Persistent myths in competition law (V): ‘there is no such thing as an abuse by object (or by effect) under Article 102 TFEU’
What a better way to start blogging in 2020, I tell myself, than writing a new instalment of a series that kept me busy last year (see here, here, here and here). As three of the posts were devoted to Article 101 TFEU, it strikes me as a good idea to move to abuses this time around.
You have probably heard this one many times: ‘the object vs effect divide does not exist in the context of Article 102 TFEU; there is no such thing as an abuse by object (or by effect)’.
One of the reasons that are given to defend this view is that the letter of Article 102 TFEU does not make an explicit reference to the object/effect divide. Any moderately attentive student of EU law (and more precisely the Court’s approach to the interpretation of the TFEU) knows well that this argument is not particularly persuasive.
It is sufficient, in fact, to take a look at the relevant case law to realise that, indeed, some practices are treated as infringements by object – in the same way that others are examined pretty much like ‘by effect’ agreements.
What does it mean, to begin with, that a practice is abusive ‘by object’? It means – and I am aware it may sound tautological – that its objective purpose is anticompetitive; in other words, that it has no plausible explanation other than the restriction of competition. In such circumstances, there is no point in establishing its effects (a key question about which the GC was explicit in Michelin II).
I can think of three practices that are clearly abusive by object under Article 102 TFEU – if I have missed other, I would very much welcome your contribution:
Pricing below average variable costs: As the Court explained in AKZO, it is in principle irrational for a firm (dominant or not) to price below its average variable costs. Why? Because it would be better off not producing at all (it loses more money by producing than by not producing).
If there is a dominant firm pricing at a prima facie irrational level, we can safely presume (as the Court did in 1991) that the behaviour only makes sense as an attempt to exclude rivals. We can safely presume, in other words, that the object of a practice is anticompetitive.
In such circumstances, I agree with the Court that it would not be necessary (even more, it would not make sense) to require a claimant or authority to show anticompetitive effects to establish an abuse. Pricing below average variable costs can be deemed capable of restricting competition. And that is all we need to trigger the prohibition.
The ‘Lithuanian Railways abuse’: We have discussed Lithuanian Railways previously on the blog. I suggested that it may well be the most straightforward abuse case ever. The facts of the case are nothing short of extraordinary. The incumbent railway operator in Lithuania dismantled 19 kilometres of track after it learnt that a rival could be using it to serve one of its customers.
In other words: the case is not about a refusal to give access to an infrastructure but the destruction (!) of an infrastructure to eliminate competition.
As a result, the sort of arguments that are invoked in refusal to deal cases (counterfactual, ex ante incentives to invest and so on) would not be relevant. In fact, it is a case where the firm devotes resources to dismantle, not to build, an infrastructure. Such a profit sacrifice can be safely deemed to have an anticompetitive rationale (or object).
I have no doubt a practice of this kind should be deemed prima facie unlawful and heavily fined. Thus, I fail to see anything surprising or unusual in the Commission decision in that respect. More controversial, however, is the question of the remedy. What remedy is possible once the infrastructure has been dismantled?
The Commission decision toys with the idea of the (now fashionable) restorative remedies, which is a question that deserves a post (or more than one), and most probably a paper. Spoiler alert: as the law stands, I do not believe the Commission (or any other competition authority) can impose restorative remedies; there is simply no legal basis for it.
In case you were wondering: the 19-kilometre stretch has been rebuilt – in fact, it was completed a few days ago, as you can read here.
The ‘AstraZeneca abuse’: AstraZeneca provides the third example of which I can think. Providing misleading information to a patent authority does not seem to serve any purpose other than the restriction of competition (via the extension of the protection).
This conclusion, in fact, is confirmed by the Hoffmann-La Roche ruling of 2018 (see here for my discussion of the case). If providing misleading information by means of an agreement is deemed to have as its object of the case, I fail to see how it would be possible to reach a different conclusion under Article 102 TFEU (and the analysis in AstraZeneca by the EU courts only confirms this point).
I look forward to your thoughts. And Happy 2020 (+weekend) everyone!
Chillin'Competition 
Great post as always. I would just like to raise 2 thoughts.
First, your reference to “pricing below average variable cost” and “a practice of this kind” could be misinterpreted as support for what I believe is an incorrect view, that there are abstract categories of conduct which are anticompetitive “by object”. But as AG Bobek has written “the assessment of a practice under EU competition rules cannot be made in the abstract, but requires an examination of that practice in the light of the legal and economic conditions prevailing on the markets concerned….”
Second (and to which I have no clear answer), what do we do with conduct whose purpose is anticompetitive but which a strong argument can be made had no anticompetitive effects? Unlike Art 101 which clearly supports the “speeding metaphor”, Art 102 uses the word “abuse”. Can “abuse … of a dominant position” textually support punishing conduct which fails to result in any anticompetitive benefit at all?
Jia Rong Low
11 January 2020 at 12:41 pm
I agree with you Pablo. I might add in your list InBev and I would be reluctant re AstraZeneca. But, definitely, these are cases where there is no need of an effects-based analysis. Whether we should be calling them “abuses by object” or something else, I do not really mind. I would avoid personally the term “object” but on substance I agree.
On restorative remedies, if by “restorative” we mean discontinuation of the conduct that has been found anti-competitive, I have no problem with that. This is how I read para. 157 of AKZO. The Court is clearly saying there that AKZO must stop meeting its competitors’ prices because this was found abusive and adds that this will help the competitor re-establish the status quo ante. In other words, the re-establishment of the competitive situation is seen by the Court as the result of the discontinuation of the problematic conduct and as utterly linked with that. If we were to consider that the “restoration” can go over and above and further than the mere discontinuation of conduct, we would have a problem with the principle of proportionality. We would also have to engage in never-ending discussions about causality. Are we sure that the position of competitors and competition in the market post the infringement is 100% due to the conduct? What about other conjectures? What about contributory faults (see e.g. Arkin v. Borchard)? How will the restorative remedy be balanced in such cases and how much “restoration” will need to be apportioned to the sphere of influence of the dominant company? Very tricky.
Makis
11 January 2020 at 1:01 pm
Might the radio jamming practices in Racal-Decca be considered to be similarly abusive by object? The frequency changes were explicitly designed to exclude competing products, and had no other technical justification (and the frequency changes even harmed some of the users of certain Decca equipment). Not quite as egregious as the Lithuanian case, but it is up there.
Andrew Leyden
12 January 2020 at 3:24 am
Pablo
Excellent post, and I would tend to agree with the overall idea. I think it always depends on the context though as a couple of the comments have suggested, and I think it’s useful to think about Cartes Bancaires’ “legal and economic context” in the context of 102 as well.
I can imagine hypotheticals where selling a single product below AVC might not be abusive, if there were some wider economic context to that sale (loss leader products, selling briefly at a loss to maintain goodwill in a long-term relationship). If there were a context that was more than pretextual, I think that context might push you towards an effects analysis even for predation. (Might…)
For your other two examples – Lithuanian Railways and Astra Zeneca – I agree.
I see LR as a type of predatory conduct – incurring a sacrifice (the costs of digging up the railway), with a view to later recoupment. There is no economic context, other than the sacrifice.
And I think Racal-Decca, as Andrew mentions, is another great example – and similarly predatory, a form of predatory innovation: incurring costs to redesign a product that brings no benefits to you or your customers, other than making your competitor’s life harder. Bard v M3 is a great US case in a similar vein.
There may be some factual investigation to be done: are there potential benefits, or only costs from this conduct? But if you conclude there are only costs – as you can easily do in the case of LR – then I don’t think 102 requires you to do any significant foreclosure analysis.
Kevin
Kevin Coates
12 January 2020 at 5:52 pm
Much, as always, depends on the facts. However, injunctions are available for incipient predation or likely abuse. No effect will have occurred if the application for injunctions is take early enough. The CAT rules on injunctions have been changed to make such applications easier- in part in recognition that remedial action is hard once the bull has entered the china shop. That being said – a remedy that does not act to remediate the position isn’t worth of the name is it?
tim cowen
14 January 2020 at 12:45 pm
Pricing below average variable costs to a small part of the market or during a short period of time produces no exclusionary effect whatsoever and that should be taken into consideration by the competition authority. Therefore, I believe pricing below average variable costs should be subject to an, at least minimal, effects analysis. The concept of object box makes sense but it has been stretched way too much in Europe over the past decades. Most European competition authorities are living in the object wonderland, taking advantage of the object shortcut to tackle practices that produce little anticompetitive effects (easily counterbalanced by efficiencies). Look at most vertical restriction cases dealing with RPM or the so-called passive sales.
Peter
15 January 2020 at 12:55 pm