Chillin'Competition

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’.