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“Crisis cartels” - Can an economic downturn ever excuse anti-competitive practices? Insights from a European Commission statement to Ireland’s High Court, April 2012

Martin Coleman, Norton Rose Publications, July 2012.

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The global economic downturn has given new life to the difficult question of whether competition authorities will ever tolerate anti-competitive agreements, practices or mergers on the grounds that they are necessitated by adverse economic conditions.

Competition authorities will normally answer with a blunt “no” - but comments made in April by the European Commission in an ongoing Irish High Court case [1], on restructuring the Irish beef processing sector, have indicated that there are circumstances where a more permissive approach will be taken.

Competition authorities’ reaction to the post-Lehmans downtown

In the immediate aftermath of the collapse of Lehmans, competition authorities were emphatic that they would not “go soft” on anti-competitive behaviour just because there was an economic crisis. The then European Commissioner for Competition, Neelie Kroes, said in March 2009:

“Some people want to hear that we have a free ride or quick fix for them. That is not true… If that sounds like ‘tough love’ - it is. It is better to have clear and strong rules in the first place and then stick to them. It lifts standards, and markets know what to expect.”

In similar vein, in January that year, John Fingleton, head of Britain’s competition authority, the OFT, declared:

“When it comes to market failure, two wrongs do not make a right. Creating a second market failure by restricting competition is not a sound policy response.”

The European Commission’s April 2012 intervention

The Irish beef case has been a chance to see how these principles work in practice. A trade association of the ten principal beef and veal processors in the Republic of Ireland had developed a rationalisation plan with a view to addressing overcapacity in the industry. They agreed between themselves that some of the processors would withdraw from the market, and would be compensated by funding from those who remained. In November 2008, the EU Court of Justice ruled that this kind of agreement was seriously restrictive of competition under the EU prohibition on anti-competitive agreements, but the case was remitted to the Irish High Court to see whether it might nevertheless benefit from exemption from the prohibition; under the EU rules (which also apply in the individual member countries of the EU), an otherwise anti-competitive agreement is exempt from the prohibition in so far as (broadly speaking) it brings economic benefits that are shared with consumers, and is no more restrictive of competition than is “indispensable” to achieving those benefits.

In the course of the proceedings before the Irish High Court, the European Commission has exercised its right to submit written observations to the national court, with a view to ensuring “the coherent application” of the competition rules across the EU. In comments submitted to the Irish Court on 24 April 2012, the European Commission has indicated that, although anti-competitive agreements will in general not be justified by recessionary circumstances, there are situations where agreements between competitors to “rationalise” production in response to overcapacity - sometimes called “crisis cartels” - may be excused, provided that they truly are indispensable to the economic benefits.

Reasons the European Commission will not normally tolerate rationalisation agreements

The European Commission said that generally it is of the strong view that “crisis cartels” aimed at reducing capacity cannot be justified by recession-induced falls in demand - because, in a free market economy, market forces should remove unnecessary capacity. Each individual market participant should decide for itself whether, and at what point, overcapacity becomes economically unsustainable, and should take the necessary steps to reduce it.

Circumstances where rationalisation agreements may be permitted

Nevertheless, the European Commission considered that there could be situations where overcapacity could not be remedied by market forces, and that these were most likely where:

  • the overcapacity was long-term and structural, rather than merely cyclical; this would be the case where, over a prolonged period, all the market participants experienced a significant reduction in capacity utilisation rates, output falls and operating losses, with no lasting improvement likely in the medium term; and
  • either (i) it is costly for firms to surrender capacity (because they have large fixed costs, or marginal costs which decrease with higher output, or significant sunk costs) or (ii) the market participants are of similar size and cost structures, in a relatively stable and transparent environment, such that their interests are likely to be sufficiently aligned to maintain capacity at an excess level.

In such circumstances, a coordinated reduction of capacity might be regarded as “indispensable”, and therefore as justifying exemption from the EU prohibition on anti-competitive agreements. However, in assessing this, the European Commission would want to see whether there might be other, less anti-competitive, ways of coordinating the restructuring of the industry - such as mergers and acquisitions that would account for a smaller share of the market than a market-wide restructuring arrangement.

In any event, the European Commission confirmed that, even where a restructuring agreement is not exempt, an economic crisis in a particular industry may be a factor which allows for a reduction in the fine imposed [2].

Footnotes

[1Irish High Court case 2003 no. 7764P Competition Authority v Beef Industry Development Society, comments submitted by European Commission on 24 April 2012.

[2Derived from the judgment of the EU General Court in Cases T-217/03 and T-245/03 FNCBV [2006] ECR II-4987.

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