Relative market power and freedom of procurement abroad – initial findings from practice
On 1 January 2022, Switzerland expanded the Cartel Act (CartA) with the adoption of the indirect counterproposal to the so-called "fair price initiative", which introduced new provisions that extend the list of examples of unlawful practices and subject undertakings with relative market power to control of abusive practices. The political objective is clear: Switzerland must not remain a "high-price island" and Swiss undertakings should not be at a disadvantage to foreign companies when procuring goods and services abroad. In the meantime, the new provisions have been put into practice – so it is time for an initial interim assessment.
1. Overview
Since the new regulation came into force, not only undertakings with absolute market dominance but also those with "relative market power" are subject to the rules on unlawful practices under the Cartel Act (Art. 7 CartA). An undertaking has relative market power if other undertakings are dependent on it for the supply or demand for goods or services in such a way that there are no adequate and reasonable opportunities for switching to other undertakings (Art. 4 para. 2bis CartA). Unlike absolute market dominance, primarily determined by market share across the entire relevant market, relative market power is independent of market share and limited to specific business relationships. The rules on unlawful practices, however, are essentially identical. In the wording of the law, the general clause in para. 1 of Art. 7 CartA prohibiting unlawful practices of exclusion and exploitation and the list of examples in para. 2 apply to both undertakings with absolute and relative market power.
In addition to the concept of relative market power, the Cartel Act has also been expanded to include a new type of abuse. The new Art. 7 para. 2 lit. g CartA specifies the prohibition of "Switzerland surcharges". Undertakings with relative market power and market dominance may not restrict the opportunity for buyers to purchase goods or services offered both in Switzerland and abroad at the market prices and conditions customary in the industry in the foreign country concerned.
Why is this relevant?
This extension of antitrust law has immediate practical consequences for undertakings. With the introduction of relative market power, the group of undertakings potentially affected by, from an antitrust perspective, abusive conduct has expanded considerably. Regardless of their market share, undertakings must now consider whether they could have relative market power over individual business partners and, if so, reassess their own market behaviour. At the same time, economically dependent undertakings now have new opportunities to oblige their business partners to enter into or continue business relationships, and to combat discriminatory conditions.
Furthermore, although the new abuse provision in Art. 7 para. 2 lit. g CartA is tailored to undertakings with relative market power, it applies equally to undertakings with absolute market power. They, too, must familiarise themselves with the new requirements, perhaps even in particular. Compliance with this new rule of conduct is particularly important for undertakings with absolute market power, as any violation of Art. 7 CartA is subject to direct sanctions (see Art. 49a para. 1 CartA). For undertakings with relative market power, however, a first-time violation of the rules of conduct in Art. 7 CartA does not directly lead to fines. Sanctions can only be imposed if the competition authorities have established a violation of the Cartel Act and the undertaking concerned subsequently violates this ruling (see Art. 50 CartA). This sometimes enables companies with relative market power to adjust their behaviour while an investigation by the Secretariat of the Competition Commission is still ongoing, potentially leading to proceedings being discontinued – as illustrated by the recently concluded BMW case. For undertakings with relative market power, civil law claims are therefore the primary focus.
2. Requirements for the assumption of relative market power
Initial practical guidance on the new provisions can be found in the explanatory note from COMCO, the concluded proceedings in Madrigall vs Payot (abuse of relative market power confirmed, but decision not yet legally binding), Fresenius vs Kabi (discontinued), BMW (discontinued) and the investigation proceedings initiated in the Nivea case, as well as the first decisions by cantonal civil courts on interim measures (the decision of the Cantonal Court of Basel-Landschaft and the decision of the Commercial Court of Zurich). The focus is on the question of when relative market power exists within the meaning of Art. 4 para. 2bis CartA. Practice has defined three essential conditions that must be fulfilled cumulatively:
- an undertaking is dependent on an undertaking with relative market power;
- the dependent undertaking has no countervailing power; and
- the dependent undertaking did not become dependent through gross negligence on its part.
These criteria have been further clarified in subsequent decisions:
- In contrast to the assessment of absolute market dominance, the focus in the case of relative market power is not on defining the relevant market, but on identifying the specific relationship of dependency. The decisive factors are the following:
- whether there are realistic alternatives, in particular whether an undertaking can purchase the same goods or services from other undertakings, switch to alternative goods or services, or dispense with the goods or services altogether;
- what economic disadvantages would be associated with switching to such alternatives; and
- whether these disadvantages are reasonable.
In the Madrigall/Payot case, COMCO emphasised that the assessment of dependency is not based on the entire business relationship between two undertakings, but always on a specific good or service. This, however, does not rule out the possibility of dependency extending to several products, entire product categories or even the entire product range. In this case, COMCO recognised Payot's dependency on Madrigall books since Payot would suffer significant sales losses if it stopped selling these books. This loss could not be compensated for by increased sales of books from other publishing groups. In the BMW case, COMCO also concluded that the existing alternatives available to the garage (i.e. discontinuing the sale of new BMW and MINI cars entirely, becoming an authorized dealer of new cars from other motor vehicle manufacturers, selling used cars from different brands, or engaging in activities outside the automotive sector) would presumably not have been reasonable. These alternatives would have led to considerable losses in turnover and profits, and investments would have been largely lost.
COMCO did not require active efforts to find alternative sources of supply as a mandatory prerequisite for an undertaking before it could invoke the provision on relative market power in Madrigall vs Payot, Fresenius vs Kabi or BMW. The Cantonal Court of Basel-Landschaft takes a different view, however, considering it necessary in principle to examine serious alternatives, even across national borders in some circumstances. In the latter two cases, both the Cantonal Court of Basel-Landschaft and the Commercial Court of Zurich rejected the existence of a relationship of dependency, as the allegedly dependent undertaking was unable to substantiate and prove such a relationship. The procedural differences between administrative and civil proceedings are particularly evident when it comes to proving a relationship of dependency. While the Secretariat or COMCO must clarify the facts of the case ex officio (principle of an ex officio investigation), in proceedings before the civil courts the plaintiff undertaking bears the burden of proof for all facts on which it derives rights.
- The Madrigall vs Payot and BMW cases demonstrate that, regarding the second criterion, the absence of effective countervailing power, the interest of the undertaking with potentially relative market power in the consideration provided by the dependent undertaking is decisive. In the Madrigall vs Payot case, Madrigall had many distribution partners in Switzerland and the termination of its business relationship with Payot would not have affected its economic position. Conversely, Payot was largely dependent on continued supplies from Madrigall for its economic survival and was therefore unable to muster sufficient countervailing power. In the BMW case, COMCO found that BMW did not renew the contractual relationship partly because it already had a new strategic partner. Furthermore, COMCO referred to the disparity in sales ratios, with BMW accounting for approximately 30% to 40% of the garage's total turnover, yet generating less than 0.1% of BMW's total turnover. Based on this, COMCO concluded from its summary examination that BMW presumably did not have the same or a similarly strong interest in continuing the BMW and MINI dealer agreements as the garage.
- According to the Cantonal Court of Basel-Landschaft, a dependent undertaking may be deemed to have acted with gross negligence if it enters into long-term contracts without an appropriate notice period, or if it voluntarily refrains from diversifying its sources of supply. By contrast, in the Madrigall vs Payot case, COMCO did not attribute Payot's relative dependency to poor business decisions, since Madrigall books could only be purchased via Madrigall's official distribution system. COMCO also ruled out (presumed) gross negligence in the BMW case. The garage was justified in assuming that BMW was interested in a long-term expanded business relationship and expected investment efforts on the part of the garage. Therefore, the investments made by the garage did not constitute an obviously unreasonable risk nor did COMCO attribute the existing dependency to any inefficient structures on the part of the garage.
Although COMCO and its Secretariat have recently clarified the conditions for the existence of relative market power, undertakings may have difficulties assessing this in practice. Unlike absolute market power, relative market power is not based on objectively measurable market shares, but on specific relationships of dependency. Assessing these relationships often requires information about the economic situation of the business partner in question, which is usually not available to the undertaking concerned in its entirety.
3. New abuse provision: Procurement abroad (Art. 7 para. 2 lit. g CartA)
Until now, the competition authorities have primarily focused on specifying the concept of relative market power. The new abuse provision under Art. 7 para. 2 lit. g CartA, on the other hand, has largely remained in the background. Here, too, there is a need for clarification in practice. According to COMCO's explanations in the Madrigall vs Payot case, the provision covers situations in which:
- a good or service is offered in both Switzerland and a foreign country;
- the dependent undertaking is supplied abroad on worse terms than a comparable foreign undertaking;
- these worse terms are to be classified as abusive; and
- there are no objective justifications.
Previous cases demonstrate that COMCO takes a comprehensive overall economic view when evaluating abuse and does not merely focus on price differences. In the Madrigall vs Payot case, for instance, COMCO also considered differences in payment terms, return policies and volume discounts. According to COMCO, abuse does not already exist in the cases of slightly (“geringfügig”) worse purchasing conditions, as outlined in the Fresenius vs Kabi case. In the Madrigall vs Payot case, however, the price difference was so significant that COMCO found that abuse occurred. It did, nonetheless, concede that recurring additional costs incurring solely as a result of distribution in Switzerland (e.g. as additional administrative expenses or higher labour costs in Switzerland) may be passed on proportionally. COMCO, however, sets relatively high requirements for proving such additional costs. They must be demonstrated convincingly and substantiated with concrete evidence. In COMCO's opinion, one-off additional costs, such as conversion costs, do not justify a permanent increase in purchase prices.
Even more complex is the question of when other terms and conditions are more than just slightly disadvantageous and can therefore be classified as unfair. The Madrigall vs Payot case provides some initial clarification. In this case, COMCO ruled that disadvantages can be expressed, for example, in the general terms and conditions (GTCs). In this instance, Madrigall's GTCs applicable in France provided for a right of return and a specific payment period for French booksellers, in line with common industry practice. In the opinion of COMCO, Swiss booksellers would be disadvantaged if Madrigall refused to grant these rights or only grant them on a more restrictive basis without objective justification. Further assessment criteria will have to be determined in practice. Of particular interest and relevance to undertakings is the extent to which Switzerland-specific additional conditions, such as the obligation to pass on price advantages to end customers could be classified as unlawful disadvantageous conditions. If there is an increased risk that the price advantages will not be passed on to Swiss end consumers, such pass-on obligations may at least be objectively justified. They would also be in line with the spirit and purpose of the new provision in Art. 7 para. 2 lit. g CartA, which aims to combat high prices in Switzerland.
4. Relative market power and other categories of abusive conduct
For undertakings with relative market power, it is not only the abuse provision under Art. 7 para. 2 lit. g CartA that is relevant, but also all other provisions under Art. 7 para. 2 CartA. This is illustrated by the BMW case, which did not involve procurement abroad, but rather a refusal to enter into business relationships in Switzerland. COMCO classified BMW as an undertaking with (potential) relative market power and stated that such companies cannot terminate business relationships at will, but must at least provide for a reasonable transition period. Otherwise, there could be an inadmissible refusal to enter into business relationships under Art. 7 para. 2 lit. a CartA. COMCO, however, noted that the constitutive elements of this form of abuse cannot be transferred directly to situations involving relative market power. Rather, when considering relative market power, the focus must always be on protecting the individual interests of the dependent undertaking and not on competition as such. According to COMCO, in cases of relative market power, the refusal of a business relationship must thus not be aimed at impairing competition as a whole, but at hindering or exploiting the dependent undertaking. Furthermore, dependency on the relevant supply or demand must be assessed on a case-by-case basis for each dependent undertaking. The Commercial Court of Zurich, however, took a slightly different view in its decision. It held that, in the context of the abuse analysis, it must be demonstrated that the alleged refusal to conclude a new contract has harmful effects on competition (“schädliche Auswirkungen auf den Wettbewerb”).
Although these statements are comprehensible, a certain degree of legal uncertainty remains for undertakings, particularly regarding how the other forms of abusive conduct of Art. 7 para. 2 CartA are to be applied in the context of relative market power. In particular, discrimination within the meaning of lit. c is somewhat at odds with the concept of relative market power. It is unclear how a dependent company can be discriminated in the traditional sense if relative market power, by definition, only concerns a bilateral relationship of dependency, whereas discrimination presupposes a comparison with other market participants.
Furthermore, in the BMW case, COMCO clarified that the conduct listed in Art. 7 para. 2 CartA is only considered inadmissible in conjunction with Art. 7 para. 1 CartA, even in cases of relative market power. According to COMCO, un undertaking with relative market power is therefore only acting abusively if the following additional requirements of Art. 7 para. 1 CartA are met:
- a distortion of competition (or individual impeding or exploitation of the dependent undertaking); and
- the absence of any objective justification.
According to COMCO, an objective justification could be affirmed if the termination of a business relationship serves to prevent inefficient distribution structures. This justification, however, was not deemed applicable in the BMW case. COMCO also rejected BMW's objection that there were no investments worthy of protection. It found that such investments did indeed exist, and that even the absence of investments worthy of protection would not in itself constitute an objective reason for terminating a business relationship.
5. Outlook
The proceedings to date clearly show the practical relevance of the latest provisions of the Cartel Act. For undertakings with absolute market dominance, Art. 7 para. 2 lit. g CartA creates a new offence, punishable by sanctions, relating to foreign purchases. At the same time, undertakings without absolute market power are now coming under greater scrutiny: They may be classified as having relative market power and must adapt their behavior accordingly – not only with regard to procurement abroad, but also for other types of conduct covered by Art. 7 CartA, such as the termination of existing business relationships.
Despite clarifications in these initial cases , key questions of interpretation remain unresolved, such as how to address discrimination and the requirements for establishing distortion of competition in the context of relative market power. Until a more established Swiss practice has been developed, it may be useful to consider foreign practices. Germany, in particular, has been familiar with the concept of relative market power for some time and possesses a wealth of practical experience in this area. While both the legislature and COMCO in previous proceedings have emphasised that foreign case law cannot be relied upon unconditionally, it can at least provide guidance and inspiration to bridge the current uncertainties in Switzerland.
For more information on Switzerland’s new regime under the Cartel Act, contact Marquard Christen (Partner), Dr Julia Haas (Senior Associate) or Dr Leandra Diem (former Attorney Trainee) your usual contact at CMS.
