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Archive for December 10th, 2015

What the Court said, and did not say, in Maxima Latvija

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Maxima Latvija

It has taken me a while to realise the significance of the recent Court judgment in Maxima Latvija. On its face, it does not seem to add much to what we know about agreements that restrict competition by object. This impression is probably due to the fact that the Court is not very explicit about why it ruled the way it did. If one takes into account what was not said, but is implicit, together with what the Court did actually say, it is possible to draw some valuable lessons.

What the Court said in Maxima Latvija

The necessary and sufficient factors to establish a ‘by object’ restriction

Paragraphs 22 and 23 are very much in line with previous case law. It is clear from the latter that the question of whether an agreement restricts competition by object is established in light of the content of the agreement and the context of which it is part. This is nothing new, but it is valuable that the Court confirms that these are the necessary and sufficient factors to evaluate whether a set of restraints is incompatible, by its very nature, with Article 101(1) TFEU.

The ‘by object’ category is not a presumption of anticompetitive effects

I repeat myself a lot, but it cannot be emphasised enough that the ‘by object’ category does not encapsulate a presumption of anticompetitive effects. When commenting on Bananas, I mentioned that an agreement such as an exchange of information can be found to restrict competition by object irrespective of whether there is evidence of its impact on competition. As Bananas itself shows, an exchange of information may be prohibited by its very nature even if it is not particularly likely to have a significant impact on prices.

Maxima Latvija is the mirror example. The case is about an obligation included in an agreement between the ‘anchor tenant’ of a shopping mall and the lessor. I understand from the ruling that the ‘anchor tenant’ had to give its consent to the letting of other premises to third parties. This restraint would work as an exclusivity obligation, in the sense that the tenant is given the right to oppose the letting of premises to competing supermarket chains.

The Court concedes that this contractual obligation is capable of having (‘could potentially have’) an anticompetitive effect. However, this fact alone is insufficient to establish that it is restrictive by its very nature. In other words, a restriction by object does not exist merely because an agreement can be presumed to have anticompetitive effects (and no, the Court never said the opposite in T-Mobile).

This is something that the Court has always held, but tends to be forgotten. Selective distribution agreements reduce substantially the ability and incentive of retailers to engage in price competition. It is in fact safe to presume that selective distribution softens price competition. However, the Court has always ruled, from Metro I to Pierre Fabre, that this fact alone is insufficient to establish a restriction of competition. As is well known, selective distribution networks fall outside the scope of Article 101(1) TFEU altogether in some circumstances.

Maxima Latvija is particularly interesting because there is recent empirical evidence suggesting that exclusivity obligations included in agreements between shopping malls and tenants have anticompetitive effects. Itai Ater comes to this conclusion in an article published earlier this year in the Journal of Economics & Management Strategy. So there it is: an agreement that is known to lead to higher prices has not been found to restrict competition by object.

What the Court did not say in Maxima Latvija

Why is an agreement not found to restrict competition by object if it is known – and can be expected – to have negative effects on some parameters of competition? The Court did not say much about it in Maxima Latvija. Actually, the Court does not really explain why the agreement is not restrictive by object. The good news is that past case law is very explicit about these two questions.

An agreement does not qualify as a ‘by object’ restriction if it has redeeming virtues that compensate for the expected negative effects. Think of Metro II. True, the Court held in that case, selective distribution softens price competition. But it benefits consumers in other ways. As a result, it is not restrictive by object.

The reasons why the Court came to the same conclusion in Maxima Latvija are probably not very different. The abundant references to Delimitis suggest that the contentious clauses were understood to be functionally equivalent to exclusive dealing obligations. And the Court has already held that exclusive dealing has redeeming virtues that are in the interest of both parties to the agreement and thus of consumers.

Interestingly, Itai Ater mentions in his paper, referred to above, that exclusivity obligations agreed upon between ‘anchor tenants’ and shopping malls can yield efficiencies. For instance (and this says much about his academic integrity), the author points out that his empirical analysis may have failed to capture that an exclusivity obligation between an ‘anchor tenant’ and a shopping mall may induce relationship-specific investments or may attract such investments at an early stage.

Written by Pablo Ibanez Colomo

10 December 2015 at 4:20 pm

Posted in Uncategorized