Competition has been an essential instrument in abolishing barriers among Member States and the EC reaffirmed it countless times over the years. The European Court of Justice (“Court” or “ECJ”) very early established the same principles in the 1966 landmark judgment in Consten and Grundig v. Commission: “An agreement between producer and distributor that is designed to restore the national partitions in trade between Member States could conflict with the basic objectives of the Community.” While over time the Commission has evolved to take increasingly into account economic efficiency, the congenital concern over internal market integration remains of paramount importance in the enforcement of competition rules.
Vertical restraints are usually seen as susceptible of contributing to generating efficiencies. The issue is how to balance the negative and the positive effects of vertical restraints.
An agreement through which exclusivity is granted for a specific territory is not, in itself, in violation of article 101(1) TFEU. In Société Technique Minière v. Maschinenbau Ulm, which was contemporaneous with the judgment in Consten, the Court made clear that in the absence of a hardcore restriction – as was the case of the absolute territorial protection found in Consten – “the consequences of the agreement must then be examined and must justify the conclusion either that the agreement prevents or that it restricts or distorts competition to an appreciable extent”, with special attention given to “whether the agreement is capable of partitioning the market in certain products between the Member States”. In this case, neither the distributor was prohibited from re-exporting to any other markets of the Community, the same applying to exclusive distributors in other Member States, nor parallel imports were prohibited.
For a long time, the Commission kept a very strict and formalistic approach to vertical agreements, with a permanent and paramount concern regarding market integration going well into the mid and late 1990s. With the gradual completion of the internal market, and with a more efficiency-oriented type of analysis making its way in the case-law of the EU Courts, the Commission came to adopt a more economic and pragmatic approach acknowledging in its analysis the possible existence of efficiencies that could be taken into account. This was notably reflected in its VBERs 2790/99 and 330/2010.
Since Regulation 330/2010, the first step in assessing vertical agreements is the calculation of the market share of the supplier and the buyer on the market where they respectively sell and buy the agreement’s goods or services. The 2010 Guidelines (para 153) highlight that “(t)he market position of the supplier and his competitors is of major importance, as the loss of intra-brand competition can only be problematic if inter-brand competition is limited. The stronger the position of the supplier, the more serious is the loss of intra-brand competition. Above the 30 % market share threshold there may be a risk of a significant reduction of intra-brand competition. In order to fulfil the conditions of Article 101(3), the loss of intra-brand competition may need to be balanced with real efficiencies”. Regulation 330/2010 provides for an exemption (article 3) from the application of article 101(1) TFEU where, notably as regards exclusive distribution agreements, “the market share held by the supplier does not exceed 30 % of the relevant market on which it sells the contract goods or services and the market share held by the buyer does not exceed 30 % of the relevant market on which it purchases the contract goods or services”.
However, this so-called safe harbour, shall not apply in case hardcore restrictions (article 4) are involved. If the relevant market share is above 30% as regards the supplier and/or the buyer, then it is necessary to assess whether the agreement violates article 101(1) TFEU and, ultimately, whether it fulfils the prerequisites for an individual exemption under 101(3) TFEU. While hardcore restrictions will hardly benefit from the application of article 101(3) TFEU, paras 60-64 of the 2010 Guidelines give examples of situations in which such an exemption may be considered, e.g. where an hardcore restriction may be objectively necessary for reasons of safety or health; where a first sale of a new brand or of an existing brand on a new market requiring substantial investments is at stake, in which case passive sales may also be restricted for a period of up to two years; or in the case of testing of a new product in a limited territory or with a limited customer group which may be coupled with the imposition of restriction of active sales outside the covered area for the period necessary for such testing or introduction of the product.
As regards the assessment of exclusive distribution in cases above the 30% market share threshold, paras 151-167 of the 2010 Guidelines provide valuable guidance. The main risks are reviewed by the Commission which lists notably i) the reduction of intra- brand competition and market partitioning, which may facilitate price discrimination in particular, ii) the softening of competition and facilitation of collusion, both at the suppliers’ and the distributors’ level, deriving from the fact that most or all of the suppliers apply exclusive distribution and iii) the foreclosure of other distributors and consequent reduction of competition at that level. The Commission notes, in particular, that exclusive distribution may lead to efficiencies “especially where investments by the distributors are required to protect or build up the brand image” and, in general, when the products at stake are new, complex and whose qualities are difficult to assess before, or even after, consumption.
Nevertheless, the Commission is far from abandoning its concern over market integration which continues to be considered an objective which enhances competition in the EU. To this day, it is understood that certain practices are considered restrictive in themselves because they attempt against this objective of market integration, i.e., absolute territorial protection and prohibition or limitation of exports within the EU. But open questions remain, and legal scholars have been debating the relevance and impact of market integration concerns in the analysis of restraints, notably when a territorial restraint may arguably have pro-competitive effects.
The history of American antitrust reveals cyclical debates on what are the main goals of antitrust, i.e., whether antitrust policy promotes, or should promote, any values other than economic efficiency. As Professor L. Sullivan wrote “[c]hanges in antitrust law and regulatory politics are related to the intellectual history of micro-economic theory. All three are embedded in a common culture”.
The neoclassical, non-interventionist, theories of the 1870s which lasted roughly until the early 1930s were followed by an increasing governmental regulation turned to other economic as well as political and social values, which coincided with the later part of the Court presided over by Chief Justice Warren. Cases such as Brown Shoe, Philadelphia Bank, Von’s Grocery and Schwinn exemplify well this kind of approach, in which antitrust was used to promote a variety of social and political goals, including the protection of dealer independence and the promotion of equity and fairness values in the market.
This blend of economics and populism interventionist approach was slowly replaced by a new emphasis on efficiency concepts, a move somewhat related to the poor performance of the American economy. Efficiency and consumer welfare became the only goals of antitrust, under the inspiration of the Chicago School theorists, who relied on the self-correctness of markets.
This new orthodoxy was gradually received by both the lower federal courts (e.g. Berkey Photo, Inc.) and the Supreme Court. The former per se rules have been progressively replaced by rule of reason analysis in vertical non-price restraints, with a clear focus on efficiency. The decisions in landmark cases such as Continental T.V., Inc. (which overruled Schwinn), National Society of Professional Engineers, Gypsum and BMI/CBS illustrate well this new era.
Robert Bork, probably the most influential scholar of this new Supreme Court approach, stated that “[a]nalysis shows that every vertical restraint should be completely lawful”, which, by the way, he thought should extend to vertical price fixing/resale price maintenance. But only in 2007 was decided, in the Leegin judgment, overruling Dr. Miles, that vertical price restraints are to be judged by the rule of reason. The Supreme Court, while stating that “[t]he justifications for vertical price restraints are similar to those for other vertical restraints”, it underlined that “[n]otwithstanding the risks of unlawful conduct, it cannot be stated with any degree of confidence that retail price maintenance «always or almost always tend[s] to restrict competition and decrease output»”.
Meanwhile, the 1970s and 1980s Chicago theoretical model came gradually under criticism. In fact, “the simplicity of the construction may also have been its greater weakness”, as Professor T. Kauper put it. In the 1990s, attacks came not only from those, inside its own ranks, who praising low prices and economic efficiency as an antitrust goal considered that it did not take sufficiently into account realistic analysis of markets, notably the acquisition and results of market power, but also from those who valued the inclusion of social and political values in antitrust enforcement. The cyclical controversy on the goals of antitrust continued over the years following the late 1990s and well into the 21st century, where a common understanding that antitrust enforcement may have been not sufficiently rigorous led to an emphasis, by the Biden Administration, on a stronger antitrust enforcement.
As regards vertical agreements, they resist well US antitrust laws scrutiny. They are in general considered as pro-competitive. The evolution of the case law since the 1977 Continental T.V., Inc. allows us to conclude that vertical non-price restrictions, including exclusive distribution, are not per se illegal but can be questioned if anticompetitive effects are shown, notably if interbrand competition is substantially lessened or if market power is found causing a restraint of trade in the relevant market.