Chillin'Competition

The Ping case was decided last year by the CMA. It has made the headlines again following the challenge brought against the decision. I (well, the two of us) have followed the case with a lot of interest and it is perhaps the time to say a word about it. Alfonso will address the procedural issues in the coming days.

On the face of it, the case may look straightforward from a substantive standpoint. It is about an absolute ban on online sales in the context of a selective distribution agreement. Following Pierre Fabre such a ban is in principle (that is, unless objectively justified) restrictive by object .

In Ping, the CMA concluded that the ban amounted to a ‘by object’ infringement that was indeed not objectively justified.

I find the route through which the CMA reached its conclusion problematic. If I do not take issue with the conclusion as such, I believe the legal analysis conducted by the authority departs from the principles laid down in the case law.

When establishing whether an agreement is restrictive by object, the bar set by the CMA is too high and (more importantly) unprecedented. The relevant judgments suggest that the legal test applied by the Court of Justice to draw the line between object and effect restrictions differs from the one applied in Ping.

Pierre Fabre and restrictions by object

The Court held the following in para 39 of Pierre Fabre:

‘As regards agreements constituting a selective distribution system, the Court has already stated that such agreements necessarily affect competition in the common market (Case 107/82 AEG‑Telefunken v Commission [1983] ECR 3151, paragraph 33). Such agreements are to be considered, in the absence of objective justification, as “restrictions by object”‘.

What does the Court mean by the above? As I have written many times before, this paragraph makes a very sensible point. In my view, it is just a way of expressing what the Court has traditionally done to distinguish between object and effect restrictions.

Readers of this blog are already familiar with the case law that captures the Court’s approach to the object/effect divide. The more explicit rulings about this approach include Metro I, Pronuptia, Delimitis, Asnef-Equifax and Cartes Bancaires.

In all of these cases, the inquiry is crystal clear: every time, the judgment starts by ascertaining whether a given clause serves a legitimate aim (that is, whether it is a plausible means to attain a pro-competitive objective).

The plausible bit is the important one. It means that the bar in the case law is low. Nowhere does the Court suggest or imply that the inquiry is an in-depth one.

In particular, nowhere does the Court suggest or hold that an agreement is restrictive by object if there are less restrictive means to attain the legitimate aim sought by the parties.

If you take a look at the above cases you will realise that the Court has never examined whether there were, in fact, other ways to attain the legitimate aims sought by the parties. This question appears to be irrelevant when establishing whether an agreement is restrictive by object.

• In paras 10-12 of Delimitis, for instance, the Court identifies the legitimate aims served by an exclusive dealing agreement. Are there less restrictive means to achieve the same objectives? Well, we know that rebate schemes can serve the same purposes, and they are certainly less restrictive than an outright exclusivity obligation. But the Court, when examining whether such an obligation is restrictive by object, did not find it relevant or necessary to consider whether the aims ought by the parties could be achieved through other, less restrictive, means.
• Consider nowPronuptia. In paras 15-17 of the judgment, the Court identifies the legitimate aims pursued by franchisors. Can one think of less restrictive means to attain the same objectives? Sure. Selective distribution is one example that comes to mind immediately. Again, the question of whether the franchisor could have protected its know-how and reputation through less restrictive means was deemed irrelevant when identifying the object of the agreement.

The mismatch between the legal question and the legal test in Ping

The test set out in Ping is different. According to the CMA, a clause is objectively justified (and thus escapes the qualification as a ‘by object’ infringement) if it can be shown that there are no less restrictive means to attain the legitimate aim.

The CMA applies, in other words, a necessity test, as opposed to the plausibility test endorsed by the Court in Luxembourg. In case you were wondering: there is nothing in Pierre Fabre that suggests this question should be subject to a less-restrictive-means test. The CMA derives it from domestic case law.

The impression I get from the decision is that the CMA conflates two separate questions: that of whether a clause is objectively necessary and that of whether it is restrictive by object.

As a result of this conflation, there is a mismatch between the legal question considered in Ping (is the ban restrictive by object?) and the legal test applied (is the ban necessary?).

The objective necessity test laid down by the CMA plays an important role in Article 101(1) TFEU. But its role is not to determine whether a clause is restrictive by object.

If it appears that a clause is objectively necessary, the said clause is not restrictive at all, whether by object or effect. It is prima facie lawful. When the (stricter) objective necessity test is met, the clause falls outside the scope of Article 101(1) TFEU altogether, and it is not even necessary to establish its effects.

The CMA conflated the two tests, I believe, because selective distribution systems are presumptively lawful if certain conditions (defined in para 41 of Pierre Fabre) are fulfilled. When these (i.e. the Metro I criteria) are met, the clauses are deemed objectively necessary and are not caught by Article 101(1) TFEU at all.

What if a clause is not objectively necessary?

Even if you agree with the above, you may still have a couple of reasonable questions: what does the third condition of Metro I (proportionality) mean? In the same vein, you may ask what happens when a clause does not meet the objective necessity test.

If you read beyond Pierre Fabre (if you read, in particular, the 1980 Perfumes judgments, including Lancôme, and Pronuptia) you will be able to get the answer to the two questions.

The proportionality assessment in Metro I (and Pronuptia) is essentially about whether there is a link between a given clause and the legitimate aim that is being considered. If no such link exists, the clause will be deemed to go beyond what is necessary to attain the aim in question. As a result, it would also fail the objective necessity test.

In Pronuptia, for instance, the Court took the view that there is no link between the legitimate aims sought by franchising agreements (protection of the know-how and reputation/uniformity of the system) and territorial restrictions protecting individual franchisees.

In the context of selective distribution, the Court ruled early on that there is no link between quantitative restrictions and the aims sought by this business model.

Importantly, the fact that a clause does not satisfy the objective necessity test does not mean that it is restrictive by object.

Paras 21-24 of Lancôme illustrate this point very well. A clause may fail the objective necessity test in relation to one legitimate aim, but may be a plausible means to attain another one (and thus may be subject to an analysis of effects). In fact, Lancôme refers explicitly to Société Technique Minière and to the need to consider the effects of clauses that do not meet the Metro I conditions.

Ping suggests that there no shades of grey in the context of Article 101(1) TFEU. A clause is either restrictive by object or necessary and thus lawful.

This understanding of the provision is at odds with the case law. Contrary to what the decision suggests (and this is perhaps its main weakness), a clause that fails the objective necessity test is not always (or not necessarily) restrictive by object. If the clause in question is a plausible means to attain a legitimate aim, it will be subject to an effects analysis.

Just think of Delimitis: the Court never suggested that exclusive dealing is objectively necessary. However, it ruled that it is not restrictive by object. Cartes Bancaires is another wonderful example.