COVID-19: Commission publishes Temporary Framework for assessing antitrust issues related to business cooperation

Practical Law UK Legal Update w-024-9291 (Approx. 7 pages)

COVID-19: Commission publishes Temporary Framework for assessing antitrust issues related to business cooperation

by Practical Law Competition

Background

On 23 March 2020, the Commission announced that all competition authorities in the European Competition Network (ECN) (the Commission, the European Surveillance Authority, and the national competition authorities of the EU/EEA) had issued a joint statement on how to apply the European competition rules during the crisis resulting from the COVID-19 outbreak (see Legal update, COVID-19: ECN joint statement on applying competition rules during the crisis ).

On 30 March 2020, the Commission announced that it had launched a dedicated website to provide guidance where there is uncertainty about the compatibility with EU competition law of concrete cooperation initiatives with an EU dimension that need to be swiftly implemented to tackle the crisis (see Legal update: COVID-19: Commission launches dedicated website to provide advice on compatibility with competition law of cooperation initiatives).

The Commission has now published a Communication providing a Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak.

Temporary Framework

The Commission recognises that the COVID-19 outbreak has caused a major and unprecedented shock to the global and EU economies. In particular:

There is a general supply shock resulting from the disruption of supply chains, combined with an asymmetric demand shock caused by either an abrupt decline in consumer demand for certain products and services or a steep rise in demand for other products and services, notably those related to the health sector.
There is also uncertainty at this stage on both the duration and intensity of the shock, which mainly rest on factors that are not all in the control of undertakings, but rather on decisions by public authorities, driven inter alia by public health considerations.
Undertakings are, therefore, facing exceptional challenges due to the COVID-19 crisis and they can play a crucial role in overcoming the effects of the crisis.
The exceptional circumstances and its related challenges may trigger the need for undertakings to cooperate with each other to overcome or at least to mitigate the effects of the crisis to the ultimate benefit of citizens. In light of the multi-faceted and asymmetric nature of the crisis, undertakings might face different challenges and thus might need to resort to different forms of cooperation.

The Temporary Framework Communication therefore covers possible forms of cooperation between undertakings to ensure the supply and adequate distribution of essential scarce products and services during the COVID-19 outbreak and so address the shortages of such essential products and services (notably medicines and medicinal equipment) resulting first and foremost from the rapid and exponential growth of demand. Such cooperation could take place among undertakings active within the relevant sector to overcome this shortage, as well as between undertakings active in other sectors.

The Commission will apply this Communication from 8 April and until further notice.

The Temporary Framework Communication explains the following :

The main criteria for the antitrust assessment of business cooperation projects aimed at addressing the shortage of essential products and services during the COVID-19 outbreak

Undertakings must self-assess whether their agreements breach Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) or meet the criteria for exemption under Article 101(3) of the TFEU. Cooperation between undertakings might help in more efficiently addressing the shortage of essential products and services during the COVID-19 outbreak. In this context, undertakings might need specific guidance on their cooperation initiatives to facilitate their self-assessment. It may even be appropriate to provide undertakings with ad hoc feedback or comfort on the legality of specific cooperation initiatives.

The Commission is therefore ready to provide such guidance and comfort to undertakings or associations of undertakings to facilitate initiatives that need to be swiftly implemented in order to effectively tackle the COVID-19 outbreak, notably where there may still be uncertainty about whether such initiatives are compatible with EU competition law. Therefore, as above, it has set up a dedicated webpage and mailbox for these purposes.

The Commission states that, over the last few weeks it has received several requests from undertakings and trade associations asking for guidance about their envisaged cooperation, notably in the health sector and in view of the risk of shortages of critical hospital medicines used to treat COVID-19 patients. These requests provide examples of the types of cooperation that is needed.

The Commission notes that different measures may contribute to bridging the gap between demand and supply, for example:

It might require a very significant, rapid increase of production for products that are needed but are in short supply. This may lead to a reduction in the production of other products.
It might also require the reallocation of stocks, which would require that undertakings agree to exchange/communicate information on sales and stocks.
To increase production, undertakings might need to switch their production lines for some non-essential/non-shortage medicines (or other products) to medicines (or other products) necessary to address the outbreak.
Output could be increased further and more efficiently if, at a certain site, only one medicine was produced (as opposed to switching production between different products, which requires time consuming cleaning of machinery, etc.), balancing economies of scale with the need to avoid excessive reliance on any particular production site.

Therefore, the response to emergency situations related to the COVID-19 outbreak might require different degrees of cooperation, with a varying scale of potential antitrust concerns. Based on recent experience, cooperation in the health sector might be limited to entrusting a trade association (or an independent advisor, or independent service provider, or a public body), to for example:

Coordinate joint transport for input materials.
Contribute to identifying those essential medicines for which, in view of forecasted production, there are risks of shortages.
Aggregate production and capacity information, without exchanging individual company information.
Work on a model to predict demand on a member state level, and identifying supply gaps.
Share aggregate supply gap information, and request participating undertakings, on an individual basis and without sharing that information with competitors, to indicate whether they can fill the supply gap to meet demand (either through existing stocks or increase of production).

The Commission states that such activities do not raise antitrust concerns, provided that they are subject to sufficient safeguards (such as no flow of individualised company information back to competitors), as indicated in the Commission’s Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements (see Practice note, Flowchart guides: Horizontal co-operation).

However, cooperation in the health sector might even need to go further to overcome critical supply shortages. It may, for instance, need to extend to coordinating the reorganisation of production with a view to increasing and optimising output so that not all firms focus on one or a few medicines, and other medicines remain in underproduction, where such re-organisation would allow producers to satisfy demand for urgently needed medicines across member states.

Measures to adapt production, stock management and, potentially, distribution in the industry may require exchanges of commercially sensitive information and a certain coordination of which site produces which medicines, so that not all undertakings focus on one or a few medicines, while others remain in under-production.

Such exchanges and coordination between undertakings are in normal circumstances problematic under EU competition rules. Nevertheless, in the current exceptional circumstances, such measures would not be problematic under EU competition law or, in view of the emergency situation and temporary nature, they would not give rise to an enforcement priority for the Commission, to the extent that such measures would be:

Designed and objectively necessary to actually increase output in the most efficient way to address or avoid a shortage of supply of essential products or services, such as those that are used to treat COVID-19 patients.
Temporary in nature (to be applied only as long there is a risk of shortage or in any event during the COVID-19 outbreak).
Not exceeding what is strictly necessary to achieve the objective of addressing or avoiding the shortage of supply.

The Commission also states that:

Undertakings should document all exchanges, and agreements between them and make them available to the Commission on request.
The fact that a cooperation is encouraged and/or coordinated by a public authority (or carried out within a framework set up by the latter) is also a relevant factor to be taken into account to conclude that such cooperation would not be problematic under EU competition law or would not be an enforcement priority for the Commission.
In the context of an imperative request from public authorities to undertakings to temporarily cooperate in response to urgency situations related to the current COVID19 outbreak (for example to organise production and delivery to meet an urgent need to keep up the functioning of health care for COVID-19 patients), such cooperation is allowed.

An exceptional procedure to provide ad hoc guidance on specific cooperation projects aimed at addressing the shortage of essential products and services during the COVID-19 outbreak

DG Competition, will continue to provide guidance to undertakings and trade associations with respect to specific cooperation initiatives with an EU dimension, that need to be swiftly implemented to effectively tackle the COVID-19 outbreak, especially where there is still uncertainty about whether such initiatives are compatible with EU competition law.

With a view to increasing the degree of legal certainty as regards antitrust guidance within a timeframe that is compatible with the urgency of certain situations related to the current COVID-19 outbreak, the Commission, through DG Competition, stands ready, exceptionally and at its own discretion, to provide such guidance by means of an ad hoc “comfort” letter.

Conclusion

The Commission encourages pro-competitive cooperation aimed at addressing the challenges of responding to urgent situations related to the current COVID-19 outbreak. It is committed to provide antitrust guidance and support to facilitate the proper and swift implementation of cooperation that is needed to overcome the crisis to the ultimate benefit of citizens.

However, the Commission emphasises that in these exceptional circumstances, it is more important than ever that undertakings and consumers receive protection under competition law. It will therefore continue to closely and actively monitor relevant market developments to detect instances of undertakings taking advantage of the current situation to breach EU antitrust law, either by engaging in anti-competitive agreements or abusing their dominant position.

The Commission states that it will not tolerate conduct by undertakings that opportunistically seek to exploit the crisis as a cover for anti-competitive collusion or abuses of their dominant position (including dominant positions conferred by the particular circumstances of this crisis) by, for example, exploiting customers and consumers (for example by charging prices above normal competitive levels) or limiting production to the ultimate prejudice of consumers (for example by obstructing attempts to scale up production to face shortages of supply).

Therefore, the Commission encourages undertakings and citizens to continue reporting any cartels and other antitrust violations, including abuses of dominant positions, that may come to their attention through the usual tools at their disposal.

Comfort letter

The Commission has announced that it has used the procedure in the Temporary Framework Communication for the first time and is providing a comfort letter to “Medicines for Europe”, formerly the “European Generics Medicines Association” (EGA), which represents manufacturers of generic medicines.

The comfort letter addresses a specific voluntary cooperation project among pharmaceutical producers (both members and non-members of the association) that targets the risk of shortage of critical hospital medicines for the treatment of coronavirus patients. Generic pharmaceutical companies produce the largest part of the critical hospital medicines that are now urgently needed in large scale volumes to avoid shortages.

The Commission considers that, in the current circumstances, this temporary cooperation appears to be justifiable under EU antitrust law, in view of its objective and the safeguards put in place to avoid anticompetitive concerns and as long as it remains within the scope communicated to the Commission.

Comment

Since Regulation 1/2003 came into force on 1 May 2004, companies have been solely responsible for self-assessing the legality of their agreements under Article 101 of the TFEU. Prior to that, companies could notify agreements to the Commission for exemption. In some cases, the Commission would issue administrative "comfort letters" rather than a formal exemption decision, indicating that it saw no grounds for action in relation to a notified agreement.

The regime introduced by Regulation 1/2003 did provide for the Commission to provide informal guidance on novel questions in certain limited circumstances (see Practice note, Article 101: Informal guidance on novel questions).

In the exceptional circumstances of the COVID-19 outbreak, the Commission has developed the informal guidance procedure and resurrected the concept of a "comfort letter". In its press release accompanying the publication of the Temporary Framework, the Commission explains that it has been engaging with companies and trade associations to help them in assessing the legality of their cooperation plans and putting in place adequate safeguards against longer-term anticompetitive effects.

The Commission explains that, in most situations, the oral guidance that the Commission has been giving to companies during the last weeks is sufficient. However, the Commission is also ready to exceptionally provide companies with written comfort (comfort letter) concerning specific cooperation projects that need to be swiftly implemented, especially where there is still uncertainty about whether such initiatives are compatible with EU competition law.

Alongside the Commission's Temporary Framework, the Commission has published a Communication providing guidelines on the optimal and rational supply of medicines to avoid shortages during the COVID-19 outbreak.

Source

Commission Communication on a Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak

Commission press release IP/20/618

COVID-19: Commission publishes Temporary Framework for assessing antitrust issues related to business cooperation | Practical Law