The recent trend in the pharmaceutical industry to notify the European Commission of its intention to change terms of trading with its distributors in Europe has prompted renewed interest in the notification process in the technology industry.

It is worthwhile reminding ourselves what the process is all about.  Any supplier of products or services to the European market must ensure that its terms of trading do not fall foul of the protective competition law regime, both locally and across Europe, that exists to maintain a level playing field across the market place.

The regime regulates how suppliers may contract with distributors and resellers.  In particular, the regime prohibits any provisions which may have as their object or effect the prevention, restriction or distortion of competition within the common market.

Many technology companies rely on the protection offered by the various block exemptions, for example the vertical agreement block exemption, to ensure compliance with the regime.

However, certain practices are outlawed completely, for example price fixing, as Hasbro may find to its cost! 

Engaging in such practices will deny a company the protection of the block exemption.  This leaves the company's terms of trading open to challenge. It also makes its agreements potentially unenforceable and leaves the company itself at risk of heavy fines.

Other practices, such as restricting levels of supply of a product, are not quite so clear cut.  In these cases you need to examine the details of the particular circumstances before it can confidently be said that the terms of trading do not fall foul of the regime.  Getting this assessment wrong can be catastrophic for the company.

The notification system comes into its own in such situations.  A company may notify the European Commission of the existence of the agreement in question. It can ask for the agreement to be given individual exemption from the regime - on the basis that the benefits of the agreement outweigh any anti-competitive effect that it may have.

"This leaves the company's terms of  trading open to challenge. It also makes its agreements potentially unenforceable and leaves the company itself at risk of heavy fines."

The advantage of notifying is two-fold.   Firstly, if the Commission agrees that there is no anti-competitive effect and is prepared to grant the exemption, the exemption may be granted with effect from the date of the agreement in question.  This insulates the company against attacks, both past and present.

Secondly, if the Commission disagrees, and finds the agreement in breach of the regime, the company can plead immunity from fines in relation to acts taking place in relation to that agreement from the date of notification.   So, why doesn't everyone try to benefit from this supposedly win-win situation by adopting the apparent "cure" to the pain caused by the regime?

The reason is that the process is both slow and expensive.  The Commission is clogged up with notification cases and it may take years to get clarity.

More importantly, notification means that the Commission's attention will be drawn to a practice which might have remained unnoticed!

This could result in an adverse finding that might have a disproportionate effect on the company's operations.  In addition, if the Commission considers that exemption is not justified, the Commission may lift the immunity from fines, despite notification.  It does this by giving a preliminary decision that exemption is not justified. This exposes the company to fines even before the final decision is given. In such circumstances, the procedure becomes a curse, not a cure.

Whether notification is a cure or a curse depends on the particular circumstances of each case.  But in any event, adopting a policy of notification is unlikely to be an effective long-term strategy, as the system is currently under review.

The Commission, bogged down by the weight of notification cases, has proposed changes to the regime that will remove the right to notify altogether. 

Under the new system, each member state will have the power to grant exemption from the regime.  Currently, the Commission has sole authority to do this.  The new legislation is being prepared and it is expected that the new system will come into force from the beginning of 2004.

The effect will be to force companies to rely even more heavily on their own judgement and on that of their advisors in determining whether their trade practices cross the line of acceptability.