Chillin'Competition

Because we tend to be absorbed by the latest news, we may forget that there are several pending cases of interest before the Court of Justice. One of these is Servizio Elettrico Nazionale, which is a preliminary reference lodged back in July of this year.

The interest of this reference, from the Italian Consiglio di Stato, is that it raises a number of fundamental issues about the interpretation of Article 102 TFEU.

While the case law seems to provide an answer to all the questions, a judgment addressing some core principles is likely to become a reference. The questions also provide an occasion to look back and reflect on the contributions made by the Court over the past decade.

I thought it would make sense to go over four of the five points raised in the submission and start a discussion from there. I very much look forward to your thoughts.

May conduct that constitutes an abuse of a dominant position be completely lawful in and of itself and be classified as ‘an abuse’ solely because of the (potentially) restrictive effect created in the reference market, or must that conduct also be characterised by a specific ‘unlawful’ component, represented by the use of ‘competitive methods (or means) that are different’ from those that are ‘normal’? In the latter case, what criteria should be used to establish the boundary between ‘normal’ and ‘distorted’ competition?

Thoughts: This is an important question of principle. It is arguably the most interesting in theory and perhaps the least crucial in practice. I have the impression that the divide between ‘proper’ and ‘improper’ forms of competition is relevant, but not in the sense suggested in the reference.

I understand the question to ask, in essence, whether there is something inherently bad, ‘improper’ or abnormal in conduct that qualifies as abusive under Article 102 TFEU.

As I understand the case law, it seems clear that conduct that is not inherently anticompetitive (and as such a valid expression of competition on the merits) can be found to be abusive if certain conditions are fulfilled.

There is nothing inherently anticompetitive, for instance, in a refusal to license an intellectual property right. The point of such rights is to reward inventive and creative efforts. And exploiting the fruits of one’s efforts as one sees fits is arguably the purest and least controversial expression of competition on the merits.

However, even a refusal to license can amount to an abuse in the exceptional circumstances defined in Magill and IMS Health.

As you can see, this example suggests an an affirmative answer to the question. It is certainly not the only one. A reading of the case law shows that other valid expressions of competition on the merits can be abusive where certain conditions are fulfilled.

For instance, the Court clearly held in Deutsche Telekom and TeliaSonera that a ‘margin squeeze’ is not, in and of itself, contrary to competition on the merits. Accordingly, it is only abusive where it is likely to have anticompetitive effects.

At its heart, the question raised by the Consiglio di Stato points to the divide that exists in the case law between practices that are inherently against competition on the merits (‘by object’ conduct) and those that are not inherently anticompetitive but that may be caught by Article 102 TFEU where some conditions are met (‘by effect’ conduct).

I wrote about ‘by object’ and ‘by effect’ abuses here. It is a divide at which the Court hinted in Generics (para 155). It would seem that the line between ‘proper’ and ‘improper’ conduct is relevant, but not in the sense suggested in the preliminary reference.

The divide between ‘proper’ and ‘improper’ conduct is useful not so much to define the boundaries of Article 102 TFEU but to identify the instances in which an analysis of effects is necessary.

Thus, only conduct that is inherently at odds with competition on the merits can be found to be abusive without conducting an evaluation of its likely impact.

For instance, pricing below average total costs but above average variable costs is abusive irrespective of its effects where it is part of an exclusionary strategy (AKZO, para 72).

Absent the element of impropriety, it would be necessary to examine the likely effects of the practice on competition (Post Danmark I, paras 38 and 39).

Is the purpose of the concept of abuse to maximise the well-being of consumers, with the court being responsible for determining whether that well-being has been (or could be) reduced, or does the concept of an infringement of competition law have the function of preserving in itself the competitive structure of the market, in order to avoid the creation of economic power groupings that are, in any case, considered harmful for the community?

Thoughts: Again, it seems to me that the answer to this question should not be controversial. The Court has repeatedly held that a finding of abuse is not contingent on harm to consumer welfare. Article 102 TFEU is concerned with the protection of the competitive process (or ‘competition as such’).

More precisely (and as consistently held by the Court over the past decade), the law of abuses is concerned, at least as a matter of principle, with equally efficient rivals.

The only exception of which I can think is the Magill/IMS Health doctrine, where the Court required evidence of consumer harm (i.e. the new product condition). For the rest, one cannot credibly argue that such evidence is a precondition to establish an abuse.

In the case of an abuse of a dominant position represented by an attempt to prevent the continuation or development of the existing level of competition, is the dominant undertaking in any case permitted to prove that the conduct did not cause any actual harm, despite its abstract ability to generate a restrictive effect? If the answer to that question is in the affirmative, for the purposes of assessing whether an atypical exclusionary abuse has occurred, must Article 102 TFEU be interpreted as meaning that the Authority has an obligation to examine specifically the economic analyses produced by the party concerning the actual ability of the conduct examined to exclude its competitors from the market?

Thoughts: Again, we seem to be on well-trodden ground here. On the one hand, the Court has clarified (in Post Danmark II, para 65) that the effects on competition must not be ‘purely hypothetical’. The analysis of actual or potential effects must always consider the relevant economic and legal context of which the practice is a part.

On the other hand, the Court has also clarified that the effects need not be actual. Potential effects on competition are sufficient to establish an abuse.

It may be difficult to distinguish between these concepts (actual vs potential effects; and potential effects vs the threshold of effects – capability likelihood and so on). This is something I acknowledged and discussed in this paper on anticompetitive effects.

Must an abuse of a dominant position be assessed solely in terms of its effects on the market (including merely potential effects), without regard to the subjective motive of the agent, or does a demonstration of restrictive intent constitute a parameter that may be used (even exclusively) to assess the abusive nature of the dominant undertaking’s conduct? Does such a demonstration of the subjective component serve only to shift the burden of proof to the dominant undertaking (which would have the burden, at this stage, of providing evidence that the exclusionary effect is absent)?

Thoughts: I do not believe one can argue any longer that the subjective intent of a firm is either necessary or sufficient to establish an abuse. Subjective intent is not necessary in the sense that, ever since Hoffmann-La Roche, the Court has ruled that the notion of abuse is an objective one. However, a firm’s motives may complete the picture (AKZO on predatory pricing, mentioned above, is an excellent example).

On the other hand, subjective intent, alone, is not sufficient to establish an abuse. In this regard, Generics was particularly explicit and helpful. The Court held that the application of Article 102 TFEU ‘presupposes that that conduct was capable of restricting competition and, in particular, producing the alleged exclusionary effects’ (para 154).

It is therefore clear after Generics it is clear that a practice is not abusive if it is incapable of having anticompetitive effects. Such effects are sometimes presumed, and thus need not be established by an authority or claimant (this is so in relation to ‘by object’ conduct).

The above said, a dominant firm can always provide evidence showing that the practice, in its economic and legal context, is incapable of having effects (which is the fundamental contribution made by the Court in Intel).