The Treatment of Horizontal Agreements Aimed at Solving Incentive Problems

• Author: Morten Hviid
• DOI: 10.1177/0003603X20929124
• Published date: 01 September 2020
• Date: 01 September 2020

Article

The Treatment of Horizontal

Agreements Aimed at Solving

Incentive Problems

Morten Hviid*

Abstract

If a group of horizontal rivals gets together to agree on a way to structure efficient production, are they

violating competition law? The issue could arise where a group of producers of agricultural products

gets together to form a cooperative or even where professionals in the same field get together in a

partnership. On the face of it, each supply agreement between the producer and the cooperative or

partnership is vertical, but the design of the collective rules, which govern for all, involves horizontal

coordination. This article takes as the starting point the example of dairy cooperatives as they emerged

in the later part of the nineteenth century as a solution to a challenge offered by new technology. We

use the landmark contract law case of McEllistrim v. Ballymacelligott Cooperative to illustrate the ways in

which competition law could be engaged when cooperatives are formed. Comparisons of Ireland and

Denmark in the period leading up to the decision suggest that not only might the restraint be ancillary,

but if not, it reduced costs, increased quality, and was welcomed by consumers (though these were in

England rather than in Denmark or Ireland). The restraint also appears essential in some form, sug-

gesting that either ancillarity or the application of Art. 101(3) Treaty on the Functioning of the Eur-

opean Union would have allowed the restraint to be used.

Keywords

agricultural cooperatives, vertical agreements, horizontal coordination, restraint of trade doctrine

[I]f every unilateral action that restrained trade were subject to antitrust scrutiny, the courts would be forced

to judge almost every internal business decision. Overregulation of unilateral conduct might threaten the

competitive enthusiasm that the antitrust laws seek to promote.

1

* Centre for Competition Policy and UEA Law School, University of East Anglia, Norwich, United Kingdom

Corresponding Author:

Morten Hviid, UEA Law School, University of East Anglia, Norwich Research Park, Norwich, Norfolk NR4 7TJ, United Kingdom.

Email: m.hviid@uea.ac.uk

1.Am. Needle, Inc. v Nat’l Football League, 560 U.S. 183 (2010).

The Antitrust Bulletin

2020, Vol. 65(3) 340–360

ªThe Author(s) 2020

Article reuse guidelines:

sagepub.com/journals-permissions

DOI: 10.1177/0003603X20929124

journals.sagepub.com/home/abx

I. Introduction

Competition law rarely engages with what goes on within the firm, treating it as a black box.

2

The

same is arguably the case when it comes to the economic theories commonly seen as relevant to

competition law.

3

The exceptions are the theories and laws surrounding vertical relationships includ-

ing vertical mergers, where the efficiency effects of structuring the ownership andthe contracts

governing the vertical value chain are actively considered. These theories are only a small part of the

economic theories dealing with what goes on within the firm. An important focus for these theories is

how incentive problems can best be solved, either through internal command structures and incentives

or through arms-length market transactions based on more or less relational contracts.

4

An important

issue for competition policy is whether the solution to incentive problems arises from a desire to soften

competition or to reduce costs.

While the issues related to the internal structure of the firm are mostly related to the vertical

structures where block exemptions may control any interference by Art. 101 of the Treaty on the

Functioning of the European Union (TFEU) into the optimal cost-minimizing structure of a firm or a

supply chain, there are two concerns that have a horizontal element. One is whether incentive provi-

sions within the firm increase the incentives for collusive behavior across horizontal rivals and how

compliance programs can be constructed to deal with these.

5

The other, which we will pursue in this

article, is whether collective agreements about incentive provisions can or should be exempt from

competition law scrutiny, either directly because the term is an ancillary restraint or because it meets

the exemption through Art. 101(3) TFEU.

The inspiration for this article is a 100-year-old case, McEllistrim v. Ballimacelligott Cooperative.

6

The suspect contract term, which was ultimately voided by the House of Lords, was a restraint of trade

forcing members of a cooperative to supply all their milk to the cooperative.

7

The concern over the

term was heightened by what was considered a penalty clause to apply where the term was breached.

The term was included in what appeared, at first glance, to be a vertical agreement between a supplier

(member) and a processor (the cooperative). Indirectly and in substance, however, it involved a

horizontal agreement between the farmers who had set up the (vertical) rules governing the coopera-

tive in the first place.

8

In the House of Lords decision, the majority interpreted the agreement between

a supplier/member of a cooperative creamery and the creamery itself as a single freestanding vertical

contract which included an illegal restraint of trade. The minority took a broader view, seeing the

vertical contract in the context of a cooperative involving coordination between horizontal competi-

tors, which itself could be viewed as a nexus of vertical contracts. In this view, the restraint of trade is

essential to the success of the cooperative. Importantly, the restraint of trade is a part of a contract that

2.A recent exception is FLORENCE TH´

EPOT,THE INTERACTION BETWEEN COMPETITION LAW AND CORPORATE GOVERNANCE:OPENING

THE “BLACK BOX” (2019). This book mostly focuses on the relationship between shareholders and managers and the

implication of this for cartel enforcement.

3.As an example, neither of the two main economics texts aimed at EU competition lawyers, MASSIMO MOTTA,COMPETITION

POLICY:THEORY AND PRACTICE (2009) and GUNNAR NEILS ET AL., ECONOMICS FOR COMPETITION LAWYERS (2nd ed. 2016), mention

anything about theories of the firm. While most textbooks on Industrial Economics (sometimes referred to as Industrial

Organization) will have a chapter on the theory of the firm, this part of microeconomics rarely plays a major or even

significant role in these books.

4.There is a substantial literature starting with Ronald H. Coase, The Nature of the Firm,4E

CONOMICA 386, 386–405 (1937). A

recent summary of the literature can be found in DAVID J. TEECE &NIEL M. KAY,Literature Review Article: The Evolution of

the Theory of the Firm,in ELGAR RESEARCH REVIEWS IN ECONOMICS (D. J. Teece & N. M. Kay eds., 2019).

5.A discussion of this can be found in TH´

EPOT,supra note 2.

6.McEllistrim v. Ballymacelligott Coop. Agricultural & Dairy Soc’y Ltd., [1919] AC 548.

7.Although in this case the period implied by the term was indefinite, that does not appear to be the key issue.

8.Ingrid Henriksen et al., Law and Peace: Contracts and the Success of the Danish Dairy Cooperatives,72J.E

CON.HIST. 197,

197–224 (2012).

Hviid 341