Competition Policy and Parallel Trade

Table of Contents

1 Introduction

2 Competition Law
2.1 Definition of parallel imports
2.2 Relevant EC Law
2.2.1 The Treaty Articles
2.2.2 The ‘de Minimis’ Principle
2.3 Interpretation and application of Treaty Articles

3 Weltbummel AG and Bouncy Ball Ltd
3.1 The Case
3.2 Application of Article 81 to the case Weltbummel / BBL
3.3 The possible outcome

4 Conclusion

Bibliography

Appendices

List of Abbreviations

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1 Introduction

Today’s highly competitive environment is characterised by an internationalisation of business activities. More and more small and medium enterprises take the first step and operate globally beyond national boundaries. Huge companies aim to concentrate activities due to high cost pressures etc. Mergers and Acquisition of “Global Players” become more and more important. In such an environment, a sophisticated competition law is indispensable.

Competition law ensures that economic operators do not “prevent, distort or restrict competition” by running their businesses. Moreover, it inhibits monopolists in abusing their dominant market position in order to protect potential competitors and / or customers.^[1] According to Craig / de Burca, competition law has three objectives. It should (1) increase the efficiency, (2) protect consumers and smaller companies and (3) continue the creation of a single European market.^[2]

Chapter 2 of this assignment addresses Question 1 and deals with Treaty Articles which are used to stop undertakings hindering parallel trade. Moreover, examples of the application and interpretation of the provisions by the European Court of Justice (ECJ) are given. Chapter 3 answers Question 2 and deals with a case of two companies which are investigated for infringements by the European Commission. At the end, a possible decision of the Commission is anticipated.

2 Competition Law

2.1 Definition of parallel imports

The term “parallel trade” refers to goods produced in one Member State and exported into another Member State by using other distribution channels outside the manufacturers official distribution system. Companies might benefit from using their own distribution system because this enables them to exploit price differences of different countries resulting from national differences in consumer tastes and behaviour. However, it might be beneficial for other companies to arbitrage the price differences by purchasing the product in low price countries and exporting them to countries in which the product can be sold at a higher price. This process is called “parallel trade” respectively “parallel importation”.^[3]

Manufacturers might protect their sales agents from other competitors by hindering the market penetration of their products through other distribution channels. Furthermore, manufacturers might try to inhibit parallel importation by prohibiting their sales agents in various countries to export the products outside their area in which they operate. In contrast to this technique, sales agents might not be allowed purchasing and importing products from other sales agents and using other informal distribution channels.

2.2 Relevant EC Law

2.2.1 The Treaty Articles

The Treaty of the European Community contains several Articles which are used to stop undertakings inhibiting parallel trade.

Article 28

Article 28^[4] deals with the prohibition of quantitative restrictions on imports and all measures having equivalent effect between Member States.

Examples of quantitative restrictions are quotas as well as import and export bans, which are mostly seen as non-proportional reactions to the restricted trade in the European Union. Measures which are equivalent to these restrictions are mostly defined by important case decisions made in the past. These are illustrated by court decisions issued in Dassonville Formula, Cassis Principles, and Keck cases.^[5]

Court rulings mandated that goods legally produced and marketed in one Member State should not be prohibited in another Member State. Restrictions were defined by directly or indirectly, actually or potentially hindering intra-Community trade.

Article 30

Article 30^[6] contains the derogations for restrictions of imports and exports. The Article holds that certain restrictions may be “justified on grounds of public morality, public policy or public security; the protection of health and life of humans, animals or plants; the protection of national treasures possessing artistic, historic or archaeological value; or the protection of industrial and commercial property.

Article 81

Article 81 (1)^[7] prohibits all agreements between undertakings, decisions by associations of undertakings and concerted practices, which may affect intra-community trade and which are suitable for preventing, restricting or distorting competition within the common market. The term undertaking is not legally defined but interpreted by the Commission and the ECJ. According to these interpretations, included are all legal and natural persons who carry out economic and commercial operations.^[8] The legal status and their sources of finance are not relevant. Examples of undertakings are companies, partnerships, trade associations, individuals, sole traders and state-owned companies which are engaged in economic operations.^[9] A group of organisations which have an economical link, for instance a parent company and its subsidiaries, can be regarded as a single undertaking. The operations of the subsidiaries are attributed to the parent company when the market policy of the parent has been followed. Undertakings located outside the EC are covered by this article too, when their operations have an effect within the EC regardless of the location of the collusions. Article 81 (1) covers all agreements regardless of its form. Hence, written and oral agreements between at least two parties are considered to be relevant. Decisions by associations of undertakings refer to trade associations which coordinate their activities. According to the definition of the ECJ, concerted practices are a form of cooperation between undertakings which aim to influence the market behaviour.^[10]

Prohibited agreements or practices are purchase or selling price fixing, limiting or controlling production, dividing markets or applying dissimilar conditions for similar transaction to different trading parties.^[11]

Article 81 (2) states that all agreements and decisions which infringe Article 81 (1) are invalid.

Article 81 (3) identifies exemptions for Art 81 (1). Agreements, decisions and concerted practices of undertakings are permitted by the commission if four conditions are fulfilled:

1. it 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. and the agreement, decisions or concerted practices do not end the competition in that product sector.^[12]

[...]

^[1] Horspool, p. 325

^[2] Craig / de Burca, p 936 / 937

^[3] http://europa.eu.int/comm/competition/general_info/p_en.html

^[4] for further reading see appendix I

^[5] Cp. Horspool, Margot, Page 301

^[6] for further reading see appendix I

^[7] for further reading see appendix II

^[8] Horspool, p. 327-328

^[9] Craig / de Burca, p 939

^[10] Horspool, p. 327 - 328

^[11] Horspool, p. 330

^[12] Craig / de Burca, p. 964