Competition Law in the Time of Corona – FCA statement on cooperation and price increases

Although the health risks of the coronavirus are of course at the centre of attention, the economy is currently also facing challenges. Especially in an internationally networked economy, plant closures, production stoppages and logistical bottlenecks can lead to considerable problems for companies operating in Austria. This is particularly true in cases of supply chain interruption − a resulting product shortage can spread through all levels of distribution and poses a major challenge to companies. Ultimately, the goal must be to ensure that the population continues to be supplied with the goods and services needed, while – ideally - at the same time maintaining a diverse business landscape. The Federal Competition Authority has recently issued a statement dealing with competition law topics raised in this context.

Competition authorities are taking action:

As the corona crisis develops, the competition authorities in various countries are increasingly reacting to emerging difficulties of the economy.

This also applies to the Austrian Federal Competition Authority (FCA) which reacted to these developments in a recent announcement. In parallel with the other EU competition authorities, the FCA addressed the most urgent topics of national importance. The FCA focuses on the following two issues:

Necessary cooperation to avoid supply bottlenecks and an impending product shortage

On the one hand, the FCA states that cooperation between competitors may be necessary to avoid supply bottlenecks and an impending product shortage in the current situation. Of course − as always in the case of exceptions to the prohibition of cartels − these are subject to (i) such measures contributing to improving the production or distribution of goods while (ii) allowing consumers a fair share of the resulting benefits.

This announcement by the FCA is made in the light of the fact that delivery and supply bottlenecks in Austria should be avoided as far as possible. A particular problem in this context is that supply chains can collapse as a result of the coronavirus. The consequence would be that Austrian industrial companies would not have sufficient quantities of input products from the relevant production countries such as China. In addition, a change in the purchasing behaviour of customers and new logistical requirements for the distribution of goods might occur. Overall, this may not only lead to production bottlenecks, but also to considerable challenges in warehouse planning and in regard to the distribution of goods (also reffered to as “bullwhip effect”).

For the competition authorities, the question therefore emerged as to whether the usual competition law restrictions on cooperations between competitors should be fully maintained under these circumstances. As a matter of principle, competition law does not provide specific exceptions for epidemics. For this reason, even in times of economic hardship, agreements or coordination between competitors and under certain circumstances also between companies at different economic levels (the latter, for example, when resale price maintenance is involved), are generally problematic from a competition point of view and must be carefully assessed in advance.

However, there is an exception to the prohibition of anticompetitive agreements. This applies where an agreement (i) contributes to improving the production or distribution of goods or to promoting technical or economic progress and (ii) allows consumers a fair share of the benefits, while not (iii) imposing restrictions which are not indispensable to the attainment of these objectives or (iv) affording the possibility of eliminating competition in respect of a substantial part of the products in question. The FCA refers to this exception in its announcement, assuming that these conditions would be met in the case of temporary cooperations to ensure security of supply. This applies in particular to measures taken until 13 April 2020.

The FCA does not explicitly list the respective cooperation measures that might be exempted. Therefore, it will be the responsibility of the companies concerned to determine whether or not the specific conduct falls within the exception.

We take it that, for instance measures aimed at coping with supply bottlenecks for raw materials or other input products could be exempted from the ban on cartels. Examples of possibly exempt measures could be:

• short-term cross-delivery of input products, also between competing companies;
• joint purchasing agreements or other reciprocal support measures between competitors to bridge interruptions in the supply chains for input products;
• Cooperation in research and development and the associated exchange of technical know-how in response to the pandemic (as declared by the US competition authorities)

In all these cases, however, a balance will always have to be struck between the restrictive effect on competition of the measure in question and its necessity in order to maintain the respective business activity. Therefore, in each individual case a competition law assessment will have to be made if and to what extent the exemption criteria apply. In this respect, also the FCA has offered to be available for inquiries from companies.

Priority for complaints regarding health products used to counter coronavirus

As a second aspect, the FCA makes it clear that another priority is the non-discriminatory provision of health products. For this reason, companies that exploit the current situation through anti-competitive practices such as excessive pricing, artificial tightening of supply, cartel agreements etc., will have to face action by the authority.

Therefore, the prohibition of the abuse of a dominant position is the underlying concept which the FCA would probably apply here. It might be infringed, for example, in case of excessive pricing or the creation of an artificial shortage of supply by companies with market power. This does not mean that the FCA starts to regulate prices but observes the conduct of the individual companies and applies a behavioural remedy if needed.

However, most of the companies currently selling products to minimise the risk of infection would usually not have the respective market power if regarded on an individual basis. Such market power could, however, arise if there is a supply shortage and only a few companies offer a specific product. According to the Austrian Cartel Act, in an oligopolistic market dominance can be assumed to exist already as of a market share of more than 5% of one company. Otherwise a presumption of market dominance applies if a company has a market share of at least 30%.

Application also for raw materials/input products

However, the relevance of excessive prices or artificial shortages of supply is not limited to products intended to prevent infections or other everyday consumer goods but may also be relevant for industrial or trade customers. This would, inter alia, be the case for companies which − as mentioned above − are affected by a (partial or total) disruption of a supply chain. The problem here is, that many companies cannot easily switch to an alternative source of supply in such a situation. If, for this reason, a shortage of raw materials or input products occurs, the above-mentioned principles of the prohibition of an abuse of a dominant position might also apply. Again, temporary market dominance of a supplier could develop if a company, unlike its competitors, is still able to produce and supply the necessary raw materials and input products. A market abuse resulting from this situation, such as an excessive price increase for such products vis-à-vis downstream companies, could therefore infringe competition law.

Special rules to safeguard local supply (“Nahversorgungsgesetz”)

The Austrian Local Supply Act (Nahversorgungsgesetz) must also be mentioned in this context. This statute prohibits certain types of conduct in commercial transactions that jeopardise fair competition. This could be the case if a supplier of goods applies unreasonable conditions to its downstream customers, like excessive prices or discriminates its customers. In addition, supply obligations can be imposed (for example, at the request of the FCA), if consumers would otherwise not be able to obtain the goods necessary to satisfy their daily needs.

Further measures of the FCA

In addition, it should be noted that the FCA has also taken far-reaching organisational measures to ensure that – albeit social distancing – the authority continues to be fully functional. Thus, they were quick at changing the systems so that electronic merger filings are now possible (see article by Christine Dietz).

Summary

Overall, the spread of the coronavirus raises questions not only in society in general, but also in competition law. On the one hand, it should be noted that competition law still applies fully and infringements (such as abuses of market power) can be punished accordingly. On the other hand, the special economic situation caused by the spread of the coronavirus may also give rise to exceptions from its application. In order to find out, if and to what extent this is the case in a particular situation, must be assessed carefully under competition law. In any case, this is an important action of the FCA (and competition authorities of other countries) to prevent market distortions - especially in the health care sector - and to facilitate the necessary cooperation between companies in order to secure supply in Austria.

Please note: This newsletter merely provides general information and does not constitute legal advice of any kind from Binder Grösswang Rechtsanwälte GmbH. The newsletter cannot replace individual legal consultation. Binder Grösswang Rechtsanwälte GmbH assumes no liability whatsoever for the content and correctness of the newsletter.