Brussels, 4 May 2010
Competition: Commission consults on new regime for assessment of horizontal co-operation agreements
Frequently asked questions
A. General Questions
1. What are horizontal co-operation agreements?
Horizontal co-operation agreements are concluded between companies operating at the same level of the supply chain, such as agreements to co-operate on research and development, production, purchasing, commercialisation, standardisation and exchange of information. These also include more complex arrangements such as integrated agreements involving various types of co-operation. Horizontal co-operation agreements can lead to substantial economic benefits. However, they can also lead to serious competition problems. This is, for example, the case where the parties agree to fix prices, share markets, or limit output.
2. What are the current rules for the assessment of horizontal co-operation agreements under EU competition law?
In November 2000, the Commission adopted Regulation (EC) No 2658/2000 on the application of Article 81(3) of the EC Treaty (now Article 101(3) of the Treaty on the Functioning of the EU - TFEU) to categories of specialisation agreements ('Specialisation BER'), Regulation (EC) No 2659/2000 on the application of Article 81(3) of the Treaty to categories of research and development agreements ('R&D BER'), and guidelines on the general assessment of horizontal co-operation agreements under the EU competition rules ('Horizontal Guidelines'). These rules embodied a shift from the formalistic regulatory approach underlying the previous regime towards a more economic approach in the assessment of horizontal co-operation agreements. The basic aim of this approach was to allow competitor collaboration where it contributes to economic welfare without creating a risk for competition.
3. What does it mean that an agreement is "block exempted"?1
Certain categories of agreements concluded between companies that have limited market power (reflected in a market share not exceeding 25% in case of joint R&D agreements between competitors or not exceeding 20% in case of specialisation or joint production agreements) and that respect certain conditions set out in the Commission's Block Exemption Regulations (BERs), can be presumed to have no anticompetitive effects or, if they do, the positive effects will outweigh any negative ones. Based on this positive presumption, agreements falling under a BER are exempted from the EU's ban on restrictive agreements and business practices (Article 101(1) of the TFEU). The safe harbour market thresholds for horizontal agreements are lower than the 30% threshold for vertical agreements between non-competitors. This is simply because agreements between competitors have a higher potential to harm competition than agreements between non-competitors. With a 25% market share threshold, R&D agreements are the most favourably treated category of horizontal agreements as such agreements can lead to substantial efficiencies because they stimulate innovation.
For R&D, specialisation or joint production agreements concluded by companies whose market shares exceed the above mentioned thresholds, there is no such automatic exemption, but there is also no presumption that the agreement is illegal: it is necessary to assess the agreement's negative and positive effects on the market. The Commission's Draft Horizontal Guidelines that accompany the Draft R&D and Specialisation BERs assist in making this assessment.
4. Why is the Commission carrying out this review?
The current versions of the R&D and Specialisation BER expire in December 2010.
5. What feedback has the Commission received on the current regime?
In late 2008 and early 2009 DG Competition consulted Member States and stakeholders (http://ec.europa.eu/competition/consultations/2009_horizontal_agreements/index.html ) on the functioning of the rules governing horizontal agreements. Feedback has shown that the current regime has worked well but that a number of improvements should be made to the current texts, in particular to clarify the rules in complex areas.
B. Draft Horizontal Guidelines
1. What are the main general changes introduced?
The main changes that have been introduced in the Draft Horizontal Guidelines are (i) a new chapter on information exchange; and (ii) a substantial revision of the standardisation chapter.
The Draft Horizontal Guidelines also reflect the need for self-assessment, introduced by Regulation 1/2003 on the application of the EU competition rules, which abolished the former notification system under which companies had to notify their horizontal co-operation agreements to the Commission, which had the sole power to grant an exemption. Nowadays, companies need to assess themselves whether an agreement infringes Article 101(1) TFEU and, if so, whether the exemption conditions of Article 101(3) TFEU are met.
The Draft Horizontal Guidelines give a clearer explanation of how to apply them to agreements covering more than one type of co-operation (e.g., joint R&D, production and distribution). The "centre of gravity test", which previously defined which parts of the Horizontal Guidelines are applicable to such an integrated agreement has been replaced. The Draft Horizontal Guidelines clarify that, generally speaking, all the chapters pertaining to the different parts of an integrated agreement will be relevant for its analysis. Consequently, the competition concerns set out in the R&D, production and commercialisation chapters are meaningful for the analysis of a joint R&D, production and distribution agreement. However, where these chapters contain graduated messages, for example with regard to the safe harbours or whether certain conduct will normally be considered a restriction by object or by effect, what is set out in the chapter pertaining to that part of the agreement which can be considered the "most upstream indispensable building block"2 of the co-operation prevails. In the above example this will normally be the joint R&D as the joint production and distribution will only occur if the joint R&D leads to results. Consequently, the assessor of such an agreement should always start its analysis by referring to the R&D chapter before turning to the production and commercialisation chapters.
Moreover, the Horizontal Guidelines now provide explicit guidance as to when a joint venture and its parent companies form part of one undertaking within the meaning of Article 101. This is an area of great importance for businesses as Article 101 is not applicable to the relationship between a joint venture and its parents if they form part of the same undertaking.
2. Why has the Commission drafted a chapter on information exchange?
There was strong demand from stakeholders and national competition authorities for extensive guidance on the assessment of information exchange.
This review provides a good opportunity to enhance legal certainty on an issue which is of significant practical relevance and for which to date only some sector specific guidance exists (for the maritime sector).
3. What is the content of the new chapter on information exchange?
There are situations where the exchange of market information may lead to restrictive effects on competition, and in particular to a coordination of companies' behaviour, leading to effects such as higher prices. By increasing transparency in the market, information exchange can enable firms to reach a common understanding on the terms of coordination or/and enable them to monitor deviations from a collusive outcome on the market. However, information exchange can be pro-competitive in some instances as it can lead to significant efficiency gains. The Draft Horizontal Guidelines give further guidance on the elements to be taken into account when assessing such agreements.
They set out that the exchange between competitors of individualised information regarding intended future prices or quantities is to be considered as aiming at restricting competition. Such exchanges are the most likely to lead to a collusive outcome because they allow competitors to increase prices without incurring the risk of losing market shares or triggering a price war during the period of adjustment to new prices. This type of information exchange is also the most likely to be taking place for anticompetitive reasons. The subsequent part of the chapter provides guidance on assessing the effects of exchanges of information that do not aim at restricting competition (e.g. for statistical or benchmarking purposes), i.e. the vast majority of information exchanges.
4. What are the main changes in the standardisation chapter?
The purpose of the standardisation chapter is to give guidance on how to ensure that the selection process is competitive and that, once the standard is adopted, access is given on "fair, reasonable and non-discriminatory" (FRAND)3 terms to interested users. Case experience in the last 10 years has shown that in practice many of the complaints and cases related to standard-setting arise because of a lack of transparency during the selection process, notably in the context of intellectual property rights. This is why the chapter now focuses on trying to avoid certain of these problems by laying down clear guidance on the standard-setting process and on the means of preventing a misuse of such process, so as to ensure that the specific benefits of standard setting are passed on to the European industry and consumers.
5. How do the Draft Horizontal Guidelines propose to assess the ex ante disclosures of most restrictive licensing terms?
One of the inherent problems of a standard-setting process is the uncertainty about the commercial terms that intellectual property rights holders will charge once the standard has been adopted and industry is locked in ("locked in" means that the costs in switching to another technology would be prohibitive). In order to solve this issue, most standard-setting organisations already require companies whose intellectual property rights would read on a standard to commit to licensing those rights on so called "FRAND" (fair, reasonable and non-discriminatory) terms. However, experience shows that disputes may arise as to the exact level of FRAND. Therefore, it has been suggested that unilateral ex ante disclosures of the maximum terms that a company would charge if its technology were incorporated in a standard would be one way of avoiding disputes. Industry and standard-setting organisations have however been cautious for fear of infringing competition law. The Draft Horizontal Guidelines now make it clear that such a system would not give rise to competition concerns.
6. Why is disclosure of intellectual property rights necessary before adoption of a standard?
In particular, in certain industries any standard is very likely to "read on" intellectual property rights (in particular, patents). The use of such intellectual property rights (IPRs) requires the permission of their owner, who also has the right to charge for the use of its IPR. Where different technologies are competing in order to be included in the standard, industry needs to be aware of which patents are relevant for each of the potential technologies, to be able to make an informed choice between alternative technologies. No or unclear disclosure obligations may furthermore give incentives to "patent ambushes", i.e. companies hiding patents until industry is locked in and thereafter refusing to license or request exorbitant fees.
7. How do the Draft Horizontal Guidelines propose to interpret "FRAND" in the context of EU competition law?
The Draft Horizontal Guidelines clarify that there are various methods to assess the level of FRAND in the context of standard-setting in case of a dispute. Particularly relevant are the licensing fees charged at an earlier stage, prior to the adoption of the standard.
8. Why does this chapter now also deal with standard terms?
The recent review of the Insurance Block Exemption Regulation (http://ec.europa.eu/competition/sectors/financial_services/legislation.html) revealed that the use of standard terms in contracts was not specific to the insurance industry. The specific exemption for co-operation on standard insurance policy conditions has therefore not been renewed. Indeed, agreements on standard terms are found in various industries such as banking or energy and there seems to be a demand for guidance on when such agreements risk infringing competition law. Therefore, the standardisation chapter now also contains guidance and examples on standard terms.
9. Why is there no longer a separate chapter on environmental agreements in the Draft Horizontal Guidelines?
Standard-setting in the environment sector – which was what the current environmental chapter effectively deals with – is more appropriately dealt with in the standardisation chapter. The removal of the chapter does not imply any downgrading for the assessment of environmental agreements. On the contrary, instead of having a chapter addressing a narrow aspect of environmental standards, we now make it clear that environmental agreements are to be assessed under the relevant chapter of the Draft Horizontal Guidelines, be it R&D, production, commercialisation or standardisation.
C. Draft R&D Block Exemption Regulation
What are the main changes?
There are no fundamental changes to the Draft R&D BER. The few amendments provide more clarity and legal certainty. In particular, in order to ensure that a party's intellectual property rights do not unduly impair the exploitation of the results of an R&D agreement by the other parties, it is now specified that an exemption under the Draft R&D BER is only available if prior to starting the research and development all parties agree that they will disclose in an open and transparent manner their existing and pending intellectual property rights relevant for the exploitation of the results by the other parties. This ensures that one of the parties cannot unduly impair the exploitation of the results by other parties, thereby depriving customers and consumers of the benefits of the joint R&D.
Moreover, restrictions on active sales to territories not exclusively allocated to one party are considered hardcore and can therefore not benefit from the BER. In addition, the draft clarifies that passive sales restrictions with regard to customers, and not only those with regard to territories, are also considered hardcore restrictions.
Furthermore, the definition of "potential competitor" has been clarified by introducing a three year time frame during which a party would need to be likely to enter a market in order to be considered to be a potential competitor. As the R&D BER applies to co-operations between competitors (including potential competitors) only if their combined market share does not exceed 25%, it is important for parties to know when one of them will be considered a potential competitor. There is no market share threshold for co-operations between non-competitors.
D. Draft Specialisation Block Exemption Regulation
What are the main changes?
The Draft BER clarifies that its benefit applies to specialisation agreements, even where one of the parties to the agreement only partly ceases production. This would enable a company that has two production plants for a certain product to close down one of its plants, outsource the output of the closed plant, and still avail of the Specialisation BER.
The Draft BER also provides that, where the products concerned by a specialisation or joint production agreement are intermediary products which one or more of the parties use captively for the production of certain downstream products which they also sell, the exemption is also conditional upon a 20% market share threshold downstream. In such a case, merely looking at the parties' market position at the level of the intermediary product would ignore the potential risk of closing off inputs for competitors at the level of the downstream products. Consequently, such a specialisation or joint production agreement should not benefit from a BER but should be subject to an individual assessment.
The definition of "potential competitors" has been clarified in the same way as in the Draft R&D BER.
"Couvert par un règlement d'exemption par catégorie" en français, "unter eine Gruppenfreistellungsverordnung fallen" auf deutsch
"Le bloc constitutif indispensable le plus en amont" en français; "der am weitesten vorgelagerte unerlässliche Baustein" auf deutsch
"Équitable, raisonnable et non discriminatoire" en français; "fair, zumutbar und diskriminierungsfrei" auf deutsch