EU Competition Law and Covid-19 Crisis: Making a Case for Efficiency-Enhancing Cartels
By Mudit Nigam & Shreya Chandhok
Introduction
The ongoing Covid-19 pandemic has affected both businesses and consumers. On the one hand, there is a steep increase in demand for certain products while on the other; there is a reduction in the distribution and supply of goods and services due to market shutdown. Consumers are struggling to purchase essential goods and services, especially related to healthcare. To mitigate the effect of this crisis, undertakings may cooperate and create synergies to produce the best results for end consumers and the market. However, such conduct may be prohibited by EU competition law. This leads to one important question; considering the current crisis, can undertakings justify agreements restricting competition for the benefit of consumers given the difficulties faced as a result of the economic crisis.
In order to answer this question, the paper firstly analyses the concept of crisis cartels and the approach of the courts towards such cartels. Secondly, the paper considers the European Commission’s (EC) response to Covid-19 and the Temporary Framework introduced by it. The paper also argues the need to allow coordination of undertakings which stabilises the disruption in demand and supply chains thereby enhancing efficacy in the market.
- EU Competition Law and Approach Towards Crisis Cartels
The EU competition law framework prohibits undertakings from entering into anti-competitive agreements. The most egregious violation of competition law is the formation of so-called ‘cartels’, which directly restrict competition in the market.[1] Article 101 of the Treaty on Functioning of the European Union (TFEU) deals with such agreements. It incorporates two steps. The first step under article 101(1) is to assess whether there is an agreement between undertakings, a decision by association of undertakings, or a concerted practice that has an anti-competitive object or effect which affects trade between Member States. The second step, under article 101(3), is to access whether the pro-competitive effects of such agreements outweigh the restrictive effects on competition.
Article 101(3) provides for the following pro-competitive effects that are to be considered by the EC while assessing the effect of any collaboration: (i) the improvement in production or distribution of goods in the market and (ii) the promotion of technical or economic progress. The so-called efficiencies must allow customers a ‘fair share’ of the resulting benefits. Furthermore, such collaboration should not impose unnecessary restrictions or eliminate competition from the market. The burden of proving the pro-competitive effects lies on the undertakings.
1.1 The Effect of Crisis Cartel on a Competitive Market
An industrial restructuring agreement, also known as a crisis cartel, is one such coordination that requires weighing the pro-competitive effects of a cartel under article 101(3) to allow such collaborations.[2] Competitors, when facing an economic downturn, are tempted to cooperate to overcome the common challenges faced. Over the years, many undertakings have attempted to justify illegal agreements by relying on a crisis or an issue of overcapacity, which eventually forced the exit of inefficient undertakings from the market, producing a cleansing effect.[3] Usually, the term ‘crisis cartels’ is misleading and creates an impression that these cartels might be authorised to protect the industry from an economic crisis in general.[4] However, these cartels should not be related to the cyclical or any current economic crisis and must deal with a situation that cannot be rectified with the help of market forces.[5]
Under normal circumstances, the European Court of Justice (ECJ) held that ‘[t]he concept inherent in the Treaty provisions on competition [is that] each trader must determine independently the policy which he intends to adopt on the common market’[6] This statement leads to the conclusion that it is for each undertaking to decide for itself when its capacity is turning economically unsustainable and undertake measures to rectify it. Generally, competition law remains enforceable, even during a crisis, and the EC, along with French, Greek, Polish, and Spanish authorities, have stated that an economic crisis alone will not exempt anti-competitive activities between competitors from antitrust scrutiny.[7]Moreover, the European General Court noted that ‘it is impossible to distinguish between normal competition and ruinous competition. Potentially, any competition is ruinous for the least efficient undertakings.’[8] This highlights the fact that collaboration in any form that restricts competition is prohibited under the EU competition law, even if it leads to cleansing of the market by eliminating inefficient undertakings.
1.2 Judicial Approach of the EU towards crisis cartels
As circumstances under the Covid-19 crisis have demonstrated, there are instances when market forces are not sufficient to eliminate this problem and therefore, collaboration in the form of cartels might be allowed. Nevertheless, such collaboration among entities must fall within one of the exemptions under article 101(3) of TFEU and thus act as efficiency-enhancing cartels.[9] For example, cases like that of Synthetic Fibres Matter in 1948,[10] and the Dutch Brick Industry restructuring (Stichting Baksteen) in 1994[11] opened up to the possibility of cooperation between competitors in case of extraordinary circumstances and financial challenges when the consumers received a ‘fair share’ of the benefits. However, in the Irish Beef Cartel Case[12] in 2008, the ECJ stated that an agreement may be regarded as anti-competitive even if a restriction on the competition is not its sole aim. Subsequently, after an amicus curiae intervention by the EC,[13] the Irish High Court[14] indicated that if the circumstances are sufficiently serious, they may warrant increased but limited cooperation under times of crisis. Consequently, in the 2011 UK Dairy Industry Price Initiative case,[15] the matter was subjected to long-standing investigations due to the collusion between dairy farmers concerning the price of milk and cheese, which could not be justified under article 101(3) and led to fines being imposed.
The EC’s approach since 2003 appears to be strict since there is no room for non-economic considerations like consumer comfort. The EC still places greater value to classic efficiencies such as increased investments, saving costs, and number of market players.[16] Cost internalisation, which is a situation when a transaction is handled by an entity itself rather than routing it out to consumers, is one of the non-economic factors for providing consumers with their ‘fair share’.[17]This must therefore be considered as an important yardstick while assessing such crisis cartels. The Covid-19 pandemic is a situation under which it can be considered logical for undertakings to come together and find a common solution lawfully.
The following section discusses the response of the EC and how the situation may be sufficiently serious to warrant collaborations amongst competitors to internalise their cost and provide the ‘fair share’ to their consumers.
- The EC’s Response to Covid-19
Considering the situation of crisis-hit European countries, the European Competition Network released a joint statement on the application of competition law during the Covid-19 crisis.[18] This joint statement acknowledged the need for coordination among companies to ensure the supply of essential goods during this extraordinary situation.
2.1 The EC’s Temporary Framework for assessing Antitrust Issues
On 8 April 2020, the EC released a Temporary Framework to provide temporary processes and criteria for assessing competition law concerns arising out of coordination of undertakings during the crisis.[19] In the Temporary Framework, the EC expressed its concern over the unprecedented shock to the global and Union economies and disruption of demand and supply chains of products, especially in the healthcare sector.[20] Additionally, the EC acknowledged the need for cooperation to mitigate the effects of this crisis by ensuring adequate supply and distribution of essential goods and services to the consumers. However, it is pertinent to note that EU competition law will remain applicable during the crisis as the Temporary Framework is a non-binding communication from the EC, mainly explaining the permitted conduct under the already existing EU competition law. The EU and the national courts in the normal course would not bring proceedings for a potential competition law breach addressed in the Temporary Framework, since it is not a legislative EU Act but only a soft law instrument.
Many undertakings, especially those operating in the health sector, may require different degrees of cooperation to meet the growing demand for essential goods and services. This cooperation may involve reorganisation of production, reallocation of production plants or stock, production of different products,[21] or sharing of information on sales and stalks.[22] These considerations may fall within article 101(1) under normal circumstances. Accordingly, to ensure smooth cooperation of undertakings under exceptional circumstances the EC has committed itself to relaxing the application of competition law. However, such cooperation must satisfy the three conditions.
Firstly, it must be objectively necessary to efficiently enhance the output or prevent scarcity of essentials goods or services especially those useful in treating the Covid-19 patients. Secondly, it must be applied only as long as there is a possibility of shortage or any other event in crisis. Thirdly, it must be within the limits necessary to achieve such objectives.[23] The Temporary Framework also provides for exceptional procedure of granting ad hoc guidance to undertakings or trade associations and industry-wide comfort letters through the Directorate General of Competition (DG Competition).
2.2 Special Relief to Healthcare and Agri-Food Sector
This Temporary Framework focused particularly on the health care and pharmaceutical sectors and emphasised the need for lawful cooperation among undertakings operating in these crucial sectors. Such lawful cooperation may include joint transportation, identification of essential medicines,[24]and prediction of demand or sharing of non-individualised information about aggregate production and capacity.[25] Moreover, in furtherance of consultation sought by the Medicines for Europe association, DG Competition has also issued a comfort letter on coordination in the pharmaceutical industry to prevent the shortage of medicines.[26] It allows such undertakings to identify demand, re-organise production of medicines and the cross supply of pharmaceutical ingredients, guided by an online platform.
The EC has also announced exceptional measures to support the undertakings operating in the agri-food sector.[27] For instance, the EC proposed to grant private storage aid for dairy and beef products and for the temporary withdrawal of such products from the market. Additionally, the EC also allowed exceptional derogation from EU competition rules in milk, flowers and potatoes sectors to allow operators to self-organise and take collective measures to stabilise the market. This power is derived from article 222 of regulation 1308/2013 on the common organisation of markets in agricultural products,[28] which allows the EC to suspend the application of article 101(1) to agreements in these sectors to stabilise the market. This scheme is applicable only for a maximum period of six months.
After the above analysis, the permitted cooperation can be divided into two categories. In the case of ‘cooperation as a response’, the collaboration aims at improving or preserving the production, distribution, and supply chains. In ‘innovative cooperation’, the cooperation aims at the creation of a new product or using innovation to counter the crisis.[29] The endorsement of the latter type of cooperation can be considered in line with article 101(3), as it creates efficiencies for the benefit of consumers. Furthermore, the general structure of article 101(1) and 101(3) allows the EC to gauge the effect of an agreement on competition in the market and exempt agreements if its pro-competitive effects outweigh the anti-competitive effects. The factors that must be considered for allowing coordination include the scope of the agreement, the instability in the market due to crisis, the duration of the cooperation and the number of parties to the agreement.[30]However, the EC in the comfort letter indicated that cooperation involving coordination or discussion on future prices, costs, and wages are unlikely to be lawful or justified by pro-competitive effects.[31]
Conclusion
The actions undertaken by the EC in response to the Covid-19 crisis are praiseworthy and timely. There has been a remarkable shift in the approach of the EC in the last 72 years, and now in 2020. The Temporary Framework allows cooperation of undertakings to promote efficiency in market along with well-defined criteria for permitting such cooperation. The EC has also warned the undertakings to not consider these relaxations as a carte blanche for breaching competition law.[32] Further, the EC has issued a comfort letter after nearly 20 years[33] from the last individual informal guidance to exempt certain types of coordination in the pharmaceutical industry, arguably the most important sector in this crisis. However, the DG Competition has not gone as far as the other competition authorities in granting sector-specific comfort letters and guidance. The Norwegian government, for example, has provided a three-month relief on prohibitions against horizontal cooperation in the transportation sector.[34] Furthermore, the Competition and Markets Authorities (CMA) in the United Kingdom are providing targeted relaxation of certain elements to facilitate coordination concerning grocery supply.[35] The Australian Competition and Consumer Commission (ACCC) has provided interim business-specific authorisations[36] to supermarkets, airlines, banks, and the wholesalers to work together to ensure a continual supply of pharmaceutical products.[37] Thus, it is submitted that the DG Competition may issue more comfort letters for similar sectors in the EU.
There is currently a heavy burden of proof on the undertakings to prove that their coordinated actions are exempted under article 101(3). It is also possible that the collaboration which is for a period of three months on paper might have its impact for a year or more during the post-pandemic period. Therefore, to have a smooth transition from the ‘pandemic period’ to ‘post-pandemic period’ the importance of proper documentation and record-keeping comes into play. Thus, it is advisable that all the undertakings must have satisfactory documentation of their actions including the circumstances that led to collusion, the response of consumers, and the pro-competitive impacts of their collusion to be transparent. In view thereof, and in absence of explicit EC guidance, the coordination among competitors could be allowed by the EC on an individual basis under article 101(3) if it enhances efficiency in the market and promotes consumer benefit.
[1] Treaty on the Functioning of the European Union [2008], article 101.
[2] The Organisation for Economic Cooperation and Development, ‘Crisis Cartels’ (18 October 2011) <www.oecd.org/daf/competition/cartels/48948847.pdf> accessed 19 May 2020.
[3] Frederic Jenny, Marcel Boyer and Christophe Bovet, ‘Competition Policy and The Covid-19 Opportunity’, (May 2020) The Concurrences May 2020.
[4] OECD, ‘Crisis Cartels’ (n 2), 110.
[5] ibid.
[6] Case C-7/95 P John Deere Ltd v Commission ECLI:EU:C:1998:256, [86].
[7] Christopher Thomas, Christian Ritz, Stefan Kirwitzke and Raphael Fleischer, ‘COVID-19 and Competition Law Companies Must Not Quarantine Competition Law Compliance’, Competition Policy International, 2020.
[8] Case T-29/92 Vereniging van SamenwerkendePrijsregelendeOrganisaties in de Bouwnijverheid (SPO) ECLI:EU:T:1995:34, [294].
[9] Bos, Iwan, and Erik Pot. ‘On the Possibility of Welfare-Enhancing Hard Core Cartels’ Journal of Economics, Vol 107, No 3, 2012, 199–216. <www.jstor.org/stable/43574617>accessed 29 May 2020.
[10] Commission Decision, Synthetic Fibres (4 July 1984) (IV/30.810).
[11] Commission Decision, Stichting Baksteen (29 April 1994) (IV/34.456).
[12] Case C-209/07, Competition Authority v Beef Industry Development Society Ltd, and Barry Brothers ECLI:EU:C:2008:643, [21].
[13] ibid.
[14] Beef Industry Development Society Ltd [2006] I.E.H.C. 294 at [98].
[15] OFT Case CE/3094-03, Decision issued 10 August 2011; Tesco et al v OFT [2012] CAT 3.
[16]European Union, ‘Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements’ (2011/C 11/01)<https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX%3A52011XC0114%2804%29> accessed 20 May 2020.
[17] See CE Delft, ‘Internalisation measures and policy for the external cost of transport’ Version 1.0 (June 2008) <https://ec.europa.eu/transport/sites/transport/files/themes/sustainable/studies/doc/2008_internalisation_measures.pdf> accessed 6 June 2020.
[18]European Competition Network, ‘Joint statement by the European Competition Network (ECN) on the application of competition law during the Corona crisis’ <https://ec.europa.eu/competition/ecn/202003_joint-statement_ecn_corona-crisis.pdf> accessed 5 May 2020.
[19] European Commission, Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak (2020/C 116 I/02),08 April 2020 (Temporary Framework).
[20] ibid para 12.
[21] European Commission, Coronavirus solidarity: EU Industry steps in to protect European citizens, (26 May 2020)<https://ec.europa.eu/growth/content/coronavirus-eu-industry-steps-protect-european-citizens_en>accessed on 27 May 2020.
[22] Temporary Framework (n 20), para 10.
[23] ibid para 15.
[24] ibid para 12.
[25] ibid para 12.
[26]European Commission, ‘Comfort Letters’ (22 May 2020) <https://ec.europa.eu/competition/antitrust/medicines_for_europe_comfort_letter.pdf> accessed 24 May 2020, (Comfort Letter).
[27] European Commission, Coronavirus: Commission announces exceptional measures to support the agri-food sector, (22 April 2020) <https://ec.europa.eu/commission/presscorner/detail/en/ip_20_722> accessed 23 April 2020.
[28]Regulation (EU) No 1308/2013 of The European Parliament And Of The Council Of 17 December 2013 (Regulation (EU) No 1308/2013).
[29]The Organisation for Economic Cooperation and Development, ‘Co-operation between competitors in the time of COVID-19’, (26 May 2020) <www.oecd.org/competition/Co-operation-between-competitors-in-the-time-of-COVID-19.pdf> accessed 28 May 2020.
[30] Regulation (EU) No 1308/2013, para 5.
[31] Comfort Letter (n 27), The European Commission explicitly carves out from the allowed co-operation ‘any discussion of prices or any other possible co-ordination on issues which are not strictly necessary for effectively achieving the aims set out’, COMP/OG – D(2020/044003).
[32] Temporary Framework (n 20), para 20.
[33]Morgan Lewis, ‘Covid-19: The Return of Comfort Letters’ (May 04 2020) <www.jdsupra.com/legalnews/covid-19-the-return-of-the-comfort-13092/> accessed 06 June 2020.
[34] Press Release, ‘Transportation sector is granted temporary exception from the Competition Act’ (19 March 2020) <www.regjeringen.no/no/aktuelt/flyselskapene-gis-klarsignal-til-a-samarbeide/id2693957/> accessed 06 June 2020.
[35] James Marshall and Grace Kim, ‘Competition law in the time of coronavirus: UK regulators’ response and approach to the COVID-19 pandemic’ (Convington Competition 7 April 2020) <www.covcompetition.com/2020/04/competition-law-in-the-time-of-coronavirus-uk-regulators-response-and-approach-to-the-covid-19-pandemic/> accessed 22 May 2020.
[36]Australian Competition and Consumer Commission, ‘Managing the impacts of COVID-19 disruption on consumers and business’ (25 May 2020)<www.accc.gov.au/speech/managing-the-impacts-of-covid-19-disruption-on-consumers-and-business> accessed 27 May 2020.
[37]Australian Competition and Consumer Commission, ‘Authorizations’ (26 April 2020)<www.accc.gov.au/topics/authorisations> accessed 29 April 2020.