Chillin'Competition

For a practice to amount to an infringement, should it be likely to restrict competition? Is capability enough? Do capability and likelihood have the same meaning? These are basic questions that, for some reason, keep coming back. I was reminded of them when going through Lithuanian Railways. In its judgment, the GC refers to the European Commission’s view, according to which there is a single threshold of effects in the case law, to which the capability/likelihood label applies. Pursuant to this interpretation, capability and likelihood would be synonymous (even though the plain meaning of the words is obviously different).

A close examination of the case law, however, shows that there are indeed two thresholds in the case law, one of capability and one of likelihood. This conclusion is apparent when one pays attention not only to what the Court says but to what it does. It is apparent, in other words, when one looks beyond the words and focuses on how the analysis is actually performed. This is something I explained in my paper on effects, but it is worth devoting a post to the matter and start, hopefully, an exchange.

A threshold of capability is relevant when the practice is prima facie prohibited irrespective of its impact (that is, it is a ‘by object’ infringement, whether under Article 101 or 102 TFEU). Capability means that anticompetitive effects are a plausible outcome of the implementation of the practice. Accordingly, it is a threshold that is easily satisfied. The Court was explicit on this point in T-Mobile, where it held that, for by object conduct to amount to an infringement, it ‘must simply be capable’ of restricting competition. In doing so, it rejected the view of the referring court, which suggested a higher threshold of effects to establish a breach of Article 101(1) TFEU.

AKZO provides a wonderful example of the practical operation of this (relatively low, easy to meet) threshold. Predatory pricing within the meaning of that judgment is prohibited as abusive without it being necessary to engage in a case-by-case analysis of its effects. As explained by the Court in para 72 of the ruling, below-cost prices are capable of excluding equally efficient rivals. They are not necessarily likely, let alone certain, to do so. However, capability is enough when predatory pricing à la AKZO is at stake. Why? Because either the below-cost prices have no plausible purpose other than the exclusion of rivals (pricing below AVC) or because the anticompetitive object is established by the claimant or authority.

A threshold of likelihood, on the other hand, is necessary when ‘by effect’ conduct is at stake. Accordingly, it is not sufficient to show that anticompetitive effects are a plausible outcome of the implementation of the practice. Something more, to be established in light of the features of the relevant market, is required. This conclusion is apparent when one examines Deutsche Telekom and Post Danmark II.

In Deutsche Telekom, the European Commission argued – not unreasonably – that a margin squeeze provides, in and of itself, sufficient evidence of an abuse. This argument would be correct if a threshold of capability were enough in relation to this conduct. It is no doubt plausible that a ‘margin squeeze’ leads to the exclusion of equally efficient rivals. However, the Court of Justice did not follow the Commission and held that the exclusionary impact of a ‘margin squeeze’ will have to be assessed by reference to, inter alia, the extent of the dominant position, the features of the market and the nature of the practice. Irrespective of the label, the threshold is appreciably higher than in AKZO (and appreciably higher than the threshold of plausibility suggested by the Commission in its Deutsche Telekom decision).

Consider now the facts at stake in Post Danmark II. The case concerned the behaviour of an incumbent in a partially liberalised industry. The practice, moreover, involved a scheme of retroactive rebates calculated over a one-year period. Such a scheme is, at the very least, capable of having anticompetitive effects. The exclusion of equally efficient rivals is more than plausible. However, plausibility was not deemed enough in the case. Thus, the Court held that the analysis must consider other factors, including the coverage of the practice. Call the threshold what you will, it is higher than the plausibility threshold embraced in AKZO.

The judgment that perhaps best shows that there are two thresholds in the case law, each with a distinct scope of application, is Post Danmark I. As in AKZO, the practice at stake involved below-cost pricing. And, as mentioned above, we know since AKZO that below-cost pricing is capable of excluding equally efficient rivals. The threshold that was considered sufficient in AKZO was not considered sufficient in Post Danmark I. Why? The object of the practice was not anticompetitive (there was no evidence of an exclusionary plan, and the prices were not below AVC, or an equivalent measure).

Accordingly, the evaluation of the effects in Post Danmark I had to dig deeper into the features of the relevant market and the impact of the conduct therein. It was not sufficient to show that exclusion was plausible; it was necessary to establish that it was likely. In this sense, the Court noted that its main rival had not been excluded. In fact, it had been able to gain two customers back from the dominant undertaking. Against this background, the Court strongly signalled to the referring court that the behaviour was not abusive.

I look forward to your comments. In line with what was suggested above, the key lesson is that, in the continental tradition, paying careful attention to what courts actually do (how the analysis is performed, what factors are considered) is as important, if not more, as meticulously scrutinising what they say.

Thibault Schrepel has been kind enough to invite me to write a piece for his Concurrentialiste (see here). It was a good chance to explore some of the themes that are central to my ongoing research projects and to share my thoughts on some of the proposals to regulate digital markets that are doing the rounds. My message? Regulatory design is key, and there are instances in which giving discretion to an authority might not be in the latter’s interest (or the public interest at large). I reproduce my post below, and very much look forward to your comments. Thanks again for the invitation, Thibault!

Emerging regimes for the regulation of digital markets share a common philosophy. They are grounded on the belief that, if authorities enjoyed more discretion and, in the same vein, if the constraints to which they are subject were reduced, they would be in a position to intervene fast, and adopt the sort of far-reaching remedies which, the argument goes, digital markets demand. In this sense, the new instruments represent, first and foremost, a departure from the limits of competition law systems. Establishing the anticompetitive object or effect of a practice and ensuring that the theories underpinning intervention reflect mainstream views are seen, from this perspective, as a burden that may dangerously delay much-needed action.

There are reasons to question whether this philosophy will deliver on its promises. Granting discretion to an authority to fine-tune digital markets whenever it deems it necessary does not address the fundamental challenges raised by the measures proposed. The phenomenal difficulty that comes with the latter does not relate to the lack of discretion, but to the very nature of the intervention expected from authorities. Redesigning products (as in Google Shopping), altering business models (as in Android) and re-allocating rents across the supply chain (is a 30% commission too much or just about appropriate?) are complex tasks, prone to errors, which are not made any easier by doing away with the need to show the anticompetitive object and/or effect of a practice (or the need to weigh such effects against any pro-competitive gains). The lengthy aftermath of the Google saga, and the aura of limbo and uncertainty that surrounds the remedies implemented in those cases, provides eloquent evidence in this sense.

This piece, however, makes a different point. It is submitted that granting discretion to an authority to fine-tune digital markets does not necessarily do it any favours. On the contrary. Depending on the design of the regime, discretion may in fact weaken it vis-à-vis stakeholders. One of the most precious powers of an administrative authority (and all of us, really) is the ability to say no. The ability, in other words, to see off pressure from firms and governments and take a decisive stand on a particular issue (or not take a stand at all). Paradoxically, the problem with discretion is that it empowers the authority to reach virtually any decision it desires from a policy-making standpoint. Once this impression is created, it may be difficult for an authority to justify why it favours certain outcomes and why it does not opt for the maximalist (or minimalist) positions allowed under the regime.

It is not difficult, on the other hand, to anticipate the behaviour of stakeholders potentially benefitting from regulatory intervention. It is natural for them to try and secure the outcomes that, within the boundaries of what is possible, best serve their interest. Where, for instance, a break-up of Big Tech firms is allowed under the regime, there is no downside, from their perspective, in pushing for structural action. An authority that is serious about meeting the objectives set in legislation, stakeholders would claim, should seek the most effective remedy, and the one that genuinely preserves competition on adjacent markets. If the regime requires intervention, and allows for the break-up of firms, all the pressure lies with the authority.

The aftermath of Google Shopping and Android gives a flavour of how these stakeholders may react to authorities’ newly found discretion. In the first of these cases, the European Commission imposed a duty of neutrality regarding the way in which the relevant search results are displayed. Ostensibly, the firm’s chosen path complies with the obligation, even if it just one of many ways to align its behaviour with the decision’s requirements. Rivals and their advisers, however, have been repeatedly pushing – again, as one would logically expect – for interpretations of the non-discrimination duty that are more favourable to their own interests. These attempts have little chance of success (and so the European Commission has signalled) because of the very constraints that come from the competition law system. The point of remedies under Regulation 1/2003 is to bring the infringement to an end, not to reshape markets to optimise rivals’ chances of success. Now think of how different the picture would be – and how much more powerful rivals would – if this constraint disappeared and every approach – from the minimalist to the maximalist – were in theory possible and left in the hands of the authority.

If you want another example of an area of the law where the European Commission enjoys broad discretion and is, as a result, subject to pressure to reach certain outcomes, think of State aid. Under Article 107(3) TFEU, the authority is empowered to define, as it sees fit, the instances in which subsidies and similar measures are in the interest of the EU as a whole. And it is not necessary to explain at any length why lobbying by EU Member States awarding aid can be just as formidable as the calls for action coming from dozens of firms operating in the digital sphere.

Of particular interest are the insights to draw from the way in which the European Commission has chosen to exercise its discretion in the field. Years of enforcement have taught the authority that it is unlikely to withstand pressure from EU Member States with a stake in a particular measure. It just does not trust itself. In this sense, it knows that its discretion is most powerful and best used when it is constrained ex ante and thus leaves minimum (if any) scope for manoeuvre in individual cases. Just like Ulysses when he reached the Land of the Sirens, the European Commission has tied its hands tightly to ensure that its decisions are in the public interest (and it is able to say no).

If you have never done so, take a look at State aid instruments implementing Article 107(3) TFEU – say for instance the Guidelines on regional aid, or the General Block Exemption Regulation. The most apparent feature of most of this body of law is its infinite dullness: pages and pages of figures detailing to the millimetre the intensity of the aid that is allowed. Beneath the dullness, however, lies the fundamental lesson to draw for the future regulation of digital markets: once the European Commission is freed from the constraints coming from the EU competition law system, it will have to devise a set of sound, effective and meaningful constraints to make sure it acts in the public interest. If it does not do so, it risks losing control of policy-making altogether.

It has become a long-established tradition for our friends Fernando Castillo de la Torre and Eric Gippini-Fournier to coordinate a high-level, one-afternoon seminar in the context of the annual IEB competition law course.

This is the first year where participants will not be travelling to Madrid. While we very much hope that this will change next year, the online format (we will be using Microsoft Teams) will give you the opportunity to discover one of the best kept secrets in the world of competition law events. The program speaks for itself:  

Friday, 5 February 2021

Moderators: Fernando Castillo de la Torre & Eric Gippini Fournier. European Commission, Legal Service.

16:00 –18:00: Competition investigations in the digital era: recent case law and practice about powers of investigation

‐Marc Van der Woude. President, General Court of the European Union.

‐Cani Fernández. President, Spanish Competition Authority (Comisión Nacional de los Mercados y la Competencia).

‐Nathalie Jalabert Doury. Partner, Mayer Brown.

‐Anthony Dawes. European Commission, Legal Service.

18:00 –20:00: Article 102 –Looking past (beyond) “GAFA”: recent cases and current issues outside digital markets

‐Pierre Régibeau. Chief Economist, European Commission.

‐Evelina Kurgonaite. Secretary General, Fair Standards Alliance.

‐Luc Gyselen. Partner, Arnold & Porter.

‐Ekaterina Rousseva. European Commission, DG COMP.

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Registration information is available here: 

Should you have any questions, you can also write to competencia@ieb.es