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25 July 2019
On 12 June 2019 the Maritime and Commercial Court upheld a decision by the Competition Appeals Board which had found that a price coordination agreement between HMN Naturgas I/S, two sub-contractors and a trade association had as its object the restriction of competition.
HMN is a municipality-owned natural gas undertaking with a significant market share. At the time of the Competition Council's decision, one of the activities that HMN carried out was service checks on natural gas boilers for final consumers.
HMN offered owners of natural gas boilers a maintenance subscription where service checks would be carried out on a regular basis. However, HMN did not perform the service checks; instead, it relied on independent sub-contractors (so-called 'service partners'). In addition to the work performed on behalf of HMN, the service partners also offer end users similar maintenance subscriptions of their own.
During a service check, the service provider replaces defect spare parts as required. The price of a service check on natural gas boilers thus consisted partly of the maintenance subscription fee and partly of the costs of replacing spare parts. HMN is the primary supplier of spare parts to all of its service partners.
In 2014 HMN concluded an agreement with its service partners, whereby the profit margin on the spare parts market would be lowered. A maximum profit margin of 25% on spare parts was offset by increased compensation to HMN's service partners.
Further, it was agreed that HMN's prices on maintenance subscriptions should reflect the change in pricing model. The court took that to mean that HMN was to increase the price of their maintenance subscriptions. HMN's price increase subsequently allowed the sub-contractors to raise the price of their individual maintenance subscriptions without losing customers to HMN.
In 2016 the Competition Council issued a decision which determined that the coordination of prices on service checks constituted competition law infringement. The decision was subsequently upheld by the Competition Appeals Board in 2017.
The Maritime and Commercial Court found that the agreement between HMN and its sub-contractors pertaining to the pricing and sale of spare parts had to be assessed separately from the agreement concerning the maintenance subscription fees of final consumers.
The part of the agreement regarding the pricing of spare parts was considered an entirely vertical agreement that influenced only HMN's customers. The maintenance subscription fee agreement was viewed as a horizontal agreement, as HMN and its sub-contractors were all active on the market for service checks on natural gas boilers for final consumers. HMN and its sub-contractors were therefore considered competitors, despite the fact that HMN had delegated all works relating to service checks to sub-contractors.
When explaining the decision to assess the two agreements independently, the court emphasised the fact that price is the most predictable element of any subscription and so it is a significant competitive parameter. Expenses relating to spare parts are less foreseeable, as they depend on how frequently a replacement is needed. The different expenses were, therefore, in the opinion of the court, incomparable.
The court further explained that while the agreement only obliged HMN to raise its maintenance subscription fees, the aim was to allow HMN's sub-contractors to similarly raise their prices. The measure would consequently affect all consumers on the market.
The court concluded that the agreement constituted a restriction of competition 'by object' which could not be justified by efficiency gains – namely, because HMN had failed to demonstrate that the agreement was objectively necessary to pursue any pro-competitive objective. Further, the court noted that the claimed efficiency gain benefitted only HMN's customers despite the fact that the agreement had allowed all parties to raise prices.
The case is not over yet as HMN has announced its intention to appeal the case before the High Court.
An interesting takeaway from the judgment is that the Maritime and Commercial Court viewed separable components of an agreement in isolation. In the present case, the court concluded that maintenance subscription fees were the most significant competitive element of service checks due to their predictability and impact on all owners of natural gas boilers. Under these circumstances, the court saw no reason to examine all parts of the agreement jointly.
It will be particularly interesting to see how the High Court views this separation of the agreement into two parts and if that is deemed sufficient to satisfy the requirement to evaluate the agreement's objectives and economic and legal context.
HMN contends that the agreement was put in to place as a result of customer complaints regarding the price of spare parts and that the agreement viewed as a whole would lead to a 10% discount for HMN's customers. However, HMN faces an uphill battle if the High Court follows the Maritime and Commercial High Court's reasoning (ie, that the claimed efficiency gains do not suffice because they benefit only HMN's customers).
The case has also been referred to the state prosecutor for serious economic and international crime with a view to pressing criminal charges.
For further information on this topic please contact Martin André Dittmer or Christian Liborius at Gorrissen Federspiel by telephone (+45 33 41 41 41) or email (email@example.com or firstname.lastname@example.org). The Gorrissen Federspiel website can be accessed at www.gorrissenfederspiel.com.
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