Our point of view

Competition Newsletter

11 May 2012

EU

Selective price cuts below costs by dominant companies are not automatically abusive

On 27 March 2012, the European Court of Justice (the “ECJ”) handed down a preliminary ruling in relation to alleged price discrimination by the Danish postal incumbent, Post Danmark A/S (“Post Danmark”) clarifying the circumstances under which price discrimination may constitute an abuse of a dominant position contrary to Article 102 Treaty on the Functioning of the European Union “TFEU”.

The Danish Competition Authority had found that Post Danmark had abused its dominant position by offering three Danish supermarket groups (which were previously customers to a competitor to Post Danmark) prices for the delivery of unaddressed mail (i.e. advertisements) which were lower than those Post Danmark normally charged to its customers. The prices offered to two of the customers were sufficient to cover Post Danmark’s average total costs (“ATC”). For the third customer, the price did not cover Post Danmark’s ATC but the price covered the average incremental costs (“AIC”). On appeal, the ECJ was asked whether price reductions aimed at a competitor’s customers by a dominant undertaking to a level lower than ATC but higher than AIC would constitute an exclusionary abuse where an intention to eliminate a competitor could not be demonstrated.

The ECJ noted that protecting competitors who are less efficient than a dominant undertaking is not a goal of EU competition law. Instead, Article 102 TFEU prohibits a dominant undertaking from, among other things, pricing practices which have an exclusionary effect on competitors who are equally efficient, i.e. practices which do not constitute competition on the merits.

Against this background, the ECJ held that price discrimination does not in itself constitute an exclusionary abuse and that for those customers where Post Danmark’s price was above ATC there could be no anti-competitive effects and, hence, no abuse of dominance. Further, where the price was below ATC but above AIC, the ECJ held that this was not an abuse in itself as it would be possible for an equally efficient competitor to compete with those prices without suffering unsustainable losses in the long term.

Finally the ECJ noted that even if the referring court should make a finding of anti-competitive effects, it would still be open to Post Danmark to demonstrate that its conduct was objectively necessary or that it created efficiency gains.

The judgment provides some welcome clarification as to the circumstances in which price discrimination constitutes an abuse of a dominant position and provides an illustrative example of the more effects-based interpretation of the prohibition of the abuse of a dominant position in the ECJ’s more recent case law.

FINLAND

Finnish competition and consumer authorities to merge?

In March 2012, the Finnish Ministry of Employment and the Economy (“MEE”) announced an investigation on whether to unite the Finnish Competition Authority (“FCA”), the Finnish Consumer Agency and the National Consumer Research Center. Provided that the merger receives a favorable review from a committee established to evaluate the proposal, the new agency is envisioned to become operational in early 2013.

The MEE observes that, because all three authorities share a common purpose of promoting effective markets, there might be synergy benefits in placing them all under one roof.

The plans to merge the Finnish competition and consumer authorities have been met with mixed reactions. On the one hand, experiences in other jurisdictions suggest that combining the agencies might elevate the level of expertise within the agency and strengthen its ability to analyze the market. As of late, competition and consumer agencies have faced integration for example in Denmark, Italy and Ireland. In the UK, where the Office of Fair Trading has been responsible for the enforcement of both competition law and consumer protection since the 1970s, a deeper integration of the two policy spheres has taken place within the last five years. It seems that despite the differences between the two areas, assigning them to the same administrative body might promote a deeper understanding of the markets within the agency.

On the other hand, a number of challenges have also been identified. One of the key questions turns on the fact that the current competition and consumer authorities diverge from each other considerably in terms of their tasks and the legal powers bestowed upon them to execute those tasks. The MEE states that the intention is not to alter the statutory duties of the existing authorities. It is however unclear how the prospective merged agency will keep its multiple mandates separate if it is tasked both to remedy the way in which consumers are treated in the marketplace as well as to investigate more broadly the impact of market structures on competition. Another related concern voiced by competition law practitioners is that competition matters run the risk of becoming captive to politics if they are housed within the same administrative entity as issues which are perceived to be more politically reactive, such as consumer protection.

Finally, the concern exists that the MEE’s goal of “streamlining administration” is rather motivated by the need to tighten the purse-strings than by an aspiration to increase the efficiency of the authorities for the benefit of the individuals interfacing with them. As such, it might be some time before businesses reap the intended efficiency gains of the merger. Concerning competition matters, it is seen as a risk that the FCA will spend considerable resources on administrative matters such as the contemplated authority merger.

In the meantime, the Director General of the FCA, Mr. Juhani Jokinen, has been appointed to head an MEE program to promote sound and effective competition. Mr. Timo Mattila will act as temporary Director General between 1 May 2012 and 30 April 2013.

Alliancing as a form of public procurement – Finnish Experiences

Alliancing is a form of public procurement where a contracting entity ("the Owner"), collaborates with designers, contractors and other service providers to share the risks and responsibilities in project delivery. Alliancing emerged in Australia in the 1990s and has been used extensively in the country, in several hundred projects.

Alliancing has also piqued the interest of Finnish contracting entities as traditional models of procurement have occasionally proved unsatisfactory. Several alliance projects have already been initiated in Finland. The pioneering project is the on-going renovation work for the railroad line between Lielahti and Kokemäki. The value of the project is approximately 90 million euros. Another project worth mentioning is the renovation and construction work related to student housing, the estimated value of which is approximately 20 million euros. Hannes Snellman has been advising the contracting entities in both of these projects.

Alliancing differs from traditional procurement in several respects. Alliancing is a model of collaboration based on certain principles of co-operation. These principles include cost reimbursement, open-book methodology, Owner participation, consensual decision-making, exit terms, and limited availability of traditional legal remedies. Hence, an alliance, unlike a public-private partnership, is not mainly financial collaboration between the parties.

Designers, contractors, and other service providers are reimbursed for their direct costs, including design and construction costs. The purpose of an alliance is to innovate and produce value for money rather than minimize costs by fixing the costs in advance. The other side of the coin is the open-book methodology: the service providers' grant the Owner (or auditors thereof) access to their books, so as to make it possible to verify the costs incurred.
Owner participation is effectuated through management and project teams in which the Owner has a representative. The decision-making in these teams is based on unanimity, i.e. each party has a veto right.

As trust is a prerequisite of successful alliancing, the Owner is provided with extensive exit rights. At any stage of the project, and for whatever reason, the Owner may rescind the contract or exclude a service provider. When the project is in phase one (an alliance often consists of two phases: development and production), services providers also have a right of exit.

Traditional legal remedies, such as arbitration, are available only in exceptional cases. Damages are compensated only when a party is guilty of malice or gross negligence or has breached intellectual property rights or has failed to have required insurance coverage.

As alliancing experiences have been positive so far, we expect new alliances to be formed in Finland in the field of public procurement in the future.

SWEDEN

Bus tour operators fined for a cartel within the context of a contemplated merger

On 4 February 2012 the Stockholm District Court (the “District Court”) fined the two bus tour operators Scandorama AB (“Scandorama”) and Ölvemarks Holiday AB (“Ölvemarks”) approx. SEK 11 million for operating a cartel by which they agreed on e.g. prices and market partitioning during April 2007 and March 2009.

In stark contrast to most cartels, the cooperation between Scandorama and Ölvemarks was in no way secret and the parties did not dispute the facts as such. However, the parties claimed that the cooperation formed part of a transaction under which Scandorama was to acquire Ölvemarks, a transaction that was not notifiable to the Swedish Competition Authority (the “SCA”) as the turnover thresholds were not met. Hence, it was to be considered under the merger control provisions rather than under the prohibition against anti-competitive cooperation under the Swedish Competition Act (the “Act”).

According to an overall frame option agreement signed in July 2007, Scandorama was to acquire Ölvemarks in a three-step process. Scandorama would acquire 10 percent of the shares in Ölvemarks in 2008, an additional 10 percent in 2009 and the remaining 80 percent in 2010. Scandorama acquired the initial 20 percent of the shares in Ölvemarks according to the step plan. Due to Scandorama’s difficult financial position, Scandorama never acquired the remaining 80 percent. Instead, Ölvemarks acquired Scandorama in June 2009.

The District Court confirmed that should the cooperation between Scandorama and Ölvemarks confer control (sole or joint) by Scandorama over Ölvemarks and, thus, constitute a concentration under the merger control provisions in the Act, the prohibition against anti-competitive cooperation in the Act would not be applicable. As such a concentration did not meet the turnover thresholds in the Act, it was not notifiable to the SCA and the stand-still provision (prohibiting the implementation of a concentration) would not be applicable.

However, the District Court found that the overall frame option agreement did not confer any sole control by Scandorama over Ölvemarks. This was primarily due to the uncertainty of the options being exercised by Scandorama which would lead to the acquisition of 80 percent of Ölvemarks. Indeed, this was also verified by the fact that they were never fully exercised (Scandorama only acquired 20 percent of the shares in Ölvemarks). Further, the District Court found that the minority shareholding (20 percent) acquired by Scandorama in Ölvemarks did not confer any joint control by Scandorama over Ölvemarks. The rights afforded to this minority shareholding did, in the District Courts’ view, not constitute veto rights over important business decisions in Ölvemarks (such as e.g. the budget, business plan and nomination of management) but rather typical minority shareholding protection rights which did not confer any joint control. The District Court finally found that the parties had not been able to demonstrate the existence of an oral agreement between Sandorama and Ölvermarks which, in their view, together with the minority rights would confer joint control by Scandorama over Ölvemarks.

As regards the amount of the fine, the District Court held that violation had been committed out of negligence rather than intent and that the parties had cooperated during the investigation. Therefore, the District Court reduced the administrative fine by 30 percent, to a total of MSEK 11.4, of what the SCA claimed.

Possible amendments of the Swedish Competition Act

On 26 April 2012, the Swedish Government appointed a committee chaired by Mr Severin Blomstrand, Justice of the Supreme Court in Sweden, to investigate the legislation that governs the powers of Swedish Competition Authority (the “SCA”) under the Swedish Competition Act (the “Act”) with the overall purpose of considering effective enforcement of the Act.

The committee is appointed to investigate matters including the following:

  • whether there are reasons to introduce provisions that enable the SCA to interrupt applicable deadlines in respect of the review of concentrations (i.e. “stop-the-clock”);
  • the functioning of the Swedish leniency program and consider the need of implementing a “marker system” for leniency applicants;
  • whether the current legislation sufficiently provides for the SCA’s needs for cooperation during dawn raids; and
  • whether there is a need to regulate the SCA’s working methods when it seizes digital material from the companies for the purposes of examining such material elsewhere than at the premises of the company.

The committee shall present its findings by 6 March 2013.