Chillin'Competition

(By Alfonso Lamadrid de Pablo and José Luis Buendía)

The Covid-19 outbreak is putting societies, institutions, companies, families and individuals to the test. Like all major crises, it is exposing our strengths and weaknesses, our contradictions and limitations. A common threat of unprecedented scale has revealed, once again, that our societies are capable of the very best and the very worst. Over the past few days, we have witnessed inspiring examples of empathy and solidarity, but also prejudice, frustration and tension. We have the chance to show we are up to the task. How we collectively choose to react to this crisis will define our future.

Like all major crises, the Covid-19 outbreak is also straining the European Union, bringing once again unresolved tensions between Member States to the surface, and awakening dangerous currents of misunderstanding among citizens. Critics of EU integration have jumped on the occasion, failing to realize that the problem calls for more, not less EU. At the current stage of European integration, absent a fiscal union and with limited EU competences on public health, decisions remain mainly in the hands of national governments controlled by national Parliaments. Disagreements among EU Member States within the European Council are sometimes desirable, and sometimes not so much, but they are perhaps inevitable. It is not only a matter of attitude and prejudice, but also of institutional and political constraints. While we wait for consensus among national governments on a comprehensive political response, other constructive and complementary solutions must be explored.

The European Commission can be the driving force in the pursuit of EU solidarity. Unlike national governments, the Commission is entrusted with safeguarding the general interests of the Union as a whole. President von der Leyen has committed to exploring any options available within the limits of the Treaties. The Commission has both the responsibility and the power to take decisive action, and to shape the reactions of Member States to the crisis in line with the general interest. The Commission cannot require Member States to ignore or work around existing constraints, but it can impose proportionate ones.

Indeed, while the Commission’s powers may be limited in certain areas, they are strong and decisive in others. Notably, the Commission enjoys the exclusive competence to control, under State aid rules, the measures adopted by Member States to support economic operators. Over the past few days, the Commission has made a significant effort to exercise these powers swiftly and responsibly, adopting a Temporary Framework and authorizing a considerable number of national measures to support the economy in the context of the pandemic. As we write, the Commission has announced an imminent amendment to the Temporary Framework aimed at enlarging the categories of permitted aid.

The unquestionable necessity of allowing the speedy authorization of Covid-19-related national measures should, however, not blind us to their inevitable negative side-effects. The “full flexibility” recognized by the Temporary Framework applies in theory to all Member States. In practice, however, it mostly benefits deeper-pocketed Member States with the means and the budget to spend the greatest resources. Note that the Member States that benefit disproportionately from this policy are also the champions of austerity Member States that, rightly or wrongly, oppose other solidarity instruments like corona bonds. Under the current Temporary Framework, all Member States enjoy the same freedom to unleash their economic arsenal, but some may end up using bazookas, while others are stuck using slingshots.

Massive capital injections by only certain Member States might lead to massive distortions of competition. Companies and sectors from wealthy Member States may enjoy much more support to weather the crisis than their competitors established elsewhere in the EU, regardless of where the ongoing crisis happens to hit harder. Under the current circumstances, this could trigger the market exit of companies that would have normally survived, and vice versa. Competitive asymmetries deriving from State aid would moreover be exacerbated should national governments fail to reach an agreement on mutualizing budget risks.

This scenario is not inevitable. It is within the power of the European Commission to ensure sure that State aid is awarded in a way that minimizes any distortions of competition and, by the same token, fosters EU solidarity. The Commission itself recognizes in the Temporary Framework that a coordinated effort will make the measures adopted more effective and may even foster a quicker recovery. The Framework also emphasizes that this is not the time for a harmful subsidies race.

Our proposal is that the Commission amend the Temporary Framework in order to make the compatibility of State aid conditional on the provision of compensation for the competitive distortions that they necessarily create. This compensation would take the form of a contribution to the support of companies established in other Member States. The contribution could be equivalent to a percentage (for example, 15%) of the public resources involved in the measures at issue. Each Member State would be able to propose specific ways to channel these contributions in a way that minimizes competitive distortions. The Commission would assess their sufficiency prior to authorizing the aid, and it would also ensure that most of the compensation is received by those who need it the most.

In order to speed up the approval process, the Commission could also predetermine ex ante that contributions to a “European Solidarity Fund” would be presumed an acceptable compensation in this regard. The Fund could be initially established by some Member States as a vehicle allowing financial solidarity among them, but would be open all  Member States. The Fund itself should also be notified under State aid rules and could obtain Commission approval as an “Important Project of Common European Interest” (IPCEI).

We see no EU law impediment to implementing this proposal. Making the compatibility of State aid measures subject to compensatory conditions would not in itself entail any deviation from the Commission’s standard assessment. The rules adopted by the Commission to manage the support to financial institutions in the context of the past crisis were accompanied by strict conditions aimed at minimizing distortions of trade and competition. To be sure, while requiring direct compensation from the State which granted the aid would constitute a novelty, this innovation would be justified. Indeed, the current circumstances do not permit the use of traditional safeguards, based on limiting the amounts of aid granted.

Several national measures have already been authorized, but it is not too late to take action. Public support measures are here to stay and are likely to materialize in unprecedented volumes of aid. Failure to prevent further asymmetries would only make matters worse. Under this proposal, Member States would retain the ability to support their national economies, subject only to the condition that they contribute, proportionately to their means and to their measures, to minimizing distortions to the internal market. This way, State aid policy could better contribute to the solution, rather than the problem.

Important details should be ironed out following an urgent consultation with Member States. Some version of this formula would not only be sensible and feasible, but also indispensable. It would mitigate serious distortions and contribute to levelling the playing field. In the absence of a political agreement between Member States, it would create a proportionate legal obligation to prevent harm to companies established in other EU countries, easing ‘rich’ Member States’ task of justifying their solidarity efforts to their citizens and parliaments. It would show precisely what the European Union is for and would restore citizens’ trust in the ideals of European integration. Let us not forget that, as empathically stated in Article 3 of the TEU, one of the main tasks of the EU is to promote ‘economic, social and territorial cohesion, and solidarity among Member States’.

This proposal is not a silver-bullet, but it is an important step towards solidarity based on legal mechanisms. As proclaimed in the Schuman declaration, the EU “will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity.” The European Commission has now the opportunity, the unique ability, and the historical responsibility to fulfill its mission.

It has been a week already since I decided to self-isolate, in London. The worrying news keep coming, virtually by the minute, on all fronts. Knowing one is safe is barely a relief: it becomes inevitable to think about people suffering and people making sacrifices, to worry about loved ones, about there being no end in sight, about the world that will emerge once we get to leave our homes.

The routine that shaped our lives until a week or two ago feels like the memory of a past life (impressive what a few days of trepidation can do). Little by little, we get used to a new reality (and our mind stops racing or at least does not race so much). However, when we think about the stuff that inspired us and kept us going, we do so from a distance, reminding us we are no longer in the same place.

The advantage of seeing things from a distance is that one gets to see the big picture: the grand themes guiding our work, whether consciously or unconsciously. But the current crisis feels so overwhelming, it raises so many fundamental questions, that no other topic seems important enough at present.

The one issue that particularly resonates these days is the importance of experts and expertise. Irrespective of the context, we all lose when expertise gets instrumentalised to achieve other objectives and/or weaponised to serve special interests. It has been distressing to see, over the past few years, how the cacophony of polarisation makes it often impossible to listen to experts.

There are major challenges ahead (climate change dominating all others), and I can only hope that the ongoing tragedy makes it abundantly clear that not everything is a matter of opinion and that we do not get to choose what is true.

Public policy, always and everywhere, should be informed by facts and expertise, not by the pre-determined outcomes that we happen to favour.

For the time being, we wish all the best to all of you and your loved ones in these difficult times. We will be back very soon.

As you know, the hearing in the Google Shopping case took place last month – speaking of which: huge thanks to Lewis Crofts for his quasi-live tweeting of what was going on (all that follows is what I gathered from his reporting).

The question of the applicable legal test was always going to be central in Google Shopping. Lewis’s tweets confirm this view. A lot of time was spent, it seems, on whether the Commission should have established that non-discriminatory display on the Google platform was indispensable within the meaning of Bronner (and, I would presume, IMS Health, which provides the most precise definition of the concept in the case law).

When I read about these matters, I am always surprised about two aspects of the discussions. One is that they are dominated by Bronner. A second one is the fixation with categorising conduct as a ‘refusal’ (as if it were the relevant factor to determine whether indispensability is an element of the legal test). I explored some of the themes in a recent paper, and tell myself it could be useful to revisit them in a post.

Bronner is just one of many cases on indispensability: it is not even the most important or relevant

Let me start with the first point. Bronner is just one of many cases addressing the indispensability condition: it was not the first and it will not be the last. It is not the most important either.

In the context of Google Shopping, it is not even the most relevant precedent: I have repeated many times (on the blog, at conferences and elsewhere) that the case is pretty much a re-run of Commercial Solvents and CBEM-Telemarketing.

As much as Commercial Solvents and CBEM-Telemarketing, the case is about a company changing its commercial practices to favour an affiliate at the expense of rivals. Indispensability was an element of the legal test in the two precedents (the latter judgment made an explicit reference to an ‘indispensable’ service).

Against this background, the fundamental question one should be asking, in my view, is why indispensability would not be an element of the legal test in Google Shopping, given that the self-preferencing has the same object and effect as the conduct considered in Commercial Solvents and CBEM-Telemarketing.

In other words: is there a good reason to depart from the legal test set out in the two closest precedents? Intriguingly, Lewis’s tweets suggest that this is not how the discussion took place.

It does not matter whether there is a refusal: what matters is the nature of the remedy

I have been able to gather from reporting-via-Twitter that a great deal of the discussion revolved around whether there had been a refusal to deal. I get the impression that this was perceived to be a crucial matter. As far as I can tell, the underlying idea is that, absent a refusal of some kind, indispensability is not an element of the legal test.

There is nothing in the case law that suggests this conclusion.

This is so, first and foremost, because there are cases where indispensability was required (including the two mentioned above) and which did not concern a Bronner-style refusal. Second, the question of whether there is a refusal can easily turn into a semantic discussion. Was the behaviour in CBEM-Telemarketing a refusal to deal? Maybe, or maybe not, depending on what one calls a refusal. How about Slovak Telekom? Is that a refusal or a strategy aimed at degrading the conditions of access? Finally, there are cases that involve a refusal and where indispensability is not required (including Slovak Telekom itself).

The criterion to determine whether indispensability is an element of the legal test was defined in Van den Bergh Foods. This criterion distils the essence of previous cases. According to this ruling, indispensability is required when intervention would require a firm to ‘transfer an asset or enter into agreements with persons with whom it has not chosen to contract’.

It is easy to illustrate this criterion by reference to Bronner. In that case, the defendant could have brought the infringement to an end in two main ways: (i) by giving access to its delivery network (that is, enter into an agreement with a firm with which it has not chosen to contract) or (ii) by transferring its assets to a third party (that is, a structural divestiture). To be sure, it could also have (iii) closed down its delivery division.

Accordingly, indispensability was found to be an element of the legal test (and the condition was found not to be fulfilled).

Apply the Van den Bergh Foods criterion to any vertical leveraging case and you will realise that, when intervention in a case necessitates one the three options mentioned above (enter into agreements with third parties, sell the firm’s upstream or downstream assets or close down its upstream or downstream activities), indispensability is a condition to establish an abuse.

This criterion helps one understand why indispensability is an element of the legal test in Commercial Solvents (the firm was asked to enter into an agreement with a third party on terms and conditions determined by the authority), Magill and IMS Health (in the last two, intervention forced the firms to change their business model and start licensing their intellectual property to third parties).

Conversely, the criterion is helpful to understand why indispensability is not required in ‘margin squeeze’ cases or in other constructive refusal scenarios. A mere cease-and-desist order was enough to bring the infringement to an end in cases like TeliaSonera and Slovak Telekom.

Whether or not there is a ‘refusal’ (however this tenuous concept is defined) does not come across as a relevant or decisive factor.

How Van den Bergh Foods is interpreted in Google Shopping, and why it is controversial

Interestingly (and reasonably), the Commission concludes in Google Shopping that the question of indispensability should be considered in light of the Van den Bergh Foods criterion.

The application of the criterion is even more interesting (and also controversial). Since the decision merely requires the firm to bring the infringement to an end (without specifying how), the Commission claimed, indispensability is not an element of the legal test.

As explained in my paper, I am not sure this comes across as the most reasonable interpretation of the Van den Bergh Foods criterion. It makes sense I go briefly over the reasons why.

In essence, this interpretation would give the Commission the discretion to decide when indispensability is an element of the legal test. The authority would have the freedom to choose when it imposes this threshold upon itself.

To illustrate the Commission’s approach and its implications, just consider Bronner (where indispensability was both required and not met).

According to the interpretation of the Van den Bergh Foods criterion advanced in Google Shopping, the Commission would be able circumvent the indispensability condition merely by requiring the defendant to bring its infringement to an end.

In other words: if, in a case identical to Bronner (same facts, same economic and legal context) the Commission left it for the firm to figure out how to comply with the decision, indispensability would disappear as an element of the legal test.

Since competition policy is implemented through law, not discretion, I struggle with this interpretation of Van den Bergh Foods .

The relevant question, as I understand the underlying principles, is not so much what the decision formally requires but what it entails in substance. What options does the firm have to comply with the decision? Are these options the same as in Bronner? If so, the Van den Bergh Foods criterion means indispensability is an element of the legal test. If there are other options (namely a negative obligation administered on a one-off basis), it is not.

Those who have read my paper knew I have nothing to disclose. Those who have not (no hard feelings) now do. I look forward to your comments!

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UPDATE: A few among you have reached out to explain that, in the hearing, some importance was given to whether there had been a ‘request’ for access, as if this factor had an impact on the applicable legal test (and whether indispensability is part of it).

I fail to see how the existence of a ‘request’ is a relevant factor. Just take a look at the facts of CBEM-Telemarketing (para 5 of the judgment). As soon as CBEM learnt about a firm’s decision to cease dealing with third parties, it brought an action before a court (and note that, because there was no ‘request’, there was no ‘refusal’ either). Still, indispensability was deemed to be an element of the legal test (para 26).

Thanks again for all the comments!