There have recently been a number of significant actions by the European Commission in the IT field, in particular against Microsoft and Google. Also the European Court has issued various judgments on EU competition law which should be noted.
Meanwhile in the UK, the Albion Water/Dwr Cymru saga has developed to the point where Albion has successfully obtained an award of damages against Dwr Cymru (the incumbent water supplier for the relevant area), for abuse of dominant position.
This is one of the few such instances of an award of damages in the English courts for competition law infringement. All of these developments and others are summarised in this issue of our Bulletin.
- EU: Record fine for Microsoft over non-compliance with binding commitments
- EU: European Commission consults on commitments offered by Google
- EU: European Commission updates explanatory note on carrying out dawn raids
- EU: ECJ rules that training rules put in place by a professional association do fall within the ambit of Article 101 TFEU - OTOC
- EU: ECJ considers what may constitute a restriction by object in the context of vertical agreements – Allianz/Generali
- Germany: On appeal, Düsseldorf court further increases FCO fine
- Germany: Federal Cartel Office launches survey on the effect of Amazon's price parity clause
- The Netherlands: Dutch Court annuls cartel decision for home care services providers
- The Netherlands: Non-compete clause in employment contract does not conflict with competition law
- UK: CAA consults on its assessment of regulation of Heathrow, Gatwick and Stansted Airports
- UK: Enterprise and Regulatory Reform Bill receives Royal Assent
- UK: Damages Award for Abuse of Dominant Position to Albion Water
EU: Record fine for Microsoft over non-compliance with binding commitments
In the first case of its kind, the European Commission announced on 6 March 2013 that it had levied a EUR561 million fine against Microsoft, for its failure to comply with binding commitments it gave to the European Commission in 2009. Microsoft was required by its commitments to provide a 'choice screen' on the first loading of its operating systems, which would allow users to choose from a selection of internet browsers, (as alternatives to Microsoft's own Internet Explorer). Microsoft failed to display this choice screen during the rollout of Windows 7, which Microsoft blamed on a technical error.
In 2008, the Commission began a formal investigation into allegations of anti-competitive behaviour by Microsoft. Microsoft was purportedly leveraging its dominant market position in the operating system market by tying in with Internet Explorer, the sole web browser in its Windows licence. This tying was alleged to have given Microsoft an artificial distribution advantage which was not linked to the quality of its products, and furthermore to have incentivised software developers to target their products solely or largely at compatibility with Internet Explorer.
Under Article 9 of Regulation 1/2003, the Commission is able to accept legally binding commitments to remedy any potentially anticompetitive behaviour. Commitments were offered by Microsoft following the Commission's Statement of Objections, and were made binding in December 2009. As part of those commitments, Microsoft agreed that it would provide, from March 2010, a "Choice Screen" when the Microsoft operating system first loaded, which would enable consumers to choose their browser from a selection of available browsers. Additionally, Microsoft would provide regular update reports to the Commission.
Falling Short of its Requirements
In July 2012, the Commission announced that it was opening proceedings against Microsoft to investigate whether it had complied with its commitments. Shortly after this announcement, Microsoft issued its own statement acknowledging that it had fallen short of its requirement to display a Choice Screen during the rollout of Windows 7. It blamed this on a technical error, and said that it had taken immediate steps to remedy the problem as soon as the issue was brought to its attention.
Ultimately, the Commission decided that Microsoft failed to offer the browser Choice Screen during its roll out of Windows 7 Service Pack 1 between May 2011 and July 2012. The result was that some 15 million users in the EU did not have the option which Microsoft had promised to offer. This is against the backdrop of the fact that, when the Choice Screen was operational, for example between March 2010 and November 2010, it was extremely successful, with some 84 million users using it to download alternative browsers.
The Commission imposed a record fine on Microsoft of EUR561 million. Commission Vice President Almunia was quoted in the press release, stating that the availability of commitments is crucial to antitrust enforcement, because they "allow for rapid solutions to competition problems… [A failure to comply] is a very serious infringement that must be sanctioned accordingly".
The Commission stated that the fine took into account the gravity and duration of infringement, but also Microsoft's co-operation and provision of information. Almunia stated that the aim was to "make companies think twice before they even think of intentionally breaching their obligations or neglecting their duty to ensure strict compliance."
The decision highlights the seriousness with which the Commission will break a breach of binding commitments. In particular, the Commission seemed keen to stress that they are not an 'easy way out' of antitrust judgments.
EU: European Commission consults on commitments offered by Google
Victoria Moorcroft and Rich Jones
The European Commission is proposing to accept commitments offered by Google in order to settle concerns that it may be abusing a dominant position in the markets for web search, online search advertising and online search advertising intermediation. The commitments are intended to give Google's customers and third parties greater freedom in their dealings with Google, and increase visibility of rival services.
The Commission's Concerns
The Commission has identified four aspects of Google's alleged behaviour, which it feels may be hampering competition and innovation in the field of online advertising. These are:
(i) favourable treatment of its own specialised web search services (e.g. Google News, Google Flights) in general search results;
(ii) non-consensual use of original content from third-party websites in its own specialised search results (e.g. use of The Guardian news articles in Google News);
(iii) agreements that tie third-party websites into obtaining the majority of their search advertisements from Google; and
(iv) restrictions on the transferability of search ad campaigns to rivals, for example on Google's AdWords platform.
In order to address the Commission's concerns without the Commission making a finding of an abuse of a dominant position, Google have offered to:
(i) label links to its own specialised services where they appear in search results, and physically separate them on the page (for example with a frame). They will additionally display three rival specialised services, and do so in a manner which is clearly visible to users;
(ii) provide an opt-out option to third parties from the use of their content, allow them to mark information in a way which means it will not be used by Google, and afford newspaper publishers increased control over the extent to which their work is displayed on Google News;
(iii) remove obligations to require third parties to source search ads exclusively from Google; and
(iv) remove obligations which prevent advertisers from managing their campaigns across competing platforms.
The Commission's preliminary finding stated that Google has 90% EEA market share for regular search functions, and great strength in its specialised searches, such as those mentioned above. From a user's point of view, these commitments could have the effect of increasing obvious choice, whereby they can see whether Google (or a rival) is promoting a result, or whether it appears through natural popularity. From the point of view of those doing business (or trying not to do business) with Google, the proposals are intended to give greater contractual freedom to both control content and to control their relationship between Google and its rivals.
The Commission is currently consulting on Google's proposed commitments, seeking comment from interested parties. At end of the consultation period, and with reference to any comments made, the Commission will decide whether or not to make these proposals legally binding upon Google. The initial indication from Commissioner Almunia was that Google's proposed commitments would not be sufficient and that it would be asked to improve them.
ECJ considers post-term non-compete obligations in franchise agreements - Retoucherie de Manuela
The ECJ has ruled in Case C-117/12 La Retoucherie de Manuela, S.L. v La Retoucherie de Burgos, S.C., on the interpretation of the Vertical Agreements Block Exemption Regulation, in relation to a post-term non-compete obligation in a franchise agreement. It concluded that, to benefit from the Vertical Agreements Block Exemption Reputation, a post-term non-compete obligation in a franchise agreement must be limited to a particular building or parcel of land used during the franchise agreement, and cannot extend to the whole territory covered by that agreement.
This ruling related to the old block exemption Regulation, but the new version is on similar terms. Article 5(b) of Regulation 2790/1999 applied to a post-term non-compete only to the extent that it was limited to the premises and land from which the buyer had operated during the contract period (and additionally was limited to one year in duration and was intended to protect confidential information).
The Dispute - Background
La Retoucherie de Manuela (the franchisor) and La Retoucherie de Burgos (the franchisee) entered into a five-year franchise agreement for clothing services. The agreement contained a non-compete clause, under which the franchisee was prohibited from undertaking identical or similar activities to the contract activities, in competition with the franchiser anywhere in the contract territory. This stood both for the duration of the contract and for one year after its termination, for any reason.
The clause's purpose was the protection of know-how and expertise, and breach of it triggered a penalty payment of more than EUR90,000. After the franchisee unilaterally terminated the contract and sought to disregard the non-compete, the franchisor had its claim seeking to enforce the penalty payment thrown out at first instance on the basis that the clause was anti-competitive and therefore unenforceable. It appealed to the provincial court of Burgos, who referred the question of validity of the non-compete obligation to the ECJ.
The question centred on the meaning of "premises and land". The Spanish court asked the ECJ whether the phrase referred only to the physical space within which the franchisee operated while the agreement was in effect, or whether, on the grounds that the word "and" led an ambiguity as to whether "land" could be extended to mean "territory", a broader meaning should prevail.
The ECJ ruled that the common-sense, obvious meanings of the words should apply, so that "premises" refers to part of a building and "land" is just a parcel of land. Specifically, because the word "territory" is used elsewhere in the Regulation, it was clearly the intention of the legislators to distinguish between the two. For a non-compete clause to benefit from the protection of the block exemption, it should be limited in geographic scope and can only apply to the specific premises, for one year after termination.
This restrictive interpretation, limited to the actual point of sale, means a post-term non-compete clause prohibiting the buyer from selling the contract goods or services away from the site and land from which he operated during the contract, does not come under the block exemption Regulation. Instead, the national court must decide if the non-compete individually meets the exceptions criteria of Article 101(3), and if therefore there has been a breach of Article 101 TFEU.
EU: European Commission updates explanatory note on carrying out dawn raids
Peter Willis and Rich Jones
In a move aimed at providing for technological advancement in business, the Commission has published revised guidance setting out how it will conduct dawn raids, including in particular the handling of data. Companies should consider whether it is necessary to update their own dawn raid manuals and checklists to reflect the Commission's new stated approach.
Where the Commission suspects a possible infringement of competition law, it has wide powers to investigate, including the power of inspection in execution of a Commission decision under Article 20(4) of Regulation 1/2003. It is this measure (inspection pursuant to a formal Commission decision, rather than just written authorisation), for which the Explanatory Note was published. The Note seeks to reflect the fact that most business is now conducted electronically, and so to supplement its rules relating to entry and inspection of physical documents, the Commission has extensively detailed its powers to inspect, detain, copy and deal with data in any medium – particularly files stored on computers or related hardware and software.
Most broadly, the Commission sets out that it will apply its general power of entry and examination under Article 20(2) to explicitly cover a company's books and records "irrespective of the medium in which they are stored", and the ability to take copies in any form. The Commission goes on to state that, in its searches of a company's IT environment and storage media (which covers everything from laptops and mobile phones to DVDs and USB sticks), it may use built in search functionality or its own dedicated forensic IT tools to copy, search and recover data, whilst respecting the integrity of the company's system and data.
The wider ICT provisions also cover the level of co-operation that is required by the company under investigation. The company should provide staff to assist the Commission, not only to provide explanations, but also to freeze email accounts, remove hardware from the network, grant administrator access rights and other general computer support.
The Commission has also included provisions which seek to minimise concerns over company data being leaked or used outside the remit of any such inspection. All documents and data copied during an inspection will be covered by the provision of Article 28 of Regulation 1/2003 concerning professional secrecy. Any personal data, as defined in Regulation 45/2001, will be processed in compliance with that Regulation. Furthermore, at the end of each inspection, the inspectors will be required to cleanse all their forensic IT tools in a manner by which none of the undertaking's data can be recovered by any known technique.
However, it may still be a concern that the undertaking's storage media may be kept by the inspectors until the end of their inspection. The Commission expressly acknowledges that, on occasion, it may be necessary to grant third party access to data – over which the undertaking will have little control other than to identify any business secrets or other confidential information, and make a case to the Commission for permission to provide non-confidential copies.
The publication of the Note means companies now have useful guidance as to how the Commission will approach electronic searches. The Note follows, on the whole, the Commission's already common practice. Indeed, the Commission has already levied fines (EUR 2.5 million) on Czech energy companies for failing to block email accounts when required, and for diverting incoming emails. Whilst the Note is not legally binding, in light of the potentially serious penalties for non-compliance with an investigation companies should nonetheless consider updating their own dawn raid policies to reflect the Commission's updated Explanatory Note.
EU: ECJ rules that training rules put in place by a professional association do fall within the ambit of Article 101 TFEU - OTOC
On 28 February, the ECJ ruled in Case C-1/12 Ordem dos Técnicos Oficiais de Contas that professional rules put in place by the Portuguese chartered accountants' professional association (OTOC), which required chartered accountants in Portugal to obtain all short training (of less than 16 hours) from OTOC itself, was anti-competitive in breach of Article 101 TFEU. It ruled that OTOC was an association of undertakings whose decisions was subject to Article 101. Although OTOC was required to lay down training rules by legislation, the detail of those rules were for it to decide and were therefore capable of being caught by Article 101. By taking a decision which reserved to itself all shorter training sessions for chartered accountants, OTOC infringed Article 101.
The proceedings arose out of decision by the Portuguese competition authority that OTOC had put in place an anti-competitive system of compulsory training for chartered accountants. The authority said that OTOC had infringed Article 101, which prohibits not just anti-competitive agreements between undertakings but also anti-competitive decisions by an association of undertakings. In appeal proceedings against the authority's decision, the national courts referred a number of questions to the ECJ; it asked whether (1) OTOC was to be regarded as an association of undertakings and, if so, whether binding rules that such a body might lay down in relation to training were subject to Article 101; (2) whether the fact that the laying down of the rules was required by legislation rendered Article 101 inapplicable (perhaps bringing the rules within the scope of Article 56 instead); (3) whether the rules could still be caught by Article 101 although they had no effect on the economic activity of OTOC's members; and (4) whether rules that reserved training to OTOC alone were permissible.
The ECJ considered firstly, and unsurprisingly, that OTOC was an association of undertakings. Its members are undertakings (being engaged in economic activity). In respect of the decision in question, OTOC's rules did belong to the "sphere of economic activity", even though they may not have affected the chartered accountants, as they had a direct impact on the market for compulsory training for chartered accountants (on which OTOC itself was active).
Secondly, it concluded that the Portuguese legislation requiring OTOC to lay down training rules did not permit OTOC to escape from the application of Article 101. The legislation did not give OTOC the exclusive right to provide the shorter training sessions, nor did it set out what the rules must be. The rules were therefore adopted solely by OTOC, in its own discretion, without any input from the State.
Finally, the ECJ ruled that rules which reserved for OTOC a significant part of the market of compulsory training for chartered accountants were likely to distort competition on the market of compulsory training for chartered accountants. The rules did not ensure equality of opportunity between the various economic operators, eliminated competition for the shorter training sessions and were not necessary to guarantee the quality of the services offered. Access to the training market should be way of clearly defined, transparent, non-discriminatory, reviewable criteria likely to ensure equal access.
The decision is interesting as it is the first time that the ECJ has considered its own decision in Wouters in any detail. In Wouters the ECJ held that the decision of a profession body was outside Article 101 because of the legislative environment in which it was made (where the national legislation had laid down the principles and objectives that the professional body had to follow). It was a somewhat surprising decision as it appeared to create a new exclusion from Article 101 that did not appear in the Treaty in any express way. The OTOC decision recognises the limits of the Wouters doctrine, concluding that where rules are laid down almost entirely at the discretion of the professional body (albeit that they were required by legislation to lay down such rules) the professional body cannot escape Article 101. Interestingly though, it also quite clearly recognised and applied the Wouters 'exemption' suggesting that it is a principle that it is content to recognise.
EU: ECJ considers what may constitute a restriction by object in the context of vertical agreements – Allianz/Generali
On 14 March 2013, the ECJ ruled in Case C-32/11 Allianz Hungária and others v Gazdasági Versenyhivatalon on a question from the Hungarian courts regarding agreements between car dealers, their trade association and car insurance companies. It concluded that to determine whether an agreement restricted competition by its object, regard must be had to the content of its provisions, its objectives and the economic and legal context of which it forms part, as well as the nature of the goods or services affected and the real conditions of the functioning and structure of the market(s) in question. In requiring an extensive analysis, the ECJ appears to blur the distinction between object restrictions, where an effect on competition is presumed, and other restrictions, for which it is necessary for a competition authority to show an actual effect on competition. In doing so, the ECJ appears also to have expanded the categories of restrictions capable of being considered 'object' restrictions.
Allianz and Generali, two insurers, both agreed (separately) with GEMOSZ, the national association of authorised car dealers, annual framework rates and conditions which would apply when a car dealer carried out repairs for that insurer. In 2004 and 2005, the individual dealer agreements (based on the framework agreement) concluded by Allianz provided that the dealers would receive higher payments if the dealer also sold a certain number of Allianz insurance contracts. Geraldi were found to have applied a similar, non-contractual, arrangement. The Hungarian competition authority found that the arrangements collectively and individually infringed competition law by object. Considering an appeal of that decision, the Hungarian courts asked the ECJ to consider whether bilateral agreements between an insurance company and individual car repairers, or between an insurance company and a car repairers' association, under which the hourly repair charges payable depend on the number and percentage of insurance policies taken out with the insurance company through the repairer, qualify as restrictions by object in contravention of Article 101(1) TFEU.
The case law of the ECJ distinguishes between agreements which are capable of restricting competition by their very nature (so-called 'object restrictions') and those agreements which have the effect of restricting competition. In the case of object restrictions, a competition authority does not need to establish any actual effect on competition with an infringement of Article 101(1) then considered proven, and the burden resting on the alleged infringer to show that the beneficial effects of the agreement meet the conditions for an individual exemption in Article 101(3). For all other types of agreement, the burden lies with the authority to carry out a detailed analysis to show that competition has in fact been restricted to an appreciable extent.
The ECJ concluded that the link between remuneration for car repair services and those for insurance brokerage did not automatically mean that the agreement was a restriction of competition by object. However, it was necessary when determining whether an agreement involves a restriction of competition by object, to have regard to its content, its objectives and the economic and legal context of which it forms a part, taking into consideration the nature of the goods or services affected, as well as the real conditions of the functioning and structure of the market(s) in question.
The ECJ indicated that relevant factors would include:
- whether the independence of the two types of services was necessary for the proper functioning of normal competition;
- that the agreement was likely to affect two markets, not just one;
- that the aim of the agreement for the insurance companies was to maintain or increase their market shares;
- that domestic law requires the dealers to be independent from the insurance companies to ensure that the policyholder is offered the most suitable policy;
- whether it was likely that competition on the market in question would be eliminated or seriously weakened following the conclusion of those agreements, given the structure of the market, the existence of alternative distribution channels and their respective importance, and the market power of the companies concerned; and
- whether the recommended prices established by GEMOSZ functioned in reality as fixed prices.
The Court concluded that if the decisions taken by GEMOSZ were themselves found to be a restriction by object, the agreements concluded between the insurance companies and the dealers, by which the insurance companies "voluntary confirmed" GEMOSZ's decision would also restrict competition by object.
Whilst it was clear from the case law that some consideration had to be given to the context of the agreement, that consideration appeared to be limited to ensuring that an agreement that would in most contexts be a restriction by object, was still a restriction by object in the specific context. However, in this decision, the ECJ appears to reverse that logic, concluding that an agreement of the type in question in this case, which would often be considered a restriction only if it had anti-competitive effects, could become a restriction by object through its context. Furthermore, the level of detail which it expects the authority to go into to prove that the restriction is a restriction by object appears to be tantamount to carrying out an effects-based analysis, such that the distinction between the two is decidedly blurred.
The ECJ's decision is perhaps a result of the very narrow remit that the ECJ had in relation to the interpretation of Article 101 on a limited point. Nonetheless it is somewhat concerning, particularly in relation to industry-wide standard agreements such as these on matters which in the context of vertical agreements between non-dominant companies would not normally be considered an object restriction. It is to be hoped that the ECJ is asked again soon to consider how to assess whether a restriction is an 'object restriction' in the context of a vertical agreement, and that the GEMOSZ decision will be seen as being very specific to its (insurance industry) context and facts.
Germany: On appeal, Düsseldorf court further increases FCO fine
Dr. Jörg Witting and Fabian von Busse
In appeal proceedings by five members of a liquefied natural gas ("LNG") cartel, the Düsseldorf Higher Regional Court has imposed a total fine of EUR 244 million, increasing the fine originally imposed by the German Federal Cartel Office ("FCO"). The cartel members are now confronted with individual fines which are up to 85% higher than in the original FCO order.
In its original decision of 2007, the FCO held that in the area of tank and bottled LNG the cartelists had established a customer protection system which also comprised elements of price fixing. Within this system, other cartelists’ customers could not be solicited and customers willing to change their LNG supplier received deterring prices or no prices at all. According to the FCO, the cartel members informed each other about customer requests and, if a customer still changed its supplier, arranged for compensatory payments. The FCO held that between 1997 and 2005 this system led to price differences in the Tank and bottled LNG area of up to 100% and imposed a fine of EUR 180 million against the five cartel members in question.
Upon appeal by the companies, the Düsseldorf court has now even increased the fines imposed by the FCO. According to the court, the duration and the significance of the cartel, as well as LNG being a good of general interest, constituted aggravating aspects in the assessment of the amount of the fine. In addition, the court estimated the cartel profit as being higher than the FCO and thus came to the conclusion that the original fines were to be increased. With more than 130 hearing days, the court proceedings were among the largest cartel proceedings in Germany.
Andreas Mundt, president of the FCO said: “This judgment sends the clear signal that cartelists are prosecuted with high fines. From the oral hearing the Higher Regional Court has gained further insight for the assessment of the significance of the acts and thus even exceeded our fines for some companies.” The judgment of the Düsseldorf court is not final and may yet be appealed to the Federal Supreme Court by the companies. Besides the proceedings in question, the fines against other members of the LNG cartel are dealt with in separate proceedings.
The proceedings show that German courts do not shy away from overruling an FCO decision even to the detriment of the appealing parties if further, prior unconsidered aspects become apparent in the court proceedings.
Germany: Federal Cartel Office launches survey on the effect of Amazon's price parity clause
On 20 February 2013, the Federal Cartel Office (“FCO”) initiated a survey of 2,400 sellers who sell their products through Amazon Marketplace in Germany. The FCO is investigating the effect of a price parity clause which prohibits sellers who offer any products on Amazon Marketplace selling them at a cheaper price on any other internet platform (e.g. Ebay) or on the sellers' own online shops.
The FCO’s President, Andreas Mundt, stated that the price parity clause could potentially violate the general ban on cartels, depriving sellers of the freedom of selling a product cheaper via websites other than Amazon. He considers that this may also have the potential to restrict competition between the different web based market places as, even if the market place offers lower fees to the seller, those lower fees cannot be reflected in more favourable prices to the customers on the platform. This may make it difficult for other internet market places, particularly new or emerging companies, to compete with Amazon. According to the FCO, there is therefore a risk that Amazon’s price parity clause could generate a higher price level without producing sufficient benefits for consumers.
The FCO specifies that, if its survey confirms that the price parity clause has a detrimental effect on competition, Amazon will be required to delete it from its terms and conditions.
The Netherlands: Dutch Court annuls cartel decision for home care services providers
Mariska van de Sanden
The Courts of Rotterdam have annulled a combined 5 million Euro fine imposed by the Dutch Competition Authority ("NMa") relating to a cartel between two home care services providers, Stichting Carinova Thuiszorg and Stichting Carint-Reggeland Groep, in a decision of 14 March 2013. In 2008 the NMa decided that the home care services providers violated the Dutch Competition Act by agreeing upon a non-compete clause. The clause stipulated that a party should not encroach, at least not without the consent of the other party, on the market area in which the other party was active with regard to home care services.
The Dutch Court states that the alternative explanation, i.e. that the agreements were made in anticipation of an expected change in law, is not implausible. That fact that one of the parties thought that it was already bound by such a law points away from the conclusion that there was consensus or coordination between the providers. The Court therefore annulled the fines of, respectively, EUR 3.7m and 1.1m. It is not known yet whether the Dutch Competition Authority will appeal against this judgment.
The Netherlands: Non-compete clause in employment contract does not conflict with competition law
Mariska van de Sanden
The Dutch Court of Appeal has held that a post-term restriction on a managing director in a relationship agreement did not infringe the Dutch Competition Act. The clause had insufficient effects on the market on the facts.
The Court of Appeal has confirmed the judgment of the Lower Court dated 8 February 2012. The case involved a 'relationship clause' incorporated into an employment contract between a company and its managing director. The clause provided that the employer could spend one day a week, during working hours, working at a company that he had established in Belgium. However, in the event that the employee intended to work for the company in Belgium after termination of his employment, he needed his employer's consent, which was not to be unreasonably withheld. The managing director alleged that the relationship clause breached Clause 6 of the Dutch Competition Act. The court concluded that such an agreement had the potential to infringe the Competition Act, but did not do so on the facts.
The Court noted that an employee non-compete clause can indeed be seen as an agreement between two companies in the event that: (i) the employee became an entrepreneur; and (ii) the clause relates to the period after termination of the contract. However, in this case the clause did not have a sufficiently material effect on the market. Moreover, as the former director knew all of his clients, the former director would have had a competitive advantage if the non-compete clause had not been incorporated in the contract. The clause was therefore legitimate and not disproportionate. Hence, the Court of Appeal upheld the judgment and rejected the arguments of the managing director.
Source: www.rechtspraak.nl, case number: LJN BZ1968, 19 February 2013.
UK: CAA consults on its assessment of regulation of Heathrow, Gatwick and Stansted Airports
Victoria Moorcroft and Rich Jones
The Civil Aviation Authority has begun a consultation regarding its market power assessments for Heathrow and Gatwick airports, as well as its initial proposals for regulating Heathrow, Gatwick and Stansted. Under the Civil Aviation Act 2012, a new system of economic regulation for airports has been introduced, such that from April 2014 the CAA will be able to impose a licensing regime intended to ensure transparent, accountable and proportionate economic policies by airport operators.
As part of its assessment of whether an airport's operator is 'dominant', such that it would require regulation, the CAA uses a three part test, which covers (i) whether the operator has "substantial market power"; (ii) whether competition law provides sufficient protection for consumers without regulation; and (iii) whether the benefits of regulating the operator outweigh the adverse effects.
Market Power Assessment
This test is rather complicated as a result of the unique dynamic that exists between London's key airports, and the CAA had some trouble applying it. However, it concluded that Heathrow is a market in itself, and therefore has SMP because of its qualities as a hub, and its central importance to key airlines.
It also concluded that Gatwick has SMP, though not because of it having some 46% of low cost carrier passengers in its market, but because carriers could not realistically leave Gatwick, as a result of there being so few available slots remaining elsewhere.
The CAA concluded that competition law would be ineffective, due to difficulties in responding to curtail abusive behaviour.
As regards the benefits of regulation, the CAA noted that, despite there being strong incentives to invest and improve the facilities at each airport, there is no guarantee that, absent regulation, prices would remain under control. It therefore concluded that the benefits of regulating outweighed the detriment of doing so.
Following a detailed engagement process, the CAA has developed its initial proposals for economic regulation of the airport operators.
For Gatwick and Heathrow, it intends to impose "challenging but fair" price caps over the coming years, prescriptive minimum standards of passenger service, and a new licence intended to enable the CAA to respond more effectively to passengers. In response to heavy media criticism in the wake of Heathrow's handling of modest snowfall, the airport has also been singled out as requiring measures to strengthen its operational resilience to reduce impact on passengers and service disruption.
Because Stansted was not considered to be as dominant in its market(s), and therefore the danger of abuse is lower, the CAA's initial proposal is that there should be a price monitoring and transparency regime introduced, to increase reporting, publication and transparency of its pricing behaviour. Additionally, the CAA intends to adopt a "show cause" trigger, which identifies a threshold for airport charges, above which the CAA would carry out a full investigation.
After the consultation, the CAA's final proposals and draft licences will be published in October 2013, and final decisions will be published in early 2014.
UK: Enterprise and Regulatory Reform Bill receives Royal Assent
The Enterprise and Regulatory Reform Bill received Royal Assent and was enacted in April 2012. Amongst many other changes, it will bring about significant changes to the competition law enforcement bodies in the UK, merging the OFT and the Competition Commission as well as noteworthy changes to the substance of competition law. Certain changes have come into force immediately, but the majority of changes to competition law are not likely to come into force until the end of 2013/beginning of 2014.
The most important changes to be introduced under the Act are:
- The creation of the Competition and Markets Authority (CMA), combining the current functions of both the Office of Fair Trading and the Competition Commission. The OFT and CC will be abolished.
- The cartel offence has been amended to remove the requirement that a person acted dishonestly. A person can now be found guilty of a criminal offence if they agree with one or more other person to make or implement, or cause to be made or implement a list of specified cartel offences (such as price fixing, limiting supply, customer sharing or bid rigging). The person will not, however, be guilty of an offence if customers are given relevant information about the arrangements before they are entered into, or alternatively if information about the arrangements is made public (in a form specified by the Secretary of State). It will be a defence to the cartel offence to show that there was not intention to conceal the arrangements from customers or the CMA or if the person has taken legal advice on the arrangements.
- The CMA will be required to observe a mandatory statutory timetable when carrying out market investigations, and will be able to consider two or more markets together.
- Although the merger regime remains voluntary, the CMA will be able to require merging companies to provide hold-separate undertakings (preventing them combining their businesses) before they have completed a merger. Currently the OFT must wait for the merger to complete before taking such steps.
- Provisions allowing the Secretary of State to remove the concurrent competition powers of sectoral regulators (such as Ofcom, Ofgem, and the CAA) which entered into force immediately. The power seems to have been included in response to criticisms that a number of regulators are reluctant to use their concurrent competition powers – the provisions appear to be intended to impose a 'use it or lose it' incentive to encourage the regulators to intervene using their competition powers where necessary.
The only other competition powers that have entered into force immediately allow the OFT and CC to consult on policy, guidance and similar documents which the CMA can then adopt as its own on its creation. It is expected that the rest of the changes to competition law will be brought into force by order by early 2014.
UK: Damages Award for Abuse of Dominant Position to Albion Water
The Competition Appeal Tribunal has awarded damages in a follow-on action for only the second time. It awarded a total of approximately £1.85 million plus interest to Albion Water, a new entrant in the incumbent Dwr Cymru's water supply area for unfair pricing and margin squeeze by Dwr Cymru in respect of a network access charge, including also additional damages for loss of chance to gain a further contract.
Albion Water's action was brought under section 47A of the Competition Act 1998, which gives a person who has suffered loss or damage by virtue of an infringement of UK or EU competition law, the right to claim compensation before the CAT. In this case, the action followed on from two judgments of the CAT concerning substantive competition law infringements by the dominant incumbent provider, Dwr Cymru. The CAT had declared that a network access price charged by Dwr Cymru resulted in a margin squeeze and abuse of dominant position contrary to Chapter II of the Competition Act 1998, in December 2006. This judgment on margin squeeze was upheld by the Court of Appeal in May 2008. The CAT also gave judgment, in November 2008, that the access price charged by Dwr Cymru was unfair in that it materially exceeded the costs of the services to be provided by Dwr Cymru and also bore no reasonable relation to the economic value of those services. These judgments have been explained in previous issues of this Bulletin: please see the issues for October 2008 and January 2009. In a further judgement on remedies in April 2009, the CAT ordered Dwr Cymru to bring the infringements to an end and to refrain in the future from conduct having the same or equivalent effect: please see the May 2009 issue of the Bulletin.
The background to the saga was that Albion Water sought to provide technical services comprising water supply using Dwr Cymru's network, to end customers to enable them to reduce their water consumption and therefore their overall water supply costs. Albion planned to purchase bulk water from an alternative supplier, United Utilities, and to arrange with Dwr Cymru for this to be transported under a common carriage agreement to its customer, Shotton Paper Mill. Shotton Paper Mill was observed to have in effect sponsored Albion's entry into the market because it wanted to reduce it water costs. Therefore the original intention was that Albion would have shared any savings arising from the common carriage arrangement with Shotton Paper.
Under the margin squeeze judgment, the CAT had found in 2006 that based on the cost of buying the water from United Utilities and the access price quoted by Dwr Cymru, Albion could not profitably resell the water to Shotton at a price less than or equal to Dwr Cymru's retail price, and thus concluded that Dwr Cymru committed a margin squeeze.
Calculation of loss and damages
In order to award damages for the financial loss suffered by Albion as a result of the abuse of dominant position, it was necessary for the CAT to construct the counterfactual that would have existed absent the abuses of dominance by Dwr Cymru. The CAT stated there was a range of lawful access prices that could have been charged and the counterfactual must be based on a reasonable access price that Dwr Cymru would have offered. The CAT agreed that the counterfactual would have involved a common carriage price equal to that which Dwr Cymru would have proposed if it had undertaken a reasonable assessment of the cost of providing the service to Albion (a price of 14.4p/m3). The CAT also concluded that for purposes of constructing the counterfactual, it should be assumed that Albion would have purchased the raw water needed to supply Shotton Paper, at the same price that United Utilities was selling it to Dwr Cymru.
In order to assess the revenue that Albion would have obtained from Shotton Paper, it was necessary to make certain assumptions about the price at which Albion would have supplied water to Shotton Paper, taking into account the terms of the supply agreement. This included a benefit-sharing clause which used, as a benchmark, Dwr Cymru's retail tariff. The CAT concluded on this basis that the savings (to the customer) in the cost of supply or services, net of financing and operating cost, would be shared between Shotton Paper and Albion Water in a 70:30 ratio.
On this basis, the CAT assessed damages for the period from the deemed date of common carriage commencement in the counterfactual situation (16th April 2001) to the date on which Dwr Cymru offered an acceptable common carriage price of 14.4p/m3 to Albion (7th November 2008) of £1,694,343.50.
Further award of damages for loss of chance of a further contract
In addition, the CAT awarded Albion damages for the lost opportunity to obtain a further water supply service contract from Corus which resulted from Dwr Cymru's abuse of dominant position. The CAT concluded that Albion was prevented from bidding to supply Corus because of the disruption at the relevant time resulting from the withdrawal of one of its investors, Pennon, which itself was shown on the evidence to have been attributable to Dwr Cymru's abuse of dominance and Albion's need to focus its limited resources on the relevant investigation by Ofwat, the water regulator, and the subsequent CAT proceedings.
The CAT concluded that but for Dwr Cymru's abuse of dominance, Albion would have tendered for the Corus contract and that it was reasonably foreseeable that Dwr Cymru's conduct would have caused loss through impeding Albion in the development of its business. The CAT concluded that Corus would have been aware that a contract with Albion would have enabled it to reduce its water consumption as a result of Albion's technical services and that there was therefore a substantial chance that, but for Dwr Cymru's abuse of dominance, Corus would have entered into a bulk supply agreement with Albion using common carriage provided by Dwr Cymru, based on the same terms as those applicable to Shotton Paper. Applying the same quantum model as used for Shotton Paper, the amount of resulting damages would be £242,651. However, as it was not certain that a contract would have been concluded given that no formal negotiations were opened, the CAT found it appropriate to reduce this damages figure for its lost opportunity by 33%, resulting in this head of damages coming to £160,149.66.
Interest was awarded on both damages sums as from the mid-point of the relevant period, namely from 26th January 2005 until the date of payment. This was to reflect the fact that the loss was not suffered from the start, but rather over the period when Albion would have earned the increased revenues through the supplies based on common carriage.
Rejection of claim for exemplary damages
Albion Water also claimed exemplary or punitive damages from Dwr Cymru concerning the abuse of dominance. However, this head of claim was rejected because an award of this type of damages would in any event be made only in exceptionally circumstances, and there was in this case no indication on the facts that Dwr Cymru had intended to set an unlawfully excessive price or that it was reckless as to whether the price was excessive. It was not possible to say that by using its chosen methodology, Dwr Cymru must have realised that the resulting price would be unlawfully high, and that there was no evidence that the board of directors had given instructions to pursue a high target price. Rather, it appeared from the evidence that the infringing access price was as a result of incompetence and inexperience rather than a cynical disregard for the legality of the resulting price.
The CAT further concluded that there was no evidence that Dwr Cymru had deliberately calculated that the profit it was likely to make from issuing an unlawful access price was likely to exceed any damages that it could ultimately be liable to pay Albion in the event that Albion made a successful claim for competition law infringement. On this basis, the compensatory awards of damages (plus interest) were not increased by any award of exemplary damages.