Supremacy of EU Law

General principle of EU Law

The European Court of Justice (ECJ) is relatively creative, as compared to English Courts, by using the purposive approach in ensuring the effectiveness of the EU Law. 

There are a number of general principles developed by the European Court of Justice, which are important and crucial to understand the application of EU Law in practice. 

In this post I will briefly discuss the principle of supremacy of EU Law. 

You can download EU Treaties here: https://europa.eu/european-union/law/treaties_en

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Supremacy

The doctrine of supremacy is one of the creations of ECJ. The Treaties do not expressly provide for the supremacy of EU law.

It answers the question of what happens in a situation of conflict between national law and EU law.

In Case 6/64 Costa v ENEL (1964), Italy has nationalised its electric power industries into one single entity ENEL in 1962. Costa, a shareholder in one of the companies, protested his loss of dividends by refusing to pay his electric bill. In his defence he argued that the nationalisation of the electricity industry violated the Treaty of Rome. The case was referred first to the Italian Constitutional Court, and then to the ECJ.  

The Italian Constitutional Court applied the principle of lex-posterior. The national law which nationalised the electricity industry, was enacted after the incorporation of the EEC Treaty, thus the Treaty of Rome which was incorporated into Italian in 1958 could not prevail over the electricity nationalisation law which was enacted in 1962.

The ECJ held that EEC Treaty is not a usual agreement between the Member States. It has created its own legal system which, on the entry into force of the Treaty, became an integral part of the legal systems of the Member States and which their courts are bound to apply. By entering into the EEC Treaty, Member States had limited their sovereign rights and that Community law ‘could not…be overridden by domestic legal provisions’.   

In Case 11/70 Internationale Handelsgesellschaft mbH v EVGF (1970), there was a conflict between EC Regulation and national constitution. The claimant argued that the Regulation infringed, inter alia, the principle of proportionality enshrined in the German constitution. The ECJ held that the Community law took precedence over fundamental rule in the German national constitution. The validity of EC measures cannot be challenged on grounds of national law rules or concepts.

In Case 106/77 Simmenthal SpA (No.2) (1978), Italy imposed a public health inspection fee for the meat crossing the frontier under an Italian law, which was conflicted with the EC Regulations. The ECJ held that the national court, even a lowly court of first instance, have a duty to set aside provisions of national law which are incompatible with EC law. There was no need to wait for the national law to be amended in line with national constitutional procedures. The national rule had to be set aside immediately if it conflicted with an EC law that is directly effective and applicable.

In Case C-118/00 Larsy v INASTI (2001), it was held the obligation to set aside conflicting national rules not only apply to national courts, even an administrative agency dealing with a national social insurance scheme was held to be required to do so.

In Case 167/73 Commission v France (French Shipping Crews) (1974), although a national law which conflicted with the EC law is rendered ‘inapplicable’, in the interests of legal certainty, the Member States still nevertheless has the duty to repeal the offending national rule.                                   

In Case C-213/89 Factortame (1990), the Spanish fishermen was claiming that the English Merchant Shipping Act 1988 was contrary to the EU law. The Merchant Shipping Act 1988 requires that a vessel can only be registered in the UK if the vessel is belongs by British citizen, the vessel is managed and its operation is directed and controlled from the UK and the shares must be belonged by UK citizen for at least 75%. There was a clear provision under the Crown Proceedings Act 1947, which states that no national court had the power to grant an injunction ‘against the Crown’. As such, the Court of Appeal held that they could not suspend the operation of an Act of Parliament and therefore they upheld the validity of Merchant Shipping Act 1988.

The ECJ disagreed with the Court of Appeal and stated that if the domestic law is conflicted the EU law, the court ought to set aside the domestic law. The European Court of Justice granted an interim injunction to the Spanish fishermen and set aside the Crown Proceedings Act 1947. As a result, the Merchant Shipping Act 1988 was held in abeyance.

The supremacy of Union law over national law is now stated in a Declaration attached to the Treaty of Lisbon. This reiterates the doctrine as stated by the Court as follows,

‘The Conference recalls that, in accordance with well settled case law of the Court of Justice of the European Union, the Treaties and the law adopted by the Union on the basis of the Treaties have primacy over the law of Member States, under the conditions laid down by the said case law.’

There is also attached the Opinion of the Council Legal Service of 22 June 2007 which states,

‘It results from the case-law of the Court of Justice that primacy of EC law is a cornerstone principle of Community law. According to the Court, this principle is inherent to the specific nature of the European Community. AT the time of the first judgment of this established case (Costa/ENEL) there was no mention of primacy in the treaty. It is still the case today. The fact that the principle of primacy will not be included in the future treaty shall not in any way change the existence of the principle and the existing case-law of the Court of Justice.’

Thus, it is clear that the supremacy of Union law is firmly established by the decisions of the Court of Justice and the deliberations of national courts.

Monist and dualist state

The way Union law applies in a domestic legal system depends, from a constitutional point of view, on whether the Member States is monist or dualist states.

In monist states, the constitution provides for international law to enter into domestic law without the need for further national measures of incorporation or transposition. International law can be directly applied by a national judge, and can be directly invoked by citizens, just as if it were national law. France is an example of a monist state.

In dualist states, such as the UK, international law does not become part of domestic law until it is incorporated by a domestic statute. So when the UK joined the EEC, the ECA 1972 had to be adopted to give effect to directly effective provisions of Community law within the UK. It has been amended, following the adoption of the SEA and all the subsequent treaties by the relevant European Communities (Union) (Amendment) Acts.

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Supremacy of Union law in the UK

The English judiciary has traditionally based its application of Union law on the rules laid down in the English statute, expressing the will of Parliament, rather than on any abstract notion of supremacy stemming from the Union Treaties. However, recent cases law suggested that UK has travelled the road from hostility to acceptance.

In Blackburn v Attorney General (1971), the English Court rejected the supremacy of Community Law. According to Lord Denning MR, Member States had not limited their sovereignty by joining the EC, and the Treaty was merely an ordinary international agreement. It was for the UK Parliament to decide at the appropriate time and until such time the Court would follow the instructions of Parliament but not the CJEU. The argument was repeated by Lord Denning MR himself again in Case 129/79 Macarthys Ltd v Smith (1980), which he emphasised the point that the duty to interpret domestic law in light of Union law is conferred by the Parliament.

In Bulmer v Bollinger (1974), the House of Lords held that the EU Law remains separate to English law and that EU Treaty had equal force to English statute. Direct applicability was accepted so that Treaty rights and obligations were immediately effective in the UK but English judges reserved the final word on application. The ECJ was acknowledged as the ‘supreme tribunal’ on EU law, not due to its merit, but rather, because the Parliament had decreed this in Section 3 of the ECA 1972.   

In Case C-12/81 Garland v British Rail Engineering Ltd (1982), Lord Diplock stated that it is a principle of construction of UK statute, to construe the statutes, which were passed after the Treaty was signed, to carry out the obligation and not be inconsistent with it.

In Stoke-on-Trent City Council v B & Q plc (1984), Hoffman J stated that,

‘The EC Treaty is the supreme law of the UK taking precedence over Acts of Parliament. Entry into the Community was in itself a high act of social and economic policy, but which the partial surrender of sovereignty was seen as more than compensated by the advantages of membership.’

In Pickstone v Freeman plc (1989), The House of Lords stated that English Courts must apply a purposive construction to legislation affecting obligations under the EC Treaty, and in doing so could rely upon Parliamentary debates as recorded in Hansard (the official record of Parliamentary debate) on the relevant national legislation. Horspool and Humphreys explains that in interpreting UK law in accordance with Union law, where a UK rule is capable of different interpretation, the judges should use the interpretation that best reflects the Union law aim.

In Lister v Forth Dry Dock and Engineering Co Ltd (1990), Lord Templeman in the House of Lords stated that ‘courts of the UK are under a duty to follow the practice of the ECJ by giving a purposive construction to Directives and to Regulations issue for the purpose of complying with Directive…’

In Case C-221/89 Factortame (No. 2) (1994), when the case back to the House of Lords, Lord Bridge states that under the European Communities Act 1972, the courts have the duty to override the national law which was found to be in conflict with the EU law. However, Lord Bridge states that this does not affect the doctrine of parliamentary supremacy because the Parliament was entirely voluntarily to enact the ECA 1972.

This case demonstrated the rule that the supremacy of EU laws over the national laws. The European Court of Justice has stated that the courts have the power to set aside the domestic law if the domestic law is conflicted with the EU law. It could be said that the UK Parliament is no longer supreme since the Act of Parliament can be questions by the court and the status of the EU laws is higher than domestic law.

In Thoburn v Sunderland Country Council (2003), Sir John Laws reiterated the traditional view about the basis of the supremacy of EU law in the UK, decided that the case based on UK constitutional law rather than on principles of EU law. He stated that ECA 1972 is a constitutional statute which means that it cannot be impliedly repealed by a later ordinary statute. Hence, it would prevail over later statutes which were inconsistent. However, he went on to comment that:

‘in the event, which no doubt would never happen in the real world, that European measure was seen to be repugnant to a fundamental or constitutional right guaranteed by the law of England, a question would arise whether the general words of the ECA were sufficient to incorporate the measure and give it overriding effect in domestic law.’

Supremacy of Union law in Germany

Article 25 ‘Primacy of international law’ of the Basic Law for the Federal Republic of Germany provides that:

‘The general rules of international law shall be an integral part of federal law. They shall take precedence over the laws and directly create rights and duties for the inhabitants of the federal territory.’

The German constitution contains strong fundamental rights provisions and the German Federal Constitutional Court (FCC) sees itself as the custodian of these human rights protections.

Article 24 of the German Constitution allows for the transfer of legislative power to international organizations, but there have been questions as to whether this Article permitted the transfer to the EC of a power to contravene certain basic principles protected under the Constitution itself.

In Case 11/70 Internationale Handelsgesellschaft mbH v EVGF (1970), the ECJ had stated that the validity of Community measures could only be judged according to Community criteria, not according to principles enshrined in the German constitution.

However, ECJ recognised the existence of fundamental rights, but concluded that there was no violation of fundamental rights. Although the Community did not have a codified catalogue of human rights, the respect of fundamental rights forms an integral part of general principles of law protected by the ECJ. The Community measures are then subject to the fundamental human rights contained in the respective national constitution.

The ECJ ruling was not accepted by the FCC. In the Solange I, the FCC ruled that, in the hypothetical case of a conflict between Community law and the guarantee of fundamental rights under the German constitution, German constitutional rights prevailed over any conflicting norm of EC law. The FCC thus impliedly rejected the position of the primacy of Community law, which has first been laid down by the ECJ in Case 6/64 Costa v ENEL (1964), and then extended in Case 11/70 Internationale Handelsgesellschaft mbH v EVGF (1970) to cover even the fundamental constitutional principles of the Member States.

In Wünsche Handelsgesellschaft GmbH v Germany (1987), which was known as Solange II, the FCC acknowledged that the Community law now had its own equivalent standard of human rights protection. It rules that as long as the Community ensures an effective protection of fundamental rights required unconditionally by the German constitution, the FCC would no longer exercise its jurisdiction to decide on the application of secondary Community legislation. The FCC nevertheless emphasised that the court did not surrender jurisdiction over fundamental rights, but only stated that it would not exercise that jurisdiction as long as the present conditions as to the protection of fundamental rights by the ECJ prevailed.

While Solange I and Solange II were concerned the interaction between Union legal provisions with fundamental rights guaranteed by the German constitution, the following cases concerned with the adoption of new EU treaties, particularly which institution has the authority to determine the competence of Union law. The issue these cases revealed has been termed that of Kompetenz-Kompetenz.

In Brunner v The European Union Treaty (1994), which was a suit claiming that the approval of Maastricht Treaty on European Union would violate the principle that all state power emanates from the people and would infringe on basic rights in German constitution. FCC reaffirmed the sovereignty of German constitutional and its right to review the scope of Community competence. In other words, FCC established its reserve power declare EU measures ultra vires. In this case itself FCC held that TEU was in compliance with the German constitution.

In Gauweiler v Treaty of Lisbon (2008), which was a case concerning the constitutionality of the Lisbon Treaty with the German constitution, FCC reiterated that the power of Kompetenz-Kompetenz remains with the German Courts and not with the EU. In the ECJ’s view, it has sole authority to decide whether national constitutional law infringes Union law. 

In the Honeywell case (2010), the claimant argued that the fixed-term clause in question, which was done on the strength of the German national employment laws, was in breach of the Union Directives. The claim was successful. FCC dis-applied the fixed-term clause, ruling that EU law took precedence where there was a conflict between national law and EU law. The defendant’s argument was that FCC, rather than EU, was supreme as the FCC was the arbiters of the exact extent of Union law in German law (in with these judgments of Brunner v The European Union Treaty and Gauweiler v Treaty of Lisbon). However, it was held that EU law here trumped national law as the EU had not gone beyond the competences conferred upon it by the Treaties.

It appears that the FCC was trying to avoid the potential conflict between EU law and national law, but at the same time, emphasising that they have the ultimate say on the competence of Union law.

Supremacy of Union law in France

France’s legal order has two court systems: the judicial and the administrative courts. The judicial courts deal with the civil and criminal matters while administrative courts under a separate system review the legality of administrative action. Administrative court may annul legislative measures enacted by the executive.

Article 25 of the Constitution of 4 October 1958 of the French Republic provides that,

‘Treaties or agreements duly ratified or approved possess, from the moment of their publication, a superior authority to those of laws under the condition, for each treaty or agreement, of its application by the other party.’

In Vabre and Weigel (1975), the Cour de Cassation (highest court in the judicial order) accepted the supremacy of Community Law on the basis on Article 55, which implies that the constitutive Treaties prevail over national law without further enactment, as well as on the specific nature of Community law.

Although the French Constitution provided for the primacy of certain international treaties over domestic law, the Conseil d’Etat (CE, the supreme administrative court) was of the view that decisions on the constitutionality of legislation were matters for the Conseil Constitutionnel to make before the legislation was promulgated. In Minister of the Interior v Cohn-Bendit (1980), the CE has showed its reluctance to accept the primacy of Union law, and in particular the Directives do not direct effect, unless there is a French implementing measure giving effect to it.

However in the Nicolo case (1990), the CE took the view that Article 55 of itself necessarily enabled the courts, by implications, to review the compatibility of statutes with treaties, and that, therefore, treaties should be given precedence over later statues.  

In Boisdet (1991), the CE recognised the priority of both Community Regulations and Directives over French statutes, without discussing the theoretical basis for that supremacy.

In Rothmans and Arizona Tabacco (1993), the CE awarded damages under the Factortame principle, for loss caused by a Ministerial order which conflicted with an EC Directive.

Conseil Constitutionnel has also made it clear that there are limits to France’s acceptance of supremacy of Union law.

In the Maastricht I decision (1992), Conseil Constitutionnel confirmed that France could transfer competence to an international organisation, provided that it did not thereby violate the essential conditions for the exercise of national sovereignty, and provided that the international agreement did not contain clause contradictory to the constitution. If the government does wish to transfer power not allowed by the existing constitutional norms it will therefore have to modify the Constitution.

In the Maastricht II decision (1992), Conseil Constitutionnel made reference to Article 89 of the French Constitution which stipulates that the republican form of government shall not be the object of an amendment. Together with the arguments above, Conseil Constitutionnel emphasised the point that the supremacy of Union law is dependent on the French constitution.

While, in practice, the French courts accept the primacy of directly effective Union law, their reasoning is frequently based on the French constitution, rather than on the European Court’s doctrine of supremacy. This is a similar view to that expressed in UK and German courts that it is the national constitution which is at the head of the legal order and that Union law supremacy exists only in so far as it is provided for under national law.

Supremacy of Union law in Italy

Italy is a dualist state and Article 11 of the Constitution of the Italian Republic has expressly accepted the limitations of sovereignty for the reasons of necessity. However, the acceptance is conditional.

In Frontini v Ministero delle Finanze (1974), the Italian constitutional court decided that Article 11 cannot give the organs of the EEC an unacceptable power to violate the fundamental principles of the constitutional order or the inalienable rights of man. It reserved the right to ensure that the fundamental principles of the Italian constitution were not infringed by EC law.

In Granital SpA v Amministrazione delle Finanze dello Stato (1984), the court accepted the supremacy of EC law. However it refused to rule that a national law conflicting with the EC law would be invalidated; rather, the law would simply be ‘dis-applied’. The Italian constitutional court reserved its power to adjudicate upon the basic issue of competence between EC law and national law.

Similarly, in SpA Fragd v Amministrazione delle Finanze (1989), it was stated that if it found a Community measure infringed fundamental rights of the Italian constitution, it would declare EC measure inapplicable. In such exceptional instances, Italian constitution is giving precedence.

In short, Italy generally accepted the supremacy of Union law, provided that they respect the fundamental values of the constitutional system as a whole. However, the Italian constitutional court asserted that it has the competence to decide on the division of competence between national law and Community law.

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Please read the disclaimer (at the top of the page) before proceeding.

Please do not take this note as the sole and only sources to study. It is only a guidance which may assist you in drawing out the full picture of the particular area of law. It is never meant to be a comprehensive text.

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Direct effect and indirect effect

General principle of EU Law

The European Court of Justice (ECJ) is relatively creative, as compared to English Courts, by using the purposive approach in ensuring the effectiveness of the EU Law. 

There are a number of general principles developed by the European Court of Justice, which are important and crucial to understand the application of EU Law in practice. 

In this post I will briefly discuss the principle of direct effect and indirect effect. 

You can download EU Treaties here: https://europa.eu/european-union/law/treaties_en

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Direct effect

The principle of direct effect is not found in the Treaty but has been created and developed by the ECJ in a series of judgments. Under the doctrine of direct effect, EU law creates rights and obligations which individual may rely on and enforce in their national courts.

A distinction must be made between direct effect and direct applicability. Direct applicability means that a measure is directly applicable in the sense that it automatically becomes part of the national law without incorporation by the Member States.

Direct effect - Treaty Article

In Case 26/62 van Gend en Loos v Nederlandse Administratie der Belastingen (1963), van Gend en Loss has imported some goods from Germany to the Netherlands and the Dutch custom authorities charged them a tariff which was contrary to the Article 12 of the Treaty of Rome (now replaced by Article 30 TFEU). Van Gend en Loos sought to retrieve the money in the national court and the national court made a request for a preliminary ruling to the ECJ, asking whether Article 12 conferred rights on the nationals of a member state.

The Dutch and Belgian government argued that this was a matter of national constitutional law. ECJ held that an individual (both natural and legal persons) could rely directly on a Treaty Article and enforce it in his own national court although the Treaty Article had not been legislated into the Member State’s legal system. ECJ stated that:

“The Community constitutes a new legal order in international law, for whose benefit the States have limited their sovereign rights, albeit within limited fields, and the subjects of which comprise not only the Member States but also their nationals… according to the spirit, the general aspect and the terms of the Treaty, Article 12 should be interpreted in such a sense as to produce direct effect and to create individual rights which internal courts should protect.”

According to ECJ, for a Treaty Article to have direct effect there are several conditions:

(a) It must be clear and precise

(b) It must be unconditional

(c) Its operation did not require a legislative implementing measure on the part of the state

(d) It must lay down a negative prohibition, rather than a positive obligation

The fourth requirement was dropped in the Case 57/65 Alfons Lütticke GmbH (1966).

If those conditions were fulfilled, individuals could enforce the Article directly in their national court. This was a right conferred on individuals ‘in addition to the supervision entrusted by Articles 169 and 170 (now Articles 258 and 259 TFEU) to the diligence of the Commission and of the Member States’.

It should be noted that until the Maastricht Treaty in 1993 there was no sanction against a Member State which failed to remedy the breach after the Court had declared it to be in breach under Article 258, other than the possibility to bring the Member State before the ECJ. The case then set a precedent to ensure the effectiveness of EU Law.

According to Case 43/75 Defrenne v SABENA (1976), whenever the Treaty includes a time limit within which such further action should take place, once that time limit has expired, the measure has direct effect. Here Ms. Defrenne worked as a flight attendant for the Belgian national airline SABENA and she was forced to retire at the age of 40. She argued that this has infringed her right to equal treatment on grounds of gender under Article 119 EC (now Article 157 TFEU).

A national court has jurisdiction over an EU provision, even though there is a lack of clarity of the provision in question, because the national court can seek clarification from the ECJ through the Article 267 TFEU preliminary reference procedure if necessary.

Treaties are vertically and horizontally directly effective, which means that it is enforceable in a national court against a Member State or individual.

In Case 26/62 van Gend en Loos v Nederlandse Administratie der Belastingen (1963), the parties were in a ‘vertical’ relationship since the case was between an individual and a Member State. In Case 43/75 Defrenne v SABENA (1976), ECJ confirmed that Treaty has horizontal direct effect.

Direct effect - Regulation

Article 288 TFEU (ex Article 249 EC) defines the relationship between the various types of Union secondary legislation and national law. Article 288 states that a Regulation is ‘directly applicable’ in all the Member States. Regulations, therefore, become automatically part of National law and this will normally mean that they can be relied on by individuals in their national courts and thus also have direct effect.

In Case 34/73 Fratelli Variola SpA, the ECJ confirmed that Regulations could be both directly applicable and directly effective because of its nature, Regulations have immediate effect and confer rights which national courts have a duty to protect. However for the Regulation to have ‘direct effect’, it must satisfy the three ‘van Gend en Loos’ standard conditions.

According to Case 39/72 Commission v Italy (Slaughtered Cows) (1973), the ECJ held that a Regulation is directly applicable in all Member States and come into force at the date of its publication or the date specified in its publication. This is so even if the Member States have failed to implement the Regulation on time: Case 128/78 Commission v UK (Tachographs) (1979).

In Case 403/98 Azienda Agricola Monte Arcosu Srl v Regione Autonoma della Sardegna, ECJ held that a Regulation does not create rights and obligation before their implementation in the national legal system. For a Regulation to have direct effect, it must be clear and precise to be enforced by a court. In this case, it is necessary for the Member States to define the criteria of ‘farmer practicing farming as his main occupation in the case of persons other than natural persons’ before the Regulation is to offer protection to them.

Direct effect - Decisions

Article 288 TFEU does not state that Decisions are directly applicable, but simply states that they are ‘binding in their entirety on those to whom they are addressed’.

In Case 9/70 Franz Grad v Finanzamt Traunstein (1970), a German finance court asked ECJ for interpretations of a decision and Directive. The ECJ affirmed that decisions could have direct effect. Three reasons were given for this finding. First, ECJ emphasised that this would increase the effectiveness (‘effect utile’) of the Community measure. Second, although the effects of a decision are not identical with those of a provision contained in a Regulation, this difference did not per se preclude the result that an individual may enjoy the same right to invoke the measure before the court. Third, Article 267 TFEU has dual effect: It does not only empower ECJ to determine the validity and interpretation of Union matters, but also empower individual to invoke all such acts before the national courts.

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Direct effect - International agreement

An international agreement does not necessarily have direct effect. For an international agreement to have direct effect, it must satisfy the three ‘van Gend en Loos’ standard conditions, and more importantly, the international agreement in question must be compatible with the ‘spirit’ of the Union.

In Case 21-24/72 International Fruit Company v Producktchap voor Groenten en Fruit (No. 3) (1972), the question posted was whether the GATT (General Agreement on Tariffs and Trade) provisions could have direct effect. The court concluded that ‘the spirit, the general scheme and the terms’ of the provisions were different from those in the EEC Treaty and the provisions were not sufficiently precise and unconditional for direct effect to apply.

In Case C-280/93 Germany v Council (1994), the ECJ held that under very limited circumstances a GATT provision could prevail over an EC provision, but only if the relevant EC provision expressly referred to the GATT provision.

In Case 270/80 Polydor Ltd v Harlequin Record Shops Ltd (1982), free trade agreements were also held not to be capable for direct effect to apply as their aim was not to create a single market. However, in Case 104/81 Hauptzollamt Mainz v Kupferberg (1982), another provision of the same agreement was found to have direct, as it did fulfill the conditions and fell within the purpose of the agreement. This concerned Portugal, which, although not a Member State at the time, did become one soon after.

Direct effect - Directive

Article 288 TFEU provides,

“A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods.”

Unlike Regulation, Directives are meant to be implemented, which mean that it is to be brought into effect by national legislation within a certain time period. Hence, Directives by its nature can never fulfill the ‘van Gend en Loos’ conditions because they require ‘further implementing measure’. In fact, according to Case 41/74 van Duyn v Home Office (1974), Directives are to be treated differently when determining whether it has direct effect.

In Case 41/74 van Duyn v Home Office (1974), the court held that Ms. van Duyn could rely on a clause in a Directive which the UK had not introduced into national law.  Ms. van Duyn, a Dutch national, claimed the British Government, through the Home Secretary, infringed Article 48(3) EEC (now Article 45(3) TFEU) by denying her an entry permit to work at the Church of Scientology. The question posted to the court was whether Article 45(3) TFEU and Directive 64/221 have direct effects as to confer on individuals rights enforceable by them in the national courts. The answer to the first question was yes as the provision imposed a precise obligation which did not require the implementing measure that involves the discretionary power of Member States or community institutions.

ECJ also stated that Directives, in principle, could be directly effective for the practical effectiveness of Directives. The effect of directives would be weakened if individuals were prevented from relying on them before their national courts. Furthermore, the preliminary reference procedure empowers the national courts to refer questions of validity and interpretation ‘of all acts of the community institutions, without distinction’. Hence, direct effects could therefore in principle arise from directive - this would have to be assessed on a case by case basis, taking into consideration ‘the nature, general scheme and wording of the provision in question’.

Case 148/78 Pubblico Ministero v Ratti (1979) introduced the concept of estoppel to EU Law, namely where a Member State is at fault (either failed to implement the Directives within the prescribed period or has done so inaccurately), an individual can claim against the state the rights he or she could have had if the Directives had been correctly implemented.

Furthermore, Case 148/78 Pubblico Ministero v Ratti (1979) also confirmed that a Directive can only be directly effective after the expiry of the time limit given for its implementation. 

The Court has confirmed in Case 152/84 Marshall v Southampton and South West Hampshire AHA (1986) that Directive can only have vertical direct effect but not horizontal. Here Ms. Marshall was dismissed from her job upon reaching the pensionable age of 62. The state retirement age for men was 65, and she argued that the dismissal is contrary to Directive 76/207 on equal treatment between women and men. Her employer was not a public authority but an independent health authority. Although it was admitted that there was sex discrimination in this case but according to Article 288 TFEU the Directive is only binding upon those to whom it is addressed, which are the Member States. As a result, Directives only have vertical direct effect as it is only possible to rely it against the Member States by an individuals.

Directive - Public Authority and the concept of 'emanation of the state'

The decision gives rise to the question that what is the definition and scope of ‘public authority’. Guidance was given by the Court in the following case.

In Case C-188/89 Foster v British Gas (1990), Mrs. Foster was required to retire from her job at British Gas when she was 60 years old, while men could continue until they were 

British Gas was a statutory body created by the Gas Act 1972 and it is responsible for developing and maintaining the system of gas supply in Great Britain, and had a monopoly supply of gas. The board member of British Gas was appointed by Secretary of State, who had power to direct British Gas in questions relating to national interest. Furthermore, British Gas was required to submit the Secretary of State periodic reports on its functions, management and programmes, which were laid before the Parliament. However, it was privatised under the Gas Act 1986 – renamed British Gas plc, it inherited the rights and liabilities of its predecessor. ECJ concluded that British Gas was a body against whom a directive could be invoked.

According to ECJ, an ‘emanation of the state’, whatever its legal form, pursuant to a measure adopted by the State, has been made responsible to provide a public service under the control of State and has for that purpose special power going beyond those of normal commercial undertakings.

The scope of this definition was unclear – to what extent could other bodies and institutions be held legally responsible for failure to comply with provisions. It has introduced a general test rather than criteria, and did not give conclusive guidance. The definition is wide enough to cover many situations, and thereby has extended the reach of the vertical direct effect of Directives.

In Eventech Ltd v The Parking Adjudicator (2012), the Parking Adjudicator was found to be an ‘emanation of the state’.

In National Union of Teachers and others v Governing Body of St Mary's Church of England (Aided) Junior School (1997), the English Court of Appeal held that a voluntary-aided church junior school is an ‘emanation of the state’ for the purposes of EC Law. Teachers who were dismissed when the school closed down were consequently entitled to rely directly on rights contained in the EC Business Transfers Directive in proceedings against the school's governing body.

In Case C-91/92 Faccini Dori v Recreb srl (1994), Advocate General Lenz proposed that it is unsatisfactory that individuals should be subject to different rules, depending on whether they have comparable legal relations with a body connected with the State or with a private individual. Furthermore, it is contrary to the requirements of an internal market for individuals to be subject to different laws in the various Member States even though harmonising measures have been adopted by the Community. The Court, however, did not follow the AG but confirmed the original rule that Directives can only have vertical direct effect. Here the dispute was between two private contracting parties, where Ms. Faccini Dori claimed that she has a right of cancellation within 7 days under the Directive 85/577, which the Italy had not taken steps to transpose the Directive into national law.    

However, in recent years the Court has increasingly resorted to other measures to give effect to Union law in what would, at first sight, be purely horizontal.

In Case C-144/04 Werner Mangold v Rüdiger Helm (2005), the Court confined itself to dealing with the incompatibility of the national legislation with Community law where a general principle of Community law (non-discrimination) was concerned. It asserted that it was the responsibility of the national court to guarantee even before the date of expiry of the implementation period.     

Although horizontal direct effect of Directives has been rejected by the ECJ, the recent development of case law shows that provisions of Directives can, at least in certain circumstances, produce a direct effect in disputes between two individuals. The Court has been willing to give ‘incidental’ horizontal direct effect of Directives in triangular situations.

In Case C-194/94 CIA Security International v Signalson and Securitel Sprl (1996), the action involved private dispute concerning a Belgian Law, which is adopted in breach of Directive 83/189. It was held that CIA Security was capable of invoking Directive 83/189 to seek an order to prevent its competitors making statement that it did not comply with the Belgian Law, which did not comply with the Directive. The Directive required that such technical laws had to be notified to the Commission, which the Belgium had failed to do so. Advocate General Elmer distinguished this case from Case C-91/92 Faccini Dori v Recreb srl (1994) on the basis that the notification procedure in Directive 83/189 imposed a number of obligations on the Member States, therefore it didn’t aim to impose duties on individuals, whereas Directive 85/577 regulated the contractual relations between individuals.

In Case 441/93 Panagis Pafitis v Trapeza Kentrikis Ellados AE (1996), the former shareholders of a Greek Bank, Panagis Pafitis, brought proceedings against the bank and its new shareholder for the increases in the capital of the bank. The increases in the capital of the Bank were made in pursuant to the Greek legislation, and the plaintiffs claimed that this was contrary to the Directive 77/91. The court interpreted the Directive in favour of the plaintiffs and ruled that the Directive precluded national legislation. The reasoning given by AG Elmer in CIA Security cannot explain this case as Directive 77/91 regulates the capital of public limited liability companies.

CRAIG and de BURCA explains that although the Directives do not impose legal obligations on defendants in CIA and Panagis Pafitis, they nevertheless have an exclusionary effect on them, i.e. they remove the defendants from the protection of national legislation and expose them to potential liability under other provisions of national law.

In Case C-443/98 Unilever ltalia SpA v Central Food SpA (2000), Unilever sold olive oil to Central Food, which refused to pay on the ground that it was not labeled in accordance with the Italian law. This was in breach of the Directive 83/189. Unilever claimed that the relevant Italian law should not be applied and sued for breach of contract. ECJ upheld Unilever’s claim that the Italian law could not applied. The Court asserted that the Italian law that has been adopted in breach of Directive 83/189 was inapplicable and thus unenforceable against individuals.

It is clear that Directive 83/189 does not confer rights on or to create obligations for individuals and the reasoning offered, neither did it define the substantive scope of the legal rule to the extent it is sufficient to be relied on in a private dispute before national implementation. There exists the legal uncertainty issue, which may lead to legal and commercial uncertainty. As AG Jacobs argued that an individual trader now must be aware of the existence of Directive 83/189 and the relevant judgments, check if the Member States in question had complied with all the procedural requirements imposed by the Directive, in order to determine their potential liability under the Directive and the relevant national legislation. On the other, it is unfair for private parties to suffer because of the Member State’s failure to comply and implement the Directives.

In a nutshell, for a Directive to have direct effect, there are certain conditions:

(a) It must be clear and precise

(b) It must be unconditional

(c) The time limit for implementation of the Directive must have expired

(d) The action based on direct effect of the Directive can only be vertical – against an ‘emanation of the state’.

Although the ECJ refused to recognise horizontal direct effect of Directive, but it is lenient in interpreting the scope of ‘emanation of state’, and allow the use of ‘incidental’ horizontal effect in private actions. However, the scope of ‘incidental’ horizontal effect is unclear and it has given rise to many problems.

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Indirect effect

The concept of indirect effect partly deals with the problem for individuals who could not rely on Directives because the conditions for direct effect were not fulfilled.

In Case 14/83 von Colson v Land Nordrhein-Westfalen (1984), Ms. von Colson was refused a job as prison worker because she was a woman. Equal Treatment Directive 76/207 required Member States to give effect to principle of equal treatment. However the Directive has no direct effect because the provisions was not unconditional and was insufficiently precise to be enforced by a court. There was some national legislation which purported to implement the Community Directive but it had did so inadequately as the amount of compensation available was very small.

ECJ held that the national court is under a duty of harmonious interpretation, which including a duty to interpret existing national law, so far as possible, to achieve the result laid down by the Directive. The doctrine is based on the idea that national courts are part of the state and, consequently, are bound by what is now Article 4(3) TEU (formerly Article 10 EC). Article 4(3) requires Member States ‘pursuant to the principle of sincere cooperation’ to ‘take any appropriate measure…to ensure the fulfillment of their obligations’ under the Treaties. The effect of the ruling is to shift the responsibility for giving effect to Directives on to National courts in situations where their governments have failed to introduce adequate national implementing measure.  

In Case C-106/89 Marleasing SA v La Comercial Internacional de Alimentacion SA (1990), the ECJ confirmed that the duty of harmonious interpretation applies to all national legislation, whether passed before or after the relevant Union legislation, and whether intended to implement it or not. Furthermore, the duty can be applied horizontally, that is between two individuals.             

In Case 456/98 Centrosteel v Adipol (2000), the ECJ said that the duty to interpret national law in the light of the wording and purpose of the Community law applied even when this would impose a civil liability on private parties.

In Case C-185/97 Coote v Granada Hospitality Ltd (1998), Ms. Coote argued that after her dismissal her former employer had victimised her by failing to provide any reference regarding her employment which would assist her in obtaining alternative employment. There has been a claim for sex discrimination alleging that her former employer’s action in dismissing her had been motivated by her pregnancy. Her former employer had then refused to provide a reference because she had brought sex discrimination proceedings against them. The question posted to the ECJ was whether Directive 76/207 was wide enough to cover post termination protection against the act of victimisation alleged by her. ECJ held that the victimisation that Ms. Coote had suffered was intended to be covered by the Equal Treatment Directive and she should be entitled to legal protection from it.

The courts are only required to carry out this duty ‘as far as possible’ – so if there is not relevant national law, or if the relevant national law is only capable of limited interpretation, the doctrine could not be used. Following Case C-334/92 Wagne-Miret v Fondo de Garantia Salarial (1993), the duty did not require national judges to rewrite national law so that it took on a meaning contrary to its ‘ordinary’ meaning.

In Case 80/86 Criminal Proceedings Against Kolpinghuis Nijmegen (1987), the ECJ made it clear that the obligation of national court to interpret their national law in light of the wording and purposes of Directive is subject to the general principles of legal certainty and non-retroactivity.

In Case C-168/95 Criminal proceedings against Luciano Arcaro (1996), the ECJ held that where there is no implementing measure taken by the Member States, and the application of the doctrine has the effect of determining or aggravating criminal liability, the doctrine cannot be applied.

The rule nullem crimen sine lege was again upheld by the ECJ in Case C-387/02 Criminal proceedings against Berlusconi Arcaro (1996), where the Italian Prime Minister was involved in proceedings concerning allegations of fraud under Italian companies’ legislation pursuant to Directive 68/151. The Court stated that the Directive could not be relied upon against accused persons by the authorities of a Member State within the context of criminal proceedings, as the criminal liability of the accused could not be determined or aggravated by the Directive itself. 

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Please read the disclaimer (at the top of the page) before proceeding.

Please do not take this note as the sole and only sources to study. It is only a guidance which may assist you in drawing out the full picture of the particular area of law. It is never meant to be a comprehensive text.

Feel free to comment if you find any mistakes, or if you have anything to share. 

COPYRIGHTS © 2017 WALLACE LEE CHING YANG. ALL RIGHTS RESERVED.

EU's Competition Law

Competition is necessary because it produces efficiency, low prices, innovations and freedom of action.

The EU's competition law was designed to protect and promote competition in a free market economy. It limits the freedom of the market players in order to protect the process of competition; yet at the same time it preserves freedom of others (e.g. by enabling market entry or preserving choice for customers and ultimate consumers).

This post will focus on Article 101 and Article 102 of Treaty on the Functioning of of the European Union (TFEU).

Both Article 101 and Article 102 seek to achieve the same aim, namely the maintenance of effective competition within the internal market, on different level: Case 6/72 Continental Can v Commission (1973).

Article 101 prohibits agreements or concerted practices between undertakings which restrict competition.

Article 102 prohibits undertakings that hold dominant position to abuse their market power.

Both Article 101 and Article 102 have direct effect: Case C-127/73 BRT v SABAM (1974).

You can download TFEU here: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:12012E/TXT

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Article 101 TFEU

Article 101(1) states:

The following shall be prohibited as incompatible with the internal 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 internal 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.

Article 101 is concerned with the conduct of undertakings and not legislation or regulations adopted by Member States: Case C-267/86 Van Eycke v ASPA (1988)

There are four requirements to prove a violation of Article 101:

1. Agreements, decisions or concerted practices
2. An effect on trade between Member States
3. The agreement or decision or concerted practice has the object or effect of preventing, restricting or distorting competition within the internal market, to an appreciable extant
4. The agreement, decision or concerted practice has prevented, restricted or distorted competition within the internal market to an appreciable extent (the de minis rule)

The possible conducts which may trigger Article 101 include:

• Price fixing: Cases C-89 etc/85 Re Woodpulp (Ahlstrom Oy v Commission) (1994)
• Limitation of production: Case T-41/96 Bayer v Commission (not to resell customers located in other territories)
• Market-sharing: Case C-41/69 ACF Chemiefarma NV v Commission (The Quinine Cartel Case) (1970)
• Market-allocation: Case C-56 & 58/64 Consten and Grundig v Commission (1966)
• Unfair trading terms: Case C-95/04 British Airways v Commission (2007)
• Exclusive distributorship: Case 56/65 STM v Maschinenbau Ulm (1966)

Article 101(2) provides that any agreements prohibited pursuant to Article 101(1) are automatically void.

Article 101 TFEU - Agreement between undertakings

For there to be a violation of Article 101, one of the following must exist:

1. an agreement between undertakings
2. a decision of an association of undertakings
3. a concerted practice between undertakings

According to Case C-41/90 Höfner and Elser (1991), ‘the concept of undertaking encompasses every entity engaged in an economic activity regardless of the legal status of the entity and the way in which it is financed’.

Hence, any entity conducting a commercial or economic activity (e.g. company, partnership, sole trader, cooperative) is subject to the competition rules.

However, state bodies which purchase goods from public funds for use in the public health systems of the Member States are not undertakings and are therefore not subject to action under Article 101.

• In Case C-205/03P FENIN v Commission (2006), the CJEU found that the purchasing of goods is not an economic activity as defined in Case C-41/90 Höfner and Elser (1991) when the goods are not offered for resale but used to perform a public function (such as social welfare). Rather, the Court stated that ‘it is the activity consisting in offering goods and services on a given market that is the characteristic feature of an economic activity’.

Parents and subsidiaries within the same corporate group are regarded as a ‘single undertaking’: Case 15/74 Centrafarm v Sterling Drug (1974).

• In Joined Cases C-628/10 P and C-14/11 P Alliance One International and Standard Commercial Tabacco v Commisison (2012), the Court held that the mere fact that a parent company and its subsidiary exercised, during a certain period, joint control of the subsidiary which has committed the infringement can satisfy a finding that those companies formed an undertaking. However, this is provided the parent companies did, in fact, exercise decisive influence over the commercial policy of the subsidiary which committed the infringement.

Both vertical and horizontal agreement are caught: Case C-56 & 58/64 Consten and Grundig v Commission (1966).

• In Case C-56 & 58/64 Consten and Grundig v Commission (1966), a German radio manufacturer G and a French distributor C agreed to make C the sole distributor of G’s radios in France and limited how the radios would be imported and exported. The vertical agreement was held to be anti-competitive.
• In Case C-32/11 Allianz Hungária (2013), the Court held that agreements concerning the price of repairs of insured vehicles concluded between insurance companies and repair shops have an anti-competitive object and are therefore prohibited under Article 101.

A violation to Article 101 does not requires a formal agreement:

• There is no requirement that there must be a written or legally enforceable contract for there to be an agreement. In Case C-41/69 ACF Chemiefarma NV v Commission (1970), nothing had been committed to paper as the collusion was based upon a ‘gentleman’s agreement’. The CJEU held that such a 'gentleman's agreement' was sufficient for Article 101 to operate.
• There is no requirement of 'formality' and a single casual meeting may suffice. In Case C-8/08 T-Mobile Netherlands and Others v NMa (2009), the CJEU held that a single meeting between competitors constitutes a sufficient basis on which to implement the anti-competitive object which the participating undertakings aim to achieve’.The burden of proof was on the undertaking concerned to prove that it did not participate in the implementation of the agreement: Case C-49/92 Commission v Anic Partecipazioni (1999).
• In Case C-51/92 Hercules Chemicals v Commission (1999), the CJEU confirmed that an agreement need not necessarily be a ‘one-off’ event. It can be the result of a process lasting years.

The issue often arises where a manufacturer unilaterally imposes anti-competitive terms on its distributors. The position of the court used to be if the recipient of the unilateral agreement have acquiesced and continued to deal with the manufacturer, there is an agreement. However, in the following cases the Court confirmed that there is no agreement if there is no ‘common interest’ between the issuer and the recipient:

• Case T-41/96 Bayer v Commission (2000), the Bayer groups, one the main European chemical and pharmaceutical groups, produces and market a medical products ‘Adalat’. It had reduced its supplies of the ‘Adalat’ to French and Spanish wholesalers who were re-exporting the drugs (‘parallel imports’) to the UK where prices were at least 40 per cent higher. Bayer wanted to keep these markets separate so that it could maintain the higher price level in the UK. The Commission decided that there was an agreement between the wholesalers and Bayer not to export to the UK, even though there was evidence that the wholesalers had in fact done their utmost to obtain supplies for re-export to ‘get round’ the restrictions imposed by Bayer.
• The Court annulled the Commission’s decision against Bayer on the grounds that it had not established that there was an agreement. According to the Court, for an agreement to be capable of being regarded as having concluded by tacit acceptance, it is necessary that the manifestation of the wish of one of the contracting parties to achieve an anti-competitive goal constitute an invitation to other party, whether express or implied, to fulfill that goal jointly. The mere fact that a measure adopted by the manufacturer, which has the object or effect of restricting competition, falls within the context of continuous business relations between the manufacturers and its wholesalers, is not sufficient for a finding that such an agreement exists.
• This was confirmed by the Court in Case T-62/98 Volkswagen AG v Commission (2000). The court made it clear that where there is no concurrence of wills between the issuer and recipient of such unilateral instructions, there is no agreement.

Article 101 TFEU – Decisions by associations of undertakings

The term ‘decisions’ encompasses decisions, recommendations and codes of practice – even if they are not formally binding on the members – where it is shown that members have tended to comply with them: Case 92/82 IAZ International v Commission (1983).

Restrictive rules of professional bodies can be considered as ‘decisions by association of undertaking’.

• In Case C-309/99 Wouters (2002), the rules of the Dutch bar association preventing lawyers from entering partnerships with other professionals such as accountants was capable of breaching Article 110. The individual member of the Dutch bar association were considered as ‘undertakings’ and the bar association was an ‘association of undertakings’. However, the Court held that the rule would only breach Article 110 only if it ‘beyond what was necessary in order to ensure the proper practice of the legal profession’ which, in this case, it did not.
• In Case T-111/08 MasterCard v Commission (2012), the Commission found that the MIFs (multilateral interchange fees, the proportion of the price of a payment card transaction that is retained by the card-issuing bank) had the effect of setting a floor under the costs charged to merchants and thus constituted a restriction of price competition. The Court found that the adoption of MIFs was decision by association of undertakings, since the MasterCard payment organisation was an association of undertakings before the Intellectual Property Office. The adoption of MIFs was a decision by MasterCard payment organisation before the Intellectual Property Office.
• In Case 1/12 Ordem dos Técnicos Oficiais de Contas (2013), the Court held that a regulation adopted by a professional association putting into a system of compulsory training for chartered accountants to guarantee the quality of their services constituted a restriction under Article 101.

Article 101 also covers decisions of ‘associations of associations’: Decision 94/815 Cement (1994).

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Article 101 TFEU – Concerted practice

Some basic knowledge relating to oligopoly market is required, in order to understand concerted practice.

An oligopoly market is one in which there is a small number of producers/suppliers. This small number leads to ‘interdependence’ between the members of the oligopoly and thus makes it is very difficult for any new producer to enter. According to this theory there is little point in trying to increase market share by lowering prices since the other members will promptly respond by lowering their prices too, depressing profits all round.

On the other hand, an independent price rise runs the risk of customers switching to another suppliers. The result, it is argued, is a practice of ‘price following’ in which, as soon as the ‘price leader’ raise its prices, the others immediately follow suit, enabling them all to retain their existing market shares but at a more profitable price. In this scenario, simultaneous price increases are not evidence of collusion by the companies, but merely a rational response to the market structure (‘conscious parallelism’).

A question then arises: Is the simultaneous increase in price between the undertakings in an oligopoly market considered as a concerted practice?

In Case 48/69 ICI v Commission (Dyestuffs) (1972), concerted practice was defined as ‘co-ordination between undertakings which, without having reached the stage where an agreement properly so called has been concluded, knowingly substitutes practical co-operation between them for the risks of competition’.

In Case 40/73 Suiker Unie (Sugar Cartel) (1975), the Commission had decided that a number of sugar producers had engaged in ‘concerted practices’. The producers appealed, arguing that there was no actual plan to restrict competition. The Court held that it was not necessary to prove that there was an actual plan, since Article 101 strictly precludes any direct or indirect contract which the object or effect is to either to influence the conduct on the market of an actual or potential competitor, or disclose to such an actual or potential competitor the course of conduct on the market which they themselves have decided to adopt.

Following Case 40/73 Suiker Unie (Sugar Cartel) (1975), there is concerted practice, if there is some contract between the companies concerned, and some conscious cooperation. Bilateral agreement is not required.

Exchanging commercially useful or sensitive information can, in itself, amount to a concerted practice when it enables competitors to see what strategy other competitors are pursuing and to respond accordingly.

• This includes the mere unilateral or reciprocal exchange of individualised commercially sensitive information (e.g. pricing): Case C-49/92 Commission v ANIC (1999).
• In Joined cases T-202/98, T-204/98 and T-207/98 Tate & Lyle and Others v Commission (1999), a number of companies attended a meeting with an-competitive purpose. Despite the fact that only British Sugar gave information on its future prices, it did not prevent there from being a concerted practice between undertakings for the purpose of Article 101.

It is not necessary for the Commission to prove the actual effects of the concerted practice on the market: Case C-199/92P Huls AG v Commission (1999)

However, in order to prove a concerted practice for the purpose of Article 101, it must be proven beyond reasonable doubt that concerted practice is the only plausible explanation for parallel conduct:

• In Cases C-89 etc/85 Re Woodpulp (Ahlstrom Oy v Commission) (1994), the only evidence the Commission could rely on to support its finding of concerted practice between woodpulp producers was that of simultaneous price increases, despite the fact that the producers were based in different parts of the world. The Court held that the price announcements in advance did not, per se, constitute an infringement of Article 101. The price announcements served the need of customer desiring the information to plan the cost of their paper conducts, and this provided a plausible alternative explanation for the parallel behaviour, in particular the price following in an oligopoly market.

Hence, in the absence of any evidence pointing toward concerted practice, a simultaneous price increase in an oligopoly market may not be considered as concerted practice for the purpose of Article 101, but it may fall within the realm of Article 102: Joined Case C-395/96P and C-396/96P Compagnie maritime Belge v Commission (1996).

An agreement to exclude a competitor is in breach of Article 101 even when the competitor is operating unlawfully on the market: Case C-68/12 Protimonopolný úrad Slovenskej republiky v Slovenská sporiteľňa (2013).

A little bit of extra knowledge on 'whistle-blowing'

Notice of the Competition Council on immunity from fines and reduction of fines in cartel cases (the ‘Leniency Notice’) offer companies involved in a cartel – which self-report and hand over evidence – either total immunity from fines or a reduction of fines which the Commission would have otherwise imposed on them.

In order to obtain total immunity under the leniency policy, a company which participated in a cartel must be the first one to inform the Commission of an undetected cartel by proving sufficient information to allow the Commission to launch an inspection at the premises of the companies allegedly involved in the cartel. If the Commission is already in possession of enough information to launch an inspection or has already undertaken one, the company must provide evidence that enables the Commission to prove the cartel infringement. In all cases, the company must also fully cooperate with the Commission throughout its procedure, provide it with all evidence in its possession and put an end to the infringement immediately. The cooperation with the Commission implies that the existence cannot be disclosed to any other company. The company may not benefit from the immunity if it took steps to coerce other undertakings to participate in the cartel.

Companies which do not qualify for immunity may benefit from a reduction of fines if they provide evidence that represents "significant added value" to that already in the Commission’s possession and have terminated their participation in the cartel. Evidence is considered to be of a "significant added value" for the Commission when it reinforces its ability to prove the infringement. The first company to meet these conditions is granted 30 to 50% reduction, the second 20 to 30% and subsequent companies up to 20%. 

Article 101 TFEU – An effect on trade between Member States

Similar to the free movement principles, the Union law will only be triggered by cross border element.

In Case C-56 & 58/64 Consten and Grundig v Commission (1966), the Court found that if an agreement, decision or concerted practice does not affect trade between Member States then it will fall within the relevant national competition rules and not EU law. It does not matter whether the effect is positive or negative.

Article 101 TFEU – The object or effect of preventing, restricting or distorting competition

It must be shown that the agreement, decision or concerted practice has the prevention or distortion of competition as either its object or effect.

The ‘object’ relates to its purpose; the effect relates to its consequence or impact.

The wording ‘object or effect’ suggests that it is disjunctive. This has been confirmed by CJEU in Case C-8/08 T-Mobile Netherlands and Others v NMa (2009). Hence, when anti-competitive object is established, there is no need to consider the actual effects.

The wording ‘preventing, restricting or distorting competition’ suggests that these requirements are alternative, not cumulative. This has been confirmed by CJEU in Case C-56 & 58/64 Consten and Grundig v Commission (1966).

In Case C-403 and 129/08 Football Association Premier League (2011), the CJEU stated that when the analysis of the content of the agreement does not reveal a sufficient degree of impairment of competition, then the consequences of the agreements must be considered. In addition, it must be showed that the competition has in fact been prevented, restricted or distorted to an appreciable extent.

A potential effect may be sufficient. However, a potential effect must have ‘a degree of probability which is objectively grounded in fact and law’: Case 56/65 STM v Maschinenbau Ulm (1966).

According to Case 56/65 STM v Maschinenbau Ulm (1966), in determining the effect on competition, one must compare it with the competition situation had the agreement not been implemented, and reference could be made to a number of factors, including:

• The nature and quantity of the products covered by the agreement
• The position and importance of parties on the product market concerned
• The isolated nature of the disputed agreement of its position in a series of agreements
• The severity of the clauses intended to protect the exclusive dealership
• The opportunities allowed for other commercial competitors in the same products by way of parallel re-exportation and importation

In Case 56/65 STM v Maschinenbau Ulm (1966), although there was an exclusive distributorship, but there was no attempt in the contract to blockade the allocated territory by grant of trademarks or by export bans. Thus, the agreement did not have the object of preventing, restricting or distorting competition. Neither it has the effect, as granting an exclusive territory to enable a distributor to enter a new area with no prohibition on exports, did not satisfied the degree of probability which is objectively grounded in fact and law.

Even if the parties are all within one Member State, there will likely be an effect on trade between Member States where the arrangement makes market penetration more difficult for companies from other Member States: Case 8/72 Cementhandelaren v Commission (1972).

Article 101 TFEU – The de minimis rule

The de minimis rule is not contained in the text of Article 101 but was established by the Court in Case 5/69 Volk (1969). Under the de minimis rule, certain breaches of Article 101 will be disregarded if the companies involved are relatively small and the effect of their activities on the overall competitive situation on the market is negligible.

According to Commission Notice on Agreements of Minor Importance (2001), whether an agreement, decision or concerted practice has an ‘appreciable effect’ depends solely on the markets shares of the undertaking involved:

• In case of vertical agreements between undertakings, 15 per cent threshold applies.
• In case of horizontal agreements between undertakings, 10 per cent threshold applies.
• In case of a mixed horizontal/vertical agreement or where it is difficult to classify the agreement as either horizontal or vertical, 10 per cent threshold applies.

The Notice states that agreement between small and medium-sized enterprises are in general de minimis and rarely capable of appreciably affecting intra-Union trade.

Furthermore, the Notice identified that hard core restrictions, which are price fixing and market sharing cartels, import and export bans and similar naked restrictions, are always prohibited irrespective of the market share.

The 'per se prohibition' versus the 'rule of reason' approach, and the justification to ancillary restraints

Restrictions which are objectively necessary to the main agreement and essential for its operation will not bring about a distortion of competition if it is ancillary to such clauses in an agreement that do not restrict competition but are beneficial to consumers and competition.

In Case C-519/04 Meca-Medina v Commission (2006), a case dealing with anti-doping sanctions, the Court held that the economic objective to ensure the organisation and proper conduct of competitive sport precluded the application of Article 101.

The Court has extended this rule to encompass non-economic objectives in the Case C-309/99 Wouters (2002).

In Case C-309/99 Wouters (2002), the rules of the Dutch bar association preventing lawyers from entering partnerships with other professionals such as accountants was capable of breaching Article 110. It was claimed that such rule was justified to avoid any risk of conflict of interest and to observe strict professional secrecy. This was accepted by the Court, despite ‘the effects restrictive of competition that are inherent in it as it was necessary for the proper practice of the legal profession, as organised in the Member State concerned’.

It has been argued that the Court is adopting a sort of ‘rule of reason’ test balancing the protection of certain public aims against the preservation of fair competition.

The term ‘per se prohibition' is refers to the two-stage test, whereby an anti-competitive behaviour that are prohibited under Article 101 can be exempted under Article 101(3). In order to permit exemption under this provision, it is necessary to weigh up the pro- and anti-competitive effects of the agreement concerned. Under such an approach, it must first be considered whether there is an agreement, decision or concerted practice fall within the ambit of Article 101(1) before it can be considered for exemption under Article 101(3) through an analysis of its pro- and anti-competitive effects.

This two-stage process can be contrasted with the US ‘rule of reason’ approach which balances the pro- and anti-competitive consequences of an agreement before a finding of infringement is made.

In Standard Oil Company of New Jersey v United States (1911), White CJEU stated that a standard of reason had to be applied to determine whether a restraint was within the ambit of Sherman Act 1890 (American competition legislation), and only undue or unreasonable restraint should be condemned.

The CJEU confirmed the two-stage test approach and rejected the ‘rule of reason’ alternative in Case T-112/99 Metropole Television (M6) v Commission (2001). The Court stated that those cases where the court had shown a flexible approach to the application of Article 101 ‘cannot be interpreted as establishing the existence of a rule of reason in Community competition law’. However Article 101 could not be applied, ‘wholly abstractly and without distinction’ to any agreement restricting freedom of action of one or more parties. Therefore a certain measure of economic analysis can take place in the initial application of Article 101(1) but ‘it is only in the precise framework of [Article 101(3)]’ that the pro and anti-competitive aspects of a restriction may be weighed’.

Professor Richard Whish has suggested that such justifications are conceptually similar to those cases which are concerned with ‘commercial ancillarity’ where ‘restrictions necessary to achieve a legitimate commercial purpose fall outside Article [101(1)]’.

Horspool and Humphreys notes that Case C-309/99 Wouters (2002) and Case C-519/04 Meca-Medina v Commission (2006) concern ‘regulatory’ ancillarity where by the restrictions are ancillary to the legitimate objectives pursued by the regulatory body and hence do not infringe Article 101.

Exemptions under Article 101(3) TFEU – Individual exemptions

Article 101(3) TFEU provides that agreements that satisfy two positive requirements and two negative requirements are not void.

The positive requirements are:

1. The restriction contributes to improving the production or distribution of goods or to promoting technical or economic progress
2. Consumers receive a fair share of the resulting benefit from the restriction

The negative requirements are:

1. The restriction on competition must be indispensable to achieve (the improvement or distribution of goods or the promotion of technical or economic progress)
2. The restriction must not put the parties in a position to eliminate competition ‘in respect of a substantial part of the products in question’.

Hence, it applies to those agreements between individual firms which may be anti-competitive in the short term but pro-competition in the long term.

In Commission decision 00/475 in case CECED (2000), an individual exemption was granted to a manufacturers’ association of washing machines that had signed an agreement to improve the energy efficiency of machines. This would have been anti-competitive under Article 101(1) but that it offered long-term benefits to consumers in the form of cheaper bills; the efficiencies used the least restrictive option possible and competition still existed because consumers could choose between model based upon price and design.

Exemptions under Regulation 330/2010 – Block exemption for vertical agreements

The block exemption is designed to reduce the burden on the Commission. While individual exemptions are assessed on a case-by-case basis, the block exemptions automatically leads to the exemption from the application of Article 101(1) – there is no need to notify the Commission.

The original system of block exemption worked on a very simplistic basis. Two lists were created:

1. Those on the ‘white list’ were acceptable and could be inserted into agreements;
2. Those on the ‘black list’ would lead to refusal of exemption.

The simple categorisation was found to be flawed. Following the criticisms of the original rule, the Commission initiated a reform in 1999, which is Regulation 2790/1999. The Regulation allows companies to benefit from a ‘safe haven’ within which they are no longer obliged to assess the validity of their agreements under the EU competition rules.

Under the Regulation 330/2010 on Vertical agreement, together with the Commission’s Guidelines on Vertical Restraints in EC Competition Policy (2000), a presumption of compatibility is possible where the vertical agreement satisfies the terms laid out in Article 101(3), involves retailers with less than 50 million euros annual turnover and less than 30 per cent market share, and does not include use of any hardcore restrictions such as pricing fixing or market allocation.

Regulation 330/2010 covers all types of basic vertical agreements, for example exclusive and non-exclusive distribution agreements, selective distribution agreements, franchising, and so on.

There are also block exemptions for horizontal agreements:

1. Regulation 771/2004 relates to categories of technology transfer
2. Regulation 1217/2010 relates to categories of research and development agreements
3. Regulation 1218/2010 relates to categories of specialization agreements

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Article 102 TFEU

Article 102 states:

Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States. 

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.

Article 102 prohibits undertaking that hold dominant position to abuse their market power. Being dominant itself is not an offence, but it is the abuse of the dominant position that is prohibited by Article 102 TFEU.

There are four requirements to prove a violation of Article 102:

1. Undertakings
2. Dominant position within the internal market or in a substantial part of it
3. Abuse
4. An effect on trade between Member States

Article 102 TFEU - Dominance

Dominance is a key concept – a firm engaging in abusive behaviour will not attract Article 102 if it is not dominant.

In Case 27/76 United Brands v Commission (1978), the Court defined a dominant position as ‘a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers’

Hence, the question of whether an undertaking possesses a dominant position requires a detailed economic analysis. There are a number of factors to be considered, including:

The relevant market: the product, geographic and temporal market

• Market share
• Barriers to entry
• Dominance – The relevant market

A market can be defined by specific products, but also by geography (the territory over which goods are made available) and time (the seasons in which goods are made available).

The existence of product market depends on the ‘interchangeability’ of the product. A product within a product market is ‘interchangeable’ by consumers by reason of its characteristic, price and intended use. The CJEU in Case 27/76 United Brands v Commission (1978) explained that a relevant product is dominant if it is ‘interchangeable’, or in economic term, the cross elasticity of demand is high, in the event of rising of price.

Following the Commission Notice on the Definition of the Relevant Market for the Purposes of Community Competition Law (1997), if there is a ‘small but significant non-transitory increase in price’ (‘SSNIP’), the relevant product would not be ‘dominant’ if it is not interchangeable, meaning that customers would still continue to buy the relevant product despite the price rise.

In Case 27/76 United Brands v Commission (1978), the bananas were found to be not interchangeable with other kinds of fruits, as it fulfills specific consumer needs and are in a product market of their own. The consumers would still continue to buy the bananas even if there is significant increase in price. Consequently an increase in price is unlikely to impact upon customer behaviour and not fall within the ambit of Article 102.

The cross elasticity of supply is also one of the factors to be considered. If the suppliers of other products can quickly and easily switch to make the product in question, the substitutability of supply is high, then the relevant product in question is likely to be ‘dominant’ in the relevant market.

In Case 6/72 Continental Can v Commission (1973), the Commission decision that Continental Can was dominant on the market for light metals for meat and fish, was annulled because, inter alia, it could not be shown that the cans in question can be easily manufactured.

In Case 322/18 Michelin v Commission (1983), it was not easy to switch from producing tyres for cars to producing tyres for heavy goods vehicles so there was no elasticity of supply between them. They were therefore in separate product market.

The geographical market requires identification of ‘a clearly defined geographical area in which it is marketed and where the conditions of competition are sufficiently homogenous for the effect of the economic power of the undertaking concerned to be evaluated’: Case 27/76 United Brands v Commission (1978).

The question of geographical market is a practical one, and the references are made to the:

• Empirical evidence of consumption
• Production patterns
• Volume
• Purchasing habits

The geographical market may be global and local. In Case C-95/04 British Airways v Commission (2007), the geographical market was identified in the territory of the UK; In Case T-30/89 Hilti v Commission (1991), it covered the whole EU; In Cases C-89 etc/85 Re Woodpulp (Ahlstrom Oy v Commission) (1994), it covered the whole globe.

Certain products have its temporal market because by its nature there may be limited production times

• For example, the selling time of tickets for the World Cup football matches held in France in 1998 was limited: Commission Decision 1998 Football World Cup (2000).
• However, the temporal market for bananas is the whole agricultural year, since bananas are ripened throughout the years: Case 27/76 United Brands v Commission (1978).

Dominance – Market Share

The market share must have been held for a period of time: Case 85/76 Hoffmann-La Roche v Commission (1979).

The CJEU held that a company with a 50 per cent share or above will normally be dominant: Case 62/86 AKZO Chemie v Commission (1991).

However, it is also important to compare the market shares of other companies on the market. In Case C-95/04 British Airways v Commission (2007), the CJEU found British Airways to be dominant on the market for air travel agency services, where it had a share of 39.7 per cent. The Court took into account the fact that the nearest rival, Virgin, had only a 5.5 per cent share.

Dominance – Barriers to entry

In assessing the dominance of an undertaking, barriers to the access to the market of new companies must be taken into account. This requires an assessment of the prevailing barriers to entry for potential competitors which might enter the market.

Possible ‘barriers to entry’ include:

• Legal provisions: Case 333/94P Tetra Pak Int SA v Commission (1996)
• Superior technology: Case 322/18 Michelin v Commission (1983)
• Deep pocket: Case 27/76 United Brands v Commission (1978)
• Economies of scale, vertical integration and well-developed distribution systems: Case 27/76 United Brands v Commission (1978)
• Product differentiation/brand image: Case 27/76 United Brands v Commission (1978)

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Article 102 TFEU - Collective dominance

Two or more independent undertakings can be regarded as collective dominance and thus capable of breaching Article 102 TFEU: Case T-68/89 and T-77-78/89 Società Italiana Vetro SpA v Commission (Flat Glass) (1992).

In Case C-393/92 Municipality of Almelo and Others v Energiebedrijf IJsselmij NV (1994), the CJEU held that ‘in order for collective dominance to exist, the undertakings in the group must be linked in such a way that they adopt the same conduct on the market’.

There must be ‘links’ or ‘other factors which give rise to a connection between the undertakings concerned’, which ‘enable them to act together independently of their competitors, their customers and consumers’: Joined Case C-395/96P and C-396/96P Compagnie maritime Belge v Commission (1996).

The existence of an agreement or concerted practice between the undertakings does not necessarily create such economic linked. However, an agreement or concerted practice between the undertakings can ‘result in the undertakings concerned being so linked as to their conduct on a particular market that they present themselves on the market as a collective entity vis-à-vis their competitors’: Joined Case C-395/96P and C-396/96P Compagnie maritime Belge v Commission (1996).

The ‘parallel behaviour’ of oligopolies, which is legal under Article 101, may be caught by Article 102 to see whether it constitutes collective dominance: Joined Case C-395/96P and C-396/96P Compagnie maritime Belge v Commission (1996).

In Case C-497/99P Irish Sugar v Commission (2001), the Commission’s finding of ‘vertical’ collective dominance between Irish Sugar and a distributor of sugar, Sugar Distributor Ltd, was upheld by the Court. Factors that contributed to its decision were the structure of policy-making between the companies and the direct economic ties between them. The Court also held that it is possible to establish abuse of a dominant position in a case of collective dominance whether there has been ‘point’ or ‘individual’ abuse. That is, it is only necessary for one of the companies to have carried out the abuse.

Article 102 TFEU - Substantial part of the internal market

Article 102 requires that an undertaking must be dominant ‘within the internal market or in a substantial part of it’. This has been interpreted as a de minimus threshold.

In Case 40/73 Suiker Unie (Sugar Cartel) (1975), it was held that a dominant position in Southern Germany was a ‘substantial part of the internal market’.

Article 102 TFEU – Abuse

The CJEU in Case 85/76 Hoffmann-La Roche v Commission (1979) has defined ‘abuse’ as behaviour which has ‘the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition’.

A ‘competition on the merits’, such as offering better quality products or lower prices than your competitors, is not an abuse. An abuse is where the dominant company uses other means to outflank or exclude competition.

Both ‘exploitative’ abuses and ‘anti-competitive’ abuses are caught by Article 102. The former refers to abuses which exploit customers (e.g. excessive prices), the latter refers to abuse which affect the competitive structure of the market by excluding actual or potential competitors.

In Case 322/18 Michelin v Commission (1983), the CJEU states that a dominant company has a ‘special responsibility’ not to act in a way that will lead to a decrease of competition on the market.

Abuse can take many forms. Different forms of abuse are subject to different tests.

Abuse – Excessive prices

Using power on the market to grant an excessively high price is an abuse, albeit difficult to prove.

The CJEU suggested that it is necessary to work out the difference between the production costs and the selling price to see if the company is making ‘super-profits’: Case 27/76 United Brands v Commission (1978).

On the other hand, economists argued that the market price of goods is not just a question of production costs but also of supply and demand.

Abuse – Predatory pricing

Predatory pricing refers to the practice whereby an undertaking prices it product so low in the sense that the competitors cannot survive and are driven from the market. Once the competitors are excluded from the market the undertaking then increase the price in order to recoup its losses.

It is not easy to decide whether the lower price is the result of ‘fair’ competition, or whether it is a below-cost price to exclude competitors from the market, as the dominant company may simply be more efficient and able to produce the goods more cheaply.

In Case 62/86 AKZO Chemie v Commission (1991), the CJEU decided that pricing below ‘average variable costs’ was automatically an abuse because the only reason a company would charge less for a product than the cost of the materials/labour used, would be to drive out competitors. While the primary objective of economic entities is profit maximisation, the only explanation to prices below variable costs is to eliminate competitors.

While the test appears to be over-simplistic, it has been suggested that evidence of an actual plan to drive out competitors had to be shown.

Abuse – Selective pricing

The term selective pricing is refers to the act of setting different prices for the same product or service in different market.

In Case T-228/97 Irish Sugar v Commission (1999), Irish Sugar offered lower prices to its competitors’ customers while maintaining higher prices for its regular customers. The Court held this policy of selective pricing was abuse.

Abuse – Fidelity discounts (Loyalty rebate)

In Case 85/76 Hoffmann-La Roche v Commission (1979), it was held that offering discounts in return for customers agreeing to buy all their vitamins from the dominant company was condemned as abuse. It deprived competitors of the opportunity of selling to those customers.

This is to be contrasted with a straightforward ‘volume’ discount, whereby the customer obtain a bigger discount if they but a large quantity of the goods. Such discount is not an abuse because it is simply a way of passing on to the customer some of the savings in transaction costs. This type of discount does not exclude competitors a priori as they are free to compete for that customer’s order.

If the discount in question limited the dealer’s choice of supplier and made access to the market more difficult for competitors, it would be considered as an abuse. For example, in Case 322/18 Michelin v Commission (1983), the discounts in question are granted according to the quantities sold during a relatively long reference period, with a result that it creates the pressure on the side of the buyer to increase the purchase in order to obtain the discount.

In Case C-95/04 British Airways v Commission (2007), British Airways abused its dominant position in the air travel agency market by offering travel agents loyalty payments and commissions which were not related to increased efficiency. These policies tied travel agents to British Airways. The Court upheld the Commission’s finding that the incentive schemes offered were also contrary to Article 102(c) since travel agents who sold the same number of tickets received different commission rates.

In Case C-209/10 Post Denmark (2012), Deutsche Post offered discount to certain former customers of a competitor. The Court made it clear that such a policy cannot be considered as an exclusionary abuse merely because the price the dominant undertaking charged was lower than the average costs of the activity concerned. Instead, it was necessary to consider whether the pricing policy produced an actual or likely exclusionary effect, to the detriment of competition and, thereby, consumers’ interest.

Abuse – Tying (Mixed bundling)

It is an abuse for a dominant obliges customers to buy another product as a condition of supplying the ‘main product’. It has the effect of extending the dominance from the main product market to the second product.

In Case 333/94P Tetra Pak v Commission (1996), Tetra Park insisted that buyers of its primary product (‘aseptic packaging machines’) should buy the secondary products from them as well. This was an abuse because there were other manufacturers of the secondary products, who were thereby excluded from the competition.

In Case T-201/04 Microsoft v Commission (2007), whose decision was later upheld in Case T-167/08 Microsoft Corp v Commission (2012) the Court upheld the Commission’s decision that Microsoft engaged in the abusive bundling of its media player with the Windows operating system. The Court has given four conditions to support the Commission’s finding, which are all present in the Microsoft’s case:

1. The undertaking must have a dominant position on the market for the bundling product
2. The bundling product and the bundled product must be two separate products
3. Consumers must not have a choice to obtain the bundling product without also obtaining the bundled product
4. The practice must foreclose the competition

Abuse – Refusal to supply

It is an abuse for a dominant supplier of raw materials to cut off supplies to a company which uses those materials to make another product, so that the dominant company can start making that product itself without competition from that other company: Case 6 & 7/73 Commercial Solvents v Commission (1974).

It is also an abuse to refuse to supply a distributor in order to punish them for promoting a competitor’s product.

In Case 27/76 United Brands v Commission (1978), United Brands refused to supply goods to existing customers, which in the first case, a distributor was to start a rival business and, in the second, because the distributor’s conduct was disloyal with regard to United Brands. Such refusals constitute abuses.

In Case 310/93P BPB Industries and British Gypsum v Commission (1995), the CJEU condemned BPB for giving priority, in a time of short-age, to those “loyal customers”, who were almost exclusively buying BPB’s products over those who were normally buying plasterboard from BPB’s competitors.

Abuse – Refusal to supply ‘essential facilities’

In Case T-69 etc/89 RTE, BBC & ITP v Commission (1991), the Court states that an abuse does not only arise where the refusal to supply is against a ‘long-standing’ customer. Refusing to grant a copy licence to a new customer was also an abuse since it prevented the emergency of a new product for which there was customer demand.

A refusal to supply ‘essential facilities’ may constitute abuse, but the court has adopted a cautious approach.

In Case 7/97 Bronner v Mediaprint (1998), the Court laid down the strict test that the facility must be indispensable and that there are ‘technical, legal or even economic obstacles capable of making it impossible, or even unreasonably difficult’ to compete without access to the facility concerned.

Case 418/01 IMS Health (2004) concerned a refusal to grant a licence for a data system which was protected by copyright. The Court held that for a refusal to supply to be abusive, three cumulative conditions had to be fulfilled:

1. The refusal must prevent the emergence of a new product for which there was a potential consumer demand
2. The refusal must be unjustified
3. The refusal must exclude any competition on the secondary market

According to Case T-201/04 Microsoft v Commission (2007), while the ‘refusal by the owner of an intellectual property right to grant a licence, even where it is the act of an undertaking in a dominant position, cannot in itself constitute an abuse of a dominant position, the exercise of the exclusive right by the owner might, in exceptional circumstances, give rise to abusive conduct’. For the exceptional circumstances to apply, the three IMS conditions must be fulfilled.

It was also not necessary that the refusal to supply eliminated all competition; rather, ‘what is required is that the refusal to supply the licence…is liable, or is likely to, eliminate all effective competition on the market’. By refusing to license the interoperability information, Microsoft was effectively able to eliminate competition in the relevant market: Case T-201/04 Microsoft v Commission (2007)

In 2004 Commission Decision, Microsoft was found to abuse its dominant position by refusing to supply interoperability information to rivals on the market for work group server OS operating systems, and tying Media Player software with Window OS. It was fined € 497 million. The decision also ordered Microsoft to supply the information to its competitors for which it would be entitled to ‘reasonable remuneration’ for licensing its software. When Microsoft failed to comply, a further decision was taken in November 2005 in which the Commission warned Microsoft that it would impose a daily fine of up to € 2 million under its powers in Article 24(1) Regulation 1/2003. In July 2006, Microsoft was fined € 280 million for its failure to comply.

In Case T-201/04 Microsoft v Commission (2007) the Court upheld the Commission’s 2004 decision. Although the Court found that the refusal to supply did not prevent the appearance of new product, but the Court stated that the appearance of new product was not the only decisive factor in determining whether a refusal to license an intellectual property right is capable of causing prejudice to consumers for the purpose of Article 102. It was sufficient that the refusal to supply ‘limited technical development to the prejudice of consumers’.

Article 102 TFEU – Objective justification

In Case C-209/10 Post Denmark (2012), the Court ruled that it is open to an undertaking in a dominant position to provide justification for behaviour liable to be caught by the prohibition laid down in Article 102 either by demonstrating that its conduct was objectively necessary or that the exclusionary effect produced may be counterbalanced or outweighed by advantages that also benefit consumers.

According to Case T-201/04 Microsoft v Commission (2007), it is for the dominant undertaking concerned to raise any plea of objective justification and to support it with arguments and evidence.

The objective justification is subject to the principle of proportionality: Case 27/76 United Brands v Commission (1978).

The possible objective justifications include:

• Efficiency defence
• Objective Necessity Defence (e.g. the protection of public health or safety)
• Reasonable steps by a dominant firm to protect its commercial interests

According to Case C-95/04 British Airways plc v Commission (2007), efficiencies can only be taken into account as an objective justification if the exclusionary effect arising from the conduct that is disadvantageous for competition may be counterbalanced or outweighed by advantages in terms of efficiency that also benefits the consumer.

According to the guidance published by the Commission, for the efficiency defence to operate it must be proven that:

1. Efficiencies will be achieved because of certain actions, for example, improvement of the quality of products;
2. Certain actions are necessary in order to increase efficiencies, i.e. it is not possible to rely on the other, not so anti-competitive actions;
3. Increased efficiencies compensate negative effect on competition and consumers;
4. Actions should not limit competition, since competition is the source of economic effectiveness.

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Please do not take this note as the sole and only sources to study. It is only a guidance which may assist you in drawing out the full picture of the particular area of law. It is never meant to be a comprehensive text.

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