Article 101 - Treaty on the Functioning of the EU

Article 101 of the Treaty on the Functioning of the European Union. The balance between allowing businesses to strike bargains and the need to maintain the consumer’s interests

Question

“Article 101 of the Treaty on the Functioning of the European Union attempts to strike a balance between the need to allow businesses to strike bargains with each other, and the need to ensure that those arrangements do not act against the consumer’s interests.”

To what extent do you think that Article 101 and its supporting notices and regulations strike the correct balance between these two competing interests?

Answer

Introduction

European Union (EU) competition law acknowledges the need to protect competition in the common market, while at the same time fostering effective collaboration where necessary between enterprises where this would benefit consumers. This juxtaposition is at the heart of Article 101 of the Treaty on the Functioning of the European Union (TFEU). Whereas Article 102 is aimed at preventing individual dominant enterprises from foreclosing markets through unilateral action such as excessive pricing or loyalty rebates, Article 101 addresses the bilateral or multilateral conduct of two or more enterprises this may take numerous forms such as price fixing, market sharing, parallel imports or most favoured nation (MFN) clauses. Indeed, the European Commission (the “Commission”) distinguishes between activity at the same level of the market, where products compete directly (‘horizontal’ arrangements) and at different levels of the market (‘vertical’ arrangements).^[1] This essay will assess to what extent the European Court of Justice (the “Court”) and the Commission (collectively the “Institutions”) have struck the right balance between fostering legitimate collaboration between businesses on the one hand, and protecting the interests of consumers on the other. It will be argued that the Institutions have taken a largely measured and prudent approach, though the approach to exemptions under Article 101(3) could still be improved.

The prohibition under Article 101(1)

Article 101(1) of the TFEU prohibits agreements and concerted practices between undertakings (or associations) which (i) may affect trade between Member States, and (ii) prevent, restrict or distort competition within the internal market either by object or effect. It is therefore important to note at the outset that the Institutions do not generally deal with anticompetitive co-operation occurring in only one Member State, since this is remains within the jurisdiction of national competition authorities: for example, the UK applies the Article 101 rules to domestic arrangements in the form of the Competition Act 1998.^[2] However, practices with a cross-border nexus which breach the de minimus threshold are usually dealt with by the Commission in the first instance. The Guidelines on the Applicability of Article 101 represent an excellent reference point for the Commission’s approach. It is clear from the Guidelines that the Commission is particularly severe on so-called ‘object’ restrictions, which have ‘a high potential of negative effects’.^[3] These include price fixing, output reduction and market sharing, all of which lead to a reduction in consumer welfare because consumers have to pay higher prices for the relevant goods or services. There is also likely to be a misallocation of resources, because such goods or services are not produced in sufficient quantities.^[4] The Commission’s approach to such activities is to impute an anticompetitive effect on the common market as a matter of course, obviating the need for a lengthy economic analysis.^[5]

Because the activities engendered by ‘object’ restrictions are so severe, much of the credibility of the Institutions rests on their ability to deter and/or punish such breaches. The evidence suggests that the Institutions have taken an admirably robust approach. It was reported by the Financial Times in early 2015 that fines for price fixing had achieved a global record of £5.3bn in 2014: EU fines formed a significant part of the total sum, and the EU is regarded as a trailblazer for less developed regimes.^[6] In 2012, the Commission fined 14 international freight forwarding companies a total of EUR 169m for activities relating to four price fixing cartels.^[7] In the previous year, the Commission had levied a fine of EUR 86m on several producers of window mountings after finding that they had convened in secret once a year at trade association meetings in order to set price increases for the following year.^[8] This decision is evidence of the Institutions’ willingness to punish informal ‘gentlemen’s agreements’ as harshly as formal, written statements of co-operation. Given the pernicious effects of price fixing, which the Commission acknowledges in paras 21 and 22 of the Guidelines, it is laudable that there is such a harsh approach to serious breaches.

The approach to other ‘object’ restrictions has been equally rigorous. The attitude to output restriction is summed up in the well-known Irish Beef case,^[9] in which Irish beef processors were fined for colluding secretly to reduce overcapacity in the domestic beef market, which had the effect of altering the supply/demand dynamic in such a way as to increase prices. This decision illustrated the Commission’s zeal to prevent anti-competitive collusion even in circumstances where to act otherwise might have produced the failure of several competitors: as such, the mantra that EU policy exists to protect competition rather than competitors was in evidence.^[10] However, the Institutions do not only punish instances of horizontal co-operation. Resale price maintenance, which is an example of vertical co-operation, is acknowledged as detrimental to consumers because a supra-competitive end consumer price is fixed, in which both parties share the spoils by retaining a larger margin.^[11] Parallel imports, another form of vertical co-ordination, is another area of concern as typified by the Court’s decision to uphold the Commission decision in the Pioneer case.^[12]

If it is clear that the Institutions have been rigorous in pursuing companies deemed to be in breach of Article 101(1), then the question remains whether the correct balance has been struck to ensure that co-operation that might produce a net benefit to consumers has not been censured. Certain exceptions are dealt with explicitly under Article 101(3), which is examined in the next section. However, at the Article 101(1) stage of analysis, the Institutions are prepared to allow certain arrangements as long as there is a sufficient benefit to offset any foreclosure effects. In the T-Mobile case,^[13] the Court was prepared to find for the defendants on the basis that exchange of sensitive market information could actually lead to better customer service, even if as a general rule such exchanges were in contravention of competition law. This is an example of the Institutions’ sensible and prudent approach to weighing up anti-competitive impact with consumer benefits, even where ‘object’ restrictions are concerned. This is also evident in the attitude to vertical restrictions. In the CEPSA decision,^[14] the Court ruled that vertical agreements containing an resale price maintenance obligation do not necessarily fall into the scope of Article 101(1). Indeed, the Commission’s Guidelines on Vertical Restraints recognise that resale price maintenance may confer a net benefit to consumers by encouraging new market entrants, preventing free-riding and providing encouragement to offer pre-sale services.^[15]

That is not to say that the Institutions’ approach to ‘effect’ (as opposed to ‘object’) restrictions is unduly lenient. When the interests of consumers are prejudiced, the Commission applies Article 101(1) and the Guidelines rigorously in order to punish non-compliance. In 2000, the Commission fined Bayer heavily for agreeing with distributors to limit parallel imports of pharmaceuticals.^[16] Where MFN clauses are concerned, the Commission showed its teeth in 2012 by fining a number of publishers and retailers for agreements that ensured that e-book process would not be cheaper in third-party retailers.^[17] Nevertheless, the overall impression is that in its interpretation of Article 101(1) the Institutions have achieved a delicate balance between enforcement and leniency. However, the main tool for exempting agreements that might otherwise be anticompetitive is contained in Article 101(3): the next section will show that that provision allows the Commission to take a holistic and common sense approach to collaboration that might otherwise fall foul of Article 101(1).

The exceptions under Article 101(3)

Though Article 101(1) operates as an initial filtering mechanism for anticompetitive arrangements, for example on the basis of the de minimus or cross-border nexus requirements, the principal means of validating collaboration between enterprises is contained in Article 101(3). Therefore, even if an agreement breaches Article 101(1) on the face of it, it may still be permitted by the Commission on the basis that it fulfils four cumulative conditions under Article 101(3): namely efficiency gains, a fair share of gains for consumers, the preservation of competition, and if the measures are a sine qua non of the objective.^[18] In order to clarify the use of Article 101(3), the Commission has issued Guidelines on the Applicability of Article 101(3) stating a set of criteria which are used in assessing pro-competitive effects. For example, efficiency gains may comprise a range of economic and econometric properties including cost and qualitative efficiencies.^[19] To use the T-Mobile example from the previous section, the exchange of sensitive market data by competitors could produce beneficial efficiency gains which ultimately lower prices because there is a rationalisation of variable costs. Or, to give another example, exclusive distributorship agreements may promote innovation by giving market players assurance about their upstream and/or downstream operations, in turn encouraging long-term investment.

Indeed, the main criticism of the Commission’s approach under Article 101(3) is not that it is not comprehensive enough in theory, but that it has not been applied scientifically enough in practice. The Commission initially took a largely unpredictable approach to collaboration, privileging social benefits rather than subjecting agreements to a rational economic analysis.^[20] However, drawing inspiration from other regimes such as that of the United States, the Commission has adopted a more rational, economic approach to Article 101(3). The result of this modus operandi is to analyse how market failures and transaction costs may influence the evaluation of potentially harmful competitive effects.^[21] However, some commentators still argue that non-economic goals still play an important role in applying Article 101(3), even though the methodology is becoming more scientific^[22]; it is to be hoped that the Commission resists the temptation to use Article 101(3) as a means to promote social goals rather than promoting competition, as per its mandate.

Even if Article 101(3) has sometimes been useful to further social objectives, its accompanying Block Exemptions do form a valuable means of exempting certain sectors from scrutiny where collaboration is undertaken as a matter of necessity. For example shipping, which requires a good degree of mutuality between charter companies in order to further logistical goals, benefits from a variety of exemptions.^[23] These exemptions may therefore benefit consumers in the relevant sectors, since they allow certain companies to operate freely without compliance risks in such a way that ensures a better service and lower prices. Elsewhere, the Guidelines make it clear that inconsequential arrangements that affect only a small fraction of the relevant market will not be deemed contrary to Article 101.^[24] These more straightforward exemptions fulfil a practical expedient of allowing the Institutions to focus only on the most damaging and consequential breaches of Article 101, instead of wasting time analysing sectors that are block exempted or which may otherwise produce an insignificant effect on the market. This further buttresses the argument, made over the course of this essay, that the Commission’s approach to achieving an appropriate balance between enforcing compliance and encouraging pro-competitive activities is largely sensible.

Conclusion

Article 101 is the Institutions’ legislative means of deterring and punishing agreements and/or concerted practices between undertakings which affect trade within the common market and which may prejudice the interests of consumers. It has been shown that Article 101(1) has been used rigorously and effectively in stamping out damaging anti-competitive practices, especially horizontal conduct between players at the same level of the market. The swingeing fines imposed on parties in breach of Article 101(1) make it clear that the Commission is not prepared to tolerate non-compliance. However, as the title quote acknowledges, there is an appropriate balance to be struck with encouraging forms of collaboration between undertakings that may, in fact, produce a net benefit to consumers. The Commission’s various Guidelines recognise the perversity of outlawing such arrangements, which may lower prices and encourage innovation. By allowing collaboration that fulfils a cumulative set of criteria and/or falls into one of the Block Exemptions, the Commission has the flexibility to apply common sense where necessary though it should ensure that social goals are a secondary consideration to rigorous economic analysis. It will be interesting to see if the Institutions gravitate to a wholly economic approach in years to come.

Footnotes

^[1] Richard Whish & David Bailey, Competition Law (7^th ed, OUP, 2012) 82

^[2] Ibid, 59

^[3] European Commission, Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Cooperation Agreements, 2011/C, 11/01, para 21

^[4] Ibid, para 21

^[5] Ibid, para 22

^[6] Financial Times, ‘Global fines for price fixing hit record high’, 6 January 2015, available at ^{http://www.ft.com/cms/s/0/83c27142-95a8-11e4-b3a6-00144feabdc0.html#axzz3dbAuolED} (accessed 20 June 2015)

^[7] Gabor Fejes, ‘Cartels and horizontal agreements: severe fines on freight forwarding companies for worldwide price fixing’ in Journal of European Competition Law (2012) 3(4), 415

^[8] Unauthored, ‘Producers of window mountings fined EUR 86m for price fixing’ in EU Focus (2012) 295, 10-11

^[9] Case C-209/07 Beef Industry Development Society Ltd v Commission [2008] ECR 1-8637

^[10] Okeoghene Odudu, ‘Restrictions of competition by object: what’s the beef?’ in Competition Law Journal (2009) 8(1), 11-17

^[11] Wenhard Moeschel, ‘Vertical price fixing: myths and loose thinking’ in European Competition Law Review (2013) 34(5), 236

^[12] Case 100/80, Musique Diffusion Francaise v Commission [1983] ECR 1825

^[13] Case C-8/08 T-Mobile Netherlands BV v Rand van bestuur van de Nederlandse Mededingingsautoriteit [2009] ECR I-4529

^[14] Case C-279/06 CEPSA Estaciones de Servicio SA [2008] ECR I-6681

^[15] European Commission, Guidelines on Vertical Restraints, 2010/C, 411, para 121

^[16] Case T-41/96 Bayer AG v Commission [2000] ECR II-3383

^[17] Case COMP/AT.39847, E-Books, July 25 2013

^[18] Article 101(3), Treaty on the Functioning of the European Union, OJ 115, 9.05.08

^[19] European Commission, Guidelines on the Application of Article 101(3) of the Treaty, OJ C 101, 27/04/2004, paras 64-72

^[20] Case T-17/93 Marta Hachette v Commission [1994] ECR II-595

^[21] Paolo Ibanez Colomo, ‘Market failures, transaction costs and Article 101 TFEU case law’ in European Law Review (2012) 37(5), 541

^[22] Aleksander Maziarz, ‘Do non-economic goals count in interpreting article 101(3) TFEU?’ in European Competition Journal (2014) 10(2), 341-359

^[23] Goyder & Albors-LLorens, Goyder’s Competition Law, 141

^[24] European Commission, Notice on Agreements of Minor Importance which do not Appreciably Restrict Competition under Article 101(1) TFEU’, OJ C 368, 22.12.2001, p.13-15