David Lowe: Hello everyone and welcome to Gowling WLG's ThinkHouse competition law update. I am David one of the organisers of our ThinkHouse events. I am a commercial contracts lawyer and Michael Luckman and I have for many years put together a ThinkHouse event. I am really sad that we are not doing this in person. Sam and I are here in the office in separate rooms but unfortunately, we are not quite in a place where we can do big events so we unfortunately had to resort to doing it on line but that does mean that many of us have been able to join us. For those of you who are new to ThinkHouse we hope you enjoy today's session.
Now ThinkHouse Autumn is made up of four sessions we have today the anti-trust update but this morning we had data protection. Next Thursday we have the in-house lawyers guide to COP26 and then followed by a session by Emma Carr and myself about what to do when contracts go wrong. By subscribing to this event you will get a link after all four events with all four recordings and all of the slides for each event so you will have the opportunity to re-look at the slides, re-look at the recording and indeed share it with your colleagues. We would be delighted if you wish to share it that would be absolutely great.
Today is about anti-trust so we all love it and we all hate it really don't we because anti-trust it gets in the way, it is complicated, it is challenging, it changes and it can have a very big impact if you get it wrong and that unfortunately is why it is important for us all to have a good understanding of anti-trust law because if you get it wrong well you could end up with a dawn raid or an investigation perhaps even going to prison. It is also shapes your business model and your competitors business models throwing up opportunities and threats so it is important medicine for us all to take isn't it, for us all to get a taste for the anti-trust law and how it is changing so I am really pleased that today Sam in our anti-trust team, a partner in our anti-trust team is joining us to give us an introduction to anti-trust changes and where we think the near future is going. Sam.
Sam Beighton: Thanks David and thanks all for joining. I think taking a step back competition law what happens next? We are obviously post-Brexit and we now have COVID-19 giving us the concept of the new normal. We have had lots and lots of social and political changes in recent months so what next for UK competition law. What I would like to cover today are four areas: distribution models, UK merger control, green cooperation and dawn raids. I have chosen to focus on these areas amongst the many moving parts of the anti-trust universe, because I think that these are the areas that are likely to have greatest impact going forwards in terms of business planning so these are issues that matter for businesses today.
So starting off with distribution models. Now I am sure you will all be well familiar with the vertical agreements block exemption regulation which I have defined as the EU VABER but for the purposes of this session. Now the EU VABER established a general safe harbour with certain conditions of entry to that safe harbour but within this safe harbour there is an assumption that competition concerns do not arise and this safe harbour is primarily available to arrangements between parties at different levels of the supply chain. There are a couple of exceptions to that but by and large the EU VABER is thinking about vertical relationships, therefore distribution arrangements. What you therefore see is the majority of distribution arrangements having crafted to fall within this safe harbour wherever possible so where you see a non-compete provision lasting for five years or less that is an echo of the EU VABER, that is there as a consequence of EU VABER, this is something which numerous business models are reliant upon. This safe harbour is certainty. EU VABER has shaped and formed how distribution arrangements are drafted in the UK and has done for many, many years. So there's that background, it is important to note that the principles of a safe harbour that still apply in the UK even post-Brexit but the current UK safe harbour is due to expire at the end of May next year. Now the CMA, the Competition Markets Authority, has been considering what should replace this, consultant proposals over the summer and is due to make a recommendation to the Secretary of State this autumn.
So what can we expect? Well I think the good news is more of the same and I say that is good news because the CMA clearly recognises the value of the safe harbour principle. Now there were some calls from certain quarters to scrap the safe harbour. Is it really needed? Is it relevant for business today? Is it not just a hangover from the EU but in the consultation process the CMA receive a clear message from business and practitioners and that is the safe harbour principle is very, very welcome for businesses. That legal certainty of the safe harbour is a good thing. To make another plus point around the CMS proposals is that key aspects of the safe harbour are unchanged so I mentioned that a lot of arrangements in place already have been based upon EU VABER, they have been shaped and formed by EU VABER so the good news is the key aspects of the proposal, they do not really change those aspects. They stay the same so market share thresholds, the commissions of entry they will still be in place up to 30% for each party, it is still the case that agreements including these restrictions cannot benefit from the safe harbour and it is still the case that certain provisions such as non-competes lasting five years or less they can benefit from the safe harbour. There is a familiarity with the proposal which I think is to be welcomed. I think the even better news is that the proposed safe harbour should bring more flexibility to distribution models and I think that has to be right given that when the EU VABER was drafted back in 2010 the world in which we all lived then was very, very different to where we are now in particular E-Commerce has changed things and what I think is a really important takeaway from CMA proposals is there is a clear recognition of on-line sales as a diSCReet channel and equally thee is a recognition of the possibility of having different fulfilment options. It is not just about exclusive distributions or selective distribution there are other ways to market that have been recognised. Also really helpfully it is a borderline with the EU so the EU is currently itself considering what should replace the EU VABER, when the UK is landing by the CMS proposals is a borderline with the EU's direction of travel and clearly the closer the alignment between those regimes the less there is in terms of a compliance burden upon businesses but active cross border.
I just need to touch on a couple of those themes and explore them a little more closely. So picking up first online sales restrictions so today as things stand the following restrictions would be deemed hardcore restrictions so they would not be able to benefit from block exemption, they would need individual exemption. The agreement itself can fall in the safe harbour. For some businesses this is in the too difficult pile. You therefore do not put the restrictions in your agreement because you want to make sure you are in a safe space so you cut them out of your agreement, you exclude the hard core restrictions.
So what are these hardcore restrictions? So the first is the hard core restriction on supplies charging distributors higher prices for a product to be resold online and the other is suppliers requiring distributors to adhere to criteria for online sales but is different to the criteria for in store sales. Now the concern back in 2010 was that these types of restrictions they could really be used by suppliers to squeeze distributors to limit, to inhibit online sales. What we now find is online sales is in a very different place compared to 2010 revolutionised by things such as 4G, 5G, very, very different world and the CMA proposal recognises this. The CMA proposal is that both of these restrictions should be able to benefit from the safe harbour. So within that proposal there is a clear decoupling of this link between online and in store and if that is adopted going forwards this would give businesses clear opportunities to start to think how they can optimise these different sales channels to compliment omni-channel experiences. There is a whole plethora of options that open up once those restrictions fall within the ambit of the safe harbour.
Another area to touch upon briefly fulfilment options. So today there are grey areas. The 2010 guidance does not cover how some business models have evolved. So for example, can a supplier appoint a distributor having initially attracted them for certain products and then have that same distributor act as an agent for different products? That's not covered by the guidance. There has been a DG comp paper published relatively recently but there is not a clear statement of intent from the CMA post Brexit on what that means for the purposes of its own enforcement activities. Similarly can suppliers set the resale prices to be charged by performance service providers, does this risk straying into re-sale price maintenance, is it legitimate. Again it is a grey area. What the CMA is proposing to do is to provide additional guidance to address and clarify what is permissible around these issues and I think what we should expect from that is more fulfilment options and the availability of different models and routes to market and hopefully this should then enable more efficient allocation of risk bringing more products to market and make them available to all consumers.
Just to close on this part of the session, what I mentioned was CMA recommendation is due soon and I think what we can all expect from that is to see a new UK specific safe harbour and for that to be in place from 1 June next year. The majority of businesses I think can expect more than this new safe harbour. I think that means more choice, more ways to allocate risk in and around distribution models. I think it is more opportunities for online and offline to be distinct and complimentary channels and I think what we will also find is that as ever the devil is in the detail so I think this is one that will be coming to a ThinkHouse event near you for further consideration once we have a clear insight in terms of how this will be landing.
Moving on to the second area that I wanted to focus upon. UK merger control and I think at the beginning of this segment, it would be remiss of me not to mention that there are a couple of ongoing consultations relating to merger control as well as other aspects of the UK competition regime so we have a BASE consultation looking at reforming competition policy, when I joined BASE, PCMS policy consultation thinking about additional markets and introduction of a new competition regime or digital market. I am not going to discuss these in detail because there is a whole raft of proposals within them. Again I think this is one for a future event to think about where this is landing. I flag it for completeness. If you are interested be aware that closing date of 1 October will be with us before we realise it. What
I would like to focus upon though in this segment is the CMA's updated merger assessment guidelines that were issues in spring of this year and the reason I wanted to touch upon these is because I think they draw out some interesting themes and crystalize some key things so you see a moment away from CMA focusing on market shares in merger analysis, we see the CMA placing a clear emphasise on available evidence. There is a note of caution as well regarding parties, seeking to position, arguments around entry, expansion and efficiencies, and as I have explained to my mind the CMA's approach clearly reads on to transaction planning, parties' activities going forwards in terms of the find build strategies. There is a lot going on there for parties to factor into their analysis in terms of how they plan deals going forwards.
We are starting with market definition and market shares. The CMA uses market definition as a tool to assess competitive effects and it does this primarily be considering the main compatible alternatives that are available to parties' customers so from a customer's perspective what do they see as alternatives in the merger parties' products and where would they buy those alternatives from, where do they source those alternatives from. We generally see a market defined by reference to both a product market and a geographic market so for example the supply of widgets in the UK which you can see in competition textbook covering competition law in the UK.
I want to explore a little bit more how the CMA thinks about product markets and geographic markets. So the product markets, which products are due as alternatives? Well the CMA focuses upon evidence including the actual characteristics and intended uses of the products or services. It also looks at the parties' internal documents and we have seen in recent years a real focus upon the parties; internal documentation. What were the parties writing before the transaction? How did I really seen their sector? What are they really competing in terms of their products? The CMA would also canvass the views of customers and competitors and what we find in practice and what is apparent from CMA decisional practice is that product markets can actually be very narrow and they can be much, much narrower than parties in their minds may think and I will give you an example of the Christmas pudding. The Christmas pudding which was found to be a product market in itself, distinct from puddings, distinct from steam puddings and a market for the Christmas pudding. Think about geographic markets, again the CMA when it is thinking about the areas in which a business competes does focus upon the evidence and when it is thinking about the evidence that can range from looking at catchment areas so if there are a number of sites, where a given site will make 80% on moderate sales, what is my focus of that site in terms of its geographic footprint. How do other firms fair, firms outside the area, can they compete effectively in that area? Is it the case that firms can readily come in and compete? The customers have preferences. In certain sectors, customers have a very, very clear preference for local supply and you can point for there being a range of different suppliers from further afield but in reality if customers wants to have a local supplier that is where competition is most intense, and again with geographic markets these can be very local. I put her the example of licensed betting offices and licenced betting offices had previously bound to compete with other licenced betting offices within a 400 metre radius so they were a very, very local market.
But what if you can point to a large market? What if you can say it is a huge market and that means we have got really low market shares. There's no issued from that right? It shouldn't be a concern. Well market definition is not a silver bullet and this is what the merger assessment guidelines make very clear. Market shares do not show you how parties actually complete and they do not show you how parties plan to compete in the future so they are a static snapshot and because of that the CMA is increasingly focusing upon competitive assessments and that means is on a case by case basis the CMA is conducting an analysis. It is thinking about if a sector under consideration what parameters of competition are most important. How do firms currently compete in the sector and how are they going to compete in the future, really importantly how close do the parties to the transaction compete and are they going to compete more closely in the future and after this transaction. The firms that are left in the sector, will those remaining firms impose sufficient constraints on the parties so they are not in a position to exploit the position of the sector following the transaction. I mean conducting that assessment, the CMA will focus on a broad range of evidence in terms of implementation as I mentioned that is a gold mine evidentially for the CMA. Views of customers and competitors can be very important when thinking about closeness of competition and alternatives. Bidding data, we see lots and lots of cases where the CMA is very keen to analyse bidding data where parties are in markets characterised by tenders. We are interested to see how customers would switch. What is the competitive interaction based on customers switching or threatening to switch between the parties.
Also how do the parties respond to each other as well as other competitors? Who if you look at the date if you think about pricing trends who moves on price, who follows, how does that map out over a period of time? In a rationale for the transaction what is the acquired reason for doing this deal, and how has the acquirer valued the target, and in transactions where future competition is likely to be more of a concern, that valuation from CMA's perspective can be quite telling. If the acquirer is paying a very high price for a target with currently limited activities, what is the reason for valuing the target business at that high price?
Now I just wanted to pick up a couple of examples from recent decisional practice on the CMA thinking about some of these issues.
So the first is the JD Sports Foot Asylum transaction and in this transaction, the area I am focusing on related to the retail supply of sports inspired casual apparel online nationally. I think that means selling stuff like this online to customers. So what the parties in their market share analysis presented was a combined share of 20% to 30%, a modest market share so that is something that is not raising a lot - 20% or 30% in a market, lots of players in that marketplace should not be a cause for concern. However, the CMA bidding into the market included this was a highly differentiated market. There were lots of players but there were lots of different business models. The parties however were close competitors and the CMA looked at the parties' internal documentation in particular and reached that conclusion so the parties are close competitors. They were only two other players of a similar size. Now there was a long tail of smaller competitors but they only imposed limited constraints so in effect this became a 4-3 loss of competition type scenario and that gave rise to a clear concern from the CMA's perspective and this concern in conjunction with others led to the CMA requiring JD Sports to sell the designs. The CMA ordered the undoing of this concluded transaction.
Another case to touch upon is the BD Cemex transaction and focusing here upon production and supply of ready mix concrete. This necessarily has a relatively local market because you cannot drive cost effectively ready mix concrete particularly far. I think it has got about a half hour dries time in terms of where you would supply this on the site so in one particular local area the combined share of the parties would be around 30% to 40% somewhere in that bracket and there will be seven competitors remaining in the area and again this is a market share level and a competitor mix where you could look at that say markets shares not that high, lots of competition, should not be a problem. However, the CMA have been looking at this transaction effectively segmented the competitors and said there was some competitors, major competitors who were more important that the other independent competitors, the smaller competitors and this particular transaction in this area resulted in a reduction in a major competitor's validity. In addition to that one customer raised concerns about a lack of viable alternatives and a competitor raised concerns. They allege there will be issues with dominance post transaction and on the back of CMS analysis it found that yes it considered was a concern in relation to this particular area and the ready mix concrete site was therefore required to be sold a third party to address those concerns.
A little bit on rate market shares and the CMA approach; I just wanted to touch as well upon arguments relating to entry expansion and efficiencies because parties who wish to position these types of arguments, they are going to need to evidence these arguments and evidence around claimed entry or expansion will need to be timely, likely and sufficient to prevent competition concerns arising. So high level concepts about it is a 4-3 transaction but do not worry as there are no barriers to entry, anyone can come in, it will not be a problem. That is not going to wash with the CMA and what the merger assessment guidelines make really clear is if competition concerns are identified entry and expansion arguments are rarely going to resolve those concerns successfully. Similarly with efficiency claims where parties are saying there may be a potential competition concern but actually the transaction overall will give rise to efficiencies and therefore those efficiencies should bear out, should overcome these competition concerns. Again the merger assessment guidelines as published in spring of this year make clear those types of claims will only rarely succeed so if you are thinking of your transactions, if you are thinking about risk if you find yourself falling back on these, a potential route to a clearance makes it a very risky place to be.
I wanted to just give a couple of comments before closing the section and I think that is to emphasise that to our planning transactions involving businesses in the UK and the merger control regime in the UK applies to those. Be mindful of the CMA's approach. I think what that really boils down to is looking beyond market shares and thinking about the impact so what is the impact not just on current competition, but also upon future competition and if you really stripped it back, if you looked at the players and actually said of these ten investors competitors maybe only five of them are really competitors and maybe only four of them in certain areas of actual competitors what does that worst case scenario look like if the CMA really, really looked at this and drilled down and segmented what is the worst case scenario and if you have looked that worst case scenario in the face, is the transaction still viable and if it is still viable who is going to bear the CMA risk because that will be a question on the table if there are concerns or potential issues who is going to be the party who is going to bear that risk and how will that get factored into the commercial negotiations in respect of the transaction.
One last point to flag in this area is the National Security Investment Act 2021, the so called UK abbreviation regime. You will have heard about this because it has been covered extensively in both press and also various law firm updates. This will fully enter force on 4 January 202 and what this introduced is a mandatory notification requirement for certain transactions in 17 deemed sensitive areas of the UK economy. In addition to that mandatory notification requirement the Secretary of State can call in other transactions. The transactions that are not subject to the notification requirement can still be called in by the Secretary of State. When the Secretary of State is considering transactions if are notified to it or called in by it, it will consider whether these transactions give rise to national security risks and the Secretary of State is able to impose remedies to address any such risks. This is a topic we have recently contributed a chapter addressing the UK abbreviation regime in a context of international regimes. That will be published on line shortly and we can obviously make that available to attendees of the session today and we will also be following up with subsequent sessions so again one to watch out for in terms of this hot topic around UK abbreviation.
Moving on then to the third topic I wanted to touch on today and that is green cooperation. Now green cooperation is something which we really see coming out of the climate emergency so there is currently a clear call to action. Now what can businesses do? Well there are a growing number of proposals for competitors to cooperate to find solutions to find ways forward to find solutions in the context of the climate emergency and I think partly that has been inspired by the COVID-19 pandemic. Again another emergency and the response of that emergency was to relax on the competition laws to make it easier for competitors to get together to find ways forward to keep supply chains running, to make sure that groceries were on shelves, COVID-19 allowed relaxations so I think there is a question about what about green cooperation, why can't we do more now as competitors to find solutions to address this emergency because this is going to be the next big thing. I think in anti-trust circles this will be the next big thing for companies, for businesses, they will either be seeking to put initiatives together or be invited to join initiatives. This is not going to go away as a topic but before moving on to thinking about where we are now what I wanted to do is just have a look at how competition law has applied previously in the context of green cooperation and to see where that has worked well and also where some of the pitfalls have been for businesses and that the challenge that he had faced in that context.
So the first case I wanted to touch upon was a commitment around CO2 emissions way back in 1998 and this emanated from a trade association, the Association of European Automobile Manufacturers for sale. A commitment was made to reduce CO2 emissions from passenger cars and that commitment was to be jointly monitored by EU member states as well as the commission and if the target was not met, the commission would consider introducing legislation so it was a clear incentive for players in this sector to find their own way forward and avoid the commission stepping into introduce legislation outside of their hands.
What the commitment did was that it applied an overall average target for all members and what that meant was the commitment did not impose a target on individual manufacturers. The manufacturers remained free to apply more or less stringent levels of emissions. So manufacturers without individual targets imposed were therefore free to apply more or less stringent levels of emissions and they were also free to develop new technologies independently and in competition with each other and because this commitment was found not to be restrictive of competition.
Fast forward a year to washing machines and another case emanating from the activities of a trade association. In this case the members of the association, they actually agreed to stop producing or importing washing machines in the lower energy efficiency categories and by doing this what the members effectively did was they introduced a new energy efficiency minimum standard so the cheaper energy, the less energy efficient machines, were no longer something they did not concern themselves with. They were raising the standard and focusing upon the more energy efficient machines.
Now what this meant was the agreement necessarily prevented the parties from competing across the full range of categories. They deliberately said we will not do these ones anymore and the so necessarily did stop competing. However while being restricted of competition it was found the agreement was never less capable than individual exemption so it did restrict competition but as we will see what happens as a result of that good things came out of this, enough good things came out of this for it to be something that complied with competition law and I think it is an interesting case to note for a number of reasons. I think the first one is that what the commission found was that even though individual purchasers would actually pay higher prices because the cheaper machines were being effectively taken off the market but individual purchase could pay higher prices but the commission found there were economic benefits for individual purchasers and the commission rationalised it as such so that machines that were available once it was just the better machines in terms of performance, they all used less energy and that means they will have lower running costs and that means that purchasers can recoup the costs for the more expensive machine by having these cheaper running costs and the commission also reached the view that newer machines were expensive now, but if manufacturers are concentrating on producing these types of machines they are going to compete more there and that additional competition, they will have to compete on price. That is going to be an element of this and that should then the prices down in terms of what consumers have to pay for these machines so the commission found there were benefits of individual purchasers but there were also collective benefits, collective environmental benefits and what the commission got very comfortable with was that this result in a significant reduction is CO2 emissions. I have put here in quotes. So the environment results for society would adequately allow consumers a fair share of the benefits even if non-benefits accrue to individual purchasers of machines so overall even if the buyers did not actually benefit, we as a society overall we will benefit from this because of these reductions in CO2 emission so the commission made very clear this agreement was expected to contribute to technical and economic progress on allowing consumers a fair share of the benefits. In addition to this the agreement did not impose restrictions that were unnecessary to attain these benefits to it did not prescribe the technical means required to meet this new minimum standard and it did not limit any others aspects of the parties' commercial behaviour.
In addition, the agreement did not actually eliminate competition so the range of technical options available to meet the minimum standard was widely available. Manufacturers could all access different options to meet this standard. They should compete on a range of other factors in remaining energy efficiency categories including price, brand, performance and the effective machines actually represented quite a small percentage of the overall sector. The agreement was capable therefore of benefiting from individual exemption and was therefore compatible with EU competition law.
Now we have looked at where things have been compliant now I just want to briefly look at where things have gone wrong for parties where they started out in green initiatives and things have taken a turn for the worse in terms of outcomes.
So we are going to 2011, washing power; again another trade association and in the context of this trade association, there is a voluntary initiative launched back in 1997 and the purpose of the initiative is to promote more sustainable consumption for laundry detergents. Members discussed a variety of things focusing in particular on heavy duty determine powder and the aim of the initiative was to reduce weight and volume in terms of detergent powder and reductions were to be implemented across a number of different stages. Outside of this though there were a number of manufacturers who are keen to ensure this initiative did not give anyone a competitor advantage and what they sought to do was to maintain market shares at the pre-existing levels before the initiative was rolled out and it did that by a number of means. So firstly they agreed on packaging formats and fill levels and that was quite important because that have allowed them to monitor and oversee the various restrictions that had been in place afterwards. They agreed not to reduce prices so when pack sizes were reduced, when weights were taken out when the packs got smaller, they agreed they would keep the prices the same so they are not going to reduce prices to reflect that reduction in volume. They also agreed to restrict promotional activities and they agreed on targeted price increases where the market leader would move first and others would follow. Now these arrangements are clearly restrictive competition not capable of individual exemption of no benefits here accruing to consumers and fines totally €350 million were imposed on the parties.
A more recent case which has been widely publicised is the emissions cleaning case and this focuses upon SCR systems and in this context SCR systems are used in diesel passenger cars to make emissions less polluting.
The case revolved around five manufacturers who cooperated to develop SCR systems and the purpose was to work together and put systems in place that would meet the EU regulatory requirements emissions levels and the manufacturers did that. They were successful. They actually cooperated, they get things to market, they produced technologies in a timely way that benefited consumers and the environment so everyone was happy and that was the end of the case. Only of course it was not, so what went wrong? Well the cooperative manufacturers in the course of their cooperation they realised, we don't just meet the regulatory requirement, it can actually exceed the regulatory requirements. It then opted not to compete on the effectiveness or the SCR systems and they colluded by indicating to each other that they would not seek to exceed the regulatory requirements. In effect they neutralised competition on emissions technologies. They did not seek to compete against each other by producing greener vehicles and these arrangements were again found to restrict competition. They were not capable of individual exemption. Fines imposed totalling €857 million and I think it is notable, this is the first time that collusion on technical elements has been treated as a cartel and the commissioner for competition Margrethe Vestager has made clear that in the decision we can look forward to this because there is guidance provided to parties about where you have hear clearly cooperation that was positive and gave rise to beneficial outcomes overall and the lines within that can take place as opposed to when that then tips over into this collusion which is clearly harmful for competition innovation and leads to suboptimal outcomes for the consumers of the markets.
Comments just in terms of closing this session in the time that we have remaining. I think it is just reiterating green cooperation it is the future. This is not going to go away and I think with that in mind it is important to remember that green agreements between competitors they can be competition law compliant, you can structure them so that these fit within the competition rules and do not give rise to undue risk.
I think what is also really clear is that green arguments, they are not say if something is obviously anti-competitive. Now in the space we currently occupy we have authorities providing guidance. The CMA itself has published high level self-assessment guidance that was January of this year. It has issued or intends to issue further guidance in relation to the green cooperation. Similarly the European Commission this month issued a policy brief in relation to how competition law can support Europe's green ambition. It has also committed to providing further guidance in a form particularly of the horizontal guidelines and the commission has also indicated that it is open to discuss projects with businesses and in some cases it has indicated a willingness to provide comfort letters so to say that something is compliant with the EU competition laws so that again is a bit of a hangover from COVID-19 when we saw comfort letters coming back, comfort letters appear to be back on the table in terms of green cooperation with the commission. So we have the promise of further guidance and we have outlined so far any available guidance. We have ways forward but I think the guidance does need to be developed quite a bit further, developed and refined so parties have a much clearer understanding of aware lines sit on some of these areas to perhaps a little more grey.
So what does that mean for businesses now? Well I think what this means is that green cooperation it needs to be handled with care and businesses should really focus on the facts. I think in particular what is the actual rationale of the proposed arrangement and realistically again if you take like your worst case scenario, realistically what will be the impact on competition not just on price but non-price factors as well. What would be the impact in competition in the specific context of the affected sector? Who is going to benefit from a proposed arrangement? How will they benefit and when will they benefit because if this other arrangement is something that could restrict competition I think it is really important to quantify those benefits so evidence in benefits, quantifying benefits, what happens in terms of the benefits, could they be achieved by less restrictive means? Is there another way to do this which would give rise to fewer restrictions of competition because if there is then that from a competition authority perspective under the orthodoxy is the preferred route for parties to go down? I think another thing to factor in is if you do have something which looks like this could be a successful cooperation successful initiative going forward.
What safeguards are going to be put in place? How are you going to ensure there is continuing compliance? How do you avoid a situation like the washing powder case and what started off as legitimate activity then tipped over into something that should not have been taking place.
Lastly, what is the appetite to approaching a competition authority and I say that because I think we are in a unique space at the moment with green cooperation. I think this is something which would have traction with the competition authority, the European Commission has indicated it is open to have discussions. I think other competition authorities potentially on an informal basis would also be happy to approach and to at least talk through developed idea, developed plans around what this would look like for business, what it would look like for a sector so that is something to bear in mind. Is there an appetite to approach a competition authority?
Mindful of time I would just like to move on to my last section. Having thought about the possibility of approaching competition authorities and want to think now about the possibility of competition authorities approaching you so dawn raids, and I am going back to a time when dawn raids were once a reality and for me I had a dawn raid kit on my desk. I was ready to go away for days at a time with toothbrush, toiletries, etc. Dawn raid were a reality, and because of this businesses trained their staff and they created contact lists, policies and procedures were put in place and then COVID-19 changed everything because lots and lots of people went into their homes for months and months and months, spent hours on video calls, hours on video calls and a few more hours on video calls and dawn raids became a distant memory. Now we are all embracing a new normal and for most of us the new normal means hybrid working. Sometimes in the office sometimes at home. Hybrid working across a range of sectors but I say this quietly, dawn raids are coming back and we saw in June I remember where I was when I read this tweet. I was surprised it was happening but it was happening. We saw in June EC officials, the European Commission, conducting a dawn raid in premises in Germany. What if officials from the CMA arrived in reception tomorrow: Would current policies and procedures be fit for purpose? Would staff remember how to respond to a dawn raid? So embracing new normal I think we are all aware this is likely to require changes to pre-COVID-19 plans and I am conscious that somewhere on the to do list will be revisiting the dawn raid policies and procedures and I say this in the spirit of opportunity rather than to be doom-monger and I think there is now an opportunity to stress test these policies and procedures in house and to revise them as required rather than have the CMA officials stress test those policies and procedures in real time when they arrive in your reception.
So with that thought in mind I will hand back over to David in terms of any questions we received during that talk.
David: Thanks Sam for ending with a reminder of the terrors of anti-trust law and apologies everyone for how with our getting used to hybrid working we ended up having the fire alarm practice in the middle of that.
Sam, we have had a few questions coming through in the Q&A so thank you to our audience for putting those forward. The first one I am going to talk on is on the vertical restraint. One of the questions we have had in is do you think that the CMA's comments on vertical restraints block exemption is giving some indication of their attitude to enforcement and I think the implication is therefore where the CMA is proposing change, does that mean that they are less likely to enforce the old rules?
Sam: No. I say that because what we have seen within CMA enforcement practice is a real focus in recent years on resale price maintenance and the context of those agreements and what the CMA makes clear in terms of proposal is resale price maintenance is not softening stance on resale price maintenance. It has had a lot of feedback from businesses and practitioners saying it doesn't really make sense. There can be efficiencies should you really treat us as a hard core restriction and the CMA has indicated that it is very much minded to do so it sees resale price maintenance as something that will remain an important priority. I think what we will actually see on vertical cases particularly on resale price maintenance is the possibility of more director disqualifications so previously director disqualifications have been the preserve of the hard core cartel so market share and price fixing between competitors. I think what we will see the CMA looking to take director disqualification cases against directors of business who have engaged in resale price maintenance as a vertical restraint. I think outside of resale price maintenance the CMA is looking to provide more guidance in relation to active and passive sale, what that means in the new world of e-commerce, online selling. I think once those rules are set again the CMA will then seek to enforce as against those rules so I think there is a general loosening of some of the restrictions allowing there to be this decoupling of online and offline but I think the more traditional restriction such as resale price maintenance, ones on passive sales for example, I think we will still see the CMA still taking enforcement action against those and seeing those as areas to focus on going forwards.
David: One of the other questions I have received is around how many specially traditional distribution arrangements are international and often strategically set up at least a regional level if not a global one and therefore the questioner has asked will this new approach and adjustments proposed by the CMA actually make any real different to where you have got a distribution network for example across the whole Europe. I think that depends where Europe lands as well as where the CMA lands. I think at the moment, where things are currently in train, there is a broad alignment and I think that would then mean that in the short term you hopefully should not see too much difference. So if something is compliant in the EU with the EU requirements, you are by and large that should then comply in the UK that should still work. The CMA has not approached this trying to make things harder for business. They have recognised there is that need where you do have an international model to make the UK as business friendly as possible so you do not duplicate a compliance requirement by having a very, very different regime in the UK so if you are operating internationally if the EU and the UK land in a similar place hopefully that does then mean you can have something in Europe that will also comply in the UK and it removes some of that issue around duplication. I think what will be interesting though is the detail and I think what the CMA may do is be more permissive in some areas so maybe you have something which is EU compliant which you can then have in the UK but loosen even further so it may only be the UK that comes a more permissive jurisdiction in that respect that you can actually do more in the UK than in Europe. It is also worth flagging that the UK proposal is for a six year safe harbour and that as against the EU's 12 year safe harbour so our work exemption for the UK will expire soon as once it comes in 2022, it will be finished by 2028. I assume they can then review again and work out is it still fit for purpose, do we need to loosen more, tighten more. We may see more diversion between the UK and EU coming down the tracks.
David: OK so if you are a EU or European manufacturer, you may well have a European template distribution agreement but it just might be that the UK one in your negotiations with the UK distributors there might be some opportunities to adjust it slightly so you can retain an overall same framework but perhaps make some adjustments in the UK to take advantage of some of the changes.
Sam: I think that has to be to see it as an opportunity to take advantage of there being more potential flexibility in the regime in the UK.
David: Great. Now while we have been talking to Sam, we have been having loads of questions coming in on dawn raids so we have obviously engaged our audience certainly worrying about what happens when the CMA comes knocking and actually the first question that came through is how can dawn, you talked about CMA knocking the door at reception, but if everyone is at home still how do dawn raids work where the senior execs are working from home?
Sam: That is a really good question. I think that is one that the CMA will also be trying to find its way with as well in terms of moving forwards. It may have some intelligence in terms of working patterns so particularly if there has been say a leniency applicant has come forward to give information about the infringement there may be seeking information from that party to confirm when is the senior person in the office, when do you normally engage with them etc. etc. so there may be some intelligence on that but otherwise the CMA is able to attend, they can attend and then word will be sent to the person and presumably they will attend quite quickly as the CMA's arrival at the office could well prompt their arrival subsequently. We have in the old world a kind of dawn raids where the CEO has not been on site and it has been the case they have then turned up afterwards. The CMA when it is entering a site actually under a warranty for example, it is effectively able to search, it can go through IT systems and it is much more focused at that point upon gathering the electronic, the physical data rather than necessarily speaking to people but obviously if you are a CEO you do want to be there to see what is happening and to have a sense of how it is all unfolding so I think that is a really good question. I think it is one that we will see an evolving practice around, but for the time being I do not think the CMA is going to hold up a dawn raid on the off chance that a senior person will not be in the office that day.
David: So can the CMA raid people at home?
Sam: That is a really good question. This is an area where the CMA in terms of its criminal powers, they can conduct inspection of people's houses. They do have certain powers as well to conduct certain investigation of domestic premises. So far it has not been the focus. It is not been where they have sought to engage. I think it remains an open question as to whether they will do that now in the hybrid world in which we are all occupying.
David: OK. So what I am hearing is that your judgment and it can only be that because we do not know but the CMA probably will still dawn raid at the main business because it is focusing on securing IT and physical evidence and things like that but it might not. If actually it is decided that we do need to grab the CEO wherever he is because he is key then he might well be raided at home.
Sam: If think if someone is involved in a criminal investigation, they can expect a visit at home or be required to attend a Police station to have a conversation. I think in the normal course of things, businesses would be expected to have a visit at the business premises at this point in time and I think it would be quite a shift in CMA policy to start making domestic attendances. I think they will still focus upon the commercial premises.
David: Right so raiding at home possible but unusual is probably where it is. OK but in your review of your dawn raid policies, it would be sensible to have a section on what happens if (a) you get called by the office saying the CMA has turned up i.e. take it seriously, get into the office if you can if you are a relevant person but also (b) if they do come knocking on your door or contact you at home what you should also do just in case…
Sam: Yes I completely agree David I think where we are currently I think it is a case of planning for all eventualities because there are a lot of known unknowns at this point in time and it may well be that all stabilises and settles down and a clear path emerges but at the moment I think having that contingency planning I think that is sensible to be doing.
David: Yes and somebody has asked; lots of questions on this in the chat is would it be reasonable to expect that if there was a raid at home, that is probably going to be restricted to senior employees. We do not need to scare and wind up the more junior employees that the CMA might come knocking.
Sam: I think that is a good way to manage things. I think if you are talking about things like attendances at home, that should to quite a select group people. I think to give that message without a clear steer from the CMA on policy to a wide number of employees. I think that would unnecessarily cause concern and assuming that most of these people in any event would be using work devices so even if they are at home, they have got a work laptop, so that should be on a work server somewhere so that should be in an office space somewhere backed up on the server and update whatever so there should be routes back to the main office that doing attendance at domestic premises would be unnecessary in those circumstances.
David: Great. I suppose it is a good point that if you are anti-trust policy to remind people that even though they are at home does not mean that they can engage in anti-competitive behaviours inappropriately. Just because they are at home does not mean that it is any different in how you operate your business.
Sam: I think that is absolutely right. I think it also says if you are using for example personal devices that that somehow takes things outside the ambit of the competition authority and depending upon the powers they are exercising, just clean up the case, the competition authority can just as the Police can, they can take evidence that is in your personal possession or personal device. You cannot say to them sorry hands off that, that's my phone it doesn't work like that I am afraid.
David: Final question before we wrap up, turning back to the merger control, I mean very clearly that the old days, I mean you would probably say the old days relying on market share was probably not effective anyway but that definitely is not the case there so if your business has got a merger strategy, it is thinking about wanting to invest in some areas and potentially buy organisations what role should the in-house lawyer have in that merger strategy given the anti-trust issues?
Sam: Well in-house counsel, I think in-house is quite central to that role in terms of if nothing else stress testing and kicking the ties of the analysis and I think the digging in to ask the questions that perhaps commercially it may be more comfortable to cross over and to get into thinking oh there are lots of competitors and it is sometimes quite helpful just to have that voice in the background saying can we really evidence that, can we really make that clear? Can we present that effectively, how does that stack up? Just ask those questions that perhaps people very close to and enthusiastic about a project, you do not necessarily have the distance to take the step back. You could then look at it a little bit more critically. So I think there is a clear central role for in-house counsel in that process.
David: To be a critical friend.
Sam: Yes and to avoid unpleasant surprises if the CMA does call in and it all then falls over.
David: Well Sam thank you very much. That has been really useful and I am sure looking at the questions we have had we have clearly had a lot of interest from our audience so thank you audience for joining us. It has been a pleasure to have this engagement with you and I really hope our next big seminar of this nature, we will be seeing you in person certainly in the spring. As I mentioned you will be getting the slides and the link to the recording so that you can review it and indeed share it. That will come round after we have done the last ThinkHouse session so just to remind you next Thursday we will have the in-house lawyers guide to COP26 and follows by a session on what to do when contracts go wrong and after those sessions we will then distribute the links and the slides etc. but thank you very much it has been a pleasure. Good to see you all. Thank you.