Gentleman's agreement between potential competitors may be an object restriction

In dismissing Toshiba’s appeal against a General Court judgment on the power transformers cartel, the European Court of Justice (ECJ) has confirmed that a gentleman’s agreement between potential competitors to share markets constitutes a restriction of competition by object.

Background

On 07 October 2009, the European Commission fined six companies over €67m for their participation in a market-sharing cartel in relation to power transformers. The Commission found that seven European and Japanese power transformer producers entered into a gentleman’s agreement so that the European Members would not sell power transformers in Japan and the Japanese members would not sell power transformers in Europe. Toshiba was fined €13.2m by the Commission and appealed to the General Court. The General Court dismissed all of Toshiba’s claims on 21 May 2014.

On further appeal to the ECJ, Toshiba argued that the General Court had:

• applied the incorrect legal test when considering that the Japanese power transformer producers were potential competitors on the EEA market
• distorted evidence
• applied the incorrect legal test for public distancing, and
• erred in its interpretation of the European Commission’s 2006 Fining Guidelines.

ECJ Judgment

On 20 January 2016, the ECJ dismissed Toshiba’s appeal in its entirety. In dismissing Toshiba’s first ground of appeal, the ECJ stated that the General Court had conducted an appropriate assessment of potential competition in the EEA. This assessment included looking at projects accepted by one of the Japanese producers (Hitachi) in Europe and the high levels of sales in North America (which the parties did not show was different from Europe in terms of entry). Both of these factors showed that entry to the European market was not insurmountable for Japanese producers. The General Court had also found that the existence of the gentleman’s agreement itself indicated that the parties considered themselves to be at least potential competitors.

Following on from this, the ECJ ruled that the General Court was correct in finding that the gentleman's agreement was an anti-competitive agreement by object. The General Court had established that, considering its objectives and the economic and legal context, the gentleman’s agreement was of a nature that would have a sufficient degree of certainty of harm to competition. This satisfied the test for the finding of a restriction "by object" under EU competition law and accordingly there was no requirement for the Commission to demonstrate any anti-competitive effects.

Interestingly, the ECJ also rejected Toshiba’s argument that the Commission and General Court should not have used worldwide market share as part of a calculation of a fine in respect of a cartel concerning only the EEA and Japan. The ECJ ruled that limiting the geographic area to the EEA and Japan would not have reflected the weight of the undertakings in the cartel, as the economic reality was that the parties were worldwide power transformer suppliers. The Fining Guidelines permitted the Commission to take this approach.

Comment

The ECJ’s judgment acts as a salutary reminder that even a gentleman’s agreement between potential competitors to share markets constitutes a “by object” restriction. “Sharing markets” can mean simply requesting traditional geographical sales patterns. The judgment also serves as a reminder of the Commission’s ability, exceptionally, to take into account worldwide market shares when setting a fine. International industry participants should avoid entering into any kinds of agreements to share markets with potential competitors - this could lead to the finding of an infringement and large fines calculated taking into account worldwide market shares. Indeed, alongside other factors, such an agreement could itself point to the fact that parties consider themselves to be at least potential competitors.