Chillin'Competition

Rules are very popular in competition law these days. We need them, many like to claim, because we need clarity and legal certainty. At the end of the day, stakeholders should know where they stand, and nothing can beat a rule that states that X is allowed or prohibited full stop – no effects analysis, no balancing and no further questions asked.

Sometimes these claims are sweet. Occasionally they are made as if the rest of the world had been missing the obvious all along. The truth is that we are all aware of the advantages of rules. What is more, I am yet to meet someone who is against clarity, legal certainty and administrability – I, for one, am a great fan of all three. It is just that, as it often happens, things are a bit more complicated.

The point of this post is not so much to explain why rules (as opposed to standards) are not always desirable, or ideal, in competition law.

My idea is to challenge the belief that rules necessarily provide legal certainty and are administrable. Sometimes, rules can be opaque and all but impossible to apply and anticipate in practice. In fact, the case law and the administrative practice of the Commission provide several valuable examples in this sense.

When people claim that rules are clear and administrable, they typically focus on the outcome of the rule. The rule determines ex ante whether a given practice is authorised or prohibited. There is no need to show, ex post or on a case-by-case basis, whether the practice has an effect on competition.

As far as the above is concerned, those in favour of rules are right. The problem is that the discussion misses the other component of the rule. When we ask the question of whether a rule provides clarity and administrability, we need to pay attention not only to the outcome but also to the scope of the rule (or trigger, to use Schlag’s expression).

In other words: even if the outcome of the rule is clear by design, we need to ask whether the scope of the rule is clear too, or whether there is uncertainty about how broad it is and about the range of conduct that is subject to it.

Legal uncertainty is inevitable when we do not know for sure the behaviour that is subject to the rule (in other words, when the trigger is ‘soft’, as Schlag would put it). In such circumstances, the much-touted advantages of rules are wholly absent.

Let me give you a couple of examples.

In Hoffmann-La Roche, the Court defined a prohibition rule with a clear scope: rebates conditional upon exclusivity or quasi-exclusivity. It was, in other words, a rule with a hard trigger.

As the case law evolved, the trigger softened, and the rule became progressively much less clear and predictable. The scope of the rule first expanded in Michelin I. After that case, it covered rebates having the same effects as those conditional on exclusivity or quasi-exclusivity. Something reasonable, may I point out.

With Michelin II, the rule expanded further. This is the point at which it softened beyond recognition. In Michelin II, the Commission successfully pushed the boundaries of the prohibition rule to cover all rebates with a ‘loyalty-inducing’ effect.

Take a look at that case, and British Airways. The ‘all the circumstances’ test laid down in them is impossible to administer. How long is a long reference period? Are all retroactive rebates prohibited in reality? What if the rebate is transparent and communicated in writing to customers? What if the rebate is standardised? What if the coverage is limited? Good luck figuring out how these factors are balanced against one another.

No wonder the Commission reviewed its approach to the enforcement of Article 102 TFEU after Michelin II.

The AKZO test laid down by the Court has a clear scope. It is based on a well-crafted, hard trigger: if a dominant firm prices below average variable costs, it infringes Article 102 TFEU. The same is true if prices fall below average total costs and there is evidence of an anticompetitive strategy.

What people forget is that the Commission, in the original AKZO decision, defended a rule with a much softer trigger. So soft, in fact, that it was impossible to administer. The Commission argued that a cost-based test was not necessary to establish the abusive nature of predatory pricing.

According to the decision, aggressive pricing by dominant firms would be prohibited full stop (the outcome, in other words, was clear).

However, the question of whether a practice amounts to aggressive or predatory pricing (i.e. the scope of the rule) in a concrete case would be evaluated, pursuant to this test, in light of a range of factors that may or may not be relevant in others. Take a look at the factors in the decision: impossible to anticipate whether a dominant firm is in breach of Article 102 TFEU, right?

As it often happens, the Court understood the implications of the rule laid down by the Commission in AKZO and hardened the trigger. This is perhaps the reason why the rule has not been altered fundamentally in the Guidance – and why the test has proved to be so popular.

Is there a moral in this story? I can think of the following:

• First, the debate about the design of legal tests in competition law should move beyond cliches and slogans. It is untrue that rules are always clear and administrable (if they are well designed, they are, to be sure). It is also untrue that standards (i.e. a case-by-case effects analysis) are necessarily opaque, convoluted and econometricky.
• Second (and on a related point), when some people defend the use of prohibition rules, they are being disingenuous. Some support rules not because of clarity and administrability, but because it is a powerful trick to shift the burden of proof.