Han-Wei Liu*

I. Introduction

The Takeover Directive, first envisioned in the White Paper on completing the Internal Market,[1] was finally adopted in 2004,[2] after almost 20 years of work.  The Takeover Directive is based upon the assumption that the takeover offers numerous benefits to companies, investors, and, ultimately, the European economy as a whole.[3]

The functions of a takeover include disciplining management, stimulating competition, and disseminating good management practice, thus improving the quality of management as well as corporate performance.[4] While one of the major purposes of the Takeover Directive is to mitigate the agency problem[5] in the takeover context,[6] some mechanisms, such as “broad neutrality” (Article 9) and the “breakthrough rule” (Article 11) are nevertheless made optional both at the Member State and at the individual company levels.[7] As a result of the compromise among Member States, whether this Directive can achieve its goal, and to what extent, deserves further consideration.

Article 20 of the Takeover Directive instructs the Commission to carry out a survey on the enforcement and experience of the Takeover Directive in 2011 for the purpose of considering future amendments. To this end, on December 16, 2008, the Commission drafted a checklist for Member States to provide relevant information as to takeover bids taking place in their respective markets.[8]

Whether the Directive really works in the way the Commission had originally intended, however, remains far from clear. Given the fact that many aspects of the Takeover Directive followed the UK City Code on Takeovers and Mergers,[9] the UK experience with regard to the agency problem in the takeover context can provide useful guidance to the revision of the Takeover Directive.[10] Among others, the major weapon for tackling the agency problem under the Takeover Directive, namely, the non-frustration rule, was modeled after the Takeover Code.  This paper seeks to explore the functions of the non-frustration rule in the UK and its implications for  the Takeover Directive.  The rest of this paper is structured as follows: Section 2 outlines the non-frustration rule of the UK’s Takeover Code; Section 3 explores the function of the non-frustration rule in tackling agency problems in the takeover context; Section 4 concludes.

II. Non-Frustration Rule of the Takeover Code

Section A of the Takeover Code states that the Code is “designed principally to ensure that shareholders are treated fairly and are not denied an opportunity to decide on the merits of a takeover and that shareholders of the same class are afforded equivalent treatment by an offeror.”[11] The non-frustration rule is established to serve the former purpose—to set management aside when hostile bids are imminent so that shareholders have the final say on the merit of the bids.

General Principle 3 of the Takeover Code further provides that: “the board of an offeree company must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid.”[12] Furthermore, General Principle 2 reads:

[T]he holders of the securities of an offeree company must have sufficient time and information to enable them to reach a properly informed decision on the bid; where it advises the holders of securities, the board of the offeree company must give its views on the effects of implementation of the bid on employment, conditions of employment and the locations of the company places of business.[13]

These principles are further elaborated upon in Rules 3, 21, and 37.3 of the Takeover Code. First, under Rule 3.1, the target board is required to obtain competent independent advice on offers and the substance of that advice must be made known to the shareholders.[14] Second, the target board should refrain from making recommendations to the shareholders as to whether to accept any offer, regardless of its fairness, although the target board may communicate to the shareholders that the offer is a fair one.[15] Rules 21 and 37.3 set down a non-exhaustive list of common situations in which shareholder approval  is required, such as an acquisition, disposal of a target company’s assets of a “material amount,” share issues, and entering into contracts in any context other than in the ordinary course of business.[16] The principles, as Professor Davies suggests, cover “any frustrating action, whether specifically mentioned in the Rules or not, and it has been held by the Panel to cover even the initiation of litigation on behalf of the target once an offer is imminent.”[17] As such, these provisions do not prohibit corporate actions which carry frustrating effects, but rather require that the decision to undertake such actions be placed firmly in the hands of shareholders during the general meeting.

III. The Non-Frustration Rule and Agency Problems

While defensive tactics are widely accepted in the US, they are strictly prohibited by the UK Takeover Code.[18] Defensives measures, or in Professor Bebchuk’s terms, a “board veto,” are said to produce ex ante and ex post agency costs.[19]

Absent a board veto, the takeover threat provides management with stronger incentives to serve the shareholders. Managers will likely determine that better performance would reduce the probability of hostile bids. By contrast, if management were given wide discretion to take defensive measures, managers would most likely assume that, even if they performed poorly and a hostile bid did follow, their veto power would nevertheless enable them either to retain control or at least to extract a favorable deal for themselves.[20] As a result, the takeover threat would lose its disciplinary function and an ex ante agency cost would be incurred.

When a takeover bid is on the horizon, the divergence of interests between managers and shareholders leads to potential agency costs. First, managers might elect to block the bid, which might be a beneficial one for shareholders, in order to maintain their position.[21] Second, instead of frustrating the bid outright, the management may exercise their voting power to extract personal benefits for themselves, rather than a higher premium for their shareholders.[22] Professor Bebchuck labeled these agency costs “ex post” in that they arise after a bid is made.[23]

In sum, since the senior managers’ jobs are at stake in the context of a takeover, management may have strong incentives to frustrate a bid—which may be beneficial from the perspective of shareholders—or to promote a shift of controls that is not, but which would preserve the incumbent management or confer other private benefits.[24] It is against this background that both ex ante and ex post agency costs are reduced in the UK because the target board is marginalized in the takeover bid process. As we shall see below, however, the agency problem nevertheless survives though various lacunas in the Takeover Code. Notwithstanding the non-frustration rule, the target board has never been rendered completely passive in the context of a hostile takeover.

First, incumbent management remains free to persuade shareholders to exercise their rights of choice in a particular way though, for example, submitting their opinion as to the bid price.[25] Second, the target board may appeal to the competition authorities to raise potential competition concerns to obstruct the bids.[26] Third, the non-frustration rule is generally “understood as a negative one and not as requiring incumbent management to take steps to facilitate an offer to the shareholders.”[27] In other words, the non-frustration rule is not interpreted to require the target board to give potential bidders access to the targets books and relevant documents in order to facilitate the bid.  Moreover, the disclosure rule imposed on listed companies, although intended to prevent insider dealing or market abuse, nevertheless gives the target management more time to take permitted defensive measures, such as seeking white knights.[28]

Among other defects, the most frequently criticized is that, in the UK, defensive actions are forbidden only in cases where the takeover bids have been crystallized.[29] As such, management may seek to entrench itself at an early stage—to take advantage of the less stringent ex ante regulation in order to “embed” takeover defense well before any bid comes to light.[30] The rules of the Takeover Code do not extend to pre-bid defensive tactics, so reliance must be placed on fiduciary duties and other provisions under the Companies Act (2006). For instance, sections 549–51 of the Companies Act (2006) require shareholders’ approval when issuing new shares. It is apparent that not all board decisions carrying defensive effects are subject to shareholders’ approval, therefore the rest still rely upon a fiduciary duty. Thus, the agency problem arises once more.

Once again, UK practice provides useful guidance. As Professor Armour observes, “embedded defenses are not observed on anything like the scale that they are in the US.”[31] This is in part because divergent aspects of the corporate government environment in the UK restrict management’s ability to entrench itself.  Among all the corporate governance mechanisms, the role of the institutional investor may be the one most crucial to constraining pre-bid defensive measures, since institutional investors can refuse to go along with some defensive measures management may seek to put in place in advance of a bid.[32]

IV. Conclusion

Conventional wisdom has it that the agency problem is the most acute in the takeover context. When a takeover bid is imminent, the divergence of interests between managers and shareholders leads to potential agency costs. The management, given that their jobs are at stake, may either frustrate a hostile bid which is beneficial for shareholders, or exercise their veto power to extract personal benefits. As we have seen, even though the non-frustration rule under the Takeover Code is not a fully fledged passivity rule, it nevertheless represents a good solution to the agency problem by giving decision-making power to the shareholders, rather than target management, when a takeover bid emerges. When considering the future reform of the Takeover Directive, one must bear in mind that, although the UK’s Takeover Code solves many agency cost problems, there are other factors that deserve more deliberation, such as ownership structures, interests of stakeholders, and the legal origins of each EU Member State.[33] Any reform which fails to take into account the distinct settings in which individual Member States operate would not secure an optimum outcome.

Endnotes.

[1] George Bermann et al., Case and Materials on European Union Law 804-805 (2nd ed. 2002)

[2] Parliament and Council Directive 2004/25/EC 21, On Takeover Bids, 2004 O.J (L142) 12 [hereinafter Takeover Directive].

[3] Commission Report on the Implementation of the Directive on Takeover Bids, SEC (2007) 268 (Feb. 21, 2007). See also Paul Davies et al., The Takeover Directive as a Protectionist Tool?, European Corp. Governance Inst. Law Working Paper Series, Working Paper No. 141/2010 1, 1–2, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1554616 (stating that “the principal purpose behind the Takeover Directive…was to promote the integration of the national economies constituting the “Single Market” and to enhance the competitiveness of European industry as against non-European rivals by facilitating takeover bids, especially cross-border ones.”)

[4] Commission Report, supra note 3, at 3.

[5] Henry Hansmann & Reinier Kraakman, Agency Problems and Legal Strategies, in The Anatomy of Corporate Law: A Comparative and Functional Approach (Reimer Kraakman et al. eds, 2004), 21. (stating that one of the functions of corporate law is to control the conflicts of interest among corporate constituencies, such as those between corporate “insiders” (e.g. controlling shareholders and management) and “outsiders” (e.g. minority shareholders or creditors). All such conflicts bear the character that economists refer to as “agency problems” or “principal-agent” problems.

[6] For a discussion of the agency problem, see generally Henry Hansmann & Reinier Kraakman, id, at 21-31.

[7] See Scott V. Simpson & Lorenzo Corte, The Future of Takeover Regulation in Europe, in Understanding Complex Financial Institutions 759, 761–62 (Practicing Law Institute, 2005) (“Initially, the objective of the Takeover Code was to harmonize EU takeover law through the adoption of a pan-European takeover code (along the lines of the UK Takeover Code) that would foster consolidation in Europe by creating a level playing field for companies across the EU . . . The Takeover Directive’s effect has been substantially curtailed by political concessions.”)

[8] Commission Checklist for Article 20 of the Directive on Takeover Bids, at DG MARKT F2/ET D (2008) 74038 (Dec. 16, 2008).

[9] The Panel on Takeovers and Mergers, The City Code on Takeovers and Mergers (8th ed., 2006), available at http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/code.pdf [hereinafter Takeover Code].

[10] It is worth noting that the UK, which has the oldest, strongest “no frustration rule” in the European Union, has rejected the breakthrough rule prescribed by the Takeover Directive.

[11] Takeover Code, supra note 9, Section A, at A.1.

[12] Takeover Code, supra note 9, General Principle 3, at B1.

[13] Takeover Code, supra note 9, General Principles 2, at B1.

[14] See Paul Davies, Gower and Davies’ Principles of Modern Company Law 716 (7th ed. 2003) (arguing that if the target board does not share the same view of the offer, the directors who are in minority should publish their view and such will normally be requested by the Panel to circulated by the target company.).

[15] Id.

[16] Id., at 717.

[17] See Davies, supra note 14, at 717.

[18] For a detailed comparison of the takeover regime of the UK with those of the US, see John Armour & David A. Skeel, Jr., Who Writes the Rules for Hostile Takeovers, and Why?—The Peculiar Divergence of U.S and U.K Takeover Regulation 95 Geo. L. J. 1727 (2007).

[19] Lucian Arye Bebchuk, The Case Against Board Veto in Corporate Takeovers, 69 U. Chi. L. Rev. 973, 991–93 (2002) (while the author does not explicitly refer to the Takeover Code, he nevertheless prefers the proposition that decisions regarding a takeover bid should be in the hands of the target shareholders.).

[20] Id., at 993.

[21] Lucian Arye Bebchuk, supra note 18, at 991.

[22] Id., at 994.

[23] Id., at 991.

[24] Paul Davies, The Notion of Equality in European Takeover Regulation 1-2 (2002), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=305979.

[25] See Paul Davies & Klaus Hopt, Control Transactions, in The Anatomy of Corporate Law: A Comparative and Functional Approach,  supra note 5, at 165.

[26] Id.

[27] Id.

[28] See Paul Davies & Klaus Hopt, supra note 25, at 165.

[29] Armour & Skeel, Jr., supra note 18, at 1736.

[30] Id. See also Report of the High Level Group of Company Law Experts Issues Related to Takeover Bids, at Annex 4, at 74–75. (which identifies that the most frequently used pre-bid defensive measures, including: (1) the acquisition of shares in the company; (2) exercising control in the general meeting (voting cap); (3) exercising control of the board of directors (staggered boards, special appointment, codetermination); (4) exercising control of the company’s assets (lock-up); (5) financial problems (e.g.  poison debts) or regulatory issues (competition issues).).

[31] Armour & Skeel, Jr., supra note 18, at 1736.

[32] See Davies, supra note 14, at 718.

[33] In Germany, for instance, the non-frustration rule is perceived to have a negative impact on co-determination. See Christian Kirchner & Richard W. Painter, Takeover Defenses under Delaware Law, the Proposed Thirteenth EU Directive and the New German Takeover Law: Comparison and Recommendations for Reform, 50 Am. J. Comp. L. 451, 459 (2002).

Domenico Siclari*

I.  Introduction

On 23 March 2010, the European Commission launched a public consultation on how the European Company Statute (SE) works.[1] This consultation aims to test the findings of an external study conducted by the Commission on this subject with the participation of all interested stakeholders,[2] and to provide input on issues relevant to the assessment of the SE.

The European Company, known formally by its Latin name, “Societas Europeae” (SE), is a second level company that may be formed through the merger of two or more existing public limited companies from at least two different EU Member States, either through (i) the formation of a holding company promoted by public or private limited companies from at least two different Member States, or (ii) the formation of a subsidiary of companies from at least two different Member States, or (iii) the transformation of a public limited company which has had  a subsidiary in another Member State for at least two years. Created in 2001, the European Company is regulated by both a Regulation, directly applicable in Member States, which establishes the company law rules,[3] and by a Directive, implemented in national law in all Member States, on worker involvement.[4]

The purpose of the SE’s legislative set up is to harmonize the legal framework within which business must be conducted in the Community. As it is currently based on national law—which no longer corresponds to the economic framework of the EU—the current legal framework forms a considerable obstacle to the creation of groups of companies from different Member States.[5]

To ensure as much as possible that the economic unit and the legal unit of business in the European Community coincide, it was necessary that along with the companies governed by a particular national law, companies could be formed and could operate under the law created by a Community Regulation, which is directly applicable to all Member States.[6] This provision permits the creation and the management of companies in a European dimension, free from the obstacles arising out of the disparity and the limited territorial application of national company law.[7]

II.  The risk of a renewed “Delaware effect” among the EU Member States

Article 9 of Council Regulation 2001/2157/EC provides legal guidance in the case of matters not regulated by that Regulation or, where matters are partially regulated by it, of the aspects not covered by it. It holds that an SE shall be governed:

(i)      by the provisions of laws adopted by Member States in implementation of Community measures relating specifically to SEs;

(ii)    by the provisions of Member States’ laws which would apply to a public limited-liability company formed in accordance with the law of the Member State in which the SE has its registered office;

(iii)   by the provisions of its statutes, in the same way as for a public limited liability company formed in accordance with the law of the Member State in which the SE has its registered office.

This complex regulation leads to a renewed “Delaware effect”[8] among the EU Member States,[9] as every State would aim to provide the most favorable legislation to induce SEs to establish their registered office in its own territory.[10] In fact, according to the European Commission, of the 431 SEs registered as of 10 September 2009, the vast majority (around 65%) have been registered in the Czech Republic (170 SEs) and Germany (109 SEs).[11]

The most important negative impetus in the establishment of an SE is the lack of employee involvement in Member States without an employee participation system.[12] It seems that new SEs prefer to establish their registered offices in  States with an employee participation system, such as Germany, with its traditional Mitbestimmung,[13] while States with troublesome, unclear or no employee participation systems are avoided.

Italy, for example, currently lacks a working employee involvement system, because European Directive 2001/86/CE was only implemented to a limited extent.[14] As such, the only thing that is guaranteed is that the development of the SE will not lead to the reduction or disappearance of existing common practices which enable the involvement of existing employees of participating partners/enterprises..

The risk is that EU States would engage in a “race to the bottom” in establishing company regulations, allowing more room for corporate autonomy.[15] Corporations might opt for the law that governs their most fundamental acts of self-governance, in a context to which the States that determine the legal framework within which the competition belong.[16]

The risk of a Delaware effect might also concern national securities legislation in the event that the SE becomes publicly listed; in fact, if an SE’s shares are listed, it must be treated in the same manner as public companies established under national law.[17]

III.  Conclusion

In the process of achieving European harmonization through the Company Law Directives, and in hoping to ensure the free movement and establishment of companies, it is necessary to avoid competition in corporate law among Member States that will carry out only an undesirable “race to the bottom.”

It is certainly not easy to move towards internal market harmonization, particularly when faced with the vastly different politico-economic traditions of the various Member States.

We must not forget that the major problem with which we are confronted has its roots in the differences between the domestic constitutions of the Member States. For example, it is well known that in Germany, the evolution of the relationships between labour and capital assets has resulted in a specific employee participation model that has thus far not been achieved in Italy. The economic value related to the creation of a European internal market will not always prevail, but for the time being, the varying economic policy relationships between enterprises and employees of the Member States must converge into a single European constitutional order.

To move forward in the right direction, we must hope that the continuous and progressive application of the principle of constitutional homogeneity[18] will produce positive effects even in the corporate and security regulation sectors; that they will be homogenized within the specific framework of the cross fertilization process, which would not only include the constitutional principle, but also the real asset: the enterprises’ economic relationships.

Endnotes.

[1] See The European Company “Societas Europaea” (SE), European Commission (Mar. 23, 2010),  available at http://ec.europa.eu/internal_market/company/se/index_en.htm.

[2] Ernst & Young, Study on the operation and the impacts of the Statute for a European Company (SE), 2008/S 144–192482, Final report, 9 December 2009.

[3] Council Regulation 2001/2157/EC, On the Statute for a European company (SE), 2001 O,J. (L294) 1 (EC).

[4] Parliament and Council Directive 2001/86/CE, Supplementing the Statute for a European Company with regard to the Involvement of Employees, 2001 O.J. (L294) 22.

[5] Council Regulation 2001/2157/EC, supra note 3.

[6] Council Regulation 2001/2157/EC, supra note 5.

[7] Id.

[8] On the “Delaware effect” in company law see, e.g., L.W. Cary, Federal and Corporate Law: Reflections upon Delaware, 83 Yale L. J. 663 (1974); M. Kahan & K. Kamar, The Myth of Competition in Corporate Law, 55 Stan. L. Rev. 679 (2002); W.J. Carney & G.B. Shepherd, The Mystery of Delaware Law’s Continuing Success, Emory Law and Economics Research Paper No. 07-17 (December 2008).

[9] In fact, in the European Union, companies have made use of the freedom of establishment to seek more favourable legislation from Member States. A negative consequence of the “Delaware effect” is, for example, the lowering of the minimum prepaid capital for limited liability. For more on the debate among European States and legal scholars in the field of corporate law regarding the possible emergence of a “Delaware of Europe,” see P.S. Ryan, Will There Ever Be a Delaware of Europe?, 11 Colum. J. Eur. L. 187 (2004); and R. Drury, The “Delaware Syndrome”: European Fears and Reactions, J. Bus. L. 709 (2005). According to J. Abramsson & R. Sandberg, Is a Delaware effect developing within the European Community?, Jönköping International Business School (2008), available at http://www.essays.se/essay/4c6d51542b/, however, the continued development of the freedom of establishment along with the companies increased understanding of its benefits might create incentives to seek more favourable legislations, but it is highly unlikely that a Member State will emerge to be as successful as Delaware.

[10] About the possibility of transferring the SE’s seat from one Member State to another without having to shut down or to re-register, see W.G. Ringe, The European Company Statute in the Context of Freedom of Establishment, 7 J. Corp. L. Stud. 185 (2007). In the context of European company law, see generally E. Wymeersch, The Transfer of the Company’s Seat in European Company Law, ECGI Law Working Paper No. 08/2003 (March 2003), available at www.ecgi.org/wp.

[11] EC Official Memorandum, Review of European Company Statute—Frequently Asked Questions, 23 March 2010, MEMO/10/97.

[12] On employee participation, see M. Andenas & F. Wooldridge, European Comparative Company Law (Cambridge University Press 2009).

[13] See, e.g., P. von Pernthaler, Qualifizierte Mitbestimmung und Verfassungsrecht, (Duncker & Humblot, 1972); P.H. Naendrup, Mitbestimmung und Verfassung, (Darmstadt, Luchterhand, 1977); in connection with setting up an SE, see M. Bock, Mitbestimmung und Niederlassungsfreiheit: Folgen der Einführung der Societas Europaea für die Vereinbarkeit paritätischer Unternehmensmitbestimmung mit europäischem Recht (Duncker & Humblot 2008).

[14] By Legislative Decree of Italy, 19 August 2005, no. 188.

[15] For the debate among corporate law scholars on whether State competition for corporate charters in the United States is a “race to the bottom” or a “race to the top” and for an analysis of the dynamics and performance of State charter competition, see L.A. Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 Harv. L. Rev. 1443 (1992).

[16] Regarding the risk of company regulation competition among EU States after the Centros judgement, see M. Siems, Convergence, Competition, Centros and Conflicts of Law: European Company Law in the 21st Century, 27 Eur. L. Rev. 47 (2002). In the Centros judgement, Case C-21/297, Centros Ltd v. Erhvervs-og Selskabbstyrelsen, 1999 E.C.R. I-1459, the ECJ held:

“it is contrary to the articles 52 to 58 to refuse to register a branch of a company formed in accordance with the law of another member state in which it has its registered office, but carries on no business … this interpretation does not prevent the authorities of the (host state) to adopt appropriate measures for preventing or penalising fraud, either in relation to the company itself, or in relation to its members, where it has been established that they are in fact attempting by means of the formation of a company, to evade their obligations towards private or public creditors established in the territory of the Member States concerned.”

[17] See, generally, R. Romano, The Advantage of Competitive Federalism for Securities (American Enterprise Institute Press 2003).

[18] On constitutional homogeneity in the EU, see V. Vadapalas, Constitutional Homogeneity in the Accession Process, in I. Pernice & R. Miccù (eds.), The European Constitution in the Making, (Nomos 2003), at 101; M. Mahlmann, Constitutional Identity and the Politics of Homogeneity, German. L. J. 6 (2005), available at http://www.germanlawjournal.com/; R. Arnold, Homogeneity and Differences: the Concept of a Core Europe for the Future?, in J. Nergelius (ed.), Nordic and Other European Constitutional Traditions (Martinus Nijhoff Publishers 2006).

Georgi Tsonchev

1. Introduction

With a recent press release[1] from March 2, 2010, the European Commission approved of Microsoft’s implementation of its commitment to allow consumers a wider choice of Windows-compatible web browsers. In December 2009, the Commission passed a decision[2] that gave binding force to these commitments offered by Microsoft. This is the latest follow-up to the controversial Microsoft case, considered a seminal case in European antitrust law regarding abuse of dominant market position. The exclusionary conduct and the tying of products that are subject to the antitrust litigation in this case are examples of abuse of dominant market position under Article 102 of the Treaty on the Functioning of the European Union (T.F.E.U.), and have played a considerable role in the history of the Microsoft case that dates back to the Commission decision from 2004. The current Article will first focus on some basic aspects of the abuse of dominant market position within the meaning of Article 102 T.F.E.U. (former Article 82 E.C. Treaty) and will then examine the already mentioned exclusionary conduct in terms of Microsoft’s abusive dominant behavior.

2. Basic Terms Defining the Abuse of Dominant Market Position Pursuant to Article 102 T.F.E.U.

a. Dominant (Market) Position

The market share and the turnover of a certain company can be strong indicators that a certain company has reached a dominant position within the market, but in the reality of the complex business world, they are not always enough. Another important aspect is the relative position of the monitored company in relation to its competitors. Thus, the direct interaction between the market players is observed and the assessment of the situation is based on practical results and not only on theoretical postulates that do not clearly reflect the circumstances at hand.

The judicial practice of the European Court of Justice (E.C.J.) followed a similar line of argument in the cases United Brands (1978),^[3] Hoffmann-La Roche (1979),^[4] and Michelin (1983).^[5] Market dominance can take two basic forms. In one form, an undertaking actively violates the fair competition on the relevant market. In the other, the current economic situation places the monitored company in a position in which it does not have to pay attention to the other market actors when forming its own behavior on the relevant market.^[6] In its United Brands decision, the E.C.J. gave a definition of the dominant position that corresponds to the latter alternative and stresses the independent formation of business conduct.^[7]

Different criteria such as market structure, limitations on market entry, specific characteristics or qualities of the monitored company, and the market behavior of the company have to be observed in their entirety in order to determine whether there is market dominance in a certain case. A very important indicator is the market share, whereby 50%, as shown in the 1991 AKZO judgment of the E.C.J.,^[8] is sufficient to create market dominance. Nevertheless, the E.C.J. has not set a fixed percentage that shall define market dominance. The issue is resolved on a case-by-case basis, although an undertaking shall certainly not possess an insignificant market share.^[9] A market share under 25% is considered to be insignificant and does not establish market dominance.^[10]

^{b. Relevant Market}

The definition of the relevant market is crucial to determine the boundaries within which the behavior of the monitored company will be assessed. The offered products must be either appropriate for the satisfaction of certain needs in a similar way or readily interchangeable with each other.^[11]

Considering the definition of the dominant position, it must be stated that market dominance exists only when there is no other appropriate replaceable product in the market. Only in such an environment does a dominant company not have to pay attention to the behavior of the other actors or the consumers in the market because the latter are forced to purchase the products of this company.

c. Abuse

Article 102 T.F.E.U. does not contain any definition of actual abuse.^[12] However, it is important to define such abuse in order to set out the criteria that describe behavior that violates free competition in the market. As adjudicated in the Continental Can case,^[13] the examples listed in Article 102 are not exhaustive.^[14]

Reaching and attaining dominant market position is in principle not prohibited. It is, in fact, encouraged by fair competition in the market.^[15] Smaller companies must have the opportunity to grow and increase their market share, and bigger companies should be able to retain the high levels of development they have reached. However, a company that has reached a dominant position in the relevant market must always respect the free competition on the market and refrain from behavior that could distort relations within the market functioning in a sound competitive environment. Prohibited is the actual abuse of the dominant position that could lead to foreclosure of the market and could severely damage the business interests of the other actors. Furthermore, it is possible that the mere increase of the market share can be classified as an abuse in the sense of Article 102 T.F.E.U. when it does not leave free space for competition and the other undertakings are dependent on the dominant one.^[16] In practice, actual abuse can take different forms, such as the imposition of unfair prices or other trading conditions, exclusive dealing, tying of products, predatory pricing,^[17] or denial of access to essential facilities.^[18]

^{3. Microsoft Case—Exclusionary Conduct in Terms of Refusal to Supply Interoperability Information to Competitors}

The Microsoft case is a recent seminal case that defines abuse in terms of refusal to supply essential information to third parties and tying of products.^[19] In its decision, the Court of First Instance (C.F.I.) confirmed the Commission’s finding that Microsoft had abused its dominant position in the PC operating system market by 1) refusing to disclose interoperability information and protocols[20] that would enable its competitors to fully interoperate with Windows PCs and servers, and 2) tying Windows Media Player with its dominant Windows PC operating system.

The refusal to disclose interoperability information and protocols to other operating system developers is abusive and makes it impossible for them to come up with competitive products. Thus, the competition is limited by the conduct of Microsoft, and potential rivals in the market are foreclosed. In addition, customers are prevented from having a choice of a wider variety of operating systems that would best respond to their needs. In that sense, the C.F.I. is right to condemn the exclusionary conduct of Microsoft. The objective of the decision in the Microsoft case is exactly to enable and foster such competition.^[21] The actions that Microsoft has undertaken now show a clear line of conduct that will promote competition in this highly technical area and will bring to the table more benefits to the customers and better satisfaction of their individual needs. Since March, Windows PC users who previously had Internet Explorer as their default web browser have been given “a browser Choice Screen, designed to give them an effective and unbiased choice between their default and competing web browsers.”[22]

The incumbent competition commissioner Joaquin Almunia welcomed Microsoft’s endeavor and expressed his expectation of more productive competition in the field of web browsers and more consumer benefits.[23] From a legal perspective, the actions of Microsoft are important in terms of fighting the exclusionary conduct resulting from a refusal to share necessary technical information in the technology sector. Their positive effect is expected in the years to come.

Endnotes

[1] Press Release, Eur. Comm’n, Antitrust: Comm’n Welcomes Microsoft’s Roll-Out of Web Browser Choice (Mar. 2, 2010).

[2] Press Release, Eur. Comm’n, Antitrust: Comm’n Accepts Microsoft Commitments to Give Users Browser Choice (Dec. 16, 2009).

[3] Case C-27/67, United Brands Co. & United Brands Cont’l BV v. Comm’n, 1978 E.C.R 207.

[4] Case C-85/76, Hoffmann-La Roche & Co. AG v. Comm’n, 1979 E.C.R. 461.

[5] Case C-322/81, NV Nederlandsche Banden Industrie Michelin v. Comm’n, 1983 E.C.R 3461.

[6] Thomas Eilmansberger et al., Materielles Europarecht [Substantive European Law] 246 (2008).

[7] Case C-27/67, supra note 3, at ¶¶ 63–66.

[8] Case C-62/86, AKZO Chemie BV v. Comm’n, 1991 E.C.R. I-3359, ¶ 60.

[9] Eilmansberger et al., supra note 6, at 250.

[10] Ivo Van Bael & Jean-François Bellis, Competition Law of the European Community 111 (5th ed. 2010); Sir Christopher Bellamy, European Community Law of Competition 927 (Peter Roth & Vivien Rose eds., 6th ed. 2008).

[11] An important case that adds to the E.C.J. cases mentioned supra in notes 3, 4, and 5 is Continental Can. Case C-6/72, Europemballage Corp. & Cont’l Can Co. Inc. v. Comm’n, 1973 E.C.R. 215.

[12] Van Bael & Bellis, supra note 10, at 797; Bellamy, supra note 10, at 947.

[13]Europemballage Corp. & Cont’l Can Co. Inc. v. Comm’n, supra note 11, ¶ 26.

[14] Peter Fischer et al., Europarecht 1786 (4th rev. ed. 2002).

[15] Eilmansberger et al., supra note 6, at 532; Fischer et al., supra note 14, at 1787; Van Bael & Bellis, supra note 10, at 797.

[16] Fischer et al., supra note 14, at 1787; Cases C-6/73 & 7/73, Istituto Chemioterapico Italiano S.p.A. & Commercial Solvents Corp. v. Comm’n 1974 E.C.R. 223.

[17] Case T-340/03, France Telecom SA v. Comm’n, 2007 E.C.R. Ⅱ-107; AKZO Chemie BV v. Comm’n, supra note 8.

[18] Case C-7/97, Oscar Bronner GmbH & Co. KG v. Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co. KG, 1998 E.C.R. I-7791; Istituto Chemioterapico Italiano S.p.A. & Commercial Solvents Corp. v. Comm’n, supra note 16.

[19] Case T-201/04, Microsoft v. Comm’n, 2007 ECR II-1491.

[20] Id. ¶ 192.

[21] Id. ¶ 236.

[22]Press Release, supra note 1.

[23]Id.

Krisztina Stump*

I. Introduction

The general principle of European Union law prohibiting all discrimination on the grounds of age is acknowledged by the case law of the Court of Justice of the European Union (CJEU)[1] and is given specific expression in Directive 2000/78.[2] This Directive has the purpose of laying down a general framework for combating discrimination on various grounds including age.[3] Pursuant to the Directive, however, a difference of treatment on the basis of age may be justified under certain circumstances.[4] In fact, while different treatment based on race or sex will be clearly inadmissible in most cases, age-based differentiations, age-limits, and age-related measures are widespread in social and employment legislation.[5] As Advocate General Mazák remarked in Age Concern,  “[a]ge is not by its nature a ‘suspect ground,’ at least not so much as for example race or sex.”[6] In addition, age is a fluid criterion: whether differential treatment constitutes inadmissible age discrimination may not only be a question of whether a measure is founded directly or indirectly on age, but also of what age it relates to.[7] Therefore it is often difficult to draw the line between justifiable differentiations on the basis of age and impermissible discrimination. Three judgments of the CJEU, all decided in January 2010, may help shed further light on Member States’ obligations with regard to the prohibition of discrimination on the grounds of age by providing some guidance as to when legislation fixing age-based limitations can be justified.

II. Article 6(1) of the Directive

The first subparagraph of Article 6(1) of the Directive states that a difference of treatment on grounds of age does “not constitute discrimination if, within the context of national law, [it is] objectively and reasonably justified by a legitimate aim, including legitimate employment policy, labour market and vocational training objectives, and if the means of achieving that aim are appropriate and necessary.”[8]

Examples of such “differences of treatment” include:

a)      the setting of special conditions on access to employment and vocational training, employment and occupation, including dismissal and remuneration conditions, for young people, older workers and persons with caring responsibilities in order to promote their vocational integration or ensure their protection;

b)      the fixing of minimum conditions of age, professional experience or seniority in service for access to employment or to certain advantages linked to employment;

c)      the fixing of a maximum age for recruitment which is based on the training requirements of the post in question or the need for a reasonable period of employment before retirement.[9]

The language of the Directive leaves relatively broad discretion to the Member States to permit such differences of treatment so long as they are reasonably justified by a legitimate aim, in particular by legitimate employment policy and labor market objectives. It also leaves them a fair amount of freedom in their choice of the measures capable of attaining those objectives. Thus, recent cases decided by the CJEU in that field are of particular interest as they indicate the limits of that discretion.

III. Case 555-07, Kücükdevici v. Swedex GmbH & Co. KG[10]

In Kücükdevici, the CJEU had to decide whether certain German legislation—under which periods of employment completed before the age of twenty-five are not taken into account for the purposes of calculating the notice period applicable to dismissal—was contrary to the principle of non-discrimination on the grounds of age as laid down by the Directive.

Under the German Civil Code, the notice periods which an employer must comply with in the case of dismissal increase progressively according to the length of the employment relationship.[11] However, periods of employment completed by an employee before reaching the age of twenty-five are not taken into account in the calculation of the notice period.[12]

Ms. Kücükdevici, employed by a company since the age of eighteen, was dismissed at the age of twenty-eight with one month’s notice, as the company calculated the notice period without taking into account the periods of employment completed before her twenty-fifth birthday. Had her full period of employment been taken into account, the notice period would have been four months.

According to the referring national court, this legislation is based on the German legislature’s assumption that older employees are more seriously affected by unemployment because of their family and economic obligations and because of decreasing flexibility and mobility. Linking the extension of the notice period to a minimum age tends to strengthen the protection of older workers against unemployment, as the legislature believes that younger employees usually react more easily and more quickly to the loss of their jobs and greater flexibility can therefore be demanded of them. In addition, according to the national court, the measure also aims to reduce the higher level of unemployment among younger workers by creating conditions which facilitate their recruitment by increasing their employers’ flexibility of personnel management.

The CJEU held that these objectives fall within employment and labor market policy as defined by Article 6(1) of the Directive. However, while such aims could in general be legitimate, the legislation was not appropriate and necessary to achieve those aims. The judgment emphasizes that Member States enjoy broad discretion in the choice of measures capable of achieving their objectives in the field of social and employment policy. Therefore, national legislation aimed at giving employers greater flexibility in personnel management by imposing less onerous conditions relating to the dismissal of young workers, from whom it is reasonable to expect a greater degree of personal and occupational mobility, can be regarded as legitimate. However, the Court held that the German legislation was not appropriate for achieving that aim, as it applies to all employees who joined the workforce before the age of twenty-five, irrespective of their age at the time of dismissal. The Court also added that the legislation affects young employees unequally, as it penalizes young people who enter active life early after little or no vocational training, but not those who start work later after a long period of training. The Court concluded therefore that the German legislation was contrary to the principle of non-discrimination on the grounds of age.

This decision suggests, nevertheless, that the CJEU would not necessarily declare illegal a measure imposing less strict conditions for the dismissal of young workers if it was intended to have a positive effect on the recruitment of young workers and was appropriate to achieve that aim. Clearly, it appears necessary to provide some flexibility to national governments to adopt measures that encourage enterprises to recruit young employees in order to deal with the high rates of unemployment affecting that age group. However, while measures relaxing dismissal conditions applicable to that age group may encourage employers to dismiss younger workers, any positive effect on their recruitment remains uncertain.[13]

IV. Case 229/08, Wolf v. Stadt Frankfurt am Main[14]

In Wolf, the CJEU held that fixing a maximum recruitment age of thirty does not constitute prohibited discrimination on the grounds of age in the case of firemen directly involved in firefighting.

The State of Hessen in Germany applies an age limit of thirty for the recruitment of officials to an intermediate career in the fire service, whose duties include firefighting. Mr. Wolf applied for such a post, but as he was over thirty years old his application was not considered.

The CJEU held that this age limit meets all the conditions for justification laid down by the Directive. First, the concern of ensuring the operational capacity and proper functioning of the professional fire service expressed by the German Government constitutes a legitimate aim. In addition, the possession of especially high physical capabilities may be regarded as a genuine and determining occupational requirement for carrying out the occupation of a firefighter whose tasks include fighting fires and rescuing people. The Court relied on scientific data submitted by the German Government according to which very few officials over the age of forty-five possess sufficient physical capability to perform the firefighting part of their tasks, and concluded that the need to possess full physical capability to carry on that activity is related to the age of persons in that career. Finally, according to the Court, the age limit does not go beyond what is necessary to achieve the objective of ensuring operational capacity and proper functioning. Accordingly, this age limit is permissible.

V. Case C-341/08, Petersen v. Berufungsausschuss für Zahnärzte[15]

Petersen concerned the age limit set by the German Social Security Code according to which admission to practice as a panel dentist in the national statutory health insurance scheme expires at the end of the calendar quarter in which the dentist reaches the age of sixty-eight.[16]

Ms. Petersen, admitted to provide panel dental care since 1974, reached the age of sixty-eight in April 2007. When the Admissions Board for Dentists decided that her authorization to practice as a panel dentist would expire at the end of June 2007, she appealed the decision.

The CJEU held that a Member State may legitimately consider it necessary to set an age limit for the practice of a medical profession such as that of a dentist in order to protect the health of patients. However, the judgment concluded that the measure in the present case lacked consistency, as the age limit applied only to panel dentists. Outside the panel system, dentists could practice their profession regardless of their age. Therefore, the measure could not be regarded as necessary for the protection of patients’ health. However, according to the judgment, this does not mean that the measure is necessarily prohibited by the Directive. The Court held that an age limit could be admissible where its aim is to facilitate access to employment by younger dentists if, taking into account the situation in the particular labor market, the measure is appropriate and necessary for achieving that aim. In that context, the Court concluded that the age of sixty-eight would appear to be sufficiently high to serve as the endpoint of admission to practice as a panel dentist. Consequently, the Court determined that it is for the national court to identify the aim pursued by the age limit for panel dentists and decide accordingly about its permissibility under the Directive.

VI. Conclusion

Three recent judgments of the CJEU reaffirm that Member States enjoy broad discretion in their choice of the measures capable of attaining their objectives in the field of social and employment policy. They are also allowed to introduce age limits on the basis of health-related concerns. However, these decisions emphasize the importance of the limits set by the Directive according to which the measures have to be “appropriate and necessary” to achieve those aims. Accordingly, inconsistent or ineffective measures may not be admissible according to CJEU standards. While these judgments do not provide an ultimate, easy-to-use test for the determination of age-based discrimination, they may help to draw a somewhat clearer picture of the scope of permissible age-based differentiations under E.U. law.

Endnotes

* Many thanks to Patrick Embley for the thought-provoking suggestions and the careful editing.

[1] See Case C-144/04, Mangold v. Helm, 2005 E.C.R. I-09981  ¶ 75.

[2] Council Directive 2000/78/EC, Establishing a General Framework for Equal Treatment in Employment and Occupation, 2000 O.J. (L 303) 16.

[3] Id. art. 1.

[4]Id. art. 6(1).

[5] Opinion of Advocate General Mazák, Case C-388/07, Age Concern Eng. v. Sec’y of State for Bus., Enterprise and Regulatory Reform, ¶ 74.

[6] Id.

[7] Id.

[8] Council Directive 2000/78/EC, supra note 2, art. 6(1).

[9] Id. art. 6(1).

[10] Case C-555/07, Kücükdeveci v. Swedex GmbH & Co. KG.

[11] Bürgerliches Gesetzbuch [BGB] [Civil Code] Aug. 18, 1896, Reichsgesetzblatt [RGBl] 195, as amended, § 622, ¶ 2, sentence 1.

[12] Id. § 622, ¶ 2, sentence 2.

[13] See Op. Advoc. Gen., Kücükdeveci, ¶ 45 (indicating that in the present case “the claim that such a measure has a positive effect on the recruitment of young workers seems theoretical, to say the very least”).

[14] Case C-229/08, Wolf v. Stadt Frankfurt am Main.

[15] Case C-341/08, Petersen v. Berufungsausschuss für Zahnärzte für den Bezirk Westfalen-Lippe.

[16] Sozialgesetzbuch V [SGB V] [Book Five of the Social Insurance Code] Dec. 20, 1988, BGBl. I at 2477, as amended by Gesetz, Nov. 14, 2003, BGBl. I at 2190, § 95, ¶ 7, third sentence http://www.sozialgesetzbuch.de/ gesetze/05/index.php?norm_ID=0509500, and § 72, ¶ 1, third sentence, http://www.sozialgesetzbuch.de/gesetze/05/ index.php?norm_ID=0507200. Section 95, ¶ 7, third sentence of the statute applies to all panel doctors of the German statutory health insurance system. Under the second sentence of § 72, ¶ 1 of the statute, that provision applies by analogy to panel dentists.

Jaroslav Šuchman*

On November 3, 2009, the ultimate stronghold of opposition to the Treaty of Lisbon, [1] seated above one of the river Vltava’s meanders, [2] succumbed, and it became clear that the Treaty would come into force on December 1, 2009. The European Commission did not hesitate long in deciding which of the array of new Treaty provisions would be symbolically best suited for the initiation of consultation, with a view towards early implementation. On November 11, 2009, the Commission presented the Green Paper on a European Citizens’ Initiative [3] (the Green Paper), and so launched the first consultation on the Treaty of Lisbon’s implementation.

I.  The ECI in the Treaty on European Union

In one of a series of attempts to tackle the pervasive beast of the Union’s democratic deficit, the Treaty on European Union as amended by the Treaty of Lisbon [4] provides in Article 11 for a new tool of direct democracy [5]—the European Citizens’ Initiative (ECI):

Not less than one million citizens who are nationals of a significant number of Member States may take the initiative of inviting the European Commission, within the framework of its powers, to submit any appropriate proposal on matters where citizens consider that a legal act of the Union is required for the purpose of implementing the Treaties. [6]

The procedures and conditions required for such a continent-wide citizens’ initiative are to be determined by regulation passed by ordinary legislative procedure. [7] The Green Paper presents and solicits ideas on how the implementing regulation should fine-tune the ECI mechanism. [8]

II.  The Green Paper

The ECI is a perfect example of a potentially far-reaching primary law provision that can be rendered useless if the implementing provisions get bogged down in special single-purpose rules and administrative twists. The Commission seems to be aware of that and thus presents ten issues, resolutions of which should provide the core of the implementing instrument. In pondering them, a balance needs to be found between assuring the representativeness of any initiative and avoiding an excessive burden on participants, together with administrative feasibility—and all this while accommodating half a billion potential citizen initiators.

A.  Representativeness

The Green Paper starts by addressing how many citizens have to sign up to an initiative: what should the “significant number of Member States” be (Issue 1), and at what number should the “minimum signatures per Member State” be set (Issue 2)? [9]

These two questions are, of course, the most salient. Finding the right answer to them will make the difference between initiatives that will be impossible to bring about on one extreme and a proliferation of spurious initiatives degrading the instrument and overwhelming the Commission’s apparatus on the other. In response to the first question, the Commission sees a majority of Member States as too high a threshold and a quarter as too low. It suggests one third as “strik[ing] the right balance.” [10] The Commission justifies this figure by referring to two treaty provisions working with such a threshold [11] and to some national provisions on popular initiatives. [12]

Important incidental questions remain. Do we want a lot of initiatives in general? Do we want initiatives on issues that may concern only several (maybe geographically defined) Member States? Or is it necessary for the initiative to emanate a “genuine European flavour” as the Commission puts it? [13] While one third is a reasonable—though, not to be denied, rule of thumb—threshold, it will make it very hard for citizens of, for example, the Baltic region (comprising, say, five Member States) to present an initiative on a topic such as regulation of polluting maritime traffic. Is that in line with the ECI’s purposes?

The Commission maintains that in order for representativeness to be assured, it is important not only to set a threshold for participating Member States, but also to require a minimum number of citizens to support a given petition “in each of the Member States involved.” [14] As setting an absolute number would disadvantage smaller Member States, a number in relation to population is the favored option. The Commission defines the needed percentage threshold very neatly. It calculates what percentage of the E.U. population equals one million and proposes that number—0.2%—to be the Member State threshold. [15]

Requiring a minimum is sensible, and 0.2% is in the lower range of thresholds used in popular initiatives [16] in European countries that use them. [17] But it is not clear whether the votes from a Member State that remain below the 0.2% threshold (say 75,000 of the 89,000 needed in Spain) get counted into the total, provided that the necessary number of Member States reaching the threshold is met. Such a limitation, which can be read from the Green Paper’s phrasing, [18] would clearly go against the transnational nature of the initiative, which would then become a series of separate referendums on the same issue.

B.  Administration—Easy Answers

The remaining issues deal with technical aspects. The minimum age requirement for eligibility to participate (Issue 3) and procedures for collection, verification, and authentication of signatures (Issue 5) are best left to national voting age rules for the European Parliament elections and national authorities, respectively. [19] The Commission contemplates full harmonization of procedural requirements, but recognizes that such a choice would be costly and confusing. [20] Formal requirements (Issue 4) should be minimal, just enough so as to assure that there is an initiative with a cause and that the cause is clear. [21] Naturally, the more comprehensive an initiative is, the more persuasive an “invitation” it may be to the Commission to propose it. Imposing a time limit for signature collection is a common practice when it comes to petitions, which protects citizens from having given their voice in favor of an initiative when times have changed (Issue 6). [22] The proposed one year time limit [23] is a little harsh on citizens, considering the average time the institutions take to pass legislation, but it should not pose difficulties to the petitioners. Possible duplication of initiatives (Issue 10) [24] need not be seen as a problem. While it may be politically difficult for the Commission to reject successive initiatives on the same issue, such a practice would certainly highlight the saliency of the matter. The ability to ask the Commission to reconsider must be allowed as a tool of the popular will.

C.  Administration—Harder Answers

There are several seemingly technical choices with larger potential impact on the policy goals of the ECI. Registration of proposed initiatives (Issue 7) and examination of petitions by the Commission (Issue 9) are good examples. The Green Paper proposes that a web-based registration process, requiring each initiative to upload information such as who the organizers are or the subject and objectives of an initiative, would “set the clock ticking.” [25] The Commission does not want to make any admissibility decisions at this early stage and would only examine the initiative after it reaches the signature threshold, [26] but the reasons it gives for this—delay and procedural and substantive confusion [27]—are not very persuasive. Instead, the Commission would like to make all decisions with regard to initiatives only after any given initiative has matured. [28] The Commission identifies a time limit of six months to determine whether the following requirements have been met: procedural requirements (was it registered correctly, was the right amount and correct signature distribution attained), admissibility (does the subject matter fall within the remit of the Commission’s powers), and substantive evaluation (does the Commission like it and will it act on it). [29]

Such an approach is justified in terms of efficiency, as it protects the Commission from having to invest resources when it is unclear whether a petition will gain popular support. However, such an approach may lead to considerable citizen frustration. Not only may the Commission, though stating reasons, decide not to act upon a million-signature petition, but it may actually rule that the initiative was futile from the beginning because it falls outside the Commission’s competence. As the ordinary European (and, looking at the European Court of Justice case law, [30] even the institutional stakeholders or the Court itself) has a hard time discerning where the given competence lies, it would be worth considering having the Commission resolve these issues at the beginning, [31] with the petition organizers having possible recourse to the Court. Such an approach would save resources, bad publicity, and resentment from those who signed in vain. Because Article 11 of the Treaty on European Union treats the ECI essentially in the same way as the European Parliament’s secondary legislative initiative is treated under the Treaty on the Functioning of the European Union, [32] the Commission should generally commit to similar treatment of both processes. [33]

The final issue concerns transparency and funding (Issue 8). [34] To gather one million signatures across at least nine countries, organizational means and finances will be essential. For the sake of the independence of initiatives, no public funding is presumed by the Commission. [35] There will be no conditions regulating the type of entity that can initiate a petition, [36] but, due to these funding constraints, most entities will necessarily be already- or ad hoc-organized interests. It is, therefore, sensible to require full disclosure of supporters and campaign means so that the risk of misuse of the initiative by disguised special interests is limited. [37]

III.  Will the ECI Deliver?

The consultation attracted a good number of contributions, [38] a lot of food for thought for the Commission to feast on before it rushes to submit a draft proposal [39] on the ECI as invited by the European Council. [40] Never before has an entity of this size attempted to introduce a popular initiative, which is traditionally a local means of generating policy decisions. Such instruments, which may have polity-building capability, [41] will likely be triggered as a reaction to the responsiveness failure of domestic or European political representation, or both. And that is its main value.

Subsidiarity should be the guiding principle in answering administrative questions such as eligibility and signature verification, possibly with “good standards” set in the implementing instrument. It must be remembered that gathering one million signatures across a continent could become an organizational nightmare, and, the more stringent the rules are, the fewer the entities that will have the capacity to run a petition campaign. The question then becomes, “Who will be able to benefit?” As it is likely that there will be no public funding available for initiatives, entities with established networks and secured finances will be advantaged, whether those be political parties, NGOs, or private interests. We might, therefore, need to brace ourselves for initiatives on issues that are taboo in high politics. Fringe parties that have a xenophobic agenda and fall short of election thresholds may unite in proposing anti-immigration measures just as much as—or even more than—say, traveling European citizens frustrated by the diversity of electrical outlets.

Led by the same drive to tackle the Union’s democratic deficit, national Parliaments were entrusted with an enhanced role in the E.U. legislative process. [42] Most notably,  as watchdogs of the subsidiarity principle, [43] they, not unlike soccer referees, can raise “yellow cards” in warning after a subsidiarity-foul is committed. However, just like citizens with their initiative, they cannot go all the way. In most cases, for the proposal to be sent off the pitch, they will need the Council or the European Parliament to join them. It would have been worth considering, either in the Convention or in the Intergovernmental Conference, whether the national Parliaments (too) ought to be given the right to invite the Commission to propose E.U. laws. National Parliaments are directly and locally elected, parliamentarians live in their constituencies in contact with citizens, there is a working inter-parliamentary network that can facilitate production of an initiative, [44] and parliamentarians are experienced legislators. If the National Parliaments were found incapable of increasing the responsiveness of Union politics, perhaps that would have been the better time to experiment with continent-size referenda on petitions. [45]

Whether the ECI proves to be no more than hot air, or whether it will mark the beginning of the end to the European Union’s democratic deficit, this first attempt to establish transnational direct democracy should not be wasted. What is not encouraging is that we already have a test case of a European initiative. In 2006, more than a million signatures were gathered in support of ending the outlandishly wasteful monthly commute of the European Parliament between Brussels and Strasbourg costing some €200 million every year. [46] And . . . it merrily shuttles on . . .

Endnotes

* Many thanks to Jana Sochorcová for the thought-provoking transatlantic chat over the ECI’s merits and prospects.

[1] Treaty of Lisbon Amending the Treaty on European Union and the Treaty Establishing the European Community, Dec. 13, 2007, 2007 O.J. (C 306) 1 (Dec. 1, 2009) [hereinafter Treaty].

[2] For less Lisbon-immersed readers, the self-declared ultimate “protector of nation-state sovereignty” was the Czech President Václav Klaus.

[3] Commission Green Paper on a European Citizens’ Initiative, COM (2009) 622 final (Nov. 11, 2009) [hereinafter ECI].

[4] Consolidated Version of the Treaty on European Union, Feb. 7, 1992, 2008 O.J. (C 115) 13 [hereinafter EU Treaty].

[5] Like many innovations of the Treaty of Lisbon, the ECI first saw light in the turbulent waters of the European Convention. Closer search for its origins within the Convention’s rich archives reveals that the proposal came about in a very late stage of the debates, when the provision now enshrined in Article 11 of the Treaty on European Union found its way into Article 46 of the Draft Treaty Establishing a Constitution for Europe, July 18, 2003, 2003 O.J. (C 169) 19.

[6] EU Treaty art. 11, ¶ 4.

[7] Id.

[8] See ECI, supra note 3.

[9] Id. at 4–5.

[10] Id. at 5.

[11] The Commission mentions the “enhanced cooperation” threshold which requires “at least nine Member States” to participate. EU Treaty art. 20, ¶ 2. This threshold is not defined by fraction but by absolute number. The number of national Parliament votes needed to set in motion the “yellow card” subsidiarity procedure provided for in Article 7(2) of the Protocol (No. 2) on the Application of the Principles of Subsidiarity and Proportionality attached to the Treaty of Lisbon is also one third. 2008 O.J. (C 115) 206, 208. There is another provision working with a one-third threshold which the Commission does not mention, where a proposal for determination of serious (and persistent) breach of the Treaty on European Union Article 2 values on the part of a Member State may (also) be made by one third of the Member States.  EU Treaty art. 7, ¶¶ 1–2.

[12] See ECI, supra note 3, at 5 for discussion of the Austrian and Swiss provisions for popular initiatives.

[13] Id.

[14] Id.

[15] Id.

[16] Nine Member States have larger minimum thresholds, ranging from 0.8% in Italy to 10% in Latvia.  Victor Cuesta, The Future of the European Citizen Initiative 4.

[17] Inconveniently, the beacon of modern-time direct democracy—Switzerland, where the first recorded direct (select, male) citizen vote took place in 1294—is (still) not a Member State.

[18] “In view of the fact that the Treaty requires that a citizens’ initiative be supported by no less than a million citizens coming from a significant number of Member States, the Commission considers that it is necessary to set a minimum number of citizens that are required to support an initiative in each of the Member States involved.”  ECI, supra note 3, at 5.

[19] See id. at 6–8.

[20] See id. at 6, 8.

[21] See id. at 7.

[22] See id. at 9–10.

[23] See id. at 10.

[24] See id. at 13.

[25] Id. at 10; see also discussion of Issue 6 supra Part II.B.

[26] See ECI, supra note 3, at 10.

[27] Id.

[28] See id. at 10, 12.

[29] See id. at 12–13.

[30] For an elementary set of legal base controversies, see, e.g., Bermann et al., The Sphere of Community Law and Policy, in Cases and Materials on European Union Law 104–28  (2nd ed. 2004).

[31] See, e.g., European Parliament Resolution of 7 May 2009 Requesting the Commission to Submit a Proposal for a Regulation of the European Parliament and of the Council on the Implementation of the Citizens’ Initiative (calling for an admissibility assessment by the Commission prior to collection of signatures).

[32] “The European Parliament may, acting by a majority of its component Members, request the Commission to submit any appropriate proposal on matters on which it considers that a Union act is required for the purpose of implementing the Treaties. If the Commission does not submit a proposal, it shall inform the European Parliament of the reasons.” Consolidated Version of the Treaty on the Functioning of the European Union, art. 225, Mar. 25, 1957, 2008 O.J. (C 115) 150.

[33] The European Parliament is already negotiating on how its “requests” to initiate legislation will be treated by the Commission within the frame of debates over the revised EP-Commission Framework Agreement. Press Release, European Parliament, Framework Agreement Between the Parliament and Commission: Key Elements in the Revision of the Framework Agreement.

[34] See ECI, supra note 3, at 11–12.

[35] See id., at 11.

[36] See id.

[37] The Czech Republic Senate raises an interesting suggestion: interlinking the Commission Register of Interest Representatives with data in the ECI registration website. 230th Resolution of the Committee on E.U. Affairs on Green Paper on a European Citizens’ Initiative, Parliament of the Czech Republic—Senate, Senate Press No. K 090/07, ¶ 2(4) (Jan. 27, 2010).

[38] The consultation period ended on January 31, 2010.  See http://ec.europa.eu/dgs/secretariat_general/citizens_ initiative/contributions_en.htm for all contributions.

[39] After this Article was written, the Commission published its Proposal for a Regulation on the Citizens’ Initiative, COM(2010) 119 final (Mar. 31, 2010). The proposal, which does not address several of the issues treated in this brief Article, introduces some interesting compromises both toward big Members States and the European Parliament, while seeming to leave considerable room for the Commission to maneuver in the legislative process. The Proposal is available here.

[40] European Council Conclusions, at ¶ 4, EUCO 6/09 (Dec. 11, 2009).

[41] For a sober analysis of the Swiss experience of demos-through-direct-democracy and why it may (not) relate to the European Union, see Lars P. Feld & Gebhard Kirchgässner, The Role of Direct Democracy in the European Union, in A Constitution for the European Union 203, 216–17 (Charles B. Blankart & Dennis C. Mueller eds., 2004).

[42] EU Treaty art. 12.

[43] Protocol (No. 2) on the Application of the Principles of Subsidiarity and Proportionality attached to the Treaty of Lisbon, art. 7, Dec. 13, 2007, 2008 O.J. (C 115) 206, 207–08.

[44] See, e.g., Conference of Community and European Affairs Committees of Parliaments of the European Union (COSAC), http://www.cosac.eu (last visited Apr. 7, 2010).

[45] It is remarkable that such an important instrument as the ECI was incorporated in the Treaty of European Union with so little preceding policy debate. See supra note 5; for the “elaborateness” of explanatory notes to the amendments that introduced the ECI at the Convention, see also Borrell, Carnero & López Garrido, Suggestion for Amendment to Article 34 of the Treaty Establishing a Constitution for Europe; Alain Lamassoure, Suggestion for Amendment to Article 34 of the Treaty Establishing a Constitution for Europe; Voggenhuber, Lichtenberger, MacCormick, Nagy & Voggenhuber, Suggestion for Amendment to Article 34 of the Treaty Establishing a Constitution for Europe; Jürgen Meyer, Suggestion for Amendment to Article I-46 of the Treaty Establishing a Constitution for Europe.

[46] Press Release, One-Seat Parliament Campaign in E.U. Treaty Pitfall (Sept. 22, 2006).

Brief Comments on the Italian Law 9 April 2009, n. 33, art. 3, co. 4-ter

Chiara Ferrari*

As a forerunner in Europe, Italy adopted in April 2009 a law on the “network contract,” under the auspices of the Small Business Act (SBA), aimed at enhancing collaboration among enterprises to increase their potential for innovation, research, and development. The Italian network contract, as a new tool for enterprises’ growth, may drive the attention of other Member States and European institutions towards contractual models of inter-firm coordination and towards the possible creation of more comprehensive solutions at the E.U. level.

The Article, after an overview of the most recent European policies in favor of small and medium enterprises, provides a brief description of the essential elements of the network contract and a critical analysis of some crucial issues posed by this new contractual form of collaboration.

I. INTRODUCTION: THE EUROPEAN FRAMEWORK FOR SMEs

Small and medium enterprises (“SMEs”) are the engine of the European economy [1] and have been the target of several policies implemented by E.U. institutions since 2000. [2]

In June 2008, the Commission adopted the SBA, which is specifically aimed at creating a level playing field for SMEs throughout the European Union and at enhancing “SME-friendly” policies. The objective is to facilitate SMEs’ growth and innovation. The SBA is founded on ten key principles that should guide national and Community policy-makers in taking SMEs’ interests into account at the very early stage of policy-making (the so called “Think Small First” principle). [3]

A year after the adoption of the SBA, [4] both the Commission and Member States [5] took substantial actions to improve framework conditions for SMEs, with a particular focus on the most urgent issues posed by the financial and economic crisis––namely, the access to finance and the removal of unnecessary administrative burdens. One of the crucial areas which the Commission and Member States are still called to work on is boosting innovation and research and development (R&D). In this context, the development of a cluster strategy, [6] also with a view to encourage transnational cooperation, is explicitly mentioned by the Commission among the practical measures to implement the SBA. [7]

Collaboration represents an increasing tendency among European SMEs [8] and is considered an effective solution enabling the achievement of development strategies (either to improve production processes or to increase competitiveness based on innovation and quality). However, the recent SBA lacks clear guidelines for designing models of inter-firm collaboration.

In addition to the actions taken in the fields of industrial and enterprise policy, the European Union has also adopted regulations establishing a harmonized legal framework for setting up businesses. European institutions, though, seem to have focused more on provisions concerning organizational devices to conduct business activities––some of which are not necessarily aimed at enhancing inter-firm collaboration––than on contractual forms of coordination. Except for the Regulation on the European Economic Interest Grouping (the EEIG), [9] which can be viewed as a sort of hybrid model between contracts and organizations, the other European interventions concentrate on corporate vehicles such as the European Company, [10] the European Cooperative Company, [11] and recently the European Private Company. [12] Yet, SMEs often prefer growing strategies that do not imply the creation of a separate entity or the loss of their own independence (through a merger). The reasons could be manifold. Among the more important ones, setting up a new organization could be not only more costly but it could also result in greater rigidity, limiting the ability of the enterprise to react to new circumstances and changes in market demands.

The absence of common forms for contractual coordination and of common principles of European contract law to be applied to these particular schemes could affect the smooth functioning of the internal markets and hamper SMEs’ growth, especially in their internationalization strategies. [13]

As a forerunner in this framework, in April 2009 Italy adopted Law 9 April  2009, n. 33 [14] on the “network contract” (the “Network Contract Law”) that, following the direction recently sketched by the European Union, promotes the development of inter-firm cooperation strategies to foster enterprises’ innovation and growth. This law represents a novelty in Europe and may offer new challenges and hints for future discussion at European and national levels on further implementations of the “Think Small First” principle.

II. THE ITALIAN LAW 9 APRIL 2009, N. 33, ART. 3, co. 4-ter: THE ESSENTIAL ELEMENTS OF THE NETWORK CONTRACT

SMEs are the backbone of the Italian economy. Their needs have been generally taken into account both in policy design and in legislative and administrative initiatives, often encouraging collaborative mechanisms to overcome the excessive fragmentation of the economic system. Indeed, the positive experience of Italian clusters [15] shows that flexible collaborative systems may be successful in overcoming dimensional limitations and difficult economic conditions.

In April 2009 the Italian legislature introduced the network contract as a flexible model for inter-firm coordination aimed at fostering competitiveness and innovation. [16] The Network Contract Law is not specifically targeted to SMEs. It is intended to offer a general tool of collaboration to be used by enterprises of any dimension. However, the Law is particularly suited for SMEs. [17] Network contracts can help SMEs overcome limitations due to their dimension without causing them to lose their legal independence, while also enabling them to collaborate with firms of different dimensions.

The network contract allows two or more enterprises, on a purely contractual basis, to jointly perform one or more economic activities in order to increase their potentials for innovation and competitiveness.

The regulation provides only a framework scheme identifying the essential content of the contract and leaving to the freedom of the parties the definition of specific clauses according to their needs and to the circumstances in which they operate. The essential elements of the network contract include the following items. [18]

Form

The contract must be in writing and it must be filed with the Register of Enterprises where the participants have their headquarters.

Structure

The contract should be at least bilateral, but there is no limitation on an increased number of participants. It therefore also encompasses multi-party agreements.

Common Purpose

Through the network contract, enterprises pursue the common goal of improving their potential for innovation and competitiveness. These strategic goals should be expressly indicated in the contract together with the economic activities to be jointly performed.

Network Program

Through the network contract, the firms perform a “network program,” as defined in the contract, which specifies rights and duties of each participant and ways and means to achieve the common goal. The participants to the network contract commit themselves to jointly perform one or more economic activities within their business scope. The Law requires some sort of functional link between the economic activities performed via the network contract and the business scope of each firm. Nevertheless, it seems not confined to the “ancillary” role typical of the EEIG. [19]

Governance

The internal governance of the network contract hinges on a common body entrusted with the performance of the network contract––the achievement of the common goal––and with powers to act on behalf of the participants when entering into contractual relationships with third parties and/or government bodies. [20] The contract should specify the powers of the management body and the governing rules concerning internal representatives of participants. The firms are also free to establish entry and exit rules and the contract duration.

Liability and Financial Aspects

The firms should create a common fund aimed at pursuing their common goal and make contributions to it, according to what is defined in the contract.

Under some circumstances, [21] such a fund constitutes a separate asset of the network: the personal creditors of the participants cannot have recourse to it and the participants cannot ask to divide and distribute it among themselves for the entire time of the contract. In this case the participants therefore have limited liability towards creditors and other third parties for the obligations undertaken within the network contract’s scope and in the network’s name. This is another major difference from the EEIG, where all the members have unlimited joint and several liability (despite the principal liability of the grouping for its debts).

Alternatively, if the firms are public stock corporations, they may also create set-apart funds in their own assets.

Finally, enterprises which use the network contract for the strategic goal of improving their potentials for innovation and competitiveness are given access to specific financial aid measures, simplified procedures for access to finance, and simplified administrative procedures. [22]

III. SOME CRITICAL ISSUES OF THE NEW NETWORK CONTRACT

The Network Contract Law provides a very poor and incomplete regulation of the network contract. This gives large freedom to the parties to “customize” the contract and emphasizes its intrinsic flexibility. Nevertheless, it poses inevitable interpretative problems.

One crucial interpretative question concerns the scope of the network contract and precisely whether it encompasses both “pure” contractual models of coordination and more structured “organizational” devices. The essential elements of the network contract, as defined by the Law, seem to allow both these possibilities. In particular, the creation of a common body to perform the contract and the availability of a limited liability regime might lean towards a type of network endowed with a certain degree of independence from its participants, even if not giving rise to a fully separate legal entity. The contractual or “organizational” elements may therefore prevail over one another, from time to time, depending on the needs and goals of the participants.

A second issue regards the aim of the contract that is the “joint performance of one or more economic activities.” A literal interpretation would exclude from the definition of network contract situations of mere coordination, therefore limiting the scope of application of the Law. In practice, networks of enterprises are used to realize either “lighter” forms of coordination, where the contract coordinates economic activities performed by each enterprise autonomously, [23] or more intense forms of coordination, where the participants perform through the network contract a specific phase or project within the value chain [24] or even jointly perform an economic activity. [25] All these different settings may equally contribute to the achievement of technological innovations and developing strategies. “Lighter” forms of coordination, moreover, may be particularly suitable in preliminary stages of cooperation among SMEs. A broad interpretation of the network contract would offer a flexible contractual form of coordination able to encompass several contractual devices currently provided by Italian law, [26] such as the consortium [27] and the “associazione temporanea di imprese,” [28] and at E.U. level, such as the EEIG.

Overall, the Network Contract Law, lacking default rules, places a significant burden on the freedom of contract of the parties who should define several aspects of their relationship (such as the contract’s termination, management of potential conflicts of interests among the firms, and financial rules). This may create uncertainty, raise transaction costs, and affect the credibility and solidity of the network contract especially when it deals with third parties. A critical issue in this perspective is the absence of rules concerning the common fund (i.e., minimum fund requirement, minimum amount of contributions, management rules, transparency requirements) which may result in a lack of safeguards for the creditors of the network. [29]

Conclusively, the Network Contract Law may be welcomed positively as far as it gives official recognition to the phenomenon of the networks of enterprises, well developed in Italy (and in Europe) for a long time. Yet, it seems it has somehow constrained a much more complex and multiform phenomenon to a limited and still troublesome description. Networks of enterprises indeed deserve a more systematic and comprehensive approach.

IV. CONCLUSION: POSSIBLE IMPROVEMENTS AT THE EUROPEAN LEVEL

The Network Contract Law deserves attention from other Member States and the European Union, as it could offer the opportunity to enhance networking among policymakers and to promote exchanges of experiences and practices, as was one of the goals of the SBA. In particular, it could further a discussion at E.U. level about defining a common legal framework on contractual devices for cross-border inter-firm collaboration, with a view to overcoming the still perceptible barriers of Member States’ different contract law regimes and private international law rules.

Endnotes

* I thank Paola Iamiceli, University of Trento; Federica Casarosa, European University Institute; and Miliça Zatezalo-Falatar for useful comments to this Article. Responsibility is my own.

[1] SMEs represent 99% of the E.U. non-financial business economy and contributed up to 84% to the employment growth between 2002 and 2007. EIM Business and Policy Research, First Section of the Annual Report on EU Small and Medium-Sized Enterprises, at 5 (Jan. 12, 2009).

[2] See Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions: “Think Small First,” A “Small Business Act” for Europe, at 2, COM (2008) 394 final (June, 25 2008) [hereinafter SBA]; Parliament and Council Decision 1639/2006/EC, Establishing a Competitiveness and Innovation Framework Programme (2007 to 2013), 2006 O.J. (L310) 15; Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions: A Single Market for the 21st Century Europe, COM (2007) 724 final; Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions: Small and Medium-Sized Enterprises—Key for Delivering More Growth and Jobs: A Mid-Term Review of Modern SME Policy, COM (2007) 592 final; Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions: Implementing the Community Lisbon Programme—Modern SME Policy for Growth and Employment, COM (2005) 551 final; European Charter for Small Enterprises, adopted by the General Affairs Council on June 13, 2000 and endorsed by the European Council in Santa Maria de Feira of June 19–20, 2000.

[3] SBA, supra note 2. The ten key principles are the following: create a “friendly environment” for entrepreneur and family businesses; support honest entrepreneurs who faced bankruptcy, providing them a “second chance”; design rules according to the “Think Small First” principle; adapt public administration to the needs of SMEs, removing administrative barriers; adapt public policy tools to the needs of SMEs, in particular in terms of awarding public procurement contracts and allocating State aid; facilitate SMEs’ access to different types of finance; ensure that SMEs benefit from the opportunities offered by the Single Market; promote SMEs’ potentials for innovation, research, and development; foster the turning of environmental challenges into opportunities for SMEs; support SMEs in opening towards external markets.

[4] Commission Working Document, Report on the Implementation of the SBA, COM (2009) 680.

[5] In Italy the SBA has been adopted by a Prime Minister’s Directive of 27 November 2009.

[6] The link between innovation, competitiveness, and inter-firm cooperation had already been recognized in previous policy interventions, emphasizing also the relevance of a cross-border dimension. See Parliament and Council Decision 1639/2006/EC, supra note 2, Recital 35, arts. 10.2.b, 12, 13; Communication from the Commission, Implementing the Community Lisbon Programme, supra note 2.

[7] See European Parliament Resolution of 10 March 2009 on the Small Business Act, P6_TA(2009)0100, ¶¶ 34–35.

[8] See Eurostat, European Business—Facts and Figures 27 (2007).

[9] Council Regulation 2137/85, On the European Economic Interest Grouping (EEIG), 1985 O.J. (L 199) 1 (EEC).

[10] Council Regulation 2157/2001, On the Statute for a European Company (SE), 2001 O.J. (L 294) 1 (EC).

[11] Council Regulation 1435/2003, On the Statute for a European Cooperative Society (SCE), 2003 O.J. (L 207) 1 (EC).

[12] A European Private Company Statute, specifically designed for small and medium enterprises, has been proposed within the framework of the Small Business Act, but it has not been yet adopted. See Commission Proposal for a Council Regulation on the Statute for a European Private Company, COM (2008) 396 final (June 25, 2008).

[13] Legal scholars have pointed out that neither Rome I on the Law Applicable to Contractual Obligations nor the Draft Common Frame of Reference provides clear rules for contractual devices of inter-firm coordination or for multi-party contracts. European Parliament and Council Regulation 593/2008, On the Law Applicable to Contractual Obligations (Rome I), 2008 O.J. (L 177) 6 (EC); Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR) (Christian von Bar et al. eds., 2009). See Fabrizio Cafaggi, Contractual Networks and the Small Business Act (EUI Working Paper LAW No. 2008/15, 2008).

[14] Law 9 April 2009, n. 33, art. 3, co. 4-ter–4-quinquies, Gazz. Uff. 11 Apr. 2009, n. 85 (Law Converting Law Decree 10 February 2009, n. 5, Gazz. Uff., 11 Feb. 2009, n. 34), available at http://www.camera.it/parlam/leggi/09033l.htm (last modified by Law 23 July 2009, n. 99, Gazz. Uff. 31 July 2009, n. 136, art. 1, available at http://www.parlamento.it/parlam/leggi/09099l.htm).

[15] The Italian industrial clusters are group of enterprises (generally SMEs) concentrated in a specific geographical area and characterized by strong relationships of strategic collaboration and networking. Nowadays, within a global scenario, it is crucial to develop inter-firm collaborative mechanisms able to go beyond the local dimension typical of the cluster model, evolving towards longer production chains and networks of enterprises.

[16] Law 9 April 2009, supra note 14. For a preliminary broader analysis of the network contract, see Il contratto di rete (Fabrizio Cafaggi ed., 2009); Le reti di imprese e i contratti di rete (Paola Iamiceli ed., 2009).

[17] In May 2010, the first network contract was been signed in Bologna (Italy) by eleven SMEs of the automotive industry. See Emilio Bonicelli, Pmi meccaniche in rete Bologna fa da apripista, Sole 24 Ore, May 7, 2010.

[18] Law 9 April 2009, supra note 14, art. 3, co. 4-ter.

[19] Council Regulation 2137/85, supra note 9.

[20] The law allows the management body of the network contract to enter into agreements with government bodies in relation to procedures facilitating the access to finance, promoting and defending Italian products, or encouraging internationalization and innovation strategies. Law 9 April 2009, supra note 14, art.3, co. 4-ter, lett. e.

[21] The limited liability is only granted if the network contract, as concretely set up by the enterprises, gives rise to a common organization which is independent from that of each participant and is in charge of performing the network program and of negotiating with third parties. The law makes the limited liability contingent upon the application of two provisions of the Italian Civil Code concerning the contract of consortium (Articles 2614 and 2615) to the network contract, as far as compatible with its concrete structure. Id. art.3, co. 4-ter, lett. c.

[22] Id., art.3, co. 4-ter.2 & co. 4-quinquies.

[23] For example, the firms through the network contract only share the costs and regulate the use of a technological innovation that each enterprise will use for its own business activities.

[24] For example, the firms through the network contract collaborate to perform R&D activities that could be beneficial to their own business or collaborate to patent and commercialize an innovation.

[25] For example, some farmers, in order to produce high quality agricultural products and to increase their competitiveness, decide to collaborate via a network contract to implement exclusively organic agricultural practices, according to specific rules to be defined in the “network program,” and to market their products with a common trademark created ad hoc as a quality certification mark.

[26] Italian legal scholars have suggested interpreting the network contract as a contract cross-cutting all the different types of collaborative devices already available in Italian law. See, e.g., Il contratto di rete, supra note 16; Carmelita Camardi, Dalle reti di imprese al contratto di rete nella recente prospettiva legislativa, 10 Contratti 928 (2009). Even so, a more comprehensive intervention to coordinate the network contract with the other tools would have seemed and seems necessary.

[27] See Codice civile [Italian Civil Code] arts. 2602–2615. The consortium is a multi-party contract giving rise to a common organization which regulates or coordinates and performs one or more phases of the economic activity of the member firms.

[28] The “associazioni temporanee di impresa” (temporary enterprise ventures) are contractual devices for inter-firm collaboration very similar to contractual joint ventures and mainly used in public construction projects. See Legislative Decree 12 April 2006, n. 163, art. 37.

[29] See also Paola Iamiceli, Il contratto di rete tra percorsi di crescita e prospettive di finanziamento, 10 Contratti 942 (2009).

Milica Zatezalo-Falatar [1]

Aiming to boost economic growth and minimize the effects of the financial crisis, the Government of France adopted a large stimulus package (Plan de relance) in the beginning of 2009. [2] The Plan is particularly geared at supporting investments in public infrastructure and comprises a State guarantee for public private partnerships (the “Project guarantee”), which the French Ministry of Economy can award under certain conditions pursuant to Article 6 of the Law Amending the French Finance Law (Loi de finances rectificative) of February 4, 2009 (the “LFR 2009”). [3]

The Project guarantee has already been approved for several major projects currently being negotiated in France, but no project benefiting from the guarantee has been closed to date. Even though it is still too early to measure its exact impact and sufficiency, the measure is showing some positive effects. This Article will examine the main characteristics of the guarantee, its use in current projects, and its initial results.

1.  Conditions for awarding the Project guarantee and its main characteristics

The Project guarantee is intended to support public private partnership (PPP) projects in the context of the economic crisis. The crisis increased the cost of funding and reduced tenors, making the financing of large infrastructure projects more difficult. The Project guarantee is one of the two main measures conceived to boost the PPP market in France, the second one being an €8 billion co-financing envelope of funds managed by the Caisse des dépôts et consignations. [4]

The LFR 2009 provides that the purpose of the Project guarantee is to “facilitate the financing of priority projects,” [5] but does not contain precise criteria for determining a “priority” project. Thus, the Ministry of Economy has a large discretion in the award of the guarantee. [6] In practice, requests are sent by relevant public authorities to the Mission d’Appui a la réalisation des contrats de partenariat (the “MAPPP”), the French task force for PPPs, attached to the Ministry of Economy. The “Guarantee committee,” composed of the members of several of the Ministry’s directorates (Budget, Treasury, Legal Affairs, and the MAPPP), recommends projects to the Minister of Economy that are to benefit from the guarantee, and the Minister decides on the matter. [7]

PPPs include various legal instruments whereby a private party is responsible for the definition, conception, realization, and exploitation of a public infrastructure. [8] In France, this includes in particular “partnership contracts” (contrats de partenariat) and “delegations of public services” (délégations de service public), notably concessions. Partnership contracts and concessions are subject to different legal regimes in France. Partnership contracts are a relatively new legal instrument, created in 2004, [9] whereby the public authority remunerates a private party through periodic payments. Such “availability payments” [10] are typically directed to lenders through a Dailly mechanism. [11] Concessions, on the other hand, are an old instrument under French law whereby the private party is remunerated by user fees and taxes and thus substantially assumes the exploitation risk.

Financial, geographic, and time conditions for the award of the Project guarantee are provided under Article 6 of the LFR 2009. Up to 80% of the loan or securities financing the project can be subject to the Project guarantee. The issuer of securities can be either the signatory of the PPP contract or the bank financing the project. [12] The maximum aggregate amount of the Project guarantee is €10 billion. [13]

The beneficiary must have a “sound financial situation and adequate solvency” [14]—the idea is to avoid, as much as possible, that the guarantee be called. [15] Signatories of concession contracts, exposed to the market risk, are subject to greater scrutiny than signatories of partnership contracts, where the private partner is remunerated directly by the public authority. Project guarantee is an on-demand guarantee: independent, irrevocable, and unconditional. It ranks pari passu with senior loans and may be called upon partially or entirely. The fact that the guarantee is called does not automatically accelerate the loans that are being guaranteed. [16] These characteristics are crucial for the lender’s security.

The price of the Project guarantee is fixed by the Ministry of Economy and is calculated taking into account “normal conditions” for covering “comparable” risks. [17] More particularly, the contract, the project type, its soundness, and its tenor are taken into account in determining the price. [18] The price is composed of a fixed commission, payable at the contract signature, and a variable component calculated in a number of basis points on the guaranteed amount. The MAPPP estimates that the cover will cost between 75 bp to 150 bp over Euribor, in addition to the fixed commission. This cost is taken into account by the bidders in the preparation of their financial proposal.

Project guarantee can only be awarded to companies established in the European Union or the European Economic Area and the project must be situated in France. [19] Finally, the time condition provided in the LFR 2009 requires that the PPP contract be signed before December 31, 2010. [20]

More generally, in order to benefit from the Project guarantee, the project should demonstrate:

• Solid technical and economic plan;
• Balanced risk sharing between public and private parties during the construction and exploitation period;
• Balanced contractual scheme, in particular with respect to provisions related to early contract termination; and
• Balance between financial actors of the project, which the State is guaranteeing. [21]

In order to solicit the project guarantee, the relevant public authority must prepare an information memorandum whose content is detailed in the Administrative Circular providing guidance to the application of the Article 6. [22] It includes elements traditionally used to assess PPP projects—risk matrices, contract provisions related to early termination, financing, and economic balance of the project. It also includes issues specific to the general purpose of the Project guarantee—impact of the project on the economic growth (sales, impact on employment, and tax revenues), as well as the description of possible difficulties related to financial closing.

2.  Use of the Project Guarantee in the current projects market in France

Given the time limit provided for in Article 6 of the LFR 2009 (December 31, 2010) and the timing required for the implementation of PPP projects, only projects that have already been launched by now will be able to benefit from the Project guarantee.

There is a significant deal volume hanging on the success of the new guarantee. There are now 10 to 15 large infrastructure projects in the French pipeline across the road, rail, transport, defense and education sectors—representing between €30–40 billion in project spending for the rail/transport sector alone. But not many are moving towards financial close. And the pipeline continues to fill—for example, most recently, the €400 million A355 Strasbourg toll road concession launched. [23]

According to the MAPPP, as of March 2010, the Ministry of Economy has approved the Project guarantee for four projects—two partnership contracts and two concessions. The global amount that has been proposed to date is approximately €3 billion, one-third of the maximum amount available under the LFR 2009. For each particular project, the bidders have to assess the proposed amounts and terms and decide whether and to what extent to incorporate the Project guarantee in their financial offer. The Partnership contracts are for a tram-train on the French island of La Réunion and a high-speed rail project, Bretagne–Pays de la Loire. The Réunion Tram-Train is a €1.55 billion project consisting of a thirty-eight kilometer line with twenty-five stations from the town of Saint Paul to Roland Garros Airport in Sainte-Marie, and incorporates two tunnels and the highest viaduct in the world. [24] The proposed amount of the guarantee for the Tram-Train is €505 million. [25] This is envisaged to cover up to 80% of the construction risk, whereas the post-construction phase will be covered by the Dailly mechanism, guaranteeing that the lenders will benefit from regular availability payments made by the State. [26] The project consortium led by Bouygues is due to sign the contract, but the financial close has been held up for some time now. The next meeting has been scheduled for May 2010. [27] For the second Partnership contract, Bretagne–Pays de la Loire, the amount of the Project guarantee envisaged is in the range of €850 million. The project cost is between €3–4 billion and involves the building of 214 kilometers of high-speed tracks running between Le Mans and Rennes.  Bouygues, Eiffage, and Vinci are running for this twenty-five-year partnership contract and the bidding is expected to follow by June 2010. [28]

The concession contracts concerned by the Project guarantee are a high-speed rail project—Sud Europe Atlantique (between Tours and Bordeaux) —and Charles de Gaulle Express, a high-speed thirty-two kilometer service between Paris East and Charles de Gaulle airport. Sud Europe Atlantique is a €8 billion, sixty-year concession. The Project guarantee proposed amount is slightly above €1 billion and the guarantee could have a potential life of thirty years, covering half of the concession’s demand risk. Bouygues, Vinci, and Eiffage have pre-qualified. As for the second concession contract, Vinci is the only bidder that ultimately submitted an offer for the Charles de Gaulle Express concession in November 2009 and the financial close is expected by the end of 2010. [29] The proposed amount of the Project guarantee for this project is under €700 million. Negotiations are expected to be difficult, considering the decrease in the number of airline passengers brought about by the economic crisis and the competition that this project faces from the RER B. [30]

The list of projects for which a Project guarantee has been requested is not public, but according to the Ministry of Economy approximately ten projects are expected to benefit from this measure.

3.  The future and impact of the Project guarantee

Even though no project benefiting from the Project guarantee has been closed to date, many consider that the guarantee has already had positive effects in that it enabled a number of major projects to not be abandoned in the economic climate characterized by unavailability of long-term financing and increased pricing terms. Some argue that the mechanism would have been necessary even without the crisis and that it may be insufficient in light of the current needs and objectives. [31] The Project guarantee may become necessary—a “need to have, not nice to have,” to use the words of one sponsor regarding the TIFIA debt (implemented through the U.S. government program providing projects with thirty-five-year subordinated debt at a single-digit market to U.S. treasuries). [32]

The impact that the Project guarantee had on pricing is also difficult to assess given that no project has been closed to date. Expectations on how pricing will shift under the influence of the guarantee range between the current level (above 250 bp over Euribor) and the pricing before the crisis (100 bp–200 bp over Euribor). [33]

From the public perspective, the fact that the State is being remunerated will enable it to benefit from regular payments as well as from not having to include the guarantee in the public debt. [34] According to the French Ministry of Economy , the Project guarantee should not have a consolidation effect pursuant to Eurostat rules, and the European Commission is expected to declare it compatible with the E.U. legal framework on state aid.

Endnotes

[1] I am grateful to François Bergère, Secretary General of the Mission d’Appui à la réalisation des contrats de partenariat, Thomas Courtel, Partner in Gide Loyrette Nouel, Paris, and their teams, as well as Miles Lang, writer in Project Finance Magazine, and Chiara Ferrari, LL.M. Columbia Law School, for all their time, valuable information, and suggestions during the preparation of this Article.

[2] For an analysis of other responses to the effect of the financial crisis on the Public Private Partnerships market across the European Union, see European PPP Expertise Centre (EPEC), The Financial Crisis and the PPP Market—Potential Remedial Actions (Aug. 2009).

[3] Law No. 2009-122 of Feb. 4, 2009, Journal Officiel de la Republique Francaise [J.O.] [Official Gazette of France], Feb. 5, 2009, p. 2032.

[4] The Caisse des dépôts et consignations is the public group managing a substantial part of French savings and acting as an escrow account for notaries, bankruptcy trustees, and social security institutions.

[5] Law No. 2009-122, supra note 3, § 6.I.

[6] Rozen Noguellou, La crise et l’exécution financière des marchés publics et des partenariats public-privé, Revue de droit immobilier [RDI] 278 (May 2009) (Fr.).

[7] Minister of Economy, Industry, and Employment, Minister for the Implementation of the Stimulus Package, Circulaire d’application de l’article 6 de la loi n. 2009-122 du 4 février 2009 de finances rectificative pour 2009 instituant une garantie d’Etat et de la loi n. 2009-179 du 17 février 2009 pour l’accélération des programmes de construction et d’investissement publics et prives, dans ses dispositions relatives aux contrats de partenariat [Circular for the Application of Article 6 of the Law No. 2009-122 of February 4, 2009 Providing for a State Guarantee and of the Provisions Related to Partnership Contracts of the Law No. 2009-197 of February 17, 2009 for the Acceleration of Public and Private Construction and Investment Programs ] [hereinafter Administrative Circular], July 23, 2009.

[8] Id.

[9] Ordinance No. 2004-559 of June 17, 2004 on Partnership Agreements (Feb. 26, 2010).

[10] Availability payments are periodic payments made by the public authority to the private party, subject to contracted services being available.

[11] A Dailly mechanism is an assignment of receivables whereby a creditor transfers the benefit of certain receivables directly to its banks. In the case of French partnership contracts, the public authority granting the contract (which is hence liable for a stream of unitary payments to the project company over the life of the contract) can in advance decide to accept the transfer of the benefit of a portion of these payments to the lenders, under certain conditions provided for in the contract. See European PPP Expertise Centre (EPEC), Note on the French System of “Cession de Créances” (Nov. 2009).

[12] Law No. 2009-122, supra note 3, §§ 6.II, 6.III.

[13] Id. § 6.IV.

[14] Id. § 6.II.

[15] Noguellou, supra note 6.

[16] Administrative Circular, supra note 7.

[17] Law No. 2009-122, supra note 3, § 6.III.

[18] Administrative Circular, supra note 7.

[19] Law No. 2009-122, supra note 3, § 6.II.

[20] Id.

[21] Administrative Circular, supra note 7, at Annex 1, 2/2.

[22] Id.

[23] Miles Lang, New French Project Guarantee Debuts, Project Fin., Sep. 2009.

[24] Tram-Train May Hit the Wall, Project Fin., Nov. 2009.

[25] Veronique Le Billon, L’Etat a accordé sa garantie à quatre projets de partenariat public- privé, Les Echos, Dec.15, 2009.

[26] Lang, supra note 23.

[27] Le Billon, supra note 25.

[28] Transport, Project Fin., Oct. 2009.

[29] Lang, supra note 23.

[30] Liaison CDG Express: Vinci poursuit les discussions, Les Echos, Mar. 4, 2010.

[31] Loïc Levoyer, La garantie de l’Etat sur les PPP, Contrats Publics, June 2009, at 68; Stéphane Braconnier, Jean-Luc Champy & Jean-Baptiste Morel, Le soutien financier de l’Etat aux partenariats public-privé, Revue Contrats et Marches Publics, Apr. 2009.

[32] Tom Nelthorpe, New Infrastructure Lending Initiatives Hit and Miss, Project Fin., Jan. 2010.

[33] Lang, supra note 23.

[34] Noguellou, supra note 6.

Download This Article

Marta Božina Beroš [1]

1. INTRODUCTION

The recent economic and financial crisis has highlighted the need for significant changes to European financial regulation and its regulatory counterpart: supervision. Significant build-ups of leverage and liquidity mismatches accumulated across national financial systems that preceded the crisis left the European financial system highly vulnerable to adverse changes in the market environment and sowed the seeds of the present macroeconomic and regulatory problems. [2] Consequently, the inefficiency of the traditional microprudential level of regulation to safeguard the soundness of the financial system as a whole has become more than evident. At the same time, the crisis prompted the old coordination/centralization debate regarding supervision. Against this background, consensus has been growing that the founding principles as well as the efficiency and effectiveness of E.U. financial regulation and supervision need to be reassessed. [3]

The recommendations of the 2009 de Larosière Report [4] were a significant step towards a different regulatory future for the European Union and its Member States. In particular, the proposed reform of the European supervisory structure was one of the most anticipated, and lately often debated, reforms introduced by the Report. [5] This Article briefly analyses both the premise that macroprudential policy was an important missing policy pillar for the past decade and the current decisive shift of European regulatory policy towards a macroprudential approach, institutionally represented by the European Systemic Risk Board. The general task of this body is to “form judgements and make recommendations on macroprudential policy, issue risk warnings, compare observations on macro-economic and prudential developments and give directions on these issues.” [6] The Article concludes that only arrangements that acknowledge the complex interdependence between the micro and macroprudential level can strengthen the European regulatory and supervisory framework and sustain overall financial stability.

2. PRINCIPLES OF MACROPRUDENTIAL REGULATION

Financial regulation worldwide was based on the assumption that by making each financial institution safe the system as a whole was safer. Thus, the approach to financial regulation was dominantly microprudential. Microprudential regulation consists of such measures as the authorization of those working in the financial sector; rules on what assets can be held by whom; rules on how financial instruments are listed, traded, sold, or reported; and finally rules concerning capital adequacy requirements which measure the riskiness and value of the assets. [7] As such, microprudential regulation was concerned with the stability of individual entities neglecting endogenous risks and the systemic implications of common behavior.

However, in the aftermath of the 2007–08 global economic and financial crisis, the issue of reducing risks to the system as a whole has emerged as a European policy priority. A macroprudential approach to regulation considers the systemic implications of the collective behavior of financial institutions. A characteristic feature of the macroprudential approach to systemic stability is the acknowledgment of the system’s heterogeneity. Homogenous behavior that was witnessed within the banking sector during the crisis—when banks were selling similar toxic assets at the same time, causing their prices to collapse and making banks short of capital and resulting in a “loss spiral”—undermines the system. It seems market participants start off as heterogeneous but certain regulatory characteristics drive them to homogeneity. Consequently, we may conclude that systemic risk is endogenous and that the task of macroprudential regulation should be to identify those endogenous processes that turn heterogeneity to homogeneity, challenging the financial system’s resilience.

A macroprudential policy is one that focuses on the financial system as a whole and treats aggregate risk as endogenous with regard to the collective behavior of institutions. [8] In the broadest sense, the main policy objective of macroprudential regulation is ensuring the resilience of the financial system over time, protecting financial institutions from the negative effects of the economic cycle. Macroprudential rules should seek to avoid the “boom and bust” cycles in the supply of credit and liquidity that have marked the recent crisis. During economic upswing, the objective of dampening the credit cycle is usually well aligned with the objective of making the financial system more resilient. By tightening capital requirements in an upswing, regulators would encourage financial institutions to monitor growth in their balance sheets, which would support financial resilience and reinforce the wider macroeconomic objective of credit supply and its cost. A macroprudential policy assumes that conservative lending in times of financial duress (as mandated by microprudential regulation) is counterproductive as it results in weakened economic activity and excessive loan defaults. Following a macroprudential approach during an economic downturn, when credit and asset prices collapse a continuing flow of lending would be ensured by allowing buffers of regulatory capital accumulated during the “good times” to be drawn down. [9]

The main functions of a European macroprudential framework include:

(1) the identifications and assessment of risks and vulnerabilities in the European financial system;

(2) the issuance of early risk warnings;

(3) the adoption of related recommendations on macroprudential policies.

The interconnectedness of financial institutions and markets within the European Union implies that the due monitoring and assessment of the implementation of macroprudential policy should be based on relevant macro-economic and macro-financial data, as well as information provided by microprudential supervisors and information obtained from market intelligence. [10] This information and data gathering is especially important from the view of macroprudential policy limitations. [11]

3. THE EUROPEAN SYSTEMIC RISK BORD

After the consensus of European policymakers that the de Larosière Report indeed represented the basis for prospective reform, in March 2009 both the European Commission and the Council endorsed the recommendations of the Report on the future design of the European regulatory and supervisory structure. In May 2009, the Commission published a Communication on Financial Supervision in the E.U., describing the institutional and other technical details of the Recommendation’s implementing process. [12] The Communication gives special consideration to the establishment of two new bodies: the European Systemic Risk Board (ESRB) and the European System of Financial Supervisors (ESFS), but more importantly, it signals a clear shift towards macroprudential regulation within the Union. The communication was swiftly followed by the Commission’s legislative proposals.

The ESRB represents a central building block of the future European supervisory structure which monitors and assesses potential stability risks arising from market developments that may have adverse impacts on a sectoral level or on financial stability overall. As the Commission has stated in its legislative proposals, the ESRB represents an entirely new European body established on the basis of Art. 95 of the E.C. Treaty. [13] It is a body without legal personality responsible for the macroprudential oversight of the European financial system. Given the wide scope and the amplitude of its mission, it was decided that the ESRB shouldn’t be granted legal personality and binding powers but rather conceived as a body which draws its legitimacy from its professional reputation for opinionated views, independent judgments, high quality analysis, and objectiveness of its conclusions. The ESRB shall be set up with the administrative, analytical, statistical, and logistical support of the European Central Bank (upon which specific prudential tasks are conferred for the first time), which will also bear its budgetary costs. In addition, an overall high percentage of central-bankers’ involvement is envisaged in the ESRB. [14] Without going into further technical details regarding the structure, organization, and political accountability of the ESRB, we will briefly focus on its regulatory objectives from a macroprudential perspective.

The ESRB lays the conditions for an improvement of the risk monitoring quality at the supranational level through a newly defined allocation of responsibility. It closes the existing supervisory gap by ensuring a new mechanism for translating early risk warnings into policy actions. The ESRB is conceived as a “reputational body” whose decisions and opinions should influence the actions of policymakers and supervisors by means of its moral authority. It is intended to issue risk warnings and recommendations which identify potential imbalances in the European financial system which are likely to have systemic effects. If such risk is identified, the first action taken by the ESRB would be to issue warnings that should prompt early responses in order to avoid the accumulation of wider problems. If the situation is deemed particularly relevant for systemic stability, the ESRB may issue recommendations that have to be transmitted to the Council. These instruments are not legally binding. However, it is expected that the addressees of these recommendations will act accordingly and report on the preventive actions taken to the ESRB. [15] In order to guarantee that corrective action will be taken by the addressees, the ESRB may decide to publicize its opinions. It is worth noting that the ESRB will also provide technical advice on issues of E.U. prudential framework from a systemic perspective, which basically means that systemically relevant E.U. financial institutions should be identified.

Finally, the ESRB will contribute significantly to the further development of the macroprudential approach to E.U. regulation. This implies close cooperation with the ESFS. In addition, the new body will probably act as a valuable counterpart to other international financial institutions as regards open issues of macroprudential regulation.

4. CONCLUSIONS

Both the de Larosière Report and the Commission’s legislative proposals have finally drawn attention to a neglected fact—that every financial system is, in fact, a system. The European one is characterized by financial institutions that may be deemed “too big to fail,” too interconnected and complex to be regulated, and supervised from only a microprudential level. In such circumstances it is important to structure a macroprudential regime that will ensure transparency, accountability, and some predictability. Macroprudential issues are clearly different from the microprudential ones; they refer to interdependencies and endogeneities in the system which lead individual institutions to act homogenously. As briefly outlined in this Article, the macroprudential approach to financial resilience would ensure heterogeneity of business views and behavior.

Europe’s first step towards better macroprudential oversight is symbolized by the formation of the ESRB. The creation of the ESRB is part of the package of regulatory and supervisory reforms proposed by the European Commission following the de Larosière Report which clearly signals a shift towards macroprudential regulatory policy in line with global regulatory trends. Although the current proposal for the institutional set up, organization, objectives, and accountability of the ESRB is subject to voiced criticism,[16] this shouldn’t diminish the value of Europe’s policy efforts to take affirmative action. However, there is a danger that too much reliance will be placed solely on the ESRB and consequently on the central banks to ensure that regulatory failure does not happen again.

Endnotes

[1] PhD candidate at the Faculty of Economics University of Ljubljana and Teaching and Research Assistant at the Faculty of Economics University of J. Dobrila in Pula.

[2] Bank of England, The Role of Macroprudential Policy: A Discussion Paper (2009).

[3] Donato Masciandaro, Maria J. Nieto & Marc Quintyn, Will They Sing the Same Tune? Measuring Convergence in the New European System of Financial Supervisors, 37 CEPR Pol’y Insight 1 (2009).

[4] The High-Level Group on Financial Supervision in the E.U., De Larosière Report (Feb. 25, 2009), [hereinafter De Larosière Report].

[5] This reform was adopted by ECOFIN on June 9, 2009, and by the European Council on June 18–19, 2009.

[6] De Larosière Report, supra note 4, ¶ 177.

[7] The Second Warwick Commission on International Financial Reform, In Praise of Unlevel Playing Fields 12 (2009).

[8] E. Phillip Davis & Dilruba Karim, Keynote Address at the 6th Euroframe Conference on Economic Policy Issues in the European Union: Macroprudential Regulation—The Missing Policy Pillar (Jun. 12, 2009) (transcript available at http://www.qass.org.uk/2009-July_Brunel-conference/Davis.pdf).

[9] This is in sharp contrast to microprudential regulation where policymakers are concerned only with the safety and soundness of individual financial institutions and traditionally impose conservative lending policies. See Bank of England, The Role of Macroprudential Policy, supra note 2.

[10] Lucas Papademos, Address at “After the Storm: The Future Face of Europe’s Financial System”: Strengthening Macro-Prudential Supervision in Europe (Mar. 24, 2009) (transcript available at http://www.bis.org/review/r090325e.pdf).

[11] Macroprudential instruments can moderately temper the credit cycle as free capital mobility and cross-border lending pose significant challenges to the possibility of tightly controlling the overall expansion of domestic credit.

[12] Commission Staff Working Document Accompanying the Commission Communication: “European Financial Supervision”—Impact Assessment,  SEC (2009) xxx (Feb. 21, 2010).

[13] Commission Proposal for a Regulation on Community Macroprudential Oversight of the Financial System and Establishing a European Systemic Risk Board, at 3, COM (2009) 499 final (Sept. 23, 2009).

[14] Id. at 4.

[15] The addressees may be the Community, Member States, one of the European Supervisory Agencies that form the ESFS, or one of the national supervisors.

[16] See, e.g., Willem Buiter, The Proposed European Systemic Risk Board is Overweight Central Bankers, Fin. Times Blog, Oct. 28, 2009.

King Fung Tsang

This article attempts to highlight certain ways that litigants in the European Union could gain unjustified advantages over United States-based insurance companies in insurance litigation by comparing Council Regulation (EC) 44/2001[1] (hereinafter “Council Regulation”) and the U.S. jurisdictional rules.  New Hampshire Insurance Co. and Others v. Strabag Bau A.G. and Others[2] is utilized as an illustration herein.

I. The Strabag Bau Case

In Strabag Bau, the defendants, Strabag Bau, a German company, along with two other companies (hereinafter the “Construction Companies”) entered into a contract for the construction of Basrah International Airport in Iraq.  The Construction Companies took out an insurance policy in London through their British brokers.  The leading underwriter, New Hampshire Insurance Co., a U.S. insurer, was represented in London by its representative, and the bulk of the risk was placed with insurers based in the United Kingdom (hereinafter the “Insurers”).  There was neither a governing law clause nor a jurisdictional clause in the policy.  Subsequently, the Construction Companies filed claims totaling £20 million to £60 million, and the Insurers sought a declaration to avoid the policy.  The English Court of Appeal held that it had no jurisdiction.[3] The following are other relevant facts to keep in mind:

-                the policy was likely to be governed by English law;[4]

-                Strabag Bau is the fifth largest construction company in Europe;[5]

-                £20m – £60m in 1989 is worth £50m – £150m today.[6]

II. The Council Regulation

The jurisdiction rules on insurance are in Section 3 of the Council Regulation.[7]

Art. 9(1) - Domicile [8]

Art. 9(1)(a) allows the insurer domiciled in a member state to be sued in the courts of the member state where it is domiciled.[9] However, in order to protect the policyholder, the insured, and the beneficiary (hereinafter the “policyholder”), Art. 9(1)(b) further allows such parties to sue in the courts of the member states where they are domiciled.[10] This greatly expands the possible fora in which an insurer could be sued despite the fact that the insurance may have little connection with the policyholder’s jurisdiction.  However, the insurer could only sue in the policyholder’s home jurisdiction.[11] Applying these rules, the Court of Appeal found that the Insurers could not sue the Construction Companies in England due to the fact that the Construction Companies were domiciled in Germany.[12] If the Insurers were to sue the Construction Companies in the EU, the only possible forum was the German court.

What if the Construction Companies sue the Insurers for non-payment instead?  Here, the Construction Companies will be able to sue the Insurers in England, where the insurers bearing the bulk of the risks were domiciled.  In addition, the Construction Companies could also sue in Germany pursuant to Art. 9(1)(b).  Thus, within the EU, the Construction Companies could shop between England and Germany.  The above analysis is summarized in Table 1 below:

* The New York court will decline jurisdiction due to forum non conveniens.

Art. 9(2) – Expansion of the Domicile Rule [13]

New Hampshire Insurance was bound by the Council Regulation because the basic domicile rule under Art. 9(1) is expanded by Art. 9(2), which provides that an insurance company is deemed to be domiciled in a member state if it has a branch, agency or other establishment in one of the member states, and if the dispute arises out of such a branch, agency or other establishment.[14] Accordingly, as New Hampshire Insurance was represented by its London representative, it would be deemed to be domiciled in England through agency.

The above rules provide a policyholder with plenty of options and motivation to engage in forum shopping and are clearly unsatisfactory.  After all, the only connection with Germany was the domicile of the policyholder, whereas the connections with London were overwhelming.  While the intention of the Council Regulation is to protect the policyholder who is usually the weaker party, the Construction Companies do not deserve the protection.  The Insurers challenged on this basis, but the court rejected that argument, referring to the drafting report of the Brussels Convention which stated that the member states failed to find a “suitable demarcation line” to limit the application of Section 3.[15] In a subsequent case, Universal General Insurance Co. (UGIC) v. Group Josi Reinsurance Co. SA,[16] the European Court of Justice (ECJ) discussed the applicability of Section 3:

According to settled case-law, it is apparent…that, in affording the insured a wider range of jurisdiction than that available to the insurer and in excluding any possibility of a clause conferring jurisdiction for the benefit of the insurer, they reflect an underlying concern to protect the insured, who in most cases is faced with a predetermined contract the clauses of which are no longer negotiable and is the weaker party economically.[17]

It seems that the Insurers’ argument above might be accepted by the ECJ.  After all, the Construction Companies are all large corporations with substantial bargaining power.  The wording of the policy was also proposed by their brokers.  However, the paragraph cited above is from Gerling and Others v. Amministrazione del Tesoro dello Stato,[18] in which the policyholder was the powerful Italian Ministry of Finance.  Accordingly, it appears that the holdings in UGIC are limited to professional insurance parties, while sophisticated policyholders will continue to be protected.

Art. 13(5) and Art. 14 – Jurisdiction Clause and Arbitration Agreement [19]

Under the Council Regulation, a jurisdiction clause in a policy is effective against the Construction Companies in our case only if the insurance policy involves “large risks,” which include inter alia “miscellaneous financial loss.”[20] A jurisdiction agreement involving a “large risk” will be effective against a policyholder that exceeds two of the following criteria: (1) a balance-sheet total of €6.2m, (2) a net turnover of €12,8m, or (3) 250 employees.[21] However, it is unclear what constitutes a “financial loss.”  Even if “financial loss” covers the policy in the case, the exception only applies to large companies.[22] The only certain way that the insurers could have prevented an undesirable forum is through the inclusion of an arbitration clause in the policy according to Art. 1(2)(d).[23] However, taking the case out of the jurisdiction of the Council Regulation by an arbitration agreement is not a complete solution.  Instead of being able to rely on a uniform enforcement mechanism under the Council Regulation,[24] the enforcement of the arbitration agreement will be subject to the various domestic rules of different countries since the New York Convention only provides that “there shall not be imposed substantially more onerous conditions or higher fees or charges on the recognition or enforcement of arbitral awards . . . than are imposed on the recognition or enforcement of domestic arbitral awards.”[25]

III. The U.S. Jurisdiction Rules

Since International Shoe Co. v. Washington,[26] “minimum contacts” has been the basic jurisdictional test in the United States.  In that case, the Supreme Court held that a state could exercise personal jurisdiction over a defendant if he has such “minimum contacts” with that state to justify requiring him to defend a lawsuit there.  Commentators divide personal jurisdiction into two categories, namely specific jurisdiction and general jurisdiction.[27] Specific jurisdiction refers to the jurisdiction over claims arising out of acts specific to the dispute.  General jurisdiction, on the other hand, refers to jurisdiction founded upon a basis independent of the nature of the dispute between the parties.[28] In McGee v. International Insurance,[29] the Supreme Court held that there were minimum contacts by the insurer even though it only had a single transaction solicited in California.  Applying these rules to Strabag Bau, the Insurers cannot sue the Construction Companies in the United States due to their lack of any operation there.  However, if the Construction Companies were to sue New Hampshire Insurance in New York, New Hampshire Insurance would be subject to the general jurisdiction of New York due to the fact that its headquarters are located there.  That being said, the New York courts probably will not exercise the jurisdiction due to forum non conveniens.  Under the doctrine, U.S. courts could exercise their discretion in declining jurisdiction on the basis that there exists a more appropriate forum.[30] In our case, England is obviously the more appropriate forum due to its overwhelming connections with the insurance company.[31] Comparatively, there is no forum non conveniens principle under the Council Regulation.  Finally, a jurisdiction agreement will usually be given effect by the U.S. courts unless it is affected by “fraud, undue influence, or overweening bargaining power.”[32] Similarly, an arbitration agreement will also be enforceable.

Differences in how the U.S. jurisdictional rules will operate are illustrated in the following hypothetical case. English insurers entered into an insurance policy with California construction companies, through their respective Texas representatives, with insured risk in Iraq:

* California courts shall deny jurisdiction due to forum non conveniens.

The conclusion is simple and reasonable.  Texas, the natural forum, will have minimum contacts and hence jurisdiction, whether the plaintiffs are the insurers or construction companies.  In addition, construction companies can sue the insurers in England, which is not unreasonable given that it is their home jurisdiction.  California will not hear the case in either scenario.

IV. Criticisms and Recommendations

1. The Council Regulation is Rigid

The Council Regulation and the U.S. jurisdictional rules could be viewed as a classic “rule versus standard” choice.  The Council Regulation is rule-based.  The purpose is to reach the same result across the member states as much as possible.  Meanwhile, the U.S. jurisdictional rules are based on a standard, the “minimum contacts” test.  As we have seen above, the rule-based Council Regulation is more prone to producing absurd results and provides more opportunities for forum shopping.  Since whether the parties can litigate in an appropriate forum has significant weight in the final decision, the U.S. rules are preferable.

2. Unfairness against Insurance Companies

The Council Regulation protects the policyholders without looking beyond the labels.  This is not fair to the insurers which deal with powerful policyholders on an arms-length basis.  If the goal of the jurisdictional rules is to allocate a dispute to the forum where the combined cost to the parties will be the lowest,[33] “subsidizing” the undeserving parties will likely increase the total cost of the litigation by disturbing that equilibrium. 

3. Unfairness against Foreign Insurers

The rules are even more unfair to foreign insurers.  Art. 9(2), by deeming the U.S. insurance company as domiciled in England, thereby allows policyholders to sue in their home jurisdictions.[34] Compared to their European counterparts, it would be more costly for the U.S. insurers to defend in the European Union.  This increased cost may be reflected in a higher premium by the U.S. insurers, making them less competitive.  Comparatively, there is also no special protection for domestic policyholders per se in the U.S. 

The European Union should consider taking one of three courses: (1) creating a forum non conveniens rule; (2) excluding the large policyholders from the protection; or (3) clarifying the “large risks” exception.  The last suggestion is the easiest as it takes only judicial interpretation and avoids formal amendment of the Council Regulation.  Even if the European Union takes no action, the U.S. courts should not change its jurisdictional rules to force a change on the EU side.  The Supreme Court believes that U.S. commerce abroad would be hampered if its courts do not adopt an internationalist approach.[35] As the Supreme Court stated in Bremen v. Zapata, “[t]he expansion of American business and industry will hardly be encouraged if . . . we insist on a parochial concept that all disputes must be resolved under our own law and in our courts.”[36] The U.S. courts therefore should not take revenge by imposing unreasonable jurisdictional rules on EU insurers.

Endnotes

[1] Council Regulation 44/2001, On Jurisdiction and the Recognition and Enforcements of Judgments, 2001 O.J. (L 12) 1 (EC).

[2] New Hampshire Insurance Co. and Others v. Strabag Bau A.G. and Others, [1992] 1 Lloyd’s Rep. 361 (A.C.).

[3] Id. at 362.

[4] See Rule 214(2), Lawrence Collins et al., The Conflict of laws 1701 (Lawrence Collins ed., Oxford University Press 2006) (1896).

[5] Strabag Bau Topic Entry, http://www.absoluteastronomy.com/topics/Strabag (last visited Oct. 5, 2009).

[6] Based on calculation from Measuring Worth, http://www.measuringworth.com/ukcompare/ (last visited Sept. 29, 2009).

[7] Council Regulation 44/2001, supra note 1, art. 8.

[8] Id. art. 9(1).

[9] Id art. 9(1)(a).

[10] Id. art. 9(1)(b).

[11] Id. art. 12(1).

[12] New Hampshire, 1 Lloyd’s Rep. at 362.

[13] Council Regulation 44/2001, supra note 1, art. 9(2).

[14] Id.

[15] New Hampshire, 1 Lloyd’s Rep. at 368.

[16] Case C-412/98, Universal General Insurance Co. (UGIC) v. Group Josi Reinsurance Co. SA, 2000 E.C.R. I-05925.

[17] See id. ¶ 64.

[18] Case 201/82, Gerling and Others v. Amministrazione del Tesoro dello Stato, 1983 E.C.R. 02503.

[19] Council Regulation 44/2001, supra note 1, art. 13(5) & 14.

[20] Id. art. 14(5).

[21] Second Council Directive 88/357, On the Coordination of Laws, Regulations, and Administrative Provisions Relating to Direct Insurance, art. 5(d)(iii), 1988 O.J. (L 172) 1 (EEC).

[22] The Frankfurt Stock Exchange only requires a minimum market capitalization of €1.25 million. See Deutsche Börse Group.

[23] Council Regulation 44/2001, supra note 1, art. 1(2)(d).

[24] One will only need to register a judgment given by another EU court for it to be enforceable. See Rule 48(1), Collins, supra note 4, at 650.

[25] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 330 U.N.T.S. 3.

[26] International Shoe Co. v. Washington, 326 U.S. 310 (1945).

[27] See Eugene F. Scoles et al., Conflict of Laws 305 (3d ed. 1992).

[28] Id. at 306.

[29] McGee v. International Insurance, 355 U.S. 220 (1954).

[30] Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508 (1947).

[31] But if the English courts cannot hear the case, how can the New York courts dismiss in favor of them? Here, since the forum non conveniens issue will only arise when Construction Companies sue Insurers (Box F instead of Box E in Table 1), the English courts will have jurisdiction in that case (Box B instead of Box A).

[32] The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 12 (1972).

[33] Richard Posner, Economic Analysis of Law 707 (Aspen Publishers 2003) (1986).

[34] Council Regulation 44/2001, supra note 1, art. 9(1)(b).

[35] Lawrence Collins, Essays in International Litigation and the Conflict of Laws 267 (Oxford Univ. Press 1994) (1979).

[36] See Bremen, 407 U.S. 1 at 8.

Nikolaos Verras

I.        Introduction

Resale Price Maintenance (RPM) refers to an agreement between a supplier and a distributor by virtue of which the parties agree to set either a (1) fixed, (2) minimum, (3) maximum, or (4) recommended resale price. The first two forms, on which this paper will focus, are considered to have more severe anticompetitive effects such as a) elimination or reduction of intra-brand competition and b) increase in price transparency that might facilitate horizontal collusion upstream or downstream.[1] Therefore, these agreements are generally treated more strictly by competition law.

The anticompetitive or pro-competitive effects of RPM and what this diversity of effects shall mean for competition law analysis has been a long debate among economists and lawyers. The issue of how the E.C. Competition Law shall treat RPM has come to the center of interest in the context of the ongoing review of the Vertical Restraints Block Exemption by the European Commission.[2] At the same time, the appropriate treatment of RPM was brought to the center of attention in the United States in the Leegin case,[3] where the Supreme Court decided by a weak majority of 5 against 4 to abandon the long-standing Dr. Miles[4] per se rule and apply to RPM the rule of reason.

II.        Proposed Changes Under Draft BER and Draft Guidelines

Under the current legal framework in the European Union, fixed and minimum RPM falls outside the scope of the vertical agreements block exemption regulation (BER) because it is considered a hardcore restriction.[5] This means that it is “presumed illegal” and considered to have as its object the restriction of competition, and is therefore expressly prohibited by Article 81(1)(a) E.C. and very unlikely to be exempted under Article 81(3) E.C.[6]

The characterization of strict RPM as a hardcore restriction is retained under the Draft BER,[7] although the Commission tried to soften the strictness of the rules’ application by setting out in the Draft Guidelines the positive effects that RPM may have for competition and by expressly mentioning that there is ground for exemption under Article 81(3) E.C.[8] In paragraph 221 of the Draft Guidelines, the Commission acknowledges that RPM may lead to efficiencies in cases of introduction of a new brand or entrance in a new market. Moreover, fixed RPM is considered to be beneficial for consumers in cases of a short term low price campaign for the purpose of organizing a franchise or similar distribution system and in cases of a distributor’s significant market power that may lead it to use a particular brand as a loss leader.

III.     Pro-Competitive Effects

Literature regarding the effects of RPM is not consistent, and although the anticompetitive effects of RPM have been proved in many papers,[9] there are also significant pro-competitive effects. We will try to present in brief some of the main situations where RPM may have pro-competitive effects:[10]

a)      Strict RPM may help overcome the free-rider problem that occurs in cases where a retailer offers pre-sale services to consumers and includes these services in the price, while another retailer does not provide pre-sale services, and therefore does not bear the extra cost and can offer the goods at a reduced price, taking advantage of the pre-sale services provided by the first retailer.[11] Strict RPM may also be used to force retailers to provide after-sales services that increase consumers’ welfare and which the retailer may not intend to provide in order to avoid the extra cost. [12]

b)      Strict RPM may also help in cases where a retailer tries to free-ride on the reputation that another retailer who provides high quality products has developed by stocking similar products; the supplier can overcome this problem by posing minimum or fixed RPM in order to “purchase” quality certification from its distributors. [13]

c)       Strict RPM may also be used for the protection of a very well-known and prestigious brand name from widespread use that might deteriorate it. [14]

d)      Strict RPM is also very effective in treating retailers’ risk aversion in cases of uncertain consumer demand. [15]

e)      Strict RPM may also have positive effects in cases where a supplier has to decide among the already used bricks and mortar retail network and the potential online retail network. The latter bears less promotional, inventory, and distribution costs and therefore can offer lower prices and damage the viability of the bricks and mortar retail network. By posing fixed or minimum RPM the supplier can retain the bricks and mortar retail network, while providing the consumer with the option to buy the same products online.

IV.     Towards a More Effect-Based Analysis of RPM?

Usually in the literature[16] the treatment of strict RPM as an object or an effect of anticompetitive behavior is combined with the answer to the question “which of the two effects of RPM (pro-competitive and anticompetitive) is most likely to prevail?” I believe that it is impossible to balance the two effects, especially due to the lack of adequate empirical evidence. Moreover, as soon as strict RPM has some significant pro-competitive effects that cannot be underestimated,[17] the Commission shall provide this RPM with the chance to be exempted. As we mentioned above, although the Commission softened its approach against strict RPM it still considers it a hardcore restriction, and the fact that there is no case in which the Commission has exempted a strict RPM illustrates that the Commission’s approach is closer to per se illegality.[18] Therefore, the express reference in the Draft Guidelines of the possibility of an exemption under Article 81(3) E.C. does not change the current situation, as the Commission’s position and the retained strong presumption of illegality discourage companies from taking the risk to defend their RPM policies. Therefore, in my opinion, further steps for the real enforcement of Article 81(3) E.C. in cases of strict RPM have to be taken by the Commission.

The exemption of hardcore restrictions and the application of an effects-based analysis to RPM will lead to fairer treatment. An effects-based analysis means that the proof of violation of Article 81(1) E.C. rests with the Commission and it is only if it succeeds that the parties bear the burden of proving that their agreement entailing strict RPM has pro-competitive effects. Some argue[19] that this will cause a significant regulatory cost, as a) this will increase the RPM cases before the Commission and b) the Commission will have the aforementioned burden of proof of the infringement, which, given the complexity and uncertainty of the issue, will require the use of experts. I believe that this is not the case, given the existence of case-law precedents finding that strict RPM infringes competition law; the main burden of proof rests on the parties to present well-founded arguments that the agreement has a positive effect on consumer welfare.

The main disadvantage for the parties asking for an exemption of a strict RPM agreement at the moment is the lack of empirical evidence and case-law precedents. In an attempt to overcome this situation and create a clear framework for RPM, the Commission could establish, for a trial period, a notification system similar to the one that existed before Regulation 1/2003 came into force for the exemptions under Article 81(3) E.C. Adoption of a system like that would, on the one hand, allow the Commission to place the burden of proof and the relevant cost on the parties’ side and therefore make them bring forward only claims that have a strong possibility to succeed, and, on the other hand, increase the relevant case law and create a framework regarding the specific circumstances under which a strict RPM has a positive effect on consumers’ welfare. Moreover, the Commission should take into consideration the fact that, as has been argued,[20] the anticompetitive effect of strict RPM has a connection with the market powers in the two markets involved in the agreement (the suppliers’ and the retailers’ markets). The Commission could a) use the market share as a screen in prioritizing the cases and therefore deal mainly with the cases where there is a large market share and the anticompetitive effects of RPM are more likely to take place, and b) remove RPM from the hardcore restraints in the De Minimis Notice, at least for a trial period.[21]

V.        Conclusion

The attempt of the Commission to soften the treatment of strict RPM as a hardcore restriction in the context of the Vertical Restraints Review is welcome, but further steps have to be taken. The example of the United States, which moved to a more effects-based analysis by adopting the rule of reason in the Leegin case, could be an indication that time has come for a change in the European Union as well. The change does not need to be radical and immediate. A gradual change with the adoption of a trial notification procedure before the Competition Authorities could offer a chance to the parties to defend their strict RPM agreements without the Commission undertaking the entire burden of proof. This would contribute to the creation of a pool of empirical evidence that could be used as a guide for future treatment of strict RPM.

Endnotes

[1] Frank Wijckmans, Filip Tuytschaever & Alain Vanderelst, Vertical Agreements in EC Competition Law 157– 58 (2006).

[2] On July 28, 2009, the European Commission published drafts of a revised vertical agreements block exemption regulation, Draft Commission Regulation on the Application of Article 81(3) of the Treaty to Categories of Vertical Agreements and Concerted Practices (July 28, 2009), [hereinafter Draft BER], and accompanying revised guidelines on vertical restraints, Draft Commission Notice for Guidelines on Vertical Restraints (July 28, 2009), [hereinafter Draft Guidelines], and initiated the consultation period on the above documents that ended on September 28, 2009. The Draft BER will replace the current vertical agreements block exemption which entered into force for a period of ten years on June 1, 2000. Commission Regulation 2790/1999, On the Application of Article 81(3) of the Treaty to Categories of Vertical Agreements and Concerted Practices, 2009 O.J. (L 336) 21 (EC), [hereinafter BER]. The scope of the BER was to determine specific prerequisites under which a vertical agreement would be exempted from the application of Article 81(1) E.C. and therefore provide legal certainty. The BER tries to determine agreements that are likely to fall within the Article 81(3) E.C. exemption due to their characteristics and refers to all types of agreements between parties active at different levels in the production line, including selective distribution and agency arrangements. Current guidelines on vertical restraints provide a commentary on the BER and determine the methodology under which the Commission approaches vertical restraints. Commission Notice for Guidelines on Vertical Restraints, C (2000) 291 (Oct. 13, 2000) [hereinafter Guidelines]. See generally Bellamy & Child: European Community Law of Competition  405–23  (Peter Roth & Vivien Rose eds., 2008).

[3] Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007).

[4] Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

[5] See BER, supra note 2, art. 4(a); Guidelines, supra note 2, ¶ 47.

[6] Fixed and minimum RPM is also treated as hardcore restrictions under the De Minimis Notice. Commission Notice on Agreements of Minor Importance Which Do Not Appreciably Restrict Competition Under Article 81(1) of the Treaty Establishing the European Community (De Minimis), ¶ 11, C (2001) 387 (Dec. 22, 2001), [hereinafter De Minimis Notice]. However it is argued that in cases of very small market shares strict RPMs may fall outside Article 81(1) E.C. See Bellamy & Child: European Community Law of Competition, supra note 2, at 436.

[7] Draft BER, supra note 2, art. 4(a).

[8] Draft Guidelines, supra note 2, ¶ 219–25. More specifically, the Commission acknowledges that in cases in which RPM will lead to efficiencies, it may have to “effectively assess—and not just presume—the likely negative effects on competition.” Id., ¶ 219.

[9] For a discussion of the so-called commitment effect theory, see Oliver Hart & Jean Tirole, Vertical Integration and Market Foreclosure, Brookings Papers on Econ. Activity: Microecon. 205 (1990); Daniel O’Brien & Greg Shaffer, Vertical Control with Bilateral Contracts, 23 Rand J. Econ. 299 (1992); Patrick Rey & Thibaud Verge, Bilateral Control with Vertical Contracts, 35 Rand J. Econ. 728, 740 (2004). For a discussion of the facilitation of manufacturers’ or retailers’ collusion, see Bruno Jullien & Patrick Rey, Resale Price Maintenance and Collusion, 38 Rand J. Econ. 983 (2007); Frank Mathewson & Ralph Winter, The Law and Economics of Resale Price Maintenance, 13 Rev. Indus. Org. 57, 65 (1998). For a discussion of the anticompetitive effects of slotting allowances and RPM, see Greg Schaffer, Slotting Allowances and Resale Price Maintenance: A Comparison of Facilitating Practices, 22 Rand J. Econ. 120 (1991).

[10] See also Frederik Van Doorn, Resale Price Maintenance in EC Competition Law: The Need for a Standardized Approach, Soc. Sci. Res. Network 12–15 (2009).

[11] Lester G. Telser, Why Should Manufacturers Want Fair Trade?, 3 J.L. & Econ. 86, 89–96 (1960); Benjamin Klein, Competitive Resale Price in the Absence of Free Riding (Apr. 3, 2009).

[12] Roger van den Bergh & Peter Camesasca, European Competition Law and Economics: A Comparative Perspective 244 (2006).

[13] Doris Hildebrand, Economic Analyses of Vertical Agreements—A Self-Assessment 15 (2005).

[14] Howard Marvel & Stephen McCafferty, Resale Price Maintenance and Quality Certification, 15 Rand J. Econ. 346 (1984); Michael Utton, Market Dominance and Antitrust Policy 238 (2003).

[15] Patrick Rey & Jean Tirole, The Logic of Vertical Restraints, 76 Am. Econ. Rev. 921 (1986).

[16] See, e.g., Van Doorn, supra note 10.

[17] For example, for a critical analysis of the pro-competitive effects of RPM, see Marina Lao, Resale Price Maintenance: A Reassessment of its Competitive Harms and Benefits, Soc. Sci. Res. Network (2009).

[18] See Linklaters LLP Submission in Response to the European Commission’s Consultation Process Regarding the Competition Rules Applicable to Vertical Agreements, 14–16 (2009).

[19] See Van Doorn, supra note 10, at 20–23.

[20] The small market share was one of the main reasons why the Court in Leegin decided that there was no fear of anticompetitive effect. For a discussion of the relationship between market share and RPM, see Foros Øystein et al., Resale Price Maintenance and Restrictions on Dominant Firm and Industry-Wide Adoption (CESifo, Working Paper Series No. 2032, 2007); Warren S. Grimes, The Path Forward After Leegin: Seeking Consensus Reform of the Antitrust Laws of Vertical Restraints, 75 Antitrust L.J. 467, 469 (2008).

[21] See White & Case LLP Comments on the Draft Commission Regulation on the Application of Article 81(3) of the Treaty to Categories of Vertical Agreements and Concerted Practices and the Draft Commission Notice—Guidelines on Vertical Restraints, 7 (2009).