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Sahil Madan explores the mismatch between the theory and practicality underlying UK and EU antitrust law.
Introduction
The primary objective of EU competition law is to prevent the distortion of competition to allow for a “free and dynamic”[1] internal market and promote general economic and consumer welfare. Article 101[2] is an instrument that implements a thorough ban on anti-competitive agreements. Article 101(1) prohibits ‘all 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 competition within the common market.’ Article 101(3) details the exceptions to Article 101(1): ‘any agreements or categories of agreement between undertakings; …which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:
- impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;
- afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.’
In this paper, I will explain the role of the ancillary restraints doctrine in EU competition law, and investigate whether it is of practical use to advisors by examining three problem areas. Please note that for the purposes of this essay, Article 85 (outdated legislation) is interchangeable with Article 101 (current legislation).
What is the doctrine of ancillary restraints?
ThatFaull and Nikpay summarise the ancillary restraints doctrine as follows: “clauses which restrict rivalry between the parties and/or third parties fall outside Article 101(1) if they are directly related and necessary to the implementation of a legitimate interest.”5 We can dissect the wording using case law.
“Directly related”
In Metropole[3], the courts held that a clause is directly related if it is “subordinate to the implementation of that operation.”[4] Faull and Nikpay wrote “the activity covered by the clause must be part of, or at least closely linked to, the main agreement.”[5] However, the clause must not be the primary purpose for which the parties come together. In Metropole, establishment of a joint venture in the pay-TV market was considered the main operation, whilst a clause which granted certain exclusive rights to the venture was found to be subordinate. There is an obvious connection between a pay-TV platform and the need for content but supplying the channels to the joint venture was not the primary reason for the agreement.
“Necessary”
In Metropole and MasterCard[6], the General Court relied on the Court of Justice’s judgment in Remia37, which established two conditions to establish ‘necessity.’
Firstly, the restriction must be “objectively necessary”[7] for the implementation of the main operation.Without the clause in question, the main operation must be “difficult or… impossible to implement”[8]. There is some debate over how the Court should interpret this. In Metropole and Van den Bergh Foods[9], the General Court held that the interpretation should not involve a weighing-up of the pro-and anti-competitive effects of the clause, rather a “relatively abstract”5 examination that does not involve a full market analysis.So, “the key question is not whether the restriction is indispensable to the commercial success of the main operation but rather its importance for the implementation of the main agreement.”3 From an economic perspective, undertakings enter into commercial agreements to make money, so commercial considerations are at the centre of these agreements. Therefore, there is little distinction between clauses which are necessary from a business perspective and those which are necessary for the implementation of agreements.
The need for this distinction is clearer through a policy or legal lens. In P&I Clubs[10], the General Court elaborated on this principle, explaining that a clause is necessary if there is “no workable method available otherwise.”7 In MasterCard, “absence of the MIF may have adverse consequences for the functioning of the MasterCard system,”[11] such as being “simply more difficult to implement or even less profitable”.[12]However, it does not mean that it should be regarded as “objectively necessary, if it is apparent from an examination of the MasterCard system in its economic and legal context that it is still capable of functioning without it.”6 We will assess this as a problem area of the doctrine.
The ‘objective necessity’ test also applies in public interest cases. In Wouters[13], the Court of Justice ruled that a regulation prohibited multi-disciplinary partnerships imposed by the Dutch Bar fell outside Article 101(1) because it was objectively necessary to “ensure the proper practice of the legal profession”.[14]
The second condition for a provision to be deemed ‘necessary’ requires that it is ‘proportional.’ In Ruhrgas[15], this meant that “the clause’s duration, material and geographical scope must not exceed what is necessary to implement the main operation.”[16] For example, in Metropole, the General Court found that a clause granting exclusive rights to the joint venture for 10 years was a disproportionate time period.We will also assess this problem area later.
Again, we should note that the ‘proportionality’ aspect also applies in public interest cases. In Wouters, the Court of Justice found that the clause was restrictive, but it did not “go beyond what is necessary in order to ensure the proper practice of the legal profession”[17].
To what extent is the doctrine useful to advisors?
Thus far, these cases have illustrated the requirements set out by the doctrine. There are many cases that fall in between these gaps, causing legal uncertainty, making it difficult for advisors. To answer the question of whether the doctrine is useful to advisors, we should analyse three identifiable problem areas.
Partial ‘Rule of Reason’ (this is perhaps the largest hindrance to advisors, so we will dedicate to it the most time)
This term ‘rule of reason’, adopted from US antitrust case law, was defined by the US Supreme Court as the need for “a case-by-case evaluation,”16 where “the fact-finder weighs all the circumstances of a case in deciding whether a restrictive practice should be prohibited”[18]. This involves weighing-up the agreement’s pro- and anti-competitive effects and, where the latter are greater, the agreement will be held as unlawful.
In Metropole, the General Court held that “it is necessary to weigh the pro-and anti-competitive effects of an agreement in order to determine whether it is caught by [Article 101(1)]”[19] but “the Court of Justice and the [General] Court have been at pains to indicate that the existence of a rule of reason in [EU] competition law is doubtful.”5 In Ruhrgas, the Commission went further, stating that the rejection of a ‘rule of reason’ type analysis is “justified not merely so as to preserve the effectiveness of Article 81(3), but also on grounds of consistency.”12
EU courts are adamant that there is no rule of reason in EU law, but some case law indicates that it has a role to play. In La Technique Miniere[20], the Court of Justice held that it must “consider the economic context… nature of the products, the position of the parties on the market, the clauses in the contract…” and hinted that the context of anti-competitive behaviour may be examined if it “seems really necessary for the penetration of a new area by an undertaking.”17
In Consten and Grundig[21], a German manufacturer gave exclusive territorial rights to a French distributor – an activity which the EU courts view as inherently anti-competitive. Thus, the Commission ruled that the clause fell under Article 85(1) and could not be exempted under Article 85(3). However, it could be argued that the agreement would have stimulated intra-brand competition and inter-State trade of Grundig products. So, the Commissionʼs decision involved weighing-up the relative importance of stimulating competition and sanctioning anticompetitive behaviour. Clearly the latter prevails, so if there is a rule of reason, it is evidently of limited scope.
In Maize Seeds[22], the Court of Justice held that an open exclusive licence of plant breeders’ rights, which involved a degree of territorial exclusivity did not necessarily fall within Article 85(1). This occurs where, in licensing and patenting cases, the territorial exclusivity was necessary to allow the licensee to enter a difficult market or where new technology was being disseminated.
Here, we can assess the usefulness of the doctrine to advisors. After Consten and Grundig, advisors can predict with some certainty that provisions regarding territorial exclusivity will fall under Article 101(1). However, following Maize Seeds, some issues arise when defining the ‘dissemination of new technology.’ Firstly, it is difficult to decide when the newness of the tech or the problems of penetrating a new market are so pronounced as to render 85(1) inapplicable. Secondly, there is no guarantee that the parties’ appreciation of these matters aligns with that of the Commission or Court of Justice (Velcro/Aplix[23]).Finally, if an exemption is granted, over time the technology becomes older and risk falls, so Article 101(1) could kick in later – it is the actual success of the agreement that causes its downfall. A similar issue is raised in Pronuptia[24], where the Court of Justice hinted that in the case of franchises, under certain circumstances, territorial exclusivity may not fall under Article 101(1) where “it concerns a mark that is already widely known”.[25]
Subjective decisions need to be made, so lawyers may have to advise their clients to notify the licence or take the easier route and comply with the terms of the block exemption.
Whilst it is evident that the scope of the rule of reason is fairly limited in relation to commercial cases, the debate remains at the heart of the issue of regulatory ancillarity. Whish and Bailey questioned whether Wouters introduced a rule of reason by establishing that reasonable regulatory rules fall outside Article 101(1). In this case, Wouters challenged a rule adopted by the Dutch Bar Council which prohibited lawyers from entering into partnership with professionals from a different line of work. The Court of Justice held that this prohibition “is liable to limit production and technical development within the meaning of Article 101(1)(b) of the Treaty.”[26] As previously mentioned, the Court of Justice explained that Article 101(1) would not be infringed where the clause could “reasonably be considered to be necessary in order to ensure the proper practice of the legal profession.”0 According to Whish and Bailey, this means that in some cases, it is “possible to balance non-competition objectives against a restriction of competition”[27] (i.e. compare non-competition issues to competition issues).
However, they suggest that this is not indicative of a rule of reason, but instead a branch of the doctrine of ancillary restraints that was necessary to allow regulatory bodies to execute their functions effectively.25 It is important to recognise how this ‘branch’ compares with Article 101(3) itself. It is argued that the Woutersdoctrine is more lenient than Article 101(3) and that it should only apply where “a delegation of regulatory or supervisory powers by the government is present as only then part of the necessary ‘balancing act’ has already been performed by [Article 101(3)].”[28] It follows that, while both tests are different in nature, the subject of both investigations is the same. However, as the Wouters doctrine explores areas beyond Article 101(3), it is clear that the doctrine would not fit well under the Article.
The Wouters judgment did not limit the scope of this regulatory ancillary doctrine to the legal or liberal professions; the doctrine was affirmed in Meca-Medina[29] and OTOC[30]. In these cases, the European Courts had the option to “reject, qualify, or distance itself” from Wouters, but chose to affirm it; however, Cleaver argued that “its juridical basis is no clearer, but it is at least more firmly established.”[31] This does little to clarify the doctrine for advisors, but it at least provides case law from which they can draw.
This partial rule of reason does not bring with it much certainty, arguably an advisor’s greatest strength, particularly to cases involving franchises and new technology. As Joliet said, businessmen “complain about the lack of certainty in Antitrust law… they are inclined to demand more flexibility. Such demands are irreconcilable. A rule of reason under Article 85(1) would bring about more uncertainty for business men.”[32]
‘Objective necessity’
The decisions in Metropole and MasterCard are founded on the case of Pronuptia, which distinguished between:
- Clauses that were necessary for the system to work (e.g. without these, there could be no franchise system in Pronuptia).
- Clauses which dampened price competition between franchisees (e.g. prospective franchisees may not take the risk of becoming part of the chain unless they benefit from a degree of protection against select competition).
This begs the question: what is the need for the distinction? The Commission argued in its White Paper on Modernisation of the Rules Implementing Article 85 and 86 that if analysis of pro- and anti-competitive effects occurred under Article 85(1), Article 85(3) would be cast aside, and this could only come about through revision of the Treaty. The fact that only an “abstract”5 analysis should be carried out and that ancillary restraints are cleared, irrespective of their effect, means that clauses which could be harmful may be taken outside Article 101(1). “Prudence would seem to dictate that the scope of application of the doctrine should not be too wide.”26 This is supported by the fact that the Commission is under-resourced and unwilling to delegate these kind of policy considerations to domestic courts.
Distinguishing clauses that were necessary for the system to work from clauses that made the agreement more commercially viable make sense from a policy standpoint, but it is difficult to practically apply. To undertake a competitive effects analysis, the EU courts consider what the position would have been had the agreement not taken place. This clarifies the impact of the agreement on the internal market – the need to establish this ‘counterfactual’ was stressed by the General Court in O2 (Germany) GmbH[33], where “the Commission had failed to show what the position would have been in the absence of the agreement.”[34]Without the ability to practically apply the distinction to real-life cases, it is difficult for the Courts to establish the counterfactual. In the same way, it is difficult for advisors to do the same and predict how the Courts will approach a case.
Case law shows that little is required to render a provision ‘disproportionate’
In Metropole, the General Court found that the clause granting exclusive rights to a joint venture for certain general-interest channels for ten years was disproportionate. Why? The answer is mere assertion. The General Court found, without much evidence, that it was “quite probable”[35] that the competitive disadvantage from which the joint venture suffered at its creation would diminish over time. It argued that the clause deprived the joint ventureʼs actual and potential competitors of access to the programmes that were considered “attractive by a large number”[36] of French television viewers – however, no real attempt was made by the Commission, nor the GC, to assess the nature or extent of the foreclosure or establish the importance of this content to competition. With baseless decisions such as that in Metropole, it becomes difficult for advisors to predict how the Court will approach the ‘proportionality’ concept.
Conclusion
To conclude, the doctrine of ancillary restraints is of limited use to advisors; it lacks certainty, logic, and reliable precedent. The largest problem area is the suggestion of a partial rule of reason, particularly notable in La Technique Minière and Maize Seeds, which highlights a lack of certainty in the law. However, perhaps the most fundamental issues are those associated with the requirement for ‘objective necessity’ and ‘proportionality.’ In these instances, the European Courts themselves do not seem to have the ability to consistently interpret these functions; this unpredictability clearly hinders an advisorʼs game plan.
This is not to say that the doctrine is entirely useless; it does offer some certainty, at least in terms of regulatory ancillarity and territorial exclusivity clauses. However, we should conclude that the doctrineʼs use to advisors is relatively limited, and it is perhaps advisable that they pursue any potential claims through Article 101(3), which the European Courts seem to implement far more comfortably.
