Understanding Restrictive Agreements and EU Competition Law
Restrictive agreements in the context of EU Competition Law involve collusion among undertakings to prevent, restrict, or distort competition. This includes fixing prices, controlling production, sharing markets, and imposing unfair conditions. The profitability of collusion in oligopolistic markets depends on factors like barriers to entry and prompt reaction to deviant behavior. Article 101 TFEU outlines the prohibition of such agreements and practices to ensure fair competition in the internal market.
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Masters Degree in Data Science a.y. 2022-2023 EU Competition Law (Part Five) The restrictive agreements Prof. Vincenzo Meli Department of Law vincenzo.meli@uniroma1.it
Restrictive agreements People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices . Adam Smith The Wealth of Nations, Book I, Chapter X. Profitability of collusion. Collusion is a positive-sum game. but It is difficult to reach an anticompetitive agreement as well as to mantain it. Conditions that facilitate the collusion: - oligopolistic markets; - barriers to entry; - homogeneous products; - transparency; - possibility of prompt reaction to the deviant conduct of a competitor (retaliation).
Definition of the relevant market in case of restrictive agreements: the smallest group of products and the smallest geographical area for which it is possible, due to the existing substitution possibilities, a significant restriction of competition according to the object or effect of the agreement understood. Distinction between agreements (prohibited) and tacit collusion (not relevant, unless it leads to a collective dominant position, in which case, however, only any abuse will be sanctioned) Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993): Tacit collusion, sometimes called oligopolistic price coordination or conscious parallelism, describes the process, not in itself unlawful, by which firms in a concentrated market might in effect share monopoly power, setting their prices at a profit-maximizing, supracompetitive level by recognizing their shared economic interests and their interdependence with respect to price and output decisions
REQUIREMENTS: Coordination between independent undertakings; Anti-competitive object or effect; Consistency INTRA-BRAND CONSPIRACY They are not relevant for antitrust law, unless they have discriminatory effects with respect to external parties.
Article 101 TFEU 1. The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. 2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void. 3 ( )
In Socit Technique Minire v Maschinenbau Ulm (1966) the Court of Justice stated that the words object or effect were to be read disjunctively; this means that where an agreement has as its object the restriction of competition it is unnecessary to prove that it will produce anticompetitive effects: only if it is not clear that the object of an agreement is to restrict competition is it necessary to consider whether it might have the effect of doing so. Object: aim of the agreement (not content) Effect: anticompetitive consequence of the agreement, even if the aim is not restrictive The distinction is controversial in doctrine CJEU: the expression "object" refers to the aims pursued by the agreement as such, in the light of the economic context in which it is to be applied (CJEU, 28 March 1984, joined cases 29 and 30/83, Compagnie Royale Asturienne des Mines SA and Rheinzink GmbH v. EC Commission) It is not necessary for there to be actual prevention, restriction or distortion of competition or a direct link between [that agreement or decision] and consumer prices. In addition, although the parties intention is not a necessary factor in determining whether an agreement is restrictive, there is nothing prohibiting the Commission or the Community judicature from taking it into account (CJEU, 11 September 2014, case C-67/ 13, Groupement des cartes bancaires (CB) v. European Commission)
When determining that context, it is also necessary to take into consideration the nature of the goods or services affected, as well as the real conditions of the functioning and structure of the market or markets in question (CJEU, 11 September 2014, case C-67/13, Groupement des cartes bancaires (CB) v. Commissione europea) Certainly prohibited for the object are the so-called hardcore restrictions, like - the horizontal fixing of prices - the allocation of markets or customers - restrictions on the quantities of goods or services to be produced or sold
Appreciable effect on competition (de minimis rule) Commission notice on agreements of minor importance which do not appreciably restrict competition under Article 101(1) of the Treaty on the Functioning of the European Union (De Minimis Notice) 2014/ 291/01 Agreements between companies whose aggregate shares do not exceed: 10% if competing companies; 15% if non-competing companies; Arrangements between small and medium-sized enterprises (fewer than 250 employees; annual turnover of less than EUR 40 million or balance sheet total of less than EUR 27 million) are not prohibited.
BUT Always prohibited are: agreements between competitors that - limit production or sales; - fix prices; - restrict supply to consumers. Agreements between non-competitors that - set minimum or fixed prices; - limit territory or access to consumers; - restrict sales in a selective distribution system; - restrict the sale of spare parts, preventing it to independent end users or repairers.
Agreement Express coordination of activities by independent undertakings (69/240/CEE: D cision de la Commission, du 16 juillet 1969, relative une proc dure au titre de l'article 85 du trait (IV/26.623 - Entente internationale de la quinine) A contract in the meaning of civil law is not necessary. Gentlemen's agreements are also agreements, i.e., agreements for which the parties, implicitly or explicitly, agree not to resort to the courts and, therefore, the violation of which is sanctioned only through social disapproval (CJEU, 15 July 1970, ACF Chemiefarma NV v. Commission of the European Communities, Case 41-69) It is not necessary that the agreement is concluded by the legal representatives of the involved undertakings It is not needed a written agreement
Sometimes unilateral behavior is considered an agreement. This occurs when conditions communicated by one party are accepted by the others (AEG, Volkswagen I and II, Adalat). In particular, a "common will" must be identified. This can occur where: (A) there is an explicit proposal by one party and a behavior of tacit adherence by the other; (b) there exists between the parties a relationship that can already be called an agreement (e.g., a contract), and the unilateral conduct refers (implicitly or explicitly) to it. What is unlawful, as an understanding, is not the unilateral conduct, but the agreement, at least in part, as applied by one party. Complex agreements and cartels (Polypropylene): mix of agreements and concerted practices, with different stages and varying participation. "Single overall agreement". Responsibility of all undertakings for the cartel in its entirety.
Concerted practices Concerted practice corresponds to a form of coordination between undertakings which, without being pushed to the point of implementing an actual agreement, consciously substitutes a practical cooperation between them for the risks of competition (CJEU, 8 July 1999, Commission v. ANIC Partecipazioni, Case 49/92 P ). The agreement or its proof is lacking. The behaviors are parallel. Contacts between enterprises are found (ICI dye stuff; Woodpulp; Sugar). Cheap talk. Tacit collusion, induced by market structure, is not enough. The problem of burden of proof A) In the presence of repeated contacts, a cartel can be considered to exist. B) In the absence of contacts, however, a pronounced parallelism of the behaviors is considered evidence of a cartel where the firms do not give a convincing alternative explanation (the evidence should consist of showing that the parallelism of behavior is induced by the oligopolistic structure of the market, i.e., that it is mere conscious parallelism)
Facilitating practices. Meetings. Information exchange, including through third parties. Public announcements of future prices or quantities. Cheap talk. Exchanges of information may be prohibited per se. To be considered illicit, the information must be - commercially sensitive, - current (or no more than one year old) or related to the future, - disaggregated, - temporally close in time
Ambivalence of information exchange (Communication from the Commission Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements Text with EEA relevance, 2011) Possible benefits of information exchange: - Efficiency gains: - Knowledge of competitors' costs can serve as an incentive; - Better knowledge of demand, saving unnecessary costs; - Better knowledge of consumer-related risks (e.g., insolvency); - If the information is truly public, the exchange can also benefit consumers; - Future information exchange can also be efficient.
Risks of information exchange; - May facilitate collusion; - May facilitate competitive foreclosure; - Characteristics of markets that favor collusion.
Decisions by associations of undertakings Broad interpretation of the notion of "association." All types of associations, whatever their structure or legal nature, acting on behalf of their members: Examples: - Professional orders and colleges; - Nonprofit associations; - Business associations; - Sports associations. Simple circulars to members and internal recommendations are also relevant. Problem of sanctions to associations.
The exemptions (Article 101 (3) TFEU) ( ) 3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of: - any agreement or category of agreements between undertakings, - any decision or category of decisions by associations of undertakings, - any concerted practice or category of concerted practices, which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.
Exemptions (EU Antitrust Law) v Rule fo Reason (US Antitrust Law) Under the rule of reason, courts examine both the positive and negative effects of an agreement before determining whether it violates antitrust laws. Courts consider several factors in making their determinations, such as the business purpose of the agreement, market power of the parties involved, competition within the relevant market, and other market circumstances. In the EU model, all agreements that restrict competition are deemed in violation of the article 101 TFUE, but those which meet the following conditions can be exempted from the application of the prohibition
Positive conditions: (a) improvement of production or distribution of goods or promotion of technical or economic progress; (b) reservation to users of a fair share of the resulting benefit. Negative conditions: (a) non-indispensability of the restriction; enterprises involved, proving too costly or too risky; (i) it must be ascertained whether coordination is necessary in place of independent action by the (ii) it must be checked whether coordination is actually necessary to achieve the efficiency gains; scenarios. (iii) it must be verified whether the chosen coordination scenario is the least restrictive of all possible (b) Elimination of competition for a substantial part of the products in question.
Originally (Reg. No. 17/1962): 1. Individual exemptions, subject to notification to the Commission of the agreement 2. Block exemptions With Reg. 1/2003, the individual exemption scheme has been repealed. Companies are required to be self-responsible, and the Commission issues numerous guidelines to give predictability to its decision-making criteria. Reasons for the use of block exemptions
Horizontal agreements/Vertical agreements The firsts are cooperative agreements between undertakings operating on the same level of the production/commercial chain The seconds are cooperative agreements between complementary enterprises placed on different levels of the supply chain. The most obvious example is agreements between manufacturers and distributors of their products.
Horizontal agreements Generally prohibited Their contents can be by and large distinguished into three categories: (a) Uniforming the market behavior of participating enterprises (problem of standardizing general terms and conditions, which can have pro-consumer effects by reducing its information costs); production standardization. (b) Differentiating and making the market behavior of participating enterprises complementary; (i) territorial limitations; (ii) limitation by customer type; (iii) limitation by type of supply to the same customer; (iv) limitations by commodity type; (c) Cooperating in some phase of activity deemed to be of common interest; Uniforming intervention by the p.a. only scriminites firms if it leaves them no room for autonomy choice Bid rigging
Block exemption for horizontal cooperation agreements Commission guidelines on horizontal cooperation agreements (2011) - R&D agreements (market share must not exceed 25 percent) - Production agreements (including subcontracting and specialization) - Purchasing agreements (max 15% joint in purchasing markets; max 15% joint in selling markets) - Commercialization agreements (max 15% joint) - Standardization agreements - Information exchange
Regulation exempting R&D agreements (Reg. No. 1218/10) (expired on 31 December 2022 but its renewal with amendments is currently discussed) Article 3 (2) The research and development agreement must stipulate that all the parties have full access to the final results of the joint research and development or paid-for research and development, including any resulting intellectual property rights and know-how, for the purposes of further research and development and exploitation, as soon as they become available. Where the parties limit their rights of exploitation in accordance with this Regulation, in particular where they specialise in the context of exploitation, access to the results for the purposes of exploitation may be limited accordingly. Moreover, research institutes, academic bodies, or undertakings which supply research and development as a commercial service without normally being active in the exploitation of results may agree to confine their use of the results for the purposes of further research. The research and development agreement may foresee that the parties compensate each other for giving access to the results for the purposes of further research or exploitation, but the compensation must not be so high as to effectively impede such access.
Duration: Non-competing undertakings: indefinite (the entire duration of the research and development activity), but seven years from the first marketing of the products when joint exploitation is envisaged; Competing undertakings: the same rule as for non-competitors applies, but only if the joint share does not exceed 25%. At the end of the period in Paragraph 1, the exemption continues to apply as long as the joint share does not exceed 25%. Black clauses: - Limitation of the parties' freedom to conduct research in areas unrelated to that of the agreement; - Limitation of production or sales, with certain exceptions. - Fixing of sales or licensing prices, with certain exceptions. - Various territorial limitations. Gray clauses: - Covenants not to challenge the validity of IPRs. - Obligations not to grant licenses to third parties.
Specialisation agreements (Reg. N. 1217/10) (expired on 31 December 2022 but its renewal with amendments is currently discussed) The exemption applies if the combined share of the participating undertakings does not exceed 20 percent of the relevant market. Black clauses (a) Price fixing when selling products to third parties, except for price fixing to direct customers in joint distribution; (b) limitation of production or sales, except: specialization agreements or relating to the fixing of production capacity and volume in the context of joint production agreements; and (i) provisions relating to quantities of products agreed in the context of unilateral or reciprocal (ii) of the setting of sales targets in the context of joint distribution; (c) allocation of markets or customers.
Vertical agreements Vertical integration/vertical agreements: advantages and disadvantages. Centrality of transaction costs. The clauses introduced in these types of agreements are, of course, intended to provide answers to the mutual and conflicting needs of the contracting parties. E.g., the manufacturer wants the distributor to promote the sale of its products, expand its market, etc., etc., etc. The distributor is reluctant to invest unless he has a guarantee from the manufacturer that the investment will not be nullified by the over-expansion of the manufacturer's network and competition within that network. The manufacturer must therefore "buy" the distributor's willingness. On the other hand, the manufacturer may also want to prevent autonomous choices by the distributor from undermining the optimal level of product sales and maximizing its own profit (problem of so- called double marginalization).
These can be achieved through the inclusion of various provisions in distribution contracts. Price and non-price restraints Most Popular forms: - RPM (maximum, minimum, fixed prices). - Most-favored-nation clause (commitment to extend discounts granted to one distributor to all distributors). - Franchising (non-linear pricing: price is divided into two parts, one fixed and one variable depending on quantities sold). - Selective distribution (qualitative, quantitative or mixed). - Exclusivity clauses (exclusive dealing; exclusive purchasing). - Territorial restrictions (ban on active sales; ban on passive sales).
From the perspective of antitrust law vertical agreements can have effects: - within the same chain of vertical relationships (intra-brand competition); - within the horizontal relationships between competitors (manufacturers or distributors) (inter-brand competition). The effects of vertical agreements on welfare are controversial. For the Chicago School, vertical agreements are all to be evaluated under the rule of reason and never be prohibited per se. Per se rule (United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967) Schwinn). Rule of reason in cases of vertical non-price restraints (Continental Television v. GTE Sylvania, 433 U.S. 36 (1977). Rule of reason in cases of vertical price restraints (Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007)
According to the Chicago School they are procompetitive because they may resolve the problem of free-riding (Telser, 1960) (the free-rider does not afford the costs to guarantee pre- and after-sales services) Criticism: It may only apply to complex products; - pre- and after-sales services are also paid for by uninterested consumers; - excessive fragmentation of distribution, attracted by guaranteed margins. Explanations against their procompetitiveness : - Restriction of freedom of competition between distributors; - Facilitation of collusion between distributors and/or between manufacturers; - Foreclosure effect - Commitment problem (with vertical restraints, a manufacturer deemed valuable - and therefore attractive to many distributors - undertakes to guarantee distributors that it will not negotiate with others in the same area). In this way, it will be able to keep prices high
The general rule is that the dangerousness of vertical agreements varies depending on - the market shares held by one or both parties; - the existence of barriers to entry; - the dissemination of that kind of restraint on the market; - the duration of the contracts.
European solution Generally hostile initial position of EU case law; Strict interpretation of restrictiveness (Art. 101(1) TFEU); Need to fight compartmentalisation of national markets Issuance of a series of regulations for categories of vertical agreements The latter is the: Commission Regulation (EU) No 2022/720 of 10 May 2022 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices
Block Exemption regulation - Purpose - Review - Market share cap - Price restraints (minimum price, fixed price, maximum price) - Non-price restraints - Selective distribution - Exclusive distribution - Active/Passive sales - Black clauses Hardcore restrictions - Gray clauses e.g. non-compete obligations
The leniency programs Leniency is the total or partial reduction of fines or other penalties granted by competition authorities to companies involved in cartels in exchange for disclosing the existence of the cartel agreement or for their cooperation during the authorities investigation by bringing forward evidence. This tool helps detect secret cartels, and also to deter companies from entering into cartel agreements. It is based on the prisoner s dilemma: its objective is to create distrust amongst cartel participants, as there is a constant threat that one of them may report the cartel to the authorities. Therefore, in combination with severe penalties, leniency programmes maintain constant pressure on companies to cooperate with competition authorities.Basis and general characteristics Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11) Non-imposition or reduction of sanctions. Conditions for obtaining leniency
The first cartel participant that informs the Commission of a cartel and provides sufficient information for the Commission to commence an investigation receives full immunity from any eventual fine, if it complies with the conditions of the Leniency Notice; Any other cartel participants that apply for leniency after the investigation has started could receive a reduction in any potential fine if they provide sufficient evidence that represents significant added value and cooperate genuinely. Evidence is considered to be of a "significant added value" for the Commission when it reinforces its ability to prove the infringement. The first company to meet these requirements is granted a reduction of between 30% to 50%, from the fine, which would have otherwise been applied, the second a reduction between 20% to 30%, and subsequent companies up to 20%.
1. the applicant must cooperate fully, genuinely, expeditiously, on a continuous basis and in a sincere spirit of cooperation. 2. it must terminate its participation in the infringement as of the date of the application. 3. the applicant must ensure that no evidence is destroyed. 4. the applicant cannot reveal the existence of the leniency application.
