Archive for the ‘Guest bloggers’ Category
(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.’
As I said in my farewell post to Nicolas, I don’t think it’s good for this blog to be run only by a practitioner like myself, so we have a “new” luxury addition to the team.
As of today, Pablo Ibáñez Colomo, who’s already been writing here for the past few months, has finally cracked and will join Chillin’Competition as editor. Most readers of this blog already know Pablo. He’s an Associate Professor of Law at the London School of Economics; prior to that was a teaching assistant at the College of Europe for three years (I was actually his student there), completed his PhD at the European University Institute in Florence (he was also Visiting Researcher at Stanford during his research period) and, among other things, is also one of the authors of the best competition law textbook ever written (in Spanish).
More importantly, like Nicolas, Pablo is also a reputed young and independent academic, a brilliant guy, a very good friend, a person whose ideas often differ from mine. On top of that, and in case you haven’t realized yet, he’s probably even geekier than Nicolas and myself :)
P.S. We will also be accepting more “guests posts”, so feel free to contact us (email@example.com and P.Ibanez-Colomo@lse.ac.uk) in case you have an urge to get anything off your chest.
I want to thank Alfonso and Nicolas for letting me post here. I’ve been following the discussion of the most recent Google competition case in Europe here at Chillin’ Competition (click here for Alfonso’s comments and here for Pablo Ibañez Colomo’s) and elsewhere with great interest. And I’ve written about it back on my home blog in the US, Truth on the Market. But I have a keen interest in discussing the case with a more European audience, so when Alfonso asked for thoughts about the case, I gladly took him up on it . The following is a re-publication of my post, Microsoft’s Android Anathema. I’d welcome any feedback. Thanks!
Microsoft wants you to believe that Google’s business practices stifle competition and harm consumers. Again.
The latest volley in its tiresome and ironic campaign to bludgeon Google with the same regulatory club once used against Microsoft itself is the company’s effort to foment an Android-related antitrust case in Europe.
In a recent polemic, Microsoft consultant (and business school professor) Ben Edelman denounces Google for requiring that, if device manufacturers want to pre-install key Google apps on Android devices, they “must install all the apps Google specifies, with the prominence Google requires, including setting these apps as defaults where Google instructs.” Edelman trots out gasp-worthy “secret” licensing agreements that he claims support his allegation (more on this later).
Similarly, a recent Wall Street Journal article, “Android’s ‘Open’ System Has Limits,” cites Edelman’s claim that limits on the licensing of Google’s proprietary apps mean that the Android operating system isn’t truly open source and comes with “strings attached.”
In fact, along with the Microsoft-funded trade organization FairSearch, Edelman has gone so far as to charge that this “tying” constitutes an antitrust violation. It is this claim that Microsoft and a network of proxies brought to the Commission when their efforts to manufacture a search-neutrality-based competition case against Google failed.
But before getting too caught up in the latest round of anti-Google hysteria, it’s worth noting that the Federal Trade Commission has already reviewed these claims. After a thorough, two-year inquiry, the FTC found the antitrust arguments against Google to be without merit. The South Korea Fair Trade Commission conducted its own two year investigation into Google’s Android business practices and dismissed the claims before it asmeritless, as well.
Taking on Edelman and FairSearch with an exhaustive scholarly analysis, German law professor Torsten Koerber recently assessed the nature of competition among mobile operating systems and concluded that:
(T)he (EU) Fairsearch complaint ultimately does not aim to protect competition or consumers, as it pretends to. It rather strives to shelter Microsoft from competition by abusing competition law to attack Google’s business model and subvert competition.
It’s time to take a step back and consider the real issues at play.
(Click here to continue reading)
On the tax-related State aid investigations. Many newspapers opened this week with big headlines on the alleged news that the Commission had adopted a “preliminary decision” regarding the State aid probe into Apple (see e.g. here). I’m a bit intrigued by what’s behind this press campaign; the only news is that the Commission has published in the Official Journal decisions that had already been adopted before the summer. This sort of publication is never news, so why the fuss about it now is beyond me.
[It is, by the way, interesting to observe how some developments are “sold” twice, whilst others –including the closure of infringement proceedings against luxury watch manufacturers– go under the radar (disclaimer/advertising: my firm represented one of the main companies subject to that investigation)].
Given that I’ve lately been working on loads of tax-related State aid cases before the General Court I’ve developed a particular interesting in these matters. We might comment more in-depth on them in the future; for the moment, I’ll simply point out that by questioning not national taxation systems or tax rulings in general but rather APAs (advance price agreements) the Commission might be opening Pandora’s box (how many multinationals –including many EU ones- have similar arrangements?; could all of those now be challenged under State aid rules? ) For my previous comments on these issues, see here.
On the Google search investigation. The Google case has been on the news again, which, paradoxically, is no news. It’s been a while since we last commented on this investigation (partly because there wasn’t anything substantial on which to comment, and partly because the susceptibility around these issues is quite acute). One of the main contributors to this blog –Pablo Ibañez Colomo- gave his views to Global Competition Review a few days ago; Pablo explained that “[i]t is very controversial to argue that, as a rule, article 102 [prohibiting abuse of dominant position] requires all dominant companies to give access to their facilities – including operating systems or search engines – on non-discriminatory terms and conditions (…) I do not believe there is case law supporting this understanding of the provision.” According to Pablo, “there is the expectation that remedies are justified even if it is not clear why Google’s conduct is illegal”.
Last time I wrote about the case I made some comments on the politicization of competition law enforcement (see here). Since then, Vice-President Almunia has explained that politics are being left aside of the case (here, ehem). So, politics aside, let me focus on a purely legal point without discussing who’s right or wrong:
The complainant’s interesting main legal argument now seems to be that Google’s proposed commitments do not address the concerns set out in the Commission’s preliminary assessment (see, e.g. here). This a most interesting claim, and one on which many –including myself- can’t really comment because we haven’t read the preliminary assessment. In fact, no one other than Google was supposed to have seen it (according to the Manual of Procedure, “the complainant has no right to a hearing or to receive a (non-confidential) copy of the Preliminary Assessment or to have access to information”). In this case, however, the Hearing Officer granted a request for access on the part of some of the complainants (see the previous hyperlink for a source).
Now, consider the future implications of this move: in the past the Commission could overdo a bit its concerns in its preliminary assessments because, after all, they are not subject to the same requirements as the SO, would not be subject to any rebuttal on the part of its addressee, unlike SOs do not need the approval of the Commission’s President and, at most, could give the Commission a stronger hand in commitment negotiations (which, regardless of what Alrosa says, obviously exist). Now that the Commission is aware of the fact that preliminary assessments will/could be accessed by complainants, will it have to show more self-restraint? Will this have an impact on future commitment negotiations? Would these problems be avoided if the Commission was required to adopt a proper SO prior to entering into commitment negotiations?
On Android. I also saw some headlines this week anticipating, once more, the initiation of a formal investigation into Android. As frequent readers will recall, I’ve already written quite extensively about this (see here). On October 15th (the same day in which, by the way, the Commission will be making public an avalanche of decisions…) I’ll be speaking about it at a conference in Brussels, so in case anyone has thoughts about the case feel free to send them my way.
On the Euribor probe and the role of the Ombudsman. Last week, the fact that Crédit Agricole had resorted to the Ombudsman to complain about a possible bias on the part of the Commission also hit the news. CA’s claim has to do with the Commission having adopted a settlement decision finding a cartel infringement in relation to the Euribor prior to concluding the infringement proceedings against those who chose not to settle (see Gaspard Sebag’s piece for Bloomberg here). This obviously raises most interesting procedural questions, which I’d nevertheless tend to think pertain more to the realm of judicial review than to the Ombudsman. The piece includes a quote of mine which is a candidate for the prize of ‘dullest comment of the year in the press’: “It’s always uncomfortable to have to deal with the Ombudsman”. A deep thought that is… ;)
[Note by Alfonso: I devoted part of the weekend to drafting a comment on the recent Court Judgment in GCB, but Pablo Ibañez Colomo has proved quicker. Here’s his reaction to the Judgment; mine will follow].
The ECJ judgment in Groupement des Cartes Bancaires will be discussed at length in the coming months (maybe more so than MasterCard). The outcome is unsurprising (at least in my view). The Court, as AG Wahl, applies the principles stemming from a well-established line of case law, which has proved to be remarkably resilient. It should now be clear beyond doubt that relying on pigeon holes or formal categories to identify object restrictions can often be misleading. What matters is the rationale behind the agreement (as inferred from its wording and the economic context), and not so much whether it includes a particular restraint. Thus even an agreement providing for price-fixing may not be restrictive by object (in para 51 of the judgment the Court is careful not to refer to any form of price-fixing between competitors, but to naked price-fixing cartels and their functional equivalents). Conversely, an agreement that does not fit within the ‘suspect’ categories may also be restrictive by its nature – this is how I understand Allianz Hungaria, and the reason why it makes sense to me.
It should also be clear after Groupement des Cartes Bancaires that identifying the object of an agreement and establishing its restrictive effects are two separate steps. The first one may at times require a careful and lengthy analysis of the relevant legal and economic factors that explain the logic and purpose of a restraint. However, this fact does not mean, as has sometimes been claimed (in light of what now seems to be a misinterpretation of T-Mobile), that it is tantamount to establishing the restrictive effects of the agreement. The ECJ finds that the GC did not distinguish between the two steps. Claiming that an agreement is capable of having restrictive effects is not the same thing as saying that it is, ‘by its nature’, contrary to Article 101(1) TFEU (see para 69). Additional questions around this point will soon be addressed in academic articles and discussed at conferences. I am ready to guess that the formula chosen by the Court (‘sufficient degree of harm to competition’) will give rise to speculation about its exact scope and meaning (I have my answer, but it would be the nth time I write about it in the blog). It is also necessary to read some paragraphs (49-51, for instance) together with the judgment in Expedia, where it was clarified that ‘by object’ agreements that have an effect on trade between Member States appreciably restrict competition.
There is another aspect that is not strictly related to the substantive analysis but that will have piqued the interest of some people. The ruling could be used in textbooks to illustrate the principles of judicial review in EU competition law. The Court is very explicit and structured in this regard. First, it sets out the legal criteria for the assessment of the object of an agreement and comes to the conclusion that the GC had erred in law by applying a different set of principles. Secondly, it examines the legal characterisation of the agreement as restrictive ‘by nature’ and finds an additional error in law. It would seem from the judgment itself that the analytical clarity with which judicial review is conducted is a ramification of KME and Chalkor. In fact, the ECJ holds that the GC had not complied with the standard of review set out in the case law (para 91).
Groupement des Cartes Bancaires is likely to have consequences for some cases pending before the Commission and the GC. I thought ‘pay for delay’ when I read the bits about the relevance of ‘experience’ and about BIDS. I thought ‘pay TV investigation’ when I read that, in order to determine whether an agreement is restrictive by object, ‘it is […] necessary to take into consideration the nature of the goods or services affected, as well as the real conditions of the functioning and structure of the market or markets in question’. In spite of its relevance for the case, this issue was never considered by the ECJ in Murphy. It had not been raised by the parties. In the context of formal proceedings before the Commission, it would inevitably have to be addressed. I have recently published a paper discussing how this factor could influence the outcome of the investigation.
Interesting times ahead!
(by Pablo Ibañez Colomo)
Voices that relativise the problems with Article 102 TFEU case law are not infrequent. It may be true that the case law is not beyond reproach in all respects, the argument goes, but perfection is not of this world. The fact that rulings are often criticised simply means that Article 102 TFEU is an inherently controversial provision and that the stakes in abuse cases are generally very high, not that there is something fundamentally wrong with the preferences expressed by EU courts. And in any event, the alternative, economics-based, approaches have their problems too. The current case law is just the expression of a legitimate choice.
There is of course some truth in this position. At the same time, I find a bit defensive and as such problematic because it can become an obstacle to an honest and constructive exchange of ideas. I can think of at least a fundamental aspect that is uncontroversially (or objectively, if one prefers) wrong with Article 102 TFEU case law. What makes it even more interesting is that it fails to attract the attention that, in my view, it deserves. We all know that exclusive dealing and loyalty rebates are (absent an objective justification) abusive under Article 102 TFEU. The assumption underlying this rule is discussed far less often and is crucial to understand the case law. In paragraph 77 of Intel, the Court repeats the old formula whereby the abovementioned practices, as opposed to quantity rebates, ‘are not based – save in exceptional circumstances – on an economic transaction which justifies this burden or benefit but are designed to remove or restrict the purchaser’s freedom to choose his sources of supply and to deny other producers access to the market’.
This statement, as a matter of economics, is incorrect. Contrary to what the Court holds, there are perfectly valid pro-competitive justifications for exclusive dealing and loyalty rebates. I am inclined to believe that everyone at DG Comp and the Legal Service agrees by now with this idea, which has long been part of the mainstream. Suffice it to check any textbook on industrial organisation or the economics of competition law. To mention the three I had in my office when preparing this post, take Carlton & Perloff; Bishop & Walker; or Niels, Jenkins & Kavanagh (Hans Zenger’s piece on loyalty rebates is great too). Given its peculiar cost structure, some of these justifications are of obvious relevance in the microprocessor industry.
Article 102 TFEU case law will not evolve until the ECJ acknowledges that a rule-based approach to exclusive dealing and loyalty rebates is grounded on a misguided economic assumption. Interestingly, a shift in this direction would not require a major revolution. The ECJ would just have to accept – finally – that what is true under Article 101 TFEU must by definition be true under Article 102 TFEU. In paras 10-12 of Delimitis the Court holds that there are perfectly valid justifications for exclusive dealing and – by extension – for loyalty rebates. As a result, they are not restrictive by object. Article 102 TFEU case law cannot be based on the opposite assumption (i.e. that these practices are anticompetitive by their very nature because they have no economic explanation other than the exclusion of competition). Paragraphs 89-91 of Intel show the difficulties into which EU courts run whenever the tension between these two lines of case law is raised (Van den Bergh Foods being another excellent example).
I am convinced that an effects-based approach would follow logically from the suggested shift. The additional arguments raised in subsequent cases to justify the current approach are not particularly persuasive. The fact that dominant firms have a ‘special responsibility’ that derives from their status does not mean that an effects-based approach to loyalty rebates and exclusivity is not conceivable. There are recent cases, like Post Danmark and TeliaSonera, where the ‘special responsibility’ of dominant firms is seen as compatible with requiring evidence of an anticompetitive effect.
Paragraph 77 of Intel also made me think of the relationship between law and economics in competition law. It is interesting that the General Court reiterates the Hoffmann-La Roche formula to make it clear that there is a long line of case law supporting its position. ‘Exclusive dealing and loyalty rebates have no pro-competitive justifications because we have always said they do not’, the judges appear to claim. What is an economic argument is dealt with, in other words, as a legal one. From an economic perspective, to be sure, the fact that EU courts have consistently relied on the same assumption does not make the latter any less incorrect.
The Intel judgment also made me think of something I often say. Economic analysis is sometimes presented as an exogenous force that has interfered with EU competition law since the 1990s. What wrong assumptions such as the one discussed in this post show is that this view is not accurate. Economics is hard-wired into competition law – it is an integral part of it. The only debate should be whether to rely on one’s more or less accurate intuitions (à la market definition in United Brands, for instance) or to trust instead the analytical tools developed over several decades by competent individuals devoting their professional lives to a systematic understanding of the economic side of the discipline.
A while ago I wrote a post and engaged in some follow-up comments on the issue of restrictions by object. But since Alfonso is busy these days and has shown some persistence in chasing me to have me write another guest post, I thought it a good idea to add a few more thoughts on the matter. I see value in doing so given that the discussion in the preceding post remained (to my regret) overly abstract. I tell myself that if I illustrate my points by relating them to some on-going disputes/investigations, they may become clearer, and might even spark more discussion.
I explained back in March that the ECJ does not see the notion of restriction by object as a presumption of the likely effects of the agreement. I know this is a very popular understanding of Article 101(1) TFEU, but I see a clear difference – and so does the Court, may I add – between understanding what the agreement is all about (Article 101 TFEU refers explicitly to its ‘object’) and establishing its likely (negative) effects on the market. A ‘naked’ price-fixing agreement between competitors is prohibited irrespective of whether collusion can realistically be sustained on the relevant market (that is, irrespective of whether there are reasons to believe that the parties will ever be credibly committed to restricting competition). When reading the case law, it is pretty clear to me that the real question is whether the agreement is a plausible source of efficiency gains (there are myriad examples where this approach has been followed, some of which I mentioned in the other post). Put differently, the true issue is whether it is realistic to expect pro-competitive effects from the agreement in light of the context in which it is implemented.
Allow me to illustrate these ideas by reference to the on-going debates around ‘pay-for-delay’ settlements (Alfonso already wrote about this some time ago). It is fairly clear that a ‘naked’ (and the word ‘naked’ cannot be emphasised enough) agreement between two competitors whereby one of them agrees to delay the launch of a product amounts to a restriction by object within the meaning of Article 101(1) TFEU. The question is whether the agreements at stake in cases like Lundbeck can be likened to such ‘naked’ restrictions. Addressing this issue requires understanding, first and foremost, the point of these agreements in their context. What becomes immediately apparent in this sense is that they cannot be said to be ‘naked’. There is something else to these agreements, namely a background dispute between the parties relating to the validity or to the infringement of a patent. From this perspective, the question could be rephrased as one of whether putting an end to such a dispute by means of a settlement can be likened to a cartel agreement.
To me, the answer is a clear no. Nobody would deny that out-of-court settlements are an efficient way to deal with disputes. In paragraph 235 of the recently issued Guidelines on technology transfer agreements, the Commission is very explicit in this regard. If this is so, and to the extent that there is genuine uncertainty about the ability of a generic producer to enter the market, the applicable case law suggests that Lundbeck-like settlements should only be deemed to restrict competition after a careful assessment of their effects under Article 101(1) TFEU. By the same token, the ‘object’ category would only be appropriate where it is clear beyond doubt that the generic producer would have been able to enter the market without infringing the patent(s) in question or it is clear beyond doubt that the said patent(s) are invalid. Only then would it be justified to assess them in the same way cartels are (in such a scenario, the restraints would in reality be ‘naked’, as there would be no actual dispute to settle).