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GT Alert

European Competition Law: A High Level Review of Issues Relevant to the Distribution of Goods in the EU

June 2005

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“Antitrust” covers two prohibition rules set out in the EC Treaty. Competition is a basic mechanism of the market economy and is a simple and efficient means of guaranteeing consumers a level of excellence in terms of the quality and price of products and services. In order to be effective, competition assumes that the market is made up of suppliers who are independent of each other, each subject to the competitive pressure exerted by the others.

  • Agreements which restrict competition are prohibited (Article 81 of the Treaty). These include, for example, price-fixing agreements and cartels between competitors.
  • Firms in a dominant position may not abuse that position (Article 82 of the EC Treaty). This includes, for example, predatory pricing aiming at eliminating competitors from the market, tying practices, freezer exclusivity and the like.
“The new system places a burden of complete self reliance upon companies and their legal advisors to determine whether their arrangements satisfy the criteria for exemption.”

The Commission is empowered by the Treaty to apply these prohibition rules and enjoys a number of investigative powers (inspection in business and non- business premises, written requests for information) to that end. It may impose substantive fines (up to 10 percent of the worldwide revenue of the undertakings involved) for such violations. Since 1 May 2004, all National competition authorities are also empowered to apply fully the provisions of the Treaty in order to ensure that competition is not distorted or restricted. National courts may also apply directly these prohibitions so as to protect the individual rights conferred to citizens by the Treaty.

General Exceptions

Article 81 applies only where there is an appreciable impact on intra-Community trade. The current quantative criteria are defined in the de minimis notice, which sets the relevant threshold at 5 percent for horizontal agreements and 10 percent for vertical agreements. This means that if these thresholds are not met at any of the relevant markets, the infringement of competition law will not be sanctioned by the Commission, with the exception of so-called hard core restrictions for which infringement is always sanctioned.1 These general hard core restrictions are:

  • In horizontal agreements restrictions that:
    • fix prices
    • limit production
    • share markets
    • share sources of supply
  • In vertical agreements restrictions that:
    • fix resale prices
    • confer territorial protection

In addition to exceeding the de minimis thresholds, the agreement still needs to have an appreciable effect on trade between the Member States. This requirement is not quite to the same as the rule of reason approach as adopted by the U.S. Supreme Court in respect to Section 1 of the Sherman Act, but elements of this approach were found in judgments by the European Court of Justice. However, the rule of reason applies in principle to unintentional restriction of competition. The absence of such an appreciable effect is no valid defense in cases where the parties intended to infringe competition law, as in a hard core restriction.

The Commission in its more recent block exemptions and the guidelines thereto gave effect to the rule of reason doctrine, as it made clear that if the limits of a block exemption are exceeded, but the agreement is covered by the rationale of the block exemption as expressed in the guidelines thereto, one is in principle in a safe zone.

Vertical Restraints

The rule of reason is specifically made more clear in the new block exemption on vertical restrictions, where vertical restrictions are not considered endangering competition but more like ancillary restraints without which there would not be an agreement at all. Vertical restrictions are taken more seriously only if there is a risk of market foreclosure. In sum, if there is enough inter-brand competition, any intra-brand restrictions will not easily have an appreciable effect on competition. An indication of such a foreclosure risk is the market share on the relevant market of the parties involved.

Consequently, the vertical restraints blocking exemption only provide a safe harbor if the market share of the supplier2 does not exceed 30 percent. However, in the new approach to competition law, this will mean that an exempted clause, when applied by a supplier with a market share of 40 percent, will be saved in principle by the rule of reason approach, if the rationale of the exemption applies.

It should be noted that the undertaking to be entered into between The Coca-Cola Company and the European Commission as to restrictive marketing and distribution arrangements applies only to markets where The Coca-Cola Company has a market share in excess of 40 percent and more than twice the share of the nearest competitor. These undertakings were entered into to avoid infringing Article 82 as regards abuse of dominancy. The threshold applied here may very well also be understood to define the new views of the Commission as to the limits of the carve-out of the rationale of the vertical restraints block exemption, and thus the scope of the safe harbor to be deducted from the guidelines thereto.

The vertical restraint block exemption does allow for unilateral vertical agreements between competitors, if the distributor does not have a worldwide turnover in excess of f 100 million.

The exemption blacklists a number of provisions. Not exempted are vertical arrangements that, possibly in combination with other factors under the control of the parties, aim at restricting:

  • the distributor’s ability to establish its price (although maximum prices are allowed, unless they would indirectly result in price-fixing);
  • the territory or the circle of customers the distributor may service (with some major exceptions to be discussed below);
  • active or passive sales to end users by a participant in a selective distribution system;
  • intrabrand deliveries between distributors (either at various levels in the chain or horizontally) within a selective distribution system;
  • the ability of an OEM supplier of an distributor to sell its components to aftermarket distributors not belonging to the distribution network of the distributor.

The following territorial and/or customer restrictions are allowed:

  • the restriction of active sales by an exclusive or non-exclusive distributor into the exclusive territories reserved by the principal or allocated to other (exclusive) distributors, provided this does not bring any restriction down to the level of the customers of such distributors;
  • the restriction of sales to end users imposed on wholesalers;
  • the restriction of sales by a participant in a selective distribution system to non-authorized resellers;
  • the restriction imposed by a manufacturer on the purchasers of its components supplied for assembly, not to supply customers that use such components to produce assembled products competing with the products of manufacturer.

The vertical restraints block exemption also blacklists the following obligations:

  • any direct or indirect concurrent non-compete obligation,3 when entered into for an indefinite period of time of more than five years, unless the distributor makes his sales from a location leased from the principal and the non-compete is restricted to the duration of the lease.
  • all post-term non-competes in relation to the “contract” good of the preceding distribution contracts,4 with the exception of a one-year post term non-compete entered into (i) in relation to the “contract” goods, (ii) provided restricted to the “contract” facility, and (iii) indispensable to protect the know-how transferred by the principal to the distributor.
  • any direct or indirect obligation that causes members of a selective distribution organization not to sell competing brands
“The regulation will have direct or indirect effect in most Member States that incorporated the exemption in their national competition law.”

The regulation will have direct or indirect effect in most Member States that incorporated the exemption in their national competition law, as well as on agreements that do not have a community dimension. Thus the block exemption also sets the standard for nation distribution issues.

It should be noted that if a distribution agreement contains a provision blacklisted under the block exemption, this will not impact the other provision of the agreement being covered by the block exemption. In practical terms, this makes the blacklisted clause null and void and may cause the parties to be exposed to fines, but the remainder of the agreement remains valid (if national law so permits). As mentioned above, the use of any hard core restriction is penalized with the nullity of the relevant agreement in toto, apart from the imposition of substantial fines(e.g., the fine of S 102 MM imposed on Volkswagen AG for having measures designed to prevent parallel trade by its distributors between Austria and Italy).

Regulation 1/2003

Regulation 1/2003 provides for the framework for the enforcement of the competition rules of the EC Treaty. In addition, Regulation 1/2003 introduces broader investigatory powers for the European Commission than were previously in place.

Abolition of the Notification System in Favor of Self-Assessment.

Regulation 1/2003 establishes a “directly applicable exception” system whereby agreements, decisions and concerted practices will be lawful or void depending on whether they fall outside the scope of Article 81(1), satisfy the conditions of Article 81(3), or in fact breach Article 82. The European Commission has abandoned its monopoly on applying Article 81(3) and, with it, the notification system. Article 81(3) will become directly applicable by National Competition Authorities and national courts, in the same way as the rest of Articles 81 and 82.5

The new system places a burden of complete self reliance upon companies and their legal advisors to determine whether their arrangements satisfy the criteria for exemption. With a view to further assist with this self-assessment by undertakings, the Commission already published so-called Commission notices and guidelines on the block exemption regulations on vertical restraints in 2000 and on the horizontal co-operation agreements in 2001. Furthermore, the Commission has published guidelines and notices. These documents should, in most cases, allow companies to reliably assess their agreements with regard to Article 81. However, the new system brings huge uncertainties which will lead to increased caution about the ways in which agreements and behavior are arranged.

Where cases give rise to genuine uncertainty because they present novel or unresolved questions for the application of Articles 81 and 82, individual companies may seek informal guidance from the Commission. The Commission may provide guidance on novel questions on the interpretation of Articles 81 and 82 in a written statement (“guidance letter”). However, these guidance letters are not a substitute for a judgment on a particular case and in the particular economic context of a case. Furthermore, it is important to emphasize that the Commission will only take up a request for guidance when it believes that the Community interest will be furthered.

 

This Alert was written by Hans E. Urlus in the Amsterdam office. Please contact Mr. Urlus at +31 20 301 7300 or your Greenberg Traurig liaison if you have any questions regarding the subject matter of this Alert.


Footnotes

1 Albeit that as regards such infringements the Commission indicated that it is the obligation of the national authorities and courts to sanction such infringements, the Commission will only act on its own devolution if community interest so requires. The Commission also stipulated that infringements made by small- and medium-sized enterprises, as defined in the attachment to the Commission recommendation 96/280/EU, in principle are not capable of infringing trade between the Member States, and the Commission will not on its own devolution or on the basis of a complaint investigate such infringements even if the thresholds of five, respectively 10 percent, are met. Please note: such minor infringements will most often be actionable infringements under the national competition law of the Member States.

2 Or, in the case of exclusive supply, the market share of the purchaser.

3 Any direct or indirect obligation imposed on the purchaser not to be involved in the distribution or marketing of products competing with the "contract" products, and/or any direct or indirect obligation imposed on the purchaser to source more than 80 percent of its demand for the "contract" products from the principal amounts to a non-compete for the purpose of the vertical restraints block exemption.

4 Post-term non-competes can be agreed upon in relation to commercial agency contracts and conceivably in relation to agreements where know-how and proprietary information were shared, but presumably only if an objective valid reason exists and it can be explained why such information can not be effectively protected by a secrecy clause and a non usus obligation.

5 Articles 81(1) and 82 of the EC Treaty have direct applicability by virtue of case-law of the Court of Justice of the European Communities.

 

© 2005 Greenberg Traurig


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This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.