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					                                           Ian S. Forrester, QC

Europe’s Civil Religion: Vertical
Restraints: Has the New Testament
Proceedings in Honour of Valentine Korah

                                                   13 October 2009
Market Integration: Europe’s Unique Competition Law Goal

  !  Consten and Grundig (1966):
      !  “[A]n agreement (…) which might tend to restore the national divisions in
         trade between member states might be such as to frustrate the most
         fundamental objectives of the Community. The Treaty whose preamble
         and content aim at abolishing the barriers (…) could not allow undertakings
         to reconstruct such barriers. Article [81(1)] is designed to pursue this aim,
         even in the case of agreements between undertakings placed at different
         levels in the economic process”
      !  The favourable effects (guarantee & after-sales services, etc) of the
         agreement were insufficient to exempt it under Article 81(3) because the
         territorial restrictions were not “indispensable” to achieve these effects

                                                                                   WHITE & CASE   October 13, 2009

    Europe’s Civil Religion: Vertical Restraints: Has the New Testament Arrived?
1970s: The Success of the Block Exemption Regulation

  !  Under Article 85(1) and 85(3) the ‘traditional’ approach made sense:
      !  Block Exemption Regulation 67/67
           !  Simple and clear with intelligible benefits
           !  An important instrument in the ‘maturing’ of EC competition law policy
      !  Distillers Company Ltd (Commission:1978): Johnnie Walker Red Label
         (Valentine Korah dissenting!)
           !  UK distributors of DCL whiskies paid a lower price if the whisky they
              purchased was consumed in the UK and a much higher price if the whisky
              was consumed elsewhere in the Common Market – dual pricing
           !  [The scheme] “prevented trade between the United Kingdom and the other
              Member States, caused an artificial partition of the Common Market and was
              likely to hinder the establishment of single market among Member States”

                                                                                   WHITE & CASE   October 13, 2009

    Europe’s Civil Religion: Vertical Restraints: Has the New Testament Arrived?
Late 1980s and 1990s: Who is Afraid of Intelligent Enforcement?

  !  Enforcement priorities
      !  Focus on distribution and vertical restraints
      !  Enforcement spread to other areas of competition law
  !  Regulation 1983/83: two muses talking to the drafters:
      !  Exceptions must be narrow or else they would be abused
      !  Exclusive dealing can be efficient and procompetitive
  !  The Commission disregards the new circumstances and continues to treat
    discouragement/bans/monitoring as illegal and incapable of being justified:
       !  Konica (Commission:1988): circulars discouraging export
       !  Parker Pen (CFI:1994): export permitted only after manufacturer’s consent
       !  Tretorn (Commission:1994): marked products supplied in order to identify parallel
       !  Dunlop Slazenger (CFI:1994): products exported repurchased by the manufacturer

                                                                                   WHITE & CASE   October 13, 2009

    Europe’s Civil Religion: Vertical Restraints: Has the New Testament Arrived?
1999: New Rules, New Environment?

  !  1999 Block Exemption Regulation and Guidelines: liberalization of the policy on
   vertical restraints
       !  Distinction between active and passive sales restrictions; active sales restrictions
          allowed in certain circumstances
       !  More like a tax statute than earlier simple regulations
  !  Shift in the enforcement priorities: far fewer decisions on vertical restraints
   after 1999 than before, but contractual restrictions on cross-border trade still
   severely punished:
       !  Volkswagen (Commission Decision 1998; CFI 2000; ECJ 2003): !102 million fine;
            reduced on appeal to !90 million
       !    Opel (Commission Decision 2001; CFI 2003; ECJ 2006): !43 million fine; reduced on
            appeal to !35.5 million
       !    JC Bamford Group (Commission Decision 2002; CFI 2004; ECJ 2006): !39.6 million
            fine; reduced on appeal to !30 million
       !    Nintendo (Commission Decision 2003; CFI 2009): !167.8 million fine; reduced on
            appeal to !137.9 million
       !    Daimler Chrysler (Commission Decision 2002; CFI 2005): !71.8 million fine; annulled
            on appeal

                                                                                   WHITE & CASE   October 13, 2009

    Europe’s Civil Religion: Vertical Restraints: Has the New Testament Arrived?
Sandoz / Prodotti Farmaceutici v Commission (ECJ:1990): “Export
  !  Condemnation of unilateral conduct with bilateral potential
      !  “The systematic dispatching by a supplier to his customers of invoices bearing the
         words "Export prohibited" constitutes an agreement prohibited by Article [81(1)] of
         the Treaty, and not unilateral conduct, when it forms part of a set of continuous
         business relations governed by a general agreement drawn up in advance, based on
         the consent of the supplier to the establishment of business relations with each
         customer prior to any delivery and the tacit acceptance by the customers of the
         conduct adopted by the supplier in their regard, which is attested by renewed orders
         placed without protest on the same conditions.”
  !  Per se prohibition on export restrictions
      !  “For the purpose of the application of Article [81(1)] there is no need to take account
         of the concrete effects of an agreement when it has as its object the prevention,
         restriction or distortion of competition within the common market. In such a case the
         absence in the Commission’s decision of any analysis of the effects of the
         agreement from the point of view of competition does not constitute a defect capable
         of justifying a declaration that it is void.”

                                                                                   WHITE & CASE   October 13, 2009

    Europe’s Civil Religion: Vertical Restraints: Has the New Testament Arrived?
Bayer/ Adalat (CFI: 2000; ECJ: 2004): Body Language

  !  An apparently unilateral conduct of a manufacturer, adopted in its contractual
   relations with wholesalers, does not form an agreement under Article 81,
   unless the Commission established express or implied acquiescence

       !  “For an agreement within the meaning of Article [81](1) of the Treaty to be capable of
           being regarded as having been concluded by tacit acceptance, it is necessary that
           the manifestation of the wish of one of the contracting parties to achieve an anti-
           competitive goal constitute an invitation to the other party, whether express or
           implied, to fulfill that goal jointly, and that applies all the more where, as in this case,
           such an agreement is not at first sight in the interests of the other party, namely the
           wholesalers.” (¶ 102)

  !  The fact, that the wholesalers did not interrupt their business relations with
   Bayer was not sufficient to establish their acquiescence to its policy

                                                                                   WHITE & CASE   October 13, 2009

    Europe’s Civil Religion: Vertical Restraints: Has the New Testament Arrived?
Agency Agreements: Restraints on Parallel Trade?

  !  Notice on Exclusive Dealings with Commercial Agents (1962): exemption of agency
    agreements from the application of Article 81
       !  Immense anxiety that there would be abuses; several cases about “false agency” relationships
       !  Pittsburgh Corning Europe (Commission: 1972)
  !  Draft Notice in 1990: focus on the criterion of economic dependence
  !  Bundeskartellamt v Volkswagen AG and VAG Leasing GmbH (ECJ:1995): focus on the
    criterion of risk allocation
       !  “Representatives can lose their character as independent traders only if they do not bear any of
           the risks resulting from the contracts negotiated on behalf of the principal and they operate as
           auxiliary organs forming an integral part of the principal’s undertaking …However, the German
           VAG dealers assume, at least in part, the financial risks linked to the transactions concluded on
           behalf of VAG Leasing, in so far as they repurchase the vehicles from it upon the expiry of the
           leasing contracts. Furthermore, their principal business of sales and after-sales services is
           carried on, largely independently, in their own name and for their own account.”
  !  Vertical Guidelines 2000
       !  “Genuine” agency
       !  Financial or commercial risk

                                                                                   WHITE & CASE        October 13, 2009

    Europe’s Civil Religion: Vertical Restraints: Has the New Testament Arrived?
Court’s Scepticism on Commission’s Agency Theory

  !  Daimler Chrysler (CFI: 2005)
      !  “The Commission has failed to show that the guarantee payment is commercially
         inadequate and that the agent accordingly bears a genuine financial risk as regards
         the obligation to carry out repair work under guarantee. The contested decision does
         not show that those activities associated with the sale of Mercedes-Benz cars in fact
         give rise to exceptional risks, even if it is true that if they are not properly and
         efficiently managed they may be loss making and reduce, or even eliminate, the
         profits made by the agent in selling cars. The Commission has also failed to prove
         that the obligations imposed on the agent to set up a workshop, to provide after-
         sales servicing and to acquire and stock spare parts give rise to meaningful
         economic risks.”
  !  Confederacion Espanola de Empresarios de Estaciones de Servicio v
    Compania Espanola de Petroleos (ECJ: 2006)
       !  “where an intermediary, such as a service-station operator, while having separate
           legal personality, does not independently determine his conduct on the market since
           he depends entirely on his principal, such as a supplier of fuel, because the latter
           assumes the financial and commercial risks as regards the economic activity
           concerned, the prohibition laid down in Article 81(1) of the Treaty is not applicable to
           the relationship between that intermediary and the principal.”

                                                                                   WHITE & CASE   October 13, 2009

    Europe’s Civil Religion: Vertical Restraints: Has the New Testament Arrived?
2009: Draft Vertical Guidelines

  !  The notion of the agreement (¶¶ 24 – 26): Reversing Bayer/Adalat (ECJ: 2004)?
       !  Tacit acquiescence can be demonstrated by a reduction in distributors’ orders and limitation of
          parallel trade following a supplier’s announcement of a unilateral reduction of supplies in order
          to prevent parallel trade
       !  “Tacit acquiescence may be deduced from the level of coercion exerted” by the manufacturer “in
          combination with the number of distributors who are actually implementing in practice the
          unilateral policy of the supplier”
  !  Agency (¶ ¶ 12- 21): Reversing Daimler Chrysler (CFI: 2005)?
       !  Qualification of an agreement as “genuine” agency agreement conditional on the agent bearing
          no, or only “insignificant”, risks (¶ 15)
             !  Daimler Chrysler: only activities giving rise to “exceptional risks” or “meaningful economic
                risks” matter (¶ 111)
       !  An agent can bear risks related to activities on other markets only if such activities are required
          by the principal and are “indispensable to engage in the selling or purchasing of the contract
          goods or services’’ (¶ 14)
             !  Daimler Chrysler: “the categorisation of the status of the (…) agent under Article 81(1) EC
                (…) is not undermined by the fact that the German Mercedes-Benz agents are required to
                undertake certain activities and assume certain financial obligations under the agency
                agreement. It should also be noted that the activities are carried out on markets other than
                the market at issue in the present case. Even if it must be recognised that those obligations
                expose the agent to certain limited risks, they do not of themselves operate to affect the
                relationship between the applicant and its agents under competition law as regards the
                market at issue in these proceedings.” (¶ 113)

                                                                                   WHITE & CASE       October 13, 2009

    Europe’s Civil Religion: Vertical Restraints: Has the New Testament Arrived?
GSK Spain: A step forward?

  !  GSK notified to the Commission its “General Terms and Conditions” (1998):
     free market price for products which were resold anywhere in Europe; local
     mandatory price set by the Spanish authorities for medicines dispensed in
     Spain, under the national reimbursement system
  !  Commission’s Decision (2001): clearance denied because GSK’s “dual pricing”
     scheme had the object of impeding parallel exports and was “tantamount to
     export ban” as it made exports economically less attractive
  !  The CFI annulled the Commission Decision (2006):
       !  Restrictions on competition were, under Article 81(1), not the object but the effect of
          GSK’s pricing scheme
       !  Decision annulled because the Commission failed to carry out an adequate
          assessment of whether the arrangement can be exempted under Article 81(3) and in
          particular, did not sufficiently refute the argument “that parallel trade was apt to lead
          to a loss in efficiency by … altering GSK’s capacity for innovation” (¶ 303)

                                                                                   WHITE & CASE   October 13, 2009

    Europe’s Civil Religion: Vertical Restraints: Has the New Testament Arrived?
GSK Spain: The ECJ Judgment (6 October 2009)

  !  Regarding Article 81(1) EC, the ECJ does not go as far as GSK had argued, and
    agrees that the Commission could find the existence of a restriction
       !  Restrictions of parallel trade constitute restrictions by object – also in the
          pharmaceutical sector (¶ ¶ 59-60)
       !  The CFI had found that a restriction to parallel trade can only be qualified as a
          restriction by object if it damaged final consumers
  !  The ECJ upheld the CFI’s finding that the Commission failed to conduct a
    proper analysis under Article 81(3):
       !  “The Commission had not considered it necessary to demonstrate in detail whether
           [the GSK’s pricing scheme] would entail a gain in the efficiency for competition” thus
           “the examination carried out by the Commission had not been sufficient”(¶ 131)
  !  For the first time the ECJ:
       !  Confirmed the annulment of the Commission’s Decision to refuse an individual
          exemption under Article 81(3)
       !  Confirmed that hindering parallel trade is not a per se infringement and that it may be
          justified under Article 81(3)

                                                                                   WHITE & CASE   October 13, 2009

    Europe’s Civil Religion: Vertical Restraints: Has the New Testament Arrived?
From Sandoz to GSK: Has the New Testament Arrived?

  !  The mission of market integration has been largely completed; the Consten and Grundig
     rationale is correspondingly less convincing, but still sacred
  !  The Community Court jurisprudence and the Commission send mixed messages
       !  Market integration still among the objectives of EC competition policy
       !  Restraints on parallel trade still treated as a hardcore restraint
       !  Draft Vertical Guidelines broaden the catalogue of hardcore restraints by treating restrictions of
          on-line sales as passive sales restrictions
       !  The Community Courts and the Commission (Draft Vertical Restraints Guidelines ¶ 47) confirm
          the possibility of exempting hardcore vertical restraints under Article 81(3)
  !  Has the time come to abolish the Vertical Block Exemption Regulation and the hardcore
    restraints catalogue?
               !  Yes: it gives certainty albeit at the cost of formalism, slippery market definitions, and complexity
               !  No: we should trust the industry to carry out self-assessment and rely on common sense and
                   general principles

                                                                                      WHITE & CASE                October 13, 2009

    Europe’s Civil Religion: Vertical Restraints: Has the New Testament Arrived?

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