Chillin'Competition

The hearing in Lundbeck will take place on Thursday of next week. Readers of the blog know that this is a case that I have been following with keen interest (see for instance here). It raises some fundamental questions about the interpretation of Article 101 TFEU.

As I explained in the past, the Commission decision in Lundbeck departed in some respects from the relevant case law (and, indeed, from the authority’s own past administrative practice). The ECJ will now have to decide whether this interpretation is upheld, thereby leading to a transformation of the nature and scope of Article 101 TFEU.

These fundamental issues will become much more apparent, I believe, in the context of the appeal. Before the General Court, issues of law and fact, generally become so intertwined that it is difficult, in practice, to tell one apart from the other – or to fully appreciate the consequences of the underlying interpretation of a given provision. In this sense, the appeal is good news for the competition law community.

The areas in which Article 101 TFEU may (radically) change after Lundbeck are the following:

• The notion of competition within the meaning of Article 101 TFEU.
• The change in the understanding of the notion of potential competition, which would become a subjective concept (as opposed to the objective concept it has so far been).
• The relationship between competition law and intellectual property.

The notion of competition within the meaning of Article 101 TFEU

In Société Technique Minière, the Court declared that the notion of competition within the meaning of Article 101 TFEU must be understood as such competition that ‘would occur in the absence of the agreement in dispute’.

As subsequent judgments would consistently confirm, the analysis of restrictions does not occur in the abstract. It needs to consider whether, in the economic and legal context in which it is implemented, the agreement restricts competition that would otherwise have existed.

It is explicit in Société Technique Minière that this analysis applies both to restrictions by object and by effect (see p. 250 of the Reports, top paragraph). The Commission Guidelines on Article 101(3) TFEU are equally explicit on this point (see paragraph 18).

What are the consequences of this interpretation of the notion of competition?

The fundamental consequence of Société Technique Minière and subsequent case law is that, if an agreement does not restrict competition that would otherwise have existed, it falls outside the scope of Article 101(1) TFEU (that is, it does not restrict competition, whether by object or effect).

For instance, the Court explained in Société Technique Minière, an agreement would not restrict competition (whether by object or effect) if it is ‘really necessary’ to enter a new market. The Commission elaborates on this example in its Guidelines on vertical restraints. An agreement protecting a distributor from both active and passive sales is in principle restrictive by object. That is not the case, however, where the agreement is objectively necessary to achieve market entry. In such a case, it falls outside the scope of Article 101(1) TFEU altogether (see paragraph 61 of the Guidelines).

Lundbeck gives rise to a similar question. What if market entry is made impossible by virtue of the intellectual property regime? Can there be a restriction of competition if the only way for generic producers to enter the market is to infringe a patent? This is a central question in the case, and one that is somewhat obscured by its complex facts.

In light of Société Technique Minière and subsequent case law, the answer to these questions is clear. In such a scenario, the agreements at stake in Lundbeck would not restrict competition that would otherwise have existed. Accordingly, there would be no restriction, whether by object or effect.

The Commission, however, proposed a new interpretation of Article 101(1) TFEU in its Lundbeck decision. It suggested that an agreement can restrict competition by object even when it would entail the breach of a patent.

The ECJ, in its Lundbeck appeals, will decide whether to depart from a consistent line of case law.

The notion of potential competition as an objective (as opposed to subjective) concept

A related question in the Lundbeck appeals relates to the notion of potential competition. Is a firm a potential competitor if market entry requires breaching an intellectual property right? Until the Lundbeck case, there was little doubt that unlawful entry on the market did not count as potential competition.

E.On Ruhrgas is an eloquent example in this regard. The General Court concluded that an agreement does not infringe Article 101(1) TFEU where market entry is made impossible by virtue of the regulatory framework – in that case, the regulatory framework created a de facto monopoly. In such circumstances, it is the regulatory framework, not the agreement, which restricts competition.

The Commission also shared this view. In the 2004 version of its Guidelines on technology transfer agreement (the version published prior to Lundbeck, that is), the authority explained, in paragraph 29, that there is potential competition if market entry would have been possible ‘in the absence of the agreement and without infringing the intellectual property rights of the other party’ (emphasis added).

Lundbeck departs from these principles. How? By embracing a subjective approach to the analysis of potential competition. In Société Technique Minière, European Night Services and E.On Ruhrgas, to name a few, the notion of potential competition was an objective concept, in the sense that market entry was assessed in light of objective factors – that is, whether such entry possible and likely, given the economic and legal context.

In Lundbeck, by contrast, the economic and legal context (in other words, objective considerations) are not decisive. Subjective considerations (in other words, firms’ perceptions about the likelihood of market entry) can lead to the conclusion that two firms are potential competitors. Accordingly, potential competition may exist even when it would require infringing a presumptively valid patent.

As can be seen, Lundbeck advocates a major shift in the analysis of potential competition. Will it win the day? An analysis of the case law reveals that the ECJ clearly prefers objective approaches to the definition of legal concepts. In particular, the subjective intent of the parties is neither a sufficient nor a necessary condition to establish a restriction of competition. Similarly, the notion of aid within the meaning of Article 107(1) TFEU is an objective one.

The relationship between competition law and intellectual property

Finally, Lundbeck also marks a new relationship between competition law and intellectual property. As mentioned above, EU law does not question the existence of intellectual property rights; it only questions the way in which they are exercised.

Accordingly, EU law does not second-guess intellectual property systems, or whether the underlying ideas are worthy of protection. Thus, Articles 101 and 102 TFEU are applied without questioning the validity of the rights at stake in a case. All cases in which intellectual property is relevant, including Consten-Grundig, Coditel II or BAT (Toltecs-Dorcet) confirm this point.

By suggesting that a firm is a potential competitor even when market entry requires the infringement of a presumptively valid patent, Lundbeck alters this balance between competition law and intellectual property. According to this new balance, EU law would question the very existence of intellectual property rights (for instance, whether they are valid, or whether the underlying ideas are worthy of being protected). The consequence of the EU legal order would inevitably be significant.

[IMPORTANT: I did not want to end this post without mentioning the passing of Gil Carlos Rodriguez Iglesias. Gil Carlos led the Court of Justice at a key moment in time – Opinion 1/94 is just an example that springs to mind immediately. More importantly, he is fondly remembered by everybody who worked with him. Alfonso and I send our deepest condolences to his family and close friends. May he rest in peace.]