Prohibition of Restrictive Agreements and Exemptions
The Union has exclusive competence to establish ‘competition rules necessary for the functioning of the internal market’ (Art 3(1)(b) TFEU). An important element within this system is the prohibition of anti-competitive agreements between undertakings, decisions by associations of undertakings and concerted practices which are capable of affecting trade between Member States as contained in Art 101(1) TFEU (briefly: prohibition of restrictive agreements).
Art 101 TFEU is set up in three parts: the first paragraph encompasses a comprehensive prohibition of anti-competitive agreements between undertakings which is illustrated by a number of examples. The second paragraph sets forth the legal consequences on the level of private law for infringement of this prohibition: it nullifies agreements which violate the prohibition. The third and final paragraph determines the requirements for an exceptional exemption of anti-competitive agreements from the prohibition in para 1.
1. Normative purpose of the prohibition of restrictive agreements
Competition in the internal market (competition (internal market)) is a central element of the European Economic Constitution. Competition develops if market participants, mainly undertakings but also consumers, make use of the economic freedom vested in them by the fundamental freedoms (free movement of goods, services, persons and capital) of the TFEU. The effectiveness of competition (eg with regard to efficiency improvements, consumer choice, adaptation of undertakings to changing economic circumstances or distribution of market income) can only be achieved if the undertakings, as market actors, behave independently from their competitors, suppliers and customers. If undertakings use (or abuse) their right of freedom of contract in order to forgo their ability to freely compete against each other, eg by agreements or concerted practices fixing minimum prices for their products to be charged to customers, the competitive process is deprived of its effectiveness. In a number of judgments, the European Court of Justice (ECJ) has emphasized the importance of the ‘postulate of independent behaviour’ for the functioning of effective competition by holding that ‘each economic operator must determine independently the policy which he intends to adopt on the common market including the choice of the persons and undertakings to which he makes offers or sells’. Although the undertakings are free to adapt ‘intelligently’ to the conduct of their competitors, the postulate of independent behaviour, however, ‘strictly precludes any direct or indirect contact between such operators, the object or effect whereof is either to influence the conduct on the market of an actual or potential competitor or to disclose to such a competitor the course of conduct which they themselves have decided to adopt or contemplate adopting on the market’ (ECJ Joined Cases 40/73 to 48/73, 50/73, 54/73 to 56/73, 111/73, 113/73 and 114/73 – Suiker Unie  ECR 1663 paras 173, 174).
In order to uphold the ‘postulate of independent conduct’, the prohibition of restrictive agreements serves the purpose of restraining undertakings from abusing their freedom of contract to forego their capacity to freely compete against each other (ie independence) by voluntarily limiting their competitive resources in respect of, for example, prices, conditions, service, choice of consumers and advertisement and thereby eliminating or restricting effective competition.
2. The prohibition of anti-competitive agreements and concerted practices
In order to effectively enforce the ‘postulate of independent behaviour’ as required by the ECJ, Art 101(1) TFEU sets out a comprehensive and far-reaching prohibition of anti-competitive agreements. The substantive scope of this prohibition is not limited to anti-competitive understandings between undertakings at the same level of the production and distribution chain which are competitors (horizontal restraints of competition including cartels), but also covers agreements between undertakings which are economic actors at different levels of the production or distribution chain and hence do not compete with one another (vertical restraints of competition).
The prohibition of Art 101(1) TFEU applies to undertakings. Under the functional concept of undertakings, every entity engaged in economic activity qualifies as an undertaking, regardless of its legal form or the way in which it is financed. The functional concept of undertakings excludes sovereign acts of the state on the one side and private consumers on the other side from the scope of the ban on restrictive agreements (competition rules (applicability)). The functional approach of the term ‘undertaking’ corresponds to the purpose of Art 101(1) TFEU: the provision intends to prevent undertakings from coordinating their behaviour on the markets and, thus, restricting competition.
b) Instruments for the restraint of competition
As instruments for such coordination Art 101(1) TFEU refers to agreements between undertakings, decisions by associations of undertakings as well as concerted practices by undertakings and by associations of undertakings. The term ‘agreement’ can be traced back to the traditional concept of the contract which is firmly rooted in the legal systems of the EU Member States. However, the term ‘all agreements’ in Art 101(1) TFEU indicates that the founding fathers of the European Union intended a broad understanding of this term.
Consequently, the interpretation of the term ‘agreement’ by the Union courts goes well beyond the understanding of that term as ‘contract’. The European Court of Justice (ECJ) takes as an ‘agreement’ every accord between undertakings through which they express their joint intention to conduct themselves on the market in a specific way (ECJ Case C-49/92 P – Anic Partecipazioni  ECR I-4125, para 130). For the existence of an ‘agreement’ within the meaning of Art 101(1) TFEU, it is irrelevant whether the accord between the concerned undertakings has been declared orally or laid down in written form or whether it has been concluded explicitly or impliedly.
Moreover, the term ‘agreement’ as used in Art 101(1) TFEU does not require that the concerned undertakings intend to be legally bound by it. The term also encompasses so-called ‘gentlemen’s agreements’ which are—as a matter of principle—concluded by the concerned undertakings without legally binding effect, but rather make the parties subject to certain economic and moral obligations. In legal literature, the question whether the intention of the parties to be legally bound forms an integral part of the term ‘agreement’ is disputed; however, this question is not important for the scope of application of Art 101(1) TFEU because an accord without legally binding force might qualify as a concerted practice and, thus, fall under the prohibition in para 1 of Art 101 TFEU. The term ‘agreement’ in Art 101(1) TFEU also encompasses clauses restricting competition which are included in reciprocal contracts (sales contracts, dealership contracts etc) through which the parties do not pursue common, but rather separate purposes. The Court of First Instance (now the General Court of the European Union (GC)) has held that an ‘agreement’ can be assumed if the parties have reached an accord on a behaviour which restricts competition in the market (see eg CFI Case T-317/94 – Weig  ECR II-1241, para 134; CFI Case T-334/94 – Sarrio  ECR II-1439, para 118; CFI Joined Cases T-25/95 ff – SA Cimenteries CBR  ECR II-508, paras 1353, 1389).
The term ‘concerted practices’ in Art 101(1) TFEU is supposed to provide a fall-back position allowing coordinated behaviour of undertakings that either does not qualify as an agreement or for which an agreement cannot be proven to come within the ambit of the prohibition of Art 101(1) TFEU. A concerted practice is to be understood as coordinated behaviour of undertakings in relation to their market conduct which falls short of fulfilling all the criteria of an agreement—namely, an accord based on express or implied acts, of which the parties assume that it is legally binding or, at least, creates moral or factual obligations—but through which the undertakings involved knowingly substitute practical coordination, albeit without any legally or otherwise binding obligation, for the risks and uncertainty which are necessarily part of the competitive process (ECJ Case 49/69 – ICI  ECR 619, paras 64, 67). The term ‘concerted practice’ presupposes two factual elements: coordinated conduct on the one hand as well as actual behaviour of the participating undertakings corresponding to the coordination on the other hand and then a causal connection between these two elements. In the administrative practice of the European Commission and the judgments of the Union courts, market information systems are the most important examples of concerted practices. Such systems are used by participating undertakings as tools to remove uncertainty about the reaction of their competitors with regard to their own market behaviour, so that competition is substantially restricted (eg ECJ Case C-7/95 P – John Deere  ECR I-3111, paras 88 ff). Concerted practices are no less incompatible with the aforementioned principle of independence than are agreements between undertakings and decisions by associations of undertakings (ECJ Case C-7/95 P – John Deere  ECR I-3111, para 87). Merely parallel conduct of undertakings which is based on the independent decision of each concerned enterprise without any coordination with other undertakings must be distinguished from concerted practices and is not prohibited by Art 101(1) TFEU. The postulate of independence does not prevent undertakings from adapting themselves ‘intelligently’ to the market conduct of their competitors, as far as this conduct is not based on an accord or contact between the undertakings. The distinction between illegal concerted practices and legal parallel conduct might occasionally prove difficult to identify in the economic and legal reality, particularly in oligopolistic markets. Agreements and concerted practices formed directly between the participating undertakings are not the only instruments for restricting competition; such effects can also be achieved by the similarly prohibited decisions of associations of undertakings under which they link together in order to further their common interests in the public, as is the case, for instance, with trade associations or agricultural cooperatives.
c) The concept of restraint of competition
Agreements, concerted practices and decisions as mentioned in Art 101(1) TFEU are only prohibited if they ‘have as their object or effect the prevention, restriction or distortion of competition within the common market’. ‘Prevention’ here represents simply a particularly extensive and far-reaching form of restraint of competition. The elements of ‘prevention’ and ‘restriction’ are therefore linked together under the term ‘restraint [or: restriction] of competition’. A certain specific meaning is attributed to the element of ‘distortion’; measures of undertakings leading to an artificial alteration of competitive conditions within the Common Market are incompatible with the aim of a system of undistorted competition, eg the foundation of a fund by undertakings for the payment of export subsidies, and are hence covered by the term ‘distortion’.
The concept of restraint of competition is the central element of Art 101(1) TFEU. According to the interpretation of the ECJ, the term covers restrictions of action of the participating undertakings with regard to their market behaviour which they bring about by entering contracts which limit their otherwise existing options of independent conduct related to parameters of competition such as prices, conditions, rebates, services, advertisement, etc. Of late, the Commission in certain categories of cases (effected restraints of competitions) has focused on the restriction of options for choice of action of other market participants, in particular focusing on the consumers rather than on restraints of action for competitors. Competition in all its manifestations, is protected under Art 101(1) TFEU which encompasses actual as well as potential competition. The provision aims at the protection of fair competition. Article 101 TFEU does not distinguish between horizontal restraints of competition (agreements between competitors) and vertical restraints of competition (agreements between undertakings on different economic levels); both types of restraints are covered by the provision. Article 101(1) TFEU distinguishes between agreements and other measures which have as their object restraint of competition and agreements and other measures which effect a restraint of competition. An agreement has a restraint of competition as its object if it is, according to its content and other surrounding circumstances, objectively capable of restricting competition. The subjective motives of the undertakings involved are irrelevant in determining the object of an agreement. If it can be shown that an agreement serves an anti-competitive object, it is unnecessary to inquire into the actual effects of the restrictive agreement on the market conditions (ECJ Joined Cases 56/64 and 58/64 – Consten and Grundig  ECR 299, 342). If, however, an agreement carries no anti-competitive purpose, it must be determined, taking account of all the circumstances of the individual case, whether such measure actually leads to a restraint of competition. Such a restrictive effect of an agreement must be determined on the basis of a comparison between the actual market conditions as they have developed with the agreement and the hypothetical conditions as they would have been in the absence of the agreement (ECJ Case 56/65 – Société technique minière  ECR 235, 250).
The prohibition of Art 101(1) TFEU is supposed to cover only such restraints of competition which affect the Common Market to an appreciable extent. With the approval of the ECJ (see eg ECJ Case 56/65 – Société technique minière  ECR 235, 249 ff; ECJ Case 5/69 – Völk/Verwaecke  ECR 295, para 7; ECJ Case C-306/96 – Javico/Yves Saint Laurent  ECR I 1983, para 20), the Commission has, for a long time, developed the unwritten requirement of appreciability in order to remove anti-competitive agreements which affect the Common Market only to a slight and hardly appreciable extent from the scope of application of Art 101(1) TFEU. If an agreement does not lead to an appreciable effect on competition, it does not infringe the prohibition of Art 101(1) TFEU despite its anti-competitive contents. According to the de minimis notice of the Commission (OJ 2001 No C368/13), a horizontal agreement does not appreciably restrict competition if the aggregated market share held by the parties to the agreement does not exceed 10 per cent of the relevant market. In the case of vertical restraints, the threshold for appreciability is not exceeded if none of the concerned undertakings has a market share of more than 15 per cent on any of the relevant markets. The criterion of appreciability does not apply to certain ‘hard-core’ restrictions as set out in the de minimis notice which have a restraint of competition as their object. Agreements with such hard-core restrictions invariably lead to an infringement of Art 101(1) TFEU and are therefore prohibited, whatever their appreciability. Finally, the applicability of the prohibition of cartels requires that the anti-competitive restraint is capable of affecting trade between Member States (the so‑called ‘interstate effects clause’, competition rules (applicability)).
Article 101(1) TFEU details a number of examples for anti-competitive clauses in agreements, concerted practices and decisions. Such examples aim to facilitate the application of the prohibition contained in Art 101(1) TFEU and comprise restrictions such as the fixing of purchase and selling prices or sharing markets or sources of supply, etc.
3. Exemption from the prohibition of restrictive agreements
Article 101(3) TFEU provides that an agreement which in principle would be prohibited because it infringes Art 101(1) TFEU may be exempted from this prohibition if it complies with the four requirements set out in Art 101(3) TFEU. The exemption of the prohibition of restrictive agreements is based on the assumption that cooperation between independent undertakings may—notwithstanding the anti-competitive effects of such agreements—lead to gains in general welfare which might outweigh the disadvantages of the restraints of competition. The legal effects of exemption lead to the consequence that agreements which are prohibited under Art 101(1) TFEU can be practised legally if the four requirements set out in Art 101(3) TFEU are fulfilled. These four conditions must all be complied with in order to justify an exemption.
a) Requirements for exemption
Article 101(3) TFEU requires that the agreement (a) contributes to improving the production or distribution of goods or to promoting technical or economic progress, (b) allows consumers a fair share of the resulting benefit, (c) does not impose restrictions on the participating undertakings which are not essential to the attainment of these objectives and (d) finally does not afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. The agreement having anti-competitive effects must result in a more efficient production or distribution of goods. Enhanced efficiency may be either quantitative (cost savings incurred, for example, through economies of scale in production or distribution) or qualitative (development and marketing of improved or new products, application of new methods etc). The improvements in efficiency have to be sufficiently substantiated by the parties interested in the exemption of an agreement; it must also be shown that there is a causal connection between the improvements and the anti-competitive agreement. According to settled case law of the ECJ and the Commission, only objective benefits can be taken into account. The improvements cannot be assessed from the merely subjective point of view of the parties to the agreement (ECJ Joined Cases 56/64 and 58/64 – Consten and Grundig  ECR 322, 396; ECR Joined Cases 209/78 to 215/78 and 218/78 – van Landewyk  ECR 3125, 3279, para 185; Commission, Case 77/592/EC – COBELPA/VNP  OJ L242/10, para 41). An ‘improvement’ in terms of Art 101(3) TFEU can only be recognized, if the expected objective benefits of the agreement outweigh the disadvantage brought about by the restraint of competition. A reasonable consumer participation assumes that the consumers receive at least such a share of the efficiency gains accruing through the anti-competitive agreement gains so that they are compensated—eg in the form of price reductions or improvement of performance—for the disadvantages they suffer from the restraint of competition. Fair consumer participation is seen as highly likely in those markets in which sufficiently strong competition urges the undertakings to pass on the cost savings and other advantages to the consumers. The requirement of indispensability makes the exemption from the prohibition of restrictive agreements dependent on a strict application of the principle of proportionality: the restraints of competition which the parties impose through their agreement may go no further than absolutely necessary for achieving the positive objectives of the cooperation. The assessment of the fourth and last criterion of exemption, ie that competition in the relevant market must not be eliminated through the agreement, depends mainly—but not solely—on the aggregated market share of the parties to the anti-competitive agreement. The higher the market share of the participating undertakings, the higher the risk must be rated that the undertakings will be in a position to eliminate competition on the relevant market or a substantial part of it. In assessing this requirement, apart from market shares, all other circumstances which may affect competition in the relevant market have to be taken into account as well. Amongst other things, this refers for instance to the actual and potential competition which remains in the market notwithstanding the restrictive agreement.
b) Exemption of individual agreements—Art 101(3) TFEU as a legal exception
Since Reg 1/2003 came into force on 1 May 2000, Art 101(3) TFEU—notwithstanding its wording which reads ‘[T]he provisions of paragraph 1 may, however be declared inapplicable …’—it has been construed as a legal exception from the prohibition of restrictive agreements. Consequently, if the requirements of Art 101(3) TFEU are complied with, an agreement which infringes Art 101(1) TFEU is exempted from the prohibition of cartels ex lege and without administrative decision of the competition authorities and can be practised legally. Under the enforcement mechanism for the EU competition rules in force before 1 May 2000, the prohibition of Art 101(1) TFEU was directly applicable (eg by the competition authorities or the courts of the Member States), whereas the exemption provision in Art 101(3) TFEU could only be applied indirectly. Under the old Enforcement Regulation 17/62, an exemption under Art 101(3) TFEU could only be declared by the Commission (a so-called ‘monopoly for exemptions’ of the Commission under Art 9(1) Reg 17/62); accordingly the provision was only applicable indirectly.
c) Block exemptions
Apart from the exemption of individual agreements, Art 101(3) TFEU provides for block exemptions (block exemption regulations). Block exemptions require legislative acts and are, therefore, framed in the form of regulations adopted by the Commission. The European Commission is empowered to adopt such block exemption regulations by corresponding regulations of the Council and the European Council. Block exemptions are subject to the same substantive requirements as the exemption of individual agreements. In practice, block exemptions are of great importance because they exempt a multitude of agreements from the ban on cartels without forcing undertakings which intend to conclude restrictive agreements to assess the broadly and vaguely worded requirements of Art 101(3) TFEU at their own risk of error. Therefore, block exemption regulations contribute to a higher degree of legal certainty with respect to the application of Art 101(3) TFEU.
4. Consequences of an infringement of the prohibition of restrictive agreements in private law
Article 101(2) TFEU provides that agreements or decisions prohibited pursuant to para 1 of Art 101 TFEU are void. It is the only provision of the treaty which deals directly with the consequences of a violation of treaty provisions with regard to contracts and decisions of private law.
The legal sanction of nullity as provided for by Art 101(2) TFEU covers agreements and decisions which, on the one hand, have restrictions of competition in terms of para 1 of this provision as their object or effect and which, on the other hand, are not exempted under the conditions of Art 101(3) TFEU. Although the term ‘nullity’ has its roots in the private law systems of the Member States, it has become a concept of Union law separate from the legal systems of the Member States and—according to the principles of interpretation of Union law—has to be construed autonomously, ie without reference to corresponding concepts in the legal systems of the Member States. With respect to the purpose pursued by Art 101 TFEU, the ECJ has always held that the legal effects of nullity in para 2 are absolute (see, for instance, ECJ Case 22/71 – Béguelin  ECR 949, para 9; ECJ Case 319/82 – Société de Vente des Ciments et Bétons/Kerpen & Kerpen  ECR 4173). The effect of absoluteness means that, because of the violation of the ban on restrictive agreements and decisions, void agreements or decisions cannot create any legal effect whatsoever between the parties involved or between them and a third party. Moreover, all individuals are allowed to invoke the nullity of the agreements and decisions under Art 101(2) TFEU in administrative or judicial proceedings. However, the legal consequences of nullity pursuant to Art 101(2) TFEU go only as far as they are necessary to achieve the purpose of Art 101 TFEU: the protection of competition. If certain parts of an agreement do not violate the prohibition of Art 101(1) TFEU and are separable from the prohibited parts, their legal fate in the absence of Union law on this question depends on the relevant provisions of the Member States’ contract law. As to German law, for instance, § 139 Bürgerliches Gesetzbuch (BGB) on partially void transactions would take effect.
b) Other sanctions
Apart from the direct legal effect of nullity as provided for by Art 101(2) TFEU, Union law does not contain rules for the indirect effects of an infringement of the prohibition of restrictive agreements. However, according to Union case law, every party injured by agreements, decisions or concerted practices in restraint of competition is entitled to damages (ECJ Case C-453/99 – Courage/Crehan  ECR I-6297; competition law (private enforcement)). According to this judgment, Member States are required by Union law to provide compensatory relief for damages caused by restraints of competition within their domestic law. German Federal legislation has complied with this requirement of Union law by adopting the 7th amendment of the Statute against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen—GWB) which in s 33 provides for claims for damages and injunctive relief for persons who are injured by a violation of Art 101 TFEU.
Moreover, an infringement of the ban on restrictive agreements in Art 101(1) TFEU can lead to administrative sanctions by the competition authorities: thus, the Commission can impose an injunction under Art 7 Reg 1/2003 or fine the involved undertakings pursuant to Art 23 f Reg 1/ 2003. Currently, the Commission is considering measures to enhance the private enforcement of competition rules relative to the thus far overwhelming role played by the competition authorities in implementing those rules.
Daniel G Goyder, EC Competition Law (3rd edn, 1998) 75 ff; Laurence Idot, Droit Communautaire de la Concurrence (2004); Ernst-Joachim Mestmäcker and Heike Schweitzer, Europäisches Wettbewerbsrecht (2nd edn, 2004) §§ 7–14; Filippo Amato and Gonzalez Diaz, ‘Art 81’ in Ulrich Loewenheim, Karl M Meessen and Alexander Riesenkampff (eds), Kartellrecht, vol 1 (2005); Reiner Schulze and Manfred Zuleeg (eds), Europarecht. Handbuch für die deutsche Rechtspraxis (2006) § 16 B–D; Jonathan Faull and Ali Nikpay (eds), The EC Law of Competition (2nd edn, 2007) 3.01–3.453 and 7.01–9.359; Reinhard Ellger, ‘Art. 81 Abs. 3 EG’ in Ulrich Immenga and Ernst-Joachim Mestmäcker (eds), Wettbewerbsrecht, vol 1 (4th edn, 2007); Volker Emmerich, Kartellrecht (11th edn, 2008) §§ 4–8; Peter Roth and Vivien Rose (eds), Bellamy & Child European Community Law of Competition (6th edn, 2008).