Crisis cartels: relying on Article 101(3) in a pandemic

The coronavirus pandemic has prompted some slackening of competition rules, but not much. Competition authorities, including the Commission and the CMA, have indicated that they are unlikely to take issue with coordination between providers of critical items such as medical equipment (see here and here). The government has issued exemptions from the Chapter I prohibition for groceries, healthcare services and Solent ferries. But these limited indulgences are all designed to remedy an urgent and heightened demand for essential products. For most businesses – many of whom will have seen a cliff-edge plunge in demand – the competition regime is unchanged.

 Nevertheless, the temptation amongst competitors to find a shared solution to a shared problem must be great. For such businesses, the critical question will be: how will competition law principles – and Article 101(3) in particular – be applied in a time of unprecedented crisis?

 Clues to the answer may lie in the EU’s reaction to historical crises in the markets for synthetic fibres (Commission Decision 84/380/EEC), Dutch bricks (Commission Decision 94/296/EC) and – most importantly – Irish beef (Case C-209/07). All these sectors suffered declines in demand which led to issues of structural overcapacity. In each case, rival undertakings agreed to reduce capacity in a concerted and orderly way, rather than allow market forces to remedy the problem. When challenged by the Commission, the relevant undertakings invoked Article 101(3) to justify their conduct.

 The starting point for the analysis in each case was that the relevant agreement to reduce capacity amounted to a restriction of competition by object under Article 101(1). In the Irish Beef case, the CJEU emphasised that the parties’ honest subjective intentions did not matter: “even supposing it to be established that the parties to an agreement acted without any subjective intention of restricting competition, but with the object of remedying the effects of a crisis in their sector, such considerations are irrelevant for the purposes of applying that provision” [21].

 Courts have reached similar conclusions in cases of other crisis cartels which do not concern overcapacity. An example from the UK is the dairy price initiative case, in which retailers clubbed together to agree prices they would charge to farmer suppliers, whose dissatisfaction at milk prices had led them to blockade creameries. Although the scheme had wide public support, the OFT nevertheless considered it an object restriction and the CAT largely agreed (Tesco Stores v OFT [2012] CAT 31).

 The objectives and pro-competitive effects of crisis cartels may, however, be relevant to the analysis of Article 101(3). This includes the following four cumulative conditions: (a) the agreement must contribute to improving the production or distribution of goods or contribute to promoting technical or economic progress; (b) consumers must receive a fair share of the resulting benefit; (c) the restrictions must be indispensable to the attainment of these objectives; and (d) the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

 In both the Synthetic Fibres and the Dutch Brick cases, the Commission found that Article 101(3) was applicable. Reducing capacity brought efficiencies and pro-competitive benefits insofar as it allowed the industries in question to shed the financial burden of keeping under-utilized excess capacity open without incurring any loss of output. Interestingly, the Commission also had regard to the social advantages which would arise from the agreements in the form of the retraining or redeployment of redundant workers. As to consumers, the Commission reasoned – without lengthy analysis – that they would benefit from an overall healthier industry with increased competition and greater specialization. In considering whether the agreements were indispenable, the Commission’s view was that (a) market forces on their own had been unable to solve overcapacity problems and (b) the agreements themselves were solely concerned with overcapacity and so went no further than necessary.

 In the Irish Beef case, the CJEU did not itself consider Article 101(3) but the Commission submitted a brief in the underlying Irish proceedings giving guidelines on its application to crisis cartels. The substance of this brief was later replicated in a paper submitted by the Commission to the OECD (here). It illustrates the key hurdles which an undertaking relying on Article 101(3) will have to clear.

 First, it will be necessary to establish pro-competitive benefits which outweigh the disadvantages for competition. In the context of the crisis, this may be one of the (relatively) easier hurdles to clear. Benefits could for example take the form of shedding inefficient capacity; or, in the case of an agreement protecting the survival of a shared critical supplier, shielding consumers from an interruption in supply, market collapse, or an overly concentrated market. There may be a useful analogy to be drawn with the failing firm defence which makes rare appearances in the mergers context: the thrust of the argument could be that, although anti-competitive, the conduct is better than the alternative of market exit.

 Second, businesses will need to show that the agreement is indispensable to achieve the benefits. The critical – and difficult – question here is likely to be whether market forces alone could remedy the problem at hand. In its paper, the Commission’s view was that an agreement reducing capacity was unlikely to be indispensable unless quite specific conditions were present (in particular, high costs associated with reducing capacity and stable, transparent and symmetric market structures). In the ordinary course of events, mergers and specialisation agreements might produce a more efficient solution.

 Third, and again critically, businesses will need to demonstrate that consumers receive a fair share of the benefits such that they are at least compensated for any negative impact. This is likely to be a hard condition to satisfy. Although the Synthetic Fibres and Dutch Brick cases contain generous reasoning on consumer benefits, the Irish Beef paper signals a more rigorous and quantitative approach. Of particular importance will be an analysis of the extent to which competitive constraints are reduced. The greater the reduction, the greater the efficiency and benefits must be for sufficient pass-on.

 The Commission’s paper concludes that pleading Article 101(3) successfully in overcapacity reduction cases is likely to be “very difficult” [58]. But these are extraordinary times. The key to success is likely to be whether the agreement in question limits any lessening of competition to the bare minimum. If it does, there may be a serious argument that the countervailing benefits in the context of an unprecedented crisis outweigh the harm.