Economic Globalisation and Competition

Economic Globalisation and Competition1. originCompetition is a vital mechanism of the merchandise place economy and is an efficient doer of guaranteeing consumers a level of quality in terms of the value and wrong of products and run. Economic globalization has increased volatile growth within international backup and as a result in down of contr everyplacesy law. hold 81(1) of the EC treaty prohibits musical arrangements in the midst of chores decisions by associations of undertakings and design practices which may affect championship among Member States and which prevent restrict or distort tilt. These bearments sh all(prenominal) be void harmonize to 81(2). However, the agreements which satisfy the conditions do expose in expression 81(3) EC shall non be prohibited, no prior decision to that entrap being required.1.1. Anti-Competitive Agreements word 81 of the EC Treaty, prohibiting anti-competitive agreements, must be considered in congeneric to all comm ercial agreements with a prob satiscircumstanceory EU cross-border impact. The Horizontal and the perpendicular agreements argon the agreements, which atomic return 18 germane(predicate) for the purposes of the cover of the arguing rules. Horizontal agreements atomic number 18 those between undertakings operating at the same level of production or merchandiseplaceplaceing, charm perpendicular agreements atomic number 18 those completed between undertakings operating at different frugal levels. Under EC Competition Law, restrains included in upright piano agreements ar regarded as non as a great deal damaging than those included in plain agreements.In Consten and Grundig v boot the European Court of Justice considered that hold 81(1) EC applies non totally to horizontal agreements besides as well as to plumb agreements. The posterior decisional practice of the way on the treatment of vertical arrangements under cheat 81(1) and 81(3) EC, and the case law of the Community Courts, fox been one of the most controversial and intemperately criticized aspects of Community contestation policy. These agreements are very important for the functioning of the economy. commercialised agreements may be exempted from the cover of article 81(1) under article 81(3).1.2. The unsloped bar granting immunity edictHowever, in that location is a safe guard for undertakings the unsloped stopover license mandate 2790/1999. Safe harbours exist for current agreements including hindrances providing conditions are met so that agreements falling within the terms of the dominion are exempt from the exertion of word 81(1) EC guaranteeing the enforceability of the agreement and granting protection from antitrust prosecution. Thus, if undertakings wish to be certain that their vertical agreements are in line with EC competition law, they should agree on cla practice sessions within the mountain chain of the principle.Outside this safe harbou r, the European focusings poster Guidelines on just Restraints are a helpful overstep for the mind under Art 81(3) EC and are explaining the application of law 2790/1999 and the Commissions approach to vertical restraints. The Guidelines on tumid Restraints sets out the principles for the sagaciousness of vertical agreements under condition 81, including the application of the mandate to vertical agreements. article 2(1) of the upright piano close privilege Regulation gives the interpretation of vertical agreements and states that Article 81(1) shall non apply to agreements or concerted practices entered into between dickens or more undertakings all(prenominal) of which operates, for the purposes of the agreement, at a different level of the production or diffusion chain, and relating to the conditions under which the parties may purchase, portion out or re tell on certain goods or work.The Commission adopted the straight Block resistance Regulation on 1999 and the new Block Exemption Regulation is expected in 2010. Modifications cleverness sojourn quite limited and superpower concern, especially, the presentation of more certain rules on e-commerce, on internet gross sales and the treatment of resale footing fear.1.3. Scope of cognitive process of the tumid Block Exemption RegulationThe objective of the upright piano Block Exemption Regulation is to exempt certain categories of vertical agreements that, under certain conditions, may ameliorate economic efficiency within a production or statistical scattering chain and is directed at vertical agreements for the purchase or sale of goods or services.The Regulation covers various vertical agreements and applies to both type of agreement entered into companies, which do non operate at the same level of the production or diffusion chain. Agreements are cover by the perpendicular Block Exemption Regulation on franchising, selective distribution, sole(a) dealing, exclusive purchasing, exclusive supply, and non-genuine agency agreements within the scope of Article 81. An agency agreement falls outside article 81(1) where the agentive role bears no or only insignifi enkindlet risks in relation to all of these matters.Article 81(1) does non apply to certain agreements or concerted practices entered into between twain or more undertakings. The apprehension of an undertaking was discussed in Hofner and Elser v Matrocton. It was stated that The concept of an undertaking encompasses every entity engaged in economic activity regardless of the legal status of the entity and the way it is financed. The definition of competing undertakings in Article 1(b) includes actual or potential providers in the same product commercialise.The excommunication may be quite wide and uncertain in application. In Tetra Pack I it was considered that a contract within the terms of the just Block Exemption Regulation enjoys prerogative from Article 81(1), but non from ar ticle 82 unless the Commission suck ups the privilege for the future, with a decision.The Regulation does not apply, however, to vertical agreements to rent and lease agreements, as no sale takes place and to agreements which have as their primary object the licensing of mental property rights, nor automobile distribution agreements, nor agreements between competitors, further if they are supplemental to a vertical agreement and facilitate the purchase, sale or resale of the contract goods or services by the corrupter and vertical agreements whose subject matter falls within the scope of an some other(a) block exemption regulation.Also, the plumb Block Exemption Regulation does not cover any barriers or debt instruments that do not relate to the conditions of purchase, sale and resale. The Regulation does not apply to vertical agreements with a subject matter that falls within the scope of any other Block Exemption Regulation.The application of the Regulation, in certain c ircumstances, sack up be withdrawn by a decision of the European Commission, or the national competition authorities. Also, the European Commission raft enact a regulation declaring the Regulation usually unsuitable to certain agreements including precise restraints.1.4. Agreements between CompetitorsThe Vertical Block Exemption Regulation does not cover vertical agreements that are concluded on a common basis between competitors. This exclusion may be very loose because it includes both actual and potential competitors, with the latter being defined as companies that would be able and likely to enter the grocery store within one year.Vertical agreements between competitors are covered by the Vertical Block Exemption Regulation if the agreement is non-reciprocal and the buyer has a turnover not haping nose candy million or the buyer is not a manufacturer of competing goods but only a competitor of the supplier at the distribution level. Also, are covered and where the suppl ier is a bring home the baconr of services operating at several levels of softwood, trance the buyer does not provide competing services at the level of handicraft where it purchases the contract services.1.5. SummaryArticle 81(1) EC prohibits agreements which have anti-competitive personal lay outs. By enacting the Vertical Block Exemption Regulation, the Commission has impart safe harbors for undertakings, that outline conditions regarding when vertical agreements and concerted practices that have an anti-competitive purpose or results and would be prohibited under article 81(1) mogul be acceptable because they satisfy the criteria of article 81(3).When an agreement fulfills the conditions set out in the Regulation, the agreement is valid and enforceable. The Vertical Block Exemption Regulation is a measure under European Union law that grants an exemption from the application of Article 81. Agreements that meet the conditions set out in the Regulation are considered either not to adversely affect competition on the relevant European merchandise(s) or only to affect competition to a limited grad.It is now magazine to examine if the Vertical Block Exemption Regulation has worked and whether the Regulation and the vertical Guidelines are postulate any modification, and, if so, what have to be done.PART IRequirements of the Application of the Vertical Block Exemption RegulationThe Vertical Block Exemption Regulation contains certain requirements that have to be satisfied before, for the vertical agreement is able to put on from the Regulation. The market lot of the supplier must not top 30% (Article 3). Also the agreement must not contain any of the hard core restrictions (Article 4). Finally, the Regulation contains conditions relating to three certain restrictions (Article 5).2. The marketplace Share CapThe Market Share sceptre is probably one of the most important provisions of the Vertical Block Exemption Regulation. In Article 3(1) is stated that the market deal out held by the supplier does not devolve 30% of the relevant market on which it deal outs the contract goods or services. Also, Article 3(2) states that in the case of vertical agreements containing exclusive supply contracts, the exemption provided for in Article 2 shall apply on condition that the market parcel out held by the buyer does not exceed 30% of the relevant market on which it purchases the contract goods or services. In Telenor/Canal+/Canal Digital the 30% rule prevented the application of the Vertical Block Exemption Regulation.The market dowery room access is aimed to reduce regulatory burdens from those businesses that, according to Bishop and Ridyard, could not behave anti-competitively even if they tried. The introducing of a market circumstances cap was one the most hotly contested aspects of the Vertical Block Exemption Regulation. Businesses and its lawyers argued that much(prenominal) a rule would be unworkable, since it is so di fficult to throw market component parts with any degree of precision, especial(a)ly in rapidly developing markets.However, the Commission insisted that there was no better factor of ensuring that the benefit of the Block Exemption, did not go to firms with withal much market power, and the market distribute cap stayed, albeit in the form of a single threshold of 30%, rather that two of 20% and of 40% which had been proposed in an earlier draft. If the market share of the parties exceeds the 10% threshold described in the De Minimis flyer, Article 81(1) EC will normally not apply to the agreement if the product is new or if the existing product is interchange for the first time on a different geographic market. oneness factor which may have assisted the Commission in prevailing was the fact that enchantment discussions on the Vertical Block Exemption Regulation were deviation on, it published its white paper on procedural modernization in the application of articles 81 and 82 EC, which proposed the abolition of the notification governing body altogether. This may have led virtually to feel less strongly about the content of the Regulation.2.1. conniving the Market ShareIn order to calculate the market share there must be identified the manufactured goods and geographic markets. Regarding market definition, the universal rules apply. On the relevant market, the supplier calculates its market share by comparison its turnover succeedd on that market with the total value of sales on that market.However, the benefit of the Vertical Block Exemption Regulation will, subject to certain conditions, not always be lost if the market share exceeds the 30% threshold. In Rewe/Meinl the European Commission considered that a supplier is in a situation of economic dependence when the buyer accounts for over a 22% market share and olibanum buyer power might distort competition.John De Gregorio, European propose for consumer goods manufacturer Kimberly-Clark Co rporation, has stated With the introduction of market share thresholds to the block exemption depth psychology, its more important than ever for in-house counsel to know how the Commission and European courts may define the relevant market for the goods that your company manufactures and sells, and to be comfortable with the definition your company adopts.2.2. The De Minimis Doctrine and Agreements of Minor ImportanceIn addition to the Vertical Block Exemption Regulation and the Guidelines the Commission has issued a series of notices, called Notices on agreements of meek importance which give guidance on the agreements which will escape Article 81(1), because the market share of each or both of the parties to the agreement is too small.The European Commissions de minimis Notice states that no Article 81 subjects are raised by an agreement between undertakings where in vertical agreements the market share of each party to the agreement does not exceed 15% of the relevant market, or 5% for vertical agreements where access to the relevant market is foreclosed by the increase consummation of parallel networks of vertical agreements by several companies. The de minimis notice sets the relevant threshold at 5% for horizontal agreements.Commercial agreements between parties where market shares exceed these thresholds might however not have a considerable effect on competition or might benefit from exemption. Nevertheless, the presumption in the de minimis Notice will not apply if the commercial agreement contains loyal restrictions. In Franz Volk v Establissments Vervaecke SPRL the 0.6% of market share in washing machines considered insignificant.In general, agreements taken between Small and Medium size Enterprisers are de minimis. dissever 3 of the Notice recognizes that agreements between small and medium-sized undertakings are seldom capable of appreciably affecting profession between Member States.Finally, Article 8 provides that the Commission can withdra w the benefit of Block Exemption where 50 % of a relevant market, contain particular restraints relating to that market. This Regulation shall not become applicable earlier than six months interest its adoption.2.3. Market PowerThe Vertical Block Exemption Regulation states that, with some certain exceptions, all vertical restrains are acceptable unless they are joined to significant market power. Market share thresholds are criticized to be uncertain because they need a definition of the market which is the reason why the idea of market share thresholds has been discarded in most systems.Also, the amount of market power can be considered by reference to market share. Scherer and Ross state that economic synopsis surfaces that in most cases the welfare-reducing effects of vertical restrains depend on the degree of market power the involved firms have.If market shares are in general revelatory of potential market power, they can never be considered without considering some othe r factors to achieve a reasonable assessment of market power for instance the barriers to entering and prospective competition and the characteristics of the oligopolistic dealings between businesses.The Commission in some of its judgments show that market shares do not equal market power. For example, in Alcatel-Telectra the Commission cleared a merger which gave the parties market shares of 83%. Also, in Rhone-Poulenc/SNIA the high degree of concentration was ought to weighed by the existence of rapid technology development.The most plain issue, according to prof Denis Waelbroeck, is to consider whether the system should not leave alone all vertical agreements which do not include hardcore restrictions, separately of the market share of the parties involved, and only apply a control under Article 82 EC in cases of federal agency. That would arrive at the burden above the threshold for businesses to achieve a complex evaluation of their agreements under Article 81(1) and Artic le 81(3) EC and it will provide more legal certainty in this subject.In addition, the economic assessment required by the Guidelines on Vertical Restrains and the Guidelines on the application of Article 81(3) of the Treaty is challenging, and it is doubtful that many judges and parties will have the income or abilities to reduce it sufficiently, olibanum raising the danger of extensive, expensive and uncertain litigation.2.4. Arguments about the ThresholdThe use of market shares as a key element of the Regulations treatment has been criticised as being possible to lean to uncertainty and unpredictability given over the difficulties in defining the relevant market and market share.It may be argued that the threshold is too low or that it is improperly scour. Those who argue that the threshold is too low point out that the anti-competitive risks can arise only when there is a dominant firm. A non-dominant firm cannot increase rivals costs and cannot make ravish to the consumers as they alleviate benefit from inter-brand competition.Those who argue that the threshold is improperly cast would agree with the above criticism but bear in mind that anti-competitive effects can manifest themselves when there is the risk of oligopolistic interdependence. Bishop. and Ridyard state that an assessment of the markets concentration would be more useful than the assessment of one players market share.Some argue that given the uncertainties over market definition, a market share threshold is not a substitute for a detailed analysis of whether the consumers suffer consequently of a particular practice but this might damage the effectiveness of the existing system which creates a safe harbour so that analytical incomes are allocated to those cases where anticompetitive effects are most possible to occur.The Vertical Block Exemption Regulation creation of a market share threshold which the Regulation does not apply, limits manufacturing businesses that manufacture exceed ingly innovative goods and want to sell them before other businesses have the chance to promote competitive goods into the market. In this situation, the manufacturing businesses with the extremely innovative goods might have a very high market share in a particular industry within a specific geographic area as no competing goods exist.However, as its market share is more than 30%, the manufacturing business is unable to take benefit from the Regulation and would be banned from effectively distributing and selling its manufactured goods in the market.2.5. Removing the ThresholdThe Vertical Block Exemption Regulation is unduly restrictive by setting the threshold at 30%. Many agreements indeed escape the safe harbour though they are completely harmless from a competition law perspective. By removing the thresholds the traffickers using private resellers may be penalised not as much as vertically integrate businesses. Also, abolishing the threshold would give more stability to the s ystem because not all restrictions of competition under 81 are an iniquity under 82.On the other hand, if the system is seen as too essential one may think a less radical change to the Regulation consisting of a differentiated approach identifying those clauses which can be problematic above 30% although the parties are not dominant. Those clauses which are always straightforward, even in cases of dominance and which thus essentially deserve an exemption and should not to be matter to any market share threshold and also those clauses which should never advantage from a group exemption even they are below 30%.2.6. SummaryThe Vertical Block Exemption Regulation can simplify issues but also can cause difficulties. It makes issues simple as it offers the parties more flexibility in establishing their agreements and if a businesss market share is less than the related market share threshold the agreement will fall outside the scope of the competition rules or be qualified for exemption provided that it does not include hardcore restrictions.The Regulation can also cause difficulties as the parties market share must be verified in every case and this can be very hard in situations, for instance as those concerning new markets. Where the market share threshold is exceeded, issues become more difficult as the Regulation requires a complete evaluation of the agreement to define whether it would restrict competition under Article 81(1) and, if so, whether it would meet the requirements for an exemption under Article 81(3). This requires the parties to verify the economic effect of certain restrictions by considering how they would operate in the specific product market involved.The Vertical Block Exemption Regulation principally proposes that businesses with small market shares are given more choice to establish their agreements and will not require undertaking an antitrust review of their dealings. Businesses with large market shares might need to slide by time and r esources to assessing their agreements from an antitrust perspective.3. The Hard-Core RestrictionsThe Vertical Block Exemption Regulation does not apply to vertical agreements that have certain anti-competitive objects. The Regulation lists a number of hard-core restrictions that, if included in the agreement, prevent the safe harbour from applying and cause the exclusion of the entirely agreement from the benefit of the Block Exemption even if the market share of the supplier or buyer is below 30%.There are hard-core restrictions which apply to agreements between competitors, and agreements between non competitors. If one hard-core restriction is present in the agreement, the agreement will lose the benefit of the block exemption so Article 81(1) EC may apply. This can result in the unenforceability of the entire agreement and may even lead to fines and it is important that a severability or invalidity clause is included in the agreement where appropriate.Hard-core restrictions a re considered to be so serious that they are nigh always prohibited. In Javico external and Javico AG v Yves Saint Laurent Parfumes SA it was considered that hard-core restrictions do not break Article 81(1) except if they might have considerable effect on trade between Member States.There are five hard-core restrictions which, if there are contained in a vertical agreement, they have the consequence of taking the whole agreement outside the scope of the Regulation.3.1. Resale expenditure MaintenanceThe first hard-core restriction concerns resale wrong victuals. Article 4(a) states that the benefit of the Vertical Block Exemption Regulation does not apply to vertical agreements that fix equipment casualtys and have the object of circumscribe a buyers ability to determine its sale price.A supplier is not allowed to fix or minimum the sale price at which distributors can resell his products. The restriction on the buyers power to establish his sale price is a hard-core restrict ion. The Commission in Yamaha considered that an obligation of a purchaser to resell at a particular price is an provable restriction of competition that is prohibited by Article 81(1).However, Paragraph 47 of the Guidelines states that the provision of a list of price recommendations by the supplier to the buyer is not considered in itself as leading to resale price maintenance if they do not amount to a obstinate or a minimum sale price. In Pronuptia de Paris v Pronuptia de Paris Irmgard Schillgalis, the Court held that the recommendation of prices would not contravene Article 81(1).In genuine agency agreements, where the principal bears all or almost all the financial and commercial risks related to the transactions concluded on his account by the agent, Article 81(1) would generally not be applicable. In Vlaamse Reisbureaus an agreement between travel agents and tour operators indented to oblige the travel agents to examine the prices and tariffs set by the Tour operators and the agents were banned from sharing commissions with or granting refunds to their customers. The Court held that the Belgium system infringed Article 81(1).From an economic point of view, it can be said that there is no certain analysis nowadays as to how to treat with resale price maintenance. Resale price maintenance can be pro-competitive or anti-competitive. Nevertheless, even when applying an effect based approach, it is open-and-shut that in many cases competition will be delayed and that cases when resale price maintenance is efficient are actually quite rare.3.1.2. Anti-Competitive and Pro-Competitive Effects in Resale Price MaintenanceResale price maintenance is a complex issue and may be harmful in some circumstances. There are two major anti-competitive effects in relation to resale price maintenance. These are the elimination of intra-brand price competition which has as a direct effect the price increase, and the resulting risk of a reduction in inter-brand competiti on which gains from increased price transparency, thus make easiest price collusion between manufacturers or distributors at a horizontal level. some other anti-competitive effects of the resale price maintenance, according to Luc Peeperkorn, are the loss of pressure on the sellers scope and the loss of dynamism and innovation from in particular discounters.However, the doubts about the efficiency of and the likelihood that resale price maintenance leads to positive aspects. Economic surmisal has shown that this practice might have a number of efficiency benefits. For instance, price fixing may prevent unbosom riding by retail price discounters on the pre-sales services and/or reputation of full price dealers while it is obvious that intra-brand price competition will be reduced by enforce a fixed or minimum price. This can be reasonable, for example, where a distribution outlet offers first-class services on which customers then rely to buy at a cheaper discounter which does no t provide these services and thus is able to charge lower prices. Free riding arises when one business benefits from the performance of another with no paying for it.A minimum price would remove the pricing advantage from the discounter and change intra-brand price competition with competition on services. Minimum resale price maintenance can thus occasionally be economically and commercially reasonable if certain conditions are fulfilled. One could argue that the free riding problem could be solved by using other block exempted restrains achieving the same result.Some inefficiencies and externalities caused by the free riding problem might be solved by exclusivity clauses, or selective distribution but this restraint may not be an ideal substitute in all conditions for resale price maintenance and it is then questionable that resale price maintenance should be per se prohibited in all cases. Also, resale price fixing can be useful to entrant manufacturers as it might assist them to position their products and thus retailers would have the incentives to invest in making the entrants products better cognize to consumers.Resale price maintenance has created worries in Commission because is being stand on national limits with different costs in different member states. According to Professor Boscheck, taking into account that the economic conditions to consider such restrains are still either too crude or too costly to apply to allow for efficient rules and structured rule of reason, it is difficult to argue that fixed or minimum prices should not be part of the hard-core list. On the other hand, it appears that such clauses are not considered as if an exemption were inconceivable in any case. There are reasonable arguments that such restrains, considered under an effects-based approach, can rarely be deemed as pro-competitive.It is still uncertain whether free riding by resale price maintenance to rationalize the exclusion of price competition between dealers o r retailers. There are methods, for instance forward motional allowances or service requirements, which can avoid free riding without the anticompetitive side effect of reducing price competition between dealers and retailers.3.2. Territorial and Customer RestrictionsArticle 4(b) states that restricting sales by the buyer into specified territories or to specified customers is a hard-core restriction. Distributors must tolerate free to decide where and to whom they sell. Paragraph 49 of the Guidelines recognizes two restrictions on buyers that would not be considered as hard-core under 4(b) a prohibition on resale except to certain and users for which there is an objective justification related to the product, and an obligation on the reseller relating to the display of the suppliers brand names.There are exceptions to 4(b), such as restriction of active sales into the exclusive soil or to an exclusive customer group close by the supplier or allocated by the supplier to another buyer. The Commission in Souris-Topps held that Toppss distribution agreements for its Pokemon Stickers and Cards failed to benefit from the Block exemption as they violated Article 4(b).The Paragraph 51 of the Guidelines deals with the Internet. It states that A restriction on the use of the Internet by distributors could only be compatible with the Block Exemption Regulation to the extent that promotion on the Internet or sales over the Internet would lead to active selling into other distributors exclusive territories or customer groups. The Commission in Yves Saint Laurent case held that a prohibition on internet furtherance and sale usually constitutes a hard-core restriction. The Commission is awry of deterring the growth of e-commerce, and has support that the use of the internet is not considered a form of active sales as it is a reasonable way of reaching customers.Provisions that restrict the territory into which, or the customers to whom, the buyer might sell the contra ct goods or services are illegal. There are four exceptions to that rule (1) The restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer, (2) Restrictions of sales to end-users by a buyer operating at the wholesale level of trade, unless it relates to a selective distribution system. This Principle was established by the Commission in Villeroy Boch, (3) the restriction of sales to unauthorised distributors by the members of a selective distribution system, and (4) the restriction of the buyers ability to sell components, supplied for the purposes of incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier.A restriction on active sales might not restrict sales by the consumers of the buyer. Thus, a seller can not prohibit his consumers to sel l his goods or services on-line without an objective reason and he also can not reserve such sales to himself and/or advertising over the internet.The Vertical Guidelines contain definitions of the terms active sales and passive sales. nimble sales are defined in paragraph 50 of the Guidelines and it means actively approaching individual customers inside another distributors exclusive territory or exclusive consumer group while passive sales means responding to unsolicitEconomic Globalisation and CompetitionEconomic Globalisation and Competition1. IntroductionCompetition is a vital mechanism of the market economy and is an efficient means of guaranteeing consumers a level of quality in terms of the value and price of products and services. Economic globalization has increased volatile growth within international trade and as a result in subject of competition law.Article 81(1) of the EC Treaty prohibits agreements between undertakings decisions by associations of undertakings and c oncerted practices which may affect trade between Member States and which prevent restrict or distort competition. These agreements shall be void according to 81(2). However, the agreements which satisfy the conditions set out in article 81(3) EC shall not be prohibited, no prior decision to that effect being required.1.1. Anti-Competitive AgreementsArticle 81 of the EC Treaty, prohibiting anti-competitive agreements, must be considered in relation to all commercial agreements with a probable EU cross-border impact. The Horizontal and the Vertical agreements are the agreements, which are relevant for the purposes of the application of the competition rules. Horizontal agreements are those between undertakings operating at the same level of production or marketing, while vertical agreements are those completed between undertakings operating at different economic levels. Under EC Competition Law, restrains included in vertical agreements are regarded as not as much damaging than those included in horizontal agreements.In Consten and Grundig v Commission the European Court of Justice considered that Article 81(1) EC applies not only to horizontal agreements but also to vertical agreements. The later decisional practice of the Commission on the treatment of vertical arrangements under Art 81(1) and 81(3) EC, and the case law of the Community Courts, have been one of the most controversial and severely criticized aspects of Community competition policy. These agreements are very important for the functioning of the economy. Commercial agreements may be exempted from the application of article 81(1) under article 81(3).1.2. The Vertical Block Exemption RegulationHowever, there is a safe harbour for undertakings the Vertical Block Exemption Regulation 2790/1999. Safe harbours exist for certain agreements including restrictions providing conditions are met so that agreements falling within the terms of the Regulation are exempt from the application of Article 81(1) EC guaranteeing the enforceability of the agreement and granting protection from antitrust prosecution. Thus, if undertakings wish to be certain that their vertical agreements are in line with EC competition law, they should agree on clauses within the scope of the Regulation.Outside this safe harbour, the European Commissions Notice Guidelines on Vertical Restraints are a helpful guide for the assessment under Art 81(3) EC and are explaining the application of Regulation 2790/1999 and the Commissions approach to vertical restraints. The Guidelines on Vertical Restraints sets out the principles for the assessment of vertical agreements under Article 81, including the application of the Regulation to vertical agreements.Article 2(1) of the Vertical Block Exemption Regulation gives the definition of vertical agreements and states that Article 81(1) shall not apply to agreements or concerted practices entered into between two or more undertakings each of which operates, for the purposes of the agreement, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services.The Commission adopted the Vertical Block Exemption Regulation on 1999 and the new Block Exemption Regulation is expected in 2010. Modifications might remain quite limited and might concern, especially, the presentation of more certain rules on e-commerce, on internet sales and the treatment of resale price maintenance.1.3. Scope of Application of the Vertical Block Exemption RegulationThe objective of the Vertical Block Exemption Regulation is to exempt certain categories of vertical agreements that, under certain conditions, may improve economic efficiency within a production or distribution chain and is directed at vertical agreements for the purchase or sale of goods or services.The Regulation covers various vertical agreements and applies to any type of agreement entered into companies, whic h do not operate at the same level of the production or distribution chain. Agreements are covered by the Vertical Block Exemption Regulation on franchising, selective distribution, exclusive dealing, exclusive purchasing, exclusive supply, and non-genuine agency agreements within the scope of Article 81. An agency agreement falls outside article 81(1) where the agent bears no or only insignificant risks in relation to either of these matters.Article 81(1) does not apply to certain agreements or concerted practices entered into between two or more undertakings. The concept of an undertaking was discussed in Hofner and Elser v Matrocton. It was stated that The concept of an undertaking encompasses every entity engaged in economic activity regardless of the legal status of the entity and the way it is financed. The definition of competing undertakings in Article 1(b) includes actual or potential suppliers in the same product market.The exclusion may be quite wide and uncertain in appl ication. In Tetra Pack I it was considered that a contract within the terms of the Vertical Block Exemption Regulation enjoys exemption from Article 81(1), but not from article 82 unless the Commission withdraws the exemption for the future, with a decision.The Regulation does not apply, however, to vertical agreements to rent and lease agreements, as no sale takes place and to agreements which have as their primary object the licensing of intellectual property rights, nor automobile distribution agreements, nor agreements between competitors, except if they are ancillary to a vertical agreement and facilitate the purchase, sale or resale of the contract goods or services by the buyer and vertical agreements whose subject matter falls within the scope of another block exemption regulation.Also, the Vertical Block Exemption Regulation does not cover any restrictions or obligations that do not relate to the conditions of purchase, sale and resale. The Regulation does not apply to vert ical agreements with a subject matter that falls within the scope of any other Block Exemption Regulation.The application of the Regulation, in certain circumstances, can be withdrawn by a decision of the European Commission, or the national competition authorities. Also, the European Commission can enact a regulation declaring the Regulation usually inapplicable to certain agreements including specific restraints.1.4. Agreements between CompetitorsThe Vertical Block Exemption Regulation does not cover vertical agreements that are concluded on a reciprocal basis between competitors. This exclusion may be very broad because it includes both actual and potential competitors, with the latter being defined as companies that would be able and likely to enter the market within one year.Vertical agreements between competitors are covered by the Vertical Block Exemption Regulation if the agreement is non-reciprocal and the buyer has a turnover not exceeding 100 million or the buyer is not a manufacturer of competing goods but only a competitor of the supplier at the distribution level. Also, are covered and where the supplier is a provider of services operating at several levels of trade, while the buyer does not provide competing services at the level of trade where it purchases the contract services.1.5. SummaryArticle 81(1) EC prohibits agreements which have anti-competitive effects. By enacting the Vertical Block Exemption Regulation, the Commission has establish safe harbors for undertakings, that outline conditions regarding when vertical agreements and concerted practices that have an anti-competitive purpose or results and would be prohibited under article 81(1) might be acceptable because they satisfy the criteria of article 81(3).When an agreement fulfills the conditions set out in the Regulation, the agreement is valid and enforceable. The Vertical Block Exemption Regulation is a measure under European Union law that grants an exemption from the application of Article 81. Agreements that meet the conditions set out in the Regulation are considered either not to adversely affect competition on the relevant European market(s) or only to affect competition to a limited degree.It is now time to examine if the Vertical Block Exemption Regulation has worked and whether the Regulation and the vertical Guidelines are need any modification, and, if so, what have to be done.PART IRequirements of the Application of the Vertical Block Exemption RegulationThe Vertical Block Exemption Regulation contains certain requirements that have to be satisfied before, for the vertical agreement is able to benefit from the Regulation. The market share of the supplier must not exceed 30% (Article 3). Also the agreement must not contain any of the hard-core restrictions (Article 4). Finally, the Regulation contains conditions relating to three certain restrictions (Article 5).2. The Market Share CapThe Market Share threshold is probably one of the most importan t provisions of the Vertical Block Exemption Regulation. In Article 3(1) is stated that the market share held by the supplier does not exceed 30% of the relevant market on which it sells the contract goods or services. Also, Article 3(2) states that in the case of vertical agreements containing exclusive supply obligations, the exemption provided for in Article 2 shall apply on condition that the market share held by the buyer does not exceed 30% of the relevant market on which it purchases the contract goods or services. In Telenor/Canal+/Canal Digital the 30% rule prevented the application of the Vertical Block Exemption Regulation.The market share threshold is aimed to reduce regulatory burdens from those businesses that, according to Bishop and Ridyard, could not behave anti-competitively even if they tried. The introducing of a market share cap was one the most hotly contested aspects of the Vertical Block Exemption Regulation. Businesses and its lawyers argued that such a rule would be unworkable, since it is so difficult to establish market shares with any degree of precision, particularly in rapidly developing markets.However, the Commission insisted that there was no better means of ensuring that the benefit of the Block Exemption, did not go to firms with too much market power, and the market share cap stayed, albeit in the form of a single threshold of 30%, rather that two of 20% and of 40% which had been proposed in an earlier draft. If the market share of the parties exceeds the 10% threshold described in the De Minimis Notice, Article 81(1) EC will normally not apply to the agreement if the product is new or if the existing product is sold for the first time on a different geographic market.One factor which may have assisted the Commission in prevailing was the fact that while discussions on the Vertical Block Exemption Regulation were going on, it published its white paper on procedural modernization in the application of articles 81 and 82 EC, which proposed the abolition of the notification system altogether. This may have led some to feel less strongly about the content of the Regulation.2.1. Calculating the Market ShareIn order to calculate the market share there must be identified the manufactured goods and geographic markets. Regarding market definition, the general rules apply. On the relevant market, the supplier calculates its market share by comparing its turnover achieved on that market with the total value of sales on that market.However, the benefit of the Vertical Block Exemption Regulation will, subject to certain conditions, not always be lost if the market share exceeds the 30% threshold. In Rewe/Meinl the European Commission considered that a supplier is in a situation of economic dependence when the buyer accounts for over a 22% market share and thus buyer power might distort competition.John De Gregorio, European counsel for consumer goods manufacturer Kimberly-Clark Corporation, has stated With the int roduction of market share thresholds to the block exemption analysis, its more important than ever for in-house counsel to know how the Commission and European courts may define the relevant market for the goods that your company manufactures and sells, and to be comfortable with the definition your company adopts.2.2. The De Minimis Doctrine and Agreements of Minor ImportanceIn addition to the Vertical Block Exemption Regulation and the Guidelines the Commission has issued a series of notices, called Notices on agreements of minor importance which give guidance on the agreements which will escape Article 81(1), because the market share of each or both of the parties to the agreement is too small.The European Commissions de minimis Notice states that no Article 81 subjects are raised by an agreement between undertakings where in vertical agreements the market share of each party to the agreement does not exceed 15% of the relevant market, or 5% for vertical agreements where access t o the relevant market is foreclosed by the increasing effect of parallel networks of vertical agreements by several companies. The de minimis notice sets the relevant threshold at 5% for horizontal agreements.Commercial agreements between parties where market shares exceed these thresholds might however not have a considerable effect on competition or might benefit from exemption. Nevertheless, the presumption in the de minimis Notice will not apply if the commercial agreement contains hardcore restrictions. In Franz Volk v Establissments Vervaecke SPRL the 0.6% of market share in washing machines considered insignificant.In general, agreements taken between Small and Medium size Enterprisers are de minimis. Paragraph 3 of the Notice recognizes that agreements between small and medium-sized undertakings are rarely capable of appreciably affecting trade between Member States.Finally, Article 8 provides that the Commission can withdraw the benefit of Block Exemption where 50 % of a re levant market, contain specific restraints relating to that market. This Regulation shall not become applicable earlier than six months following its adoption.2.3. Market PowerThe Vertical Block Exemption Regulation states that, with some certain exceptions, all vertical restrains are acceptable unless they are coupled to significant market power. Market share thresholds are criticized to be uncertain because they need a definition of the market which is the reason why the idea of market share thresholds has been discarded in most systems.Also, the amount of market power can be considered by reference to market share. Scherer and Ross state that economic analysis shows that in most cases the welfare-reducing effects of vertical restrains depend on the degree of market power the involved firms have.If market shares are in general indicative of potential market power, they can never be considered without considering some other factors to achieve a reasonable assessment of market power for instance the barriers to entry and prospective competition and the characteristics of the oligopolistic dealings between businesses.The Commission in some of its judgments show that market shares do not equal market power. For example, in Alcatel-Telectra the Commission cleared a merger which gave the parties market shares of 83%. Also, in Rhone-Poulenc/SNIA the high degree of concentration was ought to weighed by the existence of rapid technology development.The most obvious issue, according to Professor Denis Waelbroeck, is to consider whether the system should not allow all vertical agreements which do not include hardcore restrictions, separately of the market share of the parties involved, and only apply a control under Article 82 EC in cases of dominance. That would remove the burden above the threshold for businesses to achieve a complex evaluation of their agreements under Article 81(1) and Article 81(3) EC and it will provide more legal certainty in this subject.In add ition, the economic assessment required by the Guidelines on Vertical Restrains and the Guidelines on the application of Article 81(3) of the Treaty is challenging, and it is doubtful that many judges and parties will have the income or abilities to undertake it sufficiently, thus raising the danger of extensive, expensive and uncertain litigation.2.4. Arguments about the ThresholdThe use of market shares as a key element of the Regulations treatment has been criticised as being possible to lead to uncertainty and unpredictability given the difficulties in defining the relevant market and market share.It may be argued that the threshold is too low or that it is improperly cast. Those who argue that the threshold is too low point out that the anti-competitive risks can arise only when there is a dominant firm. A non-dominant firm cannot increase rivals costs and cannot make damage to the consumers as they still benefit from inter-brand competition.Those who argue that the threshold i s improperly cast would agree with the above criticism but bear in mind that anti-competitive effects can manifest themselves when there is the risk of oligopolistic interdependence. Bishop. and Ridyard state that an assessment of the markets concentration would be more useful than the assessment of one players market share.Some argue that given the uncertainties over market definition, a market share threshold is not a substitute for a detailed analysis of whether the consumers suffer consequently of a particular practice but this might damage the effectiveness of the existing system which creates a safe harbour so that analytical incomes are allocated to those cases where anticompetitive effects are most possible to occur.The Vertical Block Exemption Regulation creation of a market share threshold which the Regulation does not apply, limits manufacturing businesses that manufacture extremely innovative goods and want to sell them before other businesses have the chance to promote competitive goods into the market. In this situation, the manufacturing businesses with the extremely innovative goods might have a very high market share in a particular industry within a specific geographic area as no competing goods exist.However, as its market share is more than 30%, the manufacturing business is unable to take benefit from the Regulation and would be banned from effectively distributing and selling its manufactured goods in the market.2.5. Removing the ThresholdThe Vertical Block Exemption Regulation is unduly restrictive by setting the threshold at 30%. Many agreements thus escape the safe harbour though they are completely harmless from a competition law perspective. By removing the thresholds the sellers using private resellers may be penalised not as much as vertically integrate businesses. Also, abolishing the threshold would give more stability to the system because not all restrictions of competition under 81 are an abuse under 82.On the other hand, if t he system is seen as too essential one may think a less radical change to the Regulation consisting of a differentiated approach identifying those clauses which can be problematic above 30% although the parties are not dominant. Those clauses which are always straightforward, even in cases of dominance and which thus essentially deserve an exemption and should not to be matter to any market share threshold and also those clauses which should never advantage from a group exemption even they are below 30%.2.6. SummaryThe Vertical Block Exemption Regulation can simplify issues but also can cause difficulties. It makes issues simple as it offers the parties more flexibility in establishing their agreements and if a businesss market share is less than the related market share threshold the agreement will fall outside the scope of the competition rules or be qualified for exemption provided that it does not include hardcore restrictions.The Regulation can also cause difficulties as the pa rties market share must be verified in every case and this can be very hard in situations, for instance as those concerning new markets. Where the market share threshold is exceeded, issues become more difficult as the Regulation requires a complete evaluation of the agreement to define whether it would restrict competition under Article 81(1) and, if so, whether it would meet the requirements for an exemption under Article 81(3). This requires the parties to verify the economic effect of certain restrictions by considering how they would operate in the specific product market involved.The Vertical Block Exemption Regulation principally proposes that businesses with small market shares are given more choice to establish their agreements and will not require undertaking an antitrust review of their dealings. Businesses with large market shares might need to spend time and resources to assessing their agreements from an antitrust perspective.3. The Hard-Core RestrictionsThe Vertical B lock Exemption Regulation does not apply to vertical agreements that have certain anti-competitive objects. The Regulation lists a number of hard-core restrictions that, if included in the agreement, prevent the safe harbour from applying and cause the exclusion of the whole agreement from the benefit of the Block Exemption even if the market share of the supplier or buyer is below 30%.There are hard-core restrictions which apply to agreements between competitors, and agreements between non competitors. If one hard-core restriction is present in the agreement, the agreement will lose the benefit of the block exemption so Article 81(1) EC may apply. This can result in the unenforceability of the entire agreement and may even lead to fines and it is important that a severability or invalidity clause is included in the agreement where appropriate.Hard-core restrictions are considered to be so serious that they are almost always prohibited. In Javico International and Javico AG v Yves S aint Laurent Parfumes SA it was considered that hard-core restrictions do not infringe Article 81(1) except if they might have considerable effect on trade between Member States.There are five hard-core restrictions which, if there are contained in a vertical agreement, they have the consequence of taking the whole agreement outside the scope of the Regulation.3.1. Resale Price MaintenanceThe first hard-core restriction concerns resale price maintenance. Article 4(a) states that the benefit of the Vertical Block Exemption Regulation does not apply to vertical agreements that fix prices and have the object of restricting a buyers ability to determine its sale price.A supplier is not allowed to fix or minimum the sale price at which distributors can resell his products. The restriction on the buyers power to establish his sale price is a hard-core restriction. The Commission in Yamaha considered that an obligation of a purchaser to resell at a particular price is an obvious restrictio n of competition that is prohibited by Article 81(1).However, Paragraph 47 of the Guidelines states that the provision of a list of price recommendations by the supplier to the buyer is not considered in itself as leading to resale price maintenance if they do not amount to a fixed or a minimum sale price. In Pronuptia de Paris v Pronuptia de Paris Irmgard Schillgalis, the Court held that the recommendation of prices would not infringe Article 81(1).In genuine agency agreements, where the principal bears all or almost all the financial and commercial risks related to the transactions concluded on his account by the agent, Article 81(1) would generally not be applicable. In Vlaamse Reisbureaus an agreement between travel agents and tour operators indented to oblige the travel agents to examine the prices and tariffs set by the Tour operators and the agents were banned from sharing commissions with or granting refunds to their customers. The Court held that the Belgium system infringe d Article 81(1).From an economic point of view, it can be said that there is no certain analysis nowadays as to how to treat with resale price maintenance. Resale price maintenance can be pro-competitive or anti-competitive. Nevertheless, even when applying an effect based approach, it is obvious that in many cases competition will be delayed and that cases when resale price maintenance is efficient are actually quite rare.3.1.2. Anti-Competitive and Pro-Competitive Effects in Resale Price MaintenanceResale price maintenance is a complex issue and may be harmful in some circumstances. There are two major anti-competitive effects in relation to resale price maintenance. These are the elimination of intra-brand price competition which has as a direct effect the price increase, and the resulting risk of a reduction in inter-brand competition which gains from increased price transparency, thus make easiest price collusion between manufacturers or distributors at a horizontal level. Othe r anti-competitive effects of the resale price maintenance, according to Luc Peeperkorn, are the loss of pressure on the sellers scope and the loss of dynamism and innovation from in particular discounters.However, the doubts about the efficiency of and the likelihood that resale price maintenance leads to positive aspects. Economic theory has shown that this practice might have a number of efficiency benefits. For instance, price fixing may prevent free riding by retail price discounters on the pre-sales services and/or reputation of full price dealers while it is obvious that intra-brand price competition will be reduced by imposing a fixed or minimum price. This can be reasonable, for example, where a distribution outlet offers first-class services on which customers then rely to buy at a cheaper discounter which does not provide these services and thus is able to charge lower prices. Free riding arises when one business benefits from the performance of another with no paying for it.A minimum price would remove the pricing advantage from the discounter and change intra-brand price competition with competition on services. Minimum resale price maintenance can thus occasionally be economically and commercially reasonable if certain conditions are fulfilled. One could argue that the free riding problem could be solved by using other block exempted restrains achieving the same result.Some inefficiencies and externalities caused by the free riding problem might be solved by exclusivity clauses, or selective distribution but this restraint may not be an ideal substitute in all conditions for resale price maintenance and it is then questionable that resale price maintenance should be per se prohibited in all cases. Also, resale price fixing can be useful to entrant manufacturers as it might assist them to position their products and thus retailers would have the incentives to invest in making the entrants products better known to consumers.Resale price maintenance has created worries in Commission because is being stand on national limits with different costs in different member states. According to Professor Boscheck, taking into account that the economic conditions to consider such restrains are still either too crude or too costly to apply to allow for efficient rules and structured rule of reason, it is difficult to argue that fixed or minimum prices should not be part of the hard-core list. On the other hand, it appears that such clauses are not considered as if an exemption were inconceivable in any case. There are reasonable arguments that such restrains, considered under an effects-based approach, can rarely be deemed as pro-competitive.It is still uncertain whether free riding by resale price maintenance to rationalize the exclusion of price competition between dealers or retailers. There are methods, for instance promotional allowances or service requirements, which can avoid free riding without the anticompetitive side effect of r educing price competition between dealers and retailers.3.2. Territorial and Customer RestrictionsArticle 4(b) states that restricting sales by the buyer into specified territories or to specified customers is a hard-core restriction. Distributors must remain free to decide where and to whom they sell. Paragraph 49 of the Guidelines recognizes two restrictions on buyers that would not be considered as hard-core under 4(b) a prohibition on resale except to certain and users for which there is an objective justification related to the product, and an obligation on the reseller relating to the display of the suppliers brand names.There are exceptions to 4(b), such as restriction of active sales into the exclusive territory or to an exclusive customer group reserved by the supplier or allocated by the supplier to another buyer. The Commission in Souris-Topps held that Toppss distribution agreements for its Pokemon Stickers and Cards failed to benefit from the Block exemption as they vio lated Article 4(b).The Paragraph 51 of the Guidelines deals with the Internet. It states that A restriction on the use of the Internet by distributors could only be compatible with the Block Exemption Regulation to the extent that promotion on the Internet or sales over the Internet would lead to active selling into other distributors exclusive territories or customer groups. The Commission in Yves Saint Laurent case held that a prohibition on internet publicity and sale usually constitutes a hard-core restriction. The Commission is awry of deterring the growth of e-commerce, and has confirmed that the use of the internet is not considered a form of active sales as it is a reasonable way of reaching customers.Provisions that restrict the territory into which, or the customers to whom, the buyer might sell the contract goods or services are illegal. There are four exceptions to that rule (1) The restriction of active sales into the exclusive territory or to an exclusive customer grou p reserved to the supplier or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer, (2) Restrictions of sales to end-users by a buyer operating at the wholesale level of trade, unless it relates to a selective distribution system. This Principle was established by the Commission in Villeroy Boch, (3) the restriction of sales to unauthorised distributors by the members of a selective distribution system, and (4) the restriction of the buyers ability to sell components, supplied for the purposes of incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier.A restriction on active sales might not restrict sales by the consumers of the buyer. Thus, a seller can not prohibit his consumers to sell his goods or services on-line without an objective reason and he also can not reserve such sales to himself and/or advertising over the internet.The Vertical Guidelines contain definitions of the terms active sales and passive sales. Active sales are defined in paragraph 50 of the Guidelines and it means actively approaching individual customers inside another distributors exclusive territory or exclusive consumer group while passive sales means responding to unsolicit