Exemptions under Article 81 of the EU Law - Essay Example

Introduction. The European Community has devised rules to ensure free competition in the Single Market. It is the European Commission's responsibility to ensure the application of these rules throughout the Community, in active collaboration with national governments. The EC competition rules are set out in Article 81 (formerly Article 85) and Article 82 (formerly Article 86) of the Treaty of Rome. The Commission grants individual or group exemptions from this prohibition in cases where there are overriding countervailing benefits like improvement in efficiency or the promotion of research and development. Article 82 prohibits the abuse of a dominant position if it affects trade between member states and there is no possibility of exemption. In order to ensure free competition in the Single Market, agreements which not only have a significant effect on the trade between the Member States but also prevent, restrict or distort competition in the Single Market are prohibited by Article 81. Merger Control under Article 81 of the EC Treaty. Prohibition of behaviour which discourages competition is described in Article 81 (1) of the EC Treaty. In respect of investigations relating to mergers, to determine whether Article 81 EC will be applcable and to justify exceptions to the rule that there exists a distinction between merger control and the general competition law, a casual link must be established between the merger and the restriction of competition. In the absence of such a link, "the relevant coordination of the participants must be assessed in a separate proceeding under Article 81 (1) EC rather than as part of the merger control investigation under the E.C.M.R." An assessment under Article 81 of the EC, leads to the stoppage of the merger from going through and this constitutes an early attack on the parties. Investigation under Article 81 EC results in leaving the concentration untouched and this necessitates the intervention of the European Commission to correct this behaviour. The other major difference is that inherent in the time required for these procedures. Though the merger investigation has to be decided within four months after the notification, Article 81 EC investigations are not subject to any such time limit and may take even years to be completed. The European Commission, while analyzing a merger under Article 81 (1) of the EC, considers in particular whether "two or more participating companies retain to a significant extent activities in the same market as the joint venture, or in a market which is downstream or upstream from that of the joint venture, or in a neighbouring market closely related to the relevant market." The final issue to be decided is whether the coordination, resulting from the creation of the joint venture, enables the participants to eliminate competition in respect of a major portion of the products or services being dealt with. The interstate clause defines the boundary in-between the areas respectively covered by the law of the Member States and the Community law. Agreements which do not affect trade between member states are not covered by Article 81 EC. These agreements are the exclusive domain of the national authorities. This basic test of whether or not interstate trade was affected or not was dealt with by the E.C.J. in Socit Technique Minire v. Maschinenbau Ulm1, the E.C.J. held that "it must be possible 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." In respect of B2Bs, the test developed in Socit Technique Minire v. Maschinenbau Ulm, is apparently cleared without much difficulty, because of the type of the platforms, which function by utilizing the Internet. It is required by Article 81 (1) EC for every agreement to have as its objective or effect the prevention, restriction or distortion of fair competition. "The E.C.J. has held that these conditions have to be read disjunctively." The primary thing to be done is to determine the purpose of the agreement.When it is apparent that the aim of the agreement is not to distort competition does the E.C.J. consider whether it might have that effect. Whilst examining the objective of an agreement, the Court ignores the subjective intentions of the parties involved. The Court is more concerned with the objective meaning of the agreement and the purpose of the agreement in respect of the economic context in which it has to be implemented. The effect of an agreement must always be determined in the context of its operation in the markets in which it will be applied. This renders it essential to determine the relevant product and its intended geographic markets. The test for distortion of competition therefore entails an analysis of the performance of the competition in the absence of the agreement. If the result of such an analysis reveals significant deviation from what is usually present in the form of competition conditions then it can be said that a case of distortion of competition exists under Article 81 (1) EC. Exemptions under Article 81 EC Treaty. There are a number of exceptions to this rule. Sometimes it is possible to argue that although an agreement distorts competition the distortion is reasonable and does not require the application of Article 81 (1) EC. This approach does not constitute an exemption to the applicability of the Article 81 (1) EC, but on the other hand, is nothing more than a mere dilution of the applicability of Article 81 (1) EC by taking recourse to interpretation. Though similar to the United States approach the European approach not identical, to the rule-of-reason analysis employed there. The E.C.J. in several cases has decided that under certain circumstances certain restrictions have to be endured. This is especially true in respect of franchise and licensing agreements. Grant of this special consideration has already been made to Selective distribution systems. Hence, the European Commission or in the end the European Court of Justice may accord its acceptance for certain restrictions, which are essential to achieve the purpose of a B2B. The European Commission may deem Article 81 (1) of the EC on the basis of Article 81 (3) EC, to be inapplicable if the agreement contributes to improving the production of goods, distribution of goods, to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit. This is so provided the restrictions are indispensable to the attainment of these objectives, and the agreement does not afford the possibility of substantially eliminating competition. In accordance with these conditions, most B2Bs qualify for an initial exemption. It is permissible for companies to apply for individual exemptions under the provisions of Article 81 (3), if they are apprehensive that forming a B2B or operating one may violate Community law. This process of obtaining a declaration that, declares that further to the provisions of Article 81 EC (3), the prohibition in Article 81 (1) EC is inapplicable to a notified agreement, decision or practice is termed as notification. The European, before deciding to grant an exemption, publishes a summary of the agreement in question in the Official Journal and invites interested third parties to submit their observations. The procedure adopted by the Commission in most cases is that after the issue of the notification, it will not make a formal decision, but will merely dispatch comfort letters. The contents of these letters are that the European Commission intends to take no further action as it has closed its file. The reason for a B2B to be exempted under Article 81(3) may be given in a comfort letter, but this is not mandatory. The gauging of the European Commission's position is rendered all the more difficult as these comfort letters are not published but only addressed to the concerned parties. It is quite probable for a situation to arise in which, the national authorities are rendered powerless to conduct parallel investigations into an agreement, because the European Commission has already granted an individual exemption and the national authorities, cannot contradict the exemption or prohibit the agreement under their national laws. Despite this, comfort letters do not of themselves accord parties with immunity, because these formal letters do not prohibit the national courts from applying Article 81 (1) EC to the B2B agreement. The European Commission, of its own accord cannot change its stance regarding comfort letters, until and unless material changes of circumstances have taken place or the letter was issued on the basis of false or incorrect information. This is important for those B2Bs that do not honour their promises or those B2Bs which have changed the terms of their business. The major advantage of comfort letters lies in the fact that, while formal decisions can take years, these comfort letters are issued in usually a few months time. This is the reason for most decisions of the European Commission to be communicated through comfort letters. Analysis of Exemption Procedures under Article 81 and Article 82 of the EC Treaty. The procedure of using monopolistic power in one market to gain a competitive edge in another market is termed as Monopoly leveraging.In Europe the possibility exists for a violation under Article 81 EC by a dominant company, to be deemed as a violation under Article 82 EC also, and this is termed as an abuse of dominance. For monopoly leveraging unlike the essential facilities doctrine, control of infrastructure is not essential. The case law and literature of the United States reveals that monopoly leveraging occurs whenever a company with monopoly power in one market has either monopolized a second market or obtained sufficient market power in it to effect monopolization. The European Commission on the 30th of August 2001 initiated additional proceedings against Microsoft. These proceedings contained allegations that Microsoft had violated the antitrust rules of Europe by adopting illegal practices to extend its dominant position in the market in respect of personal computer operating systems to lower end server operation systems. The European Commission alleged that "Microsoft may have withheld from vendors of alternative server software key interoperability information that they need to enable their products to 'talk' with Microsoft's dominant PC and server software products." The European Commission further stated that Microsoft had reinforced its strategy of extending its dominance from the PC to the server by means of an abusive licensing policy for Windows 2000, the operating system used in lower end servers. The Commissioner for Competition Mario Monti aptly stated that, "Server networks lie at the heart of the future of the Web and every effort must be made to prevent their monopolization through illegal practices." Microsoft is not a B2B, and the allegations by the European Commission with regard to new dominance leveraging indicates that in the future it will be more than willing to investigate accusations in respect of a B2B, which is allegedly exploiting and leveraging its founders' and participants' collective market power in order obtain a position of dominance in a market of different product or service. This type of leveraging gains relevance when the B2B extends its operations from that of a mere collector of transaction fees or user fees, to that of a provider of a joint electronic trading platform where the income earned is substantially more. It might become irresistible for a B2B, which provides new goods, services and business solutions to refrain from exploiting the founders' and participants' collective power. The B2B could start to exploit its collective buying power to persuade or force the B2B's members and their suppliers to utilize the B2B's new products, services or solutions and to discard those already available to the industry. Abuse of an overriding position in trade between Member States is prohibited by Article 82. Unlike, Article 81, there is no exemption. The EC Merger Regulation (ECMR) classifies mergers which create an overriding position resulting in significant impediments to competition as incompatible with the Common Market. This Regulation applies to all Community related mergers, defined by reference to turnover criteria. Although, the Member States are empowered to intervene in such mergers under certain circumstances, The European Commission has exclusive competence to deal with such mergers. The DTI is in general, the Commission's main contact on policy and block exemptions. In respect of individual cases the Office of Fair Trading deals with the same. However, neither the OFT nor the DTI is empowered to advise individuals in a specific case, but on the other hand the OFT is competent to provide advice on procedures to be adopted for approaching the European Commission 2. The theoretical framework of the essential facilities doctrine is Article 82 of the Treaty of Amsterdam, which states 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 trade between Member States."3 Additionally, Article 82 also provides that this abuse includes "limiting production, markets or technical development to the prejudice of consumers."4 The rule of the EC is that a firm has the choice to decide with whom to trade, but Article 82 represents an exception to this5. Violation of Article 82 is determined by the EC competition authorities on the basis of whether, there was a dominant position; there was any abuse of that dominant position and whether there was any adverse resultant effect on trade between the Member States. Under certain circumstances, refusal of one firm to deal with another would constitute such an abuse. A special case of this is refusal to deal, this is termed as the essential facilities doctrine, and its origin was in the U.S6. The Commission's definition of essential facility is that of a facility or infrastructure essential for reaching customers, allowing competitors to carry on their business and that which does not render itself to replication by any reasonable means whatsoever7. This facility "must be complementary to an economic activity in a related but separate market."8 The provisions of EC law state that refusal to grant access to essential facilities is equivalent to an abuse of a dominant position if such a refusal results in an anti-competitive effect and if the same cannot be justified 9objectively. In the case Istituto Chemioterapico Italiano SpA & Commercial Solvents Corp. v. Commission (Commercial Solvents)10, the ECJ decided that a dominant firm's refusal to continue supplying raw materials to an existing customer was in violation of Article 82 and this was held to be so, even if the dominant firm wanted to use the raw materials for its own purposes, if such denial would serve to eliminate competition from that customer11. In the Commercial Solvents Corporation case, the firm had refused to continue supply to Laboratorio Chemico Farmaceutico Giorgio Zoja SpA (Zoja). The Commercial Solvents Corporation, CSC had supplied Zoja with nitropropane and aminobutanol, two chemical materials used to manufacture ethambutol, a drug used in the treatment of tuberculosis. CSC accepted that it was doing so in order to enter the market and contended that its aim to eliminate any competition from its former customer was legitimate and that this justified its refusal to continue supply of these chemical materials. The Commission found that CSC had "'a dominant position in the Common Market for the raw material necessary for the manufacture of ethambutol'" by virtue of its "'world monopoly in the production and sale'" of the raw materials12. On the basis of this discovery, the Commission decided that such refusal to a former customer, without any objective justification13, was abuse of the market position as per the provisions of Article 82 of the EC Treaty in as much as it would have a drastic effect on competition conditions in the EC14. The CSC made an appeal for annulment of this decision to the ECJ, but the ECJ upheld the Commission's decision, stating that there was an abuse of the dominant position under Article 8215. The importance of this decision lies in the fact that it made imposed upon dominant firms the duty of supplying to downstream competitors, wherever refusal to do so would have and adverse effect on the competition. This decision has established that there is a general rule that a dominant company may not refuse to supply a competitor if the effect would be to put the competitor out of business, even if it plans to use the products in question itself. In United Brands Co. & United Brands Continentaal B. V. v. Commission (United Brands)16, the ECJ established a general duty to supply an existing customer, this time in a case where the parties were not in a competitive relationship. In this case United Brands Co. refused to continue supplying bananas to Olesen, a Danish ripener-distributor that was a former customer, because the latter had begun advertising bananas of the competing Dole brand17. The Commission decided that the UBC has abused its dominant position. On appeal to The ECJ, this decision of the Commission was upheld. The Court decided that, pursuant to Article 82 "an undertaking in a dominant position for the purpose of marketing a product--which cashes in on the reputation of a brand name known to and valued by the consumers--cannot stop supplying a long standing customer who abides by regular commercial practice, if the orders placed by that customer are in no way out of the ordinary."18 The ECJ decided that any action taken by a dominant firm to protect its own commercial interests "must still be proportionate to the threat taking into account the economic strength of the undertakings confronting each other." In this case The ECJ was especially concerned that this act of UBC which resulted in the termination of supplies was to discourage its other customers from stocking and distributing competing brands. It further opined that such actions would weaken the independence of small and medium-sized firms in their commercial dealings with dominant companies. The decisions in Commercial Solvents and United Brands have resulted in a certain amount of criticism being levelled at the ECJ, since it is felt that there is an imposition of a general duty upon the dominant firms, which requires them to supply competitors and customers, without taking into consideration whether the withheld items were truly indispensable for the maintenance of market competition or not. These critics stress that the essential facilities doctrine must be focussed towards protecting competition in general and not a particular competitor. Since, the respective dominant firms in both Commercial Solvents and United Brands refused to supply in a discriminatory manner so as to handicap or to injure a particular competitor, the ECJ was more likely to find abuse even if the facility was inessential. Likewise, the dominant firm in both the cases had previously supplied the excluded firm. The first explicit reference to the essential facilities doctrine in EC competition law was in two decisions of the Commission, B&I Line PLC v. Sealink Harbours Ltd. & Sealink Stena Ltd. (B&I)19 and Sea Containers v. Stena Sealink (Sea Containers); involving access to the infrastructural facility of Holyhead Harbour in Wales20. In the 1992 B&I action, B&I Line PLC (B&I), a ferry operator, complained to the Commission that Sealink Harbours Ltd. and Sealink Stena Ltd, the owners of Holyhead Harbour and ferry operators, were transporting passengers and cars from Holyhead to Ireland and that the B&I's berth was in the mouth of such a narrow harbour, that when a Sealink vessel passed, the B&I ship had to stop loading or unloading. Further, Sealink so altered its sailing schedules that B&I's loading was interrupted more frequently. This improved Sealink's schedule, at the cost of B&I's schedule21. An analysis of the exemptions available under Article 81 as opposed to Article 82 is detailed in the sequel. Article 81(1) of the EC Treaty prohibits agreements or arrangements between undertakings that may affect trade between EC Member States and that have as their object or effect the prevention, restriction, or distortion of competition within the common market. Moreover, such restrictions of competition must be appreciable. Article 81(2) EC provides that restrictions in such agreements are automatically void, whereas Article 81(3) EC permits the EC Commission of the European Communities (the "EC Commission") to exempt restrictive agreements that might otherwise be prohibited, if (a) they foster technical or economic progress, (b) are indispensable to achieve such progress, (c) benefit consumers, and (d) do not completely exclude competition. Broad exemptions under Article 81(3) are contained in block exemption regulations;22 and their standardization will be automatically exempted if the joint market share is less than 25% and the agreement meets the conditions of the joint R&D block exemption regulation. In case this process deals with an entirely new product, or a product in which the participating companies do not compete, then the block exemption is valid even above the 25% ceiling for the duration of the standard setting and afterwards for a period of seven years23. In respect of horizontal cooperation agreements The EC Commission has adopted specific Guidelines with regard to the applicability of Article 81 of the EC Treaty24. Some of these include the general principles applicable to standardization agreements, whose primary objectives are the definition of technical or quality requirements with which current or future products, production processes or methods must comply25. The same or similar principles may also apply to the terms of access to a particular quality or compliance mark and as per the Guidelines on Horizontal Agreements, standards that have only "negligible coverage of the relevant market" do not come under the purview of Article 81, as long as they remain de minimis, and the associated agreements do not include violation such as price fixing or output restrictions26. Standardization agreements involving firms with a joint market share in excess of 10% may still evade the provisions of Article 81(1) if they are based on non-discriminatory, open and transparent procedures, provided that such agreements either do not compel manufacturers to comply with the standard, or they are compliant and are a part of a wider agreement to ensure compatibility of products27. On the other hand, standards agreements which "use a standard as a means amongst other parts of a broader restrictive agreement aimed at excluding actual or potential competitors." are likely to be prohibited28. Article 81(1) EC may also prohibit standardization agreements which limit product differentiation by discouraging or eliminating innovation, or giving competitors control over each other's production or innovation29. This is especially applicable to agreements that prevent the participants or third parties from developing alternative standards or selling products that do not comply with the standards, or that prevent specific manufacturers from implementing the standard30. Nevertheless, such an agreement may benefit from an exemption under Article 81(3) EC31. The EC Commission clarified that it: "generally takes a positive approach towards agreements that promote economic interpenetration in the common market or encourage the development of new markets and improved supply conditions." Since a significant portion of the industry was involved in setting this standard in a transparent manner this positive attitude was adopted32. These agreements do not contain unnecessary restrictions on innovations33. Further, Article 82 EC bans exploitation of a dominant position in a substantial part of the common market. For this article to be applicable there must be a dominant position. As a particular example, it prohibits dominant technology suppliers from exercising their rights in a discriminatory fashion. Technology suppliers in a dominant position must not engage in excessive pricing, discrimination, exclusionary practices or retaliatory measures against their competitors. This is not applicable to technology that is not required for a standard, even if that technology gives the user a competitive advantage in the standardized environment. Effective competition ensures efficient allocation of resources; increases productivity and lays the foundation for economic growth. It forces companies to reduce costs, implement new techniques, become innovative and increase productivity. This results in lower prices, greater choice and better quality goods and services. This is an essential requirement for open and competitive markets. Small and Medium Enterprises or SMEs, are affected by Article 81 if they are not covered by a block exemption regulation or by a De Minimis Notice (which stipulates that the aggregate market share held by all participating undertakings in the relevant market must exceed 10% for horizontal agreements and 15% for vertical agreements for Article 81 to apply) and if their activities appreciably affect trade between Member States. The same holds true for Article 82. A SME, like any business, would have to be dominant in its market to be affected by Article 82. Conclusion. What constitutes dominance will not be identical in each case, but it usually requires, in the case of a single firm dominance, that businesses have a market share of near to or greater than 40%. Regulation 1/2003 changes the position by transferring powers to apply EC law from the Commission to domestic competition authorities. Article 81 EC prohibits agreements, decisions and anticompetitive agreements, which prevent, restrict or distort competition. This Article forms the basis of the Competition Act 1998 and only minor changes have been made to the wording as it now appears in Article III-161, without requiring changes to UK legislation. Article 82 EC the other main competition article, prohibits abuse of a dominant and this forms the basis for section 18 of the Competition Act 1998. There are no significant changes to this provision as it now appears in the Constitution under Article III-162. In the event of Article 81/82 being infringed, the EU Commission will prohibit such conduct and in serious cases, it might even resort to imposing very large fines. Anti-competitive contract will also be void and unenforceable. John Donne wrote: ''No man is an island, entire of itself; every man is a piece of the continent, a part of the main''. In a similar way, Art.82 is dependent upon the other provisions of EC competition law, and the latest outlook of Art.82 is that it is applicable to the same underlying policy goals as in the case of the EC competition system in its totality. Bibliography. 1. Ben van Houtte , Luis Ortiz Blanco. EC Competition Law in the Transport Sector. Oxford University. Oxford. 1996. 2. Craig de B, EU Law, Oxford, 1998. 3. Clifford A. Jones. Private Enforcement of Antitrust Law in the EU, UK and USA. Oxford University Press. Oxford. 1999. 4. Lewis, Clive. Remedies and the Enforcement of European Community Law, Sweet and Maxwell, 1996. 5. Malcolm A. Jarvis. The Application of EC Law by National Courts: The Free Movement of Goods. Oxford University. Oxford. 1998. 6. Technology Transfer Agreements and the EC Competition Rules. Oxford University. New York. 1996. Read More