Cartels in the COVID-19 crisis – any flexibility?

In the commercial and financial turmoil of the COVID-19 crisis companies may have or wish to engage in industry contacts and collaboration in order to:

• ensure security of supplies of essential products and services; and
• mitigate the risk of business failure in the face of falling revenues.

This, as well as excessive pricing of scarce goods, clearly brings increased risks of anti-competitive behaviour (see here for background on the range of issues arising and the key rules which apply to different types of conduct). But at the same time there may be some – limited - increased room to cooperate with competitors to achieve urgent public policy objectives.

New opportunities for cooperation in Europe were first exemplified by several national initiatives to help retail chains, and Norway’s temporary exemption for airlines. These have now been followed on 23 March by a much broader cross-sectoral joint statement from the European Competition Network (ECN - the network of all EU national enforcers). In it they say that they “will not actively intervene against necessary and temporary measures put in place in order to avoid a shortage of supply” caused by the pandemic.

ECN joint statement: opportunities – within limits

While this communication is welcome news to the sectors concerned and certainly to consumers, it should not be misunderstood as the ECN now opening the flood gates to cooperation between competitors which may be occasioned by the COVID-19 crisis but which goes beyond temporary relief. More concretely, what the ECN seems to have in mind will mostly be mutual support in a critical sector by way of upstream cooperation on logistics, and perhaps production, to overcome shortages of supply.

The ECN’s communication is targeted at cooperation to deal with short term deficits in the supply chain which would result in companies no longer being able to meet existing demand ie under-capacity. For the time being, the more lenient enforcement action announced by the authorities does not mean that companies are now at liberty to cooperate collectively to remedy situations of over-capacity. This is an important distinction given that the COVID-19 crisis has severe effects on both supply and demand.

Following the initiatives of the United Kingdom, the Netherlands and Germany last week which gave flexibility in food retail and groceries, it is likely that other sectors supplying critical goods may now want to take advantage of forms of cooperation on logistics or perhaps more widely the production side, provided that they only lead to a limited commonality of cost (limited in time and in scale) and that the parties remain independent in terms of sales strategy and pricing.

Existing case law does not suggest that the enforcement agencies will show much sympathy to the notion of there being some special relief for crisis cartels, for anything going beyond temporary cooperation necessary and limited to meet customer demand in a crisis situation. While a crisis cartel is a technical term used by regulators and in case law, EU law currently holds that collective action by competitors may not be used to jointly reduce cyclical over-capacity. And even in the case of long term structural over-capacity, the criteria for exemption under Article 101(3) TFEU will rarely be met. Even in a severe recession, the competition authorities would normally consider that it is for market forces – and not a grouping of all major market participants - to deal with over-capacity. This emerges from the ECJ judgment in the 2008 Irish Beef case as well as a 2011 Policy Roundtable held by the OECD on crisis cartels.

Even if the COVID-19 crisis were to last longer than is currently hoped, it would clearly remain the preference of competition authorities for long term structural changes to given markets to be brought about by way of concentration subject to proper merger control rather than by more or less loose cooperation. This is especially true where the cooperation is meant to address capacity issues going beyond the expected duration of the temporary crisis, or where it may affect pricing or the choice of goods available to consumers.

Around the world – Japan and the US

Other authorities across the globe are also reacting fast. For example the Japan Fair Trade Commission (JFTC) set up a webpage quite early in the COVID-19 crisis, referring to Q&As and advice developed at the time of the 2011 Tohoku earthquake, when the JFTC gathered extensive crisis experience. Their webpage identifies permissible temporary measures such as:

• industry-wide allocation of scarce inputs among competitors;
• extensive information exchange between competitors led by industry associations to achieve efficient allocation of materials in short supply; and
• industry-wide collaboration in transportation and logistics.

At the same time, and having in mind its experience of abusive conduct in that 2011 crisis, the JFTC has also clearly warned companies against infringements such as unreasonable termination of contracts with sub-contractors and freelance vendors, and unjustified bundling of vital products.

The US antitrust agencies continue to caution companies looking to engage in collaborative ventures in the COVID crisis. The US Department of Justice, for example, issued a press release on 9 March indicating that it will “hold accountable anyone who violates the antitrust laws of the United States in connection with the manufacturing, distribution or sale of public health products such as face masks, respirators and diagnostics”, specifically referencing any efforts to fix prices or rig bids for personal health protection equipment such as masks or gloves. However, on Monday there were reports that the US Department of Justice and Federal Trade Commission will announce a streamlined procedure through which companies can seek approval of a contemplated cooperative venture and obtain feedback within a week. The main aim of a streamlined process would be to be to facilitate fast delivery of vital products such as virus testing kits, ventilators and masks, and also relevant services. It remains unclear, however, whether any such guidance would be limited to merger control review of formalized cooperative efforts, such as joint ventures, or would also cover “softer” forms of collaboration that typically are not notifiable under the HSR Act.

The ways in which authorities are responding to the crisis are developing extremely rapidly and we will continue to keep you informed.