Chillin'Competition

The Commission usually takes some time to publish its decisions. This is not necessarily a bad thing, at least for the purposes of this blog. We now have the chance to discuss a few decisions that have (finally) come out, and complement (or complete) our first thoughts on them.

I will start with ISU, about which I wrote earlier this year. The non-confidential version of the decision can be found here.

In my previous post, I asked myself whether the practice at stake was really a restriction by object. You will remember that the Commission took issue with a set of rules adopted by the International Skating Union. These rules sought to constrain athletes’ ability to take part in competitions run by rival organisations.

The Commission concluded that the rules, which are (in essence) a vertical restraint providing for a non-compete obligation, amount to a ‘by object’ infringement. Now we know the reasoning behind this conclusion.

There is something remarkable about the decision. If you take a look at it, you will realise that the Commission does not seem to incorporate the lessons of the most recent – and directly relevant – Court rulings, namely Cartes Bancaires and Maxima Latvija.

To prove my point, I propose a simple exercise: apply to the facts underpinning Cartes Bancaires and Maxima Latvija the reasoning found in ISU. You will come (inevitably) to the conclusion that the practices at stake in these two cases were restrictive by object.

In ISU, the Commission concludes that the eligibility rules are a ‘by object’ infringement for three main reasons:

• The objective and subjective purpose of the rules was to preclude other organisations from running competing events.
• The International Skating Union sought to protect its own economic interest through the rules.
• The eligibility rules were not related to a legitimate sporting objective.

Remember Maxima Latvija? In that case, the ‘anchor tenant’ of a shopping centre was given the power to veto the renting of other premises in the mall to third parties. The objective purpose of such a rule is clearly to avoid competition – and the Court ruling is based on this premise. In this sense, the case is no different from ISU.

And the anchor tenant, by restricting competition to itself and limiting the shopping centre’s freedom of action, was certainly trying to protect its own commercial interests (by the way: which firm doesn’t?).

In spite of the above, the Court ruled in Maxima Latvija that the practice was not restrictive by object.

Remember Cartes Bancaires? Essentially, the contentious rules sought to penalise one category of competitors. The objective purpose of these rules was to hinder these firms’ ability to compete. What is more, there was direct evidence in the case suggesting that the subjective intent of the rules was indeed to restrict competition and thus to protect the economic interest of another category of firms.

If one were to follow the reasoning in ISU, these two factors would be sufficient to conclude that the practice was restrictive by object. But you all know that the Court came to the opposite conclusion in Cartes Bancaires.

Cartes Bancaires is important for another major reason. The Court made it quite clear that a practice that seeks to address a genuine free-riding concern is not a ‘by object’ infringement. In other words: the fact that some firms seek to protect their economic interests is not in itself an issue (again, which firm does not seek to advance its economic interest by means of an agreement within the meaning of Article 101 TFEU?). The issue is instead whether the firms seek to address a market failure or simply extract rents (as in a cartel agreement).

The Court concluded that the measure was plausibly pro-competitive (and thus not ‘by object’) in Cartes Bancaires. And the free riding argument is also compelling in ISU, as I mentioned last time (but the issue does not seem to be given the relevance it deserves in the decision).

Against this background, the question that I find intriguing is why the Commission has not followed the case law on restrictions by object in ISU.

This question is intriguing in this particular case because establishing the restricting effects of the eligibility rules was a ‘home run’ for the Commission. Given the position of the International Skating Union, it could not have been much easier to conduct an effects analysis (as the Commission does in the case).

Had the Commission followed the ‘by effect’ route alone, the case would have been entirely uncontroversial. I would say more: the analysis of the Commission in the ‘by effect’ section shows that the case makes enormous sense from a prioritisation perspective too.

Why, if it was not at all necessary (and was in fact potentially counterproductive), did the Commission insist on qualifying the rules as a ‘by object’ infringement in ISU?

The most convincing explanation is that the Commission, as a repeat player, is interested not only in reaching the desired outcome in individual cases but in shaping the law in a particular way. In this sense, ISU provided an excellent opportunity to advance its interpretation of the notion of restriction by object in the wake of Cartes Bancaires.

I have to say I am not particularly surprised by this. I have spent the past couple of years reading pretty much every Commission decision, and this is a consistent pattern of behaviour across the board (Article 101 TFEU, Article 102 TFEU and merger control).

Examples? Just think of how the Commission interpreted Delimitis in Scholler and Langnese-Iglo (Valentine Korah, in her unique style, wrote at the time – mid-1990s – that Delimitis appeared ‘not to have been read’).

More examples? The Court emphasised, from the outset, that ‘competition’ for the purposes of Articles 101 and 102 TFEU means ‘competition that would have existed in the absence of the practice’. However, the Commission failed to consider the counterfactual in several landmark decisions that were annulled as a result.

In fact, if you read ISU, you will identify several controversial statements in this regard. For instance, the Commission asserts that the members of the International Skating Union – that is, the national associations – are potential competitors. However, this remarkable statement is not substantiated – as if the lessons from European Night Services, CISAC or E.On Ruhrgas (‘real, concrete possibilities’) had not been learnt.

Conclusions?

What do we make of the failure to incorporate some of the crucial insights from Cartes Bancaires? It is neither good nor bad. It is a reality and a feature of the EU competition law system we have to acknowledge and with which we have to live.

We have acquired sufficient experience over the years to know that the Commission is likely to behave in this way – across provisions and over the years. I would say that, first and foremost, it is useful for the authority to be aware of this reality, so as to anticipate when and why administrative decisions are more likely to be annulled.

It has taken me a while to realise the significance of the recent Court judgment in Maxima Latvija. On its face, it does not seem to add much to what we know about agreements that restrict competition by object. This impression is probably due to the fact that the Court is not very explicit about why it ruled the way it did. If one takes into account what was not said, but is implicit, together with what the Court did actually say, it is possible to draw some valuable lessons.

What the Court said in Maxima Latvija

The necessary and sufficient factors to establish a ‘by object’ restriction

Paragraphs 22 and 23 are very much in line with previous case law. It is clear from the latter that the question of whether an agreement restricts competition by object is established in light of the content of the agreement and the context of which it is part. This is nothing new, but it is valuable that the Court confirms that these are the necessary and sufficient factors to evaluate whether a set of restraints is incompatible, by its very nature, with Article 101(1) TFEU.

The ‘by object’ category is not a presumption of anticompetitive effects

I repeat myself a lot, but it cannot be emphasised enough that the ‘by object’ category does not encapsulate a presumption of anticompetitive effects. When commenting on Bananas, I mentioned that an agreement such as an exchange of information can be found to restrict competition by object irrespective of whether there is evidence of its impact on competition. As Bananas itself shows, an exchange of information may be prohibited by its very nature even if it is not particularly likely to have a significant impact on prices.

Maxima Latvija is the mirror example. The case is about an obligation included in an agreement between the ‘anchor tenant’ of a shopping mall and the lessor. I understand from the ruling that the ‘anchor tenant’ had to give its consent to the letting of other premises to third parties. This restraint would work as an exclusivity obligation, in the sense that the tenant is given the right to oppose the letting of premises to competing supermarket chains.

The Court concedes that this contractual obligation is capable of having (‘could potentially have’) an anticompetitive effect. However, this fact alone is insufficient to establish that it is restrictive by its very nature. In other words, a restriction by object does not exist merely because an agreement can be presumed to have anticompetitive effects (and no, the Court never said the opposite in T-Mobile).

This is something that the Court has always held, but tends to be forgotten. Selective distribution agreements reduce substantially the ability and incentive of retailers to engage in price competition. It is in fact safe to presume that selective distribution softens price competition. However, the Court has always ruled, from Metro I to Pierre Fabre, that this fact alone is insufficient to establish a restriction of competition. As is well known, selective distribution networks fall outside the scope of Article 101(1) TFEU altogether in some circumstances.

Maxima Latvija is particularly interesting because there is recent empirical evidence suggesting that exclusivity obligations included in agreements between shopping malls and tenants have anticompetitive effects. Itai Ater comes to this conclusion in an article published earlier this year in the Journal of Economics & Management Strategy. So there it is: an agreement that is known to lead to higher prices has not been found to restrict competition by object.

What the Court did not say in Maxima Latvija

Why is an agreement not found to restrict competition by object if it is known – and can be expected – to have negative effects on some parameters of competition? The Court did not say much about it in Maxima Latvija. Actually, the Court does not really explain why the agreement is not restrictive by object. The good news is that past case law is very explicit about these two questions.

An agreement does not qualify as a ‘by object’ restriction if it has redeeming virtues that compensate for the expected negative effects. Think of Metro II. True, the Court held in that case, selective distribution softens price competition. But it benefits consumers in other ways. As a result, it is not restrictive by object.

The reasons why the Court came to the same conclusion in Maxima Latvija are probably not very different. The abundant references to Delimitis suggest that the contentious clauses were understood to be functionally equivalent to exclusive dealing obligations. And the Court has already held that exclusive dealing has redeeming virtues that are in the interest of both parties to the agreement and thus of consumers.

Interestingly, Itai Ater mentions in his paper, referred to above, that exclusivity obligations agreed upon between ‘anchor tenants’ and shopping malls can yield efficiencies. For instance (and this says much about his academic integrity), the author points out that his empirical analysis may have failed to capture that an exclusivity obligation between an ‘anchor tenant’ and a shopping mall may induce relationship-specific investments or may attract such investments at an early stage.

Super Bock was one of the major developments of the past year. It is not immediately obvious to draw this conclusion. On its face, the judgment is brief and an Advocate General Opinion was not even deemed necessary.

The substance of the ruling is not any more auspicious: the Court does little more than reiterate the consistent line of case law since Cartes Bancaires (and subsequently refined, inter alia, in cases like Maxima Latvija, Generics and Budapest Bank).

Alas, the significance of Super Bock has to do precisely with the fact that the Court held, unceremoniously, that resale price maintenance is examined in accordance with the orthodox methodology that applies to the rest of agreements.

One should bear in mind that, before Super Bock, vertical price-fixing was deemed restrictive of competition always and everywhere (that is, irrespective of the economic and legal context and irrespective of the aims of the agreement at hand).

Such was the position taken by the Court in Binon. One of the consequences of this sui generis line of case law was that the pro-competitive benefits resulting from the agreement could only be considered under Article 101(3) TFEU.

In this regard, Binon was at odds with contemporary case law, where the pro-competitive potential of an agreement is crucial in the analysis. It is, in fact, the single most relevant factor allowing the Court to identify agreements with a restrictive object.

For instance, the fact that the contentious restraints sought to address free-riding concerns was central in Cartes Bancaires. In Budapest Bank, the Court went further, in the sense that it held that evidence that the agreement is capable of improving the conditions of competition means that its object is not anticompetitive.

If anything, the ECJ was more explicit in Generics, where it held that the parties may rely on the pro-competitive effects of a practice to cast a ‘reasonable doubt’ on its object. Such effects must be ‘demonstrated, relevant and specifically related to the agreement concerned‘.

Crucially, this aspect of the case law was reiterated in Super Bock.

In fact, Generics is particularly important in relation to resale price maintenance. Unlike cartels, which lack any redeeming virtues, vertical price-fixing is known to be potentially pro-competitive. As a result, it is at least possible for the parties to an agreement to argue that, in the relevant economic and legal context, it leads to pro-competitive gains.

An example of what such evidence may look like in practice was provided by a paper by Rhys J. Williams and recently published in the Journal of Competition Law & Economics (available in Open Access here). The study, initially conducted on behalf of DG Comp, finds that regulation fixing the price of books leads to increased sales (without having a noticeable impact on price levels).

Where evidence in this sense is produced in a given case, it would be sufficient to cast doubts about the object of the agreement. As a result, an authority would only be able to establish an infringement within the meaning of Article 101(1) TFEU by considering its actual or potential effects in the relevant market.

One must remember that, if the agreement is capable of improving the conditions of competition, it is (at the very least) questionable that it pursues an anticompetitive object (for how can its objective purpose be restrictive, if it improves the competitive process?).

To sum up, the significance of Super Bock is twofold. It departs from prior case law in that the Court held that resale price maintenance is not necessarily, or not always, restrictive by object. Second, the pro-competitive effects of the practice may lead to the conclusion that, in a particular economic and legal context, its object is not restrictive.

Advocate General Rantos’ much awaited Opinions in ISU and Superleague were released earlier today (see here for the first and here for the second).

For experienced competition lawyers, the legal interpretation suggested in both Opinions does not come as a surprise. Advocate General Rantos proposes, in essence, to follow the case law. Accordingly, he invites the Court to set aside the General Court’s judgment in ISU, which, as explained here, departed from the said case law in some important respects.

Advocate General Rantos is also explicit about the rules laid down by the UEFA and the FIFA. He strongly implies that they are not in breach of Articles 101 and 102 TFEU insofar as they appear to be ancillary to a legitimate aim. This is true, in particular, of both of the pre-authorisation requirement to set up a rival tournament (such as the Superleague) and of the sanctions (or the threat thereof) that may come with the breach of this requirement.

The two Opinions taken together make three fundamental points about the relationship between competition law and sports governance:

• First, the so-called conflicts of interest (that is, a governing body that has the power to authorise or prohibit competing ventures) are not, in and of themselves, problematic under competition law.
• Second, the ancillarity of a restraint and the object of the said restraint are two separate stages of analysis that must not be conflated.
• Third, the protection by a sports association of its economic interests is not anticompetitive in and of itself.

In any event, the two Opinions are a tour de force that provide a comprehensive analysis of the case law on object restrictions and on ancillarity: from vertical agreements (such as Maxima Latvija) to horizontal co-operation agreements (such as Gøttrup–Klim).

This overview shows that the issues underlying ISU and Superleague are relevant well beyond sports. Because the Opinions effectively address some common misunderstandings and remind us of the logic underpinning the relevant case law, they will provide helpful guidance in future non-sports cases.

International Skating Union: back to orthodoxy

The General Court’s judgment had given rise to some controversy insofar as it appeared to deviate from the relevant case law. Advocate General Rantos proposes to follow the orthodoxy. Doing so, in the specific circumstances of the case, means concluding that the rules at stake are not restrictive by object (and setting aside the first instance judgment).

Most readers will remember that the ISU case is, in essence, about a set of eligibility rules applicable to athletes taking part in competitions organised by the skating federation. These rules (of which there were variations over the years) amounted in practice to a non-compete obligation: taking part in unauthorised competitions came with sanctions for these athletes.

Advocate General Rantos rectifies the General Court’s analysis in a number of important ways. He points out, first, that the discretionary nature of the rules cannot lead to the conclusion that the object is anticompetitive. If anything, discretion might say something about the effects of the federation’s rulebook. The same is true of the severity of the penalties.

Second, Advocate General Rantos notes that the cases that were at the heart of the General Court’s analysis (OTOC and MOTOE) are not capable of substantiating the conclusions drawn from them at first instance.

In the first of these rulings (OTOC), the Court expressly held that the contentious rules were not restrictive by object; the second (MOTOE) was about State regulation, rather than a decision by an association of undertakings.

Third, and perhaps more importantly, the Opinion addresses the conflation, by the General Court, of two separate stages of analysis: objective necessity, on the one hand; and restrictive object, on the other. As explained by Advocate General Rantos, Meca Medina dealt with the ancillarity of sporting rules, and at no point did the Court hold that disproportionate rules are necessarily restrictive of competition.

Rules that do not satisfy the objective necessity test may or may not restrict competition. A conclusion in this sense requires, however, a case-by-case evaluation of their anticompetitive effects.

Superleague: the orthodoxy confirmed

The Superleague case concerns different angles of the same set of regulations laid down by FIFA and UEFA. The most relevant ones, in theory and practice, are those that have to do with the need to gather prior approval to organise a competition and the (threat of) sanctions for setting up a breakaway tournament.

In relation to these rules, Advocate General Rantos clearly suggests that they do not have a restrictive object. They appear to relate to legitimate sports-related objectives and therefore their adoption can be rationalised on pro-competitive grounds. As in ISU, the fact that the application of the criteria allow for some discretion or are not transparent and reviewable does not mean that their object is anticompetitive.

In addition, the Opinion lays down a comprehensive framework to evaluate whether or not the rules fall outside the scope of Article 101(1) in light of the ancillary restraints doctrine. Advocate General Rantos identifies four stages of analysis in this regard.

First, the objectives to which the rules relate must be legitimate. In the specific circumstances of the case, Advocate General Rantos has few doubts about the fact that the underlying objectives are not only legitimate, but relate directly to the so-called European model of sport.

Second, the rules must be inherent to the objectives pursued by the agreement (or decision by an association of undertakings). In this regard, Advocate General Rantos is explicit about the fact that both a pre-authorisation system and sanctions scheme appear to be objectively necessary to attain the objectives sought by FIFA and UEFA.

Third, the practical opeation of the rules. Advocate General Rantos engages with the closed nature of the Superleague and explains that, to the extent that it could undermine the legitimate sporting objectives sought, the non-recognition of the breakaway tournament seems inherent to the operation of the structure created by FIFA and UEFA.

Finally, proportionality. Even if it is ultimately for the referring court to deal with the matter, Advocate General Rantos signals strongly that sanctions against football clubs taking part in the Superleague (as opposed to the players themselves) would be proportionate. Crucially, he notes, again, that MOTOE is not the benchmark against which this criterion is to be assessed.

The analysis under Article 102 TFEU is not fundamentally different. It may be worth mentioning that, in the Advocate General’s view, the infrastructure around FIFA and UEFA would not quality as an ‘essential facility’ and that, even if it were qualified as such, a refusal to share it with breakaway teams could be objectively justified.

I have uploaded on ssrn (see here) a new paper, which deals with the application of Articles 101 and 102 TFEU to sporting activities. There is no need to point out how topical and important the issue has become, given that the Court hearings in International Skating Union and Super League are around the corner.

The paper builds on some posts shared on the blog (see here and here) and, in particular, a seminar delivered in the context of the mardis du droit de la concurrence at ULB.

It would be wonderful to hear your views on the piece, the main points of which can be summarised as follows:

First, it would be incorrect to see participants in a sports tournament (such as a football team) exclusively as competitors. The worth of participants depends on their ability to rival each other. In addition, cooperation between them allows them to offer something (a tournament, a championship) that is more than the sum of its parts (a collection of disparate games).

The consequence, for the purposes of competition law, is that organised sport is best understood as a joint venture in which participants both compete and cooperate (‘co-opete’) under the umbrella of a governing body. From this perspective, they are analogous to franchising and selective distribution systems.

Second, frictions of a horizontal and a vertical nature are bound to arise in organised sports. Frictions are said to be vertical when they involve governing bodies and individual participants. As recent cases show, opportunism is a potential source of vertical frictions.

Some participants may be tempted to undermine the joint venture (for instance, by setting up competing tournaments) while simultaneously trying to benefit from it. This behaviour is common, and a fact of business life. EU competition law has form dealing with opportunistic conduct (think of cases like Remia or Cartes Bancaires).

Third: what cases like Remia and Cartes Bancaires tell us is that measures aimed at tackling opportunistic behaviour (for instance, a seller setting up shop next door to the business it has just sold) are not restrictive of competition by object.

However, these measures may have anticompetitive effects. Ordem dos Técnicos Oficiais de Contas provides a comprehensive framework for the assessment of the restrictive impact of regulatory measures such as those laid down by sports governing bodies.

Fourth, controversies in the most recent cases can be primarily explained by a tendency to conflate (i) the question of whether an agreement is objectively necessary and (ii) that of whether it has a restrictive object.

Fifth, and in the same vein: some of the most recent developments appear to have introduced a fundamental transformation. What used to be a safe harbour (a set of conditions under which the agreement escapes the prohibition altogether) is now being transformed into strict requirements that sporting organisations need to satisfy to avoid a finding of infringement.

This transformation from safe harbour to minimum requirements seems to be the consequence, at least in part, of the influence of Article 106 TFEU case law. MOTOE has been cited as a precedent in support for this stricter stance vis-a-vis sports governing bodies.

However, these references to MOTOE miss a crucial aspect of this case: the preliminary reference from the Greek court concerned the lawfulness of national legislation under Article 106 TFEU. The case was not about the legality of regulations set by an autonomous body. Accordingly, MOTOE is only of limited relevance (if at all) in the latter scenario (at stake in the most recent developments).

The application of Article 106 TFEU standards into the case law would fundamentally change the approach of competition authorities to sports governance. Inevitably, competition authorities would be frequently asked to strike the right balance between cooperation and competition. Legal considerations aside, this shift would have major consequences from a policy-making standpoint.

Finally, I draw some lessons for some of the most interesting pending issues in sports regulation, including the following:

• Salary caps, which limit how much teams can spend, do not seem to be restrictive by object; what is more (and as per Wouters and Meca Medina), they do not necessarily have anticompetitive effects. The object of salary caps is to enhance competitive balance betwen the joint venture (see, by analogy, Cartes Bancaires, where the contentious clauses were a response to a similar concern).
• Transfer restrictions, which would limit whether, and how, often, some teams can hire players from other participants, would not be restrictive of competition by object either. Again, the object would be to preserve competitive balance and accurately reflect interdependence.
• Finally, competition law is agnostic about open and closed championships. Nothing in the case law suggests that Articles 101 and 102 TFEU mandate a particular model. A system of promotion of relegation, which is a key feature of the European sports model, does not flow inevitably from EU competition law.

Please do not hesitate to reach out and share your thoughts with me (via the blog or email).

And: I have nothing to disclose.

I very much look forward to seeing many of you on Tuesday of next week (16 November, 7pm) in Brussels. I am proud to have been invited by Denis Waelbroeck and Jean-Francois Bellis to discuss recent developments in relation to the interface between competition law and sports. I will be doing so in the context of the legendary mardis du droit de la concurrence.

Information on how to register for the session can be found here. The information will be delivered in hybrid format. Should you have any questions on the registration process and/or on access to the event, do not hesitate to contact Françoise Vanden Broeck via Francoise.Vanden.Broeck@ulb.be.

The application of competition law provisions to sporting activities could not be more topical, with two pending rulings. One is a preliminary reference concerning the ongoing dispute between the UEFA/FIFA and the Super League (see here). The other one is the ISU case, concerning the lawfulness of some rules laid down by the International Skating Union (see here).

The cases are not only topical but also fascinating from a legal standpoint. Evaluating the compatibility of these rules with Articles 101 and 102 TFEU forces us to engage with traditional doctrines such as ancillary restraints and classics of the case law from Gottrup-Klim to Cartes Bancaires.

I plan on expanding the thoughts on this and this posts in a paper to be published after the presentation. Your insights, in what promises to be a great discussion, will definitely improve it.

A bientôt in Brussels!

In the post published on Wednesday, I covered the substantive reasons why the Digital Markets Act (DMA) is likely to underdeliver (and if it does, it will do so by design). There are, in addition, a number of institutional factors that one needs to consider.

It is not a secret that the institutional context within which a regime is applied may play a major role in its success (not to mention its substantive scope and reach). The DMA is not an exception in this regard. It makes sense to ask, and debate, whether the premises underpinning the regime (and the resulting institutional setup) are in line with what the restructuring of digital markets requires.

Getting to the remedy stage is just the end of the beginning

Competition law has been criticised by some stakeholders for placing cumbersome demands on authorities. If it were easier to establish an infringement (or if establishing an infringement were not a precondition to intervene in the first place), the argument goes, enforcement would be more effective. Alternatively, some commentators have argued that some of the recent cases have been a “failure” (no less) because of the remedies chosen by the Commission.

These criticisms come across not only as unfair to the Commission, but also as misguided. As I have mentioned many times, establishing an infringement in digital cases is, to paraphrase Churchill, just the end of the beginning. Intervention aimed at fundamentally restructuring markets and/or altering business models is distinctly difficult and resource-intensive at the remedy stage.

In other words: the real challenge in digital cases is to figure out how to redesign a product, how to change a monetisation strategy and how to recalibrate the allocation of rents within an ecosystem. Establishing an infringement, by comparison, is just an amuse-bouche. We have always known that competition law struggles with remedies of that nature and therefore nobody should be surprised that intervention demanding authorities to restructure markets takes time or fails to fulfil the expectations of some stakeholders (more on this below).

Discussions around the DMA occasionally give the impression that the new regime is based on the idea that, by reversing the burden of intervention and, effectively, moving to the remedy stage from the get-go, the main difficulties will have been addressed. The opposite, in fact, is true.

I have often said that some of the obligations set out in Article 6 of the DMA would each require a regulatory framework of their own. In fact, a few of these duties seem far more challenging, for an agency, than regulating telecommunications. And if you take a look at how the latter are regulated in the 179 pages of the EU Electronic Communications Code, you will get an idea of the magnitude of the task ahead in digital markets.

As can be seen, the DMA does not represent a substantial change from competition law on what really matters in practice. For the same reason, it seems likely that the same stakeholders that expressed frustration with the pace and effectiveness of Article 102 TFEU enforcement will be just as dissatisfied once the DMA is in force.

Obligations do not become self-executing by decree

The solution to the challenges raised by fundamentally restructuring digital markets is, according to some, to ensure that obligations are “self-executing”. With the appropriate regulatory design, the argument goes, gatekeepers will adapt their conduct, products and business models to the demands of the DMA.

This line of thinking is what I have labelled the “Paulo Coelho School of Regulation”. It seems based on the hopeful view that the self-executing nature of an obligation depends on the willpower of the legislature. If it believes hard enough, it will ensure that the regime works without delays in its implementation and without a large regulatory apparatus.

I am afraid I do not share the optimism of the coelhians in our community. In the same way that a regime cannot turn natural monopolies into effectively competitive oligopolies, it cannot turn obligations into self-executing mandates by decree.

Again, the experience acquired in telecommunications provides a valuable cautionary tale. The liberalisation of that sector in New Zealand was based on the hope that competition law alone would do the job, and that the cumbersome access and interconnection obligations would become self-executing through court action. It did not take long to realise that such hopes would not materialise.

There is a chance that the DMA will become a second “New Zealand moment” in the history of regulation once it becomes clear that, more than “further specification”, some duties necessitate all but a sector-specific framework of their own.

The risk of perpetual grievances: when will obligations go far enough?

One can think of a third, final factor, that may stand in the way of the DMA delivering (or, rather, which may create the impression that the DMA fails to deliver).

The design of the DMA makes it particularly vulnerable to the risk of perpetual grievances. First, the obligations (at least those enshrined in Article 6) are relatively broad and vague, in the sense that they can be construed in a multitude of ways. Second, there is no obvious benchmark to assess whether or not they meet the objectives set out in the regime. Third, there is no point at which obligations cease to be imposed: there is no real sunset clause or similar mechanism.

Combine these three instruments, and one can see how stakeholders benefitting from intervention would be able to claim that a particular incarnation of the obligations in insufficient in the sense that it does not go far enough, or that it is not ambitious enough. And it would be difficult to blame them: why not go for the maximalist approach allowed under the regime? Is it not what any authority that is serious about achieving the objectives of the DMA would do?

Add to the above the fact that several agencies will compete for the same regulatory space (within or outside the confines of the DMA; within or outside the EU) and it is easy to see how a never-ending quest towards maximalism may be a feature of intervention in digital markets.

I look forward to your comments (I had nothing to disclose on Wednesday, and nothing to disclose today).

The world of sport was shaken a few weeks ago when a number of clubs announced a breakaway tournament, the SuperLeague. The follow-up suggests that the consequences for sport will not be immediate (and might never be manfiested). From a competition law perspective, however, the implications may not take long to unfold: it appears that last week, a Spanish judge has referred some questions to the Court of Justice for a preliminary ruling concerning the compatibility of UEFA and FIFA regulations with EU competition law (see here).

The submission, arguably inevitable, could not be more timely: the ISU judgment (see here) was rendered by the General Court in December of last year and has since been appealed to the Court of Justice (see here). Some of the fundamental issues raised by the two cases are identical.

In essence, ISU was about a non-compete obligation imposed on athletes taking part in competitions organised by the International Skating Union and its members. The practical consequence is that participants in competitions not authorised by the ISU would face a lifetime ban (with all the dramatic consequences that follow).

The similarities are obvious with any disciplinary action that football governing bodies might take against teams having taken part in the organisation of the SuperLeague (or at least those that have not given up on the idea).

Interestingly, the public perception was not the same. While there was a great deal of sympathy vis-a-vis athletes facing a ban from the ISU, many thought football governing bodies would be right to take disciplinary action against the teams forming a breakaway league.

From a competition law perspective, howevever, I fail to see any differences between the two. In both cases, there is a (de iure or de facto) non-compete obligation imposed by the association setting up the tournament. Accordingly, whether or not the said obligation amounts to a restriction of competition (by object or effect) should be assessed in accordance with the same principles.

Which takes me to the General Court’s judgment in ISU. I already explained, when the Commission decision came out (see here), that I struggle to see how a non-compete obligation such as the one at stake in the case can be seen as a restriction by object. Moreover, I explained why a finding of a ‘by object’ infringement in the case is difficult to reconcile with, inter alia, Cartes Bancaires and Maxima Latvija (the first crucial in relation to free-riding considerations and the second on non-compete obligations).

That post still reflects my views on the case. I fail to see why an association investing in the development of a competition and giving visibility to athletes would be infringing Article 101 TFEU, by object, when taking measures against free riding by competing organisations.

Alas, the General Court came to a different conclusion. The first instance judgment, however, seems to be at odds, in some crucial respects, with the case law on restrictions by object. In this sense, it provides a test for the case law developed in the past few years and illustrates where the potential difficulties might arise in practice in the coming years.

The points on which to focus (and the issues in which there seems to be some tension between the General Court judgment and the established case law), are the following:

• First, the conflation of the ancillary restraints doctrine (whereby some agreements escape Article 101(1) TFEU altogether) and the question of whether a practice is restrictive by object.
  • Contrary to what the judgment appears to suggest, a disproportionate measure is not necessarily restrictive by object.
  • The General Court relies on case law dealing with ‘by effect’ infringements to assess the restrictive object of an agreement; there is therefore a mismatch between the case law cited and the conclusions drawn from it.
• Second, the allocation of the burden of proof.

Ancillary restraints and restrictions by object: why they tend to be conflated (or object and effect in Ordem dos Técnicos Oficiais de Contas) 

The judgment is valuable in that it reveals that there are two tests that tend to be conflated in practice: the ancillary restraints doctrine, on the one hand, and the assessment of whether an agreement is restrictive by object, on the other.

Under the ancillary restraints doctrine, the question is whether some clauses are ancillary to a pro-competitive transaction and thus whether they fall outside the scope of Article 101(1) TFEU altogether. Where a restriction is found to be ancillary, there is no restriction of competition, whether by object or effect.

The ancillary restraints doctrine has an illustrious history in EU competition law: salient examples include Metro I (on selective distribution) and Pronuptia (on franchising). When it comes to non-compete obligations, Remia is an excellent example.

These cases define the conditions under which the clauses are ancillary and thus escape the prohibition altogether. Typically, these conditions include a proportionality assessment: only where the measure is proportionate does it escape Article 101(1) TFEU. What if one or several of the conditions, including proportionality, are not fulfilled? In that case, it would still be necessary to assess whether the agreement is restrictive by object or effect.

This is the stage at which errors arise. Every now and then, courts and authorities wrongly conclude that, because the ancillary restraints doctrine is not applicable (for instance, because the measures go beyond what is necessary), the agreement is restrictive by object. In other words: the test under the ancillary restraints doctrine and the assessment of the restrictive object of the agreement are sometimes conflated.

A clear example of this conflation is provided by Ping (see here for my analysis). In that case, the UK CMA concluded that the clauses in the agreement were restrictive by object insofar as they were not objectively necessary to attain the pro-competitive aims of the agreement. In other words: the CMA conflated objective necessity and restrictive object. The CAT identified this error of law on appeal (see here).

I notice a similar conflation in the ISU case. It is well-established case law that, in certain circumstances, sporting rules fall outside the scope of Article 101(1) TFEU altogether. In cases like Meca Medina, the Court of Justice referred to key ancillary restraints judgments such as Wouters and Gottrup-Klim. More precisely, the Court ruled, in para 47 of Meca Medina, that any restrictions must be proportionate for them to fall outside Article 101(1) TFEU.

It does not follow from that case law, however, that the agreement is necessarily a restriction by object if it goes beyond what is necessary to attain a legitimate objective. Quite the opposite, in fact. Para 47 of Meca Medina expressly refers to the potential restrictive effects of the agreement (as opposed to its object) where the clauses in question are found to be disproportionate.

There is clear tension between this line of case law and paras 100-114 of the ISU judgment, where the General Court suggests, in contradiction with the abovementioned rulings, that a measure that pursues a legitimate objective is restrictive by object if it goes beyond what is necessary (see in particular paras 103 and 110). In the same vein, Wouters and Meca Medina are not capable of substantiating the conclusions drawn from them.

The General Court makes abundant references to Ordem dos Técnicos Oficiais de Contas. This judgment is relied upon to justify a finding of a restriction by object, even though (just as Meca Medina) the Court did not treat the restraints in that case as ‘by object’ infringements (in fact, the Court of Justice expressly ruled that they did not amount to a ‘by object’ prohibition).

That judgment exemplifies, perhaps better than any other, that, contrary to what the General Court suggests, measures that go beyond what is necessary to attain a pro-competitive aim (for instance, because they provide for penalties that are too severe) are not necessarily restrictive by object.

Conflating the ancillary restraints doctrine (or, more generally, objective necessity) and the question of whether an agreement is restrictive by its very nature could have major consequences in practice. It would substantially expand the ‘by object’ category and would thus run counter to the principle whereby the said category is to be interpreted restrictively.

I guess this point will be central in the assessment before the Court of Justice.

Burden of proof and restrictions by object: what the authority needs to prove

If I look back at the landmark cases of the past few years, it appears that the rules governing the allocation of the burden of proof are at the heart of most disputes. It would seem that, very often, administrative action is quashed for reasons pertaining to the allocation of the burden of proof. From State aid to merger control, the issue cuts through key judgments.

ISU might well be the next on the list. It is unquestionable that the Commission bears the burden of showing that an agreement amounts to a restriction by object. One would be forgiven for reaching a different conclusion when reading ISU. The judgment goes over the content of the non-compete obligations and their objectives, and rules that they go beyond what is necessary (even if the legitimate objectives were to be accepted).

What seems to be missing, however, is the following step (that is, the evaluation of the evidence showing, to the requisite legal standard, that the object of the agreement is restrictive of competition). That step is crucial: it is still necessary for an authority to show that the contentious measures are caught by Article 101(1) TFEU by their very nature.

Contrary to what one may infer from ISU, it is one thing to rule out some potential justifications for the agreement and another one to evaluate whether the agreement in question is restrictive by object. The second does not follow, logically and inevitably, from the former. As already pointed out, this second step was missing in the judgment.

Here and there, the judgment gives the impression that it is for the parties to show that the agreement is not restrictive by object. This conclusion is inescapable when one reads the evaluation, by the General Court, of the objectives pursued by the contentious rules (paras 84-89). The tension between the judgment and the rules governing the allocation of the burden of proof also transpires from an analysis of paras 110-114.

The General Court, while accepting that the economic nature of the restraints cannot be a reason to conclude that their object is anticompetitive, relies on Ordem dos Técnicos Oficiais de Contas to rule that the ISU did not behave in a manner consistent with its duty to ensure undistorted competition. As pointed out above, it is sufficient to take a look at the Ordem dos Técnicos Oficiais de Contas judgment to realise that this fact alone is insufficient to substantiate the claim that an agreement is restrictive by object.

It remains to be seen how these points will be addressed by the Court in the appeal. In any event, ISU provides an excellent illustration of the areas, concerning the interpretation of Article 101(1) TFEU, in which tension between the case law and the administrative practice are likely to arise.

I very much look forward to your comments (as ever, nothing to disclose).

Thibault Schrepel has been kind enough to invite me to write a piece for his Concurrentialiste (see here). It was a good chance to explore some of the themes that are central to my ongoing research projects and to share my thoughts on some of the proposals to regulate digital markets that are doing the rounds. My message? Regulatory design is key, and there are instances in which giving discretion to an authority might not be in the latter’s interest (or the public interest at large). I reproduce my post below, and very much look forward to your comments. Thanks again for the invitation, Thibault!

Emerging regimes for the regulation of digital markets share a common philosophy. They are grounded on the belief that, if authorities enjoyed more discretion and, in the same vein, if the constraints to which they are subject were reduced, they would be in a position to intervene fast, and adopt the sort of far-reaching remedies which, the argument goes, digital markets demand. In this sense, the new instruments represent, first and foremost, a departure from the limits of competition law systems. Establishing the anticompetitive object or effect of a practice and ensuring that the theories underpinning intervention reflect mainstream views are seen, from this perspective, as a burden that may dangerously delay much-needed action.

There are reasons to question whether this philosophy will deliver on its promises. Granting discretion to an authority to fine-tune digital markets whenever it deems it necessary does not address the fundamental challenges raised by the measures proposed. The phenomenal difficulty that comes with the latter does not relate to the lack of discretion, but to the very nature of the intervention expected from authorities. Redesigning products (as in Google Shopping), altering business models (as in Android) and re-allocating rents across the supply chain (is a 30% commission too much or just about appropriate?) are complex tasks, prone to errors, which are not made any easier by doing away with the need to show the anticompetitive object and/or effect of a practice (or the need to weigh such effects against any pro-competitive gains). The lengthy aftermath of the Google saga, and the aura of limbo and uncertainty that surrounds the remedies implemented in those cases, provides eloquent evidence in this sense.

This piece, however, makes a different point. It is submitted that granting discretion to an authority to fine-tune digital markets does not necessarily do it any favours. On the contrary. Depending on the design of the regime, discretion may in fact weaken it vis-à-vis stakeholders. One of the most precious powers of an administrative authority (and all of us, really) is the ability to say no. The ability, in other words, to see off pressure from firms and governments and take a decisive stand on a particular issue (or not take a stand at all). Paradoxically, the problem with discretion is that it empowers the authority to reach virtually any decision it desires from a policy-making standpoint. Once this impression is created, it may be difficult for an authority to justify why it favours certain outcomes and why it does not opt for the maximalist (or minimalist) positions allowed under the regime.

It is not difficult, on the other hand, to anticipate the behaviour of stakeholders potentially benefitting from regulatory intervention. It is natural for them to try and secure the outcomes that, within the boundaries of what is possible, best serve their interest. Where, for instance, a break-up of Big Tech firms is allowed under the regime, there is no downside, from their perspective, in pushing for structural action. An authority that is serious about meeting the objectives set in legislation, stakeholders would claim, should seek the most effective remedy, and the one that genuinely preserves competition on adjacent markets. If the regime requires intervention, and allows for the break-up of firms, all the pressure lies with the authority.

The aftermath of Google Shopping and Android gives a flavour of how these stakeholders may react to authorities’ newly found discretion. In the first of these cases, the European Commission imposed a duty of neutrality regarding the way in which the relevant search results are displayed. Ostensibly, the firm’s chosen path complies with the obligation, even if it just one of many ways to align its behaviour with the decision’s requirements. Rivals and their advisers, however, have been repeatedly pushing – again, as one would logically expect – for interpretations of the non-discrimination duty that are more favourable to their own interests. These attempts have little chance of success (and so the European Commission has signalled) because of the very constraints that come from the competition law system. The point of remedies under Regulation 1/2003 is to bring the infringement to an end, not to reshape markets to optimise rivals’ chances of success. Now think of how different the picture would be – and how much more powerful rivals would – if this constraint disappeared and every approach – from the minimalist to the maximalist – were in theory possible and left in the hands of the authority.

If you want another example of an area of the law where the European Commission enjoys broad discretion and is, as a result, subject to pressure to reach certain outcomes, think of State aid. Under Article 107(3) TFEU, the authority is empowered to define, as it sees fit, the instances in which subsidies and similar measures are in the interest of the EU as a whole. And it is not necessary to explain at any length why lobbying by EU Member States awarding aid can be just as formidable as the calls for action coming from dozens of firms operating in the digital sphere.

Of particular interest are the insights to draw from the way in which the European Commission has chosen to exercise its discretion in the field. Years of enforcement have taught the authority that it is unlikely to withstand pressure from EU Member States with a stake in a particular measure. It just does not trust itself. In this sense, it knows that its discretion is most powerful and best used when it is constrained ex ante and thus leaves minimum (if any) scope for manoeuvre in individual cases. Just like Ulysses when he reached the Land of the Sirens, the European Commission has tied its hands tightly to ensure that its decisions are in the public interest (and it is able to say no).

If you have never done so, take a look at State aid instruments implementing Article 107(3) TFEU – say for instance the Guidelines on regional aid, or the General Block Exemption Regulation. The most apparent feature of most of this body of law is its infinite dullness: pages and pages of figures detailing to the millimetre the intensity of the aid that is allowed. Beneath the dullness, however, lies the fundamental lesson to draw for the future regulation of digital markets: once the European Commission is freed from the constraints coming from the EU competition law system, it will have to devise a set of sound, effective and meaningful constraints to make sure it acts in the public interest. If it does not do so, it risks losing control of policy-making altogether.

I have uploaded a new paper on ssrn (see here) on Anticompetitive Effects in EU Competition Law.

What was the impetus behind the paper? The ‘effects-based approach’ have long been part of discussions, yet there are only a handful of judgments addressing the analysis of effects in a meaningful way.

There is still some uncertainty about what anticompetitive effects are and how they are measured in concrete cases. On the other hand, the Court has already clarified the key issues. Against this background, I felt I could contribute to the debate by bringing together the various strands of the case law and present them in a single framework.

The paper tries to organise what we know about effects around the main variables that shape its meaning and scope, and in particular:

• The time dimension: actual and potential effects (and retrospective and prospective analysis).
• The dimensions of competition (inter-brand and intra-brand) and the counterfactual (ex ante and ex post).
• The meaning of effects: effects can mean many things, from a competitive disadvantage, to harm to the market structure to harm to consumers. The analysis is particularly sensitive to the way this variable is defined.
• The threshold of effects: again, the analysis would vary substantially depending on whether it is enough to show that effects are plausible or whether instead it is necessary to establish that effects are likely to happen.

It would not be obvious to summarise the paper in a single post (I will probably add some dedicated entries). It may make sense to mention, however, that the notion seems to have acquired a clear meaning over the years.

In particular, it seems like effects are more than a competitive disadvantage and/or a limitation of a firm’s freedom of action (think of Deutsche Telekom, Post Danmark I, MEO, Maxima Latvija, Generics and, in the context of merger control, Tetra Laval and GE/Honeywell).

We know from experience that having an edge over rivals is not necessarily fatal for competition; it may even spur rivalry (think of Post Danmark I, where rivals were able to withstand a below-cost price campaign). A limitation of a firm’s freedom of action is not enough either (think of Generics, where the Court held that the effects should be more than the impact of each individual agreement).

What matters, the case law suggests, is whether firms’ ability and/or incentive to compete is affected by a practice or transaction, and this to such an extent that competitive pressure is reduced. Thus, no effects would exist where firms on the market are still willing and able to compete.

The threshold of effects is another contentious issue. We all know that effects can be actual or potential. The real question, when the analysis of potential effects is at stake, is whether it is sufficient to show that harm is plausible or it is ‘more likely than not’ (to use AG Kokott’s expression in Post Danmark II).

If we pay attention to what the Court does, it appears that, regarding ‘by effect’ conduct under both Articles 101 and 102 TFEU (as well as mergers), the negative impact of a practice should be probable (‘more likely than not’) and not simply plausible. Just think of how the analysis was actually conducted in, inter alia, Delimitis, TeliaSonera, Post Danmark II, Kali & Salz and Microsoft/Skype. 

As far as ‘by object’ conduct is concerned, it is sufficient to show that harm to competition is ‘plausible’ (the threshold, in other words, is much lower). Bananas or Toshiba are clear examples in this regard, and reveal how much the analysis differs between the ‘by object’ and ‘by effect’ stages.

As I say, I will probably follow up with more posts on the paper. In the meantime, I very much look forward to your comments.