Chillin'Competition

On 20 April, the Florence Competition Programme organised a workshop on EU competition law after Intel and Cartes Bancaires. The organisers managed to put together a great (and fun) line-up. The keynote speech was delivered by Svend Albaek, Deputy Chief Economist at DG Comp. He shared his personal views on the notion of restriction by object. The speech was really interesting and thought-provoking. I asked whether it would be possible to publish it on Chillin’. Alfonso and I were really pleased that the answer was yes. We leave you with Svend:

In this short comment I will explain why I think that after working more than 18 years in DG Competition I still don’t really understand what the case law says on object restrictions. I probably have to give a bit of warning first. When I once tried to get help on this topic from a well-known law professor, his answer was something along the lines of “oh, you economists always want everything to be so logical; that’s not necessarily the way things work”.

So yes, I may be damaged by my training, but I really would like to see a clear logical construction underlying the characterisation of object restrictions. What I will do in this comment is to present one possible such logical construction and then point out where I think this construction does not entirely fit the way object restrictions are presented in the case law.

So what is this construction? Well, we could call it “per se light”, in the sense of something similar to the US per se concept but with the possibility – and I stress possibility for reasons that will become clear later – of an efficiency defence under Article 101(3).

The idea would be that an object restriction is a practice that (in an admittedly slightly loose formulation) looks like it (1) could plausibly be anti-competitive and (2) could never – or almost never – have pro-competitive countervailing effects. That is, it is not a plausible source of efficiency gains. If this is the case, we would (almost never) condemn a practice that has a net pro-competitive effect. In the worst case, we might attack something that only has a negligible anti-competitive effect.

Probably many readers will know an article (“Defining ‘By Object’ restrictions“) that my good friend and colleague Luc Peeperkorn published in 2015. What I’m thinking of is pretty similar to what Luc suggests, and I was pleased to find out recently that also Pablo Ibáñez and Alfonso Lamadrid think along similar lines (“On the notion of restriction of competition: what we know and what we don’t know we know“). I apologise if there are more people out there that should have been mentioned but whom I just don’t know about because I haven’t had the time to make a proper literature search. However, as you can understand, I’m certainly not trying to claim originality here when I say “my” construction. You will find much of what I write here stated in more detail – and probably better argued – in the articles of Luc, Pablo and Alfonso, so I encourage you to read them if you are interested in the topic.

We can, of course, find something pretty similar to this view in certain Commission documents. And, importantly, we can find traces of it also in Cartes Bancaires, most clearly in Wahl’s Opinion’s in paragraphs 55-58. However, it is, in my view, not spelled out as clearly as Luc, Pablo and Alfonso do.

This construction sounds very much like the US approach to per se infringements, only that there the parties cannot invoke efficiency arguments – or at least not in the lower courts – while in Europe this is still possible under Article 101(3). But the Commission does say in its Guidance on object restrictions that “practice shows that restrictions by object are unlikely to fulfil the four conditions set out in Article 101(3)”. So in reality, it sounds like we would be pretty close to a per se approach. Thus my expression “per se light”.

Now, this may sound fine and logical – perhaps also to the reader – but, unfortunately, I don’t think it reflects reality. Or at least not perfectly. Or at least not yet, if one thinks that the ECJ is in a – probably very slow – process of changing the case law.

I see two major problem areas, which I should say that Pablo and Alfonso also identity in their paper where they call them “outliers”.

The first is with respect to what we could call “internal market partitioning cases”. It is generally recognised – both in economics and in competition law – that territorial restrictions in distribution agreements can bring efficiency gains. If that is true, probably also absolute territorial protection can bring efficiency gains, and it should then not be classified as an object restriction according to my “construction”. The distinction between active and passive sales used in the case law does not really fit with this way of thinking. Something else is clearly going on. Pablo and Alfonso put it this way:

“The peculiar legal status of absolute territorial protection and other practices aimed at limiting trade between member states is explained by the fact that market integration is an autonomous objective of EU competition law”.

So basically, I think I can forget about trying to fit this into my neat logical construction.

The other outlier is Resale Price Maintenance. Many economists think there can be efficiency explanations for almost all – if not all – vertical restrictions and that it is therefore wrong to treat these as object restrictions. And many economists would without much hesitation include RPM in this way of thinking. Now, you may know that Luc Peeperkorn strongly believes that RPM should be an object restriction. So when I had read his article on object restrictions, I immediately went to his office to tease him by saying that he had just argued very eloquently for why RPM should not be an object restriction, since obviously there could be efficiency reasons for imposing RPM; for instance, avoiding free riding by retailers on service provided by other retailers. Luc’s answer was that he does not agree that RPM can be expected to lead to appreciable efficiencies and fulfil the conditions of Article 101(3) since (1) although RPM provides the retailers with a higher margin, it does not take away the free riding incentive; (2) it can thus not be expected that the retailers will voluntarily, without detailed monitoring and disciplining, spend this extra margin on free-rideable services such as product promotion; which (3) implies that there will normally be more effective and less restrictive means of achieving the same efficiencies. I’m not entirely convinced that this is true; consequently, I’m not convinced that RPM being an object restriction fits into my construction either.

Next I would like to ask a couple of questions. First, can the finding of an object restriction depend on the market power of the parties? The ECJ seemed to say so in Allianz Hungária, only to backtrack in Cartes Bancaires. And it would indeed not make sense according to my construction. Because my construction is based on categories of behaviour; I think this may be what the ECJ means when it uses the expression “types of coordination” in Cartes Bancaires (e.g. in paragraph 50). In my view, Wahl’s Opinion also strongly hints at this when he writes that “only conduct whose harmful nature is proven and easily identifiable” should be regarded as an object restriction. So the idea would be that one can easily see that a certain conduct falls into an “easily identifiable” category (e.g. price fixing or market sharing) and therefore conclude that something is an object restriction. But, in my view, that a restriction is a plausible source of efficiency gains cannot depend on market power. It may well be that the result of the ultimate balancing will depend on this, but that would imply that we may expect an effects analysis to end up with a negative (net) result if the parties have (a lot of) market power and with a positive (net) result if they don’t. The conclusion should not be that we think a category of conduct is an object restriction if the parties have market power but not if they don’t. In parenthesis, this way of thinking also made it hard for me to understand the way the General Court in paragraph 89 of its Intel judgment dismissed the relevance of Delimitis. But it seems that the ECJ has now cleared this up in its own Intel judgment.

Finally, a question related to efficiencies and object restrictions. I have a couple of times heard Richard Whish argue that competition agencies and courts should show more willingness to use Article 101(3). I have a lot of sympathy for that. But Prof Whish then pointed to decisions by the Singaporean competition authority concerning airline alliances as a kind of model to follow. As far as I understand – and I must admit that I have not read the decisions – the authority found that the alliances were object restrictions; I guess because the alliance partners would be coordinating on several parameters of competition. But the authority then apparently went on to recognise efficiencies under the equivalent of Article 101(3) and in the end found that the alliances were not anticompetitive. As I wrote, I understand that Prof Whish sees this as a positive example to learn from. But in my construction this example would not make sense. Although, of course, the formal right of the parties to have a go under Article 101(3) is always there, one would not expect to clear something that is an object restriction through efficiencies – and certainly not several times. If one does identify substantial efficiencies (several times), one would rather reach the conclusion that the original categorisation as object restriction likely was mistaken, analyse the effects of the restriction, and reach the conclusion that the net effect is positive and the restriction therefore not anticompetitive. However, as Prof Whish is Prof Whish and I’m an amateur compared to him, my tentative conclusion from this discussion is that my construction may not reflect the real world.

But if so, what is the alternative? I hope that one day I will understand this better.