Beauty and the beasts

No stone unturned, some say when reflecting on the new normal in the COVID-19 era. Surprisingly, this is not so in competition law, where things have largely remained the same. How is that possible?

The COVID-19 pandemic has not only led to an enormous health crisis but has also resulted in an economic slowdown in many sectors, not least the fashion industry. According to Deloitte’s Fashion & Luxury Private Equity and Investors Survey 2020, the COVID-19 pandemic is expected to have a large impact on this industry, and particularly on the personal luxury goods – other high-end sectors, such as luxury hotels and cruises, high-end furniture, and fine jewelry will also likely experience shocks. A significant drop in sales and a relatively long demand contraction are expected across these markets. How will competition law enforcement react to these challenges?

There are three layers of competition law: antitrust, merger control and state aid. Let us get the last one out of the way: shortly after the outbreak of COVID-19, the European Commission adopted a Temporary Framework which stated that it would relax its otherwise strict standards on limiting public subsidies to companies by Member States. Money was shelled out on an emergency basis, but there was nothing conceptually new. The US and governments throughout Asia Pacific have also supported companies in need by emergency aid.

Antitrust

Now let us look at antitrust. Under antitrust rules, collaboration between competitors is only allowed in certain cases and to a limited extent.

In Europe, so-called Block Exemption Regulations automatically authorize competitor collaboration for joint R&D, for specialization in manufacturing and in joint purchasing and joint distribution. Such collaboration is authorized where the combined market share of the parties does not exceed 20% on the relevant market, which is not always easy to define and quantify. Further, the more the joint collaboration is close to the market, the less freedom exists. Therefore, competitors collaborating in joint purchasing and joint marketing must be wary not to fall into cartel behavior. Again, the European Commission published a Temporary Framework for antitrust, which allowed suppliers of “essential goods” to coordinate their supply logistics in order to ensure a balanced allocation of supply flows. In other words, it was okay to coordinate the supply of masks, ventilators, and other medically relevant supplies. But this exception did not apply to food and wine, and certainly not to products like handbags, shoes and silk scarves.

In the US, regulators took a similar approach, with the Department of Justice and the Federal Trade Commission announcing temporary new procedures for business review letters and opinions related to proposed competitor collaborations. Many companies, mostly in the life sciences sector, were quick to take advantage of the new expedited review procedures.

Unlike regulators in other jurisdictions, the Australian regulator, the Australian Competition and Consumer Commission, opted against a general “forbearance” approach to collaboration among suppliers of essential goods. Instead it responded to the pandemic by expediting its authorization of collaborative arrangements. In normal circumstances, the ACCC would require up to 28 days to determine an urgent application for interim authorization and up to six months to grant final authorization. During the pandemic, it has in some cases granted interim authorization within 48 hours of receiving the application. These authorizations have covered a broad range of sectors where collaboration is considered necessary to mitigate the impact of COVID-19, including banking, life sciences and supermarkets. So in Australia, coordinating the supply of pasta and wine may be permitted during the pandemic, but sorry, still not the shoes and silk scarves.

Asia – Merger control

The third layer is merger control. The object of merger control is to prevent the emergence of monopolies through the combination of previously independent companies. Again, mergers between competitors are the most likely to create monopolies, dominant position or to otherwise lessen competition to a significant extent. One justification for mergers has been the “failing firm defense,” where the buyer acquires a company that would exit the market anyway due to immediate failure. This justification has been on the books for years. We expected that due to COVID-19, this concept will be more frequently used, but the “failing” had to be established according to certain standards; it was not sufficient to just claim it.

In a recently decided case which concerned the merger between two retail chains for sports footwear, the failing firm defense was not even claimed, as there was no sign of failure of either party. However, the parties claimed that their combined market power should be discounted due to the general distress caused by COVID-19. The decision of the regulator sheds an interesting light on how COVID-19 may influence the assessment of a merger. The regulator took good account of the fact that the government measures restricting store visits would likely result in fewer in-store sales, and that even after the expiry of restrictions people may just be less inclined to visit stores. However, the regulator also noted that for these reasons online sales increased generally. Moreover, evidence did not show that COVID-19 had hit the parties harder than their competitors or any other player in the industry. Thus, it did not alter the competitive relationship between the parties or between the parties and their competitors. In other words, COVID-19 did not change the assessment methodology absent evidence of a particular impact on the merging parties.

We would expect other regulators, including in the US and Asia, to follow similar patterns of thinking. In fact, in the US, other than a temporary ban on early termination of merger control review that has already been lifted, merger control seems to be business as usual. US regulators even publicly stated as much when they announced that companies should not rely on the failing firm defense to get deals approved during the pandemic; the regulators will view with skepticism claims that the acquired company would fail without the acquisition. The same can be said of the approach to merger clearance in Australia. Aside from temporary changes to the foreign investment regime intended to protect the national interest during the pandemic by subjecting all inbound investments to screening, and delays to the ACCC’s merger clearance process arising from the pandemic, it is business as usual. The ACCC did not relax its approach to merger control during the global financial crisis and, as it prepares for increased merger activity involving distressed assets, it has made clear that it will carefully scrutinize “failing firm” claims.

Asia

There is, however, another beast emerging. While COVID-19 may not have affected competition law and policy, it has certainly given online sales an even greater boost. Competition regulators around the world are busy renovating the competition enforcement tools suitable for the bricks and mortar economy to adapt competition law to the digital era.

The encouragement of online sales is therefore a very important concept, and there are a number of other issues on the radar screen. Price-following algorithms create an unprecedented level of price transparency and price alignment, which is beyond the reach of enforcers as it does not involve collusion. Marketplaces are also scrutinized, as some powerful platforms have leverage over suppliers in relation to terms and conditions. The access of marketplace platforms to supplier data is sensitive where the platform operator also sells substitutable products over its own marketplace, acting as a reseller.

The review of the rules for horizontal and vertical collaboration are already well on the way, and over the European summer, the EU Commission has put several reform proposals up for public consultation. Thus, over the next few months, market operators have the opportunity to help shape the competition enforcement tools for the years to come.