Competitor cooperation in the time of COVID-19: competition law suspended?

August 2020  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2020 Issue

Competition law generally prevents cooperation between competitors. There are some limited exceptions but on the whole the purpose of competition law is that competitors compete in the market and that this drives efficiency and consumer welfare.

Coronavirus (COVID-19) changed many markets: empty shelves in supermarkets, stockpiling toilet paper (who would have thought that?), perishable goods no longer needed in restaurants, bottlenecks in hospitals and, in the care sector, not just for personal protective equipment (PPE) but also for pharmaceuticals, ventilators and other devices. The urgent need to develop therapies and vaccines led a number of companies to seek to collaborate with their competitors.

To tackle these issues, particularly in the healthcare and grocery space, competition authorities and parliaments have been asked to allow for enhanced cooperation. By and large, authorities and lawmakers have responded positively by putting in place temporary measures allowing for some cooperation.

A core feature of these measures is that it is not a blanket permission. These are narrow exceptions. Competition authorities have warned that they will not permit COVID-19 to become a mantle justifying any cooperation which goes beyond what is strictly necessary and only for as long as it remains necessary. There are already several examples where competition authorities have intervened and issued warnings against practices that raised concerns.

For companies this creates risk, particularly where actions are investigated with hindsight in a few years’ time. How clear are they that cooperation was really necessary? If so, is it appropriately documented? Do the companies’ internal papers corroborate this?

Some cooperation allowed – but up to a point

There are two broad categories where competitor cooperation has become necessary: (i) dealing with supply bottlenecks in some areas; and (ii) dealing with significant overcapacity in other areas.

Cooperation to ensure supply of essential goods and services. Since the very start of the crisis, pharmaceutical and medical device companies have been under enormous pressure to respond to a sudden and high demand for new products, such as PPE, testing kits, drugs and ventilators.

A race to develop, test and ultimately mass produce a vaccine against and therapies for COVID-19 has also started, with very ambitious goals in terms of development and trial times.

Furthermore, a need to enhance delivery, including transport and logistic services, has become crucial to ensure supply of essential goods – particularly food and medicines – to the most vulnerable, but also generally to the wider population affected by lockdown and quarantine measures. Additional logistical hurdles were caused by additional intra-EU border controls and government imposed export bans.

On the 8 March 2020, the network of competition authorities of EU member states – the European Competition Network (ECN) – issued a joint statement announcing that its members will not actively intervene against temporary and necessary measures put in place in order to avoid a shortage of supply of essential products and equipment.

At EU level, the European Commission (EC) has set up a dedicated webpage with guidance for companies on the application of antitrust rules during the pandemic, including a dedicated mailbox that companies can use to seek informal guidance on specific initiatives. On 8 April 2020, the EC also published a ‘Temporary Framework Communication’ to provide some further guidelines to companies cooperating in response to issues caused by COVID-19.

The main principles set out by the EC guidance are listed below.

First, various forms of cooperation between competitors to bridge the gap between supply and demand during the COVID-19 outbreak would likely be permissible. While the focus is on critical medical goods and medical equipment used to test and treat COVID-19 patients, other essential goods and services outside the health sector are also covered.

Second, although sharing aggregate production, supply and capacity information for the purpose of identifying and tackling shortages may be necessary, safeguards should be put in place to limit as much as possible the flow of individualised data.

Third, any cooperation may be permissible only to the extent that it is objectively necessary to address supply issues, is temporary in nature, and does not go beyond what is strictly necessary.

Finally, to ensure prompt action and avoid the risk of a chilling effect, undertakings should be themselves responsible for self-assessing the legality of their agreements and practices. However, in an effort to provide a certain degree of legal certainty and bespoke guidance in relation to specific projects, the EC may now provide written guidance in the form of comfort letters. On 8 April 2020, the EC provided such comfort to Medicines for Europe by broadly green-lighting an extensive cooperation among pharmaceutical companies to adjust and reallocate production and stocks in order to address the risk of acute shortages in medicines used to treat COVID-19. We understand a number of other companies have been in a dialogue with the EC and other competition authorities in respect of their own cooperation projects.

At UK level, the Competition and Markets Authority (CMA) has similarly issued various communications as well as warnings to businesses. On 19 March it published statements in support of the government’s announcement to relax some of the competition rules to help supermarkets work together. At the same time, the CMA reminded businesses that exploiting the crisis as a ‘cover’ for non-essential collusion (e.g., by exchanging information not necessary to meet the needs of the current situation) would not be tolerated.

Immediately thereafter, an open letter to the pharmaceutical and food and drinks industry was issued to warn firms that they should not capitalise on the current situation by charging unjustifiably high prices for essential goods.

On 25 March, the CMA also issued formal guidance on business cooperation during the pandemic. While reassuring businesses that it will not take enforcement actions against temporary and necessary cooperation aimed at avoiding shortages or meeting supply needs of essential products and services, the CMA stressed that businesses do not have a ‘free pass’ to engage in anti-competitive conduct and exploit the crisis as a cover for non-essential collusion. Key parameters for the CMA’s approach to enforcement is the potential for the coordination to cause harm to consumers or to the wider economy, particularly where the collaboration involves coordination on pricing.

In addition, to ensure that compliance with competition law continues during the crisis, the CMA has set up a taskforce to identify potential harmful practices and has launched a dedicated online service to report allegedly unfair practices. We have found the CMA’s task force dynamic and responsive in their dialogue with companies. The mood music is that while the CMA is open to dialogue, it is not prepared to ‘rubber stamp’ business initiatives and it is closely watching market developments to monitor where action may be required.

The UK has also enacted ad hoc legislation which disapplies the UK competition regime in respect of some forms of cooperation among grocery-chain suppliers and among logistic service providers to mitigate grocery supply disruptions to consumers.

Finally, the CMA has been clear that it monitors price increases during the crisis and that it may apply its competition and consumer powers to anything it considers as amounting to ‘price gouging’. While these powers are not extensive, in some circumstances they can be applied with force and vigour.

Cooperation to tackle overcapacity. Another important consequence of the pandemic is the overcapacity created in certain sectors as a result of a drastic decrease in demand. In this context, the EC has allowed companies in the milk, flowers and potatoes sectors to collectively plan production and withdraw products from the market for a maximum duration of six months – in an effort to collectively stabilise the market.

Similarly, the CMA has allowed the dairy industry to adapt to decreased demand by sharing labour and facilities, as well as temporarily reduce production. Authorities are clearly responsive to industry issues and open to engage in a dialogue. As with supply bottlenecks, however, there is no carte blanche for companies to engage in coordinated capacity reductions or allocations and where there are any such issues a dialogue with the relevant authorities becomes essential.

Challenges moving ahead

In this time of uncertainty, companies are now left with the difficult task of making sure that the newly set and somewhat relaxed boundaries are not infringed. The developing practice by competition authorities will certainly help to shape, going forward, these boundaries.

In the meantime, there are many ways in which the gaps may be filled, including by applying the principles enshrined in the existing legal instruments – particularly the EU Treaty, as well as the EC’s guidelines on horizontal and vertical cooperation – and by making use of the newly created informal communication and notification channels set up by competition authorities to deal promptly and effectively with companies’ requests for guidance.

Companies should also bear in mind that, as it has happened in the context of past crises, in the aftermath of COVID-19 competition authorities are likely to increase their investigation activity both to ensure that, once the situation no longer requires so, normal parameters of competition are restored and that permitted cooperation never strayed into problematic areas of coordination.

For this it is important that the rationale and necessity of any cooperation is properly considered, appropriate advice is obtained and that all of it is appropriately documented at the time. In many instances, certain safeguarding measures need to be put in place, such as clean teams and firewalls. Where a company seeks a dialogue with authorities, these measures will, in many instances, need to be presented as part of such a dialogue.

John Schmidt is a partner and Ludovica Pizzetti is a senior associate at Arnold & Porter. Mr Schmidt can be contacted on +44 (0)20 7786 6255 or by email: john.schmidt@arnoldporter.com. Ms Pizzetti can be contacted on +44 (0)020 7786 2961 or by email: ludovica.pizzetti@arnoldporter.com.

© Financier Worldwide

BY

John Schmidt and Ludovica Pizzetti

Arnold & Porter

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