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Archive for March 25th, 2021

Thoughts on today’s judgments in Lundbeck and Slovak Telekom: expected and valuable clarifications for the future

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The Court of Justice has delivered an important set of judgments in the Slovak Telekom and Lundbeck cases (see in particular here and here). As widely anticipated, all appeals have been dismissed. This fact does not deprive the cases of interest, which always lied in the points of principle at stake in them.

The Slovak Telekom case raised issues relating to the scope of Bronner and the indispensability condition. The Court confirms that Bronner is alive and well and defines the scope of the ruling in a manner that is consistent with its spirit and logic (today’s judgments are very much in line with the Advocate General’s Opinion, which we discussed here). Crucially, the judgment also provides a valuable template for the evaluation of cases in digital markets.

The issues raised in Lundbeck, in turn, concerned the notion of restriction by object. It was an occasion to test the meaning of the ‘robust and reliable experience’ test laid down in Budapest Bank. Unsurprisingly, the Court concludes that the lack of experience in pay-for-delay cases is of no assistance to avoid a finding of a ‘by object’ infringement. As I explained here, cartel-like conduct is cartel-like conduct, irrespective of whether it is disguised as a pay-for-delay arrangement. And we have decades, if not centuries, of ‘robust and reliable’ experience concerning cartels and analogous practices.

In addition, the Court dismisses, in Lundbeck, the interpretation of the counterfactual advanced by the appellants. Again, this is hardly surprising. I explained in this post why the appellants’ understanding of the notion was not obvious to reconcile with the case law and why, in all likelihood, it would be rejected by the Court (in the same way it was rejected by AG Kokott).

Slovak Telekom: Bronner is alive and well, and has a definite scope of application

Following AG Saugmandsgaard Øe’s Opinion in Slovak Telekom, some commentators expressed concerns about the demise of Bronner. We can now safely say that Bronner is alive and well: in fact, its scope of application and the rationale underpinning it have never been clearer.

In essence, the Court has ruled that the indispensability and elimination of all competition conditions are part of the legal test where intervention would force a dominant firm to conclude a contract with a competitor. As the Court explained in the Slovak Telekom judgment:

’45. The imposition of those conditions [indispensability and elimination of all competition] was justified by the specific circumstances of that case [Bronner] which consisted in a refusal by a dominant undertaking to give a competitor access to infrastructure that it had developed for the needs of its own business, to the exclusion of any other conduct’.

In other words: the key lies in the remedy (in what a finding of infringement would entail in effect). By the same token, where intervention in a competition law case does not necessitate a duty to deal, indispensability would not be an element of the legal test. Such was the case in Slovak Telekom (and TeliaSonera, which is also confirmed), where remedial action only required the Commission to tackle the unfair nature of the practices involved.

The rationale behind the definition of the scope of Bronner is twofold. First, the Court explains that intervention mandating shared access to a facility interferes with the right to property and with freedom of contract (para 46). Second, it concludes (in para 47, and in line with AG Jacobs’ Opinion in Bronner) that promoting short-term competition by means of shared access may be harmful in the long run insofar as it would negatively impact firms’ incentives to invest and innovate.

These clarifications provide a useful template for the evaluation of cases in the digital arena. We now know that, when intervention interferes with a firm’s right to property and/or its freedom of contract, indispensability (and the elimination of all competition) will be a precondition for intervention.

What are the remaining pieces in the puzzle? Mandated shared access to a facility is not the only way in which intervention might interfere with a firm’s right to property. Such interference would also occur when a firm is asked to cease an activity or to sell its assets to a third party (a structural divestiture). Consistency would demand that such forms of intervention, which intrude as much as a duty to deal (if not more) with the right to property, be treated in the same way.

Where does this leave us for the future? My impression is that indispensability would be an element of the legal test, inter alia, in the following scenarios:

  • Intervention requires, in effect, a firm to remove some features from a product (say, a camera from a smartphone).
  • Intervention requires, in effect, a firm to redesign its product so that rivals have shared access to it (for instance, an interoperability duty).
  • Intervention requires, in effect, a firm to change its business model and adopt one that requires dealing with third parties with which it has chosen not to deal (for instance, by forcing a firm to start licensing a product).

Lundbeck: some refinements, and more clarity, about the scope of restrictions by object

Entire libraries have been written about the notion of restriction by object in the past couple of decades. Lundbeck confirms that we may be reaching the ‘end of history’ in relation to the notion. Most controversies have now been addressed and future rulings will provide, if at all, incremental refinements to the concept. Today’s judgments confirm the fundamentals about the Court’s approach. First, considering whether an agreement is restrictive by object demands a case-by-case, context-specific inquiry (see para 115 of Lundbeck).

Second, the fundamental question in this regard is whether the agreement can be explained on grounds other than the restriction of competition. If there is an alternative rationale for the practice, its treatment as a ‘by object’ infringement would not be warranted. In the specific context of pay-for-delay agreements, the analysis would revolve around the size of the payment (see for instance para 115 of the Lundbeck judgment). The qualification of the agreements in Lundbeck was particularly straightforward, as no plausible pro-competitive rationales had been advanced (para 118).

At the margin, however, the judgments provide useful clarifications. Reasonably, Lundbeck argued that there was no experience about the agreement and that, at the time of the infringement, it was not clear whether they were in breach of Article 101(1) TFEU. As a matter of substantive law, this argument was not deemed persuasive.

The Court’s reasoning comes across as sensible. There is certainly a great deal of experience about ‘naked’ market-sharing arrangements. Accordingly, once it is shown, to the requisite legal standard, that the object of the agreement is to restrict competition by paying a potential competitor to stay out of the market, we are in the realm of cartel-like conduct, which has long been known to be harmful, by its very nature, to the competitive process.

A second point concerned the counterfactual. Lundbeck argued in the case that the qualification of the agreement as a restriction by object demands the evaluation of a ‘counterfactual scenario’. This argument failed. According to the appellants, this analysis would have revealed that the generic producers would not have entered the market.

As explained in the judgment, the case law cannot be interpreted as supporting such an interpretation of the notion of restriction ‘by object’. Showing that a firm is a potential competitor is not the same as showing that its entry into the market would have occurred. In this sense, Lundbeck’s argument was found to relate more to the evaluation of the restrictive effects of the agreement than its ‘precise purpose’ (para 140). If such an interpretation of the ‘counterfactual scenario’ were embraced, the divide between object and effect would become blurred (ibid).

The above seems uncontroversial and fully in line with the case law. The point of the counterfactual at the ‘by object’ stage is not to assess the impact of the agreement, but its object. It is already well-established case law that the counterfactual can be relevant, at the ‘by object’ stage, in the following scenarios:

  • To show that there are ‘insurmountable barriers to entry’ and therefore that the generic producer is not a potential competitor (see in this sense Generics). In such circumstances, the agreement would not restrict competition, whether by object or effect.
  • To show that the agreement is capable of having pro-competitive (or at least ambivalent) effects and therefore its object is not the restriction of competition (see in this sense Generics and Budapest Bank).
  • To show, more generally, that the agreement is not liable to restrict competition in the economic and legal context of which it is a part (see in this sense Murphy).

Nothing in Lundbeck challenges the above aspects of the case law. Accordingly, these are factors to consider when evaluating whether an agreement is restrictive by object. Whether these steps are labelled counterfactual or otherwise, seems immaterial. As we have said many times here, fortunately competition law places substance above form.

I very much look forward to your comments. And please stay tuned for a more in-depth analysis of some aspects of the judgments.

Written by Pablo Ibanez Colomo

25 March 2021 at 2:09 pm

Posted in Uncategorized