Opinion of the Economic and Social Committee on:

- the "Proposal for a Council Regulation (EC) amending Regulation No 19/65/EEC on the application of Article 85(3) of the Treaty to certain categories of agreements and concerted practices", and

- the "Proposal for a Council Regulation (EC) amending Regulation No 17: First Regulation implementing Articles 85 and 86 of the Treaty"

(1999/C 116/06)

On 4 November 1998 the Council decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the above-mentioned proposals.

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 11 February 1999. The rapporteur was Mr Regaldo.

At its 361st plenary session (meeting of 24 February 1999), the Economic and Social Committee adopted the following opinion by 118 votes for with two abstentions.

1. Introduction

1.1. The Commission has issued its Communication(1) on the application of the Community competition rules to vertical restraints in response to the 227 written submissions received during the consultation exercise on the Green Paper(2). Its primary objective is to shape a new Community vertical restraints policy in order to remedy the shortcomings of the current one.

1.2. For its part, the Committee takes the view that firstly, an effective policy is needed as vertical restraints are a key component of EU competition policy and play a significant role in promoting business competitiveness, market integration, economic and social cohesion and consumer welfare.

1.3. Vertical agreements such as agreements and concerted practices entered into by firms, each operating at a different stage of the economic process, in respect of the supply and/or purchase of goods or the marketing of services (otherwise known as vertical restraints) have in time shown a pro-competitive tendency. However, the current rules on vertical restraint need to be updated in line with the ongoing change in production processes and the evolution and multiplication of different types of distribution point.

1.4. The proposed new rules constitute a far-reaching reform of current policy based on formal statutory criteria and specific sectoral rules.

1.5. The main features of the new policy, which is to be based on the analysis of its economic impact, are as follows:

- a single block exemption regulation for all vertical restraints in respect of finished products, intermediate products and services, apart from a few hardcore restrictions not subject to the block exemption (list of "black clauses");

- one or two market-share thresholds are proposed, in order to link block exemptions to companies' market power;

- a "safe harbour" is to be created which should distinguish the agreements that are deemed to be legal (below the threshold) from those which may require individual examination (above the threshold);

- the rules will be fleshed out by a set of guidelines detailing the political line to be followed above the market power thresholds and providing for withdrawal of the block exemption below the thresholds, as well as providing companies with clearer criteria and guidelines for calculating market shares;

- the new policy envisages increased decentralization, to enable Community competition rules to be enforced by national competition courts and authorities;

- a limit on the duration of the exempted agreements, to be differentiated by type of agreement;

- a transitional period - to be determined - for the adaptation of agreements already in existence when the new rules come into force.

1.6. To bring the new policy into effect, the Commission proposes a detailed set of measures on which the Committee has been invited to express its opinion:

- a communication outlining the new policy on the application of Community competition rules on vertical restraints;

- a draft amendment of Council Regulation No 19/65 EEC(3) to implement decentralization and to extend the powers vested in the Commission for applying Article 85(3) of the Treaty to certain categories of agreements and concerted practices;

- a draft amendment of Article 4(2) of Council Regulation No 17(4), the first regulation implementing Articles 85 and 86 of the Treaty, allowing the Commission to exempt retroactively the vertical agreements when notification takes place at a later date.

1.7. On the basis of the new powers conferred by the Council under the two above-mentioned regulations, the Commission will be able to commence work on adopting:

- the new draft regulation applicable to all vertical restraints in all distribution sectors, except motor vehicles and other vertical relations covered by other regulations and communications, in accordance with the general lines of the communication;

- a series of guidelines to accompany the regulation, specifying the policy conducted by the Commission above and beyond the thresholds set and copper-fastening the possibility of withdrawing the block exemption.

1.8. One consequence of the new regulation will be the demise of the present block exemption regulations concerning exclusive distribution [Regulation 1983/83(5)]; exclusive purchasing [Regulation 1984/83(6)]; and franchising [Regulation 4087/88(7)].

1.9. After the consultation period, the new regulation and guidelines should be adopted by the Commission and enter into force by the end of the year 2000.

2. General comments

2.1. The Commission Communication emphasizes that analysis of the different options set out in the green paper has revealed their shortcomings in terms of resolving the problems caused by the present arrangements: rigid, overly formalistic rules, neglect of market power and excessively narrow block exemptions.

2.2. The proposal, in the communication, aims at moving current policy towards a new, less formalistic approach which takes account of the economic impact of the agreements under consideration and strives to simplify supervision procedures. This should lead to a break with previous practice and is, in principle, to be welcomed as it ties in with the approach advocated by the Committee in its earlier opinion on the Green Paper on vertical restraints(8).

2.3. In that opinion, the Committee recommended moving away from the current rigidity and analysing vertical cooperation with the requisite flexibility, enabling the block exemption system to accommodate new forms of distribution geared to changing market conditions and, at the same time, to give companies the legal certainty they need in future agreements. It also stressed the importance of market structure for evaluating the effects of vertical restraints and acknowledged the role of arbitration as a precondition for proper competition and market integration: a role which must be guaranteed at the level of both consumers and middlemen.

2.4. As outlined, the new policy not only takes these recommendations on board, but takes up other highly important suggestions. These include the need to look at similar economic situations with comparable horizontal or vertical market effects in the same way, even if their legal structures differ in certain respects, and to consider how the required substantial new departure in Community policy on vertical restraints "should be integrated into the process of updating and modernizing the current legal and regulatory framework, rather than abandoning it". Lastly, the Committee called for revamping of the economic and legal theories which underlay the earlier interpretation of Article 85, particularly in the area of block exemption regulations.

2.5. The Committee now notes that the Commission aims to amend the current broad interpretation of Article 85 (which prohibits most vertical agreements containing exclusivity clauses or other restrictions on economic operators' freedom of action). It intends to base its document on the concept of market power accompanied firstly by an extension of the scope of block exemptions and, secondly, by simplification of the notification procedure for agreements. In this regard, it is worth recalling that the Court of Justice has consistently ruled that vertical agreements - particularly exclusive-distribution agreements - are not automatically subject to Article 85(1).

3. Specific comments

3.1. Exemption for distribution agreements: a wider block exemption will give parties to selective distribution agreements, exclusive purchasing agreements and franchising agreements welcome flexibility to conclude contractual arrangements which suit their commercial needs and reduce the need to fit such agreements into the straitjacket of the individual block exemptions. The Committee welcomes the fact that the new block exemption will apply to a wider range of activities by the distributor, including the supply or purchase, or both, of goods for resale or processing, as well as the marketing of services and intermediate goods, in addition to finished goods for resale only. It particularly welcomes the fact that goods or products may be "processed" as opposed to the old, more restricted test of "for resale only".

3.1.1. It would hope for further guidance upon the width of these activities to be given either in the recitals in the preamble or the new proposed Guidelines to the Block Exemption. Finally, the Committee welcomes the inclusion of vertical agreements of associations of SME retailers within the block exemption, since that meets the point raised by the Committee in its opinion.

3.1.1.1. The Committee, moreover, points out that, as regards market dynamics, such forms of cooperation should not be restricted to SMEs alone. The exemption should also apply to agreements whose parties exceed the Commission's precise definition of SME but are, nevertheless, equivalent to SME in terms of real market power.

3.1.2. The Committee also points out that the definition of vertical agreements does not cover (nor does it appear intended to cover(9)) agency agreements in respect of goods and services. The Committee hopes the Commission will take the opportunity to clarify its position in relation to agents who are not integrated into the principal's business(10).

3.2. The proposed new policy envisages using market shares as a criterion for determining whether block exemptions apply, with the laudable aim of giving firms which do not possess market power the opportunity of securing legal certainty below the defined market share threshold. The Committee notes that the introduction of thresholds is also warranted in terms of the need to prevent companies which do possess market power benefiting from exemptions, with the concomitant risk that their market power will have an adverse impact on competitiveness and jeopardize consumer interests.

3.2.1. The Committee wishes, however, to point out that:

- high market share is not synonymous with high market power. The Commission should publish in its Guidelines the factors, such as the possibility of foreclosing the market, to be taken as evidence that a high market share reflects real market power;

- the Commission retains the reserve power of withdrawing the benefit of the block exemption;

- the Commission can also enforce Article 86 in the case of individual or joint market domination. The Committee made the same comment concerning Option III in the green paper, referring specifically to the approved system of block exemptions for technology transfer(11).

3.3. Generally speaking, the Committee accepts the need for a market share cap as a condition for a wider block exemption, in the distribution context. It would remind the Commission, however, that the introduction of a market share test in the distribution block exemption will require careful treatment in the sense that sufficient guidance must be given on its calculation to ensure that the parties will make use of the block exemption. The Committee therefore welcomes the guidance given on Section IV - Point 5 and suggests that:

a) the Commission gives guidance in its proposed Guidelines; and

b) offers a "quick look facility" to parties in difficulty.

3.4. The Committee is also unclear about the basis on which the choice of thresholds was actually made. In practice, there would be a 10 % threshold for "de minimis" agreements; a second of up to 20 %; a third between 20 and 40 %; and a fourth above 40 %.

3.4.1. The Commission finally proposes choosing between a single 25-35 % threshold and a dual 20 % or 40 % threshold system. A 25-35 % market share threshold certainly offers advantages, in terms of simplicity and clarity, compared with the dual-threshold system, which would undoubtedly be complicated and could lead back to a formalistic approach. It could also have the opposite effect to that intended, on legal certainty for companies: the number of notifications could rise rather than fall.

3.4.2. The Committee recommends a single threshold of 30 % of market share.

3.5. The inadequate indication of precise, easily applicable criteria for calculating market shares and defining relevant markets, in terms of both products and services and geographically, could give rise to legal uncertainty, with the risk of further burdening rather than simplifying procedures, as mooted by the Commission in the new policy.

3.6. The Committee notes that the new arrangements, based on a single set of rules for block exemptions, effectively terminate the present sectoral regulations, namely in beer and petrol, excluding cars: however, this does not necessarily mean that the specific circumstances justifying their original adoption have ceased to exist. The guidelines should reflect these specific factors in implementing the new single regulation and, if necessary, allow the specific regulations to continue.

3.7. The Committee acknowledges the Commission's willingness to strike a balance between (a) an approach based on analysing market effects and (b) a reasonable level of legal certainty. To this end, the Commission notice on defining relevant markets(12), used as the basic reference for the forthcoming general exemption regulation, should be accompanied by guidelines going into greater detail and clarity on the indications previously supplied for calculating market shares and the arrangements in the event of thresholds being exceeded.

3.8. The Committee takes note of the advantages of using market share thresholds: below the threshold, vertical restraints are presumed to be free of any significant overall negative effect on competition and are therefore compatible with Article 85(1), with the exception of hardcore restrictions (such as imposed sales prices and resale restrictions defined under the black-clause approach). Legal certainty is thus granted to these kinds of agreement.

3.9. However, the Committee notes the disadvantages for SMEs in the distribution sector which may flow from this presumption of compatibility. If a distribution network depends on a vendor whose market share is below the threshold which will ultimately be set, the corresponding distribution contracts - which do not contain hardcore restrictions - will not be monitored at all. In order to avoid this situation - which could weaken the position of distribution SMEs and, quite apart from questions of fairness, could lead to the Commission receiving numerous complaints - the Committee calls upon the Commission to ensure that clauses are inserted which, in such cases, would restrict the powers of vendors vis-à-vis distribution SMEs or, at least, would provide the latter with effective safeguards.

3.10. The Committee welcomes both the assurance that there will be no presumption of illegality above the market-share cap, and the introduction of Guidelines to cover the three issues (negative clearance, exemption or prohibition) of the scope of Article 85(1), the Commission's policy under Article 85(3), and its policy in relation to its withdrawal powers. The Committee would have at least liked to see a draft of such guidelines before drawing up the present opinion.

3.10.1. The Commission did, however, confirm that it will take upon itself the burden of proving that an agreement is in breach of Article 85(1). Nevertheless, the Committee considers that should an agreement be declared invalid, though not by virtue of having exceeded the market share cap, the declaration of invalidity should take immediate rather than retroactive effect. This has not been clearly stated in the amendments to current rules proposed by the Commission.

3.11. The Committee welcomes the removal of the whitelist from the block exemption and would expect to see guidance on acceptable clauses in the proposed Guidelines. The Committee notes that by establishing a list of hardcore restrictions (blacklist) automatically falling outside the general exemption, the Commission's new policy heralds a new approach which is to be welcomed, since it overturns the present restrictive approach allowing block exemptions in respect of specific clauses. The Committee is pleased to note that by acceding to its request, the Commission recognizes that clauses involving maximum and recommended resale prices are, under certain conditions, compatible with competition rules. National provisions, which at present have been accepted by the Commission, should therefore remain valid under the future regime.

3.12. The Committee is nevertheless concerned at the number of clauses in the blacklist and the difficulty in interpreting and implementing them. In practice, this might not simplify matters for companies when defining agreements, thereby encouraging them to resort to notification in order to ensure legal certainty. Section V, point 3 of the Communication(13), for example, which prohibits the imposition of restrictions on distributors with regard to sales outside their contractual territory, gives great cause for concern since it substantially modifies the previous interpretation of territorial exclusivity. It would therefore require considerable clarification for the purposes of implementation. Similarly, the Commission needs to shed further light on the legality of "tying clauses" in conjunction with "no-compete" clauses.

3.12.1. Furthermore, doubts arise regarding the Commission's interpretation of exclusive distribution agreements which also provide for exclusive purchasing and which its document considers harmful in market integration terms, although they have thus far been exempted (see the Grundig-Consten judgement, 1966)(14).

3.12.2. The ESC agrees that the existing ban on passive sales under exclusive distribution agreements must be maintained. It is, however, important to recognize the importance of permitting restraints in active sales. Obviously undertakings do not wish to assume the difficult task of introducing a new product on a given market, insofar as they are not sure of achieving any form whatsoever of market - or customer - exclusivity as a quid pro quo. It seems clear that the Commission still intends to continue allowing undertakings to permit restraints on active sales on a exclusive distributors' territory; however, the Committee also wants the Commission to be able to permit an agreement between a supplier and a distributor under which the distributor will only engage in active sales vis-à-vis more specific customers determined by the supplier.

3.13. The Committee notes that the duration has been left undefined: limited duration, varying in accordance with the type of agreement, is envisaged. This seems to imply jettisoning the current rules , which allow for a five-year period renewable to ten, seen by companies as necessary in order to plan investments properly. Given that the Commission and, in the future, possibly the national authorities may have the power to withdraw exemptions if difficulties arise, any limit on the duration of agreements must reflect the length of time required for a return on investment, specifically in the beer and retail petrol sectors.

3.13.1. The Committee does not know how the Commission plans to react in the event of innovative vertical agreements or in cases where suppliers own the premises. Again, the document refers to future guidelines.

3.14. The Committee notes that as proposed in the amendment to Article 1 of Regulation 19/65/EEC, the new provision is to apply to "categories of agreements between two or more undertakings, each operating at a different stage of the economic process". Given market dynamics and the complexity and integration of certain production and processing processes, the Committee wonders whether it would not be better to delete the reference to stages of the economic process and focus instead on the economic purpose of the agreement for which exemption is sought.

3.15. As regards flanking measures, the Committee also welcomes the revision of Article 4(2) to allow retroactive exemption of non-notified agreements above the market share cap. It agrees that such a reform could help to reduce the pressure of individual notifications, although the Committee would like to remind the Commission that this does not preclude the possibility that parties above the threshold may nevertheless wish to notify immediately after the agreement is made, in order to avoid subsequent opportunistic disputes.

3.15.1. The Committee therefore remains concerned that the applications for individual notification above the market share threshold will be submitted to the Commission with no assurance of a decision within a reasonable time, nor any certainty of a result other than a comfort letter. As it mentioned in its opinion, it would like to see a procedural mechanism which has some time limits built in, such as a non-opposition procedure. Another possible model could be the time limits built into the merger control regulation(15). The Committee looks forward to such a change as part of the more general reform of procedures by the Commission.

3.15.2. The Commission should also prepare itself procedurally for notification by parties which are in dispute about entitlement to exemption. Such cases have previously been dealt with by the courts, in the absence of retrospective exemption.

3.16. With regard to the main flanking measure involving devolution to national authorities of application of Community competition rules, the Committee notes that the new policy empowers national authorities to withdraw the benefit of block exemption in their territory, and to bring Article 85(1) to bear above the market-share cap. The Committee would emphasize that the new approach is a major departure from the current one, which gives the Commission sole responsibility for full application of Article 85(3).

3.16.1. Although the Committee basically backs Commission efforts to decentralize the implementation of competition policy, it would at the same time point to the risks inherent in such an approach for the uniformity and consistency of EU competition policy. For companies, re-assigning powers to national authorities might be detrimental if differences in official and legal practice in the Member States were to jeopardize uniform application of the law within the single market and impair procedural efficiency. The Commission should lay down clear procedural rules to prevent legislative fragmentation as a result of different approaches to industrial or competition policy in the various Member States. Moreover, the Commission must be authorized to initiate proceedings against national authorities in respect of monitoring compliance with legal and technical specifications. Arrangements must also be made for cross-border investigations since, unlike the Commission, national cartel authorities have no powers in this regard. The "one-stop-shop" principle in Europe should always be the top priority, even in the event of decentralized application. That said, increasingly delegating smaller agreements involving primarily parties located in one Member State to the competition authorities of that state will help lighten the Commission's workload, and enable it to concentrate its efforts upon those agreements with a Community-wide significance.

3.17. The Committee also welcomes the Commission's willingness to take into account the economic context of vertical distribution agreements. It therefore questions whether allhardcore restraints, including those below a low market share threshold, have to be blacklisted in view of the weak economic effects of such agreements, assuming that such agreements are not part of a wider network of agreements and there is no danger of foreclosure of the relevant market. It thinks that the reasoning of the ECJ in "Delimitis v. Henninger Brau"(1991)(16) suggests that the Court takes a relaxed view of hardcore restraints in the case of small agreements with weak economic effects under Article 85(1), and considers that the Commission should rethink its position under Article 85(3).

3.18. The Committee welcomes as a step in the right direction the Commission's willingness to treat as acceptable the "non-hardcore vertical restraints" below a 20 % threshold, should the two threshold system of market share caps be adopted. This shows that the Commission is applying economic thinking to the application of the block exemption at the lower end of the market share spectrum.

3.19. The Committee would recommend that if a single threshold market share cap is adopted, such a principle should be retained by the Commission, if necessary in the Guidelines.

3.20. The Committee also suggests that the Commission, consistent with its new, more economic approach to vertical agreements, should take the further step of re-examining its use of a blacklist of all hard core restraints in the case of all small vertical agreements, including those under the 10 % threshold in the Notice of Agreements of Minor Importance.

3.21. The Committee welcomes the Commission's preparedness to make use of the withdrawal mechanism as suggested in the Communication. There must be a careful balance between the safeguards built into the block exemption and the reserve power of the withdrawal procedure.

3.22. The Committee reiterates its endorsement, voiced in its earlier opinion on vertical restraints(17).

4. Final comments

4.1. The Committee notes that the guidelines, a key component of the new policy, should have been submitted by the Commission in conjunction with the new single regulation, prior to any amendment of Regulations (EEC) 19/65 and 17/62.

4.2. With the exception of the points made in the above general and specific comments, particularly with regard to the use of the market share criterion, the Committee endorses the introduction of the new regulation with a single 30 % threshold.

4.3. This would facilitate the widespread use of the regulation, leaving the Commission to focus exclusively on those cases in which market power is liable to jeopardize compliance with the rules of competition.

4.4. With regard to the blacklist clauses, the Committee is greatly concerned about the clause contained in Section V, point 3 of the Communication, which, as mentioned in point 3.11 above, substantially modifies the previous interpretation of territorial exclusivity.

4.5. As mentioned in point 3.12, the Committee stresses the need for the Commission to bear in mind, when defining the duration of the agreements, the length of time required for a return on investment.

4.6. In the light of these comments, the Committee endorses the Commission's initiative, and calls upon it to take account of the views expressed in the present opinion in relation to the definition of the guidelines and the single block exemption regulation, on which the Committee will be consulted.

4.7. The Committee will then have the opportunity to monitor how the Commission intends to regulate vertical agreements within a clearly defined legal framework, which must be hallmarked by its straightforwardness, transparency, legal certainty and support for SMEs if the expected benefits are to be fully passed on to consumers.

Brussels, 24 February 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

(1) OJ C 365, 26.11.1998, p. 3.

(2) OJ C 296, 29.9.1997.

(3) OJ 36, 6.3.1965.

(4) OJ 13, 21.2.1962, amended by Regulation No 59, OJ 52, 10.7.1962, by Regulation No 118/63/EEC, OJ 162, 7.11.1963 and by Regulation (EEC) No 2822/71, OJ L 285, 29.12.1971.

(5) OJ L 173, 30.6.1983, p. 1, as last amended by Regulation (EC) No 1582/97, OJ L 214, 6.8.1997, p. 27.

(6) OJ L 173, 30.6.1983, p. 5, as last amended by Regulation (EC) No 1582/97, OJ L 214, 6.8.1997, p. 27.

(7) OJ L 359, 28.12.1988, p. 46.

(8) OJ C 296, 29.9.1997.

(9) See the Green Paper on vertical restraints, p. ii, Executive Summary.

(10) According to the case law of the European Court and the Commission, if the agent is integrated into the principal's business, Article 85(1) does not apply at all.

(11) OJ C 102, 24.4.1995.

(12) OJ C 312, 14.10.1997, p. 15.

(13) OJ C 365, 26.11.1998, p. 3.

(14) Judgment of 13.7.1966, ECJ Reports 1966, p. 429.

(15) OJ L 257/90, p. 13.

(16) I ECR - 935 (1991).

(17) OJ C 296, 29.9.1997.