EU & Competition Law Update - September/October 2018
European Court of Justice Asked to Confirm Whether EU Law Permits Unilateral Revocation of Article 50 Withdrawal Notice
Authored by: Robert Bell
On 21 September 2018, the Inner House of the Court of Session, Scotland's Court of Appeal, requested a preliminary ruling from the European Court of Justice as to whether it was possible for the UK to unilaterally withdraw its Article 50 notice to the European Council stating that the UK intended to withdraw from the EU to allow the UK to remain as a Member State of the European Union. This ruling has the potential to be of substantial legal and political significance in the Brexit process.
Under Article 50 of the Treaty on European Union (TEU) a Member State may withdraw from the EU. This involves notifying the European Council of that country's intention to do so. There is then a two year period in which the parties seek to agree withdrawal terms and the basis for a future trading relationship. If there is no agreement after the two years, provided there is no extension, then the EU treaties cease to apply to the withdrawing state. With the current state of the negotiations between the UK and the EU and with increasing fears of a no deal scenario many have argued that clarification was urgently needed regarding the Article 50 process.
One major question exercising many legal and political commentators and pressure groups was whether an Article 50 notice could be unilaterally withdrawn by the UK Government prior to the end of the two year period. Since the Brexit vote the UK Government have seen off many legal challenges in the Courts to keep this question out of the hands of the European Court. In addition several other cases in the Irish and other EU Member States Courts have failed to yield a successful result for those advocates seeking clarification of the law on this point.
However finally the central question will now be put to the European Court of Justice by this latest Scottish ruling. The question will now referred to Luxembourg for a preliminary ruling. Only the European Court can opine definitively on this issue.
Nevertheless an issue remains as to whether the European Court has the appetite to tackle such a politically charged case and to allow the use of its expedited procedure to ensure the case is heard before Brexit day.
Following notification, to the European Council, on 29 March 2017, of the UK's intention to withdraw from the EU under Article 50 of the Treaty on European Union, a petition was lodged before the Scottish Courts by a Member of the Scottish Parliament, Andy Wightman and certain petitioners which also included other members of the Scottish, United Kingdom and European Parliaments. The petitioners sought a declaration specifying "whether, when and how the notification…can unilaterally be revoked" in advance of the expiry of two years after the withdrawal notification, with the possible effect that the UK would remain in the EU.
At first instance the Court declined to make a reference to the European Court. However, on appeal the Inner House of the Court of Session agreed the petitioners' request to make a reference under Article 267 of the Treaty on the Functioning of the EU (TFEU). The Court considered that it was neither hypothetical, academic nor premature to do so.
The UK Supreme Court stated in R (Miller and Santos) (Respondents) v Secretary of State for Exiting the European Union (Appellant),  UKSC that a notice under Article 50(2) could not be given in qualified or conditional terms and that, once given, cannot be withdrawn. This was on the basis that it was common ground between the parties in that case. The Supreme Court did not seek to question that position. However The Court of Session now appears to be of the view that what was common ground before the Supreme Court requires clarification by the European Court.
So what has changed?
Well for one thing the European Union (Withdrawal) Act 2018 has now been passed which sets out the process for Parliament to approve withdrawal on terms agreed or to specify a mechanism in default of an agreement. Section 13 of the European Union (Withdrawal) Act 2018 provides that the withdrawal agreement can only be ratified if it, and the framework for the future relationship of the UK and EU, have been approved by a resolution of the House of Commons and been debated in the House of Lords If no approval is forthcoming, the Government must state how it proposes to proceed with negotiations. If the Prime Minister states, prior to 21 January 2019, that no agreement in principle can be reached, the Government must bring before both Houses proposals regarding how it intends to proceed.
The Scottish Court took the view that it was perfectly reasonable given the current legislative and political situation that the question as to whether the Article 50 notice could be unilaterally withdrawn by the UK should be referred to the European Court. The matter was uncertain and the answer would have the effect of clarifying the options open to MPs when casting their votes on the proposed withdrawal arrangements. Finally the question could only be answered definitively by the ECJ.
Given the current unsatisfactory state of affairs between the UK and the EU a "no deal" scenario is looking increasingly likely. Parliament is likely to have some difficult questions to confront when the matter is debated on or before 21 January 2019 under the terms of the European Union (Withdrawal) Act 2018. Therefore a ruling by the European Court of Justice on whether the Article 50 notice can be unilaterally withdrawn is likely to be of substantial legal and political significance in the Brexit process.
A UK CFIUS Regime? White Paper Consultation on National Security & Infrastructure Investment Review
Authored by: Robert Bell and Jennifer Mammen
The UK Government published on 24 July 2018 its long awaited White Paper on the proposed new national security screening regime to review investments by foreign investors which may have national security implications. In this article we review the Government’s proposals and ask what it means for foreign investment in the UK.
The UK currently uses the Enterprise Act 2002 to review mergers on national security and other public interest grounds alongside the competition regime.
Following the Chinese investment in the Hinckley Nuclear power station project, the Government voiced concern that it did not have enough powers to scrutinize properly investments by foreign investors on national security grounds.
Therefore it announced “a root and branch” review of its existing national security vetting powers and made certain proposals to extend its powers to review transactions which result in foreign hostile actors acquiring ownership and control in UK companies, property, intellectual property and other assets in certain key sectors of the UK economy.
In October 2017, the Department for Business, Energy & Industrial Strategy published for consultation a Green Paper to seek views as to whether the Government’s current powers were sufficient to ensure that national security risks receive the appropriate level of scrutiny. The Green Paper set out some immediate short term reforms to the Enterprise Act 2002 but also canvassed stakeholders’ opinions on the shape of a new CFIUS style regime in the longer term. The Government’s view contained in the paper was that there should be a substantial extension of its powers, with the formation of a vetting system entirely separate to the existing merger control system similar to other countries’ foreign direct investment (FDI) regimes.
Short term reforms
On 11 June 2018, the Government introduced reforms allowing it to intervene in a broader range of transactions where the target is active in either the military or dual-use sector, the computer hardware sector or quantum technology. Details of those reforms were provided in our previous blog ‘Greater national security scrutiny at the heart of new UK merger control reforms’.
Soon after the new rules came into effect, the UK Government took advantage of the new lower thresholds for such interventions. On 17 June 2018, it intervened on national security grounds in the proposed acquisition by Chinese-owned Gardner Aerospace of British aircraft parts manufacturer, Northern Aerospace. However, despite invoking the new rules to vet this transaction, it was subsequently cleared unconditionally on 19 July 2018 on the basis that there were no national security grounds for referring the merger for a more detailed Phase 2 investigation.
New FDI Regime
As the Government had intimated in its Green Paper, it wanted to establish a specific regime similar to other countries’ regimes entirely separate from the competition based merger control regime. Its proposals for that system and its longer term reforms were set out in the White Paper published in July. The object of the consultation on the White Paper is to seek respondents’ views about those trigger events that parties consider they would notify to the Government, or which they would seek further advice about. The consultation will remain open until 16 October for responses from stakeholders.
Following the consultation responses to the Green Paper, the Government now wishes to press ahead with its plans. It wants to introduce a standalone FDI system which protects national security from hostile actors using ownership of, or influence over, businesses and assets to harm the country. These reforms will bring the UK closer in line with other countries’ regimes, and are taking place as many other governments are also updating their powers in light of the same technological, economic and national security-related changes. The new regime is only related to national security which will be assessed by the Government. The proposals also involve removing the existing national security considerations from the Enterprise Act 2002 . National security is distinct from public interest issues. Public interest issues (namely plurality of the media and ensuring financial stability) will remain within the Enterprise Act 2002 merger control regime. The Green Paper concluded that no changes were needed to the wider public interest regime.
The Proposed New Regime
The main proposals contained in the Government’s new national interest regime are as follows:
Notification of relevant transactions covered by the regime will be voluntary, with the Government having the option of calling in non-notified transactions for a national security assessment. There will be a prescribed period in which the Government can call in any relevant transaction. This is most likely to be up to six months from the “trigger event” having taken place. The Government states it will encourage notification of investments and other events that may raise national security concerns and it will publish a detailed statement of policy intent to set out more fully where and how it considers transactions will be covered by so called “trigger events”. This will assist parties to determine whether to discuss the transaction informally with government officials and/or whether to submit a formal notification to the Government.
It estimates that it is likely to receive about 200 notifications each year of which 100 will raise national security concerns and of which 50 will be subject to some kind of intervention. This is a considerable workload. To put this into context, this is likely to be at least three times the number of UK merger notifications currently made to the CMA. There will also be powers to request information in relation to specific trigger events that the Government is aware of in order to inform its decision as to whether to call in a trigger event for screening.
For those transactions that do raise significant concerns, the Government will carry out a full national security assessment. A clear and circumscribed legal test would need to be met in order for the Government to exercise this power and the screening process would be subject to a clear and transparent process subject to appropriate judicial oversight. The national security assessment will be conducted within set time periods. The Government plans to screen out any notified transactions which do not, in fact, raise any national security concerns quickly and confirm its views within a prescribed period. The White Paper suggests the Government has 15 working days to consider whether a notified deal will be subject to a full national security assessment. If it so decides it then has a period of up to 30 working days, potentially extendable by a further 45 working days, to complete its assessment.
- Trigger Events
The new regime will extend the range of circumstances where the Government has powers to address national security risks. The areas covered include activities in the energy, communications, transport and nuclear sectors but the White Paper makes clear that this is not an exhaustive list and that national security concerns could potentially arise in any sector of the economy. So the areas covered are likely to go even beyond those set out in the short term reforms.
Transactions by which a hostile actor can acquire the ability to undermine national security in the short or long term will be deemed “trigger events” susceptible for investigation by the Government. The Government proposes to publish more detailed policy guidance as to what transactions are likely to be covered by the new regime. This will include a description of the entities and assets where the acquisition of control can be used to undermine national security, and details about the sectors of the economy where the Government expects risks are more likely to arise as well as detailed guidance as to what constitutes trigger events. These cover those areas already subject to enhanced scrutiny under the Enterprise Act 2002 but are likely to be much broader.
In summary, however, trigger events will at least include:
any investment or activity that involves the acquisition of more than 25% of an entity’s shares or votes;
acquiring significant influence or control over an entity;
increasing the quality of existing control beyond the above thresholds;
ownership of more than 50% of an asset including ownership of intellectual property rights and real estate; and
significant influence or control over any of the above assets.
Where the Government concludes that a transaction does pose a risk to national security, it will have the power to impose conditions on the transaction or prohibit it outright. If the transaction has been put into effect it will have the power to order for it to be unwound. There are also likely to be powers to impose interim enforcement orders where a transaction has been called in and has already been completed to mitigate the risk to national security pending the outcome of the investigation. The Government’s initial analysis indicates that around half of those trigger events called in for a full national security assessment are likely to require remedies.
Sanctions for non-compliance are likely to be significant to incentivise compliance. The following sanctions could be imposed upon the companies involved and /or individuals who authorised or were instrumental in the breach:
Custodial Sentences: prison sentences of up to five years will be available for most offences (including breach of conditions imposed or failure to unwind a transaction). Lesser prison sentences of up to two years are available for less serious offences (e.g. for failure to provide information or providing false information);
Civil Penalties: substantial civil financial penalties for failure to provide information (up to £30,000 or maximum daily fine of up to £15,000) and for all other breaches (up to 10% of a business’s worldwide turnover or for an individual up to 10% of the higher of their total income or £500,000); and/or Director Disqualification Orders:- director disqualifications for up to 15 years.
Government decisions under the new regime will be subject to challenge by way of judicial review in the High Court.
Lessons from the US
Indications are that the Government’s reforms will take the US CFIUS regime as their inspiration.
In the United States, in addition to competition/antitrust review, certain transactions that result in foreign control of a U.S. business may be subject to review by the Committee on Foreign Investment in the United States (“CFIUS”), an interagency group tasked with determining whether a particular transaction could impact U.S. national security. CFIUS review is not triggered by the size of a transaction, but rather by the nature of the U.S. business and the potential foreign acquirer.
Under federal law, if a covered transaction poses a national security concern that cannot be mitigated, or if the parties are unwilling to agree to the mitigation required, CFIUS may recommend that the President prohibit the transaction or, if the transaction has already been finalized, order steps to prevent the potential threat, including divestiture
Implications for Investors
So the Government is going to roll out a UK version of the CFIUS regime under which notification is voluntary but compliance is incentivized by substantial penalties.
The Government has stated that it expects 200 transactions to be caught by the regime in any given year with 50 or so of those deals subject to conditions or even outright prohibition. If implemented, this is clearly a system which means “business”. It will represent a substantial uptick in enforcement activity in UK merger policy. For inward investors it will provide additional complexity to the merger clearance process in the UK especially if they are in one of the high risk categories of the economy highlighted by the White Paper.
All investors will need to grapple with the new rules but, for those investors from countries with friendly relations with the UK, it is not likely to be a cause for concern.
Higher Regional Court of Frankfurt: Coty May Ban Sales of Luxury Perfumes on Third Party Platforms
Authored by: Dominik Weiss
After the European Court of Justice (ECJ) had handed down its preliminary ruling in the Coty case on 6 December 2017, the Higher Regional Court of Frankfurt decided on 12 July 2018 (case no. 11 U 96/14 (Kart)) that the US beauty group Coty may prevent its German authorized retailer Akzente from offering its products on third party online sales platforms.
Coty distributes brand cosmetic products in Germany within a selective distribution system. Akzente sells Coty's products both in stores and over the Internet. In addition to in its own Internet shop, Akzente also sells the products via the Amazon.de platform. The distribution agreement concluded between Coty and Akzente stipulates with regard to Internet distribution that the authorized retailer may not bear another name or use an unauthorized third-party company. In a new contract signed by all of the Coty's authorized retailers except for Akzente, Coty specified more precisely that distribution via the Internet is permissible if the authorized retailer operates its Internet business as an "electronic shop window" of the authorized retail store and the luxury character of the products is preserved.
The Higher Regional Court of Frankfurt ruled that, due to the agreement concluded with Akzente, Coty could demand that Akzente not sell its products via Amazon.de. Evidence already suggested that Coty fulfilled the requirements of a permissible distribution system in such that there was no restriction of competition in accordance with Article 101(1) of Treaty on the Functioning of the European Union. In particular, it could be assumed that Coty's products actually enjoyed the luxury image claimed by Coty and thus required the application of a selective distribution system. The Higher Regional Court of Frankfurt highlighted that the product-related marketing activities of the manufacturer and the placement of the products in a high-value market segment were of particular relevance in this respect. Furthermore, the ECJ had already made clear in its preliminary ruling that the contractual clause at issue was proportionate.
Irrespective of the question of a restriction of competition, the Higher Regional Court left open, it came to the conclusion that the contractual online platform ban was exempted by the Vertical Block Exemption Regulation (VBER) because the market shares of the parties did not exceed 30 percent in the relevant markets and there were no core restrictions. The Court pointed out that the use of the Internet was not completely excluded. Customers of third-party platforms could not be definable as a separate group within the group of online buyers because the platform ban did not regulate to whom Akzente sold but merely in what manner it was allowed to do so. The Court also took into consideration that Coty allowed in practice advertising via search engines such as Google Shopping or price comparison sites.
Furthermore, the Higher Regional Court ruled out a violation of the German Act Against Restraints on Competition. Even if the contractual clause that only applies to Akzente would contain a complete prohibition of price comparison sites, Akzente could not invoke the invalidity of such clause. It would be a breach of good faith if on the one hand Akzente asserted a violation of competition law with regard to the old contract and on the other hand refused to enter into a new contract permissible under competition law.
The judgment of the Higher Regional Court of Frankfurt is not yet final. Although a further appeal was not admitted by the Higher Regional Court, Akzente challenged the non-admission before Germany's Federal Court of Justice (case no. KZR 67/18).
"Legality Rating" by the Italian Antitrust Authority
Authored by: Gabriele Bricchi and Cora Steinringer
In 2012 Italy introduced an innovative tool, called "Legality Rating" (Rating di Legalità) designed to increase the competitiveness of Italian companies and aimed at promoting principles of ethical behavior in Italian companies.
The Legality Rating highlights the key role of the internal antitrust compliance initiatives applied by a company.
In particular, banks and the public administration shall take into account said Legality Rating for the access to bank loans, or with regard to public financing.
In May 2018 a new regulation by the Italian Antitrust Authority was adopted in order to simplify the procedure and to strengthen the role of the Italian Antitrust Authority as competent body for the rating.
The request to the Italian Antitrust Authority can be filed, generally, by a company duly enrolled in the Italian companies register for at least two years, with administrative/operational offices in Italy and a turnover of more than €2 million in the last business year. Details are provided in the regulation. This means also foreign companies with an operational office (e.g. branch office) in Italy meeting all requirements can request the rating.
The Italian Antitrust Authority, in cooperation with the Ministry of Justice, the Anti-Corruption Authority and, if necessary, the Ministry of Internal Affairs, verifies the standards of compliance with legality, transparency and social responsibility of the requesting company and its top management based on the documents provided by the latter. Crosschecks with information in possession of the public administration are possible.
In case of positive outcome of the proceedings, which normally last 60 days, unless further investigation is necessary, the Italian Antitrust Authority awards or denies the rating.
The basic award is one star, if the company complies with the basic requirements set forth in the regulation of the Italian Antitrust Authority, such as, for example, no judgments for (specifically indicated) tax and criminal offences, no serious breaches of antitrust and unfair commercial practices, no orders and/or fines for corruption, breach of anti-money laundering, breach of safety at work and/or default of social security payments, as well as no major crimes against the public administration and no crimes related to the mafia.
For each additional requirement provided by the regulation of the Italian Antitrust Authority (e.g. (external) control of internal compliance guidelines and model according to Italian Legislative Decree 231/2001), a "+" can be attributed and "+++" equals a star. Three stars are the maximum award.
The rating is valid for a period of two years, and can be renewed upon request. No fee is due for the rating.
The companies — either with positive or negative rating — are enrolled in public list, which is published on the website of the Italian Antitrust Authority.
The rating becomes more and more popular in Italy. According to a press release of the Italian Antitrust Authority published in August 2018, approximately 2000 companies obtained the rating in the first semester of 2018, and approximately 400 obtained the renewal; thus meaning an increase of first requests by 40% and those of the renewals by 85%.
However, in the same period, the Italian Antitrust Authority has also denied the rating to 50 companies, and revoked the rating of 15 companies. Such revocation is now also published in the rating list up to the date of termination of the revoked rating, but in any case for at least six months.
The Reason Why You Paid Higher Prices for Your Notebook Computer, Kitchen Appliance or Headphones
Authored by: Kathie Claret and Emmanuelle Mercier
In decisions dated 24 July 2018, the EU Commission fined consumer electronics manufacturers Asus, Denon & Marantz and Pioneer for imposing fixed or minimum resale prices on their online retailers, for a total of over €111 million.
Well-established fixed and minimum price practices
Following investigations conducted by the EU Commission's e-commerce sector, it appeared that between the years 2011 and 2015, the manufacturers engaged in practices in violation of Article 101 of the TFEU, by imposing fixed or minimum prices on the resale of their products by their online retailers.
The electronics manufacturers' actions entailed threats or sanctions imposed on their retailers if they did not comply with the manufacturers' pricing instructions, in particular by blocking the supply of products. Pioneer also forbade its retailers to sell cross-border to consumers located in other Member States, in order to maintain different pricing conditions in different Member States.
They were able to track and monitor closely their retailers' resale prices through the use of sophisticated automatic software and with the "assistance" of compliant retailers who informed the manufacturers on retailers who did not comply with the manufacturers' instructions relating to prices.
A snowball effect on the market resulting in higher prices for the consumers
The fixed or minimum resale prices imposed by the electronics manufacturers on their online retailers resulted in higher prices for the consumers who bought their products which included consumer electronic goods such as computer hardware, headphones, hi-fi products, kitchen appliances, hair dryers, vacuum cleaners, etc.
In addition, because of the system whereby many online retailers use pricing algorithms which monitor their competitors' prices and automatically align their prices on them, retailers who were not subject to the fixed prices practices would align their prices with those who sold at higher prices because they were forced to do so by the manufacturers who imposed fixed or minimum prices on them.
Thus, such practices had a global impact on the prices on the EU electronic goods market, resulting in higher prices globally for EU consumers.
This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.