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Press release - Competition Authority imposes ISK 310 million administrative fine on Eimskip for serious violations of Competition Act

12/19/2007

Unofficial translation

The Competition Authority has concluded in a new decision that Eimskip (Hf. Eimskipafélag Íslands) abused its dominant position in the maritime shipping market, thereby violating the prohibition provisions of the Competition Act. Eimskip's violations consisted, on the one hand, in actions taken deliberately for the purpose of forcing Samskip, another shipping company, out of the market and, on the other hand, in entering into a number of exclusive purchasing agreements with its customers. Exclusive purchase in this context refers to contracts where Eimskip obtained a commitment from its customers to purchase shipping services only from that company. Exclusive purchase agreements are illegal when a dominant undertaking is involved. Some of the agreements also contained anti-competitive loyalty discounts. The Competition Authority is of the opinion that Eimskip's violation of Article 11 of the Competition Act was serious and likely to result in extensive competitive damage.

The case began with a complaint from Samskip, which gave rise to a dawn raid on Eimskip, as further described in the section on procedure below.

Article 11 of the Competition Act prohibits abuse of any kind of a dominant position in the market. In order for this provision to apply, the relevant market in the case in question must be defined, and the position of the undertakings in the market assessed. Since Eimskip contended that the undertaking was not dominant, this aspect of the case required detailed study. The Competition Authority concluded that the relevant market in this case was shipping of cargo on scheduled routes between Iceland and ports in Europe, on the one hand, and ports in North America, on the other hand. Scheduled shipping routes according to the above include services which form an inseparable part of such shipping services, such as cargo handling, loading and unloading. In the case, the market shares of Eimskip, Samskip and Atlantsskip over a four year period were assessed in this market. Eimskip proved to possess an overwhelming market share (70-80% share). In light of this share, and with reference to the dominance of the company in the supply of transport services and great financial strength, it was the assessment of the Competition Authority that Eimskip occupied a dominant position.

1. Eimskip's violations
The violations by Eimskip of the Competition Act consisted principally in the following actions:

Market offensive
The documents of the case show that in the autumn of 2001, Eimskip increased the prices of shipping services to its customers and that Samskip took advantage of the situation to attract new customers. It was a source of dissatisfaction to Eimskip that Samskip did not use this opportunity to raise its prices. The documents of the case also show that at the turn of the year 2001/2002, Eimskip again took action to bring about increases in the price of the company's shipping services. Eimskip's in-house documents show that these actions were in part quite successful. However, Samskip once again took advantage of Eimskip customers' resentment at the price increases and offered them better terms, with the consequence that Eimskip lost customers to Samskip. This again caused dissatisfaction at Eimskip and an “offensive”, as it was called at Eimskip, was planned against Samskip.

Subsequently, Eimskip undertook extensive actions designed to attract as much business as possible from Samskip to Eimskip. The actions were entitled “market offensive” and were organised by the top management at Eimskip. It is clear that extensive work was launched on charting the market, i.e. preparing lists (records) of all the customers of Samskip, and organising an offensive. The documents also show that it was decided that Eimskip's “might” would be used for this purpose of securing the company's dominant position in the market. Eimskip's aim with its actions was to prevent competition or restrict it substantially and enable the company to increase its prices following the actions. This is particularly clear when the scope of the actions is taken into account.

The actions consisted primarily in Eimskip's systematically approaching numerous customers of Samskip and attempting by means of special discounts or terms to prise them away from Samskip. These offers were predatory, i.e. the prices were lower than those in the contracts of the companies in question with Samskip. The prices were also significantly lower than the prices in Eimskip's tariffs. The offers to Samskip's customers were meant to be kept confidential so that information on the reduced prices should not leak out to companies already doing business with Eimskip. A memorandum discovered in the course of the dawn raid on Eimskip revealed that customers of the company who were comparable to those customers of Samskip to whom Eimskip had made offers paid a significantly higher price for shipping services at Eimskip than the prices in Eimskip's offers to Samskip customers.

The value of the business that Eimskip was seeking from Samskip corresponded to at least ISK three billion annually, and the managers of the company believed that a realistic target was to attract to the company business from Samskip amounting to approximately ISK 800 million. In early May 2002 it was revealed in an e-mail message from Eimskip that business had been attracted from Samskip to Eimskip corresponding to about ISK 200 million, and that there were prospects of obtaining an additional ISK 400 million worth of business soon. The documents of the case indicate that the managers of Eimskip felt that the market offensive had been successful.

These actions constitute unlawful, discriminatory price reductions designed to weaken Samskip as a competitor. It is clear that if Eimskip's plans had succeeded fully, there was a significant risk that Samskip would have been forced out of the market.

Exclusive purchase agreements and anti-competitive discounts
The decision of the Competition Authority reveals that Eimskip entered into unlawful agreements with its customers involving exclusive purchasing. Exclusive purchasing in this context refers to business contracts where Eimskip obtained a commitment from its customers to purchase shipping services only from that company. In agreements of this kind with large customers, Eimskip also employed anticompetitive discounts to ensure still further that customers should not do business with Eimskip's competitors. Among other things, the company used retroactive discounts intended to secure business with Eimskip and prevent the company's customers from doing business with its competitors. There were instances when Eimskip sent protests to its customers who, in the opinion of the company, were defaulting on their contracts by turning to Eimskip's competitors.

Contracts of this kind have the effect of preventing competitors of a dominant undertaking from growing and prospering. Contracts of this kind therefore strengthen or maintain a company's dominant position, thereby disrupting competition. The decision of the Competition Authority includes accounts of numerous contracts of Eimskip which in the opinion of the Competition Authority violated Article 11 of the Competition Act in this regard.

2. Penalties
With reference, among other things, to Eimskip's intent of disrupting competition, the fact that the company's violations were planned by its top managers as well as the scope and nature of the violations, the Competition Authority, in its decision, considered a fine in the amount of ISK 310 million (approx. Euros 3.4 million) to be reasonable.

3. Extensive proceedings
This case began with a dawn raid on Eimskip on 4 September 2002. Various factors delayed its progress.

Proceedings before the courts of law
Eimskip submitted the claim that Samskip should not be regarded as a party to the case. This was rejected by the Competition Authority. However, Eimskip referred this aspect of the case first to the Competition Appeals Committee and subsequently to the courts of law. The Supreme Court upheld the conclusion of the competition authorities that Samskip should be regarded as a party to the case. There was also disagreement of the access by Samskip to certain documents of the case, and Eimskip appealed the decision of the Competition Authority to such effect to the Competition Appeals Committee. This dispute delayed proceedings until November 2003.

Slow process of collecting data
Regular proceedings, where both parties to the case submitted their viewpoints and expressed their opinions concerning each others' viewpoints continued into the year 2004. Concurrently with these proceedings, work was in progress on processing the data obtained in the dawn raid on Eimskip. Both Eimskip and Samskip have submitted extremely detailed viewpoints in the case, and in mid-2004 Eimskip called on the competition authorities to compile a statement of objection describing what the alleged violations of the company were. The case concerns extensive violations and complex issues. Disputes have come up concerning all the principal aspects of the case, such as the definition of the market, the position of undertakings in the market, the meaning of the ban on abuse of dominant position, the nature of Eimskip's conduct and the significance of structural changes in that company. This has required extensive additional collection and examination of data. And, in fact, obtaining certain documents has proven time-consuming. This collection of data went on into the year 2005. In late 2005 work was begun on writing a detailed statement of objection, which was concluded in April 2006, with the document delivered to Eimskip on 2 May 2006. Eimskip's comments on the statement of objections were received on 8 September 2006.

Extensive changes at Eimskip
The violations in this case took place in the shipping operations of Hf. Eimskipafélag Íslands, primarily in the years 2001 and 2002. Hf. Eimskipafélag Íslands established the private limited company Eimskip ehf., which took over the shipping operations of the parent company at the start of the year 2003. At the Annual General Meeting of Hf. Eimskipafélag Íslands held on 19 March 2004, the decision was made to change the names of both companies. The name of the parent company, Hf. Eimskipafélag Íslands, was changed to Burdaras hf., and the name of the subsidiary, Eimskip ehf., was changed to Eimskipafélag Íslands ehf. On 24 June 2005 there was a change in the ownership of Eimskipafélag Íslands ehf., when Burdaras sold to Avion Group hf. all its shares in the company. Subsequently, Burdaras hf. was in 2005 split up and the company was merged, on the one hand with Landsbanki Íslands hf. and, on the other hand with Straumur Investment Bank hf., which took over the assets and liabilities of Burdaras hf. On 21 November 2006, the name of Avion Group hf. was changed to Hf. Eimskipafélag Íslands, and on 26 February 2007 the board of directors of that company decided that the company should merge with its subsidiary, Eimskipafélag Íslands ehf.

Contentions of lack of legitimate interests – new lines of defence
In June 2006 the view was first expressed by Eimskip that the liability for the violations described above lay with Landsbanki Íslands and Straumur-Burdaras, and not the company currently operating the maritime shipping operations in question. Until that time, the Competition Authority was completely unaware that there was any dispute concerning this aspect of the case. This required separate collection of evidence and additional investigation. To give an example, repeated efforts had to be made to obtain viewpoints and documents from Landsbanki Íslands, Straumur-Burdaras, Avion Group and Eimskip. The last letter concerning this issue was received on 26 March 2007. As reasoned in the decision of the Competition Authority, it is impossible to accept the viewpoint of Eimskip that the fines should be imposed on the said financial undertakings. The conclusion of the Authority is that the second Hf. Eimskipafélag Íslands assumed liability for the violations committed by the first Hf. Eimskipafélag Íslands, and therefore the Authority's decision is addressed to that company. In this regard account was taken of the fact that the second Hf. Eimskipafélag Íslands is engaged in the operation of the same maritime shipping business as the former Hf. Eimskipafélag Íslands.

At the end of April 2007 Eimskip submitted an opinion prepared by an economist expounding viewpoints relating to the definition of the market, Eimskip's position in the market and the company's actions in 2001 and 2002.

Unacceptable delays – prospects of improvements
In light of the above, the drawn-out proceedings were inevitable, having regard of the scope of the case and the incidents that came up in the course of proceedings.  Generally speaking, the Competition Authority believes that it is an unacceptable situation when competition cases can be delayed as a result of actions taken by undertakings. It is the hope of the Competition Authority that the amendments to the Competition Act that entered into force this year with the purpose of improving the position of the Competition Authority in collecting evidence will have a positive impact on swiftness of proceedings.

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