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Vertical Agreements Under EU Competition Law: Proposals for Pushing Article 101 Analysis, and the Modernization Process, to a Logical Conclusion

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Vertical Agreements Under EU Competition Law: Proposals for Pushing Article 101 Analysis, and the Modernization Process, to a Logical Conclusion The Dickson Poon School of Law Somerset House East Wing Strand, London, WC2R 2LS Vertical Agreements Under EU Competition Law: Proposals for Pushing Article 101 Analysis, and the Modernization Process, to a Logical Conclusion Miguel De la Mano and Alison Jones King’s College London Dickson Poon School of Law Legal Studies Research Paper Series: Paper No. 2017-23 TLI Think! A Dickson Poon Transnational Law Institute, King’s College London Research Paper Series Vertical Agreements under EU Competition Law: Proposals for Pushing Article 101 Analysis, and the Modernization Process, to a Logical Conclusion Miguel de la Mano and Alison Jones Working Paper; D Healey and M Jacbos (eds), Handbook of Research Methods of Competition Law (Edward Elgar, Forthcoming) TLI Think! Paper 59/2017 Editor: Peer Zumbansen, Director TLI / Managing Editor: Dayan Farias Picon The Dickson Poon School of Law, King’s College London W: http://www.kcl.ac.uk/law/tli E: [email protected] This paper can be downloaded without charge at https://ssrn.com/abstract=2930943 Abstract: This paper examines how vertical agreements are analysed under Article 101 of the Treaty on the Functioning of the European Union. It observes that, in spite of modernization and the Commission’s promise to adopt a more ‘effects-based’ approach towards vertical agreements, Article 101 analysis has not evolved as might have been anticipated. Rather, it argues that the legal system still fails adequately to reflect, and is out of kilter with, the economic logic of vertical restraints. Not only does it continue to rely heavily on broad presumptions of illegality which are not justified by economic theory or experience (creating a risk of Type I errors), but the dearth of decided cases has meant that a transparent structure for analysing and balancing the competitive harms and benefits of vertical arrangements (especially new online distribution practices) has not developed. This uncertainty has been compounded by the disparities in approach to enforcement emerging at the national level. The paper considers how best to align EU law with mainstream economic thinking and proposes an approach which focuses more closely on the concepts underpinning the rules than the historic categories of analysis that have, to date, been relied upon. It also suggests how these changes might be effected and an administrable system governing vertical restraints put in place. It argues that, in order to achieve this change, the Commission should publish some carefully selected decisions in relation to vertical agreements, especially more complex effects cases. Such decisions will provide the opportunity for scrutiny of the Commission’s policy by the EU courts and ensure that the law in this important area is elucidated, particularly as distribution practices adapt to the challenges presented by the online environment and growth of e-commerce. These decisions, along with the information gathered in the course of the Commission’s e-commerce sector inquiry, may provide the crucial foundations for a necessary review and revision of the current regime and guidelines governing vertical agreements in the EU. Keywords: Vertical Agreements, Hardcore Restraints, Antitrust Analysis Institutional affiliation: Alison Jones Professor of Law King's College London – The Dickson Poon School of Law Somerset House East Wing Strand London, WC2R 2LS United Kingdom Email: [email protected] Miguel de la Mano Compass Lexecon Executive Vice President 23 Square de Meeus Bruxelles, 1000 Belgium Email: [email protected] 1 Vertical Agreements under EU Competition Law: Proposals for Pushing Article 101 Analysis, and the Modernization Process, to a Logical Conclusion Miguel de la Mano and Alison Jones* TABLE OF CONTENTS 1.# Introduction#......................................................................................................................#2# 2.# Modernization:#Evolution#in#Article#101#Analysis#..............................................................#3# A.# The#Initial#Approach#and#Modernization#.......................................................................#3# B.## The#Modernized#Regime#..............................................................................................#4# i.## Background#and#components#of#the#modernized#system#.........................................#4# ii.# A#Category#of#Vertical#Restraints#is#Presumed#to#be#Incompatible#with#Article#101#.#6# iii.# Other#Agreements:#Safe#Harbour#and#Individual#Analysis#........................................#9# iv.# What#Policy#Drives#the#Current#Approach?#............................................................#11# 3.# Problems#Stemming#from#the#Current#Framework#.........................................................#12# A.#Overview#........................................................................................................................#12# B.#The#Economic#Logic#of#Vertical#Restraints#......................................................................#13# i.# Aligning#supplier#and#dealer#incentives#....................................................................#13# ii.## Even#‘object/hard#core’#restraints#have#procompetitive#potential#.........................#17# iii.# Theories#of#harm#.....................................................................................................#18# C.## A#Continued#Risk#of#Errors#and#Lack#of#Clarity#as#to#How#Full#Article#101#Analysis#is#to# be#Conducted?#...................................................................................................................#21# i.## Overinclusive#Rules#in#the#EU?#.................................................................................#21# ii.# Lack#of#guidance#on#individual#analysis#...................................................................#24# 4.# Some#Proposals#for#Change:#An#Evolution#in#Article#101#Appraisal#................................#25# A.#The#Need#to#Develop#a#More#Flexible#and#Nuanced#Framework#for#Vertical#Agreements #............................................................................................................................................#25# B.#Refining#the#Object#Category#.........................................................................................#26# i.# Is#refinement#really#required?#..................................................................................#26# ii.# Identifying#Object#Restrictions#–#the#importance#of#the#characterization#process#.#27# C.# #A#Clearer#Framework#for#Effects#Analysis#...................................................................#30# i.# Developing#the#legal#framework#...............................................................................#30# ii.# Assessing#and#balancing#anti`#and#procompetitive#effects#......................................#31# 5.# Conclusions#.....................................................................................................................#33# * Miguel de la Mano is an Executive Vice President at Compass Lexecon. Alison Jones is a Professor of Law at King’s College London. The authors would like to thank Albertina Albors-Llorens, Andy Gavil, Joanna Goyder, Morten Hviid, William Kovacic, Danny Sokol, Deirdre Trapp and the participants of a seminar at CCP, UEA for their helpful comments on an earlier draft of this paper. Please send any further comments to [email protected] and [email protected]. 1 Electronic copy available at: https://ssrn.com/abstract=2930943 1. INTRODUCTION The analysis of vertical agreements under Article 101 of the Treaty on the Functioning of the European Union (TFEU) has been controversial since Article 101’s first enforcement. The problems created by the European Commission’s (the Commission’s) initial tendency to interpret the concept of a restriction of competition set out in Article 101(1) broadly, and to rely on Article 101(3), the legal exception to Article 101(1),1 as the main vehicle for authorising vertical agreements, are well-known. The resultant difficulties eventually led the Commission to recognise that modernization of the system was required. Although the case-law of the Court of Justice (CJ) (the Court of Justice of the European Union is comprised of the CJ and the General Court (GC)) always displayed a more nuanced approach to that initially adopted by the Commission, and Commission policy towards vertical agreements has advanced considerably since modernization, this paper sets out the view that real difficulties still persist. Further, as the Commission (following the launch of its e-commerce sector inquiry2) and a number of national competition authorities (NCAs) are now taking a renewed interest in vertical practices, especially in relation to online markets and online selling, it is important that these problems be resolved. The paper commences in Section 2 by introducing the past difficulties that resulted from the initial appraisal of vertical agreements and by describing how the modernization proposals sought to resolve them. It observes that in spite of the Commission’s promise of a more ‘effects-based’ approach, antitrust analysis has not evolved in the way anticipated. Rather, in Section 3 it is argued that, in spite of the reform, the current legal framework still fails adequately to reflect the economic logic of vertical restraints. First, it continues to rely too heavily on broad presumptions of illegality which are not justified by economic theory, evidence or experience. This creates a
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