3. Competition Law: General + Article 101(1)/Section 2: Restrictive Practices

Question 1

What is the general history of competition law?

Answer 1

1. Sherman Act [ the magna carta of free enterprise ]1890 (USA)
2. The modern model is adopted from this Act and American Constitutional Law.
3. German adoption of Sherman Act (or similar) in 1957
4. German’s attribute the rebirth of their economy to the Sherman Act.
5. The EEC Treaty 1958 (introduced competition law into the UK)
6. German’s pushed this because (1) economy flourished (2) necessary to fulfil treaty obligations to create a common market.
7. The Competition Act 1998 (UK (late to the party))
8. This mirrors the EEC Treaty (now TFEU)

Thus in the UK we are now subject to competition law under the TFEU (EU level) and also under the Competition Act 1998 (domestic level) (but both essentially say the same thing).

Question 2

What is the main purpose of competition law?

Answer 2

Competition law [This is called the law of concurrence in most EU countries. ] relates to markets. It does NOT regulate the market place. But it hinders competition and regulates market operators in order to ensure the market remains free.

Question 3

What makes up competition law?

Answer 3

1. Monopoly
2. Cartels
3. Oligopoly
4. Mergers and takeovers

Question 4

What is the “snip test”?

Answer 4

This is the non-transitory increase in price test which determines whether a market is distinct.

If the price of product A went up 5% for X period of time, would people abandon product A and go to product B. If yes, then A + B make up part of the same product market. If no, then product A is a market on its own [e.g. does whiskey compete with whiskey or whiskey including other spirits; do roses compete with roses or roses including other flowers].

Question 5

What is absolute market power (monopoly)?

Answer 5

If there is only one supplier then it is a monopoly market. The monopolist is not buffeted by competition. These markets have created problems since Roman Law.

Example: A wants to buy whisky. Sees a malt whisky (~£25 per bottle) and a blended whisky (~£15 per bottle). If these were competing products then nobody would buy a single malt whisky since it is so much dearer than blended. But because there are sufficient people to keep a single malt whisky industry afloat, the two products probably don’t constitute a single market - they are different products.

Question 6

What is perfect competition?

Answer 6

This lies at the other end of the continuum to a monopoly. It is a market with perfect competition, perfect knowledge between suppliers and buyers. This is ideal but rare. What we usually see is something somewhere along a continuum.

Question 7

What is a cartel?

Answer 7

This means “truce”. It is undertakings which will distort the market, limit production, share markets. It is an agreement not to compete. Operators who collude amongst themselves to distort the market and create disadvantage to consumer welfare

Question 8

What are the two basic questions that must be asked in considering cases of competition law?

Answer 8

1) What is the market?
2) Once the market has been defined, the next question is to identify the different firms / players in the market

⁃ If there is one player then this is a monopoly. A monopoly is not good for competition since it gives absolute market power since there is noone to compete with.
⁃ If there are an infinite number of players and an infinite number of consumers and no barriers to entry/exit, perfect access to resources necessary to operate in the market, no profit taking except just about the variable cost, perfect information available to market participants and buyers then this is perfect competition. But perfect competition only exists in theory.
⁃ In some situations the different players will join forces to act in a particular way which is contrary to natural competition to gain market power in the form of a cartel. The reason is that if competitors decide to join forces rather than to compete they can make more money.

Question 9

Article 101 TFEU / s 2 Competition Act

Answer 9

addresses cartels

Question 10

Article 102 TFEU / s 18 Competition Act

Answer 10

addresses monopolies

Question 11

What is collusion?

Answer 11

Where there is no competition on price between different players in a market e.g. heating, petrol, electricity, mortgages.

Question 12

To whom are the Competition law provisions addressed?

Answer 12

They are addressed at ‘undertakings’. This is of very broad application - it is not defined in the treaties or the legislation. It is any entity engaged in economic activity[ defined in Hoffman] (includes both natural and juridical persons).

Question 13

What is the exception to the provisions being addressed at ‘undertakings’?

Answer 13

The one exception which started under German law is that if you are a natural person buying goods or services for your own consumption then you aren’t an undertaking. The Germans assumed this would apply equally to Articles 101/102. And if it applies to these Articles it also applies to the Competition Act (because
s 60 of the Competition Act states that this statute is to be interpreted in conformity with the European Rules): s 2 - addresses cartels and s 18 - addresses monopolies.

Question 14

Federación Nacional de Empresas de Instrumentación Científica, Médica, Técnica y Dental (FENIN) v Commission [2003]

Answer 14

Producers of medical equipment in Spain. They argued that the Spanish National Health Service was a monopoly and was doing something unlawful, contrary to competition law. Court said: it is the final buyer but consumed them itself, therefore they are not an undertaking. It is not clear why the court said this and Robert Lane disagrees. So the Spanish SNS is excused from competition law because it is not an undertaking (cf. NHS in England). If the NHS went into the private sector it would become an undertaking. So the final consumer is not an undertaking.

the ECJ held that all final purchases are not undertakings. Thus FENIN went further than the Germans did (the Germans held only that natural persons who bought for their own consumption were not natural persons) since it means that juridical persons who purchase for their own consumption were not undertakings. And an employee is not an undertaking = final exception. Otherwise, any body or entity which engages in economic activity is an undertaking, so subject to Article 101 and 102.

Question 15

TFEU Article 101

Answer 15

⁃ “1. The following shall be prohibited as incompatible with the common market: all agreements[ “Agreements” are not defined - thus they have a broad application.] 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.
⁃ 2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void.”

Question 16

What is an “agreement”?

Answer 16

It is not expressly defined. It is a very broad concept.
See Bayer v Commission [2000].

‘An agreement can be said to exist … when the parties adhere to a common plan which limits or is likely to limit their individual commercial conduct by determining the lines [Richtung; lignes] of their mutual action or abstention from action in the market. While it involves joint decision-making and commitment to a common scheme, it does not have to be made in writing; no formalities are necessary, and no contractual sanctions or enforcement measures are required. The fact of agreement may be express or implicit in the behaviour of the parties.’
- Commission Decision 1999/60 (Pre-Insulated Pipes) OJ 1999 L24/1, para 129

Question 17

Bayer v Commission [2000]

Answer 17

It was held that an agreement was a concurrence of wills the form in which it is manifested being unimportant so long as it constitutes the faithful expression of the parties’ intention’; a consensus ad idem (but in a very loose sense). Thus a gentleman’s agreement or a handshake etc could be an agreement.

Question 18

What is a “concerted practice”?

Answer 18

The treaty doesn’t define this either. A good definition comes from the case of ICI v Commission (Dyestuffs) [1972]
⁃ ‘a form of coordination between undertakings which, without having reached the stage where an agreement properly so-called has been concluded, knowingly substitutes practical cooperation between them for the risks of competition which leads to conditions of competition which do not correspond to the normal conditions of the market …..’

⁃ [Concerted practices are difficult to define but it can be well described by a football metaphor.] [The narrower the market the more likely it is that you will find concerted practices.]

⁃ 1982 World Cup. West Germany lost in first match. In the final match against Austria, they played football for 10 minutes then West Germany scored. The arithmetic in the group was such that if nothing more happened then both West Germany and Austria would go through to the next round. So for the next 80 minutes there was a very uncompetitive game played. The reason for this is that there may have been a prior agreement to play for a 1-0 win.
⁃ If there was no agreement then it may have been the case that each side chose, unilaterally, to conduct their affairs in a certain manner which was anti-competitive.
⁃ In the context of markets, players frequently will unilaterally choose not to compete, giving both players a mutual advantage - this is a concerted practice.]

Question 19

What is the problem with concerted practices?

Answer 19

The problem with concerted practices is proof. The way to prove is by showing parallel conduct which can be explained by no means other than concentration. e.g. Is there any good reason why Germany and Austria weren’t playing fierce football for 80 minutes.

Question 20

What is required for Article 101 and section 2 to be engaged?

Answer 20

“…which may affect trade between Member States…” (Art 101); “…which may affect trade within the UK…” (Section 2)

1. For Article 101 to be engaged, there must be an effect on trade between Member States (albeit this may be potential). A contract or practice which affects trade within a Member State but does not spill over beyond it does not infringe Article 101(1). A contract which affects trade between a Member State and a third state does not infringe Article 101(1) (trade between Member States) unless it produces the requisite effect upon intra-Union trade.
2. Section 2 is caught so long as the agreement or practice may affect trade within the UK.
3. Trade must be affected appreciably for Article 101/s 2 to apply
4. “…and which have as their object or effect…”
   ⁃ So, a contract or practice may infringe article 101(1)/section 2 even if distortion to trade is not its purpose and, conversely, an intention to distort trade can constitute a breach even if it fails to do so.
   ⁃ This means that contracts which are inoffensive in their purpose that nevertheless have an affect on competition can infringe Art 101/ s 2.

NB the courts treat contracts which have as their object[ This is enough in itself to infringe 101/2.] the distortion etc of the market differently than contracts which have their effect[ The courts use more sophisticated measuring devices.] the distortion etc of the market.

5. Section 2 is caught so long as the agreement or practice may affect trade within the United Kingdom.

Question 21

How might a contract between parties within a Member State affect trade between Member States?

Answer 21

e.g. a cartel agreement amongst manufacturers of shinty sticks. Does this affect trade between member states? Noone outside Scotland is likely to want to buy shinty sticks. However, this may dissuade manufacturers in other Member States who could easily produce shinty sticks to stay out of the market, thus it may affect latent competition and thus may affect trade between member states.

Question 22

What is the principle of appreciability?

Answer 22

Trade must be affected appreciably for Article 101/s 2 to apply
⁃ However the court has held that the purpose of Article 101 is to maintain effective, workable competition. So it has developed a principle of applicability - this means that trade between member states must be affected appreciably for Article 101 to apply.
⁃ The meaning of appreciable is that if there is a cartel which between them they enjoy less than 10% of the market, then the effect of this cartel is inappreciable and Article 101 does not apply. Furthermore, competition must be restricted more than 10% for it to be appreciable.

Question 23

Case C-8/08 T-Mobile Netherlands

Answer 23

A good discussion of concerted practice in Case C-8/08 T-Mobile Netherlands, and an excellent discussion in the opinion of Advocate-General Kokott.

Question 24

Société Technique Minière v Maschinenbau Ulm [1966] ECR 235.

Answer 24

There must be an effect upon trade between member states (albeit potential - may affect). A contract or practice which affects trade within a member state but does not spill over beyond it does not infringe article 101(1).

A contract which affects trade between a member state and a third state does not infringe article 101(1) (trade between member states) unless it produces the requisite effect upon intra-Union trade.

Question 25

What does the rule ‘…and which have as their object or effect…’ mean?

Answer 25

So, a contract or practice may infringe article 101(1)/section 2 even if distortion to trade is not its purpose and, conversely, an intention to distort trade can constitute a breach even if it fails to do so.
Note that a restriction by effect is subject to a test of ‘appreciability’ (sensible; spürbar); see

Case 5/69 Völk v. Vervaecke [1969] ECR 269;
Commission Notice on Agreements of Minor Importance [2001] OJ C368/13;
Competition Act 1998 (Small Agreements and Conduct of Minor Significance) Regulations 2000, SI 2000/262.

But a restriction by object is not: Case C-226/11 Expedia v Autorité de la concurrence, 13 December 2012

Question 26

What are Horizontal Agreements?

Answer 26

⁃	The primary purpose is to catch 'hardcore' restraints of competition or anticompetitive practices. There are four key hardcore cartels (these are horizontal agreements[ I.e. horizontally to competing undertakings.]):
⁃	Price fixing agreements
⁃	Production quotas
⁃	Market sharing
⁃	Bid rigging

Question 27

Wha are vertical agreements?

Answer 27

Most important case in competition law is **Consten & Grundig v EEC Commission [1966] (court telling us what Article 101 sets out to achieve).
⁃ When companies in one country wish to enter a new market there are various ways they can do it. If you are a small firm then perhaps the most typical way of doing this is to enter into a distribution agreement with a firm in the country to get your goods onto shop shelves. This case involved a distribution contract between a German firm and a French firm where the German firm wished to enter the French market.
⁃ But the contract went further. The distributor wanted a degree of exclusivity - because you are agreeing to a very significant cost to get the goods onto the shelves. So the distributor wants to avoid their costs being undercut by the same goods arriving into the country by different means (e.g. directly into the country or via other countries.) So the producer agreed with the distributor that the distributor had absolute territorial exclusivity within the French market (so the producer agreed not to sell directly into France and to prevent any buyer in nearby countries from selling into France).
⁃ So this was an agreement, between undertakings, which may affect trade between Member States. But does it have “as [its] object or effect the prevention, restriction or distortion of competition within the common market”? It is clear that Article 101 is addressed to cartels (horizontally between competing undertakings). However in this case the companies are not competing undertakings - it is a vertical agreement. So does Article 101 apply?
⁃ It was argued by the parties before the court that this contract was positive and increased competition. However, the court disagreed and held that despite the fact the firms were complementary rather than competing, the effect of the contract was to reduce competition with other firms in the market for distribution of these goods (it recreates a national barrier between France and Germany which the rest of the treaty tries to obliterate.) Therefore this contract had as its object the prevention of competition and thus breached Article 101.
⁃ [Thus the scope of Article 101 is much broader than it may initially appear. It can potentially affect all (vertical) contract rather than simply horizontal ones between competitors, generally in the form of cartels. The hazard of this interpretation of Article 101 is putting in jeopardy a range of contracts which are potentially very positive. But see the exemption below VERY IMPORTANT]

Question 28

What are some common types of verticle agreements?

Answer 28

exclusive distribution agreements
exclusive purchasing agreements
franchising
selective distribution
licensing
resale price maintenance

Question 29

What is the exemption in Article 101(3) / section 9?

Answer 29

The prohibition under Article 101 is set aside where the agreement or concerted practice meets certain criteria (NB this can only apply where the agreement/practice which has its effect (not object) of restricting etc competition). The agreement must:
⁃ positively, (1) contribute to ‘improving the production or distribution of goods or to promoting technical or economic progress, while
(2) allowing consumers a fair share of the resulting benefit’; and
⁃ negatively, (3) neither ‘impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives’ nor
(4) ‘afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question’.

⁃	These four requirements are sometimes known as:
⁃	The efficiency test
⁃	The fair share for consumers test
⁃	The proportionality test
⁃	The elimination of competition test

The commission has held that vertical agreements are prima facie acceptable (i.e. excluded from the scope of Art 101/ s 2) unless they have hardcore elements within the vertical agreement like price fixing, hardcore market sharing etc).

It will be observed that they are purely economic in character; there is no provision for consideration of other criteria, such as cultural, environmental or social benefits or requirements. It is for the undertaking(s) claiming the benefit of exemption to show that the agreement fulfils the four conditions (Regulation 1/2003, art 2; Competition Act, s. 9(2)). They are cumulative and each must be met: an agreement or practice which fails to satisfy any one of the four does not qualify for exemption (Case T-7/93 Langnese-Iglo v Commission [1995] ECR II-1533; Cases T-213/95 & 18/96 Stichting Certificatie Kraanverhuurbedrijf v Commission [1997] ECR II-1739). Each case must be examined carefully and impartially, in all its relevant aspects, to determine whether the benefit of article 101(3)/section 9 applies.

Since 2004 the exemption provisions are directly effective. See Regulation 1/2003, art 1(2) and the amendment made to section 9 of the Competition Act in 2004.

Question 30

What are the block exemption?

Answer 30

As at 1 January 2015 there are block exemptions in the following fields:

• agreements within liner shipping consortia (Reg 906/2009);
• agreements in the insurance sector (Reg 267/2010);
• vertical agreements (Reg 330/2010 OJ201 L102/1); worth reading
• the motor vehicle sector (Reg 461/2010);
• (horizontal) research and development agreements (Reg 1217/2010); and
• (horizontal) specialisation agreements (Reg 1218/2010).
• technology transfer (Reg 316/2014).

Question 31

What are the exclusions/exemptions?

Answer 31

Competition Act, ss. 3, 6, 8, 9, 10, 11; Sched 3 and Sched 4
Competition Act 1998 (Land Agreement Exclusion and Revocation) Order 2004, SI 2004/1260
Competition Act 1998 (Public Transport Ticketing Schemes Block Exemption) Order 2001, SI 2001/319
A variety of exclusion Sis, usually in defence and related fields

Note the scheme of ‘parallel exemption’; s. 10