Proposed changes to the US Antitrust Guidelines for the Licensing of Intellectual Property – a transatlantic perspective

Just over a week ago, the US Federal Trade Commission and the Department of Justice’s Antitrust Division published a proposed update to the current US Antitrust Guidelines for the Licensing of Intellectual Property (the IP Licensing Guidelines). Issued in 1995, the IP Licensing Guidelines are the US equivalent of the European Commission’s Technology Transfer Guidelines, and set out the US agencies’ antitrust enforcement policy on the licensing of patents, copyright, trade secrets and know-how.  Whereas the Technology Transfer Guidelines were introduced in 2004 and updated in 2014 (our contemporaneous comments on the changes can be found here), the IP Licensing Guidelines have been in effect for rather longer.  The FTC and DOJ have asked for comments on the proposed update from interested parties – including lawyers, economists, consumer groups and the business community – by 26 September 2016.

According to this FTC press release, the US agencies’ aim is to “modernize the IP Licensing Guidelines without changing the agencies’ enforcement approach with respect to intellectual property licensing…”.  The proposed update thus retains the basic analytical framework of the 1995 guidelines.  As FTC Chairwoman Edith Ramirez puts it, the updated guidelines “reaffirm our view that US antitrust law leaves licensing decisions to IP owners, licensees, private negotiations and market forces unless there is evidence that the arrangement likely harms competition”.

The proposed revisions do, however, take into account developments in US case law that have occurred in the last 20 years or so.  One of the most significant such developments was the US Supreme Court’s decision in Leegin Creative Leather Products v PSKS (2007) that resale price maintenance (RPM) agreements should be assessed under the rule of reason, rather than being treated as per se illegal.  The proposed amendments to the guidelines reflect this change in thinking.  Although the Leegin case arose in a sale of goods context, the US agencies take the view that the Supreme Court’s analysis of vertical pricing restrictions applies equally to price maintenance in IP licences.  The rule-of-reason treatment of RPM by the US courts and agencies stands in contrast to the stricter EU approach: RPM is treated as a ‘hardcore restriction’ in the Commission’s Technology Transfer Block Exemption.  Another area in which the US and EU agencies take divergent approaches is in relation to the treatment of obligations to pay royalties after the expiry of the licensed IP right. The revised US guidelines refer to the recent Supreme Court case of Kimble v Marvel (2015), in which it was confirmed that post-expiry patent royalties are unenforceable.  In contrast, the Commission’s Technology Transfer Guidelines state (at paragraph 187) that “the parties can normally agree to extend royalty obligations beyond the period of validity of the licensed intellectual property rights without falling foul of Article 101(1) of the Treaty”.

Yet in other respects, US and EU attitudes to the relationship between IP licensing and competition law are very similar.  Both view IP licensing as typically pro-competitive and good for innovation.  The draft revised text of section 2.3 of the US guidelines states: “Licensing can allow an innovator to capture returns from its investment […] through royalty payments from those that practice its invention, thus providing an incentive to invest in innovative efforts”.  This echoes the view expressed by the Commission in paragraph 9 of its Technology Transfer Guidelines: “[…] licensing as such is pro-competitive as it leads to dissemination of technology and promotes innovation by the licensor and licensee(s)”.  In addition, the function of the antitrust “safety zone” outlined in section 4.3 of the US guidelines is akin to that of the “safe harbour” established by the Commission’s Technology Transfer Block Exemption: both seek to provide a degree of certainty for licensors and licensees alike and use market share thresholds.

In the final analysis, the proposed revisions to the US guidelines are arguably most striking for what they omit to deal with.  They do not address, for example, any issues relating to the licensing of standard essential patents (SEPs) or (other than in a single, brief paragraph) settlement agreements.  This is perhaps surprising given that both the FTC and the DOJ have paid considerable attention to such issues in recent years.  While the Commission’s Technology Transfer Guidelines also do not address these subjects exhaustively, they are in this respect arguably more helpful to practitioners and businesses than the US equivalent.  Where licensing agreements relate to both EU and US markets, however, it remains important for those involved to have regard to both sets of guidance.

Online poster seller in the frame for algorithm-centred price-fixing cartel

A few days ago, the CMA issued a decision confirming that two Amazon Marketplace vendors had fixed prices by using and configuring “commercially-available automated repricing software”.  The vendors, Trod Limited and GB eye Limited, which sell licensed sport and entertainment merchandise adorned with images of popular stars like Justin Bieber and 1D, colluded to offer online shoppers the same prices for products and co-ordinate price changes. 

Although the CMA accepts that online pricing tools can “help sellers compete better, for the benefit of consumers”, thereby benefiting competition, in this instance, the parties applied these tools to illegally fix prices at an artificially high level.  The CMA fined Trod £163,371, reflecting a 20% discount for Trod’s admission of liability and co-operation during the investigation.  GB eye, however, obtained 100% immunity for ‘whistle-blowing’, reflecting the CMA’s continued support for companies who come forward first.  

The CMA opened its investigation last year following a dawn raid at Trod’s premises and the home of one of its directors.  The CMA’s searches were co-ordinated with searches carried out by the British police on behalf of the US Department of Justice who were investigating the same conduct for sales through Amazon’s US Marketplace.  Following the dawn raid, the DoJ prosecuted both Trod and its director for price-fixing.  Trod accepted liability in the US as well, pleading guilty a few days ago (the DoJ has not yet provided details of any sanctions), but the director is still awaiting trial.  This provides an important reminder of the wider ramifications that anticompetitive behaviour can have, resulting in criminal sentences as well as civil fines and/or director disqualification.  

The CMA's investigation is yet another example of the authorities’ focus on digital markets, complementing the Commission’s e-commerce sector inquiry (see here and here).  The case follows in the footsteps of the CJEU’s Eturas decision which established the potential for liability for participants in a platform which fail to distance themselves from automated pricing updates (see here).  While the price-fixing agreement itself is hardly novel, the use of software to implement the agreement is more ‘innovative’ – and will doubtless not be the last such case to come before the competition authorities. 

This summer’s (not so) light reading – the CMA’s published Paroxetine decision (GSK/generics)

Some 6 months after issuing its infringement decision against GSK and a number of generic companies, the CMA has released a non-confidential version.  This comes in at a weighty 717 pages.  

Other than the grounds of appeal (on which we reported in the final paragraphs of this post), this is the first chance for companies and their advisors who weren’t involved in the proceedings to see the approach the CMA has taken, and to compare it with the current Commission approach.  First impressions are that the CMA has closely aligned itself with the Commission’s patent settlement decisions, such as Lundbeck**. The CMA and the parties will therefore be particularly keen to see the General Court’s forthcoming judgment in that case – indeed, the case management directions set down by the Competition Appeal Tribunal in the appeal proceedings against the CMA’s decision require the parties to prepare submissions on the relevance of the GC’s judgment to the case.

For those who aren’t keen on such weighty holiday reading, but can’t stand the suspense, below are a few pointers to the parts of the CMA’s legal reasoning which may be worth dipping into:

  • Paragraphs 1.3  1.20: A high level summary of the decision for those who only have an appetite for some light reading.
  • Paragraphs 3.65 – 3.84: The CMA’s view of patents, expanded upon at paragraphs 6.19-6.22.  The Windsurfing case law on the ‘public interest’ in removing ‘invalid patents’ is key: patents are treated as ‘probabilistic’ (although the term isn’t used) and are not guaranteed to be valid. Like the Commission, the CMA treats legal challenges to patent validity as part of the competitive process, and argues that the market is ‘in principle’ open to generic entry after expiry of patent protection over an API.  
  • Paragraphs 4.17 – 4.26: Overview of the market definition section which finds that, while other antidepressants may be substitutable for paroxetine, consumption patterns suggest that the actual competitive constraint is limited.  For market definition geeks, the full analysis is at paragraphs 4.29 – 4.97.  It is notable that paroxetine’s position within the ATC features only briefly, with the focus being on actual competitive constraints, including a ‘natural events’ analysis to look at the relative impact of generic entry in relation to the candidate competitor molecules (such as citalopram – the subject of the Lundbeck decision), and entry by generics of paroxetine itself (see para 4.73 in particular).
  • Once the narrow market definition is established, there isn’t much suspense as to the dénouement of the dominance ‘chapter’ (paragraphs 4.98 – 4.127).  In this context, the section on why the PPRS does not constrain pharmaceutical companies’ dominance is again unsurprising, but perhaps worth a read (paragraphs 4.124 – 4.126).
  • Paragraphs 6.1 – 6.9 and 6.204 – 6.206 contain a summary and the conclusion of the ‘object assessment’ under Article 101/Chapter I: while generally Lundbeck-esque, the reference to “the effective transfer from GSK [to GUK/Alpharma] of profit margins” strikes me as a novel way of expressing an old idea.
  • Paragraphs 7.1 – 7.3, 7.61 – 7.62 and 7.114 – 7.115 contain the summary and conclusions of the effects assessment under Article 101/Chapter I.  Even though the agreements were actually operated in the market, the CMA has confined itself to looking at their ‘likely’ effects – presumably to try to account for the fact that the outcome of the discontinued litigation is unknowable. It also concludes that the agreements assisted GSK to “preserve its market power” (paragraphs 7.63 – 7.64 and 7.116 – 7.117).
  • Leading on from that conclusion, paragraphs 8.1 – 8.3 summarise the case on abuse of a dominant position.  Central to the abuse case is the concept of inducement by GSK.  The allegations span not only the agreements in respect of which fines are issued under Article 101, but also an agreement with IVAX (for those with time on their hands, Annex M seeks to explain the discrepancy). GSK raised a number of objective justification arguments, notably around its right legitimately to defend its patent rights and to defend the company’s commercial position.  Paragraphs 8.61 – 8.67 reject these arguments, in particular on the basis that the conduct was not ‘competition on the merits’ (as per AstraZeneca) and that the conduct “went beyond the legitimate exercise of its patent rights to oppose alleged infringements”.  
  • Finally, and again for the more technically minded, at paragraphs 10.43 – 10.53, the relevance of the Vertical Agreements Block Exemption is dismissed, on the basis that the agreements were between potential competitors rather than being true ‘vertical’ arrangements.  At paragraphs 10.54 – 10.97, the parties’ Article 101(3) exemption arguments are also dismissed (spoiler alert: the exemption criteria are not found to have been fulfilled).  One curiosity is the lack of an infringement decision in relation to the agreement between GSK and IVAX.  This was held to benefit from the (now repealed) UK-specific Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 (now repealed).  In other words, that agreement is treated as vertical, unlike those between GSK and each of the other generic companies, even though the decision recites that IVAX did have plans to launch its own paroxetine generic.  The difference appears to be based on the context in which the agreements were reached: whereas the agreements with GUK and Alpharma related to the settlement (deferral) of litigation, that was not the case for the supply deal agreed with IVAX.  This is addressed at paragraphs 10.36 – 10.47 and in Annex M.
The paragraphs listed above focus on the legal analysis.  Those who prefer their reading less dry will want to look also at the descriptions of the agreements, and will note in particular that the ‘settlements’ considered in the decision did not finally resolve the litigation, but rather deferred it for the duration of the agreements entered into by GSK and the generic companies. Those who like tales of retribution will wish to read about the calculation of fines in section 11 – note that GSK received separate fines in relation to each of the agreements and the abuse of dominance.

The appeal hearing before the CAT is due to start next February, and to last for around a month.  By that time, the General Court will have issued its rulings in the various appeals against the Commission’s Lundbeck decision – which will doubtless be another weighty 
read for the Autumn.

** For more on Lundbeck, please see here (the abridged version) or here (the full analysis).  

Competition policy v IP: striking a balance is a tricky exercise

In this article in Competition Law Insight we consider how intellectual property rights and competition law can appear to be at odds: the former grants temporary monopolies and the latter protects and encourages market competition.  We go on to discuss how this potentially difficult relationship has been increasingly at the heart of competition policy.

That’s a wrap! The European Commission accepts Paramount’s pay-TV commitments

We hope you've got your popcorn ready because yesterday, there was a new development in the ongoing Sky UK / Hollywood Studios pay-TV investigation: the European Commission announced that it has accepted the commitments offered by Paramount Pictures, which are now legally binding.
 
We've blogged extensively on this investigation here and here, but as a quick recap:
July 2015: Statement of Objections

The Commission sent a Statement of Objections to Sky UK and six US film studios (including Paramount) in July 2015.  The Statement addressed certain clauses in the licensing contracts between Paramount and Sky UK which:

  1. prevented Sky UK from allowing EU customers outside the UK and Ireland to access Paramount films via satellite and online; and  
  2. required Paramount to ensure that broadcasters other than Sky UK were prevented from making their pay-TV services available in the UK and Ireland.

The Commission was mainly concerned that these clauses raised competition issues for pay-TV broadcasters which were operating on a cross-border basis, and consequently might restrict the EU's Single Market.  
 
April 2016: Paramount's Commitments

In response, Paramount offered four proposed commitments to the Commission in April 2016.  These were:
 
  1. when licensing its film output for pay-TV to a broadcaster in the EEA, Paramount would not (re)introduce contractual obligations, which prevent or limit a pay-TV broadcaster from responding to unsolicited requests from consumers within the EEA but outside of the pay-TV broadcaster’s licensed territory (No “Broadcaster Obligation”);
  2. when licensing its film output for pay-TV to a broadcaster in the EEA, Paramount Pictures would not (re)introduce contractual obligations, which require Paramount to prohibit or limit pay-TV broadcasters located outside the licensed territory from responding to unsolicited requests from consumers within the licensed territory (No “Paramount Obligation”);
  3. Paramount Pictures would not seek to bring an action before a court or tribunal for the violation of a Broadcaster Obligation in an existing agreement licensing its film output for pay-TV; and
  4. Paramount Pictures would not act upon or enforce a Paramount Obligation in an existing agreement licensing its film output for pay-TV.

The latest development

Following the usual market testing of the commitments, the European Commission yesterday announced that it has accepted them.  Paramount's commitments look wide-reaching: they apply to online and satellite broadcast services, and cover the standard pay-TV services as well as relevant subscription video-on-demand services.  The Commission also stated that the commitments will last for five years and apply throughout the European Economic Area.

The investigation into the other five studios continues, with the other companies still disputing the Commission's allegations.  But this latest announcement could well act as a trigger for further developments (and potentially even proposals of commitments), so stay tuned for a sequel coming to a screen near you soon.

FRAND in Finance

The European Commission has accepted legally binding commitments from the International Swaps and Derivatives Association Inc. (ISDA), a trade organisation in the market for over-the-counter derivatives, and Markit, a financial information service provider, to license their IP on fair, reasonable and non-discriminatory (FRAND) terms (see here). This forms part of an EU-wide initiative to make financial markets more efficient, resilient and transparent.  

The Commission opened an investigation into the credit default swaps (CDS) market in March 2011. A CDS is a contract designed to transfer the credit risk linked to a debt obligation – it can be traded ‘over the counter’ or ‘on an exchange’. The vast majority of CDS trading takes place over the counter, despite limited price transparency and high transaction costs. 

The Commission was concerned that the parties had blocked or delayed the emergence of exchange traded products, which could be more effective, safer and cheaper. In particular, it found that:

  • ISDA had refused to license (or restricted the use of) its proprietary rights in the ‘Final Price’ which determines the payment to be made following the default of a debt obligation; and
  • Markit had refused to license its CDS indices which are essential to support new exchange products. 

To address these concerns, the Commission has accepted legally binding commitments from ISDA and Markit to license their IP rights on FRAND terms. They have also committed to exclude CDS dealers from taking individual licensing decisions, as well as influencing such decisions.

It remains to be seen how the parties will go about setting FRAND terms particularly as they operate outside of the usual FRAND arena of telecoms where there is the most legal precedent and a more developed legal framework. Notably, the commitments are subject to mandatory third-party arbitration in case of dispute. This goes further than the Court of Justice’s only decision on FRAND which requires the parties’ agreement for any arbitration (Huawei v ZTE in relation to standard essential patents – see here). This decision is in a different context, but it is a useful reminder that remedies provided for by way of commitments may end up going further than what is required by law, despite there being no actual finding of infringement. 

Testing the patent pool waters

EC’s Investigation of Illumina for anticompetitive conduct

Demonstrating that life goes on outside of Brexit, the European Commission has opened an investigation into Illumina and Sequenom for suspected anti-competitive conduct. 

The Commission will investigate suspected breaches of Articles 101 and 102 TFEU, stemming from Illumina’s and Sequenom’s patent pool agreement concluded in December 2014 relating to non-invasive prenatal testing patents (“NIPT”). 

The agreement allowed Illumina to develop and sell in vitro diagnostic kits for NIPT and enter into licensing agreements with third parties willing to develop their own laboratory-developed tests. The agreement settled the ongoing patent disputes between the two parties and resulted in Sequenom receiving $50 million upfront and royalty payments on sales from the patent pool structure until 2020.

The information on the Commission’s investigation emerged during a Case Management Conference in UK litigation, when Premaitha Health, itself involved in litigation with Illumina in relation to NIPT-related intellectual property, referred to a communication from the Commission regarding this investigation. The Commission is believed to be looking into, on one hand, whether the 2014 agreement constitutes a restrictive agreement and gives rise to abuse of a dominant position, and on the other, whether Illumina’s licensing practices have an anti-competitive effect.

This investigation will be a rare opportunity for the Commission to give a decision in relation to patent pools, an area in which it has previously issued guidance (for instance in the rules for the assessment of technology transfer agreements (adopted on 21 March 2014 here)).

This case is also indicative of a growing trend for patent pools in the life sciences sector. This model of licensing has traditionally been more widespread in the TMT sector. Perhaps a sign that the FRAND wars (on which we reported earlier this week) may in future spread beyond the world of telecommunications…

Vodafone v Intellectual Ventures – Is a new front about to open in the FRAND wars?

When Intellectual Ventures (IV), the world’s largest non-practising entity, sued Vodafone GmbH for infringement of a batch of its standard essential patents (SEPs) in Germany last September, it probably wasn’t expecting the communications services provider to launch a FRAND counterattack in Ireland.  But that’s exactly what has happened.

Last month, the Irish High Court gave an indication that Ireland was the appropriate jurisdiction for hearing Vodafone’s allegations that two companies in the IV group – IV International (based in Ireland) and IV LLC (based in Delaware, USA) – had breached their obligations to license their SEPs on FRAND terms.  As far as we’re aware, this is the first Irish case on issues relating to FRAND and SEP licensing.  As the Irish High Court noted in its judgment, the patent and competition law issues raised by Vodafone’s application made it “something of a first in the Irish courts”.

According to the judgment, IV first approached Vodafone to discuss the terms of a licence to various IV patent portfolios in 2012.  No agreement was reached, however; and IV LLC filed two sets of patent infringement proceedings against Vodafone GmbH in Germany in September 2015 and January 2016.  The patents in question relate to DSL technology, a type of broadband technology which connects a user to a high-speed internet connection across a telephone network.  DSL services operate in accordance with so-called ‘xDSL standards’, which are set by the International Telecommunications Union (commonly known as the ITU).  Like other standard-setting organisations, the ITU has developed policies relating to IP rights which require SEP holders to license their patents on FRAND terms.  Vodafone has alleged that IV abused its dominant position on the markets for the licensing of the relevant patents by making a licence offer to Vodafone on non-FRAND terms and failing adequately to explain how the patents in question are said to be infringed.  In making these allegations, Vodafone has expressly relied on the CJEU’s July 2015 judgment in Huawei v ZTE (which we commented on here and here).

At this early stage, two aspects of the case are interesting:

1. Vodafone’s attempt to sue IV for breach of its FRAND obligations in Ireland

Vodafone’s ‘Irish torpedo’ strategy is noteworthy.  We are not involved in the case and so can only speculate, but it is plausible that Vodafone’s aim in bringing FRAND proceedings in Ireland may be to seek to limit the prospect of IV obtaining swift injunctive relief in Germany (in the event that any of its patents are found to be infringed).  Whether this will work is unclear.  Immediately, it’s important to bear in mind that the Irish Court’s judgment is based on Vodafone’s ex parte application for permission to serve a defendant (IV LLC) out of the jurisdiction.  IV has not yet had the chance to make any points about jurisdiction or the nature of its dispute with Vodafone.  The Irish Court states that it has been “advised” that “none of the eleven sets of proceedings [which IV has commenced against Vodafone in Germany] involves or is related to issues of FRAND licensing”.  This leads the Irish Court to take the view that it may have jurisdiction because the issues before it do not involve the same subject matter or cause of action as the issues already before the German Court.  But if IV can show that FRAND / SEP licensing issues are in fact relevant to the German proceedings, this puts the Irish Court’s jurisdiction in issue.  It remains to be seen whether IV will bring a jurisdiction challenge.

2. The types of declaratory relief sought 

Vodafone has asked for a number of declarations (some in the alternative).  In particular, the Irish Court’s judgment makes clear that Vodafone wants the Court to determine that: (i) the terms of the written licence offer made by IV in March 2016 were not FRAND; and (ii) the terms of the licence counter-offer made by Vodafone in June 2016 were FRAND.  In addition, and perhaps more interestingly, if neither IV’s offer nor Vodafone’s counter-offer is deemed to be FRAND, Vodafone wants the Irish Court to determine the terms and conditions of a licence “of the relevant patents for use in Germany” which would be FRAND.  It is not entirely clear from the judgment whether Vodafone is asking the Irish Court to identify FRAND terms and conditions just for the individual patents on which IV has sued in Germany, or whether it would instead like the Court to deal with some kind of wider IV patent portfolio.  If it’s the latter, it would be interesting to see whether the Irish Court takes a similar approach to that taken by Mr Justice Birss in Vringo v ZTE ([2013] EWHC 1591 (Pat) and [2015 EWHC 214 (Pat)).  In that case, the English High Court judge held that the court should only be able to set the terms of a portfolio licence if both parties agree to be bound by such a determination.

The question of FRAND rates and “what is FRAND” has been of great interest in the TMT sector for some time (as we have discussed previously, for example here and here).  A couple of cases have grappled with it, but guidance remains sparse.  It will be very interesting to see whether the Irish Court is willing and able to grasp the thorny issue, and we will be watching closely the next move from IV in the litigation and whether it resists Vodafone’s FRAND manoeuvre. 

Brexit: What it means for competition law Q&A

As the dust begins to settle on the momentous events that unfolded in the early hours of Friday 24 June, focus inevitably turns to the practical implications of what happens next.  Many articles have already been written on this subject and no doubt many more will follow.  The honest position today is that no-one can predict precisely what the long-term future holds for the UK because there is still no clarity as to which Brexit path will ultimately be chosen.  At this stage however, we can narrow the most likely options down to the following five:

  1. Leave the EU, but remain a member of the EEA (often referred to as the ‘Norwegian model’);
  2. Leave the EU, rejoin EFTA, but stay outside the EEA (often referred to as the ‘Swiss model’);
  3. Leave the EU, but join an EU customs union (often referred to as the ‘Turkish model’);
  4. Leave the EU, but negotiate individual trade terms (often referred to as the ‘Canadian model’); or
  5. Leave the EU and fall back on WTO trade terms.

Which of these routes prevails in the long-term will determine to what extent (if at all), the EU competition rules continue to apply in the UK.  Broadly speaking, Option 1 would result in no change to the status quo as regards competition law, whereas all the others would result in greater autonomy for a UK regime, potentially operating entirely separate from, but in parallel to, the EU regime.

However, the immediate consequence of the Prime Minister’s decision to resign, initiate a leadership election and to leave the decision as to when to invoke the EU’s timetable for exit under Article 50 to his successor, has given everyone a certain breathing space with which to survey the options.  Unspoken amongst these is the possibility that a UK general election will follow in the autumn, which could mean that all bets are off, including potentially even Brexit itself.

Q.   What is the immediate impact of the Brexit vote on UK competition law

A.   Nothing is likely to change at all in the short or medium term.  The prevailing national UK and EU competition regimes will remain in full force.

Q.   What about longer-term?

A.   Again, in practice, the short answer is likely to be that very little will change.  That is of course the case should the UK remain with the EEA.  Beyond that, the UK competition rules will remain in full force, operating in parallel to the EU regime.  Businesses with international operations will continue to be bound by EU rules as regards their trade within the EU.

Q.   Business relies on the legal certainty and guidance arising from the EU’s system of block exemptions.  What will happen to these assuming EU law no longer applies?

A.   The UK no longer has any national block exemptions, relying instead on the application of ‘parallel exemptions’ meaning that the EU block exemptions result in parallel exemptions from UK competition law prohibitions in addition to the EU prohibitions.  Assuming a total exit from the EU competition regime, these would no longer automatically apply and the UK would need to consider implementing new national exemptions.  Where the UK is no longer part of the single market, this could well have the result that certain limitations in the application of the block exemptions are removed (i.e. those dealing with territorial restrictions aimed at protecting parallel trade and the single market).

Q.   What happens to merger notifications?

A.   The UK’s existing merger control regime is likely to remain, although it is possible that in the longer term its voluntary nature may come under increasing pressure.  There are, however, likely to be two main effects arising directly from Brexit should EU law no longer apply in the UK.  First, there will be an increase in mergers being notified to the UK as it will no longer be possible to rely on the one-stop shop principle inherent in the EU merger regulation regime.  Mergers raising any substantive issues in the UK that would previously have fallen under the exclusive jurisdiction of Brussels will therefore require parallel notification in the UK.  Second, it is to be expected that there may be a fall in the number of mergers notified in Brussels because UK turnover will no longer count towards the EU jurisdictional criteria.  As one of the EU’s largest economies, the removal of UK turnover may therefore be expected to have a non-negligible impact.

Q.   What happens to UK competition litigation concerning EU infringements?

A.   In the short term, we see little or no change.  The doctrine of acquired rights will mean that the UK courts will continue to apply the law as it applied at the relevant time - for competition damages litigation, this will be the time of the infringement giving rise to the cause of action for damages.  In future, Brexit will have implications for the implementation of the Damages Directive dealing with follow-on actions – however, given that the deadline for implementation is 27 December 2016, it seems most likely that the UK will still be a full member of the EU and hence that this will be implemented.  As with all EU legislation given effect by national implementing legislation, the UK will need to consider whether and how to adopt and/or amend.  As regards follow-on damages, it remains to be seen how the UK legislature and courts will treat EU infringement decisions for the purposes of establishing liability.

Q.   What steps should business take now to ensure continued compliance?

A.   Understandably, businesses operating in the UK will be concerned to ensure not only that they remain fully compliant with whatever legal obligations arise as a result of Brexit but also that compliance costs can be kept to a minimum.  Pragmatically, and whatever the final outcome, the message today is one of ‘no change’.  The EU regime remains in full force for the foreseeable future and whatever the decisions that will be taken over the course of the next few months, it seems highly unlikely that substantive alterations will be made to the base rules of the game when it comes to competition compliance.

Read our previous article on Brexit here: Brexit – What next? A competition law perspective 

Sophie LawranceStephen SmithPat Treacy

Brexit – what next? A competition law perspective

Introduction

It is difficult to think of a UK statesman who did more for European unity or was more supportive of the idea of a union amongst the states of Europe than Winston Churchill and it is hence with some hesitation that we begin this article about the UK’s exit from the European Union with one of his many quotable soundbites:

"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning". 

Yet that is precisely the situation facing the UK after it woke up on 24 June to the reality that it had voted decisively in favour of leaving the European Union. This has left politicians, diplomats, business and lawyers wondering what this means in practice and what happens next. Of course the nature of the position is such that the greatest certainty today remains one of uncertainty as to what happens next – although the vote to leave was clear, there is no consensus whatsoever as to what happens next.

At one extreme, EU membership could be replaced by the UK joining the European Free Trade Association and the European Economic Area (alongside Norway, Iceland and Liechtenstein). From many perspectives, including as regards competition law, this would clearly be the most straightforward, giving rise as it would to the fewest changes. This would entail a continued financial contribution to the EU budget and requirement to sign up to free movement of persons in exchange for access to the single market. UK courts would in effect continue to be bound by EU legislation and by decisions of the European courts. So far so good, but politically it is difficult to see how this squares with a Brexit campaign that has focused so overtly on immigration and repatriation of UK funds away from Brussels.

At the other extreme, the UK could seek a total exit, falling back on World Trade Organisation (“WTO”) rules to continue trading with the EU, but without access to the single market. Under this outcome, EU law would simply become another overseas jurisdiction, persuasive, but no more to the UK authorities and the courts.

At this stage it is too early to say anything definitive on which direction might ultimately be pursued. However, now that we have moved beyond the hypothetical and the UK begins its journey into uncharted waters, there are some general points to be made whatever our final destination.

Of course most aspects of UK law will be affected to a certain extent, but competition law and policy is one area where integration is perhaps its deepest and hence forms the focus of this article. Patent law and particularly work towards creation of the Unified Patent Court is also deeply and directly affected and our thoughts on the Brexit implications for the UPC can be read here.

Merger Control

EU and EEA member states benefit from the ‘one-stop’ shop of the EU Merger Regulation, meaning that transactions that meet the jurisdictional criteria may be notified and assessed in Brussels to the exclusion of national regimes. If the UK joins the EEA, there will therefore be no practical change to the current system. However, a total exit would require companies to assess whether transactions need to be conditional on UK and EU merger clearances. Whilst the UK operates a voluntary notification regime, transactions giving rise to any substantive overlaps are routinely notified in advance in the interests of legal certainty.

A total exit may therefore be expected to give rise to duplication and increased costs as international transactions with a UK element fall to be reviewed under both the UK regime and in Brussels in parallel. There are also obvious resource and hence cost implications for the UK competition authority, costs which ultimately could be expected to be passed through to business.

Cartels and investigations

The main UK competition rules concerning anti-competitive agreements and abuse of dominance broadly mirror equivalent EU provisions. There is no obvious reason why the UK would choose to use a Brexit as an opportunity to undertake wholesale revision of the competition regime and hence we envisage very little in the way of practical implications as regards the implementation of UK competition law.

However, as with merger control, the biggest impact is most likely to be one of duplication – pan-European cartels and issues will probably face parallel investigations by the UK and EU competition authorities, potentially giving rise to increased fines.

State Aid and Public Procurement

If the UK were to join the EEA it would be required to comply with the EU rules on state aid and hence the position would be one of ‘no change’. However, in the event of a ‘total exit’, the UK would no longer be bound by the rules aimed at protecting the single market and the far looser rules under the WTO would apply (e.g. prohibitions on trade subsidies). Crucially, the WTO rules would not prevent the UK subsidising ‘national champions’ and hence could result in direct Government intervention to support businesses such as Tata Steel.

The situation in relation to public procurement is similar. Whilst EEA membership would bring with it a continued obligation to comply with EU rules, a total exit would leave the UK free to create its own national rules outside of the EU regime. In practice however, it seems inconceivable that any UK system would not result in similar obligations for the award of public contracts in the interests of transparency, value for money and non-discrimination as between bidders.

Competition Policy

It is to be expected that the UK competition authorities will cease to be full members of the European Competition Network upon exit, which in the absence of separate agreements will mean a reduced UK voice in the shaping and development of competition policy at an EU level and ultimately globally. Whilst that leaves the UK free to pursue its own policy objectives, this might result over the longer term in a gradual shift away from the existing alignment with EU law as the UK regime adapts to life outside the EU. At least initially, however, we would expect any practical impact to be limited.

Competition Litigation

The position is most uncertain as regards competition litigation, particularly enforcement of damages claims. The UK had sought to position itself as a leading jurisdiction for the private enforcement of EU competition rights (alongside Germany and the Netherlands). It is to be expected that once the UK has finally left the EU, EU Commission decisions and EU law will cease to have a binding effect on the UK courts and the UK courts would consequently cease to be such an attractive forum for claimants.

But that might not be the final word – the UK remains a large market with a well-respected judicial system. Given the similarities that exist and will likely persist in the substantive provisions, it is probable that EU infringement findings will remain highly persuasive to the UK courts and hence there might actually be an increase in cases pursued in parallel in the UK and an EU court. UK courts are also adept at resolving conflict of law issues and can be expected to apply the law as it stood when the infringement took place and/or when the right to sue accrued. Hence EU competition law may continue to be of relevance in the UK Courts for some time to come, whatever the outcome on the exit negotiations.

Conclusion

And so we are now at the end of the beginning of the UK’s exit from the European Union.All we can say with certainty today is that the UK electorate has delivered a clear, if far from unanimous, mandate to its government to start the process of extricating the UK from the EU. But the main message to businesses operating within the UK can also be summed up by a historic cliché:‘Keep calm and carry on’.

At a very practical level the present system is likely to persist for some time. Furthermore, most businesses will remain subject to the same general restrictions and obligations as they do today, albeit with a greater risk of duplication and/or parallel reviews. Watch this space as we move from the end of the beginning to a new chapter in the UK’s relationship with the EU.

Sophie LawranceStephen SmithPat Treacy