Price gouging in Europe: what are the rules and how has the pandemic shifted enforcement priorities?

Continuing our podcast series on price gouging laws, members of our global antitrust lawyers focus on the situation around price gouging (excessive pricing) in the EU, France, Germany and the UK in our latest instalment.

The COVID-19 crisis has cast new light on excessive pricing practices in Europe, our team explains the impact the pandemic has had on enforcement activity and suggest practical ways that businesses can protect themselves from price gouging practices. Please click here to listen to our latest podcast.

Is a robust compliance plan enough to ensure a discount from fines for anticompetitive activity?

In certain jurisdictions, having a tailored and comprehensive compliance programme in place may reduce the size of a fine resulting from anticompetitive activity.

Members from across our global competition team have come together to analyse the approaches of key jurisdictions and whether they offer discounts for businesses that have breached competition rules but have a compliance programme in place. We have found that, in general, there is a trend towards more jurisdictions considering reductions on fines as a means by which to encourage more widespread compliance efforts and would suggest that it is definitely worth companies investing time and energy in fostering a compliance culture. Please click here to view our full client alert and comparison table.

DOJ’s Antitrust Division makes significant updates to Merger Remedies Manual

The Department of Justice’s Antitrust Division updated its Merger Remedies Manual for the first time in more than a decade.  The updates improve upon the 2004 Manual by providing a significantly more detailed account of the Division’s approach to preserving competition pre- and post-merger. Our team highlights the various revisions and additions to the Manual in our recent alert.

Non-luxury brands can ban resale on third-party platforms

As the Amsterdam Court of Appeal recently confirmed in Action Sport v Nike (decision of 14 July 2020, ECLI:NL:GHAMS:2020:2004), the prohibition of sales on third-party platforms contained in selective distribution agreements of brand manufacturers in the EU can be in line with EU competition law irrespective of whether or not the relevant products are luxurious.

The Appeal Court’s decision confirmed the judgment of the lower instance court that arose out of a dispute between Nike and Action Sport, a former authorized reseller of Nike. Nike’s terms underlying its selective distribution system prohibited resellers from trading the contractual products via third party marketplaces, i.e. online platforms operated by non-authorized resellers. When Action Sport refused to comply with this restriction, Nike terminated the distribution arrangement and ceased to supply Action Sport.

The decision is of particular relevance as third-party platform bans imposed by brand manufacturers in the context of selective distribution terms have been the subject of heavy controversy in the EU in recent years. In 2017, the European Court of Justice (ECJ) decided in the landmark ruling in Coty v Parfumerie Akzente that a clause in a selective distribution agreement preventing resellers from selling on any third party websites can be in line with EU competition law if the following requirements are met:

  • resellers are chosen on the basis of objective criteria of a qualitative nature, applied uniformly and without discrimination;
  • the products in question necessitate selective distribution in order to preserve their quality and proper use; and
  • the restrictions imposed do not go beyond what is necessary to achieve this.

In Coty, the ECJ considered that the preservation of a luxury image of Coty’s brands can suffice to justify restrictions on resale associated with selective distribution systems. The Court also found that since third party platforms would typically sell all kinds of goods, the sale of Coty’s products on these websites would prejudice the luxury image maintained through selective distribution and the exclusion of non-authorizes resellers.

Since then, there has been a controversy about whether the legality of platform bans should be reserved to luxury products under EU competition rules. National competition authorities in the EU have taken different views in this regard. For example, the French Competition Authority (FCA) has taken a more liberal view when considering a third-party platform ban imposed on resellers by garden equipment manufacturer Stihl in its selective distribution terms to be in line with competition law despite non-luxury goods being concerned (see FCA’s decision of 24 October 2018 confirmed by the Paris Court of Appeal). However, the German Federal Cartel Office (FCO) follows a more restrictive approach and warned companies that the scope of the Coty judgment should be limited to luxury products only, and that it should not be perceived to grant a blanket authorisation for brand owners outside luxury segment to prevent sales on third party sites.

With its decision in the Nike case, the Amsterdam Court of Appeal has made a strong point that not only luxury brand owners may lawfully impose and enforce platform bans vis-à-vis its authorized resellers in selective distribution agreements in the EU. The ECJ only mentioned luxury products in the Coty case because these were the subject of the questions posed to the ECJ for its preliminary judgment, i.e. the facts of the case before it. Following the Amsterdam Court of Appeals, the ECJ’s substantive assessment must not be limited to products of this kind. A justification of third-party platform bans under EU competition law may not generally be excluded for non-luxurious products but it cannot generally be confirmed for luxury products either. Rather, an individual case-by-case assessment is required, taking the distribution terms, the characteristics of the products concerned and the brand image into account.

The decision in the Nike case is a step in the right direction. The FCO, despite not being bound by Dutch jurisprudence, should reconsider its view to the benefit of a consistent interpretation of EU competition law across Member States and to prevent legal uncertainty for brand manufacturers in Germany seeking to self-assess their relevant distribution strategies, models and underlying terms.

Price gouging during COVID-19: what’s happening in the APAC region?

As part of Reed Smith’s three -part global price gouging podcast series, this week our regulatory enforcement lawyers Dora Wang and Asha Sharma analyse the rules and regulations designed to tackle price gouging in the People’s Republic of China, and to deal with anti-competitive conduct in Hong Kong. In the episode, Dora and Asha also consider how one can report price gouging/anti-competitive conduct, as well as defend oneself against antitrust risks or price gouging claims.

You can also access our previous episode here, where our regulatory enforcement lawyers Danielle Stewart, Michelle Mantine and Jennifer Driscoll provide an update from a U.S. perspective.

U.S. price gouging during COVID-19: A changing landscape

Our U.S. team members recently joined Reed Smith’s Countering the Crisis podcast to provide an overview of the U.S. laws around price gouging in light of COVID-19. The episode addresses various ways to spot and report alleged price gouging, as well as ways to protect against price gouging claims. Our team also shares their thoughts on pending legislation and what clients can expect in today’s changing landscape. This is the first of a three-part podcast series relating to global price gouging laws—stay tuned for more.

Regulatory aspects of investing in Germany – German legislator further extends foreign investment control regime

On 18 June 2020, the German Parliament agreed to further rules on tightening foreign investment control by adopting the First Act on the amendment to the Foreign Trade and Payment Act (Außenwirtschaftsgesetz – AWG). The first amendment to the AWG was published in the Federal Gazette on 16 July 2020 and entered into force on 17 July 2020.

The amendment to the AWG is unique as it introduces for the first time a standstill obligation that is linked to a criminal sanction and administrative penalty. In addition, the amendment to the AWG implements a catalogue identifying actions that are prohibited during the period of review of a notifiable transaction, as well as unifies time-periods of cross-sectoral and sector-specific reviews.

The first amendment to the AWG is just one of various amendments to German foreign investment control in recent years and the second one after the 15th amendment to the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV), which entered into force in June this year.

I. Significant changes within the amendment to the AWG are as follows:

1. Criminal sanction for violation of the standstill obligation

  • The first amendment to the AWG provides for an overall standstill obligation: each transaction requiring notification is now provisionally suspended for the duration of the screening.
  • Pending clearance, the following activities may not be carried out to the benefit of the acquirer:
    • enabling to exercise voting rights,
    • granting distribution of profits associated with the acquisition,
    • providing information linked to the activities of the target that triggers the obligation to notify the acquisition
    • providing company-related information that the Federal Ministry for Economic Affairs and Energy has classified in an order as being important for the essential security interests of Germany or for public safety and order in Germany.
  • The first amendment to the AWG provides for an implementation of a criminal sanction of up to five years or a fine if the parties violate the provisions mentioned above.

2. Tightening up the sector-specific review

The sector-specific review is now being tightened up to cover not only companies that produce or develop military equipment and specific IT products for classified information, but also those companies that modify or have factual control over them.

3. Extension of the scope of ministerial oversight

The amendment to the AWG provides for an extension of the scope of ministerial oversight, insofar as foreign investment control reviews are now triggered where there is a likelihood that a foreign investment will impair security or public order. Previously, restrictions related to foreign investments required an actual threat to public security or order.

4. Focus on both European as well as German security interests

The scope of the Federal Ministry for Economic Affairs and Energy’s review is no longer limited to German security interests. The assessment also now focuses on the impact on other EU Member states and EU programmes, as well as EU projects.

5. Setting up a national contact point for EU-wide cooperation on foreign investment control

The Federal Ministry for Economic Affairs and Energy will establish – like other EU-Member States – a national contact point for EU-wide cooperation on foreign investment control to exchange information between Member States and the Commission, as well as to create the possibility for the Commission and Member States to issue opinions and comments on specific transactions.

6. Standardisation of time-periods for cross-sectoral and sector-specific reviews

So far, the time-periods for cross-sectoral and sector-specific reviews have not been consistent. The amendment now standardises these time-periods:

  • Instead of the previous time-period of three months for cross-sectoral investments in the context of preliminary reviews, the Federal Ministry for Economic Affairs and Energy is now required to decide within two months from when it gains knowledge of an acquisition whether to open a formal investigation (but no longer than five years after signing).
  • If the Federal Ministry for Economic Affairs and Energy opens a formal investigation, the first amendment to the AWG introduces a uniform time-period of four months from receipt of the complete documents. Within these four months, the Federal Ministry for Economic Affairs and Energy must then decide whether to clear the notification, or whether to prohibit or restrict the acquisition.
  • For the first time, the first amendment to the AWG introduces a provision whereby the period is suspended if the Federal Ministry for Economic Affairs and Energy requests further information or documents on the acquisition. To date, requests for information have restarted the time-period. The Federal Ministry for Economic Affairs and Energy may extend the time-period by three months if the review proceedings involve particular difficulties of a factual or legal nature. Further extensions of the time-period is possible if agreed by the purchaser and the seller.
  • The newly introduced time-periods apply to all transactions of which the Federal Ministry for Economic Affairs and Energy gained knowledge after the first amendment to the AWG entered into force.

II. Legal framework for German foreign investment control

The AWV and the AWG provide the legal basis for foreign investment control in Germany.

The AWV differentiates between cross-sector reviews pursuant to sections 55-59 of the AWV and sector-specific reviews pursuant to sections 60-62 of the AWV.

1. Rules governing sector-specific reviews

The German Ministry for Economic Affairs and Energy can commence a sector-specific review when:

(1) a non-German purchaser (including from another EU Member State) acquires at least 10 percent of the shares and voting rights in a domestic company; and

(2) the target company develops or produces:

  • goods that are listed in a detailed annex to the Military Weapons Control Act (Kriegswaffenkontrollgesetz – KWG);
  • products with IT security features that are used to process government-classified information; or
  • certain products that fall within the scope of specific foreign trade regulations.

2. Rules governing cross-sector reviews

The AWV authorises the German Ministry for Economic Affairs and Energy to review acquisitions by any purchaser from outside the EU (or EFTA) of 10 percent of the voting rights in a domestic company active in a security-critical industry such as:

  • operators of critical infrastructure;
  • developers of software for the operation of critical infrastructure;
  • companies active in the telecommunications and surveillance technology sectors;
  • providers of certain cloud computing services;
  • companies active in the area of telematics; and
  • media companies that are in a position to influence public opinion through broadcasting, other media services or print products that provide news and services of a topical nature and have a broad social impact. The following amendments were implemented:

The threshold of 25 percent is applicable to acquisitions of companies in the public sector that do not fall under section 55 paragraph 1 sentence 2 of the AWV, but whose activities relate to public safety or order.

a) Changes under the fifteenth amendment to the AWV

Due to the COVID-19 pandemic, the Federal Ministry for Economic Affairs and Energy considered it necessary to accelerate the implementation of those parts of the European provisions relating to the health care sector, and in particular infection prevention and control. The Federal Ministry for Economic Affairs and Energy highlighted the fact that, due to the COVID-19 outbreak, it had become clear that  Germany’s health care sector was highly sensitive and required explicit regulation.

On 20 May 2020, the federal cabinet adopted the amendment to the AWV. The amendment entered into force upon its publication in the Federal Gazette on 3 June 2020.

The 15th amendment broadens the scope of application of cross-sector reviews. In particular, the development and manufacture of the following products are covered by the cross-sectoral reviews:

  • personal protective equipment, such as face masks;
  • essential medicines such as vaccines (and including raw materials and active ingredients);
  • medical products used for diagnosing, preventing, monitoring, predicting, forecasting, treating, or alleviating life-threatening and highly contagious infectious diseases; or
  • in vitro diagnostics that are used to provide information on physiological or pathological processes or conditions, or for determining or monitoring therapeutic measures in connection with life-threatening and highly contagious infectious diseases.

Manufacturing facilities or technologies, as well as components or primary products used in the manufacture of these critical products, are not subject to the  15th amendment to the AWV.

The amendment authorises the Federal Ministry for Economic Affairs and Energy to review the planned acquisition by any purchaser from outside the EU (or EFTA) of 10 percent or more of the voting rights in any domestic health care company active in the sectors mentioned above. Under the amendment, companies are required to notify the Federal Ministry for Economic Affairs and Energy of any such planned acquisition.

b) Changes within the AWV that are not related to the COVID-19 pandemic

In addition, the amendments to the AWV also provide for new rules that are unrelated to the COVID-19 pandemic. In particular:

  • companies that provide services necessary to ensure the continuity and functioning of state communication infrastructure are considered as security-critical infrastructure for the purposes of cross-sector reviews;
  • asset deals are now also explicitly covered by the AWV; and

when assessing public safety or order, the Federal Ministry for Economic Affairs and Energy shall take into account whether (i) the purchaser is directly or indirectly controlled by governments, state bodies or armed forces, (ii) the purchaser has been involved in activities that have a detrimental effect on Germany or any other EU Member State, or (iii) the purchaser has been found in violation of the AWG, the German Military Weapons Control Act, or offences which would lead to an exclusion from public procurement tenders under section 123 of the German Competition Act.

The amendments to the AWV and the AWG are based on the EU Screening Regulation, which was adopted in 2019 and will fully apply as of 11 October 2020. It is the first time that rules relating to foreign investment control have been adopted at the European level to promote the exchange of information and cooperation between EU Member States in the field of foreign investment control.

III. Further changes within the 16th amendment to the AWV

The German Federal Government intends to further tighten German foreign investment control rules through the 16th amendment to the AWV by adding companies that are operating in the area of critical-technologies, such as artificial intelligence, robotics, semiconductors as well a biotech and quantum technology. The amendment is expected to enter into force in autumn 2020.

How can businesses ensure competition compliance?

Though competition compliance programmes may differ across jurisdictions, having one is widely regarded as essential. A way to ensure competition rules are effectively followed is to ingrain competition compliance into company culture. In our latest client alert, we consider the Competition and Markets Authority’s recent initiatives, and what steps businesses can take to foster a competition compliance culture.

Amazon/Deliveroo – when small shareholdings can lead to big issues

At a Glance:

  • The CMA’s conclusion that it has jurisdiction to review Amazon’s 16% shareholding in Deliveroo serves as a reminder that control can arise even at low levels of shareholding.
  • Minority shareholders who enjoy significant influence on the company’s policy direction and strategic commercial decisions may be considered to have sufficient control to trigger a merger review.
  • Jurisdictional tests vary between jurisdictions and care should be taken with minority shareholdings to ensure that merger filings are not missed.

Amazon/Deliveroo – an overview

On 4 August 2020, the UK Competition and Market Authority (CMA) published its final report, clearing Amazon’s 16% investment in Deliveroo following a detailed Phase 2 merger review. The investment was initially cleared based on a provisional finding that Deliveroo was a ‘failing firm’ that would have exited the market without the investment due to the impact of COVID-19.

A subsequent detailed assessment of Deliveroo’s financial position, as lockdown progressed, led the CMA to reverse this provisional finding and conclude that the company was not, in fact, likely to exit the market in the absence of Amazon’s investment. This meant that in its second provisional finding as well as the final report, the CMA focused on the effect on competition resulting from Amazon’s investment.

Minority shareholdings and merger control

The investigation is of interest because the CMA concluded that Amazon’s 16% shareholding, along with other factors, was sufficient to trigger jurisdiction for a merger review. For this purpose, the CMA considered the size of Amazon’s shareholding (both in absolute terms and relative to other shareholders), its right to appoint a director and observer on Deliveroo’s board as well as the possibility of current and future commercial relationships. It also considered Amazon’s position as a strategic investor with additional rights, which included a higher liquidation preference and ranking, that the CMA considered could allow Amazon to exert influence over any potential sale. In addition, the CMA found that Amazon’s status and expertise, specifically in the areas in which Deliveroo operates, might give it the ability to influence other shareholders and Deliveroo’s policy formation.

It can come as a surprise to companies and investors that merger control may apply when they are acquiring only a minority shareholding, particularly of less than 25%. In the UK, the relevant test for control, the acquisition of material influence, can apply even at low shareholding levels. The CMA’s jurisdictional guidance indicates that shareholdings above 25% are likely to give rise to material influence, whereas those below 15% will only exceptionally result in material influence.  Between these levels, an assessment of other factors, as carried out in this case is key to determining whether material influence has arisen.

Although not commonplace, this is not the first time a shareholding slightly above 15% has led to a finding of material influence. For example, BskyB’s acquisition of a 17.9% shareholding was considered to give it material influence over ITV, a case in which the competition authorities ultimately identified concerns and required a remedy.

Substantive assessment and minority shareholdings

Whilst material influence may be sufficient to trigger jurisdiction for a merger review, the substantive assessment of the effect of a minority shareholding on competition also needs to take into account the size of shareholding and resulting effect on the parties’ incentives.

In its assessment of the effect of Amazon’s shareholding on competition between Amazon and Deliveroo, the small size of Amazon’s shareholding was significant in determining whether the transaction would alter Amazon’s incentives to re-enter the food delivery market or to alter its business in the online convenience grocery delivery market.

In particular, an important factor in the CMA’s considerations is that any action taken by Amazon that favoured Deliveroo would result in Amazon suffering the entirety of the downside, but only gaining a 16% share of any additional Deliveroo profits that arise.  Accordingly, at this low level of shareholding, any effect on competition was much weaker than if the shareholding had been more significant. In its press release, the CMA noted that whilst the current scale of Amazon’s investment did not substantially lessen competition in both markets, if Amazon were to increase its shareholding in Deliveroo, the position might be different.

Key “takeaways”

Amazon/Deliveroo highlights that a minority shareholding, even if small, can lead to a lengthy and detailed merger review. In the UK, where the merger regime is voluntary, the effects of the CMA subsequently deciding to review such an acquisition are more limited than in those jurisdictions with mandatory notification regimes, where substantial financial penalties may be imposed for failure to notify a transaction. Given the differing tests between jurisdictions for the lowest level at which a shareholding may trigger merger review, a careful review of merger control requirement is advisable even on the acquisition of minority shareholdings.