Prohibited agreements. Part 1

Julija Jerneva

Some statistics

Ten Highest Cartel Fines Per Case Since 1969

Year Case name Amount in €

2008 Car Glass 1 383 896 000

2009 Gas 1 106 000 000

2007 Elevators and Escalators 992 312 200

2010 Airfreight 799 445 000

2001 Vitamins 790 515 000

2007 Gas Insulated Switchgear 750 712 500

2008 Candle Waxes 676 011 400

2010 LCD 648 925 000

2010 Bathroom fittings 622 250 782

2006 Butadiene Rubber/Emulsion Styrene Butadiene Rubber

519 050 000

Ten Highest Cartel Fines Per Company Since 1969

Year Case name Amount in €

2008 Saint Gobain (Car glass) 896.000.000

2009 E.ON (Gas) 553.000.000

2009 GDF Suez (Gas) 553.000.000

2001 F. Hoffmann-La Roche AG (Vitamins) 462.000.000

2007 Siemens AG (Gas insulated switchgear) 396.562.500

2008 Pilkington (Car glass) 370.000.000

2010 Ideal Standard (Bathroom fittings) 326.091.196

2007 ThyssenKrupp (Elevators and escalators) 319.779.900

2008 Sasol Ltd (Candle waxes) 318.200.000

2010 Air France / KLM (Airfreight) 310.080.000

Overview of Article 101 TFEU

§1 – The Prohibition Rule (+ examples)

Are prohibited as incompatible with the internal 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 internal market (…)”

§2 – The Rule of Nullity

“Any agreements or decisions prohibited pursuant to this Article shall be automatically null and void”

§3 – The Exception Rule

§1 may be declared inapplicable to agreements which:1. “contribute to improving the production or distribution of

goods or to promoting technical or economic progress,2. allow consumers a fair share of the resulting benefit,and which do not:3. impose on the undertakings concerned restrictions which

are not indispensable;4. afford such undertakings the possibility of eliminating

competition”

Basic structure of analysis of Art.101

• Agreements violating Article 101(1)

• and not capable of being exempted under Article 101(3)

• are null and void (Article 101(2))

Agreement: horizontal or vertical

Step one• Agreement?• Between undertakings?• Appreciable effect on trade?• Object or effect?

Step two• Derogations (Article 101 (3) TFEU)

• Rule of reason (incl. block exemptions)

Elements (step one)

1. “Agreements”

2. Between “undertakings”

3. Which have appreciable effect on intra-state trade

4. Which have as their object or effect the prevention, restriction or distortion of competition

Unilateral practices/behaviour

• Unilateral action NOT prohibited under Article 101

• Unilateral action is subject to rules of competition law only under Article 102 (abuse of dominance)

Mergers • Are “worse” than agreements”

• Joint ventures between the companies (depending on the level of integration):

• Analysed under the merger rules; or• Analysed under the Article 101 rules

Mergers Agreements

Eliminate competition Reduce competition (preserve at least some level of competition)

Leave permanent effect on the market

Leave temporary effects on the market

Agreements

The concept of an “agreement”• ”Agreement” widely construed

– It is sufficient if the undertakings in question should have expressed their joint intention to conduct themselves on the market in a specific way» Alignment of the competition parameters available to them

• “joint intention” a legally binding agreement not necessary– The form of no importance (oral, signed, unsigned)– “gentlemen’s agreements”– The agreement does not have to be exhaustive

» It is enough just to set the broad framework for the undertakings market conduct

• The engagement of the parties in the agreement– It is enough to be partly engaged in the collaboration

» Breach of contract regarding parts of the agreement

– Passive “members”– An excuse if an undertaking has been “forced” into a cartel?

• Collaboration through the establishment of a company (joint ventures)

“Decisions of undertakings”

• Collusion can take place through the medium of an association: Directly covered by art 101(1)

– Makes it possible to hold associations directly liable

• Association widely defined

• Decision every statement made with the object or effect of influencing the

commercial behaviour of the association’s members– Does not have to be binding (e g recommendations)

“Concerted practices” • A form of co-ordination where undertakings, without

concluding any sort of agreement or establishing a plan of action, knowingly substitute practical co-operation between them for the risks of competition

– This criteria avoids that situations where companies collaborate without any kind of agreement but only on the basis of a common understand falls outside article 101(1)

• It is contrary to the rules on competition for a producer to co-operate with his competitors, in any way whatsoever, in order to determine a co-operated way of action or to ensure its success by prior elimination of all uncertainty as to each others conduct regarding the essential elements of that action

– ECJ, case 48/69, ICI v Commission

Proving concerted practices

• Direct or indirect contact

• Meeting of minds or some kind of consensus– Exchange of information– Unilateral disclosure– Public announcements

• Subsequent behaviour in the market

• Indirect evidence of intention?

Can a concerted practice be inferred from circumstantial evidence alone?• A question of the use of economic evidence in

competition cases• Parallel market behaviour alone in itself not a

concerted practice• BUT: It may however amount to strong evidence of

such a practice if it leads to conditions of competition which do not correspond to the normal conditions of the market having regard to the nature of the products, the size and numbers of undertakings, and the volume of the said market power

– ECJ, case 48/69, ICI v Commission

• Oligopoly markets and economic evidence– Joint dominance

The distinction between “agreement” and “concerted practices”• Overlapping concepts

• No precise distinction– And no use for a precise distinction

• “Concerted practice” important mainly where the Commission or the Courts is forced to rely upon circumstantial evidence alone

Undertakings (market participants)

Competition law and math

Single economic unit doctrine• Two or more separate legal undertakings can be treated as on

undertaking– if the undertakings “form an economic unit within which the subsidiary

has no real freedom to determine its course of action on the market, and if the agreements or practices are concerned merely with the internal allocation of tasks as between the undertakings”» Case 30/87, Corinne Bodson

• Agreements between two undertakings within a single economic unit not regarded as an agreement “between” undertakings

– Escapes the prohibition in article 101(1)

• The rationale:– No freedom to take decisions regarding the market

conduct» Regarded as unilateral conduct» May be caught by article 102 if the undertaking has a dominant

market position

– Internal allocation of functions

• The other side of the coin:– If a subsidiary engages in anti competitive agreements

the mother company will also be regarded as part of the agreement

• The test of control– If a parent company owns more than 50% of the shares

in a subsidiary interdependency is presumed– Minority share holdings may also give control if combined

with specific rights attached to them– One large shareholder and many small– Joint control (50/50)

» Jointly controlled companies must belong to a single group of companies to be regarded as part of one economic unit

The parent company’s responsibility for infringements committed by subsidiary

• Case C-97/08 Akzo Nobel NV vs. Commission ”[W]here a parent company has a 100% shareholding in a subsidiary

which has infringed the Community competition rules (…) there is a rebuttable presumption that the parent company does in fact exercise a decisive influence over the conduct of its subsidiary (…) The Commission will be able to regard the parent company as jointly and severally liable for the payment of the fine imposed on its subsidiary”

100% (or close to) of shares in subsidiary gives rise to presumptionParent company must show that the subsidiary acted independently on

market – difficult (impossible?)! Maximum fine increases – 10% of group turnover If parent company has been involved in prior cartel – increase in fine Increased risk of being subject to specific increase for deterrence

Cross-border trade effect

Cross-border trade effect

• EU competition rules apply to practices which affect trade between Member States

• Impact «within the internal market» («effects» doctrine)• EU-based firms reach an anticompetitive agreement over

price/quantities on US markets – EU competition law is not applicable• Non-EU based firms reach an anticompetitive agreement over

price/quantities on EU markets – EU competition law is applicable

Cross-border trade effect

1. Must be appreciable2. Means decrease, increase or simply diversion of trade

Appreciable effect• The stronger the market position of the undertakings concerned,

the more likely it is that an agreement or practice capable of affecting trade between Member States can be held to do so appreciably

• BPB Industries and British Gypsum, Case T-65/89

• BUT: appreciability requirement was also fulfilled when the sales of the undertakings concerned accounted for about 5 % of the market

• Miller, Case 19/77

“Object” or “Effect”

• “The distinction between „infringements by object‟ and „infringements by effect‟ arises from the fact that certain forms of collusion between undertakings can be regarded, by their very nature, as being injurious to the proper functioning of normal competition”

• Competition Authority v BIDS and Barry Brothers, Case C-209/07

Object cases• The object-category consist of “obvious restrictions of

competition”• European Night Services v Commission, Joined cases T-374-375/94,

384/94

• The “object” rule can be described as a presumption rule: • if object is found, harmful effects on competition are presumed• certain types of agreements under normal market conditions always, or

almost always, restrict competition

Object cases

• Horizontal agreements:• fixing prices• sharing markets• limiting outputs

• Vertical agreements• Fixed and minimum resale price maintenance• Absolute territorial protection• Restrictions on passive sales• Other cases, listed in the “block exemptions”

Effects cases

• All cases, not falling within the “object box”

• Negative effects on competition within the relevant market are likely to occur when:

• the parties individually or jointly have or obtain some degree of market power and

• the agreement contributes to the creation, maintenance or strengthening of that market power or allows the parties to exploit such market power.

Economics and competition

Economic theory usage

• How can the agreement hinder competition?

• Is collusion likely to occur on a given market?

• Is cooperation between competitors likely to succeed or fail? Will it be easy or difficult?

The prisoners’ dilemma

Prisoner A

Prisoner B

Remain silent Confess

Remain silent 0, 0 25, 15

Confess 15, 25 20, 20

Firm A

Firm B

Collude Cheat

Collude 20, 20 15, 22

Cheat 22, 15 17, 17

The prisoners’ dilemma

• Prerequisites for a successful cartel and what complicates the cartel?

• The problem of cheating?

• Efficiency, savings from the horizontal cooperation

What complicates collusion?

• Demand side• Elastic demand (can the cartel set higher prices?)• Balancing buyer power?• Differentiated (vs homogenous products)• Demand booms as a characteristics of the market)• Non-stable demand

What complicates collusion?

• Supply side• Low seller concentration• Existence of competitors with elastic supply• Ease of entry• Cost assymmetries between cartel members• Prior collusion history on the market (more attention from competition

authorities)

Need for the possibility of high gains

• Elastic and constant demand

• Potential fines? (active/inactive competition authorities)

• Members want and can cheat without being detected

Organisation

• Need to meet, agree

• Need to communicate regularly

• Many competitors vs “few” competitors• Reinhard Selton, the Nobel prize winner in “Four are few and six are

many”:• Profitable to collude if less than 5 cartel members• More attractive to cheat if more than 5 cartel members

Thank you!

• Julija Jerneva• Mobile: +371 29131597