Seminar 5: Justifying a restrictive agreement (7 November)

The three cases allow us to think about how one might justify anticompetitive agreements. There are two methods: one is to apply Article 101(3), the other is to somehow find no breach of Article 101(1). The latter approach is confused, not least by the three judgments below.  The paper is not directly related to the cases, but I think it helps flesh out how to think about these issues in a new way.

Communication from the Commission – Notice – Guidelines on the application of Article 81(3) of the Treaty [2004] OJ C101/97 paragraphs 32-end, focus on the general principles (available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52004XC0427%2807%29:EN:NOT)

Case C-519/04  Meca-Medina v Commission [2006] ECR I-6991

Case C-349/09 Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l’Économie, de l’Industrie et de l’Emploi [2011] ECR I-9419 (please read the AG’s Opinion)

Case C-1/12 Ordem dos Técnicos Oficiais de Contas v Autoridade da Concorrência, judgment of 28 February 2013

Farrell and Katz ‘The Economics of Welfare Standards in Antitrust’ (2006) 2(2) Competition Policy International (this is easily available on line if you Google the title, or try this link https://www.competitionpolicyinternational.com/file/view/4359). Ignore the complex maths, just focus on the intuitions.

Further reading

This OFT document is interesting, look at the first 16 pages or so. http://www.oft.gov.uk/shared_oft/events/Article101(3)-discussionnote.pdf

Presently the Dutch Competition Authority is looking at a policy of exempting agreements that benefit the environment, see https://www.acm.nl/en/publications/publication/11733/Opportunities-for-collaborations-with-regard-to-sustainable-development/

Joined Cases C-501/06 P etc. GlaxoSmithKline Services Unlimited v Commission [2009] ECR I-9291, focus on the analysis of Article 101(3).

11 comments on “Seminar 5: Justifying a restrictive agreement (7 November)

  1. Marita Szreder says:

    Since this week’s reading materials raise the issue of the uneasy relationship between article 101(1) and 101(3), I guess it’s worthwhile first to consider available ways of reconciling the two limbs of article 101. I think three possibilities can be identified:

    1) broad approach to article 101(1) followed by more detailed analysis under 101(3) – under this approach art 101(1) serves more of a jurisdictional function

    2) more detailed analysis under art 101(1) when determining whether conduct is restrictive of competition – under this approach art 101(3) would serve a very limited role (exceptional cases)

    3) middle path.

    Under previous procedural framework, the Commission adapted a very broad approach to article 101(1) thus cementing its central role in the development of competition policy. This distorted the way the two paragraphs of article 101 were analysed. However, after Regulation 1/2003 came into force things have changed and the Commission no longer has an exclusive competence to rule on the compatibility with art 101(3). This is not to say that they became any clearer. Unfortunately, CJEU cases do little to clarify the situation. I think that the Meca-Medina case constituted a very good opportunity for the Court to clarify what it takes for an agreement to constitute a restriction of competition within article 101(1). Instead, it muddled the water even further. The same can be said of the other cases.

    At this point I would like to add that I find the outcome of the Pierre Fabre case baffling. After reading the factual background I was almost certain that the outcome would be the opposite, i.e that the selective distribution system established by Pierre Fabre would not be held to be restrictive of competition! I was astonished by the ease at which the Court found the agreements to fall within the object category and how it simply dismissed the arguments relating to reputation and prestige of the products and did not go into the detail of the argument concerning quality of service offered to the consumers (balancing exercise). I was also surprised by the analysis of what (has not) constituted an (un)authorised place of establishment in a selective distribution system for the purposes of the block exemption.

    While it might be difficult in Pierre Fabre’s case (due to the number of outlets already operating on the French market), the judgement clearly sends a signal to other undertakings producing luxury products to consider vertical integration, thus preventing the development of distribution markets altogether. Companies valuing the image and reputation of their products might thus be forced to choose the second-best solution in terms of effectiveness, which would be a very worrying development.

    I found the article Farrell and Katz very interesting, but surely it makes sense to consider the question of whether total welfare or consumer welfare constitutes a better standard for competition law only if it is agreed in the first place that welfare (in whatever form) should be the objective of competition law…in that sense the article touches only on the narrow debate, and could be seen as of limited use.

  2. Céline Estas says:

    I would like to make three points: the first and the most important on hardcore restrictions; the two last on aspects of the cases read.

    Firstly, I felt really confused after the reading of the Communication and Pierre Fabré case. Indeed, the formulation of the question referred for preliminary ruling revealed one aspect of my confusion (“a “hardcore” restriction of competition by object”). In fact, we can read in the Communication of the Commission that a hardcore restriction is likely to constitute a restriction by object (§23). I found the view of the Commission strict on this point because the Commission used the concept of hardcore restriction as an example restriction by object (communication § 23); but the reality is much more flexible. Indeed, things became clearer for me when I read the point of view of AG Makaz: no presumption of restriction by object exists for hardcore restrictions (§28). Thus, undertakings which adopted a “hardcore” behaviour may still hope and prove that this behaviour does not constitute a restriction under 101(1) TFEU.
    Then, the other aspect of my thought is related to the application of A101(3). Even thought the Commission paper states that no agreement is a priori excluded from the scope of A101(3), I had the feeling that hardcore restrictions will never succeed the test of A101(3). As the Communication says “Agreements of this nature generally fail (at least) the two first conditions of Article 81(3).” So, I had the impression that the qualification as hardcore restriction was important in order to demonstrate the severe restrictive character of the behaviour and therefore demonstrate the high unlikelihood of a justification. However, this qualification does not seem to matter as the ECJ stated in Pierre Fabré case: “However, such a contract may benefit, on an individual basis, from the exception provided for in Article 101(3) TFEU where the conditions of that provision are met.” At the end of the day, this statement has the same meaning than the Communication: if the undertaking manages to demonstrate that the four criteria of A101(3) are fulfilled, it is still possible to maintain his conduct even though it is qualified as “hardcore”. However, the Court put it in a more neutral way, without insisting on the very unlikelihood of this argument.

    Secondly, with regard to this Pierre Fabré case, I think that the Court should have taken a stronger position on whether the ban of internet sales constitutes a restriction to active and/or passive sales and why it is not treated the same way as a geographical area. Its justification for the rejection of the exception for the place of establishment (§58) was not really convincing.

    Finally, I was also confused with the Media case. When I read the facts, I did not really see the link between them and the competition rules. It is true that the claimants said that “the fixing of the limit at 2 ng/ml is a concerted practice between the IOC and the 27 laboratories accredited by it”, but it was still not obvious for me. It might have been clearer if the Court had given more details on its reasoning.

  3. Jonas von Kalben says:

    I agree that the reading materials raise the question of the relationship between Art. 101 (3) TFEU and the teleological restrictions of Art. 101 (1) TFEU. It appears to me that both aim to solve different kinds of conflicts in goals between the aim of “undistorted competition” and other (economical and non-economical) goals of the union. One possible way of differentiation might be the following: Whereas Art. 101 (3) TFEU deals with economic efficiencies (“improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit”), for systematic reasons the “objective justifications” within Art. 101 (1) TFEU focuses only on other objectives (e.g. combating doping in order for competitive sport to be conducted fairly, safeguard equal chances for athletes, athletes’ health, the integrity and objectivity of competitive sport and ethical values in sport (Case C-519/04 Meca-Medina v Commission [2006] ECR I-6991, para 43) or to guarantee the quality of the services offered by chartered accountants (Case C-1/12 Ordem dos Técnicos Oficiais de Contas v Autoridade da Concorrência, judgment of 28 February 2013, para 94)). Otherwise there is a risk of undermining the specific prerequisites of Art. 101 (3) TFEU. Apparently, since regulation 1/2003 came into force (and the change of systems towards a legal exception) the importance of the differentiation between these two kinds of conflict managements has diminished. However, the specific statutory prerequisites of Art. 101 (3) TFEU persist.
    Another question relates to the methodology. The way other objectives are taken into account within Art. 101 (1) TFEU is by discussing the “objective justification” of the conduct (see e.g. AG Mazák, in Case C-349/09 Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l’Économie, de l’Industrie et de l’Emploi [2011] ECR I-9419, para. 39 et seq.). This seems to suggest a “rule of reason”-like balancing of different objectives and effects. As statutes have to be interpreted not only in the light of their wording but also by taking into account the statutory system and the rational of the law, a careful balancing of the different statutory objects is unavoidable. I am not sure, however, I would call this an “objective justification”, as this implies an infringement of the law (which will then be justified). I would argue that when interpreting Art. 101 (1) TFEU in the light of other objectives of the treaty one should not talk about an “objective justification”.
    The paper ‘The Economics of Welfare Standards in Antitrust’ by Farrell and Katz seems to suggest that in antitrust one has to differentiate between the “consequences” and the “process that generates the consequences” (p. 6, 8), as both components are parts of an antitrust infringement. Arguably, the different objectives that are taken into account when “objectively justifying” the infringement of Art. 101 (1) TFEU have to be related to one of these categories. For example in the Case C-349/09 Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l’Économie, de l’Industrie et de l’Emploi [2011] ECR I-9419, para 40 the court argues that “a reduction of price competition in favour of competition relating to factors other than price“ might be justified, which seems to relate to the “process”, whereas other reasons, like “athletes’ health” (Case C-519/04 Meca-Medina v Commission [2006] ECR I-6991, para 43), seem to relate to the “consequences”. However, this presumes one accepts the “welfarist” approach of the paper.

  4. Karin Fløistad says:

    One interesting aspect when discussing the justification of a restriction on competition is to compare the issue with justifying a restriction in the free movement rules. The Meca Medina case illustrates the application of both internal market rules and competiton rules. A starting point for separating between the application of competiton rules and the application of free movement rules is usually the addresee of the rules in question. As is well known, EU’s internal market rules applies to states and competition rules applies to private parties, undertakings. This is only a starting point as the case law of the CJEU over the years has demonstrated and Meca Medina is an example. The justification process is not the same in the two set of rules but there may be good reasons for aligning the approaches. A point for discussion is how they differ and whether there should be an alignment.

    In the Pierre Fabre Dermo Cosmétique’s case the CJEU refers in para 44 to what it has previously accepted as a justification of a restriction of free movement when it considers a restriction on competiton.

    In this respect it is also of interest that the CJEU considers in para 48 in C-1/12 that ‘it is immaterial in that regard that the OTOC is regulated by public law. According to its very wording, Article 101 TFEU applies to agreements between undertakings and decisions by associations of undertakings. The legal framework within which such agreements are concluded and such decisions taken, and the classification given to that framework by the various national legal systems, are irrelevant as far as the applicability of the European Union rules on competition, and in particular Article 101 TFEU, are concerned (Wouters and Others, paragraph 66 and the case-law cited).’

  5. Samantha Palladino says:

    I understand and agree with the policy (or what I think is the policy) underlying the Article 101(3) exception to Article 101. However, when I was reading the Commission’s Communication, I was trying to ascertain exactly how it would all work in practice. Although the Commission laid out each of the four cumulative conditions in some detail, it all still seems rather difficult to quantify or determine with any precision. The Commission recognizes, for example, that there are different types of efficiencies and that consumers do not need to receive a share of each and every efficiency gain identified to meet those conditions, however, that leaves a lot of ambiguity for courts when they are confronted with an Article 101(3) defense. I do not have a suggestion of how to make the system more workable, however, because I do think that the exception is important for promoting potentially outweighing positive effects of restrictive agreements, and also that per se rules would probably not make me any more comfortable with the outcome. Reading through the cases did not really make this any more certain for me.

    Regarding Meca-Medina, to me, trying to frame the complaint as an Article 101 (then Article 81) issue seemed like a stretch to me. I was wondering whether I missed something, or whether this is perhaps common in EU competition or other laws to make the arguments advanced here. I do not see how setting a minimum threshold for drug testing relates to competition law or restriction of competition. I understand that it limits the athletes’ ability to dope in the future, but that does not seem like a competition law issue.

  6. Sara Perez says:

    One justification for anticompetitive agreements is if the restriction of competition is justified by a legitimate objective. As set forth by Wouters, when effects restrictive of competition are consequences of legitimate objectives, the effects must be proportionate to the objectives. Meaning, the restrictions must be necessary to fulfill the objective and not excessive. While this week’s cases show the Court of Justice grappling with how to determine when anticompetitive agreements are actually in pursuit of legitimate objectives and whether they are necessary, the cases also highlighted the lack of certainty over whether the agreements are restrictive.
    In Meca-Medina, the Court did not fully explain why the IOCs anti-doping rules were a restriction of competition. To me, this didn’t seem like an Article 101(1) case at all. If the Court wanted to clarify Wouters and expand on the ‘legitimate objective’ exception to restrictive agreements, I don’t think it succeeded. The Court did not explain how the anti-doping policy in question did not benefit the IOC, but rather presented a legitimate objective of safeguarding the integrity of competitive sports and athlete’s health. It appeared that as long as there’s one likely legitimate objective for a restrictive agreement, then that’s enough to justify the agreement (so long as the restriction is proportionate to the objective).
    Regarding the proportionality requirement, the Court has also failed to concretely define when a restriction is proportionate, or necessary, to the objective. Both Meca-Medina and Ordem dos Tecnicos confused this issue for me. Is a necessary restriction one that is the least feasible alternative? Or one that the regulating authority felt would most efficiently achieve the ends?

  7. Mariajo says:

    I was very much confused by the case law in this week’s readings. As stated by Karin, if I had just heard the facts of the Meca-Medina and Ordem dos Técnicos Oficiais de Contas, I would have expected actions under the freedom to provide services and not under competition rules. Somehow, my stubborn neurons won’t accept an Article 101 TFEU analysis for these cases (maybe because most doctrine and economic models in competition law refer to product markets?). Just the same way, I have trouble with what the court accepts as ‘objective justifications’ – to me, an objective justification means that, an otherwise prohibited behavior by a rule is not considered in breach, because it furthers some higher rule or principle. I think the Court would have done better, as Marita suggests in her option (1) to construe Article 101 (1) as a jurisdictional rule which would have found the agreements as not restrictive of competition in an economic sense and not even get itself in to applying an analysis developed in a totally different set of cases under Article 101, which simply appears misfit.
    Pierre Fabre is a different story, where the Court again (also as observed by Karin), was prepared to draw parallels to the provisions on free movement of the treaty. Again, I still cannot pin down precisely why this is a critical move. But what is clear, is that the Court was ready to replace Pierre Fabre’s business judgment (not to sell goods online) with its own – and actually, potentially depriving Pierre Fabre’s products of their goodwill which is preserved by the method in which goods of luxury brands are distributed. I mean, from a property perspective, this is akin to expropriation of the goodwill build and invested into by Pierre Fabre. The Court points at least out that the agreement might profit from an exemption under 101 (3), but it’s analysis is still not very convincing (as pointed out by both Marita and Celine).

    In a slightly different way to Jonas, I locate the paper of Farrell and Katz in the context of Article 101 (1) and 101 (3) in the following way: When we analyze an agreement under paragraph 1 of Article 101, we will look at it as whether it harms the competitive process in a significant way (and in my opinion, all three CJ cases would be out at this stage already). Only if it does so, it will be found in breach. The next step, the analysis of whether the agreement benefits of an exemption paragraph 3, would then check on the consequences, i.e. whether the agreement is still sufficiently welfare generating in order to tolerate the restriction of the competitive process. The question would then be whether we look at overall/social welfare or consumer welfare. There is one specialty about EU competition rules: I think in EU law, the “redistribution is not a business for antitrust, since it will better be achieved in other fields of law, like tax…”does not fly, because we don’t have a EU mechanism to ensure redistribution in a different way (we do not have some fiscal authority at EU level, collecting EU wide taxes). So actually, in the EU context, looking at consumer welfare, not overall welfare, might be the appropriate dimension.

  8. Delphine Defossez says:

    The Court in Meca – Medina adopted an approach to breach of article TFEU which is identical to the one in Wouters. The Court weighted the anti-competitive effect of the rule with the non-economical aim it had. Furthermore, in Meca-Medina, the Court found that the measure was justified on the ground that it was proportionate and pursuit a legitimate objective. The same approach has been adopted in Ordem dos Técnicos Oficiais de Contas. In all those cases, the Court referred to the object/effect approach; if the object of the measure is not to distort competition, then we look at the effect it can have on the market.
    In Pierre Fabre case the Court looked whether the measure was proportionate and pursuing a legitimate objective. It seems to me rather logical that the Court decided that the ban imposed by Pierre Fabre was anti-competitive in the sense that it restricts the free movement of goods. The decision is much in line with the case-law on free movement of goods. However, the fact that prestige of a brand is not recognized as legitimate objective can have a really negative effect; people are ready to pay more for products quasi identical because of the prestige of that specific brand. On the one hand it is comprehensible why the Court avoids to accept that principle, since otherwise it will have to draw a line and decide which ‘brands’ are prestigious. One the other hand, there is a huge risk for the brands themselves, if they cannot restrict their dealing to specific shops then their prestige and their uniqueness might be affected.
    Even though, on paper, the scope of justification available for article 101(3) is still narrowly interpreted. The advocate general, in the case of Pierre Fabre, stated that a ban to sell on internet imposed on one product can be justified because of the nature of the product and that it might be useful to take into consideration the fact that some specialists’ advices are required.

  9. Haukur says:

    The paper suggest a two tier approach which arguably could be seen as reflective of the two different ways to justify anti competitive agreements. The first is a crude intuitive test of whether an agreement has something to do with competition or not. The first case on the anti doping could be seen as an example of a case that has nothing to do with anticompetitive practices although it could be argued in a rather far fetched way that negative effects are conceivable as side effects of the primary purpose of the anti-doping regime.

    The second tier concerns agreements that are clearly anticompetitive in their essence, but arguably also produce positive effects that outweigh the negative effects. Baring Internet sales and restricting competition in the provision of accountant education quickly pass the first tier as having something to do with anticompetitive practices, but could perhaps be justified on the second tier through a sophisticated analysis of the complete economic effects. This of course leaves certain discretion for the Commission and the Courts to decide what is anticompetitive and what is not, since the test for Article 101(1) is not very precise. If, however, an agreement falls within the ambit of Article 101(1) the burden of prove shifts. The presumption becomes anticompetitive effects unless the defendant manages to prove otherwise under a rather detailed and precise test.

    I also found the discussion in the paper about the consumer welfare standard as a counterweight against corporate lobbying interesting. The net effects would thus be the average of the consumer welfare standard, which the authorities are predisposed to follow, and the corporate welfare standard that the corporations spend their resources on promoting.

  10. Sylvi says:

    This week’s readings brought into question the proper framework of an Article 101 analysis, in particular the scope of Article 101(3) – whether 101(3) serves as the standard means of justifying anti-competitive agreements, or whether 101(1) should play a larger role in weeding out agreements before 101(3) applies. As noted, the cases did little to clarify this question. I found the Meca-Medina opinion confusing – I did not see how the court justified its application of Article 101(1) to the IOC’s anti-doping rules. The court states that “the mere fact that a rule is purely sporting in nature does not have the effect of removing from the scope of the Treaty the person engaging in the activity governed by that rule or the body which has laid it down,” but it is unclear to me how far that principle can be stretched – because nearly every regulation has an effect on the markets and competition, isn’t there a risk of a floodgate of cases that may be governed by the treaty? Similarly, I am not sure why the “legitimate objectives” exception falls under 101(1) analysis, rather than incorporating into 101(3). If a restrictive agreement indeed has legitimate objectives, couldn’t it be framed as contributing to “promoting technical or economic progress” to the benefit of consumers under 101(3)? The OFT document raised a similar question, asking “How broadly should benefits arising from improvements in production or distribution or from promotion of technical and economic progress be defined?” I think one way to reconcile these two exceptions is to say that the “legitimate objectives” exception promotes efficiency by eliminating a large number of cases that simply do not fall within the realm of competition law, while 101(3) permits more nuanced examination of less straightforward cases.

  11. Theodosia Stavroulaki says:

    Following review of the relevant material I think it would be interesting to present the following issues:
    • With regard to the Guidelines on the Application of Article 101. 3 I consider that they introduce an analytical framework which is easy to understand but difficult to apply. In this context I would like to give some examples, which illustrate, in my opinion, some of the potential difficulties when a balancing test under article 101 para.3 is conducted.
    – First of all after reviewing the Guidelines I did not have a clear idea about the relationship between cost and qualitative efficiencies and how it is evaluated in each case which kind of efficiencies are of greater importance. As it is stated in the Guidelines (para 69) in a number of cases the main efficiency enhancing potential of the agreement is not cost reduction. According to the Guidelines, in some cases quality improvements and other efficiencies of qualitative nature are taken into consideration and depending on the individual case such efficiencies may be of greater importance. However, the Guidelines do not analyze the criteria which are taken into account by the Commission when it evaluates which type of efficiencies are of greater importance in each particular case. I consider that especially in the framework of the analysis of R&D and joint ventures agreements a better guidance regarding the relationship between cost and qualitative efficiencies would be of great importance.
    – Second, I consider that the wider interpretation of the notion of “consumers” in paragraph 84 of the Guidelines creates uncertainty regarding the application of the second condition of the test under which “consumers must receive a fair share of the efficiencies generated by the restrictive agreement”. As it is stated in the Guidelines, the concept of consumers encompasses not only final consumers but also wholesalers, retailers and producers that use the product as an input. Furthermore, the Guidelines underline that in line with the overall objective of article 101, the net effect of the agreement must at least be neutral from the point of view of those consumers directly or likely affected by the agreement and that If such consumers are worse off following the agreement, the second condition of article 101.3 is not fulfilled. However, in case an agreement benefits wholesalers or retailers but harms consumers, how the net effect of the agreement will be evaluated? The consumer’s or the producer’s interests shall be considered as of greater importance and why?
    – Third, in paragraph 106 of the Guidelines it is stated that the application of the concept in article 101.3 of elimination of competition in respect of a substantial part of the products concerned is an autonomous Community law concept specific to article 101.3 and that the application of article 101. 3 cannot prevent the application of article 102. However if an agreement is considered legal because all 4 conditions of article 101. 3 are met how it can be considered as illegal according to article 102 taking into account that a similar balancing test is undertaken also under article 102. In particular, what is the actual difference between the balancing test of article 101.3 and the balancing test of article 102 in the framework of the objective justification concept?
    – Finally I would like to underline that there is no guidance in the Guidelines regarding the integration of the concept of “legitimate objectives” in a competition law analysis under article 101. Although, taking into account the 3 cases under examination, the concept of legitimate objectives is crucial in a competition law analysis under article 101 and 101. 3, the Guidelines do not provide any guidance on the interpretation of the concept. In particular it would be really interesting to examine which are the legitimate objectives that should be taken into account under an article 101 analysis and whether these legitimate objectives should be assessed under article 101 or under article 101. 3.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s