THE EU APPROACH TO SPLIT CARTEL SETTLEMENTS – A TALE OF TWO HALVES

INTRODUCTION

This is a Speaking Note for a presentation that I gave to the New York Bar European Conference in Winterthur on 12-13 March 2015.  I would like to thank those who provided input and comments on this Speaking Note. http://www.nysba.org/Sections/International/Events/2015/Zurich_Regional_Meeting/Zurich_Regional_Meeting_program_brochure.html

The EU cartel settlement procedure remains somewhat shrouded in mystery.   There is very good reason for doing so, mainly because the negotiations need to be conducted in a safe framework and the settlement itself may potentially be market-sensitive.  However, a more generic discussion on the difficult issues arising out of a “split” settlements, is highly desirable:  In a split settlement only some of the parties subject to the investigation agree to the settlement.  Other parties will continue to defend their case under the normal procedure.  It can be expected that split settlements will become the norm in complex investigations, as it is unlikely that all parties will want to settle where their interests are very diverse.

THE EU CARTEL SETTLEMENT PROCEDURE (IN A NUTSHELL)

The EU settlement procedure involves six separate stages which include three formal meetings.  The meetings are typically chaired by the Director.

Stage I

This will be the first settlement meeting during which the Commission discloses the core evidence and explains its case.  The EC will only offer limited access to the file at this stage.

Stage II

At the second settlement meeting the Commission and the parties reach a « decision in principle” which will include an agreement on the case overview and the value of the affected sales.

Stage III

It is only at the third settlement meeting that the Commission will disclose the range of fines it is considering.

Stage IV

At this stage the parties acknowledge that (a) they have been given an indication of the range of fines (b) they have exercised their right to be heard and (c) they have been informed of the Commission’s objections. A Settlement Submission based on a template provided by the Commission is agreed with the parties.

Stage V

At this stage the « Settled » Statement of Objections is issued.  This will endorse the settlement submissions and will be sent to the parties by the Commission. The parties reply to the Statement of Objections by confirming their settlement submissions.

Stage VI

A Settlement Decision will be issued to reflect the terms of the Settlement Submissions.

It is the intention of the system that a settlement procedure should be faster than a normal procedure.  So speed is one of the major advantages of the procedure, even if the settlement process itself takes up to 12 months.

THE ADVANTAGES OF THE EU SETTLEMENT PROCEDURE

The advantages of a settlement in the EU Process are broadly threefold:

1. A reduction of 10% in the fine (but it should be noted that this is not relevant to an immunity applicant whose fine is reduced to zero in any event);

2. A shorter Statement of Objections and a shorter Settlement Decision giving more limited details on the facts;

3. A relatively quicker process.

THE PROBLEMS ARISING OUT OF SPLIT SETTLEMENTS

• The first issue arises out of the fact that the immunity applicant is entitled to a 100% reduction in any event, provided that it complies with the obligation of ongoing cooperation.  The incentives on the immunity applicant are therefore more limited than for the rest of the settling parties – the immunity applicant will be primarily concerned with reducing the scope of any “admission” for litigation purposes and with limiting the factual detail in any Settlement Decision.

• The other parties will be keen to receive a 10% discount on the amount of the fine.  With fines running into the hundreds of millions, even that amount is worth having, especially where other parties may not qualify for any reduction under the immunity/leniency programme.

• However, in those circumstances there will be a critical tradeoff between the degree of involvement of the company concerned and the amount of the fine.  If the Commission overreaches on the amount of the fine at Stage III of the settlement process, it is likely that some of the “later” parties will take a view that it is better to defend their case on (i) degree of involvement and (ii) fines – than to receive a relatively small discount on a very large fine.  The method of calculation used by the Commission Services to determine the amount of the fine is normally ‘key’ in that process.

• It should also borne in mind that most of the large investigations are now multinational in nature.  Where the Commission is moving towards a settlement early, it may be in certain parties’ interest not to settle pending the outcome of other administrative procedures globally.  The obvious point is that once an EU settlement is announced, any global defensive strategy will be much harder to run.  The scope of any admission will also dictate the approach to other jurisdictions.

• That brings me to the litigation aspects, in particular the US class-action plaintiffs.  In any investigation it is likely that the US Plaintiffs will seek disclosure of the Commission documents.  As has been set out above, the actual Settlement Process is supposed to be highly confidential.  What is less clear is the status of the Settlement Documents after the end of the procedure.  In order to retain the right incentives for Settlement, it is imperative that the Commission adopts the same rigorous approach towards protecting the Settlement Documents as it does with Leniency Documents.  The content of the Statement of Objections and of the final Decision should be very controlled and measured, otherwise the incentives to settle evaporate very quickly.

• Now let me turn to EU split settlements and explain why the process is potentially problematic:  For these purposes I will focus primarily on advantages 2. (Shorter SO) and 3. (Quicker Process).

• We can also assume that, in these circumstances, the Settlement Decision will be taken significantly earlier than the Non-Settlement Decision.  The Commission can sometimes delay the publication of the Settlement Decision and in those circumstances the non-settling parties will seek (and sometimes obtain) access to its content.  In other cases, however, the Settlement Decision is published before the Non-Settlement Decision. For instance, in the Steel Abrasives case (AT.39792), which is another example of a « split » hybrid settlement case, a public version of the final decision has already been published(http://ec.europa.eu/competition/antitrust/cases/dec_docs/39792/39792_2352_7.pdf) but the proceedings against the non-settling party are ongoing (http://europa.eu/rapid/press-release_IP-14-2361_en.htm).

• The Commission may have an incentive to « differentiate » i.e. to make the Non-Settlement Decision “worse” than the Settlement Decision.  It can do so by either (i) increasing the infringement period of the non-settling parties; or (ii) aggravating the infringement for the non-settling parties.

• However, where both the Settlement Decision and the Non-Settlement Decision relate to substantially the same facts, it is important not to forget that even the settling parties will be concerned by the content and context of the Non-Settlement Decision.  This is due to the potential litigation consequences and the possibility of joint and several liability in certain jurisdictions (e.g. the UK).  The Non-Settlement Decision could also have significant repetitional impact for the settling parties, depending on how the actual infringement in the Decision is worded.

• The parties that have settled will no longer have any official status in the non-settlement process, which could go on for years.  That is due to the fact that the Settlement Decision is addressed to them and that the Non-Settlement Decision will be addressed to others.  Although that view is formally correct, it is a major issue in any split settlement.

• A related consequence is that the settling parties will not be able to make any submissions or comments to parties in relation to the non-settlement Statement of Objections, nor will they be present at the non-settlement Hearing.  This is despite the fact that the ultimate Non-Settlement Decision will contain direct references to the Non-Settling Parties.

• There is Court precedent to the effect that a non-party can have its name treated as confidential in the ultimate Decision.  However, where the facts and participants are known due to the combination of the Settlement Decision and the Non-Settlement Decision, that right is entirely ‘hollow’.

• So is there any way that the Settling Parties can protect their legitimate interests and also protect their position in relation to any potential appeal ti the General Court?

• The only existing route is to request to be accepted as an interested third party under Article 13 of Regulation 773/2004. It is highly likely that a settling party has « sufficient interest » and this route would not be incompatible with any on-going duty of cooperation (as long as the party does not challenge what has already been agreed in the Settlement Decision).

INTERESTED THIRD PARTY STATUS (“TPS”) (Article 13 of Reg 773/2004):

• Is premised on being able to show « sufficient interest” (a settling party is likely to satisfy that requirement);

• Entitles the settling party to be informed « in writing of the nature and subject matter of the procedure” (i.e. access to the SO or at least a full summary of the SO) and to submit comments and views;

• Allows for the possibility of the settling party to be invited, « where appropriate », to the oral hearing and to develop arguments (it is not permitted to remain silent at the Oral Hearing);

• Any comments made by the settling party will need to be addressed in the full Decision.

RELEVANT CONSIDERATIONS

• It appears from the above that obtaining TPS will become an essential requirement for any settling party, as it will be the only way to somehow safeguard the interests of that party in the non-settlement procedure.

• However, that status also removes some of the advantages of settlement, in particular (I) being dragged into a longer process (ii) expense and management time (iii) potential repetitional impact of becoming more associated with the Non-Settlement Decision, especially through submissions; and (iv) potential litigation impact (US and elsewhere) of becoming more associated with the Non-Settlement Decision.

• With split settlements likely to become the norm rather than the exception, it is imperative that the Commission reviews its procedures to allow for a more effective (if limited) representation of the interests of the settling parties in any non-settlement process.  It should also look again at protecting the settling parties from the litigation effects of the Non-Settlement Decision arising out of substantially similar facts.

EU LAW AND NATIONAL REMEDIES: A REPLY FROM BRUSSELS TO MR CHISHOLM (#CMAgovUK)

As the CMA is about to embark on an exciting new adventure in relation to current accounts and SME banking (https://www.gov.uk/cma-cases/review-of-banking-for-small-and-medium-sized-businesses-smes-in-the-uk) it was interesting to read the comments of its Chief Executive Alex Chisholm contained in a recent speech to the Regulatory Policy Institute Annual Conference (https://www.gov.uk/government/speeches/cma-how-we-intend-to-use-market-investigations-to-extend-the-frontiers-of-competition). Two passages in particular attracted my attention and I have lifted them out of the speech below for ease of reference: “The third challenge has to do with the use of behavioural economics in competition assessments. Now, it may seem odd to have behavioural economics mentioned as part of the ‘challenges’ faced by a competition authority. Clearly, behavioural economics is a source of great insights for our work. But the development of behavioural economics has also raised expectations about the amount of work we need to do on the demand side. To understand how customers make decisions we need to do surveys, interviews, field studies, and lab experiments. And then we may need to do further tests to develop remedies for the problems that we have found. Our experience in this domain is still limited, but I suspect that this process will sometime involve a degree of experimentation and trial-and-error. And that is the essence of this new challenge that we are facing. For, as you know, market inquiries have a fairly ‘regimented’ process with tight deadlines; and this process does not lend itself easily to experimentation and trial-and-error.   (….)   The second claim, that divestments are a particularly intrusive form of intervention, also needs to be seen in context. A divestment is a one-off intervention. The fundamental premise is that once we have corrected an initial flaw in the market structure, we can trust the market to respond to consumer needs, and we do not need to further constrain the behaviour of market participants. If you think about it for a moment, this approach reflects a higher degree of faith in market processes than other forms of remedies; which generally imply a direct and sustained constraint on the actions of market participants. I would certainly argue that price caps or product bans are much more interventionist than divestments.” (emphasis added) The UK financial services sector presents a particular set of challenges for the CMA:  Not only is the UK a major shareholder in two of the largest UK retail banks, but the sector is affected to a significant extent by EU law and EU regulation.  The actions of the CMA (as with those of any other regulator) will be fully imputed to the UK when assessing their compatibility with EU law. So the starting point here is that any remedy in the financial services sector has to be compatible with EU law, in particular the freedom of establishment, the freedom to provide services and the free movement of capital.  These provisions are directly effective, which means that they can be invoked by anyone in national courts.  It is also established caselaw that they cover both directly and indirectly discriminatory measures and I will not dwell on that further. I would like to analyse the 2005 Commission Communication on intra-EU investment in the financial services sector (http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52005XC1125(01)&from=EN) – (“the Communication”).  I have not re-numbered the references to the Treaty Articles contained in the Communication. The Communication provides: “The fundamental Treaty principles of free movement of capital and the right of establishment impact on the detailed framework set out in secondary legislation for the financial sector. Where Member States, as is legitimate in the framework of subsidiarity, adopt supplementary rules beyond those outlined in secondary legislation, those rules and practices must be compatible with general Treaty principles. In particular, it is of the utmost importance for the completion of the internal market that discretionary powers available to supervisory authorities in matters relating to authorisation and supervision of financial intermediaries are used exclusively to protect the interest for which they were foreseen. Otherwise compatibility problems with primary EC law may arise.” (emphasis added) The same principle should apply to the CMA.  The power to conduct Market Investigation References is not exercised within the framework of Regulation 1/2003 relating to Articles 101 and 102 TFEU.  The ability of the CMA to make an order puts it at par with other supervisory authorities acting under supplementary national rules beyond those outlined in EU secondary legislation. The Communication provides as follows: “The acquisition of a controlling stake by an EU investor is also covered by the right of establishment.   The acquisition of controlling stakes in a domestic company by an EU investor from another Member State, in addition to being a form of capital movement, is also covered by the right of establishment. Article 43 of the Treaty, governing the right of establishment, provides that ‘restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited… Freedom of establishment shall include the right to set up and manage undertakings, under the conditions laid down for its own nationals’. Thus, nationals of other EU Member States should be free to acquire controlling stakes, exercise voting rights and manage domestic companies under the same conditions laid down in a given Member State for its own nationals (i.e. the application of the ‘national treatment’ principle to other EU investors).   In these cases establishment is inextricably linked to capital movements.   With respect to intra-EU investment in the financial services’ sector, both Treaty freedoms apply in parallel in cases of direct investment, whereas for portfolio investment, it is the freedom of capital movements that applies. For the purposes of the present Communication, a separate examination of the measures at issue in the light of the Treaty rules concerning freedom of establishment is consequently not called for and it is sufficient to focus on the freedom of capital movements, Article 56 EC.” (emphasis added) The Communication goes on to say that restrictions are possible on (a) prudential grounds or on the basis of (b) overriding requirements: “Among the few overriding requirements that have been found by the European Court of Justice to justify restrictions one can find the protection of consumers. It is settled case-law, however, that economic grounds can not serve as justification for obstacles prohibited by the Treaty. In cases decided by the European Court of Justice, Member States have unsuccessfully argued e.g. the need to safeguard the financial interest of a Member State or the intention to promote the economy of the country. With respect to the provision of services, the Court has recently clarified that a commercial bank does not qualify as a public service provider: it ruled that a group of commercial banks which operate in the traditional banking sector and which are not claimed to carry out any of the functions of a central bank or similar body, are not undertakings whose objective is to provide public services.” “Exceptions to Treaty freedoms are construed narrowly by the Court.   In this context it should be recalled that any exceptions to the Treaty rights of the free movement of capital and the freedom of establishment must be interpreted restrictively and their scope cannot be determined unilaterally by the Member States without any control by the Community institutions.  Thus, while prudential considerations are specifically mentioned as possible exceptions to the freedom, they, along with other exceptions, are circumscribed by the same qualifications that condition other restrictions.” (emphasis added) Measures liable to hinder or make less attractive the exercise of fundamental Treaty freedoms must fulfil four conditions; ·      they must be applied in a non-discriminatory manner; ·      they must be justified by imperative requirements in the general interest; ·      they must be suitable for securing the attainment of the objective which they pursue; and ·      they must not go beyond what is necessary in order to attain it. It would be right to challenge my conclusions on the basis that the Communication applies only to “acquisitions” of a stake in a financial services company and not to structural remedies or the “expropriation” or dismantling of such a stake. In this context I have to come back to the general principles that apply to expropriations as enunciated so well by the EFTA Court in Case E-02/06 (EFTA Surveillance Authority vs Kingdom of Norway), which concerned the public ownership of waterfalls and other natural resource assets (at paragraph 72): 72. The Court holds that Article 125 EEA is to be interpreted to the effect that an EEA State’s right to decide whether hydropower resources and related installations are in private or public ownership is, as such, not affected by the EEA Agreement. The corollary of this is that Norway may legitimately pursue the objective of establishing a system of public ownership over these properties, provided that the objective is pursued in a non-discriminatory and proportionate manner. So let me come back to Mr Chisholm’s speech and make the following observations: 1)   In circumstances where the UK Government is a major shareholder in two major UK financial institutions, any remedy in the sector has to be crafted with great care to avoid indirect discrimination that is contrary to EU law.   2)    Any remedy has to be in pursuit of and proportionate to an overriding requirement, for example the protection of consumers.  However in the specific case of Caixa-Bank France v Ministère de l’Economie, C-442/02, §21, the ECJ found that the consumer protection measure went ‘beyond what is necessary to attain that objective.’   3)   Any suggestion that a divestment remedy could be seen as a less onerous market intervention that other remedies will be subject to the principle of proportionality under EU law.   4)   EU law does not leave room for “experimentation” and “trial and error” and any justification or analysis has to fit into the established Treaty framework.

Indices, Benchmarks and Competition Law – The Dangerous Art of Window Dressing

(Speaking note for presentation at http://events.centralbanking.com/cambridge/static/og-course to be given on 11 September 2014.  I would like to thank those who have given me feedback on the note.)

During the recent Libor/Euribor investigations it became apparent that an index or benchmark may be capable of being manipulated.     This speaking note examines the interaction between the setting of indices/benchmarks and competition law.  It argues that not everything that looks bad is necessarily a competition law infringement.

There are at least three basic types of index or benchmark:

• Those that use submissions (or so-called “polling ») on a particular view of the market (for example, the price at which a hypothetical prime-bank could transact);
• Those that use submissions but those submissions relate to “actual” trade data;
• Those that are based on observation of trading in a particular time “window” or at a particular point in time.

 

This note will focus primarily on the third category of index/benchmark i.e. those that are based on a trading window or trades at a particular point in time.  However, the conclusions could apply equally to other types of indices.  It should also be noted that some indices or benchmarks are conceivably designed in a way that could be improved.  That is a regulatory issue and not a matter for competition law.

An index or benchmark is usually worked out by an independent organisation based on a particular methodology.  Sometimes the methodology is published, sometimes it is kept secret.  It should be noted that competition issues tend only to arise where those who have an interest in outcome of a particular index or benchmark have a way of influencing that benchmark.  Where there is no interest on the part of the traders in the level of the benchmark (for example, where it determines the price of other products), there should be no prima-facie incentive to manipulate it.

However, in a world where traders do have an interest in the level of the index or benchmarks and where they observe the market on a daily basis, the precise methodology matters little, as traders will have a precise idea of what is « good » and what is « bad » for their trading position on any particular day.  

They will also know that a trade in or around the window will have « market impact ».  Every trade has market impact, but depending on the timing of the trade, it’s amount, whether it is a buy or sell order and whether it falls into the window, the market impact may differ.  We can also assume that this is known to traders, who will understand whether that market impact is « good » or « bad » for their trading position.

1) Unilateral optimisation

So let us assume that a trader who knows that a particular trade will have « bad » market impact on his position decides to trade either before or after the window.  In the absence of market power, that is not an antitrust problem.

The basic proposition is that the trader can do his job on a unilateral basis, to the best of his ability.  Competition law should not intervene.

2) Parallel unilateral incentives

One further way of reducing ‘BAD’ market impact is for the trader to trade in a way that offsets her risk, for example by netting her position off against the position of others in the market.  So a direct match of +500m and -500m equals zero.  Such transactions, based on unilateral but parallel incentives, happen every day and should not raise an antitrust problem.

That should even be the case where the object for such a netting transaction is to reduce market impact for each side.  As long as that incentive is unilateral on the part of each trader, there is simply no object that could be caught by the antitrust laws.

3) Coordination around the window (going beyond parallel unilateral incentives)

The next category is « coordination ».  I have already proffered the view above that netting of positions, based on unilateral incentives, should never fall into the coordination category as long as it is in the unilateral interest of each trader.

So here we would be looking for behaviour that goes beyond netting and towards « coordinated » trading to achieve a particular outcome.  Again, even here, a competition regulator has to be very careful not to proscribe conduct that is in the unilateral interest of each trader, even if the effect (and perhaps even the object) is to reduce/increase market impact. 

The competition authority might look for contemporaneous evidence of, for example, a trader acting in a way that either (i) is not in his best interest or of her client and/or (ii) is prepared to take a short-term hit to favour someone else or (iii) evidence of wash trades which have no economic purpose.  It should be noted that these practices can indeed raise very significant regulatory concerns. 

But a competition regulator has a harder task than a financial services regulator.  At first there is the question as to whether the object of the coordination is unlawful.  The formal shortcut here is to look for language suggesting a dishonest/fraudulent intent in the contemporaneous records.  But often no such contemporaneous evidence exists and it would be dangerous for a competition regulator to proceed « by object » in these cases without careful and deliberate analysis of the trading context.

Trader communications are full of posturing, bravado and bluff, much of which is without any consequence.  Establishing the true facts is therefore difficult, which is precisely why regulators should proceed with great care. 

Just because something looks bad does not mean that it is actually a competition law infringement.  

4) Information exchange

A more delicate issue is the exchange of information.  Most antitrust laws draw a distinction between (i) current vs forward looking information and (ii) price vs non-price information.  The issue with trading is that it involves the ongoing disclosure of current pricing information, sometimes to other traders who may also be « competitors ».  That is the essence of trading and I would argue that such activity cannot be proscribed by competition law.  Every trader will have a degree of market transparency ahead of the window, based on current market information, including a view on pricing and volumes.

Sometimes traders exchange a general view on the future views and intentions ranging from « I have a lots to sell » to « I will go late » to « I could do with a high/low index » – but because of the lack of specificity that information exchange is not generally of a type that would be unlawful « by object”.  It can also be argued that such exchanges are entirely ancillary to the main trading activity.  They are “in the fabric” of that activity and should not be considered in isolation.

What may be unlawful « by object » is where the information is disclosed between the parties in bilateral/multilateral pre-pricing Discussions and other exchanges of commercially sensitive information that was not generally available to other operators active in market, where such discussions went beyond what was necessary in the context of trading activity.

Where conduct crosses the « by object » line is a matter for discussion but it is my contention that the following questions could be applied:

·       Did the information go beyond what was necessary for the legitimate negotiation of trade or market information;

·       Was the information disseminated on a bilateral/multilateral basis but was not available in the same detail to other market participants; and

·       Was there an element of pre-pricing discussion.

Again, all of these questions can only be answered by reference to the concerns in which trading takes place, taking into account factors such as the liquidity and volatility of the market concerned as well as the regulatory context.  The vast majority of day to day trader communications is unaffected by this cumulative framework and should not be touched by competition law.  

 

 

THE DISTRIPETITOR

In preparation for my presentation at the NY State Bar International Section Meeting in Vienna (http://www.nysba.org/ilpfall2014/), I have had to think again about the complex issue of how competition law deals with distributors that compete with the manufacturer

 

INTRODUCTION

 

Most competition lawyers have grown up with the certainties of « exclusive distribution », « selective distribution » and something called “franchising”, which was mainly related to wedding dresses!  We also knew the distinction between horizontal relationships (generally bad…) and vertical relationships (generally good… or at least better than the horizontal type).

 

Unfortunately life is complicated and most distributors do not sell widgets, in the same way that most franchisees do no sell wedding dresses.  Distributors commonly sell bulk industrial commodities, generally on a non-exclusive basis.  They tend to be large organisations with sophisticated marketing, branding and the ability to compete with the manufacturer.  Such competing distributors are somewhere in between a distributor and a competitor.  I have therefore called them “Distripetitors”.

 

CUSTOMERS, RESALE PRICES AND WHOLESALE PRICE DISCRIMINATION

 

So let’s turn to the easy stuff first: yes, a manufacturer is able to “reserve” certain customers or even an exclusive territory for itself.  The reserved customers tend to be the largest customers who have a habit of contracting globally/centrally with the manufacturer.  But it cannot be excluded that those same reserved customers will also seek passive quotes from Distripetitors in the major countries as a way of creating internal competition.  A Distripetitor should be permitted to respond to such “passive” requests.  The temptation for the manufacturer is therefore to seek to influence the retail pricing of the Distripetitor.  It is generally accepted that Recommended Resale Prices (RRPs) are fine, as long as no steps are taken to enforce them.  It should therefore follow that differential Recommended Resale Prices for reserved customers and non-reserved customers should also be fine, as long as they are not enforced.  However, such a policy could of course be seen as a red rag to a bull.  So, would it be possible for a non-dominant manufacturer to charge differential wholesale prices, for different types of orders?  This is more difficult because one would need to consider the indirect effects of such a policy.  A logical answer would seem that it is possible as long as (a) it is not an indirect restriction on parallel trade and (b) it is not an indirect resale restriction.  That will, as ever, depend on the pesky facts.

 

If over time a Distripetitor develops a relationship in which he seeks to challenge the manufacturer, it is of course permissible to adopt a different wholesale pricing policy to that Distripetitor, as long as the manufacturer is not dominant.  It is generally prudent never to disclose the competing wholesale pricing to other Distripetitors, as the ability to discriminate between them will be one of the key factors in working with those Distributors who invest the most effort and capital in developing a good relationship with the manufacturer.  Wholesale pricing is also commercially sensitive as between the Distripetitors.  It is also prudent to avoid collective meetings with Distripetitors unless those are purely focussed on technical issues or a new product launch.  Even then, competition compliance safeguards should be put in place and the manufacturer should avoid discussing his own retail pricing for the new product.  RRPs are of course fine.

 

Every now and then it may be necessary for the manufacturer to hand over a customer or even an estate of customers to a Distripetitor.  Provided that the Distripetitor is willing to receive that customer, it is entirely an issue for the Manufacturer whether the customer is handed over.  In such circumstances it must also be permissible to hand over the information that is necessary to ensure a smooth transition, especially if the manufacturer no longer intends to service that customer.  The handover is essentially akin to a “sale” of the customer and it should be permissible to hand over historic information on volumes, terms and even pricing.

 

Once the customer his handed over, however, the normal rules apply and any information flowing back to the manufacturer should be limited to “distribution information” such as volume forecasts, marketing spend etc.  Under no circumstances should the manufacturer continue to receive information on resale prices, discounts or other commercial aspects of the relationship.  The Distripetitor alone is responsible for determining the commercial relationship going forward.  It is therefore generally better to transfer a number of customers at the same time, which will then allow the monitoring of more aggregated information by the manufacturer to assess the performance of the distributor in relation to the transferred estate in the early years.

 

An analytical framework would look something like this:

 

• it is possible to reserve customers or even territories but do not seek to influence the resale pricing of a Distripetitor

• if the manufacturer is not dominant, discrimination in wholesale prices may be fine but confidentiality between Distripetitors is key

• always check that the relevant practice is no an indirect restriction on parallel trade, nor an indirect resale restriction

• when handing over customers to a Distripetitor, think of it as a “business sale” and limit the information and commercial influence that the manufacturer will have going forward quite severely.

COMPETING WITH A DISTRIPETITOR

 

Now let’s turn to the most difficult situation: a manufacturer is contacted by a global customer for global pricing.  However, the manufacturer operates through a Distripetitor in a number of places (generally non-exclusive territories) and would therefore be reliant on the Distripetitor in those territories to service the global contract.  The global customer is interested in global pricing, not differential pricing for different territories.  Nevertheless, it is of course possible that the same Distripetitor has also been approached by the same customer (along with other Distripetitors) to provide individualised pricing for the relevant territories or locations.

 

In developing an analytical framework for this situation, I have drawn on some of my work in relation to financial services and in particular syndicated loans:

 

• who at the Distripetitor is being contacted and for what purpose?

• is it indispensable for the manufacturer to work with the Distripetitor?

• do the paper trails record the specific purpose of the price/volume enquiry?

If the Distripetitor quotes a price for the territory that is above the price level that will be charged globally by the manufacturer, the manufacturer has a number of options:

 

• revert to the Distripetitor to ask for a re-quote (but without disclosing the manufacturer’s retail price)

• adjust the manufacturer’s retail price to achieve an acceptable average price level for the customer (a form of margin-support to the Distripetitor)

• quote without the relevant territory.

It is very important that there is no pattern of constant re-quotes which would effectively result in a communication of the manufacturer’s resale price, nor should there be joint commercial meetings to discuss pricing or volumes with the customer.

 

At this particular juncture the competition lawyer will have been shot by his client for misunderstanding commercial realities!  So please don’t get me wrong: a Distripetitor is a competitor in certain circumstance and a Distributor in others.  As long as that distinction is clearly understood, the competition risks can be mitigated but they will never disappear entirely.

 

Life is complicated!