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Archive for October 20th, 2016

AG Wahl Opinion in Case C-413/14 P, Intel Corp v Commission: towards legal certainty and consistency

with 4 comments

The big news today is the release of AG Wahl’s Opinion in Intel. The Advocate General proposes to set aside the first instance judgment in the case and to refer the case back to the General Court. In any event, the opinion was awaited not so much for the issues specific to the case, but for its position in relation to the legal treatment of exclusive dealing and loyalty rebates. In this regard, the Opinion suggests that an analysis of the likely effects of these practices is necessary to apply Article 102 TFEU. This first reaction focuses on this question.

Beyond the specifics of the case, this opinion would, if followed, be a victory for all involved: first and foremost, for legal consistency; secondly, for the Commission, which sees the remarkable efforts undertaken in the past decade validated; and finally for dominant firms, which would be subject to a more predictable framework. Indeed, AG Wahl places much emphasis on the issue of legal certainty.

Towards legal consistency

The virtue of the opinion, in my view, is that it focuses on the issues that matter, and this, from a legal perspective. AG Wahl cuts to the chase and shows why the legal treatment of exclusive dealing and loyalty rebates has simply become very difficult to sustain. For reasons of legal certainty and consistency, the view that exclusive dealing and loyalty rebates are abusive by their very nature is a source of frictions that had to be addressed sooner or later.

AG Wahl’s analysis of Hoffmann-La Roche

In Hoffmann-La Roche the Court of Justice held, in paras 89-90, that exclusive dealing and loyalty rebates are by object infringements. The prohibition in that case was deemed to apply, inter alia, to ‘discounts conditional on the customer’s obtaining all or most of its requirements – whether the quantity of its purchases be large or small – from the undertaking in a dominant position’.

AG Wahl reads Hoffmann-La Roche beyond paras 89-90 and comes to the conclusion that there is some tension between what the Court said and actually did. On the one hand, it held that loyalty rebates are restrictive by object. On the other, it examined carefully the rebate scheme applied by Roche. It is therefore difficult to say that the Court did not engage in an analysis of ‘all the circumstances’ (see paras 65-72 of the Opinion). Subsequent case law, including Michelin I and British Airways, also carefully assessed ‘all the circumstances’.

In his analysis, AG Wahl conveys a very important point: the existing categorisation of rebate schemes (‘loyalty’, ‘loyalty-inducing’, ‘exclusivity’) is somewhat artificial (see for instance para 100: ‘the difference between the rebates at issue in Tomra and Hoffmann-La Roche is one of degree rather than kind’).

For better or worse, business realities do not fit into neatly defined pigeon holes. As a result, there is a mismatch between the theory of the case law and the actual practice of the EU courts and the Commission.

Would it not be better to adjust the law so that it reflects business realities and the actual analysis performed in individual cases, asks AG Wahl?

Loyalty rebates and legal consistency

In line with consensus positions, the Opinion concludes that rebate schemes, irrespective of their form, appear to be comparable in their nature, purpose and potential effects (see para 93: ‘there is no objective reason why [loyalty rebates] should receive a stricter treatment than those falling under category 3’).

As a corollary, the qualification of loyalty rebates as a category akin to a restriction of competition by object (para 82) seems difficult to sustain. An assessment of ‘all the circumstances’ appears to be necessary in all cases involving rebate schemes.

In order to determine whether a practice is restrictive by object, it is necessary to consider whether there is ‘any other plausible explanation for that conduct’ (para 82). This assessment involves an evaluation of the particular context of the rebate (ibid). In fact, the analysis of the economic and legal context of a practice knows no exceptions in the case law, and applies both to potential restrictions by object and by effect.

As explained by AG Wahl, the prohibition of a rebate scheme on the basis of its form alone – and thus without evaluating the economic and legal context – seems to be at odds with the case law (paras 86-88). If the qualification of a practice as restrictive by object does not consider the relevant context it would rule out, from the outset, other plausible explanations for the conduct.

Ruling out other ‘plausible explanations’ for loyalty rebates is problematic because, as the GC conceded in its analysis in Intel, such schemes are capable of having beneficial effects on competition (para 91 of the Opinion). On the other hand, functionally equivalent rebate practices are capable of having the same anticompetitive effects, even though they are not formally conditional upon exclusivity (para 92).

As in Cartes Bancaires, AG Wahl draws insights from economic analysis. He explains that contemporary economic literature shows that the anticompetitive effects of loyalty rebates and exclusivity are context-dependent (para 94). As a result, such effects cannot be assumed to be an inevitable consequence of the implementation of the practice, and require a case-by-case assessment.

Towards legal certainty

A unified framework for the assessment of anticompetitive effects

The analysis of AG Wahl goes beyond loyalty rebates. He examines the case law on ‘margin squeeze’ and selective price cuts (Post Danmark I) and concludes that there is no persuasive reason why the analysis of effects should be different depending on the practice at stake.

I see para 103 as the one raising the critical issue, perhaps of the whole opinion: ‘It goes without saying that it is of the utmost importance that legal tests applied to one category of conduct are coherent with those applied to comparable practices. Sound and coherent legal categorisation benefits not only undertakings in terms of increased legal certainty, but also assists competition authorities in the enforcement of competition law. Arbitrary categorisation does not’.

AG Wahl proposes something that is only sensible. The analytical framework that applies to potentially abusive practices should be a unified one. The assessment of ‘all the circumstances’ in rebate cases should not be conceptually different from the assessment of exclusionary effects in ‘margin squeeze’ and, say, selective price cut cases. By the same token, the test that applies to standardised rebates (Post Danmark II) should be the same that applies to other rebate schemes (para 105).

I would simply add to the opinion that it would also make sense to apply the same framework to restrictive agreements within the meaning of Article 101 TFEU and to potentially abusive practices within the meaning of Article 102 TFEU. This point is implicit in these passages. The criteria that AG Wahl identifies are similar, if not the same, as the factors set out in cases like Delimitis.

How to assess the exclusionary effects of potentially abusive practices?

The Opinion provides a complete framework for the analysis of exclusionary effects under Article 102 TFEU. It is consistent with widely accepted views about how such effects must be evaluated.

  • Threshold of effects (paras 112-121): The opinion is consistent with the most recent case law (Post Danmark II) in that it holds that, when assessing the effects of potentially abusive practices, it is necessary to show that such effects are likely (and thus not merely possible, or plausible). However, he seems to disagree with AG Kokott about the meaning of likelihood. For AG Kokott, likelihood means a probability of more than 50% (‘more likely than not’). For AG Wahl, the probability should be higher.
  • Coverage of the practice (paras 137-146): This is one of the factors explicitly mentioned by the Court in Post Danmark II.
  • Duration (paras 147-157): it is only natural to take into consideration the duration of an agreement when examining whether it is likely to lead to foreclosure. Unsurprisingly, this is a factor to which the Court referred explicitly in Delimitis.
  • Market performance of the competitor and declining prices (paras 158-160): According to AG Wahl, the evolution of the position of the competitor – and of prices – is not conclusive, but is a factor to consider among others. I am ready to guess that most commentators will agree.
  • The AEC test (paras 161-172): the Opinion is consistent with Post Danmark II. Absent the particular circumstances of that case, the AEC test is one factor, among others, to evaluate the impact of a practice on competition. It is not a surprise that the Commission, together with other authorities, has decided to rely upon it to define its enforcement priorities. In this sense, the Opinion validates the use of contemporary tools .

The rest of the judgment examines the application of these principles to the case at hand – in addition to procedural issues that are by definition specific to the case. Veteran readers know that I do not have a particular interest in the outcome of individual cases. Plus, there is little that I would add to Alfonso’s excellent analysis below!

Written by Pablo Ibanez Colomo

20 October 2016 at 1:11 pm

Posted in Uncategorized

A first urgency comment on AG Wahl’s Opinion in Intel (C-413/14 P)

with 2 comments

 

Intel Reports Quarterly Earnings

AG Wahl just stirred the little competition law world with an Opinion issued a couple of hours ago in the Intel case that will drive competition law discussions in the coming months. The Opinion deals, among others, with one of the most controversial legal issues in EU competition: the legal standard applied to fidelity-enhancing rebates.  But as the Opinion observes, there are other procedural issues “by no means of lesser importance” (para. 238) than the substantive ones (actually, paras. 2 and 3 seem to accord greater relevance to the procedural ones).

The legal discussion is extremely interesting and perhaps controversial, and not only because it proposes to set aside the GC’s Judgment on virtually all possible grounds (fines aside) (as anticipated in this great account of the hearing). The Opinion is also detailed and tightly argued, which may complicate the drafting of an eventual ECJ ruling going in an opposite direction.

What follows is essentially a quick annotated summary of my first reading. I don’t seek to dissect the Opinion for now, but to be the first to summarize it and give you my first legal impressions. Pablo’s seminal-to be analysis on the substantive aspects of the case will immediately follow (he may be too humble to say it, but if you read the Opinion and his papers on the subject a certain influence transpires; he will also discuss it in Brussels next week with Damien Neven and Luc Gyselen) ].  Also, I would note that my former-co blogger Nicolas is cited in footnote 55 for this paper]. [A disclosure: I, like most lawyers, am involved in cases where this development could be relevant, but I believe what follows is an objective account; subjective comments are noted

A) On the legal standard applicable to exclusivity rebates

This is the section that will attract most attention. The Opinion starts with some quotable paras. highlighting the relevance of efficiency in EU competition law (41). It then goes on to explain the three categories distinguished by the GC between (i) volume-based rebates; (ii) exclusivity rebates and (iii) fidelity-enhancing rebates (the GC had said that only the third category due to its non-conditional nature must be assessed in the light of “all the circumstances”) [paras 81-and 82 will later say that there are only two categories: volume based and not]

The Opinion observes (47) that “the assumption that ‘exclusivity rebates’ offered by a dominant undertaking result always, and without exception, in anticompetitive foreclosure permeates the entire judgment under appeal. It is on the basis of that assumption that the relevance of context and, by way of extension, the need to consider the capability of the conduct to have anticompetitive effects was rejected by the General Court”, and then goes on to challenge that assumption.

[Comment: something important that strikes me in this para. 47 is the mention to the fact that according to the GC those rebates would result “always, without exception” in anticompetitive foreclosure; paras. 86-87 also say that “the assumption of unlawfulness would not be open to rebuttal” and that the GC’s assumption “negates the possibility (…) of invoking an objective justification. Actually, para. 59 of the General Court’s Judgment did say that the possibility to objectively justify these rebates is always open, and only noted that Intel had not invoked it. The ECJ is likely, in my view, to place great emphasis on this].

The Opinion then goes on to examine the case-law. It explains that the issue is not so much one of characterization of the rebate but of the legal standard applicable [Comment: keep an eye open for a discussion on admissibility of the plea in the Judgment].

AG Wahl’s point is essentially that the GC incurred in an error by basing its Judgment on the ECJ’s Hoffman La Roche Judgment (what he sees as the only precedent on exclusionary rebates, para. 67) the basis of what the Judgment said verbatim, and not looking at what the ECJ actually did in that case. Actually, the Opinion even says that looking at the wording of Hoffman La Roche “it is perhaps not surprising that the General Court concluded as it did” (para. 65, the same idea is repeated later in para. 71). His argument is that in Hoffman La Roche the Court said what it said but actually undertook  a thorough analysis of “the conditions surrounding the grant of the rebates and the market coverage thereof” (para. 66, later developed in paras. 75 and 84).  The Opinion notes that, since then, all relevant case law –even if referred to other “categories”- has consistently taken into account “all the circumstances” (68, also later in 76 and 83 with references to Michelin I, British Airways, Michelin II and Tomra, and in para. 101 on margin squeeze) and posits that “reiterating a statement of principle concerning abusiveness is, as shown in the Court’s case law, however, not the same thing as failing to consider the circumstances of a case”. This is a bold but very reasoned and interesting interpretation which is very aligned with Pablo’s known views.

The Opinion importantly claims that the conclusion in the Judgment even if “on its face simply reaffirms existing case-law” (71) in reality it ignores the “legal and economic context” (72, developed later in 82 and 84) [Comment: this is a very core idea in the Opinion, which does invoke the parallelism in 101 in a way reminiscent of Wahl’s Opinion in Cartes Bancaires. In my view, if one imports the notion of “by object” restraint in Art. 102, then it certainly makes sense to import as well the case law on the relevance of the “legal and economic context”. Another matter is how this is applied]

The idea then is that one cannot predicate unlawfulness in the abstract, but rather looking at “all the circumstances” (76) the “legal and economic context”. He develops at this point (86-88) the idea that assuming unlawfulness negates a possible objective justification [on this see my first comment above].

In another implied reference to his Opinion in Cartes Bancaires, he notes that “experience and economic analysis” do not unequivocally suggest that loyalty rebates are, as a rule, harmful or anticompetitive” (90) and whereas he may see reasons to treat them “more strictly” (91), he doesn’t consider they should be put in a “super-category” apart (89). He insists that according to contemporary economic literature, effects depend on context (94). After dismissing Tomra as “too ambiguous” (97) he insists on coming back to Hoffman La Roche and factors in Post Danmark II as well (100). This reasoning leads him to the “intermediate conclusion” that “the General Court erred in law in considering that ‘exclusivity rebates’ can be categorised as abusive without an analysis of the capacity of the rebates to restrict competition depending on the circumstances of the case” (106).

Since, as the Opinion observes, the Judgment did (like the Commisison; para. 27) in the alternative “assess in detail whether the rebates and payments (…) were capable or restricting competition” looking at “all circumstances” (107), it moves on to consider this alternative assessment.

What comes next is no less remarkable. Very importantly, on paras. 112 to 120 the AG rejects the idea that showing “capability” may be sufficient [Comment: don’t underestimate the importance  of this finding for ongoing and future cases]. He acknowledges that certainly, evidence of actual effects does not need to be presented” (114), but insists that “importantly, however, that capability cannot merely be hypothetically or theoretically possible(para. 114 and also 118) [Comment: this, I certainly buy]. That is why one should assess effects in all “likelihood”, which “must be considerably more than a mere possibility that certain behavior may not restrict competition” (117). Interestingly, he also rejects the idea that it would be enough to show that “foreclosure is more likely than not” as that would risk capturing isolated instances of practices that may in reality be procompetitive (119)  [Comment: Note that this contradicts AG  Kokotts Opinion in Post Danmark –not quoted here- which proposed precisely that standard]. In a key paragraph that has a lot to do with Pablo’s most recent paper (which I incidentally happen to co-author), para. 120 proposes that “to avoid over-inclusion, the assessment of capability as concerns presumptively unlawful behaviour must be understood as seeking to ascertain that, having regard to all circumstances, the behaviour in question does not just have ambivalent effects on the market or only produce ancillary restrictive effects necessary for the performance of something which is pro-competitive, but that its presumed restrictive effects are in fact confirmed. Absent such a confirmation, a fully-fledged analysis has to be performed”.

How does one then perform this fully fledged analysis?

AG Wahl focuses on market coverage, duration, market performance of competitors and the As Efficient Competitor (AEC) test and says important things regarding all of them.

On market coverage (137-145) he observes that “it is generally accepted that the likelihood of negative effects on competition increases in line with the size of the tied market share” (140), but acknowledged that this is “by no means an arithmetic exercise” which is why the Court has refused to set a specific level of foreclosure (141), noting that in some cases “even modest market coverage may result in anticompetitive foreclosure (142). He believes that a 14% coverage “may or may not have an anticompetitive foreclosure effect” and is therefore “inconclusive”(143) as, in his view, was thus he assessment in the GC’s Judgment (146).

On duration he observes that “the short duration of an arrangement does not exclude that the arrangement is capable of having anticompetitive effects. Similarly, the question of whether the overall period is short or long in the abstract is irrelevant” (150). The real question depends on the “choice of the customer” and in this regard the Opinion importantly, and in my view also correctly, underlines that “Plainly, it cannot simply be assumed, on the basis of a customer’s choice to stay with the dominant undertaking, that that choice constitutes an expression of abusive behaviour. That is because there may be other plausible explanations for that choice. Those include, but are not limited to, quality concerns, the security of supply, and the preference of end-users” (155) [Comment: one has to respect AG Wahl’s ability to draft very quotable statements ;)]

On the performance of competitors and the decline in prices he, for once, sides with the GC saying those are also inconclusive (160)

On the AEC test (161-170) he notes that even if the ECJ has in the past said it is a useful but not legally necessary test, in the circumstances of the case it was pertinent because (i) the Commission itself had carried it out and (ii) the other circumstances were unequivocal (169).

In view of the above, the Opinion concludes that the GC’s assessment was also vitiated by an error of law.

B) On the role of the notion of “single and continuous infringement” in abuse of dominance cases

In some recent cases the Commission has resorted to the notion of “single and continuous infringement” for abuse of dominance cases [to my knowledge, this is the case in Intel, Astra Zeneca and Android].

Following an explanation on the origins and use of this important notion in 101 cases [see here for my own views on this], the Opinion observes that “in the present instance, the concept of a single and continuous infringement has been inserted into a wholly different context.  In the judgment under appeal, it was employed to find an infringement concerning a single undertaking’s conduct, in relation to which it had not been verified that that conduct alone was capable of restricting competition within the internal market” (185). [Comment: this is essentially about “Karate Competition Law”; remember?]

It then sends a very important message underlining that “the General Court replaced a material criterion with a procedural one. It abandoned the criterion of sufficient market coverage, which it paradoxically held to be relevant for ascertaining whether the impugned conduct was capable of anticompetitive foreclosure, and replaced it with the criterion of a single and continuous infringement. That, quite simply, cannot stand” (189)

More on this in paras. 319 on the assessment of substantial effects for jurisdictional purposes (see below).

C) On rights of defence

The Opinion also proposes to set aside the Judgment on independent procedural grounds given the Commission’s handling of a meeting with a Dell executive. The legal issue of importance is the AG’s view that the GC wrongly created a “highly problematic” category of “informal meetings” (230-231) that could “broaden the Commission’s discretion to conduct interviews without any obligation to record them [and] would also enable the Commission to be selective in terms of the evidence to be disclosed”  (237).

To sum things up [my students on Procedure will certainly have to discuss this], he considers that since “no adequate record of the meeting exists, it is not possible to tell with certainty what was discussed and to what extent that might have been exculpatory, inculpatory, or indeed neutral” (259) and that “judicial review cannot be based on assumptions about evidence” (260) so that “it cannot be ruled out that the meeting shed a different, or indeed new, light on the conditionality of the rebates offered to Dell” (267). In his view, this would be enough to annul the Judgment. [Comment:in my view this is the only part of the Opinion that if, endorsed, would led to the annulment not only of the GC’s Judgment but also of the decision].

D) On jurisdiction and extra-territoriality

As highlighted in para. 280 of the Opinion, this ground of appeal “is by no means of lesser importance than those examined so far” as “it will enable the Court to fine-tune that line of case-law and adjust it to present-day conditions, characterised by global economies, integrated marketplaces and elaborate patterns of trade”.

Following an interesting discussion in the case-law, and notably of Woodpulp (284-290) the AG tries to solve the question of whether one needs to look at implementation and/or effects. His view, in a nutshell, is that not only direct sales in the EU as relevant as claimed by Intel (293), that implementation is a very important criterion (293: “in other words, when part of the unlawful conduct is executed, applied or put into effect within the internal market because one of its essential constituent elements takes place there”), but he also “believe[s] that the Court should explicitly address that issue here and, in line with what has been suggested by the Advocates General mentioned in the previous point, adopt an effects-based approach to the application of Articles 101 and 102 TFEU”.

The view posited in the Opinion is that the relevant effects “cannot be based on a link or effect that is too remote or purely hypothetical” and that “to comply with a certain form of comity and, by the same token, to ensure that undertakings can operate in a foreseeable legal environment, it is only with a great deal of caution that the effect of the conduct complained of can be used as the yardstick for asserting jurisdiction. That is all the more important today. There are over 100 national or supranational authorities worldwide that claim jurisdiction over anticompetitive practices” (300).

The Opinion refers to the Judgment related to the merger in Gencor, noting that EU competition law is triggered when conduct has “foreseeable, immediate and substantial effects in the internal market (301) and proposes to apply the same principle to Arts 101 and 102 (302), commenting that the “criterion of ‘qualified’ effects (meaning, as I understand it, that the effects are sufficiently significant to justify asserting jurisdiction), is not satisfied where, for example, the effect in the European Union is merely hypothetical or, in any event, of minor significance. It is also not satisfied where the distortion of competition within the internal market cannot be imputed to the undertaking in question, since those harmful effects were not foreseeable to it” (302). [Comment: I very much doubt the ECJ will address this discussion, so the Opinion is likely to open new ground for argument for years to come. Whereas I mostly think he’s right on the legal test, I’m not so sure about the relevance of “foreseeability”].

It then goes on to apply these principles to the Judgment, also proposing to annul it for errors in this regard (308-313).

His (certainly likely to be controversial) view on the criterion of implementation is that Intel’s agreements with Lenovo may have referred to the EEA territory as well and that this would be enough for a 101 case but not for a 102 one as the fact that Intel’s unilateral conduct had a bearing on Lenovo’s behavior would not be relevant (309-312). With regard to effects (315-327) the Opinion again takes issue with the use of the “single and continuous infringement notion” to establish “substantial effects” (319) (“the concept of single and continuous infringement is merely a procedural rule aimed at alleviating the evidentiary burden of competition authorities. That concept does not — and cannot — extend the ambit of the prohibitions under the Treaties”). The Opinion posits that had the analysis been carried out for each of the two conducts at issue, the outcome may have been different (321) and explains why in casu the effect would rather seem “hypothetical, speculative and unsubstantiated” (324) [Comment: since this last bit may have to do with the appreciation of facts, unless the ECJ  finds an error of law (and not only an opportunity for refinement) my bet is that they might decide not to go there]. In the view of these “legitimate doubts”, the AG also proposes to set aside the Judgment.

Finally, the Opinion considers Intel’s arguments in relation to the fine to be inadmissible, so nothing to comment on that one.

Comments welcome

We are very much looking forward to the endless discussions to come!

Written by Alfonso Lamadrid

20 October 2016 at 11:48 am

Posted in Uncategorized