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Coronavirus: The relaxing of competition law in the new normal

As governments worldwide steer their respective countries and citizens through an unprecedented time in modern day history, measures are being swiftly implemented by competition regulators to lessen the financial impact of COVID-19 on consumers. This article considers some of the areas in which measures have been taken by competition regulators so that competition rules can cater for the new normal.

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As governments worldwide steer their respective countries and citizens through an unprecedented time in modern day history, measures are being swiftly implemented by competition regulators to lessen the financial impact of COVID-19 on consumers.

Competition laws are in place to encourage lower prices, better services, higher quality, and drive innovation, all of which ultimately benefit consumers. However, owing to the extraordinary circumstances, regulators have recognised that exceptions must be made to enable government actors and key services and workers to respond to the crisis effectively, resulting in the relaxing of competition rules.

This article considers some of the areas in which measures have been taken by competition regulators so that competition rules can cater for the new normal.

Anticompetitive behaviour

The Competition & Markets Authority (“CMA”) established a dedicated COVID-19 taskforce on 20 March 2020, partly as a response to concerns that businesses might exploit the situation to take advantage of consumers (i.e. charging excessive prices),  and partly owing to the recognition that there was a risk of an increase in consumer detriment as a result of COVID-19 itself, along with the measures taken to suppress its impact on public health.

Ordinarily, amongst other prohibitions, competition law prohibits agreements and arrangements between businesses that restrict competition[1]. For example, undertakings cannot collude or cooperate to limit competition by agreeing to increase prices or to divide up markets or customers amongst themselves.

On 25 March 2020, the CMA published its approach to business cooperation in response to COVID-19. The CMA has recognised that in the current situation businesses may well need to cooperate in order to ensure the supply and fair distribution of scarce products and/or services affected by the crisis to all consumers. For example, supermarkets have been reported as having been allowed to work together to keep stores stocked, shops open and delivery services running. In doing so, they are having to share data in a manner which would not have been permitted in ordinary market conditions. Indeed, an order came into force on 30 March 2020, which excludes certain agreements between suppliers of specified groceries and logistic providers of those groceries from the application of Chapter 1 of the Competition Act[2].

The CMA has said in its guidance that it will not take enforcement action where the temporary measures to coordinate action taken by businesses:

  • were appropriate and necessary in order to avoid shortage, or ensure security, of supply;
  • were clearly in the public interest;
  • contribute to the benefit or wellbeing of customers;
  • deal with critical issues that arise as a result of the COVID-19 pandemic; and
  • last no longer than necessary to deal with the critical issues.

This reassurance from the CMA will alleviate and/or mitigate (to some extent) the concerns of those businesses that are having to cooperate in order to respond to the crisis as quickly and effectively as they can.

That said, the CMA reiterated that it did not give a “free pass” to businesses to engage in conduct that could harm consumers and said that it will  not tolerate businesses exploiting the crisis as a “cover” for non-essential collusion. The CMA provides examples, including businesses exchanging with their competitors commercially sensitive information on future pricing or business strategies, where this is not necessary to meet the needs of the current situation, and those businesses abusing their dominant position in a market (which might be a dominant position conferred by the circumstances of the crisis) to raise prices significantly above competitive levels (i.e. sanitising gel firms).  In support of its guidance, the CMA has launched an online service “Report a business behaving unfairly during the Coronavirus (Covid-19) outbreak” through which affected parties can report unfair practices specifically related to COVID-19.

Although the CMA has provided a clear response to its approach during the COVID-19 period, it has said that it cannot offer protection against private litigation brought by third parties for perceived breaches of UK competition law.

From a European perspective, the European Commission Network (the “ECN”) issued a joint statement on the application of antitrust rules during the current COVID-19 crisis. Like the CMA, the ECN acknowledged that given the extraordinary situation companies may need to cooperate in order to ensure the supply and fair distribution of scarce products to all consumers, and  the ECN confirmed that it would not actively intervene against necessary and temporary measures put in place to address the shortage of supply. Similarly, the ECN said it would not hesitate to take action against companies taking advantage of the current situation by cartelising or abusing their dominant position.

It will be interesting to see in the coming months the uptake and scale of any private litigation as a result of those engaging in “cover” collusion during the crisis, for example, horizontal collusion between undertakings at the same level of the supply chain, and businesses abusing their dominant position during this period[3]. The usual counterfactual analysis in cartel cases, and the market analysis required in abuse of dominance cases, will have to appreciate the impact of the COVID-19 crisis which will inevitably lead to variances in approach. There is no doubt that private litigants, economists, and the Courts will have to grapple with novel issues as a result of the crisis.

State aid

Government borrowing and spending is taking place at unparalleled levels across Member States.  In the UK, it has been reported that the government plans to borrow £225 billion from bond market investors in just under four months to fund the increase in public spending during the COVID-19 pandemic[4]. Borrowing levels such as these were last seen during the financial crisis.

The European Commission (the “Commission”) has adopted a Temporary Framework[5] for state aid measures to enable Member States to support their respective economies during the COVID-19 pandemic, in place until the end of December this year[6]. The Temporary Framework is in addition to existing State aid rules.  These special rules are based on Article 107 (3)(b) of the TFEU which provides that state aid may be compatible with the internal market where it is  “aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State”. The Temporary Framework recognises that the entire EU economy is experiencing a serious disturbance. Temporary measures include direct grants, repayable advances or tax advantages up to a limit of €800,000 per undertaking, subsidised loan guarantees and interest rates, investment aid with an “incentive effect”, for example, the production of COVID-19 related products (i.e. ventilators and medicinal products).

Member States must show that the State aid measures notified to the Commission under the Temporary Framework are necessary, appropriate and proportionate to remedy a serious disturbance in the economy of the Member State concerned and that the conditions within the Temporary Framework are complied with.  It appears that the Commission is approving notifications by Member States at speed. Recently, the Commission approved a €100m Dutch State aid scheme to support small medium-sized enterprises (“SMEs”) during the COVID-19 outbreak, and approved a €215m Maltese employment aid scheme to support sectors affected by the outbreak, both of which fell under the Temporary Framework.

The measures in the Temporary Framework seem to be aimed at SMEs principally as the Commission considers these particularly at risk during the pandemic. However, it is unlikely to apply to larger bail outs required by companies, for example those in the aviation industry which are suffering high operating losses as a result of the pandemic.  It will be interesting to see in the coming weeks whether the Commission considers the need to publish specific measures for businesses requiring larger bailouts.

Mergers

Merger control regulations remain in force despite the COVID-19 crisis. The majority of the Merger Control Regimes around the world continue to operate even with the shift to remote working arrangements. The new normal in merger control investigations include conducting video and telephone conference calls in place of face-to-face meetings and the encouragement of electronic filings to avoid disruption in the investigation process.

Like other Merger Control Regimes, the CMA has recognised that the COVID-19 crisis will have an impact on their merger investigations. On 22 April 2020, the CMA published Specific guidance on Merger Assessments during the COVID-19 crisis (the “Guidance”). The message of the CMA was clear in that although there may be a temporary relaxation on the procedural aspect there will be no relaxation on the substantive assessment of merger investigations.

In the Guidance, the CMA confirmed that the statutory deadlines which apply to merger investigations have not been altered as they would still want to ensure that investigations are concluded as soon as possible. However, they recognise that the current crisis will make certain aspects of the investigation process challenging such as information gathering from both the merging parties and third parties. Given this, the CMA has said that (1) the prenotification processes may suffer delays;  (2) it would be unlikely that they will impose penalties on third parties who are unable to comply with information request deadlines; and (3)  they may stop the 40-working day clock where merging parties are unable to provide information within stated deadlines. Alongside the relaxation of some procedural rules, the CMA plans to resolve some of the difficulties of information gathering by publishing invitations to comment during the pre-notification process.

On the substantive assessment of merger cases, the CMA has not imposed any relaxation of the rules thus far. The CMA impresses the importance of protecting consumers in the long term whilst considering the possible impact of the COVID-19 crisis, which they will do on a case-by-case basis. The provisional clearance of the Amazon-Deliveroo deal, which was announced on 17 April 2020, is a good example of how the CMA has factored in the impact of the COVID-19 in its decision-making processes. In its provisional findings, the CMA noted that the crisis had significantly affected the financial position of Deliveroo, citing restaurant closures and reduction in customer orders as a factor in the significant reduction of Deliveroo’s revenues[7].

Similar to the substantive assessment, the CMA will continue to impose interim measures (i.e., orders directed at the merging parties to prohibit or require certain conduct during the merger investigation). However, in cases where parties foresee a need for the relaxation of the measures, the CMA encourages the merging parties to approach the relevant case teams as early as possible. The merging parties must establish that the relaxation of any measures is necessary for the sustainability of the business by providing evidentiary proof and suggesting necessary safeguards to protect consumers.

Lastly, given the current situation of the economy, it is inevitable that there will be businesses that will succumb to the crisis. Recognising this fact, the CMA has provided a refresher on its likely approach to the failing firm defence (Link). In gist, the proof required by the failing firm defence has not changed. The Merger Assessment Guidelines set out a three-limb approach for assessing the failing firm defence, requiring the CMA to consider[8]:

  • whether the firm would have exited (through failure or otherwise) absent the transaction;
  • whether there would have been an alternative purchaser for the firm or its assets; and
  • what the impact of exit would be on competition compared to the competitive outcome that would arise from the acquisition.

To assist the CMA in assessing these three limbs merging parties should be prepared to provide enough evidence to substantiate their failing firm defences. The CMA does not appear to show any flexibility in their assessments of these defences despite the COVID-19 crisis. Instead, the CMA emphasises the need to continue their rigorous merger investigations in order to protect consumers in the long term.

Looking ahead

Whilst measures have been put in place by governments and regulators to relax competition rules during the crisis, it remains to be seen whether some of the measures will gain a form of permanence after the COVID-19 crisis comes to an end or whether governments and regulators  will simply revert back to the status quo prior to the crisis.  For example, the cooperation of supermarkets on areas of food strategy and distribution may well lead to long term efficiencies which benefit consumers beyond the crisis. Indeed, there appears a need for governments and regulators to carry impact assessments across various policy areas including competition after the pandemic comes to an end.

 [1] The prohibition is set out in section 2 of the Competition Act 1998 and is known as the ‘Chapter I prohibition’. The European equivalent is Article 101 of the Treaty of the functioning of the European Union (the “TFEU”).

[2] Competition Act 1998 (Groceries) (Coronavirus) (Public Policy Exclusion) Order 2020

[3] The principal cause of action in competition claims is breach of statutory duty.

[4] https://www.theguardian.com/business/2020/apr/23/uk-seeks-to-borrow-225bn-to-fund-huge-surge-in-public-spending

[5] Adopted on 19 March 2020, as amended on 3 April 2020 which extends the Temporary Framework to enable Member States to accelerate research, testing and production of coronavirus relevant products, to protect jobs and to further support economies.

[6] Until the end of the transition period (31 December 2020), EU state aid rules remain fully applicable in the UK. Unless an extension of the transition period is agreed between the UK and the EU, these rules will cease to apply to the UK after that date and the future relationship between any UK state aid system and EU state aid rules will be subject to further agreement.

[7] https://assets.publishing.service.gov.uk/media/5ea6e697e90e0704930d8a97/PFs_Report_.pdf

[8] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/284449/OFT1254.pdf

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