Chillin'Competition

The Vodafone/Three merger, cleared last month by the UK Competition and Markets Authority, has been widely discussed, and for good reasons. For a long time, competition agencies insisted on structural remedies as a non-negotiable first-best. Any concerns would need to be addressed from the outset and without the need of subsequent monitoring.

The authorities’ traditional approach reflect the very logic of merger control, which is after all to prevent the harmful effects of lasting changes to market structures. It was therefore inevitable that the sort of behavioural remedies imposed in Vodafone/Three would spark discussions within the community.

Are the remedies in Vodafone/Three even legally consistent with the essence and objectives of the merger control regime? Can effective compliance with a commitment to invest and to cap prices be guaranteed in the first place? What are the consequences for the system if such remedies become the bread-and-butter of merger control and authorities’ resources are increasingly dedicated to monitoring activities?

These are all fascinating questions that should be, and will be, discussed at length. My immediate reaction focused on a different aspect, which is the relationship between competition law and regulation. The outcome of this investigation reflects particularly well the trends towards the ‘blending’ of competition law and regulation, which I addressed in The New EU Competition Law.

A great deal of scholarly energy has been devoted to identifying differences between competition law and regulation and/or to determining whether discrete instruments, such as the Digital Markets Act, are best characterised as the former or the latter.

My impression has long been that these discussions are ultimately immaterial. Formal regulatory instruments often replicate the logic and operation of competition law. It is not infrequent, moreover, that their objectives are aligned with those of antitrust.

Conversely, competition law, precisely because it is so malleable, often mimics regulatory regimes. It can intervene both ex ante and ex post and can be both prescriptive and proscriptive. Remedies, moreover, have become increasingly regulatory-like across both antitrust and merger control.

As a result of these parallel trends, where competition law becomes more like regulation and vice versa, the lines between one and the other become blurred, and agencies are likely to have recourse indistinctly to one or the other (just think of action by the European Commission against Big Tech).

Vodafone/Three is but an example of this trend. From now on, mobile telephony activities in the UK will be regulated in the country not just by means of formal regulatory instruments, but also via the administration of remedies imposed in the context of a merger investigation.

When the EU Regulatory Framework for electronic communications was adopted, it was hoped that, over time, regulation would roll back as markets become effectively competitive and the need for ex ante intervention decreases. Effective competition, it was hoped, would keep prices down and investments up.

The regime did not foresee that markets might become less competitive after reaching ‘peak effective competition’ and that re-regulation might be necessary as a result. If the trend towards consolidation is followed on the other side of the Channel, regulation through merger control might become the new normal across Europe.

What would keep investments up and prices down in such a landscape would not be effective competition, but explicit obligations imposed upon operators. And competition law and regulation would turn into an indistinct blend where it is not easy to tell where one starts and the other finishes.

The edited ‘version of record’ of the paper on Remedies in EU Antitrust Law has now been published and is available for download in Open Access here.

As explained in a previous post, the paper addresses the mismatch between the centrality of remedies in the current landscape, on the one hand; and the ‘law in the books’, on the other. More than ever before, effective enforcement depends on the adequate design and implementation of remedies. However, they remain relatively misunderstood.

One of the main ideas developed at length in the paper is that ‘principles-based’ remedies, which have featured so prominently in some recent landmark cases, are unlikely to deliver on their promises and could sometimes even undermine effective enforcement.

The first, and arguably most important point I make is that a ‘principles-based’ approach to remedies is not in any way mandated by law, as sometimes suggested or implied. It is true that an authority cannot require firms to cease the infringement in a particular way if there is more than one route to achieve compliance. It does not follow from this doctrine, however, that the said authority must refrain from specifying a remedy.

The second idea that the paper advances in this regard is that the alleged advantages of a ‘principles-based approach’ are a mirage. It is often claimed that it makes sense to follow this approach insofar as it dispenses competition authorities with the need to engage in the complex technical assessments that the adequate design and implementation of remedies demands.

The experience of the past decades suggests that, sooner or later, competition authorities are likely to end up dealing with the complex issues this approach was meant to spare. Consider the Microsoft saga, where the Commission, by means of a series non-compliance decisions, had to eventually engage with thorny questions, such as what amounts to a reasonable and non-discriminatory price.

This saga is also useful in that it is a valuable reminder that a ‘principles-based’ approach can affect the effectiveness of remedies and might significantly delay compliance. This fact, alone, would negate any of its supposed advantages.

More recent developments have exposed other drawbacks of ‘principles-based’ remedies. Since they do not specify the way in which the firm is to bring the infringement to an end, the issue of compliance is left permanently in limbo (at least for as long as the authority does not issue a non-compliance decision).

As a result of the built-in uncertanty that the approach creates, the compliance question may linger long after the adoption of the decision. It is submitted that such a reality does not benefit any of the actors in the system.

‘Principles-based’ remedies may not work for third parties benefitting from the decision, as they might find themselves unable to meaningfully evaluate compliance. It may not work for firms subject to the obligation either, as the may never be fully certain that their efforts bring the infringement effectively to an end

In fact, this approach may not be in the interest of competition authorities, which (understandably) may be willing to turn the page on the case and devote their resources to new questions but may find themselves caught in limbo.

The paper submits that ‘principles-based’ remedies may not provide the optimal approach to ensure compliance. It submits, in addition, that the current reality may require some tweaks to Regulation 1/2003 (which is not surprising, given that the sort of complex, regulatory-like remedies that are all the rage today are mostly a novelty and had never played an important role under Regulation 17).

What these tweaks are is something I will address in a future instalment of this series. In the meantime, it would be wonderful to get your comments (on the above or the paper at large).

Of the many judgments addressing the notion of ‘by object’ infringement that came out last year (and which I discuss here), FIFA v BZ is particularly significant, not just because of the issues at stake and the way the Court addressed them, but because of the hints it gives about the future of Article 101(1) TFEU.

In several respects, the enforcement of EU competition law is entering a new era, and FIFA v BZ heralds the new times. There are, in my view, three main lessons to draw from the judgment.

The resilience of the Court’s approach to restrictions by object

The first lesson is that the Court’s methodological approach to identify restrictions by object is proving to be remarkably resilient. It is clear from the case law that, in order to determine whether an agreement infringes Article 101(1) TFEU by its very nature, it is necessary to consider not just its content, but also its objective aims and the economic and legal context of which it is a part.

More importantly, this methodological framework is not an abstract formula. As FIFA v BZ exemplifies, the Court walks the talk. You will find in the judgment a meticulous contextual evaluation of, inter alia, the content of the rules (in that regard, the Court found that there was a mismatch between the legitimate aims pursued and the breadth of the restraints), the discretion they gave FIFA (and therefore the ability to decide which aims to pursue case by case) and the latter’s position.

The resilience of the case law is notable considering the tendency among some actors in the system to rely on shortcuts that disregard the methodology mandated by the case law. The instinct to establish a ‘by object’ infringement on the basis of form alone (e.g. the fact that the practice amounts to ‘price-fixing’ or ‘market sharing’) remains particularly strong, even thought it has been consistently rejected by the Court.

Every now and then, some actors also display a tendency to infer a ‘by object’ infringement from the effects of an agreement. Object and effect are two separate, fundamentally different stages. However, it is tempting to claim that a practice is restrictive by its very nature where it is deemed to have substantial effects on competition, and conversely, to claim that no ‘by object’ violation exists based on the absence of an appreciable impact.

FIFA v BZ confirms that the two stages must not be conflated, even when doing so comes across as intuitively right. Object is not, and has never been, a presumption of effects (as the Expedia judgment clarified). The effects of an agreement (or the unlikelihood of such effects) is not a reliable guide of its object.

From public to private enforcement

The judgment also reveals that a new generation of cases is reaching the Court. The landmarks of the past decade addressing the notion, including Cartes Bancaires, Generics, Budapest Bank and Super Bock, all originated in cases before a competition authority, whether the Commission or an NCA.

The new generation of cases, including not just FIFA v BZ, but also Superleague and the recent ruling in Booking, originated in disputes between private parties. The rise of private enforcement is testament to the success of Regulation 1/2003.

The change in the nature and profile of litigants is not without consequences. By necessity, the objectives and incentives of private litigants differ from those of a public authority. This difference is likely to be manifested across a number of fronts, from the nature of the cases that reach the Court to the way the arguments are framed.

There is a chance, accordingly, that issues pertaining to the notion of restriction by object, will be approached in novel and unprecedented ways (and thus that the resilience of the case law will be tested from new angles).

A second consequence of the rise of private litigants is decentralised enforcement. The latter, in turn, risk affecting the uniformity in the interpretation and application of Article 101 (and 102) TFEU. For the same reason, the resilience of the Court’s methodology to identify ‘by object’ infringements is likely to be put to the test more frequently than in the past.

In a decentralised landscape, the inclination to rely on discredited methodological approaches is likely to be more frequent (by the same token, the risk of substantive fragmentation is likely to increase).

A more explicit style when ruling?

A salient aspect of FIFA v BZ (and Booking) relates to the approach when delivering rulings. In the context of a preliminary reference, it is for the national court to apply the law, as interpreted by the Court, to the facts of the case. However, the Court, in both judgments, was explicit about the legal characterisation of the practices at stake (holding, in FIFA v BZ, that the rules were restrictive by object and, in Booking, that the clauses were not ancillary restraints).

This tweak in terms of style is reasonable if one considers the risk of fragmentation mentioned above. It is an effective means to ensure that a preliminary ruling is not interpreted differently from one court to another and, similarly, to avoid that the same issues keep coming back before Court.

There is a chance that, for these very reasons, the Court will also be more explicit (and/or more structured) about certain aspects of the methodology it follows to identify restrictions by object. At the very least, doing so would contribute to ensuring that national courts do not fall into the old trap of formalism when conducting their analysis.

One of the most significant developments of the past few years is the comeback of competition on the merits (as I had the chance to discuss here). For a long time (and certainly during the past decade), competition on the merits was nothing other than an abstract aspiration (a ‘general umbrella’, as Heike Schweitzer and Simon de Ridder crisply put it here), with no real substantive content.

There has been a push, very recently, to turn this abstract idea (with which it is hard to disagree) into an operational one. Instead of a ‘general umbrella’, it was hoped that competition on the merits would become a working tool allowing courts and authorities to draw the line between lawful and abusive conduct in individual cases.

The origins of this attempt are easy to trace in the case law. Competition on the merits was invoked by defendants in some cases (namely Google Shopping and Servizio Elettrico Nazionale) in the hope that it would (i) reduce the scope of Article 102 TFEU and/or (ii) make it harder for competition authorities to discharge their burden of proof.

The hopes behind this push have not materialised. It is clear after Google Shopping that conduct that is not inherently at odds with competition on the merits can be caught by Article 102 TFEU in a particular economic and legal context.

It is also clear that a competition authority cannot be required to show, always and everywhere, that the potentially abusive practice departs from competition on the merits. Where there is an established legal test, showing that the conditions enshrined therein are satisfied will be sufficient to prove an abuse to the requisite legal standard.

The attempt to turn competition on the merits into an operational concept has failed and might have backfired. This nebulous notion can be easily used against defendants (casting conduct as departing from competition on the merits is effective, if only as a rhetorical tool, to imply that it is necessarily abusive).

It may have failed, but the attempt to revive of competition on the merits has left a trail of confusion with which the competition law community has to live. The Commission, for one, could not avoid engaging with the concept in its Draft Guidelines. It was not an easy hand.

The Draft Guidelines are particularly helpful when they clarify that it is not necessary to show that a practice departs from competition on the merits in all circumstances. The question will typically be subsumed into the legal test if there is one already in place. This is an important, if uncontroversial, clarification.

On the other hand, the Draft Guidelines do not dispel the impression that the notion of competition on the merits is a source of confusion and duplication. This is not a criticism of the document: it is a criticism of the attempts to turn competition on the merits into something that it is not.

We have known for decades that competition on the merits cannot and will never be an operational concept. As I had the chance to discuss with Heike Schweitzer, Ordoliberals became aware, early on, of the limits of the concept and that it could not assist the sort of granular assessment that individual cases demand. It did not take long before it was abandoned (other than as a ‘general umbrella’, that is).

The Draft Guidelines illustrate the uselessness of competition on the merits as an operational concept. The overlap between Section 3.2. (‘Conduct departing from competition on the merits’) and Section 3.3. (‘Capability to produce exclusionary effects’) and the confusion to which this overlap gives rise is one of the most salient aspects of the document.

There is, for instance, duplication between the idea of competition on the merits and that of ‘naked restriction’ (or ‘by object’ abuse). Is showing that a practice departs from expression of competition on the merits not the same as showing that it is abusive by its very nature (in the sense that it has no plausible explanation other than a restrictive one)? If the former is established, what is the point of requiring proof of the latter too?

The duplication that the notion creates is, if anything, more apparent after Google Shopping. As pointed out above, the Court clarified in the judgment that some practices are only against competition on the merits in certain circumstances. This is true, for instance, of a scenario where a vertically-integrated dominant firm discriminates against rivals.

In such instances, a case-by-case assessment is warranted. The assessment, according to the ruling, will have to consider the relevant economic and legal context within which the practice is implemented.

The future Guidelines will have to account for this reality, and acknowledge that the issue of competition on the merits is context-dependent. Any future version of the document will have to distinguish between conduct that is inherently at odds with competition on the merits and that which demands a case-by-case assessment of ‘all the relevant circumstances’. This distinction necessary mirrors the framework laid down in Section 3.3.

A second, related consequence is that the issue of competition on the merits will overlap in theory and in practice with the analysis of effects (as is apparent from Google Shopping itself).

Is there a way forward, against this background? A cleaner approach that would avoid duplications would be to arrange differently the ideas currently found in Sections 3.2. and 3.3.

Google Shopping shows that it would be artificial to separate between competition on the merits and the assessment of effects. Both issues are part of the evaluation of ‘all the circumstances’ and will typically consider aspects pertaining to the economic and legal context.

It would therefore be more straightforward, more intuitive and more faithful to the case law to structure the analysis along the lines of the following:

First, naked restrictions which, by their very nature, are against competition on the merits and therefore inherently abusive. In this case, the dominant undertaking would only be able to escape the prohibition in exceptional circumstances (as discussed here).

Second, conduct which, by its very nature, is an expression of competition on the merits and as such incapable of having actual or potential effects on competition. These practices, if anything, show well how artificial it is to distinguish between Sections 3.2. and 3.3. and how intertwined the questions are. Pricing above average total costs is a valid expression of competition on the merits because it cannot be expected to exclude rivals, and vice versa.

Third, conduct that is presumptively abusive and thus at odds with competition on the merits, which would include exclusive dealing, loyalty rebates and tying in traditional (that is, non-digital) scenarios. In this context, the dominant firm may avoid the prohibition if it shows that the practice is incapable of restricting competition.

Fourth, conduct that requires a case-by-case assessment. Conduct falling within this category comes in two flavours. There are, on the one hand, those subject to a specific legal test, in which case showing that the conditions of the test will be sufficient to establish an abuse; and, on the other, those practices subject to an assessment of ‘all the circumstances’.