EU Shipping Law

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An overview of European Union competition law generally and how it applies to the shipping sector generally

A. Introduction

10.001 This chapter contains: (a) an introduction to competition law;1 and (b) an overview of Articles 101–106 of the Treaty on the Functioning of the European Union (“TFEU”) which are the principal articles in the Treaty as it relates to competition.2 The chapter lays the groundwork for later chapters which address some specific

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aspects of European Union (“EU”) competition law as they relate to the shipping sector.3 10.002 There are many practices in the shipping world which are prima facie anti-competitive. For example, shipbuilders could combine to exchange forecasts and swap competitively sensitive information as well as fix prices; governments could offer anti-competitive depreciation allowances, dredging subsidies, investment grants, training aid, cargo reservation schemes; ports could refuse unfairly to allow entry to their ports, discriminate in an anti-competitive manner between users, exchange information, favour unfairly their own operators or share markets with other ports; shipping companies/carriers could conclude contracts which are anti-competitive (e.g. because of particular clauses), combine together in anti-competitive cartels (e.g. arrangements to share markets/information and/or to fix prices) or abuse their individual or collective dominance (e.g. refusing unjustifiably to supply services or pricing in a predatory manner); and shippers could agree on the maximum freight rates they would pay. It would be logical therefore that there should be laws to address those problems. An example of such a case would be one where in the USA in January 2015, an executive of Japan-based Kawasaki Kisen Kaisha pleaded guilty, was sentenced to serve an 18-month prison term and pay a US$20,000 criminal fine for his involvement in a conspiracy to fix prices, allocate customers and rig bids of international ocean shipping services for roll-on, roll-off cargo.4 10.003 Despite the need for laws to address anti-competitive conduct, many (but not all)5 competition laws are relatively recent and the introduction of some competition laws has been controversial. While over 120 jurisdictions worldwide6 now have adopted competition laws, the vast majority have adopted them only in the last two decades.7 These laws seek to control primarily anti-competitive arrangements (e.g. price-fixing, capacity sharing or market sharing arrangements), abuses of dominance (e.g. predatory pricing)8 as well as anti-competitive mergers, acquisitions and joint ventures. EU law prohibits all these anti-competitive practices but also prohibits anti-competitive practices by Member

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States such as anti-competitive interventions in the market and illegal State aid. In the context of shipping, competition laws prohibit generally such practices as market sharing arrangements, price-fixing agreements, anti-competitive exchanges of competitively sensitive information, capacity/management/ship sharing arrangements but prohibit always the abuse of dominance. 10.004 Competition laws are designed to promote rivalry between market participants, enhance consumer welfare, ensure optimal allocation of resources, stimulate innovation and to encourage merit of efficient operation of the market. A competitive market is characterised typically by productive efficiency,9 allocative efficiency10 and dynamic efficiency.11 There ought to be lower prices and higher service standards in a competitive market than in an uncompetitive one. Competition law in the EU (unlike already integrated States) has the additional aim of integrating further the EU’s internal market (i.e. creating or maintaining the internal market).12 Competition law can also serve a political purpose by ensuring that private power does not trump the needs of society. Competition law is not about protecting competitors13 but it is about protecting competition and the consumer. Ultimately, competition law is about enhancing consumer welfare. There has been some suggestion that the European Commission has used competition law to regulate maritime transport as a sector as well as address competition issues in the sector.14 Competition law has also been used by parties to contracts to deny liability – for example, by arguing that a contract was void under EU competition law, the contract is therefore unenforceable against the defendant. Indeed, more generally, competition law can sometimes be used to avoid liabilities.15 10.005 The application of competition law in shipping matters is sometimes a highly charged political and emotive issue. Many shipping industry spokespersons denied for a long time that EU competition law should apply to the sector claiming, for example, that the sector was intensively competitive already, a capital intensive industry, a sector which needed predictability, a global industry or there was a greater need for predictability/service than price competition (e.g. liner conferences offered predictability). Nonetheless, EU competition law now applies, with full vigour, to the sector. 10.006 Competition law now typically controls arrangements and practices such as price-fixing (e.g. in a liner conference), market sharing, predatory pricing, capacity sharing (e.g. ship sharing), collusive tendering, distribution and other arrangements and

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practices which could distort competition. It covers unilateral behaviour (e.g. unilateral predatory pricing) as well as multilateral conduct (e.g. price-fixing between competitors). Equally, mergers, acquisitions, State aid and intervention by the State are all controlled by EU competition law. However, there is hardly any limit to the areas of commerce which might be regulated by competition law. 10.007 Anyone subject to the main rules of EU competition law (i.e. Articles 101 and 102 of the TFEU) is known as an “undertaking”16 or an “association of undertakings”. For undertakings to ignore EU competition law is perilous: for example, a business (such as a shipping company or a port company) may be fined up to 10% of its previous year’s worldwide turnover under EU competition law.17 Arrangements (e.g. contracts) breaching EU competition law are normally legally unenforceable in whole or in part at least before the Member State courts and tribunals (including arbitral tribunals). Non-Member State courts and tribunals could also decide not to enforce them but that is dependent on their law and policy. There may be actions for damages brought in Member State courts against any undertaking in breach of EU competition law.18 There is also damage to the reputation of the undertaking which breaches competition law. It is possible that conduct which is in breach of EU law could also breach national laws (whether inside or outside the EU) (in particular, national competition law).19 Some national laws (unlike EU law) impose personal criminal liability with the result that individuals may be imprisoned and/or fined.20 Irrespective of the jurisdiction involved, competition investigations are a significant distraction for management and can be a worrying time for executives (e.g. some have faced dismissal, extradition, long trials, fines and, ultimately, prison). 10.008 Before examining the issues in depth, it is useful to consider a single case which puts many of the issues in context. This is the so-called Marine Hose Cartel case.21 It had been alleged that various producers of marine hoses organised a clandestine cartel among themselves. Over time, it is alleged, they allocated contracts/tenders, fixed prices, fixed quotas, decided on sales conditions, divided markets geographically and also exchanged sensitive information on prices, volumes and tenders. One of the participants sought immunity from the European Commission and other competition authorities. As a

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result, that particular participant was not fined as it co-operated fully with the authorities and gave them information which they would probably not otherwise have obtained. Six months later, the Commission dawn raided22 various business premises and a private home of one of the individuals involved (some evidence was found in the home which was not found in the offices raided). The Commission spent two years investigating the suspected cartel. Six participants (other than the one seeking immunity) were fined various amounts totalling €131 million. While the case relates to anti-competitive arrangements (i.e. Article 101 of the TFEU) and not abuse of dominance (i.e. Article 102 of the TFEU), the case demonstrates many of the issues often arising in both articles. While the cartel participant who reports the breach is rewarded by immunity from fines, the European Commission believes that it is useful to give the first informant immunity because otherwise the breach might never have come to light.

B. An overview of EU competition law generally


10.009 Before examining the detailed rules of EU competition law, it is useful to provide a more extensive overview of the subject. 10.010 In this context, competition is the rivalry which exists, or ought to exist, in a market. EU competition law is a means of achieving, among other aims, a fair, free and efficient internal market in the EU where businesses can thrive in a competitive environment free of undesirable anti-competitive arrangements and abuses of dominance, artificial barriers and unreasonable restraints. 10.011 The primary EU rules are contained in the TFEU. These rules control the behaviour of businesses or economic operators (i.e. “undertakings”) and Member States. Article 101 of the TFEU prohibits generally (i.e. there could be some exceptions under Article 101(3)) anti-competitive arrangements between undertakings. Article 102 of the TFEU prohibits absolutely (i.e. there can be no exception) any abuse of dominance by any undertaking having a dominant position in the internal market or any substantial part of the internal market.23 Articles 103–105 of the TFEU relate to the procedural dimension of EU competition law. Article 106 of the TFEU controls the intervention in the marketplace by a Member State where the State confers privileges or owns businesses. Articles 107–109 of the TFEU regulate the provision of State aid by Member States. 10.012 Articles 101 and 102 are interconnected and therefore should not be construed in isolation from each other. As the General Court stated in Tetra Pak Rausing SA v Commission,24 “in the scheme for the protection of competition established by the Treaty the grant of exemption, [under Article 101(3) TFEU] cannot be such as to render inapplicable the prohibition set out in Article [102 TFEU]”. In effect, this means that a breach of Article 102 means that the practice or arrangement is in breach of EU law and cannot therefore be exempted to operate lawfully under Article 101(3).

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10.013 Apart from the primary rules (i.e. the TFEU rules), there are also various secondary sources of EU competition law. They are called “secondary” because they are secondary to the Treaty rules25 but they are no less legally binding. These secondary sources include regulations, directives and decisions. Regulations tend to be used to set out procedural rules and block exemptions. Directives are used rarely in this area and have been used in regard to damages. Decisions addressed to individuals, undertakings and associations of undertakings are the instruments by which fines are imposed. 10.014 As well as these primary and secondary sources, there are also guidelines which are non-legally binding views.26 In the area of EU shipping law, the Commission issued in 2008, “Guidelines on application of competition rules to maritime transport services”27 but the Commission has chosen not to renew these guidelines.28 It has also issued guidelines on issues such as horizontal agreements, vertical restraints, market definition and the fining policy of the Commission. These notices and guidelines are extremely informative and important.29 10.015 The Treaty rules relating to competition apply fully to the shipping sector and have always done so30 but the procedural regulations did not apply until relatively recently. Now the general procedural regulation, Regulation 1/2003,31 applies to the shipping sector.

Applicability of EU competition law

10.016 For all practical purposes, EU competition law applies to all economic sectors. Shipping was given special exemption for many years32 and it is only since the adoption of Regulation 1419/200633 that EU competition law has applied in full to all shipping.34 EU competition law has an international reach. Therefore, for example, the changes brought about by the adoption of Regulation 1419/200635 have international implications in that the repeal of the exemption in Regulation 4056/86 for liner conferences means that

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it may be impractical to operate liner conferences elsewhere in the world where there is an effect on trade in the EU because EU competition law applies wherever there is an effect on trade in the EU even if the arrangement or practice occurs outside the EU. It is important to emphasise that EU competition law may apply to non-EU nationals and to events outside the EU where there is an effect on trade in the EU – this is due to the so-called “territoriality principle” (i.e. a State may legislate for whatever occurs within its territory) and the “effects principle” (a State may legislate for events outside its territory which have an effect inside the territory).36 It is worth emphasising that an anti-competitive arrangement concluded in, for example, the USA or Russia is subject to EU competition law where there is an effect on trade in the EU. 10.017 The EU needs evidence before bringing cases alleging breaches of competition law. It secures evidence from, in particular, leniency/immunity applicants (in return for leniency), whistleblowers, public sources, studies and “dawn raids” in the EU. What about the EU collecting evidence about shipping companies (and others) outside the EU? This information may be supplied voluntarily by the party, or collected where the Member State and the recipient do not object, or might even be collected from within the EU even though the information may be located outside the EU but accessible from within the EU (e.g. by way of computer).37 EU competition law may apply to cabotage services38 where there is an effect on trade between Member States. Regulation 1/2003 (the EU competition procedural regulation)39 applies to cabotage and also applies to tramp (i.e. non-liner) shipping services following the adoption of Regulation 1419/2006.40 10.018 Many undertakings in the shipping sector are used to escape the application of various laws by incorporating companies in various jurisdictions or flying flags of convenience. There is no escape from the possible application of EU competition law. The rules apply wherever there is an effect on trade between EU Member States irrespective of the nationality of the parties, the location of the arrangements, governing law or nationality/registration of the vessels involved.

Direct applicability of Articles 101 and 102 of the TFEU

10.019 Articles 101 and 102 of the TFEU are directly applicable in that they may be invoked before the courts of the Member States and may also be invoked in arbitration

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proceedings in those States. The Court of Justice of the European Union (“CJEU”) confirmed this in Belgische Radio en Televisie (BRT) v SABAM. 41 The CJEU went on to confirm in Guerin Automobiles v Commission 42 that undertakings and individuals may be deemed to have rights afforded to them by these two articles. Article 101 is directly applicable in its entirety since the enactment of Regulation 1/200343 which means that a Member State court may see an otherwise anti-competitive arrangement (i.e. one breaching Article 101(1) of the TFEU) as valid by virtue of falling under Article 101(3) of the TFEU. Anyone aggrieved or injured by a breach of Articles 101 or 102 is able to sue in the Member State courts for damages;44 indeed, aggrieved persons are positively encouraged by the European Commission to have recourse to private enforcement of EU competition law.

Market definition45

10.020 Competition does not exist in a vacuum. One needs to establish whether a particular arrangement or practice prevents, restricts or distorts competition in the context of the particular market at hand. Competition exists in the context of a market – the so-called “relevant market”. Competition does not exist in a vacuum. Market definition is often (but not always)46 an issue in merger control, anti-competitive arrangements, abuse of dominance, State aid and competition issues generally. This section introduces the issue of market definition – the analysis of it applies equally in the context of Articles 101 and 102. It is worth recalling that market definition is not an end in itself but is a tool to see the theatre (i.e. market) in which competition is occurring. It enables competition analysis to be undertaken in its correct market context. 10.021 The relevant market must always be defined where the definition of the market could influence the outcome of the proceedings.47 For example, an operator in the market (i.e. an “undertaking”) can be dominant if the market is defined narrowly but not dominant if the market is defined broadly so market definition is critical.48 It is important to remember that market definition is often a difficult task and there is rarely absolute precision. It is also important to note that market definitions in one case or at one point in time do not necessarily apply in other cases or later (e.g. technology changes, new

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facilities coming on stream elsewhere as well as changes in consumer behaviour and tastes can cause such changes in market definition over time).49 10.022 The relevant market50 must be defined in terms of the product market,51 the geographical market52 and, occasionally, the temporal market.53 The CJEU stated in Hoffmann La Roche v Commission:

“[t]he concept of the relevant market in fact implies that there can be effective competition between the products which form part of it and this presupposes that there is a sufficient degree of interchangeability between all the products forming part of the same market insofar as a specific use of such product is concerned”.54

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