Maxima Latvija: Non-compete clauses in commercial lease agreements are ‘by object’ competition restrictions

Michele Giannino (Italian qualified lawyer: LL.M. Leicester, Ph.D London)

In a preliminary reference judgment recently handed down in the Maxima Latvija case, the Court of Justice of the EU (CJEU) has ruled out that commercial lease agreements with a clause conferring on the tenant the right to approve the lease agreements that the property owner may conclude with third parties is a competition restraint by object. Therefore, a full analysis of the economic effects of the agreements in question is necessary to establish whether they breach competition. The CJEU has then set out the criteria to be applied to examine the competition impact of the agreements. This blogpost reviews the line of reasoning followed by the CJEU and also gives an insight into the implications of the judgment for property owners and retailers.

The legal issues

As is known, Article 101 TFEU prohibits agreements between undertakings that have as object to restrict competition or have restrictive effects on competition. The distinction between anti-competitive agreements that are infringements by ‘object’ and those that are infringements ‘by effect’ is relevant for the allocation of the burden of proof between the acting competition authority and the parties to the agreements. Where a given agreement is found to have as an object to restrict competition, a competition infringement is established, provided that the other requirements set out in Article 101(1) TFEU are met. In order to escape the ensuing competition liability, the parties have to apply for the exemption in Article 101(3) TFEU and prove that all the conditions laid down in this provision are fulfilled. On the contrary, where an agreement is categorized as a restriction by effect, the acting competition authority has the evidentiary burden to demonstrate the negative effects of the agreement on competition. When the anti-competitive effects are proved, the evidentiary burden is shifted to the parties that, to their defence, can submit the economic efficiency argument in Article 101(3) TFEU[1].

Though horizontal agreements to fix prices or reduce capacity are more likely to be considered as restrictive by object (European Night Services), also vertical agreements have been found to fall within the category of object restraints. This was the case of resale price maintenance arrangements (Binon v AMP) and distribution agreements that award distributors an absolute territorial protection (Costen and Grundig). It was, however, uncertain whether commercial lease agreements that contain covenants limiting the freedom of property owners to rent to the tenant’s competitors could be considered as a competition restraint by object or by effects. The Maxima Latvija judgment deals with this issue.

Facts

Maxima Latvija is a major retailer in Latvia where it runs a chain of large shops and hypermarkets. It concluded a number of commercial lease agreements with owners of shopping centres to rent commercial spaces within such malls. Some of these agreements included a non-compete clause in favour of Maxima Latvija. As ‘anchor tenant’, Maxima Latvija was awarded the right to agree to the lessors letting third parties other shops than those rented to Maxima Latvija in the same shopping centres where the tenant was already present. In essence, the property owners undertook an exclusivity obligation in favour of the anchor tenant, not being allowed to conclude a lease agreement with the competitors of Maxima Latvija without its consent.

Unsurprisingly, this exclusivity arrangement attracted the attention of the Latvian Competition Authority (LCA). The LCA believed that the agreements containing the non-compete clause infringed Article 11(1)(7) of the Latvian Competition Law, which corresponds to Article 101 TFEU. Considering the market power of Maxima Latvija in the retail market, the LCA took the view that the contested agreements were anti-competitive in nature. According to the LCA, the purpose of the contested agreement was to restrain competition by undermining the ability of competing retailers to enter the market. Therefore, the LCA made an infringement decision, imposing on Maxima Latvija a fine of about € 35,000.00, without being necessary to establish whether the contested clauses had any restrictive effects on competition.

  

Maxima Latvija appealed the infringement decision of the LCA before the regional administrative court and then before the Latvia Supreme Court. Given the similarities between Article 11(1)(7) of the Latvian Competition Law and Article 101 TFEU and being uncertain whether the contested agreements should be categorized as by object or by effect competition restraints, the Latvian Supreme Court stayed proceedings and referred the matter to the CJEU for a preliminary ruling pursuant to Article 267 TFEU.

Analysis

In practice, what the Latvia Supreme Court asked the CJEU was whether the commercial lease agreements including a non-compete clause in favour of the tenant amounted to an object restraint of competition; if it was not the case, the Latvia Supreme Court asked whether such agreements constituted a competition restraint by effect and which test should be employed to ascertain whether the agreements had negative effects on competition.

To address the first question, the CJEU followed the same restrictive approach to the concept of competition restraint by object it had taken in its previous judgment in Cartes Bancaires. The CJEU reminded that only arrangements with a sufficient degree of competition harm fall within the category of by object restraint. That said, in Maxima Latvija the CJEU noted that the contested agreement was a vertical agreement concluded by firms, a retailer and a property owner, that did not compete with each other. Vertical agreements are not normally considered as anti-competitive by their very nature. Then, the CJEU considered whether the contested agreements could lead to foreclose the competitors of Maxima Latvija by impeding the other retailers from having access to the malls where Maxima Latvija was already trading.

The CJEU acknowledged that the agreements could have the potential to have anti-competitive effects in the shape of market foreclosure. Next, however, the CJEU pointed out that the fact that the agreements at hand might have such foreclosing effects, if established, did not imply clearly that the agreements distorted or restricted, by their very nature, the competition in the relevant markets. Therefore, bearing in mind the economic context where the lease agreements applied and their contents, the CJEU concluded that the harm inflicted by the agreements to competition was not of such degree to qualify the agreements at hand as an object competition restraint for the purpose of Article 101 TFEU.

To deal with the second question put by the Latvian Supreme Court, the CJEU applied the test it had employed in the Delimitis case. This test requires a full analysis of the economic and legal context of the agreements and the competition conditions in the relevant market in order to establish whether the agreements have negative effects on competition. This is a two-limb test, the first step of which consists in the examination of all the factors affecting the access to the relevant market. The purpose of this exercise is to ascertain whether competitors may establish themselves in the catchment areas of the malls covered by the contested agreements, either by renting a shop in the nearby malls or in premises that are outside shopping centers. Whether commercial land in the catchment areas concerned is available and whether there are economic, administrative or regulatory entry barriers are all factors to be considered as well. As far the competition conditions of the relevant markets are concerned, it is necessary to look at the number and size of the retailers trading in the markets, the degree of market concentration as well as customer fidelity to existing brands and consumer habits.

The second limb of the Delimitis test kicks in when, with the above described thorough analysis of the economic and legal context where the contested agreements applied, it has been established that the competitors’ market access is frustrated by those agreements and similar agreements. Thus, under this second limb of the test, the acting competition authority has to assess whether the contested agreements have given an appreciable contribution to the cumulative foreclosing effect to the detriment of competitors. In that regard, factors such the market position of the parties and the duration of the agreements must be taken into consideration.

Practical significance

In Maxima Latvija the CJEU confirmed its strict position in Cartes Bancaires as for the definition of the category of competition restraint by object. Contrary to was found by the LCA, the CJEU held that restrictive covenants in commercial lease agreements, such as non-compete clauses in favour of the tenant, could not be categorized as object restraints. Arguably, the findings of the CJEU may be explained with the lack of a reliable theory of competition harm. The contested clauses had the legal effect to give rise to an exclusivity obligation in vertical agreements, which were not seen as being a serious threat to competition. Alternatively, it has been submitted that the CJEU did not share the more stringent position of the LCA because the restrictive covenants had some efficiency-enhancing objectives to the benefit of the parties as well as of consumers (see Pablo Ibanez Colomo, on the 'Chilling Competition' blog). 

That said, the ruling in Maxima Latvija that commercial lease agreements with non-compete clauses in favour of the tenants escape the categorization as by object restraints is a welcome development for retailers and property owners. Prospective lessors and lessees can then agree on similar restrictive covenants without running the risk of the lease agreements being considered as having an anticompetitive object. Notwithstanding that, however, they should bear in mind that such lease agreements may still be prohibited by Article 101 TFEU or corresponding national provisions if it is possible to establish that the agreements have negative effects on competition. To prevent this risk, retailers and property owners have to assess the competition impact of the agreements employing the criteria set out by the CJEU.

Finally, Maxima Latvija appear to be consistent with the position taken in the UK by the Office of Fair Trading, now Competition Market Authority (CMA). Also for the CMA, lease agreements containing exclusivity clauses in favour of tenants, though may have the potential to foreclose competitors of the lessee, cannot be considered to have an anti-competitive object. Therefore, in order to establish that the lease agreements in question infringe competition, an analysis of the economic effects of the agreements have to be conducted. To this end, it necessary to have regard to the scope of the relevant market, the market power of the parties and the impact of the arrangement on competition.

Barnard & Peers: chapter 17

Image credit: rus.tvnet.lv

Enforcement Priorities Paper on Article 102 TFEU: Is a Title Enough to Overtake Constitutional Rules and Fundamental Rule-of-Law Principles?

Konstantinos Sidiropoulos

DPhil Candidate at University of Oxford – Prof Steve Weatherill

Foundation for Education and European culture scholar

Introduction

There has been an intense debate around the optimal standard regarding abuse of dominance control in the EU. In an attempt to address the multiple complaints against the approach adopted to unilateral conduct control, in the early 2000s, the European Commission initiated a review of the law and practice of the relevant provision (see the EAGCP Report and the Discussion Paper). The recurring objective of the review was to inject more economic thinking into the enforcement of what is now Article 102 TFEU (see e.g. here and here). In this context, the ‘traditional form-based analysis’ of the EU Courts was contrasted to a allegedly superior ‘more economic approach’ to abuse of dominance.

In December 2008, the Commission adopted a guidance paper declaring its enforcement priorities when dealing with exclusionary abuses under Article 102 TFEU (‘Enforcement Priorities Paper’). This represents the culmination of the debate that crystalised the Commission’s modern approach to abuse of dominance control.

Legal Status

The Enforcement Priorities Paper is a soft law instrument of sui generis nature which is said to operate as a statement of prosecutorial discretion. The said paper is of sui generis nature with regard to both its form and its substance.

From a formal perspective, it is a ‘novel instrument’ in that it has not been adopted in the form of a Notice or of Guidelines, but as a Communication containing ‘guidance on enforcement priorities’. This is neither a legal act envisaged in Article 288 TFEU nor an instrument recognised by the case-law as containing ‘rules of practice’ (see e.g. Dansk Rørindustri at para 209). Inevitably, this raises doubts as to whether the Priorities Paper may be taken into consideration pursuant to the Grimaldi judgment (para 18). 

            The Priorities Paper is also a novelty from a substantive perspective. Its content is said to be about enforcement priorities, and not about substantive guidelines, i.e. it allegedly explains where the Commission will focus its resources rather than interpreting the law (paras 2-3). This label is due to the fact that the Commission was restricted by the EU Courts’ jurisprudence in its attempt to evolve its policy with regard to Article 102 TFEU. Producing substantive guidelines was not an attractive option, because this would mean that it could do no more than describe the current state of the law (see the European Parliament’s report at points K, L and N), and this would stand at odds with the Commission’s economics-based agenda. Under these circumstances, the adoption of a document that would claim to set enforcement priorities was seen as a wise way for the Commission to suggest that the existing law is unsatisfactory, while not directly challenging the interpretation of the jurisprudence.

At a superficial level, the constitutional question of whether the Commission has the authority to indicate ex ante which categories of practices it will prioritise when enforcing Article 102 TFEU was answered in the affirmative, by virtue of the judgment in Automec, where the GC held that ‘setting priorities within the limits prescribed by the law […]  is an inherent feature’ of the Commission’s administrative activity (para 77). Nevertheless, Automec cannot be regarded as an authority for the adoption of the Enforcement Priorities Paper for two reasons. To start with, its title is misleading because nothing is really prioritised. The Priorities Paper is drafted as substantive guidelines and mentions all the categories of exclusionary conduct that have been found to be abusive in the jurisprudence. Additionally, the recognition by the EU Courts of the Commission’s discretion to prioritise cases is not unlimited.  Above all, the Commission must act within the limits prescribed by the law; it must respect, inter alia, the interpretation given to Article 102 TFEU by the CJEU, since the latter is entrusted with the monopoly in the interpretation of EU law by virtue of Article 19(1) TEU in conjunction with Articles 267(3) and 344 TFEU. In this connection, the Priorities Paper is inconsistent with the case-law in several respects.

Consequently, the Priorities Paper is not about setting priorities in the way that it is understood in Automec; it is about providing substantive guidelines. Neither the caveat in para 3 of the Priorities Paper which states that it ‘is not intended to constitute a statement of the law’ nor the title of the document may affect this conclusion. Moreover, the attempt by certain distinguished lawyers in the Commission to reshape the objective of the Commission’s review, arguing that the case-law and the Priorities Paper do not overlap (see e.g. here at p. 7), is not persuasive.

Even so, the Priorities Paper is deprived of legally binding force. Nonetheless, it could be argued that, being a soft law instrument, it stipulates ‘rules of conduct which are designed to produce external effects’ according to the Archer Daniels Midland judgment (para 91). These effects comprise two interrelated aspects, namely that they operate as instructions on the Commission’s administrative practice, and that the Commission cannot depart from these soft rules in an individual case without giving reasons for doing so. However, two aspects of the Priorities Paper prevent it from producing the legal effects of all other soft law instruments. First of all, it departs from the case-law. For such a non-binding text to produce legal effects, not only must it be in conformity with primary and secondary EU law (see e.g. Dansk Rørindustri at para 252), but it must also be consistent with established jurisprudence (see e.g. Dansk Rørindustri at para 261).

Secondly, the CJEU recognises legal effects to soft law instruments only to the extent that this serves the promotion of the protection of legitimate expectation and the principles of equal treatment and legal certainty (see e.g. Dansk Rørindustri at para 211). The Priorities Paper however does not produce legitimate expectations and is unable to serve the principles of equality and legal certainty. To start with, it cannot give rise to legitimate expectations, since it does not give precise assurances that a firm’s conduct will go unpunished if it does not fall within the scope of its provisions (para 3). Reliance on the principle of the protection of legitimate expectations is unacceptable if no precise assurances are given by the authorities that they will act in a particular way (see e.g. the GC’s judgment in Intel at paras 161-166). In addition, a dominant firm cannot invoke the right of equal treatment to protest that the Commission did not focus its resources on pursuing another’s firm exclusionary behaviour, because the announcement that intervention against certain practices will be an enforcement priority does not imply the lawfulness of other behaviours that have been found to infringe Article 102 TFEU according to the case-law. Finally, the Priorities Paper fails to serve the principle of legal certainty; if anything, it has led to more confusion than clarity.     

            All in all, the Priorities Paper has no particular legal status. It has no binding legal force, and cannot produce any legal effects either, because it does not serve the enforcement of any of the general principles of EU law. Therefore, neither the Automec judgment nor the Grimaldi judgment may act as authorities for the Priorities Paper to be taken into consideration, since it does not meet the requirements laid down in either of them.

Practical Significance

Despite the fact that the Priorities Paper lacks legal status, it may still be of decisive practical significance. In fact, the tension between its content and the case-law may be irrelevant for the undertakings and their legal advisers when deciding to consult it. This is because it indicates the Commission’s threshold for intervention. From a practical standpoint, if the Commission decides to pursue cases on the basis of a particular test, companies and their legal advisers would immediately attempt to understand it and bring themselves into line with it.

            Nevertheless, the practical significance of the Priorities Paper is obscured for several reasons. First, there are few bright-line rules. The principles are subject to significant exceptions, which are not sufficiently explained. Second, the paper provides no safe-harbours, which in turn reduces the overall level of guidance that it provides. Third, the purpose of guidelines is to enhance transparency and accountability, provide a clarification of the law, ensure consistency of enforcement and increase legal certainty (see e.g. Tréfilunion SA v Commission at para 142). This purpose was disregarded by the Priorities Paper, which is couched in terms of theoretical economics with minimal awareness of the practical consequences for companies. Finally, the Commission itself does not comply with its ‘guidance’ (see the Intel decision).

Compatibility with the Principle of Loyal Cooperation

The principle of loyal cooperation lies at the heart of the European integration process, and the CJEU has from an early stage recognised it as being a general principle of Union law (see e.g. the ERTA judgment at para 87). The principle governs the entire Union competence, including competition policy (see e.g. Case C-344/98 Masterfoods at para 56). Moreover, as the post-Lisbon Treaty formulation emphasises, the principle of loyal cooperation has a mutual nature (Article 4(3)(a) TEU), and governs both the relations of the Member States with the EU institutions, and the relations between the various EU institutions (Article 13 TEU).

The adoption of the Priorities Paper, as well as its content, run counter to both these manifestations of the principle of loyal cooperation.

Loyalty Between the EU Institutions

To the extent that the Commission’s new approach to abusive exclusionary conduct is incompatible with the case-law, the Commission disregarded its duty of loyalty toward the CJEU. By derogating from established jurisprudence by means of guidelines, the Commission exceeded the limits of the powers conferred on it by the Treaties. Thus, it did not practise mutual sincere cooperation as required by Article 13(2) TEU. Additionally, the choice of the Commission to name the document ‘enforcement priorities’ aggravates its infringement, in the sense that it was a manœuvre aiming at relaxing the tension between the approach adopted in the Priorities Paper and the one followed in the case-law.

Likewise, the Commission disregarded the principle of sincere cooperation as regards its relations with the Council. Specifically, the Commission’s Priorities Paper functionally amended the framework of Article 102 TFEU in several respects, thus circumventing the Council’s legislative responsibility in the area of competition law (Articles 103(1) in conjunction with 289(2) and (3) and 290(1)(b) TFEU). The Commission requires delegated authority to adopt acts in this area, which may only concern non-essential issues (Article 290(2) TFEU). Otherwise, the Commission acts ultra vires, contrary to Article 17 TEU, which sets out its responsibilities. In this context, the Commission also breached the principle of institutional balance.

Loyalty Between EU Institutions and Member States

The Commission also violated the duty of sincere cooperation in the context of its relations with the Member States. This is so, despite the fact that the Commission states in the Frequently Asked Questions accompanying the initial adoption of the Priorities Paper that the said paper has been discussed extensively with the NCAs (question 9).

This is because of the parallel competence that the Commission, the NCAs and the national courts share as regards the application of Article 102 TFEU (Articles 4-6 of Regulation No 1/2003), which entails that they must apply the relevant rule in close cooperation in order to avoid inconsistent and/or contradictory decisions (Articles 11(1) and 15 of Regulation No 1/2003). As such, in principle, NCAs and national courts must take the Priorities Paper into account (see Grimaldi at paras 18-19; Commission Notice at para 8). Yet, they must respect the EU Courts’ case-law pursuant to the principle of supremacy of EU law. Therefore, NCAs and national courts may take into account the Priorities Paper exclusively to the extent that its approach is in conformity with the CJEU’s jurisprudence. As if that situation were not complicated enough, the hybrid approach that the Commission follows in its post-Priorities Paper decisional practice further perplexes things, since NCAs and national courts cannot take decisions running counter to Commission decisions (see Article 16 and recital 22 of Regulation No 1/2003). This state of uncertainty endangers the uniform application of Article 102 TFEU at the national level.

Compliance with Fundamental Rule-of-Law Principles: Analysis of Rebates as an Example

Even more disturbing is the content of the Enforcement Priorities Paper, which at times does not integrate economic and legal analyses in a manner that would ensure compliance with fundamental rule-of-law principles, such as the legal certainty and the nullum crimen, nulla poena sine lege principles (Article 49 CFREU; Article 7 ECHR). The observance of these principles is of utmost importance in the context of the enforcement of Article 102 TFEU, which is performed through fines that may be skyrocketing, as was the case in Intel.

            The Priorities Paper’s approach to rebates granted by dominant firms offers a prime example of this (see paras 37-45). The ‘as-efficient competitor’ test (‘AECT’) advocated in that paper for the assessment of rebates is the epitome of a purely theoretical economic tool; although it is a sophisticated test which is grounded on robust economics, it cannot have any practical functionality (for a list of objections against this test, see here). In other words, it is a perfect test on paper that makes perfect sense with perfect numbers. The problem, however, is that there is no such thing as perfect numbers.

            For instance, this test requires a dominant firm to estimate ex ante the units that its client would potentially purchase from its competitors. The only possible way to do this is to ask its client, who is very likely to mislead the dominant firm. Similarly, under the test proposed by the Priorities Paper, a dominant firm must evaluate ex ante the pricing and range of products that a competitor has the capacity to produce. This depends on information on rivals’ costs and sales, which the dominant firm cannot be expected to possess. Furthermore, the AECT is assuming a single competitor and a single customer. But what if the dominant firm has, for example, thirty competitors; is the dominant firm required to conduct this complex analysis thirty times for each of its clients? This would be an impossible task. Hence, this test can only operate in retrospect and with access to confidential information. It is an unworkable test for a company that attempts to self-assess its practices.

            It appears that the Commission, in its zeal for injecting more economic analysis into the enforcement of Article 102 TFEU, was oblivious to the absurdity of bestowing a self-standing role for economics in the interpretation of this provision. Indeed, any argument in favour of a more economic approach to abuse of dominance is vulnerable insofar as it is not properly integrated with legal reasoning. In this connection, legal reasoning is, by definition, about categorical thinking, and hence, formal. Only formal rules can ensure that Article 102 TFEU will be enforced properly in light of its goal, namely the maintenance of effective competition within the internal market. Indeed, effective competition can only exist if the players in the market act in an environment where they can assess in advance and at reasonable cost whether their conduct violates Article 102 TFEU.

            All in all, no matter how theoretically sound the economic arguments for using the AECT may be, this test is not appropriate for the assessment of rebates under Article 102 TFEU. This is, inter alia, because the test fails to guarantee the observance of fundamental legal principles.

Conclusion

Overall, the Enforcement Priorities Paper is flawed, both constitutionally and as a matter of substance. Constitutionally, the Commission does not have carte blanche as regards the interpretation of Article 102 TFEU; that is, the Commission is constitutionally incompetent to alter the interpretation given to the law by the CJEU. Thus, the Commission, by adopting the Priorities Paper, acted outside its remit and breached a plethora of general principles of EU law. Moreover, the Priorities Paper’s approach to rebates illustrates that its substantive analysis is incompatible with fundamental rule-of-law principles. In this connection, the selected title cannot remedy or conceal these deficiencies. It seems to me that keeping the Priorities Paper alive would be akin to contempt of the CJEU and would cause unnecessary confusion.

Barnard & Peers: chapter 17 

Photo credit: http://ec.europa.eu/competition/court/antitrust.html