Wednesday, May 30, 2012

Spanish government takes action against anticompetitive behavior in the Sherry wine industry (Guest article)

By Francisco Marcos, Professor of Law, Center for European Studies Madrid, LL.M. Berkeley Law

The American oak casks used for winemaking in the “Sherry Triangle” (an area in the Spanish province of Cádiz) have recently been the subject of scrutiny by the Spanish Government. According to separate enforcement actions by the Spanish National Competition Commission (hereinafter NCC) in the last three years several anticompetitive arrangements between various producers have dragged down market competition in the Sherry industry (all the decisions by the NCC can be downloaded here).

Sherry wine is produced through a complex method that combines a singular fermentation process favored by this specific geographical location (once the grapes are placed in the barrels, a yeast called the “flor” forms on top of the wine) with an aging process through a “solera” system (blending wines from several years together). More than 80% of Sherry wine production is sold abroad, particularly in the United Kingdom which accounts for a quarter of total sales.

The cases initiated by the Spanish NCC are interesting because they exemplify many of the issues that are generally present in modern competition law cases: leniency application and proceedings (including rejecting leniency for anticompetitive behavior that was previous given to one of the players in the market), inspections, jurisdictional issues (parties complained that Andalusia’s regional authority should have been the competent jurisdiction in some of the cases), fines, fine-setting and public authorities involvement in the restraints to competition taking place.

The controversy began with a claim filed by the wineries Complejo Bodeguero Bellavista, S.L. and Zoilo Ruíz Mateos, S.L. against the Regulation Council of the Origin Denomination “Vinos de Jerez-Xérès-Sherry y Manzanilla de Sanlúcar de Barrameda”. The wineries claimed that the Regulation Council had organized a market sharing agreement by introducing a quota system per winery, a system that they claimed violated article 101 of the EU Founding Treaty (NCC Decision of June 4, 2009, Consejo Regulador de Denominación de Origen Vinos de Jerez y Manzanilla de Sanlúcar, 2779/07). In appeal this decision was confirmed, although the amount of the fine was lowered by the court from 400.000€ to 100.000€ based on several extenuating circumstances that the appeals court believed mitigated the behavior of the Regulating Council and felt “more accurately” represented the proportionality principle (Judgment of Audiencia Nacional, November 22, 2011).

After the appeals decision, the claimants filed a clemency application that led the NCC to the discovery of the Sherry wine cartel (NCC Decision of July 28, 2010, Vinos Finos de Jerez, S/0091/08). In this case, a market sharing agreement by Sherry wine-makers and the Regulation Council of the Origin Denomination was discovered that channeled the supply in the market of branded Sherry wines through a Buyer own Brand (BOB). Fines totaling several million Euros were imposed on eight wineries and on their industry association and also on the Regulation Council of the Origin Denomination.

Finally, the Decision of the NCC of October 6, 2011 (Productores de Uva y Vinos de Jerez, S/0167/09) concerns anticompetitive practices in the market for the grapes that must used for Sherry production. For the first time, the NCC convicted Andalucía’s Regional Department of Agriculture for its involvement in the violation of article 101 of the EU Founding Treaty and article 1 of the Spanish Defense Competition Act (an English translation is available here). With a strong dose of imagination and creativity the NCC used the EU’s General Court Judgment of July 8, 2008 (Treuhand/Comisión, T-99/04) to describe the Department of Agriculture as the “promoter” of the anticompetitive practices.

In my opinion his administrative ruling is an erroneous extension of the private scope of the competition laws contained both in the Spanish Defense Competition Act and in the EU Functioning Treaty (a dissenting opinion to the NCC Decision of October 6, 2011 points in the same direction). Although the Andalucía’s Agriculture Department conduct was reprehensible, the Spanish NCC is not legally entitled to sanction an irregular or diverted exercise of public powers that favors or promotes a cartel. An extended opinion can be read in “El ámbito de aplicación subjetivo de la LDC y la condena de la Junta Andalucía en el cártel de la uva y del mosto de Jerez: Comentario a la RCNC de 6 de octubre de 2011, Exp. S/0167/09”, forthcoming in Revista de Derecho de la Competencia y Distribución, nº 11 (2012).

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