Guidelines on the application of Article 53(3) of the EEA Agreement
Date: 2007-09-06
Institutions: EFTA Surveillance Authority
Subjects: application of EU law, competition law, derogation from EU law, economic concentration

6.9.2007

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Official Journal of the European Union

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IV

(Notices)

NOTICES CONCERNING THE EUROPEAN ECONOMIC AREA

EFTA SURVEILLANCE AUTHORITY

Guidelines on the application of Article 53(3) of the EEA Agreement

(2007/C 208/01)

A.

B.

C.

The present notice is issued pursuant to the rules of the Agreement on the European Economic Area
(hereafter the ‘EEA Agreement’) and the Agreement between the EFTA States on the establishment of a
Surveillance Authority and a Court of Justice (hereafter the ‘Surveillance and Court Agreement’).

The European Commission (hereafter the ‘Commission’) has issued a notice entitled ‘Guidelines on the
application of Article 81(3) of the Treaty’ (1). That non-binding act sets out the principles which the
Commission follows for the application of the conditions for exception contained in Article 81(3) EC.

The EFTA Surveillance Authority considers the abovementioned act to be EEA relevant. In order to
maintain equal conditions of competition and to ensure a uniform application of the EEA competition
rules throughout the European Economic Area, the EFTA Surveillance Authority adopts the present
notice under the power conferred upon it by Article 5(2)(b) of the Surveillance and Court Agreement. It
intends to follow the principles and rules laid down in this notice when applying the relevant EEA rules
to a particular case (2)

D.

In particular, the purpose of this Notice is to set out the EFTA Surveillance Authority's interpretation of
the conditions for exception contained in Article 53(3) and to provide guidance on how the EFTA
Surveillance Authority will apply Article 53 in a particular case.

E.

The present notice applies to cases where the Authority is the competent surveillance authority under
Article 56 of the EEA Agreement.

1.

INTRODUCTION

undertakings and concerted practices (3) caught by Arti-
cle 53(1) which satisfy the conditions of Article 53(3) are
valid and enforceable, no prior decision to that effect being
required.

(1) Article 53(3) of the EEA Agreement sets out an exception
rule, which provides a defence to undertakings against a
finding of an infringement of Article 53(1) of the EEA
Agreement. Agreements, decisions of associations of

(1) OJ C 101, 27.4.2004, p. 97.
(2) The competence to handle individual cases falling under Articles 53
and 54 of
is divided between the EFTA
Surveillance Authority and the Commission according to the rules
laid down in Article 56 of the EEA Agreement. Only one of the
surveillance authorities is competent to handle any given case.

the EEA Agreement,

(2) Article 53(3) can be applied in individual cases or to
categories of agreements and concerted practices by way of
acts
corresponding to Community block exemption
regulations referred to in Annex XIV to the EEA Agreement
(hereafter ‘block exemptions’). Chapter II of Protocol 4 to

(3)

In the following the term ‘agreement’ includes concerted practices and
decisions of associations of undertakings.

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the Surveillance and Court Agreement (hereafter ‘Chap-
Chapter II’) (4) does not affect the validity and legal nature
of block exemptions. All existing block exemptions remain
in force and agreements covered by block exemptions are
legally valid and enforceable even if they are restrictive of
competition within the meaning of Article 53(1). Such
agreements can only be prohibited for the future and only
upon formal withdrawal of the block exemption by the
EFTA Surveillance Authority, or an EFTA national competi-
tion authority (5). Block exempted agreements cannot be
held invalid by national courts in the context of private
litigation.

will follow the present guidelines, which provide more
detailed guidance on the application of the four conditions
of Article 53(3) than the guidelines on vertical restraints,
horizontal cooperation agreements and technology transfer
agreements, also with regard to agreements covered by
those guidelines.

(6) The standards set forth in the present guidelines must be
applied in light of the circumstances specific to each case.
This excludes a mechanical application. Each case must be
assessed on its own facts and the guidelines must be applied
reasonably and flexibly.

(3) The existing guidelines on vertical restraints, horizontal
cooperation agreements and technology transfer agree-
ments (6) deal with the application of Article 53 to various
types of agreements and concerted practices. The purpose
of those guidelines is to set out the EFTA Surveillance
Authority's view of
the substantive assessment criteria
applied to the various types of agreements and practices.

(4) The present guidelines set out

the EFTA Surveillance
Authority's interpretation of the conditions for exception
contained in Article 53(3). It thereby provides guidance on
how it will apply Article 53 in individual cases. Although
not binding on them, these guidelines also intend to give
guidance to the courts and authorities of the EFTA States in
their application of Article 53(1) and (3) of
the EEA
Agreement.

(5) The guidelines establish an analytical framework for the
application of Article 53(3). The purpose is to develop a
methodology for the application of this provision. This
methodology is based on the economic approach already
introduced and developed in the guidelines on vertical
restraints, horizontal cooperation agreements and technol-
ogy transfer agreements. The EFTA Surveillance Authority

(4) When the Agreement amending Protocol 4 to the Agreement of the
EFTA States on the establishment of a Surveillance Authority and a
Court of Justice of 24 September 2004 has entered into force,
Chapter II of Protocol 4 of the Surveillance and Court Agreement
will to a large extent reflect in the EFTA pillar Council Regulation
(EC) No 1/2003 (OJ L 1, 4.1.2003, p. 1).

(5) See paragraph 36 below.
(6) See EFTA Surveillance Authority Notice on Guidelines on vertical
restraints (OJ C 122, 23.5.2002, p. 1 and EEA Supplement to the OJ,
No 26, 23.5.2002, p. 7), EFTA Surveillance Authority Notice on
Guidelines on the application of Article 53 of the EEA Agreement to
horizontal cooperation agreements (OJ C 266, 31.10.2002, p. 1 and
EEA Supplement to the OJ, No 55, 31.10.2002, p. 1) and EFTA
Surveillance Authority Notice on Guidelines on the application of
Article 53 of the EEA Agreement to technology transfer agreements,
not yet adopted.

Justice of

the Court of

(7) With regard to a number of issues, the present guidelines
outline the current state of the case law of the EFTA Court
and that of
the European
Communities under the corresponding provisions in the
EC Treaty (7). However, the EFTA Surveillance Authority
also intends to explain its policy with regard to issues that
have not been dealt with in the case law, or that are subject
to interpretation. The Authority's position, however,
is
without prejudice to the case law of the EFTA Court, the
Court of Justice and the Court of First Instance of the
European Communities concerning the interpretation of
Article 53(1) and (3), and to the interpretation that the
EFTA Court and the Community Courts may give to those
provisions in the future.

2.

THE GENERAL FRAMEWORK OF ARTICLE 53 OF

THE EEA AGREEMENT

2.1.

The provisions of the EEA Agreement

(8) Article 53(1) prohibits all agreements between under-
takings, decisions by associations of undertakings and
concerted practices which may affect trade between the

(7) Article 6 of the EEA Agreement provides that, without prejudice to
future developments of case-law, the provisions of this Agreement,
in so far as they are identical in substance to corresponding rules of
the Treaty establishing the European Community and the Treaty
establishing the European Coal and Steel Community and to acts
adopted in application of
in their
implementation and application, be interpreted in conformity with
the European
the Court of
the relevant rulings of
Communities given prior to the date of signature of
the EEA
Agreement. As regards relevant rulings by the Court of Justice given
after the date of signature of the EEA Agreement, it follows from
Article 3(2) of the Surveillance and Court Agreement that the EFTA
Surveillance Authority and the EFTA Court shall pay due account to
the principles laid down by these rulings.

these two treaties,

Justice of

shall

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Contracting Parties to the EEA Agreement (8) and which
have as their object or effect the prevention, restriction or
distortion of competition (9).

(9) As an exception to this rule Article 53(3) provides that the
prohibition contained in Article 53(1) may be declared
inapplicable in case of agreements which contribute to
improving the production or distribution of goods or to
promoting technical or economic progress, while allowing
consumers a fair share of the resulting benefits, and which
do not impose restrictions which are not indispensable to
the attainment of these objectives, and do not afford such
undertakings the possibility of eliminating competition in
respect of a substantial part of the products concerned.

(10) According to Article 1(1) of Chapter II agreements which
are caught by Article 53(1) and which do not satisfy the
conditions of Article 53(3) are prohibited, no prior decision
to that effect being required (10). According to Article 1(2)
of Chapter II agreements which are caught by Article 53(1)
but which satisfy the conditions of Article 53(3) are not
prohibited, no prior decision to that effect being required.
Such agreements are valid and enforceable from the
moment that the conditions of Article 53(3) are satisfied
and for as long as that remains the case.

(12) The assessment of any countervailing benefits under
Article 53(3) necessarily requires prior determination of
the restrictive nature and impact of the agreement. To place
Article 53(3)
in its proper context it is appropriate to
briefly outline the objective and principal content of the
prohibition rule of Article 53(1). The EFTA Surveillance
Authority guidelines on vertical
restraints, horizontal
cooperation agreements and technology transfer agree-
ments (13) contain substantial guidance on the application
of Article 53(1) to various types of agreements. The present
guidelines are therefore limited to recalling the basic
analytical framework for applying Article 53(1).

2.2.

The prohibition rule of Article 53(1)

2.2.1 General remarks

(13) The objective of Article 53 is to protect competition on the
market as a means of enhancing consumer welfare and of
ensuring an efficient allocation of resources. Competition
and market integration serve these ends since the creation
and preservation of an open EEA promotes an efficient
allocation of resources throughout the territory covered by
the EEA Agreement for the benefit of consumers.

(11) The assessment under Article 53 thus consists of two parts.
The first step is to assess whether an agreement between
undertakings, which is capable of affecting trade between
the Contracting Parties to the EEA Agreement, has an anti-
competitive object or actual or potential (11) anti-competi-
tive effects. The second step, which only becomes relevant
when an agreement is found to be restrictive of competi-
tion, is to determine the pro-competitive benefits produced
by that agreement and to assess whether
these pro-
competitive effects outweigh the anti-competitive effects.
The balancing of anti-competitive and pro-competitive
effects is conducted exclusively within the framework laid
down by Article 53(3) (12).

(8) The concept of effect on trade between Contracting Parties to the
EEA Agreement
is dealt with in separate guidelines, see EFTA
Surveillance Authority Guidelines on the effect on trade concept
contained in Articles 53 and 54 of the EEA Agreement, not yet
published.
In the following the term ‘restriction’ includes the prevention and
distortion of competition.

(9)

(10) According to Article 53(2), such agreements are automatically void.
(11) Article 53(1) prohibits both actual and potential anti-competitive
effects, see in this respect Case C-7/95 P, John Deere, [1998] ECR
I-3111, paragraph 77.

(12) See Case T-65/98, Van den Bergh Foods,

(not yet reported),
paragraph 107 and Case T-112/99, Métropole télévision (M6) and
others, [2001] ECR II-2459, paragraph 74, where the Court of First
Instance held that it is only in the precise framework of Article 81(3)
that the pro- and anti-competitive aspects of a restriction may be
weighed.

(14) The prohibition rule of Article 53(1) applies to restrictive
agreements and concerted practices between undertakings
and decisions by associations of undertakings in so far as
they are capable of affecting trade between the Contracting
Parties to the EEA Agreement. A general principle under-
lying Article 53(1) is that each economic operator must
determine independently the policy, which he intends to
adopt on the market (14).
‘decisions’ and
‘concerted practices’ are EEA law concepts which allow a
distinction to be made between the unilateral conduct of an
undertaking and coordination of behaviour or collusion
between undertakings (15). Unilateral conduct
is subject
only to Article 54 of the EEA Agreement as far as EEA
competition law is concerned. Moreover, the convergence
rule set out in Article 3(2) of Chapter II does not apply to
unilateral conduct. This provision applies only to agree-
ments, decisions and concerted practices, which are capable
of affecting trade between Contracting Parties to the EEA
Agreement. Article 3(2) provides that when such agree-

‘Agreements’,

(13) See note 6 above.
(14) See e.g. Case C-49/92 P, Anic Partecipazioni, [1999] ECR I-4125,
paragraph 116; and Joined Cases 40/73 to 48/73 and others, Suiker
Unie, [1975] ECR 1663, paragraph 173. See in this respect also Case
E-3/97, Jan and Kristian Jæger AS and Opel Norge AS, EFTA Court
Report [1998] p. 1.

(15) See the judgement in Case E-3/97 cited in the previous note and also
in this respect paragraph 108 of the judgment in Anic Partecipazioni
cited in the previous note and Case C-277/87, Sandoz Prodotti,
[1990] ECR I-45.

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ments, decisions and concerted practices are not prohibited
by Article 53,
they cannot be prohibited by national
competition law. Article 3 of Chapter II is without prejudice
to the fundamental principle that any conflict between
implemented EEA rules and national law is to be resolved
so that the EEA rules take precedence. Thus agreements and
abusive practices that are prohibited by Articles 53 and 54
may not be upheld by national law (16).

least one of

(15) The type of coordination of behaviour or collusion between
undertakings falling within the scope of Article 53(1) is that
where at least one undertaking vis-à-vis another under-
taking undertakes to adopt a certain conduct on the market
or that as a result of contacts between them uncertainty as
to their conduct on the market is eliminated or at least
substantially reduced (17). It follows that coordination can
take the form of obligations that regulate the market
conduct of at
the parties as well as of
arrangements that influence the market conduct of at least
one of the parties by causing a change in its incentives. It is
not required that coordination is in the interest of all the
undertakings concerned (18). Coordination must also not
necessarily be express. It can also be tacit. For an agreement
to be capable of being regarded as having been concluded
by tacit acceptance there must be an invitation from an
undertaking to another undertaking, whether express or
implied, to fulfil a goal jointly (19). In certain circumstances
an agreement may be inferred from and imputed to an
ongoing commercial relationship between the parties (20).
However, the mere fact that a measure adopted by an
undertaking falls within the context of on-going business
relations is not sufficient (21).

(16) Agreements between undertakings are caught by the
prohibition rule of Article 53(1) when they are likely to
have an appreciable adverse impact on the parameters of
competition on the market, such as price, output, product
quality, product variety and innovation. Agreements can
have this effect by appreciably reducing rivalry between the
parties to the agreement or between them and third parties.

(16) See in this respect Case E-1/94 Restamark [1994-1995] EFTA Court
Report, p. 15 and Case 14/68, Walt Wilhelm, [1969] ECR 1, and
more recently Case T-203/01, Michelin (II), not yet reported,
paragraph 112.

(17) See Joined Cases T-25/95, Cimenteries CBR and others, [2000] ECR
II-491, paragraphs 1849 and 1852; and Joined Cases T-202/98,
British Sugar and others, [2001] ECR II-2035, paragraphs 58 to 60.
(18) See to that effect Case C-453/99, Courage v Crehan, [2001] ECR
I-6297, and paragraph 3444 of the judgment in Cimenteries CBR
cited in the previous note.

(19) See in this

respect

Bundesverband der Arzneimittel-Importeure, not yet
paragraph 102.

Joined Cases C-2/01 P and C-3/01 P,
reported,

(20) See e.g. Joined Cases 25/84 and 26/84, Ford, [1985] ECR 2725.
(21) See in this respect paragraph 141 of the judgment in Bundesverband

2.2.2. The basic principles
Article 53(1)

for assessing agreements under

(17) The assessment of whether an agreement is restrictive of
competition must be made within the actual context in
which competition would occur in the absence of the
agreement with its alleged restrictions (22). In making this
assessment it is necessary to take account of the likely
impact of
the agreement on inter-brand competition (i.e.
competition between suppliers of competing brands) and
on intra-brand competition (i.e. competition between dis-
tributors of
the same brand). Article 53(1) prohibits
restrictions of both inter-brand competition and intra-
brand competition (23).

(18) For the purpose of assessing whether an agreement or its
individual parts may restrict inter-brand competition and/or
intra-brand competition it needs to be considered how and
to what extent the agreement affects or is likely to affect
competition on the market. The following two questions
provide a useful framework for making this assessment. The
first question relates to the impact of the agreement on inter-
brand competition while the second question relates to the
impact of
the agreement on intra-brand competition. As
restraints may be capable of affecting both inter-brand
competition and intra-brand competition at the same time,
it may be necessary to analyse a restraint in light of both
questions before it can be concluded whether or not
competition is restricted within the meaning of Arti-
cle 53(1):

(1) Does

the agreement

restrict actual or potential
the
competition that would have existed without
agreement? If so, the agreement may be caught by
Article 53(1). In making this assessment it is necessary
to take into account competition between the parties
and competition from third parties. For instance,
where two undertakings established in different EEA
States undertake not to sell products in each other's
home markets,
(potential) competition that existed
prior to the agreement is restricted. Similarly, where a
supplier imposes obligations on his distributors not to
sell competing products and these obligations fore-
close third-party access to the market, actual or
potential competition that would have existed in the
absence of the agreement is restricted. In assessing
whether the parties to an agreement are actual or
potential competitors the economic and legal context
must be taken into account. For instance, if due to the
financial risks involved and the technical capabilities
of the parties it is unlikely on the basis of objective
factors that each party would be able to carry out on
its own the activities covered by the agreement the

(22) See Case 56/65, Société Technique Minière, [1966] ECR 337, and
paragraph 76 of the judgment in John Deere, cited in note 11.
(23) See in this respect e.g. Joined Cases 56/64 and 58/66, Consten and

der Arzneimittel-Importeure cited in note 19.

Grundig, [1966] ECR 429.

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parties are deemed to be non-competitors in respect
of
is for the parties to bring
forward evidence to that effect.

that activity (24).

It

is only
restraint
effect. An agreement or contractual
prohibited by Article 53(1)
if its object or effect is to
restrict inter-brand competition and/or intra-brand compe-
tition.

(2) Does

include

the agreement

restrict actual or potential
competition that would have existed in the absence
of the contractual restraint(s)? If so, the agreement
may be caught by Article 53(1). For instance, where a
supplier restricts its distributors from competing with
each other, (potential) competition that could have
existed between the distributors absent the restraints is
restricted. Such restrictions
resale price
maintenance and territorial or customer sales restric-
tions between distributors. However, certain restraints
may in certain cases not be caught by Article 53(1)
when the restraint is objectively necessary for the
that
existence of an agreement of
that
type or
nature (25). Such exclusion of
the application of
Article 53(1) can only be made on the basis of
objective factors external to the parties themselves and
not the subjective views and characteristics of the
parties. The question is not whether the parties in
their particular situation would not have accepted to
conclude a less restrictive agreement, but whether
given the nature of the agreement and the character-
istics of the market a less restrictive agreement would
not have been concluded by undertakings in a similar
setting. For
in an
agreement between a supplier and a distributor may
for a certain period of time fall outside Article 53(1), if
the restraints are objectively necessary in order for the
distributor to penetrate a new market (26). Similarly, a
prohibition imposed on all distributors not to sell to
certain categories of end users may not be restrictive
is objectively
of
necessary for reasons of safety or health related to
the dangerous nature of
the product in question.
Claims that in the absence of a restraint the supplier
integration are not
would have resorted to vertical
sufficient. Decisions on whether or not to vertically
integrate depend on a broad range of complex
economic factors, a number of which are internal to
the undertaking concerned.

competition if

such restraint

territorial

restraints

instance,

(20) The distinction between restrictions by object and restric-
tions by effect is important. Once it has been established
that an agreement has as its object
the restriction of
competition, there is no need to take account of its concrete
effects (27). In other words, for the purpose of applying
Article 53(1) no actual anti-competitive effects need to be
demonstrated where the agreement has a restriction of
competition as its object. Article 53(3), on the other hand,
does not distinguish between agreements that restrict
restrict
competition by object
to all
competition by effect. Article 53(3)
agreements
the four conditions contained
fulfil
therein (28).

and agreements

that
applies

that

it

(21) Restrictions of competition by object are those that by their
very nature have the potential of restricting competition.
These are restrictions which in light of
the objectives
pursued by the EEA competition rules have such a high
potential of negative effects on competition that
is
unnecessary for the purposes of applying Article 53(1) to
demonstrate any actual effects on the market. This
presumption is based on the serious nature of
the
restriction and on experience showing that restrictions of
competition by object are likely to produce negative effects
on the market and to jeopardise the objectives pursued by
the EEA competition rules. Restrictions by object such as
price fixing and market sharing reduce output and raise
prices,
leading to a misallocation of resources, because
goods and services demanded by customers are not
produced. They also lead to a reduction in consumer
welfare, because consumers have to pay higher prices for
the goods and services in question.

(19) In the application of the analytical framework set out in the
previous paragraph it must be taken into account that
Article 53(1) distinguishes between those agreements that
have a restriction of competition as their object and those
agreements that have a restriction of competition as their

(24) See in this respect e.g. Commission Decision in Elopak/Metal Box —
Odin (OJ L 209, 8.8.1990, p. 15) and in TPS (OJ L 90, 2.4.1999,
p. 6).

(25) See in this respect the judgment in Société Technique Minière cited in

note 22 and Case 258/78, Nungesser, [1982] ECR 2015.

(26) See rule 10 in paragraph 119 of the Guidelines on vertical restraints
cited in note 6 above, according to which inter alia passive sales
restrictions — a hardcore restraint — are held to fall outside
Article 53(1) for a period of two years when the restraint is linked to
opening up new product or geographic markets.

(22) The assessment of whether or not an agreement has as its
object the restriction of competition is based on a number
of factors. These factors include, in particular, the content of
the agreement and the objective aims pursued by it. It may
also be necessary to consider the context in which it is (to
be) applied and the actual conduct and behaviour of the
parties on the market (29). In other words, an examination
of the facts underlying the agreement and the specific
circumstances in which it operates may be required before it
can be concluded whether a particular restriction consti-

(27) See e.g. paragraph 99 of the judgment in Anic Partecipazioni cited in

note 14.

(28) See paragraph 47 below.
(29) See Joined Cases 29/83 and 30/83, CRAM and Rheinzink, [1984]
ECR 1679, paragraph 26, and Joined Cases 96/82, ANSEAU-
NAVEWA and others, [1983] ECR 3369, paragraphs 23 to 25.

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degree of probability (33). Such negative effects must be
appreciable. The prohibition rule of Article 53(1) does not
apply when the identified anti-competitive effects are
insignificant (34). This test reflects the economic approach
which the EFTA Surveillance Authority is applying. The
prohibition of Article 53(1) only applies where on the basis
of proper market analysis it can be concluded that the
agreement has
likely anti-competitive effects on the
market (35). It is insufficient for such a finding that the
market shares of the parties exceed the thresholds set out in
the Authority's de minimis notice (36). Agreements falling
within safe harbours of block exemptions may be caught by
Article 53(1) but this is not necessarily so. Moreover, the
fact
the parties, an
falls outside the safe harbour of a block
agreement
exemption is in itself an insufficient basis for finding that
the agreement is caught by Article 53(1) or that it does not
fulfil the conditions of Article 53(3). Individual assessment
of the likely effects produced by the agreement is required.

that due to the market shares of

tutes a restriction of competition by object. The way in
which an agreement is actually implemented may reveal a
restriction by object even where the formal agreement does
not contain an express provision to that effect. Evidence of
the parties to restrict
subjective intent on the part of
factor but not a necessary
competition is a relevant
condition.

(23) Non-exhaustive guidance on what constitutes restrictions
by object can be found in block exemptions and EFTA
Surveillance Authority guidelines and notices. Restrictions
that are black listed in block exemptions or identified as
hardcore restrictions in guidelines and notices are generally
considered by the Authority to constitute restrictions by
object. In the case of horizontal agreements restrictions of
competition by object include price fixing, output limita-
tion and sharing of markets and customers (30). As regards
vertical agreements the category of restrictions by object
includes,
in particular, fixed and minimum resale price
maintenance and restrictions providing absolute territorial
protection, including restrictions on passive sales (31).

(24) If an agreement is not restrictive of competition by object it
it has restrictive effects on
must be examined whether
competition. Account must be taken of both actual and
potential effects (32). In other words the agreement must
have likely anti-competitive effects. In the case of restric-
tions of competition by effect there is no presumption of
anti-competitive effects. For an agreement to be restrictive
by effect it must affect actual or potential competition to
such an extent that on the relevant market negative effects
on prices, output, innovation or the variety or quality of
goods and services can be expected with a reasonable

(30) See the Guidelines on horizontal cooperation agreements, cited in
note 6, paragraph 25, and Article 5 of the act referred to in point 6
of Annex XIV to the EEA Agreement (Regulation (EC) No 2658/
2000 on the application of Article 81(3) of the EC Treaty to
categories of specialisation agreements (OJ L 304, 5.12.2000, p. 3),
as incorporated into the EEA Agreement by EEA Joint Committee
Decision No 113/2000 of 22.12.2000 (OJ L 52, 22.2.2001, p. 38
and EEA Supplement to the OJ, No 9, 22.2.2001, 22., p. 5), e.i.f.
1.1.2001.

(31) See Article 4 of the act referred to in point 2 of Annex XIV to the
EEA Agreement (Commission Regulation (EC) No 2790/1999) on
the application of Article 81(3) of the EC Treaty to categories of
vertical agreements and concerted practices (OJ L 336, 29.12.1999,
p. 21) as incorporated into the EEA Agreement by EEA Joint
Committee Decision No 18/2000 of 28 January 2000 (OJ, L 103,
12.4.2001, p. 36), and the Guidelines on Vertical Restraints, cited in
note, paragraph 46 et seq. (OJ C 122, 23.5.2002, p. 1 and EEA
Supplement to the OJ, No 26, 23.5.2002, p. 7). See also Case 279/
87, Tipp-Ex, [1990] ECR I-261, and Case T-62/98, Volkswagen v
Commission, [2000] ECR II-2707, paragraph 178.

(25) Negative effects on competition within the relevant market
are likely to occur when the parties individually or jointly
have or obtain some degree of market power and the
agreement contributes to the creation, maintenance or
strengthening of that market power or allows the parties to
exploit such market power. Market power is the ability to
maintain prices above competitive levels for a significant
period of time or to maintain output in terms of product
quantities, product quality and variety or innovation below
competitive levels for a significant period of
In
markets with high fixed costs undertakings must price
significantly above their marginal costs of production in
order to ensure a competitive return on their investment.
The fact that undertakings price above their marginal costs
is therefore not in itself a sign that competition in the

time.

(33) It is not sufficient in itself that the agreement restricts the freedom of
action of one or more of the parties, see paragraphs 76 and 77 of the
judgment in Métropole television (M6) cited in note 12. This is in
the object of Article 53 is to protect
line with the fact
competition on the market for the benefit of consumers.

that

(34) See e.g. Case 5/69, Völk, [1969] ECR 295, paragraph 7. Guidance on
the issue of appreciability can be found in the EFTA Surveillance
Authority Notice on agreements of minor importance which do not
appreciably restrict competition under Article 53(1) of the EEA
Agreement (OJ C 67, 20.3.2003, p. 20 and EEA Supplement to the
OJ, No 15, 20.3.2003, p. 11). The notice defines appreciability in a
negative way. Agreements, which fall outside the scope of the de
minimis notice, do not necessarily have appreciable restrictive
effects. An individual assessment is required.

(35) See in this respect Joined Cases T-374/94 and others, European
Night Services,
[1998] ECR II-3141. See also Case E-8/00,
Landsorganisasjonen i Norge and Others v Kommunenes Sentral-
forbund and Others, [2002] EFTA Court Report, p. 114, and Case E-
7/01, Hegelstad Eiendomsselskap Arvid B. Hegelstad and others and
Hydro Texaco AS, [2002] EFTA Court Report, p. 310.

(32) See paragraph 77 of the judgment in John Deere cited in note 10.

(36) See note 35.

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that allows

market is not functioning well and that undertakings have
market power
them to price above the
competitive level. It is when competitive constraints are
insufficient to maintain prices and output at competitive
levels that undertakings have market power within the
meaning of Article 53(1).

(26) The creation, maintenance or strengthening of market
power can result from a restriction of competition between
the parties to the agreement. It can also result from a
restriction of competition between any one of the parties
leads to
and third parties, e.g. because the agreement
foreclosure of competitors or because it raises competitors’
costs, limiting their capacity to compete effectively with the
contracting parties. Market power is a question of degree.
The degree of market power normally required for the
finding of an infringement under Article 53(1) in the case
of agreements that are restrictive of competition by effect is
less than the degree of market power required for a finding
of dominance under Article 54.

(27) For the purposes of analysing the restrictive effects of an
agreement it is normally necessary to define the relevant
market (37). It is normally also necessary to examine and
assess,
inter alia, the nature of the products, the market
position of the parties, the market position of competitors,
the market position of buyers, the existence of potential
competitors and the level of entry barriers. In some cases,
however, it may be possible to show anti-competitive effects
directly by analysing the conduct of the parties to the
agreement on the market. It may, for example, be possible
to ascertain that an agreement has led to price increases.
The guidelines on horizontal cooperation agreements and
on vertical restraints set out a detailed framework for
analysing the competitive impact of various types of
horizontal and vertical agreements under Article 53(1) (38).

2.2.3. Ancillary restraints

(28) Paragraph 18 above sets out a framework for analysing the
impact of an agreement and its individual restrictions on
inter-brand competition and intra-brand competition. If on
the basis of those principles it is concluded that the main
transaction covered by the agreement is not restrictive of
competition,
to examine whether
individual restraints contained in the agreement are also
compatible with Article 53(1) because they are ancillary to
the main non-restrictive transaction.

it becomes relevant

(37) See in this respect EFTA Surveillance Authority Notice on the
definition of the relevant market for the purpose of competition law
within the EEA (OJ L 200, 16.7.1998, p. 48 and EEA Supplement to
the OJ, No 28, 16.7.1998, p. 3).
(38) For the reference in the OJ see note 6.

(29) In EEA competition law the concept of ancillary restraints
covers any alleged restriction of competition which is
directly related and necessary to the implementation of a
main non-restrictive transaction and proportionate to
it (39). If an agreement in its main parts, for instance a
distribution agreement or a joint venture, does not have as
its object or effect the restriction of competition, then
restrictions, which are directly related to and necessary for
the implementation of that transaction, also fall outside
Article 53(1) (40). These related restrictions are called
ancillary restraints. A restriction is directly related to the
main transaction if it is subordinate to the implementation
of that transaction and is inseparably linked to it. The test of
necessity implies that the restriction must be objectively
necessary for the implementation of the main transaction
and be proportionate to it. It follows that the ancillary
restraints test
in para-
graph 18(2) above. However, the ancillary restraints test
applies in all cases where the main transaction is not
restrictive of competition (41). It is not limited to determin-
ing the impact of the agreement on intra-brand competi-
tion.

to the test set out

is similar

(30) The application of the ancillary restraint concept must be
distinguished from the application of the defence under
Article 53(3) which relates to certain economic benefits
produced by restrictive agreements and which are balanced
against
the agreements. The
application of
the ancillary restraint concept does not
involve any weighing of pro-competitive and anti-compe-
reserved for Arti-
titive
cle 53(3) (42).

effects. Such balancing is

the restrictive effects of

(31) The assessment of ancillary restraints

is

limited to
determining whether, in the specific context of the main
non-restrictive transaction or activity, a particular restric-
tion is necessary for the implementation of that transaction
or activity and proportionate to it.
If on the basis of
objective factors it can be concluded that without the
restriction the main non-restrictive transaction would be
difficult or impossible to implement, the restriction may be
regarded as objectively necessary for its implementation
and proportionate to it (43). If, for example, the main object
of a franchise agreement does not restrict competition, then
restrictions, which are necessary for the proper functioning
of the agreement, such as obligations aimed at protecting
the uniformity and reputation of the franchise system, also
fall outside Article 53(1) (44). Similarly, if a joint venture is
not in itself restrictive of competition, then restrictions that
are necessary for the functioning of the agreement are

(39) See paragraph 104 of the judgment in Métropole télévision (M6) and

others, cited in note 12.

(40) See e.g. Case C-399/93, Luttikhuis, [1995] ECR I-4515, para-

graphs 12 to 14.

(41) See in this respect paragraphs 118 et seq. of the Métropole television

judgment cited in note 12.

(42) See paragraph 107 of the judgment in Métropole télévision cited in

note 12.

(43) See e.g. Commission Decision in Elopak/Metal Box — Odin cited in

note 24.

(44) See Case 161/84, Pronuptia, [1986] ECR 353.

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deemed to be ancillary to the main transaction and are
therefore not caught by Article 53(1). For instance in
TPS (45) the Commission concluded that an obligation on
the parties not to be involved in companies engaged in
distribution and marketing of television programmes by
satellite was ancillary to the creation of the joint venture
during the initial phase. The restriction was therefore
deemed to fall outside Article 81(1) EC for a period of three
years. In arriving at this conclusion the Commission took
account of the heavy investments and commercial risks
involved in entering the market for pay television.

(c)

the restrictions must be indispensable to the attain-
ment of these objectives; and finally

(d)

the agreement must not afford the parties
the
possibility of eliminating competition in respect of a
substantial part of the products in question.

2.3.

The exception rule of Article 53(3)

(32) The assessment of restrictions by object and effect under
Article 53(1) is only one side of the analysis. The other side,
which is reflected in Article 53(3), is the assessment of the
positive economic effects of restrictive agreements.

(33) The aim of

the EEA competition rules is to protect
competition on the market as a means of enhancing
consumer welfare and of ensuring an efficient allocation of
resources. Agreements that restrict competition may at the
same time have pro-competitive effects by way of efficiency
gains (46). Efficiencies may create additional value by
lowering the cost of producing an output, improving the
quality of the product or creating a new product. When the
pro-competitive effects of an agreement outweigh its anti-
is on balance pro-
competitive effects the agreement
competitive and compatible with the objectives of
the
EEA competition rules. The net effect of such agreements is
to promote the very essence of the competitive process,
namely to win customers by offering better products or
better prices than those offered by rivals. This analytical
framework is reflected in Article 53(1) and Article 53(3).
The latter provision expressly acknowledges that restrictive
agreements may generate objective economic benefits so as
the restriction of
to outweigh the negative effects of
competition (47).

(34) The application of the exception rule of Article 53(3) is
subject to four cumulative conditions, two positive and two
negative:

(a)

the agreement must contribute to improving the
production or distribution of goods or contribute to
promoting technical or economic progress;

(b)

consumers must receive a fair share of the resulting
benefits;

When these four conditions are fulfilled the agreement
enhances competition within the relevant market, because
it leads the undertakings concerned to offer cheaper or
better products to consumers, compensating the latter for
the adverse effects of the restrictions of competition.

(35) Article 53(3) can be applied either to individual agreements
or
to categories of agreements by way of a block
exemption. When an agreement is covered by a block
exemption the parties to the restrictive agreement are
relieved of their burden under Article 2 of Chapter II of
showing that their individual agreement satisfies each of the
conditions of Article 53(3). They only have to prove that
the restrictive agreement benefits from a block exemption.
The application of Article 53(3) to categories of agreements
by way of block exemptions is based on the presumption
that restrictive agreements that fall within their scope (48)
fulfil each of the four conditions laid down in Article 53(3).

(36) If

finds that

in an individual case the agreement

is caught by
Article 53(1) and the conditions of Article 53(3) are not
fulfilled the block exemption may be withdrawn. According
to Article 29(1) of Chapter II
the EFTA Surveillance
Authority is empowered to withdraw the benefit of a block
exemption when it
in a particular case an
agreement covered by a block exemption has certain effects
which are incompatible with Article 53(3) of the EEA
Agreement. Pursuant
to Article 29(2) of Chapter II a
competition authority of an EFTA State may also withdraw
the benefit of a block exemption in respect of its territory
(or part of
the
if
characteristics of a distinct geographic market. In the case
of withdrawal
the competition authorities
concerned to demonstrate that the agreement infringes
Article 53(1) and that it does not fulfil the conditions of
Article 53(3).

this territory has all

its territory),

for

is

it

(45) See note 24. The decision was upheld by the Court of First Instance
in Métropole

the European Communities in the judgment

of
télévision (M6) cited in note 12.

(46) Cost savings and other gains to the parties that arise from the mere
exercise of market power do not give rise to objective benefits and
cannot be taken into account, cf. paragraph 49 below.
(47) See the judgment in Consten and Grundig, cited in note 23.

(37) The courts of the EFTA States have no power to withdraw
the benefit of block exemptions. Moreover,
in their
application of block exemptions EFTA State courts may

(48) The fact that an agreement is block exempted does not in itself
indicate that the individual agreement is caught by Article 53(1).

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not modify their scope by extending their sphere of
application to agreements not covered by the block
exemption in question (49). Outside the scope of block
exemptions EFTA State courts have the power to apply
Article 53 in full (cf. Article 6 of Chapter II).

are not satisfied the agreement is null and void, cf. Arti-
cle 53(2). However, such automatic nullity only applies to
those parts of the agreement that are incompatible with
Article 53, provided that such parts are severable from the
agreement as a whole (52). If only part of the agreement is
law to
null and void,
determine the consequences thereof for the remaining part
of the agreement (53).

it is for the applicable national

3.

THE APPLICATION OF THE FOUR CONDITIONS OF

ARTICLE 53(3)

(38) The remainder of these guidelines will consider each of the
four conditions of Article 53(3) (50). Given that these four
conditions are cumulative (51), it is unnecessary to examine
any remaining conditions once it is found that one of the
conditions of Article 53(3) is not fulfilled. In individual
cases it may therefore be appropriate to consider the four
conditions in a different order.

(42) The four conditions of Article 53(3) are cumulative (54), i.e.
they must all be fulfilled for the exception rule to be
applicable. If they are not, the application of the exception
rule of Article 53(3) must be refused (55). The four
conditions of Article 53(3) are also exhaustive. When they
are met the exception is applicable and may not be made
dependant on any other condition. Goals pursued by other
provisions of the EEA Agreement can be taken into account
to the extent that they can be subsumed under the four
conditions of Article 53(3) (56).

(39) For

the purposes of

these guidelines it

is considered
appropriate to invert the order of the second and the third
condition and thus deal with the issue of indispensability
before the issue of pass-on to consumers. The analysis of
pass-on requires a balancing of the negative and positive
effects of an agreement on consumers. This analysis should
not include the effects of any restrictions, which already fail
the indispensability test and which for that reason are
prohibited by Article 53.

3.1.

General principles

(40) Article 53(3) of the EEA Agreement only becomes relevant
when an agreement between undertakings restricts compe-
tition within the meaning of Article 53(1). In the case of
non-restrictive agreements there is no need to examine any
benefits generated by the agreement.

(41) Where in an individual case a restriction of competition
within the meaning of Article 53(1) has been proven,
Article 53(3) can be invoked as a defence. According to
Article 2 of Chapter II, the burden of proof under Arti-
cle 53(3) rests on the undertaking(s) invoking the benefit of
the exception rule. Where the conditions of Article 53(3)

(49) See e.g. Case C-234/89, Delimitis, [1991] ECR I-935, paragraph 46.
(50) Article 36(4) of Regulation 1/2003 when incorporated into the EEA
Agreement, see footnote above, inter alia, repeals Article 5 of the act
referred to in point 10 of Annex XIV to the EEA Agreement (Council
Regulation (EC) No 1017/68) applying rules of competition to
transport by rail, road and inland waterway. However, the case
practice adopted under that Act remains relevant for the purposes of
applying Article 53(3) in the inland transport sector.

(51) See paragraph 42 below.

(43) The assessment under Article 53(3) of benefits flowing
from restrictive agreements is in principle made within the
confines of each relevant market to which the agreement
relates. The EEA competition rules have as their objective
the protection of competition on the market and cannot be
detached from this objective. Moreover, the condition that
consumers (57) must receive a fair share of the benefits
implies
that efficiencies generated by the
restrictive agreement within a relevant market must be
sufficient to outweigh the anti-competitive effects produced
by the agreement within that same relevant market (58).
Negative effects on consumers in one geographic market or
product market cannot normally be balanced against and
compensated by positive effects for consumers in another
unrelated geographic market or product market. However,

in general

(52) See the judgment in Société Technique Miniere cited in note 22.
(53) See in this respect Case 319/82, Kerpen & Kerpen, [1983] ECR

4173, paragraphs 11 and 12.

(54) See e.g. Case T-185/00, Métropole télévision SA (M6) and others,
[2002] ECR II-3805, paragraph 86, Case T-17/93, Matra, [1994]
ECR II-595, paragraph 85; and Joined Cases 43/82 and 63/82, VBVB
and VBBB, [1984] ECR 19, paragraph 61.

(55) See Case T-213/00, CMA CGM and others, not yet reported,

paragraph 226.

(56) See to that effect implicitly paragraph 139 of the Matra judgment
[1977] ECR 1875,

cited in note, and Case 26/76, Metro (I),
paragraph 43.

(57) As to the concept of consumers see paragraph 84 below where it is
the parties and
stated that consumers are the customers of
subsequent buyers. The parties themselves are not ‘consumers’ for
the purposes of Article 53(3).

(58) The test is market specific, see to that effect Case T-131/99, Shaw,
[2002] ECR II-2023, paragraph 163, where the Court of First
Instance of the European Communities held that the assessment
under Article 81(3) of the EC Treaty had to be made within the same
analytical framework as that used for assessing the restrictive effects,
and Case C-360/92 P, Publishers Association, [1995] ECR I-23,
paragraph 29, where in a case where the relevant market was wider
than national the Court of Justice of the European Communities held
that in the application of Article 81(3) it was not correct only to
consider the effects on the national territory.

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where two markets are related, efficiencies achieved on
separate markets can be taken into account provided that
the group of consumers affected by the restriction and
benefiting from the efficiency gains are substantially the
same (59).
in some cases only consumers in a
downstream market are affected by the agreement in which
case the impact of the agreement on such consumers must
be assessed. This is for instance so in the case of purchasing
agreements (60).

Indeed,

Article 53(1) or fulfilling the conditions of Article 53(3), as
the case may be, for the period of time required to recoup
the investment.

(45) In some cases the restrictive agreement is an irreversible
event. Once the restrictive agreement has been implemen-
ted the ex ante situation cannot be re-established. In such
cases the assessment must be made exclusively on the basis
of the facts pertaining at the time of implementation. For
instance,
in the case of a research and development
agreement whereby each party agrees to abandon its
respective research project and pool its capabilities with
those of another party, it may from an objective point of
view be technically and economically impossible to revive a
project once it has been abandoned. The assessment of the
anti-competitive and pro-competitive effects of the agree-
ment to abandon the individual research projects must
therefore be made as of the time of the completion of its
implementation. If at that point in time the agreement is
compatible with Article 53, for instance because a sufficient
number of
third parties have competing research and
development projects, the parties’ agreement to abandon
their individual projects remains compatible with Article 53,
even if at a later point in time the third-party projects fail.
However, the prohibition of Article 53 may apply to other
parts of the agreement in respect of which the issue of
irreversibility does not arise. If, for example, in addition to
joint research and development, the agreement provides for
joint exploitation, Article 53 may apply to this part of the
agreement if due to subsequent market developments the
agreement becomes restrictive of competition and does not
(any longer) satisfy the conditions of Article 53(3) taking
due account of ex ante sunk investments, cf. the previous
paragraph.

(46) Article 53(3) does not exclude a priori certain types of
agreements from its scope. As a matter of principle all
restrictive agreements that fulfil the four conditions of
Article 53(3) are covered by the exception rule (63).
However, severe restrictions of competition are unlikely
to fulfil the conditions of Article 53(3). Such restrictions are
usually black listed in block exemptions or identified as
hardcore
in EFTA Surveillance Authority
guidelines and notices. Agreements of this nature generally
fail (at least) the two first conditions of Article 53(3). They
neither create objective economic benefits (64) nor do they
benefit consumers (65). For example, a horizontal agree-
ment to fix prices limits output leading to misallocation of
resources.
to
producers, since it leads to higher prices without producing
any countervailing value to consumers within the relevant

It also transfers value from consumers

restrictions

(63) See paragraph 85 of the Matra judgment cited in note 54.
(64) As to this requirement see paragraph 49 below.
(65) See e.g. Case T-29/92, Vereniging van Samenwerkende Prijsregelende
Organisaties in de Bouwnijverheid (SPO), [1995] ECR II-289.

(44) The assessment of

in time. The assessment

restrictive agreements under Arti-
cle 53(3) is made within the actual context in which they
occur (61) and on the basis of the facts existing at any given
point
is sensitive to material
changes in the facts. The exception rule of Article 53(3)
applies as long as the four conditions are fulfilled and ceases
is no longer the case (62). When
to apply when that
applying Article 53(3) in accordance with these principles it
is necessary to take
sunk
the parties and the time
investments made by any of
needed and the restraints required to commit and recoup an
efficiency enhancing investment. Article 53 cannot be
applied without
taking due account of such ex ante
investment. The risk facing the parties and the sunk
investment that must be committed to implement the
agreement can thus lead to the agreement falling outside

into account

initial

the

(59) In Case T-86/95, Compagnie Générale Maritime and others, [2002]
ECR II-1011, paragraphs 343 to 345, the Court of First Instance of
the European Communities held that Article 81(3) of the EC Treaty
does not require that the benefits are linked to a specific market and
that in appropriate cases regard must be had to benefits ‘for every
other market on which the agreement in question might have
beneficial effects, and even, in a more general sense, for any service
the quality or efficiency of which might be improved by the existence
of that agreement’. Importantly, however, in this case the affected
group of consumers was the same. The case concerned intermodal
transport services encompassing a bundle of, inter alia, inland and
maritime transportation provided to shipping companies across the
Community. The restrictions related to inland transport services,
which were held to constitute a separate market, whereas the benefits
were claimed to occur in relation to maritime transport services.
Both services were demanded by shippers requiring intermodal
transport services between northern Europe and South-East and East
in CMA CGM, cited in note above, also
Asia. The judgment
concerned a situation where the agreement, while covering several
distinct services, affected the same group of consumers, namely
shippers of containerised cargo between northern Europe and the
Far East. Under
the parties fixed charges and
surcharges relating to inland transport services, port services and
maritime transport services. The Court of First Instance held (cf.
paragraphs 226 to 228) that in the circumstances of the case there
was no need to define relevant markets for the purpose of applying
Article 81(3). The agreement was restrictive of competition by its
very object and there were no benefits for consumers.

the agreement

(60) See paragraphs 126 and 132 of

the Guidelines on horizontal

cooperation agreements cited in note 6 above.

(61) See the Ford judgment cited in note 20.
(62) See in this respect for example Commission Decision in TPS (OJ
L 90, 2.4.1999, p. 6). Similarly, the prohibition of Article 53(1) also
only applies as long as the agreement has a restrictive object or
restrictive effects.

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market. Moreover, these types of agreements generally also
fail the indispensability test under the third condition (66).

(47) Any claim that restrictive agreements are justified because
they aim at ensuring fair conditions of competition on the
market is by nature unfounded and must be discarded (67).
The purpose of Article 53 is to protect effective competi-
tion by ensuring that markets remain open and competi-
tive. The protection of fair conditions of competition is a
in compliance with EEA law
task for
the legislator
obligations (68) and not
to regulate
for undertakings
themselves.

agreement must outweigh its anti-competitive effects, it is
necessary to verify what is the link between the agreement
and the claimed efficiencies and what is the value of these
efficiencies.

(51) All efficiency claims must therefore be substantiated so that

the following can be verified:

(a)

the nature of the claimed efficiencies;

(b)

the link between the agreement and the efficiencies;

3.2.

First condition of Article 53(3): efficiency

gains

3.2.1. General remarks

(c)

the likelihood and magnitude of each claimed efficiency;
and

(48) According to the first condition of Article 53(3),

the
restrictive agreement must contribute to improving the
production or distribution of goods or to promoting
technical or economic progress. The provision refers
expressly only to goods, but applies by analogy to services.

(49) It follows from the case law of the Court of Justice of the
European Communities that only objective benefits can be
taken into account (69). This means that efficiencies are not
assessed from the subjective point of view of the parties (70).
Cost savings that arise from the mere exercise of market
power by the parties cannot be taken into account. For
instance, when companies agree to fix prices or share
markets they reduce output and thereby production costs.
Reduced competition may also lead to lower sales and
marketing expenditures. Such cost reductions are a direct
consequence of a reduction in output and value. The cost
reductions in question do not produce any pro-competitive
effects on the market. In particular, they do not lead to the
creation of value through an integration of assets and
activities. They merely allow the undertakings concerned to
increase their profits and are therefore irrelevant from the
point of view of Article 53(3).

(50) The purpose of the first condition of Article 53(3) is to
define the types of efficiency gains that can be taken into
account and be subject to the further tests of the second
and third conditions of Article 53(3). The aim of
the
analysis is to ascertain what are the objective benefits
created by the agreement and what
is the economic
importance of such efficiencies. Given that for Article 53(3)
to apply the pro-competitive effects flowing from the

(66) See e.g. Case 258/78, Nungesser, [1982] ECR 2015, paragraph 77,

concerning absolute territorial protection.

(67) See in this respect e.g. the judgment in SPO cited in note .
(68) National measures must, inter alia, comply with the rules of the EEA
Agreement on free movement of goods, services, persons and
capital.

(69) See e.g. the judgment in Consten and Grundig cited in note 23.
(70) See in this respect Commission Decision in Van den Bergh Foods, OJ

L 246, 4.9.1998, p. 1.

(d)

how and when each claimed efficiency would be
achieved.

(52) Letter (a) allows the decision-maker to verify whether the
claimed efficiencies are objective in nature, cf. paragraph 49
above.

forms the object of

(53) Letter (b) allows the decision maker to verify whether there
is a sufficient causal link between the restrictive agreement
and the claimed efficiencies. This condition normally
requires that the efficiencies result from the economic
activity that
the agreement. Such
activities may, for example, take the form of distribution,
licensing of technology, joint production or joint research
that an
and development. To the
agreement has wider efficiency enhancing effects within
the relevant market, for example because it leads to a
reduction in industry wide costs, these additional benefits
are also taken into account.

extent, however,

(54) The causal link between the agreement and the claimed
efficiencies must normally also be direct (71). Claims based
on indirect effects are as a general rule too uncertain and
too remote to be taken into account. A direct causal link
exists for instance where a technology transfer agreement
allows the licensees to produce new or improved products
to be
or a distribution agreement allows products
distributed at
to be
lower cost or valuable services
produced. An example of indirect effect would be a case
where it is claimed that a restrictive agreement allows the
undertakings concerned to increase their profits, enabling
them to invest more in research and development to the
ultimate benefit of consumers. While there may be a link
between profitability and research and development, this

(71) See in this respect Commission Decision in Glaxo Wellcome, OJ

L 302, 17.11.2001, p. 1.

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link is generally not sufficiently direct to be taken into
account in the context of Article 53(3).

with tasks that can be performed more efficiently by that
other undertaking.

(55) Letters (c) and (d) allow the decision maker to verify the
value of the claimed efficiencies, which in the context of the
third condition of Article 53(3) must be balanced against
the anti-competitive effects of the agreement, see para-
graph 101 below. Given that Article 53(1) only applies in
cases where the agreement has likely negative effects on
competition and consumers (in the case of hardcore
restrictions such effects are presumed) efficiency claims
must be substantiated so that
they can be verified.
Unsubstantiated claims are rejected.

(56) In the case of claimed cost efficiencies the undertakings
invoking the benefit of Article 53(3) must as accurately as
reasonably possible calculate or estimate the value of the
efficiencies and describe in detail how the amount has been
computed. They must also describe the method(s) by which
the efficiencies have been or will be achieved. The data
there can be a
submitted must be verifiable so that
sufficient degree of certainty that
the efficiencies have
materialised or are likely to materialise.

(57) In the case of claimed efficiencies in the form of new or
improved products and other non-cost based efficiencies,
the undertakings claiming the benefit of Article 53(3) must
describe and explain in detail what is the nature of the
efficiencies and how and why they constitute an objective
economic benefit.

(58) In cases where the agreement has yet

to be fully
implemented the parties must substantiate any projections
as to the date from which the efficiencies will become
operational so as to have a significant positive impact in the
market.

3.2.2. The different categories of efficiencies

is

efficiencies. There

(59) The types of efficiencies listed in Article 53(3) are broad
categories which are intended to cover all objective
considerable overlap
economic
between the various
categories mentioned in Arti-
cle 53(3) and the same agreement may give rise to several
kinds of efficiencies. It is therefore not appropriate to draw
clear and firm distinctions between the various categories.
For the purpose of these guidelines, a distinction is made
between cost efficiencies and efficiencies of a qualitative
nature whereby value is created in the form of new or
improved products, greater product variety etc.

(60) In general, efficiencies

stem from an integration of
economic activities whereby undertakings combine their
assets to achieve what they could not achieve as efficiently
on their own or whereby they entrust another undertaking

(61) The research and development, production and distribution
process may be viewed as a value chain that can be divided
into a number of stages. At each stage of this chain an
undertaking must make a choice between performing the
activity itself, performing it together with (an)other under-
taking(s) or outsourcing the activity entirely to (an)other
undertaking(s).

(62) In each case where the choice made involves cooperation
on the market with another undertaking an agreement
within the meaning of Article 53(1) normally needs to be
concluded. These agreements can be vertical, as is the case
where the parties operate at different levels of the value
chain or horizontal, as is the case where the firms operate at
the same level of
the value chain. Both categories of
agreements may create efficiencies by allowing the under-
takings in question to perform a particular task at lower
cost or with higher added value for consumers. Such
agreements may also contain or lead to restrictions of
competition in which case the prohibition rule of Arti-
cle 53(1) and the exception rule of Article 53(3) may
become relevant.

(63) The types of efficiencies mentioned in the following are
only examples and are not intended to be exhaustive.

3.2.2.1. C o s t e f f i c i e n c i e s

source of cost

(64) Cost efficiencies flowing from agreements between under-
takings can originate from a number of different sources.
One very important
the
development of new production technologies and methods.
In general, it is when technological leaps are made that the
greatest potential for cost savings is achieved. For instance,
the introduction of
the assembly line led to a very
substantial reduction in the cost of producing motor
vehicles.

savings

is

(65) Another very important source of efficiency is synergies
resulting from an integration of existing assets. When the
parties to an agreement combine their respective assets they
may be able to attain a cost/output configuration that
would not otherwise be possible. The combination of two
existing technologies that have complementary strengths
may reduce production costs or lead to the production of a
it may be that the
higher quality product. For instance,
production assets of firm A generate a high output per hour
but require a relatively high input of raw materials per unit
of output, whereas the production assets of firm B generate
lower output per hour but require a relatively lower input
of raw materials per unit of output. Synergies are created if
by establishing a production joint venture combining the

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production assets of A and B the parties can attain a high
(er) level of output per hour with a low(er) input of raw
materials per unit of output. Similarly, if one undertaking
has optimised one part of the value chain and another
undertaking has optimised another part of the value chain,
the combination of their operations may lead to lower
costs. Firm A may for instance have a highly automated
production facility resulting in low production costs per
unit whereas B has developed an efficient order processing
system. The system allows production to be tailored to
customer demand, ensuring timely delivery and reducing
warehousing and obsolescence costs. By combining their
assets A and B may be able to obtain cost reductions.

production, reducing the need to hold expensive inventory
and allowing for better capacity utilisation. Efficiencies of
this nature may for example stem from the use of ‘just-in-
time’ purchasing,
i.e. an obligation on a supplier of
components to continuously supply the buyer according
to its needs thereby avoiding the need for the buyer to
maintain a significant stock of components which risks
becoming obsolete. Cost savings may also result
from
agreements that allow the parties to rationalise production
across their facilities.

(66) Cost efficiencies may also result from economies of scale,
i.e. declining cost per unit of output as output increases. To
give an example: investment in equipment and other assets
often has to be made in indivisible blocks. If an undertaking
cannot fully utilise a block, its average costs will be higher
than if it could do so. For instance, the cost of operating a
truck is virtually the same regardless of whether it is almost
empty, half-full or full. Agreements whereby undertakings
combine their logistics operations may allow them to
increase the load factors and reduce the number of vehicles
employed. Larger scale may also allow for better division of
labour leading to lower unit costs. Firms may achieve
economies of scale in respect of all parts of the value chain,
including research and development, production, distribu-
tion and marketing. Learning economies constitute a
related type of efficiency. As experience is gained in using
a particular production process or in performing particular
tasks, productivity may increase because the process is
made to run more efficiently or because the task is
performed more quickly.

(67) Economies of scope are another source of cost efficiency,
which occur when firms achieve cost savings by producing
different products on the basis of the same input. Such
efficiencies may arise from the fact that it is possible to use
the same components and the same facilities and personnel
to produce a variety of products. Similarly, economies of
scope may arise in distribution when several types of goods
instance, a
are distributed in the same vehicles. For
producer of
frozen
vegetables may obtain economies of scope by jointly
distributing their products. Both groups of products must
be distributed in refrigerated vehicles and it is likely that
there are significant overlaps in terms of customers. By
combining their operations the two producers may obtain
lower distribution costs per distributed unit.

frozen pizzas and a producer of

(68) Efficiencies in the form of cost reductions can also follow
that allow for better planning of

from agreements

3.2.2.2. Q u a l i t a t i v e e f f i c i e n c i e s

(69) Agreements between undertakings may generate various
efficiencies of a qualitative nature which are relevant to the
application of Article 53(3). In a number of cases the main
efficiency enhancing potential of the agreement is not cost
reduction; it is quality improvements and other efficiencies
of a qualitative nature. Depending on the individual case
such efficiencies may therefore be of equal or greater
importance than cost efficiencies.

(70) Technical and technological advances form an essential and
dynamic part of
the economy, generating significant
benefits in the form of new or improved goods and
services. By cooperating undertakings may be able to create
efficiencies that would not have been possible without the
restrictive agreement or would have been possible only
with substantial delay or at higher cost. Such efficiencies
constitute an important
source of economic benefits
covered by the first condition of Article 53(3). Agreements
capable of producing efficiencies of this nature include, in
research and development agreements. An
particular,
example would be A and B creating a joint venture for
the development and, if successful, joint production of a
cell-based tyre. The puncture of one cell does not affect
other cells, which means that there is no risk of collapse of
the tyre in the event of a puncture. The tyre is thus safer
than traditional
there is no
immediate need to change the tyre and thus to carry a
spare. Both types of efficiencies constitute objective benefits
within the meaning of the first condition of Article 53(3).

It also means that

tyres.

(71) In the same way that the combination of complementary
assets can give rise to cost savings, combinations of assets
may also create synergies that create efficiencies of a
qualitative nature. The combination of production assets
may for instance lead to the production of higher quality
products or products with novel features. This may for
instance be the case for licence agreements, and agreements
providing for joint production of new or improved goods
or services. Licence agreements may, in particular, ensure
more rapid dissemination of new technology in the EEA

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and enable the licensee(s) to make available new products
or to employ new production techniques that lead to
quality improvements. Joint production agreements may, in
particular, allow new or improved products or services to
be introduced on the market more quickly or at lower
cost (72). In the telecommunications sector, for example,
cooperation agreements have been held to create efficien-
cies by making available more quickly new global
services (73). In the banking sector cooperation agreements
that made available improved facilities for making cross-
border payments have also been held to create efficiencies
falling within the scope of the first condition of Arti-
cle 53(3) (74).

(75) The first test contained in the third condition of Arti-
cle 53(3) requires that the efficiencies be specific to the
agreement in question in the sense that there are no other
economically practicable and less restrictive means of
achieving the efficiencies. In making this latter assessment
the market conditions and business realities facing the
parties to the agreement must be taken into account.
Undertakings invoking the benefit of Article 53(3) are not
required to consider hypothetical or theoretical alternatives.
The EFTA Surveillance Authority will not second guess the
business judgment of the parties. It will only intervene
where it is reasonably clear that there are realistic and
attainable alternatives. The parties must only explain and
demonstrate why such seemingly realistic and significantly
less restrictive alternatives to the agreement would be
significantly less efficient.

(72) Distribution agreements may also give rise to qualitative
efficiencies. Specialised distributors, for example, may be
able to provide services that are better tailored to customer
needs or to provide quicker delivery or better quality
assurance throughout the distribution chain (75).

3.3.

Third condition of Article 53(3):

indispensability of the restrictions

(73) According to the third condition of Article 53(3), the
restrictive agreement must not impose restrictions, which
are not indispensable to the attainment of the efficiencies
created by the agreement
in question. This condition
implies a twofold test. First, the restrictive agreement as
such must be reasonably necessary in order to achieve the
efficiencies. Secondly, the individual restrictions of compe-
tition that
flow from the agreement must also be
reasonably necessary for the attainment of the efficiencies.

(74) In the context of the third condition of Article 53(3), the
decisive factor is whether or not the restrictive agreement
and individual restrictions make it possible to perform the
activity in question more efficiently than would likely have
been the case in the absence of the agreement or the
restriction concerned. The question is not whether in the
absence of the restriction the agreement would not have
been concluded, but whether more
are
produced with the agreement or restriction than in the
absence of the agreement or restriction (76).

efficiencies

(72) See e.g. Commission Decision in GEAE/P&W, OJ L 58, 3.3.2000,
in British Interactive Broadcasting/Open, OJ L 312,
and in Asahi/Saint Gobain, OJ L 354,

page 16;
6.12.1999, p. 1;
31.12.2004, p. 87.

(73) See e.g. Commission Decision in Atlas, OJ L 239, 19.9.1996,
page 23, and in Phoenix/Global One, OJ L 239, 19.9.1996, p. 57.
(74) See e.g. Commission Decision in Uniform Eurocheques, OJ L 35,

7.2.1985, p. 43.

(75) See e.g. Commission Decision in Cégétel + 4, OJ L 88, 31.3.1999,

p. 26.

(76) As to the former question, which may be relevant in the context of

Article 53(1), see paragraph 18 above.

(76) It is particularly relevant to examine whether, having due
regard to the circumstances of the individual case, the
parties could have achieved the efficiencies by means of
another less restrictive type of agreement and, if so, when
they would likely be able to obtain the efficiencies. It may
also be necessary to examine whether the parties could
have achieved the efficiencies on their own. For instance,
where the claimed efficiencies take the form of cost
reductions resulting from economies of scale or scope the
undertakings concerned must explain and substantiate why
the same efficiencies would not be likely to be attained
through internal growth and price competition. In making
this assessment it is relevant to consider, inter alia, what is
the minimum efficient scale on the market concerned. The
minimum efficient scale is the level of output required to
minimise average cost and exhaust economies of scale (77).
The larger the minimum efficient scale compared to the
current size of either of the parties to the agreement, the
more likely it is that the efficiencies will be deemed to be
specific to the agreement. In the case of agreements that
produce substantial synergies through the combination of
complementary assets and capabilities the very nature of
the
the efficiencies give rise to a presumption that
agreement is necessary to attain them.

(77) These principles can be illustrated by the following

hypothetical example:

A and B combine within a joint venture their respective
production technologies to achieve higher output and lower
raw material consumption. The joint venture is granted an
exclusive licence to their respective production technolo-
gies. The parties transfer their existing production facilities
to the joint venture. They also transfer key staff in order to
ensure that existing learning economies can be exploited
and further developed. It is estimated that these economies

(77) Scale economies are normally exhausted at a certain point.
Thereafter average costs will stabilise and eventually rise due to,
for example, capacity constraints and bottlenecks.

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will reduce production costs by a further 5 %. The output of
the joint venture is sold independently by A and B. In this
case the indispensability condition necessitates an assess-
ment of whether or not the benefits could be substantially
achieved by means of a licence agreement, which would be
likely to be less restrictive because A and B would continue
to produce independently. In the circumstances described
this is unlikely to be the case since under a licence
agreement the parties would not be able to benefit in the
same seamless and continued way from their respective
experience in operating the two technologies, resulting in
significant learning economies.

(78) Once it is found that the agreement in question is necessary
in order to produce the efficiencies, the indispensability of
each restriction of competition flowing from the agreement
must be assessed.
In this context it must be assessed
whether individual restrictions are reasonably necessary in
order
to produce the efficiencies. The parties to the
agreement must substantiate their claim with regard to
both the nature of the restriction and its intensity.

(79) A restriction is indispensable if its absence would eliminate
or significantly reduce the efficiencies that follow from the
agreement or make it significantly less likely that they will
materialise. The assessment of alternative solutions must
take into account the actual and potential improvement in
the field of competition by the elimination of a particular
restriction or the application of a less restrictive alternative.
The more restrictive the restraint the stricter the test under
the third condition (78). Restrictions that are black listed in
block exemptions or identified as hardcore restrictions in
EFTA Surveillance Authority guidelines and notices are
unlikely to be considered indispensable.

(80) The assessment of indispensability is made within the actual
context in which the agreement operates and must in
particular take account of the structure of the market, the
economic risks related to the agreement, and the incentives
facing the parties. The more uncertain the success of the
product covered by the agreement, the more a restriction
may be required to ensure that
the efficiencies will
materialise. Restrictions may also be indispensable in order
to align the incentives of the parties and ensure that they
concentrate their efforts on the implementation of the
agreement. A restriction may for instance be necessary in
order to avoid hold-up problems once a substantial sunk
investment has been made by one of the parties. Once for
instance a supplier has made a substantial relationship-
specific investment with a view to supplying a customer

(78) See in this respect paragraphs 392 to 395 of the judgment in

Compagnie Générale Maritime cited in note 59.

with an input, the supplier is locked into the customer. In
order to avoid that ex post the customer exploits this
dependence to obtain more favourable terms, it may be
necessary to impose an obligation not to purchase the
component from third parties or to purchase minimum
quantities of the component from the supplier (79).

(81) In some cases a restriction may be indispensable only for a
certain period of time,
in which case the exception of
Article 53(3) only applies during that period. In making
this assessment it is necessary to take due account of the
period of
time required for the parties to achieve the
the exception
efficiencies justifying the application of
rule (80). In cases where the benefits cannot be achieved
without considerable investment, account must, in particu-
lar, be taken of the period of time required to ensure an
adequate return on such investment, see also paragraph 44
above.

(82) These principles can be illustrated by the following

hypothetical examples:

P produces and distributes frozen pizzas, holding 15 % of
the market in EEA State X. Deliveries are made directly to
retailers. Since most retailers have limited storage capacity,
relatively frequent deliveries are required, leading to low
capacity utilisation and use of relatively small vehicles. T is
a wholesaler of frozen pizzas and other frozen products,
delivering to most of the same customers as P. The pizza
products distributed by T hold 30 % of the market. T has a
fleet of larger vehicles and has excess capacity. P concludes
an exclusive distribution agreement with T for EEA State X
and undertakes to ensure that distributors in other EEA
States will not sell
into T's territory either actively or
passively. T undertakes to advertise the products, survey
consumer tastes and satisfaction rates and ensure delivery
to retailers of all products within 24 hours. The agreement
leads to a reduction in total distribution costs of 30 % as
capacity is better utilised and duplication of routes is
eliminated. The agreement also leads to the provision of
additional services to consumers. Restrictions on passive
sales are hardcore restrictions under the block exemption
on vertical restraints (81) and can only be considered
indispensable in exceptional circumstances. The established
market position of T and the nature of the obligations
imposed on it indicate this is not an exceptional case. The
ban on active selling, on the other hand, is likely to be
indispensable. T is likely to have less incentive to sell and
advertise the P brand, if distributors in other EEA States

(79) See for more detail paragraph 116 of the Guidelines on Vertical

Restraints cited in note 6.

(80) See Joined Cases T-374/94, European Night Services and others,

[1998] ECR II-3141, paragraph 230.

(81) See the Act referred to in point 2 of annex XIV to the EEA
Agreement (Regulation (EEC) No 2790/1999) on the application of
Article 81(3) of the EC Treaty on categories of vertical agreements
and concerted practices, OJ L 336, 29.12.1999, p. 21 (as
incorporated into the EEA Agreement by EEA Joint Committee
Decision No 18/2000 of 28 January 2000, OJ L 103, 12.4.2001,
p. 36).

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could sell actively in EEA State X and thus free ride on the
efforts of T. This is particularly so, as T also distributes
competing brands and thus has the possibility of pushing
more of the brands that are the least exposed to free riding.

if

S is a producer of carbonated soft drinks, holding 40 % of
the market. The nearest competitor holds 20 %. S concludes
supply agreements with customers accounting for 25 % of
demand, whereby they undertake to purchase exclusively
from S for five years. S concludes agreements with other
customers accounting for 15 % of demand whereby they
are granted quarterly target rebates,
their purchases
exceed certain individually fixed targets. S claims that the
agreements allow it to predict demand more accurately and
thus to better plan production, reducing raw material
storage and warehousing costs and avoiding supply
shortages. Given the market position of S and the
combined coverage of the restrictions, the restrictions are
very unlikely to be considered indispensable. The exclusive
purchasing obligation exceeds what is required to plan
production and the same is true of the target rebate scheme.
Predictability of demand can be achieved by less restrictive
for
means. S could,
customers to order large quantities at a time by offering
quantity rebates or by offering a rebate to customers that
place firm orders in advance for delivery on specified dates.

for example, provide incentives

3.4.

Second condition of Article 53(3): fair share

for consumers

3.4.1. General remarks

(83) According to the second condition of Article 53(3),
consumers must receive a fair share of the efficiencies
generated by the restrictive agreement.

(84) The concept of ‘consumers’ encompasses all direct or indirect
users of the products covered by the agreement, including
producers that use the products as an input, wholesalers,
retailers and final consumers, i.e. natural persons who are
acting for purposes which can be regarded as outside their
trade or profession. In other words, consumers within the
meaning of Article 53(3) are the customers of the parties to
the agreement and subsequent purchasers. These customers
can be undertakings as in the case of buyers of industrial
machinery or an input for further processing or final
consumers as for instance in the case of buyers of impulse
ice cream or bicycles.

(85) The concept of

‘fair share’

implies that the pass-on of
benefits must at least compensate consumers for any actual
or likely negative impact caused to them by the restriction
of competition found under Article 53(1). In line with the
overall objective of Article 53 to prevent anti-competitive
agreements, the net effect of the agreement must at least be
neutral from the point of view of those consumers directly

following the agreement,

or likely affected by the agreement (82). If such consumers
are worse off
the second
condition of Article 53(3)
is not fulfilled. The positive
effects of an agreement must be balanced against and
its negative effects on consumers (83).
compensate for
When that is the case consumers are not harmed by the
agreement. Moreover, society as a whole benefits where the
efficiencies lead either to fewer resources being used to
produce the output consumed or to the production of
more valuable products and thus to a more efficient
allocation of resources.

(86) It is not required that consumers receive a share of each and
every efficiency gain identified under the first condition. It
suffices that sufficient benefits are passed on to compensate
for the negative effects of the restrictive agreement. In that
case
the overall
benefits (84). If a restrictive agreement is likely to lead to
higher prices, consumers must be fully compensated
If not, the
through increased quality or other benefits.
second condition of Article 53(3) is not fulfilled.

consumers obtain a fair

share of

(87) The decisive factor is the overall impact on consumers of
the products within the relevant market and not the impact
on individual members of this group of consumers (85). In
some cases a certain period of time may be required before
the efficiencies materialise. Until such time the agreement
may have only negative effects. The fact that pass-on to the
consumer occurs with a certain time lag does not in itself
the
exclude the application of Article 53(3). However,
greater the time lag, the greater must be the efficiencies to
compensate also for the loss to consumers during the
period preceding the pass-on.

(88) In making this assessment it must be taken into account
that the value of a gain for consumers in the future is not
the same as a present gain for consumers. The value of
saving 100 Euro today is greater than the value of saving
the same amount a year later. A gain for consumers in the
future therefore does not fully compensate for a present loss
to consumers of equal nominal size. In order to allow for an
appropriate comparison of a present loss to consumers

(82) See in this respect the judgment in Consten and Grundig cited in
note 23, where the Court of Justice of the European Communities
held that the improvements within the meaning of the first condition
of Article 81(3) of the EC Treaty must show appreciable objective
advantages of
the
disadvantages which they cause in the field of competition.

such a character as

to compensate

for

(83) It is recalled that positive and negative effects on consumers are in
principle balanced within each relevant market (cf. paragraph 43
above).

(84) See in this respect paragraph 48 of the Metro (I) judgment cited in

note 56.

(85) See paragraph 163 of the judgment in Shaw cited in note 58.

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with a future gain to consumers, the value of future gains
must be discounted. The discount rate applied must reflect
the rate of inflation, if any, and lost interest as an indication
of the lower value of future gains.

(89) In other cases the agreement may enable the parties to
obtain the efficiencies earlier than would otherwise be
possible.
In such circumstances it is necessary to take
account of the likely negative impact on consumers within
the relevant market once this lead-time has lapsed.
If
through the restrictive agreement
the parties obtain a
strong position on the market, they may be able to charge a
significantly higher price than would otherwise have been
the case. For the second condition of Article 53(3) to be
satisfied the benefit to consumers of having earlier access to
the products must be equally significant. This may for
instance be the case where an agreement allows two tyre
manufacturers to bring to market three years earlier a new
substantially safer tyre but at the same time, by increasing
their market power, allows them to raise prices by 5 %. In
is likely that having early access to a
such a case it
substantially improved product outweighs
the price
increase.

(90) The second condition of Article 53(3) incorporates a sliding
scale. The greater the restriction of competition found
under Article 53(1) the greater must be the efficiencies and
the pass-on to consumers. This sliding scale approach
implies that if the restrictive effects of an agreement are
relatively limited and the efficiencies are substantial it is
likely that a fair share of the cost savings will be passed on
to consumers. In such cases it is therefore normally not
necessary to engage in a detailed analysis of the second
condition of Article 53(3), provided that the three other
conditions for the application of this provision are fulfilled.

(91) If, on the other hand, the restrictive effects of the agreement
are substantial and the cost savings are relatively insignif-
icant,
it is very unlikely that the second condition of
Article 53(3) will be fulfilled. The impact of the restriction
of competition depends on the intensity of the restriction
and the degree of competition that remains following the
agreement.

(92) If

it must be taken into account

the agreement has both substantial anti-competitive
effects and substantial pro-competitive effects a careful
analysis is required. In the application of the balancing test
in such cases
that
competition is an important long-term driver of efficiency
and innovation. Undertakings that are not subject
to
effective competitive constraints — such as for instance
dominant firms — have less incentive to maintain or build
on the efficiencies. The more substantial the impact of the
is that
agreement on competition,
consumers will suffer in the long run.

the more likely it

(93) The following two sections describe in more detail the
analytical framework for assessing consumer pass-on of
efficiency gains. The first section deals with cost efficiencies,
whereas the section that follows covers other types of
efficiencies such as new or improved products (qualitative
efficiencies). The framework, which is developed in these
two sections, is particularly important in cases where it is
not immediately obvious that the competitive harms exceed
the benefits to consumers or vice versa (86).

it

is difficult

(94) In the application of the principles set out below the EFTA
Surveillance Authority will have regard to the fact that in
many cases
to accurately calculate the
consumer pass-on rate and other types of consumer pass-
on. Undertakings are only required to substantiate their
claims by providing estimates and other data to the extent
reasonably possible, taking account of the circumstances of
the individual case.

3.4.2. Pass-on and balancing of cost efficiencies

(95) When markets, as is normally the case, are not perfectly
competitive, undertakings are able to influence the market
price to a greater or
lesser extent by altering their
output (87). They may also be able to price discriminate
amongst customers.

for

(96) Cost efficiencies may in some circumstances lead to
increased output and lower prices
the affected
consumers. If due to cost efficiencies the undertakings in
question can increase profits by expanding output,
consumer pass-on may occur. In assessing the extent to
which cost efficiencies are likely to be passed on to
consumers and the outcome of the balancing test contained
in Article 53(3) the following factors are in particular taken
into account:

(a)

the characteristics and structure of the market;

(b)

the nature and magnitude of the efficiency gains;

(c)

the elasticity of demand; and

(d)

the magnitude of the restriction of competition.

All
factors must normally be considered. Since Arti-
cle 53(3) only applies in cases where competition on the
market is being appreciably restricted, see paragraph 24
above,
residual
competition will ensure that consumers receive a fair share
the degree of competition
of

can be no presumption that

the benefits. However,

there

(86) In the following sections, for convenience, the competitive harm is
referred to in terms of higher prices; competitive harm could also
mean lower quality, less variety or lower innovation than would
otherwise have occurred.

(87) In perfectly competitive markets individual undertakings are price
the market price, which is
takers. They sell
determined by overall supply and demand. The output of
the
individual undertaking is so small that any individual undertaking's
change in output does not affect the market price.

their products at

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remaining on the market and the nature of this competition
influences the likelihood of pass-on.

pass on to consumers in the form of higher output and
lower prices efficiencies that reduce marginal costs, whereas
they have no such direct
incentive with regard to
efficiencies that reduce fixed costs. Consumers are therefore
more likely to receive a fair share of the cost efficiencies in
the case of reductions in variable costs than they are in the
case of reductions in fixed costs.

(97) The greater the degree of residual competition the more
likely it is that individual undertakings will try to increase
their sales by passing on cost efficiencies. If undertakings
compete mainly on price and are not subject to significant
capacity constraints, pass-on may occur relatively quickly. If
competition is mainly on capacity and capacity adaptations
occur with a certain time lag, pass-on will be slower. Pass-
on is also likely to be slower when the market structure is
conducive to tacit collusion (88). If competitors are likely to
retaliate against an increase in output by one or more
parties to the agreement, the incentive to increase output
may be tempered, unless
the competitive advantage
conferred by the efficiencies is such that the undertakings
concerned have an incentive to break away from the
common policy adopted on the market by the members of
the oligopoly. In other words, the efficiencies generated by
the agreement may turn the undertakings concerned into
so-called ‘mavericks’ (89).

(98) The nature of the efficiency gains also plays an important
role. According to economic theory undertakings maximise
their profits by selling units of output until marginal
revenue equals marginal cost. Marginal revenue is the
change in total revenue resulting from selling an additional
unit of output and marginal cost is the change in total cost
resulting from producing that additional unit of output. It
follows from this principle that as a general rule output and
pricing decisions of a profit maximising undertaking are
not determined by its fixed costs (i.e. costs that do not vary
with the rate of production) but by its variable costs (i.e.
costs that vary with the rate of production). After fixed
costs are incurred and capacity is set, pricing and output
decisions are determined by variable cost and demand
conditions. Take for instance a situation in which two
companies each produce two products on two production
lines operating only at half their capacities. A specialisation
agreement may allow the two undertakings to specialise in
producing one of the two products and scrap their second
production line for the other product. At the same time the
specialisation may allow the companies to reduce variable
input and stocking costs. Only the latter savings will have a
direct effect on the pricing and output decisions of the
undertakings, as they will influence the marginal costs of
production. The scrapping by each undertaking of one of
their production lines will not reduce their variable costs
and will not have an impact on their production costs. It
follows that undertakings may have a direct incentive to

(88) Undertakings collude tacitly when in an oligopolistic market they are
able to coordinate their action on the market without resorting to an
explicit cartel agreement.

(89) This term refers to undertakings that constrain the pricing behaviour
of other undertakings in the market who might otherwise have
tacitly colluded.

(99) The fact that undertakings may have an incentive to pass on
certain types of cost efficiencies does not imply that the
pass-on rate will necessarily be 100 %. The actual pass-on
rate depends on the extent to which consumers respond to
changes in price, i.e. the elasticity of demand. The greater
the increase in demand caused by a decrease in price, the
greater the pass-on rate. This follows from the fact that the
greater the additional sales caused by a price reduction due
to an increase in output the more likely it is that these sales
will offset the loss of revenue caused by the lower price
resulting from the increase in output. In the absence of
price discrimination the lowering of prices affects all units
sold by the undertaking, in which case marginal revenue is
less than the price obtained for the marginal product. If the
undertakings concerned are able to charge different prices
to different customers, i.e. price discriminate, pass-on will
normally only benefit price sensitive consumers (90).

the whole cost structure of

(100) It must also be taken into account that efficiency gains
often do not affect
the
undertakings concerned. In such event, the impact on the
price to consumers is reduced. If for example an agreement
allows the parties to reduce production costs by 6 %, but
production costs only make up one third of the costs on
the basis of which prices are determined, the impact on the
product price is 2 %, assuming that the full amount is
passed-on.

(101) Finally, and very importantly, it is necessary to balance the
two opposing forces resulting from the restriction of
competition and the cost efficiencies. On the one hand,
any increase in market power caused by the restrictive
agreement gives the undertakings concerned the ability
and incentive to raise price. On the other hand, the types
of cost efficiencies that are taken into account may give the
undertakings concerned an incentive to reduce price, see
paragraph 98 above. The effects of these two opposing
forces must be balanced against each other. It is recalled in
this regard that the consumer pass-on condition incorpo-
rates a sliding scale. When the agreement causes a
substantial reduction in the competitive constraint facing

(90) The restrictive agreement may even allow the undertakings in
question to charge a higher price to customers with a low elasticity
of demand.

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the parties, extraordinarily large cost efficiencies are
normally required for sufficient pass-on to occur.

by the incumbent to maintain its position (rent seeking),
misallocation of resources, reduced innovation and higher
prices.

3.4.3. Pass-on and balancing of other types of efficiencies

(102) Consumer pass-on can also take the form of qualitative
efficiencies such as new and improved products, creating
sufficient value for consumers to compensate for the anti-
competitive effects of the agreement,
including a price
increase.

(103) Any such assessment necessarily requires value judgment.
It is difficult to assign precise values to dynamic efficiencies
of this nature. However, the fundamental objective of the
assessment remains the same, namely to ascertain the
overall impact of the agreement on the consumers within
the relevant market. Undertakings claiming the benefit of
Article 53(3) must substantiate that consumers obtain
countervailing benefits (see in this respect paragraphs 57
and 86 above).

(104) The availability of new and improved products constitutes
an important source of consumer welfare. As long as the
increase in value stemming from such improvements
exceeds any harm from a maintenance or an increase in
price caused by the restrictive agreement, consumers are
better off than without the agreement and the consumer
pass-on requirement of Article 53(3) is normally fulfilled.
In cases where the likely effect of the agreement is to
increase prices for consumers within the relevant market it
must be carefully assessed whether the claimed efficiencies
create real value for consumers in that market so as to
compensate for the adverse effects of the restriction of
competition.

3.5.

Fourth condition of Article 53(3): no
elimination of competition

(105) According to the fourth condition of Article 53(3), the
agreement must not afford the undertakings concerned the
possibility of eliminating competition in respect of a
substantial part of the products concerned. Ultimately the
protection of rivalry and the competitive process is given
priority over potentially pro-competitive efficiency gains
which could result from restrictive agreements. The last
condition of Article 53(3) recognises the fact that rivalry
between undertakings is an essential driver of economic
efficiency, including dynamic efficiencies in the shape of
innovation. In other words, the ultimate aim of Article 53
is to protect the competitive process. When competition is
eliminated the competitive process is brought to an end
and short-term efficiency gains are outweighed by longer-
term losses stemming inter alia from expenditures incurred

(106) The concept in Article 53(3) of elimination of competition
in respect of a substantial part of the products concerned
is an EEA law concept specific to Article 53(3) (91).
However, in the application of this concept it is necessary
to take account of the relationship between Article 53 and
Article 54. The application of Article 53(3) cannot prevent
the application of Article 54 of the EEA Agreement (92).
Moreover, since Articles 53 and 54 both pursue the aim of
maintaining effective competition on the market, consis-
tency requires
that Article 53(3) be interpreted as
precluding any application of this provision to restrictive
agreements that constitute an abuse of a dominant
position (93) (94). However, not all restrictive agreements
concluded by a dominant undertaking constitute an abuse
of a dominant position. This is for instance the case where
a dominant undertaking is party to a non-full function
joint venture (95), which is found to be restrictive of
competition but at the same time involves a substantial
integration of assets.

(107) Whether competition is being eliminated within the
meaning of the last condition of Article 53(3) depends
on the degree of competition existing prior
to the
agreement and on the impact of the restrictive agreement
on competition, i.e. the reduction in competition that the
agreement brings about. The more competition is already
weakened in the market concerned, the slighter the further

(91) And specific to Article 81(3) of the EC Treaty, see Joined Cases
T-191/98, T-212/98 and T-214/98, Atlantic Container Line (TACA),
not yet reported, paragraph 939, and Case T-395/94, Atlantic
Container Line, [2002] ECR II-875, paragraph 330.

(92) See Joined Cases C-395/96 P and C-396/96 P, Compagnie maritime
belge, [2000] ECR I-1365, paragraph 130. Similarly, the application
the EEA
of Article 53(3) does not prevent
Agreement rules on the free movement of goods, services, persons
and capital. These provisions are in certain circumstances applicable
to agreements, decisions and concerted practices within the meaning
of Article 53(1), see to that effect Case C-309/99, Wouters, [2002]
ECR I-1577, paragraph 120.

the application of

(93) See in this respect Case T-51/89, Tetra Pak (I), [1990] ECR II-309,
the Atlantic Container Line (TACA)

and paragraph 1456 of
judgment cited in note 91.

(94) This is how paragraph 135 of the Guidelines on vertical restraints
and paragraphs 36, 71, 105, 134 and 155 of the Guidelines on
horizontal cooperation agreements, cited in note 6, should be
understood when they state that in principle restrictive agreements
concluded by dominant undertakings cannot be exempted.

(95) Full function joint ventures, i.e. joint ventures that perform on a
lasting basis all the functions of an autonomous economic entity, are
covered by the act referred to in point 1 of Annex XIV to the EEA
Agreement (Regulation (EEC) No 139/2004) on the control of
concentrations between undertakings (the EC Merger Regulation), OJ
L 24, 29.1.2004, p. 1 (as incorporated into the EEA Agreement by
EEA Joint Committee Decision No 78/2004 of 8 June 2004, OJ
L 219, 19.6.2004, p. 13 and EEA Supplement to the OJ, 19.6.2004,
p. 1).

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reduction required for competition to be eliminated within
the meaning of Article 53(3). Moreover, the greater the
reduction of competition caused by the agreement, the
greater the likelihood that competition in respect of a
substantial part of the products concerned risks being
eliminated.

(108) The application of the last condition of Article 53(3)
the various sources of
requires a realistic analysis of
the level of competitive
competition in the market,
to the
constraint
that
agreement and the impact of
the agreement on this
competitive constraint. Both actual and potential competi-
tion must be considered.

they impose on the parties

(109) While market shares are relevant,

the magnitude of
remaining sources of actual competition cannot be
assessed exclusively on the basis of market share. More
extensive qualitative and quantitative analysis is normally
called for. The capacity of actual competitors to compete
and their incentive to do so must be examined. If, for
example, competitors face capacity constraints or have
relatively higher costs of production their competitive
response will necessarily be limited.

(110) In the assessment of the impact of the agreement on
competition it is also relevant to examine its influence on
the various parameters of competition. The last condition
for exception under Article 53(3) is not fulfilled, if the
agreement eliminates competition in one of
its most
important expressions. This is particularly the case when
an agreement eliminates price competition (96) or compe-
tition in respect of innovation and development of new
products.

(111) The actual market conduct of the parties can provide
insight into the impact of the agreement. If following the
conclusion of the agreement the parties have implemented
and maintained substantial price increases or engaged in
other conduct indicative of the existence of a considerable
degree of market power, it is an indication that the parties
are not subject to any real competitive pressure and that
competition has been eliminated with regard to a
substantial part of the products concerned.

(112) Past competitive interaction may also provide an indica-
tion of the impact of the agreement on future competitive
interaction. An undertaking may be able to eliminate
competition within the meaning of Article 53(3) by
concluding an agreement with a competitor that in the
past has been a ‘maverick’ (97). Such an agreement may
change the competitive incentives and capabilities of the
competitor and thereby remove an important source of
competition in the market.

(96) See paragraph 21 of the judgment in Metro (I) cited in note 56.
(97) See paragraph 97 above.

the impact of

in the eyes of consumers,

(113) In cases involving differentiated products, i.e. products that
differ
the
agreement may depend on the competitive relationship
between the products sold by the parties to the agreement.
When undertakings offer differentiated products
the
competitive constraint that individual products impose
on each other differs according to the degree of
substitutability between them.
therefore be
considered what is the degree of substitutability between
the products offered by the parties,
is the
competitive constraint that they impose on each other. The
more the products of the parties to the agreement are close
substitutes the greater the likely restrictive effect of the
agreement. In other words, the more substitutable the
products the greater the likely change brought about by
the agreement in terms of restriction of competition on
the market and the more likely it is that competition in
respect of a substantial part of the products concerned
risks being eliminated.

i.e. what

It must

(114) While sources of actual competition are usually the most
important, as they are most easily verified, sources of
potential competition must also be taken into account.
The assessment of potential competition requires an
analysis of barriers to entry facing undertakings that are
not already competing within the relevant market. Any
assertions by the parties that there are low barriers to
market entry must be supported by information identify-
ing the sources of potential competition and the parties
must also substantiate why these sources constitute a real
competitive pressure on the parties.

(115) In the assessment of entry barriers and the real possibility
it is relevant to

for new entry on a significant scale,
examine, inter alia, the following:

(i)

the regulatory framework with a view to determining
its impact on new entry;

(ii)

the cost of entry including sunk costs. Sunk costs are
those that cannot be recovered if
the entrant
subsequently exits the market. The higher the sunk
costs the higher the commercial risk for potential
entrants;

(iii)

the minimum efficient scale within the industry, i.e.
the rate of output where average costs are minimised.
If the minimum efficient scale is large compared to
the size of the market, efficient entry is likely to be
more costly and risky;

(iv)

the competitive strengths of potential entrants.
Effective entry is particularly likely where potential
least as cost efficient
entrants have access to at

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technologies as the incumbents or other competitive
advantages that allow them to compete effectively.
When potential entrants are on the same or an
inferior technological
trajectory compared to the
incumbents and possess no other significant compe-
titive advantage entry is more risky and less effective;

It

the position of buyers and their ability to bring onto
the market new sources of competition.
is
irrelevant that certain strong buyers may be able to
extract more favourable conditions from the parties
to the agreement than their weaker competitors (98).
The presence of strong buyers can only serve to
counter a prima facie
finding of elimination of
competition if it is likely that the buyers in question
will pave the way for effective new entry;

the likely response of incumbents to attempted new
entry. Incumbents may for example through past
conduct have acquired a reputation of aggressive
behaviour, having an impact on future entry;

the economic outlook for the industry may be an
indicator of its longer-term attractiveness. Industries
that are stagnating or in decline are less attractive
candidates for entry than industries characterised by
growth;

(v)

(vi)

(vii)

(viii) past entry on a significant scale or the absence

thereof.

(116) The above principles can be illustrated by the following
hypothetical examples, which are not intended to establish
thresholds:

Firm A is a brewer, holding 70 % of the relevant market,
comprising the sale of beer through cafes and other on-
trade premises. Over the past five years A has increased its
market share from 60 %. There are four other competitors
in the market, B, C, D and E with market shares of 10 %,
10 %, 5 % and 5 %. No new entry has occurred in the
recent past and price changes implemented by A have
generally been followed by competitors. A concludes
agreements with 20 % of the on-trade premises represent-
ing 40 % of sales volumes whereby the contracting parties
undertake to purchase beer only from A for a period of

five years. The agreements raise the costs and reduce the
revenues of rivals, which are foreclosed from the most
attractive outlets. Given the market position of A, which
has been strengthened in recent years, the absence of new
entry and the already weak position of competitors it is
likely that competition in the market is eliminated within
the meaning of Article 53(3).

Shipping firms A, B, C, and D, holding collectively more
than 70 % of the relevant market, conclude an agreement
whereby they agree to coordinate their schedules and their
tariffs. Following the implementation of the agreement
prices rise between 30 % and 100 %. There are four other
suppliers, the largest holding about 14 % of the relevant
market. There has been no new entry in recent years and
the parties to the agreement did not lose significant market
share following the price increases. The existing competi-
tors brought no significant new capacity to the market and
no new entry occurred. In light of the market position of
the parties and the absence of competitive response to
their joint conduct, it can reasonably be concluded that the
parties to the agreement are not subject to real competitive
pressures and that
them the
possibility of eliminating competition within the meaning
of Article 53(3).

the agreement affords

A is a producer of electric appliances for professional users
with a market share of 65 % of a relevant national market.
B is a competing manufacturer with 5 % market share
which has developed a new type of motor that is more
powerful while consuming less electricity. A and B
conclude an agreement whereby they establish a produc-
tion joint venture for the production of the new motor. B
undertakes to grant an exclusive licence to the joint
venture. The joint venture combines the new technology
of B with the efficient manufacturing and quality control
process of A. There is one other main competitor with
15 % of the market. Another competitor with 5 % market
share has
a major
recently been acquired by C,
international producer of competing electric appliances,
which itself owns efficient technologies. C has thus far not
been active on the market mainly due to the fact that local
presence and servicing is desired by customers. Through
the acquisition C gains access to the service organisation
required to penetrate the market. The entry of C is likely to
ensure that competition is not being eliminated.

(98) See in this respect Case T-228/97, Irish Sugar, [1999] ECR II-2969,

paragraph 101.