Opinion of the Economic and Social Committee on the 'Green Paper on vertical restraints in EC competition policy` (97/C 296/05)

On 28 January 1997 the Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the 'Green Paper on vertical restraints in EC competition policy`.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 4 June 1997. The rapporteur was Mr Regaldo.

At its 347th plenary session (meeting of 9 July 1997) the Economic and Social Committee adopted the following opinion by 120 votes to one, with two abstentions.

1. Introduction

1.1. The Green Paper on vertical restraints in EC competition policy is to be welcomed, since it presents a series of pointers for further consideration (options), on the basis of a careful analysis of the economic and legal context of the restraints, and of criticisms about their application. They provide grounds for further discussion in order to allow the Commission to decide on the direction and form of the Community's future policy in this field in the full light of all the facts.

1.2. The importance of this policy is confirmed by the fact that producer-distributor agreements (or vertical restraints), designed to enhance the efficiency of distribution between companies and to facilitate penetration of new markets, contribute significantly to achieving two basic objectives of competition policy: promoting the integration of Member State economies in a single internal market, and maintaining effective competition throughout the Community's territory - which are both preconditions for European economic competitiveness, economic and social cohesion, and promoting consumer well-being.

1.3. Although they are intended to promote efficiency and market integration, vertical restraints may be used to the opposite effect; they have therefore been accorded particular importance in the sphere of Community competition policy for over thirty years, because of the strength of their influence, which may be positive or negative. The overall balance is substantially positive.

1.4. Although Community policy on vertical restraints has developed in line with economic and social change, the Commission believes a review to be necessary for the following reasons:

- single market legislation for the free movement of products is now largely in place;

- the Regulations governing vertical restraints will soon expire;

- there have been profound changes in methods of distribution that may have implications for policy;

- current economic thinking emphasizes the importance of market structure in determining the impact of vertical restraints.

1.5. While the green paper examines all vertical relationships in the distribution chain, it focuses mainly on four types of agreement, for each of which the Commission has, over the years, drawn up a specific policy set out either in regulations, individual decisions, or in the Commission's own practice:

Exclusive selling:

Block exemptions Regulation (1983/83), expires 31 December 1997

Exclusive buying: (including particular arrangements for beer and petrol distributors)

Block exemptions Regulation (1984/83), expires 31 December 1997

Franchising:

Block exemption Regulation (4087/88), expires 31 December 1999

Selective distribution:

Individual decisions.

In this connection, the Committee stresses the absolute necessity to extend the current regulations on exclusive selling (Regulation 1983/83) and exclusive buying (Regulation 1984/83), which expire at the end of 1997, until at least 31 December 1999, so that these regulations are revised at the same time as that on franchising, which is due to expire on 31 December 1999.

1.6. In the green paper, the Commission invites the Economic and Social Committee to express an opinion on the future of competition policy in the area of vertical restraints on the basis of a non-exhaustive list of four options:

- Option I: maintain current system;

- Option II: wider block exemptions;

- Option III: more focused block exemptions;

- Option IV: reduce scope of Article 85(1).

2. General comments

2.1. The Green Paper on vertical restraints fits into the broader context of competition policy, which the Economic and Social Committee recently discussed in its Opinion on the XXVth report on competition policy ().

2.2. In its opinion, the Committee emphasized a number of points which it would be worth repeating in the present document on account of their relevance and implications for vertical restraints: the growing complexity of economic phenomena; legal certainty as a positive factor for proper competition policy; the need to examine cooperatives with the necessary flexibility in the light of Article 85(3); and the role of communication technologies and their impact on agreements. Referring specifically to vertical cooperation, the Committee asked the Commission to reconsider this aspect with the necessary flexibility, since it should not necessarily be prohibited under Treaty Article 85.

2.3. The Committee welcomes the green paper because as well as responding to these demands, it initiates a revision process in an area of great sensitivity for competition policy, company competitiveness and single market integration.

2.4. The question of distribution is of the highest importance, directly involving productive areas of the economy, businesses and consumers.

2.5. The analysis of the structure of distribution made by the Commission in the green paper is unarguably well-balanced, and takes due account of changes presently under way, while also noting the difficulty in distinguishing clear trends because the market is not uniform, and because linguistic, cultural and economic differences exist between the various Member States, resulting in differing distribution structures.

2.6. It is of great importance, with a view to competition, to understand the current structural changes in distribution, generated by an increasingly competitive, open market with constantly fluctuating demand, in order to make the necessary changes to present policy on vertical restraints.

2.7. Moreover, the new competitive setting in which companies are operating on the threshold of the 21st century is radically different to that of the 1960s, when the basic regulations implementing Treaty Article 85 were adopted. It demands the partial replacement of the economic and legal theories which underlay the earlier interpretation of Article 85, particularly in the area of block exemption regulations.

2.8. The green paper spotlights the emergence of new supply and demand requirements which, on account of the growing use of computer technology, entail new types of relationship - far more stable and integrated than in the past - between suppliers, producers and distributors, and which allow the latter to gather market data and direct suppliers in line with consumer demand.

2.9. Further significant structural changes concern the concentration and development of organized independent trade and consisting principally of SMEs, taking the form of commercial cooperation (purchasing groups - voluntary unions); the green paper also places particular importance on the frequent changes in the balance of power between suppliers, producers and distributors on account of the market effects which new types of cooperation between them can have.

2.10. The Committee endorses the Commission's view in the green paper on the need to promote and maintain integrated, competitive markets and to implement an efficient competition policy in order to defend consumer interests and encourage business competitiveness, among SMEs in particular.

2.11. From this point of view, however, the Commission should, in revising vertical competition policy, acknowledge that the effects, either horizontal or vertical, of commercial cooperation (purchasing groups - voluntary chains) between independent SMEs are no different from those of the conventional franchising system in terms of boosting competition or distorting markets.

2.12. In brief, the Committee believes that similar economic situations with a comparable horizontal or vertical market impact should be approached in the same way, even if certain aspects of their legal structures may differ.

2.13. Consequently, the Committee more generally hopes that solutions will be devised for SMEs which facilitate their re-inclusion within the scope of the block exemption regulations, thereby helping them to measure up to market globalization.

2.14. The Committee shares the Commission's opinion on the basic validity of the policy so far practised in the sphere of vertical restraints.

2.15. Experience also appears to indicate that competition on the single market has worked, in terms of price structure, the growth of parallel trade and arbitrage, and market access for new producers and distributors.

2.16. The green paper clearly signals that a substantial new departure is both required and desirable in the next few years in Community competition policy with regard to vertical restraints.

2.17. However, the Committee suggests that this requirement, which must be defined in the light of the options proposed, should be integrated into the process of updating and modernizing the current legal and regulatory framework, rather than abandoning it.

2.18. The current block exemption regulations, which are certainly too rigid and often difficult to interpret, should be revised and adjusted in a flexible way, to bring them into line with the needs of a new culture of inter-firm cooperation, to enable them to provide sufficient room for the development of new types of distribution, and to ensure that future agreements enjoy the legal certainty they need.

2.19. The economic analysis contained in the green paper's conclusions confirm the general views previously expressed by the Committee. More specifically, emphasis is placed on the importance of the market structure in assessing the effects of vertical restraints, together with the need to focus on the market impact, rather than the formal content, of agreements. The consideration given to whether more favourable treatment should be given to vertical restraints accompanied by significant material or immaterial investment is of particular interest.

2.20. In the Committee's view, the list of criteria set out in the conclusions of the economic analysis contained in paragraph 85 of the Green Paper represents a potentially useful basis for assessing distribution efficiency and for defining political guidelines and general rules for competition policy in this area, while ensuring the legal certainty companies need.

2.21. The Committee would indicate the need for clarification of and coordination between the Commission's Notice on Agreements of Minor Importance ('de minimis`, COM(96) 722 final) and the options set out in the Green Paper, especially Option IV which provides for rebuttable presumption of compatibility with Article 85(1) up to the 20 % market share threshold. In the Committee's view, this should be interpreted as follows:

a) The 'de minimis` note should be applied as soon as adopted, while Option IV's presumption of compatibility is understood to apply to the regulations on block exemptions or any communications which may result from the consultations on the Green Paper.

b) The rebuttable presumption of compatibility with Article 85(1) under Option IV is understood to apply to all vertical restraints, not only those coming under the exemption regulations, a form of negative clearance similar to that under the 'de minimis` notice (non-applicability of Article 85(1) up to 10 % of market share), with the exception that with a market share of between 10 to 20 %, an agreement may still fall within the scope of Article 85(1) if, on the basis of a qualitative analysis, it is deemed to restrict competition.

3. Specific comments on options

3.1. Option I - maintain current system

The Commission has pointed out the advantages of the present system (see Chapter V). However, there are also certain disadvantages in the present system. Some examples are the following:

3.1.1. The block exemptions are based on forms of distribution and too rigid. They fail to accommodate forms of distribution which represent dynamic adaptations to changing market conditions.

3.1.2. In the case of vertical distribution agreements between firms in highly competitive product markets, there should be no need for notifications for individual exemption when the competition concerns are limited.

3.1.3. There is a need to give greater recognition to the fact that horizontal forms of cooperation between SMEs in the distribution sector are not necessarily restrictions on competition under Article 85(1) (cf. Gottrup Klim) and should be accommodated either with a rebuttable presumption of negative clearance or, where they fall within the scope of Article 85(1), under a block exemption regulation.

3.1.4. On balance, therefore, the Committee is not in favour of maintaining the status quo.

3.2. Option II - wider block exemptions

In principle, the Committee is not against wider block exemption.

3.2.1. The Committee endorses the following general measures to increase flexibility:

- the block exemptions would cover not only the precise clauses listed, but also clauses which are similar or less restrictive;

- the inclusion of prohibited clauses might not deny the benefit of the exemption for the rest of the agreement. The current position reinforced by the decision of the Court of Justice in the Delimitis case exacts a disproportionate penalty for poor wording of agreements or for miscalculations in assessing the impact of the anti-competitive effects of agreements;

- the block exemption could apply to agreements involving more than two parties;

- the Committee is less certain about the advantages of a block exemption for selective distribution. There is already considerable guidance in Court of Justice judgments and Commission decisions. These could be consolidated in a Notice but at the present stage an exemption seems unnecessary;

- the Committee would also welcome the addition of a non-opposition procedure to the distribution regulations, apart from the franchising regulation. These procedures could be useful to businesses in difficult and unusual cases and, as long as they are not judged to place undue strain on Commission resources, they should be introduced.

3.2.2. The Committee would also support the following specific measures to increase flexibility, mentioned in paragraph 284 of the green paper:

- the block exemption for exclusive distribution and exclusive purchasing could be extended to cover services or to permit the distributor to transform or process the contract goods. Distributors could be allowed to add significant value by changing the economic identity of the goods without losing the benefit of the block exemption; this would allow agreements such as industrial franchises or trade mark licenses, which are important forms of distribution, to benefit from a block exemption;

- the block exemption for exclusive purchasing agreements could be extended to cover partial as well as exclusive supply;

- the block exemption for franchising agreement could be extended to cover maximum resale price maintenance as an exception to the general principle that resale price maintenance will not be exempted; this would allow franchising organizations to match the concessions given to the consumer by large business organizations with integrated operations;

- associations or independent retailers could be permitted to benefit from block exemption regulations, provided that the independent retailers are small and medium-sized enterprises and that the market share of the association remains below a certain threshold;

- the Committee is less certain about the wisdom of setting up an arbitration procedure for distributors denied admission to a selective distribution network under the competition rules. The issue seems to be more one of civil law than competition law. Moreover, as the Galec/Centres Leclerc judgment () indicated, it is a matter for national judges to decide whether the selection criteria approved by the Commission have been applied in a concrete case of a refusal of admission in a discriminatory or disproportionate manner and if so, to implement the remedies available within the national legal order ();

- the Committee would also encourage the Commission to expand the block exemptions to apply to upstream linkages in the supply chain between producers and suppliers of necessary inputs. The wider the coverage of the block exemptions, the less the need for individual notifications of vertical agreements which pose no anti-competitive risk.

3.3. Option III - more focused block exemptions

3.3.1. In considering Option III attention should be drawn to the Committee's statement in its Opinion on the technology transfer block exemption (), that it was opposed to the inclusion of market shares as a precondition to block exemptions for vertical agreements such as technology transfer. To add the calculation of market shares to the task of fitting the agreement into the detailed requirements of the block exemption would be to add costs to the process and would reduce its effectiveness as a system of regulation. The Committee also notes that the problem of dominance of markets can be regulated under Article 86. Moreover, the Commission can retain a power to withdraw the benefit of the block exemption in cases of anti-competitive agreements made by parties with more than a 40 % market share. This is the technique finally agreed upon in the technology transfer block exemption.

3.3.2. It is true that in distribution one does not encounter the problem of near 100 % shares that one finds in some innovation markets. Nevertheless, Option III would add to the regulatory burdens of distribution. It is not clear to the Committee that the introduction of the flexibilities mentioned in paragraph 284, i.e. the suggestions made in Option II, would be adequate compensation. There appear to be inherent limits to the extent to which flexibility can be introduced to block exemptions.

3.4. Option IV - block exemptions with measures to specify the economic circumstances in which Article 85(1) applies

3.4.1. The Committee appreciates the strategic opportunity presented by Option IV. There should be more flexibility in cases of agreements between parties with no significant market power. The system of competition law imposes unnecessary costs on such parties at the present time. The Committee notes the Commission's proposals to a new notice on agreements of minor importance with approval.

3.4.2. The Committee thinks that it would be desirable for the rebuttable presumption of compatibility to apply to certain horizontal forms of cooperation as well as vertical forms. A rebuttable presumption of compatibility - Article 85(1) - the negative clearance presumption - where the parties between them have less than a market share in the contract territory, appears to the Committee to be the best way to achieve this.

3.5. Option IV - Variant I

3.5.1. The Committee notes that the new Commission notice on agreements of minor importance will in any case provide a negative clearance to vertical agreements where the parties have a market share of less than 10 %.

3.5.1.1. The Committee strongly recommends Option IV, Variant I, which will offer a rebuttable presumption of compatibility with Article 85(1) for vertical distribution agreements where the parties have a market share of less than 20 %

3.5.2. This represents a 'safe haven` from the Commission for vertical restraints apart from minimum resale prices, impediments to parallel trade, passive sales i.e. those contained in the distribution agreements between competitors.

3.5.3. The Committee notes that the 'haven` is 'safe` only from the Commission. It is not certain how the Courts will apply Article 85(1) to such an agreement.

3.5.4. The Committee also notes that an economic analysis is required. The presumption could be rebutted by market factors (see paragraph 296).

3.5.5. The Committee nevertheless considers this option to be a worthwhile step because it will reduce the regulatory burden on parties to vertical distribution agreements, particularly SMEs. The Committee also notes that the Commission will soon come forward with guidelines on the definition of markets which will help the parties to calculate market shares.

3.6. Option IV - Variant II

For the reasons mentioned in point 3.3 above, the Committee has reservations about Variant II. On the other hand, if the Commission were able to introduce Option IV, Variant I, combined with extremely wide block exemptions as under Option II, then the Committee could see a case for a procedural mechanism for monitoring vertical distribution agreements with high market shares. One possibility might be a requirement that firms with a market share of more than 40 % must use the non-opposition procedure.

Brussels, 9 July 1997.

The President of the Economic and Social Committee

Tom JENKINS

() OJ C 75, 10. 3. 1997.

() Court of First Instance judgment of 12. 12. 1996, case no T 19/92.

() It should be noted that the ESC adopted a favourable position towards the implementation of arbitration procedure in the car sector (Reg. 1475/95 - ESC Opinion, OJ C 133, 31. 5. 1995). However, the arbitration procedures do not relate to admission to the network.

() OJ C 102, 24. 4. 1995.