Competition law and coronavirus: what’s the connection?

The current Covid-19 pandemic is affecting every industry and person in Europe. While issues such as availability of hospital beds and medical staff, and how to guarantee the delivery of essential supplies are on everybody’s mind, the crisis also affects competition law and its application. Competition issues that we encountered in previous crises (such as the granting of state aids, crisis cartels and requests to suspend competition law enforcement) are starting to come back but this pandemic will bring new challenges. State aid rules will play a more crucial role than during the 2008 financial crisis. At that time, the aid was limited to banks to avoid a meltdown of the financial services sector, while,  today, the lockdown of entire countries is affecting whole economies and will require substantial amounts of state resources. Apart from state aid, failing firms, delays to court proceedings and investigations are just some examples of issues we are facing. While competition law is certainly not on everybody’s mind, certain breaches of the rules will still be investigated and will have future consequences on businesses. This briefing will discuss the effect the current crisis has on enforcement, merger control and courts, as well as suspension of competition law and state aid.

Coronavirus' impact on competition law

Effect on enforcement - EU and UK

Potential impact on antitrust investigations

The current crisis is a fluid and ever evolving situation and the steps taken by Governments to minimise the spread of the virus have an impact on the regulators' work. Many competition authorities have acknowledged this and as a result have confirmed that both new and on-going antitrust investigations will be affected.

For example, on 16 March 2020 the Competition and Markets Authority (CMA) in the UK extended its funerals market investigation by six months. The official statement is that this is as a result of both to the complexity of the investigation and to the on-going coronavirus pandemic, but no further explanation was given. On 18 March 2020, the CMA announced that it intends progressing cases and meeting statutory deadlines but will consider extending statutory timeframes where necessary.

Working policies

New working patterns have necessarily been adopted across Europe, including requiring, to the extent possible, that staff work from home. All face to face meetings have been temporarily suspended by the European Commission (Commission) and that is likely to have an impact on the work carried out. Further, we understand that the Commission staff have experienced IT issues while working remotely, including connectivity problems as the staff struggle to access the Commission's secure network and confidential databases from home. While the Commission has only confirmed that these issues have affected its merger investigation timetables at present (which we explore in greater detail below), the impact on antitrust investigations is likely to be similar and just as keenly felt. Indeed, on 18 March, the Commission announced that, due to the Covid-19 outbreak, the ability for leniency applicants to deliver oral statements will not be available until further notice.

Also on 18 March 2020, the CMA announced that its staff is now working from home and all meetings and hearings are conducted remotely via videoconferencing or telephone. Further, it is reallocating resources to ensure that all urgent and critical work is completed on time. The CMA has also confirmed that as the situation evolves it will provide additional updates and guidance.

Financial penalties

Another question for the future is whether companies which have infringed competition law and on which a penalty has been imposed will be able to claim a reduction of the fine in light of the crisis. According to the fining guidelines[2], the Commission may consider a reduction of fines in exceptional cases, taking into account the company’s inability to pay in a "specific social and economic context". That will be the case if the penalty could jeopardise the economic viability of the company. The reduction has been granted a few times in the past and we are likely to see this defence made again by companies in the future.

Merger Control

Procedural delays

As noted above, one of the main measures that has been put into place by many Governments is the requirement that employees work from home as much as possible. The impact of this on regulators cannot be underestimated and, as a result, the Commission has confirmed that companies should expect delays to ongoing merger investigations and should also delay notifying new mergers. In addition to the IT issues previously above, the Commission acknowledged that it will face difficulties in obtaining the requisite information from companies and third parties (including customers, suppliers and competitors) as these entities face their own issues during the crisis. The effect of this is that companies that are either waiting to notify or waiting for a decision will remain in the limbo stage of the clearance process for an extended period. We have considered some consequences below.

Risk of gun-jumping

The Commission’s advice not to file mergers, combined with the current economic disquiet, might lead merging entities to be tempted to work together during the pre-clearance stage to formulate contingency plans for both pre- and post-completion. While this may seem to be an effective damage limitation strategy, companies should avoid this temptation as it will be seen as "gun jumping" (the implementation of the merger prior to clearance), which is in direct contravention of European merger control rules. While the Commission will be cognizant of the issues faced by companies in these unprecedented times of uncertainty, it will not ignore behaviour that breaches competition law.

Any coordination of competitive strategies or behaviour prior to clearance may be considered to infringe competition law in two ways. First, if the parties put the merger into effect prior to clearance, this will breach the EU Merger Regulation; and second, if the merging entities are competitors, any coordination in behaviour or exchange or future strategies or commercially sensitive information will infringe Article 101(1) TFEU. In either case, subsequent merger clearance does not mitigate or exonerate the parties' pre-clearance behaviour, and indeed, the parties could be subject to substantial financial penalties.

Rescue mergers

It is likely that, as the emergency continues, companies will fall into financial difficulties and competitors might seek to buy them out. With such rescue mergers, time is usually of the essence to ensure that firms are able to be transferred as a going concern with workforce and customer contracts intact. Any delay to the merger process is likely therefore to impact severely on the ability to save companies from collapse. Further, there are strict criteria to be met for mergers to be cleared where a company acquires a competing "failing firm", in cases where serious competition concerns would otherwise be raised. The criteria include a review of the target's financial position over the preceding years, and evidence that the competitor is the only possible purchaser for the company. These may be difficult to prove and so it remains to be seen whether regulators would lessen the requirements in order to ensure that more companies are saved from the brink of collapse throughout this crisis.

Courts

The current predicament will affect court proceedings. Absence of clients, lawyers or witnesses will cause delays. When working remotely, it will be more difficult to discuss complex issues with clients and witnesses. The European Courts have announced that:

• while judicial activity continues, priority will be given to particularly urgent cases (urgent, expedited and interim proceedings)
• time limits in on-going proceedings are extended by one month
• hearings listed until 3 April are adjourned to a later date
• procedural time limits for appeals continue to apply but parties may seek to rely on Article 45 of the Protocol on the Statute of the Court of Justice of the European Union that states that “no right shall be prejudiced in consequence of the expiry of a time limit if the party concerned proves the existence of unforeseeable circumstances or of force majeure”.

The UK judiciary is starting to adopt similar remedies.

Further, the UK's Competition Appeal Tribunal (CAT) published a practice direction on 20 March, outlining that filings should be made electronically and no general extension of time will be put in place. However the CAT recognises that the current situation is exceptional and if extensions are needed, parties should inform the Tribunal as soon as possible as theCAT has wide discretion to extend time limits. The CAT also confirmed that pending cases might be disrupted or lengthened.

Crisis cartels

In times of economic downturn, competitors tend to enter into agreements to reduce capacity or to deal jointly with the economic crisis affecting their sector. The term ‘crisis cartel’ is often used to cover two different scenarios. The first relates to agreements sanctioned by the state, and the second to cartels not sanctioned by the state.

An example of the first scenario is when, during the great depression of the 1930s, Government encouraged cartels especially in the United States. It is now believed, however, that those cartels led to a prolongation of the crisis. Nowadays, competition authorities view all types of crisis cartels with suspicion.

An example of the second scenario (agreements in times of crisis not sanctioned by the state) is the Irish Beef cartel[3] in 1998. Following a study prepared at the request of the Irish Government and representatives of the beef industry, it was recommended to reduce overcapacity in the industry. The Irish beef processors agreed to reduce the total capacity and the number of players on the market: those remaining in the market would compensate those exiting. The case was referred to the European Court of Justice which made it clear that the agreement was illegal even if the intention was to remedy the effects of a crisis rather than restricting competition.

Suspension of competition law

In times of crisis, sectors which are affected usually ask Governments to suspend competition law. For example, the British food and drink industry asked the UK Government to suspend competition law in the event of a no-deal Brexit so that companies could work together to direct food supplies to areas of greater need if there were food shortages. Competition authorities are, however, typically very wary of allowing exemptions and Andrew Tyrie, chairman of the CMA, has been quoted to say in 2019 that it is up to the Government to suspend certain agreements or behaviour from competition law in the public interest. The danger is to open a floodgate of requests for exemption.

But these are exceptional times. On 18 March the Norwegian competition authority has allowed the two airlines, SAS and Norwegian, to coordinate their schedule to provide a minimum service to passengers and confirmed that such behaviour will not lead to enforcement action.

In the UK, the Government announced on 19 March that, as part of the package of measures to allow supermarkets to work together to get food to consumers, elements of competition law would be temporarily relaxed for the food sector. .

After welcoming the Government announcement in a press release, the CMA published guidance on its approach to business cooperation in response to COVID-19 on 25 March (the Guidance). The CMA confirmed that "provided that any such coordination is undertaken solely to address concerns arising from the current crisis and does not go further or last longer than what is necessary, the CMA will not take action against it". This echoes the joint statement of the European Competition Network, a network of national competition authorities in the EU, issued on 23 March. In the Guidance, the CMA also:

• Indicated that it will not take enforcement action when temporary measures meet the specified criteria (i.e. the measures should be appropriate, necessary, in the public interest and for the benefit of the consumers, and should address an issue which arose due to the Covid-19 pandemic and last no longer than necessary)
• Confirmed that non-essential collusion which exploits the crisis will not be tolerated. This includes exchanging of commercially sensitive information between competitors, excluding a rival, colluding to artificially keeping prices high to the detriment of consumers, or cooperation that is not justified by the covid-19 crisis.
• Provided guidance on the application of criteria for exemption from the prohibition on anti-competitive agreements in the specific circumstances of the Covid-19 pandemic. In addition, it acknowledged that coordinated actions in order to avoid a shortage, to ensure a fair distribution of scarce products, to continue essential services or to provide new services such as food delivery to vulnerable consumers are unlikely to raise any competition concerns.

The CMA also indicated that it could offer additional and informal guidance on a case-by-case basis.

On 27 March, three statutory instruments were issued in to order to relax competition law in relation to:

• Groceries - The order deals with agreements between grocery chain suppliers or between logistic service providers.
• Health services for patients in England - The order concerns agreements between providers of health services to the NHS.
• Isle of Wight ferry routes - The order allows ferry operators to cooperate to maintain the vital crossing between the Isle of Wight and the mainland during the crisis (i.e. the transport of essential food, freight and medical supplies).

The relaxation concerns agreements which are meant to address the effects of the Covid-19 pandemic. Businesses are allowed to cooperate in certain circumstances specified in the orders provided that the agreements in question are notified to the Secretary of State.

In addition to suspending competition law temporarily, Governments can enact legislation which might force companies to interact with competitors in ways which normally would be illegal. As companies would have no discretion and would be obliged to comply with such rules, they would not be liable for competition law infringements.

Excessive prices and protection of consumers

While excessive pricing cases are rare in competition law, there have been several cases dealing with excessive prices in the pharmaceutical sector in both Italy and the UK (please see this recent article). The CMA has already announced that it would assess any evidence that companies have charged excessive prices in the context of Covid-19 and it will take enforcement action against them as necessary[4]. It is usually only dominant companies that may fall foul of competition law by charging excessive prices, so it is likely that in the majority of cases the CMA would use consumer protection legislation to take action against unjustifiable price increases.

On 20 March the CMA launched a COVID-19 task force to avoid many businesses exploiting the current situation. The taskforce will, amongst other things:

• scrutinise market developments to identify harmful sales and pricing practices as they emerge
• warn firms suspected of exploiting these exceptional circumstances through unjustifiable prices or misleading claims
• take enforcement action if there is evidence that firms may have breached competition or consumer protection law and they fail to respond to warnings.

In line with this, the CMA has confirmed that it will also consider whether to advise the Government to regulate prices for the benefit of consumers, in order, for example, to combat the problem of opportunist retailers that have been increasing substantially the price of certain sought-after products, such as hand sanitiser both in shops and online. Such price increases are clearly to the detriment of consumers who are worried about their on-going health and sanitation at this time.

The CMA's announcements are similar to actions taken by regulators within Europe. For example, in Italy, the national competition authority has launched an investigation against Amazon and eBay in relation to unjustified price increases of hand sanitisers, respiratory protective masks and other sanitation products that are for sale on their platforms, and at the same time is inspecting the conduct of other e-commerce platforms. Further, the French Government recently announced that it will regulate the price of sanitisers going forward to ensure consumers are protected from unscrupulous retailers seeking to take advantage of the situation.

State aid

Most EU Member States are considering financial measures to support sectors and industries in distress. Many of their measures will fall under the definition of state aid, which is essentially any aid granted by a Member State through state resources in any form whatsoever that distorts competition and affects trade between Member States. If these conditions are met, the measure has to be notified to the European Commission (the Commission) and approved before it is granted. The process of approval is usually lengthy, but there are several exceptions where either aid does not need to be notified or it is subject to a simplified procedure.

During the financial crisis in 2008, when Governments started to provide assistance to banks, the Commission acted fast to ensure that such assistance could lawfully be given, and relied on Article 107(3)b of the Treaty on the Functioning of the European Union (TFEU) (which states that aid may be declared compatible if it is given to "remedy a serious disturbance in the economy of a Member State"). The Commission deemed the crisis a serious disturbance: in a very short time it provided guidance on how it would deal with aids to banks and at the same time dealt swiftly with notifications.

In the current pandemic, the lessons learned just over a decade ago will come in useful. The Commission has now confirmed it recognises that:

• significant state measures will be needed to avoid companies going bankrupt and massive unemployment
• Member States can already take many measures under the current rules such as wage subsidies, suspension of payments of corporate and value added taxes
• the EU state aid regime allows Members States to compensate companies for the damage caused by ‘exceptional circumstances’ (specifically, Article 107(2)b) which would include measures for sectors such as aviation and tourism), and
• the current situation is so serious that Article 107(3)b TFEU mentioned above will be used to assess support measures in those Member States where the situation has deteriorated.

In relation to this final point, on 19 March the Commission issued a communication titled ‘Temporary framework for state aid measures to support the economy in the current COVID-19 outbreak”[1] . While three weeks were necessary to issue a framework for aid to the financial sector in 2008; this communication was issued in only a few days. The Framework enables Member States to ensure that sufficient liquidity remains available to businesses of all types and to preserve the continuity of economic activity in this period. In particular, it provides for five types of aid:

• Direct grants, selective tax advantages and advance payments

Member States will be able to set up schemes to grant up to €800,000 to a company to address its urgent liquidity needs.

• State guarantees for loans taken by companies from banks

Member States will be able to provide State guarantees to ensure banks keep providing loans to the customers who need them.

• Subsidised public loans to companies

Member States will be able to grant loans with favourable interest rates to companies. These loans can help businesses cover immediate working capital and investment needs.

• Safeguards for banks that channel State aid to the real economy

Some Member States plan to build on banks' existing lending capacities and use them as a channel to support businesses – in particular small and medium-sized companies. The Framework makes clear that such aid is considered as direct aid to the banks' customers, not to the banks themselves, and provides guidance on how to ensure minimal distortion of competition between banks.

• Short-term export credit insurance

The Framework introduces additional flexibility on how to demonstrate that certain countries are not-marketable risks, thereby enabling short-term export credit insurance to be provided by the State where needed.

On 12 March 2020, the Commission approved in only 24 hours the first scheme which was notified in relation to coronavirus. The measure dealt with compensation for event organisers in Denmark in case certain events were cancelled or postponed due to policies introduced to deal with the pandemic. Since then, several more schemes have been notified and approved.. Companies will have to become familiar with state aid rules: if an aid has not been notified or it has not been granted in accordance with the rules, the Commission can recover the aid (with interest) from the company which received it.

Although the UK is no longer a member of the EU, EU state aid rules will apply until the end of the transition period.

During the financial crisis, some banks were brought under state control (such as RBS in the UK). We are likely to see similar measures implemented in the coming weeks across Europe, especially in the airline sector. For example, Alitalia, which has been struggling financially for several years, is being renationalised as part of a broad set of emergency measures implemented by the Italian government on 16 March 2020.

How we can help

In times of crisis, companies face so many challenges – including their survival – that compliance with competition law might not feel a priority. But non-compliance has serious consequences as fines could be severe and particularly unwelcome, certainly in a period of financial uncertainty. For that reason, it would be advisable for companies to confirm to their business that even in these unusual times, the obligation to comply with competition laws remains in place.

The competition team at Taylor Wessing has advised and continues to advise business clients and in-house lawyers on all these matters. We would be delighted to discuss with you how to help you to address these issues. Please contact Paolo Palmigiano or Louisa Penny.

[1] Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak

[2] Guidelines 2006/C 210/02 on the method of setting fines pursuant to Article 23(2)(a) of Regulation No 1/2003

[3] ECJ reference for a preliminary ruling from the Irish Supreme Court, Case C209-07

[4] CMA statement on sales and pricing practices during Coronavirus outbreak