COVID-19 is wreaking havoc with the global economy, disrupting all manner of businesses, and is requiring unprecedented measures and coordinated action. Many companies are suffering due to interrupted supply chains and reduced customer demand and will face significant losses and cash flow issues as a result. Others will face an unusually high demand for their products, which will tempt them to increase prices as they adapt to these new conditions.
Coordinating with competitors may be, or may appear to be, an efficient way to respond to some of those challenges, but companies must be mindful of the competition law parameters for such coordination. Similarly, government intervention will impact the way in which businesses behave, through explicit mandates (e.g., to stop certain activities, or curb prices) or with government encouraging and stewarding industry solutions; therefore, companies should be aware of their rights and obligations when coordinating with public authorities.
In such an exceptional and fast-moving environment, where emergency actions take priority and resources are under pressure in many organisations, you may wonder if you should also worry about your competition law risks. It is well known that the risk of competition law infringements increases during times of economic volatility. It is therefore pivotal that businesses keep the following in mind during this crisis:
- Competition law applies to you, even during a global crisis.
- Collaboration with competitors, however well-intentioned, entails competition law risks and should always be legally vetted.
- Aligning with government goals or acting in the common interest does not automatically shield you from competition law risks.
- Abusive behaviour will likely attract enforcement action, as well as civil claims and reputational damage, and possibly direct regulation. Companies in a position of market power, even if temporary, need to be alert to their special responsibilities.
- If you require subsidies or other support from governments, ensure that it is properly structured and permissible.
This alert aims to put antitrust compliance into perspective, so you can focus on what matters most.
Is competition law enforcement an issue in the current situation?
Although competition enforcement authorities generally recognise the importance of collaborative efforts to develop crises responses, they also closely scrutinize activities (perceived or otherwise) that exploit consumers’ vulnerabilities that are caused by the outbreak. Even if the authorities are ultimately unsuccessful in their cases, the mere allegation of exploitative behaviour in the face of adversity is likely to have a significant reputational impact on businesses.
Recent statements from US Attorney General William P. Barr confirm the point that antitrust enforcement remains a priority during the COVID-19 crisis: “The Department of Justice stands ready to make sure that bad actors do not take advantage of emergency response efforts, healthcare providers, or the American people during this crucial time. I am committed to ensuring that the department’s resources are available to combat any wrongdoing and protect the public”.1 Statements from the Department of Justice’s Antitrust Division, too, indicate that it will “hold accountable anyone who violates the antitrust laws of the United States in connection with the manufacturing, distribution, or sale of public health products such as face masks, respirators, and diagnostics”.2 It does not escape the authorities’ attention that cartels are more likely in times of economic trouble, because struggling businesses may perceive some form of cooperation with competitors as the only viable option.
We continue to monitor the situation for newly-perceived issues and encourage companies to seek specific legal advice if in doubt about actions, especially those involving close cooperation with competitors.
Joint research activities and competition laws are not in contradiction
Finding a vaccine and appropriate treatments for COVID-19 is a top priority for the public health community and governments across the world. As part of these efforts, governments have enlisted the assistance of private companies to collectively spearhead these endeavours. If you are a pharmaceutical company or medical supplier involved in COVID-19-related research, you may be seeking to join such efforts, including those involving your competitors, to accelerate the search for solutions.
While these efforts are critical to advancing public health, competition law nonetheless limits the extent to which competitors can lawfully engage in joint R&D activities – particularly to the extent that these activities relate to products that may be considered outside the scope of crises response efforts. For instance, R&D agreements may fall foul of competition rules:
- where collaboration agreements suppress the possibility for the companies involved to commercialise the results of the joint research independently; or
- where the joint research replaces the R&D efforts of companies that would have been competing to develop more innovative products otherwise.
To the extent that companies engage in R&D collaborations with respect to treating and developing vaccinations for COVID-19, it would be prudent for companies to structure their joint R&D arrangements to address potential competition law concerns, especially if they are seeking to engage in joint commercialisation of the results. This may include safeguards such as firewalls and limitations on the exchange of competitively sensitive information on any matter beyond what is strictly necessary for the narrow objective of the collaboration.
Given the exceptional nature of the circumstances, some states have legislated to provide exemptions from applicable antitrust laws during certain arrangements, e.g. in the US,3 to strengthen the country’s ability to respond to a range of public health emergencies; however, these exemptions may be limited and subject to certain conditions which will need to be observed carefully. Therefore, even when laws and regulations permit limited joint research activities or coordinated emergency responses, care must be taken to institute legal measures that prevent pandemic and epidemic response efforts from being used in ways that violate competition laws.
Coordinated crisis responses: a fine dividing line
Businesses in a number of industries may feel the need, whether at the behest of governments or otherwise, to consider competitor collaborations in developing responses to COVID-19. For instance:
- food and medicine suppliers might consider joint logistics and distribution to address bottlenecks in supply chains, so as to ensure security of supply of key inputs;
- travel and accommodation service providers (the leisure and hospitality sector generally, as well as many other goods and services providers) might consider coordinating policies on the cancellation of some services, or the conditions for reimbursement to customers;
- manufacturers of key medical equipment might consider collaborating with others, including competitors (e.g., through JVs), to maximise the supply of hospital and other emergency equipment; and
- insurers might wish to align their responses to claims under existing policies, or the terms and conditions of new policies.
While these efforts can be critical to advancing public health and minimizing the economic impact of the outbreak, it is important for companies to recognize the antitrust risk surrounding discussions between parties operating in the same market, however well intentioned. In particular, sharing competitively sensitive information or using discussions as an opportunity to set prices, restrict output, divide customers or markets, or coordinate on commercial strategy remains high risk. By contrast, collaborations around voluntary technical standards or developing responses to address novel issues with the COVID-19 outbreak would not raise the kinds of anti-competitive concerns that would surround more general efforts to coordinate on industry pricing and output for critical products.
Under EU rules, organisations found to have engaged in anti-competitive behaviour can be fined heavily, up to 10% of their global turnover, and be exposed to claims for damages from customers and competitors as well as suffer considerable reputational harm. Similar – sometimes more severe – sanctions may be imposed under the competition laws of other countries. These may not only impinge upon the companies colluding or coordinating unlawfully, but also on the facilitators of such coordination, such as consultants arbitrating and steering industry action. A sense of “crisis” does not, in and of itself, justify anti-competitive collaboration. For example, in 2017, the European Commission fined eleven airlines a total of €776.5m for fixing fuel and security charges on flights. The airlines sought justification in the uncertainty that ensued the 9/11 attacks, but the European Commission did not accept such pretext.
It is therefore important to remember that even in cases of crises response, safeguards and compliance policies should be in place to help ensure efforts are successful while simultaneously limiting potential antitrust exposure that could arise. Where cooperation leads to the creation of new corporate structures, merger filings may be required.
Government encouragement does not “shield” companies from challenges
Governments may be prompting, encouraging, cajoling or incentivising businesses to pursue certain policies or initiatives to assist with the crisis. For instance, they could suggest that businesses agree on fair compensations for cancelled services so that all consumers are treated equally, they might invite businesses to share competitively sensitive information on prices or capacity in connection with essential goods, or they might encourage businesses to develop plans for joint distribution of products to ensure security of supply.
Generally, companies are permitted to collaborate in joint advocacy efforts surrounding policy goals before officials at any level of government. Likewise, it is generally legitimate for companies to participate in meetings with governmental officials, including the formation of public-private partnerships to create effective crises responses.
Parties should nonetheless beware of potential competition law risks that may arise in the circumstances described above. Risks may arise when competitors meet to discuss industry responses that go beyond legitimate joint lobbying efforts or coordinate on competitively sensitive commercial activities without meaningful direction and supervision from federal, state or local officials. In some jurisdictions, such as the European Union, government intervention will only generally translate into a viable defence in circumstances where the otherwise anti-competitive conduct is required by legislation, or if legislation has been imposed that creates a legal framework which eliminates all possibility of independent competitive activity; mere government encouragement or advice will not serve as a defence. For example, in the 2017 air cargo cartel case, a number of airlines unsuccessfully sought to rely on steps taken by the Hong Kong Civil Aviation Department to encourage coordination on fuel surcharges amongst airlines. Since these steps did not have the force of legislation, they did not amount to state compulsion, meaning that this defence failed. Similarly, in this cartel case, the Australian High Court rejected arguments raised by certain airlines that their conduct was compelled by foreign regulations.
If you are in doubt as to whether exchanging information or coordinating certain activities or behaviour with your competitors is permitted, you should seek legal advice immediately.
Exploiting market power could lead to heavy fines and price controls
There has been an increase in demand for certain products, such as anti-epidemic products (face masks, hand sanitiser, hand soap, etc.) and basic goods that households stockpile in anticipation of quarantining and social distancing measures. That increased demand has already led to some shortages in warehouses, shops, and pharmacies.
Businesses selling scarce products may seek to capitalise on the tight supply-demand balance by increasing prices, or by imposing the purchase of non-essential products together with high demand products (so-called “bundling”). Competition authorities and regulators worldwide have expressed their concerns and some have begun to take steps to penalise behaviour where it is considered abusive. For example:
- China’s State Administration for Market Regulation fined a store in Beijing $434,530 for hiking the price of face masks up by more than six times the online rate;
- Korea’s Fair Trade Commission raided pharmaceutical companies and consumer-goods sellers on suspicions that they bundled face masks with other products;
- Italy’s antitrust regulator is investigating various e-commerce platform providers on whether alleged high prices and misleading claims for health products on the companies’ platforms breached the law;
- Authorities in the United Kingdom and France have each expressed that they will step in to penalise any illegal exploitative practices and may even invoke direct price regulation; and
- In the United States, the Federal Trade Commission and the Food and Drug Administration have jointly issued warnings to several companies alleged to be making unauthorized claims about the efficacy of certain products for preventing or treating COVID-19.
Such measures are not new, and authorities have reacted in similar ways in previous crises. For example, in the aftermath of Hurricane Katrina, the US Federal Trade Commission investigated post-Katrina gasoline price manipulation and gasoline price increases. The Federal Trade Commission’s report on its investigation cited numerous instances of possible price gouging by refiners, wholesalers and retailers.
The circumstances in which price increases and bundling may be legitimate requires a careful assessment of the specific market and company circumstances in each case. For example, under EU rules, competition authorities could question these unilateral practices under competition law if the seller holds a position of market power, which entails a “special responsibility” towards its customers and the market. Yet, competition authorities may take an aggressive view on what constitutes market power, in circumstances where customers simply cannot turn to alternative suppliers. This may include defining narrow geographic and temporary markets, in light of the impact of the public health restrictions on the conditions of demand and supply.
Some countries may apply stricter standards (including those set in consumer protection laws) or could ultimately regulate the prices of certain products. A majority of U.S. states have price gouging laws (e.g., prohibiting “unconscionably excessive prices” being charged for necessary goods and services), many of which are automatically triggered when the state government declares a state of emergency. For example, the New York State Office of the Attorney General has already issued letters to merchants in New York City demanding that they “cease and desist charging customers excessive prices for hand sanitizers and disinfectant sprays”.4
Crisis support in the EU: beware of governments bearing gifts… they may not be yours to keep!
Many organisations will be facing severe business disruption and/or liquidity problems as the COVID-19 spreads, supply chains are interrupted, workforce is quarantined, and customers cancel orders.
Governments across the world have indicated that they will assist struggling businesses through these difficult times. The European Commission has acknowledged the exceptional nature of the situation and has already approved a Danish State aid measure of €12 million to compensate the organisations of large scale-events that were cancelled due to COVID-19.
One is reminded of the Commission’s flexibility during the financial crisis, so we may see this approach being repeated. On March 13, 2020, European Union Competition Commissioner Margrethe Vestager said that her department had put in place all the procedures needed to deal with new State aid very quickly. The Commission has also set up a special “hotline” to assist governments, committed to share models of acceptable aid programs, and is working on a wider framework for crisis-related aid, which could resemble the one put in place during the financial crisis. In a similar vein, the EFTA Surveillance Authority has created a task force to help authorities in Iceland, Liechtenstein and Norway deal with queries related to COVID-19, particularly on State aid matters.
That being said, this does not relieve European Union countries from having to obtain Commission approval for their crisis aid in circumstances where there is no specific “block exemption” that covers their support (and while there was such an exemption for aid to the real economy during the financial crisis this remained limited).
But where such aid is not approved or exempt, it remains prohibited and businesses must understand that it may be recovered with compounded interest, for example, if challenged in national courts or as a result of a complaint to the Commission by a competitor whose Member State does not provide comparable crisis measures. Therefore, businesses should confirm in each instance that any form of support is appropriately structured and lawful under State aid rules.
Expect disruptions in ongoing dealings with antitrust authorities
Finally, in places where containment measures are being taken to reduce the spread of the virus, government authorities (including antitrust agencies) may not be available for business, or their capacity may be limited. This has already happened in China where the competition regulator is limiting face-to-face meetings and in the European Union, where staff in “non-critical” roles are now working from home. And in the U.S., most of the federal competition regulators are already or expected to shortly be working remotely. This may create practical hurdles when it comes to liaising with authorities in relation to ongoing competition law files (e.g., merger filings, or competition investigations). In addition, some authorities may decide to focus their resources on addressing pressing demands stemming from the COVID-19 situation (such as the European Commission in the area of State aid).
Businesses should seek clear advice from authorities on whether any contingency plans have been established in the event of further spread of the virus and how this may impact their case files.
Key takeaway: stay vigilant of competition law risks
We are operating in extraordinary times and businesses are doing their best to adapt to the challenges presented by the COVID-19 pandemic. They should also stay vigilant and avoid falling foul of competition rules. Competition authorities and governments have already stepped in to curb behaviour that they considered abusive. Competition bears particular relevance where competitors cooperate (to confront the disease or its economic consequences), where a business finds itself in a position of market power, and where companies require government support to cope through the downturn.
The unique challenges described above reinforce the always present need for a robust corporate compliance program that is not only tailored to a business’s specific risks, but that is capable of adapting to emerging and indeed unprecedented risks. As competition authorities around the world continue to deepen their focus on and engagement with corporate compliance programs, companies must continually evaluate and adapt their programs and controls with the same goals in mind—even when facing a challenging economic environment.
3 The Pandemic and All Hazards Preparedness and Advancing Innovation Act 2019 was enacted in the US and includes a limited exemption from certain antitrust laws for meetings held by the Secretary of Health and Human Services with “persons involved in the development, manufacture, distribution, purchase, or storage” of certain defined countermeasures or products. The exemption is subject to certain conditions and is limited to “covered activities,” that specifically excludes a range of anticompetitive conduct: https://www.congress.gov/116/plaws/publ22/PLAW-116publ22.pdf.