EU Competition Law and Policy

Table of Contents

List of Figures

List of Tables

List of Abbreviations

Note

1. Introduction

2. Competition Law – A Brief Outline
2.1. The Treaty Articles 81 (85) and 82 (86)
2.2. Agreements of Minor Importance – The de Minimis principle
2.2.1. The “New Notice” C 368/ 13 2
2.2.2. The Impact on the Effectiveness of Competition Policy Interventio n 4

3. Weltbummel AG and Bouncing Balls Ltd
3.1. The Case – Their Action
3.2. The Legal Assessment
3.3. The Outcome – Worst Case Scenario

4. Conclusion

Bibliography

Appendices
1. The Treaty Article 81 (85)
2. Notice on Agreements of Minor Importance C 372 of 1997
3. Commission Notice on Agreements of Minor Importance C 368 of 2001
4. Hardcore Restrictions under the New Notice C 368
5. Tests
6. Press Notice on Competition Policy concerning de Minimis Agreements
7. Definitions
8. Weltbummel-Case

List of Figures

Figure 1: Agreements that fall outside Article 81 (1)

Figure 2: Necessary Conditions for the Application of Article 82

List of Tables

Table 1: Overview of the changes with the “New” Notice

Table 2: Overview of the Contents and Areas of Law

List of Abbreviations

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Note

I certify that this is my own work. The work has not, in whole or in part, been presented elsewhere for assessment.

Where Material has been used from other sources it has been acknowledged.

Thorben Schenk

1. Introduction

Competition between companies, governments and states within and across the global trading areas^[1] has become a vital part in this new world of less political and economical boundaries. Competition law therefore has to regulate the market powers of those who participate in the global exchange of goods and services. “There are now at least 80 systems of competition law in the world, in all continents and in all types of economies; many others are in contemplation.[...]”^[2]. It has a substantial impact upon the outline of agreements.

With Articles 81 and 82 of the EEC Treaty EU jurisprudence and the legislative bodies of the Member States (MMS) have a basis to work on this topic of immense importance. Ignoring the competition rules not seldom lead to large fines being levied by the European Commission (in July 1991 Tetra Pak was fined because of competition law infringement with a record sum of ₤52mn)^[3].

The aim of this essay is to briefly outline the scope of EU´s competition policy and laws and to give an insight into both the Agreements of Minor Importance (“de Minimis”) and the impact of Competition Law on the topic of parallel (grey) imports. The la

tter is examined on a case study given.

The basis of this essay consists of secondary literature taken from books, treaties, articles, notices or webpages. A full bibliography can be found at the end of the main part.

2. Competition Law within the EU

2.1. The Treaty Articles 81 (85) and 82 (86)

Articles 81^[4] and 82 of the EC Treaty are inseperable combined and belong together when examining EU competition law.

Article 81 prohibits all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between MMS and which intend to prevent, restrict or distort competition within the Common Market. It has been established in a number of cases decided by the European Court of Justice (ECJ) that an agreement or concerted practice will infringe Article 81(1) if the agreement or practice has an appreciable effect on competition and trade between Member States^[5]. However, Art 81 (3) contains exemptions to Art 81 (1)^[6]. The Commission has the possibility to allow certain types of contracts and agreements.

Four conditions^[7] must be fulfilled before the Commission grants this permission:

1. the agreement must improve the production or distribution of goods or promote technical or economic progress
2. consumers must receive a fair share of the resulting benefit
3. it must contain only restrictions which are indispensable to the attainment of the agreement′s objectives
4. the agreement may not lead to the end of competition in that product sector

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Figure 1 : Agreements that fall outside Article 81 (1)^[8]

The basic principle of article 82 (86) is the control of market power that is likely to originate from a single, dominant firm. This firm^[9] then abuses its dominant position in one of the ways shown below in figure 2.

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Figure 2 – Necessary conditions for the application of Article 82

(Source: Adapted from Birtwistle, T.)

2.2. Agreements of Minor Importance – The ´de Minimis` Principle

Some agreements don´t fall within the terms of Article 81 because their impact on competition or inter-state trade can be ignored^[10]. The ECJ states that “[...] an agreement falls outside the prohibition in Article 81 (1) where it has only an insignificant effect on the market [...].”

This principle is quite important. Thus, the Commission has given guidance on a number of notices. The most recent draft^[11] was published in 2001 replacing the ´old` notice on ´Agreements of Minor Importance`.

2.2.1. The New Notice C 368

Explicitly the new de-minimis notice deals only with the restriction on competition and does not deal with the effect on interstate trade anymore. It replaced the definition of ´vertical agreements` and ´horizontal agreements´ as can be seen from table 1.

Furthermore, it increases the thresholds for the application of this principle. It states that an agreement affecting trade between MMS will not appreciably restrict competition if the aggregate market share does not exceed 10% on any of the relevant markets^[12] where horizontal agreement^[13] applies; or if the market share held by each of the parties to the agreement does not exceed 15% on any of relevant market affected by a vertical agreement^[14]. Where a classifcation is difficult, the 10% threshold is applicable^[15]. Thus, market shares are used as quantitative measure.

The Notice is confined to examining the issue of appreciability in the context of competition and not trade between MMS. The Commission states that the Notice does not “quantify what does not constitute an appreciable effect on trade”.

Additionally, the Commission states that if an agreement does appreciably restrict competition it does not apply to Article 81(1) if it does not appreciably affect trade between MMS. The notice specifies that agreements between small and medium – sized^[16] undertakings (SMEs), are “rarely capable of significantly affecting trade between Member States”^[17] and that they are not caught by the prohibition in Article 81(1).

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Table 1: Overview of the Changes with the

"New" Notice

(Source: www.europa.eu.int/eur-lex/en/search/search_lif.html)

What remains unchanged compared to the old notice^[18] is that

- the notice is still not legally binding
- it still gives only guidance to the national courts,
- it is applicable to decisions and concerted practices respectively.

2.2.2. The Impacts on the Effectiveness of Competition Policy Intervention

The notice has been recently adopted. Thus, the impacts on the effectiveness can only be predicted only vaguely.

The notice aimed at “reduce[ing] the compliance burden on companies, especially smaller companies and [… enabling…] the Commission to concentrate on more problematic agreements.”

The raise of the thresholds automatically reduces the number of cases brought to the attention of the Commission. In the contrary, the wider definition of vertical and horizontal agreements and the inclusion of parallel networks on the other hand may offset this reduction. Though the scrutiny of the cumulative effects of parallel networks will force some effort its more exact definition and the threshold set may be able to accomplish a considerable reduction in cases to be decided by the Commission.

The adoption of a higher market share maximum of 10% of the aggregate market share held by all the parties to the agreement is an advantage for the market because at such market shares even agreements between competitors cannot represent any appreciable threat to competition in the meaning of Article 81(1).

The new Notice therefore recognises the economic realities that such agreements do not pose an appreciable threat to competition in the meaning of Article 81(1). Furthermore it makes use of a turnover maximum since the relationship of the undertaking to the relevant market rather than its size is the key to competition concerns, with reference to Article 81.

The introduction of a new quantitative market share test of 5%^[19] shall also increase the threats that go out from an anti-competetive agreement. This marks a big improvement on the complicated tests provided in the 1997 Notice which relied on qualitative criteria set out in various judgements of the Court of Justice. The proposed new quantitative test will provide greater legal certainty to suppliers and distributors.

The straightforward insertion of the same hardcore restrictions as in the Block Exemption Regulation (BER) is an improvement. The different wording of the regulations and the old notice left room for speculation whether certain practices would be excluded from the benefits of the notice.

The whole usefulness is based on the definition of the relevant market. Here again, the Commission is stating its theories on “how to define the relevant product market (by making reference to the test of 'interchangeable' goods in relation to their characteristics, prices and intended uses according to the average consumer) and in terms of the relevant geographic market^[20] (the area where the conditions of competition are sufficiently homogeneous to be distinguished from neighbouring areas).”^[21]

However, it is submitted that these criteria do not always contribute to legal certainty. It is often the case that undertakings are unable to identify the relevant market. This difficulty is only enhanced by entering into agreements with other parties. Furthermore, the economic tests suggested by the Commission represent only one way of reaching the appraisal of the relevant market. These criteria may collide with the attempt to create a more competitive environment which would favour sheer volume of goods on the market over efficiency.

To conclude, it can be doubted that the overall effects will be as big as the Commission may assume:

- The task of defining the share of the relevant market remains difficult for the Commission and for undertakings respectively;
- higher thresholds and wider definitions are capable of offsetting the number of cases;
- the clarification of the wording and the distinct treatment of SME’s hopefully improve legal certainty for many undertakings.

Nevertheless, only a further delegation to national courts and competition authorities respectively can significantly reduce the Commission’s work.

3. Weltbummel AG and Bouncing Balls Ltd

3.1. The Case– Their Action

BBL uses Weltbummel as exclusive agent to distribute and market their products. On the basis on the available information it is to consider that BBL and Weltbummel actively erected barriers against parallel imports of their products within (and outside) the Community.^[22]

BBL has with its exclusive distributors introduced and set up series of mechanisms aimed at implementing barriers against parallel import^[23]. Those mechanisms consisted of systematic monitoring of the movements of BBL´s goods including color coding, printing serial numbers and the investigation of instances of parallel imports.^[24] This was done in the purpose of tracing back the origin of the products which was found in internal documents either. In addition, the reporting and investigating of parallel imports^[25] in oder to identify them and cut off suppliers is a result of concerted practice between BBL and its distributor and reinforces the ban on parallel exports which was done in concert (and not as unilateral action) with its competitiors and was part of a distribution or sales agreement. Those barriers had as their direct object the restriction of trade between MMS^[26].

The effect of hindering others in exercising parallel trade is apparently to maintain price differentials between MMS. Furthermore, the notification of parallel imports and the notification of their competitors´ prices aimed at the goal of hamonising prices within a territory with the intention of doing it with any other competitor if this was necessary.

They furthermore set up a distribution system for total territorial protection and for aiming at excluding parallel trade. This was stated in an unwritten condition of sale prohibiting the distributor from exporting or supplying to any company likely to export

3.2. The Legal Assessment

There are some requirement to the application of Article 81 in this case^[27]:

- At least one company must be MMS;
- trade between MMS must be affected;
- an agreement between at least two parties has to be agreed upon;
- breach of Article 81.

This first two criteria can be seen as to be fulfilled. The companies itself are located in different Member States^[28] and additionally the products are sold in more than one Member State.

Trade between MMS was affected by the general export ban and the barriers errected by BBL. They had the direct object and effect of restricting competition between MMS which constitutes a hindrance of the intergration of the Common Market.

The third criteria is that there has to be an agreement which is the exclusive distribution agreement between the two undertakings and several concerted practices to monitor the movement of goods. The internal memorandum must at least be seen as evidence for the intention to implement concerted practices^[29]. Agreements between undertakings in two or more MMS concerning trade are by their nature capable of affecting trade. Such agreements, no matter if they restrict competition or not, have a direct impact on patterns of trade between MMS.^[30]

And finally, there is a restriction of competition to be in breach with Article 81. Generally, all agreements restrict competition in one way or the other and should therefore be prohibited.

The only given information in this case is that the agreement grants territorial protection to Weltbummel. Territorial protection is generally prohibited and seen as a hardcore restraint. But under specific circumstances even this could be permitted. As the case lacks background information about specific circumstances it can be assumed that there is no reasonable ground for the territorial protection. Hence, the agreement will not enjoy an exemption of Article 81 and will normally be in breach with competition law and therefore be prohibited.

Table 1 : Overview of the Contents and Areas of Law

[...]

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^[1] e.g. NAFTA, MERCOSUR, EEA, EU

^[2] see: Whish, Richard: Competition Law

^[3] see Singleton, S.: Introduction to Competition Law, page 3

^[4] for further reading refer to appendix 1

^[5] This principle was first established in case 5/ 69 Völk v Verwaeke [1969] ECR 295

^[6] But Art 81 (3) may not be applied by the national courts. Because of that it is a critical 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.

^[7] taken from: Craig, P.; de Búrca, G.: EU Law, page 964

^[8] taken from: Whish, R.: Competition Law, page 120

^[9] it is not necessarily a single firm but can also well be more than one undertaking

^[10] see appendix 3

^[11] Notice C 368, see appendix 3

^[12] see appendix 7 for definition

^[13] ibidem

^[14] ibidem

^[15] In addition to that it makes also clear that the principle applies even if the above market share figures are exceeded by no more than 2% during two succeeding calendar years

^[16] see appendix 7 for definition

^[17] see Commission Recommendation 96/ 280/ EC

^[18] see appendix 2 for further reading

^[19] see appendix 3

^[20] see appendix 7 for definition

^[21] taken from: http://www.legal500.com/devs/uk/ec/ukee_013.htm

^[22] for a brief outline of the case refer to appendix 8

^[23] statet in the internal memorandum between BBL and its competitiors that reveal an agreement of concerted practice as it is ´better to co-operate than to compete`

^[24] see table 3

^[25] ibidem

^[26] against the intergration of the Common Market

^[27] ibidem

^[28] Weltbummel in Germany, BBL in England

^[29] which already seem to be implemented regarding one competitor

^[30] see: Draft Commission Notice Guidelines on: The effect on trade concept contained in Articles 81 and 82 of the Treaty, page 14