Expert economists Jorge Padilla, David Sevy, Lorenzo Coppi, Rameet Sangha, and Urs Haegler of Compass Lexecon advise firms on how to manage the antitrust risks posed by the COVID-19 pandemic in a special feature for Financier Worldwide.
Do you believe that antitrust has a role to play in the response to the crisis?
Sevy: COVID-19 has caused a simultaneous supply and demand shock in most countries around the world and in many sectors. COVID-19 can be expected to trigger changes in the way businesses operate which will profoundly affect market equilibria, locally and globally. Firstly, it will probably be more costly to do business, due to long-term restrictions on trade and an increase in the costs of providing goods and services. Secondly, digital means of doing business will grow more quickly and induce deep sectoral transformations, in the retail and services sector particularly, but also in manufacturing. When these transformations affect concentrated sectors, competition authorities will have a natural role to play – but this role itself might be affected by those ongoing transformations.
How far might competition authorities allow conduct which would normally be anticompetitive?
Coppi: All business practices that are seen to be driven by a desire to profit from market disruption – such as price increases due to increased demand or reduced supply – will likely be judged even more severely. On the other hand, coordination between competitors which is essential to ensuring an orderly supply of goods and services will probably be considered more leniently, as long as it does not amount to coordination on prices or other ‘hardcore’ collusive practices. The sectors of the economy that are more likely to benefit from a more lenient approach to coordination will comprise the sectors that have been hit hardest by COVID-19.
With governments calling for a coordinated response to the crisis, what steps should be taken to ensure that competition/antitrust risks do not arise when competitors discuss industry responses?
Sangha: It may be advisable to have a lawyer present at such discussions. It would be sensible to ensure that the objectives of any cooperation are clear and in the consumer interest and that the information exchanged, and any coordination between competitors, does not go beyond what is strictly necessary to ensure that the objective is met.
Coppi: Discussions about prices, and especially future price intentions, costs, volumes and output plans, or allocation of customers or geographic areas carry very substantial antitrust risk, even during COVID-19. On the other hand, exchanging information and forecasts on market demand, even if detailed, is more likely to be acceptable, although seeking specific legal advice is always important.
With some companies facing a sudden increase in demand, what steps might competition authorities take to protect consumers, especially from excessive prices?
Coppi: It is clear that, as a result of the crisis, most competition authorities have stepped up their antitrust enforcement against price gouging and excessive pricing. Any price increases are likely to attract regulatory scrutiny during the crisis – regardless of the reasons behind them – especially if those price increases are in sectors that are considered central to the management of the crisis. It is important that companies considering increasing their prices have a cost-based justification for doing so.
Do you expect competition authorities to adjust their approach to merger control?
Padilla: All EU economies to a greater or lesser extent are populated by “zombie” firms that are unable to repay their loans but are kept alive by weak banks concerned about their own financial stability. Zombie firms are not only inefficient, they also drive resources away from relatively more efficient firms and, therefore, slow down aggregate productivity and growth. The COVID-19 crisis risks increasing the number of these firms, which may delay economic recovery. There are different ways to facilitate the exit of zombie firms so that their scarce resources are reallocated to efficient firms – merger control is one possible route. However, current merger control rules and, in particular the ‘failing firm’ defence, are not fit for purpose. Yet, competition agencies are unlikely to promote their change because they tend to ignore the macroeconomic implications of their decisions.
Sangha: Certain authorities, for example the CMA, have signalled clearly that their normal standards will not be relaxed during the pandemic. However, assessing the impact of a merger relative to the no-merger counterfactual is challenging when there is so much uncertainty around how businesses would fare in the absence of the merger. There are signs that a ‘failing firm’ merger defence will – despite the pandemic – continue to be challenging to substantiate, as shown by the CMA’s recent assessment of Amazon’s acquisition of a minority stake in Deliveroo.
Sevy: I would expect to see an interest in building scenarios with probabilities against them, although probabilistic reasonings would lead to errors and to challenges in courts, especially given the recent General Court judgment on the Hutchison/O2 matter, which raised the standard of demonstration for prohibiting mergers. Failing firms arguments will need to be considered very seriously, as will efficiency arguments, in sectors where market forces will steer significant restructuring with only a few firms being able to remain viable.
Is the European Commission (“EC”) likely to be more lenient in its approach to State aid?
Haegler: The EC has so far approved more than €2.5 trillion across around 200 national aid schemes. However, it is member states, not the EC, that decide whether they wish to grant aid and to what extent. In setting up the Temporary Framework, which has been amended three times since its adoption, and widely approving the notified aid measures, the EC has made extensive use of the room for manoeuvre that the rules afford it in the specific context of the COVID-19 crisis.
What essential advice would you offer to companies and their legal advisers on assessing and managing competition/antitrust risks amid the COVID-19 crisis?
Padilla: I believe efficiencies are likely to play a much more important role going forward, both in connection with merger control and in the assessment of cooperation agreements. Thus, companies need to be able to better articulate the rationale for their strategies. Why are they proposing a merger? What are the efficiencies brought about by an agreement? So far, companies have dealt with these issues rather loosely, providing only vague qualitative answers which were hard to verify.
Sevy: For firms contemplating the acquisition of a rival in distress, thoroughly investigate the likelihood that the target might disappear or be absorbed by another company, which competition authorities may not take for granted. More broadly, in any merger, assessing possible scenarios of key supply or demand parameter evolutions can be helpful to delineate relevant markets and assess the merger’s competitive impact beyond the very short term. For dominant firms adapting their business models to new market realities, systematically document the assumptions on which these changes are predicated and their efficiency rationales, to limit the risks of confusion with an opportunistic, anticompetitive exclusion strategy.
Sangha: The disruption caused by COVID-19 provides a ‘natural experiment’ that could yield relevant evidence on supplier responses for future merger or antitrust cases. In certain sectors, for example in food supply and local delivery, firms have been able to adapt their businesses to enter into new areas or expand quickly to meet unmet or new demand. If this type of adaptation or supplier response has occurred in your business’s sector, it would be useful to document what has occurred or is occurring.
Looking ahead, how do you expect antitrust law and enforcement to evolve throughout the pandemic, and beyond?
Padilla: The damage to the economy resulting from the first wave of infections has been brutal, but it may be dwarfed by the consequences of a second or third wave. Competition agencies may be forced to deal with transactions and agreements in sectors experiencing a collapse in demand. They would need to assess them by reference to a counterfactual – the scenario without the merger or the agreement – which is riddled with uncertainty.
Coppi: If the worst of the pandemic is beyond us, then I expect competition authorities to return to a ‘business as usual’ stance relatively quickly. This would be the case especially in the antitrust scrutiny of digital and platform markets, and in the merger area – except perhaps for those sectors where the pandemic has had profound and possibly permanent effects, such as airlines. If, instead, we have another significant wave over the autumn and winter, then competition authorities may have to take an even more radical approach, including mergers, State aid, cooperation among competitors and prices oversight.