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. Under private law as practiced on the European continent, and unlike the legal system in the United States in the case of anti trust violations (treble damages), damage awards do not have a penal character. And we must remember that the public interest in effective competition cannot be fully upheld by successful suits for damage recovery. The successful plaintiff is to be put in a position equivalent to what his property would have amounted to if the law had not been violated. But it is impossi- ble retroactively to eliminate the distorted signals, which are sent by competitive restrictions emanating from the market conditions that the cartel shapes and which are the points of orienta-

. . . - 5 - tion for the conduct of third parties. This alone is an important reason to examine cartels before they are implemented to determine whether they meet the requirements for an exemption.

4. The Commission’s draft of guidelines for the application of Art. 81 to agreements on horizontal cooperation sets forth new principles for the interpretation of circumstances requiring a prohibition under Art. 81(1). The guidelines are designated as an analytical framework for the assessment of the other forms of horizontal cooperation. This assessment should include the economic environment of the cooperation agreement. In the words of the guideline,

“Economic criteria such as the market power of the parties and other factors relating to the market structure form a key element of the assessment of the market impact likely to be caused by a co-operation and therefore for the assessment under Article 81.” (Number 7).

In determining whether an agreement violates Art. 81(1), the assessment has thus far focused on the contractual or real restriction of the involved companies in terms of their freedom to act in the competitive environment. If cooperation is of such a nature that a tangible impact on the market and on foreign trade may be anticipated, then it violates Art. 81(1). The same applies if competitors, in their relationship to one another, eliminate the uncertainty about their competitive reactions and if competition is thereby restricted. The Commission suggests that this empha- sis be replaced by examining the position of the contractual partners in the markets affected by the cooperation so as to determine whether the agreement enables the contract partners to main- tain, gain, or increase market power, i.e. whether they “have the ability to cause negative market effects as to prices, output, innovation, or the variety or quality of goods and services.” For this purpose, the relevant markets would have to be defined (Number 27). In terms of its basis in a merger control system oriented to the market structure and in terms of the conduct to be covered, the cartel prohibition is moved within proximity of the abuse prohibition for companies with commanding market positions in Art. 82. Additional difficulties are thus placed in the way of obtaining legal redress under private law in the case of violations of Art. 81. To substantiate claims, a party that incurs damages as the result of a cartel must – similar to the situation under Art. 81(3) - outline and prove facts although that party has no access to information on them and although they cannot be determined under legal procedure for civil suits. At the same time, the criteria in terms of substantive law, which apply for the government’s legal prosecution of anti- trust violations, would thus be transformed.

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6. The administrative factors arguing against a system of notification and exemption of the exceptional cartels with a positive impact are not suited to justify its abolition.

a) The existing system has considerable positive impacts. These cannot be overlooked, not least of all owing to experience with the similar German system. The involved companies are compelled, when making such agreements, to take account of the fact that the cooperation agreements will be reviewed by an independent government agency to determine if they meet the requirements for an exemption. The necessary notification helps ensure a realistic assessment of planned competition restraints by the involved companies. Within the exemption proceedings, the cartel authorities receive important information on the competitive conditions. Only exempted cartels are given legal certainty and are permitted to operate. It is not possible retroactively to offer arguments in support of non-notified cartels. They thus run the full risk of sanctions by the authorities and by court rulings under private law.

By contrast, in a system of legal exceptions even the “hard core” cartels, which the Commission seeks most of all to prosecute, are not prevented from trying to justify themselves by retroactively invoking the exemption criteria, which by their very nature open up a broad spectrum of assessment possibilities. They cannot be ruled out a priori even in the case of price collusion or a cartel that divides up the market among its members.

Unlike the system of legal exceptions, the exemption procedure facilitates the supervision of privileged competitive restrictions. In this connection, Art. 83(2)b points to the details of apply- ing Art. 81(3), which must be enacted by Regulation; in this context, account must be taken of the need for effective supervision, the administration of which should be as simple as possible. By their very nature, the courts, which in future will have exclusive responsibility, will not be able to exercise “administrative supervision.” Among the measures that are also important in practice and that serve to prevent the abuse of exemptions is the fact that the latter are temporary in nature. In a system of legal exceptions, in which the courts decide whether there is a violation of Art. 81 in its entirety or not, there are no possibilities to review exempted competition- restricting cooperation agreements to determine whether their justification is only temporary or ongoing. If Art. 83 seeks to address this possibility in detail, then this points to the need to distinguish the category of factors constituting grounds for a prohibition in Art. 81(1) from those that justify an exemption under Art. 81(3). In violation of the EC Treaty, this difference becomes meaningless in a system of legal exceptions. . . . - 7 -

b) The excessive work load cited by the Commission can be diminished by providing for the participation of the Member States’ competition authorities. Such a solution conforms to the Commission’s goal of decentralization. It avoids the drawbacks of the system of legal exceptions and it can be designed to conform with the coherency of exemption decisions that the Commis- sion must guarantee throughout the entire Common Market. The Commission must coordinate and supervise the decisions of the national competition authorities to ensure that they are all taken in line with the common competition policy. For this purpose, decisions to assign the local responsibility of the appropriate Member States’ cartel agencies must be taken in accordance with the focus of the planned competitive restriction. The Commission would have to be in- formed by the Member States’ anti trust agencies on all exemption decisions. It would also be given a right of objection; the exercise of which would give the Commission the possibility within a deadline of one month of transferring the procedure to itself for final decision. If the Commission refrains from taking action, the decision would remain with the Member States’ competition authorities. Their decisions should have the same Community-wide effect as those of the Commission. The details of the procedure are not the topic of this expertise. It should be stressed, however, that a decentralized exemption procedure could function with fewer rights of intervention being reserved to the Commission than those which the Commission finds necessary to enact the system of legal exceptions.

7. The planned Council Regulation that is to be based on Art. 83 EC Treaty, which is intended to introduce the direct application of Art. 81 in its entirety, does not conform to the Treaty.

The shaping of competition policy by Council Regulation pursuant to Art. 83 implements the principles defined in Art. 81 and 82. But Regulations do not have the power to alter the legal principles laid down by the Treaty. Among the substantive measures of the EC Treaty, upon which the Community legislator can have no influence, is that Treaty statutes are applicable immediately subsequent to judgments of the European Court.

The wording of the Treaty, in particular the wording of Art. 81 and the already cited Art. 83(2)b, would argue that the prohibition in Art. 81 applies as long as no decision has been taken in a separate proceeding by an administrative authority by independent decision or by group exception to the effect that the conditions outlined in Art. 81(3) have been met and that the prohibition . . . - 8 - may thus be found to be non-applicable. The immediate applicability of Art. 81(1) is derived pursuant to the court decisions of the European Court directly from the EC Treaty and not from the wording of Art. 1 Regulation 17 which confirms the character of the provision.

Moreover, Art. 83(2)b already shows that one of the obligations of the Community legislator is to lay down the details for exempting competition-restricting cooperation agreements and for ensuring their effective supervision. As already stressed, there is no room for such activity in a system of legal exceptions.

Furthermore, it follows from the decisions of the European Court that a Regulation is not suited to deprive the prohibition under Art. 81(1) of its direct applicability. But the prohibition under (1) is deprived of its direct applicability if a Regulation provides that Art. 81(1) may be applied only in conjunction with Art. 81(3). Another arrangement would apply only if Art. 81(3) were directly applicable. The decision of the European Court on whether a provision is directly applicable finds that such a provision is justiciable, i.e. by its very nature capable of being applied by the courts of the Member States. Although it has not given judgment applicable for the courts of the Member States, it has indeed decided for itself in terms of the justiciability of decisions on exemptions. The subject of this judgment are the Commission’s decisions to deny exemptions, which decisions were subsequently challenged by companies. In long-standing rulings, the Euro- pean Court has found that the application of Art. 81(3) presupposes a broad latitude of assessment since difficult issues connected with economic evaluation are at stake, to which court review has access only limited access. This judicial review therefore must restrict itself to determining if the procedural rules are observed, if sufficient reasons are given for the decisions and the matter at hand correctly described, and discretionary powers have not been obviously abused. The European Court is thus not willing to decide within the bounds of its own responsibility whether granting an exemption for a competition-restricting agreement is justified, particularly since in the case of such a decision not the interests of the involved companies are ultimately at stake but the public interest in competition and in the limits of permissible competitive restraints.

With the system of legal exceptions and the application of Art. 81 in its entirety, the courts in the Member States would thus be given a responsibility that the European Court has rejected for itself owing to the lack of justiciability. The planned Regulation would be incompatible with the direct applicability of Art. 81(1) and would therefore violate the EC Treaty. In terms of competi-

. . . - 9 - tion policy, the already cited decisions of the European Court confirm the reasons why the civil courts in the Member States would not be able to apply Art. 81 effectively in its entirety.

The Advisory Council recommends that the Federal Minister of Economics and Technology do everything possible to avoid the undesirable developments in lawmaking described above.

Should this not be possible and should a Regulation be passed of the sort proposed by the Com- mission, the Federal Government should consider bringing suit before the European Court with the goal of having the Regulation declared null and void. The powers of the Federal Republic of Germany to take legal action derive from Art. 230 EC Treaty.

Dresden, July 1, 2000

The Chairman of the Federal Ministry of Economics and Technology’s Economic Advisory Council

Prof. Dr. Wernhard Möschel

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Members of the Federal Ministry of Economics and Technology’s Economic Advisory Council

Dr. Wernhard Möschel (Chairman) Professor für Bürgerliches Recht, Handels- und Wirtschaftsrecht University of Tübingen

Dr. Charles B. Blankart (Vice Chairman) Professor für Wirtschaftswissenschaften Berlin Humboldt University

Dr. Dr. h.c. mult. Horst Albach Professor für Betriebswirtschaftslehre Berlin Humboldt University

Dr. Hermann Albeck Professor für Volkswirtschaftslehre University of Saarbrücken

Dr. Peter Bernholz Professor für Nationalökonomie, insbesondere Geld- und Außenwirtschaft University of Basel

Dr. Norbert Berthold Professor für Volkswirtschaftslehre Julius-Maximilian University of Würzburg

Dr. Dres. h. c. Knut Borchardt Professor für Wirtschaftsgeschichte und Volkswirtschaftslehre University of Munich

Dr. Axel Börsch-Supan Professor für Makroökonomie und Wirtschaftspolitik University of Mannheim

Prof. Dr. Friedrich Breyer Professor für Volkswirtschaftslehre University of Constance

Dr. Ernst Dürr Professor für Volkswirtschaftslehre University of Erlangen-Nuremberg

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Professor Dr. Christoph Engel Managing Director Max-Planck Project Group Bonn and Professor für Rechtswissenschaften University of Osnabrück

Dr. Wolfgang Franz Scientific Director Center for European Economic Research Mannheim Professor für Volkswirtschaftslehre University of Mannheim

Dr. Dr. h.c. Gérard Gäfgen Professor für Volkswirtschaftslehre University of Constance

Dr. Dr. h.c. mult. Herbert Giersch Professor für Nationalökonomie, insbesondere für Wirtschaftspolitik University of Kiel

Dr. Dres. h.c. Heinz Haller Professor für Finanzwissenschaft und Wirtschaftstheorie University of Zürich

Dr. Dr. h.c. Herbert Hax Professor für Betriebswirtschaftslehre University of Cologne

Dr. Martin Hellwig Professor für Volkswirtschaftslehre University of Mannheim

Dr. Dr. h.c. Helmut Hesse President of the Central Bank of the State of Bremen, in Lower Saxony, and Saxony-Anhalt Honorarprofessor für Volkswirtschaftslehre University of Göttingen

Dr. Dres. h.c. Norbert Kloten Former President of the Central Bank of the State of Baden-Württemberg Honorarprofessor für Volkswirtschaftslehre University of Tübingen

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Professor Dr. Günter Knieps Director of the Institute for Transport Sciences and Regional Policy; School of Economics Freiburg Albert-Ludwig University

Dr. Dr. h.c. mult. Wilhelm Krelle Professor für wirtschaftliche Staatswissenschaften University of Bonn

Dr. Dr. h.c. Ernst-Joachim Mestmäcker Professor, Former Director at the Max-Planck Institute for Foreign and International Private Law in Hamburg

Dr. Manfred Neumann Professor für Volkswirtschaftslehre University of Erlangen-Nuremberg

Dr. Manfred J.M. Neumann Professor für wirtschaftliche Staatswissenschaften, insbesondere Wirtschaftspolitik University of Bonn

Dr. Dr. h.c. mult. Helmut Schlesinger Former President of the Deutsche Bundesbank Honorarprofessor an der Hochschule für Verwaltungswissenschaften Speyer

Dr. Dr. h.c. Hans K. Schneider Professor für wirtschaftliche Staatswissenschaften University of Cologne.

Dr. Olaf Sievert President of the Central Bank of the State of Saxony and Thuringia, Leipzig Honorarprofessor University of Saarland

Dr. Hans-Werner Sinn President of the Ifo Institute Munich Professor für Nationalökonomie und Finanzwissenschaft University of Munich

Dr. Manfred E. Streit Professor, Managing Director Max-Planck Institute for Research on Economic Systems, Jena

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Dr. Roland Vaubel Professor für Volkswirtschaftslehre University of Mannheim

Dr. Christian Watrin Professor für wirtschaftliche Staatswissenschaften University of Cologne

Dr. Carl Christian von Weizsäcker Professor für Volkswirtschaftslehre University of Cologne

Dr. Eberhard Wille Professor für Volkswirtschaftslehre und Finanzwissenschaft University of Mannheim

Dr. Dr. h.c. mult. Hans F. Zacher Professor für öffentliches Recht University of Munich Former Scientific Member of the Max-Planck Institute for Foreign and International Social Law in Munich

Members on Leave

Professor Dr. Otmar Issing Member of the Board of Directors of the European Central Bank Frankfurt/Main

Professor Dr. Horst Siebert President of the Institut für Weltwirtschaft Professor für Theoretische Volkswirtschaftslehre University of Kiel