ICLG The International Comparative Legal Guide to: Vertical Agreements and Dominant Firms 2017 1st Edition

A practical cross-border insight into vertical agreements and dominant firms

Published by Global Legal Group, in association with CDR, with contributions from: ALRUD KK Sharma Law Offices Blake, Cassels & Graydon LLP Lee & Lee Cliffe Dekker Hofmeyr Inc Marval, O’Farrell & Mairal Darrois Villey Maillot Brochier A.A.R.P.I. Nagashima Ohno & Tsunematsu DDPV Studio Legale Noerr LLP Debarliev, Dameski & Kelesoska, Paul, Weiss, Rifkind, Wharton & Attorneys at Law Garrison LLP Dickson Minto Pinheiro Neto Advogados ELIG, Attorneys-At-Law SRS Advogados Fourgoux-Djavadi&Associés Tian Yuan Law Firm Johnson Winter & Slattery The International Comparative Legal Guide to: Vertical Agreements and Dominant Firms 2017

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Contributing Editor 2 Australia Johnson Winter & Slattery: Sar Katdare & Maggie Hung 7 Charles F. (Rick) Rule, Paul, Weiss, Rifkind, Wharton & Garrison LLP 3 Brazil Pinheiro Neto Advogados: Leonardo Rocha e Silva & Sales Director Daniel Costa Rebello 14 Florjan Osmani Account Director Oliver Smith 4 Canada Blake, Cassels & Graydon LLP: Randall Hofley & Evangelia Litsa Kriaris 21 Sales Support Manager Paul Mochalski 5 China Tian Yuan Law Firm: Wei Huang & Fan Zhu 28 Senior Editors Suzie Levy, Rachel Williams 6 European Union Fourgoux-Djavadi&Associés: Jean-Louis Fourgoux & Leyla Djavadi 35 Chief Operating Officer Dror Levy Group Consulting Editor 7 France Darrois Villey Maillot Brochier A.A.R.P.I.: Didier Théophile Alan Falach & Guillaume Aubron 41 Publisher Rory Smith 8 Germany Noerr LLP: Peter Stauber & Robert Pahlen 49 Published by Global Legal Group Ltd. 59 Tanner Street London SE1 3PL, UK 9 India KK Sharma Law Offices: K K Sharma 60 Tel: +44 20 7367 0720 Fax: +44 20 7407 5255 Email: [email protected] 10 Italy DDPV Studio Legale: Luciano Vasques 68 URL: www.glgroup.co.uk GLG Cover Design F&F Studio Design 11 Japan Nagashima Ohno & Tsunematsu: Kaoru Hattori & Yusuke Kaeriyama 76 GLG Cover Image Source iStockphoto 12 Macedonia Debarliev, Dameski & Kelesoska, Attorneys at Law: Printed by Jasmina Ilieva Jovanovik & Dragan Dameski 84 Stephens & George Print Group June 2017 13 Portugal SRS Advogados: Gonçalo Anastácio & Luís Seifert Guincho 92 Copyright © 2017 Global Legal Group Ltd. All rights reserved 14 Russia ALRUD Law Firm: German Zakharov & Alla Azmukhanova 99 No photocopying ISBN 978-1-911367-57-4 ISSN 2399-9586 15 Singapore Lee & Lee: Tan Tee Jim, S.C. 106 Strategic Partners 16 South Africa Cliffe Dekker Hofmeyr Inc: Andries le Grange & Albert Aukema 111

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United Kingdom Ajal Notowicz

Dickson Minto Maria Ziprani

on the nature of the premises, a warrant from a judge may first be 1 General required.

1.1 What authorities or agencies investigate and enforce 1.3 Describe the steps in the process from the opening of the laws governing vertical agreements and dominant an investigation to its resolution. firm conduct? A typical CMA investigation into an alleged infringement of the The main competition authority in the UK is the Competition and rules regarding vertical agreements (in practice, most likely resale Markets Authority (“CMA”). The CMA came into existence on price maintenance (“RPM”)) or abuse of dominance consists of the 1 April 2014, and is the successor to the Office of Fair Trading following key steps: (“OFT”) and Competition Commission (“CC”). 1. Prior to opening a formal investigation, the CMA will gather In addition, the following sectoral regulators have concurrent powers and consider information on an informal basis, which will to enforce competition law (including regarding vertical agreements inform the application of its published prioritisation principles and abuse of dominance): Civil Aviation Authority (“CAA”); Financial in deciding whether or not to open an investigation. Conduct Authority (“FCA”); Gas and Electricity Markets Authority 2. If there is a reasonable suspicion of an infringement and the (“Ofgem”); Northern Ireland Authority for Utility Regulation case falls within the CMA’s casework priorities, the CMA (“NIAUR”); Office of Communications (“Ofcom”); Office of Rail and will open a formal investigation. Road (“ORR”); Payment Systems Regulator (“PSR”); Water Services 3. The CMA will then be able to use its formal information Regulation Authority (“Ofwat”); and NHS Improvement (Monitor). In gathering powers, such as issuing information requests, the remainder of this contribution, any mention of the CMA’s powers searching premises and conducting interviews. should be read as including powers which may be exercised by these 4. If the CMA has sufficient evidence of an infringement, it will sectoral regulators, unless stated otherwise. issue a Statement of Objections, and give the parties access to The UK’s substantive competition law provisions (outside the the file and the opportunity to make representations. merger control and market investigations sphere) are enshrined in 5. The CMA will close its investigation by either: Chapters I and II of the Competition Act 1998 (“CA98”) and are ■ deciding that there are no grounds for action; closely based on the corresponding provisions of the Treaty on the ■ issuing an infringement decision which includes certain Functioning of the European Union (“TFEU”), Articles 101 and actions (such as penalties and/or an order to bring the 102, respectively. Where a UK court, the CMA or any of the above- infringement to an end); or mentioned sectoral regulators apply the Chapter I and/or Chapter ■ accepting binding commitments (see question 1.6 II provisions, they must also apply the equivalent EU provisions, below for more information regarding the commitments provided the conduct in question may affect trade between EU process). Member States.

The future application of EU law in the UK is uncertain, as a result 1.4 What remedies (e.g., fines, damages, injunctions, etc.) of the UK’s stated intention to leave the EU, commonly known as are available to enforcers? “Brexit”. In this regard, see further question 1.13 below. The CMA has the following main remedies and sanctions options 1.2 What investigative powers do the responsible at its disposal: competition authorities have? ■ Impose penalties of up to 10% of the company’s worldwide group turnover. The CMA has the power to open an investigation if it has “reasonable ■ Give directions to bring an infringement to an end. grounds for suspecting” that there has been a breach of competition ■ Order the disqualification of an individual from holding law. company directorships where that individual has been a The CMA has the power to request information from companies director of a company which has breached competition law. and natural persons, as well as to enter and search business and ■ Impose interim measures where it has begun an investigation, domestic premises for documents and other materials relevant to the and it considers it necessary to take action as a matter of investigation (more colloquially known as dawn raids). Depending urgency to prevent serious irreparable damage or to protect the public interest.

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It should also be noted that an agreement (or a clause from the competition law in exchange for a penalty discount of up to agreement – see question 2.3 below regarding severability) which 20%. The CMA’s administrative process in settlement cases is infringes competition law will be unenforceable. Whilst in cartel more streamlined than in non-settlement cases, thus resulting cases, criminal sanctions may be imposed on individuals, such in efficiencies for the CMA and also the parties. The CMAhas sanctions are not available in the event of an infringement of the discretion in determining which cases to settle. For example, in the rules on vertical agreements and abuse of dominance. Finally, the two RPM cases which the CMA concluded in 2016 (Commercial courts may award damages, grant an injunction (such as an order to Refrigerators and Bathroom Fittings), the parties were granted a cease certain conduct) or make a declaration (such as a confirmation 20% settlement discount on account of their admissions. that an exclusivity clause in a vertical agreement is unenforceable).

1.7 Does the enforcer have to defend its claims in front 1.5 How are those remedies determined and/or of a legal tribunal or in other judicial proceedings? If calculated? so, what is the legal standard that applies to justify an United Kingdom enforcement action? The OFT’s Guidance as to the appropriate amount of penalty (which was adopted by the CMA when it came into existence in Unless a decision is appealed (see question 1.8 below), the CMA does 2004) sets out a six-step approach. The main factors taken into not need to substantiate or defend its case in judicial proceedings. account are the relevant turnover of the company involved, the The legal standard which applies to the CMA’s decisions is the seriousness and duration of the infringement, aggravating and one applied in civil cases of the “balance of probabilities”, as the mitigating circumstances, and a possible adjustment for deterrence CAT confirmed in an appeal by the pharmaceuticals producer and proportionality. At the end of the determination, the CMA will Napp against an OFT decision finding an abuse of dominance also need to ensure that the penalty cap of 10% of worldwide group (Napp Pharmaceutical Holdings Limited v Director General of turnover is not exceeded by the proposed fine, and that any discounts Fair Trading (2002)). However, the CAT added that Chapter I and for leniency and settlement are fully reflected in the amount. Chapter II cases involving penalties require “strong and convincing evidence” before they are found to be proven. The above-mentioned Guidance as to the appropriate amount of penalty took effect in 2012, after the OFT was forced to review its guidance on the back of a set of judgments by the Competition 1.8 What is the appeals process? Appeal Tribunal (“CAT”) in appeals regarding cartel cases in the construction industry and construction recruitment sector. In these Decisions by the CMA and sectoral regulators may be appealed to judgments, the CAT criticised certain aspects of the OFT’s previous the CAT, both on liability and on the penalty amount. The appeal approach to calculating penalties. needs to be lodged within two months of the date on which the By way of a recent example, in 2016 the CMA imposed a record appellant was notified of the decision or the date of the publication penalty of £84.2 million on the pharmaceutical company Pfizer of the decision, whichever is the earlier. CAT judgments may be in connection with an abuse of its dominant position by charging appealed to the Court of Appeal, from where a further appeal may excessive prices for an anti-epilepsy drug. Pfizer has lodged an be possible to the Supreme Court. For example, National Grid appeal with the CAT against the decision. appealed to the Court of Appeal in relation to a CAT judgment in an abuse of dominance case relating to domestic gas meters, originally As discussed in the response to question 1.10 below, in a limited set investigated by Ofgem (National Grid plc v Gas and Electricity of circumstances businesses may qualify for immunity from fines. Markets Authority et al (2010)). The Court of Appeal dismissed the appeal regarding liability but substantially reduced the penalty 1.6 Describe the process of negotiating commitments or amount. National Grid’s attempts to appeal further were rejected by other forms of voluntary resolution. the Supreme Court. The CAT may uphold the original decision, set it aside, remit it to the The CMA is able to accept binding commitments from parties CMA or regulator to reconsider, or make any decision that the CMA suspected of having infringed competition law in the UK. It is up to or regulator could have made. An example of the latter approach the parties to decide whether they would like to offer commitments to was a CAT judgment in 2005, which found that a Hertfordshire the CMA. From their perspective, the main advantage is that the case funeral firm held a dominant position and abused this position by is closed without a penalty and without a finding of an infringement. refusing a competitor access to its crematorium, despite the OFT’s Commitment decisions are also beneficial to the CMA, in that decision to the contrary (J.J. Burgess & Sons v The Office of Fair they normally result in a quicker and more efficient resolution Trading (2005)). of a case. Commitments can only be accepted by the CMA after it has started an investigation, but before it has issued a decision. The CMA has stated that it is very unlikely to accept commitments 1.9 Are private rights of action available and, if so, how in cases involving secret cartels or a serious abuse of a dominant do they differ from government enforcement actions? position (including predatory pricing). Nevertheless, there have been several instances of alleged abuse cases where commitments Whereas historically in the UK the emphasis has been more on public were considered acceptable. For example, in 2014 the OFT accepted enforcement, in the past few years the interest in private enforcement commitments from Certas Energy UK Limited and its parent DCC of competition law has increased. In particular the Consumer Rights plc to resolve possible concerns regarding an abuse of a dominant Act 2015 introduced several important changes, including a fast track position in relation to the long-term exclusive supply of road fuels procedure intended to facilitate access to justice for SMEs in private in the Western Isles of Scotland. In that case, the CMA required competition law actions. Furthermore, this legislation introduced a amendments to the proposed commitments in order to address third new collective proceedings regime for damages cases, covering both party comments received during the public consultation process. opt-in and opt-out actions, thus going beyond the requirements of the EU Directive regarding actions for damages for infringements of The commitments procedure should be distinguished from the competition law of 2014. For example, in 2016, a collective damages settlement process under which the parties admit a breach of

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action was launched on an opt-out basis on the back of a CMA decision which found unlawful restrictions regarding the advertising 1.12 How do enforcers and courts take into consideration of discounts in relation to the supply of mobility scooters, though the an industry’s regulatory context when assessing competition concerns? case was dropped in May 2017 following difficulties in assessing the claimants’ losses and mounting litigation costs (Dorothy Gibson v Pride Mobility Products Limited). The rationale behind sectoral regulators enforcing competition law is that they are regarded as being best placed to take account of the Private enforcement actions may be brought on a stand-alone or regulatory context in the sector which they oversee. Before taking follow-on basis. regulatory action, the sectoral regulators are legally required to consider whether it would be more appropriate to proceed on the 1.10 Describe any immunities, exemptions, or safe harbors basis of the general competition law powers under the CA98. that apply.

1.13 Describe how your jurisdiction’s political environment United Kingdom The CMA operates a corporate leniency policy, with full immunity may or may not affect antitrust enforcement. or a partial reduction of the fine being available in appropriate cases. Leniency is only available in relation to cartel activity (which, for The UK’s political stage is currently dominated by the Brexit these purposes, includes resale price maintenance (“RPM”)), but not process. As the UK Government gave notice under Article 50 of the with regards to other vertical agreements nor abuse of dominance Treaty on European Union (also known as the Lisbon Treaty) on 29 cases. The CMA has adopted the OFT’s Guidance regarding March 2017, the UK is expected to leave the EU on 29 March 2019, applications for leniency and no-action in cartel cases of 2013. or earlier if a withdrawal agreement is entered into any sooner, or The CA98 provides immunity from fines for so-called “small later if the negotiating period is extended with the consent of all EU agreements” (which do not include price-fixing arrangements) Member States. between SMEs whose combined group turnover does not exceed At present, the Chapter I and II prohibitions must be interpreted £20 million. For example, in two cases in 2013 and 2014 the OFT consistently with the corresponding provisions under EU law. If found that suppliers and retailers of mobility scooters had agreed on this requirement is repealed, it is likely that in the short term the restrictions regarding online sales and advertising by the retailers, CMA and courts will continue to follow EU precedents, but in the but the OFT was unable to impose penalties as the parties’ combined longer term a divergence is expected to materialise in certain areas. turnover (for any combination of supplier and retailer) did not exceed £20 million. One particular area where divergence is most likely relates to the EU’s internal market integration objective. For example, the EU In addition, a company with turnover of not more than £50 million has traditionally objected to clauses in distribution agreements that abuses its dominant position also qualifies for immunity from which restrict parallel trade between Member States, and dominant fines, on the basis that is considered to be “conduct ofminor companies discriminating between trading partners based on the significance”. For example, in 2007 the OFT found that Cardiff Bus trading partners’ Member State of origin. In a post-Brexit world, had abused its dominant position by engaging in predatory conduct, the CMA is unlikely to take such market integration objective into but the OFT was unable to impose a penalty as a result of Cardiff account in its enforcement practice. Bus’ turnover not exceeding £50 million. As the CMA will also no longer form part of the European It is worth noting that the immunity from fines only applies to Competition Network post-Brexit, a new system for cooperation in infringements of CA98, but not of the corresponding EU provisions key areas such as the launch and conduct of investigations will also (which, as outlined in response to question 1.1 above, the CMA is need to be agreed upon. It remains to be seen whether Brexit will obliged to apply in certain circumstances). Furthermore, the CMA have an impact on the UK’s current status as a favoured jurisdiction may withdraw the immunity for arrangements or conduct which for launching antitrust private damages actions, or whether a shift will occur after the date of such a decision. Finally, the immunity take place to other jurisdictions such as The Netherlands and Germany. does not provide protection against the other consequences of competition law breaches, in particular possible private damages Assuming that the UK will no longer be covered by the “one stop actions and unenforceability. shop” regime of the European Union Merger Regulation, a very substantial increase in the number of merger cases handled by the CMA is expected. This will likely require a reallocation of resources 1.11 Does enforcement vary between industries or at the CMA, possibly resulting in a decreased focus on enforcement businesses? action under the CA98, including regarding abuse of dominance and vertical restraints (unless the CMA’s budget is increased). The Chapter I and II prohibitions (and corresponding EU provisions) The CMA is an independent, non-ministerial government apply across all industries in the UK, with limited exceptions for department. As part of its Brexit-related review of UK markets, the agricultural, defence and planning sectors. Whereas the CMA’s the UK Government conducted a consultation on its Industrial enforcement powers apply across virtually all parts of the economy, Strategy Green Paper in 2017. In its response the CMA cautioned the various sectoral regulators have concurrent enforcement the Government against launching industrial policies that distort powers in their respective sectors (see question 1.1 above). The competition, and recommended achieving policy objectives through Competition Act 1998 (Concurrency) Regulations 2014 contain methods that “work ‘with the grain of’ markets”. rules for the co-ordination of the enforcement actions by the CMA and sectoral regulators. In its 2017/2018 Annual Plan, the CMA noted that it is seeking a 1.14 What are the current enforcement trends and priorities in your jurisdiction? “balanced portfolio of cases”, whilst also stating that “no business is beyond the reach of competition enforcement”. The CMA’s 2017/2018 Annual Plan highlighted a number of areas of interest that form the basis of its current investigative and enforcement efforts.

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Of particular interest in the context of this contribution is the action arising from an infringement decision regarding the rules on CMA’s increased focus on regulated sectors (which could, for vertical restraints, and the first class action being brought on an opt- example, involve abuse of dominance cases against sectoral out (rather than opt-in) basis. incumbents), and public service delivery including the healthcare In April 2017, the High Court dismissed the competition elements of sector (which could, for example, entail more excessive pricing a counterclaim in a commercial dispute between Seafood Holdings cases against pharmaceutical companies – see also question 1.15 Limited and My Fish Company Limited (Seafood Holdings Limited below). The CMA opened an RPM case in April 2017 in relation to v My Fish Company Limited and others). The court made it clear the supply of medical equipment in the UK. that, for a party to establish the existence of a dominant position Another area of ongoing interest to the CMA relates to online of a counterparty, it would normally expect to see expert evidence markets and new technologies. For example, the CMA is currently to that effect. The court also noted that the alleged restriction on pursuing a case against a supplier of golf clubs, Ping, for imposing suppliers to sell to a party would not amount to a competition an online sales ban on its retailers. Furthermore, the first case in law infringement, as such a vertical agreement would be exempt United Kingdom which the CMA used its director disqualification powers (see under the EU Vertical Agreements Block Exemption Regulation question 1.15 below) involved the use of automated repricing (“VABER”), taking into account that the parties’ market shares did software to implement a cartel involving the sale of posters on the not exceed 30%. Amazon Marketplace. Finally, although it does not, strictly speaking, fall under the The CMA aims to open at least six new competition enforcement heading of case law, it is worth noting that in December 2016 the cases this year, in addition to its continued use of advisory and CMA secured a binding undertaking from the managing director warning letters. of Trod Limited, banning him from acting as a company director for the next five years (Online sales of posters and frames). This is the first time a director has been disqualified by the CMA as a 1.15 Describe any notable case law developments in the past year. result of a company’s breach of competition law. There is a general expectation that the CMA will seek more director disqualifications in the future. In the past year, several notable case law developments took place in relation to vertical agreements (see Section 2 below) and abuse of dominance (see Section 3 below). Flynn Pharma recently failed in 2 Vertical Agreements its application to the CAT for interim relief from the CMA’s order, which required Flynn Pharma to reduce the price of the phenytoin sodium capsules it sells. Meanwhile, the main appeal by Flynn 2.1 At a high level, what is the level of concern over, and Pharma and Pfizer against the CMA’s decision, which found that they scrutiny given to, vertical agreements? had abused their dominant position by charging excessive prices, is ongoing (Flynn Pharma Limited and Flynn Pharma (Holdings) Price fixing, market allocation and bid rigging are generally Limited v Competition and Markets Authority and Pfizer Inc and considered the most egregious examples of competition law Pfizer Limited v Competition and Markets Authority). This case infringements in the UK. Such cartel conduct is subject to civil needs to be seen against the backdrop of a renewed interest at the and potentially also criminal sanctions. Only slightly lower in EU level in excessive pricing, as borne out by Margrethe Vestager’s the pecking order are RPM (see question 2.16 below) and abuse (the EU Competition Commissioner) speech in November 2016 on of dominance (see Section 3 below), which are both areas of the subject. The EU Court of Justice is expected to shed further light substantial CMA enforcement action. The CMA tends to be less on this area in a case concerning a request for a preliminary ruling keen on pursuing non-price related vertical arrangements (such as from the Latvian Supreme Court regarding collecting societies exclusive purchasing or distribution), and instead these areas are (Biedrība ‘Autortiesību un komunicēšanās konsultāciju aģentūra – more likely to be raised in private disputes. Latvijas Autoru apvienība’ v Konkurences padome). The general approach to vertical agreements is reflected in the In the first quarter of 2017 the CAT also heard appeals by OFT’s guidelines on vertical agreements of 2004 (the “UK Vertical GlaxoSmithKline (“GSK”) and various generics pharma companies Guidelines”), adopted by the CMA in 2014, which state that “vertical against the CMA’s decision in Paroxetine that these companies had agreements do not generally give rise to competition concerns unless entered into anti-competitive pay-for-delay agreements in relation one or more of the parties to the agreement possesses market power to the supply of anti-depressants, and that GSK had abused its on the relevant market or the agreement forms part of a network of dominant position (Generics (UK) Limited and GlaxoSmithKline similar agreements”. plc et al v Competition and Markets Authority). Whilst the appeal is pending with the EU Court of Justice in the Lundbeck pay-for-delay 2.2 What is the analysis to determine (a) whether there case, the outcome of the UK case is eagerly awaited, as it is the is an agreement, and (b) whether that agreement is CMA’s first pay-for-delay decision and resulted in substantial fines vertical? (c. £45 million). Another case which reached the CAT in 2016 concerned a class The UK Court of Appeal made it clear in Toys and Football Kits action for damages against Pride Mobility Products, on the back of (2006) that for an agreement to exist as a matter of competition the OFT’s March 2014 decision finding Pride and several retailers law, a “concurrence of wills” is required. An agreement does not guilty of agreeing restrictions regarding the advertising of discounts need to have been formalised between the parties, or written down. in relation to the supply of mobility scooters. In March 2017, the Indeed, an agreement can arise as a result of an oral understanding CAT adjourned the proceedings and gave permission to the proposed between two or more parties, or if one party’s unilateral actions are class representative to reformulate the claim and definition of sub- tacitly accepted by the other. The Chapter I prohibition also covers classes of claimants, but in May 2017 the claimants decided to drop “concerted practices”, which occur when companies co-ordinate the case (Dorothy Gibson v Pride Mobility Products Limited). This their behaviour, without entering into a binding agreement. Finally, was the first attempt in the UK at bringing a follow-on damages the prohibition also covers decisions by associations of undertakings,

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such as, for example, trade bodies. Genuinely unilateral conduct, Please also refer to question 1.10 above in relation to the immunities however, is not captured by the prohibition (but this may be covered which may be available. by the prohibition on abuse of a dominant position, as discussed in Section 3 below). 2.5 What is the analytical framework for assessing For an agreement to be vertical in nature, it needs to be entered into vertical agreements? by companies which, for the purposes of the agreement, operate at different levels of the production or distribution chain. The first step in the analysis is to assess whether a vertical agreement A few examples of vertical restraints are exclusive purchasing, has an anti-competitive object or effect. If this is the case, the exclusive supply, exclusive distribution, export restrictions and agreement may qualify for exemption in order to escape illegality. RPM. An exemption may result from the application of either the VABER or the rules regarding an individual exemption. If an agreement cannot be exempt under the VABER (for example, because the 2.3 What are the laws governing vertical agreements? United Kingdom parties’ market shares exceed 30%), it does not automatically mean that the agreement is unlawful, but rather that it will be necessary to The CA98 prohibits agreements between undertakings, decisions assess whether the restrictions in question may be justified by way by associations of undertakings or concerted practices which may of an individual exemption on the basis that the economic benefits affect trade within the UK, and have as their object or effect the of the agreement outweigh its anti-competitive effects. prevention, restriction or distortion of competition within the UK. This is commonly known as the Chapter I prohibition. Whilst in More specifically, in order to qualify for an individual exemption, RPM cases fines are the main sanction, in other instances involving the parties must be able to prove that the restrictions in the vertical agreements, unenforceability is likely to be the main risk agreement are indispensable, and contribute to improving the for the parties. If a vertical agreement infringes the Chapter I production or distribution of goods, or to promoting technical or prohibition, is it void and unenforceable, unless the offending clause economic progress, while allowing consumers a fair share of the is severable from the agreement under the “blue pencil” approach resulting benefit, and at the same time not eliminating competition. (in which case only that clause would be unenforceable, with the As mentioned under question 2.3 above, this exemption is not one remainder surviving). which can be obtained in advance from the CMA, but rather requires the parties to self-assess the position when they enter into a vertical As set out in response to question 1.1 above, at present the Chapter agreement containing restrictions. I prohibition needs to be interpreted consistently with its EU equivalent, Article 101 TFEU. The CA98 operates on the basis The European Commission’s Guidelines on Vertical Restraints (the of a parallel exemption system which ensures that the EU Vertical “EU Vertical Guidelines”) as well as the UK Vertical Guidelines will Agreements Block Exemption Regulation (the “VABER”, which assist in the determination of the various steps outlined above. The will be discussed in more detail below) automatically exempts CMA and the UK courts may also take these guidance documents certain types of vertical agreements from the Chapter I prohibition. into account. For example, in its Pride Mobility Scooters decision in 2014, the OFT relied on the EU Vertical Guidelines as a basis Since 2004, it is up to companies to self-assess the compliance of for explaining the requirement that anti-competitive restrictions their vertical agreements with UK and EU competition law, and in a vertical agreement must be indispensable for an individual no prior exemption or clearance can be granted by the authorities. exemption to apply. Because such indispensability could not be There is an option of seeking a non-binding Short-Form Opinion established, the OFT rejected Pride’s argument that the discount from the CMA by way of guidance, but this route is only rarely used advertising restrictions as agreed with retailers could be justified in practice. It is therefore important to emphasise that, when the under an individual exemption. remainder of this contribution discusses the criteria for an individual exemption, this does not entail some form or prior exemption or consent granted by the CMA or another authority, but rather an 2.6 What is the analytical framework for defining a market exemption based on self-assessment by the parties (which may in vertical agreement cases? ultimately be tested before the CMA or in court proceedings). Market definition is used as a tool to identify the competitive constraints which a business faces. In the context of vertical 2.4 Are there any type of vertical agreements or restraints agreements, its main practical relevance lies in the consequential that are absolutely (“per se”) protected? ability to determine the parties’ (and if necessary, competitors’) market shares. Relevant markets have a product and a geographic There are no vertical agreements which qualify for absolute or dimension. “per se” protection. However, it is clear that certain types of agreements do not cause competition law concerns. For example, Whilst both demand substitution and supply substitution are taken there is established EU case law that certain restrictions (such as an into account, in practice more weight tends to be given to the former obligation on a franchisee to sell only products in an environment than to the latter. The main tool for assessing demand substitution which meets certain standards set by the franchisor) fall outside the involves asking whether the parties’ customers would switch to scope of Article 101 TFEU and its national equivalents, such as readily available substitutes or to suppliers located elsewhere, in the Chapter I prohibition. Furthermore, if an agreement meets the response to a hypothetical small (5–10%) but permanent relative conditions of the VABER (of which the main one is that the parties’ price increase in the products and areas being considered. If market shares do not exceed 30%), the agreement is protected substitution is enough to make the price increase unprofitable, from further competition law scrutiny. Under certain conditions, additional substitutes and areas are included in the relevant market, arrangements between a principal and an agent, and between a until the set of products and geographical areas is such that a small, contractor and a subcontractor, also fall outside the scope of the permanent increase in relative prices would be profitable. rules regarding vertical restraints. The CMA is only required to define the relevant market if, without such a definition, it is not possible to determine whether the agreement is liable to affect trade in the UK, and whether it has as its object or

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effect the prevention, restriction or distortion of competition. As most establishing market shares, as well as in the competitive assessment cases pursued by the CMA are hard core infringements (such as cartels of the effects of an agreement. Even in cases which are pursued and RPM), there is a dearth of cases where the CMA needed to define as a so-called “object” infringement (where anti-competitive effects the relevant market (other than for penalty purposes). Somewhat do not need to be proven – see question 2.12 below), economic unusually, in 2003 the OFT proceeded to define the relevant market expertise is frequently required for the analysis of the available in an RPM infringement decision regarding the supply of luxury evidence. In practice, the CMA’s project team investigating a ornamental ware in the (UK Lladró Comercial S.A.). potential infringement tends to include one or more economists.

2.7 How are vertical agreements analysed when one of 2.10 What is the role of efficiencies in analysing vertical the parties is vertically integrated into the same level agreements? as the other party (so called “dual distribution”)? Are these treated as vertical or horizontal agreements? The rationale underlying the VABER is the idea that certain types of United Kingdom vertical agreements can improve economic efficiency. Where such Though the VABER does not, in general, apply to vertical agreements agreements (which do not contain any hard core restrictions) are between competitors, there is a limited exception for non-reciprocal entered into by parties with market shares not exceeding 30%, there agreements, which requires that one of the following two conditions is a presumption that efficiencies will outweigh any negative effects. is satisfied (of course in addition to the “normal” requirements under However, if a vertical agreement falls outside the VABER, the VABER, such as market shares not exceeding 30%): efficiencies are not presumed, and it is then for the parties to adduce ■ the supplier is a manufacturer and a distributor, while the evidence that the agreement will result in efficiencies that will buyer is a distributor and not a competitor at the manufacturing be passed on to end-consumers, thus qualifying for an individual level; or exemption (see question 2.5). ■ the supplier is a service provider at several levels of trade, while the buyer sells its products at the retail level and does For example, in Pirtek (UK) Ltd v Joinplace Ltd (2010), the High not compete at the level of trade where it purchases the Court determined that a post-termination non-compete in a franchise contract services. agreement qualified for an individual exemption. The court agreed If the agreement falls outside the VABER, it may still be lawful that a business has a legitimate need to protect its goodwill against based on the criteria for an individual exemption (see question 2.5 ex-franchisees when establishing a new franchising agreement with above). a replacement retailer or distributor, as otherwise the ex-franchisees would have an unreasonable advantage over the new ones.

2.8 What is the role of market share in reviewing a vertical agreement? 2.11 Are there any special rules for vertical agreements relating to intellectual property and, if so, how does the analysis of such rules differ? Market power plays a key role in the assessment of vertical agreements. The VABER only provides a safe harbour if the market There are no special UK rules for vertical agreements regarding share of the supplier does not exceed 30% of the relevant market on intellectual property (“IP”) rights. A vertical agreement that contains which it sells the contract goods or services, and the market share of IP provisions will be able to benefit from the VABER’s safe harbour, the buyer does not exceed 30% of the relevant market on which it as long as those IP provisions do not constitute the primary object of purchases the contract goods or services. the agreement, and they are directly related to the use, sale or resale If an agreement falls outside the VABER (e.g. because one of the of the goods or services by the buyer or its customers. parties’ market shares exceeds 30%), the EU Vertical Guidelines By contrast, the EU Technology Transfer Block Exemption provide guidance as to whether the buyer’s or the supplier’s market Regulation exempts IP licensing agreements concluded between share is considered more important to the analysis. For example, companies that have limited market power (i.e. a market share not when assessing a non-compete obligation (such as exclusive exceeding 20% for agreements between competitors, or 30% for purchasing) in a vertical agreement, the supplier’s market share agreements between non-competitors), that fulfil certain conditions. will be key, while in the case of an exclusive supply obligation, the Further discussion of this block exemption falls outside the scope of buyer’s market share on the downstream market will largely inform this contribution. the competitive assessment. IP rights do not tend to feature prominently in assessments of vertical Generally, the higher the market shares of the parties involved, agreements by the CMA or by UK courts. Nevertheless, they have the more difficult it will be for the parties to justify the agreement occasionally been discussed in the context of RPM investigations under the criteria for an individual exemption. In Calor Gas Ltd (see question 2.16), where suppliers withdrew copyright consent for v Express Fuels (Scotland) Ltd (2008), the supplier’s high market resellers to use official photos of products on their websites, unless share (c.50%) in a market considered to be “mature” was one of the the resellers agreed to follow the suppliers’ retail pricing schemes main factors taken into account by the Scottish Court of Sessions in (for example in the CMA’s 2016 Bathroom Fittings decision). its assessment of a single branding obligation. In another case involving IP rights, in 2004 the OFT secured If a party to a vertical agreement has sufficient market power to be assurances from Peugeot that its car dealerships were not obliged to considered dominant, that party’s conduct may also be scrutinised adhere to certain corporate branding standards, even though the use under the abuse of dominance provisions (see Section 3 below). of these standards was highly recommended (Peugeot Dealerships).

2.9 What is the role of economic analysis in assessing 2.12 Does the enforcer have to demonstrate vertical agreements? anticompetitive effects?

Economic analysis is integral to the assessment of vertical The CMA may be required to demonstrate anti-competitive effects, agreements, for example in defining the relevant market and

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depending on whether the agreement in question is anti-competitive by object or not: if it is, there is no need to prove harmful effects, 2.15 Have the enforcement authorities issued any formal as they will be presumed to exist. By contrast, if the agreement’s guidelines regarding vertical agreements? object is not anti-competitive, harmful effects need to be proven. The EU Vertical Guidelines of 2010 provide the most authoritative An agreement is anti-competitive by object if it is, by its very guidance in this area. In addition, whilst the UK Vertical Guidelines nature, harmful to the proper functioning of competition. The main of 2004 are older, they may still be taken into account. example in a vertical context is RPM, but there are other examples, such as restrictions imposed on a distributor regarding passive sales into a territory or customer group which is exclusively allocated to 2.16 How is resale price maintenance treated under the law? another distributor. If such “hard core” restrictions are contained in an agreement, the parties are no lo longer able to avail themselves RPM is one of the hardcore restrictions mentioned in the VABER, of the safe harbour of the VABER (though an individual exemption and is considered a “by object” restriction as a matter of UK and EU United Kingdom is still a possibility). competition law (i.e. its anti-competitive effects would not need to Whilst the CMA is not legally required to carry out a full effects be proven – see response to question 2.12 above). Its inclusion in analysis if it has established an anti-competitive object, in decisions a vertical agreement will remove the agreement from the VABER raising particularly complex or novel questions, the CMA may safe harbour, and enforcement action by the CMA might result in choose to do so in any event. The CMA took this approach for substantial financial penalties. example in 2016 in its first pay-for-delay decision, involving For example, in 2016 the CMA imposed a £2.3 million fine on a agreements between GSK and generics manufacturers in relation to supplier of refrigerators to commercial caterers in connection with paroxetine. That case is currently on appeal (Generics (UK) Limited a finding of RPM (Commercial Refrigerators). The supplier was and GlaxoSmithKline plc et al v Competition and Markets Authority granted several penalty reductions, including in recognition of its – see question 1.15 above). new staff compliance training programme, as well as cooperation Another example of a “by object” restriction of competition with a with the investigation. vertical dimension is information sharing by way of a so-called “hub It is worth noting that recommended resale prices (“RRPs”) and and spoke” arrangement. This sometimes occurs when retailers maximum resale prices (“MRPs”) are generally permitted, as long coordinate their pricing behaviour by using a common supplier as as these prices do not in practice amount to fixed or minimum sale an intermediary. Such arrangements can result in significant fines prices as a result of pressure or incentives. There may also be a for the parties involved. For example, in 2003 the OFT imposed residual concern regarding RRPs and MRPs turning into “focal a £22.7 million fine on retailers Argos and Littlewoods for having prices” adhered to by retailers, particularly when these are set by a engaged in price fixing with toy manufacturer Hasbro, who escaped supplier with market power. a fine of £15.6 million due to a successful leniency application. The The highest individual fine imposed on a single company for penalties were upheld by the CAT and Court of Appeal (Toys and straightforward RPM conduct in the UK was a £5 million penalty Football Kits (2006)). imposed on Hasbro in 2002 (reduced from £9 million on leniency grounds). Penalties have tended to be higher in “hub and spoke” 2.13 Will enforcers or legal tribunals weigh the harm cases which were discussed in question 2.12 above. For example, in against potential benefits or efficiencies? 2011 the OFT imposed a £10.4 million penalty on Tesco in relation to conduct in the dairy and cheese sector (with the fine subsequently As outlined in the response to question 2.5, if a vertical agreement being reduced to £6.5 million by the CAT in Tesco Stores Limited et which restricts competition is unable to benefit from the safe harbour al v Office of Fair Trading (2012)). Cumulatively, the fines imposed of the VABER (e.g. due to the parties’ market shares exceeding on the parties involved in that investigation (prior to the reductions 30%), the question arises whether the pro-competitive benefits of on appeal) amounted to close to £50 million. the agreement outweigh its anti-competitive harm, for it to qualify It is illustrative for the CMA’s current enforcement priorities that for an individual exemption. 84% of the cases in which the CMA sent warning letters in 2016 In 2008, following a request from a group of newspaper and related to suspected RPM practices. magazine publishers regarding the inclusion of exclusive territorial restrictions in agreements with wholesalers, the OFT issued an 2.17 How do enforcers and courts examine exclusive Opinion to facilitate self-assessment by industry players. In it, the dealing claims? OFT discussed the potential efficiency gains that may arise from territorial agreements in the newspaper and magazine industry, Exclusivity provisions in vertical agreements are considered under how these may be passed on to consumers, and whether they are the VABER in the first place, but will only benefit from the VABER’s indispensable, while also balancing them against the anticipated safe harbour if the parties’ market shares do not exceed 30%. competitive harm (Newspaper and magazine distribution). Exclusive purchasing and single branding obligations fall within the definition of “non-compete obligations” in the VABER. As a 2.14 What other defences are available to allegations that a consequence, in addition to the 30% market share requirement, the vertical agreement is anticompetitive? duration of the obligation should not be in excess of five years or indefinite (which would also include tacitly renewable obligations There are no meaningful defences and immunities available, beyond beyond five years). An exclusive purchasing obligation which does those discussed above (see in particular questions 1.10, 2.4 and 2.5). not meet these conditions may qualify for an individual exemption (see question 2.5 above).

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In Calor Gas Ltd v Express Fuels (Scotland) Ltd (2008), the Scottish Court of Sessions was asked to decide whether a five-year exclusive 2.20 How do enforcers and courts examine loyalty purchasing obligation imposed by Calor Gas on customers breached discount claims? competition law. It was clear that the VABER did not apply as Calor Gas’ market share exceeded 30%, and so the Court took into account Loyalty discounts are primarily considered problematic when the the EU Vertical Guidelines. Eventually the Court decided that the company engaging in the discounting holds a dominant position (see obligation was unenforceable, having emphasised “the importance Section 3 below). Outside a dominance context, a loyalty discount of the twin factors of market power and the duration of the single- granted by a supplier to a retailer in exchange for not discounting branding obligation”. below RRPs would be unlawful (see question 2.16 above). Exclusive supply agreements are generally considered unproblematic under the VABER, as long as the parties’ market shares do not 2.21 How do enforcers and courts examine multi-product exceed 30%. Outside the VABER, the market position of the buyer or “bundled” discount claims? United Kingdom (that is, the beneficiary of the exclusivity) is key. As far as exclusive distribution is concerned, the distinction Multi-product or “bundled” discounts may be considered between active and passive sales is relevant. A supplier may be able problematic in situations where the company engaging in the to prevent an exclusive distributor from actively selling into other discounting holds a dominant position (see Section 3 below). territories or other customer groups, whereas restrictions on passive sales are not allowed. 2.22 What other types of vertical restraints are prohibited If a party to a vertical agreement holds a dominant position, by the applicable laws? exclusivity provisions in the agreement may also be scrutinised under the abuse of dominance provisions (see Section 3 below). The main examples of vertical restraints which are problematic under UK and EU competition law were discussed in response to question 2.12 above. One area of practical importance which has 2.18 How do enforcers and courts examine tying/ not yet been addressed relates to selective distribution. Based on supplementary obligation claims? EU case law, it is clear that a selective distribution system will generally fall outside the Chapter I prohibition if the products are Tying is considered potentially problematic in situations where of a kind that needs a selective distribution system to be in place the company engaging in tying conduct holds a dominant position (such as technically complex products where after-sales service in the market. It could also give rise to concerns in the absence is important), the distributors are selected on the basis of non- of dominance if it resulted in single branding (see question 2.17 discriminatory qualitative criteria, those criteria do not go beyond above), depending on the duration of the agreement, and whether what is necessary and the purpose of the system is pro-competitive. market foreclosure would be likely. The VABER requires that cross-supplies between distributors in In Socrates Training v The Law Society of England and Wales a selective distribution system are unrestricted by any contractual (2017), the CAT found that the Law Society had breached both arrangements. the Chapter I and the Chapter II provisions by engaging in tying A vertical restraint which has recently received attention concerns conduct. The infringement arose due to the obligation imposed by internet sales bans. The EU Vertical Guidelines state that “dealers the Law Society on law firms who were members of an accreditation should be free to sell, both actively and passively, to all end users, scheme to obtain certain training required for that accreditation also with the help of the internet”. In its 2013 decision in Roma exclusively from the Law Society (see also question 3.4 below). Mobility Scooters, the OFT stated that retailers should be permitted In Punch Taverns (PTL) Ltd v Moses (2006), a pub tenant was under to advertise and sell products online, and that an internet sales a contractual obligation from the pub owner to purchase all his beers ban imposed on retailers could not be justified by the need for an from the owner’s list of available brewers. The tenant argued that assessment to take place in the presence of the end consumer. The the obligation was anti-competitive, and therefore unenforceable. long-awaited European Court of Justice judgment in Coty is expected However, the High Court ruled that since the obligation was to to shed further light on whether a ban on sales through third-party purchase from the list rather than from any specific brewer, and the online platforms could be justified in a selective distribution system. available brewers on the list changed regularly, there was no real risk of foreclosure of new entrants at the brewer level. 2.23 How are MFNs treated under the law?

2.19 How do enforcers and courts examine price Most favoured nation (“MFN”) clauses are sometimes known as discrimination claims? most favoured customer clauses, best price clauses or price parity clauses. MFNs used by internet platforms engender diverging Price discrimination is normally thought of as problematic conduct views between the various EU National Competition Authorities for businesses with a dominant position (see Section 3 below). (“NCAs”) as well as the European Commission. This divergence There is a particular sensitivity under EU competition law with came to light most prominently in 2015 when the Italian, Swedish regards to price discrimination in the form of charging different and French competition authorities accepted commitments in prices to customers depending on their nationality or location in relation to the use of MFNs by Booking.com, followed by other the EU. For example, several hotel industry players are currently competition authorities wrapping up investigations and the European under investigation by the European Commission under Article 101 Commission announcing a moratorium on new investigations. TFEU due to suspected price discrimination practices of this kind. At the heart of the string of investigations lies the difference between However, it is unlikely that the CMA would take similar enforcement so-called “wide” MFNs (which oblige hotels to give the platforms steps aimed at avoiding a partitioning of the EU’s internal market, the lowest room prices relative to all other sales channels) and particularly with Brexit looming (see question 1.13 above). “narrow” MFNs (which allow hotels to offer lower room prices on

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other platforms and on offline sales channels, but the platforms may decision against pharma company Genzyme, held that “a market still stop the hotels from publishing lower room prices on the hotels’ share of 90% or above, which has continued throughout the period own websites) in the platforms’ contracts with hotels. The above- of infringement and is likely to continue for several years, will be mentioned 2015 commitments package removed wide MFNs but sufficient, depending on the circumstances, to infer the existence of left narrow MFNs in place. However, several countries (including dominance” (Genzyme Limited v The Office of Fair Trading (2004)). Germany, France and Italy) have gone further, and seen legislative However, lower market shares can also result in a finding of and judicial steps banning narrow MFNs. dominance. In its 2016 decision in Paroxetine (see question 1.15), Having worked in this area alongside nine other NCAs and the the CMA cited EU case law that “very large shares (such as a European Commission, the CMA released a statement in April market share of 50%) are, except in exceptional circumstances, in 2017 regarding its ongoing monitoring of pricing practices by hotel themselves evidence of the existence of a dominant position”. booking platforms. The CMA concluded that the scrapping of wide In broad terms, a market share greater than 40% normally requires MFNs by both Booking.com and Expedia increased competition in a thorough analysis as to whether dominance arises, whereas a United Kingdom the market, and that therefore further investigations would not need lower share is normally unlikely to give rise to dominance. More to be prioritised by the CMA at that stage. exceptionally, dominance may still exist below 40%, if other relevant In its final report on the private motor insurance market investigation factors are present which provide strong evidence of dominance. in 2014, the CMA also concluded that wide MFNs between price Whilst market shares are an important factor in the dominance comparison websites and car insurers would need to be banned. assessment, the CMA and courts regularly look beyond them. For example, in Socrates Training v The Law Society of England 3 Dominant Firms and Wales (2017) (see question 2.18 above), the CAT attached importance to the fact that the Law Society’s accreditation scheme in question had become a “must have” product for law firms, before 3.1 At a high level, what is the level of concern over, and concluding that the Law Society held a dominant position. scrutiny given to, unilateral conduct (e.g., abuse of dominance)? 3.5 In general, what are the consequences of being adjudged “dominant” or a “monopolist”? Is Abuse of dominance investigations are currently relatively high on dominance or monopoly illegal per se (or subject to the CMA’s enforcement agenda and, as mentioned in response to regulation), or are there specific types of conduct that question 1.5 above, the CMA imposed a record fine of £84.2 million are prohibited? on Pfizer in 2016 in relation to an abuse of dominance. The CMA’s recent enforcement practice in relation to abuse of dominance has It is not unlawful for a business to hold a dominant position. It mainly focused on the pharmaceutical sector. It is expected that would, however, be unlawful to engage in conduct which amounts dominant businesses will remain under a high level of scrutiny in to an abuse of such a position (in the absence of any objective the foreseeable future. justification – see question 3.8 below). Dominant companies are considered to have a “special responsibility” 3.2 What are the laws governing dominant firms? according to the EU case law. This mantra was recently repeated by the CMA’s Senior Director of Antitrust Enforcement in relation to the The CA98 provides that “any conduct on the part of one or more excessive pricing case against Pfizer and Flynn Pharma (Phenytoin undertakings which amounts to the abuse of a dominant position Sodium Capsules), when she stated publicly that businesses “that in a market is prohibited if it may affect trade within the United hold a dominant position have a special responsibility to ensure that Kingdom”. This is commonly known as the Chapter II prohibition. their conduct does not impair genuine competition and that their As with the Chapter I prohibition, the interpretation of the Chapter prices are not excessive and unfair”. II prohibition should be consistent with its EU equivalent, Article 102 TFEU. 3.6 What is the role of economic analysis in assessing market dominance? 3.3 What is the analytical framework for defining a market in dominant firm cases? Economic analysis plays an important role in determining both dominance and abuse. In practice, the CMA’s project team Where the CMA and courts pursue an abuse of dominance case investigating a potential infringement tends to include one or more under the Chapter II prohibition, they are also obliged to apply economists. In private litigation, the court will regularly rely on Article 102 TFEU, if there may be an effect on trade between EU economic expert evidence in abuse of dominance cases. Member States. The framework for defining the relevant market is the same as in 3.7 What is the role of market share in assessing market other competition law cases, including vertical agreements. See dominance? question 2.6 above. See question 3.4 above.

3.4 What is the market share threshold for enforcers or a court to consider a firm as dominant or a monopolist? 3.8 What defences are available to allegations that a firm is abusing its dominance or market power? There is no single market share threshold above which dominance is certain, and no threshold below which dominance can definitively Abuse of dominance allegations may be refuted by establishing that be ruled out. The CAT, in the appeal from the OFT’s margin squeeze the business has a justification for the conduct in question. This may

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be done by demonstrating that the company’s conduct is objectively In the Groceries market investigation in 2008, the CMA’s necessary or that its conduct produces substantial efficiencies which predecessor, the CC, concluded that the grocery retailers’ exercise outweigh any anticompetitive effects on consumers. of buyer power vis-à-vis the suppliers could be anti-competitive. The objective justification defence may be argued in all cases, but This resulted in 2010 in the creation of the Groceries Supply Code in practice the CMA adopts a strict approach, setting a high bar for of Practice (“GSCOP”) which sets out rules for how retailers with a successful defence. Whilst the burden of proof as to the abusive groceries sales of more than £1 billion are expected to deal fairly conduct lies with the CMA (or the claimant, in private litigation), it with their suppliers. GSCOP is enforced by the Groceries Code is up to the dominant business to provide evidence of a justification. Adjudicator who has the power to impose fines on groceries retailers of up to 1% of UK-wide turnover. Currently 10 supermarket groups An example of the use of the “objective justification” defence are subject to the GSCOP obligations. could be seen in a 2010 case, in which the OFT examined alleged predatory pricing by Flybe on the domestic route between Newquay and London Gatwick airports. The OFT concluded that Flybe had 3.12 What counts as abuse of dominance or exclusionary United Kingdom not abused its dominant position, and in particular that there was an or anticompetitive conduct? objective justification for Flybe’s decision to enter this route despite projecting and experiencing initial losses. The OFT found that such Abuse under the Chapter II prohibition may fall in either one of the losses on entering a new route were normal commercial practice for following categories: an airline, and were due to the need to stimulate market demand for ■ Exclusionary abuse, such as refusal to supply, predatory the route. See question 3.9 below in relation to efficiencies. pricing, margin squeeze and fidelity-inducing discounts. ■ Exploitative abuse, such as excessive pricing and the imposition of unfair trading conditions. 3.9 What is the role of efficiencies in analysing dominant firm behaviour? Over the past decade most of the enforcement action in the UK (as well as at the EU level) has related to the former. However, As mentioned in response to question 3.8, potentially abusive the latter category appears to have recently made a come-back, conduct may be justified if an efficiencies defence is available. particularly in the pharmaceutical sector where high prices are In 2016, Google successfully invoked efficiencies as a defence now being challenged (see for example question 1.15 regarding the in response to Streetmap’s allegations that Google had abused excessive pricing case against Pfizer). its dominant position. The High Court accepted that Google had implemented a “technical efficiency” by presenting its own online 3.13 What is the role of intellectual property in analysing maps in the search results of geographic queries (Streetmap.eu dominant firm behaviour? Limited v Google Inc. et al). In cases involving price-based exclusionary conduct (e.g. loyalty Ownership of IP rights does not necessarily create a dominant discounts, predatory pricing) the European Commission has made position. However, dominance may result from such ownership if it clear (in its Guidance on enforcement priorities regarding abuse there are no or limited substitutes for the product, process or work of dominance) that it will focus on an “equally efficient competitor” to which the IP relates. The exercise of IP rights may in certain of the dominant business to assess whether that competitor would circumstances amount to abuse. be foreclosed from the market. The CMA took a similar approach For example, in 2011 the OFT found that Reckitt Benckiser had in 2015 in a case closure statement in 2015 regarding a suspected abused its dominant position by removing its Gaviscon Original loyalty-inducing discount scheme in the pharmaceutical sector. It Liquid product from the NHS prescription channel after the expiry explained that “where the structure of the rebate or discount scheme of its patent, but in advance of publication of the product’s generic means that the price which a competitor would have to charge to name. The purpose was to stop doctors writing prescriptions which compete for contestable sales is below the dominant company’s costs allowed pharmacies to give out generic alternatives to the original of production, the CMA is likely to be concerned that a competitor Gaviscon Liquid product. Reckitt Benckiser was fined £10.2 million that is equally as efficient as the dominant company could be (reduced from £12 million on settlement grounds). foreclosed from competing for some, or all, of the contestable share of the market”. 3.14 Do enforcers and/or legal tribunals consider “direct effects” evidence of market power? 3.10 Do the governing laws apply to “collective” dominance? Market definition tends to be an integral part of abuse enforcement Yes. The statutory wording of the Chapter II prohibition covers cases in the UK, and normally the CMA would first want to “conduct on the part of one or more undertakings”. Conduct by establish that the company in question holds a dominant position collectively dominant businesses may therefore be abusive, although before scrutinising the conduct. The use of shortcuts such as the cases are rare in this area. “direct effects approach” is rare. However, sometimes a company’s market behaviour is taken into account as one of several factors 3.11 How do the laws in your jurisdiction apply to in the assessment of dominance, as for example the CAT did in a dominant purchasers? margin squeeze case against pharmaceutical manufacturer Genzyme (Genzyme Limited v The Office of Fair Trading (2004)). The CA98 applies to all businesses, including those that hold a It is not uncommon in private litigation that, mainly for efficiency dominant position on a purchasing market. and cost reasons, the scope of the litigation is limited to the question Enforcement action against dominant purchasers is rare in the UK. of abuse, and the question of dominance is left open, at least in In BetterCare (2003) the OFT found that the North & West Belfast the first instance. For example, in Arriva The Shires Ltd v London Health & Social Services Trust had not infringed the Chapter II Luton Airport Operation Limited (2014) the parties agreed on this prohibition by purchasing social care services at low rates. approach at the outset of the court proceedings.

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seven year exclusivity period on the Luton-Central London route 3.15 How is “platform dominance” assessed in your was abusive, as it seriously distorted competition between coach jurisdiction? operators who wished to provide bus services from the airport. The court rejected the airport’s defence that it had an objective Most eye-catching platform cases (such as those involving Google, justification for its grant of exclusivity (Arriva The Shires Ltd v Amazon and Apple) have been or are being handled at the EU level. London Luton Airport Operation Limited (2014)). The CMA’s recent involvement in the Hotel Bookings case was referred to in question 2.23 above. In 2014, the CMA closed its investigation in the Service, 4 Miscellaneous Maintenance and Repair Platforms case after it received commitments from an allegedly dominant business, Epyx Limited. 4.1 Please describe and comment on anything unique to Epyx operated an online platform for service, maintenance and your jurisdiction (or not covered above) with regards repair services used by businesses with vehicle fleets, such as to vertical agreements and dominant firms. United Kingdom leasing and rental companies. The CMA provisionally concluded that Epyx held a dominant position. The potential abuse consisted Two unique features of the current British competition law scene, in the use of restrictive terms in Epyx’ contracts with customers and Brexit and GSCOP, were already discussed in response to questions suppliers, which had an exclusionary effect on competitors. Under 1.13 and 3.11, respectively. the commitments Epyx promised not to include such restrictive One other uniquely British aspect relates to the CMA’s power to terms in its contracts for a period of five years. conduct market investigations. The aim of such investigations is to examine the workings of markets to identify any competition 3.16 Under what circumstances are refusals to deal concerns and to establish whether the markets are working well for considered anticompetitive? consumers. If the CMA concludes that markets are not working well, it has far-reaching remedies powers, which may also impact Businesses are generally free to choose with whom they want to on parties to vertical agreements and operators with a dominant deal. However, in certain circumstances, a dominant company may position. be required to maintain its business dealings with another party or Such market investigations could result in the break-up of businesses. to grant access to certain facilities, as a refusal might amount to an For example, in 2009 the CMA’s predecessor, the CC, identified a abuse of dominance. number of features of the market for the supply of airport services In the 2011 case of Purple Parking Limited and Meteor Parking by BAA which gave rise to an adverse effect on competition (BAA Limited v Heathrow Airport Limited, the High Court found that Airports). In particular, it considered that competition was distorted Heathrow Airport had abused its dominant position by forcing two by BAA’s common ownership of the three largest London airports independent valet parking operators to move their ‘meet and greet’ (Heathrow, Gatwick and Stansted), and Edinburgh and Glasgow services from the airport forecourts to the short stay car parks, whilst airports. The CC decided to require BAA to divest two of its Heathrow’s own valet parking operation would be permitted to work London airports (Gatwick and Stansted) to different purchasers and from the forecourts, without any objective justification for doing so. also to divest either Glasgow or Edinburgh airport (which eventually In another case involving access to an airport’s forecourt facilities, resulted in the divestment of Edinburgh airport). the High Court determined that concession agreement between Luton Airport and National Express granting National Express a

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Ajal Notowicz Maria Ziprani Dickson Minto Dickson Minto Broadgate Tower Broadgate Tower 20 Primrose Street 20 Primrose Street London, EC2A 2EW London, EC2A 2EW United Kingdom United Kingdom

Tel: +44 20 7628 4455 Tel: +44 20 7628 4455 Email: [email protected] Email: [email protected] URL: www.dicksonminto.com URL: www.dicksonminto.com

Ajal Notowicz joined Dickson Minto in 2008 as Head of the EU and UK Maria Ziprani joined the competition practice at Dickson Minto in 2016 Competition Group. He provides advice to clients in relation to national from CMS Cameron McKenna. She has experience advising on a

United Kingdom and cross-border merger notifications, behavioural competition law wide range of competition law matters, and was previously seconded and compliance matters. The Legal 500 recently praised him for to an international oil & gas company. Maria studied EU and UK having the “rare ability to explain difficult concepts clearly”, whilst competition law during her LL.B. and LL.M. at King’s College London Chambers said he “is technically excellent and is able to communicate and University College London. She is bilingual in English and Italian. complicated issues in a straightforward manner”. From 2004 until 2008, Ajal worked in Allen & Overy’s competition department in London. In 2004 Ajal was seconded for six months to Ofcom’s Competition & Markets group. He worked at Fox Kids Europe as legal counsel in 2002 and 2003. Ajal trained at Amsterdam- based top-tier firm Kennedy Van der Laan. Prior to that, he worked for six months as a stagiaire at the European Commission in D-G Competition. Ajal is a bilingual English and Dutch speaker, and has a working knowledge of German and French.

Dickson Minto is a boutique law firm that specialises in corporate and commercial law matters. The firm is known for developing long-term client relationships by providing clear, concise and commercial advice. Dickson Minto places a high value on its partner-led quality of service, its agility, its integrity, its discretion and its value to clients. The firm is a trusted advisor for the long haul. Dickson Minto’s competition law practice assists clients on a wide range of competition law matters, including competition investigations by the UK’s Competition and Markets Authority, the European Commission and other competition authorities across the world. The competition law practice’s client base includes many major international private equity houses as well as listed and private corporates. In addition, many overseas law firms regularly call on Dickson Minto’s experience in handling EU and UK merger filings and behavioural antitrust investigations.

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