Tag Archives: coronavirus

Crisis cartels: relying on Article 101(3) in a pandemic

Brian Kennelly QC and Tom Coates examine how businesses might invoke Article 101(3) to justify collaboration during the pandemic.

The coronavirus pandemic has prompted some slackening of competition rules, but not much. Competition authorities, including the Commission and the CMA, have indicated that they are unlikely to take issue with coordination between providers of critical items such as medical equipment (see here and here). The government has issued exemptions from the Chapter I prohibition for groceries, healthcare services and Solent ferries. But these limited indulgences are all designed to remedy an urgent and heightened demand for essential products. For most businesses – many of whom will have seen a cliff-edge plunge in demand – the competition regime is unchanged.

Nevertheless, the temptation amongst competitors to find a shared solution to a shared problem must be great. For such businesses, the critical question will be: how will competition law principles – and Article 101(3) in particular – be applied in a time of unprecedented crisis?

Clues to the answer may lie in the EU’s reaction to historical crises in the markets for synthetic fibres (Commission Decision 84/380/EEC), Dutch bricks (Commission Decision 94/296/EC) and – most importantly – Irish beef (Case C-209/07). All these sectors suffered declines in demand which led to issues of structural overcapacity. In each case, rival undertakings agreed to reduce capacity in a concerted and orderly way, rather than allow market forces to remedy the problem. When challenged by the Commission, the relevant undertakings invoked Article 101(3) to justify their conduct.

The starting point for the analysis in each case was that the relevant agreement to reduce capacity amounted to a restriction of competition by object under Article 101(1). In the Irish Beef case, the CJEU emphasised that the parties’ honest subjective intentions did not matter: “even supposing it to be established that the parties to an agreement acted without any subjective intention of restricting competition, but with the object of remedying the effects of a crisis in their sector, such considerations are irrelevant for the purposes of applying that provision” [21].

Courts have reached similar conclusions in cases of other crisis cartels which do not concern overcapacity. An example from the UK is the dairy price initiative case, in which retailers clubbed together to agree prices they would charge to farmer suppliers, whose dissatisfaction at milk prices had led them to blockade creameries. Although the scheme had wide public support, the OFT nevertheless considered it an object restriction and the CAT largely agreed (Tesco Stores v OFT [2012] CAT 31).

The objectives and pro-competitive effects of crisis cartels may, however, be relevant to the analysis of Article 101(3). This includes the following four cumulative conditions: (a) the agreement must contribute to improving the production or distribution of goods or contribute to promoting technical or economic progress; (b) consumers must receive a fair share of the resulting benefit; (c) the restrictions must be indispensable to the attainment of these objectives; and (d) the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

In both the Synthetic Fibres and the Dutch Brick cases, the Commission found that Article 101(3) was applicable. Reducing capacity brought efficiencies and pro-competitive benefits insofar as it allowed the industries in question to shed the financial burden of keeping under-utilized excess capacity open without incurring any loss of output. Interestingly, the Commission also had regard to the social advantages which would arise from the agreements in the form of the retraining or redeployment of redundant workers. As to consumers, the Commission reasoned – without lengthy analysis – that they would benefit from an overall healthier industry with increased competition and greater specialization. In considering whether the agreements were indispenable, the Commission’s view was that (a) market forces on their own had been unable to solve overcapacity problems and (b) the agreements themselves were solely concerned with overcapacity and so went no further than necessary.

In the Irish Beef case, the CJEU did not itself consider Article 101(3) but the Commission submitted a brief in the underlying Irish proceedings giving guidelines on its application to crisis cartels. The substance of this brief was later replicated in a paper submitted by the Commission to the OECD (here). It illustrates the key hurdles which an undertaking relying on Article 101(3) will have to clear.

First, it will be necessary to establish pro-competitive benefits which outweigh the disadvantages for competition. In the context of the crisis, this may be one of the (relatively) easier hurdles to clear. Benefits could for example take the form of shedding inefficient capacity; or, in the case of an agreement protecting the survival of a shared critical supplier, shielding consumers from an interruption in supply, market collapse, or an overly concentrated market. There may be a useful analogy to be drawn with the failing firm defence which makes rare appearances in the mergers context: the thrust of the argument could be that, although anti-competitive, the conduct is better than the alternative of market exit.

Second, businesses will need to show that the agreement is indispensable to achieve the benefits. The critical – and difficult – question here is likely to be whether market forces alone could remedy the problem at hand. In its paper, the Commission’s view was that an agreement reducing capacity was unlikely to be indispensable unless quite specific conditions were present (in particular, high costs associated with reducing capacity and stable, transparent and symmetric market structures). In the ordinary course of events, mergers and specialisation agreements might produce a more efficient solution.

Third, and again critically, businesses will need to demonstrate that consumers receive a fair share of the benefits such that they are at least compensated for any negative impact. This is likely to be a hard condition to satisfy. Although the Synthetic Fibres and Dutch Brick cases contain generous reasoning on consumer benefits, the Irish Beef paper signals a more rigorous and quantitative approach. Of particular importance will be an analysis of the extent to which competitive constraints are reduced. The greater the reduction, the greater the efficiency and benefits must be for sufficient pass-on.

The Commission’s paper concludes that pleading Article 101(3) successfully in overcapacity reduction cases is likely to be “very difficult” [58]. But these are extraordinary times. The key to success is likely to be whether the agreement in question limits any lessening of competition to the bare minimum. If it does, there may be a serious argument that the countervailing benefits in the context of an unprecedented crisis outweigh the harm.

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Litigation in the shadow of COVID-19

Readers of this blog may be interested to know that Blackstone Chambers has set up a dedicated webpage providing legal insights into COVID-19.

In the most recent article, Credit When Credit Won’t Do, Kieron Beal QC and Tom Mountford consider the prospects of group litigation being used to help consumers whose holiday plans have been left in tatters by the pandemic.

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Coronavirus and the EU State Aid Framework

The coronavirus pandemic has ushered in an era of government spending on a scale not seen since the financial crisis. The Chancellor has so far announced £330bn of financial support in the coronavirus business interruption loan scheme and further support for the self-employed. With some squeezed industries such as aviation clamouring for help, many predict that larger bailouts are around the corner.

Much of this support will fall within the scope of the EU state aid framework. Article 107(1) TFEU prohibits any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition in a way which affects trade between Member States. Where a Member State proposes to put in place a state aid, it must notify the Commission, which determines the compatibility of the proposed aid with the internal market under Article 108 TFEU.

The Commission has scrambled a hasty response to clarify to governments how they can support businesses without infringing the rules. The Commission has done two things: first, explained which kinds of support will fall outside the scope of EU rules and so may not require notification; and second, put in place a Temporary Framework (which was amended on Friday) which sets out the kind of notified aids which it will consider compatible with the internal market.

As the Commission has clarified, there are several kinds of aid which will fall outside the scope of the state aid framework altogether or which will automatically be deemed to be compatible with the internal market:

  1. The state aid rules will not catch generally applicable measures. For example, a government can generally suspend payments of corporation tax or VAT, provided there is no selective advantage to specific companies.
  2. Financial support provided directly to consumers – for example in the form of compensation for cancelled services or tickets not reimbursed by concerned operators – will also generally not be caught.
  3. State aid may also fall within an existing block exemption. Perhaps most importantly, the Commission has issued a de minimis block exemption permitting aid of up to €200,000 to be granted to an undertaking over a three-year period without prior approval (Regulation (EU) 1407/2013).
  4. Article 107(2)(b) provides that aid granted to make good the damage caused by “exceptional occurrences” shall be considered compatible with the internal market. The Commission has made it clear that it considers coronavirus an exceptional occurrence. Accordingly, if a government compensates an undertaking for damage caused by the coronavirus, the Commission will regard that aid as compatible with the internal market. An example was the Commission’s approval on 12 March 2020 of a scheme by the Danish government to provide up to €12m in compensation to the organisers of large events which had been cancelled due to the pandemic.

Where none of the above apply, the Commission’s Temporary Framework may come into play. Article 107(3)(b) provides that aid “to remedy a serious disturbance in the economy of a Member State” may be considered compatible with the internal market. The Temporary Framework (which will continue until 31 December 2020) recognises that the coronavirus has caused such a “serious disturbance” such that this provision in principle applies (§18). It goes on to detail criteria for certain different kinds of aid which the Commission will consider compatible with the internal market. In broad terms, the kinds of aid covered are:

  1. Direct grants, repayable advances or tax advantages up to a limit of €800,000 per undertaking.
  2. Guarantees on loans at a prescribed level of premium where the principal of the loan (generally) does not exceed 25% of the turnover of the beneficiary or twice its annual wage bill, or subsidised interest rates for loans of the same size. (The Commission has also clarified that aid of this kind can be channelled through financial institutions – in which case it will not be caught by the specific aid rules relating to the banking sector, found in Directive 2014/59/EU and Regulation 806/2014).
  3. Aid in connection with short-term export credit insurance.
  4. Direct grants, repayable advances or tax advantages having an “incentive effect” for COVID-19 research and development.
  5. Investment aid having an “incentive effect” for the construction or upgrade of COVID-19 testing and upscaling infrastructures (including infrastructures relating to treatment and vaccination).
  6. Investment aid having an “incentive effect” for the production of COVID-19 relevant products (including medical equipment such as ventilators and medicinal products).
  7. Deferrals of tax or social security contributions for undertakings particularly affected by the pandemic (contrast the generally applicable measures which may fall outside the scope of Article 107(1)).
  8. Wage subsidies designed to avoid lay-offs during the pandemic which do not exceed 80% of the benefitting employee’s monthly gross salary.

The Temporary Framework will ease the passage of many government measures through the Commission approval process (the Commission has already made over 20 decisions authorising state aids pursuant to the framework, including approving three UK schemes). But it nevertheless has its limitations. Leaving aside aid connected with the medical response – in respect of which there are understandably very few limitations – many of the temporary measures are best suited for SMEs.

Should a struggling company such as an airline require a larger bailout, however, the Temporary Framework is unlikely to apply. In such cases, Member States are likely to need to invoke Article 107(3)(c), which provides that aid to facilitate the development of certain economic activities may be considered compatible with the internal market. Government rescues and bailouts are generally considered under this provision. The threshold for the approval of such aid (explained in the Commission’s pre-existing Guidelines on State Aid for Rescuing and Restructuring, 2014/C 249/01) is much stricter, requiring a well-defined objective of common interest, appropriately designed and proportionate measures, and an absence of undue negative effects on competition (among other things).

The above framework is likely to be much applied in the near future. Fiscal policies will have winners and losers and the scope for disputes is clear. Disappointed undertakings may be able argue that grants to rival companies constitute unlawful state aid. Where there has been no notification to the Commission, the route for such a challenge may be a judicial review of the relevant scheme (see e.g. R v Customs and Excise, ex p. Lunn Poly Ltd [1999] 1 CMLR 1357). Where the Commission has authorised the scheme, the proper recourse is likely to be an annulment action.

What will Brexit mean for the coronavirus state aid framework? The answer is likely to be: not much. The Commission will remain competent to complete state aid procedures commenced before the end of the transition period (31 December 2020) under Article 92 of the Withdrawal Agreement. More strikingly, under Article 93, the Commission will remain competent for a period of 4 years to initiate new state aid procedures relating to aid granted before the end of the transition period; and under Article 95, the CJEU will retain exclusive jurisdiction in respect of the legality of the Commission’s decisions under such new procedures. The practical result of these provisions is that all UK state aids granted before the end of the transition period will continue to be subject to scrutiny by the Commission and ultimately the CJEU for a considerable length of time.

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