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Impossible is nothing (or some thoughts on the statement of objections in Google)

with 7 comments

Impossible is nothing

Today, just a few hours after the Commission sent a statement of objections to Google, I have received a book I ordered a couple of weeks ago, called Do Great Cases Make Bad Law? What a wonderful coincidence. The author addresses the question, profound and fascinating, in light of 22 landmark US Supreme Court rulings. This is definitely a research exercise one could replicate by examining Article 102 TFEU case law and administrative practice.

The statement of objections in Google has just been sent, but the case has already secured its place in the hall of fame. After more than four years speculating about the legal aspects of the case, the documents issued yesterday by the Commission (see here and here) finally give a more accurate idea of the reasons why the authority has taken the preliminary view that Google has breached EU competition law. The memo is remarkable in many respects. As Alfonso explained earlier this week, it makes little sense to take a guess at this stage, but, from what I can read, the case could transform the way we think about Article 102 TFEU. The underlying issues are so fundamental, and some of the tentative theories of harm so unprecedented, that its consequences are, at least potentially, far-reaching.

What is particularly interesting is that the underlying issue is a basic one. It is in fact strange that it has not been addressed many times already. The case seems to revolve around whether, and if so, under what circumstances, a dominant firm is entitled to discriminate in favour of its own services. The Commission memo seems to take the view that, indeed, such behaviour may violate Article 102 TFEU, but it is not very clear about the conditions under which this may be the case (which is not surprising; after all, it is just a memo). In any event, one can think of three possible legal approaches to the question:

Discrimination is prima facie prohibited absent an objective justification: At times, the memo suggests that favouring one’s services is abusive by its very nature. This would make Google a by-object case. Absent an objective justification, discriminating in favour of an affiliate would be prohibited under Article 102 TFEU. According to the Commission, the prominence and growth of Google’s service since 2008 do not reflect its relative quality or its relative relevance for end-users. The document suggests, in other words, that it is not the outcome of competition on the merits.

I have explained elsewhere that it is controversial to state that dominant firms are under a general duty not to discriminate against rivals. Discrimination of the kind outlined in the memo is ubiquitous (supermarkets may give more prominence to their brands, media groups favour their own outlets and electronic equipment is often designed in a way that it only works with affiliated products). More importantly, such discrimination is more often than not pro-competitive. Trying to thrive in the marketplace by exploiting one’s advantages is what competition is all about. Similarly, it is a banality to state that markets sometimes work better when different activities are integrated. I do not know whether the Commission intends to follow a by-object line of reasoning, but it is easy to think of the far-reaching consequences for the future of Article 102 TFEU if it does. The scope of the provision would expand very significantly. Just think of the many practices that could be labelled (or re-labelled) as exclusionary discrimination.

Discrimination is abusive if it leads to anticompetitive foreclosure: The Non-Horizontal Merger Guidelines are based on an idea that contradicts the above approach. Following a vertical merger, the new entity may have an incentive to favour its own services. This is not problematic in and of itself, even when one of the merging parties holds a dominant position (and Alfonso knows a thing or two about this). Favouring an affiliate by restricting access to inputs or outlets is only an issue if it leads to ‘anticompetitive foreclosure’. This is an approach that could also be followed in Google. It would not be entirely uncontroversial – I spare you the details of why I am not entirely convinced – but it would have the advantage of consistency. Like issues would be treated alike across competition law provisions. Arguably, it would also be the logical approach for the Commission to endorse. After all, the Guidance is a pre-commitment device intended to confine administrative action to instances where anticompetitive foreclosure is likely. In this sense, it is remarkable that the word ‘foreclosure’ is not used in the memo. Not even once. The rhetoric of foreclosure is equally difficult to find in the document. This conspicuous absence raises a number of questions. Does the Commission believe that the Guidance is not relevant in Google? Is the Guidance no longer a reliable indicator of the Commission’s approach to the enforcement of Article 102 TFEU?

Discrimination is abusive if it harms consumers and innovation: The memo suggests that foreclosure is not the only source of anticompetitive effects that can trigger the application of Article 102 TFEU. The Commission seems to imply that, even in the absence of anticompetitive foreclosure, administrative action could be justified if it can be shown that discrimination harms consumers and competitors’ incentives to innovate. If the Commission chooses to follow this third approach, it would be venturing into unchartered territory. Instead of inferring harm to consumers and innovation (these effects are typically assumed to result from the exclusion of rivals), harm would be established in a direct way. I can think of several reasons why, in theory, it would make sense to do so. The questions I have in this regard are more practical than theoretical, however. For instance, I wonder whether it would be possible for the Commission to provide cogent and convincing evidence of harm to innovation (as opposed to discussing the plausible mechanisms through which innovation could be negatively affected). Similarly, I am not sure whether a dominant company would be able to challenge or disprove claims that a practice is harmful to innovation.

As usual, we very much welcome your views on the above.

Written by Pablo Ibanez Colomo

16 April 2015 at 8:33 pm

Posted in Uncategorized

7 Responses

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  1. “The underlying issues are so fundamental, and some of the tentative theories of harm so unprecedented, that its consequences are, at least potentially, far-reaching.” Here, I beg to differ: what is so unprecedented about applying the more than 60-year-old section of Article 102 (c) TFEU (“applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage”)?

    In other words: what is the difference in terms of economic harm between (i) Microsoft (upstream dominant) favouring its own media player and thereby foreclosing other media players on the downstream market and (ii) Google (upstream dominant) favouring its own travel services and thereby foreclosing other travel service providers on the downstream market???

    Interestingly, Google’s own “defense” – legally speaking – revolves around the issue of dominance and not the alleged abuse: the position of its competitors, the innovation on the markets, etc, etc. Not much is said about why it would be fine for a dominant upstream firm to discriminate (by way of in favour its own downstream services as opposed to its competitors downstream services…(http://googleblog.blogspot.hu/ – the search for harm)

    Asimo

    17 April 2015 at 3:10 pm

  2. Hi Asimo,

    As usual, thanks for your comments.

    Unprecedented theories: I struggle to find an example of an exclusionary practice that has been deemed abusive not because it was likely to lead to anticompetitive foreclosure but because it harmed innovation (even absent foreclosure). Perhaps your understanding of the Commission administrative practice is different. If so, it would be great if you could share your thoughts. Similarly, I believe it is very difficult to infer from the case law a general principle according to which dominant firms are required, as a rule, not to discriminate against rivals. This is the conclusion I reached when preparing the article I mention in the post. Perhaps your understanding of the case law is different. If so, again, do not hesitate to share your views.

    Microsoft: you certainly remember that in Microsoft the Commission established the mechanism through which anticompetitive foreclosure was likely to result from the alleged tied sale of two products. It is not clear from the memo whether Google is based on a similar idea. It may well be the case, but this is not something that transpires from the document (there are no references to anticompetitive foreclosure, as one might expect in the post-Guidance era).

    Pablo Ibanez Colomo

    18 April 2015 at 12:52 pm

  3. I think it was termed abusive precisely because it would lead to anti-competitive foreclosure!At least this is what read from this – apparently key – para of the factsheet:

    “Google’s conduct may therefore artificially divert traffic from rival comparison shopping services and hinder their ability to compete, to the detriment of consumers, as well as stifling innovation”

    Asimo

    18 April 2015 at 8:19 pm

    • Keep reading! It’s precisely when the memo develops (‘more specifically’) the generic claim that you quote that it gets intriguing

      Pablo Ibanez Colomo

      19 April 2015 at 4:47 pm

      • Well…In the “more specifically” part, at least two of the bulletpoints – in my reading – clearly refer to anti-competitive foreclosure. Although they are clearly not 100 page competition economics analyses on the application of the theory of harm, they clearly refer to “rivals” and infer that Google’s practice is wrong ecause it is “bad” for whoever else is there on that downstream market:)

        The citations are:

        1. “[Google’s own stuff] experienced higher rates of growth, to the detriment of rival comparison shopping services.” and

        2. “incentives to innovate from rivals are lowered as they know that however good their product, they will not benefit from the same prominence as Google’s product.”

        Asimo

        19 April 2015 at 9:45 pm

  4. I think a comparison can be made here between the Samsung case and this case. Before Samsung faced the statement of objections for alleged abuse of seeking injunction relief contrary to FRAND commitments, Samsung probably thought that the Commission had a weak case against it and was aiming to compel the company to a commitment decision. After the Commission sent the SO to Samsung, we saw that the case was ended with a commitment decision within less than 1.5 years. Since the investigation was opened in November 2010, I think the SO in the Google case is indicative of an upcoming commitment decision.
    It is true that Google’s proposed commitments at an earlier stage were market tested, but still the case was not settled because the unprecedented theory of harm was not convincing. Classification is all that matters in this case. Google’s alleged abuse can be categorised as abusive discrimination, predatory product design or even refusal to provide search results without favouring its subsidiaries’ services. When this is sorted out, the case will make much more sense.

    ahmetfatihozkan

    21 April 2015 at 1:58 pm

  5. […] that the Commission will have to address in its own – and pending – Google case (see here and here). In essence, Streetmap argued that Google’s prominent presentation of its mapping services […]


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