Competition newsletter - August 2016

Truck makers hit by new record fine of €2.93 billion

On 19 July 2016, the European Commission announced that it has imposed record fines totalling over €2.93 billion on leading European truck makers for breaking EU antitrust rules. The fines are the highest ever imposed by the Commission following a cartel investigation, with the previous record of €1.4 billion set in 2012 in the TV and computer monitor tubes case. In addition to fines, the cartelists can now expect to face follow-on damages claims from customers who purchased trucks whilst the cartel was in operation.

After an investigation lasting five years, the Commission found that MAN, Volvo/Renault, Daimler, Iveco and DAF breached EU antitrust rules by running a price fixing cartel for medium-sized and heavy trucks. The Commission's investigation revealed that the truck makers held regular meetings and exchanged emails to agree on: the "gross list" price for trucks in the EEA (i.e. the factory price set by each manufacturer, which generally forms the basis of the final price paid by buyers); the timing for the introduction of new emission technologies; and how the costs associated with adopting new emissions technologies should be passed on to customers.

The cartel lasted from 1997 until 2011. Meetings and discussions initially involved senior managers from the respective companies' head offices and then, from 2004, representatives of the truck makers' German subsidiaries became involved in the meetings and discussions, with participants also exchanging information by email.

The cartel members together account for around nine out of every ten medium-sized and heavy trucks sold in Europe, with the level of fines reflecting the significant scale of the cartel. MAN received full immunity from fines in its capacity as whistleblower, escaping a potential fine of around €1.2 billion. The other companies under investigation, except Scania, all acknowledged their involvement in the cartel and agreed to settle the case, in return for a 10% reduction in their fines. The investigation into Scania's involvement will continue.

The Commission's decision, in Commissioner Vestager's words, sends out "a clear message to companies that cartels are not accepted". The companies concerned are now likely to face follow-on damages claims in a number of jurisdictions, with such claims expected to become easier after 27 December 2016, the deadline for Member States to implement the 2014 Damages Directive.

A trio of Commission commitment decisions

In July 2016, the Commission published commitments decisions in three investigations. The decisions bring to an end the container liner shipping and credit default swap investigations, whilst the pay TV investigation continues.

Container liner shipping companies

On 7 July 2016, the Commission made legally binding the commitments offered by 14 container liner shipping companies. The Commission's investigation centred upon the industry practice of publishing General Rate Increases (GRI announcements), which indicate the amount of any price increase (although not the actual final price). The Commission was concerned that this practice could facilitate coordination between carriers.

In order to address this risk, the carriers have committed to: stop publishing GRI announcements; to provide more detailed information in future announcements to ensure they are of genuine use to customers; and not to make price announcements more than 31 days before their entry into force.

The commitments will not apply in certain instances, notably to communications with purchasers who have an existing rate agreement on the route to which the communication refers.

The case highlights the need for caution in the timing and content of pricing announcements to the market.

Credit default swaps

On 20 July 2016, commitments offered by ISDA and Markit to settle the Commission's credit default swap (CDS) investigation were made legally binding. A CDS is a type of derivative instrument designed to transfer the risk of a borrower defaulting on a debt obligation.

Most CDS trading takes place "over the counter", rather than on exchanges. The Commission's investigation centred upon concerns over potential barriers to exchange trading of CDS.

The commitments offered by ISDA and Markit include undertakings that both ISDA and Markit will exclude CDS dealers from taking individual licensing decisions and prevent them from influencing such decisions.

ISDA and Markit have also made separate commitments to licence certain intellectual property required to offer exchange trading of CDS on fair, reasonable and non-discriminatory (FRAND) terms.

The commitments complement measures which have been taken to move trading of derivatives onto regulated exchanges, in particular MiFID 2 and MiFIR, which are due to enter into effect from January 2018.

Paramount Pay TV commitments

On 26 July 2016, the Commission made legally binding the commitments offered by Paramount in respect of cross-border pay TV services.

The Commission's investigation centred upon concerns that licensing agreements for premium pay TV content, such as films, were typically made to a single pay TV broadcaster in each member state (or a few member states with a common language).

Although Paramount has said that it does not agree with the Commission's concerns, it has offered commitments which would remove so-called geo-blocking obligations from licensing agreements with pay TV broadcasters in the EEA. Geo-blocking refers to the requirement on licensees not to allow the licensed content to be accessed from outside the territory in which the pay TV operator broadcasts.

Again, these commitments complement an ongoing Commission project, in this case the Digital Single Market Strategy, which is expected to feed into the Commission's proposals to modernise EU copyright laws.

Without reform of EU copyright rules, the practical impact of the commitments is likely to be limited, as national copyright laws will continue to limit broadcasters and rights holders from making cross-border broadcasts.

In the meantime, the Commission's investigation continues in respect of Sky UK and five other US film studios, none of which have so far offered commitments.

Australia's first criminal prosecution for cartel

On 18 July 2016, Japanese shipping company Nippon Yusen Kabushiki Kaisha (NYK) pleaded guilty, in the Federal Court of Australia, to engaging in criminal cartel conduct in connection with the shipping of vehicles to Australia between July 2009 and September 2012. The case is Australia's first criminal cartel conduct prosecution since the criminal cartel conduct regime was enacted in July 2009.

The particulars which accompanied the charge laid against NYK by the Commonwealth Director of Public Prosecutions (CDPP) indicate that NYK's conduct related to ten different customers (including Toyota, Suzuki, Nissan, Mazda and Honda) that bought shipping services from NYK on routes to Australia from Japan, India, Thailand, Indonesia, Europe and the United States during the infringement period. No other alleged participant(s) in the conduct have been named.

The proceedings follow similar enforcement actions in other jurisdictions. For example, in the United States NYK agreed to pay US$54.9 million in fines and an NYK company executive was jailed for 15 months, and in Japan a fine of ¥13.1 billion was imposed on NYK, in relation to cartel conduct in the international transportation of vehicles.

In Australia, the maximum fine for corporations per cartel contravention (both in criminal cartel prosecutions and civil cartel proceedings) is the greater of A$10 million, three times the total benefits that have been obtained, or, if the total value of the benefits cannot be determined, 10% of the corporation’s annual turnover connected with Australia. Individuals found guilty of criminal cartel conduct face up to 10 years in jail and/or fines of up to A$360,000 per offence (compared with a maximum penalty of A$500,000 but no jail term in the case of civil cartel proceedings).

The prosecution returns to the court for procedural orders on 12 September 2016. At that hearing the Federal Court is expected to fix a date for sentencing.

The Australian Competition and Consumer Commission (ACCC), which investigated the matter and referred it to the CDPP for criminal prosecution, has stated that its investigation into other alleged cartel participants is continuing. Accordingly, it is unclear whether proceedings against any individuals or other corporations will be commenced in Australia in relation to this conduct. It has also been reported in the media that Rod Sims, the Chairman of the ACCC, has stated that the ACCC is working on "10 to 12 detailed investigations" of cartel conduct, and it is expected that more criminal cartel prosecutions will be commenced in Australia in the near future.

Award of damages to Sainsbury's in MasterCard case may open the floodgates

On 14 July 2016, the UK Competition Appeal Tribunal (CAT) awarded Sainsbury's damages of £68.6 million plus interest against MasterCard. This case is the first of a number of pending damages actions in the UK against MasterCard to be decided, and provides some indication of how those cases will be assessed. The case is also notable as the first standalone competition damages action to reach final judgment, with most cases settling before judgment is reached.

Sainsbury's claimed that MasterCard's UK multilateral interchange fees (MIFs), which are paid between banks for processing credit card transactions, were set as a result of an illegal anti-competitive agreement or decision of an association of undertakings. Sainsbury's argued that, as a result of this anti-competitive behaviour, banks charged retailers higher merchant service charges (MSCs) for processing card transactions (since the MIF represents a substantial proportion of the MSC). Although Sainsbury's case made similar allegations to the conduct found by the European Commission to infringe competition law, the CAT concluded that it was not bound by the Commission's findings, except where the facts were "materially indistinguishable" between the cases. The CAT found that it was only bound in relation to the Commission's finding that the MIFs were a decision by an association of undertakings.

The CAT agreed with Sainsbury's and awarded damages based on the extent to which the MIF exceeded the level of interchange fee which would have prevailed in the absence of the anti-competitive agreement. The CAT concluded that, in the absence of the MIF, banks would have negotiated lower interchange fees bi-laterally. In reaching this finding the CAT concluded that, in the absence of the MIFs, banks would have negotiated lower interchange fees bi-laterally, and specified what it thought these fees would have been.

The case raises important legal points in relation to whether Sainsbury's should be entitled to damages in circumstances in which: (a) it was an issuer of MasterCard payment cards through Sainsbury's Bank, and therefore party to the illegal conduct; and (b) it was likely that it had passed on at least some of the increase in its costs to its own customers.

The CAT found that although Sainsbury's Bank was a member of the MasterCard scheme, issued MasterCard branded cards and benefited from the illegal conduct, this should not disqualify it from receiving damages. However, the CAT did reduce Sainsbury's damages claim to reflect the benefits which it received.

In terms of MasterCard's "pass-on" defence, although the CAT found that Sainsbury's would have passed on a substantial amount of the increase in costs to its customers, the CAT concluded that MasterCard's defence failed because it could identify neither an actual increase in retail prices causally connected with the MIF, nor a class of purchasers to whom the overcharge has been passed-on who would be in a position to claim damages.

This judgment establishes an important precedent for the many other damages actions which have been brought against MasterCard, and its rival Visa. In particular, although Tesco settled its damages action against MasterCard in July 2015 for US$61 million, an action brought in the High Court by 12 other retailers was suspended pending the outcome of the CAT's judgment in the Sainsbury's case. The judgment will also have implications for the £19 billion collective action being brought against MasterCard on behalf of UK consumers.

FCO terminates investigation into LEGO's discount system

On 18 July 2016, the German Federal Cartel Office (FCO) confirmed that it had terminated proceedings against toy manufacturer LEGO without reaching a formal decision, after LEGO agreed to amend its discount system to enable online retailers to obtain the same level of discounts as retailers operating bricks-and-mortar stores.

Under LEGO's previous discount system, retailers could only obtain the highest discount level if they made sales from bricks-and-mortar outlets because several of the discount eligibility criteria could only be met by bricks-and-mortar retailers, e.g. metres of available shelf space. As a consequence, in many cases retailers which met all of LEGO's conditions relating to online sales obtained lower discounts than those retailers which operated exclusively out of traditional outlets. LEGO has agreed to adapt its discount eligibility criteria and to introduce alternative or additional discount criteria for online sales to reflect the particular features of this form of distribution so that ultimately retailers will be eligible for the maximum discount level irrespective of their chosen distribution channel.

The FCO has recognised that a manufacturer can set quality standards for the distribution of its products and can also grant its retailers different levels of discount linked to service quality. However, according to the FCO, manufacturers may not put the online sales distribution channel at a structural disadvantage. Notwithstanding the need in some circumstances to protect bricks-and-mortar distribution, the FCO has acknowledged that it is crucial for consumers that competition can develop over all the distribution channels.

The LEGO investigation is the latest in a series of similar cases (Bosch Siemens Hausgeräte, Gardena and Dornbracht) which have been terminated after the manufacturer under investigation agreed to amend its discount system following FCO concerns over discrimination based on the retailers distribution channel.