12 October 2023
The first episode in our new miniseries on EU and UK horizontal guidelines looks at the enforcement of the prohibition on anti-competitive agreements, focusing on recent enforcement trends and sectors that have been under scrutiny. The episode also provides a high level overview of the key changes to the horizontal block exemptions and guidelines, setting the scene for future episodes.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Listeners should take legal advice before applying it to specific issues or transactions.
Hello and welcome to Ashurst Legal Outlook and, this, the first episode in our miniseries on the new EU and UK horizontal guidelines. My name is Fiona Garside and I'm a Senior Expertise Lawyer in Ashurst's Antitrust, Regulation and Foreign Investment team. I'm delighted to be joined today by Annick Vroninks, a partner in our Brussels office, and Michael Holzhäuser, a partner in our Frankfurt office. Thank you, both, for joining me today.
Hello, everyone. And thank you, Fiona, for hosting this podcast.
Hello, Fiona and Annick, looking very much forward to discussing.
Today we're going to be talking about enforcement of the prohibition on anti-competitive agreements. Now this is an enormous topic that we could talk about for hours, so today we're going to focus on some recent trends, sectors that have been under scrutiny, and the new EU and UK horizontal guidelines. As a reminder, the prohibition on anti-competitive agreements is contained in Article 101 of the Treaty on the Functioning of the European Union and Chapter 1 of the Competition Act 1998 in the UK.
Broadly speaking, these prohibit agreements between two or more companies, which may affect trade between EU member states, or within the UK and, secondly, which are intended to have as their object or affect the restriction of competition. Practically speaking, that means the agreement is either intended to limit competition, regardless of the actual impact of the agreement, or that in fact it has that effect. Now, agreement is defined broadly here: it doesn't only mean a written agreement or a contract. Essentially, it's a meeting of minds or a concerted practice.
This is a really important area of antitrust enforcement, and it's under this prohibition that regulators scrutinise cartels. So before we dive into the new horizontal guidelines, I thought we could just recap some of the key enforcement developments from the last year or so, to help set the scene. Annick, what's been happening, and what should we look out for in the coming months?
Well, in general, competition authorities seem to have taken a much more aggressive approach when investigating cartels in the last few years. During the pandemic, enforcement activity, particularly dawn raids, inevitably slowed down, but with life having opened up again, we have seen regulators proactively enforcing competition law and looking for cases to investigate.
Since dawn raids began to pick up again towards the end of 2021, we have seen the number of raids increasing every year across the EU. Last year, for example, there were over 40 dawn raids carried out by the Commission and national regulators in Europe, including, for example, the joint raids held by the UK and EU antitrust authorities on vehicle makers and associations in relation to the recycling of end of life vehicles. We've also seen earlier this year coordinated raids by not only the Commission and the CMA, but also the US Department of Justice and the Swiss Competition authority in relation to the fragrance market. I think we expect this trend to continue throughout the rest of 2023 and beyond.
Another important development is that last year, the European Commission raided a home of an employee at the same time as raiding the company's business premises. This was the first time in many, many years and a Commission official actually indicated that the Commission is likely to use this power more frequently in the future, in particular, in light of the general adoption of hybrid working models. It is therefore important that companies and their employees are prepared for this possibility.
If we look at the UK, Michael Grenfell, the CMA's Director for Enforcement, also warned last year that the CMA would be ramping up its use of dawn raids. In 2022, the CMA conducted no less than 11 dawn raids after a two-year pause due to Covid. Michael also suggested that reforms to competition policy in the UK could strengthen the CMAs power to obtain information which is stored remotely when executing a warrant. So we'll have to wait and see where those proposed reforms lead to.
And Michael, thinking about enforcement decisions, what have we seen from the Commission recently?
In terms of enforcement decisions, in 2022, the Commission adopted two cartel decisions and we have already had one in 2023. The Commission has imposed fines totalling almost EUR 190 million in 2022 and 2023 so far. In 2022, the fines related to the styrene monomer merchant market and the metal packaging market.
The CMA has also imposed significant fines in the last year, particularly in relation to its pharmaceutical investigations. In 2021 and 2022, the CMA imposed fines totalling GBP 404 million, which is the highest level of fines since the Competition Act came into force in 1998. For example, a number of pharmaceutical companies, and their parent companies, were fined over GBP 35 million for an illegal arrangement in the supply of a prescription anti-nausea drug.
There's also been some interesting developments in relation to leniency regimes. There's been a lot of debate about whether the rise of private enforcement has reduced the incentives for companies to seek leniency from regulators because the financial exposure to private damages actions can far outweigh any reduction or potential immunity from a fine granted by authorities through the leniency process. The Commission responded to a decline in leniency applications, first, by upgrading its e-leniency tool in September 2022, to make accessing documents in antitrust proceedings easier and, then, by publishing new guidance on its leniency policy in the form of frequently asked questions. Those FAQs highlight the benefits of making a leniency application and state that the Commission is available for informal exchanges about potential immunity applications on a no-names basis.
Interestingly, Cartel Directorate Head Maria Jaspers said that the Commission received twice as many applications in 2022 as in 2021, and more than three times the numbers submitted in 2020. So this will definitely be worth keeping an eye on.
Yes, Michael and it's also interesting to note that the Commission launched a competition whistleblowing tool allowing individuals, if need be on a no-names basis, to voluntarily provide information on anti-competitive practices or potential breaches of competition rules. At the conference earlier this year, the Commission actually mentioned that the number of instances and the value of the information in particular has increased significantly in the last month and may actually lead in itself to the opening of an investigation.
Thanks both. We've touched on a few already, but are there any key sectors that you think will be subject to particular scrutiny for the rest of 2023 and in 2024?
Well, the digital revolution has of course led to intense scrutiny of tech and digital markets by competition authorities, as they try to get to grips with both the opportunities and the challenges which are posed by the digital innovation and disruption. The digital sector is certainly going to continue to be in the spotlight for some time. In a previous episode, we've talked about the anticipated impact of the DMA (or the Digital Markets Act) which heralds a new area of regulation for big tech companies. The DMA's provisions have entered into force on a staggered basis throughout the end of 2022 and the first half of this year. In early September of this year, the European Commission designated six gatekeepers. These are, not surprisingly, Google, Amazon, Apple, TikTok, Meta, and Microsoft.
These companies will now have until 6 March 2024 to comply with the DMA's obligations, such as the ban on self-referencing and obligations relating to interoperability. We expect DMA enforcement to be a top priority for the Commission, but we have to be aware that implementing the requirements of the DMA is technically highly complex and resources intensive so there's likely to be a challenging phase of working out the details. There will also be a period of uncertainty for businesses, and our clients should be aware that it's unlikely that everything will be wrapped up this year.
I agree, especially because 2023 has also given us more insight into the UK's answer to the DMA. The UK's Digital Markets Unit (or the DMU) has been operating in the shadow form since April, 2021, but the Digital Markets, Competition and Consumers Bill will put this on statutory footing, enhancing the DMU'S powers. This now looks set to enter into force in early 2024, but timing is still uncertain. Importantly, the UK regime looks at to diverge from the EU approach. The DMU will take a more qualitative approach to designating companies with strategic market status. Unlike the DMA, which has a set list of obligations, companies designated in the UK will be subject to tailored codes of conduct specific to that particular company.
It'll be interesting to see how both the new EU and UK regulatory regimes interact with traditional competition law enforcement. Companies in the tech sector have already faced the challenge of regulators mounting novel theories of harm to substantiate allegations of abuse of dominance or anti-competitive effects and this looks set to continue. Last year saw the launch and continuation of a number of cases concerning abuse of dominance. Both the Commission and the UK are pursuing investigations into market abuses by Google in the online advertising market. There are also parallel investigations ongoing into Meta's use of data, and the Commission recently clarified its objections against Apple in relation to the App store by taking the unusual step of issuing a new statement of objections.
Thank you both. Tech has been in the spotlight for a while now and we're going to pick up the developments on the DMA in more detail on a future episode. In the meantime, are there any other areas we should be watching closely in 2023?
Well, no doubt sustainability is very high on the agenda of the regulators, but also of businesses, and tackling climate change and moving towards net zero are top priorities for many governments and businesses. But competition laws application to sustainability is relatively new, and it raises a number of very interesting questions. The regulators are keen to enable collaboration, which generally promotes environmental sustainability, even if this goes at a cost, as long as competition is maintained and this is reflected by the introduction of a new chapter in the revised EU horizontal guidelines, which sets out how the Commission will assess sustainability agreements and their compliance with EU competition law. The guidelines should normally provide a safe harbour for sustainability agreements meeting certain conditions, but for many interested parties, they do, unfortunately, not go far enough. They require, in all cases, that there is a benefit for the individual users of the product while some other jurisdictions, like the Netherlands, allow for so-called out-of-market or general interest benefits. This will, however, be covered in more detail in one of our next episodes.
You are right to point out that the European Commission is still taking a narrow approach regarding the justification of sustainability agreements compared to, for example, the UK, at least in the draft version of its sustainability guidelines. The UK draft guidance is more similar to the Dutch approach, which allows these so-called out-of-market benefits (meaning benefits for wider society) to be taken into account for agreements to limit climate change. However, the draft CMA guidance takes a much narrower definition of sustainability to the EU horizontal guidelines by limiting the scope to environmental sustainability agreements. In contrast, the EU guidelines apply to social concerns such as labour and human rights, as well as environmental sustainability.
The Commission and the CMA are both conscious of the risk of companies using sustainability goals to conceal cartels and other anti-competitive behaviour. Greenwashing (where companies use sustainability as a way to justify anti-competitive agreements) and tackling green claims (which involves challenging whether companies actually meet the environmental standards they claim to) are big concerns. They pose patent risks for our clients. In our practice, we see a clear enforcement focus of the European Commission in this respect. The CMA has also opened an investigation into certain fashion brands to find out if their green claims misled consumers and has stated that there's more to come in fashion and fast sectors like food.
That brings us neatly back to the horizontal guidelines and the block exemptions. So we've been talking about the enforcement of the prohibition on anti-competitive agreements and the horizontal guidelines offer companies more guidance on how regulators will assess agreements between competitors. Agreements between parties at different levels in the supply chain are dealt with by the vertical block exemption and guidelines and if you're interested in hearing more about those, then we have a series from last year which discusses the key aspects of that regime. As we talked about last year, block exemptions provide a widely applicable safe harbour from the prohibition anti-competitive agreements provided that certain conditions are met.
In the context of horizontal agreements, there are two block exemptions: the Research and Development block exemption, and the Specialisation agreements block exemption. As the UK is no longer part of the EU, we now have separate block exemptions and guidance in the EU and the UK. The two regimes are broadly similar, but there are some notable differences which may lead to diverging enforcement action. But before we get to that, Annick, can you talk us through the background to these reforms, please?
Yes, of course. The previous EU horizontal guidelines entered into force quite a long time ago, back in 2010, and since then we have, of course, seen significant changes in how businesses interact, as well as a number of enforcement decisions with new theories of harm. And with the block exemptions due to expire at the end of 2022, the European Commission published drafts of the two revised block exemption regulations in March, 2022, as well as draft revised guidelines on horizontal cooperation. And the new European horizontal rules and guidelines were actually due to enter into force on 1 January 2023. However, quite late in the day, the Commission, apparently because of number of comments, and criticism by stakeholders, extended the previous horizontal block exemption regulations for another six months until the end of June of this year.
The new block exemptions entered then into force on 1 July 2023, and the guidelines came into force a few weeks later. The guidelines reflect the current status of the case law and also provide further guidance on how particular types of cooperation between competitors should be interpreted and applied. With regard to the UK, following Brexit, the EU block exemption regulations were replaced by the UK once already on 1 January 2023. That means that the new UK rules became effective six months earlier than the EU ones, which we hadn't anticipated. However, the UK guidance was only released in mid-August of this year.
Interestingly, the EU and UK block exemptions also have different durations. The EU block exemptions will expire on 30 June 2035, and the UK block exemptions will expire on 31 December 2035, despite having entered into force six months before the EU block exemptions. It was rumoured that the delay in the EU rules and guidance being published was due to push-back from third parties relating to the R&D block exemption. The Commission proposed that the block exemption only applies to innovation agreements if there are already at least three competing R&D efforts underway. But third parties suggested that this will be tricky in practice, seeing as so much innovation is done confidentially. Despite rumours that the Commission might amend its approach, this requirement is included in the final version.
Thank you, and at a very high level, what changes have been introduced in the new block exemptions and guidelines?
Fortunately, the EU and UK approaches, as you already said Fiona, remain broadly consistent, although we must be aware of differences. And this consistency will make it easier for companies to self-assess compliance with the two regimes but companies should be aware of the differences when adopting commercial decisions. And before we touch on those, at the high level, what has actually changed since the previous block exemptions and guidelines?
Well, starting with the R&D block Exemption, in substance, it has not so much changed: the basic principle remaining that all parties to a joint R&D need to have full access to the results. There are, however, some, if I can say, procedural changes regarding, for example, the two-year grace period when you exceed the 25% safe harbour threshold, and the calculation of the market shares, as well as the fact that member states can now withdraw the benefit of the block exemption in individual cases.
Before we talk about the changes to the specialisation block exemption, it's probably helpful to recap what it covers. It exempts agreements where one or more parties agreed to give up the manufacturing of a particular product so that they can source the requirements from the other party. The specialisation block exemption also covers so-called joint production agreements. It is, however, important to note, and this has not changed since the previous version, that agreements will only be covered by the block exemption if the party's combined market share is below the threshold of 20%.
The most significant change to the specialisation block exemption is the expansion of the definition of unilateral specialisation agreements. Previously, the block exemption only covered agreements between two parties, but the new version covers agreements between two or more parties. The same procedural changes, as I just mentioned in relation to the R&D block exemption, have also been made to the specialisation block exemption. So these are the calculation of the market shares, the grace period, and allowing national competition authorities to withdraw the block exemption in individual cases.
Michael, do you want to pick up the key changes to the guidelines?
Sure, thanks Annick. A lot of the changes to the EU guidelines reflect case law since 2010 and, as Annick mentioned, the EU and UK approaches are broadly consistent. The guidelines have also been restructured with additional guidance added to help parties self-assess their compliance with competition law. An important general point to highlight is that it has been clarified that agreements between a parent company and a joint venture, over which it exercises decisive influence, will generally be treated as intragroup agreements. This means these agreements will fall outside the prohibition on anti-competitive agreements, provided the agreements relates to the markets in which the joint venture is active. From a practical perspective, this is a really welcome change, which will significantly reduce the need for information barriers and other measures between parent companies and joint ventures. It's important to emphasise that it does not cover arrangements between the parents of the joint venture so care will still be needed.
The guidelines now offer more detail on the assessment of information exchange, which I think is the next episode in the series, so I won't go into much detail just now. But just to mention, that the guidelines now provide lists of concrete examples that the Commission and the CMA consider to be competitively sensitive information, meaning, for example, costs, capacity, and market entry or exit plans, also in line with the UK's law. The guidelines now make it clear that any exchange of competitively sensitive information that is, and I quote, "capable of removing uncertainty between participants as regards, the timing, extent, and details of a company's planned changes" will be considered to be a by object infringement. So there will be no need to show that the agreement actually had an anti-competitive effect.
We now have more guidance on how to differentiate between a legitimate joint purchasing arrangement between competitors and an illegal buyer cartel, which is a by object infringement. The main difference seems to be how the arrangement is structured and presented. In a legitimate joint purchasing arrangement, the buyers negotiate as a group with the supplier, whereas in a buyer cartel the buyers will negotiate individually while secretly coordinating with each other. While joint purchasing may still infringe competition law, it is not a by object infringement. That's important to highlight.
We have already talked about the new chapter in the EU guidelines on how to self-assess sustainability agreements. The UK has announced that it will issue separate guidance on sustainability agreements and competition law. In addition, we have additional guidance on joint bidding arrangements in the chapter on joint commercialisation, standardisation agreements, and standard terms, and mobile infrastructure sharing agreements.
Thank you, Michael and Annick. We're going to come back to the detail of the horizontal guidelines in future episodes. As I said at the beginning, this is a huge topic, and there's so much more that we could talk about but thank you very much for that insightful overview. It sets the scene really well for our upcoming discussions.
Thanks very much, Fiona, for hosting us. It was a really interesting discussion. Really looking forward to the next episode.
Thanks a lot, Fiona.
Join us for our next episode where Laura Carter and Jessica Bracker will be discussing how the horizontal guidelines deal with information exchange. To ensure you don't miss out on any future episodes, subscribe to Ashurst Legal Outlook now on Apple Podcasts, Spotify, or your favourite podcast platform. And while you're there, please feel free to keep the conversation going, and leave us a rating or a review. Until next time, thanks for listening and goodbye for now.