International competition law is extremely complex and has become increasingly important to companies conducting business activities transnationally, especially in the European Union (EU).
The source of laws governing competition for the EU is embodied in the Treaty on European Union, as amended by the Treaty of Amsterdam, signed on Oct. 2, 1997. Article 81 of the treaty governs agreements between, or practices of, two or more parties acting together that have as their object or effect the restriction of competition in the EU. Article 82 governs abusive business conduct of a single party in a dominant market position.
EU competition laws apply where the conduct, agreement, concerted practice or abuse of dominant position is likely to affect trade between two or more member countries. If there is no likelihood of an effect on trade between member states, then the agreement or conduct is subject only to national competition laws.
However, this trans-border “effect on trade” is broadly interpreted such that an agreement between two companies located in the same member state may generally be considered to affect trade with other states. Companies must comply with both EU competition laws and national laws. In the event of a conflict between these laws, EU competition laws prevail.
If EU competition laws are silent on the subject of certain conduct but a member state’s law forbids it, then the national law is effective against such conduct in that state. Reliance on the laws or accepted practices of a member state is generally insufficient to protect companies against liability under EU competition laws.
Restrictive Agreements and Concerted Practices
Article 81 prohibits companies from entering into agreements or engaging in concerted practices with other companies or participating in decisions with trade associations if those agreements, practices or decisions could affect trade between member states and if they have the purpose or effect of restricting or distorting competition in the EU.
Specifically, Article 81 provides that certain activities shall be prohibited as incompatible with the common market. For example, the article prohibits agreements between undertakings, decisions by associations of undertakings and concerted practices that may affect trade between member states and have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those that:
Directly or indirectly fix purchase or selling prices or any other trading conditions;
Limit or control production, markets, technical development, or investment;
· Share markets or sources of supply;
· Apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; or
· 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.
Article 81 also expressly prohibits agreements or concerted practices with competitors, potential competitors, suppliers or customers, whether oral or written, that:
Directly or indirectly fix purchase or selling prices or any trading conditions (which have as their object the prevention, restriction or distortion of competition), including tying the sale of one product to another, such as package deals. This prohibition applies horizontally (with competitors) and vertically (with suppliers and clients). If the products are separate and distinct, then customers should be given the choice of purchasing, or not purchasing, each one individually;
Limit or control production, markets, technical developments or investment. This prohibition applies to direct or indirect attempts at market sharing and price control by ensuring the maintenance of a status quo or regulating any move away from it. These activities are regarded as anti-competitive because they restrict actual or potential competitors’ freedom to conduct business;
Share markets or sources of supply. It is generally impermissible to agree with another party not to sell to or buy from any particular customer or class of customers; and
Apply trading conditions unevenly, resulting in a competitive disadvantage to a trading party. Giving rebates, discounts or bonuses to a customer that do not reflect genuine cost savings but are designed to exclude or restrict competition (“fidelity rebates”) may be unlawful. Also, blacklisting a customer or agreeing to give special terms to particular categories of customers is unlawful. Giving better terms to one customer than another customer in an equivalent position (for instance, a “most favored customer” provision) may violate Article 81 unless supplies to customers at different prices are the result of normal arms’ length negotiations.
Relationships with Competitors
A corporate client should be advised against discussing with a competitor any of the following subjects: (1) prices or discounts; (2) terms or conditions of sale; (3) profits, margins or costs; (4) distribution practices; (5) bids; (6) sales territories or selection; or (7) rejection or termination of clients or suppliers.
Furthermore, information should not be compiled on competitors’ prices, promotions or similar activities directly from competing companies. Companies should keep complete and accurate records of the sources of any information obtained about competitors (for example, market research organizations and trade publications). In no event should clients be used as conduits for reciprocal exchanges of nonpublic information concerning a competitor’s business practices.
It should also be noted that Article 81’s concepts of “agreement” and “concerted practice” are broad enough to cover a wide variety of conduct in which a company expressly or tacitly coordinates its competitive behavior with competitors or negotiates conditions that restrict the commercial freedom of independent parties with whom it deals.
Notwithstanding the foregoing, certain types of transactions, such as licensing agreements concerning confidential and/or proprietary information and research and development agreements are regularly exempted from the prohibitions of Article 81 upon application to the EU.
Abuse of Dominant Position
Article 82 prohibits “abusive” business behavior by firms having a dominant position within the EU or a substantial part of the union by engaging in conduct that weakens the degree of competition in the relevant market or unfairly prejudices consumers. However, fair competition on the merits that wins business and gains market share does not generally violate Article 82.
Specifically, Article 82 provides that 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 of:
Directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
Limiting production, markets or technical development to the prejudice of consumers;
Applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; or
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.
The reference to “market dominance” in Article 82 does not necessarily mean having 50 percent or more of any particular market. Generally, the ability to act independently of the rest of the market in question without regard to competitors may imply dominance.
A significant factor in assessing dominance is the condition of that particular market. If the competition in any given market consists of a very large number of small competitors, then a lower market share is likely to constitute dominance. Barriers to entry are another factor. The ability to impose a fairly substantial price increase or decrease in circumstances likely to force competitors to follow suit is another indication of dominance.
Furthermore, the article’s reference to “abuse of dominant position” includes, without limitation, the following factors:
· Unfair Pricing. It can be either too high or too low.
· Certain Pricing Terms. This may include “meet or release” competition clauses wherein a company contracts with a customer to sell a product at a given price unless the customer can purchase the product cheaper elsewhere, in which event the customer may do so only after giving the company the opportunity to meet (or better) the cheaper offer. The foregoing provision may be unlawful as reinforcing a dominant position because the customer is forced to disclose a competitor’s offer to allow another company the opportunity to match it.
· Unfair or Discriminatory Treatment of Clients. The fact that the other party agreed to, or even asked for, the terms will not be a defense to a claim by a third party or even the party concerned that the terms were unfair. Specifically, under Article 82, long-term contracts may be viewed as unfair to a client. However, evergreen contracts (contracts that continue until one party gives notice of termination) should be regarded as contracts for the minimum period until the parties can next terminate by notice and are legal unless otherwise in violation of Article 82. Notwithstanding the foregoing, lengthy notice requirements imposed upon a customer for termination of a contract (such as more than 90 days notice or otherwise in excess of standard industry practice) may be unfair or discriminatory to a client and, therefore, unlawful.
· Certain Rebates or Discounts. Fidelity rebates linked to a client’s requirements rather than by volume, which are rebates or discounts that do not reflect cost savings but are designed to offer customers financial advantages to prevent them from buying from a competitor, may violate Article 82.
· Package Deals. Requiring customers to purchase unrelated products may violate Article 82. This also covers full-line forcing, which is forcing a customer to take a full range of products.
· Product Supply Termination. Termination of product supply (except for product retirements) to long standing customers who abide by regular commercial practices may violate Article 82.
· Exclusive Dealing Arrangements. There are two types of exclusive dealing contracts. One type is an exclusive purchasing contract, in which an agreement is made to purchase a product or products from one supplier and no other. The other type is an exclusive selling contract, in which a seller agrees to sell or license products to one customer and to no other within a certain territory. Such arrangements constitute a practice that encourages buyers to purchase all, or a high percentage, of their requirements from the dominant supplier. Exclusive agreements may violate Article 82 if they have the impact of foreclosing or restricting competition in a particular market.
· Requirements Contracts. A requirements contract is an agreement to buy from one source all or some of a customer’s requirements for a particular product. Requirements contracts may be unlawful, depending on factors such as the market positions of the parties, the volume involved and the period of time during which the contracts would be in effect.
Investigations, Searches and Seizures
In connection with its duty to ensure compliance with the competition laws, the EU may send members of its staff to inspect any of a company’s offices located within the EU. An inspection should only be permitted if the EU officials first produce proper documentation in the form of personal identification (their staff card) and a nonmandatory “authorization to investigate” or a mandatory “decision to investigate.” These documents must clearly indicate the subject matter and purpose of the investigation and must be duly authenticated. A photocopy of each of the documents should be obtained by the company under review.
It is also essential that any information given to the officials (orally or otherwise) during the course of the investigation be correct and complete. Moreover, documents that contain sensitive business information should be marked explicitly as confidential. A company may be subject to fines and its entire case may be prejudiced if information given is incorrect or incomplete.
In conclusion, the consequences of a violation of EU competition law can be severe. For instance, a violation could result in the imposition of heavy fines and/or nullification of commercial agreements. The foregoing primer is intended to provide the business lawyer with a general understanding of EU competition law to assist in identifying matters that should be reviewed in advance with an international corporate client.
This article is reprinted with permission from the May 29, 2000 issue of the New Jersey Law Journal. © 2000 NLP IP Company