Michele Giannino (Italian qualified lawyer: LL.M. Leicester, Ph.D London)
A recent judgment from the Court of Justice of the EU (CJEU) concerning the Maxima Latvija case determined that commercial lease agreements containing clauses granting tenants the right to approve leases with third parties are not inherently anti-competitive. This means a full analysis of the agreements’ economic effects is required to ascertain if they violate competition laws. The CJEU outlined the criteria for evaluating the agreements’ competition impact. This blog post examines the CJEU’s reasoning and explores the judgment’s implications for property owners and retailers.
The legal issues
Article 101 TFEU prohibits agreements between businesses that aim to restrict competition or have anti-competitive effects. Distinguishing between agreements that restrict competition “by object” and those “by effect” is crucial for allocating the burden of proof between competition authorities and the parties involved in the agreements. Agreements deemed to restrict competition “by object” are considered infringements if they meet the criteria outlined in Article 101(1) TFEU. To avoid liability, the parties must demonstrate that they meet all the conditions for exemption under Article 101(3) TFEU. Conversely, for agreements considered restrictive “by effect,” the competition authority bears the burden of proving the agreement’s negative impact on competition. If anti-competitive effects are proven, the burden shifts to the parties to defend themselves, possibly by arguing economic efficiency as per Article 101(3) TFEU[1].
While horizontal agreements to fix prices or limit capacity are more likely to be considered restrictive “by object” (European Night Services), vertical agreements have also fallen under this category. Examples include resale price maintenance arrangements (Binon v AMP) and distribution agreements granting distributors absolute territorial protection (Costen and Grundig). However, it was unclear if commercial lease agreements with clauses restricting property owners from leasing to the tenant’s competitors constituted a restraint “by object” or “by effect.” The Maxima Latvija judgment addressed this ambiguity.
Facts
Maxima Latvija, a major Latvian retailer operating a chain of large shops and hypermarkets, entered into numerous commercial lease agreements with shopping center owners. Some agreements contained a non-compete clause favoring Maxima Latvija, designating them as the “anchor tenant.” As such, Maxima Latvija held the right to approve any leases the property owners made with third parties for shops within those shopping centers. This essentially obligated property owners to grant exclusivity to Maxima Latvija, barring them from leasing to Maxima Latvija’s competitors without their consent.
This exclusivity arrangement drew the Latvian Competition Authority’s (LCA) attention. The LCA argued that agreements with this non-compete clause violated Article 11(1)(7) of the Latvian Competition Law, mirroring Article 101 TFEU. Citing Maxima Latvija’s market power, the LCA deemed the agreements anti-competitive, arguing their purpose was to stifle competition by preventing competing retailers from entering the market. Consequently, the LCA ruled the agreements an infringement and imposed a fine of approximately €35,000.00 on Maxima Latvija, without needing to establish whether the clauses had any actual restrictive effects on competition.
Maxima Latvija appealed the LCA’s decision to the regional administrative court and subsequently to the Latvian Supreme Court. Given the similarities between Article 11(1)(7) of Latvian Competition Law and Article 101 TFEU, and the uncertainty over categorizing the agreements as restraints “by object” or “by effect,” the Latvian Supreme Court paused proceedings. They then referred the case to the CJEU for a preliminary ruling under Article 267 TFEU.
Analysis
The Latvian Supreme Court sought clarification from the CJEU on whether commercial lease agreements with a non-compete clause favoring the tenant constituted a restraint of competition “by object.” If not, the Court also asked whether such agreements constituted a restraint “by effect” and what test should be applied to determine if they negatively impacted competition.
The CJEU addressed the first question by adhering to its restrictive approach toward defining restraints “by object,” as established in its prior Cartes Bancaires judgment. The CJEU reiterated that only arrangements causing a significant degree of harm to competition are classified as restraints “by object.” In Maxima Latvija, the CJEU noted that the agreement was a vertical agreement between firms operating in different markets – a retailer and a property owner – and therefore not inherently anti-competitive. The CJEU then considered whether the agreement could potentially foreclose Maxima Latvija’s competitors by hindering other retailers from accessing the malls where Maxima Latvija operated.
The CJEU acknowledged the agreements’ potential anti-competitive effects in the form of market foreclosure. However, it highlighted that the possibility of such effects didn’t automatically mean the agreements inherently distorted or restricted competition. Considering the agreements’ economic context and content, the CJEU concluded that any harm inflicted upon competition wasn’t significant enough to categorize the agreements as restraints “by object” under Article 101 TFEU.
To address the Latvian Supreme Court’s second question, the CJEU employed the test it established in the Delimitis case. This test requires a comprehensive analysis of the agreements’ economic and legal context, including the relevant market’s competitive conditions, to determine if the agreements negatively impact competition. The first step involves examining all factors affecting access to the relevant market to determine if competitors can establish themselves in the catchment areas of the malls covered by the agreements. This could include renting shops in nearby malls or premises outside shopping centers. Factors like the availability of commercial land in those catchment areas and any economic, administrative, or regulatory barriers to entry are also considered. Analyzing the relevant market’s competitive conditions necessitates examining the number and size of retailers operating in those markets, the level of market concentration, customer loyalty to existing brands, and consumer habits.
The second part of the Delimitis test is triggered if the thorough analysis of the economic and legal context reveals that the agreements hinder competitors’ market access. This stage requires the competition authority to assess if the agreements significantly contribute to a cumulative foreclosing effect that disadvantages competitors. Factors like the parties’ market positions and the agreements’ duration are considered.
Practical significance
The CJEU, in its Maxima Latvija ruling, confirmed its strict interpretation of what constitutes a restraint of competition “by object,” as established in Cartes Bancaires. Contrary to the LCA’s findings, the CJEU determined that restrictive covenants in commercial lease agreements, such as non-compete clauses favoring the tenant, cannot be inherently categorized as restraints “by object.” This might be attributed to the lack of a definitive theory on competition harm. The clauses created an exclusivity obligation in vertical agreements, which are not typically perceived as significant threats to competition. Alternatively, it’s been suggested that the CJEU disagreed with the LCA’s stricter stance because the restrictive covenants aimed to enhance efficiency, benefiting both parties and consumers (see Pablo Ibanez Colomo, on the ‘Chilling Competition’ blog).
The Maxima Latvija ruling, which found that commercial lease agreements with non-compete clauses favoring tenants are not inherently anti-competitive, is a positive development for both retailers and property owners. It allows them to include similar restrictive covenants in future agreements without the risk of being automatically deemed anti-competitive. However, they should note that such agreements may still be prohibited under Article 101 TFEU or corresponding national laws if proven to have negative effects on competition. To mitigate this risk, retailers and property owners should evaluate the agreements’ potential impact on competition using the criteria outlined by the CJEU.
Finally, the Maxima Latvija ruling aligns with the position adopted by the UK’s Office of Fair Trading, now the Competition Market Authority (CMA). The CMA similarly acknowledges that while lease agreements containing exclusivity clauses favoring tenants can potentially exclude the lessee’s competitors, they cannot be inherently classified as having an anti-competitive object. Therefore, determining whether such agreements violate competition law requires an analysis of their economic effects, considering factors like the relevant market’s scope, the parties’ market power, and the arrangement’s overall impact on competition.
Barnard & Peers: chapter 17
Image credit: rus.tvnet.lv