Chillin'Competition

I have just uploaded on ssrn a new paper (see here) on the legal status of vertical restraints following Generics and Budapest Bank. It is part of a series of short contributions on the topic that is forthcoming in Concurrences and that has been coordinated by Mario Marques Mendes (thanks very much for the invitation to contribute!).

I have already discussed the implications of these two landmark rulings on the blog (for instance here). The key conclusion I draw from them is that, as a rule, an agreement that is capable of having pro-competitive effects is not restrictive of competition by object.

This conclusion is consistent with the legal treatment of vertical restraints in the Court’s case law over the years. My paper focuses on two traditional pro-competitive justifications for vertical restraints: brand protection and the fight against free riding.

Free riding considerations are particularly relevant in the context of MFN clauses. As evidenced in the Support studies for the evaluation of the VBER prepared for the Commission (see here), this pro-competitive justification is valid both in relation to the ‘wide’ and ‘narrow’ varieties of the restraint.

Accordingly, there seems to be little support for treating MFN clauses as ‘by object’ infringements and/or hardcore restrictions within the meaning of the Block Exemption Regulation. One can imagine, however, ways in which the future Regulation could provide for some bright lines in relation to ‘wide’ MFNs (for instance, by treating them as excluded Article 5 restrictions above the 30% threshold).

As far as brand protection is concerned, the paper focuses on online selective distribution. Some clauses, such as a ban on the use of online marketplaces and/or of price comparison sites serve a brand protection purpose. In this sense, they are not different from other restraints typically found in selective distribution systems.

Accordingly, there seems to be no reason to give such clauses (specifically tailored to the needs of online distribution) a different (stricter) legal treatment. The conclusion would be the same irrespective of whether the good is a luxury or a non-luxury one (experience and economic analysis show that brand protection can be relevant also in relation to the latter).

I very much look forward to your thoughts. I am happy to clarify, as ever, that I have nothing to disclose.

Teaching State aid at LSE is a particularly enjoyable experience. I will have to wait an academic year, alas, to do so again. I tell myself it is a sensible arrangement (even if not one I chose): 12 months from now the module will have become either a niche irrelevance for most students or an exciting window to explore an emerging legal regime (in the UK, that is).

The background story is well known. The EU has consistently insisted on the importance of a system for the control of subsidies and similar measures in any EU-UK trade agreement. State aid is the most salient feature of the so-called ‘level playing field’ provisions deemed necessary as part of the future relationship between the two sides.

The UK government is not inclined to remain bound by the substantive or institutional aspects of the EU system (and is very public about it). The idea of setting up a technocratic body that would constrain public authorities’ discretion to award subsidies and similar measures is resisted (see here). From a substantive standpoint, the UK government does not seem keen to make its domestic regime revolve around Article 107(1) TFEU (as interpreted by the Court of Justice over the years).

I was inspired to prepare this post after realising that the logic of the EU’s position does not come across very clearly on this side of the Channel. It is true that there are frequent references to the protection of the ‘integrity of the internal (single) market’. However, something tells me that these references sound so abstract that they are probably seen as suspicious pretexts to constrain the UK’s regulatory freedom post-Brexit.

The truth is that it is difficult to see how the EU State aid system would survive if the UK were allowed to depart from it in any significant way. For the same reason, one can understand why Member States may believe that giving up their own internal State aid regime is too high a price for a trade agreement with the UK.

State aid: a remarkable (and fragile) achievement of integration-by-law

My guess is that anybody who is reasonably familiar with the EU State aid regime marvels when thinking about the remarkable achievement it is (even if one disagrees about its pertinence).

A group of States decided to give up their discretion to award subsidies and similar measures and entrust a supranational authority with the task of deciding when they are in the interest of the community as a whole (as opposed to the interest of its individual members).

What is more, the boundaries of the system – the definition of what State aid is – are defined by law, not discretion. It is ultimately for the Court of Justice to decide whether a measure falls within the scope of Article 107(1) TFEU – a central question, for instance, in the recent Apple case, discussed by Alfonso here.

It is so unusual to see States agree such a regime that no similar system exists even within the US (see here). And precisely because it is so unusual it is also uniquely fragile. The temptation to abandon it and/or relax the rules is always present – every now and then, Member States float the idea of ‘decentralising’ State aid control (which is code for loosening it).

Can the EU State aid regime survive if the UK departs from it?

Hopefully the above gives an idea of why the Commission, and EU Member States, insist so much on State aid in the context of the EU-UK trade agreement. If the UK obtains a deal without an ex ante regime that is in essence similar to that applying within the EU, it will achieve what some EU Member States have always secretly – and not so secretly – wanted.

In other words: the one State leaving the bloc would enjoy greater leeway to engage in regulatory competition than EU Member States themselves. I find it difficult to imagine how the EU State aid system, as we know it, would survive in such circumstances. The pressure to abandon it, or to change it beyond recognition would be too strong. (And no, the issues raised by the trade agreements concluded with Canada and Japan are not comparable in this regard.)

Some may argue that the EU regime may need to change – there are commentators that claim that the notion of State aid is too broad and encompasses too many measures that fail to affect trade. Even if one assumes that this view is correct, it is probably not wise to amend the system to make sure that a trade agreement is reached with the UK. The impetus would have to come from within, not from an external stressor.

No easy way out

The above was an attempt to give an idea of what I believe are the reasons why State aid is seen as so fundamental from an EU perspective. It is not so much about emotions or curtailing the UK’s freedom as it is about making sure the EU’s own State aid regime survives the trade negotiations with the UK.

One may take the view that the EU is asking too high a price for a trade agreement and that the UK may be better off with no agreement and the regulatory freedom that comes with it. It is certainly a defensible one. On the other hand, I do not believe the EU’s demand is unreasonable, as sometimes suggested. It is reasonable to protect one’s fragile supranational arrangements.

If one takes account of the above, it becomes clear there is no obvious solution to the current situation. It makes no sense to try and anticipate the future, given the many issues at stake and given that both sides know that it is in their interest to reach an agreement (which is why they may both be prone to making compromises that would have seemed implausible ex ante).

In any event, I very much struggle to imagine a trade deal in which the UK does not agree to set up a regime that essentially mirrors the acquis on Article 107(1) TFEU and is enforced by an independent agency with powers comparable to those of the European Commission in the field. We will soon find out whether a compromise can be achieved.

Developers using Apple’s App Store have been voicing their grievances for a while. These complaints reached a whole new level last week, when a high-profile developer (or so the younger generations say) very publicly defied Apple’s rules. As expected, the firm – Epic – was expelled from the app store and the confrontation made the headlines (see here).

Reading about this sensational story made me realise it captures effectively what is new and distinctive about disputes in digital markets. There are some patterns that cut across pretty much every case against Big Tech. The point underpinning the complaints – what these seek to achieve – is identical.

The rise of the powerful complainant

Epic is a large and successful firm that offers the most popular videogame these days. It shows. The video accompanying its confrontation with Apple deserves to be watched (here, via, ahem, another platform). It is a play on Apple’s iconic 1984 ad and an astute way of pitching Epic as the outsider siding with ordinary folks against the (fruit-shaped) establishment.

Epic exemplifies the rise of the powerful complainant. This development is perhaps the single most relevant change in the competition law ecosystem over the past decade. Until relatively recently, firms – in particular large and successful ones – were wary of proactive, far-reaching competition law intervention. They all sang to the same cautious tune.

Not anymore. In fact, a few large multinationals keep urging authorities to take risks and, if necessary, depart from the case law and/or introduce new ad hoc rules. ‘Act fast, deal with the unintended consequences later’ is the mantra on the rise. Just like Epic, these players seek to persuade the wider public that these changes do not just suit their agenda but are good for society at large.

The above can hardly be criticised. It would be surprising if firms did not attempt to advance their interests on all fronts, including the legal one. The point is that the changing ecosystem introduces new, fascinating and to some extent unprecedented dynamics [note: if you happen to be a political scientist reading this post, drop me a line!).

It is all about access and rents: the fight for a larger slice of the pie

If one looks at the past and ongoing investigations involving large online platforms, it becomes apparent that there is an overarching theme cutting across all cases. In essence, complainants seek to secure access on improved terms and conditions. More precisely, they intend to capture a larger share of the rents generated by the platform.

This conclusion is obvious to draw from disputes around the App Store. Complainants in these investigations have been candid about the thrust of their claim: they consider that the 30% commission charged is excessive and thus should be entitled to a larger slice of the (apple) pie.

The rest of cases are no different, whether they are said to concern exploitative or exclusionary behaviour.

The interim measures adopted by the French competition authority – and concerning press publishers – are an obvious example (see here). The struggle for ‘equal treatment’ in Google Shopping was in essence a struggle for the traffic (and thus the rents) generated via the search engine.

Even investigations on Amazon’s marketplace are, at their heart, about rents: the data shared by retailers using the marketplace is just part of the price they pay to access the platform. It is, in other words, a fraction of the commission charged by Amazon (and should be analysed as such).

How these cases may change competition law

EU competition law occasionally ventures into the allocation of rents within a value chain. It has never been disputed that Article 102 TFEU applies to exploitative conduct by dominant firms. It is not a secret, on the other hand, that the Commission has always been careful about opening exploitation cases, for very good reasons.

It will never be never easy to determine the appropriate remuneration for a firm developing an input or infrastructure, let alone the optimal allocation of rents across the value chain. The unintended consequences of intervention along these lines are also well known.

These questions – this is not a secret either – are considerably harder when it comes to online platforms. This is so for two reasons. One relates to the dynamic and fast-moving nature of digital markets, which makes the task more prone to errors than, say, getting the access price to the telecoms network right.

The second reason is not always acknowledged. Re-allocating rents across digital markets typically goes much further than tweaking the the price of a medicine or the tariffs of a copyright collecting society. It often involves changing a firm’s product, business models and/or degree of integration.

Just think of the aftermath of Google Shopping (the design of the search engine was modified) and Android (the business model was altered) or of the implications of ruling that Apple may not impose an in-app purchase system (intervention would add an additional layer of modularity).

As already explained (see here), EU competition law is even more careful about imposing remedies leading to such outcomes (which, in turn, is the reason the indispensability condition has traditionally acted as a legal filter to limit the instances in which the system is exposed to them).

As the ‘act fast, deal with the unintended consequences later’ mantra gains traction, the exception comes closer to becoming the rule, and the system closer to dealing, on a routine basis, with the very issues it has avoided for decades. Fascinating times indeed.

Following two of my latest posts – a though experiment on smartphones and cameras, and an update on Slovak Telekom[1]– some of you have contacted me about the central argument I develop in them.

My main point in both is that the remedy is not an afterthought that is irrelevant when establishing an infringement. The remedy – or, more precisely, what a finding of liability would entail – is central to determine whether there is a breach in the first place.

This statement is true as a matter of positive law – Van den Bergh Foods encapsulates the essence of the case law – and is also true from a normative standpoint – as the post on smartphones and cameras sought to explain.

The messages I have received following these posts are certainly sensible. How can the remedy determine the applicable legal test? Is it not getting the case backwards? Should we not establish an infringement first and then figure out the way to remedy it?

These questions, no doubt reasonable, are based on a fundamental assumption, which is that the finding of an infringement and a remedy are two separate steps, independent of one another.

I do not believe this assumption reflects the reality of the interaction between legal tests and remedies. More importantly, I do not believe the Court treats the infringement and the remedy as separate steps. They are rather two sides of the same coin.

The remedy reliably tells us what a case is about, and what the legal test is

A finding of infringement and a remedy are so closely intertwined that the single most reliable way to tell whether there is a competition law breach is to inquire about how to bring the alleged breach to an end.

In other words: to understand what a firm has done (and whether what it has done is prohibited), the best approach is to ask the claimant what the alleged infringer would need to do to comply with the law.

This point can be illustrated by reference to refusal to deal scenarios. These cases are not always easy to spot, and the lines are sometimes blurred between them and other legal categories, including tying and ‘margin squeeze’.

How to tell apart one category from the other? Inquire what the endgame would be. If the endgame is one in which a court or authority mandates (directly or indirectly, implicitly or explicitly) shared access to an input or an infrastructure, then the case raises the issues that are typical of refusal to deal cases. For the same reason, indispensability would be an element of the legal test.

Suppose, conversely, the remedy is a different one. For instance, an obligation on the firm not to require exclusivity from its customers. If so, we would be in Hoffmann-La Roche and Intel territory (where nobody has ever thought of making indispensability an element of the legal test).

These statements are hardly revolutionary. It is, in essence, what the Court held in Van den Bergh Foods and then in TeliaSonera. In Van den Bergh Foods, the firm argued that indispensability was an element of the legal test. Both the General Court and the Court of Justice, in light of the endgame, concluded that the case belonged in the Hoffmann-La Roche/Intel family, and rejected the argument.

The remedy is routinely considered when calibrating the legal test

The history of competition law also teaches us that the remedy (that is, what the case would involve in practice) has been routinely considered when designing the appropriate legal test.

In particular, courts tend to craft strict legal tests where a finding of infringement would demand the administration of a regulatory-like remedy (such as mandating access obligations and setting the terms and conditions under which access is to be granted).

Again, this idea is hardly revolutionary, and is part of our law. Why is indispensability part of the legal test in refusal to deal cases? Magill and Bronner seem to reflect a deep awareness of the implications of a finding of infringement.

Think of Magill. Again, the question is: what is the endgame of ruling that a refusal to license copyright-protected information is abusive? Imposing a duty to license on the right holder. By definition, there is a tension between such an endgame and the logic of intellectual property systems (the very point of which is the right to refuse to license).

It is not a surprise, against this background, that the Court confined to ‘exceptional circumstances’ the instances in which Article 102 TFEU can be relied upon to impose a duty to license (thereby minimising the tension with intellectual property systems).

The uncertainties and complexities of administering a remedy have also been mentioned as factors to consider when crafting a legal test. In his celebrated article on essential facilities, Phillip Areeda – the ultimate centrist in our field – expressed the view that ‘[n]o court should impose a duty to deal that it cannot explain or adequately and reasonably supervise’ and went on to warn against the imposition of regulatory-like obligations.

The EU experience shows that competition authorities do not fare much better than courts when it comes to the administration of these proactive remedies. The failure of the media player remedy in Microsoft I often comes up in these discussions. The principles-based approach to the question in Google Shopping and Android, and the resulting state of limbo (which appears to continue), another one.

Big Tech and legal tests: the question that will not go away

The discussion above gives, hopefully, a sense of what is going on, from a legal standpoint, in relation to Big Tech. Many of these cases demand regulatory-like intervention, and this, more frequently and more intensely than in the past.

It would seem that some competition authorities are more confident than they used to about their ability to redesign products and to tweak business models (other authorities, like the CMA, are more cautious, as the Final Report on digital advertising shows).

This increased confidence tends to trickle down into the interpretation of competition law provisions. The link between the nature of the remedy and the legal test, which acted as a limit on intervention, is now questioned (with the institutional implications that follow, in particular in a decentralised system). Fascinating, and potentially transformative, times.

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[1] Speaking of which, AG Saugmandsgaard Øe’s Opinion is out on 9 September.