Chillin'Competition

The Court of Justice delivered its judgment in Servizio Elettrico Nazionale last week (see here for the French version). Because the questions asked by the Italian Consiglio di Stato were so broad, some hoped that the ruling would provide an overarching framework applying to potentially abusive practices (what we might call an arrêt de principe).

Having read the judgment, it seems more likely that the analysis is tailored to the specifics of the case and will not apply to other cases (what we might call an arrêt d’espèce). Seen from this (more modest) perspective, both the analysis and the outcome at which the Court hints make perfect sense.

The case concerns a textbook example of abuse, if there is one. An incumbent that uses the assets it owes to its status as a former monopoly (as opposed to its investments or innovation) to favour its own activities is prima facie in breach of Article 102 TFEU. It is a quasi-Article 106 TFEU scenario. Thus, there would be every reason to be as strict as the Court has always been in cases involving exclusive or special rights.

The outcome suggested by the Court is supported by an analytical framework that works well in the specific context of the case. On the other hand, this framework does not appear to capture the case law in its full complexity. As a result, there is a chance that it will not be the reference that some hoped would become. I can think of two main reasons in this sense.

The first reason is that the scope of Article 102 TFEU is broader than one might infer from the judgment. The scenarios identified in it do not encompass all instances in which Article 102 TFEU can come into play. The Court is careful to use language that suggests that its framework is not exhaustive (see para 76, where the French version uses the word ‘notamment‘ and the Italian one ‘in particolare‘). These nuances, however, may be lost in future interpretations of the ruling.

If nuance is indeed lost, the framework applied in the judgment may lead to the underenforcement of Article 102 TFEU. Some behaviour that amounts (and has been found in the past to amount) to an abuse of a dominant position would escape the prohibition.

In Servizio Elettrico Nazionale, the Court of Justice identifies two instances in which conduct implemented by dominant firms departs from competition on the merits:

This is so, in the first place, where the practice has no plausible purpose other than the restriction of competition (para 77). As is well known, practices are deemed abusive where they have an anticompetitive object. The Court refers in this regard to pricing below average variable costs, which is the most eloquent example. The practice at stake in Lithuanian Railways (the destruction of the dominant firm’s own property with the sole aim of restricting competition) is another one.

According to the judgment, a practice also departs from competition on the merits where it cannot be replicated by an equally efficient competitor, and this insofar as it flows from the exploitation by the dominant firm of its position (para 78).[1]

These passages may be interpreted as suggesting that, in an Article 102 TFEU case, an authority or claimant would need to show that the practice at stake (i) departs from competition on the merits, either because (ii.a) it has an anticompetitive object or because (ii.b) it cannot be replicated by an equally efficient competitor.

As I understand the case law, it seems clear to me that an abuse can be established in circumstances other than those described in the preceding paragraph. Suffice it to mention the following three points in support of this idea.

There should be little doubt, to begin with, that there is no need for an authority or claimant to show that a practice is not in keeping with competition on the merits. That is, after all, the very point of the ‘special responsibility’: conduct that would otherwise be unproblematic can be prohibited precisely because it is implemented by a firm that enjoys a dominant position.

The very finding of dominance, in other words, dispenses from the need to establish that the behaviour is somehow improper or abnormal. For instance, the unconstrained exercise of a firm’s duly earned intellectual property rights is the purest expression of competition on the merits. As such, it is in principle unproblematic. However, there are (exceptional) circumstances in which Article 102 TFEU imposes a duty to license a firm’s intangible property.

In a different vein, paras 76-78 (in particular para 78) may be interpreted as suggesting that the abusive conduct somehow needs to flow from the dominant position. There is consistent case law, dating back to the very early days (Continental Can), which shows that, as the law stands, there is no need to establish a link between the dominant position and the practice.

Finally, it is clear from the case law that an abuse can be established even when the contentious practice can be replicated by an equally efficient firm. ‘Others also do it‘ has never worked as a defence in the context of Article 102 TFEU (and I do not believe it should). If this ‘replicability test’ had applied in the Microsoft I case, for instance, the firm would have escaped the prohibition (at least as far as the Media Player aspects of the decision are concerned).

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Second, and somewhat paradoxically, the scope of Article 102 TFEU is also narrower than suggested by the Court. I would be most interested to hear your views on the scope of para 78. Having read it a few times in French and Italian, this key paragraph appears to suggest that behaviour that involves the use of assets or resources that cannot be replicated by an equally efficient rival is not in keeping with competition on the merits.

If this is indeed the correct reading of para 78, it seems difficult to reconcile with other aspects of the case law. The unique assets or resources enjoyed by a dominant firm may be the fruit of its inventive and creative efforts. If this is so, any advantages resulting from them would be the very manifestation of competition on the merits, rather than the opposite (just think of the exercise of duly earned intellectual property, which I mentioned above).

The implication of a literal reading of para 78 is that every time a dominant firm exploits a competitive advantage flowing from assets or resources that its rivals do not have, it would not be competing on the merits. It is not surprising that there is no basis for this position in the case law: it would paradoxically disincentivise the very behaviour that Article 102 TFEU seeks to promote and preserve.

One can also read para 78 as applying to the specific circumstances of the case. In Servizio Elettrico Nazionale, the dominant firm was exploiting assets that were unique, but not as a result of its efforts (that is, they had not been acquired on the merits). Rather, they were the product of the dominant firm’s status as a former monopoly.

If para 78 is confined to these circumstances (that is, if it is read as applying to the cas d’espèce), it makes perfect sense (and I tell myself that it is perhaps what the Court had in mind).

I will follow up with a few posts on other aspects of this fascinating ruling. The next one, on whether, and to what extent, the framework crafted by the Court captures the essence of the case law on which it is based. In the meantime, I very much look forward to your comments on this first entry.

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[1] The French version of para 78 reads as follows: ‘Il en va de même, ainsi que l’a relevé M. l’avocat général aux points 69 à 71 de ses conclusions, d’une pratique insusceptible d’être adoptée par un hypothétique concurrent qui, bien qu’aussi efficace, n’occupe pas une position dominante sur le marché en cause, car cette pratique repose sur l’exploitation de ressources ou de moyens propres à la détention d’une telle position‘.