How to Stay out of Antitrust Trouble in Europe (and Deal with Competitors Who Break the Rules)

Chris Bercaw | Brussels October, 2002

1. Serious Antitrust (Competition) Law Violations in Europe

The following activities are strictly prohibited under Article 81 of the European Community Treaty:

− Price Fixing: agreements to suppress price competition, such as agreements to charge the same price or offer the same discounts, margins or credit terms, or set recommended or minimum prices

− Market Sharing: Refers to division of markets between competitors, often involving an agreement not to approach each other’s customers or to those in a particular area. At its most flagrant, can involve a secret allocation of territories or lists of customers among the competitors

− Output limitations: limiting the volume of products or services that can be sold within a specified market.

− Tying: Making the conclusion of an agreement subject to the purchase of unrelated goods or services.

Violations of these rules can result in heavy fines, injunctions, private lawsuits and bad publicity.

The Commission conducts “dawn raids” (surprise inspections) at the premises of companies suspected of violating European competition law. Documents given to in-house counsel are not protected by attorney-client privilege.

2. Membership in a Cartel

Cartels are generally recognized as the most serious form of anti-competitive behavior. In recent years, the European Commission has significantly increased the resources devoted to detecting and punishing cartel behavior.

In 2001 alone the fines imposed exceeded €1.8 billion--more than the total fines imposed by the Commission in the whole of the preceding period, from the establishment of the European Community to the year 2000. The following are the 10 largest fines imposed by the Commission:

Year Case Total fines (EUR) 2001 Vitamins 855 million 2001 Carbonless Paper 314 million 2001 Graphite Electrodes 219 million 2001 Citric Acid 135 million 2001 Charges/German Banks 108 million 2000 Amino Acids 110 million 1999 Seamless Steel Tubes 99 million 1998 TACA 273 million 1994 Cartonboard 119 million 1994 Cement 109 million

The year 2001 also saw the heaviest fines yet imposed on individual companies: Hoffman La Roche was fined €462 million for its role in eight vitamin cartels, and Arjo Wiggins Appleton was fined €184 million in the carbonless paper case, which was the heaviest fine ever imposed for a single infringement.

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Cartels can include trade associations, especially where they involve:

− discussions of prices (including discounts or credit terms) or the allocation of customers or markets;

− exchanges of commercially sensitive information (e.g., exact volume of sales or market shares); or

− discriminatory membership rules.

Private parties can request an investigation by the Commission or bring private lawsuits before national courts

Companies under investigation have an incentive to divulge incriminating evidence about other cartel members in exchange for leniency from the Commission.

3. Abuse of a Dominant Position

EC Competition Law prohibits the abuse of a dominant market position within the EU if it affects trade between Member States in the EU (e.g., division of markets and tying contracts). Dominance is presumed if market share is above 50%

Parties can apply for “negative clearance” from the Commission for potentially offending acts

The Commission may impose fines for abuse of dominant position, such as in the following cases:

− In June 2001, Michelin was fined approximately EUR 20 million by the Commission for abusing its dominant position in replacement tires by granting loyalty rebates to its dealers.

− United Brands was fined for price discrimination (predatory pricing) based on the national location of the buyer; United Brands sold bananas to customers from various Member States at widely varying prices, although unloading costs in the EU were similar.

− Hugin, a manufacturer of cash registers which sold spare parts in the U.K. through a distributor; was fined for abusing a dominant position by refusing to continue to supply is UK distributor when it decided to sell directly to customers.

− In the Magill case, television channels were fined for abuse of dominant position for refusing to grant licenses to third parties to reproduce their copyrighted television programming schedules in a TV programming guide for which there was consumer demand.

− Hilti, a manufacture of nail guns, was fined for illegally tying products when it refused to supply customers with nail guns unless they also purchased its brand of nails as well.

4. Mergers and Acquisitions

EC Merger Control: mergers and acquisitions that result in a “concentration” and have a “community dimension” require prior clearance from the European Commission.

− Whether a “concentration” exists is subject to complex rules, but essentially involves a decrease in competition in the relevant market for products or services

− A “community dimension” will exists if the size of the transaction meets certain thresholds and has an effect on more than one Member State of the European Union

If EU Merger Control rules do not apply to a transaction, national merger control regulations might impose notice or clearance obligations on the parties to a merger or acquisition.

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Affected parties can challenge mergers (e.g., various competitors opposed the GE-Honeywell merger and convinced the Commission to deny clearance).

5. Joint Ventures

A joint venture is subject to merger control rules (see above) if it results in a market concentration in the EU.

6. Supply and Distribution Agreements

So-called “vertical agreements” are subject to special European competition rules

− a Commission Regulation creates a “block exemption” for agreements that meet certain requirements

− agreements that restrict competition (e.g., by granting exclusivity to a market) and fall outside the Regulation are illegal unless cleared by the Commission

Certain clauses are prohibited in such agreements, including:

− resale price maintenance

− prohibition on unsolicited (“passive”) sales outside of an allocated territory

− covenants not to compete: limited to five years during agreement; none after termination

− restrictions concerning sales of spare parts

If either party to the agreement has a market share exceeding 30%, the block exemption does not apply and the agreement must be cleared by the Commission

7. License Agreements

Exclusive patent and know-how licenses may not include the following terms:

− exclusivity period exceeding the life of the patent or 10 years for know-how

− prohibition of unsolicited sales outside of exclusive territory for a period longer than 5 or 10 years

− price restrictions on licensed product

− non-competition covenants

− output restrictions (except in certain limited circumstances)

− mandatory grant-back of improvements

Exclusive licenses falling outside the Commission’s regulation on the subject are illegal unless cleared by the Commission.

Rules are unclear for copyright and trademark licenses, and for multiparty licenses.

The European Commission will propose new licensing rules in 2003.

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8. Research and Development (R&D) Agreements

The Commission adopted a “block exemption” for joint R&D efforts that meet certain criteria. Certain agreements are absolutely prohibited, including:

− limited on R&D with third parties after completion of the project

− no-challenge of IPRs

− output restrictions or price fixing

− non-compete covenants beyond 7 years

− prohibition of passive sales outside designated territories

− prohibition of licenses to third parties

9. Use of Trademark Rights against Parallel Importers

In Europe, the use of trademarks rights to prevent parallel imports may infringe Articles 28 and 30 of the European Community Treaty.

− Once a trademarked product has been put on the market in any EU Member State by the trademark owner or with the owner’s consent, the trademark owner cannot use the trademark to oppose importation of genuine goods from one Member State to another, even if another party has an exclusive license to use the trademark in the Member State

− A parallel importer’s use of the trademark to advertise the goods in another Member State cannot be prohibited unless there may be serious damage to the reputation of the trademark

− A parallel importer may even repackage goods and re-apply the trademark, if this is necessary to sell the goods in another Member State, so long as the repackaging has no adverse effect on the original condition of a product and certain other conditions are met.

− The use of different trademarks in different Member States for the same product may be infringe European law if it can be shown that the trademark owner has used such a strategy to prevent parallel imports.

10. Government Subsidies (State Aid)

Subsidies granted by the government of an EU Member State are prohibited if the aid causes a distortion of competition by favoring certain companies or goods, and this affects trade between EU Member States

Unless subject to an exemption, the subsidy must be cleared by the European Commission. Failure to notify a prohibited subsidy can result in mandatory reimbursement

11. Using EU Competition Law as a Weapon against Unfair Practices

A party adversely affected by anti-competitive practices such as those described above can request an investigation by the European Commission, ask a national court or arbitrator to nullify the offending agreement or bring a lawsuit seeking damages for harm caused by the anti-competitive practices.

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Attorneys in the Brussels office frequently defend clients against actions by the European Commission and occasionally assist clients in bringing such claims.

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