Chillin'Competition

On 15 June the General Court (“GC”) annulled the Commission’s decision imposing a close-to-1-billion euro fine on Qualcomm in relation to alleged exclusivity payments made to Apple in breach of Article 102 TFEU. In a previous post I discussed the Judgment focusing on procedure; this second post deals with substance, and concludes my comments on what this means for future cases.

What the case was about. The case concerns rebates (in the form of direct payments from Qualcomm to Apple) in exchange for Apple exclusively incorporating Qualcomm LTE chipsets in certain devices. The Qualcomm decision was the first Commission decision concerning exclusivity rebates following the CJEUs’ Judgment in Intel.

The Commission’s approach. The Commission largely built its case on the wording of the agreements, the extent of Qualcomm’s alleged dominance, the importance of Apple as a key client and certain (see below) internal documents from Apple. For additional background on how the Commission saw the case, see this guest post from Max Kadar that we published in 2020.

What the Judgment does not address. Throughout the case there were relevant discussions about market definition and dominance (including on the question of whether conducting a SSNIP test was necessary or not) and on the binding nature of the Guidance Paper on Article 102 (see here for my take; the Guidance Paper will likely be withdrawn before the Courts address this), but the Judgment did not need touch on those points as it annulled the decision on other grounds.

The Judgment’s substantive review.

The principles. The Judgment starts off recalling the principles that competition law is not concerned with the exclusion of competitors due to their inferior efficiency because dominant companies cannot be prevented from competing on the merits (349-351). The Judgment also recalls the special responsibility of dominant firms (352), retains the formal “presumption” that exclusivity arrangements are abusive (353) subject, however, to the “further clarification” in Intel (354). It recalls that for conduct to be abusive, it must be capable of producing exclusionary effects, and that this assessment requires examining all the relevant circumstances (355). The Court also recalls the Galp case law indicating that post-decision elements may be relevant (357) Tetra Laval standard of review applicable to complex economic assessments (358), and the rules on the burden of proof/presumption of innocence (359).

The F word. In my mind, the principle in 354 (the one set out by the CJEU in Intel) makes clear that, under Art. 102, effects=capability to foreclosure (that is also view that the Commission advanced in its Guidance Paper). The Court is saying that, even for conduct presumed abusive, whenever the dominant company offers evidence challenging capability to restrict, then it is for the Commission to carry out a foreclosure analysis. This is not new, but it’s relevant here, because the Commission’s decision does not refer to foreclosure (just run a Ctrl+Find search here; 373 shows that Qualcomm made the same point). The Commission’s argument is that there was no need to show foreclosure, and that the restrictive effect consisted in the reduction of Apple’s incentives to switch to competitors (381, 384). This debate is also key several pending cases (including some in which I represent clients), but I will reserve my views on those for now. Its also worth noting that the GC’s review looks both at “real world” foreclosure effects and at “hypothetical AEC world” foreclosure effects.

The relevant circumstances. The Court observes that while the decision defines a worldwide relevant market for LTE chipsets, the alleged abuse concerns a single important customer (380). It also notes that the decision did not allege the existence of a strategy to foreclose (383). It then goes on to examine several circumstances.

• Scope of the conduct. The Judgment observes a mismatch between, on the one hand, the Commission’s analysis and findings of abuse (which relate to LTE chipsets for iPhones and iPads) (389-391) and, on the other hand, the Apple documents and explanations invoked to support those findings, which only referred to certain iPad models which Apple planned to launch in 2014 and 2015 (395, see also 420 and 422).
• The counterfactual. The Court notes that, according to the decision itself (322), between 2011 and 2015 “Apple had no alternative as regards its requirements of LTE chipsets for its iPhone devices” (400); this, the Court underlines, is common ground (403, 405). Since iPhones represented approximately 90% of Apple’s requirements of LTE chipsets (408), this means that for a very large part of Apple’s requirements covered by the decision Apple could not have switched to competing LTE suppliers (409-410). The Judgment observes that, while the decision acknowledged this fact, it failed to consider it when analyzing whether Qualcomm’s conduct was capable of restricting competition (412, 415). The Judgment does not use the term “counterfactual”, but evidently applies that logic: Qualcomm’s payments could not have reduced Apple’s incentives to switch to rivals because, even absent that conduct, Apple could not have switched to rivals. In other words, there was no competition that Qualcomm could have restricted. For this reason, the Court concludes that the decision failed to take into account all the relevant circumstances (417).
• Conditions for granting the payment / exclusivity label. The Court does not dispute that the characterization of the payments as exclusivity payments, but explains that this is “not sufficient to conclude that those payments constituted an abuse” (424).
• Other circumstances invoked by the Commission. At 425 the Court finds that while the circumstances invoked by the Commission (extent of the dominant position, conditions for granting the payments, their amount and duration or the importance of Apple as a customer) “should not be disregarded, the fact remains that those factors (…) do not in themselves demonstrate, in the present case, anticompetitive effect and, in particular, foreclosure” (425). What this means is that “all the relevant circumstances” includes “all the relevant circumstances”, not only those that may support the finding of abuse.

The Judgment also engages, for the sake of completeness (442-444), in an analysis of whether Qualcomm’s conduct could have influenced Apple’s sourcing decisions concerning 2014 and 2015 iPads. In a nutshell, the Court observes that this section of the decision is based on Apple’s internal documents and explanations regarding only to certain versions of certain iPad models which were to be launched in 2014-2015 (439, 450), which do not necessarily match  the Commission’s conclusions (455-456); the Court dismisses both the Commission’s argument that this was a clerical error (458). For this reason, the Court finds that the evidence on which the Commission relied is “inconsistent, both internally within such evidence, and in relation to the findings which it seeks to support” (462-463).

The Court goes on to address Qualcomm’s argument that the Commission failed to take into account evidence that demonstrated that Apple did not select Intel’s chipsets for reasons other than the payments concerned. [This is related to both the procedural points we discussed in the previous post and to the discussion on the counterfactual above]. This has to do with the question of whether Intel’s chipsets met Apple’s technical and schedule requirements. The Commission, based on certain Apple documents and explanations, concluded that it did. But, in the Court’s view, the evidence obtained by Qualcomm through the Section 1782 application (that the Commission opposed) “gives rise to doubts in that regard” (467, 476). Para. 475, for example, shows that the decision had relied on an internal Apple email, but that Qualcomm obtained other follow-up emails suggesting the opposite. For these reasons, the Judgment concludes that the decision failed to carry out a “true examination” of whether alternative chipsets could have met Apple’s requirements (480, also 477) and, therefore, failed to take into consideration all the relevant circumstances.

Finally, the Judgment concludes that the evidence in the decision was not only inconsistent and incomplete, but also that it was incapable of substantiating the conclusions drawn from it (483). In essence, the Court finds that the decision relied exclusively on Apple’s statements and documents which either did not refer to the models at issue (492, 496), were not conclusive (494), or had been internally challenged by other Apple’s employees according to evidence obtained by Qualcomm (498, 499). In a harsh concluding recital (505), the Judgment concludes that the Commission “in the context of a general analysis mixing models and years, relied on evidence which is not relevant, which is contradicted by other evidence or which is not capable of substantiating its conclusions (…) and which, therefore, does not make it possible to demonstrate that the payments concerned actually reduced Apple’s incentives to switch to the applicant’s competitors to obtain supplies of LTE chipsets”.

Comments

This is a thorough and (despite the confidentiality challenges) very clear Judgment articulating the principles set by the Court of Justice in its 2017 Intel Judgment. It is probably noting that the Commission’s case was initially conceived in one world (after the 2014 Intel Judment) but born in a very different (after the 2017 Intel Judgment).

From a legal standpoint, I do not see anything innovative other than the important message that enforcers must consider all, not only some, relevant circumstances. Perhaps ironically, the message from the Court in this case is, in my view, not very different from that of the Apple State aid Judgment (see my comments here). This is what I wrote exactly 2 years ago when that Judgment was delivered; everything applies equally, word by word, to this case:

“The Judgment will attract more attention than other annulments, but in reality, it is not in any way groundbreaking from a legal standpoint. The reasons, and the reasoning, leading to today’s annulment are exactly the same as the one that has led to the recent annulment of other decisions, including in Frucona Kosice, FC Barcelona, Real Madrid, Naviera Armas, Valencia and Elche cases, among others. In recent years the Courts have consistently insisted on the Commission’s obligation to actively and impartially gather and assess all the relevant evidence in relation to issues where the burden of proof is incumbent upon it. It was all there.

You might think this is easy to say in retrospect, but we already anticipated all of this here and here. At the time, we said that “it won’t be difficult for the Commission to continue to win cases if it incorporates this logic into its day-to-day. If that does not happen, we are likely to witness a series of annulments based on this logic (…) My bet is that I will be making a few future cross references back to this prediction”. Here’s one more cross reference, probably not the last one”.

Ditto.