Horizontal and Vertical Cooperation

 

The Differences Between Horizontal and Vertical Cooperation in EU Competition Law

The content below examines differences between horizontal and vertical cooperation in European Union (EU) competition law. To better understand the approach of the Court of Justice of the European Union (CJEU), the analysis also compares the differences that the United States Supreme Court (US SC) makes between horizontal and vertical cooperation. The analysis leads to the conclusion that the CJEU is substantially driven by the principles of market integration and in most instances does not make as strong of a distinction between compared to the distinction made by the US SC.

The analysis below is based on 14 leading EU competition law cases in the area of concerted practices. The majority of the cases look into horizontal type cooperation as opposed to vertical cooperation.

Background:

Article 101 prohibits “all agreements, decisions of associations of undertakings and concerted practices which may affect trade between Member States…” Restraint of competition may take place at different levels of economic activity in the Common Market; in a vertical or horizontal type of arrangement.[1]

Definitions:

EU caselaw defines horizontal as  “cooperation between two or more actual or potential competitors” and vertical as  “cooperation between companies operating at different levels of the production or distribution chain.[2]” At this point in the analysis, the US and EU courts define horizontal and vertical cooperation very similarly. In the US, horizontal cooperation is also generally defined, as restraints imposed by agreements between competitors and vertical restraints imposed by agreement between firms at different levels of a distribution chain.[3]

Some of the most common horizontal cooperation in the market includes information exchange, joint purchasing agreements and research and development agreements.[4] In contrast, some of the most common vertical cooperation includes exclusive distribution, franchising and resale price restrictions.[5]

CJEU Distinction between Horizontal and Vertical Cooperation:

The CJEU makes less of a distinction between horizontal and vertical cooperation than the US SC. This is most likely because the CJEU is influenced by strong principles of market integration.

One way to reveal the CJEU’s distinction between horizontal and vertical cooperation is when looking at the caselaw. For example, in Consten and Grundig[6], a vertical restraints case, the CJEU didn’t follow the Advocate  General’s (AG) opinion and stated that both horizontal and vertical restraints are included in Article 101(1).  Specifically, the AG argued that Article 101 TFEU would not apply to vertical agreements between a producer and his distributor because they are not each other’s competitors. However, the CJEU did not agree with the AG and reasoned that the wording of Article 101 does not suggest that a distinction between horizontal and vertical agreements should be drawn. Instead, the court stated that the Article applies to all agreements, which may distort competition within the Common Market. It should also be emphasized that the CJEU generally follows the opinion of the AG and the fact that the CJEU is taking a different approach than the AG shows the CJEU’s firm decision that the language of the treaty does not suggest a distinction between horizontal and vertical agreements.

Another way to reveal that the CJEU does not make a strong distinction between horizontal and vertical cooperation is that the Commission focuses on the economic benefit of vertical agreements but the CJEU does not look at the effect on the market in all cases. Specifically, the Commission states in the Guidelines on Vertical Agreements: “Certain types of vertical agreements can improve economic efficiency within a chain of production or distribution …they can lead to a reduction in the transaction and distribution costs of the parties and to an optimization of their sales and investment levels. [This] will outweigh any anti-competitive effects due to restrictions…”[7] However, the CJEU does not look at the effect of restraint on competition when object is present. In Grunding, the CJEU states “…for the purpose of applying Article 101(1), there is no need to take account of the concrete effects of an agreement once it appears that it has as its object the prevention, restriction or distortion of competition.”[8]

US SC Makes a Stronger Distinction Between Horizontal and Vertical Cooperation than the CJEU:

Competition law in the United States is primarily defined by Section 1 of the Sherman Act,[9] which prohibits any agreement that unreasonably restraints competition and affects interstate commerce. In  the US, violations primarily fall into two categories:

(1) Per Se Violation – requires no further inquiry into the practice’s actual effect on the market or the intentions of those individuals who engaged in the practice (i.e. horizontal agreements to divide the market or allocate customers).

(2) Violations under the Rule of Reason – a totality of the circumstances test, asking whether the cooperation promotes or suppresses market competition (i.e. vertical non-price restraints such as where a reseller can sell).

Therefore, compared to the CJEU distinction of horizontal and vertical cooperation, the US SC makes a stronger distinction where horizontal arrangement is more readily condemned as per se illegal and vertical arrangement is generally subject to the rule of reason.

Case References:

The table below points to specific text in European caselaw and AG opinions on the differences between horizontal and vertical agreement.

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*Case numbers 1,8,11,12, 13 and 14 are preliminary rulings of the CJEU on the interpretation of EU law made at the request of the court of the EU corresponding member state in the particular case.