Competition Law Summary

Competition Law

Introduction:

The objective of enacting Competition Law is to maintain a business environment with an absolutely fair and free competition to achieve the best economic and social results.  The EC Treaty regulation governing the competition within the EU also intends to prohibit the undue restrictions or limitations on competition within a market so that there is no room for the development of a monopolistic situation. While various European Commission regulations and directives contain more detailed regulations to control and monitor the competition, Articles 81 and 82 of the EC Treaty incorporates the principal provisions relating to the EC Competition Law. According to the European Commission, the application of the Competition Law is extended to cover to “all companies doing business within the member states or which may affect trade between the member states of the European Economic Area (EEA) regardless of whether these companies are established in one of these countries or not.”[1] The Rules of EC Competition contain provisions which prohibit all kinds of anti-competitive agreements between various entities that have the effect of restricting competition. “Article 81 of the EU Treaty prohibits, as a general principle, anti-competitive arrangements between undertakings, decisions by associations of undertakings and concerted practices involving undertakings which prevent, restrict or distort competition in the common market or in any part of the common market”.[2]

Issue 1: Registration with ERA and Submitting Drinks for Testing and Licensing:

Articles 81 and 82 of the EC Treaty dealing with Competition among member states are applicable to all Horizontal and vertical agreements and practices which ‘may affect trade between member states’. In order to decide on the applicability of the provisions of Articles 81 and 81 the Community courts often take into account the following criteria on any agreements. They are:

The concept of a fair trading between the member nations with a perfect competitionThe notion that the agreements or transactions ‘may affect’ the trade between the member nations andThe concept of ‘appreciability’ which implies the agreements should have a profound effect of affecting the trade and commerce between the member countries.The European Court of Justice (ECJ) has evolved standard tests to define the circumstances that will fit into the expression ‘may affect’. According to ECJ the term implies that “it must be possible to foresee with a sufficient degree of probability on the basis of a set of objective factors of law or fact that the agreement or practice may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States”[3] The European Court of Justice, in some of the judgments issued by it especially relating to the cases on vertical agreements has made specific mention about the characters of the agreements that ‘may affect’ the trade between the member nations and have the effect of hindering the achievement of the objective  of a single market. Such expressions have been contained in case T – 62/98 Volkswagen[4] and in the case no 56/65, Société Technique Minière,[5]. The impact of the agreement on the point of affecting the trade in the process of a creation of a single market among member nations is a factor that needs to be reckoned with while deciding the restrictive nature of the agreement on the ground that it ‘may affect’ the trade.

In accordance with the above principles the commission has issued guidelines that certain agreements may have the characters of “agreements that establish sector-wide standardisation and certification regimes, which either exclude undertakings from other Member States or which are more easily fulfilled by undertakings from the Member State in question due to the fact that they are based on national rules and traditions. In such circumstances the agreements make it more difficult for undertakings from other Member States to penetrate the national market.”[6]

This guideline makes the requirement of McStrong to get itself registered with the regional ERA and send their drinks for testing and licensing amounting to a restriction on the competition and hence may not legally tenable.

Issue 2: Distributorship Agreements:

In respect of the distributorship agreements, the EC has brought new ‘block exemption’ regulations (Regulation 2790/99) which acts as a safe harbor for certain types of agreements and does not insist of any notification from the commission or following up of other administrative procedure.

Regulation 2790/99 applies to all agreements entered into by companies with other companies which do not operate at the same level of production or the distribution as the company that intends to make the agreement. Such agreements include all distribution agreements entered in to in the traditional manner for reselling the products in a particular territory.  The agreements also include the franchising arrangements, selective distribution and even agency agreements.   However agreements relating to intellectual property licensing, agreements in the automobile trade and competitor agreements with certain exceptions are not covered by this regulation.

The guidelines issued by the commission to classify agreements falling under different categories of exemptions are quite complex in nature both procedurally as well as from a substantial point of view.

The ‘market share’ of the parties determines the applicability of the provisions. Where the market shares of each of the parties to the agreement do not exceed 15 percent any vertical agreement between such parties will not be deemed to be anti-competitive. The percentage is reduced to 10 when the agreement is between the competitors. Moreover “under the Regulation, a vertical agreement is exempted if the market share of the supplier on the relevant market does not exceed 30%, except – again – if the agreement contains so-called “hardcore restrictions””[7]

It may be noted that when the vertical agreement contains an exclusive supply obligation then the relevant market share to be considered is that of the buyer or the distributor proposed to be appointed and not the seller himself.

It is also important to note that the ‘hardcore restrictions’ remain the same for both the 15 percent threshold and 30 percent exemption threshold fixed for the purpose of implementation of the regulation. The ‘hardcore restrictions’ are defined to include “Any contractual provisions or concerted practices having the direct or indirect effect or object to fix the resale price or a minimum resale price to be observed by the buyer/distributor.”[8]  The exception to this rule is provided in the case of agency agreements where the pricing is the responsibility of the principal who continues to be the owner till the time the goods are sold.

Similarly the contractual provisions which have the effect of bringing in a partition in the distribution network on the basis of customers or on the basis of territories are also included in the purview of ‘hardcore restrictions’. Such provisions should exclude any exemption granted or granting of the exemption under the regulation. Of course there are exceptions to this general rule. The exceptions may relate to restriction of active sale by a distributor and the sale by a wholesaler from extending the sale to end-users. Similarly in a selective distribution system it is possible to put a restriction on the authorized distributor to sell to unauthorized distributors. It is also possible “to restrict a buyer of components supplied for incorporation into another product from reselling them to customers who would use them to manufacture the same types of goods as those produced by the supplier.”[9]

The regulation 2790/99 also provides for specific ‘hardcore restrictions’ that deal with non-compete provisions and exclusive purchase obligations.

Issue 3: Distribution Agreements in Germany:

In accordance with the provisions of Article 81 of the EU Treaty the proposed distributorship arrangement in Germany of McStrong with Deutschland Drinks needs an analysis as to whether such arrangement is an anti-competitive arrangement within the meaning of Article 81.

This arrangement intended to be entered by McStrong may be considered as an agreement or a coordinated policy eliminating or restricting competition. It may be noted that Article 81 (1) EC contains express prohibition with respect to all agreements and understandings which have the effect of preventing, restricting or distorting the competition. It is also important to note that this provision covers not only written but also oral agreements which have the effect of a deliberate and intended collaboration between different companies for the elimination or restriction of competition in a certain market.

For the purpose of this article the restraints of competition may be grouped under:

·         Vertical Restraints and

·         Horizontal Restraints

“Horizontal restraints mean agreements or co-ordinated policies between companies acting on the same marketing stage, e.g. agreements with competing manufacturers.

Vertical restraints mean agreements or co-ordinated policies restricting competition between companies acting on different marketing stages, e.g. agreements with distributors and customers, licensees, suppliers or licensors which restrict the competitive freedom of the partners or third companies.”[10]

The distributorship agreements proposed to be entered by the company McStrong is a kind of vertical restraint containing ‘exclusivity’ in the transaction. It is provided for in the provisions of Competition Law that certain guidelines need to be followed for entering into agreements to buy exclusively buy from one source; or to make supplies exclusively to one customer.

An agreement for not to supply customers passively from the outside the territoryAn agreement forbidding the distributor to accept an inquiry of a customer from outside the territoryAn agreement or understanding that forbids a distributor to make supplies to other distribution channels when there are corresponding ordersAn agreement under which there can be a refusal on the basis of territory restrictions.Vertical agreements covering the whole of a single member state which restricts the undertakings from other member states to enter in to trade in the national market of that particular member nation by means of establishment having a foreclosure effect will be considered as having the effect of partitioning the national market and also will deter the “economic interpenetration” which is one of the major objectives of the EC Treaty. Such foreclosures are witnessed when the suppliers impose exclusive conditions of buying on the prospective buyers as in the case of C – 214/99 Nestle[11]. Another instance can be cited in the case of C 234-89 Delimits[12] “which concerned agreements between a brewer and owners of premises where beer was consumed whereby the latter undertook to buy beer exclusively from the brewer, the Court of Justice defined foreclosure as the absence, due to the agreements, of real and concrete possibilities of gaining access to the market.”[13]

Since the distributorship arrangements proposed to be entered by the company McStrong presupposes that “all sales inquiries from German residents be they by phone, e-mail, internet or in person, must be directed to Deutschland Drinks,” it contains an exclusive clause that prevents or restricts competition by other dealers or distributors. Hence this clause prohibiting all the customers to send the sales enquiries to any other dealer or distributor will be treated as a ‘vertical restraint’.

Such agreements have the effect of creating significant barrier to entry since they cover almost the entire market. It must be noted that while assessing the effect of the agreement the effect of not only the particular agreements but also the effect of parallel agreements will have to be taken into account, as has been decided in the case of T-7/93, Langnese-Iglo,[14]

However the company can:

“Grant an exclusive distribution, purchase, or franchise or license right in a certain territory.Prohibit an active marketing policy outside the agreed territory. Therefore, outside the contract territory and in relation to the contract goods, the partner can be obliged to refrain from actively seeking customers, establishing any branch or maintaining any distribution depot”[15]Thus there is no prohibition on appointing the company Deutschland Drinks as the sole distributor. However McStrong cannot include a condition that all the enquiries should be directed to Deutschland Drinks only which condition will amount to a vertical restraint and hence will be prohibited by the Competition Law. The agreement may be concluded without the restraint clause.

This distributorship agreement may fall within the purview of the decision taken by the Court of First Instance of the European Communities (Fourth Chamber) in the case of Volkswagen AG v Commission of the European Commission (Case No T – 62/98) in view of the restrictive conditions the distributorship agreement contains infringing the Article 81  of the EC Treaty.

Issue 4: Contracts in the Netherlands for Dutch Off-licenses:

This condition can be viewed as a ‘Tying’ condition under the Competition Law. Making the supply of a product subject to the acceptance of supplementary obligations to buy goods and or other services “which, either by their nature or according to commercial usage, have no connection with the subject of the contract, generally should not be used,” are treated as Tying clauses. In the case of Microsoft[16] the European Commission found on the basis of evidence from a wide variety of consumers, suppliers and competitors that the company “Microsoft is leveraging its dominant position from the PC into low-end servers and that Microsoft.s tying of Windows Media Player to the Windows PC operating system weakens competition on the merits, stifles product innovation, and ultimately reduces consumer choice”.[17] The facts of the case of Microsoft are similar to that of McStrong.

Where the McStrong is enjoying a significant market share in the product of Ale then the company is prohibited to:

·         Insist on an obligation to buy other products of another nature as a condition to make the supply of the product

·         Insist on an obligation to enter into a service agreement for any kind of service as a condition to make the supply of the product.

According to this provision the condition proposed to be included in the licenses to keep a free cooler to be supplied by McStrong must be used by the dealers to stock exclusively the product of McStrong would be a ‘tying clause’ under the Competition law. However Competition Law allows the Companies to:

“•require a customer to buy a full range of products including accessories

•prescribe in license agreements to buy materials and special tools which are necessary for a technically satisfactory exploitation of the license”[18]

But these provisions do not explicitly cover the condition that McStrong proposes to insist on the dealer to keep the cooler supplied by McStrong and ask the dealers to stock only the product of McStrong.

Issue 5: Increase in Prices By a Joint Arrangement:

Under Article 81 (1) specifically provides that:

The following shall be prohibited as incompatible with the common market: 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, and in particular those which

(a) Directly or indirectly fix purchase or selling prices or any other trading conditions;

(b) Limit or control production, markets, technical development or investments;

(c) Share markets or sources of supply

The firms normally indulge in two types of collusion; tacit collusion and explicit collusion. A collusive outcome and behaviour among the competing firms may arise even without firms agreeing or communicating to coordinate their behaviour. This in turn raises the question as to whether only ‘explicit collusion’ represents a violation of the competition law or even ‘tacit collusion’ also will fall under the purview of the competition law.  A ‘Tacit collusion’ may be developed by the action of the firms taken parallel over a period of time and imitate each other’s action in increasing the prices.

In case even when there was no necessity for any price increase due to increase in demand or increase in input prices, one seller increases the price and the rivals follow him; whether such a case would be considered as an infringement of Article 81 of the EC Treaty. The answer lies in decision in the case of Wood pulp by the European Court of Justice. As against the decision of the EC that such a practice amounts to an infringement of Article 81, the ECJ annulled the decision of the EC on the grounds of procedural validity as well as on the question of substantive issues. The decision was handed over in the case of Ahlström and others v. Commission, where the Court opined “concertation is not the only plausible explanation for the parallel conduct”.

The question here is whether an infringement of antitrust laws can be adjudged by the parallel conduct of the firms. The answer is that some kind of communication or coordination among the parties is a proof that can go well to justify the existence of a concerted action.

However another decision in the case Dyestuffs the Court found that there  was infringement of Article 81 since the price rises were sudden and simultaneous and hence some communication among the parties was assumed and an infringement detected.

In the light of the above discussion, the increase of 15 percent in the price of the of the drinks will be deemed to be in contravention of the provisions of the Article 81 of the EC Treaty and Article 53 of the EEA Agreement as has been decided by the European Commission in the case of COMP/E -1/37,512 – Vitamins where a number of pharmaceuticals companies by virtue of agreements among them increased the prices of certain Vitamins in the EU member nations.

Issue 6: Assertion of Dominant Position through Manufacturing Process:

Under Article 82 of the EC Treaty:

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;

(b) Limiting production, markets or technical development to the prejudice of consumers;

(c) Applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(d) Making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

The conditions proposed to be imposed by McStrong fall within the purview of the above provisions and will amount an abuse by McStrong of a dominant position within the Common Market and it will have the effect of affecting the trades between the member states. Hence the company McStrong may not be able to enforce these conditions for the transfer of the new manufacturing process developed by it. The Commission has proposed Regulation (EC) No 773/2004 relating to the Articles 81 and 82 of the EC Treaty which may have effect on the proposed agreement for the renting of the manufacturing technology developed by McStrong.

The trade within the member state may get affected by indirect effects of the agreement in which case also the provisions of Article 82 may be of relevance. “Indirect effects may, for example, occur where an agreement or practice has an impact on cross-border economic activities of undertakings that use or otherwise rely on the products covered by the agreement or practice. Such effects can, for instance, arise where the agreement or practice relates to an intermediate product, which is not traded, but which is used in the supply of a final product, which is traded. The Court of Justice has held that trade between Member States was capable of being affected in the case of an agreement involving the fixing of prices of spirits used in the production of cognac”[19]

In this situation the decision of the court in the case 123/83 BNIC v Clair[20], is relevant to note.

Issue 7: Proposed Merger of AmBrew Company in the United States with McStrong:

In the case of mergers, when the annual global and European turnover of the company exceeds the threshold level of Euro 5 billion of the combined entities or Euro 250 million turnover within the Community in the case of each of the firms involved in the merger, there is the need to notify the proposed merger to the European Commission. The European Commission has the authority to examine the proposal. Any mergers where the turnover is the prescribed limit the merger proposal will be reviewed by the National Competition Authorities in the EU member states.

Irrespective of the location of the registered office, headquarters activities or production facilities the rules of merger will apply. This is because it may so happen that even the mergers between different undertakings outside the European Union also may affect the markets in the EU if such companies carry on their business in the EU. The European Commission will also examine those proposals referred to it by the national competition authorities in the member states and conversely the European Commission may also refer some proposals to the national competition authorities.

European Compliance Issues of the Merger Proposal:

Regulation (EC) No 139/2004 deals with the merger proposals within the EU. Merger proposals that are likely to surpass the threshold turnover limits are to be notified to the Commission for its agreement before giving effect to such mergers. The detailed guidelines on the notification requirements as well as the procedure and the forms of notification are contained in the Regulation (EC) No 808/2004.

On any notification of merger proposals there is an initial scrutiny period of 25 working days. After this period “the Commission decides either to authorise the transaction or, if it thinks that the concentration might result in a significant impediment to effective competition, it may initiate an in-depth investigation procedure which usually takes up to a further 90 working days (in certain circumstances, this may be increased to 105 or 125 working days).”[21]

Usually all the merger proposals notified to the Commission will be examined to assess the effect of such proposal on the competition in the EU. If such proposal has an impeding effect on the competition and if there are no steps taken by the merging firms to remove the impediments to competition then such proposal will be prohibited. For example if the proposed merger is between two major competing firms would adversely affect the  competition in the market by strengthening the dominance of a player then such merger proposal need to be prohibited.

It is not always the case that all merger proposals which have the effect of impeding the competition will be prohibited. The European commission will allow the parties to initiate action to reduce the effect of the merger on the impediment of the competition. “Even if the European Commission finds that a proposed merger could distort competition, the parties may commit to taking action to try to correct this likely effect. They may commit, for example, to sell part of the combined business or to license technology to another market player. If the European Commission is satisfied that the commitments would maintain or restore competition in the market, thereby protecting consumer interests, it gives conditional clearance for the merger to go ahead. It then monitors whether the merging companies fulfil their commitments and may intervene if they do not.”[22]

Compliance Issues of Merger Proposals under US Anti Trust Law:

In the US the Sherman Act (1890), the Clayton Act (1914) and the Federal Trade Commissions Act (1914) take care of the antitrust enforcement. “The Hart-Scott-Rodino Act of 1976 modified the merger review process in the United States. The Act stipulates that all large proposed mergers must be notified to both the Federal Trade Commission (FTC) and Antitrust Division of the Department of Justice (DoJ). Prior to the passage of Hart-Scott-Rodino, many horizontal merger cases were decided through the court system and many came before the US Supreme Court. “

On the submission of the proposal for merger the FTC or DoJ automatically assumes the responsibility for making a complete assessment of such merger on the market competition.[23]

In the year 1992 the merger review process in the US was further elaborated by the ‘Horizontal Merger Guidelines’. The government would look in to the transactions which has a threshold of $ 50 million. This is in contrast to the higher threshold limit of European Union where the combined sales figure of Euro 250 billion or the revenue of one of the parties should be Euro 5 billion.

The US agencies adopt a two step ‘premerger notification’ process as has been prescribed in the Hart-Scott-Rodino Act. After reporting the merger proposal to the FTC and the DoJ there is a waiting period of 30 days. If  any of the two agencies feel that there should be further enquiry then the agency may issue a ‘second request’ and during this process the waiting period is further extended to may be another 30 days . If in the opinion of the reviewing agency the proposed merger would result in substantially affecting the competition then the agency may make an appropriate request for an injunction in the Federal District Court for the prohibition of the proposed merger.

General issues of the Proposed Merger of AmBrew with McStrong:

In the case of the instant merger proposal of McStrong with AmBrew of the United States, in accordance with the detailed procedures described above the following needs to be considered:

In order to go ahead with the merger McStrong as well as AmBrew should get clearances in the respective countries of United States and the European Union considering the fact whether they are within the threshold limits set by both the countries in respect of the merger proposals.McStrong should notify the proposed merger to the European Commission under Regulation (EC) No 139/2004 as per the procedure laid down in Regulation (EC) No 808/2004.The Commission will consider the proposal above and will approve or prohibit or accord a conditional approval as the case may be within the stipulated period.In the United States AmBrew has to make an application to the FTC for the approval of proposed merger with McStrong and this application should contain all the details including the consideration of the merger scheme and how the shareholding pattern will change after the merger is carried out.The FTC or DoJ as the case may be will consider the proposal for merger and accord its approval either on the first verification of the scheme or by undertaking the second process of verification.The proceedings of the European Commission in the case of Sony/BMG – Case No COMP/M 3333 dated 19th July 2004 which is based on Regulation (EEC) NO 4064/89 dealing with the Merger Procedure and declaring a concentration to be compatible with the common market and the functioning of the EEA Agreement.

Issue 8: Investigatory Powers of European Union in Anti-Competitive Action:

Council Regulation 1/2003 which was made effective from May1 2004 provides for important changes in the powers of the European commission for any alleged infringement of the provisions of Articles 81 and 82 of the EC Treaty. There have been considerable changes in the powers of the National Competition Authorities constituted in the member states to assist the Commission in the discharge of its duties. The main changes that have been brought about in the Commission’s investigatory powers are:

“To interview any natural or legal person who consentsTo seal any business premises and books or records to the extent necessary for the predawn raidTo ask any staff member for explanation of facts or documentsTo search private homes” (Natalie Vreeburg)[24]The Commission has the power to conduct interviews with any natural or legal person for the purpose of collecting the information with respect to the subject matter of an enquiry under investigation.Under the new regulation 1/2003 the Commission has the powers to ask for undertakings and explanations from any staff member of the organizations subject to enquiry. The explanation and undertakings may relate to the subject matter of the enquiry and contain documents and facts.“Under the Regulation the Commission is also allowed to inspect any other premises, land and means of transport. This includes the homes of directors, managers and other members of staff of the undertakings under investigation. The reason for extending the Commission’s power on this point is that the Commission was often confronted with the fact that incriminatory documents of the companies concerned were kept at private homes. However, before private homes can be searched, the Commission has to meet certain conditions. There has