European Competition Law ComplianceIntertanko / Istanbul Tanker Event 2008

Matthew LevittAngus Coulter

21 April 2008

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Overview• The new regime• Compliance • Commission Guidelines • Pools and case study• Conclusion

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The new regime• Regulation 1419/2006 of 28 September 2006

• Repeals the exclusion for tramp shipping and cabotage

• Immediate (18 October 2006) exposure to direct application of EC competition law and investigation and enforcement powers

• Commission Guidelines still to be finalised

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Compliance in the new regime• What is at stake and who is at risk?• The basic rules• Classic infringements• What is collusion?• What is an agreement?• Precautionary measures for meetings with

competitors• Dawn raid training• Compliance manuals and training

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Compliance: what is at stake?• Fines• Civil damages• Criminal liability• Extradition• Disqualification of directors• Reputational damage• Share price• Relations with customers• Management time and distraction• Legal fees

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Compliance: who is at risk?• Carriers

• Within a pool context:– pool managers– pool members

• Parent companies

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Ten largest anti-trust fines imposed by the European Commission

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100

200

300

400

500

600

700

800

900

1 2 3 4 5 6 7 8 9 10

Euro

mill

ions

1 – Microsoft, 2008, €899m

2 – Microsoft, 2004, €497m

3 – ThyssenKrupp, 2007, €480m

4 – Hoffmann-La Roche, 2001,€462m

5 – Siemens, 2007, €397m

6 – Microsoft, 2006, €280.5m

7 – Eni, 2006, €272m

8 – Lafarge, 2002, €250m

9 – BASF AG, 2001, €237m

10 – Otis, 2007, €225m

Updated: 27 February 2008

Fine levels shown include any adjustments made on appeal

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The basic competition rules• Article 81(1) EC prohibits restrictive agreements and

concerted practices, eg:– discussing or fixing rates– agreeing levels of capacity and utilisation– rationalisation of capacity– allocating customers or regions– exchanging confidential information

• Article 82 EC prohibits the abuse of a dominant positions, eg:– predatory pricing– discrimination– tying

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Article 81 “Safe Harbour” (I)• Agreement or concerted practice between actual

or potential competitors?• Must be an "appreciable" restriction of

competition, ie hardcore restrictions or exceeding 10% market share

• Market definition– product market– geographical market

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Oil/gas shipping markets• Oil and gas tankers probably separate from

containerised shipping, chemical tankers and pipelines

• CoA, T/C, broker services part of same market

• Division by vessel capacity (eg VLCC, Aframax) possible due to port restrictions, canal capabilities, costs unless:– all sizes compete on spot market for all

shipments regardless of cargo quantity and competitive pressure between all vessel sizes

• Geographical scope may be broad

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Article 81 “Safe Harbour” (II)• Caught by Article 81(1) but possibly exempted under

Article 81(3) if resulting benefits outweigh the restrictive effects

• Block exemptions:– Consortia (<35% market share): Exempts pools but not price

fixing, limited to liner consortia (extension?)– Specialisation agreements (<20% market share): Exempts joint

production and may exempt price fixing

• Individual exemption: Self-assessment– Hurdle of “indispensability”

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Collusion with competitors• Every meeting and telephone call with a

competitor may raise suspicion

• Discussion of competitive matters is presumed illegal, such as:– prices, charges, surcharges, discounts and rebates– other terms and conditions of sale– relations with particular customers or suppliers– planned service launches and service characteristics

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• Need not be in writing

• Need not be legally binding

• No such thing as "off the record" discussions

• A simple question followed by a response can be an "agreement"

Unlawful agreements

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Best practice - meetings• Do not go to meetings with competitors without a clear

agenda– if necessary check that the agenda items are lawful– do not discuss "off agenda" items

• Be sure you can account for your time before and after the meeting

• If illegal matters are raised:– protest– leave the meeting or end the telephone call– report the matter to the compliance team

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Best practice – written documents• All written records and communications, internal

and external, should always be as clear as possible to avoid any misunderstandings

• This applies to drafts, notes, minutes, marginal annotations, diary entries, electronic documents etc, as well as to final documents

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Best practice – industry events• Authorities can be suspicious of trade

associations and their meetings

• Exercise same caution at such events as in purely commercial contacts

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Dawn raids• Dawn raids on any business premises,

vehicles and private homes in the EEA

• The inspectors must identify the nature of the alleged infringement they are investigating and must stay within this scope

• Electronic documents

• Limitation: No access to documents which are legally privileged or outside the scope of the investigation

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Dawn raids - three golden rules• Keep a copy of all documents copied by

the inspectors

• Each inspector must be accompanied at all times

• Keep a written record of all questions and answers

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Dawn raid training• Dawn raid training is not an admission of guilt

• Preparation is key

• File audits and mock dawn raids

• Everyone from reception and security staff, IT specialists to the CEO needs to be familiar with the procedures applicable to them

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Compliance teams, compliance manuals and training

• Identify compliance officers• Establish a compliance programme• Compliance manuals: accessible, practical, non-

technical• Compliance training:

– Regular refreshers– Training seminars– Internet based training– Employee obligations

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Commission Guidelines on Maritime Transport

• Guidelines published in draft September 2007

• Finalised Commission Guidelines due by no later than 18 October 2008

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What will the Guidelines cover?• General issues on maritime transport

– “effect on trade” within the EEA– market definition– calculation of market share

• Agreement between competitors– technical agreements– liner shipping information exchanges– pool agreements in tramp shipping

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CASE STUDY – the poolThree carriers want to pool all of their Panamax oil tankers. Each will continue to operate larger oil tankers outside the pool, as well as various product tankers.

The carriers would like the pool vessels to be managed by a pool management company under the control of the three carriers and profits to be distributed on a traditional pool points basis.

Can the carriers set up this pool under the current law?

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CASE STUDY – self assessment• Assessment based on:

– Commission Guidelines– general EC competition law

• Self assessment is the norm

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CASE STUDY – basic facts to gather• Who is involved?

• What are the parties' activities?– inside the pool – outside the pool

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CASE STUDY – EU jurisdiction?• Must have effect on trade between EU Member

States

• Test easily met

• Guidelines:– any vessel calling at any EU port may meet this test

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CASE STUDY – product market• Which market(s) are involved?

• Guidelines on demand side factors – start with main terms of individual transport request, eg cargo,

volume, ports– division by vessel size possible

• Guidelines on supply side factors– start with physical and technical conditions of cargo and vessel

type– can vessels be adapted?

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CASE STUDY – geographic market• What geographic market(s) are involved?

• Guidelines: – starting points are ports or regions of

loading/discharging – consider repositioning, ballast voyages etc

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CASE STUDY – market shares• Need to consider most likely and worst case

• Guideline examples:– number of voyages– volume or value share of cargo type– share of time charter contracts– share of capacity

• Particular issue tankers: self supply by oil companies

• Consider markets other than pool market

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CASE STUDY – Assessment 1• The pool may fall safely outside Article 81(1)

because:– participants are not actual or potential competitors

• this includes pools where participants could not provide the pool service alone – but this may be construed narrowly

– pool is of “minor importance” (below 10% market share and no "hardcore" restrictions)

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CASE STUDY – Assessment 2• Pool agreements “involving joint selling” will be

caught by Article 81(1)

• Hard to see how any pool could not include joint selling and price setting

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CASE STUDY – Assessment 3• If a pool does not involve joint selling, it may or may not

be caught by Article 81(1), based on analysis of its effects on competition

• Guidelines on the market: – market share of participants, pool market and related markets– overall market structure, eg competitors, barriers to entry,

membership of other pools

• Guidelines on the pool rules– restrictions on activities outside pool– information exchanges– links to other pools

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CASE STUDY – Assessment 4• If Article 81(1) does apply, are the Article 81(3)

exemption criteria met?

• All four tests must be met for exemption:– does the pool achieve efficiency benefits? – are these shared with customers and consumers?– are the restrictions of competition indispensible to achieving

these benefits? – check that the pool does not allow elimination of competition

• Little help from Guidelines

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CASE STUDY – What might be needed next?

• Changes to documentation

• Limiting activities, eg:– keeping market share low– not becoming involved in concentrated markets– breaking links between pools

• Approach to Commission for guidance

• Restructuring of the pool

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CASE STUDY – Two forms of restructuring• ‘Full function’ joint venture

– a ‘full function’ joint venture is one which “performs on a lasting basis all the functions of an autonomous economic entity”

– requires independent management and arm's length relationship between manager and owners

– may require merger clearance– myths about joint ventures

• Consortia-type arrangement– no price fixing (rates and charges)– restrictions on length of termination provisions– joint bidding at customer’s request may be possible

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Conclusion: The need for realism• Guidelines will not provide

all of the answers

• The Commission is a political body (not a court)

• The Commission is likely to launch investigations to establish limits of law in this area

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Conclusion: What should tanker operators be doing now?• Competition law compliance

– compliance training– review of agreements and relationships with

competitors, particularly pools

• Consider broader commercial impact– will these legal changes affect current business

models?– are individual carriers equipped to face a more

competitive environment?

European Competition Law ComplianceIntertanko / Istanbul Tanker Event 2008

Matthew Levitt – matthew.levitt@lovells.comAngus Coulter – angus.coulter@lovells.com

Telephone: +32(0) 2 647 0660

21 April 2008