Antitrust Law Daily Wrap Up, ANTITRUST NEWS: EU General Court upholds unlawfulness of Portugal Telecom, Telefónica non-competition clause, (Jun 28, 2016)

By Linda O’Brien, J.D., LL.M.

The General Court of the European Union has upheld a finding by the European Commission (EC) that a non-competition clause included in a share-purchase agreement between leading telecommunication service providers PT and Telefónica was unlawful, according to an announcement today.

PT (formerly Portugal Telecom) and Telefónica both operate in the area of electronic communications. PT is the primary telecommunications provider in Portugal and has a strategic presence in Brazil and sub-Saharan Africa. Telefónica is the primary telecommunications operator in Spain and has an international presence in several countries in the European Union (EU), Latin America, and Africa. Vivo Participacöes is one of the main mobile telecommunications operators in Brazil and is jointly controlled by PT and Telefónica.

In 2010, PT and Telefónica concluded a share-purchase agreement regarding Telefónica’s acquisition of the exclusive control of Vivo. In that agreement, the companies inserted a non-competition clause by which they agreed to refrain from participating or investing, directly or indirectly, through any subsidiary, in any project falling within the telecommunications sector (including fixed telephone and mobile telephone services, Internet access services and television services) which is in competition with the other company on the Iberian market. The clause was to apply between September 27, 2010, and December 31, 2011.

Following the initiation of proceedings by the EC against PT and Telefónica in January 2011, the companies signed an agreement to remove the clause. In a January 2013 decision, the EC determined that the clause amounted to a market-sharing agreement that restricted competition in the internal market. Accordingly, the EC imposed fines on PT and Telefónica in the amounts of €12,290,000 and €66,894,000, respectively.

The EC determined that the clause applied to all markets for electronic telecommunications services and television services in Spain and in Portugal (‘the Iberian market’), with the exception of worldwide markets for the provision of telecommunications services and services for the international carriage of goods. The clause was liable to delay integration in the electronic communications sector. According to the EC, that integration would be seriously compromised if incumbent operators such as PT and Telefónica were able to strengthen their very strong market position by protecting their home markets and preventing the entrance of other operators onto those markets.

PT and Telefónica requested the General Court to annul the EC decision and reduce the amount of the fines imposed.

The General Court first determined that PT failed to demonstrate that the restriction introduced by the clause was incidental to the option of purchasing its shares held by Telefónica. In affirming the decision of the EC, the Court considered that there was nothing to indicate that the clause contained a self-assessment obligation on which the entry into force of the non-competition obligation depended.

Telefónica contended that the clause was imposed by the Portuguese Government or that it was in any event necessary for it to refrain from blocking the agreement relating to the Vivo operation. Therefore, Telefónica had no other choice than to work on limiting the impact of the clause by transforming it into a clause self-assessing the lawfulness of a non-competition undertaking by the introduction of the phrase ‘to the extent permitted by law.’ However, the Court found that Telefónica did not adduce sufficient evidence in support of those claims. In addition, Telefónica did not provide any information to explain why a clause providing for non-competition on the Iberian market might be considered to be objectively essential for a transaction relating to the takeover of shares in a Brazilian operator.

Considering that the very existence of the clause was a strong indication of potential competition between PT and Telefónica, that its subject matter consisted of a market-sharing agreement, and that it had a wide scope and was part of a liberalized economic context, the Court noted that the EC was not obligated to undertake a detailed analysis of the structure of the markets concerned and potential competition between companies on those markets in order to conclude that the clause constituted a restriction of competition by object.

Recalculation of fines. However, the Court stated that sales of a company corresponding to activities that were not capable of being in competition with the other company over the period of application of the clause must be excluded for the purposes of calculating the fine. Those activities were excluded from the scope of the clause by virtue of its actual wording. However, the EC relied on sales coming within the scope of the clause to calculate the fines. In order to determine the value of the companies’ sales to be taken into consideration for the calculation of the amount of the fines, the EC must examine the arguments of PT and Telefónica seeking to establish that there was no possibility of competition between them with regard to certain services. Only on the basis of such a factual and legal analysis would it have been possible to determine the value of the sales linked directly or indirectly to the infringement. Thus, the EC will have to make a new finding regarding the determination of the amount of the fines, the Court concluded.

Companies: PT Portugal SGPS SA; Telefónica, S.A.

News: Antitrust