Competition law Paper Example

Introduction

            Competition practices and policies in both the European Union(EU) and the US are regulated by statutory provisions together with common law interpretations of those legislative provisions.  These provisions are similarly calculated to prevent unfair market practices with the single goal of promoting free and fair competition.  The Treaty Establishing the European Commission and its subsequent protocols define and control anti-competitive practices within the EU.  Whereas, in the US a number of legislative provisions, particularly the Sherman Act and the Clayton Act regulate and control monopolies and anti-trust practices, the terms used in the US to refer to unfair competition practices.  This paper will compare and contrast the provisions in both jurisdictions and will do so by examining the manner in which these legislative provisions are applied by the courts.

Acquisitions/Mergers/Monopolies

1)      US Competition Policies and Practices

            The US Sherman Act 1890 also known as the Anti-trust Act prohibits business arrangements that function to restrain trade.[i] Section 1 of the 1890 Act provides as follows:

“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”[ii]

American attorney and author Robert Schlossberg maintains that Section 1 of the Sherman Act has been interpreted by the US courts to bar restraints that are unreasonable.[iii] For example the US Supreme Court in Standard Oil Co. V United States, 221 US 1 (1911) noted that the Sherman Act evolved from the English common law which basically held that monopolies were inconsistent with “the English Constitution.”[iv]

            To this end the US has followed the English approach to monopolies to the extent that it has adapted a position that is designed to:

“…prohibit, or treat as illegal, contracts, or acts entered into with the intent to wrong the public and which unreasonably restrict competitive conditions, limit the right of individuals, restrain the free flow of commerce, or bring about public evils such as the enhancement of prices.”[v]

            The facts of the Standard Oil Co. V United States, 221 US 1 (1911) case were construed by the US Supreme court as a series of moves calculated to unlawfully monopolise the crude oil market and to enhance prices.[vi]  The defendants including John D. Rockefeller, William Rockefeller, Henry Flager, Samuel Andrews and Stephen Harkness had engaged in a series of acquisitions in which they obtained controlling stock in 88 percent of all oil refineries in the US.  The resulting Standard Oil group was found by the US Supreme Court to comprise an “unreasonable” monopoly within the meaning of the Sherman Act and ordered the company’s dissolution.[vii]

            It is against the background of the Standard Oil case that US law developed the concept of anti-trust and unlawful monopoly practices and policies.  US case law has developed into the approach taken by the rulings in Verizon Communications Inc. v Law Offices of Curtis V. Trinko, LLP, 540 US 398 (2004) and United State v Microsoft Corp, 253 3d 34 (D.C. Cir. 2001).  In the Verizon case the US Supreme Court ruled that for the purpose of safeguarding innovative incentives:

“…the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.”[viii]

            The Microsoft case was broader in its application and determined that in order for an acquisition or a contractual arrangement to rise to the level of unlawful monopolies within the meaning of the Sherman Act it must contain an “anticompetitive effect.” [ix]  In other words the arrangement must be injurious to competition with the result that it causes harm to the consumers.  Harm however, to one or more competitors alone will not rise to the level of antitrust interpretations under the Sherman Act.  The court went on to explain that:

“The Sherman Act directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.”[x]

            The plaintiff in all anti-trust cases will bear the burden of proving that the conduct complained of was anticompetitive in that it not only harmed competitors but that it harmed competition in general.[xi] If the plaintiff is successful the onus then falls to the defendant to prove “pro-competitive justification.”[xii] Proving pro-competitive justification involves proving that the conduct complained of amounts to a form of legitimate competition because it provides for improved efficiency and is beneficial to the consumer.[xiii] If the defendant is successful the plaintiff may rebut this defense by offering evidence that the resulting anticompetitive harm is greater than the pro-competitive benefit.[xiv]

            In the final analysis the court is duty bound to focus on the question of the alleged monopolist’s conduct and to weigh whether or not is injurious to competition.  It therefore follows that in the US, a monopoly is unlawful if its effect is injurious since US courts are more concerned with the consequences of the conduct rather than the intent of the conduct.

2)      EU Competition Practices and Policies

The EU’s position against monopolies and unlawful mergers and acquisitions are not unlike those adhered to in the US.  Article 81 of the Treaty Establishing the European Community provides as follows:

“…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.”[xv]

            While Article 81 provides a vastly similar prohibition against monopolies as that manifested by the US’s Sherman Act there is a subtle difference in their application.  Unlike the US the EU provides a more practical approach to the regulating and control of mergers and acquisitions.  The goal is to take action before any such merger can take place. This is evidenced by EC Regulation No 139/2004 Article 5 which seeks to strictly determine if a proposed merger or acquisition is an attempt to abuse a dominant market position.[xvi] If upon a review of projected sales by virtue of a merger the combined annual turnover is in excess of the thresholds of both global and European sales the parties to the proposed merger or acquisition are required to notify the European Commission of the proposed acquisition/merger and submit requested information for examination.

            If the merger/acquisition is determined to exceed the thresholds of both European and global sales the proposed arrangements will be deemed to have “community dimension.”[xvii] Moreover, by virtue of Article 81 of the Treaty Establishing the European Community, a proposed merger/acquisition that does not have community dimension may still be the subject of EU investigation.[xviii]

            The appropriate threshold is set by Article 5 of Council Regulation (EC) No 139/2004 which provides the following guideline:

“Aggregate turnover within the meaning of this Regulation shall comprise the amounts derived by the undertakings concerned in the preceding financial year from the sale of products and the provision of services falling within the undertakings’ ordinary activities after deduction of sales rebates and of value added tax and other taxes directly related to turnover.”[xix]

Article 5 of the EC Regulation No 139/2004, is very specific in its application and provides that the threshold is not met if the combined global turnover of the undertakings is more than 2,500 million Euro dollars, or if the combined turn over in at least three Member States is more that 100 million Euro dollars.[xx]

The EC Regulation like Section 1 of the Sherman Act is calculated to promote a concept of a single market and free enterprise.  The EU’s position is fortified the Treaty Establishing the European Community and the:

“…objective of instituting a system ensuring that competition in the internal market is not distorted.” [xxi]

It therefore follows that any propose merger or acquisition will be closely construed by reference to Article 81 of the EU Treaty and regulated according to the guidelines set forth in EC Regulation 139/2004.

If the merger/acquisition can be construed as a “concentration” of a “community dimension” pursuant to Regulation 139/2004 and as such falls within the EU market it will be unlawful.   A “concentration” is defined as:-

“(i) the merger of two or more previously independent undertakings, or

(ii) the acquisition of one or more persons already controlling at least one undertaking, or by one or more undertakings, whether by purchase of securities or assets, by contract or by any other means, of direct or indirect control of the whole or parts of one or more other undertakings.”[xxii]

            The European Court of Justice has set dimensions for the determination of an unlawful monopoly early on.  The case of Hoffman-La Roche (1979) 461 is well settled in the EU jurisdiction.  The court applies a general concept of abuse which is viewed objectively unlike in the US where the approach taken is purely subjective by focusing too narrowly on consequences.  In the EU the focus is primarily on conduct although regard must be had to consequences.  The European Court of Justice having ruled that “concept of abuse it an objective concept” it will focus on the conduct of the “undertaking in” a “dominant position which is such” that it manipulates the market’s “structure”.[xxiii] Abuse will therefore be inferred when such conduct weakens competition:

“…through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.”[xxiv]

            As demonstrated in the earlier discussion of US practices and policies with respect to mergers/acquisition, the approach taken in the EU is different than the approach taken in the US.  While the US will rely on the consequences of the merger, the EU will focus on the conduct and the mere likelihood that it is such that it can “hinder” competition or its growth. In other words the US is more focused on damages that have already been created and the EU is more concerned with preventing damages.

Another subtle difference between the US and the EU’s stance against unlawful mergers/acquisition is the allowable defenses available.  The US allowable defense will allow a merger/acquisition if it can be shown to be beneficial to the consumer and by implication will allow such a merger despite its negative consequences on competition.  In the EU the defense is limited by Article 81(3) of the Treaty Establishing the European Community and will only exempt such undertakings if  the collusion can be shown to be for technological advancement and provides consumers with a “fair share” of the market and does not unreasonably restrain trade.[xxv]

            Unfair Market Practices

1)      US Competition Practices and Policies

Unfair market practices include conduct calculated to limit or restrain trade and include price fixing or unfair practices calculated to exclude certain competitors.  The US Clayton Act 1914 Section 2(b) takes a general position against price discrimination allowing for exceptions only when the lower price is set in “good faith to meet an equally low price of a competitor.”[xxvi] The Robinson Patman Act 1936 amended Section 2(b)  by making discriminatory pricing a far stricter offence than in the European Union.  Section 13(f) was added to the Clayton Act by the Robinson Patman Act 1936 and imposes liability on persons who knowingly receive or induce or receive price discrimination.[xxvii]

            The Clayton Act is founded on conflicting principles of law.  It encompasses a recognition that the individual or the corporation is at liberty to sell to whomever and at whatever price desirable provide always that such free choices “does not interfere with another’s freedom.”[xxviii] Donald Bell, Esq. explains that in general the Clayton Act is designed to prevent the application of different prices for the same article “without regard to economic considerations.”[xxix]  In other words if a vendor is able to demonstrate that he lowered or raised prices in good faith with the primary purpose of keeping up with the competition he will have a viable defense.[xxx]

            The case of FTC v Morton Salt Co. 334 US 37 (1948) established that price discrimination under the Clayton Act as amended by the Robinson Patman Act 1936 would be inferred if there was a significant price disparity over a wide period of time.[xxxi] The US Supreme Court recently considered the issue of price discrimination in the case of Volvo Trucks North America, Inc v Reeder-Simco GMC,Inc US No. 04-905 (2004).[xxxii] The plaintiff had been a dealer of the defendants for quite sometime when the defendant announced its plans to:

 “enlarge the size of its dealer’s markets and to reduce by almost half the number of its dealers.”[xxxiii]

            The plaintiff discovered that the defendant had extended a greater price concession to another dealer, one that was far greater than the concession allotted to the plaintiff.  As a result the plaintiff suspecting that the defendant intended that it be among the eliminated dealers sued the defendant under the auspices of the Clayton Act.  The US Supreme Court ruled that while the plaintiff proved the first two criteria under the Clayton Act which were that the sales involved “interstate commerce” and related to goods of “like grade and quality” the plaintiff had failed to establish the third and fourth legs of the Act.[xxxiv] Put another way the plaintiff had failed to demonstrate that the price disparity did not show that the defendant had discriminated between the plaintiff and other defendant dealers in competing sales to similar retail customers.  As justice Ginsburg explained, the Clayton Act as amended:

“…does not ban all price differences charged to different purchasers of commodities of like grade and quality…rather, the Act proscribes price discrimination only to the extent that it threatens to injure competition.”[xxxv]

2)      EU Competition Practices and Policies

Article 81 of the Treaty Establishing the European Community has been interpreted to prohibit discriminatory pricing and unfair market practices in general.  However, Article 82(2) speaks directly to unfair pricing practices and provides as follows:

“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.  Such abuse may, in particular, consist in :

(a)                 directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions…”[xxxvi]

The European court considered the significance of Article 82(a) in United Brands Co v EC Commission [1978] ECR 207.  In this case the defendant had been  accused of abusing a dominant market position within the European Community by setting unfair prices and different pricing standards on banana imports.  The European Court defined ‘dominance’ as a strong economic position and at the same time subscribes to a course of conduct that has the capacity to hinder a practice fair competition in a specific market.  Although it was not found to be the case in the United Brands case the ECJ ruled that setting unfair prices, although not proven in the United Brands case, was determined to amount to abuse within the meaning of Article 82(a).[xxxvii]

Another important finding arising out of the United Brands case was that refusing to supply goods to a particular distributor within the European Community is also an abuse within the meaning of Article 82(a).  The ECJ, in a manner similar to the position taken by the US Supreme Court in the Volvo case held that price manipulation can sometimes be justified  by a party who finds it necessary to do so in order to protect its economic position within the common market.[xxxviii]   The ruling in United Brands has been upheld in Irish Sugar plc v EC Commission [2000] All ER EC 198.[xxxix]

Remedies

            Remedies in respect of unfair market practices and anti-competition practices in the US and the EU are vastly different.  In the US the remedies attract what amounts to treble remedies to the extent that the plaintiff and the government can sue for damages and the defendant can face criminal penalties and prosecutions.[xl] In the EU Article 85 of the Treaty Establishing the European Community the European Commission has wide discretionary powers to conduct investigations into business enterprises suspected of unfair competition.[xli] While civil action can be taken privately and fines can be imposed the EU does not impose criminal consequences for unfair competition practices.

Conclusion

In general the EU’s competition practices and policies takes a very different approach from that of the US although both have the shared goal of promoting fair competition.  The US’s approach is to deter unlawful monopolies and unfair market practices by punishing those found to have been in violation of fair competition practices and policies.  The EU’s approach is summed up by the decision in NV Samenwerkende Elektriciteits-Produktiebedrijven v Commission of the European Communities [1991] ECR II-1497 which defines the role of the European Commission in the investigation of suspicion of competition infringement.[xlii] The role is twofold.  One to ensure compliance with Articles 81 and 82 and to ensure that the object of the suspicion has a fair opportunity to respond to an investigation and to be in a position to respond to a resulting decision made.  In other words the EU seeks to control non-compliance by preventing current unfair market practices while the US seeks to deter non-compliance by preventing future unfair market practices.

Bibliography

Bell, Donald. (1993) “Price Discrimination: Territorial Pricing for Cable Television Services and the Meeting Competition Defense Under the Cable Television Consumer Protection and Competition Act of 1992.” Journal of Legislation, Vol. 19, 63

Clayton Act 1914

EC Regulation No 139/2004

FTC v Morton Salt Co. 334 US 37 (1948)

Hoffman-La Roche (1979) 461

Irish Sugar plc v EC Commission [2000] All ER EC 198

No Author. (April, 1929) “Price Discriminatino Under the Clayton Act.” Yale Law Journal, Vol. 38 No. 6, 804-809

NV Samenwerkende Elektriciteits-Produktiebedrijven v Commission of the European Communities [1991] ECR II-1497

Robinson Patman Act 1936

Schlossberg, Robert, S.(2004) Mergers and Acquisitions: Understanding the Anti-trust Issues. USA: American Bar Associations Publications

Sherman Act 1890

Standard Oil Co. V United States, 221 US 1 (1911)

Treaty Establishing the European Community

United Brands Co v EC Commission [1978] ECR 207

United States v Borden Co. 347 US 514 (1954)

United States v Microsoft Corp, 253 3d 34 (D.C. Cir. 2001)

Verizon Communications Inc. v Law Offices of Curtis V. Trinko, LLP, 540 US 398 (2004)

Volvo Trucks North America, Inc v Reeder-Simco GMC,Inc US No. 04-905 (2006) http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=000&invol=04-905 Retrieved April 14, 2008

[i] Sherman Act, 1890, Section 1[ii] Sherman Act, 1890, Section 1[iii] Schlossberg, Robert, S.(2004) Mergers and Acquisitions: Understanding the Anti-trust Issues. USA: American Bar Associations Publications, 8[iv] Standard Oil Co. V United States, 221 US 1 (1911)[v] Standard Oil Co. V United States, 221 US 1 (1911)[vi] Standard Oil Co. V United States, 221 US 1 (1911)[vii] Standard Oil Co. V United States, 221 US 1 (1911)[viii] Verizon Communications Inc. v Law Offices of Curtis V. Trinko, LLP, 540 US 398 (2004)[ix] United States v Microsoft Corp, 253 3d 34 (D.C. Cir. 2001)[x] United States v Microsoft Corp, 253 3d 34 (D.C. Cir. 2001)[xi]United States v Microsoft Corp, 253 3d 34 (D.C. Cir. 2001)[xii] United States v Microsoft Corp, 253 3d 34 (D.C. Cir. 2001)[xiii] United States v Microsoft Corp, 253 3d 34 (D.C. Cir. 2001)[xiv] United States v Microsoft Corp, 253 3d 34 (D.C. Cir. 2001)[xv] Treaty Establishing the European Community, Article 81[xvi] EC Regulation No 139/2004 Article 5[xvii] EC Regulation No 139/2004 Article 5[xviii] Treaty Establishing the European Community.[xix] EC Regulation No 139/2004 Article 5[xx] EC Regulation No 139/2004 Article 5[xxi] EC Regulation No 139/2004 Article 1[xxii] EC Regulation No 139/2004 Article 3[xxiii] Hoffman-La Roche (1979) 461[xxiv] Hoffman-La Roche (1979) 461[xxv] Treaty Establishing the European Community, Article 81(3)[xxvi] Clayton Act 1914 Section 2(b)[xxvii] Robinson Patman Act 1936[xxviii] No Author. (April, 1929) “Price Discriminatino Under the Clayton Act.” Yale Law Journal, Vol. 38 No. 6, 804-809[xxix] Bell, Donald. (1993) “Price Discrimination: Territorial Pricing for Cable Television Services and the Meeting Competition Defense Under the Cable Television Consumer Protection and Competition Act of 1992.” Journal of Legislation, Vol. 19, 63[xxx] Bell, Donald. (1993) “Price Discrimination: Territorial Pricing for Cable Television Services and the Meeting Competition Defense Under the Cable Television Consumer Protection and Competition Act of 1992.” Journal of Legislation, Vol. 19, 63[xxxi] FTC v Morton Salt Co. 334 US 37 (1948)[xxxii] Volvo Trucks North America, Inc v Reeder-Simco GMC,Inc US No. 04-905 (2006) http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=000&invol=04-905 Retrieved April 14, 2008[xxxiii] Volvo Trucks North America, Inc v Reeder-Simco GMC,Inc US No. 04-905 (2006) http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=000&invol=04-905 Retrieved April 14, 2008[xxxiv] Volvo Trucks North America, Inc v Reeder-Simco GMC,Inc US No. 04-905 (2006) http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=000&invol=04-905 Retrieved April 14, 2008[xxxv] Volvo Trucks North America, Inc v Reeder-Simco GMC,Inc US No. 04-905 (2006) http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=000&invol=04-905 Retrieved April 14, 2008[xxxvi] Treaty Establishing the European Community Article 82(a)[xxxvii] United Brands Co v EC Commission [1978] ECR 207[xxxviii] United Brands Co v EC Commission [1978] ECR 207[xxxix] Irish Sugar plc v EC Commission [2000] All ER EC 198[xl] United States v Borden Co. 347 US 514 (1954)[xli] Treaty Establishing the European Community, Article 85[xlii] NV Samenwerkende Elektriciteits-Produktiebedrijven v Commission of the European Communities [1991] ECR II-1497