Object and Effect

I.  Introduction

Article 101 of the Treaty on the Functioning of the European Union (TEFU) is one of the primary articles concerning competition law in the European Union.[1] It prohibits any agreement, concerted practice, or decisions of undertakings that has as its “object or effect the prevention, restriction or distortion of competition within the internal market.”[2] An agreement or concerted practice can violate Article 101, previously Article 85 and Article 81 of the European Economic Community Treaty, if it has the object or effect of harming competition in the internal market.[3] The European Court of Justice (CJEU or ECJ) has held that object and effect are two distinct categories of violations under Article 101.[4] Therefore, if there is a violation by object, it is unnecessary to look at the effects of the action on the market.[5]

The purpose of Article 101 is to prevent anti-competitive activity and promote economic integration within the European Union.[6] Market integration is critical for the success of the European Union and must be protected from private actors establishing economic borders through agreements or concerted practices.[7] Market integration is compromised if companies are able to act anti-competitively by, for example, restricting where, how, and at what price products are sold. Consequently, Article 101 is not only central to an understanding of competition law in the European Union; it is also a critical tool for maintaining market integration.

An Article 101 violation by object occurs when the action of the undertakings is by its very nature harmful to the functioning of competition in the common market.[8] The object is determined by looking at the content of the action and “the objectives it aims to pursue.”[9] If the undertaking’s exploits do not have the object of harming competition, the CJEU will then determine if they have negative effects on competition in the market. An effects analysis entails a deep factual investigation of the market, the economic consequences of the action, and the effect of partitioning the market.[10]

Overall, undertakings can violate Article 101 by object, where by the agreement or concerted practice is by its very nature anti-competitive, or the undertakings can violate Article 101 because their actions have anti-competitive effects on the market. The following sections will look at the CJEU’s analysis of agreements and concerted practices by object and effect.

Violations by Object

There are agreements that by their very nature are anti-competitive. Examples of such agreements include price fixing arrangements, agreements that limit imports and exports, and agreements that divide the market.[11] One of the first ECJ cases examining an agreement that by its object harmed competition was Consten and Grundig.[12] In Consten, a German radio manufacturer and a French distributor agreed to make the French company the sole distributor of Grundig radios in France and limited how the radios would be imported and exported.[13] Advocate General Roemer wrote an opinion for the ECJ stating the agreement did not violate Article 85.[14] He reasoned that the agreement allowed for the German producer to enter the French market and had the effect of furthering market integration since a German company now had access to France.[15] The ECJ did not agree with Advocate General Roemer, however, and held that the agreement violated Article 85 because it had the object of harming competition by limiting which distributors could sell the radios and how the radios could be imported and exported.[16] In turn, because the agreement had the object of restricting competition, there was no reason to examine the effects of the agreement on the market.[17] The ECJ held that when an agreement has an anti-competitive object, there is no need to examine the concrete market effects.[18] In other words, if an agreement has the object to harm competition, it does not matter if there are beneficial effects to market integration.

Consten and Grundig is the seminal case for agreements by object and has laid the analytical groundwork for examining such agreements. However, in a much more recent case, Allianz-Hungaria, the CJEU contemplated economic effects in examining the object of an agreement.[19] This case involved car insurance companies making agreements with car dealers concerning the hourly charges paid by the insurer for repairs.[20] The CJEU found that the agreements restricted competition by object.[21] The court examined the economic and legal context of the agreement, and some of the effects of the agreement on the market.[22] The CJEU conducted an Article 101 object analysis and concluded that the object of the agreement, which included its potential effects, harmed competition.[23] The substance of the CJEU’s analysis seems inconsistent with Consten because in that case the ECJ found that the effects of the agreement are unnecessary in determining the object of the agreement.

It is clear that when examining an agreement one begins the analysis by looking at the agreement’s object, which requires an inquiry into the objectives of the agreement. Outside of the analysis in Allianz Hungaria, it is clear one does not look at the actual or potential market effects of the agreement when analyzing the object of an agreement under Article 101. Overall, when an undertaking makes an agreement, there must be no objective to distort competition, especially by dividing the market along national lines or restricting who has access to a product. Under the traditional object analysis, the actual economic effects of the agreement are not considered, even if they might be beneficial, as in Consten and Grundig.

The ECJ case law regarding concerted practices by object is not as consistent or straightforward as the case law concerning agreements by object. The first ECJ case regarding concerted practices was ICI v. Commission.[24] In ICI v. Commission, dyestuff manufacturers around Europe had three separate and identical price increases in various national markets within the common market.[25] There was no agreement to raise the prices, so the analysis had to be under the theory of concerted practices.

All of the price increases were uniform.[26] Advocate General Mayras delivered an opinion analyzing the case and stated that in order to find a concerted practice by object, one must look at the actual market effects, because a concerted practice cannot be disassociated from the actual effects on competition.[27] Therefore, unlike agreements by object, analysis of concerted practices requires an examination of all of the effects on the market because those effects will be informative and serve as evidence as to whether there was a concerted practice that harmed competition. The facts have to be considered in light of the actual market in question, which in this case was the dyestuffs market.[28] In ICI, the effects showed a concerted practice harmed competition in the dyestuffs market.[29] There was parallel conduct in raising prices in different geographic areas of the common market that could not be explained by the market structure.[30]

The ECJ agreed with Advocate General Mayras and found a concerted practice.[31] The court observed the actions by the undertakings had the effect of harming competition by removing uncertainty on the market, meaning companies knew what competitors were planning on doing and did not face a risk of raising prices while a competitor refused to raise prices.[32] The ECJ concluded that the effects demonstrated a concerted practice in violation of Article 85.

In Suiker Unie, the ECJ again analyzed concerted practices by examining the effects on the market.[33] In this case, various sugar producers throughout the common market created systems whereby they refused to sell sugar to certain competitors in particular markets and limited sugar production.[34] However, the sugar market was heavily regulated in Europe and the market regulations had to allow for competition before the sugar producers could be found to violate Article 85.[35] The ECJ found that the regulations in Italy did not allow for competition to flourish, and, therefore, competition could not be restricted because one cannot restrict something that does not exist.[36] However, other markets permitted competition and the delivery and production limitations imposed by the sugar producers harmed competition in those markets resulting in a violation of Article 85.[37] The way the competitors acted had the effect of removing uncertainty in the market and therefore harmed competition.[38]

Taking into account the effects on the market was critical in these early cases. Unlike an analysis of agreements by object, concerted practices could not be assumed without considering the effects on the market. In other words, effects are the essence of, and cannot be separated from, the concerted practice.

However, the analysis of concerted practices changed with the Anic decision.[39] In Anic, Advocate General Cosmas stated that there could be concerted practices that violate Article 85 by object without looking at the actual effects of the concerted practice on the market.[40] He determined that since one can have agreements by object or effect that violate Article 85, there must also be concerted practices by object or effect that violate Article 85.[41] In Anic, polypropylene producers throughout Europe set target prices for their products, had meetings to discuss strategy, and had quotas.[42] Advocate General Cosmas found there was a concerted practice by object on the polypropylene market because the companies attended meetings where information was shared among competitors.[43] It did not matter if a company did not share information at the meeting; all that mattered was that the company attended the meeting where a participant shared information.[44] In so doing, the companies reduced independent action on the market through the sharing of information.[45] Autonomy on the market is critical for meaningful competition to flourish.[46] Uncertainty on the market cannot be replaced by certainty without effectively eliminating competition.[47]

The ECJ agreed with Advocate General Cosmas that there could be a concerted practice by object that violates Article 101 without any consideration of the effects on the market.[48] The ECJ stated that the polypropylene companies participated in collusion for the purpose of restricting competition and that collusion does not have to manifest itself on the market but rather is in and of itself a violation of Article 101.[49]

Anic created a new standard for concerted practices by object. The critical part of the analysis is that some sharing of information removed uncertainty on the market. This means that one no longer has to look at the effects a concerted practice has on the market, only that there was sharing of information that eliminated uncertainty on the market. This new analytical construct for concerted practices by object was evident in the T-Mobile decision.

The T-Mobile case involved five mobile carriers in the Netherlands that had a legal meeting where one company shared information about its commissions for dealers.[50] The meeting was a one-time occurrence and the sharing of the information had no actual effect on the other companies’ decision making.[51] Nevertheless, Advocate General Kokott found that the sharing of information by one carrier at a meeting was a concerted practice by object, even though no other company shared information.[52] She stated that there is no need to look at the effects of the concerted practice on the market.[53] For a concerted practice to violate Article 81 by object, the critical issue is whether uncertainty on the market was removed, because that restricts competition.[54] Companies need to operate independently and if they receive information and remain on the market, it is presumed they used the information in their decision-making and stopped acting independently.[55]

The ECJ agreed with the Advocate General and found a concerted practice that had the object of harming competition.[56] The concerted practice violated Article 101 because information was shared with competitors; the competitors remained on the market; and, therefore, when they remained on the market it was presumed they used the information in their decision-making, which reduced uncertainty.[57] The ECJ again reiterated that the actual effects on the market are irrelevant in determining if there is a concerted practice by object that harms competition in the common market.[58]

Based on the new ECJ doctrine of concerted practices by object under Article 101, the critical issue is whether information is shared by competitors and thereby reduces uncertainty on the market. This doctrine opens the door to companies violating Article 101 simply because a competitor unilaterally chooses to share company information. It does not matter if the other company uses the information. It does not matter if the other company refuses to share information. As long as one competitor shares information one time and everyone who receives that information remains on the market, there is a violation of Article 101 for all who participated in the meeting. The result is that the CJEU has made it very easy for the European Commission and national competition authorities to prove violations of Article 101 or national competition law that is comparable to Article 101. Under T-Mobile, competitors must not disclose any information to competitors and if material information is actually shared, the companies will have participated in a concerted practice that by its object restricts competition if they remain on the market, even if the company just heard the information and shared nothing to the competitor.

Violations by Effect

If an agreement or concerted practice does not have the object of harming competition, it can still violate Article 101 if it has the effect of harming competition in the common market. To determine effects on competition, the CJEU looks at the factual circumstances surrounding the action, which includes not only the legal and economic context of the actions but also an economic analysis of what happened to the market once the action occurred.[59]

In John Deere, tractor manufacturers in the United Kingdom established a registry whereby they shared information on past sales of tractors in the United Kingdom.[60] The Advocate General found that this registry had the effect of reducing uncertainty on the market and therefore violated Article 85.[61] The ECJ agreed and stated that the effect of the agreement limited competition because it reduced uncertainty and had the effect of preventing manufacturers from entering the market because they may have concerns regarding participation in the registry.[62] The ECJ did not examine how the agreement would have helped the market; all that mattered was that it had the effect of reducing uncertainty on the market.[63] Only the negative effects of the agreement were deemed relevant.

In Equifax, banks in Spain shared information on borrowers in order to help facilitate loans.[64] The Advocate General found this sharing of information about customers was acceptable because it had beneficial effects by helping banks determine the hazards of lending to particular customers.[65] It was critical that the banks did not share information about their businesses and that the shared information was available to all banks on the Spanish market.[66] The Advocate General determined that this information sharing was necessary for the banking system and actually had beneficial effects.[67] The ECJ agreed, finding the sharing of customer information did not harm competition.[68] The effects of the information sharing were beneficial to the banking industry because it helped prevent bad loans, for example, to borrowers who could not satisfy the loans.[69] This case is interesting because the ECJ examined beneficial effects and accepted the sharing of information among competitors, unlike other ECJ cases. This makes one wonder if this case is an outlier. However, it does demonstrate that when looking at the effects of a concerted practice, the CJEU will consider a certain amount of factual information surrounding the actions.

The effects analysis is not typical in CJEU jurisprudence because it is relatively easy for the CJEU to find a violation by object in agreement and concerted practice cases. However, the effects analysis can be beneficial if a company gets passed the object analysis, because the company can argue all of the factual circumstances surrounding the agreement or concerted practice, and the use of presumptions will not be as damaging to their case.

Conclusion

Object and effect are separate categories of violations under Article 101. If there is an agreement that by its very nature harms competition, it will violate Article 101, even if there are no negative effects on competition, or even if there are beneficial effects for market integration. A concerted practice by object does not require an analysis of the effects on the market; the critical point is that information was shared by competitors regarding their businesses and the competitors remained on the market. Under Article 101, the competitors cannot remove uncertainty and independent decision making from the market. If a company survives the object scrutiny, then the actual market effects will be examined to determine if there was a violation under Article 101.

The violation by object test seems overly harsh, especially when considering concerted practices, but the European Union is based on a common market; if competition is hindered, private borders can be established and prevent the market integration that key to the European Union. Therefore, Article 101 is central to the European Union’s core goals and functioning and requires strict tests to enforce it. However, a strict test can be a part of Article 101 enforcement that takes into account the factual circumstances relevant to the market, especially where the agreement or concerted practice benefits market integration.