BEIS notice on competition law in the event of a ‘no deal’ Brexit

With Brexit fast approaching, the government has issued further technical notices that set out its plans in the event of ‘no deal’ with the EU27 (our post-referendum view on possible negotiated alternatives are here, although at present the only alternative to no deal remains the so-called Chequers plan).  Issues covered in the notices include the potential loss surcharge-free mobile roaming, the UK’s withdrawal from innovative space programmes, and additional certification requirements for manufacturers.  

However, of most interest to us was the BEIS guidance on ‘Merger review and anti-competitive activity if there’s no Brexit deal’.  It’s short, and perhaps does not say much that is new or surprising, but to summarise the key points:

  • The domestic UK competition regime will remain in place, unchanged bar the removal of references to EU law and institutions, and duties under EU obligations. 

  • The EU block exemptions which are applied as parallel exemptions under UK law will be preserved; so companies that benefit from any applicable exemption will continue to do so, and any new agreements meeting the relevant criteria will also benefit. 

  • The European Commission will not begin investigations into the UK aspects of mergers or cases involving potentially anti-competitive conduct. 

  • There may be no agreement on jurisdiction over live EU merger and antitrust cases which address effects on UK markets (this could include the Commission’s investigation into Aspen’s pricing, Guess’ distribution systems, and geo-blocking by Steam and video games companies).

  • The CMA and UK will no longer be bound to follow future CJEU case law. 

  • A decision made by the European Commission could no longer be relied upon as a binding finding of an infringement in follow-on claims.  

  • A number of the rules governing jurisdiction for damages claims would be repealed (these are covered in a separate notice), and the UK would revert to the existing common law and statutory rules that apply in non-EU cross border disputes.  The UK would however retain the Rome I and Rome II rules on applicable law. 

The confirmation that block exemptions will be preserved does provide some reassurance for UK companies, but there still remains a lot of disconcerting uncertainty – particularly for any company currently engaged in merger talks and at risk of being engaged in a ‘live’ review come 29 March 2019.  However, the government is clearly focusing on solutions to the issues raised earlier this year, and is communicating developments to try and provide certainty for UK businesses; we hope this progress continues with as much transparency as possible.  

As regards the potential for lack of jurisdiction over ongoing merger and antitrust cases, the advice to ‘take independent legal advice’ will be of little comfort to business in view of the significant ongoing uncertainties.  Whilst a pragmatic solution can readily be identified for antitrust cases which address past conduct (and where, as a result, jurisdiction should follow the legal regime in place at the relevant time), the position is less obvious as regards forward-looking merger analysis.  Given the flexibility of the UK’s voluntary merger notification regime, it is to be hoped that further guidance will be forthcoming from the CMA over the next few months should a no-deal exit become inevitable.

Big Data? No antitrust problem for Apple/Shazam

Big Data has been a focus for DG Competition for the last few years.  In particular, the Commission has been interested in mergers involving the acquisition of a company holding valuable data, even if it has low turnover (see here). Apple’s $400 million acquisition of Shazam, approved by the Commission on 6 September 2018, falls squarely within this category.

Shazam is a music recognition app.  Consumers can use Shazam to record a clip of an unknown song playing in a bar or other public place – Shazam turns this into an audio fingerprint and matches this against its database containing the audio fingerprints for millions of songs in order to identify the song playing.  Shazam generates revenue through referring users once a song has been identified to Spotify, iTunes, Google Play music or other streaming services.  Although Shazam has been downloaded over 1 billion times, and is used over 20 million times a day, in 2016 it made a loss of over £3.5 million on revenues of just over $40 million.  Apple isn’t buying Shazam for its profitability, but rather the data it possesses on its millions of users, including which songs they like to listen to and other trends.

There have been a string of mergers in which data has been an issue, starting with Google/DoubleClick in 2008 and including Facebook/WhatsApp in 2014, and Microsoft/LinkedIn in 2016.  In most of these cases, the data-related concerns have centred on potential barriers to entry arising due to the concentration of valuable data in the hands of one company. The Commission looked for example at whether other advertisers would be able to replicate the data held by Google after its acquisition of DoubleClick, or whether access to the LinkedIn database was an essential part of developing advanced customer relationship management technology using machine learning in the Microsoft case.  

In Apple/Shazam the concern was different. The Commission opened a phase II review of the transaction on 23 April 2018 (here) because it was concerned that access to Shazam’s data might enable Apple to target directly the customers of its rivals (such as Spotify or Google Play Music) to encourage them to switch to Apple Music.  Unlike the more general concern in previous cases that it might be harder for new players to enter the market, here the Commission was specifically concerned about the potential for active harm to Apple’s competitors.

However, following its review, the Commission concluded (here) that:

  • Access to Shazam's data would not materially increase Apple's ability to target music enthusiasts and any conduct aimed at making customers switch would only have a negligible impact. 
  • The merged entity would not be able to shut out competing providers of digital music streaming services by restricting access to the Shazam app; the app has a limited importance as an entry point to music streaming services. 
  • The integration of Shazam's and Apple's datasets on user data would not confer a unique advantage to the merged entity in the markets on which it operates; Shazam's data is not unique and Apple's competitors would still have the opportunity to access and use similar databases.
Commissioner Vestager released a short statement accompanying the clearance: 

"Data is key in the digital economy. We must therefore carefully review transactions which lead to the acquisition of important sets of data, including potentially commercially sensitive ones, to ensure they do not restrict competition. After thoroughly analysing Shazam's user and music data, we found that their acquisition by Apple would not reduce competition in the digital music streaming market."

There seemed to be a hint of disappointment that the Apple/Shazam transaction had not ultimately enabled the Commission to take real action against a big tech company hoovering up a smaller but data-rich target, but Vestager’s comments do reveal how seriously the Commission views the acquisition of data and its potential to pose a threat to fair competition. 

There are a number of other interesting aspects to this particular transaction. The Commission’s press release also explicitly stated that “a merger decision does not release companies from respecting all relevant data protection laws”.  We have previously looked at the privacy / competition overlap (here and here for example) and this is a pointed reminder from the Commission that whilst there are no competition concerns related to the data in this transaction, Apple will have to ensure that it treats the newly acquired data in a manner that complies with the GDPR.

Apple/Shazam did not meet the turnover thresholds set by the EUMR.  It was reviewed by the Commission only because Austria (the one Member State where the transaction did meet the national merger notification threshold) submitted a referral request to the Commission under Article 22(1) EUMR. This was the first time in over two years that a national competition authority had referred a transaction up to the Commission.  Austria’s request was joined by Iceland, Italy, France, Norway, Spain and Sweden – equal to the record highest number of authorities seeking a referral (here – subscription required).

The interest taken by these national authorities in this transaction reflects the increasing recognition of the importance of acquisitions of innovative companies. There have been some concerns that high value transactions of companies with low turnovers (but valuable data) may escape review by competition regulators. For example Intel’s 2017 $15 billion acquisition of Mobileye, an Israeli company manufacturing self-driving car technologies, avoided review in Europe due to Mobileye’s low revenues in Europe.  As we discussed here, Germany (like Austria) has recently amended its domestic competition law; changing its merger thresholds to try and capture these kinds of transactions. 

We suspect there will be plenty more phase II investigations of big data mergers in the future.

‘Baysanto’: EU merger clearance of the Bayer/Monsanto confirms continued attention to innovation markets

Last week, the European Commission confirmed that it had cleared the proposed merger between Bayer and Monsanto, the third mega-merger in recent times between seeds / pesticides giants following those between ChemChina and Syngenta, and Dow and DuPont.

In common with the previous mergers in the sector, the Commission has required divestments and commitments by the parties in order to remove problematic areas of overlap.  And these again focussed not only on existing products, but on areas of innovation where both parties had active R&D projects.

The full decision is not yet available, so it is unclear whether the Commission has gone as far in identifying potential ‘innovation spaces’ as in Dow/DuPont, where it used a patent citation analysis to measure ‘innovation output’ (see the relevant section of our Survey of IP/competition law developments from 2017 for more detail).  However, it has identified a number of areas of where innovation needed to be protected before the merger could be approved, including innovation competition in:

  • GM and non-GM traits (i.e. specific plant features traceable to identifiable genes) conferring herbicide tolerance or insect resistance; and
  • herbicides / herbicide systems (i.e. herbicide combined with a trait ensuring herbicide tolerance).
Other areas of innovation (e.g. biological pesticides) were not considered to raise competition concerns.

Relevant commitments offered by Bayer include divestment of its vegetable seed and broadacre (i.e. large-scale agricultural) seeds and traits businesses, including the associated R&D units in each case, as well as three specific lines of research for non-selective herbicides (to be divested to BASF, subject to a separate merger approval).  Bayer also committed to license its digital agriculture offering and pipeline to BASF, allowing it to replicate Bayer’s position in the EEA (where Monsanto was otherwise the main competitor to Bayer’s system).

The increased focus on very early stage product developments is controversial.  In its focus on ‘innovation spaces’, the Dow/DuPont merger traversed new ground in merger analysis, considering product pipelines at a time even before specific products may have been identified.  Our new CLIP of the month, by Andrea Lofaro, Stephen Lewis and Paulo Abecasis is an ideal introduction to the economic questions involved, including whether consolidation is likely to decrease incentives to innovate (as the Commission fears) or whether it may in fact encourage innovation (both by the parties and by others in the market) and enhance the ability to take advantage of innovation that has been carried out.  

Debate will no doubt continue over these questions for some time to come.  In the meantime, Bayer and Monsanto will continue their efforts to obtain clearance for the transaction from other authorities, including the USA.

Licensing commitments sufficient for Qualcomm to secure NXP takeover green light

On 18 January 2018 the European Commission approved Qualcomm’s proposed $47 billion acquisition of the Dutch semiconductor manufacturer NXP after an in-depth second phase review. Qualcomm and NXP originally announced the deal on 27 October 2016, notifying it to the European Commission on 28 April 2017. The Commission’s Phase II review was initiated on 9 June 2017, following concerns that the merged entity would have a strong market position in a number of different technologies.

The technologies involved

Qualcomm is particularly known for its baseband chipsets which enable mobile phones to connect to mobile communications networks. NXP focuses on different semiconductors. Most notably, NXP manufactures near-field communication (NFC) chips used to enable a wireless link between two devices at close proximities over which data can be transferred, and secure element (SE) chips. SE chips control interactions between trusted sources: for example, used in combination with NFC, they enable mobile payments between a smart phone and a contactless card machine. 

NXP also developed MIFARE, a leading technology used by several transport authorities across the EEA as a ticketing/fare collection platform. London’s Oyster card transport system is one such use example of the use of MIFARE technology.

Competition concerns and remedies

NFC

Both Qualcomm and NXP hold a significant amount of IP related to NFC chips, including standard essential patents (SEPs) and non-essential patents. The Commission was therefore concerned that the increased level of bargaining power of the merged entity would enable it to demand significantly higher royalties in its patent licences. 

To address the Commission’s concerns (and it would appear similar concerns raised by the Korean Fair Trade Commission), Qualcomm offered to carve out NXP’s SEPs and some of its non-essential patents from the transaction. Instead, NXP will transfer these to a third party, who will be required to grant worldwide royalty-free licences to these patents for three years. 

Whilst Qualcomm will still acquire some of NXP’s other non-essential NFC patents, it has committed to grant worldwide royalty-free licences to these patents and not to enforce them against other companies. Interestingly, the Commission’s press release suggests that there is a significant caveat here: this commitment applies “for as long as [Qualcomm] owns these patents”. That implies the possibility of Qualcomm being able to adopt a similar strategy to that of Ericsson in Unwired Planet (see the judgment here and our blog posts here and here) – it could later assign these patents to another entity to monetise under a revenue-sharing agreement.

Interoperability

The Commission considered that the merged entity would have the ability and incentive to degrade the interoperability of Qualcomm’s baseband chips, and NXP’s NFC and SE chips with rivals’ products. This could lead to rival suppliers being marginalised, with smart phone manufacturers choosing only to purchase chips from Qualcomm/NXP.

In order to address this concern, Qualcomm agreed that for the next eight years it would provide the same level of interoperability between its own baseband chips and the NFC and SE chips it acquires from NXP with any corresponding products manufactured by rival companies.

MIFARE

For MIFARE, the Commission was again concerned about royalty levels, concluding that the merged entity would have the ability and incentive to raise royalties and make it more difficult for other suppliers to access MIFARE. It also suggested the merged entity might cease to offer licences to MIFARE altogether.

In response, Qualcomm committed to offer licenses to MIFARE technology and trademarks for an eight-year period, on terms that are at least as advantageous as those available today. The Commission was satisfied that this would enable competitors of the merged entity to continue to compete effectively.

Final thoughts

At the time of writing, the European Commission’s clearance was the eighth of nine mandatory approvals needed, with just China remaining.  

There’s an interesting discrepancy in the length of time the various commitments will run for. Eight years seems to be an extraordinarily long time in an industry driven by continual technological innovations; it also means that rival manufacturers will have some considerable time to think about alternatives to MIFARE and interoperability with Qualcomm chips. 

However, the third party that acquires NXP’s NFC SEP portfolio will be free to begin monetising that portfolio after just three years. Given the increasing use of NFC with contactless payment technologies like Samsung Pay or Apple Pay, and the expansion into other areas such as ‘smart tourism’ (e.g. using NFC tags in art galleries or museums that can show users additional information about an exhibit), there could be plenty of FRAND negotiation/litigation regarding NFC in the future.

It isn’t surprising that the Commission’s concerns centred on licensing royalty rates – this is a complicated, controversial area of law that is still developing. The Commission recently published some guidance on FRAND rates in its SEP Communication (see our blog here) and how royalty rates should be calculated was the key feature of the recent TCL decision in the US (here).

For Qualcomm, currently embroiled in a worldwide dispute with Apple over licences fees for its baseband chips (link), the NXP merger is a sensible move. It will significantly expand what Qualcomm can offer to manufacturers. However, despite regulatory approval being granted, there have been some rumblings of discontent about the value of Qualcomm’s offer (link), and the unsolicited bid by Broadcom to purchase Qualcomm (link) also has the potential to cause some interference with the acquisition. So the Commission’s decision is not quite the end of the story here…

Laitenberger on the notions of fairness and consumer welfare in EU Competition Law

Johannes Laitenberger (Director-General for Competition, European Commission) spoke last week on an increasingly prominent topic in competition authority discourse, namely the role of fairness in competition law.

Fairness

Taking his cue from Commissioner Vestager’s recent speech on the same topic (see here), Laitenberger’s speech looked at the concept through the lens of recent developments in relation to innovation and digital markets. According to Laitenberger, “fairness is important to maintain confidence in the system”. Citing a topical example, he noted the recent Amazon state aid case.

That case related to a tax ruling granted by Luxembourg to Amazon that allowed Amazon to shift ¾ of their EU profits to an untaxed entity, in the form of an IP royalty payment. The decision has strong similarities to the 2016 Apple/Ireland ruling, in which the Commission found that equivalent royalty payments bore no relation to economic reality and thus constituted illegal state aid. The Apple ruling is set to be considered by the CJEU, but the Commission remains of the view that the use of unwarranted IP royalty payments to reduce tax burdens, are ‘unfair’ and will receive short shrift.

Assessing innovation

Laitenberger emphasised that the role of competition law is not limited to consideration of price competition. Other parameters of competition, including quality, choice and innovation are also key in digital markets.

He illustrated this through a discussion of merger cases where the impact on innovation was a major concern (see our previous commentary here). Perhaps the most controversial of these has been the Dow/Dupont decision, where the Commission used techniques such as patent citation analysis to assess the impact of a reduction of the number of players in the agrichemical business. It ultimately ordered the divestiture of Dupont’s R&D organisation in order to ensure future innovation was protected. Laitenberger highlighted the Commission’s main concerns in this case: a small number of major agrichemical business with R&D capabilities; very high barriers to entry; evidence of likely lessening of R&D efforts post-merger; and existing overlaps between current R&D efforts. This is not the only merger case in which such concerns have been key, and it is likely that this trend will continue. 

EU Competition Law is “fit for purpose”

Indeed, Laitenberger also referred to the Microsoft-LinkedIn merger (about which we wrote earlier this year) as an example of the Commission being alert to the potential anti-competitive effects of big data.

Going forward, it remains to be seen whether the Commission will live up to Laitenberger’s ambition “to ensure that markets deliver for the many, not the few�� by accounting “for new phenomena and new technologies while maintaining the level of enforcement that is needed for the Single Market to serve society as a whole”. While this aspiration is probably uncontroversial, it also remains to be seen whether the Commission will continue to be able to meet it while remaining true to the fundamentals of competition law as it has developed over the past 50+ years. Indeed, if it is true that divestment remedies ordered against merging parties on grounds of innovation are controversial, the same is all the more true in behavioural cases where innovative conduct is in play. The concept of predatory innovation remains a novel one in competition law, and one where the risks of over-enforcement are legion.

Innovation and merger control

We have written on a number of occasions in the past (examples here) about the ways in which antitrust grapples with the potential for product innovations to have adverse effects on competition.  Generally, such effects are felt by a number of competitors, which may be a small price to pay for the benefit of genuine product innovation which, taken overall, benefits consumers.

Today’s topic relates to a different subject, which is the role that future innovation plays in merger control.  Merger control is of course prospective.  Antitrust reviews have, by contrast, the advantage of being able to consider actual market developments (even if they also display a worrying tendency to look for likely effects even in cases where actual market developments can be assessed – see the ‘pay-for-delay’ cases, for example…).  Merger analysis on the other hand has to take a view of the likely impacts of acquisitions both on existing products and product pipelines.  The full text of the Dow-DuPont merger decision is not yet available, but it appears that the Commission has been looking ever further into future, by considering not only defined future products (as is not uncommon in pharma merger cases – think Novartis/GSK (oncology) or Teva/Allergan), but also more speculative research poles. The Commission’s factual investigation extended to comparisons of early stage patent filings and use of the esoteric art of ‘forward citation analysis’ (essentially looking at how many other patents cite a particular prior patent to assess its importance) to determine potential future overlaps.

This week the Commission issued three Statements of Objections (SO) to companies which in some way failed to comply with merger filing requirements, either by providing misleading information or by ‘jumping the gun’ in their implementation of a transaction.  Of note in this context is the SO sent to Merck and Sigma-Aldrich. The companies had merged in 2015, and as part of the deal were required to sell off certain Sigma-Aldrich assets relating to certain laboratory chemicals.  The Commission’s allegation now is that the parties failed to tell it about “an important R&D project” which should have been addressed in the commitments package.  While the decision to issue these SOs perhaps says more about the Commission seeking to maintain the integrity of its merger review process, the importance placed on the protection of future competition should not be under-estimated.  We plan to report further on the Commission’s analysis in Dow-DuPont once the decision is available.

EU Commission’s Microsoft / LinkedIn Decision – watershed for competition and data?

On 6 December 2016, the European Commission approved the acquisition of LinkedIn by Microsoft, conditional on compliance with a series of commitments.  The full text of the decision has recently been published, affording some useful insight into the Commission’s reasoning.

The merger is one of a number of high profile technology cases in which data is the key asset. Cases such as this are challenging the Commission’s relaxed attitude to the potential effects on competition of deals involving significant volumes of data (for example, the Commission’s 2014 clearance decision of Facebook’s acquisition of WhatsApp – now the subject of an investigation into whether Facebook provided misleading information in the context of that merger review).  

Similarly, in the LinkedIn / Microsoft decision, the Commission’s assessment was that the post-merger combination of data (such as the individual career information, contact details and professional contacts of users) did not raise competition concerns.

The Commission identified two potential concerns: 

  1. The combination of data may increase the merged entity’s market power in the data market or increase barriers to entry / expansion for competitors who need this data in order to compete – forcing them to collect a larger dataset in order to compete with the merged entity; and 
  2. Even if the datasets are not combined, the companies may have been competing pre-merger on the basis of the data they control and that this competition could be eliminated by the merger. 
These concerns were dismissed by the Commission on a number of grounds, the most interesting being that the combination of their respective datasets is unlikely to result in raising the barriers to entry / expansion for other players as there will continue to be large amounts of internet user data available for advertising purposes which are not within Microsoft’s exclusive control.

The Commission’s approach contrasts with that of some commentators (and indeed some of the Commission’s own non-merger enforcement activities) which have highlighted the potential for platforms to gain an unassailable advantage over competitors in relation to data. 

Concerns of data ‘tipping points’ were among the reasons why French and German competition authorities have published a joint paper on data and competition law. 

Germany has amended its domestic competition law to increase the legal tools available to prevent market dominance and abuses in relation to data. These changes will come in to force later this year and include: 

  1. controversially) amending the German merger thresholds to require notification of deals involving innovative companies (like start-ups) with a transaction value of EUR 400 million; and
  2. introducing specific criteria for reviewing market power in (digital) multi-sided markets, for example allowing the Bundeskartellamt (BKA) to consider: concentration tendencies; the role of big data; economies of scale; user behaviour; and the possibilities to switch a platform.
The additional merger threshold is intended to allow the BKA to review mergers in which the transaction value is high but the parties’ turnover in Germany is below the existing EUR 25 million threshold; for example, when Facebook’s acquisition of WhatsApp for USD 22 billion was not notifiable in Germany (although it was reviewed by the Commission). 

France and Germany’s robust approach to competition concerns in relation to data is in contrast with the less interventionist position in the UK. This is demonstrated by recent UK government report on digital platforms which found that, “In many sectors, e.g. search engines or social networks, firm behaviour and survey evidence suggests that in the event of even a modest hike in costs users would expect to find an alternative and cease using the service. It is difficult to reconcile this behaviour, and this finding, with the sense that there is an important “moat” which prevents users switching to alternative services over time. Any moat that does exist only seems to be enough to keep them in one place if the platform continues to be free and improve its service over time.

Given the moves towards ex ante regulation of data in France and Germany, and given the ex post investigation into Facebook/WhatsApp, it remains to be seen whether future merger investigations will take a similarly permissive approach.

Brexit: What it means for competition law Q&A

As the dust begins to settle on the momentous events that unfolded in the early hours of Friday 24 June, focus inevitably turns to the practical implications of what happens next.  Many articles have already been written on this subject and no doubt many more will follow.  The honest position today is that no-one can predict precisely what the long-term future holds for the UK because there is still no clarity as to which Brexit path will ultimately be chosen.  At this stage however, we can narrow the most likely options down to the following five:

  1. Leave the EU, but remain a member of the EEA (often referred to as the ‘Norwegian model’);
  2. Leave the EU, rejoin EFTA, but stay outside the EEA (often referred to as the ‘Swiss model’);
  3. Leave the EU, but join an EU customs union (often referred to as the ‘Turkish model’);
  4. Leave the EU, but negotiate individual trade terms (often referred to as the ‘Canadian model’); or
  5. Leave the EU and fall back on WTO trade terms.

Which of these routes prevails in the long-term will determine to what extent (if at all), the EU competition rules continue to apply in the UK.  Broadly speaking, Option 1 would result in no change to the status quo as regards competition law, whereas all the others would result in greater autonomy for a UK regime, potentially operating entirely separate from, but in parallel to, the EU regime.

However, the immediate consequence of the Prime Minister’s decision to resign, initiate a leadership election and to leave the decision as to when to invoke the EU’s timetable for exit under Article 50 to his successor, has given everyone a certain breathing space with which to survey the options.  Unspoken amongst these is the possibility that a UK general election will follow in the autumn, which could mean that all bets are off, including potentially even Brexit itself.

Q.   What is the immediate impact of the Brexit vote on UK competition law

A.   Nothing is likely to change at all in the short or medium term.  The prevailing national UK and EU competition regimes will remain in full force.

Q.   What about longer-term?

A.   Again, in practice, the short answer is likely to be that very little will change.  That is of course the case should the UK remain with the EEA.  Beyond that, the UK competition rules will remain in full force, operating in parallel to the EU regime.  Businesses with international operations will continue to be bound by EU rules as regards their trade within the EU.

Q.   Business relies on the legal certainty and guidance arising from the EU’s system of block exemptions.  What will happen to these assuming EU law no longer applies?

A.   The UK no longer has any national block exemptions, relying instead on the application of ‘parallel exemptions’ meaning that the EU block exemptions result in parallel exemptions from UK competition law prohibitions in addition to the EU prohibitions.  Assuming a total exit from the EU competition regime, these would no longer automatically apply and the UK would need to consider implementing new national exemptions.  Where the UK is no longer part of the single market, this could well have the result that certain limitations in the application of the block exemptions are removed (i.e. those dealing with territorial restrictions aimed at protecting parallel trade and the single market).

Q.   What happens to merger notifications?

A.   The UK’s existing merger control regime is likely to remain, although it is possible that in the longer term its voluntary nature may come under increasing pressure.  There are, however, likely to be two main effects arising directly from Brexit should EU law no longer apply in the UK.  First, there will be an increase in mergers being notified to the UK as it will no longer be possible to rely on the one-stop shop principle inherent in the EU merger regulation regime.  Mergers raising any substantive issues in the UK that would previously have fallen under the exclusive jurisdiction of Brussels will therefore require parallel notification in the UK.  Second, it is to be expected that there may be a fall in the number of mergers notified in Brussels because UK turnover will no longer count towards the EU jurisdictional criteria.  As one of the EU’s largest economies, the removal of UK turnover may therefore be expected to have a non-negligible impact.

Q.   What happens to UK competition litigation concerning EU infringements?

A.   In the short term, we see little or no change.  The doctrine of acquired rights will mean that the UK courts will continue to apply the law as it applied at the relevant time - for competition damages litigation, this will be the time of the infringement giving rise to the cause of action for damages.  In future, Brexit will have implications for the implementation of the Damages Directive dealing with follow-on actions – however, given that the deadline for implementation is 27 December 2016, it seems most likely that the UK will still be a full member of the EU and hence that this will be implemented.  As with all EU legislation given effect by national implementing legislation, the UK will need to consider whether and how to adopt and/or amend.  As regards follow-on damages, it remains to be seen how the UK legislature and courts will treat EU infringement decisions for the purposes of establishing liability.

Q.   What steps should business take now to ensure continued compliance?

A.   Understandably, businesses operating in the UK will be concerned to ensure not only that they remain fully compliant with whatever legal obligations arise as a result of Brexit but also that compliance costs can be kept to a minimum.  Pragmatically, and whatever the final outcome, the message today is one of ‘no change’.  The EU regime remains in full force for the foreseeable future and whatever the decisions that will be taken over the course of the next few months, it seems highly unlikely that substantive alterations will be made to the base rules of the game when it comes to competition compliance.

Read our previous article on Brexit here: Brexit – What next? A competition law perspective 

Sophie LawranceStephen SmithPat Treacy

Brexit – what next? A competition law perspective

Introduction

It is difficult to think of a UK statesman who did more for European unity or was more supportive of the idea of a union amongst the states of Europe than Winston Churchill and it is hence with some hesitation that we begin this article about the UK’s exit from the European Union with one of his many quotable soundbites:

"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning". 

Yet that is precisely the situation facing the UK after it woke up on 24 June to the reality that it had voted decisively in favour of leaving the European Union. This has left politicians, diplomats, business and lawyers wondering what this means in practice and what happens next. Of course the nature of the position is such that the greatest certainty today remains one of uncertainty as to what happens next – although the vote to leave was clear, there is no consensus whatsoever as to what happens next.

At one extreme, EU membership could be replaced by the UK joining the European Free Trade Association and the European Economic Area (alongside Norway, Iceland and Liechtenstein). From many perspectives, including as regards competition law, this would clearly be the most straightforward, giving rise as it would to the fewest changes. This would entail a continued financial contribution to the EU budget and requirement to sign up to free movement of persons in exchange for access to the single market. UK courts would in effect continue to be bound by EU legislation and by decisions of the European courts. So far so good, but politically it is difficult to see how this squares with a Brexit campaign that has focused so overtly on immigration and repatriation of UK funds away from Brussels.

At the other extreme, the UK could seek a total exit, falling back on World Trade Organisation (“WTO”) rules to continue trading with the EU, but without access to the single market. Under this outcome, EU law would simply become another overseas jurisdiction, persuasive, but no more to the UK authorities and the courts.

At this stage it is too early to say anything definitive on which direction might ultimately be pursued. However, now that we have moved beyond the hypothetical and the UK begins its journey into uncharted waters, there are some general points to be made whatever our final destination.

Of course most aspects of UK law will be affected to a certain extent, but competition law and policy is one area where integration is perhaps its deepest and hence forms the focus of this article. Patent law and particularly work towards creation of the Unified Patent Court is also deeply and directly affected and our thoughts on the Brexit implications for the UPC can be read here.

Merger Control

EU and EEA member states benefit from the ‘one-stop’ shop of the EU Merger Regulation, meaning that transactions that meet the jurisdictional criteria may be notified and assessed in Brussels to the exclusion of national regimes. If the UK joins the EEA, there will therefore be no practical change to the current system. However, a total exit would require companies to assess whether transactions need to be conditional on UK and EU merger clearances. Whilst the UK operates a voluntary notification regime, transactions giving rise to any substantive overlaps are routinely notified in advance in the interests of legal certainty.

A total exit may therefore be expected to give rise to duplication and increased costs as international transactions with a UK element fall to be reviewed under both the UK regime and in Brussels in parallel. There are also obvious resource and hence cost implications for the UK competition authority, costs which ultimately could be expected to be passed through to business.

Cartels and investigations

The main UK competition rules concerning anti-competitive agreements and abuse of dominance broadly mirror equivalent EU provisions. There is no obvious reason why the UK would choose to use a Brexit as an opportunity to undertake wholesale revision of the competition regime and hence we envisage very little in the way of practical implications as regards the implementation of UK competition law.

However, as with merger control, the biggest impact is most likely to be one of duplication – pan-European cartels and issues will probably face parallel investigations by the UK and EU competition authorities, potentially giving rise to increased fines.

State Aid and Public Procurement

If the UK were to join the EEA it would be required to comply with the EU rules on state aid and hence the position would be one of ‘no change’. However, in the event of a ‘total exit’, the UK would no longer be bound by the rules aimed at protecting the single market and the far looser rules under the WTO would apply (e.g. prohibitions on trade subsidies). Crucially, the WTO rules would not prevent the UK subsidising ‘national champions’ and hence could result in direct Government intervention to support businesses such as Tata Steel.

The situation in relation to public procurement is similar. Whilst EEA membership would bring with it a continued obligation to comply with EU rules, a total exit would leave the UK free to create its own national rules outside of the EU regime. In practice however, it seems inconceivable that any UK system would not result in similar obligations for the award of public contracts in the interests of transparency, value for money and non-discrimination as between bidders.

Competition Policy

It is to be expected that the UK competition authorities will cease to be full members of the European Competition Network upon exit, which in the absence of separate agreements will mean a reduced UK voice in the shaping and development of competition policy at an EU level and ultimately globally. Whilst that leaves the UK free to pursue its own policy objectives, this might result over the longer term in a gradual shift away from the existing alignment with EU law as the UK regime adapts to life outside the EU. At least initially, however, we would expect any practical impact to be limited.

Competition Litigation

The position is most uncertain as regards competition litigation, particularly enforcement of damages claims. The UK had sought to position itself as a leading jurisdiction for the private enforcement of EU competition rights (alongside Germany and the Netherlands). It is to be expected that once the UK has finally left the EU, EU Commission decisions and EU law will cease to have a binding effect on the UK courts and the UK courts would consequently cease to be such an attractive forum for claimants.

But that might not be the final word – the UK remains a large market with a well-respected judicial system. Given the similarities that exist and will likely persist in the substantive provisions, it is probable that EU infringement findings will remain highly persuasive to the UK courts and hence there might actually be an increase in cases pursued in parallel in the UK and an EU court. UK courts are also adept at resolving conflict of law issues and can be expected to apply the law as it stood when the infringement took place and/or when the right to sue accrued. Hence EU competition law may continue to be of relevance in the UK Courts for some time to come, whatever the outcome on the exit negotiations.

Conclusion

And so we are now at the end of the beginning of the UK’s exit from the European Union.All we can say with certainty today is that the UK electorate has delivered a clear, if far from unanimous, mandate to its government to start the process of extricating the UK from the EU. But the main message to businesses operating within the UK can also be summed up by a historic cliché:‘Keep calm and carry on’.

At a very practical level the present system is likely to persist for some time. Furthermore, most businesses will remain subject to the same general restrictions and obligations as they do today, albeit with a greater risk of duplication and/or parallel reviews. Watch this space as we move from the end of the beginning to a new chapter in the UK’s relationship with the EU.

Sophie LawranceStephen SmithPat Treacy

Keeping a weather eye on competition and innovation

Last week we updated our CLIP of the month to an article on the theme of innovation, as considered through the lens of competition law.  Pablo Ibanez Colomo’s article focuses on the identification of harm to innovation in competition cases (across the behavioural / merger spectrum).  He distinguishes between cases where such analysis has been just one factor among many (referred to as cases where innovation considerations have had an “indirect” role), and cases where "direct" harm to innovation is central.  

This academic contribution is timely, as innovation is now a topic at the forefront of debate in competition circles.  Last month, Commissioner Vestager gave a speech addressing this topic head-on, in particular in relation to digital markets - the trend of favouring disruptive innovation over repeat innovation by an ‘incumbent’ remains evident.  

DG Comp also focuses on innovation in its recently published Competition Merger Brief.  The brief notes how innovation concerns have been key in mergers relating to industries as diverse as gas turbines (GE/Alstom) and biosimilar medicines (Pfizer/Hospira).  The discussion of the Pfizer/Hospira merger decision (see p.12 of the Merger Brief) is likely to be of particular interest to readers of this blog, as it is the first case in which the Commission has engaged in detail with the markets for biological and biosimilar drugs, concluding that they belong in the same market, but observing considerable differences compared to the dynamic between originator and generic versions of small molecule medicines.  (And for those with a deeper interest in this area, Bristows’ own 2015 Biotech Review  carried an article (by two of the regular writers on this blog) looking at how innovation, in the form of competition between pipeline products, played a significant role in a couple of earlier mergers - see p.17.)

The current concern with innovation does not extend only to product innovation, but also encompasses changing business models - another subject which is a particularly hot topic at present - with the CMA’s Alex Chisholm having recently noted the fragility of such innovation, and the challenge of ensuring “an economic and regulatory environment in which new business models and consumer-friendly innovations can emerge and thrive”.  It was this concern that late last year led the CMA to reject proposals from Transport for London that would have curtailed the advances made by Uber on London’s taxi scene. 

We at the CLIP Board will continue to keep a weather eye on discussions of innovation and competition law - just click on the “innovation” tag on our home page to see more.