Reflections on Regulation 1/2003, declarations of inapplicability and informal guidance

Regulation 1/2003, which replaced Regulation 17 of 1962, has worked remarkably well in practice. The time had come to bring the system of notification of agreements, negative clearance and individual exemptions to an end. However, until recently the Commission had not used the tools of declarations of inapplicability and informal guidance contained in Regulation 1 in relation to individual agreements, and there is a dearth of cases in which Article 101(3) has been seen to be applied in a positive (as opposed to a negative) way to an agreement. The Covid-19 crisis led to the issuance of two comfort letters by the Commission to horizontal cooperation agreements, and there are welcome signs that the Commission might be inclined to give more informal guidance in the future.

On 31 March 2022, Executive Vice-President Margrethe Vestager, speaking at a conference in Brussels on “Competition and regulation in disrupted times,” announced that the Commission is to launch an evaluation of Regulation 1/2003: “While Regulation 1 has achieved remarkable success, we want to make sure that DG Competition remains at the forefront of global enforcement. (…) We also hear calls for the Commission to provide more informal guidance. In a world in transition, the need for guidance may be more pronounced. This is why (…) we will also engage with stakeholders on how to make the Notice on Informal Guidance more operational and useful to the business community.”

I warmly welcome this initiative on the part of the Commission, and in particular its willingness to engage on the issue of informal guidance.

I have always admired the Commission’s initiative that led to the replacement of Regulation 17, and its system of notification, negative clearance and individual exemptions, with Regulation 1/2003. I agree with Vice-President Vestager that Regulation 1 has been highly successful, perhaps more so than some anticipated during the debate that led to it. The decentralisation of the enforcement of Articles 101 and 102 from the Commission to the national competition authorities (the “NCAs”) has worked remarkably well in practice. The statistics available on DG COMP’s website show that from 1 May 2004 until 31 December 2020, 2,388 of the 2,800 new cases involving Articles 101 and 102 were brought at NCA level; and 1,163 out of 1,392 investigations in which a decision was envisaged were NCA cases. The success of the project owes much to the prolonged and intense debate, over several years, that began with the publication of the Commission’s White Paper on Modernisation in 1999 and culminated in the entry into force of Regulation 1 on 1 May 2004.

However, I have always had one major misgiving about Regulation 1/2003, which is that the abolition of notification, negative clearance and individual exemption seems to have had an adverse effect on the utility of Article 101(3). Let me stress that I think that it was entirely correct in principle to bring an end to the notification system, and I would not wish to see it reintroduced. However, I regret the fact that we rarely, if ever, see the positive application of Article 101(3) to individual agreements, although we do get to see its negative application in cases in which its application was rejected. This seems to me to create a distorted picture of Article 101 as a whole and of Article 101(3) in particular. This could be cured, at least in part, by the Commission issuing informal guidance in relation to individual agreements that the parties draw to its attention or, alternatively, through the use of “declarations of inapplicability,” as provided for in Article 10 of Regulation 1/2003.

The drawbacks and benefits of notification

The system of notification had many drawbacks. The Commission never had sufficient staff to deal with the enormous volume of agreements that were notified to it: the result was that severe delays were experienced; considerable business time was spent collecting the data and preparing Form A/B on which notifications had to be submitted; substantial expense was incurred, not least on legal and other professional fees; and businesses faced a long period of uncertainty as to the lawfulness of their agreements.

It was understandable that a system of notification for negative clearance and/or individual exemption was introduced in 1962, when competition law was a relative novelty in Europe; it was helpful to business that guidance could be sought on the application of Articles 101 and 102. When the Member States adopted domestic laws modelled on the EU provisions they also provided for notification, although they have now abolished it.

Over a period of forty-two years, from 1962 to 2004, the Commission applied Article 101(3) to many different types of agreements (for example, research and development agreements, production joint ventures, the rules of trade fairs and exhibitions, exclusive distribution and purchasing agreements, franchises, licences of intellectual property rights). From this experience, the Commission was able to develop a large portfolio of block exemptions, and to write extensive guidance, for example on vertical agreements, horizontal cooperation agreements and technology transfer agreements. It was from reading the Commission’s decisions granting individual exemption that I learned about the scope of application of Article 101(3), and of Article 101 generally, when I first started teaching the subject, and then writing about it, in the 1980s.

Regulation 1/2003: declarations of inapplicability and informal guidance

For as long as the Commission had its monopoly over Article 101(3), it could determine how to apply Article 101(3), whether “narrowly,” taking only efficiency gains into account, or “broadly,” to factor in other considerations such as industrial, social and environmental policy. However, Regulation 1/2003 ushered in a world in which the Commission would no longer be the sole decision-maker on the application of Article 101(3) in individual cases: henceforth, the NCAs and national courts would also be able to apply it. This meant that guidance was needed on the scope of Article 101(3), in order to ensure that it would be applied in a uniform manner across the EU; this was forthcoming in the Guidelines on the application of Article [101(3)] of the Treaty. In this document, the Commission adopted the “narrow” view of Article 101(3)’s application, and explained the types of evidence that would be needed to substantiate any argument that Article 101(3) was satisfied.

Many practitioners expressed grave concerns about the abolition of notification and, in particular, of individual exemptions. I was unpersuaded by their argument that Article 101(3) was, somehow, too difficult for self-assessment: is Article 101(3) really more difficult to apply than Articles 101(1), 102 and 106, which were already directly applicable and all of which can raise complex problems? However, I could see that it might be useful if the Commission could give guidance on the application of Article 101(3) in novel circumstances; regrettably, the financial crisis of the late 2000s, COVID-19, and the outbreak of war in Ukraine have shown us that novelty is a fact of life, even though we cannot predict what the next novelty will be. To address this need, Regulation 1/2003 contained two mechanisms, declarations of inapplicability under Article 10 and informal guidance.

Article 10 of Regulation 1/2003 provides that, where the EU public interest requires, the Commission may adopt a “finding of inapplicability” that Article 101 and/or Article 102 do not apply to an agreement or practice. The Commission might adopt such a decision (in “exceptional cases,” as recital 14 says) where this would clarify the law and ensure its consistent application throughout the EU; recital 14 adds that this might be particularly useful where new types of agreements or practices occur in relation to which there is no case law or administrative practice. The need for undertakings to have legal certainty in order to promote innovation and investment is also acknowledged in recital 38 of Regulation 1/2003: it says that where there is genuine uncertainty because of novel or unresolved questions of competition law, undertakings may seek informal guidance from the Commission. The Commission’s Notice on informal guidance relating to novel questions concerning Articles [101 and 102 TFEU] that arise in individual cases (guidance letters) explains the cumulative criteria that must be satisfied for guidance to be given.

COVID-19, comfort letters and the future

Until the COVID-19 crisis arose, these two mechanisms had not been used. The Commission was anxious, especially in the early years of Regulation 1/2003, that, if the Article 10 and informal guidance mechanisms were to be used, or used too often, this could be seen to amount to the reintroduction of notification “by the back door.” This would be a particular problem for the Commission if there emerged case law from the courts in Luxembourg suggesting that anyone seeking a declaration of inapplicability or guidance has rights, analogous to those of complainants, which the courts will protect. Whilst this concern is understandable, it does mean that we rarely, if ever, see the positive application of Article 101(3) to an agreement. In some commitment decisions under Article 9 of Regulation 1/2003, there is a certain resemblance between the decision and an individual exemption granted under the old system of notification subject to conditions and obligations. For example, when accepting commitments in the case of British Airways, American Airlines and Iberia, the Commission’s decision provides some insights into its thinking on Article 101(3) in relation to aviation alliances. It is presumably the case that on some occasions, the non-prosecution of a case, in a sense, involves the “application” of Article 101(3), in that the Commission or an NCA might consider that the agreement in question does not need to be challenged because Article 101(3) is satisfied. Unfortunately, this will be invisible to interested stakeholders, unless the authority in question chooses to give a public explanation of its reason for not proceeding. It would be helpful if competition authorities would be more transparent as to their reasons for not taking action, at least in cases that involve interesting points of law and policy.

The COVID-19 crisis that swept the world in 2020 was “novel” by any standard, and it quickly became clear that cooperation between firms might be necessary to ensure that supply chains were durable, medicines and other healthcare products were available, and vaccines could be developed. In its Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak, the Commission said that it “stands ready, exceptionally and at its own discretion, to provide such guidance by means of an ad hoc ‘comfort’ letter.” In 2020 the Commission provided informal guidance to Medicines for Europe—an association of pharmaceutical manufacturers—and participating companies in relation to a voluntary cooperation project to address the risk of shortages of critical hospital medicines for the treatment of coronavirus patients. A second comfort letter was sent in 2021 to Ecorys and SPI in relation to cooperation relating to the production of vaccines during the crisis. To my mind, this was a laudable action on the Commission’s part, and showed that the mechanisms put in place by Regulation 1/2003 could be used to considerable advantage. The ECN recognised in March 2022 that the outbreak of war in Ukraine might result in situations in which firms may want to seek guidance from the Commission, the EFTA Surveillance Authority or NCAs on proposed cooperation measures between them.

It remains to be seen whether the Commission might be willing to issue informal guidance more often in the future, or indeed to make a declaration of inapplicability. An obvious possibility might concern sustainability agreements: the Commission’s draft guidelines on horizontal cooperation agreements contain a chapter on this topic, and they contain examples of agreements that might or might not be permissible. Helpful though those examples are, they are not a substitute for guidance on a “real” sustainability agreement. However, to state the obvious, the Commission can only issue guidance if firms are willing to have their agreements exposed to public scrutiny. I would encourage firms, to the extent possible, to take their agreements to the Commission; and the Commission to make more frequent use of the tools available to it under Regulation 1/2003. Vice-President Vestager said in a speech on 22 September 2020, when discussing the Green Deal and competition policy: “We’re (…) ready to give comfort, in the right cases, that particular agreements are in line with the rules – which will give companies real-world examples they can rely on. And I want to encourage businesses to get in touch with us, if they think they have a good candidate for that guidance.”

She has now gone further and announced an evaluation of Regulation 1/2003, and of the informal guidance procedure in particular. This is a laudable and timely initiative, and I look forward to the debate ahead.

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Author

  • King’s College (London)

Quotation

Richard Whish, Reflections on Regulation 1/2003, declarations of inapplicability and informal guidance, May 2022, Concurrences N° 2-2022, Art. N° 106118, pp. 1-4

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