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Shipping & Transport - European Union

On September 13 2007 the European Commission published a draft of its long-awaited Guidelines on the Application of Article 81 of the EC Treaty to Maritime Transport Services. The draft guidelines are intended to assist ship owners and operators, as well as charterers and shippers operating to or from European ports, to understand the manner in which Article 81 of the EC Treaty will be applied in the maritime sector. The sector was not subject to the full implementation of EU competition law prior to October 18 2006.

 

Background

 

Article 81 of the EC Treaty prohibits:

"agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between member states and which have as their object or effect the prevention, restriction or distortion of competition within the common market."

The rationale behind Article 81 is that companies should compete independently and should not cooperate to fix prices, bid for work or otherwise coordinate their behaviour.

 

Agreements or concerted practices which infringe Article 81 are void and can result in the imposition of heavy fines by the commission of up to 10% of the offending undertakings' annual worldwide turnover. The parties may also face legal actions for damages brought by third parties and, in addition, infringing agreements may be wholly or partly unenforceable.

 

It is possible under Article 81(3) to escape the prohibition contained in Article 81(1) if it is demonstrable that the agreement or practice "contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit".

 

The burden of showing this rests firmly on the parties and it is also necessary to show that the restrictions are indispensable to achieving the benefits.

 

Article 82 goes on to prohibit the abuse of a dominant position by a company holding a sufficiently substantial market share. However, the guidelines do not address Article 82.

 

Until October 18 2006, liner shipping conferences were excluded from the full application of Articles 81 and 82 by EU Regulation 4056/86. Additionally, tramp shipping and cabotage were completely excluded from enforcement action by the European Commission.

 

However, from October 18 2006 when EU Regulation 1419/2006 came into force, EU Regulation 4056/86 covering liner shipping conferences was abolished and the enforcement regime for Articles 81 and 82 was extended to tramp shipping and cabotage. Liner shipping conferences were given a two-year transition period, meaning that they have until October 18 2008 to adjust to the new regime. In contrast, tramp shipping and cabotage were not given any transition period, but the commission agreed to an informal amnesty and has refrained from actively initiating any action against tramp shipping operators pending the guidelines' publication.

 

Article 81 now applies from the end of the transition period where owners and operators collaborate openly through a liner conference, and applies immediately to joint venture or pooling arrangements.

 

Liner consortia are unaffected by EU Regulation 1419/2006; however, the commission has stated that EU Regulation 823/2000 which covers liner consortia will be reviewed and has already started a consultation process.

 

Draft Guidelines

 

The commission's draft guidelines stop short of giving the detailed guidance which owners had hoped to receive concerning the way in which Article 81 will be applied. However, they do give some indication as to what approach the commission will take to defining markets and assessing cooperation agreements. Therefore, they allow companies involved in shipping pools and other types of collaboration to assess the extent to which they need to reconsider their position.

 

Before deciding whether an agreement falls under Article 81, it is necessary to define the relevant market and decide whether competition within the European Union could be affected by the agreement. The draft guidelines thus deal with some of the technical aspects which must be considered.

 

Effect on trade

The draft guidelines note that transport services offered by liner shipping conferences and shipping pools are often international in nature, linking EU ports or operating between EU ports and third countries. They are therefore likely in most cases to affect trade between member states and thus meet the first criterion for Article 81's application.

 

Relevant market

It is necessary to identify the product and geographical markets in which the relevant undertakings operate in order to consider whether the object or effect of an agreement is anti-competitive.

 

Existing case law on the definition of the relevant product and geographical market in a liner shipping services context is summarized in the draft guidelines. The commission has tended in past cases to opt for a narrow definition, which results in a finding of high market shares. Factors which are relevant in identifying the relevant market in the context of tramp shipping include:

  • whether the vessel type and size required by a particular charter are negotiable (product market demand substitution);
  • the extent to which vessels of different sizes and technical specifications can be used to transport different types of cargo (product market supply substitution). The guidelines state that it is untenable to have a significant mismatch between cargo volume and vessel size and query whether each vessel size might be found to constitute a separate market. This is likely to raise significant issues since the smaller the market, as defined by the commission, the larger the market share of any individual owner or pool will be; and
  • substitutability of loading and discharge ports (geographical market - demand side) and restrictions caused by vessel mobility (geographical market - supply side).

So far as calculating market share in the liner sector is concerned, data in relation to volume and capacity has been used in past EU competition decisions and it is clear that the commission will follow similar principles in future cases.

Regarding tramp shipping, the commission has suggested that a variety of approaches could be adopted to calculate market share, but without giving any real guidance on the issue. The parameters which the guidelines suggest could be used to calculate market share in the context of tramp shipping include:

  • the number of voyages;
  • cargo volume;
  • market share in relation to time charters;
  • capacity share; and
  • "data in relation to the parties' contract negotiations".

It is unclear how easy it will be to collect such figures in order to analyze market-share data in relation to the tramp markets since there is even less transparency than in the liner sector.

Types of horizontal agreement

The draft guidelines consider in greater detail whether different types of agreement which are common in liner and tramp shipping are likely to infringe Article 81.

 

Technical agreements

The guidelines acknowledge that certain technical agreements may not fall within Article 81.

 

Exchanges of information between competitors - liner shipping

The exchange of information between competitors may infringe EU competition law depending on a number of factors. The guidelines provide general indicators as to whether a particular information exchange would be considered lawful. The actual or potential effects of the information exchange are particularly relevant. In considering those effects, regard should be paid to the structure of the market, which can be divided into two types: (i) highly competitive - transparency should enhance competition; or (ii) oligopolistic - exchange of information between the few will likely strengthen the position of the most powerful market operators.

 

Regard should be paid also to the characteristics of the information:

  1. Exchange of publicly available information does not infringe Article 81; thus, the wider the circulation of the information (including among customers), the less problematic it is likely to be.
  2. Exchange of historical information (typically more than a year old), as opposed to recent information (under a year old), is unlikely to infringe Article 81.
  3. Availability of 'future' information is particularly likely to be problematic.
  4. Exchange of statistics from different entities in an aggregated format which cannot be readily separated is permitted, in contrast to exchange of information on individual companies or 'readily disaggregated' information.

 

The more frequently information is shared, the more likely it is to infringe Article 81.

Considerable analysis of the market and position of the companies involved in liner shipping will be necessary in order to assess whether an agreement under which information is exchanged is permitted.

 

Pool agreements - tramp shipping

Shipping pools are now liable under Article 81. Pools are beneficial from owners' perspectives for a number of reasons, including the fact that they maximize utilization, smooth returns and enable owners to share and therefore reduce costs. Additionally, pools allow owners to bid for contracts of affreightment which they would be incapable of servicing individually. The benefits to customers are that pools can service contracts of affreightment so that there is more competition for these contracts, and there are benefits in terms of centralized technical management and management of safety issues.

 

The guidelines emphasize the fact that every pool arrangement is different and must be assessed on a case-by-case basis, but give no real guidance as to which common aspects of pool agreements will be regarded as infringing Article 81 and which may be permissible. The only 'guidance' is to refer to commission guidelines which were published in 2001 on horizontal cooperation agreements (2001/C3/02) in relation to joint selling and joint production.

 

The draft guidelines give little clarification as to what types of pool will be considered acceptable, but briefly discuss the types of pool to which Article 81 is likely to apply and state that:

  1. Article 81 will not apply to pools in which the participants are not competitors, or are competing companies but which cannot individually provide the service(s) covered by the agreement. Neither will it apply to pools with too small a market share to affect trade between member states, provided they do not price-fix or provide joint marketing;
  2. pooling agreements which provide for price fixing between competitors will always infringe Article 81, irrespective of market share. Likewise, Article 81 will apply to pools which intend to restrict competition by limiting output or sharing the market; and
  3. Article 81 may apply to pools which, although it is not their intention, may have an appreciable adverse effect on competition because:
  • the pool agreement restricts the extent to which participants are active outside the pool;
  • the collective market share is significant and/or assists in creating a barrier to market entry; or
  • there is an exchange of commercially sensitive information between competitors.

Accordingly, a host of factors need to be taken into account, in relation to both the relevant market in which the pool functions and the nature of the pooling agreement itself, in considering whether Article 81 applies and, if so, whether Article 81(3) may be invoked.

The guidelines contain no guidance concerning the way in which Article 81(3) may be applied to pools and parties will therefore need to assess for themselves the prospect of establishing the necessary justification to satisfy Article 81(3). In doing so, they will have to rely on:

  • general guidance published by the European Commission;
  • past commission decisions; and
  •  
  • European Court of Justice (ECJ) case law.

 

Comment

The largest section of the draft guidelines focuses on providing guidance in relation to the exchange of information between companies - highly relevant to liner shipping conferences - which already have the benefit of some commission and ECJ decisions.

 

In contrast, the section which deals with pooling agreements is not particularly instructive. Although price fixing is expressly stated to be prohibited in all cases, the guidelines do not consider other aspects of shipping pools, but rather point to the non-industry specific existing guidelines on horizontal cooperation agreements (jargon for joint ventures).

 

The guidelines do highlight specific factors in relation to both the wider market conditions and the terms of pool agreements to which the commission will have regard when considering whether Article 81 might apply. These factors may therefore be of some guidance to vessel owners and operators in self-assessing pool agreements and to documenting that process. It is clear that the commission continues to lack empirical data in relation to shipping pools and this will make market definition difficult both for the commission and for operators attempting to self-assess their pooling agreements.

 

The commission has requested comments on the guidelines from interested parties by November 14 2007. After this consultation period, the views of member states will be requested and final guidelines will be published, in time for adoption by the commission no later than October 2008. In the meantime, the only safe course of action for ship owners and charterers is to consider their arrangements and self-assess, with the assistance of external lawyers, whether the arrangements comply with competition law.

 

International Law Office