Chillin'Competition

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.

Thanks again!

P.S. We’ll be closing the shop during August, so enjoy the summer and hope to see you here soon.

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.

[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 [286]).

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 [286] and [288]).

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.

Disclaimer

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 102^nd 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.]

Some of you may remember that I wrote a few months ago about the regulation of pay TV markets by Ofcom. Back in 2010, the regulator required Sky to supply its premium sports channels to its rivals even though there was (is) no evidence that they were (are) indispensable for downstream competition (there is in fact strong evidence suggesting the opposite), and even though intervention could have the paradoxical effect of strengthening the position of the incumbent telecommunications operator (thereby contradicting the very logic and purpose of the EU Regulatory Framework for electronic communications).

The battle between BT and Sky has made the headlines again, unfortunately for the wrong reasons. BT instigated Ofcom to start the pay TV investigation that resulted in the imposition of wholesale supply obligations on Sky. It now appears that the latter wants an inquiry into the BT’s Openreach, the division that runs the network of the incumbent operator. The ultimate aim of Sky and other major broadband providers like TalkTalk is to achieve the structural separation of Openreach, which they would like to become an independent company. This question is particularly topical against the background of the (ongoing) merger between BT and EE (the leading mobile operator in the UK).

BT and Sky cannot be blamed for using regulation as a means to obtain competitive advantages (or as a means to compensate for a competitive disadvantage). If Ofcom has created the impression that lobbying to obtain regulatory favours pays off, it is natural that Sky follows that route in an attempt to achieve a level playing field in the operation of broadband Internet services. Those of us interested in competition law (and competition tout court), however, see this trend with concern. Where companies devote their resources to achieve regulatory advantages, and not to improve their services, consumers are typically made worse off.

These developments also suggest that bad regulation (and bad intervention under competition law, may I add) is more harmful than commonly assumed. Imposing an obligation on Sky to supply its premium sports channels is problematic not only because it is entirely unjustified, but also because it distorts firms’ incentives and encourages them to compete before the regulator, not in the marketplace. Not to mention that overregulation tends to create the need for ever more regulation to remedy the distortions created by the piling up of successive interventions.

It was sad and shocking to see some French taxi drivers resorting to violence in their demonstrations against Uber. These events, and the response of the French government, are the expected consequence of bad regulatory design. Regulation in the sector, as originally conceived and still enforced in many European cities, is simply not justified anymore. Applications like Uber address very effectively the market failures that used to provide a rationale for it. As an enthusiastic and regular user of the service in both London and Brussels, my impression is that Uber is in fact more effective, more responsive and more protective of the consumer than any local rules I have seen (and I have lived and used taxis in a few European cities).

The problem at the heart of the current troubles relates not so much to whether legacy regimes are justified (which they are not), but to the way in which they could be reformed to accommodate disruptive technologies. Some taxi drivers use violence because the legislator had created the expectation that existing regulation would apply forever. This expectation is reflected in the hefty prices paid for taxi licences in many cities. A government (local or national) has to be very courageous to change such a system. It is infinitely easier to prohibit a new service – no matter how good for the public at large – than to confront technological reality.

Why do I discuss all of this, which is well known by all readers of the blog? Well, if there is a lesson that the Uber debate provides is that regulation should be carefully crafted so that it can adapt seamlessly and effectively to technological change. Unless flexibility and adaptability are enshrined in the regime itself, change is unlikely to occur (or unlikely to occur at the pace required by the underlying economic and technological reality).

The European Commission had this lesson in mind when the Regulatory Framework for electronic communications was proposed in 1999. The telecommunications sector was rapidly changing, and it was already clear that technology alone would progressively address many of the concerns that were deemed to justify intervention at the time.

Thus, the Regulatory Framework was not conceived as a collection of rules imposing precise requirements on operators but as a set of broad principles that national authorities would follow when considering the need for intervention in a particular market. Because administrative action is subject to regular review, remedies are only imposed insofar as, and for as long as, they are necessary to advance the objectives of the regime.

The Regulatory Framework was an impressive legislative achievement that, alas, has been progressively undermined. Maybe it is true that good things never last. The most recent nail in the coffin has come from the recent political agreement to introduce net neutrality rules at the EU level (and which apply at least to what the press release calls the ‘open Internet’). As far as I can gather, the new rules will provide for an unconditional ban on some practices. Such prohibitions would be directly enshrined in the Framework. This is the very regulatory technique that the Commission considered to be inappropriate back in 1999.

I have never seen anything close to a theory providing a convincing case for net neutrality. But this is not really the issue here. What I find worrying is that, because of the regulatory device chosen by the European legislator, net neutrality is here to stay, and is likely to stay even if it becomes clear that it does more harm than good. The Regulatory Framework was conceived as a ‘future-proof’ instrument. It is ironic that, over time, it has evolved to become more rigid and less evidence-based.

Given that my most recent posts have been substantive and lengthy, I think I’ve earned myself a lazy short self-serving post today:

Two events have just been announced concerning some of the trendiest topics in competition law these days, so save the dates:

– On Monday 13 July the Spanish Association for the Digital Economy (Adigital) will be holding a talk about  Competition law and e-commerce featuring Thomas Kramler (head of the DG Comp task force in charge of the sector inquiry and one of the greatest experts in competition digital markets) and myself (not head of anything). All info is available here. 

– After the summer, on 24 September the European Data Protection Supervisor and the Academy of European Law (ERA) will be hosting a most interesting conference titled “Competition Law rebooted: Enforcement and personal data in digital markets“. I will be sharing a panel with Jorge Padilla and Orla Lynskey. For more info click here.

In the coming days I will also be participating in other fascinating events, including 8 hours of lectures with consecutive translation into Mandarin in Bruges, 4 cartel hearings in Luxembourg, a peculiar race in Brussels that you should join if you’re around, and swimming baby lessons, but I’m guessing I will not be attracting much public to any of these…