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'
Date: 1999-12-08
Institutions: European Economic and Social Committee
Subjects: competition law, exclusive distribution agreement, inter-company agreement, restrictive trade practice, trade agreement

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cooperation must be stepped up within the Commission. New
trends must be detected and interpreted. The Commission
possesses a tried and tested machine in its Competition
Directorate-General: it can use it to learn about and understand
its own policies promptly and
change and to ‘refocus’ all

consistently. The challenges of enlargement, globalisation and
the single currency demand a more rigorous, and at the same
time more far-sighted competition policy, backed up by
a stronger and more active Commission presence at all
international levels.

Brussels, 8 December 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

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

The Commission’s draft regulation on the application
1.1.
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 Com-
munication (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 agree-
ments and concerted practices, for the purposes of decen-
tralisation;

— 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) 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.

1.3.
The new legislation is designed to replace the Com-
mission’s existing exemption regulations relating to exclusive
distribution agreements (Regulation No. 1983/83), exclusive
purchase (Regulation No. 1984/83) and franchising (Regu-
lation No. 4087/88). It also covers selective distribution, which
was not previously subject to exemption [with the exception

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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

The Committee welcomes the broad lines of

the
2.1.
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 opin-
ions 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) (1) (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.

On these last-mentioned matters,

2.4.
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.

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

2.5.
However, the Committee welcomes the fact that in
general the new regulation confirms the Commission’s inten-
tion 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 introd-
ucing 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 agree-
ments 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.

This new regulatory framework, based on an economic
2.8.
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 auth-
orities will always be needed to avoid the abuse of market
power.

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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 pur-
chasing, 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.

The Committee also notes with approval the wider
3.1.1.1.
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.

The Committee also welcomes the inclusion of
3.1.2.
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.

The Committee suggests that the Guidelines should
3.1.4.
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.

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

Article 81 to relations with commercial agents. The require-
ment 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 (1), 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 agree-
ments of lesser importance below the threshold of 10 % of
market share.

3.2. Market shares (Article 2)

3.2.1.
for a single threshold of 30% was accepted.

The Committee is pleased that its recommendation

The Committee is pleased that the Commission has
3.2.2.
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 emphas-
izes that there will be no fines where the parties make a good
faith assumption that the threshold was not exceeded.

In the Committee’s view,

3.2.2.1.
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.

identification of

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.

3.1.6.
The Committee notes that the Commission is pro-
posing to tighten up the application of the first paragraph of

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

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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.

the Committee does not

find in the
3.2.5. Moreover,
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 Com-
mission to insert clauses to limit, in the case under consider-
ation, 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.

3.2.9.
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 econ-
omic protection for the reseller.

3.3. Above the threshold (30 %)

3.3.1.
The Committee particularly welcomes the Com-
mission’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 auto-
matic. 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 intrab-
rand 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.

The Committee is also pleased to note that pre-
3.3.2.
cautionary 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.

The Committee points out that

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

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.

3.2.8.1.
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.

3.3.3.2. 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.

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3.4. Hard-core Restrictions (Article 3)

3.4.1.
hard-core restrictions.

The Committee welcomes the reduction of the list of

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.

The Committee appreciates that Article 3 b) of the
3.4.4.
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.

3.5.2.
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.

The Committee nevertheless continues to have reser-
3.5.3.
vations 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 extingui-
shed 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.

3.4.5.
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.

3.5.5.
In cases where one party of the agreement has
introduced a long-term investment in the distribution arrange-
ment, 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.

3.4.5.1.
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.

3.6. Severability

3.4.5.2.
legal certainty on this issue.

The Committee calls for a rapid initiative to create

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

3.6.1.
The Committee is pleased to note that the Com-
mission 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.

that

in general

The Committee points out

3.5.1.
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.

3.7. 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

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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.

The national authorities may withdraw the benefit of
3.7.2.
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 contra-
dictory 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.

Brussels, 8 December 1999.

3.8. Disapplications

In the Committee’s view the Guidelines should better
3.8.1
explain how the Commission intends to guarantee an accept-
able 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 com-
ments 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.

The objective is a simple, well-defined regulatory
4.3.
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.

The Committee therefore congratulates the Com-

4.4.
mission on the work it has done to this end.

The President

of the Economic and Social Committee

BEATRICE RANGONI MACHIAVELLI