Introduction of Relative Market Power and Ban on Private Geo-blocking in Switzerland – Opportunities and Risks for Companies

In March 2021, the Swiss Parliament adopted the counter-proposal to the so-called «Fair-Price-Initiative» which shall enter into force at the beginning of 2022. In addition to the prohibition of private geo-blocking, the counter-proposal introduces the concept of relative market power in the Swiss Cartel Act and thus behavioural obligations for companies whose unilateral behaviour has so far not been subject to any competition law scrutiny. In the following, we show what opportunities and risks the new provisions entail for companies and what they can do in anticipation of their introduction.

Background

On 19 March 2021, the Swiss Parliament adopted the indirect counter-proposal to the popular initiative «Stop der Hochpreisinsel – für faire Preise» (Stop the island of high prices – for fair prices; Fair-Price-Initiative). This proposal entails a far-reaching legislative revision of the Federal Act on Cartels and other Restraints of Competition (Cartel Act) and the Federal Act against Unfair Competition (Unfair Competition Act). The revision largely implements the demands of the Fair-Price-Initiative. Subject to a referendum, the initiators of the initiative have therefore already announced the withdrawal of the initiative. Both proposals aim to combat the so called ‹Swiss island of high prices›. In particular, skimming purchasing power of customers in Switzerland by Swiss surcharges shall be prevented. According to the will of the Swiss Parliament, these aims shall be achieved by introducing the concept of relative market power in the Cartel Act and a ban on geo-blocking in the Unfair Competition Act. Based on the decision of the Swiss Federal Council of 17 September 2021, the new legislative provisions will enter into force on 1 January 2022.

Companies with relative market power are now also subject to a control of abusive behaviour

As soon as the new laws enter into force, the behavioural control pursuant to Art. 7 of the Cartel Act, which until now has only been applicable to market-dominant undertakings, will be extended to companies with relative market power. This means, for example, that in the absence of an objective justification (legitimate business reasons) also companies with ‹mere› relative market power will be prohibited to refuse business and supply relationships, discriminate on prices or impose unreasonable conditions.

In addition, the catalogue of examples of abusive conduct under Art. 7 para. 2 of the Cartel Act will be extended. According to this amendment (Art. 7 para. 2 lit. g Cartel Act), companies with relative market power or that are market-dominant may not restrict buyers from «purchasing goods or services offered in Switzerland and abroad at the market prices and the conditions customary in the industry abroad.» This provision is aimed at combatting international intra-group price discrimination of companies with relative market power. Notably, their unilateral conduct has so far not been subject to any competition law scrutiny. For example, a Swiss reseller will have the right vis-à-vis a manufacturer with relative market power to buy a specific product locally in Germany at local prices, which are presumably lower than the Swiss prices, in order to resell such product in Switzerland.

Definition of relative market power

According to the new Art. 4 para. 2^bis of the Cartel Act, an undertaking is deemed to have relative market power if «other undertakings are dependent on it for the supply of or demand for a good or service in such a way that there are no sufficient and reasonable possibilities of switching to other undertakings.» The question whether a company has relative market power cannot be answered in general terms. It requires a case-by-case assessment for each company (buyers and suppliers) and each product or service. For example, a company may have relative market power towards business partner A, but not vis-à-vis business partner B. Thereby, it can have relative market power towards business partner A only with regard to product X, but not with regard to product Y.

Both German and Austrian law contain the concept of relative market power. Following the German practice, which will presumably serve as an interpretative aid for the Swiss authorities, the following groups of cases can be distinguished:

• Assortment-based dependency: Must-in-stock products without which a retailer cannot compete (top-tier products; Sortimentsbedingte Abhängigkeit).
• Company-related dependency: Lock-in of a company e.g. due to prohibitively high switching costs (Unternehmensbedingte Abhängigkeit).
• Relative buyer power: Supplier is dependent on a strong buyer (e.g. an automotive supplier or a supplier to large retail chains; Relative Nachfragemacht).
• Platform dependency or data dependency: Dependency of a company on access to the platform or data of another company (Plattformbedingte Abhängigkeit or Datenabhängigkeit).
• Dependence due to shortage: Non-discriminatory delivery obligation in the event of a general shortage (e.g. during an oil crisis or possibly during a general chip shortage; Mangelbedingte Abhängigkeit).

Despite decades of experience with the concept of relative market power, the case law in Germany is still comparatively unclear. Depending on the specific circumstances, the existence of a position of relative market power can therefore be controversial until a final court decision is rendered.

Consequences of an abuse

Contrary to market-dominant companies, companies with relative market power are not subject to direct fines in case of an abuse of their position. However, they may face lengthy and expensive proceedings, injunctive reliefs, claims for actual delivery and damages, as well as the invalidity of the relevant contractual clauses.

Enforcement of the prohibition of abuse

In an article in the newspaper Neue Zürcher Zeitung, the Swiss Competition Commission (COMCO) has already announced that it intends to issue landmark cases relatively quickly after entry into force of the new regulations. Subsequently, it wants to refer the complainants to the civil courts. Hence, according to the intention of the COMCO, the prohibition of the abuse of a position of relative market power shall mainly be enforced by civil courts.

In case of cartel law violations, Swiss private international law provides for jurisdiction inter alia at the place where the conduct in question has its effect. If the violation affects the Swiss market, e.g. due to the market activities of dependent companies in Switzerland, the relatively dominant company may be sued in Swiss courts even if it acted abroad and has no domicile in Switzerland.

Private geo-blocking will also be prohibited

In addition to the introduction of the concept of relative market power, the Swiss Parliament has banned private geo-blocking through a revision of the Unfair Competition Act. After the entry into force of the new Art. 3a of the Unfair Competition Act, in distance commerce and provided that there is no objective justification, customers in Switzerland shall not be (on the basis of their nationality, place of residence, place of business, the location of their payment service provider or the place where their means of payment is issued):

• discriminated in price or payment terms;
• blocked or restricted access to an online portal; or
• redirected to a version of the online portal other than the one they originally visited, without their consent.

This new regulation shall prevent Switzerland from being foreclosed in e-commerce without factual justification and allow consumers in Switzerland to purchase goods and services at foreign prices. Business practices such as automated forwarding (redirecting or rerouting) to web shops with Swiss prices based on a Swiss IP address or the abortion of credit card payments upon identification of a Swiss credit card should thus be stopped. The so-called Geo-Blocking Regulation in the EU, which has been in force since 2018, served as a template for the wording of the provision. The new regulation of the Unfair Competition Act also provides for exceptions for certain sectors, such as non-economic services of general interest, financial services, public transport services, gambling, lotteries or casinos and betting. The civil courts will be responsible for enforcing the new geo-blocking prohibition. It remains to be seen to what extent the civil courts in Switzerland will follow European legal practice in the assessment of geo-blocking cases.

Critical view on the revision of the law | Opportunities and risks for companies

Whereas the Cartel Act has so far primarily served to protect competition as such (system protection), the introduction of the concept of relative market power focuses on the protection of depending companies against certain conduct (individual protection). In our view, relative market power is therefore not a lighter form of dominance, but an entirely different concept (see the article by Samuel Rutz and Christian Jaag of Swiss Economics of 24 July 2020). Whether these new rules actually contribute to combating high prices in Switzerland is controversial.

From a company’s point of view, the introduction of relative market power offers opportunities and risks depending on the initial situation. It could open up new negotiation leeway for companies potentially dependent on a company with relative market power. For example, they might benefit from better purchasing conditions or oblige a relatively powerful buyer to purchase goods or services. Digital markets are also likely to be a particular field of application when it comes to access to platforms or data. Conversely, this limits the entrepreneurial scope of companies with relative market power. Companies suing in Swiss civil courts will ultimately also have to include the increased litigation risks in the present case in their risk analysis, in particular with regard to litigation costs and party compensation.

What companies can and should already do today

In order to take or avoid the opportunities and risks related to the introduction of the concept of relative market power, companies should deal with the new legal provisions as early as possible. A mapping of buyers and suppliers for the individual products and services can provide a good basis for identifying possible opportunities and risks. The decisive factor in this regard is not the general market condition, but the bilateral business relationship.

The results of the mapping form the basis for the definition of concrete objectives and measures. For example, in view of upcoming contract negotiations, an argumentation can be prepared, substantiated by documentation as evidence for or against one’s own dependency or relative market power, respectively. Depending on the initial situation, it may also be required to amend distribution and supply contracts or the instructions for dealing with certain customer enquiries. Accompanying training of staff (especially sales staff abroad) can also help to take sufficient account of the new legal provisions.

With regard to the introduction of the geo-blocking ban, it must be clarified in good time whether potentially inadmissible barriers exist, relevant exceptions apply or such barriers can be objectively justified. Depending on the result of this examination, suitable (technical) measures may be taken to lift geo-blocking in time.