The application of competition law to small-and-medium enterprises: lessons from selected APEC countries An UNCTAD Research Partnership Platform project, coordinated by Hassan Qaqaya Project & Questionnaire outlines Guiding questions: The basic question addressed in this paper is: are there good practices in the design and the enforcement of competition laws that are applicable to breaches of antitrust conduct provisions involving SME-to-dominant arrangements? Is competition law inapplicable to SMEs, as most SMEs believe? Or is the claim an example of special interest lobby for protectionism? To anticipate the analysis, there is evidence that SMEs stand to benefit from effective enforcement of competition law and from complying with the antitrust rules voluntarily where they apply. A. Introduction Small and medium sized enterprises (SMEs) form the largest statistical group of undertakings in any free market economy; they contribute a large portion of overall GDP and employ the majority of employees. Corresponding to the diversity of this group, SMEs carry a range of important functions for the economy and society at large by, inter alia, introducing new ideas and processes, claiming niche markets or simply providing goods and services in socially important contexts. Consequently competition policy interacts with SMEs in a variety of ways - depending on the conditions of the relevant geographic and product market and the SME concerned. Areas where SMEs benefit from competition law It is conceivable that in large, open markets competition law tends to safeguard economic opportunities for SMEs against large incumbents and to limit abusive behaviour. Typically affected sectors include retail (especially in high-end specialized or branded goods where resale price maintenance (RPM) is wide-spread), gastronomy and wider hospitality, where the combination of marketing and exclusive supply agreements is common. Similarly SMEs rely disproportionately on traditional finance from banks, making them particularly vulnerable to antitrust abuses in financial services. In recent years the rise of e-commerce and online marketing has emerged as a new area where SMEs may be particularly affected by anti-competitive behaviour. SMEs have quickly embraced the opportunities of e-commerce i.e. for targeted and cost effective marketing opportunities or effective distribution channels. Thanks to the new opportunities of e-commerce, SMEs have in some instances realized previously unimaginable growth, penetrating previously inaccessible geographic markets. By relying on online marketing and distribution channels some of the most innovative start-ups and other 1
SMEs have been able to cut prices on previously complicated supply chains, offering new goods and prices to consumers. Overall, SMEs rely disproportionately on online tools and may therefore be disproportionately affected by antitrust abuses of dominant undertakings in this area. 1 Given the early development stage of the digital economy it may be expected this area will continue to grow in importance for SMEs, both as marketing and a distribution tool. This makes abuses in e-commerce an emerging key area to watch for competition authorities. Areas where SMEs participate in anti-competitive conduct At the same time, larger SMEs may hold significant market power in narrow geographic or product markets and possess an incentive for restrictive behaviour. Similarly SMEs in saturated markets with uncontested structures and a low degree of innovation may feel threatened by new, resourceful entrants and react by shutting competitors out, including by anti-competitive means. 2 Further examples of SME engagement in anti-competitive conduct are the participation in hub-andspoke cartels in high-end luxury goods, i.e. high-end entertainment systems, hearing aids, mattresses. An interesting example of anti-competitive behaviour by SMEs is the recent decision of the German Federal Cartel Office (Bundeskartellamt) against a cartel of 21 manufacturers of sausages, some of which clearly fall into the SME category. 3 The Bundeskartellamt found that the sausage manufacturers had coordinated price increases and negotiating strategies vis-a-vis the retail industry on several occasions as part of an almost traditionally cooperative industry climate. At the same time the overall efficiency enhancing effects of certain types of cooperation (i.e. research & development, production or distribution) has long been recognized i.e. under Art. 101(3) TFEU. Due to their size, limited resources and limited ability to profitably develop expertise inhouse, SMEs rely heavily on cooperation with other firms, often as the only option to develop and market new, sometimes even innovative, products. Most competition laws recognize these effects - German competition law even provides for the explicit possibility of so called "SME Cartels (Mittelstandskartelle), as Section 3 of the German competition code (Gesetz gegen Wettbewerbsbeschränkungen (GWB)) expressly allows cooperation agreement between SMEs under the condition that they provide overall efficiency gains that could not have been achieved in 1 For examples see: (1) The ongoing investigation by the EU Commission against Google investigating alleged abuse of a dominant position in online searches. Case AT.89740 - Google; For a different take pls. refer to the collapsed FTC investigation regarding the same issue: FTC File No.111 0163 - Google Inc. (2) For a good discussion of the issues surrounding anti- trust actions against search engines refer to: Lao, Marina ""Neutral" Search as a basis for Anti-trust action?", Harvard Journal of Law & Technology - Occasional Paper Series, 07/2013 (3) For the potential significance of Online platforms please refer to: European Commission Case M.71126 Hellmann & Friedman/. Scout 24 OJ C366, 14.12.2013 2 The recent struggles in the regulated taxi markets in several European cities between online based service providers and established taxi firms may serve as a case in point. 3 Bundeskartellamt Press release of 15/07/2014 - Bundeskartellamt imposes fines on sausage manufacturers Available at (15/09/2014): http://www.bundeskartellamt.de/shareddocs/meldung/en/pressemitteilungen/2014/15_07_2014_wurst.html?nn=3591286 2
any other way. 4 Equally EU law recognizes the efficiency enhancing effects of certain types of cooperation between undertakings and SMEs in particular, and regulates certain standard types of agreements as part of a long list of jurisprudence. This was later codified in block exemption regulations and guidelines on the assessment of horizontal 5 and vertical 6 cooperation agreements. The side areas - Procurement and State aid Moreover SMEs are often heavily affected by the related areas of law such as procurement and state aid law. In procurement, SMEs must comply with strict rules and processes, and rigorous efficiency requirements when bidding for public contracts. It has been argued in the past that some public procurement rules do not fully consider the particular strengths of SMEs vis-a-vis larger competitors and that some of these criteria may have unduly prevented SMEs from successful bids for public works contracts past. State aid is another area where SMEs are regularly affected by the competition law. SME promotion is a key objective of national and international economic policy, yet SMEs are also subject to state aid rules. At the same time, SMEs are disproportionately affected by orders to reclaim unduly paid aid, even if the aid has been received in good faith. 4 Federal Law against Competitive Restraints (Gesetz gegen Wettbewerbsbeschränkungen (GWB)). Available at: http://www.gesetze-iminternet.de/gwb/bjnr252110998.html 5 Council Regulation No. 2821/71 on the application of Article 85 (3) now 101(3) to certain categories of horizontal agreements OJ L 285, 29.12.1971 pp. 46-48 Pls. also refer to: Communication from the Commission - Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, OJ C11, 14.1.2011, p. 1 6 Council Regulation (EC) No 1215/1999 of 10 June 1999 amending Regulation No 19/65/EEC on the application of Article 81(3) of the Treaty to certain categories of agreements and concerted practices. OJ L 148, 15.6.1999, pp. 1 4 ; pls. also refer to : Commission notice - Guidelines on vertical restraints, OJ C 130, 19.05.2010, p. 1 3
B. Research & Questionnaire I suggest concentrating research in four areas: (1) the definition of SMEs in the national context; (2) competition law enforcement for the benefit of SMEs and the private enforcement of competition law; (3) SMEs and infringements of competition law, including sanctions guidelines; and (4) other issues i.e. state aid and procurement. 1. The Definition of SMEs & the role of a market power criterion All dominant models define SMEs in statistical terms, 7 focusing on the relative size of the undertaking in comparison with smaller, micro enterprises and larger corporations. Qualitative considerations play a minor role, although most dominant models recognize the need take into consideration the degree of factual or commercial independence from a larger entity. It has also been suggested that other quantitative considerations, such as the family ownership and the management values associated with it, should play a role in the definition of SMEs. 8 From a competition perspective market power, defined as the possibility of an undertaking to act independently from its competitors within a given market, could be an interesting further criterion. In order to get a clearer picture of how member States define SMEs, I suggest asking member States: (1) whether there is a single legal definition of SMEs in their jurisdiction and to name its constituent elements; (2) whether qualitative considerations play a part in the definition of SMEs; (3) whether the member State would favour the inclusion of qualitative elements; and (4) where the member State sees the most benefit in the inclusion of a qualitative element. 2. Competition law enforcement for the benefit of SME`s This section looks at areas and ways where SMEs can benefit from competition law enforcement. It should identify practices and sectors where SMEs are vulnerable to competition law abuses and provide an overview of how competition law enforcement can benefit SMEs in general and how SMEs can rely on competition law to counter abusive behaviour or obtain compensation for losses incurred. 7 There is no dominant for SME in academia or practice, leading definitions include: (1) The OECD defines SME`s as undertakings with 10 to 250 employees and sales below EUR 10 Mio. or a an annual balance sheet total of the same figure. (2) The EU defines SMEs as undertaking with 10 to 250 employees and an annual turnover of 10 to 50 Mio. or assets amounting to 10-43 Mio. EUR. (3) IFC and MIGA define SMEs as having from 10 to 300 employees and assets between 100.000 and 15 Mio USD or annual sales of that same amount. (4) The World Bank has no single definition of SME. 8 See for example thoughts of the Institut für Mittelstandsforschung (IfM) Bonn on SME definition: http://www.ifmbonn.org/mittelstandsdefinition 4
I take from the project synopsis and the width of this section, that this will be a major part of the paper and that a substantial part of the questionnaire will be devoted to it. Finally private enforcement and redress, in combination with effective complaints procedure, is an important instrument for SMEs to enforce the freedoms given to them by competition law. I suggest asking member States about cases where they have established harm to SMEs. I would further like to ask about specific sectors and scenarios that we identify as particularly relevant in connection SMEs i.e. (a) cases of vertical restraints to trade, identifying sectors, goods and other characteristics, (b) cases where horizontal restraints have produced particular harm to SMEs, (c) cases of competition law abuses related to SME lending, (d) cases of abuse related to SME insurance, and (e) cases of abuses in online marketing, sales and distribution. Given the importance of private enforcement and redress and the increased abilities motivations of undertakings to pursue a claim for damages I suggest taking a closer look at the state of private enforcement and/or the possibilities for damages actions in section (3) Private enforcement, redress and effective complaints mechanisms. In this field I suggest asking member States whether: (a) private enforcement is in principle possible in their jurisdiction; (b) whether damages incurred as a result of a competition law violation may lead to damages; (c) the steps required under national law to obtain damages; (d) the availability and value of competition authority decisions in private actions for damages; (f) existing complaints procedures including obligation/limitation statutes to follow up; (g) use of complaints procedures; (h) users of complaints procedures; (i) examples of successful complaints in the past; (j) the availability of electronic complaint forms; and (k) the possibilities to fill the questionnaire without expert counsel. 3. Competition law infringements by SMEs In this section I would like to explore conditions under which SMEs infringe competition laws. Potential questions for member States include the number of cases brought against SMEs, the types of infringement, the sectors and markets affected and the competitive conditions in these sectors. At the same time certain efficiency gains from certain types of horizontal and vertical cooperation i.e. in research & development, production or distribution have long been recognized i.e. under Art. 101(3) of the Treaty on the Functioning of the European Union (TFEU). I would like to ascertain from member States: (1) Past competition law infringements by SMEs (a) whether there have been cases against undertakings falling into EITHER the national or any of the standing International (OECD, IFC) definitions of an SME including the background to the dispute, sectors, remedies (b) does the member State see at present potentially problematic markets (c) What is the status of industry associations, professional organizations or unions under national competition law. (2) Exemptions (a) are there exemption to the behaviour of SME under national competition law (b) how are these exemptions defined and checked (c) is there a mandatory notification procedure (d) are there 5
penalties for non- compliance ( e) are fining guidelines taking account of the special status of SMEs (f) is there an "inability-to-pay" defence and has it been used. 4. State aid & Procurement To enhance SME growth is a central goal of national and international economic policy. It has long been recognized, that aid to SMEs, especially in the start-up and development phase of a company or product (be it in the form of direct grants or more indirect forms of support) is a good way to induce growth and innovation in a market place. Key issues here are direct grants as well as (and probably more importantly) indirect help by means of improved access to funding and advisory services incl. legal and financial advisory. The number of State sponsored help for SMEs brings them in direct and constant contact with State aid rules, where they exist. At the same time SMEs can be particularly hard it by recovery decisions, even in cases where they received aid in good faith. I would therefore like to ascertain from member States (1) whether they have State aid rules and (a) how they are applicable to SMEs, (b) what are the required approval steps, (c) whether recovery decisions take account of the principle of good faith on behalf of the SME and (d) whether there is an inability-to- pay defence and how it has been used in the past. Equally, many SMEs are constantly in contact with procurement rules, when bidding for public works contracts or contracts from private undertakings taking on public functions. It has been argued in the past that certain procurement rules with their focus on selecting the most efficient provider may have disadvantages for SMEs over larger competitors, whilst not recognizing the specific advantages of SME contracts for certain public authorities. I would therefore like to ask member States (1) whether they have procurement rules and (a) how they relate to SMEs (b) whether there notion of the most efficient undertaking includes SME specific qualities and (2) whether the SME community has voiced any concern their ability to bid for public works contracts as a result. Contact details Hassan Qaqaya Perdana University, Malaysia E-mail: hassan.qaqaya@perdanauniversiy.edu.my, hqaqaya@bluewin.ch, Graham Mott Economic Affairs Officer Competition and Consumer Policies Branch (CCPB) UNCTAD E-mail: Graham.Mott@unctad.org 6