Chillin'Competition

I was really pleased that Denis Waelbroeck invited me to speak in the context of the legendary mardis du droit de la concurrence. I was there last week. It was a wonderful occasion to share my thoughts on Coty, the future of selective distribution and, more generally, of enforcement in the area of e-commerce.

Chaired by Denis himself and by Jean-François Bellis, the seminar was great. You can find my slides here  (they are in English, don’t feel intimidated by the French used in the series!).

I felt it is the right time to discuss the online aspects of selective distribution. On the one hand, a consensus seems to be emerging about what was held in Coty. On the other hand, there are still some open issues that will have to be addressed (and will no doubt give rise to further legal frictions).

The consensus around Coty (and the recent Commission brief)

The issue of online selective distribution was, understandably, controversial before Coty. There is now a core set of principles around which a consensus seems to have emerged:

• The protection of the luxury image of a product can justify the setting up of a selective distribution system that complies with the principles set out in Metro I.
• Accordingly, a selective distribution system that aims at protecting the luxury image of a product is, under certain conditions, presumptively lawful under Article 101(1) TFEU.
• In Coty, a ban on the use of online marketplaces was deemed to be appropriate and proportionate within the meaning of Metro I.
• An online marketplace ban is not a ‘hardcore restraint’ within the meaning of Article 4 of the Vertical Block Exemption Regulation. According to the Court, such a ban does not restrict the territory into which, or the customers to which, retailers may sell their products.
• As a logical consequence of the above, an online marketplace ban can benefit from the Block Exemption Regulation irrespective of the nature of the product (luxury or non-luxury). The Commission has unambiguously endorsed the consensus on this point in a recent brief specifically devoted to Coty.

E-commerce after Coty: what to expect?

Brand image beyond luxury

An important pending issue, which I addressed at length during the seminar, concerns the legal treatment of selective distribution systems that are aimed at protecting the brand image of a non-luxury product. Are such systems restrictive of competition by object?

I do not think they are, for the simple reason that the object – the purpose, the rationale – of such systems is identical to the object of distribution networks relating to luxury products. In other words: the preservation of an aura of luxury is not the only reason why a manufacturer may be interested in preserving its brand image.

It is reasonable to say that Asics or Mizuno shoes are not luxury products. This fact does not mean that brand image is not important for a manufacturer of running shoes. Amateur athletes are keen to buy products that are safe, reliable and – above all – that prevent injury. How can one argue that a system that seeks to convey this information to end-users has as its object the restriction of competition?

It is useful also to think of Apple products – I often use the example of Apple premium resellers in class.

Apple’s immense success (and the resulting benefit for consumers and competition) is to a large extent due to its ability to ensure that end-users associate its brand with reliability, innovation and user-friendliness. Can one reasonably argue that a distribution system aimed at ensuring that this image is preserved is restrictive by object?

I emphasised in the seminar that none of the above is new. In fact, the Court of Justice has long understood the importance of preserving intangible property in the context of Article 101(1) TFEU. In Pronuptia, the Court held that clauses aimed at preserving the reputation and uniformity of a distribution network are not contrary to Article 101(1) TFEU. I fail to see how it can come to a different conclusion in relation to selective distribution.

In this regard, I also provided an economic perspective – it sometimes helps!

Many miss the fundamental point in this regard: by restricting the use of online marketplaces, manufacturers do something that looks prima facie irrational.

Why would a supplier reduce the exposure of its resellers and thus the possibility of selling more? Experience shows that, whenever we see a firm doing something that appears to go against its interests, the practice most probably has a pro-competitive object. Selective distribution is not different in this sense. As in other areas, the Court’s intuitions are aligned with mainstream economics.

Next steps

The developments that have followed Coty suggest that, again, a divide has emerged between Germany and other Member States. While courts in France and the Netherlands have embraced consensus positions in relation to the judgment and its implications, German courts (and the Bundeskartellamt) are clearly less inclined to read anything in Coty that goes beyond its narrow factual circumstances.

Ongoing disagreements relate, inter alia, to two points: one relates to the application of Coty beyond luxury products, already discussed, and the second to the treatment of other clauses having a similar object and effect – such as a ban on the use of price comparison websites. I explained that the disagreement may very well reach the Court again.

Keeping perspective

There is something fascinating about the application of competition law in online markets. I often have the impression that, for some reason, principles that have been with us for decades tend to be forgotten when things ‘get digital’. As I said, we keep ‘rediscovering mediterraneans’ these days.

I ended my lecture identifying a few guiding principles when thinking about competition law in the online world:

• Price is not the only important parameter of competition. A practice may significantly limit price competition and still be presumptively legal under Article 101(1) TFEU. This principle has been with us since the late 1970s. The Court made it explicit in Metro I and Metro II (in particular the latter). Competition in many digital and high-tech markets is not about prices anymore – think again about Apple’s immense success!
• These are the best of times for intra-brand competition: when we read about online distribution, we sometimes get the impression that it is in crisis, or in need of a boost. The reality is that independent retailers have never had it so good.
• Competition policy should be consistent: I struggle to see how a competition authority can simultaneously warn against the power of online platforms and at the same time develop policies subsidising these same platforms (such as a policy favouring the use of online marketplaces). Consistency, and thinking about the unintended consequences of some measures, could take us a long way.

And this is round 3! Click here for Round 1 and here for Round 2.

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23.”When your boss makes a terrible joke but you want a promotion” *

(Authored by a soon-to-be-former Garrigues associate after seeing one of my memes)

24.”Definitely the final deadline!” 

25.”Commission RFI generates 100,000 responses”

26.”On the way to the oral hearing”

27.”On the way back from the oral hearing”

28.”Entering the office after a Court victory”

29.”A dawn raid?? To the shredders!!!“

30.”Horizontal Overlap”

Love them or hate them, the EU competition law community should be grateful to collecting societies. Their activities have ensured a steady supply of preliminary references since the very early days. It looks like things are unlikely to change soon.

Yesterday’s judgment in Meo is the latest – but will certainly not be the last – of these preliminary rulings. The case concerned a relatively narrow issue: the interpretation of Article 102(c) TFEU in the context of exploitative discrimination.

You certainly remember that Article 102(c) TFEU concerns the application of ‘dissimilar conditions to equivalent transactions’ by dominant firms. According to the letter of the Treaty, the prohibition applies only insofar as it places some firms ‘at a competitive disadvantage’.

Reasonably – and as expected – the Court has held in Meo that the ‘competitive disadvantage’ cannot simply be assumed, or taken as a self-evident consequence of the behaviour of the dominant firm. Effects in this sense will have to be established on a case-by-case basis.

In any event, the contribution of Meo to the case law goes well beyond the legal status of exploitative discrimination. The Court has clarified some fundamental questions about which we lack meaningful guidance.

Not every disadvantage amounts to an anticompetitive effect: In para 26 of the judgment, the Court holds that ‘the mere presence of an immediate disadvantage affecting operators who were charged more, compared with the tariffs applied to their competitors for an equivalent service, does not, however, mean that competition is distorted or is capable of being distorted’.

Simply put: the Court clarifies that not every disadvantage resulting from the behaviour of a dominant firm amounts to an anticompetitive effect within the meaning of Article 102 TFEU. This clarification is no less than crucial, both in the context of exclusionary and exploitative practices.

The Court has put to rest, for good, the idea that practices (any practice) by a dominant firm cannot fail to have anticompetitive effects. According to this interpretation, anything that makes rivals’ or customers’ life more difficult would be abusive. Post Danmark I already dismissed this interpretation of Article 102 TFEU; Meo is the last nail in the coffin.

This is a point that Alfonso and I already emphasised in our piece on the notion of restriction of competition. A restrictive effect cannot be everything, it only exists when a practice harms firms’ ability and incentive to compete.

There is no de minimis threshold under Article 102 TFEU, true. However, not every practice has an effect: In Post Danmark II, the Court held that there is no such thing as a de minimis threshold below which anticompetitive effects can be excluded under Article 102 TFEU.

Some people interpreted this point as meaning that, since there is no de minimis in Article 102 TFEU, any practice has an anticompetitive effect. The Court dismisses this view. What Post Danmark II means, Meo explains, is that, because we are dealing with a dominant firm, exclusionary effects cannot be ruled out ex ante. However, these effects will still need to be established in concreto.

As the Court puts it in para 29 of the judgment: ‘[…] in order for it to be capable of creating a competitive disadvantage, the price discrimination referred to in subparagraph (c) of the second paragraph of Article 102 TFEU must affect the interests of the operator which was charged higher tariffs compared with its competitors’.

Final thoughts: The case law makes more sense after Meo. The analysis of effects is a meaningful one under Article 102 TFEU, as it is under Article 101 TFEU and merger control. Crucially, some of the issues it addresses will, before too long, be addressed by the EU courts.

Here is the second wave of contributions for our Chillin’Competition Fine Art awards (for wave one, see here). We have received many more that we will be publishing in the next few days. We’ve had a good laugh. Thanks very much and keep them coming!

11. “Did someone say dawn raid?”

12. “New emails just before holidays”

13. “Propose some commitments you say?”

14. “One party refuses to settle”

15. “Access to documents”

16.”Sent the final version and realized he forgot the last edits”

17.”Client sent suggested edits”

18.”Before the dawn raid, after the SO”

19.”Lawyers in search of efficiencies”

20. “Please! I’m telling you it was fair competition”

21. “Received an RFI on December 23rd”

22. “And that’s a potential anticompetitive effect!”

Following the success of our Meme Competition last year (see here), we are launching a Fine Arts Competition. The challenge is to come up with a painting that reflects an aspect of the daily life of people working in our field. The 5 winners will receive a special prize. You can submit your ideas until May 30th, emailing them to chillingcompetition@gmail.com. We will be publishing a weekly selection every Thursday Monday. Enjoy!

The examples that follow are the result of today’s coffee-time brainstorming at the office…

1. “A clarification of previous case law”.

2. “New lawyer joining the case team”

3. “So, the meeting at DG Comp went well…”

4. “When everyone suspects who it was that asked for leniency”

5. “Inability to Pay”

6. “Phase II is over…”

7. “So, who said this was legal?”

8. “Look! There really is a third paragraph!”

9.”How I imagine my opposing counsel”

10. “How my opposing counsel sees himself”

I am proud that the LSE (Wolfson Theatre, New Academic Building) is hosting a conference on Brexit and Energy Markets (the 2nd of its kind), organised by the awesome Leigh Hancher and Adrien de Hauteclocque.

It will take place on Thursday of next week (12 April).

I have just been told that, there are a few places available. You can register (for free!) here.  A pdf of the programme, in turn, can be found here. Students interested in energy issues would be most welcome to attend.

More info on the event? Please see below:

This conference, a follow-on from our first initiative in March 2017, aims to consider the wide-ranging impact of Brexit on the UK and EU energy markets, from a legal and economic perspective, and assess the developments and challenges which have emerged over the past year.

• How might a self-determined UK attempt to establish itself in the energy market outside of the EU?
• What will be the effect on electricity and gas trading?
• How will the UK’s exit impact EU market integration initiatives, such as market coupling, cross-border capacity mechanisms, and the development of network codes?
• How might it affect the EU ETS?
• What are the repercussions of the UK leaving the Euratom Treaty?
• The UK has promised that it will not shirk from it’s commitment to plans for an integrated all-island single electricity market in Ireland (I-SEM). But how will this work? How might this play out from a regulatory perspective?

These questions and more will be addressed through in-depth discussions at the conference.

The Commission usually takes some time to publish its decisions. This is not necessarily a bad thing, at least for the purposes of this blog. We now have the chance to discuss a few decisions that have (finally) come out, and complement (or complete) our first thoughts on them.

I will start with ISU, about which I wrote earlier this year. The non-confidential version of the decision can be found here.

In my previous post, I asked myself whether the practice at stake was really a restriction by object. You will remember that the Commission took issue with a set of rules adopted by the International Skating Union. These rules sought to constrain athletes’ ability to take part in competitions run by rival organisations.

The Commission concluded that the rules, which are (in essence) a vertical restraint providing for a non-compete obligation, amount to a ‘by object’ infringement. Now we know the reasoning behind this conclusion.

There is something remarkable about the decision. If you take a look at it, you will realise that the Commission does not seem to incorporate the lessons of the most recent – and directly relevant – Court rulings, namely Cartes Bancaires and Maxima Latvija.

To prove my point, I propose a simple exercise: apply to the facts underpinning Cartes Bancaires and Maxima Latvija the reasoning found in ISU. You will come (inevitably) to the conclusion that the practices at stake in these two cases were restrictive by object.

In ISU, the Commission concludes that the eligibility rules are a ‘by object’ infringement for three main reasons:

• The objective and subjective purpose of the rules was to preclude other organisations from running competing events.
• The International Skating Union sought to protect its own economic interest through the rules.
• The eligibility rules were not related to a legitimate sporting objective.

Remember Maxima Latvija? In that case, the ‘anchor tenant’ of a shopping centre was given the power to veto the renting of other premises in the mall to third parties. The objective purpose of such a rule is clearly to avoid competition – and the Court ruling is based on this premise. In this sense, the case is no different from ISU.

And the anchor tenant, by restricting competition to itself and limiting the shopping centre’s freedom of action, was certainly trying to protect its own commercial interests (by the way: which firm doesn’t?).

In spite of the above, the Court ruled in Maxima Latvija that the practice was not restrictive by object.

Remember Cartes Bancaires? Essentially, the contentious rules sought to penalise one category of competitors. The objective purpose of these rules was to hinder these firms’ ability to compete. What is more, there was direct evidence in the case suggesting that the subjective intent of the rules was indeed to restrict competition and thus to protect the economic interest of another category of firms.

If one were to follow the reasoning in ISU, these two factors would be sufficient to conclude that the practice was restrictive by object. But you all know that the Court came to the opposite conclusion in Cartes Bancaires.

Cartes Bancaires is important for another major reason. The Court made it quite clear that a practice that seeks to address a genuine free-riding concern is not a ‘by object’ infringement. In other words: the fact that some firms seek to protect their economic interests is not in itself an issue (again, which firm does not seek to advance its economic interest by means of an agreement within the meaning of Article 101 TFEU?). The issue is instead whether the firms seek to address a market failure or simply extract rents (as in a cartel agreement).

The Court concluded that the measure was plausibly pro-competitive (and thus not ‘by object’) in Cartes Bancaires. And the free riding argument is also compelling in ISU, as I mentioned last time (but the issue does not seem to be given the relevance it deserves in the decision).

Against this background, the question that I find intriguing is why the Commission has not followed the case law on restrictions by object in ISU.

This question is intriguing in this particular case because establishing the restricting effects of the eligibility rules was a ‘home run’ for the Commission. Given the position of the International Skating Union, it could not have been much easier to conduct an effects analysis (as the Commission does in the case).

Had the Commission followed the ‘by effect’ route alone, the case would have been entirely uncontroversial. I would say more: the analysis of the Commission in the ‘by effect’ section shows that the case makes enormous sense from a prioritisation perspective too.

Why, if it was not at all necessary (and was in fact potentially counterproductive), did the Commission insist on qualifying the rules as a ‘by object’ infringement in ISU?

The most convincing explanation is that the Commission, as a repeat player, is interested not only in reaching the desired outcome in individual cases but in shaping the law in a particular way. In this sense, ISU provided an excellent opportunity to advance its interpretation of the notion of restriction by object in the wake of Cartes Bancaires.

I have to say I am not particularly surprised by this. I have spent the past couple of years reading pretty much every Commission decision, and this is a consistent pattern of behaviour across the board (Article 101 TFEU, Article 102 TFEU and merger control).

Examples? Just think of how the Commission interpreted Delimitis in Scholler and Langnese-Iglo (Valentine Korah, in her unique style, wrote at the time – mid-1990s – that Delimitis appeared ‘not to have been read’).

More examples? The Court emphasised, from the outset, that ‘competition’ for the purposes of Articles 101 and 102 TFEU means ‘competition that would have existed in the absence of the practice’. However, the Commission failed to consider the counterfactual in several landmark decisions that were annulled as a result.

In fact, if you read ISU, you will identify several controversial statements in this regard. For instance, the Commission asserts that the members of the International Skating Union – that is, the national associations – are potential competitors. However, this remarkable statement is not substantiated – as if the lessons from European Night Services, CISAC or E.On Ruhrgas (‘real, concrete possibilities’) had not been learnt.

Conclusions?

What do we make of the failure to incorporate some of the crucial insights from Cartes Bancaires? It is neither good nor bad. It is a reality and a feature of the EU competition law system we have to acknowledge and with which we have to live.

We have acquired sufficient experience over the years to know that the Commission is likely to behave in this way – across provisions and over the years. I would say that, first and foremost, it is useful for the authority to be aware of this reality, so as to anticipate when and why administrative decisions are more likely to be annulled.