Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

The hard questions in the Lundbeck appeals: will Article 101 TFEU radically change?

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lundbeck star

The hearing in Lundbeck will take place on Thursday of next week. Readers of the blog know that this is a case that I have been following with keen interest (see for instance here). It raises some fundamental questions about the interpretation of Article 101 TFEU.

As I explained in the past, the Commission decision in Lundbeck departed in some respects from the relevant case law (and, indeed, from the authority’s own past administrative practice). The ECJ will now have to decide whether this interpretation is upheld, thereby leading to a transformation of the nature and scope of Article 101 TFEU.

These fundamental issues will become much more apparent, I believe, in the context of the appeal. Before the General Court, issues of law and fact, generally become so intertwined that it is difficult, in practice, to tell one apart from the other – or to fully appreciate the consequences of the underlying interpretation of a given provision. In this sense, the appeal is good news for the competition law community.

The areas in which Article 101 TFEU may (radically) change after Lundbeck are the following:

  • The notion of competition within the meaning of Article 101 TFEU.
  • The change in the understanding of the notion of potential competition, which would become a subjective concept (as opposed to the objective concept it has so far been).
  • The relationship between competition law and intellectual property.

The notion of competition within the meaning of Article 101 TFEU

In Société Technique Minière, the Court declared that the notion of competition within the meaning of Article 101 TFEU must be understood as such competition that ‘would occur in the absence of the agreement in dispute’.

As subsequent judgments would consistently confirm, the analysis of restrictions does not occur in the abstract. It needs to consider whether, in the economic and legal context in which it is implemented, the agreement restricts competition that would otherwise have existed.

It is explicit in Société Technique Minière that this analysis applies both to restrictions by object and by effect (see p. 250 of the Reports, top paragraph). The Commission Guidelines on Article 101(3) TFEU are equally explicit on this point (see paragraph 18).

What are the consequences of this interpretation of the notion of competition?

The fundamental consequence of Société Technique Minière and subsequent case law is that, if an agreement does not restrict competition that would otherwise have existed, it falls outside the scope of Article 101(1) TFEU (that is, it does not restrict competition, whether by object or effect).

For instance, the Court explained in Société Technique Minière, an agreement would not restrict competition (whether by object or effect) if it is ‘really necessary’ to enter a new market. The Commission elaborates on this example in its Guidelines on vertical restraints. An agreement protecting a distributor from both active and passive sales is in principle restrictive by object. That is not the case, however, where the agreement is objectively necessary to achieve market entry. In such a case, it falls outside the scope of Article 101(1) TFEU altogether (see paragraph 61 of the Guidelines).

Lundbeck gives rise to a similar question. What if market entry is made impossible by virtue of the intellectual property regime? Can there be a restriction of competition if the only way for generic producers to enter the market is to infringe a patent? This is a central question in the case, and one that is somewhat obscured by its complex facts.

In light of Société Technique Minière and subsequent case law, the answer to these questions is clear. In such a scenario, the agreements at stake in Lundbeck would not restrict competition that would otherwise have existed. Accordingly, there would be no restriction, whether by object or effect.

The Commission, however, proposed a new interpretation of Article 101(1) TFEU in its Lundbeck decision. It suggested that an agreement can restrict competition by object even when it would entail the breach of a patent.

The ECJ, in its Lundbeck appeals, will decide whether to depart from a consistent line of case law.

The notion of potential competition as an objective (as opposed to subjective) concept

A related question in the Lundbeck appeals relates to the notion of potential competition. Is a firm a potential competitor if market entry requires breaching an intellectual property right? Until the Lundbeck case, there was little doubt that unlawful entry on the market did not count as potential competition.

E.On Ruhrgas is an eloquent example in this regard. The General Court concluded that an agreement does not infringe Article 101(1) TFEU where market entry is made impossible by virtue of the regulatory framework – in that case, the regulatory framework created a de facto monopoly. In such circumstances, it is the regulatory framework, not the agreement, which restricts competition.

The Commission also shared this view. In the 2004 version of its Guidelines on technology transfer agreement (the version published prior to Lundbeck, that is), the authority explained, in paragraph 29, that there is potential competition if market entry would have been possible ‘in the absence of the agreement and without infringing the intellectual property rights of the other party’ (emphasis added).

Lundbeck departs from these principles. How? By embracing a subjective approach to the analysis of potential competition. In Société Technique Minière, European Night Services and E.On Ruhrgas, to name a few, the notion of potential competition was an objective concept, in the sense that market entry was assessed in light of objective factors – that is, whether such entry possible and likely, given the economic and legal context.

In Lundbeck, by contrast, the economic and legal context (in other words, objective considerations) are not decisive. Subjective considerations (in other words, firms’ perceptions about the likelihood of market entry) can lead to the conclusion that two firms are potential competitors. Accordingly, potential competition may exist even when it would require infringing a presumptively valid patent.

As can be seen, Lundbeck advocates a major shift in the analysis of potential competition. Will it win the day? An analysis of the case law reveals that the ECJ clearly prefers objective approaches to the definition of legal concepts. In particular, the subjective intent of the parties is neither a sufficient nor a necessary condition to establish a restriction of competition. Similarly, the notion of aid within the meaning of Article 107(1) TFEU is an objective one.

The relationship between competition law and intellectual property

Finally, Lundbeck also marks a new relationship between competition law and intellectual property. As mentioned above, EU law does not question the existence of intellectual property rights; it only questions the way in which they are exercised.

Accordingly, EU law does not second-guess intellectual property systems, or whether the underlying ideas are worthy of protection. Thus, Articles 101 and 102 TFEU are applied without questioning the validity of the rights at stake in a case. All cases in which intellectual property is relevant, including Consten-Grundig, Coditel II or BAT (Toltecs-Dorcet) confirm this point.

By suggesting that a firm is a potential competitor even when market entry requires the infringement of a presumptively valid patent, Lundbeck alters this balance between competition law and intellectual property. According to this new balance, EU law would question the very existence of intellectual property rights (for instance, whether they are valid, or whether the underlying ideas are worthy of being protected). The consequence of the EU legal order would inevitably be significant.

[IMPORTANT: I did not want to end this post without mentioning the passing of Gil Carlos Rodriguez Iglesias. Gil Carlos led the Court of Justice at a key moment in time – Opinion 1/94 is just an example that springs to mind immediately. More importantly, he is fondly remembered by everybody who worked with him. Alfonso and I send our deepest condolences to his family and close friends. May he rest in peace.]

Written by Pablo Ibanez Colomo

18 January 2019 at 2:06 pm

Posted in Uncategorized

A year in review: competition law developments in 2018 (seminar in Madrid, 25 January)

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Cibeles

Fernando Castillo and Eric Gippini, two good friends of the blog, organise every year a seminar in Madrid in which they discuss recent developments relating to the application of Articles 101 and 102 TFEU.

This year, the seminar will take place on 25 January (Friday) and, as usual, it features top Commission officials and practitioners. For some reason, I have been invited to discuss the market integration objective alongside Jorge Padilla (can’t wait).

If you happen to be around, do sign up for it. The event is invariably of the highest level (and great fun too).

More info on the event and on how to register can be found here. The location, by the way, could not be better (and more convenient): IEB, calle Alfonso XI, 6 (28014 Madrid) – literally around the corner from the spots you see in the pic above.

The programme is the following:

16:00 – 18:00: First panel
Recent developments in the Pharmaceutical sector
Borja Martínez (KPMG)
Blaz Visnar (DG COMP, European Commission)
Irene Moreno-Tapia (Cuatrecasas)
Paul Hutchinson (RBB Economics)

Chair: Fernando Castillo de la Torre (Legal Service, European Commission)

18:30 – 19:30: Second and third panels
Negotiated procedures: Settlements / Commitments
Henning Leupold (Legal Service, European Commission)
Frances Dethmers (Allen & Overy)

The market integration objective in EU competition law
Jorge Padilla (Compass Lexecon)
Pablo Ibañez Colomo (LSE and College of Europe)

Chair: Eric Gippini Fournier (Legal Service, European Commission)

If you have any questions about the event, do not hesitate to send an email to: competencia@ieb.es.

We look forward to seeing many of you there!

 

 

 

Written by Pablo Ibanez Colomo

16 January 2019 at 11:35 am

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NEW PAPER on State aid post-Brexit (with Vincent Verouden)

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Two spheres

As all of you know, the vote on the Agreement for the Withdrawal of the UK from the EU will take place in Westminster later today.

I could not think of a better way to mark the event than by sharing a Brexit-related paper.

The paper, co-authored with Vincent Verouden, is already available on ssrn (click here to access it).

As you will see, our piece examines the application of State aid rules in the UK after Brexit (if it indeed takes place). First, it shows why some form of control in this sense seems not only desirable but inevitable (given how close and how intertwined the economies of the UK and the rest of the EU are). Second, it discusses the various enforcement models that can be put in place, with a particular emphasis on the EEA system. Finally, it examines the institutional framework put in place by virtue of the Withdrawal Agreement and takes a look at what the future relationship between the EU and the UK may look like in this regard.

Vincent and I would very much welcome your comments and questions on the piece!

In accordance with ASCOLA’s declaration of ethics, I am happy to clarify that I have nothing to disclose.

Written by Pablo Ibanez Colomo

15 January 2019 at 3:26 pm

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Ahead of Siemens/Alstom, the competition law community should do more to defend the European Commission (and our law-based system)

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law

Readers of the blog know that I am sometimes critical of the European Commission. I regard it as my obligation. Since I am fortunate enough to devote my professional life to study the behaviour of competition authorities (and the evolution of the legal system), I have a duty to share my findings, wherever they take me.

Every now and then, however, people get confused about what drives my criticism. Make no mistake: if I am sometimes critical of the European Commission, this is because I believe in the crucial role of competition law in a social market economy and because I care about the system (its internal consistency, its predictability and the aspects that could be improved).

And because I care, I find it unacceptable when governments resort to all forms of lobbying to twist the arm of the European Commission in sensitive cases. The pending merger in Siemens/Alstom is one where the pressure is about to reach unbearable levels.

A few days ago, the French Minister for Economic Affairs claimed that it would be an economic and political mistake (no less) to block Siemens/Alstom. His arguments are the same tired ones (national champions and all the rest) that were advanced, back in the day, by Arnaud Montebourg, this blog’s favourite French (ex-)Minister.

Bruno Le Maire’s statements add to a plea, by 19 EU Member States, in favour of à la carte antitrust (see here). According to the reform suggested in a ministerial meeting, EU competition law would only apply to the baddies. The goodies, on the other hand, would not be subject to the rules, or would benefit from exemptions so they can become competitive at the global level.

One could say many things about these statements. One could say, for instance, that, if the approach they advocate were to be implemented, it would be the end of competition law as we know it. The French Minister’s arguments could very well be used to justify hard-core cartels: if a merger to monopoly should be allowed to go through in the name of the ‘competitiveness’ of domestic companies (whatever that means), why not allow EU firms to cartelise their activity and extract rents from companies based elsewhere?

One could also say that these statements are incredibly short-sighted and nothing sort of an own goal. If the EU system is the global reference, and if the European Commission is the leading authority in the world, this is because EU competition policy is enforced through law, not discretion or arbitrary distinctions between goodies and baddies.

If, as proposed by 19 EU Member States, the application of EU competition law were influenced by the firms’ place of establishment (or by their status as goodies or baddies), the system would lose its hard-won credibility. Such a move would play in the hands of those who argue (with no evidence so far) that EU competition law is tilted against foreign, in particular US, firms.

But there is something else that I would like to add to the above. I am always surprised that the competition law community does not do more to defend the European Commission, and our law-based system, in these circumstances. I tell myself that we should perhaps be more vocal.

One thing is to disagree with the Commission about whether Intel requires the application of the AEC test in every single rebates case, or about the legal test that should apply to constructive refusals to deal. And another thing is to question the very foundations of the system. When the latter are at stake, it makes sense to forget disagreements about particular points of law or policy (no matter how strong) and side with the Commission.

A consensus seems to be emerging across the political spectrum about the need for a well-functioning competition law regime. In particular, there is an understanding that the careful scrutiny of horizontal mergers, such as Siemens/Alstom, is indispensable (there are reasons to believe that the enforcement of merger control has been somewhat lenient vis-à-vis these transactions in the past couple of decades).

In these circumstances, and now that momentum is building, it would be terrible (for the economy, for consumers, and for our community) if competition law mutated into some sort of Frankenstein driven by political expedience (as opposed to rigorous legal and economic analysis grounded on consensus positions).

It is true that some have been vocal. At the risk of doing injustice to others, John Fingleton, for instance, has been vocal against proposed changes to UK merger control (see for instance here). It would be wonderful if others followed this example.

Written by Pablo Ibanez Colomo

10 January 2019 at 9:00 pm

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Competition Law and Innovation: Where Do We Stand? (a JECLAP editorial)

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JECLAP

The latest issue of JECLAP (see here) features an editorial of mine that takes stock of the relationship between competition law and innovation. I get the sense (a) that the topic will become increasingly prominent in law and policy discussions and (b) that there is still scope for deeper and more sophisticated analysis of the question. 

I copy the editorial below (see here for the version published in JECLAP, which is accessible for free). As usual, I look forward to your comments!

Discussions around the relationship between competition law and innovation have been on the rise in the past few years. The height of this debate took place in the lead up to, and the aftermath of, the Dow/DuPont merger. The pieces published in this Journal give a clear idea of the sort of arguments that have been advanced by commentators in this regard.

For some of these commentators (mostly economists, but also some lawyers), Dow/DuPont marks a significant departure from previous cases. The novelty would come from the fact that the analysis does not relate to markets in the traditional sense. The analysis would also move away from the way in which constraints coming from potential competitors were considered.

According to this view, the moment competition law analysis focuses on research and development capabilities – as opposed to precisely defined product markets, or pipelines in the pharmaceutical sector – it enters uncharted, speculative, territory. The fact that firms devote resources to the development of new products does not mean that these efforts will be successful. What is more – the argument typically continues – there is not an obvious relationship between the level of concentration and the rate of innovation in a given industry.

The opposite arguments have also been eloquently advanced. The idea that competition law can evaluate the impact of transactions in light of firms’ research capabilities is certainly not new. A framework based on this very idea has existed since the first version of the Guidelines on horizontal co-operation agreements. What is more, it has long been accepted that competition law analysis applies not only to price and output, but also to other parameters, including innovation.

The single most important lesson to draw from this debate is that exchanges between lawyers and economists sometimes get lost in translation. The deep and sophisticated economic debates about the relationship between market concentration and innovation, and about how to conduct merger analysis when innovation is the main driver of rivalry in an industry, have not always paid sufficient attention to the legal dimension. As a result, they fail to consider what needs to be proved as a matter of law.

Many economic arguments are indeed based on the idea that, when evaluating a merger, the European Commission is required to show direct harm to innovation (or prices, output or any other parameter of competition). This assumption is at odds with the relevant case law. In Case T-175/12, Deutsche Börse AG v Commission, the General Court confirmed that, as a matter of law, a significant impediment to effective competition can be established by proxy.

In other words, it is sufficient for the Commission to show, to the requisite legal standard, that a transaction will lead to a significant reduction of the competitive pressure faced by the parties. When conducting this assessment, the Commission can rely upon quantitative and/or qualitative evidence, including, in particular, the factors identified in the Guidelines on horizontal mergers (such as the closeness of competition between the parties, customers’ switching opportunities or rivals’ ability to expand production).

Against this background, it seems that most of the criticisms that have been directed against the analysis of the Commission in cases like Dow/DuPont – that the analysis is new and/or that it is insufficiently robust – come across as misguided, insofar as they ignore the legal dimension of merger control.

Is there room for claims that, even though it reduces competitive pressure, a merger will lead to an increase in innovation? There is. It is always possible for the parties to provide evidence showing that, in spite of the prima facie finding of a significant impediment of effective competition, the efficiency gains resulting from the transaction will outweigh its likely negative impact.

One could argue, reasonably, that the bar for the efficiency defence is overly high in Europe, and that it has not, since the adoption of Regulation 139/2004, played any meaningful role in practice. This reality is not necessarily problematic. Arguing that a significant reduction of competitive pressure can be pro-competitive is an exceptional claim that contradicts the very premises of competition law. It is therefore only natural that the so-called efficiency defence is very unlikely to succeed in practice.

Any other outcome would have serious consequences for the integrity of the competition law system. The same argument about the unique nature of innovation can also made, for instance, in the context of Article 101 TFEU enforcement, and this, with a view to justifying the most egregious practices.

Earlier this year, the Commission announced the launch of an investigation into an alleged collusive agreement involving the leading German car manufacturers. The unusual feature of this agreement is that it relates, allegedly, to innovation, and more precisely to the roll-out of clean emission technologies.

If one were to take the approach advocated by some economists in relation to merger control, one could argue that this collusive agreement, if established, should not be given the same legal treatment as other cartels. After all, the argument would go, it is not clear that cartel conduct relating to innovation is as harmful as traditional cartels – typically focused on prices, output and market-sharing.

If these arguments were to be accepted, the fight against cartels would suffer an important blow. The consequences would inevitably spill over the entire EU competition law system and would damage, without any valid reason, the ability of competition authorities to take action against particularly serious infringements.

Does the above mean that the introduction of innovation considerations in competition law analysis is always uncontroversial, or that the debate is over after Dow/DuPont?

Certainly not. Recent investigations hint at new ways in which such considerations can enter the analysis. For instance, innovation appears to play a role in the preliminary probe into Amazon’s practices. The Commission is exploring whether the online retailer exploits its role as a marketplace to copy rivals’ products, thereby reducing their incentives to innovate.

It is far too early in the process to comment meaningfully on this case. But there are grounds to believe that it gives rise to new questions. JECLAP’s editors will keep an attentive eye on this and other similar developments.

Written by Pablo Ibanez Colomo

8 January 2019 at 9:34 pm

Posted in Uncategorized

My wish for 2019: please engage with the hard questions, don’t avoid them

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Tough questions

Happy New Year! 2018 was an intense year for the two of us. But we already look forward to what promises to be an exciting 12 months.

Competition law thinking has become more polarised in the past couple of years. By and large, this is great, as it reflects vibrant competition in the marketplace of ideas. It also shows that our discipline is at the heart of some fundamental choices that our society is to make.

What is my wish for 2019, against this background? More than wishing that courts and authorities ‘get it right’ (whatever that means), I wish that they engage with the hard questions and that they do not dodge them under the pretence that things are easy.

Readers of the blog know that I do not care much about outcomes (who ‘wins’ or who ‘loses’ an individual case). That is a very poor measure of a legal system, let alone the performance of a court or authority.

A reasonable person can come to a decision that contradicts my own views on what the sensible outcome should have been in an individual case. There is nothing wrong with that. I very much struggle, on the other hand, with decisions that dodge the fundamental questions at stake.

And, at present, there is a growing market for commentators declaring that things could be very easy if we were to follow their infallible recipes.

For some people, it is all about words (or magic spells, as if we lived in Harry Potter’s universe). According to this view, magic happens when we pronounce the right words. If we proclaim that we are embracing, say, the ‘real deal competition standard’, all perceived problems in the system will vanish.

For other commentators, the secret to wisdom is to follow the long-forgotten teachings of our most virtuous ancestors. Thus, if we pick a large multinational and perform a ritual sacrifice in the form of a breakup, markets will become competitive again.

Alas, the fundamental question at the heart of any competition law system (when and how to take action against practices with ambivalent effects on the competitive process) is pretty hard.

I would say more: competition law is fascinating precisely because it is so hard. That is why reasonable people can disagree about the outcome of individual cases, and why I never take issue (or engage) with outcomes as such.

The past and coming months have given us a few good examples of the sort of tough questions that should not be dodged. Here are a couple:

  • Pay-for-delay: This area is certain to be discussed abundantly in the coming months (including on this blog). According to the Curia website, the hearing in Lundbeck (just to mention one) will take place later this month. This case and similar ones give rise to really tricky points of law.
    Is there potential competition if market entry makes it necessary to infringe a presumptively valid patent? Is there a restriction of competition if the regulatory framework makes market entry unlawful?
    I do not believe anyone claiming that pay-for-delay cases are straightforward, or just plain vanilla market-sharing arrangements. Perhaps the outcome is justified in an individual instance, but this does not mean that these cases are easy.
  • ‘Margin squeeze’ and refusal to deal: We have not yet discussed the Slovak Telekom judgment (it’s coming). This is the seminal case nobody discusses. Why? Because it has shown that the relationship between outright and constructive refusals to deal needs to be carefully pondered. Contrary to what has been suggested by some commentators, it is an incredibly tricky one.
    What Slovak Telekom has shown, first and foremost, is that the difference between refusal to deal and ‘margin squeeze’ abuses is, in and of itself, an artificial one. Some of the practices at stake in that case were half-way between a ‘margin squeeze’ and a refusal to deal à la Bronner, in the sense that they could be characterised either as the latter or as the former. Since the legal tests are so different, the question arises of how to deal with them. Should we require indispensability or not?
    I wrote last year that the relevant case law is sensible, and that its underlying logic is far less obscure than commonly argued. The Court has suggested, and I agree, that indispensability should not be required in every (outright and constructive) refusal to deal case. The remaining questions relate to the instances in which indispensability is a necessary condition for intervention, and the instances in which it is not.

These are just two examples, and I guess my message is clear. The temptation for short-cuts, or to take a ‘big picture’ (i.e. lazy) approach to tricky legal questions is always strong (in the same way that the temptation not to take the law seriously is strong).

Here’s to hoping that difficult stuff will be addressed in the way it deserves to be adressed. We will, as usual, try to contribute to these debates.

Written by Pablo Ibanez Colomo

2 January 2019 at 7:33 pm

Posted in Uncategorized

4th ChillinCompetition Conference (Robert O’Donoghue – “Coming To Our Senses: Object And Verticals”)

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Coming-to-our-senses-e1545940157677.png

Robert O’Donoghue’s discussed the notion of restriction by object in relation to vertical agreements at the 4th Chillin’ conference (a matter that we discussed on the blog here and here during 2018).

The video of his superb presentation is available here, and the slide deck he used, here.

[Note: this is the fourth 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 Pablo Ibanez Colomo

27 December 2018 at 8:51 pm

Posted in Uncategorized