What “Rule of Reason” for the EU Internal Market?

• Author: Lucia Serena Rossi/Stephen J. Curzon
• Position: Ordinario di Diritto dell’Unione europea nell’Università degli studi di Bologna/Dottorando di ricerca in Diritto dell’Unione europea nell’Università degli studi di Bologna
• Pages: 295-309

Although research was conducted jointly and the conclusions reflect the viewpoint of both authors, paragraphs 2, 3 and 6 are to be attributed to L. S. Rossi whilst 4 and 5 to S. J. Curzon.

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@1. Executive summary

1. From a general point of view, it can be argued that legal reasoning encompasses the concept of reasonableness, been as the establishment of a set of rules necessarily implies allowing a margin of flexibility. The latter may take one of several forms, ranging from exceptions and derogations to exemptions. Either way, a comparison of different competing values will need to be applied by the legislator, executive or the judiciary.

As far as competition law is concerned, the so-called “rule of reason”, a notion of elasticity allowing for exceptions from a rigid rule to be established, was developed in US antitrust law long before the creation of the European Union.

The aim of this paper is to determine whether such a concept can play a role in the EU internal market and to analyse if, and how, it has been applied in that context. A response to such a legal conundrum will be given by effecting a comparative analysis of two distinct facets, namely the market rules dealing with competition and those linked to the free movement of goods, persons, services and capital.

As a starting point, however, a few introductory remarks will be made on the rule of reason in its American and European dimensions. In fact, been as US antitrust law is the cradle of such a notion, it is appropriate to appraise that system drawing the necessary analogies, and highlighting the inevitable differences, with the European one.

@2. Comparing the American and the European Antitrust systems. The American system

2. It is the well-known Sherman Antitrust Act¹ which forbids anti-competitive agreements in the US. Section 1 states that “Every contract, combination inPage 296 the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal”.

Notwithstanding the general prohibition set, the stated Act does not provide for any sort of derogation and seems to disregard the fact that in certain circumstances an agreement between undertakings may increase market efficiency, entail benefits for consumers, or pursue other legitimate objectives. Coupled with the inherent necessity that all legal systems maintain a degree of flexibility, it was not long before a question arose as to whether the stated interdiction was to be considered absolute (per se rule) or if it could be subject to derogation.

It was the US Supreme Court’s judgement in Standard Oil Co. of New Jersey v. United States² that first attempted to define, and limit, the scope of the Sherman Act by holding that only combinations and contracts unreasonably restraining trade were subject to actions under antitrust law³. Nevertheless, it is clear from that decision that US courts remained competent to determine that certain restraints are unreasonable simply by virtue of their “nature and character”, without the need to evaluate their effects. It follows that although the case provides a statement of principle from which one may infer the existence of a test of reasonableness, the large powers retained by the Courts seemed to ensure the continued relevance of the per se rule.

Over the past four decades, however, the United States Supreme Court has narrowed the category of restraints deemed unlawful per se, thereby subjecting a greater number of restraints to the fact-based rule of reason analysis⁴. Such case-law explicitly implements the statement of principle made in Standard Oil, simultaneously confirming that the rule of reason should focus on economic, and not social, consequences of a restraint⁵.

The system described envisages the possibility of recalling exceptions to the general rule prohibiting “any restraint of trade”. In fact, in interpreting the 1890 Sherman Antitrust Act, US Courts have given life to an authentic reasonableness test under which they are entitled to employ an effects analysis, balancing the pro and anti-competitive effects of an agreement. Contracts, combinations, or conspiracies will not be declared illegal in so far as the positive effects on competition in a given market outweigh the negative ones. It follows that the application of such a test is to be understood as a sort of ex post exception allowing a measure, otherwise in violation of the US antitrust rules, to fall outside their scope.

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In such a context three points are particularly noteworthy. Firstly, the “justification” provided by the rule of reason is exclusively based on a finding of positive economic effects. It is apparent that pursuing legitimate non-economic objectives will not suffice to guarantee compliance with antitrust laws. Secondly, the application of the stated doctrine is internal to the antitrust reasoning. In fact, due to the absence of specific justificatory provisions in the Sherman Act, it has fallen to the Supreme Court to interpret the latter as containing an intrinsic limit, i.e. the rule of reason, which guarantees the necessary flexibility of the law. Finally, for the purposes of the present paper, one must not overlook the fact that in Parker v. Brown⁶ the US Supreme Court recognized the so-called “State action doctrine”, limiting the extent to which State measures are reviewed in light of antitrust rules. Subsequent case-law clarifies that measures will be excluded from the scope of the Sherman Act where they amount to the exercise of a State’s sovereign powers (i.e. a State measure) and in so far as their implementation is supervised by the latter⁷.

@3. The EU system

3. The EU antitrust system is more complex and articulated than that applicable in the US by reason of the Sherman Act. Articles 81 and 82 of the Treaty establishing the European Community (herein ECT), as given effect to by subsequent implementing regulations (adopted on the basis of Article 83 ECT), envisage a transfer of competences to the European Commission for such matters.

Moreover, with the entry into force of Council Regulation (EC) No. 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty⁸, the old and cumbersome system established by Council Regulation No. 17 of 21 February 1962⁹ has been reformed. In particular, the so-called modernisation regulation has removed the need for authorisation and notification of agreements to the Commission and has rendered Article 81(3) directly applicable by national judges and administrative authorities (see infra).

Keeping the aforesaid developments in mind, it must be noted that the EC antitrust system pivots around Article 81 ECT. It is to such an Article that we shall turn our attention in an attempt to determine whether the rule of reason can play a role in the EU.

Article 81 ECT, as defined and implemented by several EC regulations, involves a three-pronged analysis. First of all, subsection 1 requires the determination of whether an agreement is anti-competitive. In this sense it prohibits: “(…) all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member StatesPage 298 and which have as their object or effect the prevention, restriction or distortion of competition within the common market”.

Secondly, by virtue of Article 81(2), all agreements that fall within the above prohibition are to be considered null and void, and have no effect as between contracting parties¹⁰. Finally, Article 81 subsection 3, provides undertakings with the possibility of obtaining an individual exemption where an agreement helps to improve the production or distribution of goods or to promote technical or economic progress (efficiency gain), ensures a fair share of the resulting benefit for consumers (fair share for consumers), and does not impose unnecessary restrictions or aims to eliminate competition for a substantial part of the products concerned (indispensability)¹¹.

It is necessary to note that the interests protected by Article 81(3) ECT are of an economic nature. Moreover, the system of exemptions it creates does not exactly involve a balancing of interests but, on the contrary, seems to be a mere sequence of filters guiding the implementing authority towards a decision¹². Agreements that fulfil all the conditions set will be deemed legitimate regardless of their anticompetitive nature and/or effects.

It follows that examination ex Article 81(3) ECT must be distinguished from the “American” rule of reason in so far as it allows derogations from the general rule rather than an evaluation of its applicability. Furthermore, until recently the former involved an ex ante balancing of the interests at stake, rather than an ex post analysis of an agreement’s effects on market efficiency. With the entry into force of Regulation No. 1/2003 and a legal exception system, however, it is clear that analysis ex Article 81(3) ECT is also conducted ex post.

In light of the above, it has been questioned whether the “American” rule of reason can be transposed to Article 81 ECT. The application of such a reasoning would obviously lead to an interpretation of subsection 1 as not embracing those agreements which satisfy an effects analysis, i.e. where pro-competitive effects outweigh the anti competitive ones. It seems that, in order to give an answer to such a question, it is necessary to briefly focus on the system of exceptions developed by the European Court of Justice (herein ECJ) for the rules on free movement, which constitute the core of the internal market. It should be preliminarily noted that in this context it is to Member States, and not to undertakings, that the ECT prohibitions are directed.

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@4. Free movement in the EC: mandatory requirements, proportionality and the “European” rule of...