Chillin'Competition

(by Alfonso Lamadrid and Sam Villiers)

Last Thursday AG Nils Wahl delivered his opinion on the Deutsche Bahn case, criticising part of the General Court’s September 2013 judgment (see here).

As you may remember, this General Court judgment served to confirm the Commission’s wide inspection powers under Art. 20 of Regulation 1/2003 when conducting dawn raids, stating specifically that there was no need for the Commission to obtain judicial authorisation prior to a raid and that documents discovered (genuinely) by accident which indicate a separate infringement may be used as evidence of that infringement, as long as the proper procedural requirements are respected.

The facts

The Commission had information that DB was offering its subsidiaries preferential rebates when supplying electric traction energy to operators.

During the course of the dawn raid at various DB premises in Germany, documents were discovered which the Commission considered may be indicative of separate anti-competitive conduct, outside the scope of the inspection decision (regarding the ‘strategic use of infrastructure’), but in relation to which it had also received a prior complaint. The Commission decided that a fresh investigation needed to be carried out in relation to this new conduct and so adopted a second inspection decision while it was still inspecting DB premises. (Seemingly not fully satisfied with the evidence gathered in the first two inspections, the Commission returned to DB premises later that year for a third inspection.)

DB was not all happy with the conduct of the Commission during the inspections and so brought actions for the annulment of all three Commission inspection decisions.

Prior judicial authorisation required for dawn raids?

DB argued that because the three inspection decisions were taken without prior judicial authorisation, various articles of the ECHR and the EU Charter (the right to the inviolability of private premises and the right to fundamental judicial protection) were infringed. With this plea the applicants were effectively challenging the current legal framework applicable to inspections under EU Competition law. AG Wahl dismissed this argument, agreeing with the General Court’s interpretation of the case law of the ECtHR.

Citing the ECJ’s Judgments in Chalkor and KME Germany, Wahl states that ex post judicial review carried out by the EU Courts offers an adequate level of protection of fundamental rights. He also makes a distinction between this case and the recent and interesting Czech case of Delta Pekarny, where the ECtHR ruled that fundamental rights were infringed, observing that this was due to the fact that the inspection decision was not subject to any—either ex ante or ex post—judicial review.

The opinion of the AG (and General Court) would seem to be sensible, in theoretical terms. Necessarily requiring prior judicial authorization, when ex post judicial review is available, seems excessive. A separate issue, though, is the quality of the judicial review itself.  It is all very well catering for a judicial review – but it must be effective, and it is arguable that this has always been the case when it comes to, among others, the Commission’s investigatory powers (see here).

In any event, as we will explain below AG Wahl seems to strike the right balance in this regard.

‘Surprise’ discoveries

It is on the issue of the discovery of documents indicating a second infringement that the AG’s opinion differs from the General Court’s judgment. Although they both agree that under Art. 28 Reg. 1/2003 any documents collected during the inspection must be used for the purpose for which it was acquired (save for some exceptions in the regulation), and also that, by way of derogation, following the Dow Benelux case, documents found which aren’t covered by the inspection decision can be used to start a new investigation, AG Wahl thought that the GC neither correctly applied the Regulation nor the Dow Benelux case (paras 58-83) to the facts of this case.

The Commission’s undoing, it seems, is that before carrying out of the first inspection, Commission inspectors had been notified that a separate complaint had been filed against DB for a separate infringement. Dismissing the Commission’s argument that inspectors had been told about this merely for background information, AG Wahl suspected the “only plausible explanation […] is that information on the DUSS suspected infringement was given to the Commission staff so that they could ‘keep their eyes peeled’ for evidence related to the second complaint” (para 77).  This means that the Commission effectively circumvented Art 20(4) of Reg 1/2003, either deliberately or through negligence.

In Dow Benelux the Court ruled that there was no reason why the Commission should disregard documents pointing to a different infringement if it was genuinely found by accident, but, as observed by AG Wahl in para. 82 “[t]his is clearly not the type of conduct which the Court meant to allow under its Dow Benelux case-law. There is, in my view, no difference between a case in which the Commission launches an inspection without a valid decision and one in which the Commission proceeds on the basis of a valid decision, but searches for information relating to another investigation, not covered by that decision”.

As Wahl states, there seems to be no good reason why the Commission did not just adopt two separate decisions, and simply carry out the inspections at the same time.

(For an interesting discussion on the subsidiary issue of the burden of proof, see paras. 84-99).

Final remarks

AG Wahl recommends the ECJ to annul the second and third Commission inspection decisions, believing that the breach of DB’s rights of defence and right to the inviolability of private premises is a sufficient basis. It will be interesting to see whether the ECJ takes the advice.

AG Wahl’s sensible and nicely drafted Opinion does a very good job summarizing the state of the law regarding inspections on the part of the European Commission, and only for that reason makes an interesting read. More importantly, in our view it also strikes a right balance by acknowledging that the Commission is to enjoy a certain leeway when it comes to investigations powers whilst, at the same time, advocating for an effective review over the use, and possible misuse, of those powers.

Old followers of this blog might remember that when we started it we had a fairly popular section on “Competition Law and Sport” in which we also anticipated a few developments which ended up materializing, such as the state aid investigations into football clubs (not that one had to be a genius to see that one coming…).

It had been quite a while since we wrote out last post in this series, but developments in this area haven’t ceased to arise. This is unsurprising because, as I often repeat, what happened with competition law in this area is a perfect example of a “be careful with what you wish for” situation. Sports always claimed special antitrust treatment, and it got it, but perhaps for worse; following the Meca Medina and Piau Judgments it is clear that virtually any sporting rule can be challenged under competition law in the light of the Wouters test (which implies assessing whether any effects restrictive of competition are inherent in the pursuit of legitimate objectives and are proportionate to them).

In the past few months we’ve had plenty of interesting developments in this area, like, among others, the O’Bannon v NCAA decision in the U.S. (in which the NCAA’s rules prohibiting the payment of compensation to former athletes in order to preserve the amateurism of college sports was quashed); the Pedro León v LFP case, in which a Spanish Court  declared (in an interim measures order, available here) that the Spanish football league’s rules setting a limit on club expenditure on player’s salaries in the light of their debt ratios constituted an abuse of a dominant position given that they limited clubs’ ability to go into whatever debt they considered necessary. And in the past few days it was made public that the Spanish and Portugal leagues lodged a complaint targeting FIFA’s third-part ownership prohibition (see here).

On top of the above there have been a few developments regarding state aid and media rights, as well as some national cases that haven’t made headlines, such as the Swedish bodybuilders case (see here), or one concerning compensation for the release of players to national teams (see here) which is actually a follow up of a case in which I worked some years ago (see here).

We might comment on some of the least-discussed issues raised by the above-mentioned cases, but for now we’ll focus on the most recent development, which has great potential ramifications and that seems to have gone largely unnoticed, at least in the competition law world; I’m referring to the Judgment of Munich’s Oberlandesgerich of 15 January in the Pechstein saga.

Some background

Act 1- Switzerland. The Judgment concerns a longstanding legal dispute between speed skater Claudia Pechstein and the International Skating Union (“ISU”), who had banned her from all its competitions for two years due to her positive in a doping control. Mr. Pechstein unsuccessfully challenged this ban before the Court of Arbitration for Sport (“CAS”). The CAS was chosen in compliance with a dispute resolution clause in the registration form for one of the championships from which she was banned. The CAS’ award was subsequently appealed before Swiss Courts, but once again Ms. Pechstein didn’t have much success.

Act 2- Germany. Ms. Pechstein then decided to take the matter to German Courts and her luck started to change. The Regional Court of Munich held that the arbitration agreement had been invalid because of a “structural imbalance” between the athlete and the ISU, given that the latter’s dominant position in the organization of championships made Ms. Pechstein decision to go to arbitration “involuntary”. However, the Regional Court considered that, by not raising this issue in the proceedings before the CAS, Ms. Pechstein had validated and remedied the said imbalance. Showing once again her tenaciousness, Ms. Pechstein also appealed this decision before the Higher Regional Court of Munich.

The Judgment

The Higher Court takes the view that the arbitration agreement between Ms Pechstein and the ISU was invalid because it was contrary to mandatory competition law given that it was imposed by the ISU, which enjoys a dominant position and could therefore not impose non-competitive business terms.

The Court does not object to dominant undertakings requiring that an arbitration agreement be signed as a matter of principle, but it does rule, in casu, that forcing Ms. Pechstein to submit to arbitration before the CAS as a necessary condition to participate in tournaments constituted an abuse of a dominant position. The reasoning underlying the Court’s decision was that, at the time, sporting organizations such as the ISU had more influence than athletes in the designation of arbitrators; this, in turn, was considered to cast doubts on the independence of the CAS.

Interestingly, the Higher Court holds (in paras. 129 et seq) that the CAS’ award cannot be recognized in Germany in as much as it runs counter competition law, that is, to public order (the High Court refers to the ECJ’s seminal Eco Swiss Judgment in this regard) The Judgment states that “[t]he recognition of an award based on an agreement contrary to competition law would perpetuate the abusive conduct of the ISU, which would be contrary to the objective underlying the ban on abusive practices imposed by the competition rules”.

Comments

The Judgment does not go as far as to state that making participation in sporting championships contingent upon agreeing to an arbitration clause constitutes per se an abuse of dominance on the part of sporting organizations, but is rather carefully drafted in the light of the specificities of the CAS (some of which appear to have change pursuant to a reform of the rules in 2012).

In any event, this ruling (which ISU has announce that it will appeal to the Supreme Court) may provide weaponry for those wishing to contest arbitration clauses or to oppose to the recognition of arbitral awards in certain circumstances.

Whereas some have claimed that this Judgment is “revolutionary”, I recall that in the past the European Commission itself has also held a tough stance towards mandatory arbitration, considering that that provisions in private agreements whereby private parties in a situation of preeminence/dominance limited available legal actions to arbitration to the exclusion of national Courts could amount to anticompetitive conduct.

This position has been particularly evident from the Commission’s intervention precisely in sport cases, in which it was considered that the imposition by sporting federations of arbitration as the exclusive means of settling disputes would –in the absence of the possibility to appeal to national Courts- amount to a restriction of competition.  In a case concerning FIA, one of the Commission’s concerns was to ensure that legal challenge against FIA decisions would be available not only within the FIA structure but also before national courts. Following the Commission’s intervention, FIA agreed to insert a new clause clarifying that anyone subject to FIA decisions could challenge them before national courts.

Similarly, the Commission insisted in the negotiations with FIFA on transfer rules that arbitration would be voluntary and would not prevent recourse to national courts, which led to FIFA modifying its transfer rules to this end. In fact, in that case the Commission also insisted on the need of creating an independent arbitration structure, with an independent chairperson and members designed on a parity basis by players and clubs.

So, in essence, the German Court in this case has reached very similar conclusions to the ones reached by the European Commission some time ago; the main difference is that the German Court has stated its position in a Judgment (which is what Courts do) and the Commission did it over negotiations (which is what the Commission does too).