European Law and the Court of Justice in Delimitis - Case Study Example

In this work, the ECJ’s decision in Stergios Delimitis and Henninger Braeu AG, in respect of the application of Article 81 EC to the beer tie agreements was examined. The objective of Article 81 is to limit restrictive agreements and other modes of complicity between independent firms in horizontal as well as vertical relationships1. These agreements are applicable to parties such as producers and retailers at various stages of the production process. The European Court of Justice in Delimitis2 invoked an array of aspects which demonstrated the issue of deciding the individual purchasing agreement based on the stipulations contained in the agreement or that considered the extensive economic platform. In this case the German Oberlandsgericht3 had made a referral to the ECJ, in respect of the interpretation of Article 81(1) EEC Treaty and Commission Regulation 1984/38/EEC4 regarding the clash between Stergios Delimitis and Henninger Braeu AG on appeal from the Landgericht5. The German court of first instance ruled that if there was a withdrawal from the agreement, then the brewery was justified in making a deduction from the deposit amounts of Delimitis. This was because Delimitis had rented a public house from Henninger Braeu, owner of the brewery, as a part of the agreement between them under which Delimitis had to purchase a minimum quantity of one hundred and thirty – two hectolitres of draft, bottled or canned beer for a period of one year from the brewery and also soft drinks from the subsidiaries of the brewery. Further, Delimitis had to pay a penalty if it failed to execute this obligation. The agreement contained an open clause that allowed the lessee to obtain beer and soft drinks in firms established in other Member States. Subsequently in 1986 Delimitis rescinded the agreement and the brewery claimed DM 6032.15 towards rent and as a penalty for failure to execute the agreement’s obligation of minimum quantity. Delimitis sued Henninger Braeu for recovery of the sum deducted by the brewery from his deposit and claimed that the agreement violated the provisions of Article 81(2). However, the Landgericht turned down his claim on the basis of the open clause of the agreement. The claimant was permitted to purchase beer from other Member States in accordance with the open clause of the contract, which did not attract trade disputes within the boundaries of the common market. Delimitis appealed to the Oberlandsgericht for damages and the latter made a referral to the ECJ to interpret the application of Article 8. It also requested clarifications in the context of the compatibility of a beer supply agreement with Article 81(1), the scope of Article 81(1) in respect of the open clause in beer agreement, the interpretation of Regulation that contains special rules on block exemptions for beer supply agreements and the national courts’ jurisdiction in application of Article 81 to contracts not covered by the Regulation. The European Court of Justice scrutinised the effect of such agreements to determine whether competitors were facing any hindrances in the common market in the consumption of beer or while attempting to increase their market share. Since contracts to supply beer were generally made at the national level the relevant market was restricted to the national market for the distribution of beer. The relevant market was the sale of beer as it involved economic activity. Moreover, there was a vast difference between premises meant for the sale and consumption of drinks and retail channels. While establishing the fact that the prevailing beer supply agreements hindered new competitors from entering the market, the ECJ stressed that there was a need for scrutinising the nature and ambit of other contracts. The effect of such contracts on the market depended on the retailers or number of sales outlets of the national manufacturers. The Court also stressed the need to examine the practical possibility for a new competitor to enter the market even though there were a large number of similar contracts6. The market potentiality of the parties entering into contracts determines their contribution to the market. The market share of the brewery or the number of its retail outlets, however, does not determine its contribution in relation to the total available premises for sale and consumption of drinks in the relevant market. For instance, a brewery having a lesser market share and that binds its retail outlets for long periods of time, would significantly hinder access to the market than a brewery which had a strong market position but binds retail outlets for shorter periods. Thus such individual agreements fall under the purview of Article 81(1), which prohibits such contracts, as they obstruct the market. The open clause in the beer supply contract would diminish the scope of Article 81(1) by allowing the retailer to acquire beer stock from other Member States. Further, the Court added that the clause invariably matched a reasonable opportunity for other producers to supply the retailer with beer from other Member States. Thus the incorporation of such a clause in the contractual agreement would not prevent the applicability of Article 81(1) 7. The wording of such an open clause makes the contract feasible in the context of economic operability and legality. If the wording of the clause allows the retailer to import beer from another Member State and prohibits the sale of beer imported by other undertakings, then the clause closes on its very narrow scope. In addition, if the contract is formulated with specifications of the minimum quantity to be purchased from the manufacturer, then the existence of the open clause is rendered insignificant8. The Court held that as Article 6(1) of the Regulation stipulates that the condition of the purchase should be more specific, the chance of getting exemption from the scope of Article 81(1) becomes limited. There should be no unilateral obligations in the agreement; therefore, goods that fall within the scope of exclusive purchase obligation should be specified in the agreement. Article 6(1) of the Regulation does not extend to agreements that specify variable stock without inclusion of the price list. The block exemption does not apply to agreements where the freedom of the retailer is limited or the duration of the agreements is excessive9. The Court held that the agreement in its totality would be eliminated from the application of block exemption if any of its clauses or provisions contradicted the Regulation. According to Article 81(2), agreements would not become null and void even if they fail to meet the requirements of block exemption regulations. Moreover, the parties who had entered into such agreements could seek the intervention of the Commission for individual exemption under Article 81(3). The provisions of agreements that contravene Article 81(1) can be removed from the agreement and declared void. With regard to the authority of the Commission and national courts in order to implement Article 81 and Regulation 1984/83, the ECJ stated that the Commission had exclusive authority in implementing the Community competition rules. The Court, in granting jurisdiction to national courts, referred to the application of Article 81(1) EC and Article 82 EC in BRT v SABAM10 and application of the provisions of the Regulation in Fonderies11. In order to implement uniform legal competency within the European market national authorities and national courts had been issued certain guidelines in taking direct action within the scope of the competition rules at national level. The authorities of the Member States are required to act in compliance with the Commission. The counterparts of other Member States have to ensure that competition is not breached and they have to implement uniform codes of the competition rules. To promote such network work smoothly, the Commission has to cease its exemption monopoly. Moreover, the national authorities have to be permitted to rescind the advantage of Community block exemption regulation. To overcome this problem, national courts will be required to apply Article 81 EC Treaty in three types of proceedings. These categories of proceedings are contractual liability proceedings such as conflicts between parties to an agreement; non – contractual liability proceedings such as conflicts between a third party and one of the parties to the agreement; and application for injunctions. The ECJ directed the national courts to refrain from altering the exemption regulations in order to address agreements that failed to meet these conditions. In order to maintain uniformity and legal competency, national courts can declare void agreements that have been either notified or exempted under Article 81(2). National courts before declaring an agreement void should be satisfied that the agreements do not conform to Article 81(1). These agreements should not be exempted under Article 81(3) and national courts should confirm the possible intervention of the European Commission12. The European Court of Justice ruled that the Delimitis agreement of beer supply does not come under the scope and conditions of the Regulation. In addition, the agreement had failed to satisfy the conditions of Article 81(3). Accordingly, Article 81(1) was held to be inapplicable to the agreement13. The ECJ’s ruling in the case of Stergios Dilimitis v Henninger Bräu created a two – fold test that national courts could utilize in order to determine whether Article 81 EC had been applied correctly to the beer supply agreements. An agreement falls within the scope of Article 81if both the test conditions are satisfied, otherwise the EU competition law treats such agreements as being void. National market foreclosure is the first of these tests and it is viewed by the courts in the context of economic and legal competency of the agreements. The courts utilise indicators to measure the condition. Further, they examine similar agreements between various brewers in the light of the number of outlets related tied to them in relation to the number of public houses not tied to them, the period of agreements entered into, the minimum quantity of beer that has to be purchased as per the agreements, and the ratio between the quantities sold by the parties and the quantities sold by other retailers. Indicators in respect of market access opportunities include the acquisition of companies and network of brewery outlets, the possibility of opening new public houses, minimum number of public houses needed for economic feasibility, and the existence of individual retailers. The prevailing conditions, which support competitive operators on the market. These conditions include the extent of saturation of the market, customer response to the existing brands, and the trends in beer sales. The second condition is that the agreement should create a significant contribution to the sealing – off effect that results from the wholeness of such agreements in their economic and legal context. The ECJ set up standards for national courts such as the market position of breweries in question and the period of the agreement14. In the Delimitis case, the ECJ held that an agreement has to be examined from the economic and legal aspects, in order to demonstrate whether it restricts competition. Therefore, the ECJ emphasized the fact that anti competitive effect approach of an agreement was more realistic than the formalistic approach that was being employed by the Commission. References 1. Commission Regulation 2790/1999 on the application of Art. 81(3) of the Treaty to categories of vertical agreements and concerted practices (O.J. 1999, L336/21). 2. C-234/89 Stergios Delimitis and Henninger Braeu AG. 3. Case 127/73 BRT v SABAM (1974) ECR 51. 4. Case 63/75 SA Fonderies Roubaix Wattrelos v Societe nouvelle des Fonderies A. Roux et Societe des Fonderies JOT (1976) ECR 111. 5. Commission Regulation 1984/83 on the application of Art. 85(3) of the Treaty to categories of exclusive purchasing agreements (O.J. 1983 L 173, p.5, corrected by the Corrigendum in O.J. 1983 L281, p.24). 6. Dabbah, EC and UK Competition Law; Commentary, Cases and Materials. P.56. 7. Hanna Geden, Viktoriya Grynova, Jon Jekielek and Lisa Söderqvist, 28 February 1991. Examination and analysis: case C-234/89, STERGIOS DELIMITIS V. HENNIGER BRAEU AG, retrieved May 17, 2007 from http://www.jur.lu.se/Internet/Utbildning/kurser/JEG674.nsf/43e828219552baccc12568cd0028a0b9/df8d5a06409b80cec12570c9002f054f/$FILE/Delimitis.doc 8. Select Committee on Trade and Industry Second Report. December 21, 2004. Retrieved on May 18, 2007 from http://www.publications.parliament.uk/pa/cm200405/cmselect/cmtrdind/128/12806.htm 9. WHITE PAPER ON MODERNISATION OF THE RULES IMPLEMENTING ARTICLES 85 AND 86 OF THE EC TREATY, Commission Programme No 99/027. Retrieved May 17, 2007 from http://www.europa.eu.int/comm/competition/antitrust/wp_modern_en.pdf. Read More