How relevant has the concept of the 'rule of reason,' developed in United States anti- trust law, been to the particular circumstances of EC competition law?

Competition Law

Q. How relevant has the concept of the ‘rule of reason,’ developed in United States anti- trust law, been to the particular circumstances of EC competition law? Is Regulation 1/2003 and the devolution of power away from the Commission likely to make any difference to this position?

The nature of Article 81 (1) requires that the agreement, decision, or concerted practice has the object or effect of preventing, restricting or distorting competition in the common market. Article 81 (1) captures all agreements or concerted practices whose object is to restrict trade. However, a problem facing the future of competition law in the Community is the fact that some agreements, although restricting trade, may have characteristics that would enhance trade. The Commission and the European Court of Justice (ECJ) have blocked these types of agreements in the past, which is all set for change with the implementation of Regulation 1/2003. However, the United States Courts have adopted the ‘rule of reason’, a concept which allows the court to evaluate the effects of the agreement before making a decision as to whether or not this restricts trade. Although there is undoubtedly some restriction of competition, this approach, it can be argued, does allow for a greater degree of flexibility when looking at the issue of competition. In order to clearly understand the rule of reason and its impact on the EC, one must first look at the U.S example of how to apply to the rule.

In the United States, the Sherman Act is the landmark legislation with regards to Anti- Trust cases, known in the EC as Competition law. Section 1 of the Sherman Act states that every contract, combination or conspiracy in restraint of trade is illegal and this legislation, if adopted with a wide scope, could potentially lead to a restriction in trade, as most agreements would be caught by the provision. The rule of reason was a device created by White CJ in the case of Standard Oil v U.S. White believed that a standard of reason had to be applied in order to determine whether a restraint was within the Sherman Act, and that only undue or unreasonable restraints should be condemned. The rule, although not without critics, promotes the need for debate into whether restrictions in the agreement increase or decrease competition in the market as a whole.

The rule of reason has been incorporated into the EC legislation in principle. However, the courts do not look upon it as a ready and necessary solution, upon which they are willing to make a justification for the necessity of such agreements. The ECJ has not adopted the U.S approach when looking at the rule of reason, in that the U.S courts will look at the effects that the agreement would have on the levels of competition and base a decision on those merits. The ECJ rejects this approach, arguably taking a stiffer line against such agreements. The ECJ considered that no analysis of the effects on competition was required, due to the nature of the agreement, whose object was to restrict competition. The fact the agreements object is to restrict competition means it goes against the inherent nature of the EC treaty, therefore meaning that the ECJ adopted a very narrow scope when deciding whether the agreements are in breach of Article 81 (1). Although the ECJ may be seen to be taking a tougher line than the U.S courts, it must be noted that there is a fairly limited category of restraints that are considered to have as their object a restriction of trade.

This is a preview of the whole essay

The case of Constan & Grundig v Commission highlights this point. The parties in this case argued that the Commission had failed to properly apply Article 81 (1) by failing to base the decision on the rule of reason. The major flaw with Article 81 (1) is that with regards to agreements whose object is to restrict trade is that effectively only the Commission are in a position to judge if these agreements do this. Constan & Grundig argued that if the Commission were to base its decision on economic justifications, then it would be evident that such an agreement would in fact aid competition in the long term. They argued that the agreement was essential to enable Grundig to penetrate the French market. Grundig claimed that in the absence of some protection from parallel imports, no distributor would have attempted to penetrate the market due to the large cost of such a venture. It was argued that in order to promote inter- brand competition in the future, some restrictions would need to be imposed now in order to stimulate the market.

The ECJ’s decisions in Societe La Technique Miniere v Maschinebau seemingly goes against this thinking. The court found that in order to have a balanced trade system, some concessions would have to be made. It was recognised that agreements that do not have, as their object a restriction of competition, should be assessed in their market context and an economic approach should be adopted when determining its effects. This has set precedent as subsequent courts have been adopting of these economic justifications. These factors have helped to influence decisions when determining whether the agreements do in fact restrict competition within the meaning of Art. 81 (1). However, the Court of First Instance ruled in both the cases of Metropole Television v Commission and Van Den Bergh Foods v Commission that they rejected the argument that the judgement in Societe La Technique amounted to an acceptance of the rule of reason for a legal justification for exemption from Article 81 (1).

The courts rejecting the idea that the rule of reason is a necessary tool to use in Community law can be seen to be logical. The EC has a mechanism is place where agreements that restrict competition can be exempted following an economic analysis under the provisions laid out by Article 81 (3). No such provision exists in U.S law and therefore the court was forced to employ the rule of reason in order to enforce the legislation. Article 81 (3) does have limitations and these limitations are perhaps the reason for the debate surrounding the adoption of the rule of reason in EC law. Article 81 (3) can only be applied by the Commission, not by national courts so the system of application of Article 81 is seemingly at the whim of the commission. Academics such as Korah believe that the Commission is unwilling to move away from the stance taken by the ECJ, and because it grants few exemptions, the idea that national courts follow this approach would mean that their would be little incentive to attempt new ventures, ‘ If national courts adopt the Commissions practice, it is feared that many desirable contracts which restrict only competition that could not take place without such an agreement, or which restrict competition more than they increase, may not be made.’ Only two types of exemption are made under Article 81 (3), individual and block exemptions. However, it must be noted that the precise factors that will lead the Commission to exempt an agreement will differ from case to case. It is therefore prudent to note the cases of Bayer & Gist- Brocades, decided by the Commission, and L.C Nungesser, decided by the ECJ. The cases highlight the nature of the scope of Article 81(3), in that the court will not use the provisions if the agreement contains terms that partition the Community market. Whish argues that this broad interpretation of Article 81 (3) allows for ‘policies other than economic efficiency to be taken into account…according to a broad view of Article 81(3), a benefit in terms of any of these policies could ‘trump’ a restriction of Competition under Article 81(1).’

The nature of EC law is that the Community can hold omnipotent powers when deciding issues with regards to Competition. The scope of Regulation 1/2003 is to allow the EU to undertake a fundamental reform of the enforcement rules relating to anti- competitive agreements that are seen to be abuses of dominant position under Article 81 and Article 82. The new regulation will replace regulation 17/62, which was concerned with the enforcement of competition rules, not the development of competition law across the Union. This system has been replaced by regulation 1/2003, which allows for a system of legal exception in which Member states undertake a greater responsibility for the enforcement of the law, allowing the Commission to concentrate on the issue of Community wide infringements of Article 81. This devolution of power from the Commission to various bodies in member states, for example, the Office of Fair Trading in the UK will be responsible for maintaining fair competition in the spirit of the treaty. The significance of the new regulation is highlighted by the comments of Commissioner Monti, who said that the reform of Regulation 17/62 is “the most important legislative initiative in the competition field since the 1990 Merger Regulation”

The need for reform comes from the seemingly rigid nature of the law as it currently stands. Regulation 17/62, which is still in force, has two main pillars: the notification

procedure for agreements, seeking either a declaration of negative clearance

that an agreement does not infringe Article 81 (1) EC, or an exemption decision

under Article 81 (3) EC on the one hand, an exemption that can only be granted by the Commission, and the procedure for investigating and sanctioning violations of the competition rules such as cartels and abuses of a dominant position (infringement procedure) on the other. The notification procedure results from the implementation of Article 81 EC through a system of prohibition with reservation of exemption by approval, according to which all agreements potentially falling within Article 81 (1) EC must be notified to the Commission for assessment if they are to benefit from a negative clearance or an exemption according to Article 81 (3) EC and, as of the date of notification, from immunity from fines until a decision of the Commission has been made. The Commission took the role of investigator, prosecutor and judge in the same proceedings. If the Community wanted to proceed, it was evident that this situation would have to be reformed.

The Commission and the European Court of Justice (ECJ) have interpreted the exclusions set out in Article 81 (1) EC very broadly so that a wide spectrum of agreements is caught. The Commission, however, can be accused of double standards. Although Article 81 is designed to prevent abuses of the market, namely by preventing cartels and monopolies from existing, the Commission itself has a monopoly over bringing procedure and granting exemptions. This means that the new legislation is more encompassing of the Community itself, as opposed to being at the whim of the Commission. Regulation 1/2003 will hopefully provide a situation where social considerations play as much of a part in the decision as economic factors. It is clear that one cannot categorize each area of community law into separate issues. One has to recognize that their will be overlap in the future and any regulation that allows the courts a degree of flexibility in reaching a decision has to be considered to be an advancement in what can be considered outdated law. Initially, it made sense for the Commission to have a degree of autocracy as this allowed the Community law to develop in uniformed manner as well as with speed and precision due to the fact the legislative process was not held up by debate and qualification. In addition, the Commission was able to act quickly and efficiently to create the system we have today quickly and efficiently. However, this system is not desirable in the modern Community. With the EU signing the new European Constitution this year, it is imperative that the Community has a flexible, analytical system of enforcement as opposed to the ‘set in stone’ approach that was in effect with regards to the Commission previously.

In conclusion, it is evident that although the rule of reason as we know it from U.S law is seen by the courts to have no place in EC law, we can clearly see that its principles are needed in order for Community competition to advance and evolve. The restrictions that dominated procedures for all Article 81 cases are slowly being stripped away. The implementation of Regualtion 1/2003 and the devolution of power away from the Commission means we have a more representative system of legislation. The ECJ, although not a legislative body, has the power to influence any future Commission decision through the verdicts it delivers. By now implementing a system in which the ECJ is encouraged to evaluate the legislation on a much broader level, this could introduce a system where the system of Competition develops as a response to the requirement of the Community at the time, a decision based on the spirit and needs of the Community.

Word Count: 2169