Our point of view

Competition & Procurement Newsletter

5 February 2013

EU - Court of Justice of the European Union upholds EUR 38 million fines for breaking a seal during a dawn raid

On 22 November 2012, the Court of Justice of the European Union (CJEU) dismissed an appeal by E.ON Energie AG against an earlier European Commission (Commission) decision imposing a EUR 38 million fine for breaking a seal during a dawn raid. This is the first time that EU courts have reviewed a stand-alone decision by the Commission on a procedural antitrust infringement. This case confirms the Commission’s investigative powers and the seriousness with which companies must treat any antitrust investigation.

In May 2006, the Commission carried out unannounced inspections at the premises of E.ON Energie in Munich (Germany) to investigate suspected antitrust violations. The Commission exercised its investigative powers to seal business premises and certain documents were stored in a locked room and affixed an official Commission seal. When the Commission officials returned next day to continue the inspection, they found that the seal affixed the evening before had been tampered with.

In January 2008, the Commission fined E.ON Energie EUR 38 million, the first ever sanction for breaking a seal. E.ON Energie subsequently appealed against the fine before the General Court arguing that the seal had been broken due to nearby vibrations, the use of an aggressive cleaning product and the age of the seal. The General Court rejected in their entirety E.ON Energie's arguments.

The CJEU upheld the decision of the General Court rejecting E.ON Energie’s arguments on, inter alia, the burden of proof, and the principle of proportionality of fines. In respect of burden of proof, E.ON Energie had argued that the General Court had “unduly reversed the burden of proof” that where the Commission relies on direct evidence it is for the undertaking concerned to demonstrate that the evidence relied on by the Commission is insufficient. According to the CJEU, since the Commission had determined that there had been a breach of the seal based on a body of evidence, the General Court was entitled to conclude that it was for E.ON Energie to adduce evidence challenging that finding. Accordingly, there was no reversal of the burden of proof as it was up to E.ON Energie to prove the defectiveness of the seal once the Commission had determined that the seal was broken in light of evidence available to it.

E.ON Energie also claimed that the fine imposed was disproportionate to the alleged breach. As regards the level of the fine, the fine for a breach of a seal, intentionally or negligently, can amount to 1% of an undertaking's turnover in the preceding business year. Given that the €38 million fine represented only 0.14% of E.ON Energie's annual turnover, and considering the particularly serious nature of a breach of a seal, the size of E.ON Energie and the need to ensure that the fine has a sufficient deterrent effect, the CJEU held that the EUR 38 million fine could not be considered as disproportionate.

Peter Forsberg, peter.forsberg@hannessnellman.com
Liana Thorkildsen, liana.thorkildsen@hannessnellman.com

Finland - The Parliament to debate automatic dominance for certain retailers

The Finnish Government has presented a controversial Bill to amend certain aspects of competition law, which will automatically impose a dominant position on the two major Finnish retailers, S-group and Kesko.

A proposed amendment to Section 7a of the Finnish Competition Act will create an irrefutable presumption that any operator in the Finnish consumer goods retail sector with a market share exceeding 30 per cent holds a dominant market position. On current market conditions, this would mean that both Kesko and S-group would be deemed to hold a dominant position and therefore need to take into account the prohibition on certain actions which can constitute abuse of dominance.

If accepted, the proposal would result in a very different definition of dominance in Finland to that in other EU Member States. Whilst some EU Member States have sector-specific dominance rules, the market share threshold for dominance is typically set at 40 per cent. Moreover, under such rules in other EU countries, there is only a legal presumption of dominance, which the undertaking can challenge (bearing the burden of proof) to show that it is not dominant.

The non-rebuttable nature of the dominance presumption in the Government’s proposal attracted considerable criticism from the market parties when the draft Bill was circulated for comment in November 2012. Despite such criticism, notably also from the Finnish Competition Authority, very few changes were made to the text.

The Bill will be scrutinized by the parliamentary committees in coming weeks and subsequently debated by the Parliament. The new law is proposed to enter into force on 1 September 2013.

Tapani Manninen, tapani.manninen@hannessnellman.com

Finland - Finnish Competition Authority proposes record fine for abuse of dominance by predatory pricing

The Finnish Competition Authority (FCA) proposed in December 2012 that the Finnish Market Court should impose a fine of EUR 70 million on Valio Oy (Valio) for alleged abuse of its dominant position in the production and wholesale of fresh milk. It further ordered Valio to terminate its anti-competitive conduct, alleged to have continued for nearly three years.

According to a public version of the FCA decision published on 15 January 2013, Valio’s top management made a strategic decision in February 2010 to foreclose competition on the Finnish fresh milk market. The FCA argues that, to achieve the foreclosure, Valio decreased the wholesale prices of fresh milk below the cost level as of 1 March 2010, using so-called predatory pricing to achieve a near monopolistic position on the fresh milk market. Once achieved, Valio would have been able to increase the prices back to the level prevailing before Arla Ingman had entered the market.

The FCA submits that Valio’s pricing policy was so aggressive that it deprived all actual and potential competitors of any real possibility of competing on the market. Valio also showed its determination to defend its share of the market should any new competitor try to enter it by its readiness to sacrifice profit in pursuit of market share.

The FCA stresses that Valio’s conduct amounted to a serious antitrust violation ultimately aimed at harming the consumers. According to the FCA, Valio not only prevented Arla Ingman from competing on the fresh milk market but it also impaired the ability of small dairies to operate on the market.
The FCA notes that, in determining the size of the proposed fine, it paid particular attention to the gravity and duration of Valio’s anti-competitive conduct, the size of the fresh milk market, Valio’s considerable turnover and the fact that it has once before been fined for abuse of dominance.
Valio has publicly contested the FCA’s allegations.

The proposed fine of EUR 70 million is the highest single fine ever proposed in Finland for any competition law infringement. As there is very little Finnish case law on predatory pricing, we expect that the Market Court’s handling of the case will be followed with great interest.

Mikael Wahlbeck, mikael.wahlbeck@hannessnellman.com
Katja Jaakkola, katja.jaakkola@hannessnellman.com

Sweden - Swedish Market Court bans KIA Motors Sweden AB’s seven-year new car warranty

On 4 December 2012, the Swedish Market Court (Market Court) rendered its decision concerning the seven-year new car warranty which KIA Motors Sweden AB (KIA) previously applied in Sweden and the warranty’s condition requiring car owners to carry out regular car repair and maintenance services exclusively at authorised KIA repairers during the warranty period. Breach of this condition led to the warranty being reduced to three years.

The Market Court found that the seven-year exclusive service condition was anti-competitive and in breach of Section 2 para 1 of the Swedish Competition Act and the equivalent EU rules (i.e. Article 101 of the Treaty on the Functioning of the European Union) (TFEU). KIA was ordered, under penalty of a fine of SEK 5 million (approx. EUR 575 000), to cease to apply the condition. The case has important consequences for the commercial terms of consumer warranties in any vertically integrated sector involving goods requiring regular service and maintenance.

The Market Court found that the exclusive service condition implied an unlawful agreement between Kia and its authorised repairers, and constituted an infringement of competition law by object as the service condition effectively excluded other independent repairers from the market for car repair and maintenance services of KIA cars during warranty period. In addition, the independent repairers were effectively prevented from competing in respect of repair services in connection with regular car service.

Although KIA argued that the relevant product market should comprise both purchase of new cars and purchase of repair and maintenance services including all car brands, the Market Court defined the relevant product market narrowly as the market for repair and maintenance services of KIA cars. The Market Court based its assessment largely on the European Commission’s guidelines on the application of competition law in the motor vehicle sector (Supplementary guidelines on vertical restraints in agreements for the sale and repair of motor vehicles and for the distribution of spare parts for motor vehicles (OJ 2010 C138/05)). According to the Market Court, in order for the relevant product market to comprise both the purchase of the new cars and the purchase of repair and maintenance services, it must be shown that consumers regard a purchase of a new car and repair and maintenance services and the costs related to such services as one system, such that the repair and maintenance costs inform the decision to purchase a new car. The Market Court found that KIA failed to show that a sufficient number of consumers take into consideration the repair and maintenance costs and that these costs actually affect the choice of the car.

The Market Court stated that KIA’s market share on the relevant product market was above 80%. Due to such high market share, none of the legal exemptions claimed by KIA were applicable in the present case: neither the Block Exemption Regulation applicable to vertical agreements in the motor vehicle sector (Commission Regulation 461/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices in the motor vehicle sector) as the 30% market share threshold was sufficiently exceeded by KIA, nor the legal exemption according to Section 4 para 2 of the Competition Act / Article 101.3 of the TFEU.

KIA argued that the repair and maintenance services provided by independent repairers were of lesser quality compared to KIA’s authorised repairers and, in order to ensure the high quality and reliability of the regular repair services of KIA cars, and in order to be able to offer the extended seven-year warranty, it was necessary to apply the exclusive service condition. The Market Court disagreed. It held that the restrictive terms were too far-reaching. It would be sufficient for KIA to achieve its aims to require that the repair and maintenance services be performed in a professional manner in order for the warranty to apply.

The case is interesting as it was brought by the Association of Swedish Car Parts Wholesalers following a complaint it brought to the Swedish Competition Authority (SCA). However, as the SCA decided not to take any legal action, the Association filed a summons application with the Market Court. In Sweden, an undertaking that is affected by the competition infringement has a right to file a summons application directly with the Market Court where the SCA does not take any legal action.

The case is important for the entire motor vehicle industry in Sweden, and in particular, for the growing independent car repairers segment.

Peter Forsberg, peter.forsberg@hannessnellman.com
Liana Thorkildsen, liana.thorkildsen@hannessnellman.com

Sweden - Swedish Market Court condemns conditions set by the Swedish Automobile Sports Federation

The Swedish Market Court (Market Court) upheld the decision of the Swedish Competition Authority (SCA) that the rules and conditions applicable to the members of the Swedish Automobile Sports Federation (SASF) prohibiting members holding SASF’s racing licenses from participating in or being functionaries at motor races that have not been sanctioned by the SASF are to be regarded anti-competitive. SASF was ordered to cease the application of the offending conditions, under penalty of a fine of SEK 1 million (approx. EUR 115 000). This case is a further lesson in the antitrust risks in industry associations.

SASF is a non-profit organization which consists of about 470 non-profit motor clubs. During 2012, SASF had about 104 000 members. SASF promotes and manages motor sport in Sweden, grants motor racing licences and organises motor races, including championship competitions.

The Market Court found that SASF member unions, although they are non-profit organizations, are to be regarded as entities engaged in economic activities under competition law, when they are engaged in organizing motor races, as the turnover generated by such races is sufficient to qualify SASF’s activities as economic. The Market Court held that the contested conditions were anti-competitive because they could lead to competition restrictions on the market for the organization of motor sports competitions in Sweden. SASF argued that the conditions should be justified and considered lawful as they were necessary and proportionate to fulfil the purposes behind the conditions, such as ensuring fair and safe motor races and making sport available to all. The Market Court stated that the purpose of the contested conditions was legitimate; however, the conditions in question went beyond what was necessary to accomplish these purposes.

Peter Forsberg, peter.forsberg@hannessnellman.com
Liana Thorkildsen, liana.thorkildsen@hannessnellman.com

PROCUREMENT

Sweden - Significant decrease of public procurement cases in Swedish courts

In its reports Figures and facts for public procurement (the Swedish Competition Authority’s report series 2012:6), the Swedish Competition Authority provides a short introduction to public procurement and presents basic facts and some interesting statistics on numbers and values of procurements with prior publication in Sweden and how many procurements have been reviewed. The report is published on the Swedish Competition Authority’s website www.kkv.se.

In 2011, 1320 procurements with prior publication were subject to a review procedure or approximately 7 % of all procurements in Sweden. In 2011, review procedures of procurements were most common within the transport sector, where as many as 17 % of all procurements were reviewed.

Even though a significant number of public procurements still are subject to a review procedure, it is interesting to note that the total number of cases in the administrative courts has decreased. The number of cases increased steadily until 2010 when in it reached its peak with 3572 cases. In 2011 this trend was broken and in 2011, only 2754 cases, corresponding, to a decrease of approximately 23 %, reached the administrative courts. In our experience, increased competition for tenders normally leads to increased numbers of challenges to awards. It is therefore surprising that in the current competitive market to see review proceedings decreasing. However, one must bear in mind that the number of cases in the courts does, however, not necessary equal the actual number of procurements that have been reviewed. This is due to the fact that a procurement which is subject to a review procedure could generate several court cases. For an example, if a supplier initiates a review procedure of a joint procurement (in which several contracting authorities participates) the courts may register a separate case for each participating contracting authority. Thus, it is somewhat difficult to compare the number of cases from one year to another.

Joakim Lavér, joakim.laver@hannessnellman.com

Sweden - The Teckal exemption is implemented in the Swedish public procurement act

From 1 January 2013, a permanent exemption for in-house provision entered into force in the Swedish Public Procurement Act. The exemption ends a confusing divergence between EU case law and Swedish court rulings in this field and allows contracting authorities – under certain conditions – to award contracts to separate legal entities (over which they exercise control) without conducting a formal procurement process.

Under certain conditions, contracting authorities are permitted to award contracts to subsidiaries or other legal entities which they control without conducting a formal procurement process. This exemption for in-house provision has been known as the Teckal exemption, after the 1999 ruling of the Court of Justice of the European Union in the so-called Teckal case (case C-107/98).

In Sweden it was generally accepted that the Teckal exemption would also apply under Swedish law. However, in a line of cases in 2008 known as the SYSAV cases (nos 172 – 175-06 and 176 – 179-06), the Swedish Administrative Supreme Court came to the opposite conclusion. The Teckal exemption was not applicable in Sweden because it was not explicitly implemented in the Swedish Public Procurement Act. Consequently, in-house provision in Sweden was subject to a formal procurement process.

The ruling in the SYSAV cases, and the consequent divergence between EU case law and Swedish law, gave rise to a need to implement the Teckal exemption into Swedish legislation. As a first step, a temporary exemption was implemented in 2010. Now, in a second step, a permanent exemption entered into force as of 1 January 2013.

The permanent exemption mirrors the Teckal exemption and stipulates that the public procurement rules do not apply to a contract between a contracting authority and a legal entity if (i) the contracting authority exercises control over the legal entity similar to that which it has over its own departments; and (ii) the legal entity carries out the essential part of its activities with the controlling authority or authorities.

Thus, a contracting authority must – alone or collectively with other contracting authorities – exercise control over the legal entity. Accordingly, there need not be a single contracting authority in sole control. For example, where a legal entity is owned jointly by a group of contracting authorities, each may exercise control of the subsidiary in question. However, the exemption does not apply where there is private outside ownership.

There is also a distinction between the temporary exemption and the permanent one. The temporary exemption only applied to controlling contracting authorities on state, regional and local level, which excluded, inter alia, state-owned companies. However, the permanent exemption extends to any type of contracting authority.

As regards the requirement that the legal entity carries out the essential part of its activities with the controlling authority or authorities, according to EU case law, all relevant circumstances must be taken into consideration in assessing this. One such circumstance is the degree to the legal entity’s turnover is made up of sales to the controlling authority or authorities.

The exemption applies to either a down-stream or an up-stream award of contract. This implies that a subsidiary, which itself is a contracting authority, may award contracts to its parent entity or entities without conducting a formal procurement. We think it will likely need to be texted in courts, whether the exemption applies between two sister entities, controlled the same parent(s).

The exemption is not implemented in the Swedish Utilities Procurement Act. However, the European Commission has proposed that the Teckal exemption be codified and implemented in the new public procurement directive as well as the new utilities procurement directive. Further, the proposal clarifies that at least 90 per cent of the activities of the legal entity needs to be carried out for the controlling contracting authority or authorities.

The new directives are expected to be adopted during the spring this year and will call for a need for further adjustments of the Swedish Public and Utilities Acts.

Olof Larsberger, olof.larsberger@hannessnellman.com