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Quo Vadis Right of Defence? (Overview of Competition Events for March 2023)

Quo Vadis Right of Defence? (Overview of Competition Events for March 2023)

We present to you the thirty-seventh instalment of the information service regarding events that occurred in the world of competition law in March 2023. Regular readers know that this is necessarily a purely subjective selection, and one simply cannot expect complete objectivity from it.

March is the first month of spring, which requires a fresh look at everything, including the competition. And the competition authorities have certainly demonstrated such an approach. Although we are again writing about vertical agreements, we are pleased that none of the cases involve resale price maintenance. We are observing with anticipation the "novel" use of old tools to control risky mergers. And we watch with astonishment as innovative Members of the Czech Parliament restrict the right of defence in competition law infringement proceedings.

The Procedural Corner

Whether the competition authority is conducting a (preliminary) investigation into possible anti-competitive conduct or whether it is already running administrative proceedings, it has a duty to keep a proper procedural track of all its procedural steps (in particular interviews) in the file. The absence of this procedural track was one of the reasons for the annulment of the European Commission (EC) decision in the Qualcomm case by the General Court last year. Then in March came the annulment of the EC's decision to conduct a local investigation on the same grounds.

In the case of a suspected cartel agreement between the French retail chains Les Mousquetaires, Casino and Intermarché, the Court of Justice held that the EC is obliged to record all interviews with third parties (here, suppliers) aimed at gathering information relating to the subject matter of its investigation. This applies in particular where they are intended to serve as the prerequisite “clues” (l’indice) necessary for the onsite inspections to be carried out.

Not only the fact that the interview took place, but also the content of the interview, must be recorded. It is irrelevant at which stage of the investigation the interviews took place: This concerns both the administrative proceedings itself (and the collection of evidence) and the preliminary investigation (and the collection of “clues (l’indice)). The EC is also obliged to send a copy of the minutes to the person interviewed so that he can check/confirm its authenticity. Without such confirmation, the interview cannot be used as evidence or relevant evidence for the local investigation.

So while the Court of Justice is setting limits to the EC's investigative powers to protect the right of defence, the Czech legislator is about to deal a significant blow to the right of defence.

The Czech Republic is the only Member State that has not yet transposed the ECN+ Directive. The relevant amendment is currently being debated by the Chamber of Deputies of the Parliament of the Czech Republic (Chamber of Deputies). The original draft amendment, which was not ultimately approved by the Czech Government, contained a provision allowing the Office for the Protection of Competition (Office) access to telecommunications traffic records and data on telecommunications traffic acquired by law enforcement authorities.

This proposal faced much criticism regarding the rights of defence and privacy and the provision was removed from the draft amendment. However, this controversial provision returned to the draft amendment in a modified form during the deliberations of the Chamber of Deputies. In its current form, it applies to records of telecommunications traffic, data on telecommunications traffic (data on traffic and location) and records made during the surveillance of persons and things (audio records (e.g. spatial interception, placement of microphones and recording devices in dwellings/business premises), visual records, detection of the content of documents, etc.).

Unlike the previous provision, the draft new provision contains a certain "correction": the Office may only use records/data obtained by the law enforcement authorities in criminal proceedings relating (i) directly to a cartel agreement (as well as violations of the Public Procurement Act and regulations of financial markets, activities of banks, etc.) after the end of the pre-trial proceedings, or (ii) to an offence against the mandatory rules of the market economy and the circulation of goods in relations with foreign countries, if the case has been referred to the Office.

Despite this (minor) modification, we continue to believe that this is a significant interference with the rights of defence. There is no effective judicial review to guarantee the lawfulness of the records used in the proceedings before the Office. There is no mechanism to deal with a situation where, in criminal proceedings, a court finds that the acquisition of the records provided to the Office is unlawful (either in the course of the administrative proceedings or after the administrative decision has been issued). The question is whether such a provision would pass constitutional scrutiny.

Vertical agreements otherwise (than RPM)

Although it sometimes does not seem so, competition regulation of distribution agreements is not only about resale price maintenance (RPM). In addition to RPM, there are a number of other arrangements that can distort competition between resellers.

In March, the Polish competition authority fined the bicycle distributor Merida Polska PLN 2.44 million (approx. CZK 12.3 million) for restricting online sales. This was done by allowing only retailers with brick-and-mortar stores to offer goods on their websites and accept remote orders. However, they were also prohibited from completing the online transaction and sending the goods to customers. Thus, the customer had to come to the shop to collect the goods.

Another offence of the distributor was that it prohibited retailers from selling bicycles through auction portals. The dealers were threatened with contract termination for violating these rules. According to the competition authority, Merida Polska had thus completely excluded online sales and, moreover, artificially divided the markets geographically. Potential customers would not take into account those retailers for whom they would have to travel long distances when considering bids. This is said to have significantly reduced competition between retailers of the given brand.

Dual pricing can be encountered in the context of the regulation of distribution agreements in two areas. There may be dual pricing of goods for a given retailer, differentiated according to whether the goods are intended to be sold online or in a bricks-and-mortar store. Previously, this was problematic if it disadvantaged online sales. Nowadays, it is possible under certain conditions (we wrote about it in detail here). The second area then is dual pricing differentiating according to whether the goods are intended for sale in a given national market or for export. If export prices are higher, this can lead to a prohibited division of the EU single market and to restrictions on parallel exports. In the case of pharmaceuticals, however, the approach of competition law and competition authorities may be more conciliatory due to the impact of regulation.

This can be documented by the dual pricing scheme of the pharmaceutical company Pfizer, which was ultimately reviewed by the Spanish supreme court in March. The scheme was set up so that the initial free price was set the same for all wholesalers. However, if the wholesaler proved that two legal conditions were met, namely that the medicine was financed by Spanish public health insurance and that it was dispensed in Spain, Pfizer adjusted the free price to the (lower, statutory) regulated price.

The supreme court held that, in such a constellation, there was no independent setting of dual prices (Pfizer only set one (free) price) and therefore such (state-enforced) practice was not contrary to competition law. In so doing, the court noted the differences with an older Glaxo case, where the pharmaceutical company did indeed freely set two different prices: both the free price for exports and (under an extensive interpretation of the legal rules) the regulated price for the Spanish market. In the case where Glaxo itself set both prices, the court held that this constituted prohibited conduct.

From the life of Czech dominants

In its competition activities, the Office focuses mainly on vertical agreements on RPM and bid rigging horizontal agreements. A decision concerning abuse of dominance is therefore always an exceptional event.

In March, the Office issued a decision accepting the commitments proposed by Honeywell, which was suspected of abusing its dominant position by requiring a minimum purchase. Honeywell manufactures electronic fire alarm system (EFS) equipment. In order to provide installation, inspection, maintenance or repair services for EFS, the legislation requires the service to obtain the relevant certificate following a training provided by the manufacturer.

Honeywell conditioned the ability to participate in certification training on the purchase of a minimum quantity of its branded products. In this way, according to the Office, Honeywell was able to distort competition in the market for the provision of EFS servicing of Honeywell equipment, since those who exclusively provide such services (and do not install the equipment) did not have sufficient offtake and were thus unable to obtain the certificate. Honeywell committed to dropping the minimum offtake requirement and the Office terminated the proceedings without imposing a fine.

Unpredictable merger control

Most competition authority decisions concern mergers, but they tend to be rather uninteresting in competition law terms. March, however, would be an exception. As the Illumina/GRAIL case showed (we wrote about it here, for example), even a merger that does not meet the notification criteria can be subject to scrutiny by the competition authorities if they consider that it threatens competition. The semi-forgotten Dutch clause was used in the Illumina/Grail case, but other old tools have also made a comeback.

This includes the use of the rules on the prohibition of abuse of dominance to retrospectively review a merger which, although not subject to clearance, had already proved to be competitively problematic. In the case of a merger between two French undertakings competing in the transmission of television signals – Télédiffusion de France and Itas, complained about by their competitor Towecarst (hence the name of the case), the Court of Justice confirmed that the merger control regime does not prevent competition authorities from applying the prohibition of anticompetitive agreements and abuse of dominance to mergers. It specifically stated that it is possible to control mergers not meeting the notification criteria ex post facto.

Thus, if a dominant undertaking has restricted competition by acquiring a competitor on the market, there may be an abuse of its position. However, the mere fact that it has strengthened its market position is not sufficient. The competition authority must show that the market position thus achieved would significantly distort competition by leaving only competitors on the market whose “market behaviour depends on the behaviour of the dominant competitor”.

This takes the Court of Justice back to its 50 year old case law in Continental Can, where it used this reasoning to justify merger control in a situation where the EC did not yet have a specific instrument to do so (the first Merger Regulation was not adopted until 1989) and could not intervene in any way against risky mergers.

The Court of Justice's ruling was still used in March by the Belgian competition authority, which opened proceedings for possible abuse of dominance by the telecoms operator Proximus. In March, the latter made an acquisition of its wholesale customer and retail competitor, edpnet. This acquisition did not require prior clearance from the competition authority as the notification criteria were not met.

This updated decision-making practice of the Court of Justice and the EC (it remains to be seen whether the Court of Justice will uphold the Illumina/GRAIL approach – but it probably will) to the old tools makes the fairly clear merger control rules an unforeseeable threat to any transaction. We recommend that this be taken into account in the future when negotiating the terms of M&A deals (timing, liability, etc.).

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