How Should We Deal with Increasing Regulation of the Economy?

28.10.2021 / Tschudin Michael, Walti Beat

When state regulators intervene extensively in the economy – as they are doing in connection with the Covid‑19 crisis – it is more important than ever to recognise legal risks and opportunities.

We are seeing a general trend toward greater regulation of the economy. Entrepreneurial responsibility is increasingly being defined and 'steered' in laws. Reluctance about government intervention in the power of the market actually seems to be disappearing in the current Covid‑19 era.

Instead of concise regulatory policy, laws proposed by interest groups are currently more successfully communicated and implemented politically. The motion on foreign direct investment which was approved by the Swiss parliament is a good example of this. It involves more a perceived need to create a tool for taking action against unpopular direct investments by the Chinese in Switzerland than a discussion of substance. The slogan seems to be 'Don’t just stand there, do something!' This may be popular, but it can have practical consequences that are difficult to predict.

Against that background, a continuation of or even an increase in regulatory activity must be anticipated.

Risk-based approach: more responsibility for companies
From an advisor's perspective we see a general trend toward greater regulation of both individual sectors and the economy as a whole. One current example is the revision of the Swiss Data Protection Act. The revision includes most of the current European concepts, whereas Switzerland intention is to get recognized by the EU as a country having an equivalent level of data protection. The Act will apply to everyone, even though the stricter approach regarding data protection matters was originally aimed at a few big tech companies.

One response to this regulatory vagueness of the Act is what is known as the risk-based approach. Data protection requirements are tempered somewhat when the risks related to violating the privacy of data subjects appear to be minor. However, each company must weigh the options itself – at its own risk.

That means a company must be proactive and independent in ensuring compliance with the requirements and also decide for itself what requirements are even applicable and what form they take. Note that the state is not delegating any authority and instead is imposing greater responsibility on companies. However, this conceptual issue was hardly discussed during the parliamentary debate. The only thing that was disputed toward the end was the concept of high-risk profiling – an unclear concept with little value in practice.

Many questions remain unanswered
If the Act itself does not even contain any clear answers, the courts cannot be expected to offer concise practices anytime soon. We must remember that while we lawyers are able to rely on a large store of experience with judgements when interpreting and assessing contracts, there is only little corresponding case law in various areas of economic regulation.

For example, Switzerland has had an Antitrust Act worthy of the name only since 1995. Moreover, major decisions by the Swiss Competition Commission were not taken until after the introduction of direct sanctions in 2004. Given the lengthy investigations and appeals proceedings in certain cases, it is no surprise that important questions were not answered by the Federal Supreme Court of Switzerland until recently. Because Switzerland does not generally rely on precedence and because legal practices generally develop over several judgements, many questions remain unanswered. This is also the case because courts increasingly focus on individual cases and fail to pay much if any attention to regulatory effects going beyond the case to be decided.

The Federal Supreme Court of Switzerland recently ruled for the first time that a manufacturer’s price recommendations that are followed more than 50 percent of the time are not unilateral recommendations but rather harmful, sanctionable retail price maintenance agreements between manufacturers and dealers. That case comes from the distribution of pharmaceuticals, and certain particularities of the specific case were also taken into account.

We only will know for sure, whether this case is generally applicable for all economic sectors, once the Federal Supreme Court can rule on the next corresponding individual case, which will take years. This resale price maintenance case is particularly noteworthy because the Swiss Antitrust Act was applied more strictly than is the corresponding requirements under EU law. This certainly was not the thinking of parliament when it instituted the Antitrust Act as a minimum standard nolens volens in 1995 following the negative vote on joining the EEA.

Dealing strategically with legal risks
What does this mean for companies and their legal advisors? Legal risks are part of a company’s strategic orientation. Companies can no longer consider reactive measures taken in response to legal violations to be adequate. Neither is a lawyer’s work done once a specific legal case has been closed. Instead, legal advisory services must also be oriented to the future – in three respects:

First, the fulfilment of legal requirements (compliance) must be handled strategically. Depending on the risk concerned and independent of support from public officials, particular risks must be identified and mitigated in a process-oriented way. We often see in our practice how scrupulous people can be when preparing their pension contribution statements while failing to recognise risks that could have far more serious financial consequences. A compliance programme can never be set on auto-pilot and instead must be critically scrutinised, including with respect to the use of funds and to focus.

Second, legal risks must be actively managed. This means that effective risks must be recognised early on. Recognised risks must be shared to the extent possible – internally by means of the appropriate procedures and externally by way of contractual safeguards in particular. This can contribute to cost efficiency and will also ensure cooperation if worst comes to worst.

Third, legal opportunities should be identified and seized. Legal risks can often – if approached properly – be transformed into opportunities. Well-developed compliance can offer a competitive edge and also represent a barrier to entry by competitors. Moreover, anyone who knows the rules of the game has a better chance of winning, whether in the area of public procurement law, in the event of unfair competition, or where regulations for specific sectors are concerned. Legal requirements may also be helpful in dealings with suppliers and perhaps even competitors. For example, the upcoming inclusion of relative market power in the Swiss Antitrust Act may have a profound effect on negotiating power between the supply and demand sides in many different respects – independent of either side’s market share.

These changes may be strategically relevant for many companies both large and small, and the highest-ranking management bodies must engage with them. There will be no clarity about how to minimise risks and maximise opportunities until there has been an in-depth discussion of the issues. 'What is not forbidden is allowed' is definitely passé as a business principle.

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The information contained in this letter is for general information purposes and does not constitute legal or tax advice. In specific individual cases, the present content cannot replace individual advice from expert persons.

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