In this work, after an overview explanation is given (I), the restriction of competition by object and effect according to the Art. 101 of Treaty on the Functioning of the European Union (TFEU) will be explained (II). Later the restriction of competition by object will be discussed in the light of the Court of Justice of the European Union’s (CJEU) decisions (III). Lastly, the practices in Turkish law will be presented (IV).

I. Overview

Commercial relations between undertakings can be vertical or horizontal. A vertical relationship is the relationship between undertakings that are at different stages of the production chain, such as provider, manufacturer, distributor. Horizontal relations are the relationships between competing undertakings at the same stage of the production chain.

In this context, according to both Turkish Competition Law and European Union (EU) Competition Law legislation, agreements that aim to restrict the competition are prohibited. However, this does not mean that every agreement between the undertakings must be prohibited. This agreement or concrete practice must be made with the aim of restriction, or its effects has to limit the competition at the relevant market. This issue is legislated in Art. 101 of TFEU, and the purpose of this article is to ensure a sustained economic integration in the European Union so as to safeguard competition from being distorted[1].

II. Art. 101 of TFEU and Restriction of Competition by Object and Effect

Art. 101(1) of TFEU prohibits agreements and concerted practices which may affect trade between Member States and which have an object or effect to restrict competition, such agreements are prohibited unless they meet the criteria in Art.101(3).

According to the Art. 101 of TFEU[2]; “1. The following shall be prohibited as incompatible with the internal market: all 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 internal market, and in particular those which:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions;

(b) limit or control production, markets, technical development, or investment;

(c) share markets or sources of supply;

(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void. 3. The provisions of paragraph1may, however, be declared inapplicable in the case of:

— any agreement or category of agreements between undertakings,

— any decision or category of decisions by associations of undertakings,

— any concerted practice or category of concerted practices,

which 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, and which does not:

(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;

(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question”.

An agreements object can be to restrict the competition in the relevant market, if the object of the agreement is not to restrict competition, then it is necessary to look at its effects. To determine the restrictive effect of an agreement, economic analysis is required[3]. As it has been stated by Bailey and Whish, restricting competition is an economic phenomenon, but not a legal one, and therefore it is necessary to conduct economic analysis to determine whether an agreement will have a restrictive effect on competition[4].

In restriction of competition by effect, undertakings do not have an intention to restrict competition, but the outcome of the agreement results a restriction of competition in the relevant market. As it has been mentioned above, some agreements can also restrict the competition by object. Restriction of competition by object refers to the agreements that aim to restrict the competition. If a Competition Authority decide that an agreement aim to restrict the competition (restriction by object), that agreement will hold to be unlawful without further analysis. Moreover, decisions given due to the object restrictions have higher penalties.

The “effect” concept of an agreement is based on the idea that certain restrictions violate Art. 101 of TFEU because of their recognized harmful effects on the relevant market. Unlike restriction by object, which is primarily based on the aim and the nature, restriction by effect has no aim of restricting competition. As a result, competition authorities must examine each case individually to determine whether there is a restriction on market competition or not.

Restriction by object and effect agreements can be both vertical and horizontal. Like cartel fixing sale price, quotas of production and bid rigging cartel can be given as an example to the horizontal agreements and resale price maintenance can be an example to the vertical agreements, which restrict the competition by object. In the similar manner, joint venture can be named as a horizontal agreement and selective distribution agreements can be categorized as a vertical agreement, that restricts the competition by effect.

In the case of Consten and Grundig[5], the CJEU’s has stated that Art. 101 of TFEU is applicable to all agreements, including horizontal and vertical agreements, which restricts the competition. In this case, since the exclusive distribution agreement tends to restore the national division in trade between European Union (EU) Member States, CJEU has concluded that, the agreement has the object to restrict competition like the prohibition parallel trade. Therefore, CJEU has not assessed the effects of agreement on competition in the relevant market. Here, CJEU has interpretated Art. 101 broadly by including vertical agreements as well.

It has to be mentioned that, neither the above given examples nor the other agreements listed at the Art. 101 limits the restrictive agreements. Competition authority can prohibit any agreement, if it reaches to a conclusion that the agreement prohibits the competition.

In the case of Beef Industry Development Society (BIDS Case) CJEU has stated that[6]; “However, as the Advocate General pointed out in point 48 of her Opinion, the types of agreements covered by Article 81(1)(a) to (e) EC do not constitute an exhaustive list of prohibited collusion”.

It is clear to say that, if the Competition authority would assess the effect of every agreement, more precise results would be received. However, Competition authority does not examine the effect of every agreement and conclude a shortcut assessment for the agreements which has an object to restrict competition.

III. Restriction of Competition by Object in The Light of CJEU

The reason for the acceptance of a mechanism for agreements that has an object to restrict the competition is not mainly due to legal concerns, but to procedural concerns. Due to the fact that each undertakings behaviour requires detailed economic analysis and requires significant resources and time expenditures, mechanism of “agreement that restricts competition in its object” is created and thus the Competition Authorities have freed the burden of conducting detailed economic analysis in terms of agreements which aim to restrict competition[7].

What is meant by the concept of “object” is not the intentions of the parties to the agreement. The concept of “object” corresponds to the objective purpose of the agreement, which arises when evaluated within the scope of the economic and legal context. On the other hand, Competition Authority can consider the intentions of the parties as well[8].

As it has been state at the Guidelines on the Application of Art. 81(3) of the Treaty (Art.101(3) of TFEU), agreements with an object to restrict the competition have high potential to impact negative effects on the market competition and consumers, and this presumption is based on the serious nature of the restriction and on experience showing that restrictions of competition by object are likely to produce negative effects on the market and to jeopardise the objectives pursued by the Community competition rules[9].

When an agreement is confirmed as restrictive by object, the burden of proof shifts to the undertakings, in this case, undertakings have to prove that they can benefit from the individual exemption according to Art. 101(3), otherwise the agreement cannot be implemented[10]. As it has been stated above, if the existence of the “object” restriction could not be determined, an effect analysis will be required. In this manner, Art. 101 of TFEU foresees a two-stage test. The first stage is to determine whether the agreement has an object to restrict the competitive. If the restriction by object cannot be determined, the second phase will be proceeded and the restrictive current or potential effects on the competition will be evaluated[11].

Since the restriction of competition by object is interpreted as, “restrictions of competition by object are those that by their very nature have the potential of restricting competition.” in the guideline on the Application of Art. 81(3) of the Treaty (Art.101(3) of TFEU), there are opinions that the “restriction by object” mechanism has a close relation or is directly same with the per se violations of American Antitrust Law[12].

When the decisions of the CJEU is reviewed, Consten and Grunding decision is accepted as one of the constituent decisions about the restriction of object mechanism. 

As it has been stated in Consten and Grundig: “…for the purpose of applying Article [101(1) TFEU], there is no need to take account of the concrete effects of an agreement once it appears that it has as its object the prevention, restriction or distortion of competition”.

Since the CJEU indicate that, if an agreement aims to restrict the competition, there is no need to examine the effects of the agreement for the implementation of Art. 101(1) of TFEU, the “restriction by object” mechanism has continued by expanding its field. This has been continued till the case of Groupement de Cartes Bancaires. For example, case of Beef Industry Development Society (BIDS) is a prior case than case of Groupement de Cartes Bancaires.

In the BIDS case, the CJEU has declared that the precise purpose of the agreement has to be considered, in the economic context (which later become legal and economic context) in which it is to be applied. However, an agreement may be regarded as having a restrictive object even if it does not have the restriction of competition as its sole aim, but also pursues other legitimate objectives. In this case, CJEU has decieded the agreements implemented by BIDS, which aim to reduce excess capacity in the sector by encouraging some undertakings to exit the market, aimed to restrict the competition and violated the Art. 101(1) of TFEU.

Later, the case of Groupement de Cartes Bancaires[13] (Groupement case) has been analysed by the CJEU. In this case, Groupement was a French banks association established to allow interoperability of the payments and cash withdrawals via ATM machines. In 2002, Groupement has notified to European Union Commission new internal rules. According to these, banks which mostly issued bancomat cards had to pay a compensation fee to the banks which mostly provided cash withdrawal services. CJEU has stated that, the main legal criteria to be used in identifying the restriction by object is the determination of whether the “...types of coordination between undertakings reveal a sufficient degree of harm to competition” or not. However, according to the CJEU, the General Court has made a mistake by not including this criterion within the scope of the factors to be applied in the evaluation of the competitive purpose. The CJEU also pointed to the importance of experience in determining the restriction of competition by object. Most importantly CJEU found the General Court's judgment, which referred to the BIDS decision and mentioned that there should not be a narrow interpretation of the restriction of competition by object.

CJEU mentioned that, “General Court was incorrect to hold, in paragraphs 124 and 146 of the judgment under appeal, that the concept of the restriction of competition ‘by object’ must not be interpreted restrictively. That concept can apply only to agreements which, inherently, pursue an objective the very nature of which is so serious or harmful that the negative impact of the agreements on the functioning of competition is clear beyond doubt, there being no need therefore to assess their potential effects”[14].

In Groupement case, CJEU said that, where a type of coordination between undertakings does not reveal a sufficient degree of harm to competition, the effects of the coordination should be considered, and, in order for it to be caught by the prohibition, factors must be present that show that competition has been prevented, restricted, or distorted to an appreciable extent. Standard of appreciability consider the “content” of the agreement, its objectives, economic and legal context (not only the economic context as it has been mentioned in BIDS case) and the intention of the parties. As a result, after the decision of the General Court which referred to BIDS case without considering whether Groupement’s internal rules restricted competition to an appreciable extent, the previous General Court’s ruling is annulled, CJEU has reversed the previous European Union Commission’s decision and General Court’s ruling.

Through the Groupement case, the CJEU shifted from a standard of assessment based on categories of agreements to a case-by-case assessment approach. In this manner, it should be pointed out that, appreciability analysis is applicable in border line cases, where CJEU has not ruled yet whether the category of agreement is object or effect restriction. Furthermore, National courts are in charge of applying standard of appreciability.

This appreciability analysis can be seen in the Budapest Bank[15] decision of the CJEU. The CJEU has stated that, where the analysis of a type of coordination between undertakings does not reveal a sufficient degree of harm to competition, the effects of the coordination should, on the other hand, be considered and, for it to be caught by the prohibition, it is necessary to find that factors are present which show that competition has in fact been prevented, restricted or distorted to an appreciable extent. Moreover, in the Budapest Bank case, the CJEU considers the restriction by object and by effect as distinct classifications rather than alternatives. According to the CJEU, the object and effect restriction of competition prohibitions are different. Furthermore, authorities will require various forms of evidence in order to make a decision, because effect restrictions need requires higher burden of proof rather than by effect restrictions. This evaluation also results different level of penalties. Budapest Bank also has an importance because it is the first case that CJEU applies the appreciability analysis to a concrete case. In this case, CJEU mentions the ‘lack of experience’ and ‘counterfactual analysis’ as additional factors to carry out appreciability analysis of an agreement.

The last case mentioned at this part will be the GlaxoSmithKline (GSK) case. This case includes repetitions from Cartes Bancaires and Budapest Bank cases. In this decision the CJEU repeated that the restriction of competition by object v. effect must be assessed in the light of the economic and legal context, and the concept of object restriction must be interpreted strictly, which means a sufficient degree of harm to the competitive process has to be determined. The relevance of this case is accepting the agreements restricting parallel commerce in the category of agreements that restricts the competition by object.  In Generics, the CJEU clarified that agreement among ‘potential’ competitors may also be considered a horizontal agreement under Art. 101 of TFEU.