Co-operation and competition in a crisis: EU Temporary Framework on Competition Law and Coronavirus

Introduction

Recent pronouncements by Governments and competition authorities have made a focus of co-operative measures taken between competitors. The onset of the Coronavirus crisis has created higher-than-normal demands for certain medical and non-medical related goods and services. This has in turn led to a need for businesses which are normally rivals to work together to collaborate in order to address market failures, brought about by the crisis itself.

On 8 April 2020, the EU Commission issued its temporary guidelines on the application of competition law to business co-operation during the COVID-19 crisis [1].  The Commission’s guidelines build on contacts it has already had with businesses seeking guidance on how they can collaborate with competitors to address the severe challenges of the pandemic. The guidance sets out principles and examples on what may be permitted under Competition Law under the current exceptional circumstances. The guidance also provides certain examples of how rivals can co-operate to alleviate some of the problems caused by the pandemic.

Against this backdrop, it is worth noting that the EU Commission is reviewing its general guidelines on inter-competitor co-operation (the Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements ("Horizontal Co-operation Guidelines") [2]. This reviews a process which had started before the current crisis began. A future note will look at the Commission’s efforts to revise the Horizontal Co-operation Guidelines. The Commission clearly feels that the Horizontal Co-operation Guidelines may not offer enough flexibility to deal with these difficult times. 

General position on competitor co-operation

Legally, a deep suspicion surrounds situations where competing businesses work together. That is because there are bad forms of co-operation, such as price fixing, output reductions, market allocation and bid rigging. These “bad forms” of co-operation usually result in more expensive goods and services for the consumer and possibly reduced supply. They are prohibited under Article 101 of the EU Treaty and also similar provisions in national competition law (for example Chapter I of the Competition Act 1998). Parties to these arrangements can be fined up to 10% of their global turnover or even face criminal penalties where the anti-competitive impact is particularly serious.  

There are, however, forms of “good” co-operation which do not fall under the prohibition. As a general position, co-operation between competitors is permitted where this allows two rivals to compete for an opportunity which they would not be able to secure individually. It could also be because they have complementary strengths or skillsets which are required collectively to respond to the needs of a particular project. 

Through co-operation, competitors may be able to generate efficiencies or innovative products which they could not achieve alone. One positive story emerging from the crisis has been how collaboration between competing Formula 1 motorsports teams resulted in the production of an innovative ventilators now widely used to assist COVID-19 patients with acute respiratory problems. On 15 April, rival drug manufacturers GlaxoSmithKline and Sanofi announced they were teaming up to explore possible vaccines for Coronavirus and undertake joint clinical trials. The Horizontal Co-Operation Guidelines recognise that these forms of collaboration may be pro-competitive and therefore be exempt from any sanction for infringing Competition Law [3].      

Market failure caused by the pandemic

The COVID-19 crisis has brought serious disruption to markets. This is recognised in the Commission’s communication. There is an asymmetrical demand for products and services. Some are the subject of excess demand whereas other goods and services are not currently in demand at all, notably in the retail and hospitality sector, which have been stopped in their tracks by lockdown measures.     

The shortages of personal protective equipment (“PPE”) and the astronomical price rises that have ensued are the primary example.  In the USA, the fifty states have effectively become competitors against each other in trying to procure scarce PPE for healthcare workers within their state territories.  As noted in the Commission’s framework guidance, there have also been shortages of other medicines used to treat the symptoms of COVID-19.

Co-operating in a crisis: how businesses can work together

The Commission notes that it has received numerous requests for guidance from businesses seeking to work together to ramp up production of medicines in short supply. That 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, businesses 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.

This means that businesses may wish to take the following steps in order to meet these objectives:

• coordinating the re-organisation 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 under-production, where such re-organisation would allow producers to satisfy demand for urgently needed medicines across Member States;
• agreeing which production sites will be responsible for the manufacture of which medicines, where these are in critical supply; and
• exchanging information about measures to adapt production, stock management and, potentially, distribution.

The Commission points out that usually such arrangements between competitors and exchanges of information would be problematic under competition law.  

Under usual circumstances, businesses are not permitted to share information about who their customers are and which products are supplied to them. Here that may be warranted to ensure all hospitals are receiving enough medicines. Likewise, businesses do not normally agree on levels of output.  That can result in movements in the market price. Again, that may be required here in order to combat the risk of shortages.   

These types of arrangements will not be an enforcement priority for the Commission, provided they are: 

• 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 (i.e. to be applied only as long there is a risk of shortage or in any event during the COVID-19 outbreak); and
• limited to what is strictly necessary to achieve the objective of addressing or avoiding the shortage of supply. Undertakings should document all exchanges, and agreements between them and make them available to the Commission on request. 

The need for an audit trail

Whilst these practices will be tolerated in these exceptional circumstances, the Commission underscores that the co-operating parties must keep records of the agreements reached between the parties and the exchanges between them. These should be made available to the Commission on request.

It is submitted that this is an important element of compliance. My own recommendation would be for firms to record how they applied the Commission’s guidance to their plans. For example, what was the evidence they relied upon to show that the measures they envisaged were strictly necessary to deliver their objectives.  Pre-empt the questions the Commission might ask and set down your rationale in a contemporaneous manner.   

Coordinating supply through a third party

The Commission also foresees a role for trade associations or another third party (such as a public body) in performing a coordinating role. This coordination could entail:

• joint transport for input materials;
• contribute to identifying essential medicines for which 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; and
• share aggregate supply gap information, and request participating companies, 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). 

This is in some respects unusual; there are many previous decisions in which the Commission and other competition regulators have fined trade associations for co-ordinating the activities of competitors. That said, there is also a degree of orthodoxy in that the sharing of aggregated information by trade associations may sometimes be permissible where it does not facilitate cartel behaviour between competitors.

The attraction of using a third party is that it can prevent the sharing of information between individual competitors which may enable them to collude. The Commission urges parties to these measures to ensure that information relating to individual competitors is not shared. 

The intersection with public procurement

The Commission’s guidance focuses on the supply side of markets but it must be remembered that there may also be obstacles on the demand side too.

In many of the supply arrangements contemplated by the EU Commission, the purchasers will be public entities such as public health authorities. Many of the supplies will be regulated by the EU Directives on Public Procurement which generally require that suppliers must be chosen through a formal tender process. 

It may be the case that in order to perfect these co-ordinated supply objectives, thought will need to be given to how the procurement rules are navigated. For example, to meet inflated demand for medicines and respond to co-ordination measures put in place by suppliers, a hospital may need to purchase from a supplier with whom it has no pre-existing supply relationship. That may technically fall foul of the provisions on public procurement. 

Where the existing contractual relationships are not fit for purpose, the parties may wish to have regard to the Commission’s Communication on the application of the EU procurement rules during the crisis [4]. The Communication provides guidance for example on when it may be justified to procure without a tender process because of urgency caused by the COVID-19 crisis, relying on a legislative exemption. If no exemption is available, suppliers may wish to consider other solutions, such as a supplier with an existing contract procuring goods from its competitor for onward sale to the ultimate purchaser. 

Exceptional procedure to seek Commission guidance

The Commission’s guidance confirms that it has been willing to provide individualised guidance to businesses in relation to specific proposed arrangements and whether these contravene competition law. This marks a break of its general practice in recent years, which has been to encourage businesses to self-assess their commercial practices with the assistance of their legal advisors.

The Commission confirms it is willing to continue to provide such guidance and also potentially to issue “comfort letters” confirming it would not take enforcement action.  Businesses requiring such advice can contact the Commission through the dedicated email address: COMP-COVID-ANTITRUST@ec.europa.eu.

Comments: a catalyst for good behaviour?

The guidance is welcome and should give businesses the comfort that by helping to address the failures of the market they will not be subject to penalties for positive and constructive engagement. Whilst the guidance only sets out the position and views of the EU Commission, it is likely to be influential on the National Competition Authorities of the EU27 and the UK. The EFTA Surveillance Authority has also indicated it will follow the Commission’s guidance.

Businesses should not see the guidance as carte blanche for co-ordinating the supply of products without consideration for Competition Law. The guidance provides helpful overall principles which will require careful application to the specific details and provisions of any proposed arrangements. 

As the Commission itself warns in its closing comments, it is prepared to come down hard on businesses which exploit the current situation opportunistically. For that reason, businesses engaging in arrangements with competitors need to train their staff on what is permitted in terms of communication and what goes beyond the requirements of the situation. 

It is also to be noted that the Commission’s guidance appears more willing to bless arrangements which address logistical and output challenges rather than allowing competitors to coordinate over price. Where there are aspects of any proposed collaboration which do not fit squarely within the Commission’s guidelines, the parties should question whether these aspects are really necessary and be willing to discuss these directly with the Commission before implementing them.