Sailing into choppy waters? World Sailing under the competition law microscope
The European Commission ("the Commission") has recently requested further information1 from World Sailing over its choice to select a single manufacturer for its one-design sailing craft. This is the preliminary step in an EU antitrust investigation. This follows news2 that Devoti Sailing, an Italian manufacturer of sailing craft, had obtained a legal opinion stating that World Sailing was in contravention of EU competition law. A separate, but related the matter, filed at the same time as the complaint to the Commission, was referred to the Italian Competition Authority, which was closed with no further action.
This article explains the background to the investigation, the legal framework, and gives the authors’ views on the arguments that are likely to be raised.
Background to World Sailing’s policy
World Sailing is alleged to have adopted practices that prohibit competition between suppliers and makers of various Olympic class boats. Historically, the body which governed Olympic sailing would specify a class of boat to be used for each individual Olympic event, and manufacturers and competitors would have to build and use boats which complied with strict technical guidelines. However, in recent times, World Sailing has moved towards a model whereby a single manufacturer of a very specific boat is chosen for each event. Competitors must enter the event in that specific class of boat. Whilst other manufacturers could build that same boat, they would need a licence from the original manufacturer to do so, as the original manufacturer owns the intellectual and industrial property rights in the design and manufacture of that boat. It is contended that the manufacturers concerned have not been licensing their rights on commercially reasonable terms.3
The authors understand the principal allegation is that World Sailings rules breach Article 101(1) of the Treaty on the Functioning of the European Union (TFEU)4, which prohibits agreements between companies which prevent, restrict or distort competition in the EU and which may affect trade between Member States.
EU competition law – the Meca-Medina test
The first test for a case such as this when it comes to competition law is the Meca-Medina test5. This case established that policies of sporting bodies are subject to competition rules but that those policies fall outside the scope of Article 101 TFEU if they can be shown to be proportionate and necessary for the sport, and are, "justified by a legitimate objective."6
World Sailing will no doubt seek to argue that their restrictions on Class manufacturers are a necessary and legitimate measure. In its own antitrust document7 World Sailing contends that manufacturers need a sufficient period of time to justify the financial investment required to supply the equipment. The suggestion from World Sailing is that if suppliers were free to choose any boat they wished, manufacturers would not make enough money from the boats they produced which discourage manufacturers from engaging in the design and manufacturing process, eventually reducing the amount of manufacturers involved in the sport.
Another argument from those in favour of the rules imposed by World Sailing is that having standard equipment for all means the best sailor wins. This is perhaps a strong argument for World Sailing, who would contend that the winner of an Olympic event should be decided based on sailing skill, and not the quality of their equipment. However, this argument does suffer when other Olympic sports (like cycling) allow competitors to choose or make their own equipment, and yet those sports remain competitive8. In addition, one could argue that technical innovation in the equipment is actually part of the sporting process, and that the best equipment and machinery should play a part, as long as it complies with strict technical regulations. Therefore, whilst this is a legitimate and reasonable objective for World Sailing, it is vulnerable to the idea that they could achieve this aim in other ways.
The complainants in the case against World Sailing will likely argue that World Sailing might have easily solved the issue by imposing on each Class manufacturer an obligation to license to third parties its IP rights at fair, reasonable and non-discriminatory terms.9 This would ensure there were more than one supplier of boats and would give competitors the freedom of the market. World Sailing do allow manufacturers the opportunity to licence its designs under the current rules10, however there has been no evidence that this has ever taken place and it’s quite clear the World Sailing are not doing enough to ensure manufacturers are offering such licenses on reasonable terms.
It has also been suggested that World Sailing could simply provide a set of detailed technical specifications and then allow sailors to source a boat which complied with those regulations (as historically was the case)11. This is the approach taken by most Olympic sports. This would ensure a parity of equipment across the sport but would open up the sport to new suppliers and provide more choice for competitors.
The key question for competition law purposes is whether having one manufacturer of a boat is necessary for the sport, or whether World Sailing could achieve its intended goal of a level playing field in another manner. Some commentators have pointed out that World Sailing could do this by enforcing the fact that manufacturers must offer their boats to other suppliers on commercially reasonable rates, and to properly police these rates.12 There is no evidence to suggest the old system for the sport did not work, and that competitors should be free to choose the different components of their boat, provided that it complies with strict technical regulations. It is worth pointing out and comparing sailing with other Olympic sports (such as cycling). Cycling does not specify the exact bike that competitors must use, provided it complies with the specifications. Whilst this has led to some arguments that the nations which can spend more money on the equipment have dominated the event, it has not led to the sport being undermined, and cycling still remains a popular Olympic sport.
The Moto.E case
The Moto.E case, in which the EU courts looked into powers conferred upon a Greek organisation (ELPA) which had the right to authorise (or not authorise) motorbike events in Greece maybe a useful precedent here. It should be noted that ELPA was also in the business of organising events, and there was an inherent conflict of interest built into this case. ELPA had been granted a blanket power of authorisation without any restrictions or reviews. The EU court were highly critical of this arrangement stating
"such a rule, which gives a legal person such as ELPA the power to give consent to applications for authorisation to organise motorcycling events without that power being made subject by that rule to restrictions, obligations and review, could lead the legal person entrusted with giving that consent to distort competition by favouring events which it organises or those in whose organisation it participates."13
It appears that, in this case, World Sailing doesn’t ensure manufacturers have to license their boats on commercially reasonable terms, and it might be argued that they are de facto conferring the right for that manufacturer to choose to whom it wishes to issue any sub-licence(s). Indeed, in many cases, the manufacturers are choosing not to license the boats at all, creating a clear competition issue. Unless World Sailing place those manufacturers under stronger obligations, such a distortion of competition is likely to continue.
Other EU law exceptions
If World Sailing cannot rely on the exception laid down by Meca-Medina, and the restriction on the equipment competitors can use is shown to appreciably restrict competition, then World Sailing would have to attempt to rely on an exemption argument under Article 101(3) TFEU14 If applicable, this enables an otherwise restrictive agreement to escape censure under Article 101(1). In brief, Article 101 TEFU may be found inapplicable where the agreement World Sailing has in place with a Class manufacturer is found to improve either the technical or economic progress of the sport, whilst allowing "consumers" or the competitors to have a fair share of the resulting benefits. However, one of the key criteria to satisfy for Article 101(3) is that of indispensability, i.e. that any restrictive effects must be necessary to achieve economic benefits. It is difficult to see how World Sailing could rely on such a justification in present circumstances, for the reasons outlined above.
Other anti-competitive practices
There is also an argument that World Sailing does not review its contracts with manufacturers often enough. World Sailing says they intend to review each contract every 8 years (or 2 Olympic cycles)15. This means one manufacturer can be the sole manufacturer for a specific class’ boat for a long time without review.
World Sailing contends that this is to ensure manufacturers have a degree of certainty when it comes to being awarded a contract. By not effectively reviewing each contract at every opportunity to do so (i.e. at least every Olympics), It could be argued World Sailing effectively guarantees that contract to a manufacturer even if that manufacturer was not the best possible manufacturer for a subsequent Olympics.
In its guidelines on Vertical Restraints, the EU provides definitive time frames for when exclusive supply agreements, like the ones World Sailing has in place, are likely to be considered excessive. The guidelines state,
"the longer the duration of the exclusive supply, the more significant the foreclosure is likely to be […] agreements lasting longer than five years are for most types of investments not considered necessary to achieve the claimed efficiencies."16
The fact that World Sailing does not review its agreements more often than every five years is not in itself a definite breach of these guidelines. However, World Sailing would have to justify the fact that they only review their agreements every 8 years.
Currently, the investigation into World Sailing appears to be in the early stages. The EU will carry out an initial investigation in which they gather as many facts as possible and submit questionnaires to customers of Class manufacturers and other suppliers.17 At the end of the initial investigative phase, the Commission can take the decision to pursue the case as a matter of priority and to conduct an in-depth investigation, or to close it.
The results of this in-depth investigation will then either find there has been no breach of anti-trust law, or it will find there has been a breach. If the Commission finds there is a breach it submits its decision and advice regarding penalties to the advisory committee who then discuss the decision, amend it if necessary, and finally submit it to the College of Commissioners which will adopt the decision. The process itself can take around a year to 18 months conclude.
Ultimately, the Commission will have to adopt a decision which balances the requirement for sailing to be a competitive sport and allows for the long term growth of the sport, with the fact that the current policy of World Sailing appears to restrict competition amongst manufacturers. World Sailing has stated that it remains confident its policy complies in full with EU law, but it remains to be seen whether or not that confidence is well placed.
This article was updated on the 12 March 2019.
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- Tags: Anti-Trust | Commercial | Competition Law | Contract | European Commission | European Union | Italy | Treaty on the Functioning of the European Union (TFEU) | World Sailing
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