(by Giorgio Monti)
[Note by Alfonso: The US Supreme Court delivered last week an antitrust Opinion in North Carolina State Board of Examiners v FTC. We asked Giorgio Monti -whom we knew would be interested in the issues raised by the case- to write a comment for Chillin’Competition and he kindly accepted. Giorgio needs no introduction, but I’ll do a quick one: he’s one of the leading EU competition law professors, the author of this great book, currently holds one of the most envied posts in competition academia at the European University Institute in Fiesole, and, more importantly, he’s also a very nice guy. We leave you with him]
The quiet life of incumbents is often shattered by new paradigms – Uber’s controversial challenge to the taxi businesses of many countries is a colorful example of the synergy of technology and entrepreneurship doing battle with a rentier establishment. In the case at hand, the FTC saw something similar in a market for the vain: teeth-whitening services being offered by non-dentists at a price lower than the same services offered by dentists. The latter, using the State Board (the majority of which is made up of dentists), issued warnings to these pesky new entrants stating that the unlicensed practice of dentistry (including whitening of teeth) was a crime. Faced with such a potentially steep entry barrier, the new entrants abandoned the market. Is the conduct of the State Board an unfair method of competition under Section 5 of the Federal Trade Commission Act?
The answer to this question is more of constitutional law than antitrust. The anticompetitive effects are clear; the justification for this restriction on the basis of risks to health if teeth whitening was performed by non-dentists was not even pleaded on the facts; contrariwise, as the majority reports, complains to the State Board were based on the lower prices of the new entrants. Indeed it wasn’t even clear if it was true that the unlicensed practice of teeth whitening services was indeed a crime because the legislation did not include this service. And yet, in the world’s freest market, where under Federal Law the antitrust rules are compared to the Magna Carta, State laws may restrict competition, and there’s nothing (much) the Federal government can do about it. However, and this is the vital point which this judgment sheds light upon, such restrictions must be the result of state action for there to be antitrust immunity.
In briefest outline, this immunity (so-called Parker immunity after the seminal judgment) applies if the actor that restricts competition is either (1) the State acting in its sovereign capacity or (2) a private party, and then in this case only if (a) the restraint of competition is clearly articulated State policy and (b) that this policy is actively supervised by the State.
The State Board claimed that they benefited from immunity under the first limb of this doctrine because the Board had been created by the State. The bone of contention was how far this Board, created by the State (here under the Dental Practice Act) but populated by practicing dentists, merited immunity under that first limb. In the view of the majority, they did not: ‘A non-sovereign actor controlled by active market participants’ has to satisfy the second limb of the test and in this case it failed to do so because there was no active State supervision when the Board took the view that teeth whitening fell within its competences and that it was thus appropriate to send letters ordering non-dentists to stop offering teeth whitening services.
It follows that companies like Pro-Teeth Whitening, whose logo I used for this entry, might now re-open in Charlotte, North Carolina where it operated before the Board’s actions.
(1) The widening scope of Federal Competition Policy
The three dissenting Justices considered that more deference to State policies was warranted. Beneath the technical debates on whether the majority approach is consistent with precedent one gets a sense that the dissenting Justices are worried about departing from the original division of powers, so that the main bone of contention is about the constitutional balance being fixed rather than fluid. Thus the dissenters open by noting that State Dental Boards were always organized thus even before the Sherman Act. To Europeans this is a bit odd, because we know that we can use the TFEU precisely to challenge age-old practices. In Consorzio Industrie Fiammiferi the competition rules were used to challenge a 1923 Royal decree, for instance. To Europeans, competition law (and internal market law) applied to state conduct is a powerful crowbar to force states to rethink age-old restrictive practices. Of course some think this leads to neo-liberal oblivion, to others it shows we’ve got the most free market constitution in the world.
(2) Rules and Standards
The dissent felt, rightly, that the approach of the majority was also problematic because it would yield implementation problems. The rule-based approach supported by the dissent is easy to apply (Is the Board created by the State? If yes immunity) is a lot easier to apply to any case that may arise than the test of the majority (is the Board ‘controlled by active market participants, who possess singularly strong private interests’ such that there is a ‘structural risk of market participants’ confusing their own interests with the State’s policy goals’? If yes then immunity must satisfy the second limb of the Parker immunity doctrine). Is this a sufficiently strong argument to lead one to support the dissent’s view that the standard is unwieldy? I am optimistic that Federal courts will be able to find a way of testing how far the composition of the agency is sufficiently remote from the commercial interests the agency regulates. Moreover, even if we agree with the dissenting justices that ‘regulatory capture can occur in many ways’ is it not preferable to have a test that tries to challenge more of those occurrences, rather than fewer of them?
In oral argument, many of the Justices were troubled by the tension: surely the best way of regulating a profession is to ask professionals what to do (an example that was used is neurosurgery: surely nobody wants bureaucrats deciding on the best practices for neurosurgery). But this is to misread the debate. The FTC was not claiming that a regulatory board composed of self-interested experts is illegal. It is merely saying that if a State creates such a regulator, it has to actively supervise it and so the State has a duty to be the competition advocate and to ask the regulator to justify restrictive policies.
(3) Procedural Public Interest
North Carolina may still try and ban non-dentists by more direct involvement with the Board. As the majority said, if State can make a claim that an anticompetitive policy is the State’s own choice, then this suffices for antitrust immunity. No substantive test is needed to measure how far the harm caused by an anticompetitive market compares to the benefits of state regulation. The public interest, to recall Harm Schepel’s important paper (’Delegation of Regulatory Powers to Private Parties under EC-Competition Law: Towards a Procedural Public Interest Test’. (2002) 39(1) Common Market Law Review 31) is defined procedurally rather than substantively. Why so?
Perhaps doing this kind of comparison between consumer interests and producer interests is invidious (but isn’t cost-benefit analysis now so widespread?).
Perhaps States value what little residual sovereignty they still have over economic policy (spare a thought for Greece).
Or perhaps it all boils down to this: as the majority noted, if North Carolina wants to ban cheap teeth whitening services it may do so in a way that falls under Parker immunity. It will be for voters to then decide if this was the right policy choice. If so, here is a nice exam question: ‘Democracy can, and should, determine how free markets are. Discuss.’
Many of you will have read the headlines about the recent auction organised by the Premier League. A couple of weeks ago, Sky and BT paid a record sum of £5.1bn (up from £3bn in 2012) for the TV rights to three seasons of the top English football championship (2016-17 to 2018-19). Sky secured the majority of the rights (126 matches per season out of a total of 168).
Victory for Sky? I am not convinced, and given the behaviour of Sky’s shares the day after the deal was announced, it would seem that I am not alone. In fact, the deal seems to have strengthened BT’s position. Unlike Sky, the incumbent telecommunications operator in the UK had nothing to lose, and everything to gain, in the process. Just consider the aftermath of the auction. BT has managed to force Sky, a major competitor, to pay an unprecedented amount for premium sports content (thereby harming its profitability), without fearing the consequences of not securing the rights in question. Why not? In 2010, Sky was required to supply its sports channels to its competitors. As a result, BT was confident that it would be able to offer top football to its subscribers irrespective of the outcome of the auction.
An analysis of the regulatory landscape indeed shows that the incumbent telecommunications operator benefits disproportionately from the multiple distortions progressively introduced by Ofcom and the European Commission on markets for the acquisition of the rights to premium sports content. Due to intervention by the latter, BT has been able to acquire part of the rights offered by the Premier League, as well as the rights to the UEFA Champions League. As a result of the regime set up by the former in 2010, it is able to offer Sky Sports channels to its subscribers (in addition to its own content). The combination of the two regimes has allowed BT to become a credible provider of pay TV services in little time.
Against this background, the immediate question that springs to mind is why Ofcom would set up regulation having the effect of strengthening the position of the incumbent telecommunications operator at the expense of two of its rivals, Sky and Virgin Media (the main cable operator in the country). In December 2014, Ofcom launched a consultation about whether the regime introduced in 2010 should be amended or removed. If this blog post is accepted as a response to the consultation, here is my reaction: ‘Please remove the compulsory licensing obligation, and the sooner, the better. It is not necessary in any way and is likely to do more harm than good’.
I guess many among you are unfamiliar with the regulation put in place by Ofcom in 2010. If you know little or nothing about it, I am sure you would find it interesting to take a look at the consultation document issued back in December by the authority. It illustrates very well the sort of issues that might arise in areas at the crossroads of competition law and sector-specific regulation. Premium TV content is in a grey area between the two. It is not part of the traditional focus of telecommunications regulation (which is primarily concerned with access to, and interconnection between, networks). At the same time, TV content is obviously relevant for broadband Internet providers offering television services as part of their triple and quadruple play bundles. The competitive advantage, in the form of exclusive rights, enjoyed by one provider is likely to influence downstream competition.
In essence, Ofcom’s seeks comments on whether it is convenient to treat premium TV content in the same way it treats the telecommunications network and thus whether it makes sense to impose compulsory supply and non-discrimination obligations on pay TV providers like Sky. Access to BT’s network ensures a level playing field between the incumbent telecommunications operator and its competitors. Imposing similar obligations in relation to Sky’s premium channels would ensure that all broadband Internet providers are able to compete on an equal footing with the leading pay TV operator in the UK.
You may have asked yourself already whether premium TV content and the telecommunications network are really comparable. If you read the consultation document you are likely to be even less convinced about the convenience of extending to content activities the regulatory regime applying to networks.
Is premium content indispensable for downstream competition? It would make sense to treat networks and premium TV content alike if the latter were an essential facility or an indispensable input to compete on the relevant downstream market. Interestingly, Ofcom’s consultation document provides extensive evidence showing that this is clearly not the case. I have in fact not found a more exhaustive and reliable source of data showing that premium TV content is a far cry from being indispensable for pay TV or triple play providers.
There is nothing anticompetitive in trying to exploit one’s competitive advantages. One should not be surprised that companies want to keep competitive advantages for themselves. Profit-maximising firms tend to be unhappy with the idea of subsidising a competitor. Authorities and courts have long understood that a refusal to supply is, absent exceptional circumstances, a manifestation of healthy rivalry. Curiously, Ofcom seems to claim that Sky’s lack of incentive to supply its premium TV channels to its rivals is anticompetitive. This is certainly the line of reasoning that a competition lawyer is more likely to find strange or surprising.
How do companies compete on the relevant downstream market(s)? It is interesting that the consultation document never seeks to define the relevant downstream market in a systematic way. The dynamics of downstream rivalry (where BT, Sky and Virgin Media compete across the whole range of convergent services) must be understood before one determines whether it is justified to take regulatory action in a particular market segment. The consultation document falls short in this regard. At times, it borders on the tautological. Here and there, Ofcom seems to suggest that obligations relating to the provision of premium sports channels are justified to promote competition on the market for premium sports content.
What are the unintended consequences of regulatory intervention? More than anything, I am concerned about the fact that Ofcom never considers the unintended consequences of regulatory intervention. By and large, pay TV and premium content are examined in isolation. The risk that intervention could strengthen the position of the incumbent telecommunications operator is never considered. Similarly, Ofcom does not question whether it makes sense to favour the commoditisation of triple and quadruple play offers. If premium TV content is far from indispensable, would it not make more sense to favour diversity, as opposed to homogeneous offers? What are the consequences of limiting operators’ scope for differentiating their products? Does regulatory intervention commoditising retail offers harm firms’ incentives to invest and innovate? These are questions to which I do not find a satisfactory answer in the consultation document.
I look forward to Ofcom’s next steps in relation to this consultation. We (read: I) will keep you updated about them. And now with the tradition: I do not have anything to disclose (funnily enough, I had to clarify this back in 2010, when I submitted this paper to a review). In fact, I do not even have a TV set at home. Although I do have a broadband subscription, which I hope to keep many years… with BT.
Writing about the Intel Judgment seems to have become one of the favorite hobbies of some of our leading competition law experts.
One of the most downloaded and talked-about competition law articles of the year was Wouter Wils‘ one on “The Judgment of the EU General Court in Intel and the So-Called “More Economic Approach” to Abuse of Dominance“, which we discussed and first announced here.
Wouter’s piece was followed by other equally interesting ones, like Richard Whish‘s (see here), and like my current co-blogger’s, which also received considerable attention (see here for Pablo Ibañez‘s “Intel and Article 102 TFEU Case Law: Making Sense of a Perpetual Controversy” [Wouter’s and Pablo’s articles are by the way both nominated for the Antitrust Writing Awards (see the “Dominance” category here); for some reason Pablo is also co-nominated in the business category for two other pieces I wrote myself (I now understand why he likes to theorize about free riding… ;) ]
The latest addition to this list of worthy reading is a paper just made available by our friend and founder of this blog, Nicolas Petit. His piece, titled, Intel, Leveraging Rebates and the Goals of Article 102 TFEU discusses the positive law standard applicable to exclusivity rebates following Intel. He finds that the GC’s Judgment sets a modified per se prohibition rule for exclusivity rebates, and endorses the theory of anticompetitive leveraging that formed the core of the Commission’s Guidance Paper on Article 102 TFEU. Nicolas also discusses the purposivist debate that has arisen in the scholarship, and whether it is right that the General Court endorsed a non-welfarist approach to Article 102 TFEU. In his view, this cannot be right, for non welfarist goals cannot be acclimated in moden competition law. Nicolas calls for clear dicta from the ECJ along the lines of Post Danmark.
Those interested in knowing even more (or, rather, in having even more mixed views) about the Intel case should (1) have attended Nick Banasevic’s (who was Case Manager in Intel) excellent talk about the Judgment last Friday in Madrid; and (2) take a look at a new competition law journal (Competition Law & Policy Debate) which, in its first number, features a bunch of Intel-related articles authored by a very impressive line-up of authors (the same issue includes as well an interesting piece on the Google case by the former President of the CFI, Bo Vesterdorf, also available in SSRN).
P.S. Following the publication of this post I have received another piece on the Judgment. This one is authored by Luc Peeperkorn -a European Commission official and one of the main proponents of the effects-based approach, currently on a one-year leave of absence at NYU-, and its title is self-explanatory: “Why the General Court is wrong in Intel and what the Court of Justice can do to rebalance the assessment of rebates“. The piece is also interesting, and unusual, for it is not every day that a Commission official criticizes (although in an academic capacity) a Judgment that the Institution won in first instance and is defending on appeal.
I recently had to devote most of my non-billable work to finishing a few publications (the fact that after a few missed deadlines I was almost under death threat from editors also played a role) and preparing some courses. As if there weren’t better things to do with one’s time…
Anyway, since I did the work, I thought that it could perhaps be useful to post it or refer to it here, both to justify myself and in case any of you might find them interesting or have comments. These “non-working” papers include:
– A paper on “The Double Duality of Two-Sided Markets” which, to a large extent, is a beefed up version of my speech (the ppp is available here) at the Swedish Competition Authority’s Pros and Cons Conference back in November. The editors of Competition Law Journal have kindly offered to publish it, so it will appear there soon. The paper posits that competition law enforcement regarding multi-sided platforms may have not always accounted for the ambiguity of business practices carried out in these settings and attempts to identify the causes at the root of this problem and to propose some solutions. In essence, my take is that multi-sided platforms raise old questions but with renewed intensity, and that this must force us to go back to basics and recall some general principles that we should never lose sight of.
– A presentation on the Cartes Bancaires Judgment (here: Some additional reflections on Cartes Bancaires_Lamadrid ). It’s titled “some additional reflections” because it followed previous interventions at a seminar on the part of Javier Ruiz Calzado (Latham&Watkins; his very good ppp is also available here: Cartes Bancaires_Ruiz Calzado ) and Nicholas Khan, from the European Commission’s Legal Service. It was a privilege to share the panel with them.
absurdly lengthy not so succint paper I’ve co-written with my colleague Ana Balcells on cartel evidence in Spain: La prueba de los cárteles en España (Lamadrid_Balcells), forthcoming in JM Beneyto y J Maillo (Dirs): La lucha contra los cárteles en España, Aranzadi, 2015.
– Also, a few days ago the founder of this blog, Nicolas Petit, asked me (with a most kind anticipation of less than 24 hours…) to conduct a case study on the Google investigation at the Brussels School of Competition. It was a very interesting exercise. I only directed the debate asking questions and linking issues together and it was the students who brilliantly taught themselves and arrived to their own conclusions (I’m being nice to them because I told them that suscribing to the blog is a prerequisite for passing, so I assume they’re reading this). The legal issues underpinning the case (which have not always received the necessary attention) are very well-suited to reflect about some basic concepts of Article 102. In fact, Pablo also did this with his students at LSE a few days ago. Just in case any of you is interested in conducting a similar exercise, here is the (very hastily drafted) list of questions I used: Google Case study – BSC_Lamadrid.
Anyone for a spot of fishing? Opinion of AG Wahl in Case C-583/13 P Deutsche Bahn AG (and others) v European Commission
(by Alfonso Lamadrid and Sam Villiers)
Last Thursday AG Nils Wahl delivered his opinion on the Deutsche Bahn case, criticising part of the General Court’s September 2013 judgment (see here).
As you may remember, this General Court judgment served to confirm the Commission’s wide inspection powers under Art. 20 of Regulation 1/2003 when conducting dawn raids, stating specifically that there was no need for the Commission to obtain judicial authorisation prior to a raid and that documents discovered (genuinely) by accident which indicate a separate infringement may be used as evidence of that infringement, as long as the proper procedural requirements are respected.
The Commission had information that DB was offering its subsidiaries preferential rebates when supplying electric traction energy to operators.
During the course of the dawn raid at various DB premises in Germany, documents were discovered which the Commission considered may be indicative of separate anti-competitive conduct, outside the scope of the inspection decision (regarding the ‘strategic use of infrastructure’), but in relation to which it had also received a prior complaint. The Commission decided that a fresh investigation needed to be carried out in relation to this new conduct and so adopted a second inspection decision while it was still inspecting DB premises. (Seemingly not fully satisfied with the evidence gathered in the first two inspections, the Commission returned to DB premises later that year for a third inspection.)
DB was not all happy with the conduct of the Commission during the inspections and so brought actions for the annulment of all three Commission inspection decisions.
Prior judicial authorisation required for dawn raids?
DB argued that because the three inspection decisions were taken without prior judicial authorisation, various articles of the ECHR and the EU Charter (the right to the inviolability of private premises and the right to fundamental judicial protection) were infringed. With this plea the applicants were effectively challenging the current legal framework applicable to inspections under EU Competition law. AG Wahl dismissed this argument, agreeing with the General Court’s interpretation of the case law of the ECtHR.
Citing the ECJ’s Judgments in Chalkor and KME Germany, Wahl states that ex post judicial review carried out by the EU Courts offers an adequate level of protection of fundamental rights. He also makes a distinction between this case and the recent and interesting Czech case of Delta Pekarny, where the ECtHR ruled that fundamental rights were infringed, observing that this was due to the fact that the inspection decision was not subject to any—either ex ante or ex post—judicial review.
The opinion of the AG (and General Court) would seem to be sensible, in theoretical terms. Necessarily requiring prior judicial authorization, when ex post judicial review is available, seems excessive. A separate issue, though, is the quality of the judicial review itself. It is all very well catering for a judicial review – but it must be effective, and it is arguable that this has always been the case when it comes to, among others, the Commission’s investigatory powers (see here).
In any event, as we will explain below AG Wahl seems to strike the right balance in this regard.
It is on the issue of the discovery of documents indicating a second infringement that the AG’s opinion differs from the General Court’s judgment. Although they both agree that under Art. 28 Reg. 1/2003 any documents collected during the inspection must be used for the purpose for which it was acquired (save for some exceptions in the regulation), and also that, by way of derogation, following the Dow Benelux case, documents found which aren’t covered by the inspection decision can be used to start a new investigation, AG Wahl thought that the GC neither correctly applied the Regulation nor the Dow Benelux case (paras 58-83) to the facts of this case.
The Commission’s undoing, it seems, is that before carrying out of the first inspection, Commission inspectors had been notified that a separate complaint had been filed against DB for a separate infringement. Dismissing the Commission’s argument that inspectors had been told about this merely for background information, AG Wahl suspected the “only plausible explanation […] is that information on the DUSS suspected infringement was given to the Commission staff so that they could ‘keep their eyes peeled’ for evidence related to the second complaint” (para 77). This means that the Commission effectively circumvented Art 20(4) of Reg 1/2003, either deliberately or through negligence.
In Dow Benelux the Court ruled that there was no reason why the Commission should disregard documents pointing to a different infringement if it was genuinely found by accident, but, as observed by AG Wahl in para. 82 “[t]his is clearly not the type of conduct which the Court meant to allow under its Dow Benelux case-law. There is, in my view, no difference between a case in which the Commission launches an inspection without a valid decision and one in which the Commission proceeds on the basis of a valid decision, but searches for information relating to another investigation, not covered by that decision”.
As Wahl states, there seems to be no good reason why the Commission did not just adopt two separate decisions, and simply carry out the inspections at the same time.
(For an interesting discussion on the subsidiary issue of the burden of proof, see paras. 84-99).
AG Wahl recommends the ECJ to annul the second and third Commission inspection decisions, believing that the breach of DB’s rights of defence and right to the inviolability of private premises is a sufficient basis. It will be interesting to see whether the ECJ takes the advice.
AG Wahl’s sensible and nicely drafted Opinion does a very good job summarizing the state of the law regarding inspections on the part of the European Commission, and only for that reason makes an interesting read. More importantly, in our view it also strikes a right balance by acknowledging that the Commission is to enjoy a certain leeway when it comes to investigations powers whilst, at the same time, advocating for an effective review over the use, and possible misuse, of those powers.
Old followers of this blog might remember that when we started it we had a fairly popular section on “Competition Law and Sport” in which we also anticipated a few developments which ended up materializing, such as the state aid investigations into football clubs (not that one had to be a genius to see that one coming…).
It had been quite a while since we wrote out last post in this series, but developments in this area haven’t ceased to arise. This is unsurprising because, as I often repeat, what happened with competition law in this area is a perfect example of a “be careful with what you wish for” situation. Sports always claimed special antitrust treatment, and it got it, but perhaps for worse; following the Meca Medina and Piau Judgments it is clear that virtually any sporting rule can be challenged under competition law in the light of the Wouters test (which implies assessing whether any effects restrictive of competition are inherent in the pursuit of legitimate objectives and are proportionate to them).
In the past few months we’ve had plenty of interesting developments in this area, like, among others, the O’Bannon v NCAA decision in the U.S. (in which the NCAA’s rules prohibiting the payment of compensation to former athletes in order to preserve the amateurism of college sports was quashed); the Pedro León v LFP case, in which a Spanish Court declared (in an interim measures order, available here) that the Spanish football league’s rules setting a limit on club expenditure on player’s salaries in the light of their debt ratios constituted an abuse of a dominant position given that they limited clubs’ ability to go into whatever debt they considered necessary. And in the past few days it was made public that the Spanish and Portugal leagues lodged a complaint targeting FIFA’s third-part ownership prohibition (see here).
On top of the above there have been a few developments regarding state aid and media rights, as well as some national cases that haven’t made headlines, such as the Swedish bodybuilders case (see here), or one concerning compensation for the release of players to national teams (see here) which is actually a follow up of a case in which I worked some years ago (see here).
We might comment on some of the least-discussed issues raised by the above-mentioned cases, but for now we’ll focus on the most recent development, which has great potential ramifications and that seems to have gone largely unnoticed, at least in the competition law world; I’m referring to the Judgment of Munich’s Oberlandesgerich of 15 January in the Pechstein saga.
Act 1- Switzerland. The Judgment concerns a longstanding legal dispute between speed skater Claudia Pechstein and the International Skating Union (“ISU”), who had banned her from all its competitions for two years due to her positive in a doping control. Mr. Pechstein unsuccessfully challenged this ban before the Court of Arbitration for Sport (“CAS”). The CAS was chosen in compliance with a dispute resolution clause in the registration form for one of the championships from which she was banned. The CAS’ award was subsequently appealed before Swiss Courts, but once again Ms. Pechstein didn’t have much success.
Act 2- Germany. Ms. Pechstein then decided to take the matter to German Courts and her luck started to change. The Regional Court of Munich held that the arbitration agreement had been invalid because of a “structural imbalance” between the athlete and the ISU, given that the latter’s dominant position in the organization of championships made Ms. Pechstein decision to go to arbitration “involuntary”. However, the Regional Court considered that, by not raising this issue in the proceedings before the CAS, Ms. Pechstein had validated and remedied the said imbalance. Showing once again her tenaciousness, Ms. Pechstein also appealed this decision before the Higher Regional Court of Munich.
The Higher Court takes the view that the arbitration agreement between Ms Pechstein and the ISU was invalid because it was contrary to mandatory competition law given that it was imposed by the ISU, which enjoys a dominant position and could therefore not impose non-competitive business terms.
The Court does not object to dominant undertakings requiring that an arbitration agreement be signed as a matter of principle, but it does rule, in casu, that forcing Ms. Pechstein to submit to arbitration before the CAS as a necessary condition to participate in tournaments constituted an abuse of a dominant position. The reasoning underlying the Court’s decision was that, at the time, sporting organizations such as the ISU had more influence than athletes in the designation of arbitrators; this, in turn, was considered to cast doubts on the independence of the CAS.
Interestingly, the Higher Court holds (in paras. 129 et seq) that the CAS’ award cannot be recognized in Germany in as much as it runs counter competition law, that is, to public order (the High Court refers to the ECJ’s seminal Eco Swiss Judgment in this regard) The Judgment states that “[t]he recognition of an award based on an agreement contrary to competition law would perpetuate the abusive conduct of the ISU, which would be contrary to the objective underlying the ban on abusive practices imposed by the competition rules”.
The Judgment does not go as far as to state that making participation in sporting championships contingent upon agreeing to an arbitration clause constitutes per se an abuse of dominance on the part of sporting organizations, but is rather carefully drafted in the light of the specificities of the CAS (some of which appear to have change pursuant to a reform of the rules in 2012).
In any event, this ruling (which ISU has announce that it will appeal to the Supreme Court) may provide weaponry for those wishing to contest arbitration clauses or to oppose to the recognition of arbitral awards in certain circumstances.
Whereas some have claimed that this Judgment is “revolutionary”, I recall that in the past the European Commission itself has also held a tough stance towards mandatory arbitration, considering that that provisions in private agreements whereby private parties in a situation of preeminence/dominance limited available legal actions to arbitration to the exclusion of national Courts could amount to anticompetitive conduct.
This position has been particularly evident from the Commission’s intervention precisely in sport cases, in which it was considered that the imposition by sporting federations of arbitration as the exclusive means of settling disputes would –in the absence of the possibility to appeal to national Courts- amount to a restriction of competition. In a case concerning FIA, one of the Commission’s concerns was to ensure that legal challenge against FIA decisions would be available not only within the FIA structure but also before national courts. Following the Commission’s intervention, FIA agreed to insert a new clause clarifying that anyone subject to FIA decisions could challenge them before national courts.
Similarly, the Commission insisted in the negotiations with FIFA on transfer rules that arbitration would be voluntary and would not prevent recourse to national courts, which led to FIFA modifying its transfer rules to this end. In fact, in that case the Commission also insisted on the need of creating an independent arbitration structure, with an independent chairperson and members designed on a parity basis by players and clubs.
So, in essence, the German Court in this case has reached very similar conclusions to the ones reached by the European Commission some time ago; the main difference is that the German Court has stated its position in a Judgment (which is what Courts do) and the Commission did it over negotiations (which is what the Commission does too).
A very good friend tells me that the world of international arbitration is discovering the mysteries of EU State aid law, and that some of its peculiarities have not been received particularly well (to put it elegantly). Curiously enough, these developments have not gathered much attention so far in the parallel universe of EU competition law. It is a pity, as the questions raised by the interface between these disciplines are genuinely interesting. May an arbitral award amount to State aid within the meaning of Article 107(1) TFEU? May the Commission order its recovery as a result? Imagine the implications of an affirmative answer to these two questions in other areas of the law.
If you are not familiar with the ongoing debates, you may be interested to know that these issues are being discussed in the Micula case. In December 2013, Romania was ordered to pay around EUR 82 million (plus interest) as a result of an investment dispute. The arbitration tribunal found that the said Member State had breached a Bilateral Investment Treaty with Sweden. Shortly thereafter, the Commission informed the Romanian government that the implementation of the award would amount to new aid within the meaning of Article 108 TFEU and would therefore have to be notified. In addition, it issued a suspension injunction to ensure that Romania would not take any steps in this regard. From the perspective of the Commission, the implementation of the award would conflict with a previous decision declaring a tax incentive to be incompatible with EU State aid law. Romania was thus left torn between two regimes.
If you take a look at the letter submitted by the Commission in Micula, you will realise that the legal and factual scenario is fairly straightforward from the perspective of EU State aid law. I was in fact struggling to find something unusual in the case. If a measure adopted by a Member State is found to be incompatible with the internal market, it is simply natural that any subsequent measure intended to compensate the recipients of the aid for the consequences of a recovery obligation is also found to run counter to the principles set out in Articles 107 and 108 TFEU. If it were possible for a Member State to grant damages in such a context, the whole system would collapse. The ECJ understood early on that, indeed, the ex ante control for the award of State aid would otherwise become meaningless. These ideas stem clearly from cases like Van Calster or Commission v Council (2006).
It does not matter how well-established these principles may be under EU State aid law. From the perspective of international arbitration, I can understand that the intervention of the Commission in cases like Micula is received with surprise, if not shock. How can it be argued that it is unlawful for a Member State to comply with its obligations under the ICSID Convention? The same that I said in relation to EU State aid law in the preceding paragraph could be said in relation to international arbitration. The whole system for the settlement of investment disputes could be jeopardised if such arguments were to be accepted. It is in fact not unusual for States to claim that their domestic regime makes it impossible for them to comply with the award.
Underlying the Micula case there seems to be something that looks like a primacy (or, if one prefers, a kompetenz-kompetenz) issue – a debate that brings me straight out of my comfort zone. It seems to be about determining which of the two legal orders prevails. There are other issues that may be less fundamental but not necessarily less interesting, and on which I hope to work in the coming months. If you read the Commission letter, you will see that the issue of legitimate expectations is understood very differently in EU State aid law and investment arbitration, respectively. It is well-known that legitimate expectations can be validly invoked only in truly exceptional circumstances under the former. Articles 107 and 108 TFEU would not be practicable if the possibility to circumvent recovery obligations were not limited to the narrowest set of scenarios. This is a distinct feature of EU State aid law that is very unlikely to be found in other areas of the law. It should therefore come as no surprise that the principle of legitimate expectations has a broader scope of application in the context of investment arbitration, the point of which is after all to provide a framework for the protection of international investments.