Problem Question in EU Competition Law - Essay Example

The factual scenario raises issues under EU competition law in relation to distribution agreements and the Block Exemption Regulation pertaining to vertical agreements1. Moreover, as the proposed distribution agreement is selective between one manufacturer and two distributors, this clearly satisfies the requirement of a vertical agreement for the purpose of the block exemption. EC competition law is one of the fundamental policies of the Community and is mentioned in general terms in the preambles and Article 2 and 3 of the EC Treaty2. The principal provisions of EC competition policy are enshrined in Articles 81 and 82 of the EC Treaty3. With regard to the current scenario the most relevant provision will be Article 81, which governs prohibited agreements and practices and in particular prohibits: agreements between undertakings, decisions by associations if undertakings, and concerted practices which have as their object or effect the prevention, restriction or distortion of competition with the Common market”. Additionally, Article 81(2) provides that “any agreements or decisions prohibited pursuant to this Article shall be automatically void”. Accordingly, if the proposed selective distribution agreement Yanussi wishes to enter into falls within the Article 81 prohibition it will be void and unenforceable4. Moreover, Article 81(3) provides that “the provisions of Article 81(1) may be declared inapplicable in the case of: -any agreement or category of agreements between undertakings; - any decision or category of decisions by associations of undertakings; - any concerted practice or category of concerted practices; Which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question”. Previously, the parties to any such agreement would have to make an individual notification to the Commission and failure to notify would result in the agreement itself being void and the parties being liable to fines5. However, in order to avoid this, some common commercial agreements may be exempted from the prohibition under Article 81(1) by virtue of a block exemption for typical types of agreement, sometimes within certain industries or areas of trade such as the block exemption Regulation 240/96 on certain technology transfer agreements. To this end the notification procedure has now been abolished. Block exemptions set out the types of restriction or provisions which will not infringe Article 81(1) or would be exempted and there is one for vertical distribution agreements under Article 2 of Regulation 2970/99, which provides for validity of agreements provided the combined result of the transaction represents less than 30% of the total relevant market share. The basic principles for the assessment of horizontal co-operation agreements under Article 81 is to consider whether an agreement is likely to affect competition in the market to such an extent that negative affects as to prices, output, innovation or the variety or quality of goods and services can be expected6. The nature of the agreement is also relevant. Some forms of co-operation are unlikely to affect the marketing of goods or the services. For example co-operation on research and development, standards and environmental matters would not normally have a direct effect on the parties’ prices and output. In these cases the Commission takes the view that agreements are only likely to have negative effects, if at all, on the degree of innovation and a variety of products that the parties produce and they also might give rise to a foreclosure of third party access to the market7. Other agreements, for example on joint production and purchasing are more likely to lead to co-ordination of pricing and output decisions, in particular where this leads to a higher degree of common costs, for example through joint manufacture or distribution as in the current scenario. Accordingly, if we apply this to the current scenario, we are not aware of the market share however provided the impact of Yanussi’s proposed agreement does not exceed the market share of 30%. Additionally, as Yanussi is wishing to appoint a distributor in the UK, the UK Competition Act 1998 provisions will also be applicable and therefore it is important to consider the market share provisions. Under section 60(1) of the Competition Act 1998, consistency has to be maintained between UK and EC competition law, so far as is possible and the section asserts that “the purpose of this section is to ensure that so far as is possible …questions arising under this Part in relation to competition in the United Kingdom are dealt with in a manner which is consistent with the treatment of corresponding questions arising in Community law in relation to competition within the Community”8. Under the Chapter 1 Prohibition on agreements affecting trade within the United Kingdom9 set out in the Competition Act 1998, the regulatory body, the Office of Fair Trading considers that agreements are not caught by the Chapter 1 Prohibition where the parties have a market share of less than 25%, except in the case of agreements that directly or indirectly fix prices or share markets, agreements to impose minimum resale prices or networks of agreements having accumulative effect on the market in question, which is analogous to the provisions of the Block Exemption Regulation 2970/99. Additionally, under the Commission’s guidance note “Notice on agreements of minor importance which do not appreciably restrict competition under Article 81(1) of the Treaty Establishing the European Community (de minimis),10the Commission holds the view that agreements between undertakings engaged in the production or distribution of goods or in the provision of services do not fall under the prohibition in Article 81(1) if the aggregate market shares held by all of the participating undertakings do not exceed 15% of the relevant markets with regard to vertical agreements. Accordingly, the agreement proposed by Yanussi with the two distributors must not exceed a total market share of 30% in the Community and 25% in the UK under the Competition Act 1998 with regard to the UK distributor. If alternatively, the market share comes within the 15% de minimis principle, it may have some marginal relief under the Commission’s notice11. However, the thresholds would have to remain within the 15% margin for a successive two year period under the Notice12. There is no provision or guidance in the Notice with regard to what happens to an agreement when it has outgrown the Notice including the provisions for marginal relief. One possibility is that the agreement becomes void and the Notice ceases to apply, or alternatively the agreement could possibly remain enforceable until the Commission initiates proceedings to terminate the agreement. The Notice also contains a policy towards small and medium size businesses by stating that agreements between them are rarely capable of significantly affecting trade between Member States and competition within the common market. The Notice states that even if agreements between small to medium sized businesses do affect trade and competition, there will not be sufficient Community interest to justify intervention and that accordingly, the Commission will not institute proceedings even if the market thresholds are exceeded. However, the Commission does reserve a right in the Notice to intervene if for example there is price fixing or the cumulative effects of similar agreements in a particular market restrict competition. It should be borne in mind that the ECJ has indicated that it is incorrect to purely adopt the quantitative threshold approach with regard to de minimis agreements. For example, in the case of Distillers Company Limited v Commission13, the ECJ concluded that an agreement affecting the distribution of Pimms was of importance despite the tiny proportion of the market held by that drink because Distillers Company Limited held a large market share for drinks generally. Accordingly, if we consider Yanussi’s legal position, it is evident that even if Yanussi come within the de minimis principle or the Block Exemption Regulation and Competition Act 1998 requirements regarding market share, the distribution agreement will still fall foul of Article 81, if it includes the “hard core” restrictions. These “hard core restrictions” prohibit eligibility for the exemption under Article 4 of Block Exemption Regulation 2970/99. The central restrictions falling foul of Article 81 and negating applicability of the block exemption are price fixing, exclusive supply and export controls. Moreover, the inclusion of any of the provisions will exclude the entire agreement not just the offending provisions from block exemption.14 If we apply this to the current scenario in light of the individual clauses agreed to in the negotiations, the exclusive supply arrangement with Zomet will prima facie fall foul of the block exemption and infringe Article 81. This is further supported by the ECJ decision in the case of Konica15. Additionally, if the clauses agreed with both Zomet and Jean-Claude regarding Yanussi’s price structure amounts to price fixing or results in predatory pricing, this will also infringe Article 81. This is further evidenced by the decision in the Pronuptia case16 where it was held that price fixing was illegal per se. Additionally, the clause restricting sales outside of the respective distributor territories will amount to a sales restriction as an export ban and will not be acceptable under Article 81 as evidenced by the decision in Consten and Grundig v the Commission17where the Commission found Consten and Grundig in breach of Article 81(1) by attempting to prevent competition by the imposition of sale restrictions. Nevertheless, the ECJ judgments pertaining to Article 81 appear to demonstrate a consistent theme of rendering some prima facie prohibited clauses, permits restrictions, which satisfy the requirement of being objectively necessary for the performance of a particular product18. For example, in the Metro v Commission cases of 1977 and 198619, it was held that contracts relating to technical products requiring specialist sales staff would be considered compatible with Article 81(1). Accordingly, whilst the other clauses of the negotiations between Yanussi and the distributors in the current scenario may fall foul of Article 81, if the restrictions on trained staff may be permissible in line with the rationale in the Metro decisions. However, if the other provisions fall foul of Article 81 and the Block Exemption, the entire distribution agreement will be void unless Yanussi renegotiates and redrafts the agreements to comply with the Block Exemption provisions. Additionally, the selective distribution agreement will have to be entered into for a specific duration as required by Article 5 of the Block Exemption. Finally, with regard to the confidential information, they would be able to challenge this under Commission Regulation EC No 773/2004 relating to the conduct of proceedings by the Commission pursuant to Articles 81 and 82 of the EC Treaty, which provides that any proceedings in connection with Article 81 or 82 should not provide “access to business secrets or other confidential information belonging to other parties involved in the proceedings”. Additionally, the Regulation provides that “when granting access to the file, the Commission should ensure the protection of business secrets and other confidential information”. In summary, even if the proposed distribution agreement satisfies the market share requirements of Articles 81 and the Chapter I of the Competition Act 1998 and the de minimis provisions of the Commission’s Notice, it will still fall foul of the Article 81 and Block Exemption Regulation on grounds of the price fixing, exclusive supply sales restriction and export control provisions negotiated by Yanussi with the distributors. The requirement that staff be trained by Yanussi will most likely be acceptable and in order for the business arrangement to comply with competition law, the agreement will have to be renegotiated to remove the offending provisions. Additionally, Yanussi are entitled under Regulation No 773/2004 to have their confidential information protected and not disclosed to other third parties. BIBLIOGRAPHY Craig & Burca (2007). EU Law: Text, Cases and Materials. 4th Edition Oxford University Press. Damian Chambers, Christos Hadjiemmanuil, Giorgio Monti & Adam Tomkins (2006). European Union Law. Cambridge University Press Norbert Reich., (2003). Understanding EU Law: Objectives, Principles and Methods of Community Law. Intersentia. Jo Shaw. (2000). Law of the European Union. 3rd Edition Palgrave Macmillan Whish, (2003) “Competition Law”, 5th Edition Butterworths Competition Act 1998 at www.opsi.gov.uk Read More