EUR-Lex - 31978D0163 - EN

The prohibition amounted to an indirect export prohibition.

In view of the DCL position on the United Kingdom market for Scotch whisky, gin, vodka and Pimm's, these two clauses restricted competition to a considerable extent.

This direct and indirect export prohibition imposed on DCL United Kingdom trade customers was likely to affect trade between Member States. It prevented trade between the United Kingdom and other EEC Member States, caused an artificial partition of the common market and was likely to hinder the establishment of a single market among Member States.

Accordingly, the prohibitions on exports to EEC countries and on resale under bond constituted an infringement of Article 85 (1) from 1 January 1973 to or to about 24 June 1975.

(b) The conditions of sale as notified on 30 June 1973 and as modified on 24 June 1975 contain a prohibition to export outside the common market countries (clause 5 b). This prohibition precludes spirits bought in the United Kingdom from being exported to a third country and reimported into another EEC country. Such prohibition is capable of restricting competition within the common market and of affecting trade between Member States when, for example, the level of prices, of customs duties and transportation costs in respect of the goods in question would allow reimports into EEC countries to take place.

However, in this case, the application of customs duties borne by spirits crossing the external frontiers of the European Economic Community tends to make such reimports improbable. The prohibition to export outside the common market countries contained in the conditions of sale is not therefore likely at present to restrict competition and affect trade between Member States to an appreciable extent. (1)Date when United Kingdom membership of the EEC came into effect. (2)Prices in force at and immediately prior to 24 June 1975.

1.2. Inapplicability of Article 85 (3) of the EEC Treaty

Under the terms of Article 85 (3) the provisions of Article 85 (1) may be declared inapplicable in the case of any agreement between undertakings which contributes to the improvement of the production or distribution of goods or to the promotion of technical or economic progress while reserving to users an equitable share in the profit resulting therefrom, and which: (a) neither imposes on the undertakings concerned any restrictions not indispensable to the attainment of the above objectives;

(b) nor enables such undertakings to eliminate competition in respect of a substantial proportion of the goods concerned.

In the notification of the seller's conditions of sale on 30 June 1973, DCL argued that the conditions of sale contributed to the improvement of distribution and to the promotion of economic progress by ensuring that the goods are distributed with maximum efficiency ; the consumers would obtain the whole of the benefit arising from this improvement and progress.

Nevertheless, the restrictions established above brought about no perceptible objective improvement in the distribution such as would compensate for the adverse effect on competition and free movement of goods in the common market. The market conditions and the nature of the goods in question were not such as to justify a complete isolation of the United Kingdom from the rest of the common market.

Following the Commission statement of objections, DCL admitted that these conditions of sale could not be exemped under Article 85 (3).

Accordingly, the request made by DCL on behalf of its 38 subsidiary companies for exemption of the seller's conditions of sale as notified on 30 June 1973 is rejected.

1. Price terms 2.1. Application of Article 85 (1) of the EEC Treaty

The price terms applied to transactions for sales of spirits between DCL subsidiary companies and their United Kingdom trade customers are laid out in the DCL circular letter of 24 June 1975 - under the heading "Price Terms" and its Appendix II modified on 23 February 1977. (a) The price terms have as their object the restriction and distortion of competition within the common market.

Under the price terms, DCL United Kingdom trade customers have to inform the selling DCL subsidiary company that they wish to export to other EEC countries. Purchases must then be made at the gross price.

This gross price was until 22 February 1977 the price before deduction of any allowances, rebates or discounts normally granted to United Kingdom trade customers. Since 23 February 1977, it is the price before deduction of any allowances or discounts to sole distributors in other EEC countries. In both cases, United Kingdom trade customers are charged different prices for identical goods dependent on whether they resell in the United Kingdom or in another common market country.

The price terms tend to restrict competition in EEC countries other than the United Kingdom and amount to an indirect export prohibition.

The price terms, in providing for the application to DCL United Kingdom trade customers of a different price for spirits exported to other EEC countries from that charged when the spirits are resold for consumption in the home market and in reserving price allowances for spirits for resale and consumption in the United Kingdom, restrict the opportunity of such customers reselling in an EEC country other than the United Kingdom. Sales by DCL United Kingdom trade customers and by their subsequent purchasers in EEC countries other than the United Kingdom are indeed rendered, at the very least, more difficult. Competition in such countries on the part of DCL United Kingdom trade customers and traders purchasing from them is thereby restricted.

DCL admitted that their price terms were intended, following the removal of the export prohibition, to protect DCL sole distributors from competition on the part of traders purchasing from DCL trade customers in the United Kingdom and reselling for consumption in the sole distributors' territories.

The non-applicability of price allowances on spirits for export and the application to the same customers of different prices for spirits for export and for spirits for United Kingdom consumption are clearly an attempt to impede parallel imports from the United Kingdom into EEC countries other than the United Kingdom, with the same object as a formal export prohibition and can be regarded as a more efficient way to discourage export.

DCL United Kingdom trade customers are requested by DCL to indicate their intention or that of their subsequent purchasers to export to other EEC countries. Furthermore, the price terms provide for the exaction of penalties for non-observance. A customer who has not observed the price terms, or who is suspected of not observing them, may have to pay the gross price, even on spirits for consumption in the United Kingdom. He may later obtain reimbursement with reasonable interest of the amount equivalent to the price allowances to the extent to which he provides proof of consumption in the United Kingdom. Nevertheless, the application of this provision may strongly affect the commercial position of such a customer and amounts to a sanction and an effective incentive to observe the agreed price terms.

DCL argued that such price terms, restricting the allocation of price allowances to spirits sold for consumption in the United Kingdom, could not have been designed to impede imports into other EEC countries since they have been in existence for a considerable period of time and certainly antedated the commencement of such imports. This argument does not alter the assessment that the price terms have as their object the restriction of competition in EEC countries other than the United Kingdom, but demonstrates that since the existence of such price terms was simply a consequence of the non-exportation clause, the clarification of 24 June 1975 was clearly designed to maintain the effects of this non-exportation clause.

These price terms have as a further object to distort competition by preventing the price advantages attributable to the competitive conditions in the United Kingdom from affecting the competitive structure in the rest of the common market.

As stated in the circular letter of 24 June 1975 and Appendix II, the price allowances "are designed to meet the particular requirements of the home trade". DCL explained that these price allowances were intended to fit in with the competitive conditions of the United Kingdom spirits market which was characterized by the power of the purchasers and the strong price competition between the different brands of spirits.

The reservation of price allowances on spirits for United Kingdom consumption prevents the effect of favourable pricing in the United Kingdom from being extended to the DCL spirits market in common market countries other than the United Kingdom. This amounts to an isolation of the United Kingdom market in respect of such price advantages attributable to the competitive conditions which prevail in the United Kingdom with the effect of preventing them from affecting the competitive conditions in other common market countries. Accordingly, consumers in those countries cannot benefit from the better price advantages in the United Kingdom.

(b) As the price terms clearly have as their object the restriction and distortion of competition within the common market, it is not necessary to show their actual repercussions in order to establish the applicability of Article 85 (1) of the EEC Treaty. However, it should be noted, as a subsidiary matter, that the effect of the price terms is to restrict and distort competition to a considerable extent within the common market.

The prices at 24 June 1975 and 1 March 1977 of a case of 12 bottles of Johnnie Walker Red Label are used as an example. The price terms have entailed, for a British purchaser who wishes to export, a buying price 99 % and 92 77 % (or ... % "average" price) higher than the price he would pay in the absence of this restriction. An increase of this size considerably distorts competition within the common market.

Moreover, as a result of the price terms, the price paid by a United Kingdom trade customer of DCL wishing to export has at these dates been ... % and ... % higher than that paid for the same product by the sole distributors in the other common market countries. Indeed, sole distributors have higher costs due to their obligations of promoting the spirits. It has been argued that these costs approximate to the difference between the buying price of the parallel importer and that of the sole distributor. However, such differences in the buying price make it distinctly difficult for the DCL United Kingdom trade customers and, even more so, for their subsequent customers to compete with the sole distributors in the other EEC Member States or at the very least, render parallel export unattractive.

DCL has strictly implemented its price terms and effectively pursued those who breached them. DCL either asked for the price difference when spirits bought at the home trade price were later found in EEC countries other than the United Kingdom or charged certain customers the gross price for purchases suspected of being intended for exports. Such customers could then bring proof of actual consumption in the United Kingdom and be entitled to a refund. For a year following the application of the price terms of 24 June 1975, no cases of spirits purchased at the gross price were exported, except on one occasion, namely that of a United Kingdom customer who had purchased some 1 400 cases of Scotch whisky at the gross price with the intention of exporting them to other EEC countries.

DCL has stated that from July 1976 to July 1977, United Kingdom trade customers purchased approximately 250 000 cases of Scotch whisky at the gross price. However, this figure still leaves open how many of these cases were exported since the gross price is also charged for certain purchases even when the customer does not necessarily intend to export.

In any event, the said volume of parallel exports remains even lower than that before 24 June 1975 (550 000 cases) at a time when a formal non-exportation clause was imposed on DCL customers. It can reasonably be assumed that exports would have reached a significantly higher level in the absence of the restriction resulting from the price terms.

The complainants have stressed the difficulties which, due to the DCL pricing practices, they face in their trading of spirits. They find themselves in practice debarred from exporting to other EEC countries after purchase at the gross price. DCL subsidiaries tend to charge them systematically the gross price with the effect that an extra burden is imposed on their trading activities in the United Kingdom.

Furthermore, these price terms enable DCL to maintain a price to sole distributors which is somewhat higher or at least similar to that charged to United Kingdom trade customers, although sole distributors are at a higher level in the distribution chain and bear promotional expenses which the United Kingdom wholesalers do not bear.

Accordingly, in view of DCL's market position in relation to Scotch whisky, gin, vodka and Pimm's in the United Kingdom, the price terms appreciably restrict and distort competition within the common market.

(c) The price terms are likely to affect trade between Member States ; they hinder or, at the very least, make it more difficult for United Kingdom customers to export DCL spirits to the other common market countries, which they would do to a large extent in the absence of these terms. Thus they tend to partition the common market by hindering exchanges between the United Kingdom and other EEC countries for a substantial part of the products in question and are prejudicial to the establishment of a single market among Member States.

Accordingly, the price terms of 24 June 1975 infringe Article 85 (1). DCL did not contest these findings.

2.2. Inapplicability of Article 85 (3) of the EEC Treaty 2.2.1. The issue of notification

The price terms are not eligible for an exemption under Article 85 (3) since they have not been properly notified in accordance with Article 4 of Regulation No 17 and with the provisions of Commission Regulation No 27. The price terms were not exempt from notification under Article 4 (2) (1) of Regulation 17 because, although they amount to an agreement between undertakings from one Member State, the United Kingdom, they do relate to exports between Member States.

The price terms are not covered by the notification of the conditions of sale of 30 June 1973 since this notification contained no mention of the price structure. Moreover, the circular letter of 24 June 1975 and its Appendix II contain provisions over and above those of the agreement as notified. DCL did itself view them as separate measures since it replied on 8 July 1975 to a Commission request for information concerning the conditions of sale by sending to the Commission only the new version of those conditions of sale contained in Appendix I to the 24 June 1975 circular letter, omitting to refer to the circular letter itself and its Appendix II.

The sending of a copy of the price terms on 11 July 1975 to the Commission upon request cannot be considered as a notification.

Nevertheless, DCL requested in its written observations on the Commission's objections and at the hearing that approval be given under Article 85 (3) to DCL's United Kingdom price terms.

2.2.2. The conditions of Article 85 (3)

The price terms, however, could not be exempted, even if they had been properly notified, since they do not satisfy the requirements of Article 85 (3). (a) DCL put forward the following arguments in support of its contention that the price terms fulfilled the conditions of Article 85 (3).

The system of distribution by which one distributor is appointed to promote sales and to ensure the proper distribution of spirits, had numerous advantages and beneficial results in other EEC countries. The price terms were part of an overall trading pattern within which the exclusive distribution system contributes to improving distribution while reserving a fair share of the benefit to the consumer. The price terms were an indispnesable restriction to ensure that, while meeting the cost of their sales promotional obligations, sole distributors would be in a position to compete with parallel importers. Two particular circumstances justified the restrictive measure : on the one hand, sales promotion was required in the EEC countries other than the United Kingdom because DCL spirits, although not a new product, were not yet well established ; on the other hand, in the United Kingdom market spirit prices were kept artificially low due to the power of DCL's purchasers, mainly the brewers.

(b) However, the agreement, which has to be evaluated in the light of Article 85 (3) in the present proceedings, is not an exclusive distribution agreement but a series of agreements contained in and arising from sales contracts concluded between DCL subsidiary companies and United Kingdom trade customers of which the price terms are an essential part. The question is not whether the exclusive dealing agreements are beneficial, but whether the price terms which are not part of those agreements, albeit economically related thereto, are such as to be able to benefit from an Article 85 (3) exemption.

These sales contracts are not in themselves capable of directly achieving an improvement of distribution in EEC Member States. The price terms exclusively concern the application of differing prices with the object of hindering exports by United Kingdom trade customers. They further deprive the consumers in EEC countries other than the United Kingdom of possibilities of buying DCL spirits at a lower price and of the advantages deriving from competition on the United Kingdom spirits market.

The price terms therefore do not fulfil the conditions of Article 85 (3).

(c) Even if the price terms were to be viewed in relation to the exclusive distribution system established by DCL, they could not be exempted.

The Commission recognizes that, frequently, some advantages may result from the appointment of exclusive distributors in EEC countries, with responsibilities for promoting sales for a producer situated in another EEC country. As to the sole distribution agreements concluded by DCL subsidiaries with distributors in EEC Member States other than the United Kingdom the Commission had indicated its intention to take a favourable decision (1).

Admitting that the appointment of sole distributors by DCL brings about an improvement of distribution, it can however not be established that the price terms amount to a restriction which is indispensable to the attainment of that objective.

Since, according to DCL, DCL spirits are not as well-established in other EEC countries as in the United Kingdom, sales and promotion are more costly in these other countries. However, DCL spirits are not new products to need introduction for which extraordinary promotional efforts are required. The marketing conditions in these countries are not such as to call for a protection of these markets from competition on the part of traders purchasing DCL spirits in the United Kingdom.

According to DCL, competition between brands and the bargaining power of some purchasers such as the brewers have led to a low price level of DCL spirits in the United Kingdom which make it difficult for them to raise prices in the United Kingdom. (1)See notice published in OJ No C 9, 2.2.1971 in accordance with Article 19 (3) of Regulation No 17, in case No IV/10 7469 - White Horse Distillers - B.A.P. CORIMA.

DCL however is in a position to ensure, by other means than through the impediment of parallel exports, the efficient performance of their functions by its sole distributors. DCL could, for example, as it does in the United Kingdom market, itself assume the responsibility of promoting sales in the other EEC markets or allow for the costs resulting from promotion by sole distributors in the prices charged to them. At present DCL charges similar prices to United Kingdom wholesalers and sole distributors while imposing on them differing obligations, a price structure which may well have contributed to the difficulty faced by sole distributors. It has not been established that the market conditions described by DCL do not permit the application of other pricing arrangements which would not result in a restriction of competition.

Accordingly, DCL price terms do not fulfil the conditions set out in Article 85 (3) and DCL's request for an exemption for a limited period pending cessation of the "brewer's monopoly power" could not be met.

IV. APPLICABILITY OF ARTICLE 3 (1) OF COUNCIL REGULATION No 17

Under the terms of Article 3 (1) of Council Regulation No 17, where the Commission, upon application or upon its own initiative, finds that there is an infringement of Article 85 of the Treaty, it may by decision require the undertakings concerned to bring such infringement to an end.

In view of the serious effect on competition within the common market resulting from the price terms, the DCL group should be required to terminate without delay the infringement constituted by the price terms, with the obligation upon The Distillers Company Ltd, to ensure that this requirement is satisfied. The DCL group should in particular be required to refrain from all further action calculated to restrict exportation from the United Kingdom into other EEC countries of their spirits bought by United Kingdom trade customers.

V. APPLICABILITY OF ARTICLE 15 OF COUNCIL REGULATION No 17

Under the terms of Article 15 (2) of Regulation No 17, "The Commission may by decision impose on undertakings fines of from 1 000 to 1 000 000 units of account, or a sum in excess thereof but not exceeding 10 % of the turnover in the preceding business year of each of the undertakings participating in the infringement where, either intentionally or negligently: (a) they infringe Article 85 (1) ... of the Treaty ; ... In fixing the amount of the fine, regard shall be had both to the gravity and to the duration of the infringement."

Paragraph 5 of Article 15 of Regulation No 17 states that:

"The fines provided for in paragraph 2 (a) shall not be imposed in respect of acts taking place: (a) after notification to the Commission and before its decision in application of Article 85 (3) of the Treaty, provided they fall within the limits of the activity described in the notification ; ..."