Competition Law: NKK and ARI - Case Study Example

Competition Law Part I Facts of the Case: The case revolves around the growing Robotics Industry of Europe where key players are currently undergoing extensive research and development activities. In the case at bar, we two competing companies, the NKK which is a Japanese conglomerate with shares quoted on the Tokyo Exchange and Advance Robotics, Inc. (ARI) which a US privately-owned company. Both companies are deeply involved in development, manufacture and sale of industrial robots and provide services connected with industrial robots. Industrial robots are envisioned in the future to be integrated as agents is symbiotic manufacturing systems.1 “Robots as assistants at work and increasingly at home will perform tasks that would be impossible, unsafe or unhealthy for a person to attempt.”2 NKK and ARI are market leaders in the field of “factory automation robots” (FARs)3 which are currently used in mass production industries. Currently data provided in our case shows that NKK and ARI are market leaders whereby none of their many competitors have a market share in any segments of FARs in excess of 10%. Issues of the Case: The issues involve in this case the proposed “cooperation” between the two companies. There are three major areas upon which the two companies agree to cooperate. The following discussions of the case shall take each issues into considerations based on existing laws and regulations. 1. The first provision of the proposed agreement purports mutual exclusively between the two companies. According to the proposed agreement between the two parties, NKK will stop manufacturing FARs for final assembly for motor vehicles and will buy its entire requirement solely from ARI and ARI will manufacture only for NKK. In terms of product disposal and pricing, NKK and ARI agreed to sell their products independently with the agreement that they will both “price competitively”. This arrangement is valid for seven years subject to provisions on earlier termination on grounds of “fundamental disagreements” between the parties or if there are any major technological changes in the product. According to Article 81 Section 1 of the EC Treaty4, “the following shall be prohibited as incompatible with the common market…(a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.” Note that provisions of the UK Competition Act of 19985 closely follow these provisions and compliance with these provisions would also mean compliance with the UK law. Based on the aforementioned provisions of the law, the proposed agreement between NKK and ARI are in direct contravention thereof. Under the first prohibition of “directly and indirectly fix purchase or selling prices” the fact that both parties did not specifically agree on the amount to be imposed for the product, there is an implied setting of the price in the clause where they agreed to “price competitively”. Furthermore, on the prohibition against “fixing purchases price and other trading conditions”, it can be clearly inferred that the proposed agreement of the two companies violates this provision of the law. As outlined in the proposed agreement, the clause which said “subject to a minimum purchasing obligation and for prices to be calculated according to a pre-agreed formula for valuation of work” would fall under this prohibition. Although under different circumstances such in the case of made to order goods, this pre-agreed price is valid, the fact that NKK and ARI are market leaders in their industry, being well ahead in terms of research and development, there is a big possibility that such agreements would lead to unfair competition where the giant companies would dictate the market. Note also that under the given statistics of this case, none of the other competitions hold more than 10% of the market share, thus, these two companies have great amount of market influence. Not all exclusive contracts of supply and purchase are abusive. “Legal and de facto exclusivity”6 does not necessarily purport that there is abuse involved. A showing of good objective justification and similar requirements would often exonerate the parties involves. Under the Council Regulation on vertical agreements, the courts have acknowledge the need for companies to sometimes establish exclusive distribution agreements, and such agreements are allowed under the block exemption7. However, in our case, the proposed agreement of the parties is quite too to exclusive as to exclude other players in the market which would make the whole proposal a likely vehicle for abuse which is clearly prohibited under Article 82. A point of concern should also be raised on the fact that the proposed agreement is contrary to provision of Article 81 (1) which prohibits “ limit(ing) or control(ling) production, markets, technical development, or investment; (c) share markets or sources of supply”. The proposed agreement would limit production in the sense that there is an exclusive buyer/seller relationship between the two companies. ARI will only manufacture what have been specifically ordered by NKK. It also contains provisions of severance with ties to long-term business partners, which is not economically sound. We must always remember that competition is not just about laws but also more on economics. According to Whish (2001), “Competition law is about economics and economic behaviours, and it is essential for anyone in the subject – whether as a lawyer, regulator, civil servant or in any other capacity – to have some knowledge of the economics concerned”. As the main sources of the UK competition law are Competition Act of 19988, and the Fair Trading Act of 19739, it therefore worthy to note that these laws are anchored on the principles of economic advancement. We simply cannot isolate the application of the law with the economics of things. However, in the case of Matra Hachette v. Commission (1994), the CFI states that as a matter of law, there are no anti-competitive agreements, which could not be eligible for exemption. Section 3 of Article 81 provides for these exemptions as follows “The provisions of paragraph 1 may, however, be declared inapplicable in the case of (a) any agreement or category of agreements between undertakings (b) any decision or category of decisions by associations of undertakings (c) any concerted practice or category of concerted practices…” provided that such “contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit… and which does not: (a) impose on the undertakings concerned restrictions, which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.” Will the agreement between NKK and ARI qualify under this provision of the law? Does the proposed agreement between the two qualify under as an “undertaking”? By definition under the case of Hofner & Elser v Macrotron GnbH (1991) and undertaking means, “every entity engaged in an economic activity regardless of the legal status of the entity and the way it is financed.” Such broad definition encompass just about anybody who would fall within such category, including NKK and ARI in our case. However, in European Night Services (1995), the CFI said that “account should be taken of the relevant conditions in which [an agreement] functions, in particular the economic context in which the undertakings operate, the products or services covered by the agreement and the actual structure of the market concerned.” The phrase of Article 81 Section 3 which states that “contributes to improving the production or distribution of goods or to promoting technical or economic progress..” gives an impression that exemption could only be granted if there is a clear showing that it is for public benefit. In Metropole Television v Commission (2001), the court reiterated this interpretation of the law where exemptions can only be granted “in the pursuit of public interest.” In our case, there is no clear showing as to how such agreement between NKK and ARI would directly or indirectly benefit the public since the agreement is premised on the fact that ARI and NKK found it mutually beneficial in business context to pool their technical resources. By my opinion, although there may be some benefits to the public due to the hastening of research and development outputs, this beneficial effect is over-shadowed by the fact that the two market leaders would eventually become a cartel10 in an oligopoly11. Such scenario would not be beneficial to the public at all as the leading companies would now be dictating the production and prices of commodities. Article 82 of the EC Treaty prohibits the “limiting (of) production, markets or technical development to the prejudice of the consumers”. Another aspect that must be given attention is the condition set forth in the exemption in Article 81 EC Treaty is that it prohibits “such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.” Take note that the premise of the proposed agreement can be traced again on the issue of mutual benefits of parties, the fact that they are fully aware that there are no other manufacturers of FARs who are as advanced as they are in the research and development for FARs. Several competitors are working on the same field but they are still approximately two years behind NKK and ARI in terms of technological research. With the proposed exclusive transaction between the two market leaders, there is great risk of totally eliminating competition, as they will not have the monopoly of mass-producing the technology. Article 82 of the EC Treat provides that “Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited…” As market leaders NKK and ARI are in the position to eliminate competition, thus it is crucial that they not exercise such power over their competitors either directly or indirectly. Although the law does not prohibit dominance per se, the abuse thereof is considered illegal. Joint or collective dominance12 as the case of NKK and ARI should be prevented. Wherefore, on the proposed first provision of the agreement, I would advice NKK and ARI not to pursue the same since it will violate the law. I agree fully with the decision of a foreign case, the North Pacific Railroad Co v. US (1958), when the Supreme Court of the United States aptly summarized this principle through its decision in when the court said “ There are certain agreements which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.” 2. The second provision of the proposed agreement states that ARI will abandon its efforts to develop or manufacture reactive FARs for producing engine and gearbox sub-assemblies and will form 50-50 joint venture with NKK to build such products. ARI and NKK will now purchase their requirements from the joint venture for resale at “competitive prices”13. Under this provision, there is clear showing of pooling of resources and technical expertise. In my opinion, this is acceptable as it will now fall under the provisions of the EC Merger Regulations.14 Under the guidelines for application of Article 81 of the EC Treaty, it is necessary tot to make an assessment of the likely impact of inter-technology competitions and intra-technology competition. It is therefore necessary “to assess to what extent the agreement affects or is likely to affect … competition on the market.” The very purpose of the technology development is to provide conform and convenience to the public. Such research and development initiatives have been set-up to address similar opportunities and socio-economic challenges15. It is therefore very desirable to delve deeper into the prospects of Joint Venture be further explored. I would therefore recommend to ARI and NKK to pursue this section of the proposed agreement and form a joint venture company, which shall function independently. A market concentration16 will then be established which is beneficial to the public as well as forge healthy competition. The creation of the Joint Venture would be the best alternative of ARI and NKK at this point to avoid the constraints of Article 81. The proposed conditions of Joint Venture where it will be free and not obliged t source raw materials and other inputs from either of its parents if it thinks this would be advantageous is clear indication that the JV will be functioning independently. This is highly desirable in order to avoid undue influence, which may lead to unfair competition. However, the fact that there are still restrictive clauses in this provision such as “ARI will not be free to sell this type of FAR to a number of customers in the EU on reserved list produced by NKK, to whom sales may only be made by NKK” seem out of context if talk about full independence. I therefore recommend that this sentence should be struck-out from the proposed agreement. Both parties should still maintain business independence as their relationship is only limited to the JV of producing FARs and not set marketing restrictions, which may prove to be detrimental to one of the parties in the long run. Under Article 81(1) it is prohibited to “apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage.” A similar provision in Article 82(c) which provides for prohibition against abuse by “applying dissimilar conditions to equivalent transactions with other trading parties…” By imposing restrictions of ARI by limiting its clientele to those, which are not under the list of NKK, is clearly detrimental to the interest of ARI. I directly contravenes Article 81 (1) and is subject to the prohibitions on grounds of abuse in Article 82( c). This should not be countenanced. Wherefore, my advice to ARI and NKK in line with the second proposed provision of the agreement is that it is in their best interest to pursue the proposal of the Joint Venture. However, the restrictions attached to the agreement should be deleted. The Joint Venture must also be fully functional and independent from controls of its parent companies. Article 81 Section 1 so prohibits the making of “conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.” Prohibiting ARI from selling the products to companies under the list produced by NKK is stretching the law too far and is not really essential in the fulfillment of the Joint Venture agreement. Furthermore, this situation is very much conducive to abuses as defined in Article 82 of the EC Treaty. 3. The third provision in the proposed agreement states, “ARI agreed that it would cease its efforts to develop robots for microchemical manufacturing users.” I believe that this should not be included in the agreement as it is clearly limiting. Article 81 Section 1 so provides that it is prohibited to “limit or control production, markets, technical development, or investment.” Restricting ARI from pursuing research and development directly contravenes this provision of the law; therefore, such agreement is illegal. Restricting ARI from doing research and development of products, which may be beneficial to the public, is contrary to the principles of “public interest” which is clearly enunciated by the court in the Metropole Case. Article 82(b) of the ECT Treat also provides for prohibition against abuses that limits “production, markets or technical development to the prejudice of the consumer.” Although ARI may have agreed on this provision without being coerced into doing so, this does not necessarily mean that abuse is absent in this case. Abuse may take many forms which the law have not been able to define up to now and it is very important that we should make an effort to avoid situations which would expose a party to abuse or undue influence. On the other hand, Article 81 (3) also prohibits “such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.” By restricting ARI from continuing R&D for microchemical manufacturing users, the agreement would effective curtail competition in that field. This clearly against and provisions of the law and should not be countenance. Such blatant curtailing could not be excused under the exemptions provided by law in Article 81 section 3 since is not in furtherance of public interest. Stopping ARI from conducting R&D for microchemical manufacturing users may hurt public interest as it will slowdown the advancement of technology in such field which is not in consonance with the thrust of the European Union to advance the field of robotics.17 Wherefore, I strongly advice NKK and ARI not to pursue this provision of the agreement as it is contrary to the business interest of ARI and may not be in line with the best interest of the public. Part 2 The Urban Search and Rescue Robots Facts: NKK and ARI are each about to launch on market an independently developed mobile urban search and rescue robot. These are “building evaluation” robots, which are capable of evaluating the condition of damaged and destroyed buildings. Such a “building evaluation” robot would sensibly be accompanied in rescue operation by a “survivor search” robot. Although NKK and ARI tried to develop this type of robot, they proved to be unsuccessful. Two other companies undertook the research and development project for “survivor reach” robot without discussion between their respective managements. Both NKK and ARI are keen of creating an “interface protocol” which will enable their robots to communicate and to cooperate with other “survivor search” robot during search and rescue operations. Although parties are keen to encourage and cooperate with as many different developers of “survivor search” robots as possible, they consider that they may want to refuse to provide interface details to developers of “survivor search” robots of whom they do not approve or whom they think will be unable to produce a good quality product. Issue: Is it lawful to refuse to cooperate with these companies, which they believe to be incapable of producing good quality product? Under Article 81(1) it is unlawful to “ apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage. “ Abuses of same nature is also specifically prohibited under Article 82 (c) where the abuse in “applying dissimilar conditions to equivalent transactions…” is specifically prohibited. The essence of cooperation is that parties will work for the common good. By sharing technologies through the interface protocols, survivor search robots and building evaluation robots could do more efficient work during search and rescue operations. The offer of NKK and ARI for interface possibilities, which can be considered an essential facility18 in this case, to producers of “survivor research” robots is laudable but this offer should be made in general not just to selected few. Such offering of the interface to only a selected few would place other manufacturers to a great disadvantage, which is what the law is trying to prohibit. The principle of equality and equal treatment in same situation is complex and intriguing principle. In the words of Advocate General Lagrange in Italy v Commission, “Nothing is more fascinating and at the same time more deceptive that equality, and justice is often based on inequality.”19 To some extent, the in area of business where there is always a stiff competition in the market, it is misleading to speak about the principle of equality as the very essence of equality in the legal context have multi-faceted meaning in different regulatory context. The EC Treaty has many specific provisions referring to equal treatment or non-discrimination in different areas20. Article 31(1) EC specifically directs Members States to make necessary adjustments in any State monopolies of commercial character so as to ensure that “no discrimination regarding the conditions under which goods are procured and marketed exists between nationals of Member States.” Article 82 of the EC Treaty also provides that “Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect the trade between states.” These provisions and others of the same nature in the EC Treaty adhere to the principle of equality. In the words of the Court in the case of Port v Hauptzollamt Harburg-Jonas (1998) “that the non-discrimination rules of the EC Treaty constitute merely a specific enunciation of the general principle of equality which is one of the fundamental principles of Community Law”. The existence of the a single market in the European Union would need a strong implementation of the equality doctrine as it will serve as “protection against distortions of competition.”21 The parameters of defining discrimination is well laid in the case of Barbara Erzberbau and Others v High Authority (1960)22 when the Court ruled that the concept of discrimination means “primarily that unequal condition are laid for comparable cases.” This situation can be clearly seen in the proposed move of NKK and ARI to withhold access to the interface protocol to those companies whom they do not approve or whom they think will be unable to produce a good quality product. However, the ambivalence of law also gives us a reverse treatment and interpretation, which would then constitute as an exemption. According to section 81 Article 3 restrictions may be allowed as long as it “contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit.” Article 82(b) also prohibits abuses that will limit “production, markets or technical development to the prejudice of the consumers.” This can be a point of justification for the exemption as there are manufacturers who are producing unreliable goods, which may do more harm than good in the long run. Decided cases also give us some basis for arguing our position in this aspect. In the case of Keck and Mithouard (1993) ECR I-6097 the principle of equality itself was used in the reverse as “safeguard for regulatory autonomy”. Therefore, we can infer that where public interest is at stake, an exemption may be given in the exercise of discriminatory cooperation. By sharing a technology which would tend to lend credence to the application of such defective technology might endanger the public especially when the subject thereof are machines which will be used in delicate search and rescue operations. As acknowledge by the Court in the case of Metro Television v Commission that an exemption could be granted in the pursuit of public interest, NRR and ARI can therefore lawfully refuse access to the interface technology those companies, under “reasonable” circumstances. What then would constitute reasonable circumstances? To date, the definition of what is reasonable is still a subject of debate by the Courts. The existence of reasonable circumstances remains a mixed question of law and fact surrounding the event. Wherefore, there are two scenarios in this case, which must be addressed differently. First, in the aspect of withholding access to the interface protocol to manufacturers or companies whom NKK and ARI do not approve must deleted as it is arbitrary in nature. Access could not be subject to simple whims and caprices of the granting party. NKK and ARI simply cannot legally withhold access to the interface protocol just because they do not like the company requesting for such access as they are already granting same access to similarly situated entities. On the second scenario where NKK and ARI would like to withhold access to companies whom they think are unable to produce a good quality product can be validly implemented provided that strict quality standards and control are implemented to ascertain whether or not compliance had been properly met. Otherwise, the absence of clear guidelines would negate the claim that the company asking for access is not producing good quality products. Let us always remember, “similar situations shall not be treated differently unless differentiation is objectively justified.”23 Bibliography Books 1. Klien J., (2000) The War Against international Cartels: Lessons from the Battlefront, in B. Hawk ed. International Antitrust law and Policy, New York; Juris Publications 2. Massey P. (1996): Reform of EC Competition Law; Substance, Procedures and Institutions in B. Hawk (ed) International Antitrust policy, New York: Juris Publication, reproduced in B. Hawk (ed.) (2002) Reform of EU Competition Law, New York: Juris Publications. 3. Whish, R. (2001); Competition Law, 4th Edition, London: Buttersworths, Laws and Regulations 1. Commission Notice. Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements. Available online at http://europa.eu.int/eur-lex/pri/en/oj/dat/2004/c_101/c_10120040427en00020042.pdf last accessed April 12, 2006 2. Council Regulation (EC) 4064/89, OJ (1989) L 395/1, (1990) 4CMLR 286, corrigendum OJ (1990) L 257/13 3. Council Regulation (EC) No. 139/2004 online available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2004/l_024/l_02420040129en00010022.pdf 4. EC Treaty Article 82 5. EU Commission (1997) Green Paper on Vertical Restraints in EC Competition policy, Brussels European Commission 6. UK Enterprise Act 2002 online available at http://www.dti.gov.uk/ccp/enterpriseact/intro.htm Articles and Reports 1. “Spotlight on European robotics research” europa.eu.int/information_society/research/robotics/index_en.htm 2. Department of Trade and Industry (2001). A world Class Competition Regime, London;HMSO 3. Jan Wouters (2001) Constitutional Limits of Differentiation: The Principle of Equality online available at http://www.law.kuleuven.ac.be/iir/nl/wp/WP/WP04e.pdf 4. Massey P. (2005) Criminal Sanctions for Competition Law: A review of Irish Experience online available at http://www.compecon.ie/Clasf%20Speech.htm last accessed April 10, 2006 5. See European Technology Platform in Robotics online available at www.roboticsplatform.com last accessed April 11, 2006 Cases: 1. 13/63 Italy v. Commission (1963) ECR 190 2. Airtours plc v Commission of the European Communities. Case T-342/99 3. Alhstrom v Commission, (Wood Pulp) [1988] ECR 5193 4. Barbara Erzberbau and Other v High Authority (1960) ECR 173, 192 5. Case 13/63 Italy v. Commission (1963) ECR 190 6. Case 27/76, United Brands Company and United Brands Continental v. Commission [1978] ECR 207 7. Case IV/M53, Aerospatiale- Alenia/de Havilland, [1992] CMLR M2 8. Case T-17/93 Matra Hachette v Commission (1994) ECR II-595, para 85 9. Cases 100/80 etc. Musique Diffusion Francaise SA v. Commission (1993) ECR 1825 10. Europemballage Corp and Continental Can Co Inc V. Commission (Case 6/72) [1973] ECR 215 11. Hofner and Elser v. Macroton GmbH C-41/90 (1991) ECR I-1979, (1993) 4 CMLR 306 12. Joined cases 17/61 and 20/61 Klockner-Werke & Hoesch v High Authority (196) ECR 325 at 345 13. Keck and Mithouard (1993) ECR I-6097 14. Metro v Commission 26/76 (1977) ECR 1875, (1978) 2 CMLR 1 15. Metropole Television v Commission T-112/999 (2001) 5 CMLR 1236 16. Northern Pacific Railroad Co. v, US, 356 US 1 (1958), 5 17. Port v Hauptzollamt Harburg-Jonas (1998) ECR I-1023 18. Tepea v Commission Case 28/77 (1978) ECR 1931, (1987) 3 CMLR 204 19. T-68/89 Italian Flat Glass (1992) 5 CMLRep 302 20. Commission Notice on Access Agreements in Te Telecommunications Sector, OJ 1988 C265/3, para. 68 21. Van de Bergh Foods, OJ 1998 L246/1 Read More