European Community competition law

From Wikipedia, the free encyclopedia

The European Commission, established following World War II, was the first Europe-wide competition authority
The European Commission, established following World War II, was the first Europe-wide competition authority

European Community competition law is one of the areas of authority of the European Union. Competition law, or antitrust as it is known in the United States, regulates the exercise of market power by large companies, governments or other economic entities. In the EU, it is an important part of ensuring the completion of the internal market, meaning the free flow of working people, goods, services and capital in a borderless Europe. Four main policy areas include:

  • Cartels, or control of collusion and other anti-competitive practices which has an effect on the EU (or, since 1994, the European Economic Area). This is covered under Articles 81 of the Treaty of the European Community (TEC).
  • Monopolies, or preventing the abuse of firms' dominant market positions. This is governed by Article 82 TEC. This article also gives rise to the Commission's authority under the next area,
  • Mergers, control of proposed mergers, acquisitions and joint ventures involving companies which have a certain, defined amount of turnover in the EU/EEA. This is governed by the Council Regulation 139/2004 EC (the Merger Regulation).
  • State aid, control of direct and indirect aid given by EU Member States to companies. Covered under Article 87 EC (ex Article 92).

This last point is a unique characteristic of the EU competition law regime. As the EU is made up of independent member states, both competition policy and the creation of the European single market could be rendered ineffective were member states free to support national companies as they saw fit. Primary competence for applying EU competition law rests with European Commission and its Directorate General for Competition, although state aids in some sectors, such as transport, are handled by other Directorates General. On 1 May 2004 a decentralised regime for antitrust came into force which is intended to increase the application of EU competition law by national competition authorities and national courts.

Contents

[edit] Historical background

See also: Competition law history
Competition law
Basic concepts
Anti-competitive practices
Laws and doctrines

United States

Europe

Australia
Enforcement authorities and organizations
edit box
The signatories to the Treaty of Rome which covers EU competition laws
The signatories to the Treaty of Rome which covers EU competition laws

One of the paramount aims of the founding fathers of the European Community - statesmen around Jean Monnet and Robert Schuman - was the establishment of a Single Market. To achieve this, a compatible, transparent and fairly standardised regulatory framework for Competition Law had to be created. The constitutive legislative act was Council Regulation 17/62 (now superseded). The wording of Reg 17/62 was developed in a pre Van Gend en Loos period in EC legal evolution, when the supremacy of EC law was not yet fully established. In order to avoid different interpretations of EC Competition Law, which could vary from one national court to the next, the Commission was made to assume the role of central enforcement authority.

The first major decision under Art 81 (then Art 85) was taken by the Commission in 1964. They found that Grundig, a German manufacturer of household appliances, acted illegally in granting exclusive dealership rights to its French subsidiary. In Consten & Grundig [1966] the European Court of Justice upheld the Commission's decision, expanded the definition of measures affecting trade to include "potential effects", and generally anchored its key position in Competition Law enforcement alongside the Commission. Subsequent enforcement of Art 81 of the EC Treaty (combating anti-competitive business agreements) by the two institutions has generally been regarded as effective. Yet some analysts assert that the Commission's monopoly policy (the enforcement of Art 82) has been "largely ineffective",[1] because of the resistance of individual Member State governments that sought to shield their most salient national companies from legal challenges. The Commission also received criticism from the academic quarters. For instance Valentine Korah, an eminent legal analyst in the field, argued that the Commission was too strict in its application of EC Competition rules and often ignored the dynamics of company behaviour which in her opinion were in some cases actually beneficial to consumers and to the quality of available goods.

Nonetheless, the arrangements in place worked fairly well until the mid-1980s, when it started to become clear that with the passage of time, as the European economy steadily grew in size and anti-competitive activities and market practices became more complex in nature, the Commission would eventually be unable to deal with its workload.[2] The central dominance of the Directore-General for Competition has been challenged by the rapid growth and sophistication of the National Competition Authorities (NCAs) and by increased criticism from the European courts with respect to procedure, interpretation and economic analysis.[3] These problems have been magnified by the increasingly unmanageable workload of the centralised corporate notification system. A further reason why a reform of the old Regulation 17/62 was needed, was the looming enlargement of the EU, by which its membership was to expand to 25 by 2004 and 27 by 2007. Given the still developing nature of the East-Central European new market economies, the already inundated Commission anticipated a further significant increase in its workload.

To all these challenges, the Commission has responded with a strategy to decentralise the implementation of the Competition rules through the so-called Modernisation Regulation. EU Council Regulation 1/2003 places National Competition Authorities and Member State national courts at the heart of the enforcement of Arts 81 & 82. Decentralised enforcement has for long been the usual way for other EC rules, Reg 1/2003 finally extended this to Competition Law as well. The Commission still retained an important role in the enforcement mechanism, as the co-ordinating force in the newly created European Competition Network (ECN). This Network, made up of the national bodies plus the Commission, manages the flow of information between NCAs and maintains the coherence and integrity of the system. At the time, Competition Commissioner Mario Monti hailed this regulation as one that will 'revolutionise' the enforcement of Arts 81 & 82. Since May 2004, all NCAs and national courts are empowered to fully apply the Competition provisions of the EC Treaty. In its 2005 report, the OECD lauded the modernisation effort as promising, and noted that decentralisation helps to redirect resources so the DG Competition can concentrate on complex, Community-wide investigations. Yet most recent developments shed doubt on the efficacy of the new arrangements. For instance, on 20th December 2006, the Commission publicly backed down from 'unbundling' French (EdF) and German (E.ON) energy giants, facing tough opposition from Member State governments. Another legal battle is currently ongoing over the E.ON-Endesa merger, where the Commission has been trying to enforce the free movement of capital, while Spain firmly protects her perceived national interests. It remains to be seen whether NCAs will be willing to challenge their own national 'champion companies' under EC Competition Law, or whether patriotic feelings prevail.

[edit] Collusion and cartels

Main article: Article 81
Scottish Enlightenment philosopher Adam Smith was an early enemy of cartels
Scottish Enlightenment philosopher Adam Smith was an early enemy of cartels

Under EC law cartels are banned by Article 81 EC. Art. 81 EC makes clear who the targets of competition law are in two stages with the term agreement "undertaking". This is used to describe almost anyone "engaged in an economic activity",[4] but excludes both employees, who are by their "very nature the opposite of the independent exercise of an economic or commercial activity",[5] and public services based on "solidarity" for a "social purpose".[6] Undertakings must then have formed an agreement, developed a "concerted practice", or, within an association, taken a decision. Like US antitrust, this just means all the same thing;[7] any kind of dealing or contact, or a "meeting of the minds" between parties. Covered therefore is a whole range of behaviour from a strong handshaken, written or verbal agreement to a supplier sending invoices with directions not to export to its retailer who gives "tacit acquiescence" to the conduct.[8] In the language of Article 81(1), prohibited are,

"all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between member states and which have as their object or effect the prevention, restriction or distortion of competition within the common market."

This includes both horizontal (e.g. between retailers) and vertical (e.g. between retailers and suppliers) agreements, effectively outlawing the operation of cartels within the EU. Article 81 has been construed very widely to include both informal agreements (gentlemen's agreements) and concerted practices where firms tend to raise or lower prices at the same time without having physically agreed to do so. However, a coincidental increase in prices will not in itself prove a concerted practice, there must also be evidence that the parties involved were aware that their behaviour may prejudice the normal operation of the competition within the common market. This latter subjective requirement of knowledge is not, in principle, necessary in respect of agreements. As far as agreements are concerned the mere anticompetitive effect is sufficient to make it illegal even if the parties were unaware of it or did not intend such effect to take place.

Exemptions to Article 81 behaviour fall into three categories. Firstly, Article 81(3) which creates an exemption where the practice is beneficial to consumers e.g. by facilitating technological advances, but without restricting all competition in the area. In practice very few official exemptions were given by the Commission and a new system for dealing with them is currently under review. Secondly, the Commission has agreed to exempt 'Agreements of minor importance' (except those fixing sale prices) from Article 81. This exemption applies to small companies, together holding no more than 10% of the relevant market. In this situation as with Article 82 (see below), market definition is a crucial, but often highly difficult, matter to resolve. Thirdly, the Commission has also introduced a collection of block exemptions for different types of contract. These include a list of contract terms which will be permitted and a list of those which are banned in these exemptions.

[edit] Dominance and monopoly

Main article: Article 82
The economist's depiction of deadweight loss to efficiency that monopolies cause
The economist's depiction of deadweight loss to efficiency that monopolies cause

Article 82 is aimed at preventing undertakings who hold a dominant position in a market from abusing that position to the detriment of consumers. It provides that,

"Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States.

This can mean,

(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts."

First it is necessary to determine whether a firm is dominant, or whether it behaves "to an appreciable extent independently of its competitors, customers and ultimately of its consumer."[9] Under EU law, very large market shares raise a presumption that a firm is dominant,[10] which may be rebuttable.[11] If a firm has a dominant position, because it has beyond a 39.7% market share[12] then there is "a special responsibility not to allow its conduct to impair competition on the common market"[13] Same as with collusive conduct, market shares are determined with reference to the particular market in which the firm and product in question is sold. Then although the lists are seldom closed,[14] certain categories of abusive conduct are usually prohibited under the country's legislation. For instance, limiting production at a shipping port by refusing to raise expenditure and update technology could be abusive.[15] Tying one product into the sale of another can be considered abuse too, being restrictive of consumer choice and depriving competitors of outlets. This was the alleged case in Microsoft v. Commission[16] leading to an eventual fine of €497 million for including its Windows Media Player with the Microsoft Windows platform. A refusal to supply a facility which is essential for all businesses attempting to compete to use can constitute an abuse. One example was in a case involving a medical company named Commercial Solvents.[17] When it set up its own rival in the tuberculosis drugs market, Commercial Solvents were forced to continue supplying a company named Zoja with the raw materials for the drug. Zoja was the only market competitor, so without the court forcing supply, all competition would have been eliminated.

Forms of abuse relating directly to pricing include price exploitation. It is difficult to prove at what point a dominant firm's prices become "exploitative" and this category of abuse is rarely found. In one case however, a French funeral service was found to have demanded exploitative prices, and this was justified on the basis that prices of funeral services outside the region could be compared.[18] A more tricky issue is predatory pricing. This is the practice of dropping prices of a product so much that in order one's smaller competitors cannot cover their costs and fall out of business. The Chicago School holds predatory pricing to be impossible, because if it were then banks would lend money to finance it. However in France Telecom SA v. Commission[19] a broadband internet company was forced to pay €10.35 for dropping its prices below its own production costs. It had "no interest in applying such prices except that of eliminating competitors"[20] and was being crossed subsidised to capture the lion's share of a booming market. One last category of pricing abuse is price discrimination.[21] An example of this could be offering rebates to industrial customers who export sugar that your company sells, but not to Irish customers, selling in the same market as you are in.[22]

As stated above market definition is arguably the most important part of any competition case brought under Article 82. However, it is also one of the most complex areas. If the market is defined too widely then it will contain more firms and substitutable products making a finding of a dominant position for one firm unlikely. Likewise if it is defined too narrowly then there will be a presumption that the defendant company will be found to be dominant. In practice, market definition will be left to economists, rather than lawyers to decide.

[edit] Mergers and acquisitions

Main article: European Community merger law

A merger or acquisition involves, from a competition law perspective, the concentration of economic power in the hands of fewer than before. In the European Union, under the Merger Regulation 139/2004. This is known as the "ECMR", and the authority for the Commission to pass this regulation is found under Art. 83 TEC. Competition law requires that firms proposing to merge gain authorisation from the relevant government authority, or simply go ahead but face the prospect of demerger should the concentration later be found to lessen competition. The theory behind mergers is that transaction costs can be reduced compared to operating on an open market through bilateral contracts.[23] Concentrations can increase economies of scale and scope. However often firms take advantage of their increase in market power, their increased market share and decreased number of competitors, which can have a knock on effect on the deal that consumers get. Merger control is about predicting what the market might be like, not knowing and making a judgment. Hence the central provision under EU law asks whether a concentration would if it went ahead "significantly impede effective competition... in particular as a result of the creation or strengthening off a dominant position..."[24]

Under EC law, a concentration exists when a...

"change of control on a lasting basis results from (a) the merger of two or more previously independent undertakings... (b) the acquisition... if direct or indirect control of the whole or parts of one or more other undertakings." Art. 3(1), Regulation 139/2004, the European Community Merger Regulation

This usually means that one firm buys out the shares of another. The reasons for oversight of economic concentrations by the state are the same as the reasons to restrict firms who abuse a position of dominance, only that regulation of mergers and acquisitions attempts to deal with the problem before it arises, ex ante prevention of creating dominant firms. In the case of [T-102/96] Gencor Ltd v. Commission [1999] ECR II-753 the EU Court of First Instance wrote merger control is there "to avoid the etablishment of market structures which may create or strengthen a dominant position and not need to control directly possible abuses of dominant positions."

What amounts to a substantial lessening of, or significant impediment to competition is usually answered through empirical study. The market shares of the merging companies can be assessed and added, although this kind of analysis only gives rise to presumptions, not conclusions.[25] The Herfindahl-Hirschman Index is used to calculate the "density" of the market, or what concentration exists. Aside from the maths, it is important to consider the product in question and the rate of technical innovation in the market.[26] A further problem of collective dominance, or oligopoly through "economic links"[27] can arise, whereby the new market becomes more conducive to collusion. It is relevant how transparent a market is, because a more concentrated structure could mean firms can coordinate their behaviour more easily, whether firms can deploy deterrants and whether firms are safe from a reaction by their competitors and consumers.[28] The entry of new firms to the market, and any barriers that they might encounter should be considered.[29]

Certain exceptions exist, by which a firm whose conduct may be prima facie anti-competitive can be sanctioned under the reference to "technical and economic progress" in Art. 2 of the ECMR.[30] Another defence might be that a firm which is being taken over is about to fail or go insolvent, and taking it over leaves a no less competitive state than what would happen anyway.[31] Mergers vertically in the market are rarely of concern, although in AOL/Time Warner[32] the European Commission required that a joint venture with a competitor Bertelsmann be ceased beforehand. The EU authorities have also focussed lately on the effect of conglomerate mergers, where companies acquire a large portfolio of related products, though without necessarily dominant shares in any individual market.[33]

[edit] Public services

Main article: European Community regulation

The EU liberalisation programme entails a broadening of sector regulation, and extending Competition law to previously state monopolised industries, such as railways, electricity or gas. Articles 86 and 87 EC regulate the state's role in the market. Article 86(2) EC states clearly that nothing in the rules cannot be used to obstruct a member state's right to deliver public services, but that otherwise public enterprises must play by the same rules on collusion and abuse of dominance as everyone else. Article 87 EC, similar to Article 81 EC, lays down a general rule that the state may not aid or subsidise private parties in distortion of free competition, but then grants exceptions for things like charities, natural disasters or regional development.

There is also some scepticism about the effectiveness of competition law in achieving economic progress and its interference with the provision of public services. France's president Nicholas Sarkozy called recently for the reference in the preamble to the Treaty of the European Union to the goal of "free and undistorted competition" to be removed.[34] Though competition law itself would have remained unchanged, the other goals of the preamble which include "full employment" and "social progress" have the perception of greater specificity and as being ends in themselves, while "free competition" is merely a means.

[edit] Enforcement

Main article: European Union competition enforcement

The task of tracking down and punishing those in breach of competition law has been entrusted to the European Commission, which receives its powers under Article 85 EC. These grant extensive investigative powers including the notorious power to carry out dawn raids on the premises of suspected undertakings and private homes and vehicles. Any undertaking found in breach of Article 81 or 82 EC, may receive a fine pursuant to Article 15(2) of Regulation 17/62 and Article 65(5) EC. These fines are not fixed and can extend into millions of Euros, up to a maximum of 10% of turnover. Fines of up to 5% of daily turnover may also be levied for every day an undertaking fails to comply with Commission requirements. This uncertainty acts as a powerful deterrent and ensures that companies are unable to undertake a cost/benefit analysis before breaching competition law.

Questions of reform have circulated around whether to introduce US style treble damages as added deterrent against competition law violaters. The recent Modernisation Regulation 1/2003 has meant that the European Commission no longer has a monopoly on enforcement, and that private parties may bring suits in national courts. Hence there has been debate over the legitimacy of private damages actions in traditions which shy from imposing punitive measures in civil actions.

[edit] Leniency policy

The leniency policy[35] consists in abstaining from prosecuting those firms which, being party to a cartel, inform the Commission of its existence. The leniency policy was first applied in 2002.

The Commission Notice on Immunity from fines and reduction of fines in cartel cases[36] guarantees immunity and penalty reductions to firms who co-operate with the Commission in detecting cartels.

II.A, §8:
The Commission will grant immunity from any fine which would otherwise have been imposed to an undertaking disclosing its participation in an alleged cartel affecting the Community if that undertaking is the first to submit information and evidence which in the Commission’s view will enable it to:
(a) carry out a targeted inspection in connection with the alleged cartel; or
(b) find an infringement of Article 81 EC in connection with the alleged cartel.

The mechanism is straightforward. The first firm to acknowledge their crime and inform the Commission will receive complete immunity, that is, no fine will be applied. Co-operation with the Commission will also be gratified with reductions in the fines, in the following way[37]:

  • The first firm to denounce existence of a cartel receives immunity from prosecution.
  • If the firm is not the first to denounce its existence, it gets a 50% reduction in fines.
  • If the firm co-operates with the Commission, acknowledging its culpability, it gets a 10% reduction in fines.
  • If, once the investigation is opened, the firm gives additional information, it gets a 20-30% reduction in fines.

This policy has been of great success as it has increased cartel detection to such an extent that nowadays most cartel investigations are started according to the leniency policy. The purpose of a sliding scale in fine reductions is to encourage a "race to confess" among cartel members. In cross border or international investigations, cartel members are often at pains to inform not only the EU Commission, but also National Competition Authorities (e.g. the Office of Fair Trading and the Bundeskartellamt) and authorities across the globe.

[edit] National competition authorities

[edit] France

Main article: Conseil de la Concurrence

The Conseil de la Concurrence [38] is France's national competition regulator. Its predecessor was established in the 1950s. Today it administers competition law in France, and is one of the leading national competition authorities in Europe.

[edit] Germany

Main article: Bundeskartellamt
The German Federal Cartel Office, or Bundeskartellamt in Bonn
The German Federal Cartel Office, or Bundeskartellamt in Bonn

The Bundeskartellamt, [39] or Federal Cartel Office, is Germany's national competition regulator. It was first established in 1958 and comes under the authority of the Federal Ministry of the Economy and Technology. Its headquarters are in the former West German capital, Bonn and its President is Bernhard Heitzer, who has a staff of 300 people. Today it administers competition law in Germany, and is one of the leading national competition authorities in Europe.

[edit] United Kingdom

Main articles: Office of Fair Trading and Competition Commission

Following the introduction of the Enterprise Act 2002 the Office of Fair Trading[40] is responsible for enforcing competition law (enshrined in The Competition Act 1998) in the UK.

[edit] Other authorities

[edit] See also

[edit] Notes

  1. ^ see, Cini & McGowan
  2. ^ see Gerber & Cassinis
  3. ^ see Wallace & Pollack
  4. ^ Hoefner v Macroton GmbH [1991]
  5. ^ per AG Jacobs, Albany International BV [1999]
  6. ^ FENIN v. Commission [2004]
  7. ^ per AG Reischl, Van Landweyck [1980] there is no need to distinguish an agreement from a concerted practice, because they are merely convenient labels
  8. ^ Sandoz Prodotti Farmaceutica SpA v. Commission [1990]
  9. ^ C-27/76 United Brands Continental BV v. Commission [1978] ECR 207
  10. ^ C-85/76 Hoffmann-La Roche & Co AG v. Commission [1979] ECR 461
  11. ^ AKZO [1991]
  12. ^ this was the lowest yet market share of a "dominant" firm, in BA/Virgin 2004
  13. ^ Michelin [1983]
  14. ^ Continental Can [1973]
  15. ^ Art. 82 (b) Porto di Genova [1991]
  16. ^ Case T-201/04 Microsoft v. Commission Order, 22 December 2004
  17. ^ Commercial Solvents [1974]
  18. ^ C-30/87 Corinne Bodson v. SA Pompes funèbres des régions libérées [1987] ECR 2479
  19. ^ Case T-340/03 France Telecom SA v. Commission
  20. ^ AKZO [1991] para 71
  21. ^ in the EU under Article 82(2)c)
  22. ^ Irish Sugar 1999
  23. ^ Coase, Ronald H. (November 1937). "The Nature of the Firm". Economica 4 (16): 386–405. 
  24. ^ Art. 2(3) Reg. 129/2005
  25. ^ see, for instance para 17, Guidelines on the assessment of horizontal mergers (2004/C 31/03)
  26. ^ C-68/94 France v. Commission [1998] ECR I-1375, para. 219
  27. ^ Italian Flat Glass [1992] ECR ii-1403
  28. ^ T-342/99 Airtours plc v. Commission [2002] ECR II-2585, para 62
  29. ^ Mannesmann, Vallourec and Ilva [1994] CMLR 529, OJ L102 21 April 1994
  30. ^ see the argument put forth in Hovenkamp H (1999) Federal Antitrust Policy: The Law of Competition and Its Practice, 2nd Ed, West Group, St. Paul, Minnesota. Unlike the authorities however, the courts take a dim view of the efficiencies defence.
  31. ^ Kali und Salz AG v. Commission [1975] ECR 499
  32. ^ Time Warner/AOL [2002] 4 CMLR 454, OJ L268
  33. ^ e.g. Guinness/Grand Metropolitan [1997] 5 CMLR 760, OJ L288; Many in the US are scathing of this approach, see W. J. Kolasky, ‘Conglomerate Mergers and Range Effects: It’s a long way from Chicago to Brussels’ 9 Nov. 2001, Address before George Mason University Symposium Washington, DC.
  34. ^ Removal of competition clause causes dismay, Tobias Buck and Bertrand Benoit, Financial Times p.6 June 23rd 2007
  35. ^ see DGCOMP's page on leniency legislation
  36. ^ see, Draft revised notice
  37. ^ see, DGCOMP's Leniency page
  38. ^ Conseil de la Concurrence
  39. ^ http://www.bundeskartellamt.de/ Bundeskartellamt]
  40. ^ Office of Fair Trading

[edit] References

  • Jones, Alison and Sufrin, Brenda (2005) EC Competition Law: Text, Cases and Materials, Oxford University Press, 2nd Ed. ISBN-10: 0199269971
  • Monti, Giorgio (2007) EC Competition Law, Cambridge University Press, ISBN-10: 0521700752
  • Wilberforce, Richard (1966) The Law of Restrictive Practices and Monopolies, Sweet and Maxwell
  • Whish, Richard (2003) Competition Law, 5th Ed. Lexis Nexis Butterworths, ISBN-10: 0406959501

[edit] Rulings

  • 2004, December. The European Commission prohibits a merger of Energias de Portugal SA and Gas de Portugal SA.

[edit] External links

v • d • e
Flag of Europe European Union topics
History
Politics
Government
Law
Geography
Economy
Cultural policies
Lists
Portal
Languages