Client Alert

The EC Competition Law Modernization Program; Draft Flanking Measures Put Meat on the Bone

1/26/2004

On October 1, 2003, the European Commission ("the Commission") published a draft regulation ("the draft Procedural Regulation") and several draft notices setting forth detailed provisions on the day-to-day operation of the decentralized enforcement system put in place by Regulation 1/2003.[fn1] Regulation 1/2003 represents a radical restructuring of the system of EC competition law enforcement. Its most important features are:

  • abolition of the notification system. Agreements which fall under Article 81 (1) EC Treaty but fulfill the conditions in Article 81 (3) are valid and fully enforceable ab initio without a prior Commission decision;
  • creation of the European Competition Network ("the ECN"), a network consisting of the Commission and the Member States' national competition authorities ("the NCAs") which will cooperate closely in enforcing EC competition law;
  • strengthening of the Commission's investigative powers; and
  • confirmation of the primacy of the EC competition rules over national competition rules, in particular with respect to Article 81 EC Treaty.
The draft Procedural Regulation sets forth the rules concerning initiation of proceedings, handling of complaints, conduct of investigations and the hearing of the parties concerned. The draft notices further elaborate on these rules, and cover topics such as how the Commission will provide informal guidance relating to novel EC competition law questions, how it will handle complaints, and how cases will be allocated among the Commission, the NCAs and national courts. In addition, the Commission issued draft guidelines concerning the application of Article 81(3) EC Treaty.

The Draft Commission Notice on Cooperation within the ECN ("the ECN Cooperation Notice")

Regulation 1/2003 creates a system of parallel competences in which both the Commission and the NCAs have the power to apply Articles 81 and 82. In line with the rationale underlying the modernization program, the role of the NCAs in the enforcement of the EC competition rules will be expanded, allowing the Commission to focus on matters of particular Community interest. Together the Commission and the NCAs will form a network of public authorities, the ECN, which will cooperate closely in order to ensure both an efficient division of work and an effective and consistent application of the EC competition rules.

The NCAs and the Commission will be connected via an Intranet, which will facilitate the exchange of information.

The ECN Cooperation Notice lays down a detailed set of rules on (i) allocation of work; (ii) exchange of information; (iii) handling of investigations; and (iv) mechanisms to ensure a consistent application of the substantive EC competition rules throughout the ECN.

Allocation of Work

In general, the NCA that receives a complaint or starts an investigation on its own initiative will remain in charge of the case. The governing criterion is whether the NCA in question is "well placed" to investigate the alleged infringement and bring it to an end. In order for an NCA to be considered "well placed" to act, a material link must exist between the infringement and the territory of the Member State of the NCA that has been called upon to start an investigation. Such material link exists when the following three cumulative conditions are met:

  • the agreement or practice has substantial direct actual or foreseeable effects on competition within the NCA's territory, is implemented or originates from the NCA's territory;
  • the NCA is able effectively to bring to an end the entire infringement; and
  • the NCA -- possibly with the assistance of other authorities -- can gather the evidence required to prove the infringement.
The European Commission is considered to be well placed if (i) the agreement or practices have effects on competition in more than three Member States; (ii) it is in the Community interest to develop new competition policy; or (iii) a case is closely linked to other Community policies for which the Commission has exclusive competence or which are more efficiently applied by the Commission.

Re-allocation of a case should only be considered at the outset of the proceedings. If a re-allocation issue arises, the NCAs should endeavor to resolve it within two months starting from the date of the first information sent to the ECN. Unfortunately, there is no mechanism for resolving a divergence of views on the allocation of a case, although as noted below, the Commission can decide to step in and handle any case itself. Moreover, the Notice does not eliminate the possibility of multiple proceedings before several NCAs, which presents many problems, in particular relating to leniency applications (see below). Moreover, the system does not contain a prohibition on double jeopardy as regards proceedings before different NCAs; that is, when one NCA has investigated an alleged infringement and terminated its proceeding without action, there is nothing to prevent another NCA from initiating its own proceeding with respect to the same infringement (if it has jurisdiction over it).

If the Commission initiates formal proceedings, the NCAs are relieved of their competence. The Commission may decide to initiate proceedings at any point in time. It must do so before issuing a statement of objections, publishing a notice indicating the closing of the investigation following commitments, or making a finding of inapplicability. If an NCA is already acting on a case, the Commission must consult the Advisory Committee (the forum where experts from the NCAs discuss individual cases and issue non-binding opinions before initiating proceedings).

Exchange of Information

In order to allow the ECN to detect multiple proceedings and address possible case re-allocation issues as soon as practically possible, Article 11 (3) of Regulation 1/2003 lays down an obligation for NCAs to inform the Commission before or without delay after commencing the first informal investigative measure. Article 11 (2) imposes an equivalent obligation upon the Commission. The information sent to the Commission is to be made available to the NCAs via the Intranet.

The possibility of exchanging information is a precondition for the efficient and effective allocation and handling of cases. The Commission and the NCAs have the power to provide each other with and use in evidence any matter of fact or of law, including confidential information. The exchange of information may take place both between the Commission and the NCAs and among the NCAs. The exchange of information contains a number of safeguards for companies and individuals:

  • The Commission and the NCAs cannot disclose to third parties information "of the kind covered by the obligation of professional secrecy." The term "professional secrecy" covers a company's business secrets, for example.
  • The information exchanged within the ECN can only be used in evidence for the application of Articles 81 and 82 EC Treaty and for the subject matter for which it was collected. However, as the Court of Justice recognized in the Spanish banks [fn2] case, one cannot exclude the possibility that such information may prompt an NCA to start its own investigation into the matter.
  • If the transmitting and receiving NCAs provide for different kinds of sanctions for infringement of the competition rules, information exchanged within the ECN can only be used to impose custodial sanctions where both the transmitting and receiving NCAs have the power to impose such sanctions. Other sanctions, such as fines on individuals, can only be imposed if the same level of protection of the individual's rights is provided by both the transmitting and the receiving NCAs.

The position of companies applying for leniency is considerably undermined by the draft ECN Cooperation Notice. According to the Notice, an application for leniency to a given NCA is not to be considered as an application for leniency to any other NCA. As a result, a company that seeks to benefit from leniency at EU level or in a Member State will have to apply for leniency with all NCAs that are competent to apply Article 81 EC Treaty.

Investigations

Although an NCA can send written requests for information to companies located outside its territory, it cannot carry out inspections outside the territory of its own Member State. Article 22 of Regulation 1/2003 therefore provides that an NCA can ask another NCA for assistance in collecting information by carrying out fact-finding measures. Where an NCA acts on behalf of another NCA, it acts pursuant to its own rules of procedure, and under its own powers of investigation. Given the existence of many different national competition law regimes, problems may arise as a result of the existence of different procedural rules.

Consistent Application of EC Competition Law

Within the ECN the Commission has the ultimate but not sole responsibility for ensuring the consistent application of EC competition law. Before adopting a decision, the Commission must consult the Advisory Committee. There is no parallel obligation for the NCAs to consult the Advisory Committee, although an NCA may decide to do so. Generally, an NCA planning to adopt a decision requiring that an infringement be brought to an end, imposing commitments, or withdrawing the benefit of a block exemption, must inform the Commission thirty days before taking such decision by sending it summaries of the case and the envisaged decision. The Commission will share this information with the other members of the ECN.

The mechanisms to ensure consistency do not appear to be very robust. An NCA planning to adopt a decision is not required to take the Commission's comments into account, and the only way for the Commission to intervene is by taking over the case, a rather drastic measure that might have a significant impact on the companies subject to the investigation.

The Draft Commission Notice on Cooperation between the Commission and the Courts of the EU Member States ("the National Courts Cooperation Notice" or "the NCC Notice")

National courts may be called upon to apply the EC competition rules in administrative, civil or criminal proceedings. The Commission anticipates that national courts in particular will play a role in safeguarding companies' subjective rights. Only national courts -- not the Commission or the NCAs -- can draw the logical conclusion resulting from an infringement of Article 81 or 82 EC Treaty on the enforcement of a contract or on claims of damages. Although national courts may apply EC competition law and national competition law in parallel, the application of national law to agreements must not lead to a different outcome from an outcome arrived at through the application EC competition law. As regards unilateral conduct, Regulation 1/2003 does not contain a specific convergence obligation, although the general principle of primacy of Community law requires that the application of national law may not jeopardize the effectiveness of Community law.

Procedural Rules

In the absence of Community law provisions on procedures and sanctions related to the enforcement of the EC competition rules by national courts, the latter will have to apply national procedural law and impose sanctions provided under national law. However, the application of these national provisions must be compatible with the general principles of Community law, that is:

  • where there is an infringement of Community law, national law must provide for sanctions which are effective, proportionate and dissuasive;
  • where the infringement of Community law causes harm to an individual, the individual should be able to ask the national court for damages; and
  • the rules on procedures and sanctions that national courts apply to enforce Community law (i) must not make such enforcement excessively difficult or practically impossible, and (ii) must not be less favorable than the rules applicable to the enforcement of equivalent national law.
Parallel or Consecutive Application of the EC Competition Rules by the Commission and National Courts

The enhanced role of national courts in enforcing EC competition law increases the risk of conflicting decisions in cases where parallel procedures are conducted by the Commission. When a national court comes to a decision before the Commission does, it must avoid adopting a decision that would conflict with a decision contemplated by the Commission. To that effect, the national court may (i) ask the Commission whether it has initiated proceedings regarding the same agreements, and if so (ii) ask for information on the progress of the proceedings. For reasons of legal certainty, the national court may consider staying proceedings until the Commission has reached a decision.

When the Commission reaches a decision before the national court, the national court can only take a decision that runs counter to that of the Commission after referring to the Court of Justice for a preliminary ruling. The Court of Justice will then decide on the compatibility of the Commission's decision with Community law.

Cooperation Mechanisms

In order to assist national courts in the application of EC competition rules, the Commission is committed to helping national courts where the latter find such help necessary in order to decide a case.

The Commission is obliged to provide factual, legal and economic information requested by a national court concerning a case pending in front of that court. A national court may request, for example, information of a procedural nature to enable it to discover whether a certain case is pending before the Commission, whether the Commission has initiated a procedure, or whether it has already taken a position. The Commission should reply within one month from the request.

In addition, a national court may ask the Commission for its opinion on questions concerning the application of the EC competition rules. The Commission should respond within four months. Although the Commission's opinion is not binding upon the national court, it can be assumed that such an opinion would be very influential and in practice it would be rare for a national court to depart from the Commission's opinion. In any event, the national court can still ask the European Court of Justice for a preliminary ruling.

Finally, the Commission, as well as the NCAs, may, on their own initiative, submit written observations on issues relating to the application of Article 81 and 82 EC Treaty to a national court that is called upon to apply those provisions. Oral observations can only be submitted with the permission of the national court.

The duty of cooperation also extends to national courts and Member States. In order to enable the Commission to submit useful observations, a national court may be asked to transmit to the Commission a copy of all the documents necessary for the assessment of a case.

Member States must send a copy of any judgment applying Articles 81 and 82 EC Treaty to the Commission shortly after such judgment is notified to the parties. This mechanism enables the Commission to become aware in a timely fashion of cases for which it might be appropriate to submit observations when one of the parties lodges an appeal.

Finally, national courts may have a role to play in the context of a Commission inspection. With regard to inspections at business premises, national legislation may require prior authorization from a national court to allow the NCA to assist the Commission if the company decides to oppose the investigation. However, the national court's powers are limited to verifying the authenticity of the inspection decision and the proportionality of the coercive measure. With regard to inspections at non-business premises, Regulation 1/2003 requires prior authorization from a national court before the investigation can be carried out. In this respect, in addition to the powers listed above, the national court will, in particular, assess the reasonable likelihood that business books and records are kept on the premises for which the authorization is requested.

The NCC Notice merely repeats the principles of cooperation previously established in the case law of the European courts and set out in earlier guidelines. Although in practice the national courts have relied on the possibility to obtain information or guidance from the Commission only on a limited number of occasions, it is expected that the strict deadlines set forth in the Notice will increase the use of the information exchange mechanism by national courts.

The Draft Commission Notice on the Handling of Complaints by the Commission under Articles 81 and 82 EC Treaty ("the Complaint Notice")

One of the key features of the modernization program is the increased focus on combating cartels. In order to step up cartel enforcement, the Commission is encouraging companies and individuals to inform public enforcers about suspected infringements of the EC competition rules. There are two ways to do this: lodging a formal complaint or providing information concerning suspected infringements.

Given the system of parallel competences for the application of Articles 81 and 82 EC Treaty by the Commission and the Member States introduced by Regulation 1/2003, a company that claims to be a victim of a restriction of competition must consider the best forum in which to air its grievances. The Complaint Notice gives indications as to whether a company should complain at EU level or national level, and whether it would be advisable to start court proceedings rather than filing an administrative complaint. The Complaint Notice further describes who may make a complaint and how the Commission will respond to complaints.

Commission vs. National Court

While national courts are called upon to safeguard the rights of companies and individuals and thus are bound to rule on cases brought before them, public enforcers cannot investigate all complaints and must set priorities in their treatment of cases.[fn3] The Commission will focus in particular on serious infringements of the EC competition rules (such as cartel cases and abuse of dominance cases) as well as on cases that are important from a policy perspective.

There are a number of other advantages to litigating as opposed to filing a complaint. National courts may award damages; national courts may rule on claims for payment or contractual obligations; national courts may apply civil sanctions of nullity; and national courts are usually better placed than the Commission to rule on interim measures.

The Complaint Notice fails, however, to mention two major disadvantages of litigation before a national court -- cost and delay. In a number of Member States, e.g., Belgium, court proceedings often take several years to reach a conclusion. In addition, competition cases often require detailed economic analysis, which does not come cheap.

Standing

The status of formal complainant under Regulation 1/2003 is limited to natural and legal persons who can show a "legitimate interest." Member States are deemed to have a legitimate interest. The Complaint Notice further provides a non-exhaustive list of entities that can be considered to have a legitimate interest: a trade association may complain to protect the interests of its members; a company may complain about the conduct of its competitor, or when it is likely to be affected by an anti-competitive arrangement. Consumer associations can also lodge complaints with the Commission.

The Commission's Procedures When Dealing with a Complaint

Different stages can be distinguished in the Commission's procedure for dealing with a complaint. During the first stage the Commission examines the complaint and may collect further information in order to decide what action it will take. This stage may include an informal exchange of views between the Commission and the complainant. In the second stage, the Commission will investigate the case further with a view to initiating proceedings. If the Commission considers that there are insufficient grounds for acting on the complaint, it so informs the complainant and offers it the opportunity to submit further comments. In a third stage, the Commission then either initiates proceedings or adopts a decision rejecting the complaint. This decision can be appealed to the European courts.

The Commission will endeavor to inform the complainant within four months following receipt of the complaint whether or not it intends to investigate the case further. This is a significant improvement from past procedures, where the Commission did not consider itself subject to any time deadline.

Interim Measures

Complainants can no longer formally request the Commission to adopt interim measures. It is for the Commission to decide on its own initiative whether or not to impose interim measures. The Complaints Notice encourages complainants to file their request for interim measures before national courts which, according to the Commission, are better placed to decide on such measures.

Draft Commission Notice on Informal Guidance Relating to Novel Questions Concerning Articles 81 and 82 EC Treaty that Arise in Individual Cases ("the Guidance Notice")

Regulation 1/2003 abolishes the notification system. As of May 1, 2004, agreements that fall under Article 81 (1) EC Treaty but fulfill the conditions in Article 81 (3) EC Treaty are valid and fully enforceable ab initio without a prior decision being required. As a result, companies will have to make their own assessment of the legality of their agreements and conduct, taking into account the case law of the European courts as well as the numerous block exemptions, guidelines and notices adopted by the Commission.

In those situations where novel questions of EC competition law arise, the Commission is prepared to provide informal guidance in writing. A copy of the guidance letter will be published on the Commission's website.

The Commission will only consider issuing a guidance letter if the following cumulative conditions are met:

  • the request deals with a question of law for which there is no applicable precedent in the existing doctrine;
  • a prima facie evaluation of the request suggests that clarification of the new issue through a guidance letter is useful in light of the economic importance of the case;
  • the guidance letter can be issued based upon the information provided by the companies, that is, no further fact-finding is required.
From the strict conditions imposed in the Guidance Notice it is clear that the Commission will be rather reluctant to spend significant resources in providing informal guidance. In addition, there are a number of obvious flaws in the system: the Commission does not commit to issuing the guidance letter within a specific time frame; and guidance letters are not binding on the NCAs, national courts, European Courts or even the Commission.

Draft Commission Notice on the Effect on Trade Concept Contained in Articles 81 and 82 EC Treaty ("the Effect on Trade Notice")

The EC competition rules are only applicable if the agreement or conduct has "an effect on trade between Member States." If this test is met, the EC rules come into play and the NCAs and national courts must rely upon Articles 81 and 82 EC Treaty, in addition to the possible use of the national competition rules. Given the increased importance of this criterion in determining which competition rules to apply, that is, the EC competition rules, the national competition rules, or both, the Commission has prepared a notice describing the "effect on trade" test. In the first part, the Effect on Trade Notice describes the four elements that should be addressed when considering whether the test is met. The second part of the Notice applies these general principles to common types of agreements and abuses (such as agreements concerning import and export, cartels covering several Member States, national cartels, vertical agreements confined to one Member State, etc.).

The Effect on Trade Criterion

Four elements must be addressed in the application of the effect on trade criterion: (i) the concept of "trade;" (ii) the interstate dimension contained in trade "between Member States;" (iii) the notion of "may affect;" and (iv) the notion of "appreciability."

The concept of "trade" is not limited to traditional exchanges of goods and services across borders. It is a wider concept, covering all cross-border economic activity. The concept of trade also encompasses cases where agreements or practices affect the competitive structure of the market.

The requirement that there must be an effect on trade "between Member States" implies that there must be an impact on the flow of goods and services or other relevant economic activities involving at least two Member States, without requiring that the effect be felt in the whole of the Member State.

The notion of "may affect" implies that it must be possible to foresee with a sufficient degree of probability on the basis of a set of objective factors of law or fact that the agreement may have an influence, direct or indirect, actual or potential, on the pattern on trade between Member States.

Finally, the notion of "appreciability" means that agreements and practices fall outside the scope of Articles 81 and 82 EC Treaty when they affect the market only insignificantly, having regard to the position of the companies involved in the relevant antitrust markets. The Effect on Trade Notice introduces a new de minimis test according to which there is a presumption that trade between Member States is not appreciably affected when the following cumulative conditions are met:

  • the aggregate market share of the parties on any relevant market within the Community does not exceed 5%; and
  • in the case of horizontal agreements, the aggregate annual Community turnover of the undertakings concerned in the products covered by the agreement does not exceed EUR 40 million; or, in the case of vertical agreements, the aggregate annual Community turnover of the supplier in the products covered by the agreement does not exceed EUR 40 million.[fn4]
Historically, the Commission has interpreted the criterion of "effect on trade between Member States" broadly, finding an effect almost automatically. Although the Effect on Trade Notice goes into painful detail in describing different scenarios, the low thresholds adopted in the new de minimis test tend to confirm that the Commission in practice will continue finding an effect on trade between Member States without much difficulty.

The Draft Commission Notice on the Application of Article 81 (3) EC Treaty ("the Exemption Notice")

By creating an exception system, Regulation 1/2003 provides national courts and NCAs with the power to apply Article 81(3) EC Treaty, which is no longer an exclusive competence of the Commission. In order to assist the NCAs and the national courts in applying their newly established powers, the draft Exemption Notice establishes an analytical framework for the application of Article 81(3) EC Treaty. After a description of the prohibition rule set forth in Article 81(1) EC Treaty, the Exemption Notice discusses in detail the four cumulative conditions that must be fulfilled in order for the agreement to qualify for exemption. In doing so, it breaks a fair amount of new ground. It remains to be seen how these new ideas will be applied by national courts and NCAs (as well as by the Commission itself).

Improvement of Production or Distribution

According to the draft notice, the parties must substantiate the following elements:

  • nature of the efficiencies;
  • link between the agreement and the efficiencies;
  • likelihood and magnitude of each efficiency;
  • how and when the efficiency gain will be achieved; and
  • any costs incurred as a result of trying to achieve the efficiency.
The Exemption Notice refers in particular to the two following types of efficiencies which may be relevant in order to meet this test: cost efficiencies (in the form of development of new production technologies, integration of existing assets, economies of scale or scope) and new or improved products resulting from joint R&D efforts or joint production.

Fair Share for Consumers

This means that the efficiencies identified above must be able to offset any negative impact for consumers caused by the restriction of competition. In particular, the following factors must be taken into account when assessing whether the efficiencies are passed on:

  • market structure and characteristics: the higher the degree of residual competition, the more likely it is that companies will try to increase sales by passing on efficiencies;
  • nature and magnitude of efficiency gains: according to economic theory, output and pricing decisions are mainly determined by variable costs. Hence, the Commission will give greater weight to reductions in variable costs;
  • elasticity of demand: the higher the increase in demand as a result of the price decrease, the greater the chance that the benefit of the efficiency will be passed on;
  • magnitude of the restriction of competition: this consists of a weighting of the increased market power resulting from the restrictive agreement against the resulting efficiencies.

Indispensability of the Restriction

The Exemption Notice sets forth a two-fold test: first, the restrictive agreement must be necessary in order to achieve the efficiencies; second, the individual restrictions of competition that result from the agreement must also be necessary to achieve these efficiencies. This assessment must take place in the economic context in which the agreement operates.

No Elimination of Competition

The last condition requires an analysis of the various sources of competition in the market, the degree of competitive constraint they impose on the parties to the agreement and the impact of the agreement on these constraints.

As regards actual competition, not only market shares and past market behavior are relevant, but extensive qualitative and quantitative economic analysis may also be required.

As regards potential competition, barriers to entry will need to be assessed, taking into account the following factors:

  • regulatory framework;
  • entry costs, including sunk cost;
  • minimum efficient scale;
  • likelihood of sponsored entry;
  • likely response of incumbents; and
  • entry history.
The analytical framework set forth in the draft Exemption Notice is highly theoretical and based on much more rigorous economic analysis than the Commission has ever applied in its exemption decisions. The economic tests will be difficult to apply in practice by the NCAs and, in particular, by national courts, which simply do not have the necessary means or experience to deal with sophisticated economic models. It is expected that the result may well be an ad hoc approach to Article 81(3) EC Treaty as traditionally followed by the Commission.

 



Footnotes

1: For a detailed discussion of this regulation, see our legal update The EU's New Implementing Regulation for the Competition Rules, December 2002.

2: Case C-67/91, [1992] ECR I-4785.

3: The division of work between the Commission and the NCAs is described in the NCA Notice.

4: In the case of purchasing agreements, the relevant turnover is that of the buyer, whereas in the case of licensing agreements the relevant turnover is the aggregate turnover of all the licensees and the licensor's turnover.

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