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Competing concerns

This article first appeared in the October 2011 issue of Port Strategy and is reproduced with their kind permission. www.portstrategy.com.

In May this year, the biggest global container lines were “dawn raided” by the European Commission at premises across the European Union, under suspicion of conspiring to fix prices and/or capacity on major shipping routes.

The end of exemption for liner shipping from the application of competition law in October 2008, together with the dawn raids, may mark the beginning of a period of increased scrutiny for the shipping industry more generally. Often, when the Commission starts an investigation into a specific industry sector, the investigation will spread into related sectors. This has recently happened in the air travel and automotive industries.

As such, now may be a good time for ports to reappraise some of their current business practices, to ensure that they comply with EU competition rules.

If a company believes that it has been involved in an infringement, it needs to consider whether to apply for leniency - i.e. a reduction in fines in exchange for enhanced cooperation. In essence, now that the dawn raids have taken place, the applicant for leniency will need to provide the Commission with information that it does not already have, which adds significant value to the Commission’s likely case.

At this stage, there is only a small possibility that 100% immunity will be possible (if there was no leniency applicant at the time the dawn raids took place, there is a good likelihood that such an application will since have been made). However, there is every likelihood that the next company through the leniency door will obtain a 50% reduction to any fine. Subsequent applicants could also obtain smaller reductions in the region of 20%.

The decision to go for leniency can only be taken once a company has (i) reviewed all the information that has gone to the Commission (in order to ascertain whether there is a risk that it will be found to be guilty of an infringement) and (ii) conducted its own internal audit of information that the Commission has not taken which may nonetheless add value to its investigation.

If a company decides to fight the investigation (irrespective of whether or not it considers that it has committed an infringement), it will need to avoid any finding by the Commission that it is not cooperating (which would likely lead to fines).

The Commission is currently processing the information that it has obtained, and engaging with potential leniency applicants. It may issue further formal written requests for information to the companies under investigation.

Once/if the Commission is satisfied that it has enough evidence to make an infringement finding, it will send the companies involved a Statement of Objections (SO). It could take up to two years for the Commission to reach this stage. On receiving the SO, the companies involved will have a further opportunity to review their strategy.

Cooperation will likely take the form of a settlement agreement, whereby the company admits its guilt in exchange for a 10% reduction in the fine that is ultimately imposed upon it (effectively a type of plea bargain). Alternatively, it can attack the Commission’s conclusions, and seek to undermine the Commission’s confidence in its own case, opening the way to an appeal if the Commission maintains its position.

If the Commission does find that there has been an infringement of competition law, its fine will be based on the turnover of the guilty company on the market affected by the infringement, on the duration of the infringement, and on the total size of the group of companies to which the guilty company belongs. The Commission is keen to ensure that its fines have a sufficient deterrent effect - larger organisations can therefore expect to receive larger fines. They can often be very considerable, up to 10% of the global turnover of the company’s entire group of companies.

In the air cargo cartel case, the Commission fined 11 air cargo carriers a total of €800m ($1.1bn), for setting fuel surcharges on cargo flights. The fines were imposed on EU airlines such as BA (€104m) and non-EU airlines such as Cathay Pacific (€57m), and Singapore Airlines (€74m). The fines were based on a percentage of the turnover achieved from all flights that either started or ended in the EU, and were multiplied by the number of years for which the infringement was ongoing.

For ports, the following types of contact with competitors could attract dawn raids and severe financial sanctions:

  • Discussions with other ports regarding the rates being charged to customers.
  • Discussions with other ports on future capacity for different types of customer.
  • Agreements with other ports not to deal with certain customers.
  • These types of conduct amount to serious breaches of competition law. A competition authority will likely seek to impose substantial fines in any investigation of a port which engages in such conduct.

    Agreements with customers that may in certain circumstances breach the competition rules include the following:

    • Clauses in agreements with customers which seek to induce the customer to use a particular port, and not to use a competing port: for example, reduced rates if a customer does not use another port, or rebates designed to encourage a customer not to use a competing port.
    • Clauses in agreements which seek to induce ports to give preferential treatment to certain customers, at the expense of other customers: for example, where a port agrees to provide services on an exclusive basis for a certain type of customer, or provides rates to one customer which are lower than the rates provided to other customers, without any objective explanation.

    Whether or not these types of favoured customer/favoured supplier clauses will breach the competition rules will depend on a number of factors, including the length of time that the clause is to stay in effect, the market shares of each of the parties to the agreement, and the overall structure of the market.

    Where neither party is considered to hold a dominant position (typically a market share of 40% to 50% and above), any infringement of the competition rules is unlikely to attract financial sanction. However, clauses which infringe the competition rules will be unenforceable against the other party to the agreement. As a general rule, if the share of the relevant market of each party is less than 30%, and if the clause lasts for less than five years, the clause is unlikely to cause competition law concerns.

    Where one party has a dominant position, there is a much higher likelihood that the clause could infringe competition law. Other types of behaviour by dominant companies that can attract more severe sanctions include the following:

    • Charging of “excessive” rates to customers. The Commission has in the past investigated ports (including Helsingborg and Rodby) for charging customers excessive rates. In both cases, the ports were ultimately found not to be charging excessive amounts. Any finding that a port is charging excessive rates could lead to the imposition of fines. Refusing to supply access can be particularly risky if the port also has shipping activities of its own.
    • Unilaterally refusing to provide access to a port, especially where the port has its own shipping operations to which it gives preferential treatment.
    • Providing access at rates that are below cost, in order to kill off competition (so called “predatory pricing”).
    Whether or not a company will hold a dominant position will obviously depend on how the market is defined. Market definition for ports varies depending on the sector - for example, the relevant markets for passenger ferries will be narrower than those for container shipping.

    Ports should consider investigating whether they are compliant with competition law before the Commission comes to decide for them.

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