Chillin'Competition

There will be no revolution in EU merger control after all. Today’s judgment in CK Telecoms sets aside the first instance ruling. However, it does so in a way that does not depart from Tetra Laval and the prevailing understanding of, inter alia, the principles governing the review of Commission decisions and the applicable standard of proof.

A close reading of the judgment shows that much of the appeal is about the specifics of the decision. The idea that the General Court ‘distorted‘ the Comission’s analysis pervades the ruling, and comes across as an element that must have been central to the outcome of the case. This post, as usual, will not focus on these specifics, but on the issues of principle addressed by the Court.

The most salient aspects of the judgment, which I examine in detail, can be summarised as follows:

• First, the General Court erred in law when setting the applicable standard of proof. ‘Strong probability’ sets the bar too high, the ECJ holds.
• Second, the ‘marginal review’ doctrine only applies to the legal characterisation of facts and only in relation economic assessments (para 124).
• Third, the General Court erred in law when laying down the conditions under which non-coordinated effects can arise absent dominance (and, similarly, by failing to take into account the full range of factors).
• Fourth, the General Court erred in law when defining the notion of ‘closeness of competiton’ and ‘important competitive force’.

Standard of review in EU merger control

As explained back in October, Advocate General Kokott had proposed in her Opinion a major departure from the Tetra Laval case law. If the Court had followed her approach, the review of merger decisions would have been confined to manifest errors of assessment.

The Court judgment makes it clear, first, that it is not for the Commission to interpret Article 2 of the Merger Regulation, including the concepts enshrined therein (para 129). In the same vein, the EU courts are not bound or constrained by the soft law instruments issued by the administrative authority.

Second, deference is only warranted, according to the judgment in relation to (i) the legal characterisation of facts and (ii) only insofar as economic matters are concerned.

The formula is repeated in several passages, but para 124 (with emphasis added) is perhaps the most explicit: ‘[…] the Commission has a margin of discretion with regard to economic matters for the purpose of applying the substantive rules of Regulation No 139/2004, in particular Article 2 thereof […]’).

Third, the fact that a particular concept requires the use of economic analysis when implemented does not mean that the Commission enjoys a margin of discretion when defining its scope and meaning. Para 127 gives several examples, including that of ‘dominant position’, ‘relevant market’ and ‘margin squeeze’.

Standard of proof

The standard of proof was one of the big bones of contention in the case (if not the biggest). The Commission took issue with the standard of proof (administered and/or declared) by the General Court in the first-instance ruling.

On this point, the Court makes a number of observations. First (para 74), it declares that the standard of proof does not change based on the type of decision (in other words, a decision declaring the compatibility of a transaction with the internal market is subject to the same standard as one declaring its incompatibility).

Second, the standard of proof does not change, either, based on the type of transaction. In other words, it would not be higher or lower depending on whether the transaction raises conglomerate, vertical and/or horizontal concerns (para 79).

Third, the Court seems to define the standard of proof in probabilistic terms (‘more likely than not‘), which is suggestive of a balance of probabilities standard (para 87). This point is to be welcome, if only because Advocate General Kokott’s Opinion had equated likelihood and plausibility. The judgment avoids the confusion that might have resulted from the conflation of these two concepts.

The legal test applied

The central substantive point of law at stake in the case is as exciting as it is unprecedented. When, absent dominance (individual or collective), is a impediment to effective competition significant? The General Court had tried to define a legal test inspired by the Preamble to Regulation 139/2004.

In accordance with this test, the Commission would need to show that the transaction would lead to ‘(i) the elimination of the important competitive constraints that the merging parties had exerted upon each other and (ii) a reduction of competitive pressure on the remaining competitors‘ (para 98).

The Court does not embrace this test, which it finds to be too restrictive (para 113). In this regard, the judgment appears to suggest that the first of these conditions would, alone, justify intervention. As explained in para 112, establishing such a condition is sufficient to prove a significant impediment to effective competition.

One should point out, in this regard, that, from an economic perspective, the two conditions defined by the General Court are one and the same (and therefore the test would not be as restrictive as one may assume). Pascale Déchamps and Maurice de Valois Turk explained in a piece for JECLAP (see here) that, if the first condition is fulfilled, one can safely presume that the second is, and vice versa.

Against this background, the change brought about by the ruling is more apparent than real.

The meaning of ‘closeness of competition’ and ‘important competitive force’

More significant and consequential than the legal test, in fact, are the passages devoted to the definition of the key concepts around which the decision revolved, namely ‘closeness of competition’ and ‘important competitive force’.

The General Court had construed both concepts with a seemingly clear rationale: require the Commission to show that there is something distinctive about the competitive relationship that would be lost as a result of the transaction.

The Court of Justice, by contrast, interprets them more expansively. As far as the closeness of competition is concerned, for instance, it holds that it is not necessary for the Commission to show that rivals were ‘particularly close‘ (para 191). It is sufficient that they are close.

How close? Reassuringly, the Commission is echoed in the judgment making it clear that not every firm within an oligopolistic market qualifies as a close competitor (para 173). Therefore, closeness of competition cannot be automatically assumed to exist in a tight oligopoly and would have to be established case-by-case.

The same is true of the concept of ‘important competitive force’. Contrary to what the General Court held, it would be sufficient to show that a firm is a maverick, that is, one that ‘has more of an influence on the competitive process than its market share or similar measures would suggest‘ (para 167).

The redefinition of these two concepts allows for more frequent intervention. The central challenge remains unchanged: how can they be construed so that judicial review remains meaningful, effective and faithful to the Tetra Laval principles?

The Journal of European Competition Law & Practice (of which I am the Joint General Editor alongside Gianni De Stefano) regularly publishes special issues devoted to topical questions (see here for the one on the first-instance judgment in Google Shopping).

We are now working on a new Special Issue on ‘The Second Modernisation of EU Competition Law’. We welcome proposals addressing any procedural and substantive aspects relating to the two central questions that are currently under review: Article 102 TFEU (and the potential adoption of a new set of Guidelines) and enforcement (that is, Regulation 1/2003).

Topics include (but are emphatically not limited to) the following:

• The analysis of anticompetitive effects in abuse of dominance cases.
• The ‘as efficient competitor’ principle vs the ‘as efficient competitor’ test.
• The evaluation of foreclosure in digital marktes.
• Towards market investigations in EU competition law?
• The future of interim measures.
• Remedies in EU antitrust enforcement.
• Decentralisation and cooperation: how to tackle the risk of fragmentation?

If interested in publishing in the Special issue, please get in touch via email (P.Ibanez-Colomo@lse.ac.uk) by Friday of next week (21st July) with a brief outline of your potential contribution.

The proposal should take the form of an abstract of max. 250 words in which you identify:

• The question on which you would like to focus; and
• The contribution your piece is expected to make.

If your abstract is selected for publication, we expect the final article (of around 7,000-10,000 words) to be submitted by mid-September. As usual, please clarify in your proposal whether you have any conflicts of interests.

Do not hesitate to contact me with any other questions you may have. We very much look forward to reviewing your submissions!

Last week’s post explained why formalism does not work when evaluating whether an agreement restricts competition. The fact that a clause provides for price-fixing or market-sharing does not mean that it necessarily amounts to a ‘by object’ infringement.

More importantly, the case law does not support the formalistic interpretation of Article 101(1) TFEU. Time and time again, the Court has emphasised that any conclusion needs to consider the relevant economic and legal context of which the agreement is a part.

All the case law? As in Asterix’s Gaul, there was a small pocket of formalism. In Binon, the Court of Justice held that vertical price-fixing is restrictive of competition by object (Binon, para 44). The conclusion was reached on the back of the form of the restraint alone.

Binon is an old case. As such, it was very obviousy at odds with the most recent case law. For instance, it contradicts Generics (and the body of judgments that followed) in that it suggests that the pro-competitive effects of the agreement can only be considered under Article 101(3) TFEU. Binon also ignores the relevant economic and legal context.

Against this background, there were already powerful reasons to argue that Binon was no longer good law (a point I raised in this paper addressing the implications of Generics and Budapest Bank for vertical restraints).

Last week’s judgment in Super Bock confirms that the Binon era is over. The questions raised by the Tribunal da Relação de Lisboa referred explicitly to vertical price-fixing and, more precisely to whether it is necessary to engage in a contextual analysis when determining whether it restricts competition by object.

In unequivocal terms, the Court of Justice rules (para 35) that a ‘by object’ infringement can only be established after considering the content of an agreement, its objectives and the economic and legal context of which it is a part (that is, the principles that it has consistently applied over the past decade).

What is more, the analysis of the pro-competitive effects of the agreement is part of the assessment of the economic and legal context under Article 101(1) TFEU (para 36) – and not simply under Article 101(3) TFEU, which Binon, in contradiction with the rest of the case law, suggested.

The conclusion that follows from the above is that the analysis is invariably context-specific and cannot be grounded, alone, on the formal features of an agreement. For the same reasons, a hardcore restaint within the meaning of the Vertical Block Exemption Regulation is not necessarily a restriction of competition by object.

The value of Super Bock is that it shows, once again, that the Court of Justice consistently places substance above form. This is true of the EU legal order at large. Given the importance of price competition, I was not certain that the ECJ would move away from Binon. The uncertainty is over, and the substance-based approach knows no exceptions.

It makes sense to clarify a couple of key points. First, considering the context of an agreement does not mean assessing its anticompetitive effects. Object and effect remain two separate stages, and the substantive analysis of the former should not be conflated with the latter.

Second, the context-specific analysis that the case law requires may be less straightforward to administer than a formalistic approach, but it minimises the risk of under- and over-enforcement. ‘By object’ is not the same thing as a ‘per se’ restraint. It is artificial to try and force US concepts into EU law.