Belgium: Vertical Agreements - European Union Level

General Court rules on market definition concerning primary products (luxury watches) and after-markets

On 15 December 2010, the General Court (the "Court") annulled a decision adopted in 2008 by the Commission which rejected a complaint by the European Confederation for Watch Repairer Associations ("CEAHR") against several Swiss manufacturers of luxury watches. In its 2004 complaint, the CEAHR had alleged, in particular, that several luxury watch manufacturers entered into an agreement or a concerted practice and committed an abuse of dominance by refusing to continue supplying spare parts to independent repairers. In the 2008 decision, the Commission rejected the complaint on the ground that there was insufficient Community interest to continue the investigation for four main reasons.

First, the Commission found that the complaint concerned a market segment of limited size and economic importance. Second, the Commission found that the information available to it did not indicate the existence of an anti-competitive agreement or concerted practice between Swiss luxury watch manufacturers and that, in any event, the selective distribution systems implemented by such manufacturers would likely benefit from the Vertical Agreements Block Exemption Regulation ("VABER"). Third, the Commission reached the prima facie conclusion that the market for luxury watches and the two after-markets at stake (namely the market for the supply of spare parts and the market for repair and maintenance services) were part of the same product market and that the luxury watch manufacturers did not hold a dominant position (either collectively or individually) in such a market. Fourth, the Commission considered that there was ultimately little likelihood of establishing an infringement of the competition rules and that, therefore, it would be disproportionate to allocate further resources to the investigation. In addition, the Commission considered that national courts and national competition authorities appeared to be well-placed to investigate the alleged infringements.

The complainant brought an appeal against the Commission decision, which has been partly successful.

First, the Court considered that the Commission committed manifest errors of assessment when defining the market, namely insofar as the Commission made the prima facie assessment that the market for luxury watches and the market for the supply of spare parts and the market for repair and maintenance services were all part of one same market.

• As regards spare parts, the Court noted that the decision itself indicated that spare parts for primary products (i.e., luxury watches) of a specific brand may not be a separate relevant market in two situations: (i) if it is possible for a user of primary products of a brand to switch to spare parts manufactured by another producer (i.e., if spare parts of different brands are interchangeable); or (ii) if it is possible for a user of primary products of one brand to switch to primary products of another brand in order to avoid a price increase for spare parts of the first brand (i.e., in case there is a "system market" because price increases in the after-market would affect demand for products in the primary market so that such price increases would be unprofitable). Concerning the first scenario, the Court criticised the Commission for failing to take a position and establish whether users of primary products of a specific brand can switch to spare parts manufactured by another producer. Moreover, concerning the second scenario, the Court held that the Commission erred in finding that, in the event of a price increase on the market for spare parts of a specific brand, users that already own a primary product could switch to primary products of another brand since, as the Commission itself recognised in the decision, a moderate price increase for spare parts would be negligible as compared to the cost of buying a new primary product (i.e., a new luxury watch). In addition, the Court considered that the Commission's claim that, in the event of a price increase of spare parts, users could sell their primary products in the second-hand market in order to buy a new primary product of another brand was implausible. Furthermore, the Court held that, according to the case-law, the fact that there are undertakings which are active only in the production of spare parts (i.e., the after-market) is in itself a strong indication that spare parts constitute a separate market.

• As regards repair and maintenance services, the Court again held that the Commission failed to take into account that the fact that there are existing undertakings which are active only on the market for repair and maintenance services (namely independent repairers) was in itself a strong indication that these services constitute a separate market. Moreover, the Court found that the Commission failed to establish whether a moderate price increase on the repair and maintenance services market would affect demand for the primary product (i.e., luxury watches) such that this price increase would be unprofitable (in addition, the Court suggested that this would likely not be the case since the decision itself indicated that the cost of repair and maintenance services was minor as compared to the cost of the primary product).

Second, the Court held that the Commission rightly concluded that there was no evidence of an agreement or concerted practice by Swiss manufacturers of luxury watches to refuse to supply spare parts to independent repairers and that that was the result of a series of independent commercial decisions. However, in view of the errors committed when defining the relevant markets, the Court rejected the Commission's conclusion that the selective distribution agreements of Swiss manufacturers of luxury watches would in any event benefit from the VABER. The Court noted that if the Commission had not erred in defining the market, it could possibly have concluded that brand-specific spare parts constitute separate markets and that the market share held by each manufacturer may exceed the relevant 30% market share threshold.

Third, in view of the errors committed when defining the relevant markets, the Court annulled the Commission's prima facie conclusion that there was no indication of dominance and that, therefore, the allegations of abuse had to be rejected.

Fourth, the Court considered that the fact that alleged practices took place in at least five Member States (and possibly in all Member States) suggests that action at EU level could be more effective than various actions at national level by national courts and national competition authorities.

In view of the foregoing errors committed by the Commission, the Court annulled the Commission decision rejecting the complaint for lack of sufficient Community interest.

It should be noted that the Commission is now obliged to reassess the complaint. However, as the Court has not ruled on whether or not an infringement was committed, it is not inevitable that the Commission will decide to start proceedings against the luxury watch manufacturers after its reassessment of the complaint.

This judgment is interesting insofar as it analyses the circumstances in which after-markets (such as spare parts, consumables or repair and maintenance services) may or may not be part of the same product market as the primary product. Although the Court seems to acknowledge the appropriateness of the methodology set out in the Commission notice on the definition of the relevant market, it is nonetheless noteworthy that the Court also emphasises that the existence of undertakings which are only active on the after-markets is in itself a strong indication of separate markets.

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