Each business entity operating within the European Union (EU) is bound to operate within the boundaries of legislation issued by the government of the home country of the business, as well as, the rules and regulations of the EU. The Treaty on the Functioning of the European Union (TFEU) “organises the functioning of the Union and determines the areas of, delimitation of, and arrangements for exercising its competences” (TFEU, p.4), this includes economic activities as well, and therefore, has a direct affect on activities of business entities operating within the union.

This essay analyses activities that are prohibited by Article 101 of the TFEU and also explores some other related issues. Article 101 “applies to agreements between undertakings and declares these agreements void when they are found to restrict the competition” (Chalmers et al, 2010, p.962). The paper starts with specifying activities that are prohibited by Article 101 followed by explanations for the prohibition of those activities offered by some distinguished European business researchers and practitioners. Moreover, evaluations of efficiency of prohibition enforcements are undertaken taking into account the secondary data findings regarding the issue.

 

Prohibited Activities by TFEU Article 101

A range of certain activities have been prohibited by Article 101 of TFEU in order to promote fair competition within EU. As most of the formal legal texts, TFEU texts have been perfected by professionals in legal industry in order to achieve a high level of clarity, avoid any ambiguity and thus, possible misunderstandings and even manipulations. Nevertheless, TFEU texts, including Article 101 may be not clear for people with no formal legal qualifications, and thus it makes sense to explain the article in great detail before proceeding to discussions about the reasons of prohibition and the efficiency level of its enforcement.

The article starts with “The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:”(TFEU, p.C115/88).

The term “undertaking” is a potential reason for misunderstanding, and therefore deserves more discussions. ‘Undertaking’ can be defined as “activity aimed at an exchange of economic values, regardless of its legal form and intention to make a profit” (Bassan, 2011, p.3). It is clear that business entities can be classified as undertakings; however the matter is not so straightforward with the classification of state and its separate agencies. Specifically, it needs to be clarified that activities conducted by state according to its foreign functions can not be branded as undertaking, whereas individual state entities, as well as various federations, trade associations, municipalities etc. are the forms of undertaking.

Russo et al (2010) inform that the existence of independent policy making power of an entity plays an integral role in terms of their classification as undertaking. Specifically, if any entity possesses independent policy making abilities, than it can be classified as an independent undertaking. On the other hand, when such independent policy making powers are absent, then the entity is considered to be only a part of a bigger undertaking.

The prohibitions imposed by TFEU Article 101 are formulated in five points.

Firstly, the Article prohibits to “directly or indirectly fix purchase or selling prices or any other trading conditions” (TFEU, p.C115/88). This involves competitors agreeing on a specific price they are going to pay for suppliers; prices for products and services agreed on by competitors, as well as any agreed trading conditions that are going to violate the principles of free trade.

Secondly, the prohibition also relates to the attempts to “limit or control production, markets, technical development, or investment” (TFEU, p.C115/88). According to the principles of free trade and fair competition the amount of production should be dictated by the economic mechanisms of supply and demand. Any unlawful deviations from this principle, as well as attempts to limit and control markets, technical developments or the amount of investment to be committed

Thirdly, it is also prohibited to “share markets or sources of supply” (TFEU, p.C115/88). Markets within EU should be shared between competitors according to the rules of free market economy, i.e. no company should be disadvantaged in terms of gaining market share as a result of unlawful activities by other players in the market. Specifically, unlawful activities by some of the market players involve agreements between major companies to share market within them and not to let other companies to join the industry.

Fourthly any attempts to “apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage” (TFEU, p.C115/88) are also prohibited by Article 101. To put it simply, terms and conditions related to any aspect of trade introduced by undertakings or any third party should be exercised in the same way regarding all external parties of the same category the undertakings deals with. Any intentional or unintentional deviations from this principle will put some sort of stakeholders at a disadvantaged position, and therefore is prohibited by the article.

Fifthly, Article 101 also puts prohibition on any attempts to “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” (TFEU, p.C115/88). Thus, written and unwritten terms and condition bounded to the contract should directly relate to some aspect of the matter about which the contract is being prepared and the inclusion of any unrelated terms and conditions are prohibited.

 

Rationale behind the Prohibition of some Activities as Specified in Article 101 TFEU

Each TFEU article has been devised to achieve a specific objective, and therefore, there are reasons for inclusion of each of the points within each article. Accordingly, Article 101 deals with a range of issues related to competition within EU, through introducing a range of prohibition for undertakings’ certain practices.

Generally,  it has been stated that “competition law exists to protect competition in a free market economy – that is , an economic system in which the allocation of resources is determined solely by supply and demand in free markets and is not directed by government regulation” (Jones and Sufrin, 2007, p.1). The same idea can be shown as a main rationale for the points introduced within TFEU Article 101.

However, in order to explore the reasons for prohibitions in TFEU Article 101 in a more efficient manner the need for competition should be analysed in greater detail. Motta (2004) informs that competition is needed because it promotes three following things: efficiency, low prices, and innovations. All of these points can be further discussed in relation to their necessity for EU market.

Efficiency, low prices and innovation can be promoted within EU market as a result of ensuring competition based on the principles of a free market economy. There is a consensus among business researchers and practitioners regarding the validity of this idea due to the fact that in a free market economy undertakings need to possess competitive edge in the marketplace in order to succeed, and the competitive edge is obtained through becoming more efficient in various business processes, offering products an services for a lower prices than the competition, as well as offering innovative products and services to the customers. As a result, customers will benefit from free market competition though having opportunities to buy more efficient and innovative products and services for lower prices, thus most of the activities that might become barriers for free market-based competition are prohibited within TFEU Article 101.

According to Dabbah (2010) competition rules, laws and policies also aim to serve socio-political issues as well, such as improving social policies, increasing rate of employment, improving industrial policy, as well as ensuring sustainable environment. In other words, the importance of ensuring free competition based on the principles of free market economy is not limited to achieve benefits for customers associated with variety, low price and efficiency of products and services, but the provision is intended for greater benefits for all markets within the EU.

Nadeau (2010) identifies following four objectives TFEU Article 101 aims to achieve.

Firstly, the article aims to protect consumers. Consumers within EU will be protected from possible price manipulations by major undertakings that can be done through price fixing, unfair control of production and markets, sharing markets or sources of supply between themselves, putting some of their competitors in a disadvantaged position through applying different terms and conditions to them, and making the acceptance of contract subject to any unrelated terms and conditions.

Secondly, Article 101 aims to protect small firms. Due to the fact that big players in the market posses significant amount of financial and other resources, they can use these resources to increase their share of the market through the methods that are prohibited in Article 101, at the same time obtaining unfair advantage in the competition and negatively affecting the performance of smaller companies operating in the same industries. Therefore, the activities specified above are prohibited so that all competitors operating within the same market can operate according to the rules of free market with no specific undertakings getting unfair advantages.

Thirdly, TFEU in general, and Article 101 in particular aim to protect the ‘single market’. The ‘single market’ in this context can be understood as the market within the EU. The idea behind the creation of EU, along with a range of other reasons was to facilitate trade between member states in a more efficient manner and to promote the interests of EU ‘single market’ at various levels. This also involves protecting the market within EU from external markets in terms of imports to the market, the quality of products being imported into the market, as well as not allowing any internal and external parties dealing with the market in one way or the other not to get unfair advantage in competition.

Fourthly, the article aims to enhance the overall market efficiency. The advantages of free market economy over centrally-planned and many other forms of economies have been confirmed by economic history and currently there are no debates about this among business researchers and practitioners. However, the positive contribution of free market economy to the level of well-being of people in a country or a region will apply only when the principles of free market are not violated. Free market competition is considered to be one of the fundamental principles of free market economy, without which the whole concept of market economy will not work. Thus, it can be said that TFEU Article 101 is aiming to enhance the overall market efficiency by defending the principles of free market competition through prohibiting a range of practices.

 

The Efficiency of Enforcement of TFEU Article 101 Prohibition Rules

Specific measures have been put in place to ensure that the prohibitions of activities specified in TFEU Article 101 are enforced and undertakings choosing to disobey are punished accordingly. Previously, the enforcement of competition laws within EU was mainly the responsibility of European Commission and the whole system was highly centralised and inefficient that led to a range of reformations to take place in that aspect, relieving considerable amount of responsibilities from European Commission.

The changes led to the creation of the European competition network that consists from national competition authorities, as well as the Commission. However, it is still the responsibility of the Commission to ensure that national competition authorities are performing according to the standards specified by the Commission, and to promote the intensive exchange if information regarding matters of competition between national competition authorities, national courts and the Commission.

Accordingly, the Commission has to assist national competition authorities with the analysis and assessment of each individual competition case through providing all the necessary information and documents. Specifically, as it has been stated  the “national competition authorities are responsible for informing the Commission of any prohibition or commitment decision relating to the application of Articles 101 and 102 TFEU and any decision withdrawing the benefit of a block exemption regulation not later than thirty days before it is adopted” (Europa, online, 2011).

In occasions where a case is launched against an undertaking, there will be a close cooperation between the Commission and the national competition authority at all stages of the proceedings of the case. It is also important to note that the cooperation between the Commission, the national competition authority and other agencies will last until the point where the final decision regarding the case is taken. And accordingly, “before taking a decision to order an infringement to be brought to an end, to make binding the commitments offered by undertakings, to find Article 101(1) TFEU inapplicable or to impose a fine or periodic penalty payment on undertakings, the Commission will consult the Advisory Committee on Restrictive Practices and Dominant Positions at one of its meetings or by written procedure” (Europa, online, 2011).

The enforcement procedures for Articles 101 and 102 TFEU are described by EU-Commission Annex 1 (2010) in following ways.

Firstly, the origin of the case is going to be established. The case origin can be either from complaints or ‘ex officio’.

Secondly, the initial assessment of the case is going to be conducted.  This stage may include the use of investigative instruments as well as the allocation of the case to another ECN member.

Thirdly, the opening of proceedings will take place. However, this stage does not apply to cartel proceedings, where the opening of proceedings and the adoption of the statement of objections take place at the same time.

Fourthly, the state of play meeting will take place that will not be too long after the opening of proceedings.

Fifthly, investigation will take place. The state of play meeting will take place again at some stage during the investigation and it depends on the level of willingness of parties to discuss commitments. Specifically, if there are elements of willingness to discuss commitments within behaviour of parties, then the state of play meeting will take place straight away, otherwise there will be the statement of objections before the state of play meeting.

Then, the state of play meeting will be followed by preliminary assessment, submission of commitments, market test and another state of play meeting. Later advisory committee will review the case and it can lead to article 9 commitment decision.

Alternatively, in cases where the statement of objections is not followed by the state of play meeting there will be access to file for the parties that will be followed by the reply by parties to the statement of objections. Then oral meeting will take for all parties. Parties will be offered the state of play meeting either after their reply to the statement of objections or after the oral hearing. Consequently the case might be closed or the Article 7 prohibition decision might be taken by the advisory committee.

However, there might be a different scenario as well where the case can be closed for some or all parties at any stage of investigation without statement of objections and state of play meeting. In such a scenario complainants will be informed about the intention of Commission to reject the complaint. If the complainants do not reply, then the complaint is considered to be withdrawn, however, if complainants reply then the rejection decision is taken by the Commission.

However, generally, there are four possible outcomes for the case viewed by the Commission. Firstly, an infringement of the Article 101 can be found and the infringement can be terminated. Secondly, interim measures may be ordered by the Commission to the undertaking. Thirdly, commitments may be made binding according to the decisions of the Commission. And, fourthly, the Commission may establish that the Article 101 is not applicable to the case.

It can be seen through the above analysis that the current strategy adopted by the European Commission in order to enforce the adherence to the prohibitions specified in TFEU Article 101 is fairly effective and efficient due to the fact that it is undertaken through the cooperation of several organisations – the Commission, national competition authorities, national courts and a range of other government agencies on a national level.

 

Conclusion

EU has been formed in order to gain benefits for member countries in various levels, including achieving economic development of member countries through achieving economic integration, promoting economic and other interests of EU countries in a global scale, protecting the markets of EU member countries from internal and external violations and a range of other important purposes. Along with many others, ensuring free competition based on the principles of free market economy is one of the objectives EU wants to achieve within its territories.

Accordingly, the Article 101 of TFEU, one of the main important documents that formulate rules ands regulations within EU deals with the competition issues making such practices as fixing purchase or selling prices or other trading conditions; limiting or controlling production, markets, technical development or investment; sharing markets or sources of supply; applying not similar trading terms and conditions to all trading parties; as well as specifying unrelated terms and conditions as subject to acceptance of a contract.

These prohibitions have been introduced in order to protect the consumers within EU, to protect small companies within EU competing with major companies based in both, inside and outside of EU, protect the ‘single’ EU market from markets of all other countries that are not members of EU, as well as to enhance the overall market efficiency within EU.

The enforcement strategy of TFEU Article 101 has been dramatically improved through decentralising some components of the enforcement function to member countries through the creation of national competition authorities. As a result, currently the prohibition points specified in Article 101 are being enforced effectively and efficiently through the close cooperation of the Commission, national competition authorities, national courts and other related agencies. (2996 words)

 

References

• Application of Articles 101 and 102 TFEU (formerly Articles 81 and 82 of the EC Treaty), Europa, Available at: http://europa.eu/legislation_summaries/competition/firms/l26092_en.htm  Accessed April 1, 2011
• Bassan, F, 2011, European Competition Law, Master Course, Universita Degli Studi
• Best Practices on the Conduct of Proceedings Concerning Articles 101 and 102 TFEU, Annex 1, 2010,  EU-Commission
• Chalmers, D, Davies, G & Monti, G, 2010, European Union Law: Text and Materials, Cambridge University Press
• Consolidated Version of The Treaty on the Functioning of the European Union, 09 May, 2008, Official Journal of the European Union
• Dabbah, MM, 2010, International and Comparative Competition Law, Cambridge University Press
• Jones, A & Sufrin, B, 2007, EC Competition Law: Texts, Cases and Materials, 3^rd edition, Oxford University Press
• Nadeau, JD, 2010, EU Competition Law, University of Goteborg
• Motta, M, 2004, Competition Policy: Theory and Practice, Cambridge University Press
• Osterud, 2010, Identifying Exclusionary Abuses by Dominant Undertakings Under European Union Competition Law, Kluwer Law International
• Russo, F, Schinkel, MP, Gunster, AM & Carree, M, 2010, European Commission Decisions on Competition: Economic Perspectives on Landmark Antitrust and Merger Cases, Cambridge University Press