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The German Federal Court of Justice rules on MFNs: object, ancillarity and the fragmentation of the EU legal order

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The post published on Monday (see here) sought to explain the tensions that tend to emerge in relation to the interpretation of Article 101(1) TFEU. The experience of the past few years shows that the analysis of the objective necessity of a practice and/or of the ancillarity of some clauses are occasionally conflated with the evaluation of the restrictive object of an agreement.

As the ISU judgment shows, it is sometimes claimed that, unless an agreement is objectively necessary to attain a pro-competitive aim, it is restrictive by object. This interpretation of Article 101(1) TFEU is at odds with decades of consistent case law, but it is still relatively commonplace. I was reminded of this understanding of the provision when the German Federal Court of Justice announced its ruling on Most Favoured Nation Clauses (MFNs) earlier this week.

The document of the judgment is not yet available, but a press release explains the key points here. The case concerned the so-called ‘narrow’ MFNs. Even though these clauses have less restrictive potential than the so-called ‘wide’ ones, the German BGH ruled that they are restrictive of competition under Article 101(1) TFEU and do not fulfil the conditions set out in Article 101(3) TFEU.

While we wait for the judgment, there are three salient aspects of the press release that are worth discussing at this stage:

  • First, how the case was framed and approached, which is most unusual in contemporary competition law: at least in light of the press release, it looks like the discussion revolved around the application of the ancillary restraints doctrine and of Article 101(3) TFEU.
  • Second, the BGH may have departed from the case law of the Court of Justice on a key point: contrary to what the press release appears to suggest, the pro-competitive aspects of an agreement are relevant (and must be considered) under Article 101(1) TFEU.
  • Third, the BGH did not refer the case to the Court of Justice for a preliminary ruling. To the extent that the judgment may have departed from the case law on the abovementioned point, it raises the issue of the fragmentation of the EU legal order.

Ancillarity, object and Article 101(3) TFEU

The press release issued by the BGH suggests that the compatibility of narrow MFNs with Article 101 TFEU revolved around two questions: whether the clauses can escape the prohibition in accordance with the ancillary restraints doctrine and whether they fulfil the conditions defined in Article 101(3) TFEU.

There are two key intermediate steps that are nowhere to be found in the press release: first, whether the narrow MFNs are restrictive of competition by object and, second, whether they have, or are likely to have, anticompetitive effects. The judgment jumps (or so it seems from the information available) from ancillarity to Article 101(3) TFEU.

This approach comes across as unusual for a number of reasons. To begin with, the BGH seemingly accepted that ‘narrow’ MFNs may be explained as a means to address free-riding. This point would have been central to the assessment of whether the clauses are restrictive of competition by object. Suffice it to remember that free-riding considerations determined the outcome in, inter alia, Cartes Bancaires.

There are, however, no traces of the question of whether ‘narrow’ MFNs amount to a restriction by object in the press release. There is a chance that, just as in ISU, the ancillary restraints doctrine was conflated with the evaluation of the object of the clauses.

Judgments like Cartes Bancaires and Budapest Bank show that the above are two separate inquiries. More precisely, the fact that the ancillary restraints doctrine does not apply in a given case does not mean that the agreement is necessarily restrictive of competition, let alone by object. It simply means that the assessment under Article 101(1) TFEU has to move to the object and, if needed, the effect stages.

The case law makes it clear that an agreement may escape the ‘by object’ qualification irrespective of whether it is objectively necessary within the meaning of the ancillary restraints doctrine. There was no objective necessity test in Delimitis, Asnef-Equifax or Cartes Bancaires. However, in all these cases, the Court expressly ruled that the object of the agreement was not anticompetitive and that an analysis of its effects was necessary.

The BGH judgment, just like ISU and the CMA decision in Ping (to mention another salient example in which the same error of law was committed), suggests that some ideas about the operation of Article 101(1) TFEU are not easily abandoned, even when they are clearly at odds with the case law. Several factors may potentially explain this reality. In this sense, the judgment suggests that how cases are framed and argued before courts may well contribute to it.

The role of pro-competitive effects under Article 101(1) TFEU

The press release is notable in that it appears to suggest that, according to the BGH, the pro-competitive aspects of the MFN clauses (namely, the fight against free-riding) can only be considered under Article 101(3) TFEU, where they would be weighed against any anticompetitive effects.

On this point (and while we wait for the judgment), it is important to emphasise that, after Generics, there should be no doubt that the pro-competitive aspects of an agreement are relevant under Article 101(1) TFEU. More precisely, the Court made it clear that, as elements of the economic and legal and economic of an agreement, they ‘must’ be considered under the first paragraph of the provision (Generics, para 103).

What is more, the Court expressly ruled that the above should not be construed as meaning that there is such thing as a rule of reason under Article 101(1) TFEU (Generics, para 104). Thus, and contrary to what the press release appears to suggest, there was a role for the pro-competitive aspects of ‘narrow’ MFNs under Article 101(1) TFEU in the case (just as there was in Cartes Bancaires and Budapest Bank) and that such role does not necessitate any balancing assessment.

Suffice it to remember, in this regard, the centrality of the pro-competitive aspects of the agreement in Budapest Bank. The fact that the agreement is capable of leading to pro-competitive or at least ambivalent gains is, the Court confimed, a key consideration to establish a restriction of competition under Article 101(1) TFEU (Budapest Bank, paras 82-83).

The risk of legal fragmentation and the role of the Court of Justice

Regulation 1/2003 sought the decentralisation of EU competition law. The flurry of enforcement across the EU attests to the resounding success of this landmark piece of legislation. At the same time, some developments show that with decentralisation comes (inevitably) a real risk of legal fragmentation.

The risk of the fragmentation of the EU legal order originates from two main sources. On the one hand (the BGH judgment hints at this) some interpretations of Articles 101 and 102 TFEU are not abandoned, even when they are at odds with a plain reading of the case law.

There are, on the other hand, developments at the national level that are exploring (when not stretching) the outer boundaries of the EU legal order. Just last week, for instance, the Italian Competition Authority adopted a decision in a dispute involving Enel and Google that substantially expands the ‘exceptional circumstances’ case law (see here) and ventures into uncharted territory.

It was always clear that, in a decentralised model, the Court of Justice would play a central role in preserving the uniformity of the EU legal order. The evolution of the enforcement regime suggests that, as things stand, it will be called upon to intervene more frequently that some might have anticipated in the wake of the adoption of Regulation 1/2003.

Written by Pablo Ibanez Colomo

20 May 2021 at 3:16 pm

Posted in Uncategorized

2 Responses

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  1. It is clear that in the past 4-5 years there is a problem of re-nationalisation of competition law enforcement in Europe. The spontaneous harmonisation with EU competition law in the 1990s and the advent of modernisation and Reg. 1/2003 had suppressed this phenomenon but now it re-emerges strongly. There is also a battle on who will have the intellectual leadership in Europe. I am not going to name specific NCAs but we know that some are particularly “active”. The problem is accentuated with the DMA, which does not overrule sui generis national competition laws applicable to digital. Anyway, this is a more general problem. We badly need a revisiting of Art. 3 of Reg. 1/2003.

    Makis

    21 May 2021 at 1:21 pm

  2. On the role of pro-competitive effects in 101(1) I’m quite happy to share my 2010 article “EU Ancillary Restraints: A Reasoned Approach to Article 101(1)” wherein I argue, based on the case law, that there is a logical and necessary distinction between the “effects” inquiry of Article 101(1) and of Article 101(3) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2166318

    Kay

    24 May 2021 at 4:58 pm


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