The application of EC competition law to pooling arrangements

1
The application of EC competition law to pooling
arrangements

• Matthew Levitt
• BIMCO, Copenhagen 25 May 2005

2
Tramp shipping the current position

• Tramp shipping services are currently
• Subject to Articles 81 82 of the EC Treaty
  (e.g. in national courts)
• Not subject to the European Commissions powers
  of investigation and enforcement (e.g. dawn raids
  and fines)

3
Tramp shipping the proposed position

• In its White Paper, the Commission proposes to
  bring tramp vessel services within its powers of
  investigation and enforcement of EC competition
  law
• Therefore, in summary, tramp shipping services
  would be
• Subject to Articles 81 82 of the EC Treaty
• AND
• Subject to the Commissions powers of
  investigation and enforcement - - e.g. dawn raids
  and fines

4
Specialised shipping

• The Commission has distinguished 3 broad
  categories of maritime transportation
• Unscheduled (tramp) transport
• Scheduled (liner) transport
• Specialised transport
• Therefore, specialised services are neither
  liner, nor tramp, services
• Examples of specialised services carriers of
  motor vehicles, steel products, forestry
  products, chemical products

5
Specialised shipping (cont'd)

• Legal position
• Specialised services are subject to Articles 81
  82 of the EC Treaty
• Since they are not tramp services, specialised
  services already fall within the scope of the
  Commissions powers of investigation and
  enforcement (e.g. the chemical tankers case)
• Since they are not liner services, specialised
  services cannot benefit from the liner conference
  or consortia block exemptions (e.g. the
  resignation of the car carriers from the FEFC)
• The Commission does not, in its White Paper,
  propose any changes to the treatment of
  specialised shipping under EC competition law

6
Summary The Commission's powers of enforcement
7
Pools key features

• Pools bring together two or more independent
  vessel owners so they can operate as a single
  commercial entity. Key features of pools
  include
• joint marketing and collective pricing
• regulation of capacity
• non-compete provisions and restrictions on
  withdrawal
• Overlap with joint ventures and space charter
  arrangements
• Two main types of pool
• those controlled by its members
• those controlled by an administration

8
Pools application of Articles 81 and 82 EC

• Articles 81(1) of the EC Treaty may apply to
  certain key features of pools
• price fixing
• capacity regulation
• non-compete provisions
• restrictions on withdrawal from the pool
• Article 81(3) may be satisfied if
• real economic benefits are passed on to consumers
• restrictions are indispensable to the attainment
  of efficiency benefits
• no elimination of competition in a substantial
  part of the relevant market
• Article 82 may also apply, depending upon the
  relevant market shares.

9
Pools legal assessment

• The application of Article 81(1) and 81(3) will
  depend upon the market structure, including
• the market share of individual pool members and
  their main competitors
• the relative size of volumes of cargo carried by
  the pool and the nature of the shipping services
  required
• degree of concentration/fragmentation of the
  market
• barriers to entry
• Depending upon the relevant market structure,
  pools may be a pro-competitive way of improving
  the efficiency of the services required or they
  may amount to anti-competitive cooperation
  arrangements in breach of Article 81(1)

10
Pools full-function joint ventures

• Pools can be either full function or non-full
  function in nature
• A full function joint venture is one which
  performs on a lasting basis all the functions of
  an autonomous economic entity
• Article 81(1) does not apply to a full function
  joint venture agreement
• Article 81(1) would continue to apply to
  coordination of competitive activities between
  the full function joint venture and its parents
• A full function joint venture may be notifiable
  to the European Commission under the ECMR, or to
  one or more national competition authorities

11
Pools features of full-functionality (1)

• The principal elements of a full-function pool
  are the following
• the pool is administered by an independent
  manager,
• the pool manager could be owned by ship-owners
  who commit tonnage to the pool but the manager
  must operate as an independent company with its
  own staff (including sales staff), premises, and
  material and financial assets commensurate with
  the size of the business conducted by it and the
  liabilities undertaken by it,
• the pool manager is established on a lasting
  basis,
• the pool manager is free to conclude contracts
  with customers,
• the pool manager is free to determine its
  requirements for vessel capacity. If it requires
  further capacity, it should contract with its
  owners on arm's length terms,
• the pool manager is free to determine its
  commercial strategy, and
• the pool manager is remunerated on a basis which
  reflects its commercial success it should not be
  remunerated on a simple commission basis free
  from any risk in the commercial success of its
  operations.

12
Pools features of full-functionality (2)

• The following would be compatible with
  full-functionality
• the pool obtains all of its vessel capacity from
  its members, and
• key contracts require the prior approval of the
  members.
• The following would be incompatible with
  full-functionality
• the pool is operated by one of its members, or
• the members have the right to approve a
  significant proportion of the day to day
  commercial decision-making within the pool.

13
Commission guidance (1)

• The need for guidance
• there is very little guidance in the existing
  case-law
• the possibility of notification for exemption no
  longer exists
• pools are long-standing, widespread and often
  highly beneficial to customers
• the cost of non-compliance can be huge
• Timing the industry needs guidance at the latest
  by the time the revisions to Regulation 4056 take
  effect and preferably well in advance in order to
  allow the industry to adapt its behaviour and
  amend or restructure its agreements, if necessary

14
Commission guidance (2)

• Contents of guidance
• the application of the appreciability test in
  Article 81(1) EC in what circumstances are pool
  participants to be regarded as non-competitors?
• the application of the exemption conditions of
  Article 81(3) EC are the restrictions inherent
  in pooling arrangements necessary to achieve
  their benefits?
• the application of the full-functionality test to
  pools.

15
Commission guidance (3)

• How to achieve the best outcome?
• the shipping industry needs to form a consensus,
  and
• take the initiative with the Commission

16
The application of EC competition law to pooling
arrangements

• Matthew Levitt
• BIMCO, Copenhagen 25 May 2005