Complying with competition rules in a pandemic

Business is not currently operating in ‘normal’ times, and rules to ensure fair competition – usually strictly enforced by antitrust regulators and punished by potentially severe fines – are being eased. This has enabled key industry sectors to operate, but could result in some companies overstepping the mark, misinterpreting the boundaries, or simply trying their luck, as Neil Hodge explains.

Around the world, rules around competition law have been relaxed – but only in ‘limited circumstances’ and when it is ‘absolutely necessary’. In order to enable the supply of key medicines, healthcare equipment, foodstuffs and other urgent goods, antitrust regulators have allowed competitors to work together – albeit in very specific and limited ways. In some regions, such as the European Union, companies can even apply for ‘comfort letters’ to gain increased assurance from the regulator as to what practices may be allowable under these exceptional circumstances, and for how long.

In late March the European Competition Network (ECN), which brings together the European Commission and national competition authorities from across the EU, issued a joint statement in which it acknowledged that the Covid-19 crisis might require companies to temporarily cooperate to ensure the supply and fair distribution of scarce products. The ECN also made it clear that ‘it will not actively intervene against necessary and temporary measures put in place in order to avoid a shortage of supply’.

In early April the European Commission issued a ‘temporary framework’ which allows, for example, companies in the pharmaceutical sector to work together to identify essential medicines with risks of shortages and devise strategies to ensure continuity of supply. Sharing commercially sensitive information would also be permissible.

Most EU/European Economic Area countries have allowed temporary coordination between competitors to address the consequences of the crisis. The UK’s Competition and Markets Authority (CMA), for example, has stated that it will not enforce competition rules against ‘necessary cooperation between businesses to deal with the current crisis and ensure security of supplies of essential products and services.’ Some authorities have also shown leniency and flexibility with regards to penalties. For instance, in mid-March Portugal’s competition authority fined a hospital €155,000 for ‘gun-jumping’ but said that it would accept payment in instalments so that the hospital’s operations would not be negatively impacted during the Covid-19 outbreak.

However, lawyers warn companies against thinking that such arrangements are the ‘new normal’, or that a relaxation of the rules in one area means that closer cooperation in other areas of business has been tacitly allowed.

Samantha Mobley, Senior Vice-Chair of the IBA Antitrust Section and a partner at Baker & McKenzie, warns that these measures are purely there to provide relief only where necessary; must be strictly proportionate to address the immediate issues at hand; and must not be in place for longer than necessary.  

‘The measures in place to relax competition rules apply purely to specific industry sectors, specific circumstances, and for a very limited time period. They do not signify a relaxing of competition rules generally, nor a relaxation in enforcement and monitoring,’ says Mobley.

‘The measures in place to relax competition rules apply purely to specific industry sectors, specific circumstances, and for a very limited time period. They do not signify a relaxing of competition rules generally, nor a relaxation in enforcement and monitoring’

Samantha Mobley, Senior Vice-Chair of the IBA Antitrust Section

Other lawyers agree. ‘Beyond ensuring supply of essential goods and services, and even there within tight constraints, the rules around competition law continue to apply in the same way,’ says Matthew Hall, partner in competition law at McGuireWoods.

‘Companies need to be aware that even if EU governments do want to relax the rules to enable closer coordination between competitors, it does not mean that competition law ceases to apply to the arrangements they put in place,’ he adds.

Hall explains that although some statutory exemptions in specific areas have been put in place, companies can still be found to have breached competition law, even if the government has seemingly informally sanctioned them by encouraging closer cooperation.

Cartels offences also need to be considered if acting with other businesses, says Greg Walsh, commercial and regulatory barrister at law firm BLM. While the offence does have an element of dishonesty attached, he warns that ‘the basis of any arrangement should be carefully considered’ before progressing, even If acting together is for the benefit of the general public.

‘We’re living through unprecedented times, so it’s possible the enforcement of the rules could be relaxed,’ says Walsh. ‘However, care does need to be taken and advice should be sought before entering any arrangements which may fall into the competition regime, but it should also not be treated as a bar to action in the current climate,’ he says.

Guidance for in-house counsel

Experts believe that there are some key steps that companies – and their in-house counsel – should consider to make sure that any form of collaboration (however well-intentioned) does not violate competition rules. Daniel Swanson, Co-Chair of the IBA Antitrust Section and a partner at Gibson Dunn & Crutcher, says that before proceeding with any joint effort with a competitor, companies should identify a ‘legitimate objective’ for the collaboration.

From an antitrust perspective, he says, a legitimate objective is one that enhances efficiency or overcomes a market failure, or otherwise enhances competition – such as a group of companies developing a product that none of the participants could develop on their own – or that is competitively neutral (meaning that it neither enhances nor reduces competition, but serves some other goal).

Once companies have identified a legitimate objective, says Swanson, they should ensure that the activities they are collaborating on are strictly limited to achieving delivery of those aims. ‘This includes limiting the activities by scope, geography, duration, and any other factor that might have a potentially adverse impact on competition,’ he says.

‘Despite the fact that a regulator may not challenge practices that would otherwise not be allowable, it is still a good idea for in-house counsel to document appropriately the justifications for the practices’

Daniel Swanson, Co-Chair of the IBA Antitrust Section

Swanson also suggests that joint actions that are voluntary, non-exclusive, and limited in duration to the period necessary to achieve the legitimate objective ‘will go down better with antitrust regulators’. 

Swanson says that there is plenty of scope for in-house counsel to ensure compliance and best practice. For example, he says that any conversations with competitors regarding any potential collaboration (or otherwise) should follow an agenda that is prepared in advance and reviewed by counsel. Once the objective of the joint effort is achieved, or once the emergency circumstances necessitating the joint effort have abated, the joint effort should be discontinued. Any long-term joint efforts should be reviewed by counsel in advance, he says.

Similarly, warns Swanson, if a joint effort intended to be a short-term project extends for a longer term, in-house counsel should review the project on an ongoing basis to ensure that antitrust compliance is not compromised by changed circumstances.

Swanson says that, ‘despite the fact that a regulator may not challenge practices that would otherwise not be allowable, it is still a good idea for in-house counsel to document appropriately the justifications for the practices, including (if reasonably available in a given jurisdiction) a confirmation from the authority itself that the practices are permitted.’

Swanson also believes that in-house counsel should circulate notices internally to all personnel to confirm that existing antitrust and competition rules, protocols and guidance remain in place – despite the unusual situation – unless the company explicitly says otherwise.

Tackling price-gouging

Other potential competition infringements also need to be on companies’ radars, with an obvious one being price-gouging. There are always some companies that will take advantage of a crisis to make short-term financial gains, and the Covid-19 pandemic is no exception. Around the world, highly sought-after goods – everything from groceries, hygiene products, and home gym and keep-fit equipment – have experienced price-hikes as demand spiked.

Even before the country went into lockdown, the UK’s CMA issued a warning in early March to companies and online resellers not to inflate prices excessively to take advantage of increased demand for certain products as the pandemic took hold. In a statement, CMA Chair Lord Tyrie said: ‘We will do whatever we can to act against rip-offs and misleading claims, using any or all of our tools; and where we can’t act, we’ll advise government on further steps they could take, if necessary.’

However, while EU regulators may talk tough, Hall at McGuireWoods says that – in reality – it is very difficult for regulators to take action against practices such as price-gouging under EU competition law unless those companies involved are dominant players. ‘Companies that have a dominant position can be found to be abusing that position if they hike prices as demand spikes. Consequently, the Commission and national competition regulators can take action and can fine such companies and force them to desist from such behaviour,’ says Hall.

‘It is unclear what action – if any – the CMA and other EU regulators can consider under competition law against non-dominant companies that carry out [price-gouging] practices’

Matthew Hall, Partner at McGuireWoods

‘However, a company that does not have a dominant position can effectively price-gouge all it wants because, in effect, customers are supposed to have enough choice in the market to use another supplier if they want to,’ Hall adds. ‘It is unclear what action – if any – the CMA and other EU regulators can consider under competition law against non-dominant companies that carry out such practices, although in some cases national fair trading rules may be applicable.’

Other countries, such as the United States, do not have such restraints and can tackle price-gouging head-on against any alleged offender. In the US, individual states can also pursue their own complaints (as was seen in Louisiana, for example, following Hurricane Katrina, when the prices of even basic commodities skyrocketed).

The ECN has tried to offer a pragmatic solution by allowing manufacturers to set higher prices so that suppliers and distributors could not jack up the unit prices (much) further. In a statement, it said that while it ‘would not hesitate to take action against companies taking advantage of the current situation by cartelising or abusing their dominant position’, it added that ‘the existing rules allow manufacturers to set maximum prices for their products’ which ‘could prove useful to limit unjustified price increase at the distribution level.’ Whether such an approach has worked – or has simply led to manufacturers and suppliers getting rich quick – remains to be seen.

Dealing with rule breakers

Lawyers warn that companies that deliberately flout the law to attempt to gain market share are not only likely to face action from regulators, but also potentially legal action from competitors, class actions from consumers, and long-term damage to their brands and corporate reputations.

Abhijit Mukhopadhyay, Secretary of the IBA Corporate Counsel Forum and President (Legal) & General Counsel at Hinduja Group, says that infringements of competition law could be a problem once the Covid-19 pandemic subsides and the levels of cooperation between competitors becomes more obvious. ‘Currently, in-house legal, compliance teams and other functions within a company that normally monitor and look for possible competition infringements are unable to do so because site visits are prohibited or restricted,’ says Mukhopadhyay. That could change once the world returns to ‘normal’, he says.

Companies that have deliberately violated competition rules are also unlikely to recoup costs or damages from insurers. ‘Even where policy wording is sufficiently broad to allow for claims for regulatory investigations, it has long been a UK principle not to indemnify intentional wrongdoing,’ says Julian Hayes, a partner at BCL Solicitors.

EU Member States have taken a similarly harsh line. For example, Austria, Denmark, France, Italy and Luxembourg prohibit insurance for both criminal and administrative penalties, while Croatia, Greece, the Netherlands and Sweden make intention or malice the determining factor of insurability.

‘In periods where it is difficult to trade or where profit is hard to come by, there are inevitably instances of a small number of corporates or individuals being increasingly willing to stretch the interpretation of regulatory requirements’

Michael Ruck, Partner at TLT

‘Companies are still liable for compliance failures,’ says Hermès Marangos, a partner at Signature Litigation. ‘The virus emergency does not postpone or modify the law. There are no exemptions unless so provided by the legislation itself. Despite this, there are already individuals and entities trying to profiteer, behave unethically and contrary to laws and regulations in many instances.’

Experts also warn against assuming that penalties will be reduced because firms are under financial pressure. Michael Ruck, a partner at UK law firm TLT, says that although regulators are redeploying their resources during the response to Covid-19, resulting in a reduction in the number or progress of investigations, the top level amount of fines or penalties imposed will not be relaxed.

‘In periods where it is difficult to trade or where profit is hard to come by, there are inevitably instances of a small number of corporates or individuals being increasingly willing to stretch the interpretation of regulatory requirements – sometimes beyond their breaking point,’ warns Ruck. ‘A perceived relaxation of regulatory intervention may encourage such behaviour, but those that are tempted should beware.’

Mobley says that in-house lawyers should check with antitrust regulators if they have any concerns that their organisations may be non-compliant with competition rules. ‘If companies are in any doubt about what might be permissible, they should engage with the regulator – prior to any change in the way they intend to operate – to check what the boundaries might be,’ she says. ‘It is also important that in-house compliance functions provide notices to staff that the pandemic crisis does not mean that existing controls, protocols and best practices should be ignored or undermined: all laws still apply and regulators have years to review suspicious corporate practices and prosecute them,’ she adds.

Five key measures to ensure compliant collaboration

  • If any joint effort with a competitor is likely to have the effect of raising customer prices or decreasing supplier prices, reducing output, or reducing the quality of goods or services, companies should stop immediately and seek guidance from in-house counsel.
  • Companies should not discuss product pricing, pricing strategies, margins, the terms or conditions upon which they will deal with others, allocating suppliers, customers or markets, or the impact any particular action may have on pricing. Companies should also not exchange competitively sensitive information, such as current or future prices, costs, or output. If a discussion of these subjects is necessary to achieve the legitimate objective of the joint effort, companies should seek the guidance of counsel before proceeding.
  • Do not use the collaboration to discuss issues unrelated to the procompetitive objective, such as employee wages, layoffs, or hiring plans. This is an issue of particular importance in the US as the Antitrust Division of the Department of Justice and the Bureau of Competition of the Federal Trade Commission have made it clear that ‘COVID-19 does not provide a reason to tolerate anticompetitive conduct that harms workers’. Both have warned that they may criminally prosecute companies and individuals who enter into naked wage-fixing and no-poach agreements. The agencies may also use their civil enforcement authority to challenge unilateral anticompetitive conduct by employers that harms competition in a labour market (monopsony power).
  • It may be necessary and legitimate for participants in a collaboration to adopt a non-compete provision. If so, the provision should be limited in time and scope, and should not limit any participant’s ability to compete outside the scope of the collaboration.
  • Companies should seek guidance from in-house counsel if a joint effort could create a situation in which a supplier, customer, or competitor could claim that it is commercially disadvantaged as a result.