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Economic Globalisation and Competition

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1. Introduction

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.

1.5. Summary

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 involved, and only apply a control under Article 82 EC in cases of dominance. That would remove the burden above the threshold for businesses to achieve a complex evaluation of their agreements under Article 81(1) and Article 81(3) EC and it will provide more legal certainty in this subject.

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 cast. 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 unduly restrictive by setting the threshold at 30%. Many agreements thus escape the safe harbour though they are completely harmless from a competition law perspective. By removing the thresholds the sellers using private resellers may be penalised not as much as vertically integrate 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 think a less radical change to the Regulation consisting of a differentiated approach identifying those clauses which can be problematic above 30% although 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%.

2.6. Summary

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 in relation to resale price maintenance. These are the elimination of intra-brand price competition which has as a direct effect the price increase, and the resulting risk of a reduction 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 may prevent ‘free riding’ by retail price discounters on the pre-sales services and/or reputation of full price dealers 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 extremely strict on market segmentation ignores the fact that from an economic point of view, it will frequently seem right to charge a higher price to a consumer group whose ‘willingness to pay’ for the product is higher than the others. Also, Zweifel and Zach state that usually, the total quantity will increase because of price differentiation, and this will be to the overall benefit of consumers.

Furthermore, an excessively rigorous approach to territorial segmentation may lead to substitute methods for instance by unilaterally limit the quantities delivered to lower price markets in turn to avoid the cheaper products 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.

3.7. Summary

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 contact 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.

4.4. Summary

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 Reg

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