A Short Preamble to Competition Law In The EU
Article 101 (1) of the Treaty on the Function of European Union (TFEU) expresses that “agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion” of the EU Competition.[1] The article illustrates the concept of ‘object’ and how it affects competition both legally and practically.[2] In appreciating the recent increase in business and competition after the formation of the EU, it was paramount for the members to come up with, and design laws that primarily addressed issues of competition. The economies of the EU are not the same and it was vital that a balance be created between the big economies/players such as Germany, France and Italy with the other member’s whose economies were not as big.[3] It basically bars agreements which restrict competition either by ‘object’ or by ‘effect’. An agreement limits competition by object if it is considered so harmful such that no inquiry made towards its effects can lead to a ruling of violation. On the other hand, an agreement limits competition by effect if the agreement negatively affects competition.[4] An activity becomes a subject to a fine if it is found to limit competition under Article 101 (1) TFEU either by object or by effect. The amount fine placed upon the activity is not determined by the category in which the activity falls. However, the process used to make a ruling of violation against the activity can be noticeably different. Many intellectuals argue that the European Commission (EC) has overrated the type of conduct considered as restriction of competition by object; in order to achieve procedural effectiveness.[5]
There have been debates concerning the ‘object’ concept and how the European Commission overrated its categorization of restrictions by object. The debates are majorly about the difference between a restriction by object and a restriction by effect. For instance, in an attempt to clarify the concept of restrictions ‘by object’ and market evaluation of their effect, the EU Commission published a revised De Minimis notice and certain policy papers in June 2014. As a result of the development, the ECJ delivered a judgment on 11 September, 2014 concerning a case of Groupment des cartes bancaires (GCB) against a ruling by the General Court.[6] The ruling was that the pricing measures implemented by GCB in relation to its payment card system had the ‘object’ of restricting competition.[7] GCB is an economic interest body which comprises of 148 banks and was instituted under the French law. It was instituted to manage a system of bank cards used for payments and withdrawals. The system allowed bank card customers to make payments to affiliated businesses as well as make withdrawals from ATMs within the group. More than three quarters of bank card payments in France were managed through the system.
In his numerous journals on competition law, Ruyi is keen to note that the main cause of dispute in the measures was the charges adopted by GCB which was applicable to all its members.[8] The charges had an effect by preventing the smaller banks from issuing cards at a lower price as compared to larger banks in the same group. GCB argued that the charges adopted were to help new competitors obtain new businesses, install ATMs, as well as avoid exploiting investments made by main banks in the group. The European Commission ruled that the charges comprised of object of restriction under Article 101 (1) TFEU. This is because it made the prices of bank cards too high which were a disadvantage to new entrants and smaller banks in the group. Consequently, the European Commission ordered the GCB to do away with the charges. However, the GCB challenged the ruling before the General Court.[9] The GC ruled in favor of the European Commission and maintained the price measures had the restriction of competition as its object. Similarly, the GC decided that it was not supposed to examine the petition that challenged the ruling of the effects of the prices. In addition, the GCB appealed to the ECJ indicating that the GC had made a mistake in attempting to give meaning to restriction of competition by object.
The ECJ agreed with the GCB and demanded that a better approach is used to determine the restriction by object. The ECJ specified that an agreement qualifies as a restriction by object only if its nature is a total harm to competition. Otherwise, the European Commission must show the likely effect to competition before qualifying an agreement as a restriction to competition by object. According to the ECJ judgment, an agreement can only have the object of limiting competition if the content, purpose and context of the agreement display adequate harm to competition. In particular when regarded by its nature that it limits proper functioning of normal competition. It is also a restriction by object if the nature of the agreement is substantially changing the structure of the market. For example, it changes structure of the market especially in BIDS by making competitors to leave the market or by reducing congestion.[10] Likewise, the ECJ confirms in its ruling that thorough analysis must be done on agreements which concerns joined markets such as payment systems in order to determine their ability to inhibit competition on all the markets.
While seen in Legal Principles of Restriction of Competition by Object as used in Cartes Bancaires, Article 101 (1) forbids agreements, decisions or intensive practices that have the effect of restricting or preventing competition. In Groupment des Cartes Bancaire, the ECJ gave a reconfirmation on when the European Commission is allowed to rule that an agreement is restricting competition by object.[11] The General Court of the European Union must equally follow the same principle when hearing appeals against rulings by the Commission. The court must conduct a full assessment to confirm if the Commission applied Article 101 (1) in its judgment.
Reflecting on previous cases of Case C-209/07 Beef Industry Development Society[12] and Case C-32/11 Allianz Hungaria, the CJEU made a ruling that an agreement or rigorous practice becomes a restriction by object to competition only when it has adequate amount of harmful effect to the normal functioning of competition.[13] In addition, the new rules in Cartes Bancaires case did not comprise the object criterion. The CJEU discovered that the GCEU had not followed the right legal procedure in endorsing the Commission’s verdict that the rules of the Cartes Bancaires comprised of the object criterion.[14] The GCEU had failed to determine whether the rules of the case, in their nature, had adequate amount of restriction to competition. The Commission instead applied a lower threshold of whether the rules had the potential of distorting or preventing competition in the market. The GCEU had also given a wrong ruling that the concept of violation by object should not be regarded as restriction by object.
Subsequently, the CJEU determined whether the errors made by the General Court of European Union nullified its judgment that the new rules of the CB case comprised of restriction by object in competition. The CJEU found out that the GCEU did not explain how the content of the rules caused possible harm to competition. The Commission simply concluded that the rules restricted competition by issuing bank payment cards which in turn allowed entrance of new competitors to the French market. The payments cards constituted restriction by object since they extensively limited competition. Accordingly, as seen in paragraph 70 and 71 of the CB case, the GCEU has failed to establish whether the rules constituted the object criterion by noticeably changing how the market operates.
The CJEU purported that the new rules of the CB case forced certain banks to issue payment cards to its customer. These new rules therefore left the banks with only two choices. The banks were to either reduce the number of payment cards they issue, or pay a contribution to reflect the benefit they receive by acquiring other banks. This very nature of the rules did not hinder the normal functioning of competition. However, the rules could still have negative effects on competition by allowing new competitors to enter the market.
Another error discovered by the CJEU in the GCEU’s legal proceedings is the restriction by object in two sided markets. The payment system adopted by issuing bank cards is a two-sided market. They include the market that issues payment cards and market that acquires businesses. The interaction between these two markets often leads to effects on competition. However, the CB maintained that the main objective of the rules was to encourage more members to acquire businesses as well as create a balance between issuing of payment cards and acquiring of merchants. Thus, the process prevents some banks issuing payment cards from exploiting the small banks. In its ruling, the CJEU confirmed that when business takes place in be achieved if more than one market, restriction by object can only be determined if a proper analysis is done to its nature to ascertain that it negatively affects competition in all markets that it operates on. In the case of two-sided markets a thorough assessment must be carried out on the interaction between the two markets. The fact bank payment system in the French market is a two-sided market; the GCEU could not make a ruling that CB rules had a negative effect on completion without assessing their negative effect on all market. Surprisingly, the Commission had never done this.
Restriction by Object
There has been a question on when an agreement or practice restrict competition by object. It is evident that the CJEU has warned against overrating the application of the concept of ‘restriction by object’. It is agreed that an agreement restricts competition by object if by nature; it is harmful to normal competitive conditions. Certain assumptions that particular restrictions are harmful to competition are actually based partly on experience. According to Pavlic, the European Commission has most of the time validated that these kinds of restrictions are harmful to competition and are likely to paralyze the intentions of EU Competition Law.[15] The European Commission and other Competition bodies have agreed to make bigger the concept of restriction by object in order to adopt violation rulings without assessing the real effects of an agreement on competition. Similarly, the CJEU is seen to have given a contracted explanation of ‘restriction by object’ in Cartes Bancaires case as compared to the T-Mobile Netherlands case. In the latter case, the CJEU interprets that a rigorous practice or agreement can only be considered to have anti-competitive object if it has the probability or is just capable of having a negative effect on competition.[16] Nevertheless, indicates Pavlic in Cartes Bancaires, the CJEU maintains that the General Court had inaccurately used the probability test. It holds that the GCEU should have applied a more constricted test of having the possibility to have negative impact or at least sufficient damage on competition.[17]
The CJEU has made it clear that the shortcut provided to ruling of restriction by object should only be taken in very specific scenarios. Such a scenario is when the agreement or activity in its very nature will unavoidably have a fundamental negative effect on competition. However, it is not automatic that a mere declaration of a negative effect will be sufficient for a ruling. A proper examination must be conducted to find out why an agreement or rigorous practice restricts competition by object. The analysis is done to ensure that the commission does not prohibit a wide variety of agreements which by their very nature do not have negative impact to competition.
Despite the effort made by the CJEU to interpret restriction of object, there are still some considerable uncertainties. For instance, paragraph 88 of the CJEU’s ruling on Cartes Bancaires case, the CJEU concludes that the new rules in the GCB case did not have a restriction of object.[18] However, internal documents detained by the Commission showed that by accepting the new policies, the GCB members planned to obstruct competition by issuing bank cards to new entrants in order to increase their revenues, thereby increasing the card charges paid by customers. Therefore in such a scenario, actions by participants to deliberately limit market entry and growth in an effort to prevent price reductions will substantially change the market structure. Such can be compared to how market structure is equally affected by cartels, inadequate production and reduced human resource competence in modern market. The CJEU has a different thought in Cartes Bancaires where the commission says that matters of market structure are only relevant if they pose danger to competition.[19] It usually a common factor that increased prices of items in a market as well increased cartels who limit production are a barrier to competition by object. For instance, the scenario is patently obvious as shown by the CJEU in Cartes Bancaires case where such behavior led to a reduction in production and increased prices.[20] As a result, there was poor allocation of resources which eventually affected the consumers.
As much as courts of law and authorities are not supposed to readily make rulings with restriction by object, there are many agreements and practices that comprise of restriction objects. The courts must always interpret such concepts of restriction by object with broad and extensive evidence of harm to competition. There are also many other agreements and rigorous practices, in their correct nature, that suit the definition of CJEU. For example, the CJEU confirmed in the Beef Industry Case that in the business of BIDS, producers are forced to exit a market which in turn reduces congestion in a market. All these market forces are also objections of restriction to competition.[21]
The subject restriction by object also features in highly concentrated oligopolistic markets where few large firms are in competition. This is particularly during exchange of information between the firms and if the act to some extent reduces the uncertainty brought about by effects of price fluctuations. The judgment is particularly evident on paragraph 34 to 37 f the T-Mobile ruling.[22] The concept of exchange of information in oligopolistic markets has been used by the CJEU in case C-455/11P Solvay. In this case, the Commission ruled that even exchange of significant information not related to price can be a restriction by object.[23] Especially if the exchange of information entails discussions concerning stabilizing the market by forming cartel agreements. Such a tendency becomes a restriction by object if the information is exchanged frequently over a long period of time.
In addition, the CJEU found out that other forms of horizontal and vertical agreements can lawfully restrict competition by object. The discovery was particularly evident in the Allianz Hungaria case where the Commission confirmed that a range of similar vertical agreements can restrict competition by object especially if they interfere with the normal functioning of the market by gravely weakening competition.[24] That can take place even in the absence of horizontal agreements.[25] Vertical agreements which are objects of violation include maintenance of resale price and limitations on internet sales by distributors as in the case C-439/09 Pierre Fabre.[26] Similarly, other vertical agreements are those that divide markets by taking advantage of territorial limitations on parallel trade. Examples of territorial limitation include the issue of discrepancy in pricing arrangement, as in Case C-501/06P Glaxosmithkline, and limits put in agreements involving the licensing the rights of broadcasting sports as in Case C-403/08 FA Premier League.[27] In Glaxosmithkline case, the General Court held that no infringement had been performed with restriction by object, despite the fact that the presence of a hardcore restriction element, an intended parallel trade.[28] But rather, it held that there is an infringement by effect. Considering like that, the GC caused confusion of distinction between restriction by object and effect.
Therefore, in order for the EC to pass judgment to support restriction by object, it has to distinctively illustrate that the agreement has the potential to cause a negative effect to economy. The judgment is specifically illustrated in paragraph 31 of the case of T-Mobile Netherlands Vs Commission.[29] The Commission must make the ruling by assessing the main objective of the agreement and not its biased intention. The Commission must equally consider the economic background in which the agreement is built. Such a ruling is particularly evident in paragraph 26 of the case between Compagnie Royale Asturienne des Minnes SA and Rheinzinc GmbH and the Commission. In the ruling, restriction by object include harmonization of initial prices, reducing or increasing prices, harmonization of quotation prices, and market allocation.[30]
According to previous research findings, notes Alexa there are three kinds of approaches that have been developed in order to examine the ‘restriction by object’ issue by the European Court of Justice.[31] They include the orthodox approach, the more analytical approach, and finally a mixture of the two approaches known as the hybrid approach. The orthodox approach argues that the very nature of a certain category of agreements restrict competition by object as a result of their known negative effects.[32] The EU Competition Law dictates that satisfying that the object criterion is restrictive to competition does require that its restrictive effect on competition is established. According to experience, the Commission rules that particular restrictions are likely to limit competition despite of the biased intentions of parties involved. Therefore the orthodox approach is based on the classification of certain restrictions by object to competition to Article 101 (1) TFEU. The more analytical approach is more evident in the decisive judgment by the CJEU in Societe Technique Miniere (STM) case. The Commission made it clear in its ruling that Article 101 (1) TFEU should be applied to agreements.[33] The more analytical approach provides a summary of the larger analytical part where the object of an agreement is assessed in consideration t its economic and legal properties. The STM is more fundamental in bringing out a more analytical approach object cases especially during the early years of EU’s competition law jurisdiction.[34]
Beyond the above illustrated examples, there are still many questions concerning the object criterion. The law illustrates the concept of ‘object’ and how it affects competition both legally and practically. In appreciating the recent increase in business and competition after the formation of the EU, it was paramount for the members to come up with, and design laws that primarily addressed issues of competition. People still wonder if there is an appropriate way to validate whether an agreement or practice has enough reason to harm competition. There is also the question of what makes an agreement have the object of restricting competition.[35] As learnt in the essay, the rulings concerning the object of restricting competition entirely depends on experience. However, in order t reach to such a verdict, it requires one to undertake some level of analysis. Authorities are not legally permitted to simply make a ruling that an agreement, in its definite nature, has a negative effect on competition in order to find a shortcut in finding a violation. Despite this effort, there is always a loophole left to apply the ‘duck test’ and the ‘elephant test’.[36] It is because experience enables authorities and courts to continue applying the duck and elephant test when making judgments concerning restriction by object.
Bibliography
Journals
Alexa IL, ‘The Effects of Competition Regulations on Mobile Telecommunication Markets’ [2015] Theoretical & Applied Economics 22, no. 2 (February 2015): 303-310. Business Source Complete
Christophers B, ‘Competition, Law, and the Power of (imagined) Geography: Market Definition and the Emergence of Too-Big-to-Fail Banking in the United States’ (2014) 90 Economic Geography 429
Dickinson S, Humphry D and Siciliani P, ‘The Prudential Regulation Authority’s Secondary Competition Objective’ (2015) Bank of England Quarterly Bulletin 55, no. 4: 334-343. Business Source Complete
Donlagic D and Imamovic-Cizmic K, ‘Macroeconomic Aspect of Competition Law Enforcement - Review from BIH’ [2010] Conference Proceedings: International Conference Of The Faculty Of Economics Sarajevo (ICES) 1-19. Business Source Complete
Drexl J, ‘Competition Law in Media Markets and Its Contribution to Democracy A Global Perspective’ SSRN Electronic Journal
Fox EM and Healey D, ‘When the State Harms Competition ― the Role for Competition Law’ (2014) Antitrust Law Journal 79, no. 3: 769-820. Business Source Complete SSRN Electronic Journal
Karagiannis Y, ‘The Causes and Consequences of the Collegial Implementation of European Competition Law’ (2013) 19 European Law Journal 682
O’Reganon M, ‘Restrictions by Object: Duck and Elephant Hunting with the Court of Justice’ [2014] http://kluwercompetitionlawblog.com/2014/10/20/restrictions-by-object-duck-and-elephant-hunting-with-the-court-of-justice/--------
Pavlic L, ‘Addressing Responsibility of Owners and Managers in Cartel Agreements: A Competition Law Perspective’ [2015] Megatrend Review 12, no. 3: 183-196. Business Source Complete
Ruyi W, ‘Public Procurement of Innovation Policy: Competition Regulation, Market Structure and Dominant Design’ [2014] Journal of Public Procurement 14, no. 4: 473-494. Business Source Complete
Cases
Allianz Hungaria Biztosito Zrt v Gazdasagi Versenyhivatal [2013] Case C-32/11
Compagnie Royale Asturienne des Mines SA and Rheinzink GmbH v Commission of the European Communities [1984] 29/83
Competition Authority v Beef Industry Development Society and Barry Brothers [2008] Case C-209/07
Football Association Premier League Ltd and Others v QC Leisure and Others [2011] C-403/08
GlaxoSmithKline Services Unlimited v Commission of the European Communities [2009] C-501/06 P
Groupement des Cartes Bancaires v Commission [2011] Case C-67/13
Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l'Économie, de l'Industrie et de l'Emploi [2011] C-439/09
Société Technique Minière (LTM) v Maschinenbau Ulm GmbH (MBU) [1966] 56-65
Solvay SA v European Commission [2013] C-455/11 P
T-Mobile Netherlands BV, KPN Mobile NV, Orange Nederland NV and Vodafone Libertel NV v Raad van bestuur van de Nederlandse Mededingingsautoriteit [2009] Case C-8/08
Regulations
‘EU Official Journal 115 , 09/05/2008 P. 0088 - 0089 12008E101 - EN’ <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12008E101:EN:HTML> accessed 19 January 2016
[1] ‘EU Official Journal 115 , 09/05/2008 P. 0088 - 0089 12008E101 - EN’ <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12008E101:EN:HTML> accessed 19 January 2016
[2] Brett Christophers, ‘Competition, Law, and the Power of (imagined) Geography: Market Definition and the Emergence of Too-Big-to-Fail Banking in the United States’ (2014) 90 Economic Geography p.42
[3] Stephen Dickinson, David Humphry and Paolo Siciliani, ‘The Prudential Regulation Authority’s Secondary Competition Objective’ (2015) Bank of England Quarterly Bulletin 55, no. 4: 334-343. Business Source Complete p.340
[4] Josef Drexl, ‘Competition Law in Media Markets and Its Contribution to Democracy A Global Perspective’ SSRN Electronic Journal.
[5] Yannis Karagiannis, ‘The Causes and Consequences of the Collegial Implementation of European Competition Law’ (2013) 19 European Law Journal p.685 – 686.
[6] Groupement des Cartes Bancaires v Commission [2011] Case C-67/13
[7] Stephen Dickinson, David Humphry and Paolo Siciliani, ‘The Prudential Regulation Authority’s Secondary Competition Objective’ (2015) Bank of England Quarterly Bulletin 55, no. 4: 334-343. Business Source Complete p.340
[8] Wan Ruyi, ‘Public Procurement of Innovation Policy: Competition Regulation, Market Structure and Dominant Design’ [2014] Journal of Public Procurement 14, no. 4: 473-494. Business Source Complete.
[9] Stephen Dickinson, David Humphry and Paolo Siciliani, ‘The Prudential Regulation Authority’s Secondary Competition Objective’ (2015) Bank of England Quarterly Bulletin 55, no. 4: 334-343. Business Source Complete p.341.
[10] Competition Authority v Beef Industry Development Society and Barry Brothers [2008] Case C-209/07
[11] Groupement des Cartes Bancaires v Commission [2011] Case C-67/13
[12] Competition Authority v Beef Industry Development Society and Barry Brothers [2008] Case C-209/07
[13] Allianz Hungaria Biztosito Zrt v Gazdasagi Versenyhivatal [2013] Case C-32/11.
[14] Dzenan Donlagic and Kanita Imamovic-Cizmic, ‘Macroeconomic Aspect of Competition Law Enforcement - Review from BIH’ [2010] Conference Proceedings: International Conference Of The Faculty Of Economics Sarajevo (ICES) 1-19. Business Source Complete.
[15] Ljiljana Pavlic, ‘Addressing Responsibility of Owners and Managers in Cartel Agreements: A Competition Law Perspective’ [2015] Megatrend Review 12, no. 3: p185. Business Source Complete
[16] T-Mobile Netherlands BV, KPN Mobile NV, Orange Nederland NV and Vodafone Libertel NV v Raad van bestuur van de Nederlandse Mededingingsautoriteit [2009] Case C-8/08.
[17] Ljiljana Pavlic, ‘Addressing Responsibility of Owners and Managers in Cartel Agreements: A Competition Law Perspective’ [2015] Megatrend Review 12, no. 3: 187. Business Source Complete
[18] Groupement des Cartes Bancaires v Commission [2011] Case C-67/13
[19] Ibid.
[20] ibid.
[21] Competition Authority v Beef Industry Development Society and Barry Brothers [2008] Case C-209/07
[22] T-Mobile Netherlands BV, KPN Mobile NV, Orange Nederland NV and Vodafone Libertel NV v Raad van bestuur van de Nederlandse Mededingingsautoriteit [2009] Case C-8/08
[23]Solvay SA v European Commission [2013] C-455/11 P
[24] Allianz Hungaria Biztosito Zrt v Gazdasagi Versenyhivatal [2013] Case C-32/11
[25]Eleanor M Fox and Deborah Healey, ‘When the State Harms Competition ― the Role for Competition Law’ (2014) Antitrust Law Journal 79, no. 3. P.785.
[26] Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l'Économie, de l'Industrie et de l'Emploi [2011] C-439/09.
[27] Football Association Premier League Ltd and Others v QC Leisure and Others [2011] C-403/08
[28] GlaxoSmithKline Services Unlimited v Commission of the European Communities [2009] C-501/06 P
[29] Eleanor M Fox and Deborah Healey, ‘When the State Harms Competition ― the Role for Competition Law’ (2014) Antitrust Law Journal 79, no. 3: p.790
[30] Compagnie Royale Asturienne des Mines SA and Rheinzink GmbH v Commission of the European Communities [1984] 29/83
[31] Ioan Lucian Alexa, ‘The Effects of Competition Regulations on Mobile Telecommunication Markets’ [2015] Theoretical & Applied Economics 22, no. 2 (February 2015): p.307
[32] Eleanor M Fox and Deborah Healey, ‘When the State Harms Competition ― the Role for Competition Law’ (2014) Antitrust Law Journal 79, no. 3: p.795
[33] Société Technique Minière (LTM) v Maschinenbau Ulm GmbH (MBU) [1966] 56-65
[34] Eleanor M Fox and Deborah Healey, ‘When the State Harms Competition ― the Role for Competition Law’ (2014) Antitrust Law Journal 79, no. 3: p.795
[35] Stephen Dickinson, David Humphry and Paolo Siciliani, ‘The Prudential Regulation Authority’s Secondary Competition Objective’ (2015) Bank of England Quarterly Bulletin 55, no. 4: 334-343. Business Source Complete 340
[36] Matthew O’Reganon, ‘Restrictions by Object: Duck and Elephant Hunting with the Court of Justice’ [2014] http://kluwercompetitionlawblog.com/2014/10/20/restrictions-by-object-duck-and-elephant-hunting-with-the-court-of-justice/
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