EU & Competition Law Update – July 2014 - Bryan Cave

EU & Competition Law Update

July 2014

ECJ: Cartel Members can be liable for damages Key Contacts
stemming from umbrella pricing
For further details on
On 5 June 2014, the European Court of Justice (ECJ) ruled on a cartel case these articles and other
referred by an Austrian Court, concerning a lift and escalator cartel and is developments please
crucial in clarifying the EU’s position on the controversial subject of umbrella contact one of the
pricing. following authors or your
usual Bryan Cave contact:
The ECJ ruled that customers of non-cartel members were able to claim for
damages caused by market price inflation, provided a causal link could be Robert Bell
proved between the cartel’s actions and a third-party price increase. Partner - London
Eckart Budelmann
The case stems from an European Commission (EC) Decision and fines issued in Partner – Hamburg
2007. Four corporate groups were charged with infringement of Article 101(1) Kathie Claret
of the Treaty on the Functioning of the European Union (TFEU). These Partner – Paris
corporate groups were fined for operating a cartel which installed and Anita Esslinger
maintained lifts and escalators in Belgium, Germany, Luxembourg and the Partner – London &
Netherlands. The Austrian Court accepted the Commission’s Decision as Washington D.C.
establishing liability on the part of the defendants and then approached the Luigi Zumbo
issue of quantum and causation. Partner – Milan*
Bryan Cave's
One of the claimants, a subsidiary of the Austrian Federal Railways, claimed alerts/bulletins/briefings
damages of €1,839,239.74, which it believed to be the additional cost of an are available online.
increased market price, caused by the cartel. In essence, the customer

This Client Bulletin is published for the clients and friends of Bryan Cave LLP. Information contained herein is not to be considered as legal advice.

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*Affiliated Firm.

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believed that their increase in expenditure, albeit paid to an innocent third-party corporate entity,
was collaterally increased because of wider market patterns dictated by the cartel member’s
infringement of the TFEU. This cost increase serves as an example of umbrella pricing in action as
competitors to the members of the cartel were able to keep their prices higher then would have
been otherwise because of the lack of price competition in the market.

The ECJ maintained that, because EU competition law created direct rights for individuals to claim
compensatory for a breach of the Treaty, their compensatory rights should not be jeopardised
simply because their losses stem indirectly from a cartel’s infringement. Domestic legal systems
can therefore interpret the law and prove a causal relationship between artificially high market
prices maintained by a cartel, and consequential losses from a non-member third party corporate
entity.

Whilst the ECJ ruling does serve to clarify the position of the EC on corporate liability relating to
umbrella pricing, it also raises a number of difficult issues for domestic courts. Primarily, little
guidance is provided as to how to establish that the third party’s prices were higher than they
would have been without the cartel (ie the counterfactual). It could also be argued that whilst the
cartel members did adjust their own prices dishonestly, they did not directly control their
competitors pricing behaviour, regardless of their own market effect. To hold them indirectly
responsible for another’s pricing behaviour may seem fair from the point of view of innocent
consumers but it is does seem a stretch to show a direct evidential link between the misbehaviour
of the cartelists and a non-cartelists influenced but ultimately independent behaviour. The breadth
of complex counterfactual analysis necessary for proving this causal relationship presents a difficult
reality.

Regardless of the difficulties in this finding, the ECJ in this wider interpretation of the remit of
competition laws has reaffirmed and strengthened its commitment to ensure victims of anti-
competitive behaviour can claim compensation through private actions in the national courts.

French mobile phone operator fined again by Competition Authority

On June 13 2014, the French Competition Authority (FCA) issued a decision in which it fined French
mobile phone company SFR and its subsidiary SRR almost EUR 46 million for having implemented
and maintained an “abusively” high gap in prices between calls made between clients of SFR’s
network (referred to as “on net” calls) and calls from SFR’s clients to clients of SFR’s competitors
(referred to as “off net” calls).

In June of 2009, Orange Réunion, Orange Mayotte and Outremer Télécom, the principal competitors
of SFR and its subsidiary SRR, complained to the FCA that they suffered an abuse of dominance by
SRR, in the Islands of Réunion and Mayotte. The claimants argued that SRR abused its dominant
position on the relevant mobile phone markets by differentiating tariffs to customers with respect
to “on net” and “off net” calls and thus creating an incentive amongst the customers not to turn to
SRR’s competitors.

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On June 16 2009, the FCA issued a injunction ordering SRR to ensure that that the gap in prices
between on net and off net calls would not exceed the cost to SRR to route these two types of
calls. The interim decision was not challenged by SRR or SFR.

On January 24 2012, the FCA fined SRR EUR 2 million for not having fully complied with the 2009
decision. The FCA considered that despite the 2009 decision, SRR had maintained differentiated
tariffs in 2010 in the Island of Réunion which exceeded the routing costs. Still, such decision was
not challenged.

In its June 13 2014 decision, the FCA held that the existence of differentiated tariffs was not
wrongful per se, but became wrongful to the extent that such differences exceeded the costs borne
by the operator. The FCA found that the differentiated tariffs (for both calls and text messages)
implemented by SRR were not justified by the routing costs borne. Indeed, the gap in applied prices
was three times higher than the costs borne by SRR for the Island of Réunion and 50% higher for
Mayotte.

The FCA also held that such practices (i) generated an artificial “club effect”, (ii) made the
competitors appear more expensive and (iii) weakened their ability to adequately invest in the
business going forward. As for the “club effect”, the FCA noted that the excessive difference in the
prices between on net and off net calls and text messages was an incentive for the customers to
subscribe to SRR (which had the largest number of customers) and tarnished the price image of the
claimants, who appeared as more expensive. Finally, the FCA noted that by artificially reducing the
number of calls and text messages towards its competitors’ networks, SRR was likely to have
deprived its competitors from revenue on calls and text messages services and consequently limited
their investment capacity.

SRR did not dispute the facts and undertook to implement a competition compliance program, a
training program for its employees as well as a whistleblowing procedure and an internal follow-up
procedure. The fine initially amounting to EUR 56 024 100 was accordingly reduced by 18%.

Such decision is not the first of its kind in the French mobile phone sector. The FCA has several
times fined French mobile phone companies (Orange Caraibes, France Télécom, Orange, SFR) for
similar abusive practices, including on-net/off-net differentials. For example, on December 9 2009,
the FCA, after a complaint from major competitor Bouygues Telecom, fined Orange Caraibes and
France Télécom nearly EUR 53 million. More recently, through a decision of December 13 2012, the
FCA, acting again on complaint from Bouygues Telecom, fined Orange and SFR a total of EUR 183
million, notably for on and off network price differentiation.

Once again Italian Competition Authority focuses its attention on
professional societies

On 13th May 2014, the Italian Competition Authority (ICA) opened an in-depth investigation into
three different Italian professional orders of Architects (Rome, Florence and Turin, the “Societies”)
for infringements of Section 2 of the Law No. 287 of 1990 (the “Italian Competition Law”), the
prohibition against anti-competitive agreements.
The investigation started after the filing of an anonymous complaint which alleged that the

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Societies were trying to de facto apply professional fees (which were repealed in Italy in 2012)
through the use of fee calculator software available on their web site. Professional fees were a
standardised fee system for architects that was repealed in part due to concerns that it stifled
price competition to the detriment of consumers.

The fee calculator would allow the architect to determine their own fee by completing an
electronic form. In essence, this fee calculator would establish the monetary value of the
professional activities by relying on the fees in force until 2012.

The website hosting the calculator attempted to get past the repealing of the fees and the use of
the calculator by stating on its website that the fee calculator is only one of the possible
calculating methods and that the architect is free to set the level of fee he or she considers more
appropriate to charge to the client.

The ICA tried to assess whether professionals (architects in the case at stake) could be considered
as undertakings from a competition law perspective. The ICA found that according to established
case-law, professionals carry out an independent economic activity and therefore they can be
qualified as undertakings. Thus the Societies are associations of undertakings and the fee calculator
can be considered as an agreement made by an association of undertakings.

The ICA alleged that this fee calculator could be considered an anti-competitive agreement since
architects were able to standardise their fees so as to foreclose competition in the market for
architects’ services.

The ICA came to the above conclusion by pointing out that the fee calculator software was devised
so as to determine exactly the same fees amount which would have been determined by using the
professional fees in force in Italy until 2012.

In addition, the ICA found that such fees could represent an unlawful benchmark for all the
Architects involved as the Societies still have a strong representative role.

In our view, the above decision is very welcome as it highlights the conflict between the modern
and competitive European professional services market and the traditional but now antiquated (and
indeed illegal) practice of professional societies removing price competition between their
members through the setting of standard industry rates.

Talktalk complaint against BT dismissed as Ofcom shackles BT in
superfast broadband war

On June 19 2014, Ofcom made two announcement that will shape the competitive landscape in
superfast broadband. In the first announcement, Ofcom have provisionally dismissed a complaint by
TalkTalk against BT, first made in March 2013. BT provide the hardware for access to superfast
broadband, both to itself and to rival operators such as TalkTalk.

TalkTalk alleged that BT were guilty of abusing their dominant position under Article 102 TFEU by
failing to maintain a sufficient margin between their upstream and downstream prices, thereby
operating a margin squeeze. It alleged therefore that BT were selling their own superfast

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broadband to consumers at a price their rivals were unable to match because of the price their
rivals had to buy wholesale access from BT.

Ofcom’s announcement gave no reasoning behind their decision other than somewhat strangely
linking it to their second announcement, that of new requirements on BT to promote competition in
superfast broadband, before declaring that the two decisions were independent.

If readers ignore this slightly unbelievable assertion, it appears that Ofcom are satisfied that BT
were not abusing their dominance in providing access to superfast broadband or at least not at a
level that couldn’t be addressed through the competitive measures put forward.

Under the proposals, BT must ensure that the margin between its own consumer broadband and the
wholesale price is sufficient for rival operators to make a profit. Therefore it must essentially
either charge rivals less on wholesale so that they can offer their consumers a package at a
competitive price, or, BT must raise the price of its consumer broadband to a level closer to its
rivals to allow their rivals to seem competitive.

Furthermore, the new rules would take into account free services offered by BT alongside the
broadband such as the sport channels which are currently given free. This avoids the situation
where BT state they are on a level playing field on wholesale and consumer prices whilst unfairly
enticing consumers with add on packages at a level where again the competition is disadvantaged.

The proposals covers the period 2014-2017 which Ofcom believes will be a crucial period when
many households switch to superfast services. The City responded well to the package believing
that BT had not been overly burdened and shares in BT rose on the news. TalkTalk mean whilst
indicated that they hope the current proposed measures will lead to full superfast regulation from
2017 onwards.

This is a strange juxtaposition of announcements by Ofcom. On the one hand it is rejecting use of
its competition powers and yet simultaneously using its ex ante regulatory powers to impose a
solution.

Given Ofcom’s express requirement to give consideration to the use of their competition powers
first and foremost rather than their ex ante regulatory powers under Schedule 14 of Enterprise and
Regulatory Reform Act 2013, the outcome of this case appears to fly in the face of the
Government’s new concurrency rules of engagement. Perhaps the morale of this story is and always
will be that concurrent regulators feel happier and more certain using their ex ante powers and will
seldom take on the burden of advancing a competition case which is more legally onerous to prove.

The consultation on these provisional measures closes on the 24 August 2014.

The Continuing Coffee Saga: Nespresso ordered to pay Ethical Coffee
Company EUR 500,000 for unfair behaviour

In December 2010 and May 2011, two competitors of Nespresso on the single portion coffee
machines and capsules market, DEMB Holding BV and Maison du Café (“DEMB”) and Ethical Coffee
Company (“Ethical”), complained to the French Competition Authority (“FCA”) that certain French

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and Swiss companies of the Nestlé Group (“Nespresso”) implemented exclusionary practices
notably by tying the purchase of Nespresso capsules to the purchase of Nespresso coffee machines
(see our edition of May 2014). This procedure before the FCA is still pending.

On December 4, 2012, Ethical (a Swiss company), initiated a civil suit before the Paris Commercial
Court on the basis that Nespresso allegedly acted in an abusive manner through a systematic
campaign of denigration of Ethical’s compatible capsules.

Ethical complained that Nespresso’s actions were destined to encourage consumers to use only
Nespresso capsules in their Nespresso coffee machines without any objective reason. Ethical argued
that Nespresso denigrated Ethical’s compatible capsules and incited consumers to use only
Nespresso capsules in its Nespresso Clubs and on internet by publishing false comments from
consumers.

On June 6 2014, the Paris Commercial Court issued its decision in which, based on several
testimonies, affidavits and bailiffs’ reports, it held that Nespresso’s denigrating practices were
established.

In fact, the Court found that Nespresso had indeed referred to the non compatibility of Ethical’s
capsules with its coffee machines, to the alleged poor quality of such capsules, to the alleged
systematic deterioration of the machines based on the use of Ethical’s capsules and, in certain
cases, the Court found that Nespresso even alluded to the danger the use of such capsules could
cause to consumers’ health. Consequently the Court ordered Nespresso to pay Ethical EUR 500,000
for unfair competition and EUR 40,000 for legal fees.

At the time of writing there is no known appeal from Nespresso.

Italian Competition Authority opens an in-depth investigation for
mortgage interest rate collusion

On 7th May 2014, the Italian Competition Authority (“ICA”) opened an in-depth investigation into six
banks operating in the Province of Trento and Bolzano (the “Banks”) in order to assess whether
they infringe Article 2 of the Italian Law No. 287 of 1990 and/or Article 101 TFEU, the provisions
against anti-competitive agreements.

The ICA investigation started after a complaint filed by the consumer association “Centro
Consumatori Utenti Alto Adige” which alleged the existence of an anti-competitive agreement
aimed at setting a minimum mortgage interest rate among the Banks. This allegation was based on
the outcome of a comparative survey carried out by the consumer association in November 2013.

The ICA pointed out that according to the evidence gained so far, the Banks all provided for a
minimum mortgage interest rate set at 3% called “rate floor”. In essence, the interest rate could
never be below the said threshold.

Therefore, the ICA held that the homogeneous application of such an interest rate threshold among
the Banks would amount to the setting of a minimum price for mortgage. This behaviour would
constitute a hardcore restriction of competition and would aim to avoid price competition to the

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detriment of mortgage subscribers.

In addition, the ICA found that the alleged anticompetitive agreement among the Banks would
infringe also Article 101 TFEU as the territory of Trento and Bolzano borders another European
Union Member State (Austria). The alleged collusion therefore may foreclose commercial trade
between two Member States at least.

Germany supports right to sell on Ebay

On 2 June 2014 the German Federal Cartel Office (Bundeskartellamt) reported that it has closed its
proceedings against Adidas AG after the company has agreed to amend its conditions for online
sales in such a way that they comply with competition law. Adidas AG is one of the largest sports
brands in the world with turnover of approximately €14.5 billion ($19.3 billion) in 2013.

Adidas AG operates a selective distribution system, which only allows authorized retailers to sell
adidas products to consumers. In 2012, Adidas AG introduced new conditions for online sales that
included a prohibition for retailers to sell via large online market places such as eBay and amazon.
The German Bundeskartellamt had initiated proceedings after it had received numerous complaints
by sports retailers following the introduction of the new sales policy.

In its publication the Bundeskartellamt stated that the trading possibilities offered by the Internet
create new challenges for both manufacturers and retailers. In this dynamic market environment, it
is the Bundeskartellamt’s task to keep markets and opportunities open for the benefit of retailers
and consumers. Whilst manufacturers can still select their distributors according to certain quality
requirements, the manufacturers are under both European and German competition law prohibited
from largely eliminating a principal distribution channel like the internet. The Bundeskartellamt’s
proceedings against Adidas and also against ASICS (which have not yet been concluded) serve as
test case taking into account that number of brand manufacturers are contemplating similar
measures currently. The Bundeskartellamt takes the view that opening the distribution channels is
particularly important for small and medium-sized sports retailers who want to expand their
customer base. Consumers will also directly benefit from the amended conditions of sale.

Adidas AG’s decision to reconsider its distribution rules and to finally lift the restrictions imposed
on its distributors 2012 followed extensive investigations of the Bundeskartellamt and an informal
notification that its ban on sales via online market places gave rise to serious competition concerns.
Adidas AG submitted an amended version of its conditions of sale for e-commerce, in which it has
completely abandoned its ban on sales via online market places. At the same time it clarified that
all authorized retailers are free to use Adidas brand related terms as search words for search
engine advertising.

The Bundeskartellamt is currently also holding discussions with ASICS Deutschland GmbH, to which
a statement of objections has been issued on account of similar conditions of sale on how the
company could amend its selective distribution system in order to bring it in line with competition
law. However, and crucially, the Bundeskartellamt’s position in both the ASICS and Adidas cases
appears to limit the ability of parties to ban certain types of online sales. This appears at odds with

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the EU Commission’s interpretation in the Vertical Agreement Block Exemption Regulation. The
Vertical Agreements Block Exemption Regulation itself and the accompanying guidelines do not
explicitly state that sales must be allowed through third party platforms and auction websites.
Paragraph 54 of the Guidelines in fact allows (somewhat ambiguously) distributors to ban sales
through third party websites if they do not comply with the supplier’s quality and brand
requirements or if reaching these sales portals would mean using websites with third party names
and logos. Many businesses both inside and outside Germany do indeed ban sales through Ebay and
Amazon. This apparent conflict of interpretation between EU and national competition law will
need to be resolved as the resulting uncertainty is bad for business.

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