Covid-19 and cooperation between competitors: the European Commission and AGCM’s communications on emergency cooperation between competitors
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The Italian version of this article is available at this link.

On April 8, 2020, the European Commission (“Commission”) published a communication containing a temporary framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak (“European Communication”). At the same time, the Commission issued its first written comfort letter to an association of manufacturers of generic and non-generic medicines (Medicines for Europe) on the compatibility of a specific cooperation project that targets the risk of shortage of essential medicines for hospital use with the prohibition on anti-competitive agreements (Article 101 TFEU[1]).

At national level, on April 22, 2020, the Italian Competition Authority (Autorità Garante della Concorrenza e del Mercato, or “AGCM”) issued a similar communication (“Italian Communication”), applicable since April 24, 2020, on cooperation agreements in the context of the COVID-19 emergency, expressly referring to the European Communication and briefly recalling its content.

The impact of the new European Communication on companies operating locally in Italy

The European Communication is also important with regard to cooperation agreements between Italian companies operating exclusively at the local level, since Law 287/90 (Article 1) provides that AGCM must comply with the principles and guidelines of the Commission and the EU Courts even when it applies Italian competition law only. In principle, regardless of the reference made in the Italian Communication, the AGCM will have to follow the guidelines set out in the European Communication when assessing forms of cooperation between companies in purely local markets with no possible prejudice to cross-border commerce (such as for services or products for which competition exists only at the municipal or provincial level and supply from abroad is negligible), unless there are specific reasons justifying a deviation from those guidelines. Indeed, in the Italian Communication repeatedly refers to the European Communication.

Besides, the AGCM contributed to encouraging issuance of the European Communication. Prior to the Commission’s initiative, the AGCM co-sponsored a joint statement of the European Competition Network (ECN), published on March 23, 2020, which expresses the willingness of European competition authorities to help firms assessing the applicability of exemptions from the ban on anti-competitive agreements between competitors, where necessary to overcome problems of shortage of supply of essential goods and services caused by the epidemic, or to facilitate solutions to the emergency.[2]

The temporary framework’s criteria for cooperation between companies

The European Communication provides guidance to companies willing to cooperate temporarily to coordinate their activities in order to overcome emergency-related production or distribution shortages that hamper efforts to meet the demand for essential goods, such as (but not limited to) medicines urgently needed by hospitals. In this respect, the Commissioner in charge of competition policy, Margrethe Vestager, pointed out, “To avoid the risk of shortages of essential and scarce products and services because of the unprecedented surge in demand due to the pandemic, we need businesses to cooperate and do it in line with European Competition rules.”

In light of these considerations, the Commission has identified types of coordination in the health sector that could meet the needs dictated by the epidemiological crisis without raising antitrust concerns, if they are subject to enough safeguards. The types identified do not exhaustively cover the range of forms of collaboration worthy of exemption and may serve as guidance for other forms of cooperation.

First, the European Communication identifies forms of cooperation and exchanges of information between competitors that would likely be deemed non-restrictive or otherwise exempted even under normal circumstances. Nevertheless, in normal circumstances such activities would require at the minimum some investigation to verify the actual existence of the factual circumstances that justify the cooperation (e.g., a peak in demand and a shortage of supply), in addition to checking the safeguards set out in the European Communication. In an emergency situation such as the one we are experiencing, the European Communication clarifies, basically, that when it comes to ascertaining the compatibility of this first set of types of cooperation with antitrust rules, in-depth investigation of a peak in demand and shortage of supply in order to justify cooperation is redundant—it can simply be assumed that demand for essential goods is peaking and they are in short supply. Instead, these types of cooperation require appropriately verifying that the required safeguards have effectively been adopted by cooperating firms. For this purpose and to streamline assessment, the Commission recommends firms carry out these assessments in a transparent manner with the involvement and supervision of the Commission (or a national competition authority) rather than relying upon independent assessments by the firms without the involvement of authorities, as is the case in normal circumstances and is required by law.

These forms of collaboration, considered prima facie unproblematic if tied to certain safeguards, include agreements (including informal ones) between competitors in the supply of essential goods, if aimed at (i) coordinating joint transport for materials; (ii) helping to identify which essential medicines present risk of shortages based on production forecasts; (iii) providing aggregated information on production and the overall supply capacity of the undertakings concerned; (iv) working on a model to predict demand at Member State level and identify supply gaps; or (v) sharing aggregated information on supply shortages and asking the participating undertakings to indicate whether they are able to fill the supply gap to meet demand.

However, as mentioned above, in order for these agreements not to raise competition concerns, they must include the following safeguards and guarantee measures: (i) the management and execution of the cooperation agreement is entrusted to a trade association, an independent advisor, an independent service provider, or a public body; (ii) individual information and data provided by each undertaking must be aggregated by the third party entrusted with the task before being disclosed to competitors, to prevent reverse engineering capable of reattributing data to each firm.

Secondly, the Commission identifies forms of cooperation that under normal circumstances might easily be deemed restrictive and contrary to competition rules, but are likely to be exempted from the prohibition on restrictive practices (or deemed not to be an enforcement priority) because of the pandemic and the general impact it is having on the supply and demand for certain goods.

The Commission recognizes that, to promptly address the risk of shortages of key medical products as well as other essential goods and services, certain firms may need to reorganize production and exchange commercially sensitive information to avoid oversupply of certain items and undersupply of others. This may require likely competitors to coordinate their production output, as well as management of stock and its distribution. The European Communication provides criteria and appropriate safeguards to make such cooperation projects eligible for exemption, or at least to design them so they are not subject to enforcement action. In particular, the measures taken by firms must be: (i) designed and objectively necessary to actually increase output in the most efficient way to address or avoid a shortage of supply of essential products or services; (ii) not exceeding what is strictly necessary to achieve the objective in point (i); and (iii) temporary in nature, i.e., applied only as long as there is a risk of shortage (or at least during the COVID-19 outbreak).

The forms of cooperation in this second group are potentially more problematic forms of cooperation because of the tight coordination and high level of competitive sensitivity of the exchanges of information between competitors that they entail. Therefore, to minimize the risk of infringing antitrust rules, these types of cooperation require greater attention and more in-depth assessment by firms, as well as more extensive supervision by competition authorities, than the first types of cooperation described in the European Communication. In addition, the European Communication specifies that the fact that cooperation is encouraged and/or coordinated by a public authority, or carried out within a framework set up by the latter, is to be taken into account when asserting the legitimacy of such cooperation in an emergency context.

Comfort letters: An ad hoc tool to facilitate compliance assessment and feedback from the Commission

Under the EU and national antitrust regime, it is undertakings’ own responsibility to assess independently the lawfulness of agreements and practices from a competition law standpoint, while the Commission and the AGCM may intervene ex post by investigating and sanctioning the conduct if it raises competition concerns. There are law provisions at both the EU and national levels providing for the possibility that the Commission or the AGCM may expressly and formally confirm that a specific agreement is eligible for exemption, though it is not deemed mandatory for the authority to respond to firms’ requests to that end and indeed it almost never does. Sometimes, the Commission and the AGCM respond to informal requests for consultation by competitors on specific agreements of relevance to the general public interest or strategic economic sectors: in these cases the authorities may issue informal written confirmation or reassurances that such agreements are compatible with competition law (so-called “comfort letters”) on which companies can reasonably rely, though the content of such letters is not legally binding upon the authority.

In this respect, along with issuing temporary framework criteria, via the European Communication the Commission has expressed its willingness to engage in dialogue with undertakings and trade associations to help them assess the legality of their cooperation projects and to put in place the appropriate safeguards against anti-competitive effects in the longer term, without prejudice to their autonomous responsibility for the conduct in question. In particular, the Commission makes itself available to provide more tailored guidance by issuing individual comfort letters in relation to specific cooperation projects to be implemented rapidly in order to fight the epidemic effectively.

This type of procedure was used in a first instance in conjunction with the European Communication: the Commission issued a comfort letter to “Medicines for Europe” (formerly the “European Generics Medicines Association”) concerning a specific voluntary cooperation project between pharmaceutical producers, both members and non-members of the association, aimed at targeting the risk of shortage of critical hospital medicines for the treatment of coronavirus patients.

In addition, the Commission has set up dedicated channels,[3] including the e-mail address COMP-COVID-ANTITRUST@ec.europa.eu, which interested parties can use to request informal guidance from the Directorate-General for Competition (DG COMP) on the compliance of specific cooperation initiatives with EU competition law.

The AGCM communication on cooperation agreements and the COVID-19 emergency

In the Italian Communication, the AGCM acknowledges that the current circumstances require, on the one hand, the adoption of exceptional measures to avoid shortages of supplies – if they are necessary, temporary and proportionate – and, on the other hand, the issue of comfort letters (though on an exceptional and discretionary basis only). The objective of the Italian Communication is therefore same of the European Communication, and namely: (i) to outline the general criteria to assess cooperation projects and enforcement priorities in application of antitrust rules during the emergency; (ii) to introduce a transitory procedure to provide individual guidance to companies on specific projects. The Italian Communications reflects the same structure and content of the European Communication, to which it frequently refers.

The Italian Communication too states that The General or specific Directorates of the AGCM may, exceptionally and at their own discretion, express their view on individual projects submitted by competitors by means of comfort letters. To this end, the AGCM has also set up a dedicated e-mail channel: accordi-cooperazione-COVID@agcm.it. However, the Italian Communication clarifies that the AGCM will use comfort letters in connection to the application of Italian law only (i.e. Articles 2 and 4 of Law 287/90) and therefore it will not respond to consultations on agreements that significantly affect trade between Member States and which thus fall within the scope of Article 101 TFEU (despite that, by statute, the AGCM would have autonomous competence to apply EU competition law together with Italian law).

In the substance, the comparison between the Italian and the European communications reveal only minor differences. First, the AGCM explicitly mentions (in addition to healthcare) agri-food as one of the sectors that mostly require a temporary rethinking of the limitations to cooperation measures. This does not mean that the European Communication is not applicable to the agri-food sector, but clearly this sector is considered per se of essential strategic importance for the Italian ecosystem as is the healthcare sector. Second, the AGCM explicitly encourages firms to use the faculty to set maximum resale prices for their products in the agreements concluded with distributors, in order to limit unjustified price increases at the distribution level. This was however already allowed under general principles of EU competition law and does not constitute a COVID exception.

The European Communication’s relationship with existing cooperation guidelines

It may be worth noting that the Commission has already issued operational guidelines on the criteria for assessing applicability of the exemption under Article 101(3) TFEU to “horizontal” (i.e., between direct competitors) or “vertical” (i.e., between companies operating at different levels of the supply chain) agreements that may potentially restrict competition.[4] The European Communication does not change the criteria expressed in the existing guidelines, but instead complements and clarifies them with a view to facilitating their application in the current emergency and streamlining the decision-making and implementation processes. Hence, there is no derogation from the key principles and criteria for application of the exemption from the ban on anticompetitive agreements due to the emergency.

In particular, it continues to be a prerequisite for exemption that cooperation does not go beyond what is reasonably necessary to achieve efficiencies that (also) result in a net benefit to consumers, so that the overall benefits outweigh the likely negative effects on competition. This essential “test” is not considered to be passed if the same benefits that the proposed cooperation is designed to achieve can be achieved as effectively with measures that are less restrictive and pose less danger to competition.

Both the Commission and the national authorities, in their various written and oral communications on the subject, have stressed that forms of cooperation that do not meet these basic requirements will not be tolerated (but rather aggressively pursued). This might be the case where the cooperation mixes cooperative aspects necessary to overcome objective and serious emergency-related complications with measures that are disproportionate or unfit to that end. The sanctions provided for the violation of European and Italian antitrust law are very severe, as they are based on the percentage of revenues from sales affected by the agreement (which can be as high as 30%, unless the threshold of 10% of the undertaking’s overall turnover is exceeded). In addition, there is increasing attention from public prosecutors, which the crisis has only exacerbated, on investigating possible criminal aspects of the most serious forms of anti-competitive agreements (e.g., criminal conspiracy to manipulate prices of goods traded on stock markets, fraud, bid-rigging in public procurement, or private-sector bribery), especially where essential goods are involved.[5]

Cooperative practices that do not clearly meet the criteria indicated: A few examples

In clarifying the scope of the increased flexibility of competition rules, the Commission and the AGCM have stressed that the same exceptional circumstances that in some cases may suggest relaxing requisites for antitrust exemption, in others suggest even tighter and more stringent monitoring and enforcement to guard against practices that distort the proper functioning of the market, as it is all the more crucial at this time that businesses and consumers benefit from antitrust protection. Therefore, the Commission has encouraged businesses and citizens to report any anti-competitive agreements or abuses of a dominant position of which they are aware, thus reaffirming its commitment to closely and actively monitoring market developments in order to detect possible anti-competitive practices.

One form of cooperation that may appear to meet the criteria for exemption set out in the European and Italian communications but risks not meeting them is cooperation between competitors for products that are not deemed essential. Agreements that incorporate the requirements and safeguards set out in the European Communication but that concern recreational or entertainment products, or in any case products that are not essential to fighting the epidemic or meeting people’s basic needs, undoubtedly require serious investigation of all the specific circumstances of the cases and the foreseeable effects of the cooperation to assess lawfulness vis-à-vis Article 101 TFEU, even in instances where the emergency has undoubtably created more difficulties and higher costs associated with offering the products and services in question.

A type of cooperative conduct that might seem justified to some people at this time, but which should instead be carefully scrutinized, is activity between competitors aimed at increasing their negotiating strength in relation to mutual counterparties. Indeed, such cooperation risks meeting neither the criteria set out in the Italian and in the European Communications, nor those set out in existing guidelines, nor those developed by the common practices of the main European authorities. In several cases, the Commission and national competition authorities have investigated these types of arrangements and analyzed the various positive and negative antitrust aspects raised in connection to what is known as “countervailing power of demand.”

By way of example: to mitigate the damages of the epidemic crisis, suppliers or — vice versa — buyers of a certain item may wish to join forces (possibly with the help of trade associations) to obtain favorable changes to terms of delivery or payment schedules, or to other aspects of executing their commercial agreements with trading partners.

These “negotiating unions”, sometimes referred to as “crisis” or “defensive” cartels, were not considered worthy of exemption during the 2008 financial crisis and are unlikely to be seen as such in this emergency, except in very special cases. Indeed, unless necessary to counterbalance manifestly disproportionate and unfair conditions imposed by an operator with significant market power, such bargaining arrangements may prove not only unnecessary but also counterproductive, as they expose associations and firms to complaints and serious sanctions from the AGCM or the Commission.

[1] Treaty on the Functioning of the European Union.

[2] The topic of antitrust exemptions related to COVID-19 outbreak was addressed in general terms in our previous comment of March 18, 2020.

[3] Here is the DG COMP dedicated web page.

[4] The Commission’s general guidelines on individual exemptions and cooperation agreements are available on the DG COMP website at the following links: here, here, here, here.

[5] On the subject of the growing criminal relevance of cartels between companies, see our previous comments here and here.

Article filed under: COVID-19, Regulatory, Antitrust
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