Chillin'Competition

If Alfonso’s way of dealing with the unexpected – and potentially catastrophic –is to get his thoughts off his chest, mine is to focus, insofar as it is possible, on life as usual. And nothing says ‘life as usual’ more than another post – as if two were not enough – about Lundbeck.

The Brussels School of Competition organised a morning briefing on the case a couple of weeks ago. Together with David Hull and Luc Gyselen, we had a lively discussion on the case and its implications. Even better, the audience engaged with us and did not hesitate to challenge our views. Their slides, and mine, can be found here.

My presentation put Lundbeck in its broader context. This case, like some other recent ones, suggests that the balance between competition law and intellectual property is changing. In the past few years, the Commission has become less deferential to IP regimes.

How is the balance between competition law and IP changing? Back in 2004, the Commission was of the view that there is no potential competition when market entry requires the infringement of an IP right (see para 29 of the old Guidelines on technology transfer agreements).

Lundbeck shows that this view no longer reflects the approach of the Commission. Its decision in the case is based on the idea that potential competition may exist even when entry requires an infringement of an IP right. What is the logic of the new approach? Well, an IP right does not preclude entry if it is not exercised or if, when exercised, it is declared invalid.

This new logic explains Lundbeck. My guess is that it also explains pending cases like Pay-TV. The Pay TV case is unusual. What prevents Sky from offering online content outside the UK is not the agreement with the major studios, but the copyright system. Why would it be a competition law issue, then? Is it not a copyright problem instead? Well, one could argue – à la Lundbeck – that it is a competition law issue if copyright is never exercised against infringing acts.

Testing new approaches is what a competition authority should do. There is nothing wrong with it. If anything, it should be welcome. It would be disastrous if authorities did not seek to respond to emerging challenges. At the same time, new approaches need to be ultimately validated by the Court.

Alas, I am not convinced that the emerging new balance between competition law and IP will win the day. It seems to be at odds with the case law. I believe that paras 473-474 of Lundbeck capture the tension between the new approach and the case law particularly well (Luc Gyselen made a similar point during the event). These paragraphs read as follows:

‘473. The examination of a hypothetical counterfactual scenario — besides being impracticable since it requires the Commission to reconstruct the events that would have occurred in the absence of the agreements at issue, whereas the very purpose of those agreements was to delay the market entry of the generic undertakings […] — is more an examination of the effects of agreements at issue on the market than an objective examination of whether they are sufficiently harmful to competition […].

474. Accordingly, even if some generic undertakings would not have entered the market during the term of the agreements at issue, as a result of infringement actions brought by Lundbeck […], what matters is that those undertakings had real concrete possibilities of entering the market at the time the agreements at issue were concluded with Lundbeck, with the result that they exerted competitive pressure on the latter. […]’

Why am I of the opinion that these paragraphs are at odds with the case law?

The General Court appears to claim that the objective purpose – i.e. the object – of an agreement can be established without considering the counterfactual. I believe the case law is fairly clear in this regard, and it contradicts this view. It is only possible to figure out the objective purpose of an agreement by considering what would have happened in its absence.

• In fact, the Commission has already conceded that a restriction by object cannot be established without looking at the counterfactual. According to the Guidelines on vertical restraints, for instance, an agreement that restricts active and passive selling into a particular territory is not caught by Article 101(1) TFEU when the analysis of the counterfactual suggests that market entry would not have taken place in its absence.
• I also mentioned a venerable precedent, Remia, in my presentation. If you think about it, Remia is a case where the seller of an undertaking receives a payment to stay out of the relevant market. In spite of this fact, the Court held that the non-compete clause may fall outside the scope of Article 101(1) TFEU. Why? The Court understood that, in the absence of the non-compete obligation, the transaction may have never taken place.
• If the counterfactual shows that the agreement does not restrict competition that would otherwise have existed, one can safely presume that it serves a pro-competitive purpose. If the agreement is not capable of restricting competition, how can one claim that it has an anticompetitive object? This insight is apparent from a case like Micro Leader.

I also pointed out that paras 473-474 are in contradiction with other parts of the judgment. The GC examines the counterfactual at length in the judgment. The analysis of the counterfactual is after all indispensable to determine whether there are ‘real, concrete possibilities’ for generic producers to enter the market.

Thus, the GC examines the counterfactual and, at the same time, denies its relevance . Often, a contradiction of this kind suggests that there is something going on with the reasoning. What paras 473 and 474 reveal, first and foremost, is that there are two possible counterfactuals: one in which generic producers lack the ability to enter the market and one in which they are in a position to do so. In this sense, Lundbeck is different from recent cases like Hitachi and Toshiba.

This aspect of the case suggests, in my view, that the agreements are not only different, but more complex than a market sharing cartel. It also suggests that the rationale for the agreements considered in Lundbeck is not necessarily anticompetitive. The ‘by object’ label, as a result, does not seem appropriate (at least if one accepts the principle that the scope of the ‘by object’ label should be interpreted restrictively).