Chillin'Competition

September 11 2014 was a big day for antitrust at the European Court of Justice. The Court delivered two important Judgments in the Mastercard and Cartes Bancaires cases, and heard oral arguments in Huawei/ZTE. We’ll comment on the latter in due course, and will be devoting our next posts to discussing the content and implications of the two Judgments. Let’s start with Cartes Bancaires, which is the one with greater potential future implications (as already noted by Pablo in the post below).

This can be an analytically complex subject and there’s much to discuss, so allow me to skip the basics and the summary of the Judgment that you can find here (a copy-pasted version will also appear in some newsletters…) Here are my 10 initial reactions to the Judgment. These are not at all definitive positions but rather preliminary thoughts that I’m hastily posting now with the hope that I’ll be able to polish them in the course of follow-up discussions. For the lazy ones, and given that the full text may be lengthy and dense (for a change), all the main messages appear in bold.

1) The Judgment is to be welcomed mainly as a statement, or cautionary message, from the Court in reaction to an often discussed trend on the excessive use and abuse of the “object shortcut” (how many recent EU and national 101 “effects” cases do you know of?)

In the ECJ’s words (para 58) “[t]he concept of restriction of competition `by object’ can be applied only to certain types of coordination between undertakings which reveal a sufficient degree of harm to competition that it may be found that there is no need to examine their effects otherwise the Commission would be exempted from the obligation to prove the actual effects on the market of agreements which are in no way established to be, by their very nature, harmful to the proper functioning of normal competition”.

It seems almost as if the GC had asked to be quashed when writing in its Judgment in this case (para. 124) that “the concept of infringement by object should not be given a strict interpretation”. The ECJ sensibly lambasts this statement in para. 58 (admittedly, though, this may have been a problem of bad drafting on the part of the GC; read in context, the statement seems to have intended to refer to the fact that “object restrictions” are not limited to a closed list of “suspect” hardcore restrictions, which –had it been stated that way- would’ve made perfect sense; AG Wahl also seems to have observed this as evident from para. 67 of his Opinion).

This is not without importance, for the “object” category has arguably been expanded beyond the limits of its logic (remember Areeda’s quote?) not only by the European Commission, but arguably also by the ECJ itself in T-Mobile (see below) and, less visibly, but more excessively and perhaps more importantly, by national competition authorities (as AG Wahl also observed in para. 59 of his Opinion: “caution is all the more necessary because the analytical framework that the Court is led to identify will be imposed both on the Commission and on the national competition authorities, whose awareness and level of expertise vary”). For my previous comments in this regard –in relation to info exchanges- click here.

2) Until now, the ECJ had endorsed an arguably wide interpretation of the notion of restriction by object, placing however the emphasis on the need to conduct a proper 101(3) analysis in any event. This is what the Court has done since Matra, did recently in Pierre Fabre and, most obviously, in Glaxo Spain, although to no avail because –as you may not yet know- the Commission recently decided to drop this case because it allegedly lacks EU interest; this is after 14 years of proceedings, two Court Judgments, a declaration from the ECJ that dual pricing constitutes a restriction by object and also despite the ECJ’s mandate for the Institution to conduct a 101(3) assessment. No wonder they have tried to keep it under the radar… We’ll comment on this case in the future (Disclaimer: my firm represents the European Association of Euro-Pharmaceutical Companies, which has recently appealed the Commission’s decision to drop the case under a quite innovative legal reasoning]. Given the little practical impact of its previous stance and the slow death of Article 101(3), it seems reasonable for the Court to have decided to move beyond it.

3) AG Wahl had rightly observed in his Opinion, “the present case gives the Court another opportunity to refine its much debated case-law on the concept of restriction by object”. Query: has the Judgment finally shed light on how to resolve the object/effect conundrum? As developed below, I’m afraid not much.

Click here to continue reading:

Whereas the ECJ’s Judgment seems to have been warmly welcomed by practitioners and commentators, this must be because of its value as a statement in the context of the above-mentioned trend (and probably also because for some reason people tend to think that any Judgment contrary to the Commission is a good one…). However, it’s interesting to observe that the analytical framework applied in the Judgment very heavily builds on the ECJ’s previous and much criticized Judgment in Allianz Hungaria (see here for Nico’s harsh criticism), which is cited at virtually every step of the Court’s reasoning, and which AG Wahl had actually identified as one of the most confusing precedents (para. 50 of the Opinion).

4) The Judgment nevertheless does clarify two ideas that are important if only because one would’ve thought they should’ve been evident: (i) that the concept of restriction by object is to be interpreted restrictively; and (ii) that the fact that an agreement simply has the potential to restrict competition is not enough to qualify it as an object restriction.

It also makes it clear, as we said at the beginning, that a restriction by object can only be found with respect to coordination that “reveals a sufficient degree of harm to competition that it may be found that there is no need to examine their effects” (see notably paras 58 and 69)

5) Whereas I entirely agree with this (and have always held that 101(1) should logically have both a qualitative and a quantitative dimension), it’s far from evident that the ECJ has been consistent with regard to it as it may appear from a reading of this Judgment. Indeed, whereas it’s true that in the past the ECJ referred –almost in passing- to object restrictions as those having “sufficiently deleterious effects”, this qualification was almost a reminiscence from LTM and didn’t until now constitute the essence of the test. For instance, in T-Mobile the ECJ had stated that in order for a concerted practice to be regarded as a restriction by object “it is sufficient that it has the potential to have a negative impact on competition. In other words, [it] must simply be capable in an individual case, having regard to the specific legal and economic context, of resulting in the prevention, restriction or distortion of competition” (paras. 31 and 43). No quantitative (“sufficiency”) element here. This is exactly the same formulation used by the GC in para 125 of its now quashed Judgment –with a direct citation to the ECJ’s rulings in T-Mobile and Glaxo Spain– , which, ironically, the ECJ nevertheless criticizes for not having had proper regard to its case-law…

[By the way, the Commission has repeated this same statement in its soft-law; see e.g. the guidelines on horizontal agreements at para 24: “restrictions of competition by object are those that by their very nature have the potential to restrict competition within the meaning of Article 101(1)” . To the extent that the guidelines don’t refer to the sufficiency element, they would now appear to be bad (soft) law]

6) As Pablo observed in his last post, the case-law has been resilient on the idea that a restriction cannot be deemed to be “by object” without a prior assessment of its “legal and economic context”. This is a way of ensuring that we don’t prohibit agreements that would prima facie seem to be restrictive but which, placed in context, are revealed to be only ancillary and indispensable to achieve a legitimate objective or merely incidentally restrictive .

Cartes Bancaires is a perfect example of why this makes sense. Indeed, the two-sided nature of the card payments market makes it a textbook example to illustrate why what might seem as a restriction by object may not appear to be evidently so when seen in its overall context. The GC had held in its Judgment that the requirements of balance between the issuing and acquisition activities (i.e. the two sides of the market) could not be taken into account because the only market to be considered was that for the issue of payment cards. Why the GC said that is beyond me, and the ECJ is to be commended for having clearly stated what should’ve been obvious: that in a multi-sided market the competitive assessment must extend to all sides affected by the practice at issue.

7) What remains rather unclear is the degree of intensity with which the assessment of” the context” is to be carried out; how deep into the factual, legal and economic context do we need to look? Arguably, the theoretical analytical framework used by the ECJ in this Judgment seems to require a more or less “quick effects analysis” in order to identify a restriction by object. And, yes, that can be confusing and it might prima facie seem to result in some line-blurring, at least at a theoretical level.  

In my view, if  the justification for the very existence of the object shortcut lies on considerations of procedural  efficiency (as the Court appears to acknowledge and as the AG explicitly stated in para. 31 of the Opinion), then  its advantages can only materialise if the “context” examination can be undertaken swiftly and easily. Where this isn’t possible, then a full-blown effects assessment is in order.

8) It’s also interesting to note that the Judgment appears to side with the understanding of competition as outcome instead of as a process  by seemingly holding that object= presumption of effects. This is particularly evident from para. 51 which, by the way, does not cite any case law in support of that finding (the cross reference to para. 22 of Clair is equivocal because that para. has little do with this discussion). Previous case-law had stated that object and effect were alternative concepts, which some interpret as meaning not only that there can be effect without object, but also that there can be object without effects. The Judgment, however, does not seem to follow that interpretation.

9) Where do “legitimate objectives” fit in the analysis? In its Judgment the Court places value on the fact that the agreement at issue pursued the “legitimate objective” of ensuring equilibrium and combatting free riding in a two-sided market (see in particular para. 75 of the Judgment). At the same time, it also makes it clear that a restriction by object might exist even when it pursues a legitimate objective (para. 70).  I have some ideas but mostly have doubts on how exactly to reconcile this case-law with other case-law, in particular with the ECJ’s Judgments in Pierre Fabre (in which the Court essentially admitted that restrictions by object can be “objectively justified within Article 101(1) and Irish Beef, where the ECJ held that “[i]t is only in connection with Article [101(3)] that [other legitimate interests] may, if appropriate, be taken into consideration for the purposes of obtaining an exemption from the prohibition laid down in Article [101(1)]”.

10) My take on how to make sense of this all:

In my view, a way to try to resolve the problem would be to adopt a simple rule of thumb, namely “if it ain’t obvious it ain’t object”.

In my mind, an object restriction is something that is obviously restrictive and hence does not necessitate further analysis (as, btw, rightly put in para. 136 of the CFI’s Judgment in European Night Services, a recital largely forgotten ever since). Since the Court –understandably- has problems to verbalize what “obvious” means as a legal standard, it now talks about “sufficiency” and, in passing, about experience (para. 51; this is actually pretty new in the case-law, probably inspired from para. 79 of the Opinion). Personally, I liked AG Wahl’s formulation better “only conduct whose harmful nature is proven and easily identifiable, in the light of experience and economics, should therefore be regarded as a restriction of competition by object” (para. 56).

Although not explicitly worded in the Judgment, what the ECJ seems to be trying to say is that whenever the obviousness cannot be demonstrated at first sight (because it’s obviously ancillary to something else or is put into question by a peculiar context on which we have no experience), then the object categorization won’t be appropriate and a full-blown effects analysis will be necessary.

Would this narrow understanding of “object” really pose a significant obstacle for competition authorities? I guess not. As I’ve said in the past, if competition authorities are confident that a given agreement is certainly restrictive, then they shouldn’t have much trouble justifying its restrictive effects, right?

This very same case is a good example of the above for (i) the Commission was perfectly able to conduct an effects assessment in its decision and (ii) according to the ECJ, the General Court had also conducted a proper effect assessment, although only to conclude that the agreement was restrictive by object (read para 82 and you’ll understand what I mean). In other words, neither the Commission nor the General Court had any need to apply the object label.

If you think about it, in this Judgment the Court is saying, first, that in order to find a restriction by object you need to pretty much look at the likely effects but, at the same time, it also rules (again, read para. 82) that when a quasi-effects analysis is necessary to identify the restriction, then an object categorization isn’t appropriate.

As confusing as this might be, I think that it’s clear that, in practice, this Judgment will preclude competition authorities from relying lazily excessively on the object shortcut, and -adopting a case-law=outcome approach- I won’t be the one complaining about that.

P.S. As I said at the beginning, I’m digesting this Judgment slowly and will still have to think it through when work allows. For now, I just hope this is enough to get the ball rolling.