Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Unilateral Digital Service Taxes and EU State Aid Rules: the elephant in the room

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tax

We have always cautioned against the application of different rules and standards only to certain companies. That is a trend that appears to be in vogue these days. In some cases, this approach may threaten the consistency of the law and breach general principles. In other cases, the application of ad hoc rules would be in direct breach of EU Law itself.

Here is a perfect example that affects two areas that are of particular interest to the European Commission and to myself: tech and fiscal state aid. [Disclosure: I have examined these issues following a request from our friends at CCIA, who will also post this piece on their own blog. Below is my reasoning, you can make your own conclusion]

You have probably read on the news about the Commission plans to create a “digital service tax” (“DST”). This is a plan that was reportedly abandoned recently due to the opposition of some Member States (see here). Absent a harmonized EU DST, some Member States (namely France, Italy and Spain) have adopted or announced the adoption of their own unilateral DSTs. The declared objective of these taxes is to ensure that the provision of digital services is taxed in the jurisdictions where users contribute significantly to the process of value creation.

This is not the place to discuss the political opportunity or possible consequences of these initiatives nor to challenge wider proposals to reform tax systems (which may make sense), so let’s assume that these are legitimate policy initiatives. We will focus not on the idea, but on its execution.

As currently designed, it is obvious to me that the different national DST proposals would involve the granting of State aid (which doesn’t necessarily mean they are illegal, only that they need to be notified by the Commission for clearance).  Think about it:

First, the case law makes clear that a specific tax addressed only to certain undertakings may imply a selective advantage to other companies not subject to the tax. The key question is whether all the companies in the same legal and factual situation, having regard to the objective of the system, are treated in the same way. [See e.g. the Court’s recent Judgment in ANGED, where the CJEU considered that regional environmental taxes that applied to supermarkets but exempted commercial malls despite having a similar negative impact on the environment constituted a selective advantage to malls].

This means that one needs to verify whether the scope of the tax at issue is consistent with its declared objective or whether, on the contrary, it exempts other companies that should have been subject to the tax.

In the case of the DSTs, the current proposals do not target all activities where users create value, but only some, namely online advertising services, online intermediation services and data transfer services. This excludes any other services where users may also create value.

Second, the scope of the proposals is further delineated in the light of a high worldwide revenue threshold (both the French, Spanish and Italian proposals set a 750 million worldwide revenue threshold). But the case law also makes clear that crafting objective thresholds in such a way that de facto exempts domestic companies from the application of a tax can also amount to State aid.

The clearest examples are the recent Commission decisions regarding Hungarian and Polish turnover taxes on certain activities, now before the CJEU. In three separate decisions (here, here and here), the Commission considered that these taxes constituted State aid as they were based on particularly high turnover thresholds and were effectively designed to tax almost exclusively large companies (usually foreign companies) and not smaller ones (almost always domestic companies), in a way that was unrelated to the objectives sought by the Member States. [Evidently, the State aid nature of a measure does not depend on whether it is granted by Hungary and Poland or by France, Spain and Italy…]

Third, revenue-based taxes do not appear to be consistent with the declared objective of taxing digital services in the place where users contribute to the process of value creation. This is because users can create value in many ways regardless of the company’s turnover. Actually, this is precisely the reason why many people would like to see a change in merger notification thresholds only based on turnover.

Public statements from national politicians saying that SMEs and national companies have nothing to fear (see e.g. here, here –the French Government actually calls this the “GAFA tax” – or here) would appear to confirm that these initiatives have been crafted with addressees in mind, not just to tax digital services where users contribute to the process of value creation (a tax with a company nickname sounds a tiny bit selective…). This is a sort of Marxist (I mean Groucho) view of fiscal policy: “these are my principles, but to some companies we’ll apply others”. This is not just me saying it: the Danish, Swedish and Finish governments (not known for being soft on taxes) have also spotted the problem and opposed even the EU proposal (see here).

By treating differently companies that are in a comparable situation, unilateral measures such as the French, Italian or Spanish DSTs would, in my view, constitute clear State aid. It’s therefore surprising that none of these pro-European Member States have notified the projects so that the Commission can assess their compatibility.

In the light of the Polish and Hungarian precedents, one could anticipate that –regardless of its political views- the Commission will in any event ultimately intervene, or be forced to intervene.

Written by Alfonso Lamadrid

22 March 2019 at 11:15 am

Posted in Uncategorized

EU Judicial Review: Major Antitrust Implications of Recent State Aid Cases

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Blinkers

We competition lawyers often wrongly approach our discipline in isolation from the wider context in which it is applied. This is also true when it comes to judicial review. We tend to forget that antitrust is only a fraction of what the EU Courts and EU judges do, and that what they do in other areas might also have major implications in ours.

A perfect illustration of what I’m saying lies in two State aid judgments: C‑300/16 P, Frucona Kosice, and the very recent T-865/16, Fútbol Club Barcelona v Commission.

Both cases relate to how the Court approaches judicial review of complex economic assessments when the burden of proof is on the Commission. This, as you know, is an issue common to antitrust, mergers and State aid, and also to other areas of EU law. As you also know, in these cases the EU Courts apply a “manifest error of assessment” standard. Pursuant to the Tetra Laval formulation (which GC President Jaeger has called “the forgotten paragraph”), in these cases “the Court must establish “not only whether the evidence relied on is factually accurate, reliable and consistent but also whether that evidence contains all the information which must be taken into account in order to assess a complex situation and whether it is capable of substantiating the conclusions drawn from it”.

The first case is Frucona Košice.  Here, the CJEU clarified that “the information ‘available’ to the Commission includes that which seemed relevant to the assessment to be carried out in accordance with the case-law (…) and which could have been obtained, upon request by the Commission, during the administrative procedure” (71). The CJEU then observed that the Commission had “failed to obtain” (80) “all the relevant information” (81) and confirmed the annulment of the Decision.

I had already briefly discussed this case on the blog some time ago, in relation to how the Commission intended to apply the lessons from the Intel Judgment (see here). As I said then, the Frucona Judgment confirmed that the Commission cannot just sit and wait for the dominant company to bring all the necessary evidence to establish a point at a stage where the burden remains on the Commission (for competition law purposes, that would be at the state of identifyinga prima facie restriction under 101(1) or at the stage of ascertaining “intrinsic capability” to restrict competition within 102). Remember the difference between the burden of proof and the evidential burden? If not, click here.

All this was confirmed and expanded on just a few days ago in the FC Barcelona v Commission case, where the Court annulled a decision declaring that certain Spanish fiscal rules granted State aid to some football clubs (the Court’s press release available here). The Judgment (not yet available in English, can be found here).

Specifically, the GC ruled that when the Commission is confronted, during the administrative proceedings, with evidence capable of leading to “doubt” as to a relevant aspect of the case, it is then obliged to undertake measures of enquiry. Failure to do this can result in the Commission not meeting its burden of proof, which in turn might lead to the annulment of the Decision. This Judgment is based on…the Frucona Košice precedent.

In a nutshell:

-FC Barcelona argued that the Commission’s decision had not properly assessed one aspect of the case (the idea was that it had assessed a tax scheme looking only at the nominal tax rate and not to other constituent elements that cannot be dissociated from the tax scheme), and that, had it done so, it would have come to a different conclusion. FC Barcelona invoked the Commission’s duty to conduct its investigation actively, fully and impartially, seeking to gather, by means such as RFIs, any information available to it, including both inculpatory and exculpatory evidence (para. 38).

-The Commission argued that it had based the decision on the information submitted to it by the Spanish authorities and that no additional measures of enquiry were necessary. It contended that the applicant’s arguments were “simplistic and possibly erroneous” and that in any event they had not been put forward by the applicant during the administrative proceedings (para. 41);

-The Court observed, however, that “the Commission, who bears the burden of proof (…) enjoyed the possibility of requesting, within the limits of its investigatory obligations within the administrative proceedings, any information necessary to conduct its assessment” (para. 59, citing in turn para. 71 of Frucona Košice). The Court notes that the information contained in the decision did not exclude the possibility that the applicants’ argument may have been well founded (paragraph 60 in fine). In paragraphs 66 and 67 the Court finds that at the time of adopting the contested decision it had at its disposal elements that “should have led it to doubt” its approach, and that since these elements were not addressed the EC failed to meet its burden of proof. This means that the evidence to be put forward by the company must not be sufficient to prove a point, but simply to lead to doubt.

-The Court also addresses the Commission’s point that the applicant had not raised the necessary arguments during the administrative proceedings, noting that they had been raised by another party (Real Madrid; ironically, in a way Real has won the case for Barcelona…), and that therefore the Commission failed to establish its case having regard to the data at its disposal at the time of adopting the Decision.

-The GC dismissed a parallel application by another applicant in exactly the same situation, but which failed to raise this legal argument (Athletic Bilbao, in case T-679/16).

The bottomline(s):

  • The Courts recognizes the Commission’s ample powers and will often defer to its assessment on substance, but for this trust to exist the Commission will at the very least need to show that it has not avoided any relevant issues, and that it has pursued all relevant leads.
  • Some key members of the EU Courts had also signalled some of this. As noted by Vice-President Van der Woude, cases like Cartes Bancaires or Intel raise questions for which answers “can be found in the burden of proof that rests upon the Commission pursuant to Article 2 of Regulation 1/2003”. Read that in the context of the Judgments discussed above and connect the dots.
  • These developments are here so stay. It won’t be difficult for the Commission to continue to win cases if it incorporates this logic into its day-to-day. If that does not happen, we are likely to witness a series of annulments based on this logic. This, of course, is assuming that lawyers understand the underlying logic, make sure to submit the relevant info during the administrative proceedings and raise the issue in Court. [My bet is that I will be making a few future cross references back to this prediction]

 

Written by Alfonso Lamadrid

18 March 2019 at 6:31 pm

Posted in Uncategorized

A Competition Law MOOC

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mooc

The Rafael del Pino Foundation is hosting a Massive Online Open Course (MOOC) on competition law and policy (in Spanish).

The course is based on a series of approx. 12 minute videos (each one featuring an expert in the topic at issue) accompanied by basic materials, forums and an online evaluation.

Some videos provide a basic understanding of different aspects of competition law, other are more specific and can be a refresher for those with greater knowledge. You can also use them to improve your professional Spanish 😉

In its first week the MOOC has proved to be a success, with several hundred people already registered.

FYI, Pablo was in charge of the video on the competition/IP interface, and I did the one on abuse of dominance; you can safely skip those…

To register (for free), click here.

 

Written by Alfonso Lamadrid

11 March 2019 at 4:07 pm

Posted in Uncategorized

The Bundeskartellamt’s Facebook Decision- What’s not to like? Well…

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images

Earlier this month the Bundeskartellamt announced via this press release that it had “imposed on Facebook far-reaching restrictions in the processing of data”. According to its President, Andreas Mundt, this “can be seen as an internal divestiture of Facebook’s data”. The remedies are not the only thing that is far reaching in this case.

I had to read the available materials last weekend in preparation for a training session with a competition authority, but we never actually discussed the case, so here are the preliminary thoughts for discussion that I wrote down then.

In a nutshell, the Bundeskartellamt observed that Facebook was gathering user data also outside of the Facebook website and assigning them to Facebook user accounts. Its intervention seeks to ensure that going forward this will only be possible if users provide voluntary consent. Sounds good, right? Well, let’s see…

Are Facebook users better off? Probably, yes. The decision probably addressed an asymmetry of information issue. The Bundeskartelamt confers great importance to the fact that many users were not aware that Facebook could collect information also from third party websites featuring “Like” or “Share” buttons, even if the user did not scroll over or click on them. Did most Facebook users – myself included, to the extent I may still qualify as one – know this? Probably the very large majority of us didn’t. Although I guess we could have. Now…

Is that a competition law problem? Not really. The fact that an intervention makes consumers better off doesn’t necessarily mean that it’s good, or even legal. I would also be better off if the Belgian competition authority forced restaurants to serve lunch after 2 pm and with a smile, but I understand that’s not their job (I mean the authority’s…). Competition law is not something we can use to fine-tune market according to our preferences.

Market definition. The Decision is premised on the idea that Facebook is dominant in the market for social networks as well as in a market for advertising in social networks. The Bundeskartellamt observes that “services like Snapchat, Youtube or Twitter, but also professional networks like LinkedIn and Xing only offer parts of the services of a social network and are thus not to be included in the relevant market”. The Q&A document explains that other players (e.g Youtube) use business models that are not sufficiently similar to Facebook’s to warrant inclusion in the same market.

Some commentators have welcomed this “flexible approach” based on “functional similarities and differences”. I don’t. First, a formal approach merely based on functionality tells you nothing about competitive constraints. Different functionalities are often actually a way of competing, not a reason to rule out competitive constraints. The functionality approach goes back to United Brands, and I haven’t ever heard anyone saying that was a good approach. Second, it should be evident that different business models can coexist and compete within the same relevant market (think e.g. of vertically integrated companies vs non-integrated rivals or of franchises vs independents. In sum, market definition is not about formal differences in functionality, but about empirical substitutability.

“Users practically cannot switch”(?) Exploitative practices are mostly problematic when users are locked-in to a service and there are barriers to entry and switching. Is this the case here?

The Q&A document states that “because of Facebook’s market power users have no option to avoid the combination of their data”, that there is “lock-in” and that “Facebook is becoming more and more indispensable for advertising customers”. The press release explains that “Facebook users practically cannot switch to other social networks”. The adverb “practically” is not without importance, and I look forward to reading the decision. The staggered 360-degree-turn evolution of precedents on “switching” is fascinating. How can this finding coexist with the GC’s Judgment Microsoft/Skype or with the Commission’s decision in Facebook/Whatsapp? Authorities do not seem to perceive barriers to switching views on this point…

At first sight, it’s not like Facebook is an indispensable service; users can switch, and switch off. The question is: would users leave Facebook if it were to act in a non-competitive way, or in a way that users did not approve of? Press reports published following the Cambridge Analytical case suggest that users can, did and would abandon Facebook in those circumstances.

Data protection provisions as a benchmark for finding an abuse. The Bundeskartellamt has explained that Facebook’s terms of service and its collection and use of data “are in violation of the European data protection rules” and that they have “closely cooperated with leading data protection authorities in clarifying the data protection issues involved”. The obvious question is: which of these leading data protection authorities has declared a violation of data protection rules? To my knowledge, none. And had there been a violation, shouldn’t they have declared it? I don’t know whether a violation existed, but it’s not for me to say, because –like the Bundeskartellamt- I’m at most a competition expert, not a data protection one. There are very competent data protection authorities specifically prepared to deal with these issues.  Even data protection activists have stated that it doesn’t make sense to shift data protection responsibility away from specialized authorities. How can we have specialized authorities but have the call made by a non-specialized one? How can we simply assume a violation that has not been established?

Harm to news publishers from a certain Member State as a standard for amending laws, creating exemptions, and prosecuting creative competition law infringements.

Product refinement and targeted advertising as a problem. The Q&A document explains that “from Facebook’s perspective, the data are of great economic value (…) Facebook can use them to optimise its own service and tie more users to its network (…) In addition, with the help of the user profiles, Facebook can improve its targeted advertising activities”. So practices are problematic because they enable companies to improve their products and offer ads that are more relevant to users. Such allegations are commonplace these days, but sound to me like an efficiency offense. Just as in the case of network effects, one cannot simply assume that something that increases the value of a product/service has negative competitive implications. But, unfortunately, there seems to be little appetite to deal with complexity and ambiguity these days, particularly when it comes to certain “online platforms”. It’s much easier to simply assume they’re just bad.

The convergence problem (and how to avoid it). The Bundeskartellamt states that “such an abuse control proceeding against Facebook would generally also be possible under the relevant norm of Article 102 TFEU. So far, however, only the case law of the highest German court has been established which can take into account constitutional or other legal principles (in this case data protection) in assessing abusive practices of a dominant company” (sic). This is interesting. And the use of the adverb “generally” may be as telling as the use of “practically” above.

If the Bundeskartellamt is confident that its approach was possible under EU Law, why didn’t it apply Article 102 in parallel to the national law? The only legally valid reason would be that trade between Member States was not affected, but that doesn’t seem to fly in this case. That issue, however, was avoided by defining a national market for social networks, based on the observation that German users use social media to network in seemingly isolated silos with other contacts within Germany.

What’s essential to a business model? There is nonetheless an element of consolation in all this. The decision does not target the processing of data generated by Facebook’s own website because “[t]his is an essential component of a social network and its data-based business model”. The idea that one should not lightly challenge the elements underpinning a business model is a sensible one on which we have often insisted. Even if this doesn’t make the rest of the decision right, it is a good way of drawing red lines.

Written by Alfonso Lamadrid

27 February 2019 at 11:27 am

Posted in Uncategorized

Mandatory reads

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MANDATORY

There’s clearly an excessive output a fair amount of competition law publications and presentations out there. That certainly includes us too. It’s difficult to discern what to read and what not in your limited time. I have a folder of “pending reads” where I accumulate stuff that will often not be read. 

But there are some publications that never make it to that folder, because I always read them right away:

-These include any article published by Hearing Officer Wouter Wils.  Wouter recently published a piece on Legal Professional Privilege that is a must-read. It is available here. On the same topic, Eric Gippini’s 2004 Fordham article is another reading that should be mandatory for lawyers. Both now feature together in our syllabus for the module on competititon procedure at the BSC.

-These also include Fernando Castillos annual presentations on cartel case law at the ULB. This have become a essential facility for all lawyers who would rather not read some several thousands pages of cartel case law, so pretty much everyone. As such, we requested Fernando access, and permission to make these available. And he kindly accepted to make his work open-source. Some time ago we provided you with his presentations covering the period 2009-2016 (see here) (unsurprisingly, there were many hundreds of downloads for those). Today we offer you his most recent presentations, covering 2017 and 2018:

Cartels 2017_Fernando Castillo

Cartels 2018 Fernando Castillo

 

 

Written by Alfonso Lamadrid

26 February 2019 at 11:52 am

Posted in Uncategorized

4th Chillin’Competition Conference- Rich Pepper, “Big Isn’t Always Better”

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Rich Pepper

Rich Pepper is clearly one of the lawyers on the rise in the competition law field and, more importantly, a very nice guy. He participated at our most recent conference, where he discussed the increase in the intensity and lenght of Commission investigations and in the volume of information assessed.

The video of Rich’s presentation is available here.

[Note: this is the eight post in a series featuring videos of the individual interventions that took place at the Chillin’Competition conference on 30 November 2018. For more videos, click here]

Written by Alfonso Lamadrid

25 February 2019 at 4:49 pm

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The way to beat the Commission in a court

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basketball

After many years of reflection, we think we have found a way to beat the Legal Service and DG Comp and in a court:

Playing basketball.

The Legal Service has put together an all-star team, known as the LS Lakers. No kidding.

Following a victory against OLAF, they will soon be opposing DG Comp’s team (while they often team up for Luxembourg matches, where they have an astonishing away record, they often play non-public games with each other…).

And they have challenged us to compete with them.

We see this an opportunity here for those people in private practice that would like to know how it feels to beat the Commission in court, even if just once. Or at least to entertain the thought for a while 😉

Any lawyers, economists or consultants out there who think can be up to the challenge, please drop us a line and we’ll try to set it up. We can show the world the teamwork spirit, lack of individualism and superior physical skills that characterize our profession.  It’s about time we stop being known only for our humility and integrity.

We would also appreciate suggestions for a possible team name. Please feel free to submit them as comments to this post. Best suggestion gets a Chillin’Competition sports bag and running t-shirt!

If this initiative is successful, we might ask MLex to cover games instead of hearings (box scores alerts, highlight videos and full summaries directly via email).

Written by Alfonso Lamadrid

25 February 2019 at 11:28 am

Posted in Uncategorized