News Update Competition

23 April 2020

This news update is a follow-up to our news update of 25 March 2020 regarding the first reactions of the European competition agencies to the coronavirus (COVID-19) outbreak.

The competition agencies acknowledge the effects of the coronavirus outbreak on businesses. They emphasised that they will not intervene if companies temporarily cooperate, if these forms of cooperation are necessary to ensure the supply and fair distribution of scarce products to consumers. The authorities however also warned that competition laws continue to apply in the current circumstances. This raises the more granular question of exactly what forms of cooperation are permitted during the coronavirus outbreak from a competition law perspective.

This News Update starts with the basic legal framework of the cartel prohibition (section 2), and then discusses some specific forms of cooperation in times of crisis and their permissibility (section 3). It looks at the possibility of requesting a comfort letter as introduced by the Commission in its recently published Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak (section 4). For a discussion of this Temporary Framework, we also refer to our Healthcare News Update of 16 April 2020.

Legal framework: cartel prohibitions and exception

The cartel prohibitions
Agreements between undertakings and concerted practices that appreciably affect trade between Member States and have as their object or effect preventing, restricting or distorting competition within the internal market are prohibited by Article 101(1) TFEU. Article 6(1) of the Dutch Competition Act ("DCA") is the Dutch equivalent of this prohibition. However, the geographical scope of the Dutch equivalent is limited to agreements and concerted practices that only affect the Dutch market or parts of it (prohibitions under Article 101(1) TFEU and Article 6(1) DCA are simply referred to as 'cartel prohibitions' below). Typical infringements of the cartel prohibitions are agreements to (i) fix prices, (ii) limit production or technical development, (iii) share markets or sources of supply, or (iv) exchange information that reduces or removes the degree of uncertainty as to the operations of the market.

Exception to the cartel prohibitions
There are several important exceptions to the cartel prohibitions. The conditions for these exceptions are set out in the famous paragraph 3 of the cartel prohibitions and apply to all economic sectors. The Commission has also published guidance on the application of the exception to particular types of agreements or sectors (block exemptions), such as the Technology Transfer Guidelines, Vertical Restraints Guidelines and Motor Vehicles Guidelines. This news update focuses on agreements and concerted practices that could individually fall within exception of the cartel prohibitions, rather than one of the block exemptions.

Conditions for an individual exception
There are no anti-competitive agreements or concerted practices that are by definition excluded from the possible application of the cartel prohibitions – although the 'hardcore restrictions' come close. As the Commission no longer has the power to adopt a decision granting an individual exemption, parties to an agreement or concerted practice must conduct a 'self-assessment' on whether a particular agreement or concerted practice infringes the cartel prohibition and if so, whether the exception applies. The Commission has issued guidelines to provide parties with further guidance.

For an agreement or concerted practice to be exempted from the cartel prohibition, each of the following criteria should be satisfied:

1. it contributes to improving the production or distribution of goods or to promoting technical or economic progress;
2. it allows consumers a fair share of the resulting benefit;
3. it does not impose restrictions which are unnecessary for attaining these objectives on the undertakings concerned; and
4. it does not afford those undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

The legal exception applies as long as each of the conditions is fulfilled and ceases to apply when that is no longer the case.

Specific forms of cooperation and their permissibility

During this crisis, companies may cooperate in different ways to bridge the gap between supply and demand. Cooperation could relate to (i) undercapacity due to a sudden increase in demand (ii) overcapacity following a rapid and sudden decrease in demand, (iii) exchange of information about sales and stocks, or (iv) market sharing.

(i) Agreements to increase production of essential products
The Commission recognises in the Temporary Framework that companies may need to jointly coordinate reorganising production (and/or stock management and potentially distribution) to overcome shortages of essential products or services (e.g. healthcare services, the production of ventilators, protective gear, testing equipment and – hopefully – a vaccine). This could mean coordinating which sites produce which medicines, so that not all undertakings focus on one or a few medicines, while other sites remain in underproduction. These forms of coordination may require exchanging competitively sensitive information – further discussed in paragraph (iii) below. The Commission has said it would not consider coordination to adapt production and stock management to be an enforcement priority, if these measures:

1. are designed and objectively necessary to actually increase output in the most efficient way to address or avoid a shortage of supply of essential products or services.
2. are temporary in nature, meaning that they are only to be applied as long as there is a risk of shortage or as long as the coronavirus crisis lasts.
3. do not exceed what is strictly necessary to achieve the objective of addressing or avoiding a shortage of supply of essential products or services. In this regard, the Commission recommends that companies document all agreements between them carefully.

Another possibility to combat undercapacity is joint production. Joint production can contribute to efficiency gains in the form of cost savings, better production technologies and higher output. Joint production agreements that have been initiated in relation to the current coronavirus outbreak include cooperation between medical tech companies and car manufacturers to produce ventilators and the joint efforts of a supplier to the automotive industry and an underwear producer to produce face masks. In so far as these initiatives infringe the cartel prohibitions, the paragraph 3 conditions for an exception could equally apply.

Additionally, cooperation to respond to a lack of a certain new product, such as a coronavirus vaccine, could have the form of a research and development ("R&D") agreement. Several forms of cooperation could be considered by companies for the research, development and, eventually, production and/or commercialisation of a vaccine. See, for example, the development and distribution deal between pharmaceutical company Pfizer and BioNTech to co-develop a potential coronavirus vaccine using BioNTech’s mRNA-based drug development platform. Although R&D agreements or cooperation could restrict competition (for example, if they reduce or slow down innovation or lead to higher prices), most R&D agreements or forms of cooperation do not fall under the cartel prohibitions. This is particularly true if the R&D cooperation is set up between non-competitors or if an entirely new product will be developed. Should the proposed R&D cooperation nevertheless infringe the cartel prohibitions, the paragraph 3 conditions for an exception apply.

(ii) Agreements to reduce overcapacity
For some products and services, the coronavirus outbreak led to enormous and sudden decreases in demand. Well-known examples are energy (negative US oil prices in the week of 20 April), air transport, tourism and hospitality services, beer and flowers. This lead to an instant overcapacity. The social, economic and ultimately legal question is whether the markets should do the weeding of all this overcapacity, or whether – for either social, humanitarian or economic reasons - companies can be allowed to cooperate in reducing this overcapacity. Case law regarding 'crisis cartels' provides guidance as to whether the coordinated reduction of overcapacity is allowed from a competition point of view. This case law, however, raises questions as to whether the arguments brought forward in these cases equally apply in the current coronavirus circumstances. In particular, we query whether the current fall in demand in sectors such as air transport, energy, the hospitality industry etc is structural in nature and therefore, whether an actual situation of structural overcapacity exists that can be solved by coordination between companies to reduce capacity. Oil companies, airlines, hotels, restaurants and department stores will likely restart their businesses and attract new consumers as soon as governments relax their policies. This is not so much an issue of reduced demand that requires the 'least efficient' capacity to be removed from the market, but that the demand has temporarily completely vanished. In most cases, these companies are not operating at all, as a result of which the question as to which company is best suited to respond to the demand, is irrelevant.

The European Commission announced a specific derogation for agreements between producers, producer organisations and interbranch organisations to stabilise the live plants and flowers sector on 22 April 2020. This derogation has a specific basis in the regulation on the Common Organisation of the Agriculture Markets. It allows for agreements and common decisions on market withdrawals and free distribution, joint promotion and production planning for a period of six months.

(iii) The exchange of commercially sensitive information in relation to sales and stocks
The exchange of commercially sensitive information between competitors could infringe the cartel prohibitions. It may facilitate coordination by eliminating market uncertainties, or lead to anti-competitive foreclosure by strongly disadvantaging competitors that do not share in the strategic information. However, in times of crisis, the exchange of competitively sensitive information between competitors might be required to reallocate stocks or coordinate the production of essential products. In his interview with the Financieele Dagblad (the leading Dutch financial newspaper) Chairman Snoep of the Netherlands Authority for Consumers and Markets ("ACM") mentioned that (i) supermarkets could inform each other about stock, (ii) logistic service providers are allowed to exchange information in order to be able to supply essential products, (iii) industry organisations could exchange information regarding a flexible approach towards debtors and (iv) medicine suppliers may inform each other about the amounts of products that they sell.
For the exchange of commercially sensitive information between competitors to qualify for an exception, it is necessary that the exchange of commercially sensitive information:

1. leads to more efficient distribution. For example, an exchange of information between supermarkets on certain stock levels or between producers of medicinal supplies must demonstrably lead to minimising empty shelves.
2. A benefit for consumers, as products become (more or more easily) available and/or hospitals obtain sufficient medicinal supplies and medicines to treat coronavirus patients.
3. does not go beyond to what is strictly necessary (e.g. it does not pertain to future price information and strategic intentions). In this regard, aggregated information carries a lower risk to exceed what is strictly necessary than detailed information.
4. does not afford the involved companies the possibility of eliminating competition in respect of a substantial part of the products concerned.

(iv) Allocation of customers (market sharing)
Agreements or other forms of cooperation that lead to market sharing between competitors qualify as restrictions by object. In such circumstances, it is generally not likely that parties could successfully rely on the exception of paragraph 3. Parties therefore need to carefully assess whether a market sharing agreement meets the required conditions. In the current circumstances, the allocation of particular customers, for example allocating patients between hospitals, could qualify as a permissible form of market sharing as long as each of four conditions of paragraph 3 is met.

1. The allocation of patients reduces the pressure on hospitals with a high number of coronavirus patients, while other hospitals still have the capacity to admit more coronavirus patients. This might also increase the capacity for hospitals to continue the treatment of non-coronavirus patients.
2. The benefit for patients is obvious, as they will receive better quality healthcare and probably also receive it sooner than without the agreement.
3. The agreement to allocate patients should be limited in time, in any event no longer than the coronavirus outbreak.
4. The involved companies should not be afforded the possibility of eliminating competition altogether on relevant product markets.

Comfort letters

The European Commission has indicated in its Temporary Framework that it is willing to provide, where appropriate, ad hoc comfort letters to undertakings for specific and well-defined cooperation projects in this context. The Commission is willing to provide such guidance and comfort to undertakings or associations of undertakings to facilitate initiatives that need to be swiftly implemented to effectively tackle the coronavirus outbreak, notably where there may still be uncertainty about whether such initiatives are compatible with EU competition law.

The Commission has already provided its first comfort letter to Medicines for Europe (formerly the European Generics Medicines Association). The comfort letter relates to a cooperation among pharmaceutical producers that addresses the risk of shortage of critical hospital medicines.

Conclusion

Different forms of cooperation between undertakings may be allowed during this coronavirus crisis. Agreements between competitors that - in principle - also restrict competition, may still be allowed from a competition law perspective if each of the following four conditions are met: the agreement or cooperation must (i) lead to 'efficiencies' that (ii) are passed on to consumers, whereby (iii) the agreement is indispensable for the achievement of these objectives and (iv) does not eliminate competition for a substantial part of the products in question.

Because parties are dependent on a self-assessment to determine whether an agreement or form of coordination is permissible, we recommend consulting a legal adviser, the ACM or the Commission. Both authorities have expressed willingness to provide guidance. The Commission may even provide a comfort letter.