Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

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

with 6 comments

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

6 Responses

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  1. Many thanks for one more post that keeps us updated on key developments in the area!

    Yet, there is something I don’t really get.

    In Cartes Bancaires the Court stressed what is the essential criterion for determining whether an agreement constitutes a by object restriction of competition: a coordination should reveal in itself a sufficient degree of harm to competition. In order to ascribe an anti-competitive object to an agreement or practice, it is sufficient that it has the potential to have a negative impact on competition. The effects are relevant only for the award of damages [T-Mobile para 31]. Hence, in this case the Court submitted that it was not necessary to demonstrate a direct effect on prices to end users, since Art 101 is designed to protect the structure of the market and competition as such.

    In the same line in Maxima Latvija the Court says ‘where the anti-competitive object of the agreement is established it is not necessary to examine its effects on competition’ [para 17]. Indeed, in para 22 the Court avoids inferring from the fact that the said clause is capable of having an anti-competitive effect the conclusion that it is ‘restrictive by its very nature’. Yet, this happens because the analysis of the clause in its context is not capable of substantiating the conclusion that it ‘reveals sufficient degree of harm’. In other words the analysis of the clause ‘does not imply clearly’ that the agreement is anti-competitive by its nature. A by-object restriction should also be ‘obvious’. (Of course the riddle remains: how much analysis should be undertaken when determining whether a particular agreement belongs to one box or the other?). If a thorough analysis of the specificities of the market is required, then the restraint does not qualify as by object.

    As AG Kokott has said just as the law forbids people from driving cars when under the influence of alcohol regardless of causing an accident, Art 101(1) prohibits certain agreements that have the object of restricting competition irrespective of whether they produce adverse effects on the market in an individual case.

    Of course in case an agreement is characterized as a by-object restriction, it may be exempted where there is an objective justification (redeeming virtues) for it (C-403/04 P Sumimoto Metal Industries 45-46).

    In light of the above, I don’t understand why the by-object characterization does not constitute a rebuttable presumption of anticompetitive effects. Could you please elaborate?

    stavros

    10 December 2015 at 6:05 pm

  2. Hi Stavros,

    Thanks for your comment!

    You ask why the by object characterisation is not a rebuttable presumption of anticompetitive effects.

    The answer is very simple: if it were a rebuttable presumption of anticompetitive effects, it would be possible to rebut the presumption by showing that the agreement did not have, or is unlikely to have, anticompetitive effects. The Court has consistently held that the absence of effects is not a valid defence once the agreement is found to have an anticompetitive object.

    The by object characterisation is a rebuttable presumption that the agreement lacks redeeming virtues. It is possible to rebut this presumption, i.e. to show that it has redeeming virtues, under Article 101(3) TFEU.

    Two thoughts in support of the above:

    – Expedia: Remember that the Court held that there is no threshold of appreciability for agreements that restrict competition by object and that are caught by Article 101(1) TFEU. If it is not possible to escape the prohibition by showing that a by object agreement has insignificant effects on competition, it must mean that the by object category is about something else than effects. It is otherwise impossible, I believe, to make sense of Expedia.

    – Cartels: Johan Ysewyn gave a fabulous presentation at our conference. He said something that is key to understand the case law. He reminded us that even the most sophisticated cartel arrangements sometimes fail to have effects. It is simply wrong to assume, in other words, that cartels invariably have anticompetitive effects. Yet they are always and everywhere prohibited by object and subject to very large fines. If this is so, it must mean that they are prohibited for other reasons, i.e. the fact that they lack any redeeming virtues.

    Pablo Ibanez Colomo

    10 December 2015 at 8:02 pm

  3. Dear Pablo,

    Many thanks, also for Stavros, for discussing this again interesting case (one that has to do without an opinion). When I discussed it with my students last week we were a bit puzzled by the extensive references (by analogy) to Delimitis. I’m not sure whether this is indeed the most relevant precedent, given that the situation in Delimitis was one without any apparent market power (lots of breweries and even more pubs all lacking market power), whereas Maxima Latvija appears to have market power (based on anecdotal evidence of a student who stated that in Riga there were only Maxima supermarkets combined with the idea that – despite the fact that having a anchor tenant may have efficiency enhancing effects for the shopping mall – the shopping mall would seem to be more attractive to consumers if there is some competition (i.e. the anchor tenant is not able to veto competitors (on the food or non-food markets). in that regard the third preliminary reference question seems eminently sensible, but the Court doesn’t really answer this question (unless we take the ‘size of the operators present on the market’ (para. 28) as defining market power). In fact the answer appears to focus more on the possible bundle effect whereas in this case – as you also point out – the issue appears to be not so much a foreclosure effect, but rather the leveraging of market power from the market of standalone supermarkets to that of shopping malls. The price rigidity that is inherent in many selective distribution systems exists within that system, but it is not a problem if there is more than one selective distribution system on the market, i.e. – if we apply Delimitis by analogy – if there is more than one shopping mall development company and the others do business with different supermarkets. So, somehow I have the feeling that the referring court wasn’t really helped with the answer to questions 2 – 4 (then again, if you draft a preliminary reference as poorly as q. 1 was drafted, maybe you don’t deserve a particularly helpful answer ;-)). Maybe the major problem with preliminary references in effects-cases is the abundance of potential theories that apply to identify and measure such effects, which makes it all the more important for the ECJ and the referring court to really understand each other.
    best wishes,
    Hans

    Hans

    11 December 2015 at 9:14 am

  4. Hi Hans,

    Thanks so much for your comments! I can see that Maxima is much more interesting than we all thought at the beginning.

    I do not see how the issue of market power should make a difference in this case. As the Court has consistently held, the likelihood of anticompetitive effects is not relevant when determining whether an agreement is restrictive of competition by object (and this argument goes both ways, as I explain in the post).

    That Maxima has more market power than Henninger Brau (Delimitis) only tells you that the agreements it concludes are more likely to have anticompetitive effects. But if the agreements are comparable in their nature and operation (the Court seems to think they are, and I agree with the Court), then it makes sense to rule in the two cases that they are not restrictive by object.

    It is important to emphasise that the principles set out in Delimitis apply irrespective of the market power of the supplier. In the ‘ice cream’ saga, the GC emphasised this point. Remember Van den Bergh Foods too. The Commission advanced a different interpretation of Delimitis in the ice cream cases, but the GC remained faithful to a literal reading of the judgment.

    About the shopping mall being more attractive with more supermarkets and more choice. Of course! But a pub is also more attractive with more choice of beer. But is this fact relevant when ruling on whether the agreement is restrictive by object? I fail to see how, and the Court seems to be of the same opinion.

    For the rest, the framework set by the Court looks like the appropriate one to determine the anticompetitive effects of agreements concluded by Maxima.

    All the best!

    Pablo Ibanez Colomo

    11 December 2015 at 12:02 pm

  5. Pablo, great post as always.

    “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”.

    Is the above of any relevance to the TV broadcasters/Hollywood studios cases? I believe the Commission deemed them by-object restrictions but, looking at “the content of the agreements and the context of which they are part” (ie international and EU copyright rules), are they by-object? In the absence of such agreements, would anything be different for broadcasters because, if they expanded the geographical coverage beyond the terms of their licence, they would in case immediately ‘bump into’ another broadcaster’s licensed territory). What is more, do not such agreements have redeeming features (consumers get a more tailored offering…)?

    Just a question, rebuttal welcome.

    Side-liner

    25 May 2016 at 3:03 pm

    • Thanks for your comment, Side-liner!

      it is indeed clearly relevant for the pay TV case. The case law suggests that the agreements between the major studios and Sky are not restrictive of competition, let alone by object. The counterfactual clearly shows that these agreements do not restrict competition that would have existed in their absence (absent the agreement, there would still be a copyright infringement). In this sense, the pay TV case is similar to European Night Services, O2 and E.On Ruhrgas. In these cases, the GC annulled the Commission decision precisely for failing to consider the counterfactual. On the redeeming virtues: these were acknowledged by the Court in Coditel II, which is the most relevant precedent, and which also supports the conclusion that the licensing agreements are not restrictive by object.

      Pablo Ibanez Colomo

      27 May 2016 at 3:04 pm


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