European Commission’s Approach towards the Article 81 EC Essay

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European Commission’s Approach towards the Article 81 EC

Introduction

The objective of Article 81 is to limit restrictive agreements and other modes of complicity between independent firms in horizontal as well as vertical relationships[1]. Some instances of such prohibited practices are, “price fixing; limiting or controlling production, markets, technical development or investment; sharing markets or sources of supply; applying dissimilar conditions to equivalent transactions; making the conclusion of contracts subject to supplementary obligations that have no connection with the subject of the contracts[2].”

Moreover, it is immaterial if Article 81(1)[3] EC is implemented in such a fashion that most of the agreements that curtail economic freedom would be caught without any economic analysis having been performed[4]. The EC has commenced to apply a new economic approach and simultaneously the ECJ has accepted the fact that a proper rule of reason analysis has to be conducted under Article 81(3)[5].

The underlying principle of Article 3(g) of the EC Treaty[6] is to implement ‘a system… [which ensures that] competition in the internal market is not distorted[7].” Prohibition of concerted practices, abuse of a dominant position and state aid is restricted to practices that affect trade between the Member States and ignores practices that influence domestic trade[8]. Nevertheless, Article 81 EC permits anti-competitive practices whose pro-competitive results overshadow their anti-competitive consequences[9].

 In the sequel the scope of Article 81 EC has been discussed, in respect of anticompetitive issues. In this regard the substantive laws restricting the anticompetitive effects of markets and the procedural controls like prohibition and exemptions concerning public policy and economic approach have been discussed at length. In this context relevant case laws have been discussed. The contemporary tendency is to restrict competitive agreements. The Commission has implemented a more economic approach by means of the rule of reason in Article 81(1) EC, which has assisted decentralization with regard to the enforcement of Article 81(3) EC[10].

Free Competition

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[11]. Article 81 EC contains a list of practices that are usually excluded[12]. These relate mainly to licensing agreements for patents and other intellectual property rights.

Competition Law Test

In general, the Commission’s exemption policy favours the application of a competition law test. The block exemption on vertical restraints is merely an interchange between curbing intrabrand competition and encouragement of interbrand competition[13]. The European Commission is authorized to remove the advantage of an exemption in respect of agreements that are at variance with Article 81(3)[14].

Vertical Agreements

The national authorities can deprive vertical agreements that contravene Article 81(3) of the benefit of exemption.[15] In respect of vertical agreements that restrict competition and include fifty percent or more of a specific market, the Commission will cancel the exemption and apply Article 81(1) in its entirety[16]. Further, in cases of undue advantage of a dominant position, exemption is permitted by Article 82 EC[17].

The agreements pertaining to the supply and distribution of goods comply with the new Block Exemption Regulation[18]. These guidelines and Block Exemption Regulation constitute a competition policy that favours an economic approach rather than a regulatory approach to vertical agreements. This indicates the Commission’s intention to bring its competition rules into play[19]. Formerly the EC had adopted a formalistic approach that had construed any restriction of commercial freedom to be restrictive of competition. Further, the Commission had a monopoly in respect of implementing Article 81(3). Article 81(1) was given a wide interpretation as it had to be enforced uniformly in all the Member States[20].

Article 81

In Métropole Télévision (M6) et al. v. Commission[21], the Court of First Instance or CFI held that a monetary outlook was necessary as per the provisions of Article 81(3) [22]. The judgement in this case is in conformity with the present outlook of the Commission. This approach is the upshot of the White Paper and the new notice on Article 81(3) EC[23]. In this approach there is a retreat from the formalistic approach. Since, the objective of the new notice is to engender the consumer’s welfare; it requires a substantive analysis of the market in order to determine whether an agreement violates Article 81(1) EC[24].

Article 81(3) rescinds the prohibitions in Article 81(1) if competition exists for a large range of products, the manufacture or allocation of goods, and if technical and economic progress do not show any improvement[25].

Further, decisions of the Commission under Article 2(4) of Regulation 4064/89 result in a balancing exercise[26]. Thus, while applying Article 81 EC the national courts have to perform the competition law test, which is in most of the cases imposed by Article 81(3) EC[27]. In all other instances the national courts can obtain either the Commission’s assistance as per Article 15(1) EC or the ECJ’s assistance as per Article 234 EC[28]. Since, the national courts cannot apply Article 81(3) EC; the ECJ transferred the necessary portions of Article 81(3) EC to Article 81(1) EC[29].

Article 81 EC does not apply to agreements that leave trade between member states unaffected. These agreements are the exclusive domain of the national authorities. This basic test of whether or not interstate trade was affected was dealt with by the E.C.J. in Société Technique Minière v. Maschinenbau Ulm[30], 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[31].”

Economic Approach

The adoption of an economic approach first, ensures that legal provisions are not rendered ineffective due to anti-competitive behaviour[32]. This approach applies a more consistent treatment to the different practices, because a similar treatment is accorded to practices with the same outcome[33].

Second, this approach ensures that the statutory provisions do not achieve an unjustified frustration of competitive strategies[34]. Hence, a competition policy approach that recognizes this fact will guarantee the protection of consumers and also encourage increased productivity and growth[35].

The EU competition law has progressed towards a policy that depends on a market centered economy[36] and in 2004 an enforcement procedure incorporating these considerations was implemented by the European Community.

The necessity to adopt an approach that is more economic based to market definition, dominance and abuse has been conceded by the European Commission. Undertakings with a market share in excess of fifty percent can easily establish that they are not dominating the market and this stance has been accepted by the Commission[37].

Daimler Chrysler secured a highly significant reduction of the fines imposed on it by the Commission for alleged infringements of Art.81 on the German, Spanish and Belgian car market in 2001[38]. The CFI annulled two of the three findings of infringements, which resulted in a reduction of the fine from € 71.8 million to € 9.8 million[39]. Since, Daimler Chrysler was unable to establish that its Belgian subsidiary had acted independently; the CFI did not annul the decision to fine Daimler Chrysler[40]. In this case the Commission had labeled three of the Daimler Chrysler agreements as being anti competitive. The CFI set aside two of these allegations and upheld only one of them[41], thereby indicating that competitive agreements had been prohibited.

In Tetra Laval v. Commission, the Commission prohibited the merger of Sidel SA and Tetra Laval BV. Sidel was a manufacturer of stretch blow moulding machines used for packaging liquid foods in plastic. Tetra was a dominant company in the carton-packaging market operating through a related company[42]. The Commission considered the merger of Tetra Laval and Sidel to be anti competitive and prohibited it; however, the CFI disagreed with the Commission and permitted the merger.

Although, Article 81(3) permits the elimination of competition Vis – a – Vis a significant number of products, the application of Article 82[43] cannot be frustrated by Article 81(3) [44]. Moreover, not all the restrictive agreements entered into by a dominant undertaking represent the abuse of its dominant position[45].

The exemptions under Article 81(3) are contained in block exemption regulations;[46] and their standardization gains automatic exemption if the joint market share is less than twenty five percent and the agreement conform to the requirements of the joint R&D block exemption regulation[47]. In the context of a new product or a product in which the participating companies do not compete, the block exemption’s validity exists even above the twenty five percent ceiling for the duration of the standard setting and subsequently for seven years[48].     

 

Prohibition of Competition Agreements

One of the difficulties faced by Community law is to restrict intra brand competition (or competition among retailers or distributors of the same brand) by means of territorial distinctiveness, without restricting parallel trade. Of these restrictions the most important are those that create territorial restrictions[49]. Moreover, a distributor might enter into an exclusive distribution agreement solely “for the purpose of obtaining absolute territorial protection in order to ensure protection from free riders and safeguard investment in the promotion of the product[50].”

This protection is essential for launching a new product which requires more promotion than an established product. Moreover, insufficient protection may prevent the distributor from deploying the product with the result that the product may not make an entry into the market[51].

In the absence of territorial protection some distribution agreements cannot be established, for instance, in Societe la Technique Miniere[52], the Court held that a term bestowing territorial distinctiveness on a distributor would not violate Article 81(1), if it was essential for the distributor to market a producer’s product[53]. Even though, the Commission is conscious of the commercial necessity for territorial protection, it has never accepted that the aim of territorial restrictions is to assist pro competitive agreements. The Commission while permitting partial territorial exclusivity will not endure the hindrance to parallel imports, even if the agreements granting unconditional territorial protection may augment inter – brand competition, and consequently help in the assimilation of markets within the community[54].

In the Wouters case, there was a disagreement between competition rules and non competition goals. Further, harmonizing amid competition rules are absent in both Articles 81(1) and 81(3) EC[55]. If suitable conditions are present Article 81 EC can be matched against public interest concern. Since, Article 81(1) and 81(3) did not attach sufficient importance to the protection of the legal profession’s freedom it was undermined[56].

Consten and Grundig[57] established proscription on the formation of an unqualified territorial defense. Such a stringent approach has been implemented because these restrictions could prevent the development of the internal market by isolating the national markets. Moreover, the Community Authorities want to ensure that some manner of parallel trade is preserved by means of passive sales that originate outside the contract area. In case of vertical agreements total territorial protection is banned and the Court has assumed a moderate approach in less restrictive territorial limitations[58]. The fact remains that even the vertical agreements regulation is unable to distinguish between active sales and passive sales, which are not to be banned[59].

The guidelines have made it clear that selective distribution agreements could result in an increase in intra brand competition and eliminate access to markets[60]. However, selective distribution agreements could augment inter brand competition or competition based on brands or labels. Since, the sales staff are to be given relevant training there will be an increase in after sales services, the servicing of guarantees, etc[61].

The relevant case law in respect of selective distributive agreements has been accused of being intricate, contradictory and perplexing and it has rendered the task of concluding whether an agreement infringes Article 81(1). Moreover, confusion prevails in respect of the products that validate selective distribution[62].

Vertical restraints are constraints on the freedom of behaviour for undertakings resulting from a vertical agreement. Although, vertical restraints prevent, restrict or distort competition they also engender efficiency improvements. Hence, the resultant economic effect is unclear[63].

Conclusion

Competition is one of the most important factors that elicit a faster growing, consumer-oriented European economy[64]. In this context, “…The Commission has to adopt clear guidelines and binding legislation in order to secure the legal certainty of the undertakings that have to operate under the EC Competition Law Framework[65].” The uniformity in interpreting and applying competition rules are essential for legal certainty which is necessary to decentralize EC competition law[66].

At present an inordinate delay takes place, “from the time a potential claimant is subjected to anti-competitive agreement or practice till it is brought before the national court, question to the ECJ are formulated and a reply is received, and the national court eventually rules on the issue[67].” It would benefit everyone if both policy and lawmakers study the American experience that reveals that legal certainty cannot be ensured by, “leaving it up to the parties in trials before the courts[68].”

In this manner it can be seen that despite the European Commission’s approach to Article 81 involving a greater use of sensible economic analysis, too many agreements which are anti-competitive are still prohibited. The foregoing analysis reveals that a significant number of competitive agreements are being prohibited due to decentralization and a narrow approach that favours public interest and economic policy.

Bibliography

Books

 

  1. Albors – Llorens, Albertina. 2002. EC Competition Law and Policy. Willan Publishing. P. 18. ISBN: 1903240743.

  1. Dabbah, Maher M. 2004. EC and UK Competition Law: Commentary, Cases and Materials. Cambridge University Press. P. 56. ISBN: 0521604680.

  1. Mac Culloch, Angus and Rodger, Barry J. 2004. Competition Law and Policy in the EC and UK. Routledge Cavendish. ISBN: 185941933X. 139, 191, 192, 195.

  1. Stuyck, Julien, Gilliams, Hans and Ballon, Elke. 2002. Modernisation of European Competition Law: The Commission’s Proposal for a New Regulation. P. 55 -56. ISBN: 9050952224.

  1. Tillotson, John and Foster, Nigel G. 2003. Text, Cases & Materials on European Union Law 4/E. Routledge Cavendish. P 407. ISBN : 1859417779.

 

 

Journals and Working Papers

 

 

  1. Article 81. Official Journal of the European Communities. Consolidated version of the treaty establishing the European Union. 24.12.2002. C 325/64. Retrieved from http://eur-lex.europa.eu/en/treaties/dat/12002E/pdf/12002E_EN.pdf

 

 

  1. Bourgeois and Bocken. Guidelines on the Application of Article 81(3) of the EC Treaty or How to Restrict a Restriction. 32 Legal Issues of Economic Integration 111 (2005), pp. 112-113.

  1. Brusick, Philippe; Alvarez, Ana Maria and Cernat, Lucian. Competition Provisions in Regional Trade Agreements: How to Assure Development Gains. Chapter IX Modernization of the European System. United Nations Conference on Trade and Development (UNCTAD). 2005. United Nations Publication. Symbol No. UNCTAD/DITC/CLP/2005/1. p. 284.

 

  1. Goldschmidt, Peter I.B and Lanz, Christoph. Maybe Definitely – Definitely Maybe? EC Competition Law – Is the time ripe for reform? European Institute of Public Administration. EIPASCOPE 2/2001. Retrieved from http://www.eipa.nl/cms/repository/eipascope/scop2001_2_2.pdf

  1. Kallaugher, John and Weitbrecht, Andreas. 2006. Developments under Articles 81 and 82 EC – the Year 2005 in Review. C.L.R. Issue 3. p. 139, 143. © Sweet & Maxwell and Contributors.

  1. Komninos, Assimakis P. 2005. Non – competition Concerns: Resolution of Conflicts in the Integrated Article 81 EC. The University of Oxford Centre for Competition Law and Policy. Working Paper (L) 08/05. Pp. 3, 5, 10. Retrieved from

http://www.competition-law.ox.ac.uk/lawvle/users/ezrachia/CCLP%20L%2008-05.pdf

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