Competition Newsletter

April 2012

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In this issue

  • We comment on the decision of the French Competition Authority imposing sanctions on agricultural growers for having agreed to fix the sale price of endives to wholesalers and retailers.
  • We revisit the millers’ cartel case, which led the French Competition Authority to impose heavy fines on French and German millers as well as specifying the boundaries of marketing and sales agreements between competitors.
  • We analyse the French Competition Authority’s decision authorising, subject to commitments, the concentration between two local distribution companies active respectively in the electricity and gas sectors, particularly in light of the conglomerate effects that are likely to result from the transaction in the relevant markets.

A limited scope for manoeuvre for endive growers

Summary

The French Competition Authority (FCA) recalls that scope for manoeuvre enjoyed by agricultural growers in organising markets does not include the right to fix prices.

By a decision of 6 March 2012, the FCA sanctioned endive growers and several of their professional bodies for having implemented a scheme as part of a “global plan” of market management intended to control sales prices of endives to wholesalers and distributors, including a regular exchange of information intended to ensure effective coordination, including by computerised exchanges.

In their defence, the growers argued principally that such coordination had no anticompetitive object and was eligible to an exemption due to specific rules concerning the agricultural sector. According to them, such coordination was necessary in order to perform the objectives of the Common Agricultural Policy and in compliance with EC rules concerning the common organization of the market in “fruit and vegetables” (Single COM).

The FCA rejected these arguments, recalling that the scope for manoeuvre enjoyed by the growers within the Single COM is strictly regulated. In this context, price-fixing would be deemed anticompetitive. In addition, the granting of an individual exemption would be most unlikely.

While thus remaining inflexible on the applicable principles, the FCA nonetheless took into account the growers' low bargaining power vis à vis retailers as grounds upon which to reduce the amount of the fine. The FCA pointed out that the damage to the economy had been severely limited considering the significant countervailing buying power of large-scale distributors.

From a long term perspective, the compromise adopted by the FCA may seem insufficient in light of the agricultural crisis and the strong pressure exerted by retailers on the grower’s margins.

Perfectly aware of the situation, the FCA stresses that competition rules permit producers to use a variety of tools to boost their bargaining power when confronting the mass food retailers. For example, the FCA invites producers to group in powerful cooperatives, and to use “contractualisation” with retailers (short-term contracts with fixed volumes and definitions of quality), which gives producers better insight and predictability in running their farms and managing their supplies and costs in sectors exposed to price volatility. Nonetheless, such agreements may never lead to price-fixing.

These solutions are certainly not perfect but represent the only mechanism given to agricultural growers in order to try to balance, in one way or another the existing imbalance of power between producers and large-scale distributors. In fact, because the EC rules apply to the agricultural activities, the possibility of a block-exemption, under national provisions - article L. 420-4 of the French commercial code - seems excluded. An action at EU level may therefore be the best option, albeit with uncertain results.

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Millers Cartel: the French Competition Authority puts its nose to the grindstone

Summary

In a decision of 13 March 2012, the French Competition Authority (FCA) imposed a fine of 95.5 million euros on German and French millers for having put in place a pact of non-aggression coupled with an agreement on the pricing of flour imported into France. The FCA also imposed a fine of 146.9 million euros on French millers for having closed the French market through their joint venture companies, France Farine and Bach Mühle (the JVs). This decision recasts the boundaries of marketing and sales agreements between competitors.

Following a request for leniency from a German miller, the FCA, in cooperation with the Bundeskartellamt, uncovered two distinct cartels in the market for bags of flour sold to consumers. Another investigation is still on-going for the market of flour sold to local bakeries.

In the first cartel, French and German millers concluded a pact of non-aggression aimed at limiting access to their national markets by using a mixture of export quotas, apportioning of customers and price stabilisation. The FCA considered this to be a particularly serious breach because it was aimed at partitioning the markets of two large Member States of the European Union and was thus contrary to the aims of the Treaty on the Functioning of the European Union. The FCA also took a dim view of this agreement as it resulted in high prices in France for a basic and indispensable foodstuff. The FCA therefore imposed a fine of 95.5 million euros on the millers involved. Their liability may however increase as the Bundeskartellamt will soon publish its findings on the effects of the cartel in the German market, even though the FCA’s fine was calculated based on the sales of flour in both the French and German markets.

The second cartel uncovered by the FCA is limited to French millers and is centred on the JVs created to market and sell their flour to traditional and “hard-discount” supermarket chains.

Even though marketing and sales structures between competitors are not per se prohibited, the FCA concluded that the JVs had in this context an anticompetitive object. The anticompetitive nature did not result from their articles of association but rather from their actions in the markets as they jointly negotiated with customers and jointly fixed the price of flour on behalf of the millers. Moreover, they apportioned customers by allocating orders to the factories of the miller closest to the delivery location.

The FCA found that the JVs were not indispensable in order for the French millers to access the market and moreover also rejected the argument, put forward in a request for individual exemption, that the JVs created efficiencies. In imposing a fine of 146.9 million euros the FCA found that:

  • there was no proof that the existence of the JVs resulted in a lower end price of flour for consumers;
  • the optimisation of logistics was not sufficient because the millers had not redistributed packaging centres in France (this would have allowed for a more efficient delivery system to customers by harmonising geographic coverage); and
  • the innovation in the creation of the “Francine” brand (which is viewed as a guarantee of quality) did not require the restrictions of competition that had been noted.  

The above findings will no doubt provide useful guidance to companies who are envisaging entering into similar arrangements with competitors.

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Electricité de Strasbourg / Enerest: when electricity and gas meet

Summary

On 7 February 2012, the French Competition Authority (FCA) authorised the acquisition by Electricité de Strasbourg (ES), a subsidiary of EDF responsible for supplying electricity at an administered price in the French department of Bas-Rhin, of Enerest, a company which has a monopoly for the distribution of natural gas at an administered price in the city of Strasbourg and its suburbs. While this transaction shows the dynamism of electricity and gas sectors which were recently opened to competition, the FCA authorised the merger subject to the agreement by the parties to provide commitments intended to preserve the rise of new entrants on the market which are competitors of the parties to the concentration on the free market, even if it means that the expected benefits for consumers will be limited.

The transaction will result in the integration of two local distribution companies, one which is active in the electricity sector and the other in the gas sector. Given this geographic factor, the FCA did not follow its standard definition of the relevant market for the distribution of electricity on the retail market, which is usually considered to be of a national dimension, but decided to envisage the conglomerate effects of the operation at the level of the relevant department only.

Noting that the new entity would locally hold the legal monopolies for the distribution of electricity and gas at administered prices, and would also operate on the free market, the FCA considered that the envisaged concentration raised several competition concerns.

The FCA observed that the new entity could use its position as the incumbent operator to supplant its competitors by offering household and small industrial customers dual offers that none of the competitors would be able to replicate, either by combining the distribution of both energies at administered prices, or by combining the distribution of one energy at an administered price with the supply of the other at a free price. For new entrants, dual offers constitute a major axis of development and conquest of the market. While the FCA was careful to point out that dual offers are not, as such, anticompetitive, in the present case it noted that they are particularly attractive for consumers, given the relatively low level of administered prices and the security they represent, but also the corporate image which is often attached to the incumbent operator.

The FCA also found that the new entity would benefit from privileged information on the levels and consumption habits of the historical customers of the two undertakings party to the concentration. Thus, the new entity will be able to put together offers for consumers which are specifically adapted to their needs and, as a consequence, will have a significant commercial advantage over its competitors and may slow down their development on the market.

Given these competition concerns, the concentration was only authorised after the parties offered behavioural commitments which will have to be implemented until 2015, which is the date when administered prices of electricity will become neutral.

  • On the one hand, the new entity will not propose offers combining either administered prices or an administered price in one energy with a freely determined price in the other. Only the combination of dual offers on the free market remains possible. In practice, the commercial teams will have to be separated, those in charge of selling electricity not being able to propose a dual offer with gas, and vice versa.
  • On the other hand, ES undertook that the new entity will provide access to necessary commercial information to any competitor asking, in writing, for such information (subject to the acceptance of customers), in order to allow them to put together offers for consumers specifically adapted to their needs.

The scrutiny undertaken by the FCA in the present concentration illustrates the importance it grants to the development of genuine competition on formerly regulated markets, even if it means that the interest of some operations may be limited, both for undertakings and consumers.

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