The Council of the European Union adopted on 16. 12. 2002 the new Council Regulation (EC) No. 1/2003 on the implementation of the rules on competition laid down in Article 81 and 82 of the Treaty Establishing the European Community. The new Council Regulation, which came into force on 1. 05. 2004, replaces the 40 years old Antitrust-Regulation No. 17, thus bringing fundamental changes in the application of European competition law. The new Regulation is designed to respond to the current requirements of the competition policy of an enlarged and more mature European Union and to overcome the inefficiencies present in the old antitrust enforcement system. The European Commission also adopted a series of documents, regarded as the Modernisation Package, which complete the landmark modernisation of the European Union's antitrust enforcement rules and procedures. Not surprisingly, such a radical reform raises a number of questions of interpretation and as to how the new rules will work in practice. After a brief discussion of the legislative history, we will, in particular, look at what the system of legal exception will mean for the legitimate demands of undertakings for legal certainty.
Background of the Antitrust-Reform
Before exploring the development of the new Regulation No. 1/2003 it is important to briefly take a look at the main rules set out in the Regulation No.17 and to identify its major deficiencies, which the new Regulation attempted to sweep away.
Regulation No. 17 adopted and entered into force in 1962 provided until recently the rules for the implementation of Articles 81 and 82 EC-Treaty. In brief, Article 81(1) of the Treaty prohibits, under specific circumstances, 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 common market. Article 81(2) declares such agreements or decisions to be void. Although falling under para. 1, an agreement, decision or concerted practice can gain exemption under Article 81(3), which can be granted on an individual basis, or through block exemptions containing categories of agreements. Article 82 concerns abuses of dominant positions by one or more undertakings within the common market.
The Regulation No. 17 approached the competition rules of the EC-Treaty in the following way:
1. It was based on direct effect of the prohibition rule of Article 81(1) and Article 82, which means that agreements, decisions and concerted practices of the kind described in Article 81(1) EC-Treaty and the abuse of a dominant position in the market, within the meaning of Article 82 EC-Treaty, were prohibited, without prior decision to that effect being required.
2. It provided for the prior notification to the Commission of restrictive agreements and practices for exemption under Article 81(3) EC-Treaty. The Commission in exclusivity was granted the power to apply Article 81(3) thus generating a centralised system of conferring exemptions. Therefore, under the old system of Regulation No. 17, national courts and authorities could apply Article 81(1) and 82 EC-Treaty, but they could not grant exemptions under Article 81(3), which was left in exclusivity to the Commission.
This centralised notification system established by Regulation No. 17 proved to be appropriated for a relatively small Community of Member States, which was the reality at the time the Regulation was adopted. It enabled the Commission at that time to build up a coherent body of precedent cases, and to ensure that the competition rules were applied consistently throughout the Community. However, it stopped being appropriate and started causing increasing difficulties once the enlargement of the Community became a reality. As a result the Commission was faced with the serious problem that it did not have the resources to deal with all the agreements notified to it. Moreover, the maintenance of a centralised notification system with prior authorisation by the Commission in a Community which now counts 25 Member States, prevented the Commission from detecting and punishing serious infringements and ensuring effective supervision, thus posing a real threat to competition within the common market.
In this context, a reform of the antitrust enforcement system appeared as a priority on Commission’s agenda. As a result, the Commission initiated in 1999 the reform process by adopting a "White Paper on modernisation of the rules implementing Articles 81 and 82 of the EC-Treaty” which culminated in the adoption of the new Council Regulation (EC) No. 1/2003. The Commission also identified in the White Paper the two major deficiencies of the system under Regulation No. 17:
1. The system no longer ensured the effective protection of competition and the Commission's monopoly on the application of Article 81(3) was a significant obstacle to the effective application of the rules by national competition authorities and courts. This system only rarely revealed cases that pose a real threat to competition and the notification system according to Regulation No. 17 prevented the Commission's resources from being used for detection and punishment of serious infringements.
2. It imposed an excessive burden on industry by increasing compliance costs and preventing companies from enforcing their agreements without notifying them to the Commission even if they fulfilled the conditions of Article 81(3). The Commission stated that the requirement of notification was particularly detrimental to small and medium-sized enterprises for whom the cost of notification could constitute a competitive disadvantage compared with larger firms and in the absence of notification could cause difficulties in enforcing their agreements.
As a way to overcome these deficiencies, the Commission proposed the adoption of a completely different enforcement system which was ultimately laid down in the Council regulation No. 1/2003. Finally, the system of Regulation No. 17 was replaced by a directly applicable system in which the competition authorities and courts of the Member States have the power to apply not only Article 81(1) and Article 82 of the EC-Treaty, but also Article 81(3) of the Treaty.
Changes brought by the new Council Regulation:
The new Regulation, which does not concern state aid and merger control, has brought important changes in the application of the European competition law, which can be classified as follows:
I. Direct Applicability of Article 81 (3) EC-Treaty
Article 1 of the Regulation No. 1/203 establishes the direct applicability of Article 81(3), (directly applicable exception system) which is the most fundamental change brought by the new Regulation. The concept of direct applicability means that national courts and competition authorities are empowered now to apply directly not only Article 81(1) and 82 of the EC-Treaty but also Article 81(3).
1. Decentralised Application of the Competition Rules
By empowering the competition authorities and the courts of the Member States to apply Article 81 and 82 in individual cases in their entirety, Article 5 and 6 of the Regulation No. 1/2003 creates conditions for a greater involvement of national courts and competition authorities in the enforcement of competition rules. However, this doesn’t exonerate the Commission of the right to intervene in the application of Article 81 and 82 of the Treaty in an individual case whenever it is dictated by the Community public interest. In this situation, according to article 11(6) of the Regulation No.1/2003, the Commission shall initiate proceedings for the adoption of a decision that shall relieve the national competition authorities of their competence to apply Article 81 and 82 of the Treaty.
2. Abolition of the Notification and Authorisation System
The Regulation 1/2003 removes the centralised notification and authorisation system for the application of Article 81(3) of the Treaty. According to Article 1 of this Regulation, agreements, decisions and concerted practices of the kind described in Article 81(1) of the Treaty must no longer be notified to the Commission in order to gain exemption under Article 81(3). Provided that such agreements, decisions or concerted practices satisfy Article 81(3)'s conditions, they are not prohibited. In other words, Article 81(3) can be directly invoked by undertakings before a national court or national competition authority; no prior Commission statement is needed to do so. As a consequence, it is no longer the Commission but the affected undertakings themselves which must scrutinise whether their agreements, decisions or concerted practices satisfy the conditions of Article 81(3) and gain exemption or not.
Under the new directly applicable exception system the undertakings are freed from the obligation to notify, and their position is strengthened, since they can seek the enforcement of their restrictive practices in the courts, as they are now able to plead that their restrictive practices are covered by Article 81(3) of the Treaty. On the other hand, Regulation No. 1/2003 necessitates undertakings to make their own assessment of the compatibility of their restrictive practices with Article 81(3), in the light of the legislation in force and the case-law. This will certainly lighten the administrative burden weighing on undertakings, but it will also require them to take on added responsibility. The Commission takes the view that undertakings are generally well placed to assess the legality of their actions in such a way as to enable them to take an informed decision on whether to go ahead with an agreement or practice and in what form. This is also facilitated by the fact that undertakings are close to the facts and have at their disposal the framework of block exemption Regulations, case law and case practice as well as extensive guidance in Commission guidelines and notices, in particular the recently adopted "Modernisation Package.”
3. Priority of Articles 81 and 82 EC-Treaty over National Competition Law
Article 3 of the Regulation No. 1/2003 laid down the relationship between Articles 81 and 82 EC-Treaty and national competition law. In this respect, para. 1 of Article 3 imposes an obligation on Member States´ courts and competition authorities to apply EC competition rules, at least alongside national law, whenever a case falls within the scope of application of Articles 81 and 82. Of course they may also apply Articles 81 and 82 on stand-alone basis. To this end, Article 3 of Regulation No. 1/2003 is an expression of the principle of primacy of Community law over national law and of its effectiveness. At the same time, according to para. 2 of Article 3 any agreement, decision or concerted practice which affects trade between Member States but which does not restrict competition within the meaning of Article 81(1) or which fulfils the conditions of Article 81(3) or which is covered by a block exemption may not be prohibited by national authorities by means of applying national competition law. Otherwise, the supremacy of Community law and its effectiveness would be undermined. However, Member States shall not under Regulation No. 1/2003 be precluded from adopting and applying on their territory stricter national laws which prohibit or sanction unilateral conduct engaged in by undertakings.
II. Co-operation between the Commission and the Member States
One of the consequences produced by the decentralised system set by the Regulation No. 1/2003 is the need for co-ordination and close co-operation between the authorities involved in the enforcement process. The Regulation No. 1/2003, in Chapter IV lays down the mechanism of such co-operation.
1. Co-operation within the Network of Competition Authorities
Together the national competition authorities and the Commission form a network of public authorities, which act in the public interest and co-operate in order to protect competition within the common market. The network is a forum for discussion and close co-operation in the application and enforcement of EC competition policy. It is called European Competition Network (ECN). The Commission adopted a Notice on co-operation within the ECN, which provides guidance on the work-sharing between the public enforcers, the mutual information about pending cases at different stages of the procedure and the exchange of information. The ECN aims at ensuring both a flexible and efficient division of work and an effective and consistent application of EC competition rules. The Commission announced, in this respect, to concentrate its enforcement resources on the most serious infringements and to handle cases in relation to which the Commission should act with a view to define Community competition policy and to ensure coherent application of Articles 81 and 82 of the EC-Treaty.
2. Co-operation between the Commission and national courts
The co-operation with national courts is regulated by Article 15 of the Regulation No.1/2003 and by the Commission’s Notice on the co-operation between the Commission and the courts of the EU Member States in the application of Article 81 and 82 of the EC-Treaty. For the purpose of coherent application of Community competition rules: (1) the courts of the Member States may themselves ask the Commission to transmit to them information in its possession or its opinion on questions concerning the application of the Community competition rules, (2) or the Commission, acting on its own initiative, may submit written observations to courts of the Member States, whenever required by the public interests of the community. Article 16 ensures the uniform application of community law by prohibiting the national courts and competition authorities to take decisions running counter to the decisions adopted by the Commission, whenever they rule on agreements, decisions, practices under Article 81 or 82 of EC-Treaty which are already subject of a Commission decision.
III. Powers of Investigation of the Commission
Although a significant burden of enforcement responsibilities of EC competition rules is shifted to national authorities, the new Regulation has supplemented and increased the powers of investigation of the Commission as a response to the growing difficulty of detecting violations of EC competition rules. Chapter V of the Regulation No. 1/2003 establishes the powers of investigation of the Commission. Among the most important powers gained by the Commission in this respect are:
1. The right to inspect private homes
The experience of national competition authorities and the Commission has shown that incriminating documents are more frequently kept and discovered in private homes. Therefore, Article 21(1) of Regulation No. 1/2003 empowers the Commission, subject to prior judicial authorisation, to search private homes if professional documents are likely to be kept there.
2. The right to examine witnesses
This right is also a significant novelty of the new Regulation. However there is a need to distinguish between the examination of witnesses for the purpose of inspections and outside this purpose.
- Examination of witnesses outside the purpose of inspections. Until the Regulation 1/2003 came into force, the Commission did not have the right to examine witnesses and use their statements as evidence. This possibility is now regulated in Article 19 of the Regulation No. 1/2003. Still, the Commission is not entitled to force witnesses to make statements. The Commission is also obliged to examine the witnesses, whose statements are submitted as evidence by the undertakings.
- Examination of witnesses for the purpose of inspections. Article 20 (2) lit. e endows the officials and other accompanying persons authorised by the Commission with the power to ask any representative or member of the staff of the undertaking or association of undertakings for explanations on facts or documents relating to the subject matter and purpose of the inspection and to record answers. It can be inferred from the systematic context of Article 20 and 19 of the Regulation No. 1/2003 that this power can be exercised only when an inspection can be carried out. According to Article 23 (1) lit. d. of the Regulation 1/2003 the Commission has the right to impose fines on undertakings, not exceeding 1% of the total turnover in the preceding business year if they provide the Commission with incorrect information in response to a question asked in accordance with Article 20(2) lit. e and fail to rectify it within a time limit set by the Commission. Moreover, it can be claimed with certainty that fines for breach of procedural rules and the periodic penalty payments were strongly increased by Articles 23 and 24 of Regulation No. 1/2003 in order to compel compliance with the new Regulation.
IV. The system of legal exception – consequences for undertakings
The last twelve months of legal practice have proven that the most important innovation of the new Council Regulation from an undertaking´s perspective is that there is no longer any need to notify an agreement to the Commission in order to benefit from exemption under Article 81 (3) EC-Treaty. Conversely, undertakings are no longer able to ask the Commission for an exemption decision or negative clearance in order to avoid the risk of nullity of an agreement, or to obtain immunity from fines. Therefore, undertakings will have to assess their agreements themselves and rely on the results of such assessment.
In principle, this situation is not so different from the situation under the old system. Already then, undertakings were to assess the compliance of their agreements with the competition rules themselves before they notified an agreement to the Commission. As a result of this preliminary screening, the overwhelming majority of cases were not notified to the Commission. Only a relatively small number of cases, where the respective undertakings and their advisers believed that there could be a real competition issue were notified.
However, it is precisely in these difficult cases that the old system could provide for a high (in case of a negative clearance or exemption) or at least limited (in case of a comfort letter) degree of legal certainty and, as from the date of notification, for the guarantee that no fines would be imposed until such time as the Commission either revokes the immunity or finds that the agreement in question violates Article 81 (1) EC-Treaty and cannot be exempted. In this respect, even the simple and qualified so-called comfort letters that the Commission offered did provide comfort in many circumstances, assuring that the compatibility of the agreements with Article 81 EC-Treaty would only rarely become the subject of a court proceeding. Although not formally binding, comfort letters nevertheless carried a certain degree of authority that a national court hearing an Article 81 EC-Treaty case was de facto expected to take into account. Indeed, in the case of most notifications the Commission closed the file by issuing a comfort letter, while only very few notified agreements received a formal and de jure binding decision in the form of a negative clearance or exemption, sometimes after lengthy delays.
The new system does not offer instruments to replace formal decisions and informal comfort letters, except in certain very narrow circumstances. Undertakings may still be able to notify agreements to certain national competition authorities under their respective national law. However, such notifications are unlikely to be of much help, since, according to Article 3 (1) of the New Regulation, Community law takes precedence over national law and needs to be applied in parallel with national law if trade between Member States is affected. At any rate, Article 3 will lead to harmonisation of national law with EC competition law so that national notification systems are likely to be repealed.
Article 10 of the New Regulation empowers the Commission to make a positive “finding of inapplicability” by decision, which, however, will likewise only be of limited help for an undertaking seeking legal certainty. As was stated in a Commission Staff Working Paper, Article 10 is not intended to restore the notification system. According to Article 10, a finding of inapplicability can only be made on the Commission´s own initiative and where it is in the public interest to take a decision. More importantly, findings of inapplicability are only of declaratory nature, as any constitutive decision regarding the compatibility of an agreement with Article 81 EC-Treaty would be alien to the system of ex post control introduced by the Regulation. Furthermore, Recital 14 of the New Regulation implies that non-applicability decisions will only be adopted by the Commission where there are strong public policy considerations which are strictly linked to the implementation of Article 81 and 82 EC-Treaty and where the law needs to be clarified, such as “with regard to new types of agreements or practices that have not been settled in the existing case-law and administrative practice”. Notwithstanding these limitations, the wording of Article 10 allows a broader interpretation of the notion of “Community public interest”, covering cases where a significant Community policy goal is at stake, e.g. a large Community infrastructure project. Also cases of significant financial risk or capital involvement of the undertakings concerned may qualify for an Article 10 decision in exceptional circumstances.
Under the current (new) system, the Commission will provide informal guidance only in relatively few cases. According to Recital 38 of the New Regulation undertakings will be able to seek guidance from the Commission in “genuine cases of uncertainty because they present novel or unresolved question for the application of these rules”. It is likely that the Commission will accept such genuine uncertainties only to a very limited extent, since otherwise the reform would not achieve one of its main goals, namely freeing Commission resources from dealing with relatively innocuous commercial agreements in order to allow these resources to be re-deployed for the investigation of serious infringements. That being said, there will certainly be more cases that qualify for informal guidance than for Article 10 decisions. The value of informal guidance will very much depend on what status such informal Commission opinions will have in proceedings before a national judge or court, which in turn will depend on what procedure the Commission follows in issuing these informal opinions. If the Commission carries out investigations in appropriate cases before issuing a positive informal opinion, the value of such an opinion should be somewhat similar to that of a qualified comfort letter, i.e. de facto binding on the Commission and representing an important element for the assessment of a court.
Consequently, in situations where the block exemption regulations do not apply, with the exception of the guidance to be provided by the future Commission notice on the application of Article 81 (3) EC-Treaty and the possibility of case-specific guidance in the limited situations as described above, the new system does not offer undertakings any means to eliminate the risk of fines for infringement of the EC competition rules. In the future therefore, undertakings will have to rely on their own assessment of their agreements, including those agreements that formerly would have been notified to the Commission. However, in many cases there will be no simple evidence available to show that the conditions of Article 81 (3) EC-Treaty are met so that self-assessment entails a significant amount of uncertainty.
To minimise the risk associated with self-assessment, undertakings will probably resort to asking independent legal counsel for advice. In addition, where it is difficult to establish the facts for the application of Article 81 (3) EC-Treaty, e.g. what the concentration of the market may be and whether the parties have market power, a study by an economic expert or a market research institute may help. A well reasoned expert legal opinion, which concludes on the basis of an economic study that a particular agreement should not be caught by Article 81 (1) EC-Treaty because of the application of Article 81 (3) EC-Treaty, should have strong evidential value in a proceeding before an National Competition Authority, the Commission or a national court where the imposition of fines is at issue. In particular, it should suffice to prove that the undertaking committed a violation neither intentionally nor negligently as required by Article 23 (2) of the New Regulation for the imposition of fines by the Commission and by similar rules in national competition law.
The new Council Regulation (EC) No. 1/2003 on the implementation of the rules on competition laid down in Article 81 and 82 of the EC-Treaty brought fundamental changes in the observance of Community competition law. Although the changes brought by the new Regulation are highly appropriate particularly in view of the enlargement of the European Union, they still involve uncertainties which require adjustment. Therefore, in order to alleviate the burden imposed by the new system on undertakings and to take away remaining uncertainties, the Commission should facilitate undertakings' task of assessing their behaviour by block exemptions, Commission Notices and guidelines clarifying the application of the new rules. There is no denying that under the new system undertakings and their legal advisors are at greater risk in assessing the compatibility of their conduct with Article 81 EC-Treaty than under the old regime. It will be up to the courts and ultimately the ECJ to define the standards of diligence to be met by an undertaking when assessing an agreement as to its compatibility with Article 81 EC. It is to be hoped that the courts will settle for a standard of reasonable diligence which strikes an equitable and practicable balance between the obligation to observe the law and the possibility to establish the facts required for showing that Article 81 (3) EC-Treaty applies.