European Competition Law Problem Question on Pricing Strategies and Foreign Imports

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Question 1 Consider the following fictitious scenario and address all three parts of the question.

Spielzug GmbH is a toy manufacturing company based in Berlin. It is one of the world’s major toy manufacturers. It operates in many countries, including nine EU member states, where its market share of the market for toys varies between 40% and 65% (the average across the Member States is 50%, but it only has less than 2% of the market in Belgium and France). These shares have remained reasonably constant for the last ten years.

Spielzug wants to expand its market in Belgium, and is proposing to enter into a distribution agreement with Jouet bvba, a Belgium company. The companies have agreed the following terms in principle, but have not yet entered into a formal agreement.

  1. Spielzug will appoint Jouet as Spielzug’s only authorised distributor in Belgium; Spielzug also agrees not to sell its own products directly to customers in Belgium.
  2. In return, Jouet will agree not to operate outside Belgium; in particular, it must not export the toys from Belgium, or actively seek customers from outside Belgium (e.g. by advertising).
  3. Jouet will also agree to re-sell the toys at prices which Spielzug will fix

1a) Discuss the EU competition law implications of this situation. In particular, what might be the legal consequences under EU law for both parties if they entered an agreement on these terms?

Spielzug is also the leading manufacturer and supplier of spare parts for a solar powered electronic toy drone called ‘Spycam’, which is particularly good for low-level war games. This type of solar drone is very expensive, and normally very difficult to obtain in commercial quantities from any other supplier.

Recently, Spielzug heard rumours that one of its Dutch customers, Kijkover bv, had been buying quantities of similar solar drones from one of Spielzug’s competitors, Robowar. This company (Robowar) is new to the market, and is selling the solar drones more cheaply than Spielzug does. As a result, Spielzug is refusing to supply Kijkover with any further solar drones or spare parts. It has instructed its other customers that, if they share their supplies with Kijkover or buy spare parts from Robowar, Spielzug will refuse to supply them as well. Spielzug believes it is justified in doing this, as it believes that only by maintaining price stability in the market can adequate supplies of solar drones be maintained.

(a) The case of Spielzug and Jouet concerns a vertical agreement between undertakings which includes an exclusivity clause, an export ban and a price fixing clause.

Art.101(1) Treaty on the Functioning of the EU (TFEU) prohibits, inter alia, all agreements between undertakings with the objective or effect of preventing, restricting or distorting the competition within the EU internal market. In particular, Art.101(a), (b) and (d) outlaw respectively price fixing agreements, limitations on the markets of undertakings and the application of dissimilar (exclusive) conditions to similar transactions. In Consten/Grundig, the then European Court of Justice (ECJ) held that this provision applies to both horizontal and vertical agreements. Horizontal agreements are those agreements where the parties are at the same level of supply, whereas vertical agreements are those where the parties are at a different level of supply, e.g. manufacturers and distributors (Fairhurst, 2012). At first glance, it appears that the Spielzug/Jouet vertical agreement neatly falls within the scope of Art.101(1) as under the agreement, Jouet will not export or target consumers outside of Belgium and Spielzug will fix the resale prices of Jouet. Under Art.101(2), such agreements are void, unless they fall under the scope of Art.101(3).

An agreement falls within the ambit of Art.101(3) if it contributes to improving the manufacturing or distribution of goods or economic progress and enables the consumers to gain a fair share of the resulting benefits and it does not impose conditions that are indispensable to the achievement of these objectives and/or if it does not create the possibility of elimination of the competition in respect of significant part of the goods concerned.

There are several grounds on which an agreement between undertakings may be exempted from Art.101(1).

Firstly, an agreement may be exempted if it does not have an appreciable impact on competition (Völk, para.5/7). Under the Commission’s de minimis Notice on Agreement of Minor Importance (NAOMI Notice), a vertical agreement does not appreciably affect competition if the market share of each of the parties does not exceed 15 per cent on any of the markets on which the agreement has an impact (Commission Notice, 2001, para.7(b)). The market shares of Jouet are not known. The market shares of Spielzug are 50 per cent on average between the EU Member States (MS) and 2 per cent in Belgium. Since the EU market as a whole is affected by the agreement, the exemption under the NAOMI Notice is unlikely to apply to the Spielzug/Jouet. This exemption is also unlikely to apply, particularly in relation to the price fixing clause, as the NAOMI Notice explicitly does not apply to restrictions on the buyer’s ability to determine its own sale price (Commission Notice, 2001, para.11(2)(a)).

Secondly, an agreement may be exempted if it does not have an appreciable impact on the intra-EU trade under the Commission’s de minimis Notice on Non-appreciable Affectation of Trade (NAAT Notice) (Commission Notice, 2004). Under the NAAT Notice, an agreement does not have an appreciable impact on the trade if the aggregate market share of the parties on any relevant market does not exceed 5 per cent and for vertical agreements, the annual turnover of the supplier does not exceed €40 million (Commission Notice, 2004, para.52(a) and (b)). Although the market shares of Jouet are not known, the aggregate market share on the EU market of the two undertakings is likely to surpass the threshold of 5 per cent due to Spielzug’s high average market share on the EU market, so it is unlikely that Spielzug and Jouet will be able to avail themselves of the exception under the NAAT Notice.

Thirdly, a vertical agreement may be exempted from Art.101(1) if it falls under the scope of Art.101(3) TFEU by virtue of the Block Exemption Regulation on vertical agreements (BER) (Commission Regulation (EU) No 330/2010). Under Art.3 BER, vertical agreements are exempted under Art.101(3) if the market share of the supplier does not exceed 30 per cent on the market where it sells the contract goods and the market share of the buyer does not exceed 30 per cent on the market where it purchases these goods.  However, under Art.4(a), this rule does not apply to price fixing, so the price fixing clause is likely to fall within the scope of Art.101(1). Moreover, under Art.4(b), subject to certain exceptions which do not apply to this case, the rule under Art.3 BER does not apply to restrictions on the territory in which the buyer may sell the goods or the customers to whom the buyer may sell the goods. The export ban includes both a territorial restriction and a restriction on Jouet’s customers, so it is also likely to fall within the scope of Art.101(1). Under Art.4(b)(i), restrictions on the sales in the exclusive territory by the supplier are exempted under Art.3 BER. Hence, Spielzug and Jouet may be able to take advantage of the exception under Art.3 BER solely in relation to the exclusivity clause, providing that Jouet’s market share in Belgium does not exceed 30 per cent. The fact that the price fixing clause and the export ban cannot obtain clearance under the BER means that their anti-competitive effect will have to be examined under Art.101 TFEU (Graham, 2013) so if these clauses nevertheless turn out to be pro-competitive, they may be exempted under Art.101(3). Yet, the fact that these terms are not exempted by the BER will likely attract the attention of the Commission and the agreement may become subject of an investigation by the Belgian competition authorities or by the Commission.

1b) Applying EU competition law, what are the legal implications of this refusal?

The other three largest manufacturers of electronic toy drones are W, X and Y. W is established in the USA, X in Sweden and Y is established in Poland.

The Marketing Directors of each of the companies attended the Toy Trade Fair in Copenhagen in August 2012. Two weeks later the companies all raised their prices by the same amount. You are an official working at the European Commission (Directorate-General for Competition).

You have been tracking pricing patterns in the toy industry for some time. You have noticed that the three companies tend to raise their prices by similar amounts every six months. In addition, you have noticed that, over the past four years, the prices charged for solar drone components have been very high. The solar toy drone manufacturers are finding it hard to compete with manufacturers of traditional electronic battery powered drones.

(b) Kijkover’s case concerns refusals to supply products and spare parts for these products.

Art.102 TFEU prohibits any abuse by an undertaking in a dominant position in the internal market or a substantial part thereof if it affects the intra-EU trade. The Court of Justice of the EU (CJEU) has held that as a general rule, refusals to supply by a dominant undertaking fall foul of Art.102 if there are no objective justifications for the refusals (Commercial Solvents, para.25). These rules raise two issues – whether Spielzug is in a dominant position and if so, whether it has abused that position.

Whether an undertaking is in a dominant position depends on the relevant market and its market power within that market (Craig and De Burca, 2011). The relevant market is assessed by taking into account the product market and the geographical market (Craig and De Burca, 2011). The product market is assessed with reference to the interchangeability of products – if certain goods are interchangeable with other goods, the two sets of goods are part of the same product market (United Brands, para.22). Solar drones are interchangeable with battery-powered drones, but only solar drones are good for low-level war games, so the product market is likely to be considered the market for solar toy drones. The geographic market is the territory in which all traders operate in the same or sufficiently homogenous conditions of competition as far as the relevant products are concerned (Tetra Pak, para.91). Hence, in this case, it is likely that the relevant product market will be considered the entire EU. Dominance is defined as a position in which an undertaking is able to prevent effective competition on the relevant market as it can behave independently of its competitors, customers and consumers (United Brands, para.65). Since solar drones are difficult to obtain in commercial quantities from other suppliers, it is likely that Spielzug will be considered dominant.

The CJEU has held that where the result of a refusal to supply by a dominant undertaking is to preclude competitors from bringing their products to the market, this amounts to an abuse (United Brands, para.182). Since the conduct of Spielzug deters all its customers from dealing in Robowar’s products and therefore Robowar is precluded from competing with Spielzug, the conduct is likely to be considered contrary to Art.102.

1c) Applying EU competition law, what are the possible legal consequences of such pricing behaviour?

(c) The case of W, X and Y concerns a horizontal agreement between competitors to fix the prices at which they sell their products – battery-powered drones.

One of the examples of prohibited practices under Art.101(1) is price fixing. So long as W trades within the EU, the fact that it is established in the US is immaterial since Art.101(1) covers agreements or practices that affect the competitive structure inside the EU (Commission Notice, 2004, para.23).

Normally price fixing agreements between undertakings are prohibited by Art.101(1), where there is evidence of concerted practice and the price fixing is not a result of the natural structure of the market (Dyestuffs, para.66). This is regardless of whether the concerted practice has an anti-competitive effect (Hüls, para.164). The Commission will not be required to prove that the meeting between the marketing directors of W, X and Y has actually taken place (Graham, 2013). The regularity of the price increases and the fact the manufacturers of battery-powered drones can safely jointly raise the prices without worrying of competition from the manufacturers of solar drones is likely to be sufficient evidence of concerted practice.

Question 2 Consider the following statement and address the question.

In Dassonville, the Court of Justice of the European Union (CJEU) moved away from finding only measures which discriminate against foreign imports were directly or indirectly capable of hindering trade within the EU, and hence were caught by Article 34 Treaty on the Functioning of the European Union (TFEU). In Cassis de Dijon, the Court took the Dassonville test a step further by identifying indistinctly applicable measures; seeing a need to allow member states a wider margin of discretion in justifications they might raise in order to take the potential restriction of trade outside the application of Article 34. In many cases, the source of barriers to trade are product requirements.

Critically analyse the above statement in light of how the CJEU has interpreted Articles 34 and 36 TFEU. In doing so what, if any, are the exceptions to the free movement of goods outside those laid down in Article 36 TFEU that have been allowed by the CJEU. Based on your analysis, in your opinion has the Court’s jurisprudence on selling arrangements been consistent?

1. Introduction

In Dassonville, the CJEU held for the first time that the factor that determines whether a measure with equivalent effect to qualitative restrictions (MEQR) is caught by Art.34 TFEU is its effect on the inter-EU trade, rather than whether it is discriminatory (distinctly applicable) or not (European Commission, 2011). Confirming its ruling in Dassonville, in Cassis de Dijon, the CJEU suggested ways in which non-discriminatory measures may be justified on grounds of one of the mandatory requirements and providing that they are proportionate (Cassis de Dijon, para.8). In Keck, the CJEU introduced the distinction between product requirements and selling arrangements, with the latter being contrary to Art.34 only if discriminatory (Keck, para.16). This suggests that since Dassonville, the court has persistently limited the circumstances in which non-discriminatory (indistinctly applicable) measures may be caught by Art.34.

2. The Dassonville Ruling

The need to clarify that Art.34 catches both discriminatory and non-discriminatory MEQR stemmed from the fact that the first Commission directive on the implementation of Art.34 – Directive 70/50 did not clarify this issue (Fairhurst, 2012), but nevertheless expressed the intention of the Commission to prohibit measures that accord different treatment to domestic and imported products (Directive 70/50, Recital). The Dassonville ruling confirmed that the interests of the EU are to be prioritised since if the MS were allowed to impose indistinctly applicable measures that in reality affect more the imported, than the domestic products, this would have been detrimental to the principle of free movement of goods (Gormley, 2007).

3. The Cassis de Dijon Ruling

The Cassis de Dijon ruling is better remembered as a confirmation of Dassonville, rather than as a ruling that introduced mandatory requirements. Numerous scholars have commented on the effect of both decisions. White (1989) has argued that in practice, the two decisions made the scope of Art.34 potentially limitless as traders could invoke it in almost all circumstances where a given product moves from one MS to another MS. Wilsher (2008, p.3) has described the effect of both judgments as “negative harmonisation”, since instead of harmonising the product rules across the EU, they instead deemed national trading rules unenforceable. In a similar vein, Craig and De Burca (2011, p.649) have described the effect of the two decisions as “deregulatory”, since the standard of the MS with the least stringent trading rules became the standard by which all other MS had to abide. For example, although one of the mandatory requirements under Cassis de Dijon is consumer protection (Cassis de Dijon, para.8), in the majority of cases following Cassis de Dijon, the CJEU was unimpressed by the justifications presented by the respective MS for imposing national food standards and this lowered the food standards within the EU (Craig and De Burca, 2011). Moreover, the Cassis de Dijon ruling was contradictory as it confirmed that MS are free to regulate areas untouched by EU law, but the CJEU interpreted Art.34 in such a way as to significantly limit this freedom (Maduro, 1998).

In Cassis de Dijon, the CJEU said very little on the mandatory requirements. It only briefly mentioned the term and stated that the mandatory requirements include ensuring the effectiveness of fiscal supervision, protection of public health, ensuring the fairness of commercial transactions and consumer protection (Cassis de Dijon, para.8). Whilst this list is non-exhaustive and includes justifications other than those provided under Art.36, given how difficult it has been for MS to rely on the mandatory requirements (European Commission, 2010), given that the CJEU has not allowed states to extend the effects of mandatory requirements to reasons other than the ones claimed by them (İnanılır, 2008) and given that the use of mandatory requirements is also subject to a proportionality test, it cannot be argued that the mandatory requirements are in place due to the need to give MS a wider margin of discretion in relation to national trading rules. It should be acknowledged that the list of mandatory requirements has grown over the years and now includes improvement of working conditions (Oebel), attainment cultural aims (Cinéthèque), maintenance of press plurality (Familiapress), financial stability of the social security system (Decker), road safety (Commission v Finland), crime prevention (Commission v Portugal) and protection of animal welfare (Andibel). However, the fact that states may use more grounds for justification of indistinctly applicable measures does not translate into wide discretion for the above reasons. At best, it is an acknowledgement by the CJEU that indistinctly applicable measures are less blatant infringements of Art.34, compared to distinctly applicable measures.

4. The Case Law on Product Requirements and Selling Arrangements

The Keck, the CJEU returned to the issue of discrimination by ruling that product requirements continue to be caught by Art.34 regardless of whether they are discriminatory or not (Keck, para.15), whereas selling arrangements fall outside of the scope of Art.34, unless they are discriminatory (Keck, para.16). The intentions of the court in introducing the distinction between product requirements and selling arrangements are set out in para.14 of the judgment – the court aimed to curb the practice of the use of Art.34 by traders to challenge national measures that do not interfere with the free movement of goods. Whilst the ruling does not affect the previous position in relation to product requirements, in reality by introducing the distinction without clearly defining the concepts of ‘product requirements’ and ‘selling arrangements’, the CJEU introduced significant uncertainty for the EU MS and the traders (Koutrakos, 2001; Weatherill, 1996). At a conceptual level, the decision in Keck was a return to the idea prior to Dassonville and Cassis de Dijon that the internal market is about unhindered intra-EU trade, rather than unhindered access to the markets of individual states (Tesauro, 1993). In this manner, the boundary of Art.34 was again limited, but not necessarily in the best possible way.

It is submitted that instead of creating the distinction between product requirements and selling arrangements as a method to deal with the increased use of traders of Art.34 TFEU, the court could have defined the boundaries of this provision by clarifying the relevant factors that are to be taken into consideration when deciding whether a measure is a MEQR within the meaning of Art.34. For example, such factors could be the extent to which the measure restricts the access to the market of a particular MS or whether a trader needs to change the packaging of a given product when importing it in a given MS. In Commission v Italy, the CJEU appeared to support the view that market access is the defining factor – in particular, it held that measures that hinder the access to the market of a given MS are MEQR (Commission v Italy, para. 37). However, this ruling failed to provide the much-needed clarity since like in Keck, in which the court built on Dassonville and Cassis de Dijon, without explicitly overturning them, in Commission v Italy, the CJEU built on Keck, without explicitly overturning it. In both cases, this created contradiction in the jurisprudence. Keck contradicts Dassonville and Cassis de Dijon because in Dassonville and Cassis de Dijon, the CJEU held that all measures that affect the intra-EU trade are prohibited under Art.34, regardless of whether they are discriminatory or not, whereas in Keck, the CJEU explained that non-discriminatory selling arrangements are not prohibited. Commission v Italy contradicts Keck as in Keck, the CJEU decided that non-discriminatory selling arrangements fall outside of the scope of Art.34, whereas Commission v Italy suggests that non-discriminatory selling arrangements could be caught by Art.34 if they hinder the market access of traders to a particular MS. The pattern that can be identified is that the CJEU has been consistent with its creation of contradictions. However, as a result, the consistency in the jurisprudence of the court is absent as the CJEU constantly revisits it in ways that manifestly conflict with previous case law.

5. Conclusion

Dassonville was a response to the lack of clarity in EU law as to whether non-discriminatory measures may be caught by Art.34. Cassis de Dijon remained in history more due to the confirmation of Dassonville, rather than due to the creation of the notion of mandatory requirements as there is very little on this notion in the case. The mandatory requirements have not given states a wide margin of discretion in regards to the use of justifications for non-discriminatory measures since despite the long list of exceptions, states are not permitted to easily take advantage of them. At best, their presence in the case law of the CJEU merely symbolises that non-discriminatory measures are lesser manifest infringements of Art.34. The jurisprudence of the CJEU in relation to selling arrangements lacks consistency as the court constantly revisits it without rejecting the old case law in a way that is contradictory.

Overall, despite the fact that the jurisprudence of the CJEU on free movement of goods is very rich, significant uncertainties in regards to the objectives that it pursues and the meanings of key concepts still remain.

Word Count:

  • Question 1 – 1,497 words
  • Question 2 – 1,496 words

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