Chillin'Competition

A few days ago the General Court issued interesting Judgments in cases T-208/13, Portugal Telecom, and T-216/13, Telefónica that have gone fairly unnoticed (possibly because they are not available in English). For the purpose of this post I will discuss the Telefónica Judgment.

The annulment proceedings relate to a Commission decision sanctioning Telefónica and Portugal Telecom (“PT”) for having included a clause under which both parties committed “to the extent permitted by law” not to compete with each other in the Iberian market in any new projects or activities in the telecommunications sector (including fixed telephone and mobile telephone services, internet access services and television services) as part of the agreement for the sale of PT’s stake in Brasilcel to Telefónica during a certain period. The clause was meant to be in force between September 2010 and 31 December 2011 but was formally withdrawn following the opening of the case in February 2011.

The decision considered this clause akin to an outright market sharing agreement, and dismissed the arguments Telefónica put forward in relation to, among others, the fact that a qualification “to the extent permitted by law” had been introduced at the end of the negotiations; the absence of actual anticompetitive effects; the alleged ancillary nature of the clause; as well as the argument that the clause was in reality considered ineffective following an ex post self-assessment undertaken by the parties’ lawyers. For the purposes of the calculation of the fine, the decision took into account the value of sales made by the parties’ in their respective home countries and applied a 2% coefficient that resulted in almost 67 million euros for Telefónica and in roughly 12 for PT.

The General Court’s detailed Judgment validates practically all of the Commission’s substantive thesis with one notable exception related to the calculation of the fine. But don’t lose the interest yet; there is some very interesting legal debate here:

-On the one hand, the Judgment confirms that, having regard to the legal and economic context, the conduct was a “by object” restriction. Telefónica had claimed that the clause was ancillary to a complex deal and that it had been imposed by the Portuguese government, so that its only choice was to limit the impact of the clause by forcing a self-assessment of any future conduct by including the phrase “to the extent permitted by law”. The Court dismisses the argument observing that Telefónica’s behaviour was autonomous and not forced by the Portuguese government (¶¶ 111-120) and that the claim that the clause was considered indispensable by the Portuguese government had not been proved (¶¶ 123-166). The Judgment does not accept Telefónica’s contention that adding the “to the extent permitted by law” qualification conditioned the validity of the clause to a subsequent self-assessment. It essentially observes that the parties themselves did have doubts as to the legality of the clause and that no one had explained why it had not been possible to clarify the matter prior to the closing of the deal or to its entry into force (¶¶ 181-192). Moreover, the Judgment does not accept the statements of the parties’ lawyers made before a notary as those do not coincide with the content of the written agreement to suppress the clause; ¶¶ 187-200).

The counterfactual. In its fourth ground of appeal Telefónica had claimed that the Commission had failed to assess in detail the structure of the markets in order to verify whether there would have been real, concrete opportunities for the parties to compete during the period affected by the clause had the latter been absent (i.e. that the Commission failed to address the counterfactual). The legal logic is correct: an agreement cannot restrict competition that would not have existed, but the argument was lost on the facts. The Judgment responds to these arguments noting that in this case it was not necessary for the Commission to assess in detail the structure of markets or potential competition given that the non-compete clause itself implied an acknowledgment of at least potential competition, that its subject-matter consisted of market-sharing, that its scope was very wide and the affected services had just been liberalized (¶¶ 201-227).

-On the other hand, however, and this is the main novelty in the case, the Judgment rules that the Commission was nevertheless required to assess potential competition between the parties for the services affected by the clause when calculating the value of sales. Since this exercise was not conducted, the Commission is ordered to make a fresh finding with regard to the calculation of fines (see ¶¶ 295-310). This relates mainly to the sales made by virtue of activities that would not have been subject to competition even absent the agreement  (e.g. services provided under monopoly conditions or others where PT’s access was impossible; see ¶ 274). The Judgment provides that the Commission should have examined the parties’ arguments seeking to establish that there was no possibility of competition for certain services, and that only after it might determine the value of sales linked to the infringement for fining purposes.

So, effectively, the Court endorses the Commission’s stance not to assess potential competition for the purposes of determining the legality of the conduct but nevertheless requires it to conduct this exercise at a later stage, when calculating the fine. And you may wonder: Why? Is this right?

Here is my off-the-top-of my-head take subject to our usual disclaimer:

• Contrary to earlier case-law that may suggest the contrary, I do share the General Court’s underlying reasoning that the “by object” label is about the obviousness of an infringement, not about its impact or material gravity. That is in fact what I said in a previous post discussing the “bananas” case.

• My feeling is that the Court was also –rightly- seduced by the counterfactual logic, as it wouldn’t make sense to sanction a restriction of competition that would not have existed. However, the Court’s overall assessment of the nature of the clause and context to the case led it to conclude (like in Toshiba, also cited in the Judgment) that the agreement did restrict at least potential competition that would otherwise have existed. This is correct in general, but also ignores that the scope of the infringement would have been reduced by excluding those activities where competition was not possible (in fact, ¶ 221 seems to suggest this could have been done) (admittedly, I don’t know how the parties argued it so perhaps the Court wasn’t able to do more). Accordingly, it moves on to the next step and follows a similar logic at the stage of fine calculation.

• In doing so, the Court encounters a problem, as there is also case-law from the ECJ (cited in 306) stating, in the context of market sharing, that one cannot uphold an interpretation whereby the Commission would be, when calculating fines, subject to obligations to which it is not subject for the purposes of the application of Article 101 (C-543/07, Prym, ¶ 64).

• The Judgment appears to be aware of this tension and therefore observes that the ECJ’s Judgment in Prym was rendered at the time the previous Fining Guidelines were in force (306 in fine), and emphasizes that in this case it is not imposing different obligations on the Commission but merely extracting the necessary consequences of recital 13 of the current fining guidelines which was self-imposed by the Commission (and which provides that in determining the basic amount the Commission will take the value of the undertaking’s sales of goods or services to which the infringement relates). This is an interesting and certainly defensible argument; at the same time, some may claim that it does not fit squarely with other case-law (e.g. C-580/12 P, Guardian ¶¶ 57-58).

• In my personal view, and taking for granted the Judgment’s factual assessment, perhaps the “more correct” solution, and one that would have avoided this tension, would have been to rule, in the first place, that the clause restricted competition by object but only in relation to activities where there could have been viable competition between the parties. There is abundant case-law that would have supported this reasoning (STM, European Night Services, O2, E.On –discussed in the Judgment- and others). Should that have been done, the Court would not have found the above-mentioned obstacles. Now, this is only my hastily formed opinion; happy to think it through together in case you might have comments.

If interested in all of these issues (which must be the case if you made it this far), you should know that Pablo and I are (or rather he is and I should be) working on a paper that develops the views expressed here, particularly regarding counterfactual assessments.