Encouraging Business And Protecting Consumers

How far does EU competition law strike a balance between encouraging business cooperation and protecting the interests of consumers?

Introduction

The Treaty on the Functioning of the European Union (TFEU) contains two Articles designed to restrict anti-competitive practices in the jurisdiction of the European Union (EU). Article 102 (formerly Article 82) targets dominant behaviour by single enterprises rather than cooperation between two of more entities, and as such is outside the scope of the question. In contrast, Article 101 (formerly Article 81) targets cooperation between two or more undertakings which has the object or effect of distorting competition in a relevant market. This may consist of restrictive agreements between enterprises operating at the same level of the market, generally competing against one another (‘horizontal’ arrangements), or between enterprises operating at different levels of the market, where one party is upstream of the other (‘vertical’ arrangements).^[1]

Though both practices may give rise to substantial fines for the undertakings involved and/or criminal punishment for the wrongdoing individuals in severe cases, certain horizontal arrangements such as price fixing and market sharing tend to be treated as the most serious types of breach.^[2] Vertical arrangements, meanwhile, tend to relate to attempts to foreclose a particular market by relationships of exclusivity, including distribution arrangements and resale price maintenance. In applying Article 101 to enterprises operating in the EU, the European Commission (the “Commission”) and the European Court of Justice (the “Court”)^[3] must seek a delicate balance between protecting consumers and supporting the legitimate and fluid operation of the market economy. This essay will argue strongly that the EU institutions have achieved an effective balance.

Article 101(1): horizontal and vertical agreements

Under Article 101(1), the Commission is obliged to sanction both horizontal and vertical forms of anti-competitive cooperation. The Guidelines on the Applicability of Article 101 provide a useful reference point. The document recognises that cooperation between undertakings operating at the same level of the market such as two chip manufacturers may manifest itself in a variety of ways.^[4] Not all of those are recognised as harmful, as reflected in the carve-outs for collaboration which may benefit consumers and the economy as a whole (see section below). However, the Guidelines recognise that certain forms of cooperation are particularly harmful to the promotion of fair competition especially market sharing, output restriction and price fixing. Such breaches of Article 101 are regarded as ‘object’ rather than ‘effect’ restrictions, which means that the Commission assumes that there is a restrictive effect and does not undertake a lengthy economic analysis.^[5] The harsher approach taken towards such behaviour is reflected in the huge fines that have been levied from time to time on offending companies. For instance, in 2011 a combined fine of £280m was imposed on Unilever and Proctor & Gamble in respect of fixing prices of washing powder in a variety of EU countries including France and Germany.^[6] It was reported by the Financial Times in January 2015 that price fixing fines had hit a global high of £5.3bn in the previous year, of which EU fines formed a significant constituent and provided something of an inspiration for other competition authorities to levy harsher penalties.^[7]

Elsewhere, the Commission and the Court have treated so-called ‘gentlemen’s agreements’ (lacking a formal, written element of collusion) just as harshly as formal anti-competitive arrangements. Such informal arrangements typically take place in secret and are hard to detect. Nevertheless, the Irish Beef case^[8] is evidence of the Commission’s zeal to clamp down on informal horizontal arrangements. On this occasion the abuse in question was one of output restriction: certain beef processors in Ireland sought to reduce overcapacity (and falling prices) by secretly colluding to decrease output, so that an improved dynamic of supply and demand would return the beef processing firms to profitability and restore the fortunes of the sector. The Commission’s decision to fine the colluders was an example of applying common sense to prevent illegitimate and damaging cooperation the arrangement clearly operated against the interests of Irish consumers, who paid higher prices as a result of the output restriction.^[9]

However, that is not to say that the EU institutions are dogmatic even in its prosecution of pernicious ‘object’ restrictions. In the In the T-Mobile case,^[10] the Court acknowledged that the parties had exchanged information, but set this off against the pro-consumer effects of collecting market data to lead to better customer service.^[11] Specifically, it was decided that the breach in question (and subsequent breaches in the EU) would be subject to an ‘appreciability’ requirement, in which only agreements deemed to have a sufficiently damaging or wide impact would be in breach of Article 101.^[12] This is an example of the EU institutions’ measured approach to horizontal restrictions, indicating a willingness to weigh up the positive effects of cooperation (in a way that may actually benefit consumers) against potential foreclosure effects. Where the net result is neutral or positive, the institutions will not penalise collaborating entities.

If the approach to horizontal arrangements shows an enlightened and balanced approach, then this is also reflected in the EU’s attitude to arrangements between operators functioning at different levels of the market (so-called ‘vertical’ arrangements). It is certainly true that such agreements have the potential to foreclose markets and harm consumers: indeed, the Commission’s own Guidelines on Vertical Restraints recognise that vertical arrangements may produce a whole suite of negative effects such as limiting choice for consumers, raising wholesale or retail prices or both, and discouraging innovation.^[13] The logic of the Guidelines is reasonable: to give a typical example, an exclusive relationship between two undertakings operating at different levels of the market, such as a manufacturer and distributor, can harm competition by shutting out either upstream or downstream competitors. Other types of breach such as resale price maintenance (RPM), which is viewed very severely by the Commission, may keep consumer prices artificially high in the name of protecting upstream margins. However, even where RPM is concerned the EU institutions will balance the harm caused against pro-consumer effects. This was reflected in the CEPSA decision,^[14] in which the Court indicated that a vertical agreements that contains an RPM obligation does not necessarily fall into the scope of Article 101(1). Indeed, the Commission’s Guidelines on Vertical Restraints recognise that such arrangements may provide a net benefit by encouraging new market entrants, preventing free-riding and providing encouragement to offer pre-sale services.^[15]

In other forms of vertical arrangement the Commission has also recognised that anti-competitive effects must be weighed against potential benefits. That is not to say that the approach is unduly lenient. In the Pioneer case,^[16] the Commission took a severe approach towards vertical coordination in the context of parallel imports, which it recognised as especially damaging to competition on account of the fact that consumers in different EU jurisdictions could end up paying different prices for the same product.^[17] Elsewhere, the increasingly topical area of most favoured national (MFN) clauses has shown that where a vertical arrangement has bone fide pro-competitive effects the Commission will pay due regard by taking a measured attitude to enforcement.^[18] In December 2012, the Commission clamped down on MFN clauses between certain publishers and retailers, which was designed to allow Apple to compete by ensuring that the prices of e-books would not be cheaper in third-party retail operations.^[19] This decision illustrates that the Commission is willing to intervene to prevent vertical arrangements where the interests of consumers are prejudiced.

The exceptions under Article 101(3)

This essay has shown that under the remit of Article 101(1) the Commission and the Court have taken a reasonable and balanced approach to the foreclosure of markets either on a horizontal or vertical basis. Indeed, an arrangement may be deemed not to prohibit Article 101(1) on the basis of a lack of ‘appreciability’ or by taking into consideration pro-competitive effects with the exception of certain ‘object’ restrictions such as price fixing, which are considered serious enough to breach Article 101(1) as a matter of course. However, even if an arrangement is deemed on the face of it to breach Article 101(1), it may still be deemed legitimate as long as it fulfils certain conditions under Article 101(3): efficiency gains, a fair share of the gains at the consumer level, no elimination of competition and that the measures are indispensable for the fulfilment of the objective.^[20] The Commission’s supplementary Guidelines on the Applicability of Article 101(3) lay out a selection of objective and scientific criteria that the Commission will use when assessing pro-competitive effects, as set against the anti-competitive effects that may breached Article 101(1). For example, cost efficiencies and qualitative efficiencies will be considered under the heading of efficiency gains.^[21] To give an example, an exchange of information between competitors about sensitive market data which may influence marketing strategy to the detriment of other market players may, in fact, have a counter-veiling pro-competitive effect of rationalising certain variable costs in such a way as to lower prices for consumers. This flexibility allows the Commission and the Court to take a balanced and common sense approach to cooperation in which a net benefit consumers is recognised and encouraged.

The Commission’s early approach to what is now Article 101(3) was to take a rather uneven and unpredictable qualitative approach, weighing up what appeared to be the social benefits of an arrangement rather than applying a more rigorous and objective quantitative assessment.^[22] This gave the Commission a degree of flexibility to sanction arrangements which may have produced a net detriment in an economic sense, but which fulfilled the Commission’s overarching social objectives for the EU as a whole. However, the increasingly scientific and economic approach to the assessment of pro-competitive effects under Article 101(3) which is largely replicated in abuse of dominance cases under Article 102^[23] – ensures that an objective analysis may be undertaken of the impact of counter-veiling pro-competitive effects. This prevents the Commission from reaching whimsical decisions and promotes an approach that buttresses consumer welfare as well as preserving the ability of businesses to collaborate under circumstances where there is a net benefit. The upshot of the modern approach is to analyse how market failures and transaction costs may dictate the assessment of potentially harmful competitive effects.^[24] To this may be added a series of procedural exemptions under Article 101(3), which rule out a matter of course arrangements where the parties operate with an inconsequential share of the relevant market.^[25] Elsewhere, Block Exemptions listed in the Guidance provide certain established arrangements that take place in certain sectors, notably shipping, with immunity from action.^[26] This allows the Commission to give licence to certain arrangements that it deems to be beneficial to the EU, allowing enterprises in the relevant sectors to continue operating without compliance risks. This further demonstrates the balance between rigour and flexibility that the EU institutions have sought to promote in the operation of Article 101.

Conclusion

Article 101 is framed in such a way as to prevent and/or punish the commission of certain arrangements that may foreclose markets, distort competition and ultimately prove harmful to consumers. As such, the TFEU mirrors many other leading competition and antitrust jurisdictions across the world, as well as providing the underpinning for disparate national EU regimes. This essay has shown that in its approach to Article 101 the Commission and the Court have been successful in adopting a balanced, measured approach that allows legitimate business collaboration as long as the net effect on consumers is not negative. In horizontal cases, certain practices such as price fixing are rightly dealt with severely and may give rise to huge fines; in vertical cases, the Commission is less likely to find an ‘object’ restriction, but will still clamp down on arrangements that harm consumers such as parallel imports or resale price maintenance. Though Article 101(1) and its supporting Guidance allows the Commission to disregard certain types of arrangement in the first instance, Article 101(3) provides a further mechanism to weight up anti-competitive with pro-competitive effects. This ensures that the Commission is able to balance the interests of consumers on the one hand with the tendency for business cooperation on the other.

Footnotes

^[1] Alison Jones & Brenda Sufrin, EU Competition Law: Text, Cases and Materials (5^th ed, OUP, 2014) 122

^[2] Article 101(1) (a) (e), Treaty on the Functioning of the European Union, OJ 115, 9.05.08; see further Nigel Foster, Blackstone’s EU Treaties and Legislation 2014-15 (OUP, 2014)

^[3] The Commission and the ECJ form two of the core institutions of the European Union the Commission administers competition law in the first instance, and the ECJ acts as the ultimate arbiter see further Gary Slapper & David Kelly, The English Legal System 2014-15 (Routledge, 2014)

^[4] 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 32

^[5] Case T-374, European Night Services v Commission [1998] ECR II-3141.

^[6] European Commission, press release, 11 April 2011, available at ^{http://europa.eu/rapid/press-release_IP-11-473_en.htm} (accessed 18 April 2015)

^[7] 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)

^[8] Case C-209/07 Beef Industry Development Society Ltd v Commission [2008] ECR 1-8637

^[9] Okeoghene Odudu, ‘Restrictions of competition by object: what’s the beef?’ in Competition Law Journal (2009) 8(1), 11-17

^[10] Case C-8/08 T-Mobile Netherlands BV v Rand van bestuur van de Nederlandse Mededingingsautoriteit [2009] ECR I-4529

^[11] George Kypriandes, ‘Critical evaluation of information exchange in Article 101 cases’ in European Competition Law Review (2012) 33(9), 408

^[12] Angela Ortega Gonzalez, ‘Restrictions by object and the appreciability test: the Expedia test, a surprising judgment or a simple clarification?’ in European Competition Law Review (2013) 34(9), 457

^[13] European Commission, Guidelines on Vertical Restraints, 2010/C, 411, para 101

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

^[17] Joanna Goyder & Albertina Albors-Llorens, Goyder’s EC Competition Law (5^th ed, OUP, 2009) 96

^[18] Michael Frese & Ingrid Vandenborre, ‘Most favoured nation clauses revisited’ in European Competition Law Review (2014) 35(12), 591

^[19] Case COMP/AT.39847, E-Books, July 25 2013

^[20] Article 101(3), Treaty on the Functioning of the European Union, OJ 115, 9.05.08

^[21] European Commission, Guidelines on the Application of Article 101(3) of the Treaty, OJ C 101, 27/04/2004, paras 64-72

^[22] Case T-17/93 Marta Hachette v Commission [1994] ECR II-595

^[23] Julia Molestina & Peter Picht, ‘Conditional rebate schemes and the more economic approach: back to the future?’ in International Review of Intellectual Property and Competition Law (2015) 46(2), 209

^[24] Paolo Ibanez Colomo, ‘Market failures, transaction costs and Article 101 TFEU case law’ in European Law Review (2012) 37(5), 541

^[25] 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

^[26] Goyder & Albors-LLorens, Goyder’s Competition Law, 141