Chillin'Competition

I have recently uploaded on ssrn another paper, ‘Restrictions on Innovation in EU Competition Law’. It is forthcoming in the European Law Review (many thanks to Panos Koutrakos, editor of the review, for allowing me to upload a pre-edited version!).

I know much has been written about the relationship between competition law and innovation (perhaps too much in the US, perhaps not enough in Europe). I was inspired to prepare this paper because there is a crucial aspect about this relationship that tends to be ignored by commentators specialised in EU competition law. As is often the case with many academics, I write the papers that I cannot find and that I would love to read.

I explain that there are two ways in which innovation considerations may be considered in competition law analysis: direct and indirect.

The indirect introduction of innovation considerations: What do I mean by the indirect introduction of innovation considerations? What the Commission typically does, which is to infer harm to innovation from the effects of a practice on the degree of competitive pressure faced by firms.

In Intel, for instance, the Commission argued that the foreclosure of AMD would have a negative impact on the latter’s incentives to innovate. In Deutsche Borse/NYSE Euronext, the Commission claimed that competitive pressure between the merging parties had been a major driver of innovation in the industry. Thus, the loss of competitive pressure can be presumed to reduce the merging entity’s incentives to innovate.

I fail to see anything problematic with the indirect introduction of innovation consideration. As EU competition law stands, it is not necessary to directly establish, or quantify, the impact of a practice on one or more parameters of competition. Negative effects on prices, output or quality, are typically inferred by proxy, i.e. from factors that relate to the structure of the relevant market, its dynamics, and the position of the parties therein. In Deutsche Borse, the GC has confirmed that this approach is correct (the GC dismissed claims that the Commission had not established harm to innovation to the requisite legal standard).

Why is the indirect introduction of innovation considerations controversial? Because some authors, in particular in the US, argue that the link between market structures and innovation is not strong enough to establish a presumption. As a result, inferences by proxy would be insufficiently robust and not particularly reliable.

In Europe, these arguments do not seem to be particularly powerful. Because establishing harm to innovation is not essential to justify intervention, the lack of a link between market structures and a parameter of competition cannot be a determinant factor in the outcome of a case.

Arguments about the lack of robustness of analysis by proxy could only be considered at the stage of the efficiency justification, once a prima facie infringement (or finding of incompatibility) is established (which, given the nature of innovation as a process, is the same as saying that they can never be considered).

The direct introduction of innovation considerations: Innovation considerations may be introduced in a direct way when the Commission is not able to establish anticompetitive foreclosure to the requisite legal standard, or where it is unable to show that a refusal to license an intellectual property right prevents the emergence of a new product.

In such circumstances, innovation considerations are not the outcome resulting from a reduction in the degree of competitive pressure faced by firms, but the very concern justifying intervention.

The ‘scraping’ concerns raised in the context of the Google investigation provide an excellent example. The Commission has pointed out that using third-party content without authorisation could amount to an abuse of a dominant position. However, it does not seem to argue that ‘scraping’ is problematic because it could lead to foreclosure – and foreclosure does not look like a very credible claim with regard to firms like Yelp or Tripadvisor. Instead, the Commission has argued that ‘scraping’ could have a negative impact on third parties’ incentives to innovate. Innovation as such, not foreclosure, appears to the concern driving intervention in such cases.

The direct introduction of innovation considerations is problematic. There seems to be no room for it in EU competition law. This is an aspect that has not been explored in sufficient detail in existing scholarship, and I thought it was worth making the point. This approach to enforcement is problematic, first, because I do not believe it is possible to provide cogent and convincing evidence of harm to innovation. I do not believe that a competition authority could go beyond arguing that harm to innovation is a plausible outcome of a practice. And plausibility is not enough (and should not be enough) to establish a breach of competition rules.

Second, because it lays down a legal test that does not set meaningful boundaries to administrative action. For instance, a competition authority could, always and everywhere, argue that harm to follow-on innovation is a plausible consequence of a refusal to license an intellectual property right. Can you think of an instance in which this test would fail? I cannot.

In other news:

• You will have heard about Alfonso’s resounding victory before the General Court. And I am sure you very much look forward to his thoughts on it, as I do. He is busy, but he will certainly share his views on the saga.
• This is the last post that I will be writing before the new year. 2015 has been my first full year as co-editor of Chillin’ Competition. I am very pleased that our readership keeps growing. We have received substantially more views and unique visitors than in any of the previous years, which is encouraging. Thank you very much!