We present you with the fortieth anniversary edition of our newsletter. It focuses on events that took place in the world of competition law in the summer of 2023. Our regular readers know that this is a purely subjective selection of events that we found significant or noteworthy for some reason.
We are back with our never-ending series after the summer break, during which hopefully you did not miss us as we kept filling the pages of our blog with a number of articles on various topics, mainly regarding the amendment to the Czech Competition Act. Even during the summer months, the competition authorities did not take a break, and so we can offer you the premium treats from the Czech Office for the Protection of Competition (the Office) and the European Commission (EC). This time we focused on distribution agreements and mergers.
Office’s pricing evergreen
As you will have already noticed, from the point of view of the practice, the Office sees its priority in combatting resale price fixing. This is the most frequently sanctioned practice, for which the highest fines are imposed in relative (not nominal) terms – sometimes as high as 10% of the undertaking’s total annual turnover. For the Office, this summer was no exception in this regard. We can thus present you with further cases of resale price maintenance (RPM).
During the summer months, the Office imposed fines for RPM on two undertakings in the pet food distribution sector. A penalty of CZK 307,000 was imposed on TENESCO for fixing the minimum retail price of the supplied dog and cat food and treats. The company checked the sellers’ compliance with these prices and told them to increase their prices to the level set by the company, which the sellers allegedly did. The fine is unusually low at first sight.
The reason is not only the low annual turnover of TENESCO, but also the reduction of the fine by 65%. The first reason for the reduction was the voluntary cessation of the anti-competitive conduct immediately after the dawn raid performed by the Office. Furthermore, the above-standard cooperation during the administrative proceedings (similar to leniency, which at that time – before the amendment to the Competition Act became effective – was not yet applicable to this type of agreements) was taken into account. Last but not least, the Office also took into account the introduction of a new competition compliance programme. Finally, the Office reduced the fine by a further 20% as part of the settlement procedure.
During the summer, the Office also imposed a fine for the same practices in the same sector on NOVIKO. The resulting fine amounted to CZK 47.8 million despite the fact that the Office also applied a number of tools to reduce it. First, it reduced the fine by 70% for immediate cessation of the anti-competitive conduct, above-standard leniency-like cooperation and significant strengthening of the existing competition compliance programme. Furthermore, it also took into account the concluded settlement and reduced the fine by a further 20%.
In the summer months, however, the Office did not only look into pet bowls. It imposed a further fine of CZK 63.9 million on TESCOMA for RPM. According to the Office, the kitchen equipment manufacturer set minimum retail prices for retailers to sell its goods to end consumers. TESCOMA conditioned the start and continuation of the business cooperation on compliance with minimum prices. Here, too, the fine was significantly reduced, first by 60% (for above-standard cooperation and implementation of an effective compliance programme) and then by 20% (for settlement).
Since there are no signs indicating that the Office's unusual interest in combatting resale price fixing will abate in the near future, the topic of secure resale pricing communication is standardly covered in our training sessions.
Other problematic distribution agreements
The last distribution agreement case addressed by the Office this summer was eventually settled without a fine. This time, however, it did not concern RPM, but instead the restriction of customers to whom retailers can sell goods. In a preliminary investigation initiated upon a complaint, the Office found that OUTDOORBABY, a childrenswear supplier, made the sellers undertake to sell the goods only to final consumers, not to customers buying them for resale. Determining the range of customers to whom a seller may or may not sell its goods may constitute anti-competitive conduct.
However, as evidenced in its statement, the Office found that determining/restricting customers was not the primary objective of OUTDOORBABY and that the restriction was not, in fact, applied in practice (goods were also sold by e-shops to which OUTDOORBABY did not sell directly). Therefore, the Office did not initiate administrative proceedings and considered it sufficient to resolve the case within the framework of competition advocacy. OUTDOORBABY has, among other things, modified its terms and conditions and informed sellers that it does not restrict the range of customers to whom they may sell its goods.
Apart from the Office, the EC is also currently looking into distribution relationships in the case of the fashion house Pierre Cardin and Ahlers, its largest licensee, to which the EC has sent a statement of objections. The subject of the objections is again the restriction of the range of customers, this time mainly on the basis of their geographical location. The object of the arrangement was to restrict other Pierre Cardin licensees and their customers from selling Pierre Cardin clothing into territories for which Ahlers held a licence within the EEA (both online and in brick-and-mortar stores). In addition, the arrangement also prohibited the sale of Pierre Cardin clothing to discounters in those territories.
Oh, the mergers
In the summer months, there were also noteworthy news in the area of mergers. They mostly concerned banned mergers, which is in itself a rather extraordinary event.
After many years, the Office has banned a merger, namely the takeover of První novinová by Česká pošta. According to the competition authority, the merger would have led to a significant strengthening of the dominant position or the creation of a monopoly of Česká pošta in the market for the delivery of ordinary mail and addressed direct mail, as the only major competitor would have disappeared from the market. With regard to the market for the delivery of unaddressed direct mail, the merger of the second and third largest operators would have, according to the Office, resulted in a loss of significant competitive pressure. In the distribution of subscriptions and the delivery of print mail, the merger would have eliminated a potential competitor.
A ban on a merger is truly exceptional not only in the Czech Republic; the number of such cases throughout history can be counted on the fingers of one hand. Will this case set an example for further interventions?
Telefónica/O2 and Hutchison 3G mobile operators may feel like a ping-pong ball in action. The EC first banned their merger in the UK market in May 2016. The General Court then quashed the decision in May 2020. (In the meantime, since Brexit, the EC has not had jurisdiction over the UK market.) In July 2023 – 7 years after the ban – the case is still pending after the Court of Justice quashed the General Court’s decision. According to the General Court, the reason for quashing the EC decision was an undue application of the standard of proof. The General Court held that the EC had to show that the merger would constitute a significant impediment to effective competition (the SIEC test), that it would occur with a “high probability” and, conversely, it was not sufficient that the impediment was “more likely than not”. This view has now been rejected by the Court of Justice on the grounds that there is no support for it in the EU Merger Regulation.
Another case of a banned merger in the summer addressed the well-known takeover of GRAIL by Illumina. We covered yet another chapter in this long saga, in a separate post on our blog.
Merger control, however, is not just about banning mergers. Permitted mergers may also end up being noteworthy cases. A company acquiring another company may want to protect its investment by concluding a “non-competition clause” with the seller. However, such clause is not risk-free. In order not to be in conflict with competition law, it must meet certain prerequisites. Specifically, it must be directly related to the transaction and necessary for its implementation. If the transaction involves a know-how transfer, the non-competition clause can be concluded for a period of three years. If the transaction does not involve a know-how transfer, its maximum duration is limited to two years.
This issue was also addressed by the Office in the summer in a case concerning the sale of shares in Dobrá Energie. The Sellers, VORAGO HOLDING and Optimal-Energy, undertook vis-à-vis the acquirer, EP Energy Trading, in 2021 that they would not enter into any electricity or gas supply contracts with Dobrá Energie’s customers for a period of seven years after the transaction and would not commence supply to such points of delivery. After the Office opened proceedings with these companies, they accepted the commitment and reduced the duration of the non-competition clause to two years as permitted. The Office terminated the proceedings without imposing a fine.