4 Evolution Of Competition Regulations In The US And Europe

DR.Arul George Scaria

1. Introduction

Two jurisdictions that have substantially influenced the evolution of competition law in India are the United States of America and Europe. This module intends to provide a brief overview of the historical evolution of competition related regulationsin these two important jurisdictions. While the first part of the module will provide an overview of the historical evolution of anti-trust law in the US,the second part of the module provide will provide an overview of the historical evolution of the community level competition law in Europe. This brief discussion on the historical evolution of competition law in two different jurisdictions is provided with the aim of helping students to get some glances of the diverse growth trajectories of competition regulations in different jurisdictions and thereby also help them to learn the subject of competition law from a comparative perspective.

2.Learning outcomes

This module intends to provide students an introduction to –

– the historical evolution of anti-trust law in the US

– the historical evolution of community level competition law in Europe

Evolution of anti-trust law in the United States of America

Many scholars consider the Sherman Act of 1890 as one of the most significant turning points in the evolution of modern competition law. The Sherman Act was legislated in the context of rapid industrialisation in the nineteenth century. Rapid industrialisation resulted in the accumulation of wealth in the hands of many corporations and individuals. It also resulted in fast developments in corporate organisation, which in effect provided much more opportunities for combinations among competitors to avoid competition in the market.iCombinations under the disguise of ‘trusts’ multiplied swiftly in different important sectors like oil, steel and finance with the aim of curtailing competition. Their increasing economic power created widespread fears about the oppression of individuals and general injury to the public.iiThe Sherman Act was enacted with the aim of breaking up such trusts and restoring competition in the market.iiiThough many state level laws already existed in this area, they were limited to intra-state commerce and the Sherman Act was the first federal legislation to address the issue. The Sherman Act was legislated under the power vested on the Congress by the U.S. Constitution to regulate interstate commerce.

The most important provisions of the Sherman Act, Sections 1 and 2, read as follows:

Section 1: Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years,or by both said punishments, in the discretion of the court.

Section 2:Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.

As one may notice from the provisions, while Section1 prohibits agreements that restrain trade, Section 2 focus on monopolisation. Sherman Act has seven sections in total and the Act is remarkable for the simple language used.iv

Standard Oil Company Case

[Standard Oil Company of New Jersey v. United States, 221 U.S. 1 (1911)]

Standard OilCompanycase is one of the early cases that clarified the scope and ambit of the Sherman Act of 1890. It is also one of the cases that can clearly illustrate the historical context of Sherman Act and hence it is considered as a must-read for all students of competition law.

This case was an appeal against the decision of a lower court, which had directed the dissolving of a holding company for violation of the provisions of ShermanAct. The defendants in the case had formed a trust and entered into different anti-competitive agreements to fix the price of crude oil, refined oil and various other petroleum products. They had also limited the production and distribution of those products to increase profits. Through the majority decision in this case, the US Supreme Court introduced the use of rule of reason approach for interpreting the provisions of the Sherman Act and clarified that the Sherman Act prohibits only contracts and combinations that amount to unreasonable or undue restraints of trade. Based on extensive analysis of the facts of the case and the relevant legal provisions, the court came to conclusion that the defendants in the case had imposed unreasonable and undue restraints on trade in petroleum and related products and thereby violated the provisions of the Sherman Act. For the full text of the decision, click here

In 1914, the US Congress enacted the Clayton Act and the Federal Trade Commission Act to overcome some of the shortcomings in the Sherman Act and to bring more clarity on the specific business actions covered by the anti-trust laws.

The Clayton Act specifically addressed issues like price discrimination, tying and exclusive dealing contracts.vThe Clayton Act also regulated mergers and acquisitions that may affect competition or tend to create monopolies in any segment.vi The Clayton Act provided private right of action and allowed recovery of threefold the damages she or he has sustained, along with costs and attorney’s fee.vii

On the other hand, the Federal Trade Commission Act of 1914is remarkable for introducing a consumer protection aspect to the competition laws. The Federal Trade Commission Act established the Federal Trade Commission, which aims at protecting consumers from unfair, deceptive or fraudulent practices. The Federal Trade Commission is envisaged as a bipartisan federal agency and it is headed by five commissioners who are nominated by the President. The Federal Trade Commission can order investigations against corporations or persons who are suspected to be engaging in unfair, deceptive or fraudulent trade practices which are against the provisions of the FTC Act.viii

The Clayton Act was amended in the years 1936 and 1950. The 1936 Amendment through Robinson Patman Act prohibited certain forms of price discrimination. The historical context of this legislation shows that it was primarily aimed to protect small-scale retailers, who were facing considerable threat to their existence from large-scale chain stores, who were receiving highly discounted prices for goods due to their bigger procurements. The Robinson Patman Act made it unlawful to discriminate in prices between different purchasers of commodities of like grade and quality, where such commodities are sold for use, consumption, or resale and where it may substantially lessen competition or tend to create a monopoly or injure, destroy or prevent competition. ix However, the legislation also clarifies that the price differences that arise from differences in manufacturing costs or other costs, do not come within the ambit of the prohibition.x For a successful claim under the Robinson Patman Act, it is very important to prove that the products on which the alleged price discrimination happened are of like grade and quality.

Later, in the year 1950,CellerKefauver Act was introduced to address some of the loopholes in the anti-merger provisions with regard to asset acquisitions. Under the original version of Section 7 of the Clayton Act 1914, even though acquisition of “stocks” of one corporation by a competitor was prohibited, it had not explicitly included the acquisition of “assets” and many corporations were misusing this loophole. The Celler-Kefauver Act addressed this issue by amending Section 7 of the Clayton Act and it explicitly included assets within the ambit of Sec. 7 of the Clayton Act.

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 is also notable for making some substantial changes in the federal anti-trust laws. The HSR Act insisted mandatory filings before the US Federal Trade Commission and Department of Justice for completing certain mergers, acquisitions and transfers of securities or assets, so that FTC and DOJ could ensure that those transactions will not violate the anti-trust laws or adversely affect competition in the market. Substantial costs are involved to restore competition in any market after the completion of an anti-competitive merger and this was the primary factor that necessitated the formulation of these pre-merger notifications. The value of the transaction and the size of the parties to the transaction play a major role in determining whether a transaction is subject to the requirements under HSR Act and these are adjusted from time to time. The waiting period is generally thirty days from the date of filing of the notification and in the case of cash tender offers, it is generally fifteen days.xi

Before concluding this brief discussion on the evolution federal anti-trust laws in the US, it is also important to note that every student of US antitrust law must also keep in mind the important role played by case laws in the interpretation of anti-trust laws in the US. The judicial interpretation of the antitrust provisions over the years have brought in many radical changes in the interpretation of the anti-trust provisions and students must try to find the latest available case laws to determine the current interpretation of any legal provision within the realm of anti-trust law.

4. Evolution of community level competition law in Europe

Competition within Europe is regulated at two levels – at national level and at community level. While the national level regulations continue to govern matters whose effects are limited to the territories of those respective member states, the European Community level regulations deal with matters affecting trade between member states. As one could imagine, this position also make many of the contemporary commercial transactions subject to scrutiny of both national regulations as well as community level regulations. In this brief overview, we will be focusing only on the evolution of competition law at the European community level.

The Treaty Establishing the European Coal and Steel Community (also known as “ECSC Treaty” or “Paris Treaty”), which was signed in the year 1951, is considered as one of the founding blocks of modern European competition law.xiiThe treaty was signed by France, Germany, Italy, Netherlands, Belgium and Luxembourg and it helped in the creation of a new economic community in Europe. While there are diverse political and historical reasons behind the enactment of this treaty, there were two major reasons for the introduction of competition related provisions under this treaty. The most important one was ensuring equal access to essential production inputs like coal and steel for all those European countries and thereby also diminish the power of Germany. Another important aspect was the changing perspectives regarding the benefits of free competition. Some scholars also tend to view that the success of the US economy, which was extensively relying on strong ant-trust rules for bringing more efficiency to the market, might have influenced European law makers for community level competition regulations. The goal of strengthening the solidarity between France and Germany, and there by paving way for better European integration, might have also influenced the political decision making process in this regard. xiii The ECSC treaty established four major institutions for the community – High Authority, Common Assembly, Special Council and Court of Justice.xiv

The ECSC treaty in particular dealt with three issues that are commonly addressed in most of the modern competition laws we see now – anti-competitive agreements, concentrations and the abuse of dominant positions.xvArt. 65 of the treaty prohibited anti-competitive agreements between undertakings that tend to directly or indirectly prevent, restrict or distort normal competition within the market. In this regard, the provision particularly highlighted agreements with regard to fixing or determination of prices, restrictions or control on production, technical development or investment and agreements to share markets, products, customers or sources of supply. The treaty considered all such agreements and decisions as automatically void. xvi However, the treaty allowed the High Authority to exempt certain specific specialisation agreements and joint-buying/ joint-selling agreements in respect of particular products, under specific circumstances. This includes the cases wherein the High Authority finds that such specialisation or such joint buying or selling provided for substantial improvement in the production or distribution of the products; the agreement in question was essential to achieve those results and it was no more restrictive than what is necessary for achieving that purpose; and that such agreement is not susceptible of giving the concerned undertakings the power to determine the prices or to control or restrict the production or marketing of a substantial part of the products in question within the common market or of shielding them from effective competition from other undertakings within the common market.xvii

Art. 66(7) of the ECSC Treaty dealt with abuse of a dominant position. The treaty allows the High Authority to interfere in instances wherein the public or private enterprises have acquired a dominant position that protects them from effective competition in a substantial part of the common market and where they uses such position for purposes contrary to those of the treaty.xviii

Art. 66 of the ECSC Treaty dealt with concentrations and mergers. Art. 66 of the Treaty mandated that any transaction which would have in itself the direct or indirect effect of bringing about a concentration within the territories should have prior authorisation of the High Authority.xixThe treaty also clarified that this obligation shall be effective irrespective of whether or not the operation in question is carried out by a person or an enterprise, or a group of persons or enterprises, or whether it concerns a single product or different products, or whether it is effected by merger, acquisition of shares or assets, loan, contract, or any other means of control.xxThe authorisation from the High Authority depended on the analysis of whether the transaction will result in giving power to the entities to control prices, restrain production or distribution, impair the maintenance of effective competition in a substantial part of the market for such products and whether it will create an artificially privileged position involving a material advantage in access to supplies or markets.xxiThe ECSC treaty was amended by different treaties and the treaty finally expired in July 2002.xxii

The ECSC treaty was followed by another attempt to create a European Defence Community. But this effort did not materialise.xxiii However, the dialogues for more economic integration continued at different levels and a committee was appointed in the year 1956 to prepare a report on the formation of a European Common Market. In April 1956, the committee produced two drafts recommending the creation of a general common market and an atomic energy community respectively. xxiv This paved way for the establishment of the Treaty Establishing the European Economic Community (EEC), which was signed at Rome in 1957by all the original six member states – France, Germany, Italy, Netherlands, Belgium and Luxembourg.

The EEC Treaty (also known as “Rome Treaty”) aimed at the creation of a common market, a customs union and common policies.xxvThe objectives of the treaty were to be carried out with the help of four major institutions – the Assembly (the European Parliament),the Council, the Commission and the Court of Justice.xxviWhile the European Parliament had an advisory role, the Council was envisaged to prepare the standards and the Commission was envisaged to draft the proposals. The EEC treaty consisted of 240 articles. The most important competition related provisions in the treaty were Art. 85 and Art. 86. Art. 85 prohibited agreements, decisions and concerted practices which are likely to affect trade between the Member States and which have as their object or result the prevention, restriction or distortion of competition within the Common Market.xxviiSome of the acts specifically outlawed under this provision include direct or indirect fixing of prices or any other trading conditions; limitation or control of production, markets, technical development or investment; market-sharing or the sharing of sources of supply; and the application to parties to transactions of unequal terms in respect of equivalent supplies, thereby placing them at a competitive disadvantage. xxviii The EEC treaty also clarified that all such agreements or decisions shall be null and void.xxix However, the treaty exempted from the prohibition those agreements and concerted decisions which contribute to the improvement of production or distribution of goods or the promotion of technical or economic progress, while reserving to users an equitable share in the profit resulting there from.xxxIt is also made clear that those agreements cannot impose on the concerned enterprises any restrictions which are not indispensable to the attainment of the above mentioned objectives.xxxiMoreover, it is also clarified that they should not enable such enterprises to eliminate competition in respect of a substantial proportion of the goods concerned.xxxii

Article 86 of the treaty prohibited the abuse of dominant position. Some of the practices specifically prohibited under the provision include direct or indirect imposition of any inequitable purchase or selling prices or of any other inequitable trading conditions; limitation of production, markets or technical development to the prejudice of consumers; application to parties to transactions of unequal terms in respect of equivalent supplies, thereby placing them at a competitive disadvantage; and subjecting of the conclusion of a contract to the acceptance, by a party, of additional supplies which, either by their nature or according to commercial usage, have no connection with the subject of such contract.xxxiii

The EEC treaty also addressed the issue of extent of support that can be given for public enterprises and the treaty also outlawed state aids that can distort competition, except those specifically allowed under the Treaty.xxxivOne of the important and interesting aspects one may observe from the EEC Treaty is the absence of merger regulations and this was due to lack of consensus in this regard among the member states.

The EEC treaty was amended by different treaties and one of the most prominent ones in this regard include the Treaty on European Union in 1992 (also known as “TEU” or “Maastricht Treaty”), which presented the next major step in European integration. It channelised more cooperation in the fields of foreign policy, defence, police and justice together under a single framework – the European Union. It also launched the economic and monetary union (EMU) and EEC was renamed as European Community (EC).

There were further amendments in the community level law and the most important one to be mentioned in the context of discussion in this module is the Lisbon Treaty, which was signed in the year 2007. Apart from engaging in a more democratisation process within the community, the Lisbon treaty also tried to better demarcate the powers belonging to the EU and the powers that belong to the member countries. The treaty renamed the Rome treaty as ‘Treaty for the functioning of the European Union’ (TFEU).

Article 101 of the TFEU prohibits agreements, decisions by associations of undertakings and concerted practices which may affect trade between Member States. As one may clearly notice from the wordings from the article (which is provided in the textbox below), one can trace back the roots of the provision to earlier treaties. As in the case of previous treaties, the general position is that anti-competitive agreements and decisions shall be automatically void, unless they fall under the specific exemptions provided under Art. 101(3).

Art. 101

(1) 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:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions;

(b) limit or control production, markets, technical development, or investment;

(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(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.

Any agreements or decisions prohibited pursuant to this Article shall be automatically void.

The provisions of paragraph 1 may, however, be declared inapplicable in the case of:

– any agreement or category of agreements between undertakings,

– any decision or category of decisions by associations of undertakings, – any concerted practice or category of concerted practices,

which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:

(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;

(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

Art. 102of the TFEU deals with abuse of a dominant position by one or more undertakings. Examples of abuse provided by the provision include directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; limiting the production, markets or technical development to the prejudice of consumers; applying dissimilar conditions to equivalent transactions with other trading parties and thereby placing them at a competitive disadvantage.

Article 102

Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in:

(a) directly or indirectly imposing unfair purchase or selling prices or other 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, thereby placing them at a competitive disadvantage;

(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 connection with the subject of such contracts.

Art. 107 TFEU prohibits state aid. According to Art. 107, any aid granted by a Member State or through State resources in any form which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States be incompatible with the internal market. However, Art. 107 also provided certain specific exemptions like (a) aid having a social character, which are granted to individual consumers, provided that such aid is granted without discrimination relating to the origin of the products concerned; (b) aid to make good the damage caused by natural disasters or exceptional occurrences; and (c) aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid is required in order to compensate for the economic disadvantages caused by that division.xxxv Art. 107 also mentions some of the additional categories of aid that may be considered as compatible with the internal market.xxxvi

It is important to mention here that sector specific regulations may also have important competition related provisions and this needs to be borne in mind while analysing the legality of specific types of conduct in some sectors.

The EC Merger Regulation (commonly referred to as ‘ECMR’) and the implementing regulation currently deal with mergers between undertakings that may have a community dimension. The regulation prohibits mergers and acquisitions which would significantly reduce competition in the common market. While the merger regulation provides guidelines for assessing concentrations, the implementation regulation looks at the various procedural aspects like notifications and deadlines. In general, after completing the investigations, the Commission may either clear the merger without any conditions or it may approve the merger with certain conditions. However, in cases wherein no adequate remedies to the competition concerns have been proposed by the merging parties, the commission may prohibit the merger. All the decisions of the commission are published online and all the decisions of the Commission can be subject to review by the General Court and some of the decisions may even go on appeal to the Court of Justice of the European Union.

There have been many landmark decisions from the European Commission, the Court of First Instance and the Court of Justice of the European Union (formerly ‘ECJ’) on diverse aspects of European competition law and the students of this module are strongly encouraged to go through those case laws to get a broader perspective of the evolution of competition law in Europe.