Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Follow-on thoughts on (and beyond) Microsoft/Nokia (by Luis Ortiz Blanco)

with 6 comments

[Note by Alfonso: A few weeks ago I wrote a brief post regarding one particular aspect of the Commission’s press release about the Microsoft/Nokia decision that caught my attention. Before posting it, I discussed the matter with two of my bosses’ colleagues: Luis Ortiz Blanco and Marcos Araujo, both with significantly more merger experience than myself, and both of whom initially agreed with the point I was trying to make. A few days ago this question came up again, and I managed to extract from Luis the commitment that he would write his views on a guest post here (all previous attempts to get him to do that and a Friday Slot interview were unsuccessful…). Luis needs no introduction; he’s an exceptional person, professor, lawyer, and was even also one of the best men at my wedding... He’s also the reason why I work in competition law, but that's a long story. I leave you with him].

Readers of this blog may by now be familiarized with Alfonso’s and Nicolas’ well-known “persistence”. I admit to be and old-school guy, more prone to do my writings with time, pen and paper rather than swiftly and informally on blogs, but this time they caught me off guard and suggested an interesting topic, so here I am, giving blogging a try.

Despite the title of this blog entry, my intention is not to comment on the Microsoft/Nokia decision specifically, not the least because the decision is not yet available and I have not directly or indirectly worked on the case. My intention is to discuss an interesting theoretical point that appears to have arisen in that case and that prompts very relevant legal question for practitioners, academics and competition authorities which go beyond the facts of a given matter: do or should merger control rules and remedies apply also to impediments to competition that a transaction may generate on the seller’s side?

Alfonso already touched on this issue in a previous post. In my view, he rightly identified what I also see as an erred reasoning in the European Commission’s press release, according to which:

  • The Commission considers that any possible competition concerns, which might arise from the conduct of Nokia, following the transaction, in the licensing of the patent portfolio for smart mobile devices which it has retained falls outside the scope of the EU Merger Regulation. The Commission cannot take account of such concerns in the assessment of the current transaction. Indeed, Nokia is the seller whereas the Commission’s investigation relates to the merged entity.

Now, do really merger control rules really relate only to the merged entity, to the exclusion of the seller?

Prior to providing you with my answer to this question, I would remark that, in my experience, it is most unusual to see the European Commission (or any other competition authority for that matter) self-limiting its own powers. Competition enforcers often tend to do the contrary, that is, to explore the powers they have, even if at the risk of perhaps going beyond them at times.

If among the readers of this blog is the one person that bought my book Market Power in EU Antitrust Law, she or he might recall the criticism I directed (pp. 77-78) at a few cases (ExxonMobil, and particularly at Grupo Villar Mir/EnBW/Hidroelectrica del Cantábrico and EnBW/EDP/Cajastur/Hidrocantábrico in relation to the ‘third-party dominance theory”) in which the Commission had intervened aggressively on the market in order to address effects unrelated to the transaction. In those cases the Commission extended and arguably exceeded its powers because of its will to address what it saw as a competitive problem. In its Microsoft/Nokia press release, however, the Commission does the contrary: it appears to restrain or limit the powers it has in order to justify not evaluating what many saw as a competitive problem.

This stance is all the more surprising if one recalls that in the past the Commission has accepted/required some “soft commitments”  in Oracle/Sun and, in a  more similar setting, on the part of Google at the time it acquired Motorola Mobility. The theory of harm in both the latter case and Microsoft/Nokia related to the alleged possible anticompetitive use of patent portfolios. If anything, Microsoft/Nokia would seem to give rise to increased suspicion [the deal was structured in a way that has resulted in an unusual situation: Microsoft buys Nokia’s mobile device business but not valuable mobile device patents, which it will only license. Nokia, in turn, will be under pressure to assert its patents aggressively, may possibly also act under the influence of Microsoft, and would be immune from possible retaliatory strategies because it will not manufacture smartphones anymore. The move is smart, but, in my personal view, maybe also a bit obvious too].

The sole argument seemingly adduced by the Commission to justify its different treatment of the two deals seems to be the precisely the one we are discussing in this post. But, think for a second, would it make sense to endorse an interpretation of the merger regulation that would enable parties to avoid scrutiny by carefully tailoring the structure of a deal?

Now, and more importantly, why do I say that the Commission must have the power to assess the effects of a merger on the selling party?

First of all, because it makes sense. If a merger does affect the incentives of the players in a given market in such a way that competition may be significantly impeded, there would seem to be no valid reasons for competition authorities not to look at the problem and, where necessary, accept (i.e. demand) commitments The contrary would undermine the effectiveness of the merger control system. Why could not the Commission condition the authorization of a transaction to a commitment from one of the parties to it (the seller)?

Secondly, because as Alfonso pointed out in his previous post, the letter of the Merger Regulation supports this idea. He referred to recital 25 of the Horizontal Merger Guidelines; I would also argue that the references in articles 6(2) and 8(2) to “modifications [of the concentration] by the undertakings concerned” shall logically encompass the parties to the transaction (the only ones that can modify it), which obviously would include the seller.

Thirdly, because the Commission’s practice reveals that in the past remedies have been required from the selling party. Think of cases such as E.ON/MOL, where the commitments accepted by the Commission concerned the seller (interestingly, the commitment was drafted in a way such that E.ON would “undertake to procure MOL to dispose of [certain shares in the transferred companies]’. Think also of Alcatel/Telettra, where assurances by a third-party (Telefonica) were relied on by the Commission in accepting commitments. This is not to mention the cases in which the Commission relied on Member State’s (i.e. third parties) assertions and declarations of intentions in support of certain commitments.

Perhaps the Commission would benefit from a third party appeal (not that these have been successful lately) prompting the Courts to rule that the Institution has more powers than it now purports to have. Once again –just like it happened in Camera Care regarding interim measures (a story that I always like to tell my students about)- the Commission could experience the serendipity of obtaining increased powers without even seeking them.

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Written by Alfonso Lamadrid

17 January 2014 at 1:31 pm

6 Responses

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  1. Cf Commission Notice on the concept of undertakings concerned (of 1998) para 8:
    “In concentrations other than mergers or the setting-up of new joint ventures, i. e. in cases of sole or joint acquisition of pre-existing companies or parts of them, there is an important party to the agreement that gives rise to the operation who is to be ignored when identifying the undertakings concerned: the seller. Although it is clear that the operation cannot proceed without his consent, his role ends when the transaction is completed since, by definition, from the moment the seller has relinquished all control over the company, his links with it disappear. Where the seller retains joint control with the acquiring company (or companies), it will be considered to be one of the undertakings concerned.”

    Anonymous

    17 January 2014 at 3:35 pm

  2. Thanks for initiating to the debate, Anonymous. That’s a good find and an a good point, but the notice you’re referring to (aside from being that, a Commission notice) only dealt with the concept of undertakings concerned for jurisdictional purposes (namely for the purpose of calculating the relevant turnover to determine whether thresholds were met, as stated in its para. 3). The notice did not deal with substantive issues (in fact, as you know, it was subsequently subsumed within the Jurisdictional Notice), which is what Luis is referring to.

    Alfonso Lamadrid

    17 January 2014 at 6:50 pm

  3. I’m surprised that you do not bring point 118 of the Cisco judgment up.

    munja

    17 January 2014 at 7:36 pm

  4. It is not surprising, Munja; you’ll understand that it doesn’t rank as of my favorite Judgments. I don’t think that there is much in there to be quoted, but you have identified one paragraph that makes a lot of sense.

    For the benefit of anyone reading this, the paragraph reads as follows:

    118. It should be borne in mind that the Commission may declare a concentration incompatible with the internal market only if the significant impediment to competition is the direct and immediate effect of the concentration. Such an impediment, which would stem from future decisions by the merged entity, may be regarded as a direct and immediate effect of the concentration, if that future conduct is made possible and economically rational by the alteration of the characteristics and the structure of the market caused by the concentration (Case T‑342/99 Airtours v Commission [2002] ECR II‑2585, paragraph 58; see, to that effect, Gencor v Commission , paragraph 94).

    I am guessing that you did not quote it in support of my position, but my point is precisely the one made by the Court in that paragraph, that is:

    “If future conduct is made possible and economically rational by the alteration of the characteristics and the structure of the market caused by the concentration”, then the Commission has the power to intervene. To that I only add that this should be the case also when the concerns originate from alterations to the incentives of parties other than the resulting entity.

    As a matter of fact, that paragraph comes handy to support my interpretation. I am sure you have noticed that the paragraph cites Airtours and Gencor, both of which are collective dominance cases. In all those cases the Commission assesed the competitive concerns stemming not only from the resulting entities, but also from third parties (their competitors), who weren’t even parties to the transaction!

    Furthermore, you probably know, that the point that the Commission could evaluate collective dominance was made in the Kali&Salz Judment (para 171) and repeated in Gencor:

    “if it were accepted that only concentrations creating or strengthening a dominant position on the part of the parties to the concentration were covered by the Regulation, its purpose (…) would be partially frustrated. The Regulation would thus be deprived of a not insignificant aspect of its effectiveness, without that being necessary from the perspective of the general structure of the Community system of control of concentrations”.

    That is exactly the point I am making with respect to the coverage of selling parties by the Regulation.

    Thanks for refreshing my memory.

    Luis

    Luis Ortiz Blanco

    17 January 2014 at 10:44 pm

  5. I also think that point 118 could be interpreted as supporting your point. For the rest, I understand your frustration with the Cisco judgment, but come on, this is what usually happens when you bring a desperate case before the Courts. Are you going to appeal?

    rilex

    20 January 2014 at 11:57 am

    • Thanks, Rilex. For the rest, I’m sure you’ll also understand that even if we disagree with your view (which I guess is understandable in anyone not having close knowledge of the case), we don’t think this is a forum to engage in a discussion about the Judgment at this stage. Luis doesn’t plan to comment on it elsewhere either out of respect for the Court and its members. I may express my views here at some point, but only once my cooling-off period is over.

      Alfonso Lamadrid

      20 January 2014 at 12:26 pm


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