03 May 2016
Separate vertical banking agreements cannot be tainted by illegality from Libor
An interesting case came before the Court of Appeal in March. In it the Court confirmed that separate vertical banking agreements cannot be tainted by illegality which resulted from setting the Libor rate upstream between the banks. These include payment terms based on the Libor rate. The two are completely separate and the vertical agreements are therefore fully enforceable.
Deutsche Bank AG and a number of other banks brought an action against Unitech Global Limited and Unitech Limited (the defendants) for breach of a credit facility agreement (the credit facility) and an interest swap agreement (the swap agreement) before the High Court.
The defendants applied to the High Court to make certain amendments to their defence based on competition law arguments. The High Court refused their application and the defendants appealed to the Court of Appeal which heard their case on 3 March 2016.
As part of their defence, the defendants wanted to argue that the process by which Libor was set by the banks until June/July 2013 was an unlawful information exchange. This breached Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) and the Chapter I prohibition of the Competition Act 1998.
The defendants argued that the credit facility and the swap agreements were both so closely connected with the unlawful setting of Libor that the agreements should be declared void and unenforceable.
At first instance, the High Court had held that there was no basis in law for finding that a vertical agreement between the defendants and the claimant banks would be void for breach of competition law due to the assumed illegality of the upstream horizontal agreement between the banks.
The Court held that vertical agreements were separate and distinct from the horizontal agreement, were between different parties and contained their own specific terms. As a result the High Court did not accept that there were any public policy grounds for allowing the defendants’ application.
If the defendants had suffered loss by reason of the alleged unlawful horizontal agreement they would have a separate action in damages for competition law breach. Therefore the High Court concluded that the competition law defence advanced by the defendants would not have any real prospect of success and refused the defendants application.
Agreeing with the High Court, the Court of Appeal ruled that there was no authority for holding that vertical agreements would be rendered void and unenforceable as a result of a horizontal agreement infringing Article 101 (1) TFEU or the Chapter I prohibition.
Unitech argued that the illegality arose from the cumulative effect of individual Libor submissions by a number of banks, whether or not there was any deliberate manipulation on the part of Deutsche Bank. Therefore, the individual credit and swap agreements entered into by Deutsche Bank cannot be regarded as illegal or void.
In addition, the court of Appeal also observed that other banks became parties to the credit agreement after it was made and any decision that the agreements were void would be highly prejudicial to them. Especially since they had not been party to the alleged unlawful horizontal agreement.
In conclusion, the Court of Appeal agreed with the High Court that there was no real prospect that the credit agreement or the swap agreement would be held void on account of a breach of competition law from the alleged fixing of the Libor rate. Accordingly, permission to amend the points of defence and counterclaim were refused.
On 17 March, Advocate General Wathelet handed down his opinion on a question referred by the Paris Court of Appeal to Luxembourg for a preliminary ruling. The question considered whether an agreement requiring licence royalties to be paid on the basis of patents that had been retroactively revoked was in breach of Article 101(1) TFEU.
The Advocate General’s opinion was a departure from the usual position that requiring licensees to pay royalties on revoked or expired patents is likely, in the absence of any objective justification, to be a breach. However, in this case he was undoubtedly swayed by the ability of the licensee to terminate the arrangement at very short notice, thereby not really suffering any competitive disadvantage.
Advocates General opinions are advisory and as such are not binding on the Court, although they are followed by the Court in most cases.
The preliminary ruling was on a dispute over unpaid royalties from a patent licence where one of the underlying patents had been revoked. The dispute was originally the subject of international arbitration proceedings. In those proceedings, the arbitrators found that the licensee had not been required to agree a licence to use the relevant technology but did so as a precaution. This was so it could use the relevant technology without the fear of litigation.
The licensee subsequently brought an action in France contesting this ruling. They argued that paying the royalties for a revoked patent had put the company at a competitive disadvantage to their competitors. This was because their competitors had not been required to pay royalties for use of the contested technology.
The Advocate General pointed out that Article 101 TFEU did not have the purpose of protecting the efficacy of commercial arrangements. It was there to regulate agreements which both appreciably distorted competition and affected trade between member states. In reviewing the terms of the agreement he noted that the licence contained no restrictions on the licensee’s ability to set its own resale prices or conduct its own research.
Nor did it contain any restriction on the licensee’s activities after the termination of the licence. Perhaps more fundamentally the agreement was terminable at very short notice and so the licensee was not tied in to any long licence terms. In the circumstances, it was hard to see how the licensee had been placed at a competitive disadvantage when the arrangement could be so easily terminated.
Accordingly, the Advocate General considered that Article 101 of the TFEU had not been infringed and recommended his opinion was followed by the Court.
On 17 March, the EU Commission published a report on the functioning of the Insurance Block Exemption Regulation. The EU Commission has the power to exempt certain common types of commercial agreement from the provisions of Article 101(1) TFEU. This is provided all requirements in the exempting legislation are met. These are called block exemption regulations.
Regulation 267/2010 set out exempting legislation for certain types of agreements between insurers. These relate to joint compilations tables and studies, as well as co-insurance or co-insurance pools. This legislation reenacted an earlier version of the block exemption in 2010.
However, in its provisional conclusion, the Commission believes that the insurance industry no longer appears to require a specialised block exemption regulation.
The horizontal cooperation guidelines published by the Commission in 2010 specifically offer guidance on how to assess the admissibility of exchanging joint research tables and studies in the section on information exchange. Regarding co-insurance pools, the Commission considers the insurance block exemption to be of limited use.
This is corroborated by a significant proportion of those who responded to the Commission’s prior consultation. They confirmed that on their assessment they are likely to fall outside the legislation’s scope. The commission also noted that there was a growing market trend away from institutionalised pools, as identified in the block exemption, towards more alternative and flexible ways of co-insuring risks.
Although a final decision has not yet been reached, it appears from the tenure of this report that the commission is unlikely to propose to renew the existing legislation and will let it lapse upon its expiry on 31 March 2017.