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Competition Law: The Rule of Per-Se Illegality

Competition law has become an important aspect for the growth of economy and efficiency, to eliminate concerted practices, monopolization and thereby promote and sustain competition in the market. European Union (EU) is an amalgamation of 27 countries. EU focuses on economic integration of all its member-states and strives to achieve a healthy common market which offers free movement of goods and services and a wide variety of choices for consumer's benefit.[1]

Similarly, US aims to promote a free market and consumer welfare. It can be rightly said that EU and US both share common goals within their areas of operation under their respective legislations namely under Art.101 and 102 of Treaty on the Functioning of the European Union (TFEU) and under Ss.1 and 2 of Sherman Act, 1890, S.5 of Federal Trade Commission Act, 1914. It is worth noting that the Court functions within a different institutional framework in EU than the Supreme Court does within US.

An undertaking, involved into price-fixing, bid rigging, market division and other such concerted practices that results into prevention, restriction or distortion of competition in the market are considered to be in violation of the aforesaid legislation in their respective jurisdictions with or without a justification. One can argue that EU laws prohibiting certain anti-competitive acts, in a manner implies 'per-se' illegality.

However, instead of the term 'Per-Se' the terms used are 'Restriction by Object'. It can be rightly said that competition laws of EU and US have significant roles to play and a specific agenda to maintain the competitiveness in their respective markets. In this essay I will argue about how EU laws have a similar yet different approach over anti-competitive conduct by undertakings. Firstly, by understanding what are cartels. Secondly by evaluating the difference between per-se and restriction by object. Thirdly, I will argue about its viability/feasibility in the real world and fourthly, conclude that EU does have a per-se illegality comparable to US antitrust laws.

Cartel:

The term Cartel is defined under the Directive 2014/104/EU as follows:
Cartel means an agreement or concerted practice between two or more competitors aimed at coordinating their competitive behaviour on the market or influencing the relevant parameters of competition through practices such as, but not limited to, the fixing or coordination of purchase or selling prices or other trading conditions, including in relation to intellectual property rights, the allocation of production or sales quotas, the sharing of markets and customers, including bid-rigging, restrictions of imports or exports or anti-competitive actions against other competitors.[2]

In other words, when two or more competitors belonging to the same market come together to synchronize their actions for their economic gain, at the cost of consumers they are said to have formed a cartel. For instance, if A, B, C are wholesalers of onions, they decide to hold the supply of onions in the market for the time being, so that the demand for onions rise and consequently increases the price as well. This is evidently a cartel/agreement restraining the trade by restricting output.

Per Se Rule And Restriction By Object/Effect:

Per se rule is a method of analyzing the legality of an alleged agreement between the market competitors/rivals. In US, it is addressed as naked Cartel, such anti-competitive acts are considered illegal per se i.e., they are conclusively presumed that such acts are distorting competition and restraining trade in the market. It includes all concerted practices by competitors (explicit or tacit) involving price-fixing, market division, output restriction, bid rigging, etc. Often horizontal agreements fall under per se rule while vertical agreements fall under Rule of Reason (i.e. a cartel like behavior but there are justifications for that behavior).

A naked cartel prima facie restraints trade, distorts competition and the court refuses to entertain any justification or waste time on hearing such matters, they are directly penalized for their unlawful acts either by way of imprisonment, fines or both once the facts are established.[3] Compensation for damages is also awarded for the losses sustained by the complainant/victim.

In EU, it can be argued that the rule of Restriction by Object is similar to that of per se rule. It is a test to evaluate the true object behind an arrangement/agreement between the competitors. It is pertinent to note that intention of the parties here is immaterial while the resulting consequence of such agreement is given more consideration.

In the case of Consten SàRL and Grundig-Verkaufs-GmbH v Commission, (1966), it was observed by the CJ that there is no need to take account of the effects of an agreement if its object is to restrict competition.[4] Therefore, it shows that restriction by object is as good as per se illegality. All such agreements that are sufficiently injurious to the proper functioning of the market are prohibited by law and the defaulting parties are subjected to heavy fines/penalties.[5]

The EU laws have a key feature that varies from that of US laws such as EU under Art.101(3) offers exemption (individual and block) to those agreements and concerted practices that distort competition but also contributes to production/distribution and benefits the consumers.[6] Such cartels/agreements are excused from bearing the repercussions of unlawful collusive acts.

This exemption is however absent in the US laws. US has adopted the 'Rule of Reason' instead wherein certain agreements are not assumed to be restraining trade/competition but are assessed on its legal and economic context under rule of reason[7]. It can be said that under Art.101(3) and Rule of Reason, the court weighs the anti and pro-competitive effects of such concerted practices to determine its legality.

Therefore, when comparing the two competition systems/laws it can be rightly said that there exist common objectives and are similar to an extent but EU offers some relaxation/exemption for valid purposes and valid cooperation. This is mainly because as mentioned earlier EU places key importance on integration of member states and sustaining a healthy competition within the markets of these member states posing as one big single-market.

It monitors/regulates anti-competitive behavior of undertakings that are likely to deter competition in Europe. Whereas, US often considered as the father of competition law owing to its early origin adopts a very straight forward approach. There is no grey area when it comes to unlawful anti-competitive conduct. Per-se rule certainly is a conducive tool to determine the anti-competitive conduct and saves time and resources[8].

Viability:
It has been observed that the meaning of Art.101(1) is extremely broad and thus it becomes challenging to ascertain which acts will be considered anti-competitive and which not. Especially the producers/market players are under constant fear with regards to what might bring them under radar for restrictive practices.

In the case of STM, the CJ clarified that the words object or effect in Article 101(1) are not cumulative but are alternative conditions. There is a need to evaluate the precise purpose of the agreement in the economic context, whether all or some clauses are likely to deter/distort/prevent/restrain competition in the market. Only if these clauses shows its detrimental effects on the market sufficiently, the agreements are called restrictive by object. The court reiterates that to identify the agreements restrictive by object, one needs to read its provisions carefully to assess its object.[9]

Often the viability of Art.101(1) is questioned for it turns blind-eye even to those arrangements with pro-competitive effects. In a famous case of Consten v. Grundig (1966), an exclusive distribution agreement (vertical agreement) between the parties for Grundig electronic products was held to be unlawful and restrictive.

The parties disagreed that the agreement had any restrictive element and claimed that it boosted competition in the market instead. Though it was argued that the Commission must take into account the effects of such arrangement rather than jumping to conclusion, the Commission refused to take note of these arguments and maintained its stand that Grundig gave a monopoly to Consten in France and its object itself was restricting the competition, an assessment of effect was unnecessary.

It can be seen from above, the decision was more or less similar to per-se illegality, wherein the court refused a pro-competitive justification. The ambiguity of competition laws has led to serious apprehensions with what is permissible and what is not. Often the associations of market players try to create bylaws explicitly and time and again communicates the same with the authority to keep a check if they are in conformity with the laws to avoid uncertainties.

There are a number of possibilities wherein the market players are permitted to come and operate together provided their aggregate market share is below a permissible percentage. If the arrangement is likely to cause monopolization the same is then prohibited under law.

Thus, it's important for the competitors to play by the rules or face the consequences. Lately, the per se rule has also been critiqued by many scholars and economists stating that though it saves time and resources, at times it becomes essential to understand/evaluate the true nature of an agreement before labelling it per-se illegal or restricted by object.

In landmark cases of Standard Oil Co. v. United States (1911) and United States v. American Tobacco Co. (1969), the court was of the view that the broad interpretation of Sherman Act would only lead to a ruckus that there would hardly be any agreement or contract among the businessmen that does not directly or indirectly affect or possibly restrain commerce. There were some strong apprehensions with regards to application of reasonableness for adjudicating some cases under S.1 of Sherman Act. Therefore, Supreme Court cemented this idea that at least some agreements would not be found automatically in violation of Sherman Act but now would be assessed under some sort of reasonable standard.[10]

In Continental TV, Inc. v. GTE Sylvania (1977), the Supreme Court held that location restrictions were widely used and had no deleterious effect on competition. The application of per se rule was the incorrect standard and thereby reversed the order by stating it should have been assessed under rule of reason.[11]

It's important to note that mere mimicking the actions/decisions of market competitors does not imply collusion/concerted practice. To remain competitive in the market it is the most basic rule to change its stance and act according to its competitors so that consumers do not choose competitors' products over its own. These are unilateral conduct often observed in oligopoly markets and it would be highly unsatisfactory to label it per-se illegal.

Conclusion:
To conclude, it can be rightly said that EU does have a system of per-se illegality that can be compared to US antitrust laws i.e., the Restriction by Object. This is by far the closest comparison that could be found between the two jurisdictions. Once the cartel's anti-competitive object is established the undertakings/all members of the cartel are held liable to bear the consequences and pay hefty fines.

Per-se rule and Restriction by Object undoubtedly serves to be a time-saver, where the naked cartels (prima-facie) can be cornered and the guilty can be held accountable, thereby saving court's time and effort.

To reiterate, the EU as well as US laws play a significant role in conserving a free market and promote competition for the benefit of the consumers at large. Although their goals align, their modus operandi slightly differs with regards to available exemptions. It can be said that even US is now shifting from its rigid stand of per-se rule to the rule of reason to validate certain acts which cannot be overlooked for the sake of competitors and other rationale. The competition laws are little ambiguous, it could certainly use better clarity and timely update for better enforcement.

Bibliography:
Books:

  1. Jones, Sufrin, and Dunne  EU Competition Law (Chapter 5
  2. Gavil et al - Antitrust Law in Perspective Cases
  3. Hovenkamp - Federal Antitrust Policy
  4. Global Competition  David J. Gerber
Websites:
  1. https://www.lexisnexis.com
  2. https://core.ac.uk
  3. https://www.eucomplaw.com
  4. https://ec.europa.eu
  5. https://thebusinessprofessor.com
  6. https://www.gov.uk/eu-eea#
  7. https://eur-lex.europa.eu
Cases:
  1. Consten SàRL and Grundig-Verkaufs-GmbH v Commission, (1966
  2. STM
  3. Consten v. Grundig (1966)
  4. Standard Oil Co. v. United States (1911)
  5. United States v. American Tobacco Co. (1969)
  6. Continental TV, Inc. v. GTE Sylvania (1977)
Statute:
  1. Sherman Act, 1890
  2. Federal Trade Commission Act, 1914
  3. Treaty on the Functioning of the European Union (TFEU)
  4. Directive 2014/104/EU of the European Parliament and of the Council
End-Notes:
  1. https://www.gov.uk/eu-eea#:~:text=The%20European%20Union%20(%20EU%20)%20is,and%20people%20between%20member%20states
  2. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0104&rid=1  Directive 2014/104/EU of the European Parliament and of the Council.
  3. https://thebusinessprofessor.com/en_US/business-transactions/antitrust-rule-of-reason-and-per-se-illegality
  4. Jones, Sufrin, and Dunne  EU Competition Law (Chapter 5)
  5. https://ec.europa.eu/competition/speeches/text/sp2013_07_en.pdf
  6. https://www.eucomplaw.com/comparing-eu-and-us-competition-law/per-se-rules/
  7. Jones, Sufrin, and Dunne EU Competition Law (Chapter 5)
  8. Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877, 887 (2007
  9. Jones, Sufrin, and Dunne  EU Competition Law (Chapter 5)
  10. https://core.ac.uk/download/pdf/159567746.pdf
  11. https://www.lexisnexis.com/community/casebrief/p/casebrief-cont-l-t-v-v-gte-sylvania

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