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Archive for May 30th, 2019

Persistent myths in competition law (II): ‘the analysis of the counterfactual is not relevant when a practice is restrictive by object’

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As promised, this is the second instalment of the series of posts on persistent myths in EU competition law (these received ideas that will not be put to rest even though they cannot be reconciled with the case law).

For the first instalment, please see here.

This second myth is one that I have explored already in the past (see here, for instance).

This myth is about the idea that the analysis of the counterfactual is not relevant when a practice is restrictive by object. According to this view, it would be possible to establish an object infringement without considering the conditions of competition that would have existed in the absence of the agreement.

Why address it again? Because I keep listening to this idea at conferences.

Underlying this myth there are two ideas that are at odds with a consistent line of case law (these are two sub-myths if you prefer)

A restriction by object can never be established in the abstract

The idea that the counterfactual analysis is not relevant at the ‘by object’ stage assumes that a restriction by object can be established in the abstract.

Alas, this assumption is contradicted by the case law. As we have mentioned more than once (and twice) here, the Court has consistently held that, when establishing the object of a practice, one needs to consider its nature, as well as the legal and economic context of which it is a part.

For instance, it is incorrect to say that ‘price-fixing agreements between competitors are restrictive by object’ Stated in the abstract, this sentence means nothing (my undergrads know this well).

There is no shortage of examples showing that a price-fixing agreement between competitors is not always restrictive by object.

As mentioned in the first post, an agreement fixing the purchasing price of a product is not always a restriction by object. It sometimes is (as in Italian Raw Tobacco). Sometimes, it is not, as in Gottrup-Klim.

Again, it all depends on the legal and economic context of the agreement.

The evaluation of the counterfactual (that is, the conditions of competition in the absence of the agreement) may be a relevant consideration in this regard.

Think of Tournier. The case was about a form of co-operation between competitors that involved price-fixing and the restriction of output. By object? Cartel? Not at all.

Where did the counterfactual kick in? The Court explained that, in the context of the arrangement, price-fixing and output restrictions (via blanket licensing) could be strictly necessary to ensure that copyright would be adequately exploited. In the absence of these clauses, in other words, the legitimate aim of the arrangement would not have been achieved.

Another great example is Remia. Seen in the abstract, the practice would look like an obvious ‘by object’ infringement. The seller of a business agrees to a non-compete obligation. A firm that agrees with a potential competitor to leave the market? Is this not very similar to BIDS (i.e. a ‘crisis cartel’ and obvious infringement of Article 101(1) TFEU)?

Again, the Court concluded, in light of the counterfactual, that, in such circumstances, a non-compete (or market sharing) clause may fall outside the scope of Article 101(1) TFEU altogether (neither restriction by object, nor by effect). Why? Because the main (pro-competitive) transaction might otherwise not take place at all. The purchaser might never have agreed to the sale absent the non-compete (or market sharing) clause.

The bottom-line here, I guess, is that many people assume that, in the context of by object infringement, no assessment of any kind is necessary. The case law makes it abundantly clear that this idea is incorrect. The economic and legal context counts and needs to be considered. It is true that sometimes the assessment of the context can be very brief (which is the point made by the Court in Toshiba), but an assessment in the abstract will always fail to carry the day.

Considering the counterfactual is not the same as evaluating the effects of the agreement

Another reason why this myth about the counterfactual is so popular may have to do with another received idea. Some people assume that, as soon as we start considering the counterfactual, we are already considering the effects of the practices. And we all know that object and effect are distinct conditions.

Alas, it is not true that evaluating the counterfactual is the same as assessing the effects of an agreement.

Figuring out the object of an agreement and assessing its restrictive effects on competition are two different exercises.

The analysis of the counterfactual may be relevant at both stages – it would simply fulfil different purposes at each (at the object stage, its purpose is to find what the agreement is about; at the effects stage, its purpose is to evaluate its impact on competition).

If the evaluation of the counterfactual reveals that the conditions of competition would have been the same with and without the practice (that is, that the practice is incapable of restricting competition), then the object of the agreement cannot be anticompetitive. It can safely be presumed to be a pro-competitive one.

Tournier, mentioned above, is a wonderful example in this sense. If it turns out that copyright can only be meaningfully exploited (read: the legitimate aim of the agreement can only be meaningfully achieved) with price-fixing and output restrictions, then the object of the latter cannot be the restriction of competition. Their objective purpose, their rationale, is pro-competitive.

Coditel II is another wonderful example along the same lines. Remember that the licensing agreement gave absolute territorial protection to the licensee.

Absolute territorial protection is always by object, right? Not always (remember that restrictions by object can never be established in the abstract). And not in the specific context of Coditel II.

The reason is simple: what restricted competition in the specific circumstances of Coditel II was not the licensing agreement, but the underlying copyright regime. Even in the absence of the agreement, the cross-border transmissions at stake in the case would have infringed copyright.

Wait a second: did the GC judgment in Lundbeck not say that the counterfactual is irrelevant at the by object stage?

I am pretty sure many of you had this question in mind when reading the above. It is a relevant and important question.

As I see it, the GC assessed the counterfactual while denying the relevance of the counterfactual. It did one thing, it said another.

A considerable part of the first instance judgment, in fact, is devoted to whether the generic producers were potential competitors. In essence, this analysis amounts to asking whether, in the absence of the agreement(s) the generic producers would have had the ability and incentive to enter the market.

If it turns out that they were not potential competitors, then the agreement(s) would not have been capable of restricting competition that would otherwise have existed, whether by object or effect. And it (they) would have fallen outside the scope of Article 101(1) TFEU altogether.

So if the GC did assess the counterfactual, why did it deny its relevance at the by object stage? Good question, for which I have no answer. Fortunately, we will have an appeal judgment at some point in the coming months (and, according to the Court’s website, AG Kokott will deliver her opinion on 27 June).

Written by Pablo Ibanez Colomo

30 May 2019 at 4:00 pm

Posted in Uncategorized