Transcript:

Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith litigation, regulatory and finance lawyers across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers. 

Emma: Welcome to the Trading Straits podcast. Today, me Emma Weeden and my colleague Charles Sauvage from Reed Smith's London and Brussels office will be talking to you about the consortia block exemption regulation. So the Consortia Block Exemption Regulation actually expired in April and it applied to container shipping lines to allow them to collaborate on space and their sailings. Today we're going to be talking about the implications of that law expiring and how shipping consortia will work going forward. So to start off with, we should talk a little bit about what shipping consortia are. These are shipping lines that jointly cooperate in the provision of container services. These cooperations are in respect of sharing space on vessels. This can be done through highly integrated consortia using vessel sharing agreements or simply by slot charter agreements. This is exchanging slots on vessels. The features of consortia are that they share capacity to create regular weekly sailings for each line's clients. Where consortia cooperate across trades, these are known as alliances. It's important to note that these aren't conferences. So shipping conferences were abolished in 2008 and these allowed lines to collaborate on price and capacity. Here we're talking about collaborations in relation to capacity only. Today, the consortia that are often talked about are the large East-West alliances. Here, most of the world's top 10 lines participate in one of three alliances, the Alliance, 2M, and the Ocean Alliance. However, there are a lot more consortia than just these three alliances. These big alliances are famous because they operate on the world's largest trades. However, it's important to remember that there are other small consortia and alliances. They operate north-south and they operate regionally. In the Med, for example, there are lots of smaller lines operating in consortia and they shouldn't be forgotten. So what did the consortia block exemption do? So a good place to start is what are block exemptions? So block exemptions allow businesses to carry out and collaborate on activities that would usually be caught by competition law. So what did the consortia block exemption let lines do? So this regulation was introduced in 1995 and renewed in 2014 and 2020. And it specifically allows shipping liner companies to form consortia and operate a joint service on vessels and share port facilities under certain conditions so the main condition in this was that the lines together wouldn't have a market share of over 30 percent and the period of the agreement and lock-in had to be limited the agreement also had to not have any hardcore restrictions you can't do things like price fix or market share and and it's also worth noting that when the UK left the European Union it adopted the consortia block exemption regulation. The benefits of this law were that it facilitated these consortia by making the competition or assessment easier there was a regulation that laid down what lines could do this created legal certainty reduced risk reduced legal costs it was it's a straightforward assessment for shipping lines do they fit within these rules. The big benefit of this law is that it allowed lines to join up to provide ships and regular services. This has meant that you know if one line buys a big big ship it's got other partners that can fill space on this ship, so with the consortium you can fill the space have a regular sailing. You know the goods that are transported by a container often have to be there you know just just in time it's a different industry to to tramp shipping so being able to collaborate together to have one weekly sailing is a good thing for for shippers. It's also helped with environmental protection so if you've got one ship sailing rather than four ships sailing at the same time you know that reduces carbon emissions. The vessel utilization of a big ship can also be higher so you're not sailing more half empty ships. So Charles it'd be good to know your thoughts on why the consortia block exemption regulation was abolished. 

Charles: Thank you, Emma. Yeah, the CBER, in relation to why was the CBER abolished, it's important to note first that the CBER was one of the very few sector-specific block exemption regulations that were adopted in the EU. Unfortunately, the EU Commission has adopted, has moved towards getting rid of these sector-specific exemptions. And even though we continually and regularly advised in favor of maintaining the maritime, the CBER, as the sector-specific block exemption regulation for the shipping sector, we have not been heard, and we had argued that because the shipping sector was, in our view, very specific, was very international by nature, and was very high cost, and therefore needed its own legislation. Fortunately, as I said, and as Emma explained, the sewer was drawn and now the only sector-specific block exemption regulation left in the EU is the one relevant to the motor vehicle sector. This move of the EU Commission was not a given, in particular because other jurisdictions have and continue to have sector-specific block exemption regulation in the maritime sector. For instance, Hong Kong, Singapore, and Israel. And the U.S. Have a slightly different system, but in a way even more constraining because in the U.S. you have even a sector regulator, the U.S. Federal Maritime Commission, to which shipping lines must not only file the agreements they enter into, but also submit information such as their meeting minutes and other documents in order to allow the Federal Maritime Commissions to perform real-time monitoring of the maritime sector. So, yeah, the CBER in the EU was withdrawn and the same in the UK. And this is somewhat confusing, in particular because the market conditions haven't changed drastically since the last time it was renewed. For a while, the Commission considered that the shipping rates had increased, But given that they have now, since the end of the COVID-19 pandemic, fall down again, that was not found to be a good reason. The Commission also thought that the quality and reliability of services have remained since 2014. So really, the reasons for underlying the withdrawal of the CBER are yet to be determined. The Commission also considered that it wasn't clear whether a consortia could deliver sufficient consumer benefits to justify renewal. And it also queried the indispensability of having the consortia for achieving the standards required by Article 101.3 of the Treaty on the Functioning of the European Union, and in particular, the efficiencies bringing consumer benefits. But maybe in order to better understand why the expiry of the CBER will happen, why was it decided, and how it will have negative consequences, it's important to further explore the reasons underlying the EU Commission's decision to withdraw it. Maybe the first one I briefly touched on is the inconsistency in looking at the effects of the COVID-19 pandemic. So as I said, for a while, the Commission, during the pandemic, we could observe that the freight rates had increased, but evidence since suggests that these are now falling. So in its review of the specialization block exemption regulation in 2021, the Commission considered, in line with what I've just said, that the effects of the pandemic were temporary and therefore did not cause reason for concern. And yet, conversely, a year later, during its review of the CBER, the Commission focused on the adverse effects of the pandemic on fright rates and deemed it as a good reason for the CBER to expire as no longer being fit for purpose. This inconsistent approach really is a cause of concern. We also noticed that the Commission for sure underestimated the legal uncertainty and the compliance costs that the expiry of the CBER will entail for carriers. And this, even though we highlighted it several times in the consultations that were carried out in the context of the CBER review. So we'll come back to this, but as a result of the withdrawal of the CBER, carriers will now have to self-assess their cooperation agreements using the specialization block exemption regulation, which, amongst other reasons, which is not sector-specific and which will therefore increase the compliance costs. Not only because the shipper carriers will now have to familiarize themselves with this complex new sectoral new regulation, but because also precisely it is not sector-specific. And there is no, in parallel to the SBER, there is no longer any sector-specific guidance. And finally, another reason is probably is that the commission failed to properly consider the negative impacts of the expiry of the CBER on competition, innovation, and sustainability in the liner shipping sector. Indeed, there's a chance that consortia will be replaced by less efficient and environmentally friendly standalone services, or by more integrated forms of cooperation, such as mergers, which could harm competition by making the market highly concentrated. This may result in competitors outside these mergers and other concentrated markets struggling to compete, thereby having the knock-on effect of slowing technology innovation. So really, we believe that the expiry of the CBER will have a lot of negative consequences for the line of shipping industry, including in line with these justifications, which in our view were really not conclusive, greater legal uncertainty. Increased compliance costs, and reduce competition, innovation, and sustainability. Now that the CBER is abolished and that we have covered the reason why this was the reason why, we can wonder what happens now. And actually, the expiry of the CBER does not mean the abolition of consortia. So it's not because the CBER is withdrawn that the consortia are forbidden. It only means less legal certainty. How is that? The thing is that, as I've said before, the consortia agreements will now need to be self-assessed because there's no longer a piece of EU legislation granting automatic, hence the block in block exemption regulation, giving automatic exemption, what we also sometimes call the safe harbor to the agreements. The carriers and parties to these agreements will have to carry out an Article 101(3) assessment. And amongst this is comprised of four conditions, amongst which is showing the benefit of the consortia in the form of efficiencies and including the benefits to customers of the consortia. And this will need to be clearly laid out while any restrictions will need to be justified and the fact that competition in the market remains willing to be shown. So this is obviously more work to consortia members. Again, because we lose with the CBER, we lose the automaticity that was allowed by it. And well, it is true that some of the big alliances were already carrying out self-assessments because on some of the trades, the alliances market shares were above the 30% threshold that was contained in the CBER. However, for small lines and smaller control shares, this is much more work. So the Commission and the CMA have said that the specialization block exemption regulation will be a suitable non-sector-specific replacement. But that is yet to be seen. And actually, Emma, maybe you can tell us more on how is it that the SBER will be a suitable replacement to the CBER? 

Emma: As you've said, the CBER isn't a sector-specific solution. Rather, it exempts certain horizontal agreements from the prohibition that's in competition law. So it's about specialization agreements generally. It's not about the shipping industry. The reason that we've been looking at this in relation to consortia is that from the Commission's consultation on the consortia block exemption is that they've said it provides a suitable alternative. We think this is questionable. So our findings are that this assertion quite lacks clarity. So there's an assertion that it can apply to services. Predominantly, the specialization block exemption has been used in agricultural construction, there's no precedence on this legislation being used in the transport industry and as we've talked about before the transport industry is special you know it's unusually international so despite the commission saying that consortia should rely on the specialization block exemption they haven't provided any additional guidance on this so the consortia block exemption outlined specific activities necessary for the consortium's operations. Article 4 was all about what could be done but the specialization block exemption is silent on this. So you know it was about how consortia could work was in that legislation. So the fact that you could do joint procurement reports specific details like that. You know, this causes complexities for the carriers. So they are used to having specific guidelines. They don't know now whether their activities are exempted or not, and each of them will need to be, each activity will need to be looked at specifically. You know, activities like a green ports will call just things that a shipping consortia will do all the time and was clearly laid out to them in the previous legislation. As I just mentioned, the specialization exemption doesn't look at the particulars about this industry. So there's high fixed costs and volatility and demand. There's a need for frequent adjustments to capacity, to trade routes. There's an environmental impact that needs to be looked at specifically. So we had a piece of legislation that was designed to address the peculiarity of this sector. And so there could be operational cooperation and that could lead to economies of scale, better use of vessel capacity, regular savings, environmental efficiencies. And that is now gone with non-sector specific information. So the Commission has recognised that container services can be preparation services to make it full within this law. But in the UK, that guidance hasn't been as clear. So they've looked it on the basis that it can apply to joint distribution and we don't think container services are joint distributing container lines, when they form a shipping consortia, they're not jointly distributing. They're allocating spaces on vessels to serve their own singular customer. So problems with the specialization block exemption is, you know, it doesn't address the issues kind of in the market and what's happening. We've got a kind of long list of differences between the UK and the EU here. So the consortia block exemption was obviously very international. The specialization block exemption is way more domestic orientated. So the market share threshold in both pieces of legislation is different in the consortia block exemption you could use this piece of legislation if you had a 30% market share and what was great about the consortia block exemption is that it told you how to calculate your market share based on volumes and how to calculate the volumes of your whole consortia by looking at your consortia partners, volumes whether carried in another consortia, your consortia, or independently, so we had lots of guidance on how to deal with market share here. The market share thresholds are lower, it's 20%, so this means less consortia would fit into this. So that makes it you know I guess less useful because less people can like slightly bigger consortia can't use it, so we need to self-serve. So the hardcore restrictions in the consortia block exemption, like the big one is the party's never discussed pricing and market sharing. You have your own customers, you do your own sales, you do your marketing. In the specialization block exemption, there obviously are hardcore restrictions, which you can't do. But there is the possibility of joint pricing here in a more limited way and joint distribution is allowed under it. So it's slightly, slightly different. We don't know really how that would fit with shipping consortia yet. So I think if we come on to how it's been dealt with in the UK differently to how it's been dealt with in Europe. So the Commission have clearly said that we should be looking at this new law. The CMA have also mentioned it. However they've been less clear on its application to services instead of joint distribution so we don't know whether how applicable this is actually going to be in the UK to shipping consortia we haven't managed to get any more guidance from the CMA on that but time time will tell. You know the UK have followed Europe in getting rid of the consortia block exemption so So at the start of the consultation process, the CMA came out with quite bold support for the Consortium Block Exemption Regulation renewing it. So it was very positive. Then Europe made the decision not to renew. The CMA seemed to just follow that, which is quite interesting. So we think from that the UK is going to follow the EU despite it being kind of a bit more unclear about how the specialization block exemption applies to shipping consortia and their point on joint distribution which we don't think works and was different to the European guidance on it so I think we need to watch this space. Charles can you see any advantages in using the specialization block exemption, rather than the consortia block exemption? 

Charles: There is one. It was interesting to hear about the comparison between the CBER and the SBER and the UK equivalent. Indeed, there is one advantage to the Specialization Block Exemption Regulation. It lies in the fact that the latter does not contain any provision on notice or locking period. Indeed, while Article 6 of the CBER was foreseeing the right to withdraw from consortia and allowing it to subject it to a maximum period of notice as well as a lock-in period. The Specialization Block Exemption Regulation, on the other hand, provides nothing on that front. Therefore, it's possible that perhaps where a maximum of six months notice period were allowed with possibility to extend it to 24 months after a maximum initial period, what we call not a lock-in period for 36 months. Leading the whole to a maximum of five-year lock-in. It's possible that under the CBER, the longer periods, longer than five years will be allowed. But that will depend on whether this will be justified or not, will depend on the level of investment and the type of agreement. So actually, even though this is a possible advantage of the specialization block exemption regulation, it is yet to be seen if that will be allowed. Interestingly, the situation is the same in the UK because specialization agreement block exemption order also does not have any duration or locking period provisions. But now that we've covered all the aspects of the CBER and SBER, maybe Emma, you can tell us a bit more about what will the situation be going forward. 

Emma: So the change in legislation, there's a changing landscape for consortia as well. So in the market, we can see the world's two biggest lines are separating in their alliance and new alliances in 2025 we expect to form. We would be advising our clients that they need to self-assess. There's a lack of legal certainty. So all consortia and alliance agreements should be self-assessed, however big or small. We've also seen in other sectors that after block exemptions are not renewed or repealed then they there can be investigations by sector regulators and you know the commission so and you know self-assessments should should be done. I think this is the end of the the podcast so thank you for listening to Trading Straits today. If you've got any questions for Charles Sauvage or me, Emma Weeden, we'd be really pleased to hear from you. 

Outro: Trading Straits is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith’s Energy and Natural Resources or Transportation practices, please email tradingstraits@reedsmith.com. You can find our podcasts on podcast streaming platforms, reedsmith.com and our social media accounts at Reed Smith LLP. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

All rights reserved. 

Transcript is auto-generated.