A European 'Rule of Reason' in Article 101 of the Treaty on the Functioning of the European Union

Transcription

1 A European 'Rule of Reason' in Article 101 of the Treaty on the Functioning of the European Union Pakorn Yingvoragan* 1. Introduction EU competition law has long been debated over the application of Article 101 of the Treaty on the Functioning of the European Union (TFEU), in particular the question whether there is the US rule of reason imported in Article 101 or whether the EU has developed its own rule of reason. When considering this issue, it is unavoidable to compare Article 101 with Section 1 of the Sherman Act 1890 which in practice is controversial as the EU competition law. The application of the rule of reason in US antitrust law is conducted by courts which have ruled in many cases. The concept of the rule of reason makes the US antitrust law more flexible and reasonable. However, some scholars criticise that it provides a complexity of antitrust litigation and creates uncertainty and unpredictability. 1 This concern seems to be the same as in the EU where the application of Article 101 by the European Commission and the European Court of Justice (ECJ) seems to be confused because they use various considerations which are nearly likely the concept of the US rule of reason. As a result, the existence of the European rule of reason seems to be less clear and imprecise. 2 Thus, it is safe to say that * LL.B. (Second class honour) Thammasat University, Thai Barrister-at-Law, LL.M. (Private law) Thammasat University, Master of Laws in International Commercial Law with Distinction, University of Exeter (Office of the Judiciary scholarship) 1 Barry J Rodger & Angus MacCulloch, Competition Law and Policy in the EC and UK (3 rd edition, Cavendish Publishing Ltd 2004) p Richard Whish & David Bailey, Competition Law (7 th edition, OUP 2012) p.134

2 - 2 - there is no agreed approach whether the European rule of reason exists in the EU competition law. However, it appears that the Commission and the ECJ apply some considerations when considering Article 101 to make it more reasonable. This paper will explore the plausible explanation for the question whether there is, or whether there should be, the European rule of reason under Article 101. First, it will briefly overview the structure of Article 101, compared with Section 1 of the Sherman Act 1890 to find out the rationale for the application of the rule of reason. Second, it will analyse a way in which the Commission and the ECJ interpret and apply Article 101 to particular agreements, comparing with the application of the rule of reason in the US. Third, this paper will discuss the rationale for and against that whether the EU competition law needs the rule of reason. It argues that the EU has developed its own method which can be called 'the European rule of reason.' This is different from the US approach, but it has been applied with the same purpose, that is, to make the competition law more reasonable. 2. The structure of Article 101 of TFEU and Section 1 of the Sherman Act 1890 Pursuant to Article 101, agreements between undertakings which have its object or effect the prevention, restriction or distortion of competition within the common market are prohibited and automatically void. An example of those agreements provides in Article 101 (1) which consists of both horizontal and vertical agreements i.e. price fixing, output controls, market partition, applying dissimilar conditions to similar transactions and tying. Article 101 also provides the exemption for agreements that are subject to be void in Article 101 (1) may be justified if it satisfies the cumulative conditions under

3 - 3 - Article 101(3). This means that it has no per se illegality in Article as it can be exempted as such. The Sherman Act 1890 Section 1 has the provision similar to Article 101(1), but it has no exemption provision as Article 101(3). 4 If it is read strictly by focusing only contextual literature, it is possible that all contracts are illegal. 5 The US courts interpret this provision not by its language but using reasonableness taken into account. That is, the courts adopt the 'rule of reason test' which is the method whereby pro- and anti-competitive effects of the restraint in question are weighed. Thus, it needs to consider whether the restraint is one that promotes competition or one that suppresses competition. 6 This test was first introduced in Standard Oil Co. Of New Jersey v. U.S. 7 which the court had to determine whether or not contracts were subject to a 'per se' rule or 'the rule of reason' and only unreasonable restraints were prohibited. This test undeniably makes Section 1 more flexible. The consideration is given that Article 101 may not need the rule of reason because it has the exemption provision under Article 101(3). However, it seems that it is insufficient as it is limited to four grounds of cumulative conditions 8 i.e. consumer benefit, indispensability, advance in production or promoting technical or economic progress and no elimination of competition. An individual or a firm cannot argue broad grounds under Caleb Vesey, Per se Rules in U.S. And EU Antitrust/Competition Law < accessed 8 April 2014 Richard Whish & David Bailey, supra note 2, p.121 Caleb Vesey, supra note 3. National Society of Professional Engineers v U.S. 435 US 679 (1978) p.691 cited in Mark Furse, Competition Law of the EC and UK (6 th edition, OUP 2008) p US 1 (1911) Richard Whish & David Bailey, supra note 2, p.153

4 - 4 - Article 101(3) such as public policy, environmental policy or non-economic policy. 9 This seems to be a clear distinction between these two provisions that the concept of the rule of reason in the US antitrust law is likely wider than the exemption provided in Article 101(3) because it has no the exhaustive list. 10 As a result, the US rule of reason helps to reduce massively antitrust agreements to a small group. Hawk argues that Article 101(1) needs some economic analysis in order not to broadly apply Article 101(1) to agreements which have little or no competitive effects, 11 or, in other words, Article 101(1) should be applied to agreements that pose a real detrimental effect to the competition. 12 This means that Article 101(1) needs some filter as in the US to reduce the massive restraint agreements which fall within the prohibition under Article 101(1), but not harm to the competition. 3. Is there a European 'Rule of Reason'? 3.1 The Commission's perspective In 1999, the Commission proposed White Paper on modernisation of competition rules (the 1999 WP) 13 which is clear that it opposes to adopt the reasonableness test in the EU. 14 This means that the rule of reason is not accepted in Article 101(1). The Ibid., p.160 Katerina Sideromenou, Similarities and differences between Art. 101 para 3. TFEU and the rule of reason < accessed 8 April 2014 Barry E. Hawk, System Failure: Vertical Restraints and EC Competition Law (1995) 32Common Market Law Review p Richard Whish & David Bailey, supra note 2, p.116 Commission, 'White Paper on Modernisation of the Rules implementing Article 85 and 86 of the EC Treaty' (1999) OJ C132/01 Ibid., paragraph see also Peter I.B. Goldschmidt and Christoph Lanz, Maybe Definitely-Definitely Maybe? EC Competition Law Is the Time Ripe for Reform? Eipascope 2001/ < /eipascope/scop2001_2_2.pdf> accessed 8 April 2014 p.20

5 - 5 - justification is that if an assessment of pro- and anti-competitive effects is considered under Article 101(1), Article 101(3) would be cast aside. 15 However, from this statement, the Commission also stated that it has adopted the rule of reason in limited extent by conducting a balancing of pro- and anti-competitive effects under Article 101(1) and cited that the Court in Nungesser and Pronuptia had already applied in the case. Goldschmidt and Lanz rightly question that whether the Commission needs to adopt partly the rule of reason. 16 The way in which the Commission chose to interpret Article 101 creates a confusion which gives rise to the question that whether or not the application of the rule of reason is conducted under Article 101(1). It can be argued that the Commission partly true to interpret Article 101 more reasonable, but it fails to make a clear cut how this assessment is different from the rule of reason. This confusion became clear when the Commission proposed Guidelines on the application of Article 81(3) of the Treaty (the 2004 Guidelines) which clearly stated that the balancing of proand anti-competitive effects is conducted in Article 101(3). 17 This insists that the rule of reason is not applicable under Article 101(1). 3.2 The ECJ's perspective In many cases, the Court does not apply the prohibition of Article 101(1) to all agreements that constitute restriction of competition. The Court uses an economic analysis when considering the effect of those agreements. For example, having Commission, supra note 13, paragraph 57 Peter I.B. Goldschmidt and Christoph Lanz, supra note 14, p Commission, 'Guidelines on the application of Article 81(3) of the Treaty' (2004) OJ 101/97 paragraph 11

6 - 6 - considered to an exclusive distribution agreement in STM 18 and an exclusive license of maize seeds in Nungesser, 19 those agreements give an exclusive right to another individuals or firms. However, when considering to the effect on competition in the market, it is necessary for new producers or distributors to penetrate to a new market. The Court has ruled that it is ancillary restraints which do not fall within Article 101(1). This shows that the Court not only looks at the anti-competitive effects in those agreements but also regards to the pro-competitive effects. Moreover, in Pronuptia, 20 the Court dealt with a franchise agreement and applied the similar approach from Nungesser. 21 The Court considered to the aims of franchise agreements which are designed to protect the Intellectual Property rights of the franchisor and to preserve the reputation of franchisor. 22 Particularly, those agreements also give rise to consumers who benefit from the increasing of competition, thus it can be justified under Article 101(3). 23 Followed by Metro 24, the Court dealt with the selective distribution systems which were found that it has an advantage and in some aspect it gives benefits to consumers. Yet, it can be justified both Article 101(1) and (3). 25 These cases seem to be less clear whether the Court balances pro- and anti-competitive effects under Article 101(1), 26 but it appears that Case 56/65 Societe Technique Miniere (STM) v Maschinenbau Ulm GmbH [1966] ECR I-235 Case-258/78 L.C. Nungesser KG and Kurt Eisele v Commission [1982] ECR I-2017 Case-161/84 Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgallis [1986] ECR I-374 Vincent Verouden, Vertical Agreements and Article 81(1) EC: The Evolving Role of Economic Analysis (2003) 71, 2 Antitrust Law Journal p.558 Richard Whish & David Bailey, supra note 2, p.129 Case-161/84 Pronuptia, supra note 20, paragraph 24 Case 26/76 Metro SB-Grossmarkte GmbH & Co m KG v Commission [1977] ECR 1877 Ibid., paragraph Pietro Manzini, The European rule of reason-crossing the sea of doubt (2002) 23, 8 European Competition Law Review p.396

7 - 7 - the Court determined to the positive effect of those agreements. In Gottrup-Klim 27, the Court considered a certain restriction in the context that it does not constitute the restriction of competition because it is necessary in order to facilitate cooperative purchasing. 28 It is likely that the Court weighed the positive and negative effects on competition in the provision for the membership of purchasing association which prohibits the members from joining in other competitive association and concluded that it has beneficial effects on competition. Thus, it does not fall under Article 101 (1). After that, in European Night Services 29 this is another case which is clear that the Court conducted an assessment to a cooperative joint venture which has an effect to restrict competition under Article 101(1) by looking at the economic context 30 i.e. the actual condition of its function of the undertakings operate, the products or services covered by the agreement and the actual structure of the market concerned. 31 These two cases quite clear that the Court weighed pro- and anti-competitive effects or implicitly applied the rule of reason in Article 101(1). The controversy appeared when the Court decided the case in Métropole 32 as the Court changed its position from European Night Services. 33 The Court explicitly stated that there is no the rule of reason applicable in the EU competition law, though there are Case C-250/92 Gottrup-Klim v DLG [1994] ECR-I Ibid., paragraph Joined Cases T-374/94, T375/94, T-384/94, T388/94 European Night Services v Commission [1998] ECR II-1533 Renato Nazzini, Article 81 EC Between Time Present and Time Past: A Normative Critique of Restriction of Competition in EU Law (2006) 43 Common Market Law Review p.515 Joined Cases T-374/94, T375/94, T-384/94, T388/94 European Night Services, supra note 29, paragraph 136 Case T-112/99 Métropole Télévision (M6) and others v. Commission [2001] ECR-II 2459 Alison Jones, Analysis of agreements under U.S. And EC antitrust law Convergence or divergence? (2006) 51, 4 Antitrust Bull p.778

8 - 8 - judgements that conduct a flexible interpretation of Article 101(1). 34 The Court reaffirmed in line with the Commission that the pro- and anti-competitive aspects of a restriction are weighed under Article 101(3). 35 After this case, the Court in Van den Bergh 36 and O2 37 clearly followed the decision in Metropole; that is, the application of the rule of reason in Article 101(1) is not accepted 38 and all analysis conducted do not constitute the rule of reason. 39 Nevertheless, it appears that the Court in these two cases brought economic and legal context taken into account. 40 Apart from using the economic analysis, the Court in Wouters 41 also considered to the public policy when considering Article 101(1). The Court dealt with the regulation proposed by Netherlands Bar Association which prohibits lawyers practicing in the Netherlands from entering into multi-disciplinary partnerships with accounts. The Court determined this case by looking to the pro-competitive effects of this kind of restriction and also public interest in the Netherlands. The Court concluded that this regulation aims to protect the integrity of the legal profession and to guarantee the administration of justice, thus, in order to protect these objectives which is necessary, it does not infringe Article 101(1). 42 It should be noted that, according to Whish and Bailey, this case shows that the Court balanced non-competition objectives against a Case T-112/99 Métropole, supra note 32, paragraph 76 Ibid., paragraph 74 Case T-65/98 Van den Bergh Foods Ltd v Commission [2003] ECR II-4653 Case T-328/03 O2 v Commission [2006] ECR-1231 Case T-65/98 Van den Bergh, supra note 36,paragraph Case T-328/03 O2, supra note 37, paragraph Case T-65/98 Van den Bergh, supra note 36, paragraph 84 and Case T-328/03 O2, supra note 37, paragraph 71 C-309/99 Wouters v Algemene Raad van de Nederlandse Orde van Advocaten [2002] ECR I-1577 Ibid.,paragraph 110

9 - 9 - restriction of competition and found that the former outweighs the latter. 43 This means that, on the one hand, non-competition factors which relate to domestic interest can be taken into consideration. 44 On the other hand, the Court established policy assessment 45 apart from economic assessment under Article 101(1). Likewise, in Meca-Medina 46 the Court dealt with the relevant anti-doping rules which aim to combat doping. The Court has ruled that though its penalties are doping ban which has an effect that athletes has no freedom, in order for fairly competitive sport and the equal chances for athletes, athletes' health, the integrity and objectivity of competitive sport and ethical values, the restriction is inherently in the pursuit of that objectives and proportionate. Thus, it falls outside Article 101(1). 47 This is again where the Court conducted an assessment under Article 101(1) by using the policy grounds as in Wouters and balancing the positive and negative effects with regard to its objectives of the rules. From these two cases, it shows that the independence of professions and the rules of sport federations are the public goals that the Court takes into account to legitimate the restraints of trade. 48 However, it is questionable that whether the Court still follows Richard Whish & David Bailey, supra note 2, p.131 Giorgio Monti, Article 81 EC and Public Policy (2002) 39 Common Market Law Review p.1088 Ibid., p.1098 Case C-519/04 P Meca-Medina and Majcen v Commission [2006] ECR I-6991 Ibid., paragraph Davide Maresca, The Importation of the Rule of Reason in European Competition Law: The Implications of Economic and Behavioral Theories and the Case of Port Services August 2012 < article=1000&context=davide_maresca> accessed 8 April 2014 p.26-27

10 the decision in Metropole, particularly it does not refer to Metropole. 49 It seems that the Court uses the way in which the Court conducted before the decision in Metropole; that is, the Court partly applied the rule of reason when considering Article 101(1) by conducting an overall assessment and weighing pro- and anti-competitive effects. The Court made more confusion again in Brasserie Nationale SA 50 as the Court imported the rule of reason directly when considering the case. The Court concluded that an agreement that has a restriction by object such as a sharing of clientele cannot be exempted under Article 101(1) by applying a rule of reason. 51 From this case, it is clear that there is an integration of American idea, the US rule of reason, into Article 101(1) which contradicts to the decision in Metropole. 3.3 Analysing the Commission and the ECJ's perspective It is clear from the 2004 Guidelines and the decision of the ECJ in Metropole that they strongly reject to apply the rule of reason under Article 101(1), though the Commission has accepted that the protection of the competition on the market is the objective of Article Whish and Bailey agree with this point and argue further that the Commission and the ECJ should apply Article 101 in reasonable way. 53 In accordance with this argument, in practice the Commission and the ECJ do not strictly interpret Article 101(1). They use various criteria for assessment to determine whether or not the restrictive agreements fall within Article 101(1), in particular the use of economic Alison Jones, Analysis of agreements under U.S. And EC antitrust law Convergence or divergence? (2006) 51, 4 Antitrust Bull p.782 Joined Cases T-49/02 to T-51/02 Brasserie Nationale SA and Others v Commission [2005] ECR II-3033 Ibid., paragraph 85 Alison Jones, supra note 49, p.811 Richard Whish & David Bailey, supra note 2, p.136

11 analysis. 54 This means that though the restrictive agreements are subject to the prohibition of Article 101(1), it must be looked beyond the negative effects of the agreements and determine the economic impact on the market. 55 Consequently, those agreements do not infringe Article 101(1) if the positive effects far outweigh the negative effects. This argument is supported by Furse. He argues that, in Metropole, it should not be read as the Court refused to weigh pro- and anti-competitive effects at all because the Court did not explicitly say that. It is likely that the Court rigorously applied the effect-based assessment to be conducted under Article 101(1). 56 This means that economic analysis should be taken into consideration under Article 101(1) and weighing the pro- and anti-competitive aspects is still conducted under Article 101(3). In contrast, Jones and Sufrin argue that the Court sometimes goes beyond to say that an agreement does not restrict competition. It weighs pro- and anti-competitive effects of the restrictive agreement under Article 101(1). 57 They refer this point to the statement made by Advocate General Leger in Wouters that the Court has made a limited application of the rule of reason when considering certain classes of agreement. And yet some scholars argue that this means that the Court partly applies the rule of reason such as in Nungesser Commission, supra note 17, paragraph 18 see also Vincent Verouden, Vertical Agreements and Article 81(1) EC: The Evolving Role of Economic Analysis (2003) 71, 2 Antitrust Law Journal p.527 Vincent Verouden, supra note 54, p.539 Mark Furse, supra note 6, p.218 Alison Jones and Brenda Sufrin, EU Competition Law: Text, Cases and Materials (OUP 2014) p.247 Claudia Desogus, Competition and Innovation in the EU Regulation of Pharmaceuticals: The case of Parallel Trade (2010) <repub.eur.nl/pub/19408/proefschrift%20claudia%20desogus.pdf> accessed 8 April 2014 p.302

12 Irrespective of whether it is, wholly or partly, the US rule of reason, it is clear that under the EU competition law regime, the Commission and the ECJ created the European rule of reason in Article 101(1) which is different from the US rule of reason. 59 This is because these two provisions have different objectives and structure. 60 The European rule of reason can be considered as an assessment applied by the Court in order not to enforce the restrictive agreements to be subject to the prohibition of Article 101(1) by considering to the economic justification i.e. in Metro, Gottrup-Klim, European Night Services, Metropole, O2 and Van den Bergh; Public policy justification i.e. in Wouters and Meca-Medina; the necessity to new competitors or distributors to penetrate to a new markets i.e. in STM, Nungesser and Pronuptia. This is sometime known as 'ancillary restraints' or 'objectively necessary' 61 which Verouden argues that it is an element of the rule of reason. 62 Therefore, all of these assessments can be seen as a proxy of the EU style of the rule of reason. 4. Should there be the rule of reason in the EU competition law? As mentioned, the concern initially arose due to the fact that the Commission broadly interprets Article 101(1). As a result, it needs some assessment to be considered under Article 101(1) in order for some restrictive agreements which cause positive effects or have not harmful consequences to competition not to be caught by the prohibition in Article 101(1). This allows the Court to take decisions with regard to the economic reality. 63 Whish and Bailey rightly state that the competition Vincent Verouden, supra note 54, p.564 Barry J Rodger & Angus MacCulloch, supra note 1, p.183 Commission, supra note 17, paragraph 18(2) Vincent Verouden, supra note 54, p.539 footnote 56 Pietro Manzini, supra note 26, p.394

13 law is related to an economic, thus when considering whether an agreement has an anti-competitive effect, it should be determined by using economic analysis. 64 This emphasises that there should be the European rule of reason to be conducted under Article 101(1). Having regarded to the burden of proof under the bifurcated structure of Article 101, 65 a claimant i.e. National Competition Authority, the Commission or a party alleging competition infringement has the burden of proof that undertakings in question have its object or effect to destroy the market; that is, an agreement restricts the economic freedom of either a party to the agreement or a third party regardless of the effect on prices, output or consumer welfare. 66 An alleged party has a burden to rebut or defend exemption under Article 101(3) which is quite difficult because it is too rigid. Advocate General Lagrange points out that this seems to be illogical why the individuals or firms cannot avail themselves by invoking Article 101(3) when considering the condition under Article 101(1). 67 If the rule of reason is put in place under Article 101(1), the alleged party can prove that there are clear benefits arising from the restraints and it would be easier as they can argue an economic or policy ground. Although some scholars argue that having the European rule of reason in Article 101(1) will affect the essential structure of Article 101 because it Richard Whish & David Bailey, supra note 2, p.117 Brenda Sufrin, The Evolution of Article 81(3) of the EC treaty (2006) 51,4 The Antitrust Bulletin p.968 James C. Cooper, Luke M. Froeb, Daniel P. O'Brien, and Michael G. Vita, A Comparative Study of United States and European Union Approaches to Vertical Policy (2005) 13,2 Geo. Mason L. Rev < accessed 8 April 2014 p.298 Cited in Okeoghene Odudu, A new economic approach to Article 81(1) Case Comment (2002) 27,1 European Law Review p.105

14 makes Article 101(3) ineffective, 68 it can be justified that at the end Article 101 should be read as a whole. 69 That is, the restrictive agreements can be justified in both Article 101(1) and (3). This will help to avoid the bifurcated consequence, and, as a result, it will benefit to the common market because it will make the EU competition law not to enforce all restrictive undertakings which may cause positive effects to the market. Moreover, the Commission also benefit from this as the Commission has not a workload to provide a block exemption under Article 101(3) Conclusion Article 101 has long been debated whether there is the application of the rule of reason under Article 101(1). Compared with the US Sherman Act 1890 Section 1, this rule has been accepted and widely used by the US courts because there is no exemption provided in that provision. In the EU, the Commission and the ECJ in Metropole insist that Article 101 already has the exemption in Article 101(3), thus it does not need the rule of reason in Article 101(1). This gives rise to more concern that the application of Article 101(1) may be too broad. As a result, all agreements including the one that gives positive effects to the market are prohibited. Nevertheless, after reviewing the Commission's perspective and the EU case law, this paper has argued that there is the European rule of reason in Article 101(1) which is not the same concept as the US rule of reason. Due to the different objectives and Giorgio Monti, supra note 44, p see also Christopher Bovis, Proposed EU changes to competition laws (2000) 31 Amicus Curiae 8-13 < accessed 8 April 2014 p.10 Okeoghene Odudu, supra note 67, p.105 Mario Siragusa, A Critical Review of The White Paper on the Reform of the EC Competition Law Enforcement Rules (1999) 23,4 Fordham International Law Journal p.1091 in footnote 2

15 structure of competition law, the EU has its own rule of reason in Article 101(1). This argument does not contradict to the 1999 WP, the 2004 Guidelines and the EU case law. Although those explicitly show that the rule of reason is not accepted, it cannot be read as it denies to weigh positive and negative effects when considering restrictive agreements under Article 101(1). It appears that the Court uses an overall assessment including the economic and legal context and the policy ground, or regarding to the necessity of new competitors or distributors to penetrate to the market and the consumer benefits in order to justify the restrictive agreements not to fall under Article 101(1). This seems to be the concept that is not stated in Article 101(1), but it is ruled by the Court. Thus, it cannot be exaggerate to say that the Court has already developed the European rule of reason under Article 101(1). This paper has argued further that there should be the European rule of reason in Article 101(1). This is because it is believed that competition law should not enforce all restrictive agreements. Only those agreements that have negative effects to the market should be prohibited. With regard to the structure of Article 101, though it has the exhaustive exemption list in Article 101(3), it is too rigid and the alleged party needs to prove all cumulative factors. In contrast, if there is the rule of reason in Article 101(1), the alleged party can argue more grounds which are broader than Article 101(3). As a result, the undertakings which cause positive effects and do not fall under Article 101(3) can be justified under Article 101(1). Although some argue that Article 101(3) will be ineffective, it can be suggested that the justification under Article 101(1) and (3) is different and Article 101 should be read as a whole. This will make the competition law more reasonable when applying in practice.