Chillin'Competition

Last Friday I took part in an (ideally timed) panel on Intel at the IBA Conference in Florence. The panel was chaired by Thomas Janssens and Timur Bondaryev (thanks a lot to both, and the rest of the panellists!). I learnt a great deal.

Inevitably, I spent some time re-reading some decisions and judgments ahead of the event. In the process, I shaped my thoughts on Intel and its implications.

These are some key takeaways that I did not develop at any length in my first post, and which I believe are key:

The AEC test is a (valuable) proxy; it is not the only factor

One of the issues that came up in the conference (no surprise) is whether the AEC test can rule out, in and of itself, the existence of an abuse. As I understand the judgment, the AEC test is better understood as a proxy or filter, not as the end of the inquiry.

If the test suggests that an equally efficient competitor would not be forced to sell below cost (read: below ATC or LRAIC), the onus is on the Commission to show why the rebate scheme is capable of foreclosing equally efficient rivals. Anticompetitive harm is possible in such an instance, but it cannot simply be presumed. It has to be substantiated in light of the factors identified by the Court in Intel.

Post Danmark II is an exception; Post Danmark I is the rule

When Post Danmark II came out, some commentators claimed that the judgment made efficiency considerations irrelevant in practice. Intel suggests that an alternative reading of the judgment is probably more reasonable: as a matter of principle, Article 102 TFEU is concerned with the ability and incentive of equally efficient rivals to compete. This makes Post Danmark I the rule, and Post Danmark II the exception.

Post Danmark II is in fact a wonderful example of the sort of special circumstances that may justify a departure from the rule. In that case, Post Danmark’s position came close to a monopoly; this position was, moreover, protected by exclusive rights.

A victory for consistency and legal certainty

A strict stance towards exclusivity agreements and loyalty rebates has often been defended in the name of legal certainty. Is there something better for legal certainty, the argument goes, than a clear rule that states that X is unlawful?

I have never been persuaded by this claim. Those advancing the argument only pay attention to one side of the rule (the outcome) and lose perspective of the other side (the scope of the rule, or trigger).

And the scope of the rule in Hoffmann-La Roche (and Michelin I, and British Airways) has never been clear. Look no further than Intel: it is far from uncontroversial to say that all schemes in the case are truly conditional on customers obtaining ‘all or most’ of their requirements from the dominant supplier.

For a rule to provide legal certainty, both the scope and the outcome need to be clear and predictable: make the first vague and the only certainty is that an undefined but potentially very vast range of practices is caught by the prohibition.

The Court’s clarification in Intel (and I believe it is a clarification) is a valuable step towards legal certainty.

Why? Intel provides a uniform benchmark: companies know that a cost-based test can be confidently relied upon as a proxy across the board. They also know that the cost-based test will be, in practice, the starting point of any inquiry.

Intel also makes it clear that the legal characterisation of a rebate scheme no longer has fatal consequences: it does not really matter (or not that much) whether a scheme is qualified as a loyalty or a ‘third category’ rebate. The methodology and approach will be roughly the same in practice.

Capability = Plausibility

As I understand the law, the threshold of capability is a relatively low one (on this one, I understand I agree with the Commission’s submission). In a ‘by object’ case (both under Articles 101 and 102 TFEU), it is sufficient that anticompetitive harm is plausible.

By the same token, what a firm would need to show to rebut the presumption of harm is that anticompetitive effects are implausible.

The good thing about rebates and predatory pricing is that we know where the threshold of capability lies: if a practice does not force an equally efficient rival to sell below cost (again: ATC or LRAIC), anticompetitive effects are in principle implausible: absent other factors, an equally efficient rival would be in a position to match the prices offered by the dominant firm. Its ability and incentive to compete would not be affected.

Exclusive dealing and loyalty rebates are not hardcore cartels

A hardcore cartel worthy of the name is capable, always and everywhere, of having restrictive effects on competition – otherwise, the cartel would have no point. As Toshiba suggests, arguing that a genuine hardcore cartel is incapable of restricting competition is hopeless in the vast majority of, if not all, cases.

But exclusivity agreements and loyalty rebate schemes are not hardcore cartels. These practices are implemented even when anticompetitive harm is implausible – which is also the reason why small market players with little or no market power resort to them.

The acknowledgement of this reality in Intel is valuable: the Court makes explicit that not all restrictions by object are created equal and that the law should take this factor into account. What is true of exclusive dealing is also true, inter alia, of tying and RPM.

What about de minimis?

The Court held in Intel (para 139) that a dominant firm may challenge the capability of harm on the basis, inter alia, of the limited market coverage of the practice. Is there a contradiction between this principle and Post Danmark II, where the Court held that there is no de minimis threshold in Article 102?

I do not believe there is a contradiction. Once again, it is worth taking a look at how things work in the context of Article 101 TFEU.

We know from Expedia that a ‘by object’ infringement that affects trade between Member States is not de minimis. But we also know from Murphy that the parties to a prima facie ‘by object’ infringement can show that the practice is not capable of restricting competition. I have never heard anyone argue that there is a contradiction between the two.

The same system would operate in the context of exclusivity agreements and loyalty rebates under Article 102 TFEU. A claimant or a competition authority can build a prima facie case without showing that the practice is capable of having appreciable effects. This is the point the Court made in Post Danmark II. On the other hand, Intel clarifies that dominant firm(s) can show that the practice is incapable of having effects. The former does not preclude the latter (it should not).

Applications of Intel: intellectual property-related cases are the obvious candidates

Intellectual property rights may prevent actual or potential competition between firms. Competition between these firms, in other words, may be implausible due to the existence of intellectual property rights.

Cases involving the exploitation of these rights are thus an ideal arena in which firms are likely to rebut with success the presumption that a practice is capable of restricting competition.

Examples? Think of the disputes in pay-for-delay cases (Servier, Lundbeck), in which the disputes revolve essentially around whether patent protection made market entry by generic producers implausible .