Case C-211/22 Super Bock and the Inevitable End of Formalism Under Article 101 TFEU

Introduction

Article 101 TFEU prohibits anti-competitive agreements ‘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.’1 The extensive case law on the meaning of ‘by object’ violations has generated a relatively clear definition of the term, including instances whereby ‘coordination between undertakings can be regarded, by their very nature, as being harmful to the proper functioning of normal competition.’2 This generally means that there is a lack of a pro-competitive rationale. In contrast, an infringement ‘by effect’ is where, despite a pro-competitive rationale, an agreement is deemed anti-competitive due to the impact that it would have on the relevant market. Resale price maintenance refers to an agreement between two parties in a vertical relationship (e.g. a manufacturer and a distributor) not to sell a product below a certain price, and is considered to be a ‘by object’ infringement of competition law.

Throughout the history of EU competition law, there have been two contrasting methods of assessment employed to find a ‘by object’ restriction. The first method is formalism, whereby the formal features of a practice determine its legality. The second is a substantive assessment, whereby the court views the practice within the legal and economic context of which it is a part. Following the Binon3 case in 1985, resale price maintenance had been subject to a formal, ‘by object’ assessment. That is, until the General Court handed down C-211/22 – Super Bock Bebidas. Super Bock ends the formalist era in favour of the substantive method, ensuring that future assessments of the practice take the legal and economic context into account.

This case note will investigate Super Bock and its implications for the assessment of resale price maintenance as a ‘by object’ violation of Article 101 TFEU. It will proceed as follows. It will first outline the background leading up to Super Bock, by focussing on the Binon case and why a formalist mode of assessment is an inappropriate tool. Then, the Super Bock judgment will be analysed. This case note aims to demonstrate that, considering the overall trend away from formalism across the assessment of all agreements caught by Article 101, the outcome in Super Bock was an inevitability. However, that does not mean that the case lacks value. As will be shown, there are significant advantages of the substantive approach when compared to the rigid ignorance of formalism. The era of formalism is over, and this should be a cause for celebration.

SA Binon and The Imposition of Formalism

As mentioned, Binon has been responsible for the assessment of resale price maintenance for nearly four decades. The case concerned a preliminary reference made in the course of proceedings between SA Binon and SA Agence et Messageries de la Presse (AMP). AMP was responsible for the distribution of newspapers and magazines to a large number of retailers in the relevant market, having set up a selective distribution agreement whereby every retailer seeking inclusion needed to obtain approval from a regional committee prior to joining. When Binon requested that AMP provide it with newspapers and magazines, its request was denied.

As part of the selective distribution agreement, there was a provision mandating retailers to adhere to minimum resale prices for the newspapers and magazines sold. The critical question for the referring court was whether this agreement was lawful. That is, in other words, whether a distributor could reserve the right to fix and enforce prices across a selective distribution network.4

The court answered this question in the negative, making clear that ‘provisions which fix prices to be observed in contracts with third parties constitute, of themselves, a restriction on competition within the meaning of [Article 101 TFEU].’5 If price fixing were to be lawful, it could only be via the conditions that are laid out in Article 101(3), which outlines the circumstances under which Article 101(1) may be declared inapplicable. The answer provided by the court was clear: vertical price fixing was unlawful.

Upon examining the judgment, it becomes evident that the court’s decision was reached solely on formal grounds: the price-fixing element was enough in itself to determine illegality. This was despite the plea of the German government, which argued that ‘the position of the market in newspapers and periodicals is so special that it is not possible to apply to it without modification principles which have been developed in completely different contexts.’6 The German government explicitly asked the court to consider the economic context of the agreement, noting that, were the practice to be deemed unlawful, the ‘effect on diversity and freedom of the press would be disastrous’.7 Despite this, the court held that any selective distribution agreement containing an element of price fixing would be classed as anti-competitive ‘by object.’

Issues with the Formalist Approach

The glaring issue with Binon is that formalism is an inappropriate method of assessment to determine the nature of resale price maintenance. If one were to advocate for the formalist mode, a likely argument is that it is quicker and easier compared to a technical and time-consuming contextual analysis. As such, formalism can lower the administrative costs involved in the enforcement of competition law. By extension, formalism is perhaps a superior methodological tool in the assessment of certain violations of competition law. In this situation, an investigation of the economic and legal contexts of such an agreement could be a waste of time and money. 

However, Wright delivers a pertinent blow to this argument. It is important not to sacrifice accuracy in the hope of more efficient administration: a complex but accurate framework is preferable to one that is simple yet wrong.8 This is a superior argument. Although a formalist approach may be less costly in its administration, this may be outweighed by the negatives accrued from a social perspective. The social cost of a competition law system takes not only administrative costs into account, but also the costs of error. These are called enforcement errors and are outlined below. A superior mode of analysis is surely one which aims to minimise social costs by taking into account both administrative and error costs. It is important to not jump to the conclusion that the formalist mode is less costly, particularly if it proves to be less accurate.

The issue then becomes one of accuracy. If one can be sure that resale price maintenance is always anti-competitive without an appreciation of the economic context, formalism does appear to be justified. Unfortunately, the practice is too complex to warrant this. As Perinetto argues, formalism does not allow for the correct assessment of agreements with considerable factual specificities.9 According to this reasoning, if an agreement contains certain complexities, a more substantive approach is required to gain an accurate picture of its nature. Looking only at the form of vertical price fixing agreements is not well suited to the factual complexities that can arise in the formation of these agreements. This point was implicitly raised in Binon itself through the arguments of the German government. The argument that the distribution of newspapers and periodicals contained ‘special characteristics’ such as ‘an extremely rapid system for their distribution’ as well as high levels of ‘heterogeneity’10 supports the conclusion that the agreement was too complex to be adjudged purely by reference to its form. These characteristics, such as the levels of heterogeneity, lend strong evidence that price maintenance in the case may not have been a ‘by object’ infringement, due to the presence of a pro-competitive rationale. However, the court overlooked these complexities.

This argument is bolstered when one realises that resale price maintenance may have a pro-competitive rationale. To acknowledge this, one has to consider the economic implications of the practice. Akman and Sokol, in their argument that resale price maintenance is generally pro-competitive, note that vertical price fixing is an effective means of eliminating free-riding in selective distribution systems.11 Certain goods require high levels of product knowledge and customer service before the point of sale. Retailers that provide such services charge higher prices to reflect the costs of providing this more sophisticated experience. In the absence of price maintenance, other retailers in the distribution system, who do not provide this level of service, can steal customers away from these higher-charging retailers by charging lower prices. This is when free-riding occurs, as the cheaper retailers are benefitting from the work of the more expensive ones. As highlighted by the Commission itself, customers can take advantage of the higher charging retailers to make their decision regarding a particular product, but then purchase at a lower price from another retailer.12 This is further exacerbated in the age of online markets. This is because, given the ease of accessing information and the increased speed of purchase, the effects of free-riding are far more significant. Resale price maintenance eliminates the possibility of free-riding by providing higher-end retailers with an extra margin. However, judging the practice only by its formal features does not allow this pro-competitive rationale to be appreciated.

Yet, per Breyer J in Leegin, a seminal US case concerning resale price maintenance, it is important not to overstate the commonality of this free-riding paradigm. While Breyer accepts that free-riding does provide a pro-competitive rationale for fixing prices, he questions whether it occurs with sufficient frequency to create significant issues. Upon reading the court briefs, he suggested that while free-riding ‘sometimes’ occurs, it is not with definite regularity.13Breyer is correct in saying that the free-riding paradigm does not consistently hold: free-riding theory is based on numerous economic assumptions that may not fit the characteristics of real-life markets.14

However, what Breyer overlooked is that a pro-competitive rationale for resale price maintenance can also exist in the absence of free-riding. As Klein makes clear, resale price maintenance can be an efficient way to ensure that retailers provide an optimal amount of retail services, regardless of whether or not free-riding occurs.15 Retailers often gain much less than manufacturers from the point-of-sale promotional efforts in which they invest.16 Therefore, manufacturers should compensate retailers for their efforts to ensure that they have the correct incentive to promote the manufacturer’s product. Resale price maintenance can be an efficient means to do this, as it increases a retailer’s expected return by removing the possibility of them being undercut by cheaper stores.17 By providing distributors with incentives to increase sale efforts, demand for new products can increase, benefitting the manufacturer and the consumer, who will see increased choice and likely lower prices due to increased supply.

The Commission also recognises that vertical price fixing is capable of protecting a manufacturer’s brand image.18 Due to the increased promotion incentives in high-end retailers, manufacturers can rely on distributors who are of the highest quality, protecting the image of perhaps more luxurious goods. As a result, it is clear that resale price maintenance has a pro-competitive logic in both the presence and absence of free-riding.

Finally, as earlier alluded, formalism leads to inefficiencies in the enforcement of competition law through the creation of enforcement errors.  Enforcement errors fall into two categories: Type I errors (overenforcement) and Type II errors (underenforcement).19 Type I errors occur when practices with pro-competitive potential, such as resale price maintenance, are held to be anti-competitive. Type II errors occur when anti-competitive practices are mistakenly permitted. These enforcement errors have the potential to increase the social cost associated with competition law frameworks, generating inefficiencies. It is generally considered that formalism leads to an increased frequency of both Type I and Type II errors.20

Therefore, while a formalist approach may reduce the administrative costs of enforcement, a more holistic realisation of the costs of a competition regime prompts one to accept Wright’s view that a complex yet more accurate system can be less costly than a system that is simple yet wrong. Given the factual and economic complexities of resale price maintenance, accuracy assumes a role of great importance, which makes a substantive approach more suitable in comparison to the formalist mode. While resale price maintenance can be anti-competitive, its nature depends largely on the surrounding economic context. This appreciation of context is denied by Binon and the formalist approach, which is why the latter is inappropriate as a methodological tool for the assessment of resale price maintenance.

SuperBock and the End of Formalism

Having examined the lapses of formalism when applied to resale price maintenance, the Super Bock judgment can now be analysed. Case C-211/22 Super Bock Bebidas concerned a preliminary reference procedure made in the context of a dispute between Super Bock and the Autoridade da Concorrência, the Portuguese Competition Authority. The dispute derived from numerous exclusive distribution agreements between Super Bock and its independent distributors, as part of which Super Bock imposed minimum resale prices. As the agreements contained elements of price fixing, the Autoridade da Concorrência, applying the Binon logic, considered the agreements to be restrictive of competition under Article 101(1) TFEU.21

The Tribunal da Concorrência, Regulação e Supervisão, Portugal’s competition court, upheld the decision of the authorities, and Super Bock appealed. This gave rise to a preliminary reference procedure under Article 267 TFEU, where the referring court asks the ECJ for assistance with interpretation. Specifically, the referring court asked the following question: ‘Does the vertical fixing of minimum prices constitute in and of itself an infringement by object which does not require a prior analysis of whether that agreement is sufficiently harmful?’22 Clearly, therefore, the ECJ was asked to reconsider its position on the assessment of resale price maintenance. Given the recognised importance of price competition in the EU, it was unclear whether the court would stand firm by the controversial Binon reasoning or whether it would bring resale price maintenance in line with the assessment of other practices under Article 101 TFEU.

The judgment starts in a typical fashion, the ECJ referencing past case law surrounding the treatment of ‘by object’ restrictions in the realm of vertical agreements between firms. However, when reading the judgment, one does get a sense that from the outset, the ECJ was beginning to turn against Binon. The acknowledgements that the concept of a restriction ‘by object’ must be interpreted restrictively,23 and that vertical agreements are often less damaging to competition than horizontal agreements,24 created the impression that the Binon era was facing its final moments.

So it proved. The ECJ clarified that to determine whether or not an agreement is a restriction of competition ‘by object,’ ‘regard must be had to the content of its provisions, its objectives and the economic and legal context of which it forms a part.’25 Resale price maintenance is to be subject to a substantive, contextual assessment.

While the court does note that resale price maintenance remains a ‘hardcore restriction’ under the Vertical Block Exemption Regulation, they stress that this does not exempt the referring court from carrying out a contextual analysis.26 As such, the finding of whether resale price maintenance constitutes a ‘by object’ restriction of competition can ‘only be made after having determined that that agreement presents a sufficient degree of harm to competition, taking into account the nature of its terms, the objectives that it seeks to attain and all of the factors that characterise the economic and legal context of which it forms a part.’27 Furthermore, the court noted that the analysis of any pro-competitive effects has to be done as part of the initial assessment of whether the agreement causes in itself a sufficient degree of harm to competition. Contrary to what Binon suggested, the consideration of these pro-competitive benefits does not have to come as part of the subsequent assessment under Article 101(3) TFEU. As Lamadrid and Ibanez-Colomo note, the Binon era is over: the last substantial pocket of formalism in Article 101 has been closed.28

Last Domino to Fall: The Inevitability of Super Bock

While the shift away from formalism is certainly significant, Super Bock cannot be labelled as a revolutionary case. In fact, when considering the general trend away from formalism across competition law, the Super Bock judgment seems to be more of an inevitability than a revolution. This is due to the increasing emphasis that has been placed on economic theory throughout competition law. Historically, economic insight in EU competition law was limited, due to a preference for market integration.29 Formalism underpinned a pro-interference enforcement agenda, centred around the promotion of widespread European integration. As shown in the analysis above, these motivations can be detected in the Binon judgment.

It was not until the post-1990 modernisation of competition law that an increase in the prevalence of economic reasoning was experienced. As Van der Bergh notes, the ‘central questions of competition law’ (such as whether an agreement contains a pro-competitive rationale or whether it generates anti-competitive effects) are empirical, requiring quantitative reasoning to provide accurate responses.30 This realisation explains the consistent growth of economics in competition law since the end of the previous century.

This has manifested itself in the design and enforcement of competition law, where economic considerations are being given substantial weight. Firstly, upon recognition of their pro-competitive rationale, the Commission has begun to show a more lenient approach towards vertical agreements. While continuing to warn against the anti-competitive potential of resale price maintenance, there has been some recognition of the potential efficiencies that the practice creates,31 many of which are contained in the aforementioned paragraphs.

The case law shows a similar trend. A vast number of judgments surrounding ‘by object’ infringements prioritise substance over form, which cannot be reconciled with the Binon approach. Although referencing exclusive dealing agreements, _Delimiti_s made clear that when a practice has a pro-competitive rationale, it should not be treated as a ‘by object’ infringement.32 As has been shown, there is a strong case to be made that resale price maintenance does indeed possess a pro-competitive rationale, yet the formalism of Binon did not allow this assessment. Similarly, the court in Cartes Bancaires said that to determine a ‘by object’ infringement, ‘regard must be had to the content of its provisions, its objectives and the economic and legal context of which it forms a part.’33 This directly opposes Binon.

Perhaps the clearest opposition came from Generics34 and Budapest Bank.35 Despite their overt classification as cases concerning horizontal agreements, they carried vast implications for distribution agreements.36 Budapest Bank made clear that the notion of a ‘by object’ infringement has to be interpreted ‘restrictively,’37 while Generics set out that if parties wish to rely on pro-competitive effects, the latter have to be considered as part of a ‘by object’ assessment under Article 101(1).38 Both cases profess clear support for contextual assessment and as such, run contrary to Binon.

Given the growing array of contrary judgments, Lamadrid and Ibanez-Colomo made the case that Binon was already no longer good law following Generics and Budapest Bank.39 Indeed, it is hard to argue otherwise: the ECJ has embraced the need for economic reasoning in its judgments, resulting in an appropriate preference for substance over form. Binon was merely the last domino to fall in the process. Therefore, the outcome of Super Bock does not signify much of a jurisprudential shift. Rather, it merely reflects the general acceptance of economics throughout competition law. Aligning competition law with a push for economic efficiency cannot co-exist with formalism.

The Significance of Super Bock

Yet, the inevitability of Super Bock does not mean that the case is unimportant.  Super Bock reiterated that the ECJ will consistently prioritise substance over form. Binon was the last remaining precedent for the use of formalism in the Article 101 TFEU case law. After Super Bock, it is clear that the substance-based approach is to be used without exception, and the uncertainty that was generated by Binon no longer exists. This elimination of uncertainty will be of significance in the professional landscape, as one can now be certain that all vertical agreements captured by Article 101 will be examined within their context. However, there are numerous advantages to the substantive approach which extend beyond the elimination of uncertainty. As noted, an appreciation of economic context allows for an accurate diagnosis of the economic implications of agreements, with the appropriate level of sensitivity to their complexities.

The overall message of Super Bock is that ‘by object’ infringements do not exist in the abstract – everything has to be assessed in its context. This was a message that the ECJ had embraced on an increasing scale, yet one pocket of formalism remained. Super Bock shows that the ECJ will continue to prioritise accuracy over speed, and substance over form, in the analysis of resale price maintenance and beyond.

Conclusion

In summation, Super Bock Bebidas overturned the precedent set by SA Binon, clarifying that resale price maintenance is to be subject to a substantive assessment, which takes economic and legal context into account. While Binon was the last domino to fall in the overall trend away from formalism across EU competition law, this should not prevent SuperBock’s status as a case of real significance. Rather, it entrenches the present-day stance of the ECJ, that the substantive mode is a superior tool when assessing the nature of resale price maintenance, and ‘by object’ restrictions in general.

[1] Consolidated Version of the Treaty on the Functioning of the European Union [2012] OJ C326/47 (emphasis added).

[2] Case C‑67/13 P Groupement des Cartes Bancaires v European Commission [2014] ECR 204, [50].

[3] Case C-243/83 SA Binon & Cie v SA Agence et Messageries de la Presse [1985] ECR 284, [50].

[4] SA Binon (n 3) [8].

[5] SA Binon (n 3) [44].

[6] SA Binon (n 3) [42].

[7] SA Binon (n 3) [41].

[8] Joshua Wright, ‘Simple but Wrong or Complex but More Accurate? The Case for an Exclusive Dealing-Based Approach to Evaluating Loyalty Discounts’ (Bates White 10th Annual Antitrust Conference, Washington, 3 June 2013) <https://www.ftc.gov/sites/default/files/documents/public_statements/simple-wrong-or-complex-more-accurate-case-exclusive-dealing-based-approach-evaluating-loyalty/130603bateswhite.pdf> accessed 19th June 2023.

[9] Patrick Perinetto, ‘A Formalistic Approach to Competition Law and Its Risks: The Curious Case of Roche/Novartis’ (2020) 43(3) World Competition 319.

[10] SA Binon (n 3) [41].

[11] Pinar Akman and D. Daniel Sokol, ‘Online RPM and MFN Under Antitrust Law and Economics’ (2017) 50 Review of Industrial Organization 133.

[12] European Commission, Guidelines on Vertical Restraints, 2022 OJ (C 248) 54, para 225.

[13] Leegin Creative Leather Products, Inc. v. PSKS, Inc. 551 U.S. 877 (2007).

[14] Van den Bergh, Comparative Competition Law and Economics (Edward Elgar Publishing 2017) 251.

[15] Benjamin Klein, ‘Competitive Resale Price Maintenance in the Absence of Free Riding’ (2009) 76 Antitrust Law Journal 431.

[16] Klein (n 15) 436.

[17] ibid.

[18] European Commission, Guidelines on Vertical Restraints, 2022 OJ (C 248) 54, para 197.

[19] Babette Boliek, ‘Type I Vs Type II Errors: Antitrust Lessons for Communications Policy’ (American Enterprise  Institute, 05 February 2014) <https://www.aei.org/technology-and-innovation/telecommunications/type-vs-type-ii-errors-antitrust-lessons-communications-policy/> accessed 16 September 2023.

[20] Louis Kaplow, ‘Rules versus Standards: An Economic Analysis’ (1992) 42 Duke Law Journal 557, 604.

[21] Case C-211/22 Super Bock Bebidas [2023] ECR 529 [15].

[22] Super Bock Bebidas (n 21) [19].

[23] Super Bock Bebidas (n 21) [32].

[24] Super Bock Bebidas (n 21) [33].

[25] Super Bock Bebidas (n 21) [35].

[26] Super Bock Bebidas (n 21) [38]–[39].

[27] Super Bock Bebidas (n 21) [43].

[28] Alfonso Lamadrid and Pablo Ibáñez Colomo, ‘Case C-211/22, Super Bock: The Binon (Formalistic) Era is Over, and Vertical Price-fixing is no Longer the Odd One Out’ (Chillin’Competition, 3 July 2023) <https://chillingcompetition.com/2023/07/03/case-c-211-22-super-bock-the-binon-formalistic-era-is-over-and-vertical-price-fixing-is-no-longer-the-odd-one-out/> accessed 18th July 2023.

[29] Van der Bergh, Comparative Comp Law and Economics (Edward Elgar Publishing 2017), 107.

[30] ibid, 2.

[31] European Commission, Guidelines on Vertical Restraints, 2022 OJ (C 248) 54, para 197.

[32] Case C-234/89 Stergios Delimitis v Henninger Bräu AG [1991] ECR 91 [10]-[12].

[33] Cartes Bancaires (n 2) para 53.

[34] Case C-307/18 Generics (UK) Ltd and Others v Competition and Markets Authority [2020] ECR 52.

[35] Case C-228/18 Gazdasági Versenyhivatal v Budapest Bank Nyrt. and Others [2020] ECR 265.

[36] Ibáñez Colomo, ‘Vertical Restraints After Generics and Budapest Bank’ 17 Concurrences (forthcoming), 2.

[37] Budapest Bank (n 35) [54].

[38] Generics (UK) Ltd (n 34) [103].

[39] Lamadrid and Ibáñez Colomo (n 28).