The Modernization of Article 101 and 102 TFEU - Essay Example

The Modernization of Article 101 and 102 TFEU and Merger Policy Over the Last Ten Years Introduction The EU’s modernization of Articles 101 and 102 TFEU and merger policy over the last decade are designed to provide for efficient economics, protection of the consumers’ welfare and to foster a competitive environment.1 A principle step in this direction was by virtue of the adoption of Regulation 1/2003 on the Implementation of the Rules on Competition Laid Down in Articles 81 and 82 of the Treaty also known as the Modernization Regulation.2 Articles 81 and 82 are now Articles 101 and 102 of TFEU.3 Another key step in the EU’s modernization of Articles 101 and 102 TFEU overt the last decade was the implementation of Merger Regulation 139/2004 which is applicable to concentrations having an EU characteristic.4 Essentially each of the provisions form the basis of the EU’s competition policy which is essentially a method for establishing the internal common market regime.5 This paper provides a critical appraisal of the EU’s modernization of Articles 101 and 102 TFEU and merger policy over the last ten years by analyzing these areas of the EU competition laws and policies. The first part of this paper will analyze Regulation 1/2003 and Articles 101 and 102 of TFEU. The second part of this paper will analyze Regulation 139/2004. I. Regulation 1/2003 and Articles 101 and 102 TFEU Essentially Regulation 1/2003 provides the methods by which Articles 101 and 102 of TFEU can be enforced. The Modernization regulation abrogated the centralized method for effecting exemptions on an individual basis relative to the enforcement provisions contained in Article 101 (3) of TFEU and simultaneously decentralized Articles 101 and 102’s enforcement regime by conferring upon national courts and their corresponding competition authorities in collaboration with the European Commission the authority interpret and apply the provisions.6 These changes were very important because previously, Regulation 17/62 provided the Commission with virtual autonomy in enforcing competition policies and rules and also in determining the wider policies that were to be adopted by the “centralized individual regimes”.7 As Cengiz explains, the abrogation of the centralized individual exemption regime and the adoption of a decentralized enforcement process: Represented an unprecedented systematic change for EU competition police: a “cultural revolution”.8 In order to understand the implications of this unprecedented move by the EU it is first necessary to examine Articles 101 and 102 to which Regulation 1/2003 applies. Articles 101 and 102 attempts to regulate conduct relative to undertakings and does not address mergers directly.9 To this end, Article 101 does not permit commercial arrangements that are comprised of agreements amongst undertakings, decisions among associations of any undertaking and practices in concert which could have consequences for trade among contracting states and which are aimed at or actually prevents, restricts or distorts competition. Examples of these kinds of arrangements are listed under Article 101 and include agreements between competitors for fixing prices, constraining production or cornering shares in the market. 10 Any such arrangement will be null and void.11 Article 101(1) applies to both horizontal and vertical arrangements. In this regard, a horizontal agreement is one that takes place between “rival undertakings”.12 Vertical agreements are agreements that occur between undertakings that are not rivals because they function at different places in the market. 13 Vertical agreements are usually comprised of distribution, franchising, purchasing and sales agreements.14 An agreement does not necessarily have to be a contract in writing. Agreements can be informal or even surreptitious. For instance it was held in Joined Cases C-2/01 P and C-3/01 Bundesverband der Arzneimittel-ImporteureeV and Commission v Bayer [2004] that an agreement in the context of article 101(2): Centres round the existence of a concurrence of wills between at least two parties, the form in which it is manifested being unimportant so long as it constitutes the faithful expression of the parties’ intention. It is obvious from this description of an agreement that Article 101(1) has as its central aim the controlling of and prohibiting of collusion of all types that could distort competition. The ECJ has used the term “concerted practice” which effectively broadens the meaning of collusion.15 In this regard the ECJ described a concerted practice as a “form of co-operation between undertakings” from which it can be inferred that an agreement was made that compromises competition.16 It therefore follows that some form of co-ordination and cooperation is required for ascertaining if the undertakings were colluding or engaging in concerted practices. In this regard, the ECJ held in Cases 40-48/73, 50/73, 111/73, 113-114/73 Suiker Unie[1975] ECR 1663: The criteria of co-ordination and co-operation must be understood in the light of the concept inherent in the provision of the Treaty relating to competition that each economic operator must determine independently the policy which he intends to adopt on the Common Market.17 Contact in furtherance of co-ordination and co-operation will typically be manifested in an exchange of information which is conducted intentionally.18 However, conduct can also indicate co-operation and coordination if that conduct is such that it can substantiate concerted practices.19 Concerted practices are easier to discern in circumstances where the market is oligopolistic and conduct is uniform. For example there is an announcement with respect to pricing so that pricing is transparent which is followed by a uniform change in prices and uniform approaches to pricing so that this uniformity cannot be interpreted as merely coincidental.20 The most important aspect of Article 101 TFEU in terms of modernization and the enforcement of Article 101(1)’s prohibitions are contained in Article 101(3). Article 101(3) provides for exemptions to the prohibitions contained in Article 101(1).21 Prior to the implementation of Regulation 1/2003 the Commission had a monopoly on the exercise of block exemptions. However, Regulation 1/2003 confers the enforcement process and therefore exemptions on what is described as “decentralized authorities”.22 Essentially, what this means is that uniformity can be compromised by virtue of the decentralization of enforcement. Given the complex nature of what amounts to concerted practices and collusion as discussed above, there is an increased risk of diverse interpretations of what conduct should be exempt from the general prohibitions contained in Article 101(1). This can lead to varied practices and standards within the EU to the extent that some practices may be exempt in one jurisdiction and prohibited in others. Other difficulties ensuring uniformity within the EU’s competition and merger laws are implicit in the interpretative nature of Article 102. Article 102 TFEU provides for a prohibition of abuse with respect to a dominant position on the part of a sole undertaking or by virtue of more than one undertaking which can impact trade among the member states. In this regard, some guidance is found in Case 85/76 Hoffmann-La Roache v Commission [1979]. In this case dominance was characterized as occupying a place in the market dynamics that enabled the participant to have independence from rivals and consumers and therefore not amenable to the normal competitive nuances that drive market competition. This kind of dominance does not have to be such that it forms a monopoly.23 It therefore follows that dominance must be determined for enforcing competition rules and policies and this means determining the degree to which an undertaking maintains power in the market. What amounts to exclusionary conduct relative to Article 102 has been set out in the EU’s Guidance on the Commission Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings 2009.24 However the Guidance is only applicable to exclusionary conduct relative to EU competition rules and does not apply to exploitive or discriminatory practices. With regard to this modernization of Article 102, the Guidance contains two new approaches. First the Guidance indorses looking at the effect of conduct for the purpose of establishing what amounts to abusive conduct. Therefore the emphasis is on economic consequences of behaviour. Secondly, the Guidance expects that a general approach will be taken with respect to what can essentially justify abusive conduct and practices.25 Therefore dominant positions are not prohibited per se under the ambit of Article 102. It is the abuse of that dominant position that is prohibited by Article 102 TFEU. Essentially what has to be established to substantiate an infringement of the prohibited conduct under Article 102 TFEU is evidence of at least one undertaking. It is also necessary to prove that a dominant position exist within the market that has been abused and that the abuse had had consequences for trade among member states.26 In this regard, dominance is described as: A position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers, and ultimately of its consumers.27 This definition of dominance was confirmed more recently in Case T-219/99 British Airways Plc v Commission [2003]. In this case it was held that British Airways held a dominant position as a purchaser in the UK who could purchase services from travel agencies. Therefore a dominant position was held to capable of existing in both supplier and purchaser markets.28This approach was subsequently upheld by C-95/04P BA v Commission [2007] ECR 1-2331.29 What can be deduced thus far is that in its modernization approach to the enforcement of Articles 101 and 102 TFEU, the EU although claiming to decentralize enforcement powers has continued to assert significant influence. This influence is not only manifested by the ECJ’s method for interpreting Articles 101 and 102 but also in the Guidance issues. In fact the Guidance interprets dominance in a way that only reinforces the approach taken by the ECJ. In this regard, the Guidance defines dominance as: An undertaking which is capable of profitably increasing prices above the competition level for a significant period of time does not face sufficiently effective competitive constraints and can thus generally be regarded as dominant.30 The definition of dominance is entirely important for establishing a basis for enforcement of Article 102. Therefore the Commission’s influence via EU case law and the Guidance can be seen as intrusive and essentially nullifying the modernization initiatives toward decentralization of enforcement. Complicating initiatives toward decentralization of enforcement of Article 102 in terms of modernization of concepts of super-dominance and collective dominance have emerged. Super-dominance is said to exist in situations where an undertaking occupies either monopoly or semi-monopoly in a particular market. Super-dominance was introduced by Joined Cases C-395/96P Compagnie Maritime Belge and Others v Commission [2000]. In this regard, super-dominance was defined as existing in a situation where an undertaking occupies a place with overwhelming dominance and would therefore be: Consonant with particularly onerous special obligation affecting such a dominant undertaking not to impair further the structure of the feeble existing competition.31 The introduction of this new term only further compromises the modernization of enforcement of Article 102. In the absence of a clearer definition of what amounts to mere dominance and overwhelming or super-dominance, enforcement by national authorities is of no real consequence. It may still be left for the Commission to make this determination. The introduction of this new terms is essentially out of place since Article 102 does not discriminate between degrees of dominance. A similar observation is made with respect to abuse of the dominant position. There is no qualifying factor in the degree dominance as long as the dominant position is abusive. Moreover, an undertaking that has a dominant position can take reasonable measures for the purpose of protecting its financial welfare regardless of whether it is simply dominant or super-dominant.32 The introduction of the term collective dominance is likely to have far reaching implications for mergers under the auspices of Article 102.33 The ruling in Case T-102/96 Gencor v Commission, [1999] is instructive as its sets the tone for the ensuing 10 years relative to EU merger law in the context of competition law. In this case the two undertakings involved a South African company engaged in platinum metals transactions. A proposed merger with Lonrho Plc an English company was ruled by the Commission to represent collective dominance over which the Commission had jurisdiction on account of the Lonrho company having EU dimensions. Since both companies were leading suppliers of metal globally, the Commission held that the merger would be inconsistent with EU competition laws as it would amount to collective dominance in the metals market. In an action for annulment of the Commission’s decision on the part of Gencor, the action was dismissed and the Commission’s decision upheld.34 Essentially, the court ruled that collective dominance does not have to originate in the EU nor does it have to be situated in the EU. All that had to be established was that it had Community dimensions. The important aspect was that the collective dominance would impact sales in the EU and since the two dominant companies in the Gencor case conduct sales in the EU in value exceeding Euro 250 million the threshold set, for establishing community dimensions, the merger would be inconsistent with Article 102.35 Essentially what can be taken from the discussion thus far is that the modernization of Articles 101 and 102 in terms of competition and merger enforcement by the Commission is superficial at best. The Guidance dictates what matters are to given priority for enforcement purposes in terms of dominant undertakings. Complicating matters however, the Commission fails to either restate or state how to interpret Article 102 so that the ECJ is left with the task. The ECJ has certainly taken up the challenge and have introduced new terms such as super-dominance and collective dominance and have set out various interpretations of terms such as abusive practices which are essential for the enforcement of Articles 101 and 102. In this regard, thus far it can be concluded that in its modernization efforts under Regulation 1/2003, with respect to Articles 101 and 102 in terms of competition and merger laws, the EU has attempted to decentralize enforcement authority. However, the failure to define key terms have meant that in a round-about way, the EU has retained enforcement authority for the Commission thereby perpetuating the centralization of enforcement of EU competition and corresponding merger laws and policies. II. Regulation 139/2004 Articles 101 and 102 do not deal effectively and satisfactorily with mergers and merely attempts to control and regulate mergers in an indirect way. Howells et al argues that mergers were not dealt with directly because of political diversities. Even so this approach was considered entirely inappropriate as mergers are very important for facilitating the promotion of trans-border transactions in the context of European market constructs and safeguarding genuine trans-border mergers from distorted competition brought about by disingenuous mergers.36 The first attempt at directly regulating mergers within the internal market came with Regulation 4064/89 of 1989 on the Control of Concentrations Between Undertakings.37 Howell et al explains that concentration provides the Commission with creative license and is synonymous with the term merger.38 Essentially what occurred was that the EU “enjoyed a structured pattern of merger control based on pre-notification to the Commission.”39 This Regulation was replaced by Regulation 139/2004 which widened and made improvements on the control mechanisms by reforming the manner in which mergers are addressed in an oligopolistic market and making way for reforms in procedural approaches.40 At its core, control under the umbrella of Regulation 139/2004 is contained in Article 2(3) to the extent that it facilitates an evaluation of the consequences of a merger for Community competition. In this regard, Article 2(3) provides: A concentration which would significantly impede effective competition, in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position, shall be declared incompatible with the common market.41 Essentially, Article 2(3) introduces a new “substantive test” for determining what amounts to a prohibited merger.42 Another significant change introduced by Regulation 139/2004 was the expansion of the “one-stop-shop review mechanism”.43 This one-stop-shop mechanism is reflected in Article 4(5) which essentially provides that parties to a merger have the right to furnish the commission with what is characterized as a “reasoned submission” asking the Commission to exercise jurisdiction over a proposed merger where the threshold amount is not met but would ordinarily require notification in at least three states.44 Ultimately the effectiveness of Regulation 139/2004 is fraught with the same definitional and interpretative impediments discussed in the previous section relative to Articles 101 and 102 of TFEU. The Horizontal Merger Guidelines 2004 describes the most problematic terms in competition and merger laws: dominance. For this purpose dominance under the auspices of Regulation 139/2004 is defined as: A situation where one or more undertakings wield economic power which would enable them to prevent effective competition from being maintained in the relevant market by giving them the opportunity to act to a considerable extent independently of their competitors, their customers and, ultimately, of consumers.45 There is an obvious parallel between this definition of dominance and the Gencor case discussed previously. The result is, the EU has ensured that the term collective dominance is now a part of the merger enforcement and regulatory framework. Essentially, defining and applying dominance in mergers is an essential part of making appropriate assessments of appropriate market authority. This requires the implementation of a tool by which the relevant factors can be measured. There is no simple formula for defining market dominance as there are instances where market power is tolerable and in some cases acceptable. In the final analysis, the merger regime as contained in Regulation 139/2004 merely incorporates much of Articles 101 and 102 so that there is no mistake that those laws equally apply to mergers. What can be deduced from Regulation 139/2004 and Articles 101 and 102 is that the EU’s competition and merger policies under the auspices of modernization are essentially broad. Definitions are left open to various interpretations, so that any regulatory authority attempting to apply these laws will be required to look to the objectives of EU’s competition and merger policies. In this regard, even those objectives are left open to interpretation so that at the end of the day, perhaps the Commission is the best option for regulating and enforcement EU competition and merger policies. At least by taking this approach, the risk of conflicting substantive and procedural laws are minimized. The fact is the EU’s competition policies are intended to ensure that the market for competition is open and fair in the context of “an open market economy”.46 Assessing what is fair in one jurisdiction will not necessarily be fair in another market. Mergers are particularly vulnerable to this supposition since they more often than not overlap and cross borders to the extent that different market considerations will be relevant. In this regard, Regulation 139/2004 requires greater distinction from Articles 101 and 102 of TFEU. As it is it reads as no more than a repetition of Articles 101 and 102. Under the surface it is as tenuous and as open to interpretation as Articles 101 and 102 are. The difficulty however is that Articles 101 and 102 as well as Regulation 139/2004 on mergers each deal with the question of concerted conduct and/or arrangements between undertakings. Only Article 102 take account of unilateral behavior with respect to the conduct of dominant entities.47 This raises the question of whether or not Article 139/2004 is necessary at all. It might have been sufficiently addressed under Article 101. The creation of a separate regulatory regime which in essence is no different from the concentrations and concerted actions dealt with in Article 101 only creates confusion. It creates the impression that mergers are different from undertakings that fall under Article 101, but fails to distinguish between the two. It is therefore arguable that Regulation 139/2004 does not satisfactorily implement merger policies in a way that Article 101 failed to. Therefore modernization of the EU’s merger policies have essentially amounted to more than an repetition of Article 101 and the attendant interpretation problems that are associated with the application and enforcement of Articles 101 and 102. Conclusion The attending problems for enforcement of Articles 101 and 102 are repeated in Regulation 139/2004 in the sense that it is difficult for any regulatory or enforcement authority to know exactly what amounts to dominance, exploitation and abuse and even more so, what would qualify as an exemption to the prohibited conduct embedded in dominance that is exploitive or abusive. Since these terms are largely open to interpretation and therefore invariably fall under the remit of the ECJ, decentralization of competition and merger policies under the modernization of competition and merger laws appears to be counter-productive. This approach to promoting uniformity and harmony is flawed. If the EU is not going to provide clear definitions of these key terms and is going to leave it open to interpretation, centralization appears to be the most effective path to take. At the very least, one authority will set standards and define the substantive rules and its application. The chances of inconsistencies are thereby minimized. By decentralization, diverse practices and policies will only emerge with unfair and inconsistent competition and merger policies among Member States with the result that the ECJ will only have to resolve these discrepancies in any event. Bibliography Textbooks Howells, G.; Nordhausen, A.; Parry, D. and Twigg-Flesner, C. The Yearbook of Consumer Law 2007. (Ashgate Publishing 2007). Kaczorowska, A. European Union Law. (Taylor and Francis 2010). Kokkoris, I. Merger Control in Europe. (Taylor and Francis 2010). Oinonen, M. Does EU Merger Control Discriminate Against Small Market Companies? (Kluwer Law International 2010). Papadopoulos, A. The International Dimension of EU Competition Law and Policy. (Cambridge University Press 2010). Articles/Journals Albors-Llorens, A. ‘Collective Dominance: A Mechanism for the Control of Oligopolistic Markets?’ (2000) 59 The Cambridge Law Journal 235-272. Cengiz, F. ‘Milti-Level Governance in Competition Policy: The European Competition Network.’ (2010) 35 European Law Review, 660-677. Marcos, F. and Graells, A. ‘A Missing Step in the Modernization Stairway of EU Competition Law – Any Role for Block Exemption Regulations in the Realm of Regulation 1/2003?’ (2010) 6(2) The Competition Law Review 183-201. Soames, T. and Maudhuit, S. ‘Changes in EU Merger Control’. (2005) 26 (1) European Competition Law Review, 57-64. Table of Cases BBI-Boosey and Hawkes ]1987] OJ L287/36. Case T-219/99 British Airways Plc v Commission [2003] ECR 11-5917. C-95/04P BA v Commission [2007] ECR 1-2331. Case T-102/96 Gencor v Commission, [1999] ECR II-753. Case 85/76 Hoffmann-La Roache v Commission [1979] ECR 461. Case 48/69 Imperial Chemical Industries Ltd. v Commission (Dyestuffs) [1972] ECR 619. Cases 40-48/73, 50/73, 111/73, 113-114/73 Suiker Unie[1975] ECR 1663. Case 27/76 United Brands v Commission [1978] ECR 207. Joined Cases C-395/96P Compagnie Maritime Belge and Others v Commission [2000] ECR 1-1365. Joined Cases C-2/01 P and C-3/01 Bundesverband der Arzneimittel-ImporteureeV and Commission v Bayer [2004] 4 CMLR 13. Joined Cases 89, 104, 114, 116, 117 and 125-129/85 Ahlstrom and Others [Re Wood Pulp Cartel] v Commission [1993] ECR 1-1307. Table of Statutes Commission Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings 2009. Horizontal Merger Guidelines 2004 Merger Regulation 139/2004 Regulation 1/2003 Regulation 4064/89 of 1989. TFEU Read More