Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

On the (mis)application of Article 101(3): of judicial capture and cross-market assessments

with 4 comments

Lawyered

We competition lawyers are probably more stupid than other lawyers (and that’s saying something!). Think about it, on the behavioral side many lawyers essentially work with only two provisions (Arts 101 and 102 TFEU) and they don’t really know what to do with them. Granted, I’m oversimplifying, but perhaps not so much: how many people have a clear idea of what a restriction of competition is? [my previous experiment on this point was used by some to criticize our discipline; see here] How many know how to extract the consequences of Article 101(2) [see here for my take]? And how many know how to apply Article 101(3)?

Today I’ll focus only on the last of these questions, to which the answer is: very few, and I’ll give you an example.

(Note: the first half of the post is mere background; the more interesting stuff is emphasized in bold at the end. The following may be a bit dense, but I bet that if you manage to read it you’ll find it quite interesting)

In the early days the Commission essentially did what it pleased with 101(3), using it often with common sense but with very little, and often divergent, reasoning, thus bordering on the arbitrary. The Court didn’t put much order in that mess: starting with Consten & Grunding it devised the manifest error of assessment test to review the legality of “complex economic assessments”, a label which was said to apply to the application of Art. 101(3). The result of this approach is that prior to the adoption of Regulation 1/2003 the Court only rendered a handful of Judgments (30 approximately) dealing with this sub-provision, which nevertheless is at the core of our enforcement system.

Following the adoption of Regulation 1 the Commission ceased applying Article 101(3) as well, seemingly acting under the assumption that its Guidelines on the application of what then was Article 81(3) would fill the void. But the Guidelines didn’t fix much and, in fact, as will be seen in a second they also created new trouble. Also, Article 5 of Regulation 1/2003 (later interpreted by the ECJ in Tele2Polska effectively precluded national competition authorities from adopting individual exemption decisions under Article 101(3) TFEU (they can only conclude that there are no longer grounds for action)

The result is that the Commission seldom undertakes a serious evaluation of 101(3) in its individual cases, that EU Courts very rarely have the chance to review its application and that national competition authorities can’t do it to a full extent either (in spite of the fact that decentralization was intended precisely to empower them to do it…). Passivity in this regard is so extreme that even when the ECJ has instructed the Commission to perform a 101(3) assessment, the Commission has felt free enough to take a pass (we’re currently working on a case wich is a perfect example of this).

Far from being unimportant, I often contend that many of the problems encountered in modern competition law (like the object/effect debate and the discussions on how far into the “legal and economic context” one must look within 101(1)) (see here, for instance) derive from the fact that 101(3) isn’t taken seriously in individual cases.

But what is even worse is that the very exceptional cases in which Article 101(3) is indeed applied, it doesn’t seem to be properly applied.

I’ll give you an example, resorting to an issue I dealt with in my presentation on two sided markets at the Swedish Competition Authority’s Pros and Cons conference a few weeks ago and which, I realized, not many seem to be aware of.

Let’s take a simple question which should have a straightforward answer:

Can you balance the efficiencies obtained in one market against the restrictions of competition caused in a different market?

When this question first arose before EU Courts it was made it pretty clear that any positive effect should naturally have to be considered, regardless of the relevant market in which it occurs:

For the purposes of examining the merits of the Commission’s findings as to the various requirements of Article [101(3)] of the Treaty (…) regard should naturally be had to the advantages arising from the agreement in question, not only for the relevant market (…) but also, in appropriate cases, for every other market on which the agreement in question might have beneficial effects, and even, in a more general sense, for any service the quality or efficiency of which might be improved by the existence of that agreement”  (Case T-86/95, Compagnie Générale Maritime and others, [2002] ECR II-1011, paragraphs 343 to 345).

Sounds pretty unequivocal, right? Well, again, keep on reading….

Then came the Guidelines on 81(3) and ruined it. Para. 43 of the Guidelines states that “[n]egative effects on consumers in one geographic market or product market cannot normally be balanced against and compensated by positive effects for consumers in another unrelated geographic market or product market. However, where two markets are related, efficiencies achieved on separate markets can be taken into account provided that the group of consumers affected by the restriction and benefiting from the efficiency gains are substantially the same”. In other words, they said precisely the contrary to what the case law said. And, cunningly enough, the Commission did so citing in its support the very same case law that it was departing from (not that EU Courts haven’t occasionally done the same regarding their own case-law…) Indeed, the footnote (57) accompanying this paragraph refers to Compagnie Générale Maritime (quoted above) but adds a long explanation aimed at confining the Court’s ruling to the very specific situation at issue in that Judgment, in which the group of consumers affected by the restriction and the efficiencies is said to have been the same. Read it for a good example of manipulation a lawyer-like interpretation of the case law.

This very same issue returned to the EU Courts in the post-guidelines era with the Mastercard case. And instead of correcting the Guidelines’ intendedly wrong interpretation of the earlier case law, the Courts endorsed it, and I’m not sure that they did so consciously.

Click here to continue reading about how the Commission lawyered everyone:

– Indeed, in first instance, the General Court (click here for my comment on the Judgment) ruled (in para 228) that objective advantages derived from the agreement might be taken into consideration under 101(3) even if they don’t occur in the same relevant market as the restriction, but only provided that they benefit groups of customers affected by the restriction (merchants in casu: “as merchants constitute one of the two groups of users affected by payment cards, the very existence of the second condition of Article 81(3) EC necessarily means that the existence of appreciable objective advantages attributable to the MIF must also be established in regard to them”).

Interestingly, the GC did not quote any precedent in support of the latter proposition.

Advocate General Mengozzi’s Opinion in Mastercard also touched on this issue in paras 157-160, validating the finding of the GC, and making clear his view that “it is the consumers that suffer the harm caused by the restrictive effects of the agreement at issue that must, in principle, be allowed, as compensation for that harm, the fair share of the benefit resulting from the agreement referred to in Article 81(3) EC” because, in his view, the contrary “would amount to allowing the former category of consumers to be favoured to the detriment of the latter category” (158), noting that “distributive logic of that type seems, to have no connection with the practical scope of competition law (…) [competition law] is not intended to favour one category of consumers to the detriment of a different category” (in the accompanying footnote (129), however, he admits that such logic may well guide competition policy choices…).

Then in para. 159 he goes on to observe that “those considerations are not necessarily inconsistent with the settled case-law of the General Court (…), according to which it is not excluded that it may be possible to take into consideration the advantages resulting from the agreement that occur on a different market from that on which the agreement produces the restrictive effects” because “[s]uch advantages may be taken into consideration where, for example, the category of consumers affected by the agreement on the two separate markets is the same” (this is accompanied by footnote 130, which explains that “that was the position in Case T‑86/95 Compagnie générale maritime and Others v Commission [2002] ECR II‑1011, cited at paragraph 228 of the judgment under appeal. In that case the two services affected by the restrictions of competition were supplied on two distinct markets but demand for those services came from the same category of consumers”).  Please note that the latter explanation of why there is no inconsistency with earlier case law buys, almost word to word, the (mis)reading put forward by the Commission in footnote 57 of the Guidelines. The judicial capture is, in my view, evident.

The ECJ’s Judgment in Mastercard is clearly better but, in my view, still insufficient:

Para 248 only touches on it indirectly, failing to confront it properly and somehow seems  to be implicitly validating the General Court’s approach (admittedly, I don’t know how this issue was framed before the Court, so it may perhaps be the case that the ECJ had little room for maneuver).

Para. 237, on the contrary, is much better. It appears to go back to the earlier case law, holding that when assessing compliance with 101(3) “ it is necessary to take into account the system of which that measure forms part, including, where appropriate, all the objective advantages flowing from that measure not only on the market in respect of which the restriction has been established, but also on the market which includes the other group of consumers associated with that system, in particular where, as in this instance, it is undisputed that there is interaction between the two sides of the system in question”. This attempted clarification makes a lot of sense (and is particularly evident and therefore welcome with regard to two-sided markets). The paragraph however, seems to be confined to two sided markets, with the result that in other settings the ruling of the GC would still appear to be good law..

There’s an additional irony that you will appreciate. At the same time as the Commission was telling Courts this story about how efficiencies must benefit the same customers affected by the restriction and even persuaded them to buy a misreading of their case law, the Commission was doing and preaching the opposite.

Indeed, this speech from DG Italianer (from September 2013, that is, in between the GC’s and the ECJ’s Mastercard Judgments) states in pages 11 and 12 that in the Star Alliance case and in the context of air transport  the Commission for the first time accepted so-called out-of-market efficiencies. These are efficiencies which are generated on the markets other than the markets where concerns were identified”.

[Note: those of you who have read the above can clearly tell that this is by no means the first time the Commission does that]

Mr. Italianer went on to explain the test contained in the Guidelines and announced that the test applied in Star represents a broadening of the standard test because it does not require the parties to demonstrate that the groups of consumers travelling on the market(s) of concern and related markets are “substantially the same”, in order to credit any efficiencies generated on these related (other) markets” making it sufficient to find a commonality of consumer groups.

Conclusion

-The truth is that –contrary to what the Guidelines and the Mastercard rulings suggest the traditional (pre-guidelines) interpretation of Article 101(3) did allow for cross-market assessments, also regarding distinct groups of customers;

-The 101(3) Guidelines intended to reduce the scope for arbitrariness and to introduce a more structured analytical framework, but in doing so they willfully ignored the very case law they said they were applying and created other new problems;

-The Commission amazingly managed to capture both the General Court and the AG in Mastercard, both of which bought the misreading of the case law contained in the Guidelines;

– The Commission, in between, has developed what it calls a “new test”, which, in reality is closer to the one it had applied in the pre-Guidelines days and that it was telling Courts to abandon;

– The ECJ lost a unique opportunity to clearly tell the GC it was wrong on this point. Its Judgment has nevertheless put some order to this mess, but only with regard to two-sided markets, where the need to carry out “cross-market assessments” is even more pressing.

Written by Alfonso Lamadrid

20 January 2015 at 5:19 pm

Posted in Case-Law, Hotch Potch

4 Responses

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  1. Great post. I (almost) fully agree with you. One thing: When I read the MasterCard judgment, I did think that para. 237 made a lot of sense and was accurate in terms of the two sided markets. But para. 248 kind of kills that accuracy, doesn’t it? I think we could deduce from 237 that it’s possible to outweigh all disadvantages on one side, e.g. the merchant side, even if there were no advantages for them, with advantages produced for the other side, e.g. cardholders. Then the ECJ goes on to saying that “the General Court correctly indicated that merchants had to enjoy the MIF ‘as well as’ cardholders, and not ‘to the same extent’ as them.” (248) It’s confusing. I may have stronger feelings towards para.248 than you do…

    Gizem

    22 January 2015 at 10:00 pm

    • I (absolutely) fully agree with you. I tried to be prudent in my criticism to 248 because, again, I don’t know how the issue was framed by the parties, but yes, it does -in my view- kill the very sensible message in 237.

      Alfonso Lamadrid

      22 January 2015 at 11:53 pm

      • I have been thinking about whether this approach in MasterCard conflicts with Cartes Bancaires. I have the feeling that a natural indirect consequence of Cartes Bancaires would be that one could legitimately claim (in your words) the possibility to balance the efficiencies obtained in one market against the restrictions of competition caused in a different market in the context of two sided markets- despite the lack of any efficiencies on one side. But I have failed to find an actual ground for this in Cartes Bancaires, apart from the combination of “(again in your words) less object, more effect”, therefore potentially more 101(3), and “must assess two sided nature”. Is this too much cynicism?

        Gizem

        27 January 2015 at 12:38 am

  2. This is a very great post,it has really exposed so many realities in the judicial system thereby bringing about good knowledge in the system.

    Uba Babs

    30 January 2015 at 11:39 am


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