Anti-competitive activity in the single market

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Title: Discuss the effectiveness of Articles 81 and 82 of the EC Treaty in preventing distortions to the operation of the single market ANSWER In The Wealth of Nations [1], published in 1776, Adam Smith reasoned that countries should strive towards the economic goal of a perfectly free market. He argued that a market undistorted by impediments and barriers to the free play of trade would allow the most efficient and successful producers to perform at an optimum capacity and produce substantial economic benefits for all participants in the market, and he stressed that such benefits could not be obtained in markets where competitive conditions had not been optimised. The European Union adopted this theory from its inception in the 1950s in the form of the European Economic Community. The competition law provisions of the Treaty of Rome[2] have always been fundamental to the organisation’s philosophy and drive towards the integration and refinement of the national economies of its member states and thus of the combined economy of the Single Market, which grew out of the Common Market when the EU itself was established by the Treaty on European Union (Maastricht Treaty) in 1992.[3] The main competition law rules, which are now to be found in Articles 81 and 82 EC[4] are directed at controlling the behaviour of private firms. These articles will be explained and discussed in turn. Article 81 EC: ‘The Community Cartel Buster’ It is obvious that a market is likely to be distorted if undertakings which under normal, healthy competitive conditions should be operating in competition with one another choose instead to cooperate with each other in order to manipulate the market in their favour. This form of cooperation inevitably causes laxity and weaknesses in the flux of trade which negatively affects the market as a whole serves to impact on the interests of consumers served by the market. Consequently the European Union maintains a comprehensive prohibition on such cooperative activity in the form of Article 81. This Article is assiduously enforced and swingeing penalties can and are imposed on companies found to infringe it. The text of Article 81(1) states as follows: “The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: 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.” Following from this wide-ranging and far-reaching clause, Article 81(2) provides that any agreements or decisions covered are automatically void. Of course, a provision is only as effective as its practical interpretation and application.. Consonant with the overarching objectives of the European Union of market integration and efficiency, the European Court of Justice has consistently shown itself prepared to interpret the essential concepts and terms of Article 81 with full contextual and purposive force. This interpretative policy has been adopted so as to lend the provision the greatest possible scope and utility in its role as a guardian of market competitiveness. The term “undertaking” is for example, central to the application of the provision. It is left undefined in the Treaty but the European Court has chosen to interpret the word in the widest conceivable sense to embrace “any legal or natural person engaged in some form of commercial or economic activity”: Commercial Solvents Corp v Commission.[5] Many different forms of entity have been deemed to constitute ‘undertakings’ for the purposes of the provision, hence allowing its application. These include public undertakings where they are found to participate in commercial activity as in the case Bodson v Pompes Funebres des Regions Liberees[6]. Partnerships were also found covered by the term in Commission Decision (73/323) Re William Prym-Werke[7]. Interestingly, economically active individuals - including for example an opera singer in Re Unitel[8] and an inventor in AOIP/Beyrard[9] have also been ruled to qualify as undertakings. Moreover, in circumstances where such act in a commercial or quasi-commercial endeavour even non-profit making organisations and charitable organisations can be held to constitute undertakings: see Commission Decision GVL.[10] The scope and power of Article 81 can be underlined by the fact that due to the European Court of Justice’s application of the principle of extraterritoriality, even companies based exclusively outside the European Union and its Single Market can be brought to book under the competition provision if their activity falls within Article 81 and it has an anti-competitive impact on the flux of trade within the Community. The Ahlstrom (Wood Pulp)[11] case involved companies based in Scandinavia (which at the time of the litigation was still outside the EU) and North America that had conspired to manipulate prices for wood pulp which had artificially influenced the EU market. The Commission initiated Article 81 action against the companies and the European Court found against them, grounding its jurisdiction on the location of the effect of the behaviour of the companies and not on the location of the companies themselves. The Article 81 provision that agreements must be between undertakings is also very generously interpreted and applied so as to give full expansive force to the prohibition. It is submitted that the only situation in which the Court of Justice will typically refrain from acting against companies in a cooperative relationship is where those companies are in a parent-subsidiary situation. The reason for this is that such companies to all intents and purposes combine to comprise a single economic unit and therefore no competitive relationship would usually exist to be compromised in the first place. An example can be found in Centrafarm BV v Sterling Drug Inc[12]. In similar fashion, the effectiveness of Article 81 has been ensured by the Court of Justice by its definition of the central concept of “agreement” as between undertakings. In the case of ACF Chemiefarma NV v EC Commission[13], for example, the Court expressly stated that even a so-called ‘gentleman’s understanding’ between competitive companies would justify prohibitive sanction if it was found to amount to: “the faithful expression of the joint intention of the parties to the agreement with regard to their conduct in the Common Market.” As for the concept of agreement itself, the utility and efficacy of the prohibition is also maintained by the fact that the European Court does not concern itself with the distinction between vertical and horizontal agreements in its application of Article 81. Vertical agreements can be defined as those between undertakings at different levels of the market. Such an agreement might be made between a manufacturer and a wholesaler or retailer, and a tying or tied agreement is one example. On the other hand, a horizontal agreement is deemed to be those which are struck between undertakings operating at the same level of industry. Horizontal agreements therefore include those made between two manufacturers or two wholesalers in a market, and such arrangements might amount to, for example, price fixing. The point is that the Court is unconcerned with the differences between the two classes of agreement: both forms of cooperation are potentially anti-competitive and both are accordingly prohibited as detrimental to the free play of commerce in the Single Market. Article 81 also includes the concept of the ‘concerted practice’. This is clearly in place to allow the Court of Justice to rule against undertakings who attempt to avoid even the loose interpretation of ‘agreement’ by operating deliberately secretive, subtle and casual arrangements between themselves.. However, the efficacy of Article 81 is such that even this much less tangible species of collusion than agreements or decisions is caught by the provision. Cooperatieve Vereniging Suiker Unie UA & Ors v EC Commission[14] is a leading case on the issue, where the court stressed that a concerted practice would be found where 3 elements are found to co-exist: 1. Coordination in some form must replace the independent action between undertakings; 2. Coordination must be maintained by some form of contact, be it direct or indirect; 3. The object of the coordination must be to ‘remove in advance any uncertainty as to the future conduct of their competitors’. All of these concepts are very generously applied with the aim of promoting the effectiveness and reach of Article 81. Article 82 EC Article 82 operates in partnership with Article 81 in regulating the Single Market. As stated, Article 81 endeavours to promote effective competition in the Union marketplace by prohibiting multilateral coordination, anti-competitive agreements and other economic collusions between undertakings. Article 82 in turn provides a control mechanism applicable to the unilateral conduct of single firms that enjoy what is referred to as a dominant position in the markets in which they operate.. It is argued that this simple division of responsibility and scope lends a cogent symbiosis to the relationship between these two central provisions of EU competition law. Article 82 states as follows: “Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States.. Such abuse may, in particular, consist in a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; b) limiting production, markets or technical development to the prejudice of consumers; c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; d) making 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.” There is a manifest justification for Article 82. If an ordinary competitive firm attempts to do business on unreasonable trading terms or charge excessively high prices for its goods in a competitive market, the market will react in such a way as to ensure that the firm simply loses business and is forced to reconsider its policies or fail. However, if the undertaking has a dominant position (an economically powerful position defined by market share) within the relevant market it may have the freedom to act in such a way as to manipulate the market to its own ends without being subject to a market reaction that causes it to change its harmful business practices. Article 82 is designed to deal with just this situation, and it is submitted that it does so effectively when employed. As has been observed, the key terms and concepts of Article 81 EC are augmented by teleological and contextual interpretation. Precisely the same policy is adopted by the European Court of Justice in relation to the fundamental terms of Article 82, and for precisely the same reasons of market integrity, integration and efficiency. As in the case of all prohibitions, the effectiveness of Article 82 should be measured by its application. Market dominance is measured once the Court of Justice has defined the so-called relevant product market, which will be the specific product range and specific area within the Single Market in which it is claimed that dominance is enjoyed by the undertaking in question. As Michelin v EC Commission[15] illustrated, a product market will be found to include any product which is “equivalent to or interchangeable for the specific product being marketed by the dominant company”. This test is fundamental to the efficacy of Article 82 for compelling tactical reasons. The ultimate size and scope of the product market defined will typically be the determining factor in whether a company is considered dominant within it, with all the entailed consequences of that finding.. The interests of the Single Market consumer are considered paramount by the European Court in this regard. Product interchangeability with other products is judged from the vantage point of the consumer, taking into account the characteristics, price and uses of the product in question. Article 82 litigation is won and lost on this technical aspect of the prohibition. Allegedly dominant undertakings seek to contend that broad consumer preferences and uses should be adopted, for the reason that this inevitably increases the size of the relevant product market and therefore dilutes the undertaking’s dominance within it, making sanction under Article 92 less likely. On the other hand, the European Commission is usually at pains to argue that narrowly defined consumer preferences and uses should be adopted to reduce the size of the market for review and thus concentrate the undertaking’s market power within it. The issue of product interchangeability therefore necessitates an investigation into whether the scrutinised product can be replaced by other goods that satisfy the same consumer uses, expectations and demands. As Europemballage Corp and Continental Can v EC Commission[16] illustrates, if a product can be substituted then the product under review is deemed to constitute part of a larger product market which includes all those products found to be freely interchangeable with each other. If, because of its individual characteristics, a product cannot be easily replaced or substituted by other goods, it is deemed to form a relevant product market on its own. Given the fact that the European Court of Justice habitually prefers interpretations of EC competition law that reinforce and underpin the power of the Treaty, it can come as no surprise that the Commission normally wins the argument on market definition.. As stated, narrow market definition means it is easier to find dominance which in turn means that Article 82 can be successfully applied in more cases. The seminal case of United Brands v Commission[17] saw the Court hold that the banana formed a product market all of its own, independent to that of other fresh fruit, because it was ruled that bananas had unique qualities that distinguished them from other fruit. Taking the perspective of the consumer, the Court found that the size, shape and softness of bananas made them particularly attractive to certain ends of the market, including the elderly and the very young (which share a distinct lack of teeth necessary for the consumption of firmer kinds of fruit.) EU Competition Law Sanctions The end product of any prohibition’s effectiveness can be found in the sanctions that it imposes. It is submitted that Article 81 and 82 can certainly be deemed effective based on the penalties levied for their breach. Moreover, the European Court’s commitment to the efficacy and enforcement of these competition provisions is also manifest on perusal of the penalties it has endorsed. Fines of up to ten per cent of annual turnover can be imposed in cases of breach of Articles 81 or 82. In light of the fact that many of the undertakings concerned are global enterprises with vast turnovers the penalties involved can and are often draconian in size. In Tetra Pak Rausing SA (II) v Commission[18] in 1991 a single fine of 75 mECU was levied against the Scandinavian-based carton board company. 1994 saw a total fine of 248 mECU was imposed on key members of the Cement Producers’ Cartel[19] and the Austro-German car manufacturer Volkswagen suffered an individual penalty of 102 mECU for abuse of its dominant position in 1998.[20] Concluding Comments As has been discussed, Articles 81 and 82 of the Treaty of Rome operate effectively and in symbiotic partnership to combat anti-competitive activity in the Single Market. These provisions are lent power and efficacy by the generous and purposive interpretative stance of the Court of Justice and the proactive attitude of the European Commission.. The terms of the Articles themselves are, it is submitted, about as comprehensive and effective as they could be. The enduring weakness of the EU competition enforcement regime, if there is one, lies not in the text of the legal framework but in the lack of resources, in terms of time and manpower, devoted to the policing of the market. THE END GLOBAL DOCUMENT WORD COUNT : 2840 (answer only 2695) I have allowed a small overrun because I decided it was appropriate to reproduce the text of Article 81 and 82 in the answer in extenso and these words should not be counted. BIBLIOGRAPHY Adam Smith, The Wealth of Nations (1776) (Great Minds Series) (1991) Prometheus Books.. Steiner and Woods, Textbook on EC Law, (2003) Blackstone Press. Treaty establishing the European Economic Community: http://europa.eu.int/eur-lex/lex/en/treaties/dat/12002E/htm/C_2002325EN.003301.html Tillotson and Foster, Text, Cases and Materials on European Union Law, (2003) Cavendish Publishing Kent, P., Law of the European Union, (2001) Longman Recent Guidance on Fining Policy, Spink, P., [1999] European Competition Law Review, 101-108 Cases as footnoted 1

Footnotes

[1] Adam Smith, The Wealth of Nations (1776) (Great Minds Series) (1991) Prometheus Books. [2] See the consolidated version of the Treaty establishing the European Economic Community: http://europa.eu.int/eur-lex/lex/en/treaties/dat/12002E/htm/C_2002325EN..003301.html [3] See for further comment and elaboration: Textbook on EC Law, Steiner and Woods, (2003) Blackstone. [4] Previously Article 85 and 86 EC (the Treaty of Rome was renumbered by the Amsterdam Treaty). [5] Cases 6 & 7/73 [1974] ECR 233. [6] Case 30/87 [1988] ECR 2479. [7] 1973 OJ L296/24. [8] [1978] 3 CMLR 306. [9] (1976). [10] (1983). [11] Cases 89 & 125-129/85 [1993] 1 CEC 466. [12] Case 15/74 [1974] ECR 1147. [13] Case 41/69 [1970] ECR 661. [14] Cases 40-48 114/73 [1975] ECR 1663. [15] 322/81 [1983] ECR 3461. [16] 6/72 [1973] ECR 215. [17] C27/76 [1978] ECR 207. [18] T-51/89 [1991] 4 CMLR 334. [19] Decision 94/815 [1995] 1 CEC 2092. [20] Recent Guidance on Fining Policy, Spink, P., [1999] European Competition Law Review, 101-108.
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