A guide to the assessment of negative clearance and exemption under Turkish Competition Law.
What are the applicable provisions governing negative clearance and exemptions?
Article 4 of the Law No: 4054 on the Protection of Competition ("Law") prohibits agreements between undertakings restrictive of competition. According to Article 4 of the Law, "agreements and concerted practices between undertakings, and decisions and practices of associations of undertakings which have as their object or effect or likely effect the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods or services are illegal and prohibited". The article also lists certain practices that are prohibited1. However, the list is not exhaustive thus not limited to the examples provided therein.
Article 5 of the Law exempts such agreements from prohibition in Article 4 provided that certain conditions are met. The conditions for exemption (muafiyet) are explained in detail in Section 2.3 below.
In addition, Article 8 of the Law governs the negative clearance (menfi tespit). The Article 8 reads that "upon the application by the undertaking or associations of undertakings concerned, the Board may, on the basis of information in hand, grant a negative clearance order indicating that an agreement, decision, practice or merger and acquisition are not contrary to articles 4, 6 and 7 of the Law."
Therefore, within this framework, first, the Board determines whether the agreement in question violates Article 4, if not it issues a negative clearance under Article 8. In case it is found to constitute an infringement under Article 4, the Board checks whether the agreement in question can benefit from one of the block exemption communiqués or whether an exemption under Article 5 can be granted to the same.
2. How is the assessment made by the Board?
The Board, during a negative clearance or exemption application makes its assessment as follows:
i. It checks whether the agreement is restrictive of competition within the meaning of Article 4;
ii. If the agreement does not fall within the scope of Article 4, the Board grants negative clearance;
iii. If the agreement falls within the scope of Article 4, then the Board determines whether it may benefit from block exemption;
iv. If the agreement cannot benefit from block exemption, then the Board further analyses whether the agreement meets individual exemption criteria.
2.1. How does the Board determine that whether the agreement falls within Article 4?
The Board, in the first stage, while checking whether the agreement is restrictive of competition, will look into restriction by object and/or effect. It should be noted that it is not necessary that both of those factors exist but agreements that have only as their object or only as their effect the restriction of competition are assessed within the scope of Article 4.
2.1.1. How does the Board determine the restriction of competition by effect?
In light of Board decisions, with respect to horizontal agreements, restrictions of competition by object include price fixing, sharing market and customers and agreements concerning the control of supply. With regards to vertical agreements, resale price maintenance, imposing a minimum resale price limit and exclusivity agreements including passive sales are under this category.
Certain agreements may still be restrictive of competition by object even if they do not include the abovementioned provisions. Although it is not a necessary factor to determine whether the agreement has its object as the restriction of competition, the parties' intent can also be considered.
If the agreement is found to violate Article 4 "by object", it is not necessary to examine further the effects created/to be created by it in the market to "claim the violation of Article 4". In cases where the agreement is found to have as its object the restriction of competition, further analysis towards the effects of the agreement is intended to demonstrate gravity of the infringement and to determine administrative sanctions.
2.1.2. How does the Board determine the restriction of competition by effect?
Some agreements may not be restrictive of competition by object but they may be restrictive by effect, in which case, the Act requires that the effects of the agreement be examined and prohibits agreements "that have as their effect or likely effect the restriction of competition". At this point, the Board examines both "actual" and "potential" effects of the agreements in question. Therefore, beside the actual anticompetitive results, restrictive effects that have not occurred yet but are expected to occur within a reasonable probability are sufficient to claim that the agreement violates Article 4. An agreement must have or is expected with a reasonable probability to have negative effects on one of the competition parameters in the market such as price, output, quality or variety of products or innovation to be restrictive by effect.
2.2. If the agreement falls within Article 4, what type of block exemption have been granted by TCA?
The Board block exempts certain types of agreements in certain sectors provided that they fulfil the requirements covered by the relevant communiqués from the prohibition in Article 4. The agreements falling within one of the block exemption communiqués are not subject to notification obligation specified in Articles 10 and 12 of the Law. These Block Exemption Communiqués are2:
- Block Exemption Communiqué on Vertical Agreements (2002/2)
- Block Exemption Communiqué on Technology Transfer agreements (2008/2)
- Block Exemption Communiqué on Insurance Sector (2008/3)
- Block Exemption Communiqué on Specialization Agreements (2013/3)
- Block Exemption Communiqué on Research and Development Agreements (2016/5)
- Block Exemption Communiqué on Motor Vehicle Sector (2017/3)
You can find more information about each in our special article covering block exemptions.
2.3. If the agreement falls within Article 4, how is the assessment for individual exemption made?
Agreements that restrict competition may at the same time enhance welfare by way of efficiency gains. When welfare enhancing effects of an agreement outweigh its anticompetitive effects, the net effect of the agreement may be an increase in consumer welfare and strengthening the competitive process, which constitutes the basis of the exemption regime. So the agreement can be exempted from the implementation of Article 4, provided that it fulfills the conditions of Article 5 of the Law, which implies that the net effect of the agreement on economic/consumer welfare is positive or at least neutral.
The Board determines whether the exemption satisfies all four cumulative conditions set forth in Article 5:
i. The agreement must promote new developments and improvements or economic or technical progress in the production and distribution of goods and provision of services;
ii. Consumers must benefit from the positive effects;
iii. The agreement must not eliminate competition in a substantial part of the market
iv. Competition must not be restricted more than necessary to achieve the objectives listed in (a) and (b)
3. How does the Board assess the conditions for exemption set forth in Article 5?
3.1. Efficiency gains
Article 5(a) requires that "the agreement must promote new developments and improvements or economic or technical progress in the production and distribution of goods and provision of services". It is necessary that the efficiency gains should be objective and not be assessed from subjective point of view of the parties. Cost efficiencies that arise from the mere use of market power by the parties cannot be taken into account.
In order to define the efficiency gains generated by the agreement, the following points must be considered:
i. The nature of the claimed efficiencies i.e. whether the claimed efficiencies are objective in nature;
ii. The casual link between the agreement and the efficiencies i.e. the efficiencies must directly result from the activities that form the object of the agreement;
iii. The likelihood and magnitude of each claimed efficiency;
iv. How and when each claimed efficiency would be achieved.
The types of efficiencies to be taken into account for the exemption analysis can be categorized under
(a) cost efficiencies and (b) qualitative efficiencies.
Cost efficiencies may result from the following:
i. Development of new production technologies and methods;
ii. Synergies resulting from an integration of existing assets;
iii. Economies of scale;
iv. Economies of scope when firms produce two or more products related to each other (especially where the same input is used);
v. Agreements that allow for better planning of production, reducing the costs of inventory and for better capacity utilization.
Qualitative efficiencies may result from the following:
i. Production of a new or advanced products, greater product variety and higher quality;
ii. Combination of complimentary assets
iii. Distribution agreements, resulting in, for example, quicker delivery and better-quality assurance.
3.2. Consumer Benefits
Article 5(b) requires that consumers must benefit from the efficiency gains generated. The concept of "consumer" covers not only end users but also producers that use the products in question as an input, as well as those who purchase the product for resale purposes e.g. wholesalers, retailers and dealers.
The Board checks the following factors in the satisfaction of this criterion:
i. Efficiencies should directly stem from the agreement: It is the case that in absence of restriction of competition, the efficiencies would not be passed on to consumers, thus they should directly result from the agreement. The resulting efficiency gains may be in the form of cost efficiencies or qualitative efficiencies as discussed above such as introduction of new products and technological progress. Consumers as a whole may benefit from lower production costs, production of new and advanced products or services and more efficient allocation of resources thanks to efficiency gains.
Assessment concerning qualitative efficiencies is subjective in nature thus it will be more difficult to demonstrate qualitative efficiencies than cost efficiencies.
ii. Proportionality of restriction: The consumer benefits should be in proportion to the restriction of competition under the agreement. The greater the restriction of competition, the greater must be the efficiencies that will pass-on to consumers.
iii. Reasonable period of time to benefit from efficiencies: A certain period of time may be required before the efficiencies are passed on to consumers. The longer the transition period is, the lesser the actual net value of the benefits that the consumers will gain. Thus, the length of the transition period should be reasonable to fulfill this criterion in the assessment.
iv. Various other factors: Characteristics of the market, position of the competitors, strategies adopted by the competitors in the inter-brand competition, elasticity of demand may also be also important factors in the assessment.
3.3. No elimination of competition in a substantial part of the market
The basic principle of the assessment is the maintenance of the competitive process in the market. When competition is eliminated in the relevant market, even if short-term efficiency gains are created, they will not be able to outweigh longer-term negative effects such as higher prices, reduced innovation and misallocation of resources.
The Board usually evaluates the following factors in the satisfaction of this criterion:
i. Evaluation of the position of competitors in the market: the level of competitive constraint that they impose on the parties to the agreement and the impact of the agreement on the existing competitive structure. Not only actual but also potential competition in the market must be considered.
ii. Competitors' market shares for actual competition: the assessment should not be based exclusively on market share. The capacity and incentive of actual competitors to compete must be examined.
iii. Examination of the agreement's effect on the various parameters of competition: When an agreement entirely eliminates the basic parameters of competition such as price competition, innovation and development of new products, this condition cannot be fulfilled.
iv. Conduct of the parties in the market: If following the agreement, prices substantially increases.
it may be an indication that the parties are not subject to competition in the market and that competition has been eliminated in a substantial part of the relevant market.
v. Whether undertakings party to the agreement provide differentiated products: The more substitutable the products offered by the parties to the agreement are the more restrictive the effects of the agreement will be.
vi. Actual condition in the market and entry barriers: This is an important factor as it is measurable. However, potential competition should not be ignored. With respect to potential competition, an analysis of barriers to entry facing undertakings that are not already competing within the relevant market is made. In the assessment of entry barriers and the possibility for new entry it is relevant to examine, inter alia, the following factors that are also included in the secondary legislation and Board decisions:
- Impact of legal regulations in the market on new entries;
- Cost of entry including sunk costs;
- The minimum level of efficient scale;
- Characteristics of potential entrants
- Position of buyers in the market and their ability to compete;
- The likely competitive response of incumbents to entrants;
- Structure of the market (stagnating and declining markets may not be attractive for entrants);
- Past entries on a significant scale and their success.
In practice, in the regulated sectors, the Board also considers whether the applicable legislation in the relevant product market allows for the restriction intended in the agreement3. If the legislation allows for such restriction, the Board, without diving into further detailed analysis, considers that this criterion has been fulfilled. In a similar vein, the Board, beforehand, sends inquiries to the regulation authority in relation to the nature and legality of the restriction intended in the agreement4.
3.4. Not limiting competition more than necessary
Article 5(d) requires that the agreement should not restrict competition more than necessary to achieve the efficiencies aimed by the agreement. The Board usually checks as to whether more efficiencies are attained under the restriction of competition than the In light of the Guideline on Exemptions, this condition requires a two-stage test. First stage is related to whether the agreement as such is necessary and indispensable in order to achieve the efficiencies.
i. Necessity or indispensability of the agreement depends on whether the desired efficiency gains could be achieved through alternative means that are less restrictive of competition. Whether the alternative is economical and practical should be also taken into account. The parties are required to explain and demonstrate why less restrictive, economically rational and practical alternatives would be significantly less efficient.
ii. Whether the parties achieved the efficiencies on their own is also important. The undertakings concerned must explain and substantiate why the same efficiencies would not occur through internal growth and price competition. While doing this analysis, it is relevant to consider what the minimum efficient scale is.
The second stage is the individual assessment of whether each restriction caused by the agreement is necessary.
i. The indispensability of each restriction of competition flowing from the agreement must be assessed. A restriction can be deemed indispensable for the claimed efficiencies if its absence would significantly reduce the efficiencies that follow from the agreement or make it significantly less likely that they will materialize. The assessment of alternative solutions must take into account the actual and potential positive effects on competition by the elimination of a particular restriction or the application of a less restrictive alternative.
ii. Restrictions that are black listed in block exemption regulations or identified as hardcore restrictions in guidelines and communiqués are unlikely to be considered indispensable. However, the assessment of indispensability must be made within the market conditions in which the agreement will operate. The more the risks and uncertainty implied by the agreement, the more a restriction may be required to ensure the efficiencies. Restrictions may also be indispensable in order to align the parties with the same object and ensure that they work jointly for the implementation of the agreement.
In practice, the Board most of the time checks for two conditions:
i. Whether the agreement is valid less than 5 years; and
ii. Whether the restriction / exclusivity is limited to the contracting party. If the agreement satisfies these two conditions, then the Board is likely to consider this criterion satisfied.
4. Can the Board withdraw its exemption decisions and if so, under what circumstances?
The Board has the power to withdraw both individual and block exemption decisions as well as negative clearance decisions in the cases listed in Article 13 of the Law, which are:
i. Change in any event constituting the basis of the decision;
ii. Failure to fulfil the terms or obligations resolved;
iii. Having taken the decision on the basis of incorrect or incomplete information concerning the agreement in question.
1 Article 4- Such cases are, in particular, as follows:
- Fixing the purchase or sale price of goods or services, elements such as cost and profit which form the price, and any terms of purchase or sale,
- Partitioning markets for goods or services, and sharing or controlling all kinds of market resources or elements,
- Controlling the amount of supply or demand in relation to goods or services, or determining them outside the market,
- Complicating and restricting the activities of competing undertakings, or excluding undertakings operating in the market by boycotts or other behavior, or preventing potential new entrants to the market,
- Except exclusive dealing, applying different terms to persons with equal status for equal rights, obligations and acts,
- Contrary to the nature of the agreement or commercial usages, obliging to purchase other goods or services together with a good or service, or tying a good or service demanded by purchasers acting as intermediary undertakings to the condition of displaying another good or service by the purchaser, or putting forward terms as to the resupply of a good or service supplied.
2 Besides the Board issued guidelines about relevant topics such as:
- Guidelines on Certain Subcontracting Agreements Between Non-Competitors,
- Guidelines on the Application of Articles 4 and 5 of the Act to Technology Transfer Agreements.
- Guidelines on Vertical Agreements,
- Guidelines on the Explanation of the Block Exemption Communiqué No. 2017/3 on Vertical Agreements and Concerted Practices in the Motor Vehicles Sector
3 Competition Board decision dated 8 June 2017 numbered 17-19/289-126 in the exemption application for the distribution agreement between Bayer Consumer Care AG and Moltek and the license agreement between Bayer Turk and Moltek
4 Competition Board decision dated 6 April 2017 numbered 17-12/145-64 (par.24) in the exemption application in relation to the distributorship agreement to be executed by Turkcell and KVK and Genpa.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.