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The dilemma of Article 81(1) EC - the notion of 'restriction of competition'

Tjernlund-Jemail, Anders (2001)
Department of Law
Abstract
The dilemma of Article 81(1) EC can be described as a fight between control and freedom. Control in the sense that the Commission has taken a formalistic approach on the interpretation of Article 81(1) EC with the result that many agreements are caught by the prohibition. The only way to avoid the automatic nullity of Article 81(2) EC is then through the exemption paragraph, Article 81(3) EC, which is exclusively controlled by the Commission. Freedom in the sense that all agreements that, after balancing pro- and anti-competitive effects, produces a positive net effect and enhances consumer welfare cannot be subject of the prohibition or control. Article 81(1) EC prohibits all agreements 'which have as their object or effect the... (More)
The dilemma of Article 81(1) EC can be described as a fight between control and freedom. Control in the sense that the Commission has taken a formalistic approach on the interpretation of Article 81(1) EC with the result that many agreements are caught by the prohibition. The only way to avoid the automatic nullity of Article 81(2) EC is then through the exemption paragraph, Article 81(3) EC, which is exclusively controlled by the Commission. Freedom in the sense that all agreements that, after balancing pro- and anti-competitive effects, produces a positive net effect and enhances consumer welfare cannot be subject of the prohibition or control. Article 81(1) EC prohibits all agreements 'which have as their object or effect the prevention, restriction or distortion of competition'. Similarly, Section 1 of the Sherman Act 1890 in the United States declares every contract in restraint of trade or commerce to be illegal. In order to distinguish agreements that are in restraint of trade from those who are not, the American courts have developed a rule of reason. The pro- and anti-competitive effects of the agreement are weighed against each other, in its economic context, in order to determine whether the agreement in question enhances or reduces competition. In order to do that, an extensive analysis of the market has to be undertaken. The American rule of reason is solely based on economic theory, while Article 81(1) EC also adheres to the goal of creation of a single market. Businessmen, economists and several commentators have been arguing in favour of a rule of reason under Article 81(1) EC. However, the Commission has only abandoned its formalistic interpretation on a few occasions. The ECJ, on the other hand, has through several judgements narrowed the scope of Article 81(1) EC and opened the door for economic assessments under the paragraph. Because of this, there is a parallel academic debate going on. One concerning whether the ECJ has adopted some form of rule of reason and one concerning whether there should be a rule of reason. There are several arguments put forward in favour of a rule of reason under Article 81(1) EC. Besides strictly economical arguments the system failure with the current system is stressed. Because many agreements falls into the scope of Article 81(1) EC on more or less loose grounds, everyone tends to notify its agreement to the Commission in order to be on the safe side and to get immunity from fines. The Commission lacks the resources to effectively deal with these notifications, which has created a huge backlog. In order to resolve the problem the Commission introduced formalistic block exemptions and informal comfort letters instead of individual formal decisions as was intended by Regulation 17. All this has caused a state of uncertainty if not the agreements were drafted in line with a block exemption. In addition there are also problems caused with private enforcement in national courts. Furthermore, the illogical application of Article 81 is also put forward. Economic analyses are frequently made to determine if Article 81(3) EC is applicable. The issue here is whether or not, or to what extent, a competitive analysis should be made under Article 81(1) EC. The Commission has granted exemptions under Article 81(3) EC, usually justified by the agreements pro-competitive effects. This leads to the fact that the Commission states that the agreement in question both restrict and promote competition, which from an economic perspective is unacceptable. The arguments put forward against a rule of reason does foremost relate to the structural differences between the American system and the system of Article 81 EC. Section 1 of the Sherman Act does not have any possibilities for exemptions as Article 81 EC has. Therefore, Section 1 has to consist of both the jurisdictional and the assessment approach, whereas Article 81(1) EC is jurisdictional and Article 81(3) EC contains the assessment aspect. Thus, it is argued that Article 81(1) EC is designed to confer jurisdiction to the Commission in order to be able to assess the agreement under Article 81(3) EC, which according to the Commission contains all the aspects of a rule of reason. It is argued that any import of the terminology, 'per se' and rule of reason, from the American system therefore only would cause confusion in the EC system. However, the scope of economic assessment under Article 81(1) EC, introduced by the ECJ, has carefully been examined and the conclusion is made that the ECJ has created its own notion of restriction of competition, similar to the ancillary restraints doctrine. The restriction has to be objectively necessary for the attainment of a legitimate business practice and the agreement must be assessed in its legal and economic context in order to acknowledge the effects. Legitimate business practices identified by the Community Courts are exclusive distribution, selective distribution, exclusive purchasing, licensing of intellectual property rights, franchising and in special circumstances joint ventures on the horizontal level. Regard is being taken to the integration goal of the Community. The Commission has, however, changed its approach in their new block exemptions. The new block exemption on vertical restraints has already entered into force and the block exemption on horizontal restraints is on the way. The Commission has now surrendered to economic thinking and created broad flexible block exemptions based on economic theory. However, the 'hard core' clauses are still present representing the integration goal. Furthermore, by the issuance of the Modernisation White Paper the Commission intends to give up its monopoly on Article 81(3) EC. These changes have taken the force out of many of the arguments put forward in favour of a rule of reason under Article 81(1) EC. Thus, the claimed system failure seems to bee on the way to be mended. Economic thinking in flexible block exemptions clears the majority of the concerned agreements without having to draft the agreements after the structure of a block exemption. Still, there is the argument of illogical application of first prohibiting and then exempting. The Commission has still the formal control&semic even doe in practice life is easier for the businessmen and lawyers. The notion of restriction of competition, however, remains the same. The Commission uses, in general, Article 81(1) EC as a jurisdictional paragraph although the ECJ's notion of restriction of competition should prevail. With the new block exemptions it may be hard to know if an agreement is benefiting from a block exemption or falls out of Article 81(1) EC when the two mechanisms partly coincide. This does not cause, for the majority of the agreements, any practical problems, but remains to be a question with fundamental concern. (Less)
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author
Tjernlund-Jemail, Anders
supervisor
organization
year
type
H3 - Professional qualifications (4 Years - )
subject
keywords
Konkurrensrätt, EG-rätt
language
English
id
1562615
date added to LUP
2010-03-08 15:55:30
date last changed
2010-03-08 15:55:30
@misc{1562615,
  abstract     = {The dilemma of Article 81(1) EC can be described as a fight between control and freedom. Control in the sense that the Commission has taken a formalistic approach on the interpretation of Article 81(1) EC with the result that many agreements are caught by the prohibition. The only way to avoid the automatic nullity of Article 81(2) EC is then through the exemption paragraph, Article 81(3) EC, which is exclusively controlled by the Commission. Freedom in the sense that all agreements that, after balancing pro- and anti-competitive effects, produces a positive net effect and enhances consumer welfare cannot be subject of the prohibition or control. Article 81(1) EC prohibits all agreements 'which have as their object or effect the prevention, restriction or distortion of competition'. Similarly, Section 1 of the Sherman Act 1890 in the United States declares every contract in restraint of trade or commerce to be illegal. In order to distinguish agreements that are in restraint of trade from those who are not, the American courts have developed a rule of reason. The pro- and anti-competitive effects of the agreement are weighed against each other, in its economic context, in order to determine whether the agreement in question enhances or reduces competition. In order to do that, an extensive analysis of the market has to be undertaken. The American rule of reason is solely based on economic theory, while Article 81(1) EC also adheres to the goal of creation of a single market. Businessmen, economists and several commentators have been arguing in favour of a rule of reason under Article 81(1) EC. However, the Commission has only abandoned its formalistic interpretation on a few occasions. The ECJ, on the other hand, has through several judgements narrowed the scope of Article 81(1) EC and opened the door for economic assessments under the paragraph. Because of this, there is a parallel academic debate going on. One concerning whether the ECJ has adopted some form of rule of reason and one concerning whether there should be a rule of reason. There are several arguments put forward in favour of a rule of reason under Article 81(1) EC. Besides strictly economical arguments the system failure with the current system is stressed. Because many agreements falls into the scope of Article 81(1) EC on more or less loose grounds, everyone tends to notify its agreement to the Commission in order to be on the safe side and to get immunity from fines. The Commission lacks the resources to effectively deal with these notifications, which has created a huge backlog. In order to resolve the problem the Commission introduced formalistic block exemptions and informal comfort letters instead of individual formal decisions as was intended by Regulation 17. All this has caused a state of uncertainty if not the agreements were drafted in line with a block exemption. In addition there are also problems caused with private enforcement in national courts. Furthermore, the illogical application of Article 81 is also put forward. Economic analyses are frequently made to determine if Article 81(3) EC is applicable. The issue here is whether or not, or to what extent, a competitive analysis should be made under Article 81(1) EC. The Commission has granted exemptions under Article 81(3) EC, usually justified by the agreements pro-competitive effects. This leads to the fact that the Commission states that the agreement in question both restrict and promote competition, which from an economic perspective is unacceptable. The arguments put forward against a rule of reason does foremost relate to the structural differences between the American system and the system of Article 81 EC. Section 1 of the Sherman Act does not have any possibilities for exemptions as Article 81 EC has. Therefore, Section 1 has to consist of both the jurisdictional and the assessment approach, whereas Article 81(1) EC is jurisdictional and Article 81(3) EC contains the assessment aspect. Thus, it is argued that Article 81(1) EC is designed to confer jurisdiction to the Commission in order to be able to assess the agreement under Article 81(3) EC, which according to the Commission contains all the aspects of a rule of reason. It is argued that any import of the terminology, 'per se' and rule of reason, from the American system therefore only would cause confusion in the EC system. However, the scope of economic assessment under Article 81(1) EC, introduced by the ECJ, has carefully been examined and the conclusion is made that the ECJ has created its own notion of restriction of competition, similar to the ancillary restraints doctrine. The restriction has to be objectively necessary for the attainment of a legitimate business practice and the agreement must be assessed in its legal and economic context in order to acknowledge the effects. Legitimate business practices identified by the Community Courts are exclusive distribution, selective distribution, exclusive purchasing, licensing of intellectual property rights, franchising and in special circumstances joint ventures on the horizontal level. Regard is being taken to the integration goal of the Community. The Commission has, however, changed its approach in their new block exemptions. The new block exemption on vertical restraints has already entered into force and the block exemption on horizontal restraints is on the way. The Commission has now surrendered to economic thinking and created broad flexible block exemptions based on economic theory. However, the 'hard core' clauses are still present representing the integration goal. Furthermore, by the issuance of the Modernisation White Paper the Commission intends to give up its monopoly on Article 81(3) EC. These changes have taken the force out of many of the arguments put forward in favour of a rule of reason under Article 81(1) EC. Thus, the claimed system failure seems to bee on the way to be mended. Economic thinking in flexible block exemptions clears the majority of the concerned agreements without having to draft the agreements after the structure of a block exemption. Still, there is the argument of illogical application of first prohibiting and then exempting. The Commission has still the formal control&semic even doe in practice life is easier for the businessmen and lawyers. The notion of restriction of competition, however, remains the same. The Commission uses, in general, Article 81(1) EC as a jurisdictional paragraph although the ECJ's notion of restriction of competition should prevail. With the new block exemptions it may be hard to know if an agreement is benefiting from a block exemption or falls out of Article 81(1) EC when the two mechanisms partly coincide. This does not cause, for the majority of the agreements, any practical problems, but remains to be a question with fundamental concern.},
  author       = {Tjernlund-Jemail, Anders},
  keyword      = {Konkurrensrätt,EG-rätt},
  language     = {eng},
  note         = {Student Paper},
  title        = {The dilemma of Article 81(1) EC - the notion of 'restriction of competition'},
  year         = {2001},
}