The Council of Ministers adopted a Regulation to implement the main EU competition rules which are set out in Article 81 and 82 of the Treaty (Council Regulation 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (OJ 2003 L1/1)). The Regulation is the most significant change to the implementation of the EC competition rules since 1962. The new Regulation came into force on 1st May 2004.

Article 81(1) of the EC Treaty prohibits agreements between undertakings, decisions by associations of undertakings and concerted practices which affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the EU. An agreement, decision or concerted practice which infringes the above prohibition is void and unenforceable. Article 81(3) allows for the grant of exemptions from the prohibition in Article 81(1) if certain conditions are met. The Commission is empowered to adopt block exemption regulations which grant an automatic exemption to a defined category of agreements. Article 82 prohibits companies which hold a dominant position in a product or service market in the EU or a substantial part of the EU from abusing that position. The Commission is empowered to impose fines for a breach of the above rules and third parties may initiate proceedings before the national courts asserting a breach of the competition rules which if successful may result in the grant of remedies including damages.

The Irish competition rules are contained primarily in the Competition Act 2002 (the "2002 Act"). Section 4(1) of the 2002 Act prohibits all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or any part of the State. An agreement, decision or concerted practice which infringes the above prohibition is void and unenforceable. An agreement, decision or concerted practice may be exempted by satisfying certain conditions set out in Section 4(5) of the 2002 Act. The Competition Authority is empowered to issue Declarations to a defined category of agreements and practises which if applicable provide an automatic exemption to the relevant agreements and practises concerned. Section 5(1) of the 2002 Act prohibits any abuse by one or more undertakings of a dominant position in trade for any goods or services in the State or in any part of the State. The entry into or implementation of an agreement or the making or implementation of a decision or the engagement in a concerted practice or acting in a manner which is an abuse of a dominant position constitutes an offence by the undertakings concerned punishable by given sanctions. Directors and other persons may also be personably liable for a breach of the above prohibition and exposed to given sanctions in certain circumstances and "any person aggrieved" may initiate proceedings before the courts seeking various remedies including damages.

The former framework for the implementation of Article 81 was largely set out in Regulation 17/62 which provided a centralised system under which the Commission was effectively given exclusive jurisdiction to grant individual and block exemptions and under which the Commission was the executive body principally responsible for the enforcement of EU competition law. The above created a largely notification based system where the parties to an agreement notified the Commission of an agreement requesting a decision that the agreement in question was either not an infringement of EU competition law or that it qualified for the grant of an exemption. Furthermore, the above resulted in the Commission receiving many complaints of breaches of EU competition law. The Regulation is designed to decentralise the implementation of EU competition rules so that implementation occurs principally at a national as opposed to European level. Decentralisation is designed to allow the Commission to concentrate its resources on combating the most significant breaches of EU competition law such as price fixing cartels.

Below we summarise the rules set out in Article 3 of the Regulation regarding the relationship between EU and national competition law under the following headings:

1. Obligation on national competition authorities and national courts to apply to EU competition rules;
2. The circumstances where national competition laws are excluded;
3. The exceptions to the above exclusions of national competition law; and
4. The concept of trade between Member States.

Article 3 of the Regulation imposes an obligation on the competition authorities of the Member States and the national courts to apply Article 81 of the EC Treaty to agreements, decisions or concerted practices in circumstances where they apply national competition law to agreements, decisions and concerted practices which may affect trade between Member States within the meaning of Article 81(1) of the EC Treaty. Similarly, the national competition authorities and the national courts are obliged to apply Article 82 of the EC Treaty when applying national competition law to any abuse prohibited by Article 82 of the EC Treaty.

The Regulation specifically excludes the application of national competition laws to the following agreements, decisions and practices:

1. Those which may affect trade between Member States but which do not restrict competition within the meaning of Article 81(1) of the EC Treaty. The above principle excluding the application of national competition law is significant in practise in that if an agreement is entered into and it is clear that the agreement has an appreciable effect on trade between Member States and that it does not involve a breach of Article 81(1) of the EC Treaty, there will as a general rule be no need to examine whether or not the agreement complies with the national law equivalent of Article 81(1) of the EC Treaty in the relevant jurisdictions. The application of the above in an Irish context would mean that the relevant agreement would not have to be considered under Section 4(1) of the 2002 Act; or
   
   
2. Agreements, decisions or concerted practises which fulfill the conditions for an exemption under Article 81(3) of the Treaty; or
   
   
3. Those which are covered by a block exemption Regulation. The above is significant from a practical perspective in that if an agreement can be shown to fall within the parameters of an EU block exemption regulation and therefore Article 81(1) of the EC Treaty is disapplied, there will in many cases be no need to look at the domestic competition rules of a Member State in order to see whether or not its provisions are being infringed. For example, if a distribution agreement involving an Irish distributor and a German supplier has an appreciable effect on trade between Member States and involves an appreciable restriction of competition contrary to Article 81(1) of the EC Treaty and falls within Commission Regulation (EC) No 2790/1999 of 22 December 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practises (OJ 1999 L336/21) ("Vertical Restraints Block Exemption"), there is no need examine the application of section 4(1) of the 2002 Act to the agreement concerned.

There are a number of exceptions to the above which can be summarised as follows:

1. The Regulation specifically provides that Member States are not precluded from adopting and applying on their territory stricter national laws which prohibit or sanction unilateral conduct engaged in by undertakings. As a result, in our example above involving the appointment by a German supplier of an Irish distributor, the Competition Authority or any other complainant could assert that the distribution agreement infringes section 5(1) of the 2002 Act.
   
   
2. The Regulation provides that the competition authorities and the courts of the Member States are free to apply national merger control laws. As a result, Part 3 of the 2002 Act regarding mergers and acquisitions are still applicable notwithstanding the possible application of Articles 81 and/or 82 of the EC Treaty;
   
   
3. The Regulation provides that the competition authorities and the courts of the Member States are also free to apply national laws that predominately pursue an objective different from that pursued by Articles 81 and 82 of the EC Treaty.

An agreement, decision or concerted practice is caught by Article 81(1) of the EC Treaty if it (a) appreciably affects trade between Member States and (b) appreciably restricts competition in the EU. The Commission's current thinking on the circumstances where an agreement will be viewed by the Commission as appreciably affecting trade between EU Member States (as opposed to appreciably restricting competition) are set out in the recently published Commission Notice on the effect on trade concept contained in Articles 81 and 82 of the Treaty (OJ C 2004 C101/81) (the "Notice"). The Notice sets out the circumstances in which the Commission considers an agreement unlikely in general to be capable of appreciably affecting trade between Member States (the non-appreciable affectation of trade or NAAT rule). The Commission in its Notice specifies that it will apply a negative rebuttable presumption that agreements are not capable of appreciably affecting trade between Member States when the following cumulative conditions are met:

1. Market Share:
   The aggregate market share of the parties on any relevant market within the Community affected by the agreement does not exceed 5%; and
   
   
2. Turnover:
   The turnover of the parties must not exceed the following thresholds depending on the nature of the agreement:
   
   
   • In the case of horizontal agreements, the aggregate annual Community turnover of the undertakings concerned in the products covered by the agreement must not exceed €40,000,000. In the case of agreements concerning the joint buying of products, the relevant turnover is the parties' combined purchase of the products covered by the agreement; or
     
     
   • In the case of vertical agreements, the aggregate annual Community turnover of the supplier in the products covered by the agreement must not exceed €40,000,000. In the case of licence agreements, the relevant turnover is the aggregate turnover of the licensees in the products incorporating the licensed technology and the licensors' own turnover in such products. With regard to agreements concluded between a buyer and several suppliers, the relevant turnover is the buyer's combined purchases of the products covered by the agreement.

The Commission in its Notice specifies that the above negative presumption shall apply where during two successive calendar years, the above turnover threshold is not exceeded by more than 10% and the above market threshold is not exceeded by more than two percentage points.

The €40,000,000 threshold is calculated on the basis of the total Community sales (excluding tax) during the previous financial year by the undertakings concerned of the product covered by the agreement and sales between the entities that form part of the same undertaking are excluded.

It is important to note that in the case of networks entered into by the same supplier with different distributors, sales made through the entire network are taken into account. The Notice provides that contracts that form part of the same overall business arrangement constitute a single agreement for the purposes of the NAAT rule. The Commission points out that where the agreement concerned is an emerging and therefore not yet existing market and where as a consequence the parties neither generate relevant turnover nor accumulate any relevant market share, the Commission will not apply the above presumption.

The Commission points out that in such cases appreciability may have to be assessed on the basis of the position of the parties on the related product markets or their strength in technologies relating to the agreement.

The Commission specifies that it will apply a positive rebuttable presumption that trade may be affected within the meaning of Article 81(1) of the EC Treaty to agreements which by their very nature are capable of affecting trade between Member States to an appreciable extent where either as opposed to both of the above turnover or market share thresholds are met. The Commission identifies various types of agreement which would be regarded by their very nature as being capable of affecting trade between Member States.

The Commission points out that agreements covering or implemented in several Member States are in almost all cases by their very nature capable of affecting trade between Member States. The Commission continues by giving examples of such types of agreements.

1. Agreements concerning imports and exports: The Commission points out that this category includes agreements between undertakings in two or more Member States and agreements that impose restrictions on imports and exports including restrictions on active and passive sales and resale by buyers to customers in other Member States. The Commission points out that in the case of restrictions on imports/exports, there is an inherent link between the alleged restriction of competition and the effect on trade since the very purpose of the restriction is to prevent flows of goods and services between Member States which otherwise would be possible. The Commission points out that it is immaterial whether the parties to the agreement are located in the same Member State or in different Member States.
   
   
2. Cartel agreements covering several Member States: The Commission points out that cartel agreements such as those involving price fixing and market sharing covering several Member States are by their nature capable of affecting trade between Member States.
   
   
3. Horizontal co-operation agreements covering several Member States: The Commission refers to joint venture agreements. The Commission points out that joint ventures that perform on a lasting basis all the functions of an autonomous economic entity are covered by the EU Merger Control Regulation and are therefore outside the scope of Articles 81 and 82 of the EC Treaty except in cases where Article 2(4) of the EU Merger Control Regulation is applicable. The Notice points out that joint ventures which engage in activities in two or more Member States or which produce an output that is sold by the parents in two or more Member States affect the commercial activities of the parties in those areas of the Community and are therefore normally by the very nature capable of affecting trade between Member States. The Notice points out that trade may also be capable of being effected where joint venture produces an input for the parent companies, which are subsequently processed or incorporated into a product by the parent companies. The Notice provides that trade is likely to be capable of being affected where the input in question was previously sourced from suppliers in other Member States, where the parents previously produced the input in other Member States or where the final product is traded in more than one Member State. The Notice points out that the assessment of appreciability requires that account be taken of the parents' sales of products related to the agreement and not only those of the joint venture entity created by the agreement given that the joint venture does not operate as an autonomous economic entity on any market.
   
   
4. Vertical agreement implemented in several Member States: The Commission points out that vertical agreements and networks of similar vertical agreements implemented in several Member States are normally capable of affecting trade between Member States in the following situations:
   
   
   • If they cause trade to be channelled in a particular way. The Commission provides the example of networks of selective distribution agreements implemented in two or more Member States that channel trade in a particular way because they limit trade to members of the network thereby affecting patterns of trade.
     
     
   • Vertical agreements which have foreclosure effects. The Commission provides the example of agreements whereby distributors in several Member States agree to buy only from a particular supplier or to sell only its products. The Commission points out that foreclosure may result from individual agreements or from networks of agreements.
     
     
   • Agreements between suppliers and distributors which provide for resale price maintenance and which cover two or more Member States.
     
     
5. Abuses Of A Dominant Position Covering Several Member States: The Commission divides abuses into two categories namely exclusionary abuses (e.g. loyalty rebates and conduct aimed to eliminate a competitor) and exploitative abuses (price discrimination). The Commission points out that a dominant undertaking that engages in exclusionary or exploitative abuse in more than one Member State will normally by its very nature be capable of affecting trade between Member States.

With respect to agreements which cover the territory of a single Member State, the Commission points out that it may be necessary to make a more detailed inquiry into the ability of the agreement or abusive practise to affect trade between Member States. The Commission confirms that it is not necessary for trade to be reduced to establish an effect on trade between Member States. The Notice specifies that in many cases involving a single Member State, the nature of the alleged infringement and in particular its propensity to foreclose the national market, provides a good indication of the capacity of the agreement or practice to affect trade between Member States. The Commission provides the following examples of agreements which are confined to the territory of single Member State but which can be considered to be capable of affecting trade between Member States:

• Cartels Covering a Single Member State: The Notice specifies that horizontal cartels which cover the whole of the Member State are normally capable of affecting trade between Member States.
  
  
• Horizontal Co-operation Agreements Covering a Single Member State: The Commission points out that horizontal co-operation agreements and in particular non-full function joint ventures which are confined to a single Member State and which do not directly relate to imports and exports are not by their very nature capable of affecting trade between Member States and that therefore a careful examination of the capacity of the individual agreement to affect trade between Member States may be required. The Commission states that horizontal co-operation agreements may in particular be capable of effecting trade between Member States where they have foreclosure effects and in this context the Commission provides the example of agreements that establish sector-wide standardisation and certification regimes which either exclude undertakings from other Member States or which are more easily fulfilled by undertakings from the Member State in question. The Notice also points out the trade may be effected where a joint venture results in undertakings from other Member States being cut off from an important channel of distribution or source of demand and the Notice gives the example of two or more distributors established in the same Member State accounting for a substantial share of imports of the products in question who establish a purchasing joint venture combining purchases of the product and resulting in the reduction in the number of distribution channels thereby limiting the possibility for suppliers from other Member States gaining access to the national market in question.
  
  
• Vertical Agreements Covering a Single Member State: The Notice specifies that vertical agreements which cover the whole of a Member State may in particular be capable of affecting patterns of trade between Member States when they make it more difficult for undertakings from other Member States to penetrate the national market in question either by means of exports or by means of establishment (foreclosure effect). The Commission points out that foreclosure may for example occur when suppliers impose exclusive purchasing obligations on buyers. The Notice points out that vertical agreements which cover the whole of the Member State and which relate to tradable products may also be capable of affecting trade between Member States even if they do not create direct obstacles to trade. The Commission states that agreements involving resale price maintenance may have direct effects on trade between Member States by increasing imports from other Member States and by decreasing exports from the Member State in question.
  
  
• Agreements Covering only Part of a Member State: The Commission states that the assessment of agreements which cover only part of the Member State is to be made in the same way as agreements covering the whole of the Member State. The Commission acknowledges that the above two categories must be distinguished given that in this context only part of the Member State is covered by the agreement. The proportion of the national territory susceptible to trade must be taken into account. The Notice specifies that where an agreement forecloses access to a regional market, the volume of sales affected must be significant in proportion to the overall volume of sales of the products concerned inside the Member State in question for trade to be appreciably effected. The Commission points out that the market share of the parties must also be given "fairly limited weight". Even if the parties have a high market share in a properly defined regional market, the size of the market in terms of volume may still be insignificant when compared to total sales of the products concerned within the Member State in question. The Commission points out that the best indication of the capacity of the agreement appreciably to affect trade between Member States is considered to be the share of a national market in terms of volume that is being foreclosed.
  
  
• Abuses of Dominant Positions Covering a Single Member State: Where an undertaking holds a dominant position in the whole of a Member State engages in exclusionary abuses, trade between Member States is normally capable of being affected. The Commission points out that in the case of exploitative abuse such as price discrimination and excessive pricing, the situation may be more complex. Price discrimination between domestic customers will not normally affect trade between Member States. However, if the buyers are engaged in export activity and are disadvantaged by the discriminatory pricing or if the practice is used to prevent imports, trade may be affected. The Commission points out that for so long as an undertaking is in a dominant position which covers the whole of the Member State, it is normally immaterial whether the specific abuse engaged in by the dominant undertaking only covered part of its territory or affects certain buyers within the national territory. The Notice points out that if the abuse is purely local in nature or involves only an insignificant share of the sales of the dominant undertaking within the Member State in question, trade may not be capable of being appreciably effected.
  
  
• Abuse of a Dominant Position Covering only part of a Member State: The Commission states that if the dominant position covers part of the Member State that constitutes a substantial part of the common market and the abuse makes it more difficult for competitors from other Member States to gain access to the market where the undertaking is dominant, trade between Member States must normally be considered capable of being appreciably affected. The Notice states that regard must be had in particular to the size of the market in terms of volume. The Commission states that trade may not be capable of being appreciably affected if the abuse is purely local in nature or involves only an insignificant share of the sales of a dominant undertaking.

The Commission confirms that Articles 81 and 82 apply to agreements and practices that are capable of affecting trade between Member States even if one or more of the parties are located outside the EU. Articles 81 and 82 apply irrespective of the location of the undertakings or the place where the agreement has been concluded provided that the agreement or practice is either implemented inside the EU or produces effects inside the EU. It suffices that the agreement or practice involving third countries or undertakings located in third countries is capable of affecting cross border economic activity inside the EU. The Commission states that it is necessary to ascertain the object of the agreement or practice as indicated by its content or the underlying intent of the undertakings involved. Where the object of the agreement is to restrict competition inside the Community, the requisite effect on trade between Member States is more readily established than where the object is predominantly to regulate competition outside the Community. The Commission looks at the following in the context of this category.

1. Arrangements that have as their object the restriction of Competition inside the Community: With respect to imports, this category includes agreements that bring about an isolation of the internal market (e.g. the sharing of markets by competitors in the Community and in third countries by agreeing not to sell in each other's home markets or entering into reciprocal exclusive distribution agreements) and in the case of exports this category includes cases where undertakings that compete in two or more Member States agree to export surplus quantities to third countries with a view to co-ordinating their market conduct inside the Community.
   
   
2. Other Arrangements: The Commission points out that in the case of agreements and practices whose object is not to restrict competition inside the Community, it is normally necessary to proceed with a more detailed analysis of whether or not cross border economic activity inside the EU is capable of being affected. The Commission points out that it is relevant to examine the effects of the agreement or practice on customers and other operators inside the Community that rely on the products in question. The Notice specifies that trade may also be capable of being affected when the agreement prevents re-imports into the Community. The Commission provides the example of vertical agreements between Community suppliers and third country distributors imposing restrictions on resale outside a given territory including the Community. The Commission points out that for such effects to be likely, there must be an appreciable difference between the price of the products charged in the Community and those charged outside of the Community and that the price differential must not be eroded by customs duties and transport costs. Furthermore, the volumes exported compared to the total market of those products in the territory of the common market must not be insignificant. The Commission points out that regard must be had not only to the individual agreement between the parties but also to the cumulative effect of similar agreements concluded by the same and competing suppliers.

July 2004.

For further information please contact Marco Hickey.