Volume 19 - Issue 6

A diverging union: the EU and its national authorities

Mark Briggs

12 July 2016

As the European Commission launches a consultation on empowering national competition authorities, it faces the challenge of ensuring that these freshly emancipated enforcers do not use their new independence to vary in their interpretations of EU law. Mark Briggs reports

Editor’s note: this article was written before the UK voted in favour of leaving the EU on 23 June 2016

In the ballroom of The Hotel in Brussels on Boulevard de Waterloo, the president of Germany’s Federal Cartel Office prepared to ride his hobby horse: the insistence that despite his agency’s divergence from its European peers when deciding that certain vertical restraints by Booking.com were unacceptable, there is more that unites the continent’s competition authorities than divides them.

“Focus on the convergence rather than the divergence,” Andreas Mundt says, before he heads to another conference room in another hotel in another city to make the same plea.

More than a decade since the European Commission began to decentralise its competition enforcement, national authorities are reaching different outcomes in cases with the same facts and the same points of law – most notably in vertical restrictions and most-favoured nation clauses. These disparities are significant because 87 per cent of EU competition law decisions since 2004 have been made by national authorities rather than the commission.

The European Commission wants to create a single European market for all goods and services. It began with coal and steel in the aftermath of World War II, and now extends to almost everything, including hotel reservations. To create a truly unified single market and a level playing field, the law need to apply to all countries and be enforced in the same way.

Across the European Union, laws regarding competition as described in the Treaty on the Functioning of the European Union are enforced by 29 separate competition authorities: one for each member state of the European Union, and the commission itself through its Directorate-General for Competition.

The commission must ensure that national competition authorities interpret these laws in the same way, while working to put more power in the NCAs’ hands. In December 2002, it introduced Regulation 1/2003 to grant authorities the power to directly enforce EU law on their own, greatly expanding the reach of EU law and helping to normalise enforcement across the continent.

Now DG Comp wants to refresh this relationship and correct some divergence in enforcement over issues such as vertical restraints – the online hotel booking case being the most recent example. This coincides with worrying instances of local government interference in several national authorities and stretched public resources as Europe struggles to break out of the economic stagnation that has dogged it since the financial crisis.

Regulation 1/2003

Back in the 1990s, DG Comp dominated competition enforcement in the European Union. Between 1998 and 2003, the commission adopted 259 formal decisions. But with such a heavily centralised system, it struggled to prioritise cases and balance its workload.

The commission wanted to share some of this weight and to empower NCAs to take on their own cases, without them having to bother the commission for every notification of a vertical agreement in any jurisdiction in Europe. From 2004 to 2015, the commission has taken 128 competition decisions; national authorities have made 865 decisions under EU law in the same period.

Damien Geradin, a founding partner at EDGE Legal in Brussels and a professor of competition law at Tilburg University in the Netherlands, says some of the NCAs are now more active than the commission. “EU competition law is essentially enforced at the member state level. That is, I think, quite an outcome,” Geradin says.

Ali Nikpay is a partner at Gibson Dunn in London who previously worked as a senior official at the UK’s former competition enforcer, the Office of Fair Trading, and at the European Commission. He was heavily involved in drafting what became Regulation 1/2003.

“The system wasn’t working,” Nikpay says of the time before the regulation. “It focused on the wrong things, was too centralised and too interventionist.”

To reverse this trend, the regulation included a mechanism that granted authorities the power to directly enforce EU competition law. Now Germany’s Federal Cartel Office can fine a company not only for violating domestic law, but also for infringing articles 101 and 102 of the Treaty of the Functioning of the European Union regarding cartel activity and territorial constraints.

Nikpay says Regulation 1/2003 has allowed DG Comp to prioritise the use of its own resources, and along with new leniency guidelines, gave national authorities the tools they needed to pursue their own cases. This increased overall enforcement, particularly against cartels.

“There has been a massive ramp-up of cartel investigations,” Nikpay says. “If we agree that cartels are the main evil of competition law, then Regulation 1/2003 has been hugely successful.”

Gaps remain, however. For example, cartel enforcement still varies from location to location; only 18 of the 28 member states have criminal sanction for competition violations. Administrative penalties vary as well, because there is still no uniform method to calculate fines. Slovakia looks only at domestic revenue, while Romania can impose fines based on international turnover. A simulated case run last year by the European Competition Network found a 1-to-25 differential between the lowest and the highest fines issued for the same violation.

A wake up call and a nuclear option

If cartel enforcement has been the winner of decentralisation, there have also been losers.

“The commission has paid little attention to verticals,” Geradin says. “There has been no proper enforcement.”

But as the digital economy grows, enforcement of vertical deals between companies is growing along with it.

Silke Heinz, who co-founded Heinz & Zagrosek in Cologne, says, “I think the first 10 years or so looked at cartels because this was the most obvious. It is usually where fines are highest and so this was the first focus of authorities. Now other cases come into focus.”

In 2013, Germany’s Federal Cartel Office – along with competition authorities in Austria, France, Hungary, Italy, Sweden, Switzerland and the UK – launched an investigation into restrictive practices by Booking.com. The hotel reservation website had a “most-favoured nation” clause in its contracts with hotels, which had to guarantee Booking.com their best rates on all rooms. A hotel that agreed to use the company’s platform could not advertise a lower rate elsewhere online – not even on its own website.

The following year, Booking.com offered the authorities behavioural commitments that would allow hotels to offer cheaper rates to rival platforms, but still not on their own websites. Otherwise, the company argued, customers could free-ride: using Booking.com as a search tool and then booking a room directly on the hotel’s website at a discount, leaving Booking.com without a commission for a sale it helped to instigate.

All authorities except one accepted the commitments. Germany found the remaining limitation on hotels still violated competition law – a decision that Booking.com is currently appealing in the German courts.

Richard Whish QC at King’s College London described the diverging results as a “dog’s breakfast” – British slang for a mess – at GCR Live in November 2015. Despite simultaneous investigations by several national authorities, the commission declined to intervene even as the national authorities reached different conclusions.

In the wake of the Booking.com case, practitioners say it might be time for the commission to take a leading role in such investigations. DG Comp does have the power to do so under Regulation 1/2003; once the commission has opened an investigation, the NCAs must stop theirs. And the commission is allowed to take cases away from national authorities under article 11 of the regulation, something described as the “nuclear option” by Jean-François Bellis at Van Bael and Bellis in Brussels.

“When the regulation was written, this power was regarded as something the commission could threaten to use but probably would not use because it would be humiliating for the [national] authority,” Bellis says. “But it is a power that makes sense if you want uniformity. There is an impression that in some fields there is no common EU policy and verticals is a good example of that.”

A report commissioned by the UK’s Competition and Markets Authority and released in April said the importance of vertical relationships to companies has increased since the rise of the digital economy, and will continue to grow in importance as that sector develops.

“Booking.com is not a model that was on anyone’s mind when the vertical guidelines were issued 10 years ago,” Bellis said.

It certainly is on everyone’s mind now.

The divergence, however minor Andreas Mundt claims it to be, has been discussed and debated in law firms and conference rooms across Europe. The commission wants NCAs to continue to pursue these sorts of innovative cases, but not if different jurisdictions end up with varying interpretations of EU competition laws.

The great consultation

The debate comes at at a time when the European Commission has launched a public consultation on the empowerment of national competition authorities.

Silke Heinz says the larger member states’ enforcers already think they are on a par with the commission. “In practice, the Federal Cartel Office has always regarded itself as equal to the commission and I think the other authorities are catching up,” she says.

While some agencies may be concerned that big, interesting and novel cases will be taken off their hands, the FCO is clearly under no such fear. In addition to its Booking.com investigation, this year the authority carried out a joint investigation into the potential anticompetitive effects of big data and launched an investigation of Facebook.

“The commission is increasingly in the role of a moderator in the ECN,” says Heinz. “I think the NCAs will become even more emancipated as we go along.” But she warns that with greater power given to each of the 28 national authorities, the chance of divergence becomes greater too.

It is something Andreas Mundt foresees as well, but in an almost accepting manner.

“To get 28 agencies under one hat on every single nuanced question, I think is a big ask,” he tells GCR.

Regulation 1/2003 focused on giving authorities the power to enforce EU law. The current consultation will prepare the ground for new recommendations that ensure the authorities have the same powers to enforce those laws. At the moment, some authorities are unable to conduct digital searches of company hard drives; some are able to penalise trade associations while others are not; and the fining structures that authorities use differ widely.

Bruno Lasserre, the head of the French Competition Authority, thinks this needs to change. “To be more effective as a network we need to move to more instrumental convergence,” he says. “This is more about the [authorities’] status and the tool box used to counter anticompetitive practices.”

Adopting a common set of procedures across the European Competition Network, Lassere says, will help ease the minds of companies that operate across borders in Europe and are concerned about the opaque nature of the network.

“The scepticism comes from the fact there is divergence in the instruments used and the sanction issued,” Lasserre says.

With different levels of sanctions available to different authorities across the European Union, which authority takes on an investigation can make a big difference to a company’s accounts. If two authorities investigate the same conduct, it can cost the company more money than if the commission itself took the case. In its cooperation agreement with national authorities, DG Comp is referred to as “well placed” to take on cases that affect three or more member states. But it is under no formal obligation to do so, meaning several authorities can each run their own investigation and issue their own fines.

Independence has become a key pillar of the commission’s public consultation. Sources at the European Competition Network say its members are deeply concerned about political interference in the Hellenic and Polish competition authorities.

In January, the Greek government – during a hearing on powers to share criminal records with other member states – announced sweeping changes to the internal workings of the competition authority, including provisions that would retroactively bar both the president and the vice president from their positions. Greece is currently an EU programme country that received bailouts from the commission and the European Central bank in order to meet its budget requirements.

Commission officials used the channels open to them through this programme to lobby the Greek government to significantly water down the proposals. The minister of the economy was summoned to meet with the EU competition commissioner Margrethe Vestager.

But there was little that the European Commission could do in Poland when the incoming government removed Adam Jasser as the head of the competition authority in January.

During a public hearing at the European Parliament in April, Frederic Jenny, chairman of the competition committee at the Organisation for Economic Cooperation and Development, said the independence of authorities is important, but there is more than one type of independance.

Authorities should be free from what Jenny described as “ministerial steer”, in which government officials’ views on a case are officially or unofficially taken into account in the final decision, and need to have the independence of their finances guaranteed to ensure they will have the resources from one year to the next to fulfil their duties. But at the same time, Jenny said, authorities need to stick to strict rules concerning conflict of interests that govern what members of authorities can do after their employment at the agency ends.

He does not think there is a one-size-fits-all approach. “Institutional design is dependent on the local history, culture and politics,” Jenny said. “Maybe we need to be creative when it comes to funding competition authorities.”

Going forward

Sources with knowledge of the consultation say that far from ensuring authorities do not diverge in their decision making, this consultation is likely to result in a document that sets minimum duties for authorities and tries to ensure they have the powers and finances to execute them.

While divergence may be on the minds of practitioners, Brussels is more concerned about under-enforcement. Several countries that have joined the EU since 2004 lacked competition authorities prior to accession. Observers remain concerned these new enforcers have yet to mature, and that their jurisdictions suffer from under-enforcement and weak decisions – hence the EU’s move towards minimum standards.

There is a political problem about how the commission will bestow any new powers to the NCAs. Under European law, the European Council – a body comprising the heads of governments of each of the 28 member states – can impose a regulation that relates directly to the operation of the law. But rules that affect the internal workings of member states do not fall into that category. Instead, proposals must be put before the European Parliament. Because of this, observers expect the current consultation to result in a new piece of legislation, rather than subjecting 1/2003 to the renewed scrutiny of the 751 member of parliament.

The question of new laws on the operations of national authorities and protection for their independance divides two of Europe’s most powerful enforcers.

“To my view legislation is a necessity,” says France’s Lasserre.

His German counterpart is more hesitant. If such legislation is necessary, maybe it should be left to national lawmakers, Andreas Mundt says.

“Certain safeguards are important but it also has to do with the spirit, the back up the agency receives from the local policy makers,” Mundt says. “This spirit cannot easily be achieved via regulation.”

Any new protections and expectations for the continent’s competition authorities are unlikely to be a la carte, but will be focused on raising standards of smaller authorities rather than curtailing the ambitions of the larger ones.

For now, the working groups and direct phone calls must suffice to keep authorities on the same page of new and exciting cases. More communication is needed, as practitioners and authority staff expecting to see more collaboration and less centralisation among Europe’s competition enforcers. But if that approach fails, the commission can always detonate article 11, take cases away from NCAs and free the authorities from the burden of convergence – if it dares.

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