EU Internal Market

Intro

The central aim of the European Community is to promote economic integration. The prominent goal of the Maastricht Treaty, signed in 1992, was to bring together the three previous European Communities, and to create a single market. To protect this market, competition laws must be enacted. Competition policy reinforces the provisions of the Treaty aiming at the removal of barriers between the economies of Member States.

Articles 81 and 82 are regarded as the foundation of EC competition law. The Court of First Instance confirmed in Tetra Pak I:

“Articles 85 and 86 [ now Articles 81 and 82] are complementary inasmuch as they pursue a common general objective, set out in Article 3[(1)(g)] of the Treaty, which provides that the activities of the Community are to include ‘the institution of a system of ensuring that competition in the common market is not distorted’. But they none the less constitute, in the scheme of the Treaty, two independent legal instruments addressing different situations.”

Thus, it is essential that Articles 81 and 82 are read together in order to give as much effect to competition policy as possible. The rules in Articles 81 and 82 apply to ‘undertakings’, yet no definition of this concept for the purposes of competition law is provided by the EC Treaty.

In order to bring EC competition rules into line with the real needs and development of the industry and business community, the European Commission has gone a long way in modernizing these rules.

Additionally, the EC has also demonstrated an intense and resolute will as regards the future guideline in question in the context of an overall transformation of the EC competition law system.

The Commission’s reform of 2004 made to Article 81 EC cartels and merger control emphasise the market effects should underpin legal regimes. Similarly, the Commissions review of Article 82 EC is likely to embrace a more functional and effects-based analysis of abuses of dominant position.

The central hypothesis of this paper is…that the Article 82 regime has been severely underdeveloped in comparison to the Article 81 regime review. However, recent developments have shifted this paradigm slightly, and have started to bring the Article 82 regime into line with the Article 81 regime

First I will look at the Article 81 regime and its reviews and the clarification of understanding.

Then the second section will examine the current review of Article 82 principles and regime.

Third section will look at ways the Commission could improve on its review and analysis.

Before finally concluding that…although hesitant to start with, the Commission has started to review the meaning of Article 82 and clarify the understanding and the circumstances in which it is to be properly applied, thus bringing it into line with the Article 81 regime.

Section One: Article 81 Regime

The central mechanism of the EEC was, and remains, a common market covering all economic sectors. A common market implies a free market with tariff and quote-free circulation for goods, services, capital and manpower, together with a common external barrier, which distinguishes it from a mere free trade area.

Article 81 EC prohibits cartels, concerted practices and other agreements that could prevent, restrict or disrupt free competition between the Member States in the European Economic Area’s free market it is the first operative provision of the EC Treaty which gives flesh to the core Community activity prescribed by Article 3(1)(g) of the Treaty of creating ‘a system ensuring that competition in the internal market is not distorted’. Despite this, the goals of Article 81 remain somewhat unclear.

Article 81 states that agreements that fall under it should affect trade between the Member States. This has been interpreted in a non-restrictive way, i.e. several agreements amongst firms with no production in the EU have been considered to affect trade between Member States.

Although the term ‘undertaking has not been defined by the EC Treaty, it has however been broadly defined by the European courts. In Hofner and Elser v Macotron the ECJ adopts the functional approach that ‘every entity engaged in economic activity’ constitutes an undertaking for the purposes of the EC Treaty.

Accordingly, the legal form of the undertaking is irrelevant; rather following Viho EuropeBV v Commission, ‘economic activity’ is determined by whether the undertaking offers goods or services on the market; and whether in principle this activity could be profit making..

Define

Cartel

A Cartel is an agreement between a group of similar, competing firms, which join together to fix prices, to limit production or to share customers or market shares between them.

The first major decision under Article 81 was taken by the Commission in 1964 with the case of Consten and Grundig. The ECJ upheld the Commission’s original decision and expaned on the definition of measures affecting trade to include ‘potential effects’.

Regulation 17/62 The Commission’s monopoly on 85(3)

Article 4 – notification of new agreements, decisions and practices

Article 9 – powers

To obtain exemption uner Article 85(3) [now Article 81(3)], needed notification 1999 White Paper, (1999) OJ C132/1 need for centralisation ‘centralised enforement of the EC Competition rules was the only appropriate system. It enabled the Commission to establish the uniform application of Article 81 throughout the EC and to promote market integration by preventing companies from recreating the barriers which Member States themselves had gradually eliminated’

Regulation 17/62 replaced by Regulation 1/2003

Under new regulation commision’s sole right to exempt under 81(3) removed, may grant individual exemptions/negative clearance.

Cases, Case C-C-53/03 Syfait v GSK plc; Case C-453/99

The 1997 notice identifies the boundaries to competition. Paragraph two provides that: “market definition is a tool to indeity and define the boundaries of competition…the objective of defining a market in both its product and geographical dimension is to identify those actual competitors of the undertakings…that are capable of contraining those undertakings behaviour…”

OFT guideines 403, 1999

1997 notice on the definition of the relevant market

• non-binding, quasi-legislation, i.e. soft law
• consolidates the case law and decisional practice
• formalises structure of inquiry into the relevant market
• identification of main issues on constraints of competition: demand and supply substitution, potential competition
• Addoption of the SSNIP test (Small but Significant Non-transitory Increase in Price – American test) economic model based on US 1992 Merger Guidelines

Vertical Restraints: 2790/1999 2000 Guidelines on Vertical Restraints

agreements not covered by guidelines:

772/2004 TTBER – ‘pure licensing agreements’ Reg 1400/2002 MVBER – agreements within the scope of another BER BER and horizontal agreements regulation 2659/2000 – on the application of Article 81(3) to categoris of research and development agreements regulation 2658/2000 – on the application of Article 81(3) to categories of specialisation agreements 2001 guidelines – on the applicability of Article 81 to horizontal cooperation agreements ((2001) OJ C3/2) new approach: shift to a more economic approach; aim to allow collaboration without risking the benefits of competition.

2001 Guidelines on Horizontal Cooperation Agreements

2004 Guidelines on Article 81(3) EC

2001 guidelines on Horizontal Cooperation Agreements.

2004 Guidelines on the effect on trade in Articles 81 and 82 (2004) OJ C101/97

Green paper on vertical restraints

Thus, from the vast amount of soft law instruments and case reviews, it can be seen that the Commission has taken time to review and define the objectives of Article 81.

Certainly over the past 10 years, this has taken on a new gusto as there has been multiple sources of legislation. Many aspects of Article 81 have been clarified.

In The Next Section I Will Examine The Article 82 Regime, And Will Discuss Whether The Same Force Has Been Applied By The Commission When Reviewing That Regime.

Section Two: Article 82 Regime

The core role of Article 82 is the regulation of monopolies, which restrict competition in private industry and produce worse outcomes for consumers and society. It addresses expressly undertakings in a ‘dominant position’, and prohibits ‘any abuse…of a dominant position’; a term which has proven rather difficult to define. As articulated by Advocate General Jacobs in the case of Oscar Bronner:

“…the primary purpose of Article 86[now 82] is to prevent distortion of competition…rather than to protect the position of competitors…”

Article 82 is increasingly important to the Commission in its continuing enforcement of competition policy; it’s regime has been under review and scrutiny these past few years. Article 82 has the potential for further development and application by way of control of the problem of the abuse by undertakings of dominant positions in specific market.

Abuse of a dominant position has two consecutive components: market dominance, which is not prohibited; and abusive exploitation of that dominance, which is. Distinguishing pro-competitive from anti-competitive conduct is the fundamental challenge under Article 82. Differentiating these two different types of behaviour has proven to be a difficult task. According to the 2005 DG Competition Discussion Paper : “the essential objective of Article 82 when analysis exclusionary conduct is the protection of competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources.” To invoke Article 82, it is necessary to overcome a third hurdle, that is to say that the abusive conduct may affect trade between the Member States. For this the tests to be applied are essentially the same as those which apply to Article 81, that is that it must be possible to foresee with a sufficient degree of probability and on the basis of objective factors of law or fact that abuse of a dominant position may have an influence, direct or indirect, actual or potential, on the pattern of trade between member states such as might prejudice the realisation of the aim of a single market.

Dominance Definition

Dominance is a difficult term to define. Used in a commercial context, it refers to a position of power for an undertaking in relation to a specific product market and within a relavant geographical market, both of which must be defined.

A dominant position within the meaning of Article 82 was defined in the case Continental Can:

“…the power to behave independently…a position to act without taking into account…competitors, purchasers, or suppliers…a position when, because of their share of the market, or their share of the market combined with the availability of technical knowledge, raw materials or capital, they have the power to determine prices or two control production or distribution for a significant part of the products…This power does not necessarily…derive from an absolute domination…it is enough that they be strong enough…to ensure…an overall independence of behaviour…’

And was later further clarified in the case of Hoffman La Roche:

“A position of economic strength enjoyed by an undertaking which enables it to prevent effect competition being maintained [hinder the maintenance of effective competition] on the relevant market by affording it the power [allowing it] to behave to an appreciable extent independently of its competitions, its customers and ultimately of consumer.

Such a position does not preclude some competition, which it does where there is a monopoly or quasi-monopoly, but enables the undertaking which profits byt it, if not to determine, at least to have an appreciable influence on the conditions under which that competition will develop, and in any case to act largely in disregard of it so long as such conduct does not operate to its detriment.”

In other words, dominance is a position of market power in which an undertaking is not constrained in its conduct by competitive forces. Further, “[t]he power to exclude effective competition is not however in all cases coterminous with independence from competitive factors but may also involve the ability to eliminate or seriously weaken the existing competitors or to prevent potential competitors from entering the market”

A dominant firm has a special responsibility not to abuse its position; its standing in the market impacts directly on competitors, customers, and consumers. Dominance is not however synonymous with the notion of abuse.

Releavant Market Definition

Further to defining dominance, the relevant market must be defined. Like dominance, the EC Treaty does not define markets.

The Commission adopted in 1997 a Market Definition Notice and has become an established reference point.

Establishing If An Undertaking Has Abused Its Dominance

Establishing abuse is a supple concept and is permitted by the Court to have a wide application. The meaning of abuse was defined in the case of Hoffman La Roche:

‘…the behaviour of an undertaking in a dominant position which is such as to influence the structure of the market where, as a result of the very presence of the undertaking…the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition…has the effect, of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition’.

There has been a distinction between exploitative and exclusionary abuse. The effect of an exclusionary conduct on consumers is formed through the exclusion of competitors and the lessening of the intensity of competition in the internal market. With regard to these exclusionary practices, the test in order to ascertain whether the practice constititued competition on the merits of prohibited anti-competitive conduct has been until now roughly to establish if the practice had the effect as to eliminate or reduce competition.

The Commission has recently issued soft law guidance and framework agreements for helping define exclusionary abuse. The effect of exclusionary conduct on consumers is formed precisely through the exclusion of competitors, therefore the intensity of competition in the common market will be considerably weakened. Thus extra guidance is needed to clarify the objectives of Article 82; the internal market is the foundation upon which the EU is build upon, and as such it needs protecting. The interpretation of Article 82 by the European Courts requires that the competitive structure of the market, and the economic freedom of the market agents, are preserved for the benefit of consumers..

The Commission issued a Discussion Paper in 2005 focusing on cases of exclusionary abuse. The paper, the Framework for analyzing exclusionary abuse (1) is guidance for National Competition Authorities. Further, the Commission issued Guidelines in 2005 aimed at excluding rivals from the market, and focuses on product bundles.

Soft law instruments give more guidance to the Article 82 practices:

“1…it is not in itself illegal for an undertaking to be in a dominant position and such a dominant undertaking is entitled to compete on the merits. However, the undertaking concerned has a special responsibility not to allow its conduct to impair genuince undistorted competition on the common market. Article 82 I the legal basis for a crucial component of competition policy and its effective enforcement helps markets to work better for the benefit of businesses and consumers. This is paritularly important in the context of the wider objective of achieving an integrated internal market.’

The DG Competition states that: “The Commission is also reviewing its policy towards exploitative and discriminatory abuses. The work has started but is not yet at the state of public consultation.” It might prove quite hard to reconcile the principles articulated in the Discussion Paper with regard to exclusionary abused with those concerning exploitative abuse. Thus, the 2005 discussion paper can be seen to mark the symbolic starting point of the review of the Article 82 regime.

More recently, 2009 Guidance on enforcement priorities in Article 82 (Exclusionary practices) is a instrument of soft law that elaborates on the regime.

Paragraph 12 of the Guidance helps to assess if dominance is indeed present and outlines several criteria in which to follow. The Commission appears to be issuing more guidelines helping to clarify cases of exclusionary abuse. The Commission has stated that guidance on exploitative abuse will follow in the near future, however nothing has been published as of yet.

It Is Thus Become Apparent That The Way In Which The Commission Wishes To Clarify The EC’s Competition Laws, And In Particular In Its Review Of Article 82, Is Via Soft Law Techniques. However, The Amount Of Soft Law Available For Helping Define The Article 82 Regime Is Grossly Underdeveloped In Comparison To The Article 81 Regime. More Soft Law Techniques The Commission Has Invoked To Help Regulate These Regimes Are Discussed In More Detail Below.

Section Three: Recent Developments/ Paradigm Shifted?

Has The Paradigm Shifted?

As the European economy has steadily grown in size and its market practices became more complex, it became evident that the Commission would eventually be unable to deal with it’s workloads. The Commission responded to the increasingly unmanageable workload with a the so-called ‘Modernisation Regulation’. Regulation 17/62 was reformed by EC Council Regulation 1/2003. This regulation was part of a strategy to decentralise the implementation of competition rules, and places National Competition Authorities and Member State national courts at the core of the enforcement of Articles 81 and 82. Decentralised enforcement has for a long time been the usual way for other EC rules. Regulation 1/2003 finally extended this strategy to the competition sphere as well.

European Competition Network

The European Competition Network was founded/instigated by Regulation 1/2003 as a forum for discussion and cooperation of European competition authorities in cases where Articles 81 and 82 EC Treaty are applied. Its objective is to build an effective legal framework to enforce EC competition law. Articles 11 and 12 of the Regulation sets out the principles according to which the National Competition Authorities and the Commission can exchange information.

Despite having no rights over its members, the Network manages the flow of information between the NCAs and creates an effective mechanism to counter companies which engage in cross-border practices restricting competition. The Network should ensure an efficient division of work and an effective and consistent application of EC competition rules. Via the mechanism of the ECN, competition authorities inform each other of new cases and proposed decisions, and acknowledge comments from the other competition authorities. The NCAs can help each other with investigations by exchanging evidence and information, and can discuss various issues of common interest. All NCAs and national courts have been empowered since May 2004 to fully apply the Competition provisions of the EC Treaty. The functions of the ECN are laid out in the “Joint Statement of the Council and the Commission on the Functioning of the Network of Competition Authorities”, as well as in the “Commission Notice Within the Network of Competition Authorities.”

Some examples of national competition authorities are: in France, the NCA is the Conseil de la Concurrence, and is one of the leading national competition authorities in Europe. And in the Untied Kingdom, the Office of Fair Trading is responsible for enforcing competition law following the introduction of the Enterprise Act 2002.

These authorities cooperate with the European Commission to regulate competition practices, policies and regimes nationally, thereby taking the pressure off the Commission and easing up the regulation process. However, it remains to be seen whether patriotic feelings will prevail, or if these national authorities will be willing to challenge their own national ‘champion companies’ under EC Law.

Conclusion

It is true that to date the Article 82 regime has not been as fully developed as the Article 81 regime. In the recent years, we have witnessed a shift as to who sets the standards for the interpretation of EC competition rules. The Commission has started to take some steps to remedy the situation, starting with the soft law measures aimed at defining exclusionary practices. These ‘soft’ techniques, such as Guidelines and Communication, are being used increasingly to supplement the existing scheme of competition law. These devices have provided important signals to business and legal communities as to the Commission’s current rationale and thinking. The introduction through soft law of a deepened approach in the legal analysis of Article 82 should hopefully safeguard that such a reform does not result in a restriction of the scope of Article 82.

It is essential that any reform, elaboration or clarification of the rules on abuse of a dominant position abides by the rules of the EC Treaty, and their implementation and interpretation by the European courts.The European Courts guidance on Article 82 has been successfully proven to serve EC law principles. Further clarification and elaboration of the Article 82 regime is best obtained through continued development of the legal principles in the Courts. Even though a refinement of the case law in the form of Commissions guidelines, takes into account economic circumstances, the basic premises of the law should remain intact.

A great effort has been made by the Commission to delegate competition regulations to national authorities, in the form of the NCA’s. These national authorities communicate with each other regarding anti-competitive practices and can exchange information relating to new cases and proposed decision. This interaction eases the pressure off the Commission. The Commission still does retain an important role in the enforcement mechanisms, as is it the coordinating force in the newly created ECN. The OECD commended the modernisation efforts in its 2005 report as promising, and noted that decentralisation helps to redirect resources so the DG Competition can concentrate on more complex Community-wide investigation.

Thus, it has been evident that the new soft law measures have proven central to the regulation process and development of competition law within the Community. The Article 82 regime is still not as fully developed as Article 81 as one would have hoped, but through the introduction of further Regulations and Communications by the Commission, and increased regulation by the NCAs, the outcome remains optimistic that Article 82 regime soon will be fully developed.