Opinion of the Economic and Social Committee on the "Commission Regulation on the application of Article 81(3) of the EC Treaty to categories of vertical agreements and concerted practices"(1)

(2000/C 51/02)

On 21 October 1999, the Economic and Social Committee, acting under Rule 23(2) of its Rules of Procedure, decided to draw up an Opinion on the above-mentioned proposal.

The Section for the Single Market, Production and Consumption, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 26 November 1999. The rapporteur was Mr Regaldo.

At its 368th plenary session (meeting of 8 December 1999) the Economic and Social Committee adopted the following opinion by 100 votes to one.

1. Introduction

1.1. The Commission's draft regulation on the application of Treaty Article 81(3) to vertical agreements, and the accompanying draft guidelines, were the fruit of a long debate on the need for a thorough reform of competition policy in this area.

1.2. The reform process began in 1997 with the publication of a Green Paper on Community competition policy and vertical restraints(2). This was followed in 1998 by a Communication(3) in which the Commission outlined a new policy whose implementation would require changes to the current regulatory framework, by means of:

- an amendment to Council Regulation No. 19/65 EEC, in order to extend the powers assigned to the Commission under Article 85(3) of the Treaty to categories of agreements and concerted practices, for the purposes of decentralisation;

- an amendment to Article 4(2) of Council Regulation No. 17, the first implementing regulation for Articles 85-86 of the Treaty, to enable the Commission to exempt vertical agreements retroactively when notification takes place at a later point;

- the two Regulations No. 1215/99 and 1216/99, adopted by the Council on 10 June 1999.

1.3. The new legislation is designed to replace the Commission's existing exemption regulations relating to exclusive distribution agreements (Regulation No. 1983/83), exclusive purchase (Regulation No. 1984/83) and franchising (Regulation No. 4087/88). It also covers selective distribution, which was not previously subject to exemption [with the exception of the motor-vehicle industry (exemption Regulation No. 1475/95), whose specific rules arose from complex reasons, which are still valid and which are currently under re-evaluation by the Commission].

1.4. The new Regulation will enter into force on 1 June 2000, subject to Article 12 which will extend the period of validity of the three above-mentioned regulations from 1 January 2000 until 31 May 2000. Furthermore, those agreements that were already in force on 31 May 2000 and that meet exemption conditions laid down by the current (EEC) regulations will benefit from a transitional period until 1 January 2002.

2. General comments

2.1. The Committee welcomes the broad lines of the proposed reform, as much of it mirrors the recommendations made by the Committee in previous opinions on the Green Paper and on the proposed amendments to Regulations 19/65 and 17/62, including the Commission Communication on the application of competition rules to the vertical restraints, accompanying the two proposals. (See aforementioned opinions for further information).

2.2. The Committee would also point out that the proposed reform regarding vertical agreements (first phase) and the White Paper on modernising competition rules (Articles 81-82)(4) (second phase), which is the forerunner of a major procedural overhaul based largely on removing the notification burden and on decentralising competition rules to give national authorities a greater role, will completely transform the system that has governed competition law in the area of agreements for forty years.

2.3. For more information on the White Paper and the issues relating to its application, see the Committee's specific opinion on this subject. One important point is that the White Paper reforms have already been anticipated in part by the rules on vertical agreements, which are certainly not immune from the risks linked to decentralising the application of Articles 81 and 82 to national level with the switch to the system of legal exceptions: risks such as the non-uniform application of the rules, market fragmentation and possibly even the risk that competition policy will be applied differently in the various Member States in cases above the 30% threshold, in the light of the non-binding nature of the Guidelines.

2.4. On these last-mentioned matters, the Committee would repeat the point it made in a previous opinion on the "one-stop shop" in Europe, which should be given top priority in the event of decentralised application.

2.5. However, the Committee welcomes the fact that in general the new regulation confirms the Commission's intention to move away from central control by doing away with prior notification and to treat vertical agreements not only as being potentially good for competition, but also as being generally less harmful than horizontal agreements, where neither supplier nor buyer has a high degree of market power. It is also accepted that effective inter-brand competition can offset the limitations of intra-brand competition (between distributors of the same brand).

2.6. The new reform substantially modifies the current extensive legalistic interpretation of Article 81, since by introducing the concept of market power, widening the scope of the block exemption and simplifying the mechanism for notifying agreements, in essence it considerably increases the freedom of action for economic operators to respond to market dynamics with the necessary flexibility by drawing up agreements which operate in a context of reasonable legal security.

2.7. Thus, the existing block exemptions will be replaced with a single framework regulation which exempts all vertical restraints, subject to a so-called black-list of hard-core restraints which cannot be block exempted.

2.7.1. Introducing a threshold of 30 % of market share creates a safety margin which will make it possible to distinguish agreements presumed to be legitimate (below the threshold) from those (above the threshold) which, although not necessarily illicit, could call for individual examination.

2.8. This new regulatory framework, based on an economic type of approach in which vertical agreements are analysed in their market context and on the basis of the effects produced in that context, is accompanied by the Guidelines which are indispensable for making the Commission's policy under Article 81 more predictable for companies.

2.9. The Committee recalls that competition law does not always ensure fair competition. This means that an effective regulatory framework enforced by effective competition authorities will always be needed to avoid the abuse of market power.

3. Specific comments

3.1. Scope of the block exemption (Article 1)

3.1.1. The Committee notes that the new block exemption regulation will enable those who have concluded vertical agreements, including exclusive distribution, exclusive purchasing, selective distribution and franchising, to have greater flexibility and better meet their commercial needs, thereby reducing the need to adapt such agreements to the constraints of existing block exemptions. The Committee welcomes the fact that the new block exemption has been extended to a wider range of activities carried on by the distributor, including supply and/or purchase of goods intended for resale and the marketing of services and intermediate goods.

3.1.1.1. The Committee also notes with approval the wider definition of vertical agreements contained in the latest draft. By defining the relationship between the parties only for the purposes of the agreement rather than in respect of any other unrelated activities of either party, the Commission ensures that the block exemption will be available to those parties who are realistically in a vertical relationship.

3.1.2. The Committee also welcomes the inclusion of vertical agreements between associations of SME distributors since that meets the point raised by the Committee in its earlier opinion.

3.1.2.1. However, the Committee notes Footnote 12 to Guideline No. 27 that, in cases where the turnover threshold of EUR 50 million is exceeded by a limited number of undertakings, a positive assessment of individual notifications would be possible.

3.1.3. The Committee welcomes the clarification (given in Art. 1.3) of the extent to which vertical agreements with ancillary restrictions relating to intellectual property rights are included in the block exemption.

3.1.4. The Committee suggests that the Guidelines should better explain how the Commission intends to interpret the notion of "potential competitor", and draws the Commission's attention to the fact that a realistic interpretation of this notion is necessary in order to prevent a large number of industrial supply agreements from falling outside the scope of the block exemption.

3.1.5. The Committee welcomes the clarification of the relationship between the Technology Transfer Regulation and the new Block Exemption.

3.1.6. The Committee notes that the Commission is proposing to tighten up the application of the first paragraph of Article 81 to relations with commercial agents. The requirement that the commercial agent should not assume any financial or commercial risk flies in the face of economic reality and would cause enormous upheaval in the marketing networks of a wide range of sectors in the European economy. The narrow distinction with regard to risk-allocation is further aggravated by the "black list" of dangerous activities (point 17).

The Committee asks the Commission to review its attitude and, in particular, to further clarify the criterion of "financial and commercial risk" in connection with "agency agreements".

3.1.7. With reference to "de minimis" agreements, the Committee hopes that the Commission will be able to follow up the re-examination decided by the Council on 4 June 1999(5), and in line with the new approach to vertical agreements based on economic criteria will examine the undesirability of applying a list of negative clauses to agreements of lesser importance below the threshold of 10 % of market share.

3.2. Market shares (Article 2)

3.2.1. The Committee is pleased that its recommendation for a single threshold of 30% was accepted.

3.2.2. The Committee is pleased that the Commission has responded also to its concerns about the difficulties of calculating market share. It welcomes the response to its call for guidelines to calculate market share which deal with the specific issues arising in the context of vertical agreements and go beyond the Commission's Communication on Defining Relevant Markets. It also applauds Guideline 55 which emphasizes that there will be no fines where the parties make a good faith assumption that the threshold was not exceeded.

3.2.2.1. In the Committee's view, identification of the relevant market should be made clearer in the context of the guidelines through a series of significant examples to help undertakings define their market share at the regional, national and European levels.

3.2.3. The Committee would point out, subject to further analysis, that the complexity of the subject covered calls for guidelines which, using easily comprehensible language and on the basis of a set of examples interpreting various market situations, will enable operators to act on the market with the highest possible level of security.

3.2.3.1. This applies particularly to cases of highly dynamic markets, where self-assessment by companies of both the relevant product market and the geographical market may prove to be a difficult task. An undesirable consequence could be an attempt by undertakings to seek refuge in notification to ensure legal security.

3.2.4. The Committee acknowledges and appreciates the effort made by the Commission to provide undertakings, through the guidelines, with a useful instrument for assessing for themselves the agreements and their compatibility with the competition rules of the European Community; however, it feels that an effort at synthesis and greater concentration on the really sensitive aspects mentioned above is not only desirable but necessary before the new regulation comes into force.

3.2.5. Moreover, the Committee does not find in the guidelines presented by the Commission any provision for a rapid-referral structure to enable operators in difficulty to receive precise answers on the application of the regulation and of the criteria in the guidelines.

3.2.6. The Committee points out that Article 2(2) of the new Regulation only partly takes account of the concerns expressed in earlier opinions about the need to take sufficient account of SMEs in the case of distribution contracts concluded with a grantor who holds a market share lower than the threshold, which in the absence of basic restraints will escape any control. It notes that at present, apart from the motor-vehicle sector which remains excluded for the reasons mentioned above, the SMEs run the risk of seeing their contractual position weakened.

3.2.7. The Committee renews its request for the Commission to insert clauses to limit, in the case under consideration, the powers of grantors in relation to distribution SMEs, or which at least would provide SMEs with effective safeguards. In this way, the consumer would also be better safeguarded: it is worth reiterating that the consumer must derive practical benefit from the vertical agreements.

3.2.8. The Committee points out that the draft single regulation on block exemption would put an end to the current exemption regulations on agreements covering exclusive sales, exclusive purchase and franchising.

3.2.8.1. In order to avoid lower levels of protection for SMEs operating in the context of agreements covered by these regulations, the Committee thinks it necessary for the guidelines to incorporate these specific points, which caused them to be adopted in the application of the new single regulation.

3.2.9. The purpose of this is to avoid the imposition on distribution SMEs of obligations likely to worsen their commercial position and make them too dependent on suppliers; this was already covered by some provisions of Regulation No. 1984/83 on agreements on exclusive purchase of beer, and agreements covering petrol distribution. The new regulation, by placing all distributors on the same footing, removes these provisions and thus arbitrarily reduces economic protection for the reseller.

3.3. Above the threshold (30 %)

3.3.1. The Committee particularly welcomes the Commission's statement that above the 30 % threshold, vertical agreements will not be presumed to be illegal and that individual examination by the authorities will not be automatic. It also welcomes the policy that individual cases will need to be assessed in economic terms with attention paid not only to market share but also to the state of interbrand competition in the market. This implies acceptance of intrabrand restraints even above the threshold in competitive markets. Equally importantly, it suggests that the current reform of vertical agreements will be in line with proposals for the modernization of competition policy.

3.3.2. The Committee is also pleased to note that precautionary notification as set out in Art. 4 (2) of 17/62 is no longer needed. By allowing vertical agreements exemption even if notification occurs after the entry date of an agreement, this will reduce pressure to notify on firms in marginal circumstances and allow the Competition DG to concentrate on the more important cases that come to its attention.

3.3.3. The Committee welcomes the Commission's policy of encouraging self-assessment by companies. The Committee hopes however that the Commission will remain open to informal advice and one day offer a quick look facility to firms who on reasonable grounds are unsure of their position.

3.3.3.1. However, it stresses that such a modification must not prevent firms which after self-assessment think that they have exceeded the market share from notifying immediately after the conclusion of the agreement to avoid too many opportunistic disputes.

3.3.3.2. Moreover, the Committee is very surprised to note that in the Guidelines (55) the Commission suggests there should be notification only in cases where there is a dispute; otherwise the Commission, in applying the competition rules, will not give priority to notification of individual agreements.

3.4. Hard-core Restrictions (Article 3)

3.4.1. The Committee welcomes the reduction of the list of hard-core restrictions.

3.4.2. The Committee also welcomes the exemption of maximum resale price and recommended resale prices from the price fixing restriction in Art. 3(a).

In addition, this implies that similar national provisions will remain valid in the future legal framework.

3.4.3. The Committee would also point out that revision of the "de minimis" is necessary for franchising SMEs, which, in order to secure respect for the identity of the network and to have the necessary means to benefit from economies of scale, must be able to resort to certain clauses restricting competition such as exclusiveness of supply.

3.4.4. The Committee appreciates that Article 3 b) of the regulation allows the supplier the option of limiting active resales into an exclusive contractual territory or customer group, obviously allowing full scope for passive resales.

3.4.5. In this connection it is interesting to note how in the Guidelines (42) the Commission generally considers that the use of Internet for advertising or sales purposes should be regarded as passive resale where it is not specifically directed at individual customers. In contrast, e-mail messages not solicited by customers are regarded as an active form of resale.

3.4.5.1. This interpretation, which the Committee shares, will undoubtedly be useful also to the other Commission departments which for various reasons are concerned with electronic trade and the use of the Internet, although not always holding the same view on how electronic trade should be consistently regulated.

3.4.5.2. The Committee calls for a rapid initiative to create legal certainty on this issue.

3.5. Non-hard-core restraints - condition under the BE (Article 4)

3.5.1. The Committee points out that in general the exempted duration of non-competition obligations is five years, which however does not prevent the parties from renewing their agreements. This time limit does not apply when the goods and services are resold by the purchaser on premises owned or rented by the supplier with a resulting obligation of non-competition for the duration of the period concerned.

3.5.2. This approach should be endorsed as it generally satisfies the Committee's request that account be taken of the period necessary for the returns to equal the investments made.

3.5.3. The Committee nevertheless continues to have reservations about the link between permission for a one-year post termination non-compete clause in Art.4(b) and the five-year limit to an exclusive purchasing agreement in Art.4(a). If the exclusive purchaser can only terminate the relationship after five years and refuse to renew at the cost of being for a year without a livelihood in his or her chosen field, there will be relatively few non-renewals and the five year maximum will be more illusory than real. Art.4(a) restricts the non-compete clause to the period of occupancy of premises owned or leased by the supplier and this should also apply to the five year period.

3.5.4. The post-termination non-compete clause in Art.4(b) seems to go further than is necessary. Insofar as trademarks and copyright are concerned, the right to their use is extinguished when the contract terminates. It is true that know-how requires protection after the contract expires but the post termination non-compete clause is not necessary to protect the confidentiality of the know-how. More importantly, the post termination non-compete clause restrains the freedom to trade of the reseller who is no longer bound by contract.

3.5.5. In cases where one party of the agreement has introduced a long-term investment in the distribution arrangement, so that a five-year time period is insufficient, the possibility of exempting a non-compete obligation for a longer period should be decided on a case-by-case basis.

3.6. Severability

3.6.1. The Committee is pleased to note that the Commission has responded to its call for a severability rule. By providing that non-hard-core restrictions are severable the Commission has reinforced the process of self-assessment by the parties. The provision of a non-opposition procedure would have perpetuated the old method of unnecessary notification to the Competition DG.

3.7. Withdrawals of the BE (Articles 5 and 6)

3.7.1. The Committee agrees with the approach whereby the Commission can withdraw the benefit of exemption from one or more undertakings if it can demonstrate (and the burden of proof lies with it) that the agreements concluded by those firms produce a negative overall effect on competition, even if the supplier or purchaser holds a market share lower than 30 % (Art. 5). This could provide better protection for distribution SMEs and a better balance in the relationship with the grantor.

3.7.2. The national authorities may withdraw the benefit of the exemption regulation also if the country concerned has the characteristics of a distinct national market. In this case withdrawal will be effective only within that country (Art. 6).

3.7.3. The guidelines interpreting Art. 5 and 6 (points 60-69 inclusive) define precisely the exclusive power of the Commission to withdraw the benefit when the geographical market concerned is larger than the territory of a single Member State; on the other hand, when the market concerned is made up of the territory of a single Member State, the Commission and the Member State will have joint power to decide on withdrawal.

3.7.3.1. The Committee is concerned at the risks of contradictory decisions and conflicting procedures which could arise in the absence of uniform application of the Community competition rules by the national authorities. Further concern for the legal security of undertakings also arises in connection with the mechanisms for redress.

3.7.3.2. The Committee wishes to reiterate its concern that insofar as national authorities are empowered by Article 6 to withdraw the benefits of the block exemption in their territory they must also be required to provide procedural safeguards equivalent to those contained in the Commission's own withdrawal procedure. The Commission should not hesitate to use its powers to avoid such a risk.

3.7.4. At all events, a withdrawal decision cannot have retroactive effect; therefore the agreement's exemption will remain until the withdrawal becomes effective. The Committee cannot but agree, since this approach corresponds to its own precise request in an earlier opinion.

3.8. Disapplications

3.8.1 In the Committee's view the Guidelines should better explain how the Commission intends to guarantee an acceptable level of competition, compatible with the presence of parallel networks of selective distribution, while taking into full account the nature of the contract products, which may need such a type of distribution. This would back up the new policy designed to assess the effects of the agreements on the market instead of merely covering formal aspects.

3.9. Transitional period plus duration (Article 12)

3.9.1. With regard to the transitional period, the Committee takes the view that, to avoid extra costs and the risk of legal uncertainty, current contracts which are compatible with the present block exemptions and have been drawn up before the new regulation enters into force should be allowed to run until the end of 2001.

4. Conclusions

4.1. The Committee acknowledges that the Commission in its draft Regulation has paid considerable heed to the comments and proposals made by the Committee in earlier opinions.

4.2. The general and specific comments made above, whether on the Regulation itself or on the Guidelines, are intended to supplement and improve the rules governing this complex area, which is extremely important for the integration of the markets.

4.3. The objective is a simple, well-defined regulatory framework, within which undertakings can operate on the market with legal certainty, in a competitive context which offers SMEs conditions in which they can grow and which provides the consumer with practical benefits.

4.4. The Committee therefore congratulates the Commission on the work it has done to this end.

Brussels, 8 December 1999.

The President

of the Economic and Social Committee

BEATRICE RANGONI MACHIAVELLI

(1) OJ C 270, 24.9.1999.

(2) COM(96) 721 final of 22.01.97, ESC Opinion OJ C 296, 29.09.1997.

(3) COM(1998) 544 final and COM(98) 546 final, both OJ C 365, 26.11.1998, ESC Opinion OJ C 116, 28.4.1999.

(4) COM(1999) 101 final of 28.4.1999.

(5) Council of 4 June 1999 - Minutes No. 8958/99 Add. 1.