Herbert Smith Freehills Competition Law Moot 2015

Problem Question
Prepared by Professor Alison Jones, Kings College London
RURITANIA IS A FICTIONAL MEMBER STATE OF THE EUROPEAN UNION
REFERENCE TO THE COURT OF JUSTICE OF THE EUROPEAN UNION UNDER
ARTICLE 267 TFEU FROM THE RURITANIAN COMPETITION TRIBUNAL IN
THE CASE OF:
Ruritanian Competition Authority (Claimant) v Ruritanian Wind Power and others
(Defendants)
Introduction
1. The following paragraphs set out the factual and legal background to the questions
referred to below, together with a summary of the parties submissions and the written
observations made by the European Commission (the Commission) to the Ruritanian
Competition Tribunal.
2. The case raises a number of issues relating to the interpretation of Article 101 TFEU and
it is these issues that form the subject matter of the reference.
Background
3. Wind energy is one of the fastest growing energy sources. In 2014 the share of wind
power in total electricity production in the European Union as a whole was 3.7%, albeit
with significant differences among the Member States. In Ruritania, wind energy
contributed more than 20% of domestic electricity production in 2014.
4. In January 2013 the Energy Minister of the Ruritanian Government made a statement to
the Parliament of Ruritania that:
The Government is committed to wind energy and strongly supports steps taken by
wind turbine manufacturers to increase wind power capacity. The Government hopes
that wind energy can contribute as much as 40% of our domestic supply of electricity
in 2020.
5. There are four principal manufacturers of wind turbines in Ruritania: General Gas Wind
Power (GGWP); Windmens Wind Power (WWP); Westerly Wind (WW) and
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Ruritanian Wind Poweron (RWP) (collectively, the Ruritanian Turbine

Manufacturers). They have market shares of 30%, 25%, 20% and 15% respectively of all
wind turbine sales in Ruritania.
6. GGWP, WWP and WW are wholly-owned subsidiaries of diversified multinational firms
(General Gas (United States), Windmens (Germany) and Westerly (Danish) respectively)
which operate in energy markets throughout the EU and the world.
7. The fourth manufacturer, RWP, started as an irrigation system manufacturer in Ruritania
which diversified into the wind turbine business in the 1990s. Although RWP
commenced by producing wind turbines with smaller rotor diameters and generator
powers, in 2011, 50% of its shares were purchased by Poweron, a German company
specialising in energy and wind turbine manufacture. Since then Poweron has been the
single largest shareholder of RWP. The remaining shares are held by four other
shareholders, each of which hold between 5-15% of the shares. All shareholders are
keenly interested in RWPs activities and have exercised their voting rights in the recent
past. Any shareholder with a shareholding which exceeds 30% may appoint one nonexecutive director whose only entrenched right is that he or she can veto the business
plan. On all other decisions (including the nomination and employment of executive
directors), he or she has only one vote. Consequently, although Powerons shareholding
does confer a blocking right on it, and negative control over RWP, Poweron does not
have power to determine RWPs strategic decisions. Following Powerons purchase of
shares, RWP has had sufficient capital to invest in technology, enlarge production and
produce turbines with greater generator power and larger rotor diameters.
8. Two Chinese manufacturers have recently started exporting wind turbines into the EU but
they currently do not have a presence in Ruritania.
9. Production of wind turbines involves complex patented technology and requires
innovation to improve the turbines features, in particular, their shape, height, appearance,
generator rotation speed, strength and their noise output. Since the first commercial wind
turbines of the 1980s, their capacity has increased from 0.022 megawatts (MW) to about
6 MW in 2014. Each of the Ruritanian Turbine Manufacturers is seeking to increase
turbine sizes to 2 MW (on-shore) and 10 MW (offshore).
10. Given the fact that wind energy has been such a booming business in Ruritania and that
the companies have been willing to do anything to gain an advantage over their
competitors, numerous claims of industrial espionage and leaking of technology have
been levelled by each of the companies against the others. Further, the companies have
frequently been involved in patent disputes. For example, for a period of time WWP,
WW and RWP were prohibited from exporting their products to the United States
following proceedings brought against them by General Gas in the US, alleging that their
wind turbines infringed one of its patents. Although WWP, WW and RWP always argued
that General Gas technology was not infringed, these proceedings were eventually settled
when WWP brought proceedings for infringement of its patents in Ruritania against
GGWP.
11. In the last ten years the media and members of the public in Ruritania have expressed
concerns about the growing number of wind farms. There has been disquiet about the
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negative effects of wind farms on birds and bats, particularly through disturbance, habitat
loss or collision. Separately, protests have broken out in several local communities in
response to the noise created by nearby wind farms. Many of the protestors argue that
fracking and solar farms would be preferable and more efficient alternative sources of
energy production.
12. The Government of Ruritania has taken heed of public concerns. In June 2012 the
Government tightened planning and other regulations governing the installation of wind
turbines; in particular it has restricted the installation of wind turbines except in preauthorised wind farm locations in remote rural locations and offshore. These changes led
to a dramatic decrease in demand for wind turbines in Ruritania and have eliminated
demand for some types of turbines completely. At the same time the Government offered
tax incentives to wind turbine manufacturers that produce and sell wind turbines with
minimum noise pollution and reduced problems associated with amplitude modulation, (a
wave form which increases the intensity of the noise).
13. The four wind turbine manufacturers meet regularly in Ruritania under the legitimate
auspices of the Ruritanian Wind Power Association to discuss government regulations
and standards that they are required to comply with. Following the changes introduced by
the Government in mid-2012, they met to consider urgently how they should respond to
the altered regulatory landscape. After discussion with the Ruritanian Government, in
which the Government urged the companies to do something to improve the efficiency
performance of wind turbines and to invest in technology to deal with noise pollution and
threatened to legislate if they did not make the changes required imminently, the
Ruritanian Turbine Manufacturers accepted that drastic changes were required.
14. The Ruritanian Turbine Manufacturers agreed that they would no longer offer for sale:
a. smaller and less powerful wind turbines (which were in any event not usually
purchased by bigger wind farms); or
b. less efficient wind turbines that they manufactured.
They drew up qualitative and size criteria that all wind turbines sold in Ruritania should
satisfy and agreed that wind turbines satisfying these criteria should be marked with an
official Turbine logo. The manufacturers considered that these steps would have the dual
advantage of:
(i)
(ii)

making wind farms more efficient in Ruritania (and restoring public

confidence in them); and
reducing the volume of wind turbines offered on the market and raising
profitability of operations leaving the companies greater resources to invest in
research and to develop technology designed to reduce noise pollution and
especially the problem of amplitude modulation.

15. At the same meeting the manufacturers also agreed that they needed to counter the
problem of industrial espionage which was damaging innovation incentives and wasting
resources on hostile litigation. Consequently they agreed that they would no longer
poach each others skilled staff, that had had access to confidential information relating
to technology essential to the manufacture of the wind turbines, and further that they
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would not hire them for a period of 18 months after termination of their original
employment contracts.
16. In 2012 a disgruntled employee at RWP complained about all of the arrangements,
especially the no-poach agreement, to the Ruritanian competition authority (the RCA).
17. The RCA conducted an investigation into the conduct and, in 2014, brought infringement
proceedings against the four companies before the Ruritanian Competition Tribunal1 for
infringement of Article 101 TFEU (and the Ruritanian equivalent, section 1 of the
Ruritanian Competition Act (the Act),2 alleging:
a. The agreement to reduce the range and types of wind turbines in Ruritania
constitutes a clear infringement of Article 101 and section 1 of the Act:
i. The agreement was designed to reduce output and restrict consumer choice
and the range and type of the products they offered and so restricted
competition by object contrary to Article 101(1) (and section 1(1) of the
Act); and
ii. The agreement did not satisfy the conditions of Article 101(3) (or section
1(3) of the Act) as the parties had not rebutted the presumption that such
agreements containing object restrictions do not satisfy the criteria for the
legal exception to apply.
b. The no-poach agreement also infringes Article 101 and section 1 of the Act:
i. Although there was no prior authority on this point, the agreement was
clearly designed to stifle competition and to restrict competition by object;
and
ii. Again, the presumption that the agreement did not satisfy the conditions of
Article 101(3) or section 1(3) of the Act had not been rebutted.
18. The RCA applied to the Tribunal for an order declaring that the arrangements in
paragraph 17 above constitute an infringement of Article 101(1) TFEU and/or section
1(1) of the Act. It also sought a cease and desist order and an order that the companies
refrain from entering similar agreements in the future.
19. In respect of the agreement to reduce the types of wind turbine to be manufactured, the
RCA requested that the Tribunal impose fines on the following companies which it
believes have personal responsibility for the infringements involved:
a. GGWP;
b. General Gas (jointly and severally liable for the conduct of GGWP);

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The RCA is not an integrated-decision taker which is permitted to adopt infringement decisions (and so to
exercise adjudicative functions as well as investigative and prosecutorial ones), but is required to prove
violations of EU and national competition law before the Ruritanian Competition Tribunal. The Ruritanian
Competition Tribunal may impose fines on undertakings found to have infringed those rules of up to 10%
of their turnover in the preceding year of business.
The substantive provisions of the Act are modelled on, and are identical to, Article 101 TFEU save in that
they only apply to agreements etc that affect trade within Ruritania.

c.
d.
e.
f.
g.
h.

WWP;
Windmens (jointly and severally liable for the conduct of WWP);
WW
Westerly (jointly and severally liable for the conduct of WW);
RWP; and
Poweron (jointly and severally liable for the conduct of RWP).

20. The defendants deny that they have committed any competition law infringement. They
allege that their arrangements to no longer offer smaller, less powerful and less efficient
wind turbines constituted a direct response to the altered legislative environment, were
adopted to meet the Governments objectives and do not restrict competition by object or
effect; alternatively, they meet the Article 101(3) (and section 1(3) of the Act) criteria and
so are excepted from the Article 101(1) (and section 1(1)) prohibition. Further, there is no
presumption against the application of Article 101(3) to agreements which are restrictive
of competition by object.
21. They also allege that a no-poach agreement is incapable of infringing Article 101 and that
a parent cannot be held liable for the conduct of an infringing company when it only has a
right of veto over the subsidiarys commercial strategy and does not have the power to
exercise decisive influence over its day-to-day management.
The view of the European Commission
22. In July 2014 the Commission submitted the following written observations to the
Tribunal:
a. In the case of agreements between competitors (horizontal agreements),
restrictions of competition by object include, in particular, price fixing, output
limitation and sharing of markets and customers.
b. Consequently, all of the agreements alleged to have taken place in this case appear
to be restrictive of competition by object. None of the agreements seem to be:
i. objectively necessary for the existence of an agreement of a particular type
or nature or for the protection of a legitimate goal, such as health and
safety, and therefore falls outside the scope of Article 101(1) of the Treaty;
ii. part of a wider cooperation agreement between two competitors in the
context of which the parties combine complementary skills or assets.
c. In order to benefit from Article 101(3) an agreement must produce efficiencies
which off-set its restrictive effects and which are passed on to consumers:
i. There is a strong presumption that agreements which are restrictive of
competition by object do not satisfy the Article 101(3) conditions; they are
not covered by the block exemption regulations and rarely create objective
economic benefits nor do they benefit consumers. They also usually fail
the indispensability test set out in Article 101(3);

ii. Public policy benefits can only be taken into account under the first head
of Article 101(3) in so far as they supplement any economic benefits
which the agreement generates.
d. The negative nature of a parents control over a subsidiary is not sufficient to
preclude the exercise of decisive influence over a subsidiary sufficient to enable
liability to be imposed on it in relation to the unlawful conduct of that subsidiary.
Questions referred
23. Faced with such fundamental differences in interpretations and readings of the case-law,
the Ruritanian Competition Tribunal has decided to stay proceedings before it and refer
the following questions relating to the interpretation of Article 101 TFEU to the Court of
Justice of the European Union:
(1) When determining whether an agreement restricts competition by object is it
relevant that an agreement between competitors to restrict output, and the variety
of products produced, is not designed purely to maximise the profits of the parties
to that agreement but is also designed to achieve the objective of increasing
innovation and more environmentally friendly products? Does it make a
difference that the agreement was concluded with Governments support?
(2) Is an agreement that is restrictive by object presumed to be incompatible with
Article 101(3)? In what circumstances can such agreements meet the Article
101(3) criteria?
(3) What criteria are relevant to the determination of whether a no-poach agreement
of the kind described in the reference has as its object or effect the restriction of
competition and, if so, whether it meets the conditions of Article 101(3)?
(4) Which legal entities can be held accountable for the infringement committed by an
undertaking in circumstances where a company owns a 50% shareholding in
another company that directly participated in an infringement of Article 101(1),
but where that shareholding does not confer the power to determine the other
companies strategic decisions but only confers a blocking right or a right of veto
over that other companys commercial strategy?
24. The request for a preliminary ruling arrived at the Court of Justice on 8 December 2014.
In accordance with Article 23 of the Statute of the Court of Justice, the Registrar has
notified the RCA (as claimant) and GGWP, General Gas, WWP, Windmens, WW,
Westerly, RWP and Poweron (as defendants) and has invited them to submit written
observations to the Court.3 The deadline for submission is on 13 April 2015. Oral
hearings are provisionally scheduled for June 2015.

The page limit is set out in the Moot Rules. Arguments are not expected to address the effects (if any) of
the Energy Charter.