The Development in EC Competition Law Concerning Vertical Distribution Agreements

University essay from Lunds universitet/Juridiska institutionen

Abstract: EC competition policy has different objectives, for instance to create the single market and keep it open and competitive. Article 81 EC provides an effective instrument in order to ensure that competition is not distorted. Article 81 EC catches and prohibits anti-competitive agreements, decisions and concerted practices but where the positive effects of an agreement outweigh the negative effects there is a possibility to obtain an exemption under article 81(3). Such an exemption can either be obtained individually or by a block exemption regulation. The Commission has the sole power to grant individual exemptions under Regulation 17/62. This regulation also empowers the Commission to ensure that EC competition law is followed by means of investigations, inquiries and heavy fines. Block exemptions can be received if the agreement is in compliance with any of the block exemption regulations that the Commission has adopted. The Commission has adopted these block exemption regulations in order to decrease its workload and to enforce EC competition law in the most efficient way. Vertical distribution agreements are entered into by parties operating at different levels of the production process, for example a distribution agreement between a manufacturer of a product and a retailer. The reasons why these agreements are entered into are many. For example, the agreement may reduce transaction costs between the parties or the co-ordination can help undertakings to increase their profits. Vertical distribution agreements may have both advantages and disadvantages. The anti-competitive effects that may be seen are market foreclosure by raising barriers to entry, reduction of inter-brand competition, reduction of intra-brand competition and the creation of obstacles to market integration. Vertical distribution agreements may have pro-competitive effects such as to promote non-price competition and improve the quality of services. They are likely to help realise efficiencies and the development of new markets. Vertical restraints may be used for a limited duration, which helps to introduce new complex products or protect relationship-specific investments. Under the former system there was three block exemption regulations that were applicable to certain vertical distribution agreements. Exclusive distribution agreements, exclusive purchasing agreements and franchise agreements could be covered by the block exemption regulations but selective distribution agreements were not covered by any regulation. These block exemption regulations covered only vertical agreements concerned with the resale of final goods and not intermediate goods. Therefore the majority of vertical agreements were not covered by any block exemption regulation. This resulted in legal uncertainty for a large number of vertical restraints. The change in structure of distribution and other developments led to that the Commission got a growing feeling of unease with the effectiveness of its own competition policy concerning vertical restraints. As a consequence the Commission started a thorough review of its policy. The commencement of this review was the adoption of the Green Paper on Vertical Restraints in EC Competition policy. The Green Paper recognised a number of shortcomings in the competition policy. The block exemption regulations then in force comprised rather strict form-based requirements and as a result they were considered too legalistic and worked as a strait-jacket. This was seen in the light of the major changes in distribution that had taken place. Undertakings with no market power suffered unnecessary regulation and this may have prevented the parties from using vertical restraints to improve their competitive position. There was a risk that agreements falling within the scope of the block exemption regulations were distorting competition. The block exemption regulations were form-based instead of effect-based and did not contain any market share limit. This gave rise to the risk that companies with significant market power could benefit from the different block exemption regulations. The Commission therefore adopted Regulation 2790/1999 on Vertical Agreements and Concerted Practices. This regulation is a very wide block exemption regulation that covers all vertical agreements concerning intermediate and final goods and services, except for a limited number of hardcore restraints. The regulation is based mainly on a black-clause approach, i.e. defining what is not exempted instead of defining what is exempted. A market share cap of 30% is used to link the exemption to market power. The market share threshold creates a safe harbour to distinguish the agreements that are presumed to be legal from those which are not legal. If the market share threshold is exceeded negative clearance, individual exemption or prohibition can be received. The new block exemption regulation has only been in force for one year and there has not been any decisions from the Commission or judgments from the Court which give guidance on the interpretation and applicability of the regulation. Therefore it is difficult to predict the impact of the regulation on vertical restraints and if it realises the Commission's new approach towards vertical restraints efficiently. Certainly the new regulation will have several advantages compared to the old regulations but there is still the question whether the regulation will achieve the Commission's objectives concerning competition policy in the most satisfactory way.

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