For a Rigorous ‘Effects-Based’ Analysis of Vertical Restraints Adopted by Dominant Firms: An Analysis of the EU and Brazilian Competition Law

Posted by D. Daniel Sokol

Damien Geradin (Covington, U Tilburg) explains For a Rigorous ‘Effects-Based’ Analysis of Vertical Restraints Adopted by Dominant Firms: An Analysis of the EU and Brazilian Competition Law

ABSTRACT: This study concerns the way agreements between a dominant supplier and its customers that restrict the ability of those customers to buy from the dominant firm’s rivals, including exclusive dealing, conditional rebates and tying and bundling (hereafter, “vertical restraints”) have been assessed by the EU and Brazilian competition authorities and courts. For several decades, vertical restraints have been a subject of debate among lawyers and economists, and views as to how such restraints should be assessed have fluctuated. In recent years, however, a consensus has emerged that per se rules of illegality (or of legality) should not be applied to vertical restraints. Instead, such restraints should be assessed pursuant to an effects-based analysis balancing their pro- and anti-competitive effects. The difficulty, however, is to devise legal tests that allow this balancing to take place in a coherent and rigorous manner.

Following an analysis of the economics of vertical restraints, this paper shows that the European Commission, which has the power to enforce EU competition rules, has recently opted for an effects-based approach to vertical restraints, and has developed a Guidance Paper that offers a legal and economic methodology describing how it intends to analyse such restraints. This paper shows, however, that the EU courts are still reluctant to follow such a methodology preferring instead to continue to apply formalistic rules.

The situation is different in Brazil where, at least since the enactment of Law 8.884 in 1994, there has been a consensus that vertical restraints had to be analysed under an effects-based approach. However, such an approach has been pursued through balancing tests relying on qualitative criteria and intuitive reasoning, rather than and a rigorous and structured assessment, including quantitative elements, hence leading to inconsistency and uncertainty. The Brazilian competition law system would thus benefit from the adoption of guidelines, which as in the case of the EU Guidance Paper, provides a clear legal and economic methodology as to how an effects-based approach should be implemented.

This paper also analyses the extent to which the legal and institutional framework in place in the EU and in Brazil is well suited to the implementation of a rigorous effects-based approach relying on economic analysis. There is no doubt that the mature EU system possesses the legal and institutional framework to apply such a rigorous approach, the problem being however that the EU courts, which are composed of generalist judges, are still reluctant to pursue it. The European Commission, which is a sophisticated institution, can however pursue an economic based approach.

Although the Brazilian competition law system is not yet fully mature, it has gone a long way, and the entry into force of the new Brazilian Competition Act 12.529/2011 and the setting up of the New CADE will further contribute to its development. The paper argues that the Brazilian system would greatly benefit from the adoption of guidelines, which, like the European Commission Guidance Paper, would offer a clear legal and economic methodology to implement an effects-based approach to vertical restraints.