Fundamental principles

Competition policy (including state aids) is the central pillar of the economic law of the European Community (EC). It stands alongside the "four freedoms" in providing the legal framework for the Single Market. Institutionally, competition policy is the primary responsibility of the Commission, acting under Treaty rules and secondary legislation laid down by the Council. The European Courts (ECJ/CFI) play a crucial role in the judicial review of the Commission's administrative action in both competition and state aids policy.

Competition policy has the most direct impact on the private-sector of all EC policies. This derives from the wide powers of the Commission as legislator, policeman, judge and enforcement agency. Despite the quasi-monopoly of power enjoyed by the Commission, the EC system for monitoring and enforcing EC competition law is overloaded and dysfunctional. Hence, the trend towards decentralisation in the enforcement of competition law. Many Member States have recently enacted competition laws modelled on (even identical to) Articles 85 and 86.

Article 85 of the Treaty is designed to control horizontal and vertical restraints on competition by prohibiting agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. The essence of Article 86 is the control of market power. It prohibits abuse of a dominant position, in particular abuse which consists in: (a) directly or indirectly imposing unfair purchase or selling prices or unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connections with the subject of such contracts.

EC and national competition law co-exist and overlap. Articles 85 and 86 are directly applicable in national law. Many cases of agreements, concerted practices or dominant positions fall into a "grey zone" - with marginal or only potential impact on inter-state trade - and require co-operation between the Commission and national institutions. For this reason, Member States and applicant States should enact national competition laws modelled as closely as possible on Articles 85 and 86, as well as the secondary acquis.

One limitation of decentralisation is the fact that the prohibitions and sanctions contained in Articles 85 and 86 (as well as Articles 92 and 93 on state aids) can be enforced by national courts. But only the Commission can grant derogations or exemptions under Articles 85(3) and 92(2) and (3). Furthermore, the Commission is politically unwilling to relinquish or delegate its monopoly in these areas. The globalisation of the world economy is reflected in the internationalisation of competition policy. Trade and competition policy is a theme for the WTO "Millenium Round". Competition policy is increasingly important in the EC's relations with applicant States, gradually replacing trade policy, e.g. anti-dumping measures. The new "trilogy" of EC priorities in competition policy is reinforced competition in EMU, competition in support of employment, and competition policy in the context of enlargement.

Preparing Lithuania for membership

Apart from agricultural policy, competition policy is the most mature, developed and complex area of the acquis. It must be applied in full from "day 1". No derogations are possible, except in accordance with Articles 85(3) and 92(2) and (3). Lithuanian companies should prepare compliance programmes well in advance of membership (threat of sanctions, fines, damages, unenforceable contracts, bad publicity, lost management time, legal costs). The Lithuanian competition authority should adopt "best practice" through co-operation with DG IV and selected EU national competition authorities.

Practical aspects of EC competition law for companies

The EC Commission has a key role on exemptions. The Commission may approve exemptions under Article 85(3), following notification. Un-notified agreements are null and void and unenforceable in national courts, but notification to the Commission is a "black hole" with few formal decisions - notification consequently involves high costs and low legal certainty for economic operators. The purpose of Block Exemption Regulations is to reduce the notification and verification burden on, respectively, companies and the Commission. Fields covered are: exclusive distribution, exclusive purchasing, franchising, technology transfer, and R & D. However, there are no exemptions for price fixing, export bans, and cartels. Formal exemptions (or even "comfort letters") are very rare.

As noted earlier, Article 85 prevents anti-competitive agreements or understandings used to attack cartels (no price fixing or market sharing cartels) and applied in different ways to different marketing techniques (agency, exclusive distribution, exclusive purchasing, selective distribution, licensing, franchising). Agreement or concertation can include contracts, memos, letters which reveal an agreement, oral understandings, gentlemen's agreements, and industry practices. But a unilateral act and parent/subsidiary relations are not caught.

Passive sales may occur when the dealer is required to concentrate on his territory or is given very detailed local targets. The dealer may be prohibited from seeking customers or establishing a branch or a warehouse elsewhere.

Another practical aspect of competition law relates to exchange of information between competitors as well as between suppliers and distributors. Companies should be cautious about exchanging information on production quantities, market shares and sales figures, prices, costs and general business terms, distributors, consumer enquiries, details of proposed investments, and other "business secrets". Closer relationships between the supplier and distributor imply that more information is possible. As mentioned before, price fixing is prohibited. However, resale prices may be recommended, such acts being non-binding. While one should be careful requesting information on resale prices, reporting on turnover and sales figures is acceptable.

With regard to pricing, there is no duty to charge the same price in every country, but no price penalty is imposed for exporting. One should accept that supplies sold in cheaper countries will flow to dearer countries. Distributors must be free to establish their own re-sale prices.

Distribution problem areas include interfering with re-sale prices and parallel imports, customer allocation, refusal to supply, guarantees and warranties, and termination of business relationships. Current developments in competition law focus mainly on vertical agreements (Green Paper on Vertical Restraints) and sectoral developments (in telecommunications and sports and broadcasting). Also, new merger rules enter into force, and the Commission has put forward a proposal on state aids procedures pertaining to time-limits and decentralisation.