Join to survive: Cartel-proof cooperation of European undertakings

The impact of the unprecedented shock of the pandemic is now tangible, clearly affecting enterprises in Europe. Undertakings are cautious in reopening their doors to the market and customers. Although the number of new infections is (reassuringly) on the decline, the prospects for the next half year period are still filled with uncertainty: undertakings seek out ways of cooperation to survive. Together it is easier, for sure…but the devil lurks in the details. In a period of crisis, concerted action and the sharing of business information may become essential tools for enterprises to succeed and sustain their operations. But will the pandemic justify a surrealistic price increase of products on demand and possibly affected by shortage: protective masks, hand sanitizers and the like? Is it a realistic expectation to put an effective break over the enterprises’ concerted action? These questions have revolved among the European Competition Network and the Commission during the past couple of months, as Europe’s chief authorities in competition and antitrust issues have been working out possible solutions to establish a legislative framework for problems of shortage and product allocation affected by the pandemic. The ECN and the Commission intended to respond to the most urgent questions in their March and April communications that we address in the following article in detail. 1. Live and let live, forms of cooperation to survive Undertakings looking forward to the summer season face frozen supply chains and logistics due to the state borders that are still closed for the risk of infection. Product orders may be delayed, quality and quantity issues raise due to shortage and extended storage. The spectrum of problems that businesses are to face today, as well as the affected economic sectors are greatly varied, thus enterprises are to tackle the wide array of challenges in different forms of cooperation. In the period of crisis, even the seemingly innocuous and pro-bono action of an enterprise may have unexpected, economically devastating consequences on small-size undertakings. For that matter, a donation package of healthcare supply materials offered free of charge by a market leading multinational corporation to state hospitals—even if intended for the benefit of all—may close off market access and the opportunity for sales to several small enterprises that specialize merely on one or two health products, risking their continued operation. In light of the high number of similar case inquiries in Europe the Commission—as the member states’ chief competition authority—provides a general framework on competition rules under the pandemic in its April 8 communication. The Commission determines the framework for sustaining fair conditions for market competition and to tackle the safety of supply, consumer access and correct pricing. Further to these basic questions the communication also addresses potential forms of the undertakings’ lawful cooperation. According to the newly set conditions, the forms of commercial cooperation are permitted to undertakings— primarily but not exclusively to enterprises in the healthcare and pharma sector—that are severely affected by the pandemic crisis. The purpose of cooperation shall be limited to the tackling of product allocation, supply problems and the prevention of essential product shortage. If these conditions are met, European businesses may request their professional associations to organize the concerted supply of basic goods and components, or to survey product shortage and identify enterprise stocks that are nearing shortage. The Commission permits the compilation of aggregated summary of business information without unlawful leakage of sensitive data on the involved enterprises’ production capacity and supply gaps, as well as the concerted modeling of state-level market forecasts on the change in demand. The purpose of the temporarily permitted information-sharing—which would qualify in „peacetime” as a clear infringement of competition rules—is to enable undertakings to report if they are (or if they are not) able to cope with the shortage of supply on time. 2. EU criteria for the lawfulness of concerted action A harbinger of new competition rules established by the Commission, in March the European Competition Network—functioning as a collective body of member states’ competition authorities—issued a joint statement regarding the new rules of pricing and the concerted action on product shortage during the pandemic. At the same time, it established the threefold criteria applicable for the cartel-proof and market abuse-free conditions of commercial cooperation. Accordingly, the conduct of collaborating undertakings will not qualify as a cartel or the abuse of market position or other infringement of competition rules if (1) its purpose is expressly to guarantee the safety of essential product supply (2) the collaboration is limited exclusively to the extent necessary to implement the purpose (3) the collaboration is temporary, sustained only for the duration of the crisis. If the three conditions are jointly met, the undertakings are free to collaborate because their conduct either does not qualify as an infringement of European competition rules under the Article 101 of the TFEU or Article 53 of the EEC (cornerstones of European legislation on competition law) or if it would still qualify as an infringement, the collaboration would still bring widescale social benefits that would compensate the effect of infringement and therefore it would no longer be sanctioned or at all forbidden. Following upon the ECN statement, the Commission established a more detailed, clarified framework legislation to address the specific forms of permitted commercial collaboration and to determine the criteria of lawful information sharing among European businesses. According to the Commission’s communication the sharing of sensitive business information is not deemed as a potential infringement if (i) its purpose is to facilitate product supply safety and the information to be shared is indispensable to implement the purpose and (ii) the sharing is temporarily limited to the duration of crisis and iii) the scope of sharing is limited to the purpose. In addition to the three-tier criteria, the Commission obliges collaborating undertakings to document each and all information sharing and agreement—the documentation must be provided to the Commission upon request. The Commission also supplemented the enterprises’ obligatory self-check process by a new mechanism of case- by case recommendation and comfort letters issued to confirm the lawfulness of a planned cooperation. While the current EU legislation obliges European undertakings to examine and evaluate their planned commercial activities, agreements and the lawfulness of their concerted conduct (1/2003/EC regulation), due to the high number of special cases and affected sectors the Commission’s Directorate General for Competition established new communication channels for requests on recommendations about the planned forms of commercial collaboration—for instance in the pharma industry that is most widely affected by essential product shortage. 1. Legislative framework on the mold: stretching the limits of the game The test of time will tell how the Commission’s proposed legislative framework will function in practice—and whether the loosening of competition rules will indeed compensate losses with ample social benefits (better allocation, effective tackling of shortage and uneven supply problems). As in „peacetime” the risk of information leakage and its devastating consequences are still a menace, just like the risk of short-term commercial opportunism. While the criteria of lawful cooperation are now clarified, that is, any form of concerted action, agreement and information-sharing are permitted only temporarily and to the effective minimum extent, with strict purpose limitation—the condition of „temporary application” is very difficult to interpret in a situation when the pandemic may last for a basically indefinite period of time. Similarly, the „effective minimum extent” of cooperation begs interpretation in every case of planned concerted action. The forthcoming months will provide a better indication of how, and whether, cartels (or their impact) are possible to avoid, and whether the permitted cooperation will equally benefit or at least guarantee the safe operation of the majority of undertakings—without respect to market position and dominance. 2. Hardening control: competition authorities on the frontlines The pandemic left the member states’ competition authorities busy: without proper control the pandemic may become a breeding ground for the abuse of competition rules, particularly with the new, loosening perspectives provided by the Commission. Most recently on 21 May the call of the Portuguese authority (Autoridade da Concorrência, AC) addressed to stakeholders of the financial and healthcare sectors indicated strict penalties against potential abuse of the loosening rules. The Portuguese authority, surpassing in its rigor the ECN and the Commission’s communications, ordered the professional associations not to limit the commercial freedom of their member enterprises, and not to allow their members to share business secrets. The Portuguese authority’s recommendation --to the Portuguese pharmacology association--on defining a maximum profit margin on the price of protective equipment and products in order to guarantee accessible product prices to the consumers—has eventually been integrated into the Portuguese legislation. The recent proceeding of the Dutch competition authority (Autoriteit Consument en Markt, ACN) initiated in March against Roche Diagnostics envisages the stricter surveillance of EU member state authorities. The Dutch authority inspected Roche for the allegedly unlawful retainment of its newly developed SARS-CoV-2 test components. Roche is considered a dominant market player in the diagnostics sector and according to the ACN, in a period of epidemic and the ensuing shortage of drugs, Roche infringed the law when it retained information on its new finds. The dispute with the competition authority eventually escalated to the Dutch Parliament where the assembly held Roche liable for the shortage of SARS-CoV-2 test components. The assembly submitted a motion to the government to compel Roche to share information on the test components and consent to the production of the rapid test. Roche denied liability for the shortage and highlighted that the first SARS-CoV-2 tests were developed at a record speed in an unprecedented timeframe, therefore the safety and reliability of test results could not be guaranteed if the reagents were to be applied outside of the Roche laboratory setting. Roche highlighted that it did not even claim patent protection for the newly developed components. The dispute, nevertheless, resulted in voluntary commitments by Roche to share information on the test components and consent to the production of the rapid tests. The European Commission, during its collaboration with the ACN, confirmed that several EU member states are facing similar problems and shortage since the past couple pf months of the pandemic.

Author: dr. Viktória Villányi

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