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EC Treaty - Vertical Block Examption
Competition is a vital mechanism of the market economy and is an efficient means of guaranteeing consumers a level of quality in terms of the value and price of products and services. Economic globalization has increased volatile growth within international trade and as a result in subject of competition law.
Article 81(1) of the EC Treaty ‘prohibits agreements between undertakings; decisions by associations of undertakings and concerted practices which may affect trade between Member States and which prevent restrict or distort competition’. These agreements shall be void according to 81(2). However, the agreements which satisfy the conditions set out in article 81(3) EC shall not be prohibited, no prior decision to that effect being required.
1.1. Anti-Competitive Agreements
Article 81 of the EC Treaty, prohibiting anti-competitive agreements, must be considered in relation to all commercial agreements with a probable EU cross-border impact. The Horizontal and the Vertical agreements are the agreements, which are relevant for the purposes of the application of the competition rules. Horizontal agreements are those between undertakings operating at the same level of production or marketing, while vertical agreements are those completed between undertakings operating at different economic levels. Under EC Competition Law, restrains included in vertical agreements are regarded as not as much damaging than those included in horizontal agreements.
In Consten and Grundig v Commission the European Court of Justice considered that Article 81(1) EC applies not only to horizontal agreements but also to vertical agreements. The later decisional practice of the Commission on the treatment of vertical arrangements under Art 81(1) and 81(3) EC, and the case law of the Community Courts, have been one of the most controversial and severely criticized aspects of Community competition policy. These agreements are very important for the functioning of the economy. Commercial agreements may be exempted from the application of article 81(1) under article 81(3).
1.2. The Vertical Block Exemption Regulation
However, there is a ‘safe harbour’ for undertakings: the Vertical Block Exemption Regulation 2790/1999. Safe harbours exist for certain agreements including restrictions providing conditions are met so that agreements falling within the terms of the Regulation are exempt from the application of Article 81(1) EC guaranteeing the enforceability of the agreement and granting protection from antitrust prosecution. Thus, if undertakings wish to be certain that their vertical agreements are in line with EC competition law, they should agree on clauses within the scope of the Regulation. Outside this safe harbour, the European Commission’s Notice Guidelines on Vertical Restraints are a helpful guide for the assessment under Art 81(3) EC and are explaining the application of Regulation 2790/1999 and the Commission’s approach to vertical restraints. The Guidelines on Vertical Restraints sets out the principles for the assessment of vertical agreements under Article 81, including the application of the Regulation to vertical agreements.
Article 2(1) of the Vertical Block Exemption Regulation gives the definition of vertical agreements and states that Article 81(1) shall not apply to ‘agreements or concerted practices entered into between two or more undertakings each of which operates, for the purposes of the agreement, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services’.
The Commission adopted the Vertical Block Exemption Regulation on 1999 and the new Block Exemption Regulation is expected in 2010. Modifications might remain quite limited and might concern, especially, the presentation of more certain rules on e-commerce, on internet sales and the treatment of resale price maintenance.
1.3. Scope of Application of the Vertical Block Exemption Regulation
The objective of the Vertical Block Exemption Regulation is to exempt certain categories of vertical agreements that, under certain conditions, may improve economic efficiency within a production or distribution chain and is directed at vertical agreements for the purchase or sale of goods or services.
The Regulation covers various vertical agreements and applies to any type of agreement entered into companies, which do not operate at the same level of the production or distribution chain. Agreements are covered by the Vertical Block Exemption Regulation on franchising, selective distribution, exclusive dealing, exclusive purchasing, exclusive supply, and non-genuine agency agreements within the scope of Article 81. An agency agreement falls outside article 81(1) where the agent bears no or only insignificant risks in relation to either of these matters.
Article 81(1) does not apply to certain agreements or concerted practices entered into between two or more undertakings. The concept of an undertaking was discussed in Hofner and Elser v Matrocton. It was stated that: “The concept of an undertaking encompasses every entity engaged in economic activity regardless of the legal status of the entity and the way it is financed”. The definition of competing undertakings in Article 1(b) includes actual or potential suppliers in the same product market.
The exclusion may be quite wide and uncertain in application. In Tetra Pack I it was considered that a contract within the terms of the Vertical Block Exemption Regulation enjoys exemption from Article 81(1), but not from article 82 unless the Commission withdraws the exemption for the future, with a decision.
The Regulation does not apply, however, to vertical agreements to rent and lease agreements, as no sale takes place and to agreements which have as their primary object the licensing of intellectual property rights, nor automobile distribution agreements, nor agreements between competitors, except if they are ancillary to a vertical agreement and facilitate the purchase, sale or resale of the contract goods or services by the buyer and vertical agreements whose subject matter falls within the scope of another block exemption regulation.
Also, the Vertical Block Exemption Regulation does not cover any restrictions or obligations that do not relate to the conditions of purchase, sale and resale. The Regulation does not apply to vertical agreements with a subject matter that falls within the scope of any other Block Exemption Regulation.
The application of the Regulation, in certain circumstances, can be withdrawn by a decision of the European Commission, or the national competition authorities. Also, the European Commission can enact a regulation declaring the Regulation usually inapplicable to certain agreements including specific restraints.
1.4. Agreements between Competitors
The Vertical Block Exemption Regulation does not cover vertical agreements that are concluded on a reciprocal basis between competitors. This exclusion may be very broad because it includes both actual and potential competitors, with the latter being defined as companies that would be able and likely to enter the market within one year.
Vertical agreements between competitors are covered by the Vertical Block Exemption Regulation if the agreement is non-reciprocal and the buyer has a turnover not exceeding €100 million or the buyer is not a manufacturer of competing goods but only a competitor of the supplier at the distribution level. Also, are covered and where the supplier is a provider of services operating at several levels of trade, while the buyer does not provide competing services at the level of trade where it purchases the contract services.
Article 81(1) EC prohibits agreements which have anti-competitive effects. By enacting the Vertical Block Exemption Regulation, the Commission has establish ‘safe harbors’ for undertakings, that outline conditions regarding when vertical agreements and concerted practices that have an anti-competitive purpose or results and would be prohibited under article 81(1) might be acceptable because they satisfy the criteria of article 81(3).
When an agreement fulfills the conditions set out in the Regulation, the agreement is valid and enforceable. The Vertical Block Exemption Regulation is a measure under European Union law that grants an exemption from the application of Article 81. Agreements that meet the conditions set out in the Regulation are considered either not to adversely affect competition on the relevant European market(s) or only to affect competition to a limited degree.
It is now time to examine if the Vertical Block Exemption Regulation has worked and whether the Regulation and the vertical Guidelines are need any modification, and, if so, what have to be done.
Requirements of the Application of the Vertical Block Exemption Regulation
The Vertical Block Exemption Regulation contains certain requirements that have to be satisfied before, for the vertical agreement is able to benefit from the Regulation. The market share of the supplier must not exceed 30% (Article 3). Also the agreement must not contain any of the hard-core restrictions (Article 4). Finally, the Regulation contains conditions relating to three certain restrictions (Article 5).
2. The Market Share Cap
The Market Share threshold is probably one of the most important provisions of the Vertical Block Exemption Regulation. In Article 3(1) is stated that ‘the market share held by the supplier does not exceed 30% of the relevant market on which it sells the contract goods or services’. Also, Article 3(2) states that ‘in the case of vertical agreements containing exclusive supply obligations, the exemption provided for in Article 2 shall apply on condition that the market share held by the buyer does not exceed 30% of the relevant market on which it purchases the contract goods or services’. In Telenor/Canal+/Canal Digital the 30% rule prevented the application of the Vertical Block Exemption Regulation.
The market share threshold is aimed to reduce regulatory burdens from those businesses that, according to Bishop and Ridyard, ‘could not behave anti-competitively even if they tried’. The introducing of a market share cap was one the most hotly contested aspects of the Vertical Block Exemption Regulation. Businesses and its lawyers argued that such a rule would be unworkable, since it is so difficult to establish market shares with any degree of precision, particularly in rapidly developing markets.
However, the Commission insisted that there was no better means of ensuring that the benefit of the Block Exemption, did not go to firms with too much market power, and the market share cap stayed, albeit in the form of a single threshold of 30%, rather that two of 20% and of 40% which had been proposed in an earlier draft. If the market share of the parties exceeds the 10% threshold described in the De Minimis Notice, Article 81(1) EC will normally not apply to the agreement if the product is new or if the existing product is sold for the first time on a different geographic market.
One factor which may have assisted the Commission in prevailing was the fact that while discussions on the Vertical Block Exemption Regulation were going on, it published its white paper on procedural modernization in the application of articles 81 and 82 EC, which proposed the abolition of the notification system altogether. This may have led some to feel less strongly about the content of the Regulation.
2.1. Calculating the Market Share
In order to calculate the market share there must be identified the manufactured goods and geographic markets. Regarding market definition, the general rules apply. On the relevant market, the supplier calculates its market share by comparing its turnover achieved on that market with the total value of sales on that market.
However, the benefit of the Vertical Block Exemption Regulation will, subject to certain conditions, not always be lost if the market share exceeds the 30% threshold. In Rewe/Meinl the European Commission considered that a supplier is in a situation of “economic dependence” when the buyer accounts for over a 22% market share and thus buyer power might distort competition.
John De Gregorio, European counsel for consumer goods manufacturer Kimberly-Clark Corporation, has stated: ‘With the introduction of market share thresholds to the block exemption analysis, it’s more important than ever for in-house counsel to know how the Commission and European courts may define the “relevant market” for the goods that your company manufactures and sells, and to be comfortable with the definition your company adopts’.
2.2. The De Minimis Doctrine and Agreements of Minor Importance
In addition to the Vertical Block Exemption Regulation and the Guidelines the Commission has issued a series of notices, called ‘Notices on agreements of minor importance’ which give guidance on the agreements which will escape Article 81(1), because the market share of each or both of the parties to the agreement is too small.
The European Commission’s de minimis Notice states that no Article 81 subjects are raised by an agreement between undertakings where in vertical agreements the market share of each party to the agreement does not exceed 15% of the relevant market, or 5% for vertical agreements where access to the relevant market is foreclosed by the increasing effect of parallel networks of vertical agreements by several companies. The ‘de minimis’ notice sets the relevant threshold at 5% for horizontal agreements.
Commercial agreements between parties where market shares exceed these thresholds might however not have a considerable effect on competition or might benefit from exemption. Nevertheless, the presumption in the de minimis Notice will not apply if the commercial agreement contains hardcore restrictions. In Franz Volk v Establissments Vervaecke SPRL the 0.6% of market share in washing machines considered insignificant.
In general, agreements taken between Small and Medium size Enterprisers are ‘de minimis’. Paragraph 3 of the Notice recognizes that agreements between small and medium-sized undertakings are rarely capable of appreciably affecting trade between Member States.
Finally, Article 8 provides that the Commission can withdraw the benefit of Block Exemption where ‘50 % of a relevant market, contain specific restraints relating to that market. This Regulation shall not become applicable earlier than six months following its adoption’.
2.3. Market Power
The Vertical Block Exemption Regulation states that, with some certain exceptions, all vertical restrains are acceptable unless they are coupled to significant market power. Market share thresholds are criticized to be uncertain because they need a definition of the market which is the reason why the idea of market share thresholds has been discarded in most systems.
Also, the amount of market power can be considered by reference to market share. Scherer and Ross state that economic analysis shows that in most cases the welfare-reducing effects of vertical restrains depend on the degree of market power the involved firms have.
If market shares are in general indicative of potential market power, they can never be considered without considering some other factors to achieve a reasonable assessment of market power for instance the barriers to entry and prospective competition and the characteristics of the oligopolistic dealings between businesses.
The Commission in some of its judgments show that market shares do not equal market power. For example, in Alcatel-Telectra the Commission cleared a merger which gave the parties market shares of 83%. Also, in Rhone-Poulenc/SNIA the high degree of concentration was ought to weighed by the existence of rapid technology development.
The most obvious issue, according to Professor Denis Waelbroeck, is to consider whether the system should not allow all vertical agreements which do not include hardcore restrictions, separately of the market share of the parties, and only be valid a control under Article 82 in situations of dominance. That would eliminate the burden over the threshold for businesses to achieve a complex evaluation of their agreements under Article 81(1) and Article 81(3) and it will provide more legal certainty in this issue.
In addition, the economic assessment required by the Guidelines on Vertical Restrains and the Guidelines on the application of Article 81(3) of the Treaty is challenging, and it is doubtful that many judges and parties will have the income or abilities to undertake it sufficiently, thus raising the danger of extensive, expensive and uncertain litigation.
2.4. Arguments about the Threshold
The use of market shares as a key element of the Regulation’s treatment has been criticised as being possible to lead to uncertainty and unpredictability given the difficulties in defining the relevant market and market share.
It may be argued that the threshold is too low or that it is improperly specified. Those who argue that the threshold is too low point out that the anti-competitive risks can arise only when there is a dominant firm. A non-dominant firm cannot increase rivals costs and cannot make damage to the consumers as they still benefit from inter-brand competition.
Those who argue that the threshold is improperly cast would agree with the above criticism but bear in mind that anti-competitive effects can manifest themselves when there is the risk of oligopolistic interdependence. Bishop. and Ridyard state that an assessment of the market’s concentration would be more useful than the assessment of one players market share.
Some argue that given the uncertainties over market definition, a market share threshold is not a substitute for a detailed analysis of whether the consumers suffer consequently of a particular practice but this might damage the effectiveness of the existing system which creates a safe harbour so that analytical incomes are allocated to those cases where anticompetitive effects are most possible to occur.
The Vertical Block Exemption Regulation creation of a market share threshold which the Regulation does not apply, limits manufacturing businesses that manufacture extremely innovative goods and want to sell them before other businesses have the chance to promote competitive goods into the market. In this situation, the manufacturing businesses with the extremely innovative goods might have a very high market share in a particular industry within a specific geographic area as no competing goods exist.
However, as its market share is more than 30%, the manufacturing business is unable to take benefit from the Regulation and would be banned from effectively distributing and selling its manufactured goods in the market.
2.5. Removing the Threshold
The Vertical Block Exemption Regulation is overly restrictive by placing the threshold at 30%. Lots of agreements thus escape the safe harbour however they are completely harmless from a competition law viewpoint. By removing the thresholds the sellers using private resellers may be penalised not as much as vertically included businesses. Also, abolishing the threshold would give more stability to the system because not all restrictions of competition under 81 are an abuse under 82.
On the other hand, if the system is seen as too essential one may consider a less fundamental modification to the Regulation consisting of a differentiated approach classifying those clauses which can be problematic above 30% even though the parties are not dominant. Those clauses which are always straightforward, even in cases of dominance and which thus essentially deserve an exemption and should not to be matter to any market share threshold and also those clauses which should never advantage from a group exemption even they are below 30%.
The Vertical Block Exemption Regulation can simplify issues but also can cause difficulties. It makes issues simple as it offers the parties more flexibility in establishing their agreements and if a business’s market share is less than the related market share threshold the agreement will fall outside the scope of the competition rules or be qualified for exemption provided that it does not include hardcore restrictions.
The Regulation can also cause difficulties as the parties’ market share must be verified in every case and this can be very hard in situations, for instance as those concerning new markets. Where the market share threshold is exceeded, issues become more difficult as the Regulation requires a complete evaluation of the agreement to define whether it would restrict competition under Article 81(1) and, if so, whether it would meet the requirements for an exemption under Article 81(3). This requires the parties to verify the economic effect of certain restrictions by considering how they would operate in the specific product market involved.
The Vertical Block Exemption Regulation principally proposes that businesses with small market shares are given more choice to establish their agreements and will not require undertaking an antitrust review of their dealings. Businesses with large market shares might need to spend time and resources to assessing their agreements from an antitrust perspective.
3. The Hard-Core Restrictions
The Vertical Block Exemption Regulation does not apply to vertical agreements that have certain anti-competitive objects. The Regulation lists a number of hard-core restrictions that, if included in the agreement, prevent the safe harbour from applying and cause the exclusion of the whole agreement from the benefit of the Block Exemption even if the market share of the supplier or buyer is below 30%.
There are hard-core restrictions which apply to agreements between competitors, and agreements between non competitors. If one hard-core restriction is present in the agreement, the agreement will lose the benefit of the block exemption so Article 81(1) EC may apply. This can result in the unenforceability of the entire agreement and may even lead to fines and it is important that a severability or invalidity clause is included in the agreement where appropriate.
Hard-core restrictions are considered to be so serious that they are almost always prohibited. In Javico International and Javico AG v Yves Saint Laurent Parfumes SA it was considered that hard-core restrictions do not infringe Article 81(1) except if they might have considerable effect on trade between Member States.
There are five hard-core restrictions which, if there are contained in a vertical agreement, they have the consequence of taking the whole agreement outside the scope of the Regulation.
3.1. Resale Price Maintenance
The first hard-core restriction concerns resale price maintenance. Article 4(a) states that the benefit of the Vertical Block Exemption Regulation does not apply to vertical agreements that fix prices and have the object of restricting a buyer’s ability to determine its sale price.
A supplier is not allowed to fix or minimum the sale price at which distributors can resell his products. The restriction on the buyer’s power to establish his sale price is a hard-core restriction. The Commission in Yamaha considered that an obligation of a purchaser to resell at a particular price is ‘an obvious restriction of competition that is prohibited by Article 81(1)’.
However, Paragraph 47 of the Guidelines states that ‘the provision of a list of price recommendations by the supplier to the buyer is not considered in itself as leading to resale price maintenance’ if they do not amount to a fixed or a minimum sale price. In Pronuptia de Paris v Pronuptia de Paris Irmgard Schillgalis, the Court held that the recommendation of prices would not infringe Article 81(1).
In genuine agency agreements, where the principal bears all or almost all the financial and commercial risks related to the transactions concluded on his account by the agent, Article 81(1) would generally not be applicable. In Vlaamse Reisbureaus an agreement between travel agents and tour operators indented to oblige the travel agents to examine the prices and tariffs set by the Tour operators and the agents were banned from sharing commissions with or granting refunds to their customers. The Court held that the Belgium system infringed Article 81(1).
From an economic point of view, it can be said that there is no certain analysis nowadays as to how to treat with resale price maintenance. Resale price maintenance can be pro-competitive or anti-competitive. Nevertheless, even when applying an effect based approach, it is obvious that in many cases competition will be delayed and that cases when resale price maintenance is efficient are actually quite rare.
3.1.2. Anti-Competitive and Pro-Competitive Effects in Resale Price Maintenance
Resale price maintenance is a complex issue and may be harmful in some circumstances. There are two major anti-competitive effects relative to resale price maintenance. These are the elimination of intra-brand price competition which has as a direct effect the price increase, and the consequential risk of a decrease in inter-brand competition which gains from increased price transparency, thus make easiest price collusion between manufacturers or distributors at a horizontal level. Other anti-competitive effects of the resale price maintenance, according to Luc Peeperkorn, are the loss of pressure on the seller’s scope and the loss of dynamism and innovation from in particular discounters.
However, the doubts about the efficiency of and the likelihood that resale price maintenance leads to positive aspects. Economic theory has shown that this practice might have a number of efficiency benefits. For instance, price fixing might prevent ‘free riding’ by retail price discounters on the pre-sales services or status of full price traders while it is obvious that intra-brand price competition will be reduced by imposing a fixed or minimum price. This can be reasonable, for example, where a distribution outlet offers first-class services on which customers then rely to buy at a cheaper discounter which does not provide these services and thus is able to charge lower prices. Free riding arises when one business benefits from the performance of another with no paying for it.
A minimum price would remove the pricing advantage from the discounter and change intra-brand price competition with competition on services. Minimum resale price maintenance can thus occasionally be economically and commercially reasonable if certain conditions are fulfilled. One could argue that the ‘free riding’ problem could be solved by using other block exempted restrains achieving the same result.
Some inefficiencies and externalities caused by the ‘free riding’ problem might be solved by exclusivity clauses, or selective distribution but this restraint may not be an ideal substitute in all conditions for resale price maintenance and it is then questionable that resale price maintenance should be per se prohibited in all cases. Also, resale price fixing can be useful to entrant manufacturers as it might assist them to position their products and thus retailers would have the incentives to invest in making the entrant’s products better known to consumers.
Resale price maintenance has created worries in Commission because is being stand on national limits with different costs in different member states. According to Professor Boscheck, taking into account that the economic conditions to consider such restrains ‘are still either too crude or too costly to apply to allow for efficient rules and structured rule of reason’, it is difficult to argue that fixed or minimum prices should not be part of the hard-core list. On the other hand, it appears that such clauses are not considered as if an exemption were inconceivable in any case. There are reasonable arguments that such restrains, considered under an effects-based approach, can rarely be deemed as pro-competitive.
It is still uncertain whether free riding by resale price maintenance to rationalize the exclusion of price competition between dealers or retailers. There are methods, for instance promotional allowances or service requirements, which can avoid ‘free riding’ without the anticompetitive side effect of reducing price competition between dealers and retailers.
3.2. Territorial and Customer Restrictions
Article 4(b) states that restricting sales by the buyer into specified territories or to specified customers is a hard-core restriction. Distributors must remain free to decide where and to whom they sell. Paragraph 49 of the Guidelines recognizes two restrictions on buyers that would not be considered as hard-core under 4(b): a prohibition on resale except to certain and users for which there is an ‘objective justification related to the product’, and an obligation on the reseller relating to the display of the supplier’s brand names.
There are exceptions to 4(b), such as restriction ‘of active sales into the exclusive territory or to an exclusive customer group reserved by the supplier or allocated by the supplier to another buyer’. The Commission in Souris-Topps held that Topps’s distribution agreements for its Pokemon Stickers and Cards failed to benefit from the Block exemption as they violated Article 4(b).
The Paragraph 51 of the Guidelines deals with the Internet. It states that ‘A restriction on the use of the Internet by distributors could only be compatible with the Block Exemption Regulation to the extent that promotion on the Internet or sales over the Internet would lead to active selling into other distributors’ exclusive territories or customer groups’. The Commission in Yves Saint Laurent case held that a prohibition on internet publicity and sale usually constitutes a hard-core restriction. The Commission is awry of deterring the growth of e-commerce, and has confirmed that the use of the internet is not considered a form of active sales as it is a reasonable way of reaching customers.
Provisions that restrict the territory into which, or the customers to whom, the buyer might sell the contract goods or services are illegal. There are four exceptions to that rule: (1) The restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer, (2) Restrictions of sales to end-users by a buyer operating at the wholesale level of trade, unless it relates to a selective distribution system. This Principle was established by the Commission in Villeroy & Boch, (3) the restriction of sales to unauthorised distributors by the members of a selective distribution system, and (4) the restriction of the buyer's ability to sell components, supplied for the purposes of incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier.
A restriction on active sales might not restrict sales by the consumers of the buyer. Thus, a seller can not prohibit his consumers to sell his goods or services on-line without an objective reason and he also can not reserve such sales to himself and/or advertising over the internet.
The Vertical Guidelines contain definitions of the terms ‘active sales’ and ‘passive sales’. ‘Active sales’ are defined in paragraph 50 of the Guidelines and it means actively approaching individual customers inside another distributor’s exclusive territory or exclusive consumer group while ‘passive sales’ means responding to unsolicited requests from individual customers including delivery of goods or services to them.
3.2.1. Market Segmentation
The market segmentation is unwanted as it deters market integration in European Union. However, market segmentation is a significant aspect of competition because it can formulate a monopoly condition which permits the monopolist to place abusive prices.
After the latest enlargement of the European Union some market segmentation might be essential apparent of the lack of homogeneity of today’s market which might massive changes be appropriate to a number of issues, such as different regulations, in taxes, and so on. The free-rider argument proposes that market segmentation can be a useful method to ensure that distributors act to maximise sales. Therefore, manufacturers have nowadays to decide, for example, whether they adapt their prices to go through these new markets and consequently risk that these low priced products will be issue to re-exports to the old Member States.
The Commission was criticised for attaching excessively significance to the market integration goal of competition law. Professor Waelbroeck noted that being very strict on market segmentation takes no notice of the fact that from an economic approach, it will frequently seem right to charge a higher price to a customers whose ‘willingness to pay’ for the manufactured goods is higher than the others. Also, Zweifel and Zach state that usually, the total quantity will rise as a result of price differentiation, and this will be to the general benefit of customers.
Furthermore, a very rigorous approach to territorial segmentation can produce substitute methods for instance by unilaterally limit the quantities delivered to lower price markets in turn to avoid the cheaper goods from flooding existing markets (unilateral actions). In the case of Bayer/Adalat it was considered by the Court that such unilateral limitation can in some situations be permissible.
On the other hand, this can be a dangerous exercise as Article 81 EC will apply when there is ‘tacit acquiescence’, and it is not easy to predict the distributor’s actions, if will give reason for a finding of ‘meeting of minds’. Giorgio Monti stated that ‘it may be argued that the Commission’s refusal to declare territorial segmentation per se lawful is not only dictated by a political desire to pursue market integration for its own sake, but rests upon a sound economic rationale’.
In addition, territorial protection can be reached without infringing the law by using agents, by setting up their own distribution network or by serving the clients directly using the internet (vertical integration). A manufacturer might just decide not to sell into a specific country or to sell at a higher price than he would have if he could have prevented parallel exports, if there is no option of allowing for certain territorial exclusivities.
Bearing in mind the arguments, it appears that there are strong signs that the Vertical Block Exemption Regulation in some specific cases does not consider sufficiently the positive features of territorial restrictions. An argument for market segmentation is the need to present new products or enter new markets. This is obviously no trouble for new products from relatively unknown manufacturers. However, if market segmentation is used by famous brand manufacturers to establish differences of existing products and segment markets along borders or income per capita to discriminate in their pricing policies, it can be a problem.
3.3. Restrictions in Selective Distribution Systems
The third and fourth hard-core restrictions concern selective distribution (Article 4(c) and 4(d)). ‘Selective distribution system’ means a distribution system where the supplier sells the products only to authorized distributors selected on the basis of specific criteria and these distributors undertake not to sell the products to unauthorized distributors.
It is considered a hard-core restriction to restrict a selective distributor at the retail level from selling to end-users. This is without prejudice to the prospect of requiring such distributor to activate only from an authorized place of establishment. It also does not restrain the supplier from committing to supply only one distributor on a specific territory (exclusive distribution) provided that the distributors can sell the products to whomever they want at the retail level. Furthermore, the distributors should remain free to sell or buy the products to or from other distributors within the network. Therefore, distributors cannot be forced to buy the products exclusively from the supplier.
A selective distribution system may even not be considered anti-competitive at all under article 81(1) if the selection criteria are strictly necessary, qualitative and applied in a non-discriminatory manner, and the nature of the products concerned justifies the selective approach.
3.3.1. The Metro Doctrine
In Metro v Commission the Court state that selective distribution systems constitute ‘an aspect of competition which accords with Article 81(1) EC, provided that resellers are chosen on the basis of objective criteria of a qualitative nature relating to the technical qualifications of the reseller and his staff and the suitability of his trading premises and that such conditions are laid down uniformly or all potential resellers and are not applied in a discriminatory fashion’.
This statement encapsulates a rule whereby simple selective distribution networks that satisfy the criteria set out above do not restrict competition, provided there are no anticompetitive effects, which only materialise, according to Metro 2 if there is a cumulative effect when all manufacturers use similar distribution networks. It was considered in Groupment d’Achat Edouard Leclerc v Commission that the rule applies to goods where selective distribution benefits the consumer, and has been applied to luxury goods as the quality of status surrounding the product is an important issue in competition between brands.
It also applies to technically complex products because trained staff would make easier the customers choice. Finally, it was ponted in SA Binon & Cie v SA Agence et Messageries de la Presse that the rule applies and to newspapers and periodicals as the consumer expects each outlet to propose a representative selection of publications.
The benefit of falling within this rule was that an exemption was needless. Nevertheless the Vertical Block Exemption Regulation it tolerates the use of selective distribution for all types of products, and lets the manufacturer to limit the number of distributors, as the case law allowed only selection based on qualitative criteria.
On the other hand, the Metro doctrine it can be beneficial for parties whose market share does not let them to benefit from the Vertical Block Exemption Regulation to fit their contract under the Metro criterion, thus avoiding the requirement of proving that the agreement satisfies the conditions of Article 81(3). This represents disharmony between the case law and the Regulation. Possibly, the Metro doctrine it was one of those cases where the Court balanced the limit of economic freedom on the one hand with the advantages that consumers get through improved quality of service under Article 81(1) rather than under Article 81(3).
Nevertheless, the application of the Metro rule nowadays is in conflict with the economy viewpoint underpinning the Regulation as the rule is not reduced by a market power test. Therefore the rule should be deserted. Though, some features of the Courts jurisprudence might be worth retaining, such as the principle that selective distribution is proper for specific kinds of products. Businesses must not be allowed to quell intra-brand competition when customers get no further advantage from the distribution system.
It remains to be seen whether the Commission or a National Competition Authority will remove the benefit of the Vertical Block Exemption Regulation when a manufacturer operates selective distribution for products that do not require particular outlets.
3.4. Restrictions on Suppliers of Components
Article 4(e) of the Regulation deals with agreements that prevent or restrict end-users, independent repairers and service providers from getting spare parts straight from the manufacturer of the spare parts. An agreement between a manufacturer of spare parts and a buyer which incorporates these parts into its own products may not prevent or restrict sales by the manufacturer of these spare parts to end users, independent repairers or service providers. End users and independent repairers must be able to buy spare parts directly from the manufacturer. Only service providers who are members of the buyer's repair and service network can be obliged to buy the components from the buyer.
3.5. Disadvantages of the Hard-Core Restrictions
In economic terms, the notion of hard-core restriction is problematic and seems then to be excessive as each case is different. This method is excessively narrow and hard to justify from an economic point of view. As a result the results on competition have to be considered taking into account the details of every case at hand. Generally, ‘vertical restrains can increase or decrease welfare, depending on the environment’ and thus rules of reason are obviously usually more suitable from an economic point of view than per se illegalities.
If a contract includes a hard-core restriction will fall outside of the Vertical Block Exemption Regulation and this is maybe extremely harsh. Furthermore, the Guidelines on Vertical Restraints and the Guidelines on the Application of Article 81(3) of the Treaty state that it is generally impossible to exempt agreements which include hardcore restrictions.
The hard-core restrictions occasionally allow manufacturers to ban a distributor from selling the manufacturer's goods to specific customers or in specific geographic territories. Nevertheless, the restrictions do not permit the manufacturer to prohibit the distributor's consumer from doing so. This allows the distributor's sub-distributor to sell to consumers or in geographic areas near to the distributor. This takes from the manufacturing business of its power to locked sales to a specific group of consumers or in a specific geographic area.
The hard-core restriction, which prohibits a business from placing fixed or minimum resale prices for distributors, is too wide. Pricing restrictions have to be restricted to cases where fixed or minimum resale would have an anti-competitive result in the market. This would prevent distributors and agents from businesses with significant market share that might inflict undue price restrictions upon them.
It would also allow businesses with small or no market share to deal with distributors and agents in the way they believe is the best for the distribution and sale of their goods. Even the European Court of Justice in Volk v Vervaecke considered that situations where small or no market share is concerned there is no appreciable anti-competitive effect from the imposition of fixed or minimum resale prices.
3.6. Per Se Rules vs. Rule of Reason
By examining resale price maintenance and territorial protection it is argued that it cannot be shown from an economic position that these vertical agreements always have anti-competitive effects and that a number of cases can even be found in which they may have more positive than negative effects. Occasionally they can even be welfare-enhancing.
Scherer and Ross state that economic theory can demonstrate that a rule which, for instance, prohibits resale price maintenance per se however permits other vertical agreements, might cause inconsistencies as under particular circumstances, the latter practices are substitutes for resale price maintenance. A more deep discussion of the question of the rule of reason vs. per se rules is required. Per se means that as soon as resale price maintenance is established, no further analysis is possible while rule of reason means that the Court will look at the details surrounding the company practice before deciding if it assists or harms competition.
Whether per se prohibition of particular vertical agreements are appropriate depends on a generally evaluation of the advantages and disadvantages of a more differential assessment. If in most cases of particular restrains it can be expected that the negative effects prevail and if the cost and problems of identifying the smaller number of cases, in which these agreements have no negative effects or even have positive net effects, are larger than the benefits of this additional differentiation, then a per se rule of prohibiting this particular vertical agreement can be the appropriate solution.
It is obvious that is not enough to demonstrate that there are situations, where vertical agreements have no harmful or helpful results, for declining a per se prohibition of these vertical agreements. It must be shown that a change from a per se prohibition to a more differential approach has positive benefits, that is that the positive results of an additional evaluation are bigger than the resulting additional expenses and problems.
It is also essential to consider the issue of whether there are sufficient and obvious conditions for making a distinction between pro-competitive and anti-competitive types of resale price maintenance in a specific situation, what the expenses of any raised legal uncertainty are, and whether the further administrative expenses are lesser than the possible benefits. However, a more differential approach does already exist as several alternatives of resale price maintenance such as resale price recommendations or maximum prices are not per se prohibited.
Van den Bergh and Camesasca noted that economic theory does not support a per se prohibition of resale price maintenance or of absolute territorial protection. Economic theory shows that various types of restrains be likely to have the same object and as a result can be used as alternatives. Vertical price restrains and the allocation of exclusive territories may be used to deal with the free rider problem. There is therefore no ground to subject these restrains to a dealing that is dissimilar from that of other vertical restrains considered to act in response to free riding. The concern is not the type of a restriction, but its effect on the environment of competition. An economics based approach would therefore concentrate on the existence of market power at one or both levels of the business.
If no market power can be acknowledged, it is doubtful that these restrictions will produce anti-competitive results. The disconnection between the Commissions legal regime and economic examination might possibly be justified by the different purpose that has an impact on EC competition law examination. Policy creators might, for example, be anxious about the consequences of minimum vertical price fixing on retail prices. In the same way, as it might be a basis of efficiencies, absolute territorial protection turn in opposition to the goal of establishing a single European market.
If a vertical agreement contains a hard-core restriction, it will normally not benefit from the Vertical Block Exemption Regulation. The hard-core restrictions are listed in Article 4 of the Regulation. If an agreement contains just one hard-core restriction, the whole agreement loses the benefit of the Block Exemption.
The hard-core restrictions in themselves and their quasi per se prohibition disregard related efficiencies as they might delay the success of completely new ways of marketing and seem then to be excessive.
4. Conditions and Non-Compete Obligations
The Regulation includes certain rules concerning non-compete clauses in Article 5 and imposes specific conditions on three vertical restraints: non-compete obligations during the contract; non-compete obligations after termination of the contract and the exclusion of specific brands in a selective distribution system.
If a vertical agreement include such obligations and they do not meet the criteria in Article 5, the Block Exemption will not apply to those obligations. If an agreement contains these clauses does not make the Block Exemption not to fit to the entire agreement but the relevant provision will be issue to individual consideration under article 81(3).
4.1. Non-Compete Obligations
The first exclusion from exemption concerns non-compete obligations (Article 5(a)) when their duration is indefinite or exceeds five years. Any non-compete obligation that is automatically renewable falls within this prohibition. In Stergios Delimitis v Henninger Brau the Court considered that a non-compete obligation infringes Article 81(1) EC and requires exemption, if there are barriers to entry downstream and so many outlets are tied for so long, that a new firm cannot enter the market at an efficient scale of an existing firm expand.
Non-compete obligations are defined in the Vertical Block Exemption Regulation as obligations that require the buyer not to manufacture, purchase, sell or resell goods or services that compete with the contract goods or services, or to purchase more than 80%, which must be carried out on an annual basis, in value of his total purchases of the products concerned from the supplier or from a third party designated by the supplier is not exempted under the Regulation if its duration is indefinite or exceeds 5 years. Such obligations prevent the buyer from purchasing and selling competing goods or services or limit such purchases or sales to less than 20 % of its total purchases.
However, Article 5(a) state that ‘the time limitation of five years shall not apply where the goods or services are sold by the buyer from premises and land owned by the supplier or leased by the supplier from third parties not connected with the buyer, provided that the duration of the non-compete obligation does not exceed the period of occupancy of the premises and land by the buyer’.
4.2. Post-Term Non-Competes
Article 5(b) of the Vertical Block Exemption Regulation states that any obligation causing the buyer not to manufacture, purchase, sell or resell goods or services after the termination of the agreement is excluded from the exemption of the Regulation, “unless the obligation is indispensable to protect know-how transferred by the supplier to the buyer, is limited to the point of sale from which the buyer has operated during the contract period and is limited to a maximum period of one year after termination of the contract”. In Kerpen & Kerpen the Court considered that an obligation imposed on the purchaser of goods to use them himself and not to resell them, as a restriction of his economic freedom and therefore a clause which has as its purpose the restriction of Competition.
The know-how must result from “experience and testing by the supplier” and includes information which is indispensable to the buyer for the use, sale or resale of the goods or services. The benefit of the block exemption is lost to that part of the agreement which does not comply with the conditions set out in Article 5, according to Paragraph 67 of the Guidelines.
4.3. Non-Compete Clauses in Selective Distribution systems
The third exclusion concerns the sale of competing brands in a selective distribution system. If the supplier prevents his dealers from selling detailed competing products, that restriction does not benefit from the exemption of the Vertical Block Exemption Regulation.
Direct or indirect duties obliging members of a selective distribution system are not to sell the products or services of specific competing suppliers are prohibited and not covered by the Regulation. However, a total ban of sales of competing goods is permitted. This provision seeks to prevent collective boycotts that would prevent a particular competitor from entering the market.
If certain Non-Compete obligations stay in the restrictions described in Article 5 of the Vertical Block Exemption Regulation then the agreement is exempted from Article 81(1). The Block Exemption applies to the rest of the vertical agreement if that part is severable from the non-exempted vertical restraints.
Non-Compete obligations can set limits on vertical competition among producers and retailers. This might lead to an obstruction for the experimental nature of market competition in relation to the appropriate description of the different market stages. Even though it is right that all of these clauses can assist to resolve efficiency problems, it has to be recognized that they also decrease the flexibility inside vertical chains.
From an evolutionary viewpoint, the flexibility of businesses is vital for the directness and the workability of experimentation developments in marketplaces. Thus, the competition evaluation of vertical restraints must not only take into consideration their positive results on static effectiveness, but also possible negative results on flexibility.
Analysis of the Vertical Block Exemption Regulation
The Vertical Block Exemption Regulation, the most significant legislative tool in European antitrust law in the ground of vertical restraints, has been in effect for more than nine years. The Commission adopted the Vertical Block Exemption Regulation on 1999 which brought a change in the antitrust laws.
Regulation 2790/1999, valid till 2010, is a tool offering legal certainty for a large number of companies. The Commission has begun to consider whether it should propose any changes to the Regulation 2790/1999 and the vertical Guidelines and the publication of the Vertical Block Exemption Regulation is not expected before early 2010.
5. The Regulation 2790/1999
The Vertical Block Exemption Regulation has a time limit for ten years. A review will occur as the expiration date approaches, and changes to the terms of the Regulation will normally be proposed. Therefore, this is a proper time to make a review of the operation of the Regulation and to examine whether it help improve competition or maybe are even harmful to it.
5.1. The Importance of Regulation 2790/1999 in EC Competition Law
The Vertical Block Exemption Regulation, planned to liberalize the Commission's competition policy, puts less limits on the categories of restrictions that can be placed upon distributors and agents by manufacturing businesses and intends to reduce the regulatory burden on businesses with little or no market power. It also guarantees a more efficient control of the relatively few manufacturing businesses with significant market power.
The Regulation brought a clear economic approach to this area of competition law. The general response from the companies to the improvement of the European law pertaining to the block exemption of vertical arrangements has been positive too. Furthermore, given that national Courts and authorities might make a decision whether agreements correspond or not to the provision, it let them to deal more efficiently with vertical and horizontal agreements.
Moreover they permit businesses choice to decide their favoured distribution format although, they make it clear that certain practices that hinder access to markets or restrict competition will not be allowed. The Commission and national competition authorities can take efficient action to avoid these restrictive practices.
Regulation 2790/1999 generates some advantages in comparison with those of its predecessors, as it is not as much formalistic and more economics related. It provides more categories of vertical arrangements are block exempted and therefore considered to fulfil the conditions of Art 81(3). The businesses are allowed to make contracts according to their commercial needs, and also vertical agreements concluded by market dominant firms can no longer benefit from block exemption.
5.2. No Precautionary Notification
The Regulation assisted to reduce the number of individual notifications to the Commission. Previously, if an agreement did not satisfied the requirements for a block exemption, the parties usually notified the agreement to the Commission to apply for an individual exemption under Article 81(3). One of the benefits of creating such a notification was that it protected the parties against fines as of the date of notification.
An agreement may benefit, under the Vertical Block Exemption Regulation, from this protection from fines as of the date the agreement takes effect, even if notification happens later. This means that there is no need to make to the Commission a precautionary notification to obtain immunity from fines. If an issue later occurs as to whether the agreement restricts competition or whether it is qualified for exemption under Article 81(3), the parties can notify the agreement to the Commission, which might give an exemption having retroactive result as of the time the agreement is concluded. However, if the Commission does not give an exemption, it is doubtful that the parties would be subject to a fine only if they can create good faith arguments regarding why they thought the agreement was qualified for exemption.
The main reason of this modification was to decrease the number of notifications and therefore let the Commission to consider more significant enforcement concerns. Even though businesses might even now notify vertical agreements, the Commission has dispirited those notifications by making it obvious that they will not get priority reconsideration.
Dan Fitz, general counsel for Cable and Wireless plc, stated that ‘the Vertical Block Exemption Regulation relieve companies of the burden of notifying their agreements, thus saving them from having to pay unnecessary legal fees’.
5.3. Shortcomings of the Vertical Block Exemption Regulation
Even though the Vertical Block Exemption Regulation is considered as helpful to business, it had disadvantages in bringing a deal within the scope of the Vertical Block Exemption Regulation and in this system, that encouraged the Commission to make a review of the Regulation and it has some specific questions unanswered.
The calculation of a business market share for the object of considering if the Regulation applies is a main concern. Businesses are free to consider, under the Regulation, whether they fall over or under the 30% market share threshold, permitting prospect and motivation to control the limitations and the definitions of the related industry or market to fit within the Regulation.
The Commission criticised for its management of vertical restraints. The prohibited clause lists are often wide and difficult to apply for the parties. The exemption can lead the parties to distort agreements which would make the common market more competitive, integrated and efficient to fall within the formal terms of the Vertical Block Exemption Regulation. There is a risk that the Commission may exempt agreements that distort competition as block exemption is form based rather than effect based.
Also, it was argued that the Regulation established by the Commission was completely separate from economic certainty and was too formalistic. The Regulation applied to undertakings irrespective of their market power, thus small and medium-sized undertakings were matter to pointless regulation, whilst agreements by big businesses with a clear economic impact could take advantage from the application of the exemption.
Furthermore, the Regulation was considered to be excessively narrow. The Commission ratified for each type of vertical agreement separate regulations and, thus, they benefited from the Block Exemption, only exclusive distribution and purchasing, franchising, motor vehicle distribution and servicing, and technology transfer. Other vertical agreements, in spite of their economic significance, had to be considered in line with the conditions established in case law by the Court as they were not covered by the Vertical Block Exemption Regulation.
The Commission received criticism that it was concentrated in the aim of market integration and sacrificed appropriate economic examination in accord of the single market purpose of European Competition law by barring certain territorial restrictions in spite of their effectiveness or effect on trade, while in United States the vertical restraints are issue to a `rule of reason' approach.
5.4. Legal Uncertainty
The assessment of agreements under the Vertical Block Exemption Regulation is complex and even though the Regulation is intended to facilitate vertical agreements, there is a concern that, despite the presumption of legality, the loosening of the Commission’s grip on the application of the EC competition rules can lead to legal uncertainty. For example, unless clear Guidelines are presented, the new highlighting on auto-compliance, without earlier notification of agreements, might make harm in businesses. Thus there is a need for more clear Guidelines.
Also, National Competition Authorities can withdraw the benefit of the Block Exemption in the territory of a Member State where access to the market or competition is prohibited by the increasing result of parallel networks of similar vertical restraints practised by competing suppliers or buyers.
The inclusion of the market share cap is followed by a logical quantity of legal uncertainty regarding the applicability of the Vertical Block Exemption Regulation. Nevertheless, legal certainty is unsuited with a more economics-based approach to vertical agreements. Competition rules are economic rules that by their nature engage a predictable amount of legal uncertainty.
5.5. Enforcement Policy after Modernisation
At the core of the early modernization progress in Europe has been the development of the Vertical Block Exemption Regulation. The arrival of modernisation has overshadowed the discussion on the enforcement of competition policy to vertical restrains. One might argue that the discussion regarding whether competition policy is still established on the old exemption concept has become arguable.
Article 81 can be enforced by Community and national competition authorities in a similar way, while the discussion regarding the scope of Article 81(1) and 81(3) is no more relevant. It is not easy to argue that the enforcement policy option has at this time become less noticeable. The same authority is allowed to apply both limbs of Article 1, whilst the requirement subject as to the scope of the prohibition in Article 81 has lost a lot of its salience.
Furthermore, modernisation has created a change in the Commission’s enforcement main concern. The Commission is at the present clearly minded to prosecute more horizontal than vertical infringements, although even in the post-modernisation period it has issued some exemplary fines.
Even though the intention of modernisation is concentrated on procedure, there are signs that the Commission is looking to ‘modernise’ substance too. Therefore, the publication of the Commission Notice on Article 81(1), while on its face a simple codification of the Commission’s practice, can be considered as intending to effect a new direction to the application of Article 81 in the post-modernisation period.
5.6. The Commissions Review on Vertical Block Exemption Regulation
The Commission at present is examining the way the Vertical Block Exemption Regulation has been applied until now taking into consideration current judgements of the Community Courts, its own decisional practice and the position in the Member States.
The Commission will examine if the Regulation and Guidelines are in need of modification, and, if so, what must be done and also whether these and other points of criticism expressed at the time have appeared. It will also examine whether there may be a case of increasing or decreasing the market share threshold of 30% and also the list of hard-core restrictions in Article 4 of the Regulation and consider whether it should be modified in regard to the resale price maintenance and territorial restrictions.
If it decides to renew any parts of the Vertical Block Exemption Regulation the Commission will consult on a draft regulation. The view is that the Vertical Block Exemption Regulation is not expecting at this time any major reduction of the rules to be made.
5.7. Why the Vertical Block Exemption Regulation Remain necessary
The Regulation offers guidance to businesses that need to assess by themselves the compatibility of their agreements with the EC competition rules and allows undertakings more freedom to structure their agreements in ways that suit their needs in comparison with the old Block Exemptions.
The Vertical Block Exemption Regulation offers more autonomy for businesses to go into vertical dealings where the possibility to damage customers is small. Withdrawal of the Regulation is likely when the block exemption is not any more justified. The Commission, because of the ‘safe harbour’, can focus on hard-core restrictions and the anti-competitive effect of market power.
The Regulation is also necessary on the Commission, on National Competition Authorities, and the Courts as it offers a general framework to them. The Guidelines are compulsory only on the Commission, but other authorities usually refer to them. In some situations, vertical agreements can distort competition by making it easier for manufacturers to establish cartels, or for retailers to do so, but in practice most vertical agreements are beneficial.
Generally the Vertical Block Exemption Regulation appears to be sufficient and practical. However the introduction of comparatively minor changes, such as the remove of the market share threshold, could assist to attain a higher level of legal certainty. Particularly in the light of modernisation, such modifications would be helpful so as to secure a consistent and more logical and foreseeable application of the rules applicable.
In general, the Vertical Block Exemption Regulation it is a significant move to a more economic approach in the application of Art 81 to vertical restraints. The Regulation does represent an important improvement on the old block exemptions and eliminates some of the arbitrary and unconvincing restrictions that those exemptions imposed on parties concluding vertical agreements.
Although the Regulation is indented to operate as a safe harbour, its existence clouds the water when trying to rationalize and understand the analysis required under Article 81(1) and Article 81(3) respectively. The Commission has not therefore sufficiently met the criticism that it does not make a realistic economic assessment of agreements under Article 81(1). The predictable result must be that businesses feel the need to comply, where possible, with the terms of the Regulation.
6. The Vertical Guidelines
The Vertical Guidelines, setting out the manner in which the Vertical Block Exemption Regulation is to be applied and giving guidance on how vertical restraints falling outside the Regulation will be assessed.
The Guidelines set out general rules and provide criteria for the assessment of the most common types of vertical restraints: single branding (non-compete obligations), exclusive distribution, customer allocation, selective distribution, franchising, exclusive supply, tying and recommended and maximum resale prices. This should allow businesses to do their assessment of their vertical agreements under Article 81(1) and 81 (3).
The principles laid down in the Guidelines are not formally binding and are subject to approval by the European Courts on a case-by-case basis. However, they offer quite helpful, although not always comprehensive, guidance on various issues regarding vertical restraints and, therefore, complement the Vertical Block Exemption Regulation.
The Guidelines on the application of Article 81(3) set out the appropriate method with the purpose of establish a framework for the Courts and competition authorities, and offers guidance to businesses on the application of each of the conditions, contained in Article 81(3), which an agreement that has anticompetitive effects requires to fulfil to be found legal nonetheless, as it creates sufficient benefits that are passed on to the consumers.
6.1. Efficiencies of the Vertical Guidelines
The Vertical Guidelines assessing efficiency claims in vertical agreements and include in paragraphs 115-118 a detailed description of the positive effects that might be created by vertical restrictions.
6.1.1. To Solve a ‘Free Rider’ Problem
A benefit found on vertical restraints might rely in the resolution for the free-rider problem. Distributors may be reluctant to invest in the promotion of new products or services except if the manufacturer enforces a territorial restraint that make certain that late-entering distributors will not "free ride" on the previous distributors' initial attempts and investments to create the manufacturer's place in the market.
When a number of businesses compete for the distribution of particular manufactured goods or service, one distributor might free ride on the trade attempts of one other distributor. Rather than investing in their particular advertising promotion, a number of distributors might choose to free ride on the promotional attempts of other distributors.
Also, a distributor that invests substantial amounts in the formation of a sales area will create a centre of attention for consumers who visit its sales area to get information about the goods in question but who might then purchase such goods from the distributor proposing the best price. In such cases, there is a market failure, as distributors are not able to appropriate all the benefits of their investments. This market failure will consecutively reduce incentives to invest in demand-increasing pre-sales services.
The Guidelines recognize that these issues can be resolved from vertical restrictions taking the form of the granting of an exclusive right to distribute products in a specified geographic part and also the Guidelines identify these free-riding problems as being justifications for the imposition of vertical restraints, but highlight that these benefits will require to be deemed on the facts of the case.
6.1.2. The ‘Hold-Up’ Problem
A further justification for vertical restraints considered by the Guidelines relates to the risk of “hold-up” problem witch may occur when a business wants to create an important investment. This is the situation when the investment needs substantial sunk costs.
Such investments might be unsafe as they have the effect of rendering the investor dependent on the other contracting party. In this situation, after the business investments, the bargaining condition of the business is weakened. The concern is that free riding on investments is likelihood.
Because of this hold-up problem, the investor might not commit to the required investments unless the other party is ready to enter into a vertical agreement, which will assurance that it will be able to amortize its investment over a sufficiently long period of time.
6.1.3. Correcting Market Failures
Vertical restrictions will regularly be used to correct market failures which risk preventing specific categories of require rising investments. Therefore, efficiencies created by vertical restrictions will not essentially be related with obviously particular benefits, for instance cost reductions or increased production however, it will play a role to the better performance of distribution markets.
Also, vertical restrictions can create further efficiencies that are possibly more in order with the efficiencies in horizontal agreements, for example the understanding of economies of scale in distribution or the increased attractiveness of a product to the consumer which might be produced by a measure of consistency and value standardization observed by the distributors.
6.2. The Vertical Guidelines on Dominant Firms
A significant issue for potential policy discussion involves the treatment of dominant firms. The Guidelines raise the question as to whether dominant undertakings can obtain an exemption for their vertical restraints under Article 81(3) by stating that ‘where an undertaking is dominant or becoming dominant as a consequence of the vertical agreement, a vertical restraint that has appreciable anti-competitive effects can in principle not be exempted’.
Bishop and Ridyard in their article ‘EC Vertical Restrains Guidelines: Effects Based on Per Se Policy’ noted that, ‘an a priori ban would indeed fail to acknowledge that dominant firms have many of the same pro-competitive rationales for implementing vertical restrains as non-dominant firms’.
Peeperkorn, disagreed that a dominant position would ‘automatically imply’ that not all of the conditions of Article 81(3) are fulfilled. He stated that ‘dominant undertakings should compete on the merit only and should avoid behaving anti-competitive’. It is obvious that even dominant undertakings have to be permitted to compete, providing that this does not have any exclusionary result. Thus, they have to be permitted as well to obtain an exemption for vertical agreements if they include restrictions which have pro-competitive effects.
This view has been accepted in a number of cases by competition authorities such as in Heineken-Horeca overeenkomsten. The Commission has taken a similar approach with regard to Interbrew and moreover it recognized an extensive single branding duty on petrol stations for Repsol in Spain, despite its 88% market share.
One other question is the consistency of the Commission's approach under Articles 81 and 82. It would be bad if a vertical agreement that contained a number of restraints on intra-brand competition was banned whilst the company stayed free under Article 82 to recognize a vertically incorporated formation where its action was “exclusive” to the upstream sister company that gave rise to exactly the same economic results.
In Oscar Bronner, it was considered that even dominant firms are under certain conditions allowed to engage in exclusive internal distribution that maintain their competitive benefit. It would be unreasonable to oblige dominant firms to vertical integration as the only way to avoid Article 81.
6.2.1. The Guidelines on the Application of Article 81(3) on Dominant Firms
The Guidelines on the application of Article 81(3) of the Treaty appears to have altered the restrictive interpretation regarding the application of Article 81(3) to agreements with dominant undertakings. Paragraph 106 of the Guidelines on the application of Article 81(3) of the Treaty, state that Article 81(3) should be interpreted to preclude any application to restrictive agreements ‘that constitute an abuse of a dominant position’.
This is significantly different from the concept in the Guidelines on vertical restrains which excludes the possibility of applying Article 81(3) at al with regard to dominant undertakings as soon as there is a significant anti-competitive effect.
The Guidelines on the application of Article 81(3) of the Treaty state that ‘not all restrictive agreements concluded by a dominant undertaking constitute an abuse of a dominant position’. The Guidelines on the application of Article 81(3) of the Treaty also state that this is how paragraph 135 of the Guidelines on Vertical Restrains has to be understood when it states that in principle restrictive agreements concluded by a dominant undertaking cannot be excluded. This is also in line with the statement by the Court of First Instance in the TACA case, which implied that there was a possibility for a dominant undertaking to get an exemption for it agreements. Therefore, the point of the Commission appears to have altered and as a result makes the analysis which must be given to the Guidelines on Vertical Restrains.
6.2.2. General Considerations on Dominant Firms
Bishop and Walker stated that the Guidelines demonstrate hostility towards dominant firms. Irrespective of the efficiency gains which dominant firms may create the Guidelines imply that when inter-brand competition is absent vertical agreements restricting intra-brand competition cause anti-competitive effects. Nevertheless, it is wrong to believe that once inter-brand competition is ineffective then effective intra-brand competition cannot restore effective competition between manufacturers. The answer would be a careful scrutiny of the existent anti-competitive effects of vertical agreements entered into by dominant firms.
The Guidelines of Vertical Restrains appear to be extremely harsh in relation to dominant undertakings, as they exclude the opportunity of exemptions and they ignore the fact that the negative results of vertical restrains be balance by considerable efficiencies. This approach is in relation with the condition of Article 81(3), which states that an exemption is not possible if the agreement gives the undertakings the ‘possibility of eliminating competition in respect of a substantial part of the products in question’.
The Vertical Block Exemption Regulation will expire in 2010 and a new Vertical Guidelines, along with a new block exemption will established as well. The Guidelines are very specific; however, there is room to improve the presentation. National Competition Authorities and mostly stakeholders preferred more descriptive Guidelines for the self assessment of their agreements.
7. Economic Analysis of the Regulation 2790/1999
The European Court of Justice and the Court of First Instance have established through the years an approach that followed a narrow analysis of Article 81(1) and decline the United States rule of reason. In GlaxoSmithKline the Court of First Instance added that: ‘in effect, the objective assigned to Article 81(1), which constitutes a fundamental provision indispensable for the achievement of the missions entrusted to the Community, in particular for the functioning of the internal market is to prevent undertakings, by restricting competition between themselves or with third parties, from reducing the welfare of the final consumer of the products in question’.
The adoption of a more economics based approach concentrating on consumer benefit started in the area of vertical agreements, with the creation of the Vertical Block Exemption Regulation accompanied by the Vertical Guidelines in 1999. The Regulation ensured undertakings a more tolerant approach and broader exemption possibilities.
The Commission recognizes in the Recitals to the Regulation, that certain vertical agreements can develop economic effectiveness within a chain of manufacture or distribution by creating better organization between the undertakings, and in particular, they can lead to a reduction in the transaction and distribution costs of the parties and to an optimisation of their sales and investment levels. The European Union’s Competition Commissioner Neelie Kroes explained that, ‘an effects-based approach, grounded in solid economics, ensures that citizens enjoy the benefits of a competitive, dynamic market economy’.
7.1. The Economics Important Part on Vertical Agreements
The Vertical Block Exemption Regulation embodies a change from the previous legalistic line and gives more emphasis to an economics based approach in the assessment of vertical agreements under the EC competition rules. Nowadays economics play an important part in the consideration of vertical agreements. Vertical restraints often have pro-competitive results and can be used to diminish transaction costs or to reach other efficiencies among businesses at several levels of the production and distribution chain.
Paragraph 102 of the Vertical Guidelines state that the Commission will adopt an economic analysis in the application of Article 81 to vertical restraints and the scope of this provision will be limited to undertakings, holding a certain degree of market power where inter-brand competition may be insufficient. The more economics based approach in Guidelines is apparent in the extensive discussion of the efficiency-enhancing effects of vertical agreements that way counterbalance their possible anti-competitive effects.
The Guidelines also devoted a substantial part to explain the economic analysis of the negative and positive effects of vertical agreements. In the European review of the Regulation 2790/1999 the effort to base competition policy on a “more economic approach” is principally considered as developing the economic analysis in the evaluation of particular cases.
7.2. The Economic Relationship between the Parties to the Agreement
The Vertical Block Exemption Regulation applies to agreements entered into by two or more undertakings each of which operates, for the purposes of the agreement, at a different level of the production or distribution chain.
Undertakings often operate at more than one level of the production or distribution chain. While the Regulation usually does not apply to vertical agreements between competitors, an agreement between undertakings that operate at one or more of the same levels of the production or distribution chain may still benefit from the Regulation in certain exceptions. The agreement can benefit from the Regulation as the parties to the agreement each operate at different levels of the production or distribution chain for the purposes of the agreement.
Vertical agreements might be regarded anti-competitive as they limit the business autonomy of the parties and might have consequences on competition. However, the argument has been made that all vertical agreements must prima facie to be considered pro-competitive as there have to be an offsetting efficiency justification if a manufacturer wants a vertical restraint which bounds trade competition. Among these two arguments, the majority of the economics would nowadays disagree that the pro-competitive and anti-competitive character of vertical agreements requires more examination to consider their actual results.
7.3. Economic Efficiencies from Vertical Agreements
In the Guidelines on the application of Article 81(3), is pointed a broad choice of efficiency achieved from vertical agreements. By reducing the cost of producing an output, efficiencies can create further value, improving the quality of the product or creating a new product.
Commission official Luc Peeperkorn noted that another benefit consists in the elimination of double marginalization. The insight behind double marginalization is that the resulting “double” mark-up leads to excessive prices if producers and distributors insert mark-ups over their costs. Another feature, according to Dr. Doris Hildebrand, is the externality which stems from the fact that each partner, when setting his price, does not take into account the effect of this price on the other partner's income.
If the manufacturer imposes a territorial restraint that make sure that late-entering distributors will not "free ride" on the earlier distributors' initial efforts and investments to set up the manufacturer's position in the marketplace, distributors may be reluctant to invest in the marketing of new products or services except. Also, parallel imports can give grow to free rides from one exporting seller on the promotional attempts of one local seller. Therefore, vertical agreements allow a producer to be present on a market for less than it would charge him to create a subsidiary. Thus, these agreements can be beneficial to competition.
Such agreements can prove an effective tool for creating price differentials within a specific territory or for discouraging new competitors from entering the market. Exclusive agreements supported by methods intended at restricting imports can protect a distributor's territory, allowing him to maintain his prices high. Also, when the majority or all of the manufacturers/suppliers use exclusive distribution this can help collusion, both at the suppliers and distributors level.
Furthermore, vertical restraints can raise sales and create brand image by imposing on the distributors certain standards of value. In this situation, exclusive or selective distribution can be reasonable when presenting a new product into the marketplace for a limited period.
7.4. Anti-Competitive Effects
In addition, vertical restraints may cause anti-competitive results like foreclosures by creating barriers to entry, reduction of inter-brand competition, reduction of intra-brand competition, and establishment of obstructions to market integration.
Vertical restraints are considered unclear because they concerning market integration as they might restrict competition or might establish competition by the opening of new market. By containing restrictions to competition and having the intention or result of protecting Member State markets, vertical agreements are in contrast with the Community’s objective of market integration.
Harmful results traced back to vertical restraints are probable come out, if the undertakings have a specific level of market power. The most important cause is that the income of the vertical construction consequential from an efficiency vertical restraint are more potential to benefit customers in the means of reduced prices or better value, if there exists competition from other sellers of products. Nevertheless, if the vertical structure keeps a significant level of market power, it will be likely to absorb those efficiency benefits in the type of further profits.
7.5. Barriers to a Full Economic Analysis
The Vertical Block Exemption Regulation provides economic assessment in that it offers a market power screen to filter out those businesses whose actions have no result on the marketplace. However, there are some barriers that put a stop to the complete economic discussion of competition law in this area.
One barrier is that the Commission retains a concentration in consumer benefit which is against to economic benefit. Therefore, features of distributive justice inform the decision making procedure. The role of market integration remains, though in a less dogmatic form. The economic theory would propose that if a business has no market power, efforts to segment the market are not likely to decrease economic benefit. One other barrier is that the role of market integration remains, though in a less dogmatic form. The economic theory would propose that if a business has no market power, efforts to segment the market are not likely to decrease economic benefit.
Finally, the Commission retains a concern in economic freedom. Thus, the examination of the foreclosure is based upon the removal of suppliers or retailers rather than upon the undesirable economic results that might occur as a consequence of eliminating certain market players.
7.6. Criticisms Based on Economic Analysis of Vertical Restrains
The Vertical Block Exemption Regulation contains a legal regime for vertical agreements which is not totally dependable with economic concept and the Commission has not totally completed its promise to adopt a more economist based approach because it does not want to depend totally on strict economy method in the design of its policy.
Professor Van den Bergh considered that these criticisms are based on a pure economic analysis of vertical restrains and even if one would reject them as not being the only source of designing law and policy, one aspect should be always considered. The advantages in terms of efficiency investments have to be reasonable with the costs in terms of restrictions of competition. Also, the efficiency savings have to be distributed to customer on the basis of a fair share. Distorting Competition should be considered along with the damage caused to customers. If customers can switch to other products and retailers, vertical restrains are not likely to be harmful.
As these criticisms are still valid for the consideration of vertical agreements, it must not be ignored that the Regulation approach to vertical agreements was a significant improvement in the issue of establishing further economic based insights in its consideration and developing a policy that is more flexible for companies. It must be considered that it is doubtful that these criticisms will be receiving in the future full acknowledgement as they can not be submissive with the goal of market integration. Considering that market integration is still the main objective of EC competition law, efficiency issues will still have to be balanced in opposition to it and issue to its priority.
Competition law is essential to operation of market economy. Vertical restraints usually have both pro-competitive and anti-competitive effects. The same vertical restraint can have very different effects depending on the context. Therefore no per-se rules are proper to deal with vertical restraints. It is not likely, in lack of significant market power at the manufacturer’s and/ or retailer’s level, that vertical restraints are generally unwelcome. A substantiated economic case by case analysis is necessary as an economic expert outlook might smooth the progress of the self-assessment of businesses as required by EC competition law.
The Commission had already taken a more economic approach when the Vertical Block Exemption Regulation was adopted and stated that for markets to operate successfully where vertical agreements exist there must be competition in the products that are the issue of the agreement and also there must be competition between those products and the products of competing manufacturers. Such competition must exist across the common market and markets must be open to new, as well as existing, participants, so vertical agreements must not have the effect of increasing barriers to entry.
Possible Areas for Reform
The Vertical Block Exemption Regulation expires on 31 May 2010. The Commission initiated a consultation in late 2008 and will likely decide in the course of 2009 how best to renew or amend the Regulation and the Guidelines.
It is important to mention that since the Vertical Block Exemption Regulation was established, there has not been enough enforcement in vertical agreements. However, there has been more enforcement at the national level, especially to resale price maintenance and to on-line retail.
8. Competition Issues in Internet Sales
A main subject in the reconsideration of the Vertical Block Exemption Regulation is the problem of how to deal with on-line retail that has been growing at an increasing speed since the creation of the Regulation. The issue of internet sales is a significant one, and it is commonly accepted that the growth of e-commerce threatens to alter fundamentally notions of exclusivity and assigned territories.
No precise mention is made of internet sales in the Regulation. In its Vertical Guidelines, the Commission states that ‘every distributor must be free to use the Internet to advertise or to sell products. A restriction on the use of the Internet by distributors could only be compatible with the Regulation to the extent that promotion on the Internet or sales over the Internet would lead to active selling into other distributors’ exclusive territories or customer groups’. On-line distribution will be one of the major areas of the review as it offers marvellous chances for businesses and consumers whilst still facing occasionally barriers for more development.
It is essential to consider if the Vertical Block Exemption Regulation proposes a proper framework in the internet sales for businesses and consumers and if it is essential to make any modifications. The Commission is also reflecting on how the reconsideration can add to a wider schedule of reducing prohibitions to on-line retail. The Regulation is due to expire in 2010, prompting to question whether this chance to review the Regulation could be an effective instrument for dealing with this issue.
8.1. Internet Sales and Territory Allocation
Despite the major raise in the scope of internet commerce in the European Union, there has been minor enforcement of the Vertical Guidelines provisions on internet sales restrictions.
In Yamaha, the Commission considered as anti-competitive a duty on dealers to deal with Yamaha before selling abroad products sold through the internet. The Commission held that the clause is a hard-core restriction which has the effect to discourage dealers to sell abroad products in one member state to other member states.
Paragraph 7 of the Guidelines states: ‘Market integration enhances competition in the Community. Companies should not be allowed to recreate private barriers between Member States where State barriers have been successfully abolished’. The Commission’s fears appear focussed on blanket internet sales bans and requirements that buyers keep significant ‘bricks and mortar’ premises additionally to any on-line stores. It remains to be seen what, if any, developments appear from the Commission’s review.
8.2. Active v Passive Internet Sales
The Vertical Block Exemption Regulation operates as a safe place for all qualifying agreements relating to the terms and conditions of the sale of goods or provisions of services which would otherwise be prohibited for having an unpleasant effect on inter-state trade under Article 81. The Regulation allows the imposition of a number of limits on distributors and sellers regarding how and where products and services might be sold.
The Vertical Guidelines makes a distinction between ‘active sales’ which can be restricted, and ‘passive sales’ which can not, unless ‘objectively justified’. The Regulation considers that on-line sales are passive sales, something which has become uncertain because of technological improvements and new companies policies. Thus, contractual provisions prohibiting internet sales loose the benefit of Block Exemption.
However, in several cases the Commission has recognized the restriction of on-line selling to “bricks and mortar” entities just as being essential for the protection of the luxury nature of a brand, therefore objectively justifying the restriction, for instance in Yves Saint Laurent and B&W Loudspeakers.
The internet active sales while remaining within the Vertical Block Exemption Regulation can be restricted. The current rule for restrictions on internet sales is considered quite narrow, and still permits for businesses to operate in a method which results in differential pricing across the European Union. The Regulation applies only where the products or services are being sold over the internet as the result of an agreement between two or more parties and does not cover cases where the manufacturer, is selling products at different prices through the internet.
The Commission is decided to do something about this subject. However, doing it via the Vertical Block Exemption Regulation review will need proposing important change to an already complex set of rules, and in any case this will not undertake one-sided action.
8.3. Differential Pricing via the Internet
The European Union’s Competition Commissioner, Neelie Kroes recognized a risk to the efficiency of the single market caused by differential pricing for sales over the internet.
The Commission seeks to deal with the subject of differential pricing via the internet through the review of the Vertical Block Exemption Regulation. It has become familiar for manufacturers to tie the presented internet prices to the Member State where the website consumer is placed. Citizens of the European Union are successfully paying different prices for the same goods or services by preventing access to the prices proposed to consumers in different Member States.
It is irritating the fact that the suppliers re-erect them in the internet world as one of the essential objectives of the single market, and economic and financial union/Euro was to eliminate national limitations for consumers. With the level of on-line sales growing, Neelie Kroes hosted a conversation, on September 2008, with senior consumer and industry executives to talk about this issue, alongside with other prospects and barriers, with an analysis to finding possible solutions.
8.4. Selective Distribution System and Internet Sales
The Commission has brought up issues, regarding selective distribution, relative to the position of the internet in the market and whether specific selective principles might turn into a barrier to internet sales.
Vertical Guidelines state that: ‘in a selective distribution system the dealer should be free to advertise and sell with the help of the internet’. This should probable be read in the light of a former section of the Guidelines, which states that: ‘the supplier may require quality standards for the use of the internet site to resell his goods’. The Guidelines are quiet on particulars as to the nature of any restrictions that may be permitted in this regard.
Selective distribution is generally related to goods that are complicated from a technical approach and require particular services by skilled staff. The Commission took a number of internet-related selective distribution cases in the years after the publication of its Guidelines. In the case of Yves Saint Laurent’s selective distribution system, the Commission acknowledge a prohibition on internet retailers but, in B&W Loudspeaker, the Commission was stricter to on-line sales restrictions in selective distribution systems.
Andrzej Kmiecik stated that most manufacturers which activate in selective distribution systems can be expected to continue to be able to exclude e-retailers which do not also operate bricks and mortar outlets, at least unless the supplier has market power limiting its ability to operate a quantitative selective distribution system.
It is anticipated that the Commission’s present consultation, which asks, whether blanket internet sales prohibitions must be allowed and whether consumers benefit from sellers claiming that their distributors have a ‘bricks and mortar’ outlet, will lead to better clearness in this ground.
8.5. Issues Paper in Relation to On-line Commerce
In the context of the renewal of the Vertical Block Exemption Regulation and the review of the Vertical Guidelines, and given the increased importance of on-line commerce, the Commission published an Issues Paper in 2008 inviting stakeholder statement on how the EC competition rules have to properly regulate internet sales restrictions.
The Issues Paper requests charity regarding: opportunities for on-line retailing expansion, the barriers preventing consumers from enjoying those opportunities and solutions to overcome the barriers. In the context of exclusive distribution systems, the Commission look for charity relative to the concept of active and passive sales in relation to the internet. The results of this consultation will probable are taken into consideration in the Commission’s wider consultation on the Vertical Block Exemption Regulation.
8.6. Potential Revision of the Regulation 2790/1999 Regarding Internet Sales
From the economist viewpoint, it was considered that it is not easy to carry out an economic evaluation of competition rules especially of vertical restraints and that the Guidelines were unclear about the basis why restraining internet sales might be anti-competitive.
In the economists’ analysis, while restraining internet sales can raise prices and decrease option, higher prices are constant with increased consumer benefit, for instance, in the situation of value added services, although debatably, maybe not all consumers want those added services. However, it is uncertain whether selective distribution systems are likely to be advantageous for the consumer or operate to the consumers’ harm. There are reports supporting both opinions, which is why economists resist providing a final decision.
The new Guidelines have to specify which result internet selling might contain and whether would decrease the charge the manufacturers and established distributors share. It might be considered that limiting internet sales might be anti-competitive but the legislator have to make clear why. The main aim for product holders is to prove that limiting internet sales is not harmful for the consumer generally in terms of price and that it could be beneficial. Considering that there are arguments both in support of and in opposition to vertical restraints, the truth might be in the centre.
9. Evaluation of Resale Price Maintenance
Resale price maintenance is one of the most discussed and controversial subjects in competition law. The subjects may be separated into two parts. First is a conflicting nature of arguments put forward pro and against resale price maintenance and second, finding the proper tools for evaluation and the legal means for judging resale price maintenance cases that will be the most effective and efficient.
The Vertical Block Exemption Regulation considers resale price maintenance as a hard-core restriction of competition as it cannot benefit from the Block Exemption. Contrasting to the per se approach, a hard-core restriction may still exempt under Article 81(3) on an individual assessment. The likelihood of satisfying the conditions for this exemption is might quite inaccessible in most areas in any case, as indicated by the penalties forced by national competition authorities in situations concerning this practice.
In Binon v AMP the European Court of Justice stated that exceptional conditions can apply. It seems not possible that the Commission's review of the Vertical Block Exemption Regulation will suggest any major modifications to the management of resale price maintenance according to the latest statements of senior Commission officials.
9.1. Leegin in the European Union
The United States Supreme Court judgment in Leegin, overturned the longstanding rule in United States law that resale price maintenance is per se unlawful. Several articles have been considered, in research for the Commission’s Vertical Block Exemption Regulation review, on the possible effect of the Leegin judgment in the European Union and on the interest of the continuation of resale price maintenance as a hard-core restriction.
In relation to the case of Leegin, Luc Peeperkorn points out that that due to the difference between the United States per se approach and the European Union hardcore approach the potential need for change is not the same in the European Union as it was in the United States considered that the economic arguments increased on the side of resale price maintenance do not seem strong.
Also, Tirole noted that ‘theoretically, the only defensible position on vertical restraints seems to be the rule of reason. Rule of Reason means that the court will look at the facts surrounding the business practice before deciding whether it helps or hurts competition. Most vertical restraints can increase or decrease welfare, depending on the environment. Legality or illegality per se thus seems unwarranted’.
David Anderson, a Partner at the law firm Berwin Leighton Paisner LLP, make a comparison between the United States per se approach and the European Union hard-core approach and he concluded that the European Union has historically been more hostile to vertical restraints than the United States and that the case of Leegin did not yet trigger much public debate in Europe.
The Leegin judgment caused debate at the time and in United States some Federal States seem to be unwilling to follow the Leegin decision. Carney and McAhren, writing a year after Leegin, report that ‘a dramatic change for minimum resale price maintenance agreements does not appear imminent’ and that ‘their use remains problematic’.
Leegin appears to have caused discussion within the European Union about the advantages of minimum resale price maintenance on retail distribution and on the interest of altering present European Union law to approximate Leegin. The Commission deals with a crucial choice in its review of the Vertical Block Exemption Regulation: either adopting the Leegin ruling or else modifying its existing approach to a more economic standpoint.
It seems that an attempt to follow Leegin judgement would be not wise. By a comparison to the United States per se and the European Union hard-core approach it is clear that the need for change is not the same in the European Union as it was in the United States and European Commission will be careful about what if any lessons it gets from Leegin.
9.2. Minimum and Maximum Resale Price Maintenance
The subject of resale price maintenance is often considered as a clash of interests between manufacturers commencing maximum resale price maintenance agreements and consumers, who are deprived by the consequential high prices. It is an argument between manufacturers and their distributors, who are unenthusiastic by too low resale price clauses in maximum resale price maintenance agreements. This has as a result to make them not capable to obtain a proper return from their business and stop the dealer from competing on price against other dealers of the same product.
Art 4(a) of the Vertical Block Exemption Regulation makes it clear that fixed and minimum resale prices cannot benefit from block exemption. However, this does not hold for maximum resale price maintenance as it is considered that they provide as a more pro-competitive way. Minimum resale price maintenance is where in an agreement a dealer agrees either to set the price at whatever level the manufacturer needs or in any case not to charge less than the manufacturer requests while under maximum resale price maintenance a dealer agrees not to charge more than the price set by the manufacturer.
The present law it is based on main economic statements recognizing pro-competitiveness of maximum vertical price fixing. Nevertheless, per se prohibition of minimum vertical price fixing is unwanted and thus it must be recognised, that the law concerning minimum vertical price fixing is insufficient. As a result, a type of in-between position should be accepted which will allow law applying authorities to estimate resale price maintenance situations, taking into consideration the essential aspects and make the correct choice.
9.3. International Conference on Resale Price Maintenance
An International Conference on Resale Price Maintenance was hosted on September 2008, by the Austrian Federal Competition Authority. Practitioners from regulatory authorities delegates from competition agencies and law firms, business people and academics discussed about the Resale Price Maintenance in EC Competition Law and if it has an appreciable effect on the market. Also it was not regard Leegin case as a good attempt for modificating resale price maintenance in Europe.
A number of concerns were stated, by some competition authorities, of a too high executive burden in the situation of a more compassionate method to resale price maintenance in view of an uncertain possibility of pro-competitive results. A few worries that the points stated to be followed by resale price maintenance are efficiently reached by minimum resale prices.
Most of the competition authorities seem to support the existing approach, whilst some other competition authorities, lawyers and academics would support to treat minimum resale price maintenance similar to other vertical agreements. The importance might be placed on the examination of the competitive harm rather than on the classification. The conference reached it’s intend to form a good basis for discussion in the European Union on the review of the Vertical Block Exemption Regulation.
9.4. Antitrust Policy Regarding Resale Price Maintenance
In recent years, the process for assessment of vertical restrains in EC competition law has been harshly criticised as the split of Article 81 is considered to be fake producing an over-broad application of Article 81(1) to competitively harmless agreements. The Commission judgments on resale price maintenance, failed to consider sufficiently whether the restraint at issue harmed competition: injured consumers and reduced productivity.
Professor Ralf Boscheck suggested that the solution of the problem is seen in initiating vigorous and complete economic analysis of competitive harm and benefit under Article 81(1) referred as “the European rule of reason”. The other approach is a modification of Article 81 to reduce bifurcation and therefore set the whole competitive examination under a unified norm.
Two main questions have to be resolved in the prospect antitrust policy concerning resale price maintenance. It is essential, first, to allow resale price maintenance where it improves competition and discard per se prohibition on vertical price fixing. This is where resale price maintenance introduces the proviso of pre-sales services that are important to consumers and raises manufacturers’ production. Secondly, straightforward competition rules have to be established that stability cost and time of case-based study of resale price maintenance.
9.5. Alternative Strategies to Resale Price Maintenance
The treatment of resale price maintenance, on the Commission’s review of Vertical Block Exemption Regulation, will be strongly discussed. As the issue of resale price maintenance depends on an assumption of efficiencies and the possibility of pro-competitive effects, further economic discussion must be made.
The present competition law functions in a severe black and white form where a price related restraint was a hard-core restriction and thus “quasi per se” prohibited or would fall under the Regulation and was thus not issue to any scrutiny. This would concentrate on the mistaken issue that the weight is mostly placed on the classification of resale price maintenance instead than on the examination of the competitive damage. This leads to legal uncertainty and for that reason an improved analytical framework should be formed to clarify when a situation concerning price restraints could cause competitive effects that have to be more examined.
The solution how to consider resale price maintenance will depend on the possibility of its negative and its positive effects. The resale price maintenance in some situations might be pro competitive or at least neutral. It would be essential to mention in the Guidelines that resale price maintenance might be permitted in certain situations. Moreover, the establishment of examination of market share/de minimis might be considered of with the purpose of verify whether probable negative results are possible: If market shares are low, fears concerning prices and collusion are low as well.
While views were seen both in support of and in opposition to, the Commission have to be certain of the pro-competitive results of resale price maintenance and that the Commission would continue to be unconvinced that resale price maintenance was necessary to reach claimed advantages, given that the alleged efficiencies might be attained with other less restrictive ways. A clarification to the Vertical Block Exemption Regulation would refer to cases where resale price maintenance had positive results, for example by preventing important loss or when entering a new marketplace.
10. The Motor Vehicle Block Exemption and the Vertical Block Exemption
The Motor Vehicle Block Exemption Regulation was introduced in 2002 to establish fairer competition and an additional level playing field across EU member states. The Regulation provides to dealers and repairers clear contractual rights, access to negotiation, and the contribution of technological information. In addition, they make it simpler for dealer companies to create multi-franchise sales services and open shops in any Member State. The Motor Vehicle Block Exemption Regulation expires in 2010 however, the Commission recently revealed proposals to extend the Regulation for three years. After that, new car sales and distribution will come under the Regulation 2790/1999 which the Commission proposed that would be an equivalent, although more flexible rule combined with the competition rules of Article 81 and Article 82.
10.1. The Commission's Evaluation Report
The European Commission on May 2008 published its report on the treatment of the Motor Vehicle Block Exemption Regulation. The Commission’s report emphasizes the improvement that has been created in harmonising the market conditions for motor vehicles across the European Union’s borders and proposes that the basis behind the Motor Vehicle Block Exemption Regulation may now be out of date.
The Commission’s report has considered that the ‘provisions of the Regulation which diverged from the general principles derived from the case law of the European courts and currently reflected in Commission Regulation 2790/1999 may be regarded as overly strict, too complex and/or redundant’. Various previous problems in the area have been mainly settled by the application of the Motor Vehicle Block Exemption Regulation’s strict rules.
The report suggests that the Commission may not wish to adopt a new motor vehicle-specific block exemption and is more likely to bring the automotive sector within the scope of the Vertical Block Exemption Regulation while a ‘more flexible regime’ based on general principles would have been a better solution than the Motor Vehicle Block Exemption Regulation.
However, there were some reactions from automotive distributors. The members of the Right to Repair Campaign considered that it would be harmful for all aftermarket operators and consumers to remove the Motor Vehicle Block Exemption Regulation which provide legal certainty and which have created a framework for effective competition in the automotive area. FIGIEFA President Knud Sorensen stated that by ‘simply applying the general rules as currently worded and embodied in the Vertical Block Exemption Regulation to the automotive sector would be no equivalent alternative’. Furthermore, Leaseurope’s opinion was that it is difficult to judge how efficient Regulation 2790/1999 would be as a substitute of the Regulation 1400/2002.
The Commission’s review of enforcement relative to multi-branding state that the Vertical Block Exemption Regulation would offer a similarly acceptable result to that of the Motor Vehicle Block Exemption Regulation. It seems that according to Commissions’ Evaluation report that a more effects-based economic approach and less regulation would lead to better effects for consumers. Bringing the business under the framework of the Vertical Block Exemption Regulation will efficiently reduce the dealers’ right to choose what to propose, by taking the right to multi-branding, and where to open outlets, by permitting for location clauses.
10.2. Replacement of Regulation 1400/2002 to the Regulation 2790/1999
It is obvious that the Commission does not want to establish a new motor vehicle block exemption and in its place, it would choose the replacement of the Regulation 1400/2002 to the Regulation 2790/1999 to apply to all economic areas. This is maybe not unexpected if it is considered that the Motor Vehicle Block Exemption Regulation includes several provisions that are possibly not consistent with the further economics based approach.
What might be unexpected to companies is the Commission's view in the Evaluation Report that many rules of the Motor Vehicle Block Exemption Regulation are unnecessary because they only mirror existing rules of EC competition law, with rules applicable to the Vertical Block Exemption Regulation. Therefore, businesses conditional on the Vertical Block Exemption Regulation might notice that the Commission's explanation of these rules translates in fact into a number of undesirable changes for their distribution arrangements.
Even if no main modifications are anticipated to the Vertical Block Exemption Regulation, many rules in the Motor Vehicle Block Exemption Regulation would have a significant effect upon the distribution arrangements of other businesses.
10.3. The Effect of this Change
The effect of this change on contracts in the sector may well present opportunities for shoring up revenue streams, though for some it may pose a potential threat depending upon how the vehicle manufacturers react.
This will mean in cases where the manufacturer's market share for vehicle sales is above 30% that the manufacturers must undertake an individual assessment and consider revising their strategy for vehicle distribution. Most manufacturers, however, come below the 30% threshold for vehicle sales and thus may find that Vertical Block Exemption Regulation presents opportunities to more tightly control dealer activity. Whether the Commission will countenance the introduction of particular restrictions remains to be tested but certainly the Commission is now more relaxed given the existence of strong competition for vehicle sales.
Paolo Cesarini, the leader of the Commission unit in charge of competition in the Motor Vehicle Block Exemption Regulation stated that ‘there seems no valid reason to envisage a replacement sector-specific regulation’. Also, John Revill considered that the Commission prefers an end to the specific block exemption, which would leave the automotive franchise system covered by the general exemption covering other vertical distribution systems in the European Union. It seems that it will remain the freedom of competition and the Motor Vehicle Block Exemption Regulation, will be abandoned.
10.4. Motor Vehicle Block Exemption Regulation Extended to 2013
In 22 July 2009, the Commission decided to extend the Motor Vehicle Block Exemption Regulation to 2013 which, according to Competition Commissioner Neelie Kroes, ‘it is important to give the automotive sector legal certainty and predictability as to the future competition law regime. This holds even more true in times of crisis. That is why I favour a new framework which will make it easier for market players to respond to rapidly changing market circumstances while better safeguarding consumer interests’. The proposal to extend the Motor Vehicle Block Exemption Regulation for another three years has received a warm welcome from the motor trade Industry.
The Commission wishes the extension to give it time to formalise the potential legal framework for motor vehicle distribution and after sale services agreements. Generally, the Commission is concerned that a distinction have to be drawn among the markets for the repair and maintenance markets and the markets for the supply and distribution of spare parts. The Commission proposes to match the Vertical Block Exemption Regulation either with Guidelines, or with a new block exemption, or with a combination of both.
No major competition shortcomings have been found in the market for the sale of new vehicles. However, this market is recognized by structural congestion and decreasing prices. Therefore, the Commission is intend not to impose unequal regulatory restraints. To support its approach, the Commission suggests that motor vehicle distribution agreements have to be covered by the Vertical Block Exemption Regulation.
The Commission has requests for comments on its anticipated plan until 25 September 2009, and next it will take legislative actions to create a competition law framework concerning the motor vehicle sector that certifies that the level of protection of competition is improved, while providing for a high level of legal certainty and predictability.
10.5. The Future of the Motor Vehicle Block Exemption Regulation
The several seminars, speeches, conferences and reports issued allow one to make a few predictions from a legal point of view: renewal of the existing Motor Vehicle Block Exemption Regulation after 2013 is not preferred; a case is made for reliance on Vertical Block Exemption Regulation, and in the nonexistence of hard core restrictions set out in a Block Exemption Regulation, reliance on Articles 81 and 82 would mean going to Court for each individual complaint, therefore making complaints prohibitively costly for consumers and operators who are usually small and medium sized enterprises.
The Vertical Block Exemption Regulation is also under review and no indication has been given as to what it will look like in the future at the moment of writing. It does not deal with subjects in depth specific to the automotive sector. Additional provisions would have to be incorporated for the automotive sector. The Regulation specifies clearly which rules must not be broken. Thus, it is not possible to say how efficient or proper it would be to focus on the specificities of the automotive sector. Without doubt, its present provisions do not seem sufficient.
11. Commission Launches Public Consultation on Review of Regulation 2790/1999
In 28 of July 2009, the Commission has issued for discussion a revised Vertical Block Exemption Regulation and Vertical Guidelines. The Commission is requesting for observations, by 28th September 2009, on its plan for a modification to the Vertical Block Exemption Regulation and Guidelines on supply and distribution agreements. Although the consultation clearly deals with all of the subjects dealt with by the Regulation and the Guidelines, the Commission asks specifically for observations on the general performance of the Regulation and the point that new market improvements must affect the scope of the review.
When the Regulation and its Guidelines were adopted ten years ago, the aim was to decrease the regulatory burden on businesses, especially businesses with no market power and to establish an effects-based method to the evaluation of vertical restraints. In the Commission's assessment, these purposes are continued to be valid at the moment.
The main improvements that have marked the ten year time from the establishment of the Regulation are the raise in big distributors' market power and the growth of on-line sales. The draft modified rules on which stakeholders observations are noted, have been adapted to consider these developments. In addition, the Commission is requesting observations on the particular method that it is intending to handle to these issue. The Commission regards that the rules are working well overall and must not be modified.
Competition Commissioner Neelie Kroes stated: ‘Competitive and efficient distribution are essential for consumer welfare and for our economy. The review launched today aims to ensure that the assessment of supply and distribution agreements under the competition rules takes account of recent market developments, namely further increased market power at the level of buyers and new forms of distribution including the opportunities brought by the Internet’.
The Commission have to consider important issues when it will be prepare the next Vertical Block Exemption Regulation as the risks for all stakeholders are high and thus several questions are still unanswered. It must be emphasized that antitrust policy must not favor a distribution channel to the harm of another but have to instead take a neutral position.
Moreover, medium and long-term consumer benefit mostly in economically difficult period must not be traded for short-term gains. It is important that the Commission review the possible effects of the Regulation, considering all consequences on the economy.
11.1. What will 2010 bring?
The debate of ‘what will 2010 bring?’ has started. The Vertical Block Exemption Regulation expires next year and it will be reviewed with an analysis to its modification in May 2010. Also the Commission will re-examine the Vertical Guidelines. Although it expires in 2010, at present it seems likely to be renewed without significant amendment.
The Commission is expected to issue a renewed Vertical Block Exemption, possibly with some amendments, in late 2009 or early 2010. Also, the Commission will expect to renew Vertical Guidelines. The Commission has been seeking to identify the most appropriate solution for a future competitive framework for the vertical agreements and issue a more indulgent approach to the treatment of vertical agreements.
11.2. Is there a Need for Change?
It is unlikely that the Commission will propose changes as radical as those that were introduced at the time of Regulation 2790/1999. Any changes that are proposed will be the subject of a process of consultation. Arvid Fredenberg, Acting Chief Economist at the Sweden’s Competition Authority stated that “bringing together researchers and practitioners in this way to discuss the effects of vertical agreements in light of the current revision of EU rules will, I think, be very fruitful”. Regulation 1/2003 states that greater enforcement and litigation at the national level is expected.
While can not be expected more modifications to the Commission’s method to vertical restrains before to its review of the Vertical Block Exemption Regulation in 2010, however, slight modifications, at this time that the national Courts and national competition authorities have been given the chance to judge on an agreement with the requirements on both Article 81(1) EC and Article 81(3) EC, can consequence.
Those authorities might be keener to recognize, in line with the Court’s case law, that an agreement does not infringe Article 81(1) EC or that, in certain cases, agreements including price or territorial restrains fulfil the requirements of Article 81(3) EC. Though a change to the Vertical Guidelines may not be sufficient but modifications to the Regulation are required.
11.3. Concluding Remarks
The Vertical Block Exemption Regulation presented an economics based approach witch made an effort to concentrate on prohibiting distribution arrangements that are harmful to customer benefit, and allow parties to accept the distribution procedure that they believe its most efficient. These rules have significant useful effect as they apply to a broad range of agreements. The businesses have more choice to arrange their agreements in a method that makes the most trade sense.
At a practical level, the Regulation makes life easier for the majority of businesses. Only large businesses or businesses with important market shares need to undertake an in-depth analysis of their agreements from a competition law viewpoint. All other businesses will need to worry only about complying with minimum requirements.
To sum up the Vertical Block Exemption Regulation has proven very important in the day to day practice of EC competition law. Even though the Vertical Block Exemption Regulation makes life easier for most, they could mean that deals involving large businesses with important market shares will receive more analysis than in the past. As these businesses are no longer qualified for automatic exemption from the competition rules, they require undertaking their own competition law review of their agreements.
It is considered that the Vertical Block Exemption Regulation operates properly and companies are at this time not waiting for any important reduction of the rules to be created when the Regulation is adopted. As the Commission will form a new Block Exemption Regulation after May 2010, it is expected that the Commission will provide guidance on the questions mentioned above.
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