The challenge of Covid-19 for competition authorities

Jonathan Watson, IBA Finance CorrespondentTuesday 22 September 2020

The Covid-19 pandemic has forced competition regulators to find new ways of working and thinking as they react to numerous challenges. Global Insight assesses how they’ve coped so far and how the competition landscape is shifting.

‘Competition authorities have a huge task ahead of them,’ says Lord Andrew Tyrie, Chair of the United Kingdom’s Competition and Markets Authority (CMA), in a recent discussion paper. ‘They will need to adapt and refocus their work in response to the reshaping of the economy that will occur as it recovers from the coronavirus recession.’

Lord Tyrie’s comments – published in the Institute for Public Policy Research’s July paper How Should Competition Policy React to Coronavirus – may be an understatement. This reshaping of the economy in many countries is likely to include fundamental, long-lasting changes to consumer behaviour, businesses, supply chains and the regulatory environment. Many of these changes may aggravate problems that competition authorities were already struggling with before the pandemic, including: rising market concentration, the growing power of digital platforms, protectionism, consumer vulnerability and an often-understandable loss of faith in markets among the public.

The first steps

‘As is well known, the Covid-19 pandemic has dramatically changed the needs and dynamics of the markets,’ says Leonor Cordovil, Conference Quality Officer for the IBA Antitrust Committee and a partner at Brazilian law firm Grinberg Cordovil. ‘For these reasons, many jurisdictions were quick to launch investigations (preliminary or followed by the initiation of a formal proceeding) to analyse price increases in sensitive markets.’

When the pandemic took hold in March, the CMA set up a Covid-19 taskforce to provide quick responses to the crisis’ immediate effects on consumers and competition. It soon received thousands of complaints, mainly to do with cancellations, refunds and unjustifiable price increases. The taskforce has been publishing regular analyses of the complaints and its responses.

It has also sent a large number of warning letters to traders about unjustifiable price rises. In June, the CMA launched investigations under Chapter II of the Competition Act 1998 (which prohibits abuse of a dominant position) into four pharmacies and convenience stores who were alleged to have charged excessive and unfair prices for hand sanitiser.

However, all four investigations were subsequently closed as the CMA found the retailers’ prices were unlikely to infringe competition law. ‘The CMA’s current legal powers are limited as it can only intervene when a dominant firm is abusing its market power by charging excessive prices – something that is notoriously hard to prove,’ says Anna Mitchell, a partner in Linklaters’ Global Competition Practice.

Competition regulators in many countries have sought to enable people to report bad behaviour. In New Zealand, the government established a whistleblower email address to enable people to report allegations of price gouging. The email address attracted almost 1,000 complaints in its first couple of days.

In Italy, the Italian Competition Authority sent a list of URLs containing links to websites identified as ‘abusive pharmacies’ to operators of internet search engines and web browsers, asking them not to index the URLs and to remove them from search results.

Authorities in other countries with more wide-reaching powers were quick to effect change to deal with price gouging. In South Africa, the government adopted regulations designed to strengthen the ability of competition authorities to tackle exploitative price hikes for essential products, such as basic food and consumer items, and medical and hygiene supplies.

The French Government issued a decree limiting not only the retail price of hand gels to the public, but also the wholesale price to third-party sellers. The aim was to ‘protect consumers against risks brought about by a clearly abnormal market situation,’ the French Ministry of the Economy and Finance said.

In Canadian and United States antitrust law, excessive pricing is not a violation, says Logan Breed, an antitrust partner at Hogan Lovells based in Washington, DC. However, it can be a violation of some more amorphous consumer protection-based US state or Canadian province laws. ‘The US federal antitrust agencies haven’t addressed any instances of Covid-19-related price increases as an antitrust issue,’ he told a recent webinar titled ‘Impact of Covid-19 on Antitrust and Competition Enforcement: a forward-looking global survey’ held in June and organised by the IBA Antitrust Section.

However, there have been some actions at federal level. In March, US President Donald Trump signed an executive order against the hoarding of designated items, for example.

When no public investigations were launched, antitrust authorities often chose to publish statements announcing that they were monitoring particular markets. In June, for example, the Australian Competition and Consumer Commission (ACCC) said it would be looking out for any early signs of damage to competition in the domestic airline industry that could harm the long-term interests of consumers.

The ACCC said its monitoring regime will ‘provide insight into whether an airline could be adding additional flights to a route in an attempt to damage a competitor or drive them off the route.’

Market cooperation

‘Another measure taken by antitrust authorities in several countries – through guidelines or public statements – was to try to delimit, albeit by way of example, what types of cooperation, in the pandemic scenario, could take place, for what purposes and to what extent,’ says Cordovil.

She adds that in a pandemic scenario, many forms of coordination that would not be acceptable in normal situations become not only possible, but necessary, especially when they are justified in the context of joint efforts to address the immediate needs of the pandemic. ‘This is especially true when it comes to joint efforts for the production or distribution of essential goods or directly linked to the health sector.’

In South Africa in March, in order to facilitate cooperation in the private healthcare sector, a block exemption was adopted permitting conduct that would otherwise be contrary to the Competition Act.

In Nigeria, regulators recognised the fact that collaboration between competitors could be possible, although they pledged to go through each case with a fine-tooth comb, says Alexis Apostolidis, IBA African Regional Forum Membership Officer and Head of the Competition Law Group at Adams & Adams in South Africa.

In April, regulators in the European Union issued their first ‘comfort letter’ in almost 20 years concerning a cooperation project designed to avoid shortages of critical hospital medicines.

Up until 2003, companies could notify the European Commission of a cooperation agreement with a view to receiving an individual exemption from the application of EU competition rules, provided certain conditions were satisfied, by way of a written ‘comfort letter’. Since the reform of the EU merger regime in 2003, this has not been possible, save in exceptional circumstances.

‘We would probably not have accepted this in normal times,’ commented Olivier Guersent, Director-General of the European Commission’s Directorate-General for Competition, in a video call organised by the American Bar Association in April.

‘In this case, there was a need to increase production by some 15 to 20 per cent,’ Guersent said. ‘That could only be achieved by specialising the various production units and that needed to be coordinated.’

The European Competition Network (ECN), which represents the Commission and Member States’ national competition authorities, issued a statement in late March on the application of competition law during the Covid-19 crisis. It said the ECN accepted that this ‘extraordinary situation may trigger the need for companies to cooperate in order to ensure the supply and fair distribution of scarce products to all consumers.’

The ECN stated it wouldn’t actively intervene against necessary and temporary measures put in place in order to avoid a shortage of supply, given the circumstances. It also said if companies had any doubts about the compatibility of their cooperation initiatives with EU/European Economic Area competition law, they should talk to the European Commission, the European Free Trade Association Surveillance Authority or the national competition authorities for informal guidance.

While cooperation between competitors has been accepted in many industry sectors during the pandemic, the overriding message is that competition law still prevails. Authorities have been keen to emphasise that the temporary measures should not pave the way for ongoing unlawful collusion.

‘Whilst the world has fundamentally changed as a result of the pandemic, ultimately authorities will resume dawn raids and other investigative procedures, and companies should not become complacent that the temporary frameworks will provide them with a security blanket alleviating them from the full force of the law,’ says Mitchell.

Apostolidis remains concerned that some companies that collaborate during the crisis may cross the line in terms of sharing important commercial and sensitive information. ‘They might see how their competitor does business, and they might do the same,’ he says. ‘When the time comes that they are no longer allowed to cooperate, have you put them in a position where they can continue collaborating?’

Preventing market concentration

There have been concerns that some companies could use the pandemic as an opportunity to increase market share by acquiring struggling rivals. In March, for example, the Open Markets Institute think tank called for a moratorium on M&A for the duration of the crisis.

‘In the long term, the main challenges to antitrust law will be all discussions related to market concentration, given that it is the main consequence of any crisis,’ says Cordovil. ‘For example, will the failing firm theory become more accepted by the authorities?’

The failing firm defence – where a company argues that the only alternative to a transaction being cleared by authorities is their bankruptcy – has been notoriously difficult to rely on in the past and is unlikely to provide a ‘golden ticket’ to clearance, says Mitchell. ‘Authorities including the CMA and the Federal Trade Commission (FTC) in the US have confirmed that they will continue to treat the defence with caution, and that compelling and substantiated evidence will need to be put forward for it to have a chance of succeeding.’

Ian Conner, Director of the Bureau of Competition at the FTC, issued a statement in April emphasising that US regulators would not be dropping their guard. ‘We will not suspend our usual rigorous approach to ferreting out anticompetitive harm and seeking appropriate relief, even in the face of uncertainty,’ he said.

‘It might be tempting, for example, for parties to urge us to relax the rules in a time of crisis,’ added Conner. ‘But we know what the likely long-term negative consequences of such a reactionary policy would be: fewer competitors, reduced innovation and higher prices.’

The FTC, according to Conner, will ‘continue to follow the facts, adjust to changing market conditions and master the many details that comprise a thorough antitrust review.’

This could be particularly relevant to the diligence that the government applies to potential buyers of divestiture assets in a situation that requires a remedy, says Breed. ‘As the agencies look into the divestiture buyers, one thing they’ll take into account is whether the crisis has had an impact on the divestiture buyers’ viability. If so, that could make it harder to get a divestiture buyer approved.’

The Canadian Competition Bureau (CCB) also intends to remain vigilant. In guidance issued in April on its process to assess a failing firm claim under the Competition Act, it appeared to signal that it would be ‘business as usual’, at least in terms of its substantive analysis of mergers. The guidance indicated that the CCB was not prepared to relax its analytical framework for reviewing mergers during the pandemic, even where a failing firm claim is asserted.

In Ireland, the failing firm (and division) defence is a possibility in the context of an otherwise anticompetitive acquisition under merger control, says Alan McCarthy, a partner in the EU, Competition & Procurement Group at Irish firm A&L Goodbody. However, the defence ‘is a challenging one to raise successfully,’ he says, and wasn’t used often in acquisitions that followed the financial crisis.

‘The key for the merging parties in using this defence is to ensure that they have sufficient evidence to provide to Irish competition authorities to demonstrate the target’s ailing position, and also the appropriateness from a merger control perspective of the buyer in seeking to acquire the target,’ McCarthy says.

Taking on ‘big tech’

One conclusion from the pandemic feels inescapable – big tech is going to keep getting bigger. The tech giants have been able to weather the crisis well, not only because they are largely unaffected by (and even benefit from) lockdown restrictions, but also because they have large cash reserves. Many of their smaller competitors were already struggling, and they seem likely either to exit the market or be acquired by big tech.

In addition, the inevitable increase in online retail, as people avoid going to shops, will be a huge boon for Amazon and other online retailers. Google and Facebook also stand to gain from this trend due to their importance in online advertising.

In many countries, there is a consensus that digital platforms should be subject to some form of procompetitive regulation. Can antitrust authorities rise to the challenge? In the UK, the CMA has been asked to lead a cross-regulator taskforce to advise the government on designing this regulation.

Then-EU Competition Commissioner Margrethe Vestager took on Apple over the tax breaks it received in Ireland, with the European Commission finding in 2016 that the Irish Government had given the company illegal state aid. Brussels regulators argued that Ireland had allowed Apple to attribute nearly all its EU earnings to an Irish head office that existed only on paper, thereby avoiding paying tax on revenues generated in the EU.

However, a decision by the General Court of the European Union in July 2020 struck a blow to the use of EU rules on state aid as a tool for regulators to question Member States’ tax rulings, after Apple appealed the 2016 decision. The Court decided that Apple should not have to pay Ireland €13bn in back taxes.

As this saga shows, taking on the tech giants can be difficult.

Executive Vice President of the European Commission, Margrethe Vestager, delivers a statement ahead of ‘European Competition Day’ at the German Economy Ministry in Berlin, Germany, 7 September 2020. Pool via REUTERS/Michael Sohn

Governments move towards interventionism and protectionism

Europe has been a lot quicker to wave through state subsidies, said Anna Morfey, IBA Antitrust Litigation Working Group Co-Chair and a partner at Hausfeld in London, during the June IBA Antitrust Section webinar.

‘When you’re looking at a [company] that’s in difficulty, state subsidies can be an alternative to being bought out by a competitor. That’s been an angle in Europe which has had an impact on how struggling companies have been dealing with the pandemic, especially in the airline sector, which has been particularly badly hit.’

In the foreign investment space, the crisis has added momentum to the already well-developed trend of increasing interventionism by national governments. This may add an extra brake to further market consolidation. ‘Recent reforms have been introduced in France, Germany, Italy, Spain and the UK, where lower procedural thresholds have been introduced to capture a wider range of investments by foreign companies,’ says Mitchell.

‘Several European countries have been taking a protectionist approach,’ adds Morfey. ‘That’s not new, but it’s certainly been stepped up in terms of keeping an eye on foreign investments in the M&A context.’

Germany’s foreign investment rules, for example, capture any transaction relating to critical infrastructure where as little as ten per cent of shares are being acquired. New rules in Italy have extended the scope of foreign investment review to 5G networks.

The European Commission has been broadly supportive of this approach. A new framework to screen foreign direct investments (FDI) coming into the EU will apply from mid-October. It provides for a cooperation mechanism between EU Member States and the European Commission in screening FDI from outside the EU on public security grounds.

Member States will ultimately make the decision on whether to permit a foreign investment, but the mechanism does mean that Brussels can request information from national authorities and issue non-binding opinions. Member States must give these opinions ‘due consideration’.

As the pandemic took hold in March, the Commission urged EU Member States to ‘make full use already now’ of these new FDI screening mechanisms ‘to take fully into account the risks to critical health infrastructures, supply of critical inputs and other critical sectors as envisaged in the EU legal framework.’ It also encouraged Member States to use other tools, such as imposing compulsory licences of prescription medicines or ‘golden shares’ to protect local companies from hostile takeovers.

While this approach may make sense in the current, unique environment, it is likely to have lasting effects, says Jay Modrall, a Brussels-based antitrust and competition partner with Norton Rose Fulbright. ‘The Commission is taking a more prominent role in FDI screening policy than was originally anticipated, and it will likely continue to do so when the crisis has passed,’ he says.

Modrall adds that Member States using tools like golden shares and compulsory licensing ‘may be tempted to maintain those tools to advance other EU and national industrial policy goals.’

In the US, ‘economic nationalism is definitely a hot political issue,’ says Breed. ‘However, it’s not clear that the Covid-19 crisis specifically has affected the foreign investment review process.’

The expansion of the Committee on Foreign Investment in the US jurisdiction, to review non-controlling, non-passive investments of any size in certain US businesses, was fully implemented by February 2020.

Investments by foreign persons in which a foreign government holds a ‘substantial interest’ (49 per cent or more) are now subject to a mandatory filing requirement if the target US business is a critical technology company, is involved in critical infrastructure or holds certain sensitive personal data.

This trend is not limited to Europe and the US. In Japan, the scope of review had already been widened before the pandemic to include IT and telecoms technology manufacturing, software development and infrastructure provision. In terms of the extent of involvement in the target company, the filing threshold has been lowered from shareholdings of ten per cent to one per cent.

In Australia, the monetary threshold which applies to foreign investment in the country has been reduced to zero, while Canada has enhanced scrutiny for foreign investments in public health, the supply of critical goods and services or those undertaken by state-owned enterprise investors in the wake of Covid-19.

All this reflects a radically altered merger environment in which political pressure to create national champions is mounting. ‘Governments are introducing new rules (or making greater use of existing frameworks) to protect strategic technologies and build national champions,’ says Thomas Janssens, Co-Chair of the IBA Antitrust Committee and Global Head of the Antitrust, Competition and Trade Group at Freshfields Bruckhaus Deringer. ‘The use of antitrust rules and foreign investment regimes to control cross-border deals will be a key trend to watch over the months and years to come.’

There was a public tussle in April over an attempted boardroom takeover of UK-based Imagination Technologies, a chip designer at the cutting edge of artificial intelligence and communications technology. The UK Government stepped in to delay a meeting that would have seen the appointment of four board members with links to China Reform Holdings, a $30bn Chinese government-controlled venture fund.

With this pressure in mind, competition authorities that review highly political mergers may feel more comfortable clearing deals with wide-ranging commitments rather than issuing prohibition decisions, the result of which could lead to ‘quasi-monopolies’. The European Commission, for example, is widely considered to have gone further than usual in clearing the acquisition of Poland’s largest gas group by its largest refiner in July, leading to the creation of a ‘quasi-monopoly’.

The pandemic has forced competition regulators to change not only their way of working but also their way of thinking, on cooperation, consolidation, state intervention and markets in general. As societies across the world brace themselves for a second wave of infections, the checklist of new regulatory challenges is likely to keep getting longer and longer.

Jonathan Watson is a journalist specialising in European business, legal and regulatory developments. He can be contacted at jonathan.watson@yahoo.co.uk