EU Law: Anti-Competitive Agreements
Article 101(1) of the TFEU (Treaty on the Functioning of the European Union) identified that all agreements, decisions and concerted practices between undertakings, which may affect trade, and have as their objective or effect, to prevent, distort or restrict trade within the single market, are anti-competitive and prohibited.
This is a long definition and therefore must be broken down. All competition law is monitored by the Competition Markets Authority (CMA) who have the power to investigate companies who are suspected to be taking part in anti-competitive practices.
The case of Hofner & Elser identified that undertakings include all legal persons. This includes Individuals and incorporated companies that are engaged in commercial activity for the provision of goods or services.
Agreements, Decisions and Concerted Practices
The difference between all three is not strictly important. However, it is important that there is an anti-competitive practice of some sort. The definition includes all 3 words to widen its remit and include as many anti-competitive practices as possible.
Agreements can range from formal arrangements, such as a contract, to informal agreements. Informal agreements can Include ‘gentlemen’s agreements’ and could happen at all levels of a company. They may happen between managers on a local level or at a more senior level buy the directors.
These are known as cartels. The CMA alongside EU Competition law has implemented strict policy prohibiting them. This is where two or more companies bind together in order to reduce competition from which they will both benefit. This is an example of a horizontal agreement.
Consten & Grundig allowed Article 101 to also apply to vertical agreements (ones which operate at different levels of the supply chain).
Concerted practices are when 2 or more companies cooperate. This may not go as far as being an agreement between the companies, or an agreement hasn’t quite been concluded between them, but there are steps been put in place to mitigate the competitive behavior between the companies – Dyestuffs.
This can apply even if businesses have no agreement or concerted practices in place, but both set their prices high. It will be inferred that they are engaging in anti-competitive practices under Article 101 – Wooters.
Which May Affect Trade within the Single Market
For the purpose of EU law, the CMA will only be concerned with agreements that hinder trade between member states. If a cartel only operates within one-member state, the national competition authorities will deal with it. For example, Essex Estate Agents set commission all to the same rate, by definition amounting to a cartel, were investigated only by the national competition authority.
The case of Société Technique states that there must be a real degree of probability, on the basis on objective factors which may influence, directly or indirectly, actually or potentially trade between member states. On this basis, there does not even have to be an effect on trade yet, only the possibility that it will affect it at some point. The effect may be positive or negative – Consten Contd.
Object or Effect to Prevent, Restrict or Distort Competition
The case of STM concluded that agreements can have either the ‘object or effect’ the restriction of competition… not necessarily both. It is possible to have an agreement that does not have as its objective to restrict trade but does have that effect.
The terms prevent, restrict and distort are all covered under the list of practices defined under Article 101(1)(A-E):
(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development, or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(e) make 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.
These restrictions may be exempt if they are covered under the list of exemptions under Article 101(3): improvement of distribution of goods, or to promote technical or economic progress. However, this is unlikely if they include hardcore restrictions.
NATT, NAOMI and VERB
If a company is found to have been engaging in anti-competitive behaviour, there may be some ways in which it could be justified, however it does depend on their market share. Market share might sometimes be obvious, and sometimes it may be harder to classify. In order to identify the market share, it important to consider the Relevant Product Market (RPM) and the Relevant Geographic Market (RGM).
Relevant Product Market
The product market looks at the interchangeability and substitutability of the products concerned in the agreement– Hilti. For example, in the case of United Brands, the product market was specified as ‘Bananas’. They said that if a consumer wanted a banana, they would not be satisfied with any other fruit other than a banana, therefore the market could only be bananas.
The SNIPP test was also developed in relation to this. It held that if the price of the product was increased from 5-10% on a permanent basis, would the consumer still pay for that product or simply substitute it for something else? If they substitute it, the RPM is likely to be larger.
Relevant Geographical Market
The RGM looks at a company’s market share with regard to the areas it operates in. Their world-wide market share is likely to be a lot smaller than their national market share. However, it would be unfair to hold a company to a national market share, if they operate on a global level.
RGM looks at where the conditions of competition are ‘homogenous’ – United Brands. Where does it operate? Does their market share fluctuate in different places? The starting point of the RGM is the EU, but this may change when exploring the countries of operation. In the case of Hilti, the RGM was world-wide as their port delivered to countries all over the world.
NATT – No Appreciable Effect on Trade
Some businesses may escape being investigated by the CMA if their market share is below 5%. This is why it is important to work out their RPM and RGM.
However, it does not mean their anti-competitive agreements are legal. They are simply too insignificant for the CMA to investigate them. However, national competition authorities may still investigate them.
NAOMI – Notice on Agreements of Minor Importance 2014
The EU produced a list of rules giving rise to De Minimis principles. NAOMI is a list of rules that smaller businesses can use which justifies the use of some anti-competitive behaviour that are not hardcore restrictions.
If a business has an aggregate market share of 10% or less, they will be able to use NAOMI. For vertical agreements the market share is 15% or less- Article 8 NAOMI.
Article 13 of NAOMI states that hardcore restrictions, which include price fixing, price limiting and allocations of market or customers (restricting trade with certain places) are always restricted. Other types of anti-competitive behaviour may be allowed.
VERB – Vertical Block Restraints Exemption
VERB is governed by the 330/2010 regulation. This is only available to vertical agreements and allows certain agreements to be accepted even if they contain anti-competitive clauses.
Article 1(1) states that vertical agreements are ones that operate at different levels of the supply chain. Both parties must not have a market share that exceeds more than 30% – Article 3(1).
Article 4 states that hardcore restrictions will never be exempt, which are identified as passive sales and Price Fixing. If the agreement contains prohibited restrictions, the individual clauses are removed, but the rest of the agreement may remain valid.
Article 101(3) TFEU
If a business’s market share is more than 30%, they will not have the benefit of using VERB. They will have to rely on Article 101(3).
Article 101(3) states that the clause will be valid if it:
- Improves distribution
- Gives consumers a fair share of the benefit
- Does not restrict too far that is not necessary
- Does not restrict competition within the single market.
If these criteria are satisfied, the agreement will be valid.
Consequences of Breach
If Article 101 is breached, the agreement will then be void- 101(2). The EU commission or national competition authority will investigate companies and can impose a fine of up to 10% of annual world-wide turnover. This large sum is enough to place many businesses into significant financial difficulties. Note that this is turnover and not profit. Many businesses work within that margin which only increases the probability of insolvency.
Third parties are able to take action against companies found in breach of Article 101 if they have suffered a loss due to the anti-competitive agreement. Article 101 satisfies the Van Gend criteria and therefore has direct effect.
Individuals who enter into anti-competitive agreements may also be personally liable to disqualification and even face prison time.