Competition rules relating to horizontal cooperation agreements

Communication pursuant to Article 5 of Council Regulation (EEC) No 2821/71 of 20 December 1971 on the application of Article 81(3) of the Treaty to categories of agreements, decisions and concerted practices modified by Regulation (EEC) No 2743/72

(2000/C 118/03)

(Text with EEA relevance)

The Commission invites all interested parties to send their comments on the following texts:

- draft Commission Regulation (EC) on the application of Article 81(3) of the EC Treaty to categories of research and development agreements,

- draft Commission Regulation (EC) on the application of Article 81(3) of the EC Treaty to categories of specialisation agreements,

- draft Guidelines on the Applicability of Article 81 to horizontal cooperation.

These comments should be sent to the Commission not later than one month after the date of the publication in the Official Journal of the European Communities. They should not contain any business secrets or other confidential information. Comments should be sent to the following address: European Commission Competition Directorate-General

Directorate for Competition Policy, Coordination, International Affairs and Relations with other Institutions

Rue de la Loi/Wetstraat 200 B - 1049 Brussels Internet address:

COMP-HORIZONTALS@cec.eu.int

Commission Regulation on the application of Article 81(3) of the EC Treaty to categories of research and development agreements

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EEC) No 2821/71 of 20 December 1971 on the application of Article 85(3) of the Treaty to categories of agreements, decisions and concerted practices(1), as last amended by the Act of Accession of Austria, Finland and Sweden, and in particular Article 1(b) thereof,

Having published a draft of this Regulation(2),

Having consulted the Advisory Committee on Restrictive Practices and Dominant Positions,

Whereas:

(1) Regulation (EEC) No 2821/71 empowers the Commission to apply Article 81(3) of the Treaty by regulation to certain categories of agreements, decisions and concerted practices falling within the scope of Article 81(1) which have as their object the research and development of products or processes up to the stage of industrial application, and exploitation of the results, including provisions regarding intellectual property rights.

(2) Article 163(2) of the Treaty calls upon the Community to encourage undertakings, including small and medium sized undertakings, in their research and technological development activities of high quality, and to support their efforts to cooperate with one another. Pursuant to Council Decision 65/1999/EC of 22 December 1998 concerning the rules for the participation of undertakings, research centres and universities and for the dissemination of research results for the implementation of the fifth framework programme of the European Community (1998 to 2002)(3) and Commission Regulation (EC) No 996/1999 of 11 May 1999 on the implementation of Council Decision 1999/65/EC concerning the rules for the participation of undertakings, research centres and universities and for the dissemination of research results for the implementation of the fifth framework programme of the European Community (1998-2002)(4), indirect research and technological development (RTD) actions supported under the fifth framework programme of the European Community are required to be carried out cooperatively.

(3) Agreements on the joint execution of research work or the joint development of the results of the research, up to but not including the stage of industrial application, generally do not fall within the scope of Article 81(1) of the Treaty. In certain circumstances, however, such as where the parties agree not to carry out other research and development in the same field, thereby forgoing the opportunity of gaining competitive advantages over the other parties, such agreements may fall within Article 81(1) and should therefore not be excluded from this Regulation.

(4) Pursuant to Regulation (EEC) No 2821/71, the Commission has in particular adopted Regulation (EEC) No 418/85 of 19 December 1984 on the application of Article 81(3) of the Treaty to categories of research and development agreements(5), as last amended by Regulation (EC) No 2236/97(6). This Regulation will expire on 31 December 2000.

(5) A new regulation must meet the two requirements of ensuring effective protection of competition and providing adequate legal security for undertakings. The pursuit of these objectives should take account of the need as far as possible to simplify administrative supervision and the legislative framework. Below a certain level of market power it can for the application of Article 81(3), in general, be presumed that the positive effects of research and development agreements will outweigh any negative effects on competition.

(6) Regulation (EEC) No 2821/71 requires the exempting regulation of the Commission (a) to define the categories of agreements, decisions and concerted practices to which it applies, (b) to specify the restrictions or clauses which may, or may not, appear in the agreements, decisions and concerted practices, and (c) to specify the clauses which must be contained in the agreements, decisions and concerted practices or the other conditions which must be satisfied.

(7) It is appropriate to move away from the approach of listing exempted clauses and to place greater emphasis on defining the categories of agreements which are exempted up to a certain level of market power and on specifying the restrictions or clauses which are not to be contained in such agreements. This is consistent with an economics based approach which assesses the impact of agreements on the relevant market.

(8) For the application of Article 81(3) by regulation, it is not necessary to define those agreements which are capable of falling within Article 81(1). In the individual assessment of agreements under Article 81(1), account has to be taken of several factors, and in particular the market structure on the relevant market.

(9) The benefit of the block exemption should be limited to those agreements for which it can be assumed with sufficient certainty that they satisfy the conditions of Article 81(3).

(10) Cooperation in research and development and in the exploitation of the results generally promotes technical and economic progress by increasing the dissemination of know-how between the parties and avoiding duplication of research and development work, by stimulating new advances through the exchange of complementary know-how, and by rationalising the manufacture of the products or application of the processes arising out of the research and development.

(11) The joint exploitation of results can be considered as the natural consequence of joint research and development. It can take different forms such as manufacture, the exploitation of intellectual property rights that substantially contribute to technical or economic progress, or the marketing of new products.

(12) Consumers can generally be expected to benefit from the increased volume and effectiveness of research and development through the introduction of new or improved products or services or the reduction of prices brought about by new or improved processes.

(13) In order to attain the benefits and objectives described above it is appropriate to extend the benefit of this Regulation also to ancillary agreements which do not constitute the primary object of, but are directly related to and necessary for the implementation of research and development agreements.

(14) To justify the restrictions of competition which are exempted, the joint exploitation should relate to products or processes for which the use of the results of the research and development is decisive, and all parties should have access to the results of the work. However, where academic bodies or research institutes participate in research and development and are not interested in the industrial exploitation of the results, they may agree to use the results of research and development solely for the purpose of further research.

(15) The exemption granted under this Regulation must be limited to research and development agreements which do not afford the undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question. It is necessary to exclude from the block exemption agreements between competitors whose combined share of the market for products or services capable of being improved or replaced by the results of the research and development exceeds a certain level at the time the agreement is entered into.

(16) In order to guarantee the maintenance of effective competition during joint exploitation of the results, it is necessary to provide that the block exemption will cease to apply if the parties' combined shares of the market for the products arising out of the joint research and development become too great. It should be provided that the exemption will continue to apply, irrespective of the parties' market shares, for a certain period after the commencement of joint exploitation, so as to await stabilisation of their market shares, particularly after the introduction of an entirely new product, and to guarantee a minimum period of return on the investments involved.

(17) This Regulation should not exempt restrictions which are not indispensable to attain the positive effects mentioned above. In principle certain severe anti-competitive restraints such as limitations on the freedom of parties to carry out research and development in a field unconnected to the agreement, the fixing of prices, limitations on output or sales, allocation of markets or customers, and limitations on effecting passive sales for the contract products in territories reserved for other parties should be excluded from the benefit of the block exemption established by this Regulation irrespective of the market share of the undertakings concerned.

(18) The market share limitation, the non-exemption of certain agreements, and the conditions provided for in this Regulation normally ensure that the agreements to which the block exemption applies do not enable the participating undertakings to eliminate competition in respect of a substantial part of the products or services in question.

(19) In particular cases in which the agreements falling under this Regulation nevertheless have effects incompatible with Article 81(3) of the Treaty, the Commission may withdraw the benefit of the block exemption.

(20) Agreements between undertakings which are not competing manufacturers of products capable of being improved or replaced by the results of the research and development will only eliminate effective competition in research and development in exceptional circumstances. It is therefore appropriate to enable such agreements to benefit from the block exemption irrespective of market share and to address such exceptional cases by way of withdrawal of the benefit of this Regulation.

(21) As research and development agreements are often of a long-term nature, especially where the cooperation extends to the exploitation of the results, it is appropriate to fix the period of validity of the Regulation at 10 years.

(22) This Regulation is without prejudice to the application of Article 82 of the Treaty.

(23) In accordance with the principle of primacy of Community law, no measure taken pursuant to national laws on competition should prejudice the uniform application throughout the common market of the Community competition rules or the full effect of any measures adopted in implementation of those rules, including this Regulation,

HAS ADOPTED THIS REGULATION:

Article 1

Scope

1. Pursuant to Article 81(3) of the Treaty and subject to the provisions of this Regulation, it is hereby declared that Article 81(1) of the Treaty shall not apply to agreements entered into between two or more undertakings which relate to the conditions under which those undertakings pursue:

(a) joint research and development of products or processes and joint exploitation of the results of that research and development;

(b) joint exploitation of the results of research and development of products or processes jointly carried out pursuant to a prior agreement between the same undertakings; or

(c) joint research and development of products or processes excluding joint exploitation of the results.

This exemption shall apply to the extent that such agreements (hereinafter referred to as research and development agreements) contain restrictions of competition falling within the scope of Article 81(1).

2. The exemption provided for in paragraph 1 shall also apply to provisions contained in research and development agreements which do not constitute the primary object of, but are directly related to and necessary for their implementation, such as an obligation not to carry out independently or together with third parties research and development in the field to which the agreement relates or in a closely connected field during the execution of the agreement.

This does, however, not apply to provisions which have the same object or effect as the restrictions of competition enumerated in Article 5(1).

Article 2

Conditions for exemption

1. The exemption provided for in Article 1 shall apply subject to the conditions set out in paragraphs 2 to 5.

2. All the parties have access to the results of the work. However, research institutes or academic bodies may agree to confine their use of the results for the purposes of further research.

3. Where the agreement provides only for joint research and development, each party must be free to exploit the results of the joint research and development and any pre-existing know-how necessary therefor independently.

4. Any joint exploitation must relate to results which are protected by intellectual property rights which substantially contribute to technical or economic progress and the results must be decisive for the manufacture of the contract products or the application of the contract processes.

5. Undertakings charged with manufacture by way of specialisation in production must be required to fulfil orders for supplies from all the parties, except where the agreement also provides for joint distribution.

Article 3

Market share limit and duration

1. Where the participating undertakings are not competing manufacturers of products capable of being improved or replaced by the contract products, the exemption provided for in Article 1 shall apply for the duration of the research and development and, where the results are jointly exploited, for five years from the time the contract products are first put on the market within the common market.

2. Where two or more of the participating undertakings are competing manufacturers of products capable of being improved or replaced by the contract products, the exemption provided for in Article 1 shall apply for the period referred to in paragraph 1 only if at the time the agreement is entered into, the participating undertakings do not have a combined market share which exceeds 25 % of the relevant market for the products capable of being improved or replaced by the contract products.

3. After the end of the period referred to in paragraph 1, the exemption shall continue to apply as long as the participating undertakings do not have a combined market share which exceeds 25 % of the relevant market for the contract products.

Article 4

Definitions

For the purposes of this Regulation the following terms shall have the following meaning:

1. "participating undertakings" are:

(a) undertakings party to the agreement;

(b) their respective connected undertakings;

2. "connected undertakings" are:

(a) undertakings in which a party to the agreement, directly or indirectly:

- has the power to exercise more than half the voting rights, or

- has the power to appoint more than half the members of the supervisory board, board of management or bodies legally representing the undertaking, or

- has the right to manage the undertaking's affairs;

(b) undertakings which directly or indirectly have, over a party to the agreement, the rights or powers listed in (a);

(c) undertakings in which an undertaking referred to in (b) has, directly or indirectly, the rights or powers listed in (a);

(d) undertakings in which a party to the agreement together with one or more of the undertakings referred to in (a), (b) or (c), or in which two or more of the latter undertakings, jointly have the rights or powers listed in (a);

(e) undertakings in which the rights or the powers listed in (a) are jointly held by:

- parties to the agreement or their respective connected undertakings referred to in (a) to (d), or

- one or more of the parties to the agreement or one or more of their connected undertakings referred to in (a) to (d) and one or more third parties;

3. "research and development" of products or processes means the acquisition of know-how and the carrying out of theoretical analysis, systematic study or experimentation, including experimental production, technical testing of products or processes, the establishment of the necessary facilities and the obtaining of intellectual property rights for the results;

4. a "product" means goods and/or a service, including both intermediary goods and/or services and final goods and/or services;

5. a "contract process" means a technology or process arising out of the research and development;

6. a "contract product" means a product arising out of the research and development or manufactured or provided applying the contract processes;

7. "exploitation of the results" means the manufacture, selling, distribution or promotion of the contract products or the application of the contract processes or the assignment or licensing of intellectual property rights or the communication of know-how required for such manufacture or application;

8. "intellectual property rights" includes industrial property rights, copyright and neighbouring rights;

9. "know-how" means a package of non-patented practical information, resulting from experience and testing, which is secret, substantial and identified: in this context, "secret" means that the know-how is not generally known or easily accessible; "substantial" means that the know-how includes information which is indispensable for the manufacture of the contract products or the application of the contract processes; "identified" means that the know-how must be described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality;

10. research and development, or exploitation of the results, are carried out "jointly" where the work involved is:

- carried out by a joint team, organisation or undertaking,

- jointly entrusted to a third party, or

- allocated between the parties by way of specialisation in research, development, or exploitation;

11. "competing manufacturers" are undertakings that are actual or potential producers of products capable of being improved or replaced by the contract products.

Article 5

Agreements not covered by the exemption

1. The exemption provided for in Article 1 shall not apply to agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object:

(a) the restriction of the freedom of the participating undertakings to carry out research and development independently or in cooperation with third parties in a field unconnected with that to which the research and development relates or, after its completion, in the field to which it relates or in a connected field;

(b) the prohibition to challenge after completion of the research and development the validity of intellectual property rights which the parties hold in the common market and which are relevant to the research and development or, after the expiry of the agreement, the validity of intellectual property rights which the parties hold in the common market and which protect the results of the research and development;

(c) the limitation of output or sales;

(d) the fixing of prices;

(e) the restriction of the customers that the participating undertakings may serve, after the end of five years from the time the contract products are first put on the market within the common market;

(f) the prohibition to make passive sales for the contract products in territories reserved for other parties;

(g) the prohibition to put the contract products on the market or to pursue an active sales policy for them in territories within the common market that are reserved for other parties after the end of five years from the time the contract products are first put on the market within the common market;

(h) the requirement not to grant licences to third parties to manufacture the contract products or to apply the contract processes where the exploitation by the parties themselves of the results of the joint research and development is not provided for or does not take place;

(i) the requirement to refuse to meet demand from users or resellers in their respective territories who would market the contract products in other territories within the common market; or

(j) the requirement to make it difficult for users or resellers to obtain the contract products from other resellers within the common market, and in particular to exercise intellectual property rights or take measures so as to prevent users or resellers from obtaining, or from putting on the market within the common market, products which have been lawfully put on the market within the European Community by another party or with its consent.

2. Paragraph 1 does not apply to:

(a) the setting of production targets where the exploitation of the results includes the joint production of the contract products;

(b) the setting of sales targets and the fixing of prices charged to immediate customers where the exploitation of the results includes the joint distribution of the contract products.

Article 6

Calculation of market shares

For the purposes of applying the market share threshold provided for in Article 3 the following rules shall apply:

(a) the market share shall be calculated on the basis of the market sales value; if market sales value data are not available, estimates based on other reliable market information, including market sales volumes, may be used to establish the market share of the undertaking concerned;

(b) the market share shall be calculated on the basis of data relating to the preceding calendar year;

(c) for the purpose of the calculation of market shares, the market share held by the undertakings referred to in Article 4(2)(e) shall be apportioned equally to each undertaking having the rights or the powers listed in Article 4(2)(a);

(d) if the market share referred to in Article 3(3) is initially not more than 25 % but subsequently rises above this level without exceeding 30 %, the exemption provided for in Article 1 shall continue to apply for a period of two consecutive calendar years following the year in which the 25 % threshold was first exceeded;

(e) if the market share referred to in Article 3(3) is initially not more than 25 % but subsequently rises above 30 %, the exemption provided for in Article 1 shall continue to apply for one calendar year following the year in which the level of 30 % was first exceeded;

(f) the benefit of letters (d) and (e) may not be combined so as to exceed a period of two calendar years.

Article 7

Withdrawal

The Commission may withdraw the benefit of this Regulation, pursuant to Article 7 of Regulation (EEC) No 2821/71, where, either on its own initiative or at the request of a Member State or of a natural or legal person claiming a legitimate interest, it finds in a particular case that an agreement exempted by this Regulation nevertheless has certain effects which are incompatible with the conditions laid down in Article 81(3) of the Treaty, and in particular where:

(a) the existence of the agreement substantially restricts the scope for third parties to carry out research and development in the relevant field because of the limited research capacity available elsewhere;

(b) because of the particular structure of supply, the existence of the agreement substantially restricts the access of third parties to the market for the contract products;

(c) without any objectively valid reason, the parties do not exploit the results of the joint research and development;

(d) the contract products are not subject in the whole or a substantial part of the common market to effective competition from identical products or products considered by users as equivalent in view of their characteristics, price and intended use;

(e) the existence of the agreement would eliminate effective competition in research and development on a particular market.

Article 8

Decisions and concerted practices

This Regulation shall apply mutatis mutandis to decisions of associations of undertakings and concerted practices.

Article 9

Transition period

The prohibition laid down in Article 81(1) of the EC Treaty shall not apply during the period from 1 January 2001 to 31 December 2001 in respect of agreements already in force on 31 December 2000 which do not satisfy the conditions for exemption provided for in this Regulation but which satisfy the conditions for exemption provided for in Regulation (EEC) No 418/85.

Article 10

Duration of Regulation

This Regulation shall enter into force on 1 January 2001. It shall apply until 31 December 2010.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, ...

For the Commission

...

Member of the Commission

(1) OJ L 285, 29.12.1971, p. 46.

(2) OJ C 118, 27.4.2000, p. 3.

(3) OJ L 26, 1.2.1999, p. 26.

(4) OJ L 122, 12.5.1999, p. 9.

(5) OJ L 53, 22.2.1985, p. 5.

(6) OJ L 306, 11.11.1997, p. 12.

Draft Commission Regulation on the application of Article 81(3) of the EC Treaty to categories of specialisation agreements

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EEC) No 2821/71 of 20 December 1971 on the application of Article 85(3) of the Treaty to categories of agreements, decisions and concerted practices(1), as last amended by the Act of Accession of Austria, Finland and Sweden, and in particular Article 1(c) thereof,

Having published a draft of this Regulation(2),

Having consulted the Advisory Committee on Restrictive Practices and Dominant Positions,

Whereas

(1) Regulation (EEC) No 2821/71 empowers the Commission to apply Article 81(3) of the Treaty by regulation to certain categories of agreements, decisions and concerted practices falling within the scope of Article 81(1) which have as their object specialisation, including agreements necessary for achieving it.

(2) Pursuant to Regulation (EEC) No 2821/71, the Commission has in particular adopted Regulation (EEC) No 417/85 of 19 December 1984 on the application of Article 81(3) of the Treaty to categories of specialisation agreements(3), as last amended by Regulation (EC) No 2236/97(4). This Regulation will expire on 31 December 2000.

(3) A new regulation must meet the two requirements of ensuring effective protection of competition and providing adequate legal security for undertakings. The pursuit of these objectives should take account of the need as far as possible to simplify administrative supervision and the legislative framework. Below a certain level of market power it can, in general, be presumed that the positive effects of specialisation agreements will outweigh any negative effects on competition.

(4) Regulation (EEC) No 2821/71 requires the exempting regulation of the Commission (a) to define the categories of agreements, decisions and concerted practices to which it applies, (b) to specify the restrictions or clauses which may, or may not, appear in the agreements, decisions and concerted practices, and (c) to specify the clauses which must be contained in the agreements, decisions and concerted practices or the other conditions which must be satisfied.

(5) It is appropriate to move away from the approach of listing exempted clauses and to place greater emphasis on defining the categories of agreements which are exempted up to a certain level of market power and on specifying the restrictions or clauses which are not to be contained in such agreements. This is consistent with an economics based approach which assesses the impact of agreements on the relevant market.

(6) For the application of Article 81(3) by regulation, it is not necessary to define those agreements which are capable of falling within Article 81(1). In the individual assessment of agreements under Article 81(1), account has to be taken of several factors, and in particular the market structure on the relevant market.

(7) The benefit of the block exemption should be limited to those agreements for which it can be assumed with sufficient certainty that they satisfy the conditions of Article 81(3).

(8) Agreements on specialisation in production generally contribute to improving the production or distribution of goods, because the undertakings concerned can concentrate on the manufacture of certain products and thus operate more efficiently and supply the products more cheaply. Agreements on specialisation in the provision of services can also be said to generally give rise to similar improvements. It is likely that, given effective competition, consumers will receive a fair share of the resulting benefit.

(9) Such advantages can arise equally from agreements whereby one participant gives up the manufacture of certain products or provision of certain services in favour of another participant ("unilateral specialisation"), from agreements whereby each participant gives up the manufacture of certain products or provision of certain services in favour of another participant ("reciprocal specialisation") and from agreements whereby the participants undertake to jointly manufacture certain products or provide certain services ("joint production").

(10) As unilateral specialisation agreements between non-competitors may benefit from the block exemption provided by Commission Regulation (EC) No 2790/1999(5), it is appropriate to limit the coverage of unilateral specialisation in this Regulation to agreements between competitors.

(11) It is appropriate to include all agreements entered into between undertakings relating to the conditions under which they specialise in the production of goods and/or services. The block exemption should also apply to ancillary agreements which do not constitute the primary object of, but are directly related to and necessary for the implementation of specialisation agreements and to certain related purchasing and marketing agreements.

(12) To ensure that the benefits of specialisation will materialise without one party leaving the market downstream of production, unilateral and reciprocal specialisation agreements should only be covered by this Regulation where they provide for supply and purchase obligations. These obligations can be, but do not have to be of an exclusive nature.

(13) It can be presumed that, where the participating undertakings' share of the relevant market does not exceed 20 %, specialisation agreements of the category defined in this Regulation will, as a general rule, give rise to economic benefits in the form of economies of scale or scope or better production technologies, while allowing consumers a fair share of the resulting benefits.

(14) This Regulation should not exempt restrictions which are not indispensable to attain the positive effects mentioned above. In principle certain severe anti-competitive restraints relating to the fixing of prices, limitation of output or sales, and allocation of markets or customers should be excluded from the benefit of the block exemption established by this Regulation irrespective of the market share of the undertakings concerned.

(15) The market share limitation, the non-exemption of certain agreements and the conditions provided for in this Regulation normally ensure that the agreements to which the block exemption applies do not enable the participating undertakings to eliminate competition in respect of a substantial part of the products or services in question.

(16) In particular cases in which the agreements falling under this Regulation nevertheless have effects incompatible with Article 81(3) of the Treaty, the Commission may withdraw the benefit of the block exemption.

(17) In order to facilitate the conclusion of specialisation agreements, which can have a bearing on the structure of the participating undertakings, it is appropriate to fix the period of validity of the Regulation at 10 years.

(18) This Regulation is without prejudice to the application of Article 82 of the Treaty.

(19) In accordance with the principle of primacy of Community law, no measure taken pursuant to national laws on competition should prejudice the uniform application throughout the common market of the Community competition rules or the full effect of any measures adopted in implementation of those rules, including this Regulation,

HAS ADOPTED THIS REGULATION:

Article 1

Scope

1. Pursuant to Article 81(3) of the Treaty and subject to the provisions of this Regulation, it is hereby declared that Article 81(1) of the Treaty shall not apply to the following agreements entered into between two or more undertakings and which relate to the conditions under which those undertakings specialise in the production of products:

(a) unilateral specialisation agreements, by virtue of which one party agrees to cease production of certain products or to refrain from producing these products and to purchase them from a competitor, while the competitor agrees to produce and supply these products; or

(b) reciprocal specialisation agreements, by virtue of which two or more parties on a reciprocal basis accept to cease or refrain from producing certain but different products and to purchase these products from the other parties, who accept to supply them; or

(c) joint production agreements, by virtue of which two or more parties agree to produce certain products jointly.

This exemption shall apply to the extent that such agreements (hereinafter referred to as specialisation agreements) contain restrictions of competition falling within the scope of Article 81(1) of the Treaty.

2. The exemption provided for in paragraph 1 shall also apply to provisions contained in specialisation agreements, which do not constitute the primary object of, but are directly related to and necessary for their implementation, such as those concerning the assignment or use of intellectual property rights.

This does, however, not apply to provisions which have the same object or effect as the restrictions of competition enumerated in Article 4(1).

Article 2

Related purchasing and marketing agreements

The exemption provided for in Article 1 shall also apply to related purchasing or marketing agreements whereby:

(a) the parties accept an exclusive purchase and/or exclusive supply obligation in the context of Article 1(1)(a), (b) and (c); or

(b) the parties provide for joint distribution or distribution by a third party on an exclusive or non-exclusive basis in the context of Article 1(1)(c), provided that the third party is not a competitor of the parties in the relevant market.

Article 3

Market share limit

Articles 1 and 2 shall apply on condition that the participating undertakings do not have a combined market share which exceeds 20 % of the relevant market.

Article 4

Agreements not covered by the exemption

1. The exemption provided for in Article 1 shall not apply to agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object:

(a) the fixing of prices,

b) the limitation of output or sales, or

c) the allocation of markets or customers.

2. Paragraph 1 does not apply to:

(a) provisions on the agreed amount of products in the context of Article 1(1)(a) and (b) or the setting of the capacity and production volume of a production joint venture in the context of Article 1(1)(c).

(b) the fixing of prices that a production joint venture charges to its immediate customers, provided that the joint venture also carries out the distribution of these products so that the price fixing by the joint venture is the effect of integrating the various functions.

Article 5

Definitions

For the purposes of this Regulation the following terms shall have the following meaning:

1. "participating undertakings" are

(a) undertakings party to the agreement;

(b) their respective connected undertakings;

2. "connected undertakings" are

(a) undertakings in which a party to the agreement, directly or indirectly:

- has the power to exercise more than half the voting rights, or

- has the power to appoint more than half the members of the supervisory board, board of management or bodies legally representing the undertaking, or

- has the right to manage the undertaking's affairs;

(b) undertakings which directly or indirectly have, over a party to the agreement, the rights or powers listed in (a);

(c) undertakings in which an undertaking referred to in (b) has, directly or indirectly, the rights or powers listed in (a);

(d) undertakings in which a party to the agreement together with one or more of the undertakings referred to in (a), (b) or (c), or in which two or more of the latter undertakings, jointly have the rights or powers listed in (a);

(e) undertakings in which the rights or the powers listed in (a) are jointly held by:

- parties to the agreement or their respective connected undertakings referred to in (a) to (d), or

- one or more of the parties to the agreement or one or more of their connected undertakings referred to in (a) to (d) and one or more third parties;

3. a "product" is goods and/or a service, including both intermediary goods and/or services and final goods and/or services, with the exception of distribution and rental services;

4. "production" is the manufacture of goods or the provision of services and includes production by way of subcontracting;

5. the "relevant market" is the relevant product and geographic market(s) to which the products, which are the subject matter of a specialisation agreement, belong;

6. a "competitor" is an undertaking that is an actual or potential competitor on the relevant market;

7. "exclusive supply obligation" means an obligation not to supply a competitor with the product to which the specialisation agreement relates;

8. "exclusive purchase obligation" means an obligation to purchase the product to which the specialisation agreement relates only from the party which agrees to supply it.

Article 6

Calculation of market shares

For the purposes of applying the market share threshold provided for in Article 3 the following rules shall apply:

(a) the market share shall be calculated on the basis of the market sales value; if market sales value data are not available, estimates based on other reliable market information, including market sales volumes, may be used to establish the market share of the undertaking concerned;

(b) the market share shall be calculated on the basis of data relating to the preceding calendar year;

(c) for the purpose of the calculation of market shares, the market share held by the undertakings referred to in Article 5(2)(e) shall be apportioned equally to each undertaking having the rights or the powers listed in Article 5(2)(a);

(d) if the market share referred to in Article 3 is initially not more than 20 % but subsequently rises above this level without exceeding 25 %, the exemption provided for in Article 1 shall continue to apply for a period of two consecutive calendar years following the year in which the 20 % threshold was first exceeded;

(e) if the market share referred to in Article 3 is initially not more than 20 % but subsequently rises above 25 %, the exemption provided for in Article 1 shall continue to apply for one calendar year following the year in which the level of 25 % was first exceeded;

(f) the benefit of letters (d) and (e) may not be combined so as to exceed a period of two calendar years.

Article 7

Withdrawal

The Commission may withdraw the benefit of this Regulation, pursuant to Article 7 of Regulation (EEC) No 2821/71, where, either on its own initiative or at the request of a Member State or of a natural or legal person claiming a legitimate interest, it finds in a particular case that an agreement exempted by this Regulation nevertheless has effects which are incompatible with the conditions set out in Article 81(3) of the Treaty, and in particular where:

(a) the agreement is not yielding significant results in terms of rationalisation or consumers are not receiving a fair share of the resulting benefit; or

(b) the products which are the subject of the specialisation are not subject in the common market or a substantial part thereof to effective competition from identical products or products considered by users to be equivalent in view of their characteristics, price and intended use.

Article 8

Decisions and concerted practices

This Regulation shall apply mutatis mutandis to decisions of associations of undertakings and concerted practices.

Article 9

Transition period

The prohibition laid down in Article 81(1) of the EC Treaty shall not apply during the period from 1 January 2001 to 31 December 2001 in respect of agreements already in force on 31 December 2000 which do not satisfy the conditions for exemption provided for in this Regulation but which satisfy the conditions for exemption provided for in Regulation (EEC) No 417/85.

Article 10

Duration of Regulation

This Regulation shall enter into force on 1 January 2001. It shall apply until 31 December 2010.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, ...

For the Commission

...

Member of the Commission

(1) OJ L 285, 29.12.1971, p. 46.

(2) OJ C 118, 27.4.2000, p. 3.

(3) OJ L 53, 22.2.1985, p. 1.

(4) OJ L 306, 11.11.1997, p. 12

(5) OJ L 336, 29.12.1999, p. 21.

Draft guidelines on the applicability of Article 81 to horizontal cooperation

1. INTRODUCTION

1.1. PURPOSE

1. These guidelines set out the principles for the assessment of horizontal cooperation under Article 81 of the EC Treaty. A cooperation is of a "horizontal nature" if an agreement or concerted practice is entered into between companies operating at the same level(s) in the market. In most instances, horizontal cooperation amounts to cooperation between competitors. It covers for example areas such as research and development (R & D), production, purchasing or commercialisation.

2. Companies need to respond to increasing competitive pressure and a changing market place driven by globalisation, the speed of technological progress and the generally more dynamic nature of markets. Cooperation can be a means to share risk, save costs, pool know how and launch innovation faster. In particular for small and medium-sized enterprises cooperation is an important means to adapt to the changing market place.

3. Horizontal cooperation may, however, also lead to competition problems. This is the case if the parties to a cooperation agree to fix prices, output or share markets, or if the cooperation enables the parties to maintain, gain or increase market power and thereby causes negative market effects with respect to prices, output, innovation or the variety and quality of goods.

4. The Commission, while recognising the economic benefits that can be generated by cooperation, has to ensure that effective competition is maintained. Article 81 provides the legal framework for a balanced assessment taking into account both anti-competitive effects as well as economic benefits.

5. Until the adoption of these guidelines two notices and two block exemption regulations provided guidance for the assessment of horizontal cooperation under Article 81(1). The notices covered certain legal forms of agreements such as the notice on joint ventures or - as the 1968 notice on cooperation agreements - dealt with certain types of cooperation falling outside Article 81. Regulations (EEC) No 417/85 and (EEC) No 418/85 exempted certain forms of specialisation and R & D agreements.

6. Changing markets have generated an increasing variety and use of horizontal cooperation. More complete and updated guidance is needed to improve clarity and transparency regarding the applicability of Article 81 in this area. Within the assessment greater emphasis has to be put on economic criteria to better reflect recent developments in enforcement practice and case law of the Community Courts.

7. The purpose of these guidelines is to provide an analytical framework for the most common types of horizontal cooperation. This framework is primarily based on criteria that help to analyse the economic context of a cooperation agreement. Economic criteria such as the market power of the parties and other factors relating to the market structure, form a key element of the assessment of the market impact likely to be caused by a cooperation and therefore for the assessment under Article 81. Given the enormous variety in types and combinations of horizontal cooperation and market circumstances in which they operate, it is impossible to provide specific answers for every possible scenario. The present analytical framework based on economic criteria will nevertheless assist businesses in assessing the compatibility of an individual cooperation agreement with Article 81.

8. The guidelines do not only replace the abovementioned notices in the field of horizontal cooperation, but also cover a wider range of the most common types of horizontal agreements. They form a complement to the block exemption regulations on R & D and specialisation.

1.2. SCOPE OF THE GUIDELINES

9. These guidelines cover agreements or concerted practices(2) entered into between two or more companies operating at the same level(s) in the market, e.g. at the same level of production or distribution. Within this context the focus is on cooperation between competitors. The term "competitors" as used in these guidelines includes both actual(3) and potential(4) competitors.

10. The present guidelines are however not addressing all possible horizontal agreements. They are only concerned with those types of cooperation which potentially generate efficiency gains, i.e. agreements on R & D, production, purchasing, commercialisation, standardisation, and environmental agreements. Other types of horizontal agreements between competitors, for example, on the exchange of information or on minority shareholdings, are to be addressed separately.

11. Agreements that are entered into between companies operating at a different level of the production or distribution chain, i.e. vertical agreements, are in principle excluded from these guidelines and dealt with in the guidelines(5) and block exemption regulation(6) on vertical restraints. However, to the extent that vertical agreements, for example distribution agreements, are concluded between competitors, the effects of the agreement on the market and the possible competition problems can be similar to horizontal agreements. Therefore, these agreements have to be assessed according to the principles described in the present guidelines. This does not exclude the additional application of the guidelines on vertical restraints to these agreements to assess the vertical restraints included in such agreements(7).

12. Agreements may combine different levels of cooperation, for example R & D and the production of its results. Unless they fall under the merger control regulation, these agreements are covered by the guidelines. The centre of gravity of the cooperation determines which section of the present guidelines applies to the agreement in question. In the determination of the centre of gravity, account is taken in particular of two factors: (i) the starting point of the cooperation, and (ii) the degree of integration of the different functions which are being combined. Cooperation involving both joint R & D and joint production of the results would thus normally be covered in the section on "Agreements on Research and Development", as the joint production will only take place if the joint R & D is successful. This implies that the results of the joint R & D are decisive for production. The R & D agreement can thus be regarded as the starting point of the cooperation. This assessment would change if the agreement would foresee a full integration in the area of production and only a partial integration of some R & D activities. In this case, the possible anti-competitive effects and economic benefits of the cooperation would largely relate to the joint production, and the agreement would therefore be examined according to the principles set out in the section on "production agreements". More complex arrangements such as strategic alliances that combine a number of different areas and instruments of cooperation in varying ways are not covered by the guidelines. The assessment of each individual area of cooperation within an alliance may be carried out with the help of the corresponding chapter in the guidelines. However, complex arrangements must also be analysed in their totality. Due to the variety of areas an alliance may combine, it is impossible to give general guidance for such an overall assessment. Alliances or other forms of cooperation that primarily declare intentions are impossible to assess under the competition rules as long as they lack a precise scope.

13. The criteria set out in the guidelines apply to cooperation concerning both products and services(8). However, the guidelines do not apply to the extent that sector-specific rules apply, as is the case for transport or insurance(9). Operations that come under the merger control regulation(10) are also not the subject of the present guidelines.

14. Article 81 only applies to those horizontal cooperation agreements which may affect trade between Member States. These guidelines are not concerned with the analysis of the capability of a given agreement to affect trade. The following principles on the applicability of Article 81 are therefore based on the assumption that trade between Member States is affected. In practice, however, this issue needs to be examined on a case-by-case basis.

15. The assessment under Article 81 as described in these guidelines is without prejudice to the possible parallel application of Article 82 of the EC Treaty to horizontal cooperation agreements. Furthermore, these guidelines are without prejudice to the interpretation that may be given by the Court of First Instance and the Court of Justice of the European Communities in relation to the application of Article 81 to horizontal cooperation agreements.

1.3. BASIC PRINCIPLES FOR THE ASSESSMENT UNDER ARTICLE 81

1.3.1. Article 81(1)

16. Article 81(1) applies to horizontal cooperation agreements which have as their object or effect the prevention, restriction or distortion of competition(11).

17. In some cases the nature of a cooperation indicates from the outset the applicability of Article 81(1). This is the case for agreements that have as their object a restriction of competition by means of price fixing, output limitation or sharing of markets or customers. These agreements are presumed to have negative market effects. It is therefore not necessary to examine their actual effects on competition and the market.

18. Most horizontal cooperation agreements, however, do not have as their object a restriction of competition. Therefore, an analysis of the effects of the agreement is necessary. For this analysis it is not sufficient that the agreement limits competition between the parties. It must also be likely to affect competition in the market to such an extent that negative market effects as to prices, output, innovation or the variety or quality of goods and services can be expected.

19. Whether the agreement is able to cause such negative market effects depends on the economic context taking into account both, the nature of the agreement and the parties' combined market power which determines, together with other structural factors, the capability of the cooperation to affect overall competition to such a significant extent.

Nature of the agreement

20. The nature of an agreement relates to factors such as the area and objective of the cooperation, the competitive relationship between the parties and the extent to which they combine their activities. These factors indicate the likelihood of the parties coordinating their behaviour in the market.

21. Certain types of agreement, for instance most R & D agreements or cooperation to set standards or improve environmental conditions, are less likely to include restrictions with respect to prices and output. If these types have negative effects at all these are likely to be on innovation or the variety of goods. They may also give rise to foreclosure problems.

22. Other types of cooperation such as agreements on production or purchasing typically cause a certain degree of commonality in (total) costs. If this degree is significant, the parties may more easily coordinate market prices and output. A significant degree of commonality in costs can only be achieved under certain conditions: First, the area of cooperation, for example, production and purchasing, has to account for a high proportion of the total costs in a given market. Secondly, the parties need to combine their activities in the area of cooperation to a significant extent. This is, for instance, the case, where they jointly manufacture or purchase an important intermediate product or a high proportion of their total output of a final product.

Agreements that do not fall under Article 81(1)

23. Some categories of agreements do not fall under Article 81(1) because of their very nature. This is normally true for cooperation that does not imply a coordination of the parties' competitive behaviour in the market such as

- cooperation between non-competitors,

- cooperation between competing companies that can not independently carry out the project or activity covered by the cooperation,

- cooperation concerning an activity far removed from the marketing level.

These categories of cooperation could only come under Article 81(1) if they involve firms with significant market power and are likely to cause foreclosure problems vis-à-vis third parties.

Agreements that almost always fall under Article 81(1)

24. Another category of agreements can be assessed from the outset as normally falling under Article 81(1). This concerns cooperation agreements that have the object to restrict competition by means of price fixing, output limitation or sharing of markets or customers. These restrictions are considered to be the most harmful, because they directly interfere with the outcome of the competitive process. Price-fixing and output-limitation directly lead to customers paying higher prices or not receiving the desired quantities. The sharing of markets or customers reduces the choice available to customers and therefore also leads to higher prices or reduced output. It can therefore be presumed that these restrictions have negative market effects. They are therefore almost always prohibited.

25. This does, however, not apply if such a provision is necessary for the functioning of an otherwise non-restrictive or exemptable agreement. An example would be a production joint venture which also markets the jointly manufactured goods. It is inherent to the functioning of such a joint venture that decisions on output and prices are taken jointly by the parties to such an agreement. In this case, the inclusion of provisions on prices or output does not automatically cause the agreement to fall under Article 81(1). The provisions on prices or output will have to be assessed together with the other effects of the joint venture on the market following the framework described below to determine the applicability of Article 81(1).

Agreements that may fall under Article 81(1)

26. Agreements that do not belong to the above-mentioned categories need further analysis in order to decide whether they fall under Article 81(1). The analysis has to include market-related criteria such as the market position of the parties and other structural factors.

Market power and market structure

27. The starting point for the analysis is the position of the parties in the markets affected by the cooperation. This determines whether or not they are likely to maintain, gain or increase market power through the cooperation, i.e. have the ability to cause negative market effects on prices, output, innovation or the variety or quality of goods and services. To carry out this analysis the relevant market(s) have to be defined by using the methodology of the market definition notice of the Commission(12). Where specific types of markets are concerned such as purchasing or technology markets, these guidelines will provide additional guidance.

28. If the parties together have a weak market position(13), a restrictive effect of the cooperation is unlikely and no further analysis is required. Given the variety of cooperation types and the different effects they may cause in different market situations, it is impossible to give a general market share threshold above which sufficient market power for causing restrictive effects can be assumed.

29. In addition to the combined market shares, the parties' individual market shares must be taken into account. A high combined market share normally cannot be seen as indicating a restrictive effect on competition in the market if one of two parties has only insignificant market shares.

30. Where the combined market position is strong and the addition of market shares not insignificant, the market concentration, i.e. the position and number of competitors, may have to be taken into account as an additional factor to assess the impact of the cooperation on market competition. As an indicator the Herfindahl-Hirshman Index ("HHI"), which sums up the squares of the individual market shares of all competitors(14), can be used: With an HHI below 1000 the market concentration can be characterised as low, between 1000 and 1800 as moderate and above 1800 as high.

31. Depending on the market position of the parties and the concentration in the market, other factors such as the stability of market shares over time, entry barriers and the likelihood of market entry, the countervailing power of buyers/suppliers or the nature of the products (for example homogeneity, maturity) have to be considered as well. Where an impact on competition in innovation is likely and can not be assessed adequately on the basis of existing markets, specific factors to analyse these impacts may have to be taken into account (see Chapter 3, R & D agreements).

1.3.2. Article 81(3)

32. Agreements that come under Article 81(1) may be exempted provided the conditions of Article 81(3) are fulfilled. This is the case if the agreement

- contributes to improving the production or distribution of goods or to promoting technical or economic progress,

- allows consumers a fair share of the resulting benefit,

and does not

- impose restrictions which are not indispensable to the attainment of the above listed objectives,

- afford the possibility of eliminating competition in respect of a substantial part of the products in question.

Economic benefits

33. The first condition requires that the agreement contributes to improving the production or distribution of goods or to promoting technical or economic progress. As these benefits relate to static or dynamic efficiencies, they can be referred to as "economic benefits". Economic benefits may outweigh restrictive effects on competition. For instance, a cooperation may enable firms to offer goods or services at lower prices, better quality or to launch innovation more quickly. Most efficiencies stem from the combination and integration of different skills or resources. The parties must demonstrate that the efficiencies are likely to be caused by the cooperation and cannot be achieved by less restrictive means (see also below). Efficiency claims must be substantiated. Speculations or general statements on cost savings are not sufficient.

34. The Commission does not take into account cost savings that arise from output reduction, market sharing, or from the mere exercise of market power.

Fair share for the consumers

35. Economic benefits have to favour not only the parties to the agreement, but also the consumers. Generally, the transmission of the benefits to the consumers will depend on the intensity of competition within the relevant market. Competitive pressure will normally ensure that cost-savings are being passed on by way of lower prices or that companies have an incentive to bring new products to the market as quickly as possible. Therefore, if sufficient competition which effectively constrains the parties to the agreement is maintained on the market, the competitive process will normally ensure that the consumers receive a fair share of the economic benefits.

Indispensability

36. The restriction of competition must be necessary to achieve the economic benefits. If there are less restrictive means to achieve similar benefits, the claimed efficiencies cannot be used to justify the restrictions of competition. Whether or not individual restrictions are necessary depends on market circumstances and on the duration of the agreement. For instance, exclusivity agreements may prevent a participating party from free riding and may therefore be acceptable. Under certain circumstances they may, however, not be necessary and worsen a restrictive effect.

No elimination of competition

37. One of the key elements for the assessment under Article 81(3) is the question whether or not competition is likely to be eliminated. The analysis can be carried out on the basis of the assessment of market power and market structures under Article 81(1). The only difference is that under Article 81(3) a higher degree of market power is permitted provided that significant efficiencies are generated which outweigh the anti-competitive effects. The absolute limit for exemption is the elimination of effective competition. Even considerable efficiency gains cannot justify the elimination of effective competition. This is effectively the point at which the parties are or would be likely to become dominant.

Block exemption regulations for R & D and specialisation

38. Under certain conditions the criteria of Article 81(3) can be assumed to be fulfilled for specified categories of agreements. This is in particular the case for R & D and production agreements where the combination of complementary skills or assets can be the source of substantial efficiencies. These guidelines should be seen as a complement to the revised block exemption regulations on R & D and specialisation which replace Regulation (EEC) No 417/85 and Regulation No 418/85. The block exemption regulations exempt most common forms of agreements in the fields of production/specialisation up to a market share threshold of 20 % and in the field of R & D up to a market share threshold of 25 % provided that the agreements fulfil the conditions for application of the block exemption and do not contain "hard core" restrictions ("black clauses") that render the block exemption inapplicable.

1.4. STRUCTURE OF THE FOLLOWING CHAPTERS ON TYPES OF COOPERATION

39. The guidelines are divided into chapters relating to certain types of agreements. Each chapter is structured according to the analytical framework described above under point 1.3. Where necessary, specific guidance on the definition of relevant markets is given (e.g. in the field of R & D or with respect to purchasing markets).

2. AGREEMENTS ON RESEARCH AND DEVELOPMENT

2.1. DEFINITION

40. Research and development (R & D) agreements may vary in form and scope. They range from outsourcing certain R & D activities to the joint improvement of existing technologies or to a cooperation concerning the research, development and marketing of completely new products. They may take the form of a cooperation agreement or of a jointly controlled company. This chapter applies to all forms of R & D agreements including related agreements concerning the production or commercialisation of the R & D results provided that the cooperation's centre of gravity lies in R & D(15).

41. Cooperation in R & D may reduce duplicative, unnecessary costs, lead to significant cross fertilisation of ideas and experience and thus result in products and technologies being developed more rapidly than would otherwise be the case. As a general rule, R & D cooperation tends to increase overall R & D activities.

42. Small and medium-sized Enterprises (SMEs) form a dynamic and heterogeneous community which is confronted by many challenges, including the growing demands of larger companies for which they often work as subcontractors. In R & D intensive sectors, fast growing SMEs, more often called "start-up companies", also aim at becoming a leader in fast developing market segments. To meet those challenges and to remain competitive, SMEs need constantly to innovate. Through R & D cooperation there is a likelihood that overall R & D by SMEs will increase and that they will be able to compete more vigorously with stronger market players.

43. Under certain circumstances, however, R & D agreements may cause competition problems such as restrictive effects on prices, output, innovation, or variety or quality of goods.

2.2. RELEVANT MARKETS

44. The key to defining the relevant market when assessing the effects of an R & D agreement is to identify those products, technologies or R & D efforts, that will act as a competitive constraint on the parties. At one end of the spectrum of possible situations, the innovation may result in a product (or technology) which competes in an existing product (or technology) market. This is the case with R & D directed towards slight improvements or variations, such as new models of certain products. Here, possible effects concern the market for existing products. At the other end, innovation may result in an entirely new product which creates its own new market (for example, a new vaccine for a previously incurable disease). In such a case, existing markets are only relevant if they are somehow related to the innovation in question. Consequently, and if possible, the effects of the cooperation on innovation have to be assessed. However, most of the cases probably concern situations in between these two extremes, i.e. situations in which innovation efforts may create products (or technology) which, over time, replace existing ones (for example, CDs which have replaced records). A careful analysis of those situations may have to cover both, existing markets and the impact of the agreement on innovation.

Existing markets

a) Product markets

45. When the cooperation concerns R & D for the improvement or refinement of existing products, these existing products including its close substitutes form the relevant market concerned by the cooperation(16).

46. If the R & D efforts aim at a significant change of an existing product or even at a new product replacing existing ones, substitution with the existing product may be imperfect or long-term. Consequently, the old and the potentially emerging new products are not likely to belong to the same relevant market. The market for existing products may nevertheless be concerned, if the pooling of R & D efforts is likely to result in the coordination of the parties' behaviour as suppliers of existing products. An exploitation of power in the existing market, however, is only possible if the parties together have a strong position with respect to both, the existing product market and R & D efforts.

47. If the R & D concerns an important component of a final product, not only the market for this component may be relevant for the assessment, but the existing market for the final product as well. For instance, if car manufacturers cooperate in R & D related to a new type of engine, the car market may be affected by this R & D cooperation. The market for final products, however, is only relevant for the assessment, if the component at which the R & D is aimed, is technically or economically a key element of these final products and if the parties to the R & D agreement are important competitors with respect to the final products.

b) Technology markets

48. R & D cooperation may not only concern products but also technology. When rights to intellectual property are marketed separately from the products concerned to which they relate, the relevant technology market has to be defined as well. Technology markets consist of the intellectual property that is licensed and its close substitutes, i.e. other technologies which customers would substitute at comparable costs. The methodology for defining technology markets follows the same principles as product market definition(17). The parties' position in the market for existing technology is a relevant assessment criterion where the R & D cooperation concerns the significant improvement of existing technology or a new technology that is likely to replace the existing technology. Here the same considerations apply as described above under "existing product markets".

Competition in innovation (R & D efforts)

49. R & D cooperation may not, or may not only, affect competition in existing markets, but competition in innovation. This is the case where cooperation concerns the development of new products/technology which either may, if emerging, one day replace existing ones or which are being developed for a new intended use and will therefore not replace existing products but create a completely new demand. The effects on competition in innovation are important in these situations, but can in some cases not be sufficiently assessed by analysing actual or potential competition in existing product/technology markets. In this respect, two scenarios can be distinguished, depending on the nature of the innovative process in a given industry.

50. In the first scenario, which is for instance present in the pharmaceutical industry, the process of innovation is structured in a way that it is possible at an early stage to identify R & D poles. R & D poles are R & D efforts directed towards a certain new product or technology, and the substitutes for that R & D, i.e. R & D aimed at developing substitutable products or technology for those developed by the cooperation and having comparable access to resources as well as a similar timing. In this case, it can be analysed if after the agreement there will be a sufficient number of R & D poles left. The starting point of the analysis is the R & D of the parties. Then credible competing R & D poles have to be identified. In order to assess the credibility of competing poles, the following aspects have to be taken into account: the nature, scope and size of possible other R & D efforts, their access to financial and human resources, know-how/patents, or other specialised assets as well as their timing and their capability to exploit possible results. R & D pole is not a credible competitor if it can not be regarded as a close substitute for the parties' R & D effort from the viewpoint of, for instance, access to resources or timing.

51. In the second scenario, the innovative efforts in an industry are not clearly structured so as to allow the identification of R & D poles. In this situation, the Commission would, absent exceptional circumstances, not try to assess the impact of a given R & D cooperation on innovation in such a scenario, but would limit its assessment to product and/or technology markets which are related to the R & D cooperation in question.

2.3. ASSESSMENT UNDER ARTICLE 81(1)

2.3.1. Nature of the agreement

2.3.1.1. Agreements that do not fall under Article 81(1)

52. Most R & D agreements do not fall under Article 81(1). First, this can be said for agreements relating to cooperation in R & D at a rather theoretical stage, far removed from the marketing of possible results.

53. Moreover, R & D cooperation between non-competitors does generally not restrict competition(18). The competitive relationship between the parties has to be analysed in the context of affected existing markets and/or innovation. If the parties are not able to carry out the necessary R & D independently, there is no competition to be restricted. This can apply, for example, to firms bringing together complementary skills, technologies and other resources. The issue of potential competition has to be assessed on a realistic basis. For instance, parties cannot be defined as potential competitors simply because the cooperation enables them to carry out the R & D activities. The decisive question is whether each party independently has the necessary means as to assets, know-how and other resources.

54. R & D cooperation by means of outsourcing of previously captive R & D is often carried out by specialised companies or research institutes of universities or other academic bodies which are not active in the exploitation of the results. Typically such agreements are combined with a transfer of know-how and/or an exclusive supply clause concerning possible results. Due to the complementary nature of the cooperating parties in these scenarios, Article 81(1) does not apply.

55. R & D cooperation which does not include the joint exploitation of possible results by means of licensing, production and/or marketing rarely falls under Article 81(1). Those "pure" R & D agreements can only cause a competition problem, if effective competition with respect to innovation is significantly reduced.

2.3.1.2. Agreements that almost always fall under Article 81(1)

56. Cooperation that does not truly concern R & D, but serves as a tool to engage in a disguised cartel, i.e. otherwise prohibited price fixing, output limitation or market allocation, falls under Article 81(1). However, an R & D agreement which includes the joint marketing of possible future results is not necessarily restrictive of competition.

2.3.1.3. Agreements that may fall under Article 81(1)

57. R & D agreements that cannot be assessed from the outset as clearly non-restrictive may fall under Article 81(1)(19) and have to be analysed in their economic context. This applies to R & D cooperation which is set up at a stage rather close to the market launch and which is agreed between companies that are competitors on either existing product/technology markets or on innovation markets.

2.3.2. Market power and market structures

58. R & D cooperation can cause negative market effects in three respects: First, it may restrict innovation, secondly it may cause the coordination of the parties' behaviour in existing markets and thirdly, foreclosure problems may occur at the level of the exploitation of possible results. These types of negative market effects, however, are only likely to emerge when the parties to the cooperation have significant power on the existing markets and/or competition with respect to innovation is significantly reduced. Without market power there is no incentive to coordinate behaviour on existing markets or to reduce or slow down innovation. A foreclosure problem may only arise in the context of cooperation involving at least one player with significant market power for a key technology and the exclusive exploitation of results.

Block exemption

59. Absent hard core restrictions it can be assumed that R & D cooperation agreements bring about economic benefits. Under these conditions it appears reasonable to block exempt such agreements which result in a restriction of competition up to a market share threshold indicating, at best, a limited degree of market power. Therefore, the revised Regulation exempts different forms of R & D agreements which do not include hard core restrictions (see Article 5) and provided that the combined market share of the parties in the affected existing market(s) does not exceed 25 %.

R & D agreements falling outside the block exemption

60. Agreements falling outside of the block exemption due to a stronger market position of the parties do not necessarily restrict competition. However, the stronger the combined position of the parties on existing markets and/or the more competition in innovation is restricted, the more likely is the application of Article 81(1) and the assessment requires a more detailed analysis.

61. If the R & D is directed at the improvement or refinement of existing products/technology possible effects concern the relevant market(s) for these existing products/technology. Effects on prices, output and/or innovation in existing markets are, however, only likely if the parties together have a strong position, entry is difficult and few other innovation activities are identifiable. Furthermore, if the R & D only concerns a relatively minor input of a final product, effects as to competition in these final products are, if at all, very limited. In general, a distinction has to be made between pure R & D agreements and more comprehensive cooperation involving different stages of the exploitation of results (i.e. licensing, production, marketing). As said above, pure R & D agreements rarely come under Article 81(1). This is, in particular, true for R & D directed towards a limited improvement of existing products/technology. If in such a scenario, the R & D cooperation includes joint exploitation only by means of licensing, restrictive effects such as foreclosure problems are unlikely. If, however, joint production and/or marketing of the slightly improved products/technology are included, the cooperation has to be examined more closely. First, negative effects as to prices and output in existing markets are more likely if strong competitors are involved in such a situation. Secondly, the cooperation may come closer to a production agreement because the R & D activities may, de facto, not form the centre of gravity of such a collaboration.

62. If the R & D is directed at an entirely new product (or technology) which creates its own new market, price and output effects on existing markets are rather unlikely. The analysis has to focus on possible restrictions of innovation concerning, for instance, the quality and variety of possible future products/technology or the speed of innovation. Those restrictive effects can arise where two or more of the few firms engaged in the development of such a new product, start to cooperate at a stage where they are each independently rather near to the launch of the product. In such a case, innovation may be restricted even by a pure R & D agreement. In general, however, R & D cooperation concerning entirely new products is pro-competitive. This principle does not change significantly, if the joint exploitation of the results, even joint marketing, is involved. Indeed, the issue of joint exploitation in these situations is only relevant where foreclosure from key technologies play a role. Those problems would, however, not arise where the parties grant licences to third parties.

63. Most R & D agreements will lie somewhere in between the two situations described above. They may therefore have effects on innovation as well as repercussions on existing markets. Consequently, both the existing market and the effect on innovation may be of relevance for the assessment with respect to the parties' combined positions, concentration ratios, number of players/innovators and entry conditions. In some cases there can be restrictive price/output effects on existing markets and a negative impact on innovation by means of slowing down the speed of development. For instance, if significant competitors on an existing technology market cooperate to develop a new technology which may one day replace existing products, this cooperation is likely to have restrictive effects if the parties have significant market power on the existing market (which would give an incentive to exploit it), and if they also have a strong position with respect to R & D A similar effect can occur, if the major player in an existing market cooperates with a much smaller or even potential competitor who is just about to emerge with a new product/technology which may endanger the incumbent's position.

64. Agreements may also fall outside the block exemption irrespective of the market power of the parties. This applies for instance to agreements which restrict access of a party to the results of the work because they do not, as a general rule, promote technical and economic progress by increasing the dissemination of technical knowledge between the parties(20). The block exemption provides for a specific exception to this general rule in the case of academic bodies or research institutes which are not active in the industrial exploitation of the results of research and development(21). Nevertheless, it should be noted that agreements containing exclusive access rights may, where they fall under Article 81(1), meet the criteria for exemption under Article 81(3), particularly where exclusive access rights are economically indispensable in view of the market, risks and scale of the investment required to exploit the results of the research and development.

2.4. ASSESSMENT UNDER ARTICLE 81(3)

2.4.1. Economic benefits

65. Most R & D agreements with or without joint exploitation of possible results, bring about economic benefits by means of cost savings and cross fertilisation of ideas and experience, thus resulting in improved or new products and technologies being developed more rapidly than would otherwise be the case. Some of those benefits can be assumed to be caused by R & D cooperation. Therefore a block exemption is justified. If considerable market power is created or increased by the cooperation, the parties have to demonstrate significant benefits in carrying out R & D, a quicker launch of new products/technology or other efficiencies.

2.4.2. Indispensability

66. An R & D agreement can not be exempted if it imposes restrictions that are not indispensable to the attainment of the above-mentioned benefits. The individual clauses listed in the block exemption, Article 5, will in most cases render an exemption impossible following an individual assessment too, and can therefore be regarded as a good indication of restrictions that are not indispensable to the cooperation.

2.4.3. No elimination of competition

67. No exemption will be possible, if the parties are afforded the possibility of eliminating competition in respect of a substantial part of the products (or technologies) in question. Thus, dominance on existing markets and with respect to innovation must not be created or increased. For innovation this is the case, for example, if the agreement combines the only two existing poles of research.

Time of the assessment and duration of the exemption

68. R & D agreements extending to the joint production and marketing of new products/technology require particular attention as to the time of the assessment.

69. At the beginning of an R & D cooperation, its success and factors such as the parties' future market position as well as the development of future product or technology markets are not known. Consequently, the assessment at the point in time when the cooperation is formed is limited to the (then) existing product or technology markets and/or innovation markets as described in this chapter. If, on the basis of this analysis, competition is not likely to be eliminated, the R & D agreement can benefit from an exemption. This will normally cover the duration of the R & D phase plus, in as far as the joint production and marketing of the possible results is concerned, an additional phase for a possible launch and market introduction. The reason for this additional exemption phase is that the first companies to reach the market with a new product/technology will often enjoy very high initial market shares and successful R & D is also often rewarded by intellectual property protection. A strong market position due to this "first mover advantage" cannot normally be interpreted as elimination of competition. Therefore, the block exemption (ex ante) covers R & D agreements for an additional period of five years (that is, beyond the R & D phase) irrespective of whether or not the parties obtain with their new products/technology a high share within this period. This also applies to the individual assessment of cases falling outside the block exemption provided that the criteria of Article 81(3) as to the other aspects of the agreement are fulfilled. This does not exclude the possibility that a period of more than five years also meets the criteria of Article 81(3) if it can be shown to be the minimum period of time necessary to guarantee an adequate return on the investment involved.

70. If a new assessment of an R & D cooperation is made after that period, for example, following a complaint, the analysis has to be based on the (then) existing market situation. The block exemption still continues to apply if the parties' share on the (then) relevant market does not exceed 25 %. Similarly, Article 81(3) continues to apply to R & D agreements falling outside the block exemption provided that the criteria for an exemption are fulfilled.

2.5. EXAMPLES

71. Example 1

Situation: There are two major companies on the European market for the manufacture of existing electronic components: A (30 %) and B (30 %). They have each made significant investment in the R & D necessary to develop miniaturised electronic components and have developed early prototypes. They now agree to pool these R & D efforts by setting up a joint venture to complete the R & D and produce the components, which will be sold back to the parents, who will commercialise them separately. The remainder of the market consists of small firms without sufficient resources to undertake the necessary investments.

Analysis: Miniaturised electronic components, while likely to compete with the existing components in some areas, are essentially a new technology and an analysis must be made of the poles of research destined towards this future market. If the joint venture goes ahead then only one route to the necessary manufacturing technology will exist, whereas it would appear likely that A and B could reach the market individually with separate products. While the agreement could have advantages in bringing a new technology forward quicker, it also reduces variety and creates a commonality of costs between the parties. Furthermore, the possibility for the parties to exploit their strong position on the existing market must be taken into account. Since they would face no competition at the R & D level, their incentives to pursue the new technology at a high pace could be severely reduced. Although some of these concerns could be remedied by requiring the parties to license key know-how for manufacturing miniature components to third parties on reasonable terms, it may not be possible to remedy all concerns and fulfil the conditions for an exemption.

72. Example 2

Situation: A small research company A which does not have its own marketing organisation has discovered and patented a pharmaceutical substance based on new technology that will revolutionise the treatment of a certain disease. Company A enters into an R & D agreement with a large pharmaceutical producer B of products that have so far been used for treating the disease. Company B lacks any similar R & D programme. For the existing products company B has a market share of around 75 % in all EU countries, but patents are expiring over the next five-year period. There exist two other poles of research at approximately the same stage of development using the same basic new technology. Company B will provide considerable funding and know-how for product development, as well as future access to the market. Company B is granted a license for the exclusive production and distribution of the resulting product for the duration of the patent. It is expected that the parties could jointly bring the product to market in five to seven years.

Analysis: The product is likely to belong to a new relevant market. The parties bring complementary resources and skills to the cooperation, and the probability of the product coming to market increases substantially. Although Company B is likely to have considerable market power on the existing market, this power will be decreasing shortly and the existence of other poles of research are likely to eliminate any incentive to reduce R & D efforts. The exploitation rights during the remaining patent period are likely to be necessary for Company B to make the considerable investments needed and Company A has no own marketing resources. The agreement is therefore unlikely to restrict competition.

73. Example 3

Situation: Two engineering companies that produce vehicle components, agree to set up a joint venture to combine their R & D efforts to improve the production and performance of an existing component. They also pool their existing technology licensing businesses in this area, but will continue to manufacture separately. The two companies have market shares in Europe of 15 % and 20 % on the OEM product market. There are two other major competitors together with several in-house research programmes by large vehicle manufacturers. On the worldwide market for the licensing of technology for these products they have shares of 20 % and 25 %, measured in terms of revenue generated, and there are two other major technologies. The product cycle for the component is typically two to three years. In each of the last five years one of the major firms has introduced a new version or upgrade.

Analysis: Since neither company's R & D effort is aimed at a completely new product, the markets to consider are for the existing components and for the licensing of relevant technology. Although their existing R & D programmes broadly overlap, the reduced duplication through the cooperation could allow them to spend more on R & D than individually. Several other technologies exist and the parties' combined market share on the OEM market does not bring them into a dominant position. Although their presence on the technology market, at 45 %, is close to dominance, there are competing technologies and the vehicle manufacturers, who do not currently licence their technology, are also potential entrants on this market thus constraining the ability of the parties to raise price. As described, the joint venture is likely to benefit from an exemption.

3. PRODUCTION AGREEMENTS (INCLUDING SPECIALISATION AGREEMENTS)

3.1. DEFINITION

74. Production agreements may vary in form and scope. They may take the form of joint production through a joint venture(22), i.e. a jointly controlled company that runs one or several production facilities, or can be carried out by means of specialisation or subcontracting agreements whereby one party agrees to carry out the production of a certain product.

75. Generally, one can distinguish three categories of production agreements: joint production agreements, whereby the parties agree to produce certain products jointly, specialisation agreements, whereby the parties agree unilaterally or reciprocally to cease production of a product and to purchase it from the other party, and subcontracting agreements whereby one party (the "contractor") entrusts to another party (the "subcontractor") the production of a product.

76. Subcontracting agreements are vertical agreements. They are therefore, to the extent that they contain restrictions of competition, covered by the block exemption regulation and the guidelines on vertical restraints. There are however two exceptions to this rule: Subcontracting agreements between competitors(23), and subcontracting agreements between non-competitors involving the transfer of know-how to the subcontractor(24).

77. Subcontracting agreements between competitors are covered by these guidelines(25). Guidance for the assessment of subcontracting agreements between non-competitors involving the transfer of know-how to the subcontractor is given in a separate Notice(26).

3.2. RELEVANT MARKETS

78. In order to assess the competitive relationship between the co-operating parties, the relevant product and geographic market(s) directly concerned by the cooperation (i.e. the market(s) to which products subject to the agreement belong) must first be defined. Secondly, a production agreement in one market may also affect the competitive behaviour of the parties in a market which is downstream or upstream or a neighbouring market closely related to the market directly concerned by the cooperation(27) (so-called "spill-over markets"). However, spill-over effects only occur if the cooperation in one market necessarily results in the coordination of competitive behaviour in another market, i.e. if the markets are linked by interdependencies, and if the parties are in a strong position on the spill-over market.

3.3. ASSESSMENT UNDER ARTICLE 81(1)

3.3.1. Nature of the agreement

79. The main source of competition problems that can possibly arise from production agreements is the coordination of the parties' competitive behaviour as suppliers. This type of competition problems arises where the cooperating parties are actual or potential competitors on at least one of these relevant market(s), i.e. on the markets directly concerned by the cooperation and/or on possible spill-over markets. Foreclosure problems and other negative effects towards third parties may also arise, but are less frequent in the context of production agreements(28).

80. The fact that the parties are competitors does not automatically cause the coordination of their behaviour. In addition, the parties normally need to cooperate with regard to a significant part of their activities in order to achieve a substantial degree of commonality of costs. The higher the degree of commonality of costs, the greater the potential for a limitation of price competition, especially in the case of homogenous products.

3.3.1.1. Agreements that do not fall under Article 81(1)

81. Production agreements between non-competitors are not normally caught by Article 81(1)(29). This is also true for agreements whereby inputs or components which have so far been manufactured for own consumption (captive production) are purchased from a third party, unless there are indications that the company which so far has only produced for own consumption could have entered the merchant market for sales to third parties without incurring significant additional costs or risks in response to small, permanent changes in relative market prices.

82. Even production agreements between competitors do not necessarily come under Article 81(1). First, cooperation between firms which compete on markets closely related to the market directly concerned by the cooperation, cannot be defined as restricting competition, if the cooperation is the only commercially justifiable possibility to enter a new market, to launch a new product or service or to carry out a specific project.

83. Secondly, an effect on the parties' competitive behaviour as market suppliers is highly unlikely if the parties have a small proportion of their total costs in common. For instance, a low degree of commonality in total costs can be assumed, where two or more companies agree to specialise or to jointly produce an intermediate product which only accounts for a small proportion of the production costs of the final product and, consequently, the total costs. A low degree of commonality of total costs can also be assumed where the parties jointly manufacture a final product, but only a small proportion as compared to the total output of the final product. Even if a significant proportion is jointly manufactured, the degree of commonality of total costs may nevertheless be low or moderate, if the cooperation concerns heterogeneous products which require a costly marketing.

3.3.1.2. Agreements that almost always fall under Article 81(1)

84. Agreements which fix the prices for market supplies of the parties, limit output or share markets or customer groups have the object of restricting competition and do almost always fall under Article 81(1). This does, however, not apply to cases

- where the parties agree on the output directly concerned by the production agreement (e.g. the capacity and production volume of a joint venture or the agreed amount of outsourced products), or

- where a production joint venture sets the sales prices for the manufactured products when the joint venture also carries out the distribution of these products so that the price fixing by the joint venture is the effect of integrating the various functions(30).

In both scenarios the agreement on output or prices will be assessed together with the other effects of the joint venture on the market in order to determine the applicability of Article 81(1).

3.3.1.3. Agreements that may fall under Article 81(1)

85. Production agreements that cannot be characterised as clearly restrictive or non-restrictive on the basis of the above factors may fall under Article 81(1)(31) and have to be analysed in their economic context. This applies to cooperation agreements between competitors which create a significant degree of commonality of costs, but do not involve hard core restrictions as described above.

3.3.2. Market power and market structures

86. The starting point for the analysis is the position of the parties in the market(s) concerned. This is due to the fact that without market power the parties to a production agreement do not have an incentive to coordinate their competitive behaviour as suppliers. Secondly, there is no effect on competition in the market without market power of the parties, even if the parties would coordinate their behaviour.

Block exemption

87. Most common types of production agreements can be assumed to cause some economic benefits in the form of economies of scale or scope or better production technologies unless they are an instrument for price fixing, output restriction or market and customer allocation. These benefits outweigh a limited degree of market power. It is therefore reasonable to block exempt production agreements which result in a restriction of competition up to a certain market share threshold. Therefore, agreements concerning unilateral or reciprocal specialisation as well as joint production are block exempted (revised Regulation on specialisation) provided that they do not contain hard core restrictions (see Article