COVID-19 pandemic and competition law

With COVID-19 rapidly spreading in Europe and around the world, governments and businesses alike are taking action to mitigate the effects of the disease and to slow its progress. While the principles of competition law, in general, stay the same and companies should be careful to keep up their compliance efforts, we will also see some changes in the application of the law and a shift of focus of the competition authorities.

Among other things, the crisis may lead to forms of cooperation being lawful (within careful limitations and only for the duration of the crisis) which were previously considered taboo. As the crisis will likely lead to substantial upheavals in the economy, companies should be aware of the general impact of the pandemic, as well as the legal framework and options for cooperations and subsidies in order to get a legal edge withstanding the upcoming challenges. However, this relaxation of the rules will last only for as long as the crisis and it will be important to ensure that compliance with existing rules is reinstated as the crisis recedes.

General Impact

More and more governments are taking measures to fight the pandemic, with mere information notices turning to recommendations turning to outright prohibitions (as for instance lately seen for any large public events scheduled in Germany). By now the protection of the public health has in most nations overtaken economic interests as the main concern and especially the drastic measures taken in China and Italy may serve as an inspiration for other governments once the situation gets worse over there.

It is clear that virtually no industry will be left unaffected by the virus. However, some businesses will be hit harder than others, as they are facing with a potential shut-down of their entire industry. COVID-19 will most likely have the greatest effect on the travel industry (hotels, travel agencies, airlines, railway and coach carriers), the event industry (sports, fairs & exhibitions, concerts & shows) and on local leisure providers (bars, cinemas).

While more and more businesses are reducing their staff presence at offices and other places of business, some jobs may be more suitable than others for remote working. However, not all economic activity can easily be performed remotely.

It is conceivable that production shortages will eventually appear. Experts for instance already expect quite drastic delays in the supplies for the automotive and IT & telecommunications industry due to the prolonged shut-down of part providers and production facilities in China (and specifically Hubei province).

In order to estimate the effect of COVID-19 on your business, you should not only consider the immediate effects on your own work, but also on your suppliers and customers (and to the legally admissible extent your competitors). Some effects may also only come with a delayed onset.

State Aid

With these problems in mind, a lot of businesses will rely on public support to make it through these dire times. Although it is yet unclear how, to what extend and to which businesses subsidies will be granted, there is an apparent political consensus to protect businesses and individuals from the immediate economic effects of the crisis as best as possible. Not least, since this will be much cheaper and easier than cleaning up the shambles and dealing with the aftermath if whole industries should become bankrupted.

The European Commission has already signalled and showed that it will concentrate its efforts on approving appropriate state aid in the coming weeks and months. For example, last Thursday 12 March 2020 the European Commission approved the Danish compensation scheme for event organizers in record time, with a mere 24 hours between the notification by the Danish government and the Commission’s decision. The scheme is worth approximately EUR 12 million and aims at organizers of events with more than 1,000 participants which had to be cancelled or postponed due to the virus. Other governments and authorities are likely to follow suit.

In principle Article 107 (2) b) TFEU should allow for a wide range of subsidies to be granted in the wake of the pandemic, as it constitutes an exceptional occurrence comparable to a natural disaster. Meanwhile, any recipient should ensure that the proper procedures are maintained even in the crisis, since any incorrect payments will be subject to be reclaimed for many years to come.

Additionally, the Commission is currently consulting the member states on a draft proposal for a general temporary framework for the crisis related state aid based on Article 107(3)(b) TFEU. The new temporary framework is among other things supposed to address direct grants of up to EUR 500,000, state guarantees on bank loans as well as subsidised interest rates for public and private loans.

If your business is seriously affected by COVID-19 you should definitely review your options to receive public financial support. We expect a relaxation of the state aid rules during the crisis and will keep you updated on the further developments.

Merger Control

While most companies will be dealing with other issues at the moment anyway, the European Commission has asked businesses to withhold merger filings and plans at best until further notice. Similar statements by national competition authorities are expected to follow in the next few days and weeks as all authorities will be primarily dealing with other issues (i.e. state aid) and will likely also need get by with reduced staff.

However, companies and the authorities alike will eventually have to deal with the issue. The economic turmoil will in all likelihood lead to some companies going bust if no adequate state aid is provided. Either as a form of precaution or in order to deal with the fallout of such bankruptcies, companies will still want and need to merge their businesses. In all likelihood, it will also be the major companies and market incumbents (with substantial financial reserves) that will be most apt to weather the coming crisis. Quite a few markets may therefore inevitably see a further concentration in the coming months.

Some are already suggesting that the authorities should issue administrative measures, such group derogations, to allow for mergers in areas where no immediate or at least only positive effects on the markets are to be expected. Also, it should be noted that the existing law already provides for special treatment if a company involved in a potential merger is facing economic difficulties. However, at the moment there has been no change.

Of course, we will keep you up to date with the further developments and offer our advice in specific cases if necessary.

Cooperations and Market Intelligence

Due to the aforementioned issues, from a business perspective it is imperative at the moment to keep up to date with the developments in your respective market which also entails the status of other market participants.

That being said, COVID-19 will not miraculously disable the applicable Antitrust & Competition Law provisions. So far, the European Commission has maintained that an economic crisis in an industry will neither allow competition law infringements, nor will it be considered a substantially mitigating factor when determining sanctions, i.e. fines (see for instance the “zinc producer group” decision, 84/405/EEC and its decision on “electrical and mechanical carbon and graphite products” , 2004/420/EC). The European Court of Justice has also held that a crisis will in principle not lead to the elimination of the restrictive character of a conduct and that exemptions of the conduct under Art. 101 (3) TFEU may only be considered in limited circumstances if the conduct indeed evidently benefits the consumers (see “PVC” decision C-238/99). Companies should therefore still act carefully when it comes to the exchange of competitively sensitive information (CSI), especially when it concerns their competitors.

However, at the moment the long-term effects of COVID-19 on our society and the economy are still unclear. It may very well be that the crisis could last for a longer time period and lead to significant decrease of the demand in some of the affected industries. The companies operating on these markets may be faced with substantial over-capacities. In this case it might be permissible and even advisable to form a so-called crisis cartel. The aim (and legal extent) of a crisis cartel is the coordinated reduction of over-capacities to help maintain ample competition on the market while preserving its diversity. Such measures had been employed during the oil-price shocks in the beginning of the 1980s.

Moreover, while dedicated agreements and concerted practices of competitors regarding prices will remain illegal, the current situation may in some cases allow for agreements on market allocations or practices limiting sales per person in regard to scarce goods in order to maintain an adequate supply for the opposite market side and the general public.

If you need any advice on ideas about cooperation with other market participants, please don’t hesitate to reach out.

Fighting against Price Gouging

With consumers hoarding certain goods (e.g. face masks, toilet paper, sanitizers, pasta etc.) which are already hard to acquire in some places, some traders have started to demand excessive prices for the respective products.

Amazon and Ebay already took the initiative and barred certain dealers from the sales platforms who were selling such goods at astronomical prices or deceived customers about the quality and characteristics of their offers. Meanwhile, the Italian Competition Authority also launched an investigation into the unfair commercial practices in relation to the sale of hand sanitizers and disposable respiratory protection masks on these two platforms. After Amazon lately often being criticised for its practices as the dominant sales platform for consumer goods, this is certainly an interesting new development. Apart from excessive prices, the issue of tying may also arise. Just last month, the JFTC in Japan warned companies to force customers to buy other products along with face masks.

Summary

You should carefully consider how COVID-19 will affect your business and take the appropriate steps. For any questions on the above-mentioned potential competition law issues, please reach out to your usual Simmons & Simmons contact.