Hogan Lovells

On April 26, 2013, the State Administration for Industry and Commerce (“SAIC“) - one of China’s three antitrust law enforcement bodies - noted on its website that it had held a meeting with certain industry participants to obtain feedback on the latest draft Regulation on the Prohibition of Conduct Eliminating or Restricting Competition through Abuses of Intellectual Property Rights (“Draft IPR Abuse Regulation“).  In a conference at Peking University on April 28, SAIC officials gave additional comments on the draft regulation.

The request for feedback on the draft regulation is just the latest in a series of developments in relation to antitrust enforcement in the field of intellectual property rights (“IPRs“). It also illustrates the ever-increasing impact of antitrust law on the high technology sector more generally.  In this update, we discuss the development of the Draft IPR Abuse Regulation as well as judgments by the Guangdong High People’s Court in the Qihoo 360 v. Tencent case and by the Shenzhen Intermediate People’s Court in the Huawei v. InterDigital dispute.

The Draft IPR Abuse Regulation

SAIC has been drafting guidance on how the Anti-Monopoly Law (“AML“) should be applied in the IPR context for some time; at least one of the prior drafts was circulated informally for comments. Perhaps the most important change to the latest draft, when compared to the preceding draft, is that SAIC now envisages adopting a regulation (a ‘departmental rule’) as opposed to guidelines. Whilst the guidelines would have applied to IPR-related activities across the board, the scope of the regulation (if enacted) will be confined to SAIC’s regulatory jurisdiction - i.e., anti-competitive agreements between companies and abuses of a dominant market position by a single company which do not directly relate to pricing conduct.  Price-related conduct related to IPR falls under the remit of the National Development and Reform Commission, and is not meant to be directly covered by the Draft IPR Abuse Regulation.

The scope of activities caught by the DraftIPR Abuse Regulationis relatively broad, covering the use, licensing, assignment and enforcement of patents, trademarks, copyrights and trade secrets and is non-exhaustive in nature. In short, all the main classes of IPRs are caught.  Generally speaking, the Draft IPR Abuse Regulation focuses more on abuse of dominance than anti-competitive agreements. The Draft IPR Abuse Regulation provides some safe harbors for the latter, i.e., 20% total market share in the relevant technology or product market affected if the parties to the IPR-related agreement are competitors, and 30% if they are not.  For abuses of dominance, the Draft IPR Abuse Regulation outlaws the following types of practices, provided that certain conditions are met:

• refusal to license;
• tying an IPR with other IPRs or products; and
• the imposition of ‘unreasonable restrictions’ when licensing IPRs.

Beyond the specific licensing context, the setting of ‘unreasonable conditions’ can similarly be illegal under the Anti-Unfair Competition Law, and no showing of dominance is required under that law.

The Draft IPR Abuse Regulation also mentions that exclusive grant-back obligations of improvements to the technology without justifiable reasons, prohibitions to challenging the validity of the underlying IPR or on using competing technology after the expiry of the licensing term, and the requirement to pay royalties after expiry of the IPR (as well as other yet-to-be defined clauses) can be ‘unreasonable restrictions.’  Many of these types of clauses may already potentially be unenforceable or subject to challenge under the Chinese Contract Law, under which technology contracts which unlawfully monopolize technology, impede technological progress or infringe upon the technological achievements of others are void.  These provisions in the Contract Law, in a Supreme People’s Court Interpretation on disputes involving technology contracts and in the rules applicable to the import or export of technologies apply even in the absence of dominance.  In a way, the proposed new rules in the Draft IPR Abuse Regulation would not represent a paradigmatic shift of the state of the law in China, although a violation of the regulation would trigger the sanctions under the AML - e.g., fines in the amount of 1% to 10% of the perpetrator’s annual revenues - rather than simply giving rise to an enforceability and invalidation issue. 

In any event, particularly if a company believes it has a dominant market position, its licensing agreements will henceforth need to be robust enough to withstand a much greater degree of legal scrutiny than before. 

The Draft IPR Abuse Regulation also defines and contains specific rules on the operation of patent pools, the setting and implementation of standards involving patents, and on the operations of ‘collective copyright management organizations’ (in Europe mainly referred to as “collecting societies”), all of which have the potential to give rise to antitrust issues (as has been seen in other jurisdictions). 

In addition, the draft regulation also contains a broadly worded ‘abuse of rights’ clause, prohibiting an IPR holder in a dominant market position from issuing infringement warning letters against companies when their “conduct manifestly does not constitute an infringement of intellectual property rights.”

The Qihoo 360 v. Tencent judgment

On March 20, the Guangdong High People’s Court reached its decision in the high-profile Qihoo 360 v. Tencent case.  The two leading Chinese software/Internet companies - Qihoo 360 (whose main strength lies in anti-virus software) and Tencent (whose flagship product is QQ, an instant messenger service) - have been playing out their dispute in a variety of fora, including the courts in Beijing and Guangdong and with certain government authorities. 

The question before the Guangdong High People’s Court was whether Tencent had abused its dominant market position in violation of the AML. The court found that it had not.  In a lengthy opinion, the court held that plaintiff Qihoo 360 had failed to define the relevant market properly and also rejected Qihoo 360′s claim that Tencent was dominant in the instant messaging market.  Despite having dismissed the plaintiff’s arguments on market definition and dominance - and effectively concluding that Tencent had not breached the AML - the court went on to determine whether Tencent’s conduct was abusive. The reason for doing so was to provide guidance to companies in the Internet industry.  Interestingly, the court found that Tencent’s conduct would indeed amount to ‘exclusive dealing’ - a type of conduct that is prohibited for companies in a dominant position - but not to ‘tying.’

The Guangdong court’s judgment is now on appeal, before the Supreme People’s Court.

Although China is essentially a civil law jurisdiction and hence court judgments do not have precedential value, the Qihoo 360 v. Tencent judgment may nonetheless be of interest to companies involved in other cases in the high technology sector. For example, the court’s analysis regarding the definition of the relevant product market is particularly noteworthy:  first, the court examined the arguments of the economists acting for the plaintiff in quite some detail.  Second, it relied quite heavily on a decision by the European Commission, in Microsoft/Skype, a merger case.  Third, it emphasized the dynamic nature of Internet-related markets and held that the analysis of the market should not exclusively date back to the time before the lawsuit was filed.   Fourth, the court got very close to recognizing that competition in the Internet space takes place between platforms, not individual products: “in the development of the Internet industry until today, the choice of any free product or service to attract users is merely a different method of building up a platform, but the essence of competition is competition between Internet companies to develop value-added services and the advertisement business on the basis of their own application platforms.”

The judgment by the Guangdong court contains similarly interesting language on the definition of the relevant geographic market - which it found to be worldwide in scope - and the analysis of dominance - finding, for example, that “due to the particular market conditions of the Internet industry, market shares cannot be used as a decisive factor to determine a business operator’s dominant market position.”

The Huawei v. InterDigital judgments

A few weeks earlier, on February 4, 2013, the Shenzhen Intermediate People’s Court issued two rulings in the dispute between Huawei and InterDigital. 

InterDigital holds patents that are essential to implementing 3G mobile telecommunication standards, and the dispute essentially centered around the terms on which Huawei can use the patents.  In July 2011, InterDigital filed actions before the US International Trade Commission (“ITC“) and the District Court in Delaware against Huawei, ZTE and Nokia, alleging patent infringement.   In December 2011, Huawei filed two lawsuits in Shenzhen - the location of its headquarters - inter alia claiming that InterDigital had violated the AML.

According to the Shenzhen Intermediate People’s Court, InterDigital breached its obligation to license its standard essential patents (“SEPs“) under fair, reasonable and non-discriminatory (“FRAND“) terms to any company that wants to implement the relevant standards, as it had promised to the European Telecommunications Standards Institute.  The court found that by filing complaints to the ITC and the Delaware District Court to seek an injunction to ban Huawei from using those patents - while the negotiations with Huawei to license the SEPs were still ongoing - InterDigital violated its FRAND obligation.

The court held the FRAND breach - together with InterDigital’s licensing offers - to be a means to extract excessive royalties from Huawei, and condemned it as an abuse of dominance in violation of the AML.  Moreover, the Shenzhen court also held that InterDigital’s licensing of SEPs with the licensing of non-essential patents in its portfolio constitutes illegal tying.

Finally, in the other judgment issued on the same day, the court reportedly ruled that the FRAND rate for InterDigital’s 2G, 3G and 4G essential Chinese patents should not exceed 0.019% of the actual sales prices of Huawei’s products incorporating the patent technology. 

The judgments are currently also on appeal.

Conclusions

It is possible that the DraftIPR Abuse Regulation may be further amended before it becomes law.  By focusing the draft on areas within its scope of competence, notably anti-competitive agreements and abuses of dominance that are not related to pricing, SAIC is likely trying to avoid the scope for regulatory overlap and possible ‘turf battles’ with other AML enforcement bodies.  Meanwhile, in the Chinese courts, proving dominance has been a difficult task.  Taking a positive viewpoint, it is interesting to note that the Guangdong High People’s Court looked to European Union case law and went beyond simple market shares when making a ruling on dominance in the Internet industry.

In the Huawei v. Inter Digital dispute, the ruling by the Shenzhen Intermediate People’s Court may have been one of the very first cases worldwide - if not the first - that actually determined a specific FRAND royalty fee.  More generally, these recent developments indicate that patents essential to technology standards have increasingly become a focus of the authorities and courts in China.  On top of SAIC’s Draft IPR Abuse Regulation and the verdict of the Shenzhen Intermediate People’s Court in Huawei v. InterDigital, the Standardization Administration of China has recently released draft rules on the process of setting national standards, which would in part bring the Chinese system closer to international practice while maintaining some distinct Chinese characteristics.

Against this background, it appears that antitrust claims - whether used as a ‘shield’ or a ‘sword’ - are likely to become a prominent feature of high technology-related litigation in China for the foreseeable future, which requires companies to update their licensing agreements, other contracts and compliance policies and consider antitrust issues when drafting IPR-related agreements to stay within the bounds of the fast-changing legal framework.

More from our authors:

	Competition Law in the BRICS Countries by Vassily Rudomino, Jose Regazzini, Adrian Emch (eds.) € 150
	International Competition Litigation. A Multi-jurisdictional Handbook by Gordon Blanke, Renato Nazzini (eds.) € 250
	Economic Efficiency: The Sole Concern of Modern Antitrust Policy? Non-efficiency Considerations under Article 101 TFEU by Ben van Rompuy € 140

Hogan Lovells

The Chinese Ministry of Commerce (“MOFCOM“) has stepped up its merger control activities on many fronts in recent weeks, issuing ground-breaking decisions in the Glencore/Xstrata and Marubeni/Gavilon cases and circulating draft procedural rules for public consultation on merger remedies and on dealing with straightforward merger control cases.

The new decisions
On April 16, 2013, MOFCOM issued approval for Glencore’s acquisition of Xstrata subject to conditions. Less than a week later, on April 22, it did likewise for the takeover of Gavilon by Marubeni.

Overall MOFCOM’s approach in both transactions was remarkably similar. However, there were also some key differences.

Common features
Common to both transactions is that the merger control clearance procedure with MOFCOM was very drawn out – over a year from the moment of the initial filing in the Glencore/Xstrata transaction, and around 10 months for the Marubeni/Gavilon transaction. In both transactions, the parties withdrew their notifications at the end of ‘phase 3′ in the procedure (after around 180 days) – at the end of which a decision must be made according to the law – and re-filed them as new notifications.

The nature of the underlying market sectors and the concerns voiced by MOFCOM in the two cases were also remarkably similar.

In terms of the nature of the markets, both transactions were in sectors considered sensitive by the Chinese government – natural resources (Glencore/Xstrata) and agriculture/food products (Marubeni/Gavilon).

Moreover, the combined market shares of the merging parties were low in both transactions: in Glencore/Xstrata, the combined market shares in terms of actual supplies of copper concentrate, zinc concentrate and lead concentrate – the three products identified by MOFCOM as the relevant markets, with the geographic scope of the market determined to be worldwide – were 9.3%, 17.9% and 7.6%, respectively. In Marubeni/Gavilon, the MOFCOM decision does not state the market shares of the parties in the relevant market where MOFCOM expressed concerns – the “market for soy bean imports” in China – but the sales and market-related data scattered throughout the decision allow a rough calculation of the combined market share: less than 18.6%.

In addition, a common feature of both transactions was that there was little by way of overlap between their China businesses. In other words, the market share increment in China was, for the most part, rather insignificant. In Glencore/Xstrata, the market share increment through Xstrata’s supplies of copper concentrate in China was 3.1%, whilst Xstrata did not have any sales of zinc concentrate and lead concentrate in China. In Marubeni/Gavilon, the market share increment through Gavilon’s sales of soy beans in China was below 0.7%.

In terms of MOFCOM’s concerns, both decisions placed great emphasis on the fact that China relies on imports to a considerable extent: according to MOFCOM, China imported 68.5%, 28.7% and 27.3% of its consumption of copper concentrate, zinc concentrate and lead concentrate, respectively, and 80% of the soybeans consumed in China are imported. Likewise, both decisions stress that in both transactions a large proportion of the business of the acquirers is done in China in the markets in question.

Perhaps most importantly, the two decisions make clear that China’s reliance on imports and the perceived weakness in bargaining power on the side of the Chinese customers were important factors in MOFCOM’s assessment. For example, in Marubeni/Gavilon, MOFCOM explicitly stated: “At present, China is largely dependent on soy bean imports. The domestic soy crushing plants are of low concentration, small production scale and weak bargaining power. The proposed concentration between business operators is likely to further undermine the bargaining power of the downstream soy crushing enterprises.”

Of course, damage to customers including weak buyer power can be an important part of the substantive antitrust analysis in merger cases – whether in China or globally. At the same time, few, if any antitrust authorities worldwide would seek to impose conditions on transactions where the combined market share of the merging parties is below 10% or 20%, as was the case in Glencore/Xstrata and Marubeni/Gavilon.

Differences
There are, however, a number of key differences between the decisions in Glencore/Xstrata and Marubeni/Gavilon. For example, MOFCOM’s approach to market definition was quite different. In Glencore/Xstrata, MOFCOM found the relevant product markets to be those of copper concentrate, zinc concentrate and lead concentrate, and the geographic market to be worldwide. In contrast, in Marubeni/Gavilon, MOFCOM defined the geographic market to be China only, more specifically imports into China (without further explanation on how imported soy beans would differ from domestically produced soy beans).

Equally significant, the conditions subject to which approval was granted – the “remedies” imposed – differ materially between the two cases. In Glencore/Xstrata, the remedies were essentially two-fold:

• First, Glencore has to sell its rights in the copper project in Las Bambas, Peru, to a buyer acceptable to MOFCOM. If Glencore fails to do so by the specified deadlines, then a third party will be appointed as divestiture trustee to sell Glencore’s rights in other projects. This will put Glencore under considerable pressure to sell the rights in the Las Bambas project swiftly, and under MOFCOM’s supervision. It will be interesting to see whether the buyer will be a Chinese company.
• Second, Glencore entered into a number of behavioral commitments to continue providing copper concentrate, zinc concentrate and lead concentrate to Chinese buyers under certain specified conditions. In particular, Glencore committed to delivering a minimum amount of copper concentrate “at” or “by reference to” an annual benchmark price, and to supplying zinc concentrate and lead concentrate at fair and reasonable prices consistent with those in the international market.

By contrast, in Marubeni/Gavilon, the remedy in essence consists of keeping the soy bean businesses of Marubeni and Gavilon entirely separate, with firewalls in between. This commitment will stay in place for at least two years, after which Marubeni will have the right to apply to MOFCOM to waive or modify it. This remedy is very similar to those imposed by MOFCOM in the two Hard Disk Drive cases in 2011 and 2012.

There were also material differences in terms of the procedural approach taken by MOFCOM across the two cases. In Glencore/Xstrata, for the first time ever, MOFCOM published the relatively detailed ‘commitment proposal’ by the merging parties as an annex to its decision, while Marubeni’s commitment proposal was not made public.

The draft procedural regulations
In addition to the two public decisions, MOFCOM issued two draft regulations for comment. The first regulation is a draft Regulation on the Imposition of Restrictive Conditions on Concentrations between Business Operators, released on March 27. The goal of this draft regulation may be to streamline and consolidate the procedure for the negotiation, drafting and supervision of remedies. The draft regulation is meant to replace the Tentative Regulation on the Implementation of Divestiture of Assets or Businesses in Concentrations between Business Operators, issued in 2010.

The draft regulation on remedies is a relatively long and technical document. Most companies are unlikely ever to have to deal with it, as the regulation (if enacted) would only be used in a case after MOFCOM has voiced concerns and plans to clear the transaction subject to conditions. Judging from MOFCOM’s merger control track record since 2008, statistically at least, less than 5% of all transactions notified to MOFCOM will reach this point.

However, even for companies that are locked in remedy discussions with MOFCOM, the practical impact of the latter regulation (were it to become law) is not clear. As the Glencore/Xstrata and Marubeni/Gavilon cases illustrate, the approach towards remedies taken can differ quite significantly and is essentially a case-by-case approach. The remedies imposed in past cases have been quite varied, and the draft regulation – focusing mainly on the procedural aspects – may not be enough to bring about the goal of harmonizing MOFCOM practice in this regard if past form is anything to go by.

The second draft regulation circulated for public consultation is the draft of the Provisional Regulation on Standards Used for Simple Cases of Concentration between Business Operators, released on April 3, 2013.

The goal of this regulation is create a category of “simple cases,” which currently does not exist as a matter of law. The proposed category is defined by reference to a variety of factors, such as market share thresholds and includes certain types of joint ventures. However, the draft regulation may not provide any real value-add for businesses seeking to reduce the time spent waiting for MOFCOM’s decisions in simple, non-controversial cases: unlike a prior draft, the most recent version circulated for public comment does not state what consequences flow from classification as a “simple case.” In contrast, the prior draft contained a commitment by MOFCOM to accelerate the procedure for “simple cases” and issue clearance within phase 1 of the procedure (up to 30 days into the procedure), subject to certain exceptions.

Conclusions
In many ways, MOFCOM’s Glencore/Xstrata and Marubeni/Gavilon decisions are a “first.” The two cases are significant because they demonstrate MOFCOM’s willingness to impose remedies in merger control cases where the market shares go as low as 7.6%. Moreover, it emerges from both decisions that MOFCOM takes into account the reliance on imports as a key factor in its analysis. Although not entirely explicit, the two decisions come very close to an open recognition that Chinese merger control analysis can go beyond a ‘pure antitrust assessment’ and into the realm of policy. In that sense, it is also a “first” for those observers who still had any lingering doubts that this was the case.

Furthermore, the two cases have the dubious distinction of being among the longest MOFCOM procedures on record since the Anti-Monopoly Law came into effect in 2008; the Glencore/Xstrata case is the longest ever (among the cases that ended with decisions that were made public). More generally, the concern felt among many in the antitrust community on the ground in Beijing is that the processing time for merger control clearances is not decreasing as MOFCOM gains more experience in handling merger control cases. Hence, the interest of the business community in the draft Provisional Regulation on Standards Used for Simple Cases of Concentrations between Business Operators which has the potential to ease the burden upon companies notifying a concentration to MOFCOM that meets the criteria. However, the lack of any guidance on the part of MOFCOM in the current draft as to what this means in terms of processing time somewhat reduces its value to business. Companies want to have some assurance that a straightforward China merger control application will be cleared to a more definite, compressed timetable and that other parts of a global transaction are not held up by China, so that they can plan their business accordingly and concentrate on their post-transaction integration.

More from our authors:

	Competition Law in the BRICS Countries by Vassily Rudomino, Jose Regazzini, Adrian Emch (eds.) € 150
	International Competition Litigation. A Multi-jurisdictional Handbook by Gordon Blanke, Renato Nazzini (eds.) € 250
	Economic Efficiency: The Sole Concern of Modern Antitrust Policy? Non-efficiency Considerations under Article 101 TFEU by Ben van Rompuy € 140

Hogan Lovells

In March 2013, the President of the Polish Office of Competition and Consumer Protection (“OCCP”) published a new draft amendment to the Competition Act. If approved by the Council of Ministers, the draft will be sent to parliament and is likely to become effective by the end of this year.

The changes are far-reaching and are likely to have a direct impact on business activity in Poland. The main aim of the changes is to strengthen the enforcement powers of the competition authority, in particular through the imposition of individual liability for infringement, leniency programme modification, the introduction of leniency plus, as well as a system of public warnings for practices which threaten the interest of consumers. Some of the changes will also facilitate business activity like, for example, the introduction of a two-phase merger control procedure.

Regulations facilitating business activity

The bill introduces a two-phase merger control in Poland. The first phase is intended for non-complicated mergers and should be completed within a month. The second phase, which is significantly longer as it can last up to four months, is required for more difficult transactions which may significantly restrict competition or which require a detailed market analysis. It is within the sole competence of the OCCP to decide whether a second phase is necessary, and undertakings are not entitled to challenge the OCCP’s decision, once made.

Currently, the same procedural rules apply to all mergers. Under the existing Competition Act, merger review proceedings should last no longer than two months. However, the “stop the clock” rule, under the timetable is suspended while additional information is sought, can cause significant delays. The OCCP’s present practice in difficult merger cases shows that the parties often have to wait for a decision for up to six months, and even as long as nine months on certain occasions. If the new bill is passed, the “stop the clock” rule will be preserved. However the introduction of the two phase procedure is likely to significantly speed up proceedings in the case of mergers which do not raise competition issues..

The bill also provides for new exemptions from mandatory merger notification. For instance, the creation of a joint venture by undertakings with a small turnover in Poland (not more than €10,000,000 in any of the two preceding years) will not be subject to merger control.

New institutions strengthening the powers of the authority

One of the most controversial proposed changes is the introduction of personal liability for individuals who perform managerial functions or who are members of the management bodies of companies. The imposition of a fine on individuals will have to be dealt with in a similar way to criminal proceedings, and consequently the safeguards applicable to criminal proceedings under article 6 of the European Convention of Human Rights and Fundamental Freedoms will apply. Individuals may be subject to personal liability if they intentionally allow for an infringement by their company of the prohibition of anticompetitive agreements. If the OCCP fines a company for an anticompetitive agreement it will also have the right to impose a fine up to PLN 2 million (approximately € 500,000) on individuals. Technically, the fines for individuals and for the company will be imposed during the same proceedings within a single decision. However, liability of individuals has a secondary character to that of the liability of a company. In this respect, a manager may be fined only if the company is held liable.

The definition of an individual who may be liable is unclear as it includes a person who is managing the whole undertaking i.e. a member of the managing board and a person performing managerial functions in an undertaking. In practice, it is easy to qualify who is a member of the managing board, but it may be difficult to qualify who is performing managerial functions. Thus, the OCCP has a broad discretion concerning the qualification of which company employees can be held liable for infringement.  It is worth noting that former employees can also be held liable. Managers can be fined, not only for horizontal cartels, but also for illegal vertical agreements. The bill provides a very broad definition of agreements which may trigger liability for individuals. This includes price fixing (including resale price maintenance); limiting or controlling production, market, or technical development; market sharing; applying dissimilar conditions to equivalent transactions; tying transactions; and hindering access to the market (for example, exclusivity clauses). The list is not limited to severe hard-core restrictions, but can also encompass agreements which can be qualified as illegal only if their anticompetitive effects occur on the market. Thus, the concerned individuals can be fined even though it was not possible to assess at the time of signing the contract whether certain clauses were capable of bringing about anti-competitive effects on the market. Luckily, the OCCP abandoned their initial idea of introducing fines for individuals in addition for abuses carried out by companies in dominant positions. In our opinion, it would be advisable to narrow the catalogue of agreements which may trigger the liability of individuals only to horizontal agreements which are qualified as anti-competitive by their object and not by their effect. We consider that the implementation of the current bill could make the corporate decision-making process extremely complex in many companies, especially for those who have a business model of distribution based on contractual exclusivity.

In this respect it is worth emphasizing that the bill provides the same maximum value of fines for individuals participating in vertical as well as for horizontal agreements. Taking into account that, in general, horizontal agreements (cartels) are regarded as the most detrimental for consumer welfare we assume that the establishment of the same ceiling is not proportionate. We believe that, using the analogy of criminal law, actions of differing harm should be subject to sanctions of differing severity. In comparison to liability of undertakings, individuals are granted additional safeguards such as the right against self–incrimination i.e. they are not obliged to deliver to the OCCP documents and information which may be used against them. Individuals can only be held liable if the infringement by the undertaking has not  ceased as of the day of entry into force of the new legislation.

Leniency and Leniency Plus

The Leniency programme has been operating in Poland since 2004. The statistics show that only 22% of proceedings instigated between 2004 and 2012 are an outcome of a leniency application regarded horizontal relationships. The OCCP wishes to introduce changes which aim  to increase the efficiency of the leniency policy against illegal horizontal agreements. The OCCP has therefore decided to make a number of provisions more precise and to modify the conditions necessary in order to grant immunity from being fined. Under the new law an undertaking filing for leniency will not be obliged to show that they were not the initiator of the agreement, but instead will have to show that they did not urge other undertakings to participate in the agreement. The change has been welcomed as, in practice, it was difficult to establish who the initiator of an agreement actually was. The OCCP has also abandoned the condition that an undertaking should stop participating in the agreement not later than the moment of filing the leniency application. In accordance with the bill, the undertaking should cease participating in the agreement immediately after filing the application.

The changes also concern leniency applications submitted after the first application on which basis the OCCP can only reduce a fine. The OCCP proposes to change the current provisions which specify the maximum fine (as a maximum percentage of turnover) that can be imposed on an undertaking. Instead, the OCCP wishes to include a provision that will reduce a fine by the specified percentage which would have been imposed had the undertaking not filed a leniency application.

The OCCP has proposed also “leniency plus”. If an undertaking, which is party to proceedings and has filed a leniency application on the basis of which it might receive a reduction of a fine, files a leniency application in relation to another agreement which is unknown to the OCCP, it can receive a further reduction of the penalty in pending proceedings and immunity from penalty in future proceedings.

Early information about threats to consumers

The bill includes a provision whereby the OCCP will be entitled to inform the public about the behaviour of an undertaking and its probable effects where there is a high probability that an undertaking’s behaviour has violated the collective consumer interest and may result in significant losses or adverse effects to a wide circle of consumers. The information can be passed to the public before an administrative decision has been issued. In the current version of the bill this provision aims only to protect against violations of the collective interests of consumers which usually are more straight forward cases than anti-competitive behaviour.

Conclusion

The Polish competition authority has undoubtedly significantly strengthened its enforcement powers. However, the final impact of the new tools will depend on OCCP policy and the way in which the OCCP eventually chooses to use its powers. Whilst the bill is not yet final, it is unlikely to change before it enters into force. If any further changes were possible, we would encourage a revision to ensure that individuals could only be held personally liable for horizontal agreements (cartels) rather than also for vertical arrangements.

More from our authors:

	Competition Law in the BRICS Countries by Vassily Rudomino, Jose Regazzini, Adrian Emch (eds.) € 150
	International Competition Litigation. A Multi-jurisdictional Handbook by Gordon Blanke, Renato Nazzini (eds.) € 250
	Economic Efficiency: The Sole Concern of Modern Antitrust Policy? Non-efficiency Considerations under Article 101 TFEU by Ben van Rompuy € 140

VVGB Advocaten

US and EU antitrust law – antipodes as far as individual liability is concerned?

The US and EU approaches with regard to individual liability for competition law infringements have traditionally been notoriously different. US antitrust enforcement is well-known for its use of criminal sanctions against individuals, from fines to imprisonment. Since 2004, an individual who takes part in a cartel in the US can be imprisoned for up to ten years under the US Sherman act. In 2011 some 35 to 40 individuals received an average prison sentence of 17 months in the USA for cartel activities. By contrast, EU competition law exclusively focuses on infringements of competition law by “undertakings”. And the Commission can only sanction undertakings.

It’s the national competition authority, stupid!

On a closer look however, the contrast between the two major competition law systems is rapidly diminishing. As a matter of fact, employees engaging in antitrust infringements within the EU increasingly run the risk of being sanctioned. Indeed, while the European Commission does not have this power, more and more national competition authorities and criminal law enforcers in the EU can impose fines or even prison sentences on individuals for participating in anti-competitive arrangements, irrespective of whether these arrangements have been prohibited by national or EU competition law.

In nineteen of the twenty-seven Member States of the EU, individuals can currently be sanctioned for infringements of competition law. Fourteen Member States have introduced criminal penalties for competition law infringements, sometimes parallel to a system of administrative fines. For instance, individuals that have been involved in bid-rigging in Austria and Germany can be sent to prison, while in Germany individuals may face fines up to €1 millionfor other anti-competitive behavior. The Dutch competition authority may fine individuals up to €450,000. In France, individuals may be subject to fines of up to €75,000 and imprisonment for up to four years where they have ‘fraudulently taken a personal and decisive action in the conception, organization or implementation of cartel activities’. In Ireland, individuals face fines and/or imprisonment of up to ten years for cartel involvement. In the UK, disqualification, five years imprisonment and unlimited fines are sanctions faced by individuals who participate in price-fixing.

Individual liability is increasingly taken seriously by the EU Member States

Not all Member States actively enforce their provisions on sanctioning individuals yet. In particular, criminal enforcement of competition law infringements have met with substantial practical obstacles.For instance, in the UK there has only been one successful criminal prosecution thus far since 2002. In Ireland, since 2002 individuals have been given a suspended prison sentence for cartel involvement in only two cases (in one of them, in addition to a fine of €30,000). In a number of Member States, provisions to punish individuals still remain largely untested.

That being said, the understanding that adding individual penalties to fines for companies would contribute to combating cartels seems to be winning ground in the EU for at least two interrelated reasons.

First, the legislatures and competition authorities in EU Member States increasingly recognize that employees who run a risk themselves may be more reluctant to draw the company they work for into anti-competitive arrangements. The financial consequences of a personal fine will probably weigh heavily on an individual. In addition, strongly negative reputational effects of a criminal conviction or a personal administrative fine are a strong deterrent for individuals as well. Even if for the sake of confidentiality names of the natural persons are often removed in fining decisions, in practice it is often not very difficult for the societal and professional circles concerned to guess the identity of the persons in question.

Second, national competition authorities realize that individual liability may make it easier for them to uncover cartels. Indeed, most if not all EU Member States that have introduced individual liability have given individuals the opportunity to make use of their leniency systems in their own right. This may make the prisoners’ dilemma in relation to leniency even more complicated for all concerned, in particular if employees are involved who have a disturbed relationship with their (former) employer.

As a result, more and more competition authorities in the EU now focus on individual liability. For instance, the UK is strengthening criminal enforcement in preparation of its new competition authority, the Competition and Market Authority, which will become operational in 2014. Last year, the maximum prison sentence that can be imposed on individuals in respect of “hard-core” cartel offences has been increased in Ireland from five to ten years. Both the German and Dutch competition authorities now almost routinely fine not only undertakings but also individuals in their cartel cases. In 2010, the Dutch competition authority even fined individuals for non-compliance with a commitment offered by a company in a merger proceeding. In 2012, the German competition authority fined 31 individuals, whilst in the Netherlands 6 persons were fined for cartel activities.

In other EU Member States, new competences have been recently created to sanction individuals for cartel involvement. For instance, Belgium will introduce a new competition act in the course of this year, establishing a more powerful competition authority which will also have the competence to fine individuals up to €100,000 for involvement in hard core infringements. This year a new law already entered into force in Denmark, which introduced the possibility of imprisoning individuals for up to 18 months for participating in serious and intentional cartel infringements. Under special aggravating circumstances, a sanction of up to 6 years imprisonment may be imposed. Poland is considering a modification to its competition act in the current calendar year, whereby individual liability (fines up to €500,000) for cartel involvement will be introduced.

In short, individuals increasingly run the risk of being punished in the European Union for involvement in anti-competitive practices.

Individual liability in the EU also for cross-border cartels?

Thus far, national competition authorities in the EU mostly have fined individuals in cases where cartels had a national or local character. However, national competition authorities in the EU also have the competence to apply European competition law to cartels which have an effect on trade between the EU Member States.

For that purpose, the EU legislature set up the European Competition Network (“ECN”) in 2003. Within the ECN, the European Commission and the national competition authorities of the 27 (and with the accession of Croatia very soon 28) EU Member States allocate cases amongst one other. In that context, they also exchange evidence to prove infringements of EU competition law (and national competition law provided that it is applied to the same case and does not lead to a different outcome). This information can be used as evidence to impose administrative and criminal sanctions (including prison sentences) on individuals, if the national law of the transmitting authority foresees sanctions of a similar kind, or, alternatively, if the information has been collected in a way that respects the same level of protection of the rights of defense of individuals as provided under the national law of the receiving authority. In the latter case, such information may not be used by receiving authorities to impose prison sentences, but it can still be used for the purpose of imposing both administrative and criminal fines on individuals.

The general view is that the ECN operates quite successfully. It is therefore likely that in the future national competition authorities will increasingly deal with (parts of) European cartel cases either alone or in cooperation with other competition authorities, where in the past such cases would have been dealt with by the European Commission alone. Thus, while in the past individuals would go unpunished in European cartel cases, in the future they will run a higher risk in the EU of being caught by national competition authorities or criminal enforcers. In some Member States, like the Netherlands, the national competition authority might even impose fines on individuals in cross-border cartel cases while the European Commission punishes the companies in question.

Conclusion

It is unlikely that there will be a proposal to grant the European Commission competence to impose fines on individuals any time soon. But inaction at the EU level is not preventing national competition authorities and criminal law enforcers in the EU from punishing individuals for infringements of national and EU competition law. Individuals who engage in anti-competitive arrangements in the EU therefore increasingly enter a minefield that may not only harm their employers, but may also have severe financial and reputational consequences for themselves. While other differences remain, from the perspective of individual liability, antitrust law in the USA and the EU are certainly growing closer.

More from our authors:

	Competition Law in the BRICS Countries by Vassily Rudomino, Jose Regazzini, Adrian Emch (eds.) € 150
	International Competition Litigation. A Multi-jurisdictional Handbook by Gordon Blanke, Renato Nazzini (eds.) € 250
	Economic Efficiency: The Sole Concern of Modern Antitrust Policy? Non-efficiency Considerations under Article 101 TFEU by Ben van Rompuy € 140

Bird and Bird

Article 101(2) TFEU states that agreements and decisions by associations of undertakings that contravene Article 101(1) TFEU are null and void.  However, it is silent on the fate of concerted practices.  Strikingly, apart from a tangential reference in the odd Opinion of an Advocate General or one Order of the President of the General Court, there is – to the best of my knowledge – no case law addressing the question of nullity for concerted practices.  I have always found it intriguing that so little has been written about this issue and that the case law of the EU Courts on the topic is so scarce.

One may wonder whether the Treaty’s silence on this issue is simply the result of an omission by its authors.  In which case, should Article 101(2) be construed as applying equally to concerted practices?

The answer is “no”, and in my post of today I attempt to explain why.

Nullity is probably the most severe civil law sanction that a legal order can impose on illegal acts.¹  However, even the most powerful legal order can only declare null and void those acts which produce legal consequences.  That is, those acts (typically contracts) that produce rights and obligations.  As the General Court has itself stated, Article 101(2) “is intended for cases where a legal obligation is actually in issue”.²

While agreements and decisions by associations of undertakings may create legal obligations (and thus can be punished with nullity under civil law), this is not the case for concerted practices.  Concerted practices – as defined in the relevant case law – do not produce either rights or obligations.   As such, since they therefore cannot be sanctioned with nullity, they are not listed in Article 101(2) TFEU.³

While this appears relatively straightforward, the lack of a nullity sanction for concerted practices becomes more delicate when the concerted practice consists in entering into (or exiting) certain agreements, i.e. in creating legal obligations.  These “consequential” agreements, although not anticompetitive in themselves, are the expression or consequence of an anticompetitive concerted practice.  The question therefore follows as to whether – in these circumstances – such agreements can themselves be subject to Article 101(2) TFEU?  Or, can the eventual nullity of agreements emanating from a concerted practice only result from other principles of national civil law, cause illicite, unfairness, unreasonableness, etc.

The view of the European Courts on this issue is quite clear.  Agreements that are not in themselves anticompetitive but that are the result of anticompetitive concertation to which Article 101(2) TFEU does not apply, cannot be automatically null and void under that same provision.

This position was confirmed by the Order of the President of the General Court in the Artisjus case,⁴ in which the Hungarian collecting society sought the suspension of the Commission’s CISAC decision.⁵ According to the Commission, the EU collecting societies had engaged in a concerted practice intended to divide the EU markets for the management and licensing of online music rights by imposing identical territorial limitations in each of their bilateral reciprocal representation agreements.  Artisjus argued that the Commission decision, which ordered the collecting societies to review bilaterally the territorial extent of their agreements, created legal uncertainty.  In particular, since it was unclear whether the territorial clauses in the reciprocal agreements were null and void, or whether they should simply be broadened.

The President of the General Court ruled, first, that nullity under Article 101(2) TFEU does not apply to prohibited concerted practices.⁶ With regard to the reciprocal representation agreements resulting from the alleged concerted practice, he held that they were not void by virtue of the Commission’s decision, since the Commission had not declared the reciprocal agreements themselves to be illegal.  Nor did he consider them to be void as a result of the unlawfulness of the (alleged) underlying concertation.  According to the President “the unlawfulness of the concerted practice…cannot…make void the alleged result of that practice, namely the reciprocal representation agreements.”⁷  Surprisingly, however, the President made no allusion to the possibility that national civil law may nonetheless have something to say in the matter.

The President’s position in this case echoes the approach previously adopted by the General Court in Atlantic Container Line.  In that case, the Commission was sanctioned for ordering parties to an anti-competitive agreement to offer their customers an opportunity to renegotiate or terminate their contracts.  The General Court considered that, absent a compelling rationale – which was lacking here – the Commission had exceeded its powers by interfering with consequential agreements.⁸  However, the Court also stressed that “apart from the penalty of nullity expressly provided for in Article [101(2)] of the Treaty, the case-law establishes that the consequences in civil law attaching to an infringement of Article [101(1)] of the Treaty … are to be determined under national law”.⁹

In conclusion, as a matter of EU law, neither anticompetitive concerted practices nor consequential agreements resulting from such practices can be declared null and void under Article 101(2).  If at all, consequential agreements can only be impacted by national civil law applicable to the contract.¹⁰

Unfortunately, however, a cursory review of national case law on this issue reveals that the application of the above principles has been patchy at best.

In addition to the Artisjus case described above, the nullity consequences of the CISAC Decision were also put to the test by the Dutch collecting society, BUMA.  Following the publication of the Commission’s decision, BUMA took the view that the territorial limitation of its reciprocal agreement with the UK collecting society, PRS, was null and void.  As such, it considered that it was no longer limited to granting licences for PRS repertoire within the territory of the Netherlands and began offering licenses to users abroad.  PRS – which strongly contested BUMA’s position– initiated injunction proceedings at the District Court of Haarlem.¹¹ On 19 August 2008, the court ruled that the CISAC Decision did not result in the nullity of the reciprocal agreement between BUMA and PRS, since the Commission’s CISAC Decision had declared only the concerted practice resulting in the system of identical agreements to be illegal and not the reciprocal agreements themselves.  This position was subsequently confirmed by the Court of Appeal of Amsterdam.¹²

The Swedish Supreme Court has reportedly adopted a similar approach in Boliden Mineral Aktiebolag/AB Fortum Värmesamägt med Stockholms stad.  In that case, an industrial buyer of electricity argued that the price adjustment clauses in its electricity supply contract were null and void on the grounds that they had been inserted as a result, or as part, of a concerted practice. The Supreme Court rejected this conclusion.  It held that, since the concertation was not a binding agreement or decision between the parties, it could not be subject to nullity under competition law.¹³

However, the Supreme Court of the Netherlands recently adopted a somewhat different approach in its judgement in Batavus B.V. v. X.¹⁴ This case concerned an illegal concerted practice consisting of the termination of certain contracts. One of the victims of the terminations argued that the termination – as the consequence of the concerted practice –must be null and void. The Opinion of Advocate General to the Hoge Raad held that the termination of the contracts could not be null and void under competition law because neither Article 101(2) TFEU nor Article 6(2) of the Dutch Competition Act applies to concerted practices.  He further held that, since concerted practices – unlike agreements or decisions – are not binding legal acts, they cannot lose their binding power. That said, the Advocate General noted that this did not preclude the contracts being annulled on the basis of national civil law grounds.¹⁵

Contrary to the Opinion of its Advocate General, however, the Hoge Raad held that there was no reason to exclude unilateral legal acts, such as terminating a contract, from the nullity provision in Article 6(2) of the Dutch Competition Act if the act follows from, forms part of, or is sufficiently linked to a concerted practice prohibited by Article 6(1) of the Dutch Competition Act. The Hoge Raad thus effectively ruled that the nullity provision of Article 6(2) of the Dutch Competition Act applies not only to concerted practices but also to consequential agreements to the extent that they are sufficiently linked to the concerted practice.  This is at odds with both the spirit of Article 101 and the case-law of EU courts.

Finally, it has been reported¹⁶ that the Hungarian Court of Appeal, in reversing a judgment of the Metropolitan Court, has ruled that consequential agreements remain unaffected by the nullity sanction applicable to the cartel agreement from which they derive.  However, the Hungarian Court of Appeal was quick to add, in an obiter dictum, that the appropriate remedy for such cases is compensation by damages rather than an action for nullity.

More from our authors:

	Competition Law in the BRICS Countries by Vassily Rudomino, Jose Regazzini, Adrian Emch (eds.) € 150
	International Competition Litigation. A Multi-jurisdictional Handbook by Gordon Blanke, Renato Nazzini (eds.) € 250
	Economic Efficiency: The Sole Concern of Modern Antitrust Policy? Non-efficiency Considerations under Article 101 TFEU by Ben van Rompuy € 140

Davies Ward Phillips & Vineberg LLP

Here is an item on an important decision of Canada’s Competition Tribunal written by my partners George Addy, Sandra Forbes, John Bodrug and Jim Dinning. It is especially relevant for trade associations – Mark

On April 15, 2013, the Canadian Competition Tribunal released its decision dismissing the Commissioner of Competition’s application against the Toronto Real Estate Board (“TREB”). The Commissioner had alleged that TREB had abused a dominant position in the market for residential real estate brokerage services by implementing rules that limit how its member brokers and agents can provide certain information to consumers over the Internet.
Davies was counsel to an intervenor, The Canadian Real Estate Association, in the proceedings.

The case, which garnered attention for its potential impact on home buyers and their agents, was also relevant to the activities of trade associations and their members.

The Tribunal’s decision disposed of the matter succinctly, holding that the abuse of dominance provisions of the Competition Act (the “Act”) did not apply to the facts of the case. However, the Tribunal did not rule out that similar conduct may be subject to the newly enacted civil provision of the Act that allows the Commissioner to challenge certain agreements among competitors. (The Tribunal did not assess the likely merits of such a claim against TREB.)

Background

TREB, Canada’s largest real estate board, represents more than 35,000 real estate brokers and agents principally in the Greater Toronto Area (“GTA”). TREB owns and operates an electronic database known as the TREB Multiple Listing Service™ system (“TREB MLS®”), which contains current and historical information about the purchase and sale of residential real estate in the GTA. Only TREB’s members have direct access to the TREB MLS®, and these members must agree to abide by certain rules and policies enacted by TREB in order to maintain their membership in good standing.

In May 2011, the Commissioner filed an application against TREB, arguing that it had abused a dominant position in the market for residential real estate brokerage services. Specifically, the Commissioner alleged that restrictions imposed by TREB on the information that its members could provide to consumers over the Internet through password protected websites known as “VOWs” perpetuated the traditional “bricks and mortar” business model used by most brokers and agents and prevented the creation of innovative business models that, the Commissioner claimed, would improve productivity and lower costs to consumers.

Shortly after the application was filed, TREB amended its rules to allow for the provision of certain MLS® information to consumers over the Internet through VOWs. However, TREB still maintained restrictions on members making certain information available to consumers through a VOW, including certain data concerning previously sold properties and “pending sold” properties.

The Commissioner amended the application, arguing that the steps taken by TREB were insufficient to remedy the substantial lessening of competition caused by TREB’s rules.

In response to the Commissioner’s amended application, TREB argued, among other things, that since TREB does not compete in the market for residential real estate brokerage services it could not abuse a dominant position in that market.

The Tribunal’s Decision

In order for an abuse of dominance case to be made out, the Tribunal must find that:
a. one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business;
b. that person or persons have engaged in or are engaging in a practice of anti-competitive acts; and
c. the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market.

The Tribunal found that, because TREB does not compete with its members (which was not disputed by the parties in the case), none of the above requirements could be met in the context of the Commissioner’s allegations.

Notably, the Tribunal stated that it was bound by the Federal Court of Appeal’s 2006 Canada Pipe decision, where the Court held that in order for the requirements of (b), above, to be met, the anti-competitive acts in question must be directed towards a competitor of the dominant firm. Since TREB does not compete with its members, its restrictions on the data permitted to be provided to consumers on a VOW could not have the negative effect on a competitor required by the Canada Pipe decision. Further, since there was no anti-competitive act, the Tribunal held that the requirements of (c), above, also could not be met on the facts of the case.

Finally, since TREB does not compete in the market for residential real estate brokerage services, the Commissioner could not show that TREB controlled a relevant market as required by (a), above.

The Tribunal’s decision did not address any other aspects of the case, including whether, if TREB did compete in the relevant market, its restrictions on the data permitted to be provided to consumers on a VOW would have resulted in a substantial lessening of competition.

The Tribunal did observe that, while the abuse of dominance provisions did not apply, it may be open to the Commissioner to seek an order in similar circumstances under s. 90.1 of the Act, which prohibits agreements among persons, two or more of whom are competitors, that have the effect of substantially lessening or preventing competition. (The Tribunal did not assess the likely merits of such a claim against TREB.) Thus, while trade associations may find some comfort in the Tribunal’s holding that TREB could not have violated the abuse of dominance provisions of the Act since it does not compete with its members, they must still consider whether the Act’s prohibition on agreements among competitors that substantially lessen or prevent competition could render certain behaviour subject to challenge.

More from our authors:

	Competition Law in the BRICS Countries by Vassily Rudomino, Jose Regazzini, Adrian Emch (eds.) € 150
	International Competition Litigation. A Multi-jurisdictional Handbook by Gordon Blanke, Renato Nazzini (eds.) € 250
	Economic Efficiency: The Sole Concern of Modern Antitrust Policy? Non-efficiency Considerations under Article 101 TFEU by Ben van Rompuy € 140

Max Findlay Associates

Pushing people around is the flavour of the month right now. Indeed, both companies and regulators seem to be going in for it.

Take the music industry, for instance. The US entertainment giant AEG has just bought up the rights for the Wembley Arena, previously owned by that other humungous US impresario, Live Nation. AEG already operates three major entertainment venues in London: the O2 Arena, the Hammersmith Apollo and IndigO2. It’s also recently been awarded a five-year contract to put on summer concerts at Hyde Park.

Happily, the UK regulatory authorities are looking into the deal, with the Competition Commission due to report by 5 September. However, whatever the Commission finally decides, there is already a widespread public perception in the UK that the two US outfits have thrown their weight around for far too long, with tickets for headline shows getting close to the £1,000 a time mark. Smaller-scale festival promoters are finding it increasingly difficult to hire suitable venues, and many people feel that creativity in live music is being sacrificed to the pushiness and greed of the Yankee big boys.

Mind you, the regulators aren’t always that much better. In March, the European Commission fined Microsoft €561m for  breaking its promise to give PC users a clear choice of internet browsers. The commitment had originally been made four years ago and was supposed to last until 2014. However, when Windows 7 was introduced in May 2011, the choice screen was missing. This was apparently because of a technical error that wasn’t corrected for 14 months.

The competition commissioner Joaquin Almunia got on his high horse and said this was “a very serious infringement” and that therefore Microsoft deserved everything it got. But it comes to something when a regulator makes you feel sorry for Microsoft. Everybody who has ever used a computer for five minutes (which obviously excludes Mr Almunia) knows that you can easily choose another browser and that therefore no serious commercial harm was done to anyone by the lost choice screen. And while naughty Microsoft should obviously have complied with its commitment, the fine was way too high and only served to make the Commission look like the bad guys.

However, this example of regulatory bossiness is mild compared to the ticking-off the Australian Competition and Consumer Commission (ACCC) recently gave parents and carers about children playing on trampolines. An ACCC sponsored study of over 650 people came to the less-than-startling conclusion that “trampolines can put children at risk of serious injuries when used inappropriately” [my italics] and came up with a 10-point plan for improving toddler safety. This included such gems as ensuring that only one child at a time used the trampoline and that trampolinists should learn basic manoeuvres before trying more complex things. Much the same could be said for Commission officials, of course.

A more charitable interpretation of the Microsoft decision is that Mr Almunia and his chums were looking at the case through the leper’s squint of their own narrow professional viewpoint. Déformation professionnelle is, after all, an occupational hazard for civil servants everywhere. Certainly, some doubtless ignorant members of the public felt they had spotted another example of this disease when the president of the Belgian Competition Council (BCC) recently ordered De Beers to go on delivering rough diamonds to Antwerp trader Spira until the beginning of October.

This row stems from allegations that De Beers’s supplier-of-choice distribution system amounts to an abuse of a dominant position. Under this system, Spira now finds it difficult apparently to be selected as a distributor of De Beers’s rough diamonds, even though it has been doing precisely this job since 1935.

In November 2010, the BCC president made an interim order directing De Beers to go on delivering such diamonds to Spira. The interim order has been renewed at various intervals ever since, the last renewal being announced earlier this year. However, the hope is that, by the autumn, the General Court will have given judgment in Spira’s appeal against the Commission’s rejection of its De Beers complaint. At that stage, it should be clear (says the BCC) “whether future interim measures will be justified”.

For lawyers and civil servants, such three-year delays are nothing. But the outside world no longer sees things that way. It only sees inordinate delay by an out-of-touch professional clique. Why does this matter? Because after the Cyprus bailout, violent dislike of the EU is spreading like a pandemic and stories such as the Spira one – lit up its diamonds and images of a lazy elite – feed into the general feeling of distrust. And the European project is not so robust that it can afford to be blasé about disillusionment right now.

More from our authors:

	Competition Law in the BRICS Countries by Vassily Rudomino, Jose Regazzini, Adrian Emch (eds.) € 150
	International Competition Litigation. A Multi-jurisdictional Handbook by Gordon Blanke, Renato Nazzini (eds.) € 250
	Economic Efficiency: The Sole Concern of Modern Antitrust Policy? Non-efficiency Considerations under Article 101 TFEU by Ben van Rompuy € 140

Hogan Lovells

Last week, the European Commission published on its website a revised explanatory note on how it conducts on-the-spot inspections of business premises where it suspects a company has breached competition law (so-called “dawn raids”).

During a dawn raid the European Commission has the power to examine and copy not just hard copies of business records, but also electronic information. The most important revisions to the note concern the powers of the inspectors to conduct IT searches.

Extent of IT search
The revised note provides the following non-exhaustive examples of the IT storage media that the inspectors may search during an inspection: laptops, desktops, tablets, mobile phones, CD-ROMs, DVDs, and USB-keys.

The guidelines note that storage media that is examined will be kept by the inspectors until the end of the inspection, but “may be returned earlier, for instance after a forensic copy of the data under investigation has been made”.

Business executives should therefore be prepared that they may have to hand over to the inspectors their blackberry and/or smartphone during an inspection. They may be requested for passwords for these items and a forensic copy of the data on these devices may be made. They should be prepared to manage their work schedule without these devices for several hours, and at worst until the end of the raid (which may last as long as three days).

Forensic IT tools
The revised note emphasises that the inspectors may not only use built-in keyword search tools for their IT searches, but also their own dedicated software and/or hardware. These tools allow the inspectors to copy, search, and recover data “whilst respecting the integrity of the undertakings’ systems and data”. In practice the inspectors may image data from the company’s hard drive and place a copy on a PC brought by the inspectors. They will then run searches on the copy data using their own forensic software.

The note states that at the end of the inspection the inspectors cleanse all the forensic IT tools that contain data from the undertaking. The goal is to completely remove the company’s data from the PC brought by the inspectors “in a way that the data cannot be reconstructed by any known technique”. Hardware provided by the undertaking will not be cleansed by the inspectors.

Assistance from the company
The revised note states that an undertaking may be required to provide staff to assist the inspectors “not only for explanations on the organisation of the undertaking and its IT environment, but also for specific tasks such as the temporary blocking of individual email accounts, temporarily disconnecting running computers from the network, removing and re-installing hard drives from computers and providing “administrator access rights’- support”. When such actions are taken, the undertaking must not interfere in any way with these measures and it is the undertaking’s responsibility to inform the employees affected accordingly. The Inspectors may ask to use hardware (hard disk, CD-ROM, DVD, USB-key, connection cables, scanner, printer and so) provided by the undertaking but cannot be obliged to use the undertaking’s hardware.”

This requirement underlines the importance of companies training their IT staff as well as their general staff on dawn raid defence best practice, as they may be directly involved in a dawn raid. Inappropriate behaviour by IT and other staff can be costly.

On 28 March 2012, the European Commission imposed fines of €2.5m on two Czech power companies for obstruction in relation to electronic documents. During the raid the European Commission requested access to email accounts to be blocked by setting a password known only to the European Commission (to prevent tampering with emails during the raid). However, the password for one email account was modified by the company to allow the relevant employee to access the account. In addition, during the course of the raid an employee requested the IT department to divert all incoming emails to certain blocked email accounts to a server, which prevented the European Commission obtaining access to these emails for review.

Continuation of the raid at the European Commission’s premises
The revised note retains (whilst slightly amending the wording) a paragraph which emphasises that the European Commission has a right to effectively continue its review at the European Commission’s premises. The procedure is described as follows: “If the selection of the relevant documents for the investigation is not finished during the inspection on the undertaking’s premises, the copy of the data still to be searched is secured by placing it in a sealed envelope and the undertaking will be provided with a duplicate. The Commission commits to return the sealed envelope to the undertaking or to invite the undertaking to attend the opening of the sealed envelope at the Commission premises and assist in the continued selection process”.

This specific practice was challenged in the recent Nexans case before the General Court (Case T-135/09), where Nexans argued that the European Commission had no power under the relevant legislation to take away the forensic copies of computer hard drives for later review at the European Commission’s premises, as its powers were limited to searching for relevant documents on a company’s site. The General Court, however, did not rule on the legality of this practice as it found that this challenge was inadmissible. It can be expected that the power of the European Commission to continue forensic searches at the Commission’s premises after a raid, even in the presence of the company, will be challenged in other cases before the Court of Justice of the European Union.

Conclusion – a training need
It is essential that companies train their staff on how to deal with dawn raids effectively. The European Commission’s enhanced focus on IT search means that companies must also include IT staff in this training.

More from our authors:

	Competition Law in the BRICS Countries by Vassily Rudomino, Jose Regazzini, Adrian Emch (eds.) € 150
	International Competition Litigation. A Multi-jurisdictional Handbook by Gordon Blanke, Renato Nazzini (eds.) € 250
	Economic Efficiency: The Sole Concern of Modern Antitrust Policy? Non-efficiency Considerations under Article 101 TFEU by Ben van Rompuy € 140

Davies Ward Phillips & Vineberg LLP

Competition Law in Canada – Top 10 Issues for 2013

This is a post of an article written by my partners Anita Banicevic, Richard Elliott, Charles Tingley and me

****************************************

2012 was a busy year for competition law and policy in Canada. Below we consider how some of the important developments in 2012 will shape the enforcement of Canadian competition law in 2013.

1. Will the New Interim Competition Commissioner Stay the Enforcement Course?

In September 2012, the Commissioner of Competition resigned and was replaced on an interim basis by John Pecman, a seasoned Bureau veteran with over 28 years of enforcement experience. While a permanent replacement is expected to be appointed within the year, many have asked whether the Commissioner’s departure will result in a different enforcement approach to the one taken during her tenure, which saw a number of high-profile proceedings initiated before the Competition Tribunal and courts. That seems unlikely.

In Mr. Pecman’s first speech as Interim Commissioner in October 2012, he stated “the Bureau’s priorities were the right ones a few months ago and they will continue to guide us in the months ahead.” In a subsequent speech delivered in early December 2012, Mr. Pecman returned to this theme, commenting that the Bureau’s “commitment to enforcement runs deep in my veins”, and that “the Bureau’s recent track record on enforcement mirrors my own as an enforcer at the Bureau.” More importantly, as discussed below, Mr. Pecman has commenced two significant enforcement proceedings before the Competition Tribunal during his interim tenure, and has continued a number of enforcement proceedings commenced by his predecessor. Based on these initial indications, companies operating in Canada should not expect any relaxation in the Bureau’s enforcement approach in the year ahead.

2. Criminal Offences – Will there be a “Sea Change” in the Prosecution of Cartels?

As former head of the Bureau’s Criminal Matters Branch, it is not surprising that prosecuting criminal offences such as cartels and bid-rigging will remain a priority under Mr. Pecman’s administration. Taking his cue, in part, from comments about the gravity of cartel conduct made by Chief Justice Crampton of the Federal Court of Canada in a recent sentencing decision, Mr. Pecman expressed his view that there has been a “sea change” in the way that cartel offences and other white-collar crimes are now viewed in Canada. Other developments in 2012 also tend to support this trend. For example, legislation that came into effect in November 2012 has eliminated the availability of some permissive types of “conditional sentences” for persons who have violated the Competition Act’s conspiracy and bid-rigging offences (these “conditional sentences” usually consist of house arrest or community service). In addition, the federal government recently tightened its procurement rules, such that companies convicted of conspiracy/bid-rigging and certain other federal offences will be disqualified from bidding on government contracts even if they pleaded guilty and cooperated under the Bureau’s leniency program.

If there really is going to be a “sea change” in cartel enforcement in 2013, one area to watch closely will be the level of fines sought and obtained against accused parties. In 2012, a total of approximately CDN$22.2 million in fines was imposed on parties convicted of violating the Competition Act’s conspiracy offence. While the magnitude of cartel fines imposed in 2012 was up significantly from 2011 (approximately CDN$295,000 ) and 2010 (approximately CDN$8 million), the amounts are still modest when compared to cartel fines in other jurisdictions, particularly the United States, where the U.S. Department of Justice obtained US$1.13 billion in criminal antitrust fines in FY 2012.

The other key indicator of a change in approach will be whether the Bureau actively pursues jail sentences for individuals who participate in cartels. Mr. Pecman is on record as favouring prison sentences for individuals in appropriate cases, and has pointed to the supporting comments by Chief Justice Crampton that individuals convicted of cartel offences in Canada should “face a very real prospect of serving time in prison.” That said, the Bureau will not have an easy path if it decides to insist on jail sentences for cartel participants; there is a limited track record of individuals serving time in jail in Canada for cartel-related offences, and any shift in this direction is likely to be resisted by defendants. 2013, therefore, could see fewer plea agreements for cartel-related offences and more contested proceedings, including the first defended case under the per se cartel provisions that came into effect in March 2010. This would mark a fundamental shift in the nature of cartel prosecutions in Canada.

3. A New Standard for Misleading Representations?

According to Mr. Pecman, the Bureau will continue to actively pursue misleading advertising cases in 2013, with a particular focus on appropriate disclosure of key terms and pricing in the e-commerce and digital media areas. This should serve as a signal to companies marketing online or in digital media to ensure that their advertising is compliant.

Of course, compliance depends to some degree on the standard that ought to be used when evaluating whether a representation is misleading. In Richard v. Time, a decision released in February 2012, the Supreme Court of Canada held that the appropriate standard for assessing the general impression of representations under the Quebec Consumer Protection Act is from the perspective of a “credulous and inexperienced” consumer. This is quite different from the generally accepted approach under the Competition Act, which was to assess the general impression from the perspective of the average consumer, having regard to the characteristics of the consumer that is targeted by the representation. Since the Time decision, the Competition Bureau has shifted its approach and taken the position in a case before the Ontario Superior Court that the Time standard should apply equally in the competition law context. If the Court agrees with the Commissioner on this issue, this will have important implications for how companies approach their advertising in Canada.

4. Abuse of Dominance – Is More Guidance on the Horizon?

The Bureau issued new (and long-awaited) abuse of dominance enforcement guidelines in September 2012. However, these pared down guidelines arguably had the effect of reducing transparency on many important aspects of abuse of dominance enforcement in Canada, a problem that the Bureau now proposes to address by issuing supplementary FAQs. More guidance on abuse of dominance (and the related area of price maintenance) should also be available from the Competition Tribunal, with decisions expected in the Toronto Real Estate Board (TREB) case regarding rules restricting TREB member brokers from providing consumers with direct access to certain online data from TREB’s Multiple Listing Service, and the Bureau’s case against Visa and MasterCard in relation to merchant restraints alleged to maintain the price of credit card acceptance fees. The Bureau also brought two new applications under the abuse of dominance provisions at the close of 2012 against each of two suppliers of water heaters in Ontario regarding allegedly restrictive practices designed to prevent customers from switching to competitors. The Bureau is seeking the maximum financial penalties available in those cases (a total of $25 million against the two parties), which underscores the stakes involved when alleged abuses of dominance are at issue.

5. Patents and Competition Law– Will the Bureau Jump into the Fray?

In recent years, the Bureau has shown relatively little enthusiasm, at least publicly, for enforcement action in relation to the potential anti-competitive use of patents – an area that has generated significant debate and scrutiny amongst antitrust regulators in other countries. That said, an abuse of dominance investigation involving a pharmaceutical company that has recently become public appears to be based on concerns of patent leverage. Based on public documents, the Bureau has also asked the target to produce copies of settlement agreements it has entered into regarding patent litigation.

6. Continued Merger Scrutiny

In May 2012, the Competition Tribunal issued its first decision in a fully contested merger case in over a decade, ordering CCS Corporation to divest its interest in an acquired company that owned a landfill site in British Columbia. While the Competition Tribunal agreed with the Commissioner’s basis for challenging the transaction, it refused to order dissolution of the merger (as had been requested by the Commissioner) but required the parties to divest the assets at issue, allowing the vendors in that case to breathe a momentary sigh of relief – at least until the appeal of the Tribunal’s decision is resolved. Regardless of how this issue is dealt with on appeal, the other main lesson from the CCS case is that the Competition Bureau intends to closely review and challenge even relatively small and non-notifiable transactions, including circumstances where the parties have never previously competed, if it believes that they may substantially lessen or prevent competition.

7. Joint Ventures and Alliances – Lessons from the Airline Industry

In October 2012, the Bureau entered into a Consent Agreement with Air Canada and United Continental that precluded the airlines from coordinating on certain matters on 14 transborder routes. Interestingly, the Bureau challenged existing agreements between the parties under both section 90.1 of the Act, the relatively new civil provision governing agreements between competitors, and the merger provisions in section 92 of the Act. Section 90.1, unlike the Competition Act’s merger provisions, has no limitation period, allowing the Bureau to challenge agreements that had been in place for many years and raising the prospect of long-term scrutiny of joint ventures and alliances that may be functionally similar to mergers. With the settlement of the Air Canada/United Continental transaction, the Bureau may be on the lookout for a new joint venture case to test the scope of section 90.1.

8. Regulated Conduct Redux?

In recent comments, Mr. Pecman and other Bureau officials have expressed a renewed interest in competition in regulated sectors in Canada. This was a priority under former Commissioner Sheridan Scott, who, among other things, issued a study in 2007 on self-regulated professions in Canada and devoted considerable resources to educating legislators and regulators on the benefits of competition. It seems that the Bureau now intends to pick up, at least to some degree, the advocacy role that lay largely dormant during the last Commissioner’s tenure.

9. Spotlight on Trade Associations

In a similar vein, the Bureau has gone out of its way recently to highlight competition issues raised by trade association activities, such as information exchanges and restrictions on the types of services members can offer. Reports also indicate that the Bureau is currently investigating the role of a trade association in facilitating alleged price-fixing in the construction of concrete foundations for residential homes in the Toronto area. The upshot is that trade and professional associations should brace themselves for a heightened level of scrutiny in 2013.

10. Red Light or Green Light for Indirect Purchaser Claims?

In October 2012, the Supreme Court of Canada heard appeals (two from British Columbia and one from Quebec) from conflicting appellate decisions about whether indirect purchasers are barred as a matter of law from suing for damages in antitrust claims. The cases involve claims by downstream purchasers of products (software, sweeteners and computer memory) allegedly subject to upstream price-fixing conspiracies. The Court is expected to decide on the appeals later this year and will have to grapple with the merits of a rule, like the one developed by the U.S. Supreme Court, prohibiting claims by those who are not the immediate victims of an antitrust violation but who instead claim to have paid an overcharge passed-on by direct purchasers.

Originally published in Competition Law Insight, 19 March 2013

More from our authors:

	Competition Law in the BRICS Countries by Vassily Rudomino, Jose Regazzini, Adrian Emch (eds.) € 150
	International Competition Litigation. A Multi-jurisdictional Handbook by Gordon Blanke, Renato Nazzini (eds.) € 250
	Economic Efficiency: The Sole Concern of Modern Antitrust Policy? Non-efficiency Considerations under Article 101 TFEU by Ben van Rompuy € 140

bpv Braun Partners

At the end of 2012 the Slovak Antimonopoly Office presented its future plans for public discussion. Various aspects such as the announced prioritisation of antitrust enforcement, the incentives for settlement of antitrust cases, the establishment of a division of Chief Economist, the introduction of the leniency program into law, are all fully in line with international practice in antitrust law. One aspect, however, is quite interesting should it lead to a region wide development: the introduction of incentives to be paid to whistleblowers.

A new section, Section § 38f, is proposed to be introduced into the Act on Protection of Economic Competition law giving natural persons a financial incentive. A cash payment is to be given to persons who as a first comer inform the Antimonopoly Office of a horizontal cartel agreement in the production or distribution of goods and provide proof in electronic or paper form of such a cartel. If they do not provide the proof together with the information, they must provide information which is sufficient to justify a dawn raid that leads to decisive information proving of a cartel. A further condition is that he is not a party participating in the cartel, applying for leniency, nor is employee of such applicant who already filed for leniency.

Such a whistleblower is to receive a payment of 1 % of the penalties levied in the matter, up to a maximum EUR 100.000,-.  A further condition is that the decision on such penalty, being in force, shall be paid by the parties to such a cartel agreement. Interestingly enough, there is an element of risk sharing: should the penalties not be paid within a certain date set, the whistleblower`s claim is reduced to half the amount but up to a maximum of EUR 10.000.  Protection of the identity of the whistleblower is also provided for if whished.

The Office in its explanatory notes to the amendment expressly points to similar concepts in Hungarian and British antitrust law. The Hungarian antitrust law, since 2010, indeed also gives incentives of 1 % of the fine as imposed by the Hungarian Competition Council with a cap of 50 Mio HUF (about 160.000 EUR). Different from the Slovak example it actually allows several whistleblowers in one case to be remunerated. Another difference from the Slovak example is that if a court decision later overturns the decision imposing the fine, the whistleblower may keep the money. The Hungarian authority does not give numbers on whistleblowers and proceedings are marked by very long durations so that we cannot tell the percentage of investigations started by such information, nevertheless, in  informal talks the casehandlers there consider the incentives for whistleblowers to be a success already now.

Looking at the proposed Slovak changes one may, however, still be quite critical, whether the incentive is sufficient enough to result in whistleblowing or rather it is thought of as additional deterrent to enter into cartel agreements.

It is still subject to the decision of the Office whether the proof provided actually is to be considered to be the decisive proof for the decision of the Office – the same requirement as for the applicability of the leniency program.

In modern times, it has been quite rare to actually have a smoking gun – for instance written proof of an illegal cartel in one document. Would an employee actually risk not only his job in  a country marked by some 15 % unemployment and also risk the obligation to bear damages to his employer arising when defending a cartel accusation that turned out to be unfounded? Would Slovak citizens who usually do not have too high trust into state institutions` ability, to keep secrets actually believe, their identity will be protected effectively?

Nevertheless, should the proposed whistleblower provisions actually be transformed into law, in particular when preparing leniency applications in Slovakia in the future, one must calculate with the possibility that an anonymous employee tries to receive some extra cash and gives copies of documents to the Office before the application is completed.

The greyhound race for the first leniency application therefore will not only involve the other participants in a cartel but also insiders within the own organization. Even more speed and secrecy will therefore have to be used.

More from our authors:

	Competition Law in the BRICS Countries by Vassily Rudomino, Jose Regazzini, Adrian Emch (eds.) € 150
	International Competition Litigation. A Multi-jurisdictional Handbook by Gordon Blanke, Renato Nazzini (eds.) € 250
	Economic Efficiency: The Sole Concern of Modern Antitrust Policy? Non-efficiency Considerations under Article 101 TFEU by Ben van Rompuy € 140