Chillin'Competition

As an academic, I sometimes feel that ideas of principle are not discussed often enough. One misses, every now and then, deep exchanges on substantive issues. Sometimes there is so much noise around these debates that, even when they take place, they are silenced or not sufficient attention is paid to them. Therefore, I very much welcome Damien Geradin‘s post discussing my views on the ongoing Apple investigation (see here).

When I read it, I felt that it provided a wonderful occasion to discuss the case law on anticompetitive effects. By the way, much of what follows was already addressed at length in my paper on the notion of effects, which I am proud to be publishing with the Journal of Competition Law and Economics (coincidentally co-edited by Damien himself).

I will start this post by clarifying that, contrary to what Damien appears to suggest, I do not believe that the Statement of Objections issued by the European Commission is a ‘rather reckless’ move. There is nothing reckless or unusual in opening an investigation.

My own research has shown me that the European Commission regularly tests the outer boundaries of the law, and occasionally interprets Treaty provisions in a way that is not immediately obvious to reconcile with the case law. We have seen examples this very week, with the annulment, by the General Court, of the Commission decision in Amazon’s tax ruling case (see here).

There is nothing reckless in that. Quite the opposite. If you ask me, an authority that dares take risks when enforcing the law is one of the treasures of the EU competition law system (just compare and contrast with the systemic underenforcement of antitrust provisions in the US).

The practical implication, however, is that some Commission decisions will fail to persuade the EU courts and thus will occasionally be annulled. I have written that the annulment of a Commission decision is nothing more than the sound of the system working. It means that both the EU courts and the authority are serving the public interest by doing what is expected from them.

Here’s hoping the competition law community will stop using sensational vocabulary (e.g. defeat, blow) when administrative action is quashed and take it for what it is: a manifestation of the routine operation of the law and its institutions.

Most of the points addressed by Damien in his post concern the notion of anticompetitive effects. He mentions most of the key cases, which helps structure the discussion. I will focus on this aspect of the post. If there was any doubt, I am interested in the law and have nothing to disclose in this or indeed any other case (on this point, by the way, I am particularly grateful to Damien for the clarity of his disclosure).

Losing customers to a dominant firm is not in itself evidence of anticompetitive effects: I explained in my post (and in the comments section) that evidence that rivals have lost, or are likely to lose, customers to the dominant firm (or, as a commentator – Charlie – and Damien coincide in putting it, ‘some diversion to Apple’) is insufficient to show anticompetitive effects within the meaning of Article 102 TFEU. Anticompetitive effects under that provision (and Article 101 TFEU) necessitate more than evidence in this sense.

I would not have anticipated that this point would be controversial. After all, we have a case (Post Danmark I) expressly addressing it. The facts of the case reveal that the new entrant had lost two customers to the dominant firm. This fact, alone, was deemed insufficient to justify a finding of effects.

The Court examined the nature of the practice and the features of the relevant market (paras 38-39) and concluded that, in spite of losing some customers to the dominant firm, the new entrant was willing and able to fight back (it maintained its distribution network and was even able to gain its two customers back after a while).

Against this background, it seems clear to me that, under the Court’s interpretation of Article 102 TFEU, the inquiry should revolve around the actual or potential impact of the practice on rivals’ ability and incentive to compete: so long as they are likely to remain willing and able to compete on the merits (and thus place pressure on the dominant firm), the practice will fail to have effects.

As in Post Danmark I, evidence that the new entrant maintained (or will likely maintain) its assets and means to compete is particularly valuable. Other factors in this regard have been identified in subsequent cases: for instance, the coverage of a practice has emerged as a crucial consideration since Post Danmark II and Intel.

A competitive disadvantage is not in itself evidence of anticompetitive effects: Damien refers to Deutsche Telekom in his discussion. It is particularly useful in the context of the Apple investigation. After all, a ‘margin squeeze’ is the prime example of a raising rivals’ costs strategy. The crucial point in Deutsche Telekom is that, according to the Court, evidence of a ‘margin squeeze’ is, in and of itself, insufficient to show anticompetitive effects (paras 250-253).

In other words: evidence that a practice would disadvantage rivals to such an extent that it would force them to sell at a loss does not suffice to establish anticompetitive effects. Something more, to be determined by paying attention to the nature of the practice and the features of the relevant market (e.g. whether there are alternatives to the incumbent’s network), is necessary.

Anticompetitive effects need to be considered by reference to the market as a whole: Generics, mentioned by Damien too, provides a valuable clarification. In that case, the Court ruled that anticompetitive effects involve harm to competition that goes beyond harm to individual rivals (para 172). In other words: the mere fact that a particular firm no longer has (or will likely no longer have) the ability and incentive to compete is insufficient to trigger Article 102 TFEU. Again, the factors mentioned above would need to be considered.

On business models and competition law: I will say a final word about business models. I noted in my post a change of attitude in this regard by the Commission: from reluctance, absent exceptional circumstances, to challenge business models to the relatively frequent enforcement of Article 102 TFEU in relation to them. It is yet another example of EU competition law becoming increasingly proactive.

Damien rightly mentions Microsoft as an example in which a business model was changed. The case illustrates, better than any other, the point above. The threshold for intervention in Microsoft is consistent with the exceptionality of cases challenging business models under traditional competition law. After all, a variation on the Magill/IMS Health test was applied in the case (requiring evidence, in particular, of indispensability within the meaning of Magill).

Times seem to be changing. Rather than judging whether the move is good or bad, it is important to consider the consequences that follow. In this sense, my post mentions that business model cases are trickier for competition authorities, in particular because establishing a restriction against the relevant counterfactual is considerably more complex.