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I take a break from our break to let you know that new paper of mine, Post Danmark II, or the Quest for Administrability and Coherence in Article 102 TFEU, has just been uploaded on ssrn. I would love to hear your views on it (e-mail: P.Ibanez-Colomo@lse.ac.uk).
The paper discusses some of the issues I have addressed in a series of blog posts on the pending ruling in Post Danmark II. After so many years, the legal status of quantity rebates is still unclear. In Hoffmann-La Roche, the ECJ held that these rebate schemes are — at least — presumptively lawful under Article 102 TFEU. In Michelin II, the GC took the view that they should be assessed like target-based rebates have been since Michelin I. The Court will now have to choose between one or the other.
As you know already, I am of the view that a legal test applying to quantity rebates should be consistent with the presumption of legality set in Hoffmann-La Roche. I discuss in the paper some of the reasons why the approach endorsed in Michelin II — also favoured by AG Kokott in her opinion Post Danmark II — is at odds with this presumption. I can summarise some of my main findings as follows:
- Michelin II reversed the burden of proof: Rebates that depend on the volume supplied cannot be said to have an anticompetitive object. Thus, it would be for a claimant or a competition authority to show that they are inconsistent with a cost saving rationale. In Michelin II, the GC did the opposite. It did not ask the Commission to establish that the quantity rebate scheme had an anticompetitive object. The ruling reversed the burden of proof, and Michelin was the one asked to produce evidence that the scheme in question reflected the cost savings it made through it. It is difficult for me to think of a reason why this line of case law, which distorted the principles on which Hoffmann-La Roche is based, should be endorsed.
- The principles set out in Michelin I are not administrable: The fundamental problem with the case law on target rebates is that it is based on criteria that are not administrable. It is simply not possible to tell in advance whether a particular scheme is abusive or not. An analysis of the case law reveals that all cases are so fact-specific that it is difficult to infer generally applicable principles. What are the consequences in practice? When a legal test is not administrable, it tends to expand beyond the limits of its logic. A rebate scheme that is potentially abusive will always be found to be abusive in practice. The test set out in Michelin I was not crafted for quantity rebates (the Court unambiguously held that it was ruling on the lawfulness of schemes lying somewhere between loyalty rebates and volume-based schemes). We know what happened later in Michelin II. The Court did not hold in Michelin I that target rebates are always abusive, and it certainly did not hold that retroactive rebates granted over a period of one year are always abusive. In practice, as Post Danmark II shows, these schemes are always deemed to be prima facie abusive.
What are the ingredients of a reasonable approach to the assessment of quantity rebates? As you might have guessed from the title of my paper, these are, in my view, coherence and administrability. By coherence I mean that the legal test should reflect the logic on which the assessment of similar practices is based. It is now clear that price-based conduct that is not presumed to have an anticompetitive object (like the sort of selective price cuts examined in Post Danmark I), can be abusive if it is shown to be predatory within the meaning of AKZO. If a quantity rebate scheme amounts to pricing below average variable cost (or another appropriate measure), it would make sense to presume that it serves no purpose other than the elimination of rivals. The Court also made clear in Post Danmark I that above cost pricing does not have, in principle, an anticompetitive effect, as equally efficient rivals are able to match the prices of the dominant firm. Thus — never say never — it would be for the claimant or the competition authority to provide cogent and convincing evidence showing why, in spite of this fact, they are likely to have such an effect in the specific context in which the scheme is implemented.
Chillin’Competition has just reached its millionth visit, so thanks a million!
It’s amazing to see that the readership keeps growing daily after almost 5 years and over 1,000 posts. In fact, it seems that in 2015 we’ll even double the visits we had in 2014. As difficult to understand as this may be, it certainly encourages us to keep the blog alive.
Reaching this milestone has spurred some thinking on the much-talked-about-but-never-held-Chillin’Competition conference. We can now safely announce that we will be holding it in mid-November. We have a first draft ideal program and will be contacting speakers in the coming days. In order to make it a free-access conference and to pay for logistic costs we will need some corporate sponsors; so if anyone feels generous and would like to contribute to making the event possible, please drop us a line.
P.S. We’ll be closing the shop during August, so enjoy the summer and hope to see you here soon.
Copyright reform through competition law? The Commission’s statement of objections in the pay TV investigation
The moment of truth for the Pay TV investigation has arrived. Yesterday, the Commission sent a statement of objections to Sky UK and the ‘Big Six’ Hollywood majors. It has come to the preliminary conclusion that the territorial restrictions introduced in the agreements between the pay TV operator and the studios are restrictive of competition, and this insofar as they give absolute territorial protection to broadcasters (both to Sky and to licensees based elsewhere in the EU). As a result of these agreements, the Commission argues, Sky is prevented from providing its services (online and via satellite) to end-users based in Member States other than the UK. Some of the views stated in the press release are remarkable and will no doubt give rise to considerable controversy in the coming months.
Exhaustion through competition law? The Commission suggests in the press release that Sky should be entitled to provide its online pay TV services outside the UK (at least in principle). The fact that it may hold a license to offer content only in that Member State does not seem to make a difference in this regard. This position is extraordinary. It means that a TV operator having been granted a licence to broadcast content online in one Member State should be entitled to broadcast the same content in the whole of the EU. As I see it, it comes dangerously close to saying that the exhaustion doctrine applies to broadcasts. According to the Commission, online content should circulate within the EU as freely as DVDs so long as it is offered by the right holder or with its consent.
The view advanced by the Commission in the statement of objections (at least in light of the press release) is at odds with Article 3 of the InfoSoc Directive, which states very clearly that the right of communication to the public is not subject to exhaustion. The Commission indeed suggests the opposite, in the sense that it claims that the licensee in one Member State is not entitled to prevent licensees based elsewhere from offering, online, the same content in its territory.
The question is, I guess, whether it is possible to limit the scope of an intellectual property right through competition law. One can say in this regard, at the very least, that there are no precedents for such a move. EU courts have always been clear in stating that EU competition law does not question the existence of intellectual property rights, but only their exercise. Is the extension of the exhaustion doctrine through Article 101 TFEU enforcement not tantamount to questioning the very existence of the right of communication to the public?
The scope of Murphy and Coditel II. The statement of objections seems to be based on a relatively expansive interpretation of Murphy. The Court held in that case that an export prohibition regarding decoding devices is restrictive of competition by object under Article 101(1) TFEU and does not meet the conditions of Article 101(3) TFEU. I have written elsewhere that Murphy is not easy to interpret. In particular, it is not immediately obvious to reconcile with Coditel II, which remains good law. The difficulty is that, in the latter case, the Court held that an exclusive territorial licence is not as such restrictive of competition.
In any event, it seems clear to me that merely prohibiting, by means of an agreement, an operator from broadcasting content in the territory allocated to another licensee is not contrary to Article 101(1) TFEU. Paragraph 137 in Murphy seems unambiguous to me in this regard. Not only does it confirm that Coditel II has not been overruled, but it states that ‘the mere fact that the right holder has granted to a sole licensee the exclusive right to broadcast protected subject-matter from a Member State, and consequently to prohibit its transmission by others, during a specified period is not sufficient to justify the finding that such an agreement has an anti-competitive object’.
The Commission now seems to be of the view that even clauses that restrict the ability of broadcasters to offer online content in a territory other than the one for which they hold the licence (the press release refers to geo-blocking) are contrary to Article 101(1) TFEU by their very nature. It would be interesting to see how this position is substantiated by the authority. It is without any doubt the key legal issue in the case.
Copyright reform through competition law? It is impossible to ignore that the statement of objections comes at a time when copyright reforms are being discussed. The press release itself refers to some initiatives by the Commission which seek to promote cross-border access to copyright-protected works. The proposed reforms overlap with the concerns raised in the statement of objections and would have exactly the same consequences for end-users. Is cross-border access to content a competition law issue or a copyright one, then? Why apply Article 101 TFEU to a policy objective that would be more logically achieved via legislation?
I find it extremely difficult to draw neat boundaries between disciplines. I am always wary of claims that EU competition law is being applied beyond its proper scope. One thing is clear, however. If the Commission goes ahead with the theories sketched in the press release, it would be redefining, via Article 101 TFEU enforcement, the scope of the right of communication to the public and the reach of the exhaustion doctrine. Proper or improper, this, as explained above, is surely unprecedented in EU competition law.
–On being a Commission lawyer for once. A couple of weeks ago I spent some days in Luxembourg to participate in 4 cartel hearings in which, for a change, I was the European Commission’s lawyer. The experience was extremely interesting, and fun too (despite some repetitions…); being on the other side of things makes apparent some things that often go unnoticed, like how hard it really is to draft a rock-solid decision, connect all evidential dots in some cartel cases and think about the myriad things that could possibly be challenged by us lawyers. I was also impressed by Court’s detailed knowledge of very factual issues and by my co-agents encyclopedic knowledge of cartel precedents. It’s challenging to have as clients some of the foremost experts on the subject (like Fernando Castillo, Viktor Bottka and Carlos Urraca), but it’s quite comforting to be sitting, for once not opposite, but next to them in Court.
-I have just received an email advertising an article titled “How to become the highest paid partner at your law firm”. It includes healthy advice and sensible reflection, such as this quote: “[t]he highest-paid attorneys are those who work like dogs, bill lots of hours, are prodigious rainmakers and focus on high-rate practices”. For some reason I have a tendency to defend my profession, but pieces like this project an image of big-law lawyering that makes it not always easy.
– Last night I also read that the Judge handling the follow-on suit in the air cargo case was recused for having complained about his luggage being lost by one of the targeted airlines in a recent trip (apparently he complained to the President of the airline and mentioning his role in the damages claim) (see here). No comment.
– For reasons that will be explained in our next post, Pablo and I are looking around for big rooms for rent in Brussels and prices are absurd and I see little plausible alternatives to at the very least some good old tacit collusion…
– On the Spanish competition authority. The Spanish Competition authority has not fared tremendously well in Court lately. The latest news is that the Supreme Court even has doubts that its creation and the merging of regulators was compatible with EU Law and has sought a preliminary ruling from the ECJ on this point.
– On paid-for posting. In the past month we have received several requests to write posts in exchange for money. This is not new, but the number of requests is. As a lawyer, I’m not offended at all by those requests even if we have systematically turned them down. I could even accept writing for one of my clients provided that I could clearly disclose my interest and the fact that it is work that I’m doing (after all, that’s what I do for a living), and I certainly do not write on issues that can negatively affect an already existing client, but I’m in the business of selling legal services, not blog posts. As for Pablo, he would not accept money even for writing his real own views when those coincide with those of the firm willing to pay. I hope the policy is clear…
[Alfonso posted a great entry on Huawei the other day. There is not much to add to it, but I could not resist preparing a ‘B-side’ on more general issues]
Keynes famously observed that ‘the ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else’. I was reminded of this sentence (and what follows) when reading Huawei. Formal economic analysis is nowhere to be found in the judgment. Yet, it is impossible to make sense of it without taking into account the work of economists who have speculated over the past decade about the consequences of the use of injunctions by the holders of standard-essential patents (‘SEPs’).
The idea that hold-up and exclusion are a concern in the context of standard-setting has become very popular, so much so that the Court did not even see the need to discuss whether there is theoretical and empirical support for it. It is presented in Huawei as a given fact, in the same way that cartels are simply assumed to be harmful for consumers and society at large. You know that economic theories have won the day when law and policy-makers do not even see the point of discussing their validity. You know you are really influential when people do not bother to cite you anymore. From this perspective, Huawei represents an enormous victory for the economists that first advanced the assumptions informing the ruling.
Yet, the idea that patent hold-up is (i) a pervasive problem that (ii) requires intervention under competition law is hotly disputed. I have not followed this debate as closely as others, but it seems clear to me that there is no consensus around it. Many articles published in recent years claim that remedial action to limit the ability of SEP holders to use injunctions is based on a assumptions that do not necessarily reflect the actual operation of standard-setting organisations, of negotiations between developers and implementers or of intellectual property regimes.
If there is something I regret from AG Wathelet’s opinion, is that he did not see the need to engage with these debates (and an AG’s opinion is an ideal forum to do so). In line with the position broadly endorsed by the Commission, he simply took it as given that the use of injunctions by an SEP holder may amount to an abuse of a dominant position. This position is not necessarily wrong and it may well be right. My point here is that it is not self-evident and that a legal test has been crafted without considering the assumptions underpinning it. As a result, is not certain that the ruling in Huawei is the one that best reflects the available knowledge.
I guess the broader question raised by the judgment (and the one that I find really interesting, and I would love to read your views on it) is whether intervention under competition law (as opposed to deference to intellectual property regimes) is justified when there is no consensus about whether, why and how often a given practice is anticompetitive. We know from experience that, when conduct is not yet well understood, and when there are two sides to the story (as is true here), the risk of errors and over-enforcement is very high.
This debate is similar in many ways to that around net neutrality, which I have followed more closely and about which I said a word earlier this month. It is accepted as self-evident that net neutrality is a good thing. This, again, represents a great victory for the companies and activists advocating for the adoption or strengthening of such rules. Unfortunately (and this is the source of my frustrations), this victory is not the result of their ability to advance cogent and convincing evidence in support of their views, but of powerful slogans and lobbying.
Australia’s turn at antitrust pharmaceutical litigation has so far yielded interesting results, by Suiyi ZHANG
[Teaching great students is one of the best parts of being an academic at LSE. Suiyi Zhang exemplifies all the qualities of the students we are fortunate enough to attract. She graduated with top honours from our LLM programme last year and is now back in Australia, where she works on competition law matters for the ACCC. Suiyi has prepared a comment on a recent case that shows that pharmaceutical companies are under the spotlight all over the world. I leave you with it!]
In the northern hemisphere, pharmaceutical antitrust cases seem to have had their share of the limelight in the past few years. Europe is still litigating cases following the Commission’s pharmaceutical sector inquiry in 2008. The US Supreme Court handed down its decision in Actavis in 2013. Now, it is Australia’s turn.
Pfizer Australia owned a patent for the atorvastatin molecule which expired in May 2012. This molecule was used to make Lipitor which was a “blockbuster”. For many years it was the highest selling pharmaceutical in Australia.
Faced with the impending expiry of its patent, and like some of its global counterparts have done, Pfizer came up with a strategy. In January 2011 it changed the way it supplied community pharmacies, through an exclusive direct-to-pharmacy model, and established an accrual funds scheme, which involved pharmacies accruing rebates based on the quantity of Pfizer medication they acquired. From January 2012, Pfizer made offers to community pharmacies which included the release of rebates accrued on Lipitor purchases, discounts on Lipitor and discounts on Pfizer’s generic atorvastatin, each of which varied depending on the quantity of Pfizer’s generic atorvastatin product that a pharmacy purchased.
The ACCC commenced proceedings against Pfizer alleging (among other things) that through this conduct Pfizer misused its market power in contravention of section 46 of Australia’s competition legislation. Section 46 like Article 102 is not enlivened unless the firm in question is dominant, or in the words of section 46, has “a substantial degree of power in a market”.
In February 2015, Justice Flick of the Australian Federal Court ruled in favour of Pfizer on section 46. The interesting part is why.
Can the strength of market power be related to a patent’s remaining lifespan?
The definition of market power in Australia has European parallels, the Australian High Court has said that market power is manifested in a “capacity to behave in a certain way (which might include setting prices, granting or refusing supply, arranging systems of distribution), persistently free from the constraints of competition” (Melway Publishing v Robert Hicks).
Justice Flick held that Pfizer did not contravene section 46 because as at January 2012, it did not have the requisite degree of market power in the Australian market for the supply of atorvastatin, despite holding the patent.
While acknowledging Pfizer still maintained some degree of market power, for example the “unique ability to exploit…the marketing of Lipitor to a premium price and to package its generic atorvastatin in a manner identical…to the packaging of the established brand”, he held that from January 2012 this degree of power was no longer “substantial”. The approaching expiration of the patent was key to Justice Flick’s reasoning. Justice Flick said that “Pfizer’s market power gradually decreased the more imminent the expiration of its patent became” (ACCC v Pfizer at ).
Justice Flick emphasised the need for market power to be capable of being maintained over a sustained period. He said that Pfizer did not have substantial market power because its power was not “enduring” and could not be “sustained” (ACCC v Pfizer at  and ).
Why was Pfizer’s market power not enduring? Because of the impending entry of generic manufacturers. Justice Flick noted that a number of generic manufacturers had listed their atorvastatin products on the Australian Register of Therapeutic goods in 2009 and 2010, one manufacturer (Ranbaxy) had been able to promote its own generic version since 2011 due to settlement arrangements between Ranbaxy and Pfizer in other proceedings, and in 2012 generic manufacturers were holding discussions with key customers about the terms on which they would supply generic atorvastatin, with some telling customers that they would beat Pfizer’s offer.
The approach is to be further tested
The soundness of Justice Flick’s approach to market power is shortly to be tested in the full Federal Court of Australia. The ACCC has already announced that it will be appealing the decision.
The views expressed in this post are of the author only and may not necessarily be the views of the ACCC.
These are happy days for cycling fans. We are a week into the Tour de France, and the best is yet to come. The race will resume tomorrow with the mountain stages in the Pyrenees, including one featuring the mighty Col du Tourmalet on Wednesday. I follow the event with genuine interest every year. The nerd in me, alas, cannot avoid seeing the (valuable) economic lessons that can be drawn from it.
The Tour de France was not set up by public authorities. It was not an initiative of cycling fans, either. It is instead a creature of competition and vertical integration. More precisely, it was part of a strategy put in place to increase the sales of a newspaper, L’Auto. Its fiercest and more successful competitor, Le Vélo, already organised some cycling events at the time (early 20th century), but the editor of the struggling L’Auto decided to go ahead with the idea of setting up the greatest ever race of the kind. L’Auto disappeared long ago, but the Tour de France has now reached its 102nd edition and remains the most important and spectacular cycling event in the world.
This story, I think, provides a good illustration of the relationship between vertical integration (and vertical restraints) and efficiency, which is sometimes seen with suspicion. Efficiency sounds like very abstract concept – almost like an excuse – when relied upon to explain the rationale for some arrangements between firms. It is only by using concrete examples that one can understand why and how new or improved products that may never have appeared can be offered when different activities are coordinated. What these examples reveal, moreover, is that such efficiency gains are difficult to anticipate or to quantify in advance. They may never materialise, or they may exceed everybody’s expectations (and I am sure the editor of L’Auto did not anticipate that the Tour de France would be such an enormous success).
The story is also a valuable warning against the inclination on the part of competition and regulatory authorities to impose neutrality rules across the board. Alfonso and I have discussed many examples showing that access and non-discrimination obligations have become the flavour of the day. The idea underlying this trend is that strict neutrality principles will preserve competition and firms’ incentives to innovate. Supply obligations are being imposed on vertically-integrated firms even (and this is the most worrying part of the trend) absent convincing evidence of indispensability.
As the example of L’Auto and the Tour de France shows, competition is first and foremost about distinguishing oneself from rivals, not about subsidising them. L’Auto intended to sell more than its rivals and be the most interesting sports newspaper in France, not to make all sports newspapers equally interesting (even though that was an inevitable side-effect). And there was nothing wrong with that. On the contrary.
[The picture captures the defining moment of the 1991 Tour de France. Greg LeMond, who had won the previous two editions, is unable to keep pace with les hommes forts on the way up to the Col du Tourmalet. Dominance is not forever! Claudio Chiappucci would win the stage on that day and Miguel Indurain would wear the first of his many yellow jerseys.]