The Treatment of Vertical Agreements in EC Competition Law - Essay Example

Introduction EC competition policy is one of the original policy areas of the 1957 EC Treaty and has a number of objectives, some of which are commonto all competition systems and some specific to the EC. A key function of the EC competition rules, as interpreted by the ECJ, has been to assist in the establishment of a single Community-wide market, (for example, by preventing companies from dividing the market into national sales territories). In order to evaluate the change in the approach to vertical agreements in EC Competition law which occurred over the last ten years, it is necessary to explain of Article 81 EC, the requirements for the exemption under Article 81(3) and under Commission Regulation 2790/99 on vertical restraints and considering old regulations and relevant case law1. Article 81 regulates anti-competitive behaviour in a wide range of scenarios and has been applied with reference to what the EU is trying to achieve: a level playing field2 for competition within an internal market. The aim of achieving market integration between the Member States is apparent in many rulings of the Commission and European courts. Article 81(1) provides that “all agreements between undertakings, decisions by associations of undertakings and concerted practices and which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market shall be prohibited. In Article 81(3) the conditions for exemption from Article 81(1) are laid down. The way in which the ECJ has interpreted these concepts and requirements will be examined in the following subsection. According to the (C-41/90 Hofner and Elser3), the meaning of undertakings is ‘The concept of undertaking encompasses every entity engaged in an economic activity regardless of the legal status of the entity and the way in which it is financed’. This means that any entity carrying on a commercial or economic activity (company, partnership, sole trader, co-operative) is subject to the competition rules, including individual professionals, non-profit- making services, public utilities, and even public authorities when they are acting commercially, but not when exercising their official authority [Case 30/87 Corinne Bodson v Pompes Funèbres des Regions Libérées4]. Under Article 81, there is first a finding of infringement under Article 81(1). The weighing of the pro- and anti-competitive effects of an agreement only takes place under Article 81(3) which allows exemption for agreements, which produce positive effects.5 This two-stage process under Article 81 can be contrasted with the US ‘rule of reason’ approach, which balances the pro- and anti-competitive consequences of an agreement before a finding of infringement is made. The CFI recently confirmed the two-stage approach and rejected the ‘rule of reason’ in Case T-112/99 Metro pole Television (M6) and Others v Commission6. In a recent Commission decision, involving a duopoly which had engaged in information exchange, price-fixing and market sharing, one party to the cartel was granted 100 per cent remission of fines for whistle-blowing and the other 40 per cent for mitigating factors [COMP/E- 2/37.978 Re the Methylglucamine Cartel7]. The vertical regulation and guideline indicate that the commission now adopts a more economic approach to vertical agreements. The vertical regulation sets out a presumption that vertical agreements which do not incorporate hard-core restraints and which are concluded between undertakings which do not exceed a 30 per cent market threshold are Article 81. 8 Though the vertical regulation provides legal certainty and is intended to operate as a safe harbour, its existence clouds the water when trying to rationalize under and the analysis required under Article 81(1) and Article 81(3) respectively.9 The commission has not therefore met the criticism that it does not make a realistic economic assessment of agreements under Article 81(1). The new enforcement Regulation: “Although no further changes to the Commission’s approach to vertical restraints can be anticipated prior its review of the Verticals Regulation before its expiry in 2010, subtle changes may result now that the NCs and national competition authorities have been given the opportunity to rule on an agreement’s compatibility with the provisions of both Article 81 (1) and Article 81 (3). Regulation 1/2003 means that greater enforcement and litigation at the national level is likely. Those authorities may be more willing to accept in accordance with the Court’s case law, that an agreement does not infringe Article 81(1) at all or that, in exceptional circumstances, agreements containing price or territorial restraints satisfy the requirements of Art 81 (3).”10 Regulation 1/2003 marks a major decentralisation of the enforcement of the EC competition rules, intended to relieve the Commission of a huge workload, and allow it to concentrate its resources on investigating the most serious infringements. It replaces Regulation 17/62, one of the cornerstones of EC competition law for 40 years, which concentrated all powers of enforcement on the Commission. The new system is one of ‘parallel competences’ in which a case may be dealt with by a single National Competition Authority (NCA), or by several NCAs in parallel, or by the Commission11. The Commission and NCAs will together form the European Competition Network (ECN), applying the Community competition rules in close co-operation. The new system places responsibility on the undertakings themselves to assess whether their agreements/activities are compatible with the EC competition rules. Some of the key articles of the new Regulation are as follows: [Under Article 1, the whole of Article 81 is made directly effective for the first time. Specifically, Article 1(2) says that no ‘prior decision’ is needed for an exemption under Article 81(3). Once an infringement of Article 81(1) has been established, the defence is available to the undertaking(s) concerned to prove that the agreement, decision or practice fulfils the conditions for exemption under Article 81(3), (Article 2). ] There are two types of exemption these are Individual exemption which give respect of particular agreement and Block exemptions give to certain categories of agreements and which have taken from block exemption regulation. Individual exemption: Under Article 81(3) there is the possibility of exemption for agreements, decisions or concerted practices, which infringe Article 81(1) as long as they meet ALL four of the requirements set out in Article 81(3). There are two ‘positive’ and two ‘negative’ requirements: Positive requirements: a) It contributes to improving the production or distribution of goods or to promoting technical or economic progress. b) Consumers receive a fair share of the resulting benefit (it does not just make bigger profits for the companies concerned with no benefit to customers)12. Negative requirements a) The restriction on competition must be indispensable for the achievement of the improvement or progress claimed in (1) above. (That is, there must be a causal link between the restriction on competition and the improvement gained). b) It must not put the parties in a position to eliminate competition ‘in respect of a substantial part of the products in question’. Under the original Regulation governing the enforcement of the competition rules, Regulation 17/62, only the Commission could grant exemptions and undertakings had to ‘notify’ their agreements for exemption. In 1999 the Commission published a White Paper on Modernisation of the Rules implementing Articles 81 and 82 of the EC Treaty. It included a proposal that national authorities and national courts should be able to grant exemptions under Article 81(3). Based on the White Paper, a new system of enforcement has applied since 1 May 2004, under Regulation 1/2003. Under this new regime, the requirement for prior notification has been abolished and Article 81(3) is now directly effective, meaning that a national competition authority, court or tribunal can grant individual exemptions13. Because of the large number of applications for individual exemption the Commission was only able to make formal decisions in a handful of cases each year. In the remaining cases it issued what are known as ‘comfort letters’, informal assessments of the legality of the agreement. The file on an agreement was then closed. Comfort letters state that, in the Commission’s opinion, an agreement either does not infringe Article 81(1) or that, though it infringes Article 81(1), it is of a type that qualifies for exemption. They are, however, merely administrative letters, issued outside the framework of Regulation 17/62 and not binding on national courts; nor can they be challenged by Article 230 EC proceedings before the European Court. Block exemptions: Block exemptions are provided for categories of agreement, decisions or concerted practice. They are provided for by regulation. Historical Background: The Council enacted two basic regulations empowering the Commission to adopt block exemption regulations for certain categories of agreements. These were regulations 19/65 for vertical agreements ([1965] O.J. Sp. Ed. 35) and regulations 2821/71 for horizontal agreements ([1971] O.J. Sp. Ed. 1032). On the basis of regulation 19/65, the Commission adopted five block exemption regulations concerning vertical agreements: Regulation 1983/83, on exclusive distribution agreement Regulation 1984/83, on exclusive purchasing agreement Regulation 4087/88, on franchising agreements An exclusive distribution agreement is one whereby one party (supplier agrees) with the other (distributor) to supply certain goods for resale within the whole or a defined area of the common market only to that other. An exclusive purchasing agreement is one whereby one party, the reseller agrees with the other, the supplier, to purchases certain goods specified in the agreement for resale only from the supplier or from a connected undertakings or from another undertakings which the supplier has entrusted with the sale of his good14. A franchise agreement is one where undertakings, franchisor, grants other, the franchisee, in exchange for direct or indirect financial consideration the right to exploit the franchise for the purpose of marketing specified types of goods and services. In the past, there was no block exemption regulation covering from of vertical agreement, i.e. selective distribution agreements. A selective distribution agreement is one where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of certain predefined criteria and where these distributors undertake not to sell such goods or services to unauthorised dealers. These agreements were considered according to the criteria developed by the case law (Case 26/76 Metro v Commission15). Selective distribution agreements have been now been brought within the scope of the new ‘umbrella’ block exemption regulation on vertical restrains16. However, the old system of block exemptions had important drawbacks, notably its excessive formation, its straightjacket effect and the insufficient weight it placed on economic analysis. Block exemption for vertical agreements: Regulation 2790/99: Another way of reducing the need for individual exemptions is the use of ‘block exemptions’ for specific categories of agreement, such as those for exclusive distribution agreements, exclusive purchasing agreements and franchise agreements. These take the form of regulations and have legal force. The ‘old style’ Regulations set out permissible and prohibited clauses in the specified type of vertical agreement. The Block Exemption states that ‘Article 81(1) shall not apply to agreements or concerted practices entered into between two or more undertakings each of which operates, for the purposes of the agreement, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services.17’ Three basic characteristics: a) one wide ‘umbrella’ blocks exemption regulation that covers all vertical arrangements containing clauses restrictive of competition; b) Based on a clause approach, i.e. defining only what is not exempted. (No list of white or grey clauses but only list of black clauses) c) market share cap used to link exemption to market power. An agreement drawn up in line with the requirements of a block exemption is automatically exempt from Article 81. Following criticism of the straightjacket effect of the old-style regulations, the Commission launched a consultation exercise which has led to far reaching reform. Most important is the new block exemption on vertical agreements and concerted practices, Regulation 2790/99. It replaces the separate block exemptions for different types of vertical agreement and covers all types of vertical restraints, including selective distribution agreements, which were not previously covered by a block exemption. It entered into force on 1 January 2000 and the key provisions applied from June 1 2000. The Commission has formulated two questions (and guidance on how to answer them) for assessing whether an agreement (etc.) infringes Article 81. See paragraph 18(1) in relation to restrictions on inter-brand competition that does the agreement restrict actual or potential competition that would have existed without the agreement? If so, the agreement may be caught by Article 81(1)… (emphasis added). And in paragraph 18(2) in relation to intra-brand competition: ‘Does the agreement restrict actual or potential competition that would have existed in the absence of the contractual restraint(s)? If so, the agreement may be caught by Article 81(1)…’ (emphasis added)18. These tests, in particular the italicised parts, reflect the Commission’s new (ex ante) approach of considering agreements in their actual economic and legal context before finding a restriction of competition under Article 81(1). Article 2 and 3: Scope of the block exemption regulation: Definition of vertical agreement: “agreement or concerted practice entered practice entered into between two or more undertakings each of which operates, for the purpose of the agreement, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchases, sell or resell certain goods or services” (Article 2(1)(1)). This exemption shall apply to the extent that such [vertical] agreements contain restrictions of competition falling within the scope of Article 81(1) (‘vertical restraints’). Three elements of the definition: a) Agreement is between two or more undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market. b) The undertakings must be operating different level of the production or distribution chain, and relating to the conditions (i.e. one undertakings produces raw materials, the other uses it as an input, or the first undertaking is a manufacture, the second a wholesaler and the third retailer, etc). c) Agreement or concerted practices more relates to the conditions under which undertakings may purchases, sell or resell contracts goods service (the old block exemption regulations applied to the conditions or purchase, sale or resale of goods) Regulation 2790/99 does not contain additional white list provisions which is absence of a so-called ‘white list’ as it was contained in its predecessors is an essential. However, block exemption regulations should to be strictly interpreted in accordance with the European Community law19. It applies to all vertical agreements covering both services and goods, and to goods supplied both for resale and for use. It represents a more market-orientated, economics-based approach in which eligibility for exemption is based on a market share threshold, in recognition of the fact that the behaviour of companies with little market power has little significant impact on competition in the market. It allows companies which do not have market power (i.e. have less than 30 per cent of the market) to benefit from a ‘safe haven’ within which they are no longer obliged to assess the validity of their agreements under the Community competition rules. However, as with the de minimis Notice, there are some clauses, ‘hard core restraints’, which are excluded from the safe haven. The new Regulation is accompanied by Guidelines on Vertical Restraints20 designed to help undertakings to carry out their own assessment of their position in respect of Article 81. For example, in the case of Vertical Distribution Agreements, the Regulation permitted the supplier to restrict ‘active sales’, whereby the distributor actively tries to sell to customers outside his/her territory, for example by setting up a branch outside that territory. Meanwhile the Regulation prohibited any restriction on ‘passive sales’, whereby the distributor merely passively fulfils orders received from customers outside his/her territory. Thus the Regulation achieved a compromise between the commercial need to grant a degree of territorial protection to distributors on the one hand, and the need to ensure competition between distributors (parallel trade) in the single market on the other. However, the de minimis rule is not contained in the text of Article 81 but was established by the Court in Case 5/69 Volk21. It means that certain breaches of Article 81 will be disregarded if the companies involved are relatively small and the effect of their activities on the overall competitive situation on the market is negligible. The Commission formulated the precise circumstances in which it would regard a breach as ‘de minimis’ in a Notice (although this is not binding on the ECJ). The Notice has been re-issued several times with changing thresholds. The current version is: Commission Notice on Agreements of Minor Importance22. In the past, the Notice took into account turnover of the companies as well as market share. In the new Notice, whether an agreement/concerted practice etc. is ‘appreciable’ depends solely on the market shares of the undertakings involved. Paragraph 9 provides that agreements concerning goods or services will not fall within Article 81(1) if the market share of all the participating undertakings on the relevant market does not exceed: (a) the 10 per cent threshold, where the agreement is made between undertakings operating at the same level of production or of marketing (horizontal agreements) (b) the 15 per cent threshold, where the agreement is made between undertakings operating at different economic levels (vertical agreements)23. Now the new Notice includes a new de minimis market share threshold for markets where parallel networks of similar agreements established by several manufacturers or dealers exist, such as in the beer and petrol sectors. These agreements were excluded from the benefit of a de minimis threshold under the old Notice. The hard-core restrictions which are prohibited under the Notice and will stop the de minimis market thresholds. Until May 2004 the Commission had exclusive power to grant exemptions, after prior notification by the parties to the agreement (Article 4(1) and 9(1) of Reg. 17/62). Key features of Regulation 2790/99: Article 3 introduces a cap of 30 per cent market share on the availability of the block exemption. This applies to the market share of the supplier except in the case of an exclusive supply obligation as defined in Article 1(c) of the regulation where it is the buyer’s share, which is relevant. Over this threshold, an individual exemption can still be applied for. Article 4 sets out the list of hard-core restrictions which will preclude the block exemption from applying, including the imposition of fixed or minimum resale prices, export bans and restrictions on passive sales. Article 5 forbids direct or indirect non-compete clauses, although, in contrast to Article 4, inclusion of such clauses does not make the whole agreement ineligible for exemption24 In Case T 328/03, O2 (Germany) GmbH & Co. OHG v European Commission, CFI25, the Court of First Instance (CFI) annulled the Commission’s decision of 16 July 2003 concerning the agreement between O2 and T-Mobile on network sharing for the third generation of mobile telecommunications in Germany, in so far as the decision grants an exemption to the agreement under consideration without first establishing to a sufficient degree that its provisions are anticompetitive in nature. These judgment highlights, among other things, that the European Courts will invalidate a Commission decision regarding the anticompetitive effects of an agreement, if no concrete evidence specific to that agreement is included in the decision which justifies its reasoning. The CFI ultimately upheld the applicant’s appeal: the Court ruled that the exemption granted by the Commission should be declared null and void in respect of the provisions on roaming in so far as that exemption implies that those provisions fall within the scope of the rules on competition. In holding that the Commission had erred in law. The case is important in several respects. Procedural issue: This case contains an important point of clarification on a procedural issue that was argued before the Court by the Commission. The Commission argued that legal certainty would be lost if the exemption were found to be invalid, as the Commission would not be able to issue a new decision, since Regulation 1/2003 removed the system of prior notification that existed when the agreement in question was notified. This argument was not accepted by the CFI. In fact, the Court stated that if the exemption of O2/T-Mobile’s agreement was annulled, the Commission would still be able to make a new decision on the notified agreement by reference to the date of the notification and, consequently, by carrying out its analysis under Regulation 17/6226. Economic reasoning: This judgment complements the European Courts’ efforts to ensure that the Commission, in enforcing competition law, makes its decisions on the basis of sound economic reasoning. As stated above, the Court felt that the Commission, in failing to consider the particular context resulting from the specific characteristics of the relevant emerging 3G markets, had not sufficiently demonstrated that the agreement was anticompetitive in nature. The CFI’s approach helps ensure that Commission decisions under Article 81 EC reflect economic and commercial reality. The same conclusion can be reached in relation to the CFI’s ruling that the Commission failed in its obligation to undertake an objective analysis of the competitive situation in the market in the absence of the roaming agreement in question. Approach to evidence: This judgment underlines the fact that the CFI will not uphold Commission decisions on the basis of illusory evidence. Such an attitude can be seen in the CFI’s ruling that the Commission’s assessment of the anticompetitive nature of an agreement should be supported by sound, concrete evidence specific to the agreement and contained in the decision itself. In so ruling, the Court has thus shown it willing once again to invalidate Commission decisions if they are not based on evidence of the highest standards27.] In this section, we have examined the ‘building blocks’ for a finding of an infringement of Article 81 EC. We have studied the Courts’ interpretation through the case law of a number of key concepts such as ‘agreement’ and ‘concerted practice’. The Commission’s early, very broad interpretation of Article 81 to cover all restrictions on conduct has been replaced by an ‘economics-based’ approach, examining agreements in their economic context to see if there are actual or potential anti-competitive effects. The adoption of ‘new style’ block exemptions, particularly the one dealing with vertical restraints, has reduced the practical scope of Article 81 by providing a ‘safe haven’ for companies which do not have market power, provided that their agreements do not include any of the ‘hard core’ restraints. Mark Griffiths, in “A glorification of de minimis - the regulation on vertical agreements” recommend that the Regulation is advantageous for undertakings with market shares below the threshold in respect of agreements, which do not include any of prohibited restrictions. From the above discussion it can be said that the treatment of vertical agreements in EC competition law has changed significantly during the last ten years28. Bibliography: A Jones and B Sufrin, EC Competition Law, 3rd edition, (Oxford: Oxford University Press), Page-770-771 Craig, P. P. and G. de Burca, EU Law Text, Cases and Materials (Oxford: Oxford University Press 2007) 4th edition [ISBN 0780199273898]. Pages 964-964 Fairhurst, J. and C. Vincenzi Law of the European Union, 5th edition, (Harlow: Pearson Longman, 2006) [ISBN 1405812338]. Pages 423-455 Horspool, M. and M. Humphreys EU Law, 4th edition, (Oxford: Oxford University Press, 2006) [ISBN 0199287635]. Pages 511- 521 Steiner, J., L. Woods and C. Twigg-Flesner EU Law, 9th edition, (Oxford: Oxford University Press, 2006) [ISBN 0199279594]. Pages 570- 605 Weatherill, S. Cases and Materials on EU Law, 7th edition, (Oxford: Oxford University Press, 2006) [ISBN 0199282234]. Pages 255-276 S. Harris and J. Sheppard, EU law, 1st edition, University of London Press, (2006), Page-237-276 Hartley, T.C. The Foundations of European Community Law, 5th edition, (Oxford: Oxford University Press, 2003) [ISBN 0199258465]. Pages 414- 124 Mark Griffiths, a glorification of de minimis - the regulation on vertical agreements, (2000), Wast-law Read More