Seven deadly sins of joint ventures under competition law
Joint ventures in the energy and resources sectors.
In late 2015, a case before the European Court of Justice (the ECJ) addressed the tensions between the European Union’s (EU’s) Common Agricultural Policy (CAP) and EU competition policy. The CAP’s objectives involve concerted action to stabilise prices and to adjust production to demand, which often conflicts with EU competition law principles. If a conflict occurs, the ECJ has long held that the CAP’s objectives prevail over EU and national competition law. The most recent example of this is the 2003 Milk Marque decision.
The EU institutions have adopted a series of regulations and guidelines, which aim to reconcile EU competition law principles with the CAP. Council Regulation 1308/2013 established a common organization of the markets in agricultural products (the CMO Regulation). The regulation provides for general and special derogations, which allow EU farmers to cooperate in joint selling activities that might otherwise be prohibited. In December 2015, the European Commission adopted guidelines (the Guidelines) on the application of the specific derogations to the joint selling of olive oil, beef and veal and arable crops.
The Belgian endive case, raises the question of whether the derogations provided for in the CMO Regulation and discussed in the Guidelines are exclusive, or whether CAP objectives can excuse conduct that would otherwise violate EU competition law, even if the regulatory criteria for those derogations are not met. The case concerns a cartel of French producers of Belgian endives and will likely become the leading EU case on the interaction between the EU’s competition and agricultural policies.
This article briefly discusses the significance of the Belgian endives case and summarizes the Commission’s Guidelines on the CMO Regulation.
The EU’s agricultural policy and competition policy are enshrined in the EU’s constitution, the Treaty on the Functioning of the European Union (TFEU); however, these policies are sometimes at cross-purposes. The CAP’s objectives, set out in Article 39 TFEU, include the need “to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture”, to “stabilize markets” and to “assure the availability of supplies” and “reasonable prices.”
These concerted actions to increase growers’ earnings, stabilise markets and ensure both available suppliers and reasonable prices, would normally violate the EU competition law prohibition of restrictive agreements, concerted practices and abuses of dominant positions. However, the ECJ has long held that CAP objectives take precedence over competition law.
The ECJ has also said that agriculture is not a “competition-free zone”. Articles 40 and 41 TFEU provide for the establishment of a common organization of agricultural markets and include rules on competition. Article 42 TFEU authorizes the EU Council and Parliament to determine the extent to which the EU competition rules apply to agricultural products. The Council and Parliament have done this through a series of regulations adopted in 1962, which have been repeatedly updated until the most recent CMO Regulation.
The Belgian endive case originated in practices adopted by French producers of Belgian endive between January 1998 and March 2012, when two predecessors of the CMO Regulation were in effect. These practices included setting minimum prices and operating a mechanism to withdraw endives from the market as a form of price support.
The French competition authority imposed fines for violation of the EU competition rules, but the French Court of Appeal annulled the fine on the ground that EU competition rules did not apply to the price mechanisms implemented by the endive producers. However, the Court of Appeal was unclear as to whether these mechanisms were permitted under the general derogations set out in the predecessors to the CMO Regulation, under the specific derogations or under a national regime that was in effect at the time.
On appeal, the European Commission took the unusual step of intervening before the French Supreme Court to challenge the Court of Appeal’s approach. The ambiguity of the Court of Appeal decision led the Commission to review each of the possible grounds in detail. The Commission argued that the general derogations did not apply, in particular because the producers’ price mechanisms were not necessary to achieve all of the CAP objectives, and these mechanisms related to price. The CMO Regulation’s predecessors required prior Commission approval for the general derogation to apply, and the producers had never sought or obtained the Commission’s approval. The Commission also argued that the predecessors of the specific derogations could not justify the price fixing mechanisms. This was because these mechanisms were not among the specific permitted conduct and producers could not extend the application of the specific derogations to other conduct by analogy. The Commission argued that setting minimum prices clearly exceeds the association of producer organizations (POs)’ legitimate authority.
The French Supreme Court referred two questions, about the interaction between the EU competition rules and the CAP, to the European Court of Justice (the ECJ). The French court asked whether agreements and concerted practices that would otherwise be illegal under Article 101(1) TFEU could be permitted if they are “linked to” the responsibilities of producer organizations under the common organization of the market in accordance with the CAP, even if they are not covered by any of the general derogations provided for in the predecessors of the CMO Regulation. If so, the French court asked whether producer organisations can fix minimum prices, coordinate on the quantities placed on the market or exchange strategic information, if these activities are aimed at the CAP objectives of stabilising producer prices and adjusting production to demand.
The European Commission and national competition authorities are expected to argue strongly before the ECJ that the derogations to the EU’s competition rules set out in the CMO Regulation must be interpreted narrowly, and no exceptions from those competition rules outside the derogations set out in the CMO Regulation should be recognized. The ECJ’s approach to these issues will create a precedent in this area. If the ECJ finds that the CAP’s objectives can override the EU competition rules, even outside the relatively narrow scope of the CMO Regulation, then the case may lead to a period of enhanced cooperation and coordination among EU agricultural producers.
It is more likely that this case will confirm the central role of the CMO Regulation for producer organizations to avoid the EU competition rules and underline the importance of the new Guidelines. The CMO Regulation and the Guidelines are summarized below.
The CMO Regulation is long – 232 articles – and complex, covering all agricultural products listed in Annex I to the TFEU, except fishery and aquaculture products. The CMO Regulation contains detailed provisions on market interventions, aid schemes for various sectors, POs, associations of POs and so-called inter-branch organizations. These entities may collect and publish market data, forecast production and prices, coordinate how products are placed on the market, explore potential export markets, and seek ways to restrict the use of animal health or plant protection products. The CMO Regulation also addresses competition rules and exceptional measures for market disturbances, animal diseases, health risks, specific problems, severe market imbalances and crisis reserves.
The CMO Regulation contains both general and sector-specific derogations from the competition rules.
The general derogation covers all agricultural products within the scope of the CMO Regulation and all agricultural products exempt from the EU competition rules agreements, decisions and practices: (i) that relate to the production of or trade in agricultural products if they are necessary for the attainment of each of the CAP objectives (not only one or more of them); and (ii) of farmers, farmers’ associations, associations of such associations, or recognised POs concerning the production or sale of agricultural products or the use of joint facilities for the storage, treatment or processing of agricultural products unless the CAP objectives are jeopardized.
The first part of the general derogation thus applies to a wider range of undertakings, but the conditions for its application are stricter than for the second part of the general derogation. Neither part of the general derogation applies to agreements, decisions and concerted practices that entail an obligation to charge an identical price or by which competition is excluded. Article 209(2) of the CMO Regulation states that no prior decision of the Commission or a national authority is required for the general derogation to apply. Application is based on self-assessment by the producers; however, a producer claiming the benefit of the general derogation must be able to prove that the conditions for application of the general derogation are satisfied.
The specific derogations relate to three sectors: olive oil, beef and veal and certain arable crops. These derogations permit POs to negotiate contracts for the supply of relevant products and to engage in related activities without being caught by the EU’s generally applicable competition rules, subject to complex conditions. The Guidelines explain that these objectives must be achieved by generating significant efficiencies through the integration of activities in POs, so that the POs’ activities will contribute to the fulfilment of the CAP objectives, including the pursuit of an effective commercialization strategy. The Guidelines discuss the type of activities that can create the significant efficiencies required to benefit from the derogation. The Guidelines also give specific examples of situations in which such activities can create significant efficiencies.
A number of conditions must be satisfied for the specific derogations to apply while POs are negotiating supply contracts on members’ behalf
The CMO Regulation also includes a safeguard clause authorizing competition authorities to decide that an individual negotiation should be reopened or should not take place. The Guidelines clarify the situations in which the authorities may apply the safeguard clause.
Compared to the general derogation, the specific derogations have a narrower scope, as they apply only to contract systems and related activities for olive oil, beef and veal and certain arable crops. They also only apply to the activities of POs. They do not apply to inter-branch organizations or other undertakings who may benefit from the general derogation. However, the conditions to apply the specific derogations may be easier to meet, and the assessment methods and notifications give POs greater certainty.
The complex competition rules applicable to European producers are unfamiliar to many competition lawyers. These rules are a unique blend of familiar, generally applicable competition rules and sector-specific derogations applying to the agricultural sector as a whole or to limited parts of the agricultural sector.
The objectives of the CAP, including enhancing producer earnings while ensuring supply and reasonable prices for consumers, can conflict with the (almost) equally critical EU objectives of protecting competition through the EU’s competition rules. The Belgian endive case, which seems likely to create the leading competition law precedent in the agriculture sector for years to come, combined with the recent CMO Regulation and adoption of the Guidelines, are timely reminders of the need to balance these essential but competing objectives.
Joint ventures in the energy and resources sectors.