Competition law in the supply chain

Sam Beighton: Hello, I am Sam Beighton a partner in the competition and antitrust team at Gowling WLG and what I wanted to touch upon today was recent developments in competition. I will focus in particular upon co-operation, collaboration and giving some concluding thoughts in relation to these hot topics.

So without further ado I wanted to touch first of all upon co-operation and the reason for flagging this in the context of supply chain is thinking about some of the challenges being faced because, as we are all aware, we have a perfect storm. We have a perfect storm of shortages, production issues, increased demand as we all emerge from our Covid cocoons and this is resulting in higher prices and that is, I think, what people particularly in the UK but obviously other economies worldwide and that is an unescapable fact of everyday life now. We are all seeing higher prices in both business and our personal lives. This is filtering through the supply chain.

So, I think what is important in that backdrop is the well-known quote “in the midst of chaos there is also opportunity”. There are concerns that these challenges are giving business opportunities and those opportunities to collude that could be further increasing prices. So prices have gone up already and perhaps the current crisis then gives a further opportunity to perhaps be a little bit more on top of that price or if the conditions that have led to higher prices perhaps have subsided there is an opportunity for businesses to collude to maintain those increased prices at a level where they would have otherwise dropped away.

So, against this background what we are seeing now is an increased security from international agencies and, in particular, the Five Eyes Competition Authority. So the competition authorities in the US, Canada, Australia, New Zealand and UK are the Five Eyes countries, and what they have recently put together is a new working group and this new working group is focussing upon, perhaps unsurprisingly, supply chains. And what this working group is doing is developing and sharing intelligence amongst these agencies and the goal of the working group is to detect who investigates collusion both at international level co-operation amongst agencies focussing upon possible competition issues in supply chains and this is a significant, build upon an existing memorandum of understanding entered into between these authorities. We now see the bonds between them being strengthened by this working group and, I think, what we can expect from that is obviously greater scrutiny of supply chains and supply chain conduct. I think what is also useful to flag as well from a UK perspective is we have also seen, despite Brexit, we have seen continuing co-operation between the UK and the EU in relation to competition issues; a recent tech sector investigation opened into Google and Meta and recently, as well, we saw co-ordinated dawn raids taking place at multiple sites across the UK and the EU investigating suspected concerns in relation to the recycling of end of life vehicles.

On top of that, what we are seeing in the UK is a competition authority of the CMA which perhaps has a backlog to clear. Obviously as the world has been affected by Covid, dawn raids have not been a viable option for authorities. What we are now seeing are investigations beginning to pick up. We have three investigations starting in March, one of which was an end of life vehicle investigation which, as I said, saw multiple dawn raids. I think we should expect to see more as we have an authority in the UK that clearly is working through a backlog of cases and is now actually able to go and conduct investigations. And I think what this then means for businesses is inevitably, it had to happen at some point, dawn raids are back on the table. So for at least 18 months to two years that has fallen down the list of concerns, the notion that an authority could arrive in reception obviously was not happening when people were working from home. What we now have is an environment where we have authorities actively investigating and what this then means to businesses.

Well, I think the first question is, in this brave new normal we find ourselves, are you old procedures still fit for purpose? If you have the flowcharts, the contact sheets from the old world are they still where they should be? Have you had new people join? Have you had people leave in the pandemic? Are the right people in the right places or new or internal processes? And, secondly, would your business know how to respond? So if there was an investigation that started and you had an authority in reception would your business know how to engage with that appropriately? And it may well be that your business has in place training and the people you had pre-pandemic are still in post and in position. But for a lot of businesses there has been a good deal of movement during the pandemic and perhaps people who have joined maybe do not have the same level of understanding of what needs to take place in the context of an investigation, how to best protect the business’ interests. There is a question there about what we now find ourselves in with greater scrutiny, dawn raids back on the agenda, just making sure in the available time that businesses have themselves up to speed in terms of responding and having procedures in place that are fit for purpose in our new normal.

So that’s co-operation, and I wanted to then just consider a little bit the issue of collaboration and by collaboration I am thinking here about issues in the context of supply chain where competitors have interactions which potentially could then spark the kind of concerns that down the line would lead to an investigation. So just risk awareness and horizon scanning are referenced in recent developments and the first I wanted to touch upon was the commission decision in relation to car emissions and, as you may all be aware, this is a case that attracted a good deal of publicity. The focus of the competitor collaboration was to reduce emissions in relation to new diesel cars and what the circumstances of the case comprised were three competitors, actually collaborating very, very successfully. They collaborated, they worked out a new means by which to reduce emissions for diesel cars and this was a really good thing, a really pro-competitive outcome. Three competitors working together, combining resources, to devise something new, innovative that actually delivered in terms of benefits on a product.

Where things then went off-piste is the fact that the competitors then limited the technical development of the system itself and we will touch on that in the coming slides to see how that unfolded.

By way of background though, and I think this is worth flagging as technical as it is going to get, the system which was devised uses a liquid AdBlue to reduce emissions. Because it is a liquid and this is liquid going into a car there needs to be a tank to hold the AdBlue, so the system then requires a tank to go into a vehicle. The tank needs to be refilled at regular intervals by the user as the AdBlue liquid is used. This then presents a number of questions which relate directly to user and consumer experience. Do you have a big or a small tank? If you have obviously a big tank then, all things being equal, you can go longer before you have to refill that tank. If you have a small tank then you do not have as far, you have a shorter range on that. So if you have a small tank that needs refilling more often is that something that consumers would welcome or not welcome. It is perhaps a cold winter morning, you are out there with a funnel and a bottle of AdBlue trying to fill up your car. Would you wish you had had a bigger tank or does this not matter to you?

Another question which, again, fits into the refill question is how much AdBlue do you use? So if you have a small tank and you are using a lot of AdBlue then that is obviously going to require obviously more refilling. So the tank and the use of the liquid does have a bearing upon user experience.

What the parties did, they agreed to use small tank sizes. This then meant they understood the cars would have shorter refill ranges because of the smaller tank sizes and they also signal to each other the intended AdBlue usage, and the usage indicated was on a ‘meet not beat’ basis. So they could have used more AdBlue, they could have exceeded the standards but they indicated their intentions were to simply hit the standards. Not exceed the standards, hit the standards.

What the competitors did not do, and I think is worth flagging as well, they did not introduce uniform tank sizes, they did not introduce uniform refill ranges and they did not introduce uniform cleaning strategies. So amongst the offerings there was variation, observable variation, amongst the offerings. However, by exchanging information on their future intentions the commission held that this removed uncertainty, it avoided competition on solutions, nobody was going out there with a big tank strategy and they were going to max the AdBlue usage and really push emissions down. There was not competition being engaged with on solutions and then this removed the risks resulting from divergents. This was therefore seen as a buy object restriction and was fined as such and, in this context, there was no requirement for the commission to prove any actual effects upon competition and one party was a leniency applicant and therefore avoided a fine. The other two parties were fined a total of €875 million in the context of this particular infringement.

But I think another noticeable facet of this case is that the competitors had actually sought to ensure compliance with competition law. They had not set out with some kind of transcendent cartel deliberately seeking to achieve ends that were known to be against competition. They had tried to ensure compliance. They actually set out rules of engagement and the rules of engagement included there would be no discussions of issues that were irrelevant to competition. And the emission system itself was not really seen, it would appear, to be seen as relevant to competition by the individuals engaging in the development. I think what we do then find in the decision is that this position that the emission is an asset of competition, is then undermined by internal documentation and public statements.

So what does this case tell us? What are the learnings from this? I think it raises a really key question for in-house lawyers about the repositioning of risk in relation to competition or infringements. So I think the people will be well aware of price fixing, market, customer allocation bid rigging as all areas where clearly competitor attraction is going to be problematic. But this notion of technical development and the possibility of limiting technical development are not sure is as squarely on people’s radars. But I think following this case it really should be because I think this shows a direction of travel in relation to competition enforcement that these sorts of instances. I think we can expect to see more in this area, where there have been discussions between competitors seeking to find collaborative solutions but then there has been a crossing of a line which has led to reduction in competition in relation to a customer facing aspect of that product or service.

I think also it is important to flag that the parties, despite seeking to avoid competition issues, it almost reached a decision as they were designating something as not being an issue and I think it is important to raise there that parties themselves obviously cannot opt out of competition law. Parties cannot decide amongst themselves to designate something as not a competition issue and leave it as such. Competition law will obviously still apply to that.

I think the last thing to flag, I think this again is a thing we will see emerging as I talk about some HR issues, is I think we are increasingly seeing a need for in-house lawyers to reach into the parts of the business where perhaps competition law has not always had a foot and, in this context, I think it is useful for in-house lawyers to be able to reiterate to working group members if they have individuals working in any sorts of competitor collaboration groups that it is really important not to reveal plans or intentions to any of their counterparties or competitors. So obviously they can discuss the approved terms of reference and what is there to be covered, but going beyond that an opening up discussions about plans or intentions clearly should be off the table in that context.

I think a point to raise as well is how this then feeds into, as a topic, another area where there has been considerable interest in recent years in the competition arena and that is the question of when competitors can work together to achieve outcomes that support sustainability in sectors. Within the UK we have now had the CMA’s advice to the UK government being published. What we see from this advice is there is a clear intention from the CMA to provide further guidance and I think this is obviously to be welcomed by parties. Further guidance is always going to be more helpful than no guidance. What we can expect to see from this is, I think, safe harbour in the first instance, so some more clarity around when competitors can perhaps work together without those agreements restricting competition when they are working for sustainable outcomes. But also, when it comes to the individual assessments of arrangements, greater clarity from the CMA about how to apply exemptions from the chapter one prohibition. So thinking about the benefits generated by sustainability agreements and how the benefits can be shared and how you demonstrate a fair share of those benefits flowing down to consumers and end users.

So I think we will obviously await the guidance with interest. There will be, I am sure, doubts and aspects that will invite further clarity but I think to have this coming is welcome and we can expect to see more in this area because I think with the increasing pressure with regard to the climate crisis, the idea that people can now perhaps work together to achieve better outcomes is clearly one that is going to be with us for the foreseeable future.

The last point that I wanted to pick up in relation to collaboration was around recruitment challenges and this is something which we have seen a number of industries facing, I think, real and very costly competition for talent and this has led to some circumstances where businesses have perhaps sought to neutralise some of that competition. One way of doing that has been ‘no-poach’ agreements whereby parties would agree with each other not to hire employees from each other. Another angle on this is around wage fixing where perhaps parties in the same sector would agree amongst themselves a level, a banding, within which they would pay certain salaries for certain roles. What is interesting is that in the US we have recently seen criminal prosecutions. So back in 2016 the US issued guidance around HR issues, competition law, no poach, wage fixing and why this is going to be problematic. We saw a criminal prosecution started in the US. We recently had in the EU Commissioner Vestager saying that no-poach and wage fixing agreements are like buyer’s cartels. So this is seen as, from an EU competition law perspective, also problematic.

Within the UK we have not yet had a statement or case around these types of issues but I think we can expect the CMA to align closely with the commission position that these would be seen as serious infringements of competition law. I think even putting that to one side, for businesses above and beyond there is clearly the reputational damage that if your company was involved in this type of arrangement that could itself present challenges for recruitment going forwards. And again, picking up on the theme of perhaps in-house lawyers reaching into parts of the business where they have not necessarily done historically from a competition law perspective, I think this is one of those areas which lends itself to that focus.

So if you are engaging with HR I think there is a question there about current policies, having discussions with staff confirming to people that the business must act independently and obviously no-poach or wage fixing type agreements are simply not permitted, accepted or tolerated within the business. I think if you are there in HR having these sorts of conversations, it is probably doing some risk assessment as well as any benchmarking exercises. So if there are benchmarking exercises that take place around salaries within your organisation is it a third party that is preparing the confidential data set or are your HR colleagues to their counterparts are competitors or sector participants trying to ascertain who pays what, what is the salary banding, are you going to increase it this year?

That is useful to get a hand on at the outset and then another aspect to consider is where there is benchmarking taking place what are the outputs, how granular does this get? Do your HR people have a very good oversight and perhaps quite a small market of what your competitors are all doing? Or is it the case actually this is by a third party it is aggregated anonymised outputs and there is not the competition or risk involved with this. I think where things are moving with this issue, I think, this is where we will see further developments, further investigations. I think there is a window now for companies just to take stock of where they are and ensure that they are complying with the requirements at this stage in proceedings.

I think then just to conclude and just to pull together a few of these threads then.

As I said at the outset, what we are seeing is international co-operation between agencies actively being promoted with a view to focusing upon issues and supply chains as well as within the UK itself. The CMA is still working closely with the EU and obviously its own investigations that it is launching.

Dawn raids are back. That is an unavoidable fact now. Dawn raids are back and businesses, I think, just need to factor that back into their thinking. We are seeing a focus upon what I would call new areas of competitor interaction. So the traditional cases will always be there but I think we are now seeing competition law enforcement reaching into different areas where businesses perhaps do not realise they currently have a risk in those areas and I think what this then lends itself to is an opportunity now for businesses as they return from the pandemic and as they get back into a rhythm of hybrid working in this new normal, an opportunity for businesses to review and refresh their current procedures and policies around competition law or compliance, mindful of the current circumstances we find ourselves in.

Thank you.