Chillin'Competition

We still haven’t commented on some of the major developments that took place in the last days of 2017 (some major ones have gone unnoticed for many -not for the Commission- due to the holiday period). But last things first:

Yesterday, the Court of Justice rendered its Preliminary Ruling in the Hoffman-La Roche case. This is a Grand Chamber ruling dealing, among others, with the notion of “restriction by object”.  This is THE Judgment of the year (mainly because it’s the only relevant one so far), but does contan some interesting food for blog.

AG acknowledgment and self-publicity. You might also remember that we discussed AG Saugmandsgaard Øe’s very good Opinion (its only flaw was a reference to our paper in footnote 96) in a previous post (available here).

Background. The case has to do with an agreement between Roche and Novartis reportedly aimed at reducing the demand of one pharma product for ophthalmologic purposes (the product is Avastin, developed by a Roche subsidiary, marketed by Roche and authorized for the treatment of tumorous diseases but also used in practice for eye diseases) in favor of another product (the higher-priced Lucentis, developed by the same Roche subsidiary, but licensed to and marketed by Novartis, authorized for the treatment of eye diseases).

Both companies were sanctioned in Italy for having engaged in a concerted practice intended to achieve an artificial differentiation between these products disseminate information giving rise to safety concerns (“manipulating the perception of the risk” based on an “alarmist interpretation of available data”  in relation to the use of Avastin in ophthalmology. Their appeals were dismissed in first instance, a further appeal before the Council of State has triggered the preliminary reference to the CJEU.

Can allegedly unlawful products be deemed a source of competitive constraints for market definition purposes? The first question addressed by the Court relates to whether a product that has not been authorized for the treatment of eye diseases forms part of the same relevant market as those products that have. Should a possible unlawful use be factored in?

The Court explains, first, that illegal manufacture or sales would prevent the products, “in principle”, from being regarded as substitutable or interchangeable “both on the supply side, because of the legal, economic and technical risks, as well as the risks of reputational damage, to which they expose the manufacturers and distributors of those products, and on the demand side, in particular due to the risk to public health that they cause among healthcare professionals and patients”. This is a not very nuanced formulation included in para. 52. Surely some unlawful goods may exert a competitive pressure in some markets. The Court’s statement would seem to make more sense in the regulated pharmaceutical sector than in other markets (think, e.g. about unlawful digital content in some sectors), but even there a manufacturers’ market power could conceivably be affected by unlawful products. Not factoring those constraints in as a matter of principle may, depending on the circumstances, add on to the harm that they cause to lawful products (not the case here, but the idea may cut both ways). Including those products in the market def. analysis when their usage exists, does not imply validating any unlawfulness but simply accounts for reality.

In any case, the Court then goes on to note that, in any event, nothing in EU law precludes pharma products to be used or repackaged for off-label use provided that certain conditions are met. It also explains that it is not up to competition authorities to determine whether those conditions have been met, but rather to take into account the results of any such examination and observes that at the time the decision was adopted no illegality had been established. Given the relation of substitutability between Lucentis and Avatin when used off label, the Court concludes that it was legitimate for the Italian authority to consider that they belong to the same relevant market.

On ancillarity. The parties argued that the restriction was ancillary to their licensing agreement. The Council of State asked the CJEU whether a restriction not envisaged in the licensing agreement may be considered ancillary thereto.

Following a brief excursus into the notion of ancillarity built on the Mastercard precedent (nothing new but a good summary in paras. 69-71), the Court observes (i) that the restriction “was not designed to restrict the commercial autonomy of the parties to the licensing agreement (…) but rather the conduct of third parties, in particular healthcare professionals” (para 72) and (ii) that the conduct was not “objectively necessary for the implementation of the [wider] agreement” (para. 73).

That last finding underscores an interesting –if arguably evident- point. People often struggle to identify the elements to determine whether a given restraint is objectively necessary for the implementation of a wider procompetitive or neutral agreement. Whereas the burden of proof is on the authority to show that the restriction exists under 101(1), when it comes to ancillarity authorities are likely to require evidence from the accused parties. But this is akin to establishing a negative fact (probatio diabollica); how can one prove what would have happened in the counterfactual scenario absent a given restraint? In my view, one need only provide some solid indications of objective necessity to force the authority to undertake this analysis (I have already touched on this towards the end of this post and this post, but will discuss in more detail soon) and, in the face of uncertainty, the presumption of innocence or presumption of legality applies (as it does, by the way, in this Judgment regarding pharma law).

In this Judgment the Court looks at a single indication: “that conduct was agreed upon several years after the agreement was concluded, and not in the agreement itself or upon its conclusions”. This is right and pretty common sense too. If a restraint has always existed and is part of the agreement, it will logically be more likely to be considered ancillary.

Fake news claims as a restriction by object. Finally, the ruling deals with the question of whether an agreement which concerns “the dissemination, in a context of scientific uncertainty on the matter, of information (…) with a view to reducing the competitive pressure (…) constitutes a restriction of competition by object”. Despite the clickbait title, this is more about unsubstantiated claims than fake claims (not necessarily always the same thing).

Paras.78-80 briefly set the scene legal scene on restrictions by object. The CJEU then engages in an explanation of the applicable pharma regulation and observes, first, that the requirements for steps to be taken regarding perceived risks concern only the market authorization holder, not other parties (para. 91; the Court also makes the point that the fact that there was an agreement between competing undertakings to disseminate such info “might constitute evidence that the dissemination of information pursues objectives unrelated to pharmacovigilance”).

Second, the Court notes that “given the characteristics of the medicinal products market, it is likely that the dissemination of such infraction will encourage doctors to refrain from prescribing that product, this resulting in the expected reduction in demand”. It concludes that in those circumstances (which assume failure to comply with the requirements of completeness and accuracy laid down in pharma regulation), an agreement that pursues the objectives of exaggerating a perception artificially and to emphasize risks in a context of uncertainty “must be regarded as being sufficiently harmful to competition to render an examination of its effects superfluous” (para 94).

As noted by Pablo in his comment on the AG’s Opinion, this case shows that, regarding the object/effect dichotomy, form is not enough; an inquiry into the economic function and rationale of the agreement in its legal and economic context (seen here in the analysis of pharma regulation) is a way of material assessment that is not incompatible with a finding of a “by object” restriction. The question posed in that previous post therefore remains: if the “object box” has proved to be over-inclusive and under-inclusive, should we amend it or dismiss it?

All the best for the New Year! For better or worse, it is time for the blog to resume its normal activity.

We have been assisted by a flurry of enforcement that took place in the last weeks of the year. I hear a decision in a major Article 102 TFEU has (finally!) been made public. I will pass on that one (for now), and will focus on another case (for which, by the way, there is no decision published yet).

A month ago, the Commission announced that it had found that the International Skating Union’s policies vis-à-vis participants in its competitions were in breach of EU competition law. Thanks to DG Laitenberger’s speech, we know that the Commission considers these policies to be restrictive of competition by object.

The press release expressed concern about the impact of the ISU’s policies on athletes’ freedom to take part in other competitions. According to the Commission, these policies (i) did not relate to legitimate sports-related objectives; (ii) enable the ISU to pursue its own commercial interest at the expense of athletes and potential rivals; and (iii) prevent the latter from organising competing championships.

As usual, I am not interested in the outcome of this specific case. I am ready to believe that ISU’s policies did not fulfil the conditions set out in Article 101(3) TFEU. More importantly, I do not really see the point of questioning this conclusion.

If I am intrigued, it is because of the policy dimension of the case, which got me thinking. In the process, I realised that I have, after all, a few wishes for the New Year.

Yet another ‘by object’ case: why do they dominate enforcement?

One of the most remarkable features of the Commission’s enforcement policy since the adoption of Regulation 1/2003 is that virtually all non-cartel prohibition decisions are qualified as ‘by object’ infringements (if you want the exact numbers, wait for my forthcoming book!).

The dominance of ‘by object’ cases is a phenomenon which, I believe, was first described and studied systematically by Damien Gerard in this great piece, one of my favourites (if you prefer PPTs, see here).

The overwhelming dominance of ‘by object’ cases is perfectly consistent with the ‘more economics-based approach’. In fact, one would expect ‘by object’ cases to feature prominently if enforcement is informed by economics. The most egregious violations of competition rules tend after all to be ‘by object’ infringements.

Of course, the ‘by object’ label may occasionally be applied to practices that do not really belong in that category (Cartes Bancaires is there to prove the point; and I cannot resist adding Lundbeck, about which I have made my views clear on this blog and the appeal of which is pending before the Court). In this regard, ISU is also interesting…

ISU’s policies as a ‘by object’ infringement

It is impossible to draw conclusions from just a press release, but, as I say, I am nevertheless intrigued by it. In light of what I read, the reasons why these policies were deemed to amount to a ‘by object’ violation of Article 101 TFEU are not immediately apparent.

What the press release tells us, in essence, is that the ISU imposed a set of non-compete obligations in a vertical relationship (between the ISU and the athletes).

And there is long line of case law that suggests that non-compete obligations in vertical relationships are not ‘by object’ infringements.

Remember Pronuptia: the ECJ held that the non-compete obligation is not caught by Article 101(1) TFEU in a franchising agreement – in that context, it is an ancillary restraint that is prima facie lawful. Think of Delimitis too: the Court made it explicit that an exclusivity obligation in a beer distribution agreement does not have as its object the restriction of competition.

Are the ISU’s policies different from these cases? Why? I really look forward to reading the decision. Here are some thoughts on this fundamental question.

As in Pronuptia and Delimitis, the relationship between athletes and sports associations is mutually beneficial. They need each other. Competitive athletes need rivals (I have written here before that even the Harlem Globetrotters need the Washington Generals). They also need a framework in which to compete and become known by the public. Sports organisations need, of course, participants.

Against this background: is an attempt to protect the investment made in the organisation of events blatantly anticompetitive? Is it not a reasonable attempt to address free-riding, as in Pronuptia?

Even State aid provides an interesting example in this regard: ISU’s policies made me think of training aid: I see analogies between the problems faced by employers (which tend to under-invest in the training of their employees as they fear free-riding by other employers) and those faced by sports organisations.

Why would these analogies not be relevant in this case? Is there something specific about skating or speed staking?

I will have to wait to get an answer to these questions. It is clear to me, in any event, that one of the factors mentioned in the press release is not suggestive, in and of itself, of the anticompetitive object of the policies.

The Commission mentions in the press release that the ISU sought to protect its commercial interests. Well, which firm does not? The franchisor in Pronuptia and the incumbent banks in Cartes Bancaires also intended to protect their commercial interest. In spite of this fact, the agreements were not deemed to have an anticompetitive object.

The question is not so much whether the ISU wanted to protect its commercial interest but whether the policies served a legitimate purpose, not necessarily sports-related (remember Pierre Fabre!). The case law suggests that tackling free-riding is a legitimate aim (that is, in my view, the key message in Cartes Bancaires).

The press release also points out that ISU’s commercial interest is pursued at the expense of athletes. Is it really the case, considering that it is a mutually beneficial arrangement? As in Pronuptia or Delimitis, athletes give up their commercial freedom, true, but they gain in other respects. Would athletes have been able to gain prominence in the first place without the ISU? As you see, the counterfactual chases us wherever we go.

ISU and the ‘by effect’ route

When reading the press release, I could not avoid the impression that the ‘by effect’ route would have been as easy as the ‘by object’ route. As far as I can gather, the case appears to be about a monopoly or quasi-monopoly. Add an exclusivity obligation to the quasi-monopoly position and restrictive effects become very likely, if not inevitable.

And I can think of a policy-related reason why it might have been desirable to take a ‘by effect’ route: there is virtually no guidance about how to conduct a ‘by effect’ assessment under Article 101 TFEU. It is not even 100% clear what we mean by the word effect in EU competition law (although we know more about the question than we tend to assume)

As I see it, these questions are important from a policy-making perspective. I hope the New Year will bring us some guidance in this regard (and there are cases in the pipeline which are ideal candidates).

And while we are at it: another area in which we need precious guidance is in relation to Article 101(3) TFEU. Prohibition decisions dealing with the third paragraph of the provision are good. But a ‘finding of inapplicability’ within the meaning of Article 10 of Regulation 1/2003 would be even better. That is my other wish for 2018. Don’t stop believin’.