The first of the two new block exemption regulations adopted by the European Commission (the “Commission”) on 14 December 2010 addresses specialisation and joint production agreements (the “Specialisation BER”).[1]

Background

The Specialisation BER represents a balancing act between the Commission’s desire: (i) to safeguard effective competition; and (ii) to provide companies with regulatory certainty - by way of so-called “safe harbours” - in relation to specialisation and joint production agreements which are deemed, on balance, to be pro-competitive.  While falling within the safe harbour is certainly not the “be-all and end-all” of the matter when assessing the competition law compliance of a particular arrangement, many companies will consider a measure of regulatory certainty particularly important as non-compliant specialisation or joint production agreements are likely attract allegations of cartelist conduct for the participants.

The safe harbour

The Specialisation BER exempts certain specialisation and joint production agreements from the scope of Art. 101 TFEU which prohibits agreements that have as their object or effect the prevention, restriction or distortion of competition within the EU.

 It applies to the following types of agreements:

• “unilateral specialisation agreements”, pursuant to which one party agrees to cease - or refrain from - production of a product and to purchase it from another party which in turn agrees to produce and supply that product;

• “reciprocal specialisation agreements”, pursuant to which two or more parties, on a reciprocal basis, agree to cease - or refrain from - production of specified but different products and to purchase them from another party to the agreement which in turn agrees to produce and supply the relevant product; and

• “joint production agreements”, pursuant to which two or more parties agree to produce certain products jointly (e.g. by way of a joint venture).

As is common for EU block exemption regulations issued in recent years, the primary measure used for assessing whether the agreement benefits from the Specialisation BER is the combined market share of the parties to the agreement: a specialisation or joint production agreement will fall within the safe harbour if the combined market share of the parties does not exceed 20% in either: (i) the market for the product covered by the agreement; or (ii) if the product is an intermediary product, any relevant downstream markets for products which incorporate the intermediary product.

This test reflects the Commission’s view that only agreements between parties with market power are likely to have an appreciable effect on competition.  In effect, the Specialisation BER assumes that when the parties do not have market power, the pro-competitive benefits of specialisation and joint production agreements outweigh the anti-competitive restrictions.  The inclusion of downstream markets in this test is a new feature which was not included in the block exemption regulation which previously applied to agreements of this type.

The Specialisation BER further stipulates a number of “hardcore restrictions”, the inclusion of which will move an agreement outside the safe harbour regardless of whether the combined market share exceeds the 20% threshold.  “Hardcore restrictions” are defined as restrictions which have as their object:

• price fixing vis-à-vis third parties with the exception of prices charged to direct customers (i.e. in a joint distribution set-up);

• limitation of output or sales with the exception of the setting of: (i) product output in unilateral or reciprocal specialisation agreements; (ii) capacity and production volume in joint production agreements; and (iii) sales targets in agreements involving joint distribution; or

• the allocation of markets or customers.

Agreements falling outside of the safe harbour

Falling within the safe harbour provides companies with a degree of certainty.  There is, however, no presumption that agreements outside the safe harbour breach EU competition law.  Such agreements need to be individually assessed to determine whether or not they fall within the exceptions set out in Art. 101 TFEU itself.  Such assessments nowadays are undertaken by the parties themselves (i.e. there is no notification or clearance process).

In carrying out such an assessment much will depend on the market in which the parties to the agreement operate.  If the combined market share of the parties to a specialisation and joint production agreement exceeds 20%, various additional factors will need to be considered, including the concentration ratio of the market, the number of market players, the existence of barriers to entry, similar agreements in the market, as well as the market dynamics generally.

In order to benefit from the exceptions set out in Art. 101 TFEU, the parties will need to be in a position to illustrate that each of the following cumulative conditions is met:

Efficiency gains

The agreement must contribute to improving the production or distribution of goods or to promoting technical or economic progress.

The Specialisation BER recognises that specialisation and joint production agreements may have pro-competitive effects as they permit parties to take advantage of economies of scale and other efficiency gains that would not have been available to each party individually.  In addition, co-operation may result in improved production technology, product quality and product variety.  In this context, specialisation and joint production agreements that give rise to new downstream markets which the parties would not have entered independently are less likely to be problematic from a competition law perspective.

Indispensability

The restriction of competition contained in the agreement must be indispensable to the attainment of the identified efficiency gains.  This arguably represents the most significant hurdle that many specialisation and joint production agreements may struggle to clear.

By way of example, the Guidelines state that joint commercialisation of products is particularly problematic - especially if, as is the norm, it involves joint price setting as this “brings the co-operation closer to the consumer”.  However, joint commercialisation agreements for products that have been produced as part of a joint production arrangement are less likely to be problematic than stand-alone joint commercialisation agreements.  In addition, if it can be objectively shown that the parties would not have entered into the joint production agreement without also agreeing to joint commercialisation, this is a likely indicator that joint commercialisation is indispensable to achieving the identified efficiency gains resulting from joint production.

Pass-on of benefits to consumers

The parties to a specialisation or joint production agreement must allow consumers a fair share of the benefit resulting from the identified efficiency gains (e.g. by way of lower prices, superior product quality or greater variety of products).  In other words, efficiency gains that only benefit the parties are insufficient to justify co-operation between competitors.  As a general rule, the higher the combined market share and thus market power of the parties, the less likely that a fair share of the benefit will be passed on to consumers.

No elimination of competition

Lastly, any specialisation or joint production agreement that permits the parties to eliminate competition in respect of a substantial part of the products in question will fall foul of EU competition law.

The assessment under this heading will need to take into account both the primary market for the product covered by the specialisation or joint production agreement in question as well as any relevant downstream markets.

Conclusion

The Specialisation BER does not represent a radical departure from the previous regulatory regime for specialisation and joint production agreements.  The amendments made in respect of these types of agreements are relatively minor in nature and represent an update rather than a wholesale overhaul of the applicable rules. Parties familiar with the previous regime should, therefore, not find it difficult to navigate the Specialisation BER.

That said, the Specialisation BER does provide a telling insight into the Commission’s current thinking in this area of competition law.  In particular the inclusion of downstream markets in both the market share threshold test and the substantive competition law analysis represents a noteworthy development which parties would be well advised to take into account when assessing their existing and new specialisation and joint production agreements.