Competitive Law within the European Union - Art. 81 EC Treaty

Structure

1. Introduction - What is Competition Law good for ?

2. Requirements of Art 81
2.1 Undertakings
2.2 Agreements and Concerted Practice
2.3 The de Minimis Principle
2.4 The Agreement’s Objective
2.4.1 Exemptions under Art 81 (3) - who shall decide ?
2.4.2 What is considered to be harmful ?
2.4.2.1 The ECJ’s approach
2.4.2.2 The Commission’s approach
2.5 Exemptions under Art 81 (3)
2.5.1 Individual Exemption
2.5.2 Block Exemption

3. Vertical and Horizontal agreements
3.1 Horizontal agreements
3.2 Vertical agreements
3.2.1 Does is make sense to condemn vertical agreements ?
3.2.2 Examples of vertical agreements
3.2.2.1 Exclusive Distribution Agreement (EDA)
3.2.2.2 Exclusive Purchasing Agreements (EPA)
3.2.2.3 Franchising
3.2.2.4 Selective Distribution

1. Introduction - What is Competition Law good for ?

Consumers achieve maximum welfare if perfect competition dominates the society they live in. Cartels, misuse of monopolies, the building of too strong monopolies and unjustified state aids may abolish perfect competition. This leads to less welfare and should therefore be prevented by the authorities ⁱ.

2. Requirements of Art 81

Art 81 forbids agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market. In the following this rule shall be examined in detail.

2.1 Undertakings

It is questionable what can be understood as an ‘undertaking’ The Commission has taken a broad view and encloses all entity that is engaged in economic activities into the term ‘undertaking’. In Polypropylene the Commission held that legal personality is not required for being an ‘undertaking’ in the sense of the Treaty.ⁱⁱEvery entity engaged in economic activity is an undertaking, not taking the legal status and the way it is financed into consideration ⁱⁱⁱ.

Even state-owned corporations or the State itself may be controlled by Competition law if they or it act as private undertakings. E.g. if the police buys new cars it acts like private undertakings do. If the different

Minister for Internal Affairs in the German L ä nder agree to force VW to offer them a certain price, they might form a cartel.

Two undertakings that are able to proof that they are a single unit don’t fall within the scope of Art 81 because agreements ‘between’ them are regarded as internal allocations.

After having found out which undertakings fall within Art 81’s scope, we can switch over to the question which requirements must be fulfilled for that the European Union can get involved. The Member States still have own cartel authorities that are concerned with state-internal competition.

Agreements between companies situated in different Member States are clearly covered by the Article. But even an agreement between two companies situated in the same Member State can fall under it. In STM the ECJ constructed a very broad definition by saying that it only has to be possible for the agreeing parties “to foresee with a sufficient degree of probability on the basis of a set of objective factors of law or of fact that the agreement in question may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States.“^iv

The same rule applies to companies outside the Union. If two companies in non-EU East-Europe have an undue influence on the market in EU-rope they can fall within the scope of Art 81. The ability of the Community to assert such ban can not be examined in a short summary.

2.2 Agreements and Concerted Practice

Unsurprising, the Commission has taken a broad view of what an ‘agreement’ is. Usually cartels are not set up in a written contract which is deposited in a notary’s office or at court. That’s why oral agreements will fall under the provision as well as agreements that are not legally binding.

The ECJ has mostly followed the Commission’s view. In ACF Chemiefarma it found that gentleman’s agreements are agreements under Art 81 ^v. The following four features were inspected in that case:

(a) fixing of common prices
(b) determination of sales quota
(c)sharing out of markets
(d) ban of other production methods

Furthermore the court did not accept the parties pure assertion that they had given up these practices. This assertion must be proved by the parties.

Very often, no proof for an agreement can be found. If no two companies’ chairmen were stupid enough to pay with credit cards in the same hotel and no secretary was fired and went to the cartel authority straight afterwards the Commission does not find any proof. It then tends to look at the price structures of different companies to proof the existence of cartels. If the prices go up and down even, an agreement or at least a concerted practice can be suspected.

This technique has been criticised, especially if it is applied in oligopolistic markets ^vi. The reason for this criticism is that firms in such markets mutually depend. As soon as this is recognised by the competitors no firm tries to get a higher market share by lowering its prices. The reason is that if they would do so the competitors would be forced to lower their prices too and a price-collapse on a downward spiral with no end would be the result. If, on the other hand, prices would be raised by a single company, its consumers would switch their trade to one of the company’s rivals. These considerations make it plausible why prices tend to be uniform in oligopolistic markets, some economists and lawyers state.

Four main arguments are invoked against this theory ^vii:

The theory overemphasises the interdependence of firms in an oligopol. The competitors might not discover the fall in prices in short time and the price-cutter could make enough money to win a price-war. The picture of markets structures that is presented by the theory is too simple. Consumer loyalty might play a role as well as other advantages only one firm offers, like after sales service. Consumers are not as likely to switch to another firm as it is stated by Scherer and others.

Thirdly, the oligopoly-theorists can not explain why competition is intense in some oligopolistic markets.

Finally, Wish argues that prices would always be steady if the theory would be right. But prices increase from time to time. The only possible explanation why prices rise nearly at the same time is that one firm starts and the others increase their prices too. This ‘signal-theory’ could explain how prices are raised without collusion. Wish does not think that this is convincing. Furthermore a concerted practice could be established by ‘signalising’.

In ICI v. Commission the ECJ first gave a definition of what a concerted practice is. A concerted practice does not have all elements of a contract, but may inter alia arise out of coordination between the cartel members. The coordination becomes apparent from the behaviour of the participants ^viii. With this judgement the ECJ made clear that it does not intent to decide which theory might be the best. The Court accepts that prices may rise because the companies trade in a market that is shared by few rivals only. But it knows as well that competitors might find it exhausting to compete.

The Court examines the market situation and the increase of prices and comes to the conclusion that a concerted action can be assumed. The companies were not able to proof the contrary.

The judgement makes clear that the burden of proof shifts from the Commission to the defendants if prices rise and fall at the same time in a certain market. The companies will then have to proof that no concerted practice existed.

2.3 The de Minimis Principle

Agreements concerning goods or services do not fall within Art 81 if the market share of all the participating undertakings on the relevant markets does not exceed 5 % threshold if horizontal agreements and 10 % threshold if vertical agreements are concerned. The Commission will not, as a general rule, open proceedings against firms that fall under this doctrine.

2.4 The Agreement’s Objective

Art 81 requires that the agreement’s intention must be to prevent, restrict or distort competition. This wide definition causes problems because every contract binds the parties and therefore hinders them to run their business without the restrictions the contract imposes.

2.4.1 Exemptions under Art 81 (3) - who shall decide ?

Art 81 (3) contains exemptions to Art 81 (1). But Art 81 (3) may not be applied by the national courts. Because of that it is a moot point between judicial scholars whether and in how far a ‘rule of reason’ should be established that contains exemptions to Art 81 and can be applied by national courts. The main arguments of the advocates for a rule of reason are that the national courts must be enabled to find economic reasons for their decision and that firms need the information whether they act legally or illegally before they set up an agreement ^ix.

The opposite opinion argues that the power to decide about economic issues should not be shifted to the national courts because they were no appropriate fora for complex economic questions. The national courts should only apply Art 81 (1) if the fact that a cartel is established or that a monopoly is abused is obvious. The Commission should publish block exemption to give a clear guideline ^x.

2.4.2 What is considered to be harmful ?

2.4.2.1 The ECJ’s approach

The ECJ ruled in Soci é t é Technique Mini è re that the following factors shall be considered to decide whether an agreement is harmful^xi:

(a) nature and quantity of the products concerned
(b) the position and importance of the contract partners
(c1) the isolated nature of the disputed agreement or
(c2) its position in a series of agreements
(d1) the severity of the clauses intended to protect the exclusive dealership or
(d2) the opportunities for competitors to enter the market through parallel re-exportation.

In Consten / Grundig the Court emphasised that it wouldn’t even be necessary to go through economic figures if a whole market (in this case France) is isolated for a well-known consumer product ^xii. In the Nungesser case a difference was made between open exclusive licenses and exclusive licenses. Open exclusive licenses do not prevent third parties such as parallel importers from importing the concerned goods while exclusive licenses do so. The ECJ based its reasoning on the finding that intra-community trade is impossible under the Nungesser -agreement. The Free Movement of Goods-doctrine has an impact onto Competition law, too. If a new product is launched onto a market, an open exclusive license seems to be reasonable for the ECJ ^xiii.

2.4.2.2 The Commission’s approach

The Commission’s decision are criticised quite often because it is unwilling to follow the decisions of the CFI and ECJ. The Courts have emphasised the importance of economic analysis. Critics say that the Commission applies Art 81 (1) too broadly. Even agreements that have little or no anticompetitive effect are covered by the Commission’s decisions.

2.5 Exemptions under Art 81 (3)

It will be remembered that the Commission has the possibility to allow certain types of contracts and agreements. Four conditions must be fulfilled before the Commission grants this permission:

(a) the agreement must improve the production or distribution of goods or promote technical or economic progress
(b) consumers must receive a fair share of the resulting benefit
(c) it must contain only restrictions which are indispensable to the attainment of the agreement’s objectives
(d) the agreement may not lead to the end of competition in that product-sector

2.5.1 Individual Exemption

Individual exemptions are mainly granted in the following areas: distribution agreements, research and development specialisation in production, licensing of intellectual property and know-how, rationalisation of trade fairs and even crisis cartels ^xiv.

An example for a horizontal agreement to which the competitors had the Commission’s blessings is Bayer:

In Bayer and Gist-Brocades the Commission decided in favour of the companies that had set up a specialisation agreement under which the firms guaranteed to produce only one of the goods concerned, and supply it to the other firm. The Commission went through the contract and regarded the different requirements that are mentioned above.

2.5.2 Block Exemption

The Commission can declare a certain sort of provisions to be lawful under certain circumstances. Art 81 (1) then becomes inapplicable for these agreements. Examples will be considered under 3.2.2.

3. Vertical and Horizontal agreements

Horizontal agreements are those between e.g. two producers of a certain good, vertical agreements are those we have already looked at in 2.4, e.g. the contract between a wholesaler and a resaler.

3.1 Horizontal agreements

Horizontal agreements like price-fixing, market division or collective boycotts are nearly always regarded as harmful and no exemption can be invoked for them except for crisis cartels (see above). One can also see that they are considered as being more harmful by analysing the de minimis rule: The market share of companies that shall be punished for having agreed to a vertical agreement must be 10% while firms that infringe the law with horizontal agreements only need 5%.

3.2 Vertical agreements

There is an academic discussion about the question whether vertical agreements are harmful for the market. Both sides’ arguments shall be considered as well as some examples of such agreements.

3.2.1 Does is make sense to condemn vertical agreements ?

There are two main schools within the economic science: The first considers vertical agreements as harmless because they simply enable producers to decide how their goods shall be promoted and offered. The advocates of this opinion argue that it would be legal for the producer of a good to establish his own outlets in a Member State and to give these shops orders that f ^ix prices. If he does the same within a system of exclusive retailers his behaviour might be unlawful under Competition law because he establishes vertical restraints. There are no arguments for this differentiation, say the supporters of vertical agreements.

The second argument is that it should be possible for retailers to be sure that no concurrence will appear on their market, especially if a new product is launched. Otherwise their advertising costs will not only serve to their own benefit but also to those of competitors.

Those who are in favour of rules against vertical restraints present four arguments:

In their opinion, market disclosure might be a result of vertical restraints. Particularly in specialised markets it could be difficult if not impossible for competitors to find retailers who are not bound by agreements with the competitor.

They also fear that prices increase due to the fact that marketing has to be funded. Consumers are forced to buy a whole ‘package’ which includes marketing and after-sales service although they might want the pure product only.

Thirdly, A horizontal agreement might be hidden behind a vertical agreement.

Finally, the agreements might also prevent intra-community trade. This would be harmful, especially within the EU. Vertical restraints that grant absolute territorial protection could therefore not be tolerated.

3.2.2 Examples of vertical agreements

Some examples of vertical agreements will be examined now. The Commission has released block exemptions for themxv, except selective distribution.

3.2.2.1 Exclusive Distribution Agreement (EDA)

An EDA includes the producer’s guarantee that the other party to the contract will be the only resaler in a certain area. The aim of EDAs is to give the resaler the security that no ‘free-rider’ benefits from his marketing costs by selling the same product.

EDAs are allowed under a Commission Regulation if there are only two contracting parties and if it is an open EDA which allows third parties to enter the market from another place.

Reciprocal EDAs between suppliers of the same goods are not allowed because they could be a mask for horizontal agreements in which the market is divided.

3.2.2.2 Exclusive Purchasing Agreements (EPA)

In an EPA the distributor agrees to stock and sell only one sort of a certain product. EPAs are common between the suppliers of fuel and gas stations or beer-producers and public houses. EPAs can be harmful to competition if producers of competitive products do not find distributors that are not bound by EPAs. Therefore, the Commissions view is mainly focused onto markets where many EPAs exist. In Langnese ^xvi the CFI found that all agreements in the concerned area must be taken into consideration. If the culmination of EPAs makes it practically impossible for new domestic and foreign competitors to enter into the market, the EPA in question shall be abandoned, like the Langnese agreement.

3.2.2.3 Franchising

Franchising means that a licensee who pays a royalty to the licenser is allowed to use the company’s name, logos etc. and is obliged to stick to certain rules the franchisor sets up. The licensee sells goods that are produced by the licenser or offers services controlled by the licenser.

The block exemption covers the latter category only; it includes the following:

The licensor may forbid the licensee to seek actively for consumers outside the licensee’s territory, to deal with goods that compete with those of the licensor. The licensor may prevent others from selling the products in the licensee’s area.

The licensee may be obliged to sell or store a certain quantity of goods, to participate in training courses or fulfil certain standards in respect of presentations.

This regulation will not apply if the agreement is made between rival firms, if the franchisee is not allowed to sell products of the same quality than those offered by the franchisor (and this measure is not justified because the licensor’s reputation would be endangered otherwise) if the licensee is obliged, without objective justification, to sell goods of the licensor or someone designated by him, if the franchisor fixes resale prices or if the licensee is prevented from challenging any intellectual-property right.

Concerning the franchising systems that do not fall under the regulation the Commission decided in Yves Rocher ^xvii that a contract that forbid the franchisee to open more than one shop in his area and appointed only one franchisee per area fell into Art 81 (1).

3.2.2.4 Selective Distribution

Selective Distribution means that the producer chooses the retailers that are allowed to sell his products carefully, usually taking the knowledge and training of the employees into consideration. The following rules are not part of a block exemption. They are only guidelines for exemptions under Art 81:

(a) The product’s area must be one in which quality is prior to the price.^xviii Two groups of products fall within this requirement’s scope: Technical products such as electronic equipment ^xix or PCs ^xx and products where brand images is decisive such as exclusive ceramic tableware ^xxi.

(b) The outlet must be chosen on the basis of qualitative criteria.

(c) If a large number of SDAs exists this may not lead to a factual exclusion of wholesalers who do not meet the producer’s requirements ^xxii.

(d) Absolute territorial protection may not be granted ^xxiii.

[...]

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ⁱ A discussion concerning the general economic questions can be found in F. Scherer and D. Ross, Industrial Market Structure and Economic Performance (3rd edn., Houghton Mifflin, 1990)

ⁱⁱ Dec. 86/398,[1986] OJ L230/1,[1988] 4 CMLR 347, 402.

ⁱⁱⁱ ibid.

^iv STM[1966]ECR 235, 249.

^v ACF Chemiefarma NV v. Commission [1970] ECR 661, No 113.

^vi See amongst others F. Scherer and D. Ross, Ch. 5.

^vii Taken from: R. Wish, Competition Law (Butterworths 3rd edn., 1993), p. 469-70.

^viii ICI v. Commission [1972] ECR 619,[1972] CMLR 557, No 64 f.

^ix v. Korah, The Rise and Fall of Provisional (1981) 3 NW J Int. L and Bus. 320, 354-5.

^x R Wish and B. Sufrin, Article 85 and the Rule of Reason (1987) 7 YBEL 36-7.

^xi Soci é t é Technique Mini è re v. Maschinenbau ULM GmbH [1966] ECR 235,[1966]CMLR 357.

^xii Etablissements Consten SARL and Grundig-Verkaufs-GmbH v. Commission [1966] ECR 299.

^xiii L.C. Nungesser KG and Kurt Eisele v. Commission [1982] ECR 2015, No 58.

^xiv R. Wish (see above), p. 235-6.

^xv Reg. 1983/83[1983] OJ L173/1; Reg. 1984/83[1983] OJL173/5; Reg. 4087/88[1988] OJ L359/46.

^xvi Langnese-Iglo GmbH v. Commission [1995] ECR II-1533.

^xvii Dec. 87/14,[1987] OJ L8/49.

^xviii Metro-SB-Gro ß m ä rkte GmbH & Co KG v. Commission and Saba [1977] ECR 1875.

^xix AEG Telefunken AG v. Commission [1983] ECR 3151.

^xx IBM Personal Computers [1984] OJ L 118/24.

^xxi Villeroy & Boch [1985] OJ L 376/15.

^xxii Metro-SB-Gro ß m ä rkte GmbH & Co KG v. Commission No 2 [1986] ECR 3021.

^xxiii Bayerische Motorenwerke AG v. ALD Autoleasing D GmbH [1995] ECR I-3439.