European Law.

Name: Haseeb-ur-Rehman,

Matriculation Number: 00100285,

Date: 15th March 02,

Subject: European Law (LW22003) Coursework; b).

The purpose of Article 81 is to protect competition, by regulating the activities of undertakings, which would otherwise act independently, where, ‘undertakings’ is interpreted, by the European Court of Justice, (ECJ) and the Commission, as any party or person engaged, in commercial or economic activities, involving, the provision of goods and services1. This article was created under, the 1957 Treaty of Rome, initially, as Article 85, and was based on, the American, Sherman Act of 1870, which dealt with ‘anti-trust’ law2.

Accordingly, in the spirit of the mixed economy, Article 81 seeks to uphold the presumption that, any restriction, on free competition is, essentially reprehensible. However, in order to, maintain some degree, of control over free competition, Article 81, necessitates, a level of intervention, in the mechanics of the European economy. This means that, acts of industry and producers, detrimental to the consumer and the market are to be prevented, by the community, without hindering economic growth and indirectly instigating inefficient business practices, as may happen in command economy situations. The degree of intervention in the market must therefore be such, so as to provide the consumer, with some of the benefits of perfect competition, such as maintenance of price at the same level as the marginal cost of production, whilst at the same time, regulating industrial practices that are anti-competition. Without regulation, oligopolies and monopolies, restrict consumer choice, dominate the market, as well as manipulate supply, in some circumstances, so as to undermine pricing policies. Similarly, a lack of regulation tolerates the creation of discrepancies, between the bargaining power of trading parties, so allowing for coercive manipulation of contract and obligation, to fulfil market dominance, by more powerful competitors3. Regulations of the type, of Article 81, allow for avoidance, of market failures such as price fixing, supply side distortions, monopolies, independent control over production quotas and market externalities such as pollution and the opportunity cost, of undermining other undertakings, as well as limiting barriers to entry, of new firms, to the market, so allowing for healthy economic and technological growth, whilst also benefiting the consumer, by offering a greater level of product choice4.

Article 81(1), prohibits “all agreements between, undertakings, decisions made 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 competition, within the common market”.

An agreement, does not necessarily take the form of a contract, but it may be oral, or in the form of an agreement, enforceable, by means of internal arbitration. The extent of the definition of ‘agreements’ however is not significant, owing to the wider scope of the definition of concerted practices5.

Concerted practices, was defined in, Imperial Chemical Industries Ltd v. Commission (Case 49/69), as “a form of co-operation, between undertakings, which have not entered into a formal agreement, but have knowingly substituted, practical co-operation for the risks of competition” 6. Concerted practices, are therefore measures taken by undertakings, short of a formal agreement, made with the intent to orchestrate their activities, to mutual advantage. The scope of the definition of concerted practices seems to have been extended to include unilateral actions which breach, Article 81(1), as in AEG Telefunken v. Commission (Case 107/82), where contracting parties, obtained “negative clearance”, by reporting their distribution agreements, with AEG Telefunken to the Commission. AEG Telefunken, were found to be in breach of Article 81(1), as they abused the agreements, so as to restrict competition, by refusing to supply to dealers who did not comply with their unofficial pricing policies.

There seems however, to be a prerequisite that more than one undertaking is involved, for the results of an agreement or practice, to fall within the range of Article 81. The “enterprise entity principle” covers arrangements made between parent companies and their subsidiaries, where the parent company, is in a position of control, as in Belguelin Import Co. v. G.L. Export-Import SA (Case 22/71). Similarly undertakings located outside the European Community, fall within the scope of Article 81, in circumstances, where the effects of their practices or agreements are experienced within8. In Imperial Chemical Industries Ltd v. Commission (Case 49/69), ...

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Decisions by “associations of undertakings”, as covered by Article 81(1), are such, which seek to coordinate behaviour amongst undertakings, with anti-competitive effects, without the requirement for any actual agreement. In NV IAZ International Belgium v. Commission (Case 96/82), a non-binding recommendation alone, from a trade association, was held to fall within the scope of Article 81 (1)9.

All of the above-mentioned varieties of agreement, must affect trade between member states, so as to breach Article 81(1). In Sociètè Technique Minière v. Maschinenbau Ulm (Case 56/65), it was held that an agreement was capable of affecting trade, between member states “if it factually or objectively allows, for one to expect, an actual or potential, indirect or direct effect, on the flow of trade between member states”. Affirming, Constan and Grundig v. Commission (Cases 56 &58/64) this ruling by the ECJ sets out a test, by which the anti-competitive qualities of an agreement can be examined. This test greatly expands the scope of Article 81, as an ‘effect’ alone may suffice, as a breach, as compared to a hindrance to the flow of trade10.

One of the objectives of European competition legislation is to deal with deviation from the normal forms of competition, expected in the common market. Article 81, as far as “the prevention, restriction and distortion of competition within the common market” deals with horizontal agreements between competing manufacturers (cartel agreements), and vertical agreements or restraints between parties not competing with each other, but collectively involved in the distribution of products11.

The jurisdictional function, of the requirement of an effect on intra-community trade, as well as the principles of horizontal and vertical agreements, in anti-competition scenarios are emphasized, in the context of Article 81(1), in Constan and Grundig v. Commission (Cases 56 & 58/64). The ruling in this case, defined the concept of an agreement, in so far as, the boundaries of areas covered by national and community law are concerned, deeming that, “the extent to which the agreement, may affect trade between member states, is such, that the deterioration in competition, caused by the agreement… falls under the prohibition contained in Article 81, else it escapes the prohibition”12. These cases (56 & 58/64), concerned an excluded distribution agreement, between a German electronics manufacturer; Grundig, and Constan SA, which was appointed, Grundig’s sole distributor in France. Constan SA, was granted exclusive rights to the Grundig trademark. The agreement between the two parties, caused Constan SA, not to re-export Grundig’s products to any other member state. At the same time Grundig, sought similar assurances from its other distributors, within the common market13. This agreement effectually disallowed, all parallel importing and exporting of Grundig products, reinforced by trademark. A third company in France called UNEF however had obtained Grundig products from German traders and were undercutting Constan SA. In response Constan, brought an action against UNEF for infringement of trademark. UNEF in turn, applied to the Commission, claiming a breach of Article 81(1). The Commission issued a Decision, to this effect, and the parties Constan and Grundig, in Cases 56 and 58/64, sought to annul this Decision. They argued that, their agreement, sought to increase, rather than reduce trade in the Union, and streamline the distribution of Grundig products. The Court rejected these claims, as irrelevant, and held the object of the agreement, to be the elimination of competition, in the supply of Grundig products on a wholesale level. The agreement was also held to affect trade between member states, and to restrict competition between competing manufacturers14. This was because, restrictions on competition between competing brands, although in the short term provide economic growth, as in Constan and Grundig v. Commission (Cases 56 & 58/64), partitioning the market, shields individual distributors from low cost, parallel imports, so maintaining artificially inflated price levels15.

The free movement of goods, within the European Union, is dealt with, mainly by Articles 23, 25, and 28. The intent behind the concept of the free movement of goods, within the Union, is to create a barrier free internal market, by eliminating all impeding factors such as customs duties on imports and exports, individual customs tariffs and duties, as well as charges having an equivalent effect to such. The limiting of member states, to restrict the free movement of goods, by means of Union intervention, over predominantly private economic entities, allows for market integration, bringing some degree of order, to the chaos of parties battling for greater market shares and bargaining power, to the mutual benefit of all, and most significantly to the consumer16. In the case of Van Gend & Loos (Case 26/62), the objective of the ruling, was to create a customs union, allowing for the free movement of goods, persons, services and capital, within the EC, so permitting for the achivement of a single internal market, having no tariff or non-tariff barriers, to the mutual benefit, of member states.

Article 28, specifically deals with quantitative restrictions, and measures on imports, and all measures having an equivalent effect, which are prohibited between member states. Quantitative restrictions, as per the ruling in Geddo v. Ente Nazionale Risi (Case 2/73), was defined as “measures which amount to a total or partial, restraint on imports, exports or goods in transit”. ‘Measures having an equivalent effect to quantitative restrictions on imports’, is a very broadly interpreted expression. It covers the activities, of any public or semi-public body, including measures adopted by professional bodies, upon which national legislation has conferred regulatory powers. In R v. Royal Pharmaceutical Society of Great Britain (Cases 226 & 227/87), measures adopted by such bodies, upon which regulatory powers had been delegated by the state, were the same as measures taken by the state. Article 28, although addressed to member states, also binds individuals17, and applies to trade in all goods, with the exception of the implementation of the Common Agricultural Policy, by community institutions as set out in Rewe Zentral AG v. Direktor Landvirtschaftskammer Rheinland (Case 37/83)18.

Constan and Grundig v. Commission (Cases 56 & 58/64), was a case concerned with the implications of vertical restraints. Such implications are ambiguous, as on one hand they facilitate market integration by reducing the risks of entry to a market and allowing for effective communication between manufacturers and distributors, but on the other, hinder market integration by limiting a distributor’s freedom to supply competing goods, and a manufacturer’s freedom to supply competing manufacturers19. In the case of Rewe Zentral AG v. Bundesmonopolverwaltung für Branntwein (Cassis de Dijon) (Case 120/78), what is known as “the first Cassis principle”, was laid out. This principle also known as the “rule of reason” states that, “Obstacles to movement, of goods within the EC, arising owing to disparities between national laws, must be accepted, in so far as they may be recognized to fulfill, the requirements of fiscal supervision, public health, commercial equity and consumer benefit”. The Cassis de Dijon case, however, paradoxically laid out a second principle; that of “mutual recognition”, stating, in contradiction to the ‘rule of reason’ that, “ there was no valid reason why goods produced legally in one member state could not be introduced to another” 20. The ‘rule of reason’ applies to European competition law, particularly in vertical restraint scenarios, as in the Constan and Grundig cases. Vertical restraints can facilitate collusion at a manufacturing level, or allow for dominant manufacturers to indirectly control their rivals’ prices on a territorial basis, however consumers are protected, by ensuring that a manufacturer selects dealers, who engage in the marketing and servicing of their product, as well as reducing transactional costs21. In Duphar BV v. Netherlands (Case 238/82), by means of the ‘rule of reason’ a measure having an equivalent effect to quantitative restrictions on imports, was held to be justified on grounds of consumer interests.

Along with being linked by the jurisprudence of concepts22 , by means of the ‘rule of reason, competition law and the free movement of goods, are more obviously concurrent to each other, in the intent behind their creation, as principles fulfilling the purpose of establishing a single integrated European market. This collective intent, seems ultimately to be, the benefit of the consumer and businesses and undertakings, lacking in bargaining power. However Article 81, also seems to be partly associated, with the free movement of goods, particularly in Constan and Grundig scenarios, dealing with parallel imports. Article 81, could be considered, to be an extension of Article 28, as far as parallel imports are concerned, because as in Constan and Grundig, it is more than likely that had, these cases been considered as offensive to the theme of European law, in the context of having been “Measures having an equivalent effect to quantitative restrictions on imports” under Article 28, the resultant rulings would be proportionate and similar, to those found under Article 81. This seems to be plausible, because as mentioned previously, Article 28, although addressed to member states, also binds individuals, and applies to trade in all goods, and possibly goods, restricted from free movement, between member states, by means of restrictions against parallel imports and exports, created by undertakings. It is probably noteworthy that, Article 28 differs from Article 81, in the respect that, the ‘de-minimus’ rule does not apply to, measures having an equivalent effect to quantitative restrictions on imports per Article 28 as set out in van de Haar (Case 177/82)23.

The principle of the ‘rule of reason’ as per, the Cassis de Dijon case, is to some extent obscure. The disarray, concerning the pros and cons, of vertical restraints, undoubtedly aggravates this problem. The scope of Article 28, may possibly provide a safety net, to any disparity, which potentially may arise, as far the implementation of European competition law is concerned, in cases of the species of Constan and Grundig v. Commission (Cases 56 & 58/64).

European competition law, as its purpose seeks to provide, some level of equity, to businesses within the EC, and undertakings lower on the vertical hierarchy of production and distribution of goods. The benefit, consumers derive, is also one of its intended purposes. It is an instrument of market integration, and an ingredient of a perfectly competitive market, in terms of both supply and demand. All these merits are true of, European legislation concerning the free movement of goods. Conclusively it is fair to say that both these forms of regulation, are symbiotic in accomplishing, an equitable integrated common market.

(2447 WORDS)

References:

1 Kent.P. European Community Law, M&E Handbooks, Pitman Publishing, 1992. pp 185-211.

2 3Hanlon.J. European Community Law,2nd Edition, Sweet & Maxwell, London, 2000. pp 216-223.

4 Schweikart.D. Against Capitalism, Cambridge University Press, New York, 1993. pp 56-57.

5 Kent.P. European Community Law, M&E Handbooks, Pitman Publishing, 1992. p187.

6 7 Steiner.J. & Woods. L.Textbook on EC Law, 6th Edition, Blackstone Press Ltd, 1998. pp 198-201.

8 9Kent.P. European Community Law, M&E Handbooks, Pitman Publishing, 1992. pp 189-190.

10 Steiner.J. & Woods. L.Textbook on EC Law, 6th Edition, Blackstone Press Ltd, 1998. pp 202-203.

11 Cairns.W. European Union Law, Cavendish Publishing Ltd, London, 1997. pp 198-199.

12 Harding.C. & Sherlock.A. European Community Law: Text & Materials, Longman Publishing, New York, 1995. p437.

13Chalmers.D. & Szyszczak.E. European Union Law, Volume2, Dartmouth Publishing Co. Ltd. Aldershot. 1998. p529.

14 15 Steiner.J. & Woods. L.Textbook on EC Law, 6th Edition, Blackstone Press Ltd, 1998. pp 204-205.

16 Cairns.W. European Union Law, Cavendish Publishing Ltd, London, 1997. pp 137-140.

17 Kent.P. European Community Law, M&E Handbooks, Pitman Publishing, 1992. pp 83-84.

18 Steiner.J. & Woods. L.Textbook on EC Law, 6th Edition, Blackstone Press Ltd, 1998. p139.

19 EC Commission, Green Paper on Vertical Restraints in EC Competition Policy, COM (96) 721, final, paras; 80-84. In Chalmers.D. & Szyszczak.E. European Union Law, Volume2, Dartmouth Publishing Co. Ltd. Aldershot. 1998. p613.

20 Kent.P. European Community Law, M&E Handbooks, Pitman Publishing, 1992. p87.

21Schechter.M. The Rule of Reason in European Competition Law, 1982. pp 17-19. In Chalmers.D. & Szyszczak.E. European Union Law, Volume2, Dartmouth Publishing Co. Ltd. Aldershot. 1998. p613.

22Pound.R. Interpretations of Legal History, 1923. In Bullock. A. Stallybrass.O. & Trombly.S. Modern Thought, 2nd Edition, Fontana Press London. 1997. p161.

23 Steiner.J. & Woods. L.Textbook on EC Law, 6th Edition, Blackstone Press Ltd, 1998. p141.

Bibliography:

1):Bullock. A. Stallybrass.O. & Trombly.S. Modern Thought, 2nd Edition, Fontana Press London. 1997.

2):Cairns.W. European Union Law, Cavendish Publishing Ltd, London, 1997.

3):Chalmers.D. & Szyszczak.E. European Union Law, Volume2, Dartmouth Publishing Co. Ltd. Aldershot. 1998.

4):Hanlon.J. European Community Law,2nd Edition, Sweet & Maxwell, London, 2000.

5):Harding.C. & Sherlock.A. European Community Law: Text & Materials, Longman Publishing, New York, 1995.

6):Kent.P. European Community Law, M&E Handbooks, Pitman Publishing, 1992.

7):Schweikart.D. Against Capitalism, Cambridge University Press, New York, 1993.

8):Steiner.J. & Woods. L.Textbook on EC Law, 6th Edition, Blackstone Press Ltd, 1998.

European Law.

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