EC SLAMS INTEL WITH €1 BILLION FINE

The European Commission ("EC") imposed a €1.06 billion fine on US-based chipmaker Intel for abuses of dominant position. This is the highest individual fine ever imposed by the EC. Intel said it would appeal the decision.

Intel Fined For Abuses Of Dominance

Intel is the world's largest producer of x86 central processing units ("CPUs"), the main hardware component of a computer. From 2000 onwards, Intel's main rival Advanced Micro Devices ("AMD") has submitted several complaints to the EC regarding Intel's business strategies. AMD argued that Intel engaged in illegal practices aimed at excluding AMD from the market for x86 CPUs.

Following a nine-year long investigation, the EC concluded that Intel has abused its dominant position in the market for x86 CPUs. The EC found that Intel had offered loyalty rebates to computer manufacturers, i.e. rebates that were conditional on the manufacturers purchasing all, or almost all, of their CPU requirements from Intel. Intel had also made payments to retailer MediaMarkt on condition that MediaMarkt stores stocked only computers containing Intel x86 CPUs. Finally, Intel had made payments to computer manufacturers to delay the launch of certain products that incorporated AMD's CPUs ("pay for delay").

The EC emphasised that it did not object to the rebates per se, but to the conditions Intel attached to its rebates. According to the EC , rebates are abusive if offered by a dominant firm and made conditional on buying less (or none) of a rival's products, unless specific reasons justify such rebates.

The Highest Fine Ever Imposed By The EC

The EC fined Intel €1.06 billion (approx. $1.45 billion). This record-breaking fine exceeds each of the three fines imposed by the EC on Microsoft from 2004 to 2008 for abuses of dominance and for failure to comply with the EC 's orders (although the total of the fines imposed on Microsoft amounts to €1.68 billion). It also exceeds the record cartel fine of €896 million imposed by the EC in 2008 on the French group Saint-Gobain.

The fine represents 4.15% of Intel's 2008 worldwide revenues. The EC can impose fines of up to 10% of the company's worldwide annual revenues. The EC has also ordered Intel to cease all ongoing illegal practices immediately.

Intel had previously been ordered by the Japanese regulator to discontinue its loyalty rebates and was fined $25 million by the Korean regulator for similar practices. Both the U.S. Federal Trade Commission and the New York Attorney General's Office have recently opened investigations into Intel's pricing strategies. Moreover, AMD is suing Intel before U.S. federal courts.

The Crackdown On Abuses Of Dominance Will Continue

The Intel investigation and the resulting record fine is the latest example of the EC 's focus on the enforcement of Article 82 of the EC Treaty, which prohibits abuses of dominance. The EC has been emboldened by several recent cases in which EU courts have confirmed its interpretation of Article 82 (cf. France Telecom ruling summarised in See You in Court). It has issued detailed guidelines on the application of Article 82 and is currently conducting other high-profile investigations into alleged abuses of dominance (including new inquiries into Microsoft's practices, described in EU Developments).

Rebate practices, such as the ones involved in the Intel case, are but one of many types of commercial behaviour that could potentially raise concerns. Given this environment, it is essential for leading market players to carefully consider the manner in which they deal with their suppliers, distributors, customers, and competitors.

EU DEVELOPMENTS

Regulators To Review Pharmaceutical Mergers

U.S. pharmaceutical group Pfizer has recently agreed to buy its rival Wyeth for $68 billion, while drug manufacturer Merck has announced a $41 billion merger with Schering-Plough. The U.S. Federal Trade Commission ("FTC ") is reviewing both transactions and has issued a second request to Pfizer. Both transactions are also subject to approval by the EC and by several other antitrust authorities. The EC has extensive experience in reviewing pharmaceutical mergers and is expected to work in close cooperation with the FTC . The deals are scheduled to close by the end of the year.

* Fried Frank provides on-going advice to Merck in relation to its merger with Schering-Plough.

EC Challenges Microsoft's Tying Practices

The EC sent a statement of objections to Microsoft relating to the tying of Microsoft's web browser Internet Explorer to the Windows PC operating system. Microsoft is dominant in the supply of PC operating systems, with a global market share of over 90%. The EC argues that by tying Internet Explorer to Windows, Microsoft provides its web browser with an unfair advantage over competitors. If these preliminary findings are confirmed, the EC may order Microsoft to offer customers a choice of browsers (Microsoft already allows Windows 7 users to remove Internet Explorer and to use other browsers). It may also impose a significant fine on Microsoft. The EC is also currently investigating Microsoft's alleged failure to disclose interoperability information across a broad range of software products, including its Office suite and the .NET Network. Several competitors, including Google and Mozilla, have reportedly joined the investigations and testified against Microsoft.

The EC has previously fined Microsoft a total of €1.68 billion for the tying of Windows Media Player to Windows, restricting interoperability between Windows PCs and non-Microsoft work group servers, and failing to comply with the EC 's injunctions. In 2007, the EU Court of First Instance rejected Microsoft's appeal against the EC 's decision.

Mastercard Reduces Its Multilateral Interchange Fees

The interchange fee is charged by the consumer's bank to the retailer's bank whenever a consumer pays a retailer using a credit or debit card. The interchange fee is usually passed on by the retailer's bank to the retailer. In December 2007, the EC found that MasterCard's cross-border multilateral interchange fees were anti-competitive because they inflated the cost of card acceptance by retailers without leading to proven efficiencies. The EC ordered MasterCard to phase out these fees. In April 2009, following intense negotiations, MasterCard accepted to reduce its interchange fees and to enhance the transparency of its payment card schemes. According to the EC , MasterCard's new fees will be the lowest in the world for credit and debit card transactions. These undertakings will apply while MasterCard's appeal against the EC 's 2007 decision is pending before the Court of First Instance. The EC is currently investigating Visa's multilateral interchange fees and recently issued a statement of objections in which it argues that Visa's fees are also anti-competitive.

EC Investigates Airline Alliances

The EC is investigating two airline alliances: Star Alliance (Lufthansa, United, Continental, Air Canada) and Oneworld (British Airways, American Airlines, Iberia). The investigations focus on the cooperation between airlines on transatlantic routes. The EC is concerned by the parties' plans to jointly manage sales, schedules, capacity and pricing, and to share revenues on these routes. British Airways and American Airlines had previously abandoned alliance plans in 1997 and 2001 after regulators required them to divest a large number of take-off and landing slots at Heathrow, in order to limit the parties' combined market power. The parties argue that this time divestments should not be required, given, in particular, the "open skies" agreement that has liberalised transatlantic flights.

RWE To Divest Gas Transmission Network

The EC has accepted RWE 's commitment to divest its west German gas transmission network, and has closed its investigation into RWE 's alleged abuses of dominance. The EC 's investigation was launched in 2006 as a follow-up to its energy sector inquiry. The EC was concerned that RWE , the second-largest energy group in Germany behind E.ON, had denied rivals access to its infrastructure and imposed unfair transmission tariffs. Last year the EC closed an investigation into E.ON's conduct in the German electricity market after E.ON agreed to divest its extra-high-voltage transmission system and some of its generation capacity. The EC is also investigating the activities of several other European energy groups. It has issued statements of objections to French EDF relating to EDF 's electricity supply agreements, and to Italian ENI regarding the operation of ENI's gas transmission network.

COMPETITION COMMISSION ORDERS BAA TO SELL THREE AIRPORTS

The UK's Competition Commission ("CC") found that BAA's common ownership of seven British airports impeded competition. The CC ordered BAA to divest Gatwick, Stansted, and one of its airports in Scotland (either Edinburgh or Glasgow). The remedies are particularly severe given that BAA was not found guilty of any specific antitrust violation.

CC criticises BAA's common ownership of airports

BAA Limited is the successor of the State-operated British Airports Authority, which was privatised in 1987. BA owns and operates four airports which account for 90% of airport passengers in southeast England (Heathrow, Gatwick, Stansted and Southampton). It also owns and operates three airports which account for 84% of airport passengers in Scotland (Edinburgh, Glasgow and Aberdeen). In July 2006, a consortium led by the Spanish building group Ferrovial acquired BA for £10.1 billion.

In June 2006, the Office of Fair Trading ("OFT ") launched a market study of UK airports. The study was triggered by complaints made both by airlines and by passenger groups. In March 2007, after finding that the lack of competition between BAA 's airport could lead to higher charges and higher costs, the OFT made a market investigation reference to the CC under the Enterprise Act 2002. The CC 's remit in the context of a market investigation is very broad: the CC may impose remedies, including divestitures, if it considers that certain market features prevent, restrict or distort competition in the UK . The CC 's inquiry focuses on the structure of the market rather than on specific anti-competitive practices, such as cartels or abuses of dominance.

Following a two-year long investigation, the CC published its final report in March 2009. The CC found that BAA 's common ownership prevented competition between Glasgow and Edinburgh airports: both airports had spare capacity but did not compete against each other for airline businesses. The CC further considered that BAA had no effective longterm infrastructure strategy and did not seek to develop new runway capacity in the London area. While acknowledging that Government policies (e.g., delays in approving a third runway at Heathrow) have contributed to existing capacity constraints, the CC argued that primary responsibility lay with BAA . In particular, the CC argued that if London airports were owned by separate owners, competitors would have taken advantage of capacity constraints at Heathrow in order to divert business from Heathrow and gain market shares. Capacity constraints and lack of competition between airports hurt both airlines and passengers.

...and orders the break-up of BAA

The CC ordered BAA to sell both Gatwick and Stansted, as well as either Edinburgh or Glasgow airports. BAA must sell all three airports within two years, beginning with Gatwick, then Stansted, and finally one of the Scottish airports. While antitrust regulators frequently impose divestments in merger cases, this is the first time that the CC has ordered a break-up of a company outside of the merger control context.

The CC also imposed certain behavioural undertakings on BAA with respect to Aberdeen Airport. It has recommended that the Civil Aviation Authority strengthens its consultation processes in relation to Heathrow, the UK 's only hub airport. Finally, in order to promote effective competition between airports, the CC is advocating a reform of airport regulation.

BAA initiated the sale of Gatwick in September 2008, prior to the release of the CC 's final report. However, BAA has also appealed the CC 's report before the Competition Appeal Tribunal. BA argues that the CC failed to take into account the adverse financial impact of its report, in particular by requiring BAA to sell three airports in the current financial and economic circumstances. It also complains that one of the members of the CC 's panel has links to an organisation interested in acquiring the airports.

SEE YOU IN COURT

Landmark ruling on predatory pricing

In 2003, the EC imposed a fine of €10.4 million on Wanadoo Interactive, then a subsidiary of France Telecom, for predatory pricing. The EC found that Wanadoo set prices below costs, deliberately sacrificing profitability in order to drive competitors out of the ADSL market. In 2007, the Court of First Instance ("CFI ") upheld this decision and France Telecom appealed this ruling before the European Court of Justice ("EC J"). France Telecom argued that Wanadoo had charged low prices in response to aggressive pricing by other ADSL service providers and could not recoup the losses suffered as a result of this price war. In April 2009, the EC J rejected France Telecom's appeal. The EC J ruled that predatory pricing was abusive even if the dominant firm was not likely to recoup the losses resulting from pricing below costs. The EC J also reiterated that a dominant firm does not have an absolute right to align its prices to those of its competitors. This ruling is at odds with the approach adopted in the U.S., where the recoupment test is used to distinguish abusive predatory pricing from healthy price competition.

CFI reduces Nintendo's parallel trade fine by €30 million

In 2002, the EC fined Nintendo €149 million for hindering parallel imports of its game cartridges and computer consoles. The EC also fined seven of Nintendo's distributors a total of €18.8 million. Nintendo and two of its distributors appealed the EC 's decision before the CFI . In April 2009, the CFI reduced Nintendo's fine by €30 million. The Court found that both Nintendo and one of its distributors (John Menzies plc) had cooperated in the investigation (e.g. by providing incriminating documents to the EC ). In exchange for this cooperation, the EC had reduced the fines imposed on Nintendo and John Menzies. However, while the EC had reduced the distributor's fine by 40%, Nintendo's fine had been reduced by only 25%. The Court ruled that the EC had therefore violated the principle of equal treatment and that Nintendo's fine should be reduced by a further €30 million to match the reduction offered to John Menzies.

Advocate General supports the EC's appeal in the Schneider case

In 2001, the EC prohibited the acquisition of the French industrial group Legrand by its rival Schneider Electric. This decision was later annulled by the CFI but the EC reopened the investigation. As a result, Schneider abandoned the deal and sold Legrand to the consortium formed by Wendel and KKR at a reduced price. Schneider then sued the EC before the CFI claiming damages of €1.7 billion. In 2007, the CFI ruled that the EC should compensate Schneider for the loss suffered as a result of selling Legrand.

The EC appealed the CFI ruling before the EC J. The Court's Advocate General Ruiz- Jarabo has recently issued an advisory opinion in which he argues that the CFI 's ruling should be set aside. The Advocate General argues that Schneider itself was ultimately responsible for the loss it incurred when it sold Legrand. According to the Advocate General, Schneider could have avoided this loss, e.g., by exercising its option to terminate the sales agreement with Wendel/KKR .

British Airways fights of a "class action"

The Chancellor of the UK 's High Court dismissed a claim brought against British Airways ("BA ") on behalf of a broad group of air-freight customers. The claimants, two flower importers, sued BA for damages resulting from BA 's alleged involvement in an illegal agreement to fix prices for air-freight services. The claim was brought on behalf of the claimants and of all other direct and indirect customers that have purchased air-freight services at inflated prices. The Chancellor allowed the claimants to sue BA on their own behalf but ruled that the representative element of the claim should be struck out, because it was impossible to identify the members of the class unless and until the action was successful. The Chancellor also noted that conflicts would inevitably arise between the claims of different members of the class, e.g. between those that had absorbed higher air freight prices and those that had passed on the inflated prices to their own customers.

This judgment illustrates the difficulty of bringing an opt-out "class action" before UK courts. An antitrust class action is a lawsuit brought on behalf of the victims of an antitrust violation without the express consent of each of the victims (defendants can "opt out" of the class action). Both UK and EU authorities are debating legislative proposals aimed at facilitating antitrust class actions.

German Supreme Court allows a claim against cement manufacturers to proceed

The German Supreme Court ruled that a suit brought by Cartel Damage Claims ("CDC "), claiming antitrust damages against six cement companies was admissible. In 2003, the defendants had been fined a total of €660 million by the German Federal Cartel Office for operating a price-fixing cartel. CDC , a Brussels-based company specialised in antitrust litigation, purchased damages claims from 36 alleged victims of the cement cartel, and sued cartel members on its own behalf (according to CDC 's press release, the claim is for €170 million). The Supreme Court confirmed that CDC could use this procedural device as a substitute for a class action, which is not permitted under German law. The case will now proceed before the Düsseldorf district court. CDC has also recently purchased damages claims from 32 alleged victims of a price-fixing cartel between hydrogen peroxide manufacturers (CDC believes that the combined claim represents around €430 million plus interest).

High Court allows extradition of a UK citizen to the U.S.

The UK 's High Court dismissed an appeal by Ian Norris against a ruling of a District Judge and an order of the Secretary of State that Mr Norris should be extradited to the U.S.. Mr Norris is the former chief executive of Morgan Crucible, a UK manufacturer of carbon and ceramic products. The U.S. authorities are seeking his extradition in connection with two charges: Mr Norris is accused of having participated in a conspiracy to fix carbon prices and of having obstructed the investigation into the alleged cartel. Last year, the House of Lords ruled that Mr Norris could not be extradited for price-fixing because cartels did not constitute a criminal offence in the UK at the time of the alleged misconduct (before 2003). However, the High Court has now ruled that Mr Norris should be extradited to face the obstruction of justice charges. Mr Norris can still halt the extradition process by bringing an action before the European Court of Human Rights.

GERMAN MERGER CONTROL: HIGHER THRESHOLDS BUT TOUGHER GUN-JUMPING PENALTIES

Two recent developments have reshaped the German merger control regime. First, the legislator has introduced an additional notification threshold, which is expected to reduce the number of merger filings by one third. Second, the German Federal Cartel Office ("FCO") has imposed significant fines on two companies that tried to circumvent German merger control rules.

New notification threshold should lead to fewer filings

In March 2009, Germany amended its jurisdictional thresholds for merger filings. Previously, companies were required to notify a deal to the FCO if the parties' combined worldwide sales exceeded €500 million and if one of the parties had German sales in excess of €25 million. As a result, a transaction could be reportable in Germany merely because the buyer was a large global corporation with German sales of more than €25 million (even if the target had negligible domestic activities).

The 2009 amendment maintained the €500 million and the €25 million thresholds, but added the requirement that one other party to the transaction must have sales in Germany in excess of €5 million. Consequently, a transaction which consists of an acquisition by a large international company with a substantial presence in Germany of a business with German sales of less than €5 million would no longer be reportable to the FCO.

The amendment brings Germany's rules in line with the approach advocated by the OECD and other international advisory bodies. The new legislation is expected to reduce the number of merger filings in Germany by approximately one third (more than 2,300 merger filings submitted in Germany in 2007). The change is also likely to render less relevant the "domestic effect" doctrine, which in the past provided an exemption from the filing obligation when the target company was not active in Germany.

Two record fines for violation of merger control rules

In December 2008, the FCO imposed a record-breaking €4.5 million fine on U.S.-based Mars for closing the acquisition of U.S. animal feed producer Nutro Products before obtaining German clearance. Mars had made merger control filings with the U.S., German, and Austrian competition authorities. The U.S. agency let the waiting period expire but the FCO opened an indepth investigation (the Austrian investigation was also ongoing). Mars then decided to close the transaction and integrate Nutro, with the exception of Nutro's German and Austrian businesses. However, the FCO found that the carve-out of Nutro's German activities was not sufficient, and that the transfer of Nutro's foreign production facilities and global trademarks violated the stand-still obligation (i.e., the duty not to close the transaction before obtaining German clearance). The FCO noted that the fine would have been even higher if Mars had not actively cooperated in divesting Nutro's German business.

Two months later, the FCO fined German publisher Druck und Verlagshaus ("DuV") €4.13 million for failing to notify DuV's acquisition of the rival publishing house Frankfurter Stadtanzeiger. The acquisition took place in 2001 but the FCO became aware of it only in 2009 while reviewing another transaction. The FCO found that DuV had deliberately concealed the transaction by way of a trustee arrangement. Moreover, DuV had significant sales and market shares in the affected markets.

These cases illustrate the FCO 's willingness to impose heavy penalties on companies that disregard German merger control rules. The Mars precedent would also make it more difficult for the merging parties to implement carve-out arrangements.

Note: Part one is a shortened version of the article by Fried Frank attorney T. Caspary, "The German Parliament Introduces Second Domestic Turnover Threshold for Mergers", e-Competitions, 25 March 2009, n°25683.

German merger control in a nutshell:

  • Reportable transactions: a filing is required if the transaction meets the notification thresholds (see below) and the buyer acquires (i) control over the target, (ii) a stake of 25% or more or 50% or more in the target, or (iii) competitively significant influence over the target.
  • Notification thresholds: the parties' combined worldwide revenues exceed €500m, German revenues of at least one party exceed €25m, and German revenues of another party exceed €5m.
  • Deadlines: Phase 1 review is one month; Phase 2 review is three additional months.
  • Stand-still obligation: if the transaction is reportable in Germany, the parties must not close it before obtaining the FCO 's clearance.

NATIONAL UPDATE

UK : Competition Commission Blocks Video-On-Demand JV

The CC has blocked a video-on-demand joint venture between UK TV operators BBC Worldwide, Channel Four and ITV . The joint venture, referred to as "Project Kangaroo", would have combined the parties' catalogues to create a website of UK TV content accessible on demand. The CC found that the parties controlled the vast majority of the programmes produced and first aired in the UK . Post-transaction the parties could have charged higher prices to both wholesale customers and end-users. France: steel traders fined €575 million The French Competition Council has imposed fines of €575 million on 11 steel traders for operating a price-fixing cartel between 1999 and 2004. This is the largest cartel fine ever imposed by the French regulator. Three subsidiaries of ArcelorMittal were fined a total of €301 million. Other cartel participants included German group Kloeckner and French trader Descours & Cabaud. The investigation began in 2004 after several customers complained about suspiciously similar bids received from different traders. Descours & Cabaud applied for leniency while two other parties acknowledged their involvement in the cartel in exchange for a reduction in fines.

France: Orange Ordered To Give Up iPhone Exclusivity

In 2007, Apple agreed that France Telecom's subsidiary Orange would act as the iPhone exclusive wholesaler and network operator in France. Following a complaint filed by Bouygues Telecom, the French Competition Council issued an interim decision finding that the arrangement was anti-competitive. In February 2009, the Paris Court of Appeals confirmed the Council's decision. The Court agreed that the agreement's duration (five years) and scope (it covered the existing product and all future models) were excessive.

Germany : FCO Vetoes Acquisition Of Petrol Stations By Total

The German Federal Cartel Office prohibited Total from acquiring OMV's petrol station network in East Germany. Post-transaction, Total, Shell, BP, ConocoPhillips and ExxonMobil would have jointly controlled up to 85% of the regional diesel and motor gasoline retail market. The FCO found that the transaction would have reinforced the suppliers' collective dominant position. The decision takes into account the interim findings of the FCO 's inquiry into the functioning of the German fuel sector.

Germany Fines Liquefied Gas Suppliers

The FCO has fined two liquefied natural gas suppliers, Westfalen and Propan Rheingas, €41 million for running a customer-allocation and price-fixing cartel for at least eight years. The FCO previously fined nine other cartel members a total of €209 million. The case was decided under the old fining guidelines and the FCO has calculated the fines based on the cartel's profits. It is expected that the application of the new guidelines, which take into account the parties' revenues, will result in higher fines. Westfalen has appealed the FCO 's decision.

Germany : FCO Accepts Remedies Almost Four Years After Clearance

In 2005, the FCO cleared the acquisition of asphalt mixer NMW by its rival Werhahn. The transaction raised concerns in several regional markets for mastic asphalt (used for the construction of roads and bridges) but the FCO found that these markets were de minimis. One of the parties' competitors appealed the clearance decision. While the appeal was pending, the German Supreme Court changed its approach to de minimis markets: under the Court's new approach the regional markets concerned by the Werhahn/NMW deal could no longer be considered as de minimis. In light of this new case law, Werhahn offered to divest part of its mastic asphalt business, and the FCO accepted the divestiture. It is highly unusual for a merger control authority to amend a clearance decision that is under appeal. It remains to be seen whether or not the Court of Appeals will accept the arrangement.

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