Chillin'Competition

The latest issue of JECLAP (see here) features an editorial of mine that takes stock of the relationship between competition law and innovation. I get the sense (a) that the topic will become increasingly prominent in law and policy discussions and (b) that there is still scope for deeper and more sophisticated analysis of the question. 

I copy the editorial below (see here for the version published in JECLAP, which is accessible for free). As usual, I look forward to your comments!

Discussions around the relationship between competition law and innovation have been on the rise in the past few years. The height of this debate took place in the lead up to, and the aftermath of, the Dow/DuPont merger. The pieces published in this Journal give a clear idea of the sort of arguments that have been advanced by commentators in this regard.

For some of these commentators (mostly economists, but also some lawyers), Dow/DuPont marks a significant departure from previous cases. The novelty would come from the fact that the analysis does not relate to markets in the traditional sense. The analysis would also move away from the way in which constraints coming from potential competitors were considered.

According to this view, the moment competition law analysis focuses on research and development capabilities – as opposed to precisely defined product markets, or pipelines in the pharmaceutical sector – it enters uncharted, speculative, territory. The fact that firms devote resources to the development of new products does not mean that these efforts will be successful. What is more – the argument typically continues – there is not an obvious relationship between the level of concentration and the rate of innovation in a given industry.

The opposite arguments have also been eloquently advanced. The idea that competition law can evaluate the impact of transactions in light of firms’ research capabilities is certainly not new. A framework based on this very idea has existed since the first version of the Guidelines on horizontal co-operation agreements. What is more, it has long been accepted that competition law analysis applies not only to price and output, but also to other parameters, including innovation.

The single most important lesson to draw from this debate is that exchanges between lawyers and economists sometimes get lost in translation. The deep and sophisticated economic debates about the relationship between market concentration and innovation, and about how to conduct merger analysis when innovation is the main driver of rivalry in an industry, have not always paid sufficient attention to the legal dimension. As a result, they fail to consider what needs to be proved as a matter of law.

Many economic arguments are indeed based on the idea that, when evaluating a merger, the European Commission is required to show direct harm to innovation (or prices, output or any other parameter of competition). This assumption is at odds with the relevant case law. In Case T-175/12, Deutsche Börse AG v Commission, the General Court confirmed that, as a matter of law, a significant impediment to effective competition can be established by proxy.

In other words, it is sufficient for the Commission to show, to the requisite legal standard, that a transaction will lead to a significant reduction of the competitive pressure faced by the parties. When conducting this assessment, the Commission can rely upon quantitative and/or qualitative evidence, including, in particular, the factors identified in the Guidelines on horizontal mergers (such as the closeness of competition between the parties, customers’ switching opportunities or rivals’ ability to expand production).

Against this background, it seems that most of the criticisms that have been directed against the analysis of the Commission in cases like Dow/DuPont – that the analysis is new and/or that it is insufficiently robust – come across as misguided, insofar as they ignore the legal dimension of merger control.

Is there room for claims that, even though it reduces competitive pressure, a merger will lead to an increase in innovation? There is. It is always possible for the parties to provide evidence showing that, in spite of the prima facie finding of a significant impediment of effective competition, the efficiency gains resulting from the transaction will outweigh its likely negative impact.

One could argue, reasonably, that the bar for the efficiency defence is overly high in Europe, and that it has not, since the adoption of Regulation 139/2004, played any meaningful role in practice. This reality is not necessarily problematic. Arguing that a significant reduction of competitive pressure can be pro-competitive is an exceptional claim that contradicts the very premises of competition law. It is therefore only natural that the so-called efficiency defence is very unlikely to succeed in practice.

Any other outcome would have serious consequences for the integrity of the competition law system. The same argument about the unique nature of innovation can also made, for instance, in the context of Article 101 TFEU enforcement, and this, with a view to justifying the most egregious practices.

Earlier this year, the Commission announced the launch of an investigation into an alleged collusive agreement involving the leading German car manufacturers. The unusual feature of this agreement is that it relates, allegedly, to innovation, and more precisely to the roll-out of clean emission technologies.

If one were to take the approach advocated by some economists in relation to merger control, one could argue that this collusive agreement, if established, should not be given the same legal treatment as other cartels. After all, the argument would go, it is not clear that cartel conduct relating to innovation is as harmful as traditional cartels – typically focused on prices, output and market-sharing.

If these arguments were to be accepted, the fight against cartels would suffer an important blow. The consequences would inevitably spill over the entire EU competition law system and would damage, without any valid reason, the ability of competition authorities to take action against particularly serious infringements.

Does the above mean that the introduction of innovation considerations in competition law analysis is always uncontroversial, or that the debate is over after Dow/DuPont?

Certainly not. Recent investigations hint at new ways in which such considerations can enter the analysis. For instance, innovation appears to play a role in the preliminary probe into Amazon’s practices. The Commission is exploring whether the online retailer exploits its role as a marketplace to copy rivals’ products, thereby reducing their incentives to innovate.

It is far too early in the process to comment meaningfully on this case. But there are grounds to believe that it gives rise to new questions. JECLAP’s editors will keep an attentive eye on this and other similar developments.