This Article is written by Shruti Singh, a 2nd Year law intern from Hidayatullah National Law University pursuing B.A.LLB (Hons.) course. The Article explains the obligation of the Member States under the European Competition Law.
European Competition law is the law which governs the competition between the Member States within the European Union. It maintains cooperation between states and promotes anti-competitive behaviour by public undertaking and private companies so that they do not form monopolies and cartels and dominate in a single unified European Union Market.
It derives its powers mainly from Article 101 to Article 109 of the Treaty on the Functioning of the European Union (TFEU) and certain directives and Regulations.
Article 4(3) provides the base for Article 101 to Article 109 which gives the obligation of Member states while interacting with another state within the EU for trade or business. It also mentions rules propounded in various cases which have no express mention under the treaty.
Article 4(3): Treaty on European Union (TEU) Duty of Sincere Cooperation
The duty of Sincere Cooperation incorporates the task of European Union and its member states to assist each other in all the aspects that flow from the treaties. It is more of a mutual legal obligation so that all the member states can participate in the international conventions and treaties and have an equal chance. In general, the purpose behind the formation of the European Union was co-operation that is sincere and genuine from all its member states. It ensures a sense of security between the EU and its member states. It is in general, the guiding principle for all the laws in the treaty.
Showing cooperation also marks as a sign of mutual respect and trust among its members. This will establish an environment of peace and harmony.
1. Relationship between Article 4(3) TEU and Articles 101 and 102 TFEU
Article 101 of the Treaty on the Functioning of European Union (TFEU) prohibits any kind of agreements and cartels that could cause a disbalance in free competition in the internal market of the Union and the states. It prevents any kind of practice that has the object of secluding, restricting and putting unfair conditions for curbing free competition to place one of the trading partners at a disadvantage. The incorporation of Article 101 in the EU’s drive is towards ensuring that free competition exists between member states. Any agreement or decision made with this effect will be declared void. It even prohibits an agreement which is made even outside the Union restricting or causing any disruption in the internal market. Free competition is a vital part in the functioning of the European Union and there the inclusion of this Article becomes necessary.
Article 102 was formerly placed in Article 82 of the Treaty establishing the European Community(TEU). It aims at preventing the undertakings who are in a dominant position in the market from taking undue advantage of their position. It holds the core role of restricting any kind of monopolies which tend to disrupt the internal market. It primarily prohibits abusive conduct of the dominant parties. So after comprehending Article 101 and Article 102 of the Treaty on the Functioning of European Union it comes down to an inference that as a whole, the idea behind both these articles is to promote a friendly environment in relation to trade and to restrict the dominance of one or more of the undertakings in the functioning of the internal market.
The guiding principle of Sincere cooperation can only be achieved by the enabling provisions of Article 101 and Article 102 of the Treaty.
Article 4(3) of TEU is focused on the relations of member states on the other hand Article 101 and Article 102 is addressed to the undertakings. The conundrum that arises is that can a member state be liable for the actions of the undertakings in violation of competition law. There have been legal precedents which sought to achieve a balance between those infringements of Article 101 and Article 102for which member states bear their responsibility.
2. The case law predominantly concerns Article 4(3) TEU in conjunction with Article 101 TFEU
Article 106(1) of the TFEU imposes a specific duty on member states which grants special or exclusive rights to ‘public undertaking and other undertakings’ to enact or make any rule in contravention of the rules contained in treaties in particular to the measures mentioned in Article 101 and 109. The case law on Article 4(3) concerns with the liability of member states for infringements in Article 101.
Sometimes a situation like this may arise that the petrol prices prevalent in different states may differ with little provisions and it may set a horizontal cartel.
3. The case law on Article 4(3) and the competition rules
I. The INNO doctrine
INNO-B.M. v Association des détaillants en tabac (ATAB), the case was related to tobacco taxation in Belgium. Article 4(3) read with article Article 101 and Article 102 has the combined effect that a member state can infringe an EU law by maintaining in force legislation which tends to deprive the competitive rules of their effectiveness. The result of this case was that a state measure by any of the member states.
a. Unsuccessful application of the INNO doctrine
There were still many instances where INNO doctrine was not successfully applied. In the opinion of the A G Maduro in a case where there was a challenge to French legislation requiring retailer of books to adhere to minimum resale price of books fixed by the publishers failed since the Court of Justice was not in a position to decide whether the act of the state was unlawful in the context of Article 101 or not. In the case of Collet vs. Centre Leclerc, Toulouse also legislation which fixed the minimum price for petrol failed since it was held that it a pure state action which nowhere was related to agreements formed by different undertakings.
b. Successful application of the INNO doctrine
The INNO doctrine, was in the above case, successfully applied. BNIC was a French association(an inter-state state body) which represents the winegrowers and dealers in France, imposed production quotas on the production of wine. Then by a decree passed on by the minister the quotes were made binding on the entire industry and imposition of levies in case of exceeding the production. The Court held that the ministerial decree was unlawful as the prior agreements made within the members of BNIC as it was a breach of France’s obligations under the treaty. The action brought by BNIC against Yves Abert failed for the infringement of extension order.
The case concerns with the action brought about by a tour operator against an association of travel agents who were passing on the commission to its customers which they received from tour operators. According to the Belgian law, a tour operator was allowed to bring an action for unfair trade practices against the price- cutter. The Court of Justice held that the agreements between tour operators and its agents are likely to dampen the price competition and also infringed Article 101(1). The Belgian government through legislation gave it a permanent effect.
The legislation was held to be violative of Article 101 (1) and Article 4(3) of the TFEU and the action of the tour operators would fail.
The Court of Justice, in this case, held that the approval by the aeronautical authorities of air tariffs fixed by agreements by airlines resulted in violation by the member states in violation of their obligations under Article 4(3) TEU and Article 101 and Article 102 TFEU.
The Case is concerned with Italian Law. The Court of Justice held that the Italian Competition authority is required to disapply an Italian Legislation which controlled and regulated the manufacture and sale of tickets in Italy as it was against Article 4(3) of the TFEU. This should only be to the extent in so far the law that required and facilitated price-fixing and market sharing which is contrary to Article 101. It also further added to impose penalties and fines on the undertaking practising this from an unlawful period, except when it was the requirement and not just because the legislation authorises.
One of the claimants was not happy with the rate of interest payable on his savings deposits and he also asserted that the interest rate has come down to a very low level which in turn violated Article 101. And it was so because of the tax legislation. The Court of Justice held that it cannot be concluded that the legislation in any way encouraged or favoured the anti-competitive agreements. The court strictly observed that the INNO Doctrine was not applicable in this case and the case law held that the Member State cannot be made liable for the breach as it did not violate Article 4(3) in conjunction with Article 101.
II. INNO doctrine applies only where there is an infringement of Article 101 TFEU
INNO doctrine applies only in case of infringement of Article 4(3) with the conjunction of Article 101 TFEU. It is infringed only when the member state requires, favours or reinforces the anti-competitive private agreements or abandons its prices by delegating it to private engagements. There were cases where the challenge to the said legislation was declined as there were no agreements formed between undertakings, in some cases, it was difficult to establish whether the legislation supported the agreements or not.
From the cases discussed it cannot be concluded that the INNO doctrine cannot be applied simply in every case where the measures of the state resembles or is similar to a cartel. The next essential condition for the application of Article 101 is that the agreement should be between undertakings and the effect of trade on the Member States. These conditions also put limitations on the application of the INNO Doctrine. In many cases that came up to the court also observed that there were certain agreements like Joint association of employers and employees which falls outside Article 101. Again in these types of cases, the INNO Doctrine is not applied.
III. Application of the case law to lawyers’ fees
After analysing various case laws under INNO Doctrine, it is important to imagine different situations related to the fixation of lawyers’ fees.
Example 1: There is a state ‘X’ in which all the lawyers practising agree to comply with the regulations of a private based bar association. This will not lead to infringement of Article 101 (1) TFEU until there is not much effect on the competition and inter-trade and secondly there is no involvement of member states in authorising or encouraging the bar association. This will result in the inapplicability of Article 4(3).
Example 2: In another state ‘Y’, there was a regulatory mechanism set up by the state. This body seeks advice and suggestions of different lawyers and then decide on the price. Again, here it will be difficult to analyse whether the state will be liable for the unlawful act or not as the mechanism still has freedom of deciding the price and other rules for the lawyers.
Example 3: The Member state ‘Z’ fixed the fees but there was the presence of no agreement. Therefore Article 101(1) TFEU will not be infringed.
From all these illustrations it is clear that the infringement under Article 4(3) TEU and Article 101 TFEU is difficult to prove as there should be inferences that the member states made agreements and secondly favoured or encouraged it by legislation or by delegating it to some other authority which has the effect of influencing the trade and competition.
Article 106 TFEU: Compliance with the Treaties
Article 106 TFEU was formerly Article 86 TEC. Article 106 primarily demands the compliance of all the treaties of TFEU especially under Article 18 and from Article 101 to 109. There are 3 sub-clauses of article 106.
Article 106(1) states that in case of public undertakings and undertakings which have been granted special and exclusive powers by the member states, the member states in this respect shall neither enact nor maintain any measure which is contrary to the provisions mentioned in the treaty, in particular to Article 18 and Article 101 to Article 109.
Article 106(2) is an exception to clause 1 which allows undertakings entrusted with the operation of services of general economic interest and revenue-producing monopolies to the extent it is necessary for the achievement of public service missions they are entrusted with. It should also not be contrary to the interests of the Union in general.
Article 106(3) is an enabling provision that allows the Commission to issue directives or decisions to member states to ensure the application of the provisions of the treaties.
Undertaking from the economic point of view holds a dominant position and have a substantial influence in the internal market.
No definition has been provided for the term “Public Undertaking” and it only appears in Article 106(1). Public Undertaking is an undertaking on which the government or public authorities exercise influence directly or indirectly by way of ownership, finances and the rules governing it. The public authorities hold a dominant position by having a major portion of shares by themselves, by being the supreme authority information of laws or by being the largest contributor in terms of finances.
Undertaking with ‘special or exclusive rights’
1. Exclusive rights
Exclusive rights are given to the company performing a specific kind of work in an area though there has been no distinction given between Special and Exclusive Rights. An example can be la Crespelle v Coopérative d’Elevage et d’Insémination Artificielle du Département de la Mayenne it was held that a scheme for the artificial insemination of cattle in France involved exclusive rights because of the way the national legislation was operated in that practice
2. Special rights
Member State grants some “special and exclusive powers” to public undertakings and other undertakings by way of legislative, administrative and regulatory provisions to limit and define the number of undertakings and its activities to few and which substantially affects the ability of other entities to carry out such activity. It meaning can be deduced from different cases also.
Measures are directed towards leading the way to behave in abuse of dominant position or having the potential of making an undertaking to behave in a manner which tens in making the undertaking in a dominant position to abuse its powers.
Obligations on Member States under Article 106(1)
Member States should neither enact nor maintain any measure which is contrary to the rules contained in the treaty. They will no way exceed their power and infringe on the basic rules of the Union.
The judgements of 1991
This is a famous case of EU competition law case, which deals with the definition of the two most important terms in Article 106 i.e., ‘undertaking and ‘abuse of a dominant position’. In this case, Mr Hofner and Mr Elser were recruitment consultants who had placed a candidate as a sales director with a company called Macrotron Gmbh. Macrotron didn’t want the candidate and found him unsuitable for the job. As against this, the consultants sued the company for breach of contract. These consultants were working under the provisions defined by a public body called Bundesanstalt. It was held by the Court of Justice that ‘Bundesanstalt’, was considered a public body which was subject to competition law. It was considered to be an ‘undertaking’ which by controlling and regulating the terms of service of employees and employers has abused its power while being in a dominant position.
This case deals with the free movement of services in the European Union. ERT, which was a greek TV and Radio company that had exclusive rights for broadcasting. It claimed an injunction against a rival TV company for setting up a separate TV station without a licence. They contended that they have the right under Freedom of movement. The Court held that it violated Article 106(1) TFEU.
This case deals with the exclusive and special rights granted to an undertaking and because of this, the abuse of their dominant position. Merci Convenzionali Porto Di Genova was an Italian private undertaking that enjoyed an exclusive concession for the handling of loading operations in the harbour of Genova. Due to the ongoing strike at Merci, there was a delay in the unloading of the defendant’s imported goods from Germany. It was held that the abuse of their dominant position by the undertaking was not permissible.
The Court of Justice held that there was an infringement of Article 106(1) in this case. It was also observed that ERT didn’t need to abuse its power. The Court seemed to have considered it to be inevitable that an undertaking in the position of ERT, because of its conflict of interest, would act abusively.
The Court considered the extent to which the postal monopoly of the Belgian Post Office could be justified under Article 106(2) and did not discuss Article 106(1). To some extent, it was held that the measures taken were contrary to Article 106(1). This case is an example of the unlawful extension of the monopoly right to an ancillary activity. If the monopolies are too broad they can be struck down also to that extent.
Making sense of the case law on Article 102 in conjunction with Article 106 (1)
It becomes difficult to determine the liability of Member States under Article 106 (1) for an infringement in Article 102. Three different points need to be discussed before ascertaining their liability.
Firstly a member state can not be made liable on an individual basis for all the anti-competitive behaviour of undertakings happening in its jurisdiction. Article 106(1) can be infringed only when it can be shown that there is a close link between a Member State’s legislative and administrative intervention and the anti-competitive behaviour of undertakings.
Secondly, the mere creation of a dominant position by a grant of exclusive and special rights cannot by itself make the undertaking infringe Article 106(1).
Thirdly, infringement under Article 106 (1) does not simply mean that there should be an abuse of power by an undertaking in a dominant position, even if there is a risk of abuse, it is sufficient.
Even after these points, it is not clear how responsibility is adjusted in Article 102 in conjunction with Article 106(1). The subsequent decisions of the Court of Justice helped to ascertain the liability in specific cases. In Dusseldorp BV and Others v Minister van Volkshuisvesting, Ruimtelijke, the Court held that a member state infringes Article 103 in conjunction with Article 106(1) when a Member state adopts or supports any law, regulation or administrative action which enables an undertaking under dominant position to abuse its power conferred to it by special and exclusive powers. This is one category to determine the liability, there are still more categories like this observed by different courts. There cannot be any general test be introduced for this in advance for subsequent decisions in future because of different interpretations by different jurists.
Manifest inability to meet demand
In Holfer & Elser vs Macrotron, it was held that there was an infringement of Article 106(1) when Germany had created a situation when FEO was manifestly not in a position to satisfy the demand of recruitment services, and its monopoly restricted other competitors from satisfying that demand.
Conflict of interest
In ERT vs. Dimotiki also there was an infringement of Article 106(1) when somehow a situation was created in Greece by which ERT a broadcaster was lead to infringe Article 102 because of a discriminatory policy in favour of its broadcasts. What was peculiar to this case was that RRT didn’t need to abuse its dominant position. The court considered it to be inevitable for an entity like ERT, because of its conflict of interest, would act abusively.
Reservation of an ancillary activity
The court held that a measure leads to an extension of RTT monopoly to an ancillary activity on a separate market, that infringed Article 106(1). This was seen in RTT vs. GB -Inno-BM.
In this case, the Court of Justice discussed Article 106(2) and not Article 106(1) in detail. To an extent, the monopoly was falling under Article 106(2), but still, some part did infringe Article 106(1) seen from a broader view. The judgement is very radical.
It was observed that discriminatory treatment of customers is abuse by the Member State for which it can be made responsible under Article 106(1). It was held that dissimilar conditions cannot be created for equivalents situations in the case of Merci. It has also condemned price discrimination in some of the cases.
On this point, dominant companies are charged for engaging in the practice of excessive pricing. Certain national competition authorities have, especially that of UK and Italy have challenged excessive pricing by the dominant companies in the pharmaceutical company industry.
Remedies and direct effect
Article 106(1) has a direct effect when it is applied in conjunction with the other provisions of EU law. As one of the effects is that individuals can bring an action against a member state for infringement of EU laws. An undertaking can also sue any other undertaking for a breach before a national court.
In some cases it was also held that a third party who is affected by the violations can bring a suit against the member states.
Article 106 (2)
Article 106 (2) somewhat seems like an exception to Article 106 (1). For better understanding, it can be divided into three parts. It states that ‘ undertaking entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly shall be subject to the rules of the treaty, in particular, competition laws, in so far as the application of such rules does not obstruct the performance in law or in fact, to the particular tasks assigned to them. The development of such trade must not be contrary to the interests of Union in general”.
Article 106(2) somewhere leads to dis-application of Article 101 and Article 102, so it should be strictly interpreted. It is for the undertakings to prove that they are relying on this provision.
Services of general economic interest
An undertaking can claim to exclude(not follow) the rules in this treaty if it is entrusted with the services of general economic interest or it has a character of a revenue-producing monopoly. It can itself perform this service or must perform the service.
Services of general economic interest have not been defined anywhere in TFEU. It was held that service to be general economic interest it should be for the benefit of all the consumers in a given territory and be available at a given and equal tariff.
Undertakings having the character of a revenue-producing monopoly
Undertaking having the character of a revenue-producing monopoly means a state-created monopoly for raising revenue. Usually, this monopoly would be conferred on a public undertaking which has to share profits with the state.
Scope of the exception: obstruction of the performance of the tasks assigned
In several cases, undertakings have taken the benefit by contending that they are shielded from competition laws by Article 106(2). This, in turn, gives them the power to escape from some rules and thereby maximises the scope of Article 101 and Article 102.
Unsuccessful claims based on Article 106(2)
In various cases, claims brought in Article 106(2) have failed. In ANSEAU- NAVEWA, there was the formation of an agreement which required Belgium purchasers to acquire ‘conformity labels’ before washing machines and dishwashers that could be plumbed infringed Article 101(1). One of its effects was discriminatory against the importers from different member states. The Belgium association involved in this claimed benefit under Article 106(2). It held that this scheme was more of a restriction than it was necessary even though it was providing services of general economic interest.
Successful claims based on Article 106(2)
It is also wrong to conclude that wrongs under Article 106(2) will always be unsuccessful. In Viasat Broadcasting UK Ltd vs European Commission the Viasat Broadcasting UK Ltd was successful in its claim under Article 106(2).
Adverse developments of trade
Article 106(2) in a way restricts unfavourable development of trade in the garb of the exception provision in this sub-clause. It prevents undertakings who try to escape competition laws taking the excuse of this exception.
Article 106(2) directly affects the field of competition law and production of services.
It prescribes that commission shall ensure adherence to the rules in this article and during this process can issue directives and decisions also to the member states. This provision does give power to the Commission to make general laws, it is specific to this Article.
Decisions can be issued by the Commission where it thinks that it is necessary for this Article only. The meaning of decisions is taken as its standard meaning.
The term directive in Article 103 has the same meaning as in Article 288. Directives are binding on the Member States. But for it to become binding on Member states, they should incorporate it in their national laws by a process known as transposition.
Judicial review of the Commission’s power under Article 106(3)
The Commission is the initial decision-making body and it makes general rules and policies for all other provisions. The decisions of the commission are subject to judicial review. But this Judicial review does not constitute the substitution of Court’s view against that of Commission decisions. Its work is only to verify whether the commission complied with the procedural laws while framing specific laws and whether it gave the reasons for stated decisions or not.
Article 37 TFEU – State Monopolies of a Commercial Character
Article 37 (ex Article 31 TEC) as three sub-clauses. It ensures the free movement of goods in Member states. It prohibits discrimination on the ground of nationality in the operation of state monopoly.
Articles 107 to 109 TFEU – State Aids
Article 107 prohibits the grants or aid provided by member states to any undertaking or favours which can distort or threaten to distort competition. Clause 2 lays down kinds of aids that shall be considered compatible with the internal market. And Clause 3 mentions about Aids which may be considered to be compatible with the internal market.
Article 108 deals with the measures that can be taken by member states on the recommendations of the Commission concerning the grant of state aid.
Article 109 instructs the council that on the proposal of the Commission can make any regulation for member states from enforcement of Article 107 and Article 108.
The objective of the laws mentioned in this article is to establish a market for fair trade between the Member States in the European Union. All other rules in the treaty are made keeping in mind the principle enshrined in Article 4(3) which promotes sincere cooperation. Article 101 to 106 mentions the restrictions and enabling provisions for member states. It gives rules specifically dealing with the behaviour of undertakings concerning trade. The Court of Justice has formulated various other categories which fill the gap in these skeletal laws. The Commission in recent years has been very effective in implementing these laws. It has reduced the practice of unfair trade to a great extent.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: