Understanding The TFEU & Article 101

 As it is known, European economic integration has started as a process for establishing an internal market in Europe. In order to achieve this objective, all the necessary means are specified in the Treaty on the Functioning of the European Union (TFEU). In this context, competition policy is one of the main policies of the European Union (EU); because it directly or indirectly affects all other community policies.[1] However, the Community’s core competition policy is included in the “Rules on Competition” Title VII, Chapter I, including Articles 101 to 109 of the TFEU.

Article 101 and Article 102 of TFEU, which are the two most important elements regulating competition conditions and for the application of Article 101 to a case, three main elements must be present:[2]

– The existence of an agreement, an undertakings decision or concerted action,

– Degradation of competition conditions and

– The possibility of trade between Member States being badly affected by these two factors.

 i) General View of Article 101

Article 101 of the TFEU consists of three paragraphs:

The first paragraph of Article 101 (1) defines the “Parties” within the scope of the said obligation.It lists “Illegal Actions” that are incompatible with the concept of internal market established by the European Union and a set of means leading to the emergence of such “Actions”. In this context, respective parties were defined as “Undertakings” and “Subsidiaries of Undertakings”. Within the scope of this concept it includes; companies, firms, commercial organizations, partnerships, individuals engaged in trade on their own account, agricultural cooperatives, undertakings (such as commercial associations) and non-profit organizations.[3] Under some circumstances, public organizations providing goods or services in the relevant market may also be considered as undertakings.[4] In the case of suspected violations of the competition rules, the priority issue to be considered is the relevant market concept. Identification of the relevant market helps to determine the scope of competition rules, restrictive practices and abuse of a dominant position.[5] Within this scope, it should be underlined that in the context of Article 101, when checking the activities of such undertakings, it uses two different definitions for the determination of the relevant market:

– Product Market                   : It is the market that covers all products and services that can be substituted or replaced by consumers.[6]

– Geographical Market          : It includes the area of supply and demand in the scope of competition law in the geography of the related undertakings and expresses the area which is easy to separate from other geographical regions due to the similarity of competition conditions.[7][8]

The reason why the commission identifies the relevant market is to determine whether an agreement will affect the trade between Member States and the prevention, restriction or deterioration of competition within the European Union. As a result, the Commission has to define the concept of the market. However, such a definition is valid only in cases where it is not possible to determine whether the decisions taken by the subsidiaries, the concerted actions or agreements made constitute a responsibility among the member states and that competition in the domestic market is not restricted or prevented.[9]

Article 101 not only imposes many restrictions in order to provide reliable and equal conditions on competitive environment, but also prohibits concerted actions. In other words, although there is no formal agreement or decision, a variety of informal actions such as; secret meetings, phone calls, price notices, etc. can be evaluated within the framework of the prohibition under Article 101 (1).[10] Therefore it considered incompatible with the internal market due to the degradation of the competition environment.[11]

The concept of vertical and horizontal contracts should also be explained for better understanding and examination of the case after. Principle of the Article 101 (1) applies to the horizontal and vertical relations described below:[12]

-Horizontal Relations :Refers to agreements or concerted actions between two or more undertakings operating at the same level in a production or distribution chain.[13]

-Vertical Relations                 :Refers to agreements or concerted actions between two or more undertakings operating at different levels of a production or distribution chain.[14]

If it will be looked briefly at the other paragraphs of the article; the second paragraph of Article 101 automatically deems agreements or decisions as void which are prohibited under Article 101, paragraph 1.

ii) Exemptions in Article 101

 The third paragraph of Article 101 constitutes an exemption basis for agreements, decisions and concerted actions that contribute to the improvement of the production or distribution of products or acceleration of their technical and economic developmentor which enable consumers to receive a fair share of the benefits. However, it is stipulated that the related undertakings should not be restricted more than what is necessary for attainment of such purposes and it should not be given the opportunity for these undertakings to eliminate competition for a significant portion of the products.[15] Article 101 (3) refers to the fulfillment of the two positive and two negative conditions of agreements, decisions or concerted actions. if the positive conditions are mentioned; it should aim to take actions to ensure economic progress towards improving the production or distribution of goods and to contribute to the consumer in this process and negative conditions are include taking into account the commitments that may lead to the restriction or prevention of competition.[16]

Although not covered by Article 101 (1), there are two more exceptional conditions that have been developed as exemptions for many years. The European Commission considers agreements, decisions and concerted actions that are useful for promoting cooperation between small and medium-sized enterprises (SMEs) that do not significantly restrict competition and have no potential to impact on competition in the common market; it regulates that the actions are not included in the scope of restrictions and prohibitions in Article 101 (1).[17]The European Court of Justice has agreed in many case law decisions that the prohibitions under TFEU Article 101 shall not apply to the agreements, decisions and concerted acts of the companies operating in the single economic union.

 After determining the type of contract between the parties and whether it is vertical or horizontal; the market shares of the companies should also be considered. However, in case of vertical agreement; VABER element that can be applied to the parties; comes into question.

VABER by definition means that[18]; Vertical Agreements Block Exemption Regulation. For vertical agreements that fulfill certain conditions, it creates an exceptional case in TFEU’s competition clauses.Guidelines by the Commission on vertical restrictions; provides guidance on evaluating vertical restrictions. In order to benefit from VABER, two factors are important:

– Market Share Threshold      : In order to benefit from the exemption, the market share of supplier which the supplier sells its goods and services in that market; should be 30% or less. When it comes to buyer it is also same that the market share of the buyer should be 30% or less in the market which the buyer buys goods and services.

– Hardcore Restrictions         :[19] Hardcore restrictions are multiple and can be started with price-fixing or resale price maintenance. In this respect, the supplier cannot set a fixed price for the sale of goods for distributors.[20] An advisory price or maximum price setting can be considered; however, a fixed or minimum price for the sale of goods is not included. Secondly restrictions that can be mentioned about concerning the territory into which, or the customers to whom, the buyer may sell.[21] This restriction relates to the regional or customer restriction of the market. The distributors should be free about where and whom to sell their goods. It should be noted, however, some restrictions called “active sales” are permitted in an area reserved by the supplier, or in places where another buyer is entitled in particular. These restrictions are permitted only in the case of a special arrangement. In addition, the supplier is not allowed to restrict “passive sales”. If these concepts are mentioned; when it refers to active sales it means that actively approaching to a customer or a region via direct mail, personal visits or advertising in media; which is exclusively reserved for another distributor. Passive sales mean the fulfillment of unsolicited requests, as well as the transportation of goods or other services.[22] It means reaching the customer in other regions by public advertising or in the media through public advertisements without entering into the privileged area of other distributors. It is generally accepted that the supplier may prohibit all active sales outside the region allocated to the distributor. However, the existing block exemption becomes narrower, limiting the active sales to the supplier only in the areas where exclusive authorization is granted to him or another buyer. The third is the territorial / customer sales restrictions in a selective distribution system. [23] The supplier is not authorized to limit the end users to whom the distributor can sell. The other element is cross supplies between distributors within a selective distribution system. Authorized distributors in the network must be free to sell their goods or to buy goods to other networked distributors. This means that the designated distributors should not be forced to buy goods only from the supplier. However, the sale of authorized distributors to unauthorized distributors may be limited. Last but not least, agreements that prevent service providers and independent repairers to provide spare parts directly from spare parts manufacturer are also included in these hardcore restrictions.[24]

[1]Walter Frenz, Handbook of EU Competition Law (Springer, 2015) p.18

[2]Commission Notice (EC), Guidelines on the Application of Article 81(3) of the Treaty [2004] 2004/C 101/08 par. 47

[3]HöfnerveElser vs Macrotron [1991] ECR I-1979 par.21

[4]FENIN v Commission [2003] ECR II-357

[5]Commission Notice (EC), Notice on the definition of relevant market for the purposes of community competition law [1997]  97/C 372/03

[6]Alison Jones, EU Competition Law, (4th Ed, Oxford University Press, 2011) p.294

[7]Commission Notice (EC) Notice on the definition of relevant market for the purposes of community competition law [1997]  97/C 372/03

[8]Alison Jones, EU Competition Law, (4th Ed, Oxford University Press, 2011) p.82

[9]Groupe Danone v Commission [2005] ECR II-4407, par.99

[10]Imperial Chemical Industries Ltd v Commission of the European Communities [1997] ECR 619, par.64

[11]CoöperatieveVereniging “SuikerUnie” UA & Others v Commission  [1975] ECR 1663

[12]Commission Regulation (EU), on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices [2010] 330/2010 p.2

[13]Commission Communication (EC), Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements [2011] 2011/C 11/01 par.1-5

[14]Commission Notice (EC), Guidelines on Vertical Restraints [2010] 2010/C 130/01

[15]Richard Wish and David Bailey, Competition Law, (7th Ed, Oxford University Press, 2012) p.155-166

[16]Ibid

[17]Commission Notice (EC) Notice on agreements of minor importance which do not appreciably restrict competition under Article 101(1) of the Treaty on the Functioning of the European Union (De Minimis Notice) [2014]  2014/C 291/01

[18]Commission Regulation (EU) 330/2010 (OJ 2010 L102/1, 23.4.2010). This block exemption replaced Commission Regulation (EC) 2790/1999 and came into force on 1 June 2010 expires on 31 May 2022. It was incorporated into the EEA competition rules by EEA Joint Committee Decision No. 077/2010 (amending Annex XIV to the EEA Agreement).

[19]Commission Notice (EC), Guidelines on Vertical Restraints, [2010] 2010/C 2365  p.47

[20]Ibid par. 48-49

[21]Commission Regulation (EU), on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices [2010] 330/2010 par.50-55

[22]Commission Notice (EC), Guidelines on Vertical Restraints, [2010] 2010/C 2365 par.51

[23]Commission Regulation (EU), on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices [2010] 330/2010 Art. 1(c)

[24]Ibid Art. 5(b)