Paul Hughes

Brussels

30th March 2005

Article 81

Presentation Overview

• Article 81(1) - its width

• Horizontal agreements

• Vertical agreements

• Article 81(2) – nullity sanction

• Article 81(3)- capable of exemption?

Article 81(1) - structure

• Agreements between, concerted practices and

decisions by associations of

• Undertakings

• Which may affect trade between member states

• Having as their object or effect

• Prevention restriction or distortion of competition in EU

Article 81(1)

• Agreements: ACF Chemiefarma NV; BP Kemi; Sandoz;

Ford Europe; Adalat

• Concerted practice: Dyestuffs; Suiker Unie;

Polypropylene; Wood Pulp

• Decisions of associations: Vereeniging van

Cementhandelaren; EPI Code of Conduct

Article 81(1) - Undertakings

• Public sector: Aeroports de Paris; Bodson; Hofner &

Elser; Fenin

• Employees/self employed: Becu; Reuter/BASF; Albany;

• Share ownership: Viho; Hydrotherm/Andreoli

• Professions: Wouters; EPI Code of Conduct

Article 81(1) – Effect on Trade

• Consten & Grundig – concept defines boundary

between national and EU law;

• Key issue is capacity to affect imports/exports;

Dutch Electro-technical Fittings Equipment; BNIC

v Clair; Fire Insurance

Bagnasco; Dutch Banks

Javico v Yves St Laurent

• Commission Guidelines 2004/C 101/07

Article 81(1) – Object or Effect

• Object: price fixing, allocation of markets or customers,

output or sales limitations

• Effect: requires economic analysis

Delimitis v Henninger Brau

European Night Services

Van den Bergh

Article 81(1) – Restriction of Competition

• Commission Notice on Agreements of Minor Importance

- where parties are:

– Competitors – aggregate market share cap of 10%

– Not actual/potential competitors - individual market share cap 15%

– Classification difficult – 10% cap applicable

• Parallel networks of restrictive agreements cumulatively

affecting competition in relevant market – caps reduced

to 5%

Article 81(2) - Nullity

• English blue pencil test – agreement may be invalid

• Passmore v Morland plc: market shares may rise

• Right of damages: Courage Limited v Crehan

• Article 81(1) infringed? SLT v Maschinenbau Ulm; Metro; Pronuptia; Nungesser; Remia & Nutricia; Gottrup Klim

• “Rule of Reason”: Metropole v Commission

• Commission Guidelines on application of Article 81(3) 2004/C 101/08

• Article 81(3) requirements:

– Improve production/distribution or promote technical/economic progress

– Confer fair share of benefits on consumers

– Restrictions imposed indispensable to these objectives

– Do not substantially eliminate competition

• Block exemptions: legal certainty

Relationship of Articles 81(1) and 81(3)

Concerted Practice/Information Exchanges

CorporateJV

MergerCollaborative

Agreement

Behavioural arrangements

Structural arrangements

ECMRArt 81(3)

Horizontal Arrangements

Concerted Practice/Information Exchanges

CorporateJV

MergerCollaborative

Agreement

NB: Between CompetitorsHard core cartel

criminal offence UK

Behavioural arrangements

Structural arrangements

Art 81(3) ECMR

Horizontal Arrangements

Horizontal Arrangements

• R & D Block Exemption Regulation (Reg 2659/00) NB:

– Competing undertakings - 25% market share cap

– Parties must have access to results for research/exploitation (research bodies/universities can be confined to research)

– Parties must be free to conduct R&D in unconnected fields and to challenge other party’s IP (however right to terminate R&D agreement)

• Specialisation Block Exemption Regulation (Reg. 2658/00) NB:

– Competing undertakings

– 20% market share cap

• Article 81(3) and Commission Guidelines(2001/C 3/02): UEFA; Premier League; Veronica/Endemol; Television par Satellite; Ford/VW

Vertical Agreements

IP Owner(s)(R&D <25% Share)

Supply Agreement

MANUFACTURER/SUPPLIER <30% Share

Licence

RESELLER

• RPM• Export bans• NB Agency

Price/Geog

Supply Agreement

EFFECT

Licence

RESELLEROBJECT

IP Owner(s)(R&D <25% Share)

MANUFACTURER/SUPPLIER <30% Share

Vertical Agreements

• RPM• Export bans• NB Agency

Price/Geog

Supply Agreement

EFFECT

Licence

RESELLEROBJECT

Price/Geog

• RRP• Exclusive territory

IP Owner(s)(R&D <25% Share)

MANUFACTURER/SUPPLIER <30% Share

Vertical Agreements

• RPM• Export bans• NB Agency

Price/Geog

Supply Agreement

EFFECT

Licence

RESELLEROBJECT

• Selective• Franchising

QualityPrice/Geog

• RRP• Exclusive territory

IP Owner(s)(R&D <25% Share)

MANUFACTURER/SUPPLIER <30% Share

Vertical Agreements

• RPM• Export bans• NB Agency

Price/Geog

Supply Agreement

EFFECT

Licence

RESELLEROBJECT

• Selective• Franchising

Quality Segmentation

• Customers• Product categories

Price/Geog

• RRP• Exclusive territory

IP Owner(s)(R&D <25% Share)

MANUFACTURER/SUPPLIER <30% Share

Vertical Agreements

• RPM• Export bans• NB Agency

Price/Geog

Supply Agreement

EFFECT

Licence

RESELLEROBJECT

• Selective• Franchising

Quality Segmentation

•

Volumes/foreclosure

• Purchase obligations• Non-compete

Price/Geog

• RRP• Exclusive territory

• Customers• Product categories

IP Owner(s)(R&D <25% Share)

MANUFACTURER/SUPPLIER <30% Share

Vertical Agreements

IP Owner(s)(R&D <25% Share)

MANUFACTURER/SUPPLIER< 30%Share

Licence

RESELLER

Supply Agreement

Vertical Agreements

• Export Bans• RPM

OBJECT

IP Owner(s)(R&D <25% Share)

MANUFACTURER/SUPPLIER< 30%Share

Licence

RESELLER

Supply Agreement

Vertical Agreements

• Export Bans• RPM

30% 40%

Market Share

EFFECTOBJECT

20%

IP Owner(s)(R&D <25% Share)

MANUFACTURER/SUPPLIER< 30%Share

Licence

RESELLER

Supply Agreement

Vertical Agreements

• Export Bans• RPM

30% 40%

Market Share

• Territorial exclusivity• Selective Networks• Franchising

EFFECTOBJECT

20%

IP Owner(s)(R&D <25% Share)

MANUFACTURER/SUPPLIER< 30%Share

Licence

RESELLER

Supply Agreement

Vertical Agreements

• Export Bans• RPM

30% 40% 50% 70%XX

• Loyalty rebates • Exclusive purchase (80%+)• Bundling/Tying• Pricing Discrimination• Refusal to deal

Market Share

• Territorial exclusivity• Selective Networks• Franchising

EFFECTOBJECT

20%

IP Owner(s)(R&D <25% Share)

MANUFACTURER/SUPPLIER< 30%Share

Licence

RESELLER

Supply Agreement

Vertical Agreements

Vertical Agreement Block Exemption Regulation 279/99 (“VABER”)

Covers agreements between 2 or more undertakings at different levels in distribution chain

Supplier

Retailer

Wholesaler

Non-Competitors

Parties must not be actual or potential competitors unless reseller’s total annual turnover < €100 million

ORSupplier of Services

Service Provider (not competing upstream with

supplier)

Direct Supply

Supplier of Goods

Direct Sales

Distributor (where not a competing –

manufacturer)

Where agreement is non-reciprocal

Market Share Cap

Supplier

Reseller

Non-exclusive

Supplier

Reseller

Exclusive

< 30%

< 30%

Hardcore Restrictions – Price

Supplier

Reseller

NB. Indirect RPM/fixed prices: price monitoring, discount fixing, margin fixing, delivery and suspensions, pre-printed prices.

Maximum or recommended prices permissible

Minimum/fixed prices impermissible

Hardcore Restrictions – Customers and Territory (1)

Can allocate

• Exclusive territory

• Exclusive customer segment

Reseller

Supplier

Reseller(s)

Where exclusive territories are reserved to supplier or conferred on other resellers

Hardcore Restrictions – Customers and Territory (2)

Supplier

Reseller 1 Reseller 2

Exclusive Territory A

Exclusive Territory B

Can prevent active but not passive sales (NB. Internet)

Hardcore Restrictions – Selective Networks

Supplier

Selective Wholesaler I

Selective Wholesaler 2

Selective Wholesaler 3

Selective Retailer 1

Selective Retailer 2

Selective Retailer 3

End Users

Cannot ban end user sales; can require to operate from authorised premises

Must allow cross sales within the selective network

Can ban

sales

Vulnerable Restrictions (1) – Spare Parts

Supplier

Reseller

Competitors of supplier for incorporation

Can Restrict

Spare Parts

End User/Repairer

Cannot restrict

Components

Vulnerable Restrictions (2) – Non Compete Obligations

Supplier

Reseller

5 years only 80%+ exclusive

purchase obligationExcept where lease conferred when duration = period of lease

NB. Cannot prohibit selective dealers from selling specified competitive brands

Vulnerable Restrictions (3) Post Termination Restrictions

• Limited to:-

Competing goods/services

Premises from which reseller operated

One year (know how unlimited whilst remains

secret)

and must be indispensable to protect know how

Motor Vehicle Block Exemption Regulation 1400/2002 (“MVBER”)

• Previous BERs conferred high degree of intra-brand protection to safeguard dealer investments in sales/servicing

• However price differentials between Member States have persisted

• Frequent violations of Article 81 by manufacturers, e.g. BMW, Ford, Peugeot, Citroen, VW, Opel and DaimlerChrysler

MVBER - Outline

• Follows a similar pattern to VABER

• Applies to agreements at all levels of vehicle distribution in respect of:

– Sale of new motor cars and commercial vehicles

– After-sale servicing

– Spare part supply

• Parties must be non-competitors save for non-reciprocal vertical agreements:

– between reseller with annual sales <€100m; or

– where manufacturer competes in direct sales and reseller not a manufacturer

MVBER – Market Shares

• As with VABER a 30% cap (measured by reference to reseller for exclusive distribution)

• Selective distribution:

– Qualitative selective distribution – no limit on market share (case law reliant)

– Quantitative selective distribution 40% cap

• Different markets for (and consequent shares of):

– new vehicles

– new parts

– service/repair

MVBER – Conditions (1)

• Agreement must: – be for a minimum of 5 years; or

– if indefinite be terminable on 2 years notice or one year if supplier pays compensation (mandated by law or special agreement) or whole/substantial part of network being reorganised

• Disputes to be remitted to arbitration

• Termination notices must be in writing giving detailed objective and transparent reasons

• Reseller must have right to assign to another approved dealer

MVBER – Conditions (2)

• Cannot require reseller to purchase 30%+ of requirements for goods/services from supplier

• Prohibition of sales of competing brands goods/services impermissible

• Post-termination restrictions on provision of goods/services impermissible

MVBER – Hardcore Restrictions (1)

• Follows a similar pattern to VABER

• Setting fixed/minimum prices

• Territory/customer restrictions save for prohibition of:– Active sales to reserved customers/territories

– Wholesale sales to end users

– Sales to dealers outside selective network

– Sales of components for incorporation by competitor

• Prohibition on cross supplies within selective network

• Prohibition on retail sales by selective dealers (subject to authorised establishment requirement)

MVBER – Hardcore Restrictions (2)

• Prohibition on selling new model within contract range

• Restricting reseller’s ability to subcontract repair/services to authorised repairers

• Linking vehicle sales and servicing/sale of spare parts

• Limits on sales of OEM products

• Refusing access by independent operators to manufacturer’s technical information, diagnostic tools and software needed for repair/maintenance

Licensor

Licensee

Not multiparty, although guidelinesindicate that multiparty licenceswill be judged accordingto their effects underArt.s 81(1) and 81(3)

Technology Transfer Block Exemption Regulation

Licensor

Licensee

Patents, includes:• utility models• design rights (registered and unregistered)• topographies of semiconductor products• supplementary certificates for medicinal products• plant breeder’s rights

The IP rights

The IP rights

Licensor

Licensee

Know-how: package of non patentedpractical information

• secret (not generally known)• substantial: information indispensable for the manufacture or provision of the contract products• identifiable in a manner which enables verification of criteria of secrecy and substantiality

The IP rights

Licensor

Licensee

Software copyright

Licensor

Licensee

Licence of each or a mixture of:

1) patents2) know-how3) software copyrightand other ancillary IP rights necessary for the manufacture orprovision of the contract products/services

The IP rights

• The technology market - actual competitors

• The product market – actual OR potential competitors

• Difficult to ascertain markets

• Technology markets based on downstream sales of product

• NB: Market share volatility

The Concept of Competitors

The Market Share Caps

Licensor

Licensee

Non-Competitorseach party’s share < 30%

Competitors -parties’ shares in aggregate < 20%

NB. Para 131 Guidelines – 4 competing technologies

The technology

market

Licensor A(has separate market sharesof 100%+15%)

Licensor B(45%)

Licensor D(20%)

Licensor C(30%)

The product market

Licensee A (100%)market share in specialist

safety gloves

Licensee A (15%), Licensee B (45%),Licensee C (30%), Licensee D (20%) in general non-specialist market forsafety apparel

End Users

Market Shares

• Restriction on either licensor or licensee prices

• Output/sales limitations (save for limitations on a licensee in a non-reciprocal agreement or on only one licensee in a

reciprocal agreement)

• Restriction on licensee’s exploitation of own technology or on parties R&D unless indispensable to protect know-how

The “Hardcore” Restrictions where licensor and licensee are competitors

• Market/customer restrictions save for:

Field of use restriction on licensee

In a non-reciprocal agreement restriction on either/both parties relating to reserved field of use or exclusive territory

Licensor obligation not to license another licensee in a particular territory

Restriction in a non-reciprocal agreement of active and/or passive sales to territory/customer group of other party

Restriction in a non-reciprocal agreement of active sales by licensee to exclusive territory/customer group of a licensee (which was non-competing on grant of licence)

Restriction on licensee to produce for own use (no active/passive restrictions on sale of spare parts for own products)

Restriction in a non-reciprocal agreement to produce as alternative source of supply for designated customer

The “Hardcore” Restrictions where licensor and licensee are competitors

• Minimum/fixed resale prices

• Restrictions on parties’ R&D unless indispensable to protect know- how

• Restriction on territories/customers (save for certain permissible restrictions - see next slide)

The “Hardcore” Restrictions where licensor and licensee are not competitors

And save for:-

Own use (and spare parts sale rights)

Alternative source of customer supply

Restrictions on wholesales to end users

Prohibition of sales to unauthorised distributors by members of a selective network

Licensor

Licensee 1

Non-competitors

Can allocate:• Exclusive territories• Customer segments and restrict passive sales into licensor territories/customers and passive sales into other licensee territory/customers for initial 2 years

Licensee 2

Non-competitors

Territory 1Sub-distributor 1

Territory 2Sub-distributor 2

Territory 3Sub-distributor 3

Cannot ban sales

The Permissible Territorial and Customer Restrictions (1)

Licensor

Licensee 1

Non-competitors

Licensee 2

Non-competitors

Selective Wholesaler 1

Selective Wholesaler 2

Selective Wholesaler 3

Selective Retailer 1

Selective Retailer 2

Selective Retailer 3

Must allow crosssales in network

End Users

Cannot bansales

The Permissible Territorial andCustomer Restrictions (2)

Excluded Restrictions

• Grant back of exclusive licence or assignment by licensee of severable improvements

• Prohibition on challenging licensor’s intellectual property

(NB licensor right of termination)

• Where licensor and licensee are not competitors, limitation on licensee’s ability to exploit own technology or engage in independent R&D (unless indispensible to protect licensor known how)