Legal briefing | Competition |

Industry cooperation & competition after lockdown

Overview

Exiting lockdown: beware the antitrust risks

In response to the COVID-19 lockdown, certain limited forms of cooperation which would normally infringe competition law have been permitted for businesses such as supermarkets.  But these are typically very narrow exceptions and as we come out of lockdown, businesses should not assume that they are now free to cooperate on a much wider scale than before the onset of the pandemic – or that antitrust regulators will turn a blind eye.

As explored in our previous article on COVID-19 and competition law, antitrust regulators both in the UK and abroad have been quick to respond to the unique challenges posed by COVID-19. They have made clear that the competition laws will be relaxed or otherwise not enforced against industry-wide cooperation designed to deal with the immediate impact of the crisis. In the UK, this has resulted in temporary COVID-19 guidance and certain sector-specific legislation which allows competitors to cooperate to a greater degree than would normally be possible.  

But this guidance and legislation is narrowly defined primarily by reference to temporary cooperation strictly necessary to secure the supply of scarce and/or essential goods and services upon the onset of the COVID-19 crisis. Any other cooperation outside this narrow remit will not necessarily be covered by the CMA's reassurances, even if it is well-intentioned. Indeed, the UK Competition and Markets Authority ("CMA") has made clear that it will actively pursue enforcement action against firms deemed to be using COVID-19 as a 'cover' for broader commercial cooperation.  

"In most cases, competition law will continue to apply as normal regardless of COVID-19 – both during and immediately after the immediate impact of the pandemic."

As industries adapt to the ongoing commercial fall-out from COVID-19 and try return to normal services as government restrictions are eased, firms should therefore be aware that any such 'post lockdown' cooperation between competitors could carry material competition law risk.  Below we consider some of the risk areas you should consider as your industry acclimatises to a post lockdown world.

Crossing the line - when legitimate COVID-19 cooperation goes too far

"Take care that legitimate cooperation does not inadvertently lead to discussion or coordination regarding broader commercial issues".

As noted above, there are a number of means by which firms may get comfort that their COVID-19 related cooperation will not fall foul of competition laws or otherwise be investigated – namely: by self-assessment using the CMA's guidance; specific informal comfort from the CMA; and/or sector-specific legislation excluding the application of competition laws to certain activities. (See our earlier article for further information)

However, regardless of how firms get comfortable with industry-wide cooperation, it is clear that this coordination must be temporary and strictly limited to matters of "public interest" addressing "critical issues" facing consumers as a result of COVID-19.  

As the worst effects of the pandemic abate, firms must therefore be careful that their legitimate cooperation does not inadvertently lead to discussion or coordination regarding broader commercial issues – even if these are closely linked to their industry's response to the pandemic and its immediate aftermath. 

The dividing line in this respect may not necessarily be obvious.  For example:

  • Sector specific legislation is not all-encompassing. While certain sector-specific legislation has temporarily relaxed competition laws to allow in-depth cooperation between competitors (such as sharing facilities, exchanging capacity information and joint purchasing), it explicitly does not allow competitors to share related price or cost information.

  • R&D collaborations may be permissible, but joint commercialisation may not. Competitors may legitimately collaborate and/or exchange commercially sensitive information to facilitate the research and development of products required to respond to COVID-19, but collusion regarding the ongoing commercialisation of this joint R&D may breach competition laws.

  • It is not always clear what is meant by "scarce" products or "essential" services. While temporary cooperation between competitors to secure the supply of scarce or key products and services affected by COVID-19 may be legitimate, broader collaboration regarding non-essential products/services may not be (the CMA's guidance does not define what may be counted as "scare products" or "essential services").

  • Ongoing cooperation that was permissible at the outset may not be permissible once the initial issues have been addressed. Legitimate cooperation initially required to address critical product/service shortages may later fall foul of competition laws if it goes on longer than necessary (e.g. as more manufacturing capacity comes back online and product shortages no longer persist).

Returning to work - facilitating an orderly return to normal services

As government lockdowns are gradually relaxed across the UK and abroad, firms may be turning their attention to how they might function as and when the immediate impact of the pandemic has passed. 

Many firms will understandably want to resume normal trading and recover their pre COVID-19 market position as soon as possible.  This may include firms currently engaged in close cooperation with each other and public bodies to secure the supply of scarce or essential goods and services.   

However, even if government restrictions are lifted and/or in-depth cooperation between competitors may not be strictly necessary, significant supply-chain issues may persist for many businesses and firms may not be able to immediately offer their full range of products and services. 

Despite these practical challenges, firms should exercise caution before discussing with competitors how and when they will resume trading.   Even if such discussions result in the industry as a whole offering a more even and timely distribution of goods/services to consumers, they may nevertheless be regarded as tantamount to market-sharing.

STAFF ISSUES: WHAT TO WATCH OUT FOR

Firms' HR teams should also be careful not to share commercially sensitive information regarding employee terms, compensation or hiring practices upon the return to work.  Particularly as Government support for furloughed employees is phased out, many firms may be facing difficult choices about how to manage their workforce going forward.  Nevertheless, any industry-wide collusion regarding, e.g., reducing hours, temporary suspensions, hiring freezes, (etc.), could be regarded as illegal cartel conduct – even if it is well-intentioned and aimed at managing employee welfare going forward.

Managing the fall-out - dealing with the economic costs of COVID-19

The economic impact of COVID-19 is predicted by many to be significant and ongoing. In the face of an immediate and significant reduction of consumer demand in certain industries, both suppliers and customers may face cash shortages in the near future and whole markets may undergo rapid restructuring. 

However, the decisional practice of regulators in the UK and abroad makes clear that such a crisis will not, in and of itself, justify ongoing cooperation between competitors – even if it is designed to arrest the collapse of an industry or to protect vulnerable consumers. 

Firms should be careful when considering any form of ongoing multilateral discussions or cooperation between competitors, even where there are genuine industry-wide concerns that might need to be addressed.  For example, issues might arise in the following circumstances.

  • Managing overcapacity. In some markets, companies may well be dealing with significant overcapacity, or surpluses, as a result of changing patterns of demand and supply.  Such surpluses could result in rapid decreases in price and profitability for suppliers.

  • Addressing supply chain bottlenecks. Particularly in markets with complex or long supply chains, bottlenecks may be created as a result of different suppliers returning to work at different times or at different levels of production.  This could have a significant impact on the ability of particular manufacturers or retailers to bring products to market in response to customer demand.

  • Working with counterparties in financial difficulty. Given the significant economic impact of the pandemic, many suppliers and customers are likely to be facing material challenges in managing their cashflow and debts incurred in the ordinary course of business.  This might result in proposals for urgent, multilateral renegotiation of payment terms, credit terms, joint purchasing, or shared logistics, etc.

  • Changes to product offering. In some markets, companies might need to consider making changes to their product offering to take account of the impact of the pandemic (e.g. offering extra ancillary services or refunds under certain conditions).

DON'T READ TOO MUCH INTO GOVERNMENT INVOLVEMENT

Governmental bodies may well encourage or cajole firms to engage in such industry-wide cooperation to try and diminish the ongoing economic fall-out from COVID-19.   

The mere involvement of a Government body will not in itself prevent the CMA from investigating this conduct or ultimately deeming it in breach of competition laws. In other words, it is still incumbent on firms to self-assess whether industry-wide action sponsored by Government amounts to a competition law infringement.

Practical implications

In the face of the likely significant and on-going practical and economic challenges posed by COVID-19, there will still be scope for post-lockdown collaboration which does not necessarily squarely fall within the narrow remit of the CMA's existing COVID-19 guidance or sector-specific legislation. 

For example, industry-wide lobbying and discussions designed to get clarity regarding trading restrictions and/or establish best practices regarding how to safely trade are unlikely to pose material competition law risk. 

However, in the absence of further guidance or legislation, firms should still:

COMPETITION LAW AND COVID-19: KEY RECOMMENDATIONS

  • exercise considerable caution before engaging with each other or extending the remit or duration of their COVID-19 related cooperation;

  • consider whether, e.g., informal engagement of the CMA might be advisable for any joint initiatives touching on matters which would usually be regarded as a matter for the individual firm's commercial strategy – e.g. revising customer/supplier/employee terms upon the return to work;

  • continue to review whether any ongoing cooperation remains necessary as and when the immediate impact of the pandemic passes; and

  • consider carefully how to structure any such ongoing COVID-19 related discussions or collaboration, even if they still appear legitimate by reference to the CMA's guidance. Such safeguards could include: (i) using a trade association and/or internal firewalls and clean teams to ensure collaboration and information sharing remains limited to that strictly necessary to respond to COVID-19; (ii) documenting in detail the limited scope of any ongoing competitor cooperation/discussions; and (iii) being transparent with industry rivals and customers regarding this cooperation.

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