Introduction to Transnational Competition La · 1/10/2010 · concerted practices which may affect trade between Member States and which have as their object or effect the prevention,

European Master in Transnational Trade Law and Finance

Introduction to Transnational Competition Law

Prof. Dr. Francisco Marcos, Professor of Law, IE Law School

[email protected]

Bilbao, 10 January 2010, 08::00-12:20h.

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal

(Section 1, Sherman Act).

All agreements between undertakings, decisions by associations of undertakings and

concerted practices which may affect trade between Member States and which have as

their object or effect the prevention, restriction or distortion of competition within the common

market [shall be prohibited ]

(Article 81, EC)

Introduction: Firms, Markets and Governments 1. Competition Law and Competition Policy 2. General Framework and Institutions of Competition Law.

2.1. Goals and Objectives. 2.2. Rules and Institutions.

3. Overview of General Rules. 3.1. Scope and Exemptions. 3.2. Prohibitions of Unilateral and Multilateral Conducts. 3.3. Merger Review 3.4. Anticompetitive actions by State.

4. Competition Law and Regulation. 5. Competition Law and IP.

Agenda

6. Enforcement & Procedures. 6.1. Public enforcement. Sanctions. 6.2. Private Enforcement. Damages claims. 6.3. New procedural tools: leniency, settlement.

7. Sanctions. 8. Damages Claims. 9. Competition promotion & advocacy.

Agenda Session 3

Introduction: Firms, Markets and Governments

In the beginning there was night and darkness and business firms and markets appeared as a good thing…

Let there be markets!


Markets exist and are popular worldwide as the main way of allocating and distributing resources

Why are markets so prevalent?


Resources are allocated via the free match of Offer and Demand.

- Offering agents (producers) use their enterprenurial and business skills.

- Demanding agents (consumers) act following their preferences.


Markets increase social welfare: Consumer and producer surpluses are maximized


Markets have many advantages :

-In terms of participants’ incentives.

-Due to natural selection.

-From an efficiency perspective.


Market Efficiency:

i. Productive ii. Allocative iii. Dynamic


At the same time, freedom of enterprise is also almost universally recognized as a right of individuals: right to freely initiate and pursue any economic activity.

Market system (market economy-capitalism)

What should be the attitude of Governments towards business activities and markets?


What is the attitude of Governments towards business activities and markets?

- RECOGNITION - REGULATION - MONITORING


A Social Market System?  Social character of many modern States may strongly condition how markets work or function. Generally it introduces certain rules to avoid wild competition among firms, that may harm social welfare.

 It seems relevant, nevertheless, that socially-inspired government direct interventions in markets are avoided, as they may distort market functioning without achieving the pretended social goals.

  Indeed, there exist alternative devices to redistribute wealth and achieve social objectives in a more effective and efficient manner.


2.1. Goals and Objectives. 2.2. Institutions.



Agenda

-Competition Policy is a branch of economic policy.

- Broadly, competition policy groups several tools (interventions, rules, procedures and organs) reflecting governments interaction or attitude towards markets (including liberalization, regulation…).

- It aims at ensuring that competition in the marketplace is not restricted in a way detrimental to society.

- Competition Law is the legal arm of Competition Policy.

1. Competition Law & Policy


From the business pespective it is an ADDITIONAL TOOL, which may be really powerful, as it may force to change strategies, production, sale, marketing and advertising

decisions, and always conditioning business activities As a SHIELD v. gr.1, alleging the anticompetitive character and voidness of an agreement when performance of an agreed contract is claimed.

v.gr.2, alllenging that a rival’s decision or conduct is unlawful and should be sanctioned or compensation could be claimed (because it has abused of its dominant position in market.

As a WEAPON [even, strategic se to get what market competition by itself does not provide]


Competition rules govern the way firms compete in markets, prohibiting some business strategies and decisions.

Every Member State of the EU has domestic competition law rules, and there are also competition rules at the EU level.

Apart from the common existence of rules, they may vary on their nature/content although they are regularly of punitive nature, they may be of administrative or criminal nature, and the organs in charge of enforcing them may be different.



WHY IS IT NECESSARY TO REGULATE/CONTROL COMPETITION IN MARKETS?

Rectius are competition rules really needed?


Market as an system of efficient allocation and distribution of resources

And that, at the end, benefits consumers

But market is not perfect, it may fail


…..or someone may make if fail…. Market failures

Intervention of public powers

Endogenous Exogenous

•  Public Goods •  Externalities •  Natural monopolies

•  Provoked by conduct or decisions of market agents


…..or someone may make if fail…. Market failures

Endogenous Exogenous

•  Public Goods •  Externalities •  Natural monopolies

•  Provoked by conduct or decisions of market agents

Regulation Competition Law


Competition Law represents public powers intervention directed at preventing/correcting exogenous market

failures

Goal: Achieve the solution more economic to which the market

would have lead without failures, without preempting market functioning

COMPETITION LAW TOOLS

(a) Structural rules: Merger Control/Review. (b) Behavioural rules: Proscribing business conducts that restrict competition or abuse of dominant position. (c) Rules addressed to State: Vary in their scope and content, may limit public interventions in markets that distort competition (state aid and other state restricting actions).


Exception

Restrictive agreements

Abuse of dominant position

Mergers & Acquisitions State aid

NOT NOT YES NOT

Possible NOT They may be blocked or conditioned Possible

General rule

Competition Law tools: 1. Competition Law & Policy


2.1. Goals and Objectives. 2.2. Institutions and Rules.



Agenda

2.1. Goals and Objectives. - Level playing field (fairness). - The primary objective is to help economic progress and welfare of EU citizens. Free undistorted market competition is a means to that end. - Additionally, economic integration is relevant: elimination of national discrimination. EU rules apply whenever “trade among member states is affected”, otherwise domestic rules.

2. General Framework and Institutions of Competition Law.

2.1. Goals and Objectives (cont).

- ECONOMIC WELFARE (Total surplus)

Size of pie, not slice distribution, including dynamic aspects (future welfare) Other objectives should be kept aside, but occasionally they have been taken into account: promote market integration, defence of medium/small firms, fairness & equity, fight inflation, protect economic freedom, trade & industrial ends.

2. General Framework and Institutions of Competition Law.

2.2. Institutions and Rules.

- EU institutions: Commission, judicial oversight by CFI/ECJ

- Member State administrative agencies and national courts

- European Competition Network

EU Competition Law can be applied simultaneously to National Competition Law, but the principle of supremacy of the former stands (double barrier)

2. General Framework and Institutions of Competition Law





Agenda

3.1. Scope and Exemptions.

- Prohibitions are addressed to all economic agents. - And to conducts that may have an effect within EU. - However some sectors are partially exempted (agriculture, insurance, transport, etc.)

3. Overview of General Rules

3.2. Prohibitions of Unilateral and Multilateral Conducts.

Unilateral: Single-firm.

Multilateral: more than one firm, through formal agreements, collusion (understanding) or even parallel conscious behaviour. Vertical/Horizontal.

M&A, joint-ventures if lead to concentration are analyzed through Merger Review Procedure.

3.Overview of General Rules

3.2. Prohibitions of Multilateral Conducts (article 81.1 EC). GENERAL PROHIBITION

The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.


agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which

have as their object or effect the prevention, restriction or distortion of competition within the common market


3.2. Prohibitions of Multilateral Conducts (article 81.2&3 EC). CONSEQUENCE

2. Any agreements or decisions prohibited pursuant to this article shall be automatically void.

EXCEPTION 3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of:any agreement or category of agreements between undertakings, any decision or category of decisions by associations of undertakings, any concerted practice or category of concerted practices,which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.


3.2. Prohibitions of Unilateral Conducts (article 82 EC).

(1) Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States.

(2) Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.


3.2. Prohibitions of Unilateral and Multilateral Conducts.

Compare with their ancestors: Sherman Antitrust Act (Sherman Act, July 2, 1890, ch. 647, 26 Stat. 209, 15 U.S.C. § 1–7)

Section 1: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal". Section 2: "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony”


3.3. Merger Review (Regulation 139/2004)

- Premerger mandatory notification (ex ante control).

- Subsisting Member States’ domestic MRs (some ex post, some voluntary). Previous case allocation according to several thresholds.

- European Commission uses “significant impediment to effective competition”-test and may block or condition transactions that lead foreseeable may lead to that outcome (rarely occurs, most of transactions approved easily).


3.4. Anticompetitive actions by State.

Most problematic area of Competition Law, specially state aid, which is prohibited unless there is an exception (de minimis, R&D, poor regions, etc.)

Aside state aid,other public restraints to competition are more difficult to fight with current EU tools (there is only the broad and general commitmment of Member States not to adopt measures that go against the objectives of the EU….)


Página 41

Can the State initiate economic or business activities?

Up to each Member State governing Constitution and Laws, generally yes, although with several constraints and conditions. Article 128..Spanish Constitution Se reconoce la iniciativa pública en la actividad económica. Mediante Ley se podrá reservar al sector público recursos o servicios esenciales, especialmente en caso de monopolio y asimismo acordar la intervención de empresas cuando así lo exigiere el interés general.

In general terms, the exercise of freedom of enterprise by the State has to be in equal foot with private firms and in competitive contitions, although analysis gets blurred when it is used as an instrument to render public services of general interest (see article 86, EC).


Página 42

You have a successful business in the fitness industry in a small town in the Spanish coast with 12.000 inhabitants (Almazora), your star-product are aerobic lessons that you offer to your customers in several convenient schedules with multiple groups of class and….you’re making lots of money….

How to react to the decision by the mayor of Almazora of creating a municipal company to start offering the same

service at very low prices or even for free?


Página 43

Indeed, to promote economic activity or to further certain social goals still several EU Member States currently develop business activities.

Eventually there are few cases of cases in which business initiative responds to the impossibility or inexistence of private providers of the good/service. However, EU Member States legal systems acknowledge such poissibility and the existence of legal monopolies by state firms (see again, art. 86 CE).






Agenda

4. Competition Law and Regulation.

Trying to correct or aminorate the effects of endogenous market failures, regulation is aimed generally at (one or more of the following goals):

  Introduce a market where there is none (liberalization).

  Introduce some competition in a market that due to its features is not and cannot be competitive.

  Guarantee the rending of certain services which are considered specially relevant according to public general interest (“public services”).


The regulatory process: institutional devices The law introduces an institutional system (with competent authorities or specialized independent agencies), detailing those institutions’ powers (regulatory, investigation, sanctioning), setting the goals they have to pursue in their actions.

Generally, it looks at guaranteeing the rendering of services considered of general interest in certain quality/security conditions and at reasonable prices, whenever possible it is aimed at introducting competition.


Regulation material tools (economic, technical, access):  Price control: to avoind the imposition of predatory or excesive prices.  Quality control: service levels required, compatibility, security, requiring universal rendering or imposing maximum production limits.  Access control: to manage a scarce resource, ordering its use.


“[R]egulation and competition are rhetorical friends and deadly enemies: over the doorway of every regulatory agency…should be carved: Competition not admitted” George Stigler, Citizens and the State: Essays on Regulation, U. Chicago Press, Chicago: 1975, pág. 183

Nowadays, necessary coordination, multiple institutional design structures, although frictions cannot be excluded.





Agenda

5. Competition Law and IP.

- IP and Patents may lead to competition problems due to the exclusive nature of property rigths (monopoly).

- Innovation is promoted through the existence and recognition of IP and patents. Problems:

- Duration - Licences

IP and Patents are not considered anticompetitive by themselves and general analytical tools of competition law can be applied, special attention should be paid to dynamic effects of decisions.


7. Competition promotion & advocacy

Agenda

Decentralization in enforcement of EU Law (Regulation 1/2003)

More economic approach: self-assessment.

Goals pursued relevant: Deterrence value/ Compensation?

Legal and cultural tradition, costs and benefits. Institutional constraints (rules, procedures, professions) condition sytem design.

Choice of public/private enforcement?

6. Enforcement & Procedures

Theoretically both public and private enforcement are available in the EU (and in most Member States domestic laws) but in practice public enforcement is prevalent.

In recent years, public enforcement has increased notably in terms of cases and fines (either through ex parte or ex officio proceedings)

Frequently, whenever it exists, in Europe private Enforcement consists in many cases only on follow-on actions.

6. Enforcement & procedures.

6. Enforcement & Procedures.

- Only fines possible following to EU law. - Criminal sanctions available in some Member States (prison, disqualification). - Amount of fines? - Fines may lack deterrent force? - New enforcement tools: leniency and settlement. Save resources. Increase detection and conviction rates.

6. Enforcement & Procedures.

Increasing level of fines, mainly due to success of leniency programs…


7. Competition promotion & advocacy

Agenda

7. Competition Advocacy and Promotion.

- Horizontal, soft approach… - Cooperative/persuasive.

-Promotion: spreading the “competition culture” -Advocacy: specially regarding restraints or distortions framed or covered by legal rules. Influence policy-making.

Documents

Introduction to Transnational Competition La · 1/10/2010 · concerted practices which may affect trade between Member States and which have as their object or effect the prevention,