Chillin'Competition

What is competition on the merits? This is the question I seek to answer in my most recent paper, available here.

The notion of competition on the merits seemed irrelevant not so long ago (that is, before Servizio Elettrico Nazionale exposed a friction in the case law). Landmarks of the 2010s such as Post Danmark I, TeliaSonera or Intel went about applying Article 102 TFEU without paying much attention (if any) to this notion.

Competition on the merits is now back in all discussions (and, for some, central to determine whether or not a given practice amounts to an abuse). Against this background, the paper seeks to answer two interrelated questions. What is competition on the merits? Does Article 102 TFEU apply to normal conduct or is an abuse an inherently ‘abnormal’ or ‘wrongful’ act?

It makes sense to start with the second. An overview of the case law suggests that normal conduct can be subject to Article 102 TFEU. ‘Normal’, in this context, means that the strategy is potentially pro-competitive (that is, firms can have recourse to it for non-exclusionary reasons) and that can be implemented by both dominant and non-dominant firms (that is, it is not the exclusive province of the former).

Exclusive dealing, tying and rebates (not to mention a refusal to deal with a third party) are all normal in this sense. However, we know well that they may amount to an abuse of a dominant position where certain conditions are met.

How about competition on the merits? The paper explains that this notion has become an irritant in the case law, in the sense that it is a source of confusion and frictions.

Tensions can be explained in part by the fact that the notion of competition on the merits was introduced at a time when the prevailing ideas about abusive conduct were very different from today’s.

In the 1960s and 1970s, it was assumed that abusive practices could be identified ex ante and in the abstract. The underlying premise was that it was possible to draw a clear dividing line between unlawful conduct and legitimate expressions of competition on the merits.

The case law that followed (as well as the evolution of legal and economic thinking) moved away from these ideas. Whether or not most practices amount to an abuse is a context-specific exercise, not an abstract one detached from ‘all the circumstances’ surrounding their implementation.

If most practices are neither inherently good nor bad and the application of Article 102 TFEU is very much context-dependent, what is the contemporary role of competition on the merits?

My argument is that the notion of competition on the merits has role to play in the contemporary case law if it is interpreted in light of the ‘as efficient competitor’ principle (which has been a consistent feature in the judgments delivered over the past decade, including in yesterday’s ruling in Superleague).

Against this background, the argument provides a positive and a negative definition of the notion.

From a positive perspective, a dominant firm can be said to compete on the merits where it gets ahead in the marketplace with, inter alia, better, cheaper and/or more innovative goods or services.

The corollary to this positive definition is that, where the exclusion of a rival is attributable to the fact that the latter is less attractive along one or more parameters of competition, the practice is not abusive. Any exclusion would be the manifestation of competition on the merits.

From a negative perspective, a dominant firm does not compete on the merits in three instances.

First, where the practice has an anticompetitive object (that is, it makes no economic sense other than as a means to restrict competition). Pricing below average variable costs is the classic example in this regard.

Second, where the strategy involves the use of assets not developed on the merits (that is, assets that have been developed with State support, either in the form of State aid or the award of exclusive rights). In this instance, which was at stake in Post Danmark II, the ‘as efficient competitor’ principle would not be the benchmark against which the lawfulness of the practice is assessed.

Third, where the practice, while potentially pro-competitive, causes the exclusion of equally efficient rivals. In the latter, instance, the question of whether the behaviour is an expression of competition on the merits and that of whether it is exclusionary collapse into one and the same issue.

Based on the above, one can classify the case law in the manner you see on the Table below:

I would very much welcome your comments on the paper. As usual, I have nothing to disclose.

Last year, in an editorial published in JECLAP, I asked whether Article 106 TFEU would change EU competition law. I pointed out that some rulings, including the General Court’s in ISU, gave the impression that Article 106 TFEU doctrines were slowly creeping into the case law dealing with Articles 101 and 102 TFEU.

The two (eagerly awaited) Court of Justice judgments in ISU itself and Superleague suggest that this transformation of EU competition law may well be under way, at least in relation to firms that have, de iure or de facto, the power to decide who gets to compete with them.

The key takeaway, in my view, is that organisations with such a regulatory or quasi-regulatory function are subject to the sort of obligations that apply to Member States pursuant to Article 106 TFEU. A distinct, stricter tier of competition law appears to govern the activities of such organisations.

Article 106-like obligations include, in particular, the respect of the principle of equality of opportunity and the duty to adopt rules that are transparent, objective, non-discriminatory and reviewable.

Any deviation from these obligations, when implemented by such organisations, presumptively amounts, it would seem, to a restriction of competition (and, more precisely, a by object infringement within the meaning of Article 101(1) TFEU and an abuse of a dominant position).

Article 102 TFEU in Superleague

The Superleague judgment starts with the application of Article 102 TFEU to FIFA’s and UEFA’s rules on the organisation of football competitions (and which may constrain third parties’ ability to run rival tournaments).

Some aspects of the ruling are strictly canonical, and capture the case law of the past decade (concerning, in particular, the ‘as efficient competitor’ principle). There are also interesting references to the notion of competition on the merits (on which I will follow up soon).

I find it particularly intriguing that the Court expressly refers to the object or effect of restricting competition in the context of Article 102 TFEU (see para 131 of Superleague: ‘conduct may be categorised as “abuse of a dominant position” […] where it has been proven to have the actual or potential effect – or even the object – of impeding potentially competing undertakings at an earlier stage‘; emphasis added).

In other respects, however, the judgment is genuinely innovative. As much as some recent General Court judgments, the Court relies upon the Article 106 TFEU case law applying to State measures, such as GB-Inno-BM, Merci convenzionali porto di Genova or MOTOE).

The overarching point seems clear: where an organisation is, de iure or de facto, in a position that is comparable to that of an undertaking enjoying exclusive rights, it is subject to strict non-discrimination obligations, aimed at preemptively addressing the risk of an abuse (para 138 of Superleague).

In the specific circumstances of the case, the Court strongly signals that rules on the prior approval of football competitions are not necessarily abusive. However, they must be subject to appropriate constraints if they are to be compatible with Article 102 TFEU.

Where an organisation has the regulatory means to decide go gets to compete with it, the judgment explains, there must be a substantive and procedural framework detailing how its regulatory powers are to be exercised (para 147 of Superleague). In the same vein, the organisation must avoid imposing sanctions in a discretionary manner (para 148 of Superleague).

Restrictions by object by sports organisations

The appeal in ISU focused on Article 101(1) TFEU, and more precisely on whether rules limiting (or prohibiting altogether) athletes’ ability to take part in some championships restrict competition by object. The Commission had taken issue with the so-called ‘eligibility rules’ laid down by the International Skating Union (and which went through various iterations over the years).

As I wrote a while ago, the General Court’s ruling introduced a novelty in its analysis of restrictions by object, in that it appeared to inject Article 106 TFEU case law (such as MOTOE) into the assessment. It also relied upon judgments like OTOC to substantiate its findings (even though the relevant passages from OTOC concerned the effects of the rules, as opposed their object).

The innovations introduced by the General Court have now been validated by the Court of Justice. Thus, the rules set by an organisation with a regulatory function must respect the principles of transparency, objectivity, non-discrimination and reviewability if they are to comply with Article 101(1) TFEU. Where they do not, they will amount to a restriction of competition by object.

Paras 131 to 149 of ISU depart in some respects from the canonical approach to the identification of restrictions by object (interestingly, and somewhat paradoxically, paras 101 to 108 of ISU are arguably the best and most elegant summary of the said canonical approach).

The analysis in ISU focuses more on the effects of the eligibility rules (and, more precisely, on the fact that they give the International Skating Union discretionary power and thus the ability to restrict competition and impose disproportionate sanctions) than on their object.

The ISU judgment appears to conflate, in other words, one and the other (and, similarly, borrow from the former to establish the latter). This cross-fertilisation had been carefully avoided in the past (establishing the object of an agreement in the relevant economic and legal context is indeed different analytically and conceptually from showing its effects).

However, it is not entirely impossible to rationalise the Court’s approach. When it comes to bodies with a regulatory function, the absence of checks is treated as a presumptive restriction of competition, without it being necessary to assess its impact. As already mentioned, a stricter tier of EU competition law appears to have been introduced.

The relationship between ancillary restraints and restrictions by object

There is another aspect of ISU that is worth emphasising. In para 113 of that ruling, the Court clarifies that the ancillary restraints doctrine applies only to agreement that do not have, as their object, the restriction of competition.

This point is, arguably, self-evident. The ancillary restraints doctrine presupposes that the overall agreement to which the clause relates is not restrictive by its very nature (if the agreement does not have an anticompetitive object, and the clause is objectively necessary to its operation, the latter escapes Article 101(1) TFEU altogether).

It is valuable and important, however, that the Court is explicit about this point. The issue may come back in future sports cases, and in particular the one dealing with agents’ regulation (which I discussed here). If the rules at stake in the case are found to be ancillary within the meaning of Meca Medina, it would mean, by implication, that their object is not anticompetitive.

The New EU Competition Law will launch in Brussels on 11th January (Fondation Universitaire, 5pm), with the support of LSE Law School and in cooperation with the College of Europe and its Global Competition Law Centre.

Click here to register for the event.

As you see in the programme below, I will be joined by a group of outstanding experts to discuss various aspects of the book. I very much look forward to seeing many of you there! Please get in touch in case you have any questions.

Programme:

17.00 | Welcome: Inge Govaere (Ghent and College of Europe)

17.15 | The New EU Competition Law : Mapping the Transformation

• Pablo in conversation with Pascale Déchamps (Autorité de la concurrence), Luc Gyselen (Arnold & Porter) and Marieke Scholz (European Commission)

18.15 | Break

18.30 | The New EU Competition Law : Looking into the Future

• Pablo in conversation with Filomena Chirico (European Commission and College of Europe), Alexandre de Streel (Namur and College of Europe) and Alfonso Lamadrid de Pablo (Garrigues and College of Europe)

19.30 | Closing remarks: Bernd Meyring (Linklaters and College of Europe)

19.45 | Drinks reception

The New EU Competition Law comes out this Thursday (check here for a 20% discount). As you see in the picture, I got to see the hard copies (finally!) last week, with that beautiful painting by Juan Gris adding life and colour to the cover (it is the second time his work features in a book of mine, and something tells me it will not be the last). And I started to get the urge to share with the world what the monograph is all about. Which takes me to the topic of this post.

The starting point of the book is the realisation that EU competition law has changed in fundamental ways since the entry into force of Regulation 1/2003. I felt that these mutations had not been examined systematically in a single monograph, but in disparate articles that addressed one aspect or the other. As is often the case, I found myself trying to put together something I could not find elsewhere.

What are the mutations that Regulation 1/2003 favoured? In essence, this regime gave more freedom to the European Commission: more freedom to decide which cases to investigate and more freedom to make the most of its limited resources.

The new institutional landscape led to two shifts (which I discuss in Chapter 1). First, the Commission has explored, significantly more frequently than in the past, into the substantive and institutional limits of Articles 101 and 102 TFEU. ‘Market-shaping’ enforcement, in other words, has become a central feature of the contemporary landscape.

This transformation, alone, speaks to the success of Regulation 1/2003 and, more generally, of the EU model. It means that the Commission is not paralysed by fear (whether the fear relates to the exploration of new doctrines, the reinterpretation of existing ones or the implementation of the remedies) when applying Articles 101 and 102 TFEU.

Second, enforcement has become ‘policy-driven’, as opposed to ‘law-driven’. This phenomenon is not surprising. The Commission emphasised, in the lead up to Regulation 1/2003, that, after four decades, there was a ‘competition culture’ firmly in place in the EU and announced that, in the new landscape, it would make a more assertive use of its powers to advance its policy objectives.

The symbol of ‘policy-driven’ enforcement is the commitments decision, which has featured prominently in non-cartel investigations (in particular in ‘market-shaping’ cases, which demand, by their very nature, complex and resource-consuming remedies).

These two transformations have been compounded by a shift in the intellectual climate (addressed in Chapter 2) since the early to late 2010s. The modest, technocratic view of competition policy that dominated enforcement since the late 1990s progressively gave way to an approach that is less concerned with Type I errors and more with the effective application of Articles 101 and 102 TFEU.

There appears to be a progressive move away from the ‘more economics-based approach’: a new consensus may well be developing around a different set of values.

These transformation of the institutional and intellectual landscapes have had several consequences for EU competition law (and, as I argue, have led to the emergence of a ‘new’ iteration of the discipline). My book focuses on two of these consequences.

One of these consequences, which cuts across the whole of the book, is the permanent interaction with economic regulation (Chapter 3). ‘Market-shaping’ enforcement, by definition, is regulatory-like (it may lead, inter alia, to a duty to deal, to price regulation or to the redesign of products and business modelas).

Inevitably, it will enter into contact and interact with other regimes (such as telecommunications and energy regulation, which I cover extensively in Chapter 6). In some cases, Articles 101 and 102 TFEU have acted as a safety net or filled gaps in regulation; in others, they have gone as far as to rectify it or amend it de facto.

Occasionally, competition law has addressed a brewing ‘expectation of regulation’ that legislation may not be in a position to address fully and/or immediately (the legislative process is known to be often protracted and unpredictable).

Over time, it has become increasingly difficult (and increasingly pointless) to draw the line between competition law and regulation: it is no longer easy to figure out where one starts and where the other finishes. And it does not really matter. In a sense, the relationship between the DMA and Article 102 TFEU (and, indeed, the very existence of the DMA), encapsulates this idea well (as I argue in Chapter 5).

A second consequence is the change in the relationship with intangible property in general and intellectual property in particular (Chapters 4 and 7). During the formative years, EU competition law was largely deferential to intellectual property systems.

This attitude has changed over the past few years across a number of fronts that involve copyright and patents. I have discussed extensively many of these developments on the blog: taken together these developments signal a more assertive attitude vis-a-vis the malaise in intellectual property.

I very much look forward to discussing my ideas, on this platform and elsewhere. On this same note: remember that we will have a get-together on 11th January (Brussels) and 25th January (London). More details will follow soon!