Minimum prices for alcoholic beverages-the Commission thinks about going to Court

 

If it was a TV series, we could safely say that we are watching the second instalment of the "story" of Scottish legislation introducing minmum prices on alcoholic beverages.  The end of September saw the EU Commission stating that "it had a problem" with these measures: in line with established case law the Commission expressed the view that setting a minimum prices for alcoholic beverages would not comply with the free trade and competition principles enshrined in the EU treaties (see http://www.bbc.co.uk/news/uk-scotland-scotland-politics-19757149). The Commission's letter, which also takes stock of concerns expressed by a number of wine-producing Member States, is still confidential: however, many of its possible concerns and arguments can be guessed. The 'by object' illegality traditionally attached to minimum pricing; the concern for making the Scottish market "less appealing" to foreign vintners and  therefore for hampering imports into a sizeable part of the UK; and, perhaps more interestingly, the perception of these measures as "going beyond the pale" compared with other measures, such as the adoption of indirect taxation measures affecting alcohol trade are all likely to feature prominently in it.

So, what happens next? The Health Secretary for Health, Alex Neale, who has replaced Nicola Sturgeon in the last reshuffle, has confirmed the Scottish Government's commitment to these measures; He has also reiterated that the Government would "respond" to the Commission's letter within the next 3 months.  After that deadline of 27 December, the ball will be once again in the Commission's court: will the Commission bring an action for infringement in respect to this piece of legislation? Or will it take the view that it's discretion is best engaged in pursuing other alleged infringements of equally weighty EU law rules?

The Scottish Whisky Association certainly hopes that the Commission, if it is not able to "negotiate" the repeal of the legislation with the Scottish Government in the period of time intervening between now and 27 December, will indeed take the United Kingdom to Court, in respect to the prima facie infringement of the Treaty arising from the conduct of one of its regions.  And it is equally clear that the UK, as the Advocate General, Lord Wallace of Tankerness, has said today, will "stand shoulder to shoulder" to the Scottish Ministers in defending their actions before the EU judiciary (see: http://www.bbc.co.uk/news/uk-scotland-scotland-politics-19779696).  But it simply not clear how easy it will be for the UK to do so. 

There is little doubt that the measures enacted by the Scottish Parliament are problematic: minimum pricing has traditionally been regarded as something akin to "vertical" minimum pricing. Especially if these restraints on the freedom of determining prices are applied in specific areas of the Union, they have also been considered a major obstacle to the realisation of the objective of market integration.  As was held by the Court of Justice of the EU in a number of judgments, any limitation on the freedom of individual firms to set their own prices, especially in the form of a "floor price", automatically hinders their ability to pass on efficiencies to their customers, in the form of lower prices (see e.g. case C-221/08, Commission v Ireland, [2010] ECR I-1699).  As a result, in the Court's view it is likely to prevent "efficient traders" from doing business in areas where similar measures are imposed by domestic legislatures, and this regardless of the policy objectives pursued by them.  This much the Court of Justice has reiterated in cases relating for instance the trade in tobacco products. 

The SWA and the "wine producing" member states that have so far submitted papers to the EU Commission take heart from the traditional position on  geographic minimum pricing and also on the principles enshrined in the "tobacco" litigation, in which the "common market goals" seem to weigh more than the concerns for public health.  However, one key factor  at stake in the tobacco cases was the existence of extensive harmonising EU legislation in the area, legislation which had been enacted after taking into careful account the public health concerns arising from this type of trade.  Similar measures have not however been adopted by the EU legislature in the field of trade of wine, spirits, beer and other alcoholic drinks.  It is also clear from the history of the Scottish legislation that the latter envisages a system of pricing that takes into account the different strength of individual types of beverages, thus giving rise to differentiated prices; it is also based on sound health evidence (i.e. the Sheffield study, see: http://www.scottish.parliament.uk/parliamentarybusiness/28862.aspx?r=6852&i=62104&c=1284513) as to the social and medical harm caused by excessive alcohol consumption an to its economic costs.  

Against this background, could the system of minimum pricing provided in the Scottish legislation be regarded as a "disproportionate" restraint on competition and on free trade, as alleged by the SWA? In an earlier post on this Blog, I recognised that price competition is so important that it can never be eliminated (see: http://www.law.ed.ac.uk/clie/blogentry.aspx?blogentryref=8929).  However, could the legislation in question be viewed as a framework within which a different type of competition-one arising, perhaps, between different types of drinks or between beverages of a similar nature but having different alcoholic strengths-can arise?

Perhaps more importantly, the question that should be addressed is whether we should be protecting the "cut price" sellers of, for instance, high strength lager or cider, who can market these products for less per pint than mineral water: it may be queried whether these are the "efficient" undertakings that should always and at all costs be allowed to "pass on" their alleged efficiencies (which could be suspected to originate from cross subsidisation with income coming from sales of different products) to their customers, regardless of the social and economic harm arising from the impact of these sales.  In this specific respect, one dictum of the "tobacco judgments" that are much trusted by the SWA but that the Association seems to have overlooked is the following: "(…) it is (..) open to [the Member States], while allowing those producers and importers to make effective use of the competitive advantage resulting from any lower cost prices, to prohibit the sale of manufactured tobacco products at a price below the sum of the cost price and all taxes (…)" [emphasis added] (case C-198/08, Commission v Austria, [2010] ECRI-1645, para. 43).

Against this background, it could be wondered whether the "differentiated pricing scheme" de facto enshrined in the Scottish legislation could allow such "advantage" to be effectively used by "efficient" vintners and brewers while at the same time allowing Scottish authorities to prevent the sales at below-cost prices that are not only damaging public health and public order (not to mention the economy!) but also undercutting the public purse, by resulting in the tax authorities being unable to reap their revenues (see e.g. C-197/08, Commission v France, [2010] ECR I-1599, para. 43) on the sale of ultra-cheap products.  It is submitted that, if the Commission decides to take the UK to court on account of these measures, this question may well be one of the issues on which the Court of Justice could decide to focus on, in addition to considerations relating to how to balance the public health gains pursued by the Scottish Parliament against the demands of genuine competition which, it could be argued, may well arise between different products and therefore ensure that rivalry is not irremediably impaired on the market.

Finally, and to go back to the main story… where does this leave the complainant, i.e. the Scottish Whisky Association? Could they be actually regarded as potential "victims" of the cut price sales of alcoholic beverages that seem to be the target of the recent minimum price legislation? Admittedly, this is a question that needs to be answered in the circumstances-what beverage can be regarded as substitutable to whisky? And how easy or difficult is it for spirit producers coming from other member states to enter and establish themselves on the Scottish whisky market? More generally, could an "efficient distiller" be prevented from "passing on" his or her efficiency gains to consumers by the minimum price level calculated on the basis of the method established by the Scottish legislation?  It is uncontestable that setting minimum prices is liable to raise concerns for the genuinity of the rivalry in any market.  However, it is admittedly difficult to find as unlikely a substitute to single malt whisky as the beverages that are commonly sold at the "slashed" prices that can currently be seen in some off-licenses. 

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Of lending rates, information exchange agreements and competition-the Libor scandal and Article 101 TFEU

Banks are, once again, topping the news sheets, if they had ever stopped… And now it is for allegations of rigging the Libor exchange rate.  It is already rather disconcerting that such an important element in the determination of banking rates-whose value affects the lives of so many people-is, at least in its face, set up relatively informally (the Beeb have a good piece on it: http://www.bbc.co.uk/news/business-18613988). What is even more worrying is that, it is alleged, a number of traders have used this mechanism to manipulate these offer rates, in other words, to artificially alter their value. 

Determining artificially the value of Libor by declaring , however, is not a victimless crime, as the US authorities who have exacted an admission of liability from Barclays and other major banks, including the taxpayer owned RBS, have pointed out. Libor is the benchmarks for rates throughout the banking industry, affecting anything from mortgage to personal loan rates.

Apart from these considerations, the way in which these rates is set raises a number of potentially significant competition law questions: every day at 11am GMT, the "panel banks" communicate their offer rates to Thomson Reuters which collect these data on behalf of the BBA, for the purpose of setting an average rate of reference, which is then made public at 11:45am GMT (For an agile and easy to understand explanation of how the rate is determined see http://www.global-rates.com/interest-rates/libor/libor-information.aspx). So, nothing particularly "scientific", right?  However, what is problematic is that this is a mechanism through which sensitive, "fresh" and commercially significant information are pooled: while the identity of each of the bank giving details of their interchage rate is only known to ThomsonReuters, who the "panel banks" actually are is openly known.  It is therefore undeniable that the LIBOR calculation mechanism is the outcome of an information exchange arrangement among competitors, leading to the determination of a "reference rate" affecting a widespread variety and number of financial transactions and, therefore, impacting considerably on the trading conditions applied by key players on the banking market.

The legality ofinformation exchange agreements is a vexed issue in competition law, which has been examined by the EU courts in a number of cases.  In the banking market a parallel can be drawn with the credit rating information register at issue in the Asnef Equifax preliminary ruling (case C238/05, [2006] ECR I-11125), for instance.  As is well known, in that case  the Court of Justice took the view that an agreement for the exchange among banks of information relating to the "creditworthiness" of their clients, for the purpose of facilitating future decisions on whether to, inter alia, granting loans or other banking services to them, would not infringe Article 101 TFEU if a number of conditions were satisfied-in light of the domestic court's appreciation of each scheme (para. 54-56).  Access to the register had to be granted in a non-discriminatory fashion, in the sense of being open to any bank of financial institution that may be interested in obtaining these services; the information concerned customers and not the members of the scheme-in other words, lenders should not be identified or identifiable; and perhaps most importantly, the market must not be excessively concentrated, for, if that was the case, enhancing its transparency could allow the existing competitors to reciprocally align their behaviour, thus distorting any remaining competition (see para. 57-60).

It is acknowledged that the LIBOR mechanism presents several distinguishing features from those of a "credit rating register", such as the one in issue in Asnef: it concerns a "hypothetical" offer rate for borrowing from which banks can derogate.  Also, the circumstance that, at least in its face, the identity of each bank is unknown to the others, thus not allowing them to "match" rates to institutions, should prevent tacit coordination from arising.  However, it is undeniable that there are a number of significant similarities: just as with credit registers the identity of those to which the data refers (i.e the "panel banks") is openly known; also, the final figure is the result of an average calculation that takes into account each of the rates submitted to the data pooling organisation. Perhaps most importantly, LIBOR is a "key reference rate"-a  bit of a peg on which pretty much any other "significant" rate hangs.  On this point, it should be reiterated that according to the Court of Justice in Asnef, information exchange arrangements do not, at least in principle, infringe Article 101 TFEu by reason of their 'object' and that regard should be had to their actual context. Thus, this analysis could well reveal that these agreements may escape being caught by Article 101 TFEU on the ground that they are likely to facilitate the provision of banking and financial system and therefore represent a "reasonable" restraint on the freedom of trade of the parties (see Ausbanc, mutatis mutandis, para.  47-49). 

However, two further aspects merit consideration: the first concerns the state of the banking market.  According to the Asnef preliminary ruling, one of the conditions for the lawfulness of the credit rating register arrangement was that the market not be "excessively concentrated", for, if that was the case, any further exchange of "sensitive information" could make coordination among competitors more likely and thereby render the agreement capable of appreciably distorting any remaining competition.  On this point, it is accepted that the banking and financial markets are regarded as being worlwide: however, when regard is had to the state of the industry in the UK, one cannot deny that the British "domestic" segment of this market is characterised (for one reason or another) by the presence of a relatively small number of big players vis-a-vis which smaller banks can only represent a relatively limited countervailing factor when it comes to exerting competitive pressure.  Against this background, it could be questioned whether reducing the uncertainty as to the fixing of key rates via the Libor mechanism could further limit the "space of manuevre" left to rivals on this market to the point that the arrangement may no longer represent a "reasonable" restraint on competition for the purpose of securing "meritorious" objectives of stablity and good management in the provision of credit and other services.

The second consideration relates more closely to the alleged "rigging" of Libor rates, i.e. to the uncovered evidence that some banks had released artificial rates, i.e. rates that did not reflect the reality of their practices.  In a recent post, my colleague Andreas Stephan expressed doubts that this practice could amount to, and should therefore be treated as a cartel, with all the consequences (especially criminal) that this carries (see: http://competitionpolicy.wordpress.com/2012/07/11/should-libor-rigging-be-treated-like-price-fixing/): he emphasised among other features the fact that these figures "(…) are taken collectively as an indicator of how healthy those banks are individually and as a group. (…)"  It  may be agreed with Andreas that "(…) in this setting, some level of manipulation and tacit collusion seem inevitable (…)" due to the nature of the arrangement; nonetheless, it may wondered whether, given the centrality of Libor within the baking industry and, perhaps most importantly, the artificial nature of the Libor value determined as a result of the alleged "rigging", the implementation of the scheme could have led to conditions of competition on the credit market that did not correspond to the actual nature and to the features of the market itself.

Against this background, the "big" question is whether, despite being in principle a "reasonable" restraint on the freedom to trade of banks and financial institution, the Libor arrangement may represent, due to the manner in which it was implemented, a unlawful restriction on competition'by effect'.  While it is acknowledged that (as Andreas does in the blog post I previously referred to) the "criminal response" may not be appropriate, due to the regulated nature of the industry and to the "systemic" concerns characterising its functioning, this is a central question in respect to the "civil" responses to the Libor scandal: could bank customers for instance seek compensation for damages allegedly suffered as a result of an "artificially high" interest rate, by reason of their bank having taken Libor as its "benchmark"? This is admittedly a scenario that is taking shape in the US; however, as the BIS Consultation document seems to harbour a "new age" for standalone competition claims, it may not be excluded that the Libor scandal could lead to litigation in the UK courts as well.

It is however beyond doubt that the most concerning aspect of the Libor scandal lies in the perceived inability of regulators to constrain and discipline the behaviour of a relatively small and supposedly "well-educated" group of undertakings that act in a prima facie tightly surveilled market: it is acknowledged that "rough traders" are to blame for many of these practices.  However, it is equally clear that whoever was supposed to did not "see" or "hear" what was happening on the trading floor, thus revealing quite significant gaps in the internal governance as well as in the regulatory structure of an industry which should support the economy at this critical moment, just as the taxpayer did to it when banks really needed help.

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Once more on the news-the Intel appeal gathers speed!

The Intel appeal is among the major and best known cases pending before the General Court so far: lodged in 2009 to challenge a decision in which the Commission had fined the applicant for allegedly abusing its dominant position, this case is likely to give more headache to DG Competition, since it is likely to reignite the discussion as to the extent to which its investigative proceedings comply with basic tenets of due process, equality of arms and rights of defence.

To date the Commission has sought to rebut criticism largely on the ground that in its view the overall "fairness" of its enforcement mechanisms would ultimately be guaranteed by the powers, conferred to the General Court and, on appeal on points of law, to the Court of Justice, to scrutinise its decisions, in accordance with Article 263 TFEU.  At the same time, the Commission has sought to refine its procedures, by adopting new Best Practices Guidelines and in general by aiming at making its procedures more transparent and with greater opportunities for dialogue with the investigating parties. In this context, the disclosure of evidence on which the Commission has relied to establish an infringement, contained in the case file, has represented a long standing bone of contention.  It may be argued that it is legitimate to limit, if not altogether to deny, access to evidence on grounds of confidentiality of business secrecy; this may be especially important when dominant companies are under investigation, as the disclosure of, e.g. evidence originating from a rival or downstream business partner, may expose the informant to the risk of retaliation.  However, how far can this justification be relied on?  The Court of Justice has repeatedly said to the Commission, in short, that "if you don't disclose it, you can not then rely on a specific piece of evidence".  Against this background, it is perhaps not surprising that the Intel appeal, currently being heard in Luxembourg, hinges more on issues of procedure than on questions of substance.

It is in fact well-established that dominant companies cannot engage in "loyalty inducing" practices, such as tying arrangements, albeit at advantageous prices for the buyer, discounts and rebates, even at the request of the counterpart; it was often held that these practices would result in competition being irremediably impaired by locking in customers in a long relationship with the market leader.  

This is not central, it seems, to Intel's case.  Bloomberg reports today (see: http://www.bloomberg.com/news/2012-07-02/intel-to-say-eu-withheld-evidence-mitigating-1-34-billion-fine.html) that before the General Court counsel for Intel (Nicholas Green QC) has argued that "the EU [Commission] failed to use mitigating evidence or to allow it respond to all of the allegations."  Intel has also contexted the complex legal assessment of the allegedly unlawful practices in light of Article 102 TFEU, on the ground that the Commission's case would be "simplistic", "static" and unable to capture the features of competition on the IT market.  It could eb argued that these pleas are surely not unconvincing: after all, the Commission's "short term" view of competition in new economy industries has been repeatedly criticised, as was the case in relation to, e.g., the Microsoft case, on the ground that it would not be able to gauge in full the implications of operating in a market characterised by network effects and where, as a result, industry leaders are likely to emerge and "rule the roost" for a limited temporal horizon (see e.g. the brilliant piece by Pierre Larouche-available at: http://socrates.berkeley.edu/~scotch/DigitalAntitrust/Larouche.pdf)  

However, it would appear that the applicant may have more luck in litigating the case on procedural grounds.  These arguments were at the core of the original appeal-see my interview with Charles Forelle on the WSJ, among other more important pieces… http://online.wsj.com/article/SB124826913522171933.html).  However, since then it has been uncovered that the Commission has been responsible for repeated procedural shortcomings in the course of the 8 year investigation against Intel-according to the EU Ombudsman, for instance, the failure to keep regular, full and accurate minutes of the meetings with Intel executives accounted to "maladministration" (see http://www.ombudsman.europa.eu/cases/summary.faces/en/4399/html.bookmark); the Ombudsman also highlighted the circumstance that complainants in the case, i.e. AMD, were allowed unusually ample access to the case file, thus raising suspicions of further procedural infringements (this time of the Commission's duty of confidentiality) to the detriment of Intel itself. 

Against this background, it is legitimate to ask if Intel's pleas will be upheld by the Court: surely, this will depend on a number of factors, although it is undeniable that the EU Ombudsman report could have a significant weightin assessing whethr these arguments are well-founded.  However, what is also certain is that, should Intel be successful, this would represent an indictment, to some degree, of the procedures before the EU Commission, who, as a result, may no longer be able to "duck these issues in the water" in public, by reiterating the overall soundness of its due process standards, and then quietly address any perceived shortcomings by the back door of its administrative practice.

The hearing is expected to last for another 4 days, according to Bloomberg and to the EU Courts' calendar (see http://curia.europa.eu/jcms/jcms/Jo1_6581/?tri=juridiction&dateDebut=4/07/2012&dateFin=4/07/2012).   Nonetheless, it is perhaps already justifiable to wonder whether Intel will be the decisive factor in prompting a root and branch reassessment of the DG Competition investigative and decision-making practices, with a view to secure effective, true and full compliance with principles of equality of arms, due process and fairness that are now an essential part of the fundamental rights' catalogue of the EU itself.

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Hot off the press-forthcoming Competition Law workshop in Edinburgh, Programme published!

The Competition Law Scholars Forum (CLaSF) is delighted to announce that the programme for the XXth workshop is now public.  The theme of the workshop will be "Competition Law and the Economic Crisis".

We are very honoured to have Prof Luis Morais, currently at the helm of the Portuguese Competition Authority, as the keynote speaker for the day.  The line up of contributors is truly impressive and the papers will cover a range of hot topics and issues-this day is sure to inform discussion on a raft of important and topical questions.

Anyone interested in attending (you must be a member of CLaSF- see www.clasf.org re membership) should contact Dr Arianna Andreangeli in the first instance-places for the audience are limited.

The programme will be shortly live at www.clasf.org, but for a taster… 

Draft Programme

 

9-9:30am: registration and coffee

 

9:30-9:45am: Welcome and Introduction—Prof. Barry Rodger (University of Strathclyde, Vice-Chair, CLaSF) and Dr Arianna Andreangeli (University of Edinburgh)

 

9:45am-10:30am: Keynote speaker—Prof. Luis Morais, Universidade de Lisboa and Portuguese Competition Authority. 

 

10:30am-10:50am: Questions and discussion

 

10:50am-11:10am: coffee break

 

11:10am-11:50am—Panel I: Competition law and the economic crisis—general themes.

Chair: Prof. Alan Riley, City Law School, Chair, CLaSF

 

Mr Pat Massey and Mr Moore McDowell (COMPECON, Dublin, Ireland): “Competition Law: an unaffordable luxury in times of crisis?”

 

Ms Beata Slominska (College of Europe): Should crisis justify the functioning of crisis cartels?  Lessons from the history in the context of the current financial crisis”

 

11:50am-12:30pm—Panel II: the goals of competition law in the current economic turmoil

Chair: Dr Arianna Andreangeli, University of Edinburgh

 

Ms Gul Sirin Gok (University of Strathclyde): “The Interplay between the ‘Welfare of Consumers’ and ‘Economic Growth’ as Objectives of Competition Law: Overrated?”

Dr Anne-Christine Witt (University of Leicester): “Can the more economic approach survive the economic crisis?”

 

12:30pm-1pm: Q&A for all speakers

 

1pm-2pm: Lunch break

 

2pm-3:20pm—Panel III: State aid and the crisis of the banking and automotive industries.

Chair: Mr James Killick, White & Case, Brussels

Mr Gianni Lo Schiavo (College of Europe): Towards a reshaping of the rules for State aids in the aftermath of the financial crisis?”

Dr Michele Giannino (Desogus, Cagliari, Italy):Too big to fail banks: what can merger control do? An European perspective”

Dr Jonathan Galloway and Prof Joanna Gray (University of Newcastle): “Reforming the UK banking sector: Weighting Financial Stability and Competitiveness”

Mr Conor Talbot (European University Institute): “Competition Law and Policy in times of Economic Crisis: A Case study of the application of EU competition rules to consolidation in the automobile manufacturing sector”

 

3:20pm-3:45pm: Q&A

 

3:45pm-4pm: coffee break.

 

4pm-4:40pm—Panel IV: the crisis and the EU economic and social model

Chair: Mr Angus MacCulloch, University of Lancaster

 

Prof Erica Szyzsczak (University of Leicester): “Putting the ‘market’ into the ‘social’”

Prof Johan Van Den Gronden (Radboud University, Nijmegen): The Transformation of EU Competition and Internal market law by the Stability and Growth Pact: competence creep into the national welfare states?”

 

4:40pm-5:10pm: Q&A

 

5:10pm-5:20pm: closing remarks

 

 

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News come hard and fast-new OFT CEO announced today!

The Business Secretary, Vince Cable MP, announced today that Clive Maxwell is to replace John Fingleton as Chief Executive Officer of the Office of Fair Trading.

Clive Maxwell is currently an Executive Director and Member of the Board of the Office and has in the past held a number of posts in the Treasury from 2000 to 2009.

See:

http://news.bis.gov.uk/Press-Releases/New-OFT-chief-executive-announced-67b40.aspx

for more information about the handover.

His appointment comes at a critical time for the OFT, as he will be deeply involved in the transition to the new Competition and Markets Authority.  The CMA will replace the current framework for the enforcement of the competition rules in the UK, which is characterised by a division of responsibilities between the OFT and the Competition Commission; this is especially apparent in respect to the control of mergers and to market inquiries, and has been widely approved of for its thoroughness and for its efficiency.

The move to a unified agency is therefore not entirely uncontroversial: it may be wondered whether, rather than looking at the merits of such a transition the Government may have been influenced by the perceived need to implement budgetary cuts.  Surely, it is in many ways regrettable that, if that was indeed the case, the OFT and the CC could be innocent victims of the "bonfire" of many governmental and quasi-governmental agencies.

 

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Minimum prices for alcoholic beverages-a good opportunity for a fresh look at resale price maintenance?

And they really are going to do it!

http://www.bbc.co.uk/news/uk-scotland-18052849

As had been announced, the SNP led Scottish executive is indeed going to push forward in introducing a minimum price per unit of alcohol. This measure, which has been championed by the Health Secretary and deputy leader Ms Sturgeon (http://www.scottish.parliament.uk/S4_Bills/Alcohol%20%28Minimum%20Pricing%29%20%28Scotland%29%20Bill/Bill_as_introduced.pdf), represents one of the flagship policy goals of the SNP agenda.  Its justifications are to be found in great concerns as to the rise of binge-drinking, alcohol related hospital admissions as well as long-term health problems associated with high consumption of alcohol.  These problems have been regarded as strongly linked with the availability of beer, wine and (perhaps more worringly) strong cider at low prices especially in supermarkets. 

Giving evidence before Holyrood's Health and Sport Committee at the beginning of 2012 (see: http://www.scottish.parliament.uk/parliamentarybusiness/28862.aspx?r=6852&i=62104&c=1284513), Prof John Brennan of Sheffield University's Alcohol Research Group, pointed out that if "(…) we change the prices (…) the baseline consumption changes to a new level of consumption for each drinker group (…)." The Alcohol Research Group study showed that  "(…)if we put prices up, consumption falls to whatever degree the modelling says (…)". The study further showed the causal link existing between "consumption and harms",  the latter characterised in terms of mortality and illness associated with consumption (both chronic and acute) and also sickness absence; it was illustrated that, given the risk function existing between consumption and harm to health, as a result of which "(…) if consumption is higher, the risk of various health harms is higher (…)", adopting measures capable of affecting the consumption patterns had a direct impact on the level of harm.  On that basis, Prof Brennan expressed the view that the fall in consumption caused by a price rise had a direct impact on the health problems that were directly related to alcohol consumption. 

In the same hearing, Prof. Jonathan Chick, of Queen Margaret University, further noted that, while demand for alcohol, especially by heavy drinkers, seemed to remain inelastic when price rises were owed to taxation, due to the ability of buyers to "trade down" to cheaper beverages, it wasappreciably more elastic to changes instigated by minimum prices, because the latter prevented "trading down" from occurring.

The Executive's proposalswere clearly influenced by the admittedly convincing and solid evidence provided by the Sheffield Alcohol Research Group Study (see: http://www.shef.ac.uk/mediacentre/2012/minimum_alcohol_pricing_update.html).  Nonetheless, as is well know, criticism abounded, ranging from claims that "sensible drinkers" would be adversely affected to allegations that the proposed legislation could penalise "lower income groups".  However, it is readily apparent that since the Bill was introduced, the tide seems to be turning, with the Liberal democrats and the Conservatives supporting the Bill and Labour abstaining last March.

So far so good then? Surely, one cannot but regard this Bill as a courageous stance on the part of the Executive in attempting to tackle the health harms and social costs arising from excessive alcohol consumption: when the Bill eventually makes it on the statute books, none of the "rock bottom price" deals offers available so far in supermarkets and off licence outlets will be any longer possible.  However, the Executive's move brings back to the fore a much discussed issue for competition lawyers-namely, the extent to which resale price maintenance, in this case imposed by state action, can be reconciled with competition law principles. 

Resale price maintenance has been seen for a long time as a serious infringement of the EU competition rules; according to the Court of Justice of the EU in SA Binon (case 243/83, [1985] ECR 2015, para. 43-45) even in markets where "special products" were traded (in that case, magazines and newspapers) and which therefore justified the existence of, inter alia, selective distribution systems, any form of "price fixing agreement", whether horizontal or vertical, represented a 'by object' restriction of competition.  The Court emphasised that these types of arrangements would therefore be void unless it could be established that they complied with the four conditions of Article 101(3) TFEU.  A similarly hardline approach was also adopted for a long time in the US: in 1911 the US Supreme Court held in Dr Miles (220 US 373) that these arrangements should be found to be illegal regardless of their economic justification. This precedent was famously overruled at Federal level by the same Court in Leegin in 2007 (551 US 877), on the ground that this type of clause can, despite limiting the freedom of the retailers to set their prices, have pro-competitive effects, ranging from encouraging the retailers to invest in their operations to boosting inter-brand competition; they could also be used as a means to encouraging the provision of additional services that retailers may not feel able to provide due to the risk of free riding. Although the judgment has been met with resistance by several states and their courts, leading sometimes to the enactment of "Leegin-repealer" statutes, it is undeniable that this judgment raises a number of questions for EU competition lawyers as well: could any justification be found for setting minimum prices? And if that is the case, what could these justifications be?

In Binon the Court of Justice itself accepted that the legal exception's four conditions could provide a forum within which any supposed "beneficial" effects of a resale price maintenance agreement could be assessed, with a view for it to "escape" the sanction of nullity provided in its paragraph 2.  However, given the scrupulous nature of the approach adopted in the interpretation of the legal exception clause itself in the context of "per se" allegations, it may be wondered whether even convincing and well-founded justifications, such as those provided in the course of the debate on the Scottish Alcohol Bill, could pass munster under Article 101(3) TFEU.  In this respect, it should be emphasised that unlike in Binon, any distribution agreement incorporating the minimum price per unit would only affect off licence sales of alcohol and not impact on sales occuring on the premises (such as the sale of drinks in pubs and restaurants and other establishments licensed for on-premise consumption); it should also be reminded that the parties would be obliged to insert the minimum price clause as a result of a legislative command.  On this point, it should be emphasised, however, that "state compulsion" does not exonerate from competition law liability  and that, perhaps most importantly, the domestic authorities faced with appraising the legality of similar arrangements are called upon to set aside legislation conflicting with the EU competition rules (see e.g. case 198/01, Consorzio Italiano Fiammiferi v AGCM, [2003] ECR I-8055). 

Against this background, a question emerges as to the extent to which the Scottish legislation setting a minimum price may be faced with a "CIF type" scenario: in other words, would a domestic court, for instance, have to "set aside" the legislation and consequently declare an arrangement seeking to enforce the minimum price void? Or could it be claimed that the legal exception clause provides these agreements with a "safe harbour" on the ground that the health benefits arising from them (and which have been convincingly expounded for instance by the "Sheffield Report") are such as to countenance negative consequences for price competition, in accordance with the four conditions of Article 101(3) TFEU?

It is clear from the Court of Justice's case law that price competition is so important that it cannot be completely eliminated; at the same time, however, the court has repeatedly recognised that rivalry based on other parameters, such as quality, is equally worth protecting and fostering-hence its approval of selective distribution systems, franchising and other rather "straitjacketing" (especially for retailers) forms of vertical arrangements.  Could a similar argument be made for retail agreements concerning the supply of alcohol off-the-premises? The risks related to alcohol consumption, especially in significant and potentially hazardous quantities, has been well-documented; it is also clear that "non-economic goals", such as inter alia, environment and health protection were regarded as "plausible" grounds for the application of the legal exception in the past, both by the Commission and by the EU Courts, especially to the extent that these "non-economic benefits" could be "subsumed" in economic gains.  As the Sheffield study shows, it could be argued that a reduction of harm to health arising from decreased alcohol consumption is liable to have positive consequences for the economy at large-measured in terms of, for instance, less sick days for patience and consequently of increased productive efficiency on workplaces.  It is also suggested that, seen in this light, these benefits would be immediately and tangibly passed on to consumers, who would be able to take advantage from, inter alia, a reduction in alcohol related crime and, to some degree, of other positive consequences, such as a reduction of hospital waiting times arising from resources freed up by the decreased alcohol related hospital admissions.  

However, whether the agreements in question would pass munster also vis-a-vis the "negative conditions of Article 101(3) is a more complex issue.  It is acknowledged that the obligation to abide by a minimum price is limited in its scope-in as much as it only applies to "off licence" sales-and in time (the Act, if it comes into effect, will be reviewed in 6 years).  However, to ensure that this obligation is "indispensable", i.e. strictly necessary and proportionate to the realisation of its beneficial effects will be a complex knot to untie.  In this respect, it is respectfully suggested that the evidence provided in the Sheffield study as to the beneficial knock on effects of a minimum price is rather solid and convincing, thus supporting the view that a minimum price, especially as far as "hazardous drinkers" are concerned, is the only way forward to securing concrete reduction of the harm arising from excessive alcohol consumption; it is added that setting a minimum price of 50p/unit would seem to be proportionate in the face of the size of these positive effects-according to the Sheffield study, the minimum price could deliver up to a total of £64million in harm reduction after one year and up to £942m after10 years.  However, the "non-elimination-of-significant-competition" condition would admittedly be more problematic to meet: the obligation to abide by the minimum price would affect the whole off-license sale segment without exception, and touch upon the "price competition" dogma identified by the Court of Justice itself.  Surely, the circumstance that the Act is likely to be subjected to a "sunset clause" would be a relevant factor in this assessment; it is also beyond doubt that suppliers would be free to compete on the basis of non-price parameters and could even be in a position of "reinvesting" any extra margin in pro-competitive, quality enhancing initiatives.

In conclusion, it is respectfully suggested that any allegations that the Scottish measures envisaged in the Alcohol Bill would be contrary to EU competition law seem less strong than it would seem at first glance: it is argued that a careful consideration of individual sales arrangements and of pricing practices in light of the legal exception could resort in reconciling the interests of genuine competition and of "good", rivalrous business with those of implementing important policy goals, such as the protection of health and well-being of consumers in Scotland (and beyond? The Westminster coalition Government is proposing a 40p minimum price per unit of alcohol).  The Alcohol Bill, in substance, seems to be raising once again the long-standing question of "what competition is for" and what we mean by "consumer welfare": if we take the latter as our end-goal for the application of the competition rules, it is hard to see why improving public health and thereby securing the benefits that come with it, especially for the economy at large, is not worth pursuing-even at the price of a reduction (whose magnitude is yet to be assessed) of price competition.

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Hot off the press-Competition Law debate open to Honours and LLM/PhD students.

The Scottish Competition Law Forum is hosting a debate open to students, acting in teams, on 24 May at the University of Glasgow.

Please email the Forum at: sclf@oft.gsi.gov.uk, for more information.

The official call and announcement will be live on http://scotcomp.org.uk/events later today.

The link is:

http://scotcomp.org.uk/students

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Hot off the press-forthcoming Competition Law workshop in Edinburgh

The Competition Law Scholars Forum will hold its XXth workshop in Edinburgh on 13 September 2012.  The Forum has a long and established reputation as a framework for debate of competition law issues, thanks to a sizeable and diverse membership, which spans across many countries, including Australia, the USA and Japan.

A call for papers has been issued and is open to all members. The topic will be: "Competition Law and the Economic Crisis".

Anyone interested in joining CLaSF and/or taking part to the workshop may check:

http://www.clasf.org/membership/join.htm

 

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Of competition, internet shopping and the single market…

Internet shopping is now a fact of life for vast swathes of the EU population.  From books to CDs to costlier and more sophisticated products, internet sales attracted 9.6% of all the retail spending in the UK only in the month of September, according to the British Office for National Statistics (see: http://www.bbc.co.uk/news/business-15383602).  Ease of access and cheaper prices, as well as the ability to compare different goods and brands to find "better value for money" are among the key reasons for the popularity of online shopping.

Against this background, it is somehow surprising that some suppliers remain heavily poised against this means of distribution for their own goods.  It could be argued that, as the Court recognised in its Metro judgment in 1977, price competition, despite being so important that it coul not be eliminated, did not represent the only "effective" form of rivalry to which precedence must always be given.  For this reason, the Court took the view that suppliers of "high quality and technically advanced products" could restrict the channels of distribution for these goods according to "quality based" criteria: in its opinion, the presence of "a variety of channels of distribution adapted to the peculiar characteristics of the various producers and to the requirements of the various categories of consumers" would be compatible with Article 101(1) so long as the retailers participating in them were selected according to objective criteria of a qualitative nature, linked to the nature of the goods, the level of training of the staff and the quality of the resellers' premises and applied in a non-discriminatory way. (case C-26/76, Metro v Commission, [1977] ECR 1875 para. 20).

In light of Metro, "selective distribution systems" were allowed in a number of industries, from hi-fi to "luxury goods", such as perfumes and high end make up (see e.g. Cast T-19/92, Groupement d'Achat E. Leclerc  v Commission, [1996] ECR II-1851).  However, could certain forms of distribution, such as internet sales, be excluded outright on account of the "sophisticated" nature of the goods concerned? It was this question that was put before the Court of Justice by the Court of Appeal of Paris in the Pierre Fabre v Autorite' de la Concurrence and others (case C-439/09, decision of 13 October 2011).

The Luxembourg judges were asked to considere whether clauses contained in a selective distribution system for high end cosmetics and de facto preventing internet sales were compatible with Article 101 on the ground that the products' characteristics justified "non-price" competition; it was argued before the domestic court that the nature of these products required the "physical presence" of a qualified pharmacist.  However, already the referring judge had noted that this requirement de facto prevented internet sales and, consequently, had raised the question before the ECJ as to whether a de facto "blanket ban" on this type of selling practice was compatible with the EU competition rules.  

Perhaps not surprisingly, the ECJ recalled that there may be "legitimate requirements" of products or services that may justify "alternative selling arrangements" resulting in the limitation of price competition, as had been the case in Metro.  However, the Court made clear that any such limitation should be proportionate to the aim it sought to pursued.  Although it was made clear that it would be up to the domestic court to assess whether the arrangement had de facto resulted in a "blanket ban" of specific forms of supply, it was held that neither the nature of the cosmetics-which were not akin to prescription medication for instance-nor their "prestigious image" justified a restriction of competition such as a ban on internet sales.  The Court opined that this arrangement constituted an infringement of Article 101(1) by reason of its object: it emphasised that, unlike other "medical products or devices" sold in pharmacies, the cosmetics did not require the physical presence of a qualified pharmacist.  Consequently, an arrangement resulting in a total ban on sales via the web was nt "objectively justified" and should therefore be caught by the Treaty competition rules.  Importantly the Court equated the restraint to a restriction on "passive sales", which formed part of the "black listed" arrangements listed in the BER No 2790/99.  It was held that since it affected the ability of end users to approach resellers based outside their area of residence/activity, the arrangement contravened the principle that, while resellers could be prevented from seeking out business from outside their "catchment", buyers should be left free to approach any retailer (even within a selective distribution system) within the common market.

Pierre Fabre is a very important decision, which draws on established legal principles and seeks to uphold the freedom of customers to choose the most convenient way of purchasing products and services as well as the freedom of retailers to choose the most appropriate way of marketing the products they stock and to trade within the widest possible geographic remit.  Although its conclusions are not surprising, especially in light of the BER provisions, the Court of Justice sends a powerful message that any restriction on the mode of retail of products or services-even those products or services which would justify the establishment of selective distribution systems-which constitutes a restriction on the consumers' ability to "shop around"going beyond what is strictly necessary to take into account the "special nature" and features of these products will not be tolerated. 

The preliminary ruling is surely to be welcome also from a commercial standpoint: given the weight of internet sales and the benefits that they can bring to consumer choice, especially for those purchasers who have no easy access to high street shops, Pierre Fabre represents a strong endorsement of this form of retail across the single market and a recognition of the importance of the freedom of trade and the ability to compete through not only pricing but also the use of innovative, consumer friendly retail techniques.

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