Short Overview of European Competition Law

Over the years, there have been significant changes in European Competition Laws. Changes in the regimes governing distribution and purchasing agreements, the regulations on research and development, and on specialization agreements meant that companies doing business in Europe would need to review their present agreements for enforceability. Agreements which do not meet the requirements of the European Competition laws regarding block exemption rules run the risk of being void and unenforceable. In certain cases companies may be exposed to fines.

Article 81(1) of the Treaty of Rome

Under Article 81(1) of the Treaty of Rome, the Treaty which establishes the European Community, any provision of an agreement or any concerted practice which affects trade between member states and which has as its object or effect the prevention, restriction or distortion of competition within the European Union will be automatically void. However certain agreements which are deemed by the Commission to have a beneficial effect may survive by taking the benefit of an exemption, either individually or by meeting the requirements of the various block exemption regulations in force covering areas as diverse as airport slot allocations and motor vehicle dealerships.

Traditionally, block exemptions set out a prescriptive list of provisions which agreements could include to gain exemption and a “blacklist” of provisions, such as resale price maintenance which would always be unacceptable. However, the Commission has moved away from a legalistic approach to competition law towards an economic approach based on analysis of markets and the market impact of agreements.

Block Exemption on Vertical Agreements

“Vertical agreements” are, effectively, agreements between parties that operate at different levels of the supply chain, for example supplier and distributor or distributor and retailer. Block exemptions for exclusive purchasing and exclusive distribution are a unified set of competition rules which looks primarily at market shares in determining whether anti-competitive contractual provisions can be lawful.

Subject to certain exceptions, agreements where the parties’ market share does not exceed 10 percent of the relevant market are deemed not to be significant enough to affect competition between member states, whilst agreements made by parties with a market share of more than 30% cannot benefit from the block exemption. Rules are also created limiting “non-compete” obligations covered by the block exemption to 5 years and revised provisions are set out defining those “hardcore” or “blacklisted” provisions which will prevent agreements taking the benefit of the exemption.

Agreements which fall outside the block exemption and which may need to be individually notified to the Commission for exemption no longer need to be notified on a “just in case” basis. Companies are actively encouraged to take a sensible view on whether an agreement needs to be notified. If there is subsequently a dispute, then a late notification can be made and an agreement retrospectively exempted by the Commission. This pragmatic approach is designed to prevent unnecessary paperwork for the Commission and to cut the need for companies to incur superfluous legal fees.

Block Exemptions for Research and Development Agreements and Specialization Agreements

Like the regulation on vertical agreements, the arrangements for research and development (R&D) agreements and specialization agreements emphasize an economic approach to competition law and less the type of legal clauses that agreements include.

In broad terms the R&D regulation provides that any agreement between two or more parties for the joint research and development of a product or process with or without joint the exploitation of its results can be exempted from the effect of Article 81(1) for the period of the R&D plus 7 additional years for the exploitation of the results. Where the parties to the agreement are competing undertakings the exemption will only last for the period of the research and development and will only be available where the parties have a combined market share of less than 25 percent.

The specialization block exemption regulation follows closely the language of the R&D regulation. Specialization is effectively where one party agrees to another to stop production either on a reciprocal on a unilateral basis or where both parties agree jointly to produce a product. The Commission considers that, provided there are certain safeguards, specialization can benefit consumers in Europe by improving production processes. In broad terms again, specialization agreements can take the benefit of the block exemption provided that the combined market share of parties is less than 20 percent.