Recent guidance published by theCompetition Authority underlines the high burden of proof on firmsseeking to demonstrate that agreements to reduce capacity arepro-competitive.

The Notice on Agreements to Reduce Capacity, published in June 2011,follows the Authority’s long-running case against the Beef IndustryDevelopment Society (“BIDS”), arising from measures taken by BIDS toreduce capacity in the beef processing industry in Ireland by 25%. Thecase was referred for preliminary ruling by the ECJ on the concept ofobject breach, and ultimately settled in January 2011.

The guidance states that agreements to reduce capacity are likely tobe regarded as having the object of restricting competition under Irishor EU competition law. However, there is an exemption for restrictivecontracts provided that certain cumulative conditions are satisfied. TheNotice provides guidance on the application of these criteria:

• The agreement must create substantiated efficiency gains. If the contract limits output increases by players remaining in the industry, efficiencies may be unlikely.
• Consumers must receive a fair share of the resulting benefits. Any obligation on the undertakings remaining in the industry to pay a levy linked to output may increase marginal costs, leading to higher consumer prices.
• The restriction of competition must be indispensible to achieving the efficiency gain. In this regard, the question of whether market forces could have solved the overcapacity without collective intervention should be considered.
• The agreement must not involve the possibility of eliminating competition. The guidance emphasises that it will be difficult to satisfy this criterion where the capacity reduction agreement involves players with a large market share, and prevents new entry or expansion.