Changes to Competition Law and State Aid Rules in Response to the Covid-19 Crisis

8th April 2020

The implications of coronavirus (Covid-19) and measures taken to contain the spread of the virus are having a significant adverse impact on many businesses and the economy at large. It is becoming increasingly difficult for companies involved in the manufacture and supply of essential goods and services to meet current demand and as such it has become apparent that businesses must work together to adapt to the current situation and ensure security of supply.

The UK’s Competition and Markets Authority (CMA) and, at European level, the European Commission (Commission) continue to enforce competition law to deter companies from engaging in anti-competitive practices. However, recognising the serious impact of Covid-19 and the pressing need for businesses to collaborate in certain areas, competition laws have been relaxed to some degree. This article details some of the key developments.

Distinction between unlawful cartels and lawful “necessary and temporary” co-operation

Agreements between competing businesses that prevent, restrict or distort competition using practices such as price-fixing, market sharing, limiting production or rigging bids (also known as cartels) are prohibited under competition law. Businesses breaching such laws can face heavy fines. Under UK competition law it is also a criminal offence for competitors to engage in such cartels.

These rules continue to apply in the Covid-19 crisis, however, given the exceptional circumstances that we are facing, governments and the competition authorities have acknowledged that a relaxation of competition laws is necessary to enable enhanced collaboration between businesses to facilitate the supply of essential goods and services, particularly to vulnerable customers. The UK Government recently announced plans to pass legislation which will allow cooperation between supermarkets to ensure the continued supply of groceries in stores (covering matters such as the sharing of staff, distribution depots and transport and sharing of data such as stock levels). The UK Government has also decided to waive competition enforcement and allow cooperation to secure essential ferry transport between the mainland and the Isle of Wight. The ferry operators will be able to discuss and agree routes and coordinate staff resourcing and they can also cooperate to allow the transportation of essential food, freight and medical supplies.

The CMA published a guidance document titled “CMA approach to business cooperation in response to Covid-19”. This guidance explains that the CMA will not be taking action against competing businesses which are cooperating or coordinating their efforts provided that “any such coordination is undertaken solely to address concerns arising from the current crisis and does not go further or last longer than what is necessary“. This relaxed approach is not limited to collaboration in the grocery sector but also extends to other sectors manufacturing or supplying essential goods and services.

The guidance clarifies that enforcement action will not be taken against competitors choosing to collaborate, provided that such actions are temporary and:

1. appropriate and necessary in order to avoid a shortage, or ensure security, of supply;
2. clearly in the public interest;
3. contribute to the benefit or wellbeing of consumers;
4. deal with critical issues that arise as a result of the COVID-19 pandemic; and
5. last no longer than is necessary to deal with these critical issues.

However, the CMA has warned that it will not tolerate businesses exploiting the crisis as a ‘cover’ for non-essential collusion, such as the exchange of commercially sensitive information or denying rivals access to supplies or services.

Action against Excessive Pricing

Dominant businesses are those with a position of such economic strength in a market that they can act independently of customers and competitors. For a dominant business, it is unlawful under competition law to charge an excessive price for goods or services, i.e. a price bearing no reasonable relation to the cost of supply. The CMA has established a Covid-19 taskforce to identify businesses seeking to exploit customers through excessive pricing and has warned against such practices in key sectors such as pharmaceuticals and food and drink. Already the CMA has contacted traders and platforms regarding potentially excessive pricing of hand sanitiser.

State Aid and the Temporary Framework

The UK remains subject to EU State aid regulations until the end of the transition period (currently 31^st December 2020). State aid is financial assistance provided by governments or local authorities to companies that has the potential to distort market conditions by providing an unfair advantage. Under the existing regime, unless it falls within an exemption (see below), financial aid granted by the UK Government or other public bodies must be notified to the Commission and approved before it can be administered. The potential issue here is that the UK Government has launched an unprecedented level of economic support and will continue to do so to combat the economic effects of the Covid-19 crisis. Measures which have already been announced include: support to cover up to 80% of the salary costs of furloughed employees; support for small and medium-sized enterprises (SMEs); deferring income tax and VAT payments; loans for SMEs and larger businesses and support to cover statutory sick pay payments for SMEs.

The vast majority of aid which will be issued in the coming months will not require notification because such aid is covered by a relevant exemption, either because it is “de minimis” (i.e. below €200,000 over a three year period) or falls within the Block Exemption Regulation (an exemption which applies to a wide variety of aid including regional aid, aid to SMEs, aid for research and development and aid for certain types of infrastructure). Furthermore, measures which apply to the economy as a whole (e.g. do not confer any advantage on selective businesses) will not constitute State aid. Current State aid rules also allow Member States to grant compensation to businesses for damage which has been directly caused by exceptional circumstances and this would include the COVID-19 pandemic. This could be used to support badly hit sectors including transport, tourism and retail.

In addition, the Commission has adopted a temporary State aid framework (the Temporary Framework) to increase member States’ abilities to support their economies in light of the Covid-19 pandemic – the Commission took the same flexible and responsive approach in 2008 during the global financial crisis. The Temporary Framework will remain in place until the end of 2020, when the Commission will take a view on whether this needs to be extended.

The Temporary Framework specifically allows authorities to provide five types of aid to qualifying companies:

• Direct grants, selective tax advantages and advance payments – Member States may set up schemes to grant up to €800,000 to companies to address urgent liquidity needs (the business must not have been in difficulties on 31 December 2019).
• State guarantees for loans taken by companies from banks – Member States will be able to provide State guarantees to ensure banks keep providing loans to the customers who need them (maximum six year term and the business must not have been in difficulties on 31 December 2019).
• Subsidised public loans to companies – Member States will be able to grant loans with favourable interest rates to companies. Such loans may be used to cover immediate working capital and meet investment needs (maximum six year loan term and the business must not have been in difficulties on 31 December 2019).
• Safeguards for banks that channel State aid to the real economy – Some Member States plan to build on banks’ existing lending capacities, and use them as a channel for support to businesses – in particular to SMEs. The Temporary Framework provides that such aid is considered to be direct aid to the banks’ customers rather than to the banks themselves.
• Short-term export credit insurance – The Temporary Framework introduces additional flexibility on how to demonstrate that certain countries are not-marketable risks, which may enable short-term export credit insurance to be provided by the State where needed.

Where measures do amount to State aid and are not exempted, the Commission has taken a flexible approach so that Covid-19 related aid is typically being approved very quickly (generally within 24 – 48 hours). The Commission has already approved under the Temporary Framework an umbrella measure to allow GBP 50bn (EUR 57bn) aid to support SMEs and large corporates affected by the Covid-19 outbreak in the UK.

It is possible we may see some further developments to the competition and state aid regimes in the next few months but these initial measures take pragmatic steps to ensure that competition law does not hamper the provision of essential goods and services to consumers or a financial lifeline for businesses.