Horizontal Agreements

1. Horizontal Agreements ICCA Competition Law Training 4 February 2012

2. Summary • EU law on restrictive agreements and cases • Concerted practice and parallel conduct • Trade Associations © 2012 Baker & McKenzie 2

3. EU law on restrictive agreements

4. Horizontal vs Vertical • Horizontal agreement: between firms which, for the purpose of the agreement, operate at the same level of the production or distribution chain i.e. actual and potential competitors • Vertical agreement: between firms which operate, for the purpose of the agreement, at a different level of the production or distribution chain

5. EU rules on restrictive agreements: Article 101 • Article 101(1) prohibits agreements and concerted practices which have as their object or effect the prevention, restriction or distortion of competition within the EU - catches horizontal and vertical agreements • De minimis - if agreement has limited impact, it may fall outside of the rules (10% / 15% market share for horizontal/ vertical agreements) but won’t apply if agreement contains “hardcore restraints” • Exemption - Article 101(3) provides an exemption for pro-competitive agreements (e.g. joint R&D, franchising) but will not apply to cartels • Focus of today is on cartel arrangements, e.g. price fixing, bid rigging • Other horizontal agreements e.g. joint production, joint R&D can be caught and could be exempt –consider EU Horizontal Guidelines © 2012 Baker & McKenzie 5

6. EU cartel fines/cases • European Commission prioritises cartel busting – very high fines imposed e.g. €992m in Elevators and Escalators (2007) and €486.9m in Flat Glass (2007) • Very active/effective leniency regime - equivalent to Lesser Penalty Regulations • The following are unlawful and attract high fines: • Price-fixing e.g.-fixing retail prices/discounts (International Removals, 2008, € 50.4m) • Market sharing by customer e.g. “if you leave us customer X, we will not attack customer Y” or geography e.g. “if you stay out of our region, we’ll stay out of yours” (Gas Insulated Switchgear, 2007, € 750m) • Bid rigginge.g. agreements on the number / level / frequency of bids, “sham offers”, compensating the loser by sub-orders (Interbrew, 2001, € 91.65m) • Joint boycotts e.g. “we will not supply discounters“ (Sorbates, 2005, € 138.4m) • Capacity and production limits/quotas e.g. “let us jointly reduce capacities in order to boost prices” (Elevators, 2007, € 992m) • Exchange of competitively sensitive information (T-Mobile, 2002, NL competition authority imposed fine of € 52m for one meeting discussing commission to be granted to dealers) © 2012 Baker & McKenzie 6

7. How does this apply to non-EU companies • The EU rules have been applied to foreign companies, usually in global cartels • Global markets – global effects - even price fixing outside of the EU e.g. in the Middle East / Japan can have an effect in the EU – e.g. if product is sold into Europe or customers located in Europe • Market sharing agreements - by “agreeing” to stay out of the EU (even a gentlemen’s agreement) e.g. Seamless Steel Tubes, Gas Insulated Switchgear – Japanese defendants fined higher amount than the Europeans e.g. Alstom € 65m, Areva €53m and Mitsubishi Electric €115m • Change in Trends - Commission targeting the “big ticket” cartels - global players, high global turnover, foreign defendants. High fines mean more leniency e.g. reported that a Japanese company has gone in for leniency to the EU, US and Japanese competition authorities • Current EU investigations include Automotive Components Car Ignitions & Starters which concerns purely non EU companies and arrangements that took place outside EU • So, if there is a sale / customer / link to EU, there is a risk of EU enforcement © 2012 Baker & McKenzie 7

8. Concerted practice and parallel conduct

9. How is parallel conduct caught? • Art 101(1) applies to all collusion between undertakings whatever form it takes – i.e. it covers agreements and “concerted practices” • This is important because parallel conduct, e.g. parallel pricing, could be evidence of an agreement or, more likely, a concerted practice • What is an agreement? • two or more undertakings express in whatever manner, their joint intention to behave on the market in a specific way • A concurrence of wills between economic operators • E.g. written cartel agreement or unwritten “gentlemen’s agreement” • Concerted practice • Collusion – but less formal than an ‘agreement’ • A mental consensus whereby practical cooperation is knowingly substituted for competition; consensus need not be achieved verbally -can come about by direct or indirect contact between the parties (Whish) © 2012 Baker & McKenzie 9

10. Snapshot of EU cases on parallel conduct • Dyestuffs (1972) – parallel pricing found to be unlawful – looked at similarities of price increases/timing of announcements and informal contact between competitors • Zinc Producer Group (1984) – price leadership and parallel pricing in an oligopoly not in itself sufficient evidence of a concerted practice • Woodpulp (1985) – parallel pricing found to be unlawful because of indirect info exchange but overturned by Court because there was an explanation for behaviour i.e. oligopoly and rationality of response by suppliers

11. EU cases on parallel pricing - Dyestuffs • Under EU law, price parallelism, in certain circumstances, can be evidence of a concerted practice and therefore a cartel • In Dyestuffs, the Commission/Courts found that parallel pricing was unlawful - evidence relied on by Commission: • Similar rate and timing of price increases • Similar rate and timing of instructions sent by parents to subsidiaries • Informal contact between the competitors (e.g. advance announcements of price increases) • Parties argued that they acted in a similar manner because of oligopolistic market structure and that increasing prices was a rational response to competitor price increases in such markets but ECJ found that market was not a genuine oligopoly © 2012 Baker & McKenzie 11

12. EU cases on parallel pricing - Woodpulp • In Wood Pulp, Commission found that producers of wood pulp were guilty of a concerted practice to fix prices in the EU – but this was reversed by the Court • Commission relied on the following evidence: • Parallel conduct on prices from 1975 – 1981 • Direct and indirect exchanges of information (which created artificial transparency) • Market not sufficiently narrow oligopoly (so parallelism unlikely) • ECJ rejected this because: • Price announcements to customers did not eliminate uncertainty as to what competitors would do • There were alternative explanations for the system and the timing of the price announcements (i.e. they were a rational response to market conditions) • Market was more oligopolistic than the Commission thought • ECJ noted factors which suggested there was no concerted practice • Market shares fluctuated from time to time • No evidence parties had tried to establish production quotas © 2012 Baker & McKenzie 12

13. Key takeaways from EU cases • EU law recognises that parallel conduct can be entirely legitimate as companies predict and react intelligently to each other • However, the Commission can use it as evidence of prior collusion, especially where there is no alternative plausible explanation for the conduct • What could be a plausible explanation? • When markets naturally lead to the interdependence • Markets are naturally transparent • Announcements are legitimately requested by customers

14. Unilateral conduct Concertation Grey zone Explicit agreement e.g. cartel setting prices or quotas Concerted practice (e.g. pure information exchange) Parallel conduct that turns out to be evidence of concerted practice (eg evidence of contact Dyestuffs) Parallel conduct that turns out to be unilateral reactions or conscious parallelism that simply reflects market structure (e.g. Woodpulp) © 2012 Baker & McKenzie 14

15. Price parallelism – global developments (I) • Australia • New bill: Competition and Consumer Amendment Act (No 1) • Prohibition on making public or private disclosures on pricing, pricing intentions and certain related information • Government says only banking sector affected by new rules, but regulations may extend scope • China • Pricing regulations suggest that the National Development and Reform Commission will scrutinise examples of price parallelism and may use this as evidence there has been a concerted practice (in combination, however, with other factors, such as market structure) © 2012 Baker & McKenzie 15

16. Price parallelism – global developments (II) • Indonesia • Pfizer - Recent success on appeal against allegations of cartel conduct evidenced in part by parallel pricing (insufficient evidence) • Cement – ICC accepted that similar price movement did not necessarily mean there was a cartel (case dropped) • Cooking Oil – ICC considered a wide range of structural and behavioural factors (including price parallelism) as indirect evidence of a cartel • Anti-hypertension medicines – Contractual provisions in supply/distribution considered, in addition to sales and price parallelism, to find a cartel • Malaysia • Guidance interprets ‘agreement’ very widely, e.g. to include listening to a business proposal at lunch • Competitors are advised to be wary of ‘simply following the prices of competitors unless the decision was made completely independently … and there is a reasonable justification for following each other’ • Companies advised to evidence that every pricing decision they take is independent © 2012 Baker & McKenzie 16

17. Key tips – Best practice on price parallelism • Be wary of any direct/indirect communication between competitors which directly or indirectly results in parallel pricing • May need to keep paper trail of legitimate business reasons for price increase, especially if market is under scrutiny, but not always practical • Do not discuss prices even indirectly with competitors - even a general statement that “price wars are not good for anybody” is problematic • Communications on prices should be made only to parties that need to know the pricing decision and never to competitors • Timing of price announcements – allow only enough lead time for customers to implement the price change and not longer periods • All personnel should be trained on document creation and the danger of "casual" statements” - any internal documents suggesting competitor contact or consensus must be thoroughly investigated © 2012 Baker & McKenzie 17

18. Trade Associations

19. Trade Associations – Why are they problematic? • Trade Associations involve gatherings of competitors and therefore carry competition risks • Trade Association meetings can facilitate unlawful information exchange between competitors – this could amount to an anti-competitive agreement under Article 101 • Best practice is to issue guidelines / provide training to business people attending Trade Association meetings • Ideally, limit attendance at meetings as difficult to control discussions • This is a key risk in Europe – e.g. Consumer Detergents, 2011, fine of € 315m where the initial reason for meeting was perfectly legitimate (environmental issues) • In India, Trade Associations already on the CCI’s radar © 2012 Baker & McKenzie 19

20. Tips: Do not discuss with competitors… • Future individualised prices or volumes • Individualised company prices, including any matters affecting price, such as discounts, rebates, price changes, profit margins etc - this includes future, current and recent pricing • Individual company costs, cost accounting formulas etc • Individual company terms and conditions of sale • Individual company sales or production-related information, including sales volumes, market shares, sales revenues, production volumes etc • Information as to strategic future plans of individual companies concerning for example marketing, production or technology • Matters relating to individual suppliers or customers © 2012 Baker & McKenzie 20

21. Tips: Topic you may discuss… • Non-confidential, technical, legal and regulatory issues relevant to the industry such as standards, health and safety, environmental matters and corporate social responsibility – but note Consumer Detergents • Issues relating to technology in general – but not a particular company's own proposals • Industry public relations or lobbying initiatives (including responding to proposed legislation) • Education and training initiatives © 2012 Baker & McKenzie 21

22. Horizontal issues Baker & McKenzie LLP is a limited liability partnership registered in England and Wales with registered number OC311297. A list of members' names is open to inspection at its registered office and principal place of business, 100 New Bridge Street, London EC4V 6JA. Baker & McKenzie LLP is regulated by the Solicitors Regulation Authority of England and Wales. Further information regarding the regulatory position is available at http://www.bakermckenzie.com/london/regulatoryinformation. Baker & McKenzie LLP is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the terminology commonly used in professional service organisations, reference to a "partner" means a person who is a member, partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.