All of this might have been best encapsulated by Andreas Mundt, president of Germany’s Federal Cartel Office, who has insisted that despite his agency’s divergence from its European peers when deciding that certain vertical restraints by Booking.com were unacceptable, there is more that unites the continent’s competition authorities than divides them:
“Focus on the convergence rather than the divergence.”
More than a decade since the European Commission began to decentralize its competition enforcement, national authorities are reaching different outcomes in cases with the same facts and the same points of law – most notably in vertical restrictions and most-favored nation clauses, or MFNs (for an excellent guide to MFNs I highly recommend a piece from Cleary Gottlieb partner Francisco Enrique González-Díaz which you can access here). These disparities are significant because 87 per cent of EU competition law decisions since 2004 have been made by national authorities rather than the commission (hat tip to my researcher Andreas Hania for troving Eur-lex for that number).
The European Commission wants to create a single European market for all goods and services. It began with coal and steel in the aftermath of World War II, and now extends to almost everything, including hotel reservations. To create a truly unified single market and a level playing field, the law need to apply to all countries and be enforced in the same way.
Across the European Union, laws regarding competition as described in the Treaty on the Functioning of the European Union are enforced by 29 separate competition authorities: one for each member state of the European Union, and the commission itself through its Directorate-General for Competition.
The commission must ensure that national competition authorities (NCAs) interpret these laws in the same way, while working to put more power in the NCAs’ hands. In December 2002, it introduced Regulation 1/2003 to grant authorities the power to directly enforce EU law on their own, greatly expanding the reach of EU law and helping to normalize enforcement across the continent.
Now DG Comp wants to refresh this relationship and correct some divergence in enforcement over issues such as vertical restraints – the online hotel booking case being the most recent example. This coincides with worrying instances of local government interference in several national authorities and stretched public resources as Europe struggles to break out of the economic stagnation that has dogged it since the financial crisis.
Regulation 1/2003
Back in the 1990s, DG Comp dominated competition enforcement in the European Union. Between 1998 and 2003, the commission adopted 259 formal decisions. But with such a heavily centralized system, it struggled to prioritize cases and balance its workload.
The commission wanted to share some of this weight and to empower NCAs to take on their own cases, without them having to bother the commission for every notification of a vertical agreement in any jurisdiction in Europe. From 2004 to 2015, the commission has taken 128 competition decisions; national authorities have made 865 decisions under EU law in the same period.
And now many EU competition law analysts say the NCAs are now more active than the commission, that EU competition law is essentially enforced at the member state level.
The Global Competition Review (GCR) EU competition summit featured the “A List” of EU competition lawyers, one of who was Ali Nikpay, a partner at Gibson Dunn in London who previously worked as a senior official at the UK’s former competition enforcer, the Office of Fair Trading, and at the European Commission. He was heavily involved in drafting what became Regulation 1/2003. In the GCR a wrap-up of the conference event (a paid subscription otherwise I would link to it) Nikpay made the following points:
1. The system wasn’t working. It focused on the wrong things, was too centralized and too interventionist.
2. To reverse this trend, the regulation included a mechanism that granted authorities the power to directly enforce EU competition law. Now Germany’s Federal Cartel Office can fine a company not only for violating domestic law, but also for infringing articles 101 and 102 of the Treaty of the Functioning of the European Union regarding cartel activity and territorial constraints.
3. Regulation 1/2003 has allowed DG Comp to prioritize the use of its own resources, and along with new leniency guidelines, gave national authorities the tools they needed to pursue their own cases. This increased overall enforcement, particularly against cartels.
4. There has been a massive ramp-up of cartel investigations. If we agree that cartels are the main evil of competition law, then Regulation 1/2003 has been hugely successful.
NOTE TO MY E-DISCOVERY READERS: companies increasingly use e-discovery providers to carry out internal investigations as soon as the DG Comp or a national competition authority has carried out a sector enquiry – sometimes in an upstream or downstream market – in a sector where the company in question directly or indirectly operates. In other cases companies have a suspicion that anti-competitive behavior might be taking place in one of their subsidiaries. These internal investigations would typically include the collection, review and analysis of data (mostly emails and file attachments) from company devices or even personal devices used for corporate purposes following the ‘bring your own device’ policies that an ever increasing number of companies implement. Just scanning our e-discovery job posting service, there are at least 8 such reviews going on now across the EU.
But as Nikpay and others have noted, gaps remain. For example:
1. cartel enforcement still varies from location to location; only 18 of the 28 member states have criminal sanction for competition violations.
2. administrative penalties vary as well, because there is still no uniform method to calculate fines. Slovakia looks only at domestic revenue, while Romania can impose fines based on international turnover. A simulated case run last year by the European Competition Network found a 1-to-25 differential between the lowest and the highest fines issued for the same violation.
My favorite … the nuclear option!
As I have noted several times before, it’s the digital economy, stupid. As the digital economy grows, enforcement of vertical deals between companies is growing along with it. The Booking.com case is an example (Google another, and the Facebook investigations are leaning in that direction).
In 2013, Germany’s Federal Cartel Office – along with competition authorities in Austria, France, Hungary, Italy, Sweden, Switzerland and the UK – launched an investigation into restrictive practices by Booking.com. The hotel reservation website had a “most-favored nation” clause in its contracts with hotels, which had to guarantee Booking.com their best rates on all rooms. A hotel that agreed to use the company’s platform could not advertise a lower rate elsewhere online – not even on its own website.
The following year, Booking.com offered the authorities behavioral commitments that would allow hotels to offer cheaper rates to rival platforms, but still not on their own websites. Otherwise, the company argued, customers could free-ride: using Booking.com as a search tool and then booking a room directly on the hotel’s website at a discount, leaving Booking.com without a commission for a sale it helped to instigate.
All authorities except one accepted the commitments. Germany found the remaining limitation on hotels still violated competition law – a decision that Booking.com is currently appealing in the German courts.
Richard Whish QC at King’s College London described the diverging results in the best possible way. It was a “dog’s breakfast”. Despite simultaneous investigations by several national authorities, the commission declined to intervene even as the national authorities reached different conclusions.
Sooooooo … practitioners are saying “It is high time the Commission takes a leading role in such investigations!!” And DG Comp does have the power to do so under Regulation 1/2003; once the commission has opened an investigation, the NCAs must stop theirs. And the commission is allowed to take cases away from national authorities under article 11 of the regulation, something described as the “nuclear option”. When the regulation was written, this power was regarded as something the commission could threaten to use but probably would not use because it would be humiliating for the national authority. But it is a power that makes sense if you want uniformity. There is an impression that in some fields there is no common EU policy and verticals is a good example of that.
A report commissioned by the UK’s Competition and Markets Authority which was released in April said the importance of vertical relationships to companies has increased since the rise of the digital economy, and will continue to grow in importance as that sector develops:
“Booking.com is not a model that was on anyone’s mind when the vertical guidelines were issued 10 years ago”.
Now about that “great consultation” …
The debate comes at at a time when the European Commission has launched a public consultation on the empowerment of national competition authorities. The larger member states’ enforcers already think they are on a par with the commission. In practice, Germany’s Federal Cartel Office has always regarded itself as equal to the commission. The other authorities are clearly catching up.
And the Germans love a good fight. In addition to its Booking.com investigation, this year the authority carried out a joint investigation into the potential anti-competitive effects of big data and launched an investigation of Facebook.
Regulation 1/2003 focused on giving authorities the power to enforce EU law. The current consultation will prepare the ground for new recommendations that ensure the authorities have the same powers to enforce those laws. At the moment, some authorities are unable to conduct digital searches of company hard drives; some are able to penalize trade associations while others are not; and the fining structures that authorities use differ widely.
And it is clear that in-house counsel and external counsel see benefits and danger zones. There is divergence in the instruments used and the sanction issued. With different levels of sanctions available to different authorities across the European Union, which authority takes on an investigation can make a big difference to a company’s accounts. If two authorities investigate the same conduct, it can cost the company more money than if the commission itself took the case. In its cooperation agreement with national authorities, DG Comp is referred to as “well placed” to take on cases that affect three or more member states. But it is under no formal obligation to do so, meaning several authorities can each run their own investigation and issue their own fines.
And, of course, let’s not forget the “ministerial steer”, in which government officials’ views on a case are officially or unofficially taken into account in the final decision. Because some of these competition authorities do not necessarily have “independence of finances” guaranteed to ensure they will have the resources from one year to the next to fulfill their duties. Topic for another post.
Where are we going?
Sources with knowledge of the consultation say that far from ensuring authorities do not diverge in their decision making, this consultation is likely to result in a document that sets minimum duties for authorities and tries to ensure they have the powers and finances to execute them. Because as one Commission insider told me “while divergence may be on the minds of practitioners, Brussels is more concerned about under-enforcement”.
Good point. As noted by many competition analysts, several countries that have joined the EU since 2004 lacked competition authorities prior to accession. Observers remain concerned these new enforcers have yet to mature, and that their jurisdictions suffer from under-enforcement and weak decisions – hence the EU’s move towards minimum standards.
The political problem? How does the commission bestow … exactly … any new powers to the NCAs. Under European law, the European Council – a body comprising the heads of governments of each of the 28 member states – can impose a regulation that relates directly to the operation of the law. But rules that affect the internal workings of member states do not fall into that category. Instead, proposals must be put before the European Parliament. Because of this, observers expect the current consultation to result in a new piece of legislation.
After having seen the General Data Protection Regulation and the Privacy Shield run the equivalent of the EU Institutions “Palio di Siena” … oh boy, oh boy, oh boy.
I will leave the last word to Andreas Mundt (the president of Germany’s Federal Cartel Office noted in the beginning of this post):
If such legislation is necessary, maybe it should be left to national lawmakers. Certain safeguards are important but it also has to do with the spirit, the back up the agency receives from the local policy makers. This spirit cannot easily be achieved via regulation.
And if it all doesn’t work out? The commission can always detonate article 11 … take cases away from NCAs and free the authorities from the burden of convergence. If it dares.
