United States: The Draft Notice on the Guidelines on the Application of Article 81(3) EC Treaty


On 3 October 2003 the Commission launched consultation on draft texts in order to complete the reform of the European antitrust procedures. This so-called "modernization package" must be seen in light of the new enforcement system for the European competition rules on restrictive agreements and the abuse of dominant positions that will enter into force in May 2004.

Direct application of Article 81(3), the rule under which restrictive agreements can be excepted from the prohibition laid down in Article 81(1),1 is the central feature of the new enforcement system. The new system will abolish the exclusive decision competence of the Commission in relation to the exemption pursuant to Article 81(3). In future, the burden of proof under Article 81(3) rests on the parties invoking the benefit of the exemption. The direct applicability scheme therefore imposes a greater responsibility on companies and their advisors to assess the competition law implications of their agreements, decisions and concerted practices.2 Further, the new, more economic approach to the interpretation of Article 81 of the Commission – as it was heralded by the guidelines on vertical and horizontal agreements three years ago – requires the undertakings to take in greater detail account of the economic effects of their agreements.

The Commission committed itself to adopt a number of notices with a view to provide general guidance. The draft notice on the guidelines on the application of Article 81(3) ("Notice"), which will be introduced in this article, is extremely important, since the Notice aims at establishing an analytical framework for the application of the exemption.

Article 81(3) EC Treaty

Article 81(3) provides that the prohibition contained in Article 81(1) may be declared inapplicable in case of agreements which comply with certain criteria. The following summarizes the Commission’s view of how such criteria laid down in Article 81(3) may be interpreted. The criteria are only determinative for assessing an agreement if such agreement is not covered by any block exemption. In the first instance parties will seek to determine whether their agreement satisfies the conditions provided by any relevant block exemption.

The Single Conditions

The application of the exception rule of Article 81(3) is subject to four conditions:

  • the agreement must contribute to improving the production or distribution of goods or contribute to promoting technical or economic progress;
  • consumers must receive a fair share of the resulting benefits;
  • the restrictions must be indispensable to the attainment of these objectives; and
  • the agreement must not afford the undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

It is important to understand that these conditions are cumulative (and exhaustive).

The Notice follows a "market-specific" standard, that is, the reference point for the Article 81(3) conditions are the relevant markets to which the agreement relates. The competitive situation on such markets tends to change during time and the assessment of the applicability of Article 81(3) is quite sensitive to such changes. The exemption applies as long as the conditions are fulfilled and ceases to apply when that is no longer the case. The Notice states that restrictions by object, that usually are black listed in block exemptions or qualified as "hard core restrictions" in Commission’s communications, do not cause efficiencies and are unlikely to fall under the exemption.

First Condition - Article 81 (3) lit. a): Efficiency Gains

The first condition defines the types of efficiency gains. Only objective benefits normally directly caused by the agreement can be taken into account. Cost savings arising from the exercise of market power of the undertakings must be disregarded.

The claimed efficiencies must withstand the following four criteria: (i) The nature of the efficiencies must be such to be taken generally into account. Efficiencies in general stem from an integration of economic activities whereby undertakings combine their assets to achieve what they could not achieve as efficiently on their own or whereby they entrust another undertaking with tasks that can be performed more efficiently by such other undertaking. The Commission describes explicitly – whilst not meant exhaustively – cost efficiencies and efficiencies taking the form of new or improved products. (ii) The link between the agreement and the claimed efficiencies must be sufficient in order to exclude benefits that are too uncertain and too difficult to verify. (iii) The likelihood and magnitude of the efficiencies and their (iv) implementation (how) and time (when) need to be assessed in order to determine the value of the efficiencies. The efficiency value is important to balance it against the anti-competitive effects of the agreement, a consideration necessary for identifying the indispensability pursuant to Article 81(3)c (see below). For example, where cost efficiencies are being claimed the monetary value and the method of its calculation must be described. Further, the methods by which the benefits will be achieved need to be delineated. (v) The costs of achieving the claimed efficiencies must be qualified in order to determine the (only relevant) net efficiencies.

Second Condition - Article 81(3) lit. b): Fair Share for Consumers

Consumers are not only end-consumers but rather the customers of the parties to a restrictive agreement, be it industrial customers, wholesalers or end-users. The concept of "fair share" according to the Notice implies that the pass-on of benefits must at least compensate customers for any actual or likely negative impact caused to them by the restrictive agreement. Compensation is deemed to occur if the net effect of the agreement is at least neutral from the point of view of customers in each relevant market. Clearly, it is not required that the customer obtains a share of each and every efficiency gain identified under the first condition (see above) as long as sufficient benefits are passed on to compensate for the negative effects. Time-wise a general rule must be recognized: The greater the time lag between the negative effects of an agreement and the positive effects that will be passed on to customers are, the greater must be the efficiencies to compensate also for the loss during the time the customers received no fair efficiency share.

Pass-on of Cost Efficiencies

According to the principle delineation between cost efficiencies and efficiencies in terms of new or improved products the pass-on and balancing of efficiencies are described. When cost efficiencies are under consideration, (i) the characteristics and structure of the market, (ii) the nature and magnitude of the efficiency gains, (iii) the demand elasticity, and (iv) the magnitude of the restriction of competition must be taken into account. The following explanations may illustrate such criteria:

(i) The market structure is an important criterion to assess the degree of competition. The greater the remaining competition is the more likely is that the parties to the restrictive agreement are keen to increase their sales by passing on the cost efficiencies to customers. (ii) The Commission puts according to standard economic theory more weight on efficiencies that occur through the reduction of variable costs than through the reduction of fixed costs, because the reduction of variable costs is more likely to be passed on to customers than the reduction of fixed costs. (iii) The elasticity of demand is important to assess whether or not customers actually would react on a potential pass-on. The greater the demand increase is as a result of a decrease in price – which relates to the term of demand elasticity – the greater the pass-on rate will likely be. (iv) The degree of competition restriction must be balanced against the efficiencies that will be passed on to the customers. The greater the restriction of competition is, the greater must not only be the efficiencies as such but also the pass-on to customers. Naturally, one has to look more closely at agreements involving substantial anti-competitive effects than at agreements where the negative effects are relatively limited and the cost savings are substantial, because of the likelihood that in the latter case a fair share of cost savings will be passed on to customers.

Pass-on of other Types of Efficiencies

Efficiencies in the form of new and improved products capable of compensating for a price increase are notoriously difficult to assess. While the Notice recognizes that the availability of better products constitute an important source of consumer welfare, such efficiencies require to a certain extent a value judgement.

Third Condition - Article 81(3) lit. c): Indispensability of Restrictions

According to the Notice this condition requires that, firstly, the restrictive agreement as such must be necessary in order to achieve the efficiencies, and secondly, the individual restrictions of competition that flow from the agreement must also be necessary for the attainment of the efficiencies. The first test requires that the efficiencies be specific to the agreement in the sense that there are no other practicable and less restrictive means of achieving the efficiencies. Undertakings of the agreement must be able to explain why seemingly realistic and less restrictive alternatives would be significantly less efficient. In this respect it is necessary for the undertakings to demonstrate that the efficiencies would not have been achieved without the restrictive agreement, neither on their own nor by means of another less restrictive type of agreement. Once this test is positively met, the indispensability of each restriction of competition flowing from the agreement must be assessed which means that any individual restrictions must be reasonably necessary in order to produce the efficiencies. The Notice says that a restriction is indispensable if the efficiencies without the restriction would be eliminated or significantly reduced. For example, black listed restrictions in block exemption regulations or hardcore restrictions so qualified in the Commission’s guidelines and notices are only likely to be considered indispensable in exceptional circumstances. Time-wise a restriction may be indispensable only for a certain period of time, in which case the exception of Article 81(3) only applies during that period. In making this assessment it is necessary to take due account of the period of time required for the parties to achieve the efficiencies.

Fourth Condition - Article 81(3) lit. d): No Elimination of Competition

As ultimately Article 81 aims at protecting the long-term competitive structure, the agreement must not afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products concerned, irrespective of potentially pro-competitive efficiency gains resulting from restrictive agreements in the short term. The existence of the elimination of competition depends on the degree of competition existing prior to the agreement and on the impact of the restrictive agreement on competition, for example the reduction in competition that the agreement brings about. As a general rule, the more competition is already weakened in the market concerned the slighter is the further reduction required for competition to be eliminated. In addition, the greater the reduction of competition caused by the agreement is the greater is the likelihood that competition in respect of a substantial part of the products concerned will be eliminated. Market shares, capacity constraints, current market conduct of the undertakings to the agreement, past competitive interaction, and potential competition are a few of the criteria to assess the impact of the agreement.

Final Comments

The Notice is an abstract and theoretical working paper. Examples and case studies usefully provided in other notices, such as the Commission Guidelines on Vertical Restraints and on Horizontal Cooperation, are missing. It remains to be seen how this analytical framework will be applied by national courts and competition authorities. The economic tests will be difficult to apply in practice, in particular, by national courts, which neither have the necessary means nor the experience to deal with sophisticated economic models.

It is noteworthy that almost one third of the Notice itself concerns introductory explanations of Article 81(1). This shows that the Commission recognizes the need to elaborate in greater detail its understanding of the concept of Article 81(1). As such, the Notice could be improved by consolidating all the explanative guidelines of the Commission into one "Notice on Article 81 EC Treaty", thereby giving a complete and coherent overview of the Commission’s current interpretation of Article 81 in its entirety.


1 Article 81(1) EC Treaty prohibits all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition. Article 81(2) provides that such arrangements are void. 

2 See Jens Peter Schmidt, The New Implementation Rules of Articles 81 and 82 EC Treaty, Antitrust Quarterly Q1 2003. 

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Mayer Brown is a combination of two limited liability partnerships: one named Mayer Brown LLP, established in Illinois, USA; and one named Mayer Brown International LLP, incorporated in England.

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