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Partial Revision of the Cartel Act: Swiss Federal Council Presents Draft Law

<h3>1. Introduction: The EU&#8217;s New Foreign Subsidies Regulation</h3>
On January 12, 2023 the new Foreign Subsidies Regulation of the European Parliament and the European Council (the FSR) entered into force, and it will take effect on July 12, 2023. The FSR seeks to identify and redress potential distortions in the EU&#8217;s internal market caused by subsidies from foreign (non-EU) countries, including Switzerland, to companies active in the EU. According to the EC, the FSR closes a regulatory gap: Whereas EU Member State subsidies are subject to close scrutiny, prior to the FSR subsidies granted by non-EU governments to companies operating in the EU were not reviewed for potential distortive effects in the EU. The FSR complements existing EU state-aid regulations, which regulate EU  Member State subsidies, and extends the EU state-aid regime to non-EU countries.
The FSR will directly affect Swiss companies with business activities in the EU, in particular if they engage in M&amp;A activities or submit public tenders in the EU. We recommend that potentially affected companies use the next six months before the FSR takes effect to prepare.
<h3>2. The FSR Grants the EC Three New Powers</h3>
The FSR grants the EC three new tools to investigate and redress potential distortions of competition in the internal market by foreign (non-EU) subsidies.
<h4>2.1. Notification Obligation for Large Concentrations</h4>
Beginning on October 12, 2023, nine months after the FSR enters into force, companies must notify the EC of a concentration if (i) at least one of the undertakings concerned (one of the merging parties, the target or the joint venture) is established in the EU and generates annual turnover in the EU of  more than EUR 500 million and (ii) the combined aggregate contributions any of the undertakings concerned received from non-EU countries exceeds EUR 50 million in the three years prior to notification. Undertakings may request pre-notification consultations with the EC as to whether the thresholds for notification are met. The EC may, however, request that concentrations that do not meet the thresholds must still be notified.
<h4>2.2. Notification Obligation for Bids in Public Procurement</h4>
Regarding public procurement bids in the EU, companies must notify the EC if (i) the contract value exceeds EUR 250 million and (ii) the tenderer received subsidies of more than EUR 4 million from non-EU countries in the three years prior to the tender. The EC may request that bids that do not meet the thresholds must be notified if it considers that the the bid would merit ex ante review given its impact in the EU. This notification obligation takes effect on October 12, 2023.
<h4>2.3. Ex Officio Investigation Powers of the EC</h4>
The EC will also have the power to investigate all other potential market distortions from non-EU governmental subsidies, including any subsidies received in the preceeding ten years (but not more than five years before the FSR enters into force). Foreign subsidies not exceeding EUR 4 million over three consecutive years are deemed not to distort the internal market.
<h3>3. How to Assess Whether a Foreign Subsidy is Distortive?</h3>
If the EC determines that a foreign subsidy distorts competition, it will weigh the negative effects of the foreign subsidy on competition in the internal market against the positive effects on the development of the relevant subsidised economic activity on the internal market as well as other positive effects in relation to the relevant policy objectives, in particular those of the EU. If the EC finds that the negative effects outweigh the positive ones, it may impose remedies. These including undoing the acquisition of an EU target, ordering repayment of foreign subsidies, refraining from investments in the EU, expulsion from public tender proceedings in the EU, and licensing obligations under FRAND-conditions (Fair, reasonable and non-discriminatory). The EC will make decisions based on the facts available, whether or not the relevant undertaking(s) or foreign countries cooperate.
<h3>4. What Are Foreign Subsidies under the FSR?</h3>
The FSR defines foreign subsidies broadly to include any direct or indirect financial contribution from a non-EU country (including e.g. Switzerland) which confers a benefit on or more undertakings. Accordingly, foreign subsidies include:
<ul>
<li>The transfer of funds or liabilities (e.g., capital injections, granted loans, and guarantees);</li>
<li>Forgiving debts or payments due (e.g., tax exemptions, granting special or exclusive rights without adequate remuneration); and</li>
<li>The provision of goods or services at non-arms&#8217; length conditions.</li>
</ul>
According to the FSR, financial contributions will not be considered to confer a benefit if a «benchmark assessment shows that the undertaking would have obtained that benefit under normal market conditions.»
As regards transfer pricing, the FSR states that «transfer pricing in the context of goods and services exchanged within an undertaking can confer a benefit if that transfer pricing is not in line with normal market conditions. The benefit conferred by a financial contribution may be passed to an undertaking engaging in an economic activity in the Union.» Companies should therefore review their internal pricing policies to identify potential passing on of foreign subsidies.
<h3>5. How Does the FSR Impact Swiss Companies?</h3>
The FSR directly affects Swiss companies with turnover in the EU in particular if they plan M&amp;A activities or are engaged in public tenders in the EU. Swiss companies should expect potential notification obligations if the thresholds are met and can also be the target of ex officio investigations by the EC, should they be active in the EU. Any subsidies that Swiss companies receive from Swiss federal, cantonal or local governmental bodies qualify, in principle, as foreign subsidies under the FSR. These can include special, individually negotiated tax arrangements and individually granted support, even pandemic-related support if granted specifically to a particular company. In addition, Swiss companies also need to consider subsidies granted by any other non-EU countries worldwide.
<h3>6. Conclusion and Next Steps</h3>
Under the FSR, it is likely that many companies will be required to give notice to the EC of M&amp;A transactions and bids for public tenders. Companies should systematically collect information regarding any financial contributions they receive or received from non-EU countries for the past five years and establish whether these contributions were received under market conditions. This information will be necessary (i) to assess whether a M&amp;A deal or a public tender bid is notifiable under the FSR, and (ii) to provide information and prepare a defense should a company become the target of an ex officio investigation.
The EC has announced that it will shortly publish guidelines regarding the application of the FSR. Please mark your calendar for our roundtable on the FSR and its impact on Swiss companies taking place on Tuesday, March 21, 2023 at 1730 CET.

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The EU's New Foreign Subsidies Regulation

<h3>Swiss Federal Council Publishes Preliminary Draft</h3>
<h3>Background</h3>
On November 24, 2021, the Federal Council approved a preliminary draft for the partial revision of the Cartel Act (Draft-CartA) and opened public consultation. This marks a new attempt to revise the Cartel Act (CartA) following the failed revision of 2012. The planned revision contains four central points, which are presented below.
<h3>I. Re-introduction of the effects control for hardcore anticompetitive agreements</h3>
With the Swiss Federal Supreme Court&#8217;s judgment in the Gaba case (BGE 143 II 297 of June 28, 2016), the long-standing practice of the Competition Commission (ComCo) on anticompetitive agreements pursuant to Article 5 CartA was changed respectively tightened. According to this judgment, agreements under Article 5(3) and (4) CartA (hardcore horizontal and vertical agreements) do in principle fulfill the significance test. Therefore, since this decision it has generally no longer been necessary to examine whether such agreements actually affect competition, i.e. whether they have been implemented and what their effects on competition are.
As a reaction to the Gaba judgment, the parliamentary motion Français requested the Swiss Federal Council in December 2018 to amend Article 5 CartA and to stipulate that both qualitative and quantitative criteria must be taken into account when determining whether an agreement is unlawful. Article 5(1bis) Draft-CartA provides for the effects control called for by the motion Français: In addition to qualitative criteria, quantitative criteria must also be taken into account when assessing the significance of hardcore anticompetitive agreements.
The per se significance of certain agreements introduced by the Gaba judgment has led to legal uncertainty for companies, for example in the case of cooperation agreements or joint ventures. A clarification of Article 5 CartA, according to which qualitative and quantitative criteria are to be taken into account, would prevent such agreements from being considered as in principle fulfilling the significance test and thus – subject to the efficiency justification, which in practice is difficult to prove – potentially sanctionable conduct. The implementation of the parliamentary motion Français thus gives companies more leeway for competitively desirable behavior, but raises fears on the part of the Federal Council of declining competitive pressure and rising prices.
<h3>II. Merger Control</h3>
A. Limitation of the Notification Obligation
According to the Draft-CartA, the notification requirement is to be waived in the event of international mergers that are assessed by the European Commission, if all relevant geographic markets include Switzerland and at least the European Economic Area (EEA) (Article 9(1bis) Draft-CartA).
The companies concerned are thereby exempted from having to notify the merger in parallel to the European Commission and ComCo in cases where only markets covering at least Switzerland and the EEA are involved. This is likely to bring some relief in terms of resources. However, the savings should not be overestimated: Already today, notification in Switzerland in such cases is regularly based on the filing with the EU Commission. In addition, it can be expected that the definition of the relevant geographic market may give rise to discussions and that a merger would still have to be notified to ComCo in case of doubt.
B. Reduction of the Intervention Threshold in Mergers
1. Baseline
With the Draft-CartA, a new attempt is being made to introduce the so-called SIEC test (significant impediment to effective competition). Since the introduction of this test in European Union competition law in 2004, there has been discussion in Switzerland about harmonizing the legislation.
Under current law, the qualified market dominance test (dominance plus) applies. This means that ComCo can only prohibit a merger or approve it subject to remedies if the merger creates or strengthens a dominant position as a result of which effective competition can be eliminated (Article 10(2) KG).
2. Intervention Criteria of the SIEC Test
With the introduction of the SIEC test, ComCo can intervene in mergers if they (i) significantly impede effective competition and (ii) do not lead to efficiency gains for consumers demonstrated by the companies concerned and that would compensate for the disadvantages of the significant impediment to competition (Article 10(2) Draft-CartA). In contrast to the dominance test, the SIEC test allows for an intervention in particular in the case of unilateral (non-coordinated) effects below the threshold for single market dominance. Unilateral effects arise when a merger in an oligopoly market does not create dominance but reduces the competitive pressure exerted in the market. Conceptually, the SIEC test is intended to prevent welfare losses (e.g. price increases for differentiated products) in cases of mergers between close competitors in oligopolistic markets.
3. Efficiency Defense
According to the Draft-CartA and similar to EU merger control law, any efficiency gains to be considered in the efficiency defense must benefit consumers. However, a dynamic understanding of consumer welfare, i.e. one that is to be optimized in the long term, is adopted (Article 10(2)(b) Draft-CartA). The Swiss legislature has so far refrained from pursuing distributive goals in favor of consumers with competition law (see Article 5(2) CartA, which does not require consumer participation, as opposed to Article 101(3) TFEU). Alternatively, a total welfare standard could be introduced, which would allow for a somewhat more comprehensive consideration of efficiency gains – or even of sustainability benefits.
4. Lower Intervention Thresholds
According to the Draft-CartA, the referral thresholds in merger control remain unchanged. Consequently, the number of notifications will not increase with the introduction of the SIEC test. In contrast, lower intervention threshold and hence more examination procedures (Phase II) can be expected:
First, the requirement of possibility of elimination of competition no longer applies, which is likely to make some mergers more difficult. Second, intervention is also possible in the case of unilateral effects below the threshold of (individual) market dominance (so-called gap cases). Whether this will actually lead to more interventions remains to be seen. First of all, the WEKO has interpreted the concept of collective dominance under current law broadly. Moreover, it remains to be seen what requirements will be imposed in practice to prove that effective competition is significantly impeded. A look at the practice in EU competition law shows this: Following increasingly interventionist application of the SIEC test by the European Commission, recent case law has put the brakes on this practice and imposes higher requirements for intervention (see judgment of the European General Court T-399/16 in CK Telecoms UK Investments v. European Commission of May 28, 2020, appeal pending before the ECJ).
5. Impact on Companies
Following the introduction of the SIEC test, economic analyses would likely be used more frequently, in particular, to determine competitive proximity as a factor in unilateral effects analysis. This is likely to increase the complexity of Phase II proceedings and have a cost-driving effect. The Draft-CartA provides for an extension of the review periods in merger control proceedings with the consent of the reporting companies, indicating that longer proceedings may be expected in the future.
However, it is largely in the hands of ComCo how extensively it will apply the SIEC test and what information requirements it will develop in practice. The flexibility of the test in this respect is reflected, for example, in the fact that the effort required for merger control proceedings before the European Commission has steadily increased (e.g., comprehensive information requests and lengthy pre-notification procedures), whereas in Germany the additional information effort has so far been rather moderate following the introduction of the SIEC test. If the SIEC test was introduced in Switzerland, a certain degree of legal uncertainty for companies can be expected in an initial phase due to the lack of established decisional practice.
<h3>III. Changes in the Civil Enforcement of Competition Law</h3>
Another central objective of the partial revision of the CartA is the strengthening of civil enforcement of competition law, which has so far only been of minor importance in Switzerland. The most significant changes in this respect are presented below.
A. Extension of the Consumer&#8217;s Right of Action
Currently, according to the prevailing view, due to the wording of Article 12 CartA, end customers and thus in particular consumers are not entitled to assert civil claims in the event of an unlawful restriction of competition. This may lead to a liability gap: A company that restricts competition may be able to defend itself against claims for damages from other companies by arguing that the latter have not suffered any damage because they were able to pass on the price which was overpaid due to the unlawful restriction of competition to the downstream market level – ultimately to consumers (passing-on defense). For their part, these end customers cannot assert claims for damages for lack of a right of action.
The Federal Council proposes to extend the possibility of civil action, which is currently limited to competitors, to all those affected in their economic interests by restrictions of competition (Article 12 Draft-CartA). As a result, end customers (including, e.g., public contracting authorities) will also be able to assert their rights in civil proceedings in the future.
Companies must prepare for the possibility that there might be more competition civil claims. It remains to be seen how many consumers will ultimately file a lawsuit, especially if low amounts are in dispute. In this regard, the main variable will be whether claims might increasingly be asserted collectively, e.g. by consumer protection organizations.
B. Suspension of the Statute of Limitations during Administrative Proceedings
Claims arising from unlawful restraints of competition are subject to the relative limitation period of 3 years under tort law pursuant to Article 60 of the Swiss Code of Obligations (CO). In the future, the statute of limitations for claims arising from unlawful restraints of competition is therefore to be suspended from the opening of an investigation by ComCo until the final decision is rendered (Article 12a(1) Draft-CartA). Pursuant to Article 134(2) CO, the statute of limitations would subsequently begin or continue to run. This is intended to alleviate the problem that injured parties in civil proceedings are forced to submit their civil action at an early stage.
In essence, this amendment corresponds to the legal situation in the EU (see Article 10(4) of the Antitrust Damages Directive 2014/104/EU).
C. Civil Compensatory Payments will Reduce Administrative Sanctions
Article 49a is supplemented in the Draft-CartA by a new paragraph 5 about the consideration of damages payments in the assessment of sanctions. This relates to cases in which a company sanctioned by ComCo in administrative proceedings voluntarily (i.e. without being obliged to do so by a civil court) pays damages, reparations or disgorges profits at a later date. In this case, the company can request ComCo or the appeal instance to reduce the administrative sanctions appropriately by filing a request for revision.
As a result, any civil compensatory payments subsequently and voluntarily made by the companies involved to aggrieved parties will be taken into account when assessing administrative sanctions. Companies may thus have an incentive to settle with aggrieved parties in civil proceedings at an early stage. This is also in line with the recent decisional practice of ComCo, which takes into account voluntary payments made as part of a settlement with the injured party when assessing sanctions (Construction Services Graubünden).
<h3>IV. Changes in Administrative Procedural Law</h3>
A. Notification Proceedings
Pursuant to Article 49a(3)(a) CartA, a company may notify ComCo in advance of planned conduct that could be qualified as an unlawful restriction of competition. Under the current law, the reported conduct may not be sanctioned unless ComCo opens proceedings against the company within five months. The purpose of the procedure is to enable companies to obtain an assessment from ComCo within a reasonable period of time as to whether a practice could be subject to sanctions.
This procedure is now to be transferred to Article 49a(4) Draft-CartA and to be adapted in two aspects. First, the period within which the ComCo must take action is to be reduced to two months. Second, in the future, only the opening of a formal investigation pursuant to Article 27 CartA and not, as is currently the case, the opening of a simple preliminary investigation pursuant to Article 26 CartA will cause the risk of sanctions to reemerge.
From the company&#8217;s point of view, the question arises whether these adjustments are sufficient to materially increase the attractiveness of these proceedings. For companies, the most important factor is the overall time period within which the proceedings can be concluded, e.g. by means of a safe harbor provision. For companies, it is also not very attractive if the risk of sanctions remerges when an investigation is opened. A company will therefore have to consider whether to make extensive investments in a project if it must expect to risk sanctions again for several years as a result of the opening of an investigation.
B. Introduction of Time Limits and Reimbursement of Representation Costs
The motion tabled by Fournier tasks the Swiss Federal Council, first, with simplifying and accelerating court proceedings under competition law. Second, it calls for the parties&#8217; representation costs in administrative competition proceedings to be reimbursed:
The Draft-CartA provides for the introduction of time limits in investigation procedures according to the principle of comply or explain (Article 44a Draft-CartA). The respective time limits are 30 months for ComCo, 18 months for the Federal Administrative Court and 12 months for the Federal Supreme Court. This means that it should no longer take more than 5 years from the opening of an investigation until a legally binding decision of the court of last instance.
The effect of the statutory time limits is likely to remain limited in practice. Even without formal time limits in the CartA, the principle of accelerated procedure already applies today.
Next, it is proposed to introduce reimbursement of representation costs in first instance cartel administrative proceedings (Article 53b Draft-CartA). If an investigation is – in whole or in part – discontinued, the parties&#8217; representation costs can be reimbursed. Article 53b Draft-CartA is a lex specialis to Article 64 Swiss Civil Procedure Code (CPC), according to which, as a rule, no reimbursement of representation costs is owed in first instance administrative proceedings.
In practice, administrative competition proceedings before ComCo are often laborious and complex. The planned reimbursement of representation will in practice lead to considerable relief for companies that are affected by an investigation that is discontinued or if ComCo&#8217;s decision is revoked.
<h3>Next steps</h3>
The formal consultation period will last until March 11, 2022. Subsequently, the Federal Council is expected to publish the draft law with its dispatch. The revised CartA is not expected to enter into force until 2023 at the earliest.

Partial Revision of the Cartel Act

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Homburger advised Zur Rose Group on its sale of the Swiss operations to Medbase

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Homburger advises Solenis on the acquisition of Kolb's paper process chemicals business

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Homburger advised Implenia on the acquisition of Wincasa

Homburger advised Zur Rose Group on its sale of the Swiss operations to Medbase

Homburger advises Solenis on the acquisition of Kolb's paper process chemicals business

Partial Revision of the Cartel Act: Swiss Federal Council Presents Draft Law

The EU's New Foreign Subsidies Regulation

Partial Revision of the Cartel Act

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Jonas J. Krull

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Jonas J.Krull

Homburger advised Implenia on the acquisition of Wincasa

Homburger advised Zur Rose Group on its sale of the Swiss operations to Medbase

Homburger advises Solenis on the acquisition of Kolb's paper process chemicals business

Partial Revision of the Cartel Act: Swiss Federal Council Presents Draft Law

The EU's New Foreign Subsidies Regulation

Partial Revision of the Cartel Act

Join the Team

Jonas J. Krull

Career

Languages

Bar Registration

Teams

Jonas J.
Krull