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The COVID-19 crisis: EU Competition Policy response

Update April 2020


Introduction

In response to the COVID-19 crisis, European Union (EU) President Ursula von der Leyen has formed a team led by eight Commissioners to coordinate the EU response. This team of Commissioners is advised by a new advisory panel of epidemiologists and virologists. The European Commission (EC) is also coordinating daily contacts with European Health Ministers and Ministers of the Interior. New developments are posted on a dedicated EC webpage, in this rapidly evolving situation. 

Following the EU’s initial package of COVID-19 measures on March 13, 2020, the EC’s Directorate-General for Competition (DG COMP) moved quickly to update its EU competition policy enforcement, including issuing a communication on the antitrust assessment of cooperative arrangements responding to the crisis, creating a dedicated webpage and email for companies seeking guidance on proposed cooperation agreements and implementing a speedy approval process for COVID-19-related State aid. 

I. Temporary Framework for Assessment of Cooperative Arrangements and Informal Guidance

On April 8, DG COMP published a Communication on a temporary framework for assessing antitrust issues related to business cooperation stemming from the COVID-19 crisis (the Cooperation Framework). The EC has also created a dedicated COVID-19 webpage discussing the application of EU antitrust rules in the crisis. The webpage references the ECN joint statement discussed below and notes that DG COMP has created a dedicated mailbox, COMP-COVID-ANTITRUST@ec.europa.eu, for companies seeking informal guidance on specific initiatives to respond to the crisis. 

The Cooperation Framework.  The Cooperation Framework acknowledges the potential need for companies to cooperate to overcome or mitigate the effects of the crisis, especially but not only with respect to medicines and medical equipment used to test and treat COVID-19 patients or to mitigate and possibly overcome the outbreak. The Cooperation Framework covers both arrangements involving companies already active in the relevant sector and those active in other sectors (e.g. companies converting part of their production lines to start producing scarce products). The Cooperation Framework explains DG COMP’s main criteria for assessing cooperation projects and setting its enforcement priorities.

The Cooperation Framework acknowledges that companies may be able to address shortages of essential products and services during the COVID-19 outbreak more efficiently by cooperating, but they may need guidance on proposed cooperation initiatives and/or ad hoc feedback or comfort to implement these initiatives rapidly. Based on requests from companies and trade associations, notably in the health sector, the Cooperation Framework recognizes that companies might need to rapidly increase production for some products, while reducing production of others, and to reallocate stocks. These steps could require companies to share information on sales and stocks and to coordinate the use of production lines. For example, output could be increased more efficiently if only one medicine was produced at a particular site (as opposed to switching production between different products, which requires time-consuming cleaning of machinery, etc.), balancing economies of scale with the need to avoid excessive reliance on any particular production site.

The Cooperation Framework notes that some forms of cooperation in the health sector would not be considered to raise any antitrust issues if implemented in accordance with standard EC guidelines on horizontal cooperation, including entrusting a trade association (or an independent advisor, independent service provider, or public body) to e.g.:

  • Coordinate joint transport for input materials.
  • Identify essential medicines for which there are risks of shortages.
  • Aggregate production and capacity information, without exchanging individual company information.
  • Work on models to predict demand and identify supply gaps.
  • Share aggregate supply gap information, and request participants, without sharing that information with competitors, to indicate whether they can fill the supply gap through existing stocks or increased production.

The Cooperation Framework acknowledges that other forms of cooperation to overcome critical supply shortages in the health sector might go beyond the types of cooperation permitted under existing guidance. These could include coordinating production, such as which sites produce which medicines, stock management and, potentially, distribution with a view to increasing and optimising output so that not all firms focus on one or a few medicines, while other medicines remain in under-production. This coordination could also require exchanges of commercially sensitive information.

In the current exceptional circumstances, the Cooperation Framework notes that such measures would not be problematic under EU competition law or at least not give rise to an enforcement priority, to the extent that such measures would be:

  • Designed and objectively necessary to actually increase output in the most efficient way to address or avoid a shortage of supply of essential products or services, such as those that are used to treat COVID-19 patients.
  • Temporary in nature (i.e. to be applied only as long there is a risk of shortage or in any event during the COVID-19 outbreak).
  • Not exceeding what is strictly necessary to achieve the objective of addressing or avoiding the shortage of supply.

Companies seeking to rely on this framework should document all exchanges and agreements between them and make them available to DG COMP on request.

The Cooperation Framework notes that cooperation undertaken in response to an “imperative request” from public authorities (e.g. to organise production and delivery to meet an urgent need to keep up the functioning of healthcare for COVID-19 patients) is allowed, while cooperation encouraged and/or coordinated by a public authority will be considered a “relevant factor” in concluding that such cooperation would not be problematic or an enforcement priority.

The Informal Guidance Procedure. Companies seeking informal guidance under the new procedure are asked to provide as much detail as possible, including: (i) the firm(s), product(s) or service(s) concerned; (ii) the scope and set-up of the cooperation; (iii) the aspects that may raise concerns under EU antitrust law; and (iv) the benefits that the cooperation seeks to achieve, and an explanation of why the cooperation is necessary and proportionate to achieve those benefits in the current circumstances.  The informal guidance procedure is noteworthy, since the previous procedure for seeking such guidance was eliminated almost 20 years ago, with the adoption of the so-called “self-assessment” system in Regulation 1/2003.  The EC had previously signalled, however, that creation of a new informal guidance procedure was one of a number of antitrust reforms under consideration prior to the crisis.

DG COMP also announced the issuance of the first comfort letter under its new procedure to “Medicines for Europe,” formerly the “European Generics Medicines Association,” in respect of a cooperation project among pharmaceutical producers that targets the risk of shortage of critical hospital medicines for the treatment of coronavirus patients. DG COMP noted that this temporary cooperation appears justifiable in view of the urgent need for large volumes of critical hospital medicines, but it did not provide details on the cooperation or safeguards required.

Enhanced enforcement against “crisis cartels” and abuses. On the other hand, the Cooperation Framework underlines that it is more important than ever in the current crisis that competition law protect companies and consumers and warns particularly against companies engaging in anti-competitive agreements or abusing their dominant positions (including dominant positions resulting from the crisis) by exploiting customers and consumers (e.g. by charging prices above normal competitive levels) or limiting production to the ultimate prejudice of consumers (e.g. by obstructing attempts to scale up production to face shortages of supply).

International initiatives. The Cooperation Framework is in line with the March 23 joint statement of the European Competition Network (the ECN), which acknowledged that the current situation may require companies to cooperate to ensure the supply and fair distribution of scarce products and stating that the ECN will not actively intervene against necessary and temporary measures put in place to avoid supply shortages. The International Competition Network (ICN) Steering Group subsequently released a similar statement. The ECN joint statement noted that such measures would likely not to be problematic in any case, since they would either not restrict competition or generate efficiencies outweighing any such restriction. Like the Cooperation Framework, the ECN joint statement also stressed that ECN members will not hesitate to take action against companies taking advantage of the current situation by cartelising or abusing dominant positions. 

Comments on the cooperation framework and informal guidance procedure. It is perhaps regrettable that the Cooperation Framework does not provide specific examples of how its existing guidance would apply in the current extraordinary circumstances or explain the crisis’ effect on DG COMP’s application of existing guidance to specific types of cooperation. The Cooperation Framework describes ways in which a trade association could facilitate the collection of competitively sensitive information and its aggregation and use to improve the production of medicines and medical equipment consistent with existing guidance, but this description would likely apply at any time.

The Cooperation Framework does not even reference existing guidance on other types of cooperation, such as so-called “specialization agreements” by which companies decide to specialise in complementary activities, which may already benefit from an exemption from EU antitrust rules (assuming they do not involve fixing prices, limiting output or sales or allocating customers), joint purchasing or sector-specific rules, for example in the agricultural and transport sectors, much less provide details on how its application may be affected by the current crisis. The Cooperation Framework also does not go as far as some other authorities in providing formal relief or guidance, especially in sectors other than healthcare (e.g. the UK (relating to cooperation among supermarkets) and Norway (exempting certain cooperation in the transport sector)).

On the other hand, several new elements that do emerge from the Cooperation Framework include (i) confirmation of the possibility that current circumstances may justify otherwise problematic cooperation in areas such as production, stock management and even distribution, at least in relation to the production and distribution of urgently needed medicines and medical supplies, (ii) the position that cooperation in response to an “imperative request” from public authorities is allowed, while official  “encouragement” will also be considered as a favourable factor in any future investigation, and (iii) a potentially new approach to abuses of dominant positions, in which DG COMP may find abuses of temporary dominant positions created by the crisis itself. 

DG COMP’s issuance of an individual comfort letter to Medicines for Europe is a welcome confirmation that DG COMP will follow through on its promise to provide speedy comfort to companies and trade associations responding to the crisis. Other such comfort letters are no doubt under way, and additional announcements can be expected in the coming days and weeks. Based on DG COMP’s press release regarding the Medicines for Europe comfort letter, however, DG COMP may not provide details on the arrangements covered by such letters and they may thus be of limited use to other companies as guidance on DG COMP’s approach. 

Interestingly, though the Cooperation Framework stresses the need for vigilant enforcement to prevent companies from taking advantage of the crisis for anti-competitive agreements and/or abuses of dominant positions such as excessive pricing, DG COMP did not indicate that it is investigating any such conduct. This is a marked contrast to the situation in many Member States that have disclosed the existence of numerous complaints and opened a number of investigations.

II. Temporary Framework for the Assessment of State Aid

Unlike financial assistance granted directly by the EU, financial assistance granted by EU Member States is subject to the EU State aid rules under Article 107 of the Treaty on the Functioning of the EU (the TFEU). Article 107 TFEU generally prohibits “State aid,” which is interpreted broadly to include many types of financial assistance, unless the aid is covered by a general approval under EU rules or specifically approved by the EC.   

The EC adopted a temporary framework (the State Aid Framework) for the assessment of State aid based on Article 107(3)(b) TFEU, which covers aid measures adopted to address “serious disturbances” in Member State economies, on March 19, 2020. The State Aid Framework applies to aid granted to remedy liquidity shortages and to ensure that the disruptions caused by the COVID-19 outbreak do not undermine the viability of companies, especially small and medium-sized enterprises (SMEs).  The State Aid Framework was amended for the first time on April 3, 2020 notably to enable Member States to accelerate the research, testing and production of coronavirus relevant products, and will likely soon be amended further to cover Member State participation in recapitalizations.

Member States must still notify their proposed aid measures to the EC and show that they are necessary, appropriate and proportionate and that all the conditions of the State Aid Framework are respected. Nonetheless, the State Aid Framework allows the EC to approve State aid notifications very quickly. Indeed, as of April 9, DG COMP had already adopted 39 decisions covering 49 national measures under the framework.

The State Aid Framework originally set out conditions for three distinct types of aid:

  • Direct grants, repayable advances or tax advantages: Aid in the form of direct grants, repayable advances or tax advantages may not exceed €800,000 per beneficiary and must be based on a scheme with an estimated budget (additional conditions apply to aid to the agricultural, fisheries and aquaculture sectors).
  • Loan guarantees or interest rate subsidies: Public guarantees of the principal amount of investment and working capital loans or subsidized interest rates may be granted directly or indirectly via credit institutions (subject to safeguards to limit undue distortions to competition and to ensure that advantages are passed on to the final beneficiaries), subject to minimum guarantee premiums or interest rates (depending on the loan maturity); maximum loan principal amounts (double the borrower’s annual wage bill (including social charges and personnel formally employed by subcontractors) or 25 per cent of total turnover) and maximum loan durations of six years (in each case subject to adjustment where appropriate).
  • Short-term export credit insurance: The EC’s Communication on short-term export-credit insurance stipulates that marketable risks cannot be covered by public export-credit insurance. The State Aid Framework facilitates Member State provision of short-term export credit insurance by stipulating that risks may be considered non-marketable if a large well-known international private export credits insurer and a national credit insurer produce evidence of the unavailability of such cover or four well-established exporters in a Member State produce evidence of refusal of cover from insurers for specific operations.

The April 3 amendment extended the State Aid Framework by providing for an additional five types of aid measures:

  • Research and development (R&D) aid: Member States can award direct grants, repayable advances or tax advantages for coronavirus and other relevant antiviral R&D.
  • Aid for testing facilities: Member States can grant aid in the form of direct grants, tax advantages, repayable advances and no-loss guarantees to support investments enabling the construction or upscaling of infrastructures needed to develop and test products including medicinal products (including vaccines) and treatments; medical devices and equipment such as ventilators and protective clothing, as well as diagnostic tools; disinfectants; data collection and processing tools, up to first industrial deployment.
  • Aid for production: Member States can grant aid in the form of direct grants, tax advantages, repayable advances and no-loss guarantees to support investments enabling the rapid production of coronavirus-relevant products.
  • Tax deferrals and/or social security contributions suspensions: Member States can grant targeted deferrals of payment of taxes and of social security contributions in sectors, regions or for types of companies hit by the outbreak.
  • Wage subsidies: to help limit the impact of the coronavirus crisis on workers,Member States can contribute to the wage costs of those companies in sectors or regions that have suffered most from the coronavirus outbreak, and would otherwise have had to lay off personnel.

On April 9, 2020, the EC announced that it was consulting Member States on further amendments to the State Aid Framework to allow public support for recapitalizations of severely affected companies by purchasing equity or hybrid capital instruments. To reduce the risk of distorting competition, safeguards would be imposed. Member States would need to be sufficiently remunerated for the risks they assume and Member States would need to develop an exit strategy, in particular from large companies that have seen a higher equity participation by the State.

Under the State Aid Framework, aid can be granted to companies that were not in difficulty as of December 31, 2019 but have entered into difficulty as a result of the COVID-19 crisis. The State Aid Framework will be in place until December 31, 2020 unless it is amended, terminated or extended. Member States granting aid under the State Aid Framework are subject to various monitoring and reporting requirements including, publication of information  on individual aids within 12 months and providing annual reports and a list of measures  based on the State Aid Framework to the EC.

The State Aid Framework does not supersede the normally available frameworks for permitted State aid. These include:

  • De minimis aid that does not exceed €200,000 for a single undertaking per Member State over any period of three years.
  • Aid allowed under the General Block Exemption Regulation
  • So-called “rescue and restructuring” aid. Helpfully, the  State Aid Framework provides that the normal “one-time last-time” principle of rescue and restructuring aid will not preclude companies from receiving both rescue and restructuring aid and aid approved under the State Aid Framework.
  • Compensation for “exceptional circumstances” under Article 107.2(b) TFEU. 

The EC can be expected to continue approving aid measures under the State Aid Framework very rapidly to avoid standing in the way of national efforts to mitigate the crisis’ effects. The short turnaround makes it difficult for the EC to scrutinize measures closely. The State Aid Framework also provides no guidance on how Member States should allocate aid under approved measures, leaving considerable uncertainty as to how Member States will assess the incentive effect and proportionality of aid requests from individual applicants. The new process will also limit the ability of third parties, such as competitors, to participate and comment on aid requests, at least at the EU level.

III. Our take

Each company’s situation is different and must be assessed on a case-by-case basis. As the COVID-19 crisis evolves, however, many companies will need to take advantage of a combination of EU and national financial assistance. The EC rapidly adopted a special framework for assessing State aid measures responding to the crisis and is continuing to amend and expand this framework.  As of April 9, DG COMP had adopted 39 decisions covering 49 national measures, as well as four decisions on national measures to compensate for “exceptional circumstances.”  DG COMP can be expected to continue adapting the State Aid Framework and approving new aid measures expeditiously.  However, national authorities face significant challenges in deciding who will get assistance, and how much. In particular, national authorities will need to confirm that aid is limited to damages caused by the crisis and make difficult judgments about how to allocate limited resources. 

Companies will also be exploring a wide variety of cooperation arrangements, mergers and joint ventures in response to the crisis. Except in the case of hardcore violations, the EC and Member State authorities will likely be receptive to arguments that short- and medium-term cooperation arrangements to ensure continuity of supply are compatible with EU law. DG COMP’s publication of the Cooperation Framework and issuance of the first comfort letter under its new procedure for this purpose are welcome. The guidance provided is so far quite general, however; DG COMP has not gone as far as other European authorities in granting sector-specific guidance and relief, especially in sectors outside the health sector. Also unlike some Member State authorities, moreover, DG COMP has not reported investigations of crisis-related anti-competitive agreements or abuses of dominant positions.

The longer term effects of the COVID-19 crisis on EU antitrust reform remain to be seen. The crisis has already accelerated the EC’s promise to provide more guidance on cooperation arrangements, which might otherwise have been implemented only in 2021. DG COMP has also reaffirmed the timeline for its reassessment of the existing market definition notice, one of DG COMP’s key workstreams for 2020. However, other workstreams may be pushed back. The EC has committed to continuing its efforts to reform enforcement against large online platforms, but the crisis may draw attention to new forms of abuse, such as excessive pricing and discrimination.



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