Competition Newsletter

February 2012

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In this issue

  • We discuss a new application by the FCA of its guidelines on the method of setting fines in the cartel on the leisure engineering sector.
  • We welcome the annulment by two courts of appeal of two search and seizure authorization warrants due to lack of effective assessment on the merits of the administration's requests.
  • We analyse the decision by which the FCA refuses to impose interim measures in the Hewlett Packard case, particularly in light of the implementation of the criteria used to assess the potential illegality of a refusal to supply by a firm having a dominant position.

Leisure engineering: when the sanction drifts apart from a fair price

Summary

By a decision dated 12 January 2012, the French competition authority (FCA) fined several consulting firms for their participation in a cartel in the engineering sector for leisure, culture and tourism (LCT). This decision constitutes another surprising application of the FCA's guidelines on the calculation of financial penalties (the Guidelines).

In this case, the FCA had commenced a proceeding against consulting firms active in the LCT engineering sector in France, as well as against their professional association, the Gefil, for having agreed on their tariffs in the framework of public and private procurement, by setting price directives cleverly denominated the "Fair Price", and supervising the tariffs offered, potentially resulting in the exclusion of non-compliant members.

In their defence, the firms alleged that such "Fair Price" was not directed to members, but to clients in order to help them combat unreasonably low prices offered by some firms in this sector. While admitting that the "Fair Price" was addressed to clients, the FCA nevertheless considered that the consulting firms perceived it as a directive in setting their offers, which they were encouraged to comply with due to the price control policy organised by the Gefil.

According to the FCA, this constituted an anticompetitive practice per se, regardless of the fact that the Gefil had approved the membership of firms offering lower prices than the “Fair Price”, that a small number of letters were sent to principals, or that no evidence had been found of actual sanctions being applied to members in case of “dumping”. According to the FCA, this practice merited a fine due to its sole object.

A fine, perhaps, but of what amount? Insofar as the purpose of the practice was price fixing, a literal interpretation of the Guidelines should have resulted in the FCA setting the base amount of the fine at between 15 and 30 per cent of the sales value of the services concerned. However, the FCA itself could not resolve to enforce the Guidelines in such manner, as it admitted that, in this case, even though the infringement was serious by its very nature, the manner in which it was implemented made it far less serious. Moreover, the damage to the economy was “very weak”, the FCA acknowledged, since the Gefil’s directives were not closely followed, and the means of pressure and sanction procedure were not very sophisticated and not actually applied.

The FCA therefore arbitrarily set the base amount at 9 per cent. Even so, the FCA came up with surprisingly high levels of fines as compared to its previous decisions. Each consulting firm had a fine imposed on it representing between 1 and 5 per cent of its turnover, except Deloitte Conseil, which fine represented 0.1 per cent, although this was then subjected to an increase of 50 per cent because it belonged to a worldwide group with much more significant resources than the other firms (which were mostly small or very small companies).

The large margin of appreciation thereby exercised by the FCA renders less interesting the reductions which were then granted to the firms in consideration of their own individual factors (mono-product, size, contributing capacity, etc.). Is that a “Fair Price” to pay for the goals of transparency and legal certainty that were intended by the Guidelines in the first place?

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Supervision of orders authorising search and seizure procedures: two Courts of Appeal put up resistance

Summary

By two orders dated 8 November and 25 November 2011, the Chief Justices of the Orleans and Metz Courts of Appeal declared void the search and seizure authorisation warrants issued by two Judges of Liberty and Detention (JLD), as well as the subsequent operations, for lack of effective supervision of the merits of the administration's requests. A favourable echo given by courts to arguments that companies have put forward for a long time, proving that there may still be hope to see the practice of pre-drafted warrants better supervised.

Given that searches and seizures represent a serious attempt against the inviolability of the home, article L. 450-4 of the French commercial code subjects the merits of a search and seizure authorisation request to the supervision of the JLD. However, Supreme Court case law has established a presumption according to which the JLD is deemed to have exerted sufficient supervision even when the method of pre-drafted warrants prepared by the administration is used.

This was not the opinion of two courts of appeal which, notwithstanding the presumption established by the Supreme Court, annulled the authorisation warrants issued by two JLDs because it was obvious that the JLD could not, in practice, have exercised genuine supervision of the merits of the administration’s requests.

In the first case, the Chief Justice of the Orleans Court of Appeal considered, in light of the time available for the review and the material errors contained in the warrant, that the JLD had not read either the pre-drafted warrant or the attached documents, and had nevertheless signed the warrant. The Chief Justice of the Metz Court of Appeal admitted that the JLD could accept the administration’s arguments, subject however to the condition that the judge actually carries out a careful reading and scrutiny of the pre-drafted warrant and the documents attached to it. In the present case, however, this had clearly not been done, since the judge had not corrected several significant mistakes contained in the pre-drafted warrant.

These decisions are to be welcomed, not only because they apply a genuine supervision, but also because they question the pre-drafted warrants method, despite the constant positive view taken by the Supreme Court on the subject.

Indeed, the Chief Justice of the Orleans Court of Appeal openly condemned such practice, on the basis not only of article L. 450-4 of the French commercial code, but also articles 6, paragraph 1, and 8 of the European Convention on Human Rights, noting that “the practice of pre-drafted warrants which, under the guise of facilitating the judge’s task, is in fact an attempt to steer his decision [and] constitutes an interference of the administration in the powers of the judicial authority and is thus contrary to the right of individuals to have their case heard by an independent and fair tribunal”.

The Chief Justice of the Metz Court of Appeal did not openly criticise the practice of pre-drafted warrants, but considered that such practice required that the judge carries out “a careful reading of the warrant prepared by the administration, particularly as he has not written it”.

An appeal has already been lodged by the authorities before the Supreme Court against this second decision, it is to be feared that such audacity will stop at the doorstep of the Supreme Court. However, a thorough supervision of warrants pre-drafted by the administration is even more necessary considering that the Supreme Court case law provides an extensive interpretation of the administration's search and seizure powers to the administration, which has “carte blanche”, among others, to carry out massive and undifferentiated electronic seizures.

A glimmer of hope for companies whose fundamental liberties defence may therefore not be limited to bringing an ultimate action before the European Court of Human Rights.

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The French Competition Authority declines to impose interim measures against Oracle, but continues its investigation on the merits of Hewlett-Packard's complaint

Summary

The decision of the French Competition Authority (FCA) illustrates a recent tendency of competition authorities to adopt a flexible interpretation of the conditions allowing the sanctioning of instances of refusal to supply by dominant undertakings in cases involving markets where interoperability is crucial for innovation and consumers.

Hewlett-Packard (HP) filed a complaint with the FCA against Oracle Corporation's (Oracle) decision to stop developing future versions of its relational database management system (RDBMS) which would support Intel's ‘Itanium’ processor, which HP uses almost exclusively to manufacture its range of “HP Integrity” servers.

Alleging that Oracle enjoys a dominant position in the market for RDBMS, HP argued that this decision amounted to an abusive refusal to supply intended to drive HP out of the market for high-end corporate servers. According to HP, since changing RDBMS is much more expensive and risky than changing servers, companies using HP Integrity servers faced with the impossibility of migrating to a future version of Oracle's RDBMS, would choose to change their hardware platform rather than the RDBMS and, hence, opt for migrating to the new version of Oracle's RDBMS and replacing their HP servers with the servers of another manufacturer.

An interesting aspect of the FCA's decision (the Decision) is its rather flexible analysis of the conditions permitting the sanctioning of refusal to supply decisions by dominant undertakings in order to assess whether Oracle's alleged conduct justifies continuing the investigation on the merits of the case.

The FCA considers that the first criterion relating to the indispensability of the product to which access is refused cannot be excluded in light of Oracle's reputation and leadership position in the market, although other RDBMS compatible with HP Integrity servers exist. Similarly, the second criterion relating to the elimination of effective competition is deemed likely although HP still owns nearly one third of the market for high-end corporate servers and other suppliers of servers exist. The same flexible approach is taken in relation to the third criterion relating to the harm to consumers. In this respect, the FCA considers that the disappearance of HP Integrity servers would lead to the loss of “innovating products” and to the creation of a duopoly between Oracle and IBM which are fully integrated at the various stages of the ‘technology stack' (hardware, operating systems, databases, middleware and software applications).

This approach contrasts with the rigorous analysis undertaken by the FCA in rejecting the interim measures requested by HP. Here, the FCA sets aside any risk of a serious and immediate harm to the general economy or the sector involved (the main criterion to grant interim measures) considering the existence of alternatives to Oracle's RDBMS and the fact that, according to HP's own estimations, it would only lose a fraction of its clients over a period of two to five years.

Hence, the same facts lead to significantly opposite conclusions depending on whether the FCA assesses the appropriateness of continuing its investigation on the merits or HP's request for interim measures. While the rejection of the requested interim measures comes as no surprise since such measures are seldom granted (especially on the basis of rules prohibiting dominant positions which involve complex economic assessments difficult to perform on the basis of prima facie evidence), the Decision reveals a certain readiness to adopt a flexible interpretation of the conditions allowing sanctioning of refusal to supply decisions by dominant undertakings, at least in cases involving markets where interoperability is crucial for innovation and consumers.

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