The European Commission recently published its long-awaited final report on its E-commerce Sector Inquiry launched two years ago. Therein, the Commission identifies that pricing limitations, dual pricing (i.e., charging different prices according to the channel through which a product is sold) and platform bans are among the most widespread vertical competition restraints in e-commerce implemented particularly often in distribution agreements between manufacturers and retailers in Germany. The report contains some helpful guidance on the competition assessment of the individual online sales restrictions. It comes as a warning, when the Commission indicates in the report that it intends to conduct a targeted enforcement in the e-commerce sector in the near future aimed at those business practices with the greatest potential to harm competition…read more.
Facebook is faced with a fine of EUR110 million (US$122 million) for providing misrepresentative or incorrect information to the European Commission when it filed the acquisition of WhatsApp for merger approval in 2014.
In the notification, Facebook stated it would not be able to reliably link Facebook users’ accounts and WhatsApp users’ accounts. However, two years later, Facebook updated its terms of service, which then allowed for a matching of Facebook and WhatsApp user accounts. According to the Commission’s ensuing investigation, Facebook had the ability to link users at the time of the WhatsApp acquisition, when Facebook filed the WhatsApp acquisition for merger approval.
Implications: A Warning Shot for Business
The Commission sees this as a warning shot, says Margrethe Vestager, the EU’s competition commissioner: “Today’s decision sends a clear signal to companies that they must comply with all aspects of EU merger rules, including the obligation to provide correct information.” On her Twitter account, she posted: “We need accurate #facts to do our job.”
Yesterday’s decision will not affect the merger clearance approving Facebook’s acquisition of WhatsApp. Although the Commission has the power to withdraw the clearance if it is based on incorrect or misleading information, the clearance in this case was based on facts beyond the automated matching capability, and even analyzed the effects of such an automated matching. The Commission therefore decided not to withdraw the clearance of the transaction.
Risk of Major Fines Even for Procedural Violations: 1% of Global Turnover
The Commission over recent years has repeatedly fined companies for violation for procedural requirements, but yesterday’s decision is the first fine for providing incorrect or misleading information. Under the current guidelines, the Commission can fine companies up to 1 percent of their global annual turnover for violation of procedural requirements, while violations of substantive EU competition law can be fined of up to 10 percent of global annual turnover. Based on 2016 data, the Commission could have imposed a fine on Facebook of up to EUR248 million (US$276 million) for the procedural violation.
Earlier, the Commission had fined Germany’s E.On EUR38 million (US$42.2 million) and France’s Suez Environnement EUR8 million (US$8.9 million) for breaching seals during inspections, as well as Belgium’s Electrabel and Norway’s Marine Harvest each EUR20 million (US$22.2 million) for gun-jumping in acquisitions. A Czech energy company had been fined EUR2.5 million (US$3.3 million) for obstruction during an inspection by not blocking email accounts of employees, and failure to disclose complete information.
WhatsApp Acquisition Raises Antitrust Jurisdictional Debate
Facebook’s WhatsApp acquisition had sparked a debate on whether the current turnover-based jurisdictional test in European merger control was suitable to deal with acquisitions in the digital economy. The US$19 billion acquisition was initially not reportable to the European Commission, as WhatsApp in 2013 generated only US$10 million in annual turnover. However, the transaction triggered market-share-based tests in various EU Member States, and was referred to the Commission upon application of Facebook. There are now discussions of introducing a transaction value-based system, and Germany has just updated its merger control rules to capture transactions valued at EUR400 million or more, even where the target company has only minimal turnover.
Similarly, the transaction has shown a spotlight on whether seemingly free platforms to end users are subject to the antitrust rules, as end users do not pay for the platform’s services in money. However, competition authorities in Europe have clearly stated that they see these interactions as business transactions in which users pay for the platform’s services via their personal data. Germany has, for example, very recently amended its Competition Act to clarify that markets that are subject to antitrust review will not require a payment in money. In addition, the amendment sets the parameters according to which market power in digital markets is measured.
Non-federal entities that receive federal assistance—such as colleges and universities, hospitals, nonprofits, and state, local and tribal governments—have been given an additional year to comply with the Office of Management and Budget’s (OMB) revised procurement standards for grants and federal funding.
In December 2013, OMB overhauled its guidelines for the oversight and administration of federal grants and other federal financial assistance. The sweeping changes included revisions to procurement standards codified at 2 CFR §§ 200.317-200.326. OMB originally gave non-federal entities until December 25, 2016, to implement changes to their procurement policies and procedures to comply with the OMB revised guidance. On May 17, OMB announced that it would allow non-federal entities a grace period of one additional year, to December 25, 2017, to implement such changes, and the implementation date for the procurement standards will start for fiscal years beginning on or after December 26, 2017.
The OMB procurement standards require non-federal entities to establish procurement procedures that are consistent with federal law, OMB standards, and any state regulations. The non-federal entities’ procurement procedures must be formally documented and must address a number of critical procurement issues, including, but not limited to:
- Written standards of conduct covering organizational and personal conflicts of interest and contractor integrity
- Emphasis on economical and efficient solutions during the procurement process, and the inclusion of a cost or price analysis in connection with every procurement action to determine the most economical approach
- Promotion of full and open competition
- Measures to assure that minority businesses, women’s business enterprises, and labor surplus area firms are used when possible
Federal grant recipients should continue to review the OMB procurement standards under 2 CFR §§ 200.317-200.326 and should formally document their revised internal procurement policies in order to bring the entity into compliance with OMB standards before the December 25, 2017, deadline.
The revised Modernizing Government Technology Act (HR 2227) passed the House by voice vote May 17. Identical legislation already has been introduced in the Senate by Sens. Gerry Moran (R-Kan.) and Tom Udall (D-N.M.), and with strong bipartisan and industry support, the bill is expected to advance to the president in upcoming weeks.
As Reed Smith recently advised, the legislation aims to modernize federal IT infrastructure and to reduce wasteful government spending on the maintenance of existing “legacy” IT systems. The MGT Act stresses the importance of modernized information technology solutions, such as cloud computing. The heart of the legislation is the creation of two funding sources to support agency modernization efforts: working capital funds and a centralized technology modernization fund.
Agencies will be able to tailor the IT solutions to their particular needs. Contractors can anticipate an uptick in RFIs and RFPs related to this modernization effort upon passage of the MGT Act. Reed Smith will continue to monitor the legislation and provide periodic updates. To learn more about the MGT Act, click here.
On May 9, the Department of Defense Inspector General (“DoD IG”) released Audit Report No. DODIG-2017-081, Summary of Audits on Assessing Contractor Performance: Additional Guidance and System Enhancements Needed (the “Audit Report”). The audit identified weaknesses within the DoD’s contracting officials’ preparation of contractor Performance Assessment Reports (“PARs”) and potential improvements to the Contractor Performance Assessment Reporting System (“CPARS”).
Because of insufficient training, lack of internal controls, and ineffective procedures for timeliness and PAR review, DoD contracting officials sometimes failed to: (i) write sufficient narratives to defend past performance ratings; (ii) properly rate past performance evaluation factors; and (iii) prepare sufficient contract effort descriptions.
The audit highlights that contractors must be proactive in their efforts to ensure the accuracy of PARs; a contractor’s reputation with agencies is vital to any contractor’s success. To guarantee the right to appeal an inaccurate PAR, the contractor must file a claim with the contracting officer in accordance with the Contract Disputes Act. Without that claim, and the contracting officer’s ultimate denial of that claim, the Board of Contracts Appeal or the U.S. Court of Federal Claims will have no jurisdiction over the challenge.
The Audit Report is a strong reminder that contractors, and their counsel, must be conscious about how executive agencies evaluate contractors’ performance. To read more click here.
The Department of Justice Antitrust Division (DOJ) announced May 15 that it is investigating the proposed acquisition of the Chicago Sun-Times newspaper by the owner of rival publication the Chicago Tribune. As a condition of proceeding with the sale, the DOJ has required that the Chicago Sun-Times advertise for an alternative buyer. The investigation demonstrates the Antitrust Division’s willingness to scrutinize the acquisition of market power even within depressed industries.
In disclosing the Chicago Sun-Times investigation, the DOJ stated that the Chicago Sun-Times must run an advertisement seeking additional bidders and allow for a 15-day waiting period. If another viable buyer steps forward, a “reasonable opportunity” will exist for the buyer to conduct due diligence and negotiate purchase terms. A press release from the current owners of the Chicago Sun-Times, Wrapports, LLC, announced the proposed sale to tronc, Inc., which operates the Chicago Tribune, and acknowledged the DOJ’s conditions. If an alternative buyer fails to surface, tronc will run the Chicago Sun-Times as a separate unit with an independent newsroom.
The DOJ is responsible for evaluating the competitive effects of newspaper acquisitions pursuant to a 2002 memorandum of agreement with the Federal Trade Commission. In 2016, the DOJ successfully sued to block the owners of the Los Angeles Times from acquiring two bankrupt California newspapers. In response to criticism of the DOJ’s decision to sue in light of internet-based competition, then-Assistant Attorney General Bill Baer predicted that the enforcement action would “ensure that citizens and advertisers . . . continue to benefit from competition and from a diversity of views in their local news coverage.” The Chicago Sun-Times investigation is a clear reminder that the DOJ remains ready and willing to enforce merger policy guidelines, despite the widespread layoffs and sustained decreases in subscriber counts that have plagued many regional and local publishers in the industry.
The House Oversight and Government Reform Committee recently passed the revised “Modernizing Government Technology Act,” and the bill will proceed to the House floor for a vote. The legislation aims to modernize federal IT infrastructure and to reduce wasteful government spending on the maintenance of existing “legacy” IT systems. The bill has bipartisan, bicameral and widespread industry support, as well as support from the White House.
The MGT Act stresses the importance of modernized information technology solutions, such as cloud computing. According to the bill, modernized solutions offer efficiencies, cost savings, and greater computing power to agencies. The heart of the legislation is the creation of two funding sources to support agency modernization efforts: working capital funds and a centralized technology modernization fund.
Agencies will be able to tailor the IT solutions to their particular needs. Contractors can anticipate an uptick in RFIs and RFPs related to this modernization effort upon passage of the MGT Act. Reed Smith will continue to monitor the legislation and provide periodic updates. To learn more about the MGT Act click here.
The “Digital Strategy 2025”, adopted by the German Federal Government on March 1, 2016, aims to ensure that Germany remains a growing, modern and significant financial marketplace in an increasingly digitalized environment. Measures proposed under the Digital Strategy 2025 include the further development of Germany’s regulatory landscape, in particular in the areas of competition and consumer rights.
On March 20, 2017, the German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie) published the White Paper ‘Digital Platforms‘. The white paper stresses the need to further develop competition and antitrust policy in Germany to facilitate a level playing field for both digital and analog businesses.
In recent years, the German competition regime has been widely perceived as inadequate in addressing digital platforms, for instance, when assessing their market power; traditional turnover-based concepts have proved incapable of capturing their position for competition, in particular in the light of big data. The growing relevance of big data, with consumers nowadays “paying” for the services digital platforms provide “free” of charge, has created the need to refine the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen, ARC) in addition to strengthening consumer rights.
The ARC is currently going through its ninth amendment, which is expected to enter into force shortly. On March 31, 2017, the German Federal Council (Bundesrat) consented to the legislative changes which had already been approved by the German Federal Parliament (Bundestag) earlier this year. The ninth amendment introduces alternative and more effective concepts into German competition policy that apply to the specific features of digital platforms:
- Under the new law, the existence of a relevant market will no longer depend on the generation of turnover, and so social platforms, search engines and information sites will no longer slip under the radar of competition regulation only because they offer their services to consumers for free.
- The amendment further incorporates numerous criteria into the assessment of two- or multi-sided markets (in which digital platforms are typically active) such as the interdependencies of the different market sides (so-called direct and indirect network effects), whether users only engage one or several competing services (i.e., engage in single- versus multi-homing), the existence of so-called lock-in effects (e.g., losing access to contacts when leaving a social network), economies of scale relating to network effects, access to relevant data, and the potential constraints on competition due to innovation.
- The amendment introduces a size-of-transaction test into German merger control with the intention of catching transactions with a deal value of €400 million where the target company does not generate turnover in Germany or its turnover in Germany is below the €5 million threshold. This will ensure effective merger control in cases where the target’s economic relevance in Germany is not adequately reflected in its domestic turnover. Supplementing the existing turnover-based threshold test with an alternative size-of-transaction test is also being discussed at the EU level. The acquisition of WhatsApp by Facebook in 2014 prompted this change under the ninth amendment – the transaction was caught under neither German nor (initially) EU merger control although the acquisition’s relevance in the market was significant (Facebook paid approximately US$19 billion for the acquisition).
The anticipated changes to the assessment of the competitiveness of digital platforms do not necessarily introduce entirely new concepts and approaches but rather help to synchronize the law with concepts already established in the approach to decisions taken by the German Federal Cartel Office (Bundeskartellamt, FCO) and German courts. In contrast, the introduction of the size-of-transaction test into German merger controls will close a perceived enforcement gap. It remains to be seen to what extent this will lead to an increase in burdens and bureaucracy for both companies and the FCO, in particular since the size-of-transaction test will apply to transactions across all sectors and not just digital markets. This test is, therefore, also likely to increase the volume of cases before the FCO relating to mergers which are not potentially anti-competitive. Furthermore, the additional criterion introduced into the test, which requires the target to be domestically active “to a significant extent”, may lack sufficient legal certainty when determining whether or not a transaction is notifiable.
The Federal Trade Commission (“FTC”) recently charged a Puerto Rico ophthalmologist cooperative with organizing a group boycott of a health plan in violation of section 5 of the FTC Act. This action demonstrates the need for providers to be heedful of the antitrust laws when engaging in group contracting efforts. While agreements among independent providers on the prices or payors they will deal with are usually per se illegal, there are exceptions for financially or clinically integrated provider joint ventures. To read more click here.
In January of 2017 a private equity firm, Bencis, was found liable for a portfolio company’s involvement as one of 14 cartelists producing flour in the Netherlands, Belgium, and Germany. The Authority for Consumers and Markets (ACM) ruled that while company was a member of Bencis’s portfolio, Bencis was accountable for their antitrust violations. This case demonstrates the need for private equity firms to ensure that companies they invest in are in full compliance with competition rules. To read more about parental liability click here.