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Industry regulation: Article 81 of the EC Treaty
Article 81 of the EC Treaty prohibits agreements which produce a material restriction of competition and which are liable to affect trade between Member States.
Such agreements are void unless exempted by the European Commission. Exemption is available where, on an ‘economic balance sheet’ analysis, the benefits of an agreement outweigh the restrictions on competition.
The tie provisions contained in a lease or tenancy agreement between a pub company and a retailer may be caught by the Article 81 prohibition where two cumulative conditions are met. The first is that, having regard to the economic and legal context of the relevant agreement, it is difficult for competing brewers to gain access to the U.K. on-trade beer market or increase their market share there, taking into account the cumulative effect on competition of a number of similar agreements.
The second condition is that the agreement in question must make a significant contribution to the sealing-off effect brought about by the totality of those agreements in their economic and legal context, which, in turn, depends on the position of the contracting parties in the relevant market and on the duration of the agreement.
Following completion of our acquisition of the original Punch Taverns portfolio from Bass in April 1998, we notified our lease arrangements to the European Commission for negative clearance (i.e. for confirmation that those arrangements fell outside the Article 81 prohibition). A negative clearance comfort letter was duly issued by the European Commission on 2nd September 1998.
The European Commission has subsequently recognised that independent pub groups offer a gateway for brewers, both national and foreign, to the U.K. on-trade beer market. It is easier for another brewer, and in particular a newcomer to the U.K. market, to conclude an agreement with one wholesale player and thereby obtain access to all the outlets tied to such a player, than to conclude agreements with each individual outlet.
Provided therefore that an independent pub group is not tied to one brewer, the effect of the leases of an independent pub group is to mitigate rather than reinforce any network effect of brewers’ agreements in the U.K. on-trade beer market. The European Commission has therefore concluded that, rather than significantly contributing to foreclosure, the tied leases of a ‘non-tied’ pub company are more likely to enhance the competitive structure of the market. In those circumstances, the importance of a pub company’s tied estate (in terms of number of outlets tied and the beer throughput of those outlets) is not currently relevant to an assessment of the contribution to market foreclosure.
In addition, Commission block exemption 2790/99 states that Article 81 does not apply to vertical agreements (i.e. between entities operating at different levels of trade such as landlords and tenants) unless the supplier exceeds a certain percentage of the relevant market. Punch's market share is well below the relevant market share applicable.
In February 2006 in a case involving Article 81 in the Royal Courts of Justice, the Punch lease was found to not infringe Article 81. |
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