COMPETITION LAW AND POLICY IN THE EC AND UK Second Edition
Cavendish Publishing Limited
London • Sydney
COMPETITION LAW AND POLICY IN THE EC AND UK Second Edition
Barry J Rodger, LLB, Dip LP, BCL, LLM, Solicitor Professor, The Law School University of Strathclyde Angus MacCulloch, LLB, Dip LP, LLM, MPhil Lecturer in Law, School of Law University of Manchester
Cavendish Publishing Limited
London • Sydney
First published in Great Britain by Cavendish Publishing Limited, The Glass House, Wharton Street, London WC1X 9PX, United Kingdom Telephone: +44 (0)20 7278 8000 Facsimile: +44 (0)20 7278 8080 Email:
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© Rodger, BJ and MacCulloch, A 2001 First edition 1998 Second edition 2001
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except under the terms of the Copyrights Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 9HE, UK, without the prior permission in writing of the publisher.
Rodger, Barry J Competition law and policy in the UK and EC—2nd ed 1 Competition, Unfair—European Union countries 2 Competition, Unfair—Great Britain 3 Antitrust law— European Union countries 4 Antitrust law—Great Britain I Title II MacCulloch, Angus 343.4'1'0721
ISBN 1 85941 619 5
Printed and bound in Great Britain
To Susan, Lucy and Kirsty
PREFACE Competition law, at both the Community and UK levels, plays an ever increasing role in regulating the conduct of businesses. Competition law can affect business contracts, takeovers and mergers, co-ordinated actions, pricing behaviour and State subsidies. Competition law has assumed a crucial role in monitoring national and European markets, seeking to ensure workable competitive markets and to a limited extent ‘fair play’ on the level playing field created in the European single market. As businesses struggle to come to terms with the implications and impact of competition law, they require graduates aware of the significance and effect of the provisions of both national and European competition law. As competition law is loosely based on a mixture of economics and politics, and has tended to be enforced administratively, its basic tenets have proved difficult for students to understand and apply with confidence. This book seeks to provide a clear guide to, and outline of, the main provisions and policies shaping Community and UK competition law in a structured framework. The book is designed to be user friendly by encouraging the examination of competition law in context. It incorporates a glossary of useful terminology and sections at the end of each chapter for discussion and further reading. The book is aimed principally at any competition law students—BA and LLB—as a course textbook and will also be of assistance (as an introductory guide) for postgraduate students and practitioners of competition law. Both authors have gained experience from their teaching of the subject, and have been particularly aware of the difficulty students have in grasping and understanding the core issues in competition law. The text places the law in context, using clear and relevant examples of the application of the competition rules. Understanding should be fostered by the provision of discussion issues and further reading at the end of each chapter. The glossary of terms is particularly important in an area of law which has links with economics. Students often find it difficult coming to terms with the technical language and terminology adopted and the glossary aims to provide a helpful starting point in that process. The definitions and meanings provided are not intended to be technical and definitive statements on each issue. The text analyses both Community and UK competition law developments. More emphasis will be placed on the former due to its relative importance and burgeoning case law. However, no competition law text in a UK context would be complete without analysis of UK competition policy and legal provisions. This is particularly important since the Competition Act 1998 came into force on 1 March 2000. The book is not intended to be a competition law encyclopedia or practitioner reference book. It is designed to be an accessible introduction to Community and UK competition law which will provide suitable coverage for a full undergraduate competition law class. The focus is on key areas of policy and practice in order to enhance student awareness of the substance, importance and effect of the competition rules. The second edition maintains this focus and introduces more topical cases and issues to highlight the practical significance of competition law and its impact on daily life. After the introductory chapter, Chapter 2 deals with the enforcement of EC and UK competition law. We consider that prior to dealing with the substantive competition rules, it is necessary for students to understand the basic enforcement structures, to be aware of the parties involved in enforcement under each system and an outline of the powers and procedures involved. One other point to note is that have we reversed the normal practice of dealing with anti-competitive agreements before the controls on monopoly. This reflects the concentration on the vii
Preface
pure competition policy objective, based on its concern with monopolies, as a focus for all competition laws. There may be a minimal degree of repetition across chapters but this is on the assumption that students will read chapters to follow lectures and topics, without the need to make cross-references constantly. Competition law develops and adapts rapidly and there are considerable amendments to the first edition. We have retained the same basic format and chapter structure as the first edition, but a number of key developments have been covered, including in particular; the reform of vertical restraints by the Vertical Agreements Regulation (Chapter 5); the proposed modernisation of the enforcement of Community law contained in the 1999 White Paper and subsequent Draft Regulation (Chapter 2); and the developing law and practice under the Competition Act 1998 (Chapters 2, 3, and 4). There appears to be no quiet periods for competition law and policy and, inevitably, the law will develop further in the next few years, but this edition will provide students with a foundational knowledge of competition law and policy and assist them in understanding developments which occur after the publication of this edition. Finally, certain stylistic comments regarding the book’s content are appropriate. Generally the competition rules of the EC Treaty and, for example, the Merger Regulation shall be referred to as Community competition law. In that context, where references are made to the Court, this shall refer genetically to the European Court of Justice unless it is appropriate to make specific reference to either the Court of First Instance or the European Court of Justice. Similarly, generally in the book we utilise the term ‘companies’ in a non-technical and generic sense to refer to commercial enterprises. However, where appropriate we use the terminology of ‘undertakings’ which is used in Community competition law and has a specialised meaning, outlined in Chapter 3. In making references to Community case law, we have adopted the form of giving the case number followed by the case name and then where possible we have provided two alternative case report references, normally to the European Court Reports and Common Market Law Reports. In the context of UK Government publications, students should be aware of the different citations which have been adopted over the years in relation to Command publications, formerly referred to as Cmnd and now simply as Cm documents. The Director General of Fair Trading is referred to throughout as the DGFT. Finally, throughout this second edition, the new Treaty numbering system, following the entry into force of the Treaty of Amsterdam, has been adopted. However, direct quotations and citations may still refer to the old Treaty numbering system. The table of comparison below provides the reader with a simple conversion of the Treaty Articles in this context: New numbers Article 3 Article 10 Title VI Article 81 Article 82 Article 86 Article 87 Article 88 Article 89 Article 234
Old numbers Article 3 Article 5 Title V Article 85 Article 86 Article 90 Article 92 Article 93 Article 94 Article 177 viii
Preface
In relation to the first edition, the authors thanked, and continue to thank the following people for their support, advice and assistance; to Cavendish Publishing, and in particular Jo Reddy for having faith in our project; research assistants David McGowan and especially Joanne McDowall for their invaluable help in checking text and citations; Professor Alan Paterson at Strathclyde University Law School for his kind provision of funds to secure quality research assistants; to Professor David Milman, Professor Martin Loughlin and John Tillotson for their support at the University of Manchester; to David McLean, computer assistant at Strathclyde University for helping to revive many crashed files, to Lorna Balfour, of Clifford Chance, and Madame Anne Houtmann and Adinda Sinnaeve, at the European Commission, for their co-operation on Chapter 5, vertical restraints, and Chapter 7, State aids, respectively; to John Huntley and Richard Whish who successively at the University of Strathclyde and Oxford University inspired Barry Rodger’s interest in competition law. In relation to the second edition we would again thank Cavendish Publishing, particularly Cara Annett for helping, cajoling and supporting in equal measure, and to research assistants, Michelle Calvert, Steven Kennedy and Sarah-Jane Fowler for their help in updating the book. Finally, we would again like to thank all our colleagues and in particular those nearest and dearest, Susan and Lucy, for their encouragement during this project.
ix
CONTENTS Preface
vii
Table of Cases
xxi
Table of Statutes
xxxiii
Table of Statutory Instruments
xxxvii
Table of European Legislation
xxxix
Abbreviations 1
xliii
INTRODUCTION TO COMPETITION POLICY AND PRACTICE
1
COMPETITION LAW BACKGROUND
1
Monopoly
1
Cartels
2
Mergers
2
Unfair competition
3
State regulation—State aid
3
ECONOMICS OF COMPETITION LAW AND TERMINOLOGY
7
POLITICS OF COMPETITION LAW
10
COMPETITION POLICY OBJECTIVES
12
Prevention of the concentration of economic power
12
Regulation of excessive profits/fairer distribution of wealth
12
Protection of consumers
13
Regional policy
13
Creation of unified markets and prevention of artificial barriers to trade 13 Small is beautiful
14
US ANTITRUST LAW AND POLICY
15
DEVELOPMENT OF COMMUNITY COMPETITION LAW
16
DEVELOPMENT OF UK COMPETITION LAW
18
Statutory development
20
COMPARISON OF COMPETITION LAW OBJECTIVES UNDER COMMUNITY AND UK LAW AND POLICY
21
Community competition policy objectives
21
UK COMPETITION POLICY OBJECTIVES
22
COMPETITION LAW AND POLICY IN ACTION
23
The oligopoly problem—law and economics
24
Unfair competition—understanding law and policy
26
xi
Contents
2
FURTHER READING
27
DISCUSSION
28
ENFORCEMENT OF COMMUNITY AND UK COMPETITION LAW
29
INTRODUCTION
29
EC ADMINISTRATIVE ENFORCEMENT FRAMEWORK
29
Outline
29
The Commission
31
Initiation
32
Decision-making
36
Review of Commission decision-making
39
Ancillary enforcement issues
41
ENFORCEMENT DEVELOPMENTS
42
Rights of the defence
42
Notice of objections
43
Confidential information
44
Conduct of hearings
45
Proposals for reform
46
Position of complainants
47
DECENTRALISATION
47
Decentralisation to the national courts
48
Decentralisation to the National Competition Authorities
52
Subsidiarity
53
MODERNISING ENFORCEMENT OF COMMUNITY COMPETITION LAW 53 The White Paper
53
Key reform issues
54
Proposals for reform
55
Criticisms
56
The Draft Regulation
56
General principles
57
Enforcement powers
57
Commission decisions
57
Co-operation with NCAs and national courts
58
xii
Contents
3
Powers of investigation and penalties
59
Conclusions
59
HARMONISATION OF NATIONAL LAWS
60
UK ADMINISTRATIVE ENFORCEMENT FRAMEWORK
60
Introduction
60
The Fair Trading Act 1973
61
Initiation
61
Investigation and reporting
63
Enforcement
63
Under the new prohibitions
65
Competition Commission
67
Private law actions
68
RELATIONSHIP BETWEEN COMMUNITY AND NATIONAL LAW
69
GLOBALISATION AND EXTRA-TERRITORIALITY
72
Extra-territoriality
72
Subject matter jurisdiction
72
Community competition law and extra-territoriality
73
Resistance to extra-territorial application
74
INTERNATIONAL CO-OPERATION AND GLOBAL COMPETITION RULES
75
FURTHER READING
76
DISCUSSION
78
THE CONTROL OF DOMINANCE
79
INTRODUCTION TO ART 82 OF THE EC TREATY
79
UNDERTAKINGS AND THE EFFECT ON TRADE BETWEEN MEMBER STATES 79 DOMINANT POSITION
80
The relevant market
81
Dominance
84
Criticism
89
ABUSE
89
EXPLOITATIVE ABUSES
90
Excessive prices
90
xiii
Contents
Unfair conditions
91
The quiet life
91
EXCLUSIONARY ABUSES
92
Export bans
93
Price discrimination
93
Refusal to supply
96
Tie-ins
96
Mergers
97
SPECIFIC EXAMPLE: REFUSAL TO SUPPLY
97
To damage or deter a competitor
98
Intellectual property rights
98
New competitors and essential facilities
99
COLLECTIVE DOMINANCE
100
CONTROL OF DOMINANCE IN THE UK
103
Introduction
103
THE FAIR TRADING ACT 1973
104
Investigation and information gathering
105
Monopoly references
105
Monopoly situations
106
The reporting stage
108
The public interest
109
Consumer protection
116
Following a Competition Commission monopoly report
117
THE COMPETITION ACT 1980
118
REFORM OF UK ANTI-MONOPOLY LAWS
119
Abuse of Market Power
119
Trade and Industry Committee Report on UK Policy on Monopolies
120
THE COMPETITION ACT 1998
121
Introduction
121
The prohibition
121
Enforcement and ancillary issues
121
Consistency with Community law
123
Guidelines on the prohibition
123 xiv
Contents
Practice and case law to date
124
The operation of the prohibition and its relation to monopoly investigations under the 1973 Act
4
126
FURTHER READING
127
DISCUSSION
128
CONTROL OF ANTI-COMPETITIVE AGREEMENTS
129
INTRODUCTION TO ART 81 OF THE EC TREATY
129
ARTICLE 81(1)
129
Agreements, decisions of associations and concerted practices
130
Undertakings
133
Effect on interstate trade
134
Prevention, restriction or distortion of competition
135
Agreements of minor importance
141
Within the Common Market
141
ARTICLE 81(2)
142
ARTICLE 81(3)
144
INDIVIDUAL EXEMPTIONS
144
NOTIFICATION
144
The four conditions for exemption BLOCK EXEMPTIONS
145 146
Vertical Agreements Regulation
148
Problems and reform
149
ARTICLE 81 AND THE NATIONAL COURTS
150
INTRODUCTION TO UK CONTROLS ON ANTI-COMPETITIVE AGREEMENTS 152 THE 1976 RESTRICTIVE TRADE PRACTICES LEGISLATION Background
153 153
MAIN ISSUES UNDER THE RTPA1976
154
Registration
154
Categories of practice covered
154
Restrictions to be disregarded/exempt agreements
155
Registrable agreements and the Restrictive Practices Court
155
Enforcement under the 1976 Act
157
xv
Contents
CHANGING ATTITUDES UNDER THE 1976 ACTS
157
REFORM OF UK RESTRICTIVE TRADE PRACTICE LAWS
158
Review of Restrictive Trade Practices Policy
158
Opening Markets: New Policy on Restrictive Trade Practices
159
Tackling Cartels and the Abuse of Market Power
159
THE COMPETITION ACT 1998
5
159
Introduction
159
The prohibition—an outline
160
Enforcement and ancillary issues
160
The future operation of the prohibition
161
Land agreements
166
Mergers
166
Professional rules
167
FURTHER READING
169
DISCUSSION
170
VERTICAL RESTRAINTS
171
INTRODUCTION TO VERTICAL RESTRAINTS
171
THE EFFECTS OF VERTICAL RESTRAINTS
172
Objections
172
Pro-competitive effects
173
THE COMMUNITY TREATMENT OF VERTICAL RESTRAINTS
174
Outline legal position
174
General Commission approach to vertical restraints under Art 81(1)
175
Particular types of restriction
176
US rule of reason
178
The Court and the rule of reason
178
EXCLUSIVE DISTRIBUTION
180
Reasons for adopting exclusive distribution
180
Treatment of exclusive distribution agreements under Art 81(1)
181
SELECTIVE DISTRIBUTION
183
Reasons for adopting selective distribution
183
Treatment of selective distribution agreements under Community law 184 Criticisms of the Community approach to selective distribution xvi
185
Contents
ARTICLE 81(3)—THE EXEMPTION SYSTEM
186
PROPOSALS FOR REFORM OF VERTICAL RESTRAINTS POLICY
187
Criticisms of the proposals and the way forward THE VERTICAL AGREEMENTS REGULATION
189
Introduction
189
Vertical agreements
189
Market share threshold
190
Hardcore restraints
190
Other excluded obligations
191
Withdrawal of the Block Exemption Regulation
191
THE GUIDELINES
192
IMPACT ON EXCLUSIVE AND SELECTIVE DISTRIBUTION
193
Exclusive distribution
193
Selective distribution
193
Conclusion
195
UK COMPETITION LAW AND VERTICAL RESTRAINTS
6
188
195
Introduction
195
The 1976 restrictive trade practices legislation
196
The Competition Act 1998
196
Section 50 and the Order
197
The Fair Trading Act 1973
199
FURTHER READING
200
DISCUSSION
201
CONTROL OF MERGERS
203
INTRODUCTION
203
HISTORICAL BACKGROUND TO THE COMMUNITY CONTROLS
204
THE MERGER REGULATION 4064/89
207
The scope of the Regulation
207
Community dimension
209
Mandatory notification and suspension
211
Appraisal procedure
211
Basis of the appraisal
215
Exceptions to the ‘one stop shop’
218
xvii
Contents
7
Joint ventures
221
International mergers
223
BACKGROUND TO UK MERGER CONTROL
224
THE FAIR TRADING ACT 1973
224
The referral stage
225
The Competition Commission investigation and report
233
Interim measures
238
Enforcement: action following a Commission report
238
Miscellaneous issues
239
Proposed reforms
240
DTI PROPOSALS FOR REFORM 1999/2000
241
INDEPENDENT COMPETITION AUTHORITIES
241
COMPETITION BASED TEST
241
EXCEPTIONAL CASE
242
ANCILLARY ISSUES
242
CRITIQUE
243
FURTHER READING
243
DISCUSSION
244
STATE AID AND STATE REGULATION
245
INTRODUCTION TO STATE AID
245
ARTICLE 87(1): THE PROHIBITION OF STATE AIDS
246
What constitutes ‘aid’?
247
Affect on intra-Community trade
248
Distortion or potential distortion of competition
249
The market economy investor principle
250
EXEMPTIONS
252
Article 87(2): mandatory exemptions
252
Article 87(3): discretionary exemptions
253
Frameworks and guidelines
254
PROCEDURE AND REMEDIES
257
Notification
258
Competitors’ remedies
260
xviii
Contents
8
RECENT AND FUTURE DEVELOPMENTS
262
STATE REGULATION
263
MEASURES ADOPTED BY THE STATE
264
Article 81
264
Article 82
265
Article 86(3)
267
STATE REGULATION AND UNDERTAKINGS
267
FURTHER READING
269
DISCUSSION
269
OVERVIEW: POLICY DEVELOPMENTS AND PRACTICAL IMPLICATIONS
271
INTRODUCTION
271
POLICY LEVEL
271
Laissez-faire competition laws?
271
Certainty and predictability v economic analysis
272
Globalisation and international co-operation in competition law enforcement
273
Changes in substantive Community competition law
275
Developments in the enforcement of Community competition law
277
The UK Competition Act
278
PRACTICAL IMPLICATIONS
278
Instituting an effective compliance programme
278
Pigeon-holing in market analysis
280
Whistleblowing
281
The position of competitor complainants
282
DISCUSSION
284
Glossary
285
Index
291
xix
TABLE OF CASES
A, M & S Europe Ltd v Commission (Case 155/79) [1982] ECR 1575; [1982] 2 CMLR 264 36 ACF Chemifarma v Commission (Quinine) (Cases 41/69, 44/69, 45/69) [1970] ECR 661; [1970] CMLR 8083 130, 136 AEG Telefunken v Commission (Case 107/82) [1983] ECR 3151; [1984] 3 CMLR 325 185 AKZO Chemie BV v Commission (Case C-62/86) [1991] ECR I-3359; [1993] 5 CMLR 215 94, 125 AKZO v Commission (Case 53/85) [1986] ECR 1965; [1987] 1 CMLR 231 44, 85, 88, 95 AOL/Time Warner Case IV//M1825, IP/00/1145 215, 223, 274 Aberdeen Solicitors’ Property Centre v Director General of Fair Trading 1996 SLT 523 155 Accinauto v Commission [1999] ECR II-1635; [2000] 4 CMLR 67 38 Adams v Commission (Case 145/83) [1985] ECR 3539; [1986] 1 CMLR 506 44 Aeroports de Paris v Commission, 12 December 2000 268 Ahlstrom (A) Oy v Commission (Wood Pulp) (Cases C-89/85, C-104/85, C-114/85, C-116/85, C-117/85, C-125/85, C-129/85) [1988] ECR 5193; [1988] 4 CMLR 901 73, 74, 133, 142, 164, 164 Ahmed Saeed Flugreisen v Zentrale zur Bekämpfung Unlauteren Wettbewerbs (Case 66/86) [1989] ECR 803; [1990] 4 CMLR 102 101 Air France v Commission See Compagnie Nationale Air France v Commission— Airtours/First Choice (Case IV/M1524), OJ L93/1 2000 218 Alitalia v Commission (Case T-296/97) [2001] All ER (EC) 193 250 Amalgamated Industries/Herbert Morris (1975/76) HCP 434 227 Amministrazione delle Finanze dello Stato v Denkavit Italiana (Case 61/79) [1980] ECR 1205; [1981] 3 CMLR 694 247 Anglo American/Tarmac Case IV/M1779 IP/00/32, 13 January 200 219 Application des Gaz v Falks Veritas [1974] 1 Ch 381 142 Argyll v Distillers 1987 SLT 514; [1986] 1 CMLR 764 50, 282 Arjomari/Wiggins Teape Appleton (Case IV/M025) [1991] 4 CMLR 854 208 Atlantic Container Line v Commission (Case T-191/98) Pending 38 Austin Motor Car Ltd’s Agreements, Re [1958] Ch 61 155 Automec v Commission (No 2) (Case T-24/90) [1992] ECR II-2223; [1992] 5 CMLR 431 47, 48, 282 BAT v Commission (Philip Morris Case) (Case 142/84) [1986] ECR 1899; [1988] 4 CMLR 24 BNIC v Yves Aubert (Case 136/86) [1987] ECR 4789; [1988] 4 CMLR 331 xxi
40, 205 26
Table of Cases
BPB and British Gypsum v Commission (Case T-6/89) [1993] ECR II-389; [1993] 5 CMLR 32 85, 88 BT/AT&T (Case IV15, IP/99/209), 30 March 1999 222 Bayer v Commission (Case T-41/96R) [1996] ECR II-383; [1996] 5 CMLR 290 93, 131 Beguelin Import v GL Import Export (Case 22/71) [1971] ECR 949; [1972] CMLR 81 80, 175 Belgische Radio en Televisie and Societe Belge des Auteurs Compositeurs et Editeurs v SABAM and NV Fonior (Case 127/73) [1974] ECR 51, 313; [1974] 2 CMLR 238 48, 91, 268 Belgium v Commission (Case 142/87) [1990] ECR I-959; [1991] 3 CMLR 213 250, 259 Benedeti v Munari (Case 52/76) [1977] ECR 163 253 Berisford/British Sugar (1980–81) HCP 241 235 Brasserie de Haecht SA v Wilkin (No 1) (Case 23/67) [1967] ECR 407; [1968] CMLR 26 49, 138 Brasserie de Haecht SA v Wilkin (No 2) (Case 48/72) [1973] ECR 77; [1973] CMLR 287 49 Brasserie du Pêcheur v Germany (Factortame III) (Cases C-46/93, C-49/93) [1996] ECR I-1029; [1991] ECR I-5357; [1996] 1 CMLR 889; [1996] 2 WLR 506 49, 261 British Airways and Others v Commission (Cases T-371/94, T-394/94) [1998] ECR II-2405; [1998] 3 CMLR 429 256 British Airways Board v Laker Airways Ltd [1985] AC 58; [1984] 3 All ER 39 5, 75 British Airways and British Midland Airways v Commission (Cases T-371/94 and T-394/94; [1998] ECR II-2405 257, 260 British Basic Slag Ltd’s Agreement, Re [1962] 3 All ER 247 155 British Leyland v Commission (Case 226/84) [1986] ECR 3263, [1987] 1 CMLR 465 123 British Midland v Aer Lingus (Commission Decision 92/213/EEC), OJ L96/34, 1992 93 Bundessanstalt für den Güterfernverkehr v Gebruder Reiff (Case C-185/91) [1993] ECR I-5801 265 COFAZ and Others v Commission (Case C-169/84) [1986] ECR 391; [1986] 3 CMLR 385 Camera Care v Commission (Case 792/79R) [1980] ECR 119; [1980] 1 CMLR 334 Carlo Bagnasco and Others v Banco Polare di Navara and Others (Joined Cases C-215/96 and C-216/96) [1999] ECR I-135 Cementhandelaren v Commission (Case 8/72) [1972] ECR 977; [1973] CMLR 7
xxii
260 37 134 132, 134
Table of Cases
Chemidus Wavin v Société pour la Transformation et L’Exploitation des Resines Industrielles SA [1978] 3 CMLR 415 143 Claritas (UK) Limited v The Post Office and Postal Preference Service Limited [2001] UKCLR 2 69, 125, 126, 283 Coditel II (Case 262/81) [1982] ECR 3381; [1983] 1 CMLR 49 176 Comité Central d’Enterprise de la Société Anonyme Vittel v Commission (Case T-12/93) [1995] ECR II-1247 216 Comité d’entreprise de la Société françhise de production v Commission (Case C-106/98) [2000] ECR I–3659 261 Commercial Solvents v Commission (Cases 6/73, 7/73) [1974] ECR 223; [1974] 1 CMLR 309 73, 80, 83, 98 Commission Decision (64/556/EEC), OJ 2545/64; [1964] CMLR 489 130, 130 Commission Decision (70/488/EEC), OJ L242/22, 1970 (Omega) 194 Commission Decision (77/327/EEC) (ABG), OJ L117/1, 1977; [1977] 2 CMLR D1 84, 97 Commission Decision (78/516/EEC) (RAI/UNITEL), OJ L157/39, 1978; [1978] 3 CMLR 306 79 Commission Decision (80/1334/EEC) (Italian Cast Glass), OJ L383/19, 1980; [1982] 2 CMLR 61 136 Commission Decision (82/1283/EEC) (ANSEAU/NAVENA), OJ L167/39, 1982; [1982] 1 CMLR 221 79 Commission Decision (85/77/EEC) (Uniform Eurocheques), OJ 1985 135/43 268 Commission Decision (85/559/EEC) Ivoclar, OJ L369/1, 1985 194 Commission Decision (85/616/EEC) (Villeroy and Boch), OJ L376/15, 1985; [1988] 4 CMLR 461 184 Commission Decision (86/398/EEC) (Polypropylene), OJ L230/1, 1986; [1988] 4 CMLR 347 130, 136, 281 Commission Decision (87/500/EEC) (BBI/Boosey and Hawkes (Interim Measures), OJ L286/36, 1987; [1988] 4 CMLR 67 37, 97, 98 Commission Decision (88/518/EEC) (Napier Brown/British Sugar), OJ L284/41, 1988; [1990] 4 CMLR 196 96 Commission Decision (88/589/EEC) (London-European/SABENA), OJ L317/47, 1988; [1989] 4 CMLR 662 99 Commission Decision (89/93/EEC), (Italian Flat Glass), OJ L33/44, 1989; [1990] CMLR 535 25, 102, 136 Commission Decision (91/555/EC) (Sabena), OJ L300/48, 1991 256 Commission Decision (91/619/EEC) (Aerospatiale/Alenia/de Havilland) (Case IV/M53) [1992] 4 CMLR M2 217, 276 Commission Decision (92/33/EEC) (Yves Saint Laurent), OJ L12/24 1992 185, 194 Commission Decision (92/428/EEC) Parfums Givenchy, OJ L236/11, 1992 194 Commission Decision (93/82/EEC) (Cewal), OJ L34/20, 1993; [1995] 5 CMLR 198 102
xxiii
Table of Cases
Commission Decision (94/118/EC) (Aer Lingus), OJ L54/30, 1994 251 Commission Decision (94/696/EC) (Olympic Airways), OJ L273/22 1994 255 Commission Decision (95/188/EEC) (COAPI), OJ L122/37, 1995; [1995] 5 CMLR 468 132 Commission Decision (95/553/EEC) (Nestlé/Perrier) (Case IV/M120) [1993] 4 CMLR M17 217 Commission Decision (96/478/EEC) (Adalat), OJ L201/1; [1996] CMLR 416 93 Commission Decision (97/816/EC) Case IV/M877 Boeing/McDonnell Douglas, }L336/16, 1997 6, 223, 274 Commission Decision (97/624/EC), OJ L258/1, (Irish Sugar plc v Commission) T-228/97 [1999] ECR II-2969 86, 94, 95, 96, 125, 275 Commission Decision (98/273/EC) (Volkswagen), OJ L124/60 39 Commission Decision (99/243/EC) Transatlantic Conference Agreement, OJ, L95/1 1999 38 Commission Decision (2000/74/EC) (Virgin/British Airways), OJ L30/1, 2000 4, 94 Commission Decision (2001/462/EC), OJ 2001, L152121 38 Commission v Anic Partecipazioni SpA (Case C-49/92) [1999] ECR I-4125 130, 136, 138, 163 Commission v France (Case 290/83) [1985] ECR 439; [1986] 2 CMLR 546 247 Commission v Germany (Case 5/89) [1990] ECR I-3437; [1992] 1 CMLR 117 260 Commission v Germany [1973] ECR 813; [1973] CMLR 741 248 Commission v Greece (Case 226/87) [1998] ECR 3611; [1989] 3 CMLR 569 267 Compagnie Maritime Belge Transports v Commission of the European Communities [2000] ECR I-1365; [2000] 4 CMLR 1076 25, 96, 102 Compagnie Nationale Air France v Commission (Air France) (Case T-358/94) [1996] ECR II-2112; [1997] 1 CMLR 492 248, 249, 251, 257 Conagra/Idea (Case IV/M010) [1991] 4 CMLR 580 208 Consignia plc and Postal Preference Service Ltd, Decision CA 98/4/2001, 15 June 2001 124, 125 Costen and Grundig v Commission [1966] ECR 299; [1966] CMLR 418 130, 136, 145, 165, 174, 177 Continental Can v Commission (Case 6/72) [1973] ECR 215; [1978] 1 CMLR 199 81, 83, 87, 97, 205 Continental TV Inc v GTE Sylvania 433 US 36 (1977) 178 Cook v Commission (Case C-198/91) [1993] ECR I-2486; [1993] 3 CMLR 206 260 Corbeau (Case C-320/91) [1993] ECR I-2533; [1995] 4 CMLR 621 266, 268 Courage and Crehan and Crehan v Courage, Case C-453/99; [1999] EuLR 834 51, 56, 59, 143, 164, 283
xxiv
Table of Cases
Delimitis v Henniger Bräu (Case C-234/89) [1991] ECR I-935; [1992] 5 CMLR 210
58, 134, 138, 139, 140, 145, 163, 179, 190
Demenagements-Manutention Transport SA (DMT) [1999] ECR I-3913; [1999] All ER (EC) 601 Deutsche Post/trans-o-flex (Case IV/M1447) Deutsche Post AG v Gesellschaft fur Zahlungssysteme mbH and Citicorp Kartenservice GmbH [2000] ECR I-825, [2000] 4 CMLR 838 Distillers Company Ltd v Commission (Case 30/78) [1980] ECR 2229; [1980] 3 CMLR 121 Dixon Stores Group Ltd/Compaq Computer Limited/Packard Bell NEC Ltd, Decision CA 98/4/2001, 15 June 2001
247 212
268 5, 22, 32 124
EDF/London Electricity (Case IV/M1346), IP/99/49, 27 January 1999 219 ERT v DEP (Case C-260/89) [1991] ECR I-2925 267 ETA Fabriques d’Ebauches v DK Investments SA (Case 31/85) [1985] ECR 3933; [1986] 2 CMLR 674 176 Elf Atochem/Rohm and Haas (Case IV/M160) (1992) 222 Elopak Italia SI v Tetra Pak (No 2) (Commission Decision 92/163/EEC) OJ L72/1, 1992; [1992] 4 CMLR 551 87, 126 Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 19, 195 Etablissement Consten SA and Grundig Verkaufs-GmbH v Commission (Cases 56/64 and 58/64) [1966] ECR 299; [1966] CMLR 418 70, 145, 177, 178, 182, 191 Eurocanadian Shipholding/Furness Withy/ Manchester Liners (1975–76) HCP 639 227 European Night Services v Commission (Cases T-374, 375 and 388/94) [1998] ECR II-3141 175 Evven Warnink BV v J Townend &Sons (Hull) Ltd (No 1) [1979] AC 731 19 Executif Regional Wallon v Commission (Case 62/87) [1988] ECR 1573; [1989] 2 CMLR 771 260 FNCE v France (Salmon) (Case C-354/90) [1991] ECR I-5505 259, 261 FRUBO v Commission (Case 71/74) [1975] ECR 563; [1975] 2 CMLR 123 33, 136 Factortame v United Kingdom (Case 48/93) [1996] 2 WLR 506 282 Fisher v Director General of Fair Trading [1982] ICR 71 155 Flaminio Costa v ENEL (Case 6/64) [1964] ECR 585 70 Ford Werke v Commission (Cases 25/84, 26/84) [1985] ECR 2725; [1985] 3 CMLR 528 131 France v Commission (Case C-301/87) [1990] ECR I-307 259
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Table of Cases
France v Commission (Cases 188/80, 190/80) [1982] ECR 2545; [1982] 3 CMLR 144 267 France v Commission (Cases C-68/94, C-30/95) [1998] 4 CMLR 829 217 France v Commission (Kimberley Clark) (Case C-241/94) [1996] ECR I-3203 247, 248 France v Commission (Case C-17/99) 22 March 2001 256, 260 Francovich v Italian State (Cases C-6/90, C-9/90) [1996] ECR 1–5357; [1993] 2 CMLR 66 49, 50 Freistaat Sachsen & Others v Commission (Case T-132/96; T-143/96) [1999] ECR II-3663.. 249 Funke v France (A/256-A) [1993] 1 CMLR 897; (1993) 16 EHRR 297 36 GVL v Commission, (Case 7/82) [1983] ECR 483; [1983] 3 CMLR 465 123 Garden Cottage Foods v The Milk Marketing Board [1984] AC 130 50 Gebr Lorenz GmbH v Germany (Case 120/73) [1973] ECR 1471 258 Geigy v Commission (Case 52/69) [1972] ECR 787; [1972] CMLR 557 74 Gencor v Commission (Case T-102/96) ECR II-879; [1999] 4 CMLR 971 25, 74, 103, 142, 164, 217, 218, 223, 276 General Motors v Commission (Case 26/75) [1975] ECR 1367; [1976] 1 CMLR 95 90, 125 Gestevision Telecinco SA v Commission (Case T-95/96) [1998] ECR II-3407 261 Gibbs Mew v Gemmell [1998] EuLR 588 50, 143, 164 Giovanni Carra and Others (Case C-258/98) [2000] ECR I-4217 266 Glaxo/Wellcome (Case IV/M555) (1995) 213 Groupement d’Achat Edouard Leclerc v Commission (Case T-88/92) [1996] ECR II-1961; [1997] 4 CMLR 995 185 Guerin v Commission (Case C-282/95P) [1997] 5 CMLR 447 47, 261, 282 Haig & Co Ltd v Forth Blending Ltd 1954 SC 35 19 Hanson/Pioneer (Case IV/M1827) DTI Press Release P2000/ 212, 24 March 2000 219 Hasselblad (GB) Ltd v Orbinson [1985] QB 475 32 Hercules NV v Commission (Case T-7/89) [1991] ECR 1171; [1992] 4 CMLR 84 43, 130, 136, 137, 281 Hilti AG v Commission (Case T-30/89) [1991] ECR II-1429; [1992] 4 CMLR 16 82, 87 Hilti AG v Commission (Case C-53/92P) [1994] ECR 1–666; [1994] 1 CMLR 590 96 Hoechst v Commission (Case 227/87) [1989] ECR 2859; [1991] 4 CMLR 410 35, 43, 70 Hoffmann-La Roche v Centrafarm (Case 102/77) [1978] ECR 1139; [1978] 3 CMLR 217 95 Hoffmann-La Roche v Commission (Case 85/76) [1979] ECR 461; [1979] 3 CMLR 211 85, 87, 95, 101 Höffner and Elser v Macrotron (Case C-41/90) [1991] ECR I-1979; [1993] 4 CMLR 306 266, 267
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Table of Cases
IBM Case (Case 60/81) [1983] ECR 3283; [1981] 3 CMLR 635 40 IBM Personal Computers Case [1984] 2 CMLR 342 185, 186 ICI v Commission (Dyestuffs) (Case 48/69) [1972] ECR 619; [1972] CMLR 557 73, 131, 136, 141 Iberian UK Limited v BPB Industries plc [1996] 2 CMLR 601; [1997] 8 ECLR 534 282 Imperial Chemical Industries plc v Commission See Soda Ash Cases 44 Industrie Aeronautiche e Meccaniche Rinaldo Piaggio v International Factors Italia SpA (IFITALIA) [2000] CMLR 825 248 Industria Vetrana Alfonso Cobelli v Società Italiana Vetro (Commission Decision 89/93/EEC), OJ L33/44, 1989; [1990] 4 CMLR 535 136 Inno v ATAB (Case 13/77) [1977] ECR 2115; [1978] 1 CMLR 283 264 Inntrepreneur Estates Ltd v Mason [1993] 2 CMLR 293 34, 143, 152 Interbrew/Bass (Case IV/M2044), IP/00/940, 23 August 2000 219 Interbrew SA v Competition Commission and Secretary of State for Trade and Industry, High Ct QBD 25 May 2001 6, 234 Intermills v Commission (Case 332/82) [1984] ECR 3809; [1986] 1 CMLR 614 260 International Express Carriers Conferences (IECC) v Commission, Cases C-449/98, C-450/98P, 11 January 2001 47 Irish Sugar plc v Commission (Case T-228/97) [1999] ECR II-2969; [1999] 5 CMLR 1300 86, 94, 95, 96, 125, 275 Italy v Commission (Textiles) (Case 173/73) [1974] ECR 709; [1974] 2 CMLR 593 247, 248, 249 Kali and Salz/MdK/Treuhand (Case IV/M308) (1994) Kimberley-Clark/Scott Paper (Case IV/M623) (1996) Kruidvat BVBA v Commission [1999] 4 CMLR 68
217 215 40
L’Oreal v PVBA De Nieuwe AMCK (Case 31/80)[1980] ECR 3775 185 La Cinq v Commission (Case T-44/90) [1992] 4 CMLR 449 37 Ladbroke Racing Ltd v Commission (Case T-67/94) 247 Laker Airways v Pan American World Airways [1984] ECC 296, DC of Columbia 5 Lancome v Etos (Case 99/79) [1980] ECR 2511; [1981] 2 CMLR 164 34 Land Rheinland Pfalz v Alcan Deutschland (Case C-24/95) [1997] 2 CMLR 1034 260, 262 Langnese-Iglo v Commission (Case T-7/93) [1995] ECR II-1583; [1995] 5 CMLR 602 Leeuwarder Papierwarenfabriek v Commission (Case 296/82) [1985] ECR 809; [1985] 3 CMLR 380 250 Leyland DAF v Automotive Products [1994] 1 BCLC 245 97
xxvii
Table of Cases
Lloyd’s TSB/Abbey National (2001) Cm 5208, DTI Press Release, P/2001/362, 10 July 2001 Lonrho plc v Fayed and Others (No 5) [1994] 1 All ER 188 Lonrho plc v Secretary of State for Trade and Industry [1989] 2 All ER 609 Louis Erauw-Jacquery v La Hesbignonne (Case 27/87) [1988] ECR 1919; [1988] 4 CMLR 576 Lucazeau v SACEM (Case 110/88) [1989] ECR 2811; [1991] 4 CMLR 248
229, 236 19 230 176 91
MD Foods plc (Formerly Associated Dairies Ltd) v Baines [1997] 3 WLR 364 196 MTV Europe v BMG Record (UK) Ltd and Others [1997] 1 CMLR 867 151 Mackprang v Commission (Case 15/71) [1971] ECR 997; [1972] CMLR 52 41 Magill TV Guide: ITP, BBC and RTE v Commission (Commission Decision 89/205/EEC) OJ L78/43, 1989; [1989] 4 CMLR 757 99 Mannesmann/Valourec/Ilva (Case IV/M120) (1994) 217 Masterfoods v HB Ice Cream Case C-344/98 [2001] 4 CMLR 14 51, 58, 152, 282 Matra SA v Commission (Case C-225/91) [1993] ECR I-3203 260 Mercedez Benz/Kassbohrer (Case IV/M774) (1996) 216 Merci Convenzionali Porto di Genova SpA v Siderurgica Gabrielli (Case C-179/90) [1991] ECR 1–5889; [1994] 4 CMLR 422 92, 266 Metro v Commission (No 1) (Case 26/76) [1977] ECR 1875; [1978] 2 CMLR 1 40, 140, 145, 184, 186, 190 Metro v Commission (No 2) [1986] ECR 3021; [1987] 1 CMLR 118 186 Michelin v Commission (Case 322/81) [1983] ECR 3461; [1985] 1 CMLR 282 89, 90, 92, 94, 95 Mid Kent Holdings v General Utilities plc [1997] 4 ECLR 273 232, 283 Midland Bank plc v Laker Airways plc [1986] 1 All ER 526 75 Mileage Conference Group of Tyre Manufacturers’ Conference Ltd’s Agreement, Re [1966] 2 All ER 849 155 Miller and Bryce Ltd v Keeper of the Registers of Scotland 1997 SLT 1000 50, 79, 283 Miller International Schallplatten GmbH v Commission (Case 19/77) [1978] ECR 131; [1978] 2 CMLR 334 176 Mogul Steamship Co Ltd v McGregor Gow & Co [1892] AC 25 19 Municipality of Almelo v Energiebedrijf Ijsselmij (Case C-393/92) [1994] ECR I-1477 102 Musique Diffusion Francaise SA, C Melchers and Pioneer Electronic (Europe) and Pioneer High Fidelity (GB) Ltd v Commission; Pioneer, Re (Cases 100/80–103/80) [1983] ECR 1825; [1983] 3 CMLR 221 38, 178 Napp Pharmaceutical Holdings Limited and Subsidiaries (Napp) Decision CA 98/2/2001, 30 March 2001
xxviii
124, 125
Table of Cases
National Panasonic v Commission (Case 136/79) [1980] ECR 2033; [1980] 3 CMLR 169 Nederlandsche Branden-Industrie Michelin NV v Commission (Case 322/81) [1983] ECR 3461; [1985] 1 CMLR 282 Neste Markkinointi Oy v Yotuuli Ky and Others (Case C-214/99) [2001] All ER (EC) 76; [2001] 4 CMLR 27 Net Book Agreement (No 2), Re (1964) LR 4 RP 484 Net Book Agreement (No 4), Re [1998] ICR 753 Net Book Agreement, Re [1962] 3 All ER 751 Netherlands and Others v Commission [1992] ECR I-565 Network Multimedia Television Ltd v Jobserve 5 April 2001, Ch Neue Maxhutte Stahlwerke v Commission (Case T-129/95, T-2/95 and T-97/96) [1999] ECR II-17; [1999] 3 CMLR 366 Newsquest Media Group Ltd/Westminster Press [1996] 7 ECLR R-183 Nungesser (LC) KG and Kurt Eisele v Commission (Case 258/78) [1982] ECR 2015; [1983] 1 CMLR 278 NV Algemene Transport en Expeditie Onderneming Van Gend en Loos v Netherlands Administratie der Belastingen Case 26/62 [1963] ECR 1; [1963] CMLR 105 Ohra Schadeverzekeringen (Case C-245/91) [1993] ECR I-5851; [1995] 5 CMLR 145 Orkem v Commission (Case 374/87) [1989] ECR 3283 Oscar Bronner GmbH & Co KG v Mediaprint Zeitungs und Zeitschriftenverlag GmbH & Co KG (Case C-7/97) [1998] ECR I-7791; [1999] 4 CMLR 112
34 83 139 158 158 267 126
250 225 140, 180
70
265 36
99, 275
Panayiotou and Others v Sony Music Entertainment (UK) Ltd [1994] 1 All ER 755 19 Parke, Davis & Co v Probel (Case 24/67) [1968] ECR 55; [1968] CMLR 47 98 Passmore v Moreland and Others [1999] 1 CMLR 1129 140, 143 Petra Kirsammer-Hack v Nurhan Sidal (Case C-189/91) [1993] ECR I-6185 247 Phillip Morris Holland BV v Commission [1980] ECR 2671; [1981] CMLR 321 249 Portugal v Commission 29 March 2001 267 Practice Note OJ C343/4, 1982 [1984] 1 CMLR 38 Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgalis (Case 161/84) [1986] ECR 353; [1986] 1 CMLR 414 140, 176, 180, 193 R v Customs and Excise ex p Lunn Poly Ltd and Another [1998] 3 CMLR 369; [1999] EuLR 653 248, 259, 263
xxix
Table of Cases
R v MMC ex p Argyll Group plc [1986] 2 All ER 257 234, 235 R v Monopolies and Mergers Commission ex p South Yorkshire Transport Ltd [1993] 1 All ER 289 228 R v Monopolies and Mergers Commission ex p Visa International [1991] CCLR 13 108 R v Secretary of State for Trade and Industry ex p Anderson Strathclyde plc [1983] 2 All ER 233 230, 239, 283 Radio Telefis Eireann v Commission (Case T-68/89) [1991] ECR II-485 126 RICS’s Application, Re [1985] ICR 330; aff’d [1986] ICR 550 155 Roberts v Commission, (Case T-25/99) 5 July 2001 138, 139 RTE and Others v Commission (Cases C-241/91P, C-242/91P) [1995] ECR 1–743; [1995] 4 CMLR 718 99 RTT v GB-Inno (Case C-18/88) [1991] ECR I-5941 266, 267 Registrar of Restrictive Trading Agreements v Schweppes Ltd (No 2) [1971] 2 All ER 1473 Remia BV and Nutricia v Commission (Case 42/84) [1985] ECR 2545; [1987] 1 CMLR 1 140, 180 SABA [1976] 1 CMLR D61 Sacchi (Case 155/73) [1974] ECR 409 265 Sanofi/Synthelabo (Case IV/M1397) 212 Scholler Lebensmittel v Commission (Case T-9/93) [1995] ECR II-1583; [1995] 5 CMLR 602 Schroeder Music Publishing Co Ltd v Macauley [1974] 3 All ER 616 19 Scottish Milk Marketing Board v Dryborough & Co Ltd 1985 SLT 253 19 Sealink/B and I—Holyhead: Interim Measurers [1992] 5 CMLR 255 99 Sloman Neptun Schiffahrts AG v Seebetriebstrat Bodo Zeisemer der Sloman Neptun Schiffahrts (Cases C-72/91, C-73/91) [1993] ECR I-887 247 Smalbach-Lubeca v Carnaud [1988] 4 CMLR 262 205 Società Italiana Vetro SpA and Others v Commission (Italian Flat Glass Case) (Cases T-68/89, T-77/89, T-78/89) [1992] ECR II-1403; [1992] 5 CMLR 302 25, 101, 102, 136 Société d’Hygiène Dermatologique de Vichy v Commission (Case T-19/91) [1992] ECR II-415 185 Société Technique Minière v Maschinenbau Ulm GmbH (Case 56/65) [1966] ECR 235; [1966] CMLR 357 80, 134, 135, 143, 164, 174, 179, 182, 183 Soda Ash Cases (Cases T-30/91, T-31/91, T-32/91 (Solvay v Commission), T-36/91 (ICI v Commission)) [1995] ECR II-1775, II-1821, II-1825, II-1847, II-1901 44, 45, 80
xxx
Table of Cases
Solvay v Commission (Case 27/88) [1989] ECR 3355; [1991] 4 CMLR 502 36, 44 St Gobain/Poliet (Case IV/M764) (1996) 208 St Gobain/Wacker-Chemie/NOM (Case IV/M774) (1996) 216 Stagecoach Holdings plc v Secretary of State for Trade and Undustry 1997 SLT 940226, 228, 234 Steinike and Weinlig v Germany (Case 78/86) [1977] ECR 595; [1977] 2 CMLR 688 249 Stenuit Decision [1992] 14 EHRR 509 42 Suiker Unie v Commission (Sugar) (Cases 40/73, 48/73, 50/73, 54/73–56/73, 113/73, 114/73) [1975] ECR 663; [1976] 1 CMLR 295 131 Supply of Ready Mixed Concrete (No 1), Re; Director General of Fair Trading v Smiths Concrete Ltd [1991] 4 All ER 150 156 Supply of Ready Mixed Concrete (No 2), Re; Director General of Fair Trading v Pioneer Concrete UK Ltd and Another [1995] 1 All ER 135 18, 156, 157 Syndicat Francais de 1’Express International (SFEI) and Others v La Poste and Others (La Poste) (Case C-39/94) [1996] ECR I-3547; [1996] All ER (EC) 685; [1996] 3 CMLR 369 259, 261, 262 Synstar Computer Services (UK) Ltd v ICL (Sorbus) Ltd (2001) The Times, 1 May 69 Sytraval v Commission (Case T-95/94) [1995] ECR II-2651 260 TNT Traco SpA v Poste Italiane SpA, 17 May 2001 268 TWD Textilewerke Deggendorf GmbH v Germany (Case C-188/92) [1994] ECR I-833; [1995] 2 CMLR 145 261 Tate & Lyle plc, British Sugar plc and Napier Brown & Co Ltd (Cases T-202/98, T 204-/98, T-207/98) 12 July 2001 38, 39, 131, 134, 136 Tarmac/Steetley (Case IV/M75) [1992] 4 CMLR 343 219 Tele-Marketing v CLT (Case 311/84) [1985] ECR 3261; [1986] 2 CMLR 558 87 Téneo/Merill Lynch/Bankers Trust (Case IV/M722) (1996) 222 Tetra Pak International SA v Commission (Case 333/94P) [1996] ECR I–5951; [1997] 4 CMLR 612 87, 126 Tetra Pak v Commission (Case T-51/89) [1990] ECR II-309; [1991] 4 CMLR 334 95 Texaco Ltd v Mulberry Filling Station Ltd [1972] 1 All ER 513 19 Texaco/Norsk Hydro (Case IV/M511) (1995) 222 Thomas Cook/LTU/West LB (Case IV/M229) (1992) 208 Tierce Ladbroke v Commission (Case T-504/93) [1997] ECR II-923 99 United Biscuits (UK) Ltd v Asda Stores Ltd (1987) (unreported) 18 March 7 United Brands Continental BV v Commission (Case 27/76) [1978] ECR 207; [1978] 1 CMLR 429 82, 84, 85, 87, 88, 91, 98
xxxi
Table of Cases
United States v Aluminium Co of America (Alcoa) 148 F 2d 416 (1945), 2 Circ United States v Microsoft, Civil Action 98–1232 (TPJ), 7 June 2000
73, 75 16
Van Eycke (Case 267/86) [1988] ECR 4769; [1990] 4 CMLR 330 265 Van Vliet Kwasten and Ladderfabrieke v Fratelli Dalle Crode (Case 25/75) [1975] ECR 1103; [1975] 2 CMLR 549 177 Vereniging van Vlaamse Reisbureaus v Sociale Dienst (Case 311/85) [1987] ECR 3801; [1989] 4 CMLR 213 265 Vichy (Case T-19/91) See Société d’Hygiène Dermatologique de Vichy v Commission Viho Europe v Commission (Case T-102/92) [1995] ECR II-17; [1997] 4 CMLR 469, On Appeal, Case C-73/95P [1996] ECR I-5457; [1997] 4 CMLR 419 80, 134 Viscido and Others v Ente Post Italiane (Cases C-52–54/97) [1998] ECR I-2629 248 Vodaphone/Airtouch (Case IV/M1430), OJ C295/2, 1999) 213 Völk v Ets Vervaecke Sprl (Case 5/69) [1969] ECR 295; [1969] CMLR 273 141, 175 Volkswagen v Commission [2000] ECR II-2707 Case T-62/98 39 Walt Wilhelm v Bundeskartellamt (Case 14/68) [1969] ECR 1; [1969] CMLR 100 57, 70, 71 Wolf Meng (Case C-2/92) [1993] ECR I-5751 265
xxxii
TABLE OF STATUTES Companies Act 1989 105, 224, 231, 232, 240 s 150(1) 227 s 151 105 Competition Act 1980 20, 21, 62, 64, 103, 104, 119, 126 ss 2–10 118 Competition Act 1998 2, 5, 18, 20, 21, 23, 25, 29, 60, 62, 64, 65, 67, 73, 103, 104, 105, 107, 115118, 119, 120, 152, 154, 159, 170, 171, 195, 196, 199, 240, 241, 243, 278, 279, 281, 283 Pt I 121, 122, 160, 161, 197 Pt I, Ch V 122, 161 s2 73, 160, 161, 162, 163, 196 s 2(3) 164 s 2(4) 164 s 10 69, 162, 165, 197, 198 ss 12–16 160 s 13 165 s 14 164 s 15 164 s 17 126 s 18 73, 121, 199 s 18(l) 121 s 22 122 s 23–24 122 ss 26–29 122, 161 s 30 161 ss 31, 33–36, 38 122, 161 s 36 66 s 39 164 s 40 122 s 41 161 ss 42–44 122, 161 s 43 18 s 45 122, 161, 233 s 46(1) 67 s 47 67,122, 283 s 48 123
s 49 161 s 50 154 s 50(1) 166, 197 s 50(3) 197 s 51(1) 66 s 52 66, 122, 161 ss 52, 54, 55, 56, 58 122, 161 s 52(1) 123 s 54(4)–(5) 67 s 59 124 s 60 69, 121, 123, 124, 126, 160, 161, 162, 164, 197 s 60(1)–(3) 123 Pt II (ss 61–65) 35, 160, 275 Pt III 105, 160 s 72 18 s 76(2) 167 Scheds 1–4 160, 166 Sched 1, paras 1, 2 166, 240 Scheds 1, 3 121 Sched 4 167 Sched 4 (1)(1) 167 Sched 5 160 Sched 6 121 Sched 7 122, 161, 233 Sched 7 (4) 67 Sched 8 67, 122, 161 Sched 8, Pt II 123, 161 Sched 10 122, 160 Sched 10, Pts II–III 122 Sched 13, Pts III, paras 19, 21, 23 167 Sched 14 160 Competition and Services (Utilities) Act 1992 239 Copyright Designs and Patents Act 1998 s 144(1) 114 Deregulation and Contracting Out Act 1994 224, 231, 240 s7 119 s 39 231 Sched 2 120 Sched 11 231
xxxiii
Table of Statutes
European Communities Act 1972 ss 2(1), 3(1)
70
Fair Trading Act 1973 2, 10, 13, 20, 21, 23, 25, 60, 61, 62, 63, 64, 65, 67, 69, 103, 104, 108, 110 111, 113, 115, 118, 119, 121, 126, 127, 195, 198, 199, 204, 224, 225, 232, 232, 240, 241, 243, 280, 283 Pt I 117, 239 Pt II 117, 239 Pt V 166, 224, 240 s 2(2) ss 6–8 s 6(1)(c), (d), (2) s 6(2) s 12 s 41 s 46(2), (3) s 48 s 49(2) s 54(2) s 55 s 56A s 63(2) s 64 s 64(1) s 64(1)(a) s 64(4) s 64(5) s 65(1) s 65(3)–(4) s 66A s 67(2)(a) s 69
105 106 107 107 105 120 105 106 105 110 108 120 226 227 226, 230 228 230, 232 229 226 227 227 228 233
s 69(3) s 72(2) s 75 s 75(5) ss 75A–75F s 75H s 76 s 76(1)(a), (2)(b) s 84
s 88 ss 90–93 s 90 ss 91, 93 s 93A s 93A(2) s 93B Sched 8 Sched 8
235 238 232 233 232 231 225 230 3, 11, 13, 14, 64, 105, 109, 111, 116, 156, 229, 235, 237, 240, 273 64 239 64, 117 64 231 231 105 64, 117, 239 64
Monopolies and Mergers Act 1965 20, 224 Monopolies and Restrictive Practices (Inquiry and Control) Act 1948 20, 153, 154, 224 Patents Act 1977 s 51(5) Profiteering Act 1919 Protection of Trading Interests Act 1980 ss 1–3, 5, 6
114 20 75 75
Resale Prices Act 1964 20, 158 Resale Prices Act 1976 20, 64, 153, 159, 167, 196
xxxiv
Table of Statutes
Restrictive Practices Court Act 1976 20, 64, 196 Restrictive Trade Practices Act 1956 20, 153, 224 s7 153 Restrictive Trade Practices Act 1968 153 Restrictive Trade Practices Act 1976 20, 25, 64, 107, 153, 154, 156, 157, 158, 167, 196 s 1(2) 154 s 1(2)(c) 155 s9 155 s 9(3) 155, 196 s 10 156 s 18 155 s 19 156
s 21 s 21(2) s 28 s 35(2) s 43 ss 55, 56, 58 Sched 3 Restrictive Trade Practices Act 1977 Restrictive Trade Practices (Inquiry and Control) Act 1948 Trade Marks Act 1994 s 10(6) s 56(2)
xxxv
154 155, 196 155 68, 154 155 68 155 153
26 26 19
TABLE OF STATUTORY INSTRUMENTS
Competition Act 1998 (Directors Rules) Order 2000 (SI 293) 66 Competition Act 1998 (Concurrency) Regulations 2000 (SI 260) 67 Competition Act 1998 (Small Agreements and Conduct of Minor Significance) Regulations 2000 (SI 262) 161, 164 Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 (SI 310) 154, 162, 166, 171, 197 Art 2 Competition Act 1998 (Public Transport Ticketing Schemes Block Exemption) Order 2001 (SI 319)
Deregulation (Fair Trading Act 1973) (Amendment) (Merger Reference Time Limits) Order 1996 (SI 345)
64, 114
Merger References (Increase in Value of Assets) Order 1994 (SI 72)
228
Monopolies and Mergers— the Restriction on Agreements and Conduct (Specified Electrical Goods) Order 1998 (SI 1271) 64, 117
166
169
Competition Act 1998 (Commencement No 5) Order 2000 (SI 344) 167 Competition Commission Appeal Tribunal Rules 2000 (SI 261)
Foreign Package Holidays (Tour Operators and Travel Agents) Order 2000 (SI 72 2110)
67
Restriction on Agreements and Conduct (Specific Domestic Electrical Goods) Order 1998 (SI 1271)
Restrictive Trade Practices (Services) Order 1976 (SI 98) 154 Supply of Beer (Loan Ties, Licensed Premises and Wholesale Prices) Order 1989 (SI 2258) 64, 111 Supply of Beer (Tied Estate) Order 1989 (SI 2390)
230
EC Competition Law (Arts 88 and 89) Enforcement Regulations 1996 (SI 2199) 226
112
64, 111
Supply of New Cars Order 2000, (SI 2088) 113, 117 Water Enterprises (Merger) Modification Regulations 1994 (SI 73) 239
Fair Trading Act (Amendment) (Merger Pre-Notification)Regulations 1994 (SI 1934) 232 xxxvii
TABLE OF EUROPEAN LEGISLATION
Regulations 17/62 (Enforcement Regulation Implementing the EC Treaty) 17, 29, 30, 31, 32, 35, 37, 41, 42, 46, 49, 53, 54, 55, 62, 65, 189, 221 Art 2 33 Art 3 37, 37, 38, 57 Art 3(2) 47 Art 9(1) 54, 144 Arts 11–14 34, 161 Art 11 34, 36, 59, 122, 137 Art 11(3) 34 Art 11(5) 34 Art 11(6) 35 Art 12 34, 59 Art 13 34, 35, 59 Art 14 34, 35, 122 Art 14(2) 34 Art 14(3) 34, 36 Art 14(4) 35 Art 14(5) 35 Art 15 38 Art 15(2) 38 Art 15(5), (6) 37 Art 16 38 Art 19 38 Art 19(3) 44 Art 20(1) 46 Art 20(2) 44 99/63 (Hearings Regulation) Art 6
1984/83 (Block Exemption Regulation on Exclusive Purchasing) 174, 182, 187, 189, 191, 193 418/85 (Block Exemption Regulation on Research and Development)
138
4087/88 (Block Exemption Regulation on Exclusive Franchise)
189
4064/89 (Merger Regulation) 17, 41, 71, 74, 97, 102, 103, 206, 207, 214, 216, 221, 222, 276, 280
47
19/65 (Block Exemption Regulation)147, 188 1983/83 (Block Exemption Regulation on Exclusive Distribution) 174, 182, 187, 189 Arts 1, 2(1), (2)(b), 3(c), 3(d) 193
xxxix
Art 1 Art 1(2) Art 1(3) Art 2 Art 2(1) Art 2(3) Art 2(4) Art 3 Art 3(1) Art 3(2) Art 4(1), (3) Art 5 Art 6(1)(a), (b) Art 7(4) Art 8 Art 8(6) Art 9 Art 9(5)–(6), (8) Art 10 Art 10(4) Art 10(6) Arts 12–13 Art 14(1) Art 14(2)
71, 209, 220, 226 209, 210 206, 210 216 216 215 216, 223 207, 208 207 222 211 209 213 211 218, 220 215 211, 218, 226 219 214 213 213 213 212 214, 215
Table of European Legislation
Art 15(1) Art 15(2) Art 21(1), (2) Art 21(3) Art 22(3) Art 22(5)
212 214, 215 71, 209, 226 220, 226 219 220
3384/94 (Merger Implementing Regulation)
2790/99 (Vertical Agreements Regulations) 140, 147, 148, 154, 171, 174, 176, 179, 181, 182, 183, 185, 187, 188 189, 189, 191, 192, 193, 194, 195, 197, 198, 280
213
1475/95 (Block Exemption Regulation on Motor Vehicle Distribution) 147, 149, 188, 189
240/96 (Block Exemption Regulation on Technology Transfer) 140, 145, 147, 149, 180, 188, 189 Art 4 148
1310/97 (Amendment to Merger Regulation)
447/98
994/98 (Horizontal Aid Regulation) Art 2
71, 97, 207
214
249, 257, 262 249
2842/98 (Hearing of the Parties (Antitrust Procedure) Regulation 38, 43, 45, 46 Art 10 38 Art 13 45
xl
Art 1 Art 2 Art 2(1) Art 2(3) Art 2(4) Art 3–4 Art 4 Art 4(a) Art 4(b) Art 4(c) Art 4(d) Art 5 Art 6 Art 7 Art 8 Art 9–11
198 198 189 190 190, 198 190, 198 190 190 190, 193 194 195, 198 191 191 165, 192, 198 198 165
659/99 Art 2(1)
42, 245, 246, 257, 260 258
1215/99
188, 190, 192
1216/99
189, 190, 192
2658/2000
147, 149
2659/2000
145, 147, 149
44/2001
58
69/2001
246, 249, 258
70/2001
246
Table of European Legislation
Art 81(2) Art 81(3)13,
Treaties European Convention on Human Rights and Fundamental Freedoms Art 6 42, 43 EC Treaty Art 1 Art 2 Art 3 Art 3(g) Art 5 Art 6 Art 7(6) Art 10 Art 10(2) Art 10(3) Art 12 Art 13 Art 14 Arts 20(1)–(2) Art 22 Art 65 Art 67 Arts 81–89 Art 81
17 17, 22, 89, 216 17, 264 17, 79, 89, 93, 263 48 259 259 53, 264 264 259 264 45 259 260 258 50 50 264 2, 19, 20, 21, 23, 24, 25, 29, 30, 31, 32, 33, 34, 41, 46, 50, 51, 52 54, 55, 56, 57, 59, 60, 64, 70, 71, 79, 80, 93, 101, 102, 102, 129 130, 131, 132, 133, 134, 134, 135, 141, 142, 143, 144, 150, 152 154, 156, 158, 159, 160, 161, 163, 164, 165, 166, 174, 177, 189 195, 196, 197, 201, 205, 206, 220, 221, 222, 223, 226, 247, 260 261, 265, 267, 276, 278, 279, 282, 283 Art 81(1) 33, 54, 121, 129, 130, 131, 133, 134, 135, 139, 140, 142, 143, 144, 147 148, 151, 155, 162, 163, 165, 170, 171, 174, 175, 176, 177, 178, 179 180, 181, 182, 183, 184, 185, 186, 188, 189, 192, 193, 194, 195, 196, 197, 216, 223, 281 xli
142, 143, 151, 205 33, 33, 52, 55, 56, 57, 58, 59, 70, 135, 139, 144, 145, 146, 147, 150 152, 165, 170, 171, 174, 176, 177, 179, 181, 182, 184, 185 186, 188, 191, 192, 193, 194, 195, 205, 206, 212, 216, 221, 223, 277 Art 82 2, 20, 21, 23, 24, 25, 29, 30, 31, 32, 33, 41, 45, 46, 48, 50, 51, 52, 56, 57, 59, 60, 64, 70, 71, 79, 80, 82, 84, 86, 89, 92, 93, 82, 97, 98, 100 101, 102, 103, 104, 110, 111, 118, 119, 120, 121, 123, 124, 132, 134, 135, 138, 150, 152, 160, 189, 205, 206, 220, 221, 226, 260, 261, 265, 266, 267, 275, 278, 279, 282, 283 Art 83 54 Arts 83–85 17, 41 Art 85 29, 45, 52, 55, 150, 152, 221 Art 85(1) 37, 181, 223 Art 85(3) 29, 37 Art 86 17, 45, 52, 55, 150, 152, 264, 267, 268, 269 Art 86(1) 265, 266 Art 86(1)–(2) 264, 267, 268 Art 86(3) 267 Art 87 253, 258, 261, 263 Arts 87–89 17, 245, 257 Arts 87–88 246, 252, 258 Arts 87(1)–(3) 246, 252 Art 87(1) 247, 248, 249, 252, 258, 263 Art 87(2)(a)–(c) 253 Art 87(3) 254 Arts 87(3)(a)–(c) 253 Art 87(3(c) 256 Arts 87(3)(d)–(e) 254 Art 88 262, 282 Arts 88, 89 52, 226 Art 88(2) 258, 261 Art 88(3) 249, 258, 259, 261, 262
Table of European Legislation
Art 92 255, 257, 262 Art 92(3)(a) 253 Art 92(3)(c) 253 Art 93 255, 257, 262 Arts 130a, 130r 216 Art 157 22 Art 220 39 Art 223 220 Art 223(1) 226 Art 226 264, 267 Art 229 40 Art 230 40, 47, 67, 260, 261, 282 Art 230(2) 40, 260 Art 232 41, 47, 260, 261, 282 Art 234 41, 47, 51, 58, 70, 91, 139, 143, 259, 261, 262 Art 295 250, 264, 265
Single European Act 1986 Art 130(f) Treaty of Amsterdam 1997 Treaty of Brussels Treaty on European Union (The Maastricht Treaty 1992)
ECSC (European Coal and Steel Community) Treaty (Treaty of Paris) 1951 16, 204, 263 EEC Treaty (The Treaty of Rome 1957) Arts 85–86
16 150, 151
xlii
39
88 16
ABBREVIATIONS Journals All ER (EC)
All England Law Reports (EC)
CLP
Current Legal Problems
CMLR
Common Market Law Reports
ECLR
European Competition Law Review
ECR
European Court Reports
Harv L Rev
Harvard Law Review
JL and Econ
Journal of Law and Economics
LIEI
Legal Issues of European Integration
OJ
Official Journal
Ox YEL
Oxford Yearbook of European Law
Statutes RTPA
Restrictive Trade Practices Act
Terms DGFT
Director General of Fair Trading
DTI
Department of Trade and Industry
MMC
Monopolies and Mergers Commission
NBA
Net Book Agreement
NCA
National Competition Authorities
OFT
Office of Fair Trading
RPM
resale price maintenance
Courts CFI
Court of First Instance
DC
Divisional Court
ECJ
European Court of Justice
RPC
Restrictive Practices Court
xliii
CHAPTER 1
INTRODUCTION TO COMPETITION POLICY AND PRACTICE COMPETITION LAW BACKGROUND Competition law concerns intervention in the market place when there is some problem with the competitive process or when there is ‘market failure’. This broad generalisation needs to be clarified in two respects. First, public authority intervention is the dominant mode of competition law enforcement. However, although competition law has generally been enforced administratively by national or European Community regulatory authorities intervening in markets, there has been a more recent development, particularly at the European Community level,1 towards private enforcement of competition laws through regular court processes.2 Nonetheless, it is difficult to equate competition law with other areas of law, such as the law of contract or delict/tort, which rely almost exclusively on adjudication by normal court processes. Administrative enforcement of competition law is currently still the norm, although we have to be aware of developments in private enforcement of competition law ‘rights’ in the courts, particularly in light of current Community moves toward ‘modernisation’, in the traditional manner. Secondly, the broad definition does not really clarify exactly what kinds of ills competition law seeks to remedy. In order to explain and understand the role of competition law more fully, one should assess what is meant by a failure in competition or the competitive process. This must also be considered in its appropriate context. We must ask whether all systems of competition law consider the same types of conduct or market result to be a ‘market failure’ and anticompetitive? The basic answer is no; this will become apparent on closer analysis of the respective roles that economics and politics play in competition law and the different concerns of the principal legal systems to be considered. However, it is possible at this introductory stage broadly to outline the types of issue that competition law will be concerned with, although the policies and specific rules adopted in various legal systems may differ. The following are the key issues concerning competition law which will be addressed in this book. Monopoly In purely economic terms, this means a market in which a company controls 100% of the market.3 In practice, this situation is very rare. However, competition law is also interested in companies with smaller, but still significant, market shares which allow such companies to have power or influence over the market. For instance, the term adopted in Community law and the Competition Act 1998 is that of a
1 2 3
The law of the European Community will hereinafter be referred to as Community law. See, further, in Chapter 2. US antitrust law is particularly distinctive in that it relies more heavily on private enforcement in the courts. We shall return to the complex issue of the determination of what constitutes a particular market in Chapter 3.
1
Competition Law and Policy in the EC and UK
company with a ‘dominant position’,4 while the UK provisions in the Fair Trading Act 1973 refer to ‘monopoly’ even though the minimum market share criteria is 25%. The general concern in these situations is that the monopolist will exploit this power over the market and act anti-competitively.5 Cartels This is a non-technical term for various forms of co-operation between companies which may be prohibited by competition law. In everyday use, cartel signifies a group of conspirators pooling their production resources. Readers may be aware of the OPEC oil cartel as an example of such behaviour. This type of phenomenon is more usually referred to under competition law as anti-competitive agreements, although looser collaborations and ‘oligopolistic markets’6 are also considered under this broad heading.7 The main competitive concern is that a group of producers will conspire or agree to act together and in effect possess the same unified threat to the market as a monopolist. Mergers This covers the situation where two companies, and their respective shareholders, have agreed on some form of union between them. It also includes hostile take-overs, where the take-over by a ‘predator’ company has been resisted. Competition law is not concerned with shareholder welfare or interests. There are a wide variety of types of mergers which may provoke different concerns but there is a general consensus that the principal focus of competition law should be on the effect that the merger has on competition in the market. The basic idea is that two or more companies can achieve a position akin to that of a monopolist by formally merging their companies. It should be noted here that probably to a greater extent than with either monopoly or cartel control, competition law merger control may also consider wider ‘public interest’ issues, such as the resultant loss of jobs, and not focus solely on the competitive impact of any merger. These are the three principal areas of interest for most competition law systems. The concern with the potential anti-competitive market consequences of a monopoly situation is the unifying link between the three issues. In other words, the concern with cartels and mergers between competitors is that they will in effect achieve a monopoly position, dominate the market and exploit their position as an anti-competitive monopolist would be expected to do.8 We consider the ‘pure competition’ objective in competition law to be this concern with monopoly and economic theory’s prediction of the negative consequences of a monopolistic market.
4 5
6 7 8
See, further, below and also the detailed consideration of Art 82 under ‘Community law’, in Chapter 3. The economic concern with monopolies shall be addressed more fully shortly. The idea of what constitutes exploitation or anti-competitive behaviour shall also be addressed in outline in this chapter and further reference should also be made to consideration of the particular Community and UK rules in Chapter 3. See, further, below. See, further, Chapters 4 and 5, pp 134–36, on Art 81. The economic analysis of monopoly shall be discussed shortly.
2
Chapter 1: Introduction to Competition Policy and Practice
However, things are not as simple as they may seem. First, virtually no competition law system bans monopolies outright. This would seem to be the logical consequence of concentration on the pure competition objective. Indeed, debate has focused more recently on the situations under which a monopolist’s behaviour may be declared anti-competitive and unlawful. As very few firms have a true monopoly position, reliance on the pure competition objective is not realistic. A key factor in many jurisdictions is whether or not the monopolist’s behaviour is efficient. This is certainly not the same as the pure competition objective although, particularly in the USA, efficiency has been developed as the criteria for judging monopolists’ conduct. Cartels tend to be prohibited, particularly where they fix prices between competitors, even where the companies combined do not have monopoly power. In addition, some restrictions placed upon a retailer by a producer of goods may be caught by some competition law systems even though they do not seek to create a traditional type of monopoly. These are known as vertical restraints. Finally, merger control can appear to reflect the pure competition objective in that a merger may be blocked when it threatens to create a greater degree of concentration in the market. Nonetheless, proefficiency arguments in favour of the merger may counterbalance such concerns. Furthermore, there are also a range of other objectives which may be embodied in the legal rules.9 To conclude, the core concern with the pure competition objective still exists through analysis of the degree of concentration in markets, but it may also be applied in tandem with other policy objectives. The potential for economic analysis and political input into the competition controls shall be examined shortly in more detail. There are other issues which fall within the broad heading of competition law and which shall be outlined in this book. Unfair competition This concept would appear to be rather vague and indeed there is no specific set of rules under either Community or UK competition law which can accurately be described as based on the prohibition of unfair competition. At first glance, readers may consider that such a concept would encompass the type of behaviour or conduct which competition law should find reproachable. In practice, some of the activities which may be prohibited by competition law may be considered to be ‘unfair’ in lay terms. However, as shall be discussed at the end of this chapter, unfair competition is generally associated with a distinct type of legal provision, such as under the German Unfair Competition Act, as reenacted in 1994, which seeks to ensure that competitors act in accordance with ‘good morals’.10 State regulation—State aid This area is exclusively related to Community competition law. The coverage of these issues reflects particular concerns of the Community system within which
9 10
Exemplified in the UK by the wide ‘public interest’ test under the Fair Trading Act 1973, s 84, see Chapter 6, below. See Willimsky, SM, ‘Aspects of unfair competition law in Germany’ [19%] 5 ECLR 315.
3
Competition Law and Policy in the EC and UK
the Community competition rules operate. State regulation broadly covers involvement by the governments of Community Member States in the market thereby affecting competition within the Community. State aid is an important and distinct aspect of the competition rules regulating the financial assistance which Member States may afford to companies. Both of these areas reflect the general Community aspiration that there should be a level competitive playing field between companies situated across the various Member States within the Community. Practical examples Understanding these basic problem issues is assisted by a consideration of practical examples, and readers may note that competition related issues are reported daily in the press, particularly in the Financial Times. Readers should be aware that competition law has directly affected the pricing and availability of goods and services as such as: petrol, milk, electrical and electronic goods, ice cream, beer, contraceptive sheaths, breakfast cereals, perfume, tampons, estate agents, air travel, travel agents, banking services, Coca-Cola, whisky, cars, CDs and DVDs. Competition law and policy therefore has a direct impact upon all our daily lives. Monopoly This concept could be more readily associated with the pre-privatisation nationalised industries such as British Gas and British Telecom. Although competition has been introduced in both industries, the latter company remains in a particularly strong position in its market.11 There have also been allegations in recent years by Easyjet that British Airways had used its strong market position unfairly to competitors’ detriment and BA has been fined by the European Commission in respect of its unlawful incentive scheme for travel agents.12 On a more localised level, UK competition law authorities have monitored the behaviour of Stagecoach Holdings plc in various local areas, particularly in regard to allegations of price cutting to force out actual and potential competitors.13 Cartels The most obvious examples in a UK context concern agreements to fix prices of two products, books and drugs. The Net Book Agreement (NBA) raised particular controversy in 1995. The NBA was a long standing agreement by book publishers to set prices for their titles for up to six months after their publication. This had been approved by the UK competition authorities under the restrictive trade practices legislation. Although its approval would appear to be contrary to anticartel type laws, this highlights the different interests and policies that can operate under competition law. In this case, the cultural argument was that price fixing
11
12 13
Regulation of the privatised utilities forms a distinct set of regulatory controls which will not be dealt with in this book. See Long, D, Telecommunications Law and Practice, 2nd edn, 1995, London: Sweet & Maxwell; and, on regulation generally, Ogus, A, Regulation: Legal Form and Economic Theory, 1994, Oxford: Clarendon. Commission Decision (2000/74/EC) Virgin/British Airways, OJ L30/1, 2000. See discussion on this tactic, known as ‘predatory pricing’, in Chapter 3.
4
Chapter 1: Introduction to Competition Policy and Practice
under the NBA allowed a wide range of books to be stocked by small as well as by large shops, encouraging new writers. In 1995, certain publishers withdrew from the NBA and recently the NBA has been declared unlawful by both the UK14 and Community authorities. Similar arguments and developments can be noted in relation to the resale price maintenance agreement for non-prescription drugs which Asda breached in 1996 to sell cut-price branded drugs. This issue was brought before the Restrictive Practices Court by the DGFT, but pharmaceutical suppliers withdrew their opposition to the case in May 2001. In the late 1970s, there was prominent coverage of an alleged cartel in the airline industry. Sir Freddie Laker began operating a cheap rate, cost-cutting service between the United Kingdom and the United States. Several years later, his company was forced out of business and he claimed that this was as a result of a conspiracy amongst other carriers, including British Airways, collectively to drop their fares. Litigation ensued in both the English and American courts.15 The European Commission has fined companies involved in cartels in a number of industries with homogeneous products in which there is no difference between products and price fixing is easier to maintain. For example, at the start of 2000, the European Commission began an investigation into claims that the world’s largest music companies fixed artificially high prices of compact discs in Europe. A similar investigation has been commenced in the UK under the Competition Act 1998. In May 2000, the US Federal Trade Commission found that the same companies had forced retailers to overcharge consumers in America $480 m (£330 m) since 1997.16 Vertical restraints are not strictly a cartel-type problem, but such agreements between companies have been subject to scrutiny by competition authorities and intense debate by competition practitioners and academics. A clear example of this arose under Community law in relation to the marketing of Johnny Walker Red Label Whisky in the 1970s. Distillers, who produced Johnny Walker, wanted to sell Red Label in France and, in order to protect distributors there, imposed an export ban on its UK distributors. This ban was declared contrary to the competition rules by the Community authorities,17 reflecting a particular Community interest in maintaining the free flow of trade across Member State borders.18 As a result, Distillers decided that Johnny Walker Red Label would no longer be sold in the United Kingdom in order to protect its overseas distributors, thus highlighting the dramatic effect which competition laws can produce. Mergers Examples of competition law authorities’ interest in mergers are very frequent and can range from very localised alliances to mergers on a global scale. For instance, Stagecoach was the subject of investigation by the UK competition authorities during
14 15 16 17 18
Illustrating the change in emphasis on different policy goals within the same framework of competition rules over a period of 30 years. British Airways Board v Laker Airways Ltd [1985] AC 58; and Laker Airways v Pan American World Airways [1984] ECC 296, DC of Columbia. FTC News Release, 10 May 2000. Case 30/78 Distillers Company Ltd v Commission [1980] ECR 2229; [1980] 3 CMLR121. See, further, below, regarding Community competition law objectives, and Chapter 5, on vertical restraints.
5
Competition Law and Policy in the EC and UK
the early 1990s in relation to the take-over of various local bus operators in areas throughout the UK19 during the post-deregulation era known as the ‘Bus Wars’.20 In the late 1980s, controversy arose, for a variety of reasons, during the protracted takeover by Guinness plc of Distillers plc, two major UK drinks companies. The UK merger controls played a significant, though ultimately limited, role in the process which eventually led to the take-over being permitted, subject to conditions. The affair also highlighted the potential conflict between a ‘pure competition’ policy and other policy reasons for prohibiting mergers and take-overs.21 The UK system of merger control was also seen working in July 1997, when a merger between Bass and Carlsberg, designed to create Britain’s biggest brewer, was blocked by the Trade and Industry Secretary on competition grounds.22 At the beginning of 2001, the Commission reported that the merger between Interbrew and Bass was expected to operate against the public interest on competition grounds and the Secretary of State decided that Interbrew should be required to divest Bass Breweries in the UK to a buyer approved by the DGFT.23 Controversially, the proposed take-over by BSkyB of Manchester United, arguably the largest football club in the world, was blocked following the recommendations of the Competition Commission that it would be against the public interest by limiting competition and exacerbating the unequal share of wealth in English football.24 During 1997 and 1998, Community merger controls also made headlines in relation to the airline industry. The Community authorities were involved in extensive and well publicised negotiations concerning the proposed merger involving Boeing and MacDonnel Douglas in an attempt to alleviate competition related concerns arising from the merger.25 More recently, the Commission has been involved in the scrutiny of a number of important global merger situations, such as AOL/Time Warner and the high profile prohibition of the proposed merger between General Electric and Honeywell.26 Unfair competition There are very few clear examples of unfair competition as there is no such rigid categorisation under either UK or Community law. In Germany, there exists a 19 20 21 22 23
24 25 26
See, for instance, The Supply of Bus Services in the North-East of England, Cm 2933, 1995, and Stagecoach Holdings plc and Mainline Partnership Ltd, Cm 2782, 1995. Other operators have also been involved although Stagecoach’s activities and scrutiny thereof have been most prominent. The take-over by FirstBus of Strathclyde Buses was also the subject of a UK merger investigation during 1996. See FirstBus plc and SB Holdings Ltd, Cm 3531, 1997. In this instance, there was a strong, but insufficient, ‘pro-regional policy’ lobby which sought to prevent the take-over on the basis that indigenous control of a major Scottish based company would be lost from Scotland. See (1997) Financial Times, 28 and 29 July. See, also, the Monopolies and Mergers Commission’s report, discussed more fully in Chapter 6. See, Interbrew SA and Bass plc: A Report on the Acquisition by Interbrew SA of the Brewing Interests of Bass plc, Cm 5014, 2000, and DTI Press Release, P/2001/11, 3 January 2001. Judicial review of the Commission’s recommendation and Secretary of State’s decision was successful in Interbrew SA v Competition Commission and Secretary of State for Trade and Industry, High Ct QBD, 25 May 2001. See, British Sky Broadcasting Group plc and Manchester United plc: A Report on the Proposed Merger, Cm 4305, 1999 and DTI Press Release, P/99/309, 9 April 1999. See Commission Decision (1997/816/EC) Case IV/M877 Boeing/McDonnell Douglas, L336/16, 1997. See, Commission Press Release, ‘Commission gives conditional approval to AOL/Time Warner merger’ IP/00/1145, 11 October 2000. Regarding the later, see Commission Press Release IP/01/ 939, 3 July 2001.
6
Chapter 1: Introduction to Competition Policy and Practice
prohibition on free gifts with the sale of goods as this would constitute unfair competition.27 There are certain UK laws which may be considered to fall within this broad banner, although they tend to be part of the law of delict/tort as opposed to competition law proper. The laws on passing-off and intellectual property infringement are such examples. Indeed, in recent years as a result of problems, particularly in copying goods—such as Sainsbury’s own brand production of cola drinks, Asda’s Puffin Biscuits imitating the design of Penguin Biscuits28 and the allegations that Marks & Spencer copied Liza Bruce’s swimsuit designs—it has been suggested that both the UK and the Community should develop a general law on unfair competition to cover this type of problem amongst others. State aid The most notable examples of Community competition law intervention using the State aid rules have occurred in the airline industry. There were numerous instances during the 1980s and 1990s in which the State aid rules were applied to the financing of airlines by Member State governments. In most Member States, there exists one prominent airline, generally known as a ‘flag-carrier’, such as British Airways or Air France. Problems have arisen in the past partly because some of these airlines, if not all at one time, have been State owned or controlled and also because no Member State wants to see its flag-carrier going out of business. Accordingly, there have been numerous instances in which Member States have financed and, indeed, ‘bailed out’ their flag-carrying airline when in difficulty. These instances have been regulated to a certain extent by the Community authorities. One of the most prominent State aid disputes became apparent in the early 1990s as a result of subsidies to Air France by the French Government.
ECONOMICS OF COMPETITION LAW AND TERMINOLOGY In order fully to appreciate the objectives of competition law and, indeed, the debate on the aims and objectives of competition law across differing legal systems, it is helpful to be aware of the economic background to competition policy. It is important to understand the significant role which both politics and economics play in the formation of competition policy. For competition law students, it suffices to gain a simplistic appreciation of economic theory in relation to market structures, as this forms the basis of the pure competition strand of competition policy. This shall be outlined in this section together with an introduction to some economics based concepts which have a bearing on competition policy and a brief account of developments which challenge the application of basic economic theory in competition law. Neo-classical economic theory plays a crucial role in competition policy, based on the presumption that society, or consumer welfare, to use a more technical term, is better off when a state of perfect competition exists in a market. Perfect competition under economic theory has certain prerequisites. It must be in relation
27 28
See Willimsky, SM, ‘Free gifts “verboten”: the German regulation on free gifts’ [1996] 1 ECLR 59. United Biscuits (UK) Ltd v Asda Stores Ltd (1987) unreported, 18 March.
7
Competition Law and Policy in the EC and UK
to an identical29 product, there must exist an infinite number of buyers and sellers, free entry and exit from the market, with full information available to consumers, allowing them to make rational decisions. The perfect competition model is abstract and unlikely to arise in practice due to the improbability of all these conditions existing simultaneously. The reader could, nonetheless, consider the degree of competition between corner grocers to reflect the main ideas in the theory. The theory is based on the prediction of different market outcomes from perfect competition at one end of the spectrum and monopoly at the other. The theory predicts that perfectly competitive markets will result in both allocative efficiency and productive efficiency.30 Allocative efficiency is achieved when resources are allocated in accordance with consumer demand. This arises under perfect competition because the producer is a ‘price-taker’, the price of the product being determined by aggregate industry output and consumer demand through the law of supply and demand. The individual company has a minimal effect on aggregate output and, hence, is a price-taker. On the other hand, as a monopolist controls the output of the market, the monopolist can decide upon the appropriate output, therefore determining the price. The monopolist is a ‘pricemaker’. Perfect competition, according to the theory, results in the most efficient allocation of resources—‘allocative efficiency’. Alternatively, it is predicted that a monopolist will create a scarcity of the product in order to make excess or monopoly profits and resources are, thus, misallocated. In addition, the theory predicts that there will also be productive inefficiency on the part of the monopolist because there will be neither the incentive nor the competitive pressure to keep down production costs as would exist under perfectly competitive conditions. What must be remembered is that the models of perfect competition and monopoly are best used as tools to provide us with an understanding of how markets would operate under such theoretical conditions. They are useful as a point of reference when considering real market conditions. Indeed, real market conditions reflect a range of competitive structures between perfect competition and monopoly. The theory is a useful starting point in identifying a core concern in competition policy—the pure competition objective—with the degree of power or control that a firm or firms exert on the market. The concern with monopolies, as alluded to earlier, also explains the attention that competition law pays to cartels and mergers. However, because the theoretical true monopoly situation is likely to be very rare in practice, competition policy has generally tended to use the tenets of the theory in relation to high degrees of concentration in a particular market. Thus, a company with a high market share may be able to act in a similar way to a monopolist through the exercise of their ‘market power’, without achieving true monopoly. Furthermore, a high degree of concentration may lead to the problem of oligopoly 31 where the limited number of market competitors may facilitate collusion, whether intentionally or tacitly.
29 30 31
The technical term is ‘homogeneous’. See economic textbooks for further detail: Scherer, FM and Ross, D, Industrial Market Structure & Economic Performance, 3rd edn, 1990, Boston: Houghton Mifflin; and Livesey, F, A Textbook of Core Economics, 4th edn, 1995, London: Longman. This will be discussed briefly towards the end of this chapter, p 24.
8
Chapter 1: Introduction to Competition Policy and Practice
A further argument is that the model may not necessarily be accurate. The theory suggests that perfect competition caters best for society’s needs through satisfying consumer demands, but it is difficult to prove empirically. First, the ideal state of perfect competition is in reality an unattainable goal. Secondly, although the theory predicts that monopolists will be inefficient in their production, as there is no pressure of competition, this has not been proven conclusively. Indeed, it may be argued that powerful firms are in that position simply because they are more efficient and responsive to consumer demands. Thirdly, although competition policy may be shaped on the basis of this theory and termed a pro-competition policy, its influence has waned, particularly in the USA. Certain scholars in the USA have adopted the concept of ‘workable competition’ as a means to counter the argument that the theoretical model could not work in practice. In effect, this means that competition law should adopt rules which are not abstract, but which attempt to ensure an appropriate and adequate level of competition. This is of course a generalisation of the ‘workable competition’ school and it also begs the question as to what level of competition is appropriate.32 This issue has stimulated a great deal of debate, notably in the USA, where a particular approach to competition policy based on the analysis of the efficiency of conduct has been especially prominent. In effect, this approach has challenged neo-classical economic theory and seeks to assess company behaviour based not strictly on the theory’s analysis of the effects of market power but rather on whether the particular behaviour is efficient. This shall be outlined further in this chapter but this different economic view of the function of competition law as an alternative to the traditional theory is noteworthy. Traditional economic theory is static in that it predicts the effect of competitive markets but does not consider competition as a process. For instance, the theory is generally considered to be laissez-faire in that it allows competitive forces to have a free role. The pure competition objective has thus been taken to connote ‘let the free market operate’. However, competition law looks to intervene when the markets do not perform according to the competitive ideal. The paradox inherent in this simplistic outline of competition law objectives is clear. Competition law should seek to encourage the free play of competitive forces in the market on a neutral basis— Darwinian-style survival of the fittest. Yet, in certain conditions, competition law will seek to interfere with these forces where, for instance, there may be ‘detrimental behaviour’ such as a cartel agreement or a monopolist exploiting its position in some way. Accordingly, neo-classical economic theory predicts the best outcome if there are many competitors. But what should happen if in the ‘process of competition’ one competitor wins fairly and then makes excess profits out of the unwitting consumer? This highlights that the theory may not be pro-competitive, in that it does not encourage companies to compete, and also that different policy goals are likely to exist in any system in order to help to determine when the law should intervene. It is interesting to note here the confusion of the pure competition objective with support for a pro-competitive free market stance which would advocate minimal market intervention. One extreme of this latter stance is termed ‘creative destruction’ and is related to the Austrian school of economics. This group of economists regarded competition as a process rather than a desirable end, and, particularly, that innovation would result from non-intervention in the
32
See Easterbrook, FH, ‘Workable antitrust policy’ (1986) 84 Michigan L Rev 1696.
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competitive process. Similar ideas have been expressed through the Chicago school in the USA and in UK competition policy, particularly during the 1980s. To sum up, neo-classical theory is a guide—albeit an imperfect one—to basic analysis of competition law problems. It can be criticised as being too abstract and alternative modern economic theories have sought to marginalise its basic concerns. In addition, competition law is not solely about the fulfilment of economic ideals. These would not relate directly to rules on unfair competition or State aid and, also, economic theory is combined with other political and social goals to form competition policy. Indeed, an interesting debate concerns the role of economics in competition law. The next section outlines the problems with relying solely on economic theory and it is suggested that this can be distinguished from economic analysis. General economic theory has problems in dealing with real world market situations, but economic analysis of particular markets and predicted outcomes may be useful for competition law enforcers. Economic analysis can be used to aid enforcement of existing competition laws and policies, but we should be wary of uncritically accepting economic theory as a pure science to guide competition policy. The politics of competition law should not and cannot be ignored.
POLITICS OF COMPETITION LAW It is clear that in all developed competition law systems competition policy does not seek solely to fulfil the pure competition objective of competitive markets, with cartels outlawed, no monopolistic companies and mergers between competing companies prohibited. For instance, in the Community one must note the important link between competition law and trade and industrial policy. There have been numerous instances in which the Community authorities have approved what appeared to be highly anti-competitive agreements—market sharing or price fixing cartels. These have been justified on various grounds, for instance, that these were ‘crisis cartels’, and were allowed in order to protect the continuing existence of an industry within the Community. Similar trends can be identified in both Community mergers and State aid policy. Under the former, there has been debate as to whether Europe-wide alliances should be encouraged to foster pan-European businesses able to compete on the global market. Certain Member State governments have made financial contributions to major companies which have been allowed under the State aid rules for both industrial and overtly political reasons. Also, under the variety of interests that have been relevant considerations in UK merger policy under the Fair Trading Act 1973, regional policy was at one stage a particularly important factor. Accordingly, a discussion of the political goals and policy objectives forming the basis of a system of competition laws is necessary. Furthermore, these objectives are linked to the interpretation given to the concepts used in competition law. Terms are therefore only given meaning or content in the context of the particular competition law system. For example, what is considered to be a competitive or uncompetitive market? A subsidiary question here is whether we have a scientific understanding of markets, and what ideal competition is, and can we then use that to define the role 10
Chapter 1: Introduction to Competition Policy and Practice
of competition law? As discussed, there are economic theories defining and delimiting what is termed perfect competition, monopoly or oligopoly, but the fundamental flaws or deficiencies in these limit their applicability in real world situations, although they are extremely useful reference points. A useful example is the work of Robert Bork, an influential American economist and antitrust lawyer associated with the Chicago school and renowned for his important contribution to economic theory and competition policy in his book, The Antitrust Paradox: A Policy at War with Itself.33 In this book he advocates that one economic theory should be at the core of antitrust policy, based on the efficiency of a monopolist’s behaviour or the enhanced efficiencies derived from a merger. Nonetheless, it is clear that his work is based on his own beliefs as to the success of markets and the limited scope for intervention in markets by competition authorities. It has been suggested by John Flynn34 that all scientific models, whether political, economic or other, must be aware of the ‘ought assumptions’ which underlie them. Furthermore, these ‘ought assumptions’ form the basis of key terms such as consumer welfare as defined by various economic and competition policy scholars. In other words, ideological beliefs are sought to be implemented through supposedly scientific economic models but antitrust/ competition law has to be clear and specific about its socio-economic and political goals.35 Looking, for instance, at the USA, we can see that there have been two dominant schools of antitrust thinking in the last 60 years, namely those associated with the Harvard and Chicago schools. The models of competitive analysis associated with each school36 are in essence related to the academics’ fundamental beliefs as to what is meant by the competitive process and the role of the State via the law in that process. In other words, what ends does competition law serve? This academic debate in the United States can be referred to as the ‘battle for the soul of antitrust’. Importantly, this is also part of the free market/government interference dichotomy37 as to what legitimate role the State should play in interfering to correct perceived market failures. However, again we fall back on the, as yet unresolved, issue of what constitute the legitimate competition policy goals upon which the role of the State is dependent. For instance, is the aim of competition law to protect the public interest, and how is this to be defined and quantified?38 This leads to a discussion of the various potential aims and objectives which competition policy may wish to include.
33 34 35
36 37 38
Bork, R, The Antitrust Paradox: A Policy at War with Itself, 1993, Oxford: Maxwell Macmillan. In ‘Legal reasoning, antitrust policy and the social sciences of economics’ (1985) 62 Antitrust Bulletin 713. Helm, D, The Economic Borders of The State, 1989, Oxford, New York: OUP, pp 1–45, uses corresponding terminology of underlying value assumptions and suggests that political arguments about economic policy tend to start with ideology and progress to search for an economic rationale. To be discussed, briefly, later in this chapter. Discussed by Helm, op cit, fn 35. For instance, the public interest test in UK competition law under the Fair Trading Act 1973, s 84.
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COMPETITION POLICY OBJECTIVES The ‘pure competition’ objective or ideal has already been outlined. However, in practice there are a number of different economic, social and political objectives which may also form part of any particular competition policy. It is often the extent to which these other policies should and do play a role that causes greatest debate among practitioners, competition administrators and academics. Some of these other policies have been termed ‘extra-competition’ policies or ‘noncompetition law proper’ policies and it has often been suggested that competition law should not be concerned with them. However, this argument often comes from those, particularly those academics associated with the Chicago school, who consider that efficiency should be the only criterion of legality, ignoring the politically biased basis to that preference. Also, as this introduction suggests, competition law or policy is not fixed, but is dependent to a great extent upon the particular political and social emphases of the legal system in which it operates. It can therefore be justifiably stated that, in applying the core economic thesis which informs competition law, any set of appropriate principles and policies may play a part in a coherent competition law system. Indeed, it has been recognised that the fundamental rationale for the introduction of a set of competition policies has been to promote the economy of a given country and the well being of both its consumers and its industries generally. The appropriate balance must be sought between industry and the consumer, but this illustrates that the incorporation of any set of extracompetition policy objectives will be to further national interest irrespective of the outcome predicted by economic theory. The following are examples of political objectives which may form part of competition policy. Prevention of the concentration of economic power This is a political ideal which relates to the pure competition objective. It is based on the idea that economic corporations should not become more powerful and influential than elected democratic governments, an influential idea at the time of the introduction of the first US antitrust statute at the end of the 19th century.39 Regulation of excessive profits/fairer distribution of wealth Again, this is essentially derived from the neo-classical theory’s concern with monopolies. The general idea was fairly topical in 1997, with discussion in the UK surrounding the introduction of windfall taxation of the regulated utilities, and is a traditional concern of anti-monopoly laws, particularly during the 1970s in the UK. However, this concern has more generally been less well regarded in recent times, partly because of the advanced debate on incentives to new market entrants created by such excessive profits and the ongoing criticism that redistribution of wealth should not be a concern of competition law. However, it has been prominent again in recent UK competition law. For example, one ground for the
39
Sherman Act 1890. See, also, Amato, G, Antitrust and the Bounds of Power, 1997, Oxford: Hart.
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Chapter 1: Introduction to Competition Policy and Practice
Competition Commission’s criticism of the proposed BSkyB/Manchester United merger was the concern over the consequent worsening of the distribution of wealth in English football.40 More generally, the post-1997 Labour Government introduced a high profile ‘Rip-Off Britain’ campaign which resulted in subsequent referrals to the Competition Commission concerning the possibility of excessive pricing in supermarkets and of new cars in the UK.41 Protection of consumers This seeks to further the basic pure competition objective by providing the extent to which competition law shall have regard to the interests of the consumer. Indeed, competition laws often seek to balance competing gains to industry and the consumer.42 In the mid 1990s, the competition authorities in the UK were criticised, after an investigation into the pricing of compact discs and cassettes, for no longer representing the consumer and being a ‘soft touch’ for big business.43 The link between consumer policy and competition policy is also highlighted in the UK by the existence of one official, the DGFT, who supervises both areas. In his Annual Report 1999, he underlined that his ‘job is to protect consumers and to champion their interests’. Regional policy This may seem to be a strange component of competition policy, but it can be understood given that competition law is part of an overall policy to promote the national, or regional, economy. Thus, regional policy has formed a clear part of UK competition policy under the Fair Trading Act 1973. Furthermore, it constituted an overriding consideration in the analysis of a series of mergers which may have proven specifically detrimental to the Scottish economy and which were prohibited under this regional policy criterion.44 Regional policy is also important under Community law, specifically in relation to State aid, where financial assistance may be allowed for a deprived region of the Community. Creation of unified markets and prevention of artificial barriers to trade This is a political objective peculiarly related to Community competition policy. This is termed the policy of ‘market integration’ and is crucial to European
40 41 42 43 44
See, British Sky Broadcasting Group plc and Manchester United plc: A Report on the Proposed Merger, Cm 4305, 1999 and DTI Press Release, P/99/309, 9 April 1999. Supermarkets: A Report on the Supply of Groceries from Multiple Stores in the United Kingdom, Cm 4842, 2000 and New Cars: A Report on the Supply of New Motor Cars Within the UK, Cm 4660, 2000. See, for instance, the Fair Trading Act 1973, s 84, and also the conditions for gaining an exemption under Art 81(3) in Community law. iry into the supply of compact discs under the Competition Act 9 February 2001). See Rodger, BJ, ‘Reinforcing the Scottish “ring-fence”: a critique of UK mergers policy vis à vis the Scottish economy’ [1996] 2 ECLR104.
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competition policy. It is derived from the overall aim of integrating the markets of Member States to create a more united Europe.45
Small is beautiful This is indirectly related to the pure competition policy objective in that competition policy may seek to foster smaller companies’ ability to compete more directly with established powerful companies. One way that it can achieve this is by responding more leniently to forms of co-operation between smaller firms, which might involve the sharing of technology. Competition authorities may also adopt the concept of ‘countervailing power’ based on the need for strength on one side of the market in order to counteract strength on the other, the general consensus being that this may ultimately benefit the consumer. The promotion of SMEs (small and medium-sized enterprises) is a particular goal of the Community authorities, as it is believed that such companies may start to compete across national frontiers and, hence, indirectly support the market integration policy. These are some of the individual objectives which may form part of competition law and policy. Once we have identified the particular objectives that form part of competition policy, one of the difficulties for competition law is assessing the priorities and trade-offs between the various objectives in a concrete case.46 These political objectives inevitably have a spill-over effect into the types of competition rules employed by the particular system. We will see in the Community context how important the principle of market integration has been. Indeed, it has appeared to override many other objectives, such as efficiency. In the UK, under the Fair Trading Act 1973, we can note the wide, and vague, public interest test. During different periods in development there will be changes in the emphasis given to the various policy objectives. For instance, the last decade has witnessed many developments in the Community to enhance small and medium-sized undertakings and, thus, promote the integration of the Community. Changes in preoccupations are also evidenced by a brief consideration of the USA, where the fear of big business was obvious, particularly when antitrust law was introduced at the end of the 19th century, and in the UK, where collusive practices were encouraged in the post-war era. The marked change in approach over the last 30 years to the NBA, which was recently prohibited, is also clear evidence of trends in competition policy. Community competition law in practice reflects many of the above comments. There are a number of policy objectives which may be identified in Community competition law and the emphasis given to each may vary over time. These objectives inevitably affect the interpretation of the specific legal provisions. Furthermore, a similar debate has ensued regarding the respective values of the laissez-faire free market and intervention by public authorities and, also, whether competition law should embody any extra-competition policies at all.
45 46
This shall be assessed in fuller detail, below. And this is often the matter which is debated most strongly.
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Chapter 1: Introduction to Competition Policy and Practice
The inclusion of political objectives or extra-competition policies raises two further issues, as it suggests the necessity of some degree of discretion within the rules to accommodate flexible objectives. First, this may have repercussions on the type of remedies which will be available under the competition rules. Should the remedies be public or private remedies and should they be retroactive and punitive, or prospective? Secondly, the flexible nature of the administrative intervention in advancing those political objectives has led to calls for greater certainty and predictability in the enforcement of competition law. Indeed, criticism over the inclusion of extra-competition policies is essentially due to the unpredictability of administrative intervention in the market. Thus, the argument for certainty and predictability may be observed as a political objective in itself.
US ANTITRUST LAW AND POLICY In this book we shall be focusing on the competition law and policy of the Community and UK. However, some reference will be made to USA antitrust law and policy due to its influence on the competition policy of other jurisdictions. The USA was the first jurisdiction to introduce a coherent competition system, known as ‘antitrust’, and it produces a vast amount of academic literature on the topic. The substantive provisions of USA law are notable for their brevity. Essentially, legislative provision is made in three statutes: the Sherman Act of 1890, the Clayton Act and the Federal Trade Commission Act both of 1914, of which the Sherman Act is the most important. The core provisions of that Act are ss 1 and 2, and there has been intense debate throughout the history of the Sherman Act as to the role of antitrust policy and the ensuing implications for the interpretation of those provisions. The history and traditions of USA antitrust law form an essential backdrop to the continuing debate over its role and purpose. It has been argued that ‘American antitrust law is not only “law” but also a socio-political statement about our society’.47 The political consensus reflected in the law during the early years of antitrust, and for a considerable period thereafter, was that high concentration of industry lessened competition. This mainstream antitrust tradition was also sceptical of the notion that the competitive process adequately controls market power. The Harvard school of antitrust law and economics had its origins in the 1930s. Harvard school economists placed great emphasis on market structure as the root of market failure and particularly that excessive concentration of market power resulted in poor performance, primarily in the form of high profits. Parallel to the academic prominence they achieved, the US Supreme Court, in the 1960s and 1970s, appeared to adopt a similar concern for increasing concentration. The Chicago school of antitrust law and economic analysis began its development in the 1950s and is particularly associated with the work of Robert Bork. The Chicago school tends to focus on two ‘truths’. The first is that they are
47
Sullivan, T, The Political Economy of the Sherman Act: The First One Hundred Years, 1991, Oxford: OUP, p 3.
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Competition Law and Policy in the EC and UK
‘efficiency advocates’. The goal of markets is the efficient allocation of resources and the only concern of antitrust, therefore, is to intervene to prevent the inefficient allocation of resources. The second ‘truth’ is that there is very little scope for antitrust law and, consequently, for government intervention in the functioning of markets. This is perhaps a logical consequence of the Chicago school’s presumption of the efficiency of firms and the functioning of markets. The Chicago school’s aim would appear to be to ‘keep government out’ and to seek the least disruptive way to correct market failures. In any event, with the inauguration of President Reagan in 1980, the Chicago school approach was adopted by the US Government with Reagan’s promise to curtail the Government’s role in business. As a result of adherence to the Chicago school policy, government enforcement of antitrust was at a low ebb, although the Supreme Court never fully embraced the concept that efficiency was the only concern. The Chicago school also encouraged a black letter approach to competition law, based on the importance of legal certainty and predictability. This also reflects the fact that the USA system relies to a great extent on private enforcement of the antitrust laws. Although the Chicago school’s beliefs are still important in the USA, there has been constant debate and criticism of the Chicago school’s approach. In addition, there has been a recent rise in prominence of a new school of industrial economics, in response to Chicago, seeking to analyse strategic behaviour affecting competition, emphasising indepth analysis of the particular market involved. Furthermore the US Department of Justice’s antitrust action against Microsoft is perhaps indicative of a move away from a laissez-faire ‘winner takes all’ approach to antitrust policy.48
DEVELOPMENT OF COMMUNITY COMPETITION LAW The earliest Community competition controls were introduced in the Treaty of Paris establishing the European Coal and Steel Community. However, these are specialised rules pertaining only limited markets and shall not be considered further in this text. The main competition provisions were introduced in the Treaty of Rome 1957. This established the European Economic Community (EEC). This is now known as the European Community following the adoption of the Treaty of European Union in 1992.49 Community law is a separate legal order which applies throughout the European Community. Accordingly, both governments and private citizens, including companies which operate within the Community, are required to comply with the legal rules established by Community law. It is useful to be aware of the Treaty background in addition to the specific provisions on competition law, partly because of what is known as the teleological
48
49
US v Microsoft, Civil Action 98–1232 (TPJ), final judgment, 7 June 2000. On 20 June 2001, the Court of Appeal overturned the judgment part and effectively this means that the original remedy of divestiture of Microsoft is unlikely to be effected ultimately. It will be interesting to note it the Department of Justice’s policy changes following the election of George W Bush as US President. The EEC was originally formed with six Member States. In 1998 the EC has 15 Member States and forms part of the European Union. For further detail on the background to the European Union and European Community law, see, for instance, Ward, I, A Critical Introduction to European Law, 1996, London: Butterworths; and Craig, P and de Búrca, G, EU Law: Text, Cases and Materials, 2nd edn, 1998, Oxford: OUP.
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Chapter 1: Introduction to Competition Policy and Practice
system of interpretation which is used in Community law. This essentially means that, in interpreting any particular or specific provision of the Treaty or Community rule, regard should be had to the spirit of the Treaty as well as the strict wording. The following is a brief review of the introductory Articles of the Treaty. Article 1 sets the basic outline for the establishment of the Community, but more specifically Art 2 provides that: The community shall have as its task, by establishing a Common Market and progressively approximating the economic policies of Member States, to promote throughout the Community a harmonious development of economic activities, a continuous and balanced expansion, an increase in stability, an accelerated raising of the standard of living and closer relations between the States belonging to it.
Article 3 lists the means necessary to achieve Art 2’s goals and includes in para g: …the institution of a system ensuring that competition in the common market is not distorted.
One of the objectives of the establishment of the European Community was to prevent a re-occurrence of a war in Europe. Therefore, in order to unite the people, at least economically, the EEC was established. The Common Market, known since 1992 as the Internal Market, was intended to create interdependence between the States of Europe. However, it was considered that, in order to make such a Common Market operate successfully, it would be necessary to ensure more or less equivalent competitive opportunities existed throughout this ‘integrated market’. Accordingly, competition rules were included to assist in the creation of a unified competitive environment and partly in an attempt to prevent companies from reerecting trade barriers. The main competition law rules which readers should be aware of are as follows. Articles 81 and 82 are the principal substantive rules dealing with anticompetitive agreements and the activities of the powerful respectively. Article 86 contains specialised provisions relating to undertakings where there is some form of State regulation or involvement. Articles 87–89 provide the rules on State aid. Regulation 4064/89 was introduced in 1990 and provides a specific set of Community merger control provisions. In addition, Arts 83–85 provided a set of measures for enforcement of the substantive rules, but these were intended to be of an interim nature and have, for most purposes, been superseded by the provisions of reg 17/62 which sets out the enforcement procedures to be followed under Arts 81 and 82. In turn, there are currently proposals radically to reform the enforcement of Community competition law and new legislation is likely to be introduced in the future.50 There have also been a range of additional measures introduced by the Community authorities which aim to expand the range of competition law coverage and also to assist and clarify enforcement in a number of areas. These additional measures shall be examined, where appropriate, in the following chapters.
50
Proposal for a Council Regulation on the Implementation of the Rules on Competition Laid Down in Arts 81 and 82 of the Treaty, Com 582 (2000), OJ L365/284, 2000.
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Competition Law and Policy in the EC and UK
DEVELOPMENT OF UK COMPETITION LAW Competition law in the UK is essentially statute based. The most notable feature of the common law’s development for these purposes was its abstinence from competition issues. This may reflect the adoption of the philosophy of Adam Smith, the famous Scottish economist, an advocate of the free market and laissezfaire in the early 19th century. The common law has attempted to develop methods of dealing with competition problems in three areas. Criminal law The criminal law is not generally considered to be the best technique to pursue anti-competitive behaviour, although breach of the former UK restrictive trade practices legislation, which was repealed by the Competition Act 1998, constituted a contempt of court with the possibility of fines and imprisonment for senior managers.51 Breach of Community law may lead to ‘administrative’ fines of up to 10% of a company’s annual turnover. Similarly, breach of either prohibition under the Competition Act 1998 may result in a fine imposed by the DGFT which may not exceed 10% of the turnover of the undertaking over the last three years. Debate exists as to whether these should be considered penal in nature.52 It is worth noting that the Competition Act includes particular provision in s 72 in respect of bodies corporate and partnerships for offences committed under the Act, such as destroying or falsifying documents, under s 43, to be attributed to individual officers, directors or partners. In addition, following Community law, a number of classes of individuals (for example, opera singers) can be considered to be acting as undertakings and are therefore open to the full range of penalties. The Government has made dramatic proposals to further enhance the deterrent effect of the legislation to create criminal responsibility punishable by imprisonment, for individuals involved in cartels.53 Delict/tort The law of delict or tort is also of limited application to competition matters, being designed essentially to regulate personal and property interests. However, there are various forms of delictual or tortious action under both UK legal systems which are competition related, and these may be collectively termed the ‘economic delicts’.54 The most directly related for these purposes is the action based on conspiracy to injure. This type of action has recently been confirmed,55 but the
51 52 53 54
Re Supply of Ready Mixed Concrete (No 2), Director General of fair Trading v Pioneer Concrete UK Ltd and Another [1995] 1 All ER135. As in the United States where the principal method of enforcement is through private actions for ‘treble damages’ in which the aggrieved litigant will be awarded three times the amount of their alleged loss as a result of the anti-competitive action. See HM Treasury and DTI, ‘Productivity in the UK: enterprise and the productivity challenge’, June 2001, at para 3.23, and Productivity and Enterprise: A World Class Competition Regime, Cm 5233, 31 July 2001. See Chapter 4; Thomson, J, Delictual Liability, 2nd edn, 1994, Edinburgh: Butterworths; Brazier, M and Murphy, J, Street on Torts, 10th edn, 1997, London: Butterworths. Carty, H, An Analysis of Economic Torts, 2001, Oxford: OUP.
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classic example, in Mogul Steamship Co Ltd v McGregor Gow & Co,56 highlights its limitations. A shipping conference regulated freight in the China tea trade. Mogul joined the trade and managed to transport tea at lower rates. The reaction of its competitors was to drop their rates to such a level that Mogul went out of business. This was a classic predatory pricing case and Mogul sued for conspiracy to injure. There was a clear purpose to restrain trade, but the action would only succeed if the conspiracy was to fulfil an improper purpose. Although there was clear evidence of a cartel, there was no liability as it was not deemed to be an improper purpose, even if it restricted competition, to protect legitimate trade interests. In the UK legal system the most important competition remedy under delict/tort is that of passing-off. The basic premise is that it is not permissible to confuse the public into thinking your goods are in fact someone else’s. This allows an action to be brought if the public associates particular goods, or the way they are marketed, with company A and another company misrepresents their goods in such a way as to confuse the public and seeks to benefit from the goodwill of company A.57 Passing-off is one area of the present law which may be considered as falling under a general principle against unfair competition. Restraint of trade The third area of common law involvement is through the contract based remedy of unreasonable restraint of trade. This is a fairly limited doctrine allowing a party to escape a contract which unreasonably restrains his ability to trade. It essentially relies on two tests: first, reasonableness between the parties; and secondly, reasonableness in the public interest. The doctrine was given importance in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd58 where purchasing agreements which required the purchase of petrol exclusively from Esso were considered. Although the effect is limited,59 the restraint of trade doctrine still has vitality. In particular, the action has been used in recent years by individuals claiming that long term agreements have been in restraint of trade due to the inequality of bargaining power. Notable in this context have been claims by various recording artists, for instance, George Michael’s claim against Sony.60 That action failed, although it was noted that agreements of lesser duration involving Holly Johnson and the Stone Roses were held to be invalid in earlier litigation. In practice, it appears that parties often make alternative claims under Art 81 of Community law and the common law restraint of trade doctrine in order to seek to avoid their contractual obligations.
55 56 57
58 59 60
Lonrho plc v Fayed and Others (No 5) [1994] 1 All ER 188. [1892] AC 25. See, for instance, Evven Warnink BV v J Townend & Sons (Hull) Ltd (No 1) [1979] AC 731; Haig & Co Ltd v Forth Blending Ltd 1954 SC 35; and Scottish Milk Marketing Board v Dryborough & Co Ltd 1985 SLT 253. Also, note the related remedies under the Trade Marks Act 1994, s 56(2), in respect of the proprietor of a ‘well known’ trade mark. [1968] AC 269. See Texaco Ltd v Mulberry Filling Station Ltd [1972] 1 All ER 513. Panayiotou and Others v Sony Music Entertainment (UK) Ltd [1994] 1 All ER 755. See, also, the earlier case of Schroeder Music Publishing Co Ltd v Macauley [1974] 3 All ER 616.
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Statutory development As noted above, competition policy objectives can change. This can be observed in the changing attitudes towards differing competition concerns, such as cartelisation and pricing, which are reflected in the statutory developments and their enforcement. The first competition related statute was the Profiteering Act 1919 which was aimed at excessive pricing following the First World War. The 1944 White Paper on Employment Policy led to the Monopolies and Restrictive Trade Practices (Inquiry and Control) Act 1948. A major concern of the administrative body thereunder, the Monopolies and Restrictive Practices Commission, lay with the activities of trade associations which were prevalent in the UK. Following upon their report, Collective Discrimination, in 1955,61 the Restrictive Trade Practices Act 1956 was introduced, and later extended by the Resale Prices Act 1964. The only other major statutory development before 1973 was the Monopolies and Mergers Act 1965 which introduced merger controls for the first time. The UK entered the European Community in 1973 and, in that year, the Fair Trading Act 1973 was enacted. This statute was not a response to membership of the Community, but was, essentially, a consolidating piece of legislation adding a major new feature to the UK competition law regime. This was the creation of the post of the DGFT, who would be assisted in his task of overseeing competition law enforcement in the UK by the Office of Fair Trading (OFT). The 1973 Act covered monopolies, in the loosest possible sense, and mergers. Further consolidatory legislation was introduced in 1976, regulating anti-competitive agreements: the Restrictive Trade Practices Act 1976 (RTPA), the Restrictive Practices Court Act 1976 and the Resale Prices Act 1976. The only significant competition legislation introduced by successive Conservative Governments from 1979–97 was the Competition Act 1980. This Act extended the powers of the DGFT to regulate ‘anticompetitive practices’ and also introduced a measure, latterly of limited significance, providing for efficiency audits of nationalised industries. From the late 1980s, there was continuous debate on whether UK competition law should be reformed to mirror the Community competition law provisions. This has finally been resolved by the Competition Act 1998.62 Readers should, nonetheless, be aware of the earlier proposals for reform in order fully to appreciate the debate surrounding the rationale for and ultimate form of the new competition legislation. A White Paper in 197963 approved the adoption of restrictive practices legislation based on the Community provision in Art 81 and, although legislation was promised, it did not appear. Subsequently, a Green Paper was published in 199264 regarding proposed reform of the 1973 Act and the Competition Act 1980. The Paper made three alternative recommendations for change, each of which envisaged, to varying degrees, moving closer towards the system for supervision of monopoly behaviour under Art 82. The Government 61 62 63 64
Monopolies and Restrictive Trade Practices Commission, Collective Discrimination: A Report on Exclusive Dealing, Collective Boycotts, Aggregated Rebates and Other Discriminatory Trade Practices 1955–56, Cmnd 9504, 1956. The basis of which will be outlined in Chapter 2. Opening Markets: New Policy on Restrictive Trade Practices, Cm 727, 1989, following the earlier Green Paper, Review of Restrictive Trade Practices Policy, Cm 331, 1988. Abuse of Market Power, Cm 2100, 1992.
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subsequently announced in 1994 that there would be no radical reform of the 1973 Act and only minor procedural changes would be introduced. This stance was again adopted by the Government when the Trade and Industry Committee of the House of Commons, in their report on monopolies in 1995, recommended a shift to a Community-style set of provisions.65 More recently, the outgoing Conservative Government published, in 1996, a consultation document66 followed by a draft Competition Bill.67 This would have introduced an Art 81-type provision in place of the 1976 Acts and added newer enforcement powers for the DGFT under the Fair Trading Act 1973 and Competition Act 1980. The Labour Government, following the 1997 election, introduced the Competition Bill, subsequently passed as the Competition Act 1998. This has radically altered the former competition law provisions by repealing the 1976 Acts and the Competition Act 1980. In their place, the Competition Act 1988 introduces new controls modelled essentially on Arts 81 and 82. The Fair Trading Act 1973 has been retained, subject to certain modifications. The DTI has made formal proposals to modify UK merger control and these will be addressed in Chapter 6. These proposals were confirmed in a recent Government strategy document which also proposes, inter alia, the following changes to UK competition law structure: increased resources for the OFT and Competition Commission, enhanced rights to complain for consumer bodies; reform of the complex monopoly provisions; the creation of a criminal offence for involvement in a cartel; and the institution of specialist competition courts. It will be interesting to note how these proposals are developed.68
COMPARISON OF COMPETITION LAW OBJECTIVES UNDER COMMUNITY AND UK LAW AND POLICY Community competition policy objectives The market integration objective is a general aim of the Treaty of Rome and has become one of the most important goals of Community competition policy. Most commentators accept that market integration has been the unifying aim of Community competition policy. However, it is difficult to discern the other policy objectives which should be pursued by Community competition policy. Nonetheless, certain objectives have become clear in the jurisprudence of the Commission and Court in applying Community competition law, such as the diffusion of economic power, the protection of the economic freedom of market participants, specifically of small and medium-sized firms, and the assurance that economic resources are efficiently allocated. More generally, and in contrast to the USA, the social value of ‘fairness’ has also been incorporated. The Community’s 65 66 67 68
Fifth Report, HC 249–1, 1995; see, also, Government Observations on the Fifth Report from the Trade and Industry Committee (Session 1994–95) on UK Policy on Monopolies, HC 748, 19 July 1995. Department of Trade and Industry, Tackling Cartels and the Abuse of Market Power: Implementing the Government’s Policy for Competition Law Reform, a Consultation Document, March 1996, London: DTI. Department of Trade and Industry, Tackling Cartels and the Abuse of Market Power: A Draft Bill, An Explanatory Document, August 1996. HM Treasury and DTI, ‘Productivity in the UK: enterprise and the productivity challenge’, June 2001, and Productivity and Enterprise: A World Class Competition Regime, Cm 5233, 31 July 2001.
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refusal to adopt the Chicago school approach, based solely on efficiency, can be linked to these broad objectives. The emphasis on market integration means that tensions may exist between the competing objectives of competition law and this overriding goal. Furthermore, Art 157 of the EC Treaty gives legal basis to the link between competition law and industrial policy. Similar links exist with other tangential policy objectives pursued by the Commission. Competition law does not exist in a vacuum and this is clearly recognised by the Commission. Indeed, it is instructive to examine the Annual Report on European Competition Policy, compiled by the Commission, to gain an insight into the Commission’s views on the objectives of competition law. The XXVIth Report (1996) is particularly informative and states that: (1) …competition policy interacts with most other broadly based policies such as the development of the internal market, the policy on growth and competitiveness, the policy on cohesion, research and development policy, environmental policy and consumer protection. (2) Competition policy is thus both a Commission policy in its own right and an integral part of a large number of Union policies and with them seeks to achieve the Community objectives set out in Art 2 of the Treaty.69
In particular, that report identified a positive link between competition policy and employment policy. In addition, it stressed that before Community competition policy could function fully it should be required to ‘take account of globalisation’ and ‘help to develop the full potential of the internal market’. In 2000, the European Commissioner responsible for competition, Mario Monti, stressed that: Competition policy serves as an instrument to encourage industrial efficiency, the optimal allocation of resources, technical progress and the flexibility to adjust to a changing environment. In order for the Community to be competitive on worldwide markets, it needs a competitive home market.70
Finally, the authors suggest that, since the Maastricht Treaty and the achievement of the internal market, market integration may no longer continue to be the predominant principle in Community competition policy. In any event, from analysis of the Community jurisprudence, it is not an issue in all, or even most, cases involving the application of the competition rules, notwithstanding its persuasive effect in cases such as the Johnny Walker Red Label case.71
UK COMPETITION POLICY OBJECTIVES This section aims to give a brief background to the history of UK competition law and the approach adopted by the UK authorities involved. At no time have the objectives of UK competition law been clearly stated and defined. However, general directions can be derived from the reports of the DGFT, policy statements
69 70 71
European Community Competition Policy—1996, 1997, Brussels: OOPEC. XXIXth Report on Competition Policy 1999, para 2. Case 30/78 Distillers v Commission [1980] ECR 2229; [1980] 3 CMLR121.
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by the Secretary of State and various policy review documents. The UK legislative materials provide a useful example of how competition law objectives can differ, even within the context of the same domestic setting. Under the Fair Trading Act 1973, conformity of market structure and conduct with the public interest is the basic benchmark, but this broad test comprises a variety of vague economic and socio-political concerns. This flexibility allows markets to be investigated without the requirement for blame and, consequently, a variety of factors which may have led to the market failure can be assessed. The utilitarian model of public interest assessment is central to a statutory framework which concentrates on market failure and not necessarily some form of reproachable behaviour. The public interest test is certainly not based on the need for certainty and predictability. However, on the basis that competition laws are designed to enhance the national economy, the test under the 1973 Act is particularly appropriate. There has been debate in the UK regarding the suitability of the public interest test and its concern with non-competition issues. The tension was noted by Sir Geoffrey Howe, as the Minister for Trade and Consumer Affairs, after the 1973 Act was passed, in relation to merger control: If a merger seemed likely to cause significant redundancies or to be incompatible with the Government’s regional policies, the case for full investigation would be strengthened… What I have deliberately not attempted to do is to say what weight is to be attributed, for all time, to any particular aspect. Our national priorities change. The Government’s powers must be sufficiently flexible to reflect these changing priorities.72
Subsequently, in July 1984, the then Secretary of State for Trade and Industry, Norman Tebbit, issued a statement now known as the ‘Tebbit Doctrine’. He stated, in relation to merger control, that the merger referral policy would be based ‘primarily on competition grounds’. Interestingly, the first Labour President of the Board of Trade and Secretary of State for Trade and Industry following the 1997 General Election, Mrs Margaret Beckett, confirmed that this policy would be continued. Further, there have been recent proposals radically to reform UK merger control by adopting a competition based test as the principal statutory basis for assessing mergers.73 The Competition Act 1998 is widely anticipated to become the predominant statute in UK competition law and policy. It is suggested that there are two principal objectives behind this legislation. The first is to harmonise domestic controls with those under Arts 81 and 82 of Community law, partly in order to avoid the imposition of a double burden on UK business. The second, perhaps paradoxical object, is to increase the effectiveness and deterrence of UK competition law by providing enhanced investigatory and fining powers to the DGFT.
COMPETITION LAW AND POLICY IN ACTION This section shall outline two issues which reflect many of the points addressed in this chapter and which are also fairly topical in debates on competition law and 72 73
‘Government policy on mergers’ (1973) 13 (1 November) Trade and Industry 230, p 235. These proposals will be discussed more fully in Chapter 6.
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policy. The first issue is the difficulties which competition law has in dealing with the complex economic problems of oligopoly. The second is a consideration of unfair competition laws and their connection with the policy debate on traditional competition rules. The oligopoly problem—law and economics Both the Community and UK competition provisions have responded to oligopoly and oligopolistic market structure. Here, we hope to indicate that using a formalistic legal approach to address a market problem identified by economic theory is unwise. Furthermore, it suggests that a reactive, as opposed to proactive, approach by the law to economic problems is likely to prove difficult and will ultimately fail to deal with the identified problem adequately. An economic outline of the oligopoly problem An oligopolistic market is one where there are few competitors and their actions are transparent, notably their pricing behaviour. This means that each of the limited number of competitors knows what the others are doing and, by studying past reactions, can predict future conduct. The problem is, therefore, that the market structure ensures that there will, in effect, be little competition, particularly in terms of price. Furthermore, the theory of oligopolistic interdependence means that the limited number of companies involved will be able to make a monopolist’s excess profit without having to conspire together or form a cartel in a way that is usually prohibited by competition rules. Due to the market structure, and the size of each company in the market, rivals are interdependent and are bound to match policies, with price competition being minimal or non-existent. As all companies seek to maximise profits, oligopolists will be able to match strategies and set monopolistic profit-maximising prices. There does not need to be a collusive agreement due to the companies’ mutual self-awareness. Often, in practice, this may be achieved by a system of price leadership in which one company traditionally increases prices and the other companies in the market follow this lead. This achieves ‘parallel pricing’; an example is the petrol retailing industry, which has been subject to the scrutiny of the UK competition authorities in the past. The central theory of oligopolistic interdependence has been criticised for its simplicity and its failure to explain fierce competition in some markets which appear to be oligopolistic. Empirical research has sought to consider the link between market structure and profit levels to assess whether profit levels increase with increased concentration in the market. Results have been inconclusive and the adequacy of many of the studies has been disputed, though they tend to favour the existence of the link. The problem for competition policy is how to deal adequately with the problems caused by the theory of oligopolistic interdependence. Community competition law and oligopoly Attempts have been made through Arts 81 and 82 to address the potential problems in oligopolistic markets. These have not been particularly successful. The main reason for this failure lies in the legalistic nature of these provisions. Under Art 81, the existence of an agreement requires to be proved. This has demonstrated Art 81’s general inadequacy at dealing with a market form in which there may be 24
Chapter 1: Introduction to Competition Policy and Practice
no evidence of such collusion between the parties. Indeed, because breach of Art 81 may result in fines, companies defend their behaviour on the basis of market structure, denying any conspiracy between them. Accordingly, Art 81 has a very limited role in relation to oligopoly. Article 82, which controls the abuse of a dominant position, was originally considered to be limited to the actings of a single powerful company and thus inapplicable to the oligopoly situation. Partly due to the inadequacy of Art 81, the Community authorities have sought to extend the coverage of Art 82 to the oligopoly problem by developing the concept of the abuse of a collective dominant position. This concept may help to close the oligopoly gap under the rules, although the requirement, as set out by the Court in the landmark Italian Flat Glass case,74 of proving ‘economic links’ between the companies, bears no relation to the economic theory. The possibility of independent parties acting as a ‘collective entity’ has been clarified and expanded to some extent by the European Court in Compagnie Maritime Belge,75 but, in any event, Art 82 may not be the most appropriate tool for dealing with oligopolies. Market failure can arise for a variety of reasons in oligopolistic markets and to attack such markets under a legalistic, retroactive system may be unsuitable. It is useful to note at this stage that the Community Merger Regulation 4064/89 has been developed in recent years to prevent the creation of potentially anticompetitive oligopolistic markets. Despite the difficulties in adapting the test in the regulation, based on the wording of Art 82, to deal with the creating or strengthening of a collective dominant position in potential oligopoly market situations, cases, such as Gencor,76 have highlighted the benefits of a predicative merger control approach to oligopoly issues. UK competition law and oligopoly The Restrictive Trade Practices Act 1976 was aimed at cartels or agreements between parties which restrict competition and was the UK provision most like Art 81. The Act also suffered deficiencies, because of its legalistic nature, in its ability to deal with oligopoly. The dilemma was that its provisions could not condemn parallel behaviour which was argued to be directly attributable to or facilitated by an oligopolistic market structure. Similarly, the Chapter I prohibition in the Competition Act 1998, modelled on Art 81, is unlikely to prove more helpful in the future. The Chapter II prohibition, the UK equivalent to Art 82, should be interpreted consistently with Community jurisprudence on collective dominance with its inherent difficulty and limitations. However, the Fair Trading Act 1973 contains a set of flexible and pragmatic measures which are considered to be particularly appropriate for consideration of oligopolistic problems. The system under the Fair Trading Act 1973 allows for an investigation into ‘market failure’ with a variety of possible outcomes. This different approach under the Fair Trading Act 1973 places little emphasis on legal analysis. The solution adopted is to accept that there are certain industries with structural problems, abandon the search for unlawful activity, but instead investigate and monitor behaviour 74 75 76
Commission Decision (89/93/EEC), OJ L33/44, 1989; [1990] 4 CMLR 535; Cases T-68, 77 and 78/89 Società Italiana Vetro SpA and Others v Commission [1992] ECR 3/II-1403, CFI. Case C-395/96 Compagnie Maritime Belge Transports SA v Commission of the European Communities [2000] ECR I–1365; [2000] 4 CMLR 1076. Case T-102/96 Gencor v Commission [1997] ECR II-879; [1999] 4 CMLR 971.
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prospectively During the passage of the Competition Act 1998, it was stressed that a principal motivation for the retention of the Fair Trading Act 1973 was its provision for suitable treatment of oligopoly problems. Unfair competition—understanding law and policy An interesting policy debate surrounds the prohibition of unfair competition. This has not been developed under either Community or UK competition law, in contrast with, for instance, Germany, France and Poland. This raises the question of what such a prohibition could consist of. In Germany, a competitor may claim damages under the unfair competition rules for conduct which would normally be considered under consumer law in the UK. However, UK and Community law has avoided providing remedies for competitors. The most closely related actions under UK law are passing-off and remedies created by legislation on intellectual property rights.77 Unfair competition has been topical in recent years, particularly due to two issues: brand copying by major retailers and comparative advertising. With the former, the only remedies lie under passing-off and possibly under the Trade Marks Act 1994, although the protection is limited. The lack of legal recourse was demonstrated in 1995 by the events surrounding the packaging of Sainsbury’s own brand cola drink which was remarkably similar to Coca-Cola’s. There have been numerous examples of comparative advertising: Hyundai’s statement that ‘even a kettle has a longer guarantee than a Rover’; Avis’ claim that ‘we try harder’, which, incidentally, was not allowed in Germany due to the presumed reference to Hertz; and Carlsberg’s famous slogan ‘probably the best lager in the World’. The most notable dispute in recent years involved Unilever and Proctor & Gamble in an advertising war comparing the respective merits of Persil Power and Ariel Ultra. Writs were apparently issued, but no court case ensued. The limited protection available in respect of comparative advertising is again largely based on the passing-off doctrine combined with trade mark protection. The Trade Marks Act 1994 appears to allow comparative advertising, but a trade mark infringement will occur where use is contrary to honest practices and takes unfair advantage or is detrimental to the trade mark’s reputation.78 Many European countries’ unfair competition laws prohibit disparaging competitors, making special offers, discounting or the slavish copying of merchandise. A particularly interesting example is the German Regulation on Free Gifts.79 This highlights the reach of certain unfair competition laws, their emphasis often being on consumer protection. This German regulation prohibits free gifts linked to a product on the basis that the quality and price of the product alone should affect the consumer who should not be misled by so called ‘free gifts’. Examples of such gifts in the UK are plentiful, for instance, the famous Hoover free flights offer in 1992–93. Analysis of this particular type of unfair competition law is clearly related to the objectives of competition law generally. For instance, a Darwinian laissez-faire approach, of the type advocated by the Chicago school, would suggest that this law is paternalistic and restricts consumer choice. They would also argue that it is inefficient in preventing 77 78 79
For instance, the Trade Marks Act 1994. Trade Marks Act 1994, s 10(6). See op cit, Willimsky, fn 27.
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Chapter 1: Introduction to Competition Policy and Practice
producers from improving their products and thereby gaining an advantage over their competitors. Other commentators would stress the need for fairness in the market place for all competitors, or adopt the pro-consumer stance that consumers are not always able to make an informed and rational choice concerning ‘free gifts’.
FURTHER READING Competition policy general Bodoff, J, ‘Competition policies of the US and EEC: an overview’ [1984] ECLR 51 Furse, M, ‘The role of competition policy: a survey’ [1996] 4 ECLR 250 Jebsen, P and Stevens, R, ‘Assumptions, goals and dominant undertakings: the regulation of competition under Art 86 of the European Union’ (1996) 64 Antitrust LJ 443 Willimsky, S, ‘The concept(s) of competition’ [1997] 1 ECLR 54 EC competition policy development Amato, G, Antitrust and the Bounds of Power, 1997, Oxford: Hart Ehlermann, C-D, ‘The contribution of EC competition policy to the Single Market’ [1992] CMLR 257 Frazer, T, ‘Competition policy after 1992: the next step’ (1990) 53 MLR 609 Gerber, D, Law and Competition in Twentieth Century Europe, 1998, Oxford: Clarendon UK competition policy development Maher, I, ‘Juridification, codification and sanction in UK competition law’ (2000) 63 MLR 544 Rodger, BJ and MacCulloch, A (eds), The UK Competition Act: A New Era for UK Competition Law, 2000, Oxford: Hart US background Bork, R, ‘Introduction: the crisis in antitrust’, in The Antitrust Paradox: A Policy at War with Itself, 1993, Oxford: Maxwell Macmillan Fox, E, ‘The new American competition policy—from antitrust to pro-efficiency’ [1981] ECLR 439 Pitofsky, R, ‘The political content of antitrust’ [1979] 127 UPLR 1051 Schwartz, L, ‘Justice and the non-economic goals of antitrust’ [1979] 127 UPLR 1076 Sullivan, L, ‘Antitrust, microeconomics and politics: reflections on some recent relationships’ [1980] 68 Calif LR1
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Unfair competition Robertson, A and Horton, A, ‘Does the United Kingdom or the European Community need an unfair competition law?’ [1995] EIPR 568. Willimsky, SM, ‘Free gifts “verboten”: the German regulation on free gifts’ [1996] 1 ECLR 59 Willimsky, SM, ‘Aspects of unfair competition law in Germany’ [1996] 5 ECLR 315
DISCUSSION ‘Antitrust policy cannot be made rational until we are able to give a firm answer to one question: what is the point of the law—what are its goals?’ (Robert Bork, The Antitrust Paradox: A Policy at War with Itself, 1993, Oxford: Maxwell Macmillan.)
Discuss the possible goals of antitrust/competition law.
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CHAPTER 2
ENFORCEMENT OF COMMUNITY AND UK COMPETITION LAW INTRODUCTION This chapter deals with the ways in which Community and UK competition law are enforced. The chapter will review the administrative framework for enforcement in each system, the bodies involved in enforcement, and outline the relevant rules for investigation, decision-making and judicial review. The starting point is the Community framework of centralised enforcement led by the Commission, although various recent developments moving away from that model will also be discussed. In particular, we shall address the recent proposals for modernisation of Community competition law enforcement set out in the Commission’s White Paper of 1999 and the resulting draft Regulation.1 In the UK context, the changes in enforcement structure introduced by the Competition Act 1998 will be outlined in tandem with the remaining elements of the previous administrative framework. Thereafter, the relationship between the enforcement of Community and national competition rules will be examined, in particular the doctrine of supremacy of Community law. Markets, and hence the application of competition rules in relation to market behaviour, are not necessarily confined to the territorial boundaries of either the Community or the UK, particularly given the increasing tendency towards globalisation. Accordingly, the possible extraterritorial application of the competition rules will be considered together with efforts towards international co-operation in competition law enforcement.
EC ADMINISTRATIVE ENFORCEMENT FRAMEWORK Outline The European Commission (‘the Commission’), based in Brussels, is entrusted with enforcement of the Community competition rules. This is known as centralised enforcement. This task is carried out within the Commission by Directorate General for Competition (formerly ‘DGIV’). The primary responsibility for implementing the competition rules rests with the Commission under Reg 17/62 (Reg 17). Regulation 17 set up the framework for the enforcement of Arts 81 and 82. It contains provisions on investigation procedures, how the Commission conducts its infringement proceedings, general rules for hearings, and gives the Commission power to take other decisions. Later in this chapter we will look at the proposals for radical reform of the current enforcement framework set out in Reg 17. There are also two appellate judicial bodies which may be involved in Community competition law. First, appeal from a Commission 1
White Paper on Modernisation of the Rules Implementing Articles 85 and 86 of the EC Treaty, Commission Programme No 99/027, OJ C132/01, 1999 and Proposal for a Council Regulation on the Implementation of the Rules on Competition Laid Down in Articles 81 and 82 of the Treaty, COM (2000) 582, OJ C365/284, 2000.
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decision may be made to the Court of First Instance, and thereafter a further appeal may lie on a point of law to the European Court of Justice. The Commission has the central enforcement role under Reg 17, but its powers are subject to certain limitations. Procedural fairness and other general principles of Community law such as a right to a hearing, proportionality and fundamental freedoms have to be ensured, particularly in the exercise of its fining powers. Diagram 1 provides an outline illustration of the enforcement framework in relation to Arts 81 and 82 in the Community context. Diagram 1: the Community system
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Chapter 2: Enforcement of Community and UK Competition Law
The Commission The Commission’s main task under Art 211 of the Treaty is to ‘ensure the proper functioning and development of the common market’ and it has been described as the ‘guardian of the Treaty’. It represents the Community’s interests and seeks to ensure that the provisions of Community law are applied. Accordingly, the Commission was granted general supervisory powers under the Treaty for dealing with competition law enforcement and more specific powers under Reg 17 in relation to enforcement of Arts 81 and 82. The Commission has a number of members, presently 20, termed Commissioners, one of whom is allocated responsibility for competition policy. Currently the Commissioner for Competition policy is Mario Monti. The staff of the Commission are divided into a number of departments each with a specialist portfolio of responsibilities. These departments are known as ‘Directorates General’, shortened to DG for ease of reference, each headed by a Director General. There are a number of DGs which cover the full range of Community policies from agriculture to taxation and Customs Union. Competition policy and enforcement is allocated to the DG for Competition and the current Director General is Alexander Schaub, who followed the long-standing previous incumbent, Claus-Dieter Ehlermann. The DG for Competition is itself subdivided into particular areas of competence for competition law enforcement. Notable in this regard is the Mergers Task Force, which is part of DG for Competition but which has responsibility for merger control under the distinctive set of procedural and enforcement rules provided by the Merger Regulation.2 The Commission also has a separate Legal Service. Community competition law enforcement is complex and the Commission is short of resources. Therefore, the number of formal decisions taken has been relatively small, and those have generally concerned important points of principle in the development of Community competition policy or where there have been particularly serious transgressions of the rules. In recent years the Commission has been keen to encourage enforcement of Community competition law in the national courts and through the National Competition Authorities (NCAs). These developments are known as decentralisation because they devolve decisionmaking away from the centre, Brussels, to national courts and competition authorities dispersed throughout the Member States of the Community. Nonetheless, the Commission still has the key central role of supervising and enforcing Community competition law stemming from its general duty under Art 211 to apply the Treaty. In particular, the Commission has wide power to carry out investigations into possible infringements of the competition rules and it also has the power to impose fines. The Commission’s powers have been criticised as unfair as it is involved in all stages of investigation; as police, prosecutor, judge and jury. Further, an investigation will be handled by one set of officials throughout the whole procedure, from initial investigation through to the final decision-making process. The Commission has attempted to modify proceedings by introducing and later extending the role of an official called the Hearing Officer. This is part of a wider range of measures which have emphasised the rights of the defence during Commission proceedings. Criticisms of the process have been rejected, mainly because of the existence of the appeals procedure to the Court of First Instance and 2
Council Reg (4064/89) OJ 395/1, 1989.
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Court of Justice, but it is probable that Reg 17 will be replaced by the proposed Regulation implementing the White Paper proposals.3 The enforcement process by the Commission can be divided into three broad phases: (1) initiation of proceedings and investigation; (2) decision-making; and (3) judicial review. Initiation This refers to the fact finding stage of the enforcement process and there are three main ways in which the Commission can gather initial information about potential competition problems: (a) its own research, for example, sectoral surveys of particular markets; (b) complaints; and (c) notification. The latter two methods raise certain issues which need to be addressed before analysing the Commission’s investigative powers. Complaints The Commission receives numerous complaints from the general public that Community competition rules have been infringed, most frequently from competitors or customers of the company which is the subject of the complaint. There is a specific form, Form C, which is provided by the Commission to allow complaints to be made, although its use is not obligatory. Any communications to the Commission are privileged for defamation purposes.4 Notification Regulation 17 establishes a system of notification to allow companies to notify agreements to the Commission. Formal notification only operates in relation to Art 81 issues. The notification procedure was intended to enhance the legal security of such agreements. It is not compulsory to notify an agreement to the Commission as there is no sanction for failure to do so. However, unless an agreement has been notified, and notified formally using the appropriate form (Form A/B), the parties cannot benefit from the positive effects derived from a notification.5 Article 15(1)(a) provides the Commission with the power to fine if the information disclosed in a notification is inaccurate. Once notified, the Commission can grant agreements either ‘negative clearance’ or an ‘exemption’. Alternatively, the Commission may follow an informal settlement procedure by granting a ‘comfort letter’. Finally, the 3 4 5
Proposal for a Council Regulation on the Implementation of the Rules on Competition Laid Down in Articles 81 and 82 of the Treaty, COM (2000) 582, OJ C365/284, 2000. See Hasselblad (GB) Ltd v Orbinson [1985] QB 475. The Johnny Walker Red Label case (Case 30/78 Distillers v Commission 1980 ECR 2229; [1980] 3 CMLR 121) discussed in Chapter 1, illustrates this point clearly. Even if grounds exist for the granting of an exemption, this could not be done without prior notification. Accordingly, in that case the agreement had to be abandoned.
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Commission may decide that the agreement breaches the competition rules and to proceed with infringement proceedings. At this stage it is sufficient to note that a central proposal in the White Paper and subsequent proposed regulation is to abolish the process of notifying the Commission to gain exemption. Negative clearance Article 2 of Reg 17 introduced the procedure for negative clearance whereby the Commission may certify that the activity does not infringe Art 81. It is normally sought in relation to agreements but also has limited applicability under Art 82. Few are granted each year. Exemptions The availability of exemptions for certain anti-competitive agreements stems from Art 81(3) of the Treaty. An exemption allows parties to rely on an agreement which infringes Art 81(1) of the Treaty. An exemption may be granted from the general prohibition on the grounds in Art 81(3); such agreements are exempted as they are of economic benefit to the Community.6 The Commission has tended to take a wide view of the coverage of Art 81 (1)7 and therefore the system of notification has been important. The specific Commission powers and appropriate procedures for granting exemptions is provided in Arts 6–10 of Reg 17. However, due to time and staff shortages, few formal decisions granting exemptions have been taken each year. The Commission has partly resolved this problem by introducing Regulations, known as Block Exemptions, to cover categories of agreements which the Commission considers should benefit generally from exemption, notably in relation to vertical agreements as discussed in Chapter 5. Parties can gain security by making their agreements fit the requirements of the Regulation. Comfort letters As a result of the pressure caused by the number of notifications received, the shortage of staff and resultant backlog of cases, the Commission has developed methods of dealing with some cases informally. In many such instances, the Commission will state that it does not consider the competition rules to have been breached, and that it will accordingly close its file on the matter and bring no infringement proceedings. However, the status of comfort letters is a problem. In FRUBO v Commission,8 the Court of Justice considered that even a letter issued by the Director General to the effect that an exemption was likely did not commit the Commission to that form of action at a later stage. When a Community exemption under Art 81(3) is granted there are two consequences. First, national law cannot prohibit the agreement. Secondly, if the validity of the agreement is in dispute in a national court, the national court has to respect the Commission’s decision to grant an exemption and cannot invalidate the agreement based on Art 81. In contrast,
6 7 8
See further, below, in Chapter 4 regarding Art 81 and the requisite conditions for granting exemptions under Art 81(3). See further discussion of this issue, in relation to vertical restraints in Chapter 5. Case 71/74 [1975] ECR 563; [1975] 2 CMLR 123.
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comfort letters are not binding on national courts or authorities. National Competition Authorities may proceed to enforce national competition rules and prohibit an agreement in relation to which a comfort letter has been granted.9 In the English courts there has been evidence as to the uncertainty regarding the status and effect of a comfort letter issued by the Commission.10 Investigatory powers During the course of an investigation, the Commission has wide powers to collect information, even from third parties. The full extent of those powers was witnessed when a ‘dawn raid’ was carried out on National Panasonic in relation to alleged infringements of Art 81. The information gathering powers are contained in Arts 11–14 of Reg 17.11 The principal rules are contained in Arts 11 and 14. Article 12 provides for inquiries where there may be a competition problem in a sector of the economy. Article 13 allows the Commission to request authorities of Member States to carry out investigations into alleged breaches of the competition rules. Article 11: requests for information Article 11 envisages a two stage procedure. First, under Art 11(3), the Commission may make a request for information, stating its legal basis, the purpose of the request and the likely penalties for providing incorrect information. Should the information not be supplied within the time-limit fixed by the Commission, the Commission can order it to be produced under Art 11(5). Under this provision, fines are available for failure to produce or producing incorrect information. These fines can include periodic penalties for continued failure to provide the requisite information. Article 14: investigations There are also two types of investigation which the Commission may pursue under Art 14. The main difference is that the two procedures are alternatives and there is no requirement to follow the voluntary procedure first. Article 14(2) provides for an investigation by Commission officials upon production of an authorisation. This must specify the subject matter and purpose of the investigation, and penalties for incomplete production of information. The company under investigation is not required to submit to such an authorised investigation. Alternatively, the Commission may take a formal decision to carry out a mandatory investigation under Art 14(3). Such an investigation must be submitted to by the relevant company. These are strong powers of investigation, as seen in National Panasonic12 where the Commission performed an on the spot inspection at the company’s premises. The principle of proportionality seeks to ensure that the Commission will only take such action where there is a serious
9 10 11 12
See the ‘Perfumes cases’, eg, Case 99/79 Lancome v Etos [1980] ECR 2511; [1981] 2 CMLR164. See Inntrepreneur Estates Ltd v Mason [1993] 2 CMLR 293. Merger Regulation, Council Reg (4064/89), OJ 395/1, 1989, as amended, Arts 11–13. Case 136/79 [1980] ECR 2033; [1980] 3 CMLR 169.
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infringement of the competition rules alleged.13 The wide powers of investigation provided for under Art 14 are as follows: (a) (b) (c) (d)
to examine the books and other business records; to take copies from or extracts from the business books and records; to ask for oral explanations on the spot; and to enter any premises, land and means of transport of undertakings. Co-operation with national authorities
The provisions in Reg 17 encourage the Commission in the exercise of its investigatory powers to co-operate with the authorities of the Member States. Indeed, this may be of particular practical significance in securing compliance.14 Article 11(6) provides that a copy of a decision taken pursuant to that Article shall be forwarded to the relevant Member State authority. More detailed provisions exist under Art 14 probably because its powers are more contentious. Article 14(4) provides that the Commission must notify the competent national authority, the DGFT in the UK’s case, prior to the exercise of its powers. Article 14(5) makes it clear that the national authority officials may assist the Commission officials. Article 14(6) goes further and provides that the national authorities are obliged to assist in carrying out the investigation if the company opposes it. Finally, Art 13 provides a mechanism for the Commission to request the appropriate national authority to carry out the investigation on its behalf. Part II of the Competition Act 1998, comprising ss 61–65, seeks to enhance co-operation by the UK competition authorities, principally the DGFT, by providing a procedure for authorising forcible entry and search in connection with certain Community investigations. Special types of information In most mature legal systems there exists some form of protection for certain kinds of documents or information, which are granted privileged status. This in effect means that they can not be relied upon by the other party in a dispute. The two main types of information which need not be divulged by companies to the Commission are those covered by professional legal privilege and the doctrine of self-incrimination. In the Community context there is an additional third category, confidential information, for which there are special rules. The rules on confidentiality shall be considered in the section on the rights of the defence, below.
13
14
Cases 46/87 and 227/88 Hoechst v Commission [1989] ECR 2859; [1991] 4 CMLR 410 also illustrates the powers available to the Commission under Art 14, although also stressing the fundamental need for Commission disclosure of the subject matter and purpose of the investigation. These cases involved an Art 14 decision which authorised search and seizure operations of premises under investigation for suspected cartels in the PVC and related sectors. They also confirmed that the rights of the defence extended to this early stage of proceedings under reg 17, including the right to legal representation. As recognised in Cases 46/87 and 227/88 Hoechst v Commission [1989] ECR 2859; [1991] 4 CMLR 410.
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Professional legal privilege The existence of this doctrine under competition law enforcement was confirmed in A, M & S Europe Ltd v Commission.15 In that case, the Commission sought to carry out a mandatory investigation under Art 14(3) but documentation was withheld by the company. The Commission had demanded disclosure of certain documents in an inquiry into an alleged zinc suppliers’ cartel. A, M & S Europe Ltd had withheld supply on the basis of the professional legal privilege which was attached to certain documents and correspondence between them and their legal advisers. The Commission fined A, M & S for their failure to produce the documents. A, M & S sought review of the Commission decision before the European Court. The Court confirmed the existence of the doctrine of professional legal privilege subject to three limitations: (a) it only covers documents between lawyer and client related to the purpose of the defence; (b) it only applies to communications between a client and an independent lawyer. Advice and documents prepared by in-house lawyers are not covered; and (c) the privilege extends only to independent lawyers based in the Community. The latter two limitations have been criticised. The exclusion of in-house lawyers makes no sense in legal systems where such lawyers have the same status as independent lawyers, and this exclusion may also prejudice the ability of companies to organise an effective competition law compliance programme. The restriction to Community based lawyers is discriminatory but the rule still applies. In practice, should the Commission demand information for which privilege is claimed, the recourse available is to seek review of that decision by the Court of First Instance. These principles apply equally for information required under the provisions of Art 11. Self-incrimination This privilege is rather limited under Community law. This was highlighted in the Orkem and Solvay cases.16 These authorities established that suspect companies may refuse to give responses to questions which may directly incriminate them but they are required to disclose documents which may assist in establishing such a breach. The position adopted by the European Court is increasing in doubt following rulings made by the European Court of Human Rights.17 Decision-making Once the Commission has gathered sufficient information, using any of the methods mentioned, it will then decide which decision-making process is most appropriate. If the competition rules have not been breached the Commission will 15 16 17
Case 155/79 [1982] ECR 1575; [1982] ECR 1575. Case 374/87 Orkem v Commission [1989] ECR 3283; Case 27/88 Solvay v Commission [1989] ECR 3355; [1991] 4 CMLR 502. See, eg, Funke v France (A/256-A) [1993] 1 CMLR 897; (1993) 16 EHRR 297.
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take no further action. If there has been notification and the decision is favourable, the Commission will proceed as appropriate to issue a negative clearance, exemption or comfort letter. The basis on which negative clearance and exemptions are issued shall be outlined in fuller detail in Chapter 4. Should the Commission consider that that the competition rules have been breached, the Commission will initiate infringement proceedings. At an earlier stage, most commonly upon receipt of a serious complaint, the Commission may exercise its powers to make interim measures or provisional decisions. Interim measures Article 3 of Reg 17 provides the Commission with power to grant interim relief where necessary according to the European Court in Camera Care v Commission18 The power to take interim measures is subject to certain limitations, the most important of which is that the measures must be necessary due to the urgency of the situation. The urgency must arise due to a situation which is ‘intolerable for the public interest’ or, as is most commonly the case, ‘is likely to cause serious and irreparable damage’ to another undertaking which is seeking the adoption of the measures.19 For the Commission to act there must be a reasonably strong prima facie case though it is not necessary to establish an infringement with certainty.20 Another significant limitation is that the Commission must adhere to the essential procedural requirements under Reg 17. Accordingly, unlike certain interlocutory court orders, interim measures will not be awarded ex parte and interested undertakings will be given the opportunity to be heard. The Commission has rarely granted interim measures, the most noteworthy example in the UK context being BBI/Boosey and Hawkes: Interim Measures21 in which the Commission took action in respect of a refusal to supply brass band instruments by an undertaking to existing customers who were also going to produce similar instruments in competition with it. A Commission decision to adopt interim measures is subject to review by the Court of First Instance. Provisional decisions One of the benefits of notification to the Commission is provided by Art 15(5) of Reg 17 which states that no fine can be imposed in respect of an anti-competitive agreement between the date of notification and the Commission’s final decision. However, Art 15(6) allows the Commission to take a provisional decision withdrawing the benefit of the provision in Art 15(5), where after a preliminary investigation into the matter it concludes that the agreement falls within Art 85(1) and the grant of an exemption is not justified under the provisions of Art 85(3). Infringement proceedings Infringement proceedings are brought under Art 3 of Reg 17 and commence with the Commission issuing a document called the ‘Statement of Objections’ to the 18 19 20 21
Case 792/79R [1980] ECR 119; [1980] 1 CMLR 334. Ibid, para 19. Case T-44/90 La Cinq v Commission [1992] ECR II-1; [1992] 4 CMLR 449. OJ L 286/36, 1987; [1988] 4 CMLR 67.
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undertakings involved in the alleged breaches. The Statement of Objections must contain a statement of the facts, a legal assessment of the position and, if the Commission intends to impose a fine, the period of infringement. In its final decision the Commission cannot rely on matters not included in the Statement of Objections or matters which are discovered after it has been issued. The parties involved, and any interested third persons, must be given a hearing,22 although representations are also made to the Commission in writing. The Hearing Officer conducts the hearing23 and his remit is to ensure that the parties receive a fair hearing and that the rights of the defence are respected.24 After the hearing, in liaison with the appropriate Member State’s authorities,25 and in consultation with the Advisory Committee on Restrictive Practices and Monopolies 26 the Commission may make a formal decision.27 This can be a ‘cease and desist order’ which requires the parties to cease any infringements of the competition rules and to desist from future infringements.28 The Commission may also impose a fine on any undertakings which have breached the competition rules of up to 1 m or 10% of the worldwide turnover of the undertaking.29 Periodic penalty payments can also be imposed under Article 16 for continued infringements. The largest fines imposed have tended to be for price fixing agreements and agreements which divide up the internal market in the Community. The Commission enjoys a wide discretion in imposing fines and generally takes into account such factors as the gravity of the behaviour, its duration, the profits enjoyed by the company and the likely deterrent effect of a fine.30 Since the case of Re Pioneer,31 in which the Court was asked to review the Commission’s decision on fines, fines issued by the Commission have increased markedly. The highest total fine on a group of undertakings to date is 273 m ECUs32 and the highest fine on a single undertaking
22 23 24
25 26 27 28 29 30
31 32
See Reg 17, Art 19. See now, also, Hearing of the Parties (Antitrust Procedure) Regulation, Commission Reg (2842/98/EC), OJ, 1998, L354/18; [1999] 4 CMLR 228. Commission Reg (2842/98/EC), Art 10. See, more generally, Commission Decision on the terms of reference of Hearing Officers in certain competition procedures (2001/462/EC, ECSC), OJ, 2001, L162/21, replacing Commission Decision (94/810/ECSC, EEC), OJ, 1994, L330/67. See, also, House of Lords Select Committee on the European Union, Session 1999–2000, 19th Report, Strengthening the Role of the Hearing Officer in EC Competition Cases, HL Paper 125, HMSO, 21 November 2000. Reg l7, Art 9(1)–(2). Reg 17, Art 9(3)–(6). A body staffed by officials from each of the Member States whose task is to advise the Commission on competition law and policy issues. It is assisted in this process by the Legal Service of the Commission. See Reg 17, Art 3. See Reg 17, Art 15 on the fining powers, generally, and Art 15(2), specifically, regarding this limit. See, eg, Case T-176/95 Accinauto v Commission [1999] ECR II4-1635; [2000] 4 CMLR 67. To improve transparency in this area, the Commission has published a notice on the setting of fines, Guidelines on Method of Setting Fines, OJ, 1998, C9/3; [1998] 4 CMLR 472. See, also, Spink, PM, ‘Enforcing EC competition law: fixing the quantum of fines’ [1999] JBL 219. For a recent discussion of the application of the Commission’s fining powers, see the CFI judgment in Cases T202/98, T-204/98 and T-207/98 Tate & Lyle plc, British Sugar plc and Napier Brown & Co Ltd, 12 July 2001. Cases 100–03/80 Musique Diffusion Francaise SA, C Melchers and Pioneer Electronic (Europe) and Pioneer High Fidelity (GB) Ltd v Commission [1983] ECR 1825; [1983] 3 CMLR 221. See Commission Decision (1999/243/EC) Transatlantic Conference Agreement, OJ, L95/1, 1999, under review as Cases T-191 etc/98 Atlantic Container Line v Commission, pending.
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is 90 m ECUs.33 The Commission has introduced a formal leniency programme under which ‘whistleblowers’ who have participated in secret cartels can secure either partial or total immunity from fines by disclosing the existence of the cartel to the Commission.34 Finally, the Commission may agree an informal settlement with an infringing undertaking which accepts that it has breached the competition rules and agrees to adjust its behaviour in future. Review of Commission decision-making The appellate bodies involved in Community competition law are the Court of First Instance and the Court of Justice. Court of First Instance The Court of First Instance was established in 198935 in order to reduce the increasing workload of the Court of Justice. The remit of the CFI is fairly limited but as it includes competition law appeals its workload is substantial and significant. The CFI hears appeals from Commission decisions on points of fact and law. Thereafter a further appeal may be made to the Court of Justice on a point of law. European Court of Justice The task of the Court under Art 220 of the Treaty is to ‘ensure that in the interpretation and application of the Treaty the law is observed’. The Court is the ultimate authority on Community law issues, including competition law. The Court is renowned for its creative techniques of interpretation, partly due to the need to ‘fill the gaps’ in the Treaty. It has been criticised for this judicial activism which has been obvious in the development of competition law principles from the limited text of the Treaty. In addition to the Court’s judgments, there are the Opinions of the Advocates General. An Advocate General is an official of the same status as a Court judge, but their task is to prepare a review of the facts and legal analysis of the issues together with recommendations for the Court. The Opinion is delivered in advance of the Court’s final deliberations and is important because it is of persuasive effect in the instant case, and later cases, and also because it gives a wider picture of Community competition law development. The Opinions tend to look more fully at the background of the case, related developments and make a comparative assessment of national laws. This contrasts with the typically short and precise Court judgments which have little indication of their rationale and the developments leading to the particular legal analysis. The trend has changed in
33 34
35
Commission Decision (98/273/EC) Volkswagen, OJ L124/60, 1998. On appeal in Case T-62/98 Volkswagen v Commission [2000] ECR II-2707, the Court of First Instance reduced the Commission’s original fine of 102 m to 90 m ECUS. Commission Notice on the non-imposition or reduction of fines in cartel cases, OJ C207/4, 1996. See Cases T-202/98, T-204/98 and T-207/98, where the CFI reduced the fine imposed on Tate & Lyle plc due to its co-operation with the Commission. The Commission is currently consulting on a revised version of the Notice, OJ C215/18, 2001. As provided for by the Single European Act 1986.
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recent years with longer judgments in competition law cases, particularly by the Court of First Instance. Article 230 Article 230 provides for review of the legality of an act of a Community institution. Accordingly, the legality of a Commission decision taken in competition proceedings may be reviewed under this procedure which allows for annulment of the act. There are three requirements which need to be satisfied for success: (a) Who may sue? Article 230(2) states that the act must be of ‘direct and individual concern’ to the party seeking its annulment. This would obviously apply to a party which is the subject of a Commission decision. It has also been held to apply to a complainant who was unhappy with a Commission’s decision, 36 in appropriate circumstances, a non-complainant will also qualify under this head.37 (b) What constitutes an ‘act’? This term covers more than formal decisions taken by the Commission, such as cease and desist orders. A wider view was taken in the IBM case38 which held that an act capable of affecting the interests of an applicant, by bringing about a change in their legal position, could be challenged. On the particular facts of that case the action was unsuccessful as an ‘act’ did not include issuing a Statement of Objections, as this was held to constitute merely a procedural step in the process. In subsequent case law39 letters rejecting complaints have been held to constitute ‘acts’ and it is also possible that comfort letters could be construed as acts. However, an act does not extend to decisions taken by the Commission on whether, and to what extent, they will allow access to their files to suspect companies. (c) Grounds of review? The following are the grounds of review available when seeking annulment of a Commission act: lack of competence/authority; infringement of an essential procedural requirement; infringement of the Treaty or any rule of law relating to its application; or misuse of powers. These grounds are alternatives although they overlap to a certain extent. Annulment may be sought, for instance, for a failure to give a party a hearing, inadequate reasoning in a decision, basing a decision on inadequate evidence, or an erroneous application of the competition rules. An action for annulment is often combined with an action seeking review of a Commission fining decision. Article 229 of the Treaty provides the Court with unlimited powers to annul, vary or increase the fine imposed by the Commission.
36 37
38 39
Case 26/76 Metro v Commission [1977] ECR 1875; [1978] 2 CMLR1. For fuller analysis of the issue of ‘direct and individual concern’ see Nordberg, C, ‘Judicial remedies for private parties under the State aid procedure’ [1997] LIEI35, pp 54–59, which is of general interest regarding locus standii for competitors. See, also, Case C-70/97 Kruidvat BVBA v Commission [1999] 4 CMLR 68. Case 60/81 [1983] ECR 3283; [1981] 3 CMLR 635. Case 142/84 BAT v Commission [1986] ECR 1899; [1988] 4 CMLR 24.
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Article 232 This provides for an appeal for a failure to act by a Community institution. In competition law proceedings, this may be appropriate for a complainant which considers that the Commission has not dealt with its complaint properly by taking action against the alleged infringements. There are limitations on the availability of this review mechanism which shall be addressed further below. It is important to note at this stage that such a failure may only be challenged where the applicant would have been the addressee of such a binding act.40 Article 234 Article 234 provides for a system of ‘preliminary rulings’ to be given by the Court. This means that the Court has final interpretative jurisdiction over references from national courts concerning the application and meaning of Community law. This seeks to ensure the uniform application of Community law throughout the legal systems of the various Member States. A national court may refer an issue to the Court where a ruling is necessary to enable the national court to give judgment, and must do so where there is no right of further appeal. The Court does not decide the dispute between the parties, but provides an interpretative ‘preliminary ruling’ which provides guidance on the interpretation of the point of Community law which is at issue. This is important for the development of Community competition law given the importance attached to ‘decentralisation’ and the likelihood of an increasing number of disputes involving Community competition law coming before national courts, particularly following the White Paper and Draft Regulation, to be discussed further below. Ancillary enforcement issues Articles 83–85 of the Treaty Article 83 of the Treaty enables implementing Regulations such as Reg 17 to be introduced. Article 84 provides that national authorities retain the power to apply the rules in Arts 81 and 82 until appropriate provisions have been adopted under Art 83, and are in force. However, Reg 17 provides that as long as the Commission has not initiated any procedure, Member States’ authorities remain competent under Art 84 to apply the competition rules. Article 85 allows the Commission to act and to authorise Member States to act on its behalf where the appropriate implementing Regulations have not been introduced under Art 83. These provisions are important, first, in allowing the possibility of a continued role for national competition authorities in the administration of Community competition law, and also because certain matters are not covered by Reg 17. Exclusions from Reg 17 Regulation 17 does not apply to merger control which has its own separate regulation, Reg 4064/89, containing both the substantive and procedural rules for reviewing merger activity.41 There is also specific provision under Art 89, which 40 41
Case 15/71 Mackprang v Commission [1971] ECR 997; [1972] CMLR 52. Council Reg (4064/89) OJ L395/1, 1989, as amended.
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Competition Law and Policy in the EC and UK
regulates the procedure in respect of State aids.42 Regulation 17 does not apply to various market sectors, such as transport, agriculture, telecommunications and various energy markets, in relation to which particular Treaty provisions exist with specialised enforcement regimes.43
ENFORCEMENT DEVELOPMENTS Many, although not all, of the developments in Community law enforcement are derived from the problems encountered by the Commission in performing its central task of supervising and applying the competition rules. The fundamental problem lies in the lack of resources afforded to the DG for Competition to carry out its tasks. This has been compounded by several factors: (a) expansion of the Community has inevitably increased the workload of DG for Competition without a corresponding increase in workforce; (b) 40 years of Community competition law jurisprudence has been marked by development in the application of that law to wider circumstances and different types of market activity. A related substantive problem in the past has been the controversial treatment of vertical restraints by the Commission under Art 81. The approach adopted by the Commission overloaded the exemption system and led to inevitable backlogs and delays. Further, there has been an increased number of complaints from parties suffering from an alleged breach of the competition rules. Community law has developed, and is in the process of further developing, methods allowing the Commission to seek to reduce this additional burden; and (c) the rights of the defence have become crucial. There have been major developments in this area, in the last 20 years, with substantial improvements in inquiry procedures. The effect of these developments, for instance, in relation to the issues of access to files and the increased role of the Hearing Officer, has been to require further work on the part of DG for Competition officials which has inevitably slowed the enforcement process further. Rights of the defence The development of the rights of the defence in Community competition law enforcement has been a significant development, taking up a significant proportion of the Court’s caseload. In addition, this has resulted in increased pressure and workload on Commission officials. An important starting point would be to note the decision of the European Human Rights Commission in Stenuit. 44 In that case, the Commission considered that competition law proceedings, which may lead to the imposition of a fine, are of such a nature that Art 6 of the European Convention for the Protection of Human Rights and Fundamental Freedoms is applicable to them. The Community is not a signatory to 42 43 44
Council Reg (659/1999/EC) OJ L83/1, 1999. See Whish, R, Competition Law, 3rd edn, 1993, London: Butterworths, Chapter 10 for further detail on these issues which are outside the scope of this book. (1992)14 EHRR 509.
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the European Convention, however, it is clear from the Treaty and Court jurisprudence that the principle in Art 6, providing for a fair and public hearing within a reasonable time by an independent and impartial tribunal, is to be respected. In the Community context, administrative decisions by the Commission are not contrary to this general right because of the existence of a full and independent review, involving due process, before an independent tribunal, the Court of First Instance or European Court. 45 Nonetheless, the Court has continually insisted that the Commission is obliged to give a fair hearing in terms of its procedure and administration. This has been further strengthened by the introduction of the Hearing of the Parties (Antitrust Procedure) Regulation46 which makes various provisions to clarify and enhance the Commission’s hearings procedure with a view to improving the rights of the defence. More generally, the provision of a fair hearing has two main elements: (1) (2)
that the defendant company is made aware of the objections against it; and that it has a reasonable opportunity to air its views.
Notice of objections One aspect of this has already been mentioned: the provision of the Statement of Objections by the Commission to a suspect company. Articles 2–3 of Reg 2842/ 1998 clarify the importance and role of the statement of objections in the procedure. A second, and more controversial, aspect is the issue of provision of access to the file. This concerns the extent to which a suspect company is entitled to have access and inspect the Commission file and case against it. Access to the file What is clear is that the Commission is prima facie bound to disclose all documents upon which it relies to substantiate its allegations. In addition, according to case law in Hercules47 and Hoechst,48 this requirement of disclosure extends equally to exculpatory documents held by the Commission. These are documents which tend to clear the suspect company of the allegations made by the Commission. In the early years, the procedure followed by the Commission was to allow access to all files by allowing representatives of the suspect company to come to the Commission offices and inspect the Commission’s files. However, this procedure has altered due to internal changes, the vast paperwork involved in cartels cases, and difficulties surrounding the duty of confidentiality when several companies are involved. Accordingly, the more recent practice has been for the Commission to select and add the relevant documentation and parts of its file to the Statement of Objections forwarded to the company involved. In the first instance, the Commission decides which documents are required to be forwarded. This is a difficult task to combine with its duty of confidentiality to those who provide 45 46 47 48
For a discussion of this, see the House of Lords Select Committee on the European Union, 19th Report, ‘Strengthening the role of the Hearing Officer in EC competition cases’, 21 November 2000, HL Paper 125, paras 55–56 and 75–78. Commission Reg (2842/1998/EC) OJ L354/18, 1998; [1999] 4 CMLR 228. Case T-7/89 SA Hercules Chemicals NV v Commission [1991] ECR 1171; [1992] 4 CMLR 84. Cases 46/87 and 227/88 Hoechst AG v Commission [1989] ECR 2859; [1991] 4 CMLR 410.
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information. Impartiality has been increased by providing a greater role for the Hearing Officer during the process of granting access to the file. Confidential information During the enforcement process the Commission often has to balance two opposing interests. Complaining and notifying companies tend to be worried about the confidentiality of the information they provide to the Commission. On the other hand the Commission has to ensure that companies are given a fair hearing. This involves allowing the company to prepare its defence by having access to the Commission file and knowledge of the basis of any allegations. However, understandably, competitors do not want their rivals either to know that they have made a complaint, or to have access to any information which may prejudice their market position by informing the rival company. This is particularly controversial in contract related cases—those cases involving a company dependent on the supply of goods/services from the suspect company— and cartel cases involving a number of defendant companies. There exists a general duty of confidentiality under the Treaty although the extent of the duty is unclear where there is a conflict with the principle of access to the file. More specifically, Art 20(2) of Reg 17 places a duty on the Commission not to disclose information which falls within the heading of professional secrecy. In addition, Art 19(3) of Reg 17 provides that the Commission is to have regard to the legitimate interest which parties have in the protection of their business secrets. The breadth of the concept of professional secrecy idea is unclear, but in practice the protection of business secrets is more crucial. It has been established by the Court in AKZO v Commission49 that business secrets may never be divulged by the Commission. If there is a dispute as to whether information or documentation falls within this category the Commission will take a decision subject to review by the Court. The general prohibition on the disclosure of confidential information by the Commission was illustrated in Adams v Commission.50 In that case, information was supplied by an employee of the suspect company. The Court held that the Commission, under the general principle of confidentiality, owed him a duty of care to safeguard his anonymity. Accordingly, the Commission ought to have warned him of the risk of providing information which rendered him liable to prosecution under Swiss law. Recent developments In recent years there has been a significant number of legal challenges to Commission decisions on access to the file issues. For instance, judgments in the Soda Ash51 cases annulled, on procedural grounds, Commission decisions in five related cases. Two of the cases involved a failure by the Commission to respect the rights of the defence in relation to access to the file. These cases were a major setback for the Commission and the most significant judicial statement on the 49 50 51
Case 53/85 AKZO Chemie BV v Commission [1986] ECR1965; [1987] 1CMLR 231. Case 145/83 Adams v Commission [1985] ECR 3539; [1986] 1 CMLR 506. Cases T-30–32/91 Solvay SA v Commission [1995] ECR II-1775, II-1821, II-1825, and T-36 and 37/91 Imperial Chemical Industries plc v Commission [1995] ECR II-1847 and II-1901.
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exercise of the right of access to the file, and the rights of the defence generally. Importantly, the Court of First Instance confirmed that the right of access to the file is a fundamental right of the defence and not a self-imposed requirement by the Commission. Parties are entitled to see all documents relating to the case. The three protected categories of information are retained: professional secrets, business secrets and other confidential information. The third category would protect information which would breach the requested anonymity of an informant, and also sensitive commercial information which is not technically a business secret. Determination of what constitutes a business secret will be made on a case by case basis and would cover information relating to the commercial interests of its owner, such as internal price calculations, market strategy plans and know how. Access to the file helps to ensure the right to be heard is protected, but the Soda Ash cases demonstrated the difficulties involved when access is requested to documentation relating to competitors held by the Commission. The Commission has to carry out a sensitive balancing act in conducting the procedure due to the conflict between the respective rights of the defence and the duty of confidentiality. In an attempt to clarify its procedure and ensure its conformity with Court jurisprudence, the Commission issued a Notice in January 1997 ‘on the internal rules of procedure for processing requests for access to the file in cases pursuant to Arts 85 and 86 of the EC Treaty’.52 The Notice confirms the Commission’s task in following the Soda Ash rulings as reconciling the two opposing obligations imposed upon it. The Notice confirms that defendant companies can have access to all documents on the Commission file except for the three categories of ‘noncommunicable documents’. In particular, the Notice confirms that the Commission must make available any studies commissioned from independent consultants or experts. The Notice seeks to clarify the procedure for obtaining access to the file and for determining the confidential or other nature of information received. Importantly, the Notice provides that the Commission will only attach to the Statement of Objections or complaint rejection letter such evidence or documentation relied upon by it. Thereafter, the file may be inspected at the Commission’s premises, although it may be sent if it is not too bulky. In this context, the Commission noted that complainants’ rights of access are more limited and that a company facing an allegation of a breach of Art 82 will have more restricted rights of access to information from third party sources. Finally, it should be noted that Art 13 of Reg 2842/1998 confirms, in general terms, the Commission’s policy in relation to access to the file. Conduct of hearings A reasonable opportunity for defendant companies to be heard is ensured by the procedure during which the company is entitled to submit a written response to the Statement of Objections, culminating in an oral hearing. At the oral hearing, all parties are allowed to be represented by counsel. In addition, since 1982, a Hearing Officer, independent of the DG for Competition officials conducting the case, will preside over the full procedure, including the oral hearing, in order to ensure that the rights of the defence are respected. Regulation 2842/1998 now regulates the 52
OJ C23/3, 1997.
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hearing procedure and confirms, in Art 10, that hearings shall be conducted by the Hearing Officer. In addition, the hearing officers’ mandate has been further reformed and developed in 2001 to better defend the rights of parties.53 Proposals for reform Despite developments in recent years, the Commission has faced continued criticism in its enforcement of Community competition law and there have been many calls for, at the very least, procedural improvements.54 A widespread criticism has been the time-lag in enforcement. Competition law plays a central role in industrial policy and should act swiftly to prevent abusive foreclosure of markets. At the same time, competition law should not handicap the market by prohibiting beneficial agreements and it must provide swift clearance in such instances. The Commission procedure has also been criticised, as officials become entrenched in cases where the proceedings have been running for a number of years, and fail to respect the rights of the defence. The House of Lords’ Report on Strengthening the Role of the Hearing Officer in EC Competition Cases55 has noted that there is scope, despite the introduction of Reg 2842/1998, to enhance the Hearing Officer’s role and the rights of the defence, by, for example, providing for disclosure of his Report. It should be noted that Art 26 of the Draft Regulation,56 following the White Paper of 1999, confirms the right of access to the file and Art 27 will replace the existing professional secrecy obligation in Art 20(1) of Reg 17. However, the latter will be subject to mechanisms for the exchange of information between the Commission, the NCAs, and national courts as set out in Arts 12 and 15 of the Draft Regulation. The Commission’s fining policy has also been criticised as lacking transparency, particularly as the level of fines has risen dramatically in recent years. Partly in order to alleviate these concerns, the Commission published a Notice giving guidance on the level of fines to be imposed under Reg 17.57 There were proposals in the 1990s to remove the enforcement of Community competition law and policy from the Commission to be undertaken by an independent European Cartel Office. These proposals came mainly from Germany and suggested that Arts 81 and 82 should be enforced by an independent authority, as the Commission’s decision-making is ultimately political. It was argued that the introduction of an independent cartel office would ensure transparency, speed and efficiency, as it would concentrate solely on competition issues. These proposals were not taken on board, partly as they could lead to the marginalisation of competition policy from related policy fields such as industrial policy. Nonetheless, the recent proposals for modernisation of enforcement, set out in the
53 54 55 56 57
See fn 24. See House of Lords Select Committee on the European Communities, Enforcement of Community Competition Rules, First Report, Session 1993/94, and also Levitt, M, ‘Commission hearings and the role of the hearing officers: suggestions for reform’ [1998] 6 ECLR 404. See, House of Lords Select Committee on the European Union, Session 1999–2000, 19th Report, Strengthening the Role of the Hearing Officer in EC Competition Cases, HL Paper 125, HMSO, 21 November 2000. Proposal for a Council Regulation on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, COM (2000) 582. Commission Notice on Guidelines on Method of Setting Fines, OJ C9/3, 1998; [1998] 4 CMLR 472.
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1999 White Paper and embodied in the Draft Regulation, will inevitably lead to the further depoliticisation of Community competition law. Position of complainants The rights of complainants to pursue their complaints to the Commission regarding alleged infringements of the Community competition rules has been subject to scrutiny by the European Court. Article 3(2) of Reg 17 provides that any person can request an infringement of the rules to be brought to an end by the Commission. Such a complainant is thereafter entitled to an ‘Art 6 letter’ under Reg 99/6358 stating the reasons for rejection of their complaint. Accordingly, the position appeared to be that a complainant was entitled to a decision indicating the Commission view but little more. The problem for complainants facing such a situation is that they may not raise an action under Art 232 for failure to act by the Commission at the Art 6 letter stage. On the other hand, as the Commission was unlikely to reject a complaint definitively, no action could be raised for annulment under Art 230 or 234 as there is no formal decision or act to annul. The judgment in Guerin has extended the Commission’s obligations in respect of complainants and seeks to ensure that complainants can have a decision by the Commission not to proceed with a complaint reviewed.59 This area is made more complicated by the Automec (No 2)60 case in which the Court of First Instance confirmed that there was no requirement for the Commission to open a formal investigation if they considered that there was not a sufficient Community interest in pursuing its investigation. The Commission can accordingly decide not to pursue a complaint at all upon consideration of the priorities involved in the case. The Commission is still required to take a complaint seriously but it may exercise its discretion not to pursue a complaint if it lacks the political, economic or legal significance to be deemed as having a Community interest. The Commission must be able to justify its reasons for not pursuing a complaint and its discretion is subject to review by the Court of First Instance.61 However, the Court will not substitute its judgment for that of the Commission unless there is a manifest error by the Commission. There is therefore a gap in enforcement for complainants which can only be resolved by self-help means, through the complainant pursuing their grievance directly. The Commission’s policy is that more cases should be resolved in national fora, either by national courts or NCAs.62
DECENTRALISATION At the start of this chapter, we emphasised that the Commission has enjoyed the crucial role in enforcement of Community competition law; the law is enforced throughout the Community by officials operating from the centre, Brussels.
58 59 60 61 62
OJ 47, 1963–64. Case C-282/95P Guérin Automobiles v Commission [1997] ECR I-1503; [1997] 5 CMLR 447. Case T-24/90 Automec v Commission (No 2) [1992] ECR II-2223; 5 CMLR 431. See, eg, the Opinion of AG Ruiz-Jarabo Colomer in Cases C-449/98 and C-450/98P International Express Carriers Conferences (IECC) v Commission, 11 January 2001. See Kerse, CS, ‘The complainant in competition cases: a progress report’ (1997) 34 CML Rev 213
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However, in recent years, it has been recognised that the Commission cannot deal as effectively as it would like with its caseload. As a result, a new framework has been emerging which seeks to ensure the Commission’s role at the apex of Community competition law enforcement while at the same time allowing the Commission to focus on its central task. During the late 1980s, in the lead up to the finalisation of the EU Treaty, the term ‘subsidiarity’ was widely debated and a form of subsidiarity was incorporated into Art 5 EC which stated: …the Community shall take action, in accordance with the principle of subsidiarity, only if and so far as, the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community.
The Commission sought to harness the basic idea of subsidiarity and improve the effectiveness of Community competition law enforcement by looking to Member States’ authorities to assist in this task. The new set of policies introduced in the 1990s has the aim of decentralising enforcement power from the Commission to the national courts and NCAs.63 We shall assess the development and success of both streams of this policy, and thereafter we shall outline the most recent proposals for modernisation of the enforcement framework contained in the White Paper and subsequent Draft Regulation.64 Decentralisation to the national courts This became a core Commission competition policy during the 1990s. Enforcement in the national courts by individuals, as opposed to the traditional method of administrative and centralised enforcement by the Commission, is facilitated by the applicability of the direct effect doctrine to the basic Community competition prohibitions.65 Through direct effect, Community law gives rise to rights and obligations which may be enforced by individuals before their national courts. Community competition law can therefore be resorted to in domestic litigation. It can be used as a ‘shield’ in defence to an action, for example, as a defence to a breach of contract claim. More contentiously, the competition provisions, particularly Art 82, may be used as a ‘sword’ to claim damages in the national court based on an infringement of the rules. Automec (No 2)66 was a very significant development in the Commission’s decentralisation policy. In that case, the Court of First Instance held that the Commission may prioritise its resources and, accordingly, it may refuse to investigate a complaint fully if it can not offer the remedy the person seeks and also, most importantly, if there is a lack of Community interest in pursuing the investigation. This confirmed that duty of the Commission to investigate is 63 64
65 66
See Rodger, BJ and MacCulloch, A, ‘Competition law enforcement in the Community. Deregulation and re-regulation: the Commission, national authorities and private enforcement’ (1998) 4 CJEL 579. White Paper on Modernisation of the Rules Implementing Articles 85 and 86 of the EC Treaty, Commission Programme No 99/027, OJ C132/01, 1999 and Proposal for a Council Regulation on the Implementation of the Rules on Competition Laid Down in Articles 81 and 82 of the Treaty, COM (2000) 582, OJ C365/284, 2000. See Case 127/73 BRT v SABAM [1974] ECR 51. Case T-24/90 Automec Srl v Commission [1992] ECR II-2223; [1992] 5 CMLR 431.
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dependent on its priorities in enforcement. The Commission is only likely to pursue an investigation where there has been a serious breach of the competition rules or the subject matter concerns the development of an important point of principle. This ruling facilitates enhanced decentralisation by encouraging complainants to bring actions directly before the courts, as the Commission may refuse to pursue their complaint fully. The possibility of individual enforcement in the national courts had existed for a number of years. However, as part of the decentralisation policy, the Commission recognised the need to stimulate interest and increase awareness of the possibilities of national court action. Support for decentralisation by the Commission stemmed from the practical problems the Commission faced under Reg 17, together with the greater focus in the political arena on the role of subsidiarity. As a result, the Commission issued the Notice on Co-operation between the Commission and the national courts in 1993.67 The Notice refers to the perceived benefits which would be gained by a complainant raising a court action based on breach of the competition rules at domestic level as opposed to, or in addition to, making a complaint to the Commission. The stated benefits included the availability of damages, interim measures and the award of costs, together with the likelihood of a more speedy resolution of the dispute. However, the Notice also highlights the formidable nature of the Commission’s fact finding powers and that a complaint to the Commission is cheap and anonymous. The Notice provides an informal procedure for national courts to seek guidance directly from the Commission when faced with a Community competition law issue. It was hoped that this procedure would assist national courts in dealing effectively with Community competition law claims and thereby encourage further litigation. At the time, the Notice was criticised as being likely to increase the Commission’s workload, due to the additional assistance the Commission would provide to the courts. The Notice was also criticised as it failed to provide for judicial training and was too timid in that it did not bring about more detailed harmonisation. In the absence of common rules of procedure or set levels of damages, there could be divergent national approaches and a lack of uniformity. This problem has been minimised to an extent because the Court has, in a series of judgments during the 1990s, placed emphasis on the requirement that national courts develop remedies to support the rights created by Community law.68 Alongside easing the Commission burden, this area of jurisprudence has further facilitated decentralisation and the increasing effectiveness of the enforcement of Community competition law.69 Although there has been an increase in litigation concerning Community competition law in the national courts, there has, as yet, been no reported court
67 68
69
OJ C39/6, 1993. See Cases C-6 and 9/90 Francovich v Italian Republic [1991] ECR I-5357; [1993] 2 CMLR 66; Cases C46–49/93 Brasserie du Pecheur v Germany (Factortame III) [1996] ECR I-1029; [1996] 1 CMLR 889; Case 23/67 Brasserie de Haecht SA v Wilkin (No 1) [1967] ECR 407; [1968] CMLR 26; Case 48/72 Brasserie de Haecht SA v Wilkin (No 2) [1973] ECR 77; [1973] CMLR 287. For an example of the problems experienced in pursuance of these aims, from a UK perspective, see MacCulloch, A and Rodger, BJ, ‘Wielding the blunt sword: interim relief for breaches of EC competition law before the UK courts’ [1996] 7 ECLR 393. See, more generally, Kon, S, and Maxwell, A, ‘Enforcement in national courts of the EC and new UK competition rules: obstacles to effective enforcement’ [1998] 7 ECLR 443.
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decision awarding damages in the United Kingdom. Garden Cottage Foods v The Milk Marketing Board70 remains the most important case to date in the UK courts. In that case, the House of Lords confirmed the possibility of direct action before the national courts on the basis of infringement of Art 81 and/or Art 82 of the Treaty. The Milk Marketing Board sold bulk butter to distributors for resale. This was surplus UK butter sold for export with conditions that banned re-imports. Garden Cottage Foods bought butter from the Milk Marketing Board and resold it overseas. A dispute arose between the parties because Garden Cottage Foods allegedly sold some butter internally. This dispute was apparently settled but subsequently the Milk Marketing Board reduced their number of distributors from 20 to 4 and Garden Cottage Foods were not on the new list. They raised an action primarily seeking an injunction to stop the Milk Marketing Board from revoking its contract with Garden Cottage Foods, claiming this to be an infringement of Art 82. The House of Lords overturned the Court of Appeal and held that the claimant was not entitled to injunctive relief. However, the majority of the Court suggested that it would possible to bring a claim alleging infringement of the Community competition rules.71 It now seems clear that given the right conditions a remedy would be available. The major debate concerns how the courts would frame the appropriate remedy.72 However, as suggested above, there has been pressure applied from the Court in recent years to seek to ensure that appropriate remedies are available in the national courts. Indeed, there were statements in Francovich v The Italian Republic73 which suggested that there may be an obligation under Community law for Member States to provide a remedy in damages, failing which it could be argued that the Member State could be held liable for the loss suffered. There has been no formal suggestions as yet that Community legislation should be introduced to specify procedural rules for national courts to follow in such actions, although, following the entry into force of the Treaty of Amsterdam, measures in the field of judicial co-operation in civil matters are now within the field of Community competence.74 However, in any event, it appears likely that the European Court will gradually seek to harmonise the provision of effective remedies in the national courts. Rather surprisingly, in recent English cases parties to contracts which were caught by Art 81 were effectively denied remedies.75 In particular, in a case where a publican sued for unjust enrichment/restitution in respect of a beer tying arrangement between himself and a brewer, the Court of Appeal held that, as a party to an illegal agreement prohibited by Art 81, he was not entitled to a remedy in damages.76 70 71 72 73 74
75 76
[1984] AC 130. See, also, the Scottish cases of Argyll v Distillers, 1987 SLT 514, and, more recently Millar & Bryce v Keeper of the Registers of Scotland 1997 SLT 1000 (OH). See op cit, MacCulloch and Rodger, fn 69. For a fuller discussion of this issue and a comparison with the experience in the US, see op cit, Rodger and MacCulloch, fn 63. Cases C-6 and 9/90 [1991] ECR I-5357, [1993] 2 CMLR 66. Article 65 provides that; measures in the field of judicial co-operation in civil matters having crossborder implications, to be taken in accordance with Art 67 and in so far as is necessary for the proper functioning of the internal market, shall include: (c) eliminating obstacles to the good functioning of civil proceedings, if necessary by promoting the compatibility of the rules on civil procedure applicable in the Member States. See Maitland-Walker, J, ‘Have English courts gone too far in challenging the effectiveness of EC competition law’ [1999] 1 ECLR 1. See Gibbs Mew v Gemmell [1998] EuLR 588.
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In Crehan v Courage,77 the Court of Appeal has referred a question to the European Court asking whether Community law requires English law to make suitable remedies available. The Opinion of the Advocate General has shed further light on the extent to which Community law requires the effective harmonisation of national remedies to ensure consistent treatment of Community competition law. 78 First, Advocate General Mischo ruled that a co-contractor in these circumstances could rely on the nullity in Art 81. More importantly he was of the opinion that, in the interests of the effectiveness of Community law, Community law precludes a rule of national law which prevents the recovery of damages merely by reason of being a party to an illegal contract. However, he stated that national law may refrain from providing remedies to a party seeking to rely on his own illegal actions, but that this would not be permissible where that person bore negligible responsibility for the illegality, for instance if that party was in a weaker position and not genuinely free to choose the terms of the contract. This Opinion is very important and paves the way for a review of private law remedies in the UK legal systems. The ruling by the European Court is awaited with great interest. The 1993 Notice raised one final difficulty regarding the role of national courts in applying Community competition law. As the European Commission, the Member States, and individuals, can enforce the competition prohibitions, there is the potential for parallel proceedings running concurrently at more than one level. The Notice stated that when the Commission has not yet adopted a formal decision the national court ‘may, if they consider it necessary for reasons of legal certainty, stay the proceedings while awaiting the outcome of the Commission’s action’.79 In Masterfoods v HB Ice Cream80 the Irish Supreme Court were dealing with a private action in relation to Arts 81 and 82 of the Treaty at the same time as one of the parties were appealing a Commission decision on the same issue to the Court of First Instance. It was held that when the national courts rule on an agreement or practice which is already the subject of a Commission decision they cannot take decisions running counter to that of the Commission. Acts of the Community institutions are in principle presumed to be lawful until such time as they are annulled or withdrawn. If a national court has doubts as to the validity or interpretation of an act of Community institution it may, or must, refer a question to the Court of Justice for a preliminary ruling. Accordingly, the only options which appear to be open to a national court are to stay proceedings, and await the finalisation of the Community proceedings, or to make a reference to the Court under Art 234. Both of these may be unsatisfactory in many cases because of their inherent delay. This judgment appears to be very ‘centralist’ in nature when there is a desire to expand the role of the national courts. This section has concentrated on Arts 81 and 82 although actions can also be brought by third parties in respect of a breach of the State aid rules. National court enforcement is not available for mergers which are within the scope of the Mergers Regulation. In any event, the process of decentralisation to the national courts, being partly dependent on the willingness of claimants to raise actions, still has difficulties to overcome, notably the Commission’s current monopoly in relation to 77 78 79 80
[1999] EuLR 834. Case C-453/99 Courage v Crehan and Crehan v Courage, AG Mischo, 22 March 2001. See para 22. Case C-344/98 [2001] 4 CMLR 14.
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the granting of exemptions under Art 81(3), and is unlikely, in the present circumstances, to provide the complete solution to the Commission’s workload problems. Decentralisation to the National Competition Authorities National court enforcement by national judges is merely part of a wider strategy aiming at the most efficient enforcement of Community law.81 Enforcement by the Commission alone is no longer plausible and the difficulties encountered in facilitating widespread recourse to national courts suggested that an alternative and more radical solution was required. The solution proposed during the early 1990s was to institute a system of National Competition Authorities in each Member State enforcing Community competition law. The NCAs were to enforce Community competition law on a decentralised basis. Decentralisation to the NCA’s was perceived to be complementary to the policy of encouraging decentralisation to the national courts. Most Member States have a body which could fulfil the NCA role and several Member States have adopted rules enabling their NCAs to apply Community competition law.82 Additionally, in the longer term, NCAs could provide the necessary administrative back-up to enhance the process of decentralisation to the national courts. In 1997, the Commission Notice on Co-operation between National Competition Authorities and the Commission, in handling cases falling within the scope of Arts 81 and 82 of the Treaty, was published.83 The crucial features of the Notice are the provisions on the allocation of competencies for applying Community competition law both between the Commission and the Member States and between the Member States themselves. Essentially, the Notice provides that a particular NCA shall have jurisdictional competence upon the request of the Commission, where Community competition law is applicable and where the potentially anti-competitive activity produces effects largely confined to the territory of that NCA. The Notice also provides advice to NCAs as to how they should proceed in enforcing the Community competition rules. However, the Notice lacked detail, for instance, regarding a refusal by an NCA to deal with a case or complaint by an alternative NCA that it should deal with the case. Although the intention was to reduce the workload of the Commission, its impact in practice was minimal. Its value was particularly limited by the absence of provision in all Member States affording their NCAs the competence to apply Arts 81 and 82.84 Nonetheless, the Notice did set the platform for the more detailed set of decentralisation proposals set out in the 1999 White Paper and subsequent Draft Regulation.
81 82 83 84
See, eg, Ehlermann, C-D, ‘Implementation of EC competition law by national antitrust authorities’ [1996] 2 ECLR 88. See for further discussion of the limited UK provision, Kerse, CS, ‘Enforcing Community competition policy under Articles 88 and 89 of the EC Treaty—new powers for UK competition authorities’ [1997] 1 ECLR 17. OJ C313/3, 1997. In the UK context, see op cit, Kerse, fn 82. See, also, Maitland-Walker, JH, ‘Commission Notice on Co-operation between National Authorities and the Commission in handling cases falling within the scope of Arts 85 and 86 of the EC Treaty’ [1998] 2 ECLR 124.
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Subsidiarity The decentralisation policy was certainly not as effective in the late 1990s as the Commission would have hoped, there was little impact in the national court systems and decentralisation to the NCAs was not fully implemented. There were suggestions that the Community should adopt a new approach to competition law enforcement based on the concept of subsidiarity.85 Subsidiarity is based on decision-making competence being allocated between national law and Community law at the appropriate level. It was proposed that the ‘Community interest’ threshold should replace the affect on interstate trade as the separating threshold between the application of national and Community law respectively. Community competition law would apply where there was a Community interest and national law would apply otherwise. This would be clearer than the existing position and would also reduce the potential application of Community competition law. The threshold would be higher than the affect on interstate trade criterion and would therefore allow more scope for the application of national competition rules by national competition authorities. The introduction of mutually exclusive jurisdiction would also resolve the situation where it is problematic for Member States to act when Community law is potentially involved. Subsidiarity, however, increases the risk of a potentially diverse application of the competition laws throughout the Member States of the Community. This risk has been reduced through the trend in recent years for national laws to be harmonised broadly in line with Community law, and also through the duty of co-operation under Art 10 of the Treaty. A further reason supporting the realignment of competencies based on the wider application of national laws is based on the argument that diversity in the application of broadly similar national laws is appropriate given accepted and welcome diversities in national approaches and economies.86 Nonetheless, it is clear that the Commission is not in favour of this alternative approach.
MODERNISING ENFORCEMENT OF COMMUNITY COMPETITION LAW The White Paper The position facing the Community now is remarkably different to the position in 1962 when the Council adopted Reg 17, which has remained virtually unchanged since. Regulation 17 was designed to meet the twin challenges of competition policy, to enhance Community integration and to stimulate competition to drive the economy. However, competition policy enforcement needs to adapt to the modern setting, particularly the continued enlargement of the Community.
85 86
See Wesseling, R, ‘The Commission Notices on Decentralisation of EC Antitrust Law: in for a penny not for a pound’ [1997] 2 ECLR 94; and Rodger, BJ and Wylie, S, Taking the Community interest line: decentralisation and subsidiarity in competition law enforcement’ [1997] 8 ECLR 487. See ibid, Wesseling.
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It is clear that the Commission’s role has developed since the 1960s with expanding case law due to market integration, the accession of new Member States, involvement in agreements with third countries, and globalisation of the economy. The White Paper points out that the centralised model of Reg 17 allowed a corpus of rules to be coherently developed. Nonetheless, the ex ante system of authorisation had limitations due to the number of cases notified for exemption and the ensuing backlog. Consequently, adjustments adopted included measures to reduce individual notifications, such as the de minimis doctrine,87 issuing general notices, introducing various Block Exemption Regulations, 88 and use of the ‘comfort letter’ procedure with over 90% of cases being closed informally. However, this system also has its drawbacks, namely the lack of transparency and the limited legal value of comfort letters. Another adjustment to the enforcement system has been to promote the decentralisation of enforcement to the national courts and competition authorities, resulting in the two Notices on Co-operation. However, the decentralisation efforts to date have been of limited success and accordingly the White Paper considered that the existing centralised process of enforcement is cumbersome, inefficient and overly burdensome. Key reform issues The White Paper considered that the Commission should focus on the most serious cases and provide for an enhanced system of decentralised enforcement whilst seeking to ensure consistency in the application of Community law. Further, the framework should ease administrative constraints on undertakings and provide greater legal certainty. Regarding decentralisation, the White Paper accepts89 that centralised enforcement in an enlarged Community will be even less appropriate and efficient. The main problem noted by the White Paper is in seeking to ensure uniformity and consistency in the application of Community law. Another issue considered was the simplification of the administration of the competition rules. The key options at this stage, as noted by the Commission, were the improvement of the authorisation system or the adoption of a directly applicable exception system. The former could be achieved in a variety of ways, including the adoption of a wide rule of reason under Art 81(1). The Commission clearly preferred the alternative of switching to a directly applicable exception system. Such a system would allow ex post facto supervision of anti-competitive practices in which ‘Art 81 would then become a unitary norm comprising a rule establishing the principle of prohibition, unless certain conditions are met’.90 This could be achieved by a Regulation adopted under Art 83 and would allow for the application of Art 81(3) by national courts and authorities. Given the greater awareness of Commission policy and Block Exemptions, the scope of the conditions for exemption are now much more apparent and more easily applied. Adopting a directly applicable exception system would mean the removal of the Commission’s sole power of exemption under Art 9(1) of Reg 17, thereby facilitating decentralised application 87 88 89 90
Notice on Agreements of Minor Importance, OJ C231/2, 1986. This was revised and replaced in 1997, OJ C372/13, 1997. Eg, the Vertical Agreements Regulation 1999, discussed in greater detail in Chapter 5. See para 46. See para 69.
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of the rules and reducing the notification burden, allowing the Commission to focus on the most serious infringements. Proposals for reform There are 3 facets to the Commission’s proposed approach to modernisation of the enforcement of the competition rules. The first is that the system of notification and authorisation as established by Reg 17 will be ended. The second is the proposed ‘full’ decentralisation of the application of the Community’s competition rules, by the removal of the Commission’s exemption monopoly, such that Art 81 could be applied by all national authorities as a whole. This inevitably requires consideration of the subsequent division of responsibilities in competition law enforcement. The starting point is that competition policy will continue to be determined by the Commission, and the Commission will retain its sole legislative competence in this area. The second aspect of the removal of the Commission’s monopoly is perhaps the most crucial and potentially problematic, namely the enhanced role which the Commission foresees for national authorities in the application of the Community competition rules. Notwithstanding the relative lack of success of the Co-operation with NCAs Notice,91 the Commission intends to make greater use of the ‘network of authorities’ within the Community and will require Member States’ authorities to apply Community law. The White Paper’s discussion on appropriate case allocation is not particularly clear or convincing.92 The role of the national courts is also to be enhanced because Art 81(3) will no longer be the exclusive preserve of the Commission and its provisions are to be arguable directly in court. This will extend the applicability of the competition rules and avoid the problem of dilatory notifications which currently hinders the national courts’ treatment of Art 81. Despite these developments, which it is keen to encourage, the Commission is concerned about ensuring consistent and uniform application of the competition rules. The White Paper acknowledges that the network would require a greater role for the Advisory Committee on Restrictive Practices and Dominant Positions as a forum for discussion of all important cases. Regarding national courts, the White Paper suggests that they should be required to inform the Commission when they deal with Community law, and proposes that the Commission should also be allowed to intervene in national court proceedings as amicus curiae.93 The third strand of the proposed regime is for intensified ex post facto control by the Commission,94 a necessary corollary to the new system. This would involve an increase in the Commission’s investigation powers, particularly in multijurisdiction cases, with stress on the importance of complaints,95 and a revision and strengthening of the Commission’s power to set penalties, by retaining the 10%
91 92 93 94 95
OJ C313/3, 1997. At para 96. In addition, there is the question of confidentiality of information. See Cumming, G, ‘Assessors, judicial notice and domestic enforcement of EU Articles 85 and 86’ [1997] 6 ECLR 368. See White Paper, para 108. The method of dealing with complaints will be revised.
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limit but, for instance, increasing the levels of periodic penalty payments and fines for procedural non-compliance. Criticisms There are some problems created by the Commission’s proposed new system. A fundamental criticism is that the Commission should have invested further resources in the DG for Competition, and that the White Paper proposals merely transfer the existing burden to national authorities and the courts. Industry is concerned with potential legal uncertainty arising from the end of the notification and authorisation system. Another key issue is whether national courts are appropriate and competent to apply Art 81(3). It is at least arguable that Art 81(3) embodies a policy element and the consideration of non-competition issues which only the Commission should determine.96 In addition, the practice of attaching conditions and obligations to an exemption will be difficult for courts to replicate in the context of private litigation. The proposals will also have an indirect impact on the procedural autonomy of national courts. The requirement for consistent and uniform application of Community law will be difficult to balance with the maintenance of national legal traditions, although, for instance, the Crehan97 case demonstrates that this is not a new phenomenon. The Draft Regulation After an extensive period of consultation the Commission made its formal proposals for a new Regulation in September 2000—Commission Proposal for a Council Regulation on the implementation of the rules of competition laid down in Arts 81 and 82 of the Treaty.98 The proposed Regulation does not concern state aid or merger control. The main characteristics of the proposed Regulation, as indicated by the Commission, are as follows: (a) more efficient protection of competition in the Community. This will be achieved through a network involving more enforcement bodies, including the national courts and authorities. The Commission’s actions will be refocused on the most serious infringements utilising increased investigatory powers; (b) creating a more level playing field in Community competition law through, more frequent and consistent application of competition law; (c) creating an adequate level of legal certainty for companies and reducing bureaucracy; and (d) reflecting the principles of subsidiarity and proportionality in the enforcement of Community competition law.
96 97 98
See Wesseling, R, ‘The Commission White Paper on Modernisation of EC Antitrust Law; unspoken consequences and incomplete treatment or alternative options’ [1999] 8 ECLR 420. See, also, Ford/Volkswagen OJ L20/14, 1993; [1993] 5 CMLR 617, paras 23, 28 and 36. Case C-453/99 Courage v Crehan and Crehan v Courage, AG Mischo, 22 March 2001. COM (2000) 582, OJ C365/284, 2000.
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General principles Article 1 provides for the direct applicability of Art 81, in its entirety, and Art 82. Article 2 provides that the burden of proof shall rest on the party alleging infringement, although the burden is reversed in relation to Art 81(3). Article 3 sets out the new relationship between Arts 81 and 82 and national competition laws by stipulating that where there is an affect on interstate trade, only Community law can be applied. This responds to the criticism of the application of the Walt Wilhelm supremacy rule99 by demarcating the application of national and Community law more clearly. It also seeks to promote a more level playing field in the Community ensuring most cases fall within a single set of rules. One could suggest that this merely transfers the resource pressure from the Commission to the national level. Enforcement powers Article 4 provides that the Commission may use the powers provided in the Regulation in individual cases and also adopt Block Exemption Regulations.100 Article 5 empowers NCAs to apply Art 81 in its entirety and Art 82. However, the NCAs can only rely on the powers granted to them under national law. There are no concrete proposals for harmonisation of national sanctions, although the effective enforcement of competition law is to be ensured. Article 6 confirms that national courts have jurisdiction to apply Art 81(3), despite the criticism that national courts are ill-equipped for this task. Commission decisions These provisions reflect the White Paper’s proposals for more intense ex post facto supervision of competition law by the Commission. Article 7 is basically equivalent to Art 3 of Reg 17. The most important change is the proposed addition of new powers for the Commission to impose structural remedies to terminate an infringement. Article 8 makes express provision replicating the Court’s jurisprudence that the Commission can take interim measures where appropriate. Article 9 is a new provision which allows the Commission to accept binding commitments from undertakings which meet the competition concerns raised. In the absence of the Commission’s power to grant exemptions under the new system Art 10 makes provision for the Commission, on the basis of the Community interest, to take positive decisions in individual cases by declaring either prohibition to be inapplicable.
99 Case 14/68 Walt Wilhelm and Others v Bundeskartellamt [1969] ECR 1. 100 Article 28 empowers the Commission to adopt Block Exemption regulations. As part of the new decentralised approach being introduced, Art 29 provides that not only can the Commission withdraw the benefit of a Block Exemption, but NCAs can also do so for their own territory where that constitutes a distinct geographic market.
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Co-operation with NCAs and national courts Article 11 establishes the principle of close co-operation between the Commission and NCAs to enable the proposed network of enforcement authorities to function smoothly. It sets out the basic information exchange and consultation mechanisms, and the Explanatory Memorandum notes that a Regulation and new Notice on cooperation will also be required. Article 11(6) is particularly important and allows the Commission to withdraw a case from an NCA and deal with it itself. Article 12 sets out the legal basis for the exchange of information in the network between NCAs and the Commission, including confidential information. Article 13 seeks to ensure effective case allocation and avoid duplication of effort by allowing an NCA or the Commission to suspend or terminate proceedings where a case is being, or has been, dealt with by another authority. One problem with the Regulation is that it does not seek to define the jurisdictional competence of the NCAs. It is assumed that this matter will be considered in the new Co-operation Notice, and that case allocation will be on a similar basis to the current Notice, although it has been criticised for its lack of detail. This difficulty does not arise in relation to the national courts, as jurisdiction over a legal dispute will generally be established under the Brussels Convention.101 Article 15 aims to ensure the consistent application of the competition rules, including Art 81(3), in the national courts, by reinforcing the co-operation mechanism with the Commission. The Commission is to publish a new Notice elaborating the practical operation of these provisions. Article 15(1) entitles the national courts to ask for information held by the Commission, or for a Commission opinion on the application of the rules. Article 15(2) provides for application of the rules at the national level to be monitored, by requiring all judgments to be forwarded to the Commission. Article 15(3) is a fairly controversial ‘amicus curiae’ provision, which empowers the Commission and NCAs to intervene in litigation between private parties and deliver an oral or written opinion. There are two further provisions which seek to ensure consistency and uniformity in the application of Community law. Article 14 consolidates the existing role of the Advisory Committee on Restrictive Practices and Dominant Positions (ACRPDP) by requiring the Commission to consult with it prior to taking decisions. In addition, Art 14(6) provides for consultation of the ACRPDP at the request of the Commission or Member State prior to a final decision being adopted by an NCA. The principle of the uniform application of Community law also informs Art 16 which provides that national courts and authorities are to use ‘every effort’ to avoid taking decisions which conflict with those of the Commission. National courts can make preliminary references under Art 234, and the Delimitis principles, as clarified by Masterfoods,102 encourage national courts to suspend proceedings pending a Commission decision.
101 OJ C27, 1998. This is generally based on the domicile of the defendant. Note, that as of 1 March 2002, the Brussels Convention will be largely replaced by Reg 44/2001, OJ L12, 2001 although the rules are very similar. Where a defendant is domiciled outside a Member State, neither the Convention nor the new Regulation will apply, and this may occur in cases of extra-territorial application of competition law. 102 Case C-344/98 [2001] 4 CMLR 14.
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Powers of investigation and penalties Articles 17 on sectoral inquiries and Art 18 on requests for information replace Arts 12 and 11 of Reg 17 respectively. Article 20 is largely identical to Art 14 of Reg 17 and provides the Commission’s powers of inspection. A key addition empowers a search where the Commission suspects that business records are stored in private premises. In order to enhance the effectiveness of the decentralised network, Art 21, based on Art 13 of Reg 17, enables Member States’ authorities to carry out investigations on behalf of another Member State’s NCA. Article 22(2) retains the primary basis for the Commission to fine undertakings, up to 10% of their total annual turnover, for breach of Arts 81 and 82, and extends that power to any breach of an interim measures decision or a failure to comply with an Art 9 commitment. Article 22(1) seeks to enhance deterrence by providing for fines of up to 1% of annual turnover for any failure to comply with a Commission investigation. Similarly, Art 23 changes the basis for periodic penalty payments from limited fixed sums to a maximum of 5% of average daily turnover. The Regulation contains a number of ancillary provisions, of which Art 36 is notable. It requires Member States to designate their competent authorities and to take measures necessary to empower them to apply Arts 81 and 82. Conclusions Reform and modernisation of Community competition law enforcement was perhaps inevitable as the rationale for a centralised authorisation system was diminished through increased familiarity with the law and the demands of a much larger Community. Nonetheless, the proposals are dramatic and propose a major overhaul of the present system. The Commission is now undertaking a further period of consultation on the Draft Regulation and it is unlikely that the finalised Regulation will be in force prior to 2003. Despite criticism, the Commission is keen to proceed with legislative reform, although the replacement Co-operation Notices will be vital in ensuring the system is effective. There remains uncertainty regarding the ability of national courts to deal with Community competition law generally, and Art 81(3) in particular. The Commission have not adopted the suggestion that there should be an independent Community law adviser or national Advocate General in each Member State to advise national courts.103 It is also uncertain whether a shift towards an American approach to enforcement, based on deterrence and private enforcement, is particularly appropriate in the Community setting.104 The new enforcement system will encourage self-assessment by industry. Civil enforceability of contracts should be improved as the delay and uncertainty which characterised the notification and exemption procedure is removed. There will be tension between the effectiveness of Community law in the courts and the autonomy of national legal systems, but this is not a new problem, as demonstrated by Crehan.105 Finally, from a UK perspective, the new system will 103 Temple Lang, J, ‘Decentralised application of Community competition law’ (1999) 22 World Competition 3. 104 Wissman, T, ‘Decentralised enforcement of EC competition law and the new policy on cartels, The Commission White Paper of 28 April 1999’ (2000) 23 World Competition 123. 105 Case C-453/99 Courage v Crehan and Crehan v Courage, AG Mischo, 22 March 2001.
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alter the enforcement mechanism for Community law, shortly after the UK introduced a system of notification and exemption, in the Competition Act 1998, based on the Community model. The UK approach may therefore also require modification.
HARMONISATION OF NATIONAL LAWS In recent years there has been a distinct trend towards the harmonisation of national laws with the Community competition law model. This has not stemmed from any form of ‘hard’ harmonisation or legislative intervention by the Community authorities, but has been based on three principal developments. First, expansion of the European Union has been on the basis that incoming countries are required to adopt market based competition laws framed, at least loosely, on the model of the Community competition rules. A clear example of this exists in relation to the four Visegrad countries: Poland, Hungary and the Czech and Slovak Republics, each of which introduced competition laws in 1990–91, modelled on the Community rules. Secondly, certain Member States which previously had little or no national competition law provision have adopted legislation based on the Community model. Examples include Italy and The Netherlands. Thirdly, other Community Member States have amended their existing competition law systems to be modelled on or complement the Community rules. The UK Competition Act 1998 is a classic example of this trend. Although existing competition provision under the Fair Trading Act 1973 has been retained, the 1998 Act repealed other provisions and introduced new competition prohibitions modelled on Arts 81 and 82 with a general requirement to interpret them consistently with Community law. The main difference between national and Community provisions is that national competition law will not be based on the ‘Community interest’, for instance, the emphasis on market integration is particularly relevant only to Community law. However, the recognition that national laws are, in the majority of Member States, very similar to those of the Community supported the proposal that competition law enforcement develop using the subsidiarity model, although this was ultimately rejected by the White Paper.
UK ADMINISTRATIVE ENFORCEMENT FRAMEWORK Introduction This section is concerned with the principal bodies involved in the same general stages of administrative enforcement—initiation, decision and review—of UK competition law. Several introductory comments are necessary nonetheless. The system of enforcement does not fully fit the pattern set by Community competition law enforcement. The UK framework is particularly interesting given the recent changes introduced by the Competition Act 1998. The new Act has introduced new enforcement authorities and abolished some existing bodies, such as the Restrictive Practices Court. It has also varied the functions performed by the 60
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competition authorities and the powers available to them. Finally, although the Competition Act prohibitions can also be enforced by consumers or other interested parties through normal court processes, it is important to note that the essentially administrative enforcement framework has been retained. Indeed, the role of the courts will be limited, at most, to disputes based on the new prohibitions introduced by the Act, as the administrative enforcement schemes in respect of the control of monopolies and mergers has been retained. The Fair Trading Act 1973 Diagrams 2 and 3 depict, in relation to monopoly and merger control respectively, the bodies and processes involved under the Fair Trading Act 1973. The enforcement framework outlined in each diagram shall be discussed in the following sections. Diagram 2: Fair Trading Act 1973 and monopoly
Diagram 3: Fair Trading Act 1973 and mergers
Initiation Director General of Fair Trading These diagrams illustrate the important position the DGFT holds in competition law enforcement in the UK. The DGFT is, at the time of writing, John Vickers. It should be noted that the Secretary of State for Trade and Industry has made proposals for the Office of Fair Trading (OFT) to be replaced by a new statutory authority, called the Fair Trading Authority. The main aims are to ensure its 61
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independence and transfer the powers vested in the DGFT to the Board of the new authority. The DTI is currently undertaking a consultation process on the proposals which will introduce major structural reform to the administrative framework for the enforcement of UK competition law. Information is gathered for the DGFT by the staff of the OFT using a variety of research methods. For instance, under monopoly control, the OFT carries out a general review of all the major sectors of the economy. Otherwise, initial information tends to come from complaints, from the Consumer’s Association or aggrieved competitors, or as a result of inquiries by Parliamentary committees. One problem for the DGFT has been the limited information-gathering powers under the 1973 Act compared with the powers available to the Commission under Reg 17. A major change introduced by the Competition Act 1998 was to provide similar investigative powers to the DGFT as exist under Reg 17 for the Commission. Additional powers now exist not only in relation to the two new prohibitions, but also to the monopoly and merger provisions of the former legislation which have been retained. Before the 1998 Act, the DGFT’s primary function was to decide whether or not to initiate, or recommend initiation of, proceedings under the appropriate legislation. With monopolies, the DGFT can refer matters to the Competition Commission, for further consideration, or advise the Secretary of State upon a possible reference. Regarding mergers, the DGFT’s function was, and remains, merely to give advice to the Secretary of State. The latter is the only person with power to refer a merger situation to the Competition Commission, although the current DTI proposals for reform of UK merger control involve reduced ministerial involvement.106 The provisions in the Competition Act 1980 on anti-competitive practices, which have now been repealed, were notable for the development of the DGFT’s role. That Act provided a greater investigative role for the DGFT. This role has been developed further by the Competition Act 1998. The lack of investigative powers for the DGFT was considered to be a hindrance to the fulfilment of his duty to unearth registrable agreements under the restrictive trade practices legislation. Enhanced investigative powers have been given to the DGFT under the Competition Act 1998 to assist his task in discovering infringements of the new prohibition on anticompetitive agreements. Secretary of State for Trade and Industry The Secretary of State has an exclusive power to refer mergers to the Competition Commission. The DGFT may give advice but it remains ultimately a political decision, although the DTI has proposed a reduced role for the Secretary of State in the future and an enhanced role for the DGFT and Competition Commission.107 The Secretary of State also has exclusive power under the Fair Trading Act 1973 to make general references of an anti-competitive nature. These have often resulted in important reports, such as those on Collective Discrimination and Parallel Pricing108 However, since 1973 there has been a gradual shift in prominence in UK competition law matters from the Secretary of State to the DGFT. This process has been continued by the Competition Act 1998, although the Secretary of State’s 106 These proposals will be discussed more fully in Chapter 6. 107 See Chapter 6, below, for discussion of the reform of UK merger control. 108 Cmnd 9504, 1955 and Cmnd 5330, 1973.
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crucial role remains in relation to monopoly issues and merger control under the Fair Trading Act 1973. It has already been noted that there are current DTI proposals to reduce ministerial influence and involvement in merger control.109 Investigation and reporting Competition Commission The Competition Commission cannot initiate competition law proceedings but investigates and reports on references made to it under the monopoly or mergers provisions of the Fair Trading Act 1973. Normally, between four and six members sit and consider a reference. Investigations tend to take a long time because the Commission invites submissions from all interested parties. The length of inquiries has become a particular concern of critics of the system. The Commission also holds a meeting on the public interest aspects of the reference subject-matter at which the parties tend to be represented by counsel. The Commission’s Report must be submitted to the Secretary of State and must include a summary of the factual situation of the market and the companies involved. In addition, merger reports and public interest monopoly reports must include an assessment of the public interest. Invariably the Commission also provides recommendations on possible remedies if this is appropriate. Since April 1999 it is evident that the Commission have sought to make their procedures throughout the inquiry process more transparent by, for example, holding public meetings to air views on relevant inquiry issues. Commission Reports are located in the Government publications section of libraries or the Commission’s website.110 Enforcement Fair Trading Act 1973 There is a clear separation of powers under the legislation as the Competition Commission may only make recommendations in its Reports which are not binding. The Secretary of State may take action on the basis of a Report but normally enforcement is delegated to the DGFT. There are two methods of enforcement available under the legislation. Usually, if there is an adverse report which considers a practice to be against the public interest, the DGFT will negotiate with the companies involved to gain undertakings from them as to their future market conduct. This practice, and the Commission system of reporting, demonstrate clearly the administrative and non-legalistic enforcement framework under this Act. Nonetheless, undertakings often reflect the bargaining involved and, as a result, are watered down versions of the original recommendations in the Commission Report. The undertakings may be reviewed if circumstances change and it is the DGFT’s duty to keep such undertakings under review. Alternatively, the legislation provides for order making powers by the Secretary of State.111 This
109 Productivity and Enterprise: A World Class Competition Regime, Cm 5233, 31 July 2001. 110 www.competition-commission.org.uk.
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more drastic action may be taken if undertakings are not agreed, if they are broken, or if the conduct is particularly serious. The powers provided for in Sched 8 to the Fair Trading Act are fairly exhaustive, and include, for instance, publication or notification of prices, regulation of prices, prohibition of the acquisition of undertakings or assets, and the division of a business. Significant and controversial ‘structural’ orders were made by the Secretary of State following upon the Commission’s recommendations in its Report on The Supply of Beer in 1989.112 The Commission was critical in particular of the tied house system which resulted in a lack of competition and a virtual monopoly over beer sales of the Big Six Brewers. The Secretary of State made two orders, with the most important and controversial forcing the major brewers to shed a number of licensed premises, allow a guest beer to be sold in their tied houses, and end the tie on the sale of nonalcoholic drinks to beer.113 The Orders have recently been reviewed and while the guest beer provision is to be retained, the other two main restrictions are to be revoked due to changed market circumstances.114 Following the Commission’s report on Foreign Package Holidays in 1997,115 some concerns over the transparency of ownership links between tour operators and travel agents were remedied by the Foreign Package Holidays (Tour Operators and Travel Agents) Order 2000.116 Post-Competition Act 1998 The Competition Act 1998 repealed the 1976 Acts and the competition related provisions of the Competition Act 1980. Accordingly, the enforcement structure under those provisions will not be considered here, although brief discussion of the role of the legislation will be considered in later chapters as appropriate. In their place, the Act introduced a new prohibition approach to both anticompetitive agreements and the abuse of a dominant position based on the Community provisions Arts 81 and 82. 1973 Act: monopoly and merger control The Competition Act retains the existing provisions under the 1973 Act for dealing with structural and complex monopoly problems and merger control. Accordingly, the same administrative enforcement process as explained above, and depicted by Diagrams 2 and 3, have been retained. The public interest test under s 84 of the Act remains in place as the benchmark for assessing monopolistic structure and behaviour and also merger activity, subject to proposed reforms in the latter area. The Competition Commission replaced the Monopolies and 111 See the Fair Trading Act 1973, ss 56 and 73. The scope of the orders is defined in s 90 and Sched 8. Section 91 and Sched 9 lay down the appropriate procedures and enforcement is regulated by ss 88 and 93. 112 The Supply of Beer: A Report on the Supply of Beer for Retail Sale in the United Kingdom, Cm 651, 1989. 113 Supply of Beer (Tied Estate) Order 1989 SI 1989/2030 and the Supply of Beer (Loan Ties, Licensed Premises and Wholesale Prices) Order 1989 SI 1989/2258. See also, Monopolies and Mergers—the Restriction on Agreements and Conduct (Specified Electrical Goods) Order 1998 SI 1998/1271, introduced in order to increase price competition in respect of televisions, washing machines and other electrical goods. See DTI Press Release, P/98/397, 20 May 1998. 114 See DTI Press Release, P/2000/805, 1 December 2000. 115 Foreign Package Holidays: A Report on the Supply of Tour Operators’ Services and Travel Agents’ Services in Relation to foreign Package Holidays, Cm 3813, 1997. 116 SI 2110/2000.
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Mergers Commission in 1999. The reporting panel of the Competition Commission performs the tasks previously attributed to the MMC, in addition to its new role as a Tribunal of Appeals in relation to decisions taken by the DGFT under the 1998 Act prohibitions. Sections 66–67 of the Act give additional investigative powers to the DGFT when exercising his functions under the Fair Trading Act 1973. Under the new prohibitions Diagram 4 illustrates the enforcement mechanism under the prohibition provisions of the Competition Act 1998. The DGFT will essentially derive information at the outset of any investigation from the same principal sources as before. In addition, parties will be able to notify agreements in the same way as the current Community system, seeking negative clearance or exemption. Furthermore, the Act has provided the DGFT with extensive new investigative powers based on those available to the Commission under Reg 17. The Act is also intended to confer rights on third parties to sue for breaches of the prohibitions through normal court processes. This is a major development in UK competition law enforcement which has almost always been exclusively the preserve of administrative bodies. Diagram 4: Competition Act 1998 and the new prohibitions
Director General The most important change in terms of enforcement under the new provisions is the increased role for the DGFT. The DGFT’s new role under the prohibitions can be equated with the Commission’s role in enforcement of Community competition 65
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law. The DGFT has the most important substantive role, charged with investigating and taking decisions on whether the prohibitions have been breached. The DGFT has the central investigative and decision-making role in the process as opposed to being involved only at the initiation and latter enforcement stages. Section 51(1) of the Act gives the DGFT power to propose rules about procedural and related matters.117 The Secretary of State has a limited role being involved only in defining the exclusions from the prohibitions and setting out the procedural rules to apply in their enforcement. The OFT Competition Policy Division was reorganised to deal with the new competition regime. Additional resources were made available and the Division was divided into seven branches; four sectoral branches, a cartel investigations branch, a policy-co-ordination branch, and a mergers branch, modelled on European Commission Directorate for Competition lines.118 Parties are able to notify to the DGFT in order to seek negative clearance or an exemption from the prohibitions, and a Public Register has been created for transparency purposes. The new scheme allows the DGFT to issue informal guidance, on a similar basis to comfort letters issued by the Commission, and also take formal decisions. Such formal decisions include negative clearance and exemption decisions. They also include formal decisions that the rules have been infringed, allowing for the imposition of penalties. The DGFT has been given increased powers to enable him to enforce the prohibitions, including the following: to enter premises to inspect and copy documents, and to use force to enter premises upon authority of a warrant. To support these powers the Act also creates a criminal offence of obstructing the DGFT’s right of entry or deliberately or recklessly supplying false or misleading information. The DGFT has the power to take decisions on an interim basis to protect the public interest or to prevent serious damage from occurring. Guidance as to when such measures may be granted can be gained from the Commission’s practice under Community law. The DGFT can also now impose civil financial penalties for infringement of the prohibitions, up to a maximum of 10% of the total UK turnover of the business involved. In addition, he can order the parties in breach to stop the infringement. Appeals from decisions of the DGFT may be made to the appeal tribunal of the Competition Commission. Section 52 of the Act required the DGFT to publish advice and information on the Act. Accordingly, the OFT have published a wide range of guidelines on various aspects of the legislation. In relation to enforcement, the Guidance on the appropriate amount of penalty, issued in accordance with s 36 of the Act, is particularly notable.119 The OFT has also established a Compliance and Education Unit with the aim of increasing awareness of the implications of the Act and encouraging the introduction of effective compliance programmes in industry.120 The introduction of a leniency programme for whistleblowers has also sought to enhance the deterrent effect of the legislation.121 It is clear that the OFT is seeking to ensure the effectiveness of the Act’s provisions, particularly in dealing with cartels. 117 118 119 120 121
See the Competition Act 1998 (Director’s Rules) Order 2000 SI 2000/293. See OFT Press Release, PN 41/99, 5 November 1999. OFT 423. See Rodger, BJ, ‘Compliance with competition law: a view from industry’ [2000] CMLR 249. See Guidance as to the appropriate amount of a penalty, OFT 423, Pt II.
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It should be noted that the Act, in s 54, provides for the DGFT to exercise his powers concurrently with the utility regulators, OFGEM, OFTEL, OFWAT, ORR and the Northern Irish Electricity and Gas Regulator (OFREG).122 The general principle is that a ‘case will be dealt with by whichever of the Director General of Fair Trading or the relevant Regulator is better, or best, placed to do so’.123 Section 54(4) provides for the Secretary of State to make regulations for the purpose of coordinating functions under the Act and s 54(5) makes provision for joint decisionmaking. The Competition Act 1998 (Concurrency) Regulations 2000 provide for appropriate allocation of competence in enforcing the prohibitions.124 The OFT’s guideline, Concurrent Application to Regulated Industries,125 outlines the practical aspects of case handling and there have also been other guidelines published by individual regulators in relation to their particular sector.126 One the first decisions taken under the 1998 Act was by OFTEL concerning alleged breaches of the prohibitions.127 Competition Commission The Competition Commission replaced the MMC and its reporting panel fulfils the tasks of the MMC which were retained from Fair Trading Act. In addition, the Competition Commission has a separate function as a tribunal to hear appeals against the DGFT’s decisions. The system allows appeals against the substance of any decision taken by the DGFT, as detailed in s 46(1), including the level of any penalties imposed. The Competition Commission has an appeal panel and a reporting panel dealing with its main functions. There is also a specialist panel to deal with regulatory issues. Members of the panels, the Chairman of the Commission and the President of the Appeal Tribunal are appointed by the Secretary of State. Detailed rules for the procedure of the Appeals Tribunal have been introduced in the Competition Commission Appeal Tribunal Rules 2000, as provided for in Sched 8 to the Act.128 The main party or parties against whom the DGFT has taken decisions can appeal, as can ‘qualifying third parties’ with a sufficient interest in the issue. The qualifying test is wider than the Community law test under Art 230, and includes interested consumers and organisations representing such consumers. Section 47 provides for the DGFT to grant leave to a third party to appeal, and also allows for an appeal to the tribunal against a decision on this issue by the DGFT. Each tribunal consists of a chairman, who is either the President or a member of the panel of tribunal chairmen, and two other appeal panel members. Paragraph 4 of Sched 7 of the Act provides for the appointment of a President of the Competition Commission Appeal Tribunals to preside over the Appeal Tribunals. Sir Christopher Bellamy QC is the first 122 See for a detailed consideration of this issue, Prosser, T, ‘Competition, regulators and public service’, in Rodger, BJ and MacCulloch, A, The UK Competition Act: A New Era for UK Competition Law, Oxford: Hart, 2000. 123 Concurrent Application to Regulated Industries, OFT 405, para 3.8. 124 SI 2000/260. 125 Concurrent Application to Regulated Industries, OFT 405, para 3.8. 126 Eg, the Application of the Competition Act in the Telecommunications Sector, OFT 417, an OFTEL publication. 127 Swan Solutions Ltd/Avaya ECS Ltd, March 2001. 128 SI 2000/261. See, also, the Guide to Appeals under the Competition Act 1998, available on the Competition Commission website.
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President of the Competition Commission Appeal Tribunals. The Appeal Tribunals may confirm, set aside, or vary the DGFTs decision, or remit the matter to the DGFT, or make any other decision that the DGFT could have made. There is the right to an oral hearing, although it is the intention that oral hearings will be short and structured and conducted as informally as possible. There is a further right of appeal on a point of law to the Court of Appeal in England and Wales, the Court of Session in Scotland and the High Court in Northern Ireland. The procedural rules of the Competition Commission also provide for the possibility of a reference to the European Court under the preliminary ruling procedure.129 At the date of writing, there had been one judgment by the Competition Commission in an interim relief application, and several cases pending. Private law actions A DTI policy document, published prior to the Act, confirmed it was the intention that the new prohibitions should be enforceable by means of private law actions through normal court processes.130 This was a dramatic change in the enforcement regime of UK competition law. Previously, the only provision which could have been enforced by individuals was s 35(2) of the Restrictive Trade Practices Act (RTPA) 1976, although no damages were awarded in court actions under this provision. Margaret Beckett, then President of the Board of Trade, in the foreword to the draft Bill, stated that, ‘Competitors and customers damaged by anticompetitive behaviour in breach of the prohibition will be entitled to seek damages’. The Competition Commission was considered as a possible forum to hear private law actions, such as claims for damages by third parties or for interim remedies. However, this was not considered to be feasible and such actions are to be heard in the courts. Provision for private law actions for breach of the prohibitions is expected to increase the deterrent effect of the new rules. This will be facilitated by provisions, in s 58, ensuring that findings of fact by the DGFT, which are relevant to an issue arising in Pt I proceedings, that is, in respect of an infringement of the prohibitions raised by a party other than the DGFT, are binding on the parties, if his decision is no longer subject to appeal. Also, s 55 enables the DGFT to disclose information to third parties, subject to limitations under s 56 relating to, inter alia, the public interest and certain confidential information. The Act contains no express provision stating that the prohibitions can be enforced by private civil law action. Where statutes do not state specifically that such private law remedies are available, it is a matter of construction of the particular statute as to whether Parliament intended to create such remedies. This allows the courts considerable discretion in construing Parliamentary intention and it may be considered that the clear policy statements on this issue and the economic sense in creating such rights would determine the matter. 131 In any
129 See Middleton, K, ‘Harmonisation with Community law: the Euro-clause’, in op cit, Rodger and MacCulloch, fn 122. 130 A Prohibition Approach to Anti-Competitive Agreements and Abuse of a Dominant Position: Draft Bill, DTI, August 1997. 131 See MacCulloch, A, ‘Private enforcement of the Competition Act prohibitions’, in op cit, Rodger and MacCulloch, fn 122, Chapter 5. See, also, op cit, Rodger and MacCulloch, fn 63.
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event, in the the first case on the substance of the Chapter II prohibition, Claritas (UK) Limited v the Post Office and Postal Preference Service Ltd,132 the matter was not even raised and the case proceeded on the assumption that the new prohibitions could be enforced in private litigation. Also of interest in this context is a judgement by Lightman J in Synstar Computer Services (UK) Ltd v ICL (Sorbus) Ltd.133 In that case the court granted a stay of proceedings when the claimant was due to appeal a decision by the DGFT in respect of a complaint by the claimant to the Competition Commission, in order to discourage parallel proceedings between the same parties on substantially the same issue. The Government is currently consulting on various methods of encouraging private actions.134
RELATIONSHIP BETWEEN COMMUNITY AND NATIONAL LAW An important question concerns the relationship between national, or domestic, competition rules and Community competition law. This general issue can be broken down into specific problems for ease of understanding. For instance, the DGFT could take a decision to prohibit an agreement under the prohibition of anticompetitive agreements under the Competition Act. However, how should the DGFT react when the same agreement is exempted by a Community Block Exemption, has already been granted an exemption by the Commission, or has been notified to the Commission and is awaiting decision? On the other hand, a situation could arise in which the DGFT is minded to grant a domestic exemption in respect of an agreement which has already been prohibited by the Commission, or for which a Commission decision is awaited. A similar scenario may arise in relation to the prohibition of the abuse of a dominant position under the Competition Act should parties seek negative clearance. Of course, the UK provisions under the new Act are modelled on the Community provisions and there are measures to ensure consistency in ss 10 and 60, therefore disharmony is less likely, although the distinctive treatment of vertical restraints under the two sets of laws, discussed in Chapter 5, leaves scope for potential overlap problems. Moreover, the existing provisions of the Fair Trading Act have been retained and the public interest test bears little resemblance to the basis of the Community rules. Accordingly, difficulties may arise should the same conduct be deemed to be in the public interest by the Competition Commission yet condemned and prohibited by the Commission, or vice versa. How is the general dilemma of the dual application of domestic and Community competition rules resolved? The EC Treaty establishes an independent legal order capable of affecting Member States governments and of conferring rights on individuals in certain instances. The basic rule regarding the relationship between this new legal system and existing national laws is that of the supremacy of Community law. Directly applicable Community rules, such as Community competition law, take precedence over national law. This principle of supremacy of Community law, or the doctrine of ‘precedence’, was established in Community law by the important Court judgments in Van Gend en Loos135 and Costa v ENEL136 This principle was given effect in the UK 132 [2001] UKCLR 2. 133 (2001) The Times, 1 May. 134 Productivity and Enterprise: A World Class Competition Regime, Cm 5233, 31 July 2001.
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by ss 2(1) and 3(1) of the European Communities Act 1972, upon the UK accession to the European Community.137 Accordingly, when a conflict exists with UK domestic competition law it follows that Community competition law is treated as supreme and the provisions of UK law cannot be relied upon. For instance, Art 81 is supreme even if the conduct is permitted under national law. A classic example of this situation arose in the case of Consten and Grundig v Commission.138 That case shall be examined in fuller detail in Chapters 4 and 5, but it is interesting to note that the prohibition under Art 81 prevailed even where a party sought to rely on a trade mark right which was legitimate under national law. The respective roles for the application of national and Community competition laws was laid down in Walt Wilhelm v Bundeskartellamt.139 That case involved a company which was allegedly involved in a price fixing cartel in the aniline dyes industry. Parallel proceedings were commenced in Germany, under German law, and by the European Commission under the Community competition rules. The German Court made a reference under Art 234, asking the Court if the company could be subject to penalties under national rules in respect of the same conduct which could be penalised under Community law. The Court confirmed that this was possible but that in imposing the penalties the national authorities must bear in mind the penalties which may imposed by the Community authorities. The Court also confirmed the following points: (a) any conflicts would be resolved by the principle of supremacy of Community law; (b) if the national authority decision is incompatible with the Commission decision then the national authority needs to take proper account of any such decision; and (c) if during the national proceedings it appears possible that the Commission may take conflicting measures then it is for the national authority to take the appropriate measures to avoid such a difficulty. However, the national authorities can still apply national rules even where the same issues are under investigation by the Commission provided that it does not prejudice the full and uniform application of Community law. For instance, the national authorities cannot condemn agreements which are exempted under Art 81(3). The basic rule, confirmed by the Walt Wilhelm case, of the supremacy of Community law is fairly straightforward in principle. However, in practice, it may lead to a degree of uncertainty. The Community rules in Arts 81 and 82 only apply when there is an affect on interstate trade as a result of the conduct. Otherwise, only national competition rules may be applicable to the potentially anticompetitive activity. However, the affect on interstate trade criterion has been interpreted widely by the Community authorities. The result is that there is a great 135 Case 26/62 [1963] ECR 1; [1963] CMLR 105. 136 Case 6/64 [1964] ECR 585; [1964] CMLR 425. 137 European Communities Act 1972, s 2(1) provides: ‘All such rights, powers, liabilities, obligations and restrictions from time to time created under… Treaties…are without further enactment…to be treated as law in the UK.’ Section 3(1) provides that if there is any question as to the meaning or effect of the Treaty such a question of law will go to the Court or be dealt with in accordance with the principles laid down by it. 138 Case 56 and 58/64 [1966] ECR 299; [1966] CMLR 418. 139 Case 14/68 [1969] ECR 1; [1969] CMLR 100. See, also, Cases 46/87 and 227/88 Hoechst v Commission [1989] ECR 2859; [1991] 4 CMLR 410.
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degree of potential overlap between the applicability of national and Community competition rules to the same potentially anti-competitive activity. The statements by the Court in Walt Wilhelm compound this problem, resulting in a vague separation between the powers of the national and Community authorities. The rule in Walt Wilhelm has been described as a procedural precedence rule which concentrates on the status of administrative decisions and thus provides that national authorities should have regard to Community law decisions which are issued or expected. This may cause both delay and confusion. An alternative, and clearer, way of separating the competencies of national and Community authorities, by providing a clear line between the application of national and Community competition controls has been provided in the Merger Regulation.140 The approach provided by the Regulation seeks to avoid the difficulties involved where two systems of law may apply to the one issue. The Merger Regulation establishes a basic rule that provides for the exclusive application of Community law above a certain threshold. The Merger Regulation set up a new tier of specific merger control provisions at the Community level. Through a combination of the provisions of Arts 1 and 21(2), the Regulation established a system of exclusive and separate competencies for the Community and national authorities based on the concept of a ‘Community dimension’.141 The Regulation applies to all concentrations with a Community dimension as defined quantitatively under Art 1, based on the turnover of the relevant undertakings. Article 21(1) provides that the Commission alone is to have jurisdiction under the Regulation, and more importantly, Art 21(2) provides that: ‘No Member State shall apply its national legislation on competition to any consideration that has a Community dimension.’ The Regulation effectively sets clear and separate competencies for national and Community authorities to apply national and Community merger control measures in the event of a take-over or merger. Although the White Paper on Modernisation rejected the arguments for reform of enforcement of Community law based on subsidiarity, the Draft Regulation142 makes provision to avoid potential problems arising from the procedural precedence rule outlined above. Article 3 of the proposed Regulation deals with the relationship between Arts 81 and 82 and national competition laws and provides: Where an agreement, a decision by an association of undertakings or a concerted practice within the meaning of Article 81 of the Treaty or the abuse of a dominant position within the meaning of Article 82 may affect trade between Member States, Community competition law shall apply to the exclusion of national competition laws.
This seeks to ensure a clearer demarcation between the application of Community law and national law, and, given the wide interpretation afforded to the interstate trade criterion, it is likely to afford less scope for the application of national competition law than at present.
140 Council Reg (4064/89) OJ L395/1, 1989 141 As amended by Council Reg (1310/97/EC), OJ L180/1, 1997. 142 Proposal for a Council Regulation on the Implementation of the Rules on Competition Laid Down in Articles 81 and 82 of the Treaty, COM (2000) 582, OJ C365/284, 2000.
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GLOBALISATION AND EXTRA-TERRITORIALITY Extra-territoriality Extra-territoriality concerns the extent to which competition laws can be applied and enforced outside the specific territory of their competence. For instance, can UK competition law be applied to an agreement between companies based in America, or can Community law be applied in respect of a merger between a Japanese company and an American company? The reason for the significance of extra-territoriality in competition law is the potential for effects on international trade, or another economic area, as a result of competition violations. This potential has increased in recent years due to enhanced globalisation of markets. For instance, there may be a production cartel based in State A which artificially increases the supply price of the product to State or economic area B, thereby affecting its economic interests. As a result, State B may decide to apply its competition laws to the participating companies and impose fines. This issue is controversial as it implies a breach of territorial sovereignty of State A. On the other hand, many systems of competition law, which are applicable to anticompetitive action which is harmful within a State or which affects the economy of a State, make no provision for conduct which produces effects only outside the State’s territory. An example of this would be the grant of a competition law exemption to an export cartel. Subject matter jurisdiction The basic problem which faces the enforcement of competition law outwith the territory of the State arises from the commonly accepted principle of public international law that there are limits to a State’s jurisdictional competence. The starting point is to differentiate between subject matter jurisdiction and enforcement jurisdiction. A State may consider that it has subject matter jurisdiction to apply its rules to conduct, or more often to the economic effects of conduct, irrespective of the precise locus of the conduct. The principal reason this issue has arisen in competition law is because the economic effects of market conduct are often easily separable from the initial conduct. Accordingly, it is perhaps understandable that difficulties arise and that States may consider their competition laws applicable to economic effects produced within their State which derive from conduct or activity that originated elsewhere. However, this becomes particularly contentious if the State seeks to go further and exercise enforcement jurisdiction, enforcing its competition rules by normal means such as serving court papers or demanding evidence from a company. Enforcement of competition laws abroad may cause conflict with the State in which enforcement is sought. Under international law subject matter jurisdiction may be based on nationality or territorial grounds. Under the territoriality principle, jurisdiction may exist if the act originated abroad but was completed within the jurisdiction. A straightforward example would be the refusal to supply goods or services. However, it is less clear whether this can be applied where there are only economic effects produced within the territory. Often, the anti-competitive behaviour, such as predatory or excessive pricing, will be within the jurisdiction, or at least one party to an agreement will be based within the territory. Should this not be the case, one possibility for competition authorities would be to invoke the ‘economic 72
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entity’ doctrine. Using this approach, enforcement may be sought against a parent company outwith the jurisdiction on the basis of the actions of a subsidiary company within the jurisdiction, where the conduct or activity was controlled or directed by the parent company. The main controversy arises where the actions take place outside the jurisdiction but produce economic effects in a market within the jurisdiction. A clear example of this would be a price fixing cartel based in another jurisdiction. One possible solution to this problem is to adopt the effects doctrine derived from the famous Alcoa143 decision in the US, which confirmed that liability can exist for breach of the antitrust rules for conduct outside the borders of the US which produces consequences within it. Regarding the UK, there is little or no mention of extra-territorial enforcement within the competition law provisions. The main reason has been a strict adherence to traditional international law principles which are opposed to concepts such as the effects doctrine. The Competition Act makes no reference to extraterritorial application and the prohibition of anti-competitive agreements only applies to those ‘implemented within the United Kingdom’.144 Community competition law and extra-territoriality Community law applies if there is an affect on interstate trade. Beyond this basic rule, it is unclear whether an effects doctrine may be applied by the Commission. The economic entity doctrine was approved by the Court in early case law.145 The Dyestuffs case involved illegal price fixing within the Community which was principally carried out by non-Community based undertakings through Community based subsidiaries. The anti-competitive conduct was attributed to the parent company as the subsidiaries were effectively under its control. The application of the economic entity doctrine has been criticised as ignoring the separate legal personality of the companies but it has been relied on by the Commission.146 Application of the doctrine is dependent on the existence and exercise of control by the parent company, such as its representation on the subsidiary board. Although the doctrine allows Community competition law to be enforced against companies beyond the Community, enforcement is ensured practically be serving documentation on the subsidiary. An alternative approach adopted by the Commission seeks to utilise the effects doctrine. However, its application is still unclear as a result of the Court’s judgment in Wood Pulp.147 That case involved allegations of price fixing between wood pulp producers throughout the world including various non-Community based producers. The Commission claimed that Community competition law applied where the conduct produced effects within the Community. The Court avoided the controversial issue of the applicability of the economic effects doctrine by staring that on the facts the agreement had indeed been implemented within the Community. It remains
143 144 145 146 147
United States v Aluminium Co of America (Alcoa) 148 F 2d 416 (1945), 2 Circ. For the limits of the new Chapter I and II prohibitions, see ss 2 and 18, respectively. Case 48/69 ICI v Commission (Dyestuffs) [1972] ECR 619; [1972] CMLR 557. Eg, Case 7/73 Commercial Solvents v Commission [1974] ECR 223; [1974] 1 CMLR 309. Cases C-89, 104, 114, 16, 117 and 125–29/85 A Ahlstrom Oy v Commission [1988] ECR 5193; [1988] 4 CMLR 901.
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unclear what constitutes implementation and also whether purely economic effects within the Community would be considered sufficient. A possible scenario could, for instance, involve a refusal to supply within the Community by a cartel boycotting the Community market. As far as enforcement is concerned, the Court has considered that it is competent for the Commission to serve documents, and indeed necessary for enforcement to be pursued, on a non-Community company.148 On a practical level, the basic difficulty in enforcing any Commission decision and/or penalty may be overcome by seizing that company’s assets in the Community. Extra-territorial application of Community has been a particularly high profile issue in recent years, given the Commission’s involvement in the merger between two US companies, McDonnel Douglas and Boeing, and the controversial Court of First Instance ruling in Gencor Ltd v Commission.149 In that case, parent companies Gencor and Lonrho agreed to merge the activities of their platinum mining subsidiary companies in South Africa. The South African authorities did not object to the merger but the Commission blocked the merger on the basis of the collective dominance theory.150 A key issue concerned the territorial reach of the Merger Regulation.151 The starting point was that the Regulation applied to all mergers with a Community dimension and was the case in this instance. Sales within the Community constituted substantial operations in the Community152 and, also, were deemed to satisfy the implementation test set out in Wood Pulp. The most controversial aspect of the case was the Court of First Instance’s view that the ‘application of the Merger Regulation is justified under public international law when it is foreseeable that a proposed concentration will have an immediate and substantial effect in the Community’.153 This appears to endorse the widely criticised effects doctrine, although the impact of the judgment may be restricted to merger control. More recently, the Commission has decided to prohibit the proposed acquisition by General Electric Co of Honeywell Inc, two American undertakings involved in aero-engines, avionics and other aircraft components and systems.154 Resistance to extra-territorial application Disputes can arise between different legal systems due to the controversial nature of the extra-territorial application and enforcement of competition laws. For example, in the mid-1980s, litigation involving Laker Airways suing for breach of US antitrust law against certain UK based airline companies, involved sensitive considerations of the possibility of UK courts preventing the US courts from enforcing their antitrust laws against the UK based companies.155 A number of 148 Case 52/69 Geigy v Commission [1972] ECR 787; [1972] CMLR 557. However, see Feibig, A, ‘International law limits on the extra-territorial application of the European Merger Control Regulation and suggestions for reform’ [1998] 6 ECLR 323. 149 Case T-102/96 [1999] ECR II-753; [1999] 4 CMLR 971. 150 For further discussion of collective dominance see Chapters 3 and 6. 151 See Fox, E, ‘The Merger Regulation and its territorial reach: Gencor Ltd v Commission’ [1999] ECLR 334; Porter Elliott, G, ‘The Gencor judgment: collective dominance, remedies and extraterritoriality under the Merger Regulation’ (1999) 24 EL Rev 639. 152 Per the 11th recital to the Merger Regulation. 153 [1988] ECR 5193; [1988] 4 CMLR 901, para 90. 154 Commission Press Release, IP/01/939, 3 July 2001.
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countries have passed blocking statutes to prevent the extraterritorial application of US antitrust law, in some instances as a direct response to the Alcoa decision. This demonstrates how the extra-territoriality issue relates clearly to political and nationalistic considerations. This is evidenced by the introduction of the Protection of Trading Interests Act 1980 in the UK. This legislation is not limited to the possible extra-territorial enforcement of US antitrust laws but may be more broadly applicable in relation to possible harm to the commercial interests of the UK. The Act gives the Secretary of State powers to prohibit the compliance of UK firms with foreign laws and also with any requirement to submit information to foreign authorities beyond their territorial jurisdiction.156 Sections 5 and 6 provide that multiple damages awards are not enforceable in the UK and that an action may be brought to ‘claw back’ the excess awarded in a foreign multiple damages action.
INTERNATIONAL CO-OPERATION AND GLOBAL COMPETITION RULES Enforcement jurisdiction, as noted, may lead to possible conflicts where authorities seek to serve court papers or order the production of documents. However, as markets become more global and the larger companies operate on a worldwide scale, information regarding a company’s operations beyond the particular territory of the enforcement authority is becoming even more important. Partly as a result of this, and in an attempt to ensure more effective enforcement of competition law generally, there have been various developments to seek to ensure some form of co-operation between national and supranational agencies. Efforts to improve co-operation have developed on both a multilateral and bilateral basis. The United Nations Conference on Trade and Development (UNCTAD) and the Organisation for Economic Development (OECD) are active in this area and there are suggestions that competition enforcement should be brought within the auspices of the World Trade Organisation (WTO). Bilaterally, there has been increased international co-operation in competition law enforcement between a number of States. There have also been important developments involving the Community. The Community entered a co-operation agreement with the US in 1991. The Agreement was successfully challenged before the Court by the French Government on the basis that the Commission were acting ultra vires. In April 1995, this was remedied with retroactive effect by a decision of the Council and Commission.157 The Agreement is significant and provides for notification, consultation, information sharing, and co-operation and coordination in enforcement, although the Agreement makes clear that it should be interpreted in conformity with the respective substantive rules of the US and European Union and that the competition authorities remain bound by their own
155 See Midland Bank plc v Laker Airways plc [1986] 1 All ER 526; and British Airways v Laker Airlines [1984] 3 All ER 39. 156 Protection of Trading Interests Act 1980, ss 1–3. 157 Agreement Between the Government of the United States of America and the European Communities Regarding the Application of their Competition Laws, OJ, L95/47, 1995, as corrected by OJ L131/38,
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internal rules on confidentiality.158 There has been a substantial body of practice developed under the Agreement and the Commission publishes an annual report on its operation. In 1999, the Community and Canada also finalised a Cooperation Agreement due to the increase in the number of cases being investigated by the authorities of both jurisdictions.159 In a European context, the European Economic Area Agreement provides a clear system of collaboration between the Commission and the European Free Trade Association Area (EFTA) Surveillance Authority in the enforcement of Community and EEA competition rules. In addition, the Europe Agreements concluded by the Community with the six Central and Eastern European Countries and the three Baltic States provides for some limited Commission involvement in ensuring that the competition rules provided in the Agreements are implemented properly. Finally, there have been developments within the WTO framework with a view to establishing, in the longer term, an international antitrust code. 160 At present, a global code or competition authority seems unlikely. Nonetheless, there has been an important report by the International Competition Policy Advisory Committee (ICPAC) of the Antitrust Division of the US Department of Justice.161 It focused on the issues of multi-jurisdictional mergers, international co-operation, particularly in relation to cartels, and the interface between trade and competition rules. The Report considered that the WTO was not the appropriate forum for advancing global competition issues and it proposed a Global Competition Initiative as a new venue for the exchange of ideas and progress towards common solutions for competition law and policy problems.
FURTHER READING Administrative enforcement of Community law Ehlermann, C-D, ‘European administration and the public administration of Member States with regard to competition law’ [1995] 8 ECLR 454 Spink, PM, ‘Recent guidance on fining policy’ [1999] 2 ECLR 101 Developments in enforcement—the rights of the defence House of Lords Select Committee on the European Union, Strengthening the Role of the Hearing Officer in EC Competition Cases, 1999–2000, 19th Report, HL Paper 125
158 The Community has entered into an agreement on the application of ‘positive comity’ principles to further strengthen existing co-operation under the 1995 Agreement, The main objective, further to Article V of the 1995 Agreement, is to provide that either party whose interests are adversely affected by anti-competitive activities occurring in whole or in substantial part in the territory of one of the parties, may request the other party to take action, in the form of investigating and remedying the anti-competitive activities. See in particular Arts I and III, OJ L173/28, 1998. 159 OJ L175/50, 1999. 160 See Koczarowska, A, ‘International competition law in the context of global capitalism’ [2000] 2 ECLR 117. 161 At www.usdoj.gov/atr/icpac/finalreport.htm, 20 April 2001.
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Levitt, M, ‘Commission hearings and the role of the Hearing Officer: suggestions for reform’ [1998] 6 ECLR 404 Montag, F, ‘The case for a radical reform of the infringement procedure under Regulation 17’ [1996] 8 ECLR 428 Decentralisation MacCulloch, A and Rodger, BJ, ‘Wielding the blunt sword: interim relief for breaches of EC competition law before the UK courts’ [1996] 7 ECLR 393 Rodger, BJ and MacCulloch, A, ‘Community competition law enforcement. Deregulation and re-regulation: the Commission, national authorities and private enforcement’ (1998) 4 CJEL 579 Von, S and Maxwell, A, ‘Enforcement in national courts of the EC and new UK competition rules’ [1998] 7 ECLR 443 Wesseling, R, ‘The Commission Notices on decentralisation of EC antitrust law; in for a penny, not for a pound’ [1997] 2 ECLR 94 The White Paper reform proposals Paulweber, M, ‘The end of a success story? The European Commission’s White Paper on the Modernisation of the European Competition Law’ (2000) 23 World Competition 3 Temple Lang, J, ‘Decentralised application of Community competition law’ (1999) 22 World Competition 3 Wesseling, R, ‘The Commission White Paper on Modernisation of EC Antitrust Law: unspoken consequences and incomplete treatment of alternative options’ [1999] 8 ECLR 420 Wissman, T, ‘Decentralised enforcement of EC competition law and the new policy on cartels, the Commission White Paper of 28th April 1999’ (2000) 23 World Competition 123 Harmonisation, UK competition law and the 1998 Act Rodger, BJ and MacCulloch, A, The UK Competition Act: A New Era for UK Competition Law, 2000, Oxford: Hart Ullrich, H, ‘Harmonisation within the European Union’ [1996] 3 ECLR 178 Wilks, S, In the Public Interest: Competition Policy and the Monopolies and Mergers Commission, 1999, Manchester: Manchester UP
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DISCUSSION (1) Compare and contrast the system of enforcement of competition law in the UK and Community respectively. (2) Why, and how, is enforcement of Community competition law being decentralised? (3) What are the key reforms to be introduced following the White Paper of 1999, and what are the main obstacles to a consistent and uniform application of Community competition law? (4) To what extent has the Competition Act 1998 effected radical reform of UK competition law?
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THE CONTROL OF DOMINANCE
INTRODUCTION TO ART 82 OF THE EC TREATY The essence of the European Community is the four freedoms: free movement of goods, services, labour and capital. Competition law is vital to those goals as the four freedoms will only work if businesses within the Community can compete freely. A principal objective of Community competition law is to prevent businesses from distorting or dividing up markets within the Community. The objective of the Community’s competition provisions is set out in Art 3(g) of the EC Treaty. The Community is to set up ‘a system ensuring that competition in the internal market is not distorted’. The first substantive provision in the EC Treaty that we shall discuss is Art 82. It is designed to deal with the activities of businesses, ‘undertakings’ in European terminology, which have a powerful market position similar to the economists’ concept of monopoly The actions of a firm which has market power can have serious effects on the operation of a market. Article 82 is directed at the activities of a powerful single firm which is not subject to effective competition. An undertaking in a dominant position may use its market power in several ways: to exploit consumers by restricting output and increasing prices; to perpetuate its own position, perhaps through unfair discounting; or to extend its position into another market, perhaps by tying the sale of one product to another. For that reason, Art 82 prohibits the ‘abuse’ of a ‘dominant position’ within the Community so far as it may affect trade between Member States. When examining the application of Art 82 in practice it is better to consider the interpretation of the constituent parts of the prohibition in reverse order: ‘effect on trade between Member States’, ‘dominant position’ and, finally, ‘abuse’.
UNDERTAKINGS AND THE EFFECT ON TRADE BETWEEN MEMBER STATES Only ‘undertakings’, within the terms of EC law, are controlled by the competition provisions of the Treaty The definition used is the same for both Arts 81 and 82. The Court and the Commission have interpreted the term very broadly, maximising the scope of the competition rules. All natural or legal persons carrying on some form of commercial activity, in the goods or services sector, will be included.1 Commercial activities include those which are not designed to be profit making.2 For instance, it was held in proceedings before a Scottish court that a statutory body, the Keeper of the Registers of Scotland, an officer of the Crown, constituted an undertaking for the purposes of Art 82.3 Legally distinct companies may be considered as one undertaking for the purposes of Community 1 2 3
Eg, opera singers in Commission Decision (78/516/EEC) RAI/UNITEL, OJ L157/39, 1978; [1978] 3 CMLR 306. Commission Decision (82/1283/EEC) ANSEAU-NAVENA, OJ L167/39, 1982; [1982] 1 CMLR 221. Miller & Bryce v Keeper of the Registers of Scotland 1997 SLT1000 (OH).
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competition law when they are not independent from each other. This is the case in a parent/subsidiary situation. Although legally separate, the subsidiary is controlled by the parent company. This is known as the ‘economic entity’ doctrine.4 Accordingly, when dealing with connected companies it is important to examine the economic and managerial independence of the companies in question.5 The prerequisite that there should be an effect on trade between Member States acts as a jurisdictional test. It is the boundary between the application of Community and national competition law. Its interpretation, therefore, is politically important.6 Not surprisingly, the Community courts have given the phrase a broad interpretation. The general test, which applies to cases under Art 82 and Art 81, was laid down in Société Technique Minière:7 …it must be possible to foresee with a sufficient degree of probability on the basis of a set of objective factors of law or fact that the agreement in question may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States.
The test, therefore, covers any conduct which could affect the way in which trade patterns operate across the Community. In addition to this general test, there is a structural test peculiar to Art 82. Market structure is important in this area. Where market power is concentrated in one undertaking, it can have damaging effects on competition. An undertaking’s economic power can discourage other undertakings from entering the market. The economic models of competition require new entrants to control the power of existing undertakings. The ability of a dominant undertaking to use market power to exclude competitors, or potential competitors, is therefore of particular concern. The structural test operates where there is an alteration in the structure of competition within the market.8 The test will usually be fulfilled even where the dominant undertaking only operates in one national market, as the strength of that undertaking will tend to reinforce the division of markets along national lines. The strengthening of such a division will have an effect on trade between Member States.9
DOMINANT POSITION The use of economic analysis under Art 82 is very important. A finding of dominance will largely rest on economic factors, although there are legal guidelines laid down by the Court and the Commission. In practice, three main areas have to be examined before dominance10 can be established. These involve defining the relevant market, establishing market strength, and a consideration of
4 5 6 7 8 9 10
Case 22/71 Beguelin Import v GL Import Export [1971] ECR 949; [1972] CMLR 81. Case T-102/92 Viho v Commission [1995] ECR II-17; [1997] 4 CMLR 469. On appeal, Case C73/95P [1996] ECR I-5457; [1997] 4 CMLR 419. Draft Regulation, OJ C365/284, 2000, Art 3, sets out that where there is an effect on interstate trade, Community law only will be applicable. Case 56/65 Société Technique Minière v Maschinenbau Ulm GmbH [1966] ECR 235; [1966] CMLR 357. Cases 6 and 7/73 Commercial Solvents v Commission [1974] ECR 223; [1974] 1 CMLR 309. See Case T-30/91 Soda Ash (Solvay v Commission) [1995] ECR II-1775. In more general terms, it is sometimes known as ‘market power’.
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possible barriers to entry. Only once all three of these areas have been examined will any finding be reliable. The relevant market The first, and potentially most vital, step is to define exactly which market the undertaking is competing in. That market is known as the relevant market. Without delineating the products or services which are in competition it is impossible to gauge how much power an undertaking has over its competitors and consumers. The relevant market is itself divided into three parts: product market, geographical market, and temporal market. The Commission has helpfully produced a Notice on the definition of the relevant market. In that Notice it sets out the methods it employs in market definition. The Commission’s aim is to increase the transparency of its decisionmaking process. It is particularly interesting in that the Notice explains the practical steps the Commission takes when it examines a market.11 The relevant product market Before it is possible to say that an undertaking is dominant in a market, we have to ascertain what constitutes that market by defining the range of products in competition with those of the undertaking in question. Only an undertaking’s position in relation to actual or potential competitors will give a true indication of its dominance. The importance of market definition was emphasised in Continental Can v Commission12 where the Commission’s decision was annulled by the Court because of its failure to properly demarcate the relevant market. The definition of the market can be very controversial. If the product market is drawn narrowly, there being few competing products, it is much more likely that the undertaking will be found to be dominant. The legal test adopted is that of interchangeability.13 An examination must be made of products which are: …particularly apt to satisfy an inelastic need and are only to a limited extent interchangeable with other products.14
At its simplest level the test requires an examination of the products which a consumer will regard as interchangeable with the product in question; this is known as demand side interchangeability. What is interchangeable with a product may seem to be a matter of common sense but there are difficult issues to be addressed. For instance, if product A is interchangeable with product B, and product B is interchangeable with product C, does that mean that A is interchangeable with C? To help to define the market the Court has set out a number of areas to be considered.
11 12 13 14
OJ C372/3, 1997. See Baker, S and Wu, L, ‘Applying the market definition guidelines of the European Commission’ [1998] 5 ECLR 273. Case 6/72 Continental Can v Commission [1973] ECR 215; [1978] 1 CMLR199. Sometimes referred to as ‘substitutability’. [1973] ECR 215, para 14. ‘Inelastic’ is an economic term describing a type of demand. For a simple explanation of this, and other economic terms, see Glossary, p 285.
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Cross-elasticity of demand One method used to discover whether products are interchangeable is an economic test examining the cross-elasticity of demand. Although the economic terminology is somewhat opaque, the basis of the test is relatively simple to explain. Cross elasticity is high where an increase in the price of one product causes a significant shift by consumers to another product. In the Commission Notice on Market Definition, elasticity is one of the most important factors. It is suggested that one should assess the likely reaction to a hypothetical small, nontransitory change in price of around 5–10%. It is obvious that if a large percentage of consumers shift their allegiance in relation to a relatively small percentage price change, they consider the other product to be interchangeable with the original. If there is little or no shift in consumer allegiance it would tend to suggest that the products are not interchangeable. Cross-elasticity is valuable in that it gives an objective determination of the actual operation of the market. Such economic analysis was found to be of value in United Brands,15 but in other cases, for example, in Hilti,16 such studies have been of less use. As with all statistical analysis great care must be taken to ensure that the results are a true reflection of the market. Physical characteristics The physical characteristics of a product will obviously be vital in deciding if products are interchangeable. If products are physically similar and have similar functions the consumer is more likely to see them as being interchangeable. Even where products have broadly similar characteristics, it may be possible to find ways in which particular characteristics place them in a separate market. A classic example of such a distinction was seen in United Brands.17 The Commission argued that the market for bananas was separate from the market for fresh fruit generally. The Commission concentrated on the year round availability of bananas, their appearance, softness and seedlessness, which meant that they satisfied the particular needs of the very young, the old and the sick. On the basis of this, and other, arguments the Court accepted that bananas should be differentiated from other fresh fruit. The Court’s reasoning on this point has been challenged but it illustrates the way in which minor differences between products can affect the consideration of the market in which they are competing with other similar goods. Price The price of a product can affect the relevant market. Take for example the market for domestic vehicles. It is unlikely that a Ferrari 360 and a Ford Fiesta will be considered to be competing in the same market. Even though they fulfil the same function, personal transport, they do not compete. It is unlikely that a consumer would consider them interchangeable.
15 16 17
Case 27/76 United Brands Continental BV v Commission [1978] ECR 207; [1978] 1 CMLR 429. Case T-30/89 Hilti AG v Commission [1991] ECR II-1439; [1992] 4 CMLR 16. See Case 27/76 United Brands Continental BV v Commission [1978] ECR 207; [1978] 1 CMLR 429.
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Intended use The intended use of the product is a very important consideration. A product may have a number of different uses, each of which may form a different market. In Michelin,18 the Court examined the market for car tyres. Because of the differing nature of demand, the Court found that the market for original equipment tyres, to be fitted to new vehicles during manufacture, and the market for replacement tyres, to be fitted during repairs, were in separate markets. Manufacturers ordered original equipment tyres in bulk while replacement tyres were ordered as and when required. Another way in which the intended use criterion can narrow a market was seen in Commercial Solvents.19 A subsidiary of Commercial Solvents supplied Zoja with nitropropane which they processed into an anti-TB drug. When Commercial Solvents ceased supplies of the raw material, Zoja claimed they were in a dominant position. Commercial Solvents argued that other chemicals could be used to produce the drug, and that those chemicals should be considered as part of the overall market of materials for producing the drug. The Court disagreed and focused on the fact that the process in Zoja’s plant relied on supplies of nitropropane; no other raw material could be used. Therefore, the way in which Zoja utilised the product limited the market. Supply side interchangeability So far, we have considered a number of demand based factors, concentrating on consumer perception, but the supply side can also affect the relevant product market. A product may not be directly interchangeable with any others but this may not mean that it is the only product to be considered. If other suppliers, currently manufacturing other products, can ‘switch production to the relevant products and market them in the short term without incurring significant additional costs’,20 they should also be considered as part of the market. This possible alternative supply, known as potential competition, is likely to exert a competitive pressure on the current supplier. In Continental Can,21 the Court annulled the Commission’s decision on the basis that it had not properly considered if the producers of other types of can, largely cylindrical cans, could enter the market for meat and fish cans. The relevant geographical market It is also important to determine the geographical extent of the relevant market. Before evaluating dominance it is important to ensure that the same conditions of competition exist across the whole market. There may be legal, technical or practical reasons why a product only competes within a limited area of the Community. Accordingly, the assessment of market power can only take place in the geographical area where competition can be realistically expected. The general test was laid down in United Brands where the Court limited the geographical market to:
18 19 20 21
Case 322/81 Nederlandsche Banden-Industrie Michelin NV v Commission [1983] ECR 3461; [1985] 1 CMLR 282. See Cases 6 and 7/73 Commercial Solvents v Commission [1974] ECR 223; [1974] 1 CMLR 309. Commission Notice on market definition, OJ C372/5, 1997, para 20. See Case 6/72 Continental Can v Commission [1973] ECR 215; [1978] 1 CMLR 199.
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In the market for bananas the UK, France and Italy were excluded, as the conditions of competition were different in those States because of their long term relationships with former colonies which produce bananas. Geographical markets may also be limited by transport restrictions on the product. If the unit transport cost of the product is high it is less likely that the product will have a Community-wide market. This is particularly important for products which are difficult to transport over long distances, for instance dangerous chemicals, or for some types of fresh food such as bread. The temporal market A market may vary over time. This can be due to seasonal variations in production. The seasonal nature of fruit production was raised in United Brands.22 External factors may also affect the market, altering the conditions of competition. If those factors are temporary in nature the period in which they affected the nature of competition will be considered separately.23 Dominance Once the relevant market has been determined it is then possible to calculate if an undertaking is dominant. The traditional definition of dominance was laid down by the Court in United Brands: The dominant position thus referred to [by Art 82] relates to a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.24
The test has two main elements. First, the allusion to the ability to act independently refers to an economic view of market power: the fact that the undertaking’s actions are not constrained by effective competition. The dominant undertaking is no longer a ‘price taker’. Secondly, the reference to the prevention of effective competition refers to a dominant undertaking’s ability to prevent potential competitors from entering the market. This is referred to as exclusionary conduct and allows an undertaking to protect its dominant position. The difference between these two elements is more important in the discussion of types of abusive conduct. The tools used to investigate whether an undertaking is dominant are the same in both situations. For the purposes of this text we shall split that investigation into two separate sections, market strength and barriers to entry, although in practice both are 22 23 24
See Case 27/76 United Brands Continental BV v Commission [1978] ECR 207; [1978] 1 CMLR 429. As the Court defined the market narrowly it did not rely on the seasonal nature of the market in its judgment. This was the case during the 1970s oil crisis. See Commission Decision (77/327/EEC) ABG, OJ L117/1, 1977; [1977] 2 CMLR D1. Case 27/76 United Brands Continental BV v Commission [1978] ECR 207; [1978] 1 CMLR 429, para 38.
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usually considered together. There is an ongoing policy debate as to what should properly be termed as a barrier to entry, and for that reason it warrants separate discussion. The debate over the importance of barriers to entry has largely been conducted in the USA and its impact has been limited in the Community. In Community cases, there has been very little reference to the conceptual problems but in practice problems concerning barriers to entry are being addressed in an increasing number of cases. Before we go on to deal with that debate, the less controversial, but equally important, area of market strength shall be discussed. Market strength One of the first steps in investigating dominance is to establish the market share held by the undertaking in question. The market share will not in itself establish an undertaking’s dominance but it will be evidence of strength on the market. It is only the ability to maintain that strength over time which will constitute dominance. That is why barriers to entry, which give an insight into potential long term strength, are very important. A market share percentage only gives a snapshot of the relative strengths of undertakings at a particular moment. If market shares have changed considerably over a period of time it suggests that there may be effective competition on the market. The Court has relied heavily, some would say too heavily, on market shares. By analysing the Court’s judgments it is possible to lay down some rules of thumb. Market shares nearing 100% are very rare in practice, although some undertakings have come close to that mark.25 In Hoffmann-La Roche, the Court took the view that very large market shares will give rise to a presumption of dominance, unless there were exceptional circumstances.26 The reference to ‘exceptional circumstances’ takes account of potential competition from outside the existing market. Large market shares held for a period of time will give rise to a stronger presumption. A market share of 50% was considered to be very large in AKZO.27 Markets shares below 50% can still be indicators of market strength. When shares are between 30–50%, it is important to compare the undertaking’s market share with its nearest rivals’. If an undertaking has a 40% share and its rivals all have small shares of the remaining market, that undertaking will still have considerable strength in the market. In United Brands, the undertaking in question, UBC, had a market share between 41–45%, but its closest rival only held 16% of the market. It was therefore apparent that UBC had a position of considerable strength. If UBC had a competitor with a 35% market share, the findings in that case may have been very different. An undertaking with similar market strength would have been in a position to exert competitive pressure on UBC. As an undertaking gains a larger market share it is more likely that it will be found to have a dominant position in a market. When market shares are smaller, there are a number of other factors which should be taken into account before a reliable finding of dominance can be made. Although it may be tempting, very large shares will not always indicate the existence of a dominant position. 25 26 27
In Case T-6/89 BPB and British Gypsum v Commission [1993] ECR II-389; [1993] 5 CMLR 32, it was established that the undertakings had a 96–98% market share of the plasterboard market in the UK, and 92–100% share in Ireland. Case 85/76 Hoffmann-La Roche v Commission [1979] ECR 461, p 463; [1979] 3 CMLR 211. Case C-62/86 AKZO Chemie BV v Commission [1991] ECR I-3359; [1993] 5 CMLR 215, para 60.
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However, once dominance is established, the existence of very high market shares may lead to the special responsibilities of ‘super-dominance’.28 Temporary strength on a market does not become dominance until there is an element of permanence. A strong undertaking must be in a position to effectively protect its market share before it will be truly dominant. Barriers to entry There is great debate over what should be included within the term ‘barrier to entry’. The debate exists in both law and economics. For the purposes of this text we shall concentrate on the legal implications of the debate, but the economic arguments will be noted where relevant. A commonly accepted view is that a barrier to entry is any cost which is higher for a new entrant to the market than for an existing market player.29 These costs are important, because where there are few barriers to entry an undertaking with market strength cannot easily protect itself from new entrants to a market should it act inefficiently, either through charging a supra-competitive price or by stifling innovation. In this way, potential entrants to such markets will exert competitive pressures on existing market players, and there will be little need for competition law to intervene and control undertakings with market strength. Where such barriers exist undertakings with market strength are, therefore, more likely to be considered to hold a dominant position, and will be in a better position to exert an anti-competitive influence on the market. Due to the important role of barriers to entry in indicating the existence of dominance, the decision over what is included within the term is vital to the way in which Art 82 works in practice. The debate over inclusion centres around two schools of thought. One school perceives many purported barriers to entry as entirely natural, being related to efficiency. They would argue that a true barrier to entry is a cost to new entrants which was not applicable to the existing market operators when they entered the market.30 This strict view of barriers to entry discounts many, potentially massive, costs that face new entrants, as those problems were also faced by the operators who currently hold positions of market strength. Under this type of analysis, the only real barriers to entry are legal provisions that restrict entry to the market. The narrow view of barriers concentrates on the perceived ability of the market to rectify any inefficiencies without intervention from the law. The other school of thought, linked, for instance, with the Commission approach, views barriers to entry as being much wider, including any factor which would tend to discourage new entrants from entering the market. This is a more practical view which focuses on the actual difficulties faced by potential entrants. This view has been challenged on the basis that it penalises, through the increased likeliness of a finding of dominance, those undertakings which entered a market early and made large investments to become efficient. They paid the costs of entry and through that investment reached a position of strength. Should potential entrants not be forced to do the same? The decision in any jurisdiction to prefer a 28 29 30
Commission Decision (1997/624/EC) OJ L258/1, 1997. On appeal Case T-228/97 Irish Sugar plc v Commission [1999] ECR II-2969; [1999] 5 CMLR 1300. See Stigler, GJ, The Organization of Industry, 1968, Chicago: Chicago UP. See the work of the Chicago school of antitrust economics and, in particular, Bork, R, The Antitrust Paradox: A Policy at War with Itself, 1993, Oxford: Maxwell Macmillan.
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particular school will largely depend on policy/political views of the need for intervention in markets. For that reason, distinctions can be seen between the practice in the Community, UK and USA. In the Community, the Court and the Commission have followed a policy closer to the broader definition of barriers to entry. In their reasoning they have used many factors as being barriers to entry or, as they are sometimes referred to, factors indicating dominance. Legal provisions Statutory or regulatory powers granted by national legislation can act as barriers to entry. One example is intellectual property rights which protect the exclusivity of the right holder. Such rights can effectively grant a monopoly which will be protected through the national courts. 31 Similar results can arise through government licensing restrictions which impede entry to a market.32 Technological advantage The possession of existing and potential access to future technology is also relevant.33 This is one of the areas in which the divergence between the two schools of thought is clearly seen. Advocates of the narrow view of barriers to entry would argue that a new entrant would face the same research costs as the existing market operators faced, and, therefore, any purported technological advantage is not a true barrier to entry but merely evidence of the efficiency of that undertaking. As the Court has accepted technological advantage as a barrier, it indicates its support for the broader view. Financial resources A leading undertaking which has easy access to large amounts of capital, often termed as having ‘deep pockets’, will be able to utilise those sums to protect itself from new entrants. Access to capital is one of the major difficulties for all small and medium-sized enterprises (SMEs). The sheer size of the undertakings, and their international links, were considered by the Court in Continental Can34 and United Brands.35 Economies of scale Some markets, particularly those which demand complex manufacturing processes, require an operation to be on a large scale before high levels of efficiency are reached. Where there are such economies of scale it can be very difficult for new entrants; to be as efficient they must enter the market with a high level of output. If there was a market with one major supplier, but the efficient scale of operation was 60% of that market, it would be very difficult for a new entrant to compete. If the new entrant 31 32 33 34 35
See Case T-30/89 Hilti AG v Commission [1991] ECR II-1439; [1992] 4 CMLR 16; and Case T-51/89 Tetra Pak v Commission [1990] ECR II-309; [1991] 4 CMLR 334. Case 311/84 Tele-Marketing v CLT [1985] ECR 3261; [1986] 2 CMLR 558. See Case 85/76 Hoffmann-La Roche v Commission [1979] ECR 461. See Case 6/72 Continental Can v Commission [1973] ECR 215; [1978] 1 CMLR 199. See Case 27/76 United Brands Continental BV v Commission [1978] ECR 207; [1978] 1 CMLR 429.
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operates below the 60% scale, they would be less efficient. If they operate at the 60% scale, there would be overcapacity in the market.36 Vertical integration An undertaking is vertically integrated when it controls upstream and downstream production facilities. Integration allows an undertaking a much higher level of control over the way in which a product reaches the market. A good example of vertical integration was seen in United Brands.37 For bananas to reach the European market there are many stages in the production process: growing, shipping, ripening and distribution. UBC was highly vertically integrated, controlling its own research and development, plantations, refrigerated ships, ripening stores and distribution system. As UBC had complete control over the product, it had the advantage of commercial stability. A new entrant would be forced to invest heavily or rely on others to provide those services. Product differentiation Product differentiation can be a barrier to entry. It occurs when consumers perceive homogeneous products as being different due to advertising or brand loyalty. Consequently, the consumer will not consider the new entrant’s product as interchangeable, making it difficult for the entrant to break into the market. Again, this phenomenon could be observed in United Brands. Some of UBC’s bananas were marketed under the ‘Chiquita’ brand, the bananas having a small blue sticker attached to them. The branded bananas sold at a premium of around 10%. Despite this, the Court found that there was no real difference in quality between the unbranded and branded product. The consumer was willing to pay 10% more for the branded product as they perceived it as being of a higher quality. A new entrant would not only be compering against the product but also the consumers’, sometimes erroneous, perceptions. The increasing importance, and value, of branding emphasises the increasing level of product differentiation in many markets. Conduct One of the most controversial barriers to entry adopted by the Court has been the conduct of the undertaking in question. The Court adopted this form of reasoning in AKZO.38 Conduct is normally considered when examination of the alleged abuse is made, but here an exclusionary abuse, one designed to discourage new entrants, was seen as being a barrier to entry indicating dominance. This approach can be seen as somewhat circular. Conduct will not normally be considered abusive until an undertaking is in a position of dominance. However, if conduct can indicate dominance, through being a barrier to entry, it could greatly increase the likelihood of such a finding. Such an argument has logical flaws but the reasons for its adoption are straightforward. If an undertaking has a history of reacting to new entrants with exclusionary conduct, it will discourage potential entrants from attempting entry. They will be well aware of the likely response of that undertaking. 36 37 38
Similar problems were discussed in Case T-6/89 BPB and British Gypsum v Commission [1993] ECR II389; [1993] 5 CMLR 32. See Case 27/76 United Brands Continental BV v Commission [1978] ECR 207; [1978] 1 CMLR 429. Case C-62/86 AKZO Chemie BV v Commission [1991] ECR I-3359; [1993] 5 CMLR 215.
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Criticism The Court and the Commission have reacted to criticism over their broad definition of dominance by emphasising that a finding of dominance is not, in itself, a finding of wrongdoing.39 There are no penalties for simply being dominant. As long as the dominant undertaking does not abuse its position, it will not come under the scrutiny of the competition authorities. Such an assertion is of little comfort to undertakings that have achieved a position of market strength, particularly if they have a market share of around 40%. Undertakings will have to be very careful to ensure that their actions do not attract an accusation of abuse, particularly where market shares are very high. The cost of compliance programmes and the potential cost of putting forward a defence against such an accusation may lead to undertakings acting in a manner which may be less efficient, but less likely to fall foul of the competition provisions. It is questionable whether the broad definition of dominance used in the Community truly encourages efficient competition within the Single Market. Nonetheless, the different context in which barriers to entry are considered under US antitrust law means that we should not be over-reliant on the criticisms levelled at the broader definition by some commentators.40
ABUSE Article 82 of the Treaty gives several examples of abusive conduct. The list is purely indicative, leaving the Court a wide discretion in interpreting the basic prohibition. The list includes: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, market or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to the acceptance by the other party of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. The Court, using teleological interpretation of Arts 2, 3(g) and 82 of the Treaty, has given the concept of abuse a very wide scope. The test used is objective, although intent may be a factor in the determination of the level of fine, and there is no requirement that there be a causal link between the existence of dominance and the abuse itself. There are two main forms of abusive behaviour, although some types of behaviour contain elements of both. First, exploitative abuses, which most closely follow the neo-classical economic models concerned with monopolies. The concern is that a monopolist will be in a position to maximise profits by reducing 39 40
Case 322/81 Michelin v Commission [1983] ECR 3461; [1985] 1 CMLR 282. For an insightful examination of the contextual differences between the EC and US systems see, Amato, G, Antitrust and the Bounds of Power, 1997, Oxford: Hart.
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output and increasing the price of his product above a competitive level. By ensuring such a price increase the monopolist will exploit his customers. Sometimes this form of exploitative behaviour is, rather confusingly, known as pro-competitive. This is because without the existence of barriers to entry it would encourage new entrants to enter and compete on the market. If there are barriers to entry the dominant undertaking will not be constrained effectively and may be in a position to charge a supra-competitive price. The second form of abusive conduct is exclusionary abuses. These are where a dominant undertaking adopts behaviour which would be considered perfectly legitimate if the undertaking had no market power but may cause serious concerns when a position of market dominance is held. The Court has held that an undertaking in a dominant position has ‘a special responsibility not to allow its conduct to impair undistorted competition on the Common Market’.41 Therefore, any form of conduct by a dominant undertaking which threatens the competitive structure of the market may well be abusive. Exclusionary abuses have been the subject of Community action more frequently than exploitative abuses. This may be because exclusionary abuses are often easier to prove and can also be seen as more likely to damage the competitive process. They tend to bolster the undertaking’s dominant position, making it more difficult for entrants to challenge the undertaking’s market strength. An undertaking which indulges in exclusionary abuses may also find it easier to engage in exploitative abuses as there is less chance that competition will be encouraged by potentially high returns. Not all types of abuse can be easily categorised between these two forms. Some abuses can fall into both categories. An example is discriminatory pricing—by illustration, the scenario of a dominant undertaking offering different prices to different consumers. This strategy may be adopted in order to exploit some of those consumers who would find it difficult to get supplies elsewhere. But it could also be charging lower prices to customers who may be tempted to obtain supplies from another undertaking. The Court has never found it necessary to explicitly state whether abuses fall into either category, but it is easier to deal with the differing forms of abuse separately.
EXPLOITATIVE ABUSES Excessive prices The classic form of exploitative abuse is the charging of a monopoly price. An undertaking which is unconstrained by competitive pressures no longer takes a price from the market but can maximise profits by setting a higher monopolistic price. The difficulty stems from deciding exactly what price is excessive or unfair. In General Motors v Commission, 42 the Court confirmed that it is an abuse to charge an excessive price. It suggested that prices would be excessive where they do not reflect the ‘economic value’ of the goods. In that case they decided that the prices were not excessive. No real indications were given as to exactly how the
41 42
Case 322/81 Michelin v Commission [1983] ECR 3461; [1985] 1CMLR 282, para 10. Case 26/75 [1975] ECR 1367; [1976] 1 CMLR 95.
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‘economic value’ of a product could be calculated other than by reference to a hypothetical competitive market. In United Brands,43 the Commission used various factors to support their finding of excessive pricing in continental Europe. They compared prices between States, between branded and unbranded bananas, and between different brands of banana. After these comparisons the prices charged on the relevant market appeared to be unjustifiably high. The Court quashed the Commission’s findings as they had failed to examine UBC’s costs before coming to their decision. In subsequent cases there have been two main approaches taken to excessive prices. The first is to examine prices in markets across Europe to determine if one price is prima facie excessive. This approach has its limitations in that different markets have very different cost structures. The variations in taxation, marketing strategy and consumer behaviour may result in different price levels without there being any hint of exploitation. The Court has recognised this by treating such evidence as raising a presumption of abuse which can be rebutted by evidence of differences between the markets on which the comparison was based.44 The second approach has a ‘cost plus’ basis. The Court’s assertion about the need to examine costs in United Brands suggests that a certain level of profit may be excessive. So far the Court has made no statements about what level above cost constitutes a reasonable profit. Many commentators consider direct intervention in market pricing decisions as a step too far for competition law, and that the operation of the market alone should control prices. If high prices are charged, new entrants will be encouraged, and intervention is an inefficient tool ill-suited to perform the task. The difficulties in proving excessive pricing are reflected in Commission policy. It has not made a decision based on excessive pricing since United Brands, and all subsequent cases have been considered by the Court under the Art 234 reference procedure. The amount of information which would need to be gathered before an excessive price can be proved constitutes a major hurdle. Unfair conditions One of the only cases in which unfair conditions have been considered as an abuse, in themselves, is BRT v SABAM.45 SABAM, a performing rights society, was found to have abused its dominant position by imposing on its members obligations which were not absolutely necessary for the attainment of its object. This unfairly restricted the members’ freedom to exercise their copyright as they wished. Many other abuses in which additional unfair conditions are imposed by a dominant undertaking are considered to be exclusionary rather than exploitative. The quiet life The final type of exploitative abuse is also predicted by the neo-classical economic models. Accordingly, a monopolist will not be subject to competitive pressure forcing them to innovate and they can effectively enjoy a ‘quiet life’. It is
43 44 45
See Case 27/76 United Brands Continental BV v Commission [1978] ECR 207; [1978] 1 CMLR 429. Case 110/88 Lucazeau v SACEM [1989] ECR 2811; [1991] 4 CMLR 248. Case 127/73 [1974] ECR 313; [1974] 2 CMLR 238.
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sometimes also known as ‘x-inefficiency’. The Court has recently begun to adopt this form of reasoning in its judgments. In Porto di Genova,46 the Court held that the port dock workers’ refusal to utilise modern technology in their unloading operations constituted an abuse. The use of older methods meant that the unloading of vessels took much longer and was consequently more expensive. As can be observed from the cases mentioned above, the difficulty in proving exploitative abuses stems from the subjective decisions involved. How excessive, unfair or inefficient must a practice be before an abuse is proved? The inherent uncertainty in such a question discourages both the Commission and individual plaintiffs/pursuers from bringing actions. This may be one of the reasons why most of the cases coming before the Commission and the Court have concentrated on exclusionary abuses in recent years.
EXCLUSIONARY ABUSES The majority of abuses dealt with under Art 82 are exclusionary. While this type of abuse is not expressly predicted by the neo-classical economic model of monopoly, discussed in Chapter 1, it is very important in practice. Exclusionary, or anticompetitive, abuses are harmful to competition in that they allow dominant undertakings to protect their market power, usually by discouraging or making it more difficult for new entrants to challenge them on the market. Such abuses are harmful in that they distort the process of competition itself. As we have already discussed, easy entry and exit from markets is important. By discouraging or stopping entry, a dominant undertaking will be able to perpetuate its market power. Furthermore, it will be in a better position to exploit its customers. It is also important that a dominant undertaking should not be able to drive out existing weaker competitors using methods other than normal competition. The Court has shown willingness to consider many forms of conduct as exclusionary, even when they are economically beneficial to the undertaking itself. The concept of abuse in such situations is an objective one. The Court concentrates on the effect of a practice on the structure of the market itself, not necessarily on the benefits to the dominant undertaking. The Court explained its approach in Michelin:47 Article 82 covers practices which are likely to affect the structure of the market where, as a direct result of the presence of the undertaking in question, competition has already been weakened and which, through recourse to methods different from those governing normal competition in products or services based on traders’ performance, have the effect of hindering the maintenance or development of the level of competition still existing on the market.
How far the methods of the dominant undertaking have to differ ‘from those governing normal competition’ is a controversial question. What is normal in competitive situations is perplexing in itself. The Court has taken a broad procompetitive approach, condemning methods of competition which in practice 46 47
Case C-179/90 Merci Convenzionali Porto di Genova SpA v Siderurgica Gabrielli [1991] ECR I–5889; [1994] 4 CMLR 422. Case 322/81 [1983] ECR 3461; [1988] 1 CMLR 282, para 70.
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could be exclusionary but which many critics would argue were ‘normal’ in competitive situations. A controversial example of this broad approach was seen in the Commission’s decision in British Midland v Aer Lingus.48 British Midland were attempting to enter the market for the Dublin to Heathrow air route. The Commission required Aer Lingus, the dominant operator, to allow British Midland to ‘interline’ with it. This meant that British Midland were allowed to use the Aer Lingus computer system to sell its tickets for the same route. Effectively, Aer Lingus were to assist a competitor in entering the market. Although interlining is common on established air routes, it is arguably unusual to interline with a new competitor. The broad approach can partially be explained by examining the objectives of the EC Treaty. Article 3(g) sets out, as one of the Community’s goals, that ‘competition in the internal market should not be distorted’. Thus, the structure of competition itself is one of the main planks upon which the whole Community system is built. The divergent nature of exclusionary abuses can best be noted by examining the types of behaviour that have been found to be abusive. Although the situations examined below are by no means an exhaustive list, it does give a good indication of the types of behaviour that the Court and the Commission are likely to consider as distorting competition, and therefore condemn. Export bans Any attempt by a dominant undertaking to impose export bans on its purchasers will be considered abusive. Obviously, this forms part of the Community’s attempt to stop undertakings re-erecting trade barriers which have been dismantled at State level. Such bans distort trade flows across the Community and intrabrand competition, competition between same brand products. If such bans were put in place, a dominant undertaking would be able to segregate national markets. In United Brands, a clause prohibiting the resale of green bananas49 was considered to act as an export ban and was condemned because it would grant national distributors protection from parallel imports. Export bans may also be dealt with under Art 81, even when they appear to be unilaterally imposed.50 Price discrimination Various types of discrimination on the grounds of price have been deemed to be exclusionary abuses caught by Art 82. The most important cases in this area have considered predatory pricing and discounting. Both of these can be exclusionary as they tend to foreclose markets. New entrants can be discouraged by the dominant undertaking’s pricing policy. Prices can be lowered to drive out an existing competitor or make it difficult for the new entrant to obtain a foothold in the market.
48 49 50
Commission Decision (92/213/EEC), OJ L96/34, 1992. Unripe ‘green’ bananas are much easier to transport long distances. See Commission Decision (96/478/EEC) Adalat, OJ L201/1, 1996; [1996] CMLR 416. On appeal, see Case T-41/96 Buyer v Commission [2000] ECR II-3383; [2001] 4 CMLR 4.
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Discounts and rebates The use of discounts and rebates can also be problematic when an undertaking is in a dominant position. Discounts can be used to tie a customer to a particular supplier. The customer may be aware that if they were to take supplies from a competitor they would lose their discount with the dominant supplier. A new supplier would have to charge prices low enough to compensate their new customers for the loss of those discounts. One particularly damaging form of discount is known as a loyalty rebate’. These rebates are given to a customer who takes a certain percentage of their total requirements from a supplier. For example, they may receive a 10% discount if they buy 75% of their requirements from the supplier, and a 15% discount if they purchase 90% of their requirements. Such a discounting structure may be useful for an entrant firm but as dominant undertakings are the major supplier on a market they can act anti-competitively. The discount tends to tie customers to the dominant undertaking and makes it very difficult for other undertakings to increase their market share. Loyalty rebates were employed in Hoffmann-La Roche,51 alongside some other abusive discounts. The loyalty rebate was connected to an English clause which allowed customers to obtain supplies from other undertakings where they were charging a lower price if the customer informed La Roche of the lower price. While this may appear to be pro-competitive, it meant that La Roche were given full information about their competitors’ pricing policies by their customers, allowing them to react and maintain their market share. This was also deemed to be abusive. It did not matter that the use of these rebates was at the customers’ request, the effects on potential competitors were obvious. Hoffmann-La Roche also used ‘across the board’ rebates. These awarded a discount where a customer purchased all of the supplier’s range of products. This would also tend to foreclose the market in that it would discourage customers from dealing with different suppliers for different products. Another abusive discounting practice was seen in Michelin.52 The Court found that annual discounts awarded by Michelin, on the basis of sales targets set for dealers, amounted to an abuse, as the dealers could not deal with another supplier without fear of a heavy economic loss. The discounts were awarded on an informal basis, for short time periods, and the rates varied enormously between dealerships. It was considered that the ad hoc nature of the rebates, and the lack of certainty faced by dealers, tended to increase the tying effect. In Irish Sugar the Commission appeared to take a stronger view on targeted discounts suggesting that they will always be unlawful as they are ‘clearly aimed at tying customers closely to the dominant company’.53 In Virgin/British Airways,54 British Airways were fined £6.8 m by the Commission for offering commission bonuses to travel agents who exceeded BA sales targets.
51 52 53 54
See Case C-62/86 AKZO Chemie BV v Commission [1991] ECR I-3359; [1993] 5 CMLR 215. Case C-333/94P [1996] ECR I-5951; [1997] 4 CMLR 662. Commission Decision (1997/624/EC), OJ L258/1, 1997, para 152. On appeal Case T-228/97 Irish Sugar plc v Commission [1999] ECR II-2969; [1999] 5 CMLR 1300. Commission Decision (2000/74/EC), OJ L30/1, 2000.
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Although the Court has challenged a number of different types of discount, not all such discounts or rebates are abusive. If the discounts are objectively based on savings made by the producer, they will be justifiable. 55 If, for example, a manufacturer can reduce costs by making volume sales, enabling larger manufacturing runs, those savings can be reflected in discounted pricing. However, any such discounts must be fixed objectively and be open to all customers. The Irish Sugar case suggests there may be an overlap between the case law on discounts and the abuse of predatory pricing in that prices could be considered as predatory where they discriminate between different customers without such objective justification. Predatory pricing This type of abuse is characterised by a selective price reduction which is intended to harm a competitor. The reduction will usually be to levels at or below cost. Because of its economic strength the dominant undertaking will be able to sustain its losses for a limited time, but its weaker competitor, with access to fewer resources, will be driven from the market. Most of the case law in this area stems from the US, but there have been recent cases in Community law. The Court of Justice first upheld the proposition that not all such price competition is legitimate in AKZO.56 The Court set out a formula with which it is possible to calculate whether pricing is ‘predatory’. If prices are below Average Variable Costs, costs which vary according to the quantities produced, predatory pricing is presumed. If prices are between Average Variable Costs and Average Total Costs (fixed costs plus variable costs), pricing will be predatory where it is part of a plan to eliminate competition. This test is very difficult to apply for two main reasons. First, the assessment of what costs should be considered in either category is very controversial. Even if it is possible to categorise costs, the information will be difficult to gather and may change rapidly. Secondly, it will be very difficult to prove the intentions of the dominant undertaking in the grey area between Average Variable Costs and Average Total Costs. In a competitive situation, most firms will effectively be trying to ‘eliminate’ their competitors. That is the nature of competition. The guidelines set out by the Court in AKZO are inherently difficult to apply and may be of little use in practice. Predatory pricing policy was developed in a novel way in Tetra Pak II.57 In the Court’s recent consideration of liquid food packaging, it decided that the undertaking was dominant in the aseptic packaging market but had been involved in abusive predatory pricing in the non-aseptic packaging market, in which it was not dominant. This was a novel extension of the doctrine, but only appears possible where there are associative links between the dominant market and the market in which the predatory behaviour took place. Here, the markets were separate but closely related.
55 56 57
Case 102/77; and see Case 85/76 Hoffmann-La Roche v Centrafarm [1978] ECR 1139; [1978] 3 CMLR 217. See Case 322/81 Michelin v Commission [1983] ECR 3461; [1985] 1 CMLR 282. See Case 85/76 Hoffmann-La Roche v Commission [1979] ECR 461, p 463; [1979] 3 CMLR 211.
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In Irish Sugar,58 the Commission appeared to take a rather different approach to predation. It concentrated on the selectivity of Irish Sugar’s price cuts rather than their relation to costs. Irish Sugar were cutting prices in the border region to protect the sugar market in the Republic of Ireland form competition from imports from Northern Ireland. Although this point was not directly addressed by the Court of First Instance, it indicates that where price cuts are targeted at customers who might seek supplies from a competitor this may be enough to found a finding of predatory pricing unless all customers are offered the favourable terms.59 Refusal to supply Where a dominant undertaking refuses to supply goods or services to another undertaking, this may, in some circumstances, constitute an abuse. In normal situations, an undertaking will have the freedom to supply whomsoever they wish, freedom of contract being a basic principle. But, in some cases, competition law intervenes where a refusal has serious anti-competitive implications. Refusals to supply will be dealt with in more detail below. Tie-ins As discussed above, an undertaking can be dominant in one market and abuse its dominance in another. With tie-ins, a dominant undertaking attempts to extend its market power from the market in which it is dominant to another market. This usually involves a requirement upon customers to obtain supplies of the tied product when purchasing the tying product, in relation to which the supplying undertaking has a dominant position. In this way, dominance over the market of the tying product is extended into another market. If a customer wants to buy the dominant product, they must also purchase the tied product. They may have been able to obtain that product on better terms elsewhere, or they may not want it at all. In that sense, the abuse is exploitative. But it is also exclusionary in that it forecloses the tied market. Other suppliers of the tied product will struggle to find outlets for their version of the product as most customers will have been forced to obtain tied supplies from the dominant undertaking. A simple example of a tying arrangement was evident in Napier Brown/British Sugar.60 A sugar processor forced customers to buy bulk sugar at delivered prices, the price including delivery. The purchase of haulage services was therefore tied to the purchase of the sugar. Other haulage undertakings would have found it very difficult to break into the market. The Court’s approach to tying arrangements was further explained in Hilti’.61 A manufacturer of nail guns refused to supply cartridge strips containing the charge which fired the nails, and over which they
58 59 60 61
Commission Decision (1997/624/EC), OJ L258/1, 1997. On appeal Case T-228/97 Irish Sugar plc v Commission [1999] ECR II-2969; [1999] 5 CMLR 1300. See Andrews, P, ‘Is meeting competition a defence to predatory pricing?—the Irish Sugar decision suggests a new approach’ [1998] ECLR 49. See, also, Case C-395/96 Compagnie Maritime Belge Transports SA v Commission of the European Communities [2000] ECR I-1365; [2000] 4 CMLR 1076. Commission Decision (88/518/EEC), OJ L284/41, 1988; [1990] 4 CMLR 196. Case C-53/92P Hilti AG v Commission [1994] ECR I-666; [1994] 1 CMLR 590.
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had intellectual property rights, without customers also purchasing the corresponding nails. Suppliers of Hilti-compatible nails complained about the tie. In its decision, the Commission concentrated on two particular consequences of the abuse: the extension of monopoly power into a new market, and the foreclosure of competitors. Hilti were protected from competition in the market for Hilti-compatible cartridge strips as they had registered design rights. They were attempting to extend their power over that market into the market for Hilticompatible nails where they were much more vulnerable to competition. By extending that power Hilti were effectively seeking to exclude potential competitors from the secondary market in Hilti-compatible nails. All potential purchasers of Hilti-compatible nails would have already been required to obtain supplies with the cartridge strips and would not need to buy nails from any other competing source. No viable competition would therefore be able to develop on the market. Hilti’s attempts to justify the tie were dismissed. Mergers Article 82 has, in the past, been used to control mergers. In Continental Can,62 the Court held that it was an abuse for a dominant undertaking to strengthen its position in a market by merging with a competitor. Now, mergers are controlled by a more sophisticated system, under Reg 4064/89,63 but the judgment in this case does show the Court’s concern to maintain a competitive structure within a market.
SPECIFIC EXAMPLE: REFUSAL TO SUPPLY As has been noted above, the treatment of refusals to supply is a particularly controversial area. Most legal systems have shied away from insisting that an undertaking be forced to contract when they do not see it to be in their best interests to do so. However, under Community law the basic rule is that a refusal to supply by a dominant undertaking must be objectively justified. The justification must not be based solely on the undertaking’s commercial interests but on more general concerns.64 In ABG,65 a refusal to supply was justified on the basis of a global shortage of the goods in question, and in Leyland DAF v Automotive Products66 the English Court of Appeal considered that an undertaking’s failure to pay for previous contract goods constituted sufficient justification. There are three broad categories in which Art 82 has intervened, although it is arguable that the latter two cases are specific examples of the former. (a) where a refusal to supply is used to damage or deter a competitor; (b) where there is a refusal to grant a license of intellectual property rights; or (c) where there is a refusal to supply new competitors and ‘essential facilities’. 62 63 64 65 66
See Case 6/72 Continental Can v Commission [1973] ECR 215; [1978] 1 CMLR199. OJ L177/14, 1990, as amended. See, in particular, Council Reg (1310/97), OJ L180/1, 1997. Commission Decision (87/500/EEC) BBI/Boosey & Hawkes (Interim Measures), OJ L286/36, 1987; [1988] 4 CMLR 67. Commission Decision (77/327/EEC) ABG, OJ L117/1, 1977. [1994] 1 BCLC 245.
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To damage or deter a competitor The first category covers the most obvious threat to competition raised by a refusal to supply, in that such a refusal may be linked to an attempt to eliminate an actual or potential competitor. A clear example of an attempt to eliminate a competitor was seen in Commercial Solvents. 67 Commercial Solvents were the dominant supplier of a bulk chemical used in the production of pharmaceuticals. Another undertaking had purchased supplies of the chemical for manufacturing purposes but were refused further supplies when Commercial Solvents decided to expand into the market for the finished product. The Court held this to be an abuse. By refusing to supply the raw material, Commercial Solvents had effectively removed its main competitor. In subsequent cases, such as United Brands68 refusals to supply which did not seek to eliminate, but which were likely adversely to affect competitors, have also fallen foul of Art 82. In United Brands, the mere fact that a distributor had been involved in a competitor’s promotional campaign did not justify the refusal to supply that distributor. An overzealous reaction to a new competitor may also be seen as abusive. In BBI/Boosey & Hawkes69 an established manufacturer of brass band instruments refused to supply one of its existing distributors after they started producing competing instruments. The Commission was of the opinion that a dominant undertaking can take steps to defend itself when faced by new competition, but those steps must be proportionate to the threat. In this case, the new competitor’s level of production was such that an outright refusal to supply was disproportionate. Obviously, it will be difficult for a dominant undertaking to decide how to react to new competition in these circumstances. The interpretation of the proportionality doctrine can be very difficult. Intellectual property rights The co-existence of intellectual property rights and competition law has always been difficult. Intellectual property rights encourage innovation by rewarding the innovator with exclusivity, but that may in turn become statutory dominance which may be abused. Article 82 makes an attempt to balance the various goals. It has always been held that the ownership of an intellectual property right was not, in itself, an abuse but the use of such a right may amount to one.70 One area where abuses have been found is in relation to refusal to grant licenses of such rights. One of the most important cases in recent years concerned the licensing of copyright in TV listings. Magill, an Irish company wished to publish a weekly TV guide listing all the programmes which could be viewed in the Republic of Ireland. Those programmes included those broadcast by RTE, the national Irish station, BBC and ITV. All three broadcasters published weekly guides of their own programmes and licensed newspapers to publish daily listings. They all refused to grant Magill a license to publish a weekly listing. This refusal meant that no comprehensive guide existed and consumers were forced to purchase three separate weekly
67 68 69 70
See Cases 6 and 7/73 Commercial Solvents v Commission [1974] ECR 223; [1974] 1CMLR 309. See Case 27/76 United Brands Continental BV v Commission [1978] ECR 207; [1978] 1 CMLR 429. Commission Decision (87/500/EEC), OJ L286/36, 1987; [1988] 4 CMLR 67. Case 24/67 Parke, Davis & Co v Probel [1968] ECR 55; [1968] CMLR 47.
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guides. The Commission held that the undertakings had abused their dominant position by preventing a new product, the comprehensive guide, from reaching the market.71 They had used the copyright in the listings beyond the purpose for which the right was granted. On appeal, the Court concentrated on the fact that the undertakings were denying consumers a product for which there was demand.72 In addition, they were attempting to reserve a secondary market, TV guides being a secondary market to broadcasting, for themselves by denying others the basic information required. New competitors and essential facilities The third controversial area of concern is refusal to supply new customers, especially when the supply of the goods or service would allow the new customer to compete with the dominant undertaking in a secondary market. Most of the cases in this area have dealt with the refusal to supply a service. In some cases the Court has gone some way towards holding that a dominant undertaking acts abusively if it fails to help a new competitor enter the market. An example of this extension was seen in London-European/Sabena73 where Sabena was held to be abusing its position by refusing London-European access to their computerised reservation system. London-European wished to introduce an air service between London and Brussels in competition with Sabena. To compete effectively it needed access to Sabena’s reservation system. The Commission decided that access to the system was essential for competition to develop and, therefore, refusal of access to the service was an abuse. This was the starting point for a number of cases in recent years where competitors have been granted access to what has become known as an ‘essential facility’, particularly where competition would not be possible without access. In Sealink/B and I—Holyhead: Interim Measures74 the potential impact of the doctrine was demonstrated. Sealink owned the port of Holyhead and operated ferry services from it. The port was deemed to be an essential facility and Sealink was forced to grant B & I, a competing ferry operator, access on a nondiscriminatory basis. The Court clarified its position on a new competitor’s access to an essential facility in Oscar Bronner.75 The publisher of an Austrian daily newspaper, Bronner, sought access to a dominant rival’s newspaper home delivery system. The Court set out the conditions upon which the essential facilities doctrine could be invoked: (i) the facility must be indispensable to carrying on that person’s business, in that there are no potential substitutes; and (ii) there must be technical, legal, or economic obstacles which make it impossible or unreasonably difficult to replicate the facility. The Court was of the view that there were no such obstacles to Bronner, alone or in co-operation with other publishers, in setting up an alternative distribution system. It was also made clear that it was not enough to 71 72 73 74 75
Commission Decision (89/205/EEC) Magill TV Guide: ITP, BBC and RTE v Commission, OJ L78/43, 1989; [1989] 4 CMLR 757. Cases C-241 and 242/91P RTE and Others v Commission [1995] ECR I-743; [1995] 4 CMLR 718. For further consideration of the area, see Case T-504/93 Tierce Ladbroke v Commission [1997] ECR II-923. Commission Decision (88/589/EEC), OJ L317/47, 1988; [1989] 4 CMLR 662. [1992] 5 CMLR 255. Case C-7/97 Oscar Bronner GmbH & Co KG v Mediaprint Zeitungs und Zeitschriftenverlag GmbH & Co KG [1998] ECR I–7791; [1999] 4 CMLR 112.
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argue that the alternative service would not be economically viable given the low circulation of Bronner’s newspaper.
COLLECTIVE DOMINANCE One of the most interesting areas in recent years has been the attempt by the Commission to control oligopolistic markets using Art 82. An oligopolistic market is one that has few suppliers, none of which have market dominance, but all of which are relatively large. A small number of undertakings exercise collective market power. Although all oligopolistic markets will be different, they will tend to have similar features. There will usually be a small number of sizeable undertakings operating in a market with homogenous products. The market may also be characterised by limited price competition and parallel behaviour. It is because of this tendency towards limited competition and parallelism that the competition authorities are interested in finding ways to regulate such markets. An example of an oligopolistic market is the petrol market in which a small number of oil companies sell nearly all the UK’s fuel. It is now very common to see markets becoming oligopolistic in Europe as competition drives out weaker competitors and mergers lead to increased market concentration. Although oligopolistic markets do not raise the same problems as monopolies, they can have similar effects. Often, oligopolists do not compete strongly on price, and there is little incentive to compete in other ways. This is because of what is known as ‘oligopolistic interdependence’. In a market with three equally strong undertakings, known as a tight oligopoly, no one firm would be dominant. In a truly competitive situation, a price cut by one undertaking should result in an increase in profit. Customers would switch to the lower priced good. But, in a tight oligopoly, such a cut would result in a swift response from the other undertakings. They would quickly be aware of the price change and would be forced to respond with a similar cut. As there are few competitors, it is easy to keep track of your rivals’ actions. The reaction of the competitors would quickly negate any rise in market share. As all the undertakings will be charging at the same level, market shares will remain at similar levels as before. The end result of a price cut will be a similar market share but much lower levels of income, as the unit price will have dropped. A unilateral price cut, therefore, would bring little benefit. Similarly, there will be little benefit from a unilateral price increase. If one undertaking were to increase its prices its customers would soon switch to purchase from the undertaking’s rivals whose prices remain at the original level. Such an increase would simply result in a loss of custom. As unilateral price changes appear to have little merit, it follows that price competition tends to stagnate. Although the undertakings may try to compete in other ways, through service or product differentiation, the competitive process is very limited, with no benefits passing on to the customer or the economy. When oligopolists become aware of this situation they become very sensitive to each other’s actions, and aware that they have limited opportunities to increase their profit levels. At this stage ‘game theory’ and practice suggest that an even more worrying development may occur. When the oligopolists become sensitive to the situation they are in, it becomes apparent that they can maximise their profits by gradually increasing their prices. If they do this simultaneously, they will not lose any market share, but 100
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will receive a higher unit price. They effectively act as a single ‘monopolistic’ entity. At this stage, they realise that they are interdependent and can work together to maximise profits. The difficulty competition law has with this type of market is that there is little need for formal organisation of such a scheme; it can occur through the simple operation of the market. Most of the regulatory tools used in competition law are aimed at dealing with market behaviour rather than market structure itself. While the theory above can help to explain apparent parallelism on oligopolistic markets, it does not satisfactorily explain how the simultaneous action comes about. Traditional theory suggests that a price rise will result in customer desertion, and, therefore, it is unlikely that an undertaking would be willing to risk such desertion without some form of guarantee that its competitors would follow. There are several possible explanations. First, a branch of economics known as ‘game theory’ has attempted to explain business behaviour by examining the way in which business decisions are taken as part of a game of strategy. This theory is interesting in that it helps to explain why such behaviour might come about, but not how it occurs in practice. The second possible explanation relies on the existence of a ‘price leader’. The price leader is an undertaking in the market that traditionally signals price rises to other undertakings, which then habitually follow the lead of that undertaking because it has a good eye for changes on the market. If that price leader becomes aware of its position, it will be able to gradually increase prices in the knowledge that the others will follow and, hence, that profits will be maximised. The other undertakings will be aware that a failure to follow could result in a destructive price war which would be harmful for all. As oligopolistic markets differ greatly no single theory can hope to explain all the potential scenarios, but the suggestions above may help to describe some of the problems that are likely to be encountered. To control the competitive problems in oligopolistic markets, the Commission have been keen to extend their ability to regulate under Art 82 by using the concept of collective dominance. It is argued that such a concept was envisaged by the drafters of the Treaty, wherein it states in Art 82, that ‘Any abuse by one or more undertakings of a dominant position’ will be prohibited. Some view this as a reference to the possibility of more than one undertaking being collectively dominant. The Commission tried to raise the possibility of collective dominance in Hoffmann-La Roche76 but the Court rejected it on the basis that dominance requires unilateral action. The Court relaxed its position in Ahmed Saeed77 where it held that Arts 81 and 82 could be applied to the same situation. It was not until the Court of First Instance dealt with Italian Flat Glass78 that the position of collective dominance was clarified. Three Italian undertakings in the automotive and non-automotive flat glass markets had aggregate market shares of 79% and 95% respectively. The Commission found that they had formed a cartel contrary to Art 81 but also found that there was a collective dominant position as
76 77 78
See Case 85/76 Hoffmann-La Roche v Commission [1979] ECR 461; [1979] 3 CMLR 211. Case 66/86 Ahmed Saeed Flugreisen v Zentrale zur Bekämpfung Unlauteren Wettbewerbs [1989] ECR 803; [1990] 4 CMLR 102. Cases T-68, 77 and 78/89 Società Italiana Vetro v Commission [1992] ECR II-1403; [1992] 5 CMLR 302.
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the undertakings ‘present themselves on the market as a single entity and not as individuals’.79 The Commission based this decision on the existence of a tight oligopoly, the long term stability of market shares, the interdependence of their decisions, and the structural links between them. When the case reached the CFI the findings on Art 81 were struck down, as the Commission had failed to prove the case to the necessary standard. When it came to consider collective dominance, the CFI adopted the interpretation of Art 82 suggested above, allowing for collective dominance, and stated: There is nothing in principle, to prevent, two or more independent economic entities from being, on a specific market, united by such economic links that, by virtue of that fact, together they hold a dominant position vis à vis the other operators on the same market80
The actual decision of the Commission was overturned as it had ‘recycled’ the facts found under Art 81 and had not detailed the necessary findings on the nature of the market. However, the concept of collective dominance set out by the CFI in Italian Flat Glass was approved by the ECJ in Almelo.81 The Commission went on to use the CFI’s findings in Flat Glass in its Cewal Decision.82 The Commission decided that the shipping conference, Cewal, had abused its collective dominant position. Shipping conferences are organisations of shipping companies which plan schedules and pricing levels for particular shipping routes. They were exempted from the prohibition in Art 81 by Council Reg 4056/86.83 Cewal controlled 90% of the market and had abused its position by using ‘fighting ships’ against their main competitor. On appeal, before the Court of Justice,84 the nature of the ‘economic links’ required for a finding of collective dominance was clarified. Although there was strong evidence of linkage through the conference agreement, the Court did not find it necessary to limit its discussion to such formal arrangements. It noted that: The existence of a collective dominant position may therefore flow from the nature and terms of an agreement, from the way in which it is implemented and, consequently, from the links or factors which give rise to a connection between undertakings which result from it. Nevertheless, the existence of an agreement or of other links in law is not indispensable to a finding of a collective dominant position; such a finding may be based on other connecting factors and would depend on an economic assessment and, in particular, on an assessment of the structure of the market in question.85
This suggests that it may be possible to show that there are ‘links’ between undertakings which stem entirely from the structure of the market. This would obviously be useful in dealing with undertakings in oligopolistic markets. The 79 80 81 82 83 84 85
Commission Decision (89/93/EEC), OJ L33/44, 1989; [1990] 4 CMLR 535. [1992] ECR II-1403; [1992] 5 CMLR 302, para 358. Case C-393/92 Municipality of Almelo v Energiebedrijf Ijsselmij NV [1994] ECR I-1477, an Art 177 reference. Commission Decision (93/82/EEC), OJ L34/20, 1993; [1995] 5 CMLR 198. OJ L378/4, 1986. Case C-395/96 Compagnie Maritime Belge Transports SA v Commission of the European Communities [2000] ECR I-1365; [2000] 4 CMLR 1076. Ibid, para 45.
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Court of First Instance went somewhat further in Gencor86 when it set out that ‘there is no reason whatsoever in legal or economic terms to exclude from the notion of economic links the relationship of interdependence existing between the parties to a tight oligopoly’.87 But it must be noted that the Gencor case was discussing the creation of a collective dominant position within the terms of the Merger Regulation. Although the same terminology is used in Art 82 and the Merger Regulation, the control of mergers does raise a somewhat different set of issues.88 The developments in these cases should bring the control of oligopolistic markets more securely within the terms of Art 82, but will also create pressure on the Commission to present convincing economic evidence.
CONTROL OF DOMINANCE IN THE UK Introduction This section shall look at the anti-monopoly laws in the UK. It shall be divided into four general sections relating to the Fair Trading Act 1973, the Competition Act 1980, the process of reform and the Competition Act 1998. During the last three decades the Fair Trading Act 1973 has been the most important provision in UK anti-monopoly laws, though there has been continued debate regarding its reform and/or replacement by new rules. The Competition Act 1998 has introduced a new era for UK competition law and it is anticipated that it will become the primary legislation in UK competition law and practice. This chapter will deal with the 1973 Act and, briefly, the Competition Act 1980, before considering the reform process, in order to facilitate an understanding of the rationale for the introduction of the new legislation. The Green Paper in 199289 was important in this process and made three alternative recommendations for reform of the 1973 Act and Competition Act 1980. The three options were as follows: (1) retain the existing legislation but extend it to the improper use of property rights and introduce some procedural changes; or (2) repeal the existing legislation and replace totally with provisions based generally on Art 82 including enhanced investigation and fining powers; or (3) introduce a prohibition system based on Art 82 in tandem with the monopoly provisions under the Fair Trading Act 1973 and repeal the monopoly provisions of the 1980 Act. The Government opted for the status quo and no substantive changes to the legislation were brought forward until the Competition Act 1998 proposals were first introduced by the then recently installed Labour Government. The effect of the Competition Act 1998 is to adopt Option 3. The Competition Act 1980 86 87 88 89
Case T-102/96 Gencor Ltd v Commission [1999] ECR II-753; [1999] 4 CMLR 971. Ibid, para 276. For the discussion of collective dominance under the Merger Regulation, see Chapter 6. See, also, Niels, G, ‘Collective dominance: more than just oligopolistic interdependence’ [2001] 5 ECLR 168. Abuse of Market Power, Cm 2100, 1992.
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provisions on monopoly control have been repealed by the 1998 Act, although they shall be briefly reviewed here. The Fair Trading Act 1973 has been retained due to the perceived advantages of flexibility and pragmatism under its provisions for control of structural and complex monopolies. One of the principal reasons is its suitability for dealing with problems in oligopolistic markets. All existing provisions under the 1973 Act have been retained although the Monopolies and Mergers Commission has been replaced by the Competition Commission. The Competition Act 1998 has provided, in addition to the anti-monopoly controls of the 1973 Act, a new prohibition on the abuse of a dominant position based on Art 82. The new prohibition will be enforced in a dramatically different manner from previous practice. The DGFT will enforce the prohibition directly although there will be a right of appeal to the Competition Commission acting as an appeals tribunal and thereafter to the High Court/Court of Session. It will be particularly interesting to view the developing relationship between the two sets of controls under the 1973 Act and 1998 Act. They are aimed at different issues within the same problem area but there is a great degree of overlap. It is anticipated that the prohibition provisions of the 1998 Act will become the dominant mode of enforcement with exceptional resort to the provisions under the 1973 Act. However, a similar trend was also expected with the introduction of the Competition Act 1980 and yet the Fair Trading Act 1973 retained its central role in UK competition law. An insight can be gained into past experience under the antimonopoly controls from the Annual Report of the DGFT.90 Future reports may also prove helpful in determining the DGFT’s enforcement policy in relation to the substantive provisions and procedures available under the two statutes. It should be noted that, for reasons of space, the particular problems involved in the regulation of utilities will not be dealt with in this book.
THE FAIR TRADING ACT 1973 The basic structure under the Act is that a ‘monopoly situation’ will be referred by either the DGFT or the Secretary of State for Trade and Industry to the Competition Commission.91 Most references in the following sections will be to reports completed by the MMC given that there have been relatively few reports to date by the Competition Commission. After a period of investigation, the Competition Commission will compile and forward a report to the Secretary of State. Thereafter, the Secretary of State will decide what action to take on the basis of the report, usually on the advice of and with assistance from the DGFT.
90 91
See, also, for earlier analysis of MMC reports under the 1973 Act, Pass, CL and Sparkes, JR, ‘Dominant firms and the public interest: a survey of the reports of the British Monopolies and Mergers Commission’ (1980) Antitrust Bulletin 437. The reporting panel of the Competition Commission assumed the functions of the Monopolies and Mergers Commission under the 1973 Act from 1 April 1999.
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Investigation and information gathering The DGFT has a duty to gather information about monopoly situations and uncompetitive practices92 and to give advice to and assist the Secretary of State.93 In pursuing his duties, the DGFT has powers to require information under s 44 of the Act as extended by the Companies Act 1989. Section 44 allows him, where he believes there to be a structural monopoly which may be referred by him to the Competition Commission, to require any person, who supplies or is supplied with the goods or services which are the subject matter of the enquiry, to provide him with information about his or her business. He also has more restricted powers under s 45 relative to what is termed a ‘complex monopoly’. Information may be sought under this provision from a limited range of people, with the consent of the Secretary of State. There are penalties under s 46 for failure to give replies or giving false information under these provisions.94 Part III of the Competition Act 1998 strengthens the existing investigative powers of the DGFT under the Fair Trading Act 1973. Monopoly references A monopoly reference may be made to the Competition Commission where a monopoly situation exists or may exist. In practice, most monopoly references are made by the DGFT although, under s 50, only the Secretary of State has power to make references which relate, for instance, to electricity, mail, gas supplied to tariff customers, and certain transport and agricultural matters. The Secretary of State also has exclusive power to refer specified practices which are considered to be anti-competitive. These are general references of practices which are anticompetitive but not necessarily involving a particular company or within a particular industry. A notable example resulted in the MMC report, Parallel Pricing, in 1973.95 Most monopoly references are made under s 49. These are references which are ‘not limited to the facts’. This effectively means that the Competition Commission is asked to report under s 84 of the Act on the public interest implications of the monopoly situation being referred to them. The Competition Commission is normally asked to look at specified practices or activity within a market, but the monopoly reference may be made under s 49(2) limiting the Competition Commission investigation and consideration to the practices of a specified undertaking. Perhaps, with the introduction of the new prohibition under the Competition Act 1998, this latter provision will become less important. Indeed, most references under the anti-monopoly provisions of the 1973 Act concern specified practices in a market and are not confined to one company. This distinct practice may provide the rationale for enforcement selection between the two statutes by the DGFT. A notable recent instance of specified practices in a
92 93 94 95
Fair Trading Act 1973, s 2(2). Ibid, s 12. Ibid, s 46(2) and (3), respectively. The Companies Act 1989, s 151, introduced a new s 93B into the 1973 Act, creating an offence for giving the DGFT, Competition Commission or Secretary of State false information in connection with their functions under the Fair Trading Act 1973. Cmnd 5330, 1973.
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market resulted in the MMC report, Electrical Goods.96 A monopoly reference may alternatively be made under s 48 of the Act. This allows references ‘limited to the facts’ to be made, in relation to which the Competition Commission is not asked to report on the public interest. Monopoly situations The Act provides for monopoly situations to be referred, by either the DGFT or the Secretary of State, to the Competition Commission. There are three broad categories of monopoly situation which may be referred. These are in relation to: (a) goods (s 6); (b) services (s 7); and (c) exports (s 8). Within these categories there are two main types of monopoly situation which may be referred, although these can also be divided into a principal and a subsidiary monopoly situation. For reasons of simplicity, the discussion below shall concentrate on the provisions on monopoly situations in relation to goods under s 6 of the Fair Trading Act. Virtually identical provisions exist under s 7, in relation to services, and s 8 also contains broadly similar provisions concerning exports, although these have been resorted to infrequently. Scale or structural monopoly situations (a) A scale or structural monopoly situation exists when 25% of the goods of any description are supplied in the United Kingdom by the same person.97 (b) A scale or structural monopoly situation also exists where 25% of the goods of any description are supplied by ‘interconnected bodies corporate’.98 This will be the case where the relevant bodies have separate legal personalities but are, in effect, economically part of a single economic unit. Accordingly, a scale or structural monopoly situation exists simply where the 25% threshold is met by a company or a linked group of companies. Satisfaction of the threshold is made more straightforward by the omission of any reference to this percentage relating to a market. The ‘goods of any description’ test can be easily satisfied by the referring authority if necessary. Complex or behavioural monopoly situations (a) A complex (or behavioural) monopoly situation may arise under s 6(1)(c) where at least 25% of the goods of any description are supplied to, or by, two or more persons who ‘whether voluntarily or not, and whether by agreement or
96 97 98
Monopolies and Mergers Commission, Electrical Goods: A Report on the Supply in the UK of Washing Machines, Tumble Driers, Dishwashers and Cold Food Storage Equipment, Cm 3676-I and II, 1997. Fair Trading Act 1973, s 6(1)(a) Ibid, s 6(1)(b).
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not’ so conduct their respective affairs in any way to prevent, restrict or distort competition in the production or supply of those goods.99 (b) Section 6(1)(d) provides for a subsidiary, and fairly insignificant, type of complex monopoly situation where, as a result of the behaviour, no goods are supplied in the UK at all. Complex monopoly situations and oligopoly The complex monopoly provisions under the Fair Trading Act are useful in allowing for the possibility of oligopolistic markets to be referred to the Competition Commission, and any problems or market failure therein to be considered under the public interest test. This has been particularly important due to the difficulties the UK’s restrictive trade practices legislation100 encountered in dealing with the parallel conduct, notably parallel pricing, which may be anticipated in many oligopolistic markets. In such markets, price competition may be restricted or the parties may indulge in similar practices without the need for an agreement which could be regulated. Enabling the investigation of oligopolistic markets under these provisions is helpful because there may be a variety of reasons for the market failure, not necessarily based on improper behaviour or the existence of a cartel. The complex monopoly provisions allow markets where more than one firm is involved to be referred as a monopoly situation, without the necessity of proving the existence of an agreement, provided the 25% threshold is satisfied. Nonetheless, the provision has been criticised for its inclusion of the criterion that a restriction, distortion or prevention of competition needs to be identified before a reference can be made. In the past, the MMC has taken a fairly wide view of when this is satisfied, by considering, for instance, that it is not necessary that competition is altered detrimentally.101 However, it has been argued that this requirement should be omitted at the reference stage and that a new category of structural monopoly situation should be created, aimed directly at oligopolies leaving the investigation of any restriction of competition to the Competition Commission.102 No such reform was introduced by the Competition Act 1998. Indeed, a key factor in retaining the Fair Trading Act monopoly provisions, in contrast to the Chapter II prohibition in the 1998 Act, was its effectiveness and adaptability in dealing with oligopoly issues. For instance, the eagerly awaited Competition Commission report on the clearing banks in the UK is based on the complex monopoly provisions. Nonetheless, recent Government documents have suggested that they should be generally replaced by a new set of provisions with a focused competition based test and decision making by independent competition authorities, involving a more flexible reference test and a duty for the Competition Commission to develop appropriate remedies.103
99 Ibid, s 6(2). 100 Restrictive Trade Practices Act 1976, which has been effectively repealed by the Competition Act 1998. 101 The Supply of Beer, Cm 651, 1989. 102 Generally, see, eg, Brent, R, ‘The meaning of complex monopoly’ (1993) 56 MLR 812. 103 See HM Treasury, ‘Productivity in the UK: enterprise and the productivity challenge’, June 2001, paras 3.19–3.22, and, Productivity and Enterprise: A World Class Competition Regime, Cm 5233, 31 July 2001.
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The reporting stage The Competition Commission will have responsibility for the reporting functions of the MMC. There are various matters which the Competition Commission is required104 to report upon after carrying out its detailed investigation. These are: (a) (b) (c) (d) (e)
whether a monopoly situation exists; the type of monopoly situation; in whose favour it operates; what steps are taken to exploit or maintain it; and what conduct is attributable to it.
In a full reference (reference not limited to the facts), the Competition Commission is also required to consider the public interest implications in relation to the monopoly situation and make recommendations if it considers that these adverse effects can be remedied. One aspect of the monopoly controls under the Fair Trading Act 1973 which was criticised in the past was the apparent duplication of effort by the Commission and the DGFT. The criticism is based on the notion that the DGFT is in effect required to establish whether there is a genuine competition related concern in relation to the purported ‘monopoly situation’ which may now be referred to the Competition Commission, which will set out to establish the same issue. Accordingly, there have been a variety of proposals to provide a unitary competition authority in order to prevent the two authorities covering much of the same ground in their work.105 In effect, this has been implemented in relation to the new prohibitions, but the existing system of reference and report by two separate authorities remains intact under the 1973 Act. Indeed, these criticisms of the institutional structure under the 1973 Act were usually founded on antipathy towards the public interest analysis of the Commission, by those who advocate that competition authorities should deal only with competition issues. The Competition Commission is required to conduct its investigation and produce a report to the Secretary of State within the specified time limit.106 Upon receipt of a reference, the Commission will carry out detailed investigations of the market under reference. A group, usually of between four and six members, is appointed by the Chairman to conduct the inquiry. At the outset, the Commission will identify interested parties, such as consumer bodies, and approach them for evidence. Press advertisements invite others to submit their views or any pertinent information and site inspections are carried out. A series of private oral hearings with the parties may be held in order to confirm factual evidence which has been obtained. Thereafter, the Competition Commission will focus on the public interest issues arising from the monopoly situation. The main parties will be sent an ‘issues letter’ in which they are given advance notice of: (a) the issues the group proposes 104 The Court of Appeal, in R v Monopolies and Mergers Commission ex p Visa International [1991] CCLR 13, confirmed that the MMC is required to deal with each of these matters specifically in its reports. 105 For instance, the CBI consistently adopted this approach. See, also, House of Commons Trade and Industry Committee, Report on Monopolies, Fifth Report, HC 249-I, 1995. 106 Fair Trading Act 1973, s 55. This limit may be extended under the power available in s 55(2). The deadline for the report into the supply of raw milk in Great Britain was extended under this provision.
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to raise at the oral hearing; and (b) any information the parties require in order to respond fully to the issues. As part of the Commission’s drive to enhance transparency, it is now standard practice for the Commission to combine the issues letter with an indication of the proposed hypothetical remedy. This issues and remedies statement is published with a view to further comment from interested parties. A public interest hearing will normally be held at which the parties will be represented. Thereafter a draft report will be compiled and forwarded, with the exception of the public interest conclusions, to the parties to allow them to make submissions on the accuracy of any information. After this process, the Competition Commission will submit its final report to the Secretary of State within the specified time limit. The Competition Commission’s procedures and findings are subject to judicial review, although the courts have in the past demonstrated an unwillingness to interfere in the MMC’s procedures as long as it had acted reasonably. The public interest Definition and scope The current definition of the public interest is to be found in s 84 of the 1973 Act. It is instructive to read the section in full to acquire a ‘flavour’ for the goals of this key component of UK competition law and the functions of the Competition Commission. It requires the Competition Commission to: …take into account all matters which appear in the particular circumstances to be relevant, and among other things, shall have regard to the desirability: (a)
of maintaining and promoting effective competition between persons supplying goods and services in the UK; (b) of promoting the interests of consumers, purchasers and other users of goods and services in the UK in respect of the prices charged for them and in respect of their quality and the variety of goods and services supplied; (c) of promoting, through competition, the reduction of costs and the development and use of new techniques and new products, and of facilitating the entry of new competitors into existing markets; (d) of maintaining and promoting the balanced distribution of industry and employment in the UK; (e) of maintaining and promoting competitive activity in markets outside the UK on the part of producers of goods, and of suppliers of goods and services, in the UK.
This section is notable for the breadth of interests which the Competition Commission may consider within the public interest remit. It is also significant that there is no presumption in favour of competition and there is no weighting of the conflicting criteria which may be considered. They are merely guidelines to assist the Competition Commission, none of which are overriding. This section is an important example of the principal characteristics enshrined in the 1973 Act: pragmatism, discretion and the role of politics. Over the years there have been repeated demands for reform of the basis of reporting on the public interest, for instance, the House of Commons Trade and Industry Committee in 1995107 was 107 Fifth Report, HC 249-I, 1995.
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critical of the uncertainty and unpredictability of the public interest test. Criticism has also been made of the length of time and disruption to industry that a public interest inquiry can take. Role of the relevant market Compared to the crucial role which the relevant market determination assumes under Art 82 of Community competition law, the provisions of the Fair Trading Act 1973 are extremely vague. The only market criterion is the 25% figure and this can be arbitrarily satisfied as the DGFT or Secretary of State, has discretion in determining what constitutes ‘goods of any description’ for reference purposes. The important point is that practice under the 1973 Act clearly distinguishes market power from market share. Determination of market share requires accurate identification of the particular market, but this is considered to be unnecessary under the 1973 Act. In effect, the Competition Commission will focus on any problems caused by actual market power irrespective of the market defined by the reference and the market shares relative thereto. The question of market power becomes relevant at the public interest assessment by the Competition Commission. The Competition Commission will routinely evaluate the extent to which a referred monopolist is actually exposed to competition from firms in the reference market and also suppliers of close substitutes. It will effectively analyse whether there are any barriers to entry for potential competitors which may prevent effective competition on the market. However, this is not dependent upon any formal requirement of the Competition Commission to define the market in economic terms, it is merely required to confirm that a monopoly situation exists.108 Monopoly situations per se and the public interest The first task for the Competition Commission is to establish whether the monopoly position itself operates against the public interest. Although there may be a general concern regarding ‘monopoly’, the Competition Commission will recognise the economic benefits to be gained by a firm whose superior market position has been achieved and retained due to enhanced efficiency, better marketing and communication skills. Indeed, relatively few reports have found that the monopoly conditions themselves operate against the public interest.109 A major problem with criticising the monopolistic structure of the market consists of devising the appropriate remedy. The only logical solution would appear to be divestiture, but this is beset by a variety of practical and political difficulties. For instance, economies of scale may make a monopolistic industry the only natural result. Political argument often criticises divestiture as too gross an interference in market processes. Nonetheless, in recent years we have witnessed a greater willingness to consider this remedy, most notably in The Supply of Beer report110
108 Fair Trading Act 1973, s 48(d) in conjunction with s 54(2). 109 See, eg, Roadside Advertising Services (1980–81) HCP 365; Contraceptive Sheaths (1974–75) HCP 394. 110 Cm 651, 1989.
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which made recommendations on the maximum number of retail outlets each of the six big brewers could own.111 In addition, the inquiry into the supply of fresh processed milk to middle ground retailers in Scotland the Competition Commission consulted on a structural remedy whereby Wiseman Dairies plc would divest itself of part of its processing capacity in Scotland and/or part of its business with middle ground retailers.112 More dramatically, in its report on the supply of raw milk in the UK, the Commission noted that Milk Marque had a scale monopoly with 49.6% market share. With a view to eliminating the market power of Milk Marque, it recommended that Milk Marque should be divided into a number of independent quota holding bodies.113 The Secretary of State rejected the recommendation to enforce the break up of Milk Marque, but announced changes to the conditions of sale in the future.114 Conduct The Commission accepted that in certain markets competitive pressures are likely to be muted between ‘rival’ firms, and that market power may be used to exploit and protect or maintain a firm’s monopoly position in a market. There are various types of conduct that the Commission has in the past been required to report upon, including pricing policies within certain industries. As discussed above in relation to Art 82, classic monopolistic behaviour takes the form of two distinct pricing strategies. Excess pricing is predicted by neo-classical economic theory, the monopolist reducing output and gaining a monopoly profit from the consumer. On the other hand, monopolists often engage in predatory pricing by selectively price cutting in the short term to force out any potential competitive threat in the market. Excess or unfair prices or profits Consideration of the prices charged to consumers is one of the criteria expressly referred to in s 84. The analysis normally adopted is to monitor the percentage return on average capital employed. Matters are complicated by the additional problem of attributing costs where a multi-product firm is involved or research and development costs have to be considered. However, the pragmatic approach under the 1973 Act prevails and the Commission has never sought to define excessive pricing; this is not necessary in a system which does not seek to punish 111 The Secretary of State subsequently made two Orders, although these did not replicate the recommendations: Supply of Beer (Tied Estate) Order 1989 SI 1989/2390 and Supply of Beer (Loan Ties, Licensed Premises and Wholesale Prices) Order 1989 SI 1989/2258. The Beer Orders have been reviewed by the OFT in 2000 and while some aspects, such as the ‘guest beer provision’, are to be retained, the Secretary of State announced his decision to introduce a new Order to revoke some of the existing Order’s provisions due to changes in the beer market, DTI Press Release, P/ 2000/805, 1 December 2000. See, also, the earlier MMC report, Domestic Gas Appliances (1979–80) HCP 703, and the subsequent report, Gas and British Gas plc, Cm 2317, 1993, which also recommended divestiture as a possible remedy. 112 See Competition Commission Press Release 32/00, 28 June 2000. Ultimately, structural remedies were not proposed, see Scottish Milk: A Report on the Supply of Fresh Processed Milk to Middle Ground Retailers in Scotland, Cm 5002, 2000. 113 Supply of Raw Milk: A Report on the Supply in Great Britain of Raw Cows’ Milk, Cm 4286, 1999. 114 DTI Press Release, P/99/587, 6 July 1999.
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and apportion blame. The Competition Commission will seek an objective measurement of profits earned and it will then make a qualitative judgment of its reasonableness in the circumstances. This will be measured by looking at the rates of return for similar goods in the UK, in industry generally or with prices in other Community States. The Commission has over the years frequently criticised profit levels. For instance, in its report on valium and librium, 115 it recommended reduction in the prices of the two drugs to 25% and 40% of their existing level. In its report on Ready Cooked Breakfast Cereal Foods,116 it concluded that the prices charged were excessive and as a result an undertaking was given not to increase prices without Government approval. In White Salt,117 the Commission recommended that British Salt’s prices should be controlled directly and any increases were to be related to rises in costs. Thus, it is evident that the form of price regulation recommended by the Commission has varied, according to the circumstances, from an initial reduction to direct control, monitoring or requiring the provision of more information to consumers. These three reports reflected an attitude, more prevalent in the 1970s, that direct regulation of prices was appropriate for the competition authorities. The suitability of this approach was doubted in the 1980s and early 1990s when there were fewer reports directly criticising pricing levels, and little evidence of the direct approach to price regulation in enforcement. This may be due to the greater acceptance of the free market as opposed to the role of public control. The report, Supply of Recorded Music,118 for instance, did not find the pricing of compact disks to be against the public interest despite clear evidence that the pricing levels were considerably higher in the UK than in the US and other Community States. Two more recent reports by the Commission nonetheless indicate a willingness to consider and criticise prices which are unfair on consumers. These reports again demonstrate how market failure, excessive prices in this instance, may result from a variety of factors. In its report, Video Games,119 the Commission concluded that Sega and Nintendo used their control over intellectual property rights to set excessive prices for their games, while setting low prices for consoles to lock customers into their system. In the recent report, Domestic Electrical Goods,120 the Commission were critical of high prices maintained by a system of recommended retail prices and suggested various ways to increase competition in order to reduce prices of electrical goods for the consumer. Similarly, in the Milk Marque inquiry, the Commission was seriously concerned about the way the company could raise the average price of milk above levels that otherwise would have been reached. The link between competition policy and politics is exemplified by the campaign by the Labour Government since 1997 concerning ‘Rip-Off Britain’ with its focus
115 116 117 118
Chlordiazepoxide and Diazepam (1972–73) HCP 197. (1972–73) HCP 2. Cmnd 9778, 1986. Monopolies and Mergers Commission, Supply of Recorded Music: A Report on the Supply in the UK of Pre-recorded Compact Discs, Vinyl Discs and Tapes Containing Music, Cm 2599, 1994. 119 Monopolies and Mergers Commission, Video Games: A Report on the Supply of Video Games in the UK, Cm 2781, 1995. 120 Cm 3676, 1997. The Restriction on Agreements and Conduct (Specified Domestic Electrical Goods) Ord 1998 SI 1998/1271 came into force on 1 September 1998.
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on the effect of excessive pricing on UK consumers. This resulted in the reports on Supermarkets121 and New Cars.122 The supermarket report was largely uncritical, but the direct impact of competition law on the consumer was evidenced by the reduction of UK prices by a number of car manufacturers after the introduction of an Order by the Secretary of State following the New Cars report.123 Oligopolistic pricing The theory of oligopolistic interdependence suggests that, where there are few firms in a market, they may act collectively and in parallel without the necessity of collusion between them. The investigative and non-doctrinaire approach under the 1973 Act, facilitated by the provisions on complex monopoly situations, is particularly suitable for dealing with competitive problems associated with oligopoly. The 1973 Act does not punish anti-competitive activity but seeks ways to improve competition, and it is recognised that many factors may contribute to oligopolistic market failure. In their general report on Parallel Pricing, 124 the Commission considered parallel pricing in the absence of parallel costs to be generally detrimental to consumer welfare. After years of speculation concerning similar price movements in the UK petrol retail market, the Commission produced its report, Supply of Petrol.125 To the surprise of many, the Commission did not find the parallel prices and price movements to be against the public interest, as they could be accounted for by the same international cost factors. On the other hand, in White Salt,126 the Commission had earlier produced a classic report on parallel pricing in an oligopoly. In fact, the market was a duopoly involving British Salt and ICI. This report demonstrated how parallel pricing could also lead to excessive pricing, at least for one producer. The Commission recommended that British Salt’s prices should be regulated and ICI could therefore only charge parallel prices in the future if its efficiency improved. Advertising expenditure Advertising expenditure was a particular concern of the Commission at one stage. The paradox with this issue is that competition law should ensure it is not restricted, in order to provide greater consumer information, but that its use should not become so extensive as to constitute a barrier to entry. For instance, in its report, Household Detergents,127 the Commission recommended that advertising expenditure was wasteful and ought to be reduced as the costs were prohibitively high and acted as a barrier to entry.
121 Supermarkets: A Report on the Supply of Groceries from Multiple Stores in the United Kingdom, Cm 4842, 2000. 122 New Cars: A Report on the Supply of New Motor Cars within the UK, Cm 4660, 2000. 123 See DTI Press Release, P/2000/549, 1 August 2000. The Supply of New Cars Order 2000 SI 2000/ 2088. 124 Cmnd 5330, 1973. 125 Cm 972, 1990. 126 Cmnd 9778, 1986. 127 (1965–66) HCP 105.
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Intellectual property rights The essential characteristic of intellectual property rights, such as patents and licences, is that they grant an exclusive right. IPRs confer a form of statutory monopoly. Although it would be strange to condemn the right granted, any exploitation will be monitored. Intellectual property rights can reinforce barriers to entry and the Commission confirmed, in its report, Video Games,128 that it would be critical of the anti-competitive use of intellectual property rights. The DGFT has general power to impose compulsory patent and copyright licensing.129 Vertical restraints Vertical integration Vertically integrated firms may develop through internal growth and in appropriate circumstances, the Commission130 may recommend divestiture if it is harmful to competition. Vertical integration as a result of external growth is normally a matter to be considered in merger investigations. Nonetheless, there has been some criticism of vertical take-overs by the Commission under its monopoly function. In Asbestos,131 it recommended that there should be no further take-overs by Turner and Newell without DTI approval. Following the Commission’s report on Foreign Package Holidays in 1997,132 action was taken to ensure that consumers are aware of the ownership links between travel agents and tour operators.133 Contractual controls over distributors The Commission has frequently commented adversely on the tying of distributors. The main objection is that they foreclose competition and harm consumers. The producer’s rivals will be foreclosed as the number of outlets are limited. Inevitably the distributor’s choice of products will be limited and the consumer may also be harmed because the reduction in competition may lead to higher prices alongside a reduction in consumer choice. Exclusive purchasing Exclusive purchasing is a particular type of limitation on a distributor which has been the subject of Commission reports. In its reports on petrol,134 the Commission accepted exclusive purchasing agreements as justifiable if they were reasonably limited in duration, and recommended a period of five years in the first report. The
128 Cm 2781, 1995. 129 Under the Patents Act 1977, s 51(5), and the Copyright Designs and Patents Act 1988, s 144(1), respectively. 130 Eg, The Supply of Beer, Cm 651, 1989. 131 Asbestos and Certain Asbestos Products (1972–73) HCP 3. 132 Foreign Package Holidays: A Report on the Supply in the UK of Tour Operators’ Services and Travel Agents’ Services in Relation to Foreign Package Holidays, Cm 3183, 1997. 133 DTI Press Release, P/99/636, 23 July 1999. The Foreign Package Holidays (Tour Operators and Travel Agents) Order 2000 SI 2000/2110. 134 Petrol to Retailers (1964–65) HCP 264; and Petrol, Cm 718, 1989.
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Commission’s report, The Supply of Beer, led to Orders which required brewers to allow tied houses to supply a ‘guest’ beer and provided that they could not compulsorily tie non-alcoholic beer or other drinks to the supply of beer.135 Tie-ins and full-line forcing A tie-in is where a distributor must purchase part or all of its requirements of a second product from the supplier of the first product. Full-line forcing requires the distributor to purchase each in a range of products. In appropriate circumstances these practices may be condemned136 but in its general report, Tie-in Sales and FullLine Forcing,137 the Commission recommended the adoption of a case by case view in relation to such practices as they may be required, for instance, to maintain economies of scale. Discriminatory practices Refusal to supply Refusal to supply may cause concern if it hampers the ability of firms at a lower level of the market to compete effectively, according to the Commission in its general report, Refusal to Supply.138 Few cases have arisen under the 1973 Act and this issue was usually considered under the Competition Act 1980, which of course was repealed by the Competition Act 1998, replacing it with provisions mirroring the position under Community law. Price discrimination Price discrimination involves charging prices which are unrelated to the costs of producing and selling the product. Accordingly, price discrimination can arise where the firm charges different customers different prices, and also in circumstances where it charges the same prices. An example of the latter is what is termed uniform delivered pricing, which may be considered to discriminate against local purchasers and distant competitors. The basic competition concerns are that price discrimination can cause primary line injury, injury at the same level of the market as the perpetrator. The classic example of this is predatory pricing. Price discrimination can also result in secondary line injury, at the purchasers’ level, due to differential pricing without any cost justification. Price discrimination often results through discounts and loyalty rebates. When granted by a dominant firm, they are likely to be acceptable only if they bear a direct relationship to cost differences, and as such constitute quantity discounts. For instance, in its report, Frozen Foodstuffs,139 the Commission criticised Birds Eye’s practice of granting discounts where freezer space was reserved exclusively for its products, as this made it more difficult for small suppliers to obtain access to retail outlets. The rule of thumb is that, if a firm has genuine market power and rebates are not related to 135 The Orders adopted following the report are to be amended, DTI Press Release, P/2000/805, 1 December 2000. 136 Eg, in the report, The Supply of Beer, Cm 651, 1989. 137 (1980–81) HCP 212. 138 Cmnd 4372, 1970. 139 (1975–76) HCP 674.
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genuine cost savings, they are likely to be condemned as their effect may be substantially exclusionary and anti-competitive. On the other hand, in a particularly competitive market, discrimination may be perfectly legitimate and in the public interest. For instance, in its report, Ice Cream, 140 the Commission examined the practice of freezer exclusivity employed by major manufacturers of ‘impulse ice cream’ in relation to their retailers, tobacconists, confectioners and newsagents. This meant that the newsagents could stock no other ice creams in the freezer, which was provided on free loan. In effect, this ensured that no other type of ice cream could be sold at the outlet. The Commission concluded that freezer exclusivity did not inhibit competition or affect consumer choice, nor did they consider that it affected the price of the products and, accordingly, it was not against the public interest.141 The Commission has recently condemned Birds Eye Walls, finding its wholesaling operations against the public interest.142 Predatory or selective price cutting This is the classic monopolistic action to force competitors or potential competitors from the market, at least in the short term. An example is in the report, Concrete Roofing Tiles.143 The background involved a claim by Scotcem that Marley Tile Company and Redland Roof Tiles Ltd had indulged in predatory pricing to keep them out of the Scottish market. The Commission considered that the discounting practices of the two companies acted as a barrier to entry; the elimination of Scotcem would be against the public interest and some form of control should be exercised over future discounts offered. The issue of predatory pricing has been high profile in recent years, partly due to bus deregulation in the late 1980s and the ensuing ‘Bus Wars’.144 As a result, there have been a number of Commission reports concentrating on predatory pricing in local bus markets, particularly involving the activities of Stagecoach Holdings plc. For instance, in its report, Bus Services in Mid and West Kent,145 the Commission discovered that Stagecoach timetabled its buses to arrive just before competitors’ buses, charged predatory prices and sought to deny reasonable access to the bus station to other companies. The Commission made recommendations against these practices and undertakings were given. Consumer protection The DGFT has a role in both competition and consumer protection. These policies are obviously linked and this is clear from the wording of s 84 of the 1973 Act. In the early 1990s, the Commission was criticised for reports in which it was not considered to be as protective of the public and consumer interest as in earlier years, and that it had become too favourable towards big business in its outlook. 140 Ice Cream: A Report on the Supply in the UK of Ice Cream for Immediate Consumption, Cm 2524, 1994. 141 For further discussion, see Robertson, A and Williams, M, ‘An ice-cream war: the law and economics of freezer exclusivity’ [1995] 1 ECLR 7. 142 Birds Eye Walls Ltd, Cm 3971, 1998. 143 (1981–82) HCP 12. 144 The OFT has also issued Research Paper 5, Myers, G, Predatory Behaviour in UK Competition Policy, November 1994, London: OFT. 145 Cm 2309, 1993. See, also, the report, The Supply of Bus Services in the North East of England, Cm 2933, 1995.
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Although it is perhaps understandable that the emphasis shifted from the more direct forms of price control encouraged by the Commission during the 1970s, the Commission was criticised for its reports, Fine Fragrances and Perfumes146 and Supply of Recorded Music.147 The former allowed manufacturers to continue allegedly unfair discrimination against cut-price shops, and the latter was based on a survey which found only moderate price differences between the UK and USA. However, perhaps we have witnessed a further change in trend with a reinvigorated and pro-consumer oriented MMC in recent years, particularly evidenced by its reports, Video Games and Electrical Goods, discussed above. This has also recently been highlighted by the preliminary investigation being undertaken by the DGFT into the big four supermarket groups. The main concern is whether lower prices are being passed on to the consumer. This may lead to a monopoly reference by the DGFT. Following a Competition Commission monopoly report Should a Competition Commission report conclude that there is no harm to the public interest, then no formal action can be taken. Sometimes, the Commission has requested that the DGFT keeps the industry under review, and often the DGFT will enter into negotiations with firms whose conduct has been the subject of criticism in a report, although there has been no finding against the public interest. Should the Competition Commission report be adverse, finding that the monopoly situation or conduct which maintains or exploits it is against the public interest, enforcement may proceed in one of two ways. The Secretary of State has power148 to make a wide range of Orders to remedy the situation which are specified in Sched 8 to the Act. Part I includes the power to order the publication of prices, to control prices and to prohibit discriminatory and tie-in practices. Part II provides the Secretary of State with power to order divestiture.149 The exercise of the Order making powers was demonstrated by the Orders following the report, The Supply of Beer, which had a significant effect on the brewing industry in the UK. More recently, the Order introduced following the report into New Car Pricing has had a dramatic impact on the price of many new cars in the UK.150 Although the Secretary of State has resorted to use of Order making powers more frequently in recent years,151 the preferred method of enforcement is through a process of negotiation between firms which are the subject of an adverse report and the DGFT. This process usually leads to firms giving undertakings as to their future conduct, normally to the Secretary of State, based on the findings and recommendations in the report. For example, following the most recent Ice Cream report152 undertakings were subsequently accepted from BEW, Mars and Nestle on outlet exclusivity, and from BEW on freezer exclusivity inter alia.153 If undertakings 146 147 148 149 150 151
Cm 2380, 1993. Cm 2599, 1994. Under ss 56 and 90 of the Act. Part II Orders require the positive approval of Parliament before they can be exercised. The Supply of New Cars Order 2000 SI 2000/2088. See, also, Monopolies and Mergers—the Restriction on Agreements and Conduct (Specified Electrical Goods) Order 1998 SI 1998/1271, made by Margaret Beckett, then President of the Board of Trade, in order to increase price competition in respect of televisions, washing machines and other electrical goods. See DTI Press Notice P/98/397, 20 May 1998. 152 The Supply of Impulse Ice Cream: A Report on the Supply in the UK of Ice Cream Purchased for Immediate Consumption, Cm 4510, 2000.
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are not given or are breached, the Secretary of State, upon the advice of the DGFT, may utilise the Order making powers under the Act. Reflecting the pragmatic, political and ultimately discretionary approach of the Fair Trading Act, the Secretary of State is not bound by the advice of the DGFT or the findings of a Competition Commission report which he may choose to ignore. This power was demonstrated when the Secretary of State rejected the Commission’s recommended structural remedy following its report into the Supply of Raw Milk.154 It should be noted that no enforcement action may be taken where less than two-thirds of the members of the Commission support the conclusions. Recently, the Competition Commission concluded that Wiseman Dairies had a monopoly in the supply of processed milk to middle ground retailers in Scotland and that their actions were against the public interest. However, the group was clearly divided (2:2) on the main issues. Even though the Chairman used the casting vote in favour of the main conclusion, no further action could be taken on the basis of the report.155 Interestingly, and as an indication of the way in which the two statutes will interact in the future, the Secretary of State requested that the DGFT monitors the situation with regard to potential infringements of the Competition Act 1998 prohibitions.
THE COMPETITION ACT 1980 In 1977 the Government established a Committee which published two reports, A Review of Monopolies and Mergers Policy and A Review of Restrictive Trade Practices Law,156 which are known after their chairperson as the Liesner Reports. The 1978 report considered that monopoly investigations took a long time, imposed a considerable burden upon the firms being investigated and required the Commission to investigate the product rather than individual firms. It recommended that a new system of control should be introduced to monitor anticompetitive practices of dominant firms. The 1979 report reviewed this matter further, and preferred the introduction of a system which allowed for investigation of anti-competitive practices on a case by case basis through a procedure which would be more focused and swifter than the monopoly investigations under the 1973 Act. The 1979 Conservative Government introduced the Competition Bill, which was passed in 1980. The principal innovation in the legislation was the provisions on the control of anti-competitive practices in ss 2–10 of the Act. The Competition Act 1980’s provisions on anti-competitive practices were not as great an influence on the overall competition law enforcement regime in the UK as expected. This is perhaps due to the frequent resort to more informal settlements under the Act, and also partly due to the effect of Community law. Article 82 provides a similar mechanism for dealing with dominant firm abuse and provided more potent remedies in the form of European Commission interim measures, fining powers and the availability of damages in the courts. The 1980 Act tended to 153 DTI Press Release, P2000/509, 20 July 2000. 154 Supply of Raw Milk: A Report on the Supply in Great Britain of Raw Cows’ Milk, Cm 4286, 1999. 155 Scottish Milk: A Report on the Supply of Fresh Processed Milk to Middle Ground Retailers in Scotland, Cm 5002, 2000. DTI Press Release, P/2000/863, 22 December 2000. 156 Cmnd 7198, 1978 and Cmnd 7512, 1979, respectively.
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deal with minor competition problems at a localised level, for instance, in certain cases involving bus companies principally as a result of deregulation.157 The relationship between the anti-competitive practices provisions of the 1980 Act and the monopoly controls of the 1973 Act were never stated and remained unclear. There was no strict division between the two regimes and it was for the DGFT to decide under which legislation to proceed, although investigations were normally directed at one firm under the 1980 Act as opposed to a perceived industry-wide problem under the 1973 Act. It will be interesting to view how the relationship between the retained monopoly controls under the 1973 Act and the new prohibition on the abuse of a dominant position under the 1998 Act is developed by the policy of the DGFT.
REFORM OF UK ANTI-MONOPOLY LAWS Abuse of Market Power This Green Paper,158 discussed earlier in this chapter, and published in 1992, considered the case for reform of the UK anti-monopoly laws for dealing with situations of market power. It assessed the advantages and disadvantages of the Fair Trading Act 1973 and the Competition Act 1980 in comparison with Community experience under the model of Art 82. Indeed, the Green Paper identified recurrent themes in the debate on reform of the UK provisions. The advantages identified under the 1973 Act are its flexibility, the wide range of remedies available and its particular suitability for dealing with market structure issues, notably oligopolistic markets. On the other hand, it lacks deterrent effect, there are no penalties, the DGFT’s powers of investigation are limited and its provisions are not enforceable in the courts. The Art 82 model would remedy each of these disadvantages but it concentrated on behavioural issues and lacked the flexibility to deal with certain problems, particularly market structure issues and oligopoly. The Green Paper identified three options for reform: (1) retain the existing provisions with minimal procedural changes; (2) abolish the existing provisions and replace with an Art 82 model; and (3) introduce an Art 82 model and retain the provisions of the 1973 Act to deal with problems of market structure, particularly oligopolies. Following the Green Paper, the Government announced its intention to implement Option 1. The intention was to retain the existing provisions but bolster the deterrent effect by enhancing in various ways the investigative and enforcement powers of the DGFT. It was suggested that these limited reforms would be introduced in legislation to reform UK restrictive trade practices legislation. In fact, very limited changes were introduced prior to the Competition Act 1998. One example, however, is s 7 of the Deregulation and Contracting Out Act 1994 which 157 See, eg, Monopolies and Mergers Commission, Southdown Motor Services Ltd: A Report on the Conduct of Southdown Motor Services Ltd in Respect of its Operation of Local Bus Services on Routes 262 and 242 in Bognor Regis, Cm 2248, 1993. 158 Abuse of Market Power, Cm 2100, 1992.
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permits the Secretary of State, upon the advice of the DGFT, to accept undertakings from companies as an alternative to a monopoly reference to the Competition Commission.159 Trade and Industry Committee Report on UK Policy on Monopolies In this report, produced in 1995,160 the Committee considered that there were a variety of flaws in the UK approach to monopoly control. The report considered the criticism that the public interest criteria were too broad and vague, resulting in inconsistency and unpredictability in the outcome of MMC reports. It highlighted the failure to set policy guidelines and priorities in relation to the public interest test. The Committee was also concerned that DTI policy was not clear as to the objectives of UK competition policy and the report advocated that consumer policy interests should be at the heart of UK competition policy. The DGFT had campaigned for a number of years for reform and his representations to the Committee highlighted four main shortcomings of the present system: (1) (2) (3) (4)
the lack of deterrence; the limited investigation powers for the DGFT; no provision for interim measures by the DGFT; and the absence of rights for private parties to take action for damages or other relief.161
The Committee reviewed earlier reform proposals and confirmed that a prohibition approach, based substantially on Art 82, should be adopted together with reform of the institutional structure by the creation of a unitary competition authority. The Committee considered that a prohibition approach would provide greater deterrence and had the potential to provide greater clarity, consistency and predictability. The creation of a single competition authority was advocated in order to avoid the apparent duplication of functions by the DGFT and MMC. The report was critical of the overtly political role of the Secretary of State but was unclear regarding his proposed accountability to Parliament and the limited role in cases where structural remedies would be appropriate. This report is notable because of the remarkable similarities with the ultimate reform proposals introduced into the Competition Act 1998. Nonetheless, the Government’s response at the time of the publication of the report was to reject the Committee’s view and maintain the status quo on the basis that no change to the existing legislative framework was necessary.162 Interestingly, the DGFT, in the Annual Report of 1994, called for similar reforms to those later proposed by the Committee based on the adoption of an Art 82 prohibition approach and the creation of a unitary competition authority.163 159 This section, which inserted s 56A into the 1973 Act, together with Sched 2 to the 1994 Act, amended s 41 of the 1973 Act. 160 Fifth Report, HC 249-I, 1995. 161 Ibid, para 94. 162 Government Observations on the Fifth Report from the Trade and Industry Committee (Session 1994–95) on UK Policy on Monopolies, HC 748, 1995. 163 See, for further discussion, Rodger, BJ, ‘Decentralisation, the public interest and the pursuit of certainty’ [1995] 7 ECLR 395.
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THE COMPETITION ACT 1998 Introduction The Conservative Government decided in 1996 finally to introduce legislation to reform UK competition law and published a DTI Consultation Document followed by an Explanatory Document and draft Bill.164 The Bill sought to replace the 1976 Acts with a prohibition on anti-competitive agreements based on Art 81, and to introduce extended powers of investigation and enforcement for the DGFT under the existing legislative scheme for dealing with monopoly control. The new Labour Government in 1997 almost immediately published a new Explanatory Document and draft Bill which formed the basis of the Competition Act 1998.165 The prohibition Part I of the Act introduces two new prohibitions based on Arts 81 and 82. These are known respectively as the Chapter I and Chapter II prohibitions. The Chapter II prohibition is in respect of the abuse by an undertaking or undertakings of a dominant position in the UK. The Chapter II prohibition is contained in s 18 of the Act, which contains virtually identical provisions to those contained in Art 82. Section 18(1) provides, ‘any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom’. The only difference is that s 18 refers to a dominant position and the effect on trade within the UK. Consistency of interpretation with Community law, Art 82 in this context, is ensured by s 60 of the Act. This provides that the determination of any questions under the prohibitions should be consistent with the treatment of corresponding questions arising under Community law. This may, for instance, have an obvious impact on the interpretation of the term ‘undertaking’, which is likely to be given a broader meaning than the terminology of ‘firms’ adopted under the 1973 Act. This provision clearly ensures that Community case law on what constitutes an abuse of a dominant position will be followed to the extent that it is relevant in a national context. Section 19 excludes the application of the prohibition where Sched 1 (mergers and concentrations) or Sched 3 (general exclusions) applies. Enforcement and ancillary issues Sections 20 to 24 of Chapter II make provision for a person to make notification, in accordance with the procedure provided in Sched 6, in respect of conduct which may infringe the prohibition. Section 21 provides for notification for guidance as to
164 Department of Trade and Industry, Tackling Cartels and the Abuse of Market Power: Implementing the Government’s Policy for Competition Law Reform, a Consultation Document, March 1996, London: DTI; and Tackling Cartels and the Abuse of Market Power: A Draft Bill an Explanatory Document, August 1996, London: DTI. 165 Department of Trade and Industry, A Prohibition Approach to Anti-Competitive Agreements and Abuse of a Dominant Position: Draft Bill, August 1997, London: DTI. The subsequent Bill, which had its first reading in the House of Lords on 15 October 1997, was amended in certain respects from the original draft Bill.
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whether the conduct is likely to infringe the prohibition, and s 22 provides for notification for a decision as to whether the prohibition has been infringed. Sections 23 and 24 make similar provision as to the effect of guidance and decisions respectively. In both cases, the DGFT may take no further action unless there has been a material change of circumstances, or he has a reasonable suspicion that the information on which the guidance/decision was granted was incomplete, false or misleading. Chapter III makes provision for the investigation and enforcement of the Chapter I and II prohibitions. The DGFT has the key role of enforcing and applying the new regime. 166 Section 25 provides that the DGFT may conduct an investigation upon reasonable suspicion that either prohibition has been infringed. The powers of investigation provided under ss 26 to 29 are very similar to those powers afforded to the Commission under Arts 11 and 14 of Reg 17.167 Similarly, the DGFT is required under s 31 to give persons affected by a proposed decision on whether the prohibition has been infringed an opportunity to make representations. The DGFT may make interim measures under s 35, and the DGFT has proposed his first interim measure direction against Robert Wiseman Dairies plc in order to prevent serious irreparable damage to competitors and to protect the public interest.168 He is also empowered to require conduct in breach of the prohibition to be modified or terminated.169 Section 36 allows the DGFT to impose a fine of up to 10% of the turnover of an undertaking whose conduct infringes the Chapter II prohibition. Furthermore, he is required by s 38 to publish guidance on the determination of the appropriate level of fines.170 Where conduct infringing the prohibition is of ‘minor significance’ there is an immunity from the imposition of any fines under s 40. Chapter V of Pt I of the Act contains a variety of rules, for instance, enabling the DGFT to make rules about procedural matters under Pt I of the Act, restricting the disclosure of information obtained under the Act by ss 55– 56,171 and providing for findings of fact by the DGFT to be relied upon in civil court proceedings under s 58. Schedule 7 to the Act, introduced by s 45, makes provision for the composition and functions of the Competition Commission. This is to act as an appeals tribunal in relation to decisions taken in respect of the Chapter II prohibition, the mechanism for appeals being regulated by Sched 8. Third parties with a sufficient interest may also apply under s 47 to the DGFT to withdraw or vary decisions, and any appeals under this provision will also be made to the Competition Commission.172 Further appeals may be made on a point of law to the Court of Appeal, Court of Session or Court of Appeal in Northern Ireland in respect of England and Wales, Scotland and Northern Ireland respectively.
166 Competition Act 1998, s 54 introduces Sched 10 to the Act, Pts II and III of which provide that the DGFT’s functions under Pt I may be exercised concurrently by the respective Directors General of the regulated utility sectors. 167 Ibid, ss 42–44 create certain offences in relation to the obstruction of the DGFT’s information gathering tasks under these provisions. 168 OFT Press Release, 25 June 2001. 169 By s 33. Section 34 provides that this may be enforced by the DGFT seeking a court order. 170 See Guidance as to the appropriate level of a penalty (OFT 423). Section 52 requires the DGFT to publish general information and advice about enforcement of the prohibition. 171 Competition Act 1998, s 56 restricts the disclosure of types of confidential information. 172 See, also, s 48 and Sched 8, Pt II on the rules on appeals to the Competition Commission.
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Consistency with Community law Section 60(1) of the 1998 Act provides that: The purpose of this section is to ensure that so far as is possible (having regard to any relevant differences between the provisions concerned), questions arising under this Part in relation to competition within 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.
The basic rule, stemming from the overall objective of introducing a set of rules harmonised with Community law and minimising the risk of a double burden on UK business, is that the Chapter II prohibition should be interpreted consistently with the interpretation of Art 82 utilised by the Community authorities.173 Subsection (2) provides that a court must act with a view to ensuring consistency with the jurisprudence of the European Court. Furthermore, courts are to have regard to any relevant decision or statement of the Commission.174 The requirement of consistency applies equally to decisions by the DGFT in relation to the prohibitions. Section 60 contains the important proviso that consistency should be achieved, ‘in so far as is possible (having regard to any relevant differences between the provisions concerned)’. This permits departure from Community law principles, but the scope of the proviso is uncertain and is likely to be contentious. It was introduced primarily to avoid the application of Community principles designed to further individual Community objectives which should be irrelevant for domestic purposes, primarily the attainment of the single market. It should be noted in the context of the Chapter II prohibition that the application of Art 82 has not been greatly influenced by the integration imperative although there has been case law involving abuses such as prohibiting imports175 and discriminatory refusals to supply on the basis of nationality,176 which may fall within the proviso. A particular difficulty in the application of the basic rule, and the proviso, is that the Art 82 case law is often complicated and involves different types of abusive conduct, therefore, the selection of particular aspects of the case law to apply in a UK context will not always be straightforward.177 Guidelines on the prohibition Section 52(1) of the Act requires the DGFT to prepare and publish general advice and information about: (a) the application of the Chapter I prohibition and the Chapter II prohibition; and (b) the enforcement of those prohibitions. 173 See Middleton, K, ‘Harmonisation with Community law: the Euro clause’, Chapter 2 in Rodger, BJ and MacCulloch, A (eds), The UK Competition Act: A New Era for UK Competition Law, 2000, Oxford: Hart. 174 Competition Act 1998, s 60(3). This will extend to Commission decisions and Notices published indicating Commission practice. 175 See Case 226/84 British Leyland v Commission [1986] ECR 3263; [1987] 1 CMLR 185. 176 See Case 7/82 GVL v Commission [1983] ECR 483; [1983] 3 CMLR 465. 177 See generally, Sufrin, B, ‘The Chapter II prohibition’, Chapter 6 in op cit, Rodger and MacCulloch, fn 173.
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With the exception of debates on the introduction of a predatory pricing provision for the newspaper industry and on the implications of the Act for resale price maintenance for over the counter medicines, there was little technical debate in Parliament during progress of the Competition Bill. The key statutory provision, s 18, like Art 82, is fairly succinct and the absence of any definition of key concepts is notable.178 This was remedied to a certain extent by the publication of a wide range of guidelines on the application of the prohibition, after consultation, which generally took place during the period between enactment and 1 March 2000. These guidelines can be found at the OFT’s website and include a range of guidance of direct relevance to the Chapter II prohibition, such as the Chapter II prohibition Guideline, ‘Assessment of Market Power Guideline and the Assessment of Individual Agreements and Conduct Guideline’.179 The publication of the series of guidelines on the Act formed an integral part of the OFT’s compliance programme aimed at encouraging companies to comply with the new prohibitions, by educating them and also informing them of the potential sanctions involved for their breach. These guidelines provide a helpful guide to the relevant Art 82 case law, notwithstanding its inherent uncertainty and unpredictability, but the DGFT was clearly wary of giving precise indications of the future application of the Chapter II prohibition in the light of the s 60 requirement for consistency with future Community law developments.180 Practice and case law to date Practice At the date of writing, there have been several decisions taken by the DGFT under the Chapter II prohibition—and two by the Director General of Telecommunications— 181 but as yet no final judgments by the Competition Commission acting as an appeal tribunal. One of the DGFT’s decisions found that there was no dominance and, in the other, there was no infringement of the prohibition.182 In Napp,183 the DGFT found an infringement and imposed a fine of £3.21 m. In the definition of the market in Napp, the DGFT relied on European case law, medical practice and economic information in his decision. The market was finally defined as the market for sustained release morphine tablets and capsules in the UK. On the basis of that definition, Napp had a persistently high market share, well in excess of 90%. It was noted that in the medicine market there were significant regulatory barriers to entry and Napp had ‘first mover’ advantages in that medical practitioners were familiar and comfortable with their products. Napp
178 179 180 181
Competition Act 1998, s 59. OFT 402, 415 and 412 respectively. Subject to the ‘relevant differences’ proviso in s 60. Complaint Submitted under the Competition Act 1998 by Swan Solutions Ltd (Swan) Alleging a Breach of the Chapter II Prohibition by Avaya ECS Limited (Avaya) and a Related Breach of the Chapter I Prohibition by Avaya and Others, March 2001. No infringement of the prohibitions was found. Similarly, no infringement was found in investigation by the Director General of Telecommunication into the BT Surf Together and BT Talk and Surf Together Pricing Packages, 4 May 2001. 182 Dixon Stores Group Ltd/Compaq Computer Ltd/Packard Bell NEC Ltd, Decision CA 98/3/2001, 6 April 2001, and Consignia plc and Postal Preference Service Ltd, Decision CA 98/4/2001, 15 June 2001. 183 Napp Pharmaceutical Holdings Ltd and Subsidiaries (Napp), Decision CA 98/2/2001, 30 March 2001.
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was also seen as adopting strategic behaviour, heavily discounting products to hospitals where there was more prospect of substitution with competing products. This also acted as a barrier to entry. The abusive behaviour adopted by Napp included predatory discounting of drugs sold to hospitals. Discounts in excess of 90% were made available in circumstances, particularly where there was a potential competitor. The DGFT followed the case law of the European Court when discussing predation, in particular AKZO.184 Napp were also found to be charging excessive prices to community consumers where they charged a 40% premium above their nearest rival while still maintaining a 90% plus market share. The price to community customers was 10 times that charged to hospitals. It was viewed that this was well in excess of that which would be expected in normal competitive conditions. It is interesting that the DGFT has made a positive finding of excessive pricing in his first infringement decision as the European Commission has struggled to support findings of excessive pricing since the 1960s.185 An appeal before the Competition Commission on that case is pending, although Napp were successful in an interim relief application to the Tribunal to suspend the DGFT’s directions pending determination of the appeal.186 The DGFT has imposed a penalty of over £1.3 m on Aberdeen Journals Ltd for breach of the Chapter II prohibition in respect of predation, by incurring losses for selling advertising space in an attempt to expel its only local rival. The DGFT has also intimated that Competition Act inquiries are being conducted into BSkyB’s activities, in particular its supply of wholesale payTV, with a view to examining whether the company has infringed either of the prohibitions,187 Robert Wiseman Dairies plc and its pricing strategy for processed milk, and, more recently, into the British Horseracing Board in relation to its supply of pre-race data to internet betting sites.188 Case law The first judgment on the substance of the new Chapter II prohibition was delivered eight months after its introduction, on 2 November 2000, by Lawrence Collins J in the High Court of Justice, Chancery division, in Claritas (UK) Ltd v The Post Office and Postal Preference Service Ltd.189 This was in the context of an action for interim injunction to restrain the despatch of consumer preference questionnaires using the Royal Mail brand and logo throughout the UK by the Royal Mail. The Post Office owned 30% of PPS Ltd, and Claritas, a company involved in procuring, supplying and analysing consumer information for a fee for businesses, claimed that this amounted to an abuse of the Royal Mail’s dominant position. The key question was whether at this interim stage there was a serious issue to be tried. Different strands of European jurisprudence were analysed. First, the possibility of an abuse based on refusal to licence intellectual property rights was rejected as 184 Case C-62/86 Commission v AKZO [1991] ECR I-3359, [1993] 5 CMLR 215. Although it was interesting that the DGFT did not rely on the more recent decision in Case T-228/97 Irish Sugar plc v Commission [1999] ECR II-2969; [1999] 5 CMLR 1300. 185 See, eg, Case 26/75 General Motors Continental NV v Commission [1975] ECR 1367. 186 Napp Pharmaceutical Holdings Ltd v DGFT, Case No 1000/1/1/01 CIRI, 2 May 2001. 187 OFT Press Release, PN 50/00, 5 December 2000. 188 OFT Press Release, PN 26/01, 12 June 2001. 189 [2001] UKCLR 2. This was subsequently followed by the DGFT decision in relation to the same dispute, Consignia plc and Post Preference Service Ltd, Decision CS 98/4/2001, 15 June 2001, although the quality of the reasoning adopted is notably weaker.
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Claritas would not be excluded from the market because they could not use the Royal Mail logo.190 Secondly, the application of the essential facilities doctrine was deemed inappropriate as Claritas retained full access to the postal facilities. Finally, in any event, given that the alleged abuse was not in a market in which the Post Office was dominant, Claritas had failed to demonstrate that this situation fell within the scope of the Tetra Pak II requirement for close links between the dominant market and abuse market.191 Although the application was dismissed, this early resort to the prohibition in private litigation demonstrates an awareness of the possibilities for aggrieved competitors under the Act and suggests that a considerable body of case law may develop in the near future. Substantively, it is interesting to note the way Lawrence Collins J applied the s 60 ‘consistency with Community law’ requirement and seamlessly applied European jurisprudence to the Chapter II prohibition as the Act intended. An injunction has also been issued on the basis that the Chapter II prohibition raised a serious issue to be tried in Network Multimedia Television Ltd v Jobserve.192 The operation of the prohibition and its relation to monopoly investigations under the 1973 Act The Chapter II prohibition under the Act came into force on 1 March 2000, at which stage the provisions of the Competition Act 1980 on anti-competitive practices were effectively repealed by s 17 of the 1998 Act. However, there are a number of unresolved issues which will only become clear once policy and practice under the Act have developed given, as noted above, the limited application of the Chapter II prohibition to date. For instance, to what extent will the DGFT, and thereafter the Competition Commission and courts, follow Community precedent in line with s 60? Will the courts deal effectively with private actions seeking interlocutory relief and claiming damages in respect of infringement of the Chapter II prohibition? We are now witnessing the first cases which should clarify many of those issues in the near future. Another interesting question concerns the relationship between the Chapter II prohibition and the monopoly provisions of the Fair Trading Act, which overlap to some extent. As discussed, the introduction of the Competition Act 1980 was expected to supersede, to a great extent, the work of the DGFT under the 1973 Act. However, this clearly did not happen. With particular regard to oligopolistic market problems, it has been suggested that a major reason for retention of the monopoly provisions of the Fair Trading Act was to provide a flexible and suitable tool, present in the complex monopoly provisions, for dealing with market failure in oligopolies. It is unclear to what extent the complex monopoly provisions will be utilised, or whether the DGFT will follow Community jurisprudence and adopt the concept of the abuse of a collective dominant position, which should be available on the liberal interpretation of ‘one or more undertakings’ under the Chapter II prohibition.
190 See Case T-68/89 Radio Telefis Eireann v Commission [1991] ECR II-485. 191 [1996] ECR I-5951. 192 5 April 2001 (Ch).
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Even if this is the case, the recent reports on Supermarkets193 and New Cars194 demonstrate the continuing utility of the complex monopoly investigation system for investigating potential market failure as opposed to individual abuse of dominance. That utility has been highlighted by the Government who propose to retain a reformed version of the complex monopoly provisions.195 The reforms proposed include a new competition based test, rather than the public interest test, and reduced involvement for the Secretary of State with decisions being taken by the independent competition authorities. Although the scale/structural monopoly provisions have been retained, the provisions will only be utilised following an earlier finding of dominance under the Chapter II prohibition, the advantage being the availability of a distinct remedy under the 1973 Act.196 In any event, Pt III of the Competition Act 1998 introduces certain amendments to the monopoly provisions under the Fair Trading Act 1973. In particular, s 66 gives the DGFT enhanced investigative powers, in respect of monopoly investigations, which are similar to those introduced in relation to the Chapter II prohibition.197
FURTHER READING Article 82 Andrews, P, ‘Is meeting competition a defence to predatory pricing? The Irish Sugar decision suggests a new approach’ [1998] 1 ECLR 49 Baker, S and Wu, L, ‘Applying the market definition guidelines of the European Commission’ [1998] 5 ECLR 273 Bergman, M, ‘The Bronner case—a turning point for the essential facilities doctrine’ [2000] 1 ECLR 59 Jebson, D and Stephens, R, ‘Assumptions, goals and dominant undertakings: the regulation of competition under Art 86 of the European Union’ (1996) 64 Antitrust LJ 443 Newton, C, ‘Do predators need to be dominant?’ [1999] 3 ECLR 127 Ridyard, D, ‘Essential facilities and the obligation to supply competitors under UK and EC competition law’ [1996] 8 ECLR 438 Turnbull, S, ‘Barriers to entry, Art 86 EC and the abuse of a dominant position: an economic critique of European Community competition law’ [1996] 2 ECLR 96
193 Supermarkets: A Report on the Supply of Groceries from Multiple Stores in the United Kingdom, Cm 4842, 2000. 194 New Cars: A Report on the Supply of New Motor Cars Within the UK, Cm 4660, 2000. 195 Productivity and Enterprise: A World Class Competition Regime, Cm 5233, 31 July 2001. 196 See The Major Provisions, OFT 400, para 13.4. 197 Competition Act 1998, s 67 also creates offences for wilfully neglecting to comply with a requirement to provide information or obstructing the DGFT in the exercise of his powers.
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Chapter II prohibition Sufrin, B, ‘The Chapter II Prohibition’, in Rodger, BJ and MacCulloch, A (eds), The UK Competition Act: A New Era for UK Competition Law, 2000, Oxford: Hart
DISCUSSION (1) Why is the identification of what constitutes barriers to entry crucial for antimonopoly laws? (2) If an undertaking or firm is considered ‘dominant’ under Community or UK law, is it really in the position of a monopolist, having power to influence the market? (3) To what extent does Art 82, and the corresponding Chapter II prohibition under UK law, restrict the ability of companies to compete effectively?
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CHAPTER 4
CONTROL OF ANTI-COMPETITIVE AGREEMENTS
INTRODUCTION TO ART 81 OF THE EC TREATY The Community rules surrounding the control of agreements 1 have been influenced to a much greater extent by the general goals of the Community than have the rules on control of dominant undertakings. The neo-classical model of competition discussed in Chapter 1 highlighted the problems which a monopoly can create. It is also possible for undertakings to reach that monopoly position by agreeing with their competitors that they should not compete. In effect, the parties to the agreement, forming what is known as a cartel, will have a monopoly position on what was previously a competitive market. Historically, the existence of cartels was common in European markets, and therefore their removal was one of the central goals of the Community. The competition rules in this area were also very important in securing the four freedoms of the Community. The achievement of the free movement of goods would have been hampered were undertakings in a position to erect barriers to free trade after the Community had removed those put in place by Member States. Undertakings which had previously been protected from competition by those State barriers may have been tempted to try to maintain their privileged position by entering into agreements with their potential competitors in other Member States. Throughout the development of case law under Art 81, there have been observable tensions between the desire to promote market integration on the one hand and to improve economic efficiency on the other. In some cases market integration has been preferred over economic reasoning. Awareness of that tension, and the balancing of different goals, is one of the keys to understanding the development of competition policy in this area. Article 81 consists of three logically discrete paragraphs. The first lays down the prohibition, the second the consequences of infringement, and the third gives the Commission the power to grant exemptions in certain circumstances. Each of these shall be dealt with in turn.
ARTICLE 81(1) Article 81(1) of the Treaty prohibits agreements, decisions of associations 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. It also includes an indicative list of types of agreement which may be covered. The Court and the Commission have given the Article a very wide interpretation encapsulating many types of collusive behaviour. The simplest way to approach the detailed analysis of the prohibition is to break it down into its constituent parts.
1
In this context, the term ‘agreement’ should be used loosely; its more technical meaning will be introduced later.
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Agreements, decisions of associations and concerted practices Each of the terms used in Art 81 has a separate definition but there is considerable overlap between them. It is therefore not crucial that a particular ‘agreement’ is identifiable, so long as it is demonstrable that some form of collusion, falling within the concept of ‘concerted practice’, has occurred. Agreements The concept of agreement is not restricted to legally binding and enforceable agreements, as this would make evasion of the prohibition very simple. In its leading judgment in this area, ACF Chemifarma v Commission (Quinine),2 the Court found that an unsigned ‘gentlemen’s agreement’ fell within the prohibition. The definition was extended in Polypropylene.3 Here, the Commission investigation centred on a complex cartel of 15 undertakings. The agreement took the form of several oral, non-binding, arrangements which had no enforceable sanctions. It was held that this formed a single agreement infringing Art 81(1). Some of the undertakings concerned had not attended all of the meetings or had deviated from the terms of the agreement but they were still considered to be party to it. In one of the first competition cases to come before the Court of Justice, the parties tried to draw a distinction between horizontal and vertical agreements. A horizontal agreement exists between undertakings at the same level of the market, for example, two manufacturers of a product. Vertical agreements exist between undertakings who operate at different levels of the market, for example, a manufacturer and a distributor or retailer. In Consten and Grundig, the Commission found that an exclusive distribution agreement between Grundig, a German electronics manufacturer, and Consten, a French distributor, infringed Art 81(1).4 On appeal, the undertakings argued that vertical agreements such as this did not fall within the terms of the prohibition. The Court was not convinced by their argument and came to the conclusion that Art 81 protected both interbrand competition (between different brands of the same product) and intrabrand competition (between the same branded product sold by different retailers).5 Under the terms of this vertical agreement, intrabrand competition would have been almost eliminated; however, interbrand competition may have been increased. Without the guarantee of exclusivity, Consten may not have been willing to invest as much time and resources into the promotion of Grundig’s products. By investing in promotion, Consten would have increased competition between Grundig products and other brands. Without exclusivity, other retailers selling Grundig profits would benefit from Consten’s promotional efforts; these retailers are known as ‘free-riders’. Another interesting interpretation of agreement concerns situations where there is apparently unilateral behaviour. The Court has been willing to infer the
2 3 4 5
Cases 41, 44 and 45/69 [1970] ECR 661; [1970] CMLR 8083. Commission Decision (86/398/EEC), OJ L230/1, 1986; [1988] 4 CMLR 347. Upheld, on appeal, in Case T-7/89 Hercules NV v Commission [1991] ECR II-1711; [1992] 4 CMLR 84 and Case C-49/920 Commission v Anic Partecipazioni SpA [1999] ECR I-4125. Commission Decision (64/556/EEC), OJ 2545/64, 1964; [1964] CMLR 489. Cases 56 and 58/64 Consten and Grundig v Commission [1966] ECR 299; [1966] CMLR 418. For a further discussion of vertical agreements, see Chapter 5.
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existence of an agreement where behaviour confers a benefit on another undertaking. In Ford Werke v Commission,6 the refusal of Ford in Germany to supply right hand drive cars to their German distributors was challenged on the basis that it was designed to protect Ford’s UK distributors from competition from cars sold in Germany. Although the refusal appeared to be unilateral, it was held to be part of an agreement. The extent of this ability to impute apparently unilateral behaviour to an agreement was further discussed by the Court in Bayer v Commission.7 The Court of First Instance stressed that there must be a ‘concurrence of wills’ between the parties before an ‘agreement will be formed’. Concerted practices The term ‘concerted practice’ in Art 81(1) has been given a particularly broad definition. In many cases, the Commission will merely state that co-operation between undertakings amounts to an agreement or at least a concerted practice. The important point when dealing with concerted practices is the existence of some form of collusion between undertakings. There is no easy way to define exactly where an agreement stops and a concerted practice begins, although it is evidently a looser form of ‘agreement’ which involves some form of understanding or collaboration. The classic definition was given by the Court in ICI v Commission (Dyestuffs)8 stating that it is: …a form of co-ordination between undertakings which, without having reached a stage where agreement properly so called has been concluded, knowingly substitutes practical co-operation between them for the risks of competition.9
The forms of practical co-operation which were alluded to in Dyestuffs were more fully explained by the Court in Suiker Unie v Commission (Sugar).10 The emphasis was placed upon mental consensus11 between the co-operating undertakings. Article 81 precluded: …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.12
It should be noted that the term, concerted practice, has been left broadly defined. This is a necessity due to the lengths to which undertakings go to disguise their activities. Moreover, the form of the agreement or practice is less important than the economic effect it has on the market. A formalistic approach would not help the law attain its objectives. Despite this broad definition the concept of a ‘concerted practice’ has had difficulty in dealing with oligopolistic behaviour. 6 7 8 9 10 11
12
Cases 25 and 26/84 [1985] ECR 2725; [1985] 3 CMLR 528. Case T-41/96 [2000] ECR II-3383; [2001] 4 CMLR 4. Case 48/69 ICI v Commission [1972] ECR 619; [1972] CMLR 557. Ibid, para 64. Cases 40–48, 50, 54–56, 111 and 113–14/73 [1975] ECR 663; [1976] 1 CMLR 295. It is interesting to note the CFI’s wide definition of ‘agreement’ in Bayer v Commission (Case T-41/ 96) [2000] ECR II-3383; [2001] 4 CMLR 4. See, also, the CFI’s judgement in Joined Cases T-202/98, T-204/98 and T-207/98 Tate & Lyle plc, British Sugar plc and Napier Brown & Co Ltd v Commission, 12 July 2001. [1975] ECR 1663, para 174; [1976] 1 CMLR 295.
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One of the reasons for seeking to avoid formalism when dealing with concerted practices is the difficulty in proving the existence of collusion. There may be a suspicion that some form of collusion exists when there are parallel price rises or similar forms of behaviour. However, the Commission must be able to prove the existence of a concerted practice before it makes a decision against the relevant undertakings. The type of evidence the Commission seeks is illustrated in the Dyestuffs case. An investigation was carried out into similar price rises for aniline dyes across the common market. In total, 10 undertakings were investigated. It was discovered that there were identical percentage increases within two or three days across the industry on a number of occasions. On one occasion, instructions were telexed by different undertakings to subsidiary companies on the same evening at the following times: 5.05 pm, 5.09 pm, 5.38 pm, 5.57 pm, 6.55 pm and 7.45 pm. On another occasion, the telexes of ‘competitors’ used the same wording. On the basis of this evidence, the Commission had little difficulty showing that there must have been collusion between the undertakings. Unfortunately, in many cases, such proof will not always be available. Decisions of associations of undertakings This section of Art 81 deals with the organisation of undertakings through a trade or professional association. Such associations have the aim of representing and promoting the interests of its members. It is easy to understand how the decision of such an association may affect competition in a market. An obvious example of how an association’s rules may affect the market was the subject of investigation in COAPI.13 The Colegio de Argentes de la Propiedad is an association of all the industrial property agents practising in Spain. Any breach of its set scale of fees could be punishable by fines, suspension or expulsion from the association. It was argued that they were a body set up by statute with special regulatory functions, but the Commission concentrated on the fact that it was an association of independent undertakings attempting to fix prices across a market. Even nonbinding recommendations by an association may be caught by Art 81, as those recommendations are likely to affect the behaviour of association members.14 Parallelism and oligopoly Where there is evidence of parallel behaviour there is often the temptation immediately to categorise the behaviour as a concerted practice. While parallelism may be an indicator that undertakings are colluding it would be premature for the Commission to conclude that a concerted practice exists. The burden is on the Commission to prove the existence of the concerted practice. This may be difficult as parallelism may occur through the natural operation of an oligopolistic market. In such circumstances proof may be very difficult. As discussed in the previous chapter, oligopolists become interdependent and tend to follow each other’s behaviour very closely. In the Dyestuffs case, the ‘oligopoly’ defence was raised by the parties, claiming that their parallel behaviour was a natural result of the oligopolistic market structure, but the
13 14
Commission Decision (95/188), OJ L122/37, 1995; [1995] 5 CMLR 468. See Case 8/72 Cementhandelaren v Commission [1972] ECR 977; [1973] CMLR 7.
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Commission were able to show evidence of collusion. In other cases, the oligopoly defence has proved more successful. It is in this context that economic evidence is vital. The Court has accepted that in oligopolistic markets undertakings must take into account the behaviour of their competitors, and in so doing they may appear to act in parallel. However, it added that such behaviour may constitute strong evidence of collusion where parallelism would not result from the normal operation of the market. The Court considered the difficulties faced in such situations in the Wood Pulp case.15 In his Opinion, Advocate General Darmon explained the potential for parallelism: …parallel conduct is not necessarily the result of prior concentration. It can be explained or even dictated by the very structure of certain markets… The first situation involves a concentrated oligopoly, in which undertakings are independent: each undertaking must take into account in its decisions the conduct of its rivals. Alignment on others’ conduct constitutes a rational response, independently of any concentration. ‘Price leadership’ constitutes the second situation: undertakings align themselves on a ‘price leader’ on account of the latter’s power on the market. Mention may also be made of the spontaneous alignment on a price leader which acts as barometer, either its decisions reflecting changes in market conditions for reasons linked, for instance, to previous knowledge of that market.16
The Court instructed two independent economic experts to investigate the market for wood pulp to aid it in its judgment. The experts’ analysis explained in some detail the workings of the market and the external pressures that had effects on pricing within the period of the alleged infringement. In its judgment, the Court accepted the findings of the experts and concluded that concerted practices were not the only plausible explanation of the parallel price announcements on the wood pulp market. The experts had identified that the long term nature of purchasing requirements, the limited number of customers for each producer and the transparency of price information, particularly through a dynamic trade press, could account for parallel behaviour in the market. As the parallel behaviour could be explained by the operation of the market, and the Commission had produced no evidence of actual collusion, the Court annulled the majority of its decision. The judgment in Wood Pulp has confirmed that Art 81 is unsuitable for dealing with cases in which the operation of an oligopolistic market alone is challenged. Article 81(1) will only deal with cases where collusion between the undertakings has been proved. Accordingly, it may still be possible to use Art 81 where there is no other plausible explanation for the parallelism. However, regarding proof, the Court has confirmed the use of economic analysis where other means of proof may be impracticable or impossible. This is a difficult burden to overcome in terms of the economic evidence required. Undertakings The definition of undertaking in Art 81 is very similar to that under Art 82, being constituted by any legal or natural person involved in a commercial enterprise. In the context of Art 81 the ‘economic entity’ doctrine is also of importance. If legally 15 16
Cases C-89, 104, 114, 116, 117 and 125–29/85 A Ahlstrom Oy v Commission [1993] ECR I-1307; [1993] 4 CMLR 407. Ibid, para 177.
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separate bodies are linked, through ownership or management agreements, any form of ‘agreement’ between them will not be considered under Art 81 as they will be deemed to be within the same undertaking. The Court’s jurisprudence on groups of companies was recently confirmed in Viho Europe v Commission.17 Viho had challenged the restrictions imposed by Parker Pen on its national distributors prohibiting them from supplying those outside their national territories. The Court confirmed that the arrangements between Parker and its national distributors, which were also its subsidiaries, fell outside Art 81(1). The reason for this finding was that Parker owned 100% of the shares in the subsidiary companies and their sales and marketing activities were directed by an area management team appointed by the parent. It would appear that both ownership and management are important in deciding if intra-group agreements are caught by Art 81. This use of the economic entity doctrine has been criticised as it encourages undertakings to integrate vertically their distribution systems to avoid the prohibition. If an undertaking owns or manages its own distributors they can impose whatever restrictions they consider necessary without the threat of nullity or sanctions under Art 81. Effect on interstate trade The requirement of an effect on interstate trade concerns the jurisdictional scope of the provision. The Court and the Commission have given the phrase a broad interpretation. Many agreements which at first sight appear to only affect one Member State have been held to come within the ambit of the Community rules. Article 3 of the draft Regulation sets out that where trade between Member States is affected, Community law only will be applicable.18 The Court laid out the basic test for the effect on interstate trade in Société Technique Minière v Maschinenbau Ulm:19 …it must be possible to foresee with a sufficient degree of probability on the basis of an objective set of factors of law or fact that the agreement in question may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States
This broad test has also been given a wide interpretation. Where an agreement is between undertakings based in the same Member State, it may still be deemed to affect interstate trade. Agreements in one State may have the effect of compartmentalising the market, discouraging undertakings from other States from entering the market.20 Very minor agreements may also affect interstate trade if they are part of a larger network of agreements.21 The importance of such networks can be seen when one considers complex distribution systems used in industries such as brewing. A brewer may have thousands of agreements with pubs relating to the supply of beer. Each one of those agreements would have little 17 18 19 20 21
Case C-73/95P [1996] ECR I-5457; [1997] 4 CMLR 419. Proposal for a Council Regulation on the implementation of the rules on competition laid down in Arts 81 and 82 of the Treaty, COM (2000) 582, OJ C365/284, 2000. Case 56/65 [1966] ECR 235; [1966] CMLR 357. Case 8/72 Cementhandelaren v Commission [1972] ECR 977; [1973] CMLR 7. See, also, Cases T-202/ 98, T-204/98 and T-207/98 Tate & Lyle plc etc. Cf Joined Cases C-215/96 and C-216/96 Carlo Bagnasco and Others v Banco Polare di Navara and Others [1999] ECR I-135. Case C-234/89 Delimitis v Henniger Bräu [1991] ECR I-935; [1992] 5 CMLR 210.
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impact on interstate trade, but taken as a network the economic impact of the agreements may be significant. Prevention, restriction or distortion of competition In this chapter, the type of ‘agreements’ which are controlled by Art 81 have been considered. The next section of the prohibition concerns the competitive impact of those agreements. Unless the Commission or the Court is satisfied that an agreement has as its ‘object or effect the prevention, restriction or distortion of competition’, it will not infringe Art 81. This area has proved to be one of the most controversial in Community competition law. It is an area which highlights the conflict between the economic and political goals which exist within Community competition policy, particularly in relation to vertical restraints. For that reason, this chapter will concentrate on the basic provisions, giving examples of some of the common types of restrictive agreements. In the following chapter, there will be a more detailed discussion of the debate surrounding vertical restraints. Article 81 includes an indicative list of the types of agreement that will prevent, restrict or distort competition, though, as with Art 82, this list is not exhaustive. The Commission and the Court have given the terminology a very wide interpretation. Some commentators have argued that the interpretation adopted is so wide that it bears little relation to competitive reality. One possible reason for this interpretation is the existence of Art 81(3) which allows for exemptions from the prohibition to be granted. The US antitrust provisions, to which the Community rules are usually compared, have no corresponding exemption system. As a result, in the US the consideration of any economic benefits stemming from an agreement is made at the initial stage. It therefore requires more flexibility within the prohibition. Another reason may be historic as, in the early years of Community competition law’s development, a wide interpretation of Art 81(1) meant that most potentially restrictive agreements required notification for exemption. As the power of exemption rested solely with the Commission, they were in the position to shape the development of the rules through their use of the Art 81(3) exemption procedure. If more flexibility was built into Art 81(1), the national courts would have had a greater role to play in the evolution of the rules. The Commission wanted to retain the power to develop the rules and prevent any possible conflicting interpretations. Whatever the reason behind the broad interpretation of Art 81(1), as the system became more mature, its continued use caused a great many problems.22 The ‘object’ of restricting competition A distinction has been made between agreements which have the object of restricting competition and those which have the effect of doing so. In STM,23 the Court stated that the words should be read disjunctively and thus consideration should first be given as to whether an agreement has the object of restricting competition. Only when it does not, is it necessary to consider the effects of the
22 23
A number of those problems and the prospective solutions were discussed in Chapter 2 and will be examined in the following chapter. Case 56/65 STM v Maschinenbau Ulm [1966] ECR 235; [1966] CMLR 357.
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agreement. In Polypropylene,24 there was considerable evidence of the cartel members’ intention of co-operating across the market but there was little evidence of any anti-competitive effects. Nonetheless, the Commission imposed a large fine which was upheld by the Court of First Instance.25 This simplification of the Commission’s task is limited by a number of factors. Shortly after the decision in Polypropylene the Court of First Instance appeared to question the paucity of economic evidence in ‘object’ cases. In Flat Glass,26 the Commission viewed the object of the agreement as obviously restrictive and did not analyse it further. The Court of First Instance considered that there was a need for some form of delineation of the market in all competition cases. 27 This requirement for some form of analysis is even more important since the adoption of the new Notice on Agreements of Minor Importance.28 As market share tests have been adopted, market analysis will obviously be required to establish if the undertakings involved have a market share above the necessary threshold. Other issues, such as the effect on interstate trade, will also require evidence as to the effects of the agreement. Many of the types of agreement which have been considered to have the object of restricting competition are well known cartel activities, such as price fixing29 or market sharing.30 However, other forms of behaviour, such as collective boycotts31 and information exchanges,32 have also been challenged. Due to the importance of market integration in Community competition law, many forms of export restriction, in both vertical and horizontal agreements, have been taken to have the object of restriction competition.33 The Polypropylene case, already mentioned, is a good example of the way that a horizontal cartel can operate. After its investigation the Commission found strong evidence that 15 undertakings working in the polypropylene market had formed an agreement to restrict competition. It was discovered that there had been regular contact between the suppliers of polypropylene since 1977. These meetings were held on a Community wide basis between senior management, referred to as the ‘bosses’ meetings, and technical managers, referred to as the ‘experts’ meetings. The bi-monthly Community wide meetings were supplemented by occasional national meetings. In the evidence uncovered by the Commission it became apparent that several ‘initiatives’, as they were described by the parties, were discussed at these meetings. The parries discussed ‘target prices’ for the coming months. There was overcapacity in the industry and the prices were falling to
24 25 26 27 28 29 30 31 32 33
Commission Decision (86/398/EEC), OJ L230/1, 1986; [1988] 4 CMLR 347. Commission Decision (86/398/EEC), OJ L230/1, 1986; [1988] 4 CMLR 347. Upheld on appeal in, eg, Case C-49/920 Hercules NV v Commission [1991] ECR II-1711; [1992] 4 CMLR 84 and Commission v Anic Partecipazioni SpA [1999] ECR I-4125. Commission Decision (89/93/EEC) Industria Vetrana Alfonso Cobelli v Società Italiana Vetro, OJ L33/ 44, 1989; [1990] 4 CMLR 535. Cases T-77–78/89 Società Italiana Vetro v Commission [1992] ECR II-1403; [1992] 5 CMLR 302. OJ C372/4, 1997. Cases 48, 49, 51–57/69 ICI v Commission (Dyestuffs) [1972] ECR 619; [1972] CMLR 557. Case 41/69 Quinine, ACF Chemifarma v Commission [1970] ECR 661; [1970] CMLR 8083. Case 71/74 FRUBO v Commission [1975] ECR 563; [1975] 2 CMLR 123. Commission Decision (80/1334/EEC), OJ L383/19, 1980; Italian Cast Glass [1982] 2 CMLR 61. See, also, Cases T-202/98, T-204/98 and T-207/98 Tate & Lyle etc regarding meetings where parties revealed future price intentions, particularly para 73. See Cases 56 and 58/64 Consten and Grundig v Commission [1966] ECR 299; [1966] CMLR 418.
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unprofitable levels, and to avoid this the producers wanted to increase prices gradually towards these ‘targets’. There was also discussion of production quotas, known as ‘aspirations’, to ensure that production levels remained constant, as any increase would put downward pressure on prices. A system of ‘account leadership’ was also introduced. Under that system, ‘key’ major buyers in a Member State were assigned a ‘co-ordinator’. That co-ordinator would deal with the customer and was expected to make sure the price initiatives were followed. Other suppliers, known as ‘contenders’, were to co-operate with the co-ordinator in quoting prices higher than the desired target. This would ensure that these large buyers paid the target price. The Commission gathered evidence in simultaneous ‘dawn raids’ on the premises of 10 of the undertakings involved. In those raids, they uncovered a large number of documents which helped them piece together the activities of the cartel. Most of the information came from ICI, who were the chair of the meetings during the latter period of the infringement. The Commission discovered detailed reports of target prices headed ‘personal—no copy to file’, internal memos dealing with discussion at meetings, accounting documents and travel orders covering the expenses for attendance at meetings, and pricing instructions given to subsidiaries and national sales offices. By combining all this evidence with the responses to requests for information made under Art 11 of Reg 17, it was possible to come to detailed conclusions about the operation of the agreement. In its legal assessment of the cartel, the Commission decided that the complex scheme of arrangements between the 15 suppliers formed a single continuing agreement. There was no need for the agreement to contain sanctions or to be in writing. There was also no need to differentiate between the aspects of the cartel which constituted an agreement and those which were merely concerted practices. Even where particular undertakings were not present at all the meetings, they were held to be involved via a reporting system whereby all the undertakings knew what was being proposed by the others. The important aspect was considered to be the consensus that was reached between the producers and the steps that were taken over a period of time to implement that consensus. The Commission did not consider it necessary to address in any detail the effects of the agreement as its object was obviously anti-competitive, but it did outline a number of ways in which it believed the effects to be manifested. On appeal, the Court of First Instance upheld the Commission’s findings.34 It agreed that there was effectively a single ‘agreement’ operated over a period of time. It added that where some parts of the ‘agreement’ could be described as an agreement proper, others could be better categorised as concerted practices. Despite this, there was no need to distinguish between them, especially where the various schemes formed a single infringement of a complex nature. The argument that the cartel’s activities did not affect competition were also dismissed by the Court on the basis that the effects of the agreement were not relevant as its object was clear. The proper question was whether the agreement could have had an effect on the market, and as the undertakings concerned represented nearly the whole market that question must be answered in the affirmative. The CFI’s 34
See Case T-7/89 Hercules NV v Commission [1991] ECR II-1711; [1992] 4 CMLR 84. The appeal to the Court of Justice did not directly address this issue, Case C-51/92P [1999] ECR I-4235; [1999] 5 CMLR 976.
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findings were upheld by the Court of Justice in Commission v Anic Partecipazioni SpA.35 The ‘effect’ of restricting competition Where an agreement does not have the object of restricting competition, it is necessary to consider its effects. Even horizontal agreements between competitors may not have the object of restricting competition. In innovative or high technology industries, it is common for undertakings to co-operate in the development, of new technology or products. That co-operation will be designed to improve competition by bringing new products on to the market or improving the technology used in existing production, thereby allowing for greater efficiency. Without spreading the risks involved in research and development the project may not be viable. Even if the research would have gone ahead, the co-operation may result in the development reaching the market more quickly. While these agreements may result in advantages, they may also have disadvantages. When the research work is complete should there also be co-operation in production and marketing of the new advance? At what stage should the co-operation cease? By allowing competitors to work together on the development programme, will it blunt their desire to compete in other areas? These concerns mean that the particular agreement must be carefully considered to establish its potential effects on the market.36 When the effect of an agreement is considered it is important to examine the market in its economic context. Without a full analysis of the market in question, it will be impossible to discover if the agreement has prevented, restricted or distorted competition, or has the potential to do so. This was emphasised by the Court in Brasserie de Haecht v Wilkin:37 It would be pointless to consider an agreement, decision or concerted practice by reason of its effect if those effects were to be taken distinct from the market in which they are seen to operated.38
The Court adopted similar reasoning in Delimitis.39 In both these cases the agreements were between brewers and cafes. The agreements tied the cafe owners to purchase beer supplies from the brewer. A single agreement would be of limited impact; however a network of such agreements across a national market could have the effect of foreclosing competition. If large numbers of outlets were tied to brewers it could mean that potential competitors would find it difficult to enter the market and compete against existing brewers. Although the definition of the relevant market is a concept usually associated with Art 82, in these situations considering the relevant market is also vital. Before deciding whether a network of 35 36 37 38 39
Case C-49/92P [1999] ECR I-4125. For the Commission’s treatment on such agreements, see the Commission Notice on co-operation agreements OJ C84/14, 1968, and the Block Exemption for research and development agreements, Commission Reg (418/85), OJ L53/5, 1985. Case 23/67 [1967] ECR 407; [1968] CMLR 26. Ibid, para 40. See Case C-234/89 Delimitis v Henniger Bräu [1991] ECR I-935; [1992] 5 CMLR 210. For an application of these principles by the CFI, see Case T-25/99 Roberts v Commission, 5 July 2001.
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agreements can foreclose a market it is vital to define exactly which type of outlets are competing. For example, do cafes compete with off licences and supermarkets? It is also apparent from the reasoning in Delimitis that not only must consideration of the effects of the agreement on the existing market be made, but also its potential effects on the development of the market. The Court emphasised that the effects of the agreement, taken together with other contracts of the same type, may have an impact on the opportunities for others to gain access to the market. This would in turn have an effect on the products offered to consumers. The Court decided that the demand structure for beer to be consumed on the premises, in particular in public houses and restaurants, was very different from the retail sector in that there was also a provision of services. The differing nature of the trade was also indicated by the different distribution systems. As this was a preliminary ruling under the Art 234 procedure, the Court indicated a number of factors which should be taken into account when examining the potential to foreclose the market through a network of agreements:40 (a) the possibilities for a new competitor to penetrate the bundle of contracts by acquisition of an established operator or the establishment of new outlets; (b) the conditions of competition on the market, including the level of product saturation and customer loyalty. When a market is difficult to enter, the national court should also examine the effects of the bundle of agreements in question to decide the extent to which they contribute towards that effect. If their effect is insignificant, they will not fall within the Art 81(1) prohibition. The extent of the economic and legal analysis required under the Delimitis approach was highlighted by the Court in Neste.41 The Court ruled that it was appropriate to separate petrol supply agreements which had a one year notice period from the consideration of other agreements which were concluded for a number of years. Agreements which contained a one year notice period were likely to have an insignificant effect in the terms of Art 81(1), even though they formed part of the wider set of agreements which could make a significant contribution to foreclosure. Thus, the Court limited the relevant network of agreements which were under consideration to those which made a significant contribution to the anti-competitive effects. Market analysis is now very important in the consideration of the effect of an agreement, though in the early years of the Community competition system the Commission and the Court gave the ‘effect’ requirement a very broad interpretation, catching many agreements which appeared to be restrictions on conduct rather than of competition. The Commission used Art 81(3) to allow agreements having positive benefits to proceed. This approach came under strain as the workload of DG for Competition increased. The Commission was no longer capable of giving each potentially restrictive agreement individual attention. Partly in order to relieve this problem, a number of Block Exemptions were 40 41
Case C-234/89 Delimitis v Henniger Bräu [1991] ECR I-935; [1992] 5 CMLR 210, paras 20–26. See, also, Case T-25/99 Roberts v Commission, for consideration of the network of brewers and potential foreclosures in a UK context. Case C-214/99 Neste Markkinointi Oy v Yötuuli Ky and Others [2001] All ER (EC) 76; [2001] 4 CMLR 27.
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adopted to exempt classes of agreements from the prohibition. The Block Exemptions cover common types of agreement, vertical agreements 42 and technology transfer agreements,43 and include an indication of permitted and prohibited terms. The Court also became involved in developing jurisprudence which went some way to reducing the Commission’s workload. When considering a number of vertical agreements, the Court appeared to be willing to allow agreements, which contained restrictive clauses, if they were pro-competitive when considered in context.44 More particularly, in a series of cases, the Court has shown that it will analyse restrictions in agreements to examine whether they are ‘necessary’ for the agreement to be of commercial value. One of the earliest examples of this was in Remia.45 This case involved an agreement for the sale of a business which included a restrictive covenant. It is common for the sale price of a business to include an amount accounting for the goodwill that the business has built up over time. The purchaser would not wish to pay for this goodwill if the vendor were able to open a competing business in the vicinity and entice customers away from the original business. A restriction is often placed in such contracts prohibiting the vendor from trading in that vicinity for a period of time. It was such a clause which was examined in this case. Looking at that term alone, it is possible to see how competition might be affected. One potential competitor is barred from entering the market for a stipulated period. But, on the other hand, the whole agreement is pro-competitive, as without such a term a potential purchaser would be deterred from investing in the business. He would not want to pay for the goodwill. It would therefore be considerably more difficult to enter, or exit, the market. The Court found that the term was necessary as an ancillary restraint. Without the restrictive term, the pro-competitive agreement would not go ahead. It did not, therefore, fall within Art 81(1). On a number of occasions, the Court has used similar reasoning to find that agreements which are pro-competitive, but which contain potentially restrictive terms, do not fall within the prohibition so long as the restrictions are necessary for the agreement to work. Examples can be found in a variety of areas: the licensing of intellectual property rights, as in Nungesser;46 qualitative membership criteria in selective distribution systems, as in Metro I;47 and prescribed sales methods and limited territorial restrictions in franchising systems, as in Pronuptia.48 The arguments surrounding the Court’s approach to restrictions within vertical agreements are discussed in more detail in the following chapter.
42 43 44
45 46 47 48
Commission Reg (2790/99/EC), OJ L336/21, 1999. Commission Reg (240/96/EC), OJ L31/2, 1996. See Case C-234/89 Delimitis v Henniger Bräu [1991] ECR 1–935; [1992] 5 CMLR 210. For an implementation of the Delimitis principles in the UK, see Passmore v Moreland and Others [1999] 1 CMLR 1129 where the English Court of Appeal ruled that the validity of an agreement may change as the market conditions alter. Case 42/84 Remia and Nutricia v Commission [1985] ECR 2545; [1987] 1 CMLR 1. Case 258/78 Nungesser v Commission [1982] ECR 2015; [1983] 1 CMLR 278. Case 26/76 Metro v Commission [1977] ECR 1875; [1978] 2 CMLR 1. Case 161/84 Pronuptia v Schillgalis [1986] ECR 353; [1986] 1 CMLR 414.
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Agreements of minor importance A very important limit on the application of Art 81 is the de minimis principle. De minimis covers agreements which due to their limited significance may not be caught by the prohibition. Such agreements do not fall within the prohibition as either they do not have an appreciable effect on competition or they do not affect interstate trade. This principle was first expounded by the Court in Völk49 and has been formalised by the Commission in a series of Notices. The latest Notice on Agreements of Minor Importance was published in December 1997 and changes the structure of the de minimis system.50 Rather than relying on simple turnover thresholds, the new Notice introduces a market share test and differentiates between horizontal and vertical agreements. Article 9 of the Notice sets out that an agreement will not fall within the prohibition if the aggregate market share of the participating undertakings does not exceed 5% of the relevant market for a horizontal agreement, or 10% of the relevant market for a vertical agreement.51 For mixed agreements, the 5% threshold is applicable. As well as the market share test, the Commission states that agreements between small and medium-sized undertakings will rarely be capable of affecting trade between Member States.52 While the Notice can be welcomed as being more economically realistic about the appreciability of agreement, it does have some problems. It is likely to create a degree of confusion as it will be far more difficult for undertakings, and the national courts, to decide if an agreement comes within the terms of the Notice. Not only will the undertakings involved have to define the relevant market, they will also have to establish their combined share of it. In practice, this task will not be easy, and the Notice may therefore generate less certainty than the previous system, which relied on a calculation of aggregate turnover. Within the Common Market The final part of the prohibition concerns its territorial extent. Only agreements which restrict competition within the Common Market are prohibited. Questions have been raised as to the application of the Community rules to agreements between undertakings established outside the Community. The Commission have always been of the opinion that such application is possible under the Treaty. In Dyestuffs,53 the Commission found against ICI on the basis that an undertaking based outside the Community, ICI, had put the concerted practice into effect through its subsidiaries in Europe.
49 50 51 52
53
Case 5/69 Völk v Ets Veruaecke Sprl [1969] ECR 295; [1969] CMLR 273. OJ L33/44, 1989. The Commission is currently consulting on a revision of the de minimis Notice with higher thresholds, OJ C149/5, 2001. The importance of this figure has been reduced following the adoption of the Commission’s new Vertical Agreements Regulation, Commission Reg (2790/1999/EC), OJ L336/21, 1999; [2000] 4 CMLR 398. Article 19 of the Notice. Medium-sized undertakings are defined in Commission Recommendation (96/280/EC), OJ L107/4, 1996, as undertakings with fewer than 250 employees and either an annual turnover of no more than 40 m ECU or a balance sheet not exceeding 20 m ECU. Cases 48, 49, 51–57/69 ICI v Commission [1972] ECR 619; [1972] CMLR 557.
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The same question was considered in Wood Pulp.54 The majority of wood pulp suppliers investigated by the Commission were based outside the Community in North America and Scandinavia. Sales were made directly into the Community via subsidiaries, branches or agents. The Court’s judgment concentrated on the ‘implementation’ of the agreement, decision or concerted practice within the Common Market. But it also added that it was immaterial that the implementation was carried out through persons operating within the Common Market. The exact meaning of implementation within the judgment is unclear, though it appeared that the Court was willing to uphold the application of Community competition law against undertakings which had no physical presence in the Community. Although Wood Pulp is still the leading judgment in this area the Court of First Instance adopted a different approach in Gencor.55 Rather than discussing the ‘implementation’ of the agreement the CFI concentrated on whether there was an ‘immediate and substantial effect in the Community’.56 The concentration on ‘effect’ rather than ‘implementation’ leads to a wider and much more flexible test. It will be interesting to see which approach the Commission and the Court follow in the future.
ARTICLE 81(2) Article 81(2) describes the consequence of breaching the prohibition contained in Art 81(1). The agreement is automatically void. The sanction of nullity is not significant for agreements which involve market sharing or price fixing, as it would be incredibly unusual if the parties to the agreement were to seek its enforcement. In those circumstances the parties would seek to deny the agreement and hope that they can avoid Commission fines or the civil consequences of being found in breach. The sanction of nullity is more important when Art 81 is used as a ‘Euro-defence’ by a party in breach of the contested agreement. This is more common in respect of agreements for the licensing of intellectual property rights or other vertical restraints, such as distribution agreements. One of the first competition cases to come before the UK courts involved, inter alia, an Art 81 Euro-defence although the defendant in this case was not party to the relevant agreement. Application des Gaz v Falks Veritas57 was a preliminary hearing in a copyright dispute. A French company, Application des Gaz, claimed copyright in a metal gas canister and sought to prevent an English company, Falks Veritas, from producing an identical can. The French company had already granted an exclusive right in production to another English company. After the coming into effect of the UK’s accession to the Community, Falks Veritas sought to amend their defence to include an alleged breach of Art 81. It claimed that there was a concerted practice between the French company and its English licensees to discourage retailers from stocking the Falks Veritas product. 54 55 56 57
See Cases C-89, 104, 114, 116, 117 and 125–27/85 A Ahlstrom Oy v Commission [1993] ECR I-1307; [1993] 4 CMLR 407. Case T-102/96 Gencor v Commission [1999] II-ECR 753; [1999] 4 CMLR 971. Although this is a merger case the principles the principles are similar. Ibid, para 90. [1974] 1 Ch 381.
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The Court of Appeal did not consider the merits of the case in detail but accepted that the defence based on Art 81 appeared to be valid. Another example of an Art 81 Euro-defence was considered by the English High Court in Inntrepreneur Estates v Mason.58 Inntrepreneur, the landlord of a chain of pubs, sought to forfeit the lease granted to Mason after he fell into arrears with his rent. The landlord sought rent arrears and other sums due, a total of £38,000. The tenant claimed in his defence that because of the ‘tie’ in the lease requiring the tenant to purchase beers and other drinks directly from the landlord the lease was an agreement falling within the prohibition under Art 81(1) and therefore null and void under Art 81(2). In this interlocutory appeal it was not contested that the argument based on Art 81 had a real prospect of success. The contentious issue concerned the effects of nullity. If the whole lease became void the claim would fail, but if Art 81(2) only affected the clause of the agreement which restricted competition, the ‘tie’, the rest of the lease would stand and the back rent would still be due. This question of severance was considered by the European Court of Justice in STM.59 The Court stated that the sanction of nullity only applies to those parts of the agreement that are subject to the prohibition. If it is possible to sever the offending parts, the rest of the agreement may stand. This coincides with the English rules on severance. In a previous English intellectual property case involving Art 81, Chemidus Waving, 60 the Court of Appeal decided that the offending term should be severed unless the contract would be so altered in character as not to be the contract into which the parties entered. That would occur if a major term of the contract was removed which changed its nature dramatically. In Passmore v Moreland and Others61—the English Court of Appeal addressed the question of when an agreement becomes void. Mr Passmore was, at the time of the dispute, the tenant of a pub which was tied to a small brewery. Because of the brewer’s size the beer tie did not have an appreciable effect on competition. When the lease was originally granted the pub was owned by a much larger brewer who had transferred the lease to the current owner. It was argued that the lease was void when it was granted and was therefore still unenforceable. The Court of Appeal decided that the sanction of nullity was ‘temporaneous or transient’62 in effect, as is the prohibition. Even if the lease may have been void when it was granted it was not still to be considered void following the change in circumstances. It must however be noted that the European Court has not expressed a view on this issue and the Court of Appeal did not consider it necessary to make a preliminary reference under Art 234.63
58 59 60 61 62 63
Inntrepreneur Estates v Mason [1993] 2 CMLR 293. Case 56/65 STM v Maschinenbau Ulm [1966] ECR 235; [1966] CMLR 357. Chemidus Wavin v Société pour la Transformation et L’Exploitation des Resines Industrielles SA [1978] 3 CMLR 514. [1999] 3 All ER 1005; [1999] 1 CMLR 1129. Per Chadwick LJ, p 1014. See Maitland-Walker, J, ‘Have English courts gone too far in challenging the effectiveness of EC competition law’ [1999] 1 ECLR 1. See, also, the discussion of Gibbs Mew v Gemmell [1998] EuLR 588, and Case C-453/99 Courage v Crehan and Crehan v Courage, pending, in Chapter 2.
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ARTICLE 81(3) The third paragraph of Art 81 allows for an exemption to be granted from the prohibition in Art 81(1). The importance of Art 81(3) stems from the wide interpretation adopted under Art 81(1), as a result of which a large range of common agreements fell within the prohibition and required exemption. Article 9(1) of Reg 17 gave the Commission the sole power to grant exemption under Art 81(3). This gave the Commission extensive and exclusive powers which they used to mould the shape of the competition system in the Community. It also gave them the opportunity to promote other goals, such as market integration, within the competition sphere. The Commission used its power of exemption to influence the way in which agreements which were caught by Art 81(1), but which were beneficial overall, were drafted. This policy worked well for the Commission in the early years, as it allowed them to gather large amounts of information about the way in which agreements operated across the Community. As undertakings became more aware of the provisions, and the Common Market became more integrated, the number of exemptions which were sought increased to such levels that the Commission had difficulty handling the workload. The Commission took several steps to reduce the number of agreements notified for exemption, but it still has serious problems. A number of Block Exemptions have been adopted which automatically exempt certain classes of agreement. These allow many common agreements, such as exclusive distribution agreements, to go ahead without Commission involvement. There have also been efforts to adopt more efficient procedures, and informal methods of closing cases are used more frequently. Even with these efforts the Commission’s workload is still overwhelming. In an effort finally to deal with the operation of the exemption system, the Commission is currently involved in a process of reform. The process is discussed more fully in Chapter 2 but, in summary, the Commission intends to abolish the notification requirement and give up its exclusive power to grant exemptions, allowing Art 81(3) directly to be effective.
INDIVIDUAL EXEMPTIONS Before the requirements for exemption are discussed, it is also important to note that this is an area where the Commission can introduce other policy considerations, such as regional and industrial policy. Any cases which are discussed must be placed in their context and should be considered as examples, rather than precedents.
NOTIFICATION The notification of an agreement to the Commission is an important step in the procedure and has several consequences. Obviously, an agreement cannot benefit from an exemption unless it has been notified to the Commission in the proper manner. If litigation in a national court concerns an agreement alleged to be in 144
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breach of Art 81(1), whether or not it has been notified to the Commission may be very important. If it has been notified, the Court and the Commission have stated that the national court must avoid taking a decision which is contrary to that of the Commission.64 In practice, the Commission has tended to favour the exemption of particular classes of agreement and those between parties without market power. It takes into account a broad range of factors when making a decision and for that reason the Court has not been willing to interfere with the Commission’s discretion, even where the Commission’s reasoning has been remarkably brief.65 The four conditions for exemption To benefit from an exemption, the agreement must satisfy the four conditions in Art 81(3). An agreement must: (a) improve the production or distribution of goods or promote technical or economic progress; and (b) consumers must receive a fair share of the resulting benefits; and (c) the agreement must not contain indispensable restrictions; and (d) must not substantially eliminate competition. Benefit The benefit must be for the Community as a whole, not just the parties to the agreement. It is in this area that the Commission has been creative in using the other goals of the Community to demonstrate benefit where the beneficial effects on competition are limited. In Metro,66 the Court accepted that the stabilisation of employment may improve production, and may therefore fall under Art 81(3). The Commission’s approach to ‘crisis cartels’ is also instructive in this area.67 These are cartels which may be permitted within an industry to allow for reorganisation during periods of economic difficulty. Good examples of the form of benefits the Commission desires can be seen in the Block Exemptions. The Technology Transfer Regulation68 is designed to facilitate the dissemination of technology and the improvement of manufacturing processes. It is believed that research and development agreements are suggested to promote technical and economic progress by increasing the dissemination of know how and avoiding duplication.69
64 65 66 67 68 69
See Case C-234/89 Delimitis v Henniger Bräu [1991] ECR I-935; [1992] 5 CMLR 210 and the Commission Notice on co-operation between national courts and the Commission, OJ C39/6, 1993. The problems in this area will be discussed in more detail later in the chapter. See Case 8/72 Consten and Grundig v Commission [1972] ECR 977; [1973] CMLR 7. See Case 26/76 Metro v Commission [1977] ECR 1875; [1978] 2 CMLR 1. Eg, Synthetic Fibres, OJ L207/17, 1984. Commission Reg (240/96/EC), OJ L31/2, 1996. Commission Reg (2659/2000/EC), OJ L304/7, 2000.
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Fair share to consumers The parties are unlikely to proceed with an agreement unless they benefit in some way from it. Using this condition, the Commission seeks to ensure that the benefits received by the parties are ultimately passed on to the consumer. The reference to the consumer refers to any persons who deal with the product or service at any level of the market. The consumers who may receive a share of the benefit therefore range from manufacturers to high street shoppers. The main benefit is likely to be a reduction in price. No indispensable restrictions This element can be regarded as the Art 81(3) version of the proportionality test. An exemption will not be granted unless the restriction of competition is no less than is necessary to allow the agreement to go ahead. The Commission does not apply this test as rigorously as it does in other areas of Community law. It will examine the agreement in its context in order to see what restrictions are necessary. However, there are some forms of restriction which it is very unlikely to accept, even if they make commercial sense in the particular agreement. This is especially the case with price fixing and absolute territorial protection. Often, the Commission will take the opportunity at this stage of the investigation to suggest to the parties possible amendments which, in its view, would make the agreement more likely to be accepted. The parties will be aware that a failure to amend along the lines suggested is likely to result in a refusal of the exemption sought. It is questionable whether interventions by the Commission in this way help to attain efficiency in business organisation. It could be queried whether the Commission is really in a better position than the parties to decide what is necessary in the circumstances. No substantial elimination of competition The final area of analysis is a catch-all provision which may stop agreements that would remove competition from a market. It is likely that agreements with this effect would have fallen at an earlier stage of the Commission’s deliberations under Art 81(3), though, in some circumstances, it has posed problems. These have been where the Commission is inclined to grant an exemption, but it is difficult to show that some competition will remain on the market. The Commission faced this problem in Synthetic Fibres.70 A crisis cartel was organised to reduce production levels in the fibres market. It involved most of the market operators but it was argued that competition from other types of fibre would retain a level of competition. Many considered the Commission arguments not to be particularly convincing in this case.
BLOCK EXEMPTIONS The main Commission weapon in the struggle to control its exemption workload has been the adoption of Block Exemptions. Block Exemptions differ from 70
OJ L207/17, 1984.
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individual exemptions in that they exempt a class of agreements automatically without formal intervention and approval from the Commission. The drafters of the Treaty obviously envisaged such a form of exemption when they referred to ‘categories of agreement’ in Art 81(3). Before the Commission may adopt a Block Exemption, they must be given authority by Council.71 Once a Block Exemption is in place, a large number of common business agreements covered by the Block Exemption can be cleared without administrative difficulty. The arrangement makes sense for parties to an agreement as they know in advance that if their agreement conforms with the terms of the Block Exemption then it will be valid and will not attract the attention of the competition authorities. Block Exemptions have been adopted for the following types of agreement: vertical agreements,72 specialisation,73 research and development,74 motor vehicle distribution75 and technology transfer.76 The details of the Block Exemptions are quite technical and therefore shall not be discussed here. The outline of all the provisions is basically similar. A more detailed discussion of the Vertical Agreements Regulation is contained in the following chapter. A traditional Block Exemption has four or five main sections. Although many of the Regulations are quite long the central provisions are relatively short. The bulk of the Regulation deals with specialist areas which require more detailed consideration. The traditional format of a Block Exemption regulation has now been modified by the adoption of a more flexible format in the Vertical Agreements Regulation. A number of the existing Block Exemptions are now under review77 and it will be interesting to see whether the more flexible format is adopted in these situations. The first section of a traditional Block Exemption outlines which agreements fall within the Regulation. The section is phrased in a general manner describing the type of agreement which is intended to benefit from the exemption. If the agreement has some other purpose than that described, it will not benefit from exemption, even where it contains the particular clauses exempted in later sections. This ensures that agreements are within the ‘spirit’ of the exemption. The second section contains what is known as the ‘White List’. This is a list of terms common in such agreements which do not fall within the prohibition in Art 81(1). The inclusion of these terms is not strictly required as they are not generally considered to be anti-competitive. They are included for the purpose of certainty, as in some circumstances it is possible that, because of the market in which they operate, they may fall within the prohibition. If they do fall within Art 81(1) they are exempted as a result of the White List.
71 72 73 74 75 76 77
Eg, Council Reg (19/65), OJ Spec Ed 35, 1965. Commission Reg (2790/1999/EC), OJ L336/21, 1999; [2000] 4 CMLR 398. See, also, the Guidelines on Vertical Restraints, OJ C291/1, 2000; [2000] 5 CMLR 1074. Commission Reg (2658/2000/EC), OJ L304/3, 2000. Commission Reg (2659/2000/EC), OJ L304/7, 2000. Commission Reg (1475/95), OJ L145/25, 1995. Commission Reg (240/96), OJ L31/2, 1996. Commission Reg (1475/95) and Commission Reg (240/96) are both now under review.
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The third section contains the ‘Grey List’.78 These are terms which normally fall within the Art 81(1) prohibition but are exempted under the Regulation. These are the typical terms which one would expect to see in an agreement of this class. The permitted restrictions are generally fashioned by the Commission in order to allow parties to achieve the aims of the agreement with limited disruption to the goals of the Community. One of the most important sections of a Block Exemption is the ‘Black List’. This contains the terms which, if included in an agreement, will result in that agreement losing the benefit of the Block Exemption. Due to the restrictive nature of the terms they are prohibited from inclusion in exempted agreements. If such a term is to be included in an agreement an individual exemption must be sought, but is unlikely to be granted. The Black List includes terms which the Commission believes are either not necessary in such agreements or will result in a substantial restriction of competition. A common criticism of the early Block Exemptions was that they forced parties into very narrow forms of agreement, the Block Exemption effectively providing a standard form agreement. To address that criticism the Commission introduced the ‘opposition procedure’ in some Block Exemption Regulations. This section of a Block Exemption states that all terms which do not appear in the White, Grey or Black Lists will be liable for exemption through the opposition procedure. The parties must notify the Commission of the new term. The Commission then has a specified period of time in which they may challenge the term. In the Technology Transfer Regulation,79 the period is four months. If there is no challenge, it will be deemed to have been exempted. In effect, this means that the Commission must act where it feels that a term is too restrictive to be exempted. The majority of terms will not require Commission action and will be passively exempted. The procedure also gives the parties a time limit in which they will receive a Commission response. Vertical Agreements Regulation The latest development in the scope of Block Exemptions was seen in 1999 when the Commission adopted the Vertical Agreements Regulation.80 The Vertical Agreements Regulation is discussed in detail in the Chapter 5 but it adopts a very new approach. Rather than a White and Grey List, the Regulation creates an ‘umbrella’ exemption for all vertical agreements, which are not covered by other Block Exemptions, where the lead party81 has a market share of less than 30%. A form of Black List is retained in that the benefit of the exemption will be removed if the agreement contains any of the ‘hard core’ restraints, such as maximum price fixing or certain territorial restrictions. This creates a more flexible exemption which does not concentrate on a clause by clause examination of each agreement. It allows the majority of agreements to go ahead where the parties do not hold market power while restricting agreements where the parties hold market power. 78 79 80 81
In some of the older Regulations, the White and Grey Lists were combined into a single White List. The newer regulations have introduced the Grey List to differentiate between those terms exempted and those which will not normally be prohibited. Commission Reg (240/96), OJ L31/2, 1996, Art 4. Commission Reg (2790/99/EC) OJ L336/21, 1999; [2000] 4 CMLR 398. It may be the seller or buyer depending on the nature of the agreement.
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This is a more economically sensible approach as restrictions in a vertical agreement are only likely to limit intra-brand competition. Limits on intra-brand competition will only be a concern where the product is not subject to competition from other brands, and competition from other brands will only be limited where the parties have market power. Although the flexibility of the Regulation was welcomed, the introduction of a market share test has potential problems, the main difficulty being correctly to identify an undertaking’s market share. Under the previous system, the terms of the agreement were the main focus but now the parties to an agreement have to focus on their ever shifting market shares. When the parties suspect they are near the 30% figure the position of the agreement becomes very uncertain. Problems and reform The most common criticism of the traditional Block Exemption system related to its formalism. In practice, business parties had an enormous incentive to fit their agreements within a Block Exemption. If this was not possible they had to notify the agreement and wait for an exemption. The delays and uncertainties in the individual notification procedure, and the unsatisfactory nature of an informal decision, made the procedure impractical for most agreements. The vast majority of agreements were therefore squeezed within the terms of a Block Exemption, even where a more efficient arrangement was possible. The opposition procedure was an attempt to lessen this problem, though relatively few agreements have been exempted in this manner. It is apparent that the requirement of notification discourages its use. The introduction of the Vertical Agreements Regulation has indicated the extent to which the Commission has recognised the concerns of industry over the lack of flexibility in Block Exemptions. The problems of formalism and flexibility were discussed at length in the consultation process which lead to the adoption of the Regulation.82 The use of market share thresholds to allow for increased flexibility has always been controversial. The Commission wanted to introduce a market share threshold into the Technology Transfer Regulation,83 but were forced to back down in the face of protest from industry. The calculation of market share is a complex problem which creates uncertainty in many areas, but it would appear that some form of consensus has been reached that it is one of the most practicable ways to move forward. A similar approach was adopted in both the specialisation84 and research and development85 Regulations, with a broad exemption and market share threshold. A number of other Block Exemptions are currently under review86 and it will be interesting to see if the traditional approach is to be abandoned. The Commission’s most recent moves towards reform in this area have taken an even more radical turn. The potential effects of the proposals in the White Paper on 82 83 84 85 86
See, eg, the Green Paper Vertical Restraints COM (96) 721, and the follow-up Commission Communication OJ C365/3, 1998. Commission Reg (240/96), OJ L31/2, 1999. Commission Reg (2658/2000/EC), OJ L304/3, 2000. Commission Reg (2659/2000/EC), OJ L304/7, 2000. Motor Vehicle Distribution, Commission Reg (1475/95), OJ L145/25 1999, and technology transfer, Commission Reg (240/96), OJ L31/2 1999. See, also, Report on the Evaluation of Regulation (EC) No 1475/1995, COM (2000) 743 final.
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Modernisation87 and the Commission’s Draft Regulation,88 as discussed in Chapter 2, are dramatic. If the proposals go ahead as the Commission envisages, the notification system which has characterised Art 81 since 1962 will be brought to an end. The exemption in Art 81(3) will be directly applicable and will exempt any agreement which falls within its terms without the need for notification. This will obviously increase the day to day importance of Art 81(3) and will shift the burden of application away from the Commission to the parties to agreements and the national courts. It will also result in an increase in cases concerning the interpretation of Art 81(3) coming before the Court under the preliminary reference procedure. The position of Block Exemptions under such a system is interesting. The Commission intends to continue to adopt ‘new style’ wider Block Exemptions under a directly applicable system to ensure that a high level of legal certainty is retained. While the Block Exemptions will be useful for those planning agreements it is clear that they will not be the only way that parties could seek exemption. Even if an agreement falls outside a Block Exemption it will still be possible to benefit from the direct applicability of Art 81(3) as a matter of course. It will be interesting to see whether the national courts are willing to allow exemptions for agreements which fall outside the Block Exemptions, but where the parties argue that the agreement falls within the terms of Art 81(3). The Commission also intends to ensure that the National Competition Authorities have the power to withdraw the benefit of a Community Block Exemption from an agreement in their own territory, on the basis that the agreement has particularly damaging effects in that area.
ARTICLE 81 AND THE NATIONAL COURTS As Art 81 is directly effective it has an important impact on national courts. The concurrent jurisdiction of the national courts and the Commission has resulted in several problems, especially where a dispute over an agreement comes before the national courts and the agreement has been notified to the Commission. As the national courts cannot currently grant exemptions under Art 81(3), they have difficulty dealing with cases where an exemption has been sought. There are four differing situations in which notification can cause problems. First, where an agreement is notified to the Commission after the agreement is challenged in the national court. Secondly, where an agreement is already being considered by the Commission. Thirdly, where the Commission has concluded its consideration and issued a comfort letter. Fourthly, where the Commission has issued a decision but it is subject to appeal. The first two situations are dealt with in a similar manner, although the former is known as a ‘dilatory notification’, and is of particular concern because the notification may simply be a delaying tactic to hold up the court action. The
87 88
White Paper On Modernisation of the Rules Implementing Articles 85 and 86 of the EC Treaty, Commission Programme No 1999/027, OJ C132/1, 1999. Proposal for a Council Regulation on the Implementation of the Rules on Competition Laid Down in Articles 81 and 82 of the Treaty, COM (2000) 582, OJ C365/284, 2000.
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Commission has issued guidance to the national courts in such circumstances in the 1993 Co-operation Notice.89 The guidance states that where a national court is of the opinion that an agreement infringes Art 81(1) and it has been notified to the Commission for exemption, the national court must assess the likelihood of an exemption being granted. Where the court concludes that it cannot be the subject of an individual exemption, it should apply Art 81(1) and (2). If, on the other hand, it believes an exemption is possible, it should suspend the proceedings pending a Commission decision, making any interim orders it considers appropriate.90 The Commission stated that priority will be given to its cases which are the subject of national proceedings, and that national courts may approach the Commission seeking an opinion as to how long exemption proceedings are likely to take or whether interim measures may be required.91 Although the suspension of national proceedings is sensible, in that it avoids potentially conflicting decisions, it does create some difficulties. The lengthy delays in the Commission’s consideration of notifications can lead to long delays in national proceedings. These delays may encourage a party involved in national proceedings to notify an agreement as a delaying tactic. This would discourage decentralised enforcement of Community competition law and slow the reduction in the Commission’s workload. The majority of notifications are dealt with informally by the Commission. It is relatively rare for the Commission to adopt a formal decision granting an exemption.92 The third situation, where the Commission closes a file by issuing a comfort, or a ‘discomfort’, letter is relatively common. These are informal communications which state that the Commission is of the opinion that the agreement does not infringe Art 81(1), a comfort letter, or that it does infringe Art 81(1) but the Commission is minded to grant an exemption under Art 81(3), a discomfort letter. In the former case, the national court will, in normal circumstances, simply follow the Commission’s advice. In the latter situation, its position is much more difficult. The national court knows that the agreement infringes Art 81(1), as stated in the letter, and it should therefore apply Art 81(2). It does not have the power to apply Art 81(3) and the comfort letter has no formal legal status. The guidance states that such letters should be taken into account when a national court deals with these issues.93 Again it would appear that the national court’s only option is to stay the proceedings until the Commission
89 90 91 92 93
Commission Notice on Co-operation between National Courts and the Commission in Applying Arts 85 and 86 of the EEC Treaty, OJ C39/6, 1993; [1993] 5 CMLR 95. Co-operation Notice, ibid, Points 29 and 30. See, also, MTV Europe v BMG Record (UK) Ltd and Others [1997] 1 CMLR 867. Co-operation Notice, ibid, Point 37. According to the XXVIIth Report on Competition Policy (1997), three decisions granting an exemption were made in 1997. Point 20 of the Co-operation Notice, OJ C39/6, 1993; [1993] 5 CMLR 95.
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adopts a formal decision. This was the situation in Inntrepreneur Estates v Mason,94 where the High Court was forced to stay proceedings when considering an agreement for which a discomfort letter had been issued. The deputy judge was obviously unhappy with the impact the Commission’s policy of informally closing cases had on national proceedings.95 The final area of difficulty is where the Commission has adopted a final decision, but it is subject to appeal to the European Courts. If the national court is asked to consider the position of that agreement what should it do? The Court addressed that question in Masterfoods96 and clarified the position. The national courts cannot take decisions which run contrary to that of the Commission. It should, therefore, if it is concerned about the validity of the Commission decision, either stay proceedings and await the conclusion of the appeal procedures, or refer a question to the Court for a preliminary ruling. Again this assures the uniformity and respect of Community law but entails delay and uncertainty for the parties. The position of the domestic courts will change dramatically when the proposed changes suggested in the White Paper come into effect.97 It is intended that the whole of Art 81 be justiciable and that domestic courts should apply Art 81(3). This would switch the emphasis of enforcement away from the Commission towards private litigation. It should also improve the enforceability of agreements as parties will be able to enforce their agreements directly if the agreement falls within Art 81(3) without the need to notify the Commission.98
INTRODUCTION TO UK CONTROLS ON ANTI-COMPETITIVE AGREEMENTS This section shall look at the background to the restrictive trade practices legislation of 1976 and give an outline of the provisions and means of enforcement. Proposals for reform of the legislation, dating to 1989, shall be analysed and the provisions contained in the Competition Act 1998 for dealing with anticompetitive agreements shall be discussed. The Competition Act 1998 repeals the 1976 legislation and sets out a new prohibition on anti-competitive agreements modelled largely on Art 81, but it is instructive to consider the structure and nature of the earlier legislation in order to understand the rationale for reform and basis for introducing the new rules.
94 95 96 97
98
[1993] 2 CMLR 293. Ibid, p 306: ‘It appears to me that I have no real means of knowing the real likelihood of an exemption being granted.’ Case C-344/98 Masterfoods v HB Ice Cream [2001] 4 CMLR 14. White Paper on Modernisation of the Rules Implementing Articles 85 and 86 of the EC Treaty, Commission Programme No 99/027, OJ C132/01, 1999 and Proposal for a Council Regulation on the Implementation of the Rules on Competition laid down in Articles 81 and 82 of the Treaty, COM (2000) 582, OJ C365/284, 2000. For a fuller discussion of the reforms, see Chapter 2.
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THE 1976 RESTRICTIVE TRADE PRACTICES LEGISLATION Background Until 1956, the discretionary and flexible investigative system adopted under the Monopolies and Restrictive Practices (Inquiry and Control) Act 1948, involving references to the Monopolies and Restrictive Practices Commission (MRPC), was the only available tool to control cartel activity. However, in its general report in 1955, Collective Discrimination99 the MRPC commented on the problems caused by cartels and advocated that there should be a more rigorous approach adopted towards anti-competitive agreements. The report demonstrated the clear concern of the MRPC regarding the prevalence of cartels in industry and their pernicious effects on the UK economy. A majority of the Commission members favoured the introduction of a prohibition system for anti-competitive agreements but the minority’s preferred option of a system of registration and scrutiny of agreements prevailed. The Restrictive Trade Practices Act 1956 largely implemented the minority’s recommendations by introducing a system of registration and case by case analysis of agreements which would no longer be covered by the investigative system under the 1948 Act. As a result of the Collective Discrimination Report and the Report of the Committee on Resale Price Maintenance100 which criticised agreements to maintain resale prices, the 1956 Act also dealt with collective fixing of resale prices—collective resale price maintenance. Subsequently, the Resale Prices Act 1964 was introduced to tackle the problem of individual, or vertical, resale price maintenance. Resale price maintenance is the practice by which a producer fixes the resale price of his goods. Important amendments were made to the 1956 Act by the Restrictive Trade Practices Act 1968. The 1956 Act had been criticised for its failure to provide any sanctions where a restrictive agreement was not registered appropriately. This was rectified by providing that unregistered registrable agreements were void and that anyone harmed by the operation of such an agreement had a private right of action.101 These amendments sought to enhance the deterrent effect of the legislation. The 1956 Act was repealed when the legislation was consolidated by the Restrictive Trade Practices Act (RTPA) 1976 and the 1964 Act was repealed when the legislation on resale price maintenance, including Pt II of the 1956 Act, was consolidated by the Resale Prices Act 1976. Consequently, the Resale Prices Act 1976 applied to both collective and individual resale price maintenance (RPM). Collective RPM was prohibited absolutely, whereas individual RPM had the possibility of exemption under various ‘gateways’ in the legislation. Finally, amendments to the RTPA 1976 were made, inter alia, by the Restrictive Trade Practices Act 1977, and references to the 1976 Acts in this section include that legislation. After the enactment of the Fair Trading Act 1973, the DGFT was given the functions of the Registrar under the existing restrictive trade practices legislation, and this role was continued when the RTPA 1976 was introduced. The 1973 Act also provided for the restrictive practices legislation to be extended to the services
99 Cmd 9504, 1955. 100 Cmnd 7696, 1949. 101 Restrictive Trade Practices Act 1956, s 7.
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sector.102 Under the RTPA 1976, it was the duty of the DGFT to register registrable agreements and, in most cases, 103 to take proceedings before the Restrictive Practices Court to determine if the agreement was in the public interest. The formalistic style of the RTPA 1976 was one of the most significant aspects of the legislation, as it relied on the technical form of an agreement in order for it to be registrable. This was criticised and often led to very technical arguments as to the types of restrictions in agreements covered by the legislation. The form of the legislation was derived from initial criticism of the political investigative system inherent in the 1948 Act, and probably also arose because the judiciary were wary of dealing with complex economic issues in a court based system. Accordingly, the legislation sought to increase certainty by adopting a legalistic approach without requiring an economic assessment of the economic effect of an agreement and its restrictions. This approach, and the general model of the legislation was the subject of constant criticism. For instance, the 1989 White Paper recommended repeal and a new model for dealing with anti-competitive agreements based on Art 81. Interestingly, the legislation was also criticised for its focus on restrictions in horizontal agreements. Despite these criticisms, recent developments in Community law have suggested that a more lenient approach towards vertical restraints is warranted and that they should not be treated in a similar manner to horizontal restraints. This has culminated in the introduction of the Vertical Agreements Regulation,104 as discussed in Chapter 5. The Competition Act 1998 makes provision in s 50 for additional categories of agreement to be excluded from the effect of the new prohibition of anti-competitive agreements and an Order has been introduced which excludes vertical agreements from the Chapter I prohibition.105
MAIN ISSUES UNDER THE RTPA 1976 Registration Details of registrable agreements were required to be provided to the DGFT within three months of their formation. The DGFT was required by s 1(2) of the RTPA 1976 to maintain a public register with details of all registered agreements. If parties failed to register a registrable agreement it was rendered void and s 35(2) of the Act conferred a private right of action for harm caused by an unregistered registrable agreement. No damages were awarded in the UK courts under this provision, although it is understood that there were out of court settlements based upon it. Categories of practice covered The purpose of the restrictive practices legislation was to prevent agreements which were anti-competitive and against the public interest. The basic problem in 102 103 104 105
This was brought about by the Restrictive Trade Practices (Services) Order 1976 SI 1976/98. Subject to s 21 of the RTPA 1976. Commission Reg (2790/1999/EC), OJ L336/21, 1999; [2000] 4 CMLR 398. Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 SI 2000/310.
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such legislation is to clarify what constitutes an agreement. For example, in order for the legislation to be effective, it must be capable of dealing with looser forms of collaboration between parties. The difficulty for the restrictive trade practices legislation lay in seeking legally to define the point at which more informal types of agreement, collusion or cartelisation would be covered by the rules. There was also a difficulty regarding the gathering of evidence to prove any such informal anti-competitive collaboration. If firms engage in conspiracy, it is most likely that they will seek to destroy or hide direct evidence of any meetings or plans. In that event, competition authorities would only be able to seek to infer anti-competitive conduct from circumstantial evidence, such as parallel conduct. However, as noted earlier, economic theory suggests that some firms will act in a co-ordinated fashion without colluding. Section 43 of the RTPA1976 provided that it applied to an ‘agreement or arrangement, whether or not it is intended to be enforceable by legal proceedings’. A plethora of case law developed interpreting this provision,106 and although there has been conflicting dicta and criticism of the looseness of the legislation, Lord Marnoch, in Aberdeen Solicitors’ Property Centre v DGFT, 107 considered that the Act would cover any understanding for the future between two or more persons, involving mutuality of expectation or reciprocity of action, whether arrived at expressly or by implication. The case law on this issue demonstrated the technical nature of the legislation with its limited concentration on the competitive consequences of any agreement or arrangement however constituted. Restrictions to be disregarded/exempt agreements Sections 9 and 18 of the RTPA 1976 provided for certain restrictions to be disregarded when considering whether an agreement required to be registered. The most important of these provisions was s 9(3) of the Act. This provided that ‘no account shall be taken of any term which relates exclusively to the goods supplied…’. In addition, certain types of agreements were generically exempted under the legislation. Section 28 of the RTPA 1976 provided that the Act did not apply to those agreements contained in Sched 3 to the Act, for example, in relation to certain distributorship and intellectual property agreements. Registrable agreements and the Restrictive Practices Court The DGFT had in most cases a duty to refer registrable agreements to the Restrictive Practices Court (RPC).108 In practice, the most important provision allowing the DGFT not to take proceedings before the RPC was s 21(2) of the RTPA 1976. Section 21(2) was similar to the de minimis provision under Art 81(1) and allowed the Secretary of State to discharge the DGFT’s duty to refer where the restrictions or information provisions involved were not significant enough to warrant consideration by the RPC.
106 Eg, Re Austin Motor Car Ltd’s Agreements [1958] Ch 61; Re British Basic Slag Ltd’s Agreement [1962] 3 All ER 247; Re Mileage Conference Group of Tyre Manufacturers’ Conference Ltd’s Agreement [1966] 2 All ER 849; Fisher v DGFT [1982] ICR 71; Re RICS’s Application [1985] ICR 330; aff’d [1986] ICR 550. 107 1996 SLT 523. 108 Under s 1(2)(c).
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The RPC would normally consist of a judge and two lay members and its function was to decide whether or not the agreement could be justified in the public interest. This was not the same public interest test as under s 84 of the Fair Trading Act 1973. The agreement would be justified if it satisfied one of the ‘gateways’ specified in ss 10 and 19 of the RTPA 1976. Examples of these gateways included, for instance, that the restriction was necessary to protect the public against injury, that its removal would have a persistent and serious adverse effect on local unemployment or that its removal would lead to a substantial reduction in exports earnings. Indeed, the Act provided a further, final hurdle for parties to overcome, known as the ‘tailpiece’ which was also contained in ss 10 and 19. This provided that no restriction would be approved by the RPC if it was satisfied that the restriction would lead to an unreasonable detriment to the public or other parties. The onus of proof in respect of the tailpiece rested with the DGFT. On only one occasion did a restriction fail solely at the tailpiece stage.109 If the RPC considered that any restrictions were not contrary to the public interest then no further formal action could be taken, although parties still required to be aware of Community law, principally Art 81, and the common law doctrine of restraint of trade. If, however, the RPC did find the relevant restrictions to be contrary to the public interest it would make an appropriate declaration and those provisions would be void. The effect on the contract as a whole would be determined by normal contractual principles. The RPC also had power to make Orders prohibiting parties from giving effect to the restrictions or from making an ‘agreement to the like effect’. Usually the RPC would accept undertakings from parties, though if the parties breached either an Order or an undertaking this constituted contempt of court and the parties were liable to heavy fines. This was clearly demonstrated in the ruling of the House of Lords in the Pioneer Concrete case involving a cartel in the market for ready mixed concrete.110 The Pioneer Concrete case clearly increased the deterrent effect of the 1976 Act. In it the House of Lords overruled earlier case law of the Court of Appeal in Smiths Concrete Ltd.111 The House of Lords held that a company would find itself in contempt of an existing injunction if one of its employees entered into an agreement in the course of their employment, even if higher management knew nothing about the employee’s actions. The case highlighted that if an unregistered agreement was caught there could be no sanctions imposed under the Act; however, vicarious liability for contempt would be imposed if a company was caught breaching an undertaking that it would not enter an agreement to like effect. This would be the case even if the company took reasonable steps to ensure that this did not occur. Accordingly, corporate compliance schemes were required to be even more vigilant. The Lords also confirmed the possibility of the ultimate sanction of imprisonment for contempt of court. This was expected to act as a greater deterrent against both the employees and the directors who constituted the directing mind or will of the company.
109 Re yarn Spinners’ Agreement [1959] 1 All ER 299, RPC. 110 Re Supply of Ready Mixed Concrete (No 2); DGFT v Pioneer Concrete (UK) Ltd and Another [1995] 1 All ER 135. See Robertson, A, ‘Corporate liability for contempt of court under the Restrictive Trade Practices Act 1976’ [1995] 3 ECLR 196. 111 Re Supply of Ready Mixed Concrete (No 1); DGFT v Smiths Concrete Ltd [1991] 4 All ER 150.
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Enforcement under the 1976 Act The 1976 Act was a partial success in dealing with restrictive trade practices. The Pioneer Concrete case demonstrated that the contempt of court sanction had the potential to act as an effective deterrent. Furthermore, in the 1990s, the DGFT stepped up the campaign to remove cartels and their pernicious effects on the economy by establishing a Cartels Task Force within the OFT in 1994. This was designed to increase awareness of the effects of price fixing and market sharing. The other main aim of the Cartels Task Force was to carry out an extensive information campaign and encourage the general public to inform the OFT of the existence of such practices. Nonetheless, the evidence that many cartels still operated without detection was one of the reasons for reform proposals, based on the lack of sanctions for failure to register a registrable agreement. This was also linked to the criticism of the limited investigation powers afforded to the DGFT. Basically, if there was reasonable cause to believe a person was party to a registrable agreement a Notice could be served upon that person. However, this was an objective test and the DGFT had to have a fairly strong prima facie case that a cartel existed. This diminished the value of the power. However, a brief perusal of the OFT website in 1998 and 1999 would have demonstrated that the 1976 Act did catch a number of cartels operating in the UK. The following cartels were dealt with in the Restrictive Practices Court: a ceiling tiles cartel; a cartel supplying replacement car panels; and price fixing and market sharing bus cartels in the North West of England and Staffordshire.112 In addition, the OFT uncovered: a car-pricing cartel including the car manufacturer Volvo, which admitted the cartel and gave assurances as to their future conduct; an international cartel involving animal feed companies; and a price fixing arrangement in the foam market.113 It also received assurances from the FA and SFA that they would prevent resale price maintenance in replica football kits.114 Nonetheless, the DGFT remained adamant that the new powers of investigation and power to penalise companies for involvement in cartels was necessary and that the 1998 Act’s provisions would enhance his ability to deal effectively with cartels.
CHANGING ATTITUDES UNDER THE 1976 ACTS The treatment of the Net Book Agreement (NBA) under UK competition law highlights changing attitudes to competition policy over a period of time. It also demonstrates the significance of the resale price legislation in tandem with the restrictive practices legislation. The NBA was an agreement among publishers in the UK and Ireland which allowed publishers to determine which books would be considered ‘net books’, and in respect of those, retailers would be prevented from selling at lower than the publisher’s fixed price. A form of the NBA had 112 See, respectively, OFT Press Releases: No 31/98, 27 July 1998; No 34/98, 29 July 1998; No 47/98, 5 November 1998; PN 28/99, 29 July 1999; and PN 44/99, 29 November 1999. 113 See OFT Press Releases, PN 24/99, 9 July 1999; and PN 25/99, 14 July 1999; and PN 44/99, 17 December 1999. 114 See OFT Press Release, PN 30/99, 6 August 1999.
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been in existence since the beginning of the century. The NBA was referred under the RTPA 1956 to the Restrictive Practices Court in 1962. Judgment was given by Buckley J 115 and he supported the Publishers Association’s arguments that prohibition of the NBA would lead to price cutting, a reduction in the number of stockholding booksellers, a diminution of the stocks held by those remaining in business, less adventurous publishing and generally buyers paying higher prices for books. He relied heavily on the argument that ‘books are different’, partly because the method of producing and distributing books merited special treatment. Even more important was the argument that books are so important to the cultural life of the nation, and have a social and educational role to play, that they are to be protected from the rigours of competition. An ancillary agreement was approved in 1964 and an exemption from the prohibition contained in the Resale Prices Act 1964 was granted in 1968. In March 1995 the Director General decided to refer the NBA to the RPC to set aside the earlier rulings that it operated in the public interest. The case proceeded to the Restrictive Practices Court, although the NBA had effectively collapsed as a result of the withdrawal of certain major publishers and the Publishers Association did not defend the action. The RPC considered that there had been a material change in circumstances since 1962, particularly in book retailing, and that it was now contrary to the public interest.116 A related development was the DGFT’s decision to refer to the RPC, under the resale price maintenance legislation, the pricing arrangements in Medicaments, which is more commonly known as the ‘over the counter medicines’ case and which had earlier been granted an exemption from the legislation. The argument in justification of the resale price maintenance in Medicaments was that chain stores would automatically cut the price of such products and this would have disastrous effects on local chemists and pharmacists. The pharmaceutical suppliers withdrew their opposition to the case in May 2001.
REFORM OF UK RESTRICTIVE TRADE PRACTICE LAWS
Review of Restrictive Trade Practices Policy117 The Green Paper assessed the operation of the RTPA 1976 and highlighted a number of weaknesses and disadvantages resulting from the system adopted under that legislation. In particular, it identified major criticisms, such as the lack of sufficient investigative powers, the absence of effective sanctions, the failure to catch certain significant agreements, particularly vertical restraints, and the complexity and over-technical nature of the legislation. The Green Paper recommended the adoption of a prohibition system modelled on Art 81, based on the effects of an anti-competitive agreement rather than its form.
115 Re Net Book Agreement [1962] 3 All ER 751. 116 In Re Net Book Agreement 1957 (No 4) [1998] ICR 753. For an earlier approach, see Re Net Book Agreement (No 2) (1964) LR 4 RP 484, and Report of the Registrar of Restrictive Trading Agreements 1966–69, Cmnd 4303, 1970, p 26, respectively. 117 Cm 331, 1988.
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Opening Markets: New Policy on Restrictive Trade Practices118 The UK restrictive trade practices legislation was criticised on the grounds that it was unnecessarily complex, formalistic and took insufficient account of the effects of an agreement. The basic proposal in the White Paper was to replace the existing legislation, including the Resale Prices Act 1976, with a prohibition similar to the provisions of Art 81. The White Paper also proposed that Art 81 should be followed in allowing for exemptions from the prohibition. The DGFT would be the primary enforcement agency under the new prohibition, with enhanced investigatory powers. A new institutional set up was also recommended with a tribunal to hear appeals from the DGFT. Following the publication of the White Paper, the Government declared itself to be committed to implementing the proposed reforms and it reaffirmed this commitment on a number of subsequent occasions, although there were no further significant developments until 1996.119 Tackling Cartels and the Abuse of Market Power The Conservative Government decided in 1996 to finally introduce legislation to reform UK competition law and published a DTI Consultation Document followed by an Explanatory Document and draft Bill.120 The Bill sought to replace the 1976 Acts with a prohibition on anti-competitive agreements based on Art 81, and to introduce extended powers of investigation and enforcement for the DGFT under the existing legislative scheme dealing with monopoly control. The original consultation document reiterated the failings in the 1976 Act and confirmed that the White Paper proposals remained Government policy. The document, however, sought views on whether some amendments to the White Paper proposals were appropriate in the light of more recent developments, particularly in Community law and policy.
THE COMPETITION ACT 1998 Introduction The new Labour Government in 1997 almost immediately published a new Explanatory Document and draft Bill which formed the basis of the new Competition Act 1998.121 The original draft Bill virtually repeated the provisions of 118 Cm 727, 1989. 119 See Robertson, A, ‘Recent developments in UK law’ [1997] JBL 358. 120 Department of Trade and Industry, Tackling Cartels and the Abuse of Market Power: Implementing the Government’s Policy for Competition Law Reform, a Consultation Document, March 1996, London: DTI and Tackling Cartels and the Abuse of Market Power: A Draft Bill, an Explanatory Document, August 1996, London: DTI. See, also, Robertson, A, ‘The reform of UK competition law—again?’ [1996] 4 ECLR 210; and Rose, S, ‘Tackling cartels: the Green Paper proposal for implementing the Government’s policy on restrictive trade practices’ [1996] 7 ECLR 384. 121 Department of Trade and Industry, A Prohibition Approach to Anti-Competitive Agreements and Abuse of a Dominant Position: Draft Bill, August 1997, London: DTI. The subsequent Bill, which had its first reading in the House of Lords on 15 October 1997, was amended in certain respects from the original draft Bill. See Peretz, G, ‘Detection and deterrence of secret cartels under the UK Competition Bill’ [1998] 3 ECLR 145.
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the 1996 draft Bill in relation to those provisions on anti-competitive agreements, although these were further refined in the draft Bill, which received its first reading in the House of Lords on 15 October 1997. The prohibition—an outline Part I of the Act introduces two new prohibitions based on Arts 81 and 82. These are known respectively as the Chapter I and Chapter II prohibitions. The Chapter I prohibition is in respect of agreements, decisions and concerted practices, between or by undertakings or associations of undertakings, which are implemented in the UK and the object or effect of which is the prevention, restriction or distortion of competition in the UK. The Chapter I prohibition is contained in s 2 of the Act which contains virtually identical provisions to those contained in Art 81. The principal difference is that s 2 refers to such agreements, etc, implemented and which affect trade in the UK. Consistency of interpretation with Community law, Art 81 in this context, is ensured by s 60 of the Act. This provides that the determination of any questions under the prohibitions should be consistent with the treatment of corresponding questions arising under Community law. Section 3 provides that certain agreements contained in Scheds 1–4 of the Act are to be excluded from the Act’s operation. The DGFT has the power under s 4 to grant individual exemptions to agreements which meet the appropriate criteria specified in s 9, and s 5 provides him with the power to vary or cancel such an exemption or the conditions attached to it. Following the Community system, the Secretary of State acting under s 6, upon a recommendation of the DGFT, may by order exempt categories of agreement. These Block Exemptions may also contain an opposition procedure, similar to certain Community Block Exemptions. Agreements which are exempt from the prohibition in Art 81, or would be so if they affected interstate trade, have been conferred exemption by s 10. Enforcement and ancillary issues Sections 12 to 16 of Chapter I make provision for a person to make notification, in accordance with the procedure provided in Sched 5, in respect of conduct which may infringe the prohibition. Section 13 provides for a notification for guidance as to whether the conduct is likely to infringe the prohibition. Section 14 provides for notification for a decision as to whether the prohibition has been infringed and whether or not it is likely to be exempt. Sections 15 and 16 make similar provision as to the effect of guidance and decisions respectively. In both cases, the DGFT may take no further action unless there has been a material change of circumstances or he has a reasonable suspicion that the information on which the guidance/ decision was granted was incomplete, false or misleading. Chapter III makes provision for the investigation and enforcement of the Chapter I and II prohibitions. The DGFT has the key role of enforcing and applying the new regime. 122 Section 25 provides that the DGFT may conduct an investigation upon reasonable grounds for suspecting that either prohibition has 122 Competition Act 1998, s 54 introduces Sched 10 to the Act, Pts II and III of which provides that the Director General’s functions under Pt I may be exercised concurrently by the respective Directors General of the regulated utility sectors in their sectors.
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been infringed. The powers of investigation provided under ss 26–29 are very similar to those powers afforded to the Commission under Arts 11 and 14 of Reg 17. 123 Similarly, s 30 excludes documents and information subject to legal professional privilege from the DGFT’s powers, and he is required under s 31 to give persons affected by a proposed decision on whether the prohibition has been infringed an opportunity to make representations. The DGFT may make interim measures under s 35 and he is empowered to require conduct in breach of the prohibition to be modified or terminated.124 Section 36 allows the DGFT to impose a fine of up to 10% of the turnover of an undertaking whose conduct infringes the Chapter I prohibition, and he is required by s 38 to publish guidance on the determination of the appropriate level of fines.125 ‘Small agreements’ are immune from the imposition of penalties for breach of the prohibition.126 In addition, s 41 gives immunity from penalties for breach of the prohibition where an agreement has been notified to the European Commission seeking an exemption under Art 81. Chapter V of Pt I of the Act contains a variety of rules, for instance, enabling the DGFT to make rules about procedural matters under Pt I of the Act, restricting the disclosure of information obtained under the Act by ss 55–56,127 and providing for findings of fact by the DGFT to be relied upon in civil court proceedings under s 58. Sched 7 to the Act, introduced by s 45, makes provision for the composition and functions of the Competition Commission. This is to act as an appeals tribunal in relation to decisions taken in respect of the Chapter I prohibition, the mechanism for appeals being regulated by Sched 8. Third parties with a sufficient interest may also apply under s 47 to the DGFT to withdraw or vary decisions, and any appeals under this provision will also be made to the Competition Commission.128 Further appeals may be made on a point of law to the Court of Appeal, Court of Session or Court of Appeal in Northern Ireland in respect of England and Wales, Scotland and Northern Ireland respectively. The future operation of the prohibition Harmonisation and the Guidelines The aim of the introduction of the new Chapter I prohibition was to harmonise domestic law with Community law. Thus, s 2 replicated the Art 81 model and was reinforced by the requirement under s 60 to interpret the prohibition consistently with Community law. However, the substantive treatment of cartels will change little under the Act. The crucial changes are in terms of the enhanced investigatory and enforcement powers. Cartels, accepted as the most heinous form of
123 Ibid, ss 42–44 create certain offences in relation to the obstruction of the Director General’s information gathering tasks under these provisions. 124 By s 33. Ibid, s 34 provides that this may be enforced by the Director General seeking a court order. 125 See Guidance as to the Appropriate Amount of a Penalty, OFT 423. Ibid, s 52 requires the Director General to publish general information and advice about enforcement of the prohibition. 126 Competition Act 1998 (Small Agreements and Conduct of Minor Significance) Regs 2000 SI 2000/ 262. 127 Competition Act 1998, s 56 restricts the disclosure of certain types of confidential information. 128 See, also, s 49 and Sched 8, Pt II on the rules on appeals to the Competition Commission.
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competition law ‘crime’, will differ not in substantive treatment, but through the facilitation of their detection by the enhanced investigatory and fining powers, including the leniency programme, available to the DGFT. Nonetheless, the notification and exemption system is novel and there are certain horizontal agreements which may enjoy new status following introduction of the Act. For instance, it is likely that either directly, through individual and Block Exemptions under the Act, or indirectly, through the parallel exemption system in s 10, certain forms of horizontal agreement, such as R & D and specialisation agreements, may be exempted. In relation to vertical agreements, it appears that the justification for harmonising domestic law with Community rules on anti-competitive agreements has been ignored and a different approach altogether adopted. Particularly in this context, it was apparent that Community rules surrounding the control of agreements have been influenced to a greater extent by the Community’s market integration goal than have the rules on control of dominant undertakings. The difficulties in translating this into UK law were clear. Indeed s 60 explicitly notes that interpretation under the Act is to have ‘regard to any relevant differences’ between the national and Community provision.129 In addition, the new system is based on the Community model at a time when the Community is in the process of reform likely to reject its system of notification and exemption. The debate on Euro-law harmonisation may appear to have little relevance except in relation to the adopted system of investigation and enforcement powers. Nonetheless, the OFT have produced some helpful guidelines on the application of the prohibition, for instance, The Chapter I Prohibition130 and Assessment of Individual Agreements and Conduct131 which provide an overview of Community jurisprudence as it stands to be applied by the UK authorities. Notably, given the distinctive approach to vertical restraints adopted under the Act, the OFT’s guideline, Vertical Agreements and Restraints132 outlines the proposed treatment of vertical restraints under the Competition Act (Land and Vertical Agreements Exclusion) Order 2000.133 Agreements and Concerted Practices Like Art 81(1), s 2 prohibits certain agreements, decisions of associations and concerted practices, and it also includes an indicative list of types of agreement which may be covered. Each of the terms used in Art 81, agreements, decisions of associations and concerted practices, has a separate definition, but there is considerable overlap between them. It is therefore not crucial that a particular ‘agreement’ is identifiable, so long as it is demonstrable that some form of collusion, falling within the concept of ‘concerted practice’, has occurred.134 The
129 As discussed more fully by Middleton, K, Chapter 2, ‘Harmonisation with Community law—the Euro clause’, in Rodger, BJ and MacCulloch, A (eds), The UK Competition Act: A New Era for UK Competition Law, 2000, Oxford: Hart. 130 OFT 401. 131 OFT 414. 132 OFT 419. 133 Following the publication of the White Paper, Production and Enterprise: A World Class Competition Regime, Cm 5233, 31 July 2001, the Government intends to follow the EC approach to vertical agreements.
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concept of agreement is not restricted to legally binding and enforceable agreements as this would make evasion of the prohibition very simple, and Art 81 also deals with the organisation of undertakings through a trade or professional association. The term ‘concerted practice’ has been given a particularly broad definition. There is no simple way to define exactly where an agreement stops and a concerted practice begins, although it is evidently a looser form of ‘agreement’ which involves some form of understanding or collaboration.135 Effect on competition and appreciability Section 2 mirrors Art 81(1) by prohibiting agreements, etc, which ‘have as their object or effect the prevention, restriction or distortion of competition’. What constitutes such an effect on competition has been at the core of the prolonged Community debate on vertical agreements, discussed in more detail in Chapter 5. Market analysis is now crucial in the consideration of the effect of an agreement,136 although, in the early years of the Community, competition system the Commission and the Court gave the ‘effect’ requirement a very broad interpretation catching many agreements which appeared to be restrictions on conduct rather than of competition. The concept of the appreciability of the effect on competition is crucial in delimiting the scope of the prohibition although ultimately no express criterion of appreciability was included in s 2. The DGFT’s Guidelines on the Chapter I Prohibition137 confirm that the concept of appreciability follows established Community jurisprudence, yet in applying the principle, the approach indicated by the DGFT is at variance with the Community approach as outlined in the Commission Notice.138 The Guidelines state that ‘an agreement will generally have no appreciable effect on competition if the parties’ combined share of the relevant market does not exceed 25%’.139 This will not, however, be the case where the agreement involves price fixing, market sharing, imposes minimum resale prices, or forms part of a network of agreements with cumulative effects. Despite the general aim of harmonisation, the proposed policy on appreciability is clearly at variance with the Commission’s Notice, under which agreements will not be deemed appreciable, and therefore not prohibited, where the market share held by all the participating undertakings does not exceed: (a) 5% in the case of a horizontal agreement; and (b) 10% in the case of a vertical agreement. One further point to note is that the Commission Notice states that agreements between small and medium-sized undertakings will rarely be capable of affecting
134 The European Court recently discussed the overlap between ‘concerted practices’ and ‘agreements’ in Case C-49/92P Commission v Anic Partecipazioni SpA [1999] ECR I-4125. 135 See The Chapter I Prohibition, OFT 401, paras 2.11–2.13. 136 See Case 234/89 Delimitis v Henniger Bräu [1991] ECR I-935; [1992] 5 CMLR 210. See now, also, the Guidelines on Vertical Restraints, OJ C291/1, 2000; [2000] 5 CMLR 1074. 137 OFT 401. 138 Commission Notice on Agreements of Minor Importance, OJ C327/13, 1997. The Commission are consulting on a revised version of the Notice, OJ C149/18, 2001. 139 At para 2.19.
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trade between Member States.140 No specific provision is made in the Act for small and medium-sized companies, although indirectly s 39 provides for limited immunity for small agreements and the relevant Order has now been made.141 Extra-territoriality Section 2(3) states that the prohibition only applies ‘if the agreement, decision or practice is, or is intended to be, implemented, in the United Kingdom’. There is no equivalent explicit provision setting out a territorial limitation on the effect of the prohibition in Art 81. The form of words adopted in the provision replicates the European Court’s test of ‘implementation’ as set out in Wood Pulp, and maintains this test for the future.142 However, the line between implementation and effects is not particularly clear and the adoption of the term specifically from Community jurisprudence suggests that UK competition authorities will be required under s 60 to follow the line of authorities concerning implementation.143 Voidness and private litigation Section 2(4) provides that, ‘[a]ny agreement or decision which is prohibited by sub-s (1) is void’. The European Court has confirmed that it is only those elements of an agreement which are prohibited under Art 81 which are void.144 Ultimately, whether or not the offending provisions are severable from the agreement, and the remaining agreement is therefore enforceable, is a matter of the general law of contract applicable in England and Wales, Scotland and Northern Ireland. In recent years, there has been a noticeable increase in case law involving Art 81 and the question of remedies, particularly in unjust enrichment arising out of a void and illegal contract before the English courts. 145 The recent reference to the European Court in the case of Crehan v Courage146 may shed some light on whether Community law requires appropriate remedies to be made available by the courts. This will also be of direct interest to the 1998 Act given that the s 60 consistency requirement also applies to decisions as to ‘the civil liability of an undertaking for harm caused by its infringement of Community law’.147 Notification, exemption and harmonisation The Act utilises the Community system of notification and exemption and there is provision for notification in s 14 and provision for individual and Block Exemptions in ss 4–8, with the criteria for individual and Block Exemptions
140 Article 19 of the Notice. 141 The Competition Act 1998 (Small Agreements and Conduct of Minor Significance) Regs 2000 SI 2000/262. 142 Cases C-89, 104, 114, 116, 117 and 125–29/85 A Ahlstrom Oy v Commission [1988] ECR 5193; [1988] 4 CMLR 901. 143 Community law appears to developing in a different direction. See, for instance, Case T-102/96 Gencor v Commission [1999] II-ECR 753. 144 Case 56/65 STM v Maschinenbau Ulm [1966] ECR 235; [1966] CMLR 357. 145 See Gibbs Mew plc v Gemmell [1998] EuLR 588, CA. 146 Crehan v Courage Ltd and related cases [1999] Eur L Rep 834. 147 Competition Act 1998, s 60(6)(b).
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contained in s 9 replicating the Community criteria in Art 81(3).148 The parallel exemption provision in s 10 is likely to be crucial in practice. It provides automatic exemption to agreements exempted by a Community Block Exemption, including those unopposed under the opposition procedure, or individual exemption. It even includes agreements which would be covered by a Block Exemption except that they do not affect interstate trade. It also means that the DGFT is unlikely to adopt Block Exemptions for areas covered by Community Block Exemptions. The parallel exemption provision does not extend to informal settlements, ‘comfort letters’, and although they will be relevant in the application of the prohibition, an agreement may raise particular UK competition concerns with purely domestic effects.149 The European Commission is currently consulting on its White Paper on Modernisation and the Draft Regulation, discussed earlier in the chapter, with its proposals to abolish the notification requirement. This is significant in two respects. First it would call into question the notification system introduced in the UK based on the old Community system. More importantly, Art 81(3) would be justiciable by the national courts. However, courts would not be able to deal with the Chapter I prohibition in a similar fashion as only the DGFT would be able to grant an exemption. This would preclude courts being able to consider whether agreements benefit from the exemption criteria.150 The Chapter I prohibition and vertical agreements This is a complex issue which was the subject of considerable debate as the Competition Bill was proceeding through Parliament. Under Community law, the European Court established, in its first substantive judgment on the competition rules, that Art 81 was capable of applying to both horizontal and vertical agreements, and furthermore, that Art 81 could apply to restrictions of intrabrand competition as well as to restrictions of interbrand competition.151 A consequence of this judgment was that a very large number of vertical agreements were brought within the scope of Art 81(1), although they might then be eligible for individual or Block Exemption under Art 81(3). The particular concern of the Commission, and also to a more limited extent the European Court, has been that vertical agreements might have the effect of dividing up the single market, preventing the free movement of goods from one Member State to another. The ‘Community’152 interpretation of Art 81’s application to vertical restraints has been almost universally criticised as being too strict and inclusive. How would this be taken on in the UK given the aim of harmonisation with
148 Note that the 1998 Act has formalised the informal Community procedure for obtaining comfort letters by providing for notification for guidance under s 13 and the effect of guidance under s 15. 149 Vertical Agreements Regulation, Commission Reg (2790/99/EC), OJ L336/21, 1999, Art 7, makes provision for NCAs to withdraw the benefit of a Community exemption in some circumstances. 150 Perhaps this aspect may be revised after the Community reform process has been finalised in order to ensure consistency and a harmonised approach to enforcement of the two prohibitions. Such reforms are foreseen by the White Paper, Cm 5233, 31 July 2001, paras 2.16–2.22. 151 Cases 56 and 58/64 Consten and Grundig v Commission [1966] ECR 299; [1966] CMLR 418. 152 Note the differences in emphasis between the Commission and European Court. See, eg, Forrester, I and Norall, S, ‘The laicisation of Community law: self-help and the rule of reason: how competition law is and should be applied’ (1984) 21 CML Rev 11.
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Community law? This issue will be considered in fuller detail in the following chapter. However, it suffices to note that, despite recent reforms in the Community approach to tackle the criticisms, 153 the UK authorities have ultimately decided to adopt a distinctive approach.154 Other exclusions from the prohibition In addition to the vertical agreements exclusion, the 1998 Act excludes the application of the Chapter I prohibition from a number of other areas, some of which shall be outlined here. For further detail reference should be made to Scheds 1–4 to the Act. Land agreements The Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 also excludes any agreement from the scope of the Chapter I prohibition to the extent that it constitutes a land agreement’.155 An interest in land is defined as, ‘any estate, interest, easement, servitude or right in or over land (including any interest or right created by a licence), and in Scotland also includes any interest under a lease and other heritable right in or over land including a heritable security’, in Art 2. It should be noted that there is no analogous exclusion from the Art 81 prohibition and therefore land agreements could still be challenged directly if it were possible to show that they had an affect on trade between Member States. Mergers Agreements are excluded, under Sched 1, from the Chapter I prohibition to the extent that they give rise to a merger situation within the terms of Pt V of the 1973 Act.156 The exclusion is automatic and no notification need be made. Thus, where a merger falls within the jurisdiction of the 1973 Act merger system, it will not usually be subject to dual control under the 1998 Act. Any ancillary restriction that facilitates a merger is also excluded where it is ‘directly related and necessary to the implementation of the merger’.157
153 Commission Reg (2790/1999/EC), OJ L336/21, 1999. 154 It appears the Government is more satisfied with the EC approach following its reform and will now adopt it. Competition Act 1998, s 50(1) states that the Secretary of State may by order provide for any provision of Pt I of the Act to apply to vertical agreements with such modifications as may be prescribed. An Order (The Competition Act 1998 (Land and Vertical Agreements Exclusion) Ord 2000 SI 2000/310) was introduced, which came into force on 1 March 2000 and effectively removed vertical agreements from the scope of the prohibition. The background to the Order and a fuller analysis of its provisions shall be provided in Chapter 5. 155 SI 2000/310, Art 5. 156 This exclusion also applies to the Chapter II prohibition. 157 Competition Act 1998, Sched 1, para 1(2).
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Professional rules Under Sched 4 to the Act ‘designated’ professional rules are excluded from the Chapter I prohibition, as are obligations arising from those rules and agreements to act in accordance with those rules.158 Only those rules ‘designated’ by the Secretary of State as falling within the Schedule will benefit from this exclusion, all other professional rules can be prohibited if they infringe the prohibition. The current list of designated professional services includes: legal, medical, dental, ophthalmic, veterinary, nursing, midwifery, physiotherapy, chiropody, architectural, accounting and auditing, insolvency, patent agency, parliamentary agency, surveying, engineering and technology, educational, and religious. Following an investigation by the DGFT, it is likely that this exclusion may be withdrawn. Transitional arrangements The Act provided in s 76(2) for the Secretary of State to appoint the date upon which the various provisions came into effect, and a subsequent Order by the Secretary of State provided for both prohibitions to come into effect on the 1 March 2000.159 There are complicated provisional arrangements envisaged in relation to the Chapter I prohibition. Schedule 13, Transitional Savings and Provisions, provides the detailed rules, which the OFT guidelines supplement.160 The general rule under Sched 13 was that for any agreement made before the starting date, there was a transitional period of one year beginning on the starting date during which the Chapter I prohibition did not apply.161 The transitional period for agreements subject to continuing proceedings under the RTPA 1976 and the Resale Prices Act 1976 begins when the proceedings are discontinued or determined.162 In addition, provisions which the RPC found not to be contrary to the public interest have a transitional period of five years from the starting date or discontinuation/ determination of the proceedings, whichever is the latter.163 Enforcement: deterrence and compliance The enhanced investigatory and enforcement powers introduced in Chapter III of the Act make a marked difference to the impact of the new anti-cartel law, compared to the previous legislation. The DGFT has on various occasions emphasised that dealing with cartels will be the top priority of the OFT’s work. This was emphasised when the OFT organised a conference of international ‘cartel busters’ from a number of competition authorities worldwide.164 The OFT has set up a Compliance and Education Unit in order to drive home the message of compliance with the new prohibition. This is essentially a programme of education involving the various guidelines published in relation to the Act together with a number of pop guides and a video focusing on compliance. OFT officials have 158 159 160 161 162 163 164
Ibid, Sched 4, para 1(1). Competition Act 1998 (Commencement No 5) Order 2000 SI 2000/344. Transitional Arrangements, OFT 406. Competition Act 1998, Sched 13, Chapter III, para 19. Ibid, para 21. Ibid, para 23. OFT Press Release, PN 46/00, 21 November 2000.
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toured the country delivering seminars on the significance of the Act in an effort to enhance awareness of the prohibitions.165 Underlying the compliance initiative is the enhanced deterrent effect of the greater powers of investigation under ss 26–28 of the Act and the ultimate sanction of fining companies up to 10% of their UK turnover for breach of the prohibitions. The OFT is clearly seeking to increase the deterrent power of the legislation by instilling a fear of being caught out under the Act. Copying US and Community enforcement initiatives, the fear factor has been extended to existing and ongoing cartels by the introduction of a leniency programme for whistleblowers in cartel cases. 166 This openly encourages companies to confess to participation in a cartel with a view to being granted immunity from fines or reduced fines. The extent of the reduction is dependent on a range of factors, primarily whether the company is first to come forward to the OFT and the extent of their involvement in the cartel. In its fight against cartels, the OFT has recently emphasised a new three-pronged strategy for companies to ‘complain, comply or confess’ and it will be interesting to note how successful this strategy is in practice. Practice to date OFT officials have on innumerable occasions expressed the mantra ‘don’t notify, complain’, that is, the OFT does not really want to deal with notified agreements under the Act. However, clearly, the two options are not alternatives and although complaints about a cartel or abusive behaviour may be appropriate, in some circumstances, given the structure of the Chapter I prohibition, parties should notify to seek an exemption for their agreement. The DGFT maintains a Public Register of Notifications and in 2000 there were a number of high profile notifications, involving: Mastercard/Europay UK Ltd; the General Insurance Standards Council; the Society of Film Distributors; BSkyB/NTL Channel Supply Agreement; the British Horseracing Board and the Jockey Club; and Memorandum of Understanding on the supply of oil fuels in an emergency. The first decision by the DGFT was issued on the 26 January 2001 whereby he notified the General Insurance Standards Council that the rules notified by them did not infringe the Chapter I prohibition.167 Members of GISC agree to abide by its rules, which include a General Insurance Code for private customers and a Commercial Code setting out the minimum standards of service which customers can expect. The rules aim to ensure members are competent to carry on general insurance activities and put in place safeguards to protect consumers. The DGFT accepted that the rules were protective of consumers and were unlikely to restrict competition and drive up prices. They did not impose considerable entry barriers nor would they appreciably reduce or distort the overall level of competition.168 In another recent development, the Secretary of State has introduced a Block Exemption to effectively allow bus and train companies to continue to offer travel 165 See OFT Press Release PN 12/99, 19 April 1999—Low awareness of new Competition Act to be addressed. 166 See Guidance as to the Appropriate Amount of a Penalty, OFT 423, Pt II. 167 Notification by the General Insurance Standards Council (GISC), CA 98/1/2001, 24 January 2001. 168 See OFT Press Release, PN 03/01, 26 January 2001. The Competition Commission’s judgment in Institute of Independent Insurance Brokers v DGFT—Cases 1002/2/1/01 (IR) and 1003/2/1/01 and Association of British Travel Agents Ltd v DGFT–Case 1004/2/1/01 is awaited.
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cards and through tickets with a view to balancing convenience to consumers with the benefits of competition between operators.169 The OFT has publicised a number of investigations to date involving the new powers in relation to the Chapter I prohibition. The DGFT has warned that private hire taxi companies must not get together to set prices and has undertaken an investigation in relation to the private hire association in Bury. This demonstrates that the new Act can potentially extend even to small businesses like private cab firms in a localised area. More significantly, the OFT has launched an investigation into the supply of compact discs with formal notices forwarded to seven major record companies. The inquiry will focus on the way they have responded to the import of cheaper CDs from elsewhere in Europe, following a preliminary view that there were reasonable grounds to suspect that they had taken concerted action to limit the parallel importing of CDs. It is inevitable, given the DGFT’s avowed focus on cartel busting, that a body of case law under the Chapter I prohibition will develop rapidly.
FURTHER READING Article 81 Bouterse, RB, Competition and Integration—What Goals Count? EEC Competition Law and Goals of Industrial, Monetary and Cultural Policy, 1994, The Hague: Kluwer Ehlermann, CD, ‘The modernisation of EC antitrust policy: a legal and cultural revolution’ (2000) 37 CML Rev 537 Forrester, I and Norall, C, ‘The laicisation of Community law—self-help and the rule of reason: how competition law is and could be applied’ (1984) 21 CML Rev 11 Van Gerven, G and Varona, EN, ‘The Wood Pulp case and the future of concerted practices’ (1994) 31 CML Rev 575 The Competition Act 1998; the Chapter I prohibition Barr, F, ‘Has the UK gone European: is the European approach of the Competition Bill more than an illusion?’ [1998] 3 ECLR 139. Peretz, G, ‘Detection and deterrence of secret cartels under the UK Competition Bill’ [1998] 3 ECLR 145. Rodger, BJ and MacCulloch, A, The UK Competition Act: A New Era for UK Competition Law, 2000, Oxford: Hart, in particular Chapter 1, Whish, R, ‘The Competition Act 1998 and the prior debate on reform’; Chapter 4, MacNeil, I, ‘Investigations under the Competition Act 1998’; Chapter 8, Rodger, BJ and MacCulloch, A, ‘The Chapter I prohibition: prohibiting cartels? Or permitting vertical? Or both?’
169 Competition Act 1998 (Public Transport Ticketing Schemes Block Exemption) Order 2001 SI 2001/ 319. See OFT press Release, PN 4/01, 8 February 2001.
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DISCUSSION (1) Does Art 81(1) cover all forms of understanding between competitors? (2) Are national courts an appropriate forum for dealing with the issues raised in Art 81(3)? (3) To what extent is the Chapter I prohibition in the Competition Act 1998 a dramatic reform in UK competition law on anti-competitive agreements?
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CHAPTER 5
VERTICAL RESTRAINTS
INTRODUCTION TO VERTICAL RESTRAINTS Vertical agreements are agreements made between undertakings operating at different levels of the market. A typical example is an agreement between the producer of a product and a distributor. This chapter is principally concerned with vertical restraints, the contractual restrictions employed in such vertical agreements, which are used, inter alia, to facilitate the distribution of goods and services. This chapter will focus on the impact of the competition rules on distribution agreements, and in particular on exclusive and selective distribution agreements. However, it should be noted that there are a variety of types of vertical agreements, including exclusive purchasing and franchising, and often a particular vertical agreement may contain a complex mix of different vertical restraints. The efficient distribution of goods is crucial to the success of a business and the vibrancy of the economy. It is, therefore, important that the legal framework which applies to distribution agreements is clear so that firms may operate their distribution systems efficiently. The Community’s treatment of distribution agreements, particularly by the Commission, has been criticised for failing to create such a framework. The Commission has been aware of the criticisms of its approach, and published a Green Paper, Vertical Restraints, 1 as part of a consultation process considering reform of its approach in this area, which culminated in the adoption of the Vertical Agreements Regulation2 (hereinafter referred to interchangeably as ‘Reg 2790’ and ‘the Vertical Agreements Regulation’). This chapter will outline the main benefits and detriments associated with vertical restraints, and the general Community law position. The development of the Community approach under Art 81(1), its criticisms and a brief background on the US debate will be considered. Thereafter, more detailed analysis will be made of exclusive and selective distribution agreements respectively. The exemption system, proposals for reform of the Community approach and the position following adoption of the Vertical Agreements Regulation will be detailed. Finally, the treatment of vertical restraints under UK law in the past, and, more importantly, following the Competition Act 1998 (in particular the Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000)3 will be outlined.
1 2 3
COM (96) 721 final. Commission Reg (2790/99/EC) on the application of Art 81(3) of the EC Treaty to categories of vertical agreements and concerted practices, OJ L336/21, 1999; [2000] 4 CMLR 398. SI 2000/310.
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THE EFFECTS OF VERTICAL RESTRAINTS There are various potential positive and negative effects of vertical restraints and, although much depends on the format, content and context of the specific restraint, those effects may result from all forms of vertical restraints. The following are the principal considerations which require to be balanced in any set of competition rules dealing with vertical restraints. Objections Restriction of intrabrand competition Chapter 4 outlined the difference between interbrand and intrabrand competition. The former involves competition between the varying brands of different producers, for example, Nike and Adidas sports shoes, and the latter concerns competition by retailers/distributors in the sale of a particular brand of a producer, for example, between two competing retailers selling Nike sports shoes. Exclusive distribution is a good example of the potential restriction of intrabrand competition. A distributor will be appointed as the sole distributor within a particular territory. The extent of the restriction depends upon the terms of the agreement. If absolute territorial protection is provided then intrabrand competition will be virtually eliminated, as supplies of the product will only be available to customers from that one distributor. However, if it is possible for another distributor to make passive sales into the territory, that is, without an active marketing campaign, the restriction in intrabrand competition will be reduced. In either case, the main objection to any restriction on intrabrand competition is that it may lead to reduced consumer choice, due to the excessive concentration on brand image, and ultimately higher prices for the consumer of the particular branded product. Foreclosure of competition ‘Single branding’ commitments imposed upon a distributor, restricting the distributor to the supply of that particular brand, can cause foreclosure of markets by making it more difficult for other producers of competing brand products to find outlets for their particular product. Exclusive distribution agreements often contain exclusive purchasing obligations and may also, therefore, cause foreclosure of markets. Compartmentalisation of markets Selective distribution systems indirectly, and exclusive distribution systems directly, impose some form of restraint on the free flow of trade. For instance, in the most extreme case of an agreement creating an absolute territorial protection in favour of a distributor of a branded product, no possibility exists for any trade in that product, from other countries, into the restricted territory. This is particularly objectionable in the Community context, given the overriding goal of market integration in the application of Community competition law. Indeed, the Community has attempted to strike a balance between the pro-competitive effects of vertical restraints and limitations on cross-border trade necessitated by distribution agreements. 172
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Pro-competitive effects Efficiency gains Distribution agreements allow a producer to manage the number of outlets that are to be supplied, enabling greater efficiency to be achieved in the overall distribution system. The Commission has recognised the possibility of economies of scale in distribution.4 Increase in interbrand competition A distributor may be unwilling to promote a producer’s product unless it is granted some form of territorial exclusivity. For a product to compete effectively with other products on the market it will usually require promotion, particularly if it is a new product. Accordingly, exclusive distribution agreements may stimulate interbrand competition by facilitating the entry of new products on to the market—‘to open up or enter new markets’. This will increase interbrand competition with existing branded products to the ultimate benefit of the consumer. Free rider problems Exclusive distribution may help to prevent one distributor from free-riding on the promotion efforts of another, particularly with new or complex products. An extension of this argument is the ‘certification free-rider issue’ whereby the supplier seeks to ensure a positive introduction to a new product by restricting its sale to quality retailers, common in selective distribution systems. A related factor is known as the ‘hold-up problem’ whereby exclusivity is required to induce a party to invest in special equipment or training where the investment is relationship specific. Given these potential pros and cons, there has been a vigorous debate on the merits of vertical restraints, particularly in the United States. Proponents of the Chicago school have based their favourable approach to distribution restraints on the free rider rationale. This suggests that intrabrand protection is necessary to allow a distributor to promote a brand effectively and thereby enhance interbrand competition.5 Vertical restraints would only be considered harmful under this broad approach where the parties had market power and, accordingly, interbrand competition was weak. Bork has even argued that every restraint should be completely lawful on the basis that the only reason for any form of vertical restraint is that it creates efficiencies.6 Bork argues that a producer will impose restraints only where it can derive higher profits by increasing sales, and consumers will increase purchases only when the value of any additional services exceeds the additional charge imposed by the distributor. His conclusion is that vertical restraints will only lead to higher profits when customers receive a net benefit. This argument has been challenged on the basis that it fails to discriminate between existing and new consumers and established or new products. For the latter, vertical restraints 4 5 6
See, eg, Green Paper on Vertical Restraints, op cit, fn 1. See Telser, LG, ‘Why should manufacturers want fair trade?’ 3 JL & Econ 86 (1960). See, also, Marvel, HP, ‘The resale price maintenance controversy: beyond conventional wisdom’ (1994) 63 Antitrust LJ 59, pp 69–71. See Bork, R, The Antitrust Paradox: A Policy at War with Itself, 1993, Oxford: Maxwell MacMillan, Chapters 14 and 15.
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may have net benefits, but, otherwise, a more hostile treatment is required.7 In the Community context the Commission has been criticised in the past for its hostile treatment of vertical restraints and its failure to consider the free rider rationale.8 The Commission reviewed the position in its Green Paper on Vertical Restraints,9 which led to the 1999 Vertical Agreements Regulation introducing a new more favourable approach to vertical restraints under Community law focused on market power and interbrand competition. Interestingly, recent US literature has suggested that we should be concerned with downstream market power by distributors, and that intrabrand competition remains important.10
THE COMMUNITY TREATMENT OF VERTICAL RESTRAINTS Outline legal position The main Community provision applicable to vertical restraints, particularly distribution agreements, is Art 81. Vertical restraints are subject to a two step scrutiny. The first, under Art 81(1), is to consider whether an agreement has as its object or effect the prevention, restriction or distortion of competition within the Community, affecting trade between Member States. If this is the case, the second step is to consider whether the agreement might benefit from individual or Block Exemption under Art 81(3). The Commission has sole power to grant individual exemptions and to issue Block Exemptions pursuant to Art 81(3), although following the White Paper, discussed in earlier chapters, the Commission is set to lose its monopoly regarding individual exemptions in the near future. The Commission has in the past issued Block Exemptions for, inter alia, exclusive distribution agreements11 and exclusive purchasing agreements.12 An agreement which complies with the terms of a Block Exemption is valid without specific authorisation. Failure to comply with Art 81 can have serious implications for undertakings. The most important in this context is that an agreement, or at least the infringing provisions of the agreement, which fall foul of Art 81(1) is void, unless exempted.13 This can have important consequences for the contractual rights of parties to distribution agreements affected by the prohibition.
7 8
9 10 11 12 13
Comanor, WS, ‘Vertical price-fixing, vertical market restrictions and the new antitrust policy’ (1984–85) 98 Harv L Rev 983. See Gyselen, L, ‘Vertical restraints in the distribution process: strength and weakness of the free rider rationale under EEC competition law’ (1984) 21 CML Rev 647; Hawk, B, ‘System failure: vertical restraints and EC competition law’ (1995) 32 CML Rev 973; Korah, V, ‘EEC competition policy—legal form or economic efficiency’ (1986) 39 CLP 85; and Carlin, F, ‘Vertical restraints: time for change?’ [1996] 5 ECLR 283. COM (96) 721 final. See, eg, Grimes, WS, ‘Brand marketing, intrabrand competition, and the multibrand retailer: the antitrust law of vertical restraints’ (1995) 64 Antitrust LJ 83; and Comanor, WS, ‘The two economics of vertical restraints’ (1992) 21 Sw UL Rev 1265. Commission Reg (1983/83), OJ L173/1, 1983, as corrected by OJ L281/24, 1983. Commission Reg (1984/83), OJ L173/5, 1983. An agreement will only be wholly void if the infringing clauses are not severable from the agreement, Cases 56 and 58/64 Consten & Grundig v Commission [1966] ECR 299; [1966] CMLR 418. Whether infringing clauses are severable depends on national law, Case 56/65 Société La Technique Minière v Maschinebau Ulm GmbH [1966] ECR 235; [1966] CMLR 357.
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The de minimis doctrine An important starting point is to consider the impact of the de minimis doctrine. An agreement will not be caught by Art 81(1) if it does not have an appreciable impact on competition or upon interstate trade. This is known as the de minimis doctrine and the Commission has given guidance on its application in a series of Notices. The latest Notice was published in 199714 and revises the earlier Notice of 198615 in order to enhance legal certainty, take into account developments in Community competition policy, and avoid imposing unnecessary burdens on business and the Commission. The Notice is based on the de minimis doctrine outlined by the Court in Beguelin16 and Völk v Vervaecke17 and discussed in Chapter 4. The informal practice created by the previous Notice was based on quantitative turnover tests. The revised 1997 Notice seeks to enhance the existing possibilities to parties entering vertical agreements and contribute to the development of competition policy, concentrating on the most important cases for the Community. The crucial issue for the application of the Notice is the extent to which there is an ‘appreciable effect’ on competition. The Notice’s application is based upon the significance of market shares, demonstrating the importance accorded to interbrand competition. Accordingly, it makes a clear distinction between horizontal and vertical agreements, the former posing a greater threat to competition, due to the increased emphasis on interbrand competition. The Commission indicates in the Notice that notification will no longer be necessary and no fines will be imposed if undertakings interpret the Notice erroneously but in good faith. Agreements will not be deemed appreciable, and therefore not prohibited, where the market share held by all the participating undertakings does not exceed: (a) 5% in the case of a horizontal agreement; or (b) 10% in the case of a vertical agreement. The revised Notice was welcomed, although difficulties may exist in relation to identification of the parties’ market shares,18 and a clear distinction between horizontal and vertical agreements may be elusive. Overall, however, the Notice is beneficial and should lead to more vertical restraints falling outside the prohibition of Art 81(1). In European Night Services v Commission19 it was held by the Court of First Instance that even restraints which fell outwith the Notice’s thresholds may not be sufficiently appreciable to fall within Art 81(1). General Commission approach to vertical restraints under Art 81(1) The crucial issue under Art 81(1) is the determination of what constitutes a ‘prevention, restriction or distortion of competition’. Many commentators consider that the Commission interprets this requirement as being satisfied by a restriction of the economic freedom, or the freedom of action, of the contracting
14 15 16 17 18 19
Commission Notice on agreements of minor importance, OJ C372/13, 1997. This Notice is the subject of revision, see OJ C149/18, 2001. Commission Notice on agreements of minor importance, OJ C231/2, 1986. Replaced by the 1997 Notice, above. Case 22/71 Beguelin Import v GL Import Export SA [1971] ECR 949; [1972] CMLR 81. Case 5/69 Völk v Vervaecke [1969] ECR 295; [1969] CMLR 273. Parties may seek assistance from the Commission Notice on the definition of relevant market for the purposes of Community competition law, OJ C372/3, 1997. Cases T-374, 375 and 388/94 [1998] ECR II-3141.
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parties to an agreement.20 This approach has attracted widespread criticism as it can lead to a variety of undesirable consequences.21 It has resulted in a wide interpretation of Art 81(1), regardless of an agreement’s actual competitive effects, leaving fuller analysis to the Commission under Art 81(3). Accordingly, the vast majority of vertical agreements would require notification and exemption under Art 81(3). This formalistic approach, coupled with the Commission’s resources problem, has meant that very few formal decisions are taken annually, leading to delays and uncertainty for businesses. This is alleviated to some extent by the issue of comfort letters in appropriate cases. As the Commission has, at present, sole power to grant exemptions, informal settlements also affect the purported validity of agreements in actions in the national courts. Finally, the Commission approach may impede innovative and efficient forms of distribution or other forms of investment, for example, through technology licensing arrangements. The Commission’s policy in the past of issuing Block Exemptions for certain types of restraints, such as exclusive distribution, has alleviated the situation, although it has also led to criticisms of ‘straitjacketing’ companies’ commercial strategies. The Vertical Agreements Regulation, discussed further below, has sought to provide a more general solution under Art 81(3) to vertical agreements. In addition, the Commission has clearly indicated in its Guidelines on Vertical Restraints22 that its future approach under Art 81(1) will be based on the economic effects of vertical agreements and will focus on agreements where market power is involved. Particular types of restriction This view of the Commission’s approach to date under Art 81(1) is perhaps an over-simplification and it is of more direct interest to note the attitude of the Community authorities to particular types of restriction. In particular, both the Commission and the Court have viewed export bans, both direct and indirect, as being clear infringements of Art 81 (1).23 Similarly, resale price maintenance provisions in vertical agreements are routinely prohibited under Art 81(1).24 Otherwise, the Court has taken a more flexible approach to the consideration of when there is a ‘restriction of competition’ under Art 81(1). However, before considering these developments it is necessary to look at the treatment of territorial restrictions in vertical restraints, as these are very important in a wide range of vertical agreements, particularly exclusive distribution agreements.
20 21 22 23
24
See, eg, Hawk, B, ‘System failure: vertical restraints and EC competition law’ (1995) 32 CML Rev 973. See, also, Hawk, B, ‘The American (antitrust) revolution: lessons for the EEC?’ [1988] ECLR 53; Bodoff, J, ‘Competition policies of the US and EEC: an overview’ [1984] ECLR 51; and Whish, R and Sufrin, B, ‘Article 85 and the rule of reason’ (1987) 7 Ox YEL 1. OJ C291/1, 2000; [2000] 5 CMLR 1074. For direct export bans, see Case 19/77 Miller International Schallplatten GmbH v Commission [1978] ECR 131; [1978] 2 CMLR 334. Cf Case 262/81 Coditel II [1982] ECR 3381; [1983] 1 CMLR 49. For an example of a prohibition of an indirect export ban, see Case 31/85 ETA Fabriques d’Ebauches v DK Investments SA [1985] ECR 3933; [1986] 2 CMLR 674. See Case 27/87 Louis Erauw-Jacquery v La Hesbignonne [1988] ECR 1919; [1988] 4 CMLR 576. See, also, Case 161/84 Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgalis [1986] ECR 353; [1986] 1 CMLR 414 in which resale price maintenance in a franchise network infringed Art 81(1) and was not capable of exemption.
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Territorial restrictions The crucial starting point is the Consten and Grundig case.25 It involved an agreement between Grundig, a major manufacturer in West Germany of electrical and electronic equipment, and Consten, a French distributor. The agreement was a sole or exclusive distributorship for France, and it included three main features: (a) it imposed an obligation on Consten, similar to that imposed on Grundig distributors in other Member States, not to export the contract goods from France; (b) Grundig undertook not to sell directly to anyone in France; and (c) Grundig assigned the trade mark attached to each piece of equipment for its sale in France. Later, a French company obtained Grundig’s products in another Member State, and sought to import and sell them in France. Consten brought an action to stop the resale of those goods. A complaint was made by the French company to the Commission, which ruled that the contracts intended that Consten be free from competition in the distribution of Grundig products in France and therefore restricted competition within Art 81(1). Furthermore, an exemption would not be granted under Art 81(3) as the absolute territorial protection granted was not indispensable. On appeal to the Court, it was argued that Art 81 did not apply to vertical agreements. This was rejected by the Court stating that competition can also be limited by agreements which restrict competition between one of the parties and any third party. It was also argued that Art 81 should only apply to restrictions of interbrand as opposed to intrabrand competition. This was also rejected by the Court although it did state that unless the object of the agreement was to restrict competition, an analysis of the effects of the agreement was required. In this case, the Court considered that the object was to restrict competition and further analysis was not required. The Court also confirmed that absolute territorial protection is prohibited under Art 81(1) and that an exemption would not be justified. However, the Court stressed that the Commission should not have prohibited the whole agreement but merely the clauses which created the absolute territorial protection. The clauses providing for exclusive distribution were not necessarily an infringement, although the third aspect, the assignation of the trade mark, created absolute territorial protection and was therefore prohibited. Consten & Grundig was a crucial case and the Court sought to achieve a balance by prohibiting absolute territorial protection, which sought to stop any parallel imports of the contract good, while providing that the provision of territorial exclusivity did not in itself infringe Art 81(1). Nevertheless, the line between legal territorial restrictions and illegal absolute territorial protection has become clouded in subsequent Commission decisions and Court judgments. For instance, in Van Vliet26 an undertaking by a producer to its Dutch distributor to prohibit its other distributors from exporting to Holland was held to be unlawful, as it could result in a partitioning of the market contrary to the fundamental principles of Community law. This apparently signified a shift away from the more lenient approach adopted 25 26
Cases 56 and 58/64 Etablissement Consten SA & Grundig Verkaufs-GmbH v Commission [1966] ECR 299; [1966] CMLR 418. Case 25/75 Van Vliet Kwasten & Ladderfabrieke v Fratelli Dalle Crode [1975] ECR 1103; [1975] 2 CMLR 549.
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by the Court in Consten and Grundig. Subsequent case law confirmed a more restrictive approach to exclusive distribution agreements, relying on the existence of export bans on the distributor as constituting the infringement of Art 81(1).27 The wide ambit of the Art 81(1) prohibition as construed particularly by the Commission, but also by the Court after Consten and Grundig, has led to repeated calls for reform of the approach to a model based on a US style ‘rule of reason’. Nonetheless, it should be noted that, even following the recent reform process, the Commission’s approach to territorial restrictions appears to have altered little. US rule of reason In America there is a dual approach to the consideration of restrictions in vertical agreements under s 1 of the Sherman Act.28 The distinction lies between restraints of trade which are illegal per se and agreements which are subject to the rule of reason in order to determine whether they are reasonable or unreasonable. The major development in US antitrust law has been the dramatic reduction in restrictions which are subject to the per se test, now limited, for instance, to price fixing, whether horizontal or vertical, and horizontal market division. Under the per se rule, no further inquiry is made into the existence of anti-competitive effects, market power or intent. The rule of reason test, requiring a consideration of the impact of the restraint on competitive conditions, is more complex. It requires a detailed economic analysis of the restraint, market structure and market conditions to assess its likely pro- and anti-competitive effects. This, inevitably, has increased the complexity of antitrust litigation and reduced its certainty and predictability. Nonetheless, a particularly important development in this context was the US Supreme Court decision in Continental TV Inc v GTE Sylvania,29 This case confirmed that the rule of reason test should be applied to non-price vertical restraints to assess their legality. In that case, Sylvania had decided to limit the number of retail franchises granted and to restrict each of its brand dealers to sales only at the particular point for which it was franchised. These territorial and customer restrictions were held to be subject to a rule of reason test. This acts as a significant point of comparison for Community law and since that case, in line with general academic opinion in the US,30 US authorities have adopted a particularly tolerant approach to vertical restraints based primarily on the free rider rationale.31 The Court and the rule of reason There has been continued criticism of the Community authorities’ treatment of vertical restraints and calls for the adoption of a US-style rule of reason approach. Although US antitrust law has attempted to provide a more refined formulation of what actually constitutes a restraint of trade, the rule of reason approach can be 27 28 29 30 31
See, eg, Cases 100–03/80 SA Musique Diffusion Francaise and Others v Commission (Pioneer) [1983] ECR 1825; [1983] 3 CMLR 221. See op cit, Hawk; Bodoff; and Whish and Sufrin, fn 21. 433 US 36 (1977). Although see op cit, Grimes and Comanor, fn 10, for alternative perspectives. See, eg, ‘Vertical restraints guidelines of the National Association of Attorneys General’ (1995) 68 Antitrust & Trade Regulation Report 1706. For an updated analysis of the complexity of the rule of reason approach in the US context, see Calvani, T, ‘Some thoughts on the rule of reason’ [2001] 6 ECLR 201.
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criticised for its complexity and lack of certainty. In addition, Community law should not necessarily follow US antitrust law because Community aims, particularly the creation of the integrated market, are different. Finally, and most importantly, there are significant textual differences between the two sets of laws. The existence of Art 81(3) and the possibility of exempting beneficial agreements means that there is not the same pressure under Art 81(1) to delimit what constitutes a ‘restriction of competition’. Nonetheless, there have been certain important developments. First, Community procedures have been improved through the use of comfort letters and the introduction of various Block Exemptions, particularly the recent Vertical Agreements Regulation.32 In addition, under Art 81(1), the Court has adopted a more lenient approach towards certain vertical restraints, which is based on an economic analysis of the effects of an agreement.33 As early as 1966, in Société La Technique Minière,34 the Court confirmed in relation to Art 81(1) that, if the object of an agreement was not sufficiently detrimental to competition, then its effects would be assessed to consider if it had an appreciable affect on competition. This underlined the need to examine the effects of vertical restraints, which led to the Commission’s quantification of appreciability in its Notice on de minimis.35 Often an individual agreement is unlikely to have an appreciable effect on competition. The Delimitis36 case considered the legal position of an agreement where the agreement’s object is not anti-competitive and the agreement itself does not have an appreciable effect on competition, but is set in the context of a network of vertical restraints. The Court set out a general two stage test in Delimitis37 to test the compatibility of such agreements with Art 81(1). It is important to examine: (a) the degree of difficulty facing competitors seeking access to the market because of market foreclosure; and (b) whether the particular agreement constituted a significant contribution to foreclosure through a network of similar agreements. The market foreclosure test is a useful way of differentiating between vertical restraints likely to lead to competition problems and those which are acceptable, although the application of the Delimitis test is complex and difficult to predict. In addition to these broader developments in the Court’s approach there has been more specific recognition of the need to adopt a flexible attitude towards vertical restraints. For instance, there is now a body of case law providing for selective distribution agreements to escape the prohibition under Art 81(1) on qualitative grounds to allow for the maintenance of the brand names. The Court has also decided in a series of judgments that restrictions which are necessary for 32 33 34 35 36 37
See op cit, Whish and Sufrin, fn 21, and Forrester, I and Norall, C, ‘The laicisation of Community law, self-help and the rule of reason: how competition law is and could be applied’ (1984) 21 CML Rev 11. See Lasok, KPE, ‘Assessing the economic consequences of restrictive agreements: a comment on the Delimitis case’ [1991] 5 ECLR 194. Case 56/65 [1966] ECR 235; [1966] CMLR 418. Commission Notice on agreements of minor importance, OJ C372/13, 1997. Case 234/89 Delimitis v Henniger Bräu [1991] ECR 1–935; [1992] 5 CMLR 210. This test is particularly relevant for the consideration of exclusive purchasing agreements, such as those prevalent between brewers and pubs.
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the agreement to proceed in the first place, often known as ‘ancillary restraints’, may not infringe Art 81(1). For instance, in Remia38 the Court ruled that a restriction on a seller not to compete with a business sold with its goodwill does not infringe Art 81(1) provided it is reasonably limited in time and space. Similarly, the result of the judgment in Pronuptia39 is that many provisions in franchises, which are necessary to protect intellectual property rights and the common identity of the franchise, fall outside the Art 81(1) prohibition. Finally, there has been a move, led by the Court, towards a limited rule of reason approach, particularly in relation to licensing arrangements involving intellectual property rights and certain exclusive distribution agreements. The premise acknowledged by the Court here is that the parties would not have invested in the promotion of new technology without some form of protection. For instance, in Nungesser40 the Commission’s finding that an exclusive licence of plant breeders’ rights infringed Art 81(1) was quashed by the Court, as the Commission had failed to consider whether ‘open exclusivity’ was justifiable on the basis that investment was necessary to develop the product and the German market for it. Nevertheless, absolute territorial protection, or ‘closed exclusivity’, remains prohibited and the Commission’s application of the Nungesser principle has been restrictive, emphasising, and thereby limiting its applicability to, the novelty of the product.41 There has also been limited acceptance of certain territorial restrictions in exclusive distribution agreements. The following sections will analyse the approach adopted under Art 81(1) towards two particularly important methods of distribution in the Community.
EXCLUSIVE DISTRIBUTION Exclusive distribution is a form of distribution whereby a producer agrees with a distributor to supply only to that distributor within a particular territory. The crucial elements in such an agreement are the allocation of a particular sales territory to the distributor and the undertaking by the producer not to appoint another distributor within that territory. It will also normally involve an undertaking by the producer not to sell directly within the territory. The producer’s obligations are the key elements of the relationship, but certain obligations will also normally be imposed upon the distributor, for example: (a) to stock the complete range of a producer’s goods; (b) to stock certain spare parts; and (c) to promote the producer’s goods. Reasons for adopting exclusive distribution A producer may distribute his own goods either by in-house means or by setting up a subsidiary company. However, it may be more efficient for a producer to appoint a third party to distribute the goods. If the producer is supplying goods to 38 39 40 41
Case 42/84 Remia BV and Others v Commission [1985] ECR 2545; [1987] 1 CMLR1. Case 161/84 Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgalis [1986] ECR 353; [1986] 1 CMLR 414. Case 258/78 Nungesser (LC) KG and Kurt Eisele v Commission [1982] ECR 2015; [1983] 1 CMLR 278. There is, in addition, a Technology Transfer Regulation, Commission Reg (240/96/EC), OJ L31/2, 1996. See, for full discussion or this area, Korah, V, Technology Transfer Agreements and the EC Competition Rules, 1996, Oxford: Clarendon.
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a new market it would be sensible to appoint a distributor who is familiar with that market, thereby avoiding difficulties resulting from a lack of knowledge of the market or because of linguistic and legal differences. In addition, a smaller producer may lack the necessary resources for the distribution of its own goods. Exclusive distribution may also avoid the additional cost of supplying a large number of distributors. One of the primary reasons for adopting the exclusive distribution format is to encourage a distributor to advertise the producer’s goods and to provide any necessary after-sales customer service, as this would be prohibitively expensive for most distributors unless they are provided with the protection of exclusivity. Without exclusivity, other potential distributors, within the contract territory or beyond, may be able to ‘free-ride’ on the distributor’s promotional efforts and undercut his selling price. Exclusive distribution may be particularly important for new products entering the market, as a distributor may be required to expend a considerable sum on advertisement and promotion of the product, and will not want to risk such an outlay if other potential sellers of the product could free-ride on his efforts, that is, if they sought to market the product without incurring the same promotional expenditure. Treatment of exclusive distribution agreements under Art 81(1) The discussion of the pros and cons of vertical restraints outlined above is particularly relevant in this section. The problem for Community law has been how to achieve the appropriate balance between the necessary restrictions on intrabrand competition through territorial exclusivity, which may enhance interbrand competition, and the avoidance of the restrictions on parallel trade which are contrary to the Community goal of market integration. The central issue for Community law is whether an exclusive distribution agreement infringes Art 81(1) and, if it does, whether it will be exempted under Art 81(3) either individually or under the Vertical Agreements Regulation. As noted above, although the Commission is criticised for what is generally perceived as its ‘economic freedom’ approach, according to which any restriction of conduct is caught by Art 81(1), accurate analysis requires examination of the approach towards particular types of restraint. The most important restrictions in this context are those which create territorial restrictions. Territorial restrictions The Commission approach In practice, the Commission almost automatically holds exclusive distribution agreements, which contain territorial restrictions in the marketing and sale of the branded product, to infringe Art 81(1) regardless of their market effects.42 The Court’s approach The Court has generally rejected the formalistic reasoning adopted by the Commission and has adopted a more flexible and accommodating approach to the 42
See, eg, Bright, C, ‘Deregulation of EC competition policy: rethinking Article 85(1)’, in Hawk, B (ed), Twenty Second Annual Proceedings of the Fordham Corporate Law Institute, 1995, New York: Juris.
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use of territorial restrictions as an inevitable part of exclusive distribution agreements. For instance, in Société La Technique Minière,43 the Court stressed the need to take into account the actual or potential effects of an exclusive distribution agreement and its economic context, rather than focusing simplistically on its legal format in determining whether the prohibition under Art 81(1) applied. Absolute territorial protection The less mechanistic approach by the Court does not extend to exclusive distribution agreements which directly or indirectly attempt to establish absolute territorial protection for a distributor. Consten and Grundig 44 established the prohibition on the creation of an absolute territorial protection. The reason for the strict approach is that the Community authorities view such restrictions as impeding the development of the internal market by isolating national markets. The Community authorities are keen to ensure that some form of parallel trade is maintained by passive sales from outside the contract territory. However, although absolute territorial protection remains prohibited and the Court adopts a more lenient approach to less restrictive territorial limitations, the line between them is not always clear. Indeed, even the Vertical Agreements Regulation fails to draw a clear boundary between active sales into another territory, which can be restricted, and passive sales, which must not be prohibited. Exemption On the basis that Art 81(1) extends to a particular distribution agreement, it will require to be exempted under Art 81(3) for the parties to continue with the agreement. Until the Vertical Agreements Regulation45 came into force on 1 June 2000, parties could benefit from the provisions of a specific Block Exemption Regulation for exclusive distribution agreements.46 However, Reg 2790 has introduced dramatic change and the effects on exclusive distribution will be examined briefly in a later section following a detailed discussion of the new Regulation’s provisions. If the agreement falls outside the terms of the new Regulation, as with Reg 1983/83, parties may seek an individual exemption. The Guidelines on Vertical Restraints47 give some indications of the exemption policy the Commission will operate and this shall also be discussed further below. Criticisms of the Community approach to exclusive distribution There has been considerable criticism of the treatment of exclusive distribution agreements under Community competition law. First, uncertainty has stemmed from the apparent divergences in approach between the Commission and the Court towards territorial restrictions contained in exclusive distribution agreements. Although the Court’s approach can be more lenient, legal advisers have had to consider the practical reality that the Commission has been more 43 44 45 46 47
Case 56/65 [1996] ECR 235; [1966] CMLR 357. Cases 56 and 58/64 [1966] ECR 299; [1966] CMLR 418. Commission Reg (2790/99/EC) on the application of Art 81(3) of the EC Treaty to categories of vertical agreements and concerted practices, OJ L336/21, 1999; [2000] 4 CMLR 398. Commission Reg (1983/83), OJ L173/1, 1983, as corrected by OJ L281/24, 1983. OJ C291/1, 2000; [2000] 5 CMLR 1074.
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likely to view any restrictions as falling within Art 81(1) and, therefore, require individual or Block Exemption. Secondly, the paucity of economic market analysis under Art 81(1) is reflected in the failure by the Commission and, to a lesser extent, the Court to consider whether the parties to an agreement, either individually or jointly, possess market power, although this has been remedied to some extent by the revised de minimis Notice based on market shares and the Commission’s views expressed in the Guidelines on Vertical Restraints. Prohibition of absolute territorial protection This is the key issue and the Community authorities’ refusal to allow exclusive distribution agreements which provide for absolute territorial protection is notable. They have recognised that territorial protection is necessary in order for certain distribution agreements to be established. The Court has recognised the need for territorial protection, for instance, in Societe La Technique Miniere,48 in which case it found that a term conferring territorial exclusivity on a distributor might not infringe Art 81(1) where it is a vital element for the distributor to market a producer’s product. A distributor may only be prepared to enter into an exclusive distribution agreement which confers absolute territorial protection in order to ensure protection from ‘free riders’ and safeguard investment in the promotion of the product. This will particularly be the case in respect of a new product entering the market which will require more promotional effort than an established product. Without adequate protection, the distributor may not be prepared to distribute the product and it therefore may never reach the market. Although the Commission is aware of the commercial necessity for territorial protection, it has never accepted the principle that all territorial restrictions should be permitted to facilitate pro-competitive agreements. The Commission will accept limited territorial exclusivity but will not tolerate the obstruction of parallel imports, even where agreements conferring absolute territorial protection may increase interbrand competition, and therefore indirectly aid the integration of markets within the Community. Indeed, as we shall note, despite the recent criticisms of the Community approach and subsequent reform introduced in the Vertical Agreements Regulation, absolute territorial protection is not permitted under the new Regulation.
SELECTIVE DISTRIBUTION Selective distribution connotes a form of distribution whereby: (a) a producer limits the sale of his products to appointed distributors chosen according to certain criteria; and (b) appointed distributors are not permitted to resell to anyone other than to other appointed distributors, final users or consumers. The appearance of selective distribution systems may vary from case to case, but in all cases they will share these two principal features. Reasons for adopting selective distribution A producer may choose to adopt a system of selective distribution for a variety of reasons. It may be appropriate if the number of potential customers is too small to 48
Case 56/65 [1996] ECR 235; [1966] CMLR 357.
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justify a large distribution network and, accordingly, the number of sales outlets for the product requires limitation. More significantly, the producer may only wish to use distributors who are able and prepared to undertake certain obligations, for example, to carry and stock the producer’s entire range, to display the product in an attractive manner,49 or to provide appropriate after-sales service. In practice, selective distribution tends to be limited to branded products which are highly technical or luxury goods. This is because selective distribution enables a producer to ensure: (a) that the product is only sold by distributors with qualified staff available at the point of sale and capable of advising customers on the technical aspects of the product; and (b) that the product is not sold by unqualified dealers, in order to protect the exclusive image of the product. Treatment of selective distribution agreements under Community law The same pro- and anti-competitive effects as outlined above are possible in relation to selective distribution agreements, and, in particular, the balance between the reduction in intrabrand competition and the potential increase in interbrand competition has to be assessed. In addition, another potential benefit is that the requirement for the product to be sold only by suitably qualified staff is likely to increase after-sales services including the servicing of guarantees, the provision of maintenance and repair facilities, and the holding of stocks of spare parts. There are three options for the Commission in dealing with a selective distribution agreement. These are also relevant for national courts in any contractual disputes involving such agreements. The Commission can find the agreement: (a) compatible with Art 81(1); (b) incompatible with Art 81(1) and not qualifying for exemption under Art 81(3) in which case it is prohibited; or (c) incompatible with Art 81(1) but qualifying for exemption under Art 81(3). This shall be discussed following the general review of the Vertical Agreements Regulation. Article 81(1) The seminal case involving selective distribution is Metro (No 1)50 where the Court set out the basic principles which determine whether a selective distribution agreement is compatible with Art 81(1). The Court held that they are compatible with Art 81(1) provided: (a) the producer chooses distributors according to objective criteria of a qualitative nature relating to the technical qualifications of the distributor and his staff and the suitability of his trading premises; and (b) such criteria are laid down uniformly for all potential distributors and are not applied in a discriminatory fashion.51 49 50 51
See, eg, Commission Decision (85/616/EEC) Villeroy and Boch, OJ L376/15, 1985; [1988] 4 CMLR 461. Case 26/76 Metro-SB-Großmärkte v Commission (No 1) [1977] ECR 1875; [1978] 2 CMLR 1. Ibid, para 20.
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This test has become known as the ‘Metro test’ or ‘Metro doctrine’. However, it should be noted that there are a number of additional conditions with which a selective distribution agreement must comply before the Metro test applies. First, the product involved must be of a kind which is considered by the Commission and Court as justifying reliance on specialised distributors.52 It is possible from the decisions of the Commission and judgments of the Court to identify three categories of goods that have justified such reliance: (a) technically complex products, such as electronic equipment, for which aftersales service may be required;53 (b) products relying on brand image such as luxury goods,54 and (c) newspapers which require particular forms of distribution due to their limited shelf life. In addition to the requirements relating to the type of goods, the selection criteria must, ‘...go no further than may reasonably be thought necessary for the distribution of the products in question’.55 Finally, if the objectives of the selective distribution system are met through national rules or requirements, the contractual restrictions may not be justified. For instance, in Vichy56 there were national rules governing cosmetic products for the protection of consumers’ health, and Vichy’s requirement that its cosmetic products were sold through pharmacies was considered to be more stringent than necessary. Article 81(3)—individual exemption If a selective distribution agreement infringes Art 81(1), it may be eligible for exemption under Art 81(3), although the Commission has apparently been reluctant to grant exemptions. The exemption decisions of the Commission have mainly consisted of consideration of selective distribution agreements containing quantitative criteria and/or sales promotion obligations. The possibility of Block Exemption for selective distribution systems will be considered after a general review of Reg 2790 and the Commission’s individual exemption practice will be reviewed in light of the Commission Guidelines on Vertical Restraints. Criticisms of the Community approach to selective distribution The case law in this area is criticised for being complex, inconsistent and confusing, in particular making it difficult to determine whether an agreement infringes Art 81(1). The main criticisms are described in the next three paragraphs.
52 53 54 55 56
See Case 31/80 L’Oreal v PVBA De Nieuwe AMCK [1980] ECR 3775. Eg, Case 107/82 AEG Telefunken v Commission [1983] ECR 3151; [1984] 3 CMLR 325. See Commission Decision (1992/33/EEC) Yves Saint Laurent, OJ L12/24, 1992 where the luxury product was perfume. See, also, the Perfumes case, Case T-88/92 Groupement d’Achat Edouard Leclerc v Commission [1996] ECR II-1961; [1997] 4 CMLR 995. Commission Decision (1984/233/EEC) IBM Personal Computers, OJ L118/24, 1984; [1984] 2 CMLR 342. Case T-19/91 Société d’Hygiène Dermatologique de Vichy v Commission [1992] ECR II-415.
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The product There is an element of confusion over the types of product which justify selective distribution. High technology goods may qualify but technology may advance to an extent that a product is simplified or consumers may develop a better understanding of it. The Commission has indicated that where such technological advances occur selective distribution may no longer be justified.57 Quantitative/qualitative criteria distinction The logic of the distinction between qualitative and quantitative criteria made in Metro (No 1) has been questioned. Qualitative criteria, for example, limiting the appointment of distributors according to professional qualifications, inevitably limit the number of sales outlets for the product and therefore have a quantitative effect. It could, therefore, be argued that the effects of selective distribution agreements are essentially the same irrespective of whether quantitative or qualitative criteria are chosen and the legal distinction is difficult to justify. Uncertainty Apart from the concern over possible divergence of approaches between the Commission and the Court, Metro (No 2)58 has been criticised for creating further uncertainty in the law. According to this judgment, if economic analysis demonstrates that the existence of a number of selective distribution systems leaves no room for other methods of distribution, or results in a rigidity of price structure which is not balanced by other types of competition, Art 81(1) may apply to a selective distribution system even though its criteria are qualitative.
ARTICLE 81(3)—THE EXEMPTION SYSTEM We have identified in this chapter a number of problems with the Community’s approach to vertical restraints and the criticism that Art 81(1) has been interpreted too widely. This approach has led to the Commission being overburdened with notification of many kinds of vertical agreements and left it unable, in most cases, to deal effectively with them by taking final decisions, for example, by granting an exemption. One way to combat this was to introduce Block Exemptions effectively dealing with types of agreement with which the Commission had become familiar. This was discussed in Chapter 4, but it is important to note that a number of Block Exemptions were introduced to deal with types of vertical agreements, such as exclusive distribution, but notably not in respect of selective distribution. This ensured that as long as the particular agreement could be brought within the ambit of the Block Exemption Regulation, it would be automatically exempted and parties would not be required to notify the agreement and wait for an exemption. However, there were criticisms of the format of the Block Exemptions and it is instructive to be aware of the weaknesses in Reg 1983/83 dealing with exclusive 57 58
See, eg, Commission Decision (1984/233/EEC) IBM Personal Computers, OJ L118/24, 1984; [1984] 2 CMLR 342, paras 14 and 15, in which a selective distribution system was justified ‘at present’. Case 75/84 Metro-SB-Großmärkte v Commission (No 2) [1986] ECR 3021; [1987] 1 CMLR 118.
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distribution agreements, although this has now effectively been replaced by the Vertical Agreements Regulation. Regulation 1983/83 was criticised on a number of grounds. It only applied to purely bilateral agreements covering goods for resale, and agreements for services were excluded. It was also criticised for its straitjacketing effect and its concentration on the form of an agreement rather than its effect. This was evidenced by the inapplicability of the Regulation to an agreement which contained a clause not covered by the Regulation, even where it was less restrictive than clauses which were expressly permitted. This may have discouraged industry from developing innovative forms of distribution, as parties were required to tailor their agreements to fit within the terms of the Regulation, even though it did not necessarily reflect commercial reality.
PROPOSALS FOR REFORM OF VERTICAL RESTRAINTS POLICY The Commission published a Green Paper59 in January 1997 in order to review Community competition policy on vertical restraints. The Green Paper set out the framework of rules and procedures for dealing with vertical restraints and their strengths and weaknesses, and suggested four possible options for reform which were to form the focus of a consultation process. One of the principal reasons for undertaking a review of Community policy on vertical restraints was the expiry of the Block Exemption Regulations governing exclusive distribution, purchasing agreements and franchising on 31 December 1999. In the Green Paper the Commission acknowledged the dilemma of vertical restraints. Exclusive arrangements may enhance efficiency and result in cost savings for the consumer, yet they could also lead to weakened competition in the product which could drive up prices. Vertical restraints policy also indirectly affects employment which would be bolstered by efficient forms of distribution, and the risk of entry into a market may be diminished by the protection offered by an exclusive arrangement. These advantages may be outweighed if the distributor was able to exploit its position. The Commission, in the Green Paper, considered that its vertical restraints policy had been ‘largely successful’ and, although it was clear, for instance, that the Commission would not permit absolute territorial protection to be employed, the Green Paper acknowledged that reform was required, partly to ensure that it is easier to enforce contractual provisions necessary to protect those who must be induced to invest. This would also result in fewer notifications, thereby easing the Commission’s resource problem. The Green Paper stressed the importance of market structure and the role of interbrand competition and suggested a shift in emphasis from intrabrand competition to an analysis focused on interbrand competition, in which the anti-competitive effects of vertical restraints would only be considered where interbrand competition is weak and there were barriers to entry at either producer or distributor level. Although the Green Paper formally suggested four options, effectively, the different formulations of Option 4 meant that five options were available for consultation. The options considered were: (1) to maintain the current approach; 59
COM (96) 721 final.
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(2) to broaden the scope of the Block Exemption Regulations; (3) to adopt more focused Block Exemptions; or (4) to reduce the scope of Art 81(1) with a negative clearance presumption— (i) with wider Block Exemptions; or (ii) with wider Block Exemptions with a market share cap. Criticisms of the proposals and the way forward There were two general criticisms of the proposals. The first was the limitation in scope to ‘agreements between producers and distributors’, that is, distribution agreements, and that its consideration could have been broader and encompassed all forms of vertical restraints, such as licensing and technology transfer agreements,60 agency agreements and motor vehicle distribution agreements.61 The second criticism related to the adoption of market share thresholds suggested in Options 3 and 4 as the difficulties in determining this would reduce legal certainty.62 Most commentators favoured reform modelled on Option 2, the extension of the Block Exemption system. Block Exemptions create legal certainty and also preclude the application of national competition laws, which is not the case if Art 81(1) is inapplicable. A further option, known as Option 5,63 to extend the principle in Option 2 by the introduction of one Block Exemption to cover all vertical restraints, was suggested, to create a system in which all vertical restraints were permitted unless specifically prohibited by the Commission’s withdrawal of the benefit of the Block Exemption. The Commission adopted a similar approach to Option 5 in its follow-up policy proposal contained in the Communication on the Application of the Community Competition Rules on Vertical Restraints.64 Therein it proposed the introduction of one broad umbrella Block Exemption Regulation applying to both goods and services, with market share thresholds and a black list approach to cover all vertical restraints except for a limited number of hardcore restraints. This is essentially the basis upon which the Commission reformed the existing law by introducing the Vertical Agreements Regulation in 1999. In particular, it should be noted that the reform has been introduced in relation to Art 81(3). Nonetheless, the Commission has indicated, in its Guidelines on Vertical Restraints, that its future policy under Art 81(1) will also focus on vertical restraints associated with market power. However, before proceeding to assess Reg 2790, it is necessary first to consider two necessary ancillary reforms suggested by the Commission follow-up Communication. First, Reg 1215/9965 extended the power of the Commission to introduce Block Exemption Regulations to cover all vertical agreements affecting
60 61 62 63 64 65
See the Technology Transfer Regulation, Commission Reg (240/96/EC), OJ L31/2, 1996. Currently under review by DG Competition. See Commission Reg (1475/95/EC), OJ L145/25, 1995. See Schroeder, D, ‘The Green Paper on Vertical Restraints: beware of market share thresholds’ [1997] 7 ECLR 430. Ibid, p 434. OJ C365/3, 1998; [1999] 4 CMLR 281. Council Reg (1215/1999/EC) amending Council Reg (19/65/EEC) on the application of Art 81(3) of the Treaty to certain categories of agreements and concerted practices, OJ L148/1, 1999.
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finished or intermediate goods or services and extended the potential scope of future Block Exemptions in other ways. In addition, Council Reg 1216/199966 has exempted all vertical agreements from the requirement of prior notification and accordingly individual exemption may be backdated to the date on which the agreement was concluded. The Commission proposed this reform on the grounds that the market share threshold to be introduced in the Vertical Agreements Regulation may cause uncertainty and they wanted to minimise the possibility of a considerable number of precautionary notifications by parties’ advisers.
THE VERTICAL AGREEMENTS REGULATION Introduction Regulation 2790 is a radical change from previous Commission Block Exemption practice. The Black List approach adopted ensures that every type of restraint is permitted unless it is strictly prohibited. The non-inclusion of a White List of permitted restraints increases the flexibility of parties to adopt agreements which are appropriate in their commercial setting. This is also ensured by having one umbrella Block Exemption for all forms of vertical agreements as defined in the Regulation. The belief that the anti-competitive nature of vertical restraints is dependent on a degree of market power is reflected in the safe haven which is created by the Regulation below the market share threshold set at 30%. As the Commission noted in recital 6 of the Regulation: Vertical agreements of the category defined in this Regulation can improve economic efficiency within a chain of production or distribution…in particular they can lead to a reduction in the transaction and distribution costs of the parties and to an optimisation of their sales and investments levels.
The Regulation entered into force on 1 January 2000 and shall expire on 31 May 2010, although the Art 81(1) prohibition is inapplicable to agreements which were in place prior to 31 May 2000, and which were exemptable under Block Exemption Regs 1983/83, 1984/83 and 4087/88, until 31 December 2001. Regulation 2790 does not apply to vertical agreements falling within the scope of other Block Exemptions.67 This section shall provide a brief overview of the key provisions of the Regulation. Vertical agreements Article 2(1) defines vertical agreements for the purposes of the Regulation as, ‘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’. Many vertical agreements will not infringe Art 81(1) in the first place and will not require 66 67
Council Reg (1216/1999/EC) amending Reg 17: first Regulation implementing Arts 81 and 82 of the Treaty, OJ L148/5, 1999. At least in the short term, this excludes motor-vehicle distribution, Commission Reg (1475/95/ EC), OJ L145/25, 1995, and technology transfer agreements, Commission Reg (240/96/EC), OJ L31/2, 1996.
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exemption under the Regulation, for instance, agreements satisfying the Delimitis or Metro principles outlined above. For a wide range of other vertical agreements, this definition is certainly more expansive than under previous practice, mirroring the definition adopted in Reg 1215/99 and extending to agreements in relation to intermediate goods and services. However, agreements containing provisions relating to the assignment or use by the buyer of intellectual property rights are not to be exempted unless those provisions do not constitute the primary object of such agreements, per Art 2(3). Accordingly, where the agreement is, for instance, a pure licence of know-how it would fall outwith the Regulation, although it may be exempted under the Technology Transfer Regulation.68 Distribution agreements, whereby the assignment of an IPR, such as a trade mark right, would potentially be exemptable, where that provision was ancillary to the main object of the agreement setting up an efficient distribution system. A further limitation is contained in Art 2(4) which provides that vertical agreements between competing undertakings are not exempted unless they satisfy certain conditions. Market share threshold Following the Commission Communication’s focus on market power, Art 3 of the Regulation creates a safe haven for all vertical agreements, subject to Art 4, where, ‘the market share held by the supplier does not exceed 30% of the relevant market on which it sells the contract goods or services’. The use of market shares as a key element of the Regulation’s coverage has been criticised as being likely to lead to uncertainty and unpredictability given the difficulties in defining the relevant market and thereafter market share. The Commission and Court’s jurisprudence over the years should act as a guide and the Commission’s 1997 Notice on market definition, considered in Chapter 3, will also provide assistance. Nonetheless, the provision for retrospective notification and exemption introduced by Reg 1216/99 was introduced to alleviate the concerns of parties who may be uncertain whether their agreements would fall within the scope of the Regulation or require individual notification. Articles 9–11 provide the detailed rules on the calculation of market shares. It should also be noted that, in agreements involving exclusive supply obligations, the relevant market share is that of the buyer in the market in which it purchases the contract goods or services. Hardcore restraints The Black List is provided in Art 4 of the Regulation. This sets out the list of provisions which are prohibited and which will render an agreement nonexemptable under the Regulation. The following are the two most significant types of hardcore restraint in Art 4, resale price maintenance and excessive territorial protection. Resale price maintenance Article 4(a) provides that resale price maintenance is considered to be a hardcore restriction, whether it is imposed directly by fixing a resale price or indirectly, by fixing discount levels or linking threats of delayed supplies or penalties to the 68
Commission Reg (240/96/EC).
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observance of a given price level. This hardcore restriction is unobjectionable and most competition law systems prohibit vertical forms of resale price maintenance. Territorial restrictions Article 4(b) excludes from the scope of the exemption any, ‘restriction of the territory into which, or the customers to whom, the buyer may sell the contract goods or services’. This exclusion is predicated upon the Community market integration goal and the concern over the creation of compartmentalised markets within the Community. Nonetheless, even in Consten and Grundig, and in a number of developments since then, notably the exclusive distribution Reg 1983/83, it has been recognised that some form of territorial exclusivity may be required as an incentive for a distributor to promote a product effectively, even if absolute territorial protection is not allowed. Accordingly, there are exceptions to this exclusion and the key exception allows for the restriction of ‘active sales to the exclusive territory or exclusive customer group’. This may allay some of the criticisms of the Community’s past approach to territorial restrictions. However, in the Commission’s Guidelines on Vertical Restraints, the Commission seeks to distinguish between active and passive sales.69 The Commission is obviously wary of deterring the growth of e-commerce and, in general, the Commission confirmed that the use of the internet is not considered a form of active sales since it is a reasonable way of reaching customers. As long as the website is not specifically targeted at specific customers or customers primarily inside another territory, it will not constitute active sales, and the language used on the website is not a crucial factor. The Commission’s views of passive selling appear to limit it to catalogue selling and sending unsolicited emails. This restrictive view means that the exclusion of territorial restrictions from the exemption will be wide and again lead to uncertainty as to what constitutes an active sale. This matter may need to be resolved by the European Court. In the meantime, it may lead to difficulties for national courts attempting to interpret the Regulation and, also, the exclusion from the Regulation of many distributorship agreements which limit web-selling across territories. Other excluded obligations There are certain other obligations contained in vertical agreements which are not exempt. Article 5 details three types of obligations: (a) non-compete obligations, (b) post-term non-compete obligations, and (c) obligations regarding competing products in a selective distribution network. The key difference from the hardcore restraints is that provided these non-exempted obligations are severable, the remainder of the agreement can benefit from exemption under the Regulation. Withdrawal of the Block Exemption Regulation There are two ways in which the benefit of the Block Exemption may be withdrawn from a particular agreement. The first is set out in Art 6 which provides that the Commission may so act where the agreement has effects which are incompatible with Art 81(3). In particular, this may arise where there are parallel 69
Guidelines on Vertical Restraints OJ C291/1, 2000; [2000] 5 CMLR 1074, paras 50–51.
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networks of similar vertical restraints imposed by competing customers and access to the market is foreclosed. This possibility for withdrawal is based on the rationale underlying the Delimitis judgment. In addition, Art 7 provides that the competent authorities of a Member State may, where an agreement produces effects incompatible with Art 81(3) on a distinct geographic market within a Member State, withdraw the benefit of the exemption in respect of that territory. This is an important extension of the decentralised enforcement of Community competition law.
THE GUIDELINES The fourth element in the Commission’s strategy set out in its follow-up Communication in 1998, following Regs 1215/99, 1216/99 and 2790/1999, was the publication of Guidelines on Vertical Restraints.70 The Guidelines seek to give assistance on the interpretation of the Regulation and to outline the Commission’s new policy outlining where agreements fall outside the Regulation’s scope, with a view to encouraging self-assessment of agreements and discouraging notifications. The starting point is that there is no presumption of illegality outside Reg 2790.71 The Commission has set out a four stage approach for the analysis of vertical restraints. First, parties should define their relevant market and ascertain their market share. Second, if market share does not exceed 30%, the agreement is covered by the Regulation, subject to the existence of hardcore restrictions. The third and fourth stages, where the agreement has a higher than 30% market share, involve an assessment of whether the agreement is caught by Art 81(1) and, thereafter, entitled to individual exemption. In formulating general rules for assessing vertical restraints, the key to the new approach is that agreements only raise competition concerns if there is insufficient interbrand competition72 and that a reduction of interbrand competition is generally more harmful than a reduction in intrabrand competition. This is the new market power based economic approach which the Commission claims will inform its approach to individual restraints. This basic approach is supported by ancillary factors, for example, that a combination of restraints aggravates their negative effects, and that restraints linked to relationship specific investments are easier to justify, as are restraints in relation to opening up new product or geographic markets. The Commission notes that particular factors in the assessment of the position under Art 81(1) will be the market position of competitors, the existence of entry barriers and the maturity of the market, in that negative effects are more likely in mature markets, rather than in dynamic markets.
70 71 72
Published in October 2000, ibid. Ibid, para 62. Ibid, para 119.
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IMPACT ON EXCLUSIVE AND SELECTIVE DISTRIBUTION Exclusive distribution Regulation 2790 is more accommodating than Reg 1983/83 in many respects. The restrictions on the form of the agreement under Reg 1983/83, for instance, that the goods supplied must be for resale, or that the distributor must be granted exclusivity within the whole, or a defined area, of the Community,73 are not part of the present Regulation. The removal of the White List has certainly enhanced the flexibility of the parties. However, on the key issue of what territorial restrictions are permitted in an exclusive distribution agreement, it appears that the Regulation, and certainly the Commission’s interpretation of Art 4(b) is, if anything even more restrictive. Regulation 1983/83 permitted qualified exclusivity and, accordingly, a producer was permitted to agree not to supply the contract goods directly in the contract territory,74 the distributor could be obliged to obtain the contract goods only from the producer75 and to refrain from seeking customers outside the contract territory. However, the benefit of Reg 1983/83 was lost where users could obtain the contract goods only from the exclusive distributor in its territory and had no alternative source of supply from outside that territory,76 or where it was more difficult for users to obtain the contract goods from other distributors.77 However, as discussed above, Reg 2790 places considerable restrictions on the types of territorial exclusivity which can be granted, particularly notable in the context of e-commerce and methods of attracting trade via the internet, and the new rules appear to be even stricter than under Reg 1983/83. If an exclusive distribution agreement infringes Art 81(1) and falls outside the terms of the Regulation, parties can seek an individual exemption. However, it is extremely unlikely that an exemption would be granted in respect of an agreement conferring absolute territorial protection or providing for resale price maintenance.78 Selective distribution Prior to the Regulation, there was no specific Block Exemption for selective distribution agreements and, where agreements were caught by Art 81(1), parties were required to notify for individual exemption. It is instructive to be aware of the individual exemption practice of the Commission under Art 81(3) before assessing the impact of Reg 2790. Quantitative criteria In the past, the Commission has stated that exemptions for selective distribution agreements containing quantitative criteria can be granted only in exceptional cases, and then only when the technical or other nature of the product is such that there must be close co-operation between the producer and the distributor which 73 74 75 76 77 78
Commission Reg (1983/83), OJ L173/1, 1983, as corrected by OJ L281/24, 1983, Art 1. Ibid, Art 2(1). Ibid, Art 2(2)(b). Ibid, Art 3(c). Ibid, Art 3(d). In Case 161/84 Pronuptia [1986] ECR 353; [1986] 1 CMLR 414, the Court held that resale price maintenance infringed Art 81(1) and was not entitled to exemption under Art 81(3).
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could not be secured in some other way.79 In Omega80 the Commission, in 1970, agreed to exempt Omega’s selective distribution agreements in relation to its watches for a period of 10 years, although the distributors were partially selected on the basis of a quantitative criterion, the maximum number of appointed distributors in each sales region was fixed from the outset according to the potential purchasing capacity of customers in that region. The numerical restriction was accepted by the Commission because Omega was only capable of manufacturing a limited number of its luxury watches and there was a limited demand, therefore, the quantitative criterion was justified for the proper distribution of the product. However, Omega is one of the few cases in which the Commission has granted an exemption for agreements involving quantitative criteria.81 Indeed, in 1977, the Commission reconsidered its position and advised Omega that the exemption would not be renewed as long as Omega applied the quantitative criterion in the selection of its distributors. Accordingly, if the selection criteria were quantitative the Commission was unlikely to grant individual exemption to a selective distribution agreement. Sales promotion obligations Sales promotion obligations, such as an obligation to achieve a certain level of turnover or maintain a given level of stocks of the contract product, may in effect limit the number of distributors appointed by a producer. They may have a quantitative effect, thus infringing Art 81(1), and require exemption under Art 81(3). The Commission has granted exemptions in some cases to selective distribution agreements containing sales obligations of this kind. The Commission was also criticised for its approach to the granting of exemptions to certain selective distribution agreements in the luxury perfume sector, including a notable case involving Yves Saint Laurent.82 In effect, the criticism was that the policy was too lenient and has been unfair on hypermarkets which wish to distribute such products. Retailers are often excluded despite qualifying for admission to the system, and they complained that selective systems of distribution operate as an artificial price support mechanism. Post-Regulation 2790 The change is that the definition of vertical agreements in the Regulation can extend to selective distribution systems whereas there had previously been no Block Exemption Regulation. Accordingly, selective distribution, even where it falls within Art 81(1) because of quantitative restrictions, can benefit from Block Exemption. However, there are two hardcore restrictions which are specifically targeted at selective distribution networks. The key provision is Art 4(c) which excludes from the Regulation any agreements which restrict the active or passive sale to end users
79 80 81 82
Vth Report on Competition Policy, 1975, paras 12 and 13. Commission Decision (1970/488/EEC), OJ L242/22, 1970. See, also, Commission Decision (1985/559/EEC) Ivoclar, OJ L369/1, 1985. Commission Decision (1992/33/EEC) Yves Saint Laurent Parfums, OJ L12/24, 1992. See, also, Commission Decision (1992/428/EEC) Parfums Givenchy, OJ L236/11, 1992, and Murray, F and MacLennan, J, ‘The future for selective distribution systems: the CFI judgments on luxury perfume and the Commission Green Paper on vertical restraints’ [1997] 4 ECLR 230.
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by members of a selective distribution network.83 Otherwise Reg 2790 ensures that both qualitative and quantitative selective distribution networks will be exempted up to the 30% market share, subject to the possibility of withdrawal. Conclusion Regulation 2790 is an important, although limited, revolution in the Community treatment of vertical restraints. The format of the Regulation, a general Regulation for vertical agreements incorporating a Black List approach, is welcome, although there may be some teething problems in applying the market share threshold with the ensuing difficulties regarding uncertainty and legal security. This development is clearly linked to the earlier revision of the de minimis Notice and the ongoing modernisation developments following the Commission White Paper, in particular the plan to abolish the notification requirement under Art 81(3). The Regulation and Guidelines demonstrate the new emphasis on market power but much will also depend on the Commission’s approach under Art 81(1). This may be of limited significance given the Draft Regulation following the White Paper, which will ensure a greater role for national courts and authorities in interpreting Art 81. An important theme, which will raise important questions about the degree of territorial protection permitted within the Regulation, is the interplay between competition law and e-commerce and the issues surrounding what constitutes a restriction on active sales in the context of the internet.
UK COMPETITION LAW AND VERTICAL RESTRAINTS Introduction There has never been the same level of debate in the UK as to the relative merits of vertical restraints. This is partly due to the particular format of Art 81 and the special status accorded to market integration in the application of Community competition law. Unsurprisingly, UK law has never adopted a unified and consistent approach towards varying forms of vertical restraints. Indeed, it has been characterised by the consideration of vertical restraints under the full range of different competition law provisions, including the common law doctrine of restraint of trade.84 It has also generally adopted a fairly lenient approach, typified by the exclusion of vertical agreements from the Competition Act 1998 Chapter I prohibition. Nonetheless, it has been noted that many recent Commission reports under the Fair Trading Act 1973 have been concerned with types of vertical restraints.85
83 84 85
Regulation 2790, Art 4(d) concerns the restriction of cross supplies between appointed distributors within a selective distribution network. See Chapter 1, particularly in relation to exclusive purchasing agreements, Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269; [1967] 1 All ER 699. See Dobson, PW, and Waterson, M, Vertical Restraints and Competition Policy, OFT Research Paper 12, December 1996, p 1.
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The 1976 restrictive trade practices legislation Background and key issues The 1976 Acts are the most logical starting point for consideration of current UK competition law’s application to vertical restraints. The approach towards vertical restraints was accommodating, the Restrictive Trade Practices Act 1976 and its consequences could be avoided by appropriately drafted vertical agreements, although the approach to resale price maintenance was more prohibitive as the Resale Prices Act 1976 applied to both collective and individual resale price maintenance (RPM). Collective RPM was prohibited absolutely whereas with individual RPM there existed the possibility of exemption under various ‘gateways’ in the legislation.86 Interestingly, the RTPA 1976 was also criticised for its focus on restrictions in horizontal agreements. Despite these criticisms, developments in Community law indicate that a more lenient approach towards vertical restraints is warranted and that they should not be treated in a similar manner to horizontal restraints. Similarly, vertical agreements are excluded from the Chapter I prohibition under the Competition Act 1998. The most important of the RTPA 1976 provisions was s 9(3). Section 9(3) provided that ‘no account shall be taken of any term which relates exclusively to the goods supplied’. This provision was considered by the House of Lords in MD foods plc (formerly Associated Dairies Limited) v Baines.87 The outcome of this case demonstrated clearly that the effect of s 9(3) was to essentially remove purely vertical restraints from the requirement of registration under the legislation. In addition, s 21(2) was similar to the de minimis provision under Art 81(1) and allowed the Secretary of State to discharge the DGFT’s duty to refer where the restrictions or information provisions involved were not significant enough to warrant consideration by the Restrictive Practices Court. The Conservative Government decided in 1996 to introduce legislation to reform UK competition law and published a DTI Consultation Document followed by an Explanatory Document and draft Bill.88 The Bill sought to replace the 1976 Acts with a prohibition on anti-competitive agreements based on Art 81. The more recent Explanatory Document and draft Bill issued by the new Labour Government in 1997 formed the basis of the Competition Act 1998.89 The Competition Act 1998 The prohibition The relevant provisions for vertical restraints are contained in the Chapter I prohibition. The Chapter I prohibition, contained in s 2, is virtually identical to Art 86 87 88
89
Eg, in relation to certain ‘merit’ products such as books or medical products in relation to which resale price maintenance may be justifiable as ensuring a wide variety of products and availability. [1997] 2 WLR 364. Department of Trade and Industry, Tackling Cartels and the Abuse of Market Power: Implementing the Government’s Policy for Competition Law Reform: A Consultation Document, URN 96/760, 27 March 1996, and Department of Trade and Industry, Tackling Cartels and the Abuse of Market Power: A Draft Bill, an Explanatory Document, URN 96/905, 8 August 1996. Department of Trade and Industry, A Prohibition Approach to Anti-Competitive Agreements and Abuse of Dominant Position: Draft Bill, URN 97/803, 8 August 1997.
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81 and prohibits agreements, decisions and concerted practices between or by undertakings, or associations of undertakings, which are implemented in the UK the purpose or effect of which is the prevention, restriction or distortion of competition in the UK. Section 60 of the Act seeks to ensure that that the prohibition is to be interpreted consistently with Community law. In addition, s 10 of the Act provides that agreements which are exempt from the prohibition in Art 81, or would be so if they affected interstate trade, are automatically exempted. For instance, exclusive distribution agreements which fall within the provisions of Reg 2790 will be treated as exempted from the UK prohibition, even where they do not affect interstate trade and therefore do not breach Art 81(1) and are not exempted by the Regulation. It would have been possible for the Act simply to duplicate the position under Community law, including the adoption of an equivalent to Reg 2790. During the passage of the Competition Act through Parliament, the Government was waiting for Community policy to be finalised. But, as already noted, the application of Art 81 to vertical agreements has been strongly influenced by single market considerations. On a more pragmatic note, the DGFT was obviously very keen to avoid being inundated with notifications for exemptions for agreements that arguably entail no restriction of competition at all. This point was arguably most important in the final adoption of policy. Nonetheless, the UK approach to vertical restraints ultimately adopted under the Act will mean that parallel exemptions are not particularly significant in the context of vertical restraints. Section 50 and the Order Section 50(1) states that the Secretary of State may by order provide for any provision of Pt I of the Act to apply to vertical agreements with such modifications as may be prescribed. The Secretary of State was given power to allow the DGFT to exercise a right of ‘clawback’ in relation to an individual agreement.90 The DTI published a consultation document in February 1999 together with a draft of the Order.91 The document stated that vertical agreements do not generally give rise to competition concerns unless one of the parties to the agreement has ‘significant market power’ or there exists a large network of similar agreements. It is clear that the purpose of excluding vertical agreements is to reduce the number of precautionary notifications of essentially benign agreements. This will help ensure that the competition authorities are able to concentrate their resources on matters of significant competition concern. It will also avoid the unnecessary burden on business of notifying very large numbers of essentially benign agreements and of scrutinising agreements to determine whether or not notification should be made. It followed that there was a good case for disapplying the Chapter I prohibition from a broad range of vertical agreements. The Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 200092 came into force on 1 March 2000 and in a notable change from earlier drafts, the exclusion of vertical and land agreements is combined. The Order excludes 90 91 92
Competition Act 1998, s 50(3). Department of Trade and Industry, Exclusion of Vertical Agreements: Consultation on a Draft Order, URN 98/1030, 4 February 1999. SI 2000/310.
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vertical agreements from the Chapter I prohibition. Vertical agreements that give rise to concern will be dealt with in one of four ways: (1) under the ‘clawback’ power; (2) there will remain the possibility of a complex monopoly reference under the Fair Trading Act 1973; (3) the Chapter II prohibition will apply where there is dominance; or (4) vertical price fixing will not be excluded. Vertical agreements The definition of a vertical agreement is set out in Art 2. ‘Vertical agreement’ means an agreement, ‘between undertakings, each of which operates, for the purposes of the agreement, at a different level of the production or distribution chain’. This aspect of the definition is identical to the definition in the Community Block Exemption.93 The purpose of the definition is that any agreement that is genuinely vertical should be excluded from the Chapter I prohibition,94 subject to Art 4 on price fixing. Article 3 effects the disapplication of the Chapter I prohibition for vertical agreements. The definition differs in some respects from the position under the Reg 2790, for example, it does not disapply the exclusion to reciprocal or non-reciprocal agreements between actual and potential competitors.95 However, the inclusion, as under the Regulation, of the term ‘for the purposes of that agreement’ means that an agreement could be treated as vertical, and hence excluded, even though, for other purposes, the parties might be considered to be in a horizontal relationship. Finally, it should be noted that the definition of a vertical agreement in Art 1 does not extend to licences of intellectual property rights and know-how, although it should also be noted that such agreements could benefit from parallel exemption by virtue of s 10 of the Act. Nonetheless, the definition of vertical agreements in Art 2 of the Order extends to any IPR provisions of an agreement in so far as they do not constitute the primary object of an agreement and are directly related to the use, sale or resale of the goods or services. Price fixing is not excluded from the prohibition and the terms of this exclusion of resale price maintenance from the Exclusion Order are virtually identical to those adopted under Reg 2790.96 Article 7 gives the DGFT a power of clawback effectively to withdraw the benefit of the exclusion. This provision is an important safeguard in the event that an excluded vertical agreement might, in fact, be seriously detrimental to competition. The Guidelines note that the withdrawal power will be rarely exercised, and only where there are networks of agreements or ‘significant market power’97 a concept which is not defined. The purpose of Art 8 of the Order is to prevent the clawback power in Art 4 being circumvented by the parties entering into a new agreement to the same effect as an agreement subject to a clawback direction.
93 94 95 96 97
And differs from the definition contained in the February 1999 consultation document. See Art 3. See Art 2(4) of Reg 2790. Regulation 2790, Art 4(d). OFT 419, para 5.1.
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It should be noted that the definition of vertical agreements adopted under the 1998 Act reflects the Community definition. Nonetheless, this is basically the only similarity between the two legal regimes for vertical agreements. Community policy and practice on vertical restraints has been greatly shaped by the market integration imperative and a fresh approach to vertical restraints under the Act was probably appropriate. The key differences in practice lie in the significantly more limited UK list of hardcore restraints and also the non-adoption under the 1998 Act of a market-capped safe harbour. It is clear that minimising business burdens has driven the new policy under the Act. In relation to the argument that the exclusion of vertical agreements from the Chapter I prohibition might be unduly lenient, there are two other potential avenues for redress. First, vertical agreements do not enjoy any exclusion from the Chapter II prohibition, and, consistent with the view that market power is the core concern, a vertical agreement entered into by undertakings with market power could be scrutinised under s 18 of the 1998 Act. Second, the complex monopoly provisions in the Fair Trading Act 1973 remain in force. Where there is a competition problem in a particular sector because of the cumulative effect of the vertical agreements in operation, it is open to the DGFT to refer the matter to the Competition Commission for investigation. In the White Paper, Productivity and Enterprise: A World Class Competition Regime,98 the Government has indicated that it intends to repeal the exclusion of vertical restraints and rely on parallel exemptions stemming from the EC Vertical Agreements Regulation. The Government is of the view that a permissive domestic exclusion may have the effect of discouraging private actions. The Fair Trading Act 1973 The Fair Trading Act is not repealed by the Competition Act 1998 and will continue to have at least a minor role in monitoring restraints in vertical agreements. The Act will have continued vitality where there is concern over industry wide use of certain vertical restraints, and it may be resorted to more frequently as vertical agreements are excluded from the Chapter I prohibition in the Competition Act 1998. The Commission has frequently commented adversely on the contractual restrictions imposed upon distributors,99 most recently in relation to the new cars and ice cream,100 although there has been minimal consideration of exclusive distribution, a particular concern of the Community authorities. Exclusive purchasing Exclusive purchasing is a particular type of limitation on a distributor which has been the subject of Commission reports. In its reports, Petrol to Retailers and Petrol,101 the Commission accepted exclusive purchasing agreements as justifiable if they were reasonably limited in duration, and recommended a period of five years in 98 99
Cm 5233, 31 July 2001, paras 8.14–8.16. Eg, in Carbonated Soft Drinks, Cm 1625, 1991, New Motor Cars, Cm 1808, 1992, and Films, Cm 2763, 1994. 100 New Cars: A Report on the Supply of New Motor Cars Within the UK, Cm 4660, 2000 and The Supply of Impulse Ice-cream, Cm 4510, 2000, respectively. 101 Petrol to Retailers (1964–65) HCP 264, and Petrol, Cm 718, 1989.
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the first report. The Commission’s report The Supply of Beer102 led to Orders which required brewers to allow tied houses to supply a ‘guest’ beer and provided that they could not compulsorily tie non-alcoholic beer or other drinks to the supply of beer. Following a review of the Beer Orders in 2000, it was confirmed by the DTI that the Order protecting publicans’ right to offer a guest beer to customers is to remain in place.103 Tie-ins and full-line forcing A tie-in is where a distributor must purchase part or all of its requirements of a second product from the supplier of the first product. Full-line forcing requires the distributor to purchase each in a range of products. In appropriate circumstances these practices may be condemned104 but in its General Report, Tie-in Sales and FullLine Forcing,105 the Commission recommended the adoption of a case by case view in relation to such practices, as they may be required, for instance, to maintain economies of scale. Refusal to supply Refusal to supply may cause concern if it hampers the ability of firms at a lower level of the market to compete effectively. Very few cases have arisen under the 1973 Act although, for instance, in Domestic Electrical Goods I-II,106 the Commission considered the refusal to supply through warehouse clubs to be contrary to the public interest.
FURTHER READING Policy background Bork, R, The Antitrust Paradox: A Policy at War with Itself, 1993, Oxford: Maxwell Macmillan, Chapters 14 and 15 Comanor, WS, ‘Vertical price fixing, vertical market restrictions and the new antitrust policy’ (1985) 98 Harv L Rev 983 Gyselen, L, ‘Vertical restraints in the distribution process: strength and weakness of the free rider rationale under EEC competition law’ (1984) 21 CML Rev 647 Rule of reason/US comparative Hawk, B, ‘System failure: vertical restraints and EC competition law’ (1995) 32 CML Rev 973 Korah, V, ‘EEC competition policy: legal form or economic efficiency’ (1986) 39 CLP 85 Whish, R and Sufrin, B, ‘Article 85 and the rule of reason’ (1987) 7 Ox YEL1
102 103 104 105 106
Cm 651, 1989. DTI Press Notice, P/2000/805, 1 December 2000. Eg, The Supply of Beer, Cm 651, 1989. (1980–81) HCP 212. Cm 3675–76, 1997.
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Article 81/Vertical Agreements Regulation Korah, V, ‘The future of vertical agreements under EC competition law’ [1998] 5 ECLR 506 Lidgard, HH, ‘Territorial restrictions in vertical relations’ (1997) 21 World Competition 71 Subiotto, R and Amato, F, ‘Preliminary analysis of the Commission’s reform concerning vertical restraints’ (2000) 24 World Competition 5 Whish, R, ‘Regulation 2790/99: the Commission’s “new style” Block Exemption for vertical restraints’ (2000) 37 CML Rev 887 UK: s 50 and the Order Vertical Agreements and Restraints, OFT 419
DISCUSSION (1) Is the US rule of reason debate appropriate in the context of the Community approach to vertical restraints? (2) Should all forms of territorial restrictions on intrabrand competition be permissible under Art 81? (3) Can/should a supplier be allowed to limit website advertising by a distributor? (4) To what extent should competition law focus on market power/market share and the effect on interbrand competition when dealing with vertical restraints?
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CHAPTER 6
CONTROL OF MERGERS
INTRODUCTION Merger control is a particularly political area, principally due to divergent beliefs as to the merits of mergers and contrasting analysis of the likely outcomes of proposed individual merger arrangements. In this context, the term merger connotes a welcome, uncontested, union but it applies equally to a hostile takeover. The intricacies of both Community and UK merger controls ensure that the respective controls also apply to wider situations than the commonly understood full legal merger. The principal focus of merger control concerns the potential competitive consequences which may arise as a result of the increased concentration in a market caused by a merger. However, other policies and interests may also have a role to play, such as industrial and employment policy or national ownership of industry. The general consensus in a free market economy is that shareholders of a company are entitled to act as they wish in the pursuit of a more profitable return on their property. This right can be viewed as an incentive, or threat, to the management of the company to maintain a high degree of efficiency and profitability. The interests of the shareholder can consequently be viewed as a stimulant for a vibrant economy and hence any take-overs or mergers acceptable to shareholders should be welcomed. However, it is also generally recognised that mergers may have implications which extend beyond the shareholder’s interest, requiring some form of control due to their possible wide ranging effects on the economy. There are two general schools of thought concerning the appropriate degree of control of merger activity. The first would advocate intervention only if the proposed merger is likely to have an adverse effect on competition in a market, otherwise merger decisions should be left in the capable hands of entrepreneurs and ultimately shareholders. The second approach believes that a more interventionist stance is required because mergers have generally not yielded the anticipated benefits and have wide ranging potential repercussions. The primary benefit which a merger can bring is to improve the efficiency of the companies involved, particularly when there are economies of scale which can only be achieved by a merger. Efficiency can also be enhanced by better management or easier access to capital resulting from a merger. Other benefits include the possibility of the take-over of a firm facing closure, thereby extending its life and reducing concerns regarding unemployment. Of all the arguments raised against mergers, the most significant concerns the potential reduction in competition which may result. However, there are also wider concerns raised by mergers which may justify intervention by National and supra-National Competition Authorities. These include objections as to the size and power of the merged firm, the possible detrimental effect of the merger on the balance of payments, or the transfer of control of a company into ‘foreign’ ownership. It may, in appropriate circumstances, be considered that these disadvantages reduce or negate any purported economic advantages which are 203
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advocated in justification of a particular merger. There is also empirical evidence which suggests that merger objectives are not always achieved.1 The three generic types of merger which may be effected are horizontal mergers, vertical mergers and conglomerate mergers. One can identify different objections to each based on the outline of the purported benefits and detriments of mergers. Horizontal mergers are generally of greatest concern for competition law. They are effected by parties at the same level of the market, such as a merger between two producers, and the concern is that the increased concentration in the market may result in a reduction in interbrand competition. This will particularly be the case where there are already few market participants, competition is limited, and the merged entity will have significant market share and market power, contrary to the pure competition policy objective outlined in Chapter 1. A vertical merger may result between a producer and a distributor of its products. Such mergers may have competitive consequences if they foreclose competitive opportunities to other market participants at either level of the market, for instance, if another producer can no longer find an outlet for its products as a result of the merger. On the other hand, as with vertical restraints, considered in Chapter 5, a vertical merger may enhance interbrand competition by increasing the efficiency of that particular brand. Finally, although conglomerate mergers may not be directly associated with any competition gains or losses, it has been suggested, according to the ‘deep pocket theory’, that conglomerates may cross-subsidise across products, thereby facilitating predatory pricing to defeat competition illegitimately.2 However, the most interesting issue concerns the extent to which conglomerate mergers, and indeed also vertical and horizontal mergers, may be controlled on the basis of policies unconnected with the pure competition policy objective. This has been of particular interest in the UK context, although there has also been recent discussion of this issue at the Community level. Finally, the trend towards ‘global’ mergers has an impact on merger control, requiring closer international co-operation between competition authorities. This chapter will look at the approach to merger control undertaken by the Community and UK authorities, respectively. In the Community context, the Merger Regulation will be addressed; thereafter we shall focus on the Fair Trading Act 1973 and also recent proposals for merger reform of the UK merger control system.
HISTORICAL BACKGROUND TO THE COMMUNITY CONTROLS The was no explicit provision for the control of mergers in the Treaty of Rome3 but the lack of a regulatory mechanism was recognised as being a problem. In a report
1 2 3
Cowling, K et al, Mergers and Economic Performance, 1980, Cambridge: CUP. See, also, Schenk, H, ‘The performance of banking mergers: propositions and policy implications’, in The Impact of Mergers and Acquisitions in France on Workers, Consumers and Shareholders, Uni Europa, 2000. See Scherer, FM and Ross, D, Industrial Market Structure and Economic Performance, 3rd edn, 1990, Boston: Houghton Mifflin. See, also, Bork, R, The Antitrust Paradox: A Policy at War with Itself, 1993, Oxford: Maxwell Macmillan. There were merger provisions in the European Coal and Steel Community Treaty (the Treaty of Paris) 1951, and Newton, C, ‘Do predators need to be dominant?’ [1999] 3 ECLR 127.
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in 1966, the Commission suggested that Art 82 would cover mergers where the merger amounted to an abuse of a dominant position.4 This view was controversial although it was supported by the European Court of Justice in Continental Can.5 Continental Can, a US company with a dominant position in the market for metal containers, attempted to obtain control of a Dutch undertaking operating in the same market. The Commission argued that the acquisition of the target company would constitute an abuse of Continental Can’s dominant position, as it would eliminate future competition between the two undertakings. On appeal, the Court overturned the Commission’s decision but upheld its reasoning in relation to the possibility of Art 82 applying to the extension of a dominant position through a merger. The control of mergers through Art 82 raised a number of problems. It would only apply to the extension of an existing dominant position, not to the creation of a dominant position through a merger. Article 82 would therefore not be useful in the regulation of a hostile take-over of a dominant undertaking by a non-dominant undertaking, a conglomerate merger,6 or a vertical merger. Article 82 would also be limited in that there is no provision for defences or exemptions where a merger may prove to be beneficial. Such mergers would only be permitted if they could be objectively justified and, therefore, not considered to be abusive within the terms of Art 82 itself. Furthermore, a major procedural difficulty in the use of Art 82 is that it would only be possible to control mergers after they had been completed. Once a merger is complete, and the appeal process is exhausted, a number of years may have passed and it would then be difficult to return the market to its original position. The use of Art 81 to control mergers was not envisaged in the 1966 report; however, in the Philip Morris case,7 Art 81 was held to be applicable to some mergers. Philip Morris was to purchase a 50% share of Rothmans Holdings, another cigarette manufacturer. After complaints from competitors, the Commission intervened and Philip Morris agreed to change the nature of the purchase to lessen the competition concerns of the purchase. It reduced the size of its holding to 30.8% of the shares, with only 24.9% of the voting rights, and gave the Commission undertakings as to its influence on the Rothmans board. The Commission was happy with this arrangement but the original complainants challenged the Commission’s decision before the Court. The Court stated that Art 81 was applicable to the acquisition of shares in a competitor where the acquisition leads to an ability to influence the conduct of the target undertaking. The Court was careful to emphasise that it was discussing the acquisition of a minority shareholding in undertakings which remained independent after the purchase, but the Commission took a much wider view of the judgment, arguing that it also meant that Art 81 would be applicable where a majority interest was acquired.8 Nonetheless, the use of Art 81 to control acquisitions also has a number of problems. The sanction of nullity under Art 81(2) is not suitable to the purchase of a controlling interest in an undertaking and an Art 81(3) exemption can only be granted on the basis of the narrow grounds set out in the Treaty. The concerns raised by mergers are much broader than those mentioned in Art 81(3). There 4 5 6 7 8
‘Le problème de la concentration dans le marché commun’ (1966) 3 Etudes CEE, série concurrence. Case 6/72 Continental Can v Commission [1973] ECR 215; [1973] CMLR 199. As there would be no extension of market power in any one market. Cases 142 and 156/84 BAT v Commission [1987] ECR 4487; [1988] 4 CMLR 24. A wide interpretation of the applicability of Art 81 appeared to be used in Smalbach-Lubeca v Carnaud IP/88/14; [1988] 4 CMLR 262.
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would appear to be limited scope for important social and political concerns to be taken into account. Exemptions granted must also be of limited duration. It is very difficult to undo a merger after a period of time, and it would be better practice to give the parties a firm decision after the initial consideration. Alongside the development of potential merger controls under Art 81 and 82 of the Treaty, the Commission attempted to persuade the Council to adopt a separate system for the control of mergers within the Community. The Commission put forward its first proposal for a Merger Regulation in 1973 but the Council did not give the introduction of specific merger controls a high priority. The low political priority accorded to merger control meant that the Commission proposals were not acted on for 15 years. Several of the larger Member States wished to maintain their own controls over mergers while the smaller Member States, who did not have their own controls, wanted the Community to assume responsibility. One of the major impediments to reaching agreement was the setting of an appropriate demarcation between Community and nationally controlled mergers. The change in the Council’s priorities resulted from two factors. First, the increasing number of large scale and cross-border Community mergers, which resulted from preparation for the 1992 Single Market programme, raised awareness of the need for a unitary Community control system. A Community system was viewed as being better placed to deal with large multi-State mergers, as there would be one set of controls applicable rather than a number of separate national regimes. In addition, Community based criteria could be used rather than those which focused on national interests. Secondly, the Commission argued that a specific merger control system would be more satisfactory than increasing resort to the existing, and deficient, set of rules under Arts 81 and 82 of the Treaty. Finally, the Regulation may have been advocated as a means of promoting Community scale mergers which would make European industry more competitive in the global market, particularly in relation to industry in Japan and the USA. The Merger Regulation was adopted by Council on 21 December 1989 and came into force on 21 September 1990.9 The new system operated well in practice; however, the debate over the thresholds which brought a merger within the Community system continued. Article 1(3) of the Regulation required a review of the thresholds in 1993, though this review was delayed until 1996. In 1996, the Commission issued a Green Paper outlining the issues which would be addressed in the review.10 The main concern was the level of the thresholds. They were initially fixed at a very high level in order to obtain support from States that wished to retain control over ‘national’ mergers. The Commission proposed that the thresholds be lowered. Two options were suggested, a simple lowering of the existing thresholds or a more complicated system depending on the existence of ‘multiple filings’, situations in which a proposed concentration would otherwise be likely to be investigated and considered under several Member States’ competition controls. Political agreement was reached on the reform of the merger control system along the lines of the ‘multiple filing’ proposal and an amending Regulation was adopted by Council on 30 June 1997.11 The Commission process of
9 10
Council Reg (4064/89/EEC), OJ L257/13, 1990. Community Merger Control Green Paper on the Review of the Merger Regulation COM (96) 19 final.
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review is ongoing and a Commission Report on the application of the Merger Regulation thresholds was published in 2000. 12 Following that Report, the Commission is continuing to investigate a number of issues.13
THE MERGER REGULATION 4064/89 The Merger Regulation was designed partly to reduce the confusion and bureaucracy arising from large scale mergers in the Community. Cross-border mergers and mergers affecting different national markets often required notification under several different systems, each with different filing requirements. This duplication was costly and time consuming. A single system at the Community level would reduce the administrative burden. Control at a Community level was also seen to be important to allow Community undertakings to compete with US and Japanese competitors. Mergers between successful European undertakings were perceived as being one way in which Community based industries could compete effectively on global markets. National controls were considered to be more likely to prevent important mergers on national, rather than competition, grounds. In addition, national merger controls were more likely to consider the competitive effects on the national market alone, even if the merger made competitive sense in a global industry. The adoption of the Regulation also led to a re-organisation of the Directorate General for Competition. A special unit, the Mergers Task Force, was set up to deal with all the cases stemming from the new system.14 The scope of the Regulation Although the Regulation is known as the Merger Regulation, it does not use the term ‘merger’ but refers rather to the ‘control of concentrations’; it covers not only full mergers, as used in the normal commercial sense, but all concentrations, whether through the acquisition of shares or assets, where an undertaking acquires control over another undertaking. Some joint ventures are also considered to be concentrations. Article 3 of the Regulation defines concentrations as being where: (a) two or more previously independent undertakings merge; or (b) one or more persons already controlling at least one undertaking, or one or more undertakings, acquire, whether by purchase of securities or assets, by contract or by any other means, direct or indirect control of the whole or parts of one or more other undertakings.15
11 12 13 14 15
Council Reg (1310/97/EEC), OJ L180/1, 1997. Report from the Commission to the Council on the application of the Merger Regulation thresholds, COM (2000) 399 final. See XXXth Report on Competition Policy, 2000, points 240–43. See Krause, H, ‘EC merger control: an outside view from inside the merger task force’ [1995] JBL 627. Council Reg (4064/89/EEC), OJ L257/13, 1990, Art 3(1).
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Article 3 of the Regulation gives a fairly detailed definition of the term ‘concentration’ and the Commission has published a Notice giving more detailed guidance as to how it will be applied.16 An obvious form of concentration is where previously independent undertakings merge, where one or both original undertakings cease to exist. Less obvious concentrations occur where a transaction results in a change of control over an undertaking. In these cases, the central concern is whether the rights gained by one undertaking in another confer on it ‘the possibility of exercising decisive influence’.17 It is possible to gain such influence over another undertaking by acquiring a majority of voting shares in that undertaking, or by having the right to appoint half of the members of the controlling board. In St Gobain/Poliet, a 4.7% interest in Poliet was enough to give sole control when the majority shareholder agreed that St Gobain would appoint the majority of the supervisory board.18 It is possible to be seen as having ‘decisive influence’ even where the undertaking concerned has a minority holding in the target. In Arjomari/Wiggins Teape Appleton,19 Arjomari acquired a 39% share of Wiggins Teape and this was seen as being capable of giving sole control. No other shareholder had more than a 4% holding and only three shareholders owned over 3% of the issued share capital. As Arjomari had such a comparatively large holding, it was considered to be effectively gaining control of Wiggins Teape. When examining whether the acquisition of a minority holding establishes decisive influence, it is important to explore the practical implications of such a level of control. It may be the case that shareholder participation is historically low in that undertaking. If it is, a relatively low shareholding may give de facto control over its decision-making. The discussion above concerns sole control of an undertaking but it is also possible for two or more undertakings to acquire joint control of another. The utilisation of such joint ventures or strategic alliances is becoming increasingly common. This situation normally occurs where two undertakings transfer part of their business to a joint venture. Both the parent undertakings will have joint control over the joint venture. Even where one of the parents has a majority shareholding, for example, 60% of the voting shares, the minority party may well be in a position to cast a blocking vote over certain strategic decisions. Where the undertakings are forced to co-operate to avoid a minority veto, they are considered to have joint control.20 Where one of the parent undertakings has a much smaller shareholding, for example, 20%, it will not normally have a blocking veto; however, there may still be joint control where a shareholders’ agreement provides for co-operation.21 There is a distinction between concentrative and co-operative joint ventures in Community law. The distinction between the two types of joint venture and the difficulties surrounding them will be discussed in more detail in a later section.
16 17 18 19 20 21
Commission Notice on the Concept of Concentration, OJ C66/5, 1998. Council Reg (4064/89/EEC), OJ L257/13, 1990, Art 3(3). Case IV/M764, OJ C225/08, 1996. Case IV/M025, OJ C321/16, 1990; [1991] 4 CMLR 854. Case IV/M010 Conagra/ldea, OJ C175/18, 1991; [1991] 4 CMLR 580. Case IV/M229 Thomas Cook/LTU/West LB, OJ C199/16, 1992.
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Community dimension The concept of the Community dimension is crucial to the creation of what is known as the one stop shop in Community merger control. Once the existence of a concentration has been established the next step is to decide whether a concentration will be considered at the Community level or by the relevant national authorities. One of the key benefits of the Community system is the creation of a ‘one stop shop’, whereby the parties to a concentration are only subject to one set of administrative controls. This avoids potential conflicts between different administrative systems. The Regulation sets out the thresholds for the application of the Community system based on the concept of ‘concentrations with a Community dimension’.22 Furthermore, Art 21(1) of the Regulation provides that only the Commission shall take action in respect of Community dimension mergers. This is supported by Art 21(2) which provides that no national law will apply to such mergers. Due to the importance of the thresholds, they have proved to be one of the most controversial elements of the Regulation. The thresholds were lowered following the 1996 review of the Regulation. The main threshold for the existence of a Community dimension in a concentration is where: (a) (b)
the combined aggregate worldwide turnover of the undertakings concerned is more than 5,000 m ECU; and the aggregate Community wide turnover of at least two of the undertakings concerned is 250 m ECU, unless each achieves more than two-thirds of its aggregate Community wide turnover within one and the same Member State.23
The main threshold test for identifying a Community dimension merger is, therefore, based entirely on the turnover of the undertakings concerned. There is no qualitative assessment at this stage. For those involved, this approach has the benefit of certainty, which will only be apparent where the figures on worldwide, Community and Member State turnover are available. As few undertakings keep accounts in this fashion, the certainty may be more apparent than real. Other difficulties arise in relation to the calculation of the relevant figures for turnover. To aid the undertakings involved, there is more detailed guidance in Art 5 of the Regulation, as well as in the Commission Notice on the Calculation of Turnover.24 The 1997 amendment of the Regulation introduced a second way in which concentrations are deemed to have a Community dimension. It has become known as the ‘multiple filing’ route. A concentration will now also have a Community dimension where: (a) (b)
22 23 24
the combined aggregate worldwide turnover of all the undertakings concerned is more than 2,500 m ECU; in each of at least three Member States the combined aggregate turnover of all the undertakings concerned is more than 100 m ECU;
Council Reg (4064/89/EEC), OJ L257/13, 1990, Art 1. Ibid, Art 1 (2) (emphasis added). OJ C66/25, 1998.
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in each of at least three Member States included for the purpose of point (b), the aggregate turnover of at least two of the undertakings concerned is more than 25 m ECU; and (d) the aggregate Community wide turnover of each of at least two of the undertakings concerned is more than 100 m ECU, unless each of the undertakings concerned achieves more than two thirds of its aggregate Community wide turnover within one and the same Member State.25
It is important to note that if this final proviso applies the concentration will not have a Community dimension even if the other four criteria are satisfied. The ‘multiple filing’ route is designed to catch concentrations which fall below the original and principal threshold test but which would normally qualify for consideration under more than one Member State’s national controls. Following the 1996 review, this option was preferred to a simple reduction of the thresholds contained in Art 1(2). The compromise is probably best understood in the context of subsidiarity. The Member States were unwilling to extend further power to the Commission unless it was in circumstances where the duplication of national merger controls was imminent. That was likely to be the case where the concentration was of a certain significance in several Member States and therefore the Commission would be best placed to consider the concentration. The retention of the two-thirds rule, and the requirement that the turnover of the relevant undertakings reaches euros 25 m in at least three Member States, will exclude from the Commission’s competence concentrations which are likely to have their principal effects in one Member State. This option made sense as a political compromise but has several practical difficulties. One of the original benefits of the Community regime was the ‘one stop shop’ principle, and the certainty produced by this has been reduced by the introduction of the new alternative threshold criteria. The question whether a concentration between undertakings with a combined turnover of between euros 5,000 m and euros 2,500 m falls under the Community regime will depend on a complex breakdown of the turnover spread between Member States. Each undertaking will need to examine its turnover in each Member State to assess whether the various thresholds have been reached. The complexity of the calculations involved in Art 1(2) has posed problems in the past; the calculations under Art 1(3) will no doubt be even more difficult. In the 2000 Review of the Merger Regulation, the Commission noted that 9% of notifications came through the ‘multiple filing’ route and most of those had a clear Community dimension.26 In the Commission’s view, the new threshold has been successful. Indeed, the Commission Report suggests that a large number of mergers do not fall within Art 1(3) but still require notification in several Member States.
25 26
Ibid, Art 1 (3) (emphasis added). Report from the Commission to the Council on the application of the Merger Regulation thresholds, COM (2000) 399 final.
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Mandatory notification and suspension Concentrations which have a Community dimension must be notified to the Commission not more than one week after the conclusion of the agreement, announcement of the bid or acquisition of the controlling interest.27 It is obviously important that the Commission is informed of a proposed concentration as soon as possible. As a quick resolution of the procedure is vital in commercial situations, a swift notification is required and beneficial to the parties involved. If the deadlines for notification are not met, the Commission can impose a fine of between euros 1,000–50,000.28 On receipt the Commission publishes the fact of notification along with the names of the parties and the nature of the concentration.29 The publication of the notification is designed to elicit third party observations. These will have to reach the Commission within a tight time-limit specified in the published notice. The notification must contain a considerable amount of detailed information about the relevant undertakings. The Commission must be in a position to decide whether the concentration has a Community dimension and make an initial appraisal based on the facts provided. Due to the complexity of the information required, within a week of the conclusion of the concentration, it is often advisable for parties to approach the Commission informally before the official notification is required. Consultation will assist the undertakings concerned in compiling the relevant information and should protect them from the imposition of fines for late notification. According to Art 7, a concentration cannot be put into effect until the concentration has been declared compatible with the Common Market by the Commission. Article 7 is one of the provisions that was substantially amended in 1997; before the amendment, the period of suspension was only three weeks after the notification. Suspension of a concentration is the key to the success of the system, and as concentrations are very difficult to undo once they have gone ahead it is important that the appraisal of any concentration takes place during the period of suspension. The Commission can, if it considers it necessary, waive the suspension period and allow the concentration to be implemented.30 Before granting a derogation, the Commission must take into account the potential effects on other parties and competition. Appraisal procedure Once notification has taken place, the Commission will begin the examination of the concentration. As a result of the sensitive commercial nature of most concentrations, it is considered vital that the Commission examination is completed without delay. To that end very strict time-limits were imposed in the Regulation. The initial decision must be taken within one month, that period starting on the day following receipt of the notification. 31 Although the Commission is notorious for delays in its decision-making, the Mergers Task Force 27 28 29 30 31
Council Reg (4064/89/EEC), OJ L257/13, 1990, Art 4(1). Ibid, Art 14(1)(a). Ibid, Art 4(3). Ibid, Art 7(4). Ibid, Art 10(1). The period may be extended to six weeks if the Commission receives a ‘German’ clause request from a Member State under Art 9.
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has been very successful in adhering to the time-limits. Increasing merger activity and the strict deadlines have placed great pressure on the Mergers Task Force. The Commission has sought relief from that pressure from two sources. First, the Commission has been given increased resources32 and, second, a simplified procedure for the treatment of certain concentrations33 has been introduced. The detail of the simplified procedure will be discussed shortly. The success of the Merger Regulation in this regard has led to calls in the past for similar time-limits to be introduced for the Art 81(3) exemption procedure. The Commission has been given various investigative powers to assist in its task. Article 11 gives the Commission the power to request information from the undertakings concerned, Member State governments and the competent authorities, for example, the Office of Fair Trading. Information will usually be sought from the undertakings concerned and the Commission is required to detail the information requested, set a time-limit for the provision of the information and set out the penalties for non-compliance. It must also provide the relevant competent authority with a copy of the request. If the undertaking concerned fails to provide the information requested or does not provide complete information, the Commission may make a formal decision requiring the provision of the information. The fine for failing to provide information or providing incomplete information ranges between euros 1,000–50,000 and a periodic penalty payment of up to euros 25,000 is possible for each day of delay.34 A simplified procedure for dealing with certain concentrations was introduced in 2000. It will allow uncontroversial concentrations to be declared as compatible with the common market with minimal investigation. The Commission Notice35 sets out a number of categories of communication which will benefit from this new procedure: (1) where undertakings acquire joint control over a joint venture where that joint venture has no, or negligible activities in the EEA; (2) where none of the parties is engaged in business activities in the same product and geographic market (horizontal relationships), or in a product market which is upstream or downstream of a product market in which any other party is engaged; or (3) where two or more of the parties are engaged in the same product and geographic market or upstream or downstream market, provided that their combined market share is not 15% or more for horizontal and 25% or more for vertical relationships. Commission practice has shown that these types of concentration rarely give rise to competition concerns. If a concentration falls within any of these categories, a short form decision will be published within one month of the notification. At any point before the publication of the decision, the Commission may intervene and revert back to the normal procedure. The simplified procedure should reduce the administrative burden for both the parties and the Commission.
32 33 34 35
XXXth Report on Competition Policy, 2000, Point 238. Commission Notice on a simplified procedure for the treatment of certain concentrations under Council Reg (EEC) No 4064/89, OJ C217/32, 2000. Council Reg (4064/89/EEC), OJ L257/13, 1990, Arts 14(1) and 15(1). See, eg, Case IV/M1447 Deutsche Post/trans-o-flex and Case IV/M1397 Sanofi/Synthélabo. OJ C217/32, 2000.
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In the standard procedure the Commission may conduct its own investigation36 or ask the competent authorities of the Member States to conduct investigations on its behalf.37 The Commission can enter the undertaking’s premises to examine books and business records, take copies and ask for explanations. The Commission is required to co-operate closely with the competent authorities of the relevant Member States while planning and conducting investigations. Requests for information and investigations will often take a considerable amount of time. This will cause the Commission difficulties in meeting the strict time-limits imposed by the Regulation. Consequently, in situations where one of the relevant undertakings is responsible for the circumstances leading to the request or investigation, the time periods will be suspended.38 Details of the procedure followed by the Commission during an investigation are set out in the implementing Regulation.39 After the initial examination, the Commission may deal with the case in a number of ways. It may conclude that the concentration does not fall within the scope of the Regulation,40 and thus will close the case. If the concentration does fall within the Regulation, the Commission may declare, under Art 6(1)(b), that it does not raise serious doubts as to its compatibility with the Common Market, and allow it to go ahead. The Commission’s final option is to decide to initiate proceedings, the second phase of the examination, if it believes the concentration raises serious doubts as to its compatibility with the Common Market. The second phase investigation is more detailed and operates in accordance with longer timelimits. After making a decision, the Commission must notify the undertakings concerned and the relevant Member States. Where the Commission fails to make a decision within the time period, the concentration will automatically be deemed to be compatible with the Common Market under Art 10(6). A third method of case handling within the initial stage of the proceedings was introduced by the amendments to the Regulation. A concentration which raises serious doubts as to its compatability with the Common Market on notification can be declared compatible, under Art 6(1)(b), if the undertakings concerned agree to modify the proposed concentration. Under this procedure, the Commission and the undertakings may negotiate a settlement and ensure that the concentration is cleared at the initial stage. The Commission can also attach conditions and obligations to the Art 6(1)(b) decision to ensure that the undertakings fulfil their commitments. In Glaxo/Wellcome,41 the parties gave certain commitments at the first stage to avoid second stage proceedings. Glaxo had an 80–90% share of the market for anti-migraine drugs in some national markets and both companies had new drugs in clinical trial. To avoid further investigation, Glaxo undertook to license a third party to develop a number of the new drugs. In Vodaphone/Airtouch,42 a merger between UK and US mobile communications operators, the Commission was concerned as the merged company would have 36 37 38 39 40 41 42
Ibid, Art 13. Ibid, Art 12. Art 10(4). Commission Reg (3384/94/EEC), OJ L377/94, 1994. Council Reg (4064/89/EEC), OJ L257/13, 1990, Art 6(1)(a). The commitments were given in the informal procedure which operated before the formalisation of procedures in the amended Regulation. (Case IV/M555, OJ C65/3, 1995.) Case IV/M1430, OJ C295/2, 1999.
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control over two of the four major mobile communication operators in Germany. In order to allay these concerns Vodafone submitted a divestment undertaking to the Commission whereby Vodafone agreed to sell its stake in one of those operators. With the sale the overlap in the German market for mobile telecommunications between Vodafone and Air Touch was eliminated. If the conditions attached to a decision are not fulfilled, the Commission may revoke its decision and initiate the second stage. Where a decision is made following negotiations, the Commission is not bound by the one month time-limit set out in Art 10. The second stage proceedings involve a more detailed investigation and have a time-limit of four months from the initiation of proceedings. At the end of the investigation, the Commission may declare the concentration to be compatible, under Art 8(2), or incompatible, under Art 8(3), with the Common Market. Where a concentration has been implemented and is then declared to be incompatible with the Common Market, the Commission can order the separation of the assets and/or the cessation of joint control. They may impose a fine on the undertakings concerned of up to 10% of aggregate turnover and, in addition, impose a periodic penalty of up to euros 100,000 per day until the assets are separated or control is relinquished.43 The final options for the Commission are therefore very simple, but in practice the procedure can be quite complex. During the investigation, it may well become apparent that the concentration is unlikely to be compatible with the Common Market, and if that is the case a process of negotiation may begin in an attempt to find some form of compromise with a view to allowing a modified concentration to proceed. The Commission has the power to attach conditions to an Art 8(2) clearance. The use of conditions is the norm if a clearance is granted after an investigation advances into the second stage. The negotiations usually take place within the constraints of the four month time-limit to avoid the unnecessary adoption of an Art 8(3) decision. In order to assist the transparency of such negotiations the Commission has published a Notice on Remedies.44 The Notice sets out the underlying principles upon which Commission practice is based but it must be noted that each case is very different and the Commission retains a large degree of flexibility. It is for the parties to show that the undertakings they suggest, in the context of the Notice and Commission practice they are known as ‘remedies’, remove the competition concerns highlighted by the Commission. The Commission prefers structural solutions to competition concerns as they are likely to solve the problem of dominance and do not require medium to long term monitoring.45 It is also clear that where suggested remedies are so complex that the Commission cannot determine whether competition will be effectively restored, an authorisation cannot be granted.46 The Notice also set out more detail on how the Commission deals with particular types of remedy. An incompatibility decision under Art 8(3) is required to avoid automatic clearance at the end of the four month period under Art 10. As the Commission must consult the Member States and the Advisory Committee on Concentrations before granting a clearance, it needs to finalise the modifications well in advance of the 43 44 45 46
Council Reg (4064/89/EEC), OJ L257/13, 1990, Arts 14(2) and 15(2). Commission Notice on remedies acceptable under Council Reg (4064/89/EEC) and under Commission Reg (447/98/EC), OJ C68/3, 2001. Ibid, Commission Reg, para 9. Ibid, para 32.
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four month deadline. Once an incompatibility decision has been taken, negotiations over commitments, which could lead to a clearance, can continue, as an amending clearance can be made outside the original four month period.47 If the undertakings do not fulfil the conditions contained within a clearance, again the Commission may impose a fine of up to 10% of aggregate turnover and, in addition, impose a period penalty payment of up to euros 100,000 per day until the situation is rectified.48 An example of a negotiated clearance was Kimberley-Clark/Scott Paper.49 The deal would have combined the Andrex, owned by Scott Paper, and Kleenex, owned by Kimberly-Clark, brands of paper products in the UK and Ireland. The undertakings would have had a combined market share of 20–45% of branded products, that is, Kleenex and Andrex, and 40–60% of branded and private label products, products made by the companies for others. The Commission discovered that the concentration raised particular concerns, as all retailers stocked the branded products, and that it would result in the creation of the leading supplier of private branded products. Before the Commission cleared the concentration, it required the divestiture of a major UK production facility and the licence of the use of the Kleenex brand for 10 years. In other markets, the competition concerns were different. To address those concerns, other conditions were attached in those markets: the continued use of the Kleenex brand was allowed, while the Andrex brand was not to be used for an indefinite period. It is interesting to note that the merger was also the subject of investigation, and eventual approval, in the United States. In AOL/Time Warner,50 another large scale international merger, the Commission approved the merger after the parties agreed to sever all links with the German media group Bertelsmann. The merger between AOL, the leading internet access provider in the US and the only access provider across Europe, and Time Warner, one of the world’s biggest publishing and media companies, created the first vertically integrated internet content provider with access to Time Warner’s content library. AOL operated in Europe through several joint ventures with Bertelsmann whose operations include a large music publishing interest and therefore a large musical library. The Commission was concerned as AOL would have had a dominant position on the market for online delivery of music, utilising both Time Warner and Bertelsmann’s content. There was also concern that AOL would have been in a position to format its music libraries to work only with their own music player, Winamp, allowing that player to become dominant. By severing all links between AOL and Bertelsmann those concerns were removed. Basis of the appraisal The Commission’s decisions under Arts 6 and 8 are based on the concept of ‘compatibility with the Common Market’, and that concept is explained in Art 2 of the Regulation. The basic prohibition is against concentrations that create or strengthen a dominant position which would significantly impede effective 47 48 49 50 51
Council Reg (4064/89/EEC), OJ L257/13, 1990, Art 8(6). Ibid, Arts 14(2) and 15(2). Case IV/M623, OJ L183/01, 1996. Case IV/M1825, IP/00/1145. Council Reg (4064/89/EEC), OJ L257/13, 1990, Art 2(3).
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competition within the Common Market.51 The Commission are required to take into account the need to develop and maintain competition within the Common Market, the market position of the undertakings, and the development of technical and economic progress that is to the consumers’ advantage.52 The appraisal of a particular concentration will therefore require detailed market analysis to establish if a dominant position is strengthened or created. The Commission Notice on the Definition of the Market53 is largely based on the Merger Task Force’s practice in this area. In the context of some joint ventures, the amended Regulation now also provides in Art 2(4) that any co-ordination between the competitive behaviour of independent undertakings is to be appraised in accordance with the criteria of Art 81(1) and (3) of the Treaty. In most cases, the competitive effects of the concentration will be of paramount importance. But in some circumstances other, non-competition, considerations may be taken into account during the appraisal. An examination of the technical and economic progress promoted by the concentration in question is mentioned specifically in Art 2. It is possible to see this as being a potential ‘efficiency’ defence. This was partially recognised in Mercedes Benz/Kassbohrer 54 where the improvements in research and development, and savings in production and administration, were recognised. The existence of efficiencies giving rise to consumer benefit was also considered in St Gobain/Wacker-Chemie/NOM.55 The proposed joint venture was prohibited even though the concentration would have improved efficiencies in Wacker-Chemie’s troubled operations. The Commission were of the opinion that consumers would receive more benefit through the cessation of Wacker-Chemie’s operation than through the concentration. Although the Commission does take cognisance of the ‘efficiency defence’, usually within their calculation of dominance, it is important to note that such a defence will only ‘tip the balance’ if the competition effects of a merger are close to the borderline. An efficiency defence is unlikely to succeed where there will be a significant impediment to competition.56 Other broader Community goals may also have an impact. Recital 13 of the Regulation states that consideration should be given to the objectives set out in Arts 2 and 130a of the Treaty The Court of First instance was asked to rule on the consideration of such factors in Comité Central d’Enterprise de la Société Anonyme Vittel v Commission.57 It was of the opinion that the primary considerations should be competition related, though in some circumstances social goals could be taken into account where the concentration was likely to have adverse effects on the objectives set out in Art 2 of the Treaty. A similar form of reasoning could be extended to environmental factors. Article 130r of the Treaty states that environmental protection shall be integrated into the Community’s other policies. The Commission has recognised that this will have an effect on competition policy. The extent to which the Merger Regulation can be used as a tool of Community 52 53 54 55 56 57
Ibid, Art 2(1). OJ C372/03, 1997. See the discussion in Chapter 3. Case IV/M477, OJ L211/1, 1995. Case IV/M774, OJ L247/1, 1996. See Camesasca, PD, ‘The explicit efficiency defence in merger control: does it make the difference’ [1999] 1 ECLR 14, and Halliday, J, ‘The recognition, status and form of the efficiency defence to a merger’ (1999) 22 World Comp 91. Case T-12/93 [1995] ECR II-1247.
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industrial policy by the promotion of ‘European champions’ is also of interest. As noted earlier, one of the considerations in introducing the Regulation was to ease the formation of European alliances which could go on to compete on the global market. Nonetheless, the Commission prohibited a merger in Aerospatiale/Alenia/de Havilland,58 which may have created such a ‘European champion’ in the aircraft manufacturing industry, and the role of Community industrial policy in merger control remains doubtful.59 Collective dominance The Regulation makes no mention of prohibiting the strengthening or creation of collective dominance but the Commission was of the opinion that a concentration producing this effect may be incompatible with the Common Market. In Nestle/ Perrier,60 the Commission attached conditions to its clearance that certain parts of the business were to be sold to third parties to avoid the strengthening of a collective dominant position. In a further case, Kali and Salz/MdK/Treuhand,61 the Commission again cleared a concentration on the basis of conditions attached to the decision to avoid the creation of a duopolistic dominant position. The Commission was of the opinion that the concentration would create a duopoly controlling 60% of the market for potash. As outside operators were fragmented they would provide little competition, and competition between the duopolists would probably be limited because of the structure of the potash market and their close economic links. The decision was challenged before the Court in France v Commission62 on the basis that the Merger Regulation had no application to the creation or strengthening of collective dominance. The Court rejected that argument, confirming that collective dominance did come within the terms of the Regulation. Although the Court upheld the principle, they annulled the Commission decision on the basis that it had not established, to the necessary legal standard, that the concentration would give rise to a collective dominant position. The Court of First Instance went further in its discussion of collective dominance in Gencor.63 In its judgment the CFI made it clear that collective dominance was covered by the Regulation and that the avoidance of anticompetitive market structures was important. It went on to state that: Those structures may result from the existence of economic links in the strict sense…or from market structures of an oligopolistic kind where each undertaking may become aware of common interests and, in particular, cause prices to increase without having to enter into an agreement or resort to a concerted practice.64
58 59 60 61 62 63 64
Commission Decision (91/619/EEC) Case IV/M53, OJ L334/42, 1991; [1992] 4 CMLR M2. Banks, D, ‘Non-competition factors and their future relevance under European merger law’ [1997] 3 ECLR182. See, also, Case IV/M315 Mannesmann/Valourec/Ilva, OJ L102/15, 1994. Commission Decision (95/553/EEC) Case IV/M120, OJ L356/1, 1992; [1993] 4 CMLR M17. Case IV/M308, OJ L186/38, 1994. Cases C-68/94 and C-30/95 [1998] 4 CMLR 829. Case T-102/96 Gencor v Commission [1999] ECR II-753; [1999] 4 CMLR 971. See, also, the discussion in Chapter 3, and Korah, V, ‘Gencor v Commission: collective dominance’ [1999] 6 ECLR 337. Gencor v Commission [1999] ECR II-753; [1999] 4 CMLR 971, para 227.
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The approach suggested in Gencor was utilised by the Commission in Airtours/First Choice.65 The Commission was of the view that a merger between Airtours and First Choice would result in a collective dominant position between the merged entity and the two other leading tour operators, Thomson and Thomas Cook, on the short haul package holiday market in the UK. It therefore prohibited the merger. In discussing the issue of collective dominance the Commission were of the opinion that, ‘it is sufficient that the merger makes it rational for the oligopolists, in adapting themselves to market conditions, to act—individually—in ways which will substantially reduce competition between them’. 66 This shows the Commission’s willingness to utilise the collective dominance jurisprudence, and even to extend it somewhat further than the CFI. Exceptions to the ‘one stop shop’ The Regulation provides for three exceptions to the ‘one stop shop’ principle, whereby the Commission alone will investigate mergers of a Community dimension. The first exception allows the Commission to refer concentrations which have a Community dimension for consideration by the competent authorities of the Member States under national competition law. The second allows Member States to refer concentrations which do not have a Community dimension to the Commission. This is not strictly an exception to the one stop shop although it provides for Commission control in respect of non-Community dimension mergers. The third allows Member States to take appropriate measures to protect legitimate interests not covered by the Regulation. The first exception is known as the ‘German’ clause as it was included at the behest of the German authorities. Article 9 of the Regulation allows a Member State to request that consideration of a concentration be referred back to its competent authority if: (a) a concentration threatens to create or strengthen a dominant position as a result of which effective competition will be significantly impeded in a market within that Member State, which presents all the characteristics of a distinct market; (b) a concentration affects competition in a market within that Member State which presents all the characteristics of a distinct market and which does not constitute a substantial part of the Common Market.67 The Member State must seek a referral within three weeks of it receiving the copy notification from the Commission. The Commission must make a decision to refer all or part of the concentration to the competent authority within six weeks of the request, where proceedings are not initiated, or within three months, where proceedings have been initiated but no preparatory steps to adopt measures under Art 8 have been taken.68 If preparatory steps have been taken toward such measures, the Commission is deemed to have decided not to refer. But if the Commission does not take a decision within the relevant time period the concentration is deemed to have been referred back to the competent national 65
66 67 68
Case IV/M1524, OJ L93/1, 2000. The Commission Decision is currently subject to appeal, Case T342/99 Airtours v Commission (pending). See, also, Motta, M, ‘EC merger policy and the Airtours case’ [2000] 4 ECLR 199; Christensen, P and Rabassa, V, ‘The Airtours decision: is there a New Commission approach to collective dominance?’ [2001] 6 ECLR 227. Ibid, Commission Decision, para 54. Council Reg (4064/89/EEC), OJ L257/13, 1990, Art 9(2). Ibid, Art 9(4).
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authority.69 Once the concentration is referred back, the competent authority should report on its findings under national law not more than four months after referral.70 The Member State may only take measures which are strictly necessary to safeguard or restore effective competition on the market.71 The German clause has been used relatively infrequently, and even in those situations the Commission has sometimes refused to refer the concentration to the competent authority, preferring to take the Member State’s concerns into account in its own consideration. The referral criteria were amended in 1997. Accordingly, the Member State will not have to show the creation or strengthening of dominance where the distinct market does not form a substantial part of the Common Market. Although this appears to broaden the referral criteria, it has been used infrequently. A good example of the use of these provisions is Tarmac/ Steetley72 The UK Government requested a partial referral of a case back to the UK. The Commission investigated the request and came to the conclusion that a dominant position was created in a distinct market for bricks and clay tiles. The relevant market for bricks was limited to the north east and the south west of England, the market for clay tiles being the whole of the UK. With regard to bricks, the referral was important, as the Commission could only adopt measures to avoid the creation or strengthening of a dominant position in a substantial part of the Common Market. The relevant markets covered 10% of the UK population and it was doubtful whether the Commission would have authority to act. As the market for clay tiles was larger, covering the whole of the UK, though still a distinct market because of transport costs, the Commission could act. It was decided that the concentration should be referred to the UK authorities to ensure that one authority dealt with all the issues. This was particularly important in this case as there was a competing bid from another company which had been referred to the Office of Fair Trading because it did not meet the Community dimension thresholds. It made sense for all the bids to go through the same regulatory procedures and be considered under the same substantive rules. Other recent examples of referrals back to the UK authorities include Anglo American/Tarmac73 Hanson/Pioneer74: and Interbrew/Bass,75 although others have been reclaimed by the Commission, for instance, EDF/London Electricity76 The second ‘exception’, introduced following a suggestion by the Dutch authorities, is known as the ‘Dutch’ clause. Under Art 22(3) of the Regulation, one or more Member States can refer a concentration which does not have a Community dimension to the Commission. This procedure was put in place to protect a number of smaller Member States which did not have their own merger control systems. Where a concentration would have serious effects on a market in a Member State but would not fall within the Community dimension thresholds in the Regulation, the authorities of that Member State can ask the Commission to
69 70 71 72 73 74 75 76
Ibid, Art 9(5). Ibid, Art 9(6). Ibid, Art 9(8). Case IV/M75, OJ C50/25, 1992; [1992] 4 CMLR 343. Case IV/M1779, IP/00/32, 13 January 2000. Case IV/M1827, DTI Press Release P2000/212, 24 March 2000. Case IV/M2044, IP/00/940, 23 August 2000. Case IV/M1346, IP/99/49, 27 January 1999.
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investigate the concentration if it ‘creates or strengthens a dominant position as a result of which effective competition would be impeded within the territory of the Member State or States making the joint request’. The Member State making a request must do so within one month of the date on which the concentration was made known to them. When disposing of such a case, the Commission may use the powers available under Art 8. In the use of those powers the Commission may take measures which are strictly necessary to maintain or restore effective competition within the relevant State.77 Under the Dutch clause procedure, the concentration is only suspended from the time the Commission informs the parties to the concentration that the request has been made. It is therefore likely that, in States where there are no national controls, the concentration may have already partially taken place. Other potential problems arise where a concentration affects several Member States and only some have national controls. If, for instance, a concentration affected two States and one of them had existing national controls, that State may decide to examine the concentration according to national law. The other State may decide to refer the concentration to the Commission. In those circumstances, there exists the possibility of dual control at the national and Community levels. There is no implicit conflict in this position as the Commission is only acting to safeguard the position in the Member State with no national controls. A Commission prohibition would effectively have the same standing as a national decision, though it does mean a duplication of the administrative steps the concentration will have to go through. The introduction of the ‘multiple filing’ element of the Community dimension thresholds within the Regulation may reduce the potential for such a situation occurring. The final exception, provided for in Art 21(3) of the Regulation, which allows for the protection of legitimate interests, is designed to allow Member States to protect three named interests: public security, plurality of the media and prudential rules. If the Member State wants to invoke a ‘legitimate interest’, it must notify the Commission of its intention prior to the adoption of the measure, and the Commission will consider its applicability with the general principles of Community law before its adoption. The Commission has one month to undertake this task. This exemption allows a Member State to adopt measures based on existing national law on the basis of non-competition grounds. Those measures must comply with general Community law principles, such as non-discrimination and proportionality. The exception does not allow a Member State to allow a prohibited concentration to go ahead, but it does allow a Member State to impose restrictions on a concentration which has been cleared by the Commission. In addition to these exceptions provided for in the Merger Regulation text, there are additional problems with the concept of the one stop shop. Related to the third exception is the Treaty provision in Art 223 that Member States are not precluded from taking measures necessary to protect national security. This is most likely to arise in the context of take-overs and mergers related to the defence industry. More significantly, the Merger Regulation, as secondary Community legislation, does not prevent the continued applicability, discussed above, of Arts 81 and 82 of the Treaty. Accordingly, for mergers without a Community dimension as defined in Art 1 of the Regulation, Arts 81 and 82 may have continued effect. The
77
Council Reg (4064/89/EEC), OJ L257/13, 1990, Art 22(5).
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Commission has, however, indicated that it intends to take no action against concentrations with an aggregate world wide turnover of less than •2,000 m, an aggregate Community turnover of less than euros 100 m or where two-thirds of their combined turnover is within one Member State, as such mergers will not normally produce significant effects on interstate trade. The Commission is unable to use its powers under Reg 17, but has the power to act under Art 85 of the Treaty, although this does not provide investigative or fining powers. Nonetheless, Art 81 and, particularly, Art 82 may be directly enforceable in the national courts in any proceedings in connection with a take-over or merger. This possibility of national courts providing remedies, for instance, interim relief, in the context of mergers with a Community dimension may undermine the basis of the one stop shop intended to be created by the Merger Regulation. Joint ventures The control of joint ventures, sometimes also known as strategic alliances, has caused problems in Community competition law for many years. Joint ventures involve the setting up of a company by two or more parent companies. The main difficulty for merger controls in dealing with joint ventures is that in practice the formation of the joint venture, and the roles undertaken by the various parties, can vary to such a great extent that a unified approach is difficult. Under the unamended form of the Merger Regulation, if two independent undertakings transferred their activities in one area to a joint venture and then withdrew permanently from that area the joint venture would be considered to be a concentration, a concentrative joint venture, falling within the Merger Regulation and its procedures. If, on the other hand, two independent undertakings set up a joint venture to control their sales, for instance, through a joint sales agency, this would have been seen as part of a strategy to operate a cartel, and would have fallen under Art 81(1) as a co-operative joint venture. These are fairly polarised examples of what are termed concentrative and co-operative joint ventures respectively. It was often difficult to decide whether a proposed joint venture would be concentrative or co-operative and, consequently, under which procedure it should be considered. In most circumstances, joint ventures are encouraged by the Community authorities on policy grounds. It is considered that European industry will enhance its competitiveness on the global market by the formation of alliances between companies which are able to pool their resources and respective specialisations. The Merger Regulation’s speedy procedures allow such beneficial concentrative joint ventures to proceed with minimal disruption to the parties’ competitive strategy. However, many businesses complained that co-operative joint ventures, those that fell under the Art 81 procedure but were not anticompetitive, were disadvantaged because of the uncertainty and delays in the Art 81(3) exemption procedure. Many advisers suggested that undertakings should structure their joint ventures so that they fell within the definition of a concentrative joint venture and, as such, would be considered within the timelimits of the Merger Regulation. In an attempt to deal with many of these criticisms, the Commission in the mid 1990s sought to both clarify the distinction between concentrative and co-operative joint ventures and also reduce the scope of co-operative joint ventures to situations where there was likely to be cooperation between the parents. This approach has been dramatically extended by 221
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the recent amendments to the Merger Regulation which have brought many more joint ventures within the Regulation. The distinction between concentrative and co-operative joint ventures still exists but the balance has shifted, many more joint ventures now being considered as concentrative. Every ‘full function’ joint venture, that is, a ‘joint venture performing on a lasting basis all the functions of an autonomous economic entity’, 78 will be considered to be a concentrative or structural joint venture to be dealt with under the Merger Regulation. A joint venture which is not full function will fall under Art 81 of the Treaty. Before a joint venture is considered to be full function it must have all the characteristics of an independent, self-contained, business unit. It must not be reliant on its parents for survival. It should therefore have its own human and material resources to allow it to carry on business, and not rely on others’ staff or assets. The Commission has also considered the joint venture’s research and development capacity, ownership of intellectual property rights, and access to distribution networks as being relevant to its status.79 Even if it has limited staff and financial resources, a joint venture may not be considered full function if those resources would not enable it to operate on a lasting basis.80 In many cases, the joint venture will continue to deal with its parent companies in some capacity. This will obviously question their status of independence on the market. The Commission must be sure that the joint venture is not simply a disguised sales agency.81 An example of the way in which such concerns are handled was Texaco/Norsk Hydro.82 The joint venture was established to distribute refined oil products to consumers in Denmark, Norway and Iceland. The parent oil companies withdrew from the market but would still be active in the upstream market, supplying products to such distributors. Although the parents would have supplied the joint venture with up to 50% of its requirements in some areas, the Commission ensured that these sales would be at arms length and the joint venture would be able to purchase substantial supplies from the parents’ competitors. The Commission was therefore of the opinion that the joint venture was sufficiently independent to be concentrative. In BT/AT&T,83 the parties gave various divesture undertakings to allay Commission fears over parental co-ordination. Under the unamended provisions of the Merger Regulation, full function concentrations which gave rise to the threat of the co-ordination of competitive behaviour between the parties, or between them and the joint venture, would fall outside the Regulation and be dealt with under Art 81 as co-operative joint ventures. This would normally be the case where both parents retained significant activities in the same market as the joint venture. The concern is primarily with the co-ordination of competition between the parents rather than co-ordination between one of the parents and the joint venture.84
78 79 80 81 82 83 84
Council Reg (4064/89/EEC), OJ L257/13, 1990, Art 3(2). See, also, the Commission Notice on the Concept of Full Function Joint Ventures, OJ C66/1, 1998. See Case IV/M160 Elf Atochem/Rohm and Haas, OJ C201/27, 1992. See, eg, Case IV/M722 Téneo/Merill Lynch/Bankers Trust, OJ C159/03, 1996. See the new Commission Notice, para 14. Case IV/M511, OJ C23/3, 1995. Case IV15, IP/99/209, 30 March 1999. The guidance for the old system was found in the Commission Notice on the Distinction between Concentrative and Co-operative Joint Ventures, OJ C385/1, 1994.
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The amended system no longer removes these joint ventures from the scope of the Regulation. They are now considered in the same way as other concentrative joint ventures. However, where the Commission believes that the concentration have, ‘as its object or effect the co-ordination of the competitive behaviour of undertakings that remain independent, such co-ordination shall be appraised in accordance with the criteria of Art 85(1) [81(1)] and (3) of the Treaty with a view to establishing whether or not the operation is compatible with the Common Market’.85 This effectively means that the Commission will carry out its normal appraisal alongside an assessment based on Art 81. This dual appraisal must take place within the time-limits set out in the Regulation. The Commission is required to take two factors into account: (a) whether two or more parent companies retain, to a significant extent, activities in the same market as the joint venture, or in a market which is downstream or upstream from that of the joint venture, or in a neighbouring market closely related to this market; and (b) whether the co-ordination which is the direct consequence of the creation of the joint venture affords the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products or services in question. This provision amending the original Regulation gives the Commission an opportunity within the merger system to examine the potential for co-ordination following the creation of a joint venture, while giving the parties to a concentration the benefits of the time-limits contained in the Regulation. Hopefully, the new system will allow more beneficial joint ventures to be cleared more quickly. International mergers The increasing globalisation of markets demands a response from the competition authorities and this is most evident in relation to merger control, given the spate of high profile worldwide mergers which has taken place in recent years. The most dramatic solution would be to institute some form of global authority to deal with such mergers which cut across a range of markets and territories. This is unlikely to occur, at least in the near future, and any developments are likely to be procedural, such as by ensuring similar filing requirements under different merger control systems. In the meantime, the Community has entered a number of bilateral enforcement co-operation agreements, most notably with the USA as discussed in Chapter 2. It is clear that the co-operation practice under the agreement has focused on merger activity, and this is exemplified by the recent mergers involving Boeing/ MacDonnel Douglas86 and AOL/Time Warner87 which were dealt with under both competition law systems. More generally, the possibility for surveillance of international mergers is linked to the issue of extra-territoriality, discussed in Chapter 2, evidenced by the dispute regarding the Commission’s intervention in the Gencor/ Lonrho88 merger involving two mining companies based in South Africa.89 85 Council Reg (4064/89/EEC), OJ L257/13, 1990, Art 2(4). 86 Case IV/M877, OJ 1336/16, 1997. 87 Case IV/M1825, IP/00/1145. 88 Case IV/M619, OJ L11/30, 1997 89 See Fox, EM, ‘The Merger Regulation and its territorial reach’ [1999] ECLR 334.
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BACKGROUND TO UK MERGER CONTROL It was only in 1948, through the Monopolies and Restrictive Practices (Inquiry and Control) Act 1948, that any form of merger control was introduced into the UK. However, that legislation merely enabled the Monopolies and Restrictive Practices Commission (MRPC) to investigate mergers on an ex post facto basis where a merger resulted in a concentrated market. Investigations by the MRPC under the 1948 Act often condemned merger activity.90 However, the procedures were sterile because the authorities could not prevent a merger from taking place, nor was there the possibility of remedial action through divestiture. Partly due to the inadequacy of the procedures available under these provisions and also partly due to the impact of the Restrictive Trade Practices Act 1956, the Monopolies and Mergers Act was introduced in 1965 in order to provide effective merger controls in the UK. The 1956 Act led to a ‘merger boom’ as companies sought alternatives to collusive activities which were caught by the Act’s provisions. The form of control instituted in 1965 was essentially a benign investigative system, applicable to monopoly references since 1948, reflecting the predisposition on the part of the authorities in favour of mergers taking place.91 This chapter will focus on the current merger control regime in the UK and the recent dramatic proposals for its reform.
THE FAIR TRADING ACT 1973 The merger control provisions are now contained in Pt V of the 1973 Act, which maintained the same basic format as under the previous legislation.92 The major change it introduced was the creation of the post of DGFT who, assisted by the Office of Fair Trading, plays a key role in the shaping and enforcement of UK competition policy, including merger control.93 The provisions for merger control have been subject to modification in recent years, for example, changes have been introduced as a result of the Companies Act 1989 and the Deregulation and Contracting Out Act 1994. UK merger control principally involves three institutions: (a) the Director General of Fair Trading; (b) the Secretary of State for Trade and Industry; and (c) the Competition Commission, which replaced the MMC. There are also three main stages involved under the merger control provisions of the 1973 Act, which shall be considered in this section: (a) referral; (b) investigation and report; and
90 91 92 93
Eg, see Matches (1952–53) HCP 61. Exemplified by a speech by the then President of the Board of Trade, Anthony Crossland, at a launch of the British Association of the Chambers of Commerce on 25 June 1969. The market share criterion for referral was reduced from a figure of 33% to 25%. For general guidance, see the Office of Fair Trading, Mergers: A Guide to the Procedures under the FTA 1973, revised 1994, London: OFT and, for a practitioner’s guide, see Celli, R and Grenfell, M, Merger Control in the UK and European Union, 1997, London: Kluwer.
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(c) subsequent enforcement. Under the 1973 Act, the Secretary of State is allocated the formal statutory role in relation to referral and subsequent enforcement, and the DGFTs duty, through the Office of Fair Trading, is to advise and support the Secretary of State in his tasks.94 The Competition Commission is exclusively involved in reporting on the public interest implications arising out of a merger situation. There are specific provisions under the legislation in relation to newspaper mergers which shall not be considered here. Basically, these provisions, in ss 57–62 of the Act, ensure that mergers qualifying as ‘newspaper mergers’ may only be effected with the approval of the Secretary of State, normally after the case has been referred to, and considered by, the Competition Commission. In the past, the Commission has, for instance, been requested to take into account, in its public interest assessment, the need for accurate presentation of news and the free expression of opinion.95 Before assessing the merger controls in further detail, one should also be aware of the necessity to differentiate between merger control in the public interest under these provisions and the protection of investors. The latter is a matter of company law and the additional protection afforded by the City Code on Take-overs if a quoted company is involved. The referral stage For simplicity of reference, this section has been termed the referral stage, although it may be more accurate to depict it as the stage at which it will be decided whether to make a formal reference to the Competition Commission. This involves a number of separate sub-stages where the following questions require to be addressed: (a) Does Community competition law preclude the exercise of UK merger controls? (b) Is a ‘merger situation’ established? (c) Does the ‘merger situation’ qualify for investigation? (d) What policy issues will be taken into account in deciding whether to refer? (e) Can and should undertakings be sought in lieu of a reference? (f) Is notification possible?
94 95
FTA 1973, s 76. See MMC Press Release 183; Newsquest Media Group Ltd/Westminster Press [1996] 7 ECLR R-183. In Daily Mail/General Trust and Bailey Forman Ltd, Cm 2693, 1994, the MMC advised that some benefit would accrue to readers as a result of the take-over but this would be outweighed by the adverse consequences which would arise from the significant increase in the concentration of local newspapers in the region, including reduced choice for advertisers. The Secretary of State advised that, unless satisfactory undertakings were negotiated, consent would be refused: (1994) DTI Press Notice, 31 October; [1995] 1 ECLR R-26.
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Community merger control The Merger Regulation As noted earlier in relation to Community merger control, the Merger Regulation 4064/89 established a set of merger controls at the Community level. The central idea is that mergers with a Community dimension are investigated only by the Commission. Article 21(1) provides that only the Commission is to deal with Community dimension mergers, and this is re-affirmed by Art 21(2), which states that no national legislation may be applied to such mergers. Accordingly, the first stage for the Office of Fair Trading/Secretary of State is to assess whether the particular merger situation qualifies as a Community dimension merger and is, therefore, to be considered solely by the Mergers Task Force under the Merger Regulation. This involves consideration of the thresholds under Art 1 of the Merger Regulation discussed in the Community merger control section of this chapter. There are certain limited exceptions to the exclusive competence of the Commission, under Arts 9 and 21(3) of the Regulation and Art 223(1) of the Treaty. However, the UK authorities may also need to consider the possible application of Arts 81 and 82 to a merger situation which does not qualify for investigation under the Merger Regulation.96 Establishing a ‘merger situation’ Section 64(1) of the 1973 Act defines a merger situation as arising where two or more enterprises, of which at least one was carried on in the United Kingdom or carried on, by, or under a body corporate incorporated in the United Kingdom, have ceased to be distinct enterprises. An enterprise is defined as comprising the activities, or part of the activities, of a business.97 Accordingly, UK merger control does not only apply to mergers and take-overs of companies, but it can apply to the purchase of particular assets which form a business, for example, where a bus company acquired a depot and some buses from a rival company.98 The crucial issue under this provision is identifying when the enterprises have ceased to be distinct. Cease to be distinct Section 65(1) provides that enterprises cease to be distinct when: (a) they are brought under common ownership or control; or (b) either of the enterprises ceases to be carried on at all, as a result of an arrangement or transaction entered into to prevent competition between the enterprises. Merger control is primarily concerned with the former type of situation. However, the first thing to note is that it is very uncommon in business practice for either of the merged enterprises to cease completely. Full mergers are relatively rare. The 96 97 98
The EC Competition Law (Arts 88 and 89) Enforcement Regulations 1996 SI 1996/2199. See Kerse, C, ‘Enforcing competition policy under Arts 88 and 89 of the EC Treaty—new powers for UK competition authorities’ [1997] 1 ECLR 17. FTA 1973, s 63(2). Stagecoach Holdings plc/Lancaster City Transport Ltd, Cm 2423, 1993. The MMC considered that, in effect, the business had been acquired, as the purchaser could essentially provide all the services previously offered by the vendor.
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most common practice is for the acquisition of control, to some extent, in another company, normally via the acquisition of shares. The Act envisages, under s 65(3) and s 65(4), three possibilities in the consideration of whether or not common ownership or control has been brought about: (a) a controlling interest; (b) the ability, directly or indirectly, to control policy; and (c) the ability, directly or indirectly, materially to influence policy. The first possibility is the most straightforward and would cover a situation where a parent company acquired a 100% stockholding in a subsidiary company, or any other shareholding which conferred a majority in voting terms. However, the legislation acknowledges that control may be achieved even where the majority of shares and voting rights are not acquired, particularly in cases where the remaining shareholding is dispersed widely. The relationship with other institutional investors may also be important. In one example, a 29% shareholding was considered sufficient for control and a 20% holding gave a position to materially influence policy.99 A merger situation may arise where the acquisition of a further interest triggers a change in the level of control of the other enterprise. For instance, in Amalgamated Industries/Herbert Morris, 100 a merger reference was not made at the stage when the ability to materially influence policy was acquired, but rather was made later when this was extended to allow actual control. Creeping mergers The thresholds for establishing a merger situation are not easily identifiable on an objective basis and it is difficult to ascertain exactly when any threshold has been triggered. Accordingly, if a transfer of common ownership or control is effected by a series of share transactions over a period of time, it may be uncertain when a merger situation is established, as the thresholds are only triggered when there is a change in the level of control from one threshold to another. In order to clarify this problem and prevent any attempted avoidance of the merger control provisions, a new provision, s 66A, was inserted into the 1973 Act in 1990 by s 150(1) of the Companies Act 1989. Section 66A provides that, where a series of transactions over a two year period has the aggregate effect of bringing two or more enterprises under common ownership or control, that series of transactions may be treated, for the purposes of referral under the Act’s provisions, as having occurred simultaneously on the date on which the latest occurred. Qualification for investigation Section 64 provides two alternative tests in order for a merger to qualify for investigation under the 1973 Act: the market share test and the assets value test.
99 Eurocanadian Shipholdings/Furness Withy/Manchester Liners (1975–76) HCP 639. 100 (1975/76) HCP 434.
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Market share test This test, under s 64(1)–(3), will be satisfied where as a result of the merger at least 25% of the goods or services of any description are supplied by, or to, the same person in the UK or in a substantial part of the UK. Like monopoly control under the 1973 Act, this market share test can be easily satisfied due to the use of the fairly flexible criterion of goods or services of any description. The test will also be satisfied where one enterprise already supplies or consumes 25% and this figure is increased as a result of the merger.101 Case law has considered the extent to which the market share test is satisfied in a substantial part of the UK. In the South Yorkshire Transport case,102 the House of Lords considered that, although the term ‘substantial part’ could not be defined by arithmetical criteria based on area of coverage or population, ‘the reference area must be of such size, character and importance as to make it worth consideration for the purposes of the Act’.103 In Stagecoach Holdings plc v Secretary of State for Trade and Industry,104 this test was applied and satisfied where the Commission had considered a designated area which represented 1.4% of the UK population and 1.8% of the UK geographical area. Assets value test This provides an alternative basis for qualification if the value of the assets taken over exceeds £70 m. It should be noted that this figure is subject to review and has been increased from lower figures in the past.105 This is based on the gross, worldwide assets of the acquired enterprise as at the date the enterprises ceased to be distinct, except in the case of a joint venture where neither party has been taken over in relation to which the assets of the enterprise with the lower value are considered.106 In practice, the assets value test is resorted to most frequently by the authorities because of its relative simplicity and as it allows conglomerate mergers and other mergers which involve aspects of the public interest, not directly related to the pure competition objective, to be investigated. Policy on referrals Only the Secretary of State can make a merger reference to the Competition Commission. However, a small number of qualifying mergers are referred and inevitably Government trade and industry policy will be reflected in the choice of which mergers should be referred for further consideration. The exclusive merger referral power of the Secretary of State reflects the political nature of the UK merger control system. The Secretary of State is assisted by the DGFT in assessing which merger situations ought to be referred. In turn, the DGFT is assisted by the Mergers Panel. With the benefit of advice on any public interest issues raised, the DGFT makes recommendations to the Secretary of State, who exercises the 101 As a result of the provision in s 64(1)(a) that the figure is satisfied ‘or does so to a greater extent’. 102 R v Monopolies and Mergers Commission ex p South Yorkshire Transport Ltd [1993] 1 All ER 289. See, also, South Yorkshire Transport Ltd Acquisitions, Cm 1166, 1990. 103 R v Monopolies and Mergers Commission [1993] 1 All ER 289, p 296. 104 1997 SLT 940 (OH). 105 FTA 1973, s 64(1)(b) amended by Merger References (Increase in Value of Assets) Order 1994 SI 1994/72 (£30 m increased to £70 m). 106 Ibid, s 67(2)(a).
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ultimate political decision-making power over whether or not to refer. He is not bound by the DGFT’s advice. Furthermore, although the DGFT and Secretary of State in their respective capacities are likely to consider the criteria in s 84 of the Act, outlining the ‘public interest test’, as having some bearing on their decisionmaking, there is nothing in the Act requiring references to be made in accordance with the public interest test. Section 64(5) only requires that a decision whether to refer should be made as soon as is reasonably practicable by the Secretary of State. Indeed, the key policy development in UK merger control over the last 20 years has been the Tebbit Doctrine. In July 1984, the then Secretary of State for Trade and Industry, Norman Tebbit, stated that his ‘policy has been, and will continue to be to make references primarily on competition grounds’.107 As merger policy is, to a great extent, made at the referral stage, this ensured that other public interest issues in s 84, such as consideration of regional policy and employment issues, would have no practical impact in UK merger control. This was exemplified by the decision not to refer the final take-over bid by Guinness for United Distillers in 1982, despite concerns over the likely effect of the take-over on the Scottish economy.108 The continued application of the Tebbit Doctrine at the referral stage was confirmed by subsequent Secretaries of State. In assessing the effects of competition, the DGFT and Secretary of State will inevitably, although not formally, consider the relevant product and geographical market, involving an assessment of demand-side and supply-side substitutability. Thereafter, the structure of the market will be analysed by ascertaining the market shares of the merging parties, the extent of existing competition, the likelihood of potential competition and any barriers to entry for potential competitors. The proposed acquisition of Abbey National by Lloyd’s TSB was recently blocked on the basis of competition concerns as it would lead to the elimination from the market of one of the most significant branch based competitors to the UK’s largest banks.109 Other relevant policy factors have been discernible at the referral stage in the past. These demonstrate the breadth of possible public interest issues and the diversity of approach adopted in different periods. For instance, employment and regional policy issues were often considered to be important prior to the introduction of the Tebbit Doctrine.110 As part of the Conservative Government policy in the 1980s and early 1990s of referring solely on competition grounds, stress was placed on the international competitiveness of UK companies by Michael Heseltine. For instance, in 1995, he refused to make a merger reference of Hasbro UK Ltd’s take-over of Waddington Games in order to encourage higher sales of UK board games abroad.111 A policy operated by Peter Lilley in 1990 and 1991, subsequently known as the ‘Lilley Doctrine’, was in conflict with the Tebbit Doctrine. He would make references of mergers where the acquiring company was state owned or controlled even where competition issues were not otherwise 107 DTI Press Notice, 5 July 1984. A policy also confirmed subsequently in the Government’s Blue Paper on Mergers Policy, 1988, London: HMSO. 108 See Rodger, BJ, ‘Reinforcing the Scottish “ring-fence”: a critique of UK mergers policy vis a vis the Scottish economy’ [1996] 2 ECLR 104. 109 Lloyds TSB/Abbey National (2001) Cm 5208, DTI Press Release, P/2001/362, 10 July 2001. 110 Ibid. 111 In this context, the approval by the Secretary of State of the Post Office’s acquisition of German Parcel in January 1999 as a major step towards becoming a global communications organisation is notable. See DTI Press Release, P/99/018, 11 January 1999.
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concerned. Finally, defence and other strategic interests may have a crucial bearing on whether to refer a proposed merger. The impact of UK merger controls was shown by the Secretary of State’s decision to refer the proposed acquisition by BSkyB of Manchester United to the MMC, due to competition interests in broadcasting in addition to the wider public interest and the impact on football. Making a merger reference As explained, only the Secretary of State can make a merger reference, although this is normally taken upon the advice of the DGFT.112 The DGFT will carry out a preliminary investigation to establish whether there is a qualifying merger and, where serious issues are raised, he will seek the opinion of the Mergers Panel, which consists of Office of Fair Trading and DTI officials and other representatives from government departments. Section 64(1) provides that the Secretary of State may make a reference after he has received appropriate advice from the DGFT.113 The Secretary of State has wide discretion to make an essentially political decision in line with current government policy. A merger reference must be made within four months of the date upon which any of following are satisfied: (a) the transaction creating the merger situation occurred; (b) all material facts regarding the transaction were given to the OFT or Secretary of State; or (c) all material facts regarding the transaction being made public and being generally known or ascertainable.114 There are even stricter time-limits in the event that the merger transaction has been notified using the appropriate statutory procedures. The Secretary of State is not bound by the advice of the DGFT regarding referrals and if he decides not to refer a merger, or fails to refer a merger within the time-limits imposed, the merger is effectively cleared.115 The only option available to interested parties is to seek judicial review of the Secretary of State’s decision, but that is unlikely to be successful.116 On the other hand, reference of a proposed merger often leads to the proposal being abandoned due to the delay, costs and intrusion involved in a Commission investigation. Where there are two bidders for a company, it may be appropriate in the circumstances to refer the proposed acquisition by one bidder and not another.
112 FTA 1973, s 76(1)(a) of the Act requires the Director General to keep informed about actual and prospective mergers within the Act, and s 76(2)(b) requires him to make appropriate recommendations to the Secretary of State. 113 The OFT Booklet on mergers (op cit, fn 93) gives guidance on issues considered relevant by the Director General in making his advice. 114 S 64(4) amended by the Deregulation (Fair Trading Act 1973) (Amendment) (Merger Reference Time Limits) Ord 1996 SI 1996/345. This amendment reduced the period from six months to four months. 115 See, eg, in the banking sector, the clearance of the acquisitions of Woolwich plc by Barclays plc, DTI Press Release, P/2000/658, 2 October 2000. 116 See Lonrho plc v Secretary of State for Trade and Industry [1989] 2 All ER 609. See, also, R v Secretary of State for Trade ex p Anderson Strathclyde plc [1983] 2 All ER 233.
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Undertakings in lieu of reference A merger reference can be avoided if the Office of Fair Trading and Secretary of State’s concerns about the merger or proposed merger can be alleviated in some way by the parties offering undertakings. ‘Undertakings’ is the technical term for legally binding commitments offered by parties involved in the merger to modify their behaviour or the structure of the combined enterprises in the future. The possibility of giving ‘structural undertakings’ was provided for by the Companies Act 1989, which added ss 75G-K to the Fair Trading Act 1973. This resulted from the informal practice, which had arisen over the years, of negotiations taking place between the DGFT and the parties involved with a view to commitments being given to remedy any public interest detriment. Consequently, the DGFT’s advice to the Secretary of State would be to refrain from referring the merger situation. This informal practice was exemplified by the undertakings given by Guinness plc in 1982 in relation to the sale of certain whisky brands, which ultimately led to the non-referral of its take-over of United Distillers. This informal practice was given a statutory basis by the introduction of these provisions and they have been utilised on a number of occasions since.117 However, the undertakings in lieu of a reference introduced by the Companies Act 1989 were limited to undertakings relating to the sale or divestiture of assets or splitting up of the merged enterprises.118 The power to accept undertakings was extended by the Deregulation and Contracting Out Act 1994 which provided for undertakings in lieu of a reference on any issue.119 Accordingly, structural and behavioural undertakings can now be accepted in lieu of a reference to the MMC. For instance, in relation to the take-over by Stagecoach Holdings plc of Cambus Holdings Ltd in 1996, undertakings were accepted which provided for the divestment of two other companies and a depot in Huntingdon, in addition to a number of behavioural undertakings regarding fares, service levels, tenders, responses to competition and the provision of information.120 This process has given further importance to the quality of analysis of the impact of a merger at the preliminary stage of an investigation, although it casts further doubt on the significance of the public interest test. Normally, the DTI will issue a press release stating that a reference is to be made to the MMC unless suitable undertakings are offered. After a period of negotiations, if undertakings are to be accepted, s 75H requires the Secretary of State to publish the text of the Office of Fair Trading’s advice to the Secretary of State in relation to the proposed undertakings and also the text of the undertakings. Section 93A of the Act provides that proceedings may be brought in respect of a failure by a party to fulfil an undertaking given. It was expected that this entitled any private party to bring 117 Eg, the first case in which an undertaking was accepted was in 1990, and concerned the commitment by the Rank Organisation to dispose of 10 of Mecca’s bingo clubs in Greater London in order to alleviate concerns over the effects on competition of the proposed merger: DTI Press Release P/90/576. 118 See, eg, a DTI Press Release in relation to Granada Group plc, in which undertakings were accepted from Granada regarding the sale of motorway service areas in lieu of a reference to the MMC: DTI Press Release P/96/540. 119 Deregulations and Contracting Out Act 1994, s 39, Sched 11, para 2. 120 DTI Press Release P/96/408. See, also, the undertakings received from Scottish and Newcastle plc in relation to its acquisition of the pubs, restaurants and lodges business of Greenalls plc, DTI Press Release, P/99/1054, 22 December 1999. 121 FTA 1973, s 93A(2).
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compliance proceedings.121 However, in Mid Kent Holdings v General Utilities,122 it was held that only the Secretary of State could seek to enforce undertakings given in lieu save in exceptional circumstances where the undertakings conferred specific and direct benefits on a private party.123 Notification and confidential guidance The provisions of the Fair Trading Act 1973 allow for references of proposed mergers after a qualifying merger has taken place. In the case of a proposed merger,124 there is no system of compulsory notification under the Act, although it is most likely that the parties will seek informal confidential guidance from the DGFT or utilise the statutory pre-notification procedures. In the latter case, the Secretary of State must make a reference within four months of the enterprises ceasing to be distinct or the transactions effecting the merger being notified to the Secretary of State/DGFT or being made public.125 Both these possibilities indicate that the procedures under the Act are generally preventative rather than curative. Confidential guidance For a number of years, the DGFT has established a system whereby the parties can seek informal confidential guidance as to whether a proposed transaction would constitute a qualifying merger and whether it was likely to be referred to the Competition Commission. The Office of Fair Trading has indicated that it will seek to make its advice known to the Secretary of State within 19 working days, and his response should take a further six working days, setting a target of guidance within 25 working days, although the formal decision to clear will come later. The benefit for the parties is that the procedures are confidential and swift although the guidance is not binding. Statutory pre-notification Formal pre-notification procedures were introduced by the Companies Act 1989, which added ss 75A-F to the Fair Trading Act. This placed the previous informal practice on a statutory basis. Full details of the merger must be given in a formal Merger Notice, including market shares, financial information, and the intended timescale of the merger. Section 75B provides that the period for consideration of a merger notice is 20 days, and if this period expires without a reference being made to the Competition Commission, no subsequent reference can be made. There was provision for the DGFT to seek an initial extension to the 20 day limitation period of 10 days, and thereafter a final extension of 15 days if this is deemed to be necessary, for example, if the situation raises difficult public interest or competition issues. This is now limited to one extension of 15 days.126 The obvious advantage to the parties is that a final, formal decision is guaranteed within 35 122 [1996] 3 All ER 132. 123 See Rodger, BJ, ‘Mid Kent Holdings plc v General Utilities plc: remedies under the Fair Trading Act 1973’ [1997] 4 ECLR 273. 124 FTA 1973, s 75 of the Act provides for references in anticipation of a merger. 125 Ibid, s 64(4), as amended, see above. 126 Ibid, s 75B(2) and (3) as amended by the Fair Trading Act (Amendment) (Merger Pre-Notification) Regs 1994 SI 1994/1934.
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days. The procedure is only available if the merger proposals have been made public. However, the parties may consider the statutory procedures and, in particular, the required format of the Merger Notice to be too inflexible. In that event, parties may proceed via non-statutory notification, the advantage being that they can submit information and present the merger in the manner deemed most suitable to them. The Office of Fair Trading has established a non-binding time-limit of 45 days from notification until the Secretary of State’s decision is issued. Neither of the alternative notification procedures are confidential, and the Office of Fair Trading will routinely seek the views of interested third parties. An example of this process involved the proposed acquisition of NatWest Bank by the Royal Bank of Scotland which was cleared by the Secretary of State in 1999,127 and the acquisition thereafter proceeded without concern over competition law intervention. In the case of statutory notification, if the Office of Fair Trading has indicated that it is seeking undertakings in lieu of a reference, this does not preclude a reference being made after the expiry of the statutory period.128 The Competition Commission investigation and report Introduction The tasks of the MMC in merger inquiries under the Fair Trading Act 1973 have been taken over, as a result of s 45 of the Competition Act 1998, by the Competition Commission. Schedule 7 of that Act makes detailed provision for the constitution and composition of the Competition Commission. In practice, the Commission is normally constituted of a group, usually between four and six members, appointed by the Chairman to conduct the inquiry. The Competition Commission inquiry If a reference is made to the Competition Commission, it is required to conduct an investigation and determine: (a) whether a qualifying merger situation has been created; and (b) whether the creation of the merger situation operates or may be expected to operate against the public interest.129 The Competition Commission is required to conduct its investigation and produce a report for the Secretary of State within the period prescribed in the reference, and in any event within six months. This can be extended in some circumstances to nine months, although in practice the Commission has normally reported within three to four months of receiving a reference. A merger reference may be laid aside by the Commission, with the consent of the Secretary of State, if the merger has been abandoned following the reference.130 Upon receipt of a reference, the Commission will write to the parties requesting detailed information regarding 127 See DTI Press Release, P/99/1036, 10 December 1999. 128 Although, if the notifying party states that it does not intend to offer undertakings, the Secretary of State must make a reference within 10 days of receipt of that statement. 129 FTA 1973, s 69. 130 Ibid, s 75(5). The parties are required to notify the Commission.
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the merger. At the same time, it will also seek representations from any interested third parties. A series of private oral hearings with the parties is held in order to confirm factual evidence which has been obtained. Thereafter, the Commission will focus on the public interest issues arising from the merger and will normally forward an issues and remedies letter to the parties, highlighting the issues the group proposes to raise and also any hypothetical remedies to possible public interest detriments. Prior to any conclusions being reached, the group will allow further representations, including further oral hearings, on any public interest issues and how they may be remedied. A draft report will be compiled by the Commission, excluding their conclusions, for parties to consider submissions on the accuracy of any information and whether any confidential information ought to be removed from the report. After this process, the Commission will submit its report to the Secretary of State and it will normally include the following: (a) a summary including conclusions and recommendations; (b) a conclusions chapter setting out in detail the public interest issues and any proposed recommendations to remedy those effects; (c) a chapter providing details of the background and the parties involved; (d) a chapter detailing the markets affected by the proposed transaction; (e) a chapter summarising the views of the parties; (f) a chapter summarising the views of interested third parties; and (g) appendices containing details of submissions by third parties and other relevant financial and statistical information.131 The Commission’s procedures and findings are subject to judicial review, although the courts have demonstrated an unwillingness to impose too many fetters on the Commission’s decision-making process. 132 However, judicial review was successful following the prohibition of the Interbrew/Bass merger on the basis that Interbrew were not given an adequate opportunity to comment on the remedies proposed.133 A qualifying merger The Commission is required to verify that the merger meets the statutory criteria for referral. This was one of the main issues which arose in Stagecoach Holdings plc v Secretary of State for Trade and Industry.134 In that case, the pursuer claimed that the Commission had exceeded its jurisdiction by establishing a designated area which was different from that of the reference area provided by the Secretary of State. Lord Johnson considered that it would be ‘ridiculous’ if the Commission had to proceed to consider the public interest without having the power to determine first that the issue constituted a qualifying reference.135 Furthermore, the Commission’s
131 See, for a recent example, British Sky Broadcasting Group plc and Manchester United plc: A Report on the Proposed Merger, Cm 4305, 1999. 132 Eg, see Stagecoach Holdings plc v Secretary of State 1997 SLT 940 (OH) and R v MMC ex p Argyll Group plc [1986] 2 All ER 25. 133 Interbrew SA v Competition Commission, 25 May 2001, QBD, (2001) Daily Telegraph, 29 May. 134 1997 SLT 940 (OH).
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assessment that the designated area constituted a substantial part of the UK was appropriate following earlier case law of the House of Lords.136 Public interest issues The Commission is required to report on whether the merger situation is expected to operate against the public interest. Accordingly, there is a burden of proof in favour of permitting mergers and this is underlined by the Commission’s belief that it is insufficient merely to establish some possible detriment. What is required is a real expectation that the merger would operate contrary to the public interest.137 Section 84, detailed earlier in connection with UK monopoly controls, provides the public interest test with a variety of factors which the Commission shall take into account in its evaluation. Notably, the promotion of competition is not the only factor to be considered and is not given pre-eminence over the other factors. Nonetheless, due to the overriding importance of the referral stage and the Tebbit Doctrine, the Commission is inevitably constrained in the public interest issues upon which it can consider and report. The following are issues which it has identified as being contrary to the public interest under s 84. Competition related problems As a consequence of the Tebbit Doctrine, these issues are inevitably the most commonly tackled by the Commission. It will assess any detrimental effect on competition in the designated market area, which may be fairly localised as noted above. Many recent reports have concerned the take-over of bus services, particularly involving Stagecoach Holdings plc, and the Commission has on occasion been concerned that the company may exercise local dominance as a result of a proposed take-over to the detriment of the travelling public. For instance, in one report, the Commission was concerned that the company would engage in predatory conduct and that in the long term they may raise prices or cut services.138 The merger controls were also involved in the long running saga of the take-over of Strathclyde Buses Holdings Ltd (SB Holdings Ltd), based in Glasgow. The proposed take-over by FirstBus plc of SB Holdings Ltd was referred. The Commission noted that SB Holdings Ltd was the largest operator in Glasgow with over two-thirds of the market in certain districts. The merger was found to be contrary to the public interest because of the loss of actual and potential competition
135 This power may be restricted where the Minister has limited the designated area under s 69(3). 136 R v MMC ex p South Yorkshire Transport Ltd [1993] 1 All ER 289. 137 Berisford/British Sugar (1980/81) HCP 241, para 9.40. See, also, more recently, in relation to Cowie Group plc/British Bus Group Ltd, Cm 3578, 1992, the Secretary of State’s acceptance of the MMC conclusion in its report that the acquisition was not expected to operate against the public interest as, although some consequences against the public interest were possible, the MMC was not satisfied that they were probable: DTI Press Release P/97/268; [1997] 4 ECLR R87. The MMC carries out a weighing up exercise of the benefits and detriments of the merger known as the ‘Williamson trade-off’. 138 Stagecoach/Ayrshire Bus (A1 Service), Cm 3032, 1995. See, also, [1996] 1 ECLR R28; DTI P/95/772; and [1997] 5 ECLR R104; DTI Press Release P/97/293, confirming that undertakings had been accepted which remedied the Commission concerns. The Commission reported that, following the merger, there would be a modest loss of actual competition and a significant loss in potential competition between the two in commercial bus services and schools transport.
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between the two. The Commission recommended that First Bus should divest itself of another bus company, Midland Bluebird, and some of the operations of SB Holdings Ltd to allow the merger to proceed.139 A proposed take-over by Robert Wiseman Dairies plc of Scottish Pride Holdings Ltd was also considered as likely to operate against the public interest, due to its likely effect on competition in the supply of processed fresh milk to customers in Scotland other than national supermarket group customers. The parties were found to have 80% of the wholesale market and, although national supermarket groups could prevent exploitation, other customers could not, and therefore the merger could lead to higher wholesale prices and possibly also increased retail prices.140 Other examples include the report in connection with the Bass/Carlsberg-Tetley merger in which the MMC considered that the merger was likely to operate against the public interest, by strengthening their combined brand portfolios, and would lead to a significant increase in market power, similar to the conclusion in the high profile Ladbroke/Coral merger. Ladbroke was required to divest Coral as the merger would damage competition and disadvantage punters.141 Probably the most high profile merger investigation in recent years involved the proposed acquisition of Manchester United by BSkyB.142 The merger was blocked following the Commission report which concluded that the proposed merger would reduce competition for the broadcast rights of Premier league matches.143 In addition, the merger would adversely affect football in two ways. First, by reinforcing the trend towards greater inequality between football clubs and, second, by giving BSkyB influence which may not be in the long term interest of football. More recently, the merger between Interbrew, a Belgian brewer, and and the UK business of Bass Brewers was also blocked under the Act. The Secretary of State accepted the Commission’s conclusion that the merger would be against the public interest by reducing competition leading to higher prices and reduced consumer choice and required the divestment of Bass Brewers to a buyer approved by the DGFT.144 In July 2001, the Secretary of State blocked the proposed merger between Lloyds TSB and Abbey National on the basis of the Competition Commission’s report concluding that the merger would operate against the public interest by reducing competition, for instance, in the markets for personal current accounts.145
139 FirstBus plc/SB Holdings Ltd, Cm 3531, 1997. The Secretary of State granted First Bus nine months to seek a buyer or divest its full interest in SB Holdings. See further, below, p 238. 140 Cm 3504, 1996. 141 Bass/Carlsberg-Tetley, Cm 3662, 1997; [1997] 6 ECLR R-132, Ladbroke plc/Coral, Cm 4030, 1998; DTI Press Release P/98/713, 23 September 1998. 142 Cm 4305, 1999. 143 DTI Press Release P/99/309, 9 April 1999. 144 See, Interbrew SA and Bass plc: A Report on the Acquisition by Interbrew SA of the Brewing Interests of Bass plc, CM 5014 (2001), DTI Press Release P/2001/11, 3 January 2001. The remedies adopted were subject to judicial review and were found void for reasons of unfairness, Interbrew SA and Secretary of State for Trade and Industry, 25 May 2991, QBD, (2001) Daily Telegraph, 29 May. The OFT is, at the time of writing, consulting on potential remedies to the adverse competition effects arising from the acquisition, OFT Press Release, PN29/01, 4 July 2001. 145 Lloyds TSB/Abbey National, Cm 5208, 2001, DTI Press Notice P/2001/362, 10 July 2001.
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Regional policy There was a period when considerable weight was attached to the regional policy aspect of the public interest test as provided for in s 84(d). Under that provision, the Commission should have regard to the desirability, ‘of maintaining and promoting the balanced distribution of industry and employment in the United Kingdom’. In particular, there was a series of important Commission reports on take-overs of indigenous Scottish companies. These reports considered a variety of detrimental effects produced by such take-overs. These included the loss of employment and autonomous decision-making in the Scottish economy. These issues appeared to assume particular significance between 1978 and 1982.146 In particular, the Commission’s approach in consideration of the two bids for the Royal Bank of Scotland in 1982 is particularly interesting.147 The Commission found the proposed mergers to be likely to operate against the public interest due to the removal of ultimate control from Edinburgh, the importance of the company and the industry in Scotland, the reduction of career opportunities in Scotland and fears generally over the creation of a branch economy. Similar arguments were accepted by the majority Commission report into the proposed take-over of Anderson Strathclyde, an important Scottish engineering company, by Charter Consolidated in 1982.148 However, it was clear that the period in which regional policy in UK merger control had assumed a degree of importance was waning. This was confirmed by the Tebbit Doctrine and subsequent refusals to refer the Guinness/Distillers merger and other take-overs of Scottish companies.149 Accordingly, the Commission has not in recent years had the opportunity to deal with regional policy in its public interest assessment of mergers. Other public interest issues Due to the breadth of s 84, the Commission can take into account a wide variety of factors in its assessment of the public interest. In the past, the Commission has considered the possible inefficiencies resulting from a merger,150 it has condemned mergers which may lead to a reduction in the United Kingdom’s balance of payments151 and it has also criticised mergers involving overseas companies.152 It has also commented on the consequences of a merger on unemployment153 and even in relation to the environment.154
146 See Lonrho/Suits/House of Fraser (1978–79) HCP 261; Hiram Walker/Highland Distilleries (1979–80) HCP 743; Lonrho/House of Fraser (1981–82) HCP 73. 147 The Hong Kong and Shanghai Banking Corporation Standard Chartered Bank/The Royal Bank of Scotland Group, Cmnd 8472, 1982. 148 Charter Consolidated/Anderson Strathclyde, Cmnd 8771, 1982. 149 Eg, in the Guinness/Distillers and BP/Britoil take-overs. See Rodger, op cit, fn 88. 150 Lonrho/House of Fraser (1978–79) HCP 261. 151 Eg, Hiram Walker/Highland Distilleries, (1979–80) HCP 743. 152 Eg, Enserch/Davy International, Cmnd 8360, 1981, and The Hong Kong and Shanghai Banking Corporation/Royal Bank of Scotland, Cmnd 8472, 1982. The UK authorities have to be wary that they are not in breach of the anti-discriminatory provisions of Community law. 153 Enserch/Davy International, Cmnd 8360, 1981. 154 In Prosper de Mulder Ltd/Croda International plc, Cm 1611, 1991, the environmental advantages of the merger were considered.
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Recommendations If the Commission concludes that there is a qualifying merger which operates against the public interest, s 72(2) provides that it may recommend what steps may be taken to remedy the defects. In practice, it has routinely made recommendations in its reports. For instance, in relation to Bass/Carlsberg-Tetley, the majority view was that the public interest concerns could be remedied by structural undertakings by Bass to divest itself of around 1,900 pubs. It also recommended, in relation to its proposed take-over of Scottish Pride Holdings Ltd, that Robert Wiseman Dairies should submit regular audited reports on its prices to seven customer categories, and that it should not acquire any other supplier without the DGFT’s prior consent in order to remedy the public interest concerns. In some limited cases, the Commission may consider that nothing short of outright prohibition of the merger will protect the public interest, as in the BSkyB/ Manchester United, Interbrew/Bass and Lloyds TSB/Abbey National reports. However, in the vast majority of cases, it will seek to suggest a remedy or range of remedies to limit or prevent the adverse effects of a merger. Interim measures In order to ensure that the outcome of the Commission inquiry is not prejudiced, the authorities are empowered to effect two forms of interim order. The automatic interim order provided by s 75(4A) prohibits share dealings in relation to proposed mergers referred under s 75 immediately upon the reference until the reference is laid aside, the reporting period expires, or whenever no subsequent action can be taken on the Commission report. The Secretary of State may grant specific consent to share transactions, although this has never been granted to date, and also general consents, the only example of which relates to intra-group transactions. The Secretary of State’s interim order making power under s 74 is designed to achieve the same effect where the automatic order is inapplicable because the situation involves a completed merger or relates to a merger effected by sale of assets. Enforcement: action following a Commission report The Commission must report to the Secretary of State within the prescribed timelimit, otherwise, no further action can be taken. In addition, if the Commission does not make an adverse finding, then no subsequent formal enforcement action is possible. However, if the Commission report concludes that there is a qualifying merger which is expected to operate against the public interest, the Secretary of State must decide on the appropriate action to remedy any adverse effects likely to be produced by the merger. Whichever is the case, the Secretary of State is obliged to publish the report and lay it before Parliament. In the latter case, the DTI has set a target of 20 days for the report to be published together with a press release explaining the situation and the proposed remedies. The Secretary of State has a wide array of powers in order to remedy the adverse effects of mergers. However, he may only exercise these powers if a two-thirds majority of the Commission carrying out the merger investigation considers that it may be expected to operate against the public interest. The Secretary of State may make an appropriate order,155 including interim orders.156 The types of order are detailed in Pts I and II of 238
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Sched 8 of the Act, and include orders prohibiting a merger or attaching conditions to it. Paragraph 11 contains the power to order divestiture, the unscrambling of a merger which has already taken place by ordering the division of the business. In practice, the formal order making powers are rarely resorted to and in most cases, the Secretary of State will request the DGFT to consult the parties with a view to obtaining appropriate undertakings from them under s 88. In one case involving Stagecoach the undertakings required Stagecoach to divest itself of its 20% shareholding and its seat on SB Holdings Ltd’s Board and undertake not to reacquire any shares, thereby preventing the merger proceeding and demonstrating that it was unnecessary to resort to the Secretary of State’s order making powers.157 Even if the Commission concludes that the merger may be expected to operate against the public interest, the Secretary of State is not required to accept this conclusion and take any action upon it. The Secretary of State has discretion at the referral stage and at the subsequent enforcement stage as to what course of action is appropriate. For instance, following the Commission’s majority report on Charter Consolidated/Anderson Strathclyde,158 the Secretary of State decided to allow the bid to go ahead. This refusal to accept the Commission’s findings was challenged by judicial review. However, the challenge was rejected by the court, which confirmed that the final decision in a merger case rests with the Minister.159 As with the DGFT’s advice, the Commission’s views are not binding and are merely advisory. Indeed, in the recent proposed merger involving Bass/CarlsbergTetley, the Secretary of State disagreed with the Commission’s view that structural undertakings offered by Bass would remedy the public interest detriments and effectively blocked the merger from proceeding, requesting the DGFT to seek undertakings to that effect.160 Miscellaneous issues Regulated industries There are particular provisions in the Fair Trading Act in relation to newspaper mergers. In addition, there are special regimes in relation to certain industries regulated following privatisation during the 1980s and early 1990s. For instance, in relation to water, the Water Industry Act 1991161 contains merger control provisions which are generally similar to those under the 1973 Act, and involve the same institutions. For instance, subsequent to the Mid Kent Holdings Ltd v General Utilities plc, the Secretary of State accepted the DGFT’s advice and referred the merger
155 FTA 1973, s 73. The procedure for making an order by statutory instrument is provided in ss 90–93. Section 92 states that enforcement of an order shall not be by criminal proceedings and is enforceable only by the Crown. 156 Ibid, s 74. 157 DTI Press Release, 27 April (1995); [1995] 5 ECLR R-135. 158 Cmnd 8711, 1982. 159 R v Secretary of State for Trade and Industry ex p Anderson Strathclyde plc [1983] 2 All ER 233, DC. 160 [1997] 6 ECLR R-132. 161 As amended by the Competition and Services (Utilities) Act 1992 and the Water Enterprises (Merger) Modifications Regs SI 1994/73.
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under that Act. The possibility of instituting infringement proceedings in respect of the broken undertakings would then be reviewed upon receipt of the Commission report. The electricity industry, on the other hand, is subject directly to the controls under the Fair Trading Act 1973, although the DGFT must consult with the Director General of Electricity Supply (DGES) on whether a reference is suitable. Competition Act 1998 Agreements are excluded, under Sched 1, from the Chapter I prohibition to the extent that they give rise to a merger situation within the terms Pt V of the 1973 Act.162 Thus, where a merger falls within the jurisdiction of the 1973 Act merger system it will not usually be subject to dual control under the 1998 Act. Any ancillary restriction that facilitates a merger is also excluded where it is ‘directly related and necessary to the implementation of the merger’.163 Proposed reforms There have been a number of criticisms of the UK merger controls over the years. The system of referral has been criticised as essentially political. As a result, the applicable criteria are neither clear nor discernible. The broad scope of s 84 has also been criticised together with the length of time and inconvenience of Commission public interest inquiries. There have been certain reports which have considered possible reforms of the merger control provisions. The Liesner Report, in 1978, recommended the retention of the case by case basis of merger control, but that a more critical stance be adopted towards mergers, in contrast with the existing presumption that mergers are beneficial.164 No alterations were made to the 1973 Act as a result of the report. The Trade and Industry Committee report in 1991,165 followed upon the earlier government publication of a Blue Paper on Mergers Policy, in 1988, which stressed that most mergers would be left to the market to decide and competition issues were to be accorded primacy under the system.166 It made various recommendations for reform, including mandatory pre-notification of certain mergers, and giving the Secretary of State power to block a merger even where the MMC’s report is not adverse. These suggestions have not been implemented and indeed there has been little substantive change of merger control in recent years. Important modifications have been introduced by the Companies Act 1989 and the Deregulation and Contracting Out Act 1994. The introduction of undertakings in lieu and the statutory notification procedure were significant procedural changes. The basic system of control has not been altered in substance at all, although it could be argued that these procedural changes clearly alter the process of control albeit in an indirect fashion. The Competition Act 1998 contains no provisions directly relating to merger control. However, the UK merger control system is likely to be reformed in the near future. 162 163 164 165 166
This exclusion also applies to the Chapter II prohibition. Competition Act 1998, Sched 1, para 1(2). A Review of Monopolies and Mergers Policy, Cmnd 7198, 1978, para 2.1. Trade and Industry Committee, Take-overs and Mergers, First Report, (1991–92) HCP 90. Blue Paper on Mergers Policy, 1988, London: HMSO.
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DTI PROPOSALS FOR REFORM 1999/2000 As noted above, the Competition Act 1998 did not introduce any change to merger control, the traditional public interest investigation system being retained under the 1973 Act. However, the DTI issued a Consultation Document on proposals for reform in August 1999167 and this has been followed by its October 2000 document, The Response to the Consultation on Proposals for Reform, which endorsed the main proposals in the earlier document.168 The 1999 document noted the key objectives of reform as being three-fold: (a) to enhance clarity, transparency and consistency; (b) to be more responsive to the needs of business and impose only the minimum necessary burdens; and (c) to ensure effective and proportionate control of mergers with harmful effects. The October 2000 document noted that response had been favourable on the two fundamental proposals in the 1999 consultation document: ‘…that Ministerial involvement in mergers decisions should be minimised and that the current public interest test should be replaced by a competition-based test,’169 In July 2001, the Government set out its legislative plans in its White Paper Productivity and Enterprise: A World Class Competition Regime.170 This further clarified the position that should appear in legislation. The main proposals for reform will now be summarised.
INDEPENDENT COMPETITION AUTHORITIES One of the key objectives was based on the populist support for ‘politicians to be taken out of merger decisions’.171 The August 1999 document suggested two alternative institutional models for the new regime, Option 1 based on the division of functions under the 1973 Act and Option 2 based on the Competition Act 1998 scheme, with the Competition Commission acting as an appeal tribunal. In October 2000, the Government favoured Option 1, with fuller investigation of a merger being carried out, as at present, by the Competition Commission, and with a clearer role for the OFT to make an initial assessment of mergers and refer in appropriate cases to the Competition Commission.172
COMPETITION-BASED TEST Following the barrage of criticism the public interest test has received over the years, the key proposal in August 1999 was to replace it with a competition-based test with a view to increasing certainty and predictability. The DTI proposed that 167 DTI, Mergers: A Consultation Document on Proposals for Reform, URN 99/1028, 6 August 1999. 168 DTI, Mergers: The Response to the Consultation on Proposals for Reform, URN 00/805, 26 October 2000. These proposals are also confirmed in the Government’s strategy document for the next Parliament; HM Treasury Document, ‘Productivity in the UK: enterprise and the productivity challenge’, June 2001 and Productivity and Enterprise: A World Class Competition Regime, Cm 5233, 31 July 2001. 169 Executive Summary, p 3. 170 Cm 5233, 31 July 2001. 171 DTI Press Release, P/99/690, 6 August 1999. 172 Response to Consultation, pp 15–19, White Paper, pp 23–24.
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the controls should deal with mergers resulting in a significant loss of competition and take into account efficiency arguments, but sought views on the exact formulation of the test, bearing in mind the test adopted under the Community Merger Regulation. The October 2000 document confirmed a competition-based test as appropriate, and proposed a test based on the ‘substantial lessening of competition’. The experience of the Merger Regulation dominance-based test in dealing with problems of collective dominance suggested that this more flexible test was suitable. In addition, it was noted that the competition analysis would consider efficiency gains and consumer benefits.173 The White Paper confirmed the ‘substantial lessening of competition’ test but added that mergers may be allowed where the merger brings overall benefits to UK consumers.174
EXCEPTIONAL CASES The 1999 document recognised that there may be exceptional circumstances where the competition test will not be appropriate and where mergers should be determined on exceptional public interest grounds to be determined by the Secretary of State.175 The 2000 document confirmed, uncontroversially, that criteria based on national security, covering defence interests and other public security concerns, will be introduced and defined in the legislation. However, it is also proposed that there will be a reserve power for the Secretary of State by statutory instrument to define further exceptional public interest criteria when specific cases arise.176 The Government considers that this limited right is appropriate given the Secretary of State’s accountability through Parliament and that it is an improvement on the current system with potential political involvement in all merger cases.
ANCILLARY ISSUES Mandatory pre-notification is not to be introduced and the notification regime will remain voluntary. There will be a fixed timetable for first and second stage investigations, the OFT deadlines will be reduced from their current levels, and there is currently further consultation on appropriate reduction of Competition Commission investigation deadlines. Regarding jurisdiction thresholds, the assets based test will become a turnover test and the DTI is consulting on its proposed level of £45 m, whereas the share of supply alternative test is to be retained. An important proposed change will allow the Competition Commission to take the final decision on proposed remedies following a critical report.
173 174 175 176
See, generally, op cit, DTI, fn 168, pp 10–14. Op cit, White Paper, fn 170, pp 24–25. Op cit, DTI, fn 167, para 4.12. Note that, at least for the present, the existing regimes for water mergers and newspaper mergers is to be retained, see op cit, DTI, fn 170, paras 4.13–4.16.
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CRITIQUE These proposals represent the most direct attack on the distinctive merger control system in the UK, based largely on the drive for greater certainty and predictability in the law.177 Although the Tebbitt Doctrine has indirectly affected the public interest basis of the present legislation, ‘political’ and ‘non-competition’ issues inevitably arise in relation to certain mergers. Further, it appears that the assumption, without substance, that mergers are generally beneficial as stimulating investment and innovation, lies behind the proposals. The new approach certainly reflects the shift to a pure competition objective also identified with the introduction of Competition Act 1998. It also leaves the future of the remaining aspects of the Fair Trading Act 1973 rather uncertain.
FURTHER READING General Celli, R and Grenfell, M, Merger Control in the United Kingdom and European Union, 1997, London: Kluwer Merger regulation Albhorn, C and Turner, V, ‘Expanding success? Reform of the EC Merger Regulation’ [1998] 4 ECLR 249 Banks, D, ‘Non-competition factors and their future relevance under European merger law’ [1997] 3 ECLR 182 Barrasso, AF, ‘Gencor: a judicial review of the Commission’s policy and practice: many lights and some shadows’ (2000) World Competition 5 Camesasca, PD, ‘The explicit efficiency defence in merger control: does it make the difference?’ [1999] 1 ECLR 14 Kirkbride, J and Xiong, T, ‘The European control of joint ventures: an historic opportunity or a mere continuation of existing practice?’ (1998) 23 EL Rev 37 Zonnekeyn, GA, ‘The treatment of joint ventures under the amended EC Merger Regulation’ [1998] 7 ECLR 414 UK merger control DTI, Mergers: The Response to Consultation on Proposals for Reform, URN 00/805, 26 October 2000 DTI, Mergers: A Consultation Document on Proposals for Reform, URN 99/1028, 6 August 1999 Rodger, BJ, ‘UK merger control: politics, republic interest and reform’ [2000] 1 ECLR 24
177 For a fuller critique, see Rodger, BJ, ‘UK merger control: politics, the public interest and reform’ [2000] 1 ECLR 24.
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Rodger, BJ, ‘Reinforcing the Scottish “ring-fence”: a critique of UK mergers policy vis a vis the Scottish economy’ [1996] 2 ECLR 104 White Paper, Productivity and Enterprise: A World Class Competition Regime, Cm 5233, 31 July 2001
DISCUSSION (1) There are no grounds for interfering with the market for corporate control except where there is a serious risk to competition likely to arise from any merger. Discuss. (2) The Merger Regulation is merely a tool of industrial policy designed to facilitate the progress of Community-scale mergers. Discuss. (3) How has the Merger Regulation proved to be a useful additional tool in the Commission’s competition law armoury? Consider particularly the problems of joint ventures and oligopolistic markets. (4) UK merger control is too discretionary and should be reformed. Discuss.
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CHAPTER 7
STATE AID AND STATE REGULATION
INTRODUCTION TO STATE AID The rules on State aid form a crucial part of the relationship between State involvement in, or regulation of, national markets and Community competition law. The Treaty has specific provisions in Arts 87–89 regulating State aid granted by Member States. The basic rationale behind these rules is that the level competitive playing field for undertakings throughout the Community may be jeopardised by any grant of aid to undertakings by public authorities of Member States. The premise is that the competition rules would be futile if Member States could favour their own home-based companies by subsidising their ability to compete or by using subsidies to attract investment. State aids can therefore be viewed as ‘beggar my neighbour’ subsidies which can distort competition and in particular harm the fabric of the Community by allowing richer Member States to use their economic well being to give unfair support to national undertakings. Although State aid is a potential danger for competition, the prohibition in the Treaty is neither absolute nor unconditional. State aids do have positive aspects in that they may be vital, and even necessary, to attain certain objectives of the Community. The general justification for State aid is that it may contribute to the correction of market failures or market imperfections. State aid often produces important externalities (for example, employment aid, environmental aid, aid for research and development, or regional aid) which may sufficiently compensate the distortion of competition. These factors will have to be considered in the appreciation of the compatibility of an aid with the Common market. Accordingly, the control of State aid is a particularly political and sensitive issue, with great potential for conflict between the aims of the Community and the nationalistic concerns of Member States. It follows that this is a task particularly suited to the Commission which should act in the general interests of the Community and without nationalistic prejudice. The Commission, principally through the DG for Competition has been criticised for the lack of transparency in its decision-making on State aids, partly reflecting the peculiar political sensitivities involved in the control of State aid. The issue is particularly sensitive in the context of partially or fully State owned industry which benefits from Governmental financial assistance. This is especially problematic in States, like France, in which there continues to be a high degree of public involvement in industry. Nonetheless, the Commission has, of late, attempted to provide greater transparency in this controversial area through the publication of numerous guidelines, notices and Regulations. Council Reg 659/1999, 1 detailing the procedural rules for the application of the State aid provisions, is notable in this regard. All Member States give assistance to industry and the Commission’s workload in regulatingthisareaisincreasing.Accordingly,therehavebeenmanyrecentdevelopments to reform this area of law and alleviate criticisms of the Commission’s practice. First, it is necessary to look at the substantive content of the State aid rules and thereafter 1
OJ L83/1, 1999.
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the procedures for enforcement will be discussed. In effect, State aid connotes selective support given to business which may confer a competitive advantage over others. The detailed criteria for the assessment of what constitutes State aid which is incompatible with the Treaty and the possibility of gaining an exemption from that prohibition will now be considered. The general prohibition on State aid is in Art 87(1). Mandatory exemptionsareprovidedinArt87(2)andtherealsoexiststhepossibilityofdiscretionary exemption under Art 87(3). The Commission’s general approach to a range of State aid issues is set out in two published volumes available on the Commission website2 and, in addition, the Commission has developed policies in relation to specific types ofaid3andalsocertainindustrialsectors.4Finally,followingtheintroductionofRegulation 659/1999 the Commission has set up a StateAid Register. Part I of the Register provides data on all cases under preliminary examination that were registered after 1 January 2000.PartIIcontainsinformationoncaseswhichhavebeenregisteredbytheCommission since 1 January 2000 and which have also been the subject of a Commission decision.
ARTICLE 87(1): THE PROHIBITION OF STATE AIDS Article 87(1) states: Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market.
In the past, State aids have been held to be constituted by assistance from State subsidies and capital injections, exemptions from taxation, and loan guarantees by the State. Article 87(1) requires three criteria to be fulfilled in order for the prohibition to apply. The State assistance must: (a) constitute aid. In order to constitute aid, the assistance must: • • •
confer an advantage; be granted by a Member State or through State resources; and favour certain undertakings or the production of certain goods (selectivity);
(b) affect trade between Member States and; (c) distort or threaten to distort competition.
2
3
4
Volume IIA, Rules Applicable to State Aid (as at 30.6.1998) and Volume IIB, Explanation of the Rules Applicable to State Aid. In a UK context, see DTI, European Community State Aids—Guidance for all departments and agencies, June 2001, www,dti,gov.uk. See, generally, Ross, M, ‘State Aids and national courts: definitions and other problems—a case of premature emancipation’ (2000) 37 CML Rev 401. Eg, see the range of recently adopted Regulations: Commission Reg (70/2001/EC) on the application of Arts 87 and 88 of the EC Treaty to State aid to small and medium-sized enterprises, OJ L10/33, 2001; Commission Reg (69/2001/EC) on the application of Arts 87 and 88 of the EC Treaty to de minimis aid, OJ L10/30, 2001; and Commission Reg (68/2001/EC) on the application of Arts 87 and 88 of the EC Treaty to training aid, OJ L10/20, 2001. Eg, see Code on aid to the synthetic fibres industry, OJ C94/07, 1996, recently extended for a further period, OJ C24/18, 1999. The Commission has also adopted specific substantive and formal rules into a range of other sectors such as the shipbuilding and steel and coal industries.
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What constitutes ‘aid’? An advantage The text of Art 87(1) refers to aid granted in any form whatsoever and this has been given a wider interpretation than was probably originally envisaged. The Commission and Court have consistently held that a measure will be regarded as State aid if it gives the firm an economic or financial advantage which it would not otherwise have enjoyed.5 It has been held to cover, for example, loan guarantees, deferral of tax or social security payments, differential rates of tax, debt write-offs to prepare a public company for privatisation and even free advertising on State owned television. The concept of aid is objective and is therefore defined by the effects of State intervention irrespective of its aims and objectives.6 The Court has defined ‘advantage’ in terms of whether or not there has been a ‘manifest’ favouring of certain undertakings or goods, a test which is similar to the appreciability requirement under Art 81.7 State source of funding The prohibition in Art 87(1) only applies where the aid has been granted by a Member State or through State resources.8 This covers all levels of public authority, including local authorities. State resources have been interpreted widely, for instance in Italy v Commission9 where the assistance was derived from compulsory contributions imposed by State legislation. When a private body administers aid some form of State control must be established before it falls within the prohibition.10 According to earlier case law, funding by private bodies requiring public authority approval prior to allocation was considered to be covered by Art 87(1). In one case, the Commission challenged financial assistance granted to certain French farmers. The fund was financed by the operating surplus of Caisse Nationale de Credit Agricole, a private enterprise, but the decisions on the allocation of the fund required the approval of public authority members of the board and therefore constituted state aid.11 More recent pronouncements by the European Court of Justice have stressed the necessity for the measure to involve public funds or charges on the public account in order to constitute State aid.12 In
5 6 7 8
9 10 11 12
See Case 61/79 Amministrazione delle Finanze dello Stato v Denkavit Italiana [1980] ECR 1205; [1981] 3 CMLR 694. See Case C-241/94 France v Commission (Kimberley Clark) [1996] ECR I-3203. See Case C-256/97 Déménagements-Manutention Transport SA (DMT) [1999] ECR I-3913; [1999] All ER (EC) 601. See, also, op cit, Ross, fn 2. In Case C-189/91 Petra Kirsammer-Hack v Nurhan Sidal [1993] ECR I-6185 and Cases C-72 and 73/91 Sloman Neptun Schiffahrts AG v Seebetriebstrat Bodo Zeisemer der Sloman Neptun Schiffahrts AG [1993] ECR I-887 the Court decided that no State resources were involved. See, also, Case C-83/98P Ladbroke Racing Ltd c Commission [2000] ECR I-3271. Case 173/73 Italy v Commission (Textiles) [1974] ECR 709; [1974] 2 CMLR 593. See, Regarding Aid No C39/93 by France to Air France, OJ C334/7, 1993. Case 290/83 Commission v France [1985] ECR 439; [1986] 2 CMLR 546. See, eg, Cases 72 and 73/91 Sloman Neptun Schiffahrts AG [1993] ECR I-887. See, also, Slotboom, P, ‘State Aid in Community Law: a broad or narrow definition?’ [1998] ELR 289. This newer interpretation does not appear to fit easily with the applicability of the State aid rules to, eg, loan guarantees which would not necessarily involve a charge on the public account.
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Compagnie Nationale Air France13 the Court of First Instance held that the financial assistance had come from the ‘Caisse’, a body established under the supervision and guarantee of the legislature, governed by statutory and regulatory rules with its Directors appointed by the State, and could therefore be characterised as belonging to the public sector. However, the Court, in Viscido and Others v Ente Poste Italiane,14 basically confirmed that national labour law regimes are in effect excluded from the prohibition on the basis of the lack of any direct or indirect transfer of State resources.15 Selectivity Aid measures which favour ‘certain undertakings or the production of certain goods’ are incompatible with the common market under Art 87(1). In order to establish this one needs to distinguish between general economic policy measures and those which exclusively benefit, directly or indirectly, certain industries.16 State aid would not normally extend to general measures of economic policy such as taxation or other fiscal measures.17 Tax exemptions have consistently been treated as State aid by the Commission18 and reductions in the rates of taxation applicable to products defined by regional, sectoral or other criteria may constitute aid. This selectivity requirement will generally be satisfied where aid is provided for a particular economic activity, a particular sector, a branch of industrial activity, according to geographical area or to undertakings of a particular nature.19 The English Court of Appeal has confirmed that a differential level of taxation can constitute State aid.20 Case law indicates that it is becoming more difficult for a Member State to argue that a measure is general rather than selective. It has been held that measures which are universally applicable may constitute State aid where discretion exists in the means of their application.21 Affect on intra-Community trade In most cases, this requirement poses little difficulty as any significant quantity of aid granted to particular undertakings or the production of certain goods will strengthen the beneficiary’s competitive position compared to its competitors throughout the Community and thereby have the potential to affect intraCommunity trade. In the past the Commission has considered that where there is a
13 14 15 16 17 18 19
20 21
Case T-358/94 Compagnie Nationale Air France v Commission (Air France) [1996] ECR II-2112; [1997] 1 CMLR 492. Cases C-52–54/97 [1998] ECR I-2629. See Rodger, BJ, ‘State aid—a fully level playing field?’ [1999] 5 ECLR 251. See Case C-241/94 France v Commission (Kimberley Clark) [1996] ECR I-3203. Ibid. See Case 70/72 Commission v Germany [1973] ECR 813; [1973] CMLR 741. See, eg, XIth Report on Competition Policy 1981, point 244; XXVth Report on Competition Policy, 1996, Points 167–70. For examples of measures which, although not applicable to all undertakings and thus not strictly general, have been considered to constitute ‘general measures’, see Case 173/73 Italy v Commission [1974] ECR 709; [1974] 2 CMLR 593, and Maribel Quater, OJ C201/6, 1997. See R v Customs and Excise Commissioners ex p Lunn Poly Ltd and Another [1999] EuLR 653. See Bacon, K, ‘Differential taxes, state aids and the Lunn Poly case’ [1999] 7 ECLR 384. See Case C-295/97 Industrie Aeronautiche e Meccaniche Rinaldo Piaggio v International Factors Italia SpA (IFITALIA) [2000] 3 CMLR 825.
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problem of over capacity, a small amount of State aid may be sufficient to produce harmful effects on competition within the Community and hence affect intraCommunity trade. In Italy v Commission22 the Court held that trade was clearly affected where the lowering of social security charges reduced labour costs and strengthened the competitive position of the Italian undertakings as shown by an increase in exports from Italy. For activities of a local nature, such as the provision of local services, there may be no affect on intra-Community trade. Distortion or potential distortion of competition When it has been shown that aid has been granted by a Member State or through State resources, it must also fulfil the third criterion, that it distorts or threatens to distort competition. In practice, the Commission adopted a specific de minimis policy in relation to State aid. The Commission’s policy is based on the premise that limited aid does not affect trade between Member States or distort competition in the Community and consequently parties should not be required to notify the aid under Art 88(3).23 This policy has now been placed on a firmer legal footing. Article 2 of Reg 944/98 empowered the Commission to set out in a Regulation a threshold under which aid measures are deemed not to constitute State aid under Art 87(1) requiring notification. The previous policy as laid down in the Commission’s 1996 Notice has now been adopted in Reg 69/2001.24 Article 2 provides that the conditions in Art 87(1) are not fulfilled in respect of aid of up to 100,000 to any one undertaking over a three year period. Otherwise, this criterion is easily satisfied once it has been demonstrated that aid has been granted. In Phillip Morris,25 the Court considered that regardless of the degree of competition in the Community, State aids were distortive. The test to establish a distortion focuses on the strengthened position of the assisted undertaking in relation to its competitors. For instance, in Italy v Commission26 it was held that the aid had improved the competitive position of Italian textile producers within the Community by reducing their production costs. The Commission is not required to quantify the actual economic advantage from the State aid.27 Recently, the Court has drawn attention to the fact that the Commission has a wide discretion in monitoring State aid due to the necessity for both a complex economic and social assessment of the issues involved.28 Further, even State aids which may be perceived as compensatory have been held by the Court to be prohibited as they do not cancel each other out, but, instead, accumulate and cause further damage to the Community.29
22 23 24 25 26 27 28 29
Case 173/73 Italy v Commission [1974] ECR 709; [1974] 2 CMLR 593. Commission Notice on the de minimis rules for State aid, OJ C68/06, 1996. Commission Reg (69/2001/EC), OJ L10/30, 2001. Case 730/79 Phillip Morris Holland BV v Commission [1980] ECR 2671; [1981] 2 CMLR 321. Case 173/73 Italy v Commission (Textiles) [1974] ECR 709; [1974] 2 CMLR 593. See Case T-358/94 Air France v Commission [1996] ECR II-2112; [1997] 1 CMLR 492, pp 165 and 166. See Cases T-132/96 and T-143/96 Freistaat Sachsen and Others v Commission [1999] ECR II-3663. See Case 78/86 Steinike and Weinlig v Germany [1977] ECR 595; [1977] 2 CMLR 688.
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The market economy investor principle One of the difficulties with the identification of State aid concerns undertakings which are to any extent State owned or controlled. This may involve a wide range of potential circumstances from completely nationalised industries to private companies with a minor State shareholding. This issue is particularly significant given the high degree of State shareholding, in a variety of forms, in private industries in the Community. Generally, therefore, the State aid rules must differentiate between assistance by the State acting in the same manner as a private person and State aid where the commercial sector would not intervene and invest. 30 Accordingly a transaction involves State aid if it takes place in circumstances which would not be acceptable to a private investor operating under normal market conditions. Conversely, if under similar market conditions the State measure would also have been taken by a private entrepreneur it will not constitute State aid.31 As a result, all equity injections have to be monitored, using the market economy investor principle (MEIP), to ensure that the State does not abuse its enormous financial power when it is involved in the ownership of undertakings. Advocate General Slynn stated in Leeuwarder Papierwarenfabriek v Commission 32 that the purpose behind State capital investments requires consideration in order to determine whether they constitute aid. If the motivation behind the investment is assessed to be the generation of income or capital, as with a private investor, it will not constitute aid. This does not require the most profitable investment to have been chosen although it would generally have to be demonstrated that the benefit from the continued trading of the ailing firm would exceed the cost of investment and provide a sufficient return. The Commission cannot replace the judgement of the investor but it can assess whether the investment would have been acceptable to a long term profit oriented private investor. Article 295 of the EC Treaty lays down the principle of neutrality regarding the system of property ownership in a Member State, and the principle of equality between public and private undertakings. However, the MEIP is utilised in order to balance the protection afforded to Member States in their system of property ownership and the prohibition on State aid. The MEIP test ensures that any State investment which would not be acceptable to a private investor in a market economy will be held to constitute State aid. For instance, in one case it was considered that investment may constitute State aid if the amount in question could not have been obtained on the capital market.33 Further, the MEIP test ascertains the amount of any State aid by providing a basis for calculating the different terms upon which the State has invested from those which would have been required by a private investor under similar circumstances.34 The following are examples of types of State aid and the way in which the MEIP test is utilised.
30 31 32 33 34
See Abbamonte, G, ‘Market economy investor principle: a legal analysis of an economic problem’ [1996] 4 ECLR 258. See Cases T-129/95, T-2/95 and T-97/96 Neue Maxhutte Stahlwerke v Commission [1999] ECR II-17; [1999] 3 CMLR 366, and Case T-296/97 Alitalia v Commission [2001] All ER (EC) 193. Case 296/82 [1985] ECR 809; [1985] 3 CMLR 380. Case 142/87 Belgium v Commission [1990] ECR I-959; [1991] 3 CMLR 213. See op cit, Abbamonte, fn 30.
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Capital and equity injections The MEIP will be satisfied where the structure and future prospects of the company are likely to yield a normal return within a reasonable period, by reference to a comparable private enterprise.35 In order to calculate the expected rate of return the Commission will take into account the company’s financial performance, its economic and technical efficiency and the general economic environment of the particular industry or sector. In particular, for loss-making industries the MEIP would require a viable restructuring plan, as would be required by a private creditor in similar circumstances. These plans are likely to be viewed more favourably by the Commission where prepared by external, independent financial advisers. The Commission may require advice on the validity of any plan by such advisers. The Commission is keen on promoting risk capital in the Community and is, at the date of writing, consulting on the issue of State aid and risk capital and how such measures may be authorised under the exemption system,36 which will be discussed shortly. The issue of State aid has been particularly prevalent in the airline industry with Member States’ Governments providing financial assistance to ‘flag-carrying’ national airlines, whether State owned or privatised. This is a sensitive political area as Member States do not want their ‘flag-carrier’ to be forced out of business. Various cases have arisen involving assessment of support given to national airlines using the MEIP. It should be noted at this stage that examples in relation to the air transport sector are intended merely to illuminate the various issues for the reader. The air transport sector represents a small proportion of all State aid cases and in relation to air transport there are often special rules, differing from the general rules applied. In the Aer Lingus case,37 the Irish Government had proposed to inject £IRL175 m into its ailing national airline. The injection was to form part of Aer Lingus’ final restructuring over a three year period. Taking into account large losses over the previous three years and a long-term high debt/equity ratio, the Commission considered that, in the light of the particularly difficult position of Aer Lingus, it was unlikely that a market investor would have sought equity in the airline. In 1994, the Commission considered financial assistance to be given by one of Air France’s shareholders, which was deemed to be a public sector body. The Commission assessed Air France’s financial position and in particular its massive debts, negative cash flows and continuous substantial losses and concluded that the MEIP was not satisfied and therefore the measures proposed constituted State aid. The Court of First Instance subsequently confirmed that the Commission had discretion in applying what they termed ‘the prudent private investor test’ and that judicial review of the Commission’s application was limited to the grounds of procedural irregularity, manifest error or misuse of powers.38
35 36 37 38
For discussion, see Koenig, C and Bartosch, A, ‘EC State aid law reviewing equity capital injections and loan grants by the public sector: a comparative analysis’ [2000] 8 ECLR 377. State Aid and Risk Capital, Discussion Document 175/COMP/01-EN (BS), April 2001. Commission Decision (94/118/EC) Aer Lingus, OJ L54/30, 1994. Case T-358/94 Air France v Commission [1996] ECR II-2112; [1997] 1 CMLR 492, para 72.
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Loan guarantees Guarantees, whether or not used to secure lending, potentially constitute State aid39 as they extend a competitive advantage over other competitors. Again, the Commission will assess the borrower’s financial situation in order to consider whether a private investor would grant a guarantee under similar conditions. If the State is deemed to be acting beyond the role of a private investor, the aid element will be the difference between the rate which the borrower would pay on the free market without the state guarantee and the rate actually obtained with the benefit of the guarantee, net of any premium paid to the State for the guarantee. If the company’s financial position is so weak that a loan would not have been advanced by any financial institution without a guarantee, the amount of the aid will be the value of the loan advanced based on the guarantee. The Commission issued a Notice in 2000 which was designed to clarify the basis on which the Commission applies the rules to loan guarantees.40 Loan financing Loans provided by State owned financial institutions will be considered as State aid where they are advanced at lower rates of interest than would otherwise be offered by a private financial institution under market conditions. However, even loans at commercial rates may still constitute State aid where the security terms upon which they are granted are less onerous than would be required by a private investor, or, indeed, where credit would not have been made available at all, taking into account the company’s financial position. Quantification of the aid element will vary according to the type of situation involved. In the differential rate situation, the aid element would be the difference between the applied rate and the market rate. Where a loan would not be available under market conditions the aid element will be the full loan. Finally, for inadequately or partially secured loans it has been suggested that the aid element should be the difference between the amount of the loan which would have been advanced upon the security offered and the amount actually advanced.41
EXEMPTIONS Article 87(1) lays down the prohibition on State aid which is applicable when the criteria noted above are satisfied. However, it is possible for the grant of State aid to be exempted under Arts 87(2) and 87(3) of the Treaty. These provide respectively for mandatory and discretionary exemptions from the operation of the prohibition. Article 87(2): mandatory exemptions Article 87(2) lays down the mandatory exemptions by stating that three specific forms of aid ‘shall be compatible with the common market’. It is uncertain whether 39 40 41
Guarantees on market conditions do not constitute State aid. They only constitute State aid if they are granted on preferential terms, according to the MEIP test. Commission Notice on the Application of Articles 87 and 88 of the EC Treaty to State aids in the form of Guarantees, OJ C71/7, 2000. See Soames, T and Ryan, A, ‘State aid and air transport’ [1995] 5 ECLR 290, p 297.
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these types of aid are free from the duty of notification.42 The three forms of aid are: aid of a social character, 43 granted to individual consumers and without discrimination as to the origin of the products; aid to make good the damage caused by natural disasters or exceptional occurrences;44 and aid granted to certain areas of the Federal Republic of Germany in order to compensate for the economic disadvantages caused by the division of Germany.45 Article 87(3): discretionary exemptions The Commission is required to interpret the discretionary exemptions under Art 87(3), which constitute derogations from the general rule, narrowly and exercise its discretion in such a manner as to ensure that any exemptions granted contribute to the achievement of the Community objectives identified in Art 87. Accordingly, the aid must be analysed from a Community, and not a national, perspective. Article 87(3)(a) The Commission has discretion under this provision to declare as compatible, ‘aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment’. The regions that could potentially benefit from this exemption are those facing abnormally low living standards or serious underemployment, and those where the Gross Domestic Product does not exceed 75% of the Community average.46 Article 87(3)(b) Under this provision the Commission may consider for exemption, ‘aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State’. The former type has included schemes for energy saving or diversifying energy resources.47 Aid to remedy serious disturbances in the economy of a Member State was invoked successfully by Greece in relation to the privatisation of 208 undertakings in 1991 as there was economic evidence of serious disturbance within the Greek economy. Section 87(3)(c) Exemption may be provided in respect of, ‘aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest’. Two categories of exemptable aid within this provision which are often invoked are regional aid and sectoral aid.
42 43 44 45 46 47
See ibid. EC Treaty, Art 87(2)(a). See Case 52/76 Benedeti v Munari [1977] ECR163. Ibid, Art 87(2)(b). Ibid, Art 87(2)(c). As set out originally in the Commission Communication on the method for the application of Art 92(3)(a) and (c) to regional aid, OJ C212/02, 1988. The most recent guidelines are published in OJ C74/6, 1998. See XXIst Report on Competition Policy (1991), Point 258.
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Article 87(3)(d) This provision is in respect of aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Community to an extent that is contrary to the common interest. Article 87(3)(e) This provides a catch-all provision in that the Commission may consider for exemption, ‘such categories of aid as may be specified by decision of Council acting by a qualified majority on a proposal from the Commission’. This may allow for a variety of potential aid schemes by Member States but requires secondary Community legislation to be passed. Frameworks and guidelines For transparency reasons, the Commission has gradually developed a variety of frameworks and guidelines clarifying how the Commission will assess certain types of aid and laying down the criteria for its approval. At present such texts exist for what is termed ‘horizontal aid’ (aid to SME’s, aid for R & D, employment aid, environmental aid, aid for rescue and restructuring of enterprises in difficulties, regional aid etc) as well as for particular industries (for example, motor vehicle, shipbuilding, transport, steel, etc). Indeed, the Commission has adopted a considerable number of measures in these areas in recent years and greater detail on the range of Commission State aid policies can be found at the Commission website.48 The following is a brief discussion of the Commission’s approach to two types of horizontal aid, regional aid and sectoral/restructuring aid. Regional Aid On a practical basis, the Commission has developed maps of regions eligible for aid and it is constantly seeking to reduce the geographic coverage of such areas. Member States draw up the maps according to ceilings defined by the Commission and these require the approval of the Commission. There are often lengthy negotiations between the Commission and Member States, which can delay important investment which is dependent upon Government grants, as evidenced by the delay in entry into force of the revised UK map from January 2000 to July 2000. The Commission has ascertained appropriate aid ceilings for different regions according to the relative weaknesses of their economies. 49 Substantively, the Commission reviewed its national regional aid guidelines in 1998.50 This was partly in order to enhance cohesion between competition policy on State aid and the Community’s own system of aid provided through Structural Funds. The guidelines provide detailed advice on the criteria to be applied in the future in demarcating appropriate regions to qualify for aid and the object, form and level of any aid to be 48 49 50
http: //europa.eu.int/comm/competition/index_en.html. National ceilings for regional aid coverage under the derogations provided for in Art 87(3) of the EC Treaty for the period 2000–06, OJ C165/5, 2000. The guidelines are published in OJ C74/6, 1998. See, also, Corrigendum to Guidelines on National Regional Aid, OJ C394/09, 1998, and Amendments to the Guidelines on national regional aid, OJ C258/5, 2000.
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granted. The Greek Government sought to use the regional aid exemption, within the air transport sector framework, in relation to loan guarantees to ease the burden of its national airline, Olympic Airways. Greece claimed that it was the poorest country in the European Union and that Olympic Airway’s air transport services were crucial to the Greek economy. However, these arguments were rejected. Although Greece was a region falling within this provision, the aid at issue was not regional aid as it did not relate to all airlines and routes operating in Greece but was intended merely to keep Olympic Airways afloat.51 Sectoral aid—restructuring The Commission has developed a number of sectoral policies in its application of the State aid rules, with certain sectors such as shipbuilding, steel, coal, the motor vehicle industry, the synthetic fibres industry and transport being subject to specific rules. In other industries, the general State aid rules continue to apply and the position is less clear. However, the Commission introduced general guidelines on State aid for rescuing and restructuring firms and these have been revised recently52 The basic principles remain the same, although the Commission’s approach is more restrictive in scope. Rescue aid must consist of financial assistance at normal commercial interest rates, be restricted to the amount necessary to keep a firm in business and to the time in which a feasible recovery plan can be devised, be justified on the grounds of serious social difficulties and have no undue adverse effects on the industrial situation in other Member States. In the context of restructuring aid, a restructuring plan is required which must satisfy the following conditions: (a) it must plan the restoration of the long term viability of the firm within a reasonable timescale; (b) it must contain realistic assumptions as to future operating conditions; (c) it must avoid undue distortions of competition; (d) the level of aid must be the strict minimum to enable restructuring to take place; and (e) the plan must be fully implemented. Finally, the implementation progress of the plan is monitored by the submission of detailed annual reports. The air transport industry is an interesting example of the application of the general State aid rules to a particular sector. As noted above, this has been one of the most contentious areas of State aid practice, due to the politically sensitive attitude of Member States towards their traditional flag-carrying airline. Indeed, over the last 10 years, the Commission has been extremely active in assessing State aids in the airline industry. The application of the provision of State aid to the aviation sector is laid down in guidelines issued in 1994 and these cover the issue of rescue and restructuring in that sector.53 The Guidelines provide that State aid may be allowed in exceptional cases where accompanied by a restructuring plan although Commission approval is likely to be subject to a number of conditions. First, the aid 51 52 53
Commission Decision (94/696/EC) Olympic Airways, OJ L273/22, 1994. OJ C368/05, 1994. Community guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C288/02, 1999. Application of Arts 92 and 93 of the EC Treaty and Art 61 of the EEA Agreement to State Aids in the Aviation Sector, OJ C350/7, 1994.
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provided must be of limited duration and be combined with a valid restructuring plan, in order to restore the airline’s financial health and enable it to operate viably within a reasonable period of time.54 Further, the aid should be sufficient to achieve the objectives of the restructuring plan in that the airline will return to viability and no future aid will be required. Assurances will generally be required from Member States that no future aid will be granted. This is known as the ‘one time, last time’ principle, although it has not always been strictly adhered to in the past. For instance, Air France has been granted aid on more than one occasion and later measures have been approved by the Commission, subject to a restructuring plan intended to return the failing airline to viability. Often the restructuring plan will necessitate a reduction in capacity for the troubled firm to return to long term financial well being. In particular, the Commission will take a more lenient attitude to non-expansionary restructuring plans as otherwise the difficulties may simply be transferred to its competitors.55 A further requirement is that the government concerned should not interfere in the airline’s management which should be run according to commercial principles. The need for the submission to the Commission of a credible restructuring plan, particularly regarding the long term profitability of the aid recipient, was recently emphasised by the Court in France v Commission.56 The most recent Air France case is a particularly interesting example of the application of these criteria to the proposed grant of State aid in the airline industry The French Government proposed to inject capital to the sum of FF 20 bn into its ailing national carrier Air France. The French Government in its representations to the Commission included a comprehensive restructuring plan designed to transform Air France’s fortunes and turn it into a viable company over three years from the start of 1994, involving an anticipated 30% increase in productivity. The plan detailed investment reduction, lower operating costs, staff cuts, increased flexibility of services, new products and a change in the company structure involving commercial investment techniques. The Commission ultimately approved the state aid as the restructuring programme was sufficient and necessary to return Air France to long term viability without further State assistance.57 The Court of First Instance annulled the Commission decision on the approval of aid to Air France.58 The CFI held that the Commission had failed to provide adequate legal reasoning for approving Air France’s purchase of 17 new aircraft worth £1.1 bn.59 In addition, in relation to criteria in Art 87(3)(c) that the aid should not adversely affect trading conditions to an extent contrary to the common interest, the Commission had failed to analyse the competitive effect the subsidy would have on the airline’s business on routes outside the EEA.60 State aid in the airline industry is particularly controversial and the Commission has adopted a delicate balancing approach. It appears that there is a
54 55 56 57 58 59 60
Commission Decision (91/555/EC) SABENA, OJ L300/48, 1991. Eg, regarding the notified capital increase of Air France, Commission Decision (94/653/EC), OJ L254/73, 1994, the Commission imposed a number of conditions such that Air France could not increase capacity or reduce tariffs in certain routes. Case C-17/99, 22 March 2001. Ibid. Joined Cases T-371/94 and T-394/94 British Airways and Others v Commission [1998] ECR II-2405; [1998] 3 CMLR 429. Ibid, paras 84–120. Ibid, paras 238–80.
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special State aid policy for the airline industry operated by the Commission, detailed in the guidelines published in 1994.61 The Commission’s application of the rules has been challenged in recent years, most notably by Air France and British Airways.62 Air France unsuccessfully challenged the categorisation of certain financial assistance to it as State aid. In this context, it is interesting to note that the Commission has refuted the existence of a ‘one time, last time’ policy. Although the Commission will generally require adequate evidence of a suitable restructuring plan, decisions involving Air France indicate that approval is possible for a State aid scheme where other State aid had already been approved. More generally, the new guidelines mark a shift in approach and it appears that the Commission is seeking to restrict the amount of State aid granted on this basis. The following aspects of the revised guidelines are particularly notable: (1) the ‘one time, last time’ rule prevents follow-up restructuring aid for 10 years after the end of the first restructuring process; (2) the rules on eligibility as ‘firms in difficulty’ has been tightened, for instance, to exclude new firms; and (3) the possibility for Member States to provide other types of aid, such as regional aid, to firms already receiving restructuring aid, has been curtailed.
PROCEDURE AND REMEDIES In the late 1990s the Commission realised that the system of enforcement of the State aid rules required modification. The number of complaints and notified aids had increased, partly due to greater awareness of the rules and because of continuing resort to State aid measures by Member States. Enlargement of the Community would necessarily exacerbate these difficulties and lead to a greater workload on the part of the Commission. A partial solution would lie in the greater involvement of national courts in the system of State aid enforcement and this is an issue which will be discussed in brief shortly. The key Commission proposal was to use the provisions of Art 89 to ease its workload problems by simplifying and enhancing the efficiency of the system. Article 89 empowers the Commission to adopt appropriate Regulations for the application of Art 87. The principal motivation for resorting to this provision, in addition to the efficiency argument, was to increase transparency and legal certainty in the application of the State aid provisions. The first tranche of its modernisation programme was to introduce an enabling Regulation, Reg 994/98, 63 to enable the Commission to introduce exemption Regulations for categories of horizontal aid and, also, to provide a legal basis for the de minimis rule. The Commission also proposed to introduce a clear system of procedural rules, in the form of a Regulation, for the enforcement of the substantive State aid rules. This proposal was subsequently adopted in Reg 659/99 61 62 63 64
OJ 1994, C350/7. Case T-358/94 Air France v Commission [1996] II-ECR 2112; [1997] 1 CMLR 492; and Cases T-371/94 and T-394/94 British Airways and British Midland Airways v Commission [1998] ECR II-2405. Council Reg (994/98/EC) on the application of Arts 92 and 93 of the EC Treaty establishing the European Community to certain categories of State Aid, OJ L142/1, 1998. Council Reg (659/99/EC) laying down detailed rules for the application of Art 93 of the EC Treaty, OJ L83/1, 1999.
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which codifies existing practice in relation to notification of new State aid.64 The Regulation’s objective was to consolidate the procedural rules and provide an integrated and binding set of legal provisions. The Regulation makes provision for notified aid, unlawful aid, misuse of aid and existing aid schemes and sets out the appropriate procedures and rules for each area. The Regulation will not be dealt with in any depth here, but, where appropriate, reference will be made to appropriate aspects of it.65 The main procedure concerns the requirement to notify new aid, although the Regulation merely refers to the criteria in Art 87(1) for the identification of State aid. The Regulation also gives the Commission requisite powers to monitor and supervise the rules, by requiring annual reports from all Member States on aid schemes and, importantly, provides in Art 22 a new power for the Commission to undertake inspections in relation to its State aid functions. Notification Paragraph 3 of Art 88 is referred to as the ‘stand still’ clause and provides that any aid must be notified prior to being paid. Furthermore, the aid may not be implemented before a Commission decision under Art 88(2) is made as to the compatibility of the aid. Accordingly, any aid must be notified and not put into effect before the Commission has approved it. Article 2(1) of Reg 659/99 codifies this requirement to notify new aid to the Commission. Otherwise any aid granted will constitute illegal aid. In the UK, the task of notification is carried out by the State Aid Policy Unit, part of the Trade Policy and Europe Directorate of the DTI. One of the difficulties for Member States is that it may not always be certain, due to the detailed criteria involved and notably the MEIP, which types of assistance constitute State aid under Art 87. This has been referred to recently as the ‘existential uncertainty’, faced by Member States as to whether their measure actually constitutes State aid.66 In this regard, the Regulation provides little assistance and merely refers back to Art 87 and the principles developed in the existing body of case law. Accordingly, it is safer for any measures to be notified and approved by the Commission as not constituting State aid or, alternatively, approved under the mandatory/discretionary exemptions. Aid does not require to be notified in two instances: (1) where it constitutes de minimis aid under Reg 69/2001;67 or (2) if it is existing aid already authorised and the level will not be exceeded by 20%. Upon notification, the Commission will undertake a preliminary investigation of the proposed aid. If the Commission has no doubts about its compatibility, the aid will be approved. Otherwise, the Commission will initiate the contentious procedure in Art 88(2) culminating in a final decision. In Lorenz,68 the Court decided that the preliminary examination shall not take more than two months. The Regulation codifies existing practice in that during the preliminary examination phase, the Commission has to decide within two months of ‘complete notification’, that a measure does not constitute aid, to raise no objections to the notified aid, or to initiate the formal investigation procedure according to Art 88(2). The detailed 65 66 67 68
For a comprehensive review of the Regulation, see Sinnaeve, A and Slot, PJ, ‘The new regulation on State aid procedures’ (1999) 36 CML Rev 1153. Ibid. Commission Reg (69/2001/EC) on the application of Arts 87 and 88 of the EC Treaty to de minimis aid, OJ L10/30, 20001. Case 120/73 Gebr Lorenz GmbH v Germany [1973] ECR 1471.
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rules for the formal investigation procedure are set out in Art 6. Three options are open to the Commission upon culmination of the procedure: that the measure does not constitute aid, a positive decision of compatibility, or, thirdly, a negative decision of incompatibility. Article 7(6) provides for a new time limit of 18 months from the opening of the procedure for the Commission to make a decision. If State aid is implemented prior to approval by the Commission, whether notified or not, the State aid is illegal, sometimes referred to as unlawful. It is important to outline the appropriate procedures in respect of illegal aid. In Boussac69 the Court considered how the Commission should proceed in cases of illegal aid. The Court made it clear that the Commission is still required to examine the compatibility of the aid with the common market, despite the procedural irregularity. If the aid is compatible, the Commission will approve it. Only if the Commission takes a negative final decision will it require the Member State to recover the aid with interest from the beneficiary. In relation to unlawful aid, the Regulation codifies existing powers available to the Commission to require information, under Art 10(3), order suspension of unlawful aid, under Art 11(1), and to issue a provisional recovery injunction under Art 11(2). Article 14 is crucial and reinforces the Commission’s power to order recovery of aid subject to two exceptions: where recovery is contrary to a general principle of Community law, or recovery is beyond a 10 year limitation period. The competence of the Commission with regard to illegal aid is different from the competence of the courts in Member States.70 The notification obligation and the standstill clause of Art 88(3) have direct effect. Therefore, if a Member State has not respected these rules, a national court, where an action has been raised before it, shall take all necessary measures in respect of the illegally granted aid, such as by ordering suspension and recovery. For instance, in a recent English case involving Lunn Poly, an application for judicial review of a Finance Act, imposing differential taxes as contrary to Community law and therefore illegal, was successful.71 The national court does not have to wait until the Commission has taken a decision on the compatibility of the aid. If the national court faces difficulties in this process, for instance, in establishing the aid character of the measure, it can seek assistance from the Commission, under the Notice on Cooperation, or the Court utilising the Art 234 procedure. As noted above, the difficulties facing the national court in identifying State aid are manifold and the new Regulation simply refers back to the Treaty provision.72 Arguments invoked by Member States before the Court in respect of their failure to ensure recovery, pursuant to a Commission decision in respect of illegally granted State aid, are rarely successful. In practice, only absolute impossibility is likely to preclude repayment/recovery. In Belgium v Commission,73 it was held that the requirement to repay was absolute even if the company had gone into liquidation.
69 70 71 72 73
Case C-301/87 France v Commission [1990] ECR I-307. See Case C-354/90 FNCE v France (Salmon) [1991] ECR I-5505 and Case C-39/94 Syndicat Francais de l’Express International v La Poste (La Poste) [1996] ECR I-3547; [1996] 3 CMLR 369. R v Customs and Excise Commissioners ex p Lunn Poly [1998] 2 CMLR 560, DC; [1999] EuLR 653, CA. In the Lunn Poly case, ibid, eg, it was argued that determination of what constitutes State aid was subject to the principle of objective justification. Case 142/87 [1990] ECR I-959; [1991] 3 CMLR 213.
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The State therefore had to compete in the process of the division of assets with trade creditors. The Court confirmed that the only limitations on recovery are where it is absolutely impossible,74 or where repayment would contravene the recipient’s legitimate expectations, a defence available only in exceptional circumstances.75 The beneficiary is unlikely to be successful in invoking the legitimate expectations argument if it has not checked whether the aid was notified and approved. According to the Court, enterprises should normally be able to verify these requirements.76 The only situation in which this argument is likely to be successful is where the Commission itself was responsible for the legitimate expectations of the beneficiaries. In the context of national court actions the Court has adopted a similarly restrictive approach in respect of the possibilities for beneficiaries to rely on the legitimate expectations defence.77 If the State aid is not approved by the Commission, an appeal is available to the Court of First Instance and thereafter to the Court of Justice. In numerous cases the Court has confirmed that the recipient of State aid, which is subject to a Commission decision, is directly and individually concerned by the decision and has standing to bring an action under Art 230(2).78 Competitors’ remedies One of the main problems generally, for complaining competitors, was the absence of a Regulation containing the procedural rules for enforcement of the State aid rules. The ability of competitors to lodge complaints with the Commission had become established practice and the Court of First Instance also provided for complainants to be heard during the preliminary investigation of the issues.79 Regulation 659/99 deals with the rights of interested third parties, but does not radically alter the position or give them a status similar to that of competitors in Art 81/82 cases. They can submit comments, per Art 20(1), and thereafter be sent a copy of the decision concluding the formal procedure. They also have the right to complain to the Commission under Art 20(2). Competitors can also use the provisions of Arts 230 and 232 to take proceedings before the Court. Article 230 allows for actions against the Commission by Member States or other third parties who are directly and individually concerned by any Commission decision to approve State aid.80 As a result of recent Court developments, in most cases it should be relatively straightforward for a competitor or potential competitor of the undertaking receiving aid to satisfy the requirements under Art 230.81 The Court of First Instance, in British Airways and Others v Commission,82 confirmed that those whose interests might be affected by the granting of aid, in particular, competing
74 75 76 77 78 79 80 81 82
Confirmed again more recently in Case C-261/99 France v Commission, judgment of 22 March 2001. See Case 5/89 Commission v Germany [1990] ECR I-3437; [1992] 1 CMLR 117. Ibid. See Case C-24/95 Land Rheinland Pfalc v Alcan Deutschland [1997] ECR I-1591; [1997] 2 CMLR 103. Case 332/82 Intermills v Commission [1984] ECR 3809; [1986] 1 CMLR 614; and Case 62/87 Executif Regional Wallon v Commission [1988] ECR 1573; [1989] 2 CMLR 771. Case T-95/94 Sytraval v Commission [1995] ECR II-2651. On the grounds of lack of competence, infringement of an essential procedural requirement, infringement of the Treaty or any rule of law relating to its application, or misuse of powers. See Case C-169/84 COFAZ and Others v Commission [1986] ECR 391; [1986] 3 CMLR 385, and, in particular, Case C-225/91 Matra SA v Commission [1993] ECR I-3203, and Case C-198/91 Cook v Commission [1993] ECR I-2486; [1993] 3 CMLR 206. Joined Cases T-371/94 and T-394/94 British Airways and Others v Commission [1998] ECR II-2405.
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undertakings, would qualify. The Court confirmed that the applicants satisfied the Art 230 requirements given that their market position was significantly affected by the measure.83 The same general limitations and difficulties are likely to exist in proceedings by a complainant competitor under Art 232 for failure to act in a State aid case, as exists under Arts 81 and 82, although perhaps the judgment in Guerin84 provides some assistance. More directly, in relation to State aid, in Gestevision,85 the Court of First Instance confirmed that an action under Art 232 is not limited to persons to whom a requested act could potentially be addressed. Accordingly, satisfaction of the direct and individual concern criterion, for instance, by companies active in the same market, would be sufficient.86 Finally, the validity of a Commission State aid decision may be challenged in the national courts utilising the preliminary ruling procedure under Art 234.87 The possibility exists for further direct action by a disgruntled competitor.88 Although Art 87 itself does not have direct effect, it may, for instance, be relied on before a national court where the Commission has taken a decision pursuant to Art 88(2) to prohibit the granting of State aid. In addition, the last sentence of Art 88(3) providing that: ‘The Member State concerned shall not put its proposed measures into effect until this procedure has resulted in a final decision’ has direct effect.89 Accordingly, if aid is implemented prior to notification and approval, and therefore constitutes illegally granted State aid, an individual can seek redress in the national courts. Normally a competitor would seek some form of interim relief to prevent the implementation of the State aid. The competitor can seek an interlocutory injunction in England or interim interdict in Scotland to stop financial assistance, or a subsidy or loan guarantee being granted. Damages may also be sought from the relevant State on the basis of the non-contractual liability of Member States for breaches of Community law.90 Finally, damages may be sought from the recipient in so far as this is provided by the rules of the relevant
83 84 85 86 87 88 89 90
91
Ibid, para 93. Case C-282/95P Guerin v Commission [1997] ECR I-1503; [1997] 5 CMLR 447. See Chapter 2. Case T-95/96 Gestevision Telecinco SA v Commission [1998] ECR II-3407. See Case C-106/98 Comité d’entreprise de la Société française de production v Commission [2000] ECR I3659, where a works council and trade union representing the sector in question were considered not to be individually concerned. See Case C-188/92 TWD Textilewerke Deggendorf GmbH v Germany [1994] ECR I-833; [1995] 2 CMLR 145, particularly regarding the time limits on the availability of this possibility of challenging the validity of a Commission decision. See Abbamonte, G, ‘Challenges to illegally granted aid and the problem of conflicting decisions in the field of competition’ [1997] 2 ECLR 87. See Case C-354/90 Salmon [1991] 1 ECR 5505. See Case 48/93 Brasserie du Pecheur-Factortame III [1996] I-ECR 1029; [1996] 1 CMLR 889; [1996] All ER (EC) 301, and Hernandez, AG, ‘The principle of non-contractual State liability for breaches of EC law and its application to State aids’ [1996] 6 ECLR 355. However, the difficult issues of causation and quantification of damages need to be resolved adequately under the relevant national rules. See Case C-39/94 Syndicat Francais de l’Express International and Others v La Poste and Others (La Poste) [1996] I-ECR 3547; [1996] All ER (EC) 685; [1996] 3 CMLR 369, pp 373–75. Although the Court does not discuss this in any detail, it is likely that this would be determined as follows; the private international law rules of the court with jurisdiction over the subject matter would determine the applicable law to govern this matter, likely to be characterised as an issue of unjust enrichment. See Rodger, BJ, ‘The interface between State aid, unjust enrichment and private international law’, to be published in a book of the proceedings of the Bregstein Congress, October 2000.
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national law.91 The remedy against the recipient is more limited because the State aid rules and Commission decisions taken under the rules are directed towards the Member State concerned. In the context of national court actions the Court has adopted a similarly restrictive approach in respect of the possibilities for beneficiaries to rely on the legitimate expectations defence.92 Article 88 has limited direct effect, only the last sentence of Art 88(3) is directly effective, and the national courts can not determine the compatibility of the aid but can only provide remedies if the aid has been illegally implemented. The Commission has introduced a Notice to assist the national courts in the application of this provision in actions brought by competitors in the context of remedies against illegal aid.93 The Notice seeks to encourage courts to exercise their powers and undertakings to resort to the appropriate legal remedies under their national system. In addition, in La Poste94 the Court confirmed that the national courts have an important and complementary role to that of the Commission regarding State aid. The Court in La Poste provided that national courts should co-operate with the Commission or seek a preliminary ruling under Art 234 in order to avoid the possibility of reaching conflicting decisions as to whether the measure constitutes State aid.
RECENT AND FUTURE DEVELOPMENTS In April 2000 the Commission published its Eighth Survey on State Aids, covering the period 1994–98. It notes that the overall level of State aid has been reduced. However, it confirms that there remain large disparities in State aid provision between the Member States. The Commission has in recent years launched a process of modernisation in order to improve efficiency, reinforce control and simplify procedures for less significant cases. As we have noted above, a number of Regulations, notices and decisions have already been put in place. There is a discernable trend towards greater decentralisation in the application of the rules, and an approach better justified on economic grounds. These objectives could be seen to mirror the earlier proposals in the White Paper on Modernisation and subsequent draft Regulation discussed in detail in Chapter 2. The Commission’s developing policy is that aid should be oriented towards horizontal goals where there exists a gain for the common interest. Welfare gains include regional development, environmental protection, research and development, innovation, employment, etc. Accordingly, the Commission introduced a Regulation to enable it to adopt group exemptions for certain categories of horizontal aid95 This Regulation defines the criteria under which certain horizontal aid, such as for Research and Development (‘R & D’), may be exempted from the notification obligation. Very recently, the Commission has used its powers under the enabling Regulation to introduce State aid Block 92 93 94 95
See Case C-24/95 Land Rheinland Pfalz v Alcan Deutschland [1997] ECR I-1591; [1997] 2 CMLR 1034. Commission Notice on Co-operation between National Courts and the Commission in the State Aid Field, OJ C312/7, 1995. Case 39/94 La Poste [1996] ECR I-3547; [1996] 3 CMLR 369; [1996] All ER (EC) 685. Council Regulation (994/98/EC) on the application of Arts 92 and 93 of the EC Treaty to certain categories of horizontal aid, OJ L142/1, 1998.
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Exemption Regulations in relation to small and medium-sized enterprises, de minimis aid, and training aid. The Fifth Survey pointed out that aid for horizontal objectives, such as R & D, environmental protection, and for small and mediumsized enterprises, contributes to overall Community objectives. Accordingly, the new Regulations, and further Regulations likely be adopted in the near future, exempting certain categories of aid from notification requirements, should allow the Commission to concentrate its resources on ad hoc schemes to assist particular companies. Overall, the Commission has indicated a shift away from supporting aid to individual companies or sectors towards tackling horizontal objectives of Community interest. The key trends in the jurisprudence also demonstrate a tightening in the State aid rules: selectivity is becoming more difficult to disprove and advantage has been construed widely. The English Court of Appeal has rejected the possibility of arguing that a State aid can be objectively justified and therefore not prohibited by Art 87(1).96 This would import a rule of reason approach into Art 87(1) and also lead to confusion with the provisions for exemption in Art 87. An important future trend may be the increased role of the national courts as part of the general process of decentralisation of the Community workload, although the national courts’ role is limited and will be fraught with difficulties.97 One area of difficulty for national courts has been avoided by the Court’s determination that State labour law regimes, which inevitably impact on the competitiveness of undertakings, are not covered by the State aid rules.98 Nonetheless, it has been argued that although State aid law has shifted from being a purely administrative procedure to a system of economic law enforcement involving legal challenges by competitors, this development is limited. On the one hand, the role of national courts through the direct effect doctrine is limited, and the European Courts have not developed standing beyond market interests to include environmental or regional interest groups despite the important role that environmental and regional policy play in the State aid control regime.99
STATE REGULATION In the first part of the chapter the potential effect of aid granted by a Member State is discussed, but this is not the only way in which the activities of States may distort competition. Most Member States have ‘mixed economies’ in that the State may intervene in those industries which are considered ‘essential’ to the health of the national economy. For example, the importance of coal and steel to European economies was recognised by the Treaty of Paris of 1951 which formed the European Coal and Steel Community, the precursor to the European Economic Community. However, such recognition of State intervention does not sit well with a literal interpretation of Art 3(g) of the Treaty which requires ‘that competition in 96 97
98 99
R v Customs and Excise Commissioners ex p Lunn Poly and Another [1999] EuLR 653. See Application of EC State Aid Law by the Member State Courts, Commission, 1999, for a discussion of practice in the 15 Member States. Also, Ross, M, ‘State aids and national courts: definitions and other problems—a case of premature emancipation’ (2000) 37 CML Rev 401, notes the ‘mismatch’ between the Court imposed duties and their impact at national level, p 421. See Rodger, BJ, ‘State aid—a fully level playing field’ [1999] 5 ECLR 251. See Evans, A, ‘Law, policy and equality in the European Union: the example of State aid control’ (1998) 23 EL Rev 434.
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the common market is not distorted’. The involvement of Member States in the economy will inevitably distort competition to some extent. The intervention of Member States will also be a particular problem as it leads to markets being organised within national boundaries, thereby hampering the creation of a single market. However, as market regulation, intervention or involvement, is so well recognised, and even protected to a degree by Art 295 of the Treaty,100 it is not directly challenged. Although there is no direct challenge to State regulation there have been ways in which the Commission has used the Treaty to ensure that competition is distorted to the least extent possible. The interplay between the competition rules and State regulation is developing constantly and is likely to be given even greater scrutiny in the near future. The main limit on the behaviour of States is enshrined in Art 10 of the Treaty. Article 10(2) obliges Member States to abstain from adopting measures which could jeopardise the attainment of the objectives of the Treaty. The Commission can enforce this obligation through Art 226 of the Treaty where the actions of Member States threaten to distort competition. This general power is expressed more clearly in relation to ‘public undertakings and undertakings to which Member States grant special or exclusive rights’ in Art 86(1) of the Treaty. Member States are required to ‘neither enact or maintain in force any measure contrary to the rules contained in the Treaty’. This provision is unusual in that it relies, for its effect, on other Articles of the Treaty. Despite referring specifically to Arts 12 and 81–89 it also applies to all the other provisions of the Treaty. Article 86(2) of the Treaty gives a special defence to undertakings who have been granted ‘special or exclusive rights’ from challenge under the competition rules. We shall deal with the application of the competition rules to Member States before considering the effect of Art 86 on undertakings.
MEASURES ADOPTED BY THE STATE One of the first applications of the competition rules to measures adopted by Member States was in Inno v ATAB.101 In that case the Dutch taxation of tobacco was challenged on the basis that it distorted competition. The Court’s judgment focused on the relationship between Arts 3, 10, 81 and 82 of the Treaty and stated in very broad terms that Member States should not adopt measures which deprived the competition rules of their effect. The subsequent case law has largely been used to refine the meaning of the Court’s earlier judgments. Article 81 In several cases the Court has challenged the sanctioning of private cartels by a Member State. In BNIC v Yves Aubert102 the Court examined the extension of a price fixing agreement set up by BNIC, a trade organisation for cognac producers, to the entire industry through a ministerial order. An action had been brought against 100 EC Treaty, Art 295 provides that nothing in the Treaty shall prejudice the ownership of property. This has been taken to cover the purchase of property, or industries, by States themselves. 101 Case 13/77 [1977] ECR 2115; [1978] 1 CMLR 283. 102 Case 136/86 [1987] ECR 4789; [1988] 4 CMLR 331.
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Yves Aubert for undercutting the fixed price and the national court referred the matter to the Court under Art 234. The Court was of the view that the ministerial order extended the impact of the private agreement and constituted a breach of France’s obligations under the Treaty. It seems obvious that the Court was able to challenge the State support of a blatant price fixing agreement, but the use of Art 81 has been extended to less obvious situations. There is no need for the State measure to support an existing agreement, only, as in Vlaamse Reisbureaus,103 that the State measure be related to an agreement between private undertakings. In that case the State measure prohibited travel agents from passing on commissions to their clients. The Court decided that the measure evolved from a pre-existing, though no longer operative, agreement which fell foul of Art 81. A different use of Art 81 can be observed from Van Eycke.104 The Court held that Member States could not, ‘deprive [their] own legislation of its official character by delegating to private traders responsibility for taking decisions affecting the economic sphere’. The danger with such delegation is that it may lead to traders disguising anti-competitive activity behind the veil of State regulation. As traders would represent only their interests, rather than the interests of the State as a whole, they should not be granted such powers. It can be seen that the grant of such powers would result in an organisation which would effectively operate as a cartel. The operation of Art 81 in relation to State measures is therefore dependent upon the activities of undertakings in the market. The acts of the State will not be challenged unless they come within one of the types of situations mentioned above. There has been academic debate about the conceptual basis of the Court’s jurisprudence in this area,105 but the Court has confirmed its approach in a number of cases.106 Article 82 Article 82 has been applied more frequently in relation to State measures. Its application is usually in conjunction with Art 86(1) of the Treaty which deals with public undertakings107 or undertakings granted special or exclusive rights.108 It is obvious how the granting of special or exclusive rights to an undertaking may bring it within the concept of dominance in Art 82. While it was considered that Art 86(1) and Art 82 did not challenge the grant of such rights,109 it was assumed initially that they were designed to deal with State measures which required
103 Case 311/85 Vereniging van Vlaamse Reisbureaus v Sociale Dienst [1987] ECR 3801; [1989] 4 CMLR 213. 104 Case 267/86 [1988] ECR 4769; [1990] 4 CMLR 330. 105 See Bacon, K, ‘State regulation of the market and EC competition rules’ [1997] 5 ECLR 283. 106 Case C-2/91 Wolf Meng [1993] ECR I-5751; Case C-185/91 Bundessanstalt für den Güterfernverkehr v Gebruder Reiff [1993] ECR I-5801; and Case C-245/91 Ohra Schadeverzekeringen [1993] ECR I-5851; [1995] 5 CMLR 145. The Court’s judgment in Case C-35/99 Criminal Proceedings v Manuele Arduino is eagerly awaited. 107 Undertakings owned or controlled by the State. 108 There is no authoritative definition of special or exclusive rights but in the telecommunications sector the Commission defined them as, ‘the rights granted by a Member State or a public authority to one or more private bodies through any legal, regulatory or administrative instrument reserving them the right to provide a service or undertake an activity’, Art 1, Commission Directive (90/388), OJ L192/10, 1990. 109 Case 155/73 Sacchi [1974] ECR 409.
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undertakings with such rights to act in an abusive manner. This view was challenged in a number of cases in the early 1990s. In Höffner & Elser v Macrotron110 the Court considered the grant of the exclusive rights in the employment procurement market upon a public undertaking, the Federal Employment Office. In reality the Federal Employment Office did not have the resources to satisfy the demand of the German employment market and as a result several ‘head-hunting’ agencies operated alongside the service. One of these unofficial agencies raised an action over a disputed fee and was met with a defence based on the illegality of its operation. The matter was referred to the Court. It decided that the grant of an exclusive right would breach Art 82 and 86(1) of the Treaty if the existence of those rights would inevitably lead to an abuse under Art 82. That would be the case if the agency which was granted special rights could not satisfy demand whilst other competitors were barred from the market. The Court appeared to go further in Porto di Genova111 when it suggested that there would be a breach not only where the undertaking in question cannot avoid abusing its dominant position but also, ‘when such rights are liable to create a situation in which that undertaking is induced to commit such abuses’. But, in Carra and Others112 a case with similar facts to Höffner, the Court set out three cumulative criteria in order to establish a breach: (1) the public placement offices are manifestly unable to satisfy demand on the market for all types of activity; and (2) the actual placement of employees by private companies is rendered impossible by the maintenance in force of statutory provisions; and (3) the placement activities in question could extend to the nationals or to the territory of other Member States. Therefore where there is a necessary link between the grant of the right and the existence of an abuse the grant of the right can be challenged under Art 86(1) and Art 82. A second type of application of Art 86(1) and 82 is evident in relation to the nature of special or exclusive rights granted by the Member State. Again this allows the grant of such a right to be challenged but this time on a somewhat different basis. In RTT v GB-Inno113 the Court considered the Belgian telephone monopoly system. RTT had control over the public telephone network but their exclusive rights also extended over the market for telecommunications equipment. Before telephone equipment could be connected to the Belgian network it had to be approved by RTT. GB-Inno had been importing telephone equipment and RTT asked for an injunction to stop the imports which encouraged the connection of unapproved equipment. The Court held that the extension of the monopoly into the secondary market for the approval of equipment was a breach of Art 86(1). It did so on two grounds, first, the extension would have been an abuse of a dominant position as RTT could use its monopoly power to eliminate competitors from a secondary market. Secondly, Art 86(1) prohibits Member States from putting such undertakings, ‘in a position which the said undertakings could not themselves attain by their own conduct without infringing Art [82]’.
110 Case C-41/90 [1991] ECR I-1979; [1993] 4 CMLR 306. 111 Case C-179/90 Merci Convenzionali Porto di Genova v Siderurgica Gabrielle SpA [1991] ECR I-5889; [1994] 4 CMLR 422. 112 Case C-258/98 Giovanni Carra and Others [2000] ECR I-4217. 113 Case C-18/88 [1991] ECR I-5941. 114 Case C-320/91 [1993] ECR I-2533; [1995] 4 CMLR 621.
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The reasoning in RTT was explained further by the Court in Corbeaul.114 Once more the question concerned the inclusion of ancillary services within a State monopoly, in this case the inclusion of express courier services within the Belgian postal monopoly. The Court interpreted Art 86(1) alongside Art 86(2). This provision gives private undertakings, with exclusive rights, a defence to competition actions in so far as the exclusive rights are necessary to ensure the performance of their particular tasks. When examining the nature of the monopoly in question it was apparent that the reservation of express courier services to the holders of the postal monopoly was not necessary for the maintenance of the more general postal service. In that sense the Court was of the opinion that the reservation of the secondary market was inherently abusive and contrary to Art 86.115 The use of Art 86 to challenge State monopolies is a relatively recent concept and therefore the case law is in a formative stage of development. The doctrines introduced in Höffner and RTT have a potentially wide application to the way in which Member States organise their economies and it will be interesting to see how far they develop in the future.116 Article 86(3) Under Art 86(3) of the Treaty the Commission has the power to ensure the application of Arts 86(1) and 86(2). To that end the Commission can adopt decisions addressed to Member States and also produce directives. The Commission’s ability to issue decisions and directives in this way has been challenged on a number of occasions as it enables the Commission to avoid the parallel and more complex procedure available to it under Art 226 of the Treaty. The Court has consistently held that Art 86(3) empowers the Commission to adopt such measures where appropriate.117
STATE REGULATION AND UNDERTAKINGS Although Art 86 of the Treaty refers to the activities of Member States, it may also have an important impact on private undertakings. As can be seen from the cases that have already been discussed it may well be possible for an undertaking involved in a dispute before a national court to use Arts 81 or 82 alongside Art 86 in order to indirectly challenge a State measure. This ability has been very important for the development of the Court’s jurisprudence. Member States prefer to use informal methods to resolve disputes with the Commission but where private undertakings are involved in disputes before national courts, the issues are more likely to be referred to the Court. Without those references it is unlikely that the law would have developed to the extent it already has.
115 See, also, Case C-260/89 ERT v DEP [1991] ECR I-2925. 116 See Fenger, N and Broberg, MP, ‘National organisation of regulatory powers and Community competition law’ [1995] 6 ECLR 364. 117 See, in particular, Cases 188–90/80 France v Commission [1982] ECR 2545; [1982] 3 CMLR 144; Case 226/87 Commission v Greece [1988] ECR 3611; [1989] 3 CMLR 569; Cases C-48/90 and C-66/90 Netherlands and Others v Commission [1992] ECR I-565; and Case C-163/99 Portugal v Commission, judgment of 29 March 2001.
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Article 86(2) contains provisions that relate directly to undertakings which are, ‘entrusted with the operation of services of general economic interest or having the character of revenue producing monopolies’. The Article states that the competition rules apply to those undertakings but only in so far as, ‘the application of such rules does not obstruct the performance, in law or in fact, of the particular task assigned to them’. There is also the general proviso that trade should not be effected in a manner which is contrary to the interests of the Community. This is effectively a defence against the application of the competition rules in favour of undertakings given special responsibilities by the State. It is thought that there is a correlation between the undertakings granted special or exclusive rights under Art 86(1) and undertakings entrusted with the operation of services of general economic interest under Art 86(2) although this is not explicit from the wording. It is important that the undertaking has been ‘entrusted’ with the operation of the service by a Member State. In Uniform Eurocheques,118 the Commission decided that Art 86(2) did not apply as the founders of the Eurocheque system were private undertakings even though the system had been approved by several Member States. As it is a defence, or derogation, from the competition rules, the Court has construed Art 86(2) very narrowly.119 Before the defence is available the Court requires the anti-competitive behaviour to be necessary for the performance of the tasks assigned, not that it merely facilitates their performance. That question was considered by the Court in Corbeau.120 Corbeau had set up an alternative express postal service in Liège. Under this service mail would be collected and delivered by noon the following day. Mail for outside the local area was placed in the normal postal system. Corbeau was prosecuted under Belgian law for breach of the postal monopoly system and he claimed in defence that Belgian law was contrary to Art 86. The Court considered whether the reservation of the postal services to the national monopoly was necessary for the performance of its tasks. It was recognised that the postal service would need to offset the losses entailed on less profitable services with the revenue from profitable sectors. If private undertakings could offer cheaper services in the profitable areas it would remove this ability to offset losses. However, the Court held that where there are services which could be dissociable from the general service, such as express services or the ability to change the destination in the course of transit, the exclusion of competition is not justified unless the ability to offer such services in a specific area compromised the general service. As this was a preliminary reference the Court left the final decision in this case to the national court. It would appear, however, that the defence will only be available when a service of general economic importance is threatened by competitors who can ‘cherry pick’ the profitable sectors of the business without bearing the costs involved in operating the general service. Competition will be allowed to operate in as many areas as possible until the general service is threatened.121 118 Commission Decision (85/77/EEC), OJ 1985, L35/43. 119 Case 127/73 BRT v SABAM [1974] ECR 313; [1974] 2 CMLR 238. See, also, Case T-128/98 Aéroports de Paris v Commission, judgment of 12 December 2000. 120 Case C-320/91 [1993] ECR I-2533; [1995] 4 CMLR 621. 121 See, also, Case C-340/99 TNT Traco SpA v Poste Italiane SpA, judgment of 17 May 2001. 122 Joined Cases C-147 and 148/97 Deutsche Post AG v Gesellschaft für Zahlungssysteme mbH and Citicorp Kartenservice GmbH [2000] ECR I-825; [2000] 4 CMLR 838.
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Another postal case has been considered by the Court of First Instance in Deutsche Post.122 Deutsche Post were making charges for the practice of ABA nonphysical remailing. Where bulk mail is sent electronically from a sender in country ‘A’ to country ‘B’ for re-mailing back into country ‘A’. This is done to benefit from lower charges in country ‘B’. In order to balance this the destination country applied extra charges to recover costs similar to the normal domestic tariff. The key question for the Court was whether the application of competition law would jeopardise the performance of the postal service which was seen to be in the general economic interest. The Court decided that charges made would be compatible with Art 86 as long as there was no double charging after other compensation from international mail Conventions was taken into account.
FURTHER READING State aid Abbamonte, G, ‘Competitors’ rights to challenge illegally-granted aid and the problem of conflicting decisions in the field of competition’ [1997] 2 ECLR 87 Abbamonte, G, ‘Market economy investor principle: a legal analysis of an economic problem’ [1996] 4 ECLR 258 Bishop, SB, ‘State aids: Europe’s spreading cancer’ [1995] ECLR 331 Evans, A, ‘Law, policy and equality in the European Union: the example of State aid control’ (1998) 23 EL Rev 434 Ross, M, ‘State aids and national courts: definitions and other problems—a case of premature emancipation’ (2000) 37 CML Rev 401 Sinnaeve, A and Slot, PJ, ‘The new Regulation on State aid procedures’ (1999) 36 CML Rev 1153 State regulation Bacon, K, ‘State regulation of the market and EC competition rules: Articles 85 and 86 compared’ [1997] 5 ECLR 283 Ehle, D, ‘State regulation under the US antitrust State action doctrine and under EC competition law: a comparative analysis’ [1998] 6 ECLR 380 Gagliardi, AF, ‘United States and European Union antitrust versus State regulation of the economy: is there a better test?’ (2000) 25 EL Rev 353
DISCUSSION (1) Does Community law intend to set up a level competitive playing field across all Member States? Is a completely level playing field feasible, and desirable? (2) Explain the difference between illegal and incompatible State aid. To what extent can and should enforcement of the State aid rules be decentralised? (3) To what extent does Art 86 alter the way in which Member States can organise their national economies?
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CHAPTER 8
OVERVIEW: POLICY DEVELOPMENTS AND PRACTICAL IMPLICATIONS INTRODUCTION The previous seven chapters have introduced the principal issues which are of interest to competition lawyers. Discussion focused on the substantive rules and enforcement regimes under the main competition laws of both the Community and the UK. This concluding chapter aims to provide a brief overview of certain topical policy issues and practical implications, which are relevant for Community and national competition practitioners, enforcement authorities, academics and industry, of which students of competition law ought to be aware. These include current debates and problems in addition to likely developments in the near future. Students should be conscious that certain issues in both sections may overlap to a degree. At a policy level, the following issues will be at the forefront of debate: (a) the continuing debate concerning the role of intervention by competition authorities as opposed to a laissez-faire approach based upon free markets; (b) certainty and predictability in competition law and the relevance of economics and economic analysis; (c) the increasing trend towards globalisation of markets and international cooperation in competition law enforcement; (d) substantive reform of Community competition law; (e) developments in enforcement of Community competition law; and (f) the operation of the UK Competition Act. At a practical level, for businesses and their legal advisers, there are certain issues which are likely to develop and increase in importance: (a) enhanced awareness of the need for effective compliance programmes; (b) the debate between the pigeon-holing of business activity and market analysis; (c) ‘whistleblowing’—strategies of informing the competition authorities of breaches of competition law; and (d) development of the remedies for competitor complainants.
POLICY LEVEL Laissez-faire competition laws? The debate surrounding the nature and role of competition law and policy, outlined in Chapter 1, has both a national and international perspective. At the national level, there have always been advocates of laissez-faire market economics whose faith in free markets leads to a distrust of regulatory competition authorities. These ideas are based on the concept of economic freedom and the limitation of 271
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Governmental intervention. The implications for competition policy will depend to a great extent on any national system’s historical, political and legal culture and the attitude towards markets and the role of the State.1 Inevitably, therefore, competition law and policy reflects the prevailing political ideology. For instance, particularly in the United States, the debate over the last 40 years between the Chicago and Harvard schools generally mirrors the wider political debate on intervention or freedom of the market, although not all Harvard scholars were particularly interventionist and even most Chicago school proponents have agreed that some form of control over naked horizontal cartels is required. Accordingly, the debate in competition law has tended to concern the degree of intervention which is deemed appropriate. Recent discussion in politics in the UK and US, particularly by Prime Minister Blair, has focused on a ‘third way’ in politics between capitalism/free markets and the State economy. Although this ‘third way’ may in fact be little more than the traditional concept of the mixed economy, it may shed light on recent developments in competition/antitrust economic analysis which have tended to move away from the Chicago/Harvard dichotomy and look for practical economic theories such as those found in industrial economics.2 On an international perspective, it has been noted that whilst commerce is booming internationally the number of systems of national competition law is increasing.3 National competition laws are introduced to reflect domestic realities yet national competition laws can lead to competitive distortions based on national protectionism.4 Accordingly, it has recently been asserted that, instead of creating globalised rules of competition or co-operation in enforcing national competition rules, a new globalised market without competition laws and based on free trade would be preferable.5 Certainty and predictability v economic analysis Although it is suggested below that a practical problem in competition law is the ‘pigeon holing’ of commercial transactions to achieve fixed legal outcomes, many practitioners, reformists and certain academics, particularly in the UK, stress the need for certainty and predictability in competition law. This view informs the systems of competition law enforcement discussed in Chapter 2 and a notable critique of the 1999 White Paper proposals focused on their lack of certainty for industry. The discussion of the substantive issues in Chapters 3–7 demonstrates the continuing debate over certainty and predictability in competition law and policy. We would suggest that achieving certainty and predictability is in the second order of importance and that recent economic analysis suggests that it is unattainable as a primary goal. It is clear that any set of competition laws arise necessarily as a 1 2 3 4 5
See Helm, D, ‘The economic borders of the State’, in The Economic Borders of the State, 1989, New York: OUP, pp 1–45. See, eg, Larner, RJ and Meehan, JW (Jr), ‘The structural school, its critics, and its progeny: an assessment’, in Larner, RJ and Meehan, JW (Jr), Economics and Antitrust Policy, 1989, New York: Quorum, pp 179–209. Baker, DI, ‘US: international co-operation on competition law policy’ (1997) International Business Lawyer, November, pp 473–80. See Nicolaides, P, ‘Competition policy in the process of economic integration, an exploration of the forms and limits of co-operation’ (1997) 21(1) World Competition 117–39. De Leon, I, ‘The dilemma of regulating international competition under the WTO system’ [1997] 3 ECLR 162.
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result of political choice, and the chosen rules will reflect this first order rationale for their existence.6 This ensures, at least to a certain extent, that the relevant rules are not mechanical, but discretionary, and require a degree of political value judgment. In achieving these political aims, certainty and predictability in the application of the chosen rules would be a useful though secondary aim. Another difficulty as regards certainty and predictability in practice is the role of economic theory and analysis. On the one hand, legal rules in competition law tend, with the obvious exception of the public interest test under s 84 of the Fair Trading Act 1973, to rely upon the legalistic concept of identifying a wrong. This does not fit particularly well with economic analysis. However, it has been generally noted that competition rules utilise economic theory, itself based on various unobservable assumptions, which seeks to provide fairly clear cut answers reliant on the abstract notions of perfect competition and monopoly. This forms the basis of the pure competition policy objective at the core of most competition laws. However, the difficulty now being recognised is that, although providing us with the general theory about monopoly, economic analysis should be used to identify particular behaviour which is harmful. Whether this is, for instance, through law and economics or industrial economics, the implication is that individualised, predictive economic analysis of the particular market will be required. The most obvious example is in identifying the predictable effects of a merger. This does not fit easily with providing certainty and predictability in the law.7 A final point to remember is that most forms of economic theory are founded on political ideology, for example, the approach based on law and economics is loosely identified with the Chicago school. Globalisation and international co-operation in competition law enforcement One of the most important trends in recent years has been the globalisation of markets, as discussed in Chapter 2. The international nature of business activity and commerce is indicated by the number of recent competition cases which have involved more than one competition law system. Strangely, it has been observed that although national competition law generally reflects domestic politics and interests, the introduction of nationally based competition laws has occurred during a period of market globalisation.8 This increasing globalisation of markets has inevitably required some form of response from competition authorities facing the international aspects of competition law, such as international cartels, worldscale mergers and abuses of dominance on several markets. A competition authority may lack the appropriate remedies to tackle competition problems arising in its jurisdiction which stem from organisations beyond its territory or there may be the risk of taking action which affects the interests of a third country or is in conflict with measures adopted there. In order to overcome these 6 7
8
See Fiddler, ‘Competition law and international relations’ (1992) 41ICLQ 563. See McNutt, P, ‘Efficiency in competition policy: “expendable” competitors and making defendants “whole”’ (1998) unpublished paper, Strathclyde University Business School, Glasgow, 27 February. See also the DTI proposals for reform of UK merger control in Mergers: The Response to the Consultation on Proposals for Reform, URN 00/805, DTI, 26 October 2000, and the White Paper Enterprise and Productivity: A World Class Competition Regime, Cm 5233, 31 July 2001, discussed in Chapter 6. See op cit, Baker, fn 3.
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difficulties some form of international co-operation appears to be both necessary and desirable. The Organisation for Economic Co-operation and Development (OECD) recognised this in the 1960s and recommended that there should be increased co-operation on anti-competitive practices affecting international trade, a recommendation revised in 1995.9 No formal system was instituted but many bilateral agreements have arisen consequently. Most important here is the agreement between the Community and the United States.10 This provides for notification in a case affecting the other authority’s interests, co-operation and coordination of activities and also contains provisions on the confidentiality of information exchanged. Importantly, it provides for both negative comity, that is, respect for the other party’s enforcement, and also positive comity, whereby either party can request the other to act in a matter which may affect its interests.11 This agreement was resorted to in recent years concerning the activities of Microsoft and it has also been used extensively in merger cases, although the Boeing/ McDonnell Douglas merger revealed the limitations of the co-operation process.12 However, it has subsequently been resorted to, with success, in major mergers including AOL/Time Warner and Exxon/Mobil International co-operation is particularly important in the context of mergers because of the likelihood of multiple authorities considering significant mergers between parties with worldwide trading interests. Such large scale mergers may lead to the requirement of multiple notifications or ‘filings’ with various competition authorities, and this may in turn result in international disagreements and uncertainty, as in Boeing/ McDonnell Douglas and GE/Honeywell, where the Commission prohibited a merger permitted by the US authorities. A proposed merger between major worldwide accountancy firms KPMG and Ernst & Young was abandoned in February 1998 apparently due to the concerns of various competition authorities. The importance of international co-operation has been highlighted by the recently agreed AOL/ Time Warner merger, considered to be the world’s biggest merger to date. It is also in the interests of the private sector to promote co-operation between enforcement agencies in order to reduce uncertainty and delays in their international business transactions. A lingering doubt remains as to the range of co-operation which is possible. Beyond the confines of economic trading blocs, limited cooperation along the lines of the US/EC agreement is all that seems possible, although perhaps the timescales for decisions and forms of notification could also be standardised. It has been suggested that deeper co-operation, reliant on the adoption of similar substantive rules, is unlikely except within regional blocs which have a degree of economic integration. 13 Indeed, we are currently witnessing the harmonisation of substantive national laws in the Member States of the Community. Perhaps this will lead to greater co-operation in the enforcement of national competition laws within the Community. At present, there are limited informal co9 10
11 12 13
Revised Recommendation of the Council Concerning Co-operation Between Member Countries on Anti-Competitive Practices Affecting International Trade, 27 and 28 July 1995, C(95)130/final. Agreement between the Government of the United States of America and the European Communities Regarding the Application of their Competition Laws, OJ L95/47, 1995 as corrected by OJ L131/38, 1995 and amended by OJ L173/28, 1998. For a fuller discussion see, Cocuzza, C and Montini, M, ‘International antitrust co-operation in a global economy’ [1998] 3 ECLR 156. Ibid, Art V. Commission Decision (1997/816/EC), OJ L336/16, 1997. See op cit, Nicolaides, fn 4.
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operation schemes between national authorities, in particular between the Office of Fair Trading and the Bundeskartellamt in Germany. In addition, Pt II of the Competition Act 1998 provides additional powers for the Director General of Fair Trading in order to assist Commission officials in carrying out Community competition law investigations. The Commission approach, set out in the 1999 White Paper is to have a co-ordinated network of NCA’s applying Community law. On a wider note, co-operation at a world level is unlikely to proceed beyond basic cooperation in the absence of the convergence of competition laws. In particular, a world competition authority is unlikely to arise in the near or distant future although the European Commission is seeking to develop matters on a multilateral level through the World Trade Organisation (WTO) and by expanding the scope of existing bilateral agreements.14 Discussion in the near future is likely to focus on the proposed Global Competition Initiative by the International Co-Operation Policy Action Committee of the US Antitrust Division.15 Changes in substantive Community competition law This section shall briefly review the key developments in relation to the principal Community competition law rules. Article 82 has been revitalised by reducing its focus on exploitative abuses such as charging excessive, monopolistic prices. Instead, the Commission has been concentrating on exclusionary or anticompetitive types of abuse which are more likely to damage the longer term competitive structure of the market. Article 82 has been extended to deal with novel situations involving refusal to supply actual or potential competitors, particularly in relation to essential facilities which are necessary for a potential competitor to enter the market.16 The prohibition on predatory pricing has also been extended. The Community authorities have been criticised for developments under Art 82 which allegedly constitute unnecessary intrusions into lawful and legitimate competitive activity and it has been argued that they still need to develop a clearer distinction between unlawful abuse and legitimate competition on the merits.17 The Court, in Irish Sugar, emphasised that super-dominant undertakings have to be particularly cautious about their competitive behaviour, and the Court also sought to provide a simpler method of demonstrating predatory pricing based on the concept of selectivity. In relation to the essential facilities doctrine, the judgment in Oscar Bronner certainly indicates the Court’s caution regarding its application. 18 It will be interesting to note how the Commission takes on board these developments regarding super-dominance, selectivity in pricing and the essential facilities doctrine. 14
15 16 17 18
Schaub, A, (Director General for Competition), ‘International co-operation in antitrust matters: making the point in the wake of the Boeing/MDD proceedings’ (1998) EC Competition Policy Newsletter, Spring, p 3. See, also, Koczavowska, A, ‘International competition law in the context of global capitalism’ [2000] 2 ECLR 117; and Rodger, BJ, ‘Competition policy, liberalism and globalism: a European perspective’ (2000) 6 CJEL 289. See the Antitrust Division website: www.usdoj.gov. See Ridyard, D, ‘Essential facilities and the obligation to supply competitors under UK and EC competition law’ [1996] 8 ECLR 438. See Andrews, P, ‘Is meeting competition a defence to predatory pricing?—the Irish Sugar decision suggests a new approach’ [1998] 1 ECLR 49. See Bergman, M, ‘The Bronner case—a turning point for the essential facilities doctrine’ [2000] 1 ECLR 59.
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In relation to Art 81, the most important substantive development in recent years has been the introduction of the Vertical Agreements Regulation, discussed in detail in Chapter 5. Following the Green Paper on vertical restraints, the Regulation and ancillary Guidelines make clear that the Commission will focus on interbrand competition and vertical restraints where market power exists.19 Community policy will still not reflect Bork’s view that all vertical restraints should be lawful. The dilemma for Community competition law posed by territorial restrictions refuses to go away, and restrictions on passive sales into exclusive territories are excluded from the Regulation and prohibited. Given the Commission’s wide interpretation of what constitutes a passive sale in the context of e-commerce, this issue is likely to be particularly problematic. Merger Reg 4064/89 was revised in 1997 with one amendment introducing additional Community dimension threshold criteria with a view to ensuring some joint ventures and strategic alliances would be dealt with under Community law as opposed to a variety of national merger controls. The Commission, in 2000, had undertaken to review the Merger Regulation again as it appeared that the Commission considered the thresholds should be further reduced. The final report is awaited with interest as it will have important implications for merger and acquisitions practice. More recently, the Commission has introduced simplified procedures for unproblematic mergers and this should allow the Commission to concentrate on more important cases. The role for Community industrial policy and the promotion of European ‘champions’ in the context of the global economy,20 and more particularly the scope for the application of a variety of objectives, including efficiency, and non-competition policy objectives such as environmental and regional policy, will remain of interest in the Community merger appraisal process.21 Most attention in recent years, as noted in detail in Chapter 6, has focused on the Commission attempts to develop the concept of collective dominance under the Merger Regulation. The Gencor judgment was particularly important in confirming the application of the doctrine and limiting the purported requirement for economic links.22 The outcome of the Airtours23 case will also be significant in further clarifying the scope of the doctrine. The State aid rules, outlined in Chapter 7, are potentially the most contentious aspect of Community competition law. For this reason, the developments in transparency, through the introduction of a Regulation codifying procedural aspects of State aid control, albeit limited, is to be welcomed. However, these are unlikely to deflect the inherent conflicts between Community Member States over the grant of State aid. The Commission’s task is likely to increase with the expansion of the Community, yet this is an area in which decentralised
19 20 21 22 23
See Whish, R, ‘Regulation 2790/99: the Commission’s “new style” block exemption for vertical agreements’ (2000) 37 CML Rev 887. See, eg, Commission Decision (1991/619/EEC) Aerospatiale/Alenia/de Havilland, OJ L334/42, 1991, [1992] 4 CMLR M2. See, also, the difficulties surrounding the Boeing/McDonnel Douglas merger. See Banks, D, ‘Non-competition factors and their future relevance under European merger law’ [1997] 3 ECLR 182. See, also, Camesasca, PD, ‘The explicit efficiency defence in merger control: does it make the difference’ [1999] 1 ECLR 14. Korah, V, ‘Gencor v Commission: collective dominance’ [1999] 6 ECLR 337, and Bavasso, AF, ‘Gencor: a judicial review of the Commission’s policy and practice, many lights and some shadows’ (1999) 22 World Competition 45. Case T-342/99, pending.
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enforcement of the substantive rules can only play a limited role. Nonetheless, the Court has indicated a tightening of the availability of the State aid. In the next few years, we should witness further developments as part of the Commission’s policy of supporting aid to tackle Community horizontal objections, such as environmental policy, as opposed to sectoral or restructuring aid. There are a range of issues at the interface between the development of the ‘new economy’ and competition law which are too detailed for this book to address, but which the Commission and Community law in particular are already starting to tackle. The specific issue of what constitutes active sales into exclusive territories, which may be prohibited by agreement, in the context of internet advertising and sales has already been addressed in Chapter 5. More general problems concern regulation of the B2B market and the wider thrust of competition law to new economy issues, particularly involving mergers, such as network effects.24 Developments in the enforcement of Community competition law At present, the Community is at a cross-roads in relation to its enforcement of Community competition law. The basic problem is the lack of resources available to the Commission, through the DG for Competition, to deal with the constantly increasing demands of competition law enforcement. The trend towards increased recognition of the rights of the defence during the Commission investigative and decision-making processes has been made in order to allay concerns that the process is unfair for undertakings under investigation.25 In addition, the proposed enlargement of the European Union to accommodate new Member States is significant. This is likely to have a dramatic effect on Commission workload even though the Commission has required acceding countries to adopt competition laws modelled on the Community system. In this context of further enlargement of the European Union, the proposals set out in the White Paper of 1999, and further detailed in the Draft Regulation, both discussed in detail in Chapter 2, are understandable. The aim is to enhance the existing policy of decentralisation with greater involvement by the national courts and NCAs through the removal of the Commission’s monopoly to grant exemptions under Art 81(3). It is almost certain that a finalised Regulation will come into force in the near future, probably by 2003, and this will introduce a radical change in Community competition law enforcement. It will take a number of years for the effectiveness of the new system to be assessed, but revised Notices on Co-operation between the Commission, the national courts and NCAs, which the Commission is still to produce, will be vital to the operation of the new system.
24
25
See, eg, Lancefield, D, ‘The regulatory hurdles ahead in B2B’ [2001] 1 ECLR 9; Bishop, B and Caffarra, C, ‘Merger control in “new markets”’ [2001] 1 ECLR 31; Veljanovski, C, ‘EC antitrust in the new economy: is the European Commission’s view of the network economy right?’ [2001] 4 ECLR 115; and Ahlborn, C, Evans, DS and Padilla, AJ, ‘Competition policy in the new economy: is European competition law up to the challenge?’ [2001] 5 ECLR 156. See Montag, F, ‘The case for a radical reform of the infringement procedure under Regulation 17’ [1996] 8 ECLR 428; and House of Lords Select Committee on the European Union, Session 1999– 2000, 19th Report, Strengthening the Role of the Hearing Officer in EC Competition Cases, HL Paper 125, HMSO, 21 November 2000.
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The UK Competition Act If the decentralisation of Community competition law enforcement does not operate effectively, an alternative option available to reduce Commission workload is for the Community to implement the subsidiarity model in the context of competition law.26 This would reduce the number of cases to be examined by Community law, and hence the workload of the DG for Competition, the remaining situations being dealt with by national competition laws. This is an increasingly unlikely option, although most Member States’ national competition laws are based on Arts 81 and 82. This process of soft harmonisation has occurred without any direct pressure from the Community authorities except in relation to those countries now wishing to join the Community.27 In the Europe Agreements with the Visegrad countries: Poland; Hungary; the Czech and Slovak republics, those countries were required to introduce market competition rules based on Arts 81 and 82.28 UK competition law has undergone major reform to introduce provisions based on Arts 81 and 82 under the Competition Act 1998. The Act was given Royal Assent in November 1998; the major provisions came into force on 1 March 2000. The Act was introduced in Chapters 1 and 2 and the Chapter I and II prohibitions were discussed in Chapters 3–5. There are a number of interesting issues raised by the Act which merit discussion. There has already been considerable practice under the Act in a relatively short period of time, although some issues remain unresolved.29 There have been further proposals to modify the UK competition legislation notably to introduce criminal sanctions for involvement in cartels. One other proposal by the OFT is to ensure that the liberal professions are in future subject to the full scrutiny of competition law.30
PRACTICAL IMPLICATIONS Instituting an effective compliance programme The practical importance of ensuring that competition laws are complied with cannot be underestimated.31 Any undertaking must be aware of the potential impact of both national and Community competition rules. The laws of, for instance, other Member States or the USA may be applicable to the activities of UK based companies. This can affect an organisation in all aspects of its activities, such as its form of contracting for distribution and purchasing, any pricing policies adopted, its responses to competition in the market, any governmental funding acquired and also the purchase of assets or shares of another organisation. The 26 27 28 29 30 31
See Wesseling, R, ‘The Commission Notices on decentralisation of EC antitrust law: in for a penny not for a pound [1997] 2 ECLR 94; Rodger, BJ and Wylie, SR, ‘Taking the Community interest line: decentralisation and subsidiarity in competition law enforcement’ [1997] 8 ECLR 345. See Ullrich, H, ‘Harmonisation within the European Union’ [1996] 3 ECLR 178. See Fingleton, J, Fox, E, Neven, D and Seabrieht, P, Competition Policy and the Transformation of Central Europe, 1996, London: Centre for Economic Policy Research. See Rodger, BJ and MacCulloch, A (eds), The UK Competition Act: A New Era for UK Competition Law, 2000, Oxford: Hart. White Paper, Enterprise and Productivity: A World Class Competition Regime, Cm 5233, 31 July 2001. See Armstrong, J, ‘Compliance programmes’ [1995] 3 ECLR 147, and Rodger, BJ, ‘Compliance with competition law: a view from industry’ [2000] CLLR 249.
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implications of a lack of awareness or the inability to deal with the effect of competition law are significant. A restriction in an agreement for the distribution of products may be null and void. Governmental aid may need to be refunded with interest. A past take-over may be unravelled and fines may be imposed. A planned take-over may be prevented by the authorities. Parties may be required to divest certain assets for a merger to proceed or to give commitments as to future pricing and market behaviour. An undertaking may be ordered to resume supplies to a competitor, either by a court or a competition authority. The European Commission can impose fines of up to 10% of an undertaking’s world wide turnover, a very significant and practical threat, in addition to imposing daily penalties for non-compliance with Arts 81 and 82. Damages, and interim remedies, can be sought in the national courts in respect of breaches of Arts 81 and 82 and illegally provided State aid. The position is similar under the Competition Act 1998. For all of these reasons, it is necessary for a company to establish an effective compliance programme and ensure that its directors and employees are both aware of competition law’s existence and adequately prepared to follow it. An effective compliance programme would include at least the following features: (a) effective communication to all staff through a policy statement that compliance with competition law is a core value of the organisation; (b) senior management should be knowledgeable about, and keen to conform to, competition rules and discipline any breaches; (c) an established education programme to update management on current competition law developments; (d) a system of reporting on compliance with competition law; (e) a satisfactory policy on record-keeping to ensure the retention of relevant documentation. It is obvious that companies are becoming increasingly aware of the need for effective in-house compliance programmes, and many conferences now provide advice on the effective implementation of such a policy. Effective compliance can be both costly and time consuming, for employees and particularly directors. However, it is clear that the benefits of an effective programme may be significant in helping to avoid potentially illegal activity with all its associated uncertainty, costs and the resources wasted during a competition investigation. This is probably even more important in the UK following the introduction of the Competition Act 1998 with its increased fining and investigative powers. Indeed, it is clear that business practice in the UK is not nearly as well evolved as in the United States where antitrust compliance is taken very seriously.32 This may be accounted for by the litigious nature of US antitrust lawyers, the longer history of antitrust enforcement and also the consideration given by enforcement authorities to the existence of an antitrust compliance programme. Nonetheless, it is clear that a compliance has markedly developed in relation to both Community and UK law in recent years.33 A final form of compliance education requires awareness of the 32 33
O’Meara, B, ‘Corporate antitrust compliance programmes’ [1998] 2 ECLR 59. See op cit, Rodger, fn 31.
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effect of other competition law regimes. This is partly due to the increasing globalisation of markets and also necessary as a result of the extraterritorial enforcement of certain competition laws.34 In particular with mergers there has to be practical awareness of the different filing requirements in each potentially applicable competition law system.35 Pigeon-holing in market analysis Pigeon-holing is a common problem recognised by economists and practitioners in the field. Effectively, this can refer to two related issues. The first is that competition laws tend to be fairly formalistic, the public interest test under the 1973 Fair Trading Act being a notable exception. Although competition laws tend to be based, at least loosely, on economics, competition law has struggled to accurately translate the economic concern into the form of a legal wrong with which it can deal. A classic example of this is the way competition laws generally struggle to deal effectively with oligopolies. These issues are pigeon holed into legal terminology such as anticompetitive agreement and collective dominance. It is apparently crucial in determining the existence of a dominant position to assess the market and market share of an undertaking, even though many economists would clearly argue that this is formalistic and unnecessary in assessing market power. More important is the pigeon-holing of types of conduct into legal forms exemplified in relation to vertical restraints and merger control in Chapters 5 and 6. All competition practitioners should be aware of this practice. For instance, until the recent amendment of the Merger Regulation in 1997, the distinction between co-operative and concentrative joint ventures was in reality a matter of degree. However, in legal practice the distinction was crucial as it resulted in two disparate procedures and forms of assessment.36 The phenomenon is also important in relation to vertical restraints, the Commission’s approach prior to the introduction of the Vertical Agreements Reg 2790/99 was criticised as formalistically pigeon-holing types of restriction and agreement for reasons of convenience without valid competition reasons.37 The classic examples were the Block Exemptions, for example, in relation to exclusive distribution. These set out the parameters for the exemption of a type of agreement into which parties may want to enter. If parties were interested in a specific form of distribution agreement as being most suited to their economic, distribution and other needs, their legal advisers would advise them that it would be preferable to adapt the agreement to the approved legal form. Otherwise, they would have to proceed according to the vagaries, uncertainty and delay of the individual exemption process. However, the recent sea change in vertical restraints policy through the Vertical Agreements Regulation and Guidelines38 demonstrates the new emphasis on an economics based approach focusing on market power and interbrand competition. The new position in less formalistic and will not result in the same degree of pigeon-holing of commercial activities. 34 35 36 37 38
See Griffin, JP, ‘Antitrust aspects of cross-border mergers and acquisitions’ [1998] 1 ECLR12. Ibid. See, eg, Brown, A, ‘Distinguishing between concentrative and co-operative joint ventures: is it getting any easier?’ [1996] 4 ECLR 240. See Hawk,B, ‘System failure: vertical restraints and EC competition law’ [1995] 32 CMLR 973. Commission Reg (2790/1999/EC), OJ L336/21, 1999 and Guidelines on Vertical Restraints, OJ C291/1, 2000.
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Whistleblowing It is commonly accepted that the most pernicious type of competitive activity is the formation of a horizontal cartel, such as was uncovered by the Commission in Polypropylene.39 It is evident that new cartels are regularly being uncovered by domestic competition authorities and the Commission. Accordingly, there have been efforts to enhance attempts to tackle cartels. In the UK, a Cartels Task Force was created in 1994 in order to increase general awareness of the problem and to encourage people to inform the OFT about any secret agreements or cartels they believe to be in operation.40 The concern with detecting and deterring secret cartels is also a primary reason for the introduction of the new Chapter I prohibition under the Competition Act 1998.41 This has been taken further in the Community by the Commission in its Notice on the Reduction of Fines in Cartel Cases.42 Under the Notice, the Commission has indicated that parties to a cartel in breach of Art 81(1) may have their fines reduced by the Commission, at its discretion, on the basis of criteria set out in the Notice. For instance, parties may be entitled to a waiver of between 50–100% of the fine likely to be imposed if they satisfy the following requirements: that they inform the Commission of the secret cartel before the Commission has sufficient information to establish the existence of an alleged cartel; they must be the first to adduce evidence of the cartel; the illegal activity must have ended no later than at the time of disclosure; they must provide evidence, fully cooperate with the Commission and not have compelled another undertaking to participate in the cartel or have played a determining role in it. The Commission Notice provides a sliding scale of possible reductions in fine according to which of the various requirements in the Notice are complied with. The Commission’s motive behind the Notice is to increase the likelihood that parties will provide information on secret cartels to which they have been party. However, the likelihood of a company acting under the Notice and blowing the whistle on fellow conspirators will depend on a number of factors. In any one case, the company’s decision-makers will have to consider the likely level of fines, the seriousness of the cartel and the importance of its role within the cartel, the likelihood of detection including the uncertain state of knowledge of the Commission, any continuing business relationships it may have with the other companies involved, any effects on its reputation and the possibility that damages actions may subsequently be raised against it by parties allegedly suffering damages as a result of the operation of the cartel. In each case, the company will have to undertake a cost/benefit analysis of these factors. The inherent uncertainties of such a process will make any decision difficult to predict.43 Nevertheless, the OFT, as part of its education programme, has introduced a similar leniency programme for whistleblowers in relation to the Competition Act 1998.44 39 40 41 42 43 44
Commission Decision (86/398/EEC), OJ L230/1, 1986. Upheld, on appeal, in Case T-7/89 Hercules NV v Commission [1991] ECR II-1711; [1992] 4 CMLR 84. See Annual Report of the Director General of Fair Trading, 1994, London: OFT, p 48. See Peretz, G, ‘Detection and deterrence of secret cartels under the UK Competition Bill’ [1998] 3 ECLR 145. Notice on the Non-imposition or Reduction of Fines in Cartel Cases, OJ C207/4, 1996. Note that the Commission is consulting on a draft Notice to replace the 1996 version, 2001 OJ C205/18. See Hornsby, S and Hunter, J, ‘New incentives for “whistle blowing”: will the EC Commission’s Notice bear fruit?’ [1997] 1 ECLR 38. See, Leniency in Cartel Cases, OFT 436.
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The position of competitor complainants Complainants generally have two options as to how to proceed. The first is to complain to the relevant National Competition Authorities and/or the Commission in respect of alleged anti-competitive behaviour, and the second is to seek a remedy through the appropriate national court. Under Community law, the Commission receives a number of complaints regarding infringement of the Community rules. It should be noted that the Community rules on State aid and mergers are specialised regarding the rights of complainants and the available remedies.45 Generally, the complainant can pursue both options. The Commission may, for instance, take action in respect of a complaint alleging a breach of Art 82. At the same time, the complainant may seek either interim remedies or damages in court. If the court deals with the issue after a Commission decision has been made, then that decision is binding on the court.46 Otherwise, the court has to be wary of taking a decision which may conflict with that of the Commission. This is more difficult under Art 81 where the agreement may have been notified to the Commission for exemption using its exclusive powers. However, the options may be more limited for the complainant if the Commission decides not to pursue the complaint. The rights of the complainant in this regard, under Arts 230 and 232, have been the subject of intense scrutiny in recent years. In Automec (No 2),47 the Court confirmed that the Commission has different priorities in dealing with complaints and may refuse to deal with cases which do not have sufficient Community interest. This would be the case where a plaintiff could secure adequate protection before their national courts. Although the specific decision not to proceed with a complaint requires justification by the Commission and could be the subject of review by the Court, this development nonetheless restricted the rights of complainants. However, they were given a boost in a related aspect by the judgment in Guerin,48 which extended the Commission’s obligations in respect of its treatment of complaints and ensures that complainants can seek review of any decision not to proceed with a complaint.49 Nevertheless, following Automec (No 2), complainants may only have the option of seeking remedies in the appropriate national court. The Notice on Co-operation between the Commission and National Courts50 sought to enhance awareness of this option. Community jurisprudence has sought to ensure that adequate and effective remedies are available in the national courts,51 but uncertainties still exist in the UK courts. It has been difficult to obtain interim remedies,52 although these
45 46 47 48 49 50 51 52
See Nordberg, C, ‘Judicial remedies for private parties under the State aid procedure’ (1997) 24(1) LIEI 35; and Winter, JA, ‘The rights of complainants in State aid cases: judicial review of Commission Decisions adopted under Article 88 (ex 93) EC’ (1999) 36 CML Rev 521. See Cumming, G, ‘Iberian UK Limited v BPB Industries plc’ [1997] 8 ECLR 534, regarding Iberian UK Limited v BPB Industries plc’ [1996] 2 CMLR 601 and Case C-344/98 Masterfoods v HB Ice Cream [2001] 4 CMLR 14. [1992] 5 CMLR 431. Case C-282/95P Guerin v Commission [1997] ECR I–1503; [1997] 5 CMLR 447. See Cumming, G, ‘Guerin v Commission’ [1998] 1 ECLR 46. OJ C39/6, 1993. See, eg, Case 48/93 Factortame v United Kingdom [1996] 2 WLR 506. Argyll v Distillers 1987 SLT 514; [1986] 1 CMLR 764. See MacCulloch, AD and Rodger, BJ, ‘Wielding the blunt sword: interim relief for breaches of EC competition law before the UK courts’ [1996] 7 ECLR 393.
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are more readily available in refusal to supply cases, under Art 82.53 Otherwise, there have been difficulties in granting appropriate remedies in contractual disputes involving Art 81 and, as yet, there have been no reported cases awarding damages on the basis of Art 82. Although more actions are being raised and settled, a number of outstanding issues require to be resolved, such as what types of remedy are available which third parties may sue for damages and the appropriate basis for quantification of damages. The Court’s ruling in the Crehan reference,54 discussed in Chapter 2, will further clarify the requirement for national legal systems to make available appropriate legal redress in respect of breach of Community competition law. In the UK, prior to the Competition Act 1998, a complainant enjoyed virtually no means of redress. For instance, under the Fair Trading Act, a complaint may be made about some form of monopoly behaviour or merger. However, thereafter there is little possibility of action. At all stages, the exercise of discretion is involved in determining whether to refer an issue to the Competition Commission, whether behaviour is against the public interest and ultimately as to whether enforcement action is taken. The only possibility open to a complainant, or indeed to a party subject to investigation, is to seek judicial review, but the courts have been very unwilling to interfere in the exercise of discretion under the public interest based legislation.55 In addition, there are no express rights of redress under the Fair Trading Act 1973 and it has been held in relation to the only real form of breach under the Act, breach of an undertaking or Order, that the power to seek enforcement is severely circumscribed.56 Under the Competition Act 1998, the position may improve for complainants. If they can satisfy the criteria of being interested third parties,57 they will be able to seek review of the Director General’s decisions in relation to the prohibitions. More importantly, the Act is intended, according to official pronouncements, to provide for effective enforcement by allowing third parties to sue. There is no express reference in the Act to the creation of third party remedies which effectively means that the right to seek a remedy, including damages, will be based on normal methods of interpretation for the creation of statutory liability. However, in the only judgment under either prohibition to date, in Claritas,58 a private right of action was not disputed. If remedies are granted, the same difficult issues as exist under Community law, such as the range of parties able to recover damages, will need to be resolved. The Government has recently stated its intention to improve the position of complainants seeking redress by considering, for instance, the institution of a specialist competition court or tribunal.59
53 54 55 56 57 58 59
Eg, in Millar and Bryce Ltd v Keeper of the Registers of Scotland 1997 SLT 1000. Case C-453/99 Courage v Crehan, pending. Eg, see R v Secretary of State for Trade ex p Anderson Strathclyde plc [1983] 2 All ER 233. Mid Kent Holdings plc v General Utilities plc [1996] 3 All ER 132. See Rodger, BJ, ‘Mid Kent Holdings plc v General Utilities plc: remedies under the Fair Trading Act 1973’ [1997] 4 ECLR 273. Section 47 provides that third parties with a sufficient interest, and bodies representing such persons, may apply to the Director General to vary or withdraw certain decisions and appeal lies to the Competition Commission. Claritas (UK) Ltd v The Post Office Postal Preference Service Ltd [2001] UKCLR 2. Enterprise and Productivity: A World Class Competition Regime, Cm 5233, 31 July 2001, paras 8.6–8.11.
283
Competition Law and Policy in the EC and UK
DISCUSSION (1) Should competition law provide settled rules or does it need to constantly adapt and reinvent itself? (2) Consider what issues are relevant for an effective competition law compliance programme and devise the format of such a programme.
284
GLOSSARY OF KEY COMPETITION RELATED TERMS
allocative efficiency: a distribution of resources whereby the resources are put into the production of goods that customers want most, in the quantities they require. Through the most efficient allocation of resources, goods will be produced to meet demand at the lowest possible price. anti-competitive: behaviour which is considered to be contrary to the prevailing competition rules. For instance, under Community law, note the possibility of anti-competitive agreements or anti-competitive abusive conduct. The term anti-competitive has no fixed meaning and depends largely on the rules of the relevant legal system. antitrust: USA competition law is usually known as antitrust law. The name is taken from the trust companies which were prevalent at the time of the adoption of the Sherman Act in 1890. Trust companies formalised large cartels which antitrust law was designed to prevent. barrier to entry: a cost or obstacle which falls upon entrants to a market but which does not fall on existing market operators. There is a debate whether a barrier to entry is restricted to a cost which was not borne by existing operators when they entered the market, or is simply a cost which must be borne by new entrants before they can enter a market. cartel: a group of undertakings which, usually through agreement or understanding, act together in a market. By acting together, they can effectively act as a monopoly and fix prices or allocate markets. Chicago school: a school of antitrust economics which developed at the University of Chicago and came to prominence in the 1960s. Its proponents believe that free markets are the best way to decide upon the allocation of resources. They also take a non-interventionist stance over the regulation of ‘free’ markets through law. collective dominance: an alternative term to denote the collective power of oligopolists adopted under Community competition law. Collective dominance, by a group of undertakings, may, where there is abusive conduct, be dealt with under Art 82. collusion: a generic term for any form of agreement or understanding reached between competitors. compartmentalisation of markets: related to the primary goal under Community competition law of market integration. The concern is that certain types of agreement, for example, networks of distribution agreements, will be organised along national boundaries, in effect separating national markets from each other, thereby defeating the aim of a single Community market. complex monopoly: term used under UK legislation, the Fair Trading Act 1973, for a type of market structure under which a number of firms collectively satisfy the 25% market share threshold for investigation. Otherwise known as a behavioural monopoly, it allows for the investigation of oligopolistic markets, operating in a similar way to the concept of collective dominance in Community law. concentration: the generic term adopted under Community law to cover mergers, take-overs and joint ventures. What constitutes a concentration is determined under the Merger Regulation.
285
Glossary
cross-elasticity of demand: the degree of influence the price of one good has on the demand for another. If cross-elasticity between goods is high, the reduction in price of good X will cause a drop in demand for good Y. The fall in price of good X encourages customers to use it at the expense of good Y. A high cross-elasticity of demand indicates that goods are substitutable. demand-side substitutability: the extent to which the consumer will regard different products as substitutes for each other. The legal test adopted is referred to as interchangeability. direct effect: this doctrine means that certain Community law provisions give rise to rights and obligations which may be enforced by individuals before their national courts. dominant position: the classic definition is that it is a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave, to an appreciable extent, independently of its competitors, customers and ultimately of its consumers. economic entity doctrine: this may require legally distinct companies to be considered as one undertaking, for the purposes of Community law, where they are not independent from each other, for example, in a parent/subsidiary situation. The doctrine requires an examination of the managerial and economic independence of the undertakings in question. effects doctrine: this doctrine provides that a legal system’s competition laws are applicable where the action/behaviour takes place outside the jurisdiction but produces economic effects on its market. It is unclear whether or not the doctrine applies under Community competition law. It is inapplicable under UK competition law. essential facility: this concept is relevant under Community competition law in the context of refusals to supply which may be deemed abusive under Art 82. Certain types of infrastructure, such as a national electricity grid or computer reservation systems, may be considered to constitute an essential facility, such that access is essential for competition to develop, and the refusal to allow access to the facility may amount to abusive behaviour. exclusive distribution: this is a form of distribution whereby a producer agrees with a distributor to supply only to that distributor within a particular territory. This is a type of agreement involving vertical restraints. exclusive purchasing: this is a type of agreement requiring an exclusive commitment by the purchaser to purchase goods of that type only from the vendor. Such commitments are frequently associated with exclusive distribution agreements. free-rider: the free-rider rationale is associated with the debate on the merits of vertical restraints and it suggests that some form of intrabrand protection is necessary to allow a distributor to promote a brand effectively and thereby enhance interbrand competition. The basic idea is that, without a degree of exclusivity, competitors of the distributor would take a free-ride on its advertising and promotional outlays and be able to sell the product at a cheaper price. game theory: a mathematical/economic analysis of decision making which attempts to predict the results of a situation as if it were a game of strategy. 286
Glossary
For each event, a prediction can be made based on the state of knowledge of the players at the time of the decision and their knowledge of earlier events. Harvard school: this school of antitrust analysis had its origins in the 1930s and it placed emphasis on market structure as the root of market failure by exploring the link between market structure, conduct and performance, stressing that excessive concentration of market power resulted in undeservedly high profits. intellectual property rights: these are types of property rights, normally granted by national legal systems, which give the holder or owner the exclusive power to exploit the property. Examples are patents, trade marks and copyright. These exclusive property rights may come into conflict with the application of competition law. interbrand competition: the competition between different brands of competing goods. intrabrand competition: competition, normally between market operators at the same level of the market, for example, between two distributors, in relation to one brand of product. joint ventures (concentrative and co-operative): these involve the setting up of a company by two or more separate parent companies. The formation of the joint venture and the roles undertaken by the various parties can vary to a great extent. The distinction between concentrative and co-operative joint ventures, made by the Commission under the Merger Regulation, is now less significant. A concentrative joint venture is a full function joint venture performing on a lasting basis all the functions of an autonomous economic entity, and is considered under the Merger Regulation. All other joint ventures are co-operative as they give rise to the threat of the co-ordination of competitive behaviour between the parent companies or between them and the joint venture and are considered under Art 81. market integration: one of the key goals of Community competition policy to create an integrated Single Market across all the Member States. The desire to create such a market shapes the Community’s definition of, and response to, anti-competitive conduct. merger (horizontal, vertical, conglomerate): the term connotes both a welcome uncontested union between two or more parties and, equally, a hostile takeover. In addition, merger control will normally also cover differing degrees and forms of transfer of control of an undertaking, normally via the transfer of shares or assets. A horizontal merger involves parties at the same level of the market, such as two producers. Vertical mergers involve parties at different levels of the market, such as a producer and a distributor. Conglomerate mergers bring together unassociated types of business, often in a portfolio of company purchases by a holding company. monopoly: a market structure where, in theoretical terms, one producer controls 100% of production or the supply of services (monopsony exists where one purchaser takes 100% of the goods produced or services supplied). Such a level of control is unlikely to exist in practice without governmental involvement, and the term is more generally used to refer to producers or service providers who have achieved a high level of control of a market.
287
Glossary
multiple filing: a situation in which a business is forced to go through a number of similar administrative procedures for a single transaction in more than one national or supra-national jurisdiction, for instance, in several Member States regarding the same merger. The requirement to file similar notifications in more than one jurisdiction is seen as wasteful and likely to encourage divergent results. Its avoidance is one of the benefits of the ‘one stop shop’. oligopolistic interdependence: the theory of oligopolistic interdependence asserts that, due to the limited number of parties involved in an oligopolistic market, they will each be able to derive a monopolist’s excess profit without having to conspire together or form a prohibited cartel, as a result of the combination of the profit maximising motive and their mutual self-awareness on the market. oligopoly: a type of market where the majority of production comes from a group of few suppliers, none of which are dominant, but all of which are relatively large (oligopsony involves a limited number of purchasers and duopoly exists where there are only two producers). A market which is characterised by the existence of an oligopoly is known as an oligopolistic market. Although oligopolistic markets will be different, they will tend to have similar features. There will usually be a small number of sizeable undertakings operating in a market with homogenous products. The market may also be characterised by limited price competition and parallel behaviour. one stop shop: a single agency which deals with all the regulatory matters in an area. The term is usually connected with Community merger control, where the Commission took over responsibility for Community scale mergers from the Member States’ national authorities, creating a single regulatory system. passing off: a common law action in the UK allowing an action to be raised if the public are confused into thinking that the goods marketed are, in fact, someone else’s, thereby unfairly benefiting from the latter’s goodwill. per se: Latin phrase meaning ‘in itself’. In a competition law context, this normally suggests that a particular type of market activity or agreement will be illegal without any further requirement to investigate and assess its economic impact. perfect competition: the theoretical neo-classical model of competition which results in optimum allocative and productive efficiency. The model has certain prerequisites. It must be in relation to a homogenous product, there must exist an infinite number of buyers and sellers, there must be free entry to and free exit from the market, and there must be full information available to consumers, allowing them to make rational decisions. Because real markets rarely meet the prerequisites, the model is virtually unknown in practice. predatory pricing: a pricing strategy whereby a powerful operator reduces its prices to near or below cost to drive a competitor out of the market. relevant market: normally the first stage in any competition inquiry into dominance, particularly under Community law. It is also relevant for merger inquiries and under Art 81. In order to determine an undertaking’s market strength one must define exactly which market the undertaking is competing in; that market is known as the relevant market. The relevant market is itself divided into three parts: product market, geographical market and temporal market. 288
Glossary
restrictive trade practices: in the UK, the area of law dealing with the problems associated with cartels and other anti-competitive agreements has traditionally been known as restrictive trade practices legislation. This legislation has been repealed by the Competition Act 1998. rule of reason: a term derived from US antitrust law, the rule of reason approach runs counter to the per se approach. It requires a detailed economic analysis of an agreement, the market structure and market conditions to assess the likely pro- and anti-competitive effects. It increases the complexity of antitrust/ competition law enforcement and reduces certainty and predictability. It has been partially adopted by the Community authorities. selective distribution: a type of distribution system whereby a manufacturer chooses its authorised distributors according to qualitative criteria. If a potential distributor meets the criteria, it should be allowed to distribute the product. State aid: there are specific Community rules on State aid in the Treaty. It is defined as aid, normally financial, to companies by public authorities of Member States. The aid can vary from State subsidies and capital injections to exemptions from taxation and loan guarantees. State aid can jeopardise the level competitive playing field in the Community. structural monopoly: a technical term under the Fair Trading Act 1973 meaning a situation where 25% of the goods of any description are supplied to, or by, the same person. supply-side substitutability: otherwise referred to as supply-side interchangeability. This involves consideration by the competition authorities of the extent to which other suppliers, currently manufacturing other products, can quickly, and without major expenditure, begin producing a product which is substitutable. This possible alternative supply is known as potential competition and is relevant in assessing the likely competitive pressures on the supplier under consideration. tie-ins: transactions where a seller insists on selling additional products, tied products, to buyers of another product, tying products. Such a transaction forces the buyer to accept products which it did not want or could have acquired at a lower price elsewhere. vertical integration: where a producer has control over many stages of the production and/or marketing of a product. For instance, it may control the supply of raw materials, processing, manufacture, transport and distribution, rather than operating at only one level of the market. vertical restraints: these are the contractual restrictions employed in vertical agreements, made between undertakings operating at different levels of the market, to facilitate the distribution of goods and services. An example would be an exclusive distributorship requirement in a distribution agreement. workable competition: a level of competition which falls short of ‘perfect competition’ but produces a reasonable level of allocative efficiency. The prerequisites of perfect competition do not have to be present, but an efficient scale of production will be reached with genuine alternatives for consumers and without over-capacity for producers. The concept is difficult to define in detailed terms but is an obtainable policy goal between perfect competition and monopoly. 289
INDEX A
exemptions 66 extraterritoriality 73 Fair Trading Act 1973 61–65 fines 66 formal decisions 66 investigations 63, 65–66 Merger Regulation 71 mergers 64–65, 238–39 monopolies 64–65 national competition authorities 71 negative clearances 66, 69 notifications 65, 66 penalties 70 powers of entry 66 private law actions 68–69 prohibitions 65–67 public interest 69 remedies 68 reporting 63 Secretary of State 62–63, 65 subsidiarity 71 supremacy of EC law 69–70 utilities regulators 67 vertical restraints 69 whistleblowing 66
Abbey National 229 Abuse of a dominant position 79, 89–100 administrative enforcement in UK 64, 69 airline industry 93 barriers to entry 90 distortion of competition 92 EC law 89–100 exclusionary abuses 90 exploitative abuses 90–92 export bans 93 forms of 89–90 indicative list 89 interpretation 89 mergers 97, 205 monopolies 91–92 neo-classical economic policies 91–92 oligopolies 25 prices discrimination 93–96 excessive 90 refusal to supply 96–100 tie-ins 96–97 unfair conditions 91 United Kingdom, in 104, 118–19
Advertising expenditure 113
Abuse of market power 119–20 Access to files 43–45
Advisory Committee on Restrictive Practices 38, 55, 58
Accession of new Member States 54, 60, 257, 277, 278
Advocates General 39 Aer Lingus 93, 251
Administrative enforcement in UK 60–69 abuse of a dominant position 64, 69 anti-competitive agreements 64, 69 appeals 66, 69 Block Exemptions 69 Competition Act 1998 60–61, 64–67, 69 Competition Commission 63, 66, 69, 238–39 damages 68 decision-making 66 Director General of Fair Trading 61–62, 65–67 EC law and 69–71
Agreements of Minor Importance, Notice of 136, 141 Airline industry abuse of a dominant position 93 antitrust 74–75 cartels 5 essential facilities 99 flag-carriers 7, 251 mergers 6 monopolies 4 prices 5 State aid 7, 251, 255–57 unfair competition 4 291
Index Allocate efficiency 8
notification 144–46, 150–51 nullity, sanction of 142–43 object of restricting competition 135–38 oligopolies 132–33 parallelism 132–33 prevention of competition 135–40 prices 137 professional associations 132–33 restriction of competition 135–40 restrictive practices legislation 153–59 small companies 141 State regulation 268 trade associations 132–33 UK controls on 152–69 undertakings, definition of 133–34 unilateral behaviour 130–31 vertical agreements 130, 141
A, M & S Europe Ltd 36 Amicus curiae 55, 58 Annulment actions 40 Anti-competitive agreements 129–70 administrative enforcement in UK 64, 69 appeals 152 associations of undertakings 132–34 barriers to entry 129 Block Exemptions 139–40, 144, 146–50 cartels 129, 130, 136–38 comfort letters 151–52 Common Market, within the 141–42 Competition Act 1998 121, 152, 159–69 concerted practices 131–32 cooperation 138 dawn raids 137 de minimis principle 141 Director General of Fair Trading 20 distortion of competition 135–40 EC law129–52 economic efficiency 129 economic entity doctrine 133–34 effect of restricting competition 138–40 exclusive distribution agreements 130 exemptions 33, 144, 145, 150–51 free movement of goods 129 horizontal effects 130, 138, 141 indicative list 129 individual exemptions 144 intellectual property rights 142 interstate trade, effect of 134–35, 141 interim measures 151 markets analysis 139–40 foreclosure 138–39 integration 129 shares 141 minor importance, agreements of 136, 141 monopolies 129 national courts 139, 150–52
Anti-competitive behaviour dominance in UK, control of 118–19 mergers 3 monopolies 105 Antitrust law 15–16 airline industry 74–75 allocation of resources 16 Chicago and Harvard schools 10, 11, 12, 15–16 economics 11 efficiency 15–16 enforcement 16 extraterritoriality 74–75 legislation 15 rule of reason 178–79 World Trade Organisation 76 AOL/Time Warner 6, 215, 274 Appeals administrative enforcement in UK 66, 69 anti-competitive agreements 152 Competition Act 1998 122, 161
292
Index Competition Commission 67–68 enforcement of EC competition law 29–30, 39 restrictive practices 159
Grey List 148 intrabrand competition 149 market share 149 notification 150 problems 149–50 reform 149–50 regulation on, withdrawal of 191–92 selective distribution 185 State aid 262–63 vertical agreements 149 vertical restraints 174, 176, 186–89, 191–92 White List 147, 148
Article 6 letters 47 Assets value test 228 Associations of undertakings 132–34 Authorisations 55, 59 Automec 282
B
Boeing 6, 74
Barriers to entry advertising expenditure 113 anti-competitive agreements 129 artificial 13–14 Competition Act 1998 124–25 conduct 88 dominance 86–89 EC law 87 economies of scale 87–88 financial resources 87 prices 116 product differentiation 88 small companies 87 statutory or regulatory powers 87 technological advantage 87 vertical integration 88
Bork, Robert 11 Brand copying 26 Brewing industry 6, 64, 115, 134–35, 138, 143, 200, 229, 236 British Airways 4, 5 British Midland 93 ‘Bus Wars’. 4, 5–6, 116, 231, 235–36, 239
C Canada, cooperation with 76
Bass 6, 236
Capital injections 251
Behavioural monopoly situations 106–07
Carlsberg 6 Cartels abuse of market power 159 airline industry 5 anti-competitive agreements 129, 130, 136–38 Competition Act 1998 161–62 crisis 10, 145 defined 2 examples 4–5 exemption 145 jurisdiction 73 mergers 2–3 Net Book Agreement 4–5
Block exemptions administrative enforcement in UK 69 anti-competitive agreements 139–40, 144, 146–50 Black List 148 Commission 146–50 Competition Act 1998 160, 164–65 enforcement of EC competition law 54, 57 exclusive distribution 182–83 format 147 293
Index politics 10 restrictive trade practice laws reform 157, 159 State regulation 264–65 Task Force 281 United Kingdom 281 CFI (Court of First Instance) 30, 39, 43 Chicago school 10, 11, 12, 16, 173, 272 Coca-Cola 26 Collective Discrimination report 20, 153 Collective dominance 25, 100–03 EC law 100–03 economic links 102–03 market power 100 Merger Regulation 103, 217–18 mergers 100 oligopolies 100–03 parallelism 101 prices 100–01 Comfort letters 33–34, 54, 151–52, 176
role of 31 staff 31 State aid 245–46 vertical restraints 175–76 workload 140, 245–46 Competition Act 1980 20, 103–04, 118–19 Competition Act 1998 abuse of a dominant position 125–26 accession to EC 278 administrative enforcement in UK 60–61, 64–67, 69 ancillary issues 121–22 anti-competitive agreements 121, 152, 159–69 appeals 122, 161 appreciability 163–64 barriers to entry 124–25 Block Exemptions 160, 164–65 cartels 161–62 case law 125–26 clawback 197 Competition Commission 122–24, 126, 161, 199 complainants, position of 283 concerted practices 162–63 damages 126 decentralisation 278 Director General of Fair Trading 122–26, 160–61, 197, 199 discounts 125 documents, destroying or falsifying 18 dominance control in UK 103–04, 121–27 EC law123, 196–999 effect on competition 163–64 enforcement 121–22, 160–61 essential facilities doctrine 126 establishment of 21 exclusive distribution 197 exemptions 160, 162, 164–65, 197 extraterritoriality 164
Commercial Solvents 98 Commission See, also, Competition Commission (UK) Block Exemption 146–50 decision-making 36–41 exclusive distribution 181 Calculation of Turnover, Notice on 209 Commissioner for Competition Policy 31 Co-operation, Notice on 51, 52, 55 Directorate Generals 31 enforcement of EC competition law 29–60 investigations 31–32 Merger Regulation 207, 211–17 national authorities, cooperation with 31 national courts 31 Regulation 17 31–32 relevant markets, notice on 163–64 resources 31
294
Index Competition Act 1998 122–24, 126, 161, 199 composition of 233 Director General of Fair Trading 62, 67–68, 238–39 dominant position 235 European Court of Justice 68 fair trading 63, 104–05 inquiries 233–34 interim measures 238 investigations 63, 104, 233–38 issues and remedies letters 234 mergers 63, 225, 233–38 monopolies 63, 105–08 Monopolies and Mergers Commission 67, 108, 233 parallel proceedings 69 President 67–68 prices 111–12, 236 public interest 63, 109–10, 234–39 qualifying test 67, 234–35 recommendations 238 regional policy 237 remedies 63 reporting 63, 233–39 resources 21 Secretary of State 62 specialist panels 67 takeovers 237 undertakings 239
fines 18, 122, 124, 161 guidelines 161–62 harmonisation 161–62, 164–66, 278 intellectual property 125–26, 198 interim measures 122 interstate trade, effect on 165 intrabrand competition 165 investigations 122, 126–27 land agreements 166, 197–98 legal professional privilege 161 market integration 162, 199 mergers 166, 241 minor significance, agreements of 122 monopolies 119–21, 126–27 notification 121–22, 160, 162, 164–65, 197 objectives of 23 oligopolies 126 practice 124–25 predatory pricing 124 prices 125, 198 private litigation 164 professional rules 167–69 prohibited acts 121–24, 126–27, 160–66 prohibition 160–68, 196–97 public interest 122, 127 relevant market 163 remedies 164 resale price maintenance 198 restrictive practices 154 Secretary of State 62–63 small companies 163–64 unjust enrichment 164 vertical agreements 162–63, 165–66, 198–99 vertical restraints 171, 195, 196–99 voidness 164
Complainants, position of 282–83 Complex monopoly situations 105, 106–07 Compliance, instituting effective programmes of 278–80 Concentrations 207–13, 216, 218–22, 280 Concerted practices 131–32, 162–63
Competition Commission (UK) administrative enforcement in UK 63, 66, 69, 238–39, 238–39 appeals 67–68
Concrete Roofing Tiles 116 Confidential information 43–45, 58, 232–33
295
Index Conservation 254
D
Consten and Grundig case 130, 177, 182
Damages administrative enforcement in UK 68 Competition Act 1998 126 complainants, position of 282–83 enforcement of EC competition law 48 State aid 261
Consumer protection Director General of Fair Trading 13, 116–17 objectives of competition law 13 Consumers’ Association Continental Can 205 Control of dominance in UK 103–27 abuse of a dominant position 104, 118–19 anti-competitive practices 118–19 Competition Act 1980 103–04, 118–19 Competition Act 1998 103–04, 121–27 Director General of Fair Trading 104, 119 Fair Trading Act 1973 104–18 Green Paper 103 Liesner Reports 118 monopolies 103–04, 119–20 remedies 118–19 Co-operation anti-competitive agreements 138, 151 Canada 76 enforcement 35, 58, 59, 273–75 Europe Agreements 76 internationa l75–76, 273–75 joint ventures 208, 221–23, 280 mergers 274 national competition authorities 35, 51, 52, 55, 58, 59 small companies 14 United States 75–76
Dawn raids 34, 137 De minimis principle Agreements of Minor Importance 136, 141 anti-competitive agreements 141 enforcement of EC competition authorities 54 exclusive distribution 183 Notice on 175, 183 rule of reason 179 selective distribution 195 State aid 249, 257–58 vertical restraints 175 Decentralisation Competition Act 1998 278 enforcement of EC competition law 47–54, 277 national competition authorities, to 52, 53 national courts, to 48–52 State aid 262–63 Decision-making administrative enforcement in UK 66 Commission 36–41 enforcement of EC competition law 36–41, 57 provisional decisions 37 review of 39–41 State aid 245
Countervailing power 14
Defence rights 42–16, 277
Court of First Instance 30, 39, 43
Delict, law of 18–19
Criminal law 18
Demand, cross elasticity of 82
Crisis cartels 10
Directly applicable exception system 54–55 296
Index barriers to entry 85, 86–89 Competition Commission 235 control of 79–129 definition 84, 89 EC law 79–103 economic analysis 80–81 economic entity doctrine 80 exclusionary conduct 84 market power 80, 84 market share 85–86 market strength 85–86, 89 Merger Regulation 215–16, 218–19 mergers 205 monopolies 2 oligopolies 25 relevant market 80–84 structural test 80 super-dominance 275 undertakings, effect on trade and 79–80
Director General of Electricity Supply 240 Director General of Fair Trading administrative enforcement in UK 61–62, 65–67 anti-competitive practices 20 Competition Act 1998 122–27, 160–61, 197, 199 Competition Commission 62, 67–68 consumer protection 13, 116–17 creation of post 20 dominance control in UK 104, 119 enforcement provisions 21, 167–68 fair trading 63, 104–05 function of 62 information 62 investigations 62, 105, 275 merger control 62, 224, 228–32, 240 monopolies 105–06, 119–20 Office of Fair Trading 62 replacement of 61–62 restrictive practices legislation 153–56, 158–59 Secretary of State 62
Draft Regulation 56–57, 59 ‘Dutch’ clause 219–20 Dyestuffs132–33, 141 E
Directorate General IV enforcement 29, 42, 56 Mergers Task Force 31, 207
Easyjet 4 EC law See, also, Enforcement of EC law, Merger Regulation administrative enforcement in UK 69–71 Annual Report on European Competition Policy 22 articles, relevant 17 barriers to entry 87 collective dominance 100–03 Competition Act 1998 123, 196–99 development of 16–17 dominant position 79–103 employment policy and 22 Europe Agreements 76 European Coal and Steel Community 16, 263 exclusive distribution 180–83, 193 fairness 21–22 globalisation 22
Directorates Genera l31 Discounts and rebates 93, 94–95, 115–16, 125 Distillers plc 6, 229, 231 Distribution See, also, Exclusive distribution, Selective distribution anti-competitive agreements 130 contractual controls over 114–15 exclusive purchasing 114–15 vertical integration 114–15 wealth 12–13 Dominant position See, also, Abuse of a dominant position, Collective dominance, Control of dominance in the UK 297
Index industrial policy and 22 internal market 22 interpretation 17 market integration 21–22 mergers 204–23 oligopolies 24–25 policy objectives, comparison with UK 21–22 regional policy 13 selective distribution 184–86, 193–95 State aid 245–63 State regulation 263–69 substantive law, changes in 275–77 supremacy of 69–70 treaties 16–17, 22 Treaty on European Union 22 UK law and 20–21 vertical restraints 174–95 ECJ See European Court of Justice Economics 7–10 aggregate output 8 allocative efficiency 8 anti-competitive agreements 129 antitrust 11 certainty and predictability 272–73 Chicago school 10, 11, 12 concentration of economic power, prevention of 12 delict 18–19 dominant position 80–81 economic entity doctrine 73, 80, 133–34 effects doctrine 73–74 efficiency 8–9, 11, 129 laissez-faire 9 market power 8 monopolies 8–9 neo-classical theory 7–8 objectives of competition policy 12 outcome 12 perfect competition 7–9 productive efficiency 8 pure competition 7–9 tort 18–19 United States 9 workable competition 9
Economies of scale 87–88 ECSC (European Coal and Steel Community) 16, 263 EEA (European Economic Area Agreement) 76 EEC (European Economic Community) 16 Effects doctrine 73–74 Efficiency concept anti-competitive agreements 129 allocative 8 economics 8–9, 11, 129 Merger Regulation 216 mergers 3, 203 neo-classical economic theory 8 productive 8 United States 3 vertical restraint 173 EFTA Surveillance Authority 76 Employment 22, 266 Enforcement See, also, Administrative enforcement in UK, Enforcement of EC competition law administrative 1 antitrust 16 Competition Act 1998 121–22, 160–61 deterrence 167–68 Director General of Fair Trading 21, 167–68 extraterritoriality 72–75 globalisation 72–76, 273–75 international cooperation 273–75 Merger Regulation 17 mergers 225 mode of 1 Office of Fair Trading 20, 167–68 private 1 professional rules 167–68 restrictive practices 157 subject matter jurisdiction 72–73 whistle blowing 168 Enforcement of EC competition law 29–60 298
Index access to files 43–45 accession of new Member States 54, 60, 277 Advisory Committee on Restrictive Practices 38, 55, 58 amicus curiae 55, 58 ancillary issues 41–42 anti-competitive agreements 33 appeals 29–30, 39 Article 6 letters 47 authorisations 55, 59 Block Exemptions 54, 57 burden of proof 57 centralisation 29 comfort letters 33–34, 54 Commission 29–60 complaints 32, 42, 47 confidentiality 43–45, 58 cooperation with national authorities 35, 58, 59 Court of First Instance 30, 39, 43 damages 48 dawn raids 34 de minimis doctrine 54 decentralisation 47–54, 277 national competition authorities, to 52, 53 national courts, to 48–52 decision-making 36–41, 57 review of 39–41 defence rights 42–46, 277 delay 46, 59 developments 277 DGIV 29, 42, 56 directly applicable exception system 54–55 disclosure 43 Draft Regulation 56–57, 59 economic entity doctrine 73 effects doctrine 73–74 essential procedural requirements 37 European Cartel Office, proposal for 46 European Convention on Human Rights 42–43 European Court of Justice 30, 39–41
exemptions 32–33, 37, 51–52, 54–57, 59–60 extraterritoriality 73–74 fair trials 42–43 fines 34, 38–39, 56, 59, 279 Form A/B 32 Form C 32 harmonisation of national laws 60 Hearing Officer 38, 45–46 hearings, conduct of 45–46 individual 48–49 information 58 requests for 34 special types of 35 infringement proceedings 37–39 initiation 32–35 inspections 59 interim measures 37, 57, 59 intervention 55, 58 investigatory powers 34–37, 47–49, 55–56, 59 legal professional privilege 35–36 market integration 54 Merger Regulation 74 mergers 41–42 modernisation 46–47, 53–60 national competition authorities 35, 48, 52, 53, 58 national courts 33–34, 49–52, 55, 57, 58 negative clearances 2–33, 37 notice of objections 43–44 notifications 37, 55, 59, 60 periodic penalty payments 38, 56, 59 proportionality 34–35 provisional decisions 37 reform proposals 46–47, 54–56 criticisms of 56 Regulation 17 29–30, 33, 35, 37–38, 41–42, 44, 46–47, 53–54 remedies 49–51, 57 secrecy 46 self-incrimination, privilege against 35, 36 simplification of administration 54 299
Index State aids 42, 51 Statement of Objections 37–38 subsidiaries 73 subsidiarity 48, 49, 53 vertical restraints 42 whistleblowing 39 White Paper 53–55 Equity injections 251 Essential facilities doctrine 99–100, 126 Essential procedural requirements 37 Eurocheques 268 Europe Agreements 76 European Cartel Office, proposal for 46 European Coal and Steel Community 16, 263 European Commission See Commission European Community See EC law establishment of 17 internal market 17 UK, entry into 20 war, prevention of 17 European Convention on Human Rights enforcement of EC competition law 42–43 fair trials 42–43 self-incrimination 36 European Court of Justice Advocates General opinions 39 annulment actions 40 Competition Commission 68 enforcement of EC competition law 30, 39–41 exclusive distribution 181–82 interpretation 39 preliminary rulings 41, 68 review of acts 40–41 role 39–41 rule of reason 178–80 vertical restraints 178–80
European Economic Area Agreement (EEA) 76 European Economic Community 76 16 European Union See EC law, European Community Excessive prices 12–13 Exclusionary conduct 84, 92–97 Exclusive distribution Block Exemptions 182 Commission 181 Competition Act 1998 197 criticisms of approach to 182–83 de minimis doctrine 183 definition 180 EC law 180–83, 193 European Court of Justice 181–82 exemptions 182–83, 183 reasons for adopting 180–81 territorial restrictions 181–83 treatment of 181–83 vertical restraints 171, 173, 174, 177– 78, 180–83, 193 Exclusive purchasing 114–15, 199–200 Exemptions See, also, Block Exemptions administrative enforcement in UK 66 anti-competitive agreements 33, 144–46, 150–51 benefit 145 cartels 145 Competition Act 1998 160, 162, 164, 197 conditions for 145–46 discretionary 253–54 elimination of competition, no 146 enforcement of EC competition rules 32–33, 37, 51–52, 54–57, 59–60 exclusive distribution 182, 193 fair share to consumers 146 indispensable restrictions, no 146 300
Index mandatory 252–53 mergers 205–06 national courts 33–34 selective distribution 184, 185 State aid 246, 252–57 technology transfer 145 vertical restraints171, 174, 176, 186–87, 191, 193
cartels 5, 281 Competition Act 1998 18, 122, 124, 161 criminal law 18 enforcement of EC competition rules 34, 38–39, 56, 59, 279 Merger Regulation 214–15 price fixing 38 reduction in 281 waiver 281
Exploitative abuses 90–92 Export bans and restrictions 93
Flat glass markets 101–02
Extra-territoriality 72–75, 164
Footbal l5, 13, 230, 236 Foreclosure of competition 138–39, 172, 204
F Fair trading See, also, Director General of Fair Trading 20 administrative enforcement in UK 61–65 brewing industry 64 Competition Act 1998 Competition Commission 63, 104–05, 117–18 complainants, position of 283 dominance, control of 104–18 EC law 21–22 exclusive purchasing 199–200 Fair Trading Authority 61 information gathering 105 investigations 104, 105 merger control 224–40 monopolies 104, 117–18 complex 105 references 105–16 penalties 105 public interest test 23, 63, 273 Secretary of State63–64, 104–5 undertakings 63–64 vertical restraints 199–200
Form A/B 32 Form C 32 Free gifts 7, 26–27 Free movement of goods 129 Free-rider problems 173–74 Full-line forcing 115
G Gencor 74, 217–18, 223 General Electric 6 Geographical markets 82–84 ‘German’ clause 218–19 Globalisation of markets 72–76, 273–75 Glossary 285–90 Guarantees 252 Guinness 6, 229, 231
Fair trials 42–43 Fines administrative 18 administrative enforcement in UK 66 British Airways 4
H Harmonisation of national laws 60, 161–62, 165–66, 278 301
Index Harvard school 10, 11, 12, 15–16, 262
Interim measures 37, 57, 59, 122, 151, 238
Hasbro 229
Internal market 17
Hearing Officer 38, 45–46
International mergers 223–24
Hearings, conduct of 45–46
Interstate trade, effect on 134–35, 141, 165, 248–49
Honeywell 6 Horizontal agreements 130, 138, 141, 154 Human rights See European Convention on Human Rights
I
Intervention 55, 58 Intrabrand competition 172 Investigations administrative enforcement in UK 63, 65–66 Competition Act 1998 122, 127 Competition Commission 63, 104 Director General of Fair Trading 62, 105, 274 enforcement of EC competition law 31–32, 34–37, 47–49, 55–56, 59 fair trading 105 Merger Regulation 212–14 mergers 227, 242 State aid 258–59
Industrial policy 22 Information confidentiality 43–45, 58, 232–33 Director General of Fair Trading 62 enforcement of EC competition law 34–35, 58 fair trading 105 Merger Regulation 212 requests for 34 secrecy 46 special types of 35 State aid 259
Investments 250–52
Initiation of proceedings 32–35
Jurisdiction, subject matter 72–73
Issues letters 108–09, 234
J Joint ventures 207, 221–23, 280
Injunctions 261 Inspections 59
L
Intellectual property rights 7, 98–99, 114, 125–26, 142–43, 180, 190, 198
Laissez-faire 9, 14, 18, 271–72
Interbrand competition 149, 172, 173–74, 187, 204
Legal professional privilege 35–36, 161
Interbrew 6, 236
Legitimate expectations 260
Laker, Freddie 5, 74–75 Land agreements 166, 197–98
302
Index Liesner Report 118, 240
MEIP (Market Economy Investor Principle) 250–52
Lilley doctrine 229
Merger Regulation 206, 226 administrative enforcement in UK 71 amendments to 276 appraisal by Commission 211–17 collective dominance 103, 217–18 Commission 207, 211–17 Community dimension 209–11, 226 concentrations 207–13, 216, 218–22 DGIV 207 dominant position 215–16, 218–19 Dutch clause 219–20 efficiency 216 enforcement 17 entry into force 206 extraterritoriality 74 fines 214–15 ‘German’ clause 218–19 information 212 international mergers 223 investigations 212–14 joint ventures 207–08, 221–23 concentrative 208, 221–23, 280 co-operative 208, 221–23, 280 full function 222 market analysis 216 Mergers Task Force 31, 207, 211–12 multiple filing 209–10 national competition authorities 213, 219 national courts 221 negotiated clearances 215 notification to Commission 211 oligopolies 25 ‘one stop shop’ principle 209–10, 218–21 periodic penalty payments 214–15 purpose of 207 referrals 218–19 remedies 214 Review of 276 scope 207–08
Loans 252 Loyalty rebates 94, 115
M MacDonnel Douglas 6, 74 Market Economy Investor Principle 250–52 Markets See, also, Relevant market abuse of market power 119–20, 159 analysis of 138–40, 216, 280 anti-competitive agreements 129, 138–39 Block Exemptions 149 collective dominance 100 compartmentalisation of 172, 191 Competition Act 1998 162, 199 EC law 21–22 enforcement of EC competition law 54 failure 1, 11, 23, 25 foreclosure 138–39 globalisation 72–75, 273–75 integration of 13–14, 21–22, 54, 114, 129, 162, 199 Merger Regulation 216 mergers 228 monopolies 1–2 oligopolies 25 pigeonholing 280 power 8, 80, 84, 100, 110, 119–20 scientific understanding of 10–11 share 1–2, 85–86, 110–11, 149, 190, 192, 228 strength 85–86, 89 unified, creation of 13–14 vertical restraints 172, 190, 192 Medicaments 158
303
Index subsidiarity 210 suspension 211 thresholds 206, 209, 219–20, 226 transparency 214 turnover 209–10, 221 Mergers See, also, Merger Regulation 203–44 abuse of a dominant position 97, 205 administrative enforcement in UK 64–65 airlines 6 ancillary issues 242 anti-competitive behaviour 3 assets value test 229 brewing industry 6 cartels 2–3 collective dominance 100 Competition Act 1998 166, 240, 241 Competition Commission 63, 225, 233–39, 241–42 competition based test 241–42 confidentiality 232–33 conglomerates 204 creeping 227 defined 1–2 Department of Trade and Industry 241–43 Director General of Fair Trading 62, 224, 228–32, 240 distinct, ceasing to be 226–27 dominant undertakings 205 abuse 97, 205 collective 100 EC law enforcement of 41–42 historical background to 204–23 economics 8 efficiency 3 enforcement 238–39 EC competition law 41–42, 225 examples 5–6 exceptional cases 242 exemptions 205–06 fair trading legislation 224–43 foreclosure 204 global 6
horizontal 204 independent competition authorities 241 interbrand competition 204 interim measures 238 international cooperation 274 investigations 233–38 qualifying tests for 227 Lilley doctrine 229 market share test 228 merger situations 226–27 monopolies 2–3 Monopolies and Restrictive Practices Commission 224 national competition authorities 203 notification 232–33 objections 204 Office of Fair Trading 232, 233 pigeon holing 280 pre-notification 232–33, 242 public interest 225, 229, 240, 242 pure competition objective 2–3, 6 references, making 230–32 referral stage 225–33 reform 21, 23, 240–43 regional policy 13 regulated industries 239–40 Regulation 17 41 Secretary of State 62, 228–30, 232, 239–40 Stagecoach Holdings plc 4, 5–6 takeovers 2 Tebbit doctrine 23, 229, 243 undertakings in lieu of 231–32 United Kingdom 224–243 United States 3 vertical 104 restraints 3 ‘Metro test’ 185 Milk Marketing Board 50 Milk Marque 111, 112 MMC See Monopolies and Mergers Commission 304
Index Modernisation of competition law 1, 46–47, 53–60, 165, 262
Trade and Industry Committee Report 21, 120 UK Policy 120 Undertakings 120
Monopolies abuse of a dominant position 90–92 abuse of market power 119–20 administrative enforcement in UK 64–65 airline industry 4 anti-competitive agreements 129f anti-competitive behaviour 105 behavioural 106–07 Competition Act 1998 119–21, 126–27 Competition Commission 63, 105–08 complex 105, 106–07 defined 1–2 Director General of Fair Trading 105–06, 108, 119–20 dominant position 2 abuse of 90–92 Control in UK of 103–04, 119–20 EC law 119 economics 9 examples 4 fair trading legislation 105–16 intellectual property rights 114 issues letters 108–09 market shares 1–2 mergers 2–3 oligopolies 24, 107 prices 4, 90 prohibition approach 120 public interest 105–16, 120 references 105–16 reform 119–20 remedies 109 reporting stage 108–09 scale 106 Secretary of State 106 situations 106–07 State regulation 266–68 structural 106
Monopolies and Mergers Commission Competition Commission, replacement by 67, 108 Monopoly and Restrictive Practices Commission 153, 224 ‘Multiple filing’ route Music companies 5, 19
N Napp 124–25 National competition authorities administrative enforcement in UK 71 Commission 31 complainants, position of 282–83 cooperation 35, 58, 59, 51, 52, 55 enforcement of EC competition law 35, 48, 52, 53, 58 independent 241 Merger Regulation 213, 219 mergers 203, 241 National courts and laws amicus curiae 55, 58 anti-competitive agreements 139, 150–52 Commission 31 decentralisation 48–52 enforcement of EC competition law 33–34, 49–52, 55, 57, 58 exemptions 33 intervention 55, 58 protectionism 272 remedies 282–83 suspension of proceedings in 151
305
Index Net Book Agreement 4–5, 157–58
defined 24 EC law 24–25 economics and law 24–26 interdependence 24 market failure 25 Merger Regulation 25 monopolies 24, 107 parallelism 24, 25 pigeon holing 280 prices 113 professional rules 167–69 profits 24 UK competition law 25–26
NCAs See National Competition Authorities Negative clearances 32–33, 37, 66, 69 Neo-classical economic theory 7–8 Newspapers 99–100 Notifications anti-competitive behaviour 144–46, 150–51 Block Exemptions 150 Competition Act 1998 121–22, 160–62, 164–65, 197 Competition Commission 65, 66 enforcement of EC competition law 37, 55, 59, 60 Merger Regulation 211 mergers 232–33 State aid 258–60 vertical restraints 176 Nullity sanction 142–43
‘One stop shop’ principle 209, 210, 218–21 Organisation for Economic Development 76, 274 P Parallel pricing 24, 101, 113, 132–33 Parallel proceedings 69 Paris Treaty 1951 16, 263 Passing off 7, 19, 26
O Objectives of competition policy 12–15, 21–23 OECD 76, 274 Office of Fair Trading Director General assistance to 62 enforcement 20, 167–68 merger control 232–33 restrictive practices 157 Oligopolies abuse of a dominant position 25 anti-competitive agreements 132–33 cartels 25 collective dominance 25, 100–03 Competition Act 1980 25–26 Competition Act 1998 126 complex monopoly situations 107
Penalties See, also, Fines administrative enforcement in UK 70 fair trading 105 periodic penalty payments 38, 56, 59, 213 Perfect competition 7–8 9 Periodic penalty payments 38, 56, 59, 213 Petrol 19 Philip Morris 205 Pigeon-holing in market analysis 280 Policy developments 10–11, 271–78 Polypropylene case 136, 281 Postal services 266–69
306
Index geographical markets 83–84 physical characteristics 82 price issues 82 relevant market 81–83 selective distribution 186 supply side interchangeability 83 temporal markets 84
Powers of entry 66 Predatory pricing 93, 95–96, 116, 124, 275 Preliminary rulings 41, 68 Prices abuse of a dominant position 90–91, 93–96 airline industry 5 anti-competitive agreements 137 barriers to entry 116 collective dominance 100–01 Competition Act 1998 124, 125, 198 Competition Commission 111–12, 236 discounts 93–94, 115–16 discrimination 93–96, 115–16 excessive 13, 20, 90–91, 111–113, 125 fines 38 fixing of 38, 198 leaders 101 loyalty rebates 94 monopolies 4, 90 Net Book Agreement 4–5 oligopolies 24, 113 parallel 24, 101, 113 predatory pricing 93, 95–96, 116, 275 profiteering 20 public interest 111–13, 116 rebates 94–95, 115–16 regulation 112 relevant product market 82 resale price maintenance 5, 153, 157–58, 190–91, 198 ‘Rip-off’ Britain 13, 112–13 selective price cutting 116 unfair 111–13 vertical restraints 115–16, 190–91
Professional associations 132–34 Professional rules 167–69 Profits excessive 12–13, 111–13 profiteering 20 public interest 111–13 unfair 111–13 wealth distribution 12–13 Proportionality principle 34–35, 98 Provisional decisions 37 Public interest administrative enforcement in UK 69 advertising expenditure 113–14 Competition Act 1998 122, 127 Competition Commission 63, 109–10, 234–39 conduct 111–13 definition 109–10 discriminatory practices 115–16 fair trading 23, 273 intellectual property rights 114 market power 110–11 market share 110–11 mergers 225, 229, 240, 242 monopolies 105–16, 120 oligopolies 113 prices discrimination 115–16 excessive or unfair 111–13 profits, excessive or unfair 111–13 reform 109–10 refusal to supply 115 relevant market 110 restrictive practices 154–56, 158 scope 109–10 vertical restraints 114–15
Private law actions 68–69 Productive efficiency 8 Products cross-elasticity of demand 82 differentiation 88
307
Index Public/private dichotomy 15 Pure competition objective 2–3, 6–9, 12, 14
Q Quantitative/qualitative criteria distinction 186, 193–94
R Reason, rule of See Rule of reason Rebates 94–95, 115–16 Refusal to supply abuse of a dominant position 96, 97–100 damaging or deterring competitors 98 discrimination 115 essential facilities doctrine 99–100 intellectual property rights 98–99 new competitors 99–100 proportionality 98 refusal to supply 115 vertical restraints 200 Regional policies 13, 237, 254–55 Regulated industries 239–40 Regulation See, also, State regulation barriers to entry 87 prices 112 profits, excessive 12–13 Regulation 17 Commission 31–32 enforcement of EC competition law 29–30, 33, 35, 37–38, 41–42, 44, 46–47, 53–54 exclusions 41–42 mergers 41 secrecy 44
Relevant market Commission notice 81, 163–64 Competition Act 1998 163 cross elasticity of demand 82 definition 80–81 demand size interchangeability 81 dominant position 80–84 geographical market 83–84 intended use 83 physical characteristics 82 prices 82 product market 81–83 public interest 110 supply side interchangeability 83 temporal market 84 vertical restraints 192 Remedies See, also, Penalties administrative enforcement in UK 68 Competition Act 1998 164 Competition Commission 63 dominance in UK, control of 118–19 enforcement of EC competition law 49–51, 57 injunctions 261 Merger Regulation 214 monopolies 109 national courts and law 282–83 public/private dichotomy 15 State aid 257–62 third parties 260–62, 283 unfair competition 26 Resale price maintenance 5, 153, 157–58, 190–91, 198 Restraint of trade music 19 petrol 19 reasonableness 19 rule of reason 178 shipping conferences 19 test for 19 Restraints See Vertical restraints 308
Index Restrictive covenants 140
Sales promotion 194
Restrictive trade practices abuse of market power 159 anti-competitive agreements 153–59 appeals 159 background 153–54 cartels 153, 157, 159 categories of practice covered 154 Competition Act 1998 154 conduct 155 criminal law 18 Director General of Fair Trading 153–54, 155, 158–59 enforcement 157 exempt agreements 155 gateways 156 horizontal agreements 154 Monopolies and Restrictive Practices Commission 153 Net Book Agreement 157–58 Office of Fair Trading 157 policy, review of 158–59 professional rules 167 prohibition system, adoption of 158–59 public interest 154–56, 158 reform 158, 196 registration 153, 154–56 resale price maintenance 153, 157–58 Restrictive Practices Court 154–56, 196 vertical agreements 154 vertical restraints 196
Scale monopoly situations 106
Restructuring 255–57
Small companies anti-competitive agreements 141 barriers to entry 87 cooperation 14 countervailing power 14 financial resources 87 market integration 14 pure competition 14 State aid 262–63
Scotland 237–38 Secrecy 46 Secretary of State for Trade and Industry 62–65, 104–05, 228–31, 239–40 Sectoral aid 255–57 Selective distribution Block Exemptions 185 criticisms of approach to 185–86 de minimis doctrine 195 EC law 184–85, 193–95 exemptions 184, 185 products 186 quantitative/qualitative criteria distinction 186, 193–94 reasons for adopting 183–84 sales promotion obligations 194 uncertainty 186 vertical restraints 172, 183–86, 193–95 Selective price cutting 116 Selectivity aid measures 248, 263 Self-incrimination, privilege against 35, 36 Shipping conferences 19, 102 Single Market
‘Rip-off’ Britain 13, 112–13 Role of competition law 1 Royal Mail 125 Rule of reason 178–80
S
SMEs See Small companies
SABAM 91 SABENA 99
Smith, Adam 18 309
Index Stagecoach Holdings plc 4, 5–6, 116, 231, 235–36, 239 State aid 245–63 accession to EC 257 advantages, conferring 247 ‘aid’, constituting 247–48 airline industry 7, 251, 255–57 assessment criteria 246 Block Exemptions 262–63 capital injections 251 Commission 245–46 conservation 254 damages 261 de minimis doctrine 249, 257, 258 decentralisation 262–63 decision-making 245 defined 3–4 developments, recent and future 262–63 distortion or potential distortion of competition 249 EC law 245–63 enforcement of EC competition law 42, 51 examples 7 exemptions 246, 252–57 discretionary 253–54 mandatory 252–53 framework 254–57 funding, State sources of 247–48 future developments 262–63, 276–77 guarantees 252 guidelines 254–57 horizontal 262–63, 277 illegal 259, 262 information 259 injunctions 261 intra-State aid, effect on 248–49 investigations 258–59 investments 250, 252 justification for legitimate expectations 260 loan financing252 loan guarantees 252 loan injections 251
Market Economy Investor Principle 250–52 modernisation 262 notification 258–59 politics 10 procedure 257–62 prohibitions 246–52 public authorities 247 recent developments 262–63 regional policy 254–55 Register 246 remedies 257–62 restructuring 255–57 sectoral policies 255–57 selectivity 248, 263 small companies 262–63 State ownership 250 taxation 248 third parties 260–62 transparency 245, 276 St Gobain/WackerChemie/NOM 216 State regulation See, also, State aid 3–7, 263–67 anti-competitive behaviour 268 cartels 264–65 decisions 267 directives 267 distortion of competition 264 EC law 263–69 European Coal and Steel Community 263–64 exclusive rights 265–67 examples of 3–7 measures adopted 264–67 monopolies 266–68 private undertakings 267–69 public undertakings 265–66 State monopolies 266–67 undertakings 265–69 Statement of Objections 37–38 Statutory developments 20–21 Structural test 80, 106
310
Index Subject matter jurisdiction 72–73
U
Subsidiaries 73
UNCTAD 75 Undertakings anti-competitive agreements 132–34 associations, decisions of 132–34 defined 133–34 effect on Community trade 134–35 State regulation 265–69
Subsidiarity concept 48, 49, 53, 71, 210 Supremacy of EC law 69–70 Supply See Refusal to supply
Take-overs Competition Commission 237 hostile 2 mergers 2 vertical restraints 114
Unfair competition airlines 4 brand-copying 6 defined 3, 6–7 examples 6–7 free gifts, prohibition on 7, 26–27 Germany 7, 26–27 intellectual property 7 passing off laws 7, 19, 26 policy on 26–27 remedies 26
Taxation 248
Unfair conditions 91
Tebbit doctrine 23, 229, 235, 237, 243
Unified markets, creation of 12–14
Technology Transfer Regulation 145, 149–50, 190
United Kingdom See, also, Administrative enforcement in UK, Competition Act 1998, Fair trading, Office of Fair Trading, Restrictive trade practices Cartels Task Force 281 development of competition law 18–21 EC law and 20–21 comparison with 20–21 European Community, entry into 20 mergers 223–43 oligopolies 25–26 policy objectives 21–23 reform, debates on 20–21
Supply side interchangeability 83
T
Temporal market 84 Territorial restrictions 177–78, 181–82, 191, 276 ‘Third way’ 272 Tie-ins 96–97, 115, 200 Time Warner/AOL 6, 215, 274 Tort, law of 18–19 Trade See Barriers to trade, Restraint of trade, Restrictive trade practices Trade and Industry Committee report 21, 120, 240
United Nations Conference on Trade and Development 75
Trade associations 32–34
United States See, also, Antitrust law Chicago and Harvard schools 10, 11, 12, 173, 272
Treaty of Paris 16, 263 TV listings 98–99
311
Index cooperation 75–76 economics 9 concentration of power, prevention of 12 efficiency of conduct 3 extraterritoriality 73 mergers 3 rule of reason 178 vertical restraints 173, 178 workable competition 9
enforcement of EC competition law 42 exclusive distribution agreements 171, 173–74, 177–78, 180–83, 193 exclusive purchasing 114–15, 199–200 exemptions 171, 174, 176, 186–87, 191, 193 fair trading 199–200 foreclosure 172 free-rider problems 173–74 full line forcing 115, 200 guidelines 192 hardcore 190–91 horizontal agreements 196 integration 114 intellectual property rights 190 interbrand competition 172, 174, 187, 192 intrabrand competition increase in 173 restrictions on 172 market share threshold 190, 192 mergers 3 notification 176 objections 172 pigeon-holing 280 pro-competitive effects 173 public interest 114–15 reform 187–89 refusal to supply 200 regulation on 189–92 relevant market 192 resale price maintenance 190–91 restrictions 176–78 restrictive practices 196 rule of reason 178–80 selective distribution agreements 171, 172, 183–86, 193–95
Utilities regulation 67
V Vertical agreements 130, 148–50, 154, 162, 165–66, 198–99, 276 Vertical integration, defined 88 Vertical restraints 171–201 administrative enforcement in UK 69 Block Exemptions 174, 176, 186–89 withdrawal of regulation on 191–92 Chicago School 173 comfort letters 176 Commission 175–76 compartmentalisation of markets 172, 191 Competition Act 1998 171, 195, 196–99 contractual controls over distributors 114–15 de minimis doctrine 175 definition 189–90 EC law 174–95 effects of 172–74 efficiency gains 173
312
Index takeovers 114 territorial restrictions 177–78, 191, 276 tie-ins 115, 200 United Kingdom 195–200 United States 173 Vodaphone/Airtouch 213
Wiggins Teape 208 Windfall tax 12–13 Wiseman Dairies 118 Wood Pulp133, 142 ‘Workable competition’ concept 291 World Trade Organisation 75
W Wealth distribution 12–13 Whistleblowing 39, 66, 168, 281
313
