United States: Regulation 1/2003 — From Burdensome Regulation to Self-Assessment

The EU Commission recently introduced major changes to European competition rules, affecting both the substance of and the procedures for antitrust enforcement. One such change eliminates the requirement for obtaining clearance for all restrictive agreements, replacing it with self-assessment and post-execution challenges as necessary. Since 1962, the Commission managed the application of Articles 81 and 82 of the EC Treaty under the "venerable" Regulation No. 17, which was in place virtually unchanged for more than 40 years. The centralized system under this regulation required that firms notify the Commission and obtain clearance and permission before implementing restrictive agreements, such as exclusive distribution arrangements.

Under new Regulation 1/2003, which replaced the old 17/62 effective May 1, 2004, the application of Articles 81 and 82 has been entrusted to National Competition Authorities ("NCAs") and national courts. This reform obviously presupposes a consistent enforcement of Articles 81 and 82 of the EC Treaty in all Member States by NCAs and domestic courts, which is in itself an enormous task to achieve, especially given the expansion of the European Union with the recent addition of 10 new Member States.

Notwithstanding this decentralization, the Commission's role will still be particularly significant, given the diffusion of antitrust decisions across so many Member State authorities and courts. The Commission has formed a network with the NCAs, and the new Regulation provides that they shall cooperate closely. Further, the Regulation provides that the Commission may take over a matter from an NCA. The Commission seems instinctively to consider NCAs and national courts less reliable in applying EC competition rules, perhaps because national courts in particular are unlikely to be familiar with markets, competitors, and economic theories. As a consequence, the "leading role" that the Regulation grants to the Commission seems to be designed to give a strong supervisory power to the Commission over the national entities authorized to enforce EC competition rules. And the Commission likely will need to devote significant resources to ensuring a uniform interpretation of EC competition rules by the 10 new Member States’ NCAs, courts, and businesses, which, inevitably, are not skilled in the enforcement of EC competition rules.

According to Mario Monti, the EC Commissioner responsible for the Competition Directorate, this is "the most important legislative initiative in the competition field since the Merger Regulation." In the Commission’s view, this step forward has been made possible because antitrust EU case law has evolved to create a mature and consolidated enforcement system. All of the decisions adopted in the past were aimed at creating a regulatory framework that provided guidelines, not only for the businesses concerned, but also for third parties not directly involved in the decisions. Indeed, all notifications filed provided opportunities for the Commission to issue landmark decisions. In addition, the Commission’s examination of all notified agreements resulted in a continual monitoring of the European Union market. In Commissioner Monti’s view, now that EC competition rules and their application are sufficiently clear to businesses, and the close scrutiny of the market’s dynamics is no longer necessary, the old notification system can be finally abandoned.

In embracing the new plan, the Commission has also emphasized that the old system was not flawless and, indeed, in the opinion of those more enthusiastically favoring the new strategy, resulted in an excessive number of notifications being filed by dominant businesses wishing to achieve immunity from fines while, in contrast, it represented a serious administrative burden, especially for small enterprises.

Now, Article 1 of the Regulation expressly establishes that the agreements satisfying the four conditions of Article 81(3) are not prohibited, no prior decision to that effect being required. Consequently, effective May 1, 2004, parties to potentially prohibited agreements will no longer have to notify the Commission to obtain an exemption. Instead, parties will have to assess, on their own, the legality of restrictive agreements under EC competition rules.

This arrangement will place a greater burden on businesses and their lawyers, which will not be able to rely on governmental authorities and independent agencies to obtain an exemption, or even a mere comfort letter asserting (or indirectly confirming) the validity of an agreement. The European exemption process will now be more similar in this respect to what businesses are accustomed to in the United States.

While undoubtedly requiring a change of culture for all domestic and EU multinational companies, we believe that the self-assessment procedure is a positive change. Successful implementation, however, likely requires clear guidelines and a constructive dialogue with the Commission’s officials. While in the past, it was common to obtain advice from Commission officials regarding whether a notification filing for a particular transaction would be prudent, under the new regime this will no longer be an acceptable practice. Thus, some have asked whether the Commission will create an advisory body, at least for an initial period after the Regulation goes into effect, so that it will be possible to have discussions with officials of the Competition Directorate. It appears, however, that recourse to the Commission will be allowed solely through guidance letters and — as envisaged by Commissioner Monti — only for those cases in which novel issues arise.

Some commentators are concerned that the new Regulation will encourage forum shopping by competing industries. This concern is legitimate given that the various NCAs may have different approaches simply because they have different powers or may exercise their powers differently based on their institutional settings, procedures, and criteria of operation. Indeed, some NCAs likely will have to amend or enhance their powers because, otherwise, the lack of harmonization will result in inconsistent or unpredictable enforcement of EC competition rules from country to country. This disparity may be amplified when different Member States’ courts have to render a decision within the timeframe applied locally.

An attitude of sensible skepticism should suggest that the "Modernization Package" reform, implemented by Regulation 1/2003 and completed by the enactment of specific guidelines, presents its own issues and uncertainties. Nevertheless, all things considered, it should be welcomed, because it represents an expected and long-awaited evolution of an overly regulatory and burdensome system and implements a decentralization that is an important milestone in the application and enforcement of EC competition rules within the "enlarged" European Union.

NCAs and national courts must undertake a major effort to comply with the Regulation’s provisions; equally, we all should be ready from now on to deal with decisions by NCAs and national courts that may include interim measures or commitments limiting the scope of action of the parties to a restrictive agreement.

At bottom, the greatest challenge for Corporate Europe (and their lawyers) will be to accept the new role of self-evaluators of their own agreements, which requires a revolutionary change of culture and undoubtedly will raise unexpected issues for the business and legal profession.