Expertise of July 1, 2000 Topic: Reform of European Anti

Expertise of July 1, 2000 Topic: Reform of European Anti-Trust Policy Meeting in a number of sessions, the last on July 1, 2000, the Federal Ministry of Economics and Technology’s Economic Advisory Council addressed the topic of the Reform of European Anti-Trust Policy and subsequently adopted the following position. In earlier analyses of German and European competition policy, the Advisory Council outlined the economic and legal reasons why, within a market economy, there must be a fundamental and effective prohibition of cartels. In connection with the establishment of the Economic and Mone- tary Union, the Member States, in the Maastricht Treaty, for the first time established as a legal tenet that the Community was committed to upholding a system of open markets based on free competition (further details in: Advisory Council paper of August 1994 entitled “Ordnungspoli- tische Orientierung für die Europäische Union”). Although the competition rules already in force remained unaffected by this step, it was stressed that the effective functioning of the instruments of monetary policy as set forth in the EC Treaty depended on the existence of competitive structures. The purpose of the system of undistorted competition, which was enacted into law by the EC Treaty and includes a prohibition of cartels under Art. 81 EC Treaty, was to guarantee these prerequisites. 1. The EC Commission has announced fundamental changes in the manner in which cartels would be assessed. Its White Paper of May 12, 1999 (Official Journal C 321) proposes a Regulation based on Art. 83 EC Treaty. This measure is aimed at changing the present rules by which the cartel prohibition in Art. 81(1) can be declared to be not applicable only through a special exemption procedure under Art. 81(3). Thus far, agreements for cooperation that seek to or have the impact of restricting competition are prohibited and null and void pursuant to Art. 81(2). If, by exception, such cooperation has a predominantly positive effect by helping to improve the production or distribution of goods or facilitates technical or economic progress, the prohibition may be declared non-applicable. This decision is taken as part of an administrative proceeding that requires the previous notification of the cooperation to the Commission. The . - 2 - interpretation of Art. 81 as a prohibition with legal exceptions is to take the place of this system. Accordingly, Art. 81 is to be applied in its entirety by the courts of the Member States. This direct applicability, which previously covered only the prohibition in Art. 81(1), is in future to be linked with Art. 81(3). This means that courts may apply the prohibition in Art. 81(1) only if they simultaneously determine that the conditions for an exemption are not present. This change in the exemption procedure basically means that cartels will be able to be executed without prior review by the authorities. The April 27, 2000 draft of guidelines governing the application of Art. 81 EC Treaty to agreements for horizontal cooperation (Official Journal C 118/3) announces an interpretation of the prohibition of competition-restricting cooperation under Art.81 (1) that departs from the previous practice followed by the Commission and the European Court. The basis for the assessment of competition-restricting cooperation is no longer to be the contractual or agreed restriction of the competitive freedom of action but a review of the overall situation from an economic perspective in terms of the market structures resulting from the cooperation. In the following, the Advisory Council outlines its position on some of the fundamental issues at stake, without, however, reviewing the Commission’s overall competition policy. In particular, the manner in which the legal-exception system works will be examined and compared with the notification-and-exemption system it is to replace, the goal being to determine if the new system can guarantee effective enactment of the prohibition of cartels, and if it conforms to the EC Treaty. 2. Under present statutes, the prohibitions of cartels under Art. 81(1) and of abuses by companies with commanding positions on the market Art. 82 are administered by the Commis- sion and, in some Member States, also by national competition authorities. The courts in the Member States are in particular authorized and obliged to heed the invalidity of cartel agreements that derives from Art. 81. However, the Commission has the exclusive power under Art. 81(3) to declare the non-applicability of the cartel prohibition. An exemption may be ob- tained only for such cooperation agreements as are notified to the EC Commission (Art. 9(1) of Regulation Nr. 17). The Commission seeks to change this centralized exemption system since it places excessive burdens on the administration in an enlarged Community and impedes the prosecution of serious . - 3 - competitive violations. For this reason, the application of the competition rules at national level was to be fostered. To this end, the reporting and exemption system was to be abolished. In a Council Regulation, Art. 81(3) was to be declared as directly applicable. In this manner, the Commission, national agencies, and courts would be in a position to apply Art. 81 in its entirety. There would no longer be a separation of mechanisms for prohibition and exemption. A special procedure for the exemption of competition-restricting agreements would no longer be necessary in this system of statutory exceptions. The Advisory Council is in agreement with the Commission that the decentralized application of competition rules by national competition authorities and courts should be fostered. The proposal to abolish the exemption procedures and to have national courts decide on the application of Art. 81 in it entirety, however, is not the right way to reach this goal. 3. The Commission compares the previous exemption procedure with the supposedly more effective system of legal exceptions. According to the latter, companies would be “able to obtain immediate execution of their contracts before national courts, with effect from the date of their conclusion,” provided that the conditions of Article 81(3) are met (White Paper, Number 78). Damaged third parties could sue for damages and claim non-performance. But here the impacts of the system of legal exceptions are, to some extent, incorrectly described. Correct is that all competition-restricting agreements may be executed by the companies from the very outset. But it is neither necessary nor possible to obtain the “immediate” authorization from national courts to execute the cooperation. Rather, whether the participating companies execute the cooperation remains a matter for them to decide on their own. A court review is undertaken only if the agreement’s validity is challenged by one of the involved companies or by a third party. All cooperation agreements may be executed, regardless of potentially damaging impacts, until a negative judgment is pronounced. Under these circumstances, the efficacy of the prohibition in conjunction with the possibility of a legal exception is highly dependent on whether the possibility that a court later finds that the cooperation has violated the law suffices as a deterrent. Only under this condition does the cartel prohibition retain any efficacy in practice. 4. In terms of its application by national courts, the prohibition does not have a deterrent effect. The application of the cartel prohibition and the granting of an exemption are primarily the task of agencies since potentially damaged third-parties, for economic reasons, are often . - 4 - neither willing nor in the position of pressing legal claims for compensation of damages or suing for non-performance of contracts. Even though willing to defend their own interests against the cartel, potential plaintiffs must be willing to bear the especially high costs of legal action. If the conditions stipulated under Art. 81(3) have not been fulfilled, the prohibition nullifies the cooperation agreement from its very start pursuant to Art. 81(2). This constitutes a risk for the cartel members only if the violation under national law is sufficient to entitle potentially damaged parties to sue for compensation or non-performance and only if such legal action can real- istically be anticipated. In this regard, there are considerable differences in the private law statutes of the individual Member States. Assuming that a violation of Art. 81 can justify claims to compensate for damages owing to prohibited acts or unfair competition (as is possible in certain cases under German law), the prospects of success for potential litigants are still slight. The Commission stresses that in a system of legal exceptions there is no presumption of a violation of Art. 81 (White Paper, Margin Number 78). The plaintiff bears the burden of proving that the provisions of the cartel prohibition have been violated and that the conditions for an exemption have not been met. The circumstances that might justify an exemption are contributions to economic or technical progress and rationalization gains. These, by nature, can only be known to the companies involved in the cartel activities. There are indications that, in departure from the White Paper, the planned Regulation will assign to the companies engaging in cooperation under Art. 81(3) the burden of proving that the cooperation does not violate the law. Even under such an arrangement, it would be extremely difficult for damaged third parties to undermine the credibility of evidence offered in the framework of a civil law suit. The risk of the litigation being very costly is also correspondingly high. Nor do the members of the cartel have to particularly fear the improbable success of a law suit. At the worst, they would have to pay compensation for damages that are difficult to prove.

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