The Chronicles of EssilorLuxottica: Can Non-Compliance with Commitments lead to Re-Examination of a Completed Transaction?
Introduction
There have been some exciting developments in Turkish competition law recently, not least of which was the Turkish Competition Board’s (“Board“) first-ever judgment on non-compliance with commitments. To recap, the Board approved the merger between Luxottica Group S.p.A. and Essilor International S.A. back in 2018, subject to behavioural and structural commitments. To review the allegations that the behavioural commitments to refrain from tying and de facto and/or contractual exclusivity were violated, the Turkish Competition Authority (“TCA“) initiated an investigation into the merged entity, EssilorLuxottica S.A. (“EssiLux“).
The TCA previously announced that it had concluded its investigation into EssiLux’s alleged anti-competitive practices on 28 August 2023 and the Board’s reasoned decision was published on 8 August 2024. The Board’s review found that EssiLux violated its commitments to refraining from exclusivity and abused its dominant position. However, the Board chose not to initiate a secondary review of the transaction. Due to the principle of ne bis in idem, the Board opted to impose one fine for breach of commitments and no fine for abuse of dominance. The daily fine was 0.05% of EssiLux’s turnover from 2018 which equated to approx. EUR 16.9 million and 1,781 days (more than 4 years).
Of course, voiding a completed merger is often difficult and expensive. Where a transaction is approved on the condition of meeting specific commitments provided during a merger review, effective monitoring of said commitments is crucial. Without strong deterrence mechanisms against non-compliance, there is a risk that these conditions will not be fulfilled, potentially undermining the rationale for approving the merger in the first place.
In this article, we will discuss commitments under the Turkish merger control regime and the potential consequences of non-compliance with commitments provided as part of a merger review.
Commitments under the Turkish merger control regime
Either structural commitments (such as divestiture of business units, asset sales) which offer a more permanent solution to competition concerns or behavioural (conduct) commitments (such as restrictions on sharing of information, limitations on joint purchasing/marketing activities, granting competitors access to facilities) may be deemed effective and acceptable by the Board to approve the transaction. The Board classifies these commitments as obligations or conditions.
Obligations encompass any ongoing requirement following approval of the transaction (e.g., behavioural commitments to not to engage in a certain conduct or reporting obligations, while conditions are specific actions transaction parties must take before the Board approves the merger (e.g., divestiture of a business) (see, Guidelines on Remedies Acceptable by the Turkish Competition Authority in Mergers and Acquisitions Transactions (“Guidelines on Remedies“), para 92).
In simpler terms, conditions and structural commitments deal with the upfront changes required for approval, while obligations and behavioral commitments focus on the ongoing actions required to maintain a competitive post-merger market.
Consequences of non-compliance with commitments
Art. 16 of the Communique No. 2010/4 on Mergers and Acquisitions Requiring the Approval of the Competition Board, a cleared transaction can only be re-examined under two circumstances: (i) if the parties submitted false or misleading information[1]; and (ii) if conditions or obligations are not fulfilled. Therefore, the Communique does not make a distinction between non-compliance with obligations and commitments.
However, the Guidelines on Remedies envisages different outcomes for respective breaches of obligations and conditions stating that, where a condition is not fulfilled, the clearance will be automatically revoked, and if an obligation is not fulfilled, daily administrative monetary fines will be imposed. Therefore, given that the TCA provides guidance on the application of communiques with its guidelines, it seems to have narrowed the scope of Article 16 of Communique No. 2010/4.
The European Commission (“Commission“) appears to have granted discretion by allowing itself to either revoke the clearance or impose fines if parties breach an obligation – but specifying that breach of condition will result in automatic nullity. (see Commission Notice on Remedies Acceptable, (2008/C, 267/01), para. 20) It may also be possible to interpret the TCA’s Guidelines on Remedies in this way.
EssiLux Decision and Turkiye
EssiLux is the first decision where breach of merger commitments is examined in Turkiye. As noted above, the parties proposed certain remedies so that the merger between two significant competitors in the eyewear sector would be approved by the Board.
The structural commitment entailed Essilor’s divestiture of Merve Optik, a leading company in the domestic optical sector. Besides the divestiture of Merve Optik, behavioral commitments were as follows: (i) merged entity shall not refuse to sell ophthalmic lenses, optical frame and sunglasses separately in Turkiye (i.e., no tying) and (ii) shall not engage in contractual or de facto exclusivity limiting or forbidding its resellers to purchase ophthalmic lenses, optical frame and sunglasses from its competitors in Turkiye. Although EssiLux raised in its defenses that anti-competitive effects of the alleged conducts were not established, the Board said that such an analysis is not necessary to establish that EssiLux violated its commitments. Article 17 of Law No. 4054 on the Protection of Competition envisages an automatic daily monetary fine, if an undertaking acts contrary to the obligations imposed with the final decision / interim measures. No actual or potential effects are required to be demonstrated.
The Board found that EssiLux’s bundled sales and its rebate scheme induced resellers to purchase all, or a significant portion of their ophthalmic lens needs from EssiLux. It further noted that it seized a handful of agreements that featured exclusivity clauses. Consequently, the Board stated that EssiLux’s actions also amounted to contractual exclusivity for ophthalmic lens products and breached its behavioral commitments.
The Board’s analysis can be summarized as follows:
For bundled sales, the Board examined whether the bundle comprising of “glass cutting machine” and ophthalmic lens was below cost. On this front, the Board found that EssiLux was subsidizing the loss from the machine (where EssiLux was deemed dominant) with the high profits it generated from the sales of ophthalmic lenses (where it was also found dominant for production and wholesale of said lenses). The Board further noted that opticians consider the discount they will receive from the machine when choosing a supplier and offered higher purchasing commitments for ophthalmic lenses to receive greater discounts.
For the rebate system, the Board remarked that the rebates were personalized and comprised all or a sizable amount of a reseller’s total purchases. If the targets were not reached, there would be punitive clauses in place, or the machine was taken back. The Board noted that this clause incentivized resellers to purchase as much as they could from EssiLux to not pay any fines and receive the lens and the machine discounted.
On the back of this analysis, the Board found that EssiLux’s bundled sales and rebate system together created a de facto exclusivity by influencing the purchasing behavior of its resellers.
The reasoned decision does not discuss whether the Board could have reviewed the merger and simply stated that a daily fine should be imposed. This supports the conclusion that the Board indeed follows the distinction made between the breach of obligations and commitments in the TCA’s Guidelines on Remedies.
Finally, the Board also stated that it was EssiLux’s responsibility to follow its commitments, entirely disregarding EssiLux’s defense that it was not possible to conduct a comprehensive market test to detect de facto exclusivity. The Board thereby underlined a simple fact, undertakings should be very careful and take every measure to monitor and comply with their obligations post-merger.
Examples in Europe and US
In contrast with the TCA’s approach, the European Commission notes that if breach of obligation is not subject to revocation it amounts to mere declaration of intention (see Commission Notice on Remedies Acceptable, (2008/C, 267/01), para 13) referring to the decision in easyJet v Commission (para 186-7) which ruled that merger parties are subject to obligations, not declarations of intention, breach of which will result in revocation. The court also rejected the applicant’s argument that the Commission did not make its decision expressly subject to revocation should commitments be breached.
In the US, the Department of Justice (“DoJ“) cleared the 2009 merger of Ticketmaster and Live Nation subject to commitments including divestment. However, in 2019 it asked the court to modify this 2010 judgement claiming that the merged entity had not complied. In order to prevent this conduct and remove any doubt regarding the merged entity’s obligations, the DoJ sought to extend its commitments to 2025 and add non-retaliation clauses violation of which would result in an automatic USD 1,000,000 penalty per breach.
In May 2024, the DoJ, and several attorneys general, filed a lawsuit requesting divestiture of Ticketmaster and alleging Live Nation/Ticketmaster has unlawfully maintained its monopoly via exclusive agreements with venues, forcing artists to work with Live Nation, and retaliation against uncooperative venues and competitors.
Are monetary fines sufficient deterrents or is more needed?
Commitments are an essential tool in counterbalancing the positive and negative effects of the types of transactions necessitating merger control. Effective monitoring and sanctions are crucial in ensuring undertakings do not view behavioral commitments as mere declarations of intent.
On that note, the TCA may ponder whether monetary fines are a sufficient threat? Internal correspondence seized by the TCA suggests that some companies are apparently less concerned of the consequences of any fine. An employee of a dominant player in the Turkish alcoholic spirits market noted that “I am unable to write openly, but we are doing what is necessary, as we always have…”. The relevant decision even states that the employee was aware of the implications of Turkish competition law since their company had undergone three preliminary investigations and previously been prevented from engaging in exclusivity.
Mergers approved with commitments usually involve at least one party enjoying significant market power. Thus, classification of violation as obligations may not result in any meaningful burden on the merged entity in cases where it can simply pay the imposed fine (while safely eliminating a competitor). In other words, if breach of obligation does not carry the risk of re-examination and potential merger reversal, companies may readily accept commitments they have no intention of pursuing.
Of course, exclusionary abuses such as exclusive dealing and rebate schemes aimed to or have the effect of hindering competition and discrimination between purchasers are subject to monetary fines anyway. Therefore, it is easy to argue that for dominant undertakings, classifying such behavior as obligations serve only as a reminder to simply not violate the law and this calls into question the effectiveness of this instrument of the merger control mechanism.
Conclusion
The principles of Turkish competition regulation favor less harsh measures which are nonetheless effective in addressing competition concerns. The Board therefore prioritizes administrative fines but retains the power to dissolve transactions if violations persist (an approach which also places the monitoring burden on the TCA).
As we noted earlier, the Guidelines on Remedies foresee a distinction between the breach of obligations and conditions. The recently published EssiLux decision may indicate that the Board will continue to view fines as sufficient. However, especially considering how the market will be affected after the most recent EssiLux decision and the examples from other jurisdictions, the TCA may re-visit its approach on similar cases.
Of course, every market and each case is unique. We understand that it would be very difficult to reverse a market’s competition dynamic retrospectively after four years. However, such measures may be taken in cases such as Live Nation/Ticketmaster where similar post-merger concerns are raised.
[1] The Board ruled on this area in its Brookfield decision (30.04.2020, 20-21/278-132), para. 20 which stated that the market assessment could not consider Graftech’s activities since the part of its Turkish turnover controlled by Brookfield was mistakenly designated as Swiss revenue. However, this did not affect the Board’s review on the merits and, accordingly, it did not initiate a new review and imposed fines.
