The enforcement agency: the European Commission
At EU level, responsibility for enforcing EC competition law lies with the European Commission (Commission), and in particular the commissioner for competition and the administrative staff within the Commission’s Directorate General for Competition (DG Comp).

DG Comp’s wide remit covers the following areas, and we shall consider recent significant developments in each of these fields:

• horizontal cartel agreements;
• other anti-competitive agreements, and sector inquiries by the Commission;
• control of state aid, meaning advantages conferred on a selective basis to undertakings by national public authorities and bodies;
• review, and possible prohibition, of concentrations (including mergers) that meet certain thresholds;
• abuse of positions of market dominance; and
• procedural and legislative developments.

The change in control at the helm of DG Comp in February 2010, following the arrival of commissioner Almunia and director general Italianer and the departure of their predecessors, inevitably led to a number of other significant changes in senior positions within DG Comp, as we reported in last year’s edition. However, further senior personnel moves have taken place during the ensuing months of Joaquín Almunia’s first year as competition commissioner.

Chief competition economist Damien Neven will be replaced on 1 May 2011 by Professor Kai Uwe Kühn, currently an associate professor at the University of Michigan. Professor Neven took over the role of chief economist in July 2006 on a three-year non-renewable contract, but was exceptionally reappointed in September 2009 to ‘ensure continuity’ in certain projects. The chief economist’s team comprises some 20 economists, and assists DG Comp in evaluating the economic impact of its actions, including providing independent guidance on methodological issues of economics and econometrics in the application of EU competition rules.

The director general of DG Comp is supported by three deputies and, rather unusually, 2010 saw personnel changes in all three positions, with two posts remaining unfilled at the start of 2011. Following the retirement in July 2010 of Hubert Ungerer, deputy director general for state aid, this post was overseen by Lowri Evans, the deputy director general for operations. However, in June 2010 Ms Evans swapped competition policy for fisheries policy, leaving both posts vacant. Gert-Jan Koopman has now taken up the post of deputy director general for state aid, but the operations post has been eliminated and the role of deputy director general for mergers and antitrust split into two separate positions.

In October 2010, Nadia Calviño moved to the Commission’s Directorate General for Internal Market and Services, vacating her powerful deputy director general position. Cecilio Madero is currently acting deputy director general for both mergers and antitrust, and it remains to be seen whether either of his temporary positions will be made permanent. Mr Madero headed the Commission’s team in its investigation against Microsoft for six years, and in 2007 became director of DG Comp’s Directorate for Information, Communication and Media.

Within the Hearing Office (which is administratively separate from DG Comp) the post vacated when Karen Williams moved to DG Admin has been filled by Wouter Wils. His background within the Commission’s internal legal service, rather than within DG Comp, may serve to increase the perception of independent scrutiny provided by the hearing officers, although Dr Wils himself has long been a staunch and outspoken defender of existing Commission practice and procedure, in particular in the sphere of antitrust due process.

A number of senior officials with experience in DG Comp, including Nadia Calviño, Olivier Guersent (previously director for cartels) and Jonathan Faull (previously deputy director general), now hold high-level positions within the Commission’s Directorate General for Internal Market and Services. Further, competition-related issues are now regularly touched upon by other directorates general within the Commission, including those for Health and Consumers and for Digital Agenda (headed by the previous competition commissioner Neelie Kroes). This broadening of experience and expertise across the Commission, rather than keeping it concentrated within DG Comp, is to be welcomed.

Key developments: 2010
Cartel agreements
Fines
The year 2010 saw the Commission impose total cartel fines of over €3 billion in seven decisions - its second highest annual total. This sum was only just surpassed by the record high in 2007 of €3.3 billion, and significantly up from the totals of €2.3 billion and €1.6 billion in 2008 and 2009 respectively.

2010 saw big fines meted out in big cases - almost €800 million on 11 companies involved in a cartel in the airfreight sector, and €649 million on six companies participating in an LCD panels cartel. The highest fine imposed on a single company was the €326 million sanction imposed on Ideal Standard for its involvement in the bathroom fittings cartel.

However, these significant fines are not necessarily a sign that commissioner Almunia is cracking down on cartels more than his predecessor, commissioner Kroes, as cases resulting in fines in 2010 had already been under investigation for a number of years. It seems likely that the next few years will also produce significant levels of fines, given the number of cases already in the pipeline. Ongoing investigations already confirmed by the Commission are taking place in sectors varying from consumer detergents and smart-card chips to paper envelopes and exotic fruits.

When the Commission introduced its current Fining Guidelines in 2006, commentators noted that lengthy cartels would consistently result in heavy fines, due to the instigation of a duration multiplier by which the basic amount of a fine can be multiplied for every year of cartel activity. This was clearly demonstrated in July 2010 in relation to the Animal feed phosphate cartel, which was found to have lasted for some 35 years, leading the fines for a number of companies to reach the legal maximum of 10 per cent of total turnover.

Use of the settlement procedure
The Commission’s settlement procedure, introduced with some fanfare in July 2008 and met with relative indifference by the legal and business communities, was finally employed in two cases in 2010. The first ‘settled decision’ was in the DRAM case, where all parties settled with the Commission and consequently received a 10 per cent reduction in the fine imposed. The immunity application in that case was made in 2002, and the decision reached in May 2010, significantly longer than the two-year period in which the Commission aims to conclude settled cases. However, the Commission was understandably keen to ensure that its first settlement procedure was concluded smoothly.

When launching the settlement programme, the Commission indicated that it did not intend to use the procedure in hybrid cases, that is, cases where not all parties choose to settle. However, only the Commission’s second settlement decision, in the Animal feed phosphate case, became hybrid when one of the parties decided not to continue with the settlement procedure. The non-settling party (Timab Industries SA) has now appealed the Commission’s decision, significantly limiting the administrative efficiencies hoped for by the Commission when using the settlement system.

Despite the Commission’s protestations that its settlement procedure is in no way a plea-bargaining regime such as that used in the United States, feedback from parties involved in both the decided and the ongoing settlement cases appears to be that, although the 10 per cent reduction in fine is still seen as rather limited, the opportunity to interact with the case team and arguably to have some influence on the legal and factual assessment can be beneficial.

‘Inability to pay’ arguments
The continuing impact of the financial crisis has been visible in the increased number of companies arguing that their fines should be reduced due to financial hardship. In 2010, the Commission granted the largest number of reductions based on ‘inability to pay’ applications ever. For example, in the Bathroom fittings cartel reductions of 50 per cent for three companies and 25 per cent for a further two were granted on an inability to pay basis. Ten of the 17 companies fined in that case argued that they would be unable to pay the fine and, aware that such arguments would increasingly be raised, commissioner Almunia took the opportunity to clarify the Commission’s policy regarding the assessment of such claims. He stressed that ‘[w]hat we assess is whether the fine we are planning to impose would cause […] the bankruptcy of the company. Of course, for this to happen the company would need to be in a very bad shape already and the fine would push it over the cliff’.

In June 2010 the Commission published an information notice setting out in further detail its position in relation to inability to pay arguments. The Commission’s approach in assessing such arguments is detailed and company-specific, requiring a significant amount of input from the companies involved. The Commission will look at the company’s annual financial statements and relations with banks and shareholders, as well as the financial ratios that measure a company’s solidity, profitability, solvency and liquidity.

The Commission will grant such reductions where it considers that the specified requirements are met. One of the parties in the Animal phosphates investigation had its fine reduced by 70 per cent, and in Pre-stressing steel three companies were granted reductions of 25 per cent, 50 per cent and 75 per cent respectively. However, many more companies have requested such reductions than have received them. In addition, the fact that a company has asked the Commission to take into account its weakened financial state will be recorded in the Commission’s final decision, and this publicity alone has caused a number of companies to retract or reconsider their requests.

Restrictive agreements and sector inquiries
Moving away from cartels, a number of the most significant EU block exemption regulations expired in 2010, and were replaced with updated versions further to public consultation. This legislative overhaul encompassed the regulations relating to the insurance and motor vehicles sectors, as well as R&D and specialisation agreements.

In December 2010, the Commission published revised guidance on horizontal cooperation agreements (or cooperation agreements between competitors). The guidance provided a framework for the analysis of the most common forms of horizontal agreements, such as those in the areas of R&D, production, purchasing, commercialisation, standardisation and standard terms. In particular, the new guidance includes a chapter on information exchange, often considered a grey area in terms of competition law application and enforcement. The guidance sets out factors relevant for the assessment of the competitive outcome of information exchange, illustrated by practical examples.

The Commission’s block exemption relating to vertical agreements (VABE) also expired in 2010, with a revised regulation and accompanying guidelines coming into force on 1 June 2010. The VABE was updated to reflect changes in business practice over the 10 years since it was last reviewed, and in particular the expansion of internet distribution and the increased market power of major retailers. The most significant change was the introduction of a 30 per cent market share threshold for both buyers and sellers, above which the VABE does not apply. Previously such a threshold applied only in relation to sellers, and the amendment reflects the significant buyer power of certain retailers. The Commission also clarified the distinction between online active sales and online passive sales (ie, between sales made as a result of active marketing and sales made as a result of the consumer taking the initiative). Commissioner Almunia stated that ‘[d]istributors should be free to satisfy consumer demand, whether in brick and mortar shops or on the internet’.

The Commission did not launch any new sector inquiries in 2010, although it continued its work in the pharmaceutical sector, further to publication in July 2009 of its final report into the industry. In July 2010 the Commission published its first report on the monitoring of patent settlements, which indicated that the number of potentially problematic settlements had decreased significantly in importance and number. Commissioner Almunia considered that the report ‘appears to show the sector’s increased awareness of the potential competition concerns, but the Commission will remain attentive to ensure that the sale of safe, affordable medicines is not delayed by unfair practices’. In January 2011 the Commission launched a second monitoring exercise, asking selected pharmaceutical companies to submit copies of their patent settlement agreements concluded in the EEA in 2010 between originator and generic companies.

State aid
During his hearing in the European Parliament in January 2009, commissioner Almunia stated that ‘[a]s regards state aid control, the most pressing issue is to manage the financial crisis and its impacts’, and that his ‘absolute priority’ would be ‘to overcome the crisis and ensure that Europe comes out of it better equipped for balanced and sustainable growth’.

The financial crisis brought state aid to the forefront of competition policy as a tool to enable member states to shore up the troubled economy. The Commission adopted a temporary framework that allowed member states to facilitate access to financing, but commissioner Almunia stated in December 2010 that:

After almost two years of a specific crisis state aid regime, we need to prepare a gradual return to normal market functioning. Of course, the remaining risk of renewed stress is a valid reason to proceed with care and caution in the exit process.

DG Comp has taken a number of steps to facilitate the return to market normality, including publishing a working paper in May 2010 on the phasing out of bank guarantees that tightened the conditions for new government guarantees from July 2010. However, in December 2010 the Commission decided to extend its state aid crisis framework until October 2012. Although the temporary framework has been prolonged, certain measures have been removed from its application. For example, working capital loans for large firms are now excluded, as is finance to firms in financial difficulty.

DG Comp’s economic crisis team continues to act as a first point of contact for member states in relation to state aid measures for the real economy being prepared either under the Commission’s European economic recovery plan, or as a result of any national recovery plan.

Mergers
The annual total number of mergers notified to the Commission rose for the first time in several years in 2010, up to 274 - an increase from 2009’s total of 259, but remaining far short of the record high in 2007 of 402 notifications.

The number of Phase II investigations, in which the Commission undertakes a highly detailed and extended analysis of the proposed transaction, reached its lowest number in 17 years, with only four Phase II proceedings initiated. This figure has declined steadily over recent years, from 15 in 2007 to 10 in 2008 and only five in 2009.

No transactions were blocked by the Commission in 2010, but in January 2011 it blocked the proposed merger between Aegean Airlines and Olympic Air, concluding that it would have resulted in a quasi-monopoly on the Greek air transport market. The prohibition was the first since 2007, when the Commission blocked another EU domestic airline merger (Ryanair/Aer Lingus), and only its 21st such prohibition decision since 1990. Announcing the prohibition of the Aegean Airlines/Olympic Air deal, Commissioner Almunia stated that: ‘[m]y services and myself did our best to find a solution, but unfortunately the remedies offered by the companies would not have adequately protected the interests of the four million consumers that use the routes.’ The Commission has been at pains to demonstrate that prohibition of a notified transaction is rare, stressing in its press release that more than 90 per cent of notifications are cleared during a Phase I review, with over 4,500 merger notifications leading to only 21 prohibitions.

The Commission continues to use commitments (or remedies) offered by the parties to alleviate competition concerns in relation to proposed transactions, enabling those deals to be approved subject to the agreed commitments. This helps to prevent Phase I proceedings from moving into Phase II, and Phase II proceedings from leading to prohibition decisions. The number of Phase I commitment decisions has remained relatively steady over recent years, at 3 to 4 per cent of total Phase I decisions. The number of commitment decisions under Phase II is proportionally much higher, as such cases inevitably pose more significant competition concerns. In 2010, two of the three Phase II decisions issued involved remedies.

The number of case referrals back to EU member states increased significantly during the course of 2010, with four full references and three partial references. The total number of referral requests made was 11 - the highest ever annual total, and equalling the total number of requests made in 2007, 2008 and 2009 combined.

Abuse of dominance
The Commission’s focus on the hi-tech sector continued in 2010, with abuse of dominance investigations being opened into the business practices of IBM (on the market for mainframe computers) and Google (on the online search market). The Commission reached no final decisions in any abuse cases in 2010, and it remains to be seen whether the ongoing investigations into IBM and Google will result in fines in 2011 of the level imposed on Intel in 2009.

During the course of 2010, the Commission accepted binding commitments (under article 9 of regulation 1/2003) from a number of companies in order to alleviate concerns regarding potential abuse of a dominant position. Many of these cases related to the energy sector, where commitments offered by EDF were held to address the Commission’s concerns regarding the French electricity market, while those from Svenska Kraftnat related to export transport capacity on interconnectors situated along the Swedish border. Commitments offered by E.ON and ENI resolved the Commission’s concerns relating to the German and Italian gas supply markets respectively.

DG Comp continues to be active in the development of policy and best practices for the prevention of abuse of dominance. It hosted the International Competition Network’s (ICN) workshop on unilateral conduct in December 2010 in Brussels. The workshop sought to increase convergence worldwide in applying the ICN’s recommended practices and modern analytical techniques to the assessment of dominance and abusive conduct.

Procedural and legislative developments
With the launch in February 2011 of a Commission consultation on common legal principles on collective redress, a further step was taken towards the creation of long-awaited legislation on private damages actions in competition cases. A draft directive circulated within the EU institutions in the second half of 2009 drew significant political opposition, in particular on the issue of collective redress, which many in the European Parliament thought should be made more widely available to consumers and not limited to the field of competition. Commissioner Almunia made clear during his approval process that, although keen to develop methods for companies and consumers to obtain compensation, he intended ‘to examine closely the different possibilities of addressing collective redress’ and ‘to involve Parliament fully’. Following the consultation (which has been launched jointly by the Directorates General for Competition, Justice and Health and Consumers), it is likely that DG Comp will seek to relaunch its previous draft directive. However, whether the draft will be in largely unchanged form, or require a significant rewrite, will depend on the results of the consultation and political pressure from many quarters in Brussels and in national EU capitals.

In order to address longstanding criticisms of procedural due process, in January 2010 the Commission published for consultation three documents which aim to explain in detail how its procedures in antitrust cases operate in practice. The documents cover:

• best practices for antitrust proceedings;
• guidance on the role of the hearing officers in the context of antitrust proceedings; and
• best practices for the submission of economic evidence (both in antitrust and merger proceedings).

The best practices for antitrust proceedings aim to increase levels of fairness, transparency and predictability in antitrust proceedings, while maintaining effective procedures, and were broadly welcomed by practitioners as providing further insight into the Commission’s methods in analysing potential breaches of the EU antitrust rules. Although the Commission has been applying the best practices since their publication, it held a public consultation on the documents in the course of 2010 and is presumably still planning to adopt a final version.

Development of the best practice guidelines has encouraged more significant questions to be raised regarding the process of antitrust cases at EU level, and in particular about due process. One major issue relates to the Commission’s ongoing role as judge, jury, legislator and prosecutor in such cases, but other concerns have been raised regarding, for example, the level of fines imposed by the Commission and its approach to parental and successor liability. These issues are not addressed in the guidelines.

A further layer has recently been added to the debate regarding the underlying fairness of the Commission’s antitrust proceedings. When the Treaty of Lisbon entered into force on 1 December 2009, the EU Charter of Fundamental Rights became binding on the EU institutions. Further, the Treaty of Lisbon set in train a process that will lead to the EU becoming a contracting party to the European Convention on Human Rights, at which point the European Court of Human Rights (ECtHR) will be able to review all actions of the Commission (and the other European institutions) for conformity with the protection of fundamental rights. Commission Almunia has confirmed that he has ‘complete confidence in our current system’ which ‘compares positively and favourably with many other systems’, but whether the ECtHR (which has been critical of the lack of procedural due process in some national systems) will agree is an issue that will continue to be debated during 2011.

Berwin Leighton Paisner LLP