Chillin'Competition

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Archive for November 2016

The innovation offence (by Stephen Kinsella)

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offence

[We are happy to publish a guest post from one of the most respected and interesting practitioners in the EU market, Stephen Kinsella (he’s of course best known for having been a speaker at the first Chillin’Competition conference and for being the husband of a great novelist  who is currently crowdfunding her new novel. Below he gives his views on a very topical matter on which we have also commented before. As always, we will be happy to foster discussion and are open to publishing other views on the matter. Enjoy!]

Mergers tend to get more attention in press coverage than other antitrust activity in Europe.  That is partly because they have compressed timetables and obvious milestones to trigger stories (announcement, filing, enquiries, third party interventions etc) but also because they can be resolved to a binary choice between approval or block, with readily understandable consequences.  Not only shareholders but other financial players follow closely each twist and turn, placing bets on rumours of setbacks or “theories of harm”.

All this froth can sometimes mask a duller reality, which is that at the EU level of an average 350 or so deals notified in Brussels each year, less than one a year is ultimately prohibited. Of those that are permitted only around 5% are subject to any modifications or commitments as the price of approval.

And there is a reason for this. The system is weighted in favour of approval.  It carries within it a presumption that deals will be cleared, and speedily, unless good evidence can be brought forward of some creation or strengthening of dominance causing harm to effective competition, to the detriment of consumers denied the benefits of choice.

Granted, merger control, like other aspects of antitrust, is not static.  It evolves in response to evidence, to greater learning about how markets behave and to developments in legal and economic thinking.  But it does so cautiously, trying to balance the risks of excessive intervention (in the jargon, Type 1 errors) against non-intervention (Type 2 errors).  The Type 1 errors could include not only hampering the ability of the merged entity to innovate, but also deterring those who would invest in creating products with the aim of selling them to another who is better able to exploit them.

One area in which we are seeing calls for such an evolution relates to “big data”.  Enforcers at EU and national level are asking themselves whether the mantra that “knowledge is power” literally means that the acquisition or accumulation of data, in particular about the behaviour of and relationships between large numbers of individuals, could confer the power to exploit and exclude.

This is not to be confused with concerns over privacy.  We have seen numerous statements, including from Commissioner Vestager, that competition law is not to be used to try to cure possible concerns that fall more properly in the realm of consumer (or data) protection.  Rather the question is a narrower one: whether a data set might be so special, valuable and non-replicable that its concentration in one undertaking would give it an overwhelming competitive advantage that could be checked only by regulatory intervention.

Such a theory is not controversial in principle if one looks at data as if it were an essential facility.  But it runs up against the objection that unlike a piece of infrastructure such as a port or a pipeline, the data (or substitutable data) may well be capable of being compiled by others, or already exist in the form of other accessible compilations.  Again to cite Commissioner Vestager in a recent speech, the data might quickly go out of date and need refreshing, and “we also need to ask why competitors couldn’t get hold of equally good information”.  And while we sometimes see reference to the question of whether the data is “unique”, the better way of expressing it, as recognised in the Franco-German discussion paper from May this year, is whether it is really “unmatched”.  This recognition has led to understandable caution.  A recent consultation exercise by the Commission is beginning to explore whether the merger rules need to be adjusted – though even here the focus is more on the jurisdictional thresholds that might be appropriate to ensure deals receive proper scrutiny, rather than suggesting that data poses particularly intractable problems.

Against this backdrop, the public discussion around the Microsoft – Linked-in transaction is interesting, and rather curious [my firm has advised Microsoft on a range of antitrust issues but I am not acting on the notification of the Linked-In deal] .  I only have access to what is in the public domain, but it appears to be a case where a company acquires a target with which it is not in competition and where there is no suggestion that the target will alter its commercial strategy in terms of its market behaviour or how it makes available its data to third parties.  According to press reports the acquirer has already given assurances to that effect and those assurances do not seem to  be seriously disputed.  Therefore it is hard to see that any adverse change in the market will inevitably occur that is “deal specific”.

At the same time, though nobody disputes the value of the data held by Linked-In, there are many other players in the market and apparently many other ways of obtaining similar or competitive data sets.  In fact an increasing number of companies hold substantial amounts of data regarding their customers or others with whom they interact and some use that purely for internal purposes while others develop business models around exploiting that data.  Unless there is convincing evidence that a particular data set is genuinely both non-replicable and uncontestable, it would place an unreasonable burden on competition enforcers if they were always obliged to analyse the impact on some rather nebulous “data market”.

But horizontal concerns are not the end of the story.  There have been claims by opponents of the deal that in the future, in some unspecified manner, the two companies could combine their data and expertise. In doing so they would come up with some new product, for which there would be strong consumer demand, and with which third parties would struggle to compete (though I have seen no suggestion that those third parties would be forced to exit the market).  Such reasoning evidently includes a number of leaps and suppositions, but reduced to its essentials it seems to try to take merger theory even beyond the notion of an “efficiency offence” (always rejected by the Commission) into the realm of an “innovation offence”.

One can well understand why any regulator would be sceptical about such an approach.  Merger control has to be to some extent forward looking in that it must try to identify the suppression not only of actual but also of potential competition.  But when asked to go even further and tackle some speculative impact on a form of competition that absent the transaction would not anyway have taken place, combined with the fact that the transaction will in the complainants’ “worst case” scenario introduce a new element of competition through a new product, the levels of abstraction introduce too much uncertainty into the merger review process.

Moreover, it is not as if merger control is the last and only chance that the Commission has to protect competition.  If following a concentration some development occurred that put the new entity into a position of unassailable market power, there remains Article 102.  Indeed we saw relatively recently in the Thomson-Reuters case that the Commission, having cleared a merger, then opened a proceeding to verify the impact on the market of the merged firm’s unilateral behaviour and extracted a package of commitments that the Court subsequently ruled was sufficient to restore competition.

Those opposed to transactions will continue to innovate with theories of harm.  Regulators will continue to welcome and even encourage their contribution, while maintaining a healthy scepticism regarding their agenda.  But the threshold for intervention remains high.

Written by Alfonso Lamadrid

14 November 2016 at 12:08 pm

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Double combo Florence-Brussels: Lundbeck and the new balance between competition law and IP

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Image result for brussels school of 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).

Written by Pablo Ibanez Colomo

10 November 2016 at 4:22 pm

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When they go low, we go high

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It’s a mixture of incredulity, sadness, disgust, impotence and great uncertainty.

Half the voters in the US have decided to profoundly change their country, renouncing many of the values that made the United States a reference for the rest of the world.

I guess it is in their right to do that. But they have provoked a change that destabilizes the world in unpredictable ways and that endorses much of what I would like to educate my children against. It was hard to see my 2 year old sleeping this morning, doubting how this will evolve and what world he will have to live in.

It’s hard to understand, to accept and it will be hard to live with it. It changes the world as some of us have always known it, back to a scenario which no one seems to remember. As always with the pendulum that governs history, I am afraid it will only get worse before it gets better.

Someone told me this morning that there is nothing we can do, only wait and see, and hope that hell does not break lose (also in the EU, after Brexit and with elections coming up in France and The Netherlands). I don’t buy that.

This is a wake-up call for many, and particularly for the type of people who read this blog, most of whom live and work around the EU, an entity that was born from the ashes of a Europe that burnt after an experiment of populism and madness that won an election trafficking in fear, prejudice and despair.

We will have to come to terms with the reality that the US will not contribute to guiding the way in facing many of the pressing and capital challenges of our times, and that it is for us to step up.

It is now for the EU to show the world how a society can only succeed when it is inclusive, respects, takes responsibility and exercises solidarity; what we used to call western values. These are our founding principles, and now we need them more than ever, just like they need us. The challenge is enormous but everything is at stake and we need to step up.

It’s the time to be more active, assertive, to not shy away from embracing our values in the face of resistence or political risks both at home and in the international sphere. It is also a time for showing many, not only European citizens, but also those in the US and elsewhere, what the EU is there for and how it can represent their values too. The US, in particular, still has much of the best in the world to offer, including the best universities, the most successful open and innovative companies, many educated, talented, brilliant, responsible citizens, good people who we know, who have impressed us, and who will now need us much as we will need them. Let’s not let each other down.

You may perhaps think I am exaggerating but this, for me, is a breaking point. We will now have to fight for the things we used to take for granted and we will have to figure out ways to stop just watching silently from the sidelines. If we don’t, we might very well regret it, and, much worse, we will find it impossible to explain it to our children.

Paraphrasing someone who is already missed, let the world know that when they go low, we go high.

Written by Alfonso Lamadrid

9 November 2016 at 1:08 pm

Posted in Uncategorized

On the US elections, again the unreasonable and unthinkable

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Forgive us for devoting a brief space in this blog to stuff that actually matters. It is not the first time that we think we feel we are all a bit like the musicians in the Titanic, playing music as the ship sinks.

A few months ago we expressed ex post despair at “the unthinkable and unreasonable” in relation to the Brexit vote. We now feel a bit morally compelled to at least say something with regard to what could happen in the US.

Initially we were going to debate about the interesting different views of antitrust policy in Hillary’s camp (hopefully there will be time for this) and oppose them with all the antitrust trouble experienced by Trump’s companies. But we don’t even feel like making jokes about it anymore.

The issues underlying the current absurdity and that make possible this feeling of dystopian unreality are too complex to even attempt to remotely grasp them here, but the choice now could not be more radically simple.

A country that can often offer at the same time the best (too many examples) and sometimes the worst (many less examples, but sadly there) now presents its citizens with a simple choice:  an open society with its real problems and imperfections or a post-truth closed promiseland (for some).

The choice is theirs, but talk about negative externalities or about the lessons of experience.

It is true, as he claims, that if he wins things won’tever be the same again.

If anyone in the US is reading this and you are undecided, please read this Slate piece on “Making the Choice”. And if you have more time, please recommend those around you to read “The Word of Yesterday”, to read “The Revolt of the Masses”, to read “Sleepwalkers” and to stop for a second and think.

Hopefully this bad dream will be over in a few hours and we can all go back to what reality and to the sensible life of true old European democracies; or can we?

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I’ll now go back to prepare my  lecture of this afternoon on selectivity in State aid, as if nothing were happening.

Written by Alfonso Lamadrid

7 November 2016 at 3:27 pm

Posted in Uncategorized

EU and Spanish Competition Law Course

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As previously announced, the EU and Spanish competition law course that I co-direct with Luis Ortiz Blanco in Madrid is turning 20 this year.

The course will run between 13 January and 17 March and it will once again feature an impressive line-up of international lecturers that includes Judges, officials from the EU Courts, European Commission, the Spanish authority and national Courts, as well as top-notch academics, in-house lawyers and practitioners. Pablo, Nicolas and myself will also be there on a few occassions to balance the otherwise great level. Lectures will be conducted in English and Spanish. It is also possible to attend specific modules or one-day seminars.

For more info click here: triptico-xx-curso-de-la-competencia-europeo-y-espanol-2016 or drop us a line at competencia@ieb.es

 

 

Written by Alfonso Lamadrid

3 November 2016 at 12:19 pm

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Double combo Florence-Brussels: the Florence bit

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florence

I have been busy taking planes and trains in October. I have presented at four conferences. Fortunately, they were conveniently placed. Two of them took place on 14-15 October and the other two on 25-26 October. Even more fortunately, the first two were in Florence. That trip never disappoints (if you plan to go in the near future, by the way, make sure to attend Ai Weiwei’s exhibition at the Palazzo Strozzi – genuinely impressive and moving).

ENTraNCE Annual Conference: On 14 October, I presented at the EUI, in the context of the ENTraNCE project (of which I am a member of the Scientific Committee). As you see from the programme, it sought to provide an overview of some hot topics from a transatlantic perspective.

I presented in the session devoted to merger control, which examined trends in innovation markets. It is a topic that I have followed with interest for a while. And I was lucky that the organisers chose a great format. Essentially, my presentation revolved around series of questions about the role of innovation considerations in merger control analysis. Frederic Jenny and Vicent Verouden addressed these from an economic perspective. Their presentations (see here and here) were insightful and rich in details. The only thing I regret is that Mr Merger Control (aka Carles Esteva Mosso) gave the keynote speech but could not stay for our panel…

20th IBA Annual Competition Conference: …as he had to run to the St Regis to make it to the legendary IBA Competition Conference. I was delighted to be speaking there for the first time (I did not have to run, as I presented on the second day). My panel was devoted to ‘Antitrust in the Online World’. Huge topic made manageable thanks to Kyriakos Fontoukakos and Julian Pena’s efforts.

My intervention focused on two questions: online selective distribution and the regulation of the so-called platforms. On the first point, I argued – as you can see in the slides – that the case law provides a framework to assess emerging issues such as marketplace bans. There is, I would say, nothing really new under the sun. On the second, I identified some of the limits of competition law enforcement – and analysis – in this context.

 

Written by Pablo Ibanez Colomo

2 November 2016 at 4:50 pm

Posted in Uncategorized