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Article 81 Paul Hughes Brussels 30th March 2005 Presentation Overview • Article 81(1) - its width • Horizontal agreements • Vertical agreements • Article 81(2) – nullity sanction • Article 81(3)- capable of exemption? Article 81(1) - structure • Agreements between, concerted practices and decisions by associations of • Undertakings • Which may affect trade between member states • Having as their object or effect • Prevention restriction or distortion of competition in EU Article 81(1) • Agreements: ACF Chemiefarma NV; BP Kemi; Sandoz; Ford Europe; Adalat • Concerted practice: Dyestuffs; Suiker Unie; Polypropylene; Wood Pulp • Decisions of associations: Vereeniging van Cementhandelaren; EPI Code of Conduct Article 81(1) - Undertakings • Public sector: Aeroports de Paris; Bodson; Hofner & Elser; Fenin • Employees/self employed: Becu; Reuter/BASF; Albany; • Share ownership: Viho; Hydrotherm/Andreoli • Professions: Wouters; EPI Code of Conduct Article 81(1) – Effect on Trade • Consten & Grundig – concept defines boundary between national and EU law; • Key issue is capacity to affect imports/exports; Dutch Electro-technical Fittings Equipment; BNIC v Clair; Fire Insurance Bagnasco; Dutch Banks Javico v Yves St Laurent • Commission Guidelines 2004/C 101/07 Article 81(1) – Object or Effect • Object: price fixing, allocation of markets or customers, output or sales limitations • Effect: requires economic analysis Delimitis v Henninger Brau European Night Services Van den Bergh Article 81(1) – Restriction of Competition • Commission Notice on Agreements of Minor Importance - where parties are: – Competitors – aggregate market share cap of 10% – Not actual/potential competitors - individual market share cap 15% – Classification difficult – 10% cap applicable • Parallel networks of restrictive agreements cumulatively affecting competition in relevant market – caps reduced to 5% Article 81(2) - Nullity • English blue pencil test – agreement may be invalid • Passmore v Morland plc: market shares may rise • Right of damages: Courage Limited v Crehan Relationship of Articles 81(1) and 81(3) • Article 81(1) infringed? SLT v Maschinenbau Ulm; Metro; Pronuptia; Nungesser; Remia & Nutricia; Gottrup Klim • “Rule of Reason”: Metropole v Commission • Commission Guidelines on application of Article 81(3) 2004/C 101/08 • Article 81(3) requirements: – Improve production/distribution or promote technical/economic progress – Confer fair share of benefits on consumers – Restrictions imposed indispensable to these objectives – Do not substantially eliminate competition • Block exemptions: legal certainty Horizontal Arrangements Art 81(3) Concerted Practice/ Information Exchanges Behavioural arrangements Collaborative Agreement ECMR Corporate JV Merger Structural arrangements Horizontal Arrangements Art 81(3) Concerted Practice/ Information Exchanges Behavioural arrangements NB: Between Competitors Hard core cartel criminal offence UK Collaborative Agreement ECMR Corporate JV Merger Structural arrangements Horizontal Arrangements • R & D Block Exemption Regulation (Reg 2659/00) NB: – Competing undertakings - 25% market share cap – Parties must have access to results for research/exploitation (research bodies/universities can be confined to research) – Parties must be free to conduct R&D in unconnected fields and to challenge other party’s IP (however right to terminate R&D agreement) • Specialisation Block Exemption Regulation (Reg. 2658/00) NB: – Competing undertakings – 20% market share cap • Article 81(3) and Commission Guidelines(2001/C 3/02): UEFA; Premier League; Veronica/Endemol; Television par Satellite; Ford/VW Vertical Agreements Licence MANUFACTURER/SUPPLIER IP Owner(s) <30% Share (R&D <25% Share) Supply Agreement RESELLER Vertical Agreements Licence MANUFACTURER/SUPPLIER IP Owner(s) <30% Share (R&D <25% Share) Supply Agreement OBJECT Price/Geog • RPM • Export bans • NB Agency RESELLER EFFECT Vertical Agreements Licence MANUFACTURER/SUPPLIER IP Owner(s) <30% Share (R&D <25% Share) Supply Agreement OBJECT Price/Geog • RPM • Export bans • NB Agency RESELLER Price/Geog • RRP • Exclusive territory EFFECT Vertical Agreements Licence MANUFACTURER/SUPPLIER IP Owner(s) <30% Share (R&D <25% Share) Supply Agreement OBJECT Price/Geog • RPM • Export bans • NB Agency RESELLER Price/Geog • RRP • Exclusive territory EFFECT Quality • Selective • Franchising Vertical Agreements Licence MANUFACTURER/SUPPLIER IP Owner(s) <30% Share (R&D <25% Share) Supply Agreement OBJECT Price/Geog • RPM • Export bans • NB Agency RESELLER Price/Geog • RRP • Exclusive territory EFFECT Quality Segmentation • Selective • Customers • Franchising • Product categories Vertical Agreements Licence MANUFACTURER/SUPPLIER IP Owner(s) <30% Share (R&D <25% Share) Supply Agreement OBJECT Price/Geog • RPM • Export bans • NB Agency RESELLER Price/Geog • RRP • Exclusive territory EFFECT Quality Segmentation • Selective • Customers • Franchising • Product categories Volumes/foreclosure • Purchase obligations • Non-compete Vertical Agreements IP Owner(s) (R&D <25% Share) Licence MANUFACTURER/SUPPLIER < 30%Share Supply Agreement RESELLER Vertical Agreements Licence IP Owner(s) (R&D <25% Share) MANUFACTURER/SUPPLIER < 30%Share Supply Agreement OBJECT • Export Bans • RPM RESELLER Vertical Agreements IP Owner(s) (R&D <25% Share) Licence MANUFACTURER/SUPPLIER < 30%Share Supply Agreement OBJECT EFFECT RESELLER • Export Bans • RPM Market Share 20% 30% 40% Vertical Agreements IP Owner(s) (R&D <25% Share) Licence MANUFACTURER/SUPPLIER < 30%Share Supply Agreement OBJECT EFFECT RESELLER • Export Bans • RPM Market Share 20% 30% 40% • Territorial exclusivity • Selective Networks • Franchising Vertical Agreements IP Owner(s) (R&D <25% Share) Licence MANUFACTURER/SUPPLIER < 30%Share Supply Agreement OBJECT EFFECT RESELLER • Export Bans • RPM Market Share 20% 30% 40% X 50% 70% • Territorial exclusivity • Loyalty rebates • Selective Networks • Exclusive purchase (80%+) • Franchising • Bundling/Tying • Pricing Discrimination • Refusal to deal Vertical Agreement Block Exemption Regulation 279/99 (“VABER”) Supplier Covers agreements between 2 or more undertakings at different levels in distribution chain Wholesaler Retailer Non-Competitors Parties must not be actual or potential competitors unless reseller’s total annual turnover < €100 million OR Supplier of Services Supplier of Goods Direct Sales Direct Supply Service Provider (not competing upstream with supplier) Where agreement is non-reciprocal Distributor (where not a competing – manufacturer) Market Share Cap Supplier < 30% Supplier Non-exclusive Reseller Exclusive Reseller < 30% Hardcore Restrictions – Price Minimum/fixed prices impermissible Supplier Maximum or recommended prices permissible Reseller NB. Indirect RPM/fixed prices: price monitoring, discount fixing, margin fixing, delivery and suspensions, preprinted prices. Hardcore Restrictions – Customers and Territory (1) Supplier Can allocate • Exclusive territory • Exclusive customer segment Reseller Where exclusive territories are reserved to supplier or conferred on other resellers Reseller(s) Hardcore Restrictions – Customers and Territory (2) Supplier Reseller 1 Reseller 2 Exclusive Territory A Exclusive Territory B Can prevent active but not passive sales (NB. Internet) Hardcore Restrictions – Selective Networks Supplier Selective Wholesaler I Can ban sales Selective Retailer 1 Selective Wholesaler 2 Selective Retailer 2 Cannot ban end user sales; can require to operate from authorised premises End Users Must allow cross sales within the selective network Selective Wholesaler 3 Selective Retailer 3 Vulnerable Restrictions (1) – Spare Parts Supplier Cannot restrict Can Restrict Reseller Spare Parts End User/Repairer Components Competitors of supplier for incorporation Vulnerable Restrictions (2) – Non Compete Obligations Supplier 5 years only 80%+ exclusive purchase obligation Except where lease conferred when duration = period of lease Reseller NB. Cannot prohibit selective dealers from selling specified competitive brands Vulnerable Restrictions (3) Post Termination Restrictions • Limited to:- Competing goods/services Premises from which reseller operated One year (know how unlimited whilst remains secret) and must be indispensable to protect know how Motor Vehicle Block Exemption Regulation 1400/2002 (“MVBER”) • Previous BERs conferred high degree of intra-brand protection to safeguard dealer investments in sales/servicing • However price differentials between Member States have persisted • Frequent violations of Article 81 by manufacturers, e.g. BMW, Ford, Peugeot, Citroen, VW, Opel and DaimlerChrysler MVBER - Outline • Follows a similar pattern to VABER • Applies to agreements at all levels of vehicle distribution in respect of: – Sale of new motor cars and commercial vehicles – After-sale servicing – Spare part supply • Parties must be non-competitors save for non-reciprocal vertical agreements: – between reseller with annual sales <€100m; or – where manufacturer competes in direct sales and reseller not a manufacturer MVBER – Market Shares • As with VABER a 30% cap (measured by reference to reseller for exclusive distribution) • Selective distribution: – Qualitative selective distribution – no limit on market share (case law reliant) – Quantitative selective distribution 40% cap • Different markets for (and consequent shares of): – new vehicles – new parts – service/repair MVBER – Conditions (1) • Agreement must: – be for a minimum of 5 years; or – if indefinite be terminable on 2 years notice or one year if supplier pays compensation (mandated by law or special agreement) or whole/substantial part of network being reorganised • Disputes to be remitted to arbitration • Termination notices must be in writing giving detailed objective and transparent reasons • Reseller must have right to assign to another approved dealer MVBER – Conditions (2) • Cannot require reseller to purchase 30%+ of requirements for goods/services from supplier • Prohibition of sales of competing brands goods/services impermissible • Post-termination restrictions on provision of goods/services impermissible MVBER – Hardcore Restrictions (1) • Follows a similar pattern to VABER • Setting fixed/minimum prices • Territory/customer restrictions save for prohibition of: – Active sales to reserved customers/territories – Wholesale sales to end users – Sales to dealers outside selective network – Sales of components for incorporation by competitor • Prohibition on cross supplies within selective network • Prohibition on retail sales by selective dealers (subject to authorised establishment requirement) MVBER – Hardcore Restrictions (2) • Prohibition on selling new model within contract range • Restricting reseller’s ability to subcontract repair/services to authorised repairers • Linking vehicle sales and servicing/sale of spare parts • Limits on sales of OEM products • Refusing access by independent operators to manufacturer’s technical information, diagnostic tools and software needed for repair/maintenance Technology Transfer Block Exemption Regulation Licensor Licensee Not multiparty, although guidelines indicate that multiparty licences will be judged according to their effects under Art.s 81(1) and 81(3) The IP rights Licensor Licensee Patents, includes: • utility models • design rights (registered and unregistered) • topographies of semiconductor products • supplementary certificates for medicinal products • plant breeder’s rights The IP rights Licensor Licensee Know-how: package of non patented practical information • secret (not generally known) • substantial: information indispensable for the manufacture or provision of the contract products • identifiable in a manner which enables verification of criteria of secrecy and substantiality The IP rights Licensor Software copyright Licensee The IP rights Licensor Licensee Licence of each or a mixture of: 1) patents 2) know-how 3) software copyright and other ancillary IP rights necessary for the manufacture or provision of the contract products/services The Concept of Competitors • The technology market - actual competitors • The product market – actual OR potential competitors • Difficult to ascertain markets • Technology markets based on downstream sales of product • NB: Market share volatility The Market Share Caps Licensor Competitors parties’ shares in aggregate < 20% Non-Competitors each party’s share < 30% Licensee NB. Para 131 Guidelines – 4 competing technologies Market Shares The technology market The product market Licensor A (has separate market shares of 100%+15%) Licensee A (100%) market share in specialist safety gloves Licensor B (45%) Licensor C (30%) Licensor D (20%) Licensee A (15%), Licensee B (45%), Licensee C (30%), Licensee D (20%) in general non-specialist market for safety apparel End Users The “Hardcore” Restrictions where licensor and licensee are competitors • Restriction on either licensor or licensee prices • Output/sales limitations (save for limitations on a licensee in a non-reciprocal agreement or on only one licensee in a reciprocal agreement) • Restriction on licensee’s exploitation of own technology or on parties R&D unless indispensable to protect know-how The “Hardcore” Restrictions where licensor and licensee are competitors • Market/customer restrictions save for: Field of use restriction on licensee In a non-reciprocal agreement restriction on either/both parties relating to reserved field of use or exclusive territory Licensor obligation not to license another licensee in a particular territory Restriction in a non-reciprocal agreement of active and/or passive sales to territory/customer group of other party Restriction in a non-reciprocal agreement of active sales by licensee to exclusive territory/customer group of a licensee (which was non-competing on grant of licence) Restriction on licensee to produce for own use (no active/passive restrictions on sale of spare parts for own products) Restriction in a non-reciprocal agreement to produce as alternative source of supply for designated customer The “Hardcore” Restrictions where licensor and licensee are not competitors • Minimum/fixed resale prices • Restrictions on parties’ R&D unless indispensable to protect knowhow • Restriction on territories/customers (save for certain permissible restrictions - see next slide) And save for:Own use (and spare parts sale rights) Alternative source of customer supply Restrictions on wholesales to end users Prohibition of sales to unauthorised distributors by members of a selective network The Permissible Territorial and Customer Restrictions (1) Licensor Non-competitors Licensee 1 Can allocate: • Exclusive territories • Customer segments and restrict passive sales into licensor territories/customers and passive sales into other licensee territory/customers for initial 2 years Noncompetitors Licensee 2 Cannot ban sales Territory 1 Sub-distributor 1 Territory 2 Sub-distributor 2 Territory 3 Sub-distributor 3 The Permissible Territorial and Customer Restrictions (2) Licensor Noncompetitors Non-competitors Licensee 1 Licensee 2 Selective Wholesaler 1 Selective Retailer 1 Selective Wholesaler 2 Selective Retailer 2 End Users Selective Wholesaler 3 Must allow cross sales in network Cannot ban Selective sales Retailer 3 Excluded Restrictions • Grant back of exclusive licence or assignment by licensee of severable improvements • Prohibition on challenging licensor’s intellectual property (NB licensor right of termination) • Where licensor and licensee are not competitors, limitation on licensee’s ability to exploit own technology or engage in independent R&D (unless indispensible to protect licensor known how)