Competition Law Notes - Article 81 Horizontal and Vertical Agreements

Article 81
Horizontal
Vertical Agreements
Article 81

The following shall be prohibited as incompatible with the common market: all agreements between 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, and in particular those which:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions;

(b) limit or control production, markets, technical development, or investment;

(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

Article 81 Cont.

Any agreements or decisions prohibited pursuant to this article shall be automatically void.
The provisions of paragraph 1 may, however, 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,

Article 81 (3) cont.

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.

Article 81 Terms
Undertaking
Agreement
Decisions by association of undertakings
Concerted practice
Affect trade between member states
Object or effect the prevention, restriction or distortion of competition within the common market
Article 81
Horizontal: price fixing, market sharing, collective boycotts

Vertical : resale price maintenance, exclusive distributorships
Undertaking
same meaning as under Art 82
“every entity engaged in an economic activity”
distinguish exercise of powers as a public authority, health service
functional approach – may be acting as an undertaking when it carries on one activity but not when it is carrying on another
members of profession such as lawyers and accountants can be undertakings for the purposes of the Treaty – Wouters [2002]

Single economic entity

Art 81(1) does not apply to agreements between two or more legal persons that form a “single economic entity” – they are treated as a single undertaking.

g. agreement between parent and subsidiary. Question of control: are the parties independent in their decision-making or does one have sufficient control over the other
principal and agent; contractor and sub-contractor

Agreements
Broad interpretation, not limited to legally enforceable agreements
Decisions and constitutions of trade associations
Informal understandings (concerted practices)
Can be oral
Cartel: Commission does not have to prove several different agreements - enough that “single overall agreement” for which all members of a cartel bear responsibility, irrespective of precise involvement, even if participate in only part of its elements: Polypropylene OJ [1986] L 230/1
If one party wants to demonstrate no longer wants to be part of the agreement must publically distance itself from agreement, otherwise will presume to be part of it: Westfalen Gassen Nederland [2007] 4 CMLR 334

Concerted Practices

Less than an agreement but same conduct can be held to be agreement and concerted practice

Difficult issue in oligopoly markets e.g. Is parallel behaviour result of agreement or concerted practice or just the result of the structure of the market?

ICI v Commission (Dyestuffs case) [1972] ECR 619

“a form of coordination between undertakings which, without having reached the stage where an agreement properly so-called has been concluded, knowingly substitutes practical cooperation between them for the risks of competition”

Suiker Unie v Commission (Sugar Cartel Case) [1975] ECR 1663

“any direct or indirect contact between such operators, the object or effect whereof is either to influence the conduct on the market of an actual or potential competitor or to disclose to such a competitor the course of conduct which they themselves have decided to adopt or contemplate adopting on the market”.

Soda-ash/Solvay OJ[1991] L 152/1

“...the parties have not spelled out an agreement in terms but each infers commitment from the other on the basis of conduct.”

Wood Pulp [1988]

“...parallel conduct cannot be regarded as furnishing proof of concertation unless concertation constitutes the only plausible explanation for such conduct..[Art 81] does not deprive economic operators of the right to adapt themselves intelligently to the existing and anticipated conduct of their competitors...it is necessary to ascertain whether the parallel conduct ...cannot... be explained otherwise than by concertation.”

Facilitative practices – what evidence beyond normal market behaviour will be required – acting against interest

Object or effect

Not only condemned when successful – consider the object of the agreement

Polypropylene (1986)

“The fact that in practice the cartelisation of the market was incomplete and did not entirely exclude the operation of competitive forces does not preclude application of article 81”

Ferry operators – currency surcharge (1997)

The fact that they found it extremely difficult to impose the charge they had agreed to levy did not exonerate them from the fact that they were in breach of Art 81

Preventing, restricting or distorting competition
Is the agreement capable of distorting competition
EC: Guidelines on the Application of Art 81 to Horizontal Cooperation Agreements (2000)
EC: Guidelines on Vertical Restraints

European Night Services v Commission [1998]

Factors:

Actual conditions in which it functions, the economic context
Products or services covered by the agreement
Structure of the market
obvious restrictions such as price-fixing, market-sharing or the control of outputs
Such restrictions may be weighed against their claimed pro-competitive effects only in the context of art 81(3) with a view to gaining exemption
Competition includes potential competition

Article 81(2) void agreements
Not all the agreement may be void – may be severance

Trade between member states

Community law covers any agreement or conduct which is a threat to freedom of trade between member states in a manner which may harm the attainment of a single market , by portioning the national markets or by affecting the structure of competition within the Common Market. Conduct the effects of which are confined to the territory of a single Member State is governed by national law: see Hugin Cash Registers (1979)

EC Guidelines on the effect of trade concept contained in articles 81 and 82 of the Treaty (2004)

De minimis rules and the notice on agreements of minor importance

Remove from operation of art 81 those agreements where the market shares of the parties concerned was only minimal.

Volk v Vervaecke [1969] exclusive distribution agreements but firm only had market share of .6% - insignificant effect on market

EC Notice on agreements of minor importance (2001)

Thresholds: – if competitors or potential competitors - aggregate market shares do not exceed 10%

- If not competitors or potential competitors threshold is 15%

-If price fixing however minimums do not apply

Relationship between Art 81(1) & Art 81(3)

Should Article 81(1) be given a broad or narrow reading? What effect does this have on the role of Article 81(3)?

Burden of proof

Burden of proving Art 81(1) is on the person alleging the breach
While burden for establishing Art 81(3) is on those undertakings claiming its benefit

Prior to modernization

System of notifications and block exemptions

Only Commission could determine what exempted under Article 81(3)

Modernization

1st May 2004 Regulation 1/2003 made Article 81(3) directly effective – so that Member states and Courts could apply the art 81(3)

Abolished the notification system but system of block exemptions remains
Section 1 Sherman Act (1890) US

Every contract, combination.. in restraint of trade or commerce among the several States... is declared to be illegal

US - Rule of reason under s1

Pl. has initial burden that restraint has adverse effect on competition
burden shifts to def. to prove that restraint serves legitimate procompetitive purpose
burden shifts back to pl. to prove that the restraint is not reasonably necessary to achieve the claimed objectives

Application in the EU?
White Paper on the Modernisation (1999) explicitly states that to incorporate a full rule of reason under Art 81(1) would be to cast aside Art 81(3) and this could only be made through amendment of treaty
Métropole Télévision SA v Commission [1996]
More economic approach
Block exemption for Vertical Agreements (1999)
Guidelines on Vertical Restraints (2000)
Commission Guidelines on the applicability of Article 81 to horizontal co—operation agreements (2001)

Guidelines on the application of Article 81(3) of the Treaty [2004]

Sets out guidance for the relationship between Art 81 (1) and (3)

Article 81 (3)

The provisions of paragraph 1 may, however, 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,

Article 81 (3) cont.

(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.

4 criteria must be established
The agreement must lead to an improvement in the production or distribution of goods or the promotion of technical or economic progress
Allow consumers a fair share of the resulting benefit
Must not contain any indispensable restraints
Must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question

GlaxoSmith Kline Services v Commission [2006] 5 CMLR 1623

The Commission must adequately examine the arguments and evidence to determine whether the conditions for the application of Article 81(3) are satisfied

The agreement must lead to an improvement in the production or distribution of goods or the promotion of technical or economic progress

Includes efficiencies but not generally public policy issues: Stichting Baksteen [1995] 4 CMLR 646; Exxon/Shell [1994] OJ L144/20

Allow consumers a fair share of the resulting benefit

passing on of the cost and quality efficiencies

consumer not total welfare

consumer can be the final or the intermediate consumers

Must not contain any indispensable restraints
Question of proportionality
The restriction of competition must be reasonably necessary for the attainment of the efficiencies
Would its absence make it significantly less likely that the efficiencies will materialise
Could the efficiencies be achieved by other less restrictive means
P&OStena Line [2000] 5 CMLR 646

Must not afford the parties the possibility of eliminating competition
Short term efficiency goals must not be outweighed by longer term losses from the elimination of competition
Protection of rivalry important

Impact of the agreement on competition
Sources of competition, actual and potential competitors
Market shares of the parties
Past competitive interaction of the parties
Barriers to entry and impact on likelihood of new entry
Block exemptions

Vertical Agreements Regulation 2790/1999

Vertical Agreements in the motor vehicle sector Reg 1400/2002

Technology Transfer Agreements Reg 772/2004

Specialization Agreements Reg 2658/2000

Research & Development agreements Reg 2659/2000

Market share thresholds e.g.
vertical restraints must be market share less than 30%
R & D agreements between competitors whose market shares do not exceed 25%
If do not contain ‘hardcore’ restraints (price fixing, market sharing etc) are unlikely to raise competition problems