Archive for the ‘Case-Law’ Category
For a number of years many in our peculiar little world have been pretty obsessed with standard-essential patents, due to a great extent to the economic significance of the legal fight at the heart of the so-called smartphone wars.
A bit more than a year ago the Commission made binding the commitments proposed by Samsung (see here for our initial comment on these) and adopted a decision declaring an infringement on the part of Motorola, which did not receive a fine. The Commission tried to introduce clarity in a mudded area in which there were no clear precedents and in which the industry couldn’t agree by providing a safe harbour for standard implementers/willing licensees; the Commission did so by means of two individual cases, one establishing the principle (Motorola), and one articulating it in practice (Samsung).
As these cases were ongoing the European Court of Justice received a preliminary reference from the Düsseldorf District Court (Landgericht Düsseldorf), concerning the very same issues, with the difference that the Court was not being asked about fact-specificities, but about the general, broader, principles and concepts at issue. The referring Court even explicitly opposed the so-called Orange Book standard to the Commission’s reasoning in Motorola and Samsung noting that they would seemingly lead to opposite results in casu. At the time some wondered whether the Commission had done well in deciding its cases prior to the ECJ’s ruling.
The underlying national case was one in which Huawei had sought an injunction against ZTE after the two companies failed to reach a licensing agreement on FRAND terms for a patent essential to the LTE wireless broadband technology standard.
Last November AG Wathelet issued an Opinion in the case in which he essentially concurred with the Commission’s views.
That highly anticipated ruling was rendered only a couple of hours ago (see here), and it has clearly endorsed the Commission’s action in this area.
The questions posed by the referring Court were carefully drafted and structured and sought detailed guidance from the ECJ on very specific points. The ECJ’s ruling nevertheless responds to them altogether (§ 44), given that they all seek to ask one question: when is the seeking of injunctions by an undertaking with a SEP that it has committed to license to third parties on FRAND terms an abuse of dominance?
The Court starts off citing the classic case-law on definition of abuse (§ 45) and recalls the fact that exercising the rights that form part of an IPR cannot in itself constitute an abuse of dominance; an abuse will only exist in exceptional circumstances (§§ 46-47). It then goes on to identify the exceptional circumstances in the case, after noting (§ 48) that they are different from the ones found in the case-law on refusal to supply IPRs.
According to the Judgment, those exceptional circumstances in the situation at issue are (i) the indispensability of the patent (§§ 49-50); and (ii) the fact that SEP status was only achieved in return for an irrevocable undertaking to licence on FRAND terms (§§ 51-52). The Court takes the view that since these circumstances “create[s] legitimate expectations on the part of third parties that the proprietor of the SEP will in fact grant licences on such terms, a refusal by the proprietor of the SEP to grant a licence on those terms may, in principle, constitute an abuse within the meaning of Article 102 TFEU” (§53).
How do we then determine what FRAND terms are? The Court insists on the need of striking “a fair balance between the interests concerned” (a wording that sounds reminiscent of Orange Book, even if the approach in the latter Judgment is then not followed) (§ 55). In this regards, the Court acknowledges that the need to enforce IP rights provides a range of legal remedies including the right of access to Courts (§ 57), and that therefore “in principle, the proprietor may not be deprived of the right to have recourse to legal proceedings to ensure effective enforcement of its exclusive rights (…)” (§ 58).
The Court’s approach is that the irrevocable offer to grant licences on FRAND terms) cannot “negate the substance of [those] rights”, but that “it does, none the less, justify the imposition on that proprietor of an obligation to comply with specific requirements when bringing actions against alleged infringers for a prohibitory injunction or for the recall of products” (§ 59).
The Judgment then goes on to identify those “specific requirements”, namely that in order to escape 102 liability:
(1) The SEP holder must give notice or hold prior consultations –even if the SEP has already been used by the infringer- or, in other words, it must “alert the alleged infringer of the infringement complained about by designating that SEP and specifying the way in which it has been infringed” (§§ 60-62; in the latter of these paras. the Court explains the need for this requirement, which has to do with the number of SEPs in a product and the fact that a party may not be aware about possible infringements);
(2) Following the expression of the alleged infringer’s willingness to conclude a licensing agreement on FRAND terms, the proprietor is to present “a specific, written offer for a licence on FRAND terms, in accordance with the undertaking given to the standardisation body, specifying, in particular, the amount of the royalty and the way in which that royalty is to be calculated” (§ 63). The Court explains in 64 that this requirement in reality seems to already stem from the commitment to standardization body to grant licences on such terms (§ 64). The Court does not venture into the discussion of what is fair or not, but notes that the proprietor knows the content of other licensing contract and can (should) operate guided by the principle of non-discrimination (§ 64).
(3) It would then be for the alleged infringer “to respond to that offer, in accordance with recognised commercial practices in the field and in good faith, a point which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics” (§ 65) [Comment: This is perhaps the most unclear part of the Judgment]. In this sense, the alleged infringer will only be able to bring an abuse of dominance claim against the injunction if it has submitted to the proprietor of the SEP in question, promptly and in writing, a specific counter-offer that corresponds to FRAND terms (§ 66) [Comment: I understand how the Court favours defining FRAND terms on the part of the holder by reference to non-discriminatory conditions, but it is unclear to me what FRAND terms are from the perspective of the alleged infringer].
The Court also adds that when the alleged infringer is using the teachings of the SEP prior to concluding an agreement, it should, “from the point at which its counter-offer is rejected, to provide appropriate security, in accordance with recognised commercial practices in the field” which must include, among others, the numbers of past acts of use (of which it must be able to render account) (§ 67).
(4) In case of no agreement after this round of offer and counter-offer, “the parties may, by common agreement, request that the amount of the royalty be determined by an independent third party, by decision without delay” (§ 68). [Comment: the Judgment reads “may”, but it sort of reads as intending to be saying “shall”; also, query: what are the implications of the “by common agreement” qualification?
(5) The Court also takes into account the public interest in having invalid or non-truly-essential patents identified as well as the right to effective judicial protection and states, in a nutshell, that the alleged infringer shall not be banned from challenging the validity, essential nature of the patents and /or their actual use (§ 69). [Comment: once again the Judgment resorts to soft wording (i.e “an alleged infringer cannot be criticized for…”) when it seems to mean something clearer (i.e. “the alleged infringer must be free to…”)]
– Interestingly, whereas the Judgment reads as if these were 5 cumulative conditions, as I read them I got the impression that requirements 4 and 5 were not given the same relevance. As observed in the comments above, the drafting seems to be softer, alluding to facultative possibilities or elements that “may” be taken into consideration, as opposed to 1, 2 and 3 that “must” be required. This impression seems to be confirmed by § 71, which in summarizing the Court’s response does only refer to requirements 1 to 3.
In many ways, it would seems as if the Court had included (4) and (5) as a way of endorsing the Commission’s approach in Motorola and particularly in Samsung.
An open question that remains relates to requirement (4) and the relevance of third party determination given the wording used (i.e. “may”, “by common agreement”, etc).
– Remarkably, there is nothing on the Judgment about the alleged applicability of the ITT Promedia standard for “sham litigation”. As visible from the above, the Court does not approach the case in terms of shams (nor of refusal to supply), but in terms of self-imposed constraints on the right of access to Courts (one more example of the “estoppel abuse” theory identified by Kevin Coates?)
– Also of interest is the Court’s response to Question 5, in which it clarifies that all the above applies only to actions that can prevent products manufactured by competitors to appear or remain on the market (§§ 73-74) and not to other actions (such as those seeking the rendering of accounts in relation to past acts of use of that SEP or an award of damages in respect of those acts of use).
– I’m not sure that the Court has responded to everything in the manner wished by the referring Court (notably, what’s FRAND remains unclear), but I’m pretty sure that it is a strong endorsement to the Commission, the only noteworthy addition being perhaps the reply to question 5.
Last week the ECJ rendered its Judgment in Deutsche Bahn, a case that was already discussed in this blog at the time Advocate General Wahl issued its Opinion
For background on the case, comments on the Opinion, and interesting readers’ comments, see our previous post). Those already knowledgeable of the case and of the issues it raises can jump directly to the second half of the post, in which we discuss the ECJ’s ruling and give our views.
(This is a bit lengthy, but I bet you’ll find a couple of interesting points)
The facts. For those too lazy to read the Judgment or our prior comments, the case is, in a nutshell, about an inspection carried out without judicial authorization in the course of which the Commission found documents related to a possible different infringement in relation to which the Commission had received a prior complaint (apparently, and this is key, inspectors had also been briefed about that complaint, although the Commission says this was only for background purposes). Since the subject matter of that evidence was out of the scope of the inspection decision, the Commission adopted a second inspection decision on the fly [old/bad joke alert!]. Those as well as a third inspection decision were later appealed before the General Court.
[By the way, the substance of the case would have also been interesting. The first suspected infringement was about whether Deutsche Bahn could offer preferential treatment to its subsidiaries; does that sound familiar? The case was nevertheless eventually closed pursuant to commitments (see here) which, as it happens, closed the case but did not clarify the law].
The General Court’s Judgment (see here) unsurprisingly confirmed the Commission’s wide inspection powers, stating that there was no need for the Commission to obtain judicial authorisation prior to a raid and that documents discovered (genuinely) by accident which indicated a separate infringement could be used as evidence of that infringement, as long as the proper procedural requirements were respected.
AG Wahl’s Opinion nicely summarized the relevant case law on inspections, and essentially took the view that whereas the Commission shall have a certain leeway when it comes to inspection powers, those already ample powers are to be used prudently, and their misuse must be subject to effective judicial review.
Firstly, with regard to the alleged necessity of prior judicial authorization, Mr. Wahl considered that ex post judicial review on the part of EU Courts already offers an adequate level of protection of fundamental rights, and observed that in Delta Pekarny (a recent case in which the ECtHR ruled that fundamental rights were infringed) the ECtHR decision could be explained by the fact that the inspection decision was not subject to any—either ex ante or ex post—judicial review. Secondly, on “surprise” discoveries, the AG took a different view from the General Court and took issue with the fact that the Commission had informed inspectors about the “second” infringement. AG Wahl suspected the “only plausible explanation […] is that information on the DUSS suspected infringement was given to the Commission staff so that they could ‘keep their eyes peeled’ for evidence related to the second complaint” (para 77). This means that the Commission effectively circumvented Art 20(4) of Reg 1/2003, either deliberately or through negligence. Whereas in Dow Benelux, the Court ruled that there is no reason why the Commission should disregard documents pointing to a different infringement if it was genuinely found by accident, AG Wahl noted in para. 82 that “[t]his is clearly not the type of conduct which the Court meant to allow under its Dow Benelux case-law. There is, in my view, no difference between a case in which the Commission launches an inspection without a valid decision and one in which the Commission proceeds on the basis of a valid decision, but searches for information relating to another investigation, not covered by that decision”.
The ECJ’s Judgment:
On whether a judicial authorization is necessary:
In a prelude of what is to come, the ECJ analyzes the case law of the ECtHR concerning the fundamental right to the inviolability of the home, observing (i) that it states expressly that absence of prior judicial authorization nay be counterbalanced by a post inspection review covering both questions of fact and of law; and (ii) that the EU legal system is premised on that basis, and that its legality under the ECtHR is ensured by the fact that EU Courts carry out an in-depth review of law and fact (unsurprisingly, the ECJ cites KME and Chalkor in support of this declaration). Judicial authorizations are only necessary, pursuant to Art. 20(6) and (7) of Regulation 1, when the undertaking opposes the inspection, which was not the case here.
The ECJ also goes on to explain why this system is also compliant with the fundamental right to effective judicial review, thus dismissing the applicant’s second ground of appeal.
On the “not-so surprise” findings:
The debate before the ECJ focused on whether the Commission had had valid reasons for telling its officials about the existence of suspicious concerning the second infringement prior to the inspection, as declared by the General Court, but as disputed by the applicant and the AG.
I didn’t take for granted that the ECJ would have dealt with the issue given that –as argued by the Commission- it could be characterized more like a question of fact than of law, and as you know issues of fact cannot be reviewed by the ECJ. Nonetheless, the ECJ states very very succinctly in para. 54 that DB “is arguing that the GC erred in law by holding that the Commission had valid reasons to tell its officials about the existence of suspicions concerning [the second infringement] before the first inspection”. The ECJ does not explain why the claim is really a legal and not a factual one (interestingly, the whole incident does not appear in the factual introduction to the Judgment…) but right away asserts the admissibility of the plea [perhaps to reassure some as to the appropriateness of the judicial review carried out by EU Courts in this area???😉 ] (to better understand this, we suggest you read our comments below).
As to the merits, the ECJ recalls the relevant case law in the field, emphasizes that the Commission can only search for documents coming within the scope of the subject-matter of the inspection as defined in the decision (para. 60), recalls that pursuant to Dow Benelux the Commission can start new investigations if it comes across new evidence genuinely by surprise (para 59) , but concludes –siding with the AG- that although inspectors need to be provided with background info about a case, “all that information must nevertheless relate solely to the subject-matter of the inspection ordered by the decision” (para. 62). The Court then concludes that the first inspection was vitiated by an irregularity “since the Commission’s agents, being previously in possession of information unrelated to the subject-matter of that inspection, proceeded to seize documents falling outside the scope of the inspection as circumscribed by the first decision” (para. 66). The ECJ decided to give itself final Judgment under Art. 61 of the Statute of the Court and annulled the second and third inspection decisions instead of sending the case back to the GC.
–The Judgment is solidly built on the case law of the ECtHR, which is abundantly cited, as well as on AG Wahl’s Opinion, which is also repeatedly cited. It is no surprise that procedural standards have progressively aligned with those set out by the ECtHR, whose great influence in Luxembourg is already now undeniable and increasingly more visible, even pre-EU membership to the Convention.
-As we said in our previous post, we agree with the idea that it would be excessive to necessarily require prior judicial authorization, when ex post judicial review is available, but, in our view, the key issue is that of the quality of the judicial review itself. The ECJ actually cites case law of the ECtHR saying exactly that, “that the key issue is the intensity of the review covering all material matters of fact and law and providing an appropriate remedy if an activity found to be unlawful has taken place (…)” (para. 41 of the Judgment). The ECJ then assumes that since judicial review extends to both matters of law and fact, and includes the power to assess evidence and annul decisions, it is intense enough. In my view, however, scope and intensity are two different things, and the ECJ does not really talk about intensity. Admittedly, the intensity of judicial review is hard to assess, it is more a matter of attitude than of law (as I explained here; in Spanish, sorry…).
– With regard to the misconduct of the investigation:
(i) it may be just me, and I see how this is arguable, but I think it is possible that the Court may have blurred the lines between what is an issue of law and fact amenable to appeal before the ECJ as a way to appease concerns about the intensity of the review required by the ECtHR; if so, that would be an interesting development;
(ii) on the merits, the Judgment endorses a strict approach towards the Commission’s misuse of the very ample powers that it enjoys and that EU Courts recognize –and typically uphold- with no problem. The thing is that when one has such great powers, there is really no need to use shortcuts or engage into arguable practices; the Commission could have avoided this whole problem by adopting two different decisions, or by referring to the two suspected infringements in the same one. Why it did not do that is not easy to understand;
(iii) at the end of the day, in my view, the Judgment is more remarkable for its sensible approach and general message than for its practical consequences (not only was the situation at issue very specific but also I, for one, have first-hand recent experience confirming that the Commision had already learnt the lesson prior to the Judgment being rendered..)
P.S. I offer a couple of rounds of beers to anyone who can tell good inspection anecdotes in the comments to this post (hearsay is admitted)🙂
Two important Opinions: AG Kokott on Post Danmark II (C-23/14) and AG Wahl on AC Treuhand (C-194/14 P)
A few hours ago two important competition law-related Opinions were made public by the European Court of Justice. Both are remarkable and, interestingly, I would even dare to say –and note that this is not a criticism- that the direction of each of them could have been expected in the light of the track record of their respective authors, Mr. Wahl and Ms. Kokott. Similarly, I also have the sense that the Court might finally be inclined to follow only one of the two Opinions, I let you guess which.
That said, both Opinions raise most interesting questions regarding two very different issues, one of them novel (can a cartel “facilitator” be sanctioned under 101 TFEU despite not being a party to the agreement?) and one of them fairly old but always hot (what are the criteria to assess loyalty rebates by a dominant firm?; Is it mandatory to follow the “as-efficient competitor test”; Is there an appreciability threshold for such conduct to fall under 102 TFEU?).
Let’s look at them one at a time. I have more extensively summarized Kokotts Opinion (because I know you’re too lazy to read Opinions in full), but have included all key messages in bold for those lazy enough to not read even the blog posts😉
AG Kokott on Post Danmark II (more on the fight for the soul of EU Competition Law)
The legal treatment to be applied to rebates on the part of dominant companies remains one of the most contentious issues in contemporary EU competition law and is in many ways the main battleground on the –legal or economic- soul of EU competition law. Discussions about it have abounded in recent times (see here for a summary), and have also occupied our attention (for Pablo’s views see here, here or here, and for my own views click here).
Kokott sends a clear message right from the start (para. 4), noting that the case comes at a particularly controversial time when many push for a more “economic approach”, and recommends that “in is replies, the signal effect of which is likely to be extended well beyond the present case (she refers to Intel in a footnote) the Court should not allow itself to be influenced so much by current thinking or ephemeral trends, but should have regard rather to the legal foundations on which the prohibition of abuse of a dominant position rests in EU Law”.
In her Opinion the AG first goes on to identify the general criteria that should be taken into account in order to assess rebates, referring first to the special responsibility of the dominant company (para. 24), underlining that the “quantitative” or “loyalty” labels are irrelevant, and that what is decisive is the possibility that they may lead to an exclusionary effect which is not economically justified (para. 29). AG Kokott then insists but that there is not a closed list of factors to be considered given that each rebate might have its peculiarities, but identifies some particular criteria, namely (a) the “criteria and rules governing the grant of the rebate” (paras. 36-41: referring to loyalty building/suction effects, which depend inter alia on retroactivity, the volume and time-span of the rebate, as well as intent -the latter is referred to as a “strong additional indication” as opposed to a “mandatory precondition”-; she also adds that the charging of “negative prices” should not be a precondition either (para. 41); and (b) the conditions of competition in the market and the position of the dominant company (see paras. 42-50, very closely linked to the facts of the case). She sums all this up in a “interim conclusion” (para. 55) stating that a rebate scheme operated by a dominant company will be abusive “where an overall assessment of all the circumstances of the individual case shows that the rebates are capable of producing an economically unjustified exclusionary effect, it being important to take into account in that regard, in particular, the criteria and rules governing the grant of the rebate, the conditions of competition prevailing on the relevant market and the position of the dominant undertaking on that market”. Nothing groundbreaking or too controversial here.
From para. 57 onwards she refers to the Commission’s Guidance on exclusionary abuses and its endorsement of the “as efficient competitor test” that the Institution imposed upon itself. She notes that such an administrative practice “is not, of course, binding on the national competition authorities and Courts”. Importantly, she says that “although the national authorities themselves are not precluded from following the Commission’s example and using the AEC test, they are none the less, from a legal point of view, bound only by the requirements arising from Article ” and that “[i]t is for the Court to define what those requirements are”. This isn’t groundbreaking at all either, but some might consider it controversial.
It is at this point that the most relevant stuff comes. In para. 61 the Opinion observes that Article 102 does not support the inference of any legal obligation requiring the use of the AEC test. It then observes that in previous cases (Telia Sonera or Post Danmark I), the ECJ has validated this test but not as an “absolute requirement” for all price-related cases. The AG remarks, first, that the said-case law is specifically concerned with other pricing practices that are by their nature closely related to the cost structure of undertakings and also, second, that the wording used by the Court in those cases made it clear that anticompetitive exclusion is not only that which affects equally efficient competitors (62-63).
With regard to rebates in particular the Opinion refers to the ECJ’s Judgment in Tomra (para. 92 later mentions that Tomra was rendered “at about the same time” as Post Danmark I) to support the contention that a cost-price assessment is not mandatory. Although she contemplates the possibility of establishing this requirement, she expresses “skepticism” towards any reorientation of the law (65) given that (i) “the added value of expensive economic analyses is not always apparent and can lead to the disproportionate use of resources” [economist will love this..] (66); (ii) “it is wrong to suppose that the issue of price-based exclusionary effects can be managed simply and in such a way as to ensure legal certainty by applying some form of mathematical formula based on nothing more than [business data] not uncommonly open to different interpretations” (67); and (iii) “the finding of an abuse requires taking into account all the relevant circumstances of the individual case in question and must not be confined to an examination of price and cost components alone” (68).
In para. 69 the Opinion explains that taking into account all circumstances + considering whether there is any objective justification for the rebate “adequately ensures that the legal requirements (…) do not disregard economic realities”.
Paras. 71 to 75 then develop some further objections to the AEC test, notably regarding the fact that when a dominant company is present the structure of the market often rules out the presence of equally efficient competitors (due e.g. to barriers to entry, economies of scale or network effects) which implies that “the competitive pressure exerted by less efficient undertakings must not be underestimated.
In the light of the above, Kokkot’s recommendation for the Court in para. 75 is to respond that Article 102 does not require the abusive nature of rebates to be established pursuant to an AEC test, but that national authorities and Courts are at liberty to avail themselves of a price/cost analysis unless, on account of the circumstances, it would be impossible for another undertaking to be as efficient as the dominant one.
Finally, the Opinion addresses the question about how “likely and serious” the exclusionary effect must be in order for Art. 102 to apply. With regard to likelihood, it states that “hypothetical effects” are not enough because the rebate must be capable “not only in the abstract but also in practice of making it difficult or impossible for the dominant undertaking’s competitors to gain access to the market”; in its view, the provision is triggered in the face of “likely” effects, not of “very likely” or ·particularly likely” or “beyond reasonable doubt”. At most, the Opinion explains, the degree of likelihood may have a bearing on sanctions. With regard to seriousness (appreciability) she first observes that the doubts of the Danish Court may have to do with a deficient translation of the Judgment in Post Danmark I from French to Danish (the latter version referred to appreciable effects/elimination effects instead of exclusionary effects). In her view, likely exclusionary effects are enough, there not being a need to qualify it those effects as serious or appreciable; the Opinion then cites Tomra for support, and adds that a de minimis threshold doesn’t seem necessary given that there will already be a an assessment of all relevant circumstances and also given the fact that Art. 102 extends only to conduct that is likely to affect trade between Member States [I personally don’t think that this latter argument is valid, for the effect on competition and on trade between Member States are two different things assessed pursuant to different criteria; this, in my view, is quite clear in the case law on 101]
This very last section of the Opinion is what I find less satisfactory (many people will probably take issue with the previous stuff too) because it leaves a question unaddressed (in its defense, one that was not posed directly in the case, and one that I think is at the root of most major current substantive discussions: what is really anticompetitive exclusion/foreclosure? when is it enough to warrant intervention? is it about making life more difficult to competitors –and how much more?- or about their elimination –and to what extent-?) I’m not sure that the argument that “we will know after considering all circumstances” is enough. In practice the issue if often solved by prosecutorial discretion (the EC at least has chosen well its cases) but, query, is that the appropriate solution? Perhaps the question is not so relevant for loyalty rebates since –according to Michelin and Intel –the only two Judgments that, unless I’m wrong, contain the expression- they are considered restrictive “by object” (pending the objective justification assessment), but it is the key question to every other practices assessed under 102.
As for the rest of the Opinion, I think there is nothing new; it fits within the line of the established and controverted case-law on the issue that we have extensively discussed here. I suspect that (i) people with strong views on either sides will regard this Opinion as a lost opportunity for very different reasons; (ii) the ECJ is likely to endorse this view; and (iii) I also suspect AG Wahl might take a different view when he writes his Opinion in Intel. And speaking of AG Wahl:
AG Wahl on AC-Treuhand (or what is a restriction of competition?)
The second Opinion rendered today concerns a novel issue which AG Wahl proposes to address by returning to the fundamental –and unclear– concept of restriction of competition.
The case concerns an appeal against the General Court Judgment endorsing the Decision which –for the first time- sanctioned a company for its role as a “cartel facilitator” despite not being a player in the affected markets. In essence, the company’s role consisted in arranging and participating in meetings, gathering and circulating data, moderating tensions and fostering commitments in exchange for a remuneration.
The ground of appeal that is dealt with in the Decision raised two interesting questions, namely: (i) does Article 101 encompass this sort of conduct?; and (ii) subsidiarily, could the company be sanctioned in a manner compliant with the principle of legality considering that there was no previous case-law establishing that such conduct fell within the scope of Article 101?
In the view of AG Wahl, “in order to identify a restriction of competition it must be shown, following the pertinent economic analysis, [intermission, note the difference in the language compared to the previous commented Opinion] that the company at issue has renounced, totally or partially, by its conduct, to exert a pressure characteristic of effective competition on the rest of the operators in the market or markets affected to the prejudice of economic efficiency and consumer welfare” (para. 1, later paraphrased at various key paragraphs of the Opinion, notably 47, 50, 51, 62 and 69). In the light of this notion of restriction, and considering that AC Treuhand did not exert any competitive pressure on the other participants in the cartel prior to the agreement, it never ceased exerting any such pressure and therefore, according to AG Wahl, cannot be held directly responsible for the cartel. Consequently, he recommends the ECJ to annul the General Court’s Judgment.
I see the point, but at the same time I have doubts: didn’t the company participate in an agreement that had as its object the restriction of competition? Also, it is true that a wide interpretation of Art 101 to capture facilitators could potentially extend even to lawyers not doing their job properly; at the same time, however, organizing cartels should probably not be a legitimate business.
Btw, the notion of restriction used here –despite the reference to economic analysis- seems close to that often criticized as ordoliberal; I’m not saying this pejoratively, I’m simply observing it.
According to the Opinion – which in para. 71 is quite blunt- if the Court were to endorse the view of the General Court and of the Commission, it would “profoundly disturb” the method of identification of anticompetitive conduct by disconnecting the conduct and the economic restriction in such a way that the definition of the relevant market and the identification of anticompetitive constraints therein would become completely superfluous. Again, I see AG Wahl’s major point, but I’m not really persuaded by the latter part of this particular argument, for market definition is already deemed superfluous when it comes to cartels…
The Opinion then goes on to consider the theoretical question of whether the company could be sanctioned as an “accomplice” (paras. 77-83). It notes that whereas this would seem convincing at first sight, the charges were not framed in that sense and, moreover, the concept of “accomplice” belongs to criminal law and is alien to administrative law, so resorting to it in a case like this would not make sense (para. 82).
In AG Wahl’s view, it is exclusively for the legislator to foresee a sanction for accomplices under EU Law. After stating this, at the very end of the Opinion, he sends a clear message that I, for one, am likely to quote in the future-: “it is necessary to underline that the will of the Institutions of safeguarding the effectiveness of their policies must be conciliated with legality and legal certainty. As pointed out by an author (a footnote clarifies that the “author” is Pierre Pescatore) the effectiveness -effet utile- doctrine cannot lead the Court of Justice to interpret Treaty provisions so as to extend to the maximum the competences of the Institutions, but must permit to interpret the pertinent rules in the light of their objective and goal”. (Note that an English version of the Opinion is not yet available; this is my own translation).
The second question raised by the applicants was, in my view, equally interesting, but was not addressed in the Opinion (although I predict that it may be more relevant to the eventual Judgment…). Could the company be sanctioned for acting as a facilitator when the law was unclear –there was no precedent- as to whether it violated Art. 101? In practice the Commission has sometimes decided not to sanction a company resorting to this reasoning but it has done so on its own motion (see here). However, is there a legal obligation for the lege to be clear for the poena to be imposed? This is a question –or rather a problem- that, in reality, concerns not only this issue but the whole of competition law (with the exception of cartels, or at least of how the term “cartel” was traditionally understood). I will recall the answer that the General Court gave to an argument that also concerned the principle of legallity in Case T-167/08, Microsoft (compliance):
- “(…)the use of imprecise legal concepts within a provision does not prevent liability being established as against a person who contravenes it. As the Commission points out, if it were otherwise, an infringement of Article 101 or 102 TFEU – which are themselves drawn up using imprecise legal concepts, such as distortion of competition or ‘abuse’ of a dominant position – could not give rise to a fine without the prior adoption of a decision establishing the infringement“.
I guess that says a lot about our discipline…
Bananas have traditionally been an important product in competition law. Among others, they provoked the peculiar market definition at issue in United Brands (vitiated by the toothless fallacy :“the banana has certain characteristics , appearance , taste , softness , seedlessness , easy handling , a constant level of production which enable it to satisfy the constant needs of an important section of the population consisting of the very young , the old and the sick”), and they also inspired Kevin Coates’ “exploding banana hypothesis”.
Most recently they were the subject of the ECJ’s Judgment in Dole. A few weeks ago Pablo commented on this case focusing on how the Judgment illustrates that the “object” label is not about formal categories nor about a presumption of effects. I don’t disagree with Pablo’s views, but I think that they only tell one part of the story.
In a nutshell, employees of companies active in the banana trade apparently had numerous bilateral calls to discuss/disclose pre-pricing information (namely factors relevant for the setting of quotation prices for the forthcoming week or price trends). These exchanges of views were in a sense pure gossip, and were not liable to affect real market prices because quotation prices were neither actual prices nor the basis for the negotiation of the actual prices. Moreover, the Commission had not contested that the employees taking part in these discussions did not have the authority to set the quotation prices.
The legal issue
Against this background, the legal question raised by Dole’s third ground of appeal was notably whether it is possible to characterize the information exchanges as an infringement by object. According to Dole, the information exchange was in no way capable of reducing uncertainty on the market regarding actual prices.
The ECJ validated the General Court’s conclusions in this regard, observing essentially that information had been exchanged, that the information could be relevant to infer “signals, trends or indications”, that accordingly the exchange of info created abnormal conditions of competition, and that a given practice may have an anti-competitive object even if it does not have a direct link with consumer prices.
Why I think this is bananas
Many of you may think that there’s nothing new here, and that all this was already present in T-Mobile (and partly in the guidelines on horizontal agreements), and you would be right. This is not so much a novelty as an additional (and particularly illustrative) step in a very wrong direction.
The point I want to make today is not about whether the object label was rightly applied or not (a matter on which I have doubts, particularly if one takes seriously the requirement on the “sufficient degree of harm” set out in para 58 of Cartes Bancaires).
My point is that even if the object categorization were correct, this should only entail a procedural consequence: that the Commission would be dispensed of the burden of proving effects. In spite of my doubts, I can see how the Commission could regard these practices as being more restrictive than not and lacking a “legitimate objective” (which was the sensible point made by Pablo in his post on the Judgment).
In my view, the widespread misconception lies in the automatic identification of “object restriction” with “very serious infringement” and even with a “cartel”. In other words, the way I see it, “object” is about obviousness, not about gravity.
Even if the practices at issue were labelled as object and not considered objectively justifiable or redeemable under 101(3), they –apparently- were little more than gossip of irrelevant employees with regard to quotations far removed from actual prices. Is that really so serious as to deserve a 60 million euro cartel fine? I don’t think so. And would the Commission have characterized it equally had it not received a leniency application? I doubt it.
A cartel is something else and is subject to a whole different level of reproach (even criminal in some jurisdictions); companies and individuals know when they are engaging in a cartel, and do not engage in it unconsciously; a cartel does have effects; a cartel is the “supreme evil of antitrust” (I’m using Scalia’s words in Trinko), and an exchange of information like this, which appears as practically irrelevant at all levels, might not be right, may be a restriction by object, but it certainly is not a cartel deserving a quasi-criminal fine. It is a venial sin, not a mortal one.
Holding the contrary is not only at odds with traditional (pre-T Mobile) case law, it also is at odds with economic reality and with the principles underlying any sanctioning regime; it is, in sum, bananas.
Searching for an answer. A few days ago I asked Pablo in public (following some private teasing) whether there is any Article 102 TFEU decision adopted by the Commission that he liked. He tells me he replied with a blog post last week (see here). Perhaps I read it too quickly, because I don’t see an answer🙂 In any event, the fact that he did not identify any case with which he agrees probably means that there is no such thing.
[Intermission: the fact that we are good friends enables us to discuss things in a way which would be much harder to do with other people. This was also the case with Nico back in the day. This, by the way, confirms that having another brilliant academic with views not always coincidental with mine was a great decision for this blog].
This failure to choose is interesting because, in my view at least, the Commission is quite (perhaps too) selective when it comes to picking abuse of dominance cases (that is unless they are predestined to go through the commitment route; it’s those that I personally like the least, not the Article 7 ones, which tend to be quite solid).
Law in abstract and Law in casu. The reason Pablo doesn’t reply citing specific cases is because he says he “does not see Commission decisions that way” (I can see how people don’t have a list of “best” and “worst” decisions, but if anyone had one, it would have been Pablo…). His point is that he doesn’t really care about cases, nor about who wins or loses, but about “the way in which the law is shaped and evolves over time”.
This is commendable for an academic, but I’m not sure I agree with the implications. In competition law it is cases that shape the law and that drive its evolution, so one can perfectly assess cases in the light of their contribution to the state of the law. If what Pablo means is that he doesn’t care what party wins or loses, I can testify that he truly doesn’t. If what he means is that cases should not be driven by policy but by the law, then we fully agree. However, I don’t see why all of this could mean that there cannot be cases that he likes or dislikes.
The approach of a practitioner is not, or should not be, so different. I only care about the party who wins when the case involves a client of mine. I also take an interest, but one that has nothing to do with the law, when a friend is involved (for disclosure purposes: I have good friends involved in Intel and Post Danmark II). As for the rest of the cases, I have enough with understanding the case-law and how it can relate to my clients’ issues, and I am not so concerned about contributing to the evolution of the law in a particular direction (partly because I don’t know what side I’ll be on in the future, and partly because it would be pretentious on my part: I would rather leave that to those whose jobs is to study cases in the depth they deserve, like the parties to every case, the judge, the clerks, or the academics who may want to contribute to the debate).
In sum, I’m not in the business of trying to influence the evolution of the law (except when paid to do it), and this is what explains that I haven’t written about the ongoing debates on exclusivity rebates, Intel and Post Danmark II, that occupy Pablo and others at a time when these important specific cases are pending.
Pablo’s whole post is about returning a question to me (never mind that mine wasn’t answered!), and to compel me to
spend part of a Sunday morning typing instead of doing better things break my silence; the question is:
Do I believe exclusive dealing should be prohibited absent an objective justification or whether, instead, Article 102 TFEU enforcement should follow the principles set out by the Commission in the Guidance and by the Court in Delimitis?
On the key assumptions underpinning the debate. Pablo’s post notes that his (brilliantly written) paper on Intel , everything, exclusive dealing and loyalty rebates focused not on who won or didn’t, but on the “key assumption underpinning 35 years of case law”.
Discussing key assumptions makes a lot of sense, so let’s start from there:
-Unless I’m wrong, the key assumption underpinning 35 years of case law is that in markets characterized by the presence of a dominant company (not the case in Delimitis, mentioned by Pablo), the use of exclusivity inducing arrangements can be deemed prima facie restrictive of competition. I’m familiar with the case law in this regard and actually think that this is sort of intuitive, for exclusivity almost by definition raises barriers to entry and deprives rivals of scale (as Pablo has very well explained in other domains –see here-, EU Courts have been able to implicitly incorporate sound economic insights to their case law). Many of the most reputed competition economists do not seem to question this. I won’t bother to conduct research on this point for a blog post, but I happen to have read this Carl Shapiro piece yesterday for a case in which I’m working, and it is quite clear.
– And unless I’m wrong, the key assumption underpinning the critique to that case-law is that “the lessons of experience and economic analysis” (this is the formulation in vogue, also used in Pablo’s post, tailored to evocate the Cartes Bancaires Judgment and draw a parallel) undoubtedly show that exclusivity arrangements are more often than not procompetitive, also when carried out by a dominant firm. Leaving aside the fact that experience and economics do not always go hand in hand, there is this widespread assumption that according to economic “science”, it is absolutely beyond discussion that the law here is a mess.
Leaving the theoretical economic literature aside (basically because I don’t know much about it; query: is there so much conving research on the advantages of exclusivity when carried out by a dominant firm?), I know from my personal experience with companies that exclusivity inducing rebates may –in certain cases- be perfectly justified by reasons other than anticompetitive motive. But I frankly do not know whether these outweigh, in the abstract or in general, the anticompetitive perils associated to these practices when carried out by a dominant player.
Those who have heard my presentation on two-sided markets or that will read my forthcoming Competition Law Journal article on the subject will realize that I’m all for taking into account economic lessons -when they are well established- for the application of the law. I’m simply not fully persuaded that economic research so clearly shows that the current state of affairs in the EU is so manifestly wrong.
Since I am asked, in my view the current state of the law strikes what seems to be a reasonable balance, at least in theory. It may, like almost anything, be debatable, but I fail to see it as the epitome of absurdity:
-In the field of Article 101, the Commission’s soft law as well as the case-law (mainly Delimitis, cited by Pablo) explicitly acknowledge the mixed effects that exclusivity agreements may have, and subject them to a balancing test in which the burden of proof rests on the accusing party. No one seems to complain about this.
-In the field of 102, the case-law takes into account that the degree of competition is already lessened by the presence of a company that is, by definition, able to behave independently of competitors and customers (in a way, conducting a strict foreclosure/effects assessment from this starting point risks incurring a variant of the cellophane fallacy, which is what the Court said, in a way, in the heavily criticized para. 245 of Michelin II) and strikes a different balance. This is explicitly explained in para. 89 of the Intel Judgment.
In the 102 domain, precisely because competition is considered to be reduced, restrictive effects are presumed in a first stage, BUT there always remains an open door to show that the practice is not abusive because parties can always show that the arrangement is objectively justified.
This reflects a double assumption that exclusivity always makes life more difficult for the competitors of the dominant company (as explained in para.150 of Intel, the analysis favored by the Court is one of difficulty, not the one of impossibility linked to the as-efficient competitor test set out in the Guidance; this is a crucial point that many overlook and that has to do with how we define foreclosure) and that sometimes exclusivity is part of a procompetitive strategy.
As I hinted in the first comment to Pablo’s post on Intel, this is key. If this escape door were not here, I would also take issue with the case-law. But it is, as unequivocally stated in paras. 94 and 173 of the Intel Judgment. In my view, this explicitly acknowledged the economic lesson that in some cases these practices may be procompetitive and hence should not be prohibited. Why is this, legally speaking, a problem? To the extent the presumption can effectively be rebutted, I see no problem to it.
Now, a different debate is whether an “objective justification” defense is a mere chimera or not, and there, I do agree that it should be a real possible defense, not just some nice wording.
In an ideal world, and like I have said more generally with respect to 101, presumptions at the level of establishing the restrictive effect of a given practice should not be so important as they are. Firstly, because if something is so obviously restrictive to be deemed restrictive, then it should not be so difficult to show effects (as, by the way, both the Commission and the General Court were able to do in a few hundred pages in Intel; this, on the other hand, is probably a very good example of why shortcuts may make sense). Secondly, and conversely, because if a practice is so obviously pro-competitive, and if defences (like 101(3) and the objective justification notion) were effectively available, then there would be no obstacle for the practice to be redeemed this way.
On the old debate of form and effects. I have in the past set out very clearly my views on the interface between competition law and competition economics (see here), so I won’t repeat myself. Let me just add that when it comes to exclusivity inducing rebates, even people not at all suspect of “ordoliberalism” [one day we should try to clarify here what this means], like Commissioner Josh Wright, are of the view that cost assessments (like the one advocated for in the Guidance Paper) might not be well suited for loyalty discounts, because their essence lies not in price but on exclusivity (see his speech “Simple but Wrong or Complex but More Accurate? The Case for an Exclusive Dealing-Based Approach to Evaluating Loyalty Discounts”. On this point, see also the excellent writings of one of our Friday Slotters, Einer Elhauge (see e.g. pages 463-464 of this great one).
“Rules and standards need to be crafted to ensure that they are accurate and administrable” is a phrase that appears at the end of Pablo’s post, and that leads me to one final comment. The current situation is, in my view, the one that is easiest to be administered, and, importantly, the one that requires less work from the lawyers, and particularly from the economists advising the dominant company. If we were to apply the Guidance paper test to all these cases, we would need to deploy hordes of public officials, and countless hours of lawyers and economic consultants (as if something good comes out of that mix…)
Under the current situation, on the contrary, companies know that except for one red line, they can design their rebate schemes the way they wish. Most of the objectives of exclusivity inducing practices can be achieved through other, perfectly legitimate and less risky, means. With less intense but more refined and creative legal and economic advice companies could continue competing intensely on the merits whatever the rule on loyalty-inducing rebates.
(by Giorgio Monti)
[Note by Alfonso: The US Supreme Court delivered last week an antitrust Opinion in North Carolina State Board of Examiners v FTC. We asked Giorgio Monti -whom we knew would be interested in the issues raised by the case- to write a comment for Chillin’Competition and he kindly accepted. Giorgio needs no introduction, but I’ll do a quick one: he’s one of the leading EU competition law professors, the author of this great book, currently holds one of the most envied posts in competition academia at the European University Institute in Fiesole, and, more importantly, he’s also a very nice guy. We leave you with him]
The quiet life of incumbents is often shattered by new paradigms – Uber’s controversial challenge to the taxi businesses of many countries is a colorful example of the synergy of technology and entrepreneurship doing battle with a rentier establishment. In the case at hand, the FTC saw something similar in a market for the vain: teeth-whitening services being offered by non-dentists at a price lower than the same services offered by dentists. The latter, using the State Board (the majority of which is made up of dentists), issued warnings to these pesky new entrants stating that the unlicensed practice of dentistry (including whitening of teeth) was a crime. Faced with such a potentially steep entry barrier, the new entrants abandoned the market. Is the conduct of the State Board an unfair method of competition under Section 5 of the Federal Trade Commission Act?
The answer to this question is more of constitutional law than antitrust. The anticompetitive effects are clear; the justification for this restriction on the basis of risks to health if teeth whitening was performed by non-dentists was not even pleaded on the facts; contrariwise, as the majority reports, complains to the State Board were based on the lower prices of the new entrants. Indeed it wasn’t even clear if it was true that the unlicensed practice of teeth whitening services was indeed a crime because the legislation did not include this service. And yet, in the world’s freest market, where under Federal Law the antitrust rules are compared to the Magna Carta, State laws may restrict competition, and there’s nothing (much) the Federal government can do about it. However, and this is the vital point which this judgment sheds light upon, such restrictions must be the result of state action for there to be antitrust immunity.
In briefest outline, this immunity (so-called Parker immunity after the seminal judgment) applies if the actor that restricts competition is either (1) the State acting in its sovereign capacity or (2) a private party, and then in this case only if (a) the restraint of competition is clearly articulated State policy and (b) that this policy is actively supervised by the State.
The State Board claimed that they benefited from immunity under the first limb of this doctrine because the Board had been created by the State. The bone of contention was how far this Board, created by the State (here under the Dental Practice Act) but populated by practicing dentists, merited immunity under that first limb. In the view of the majority, they did not: ‘A non-sovereign actor controlled by active market participants’ has to satisfy the second limb of the test and in this case it failed to do so because there was no active State supervision when the Board took the view that teeth whitening fell within its competences and that it was thus appropriate to send letters ordering non-dentists to stop offering teeth whitening services.
It follows that companies like Pro-Teeth Whitening, whose logo I used for this entry, might now re-open in Charlotte, North Carolina where it operated before the Board’s actions.
(1) The widening scope of Federal Competition Policy
The three dissenting Justices considered that more deference to State policies was warranted. Beneath the technical debates on whether the majority approach is consistent with precedent one gets a sense that the dissenting Justices are worried about departing from the original division of powers, so that the main bone of contention is about the constitutional balance being fixed rather than fluid. Thus the dissenters open by noting that State Dental Boards were always organized thus even before the Sherman Act. To Europeans this is a bit odd, because we know that we can use the TFEU precisely to challenge age-old practices. In Consorzio Industrie Fiammiferi the competition rules were used to challenge a 1923 Royal decree, for instance. To Europeans, competition law (and internal market law) applied to state conduct is a powerful crowbar to force states to rethink age-old restrictive practices. Of course some think this leads to neo-liberal oblivion, to others it shows we’ve got the most free market constitution in the world.
(2) Rules and Standards
The dissent felt, rightly, that the approach of the majority was also problematic because it would yield implementation problems. The rule-based approach supported by the dissent is easy to apply (Is the Board created by the State? If yes immunity) is a lot easier to apply to any case that may arise than the test of the majority (is the Board ‘controlled by active market participants, who possess singularly strong private interests’ such that there is a ‘structural risk of market participants’ confusing their own interests with the State’s policy goals’? If yes then immunity must satisfy the second limb of the Parker immunity doctrine). Is this a sufficiently strong argument to lead one to support the dissent’s view that the standard is unwieldy? I am optimistic that Federal courts will be able to find a way of testing how far the composition of the agency is sufficiently remote from the commercial interests the agency regulates. Moreover, even if we agree with the dissenting justices that ‘regulatory capture can occur in many ways’ is it not preferable to have a test that tries to challenge more of those occurrences, rather than fewer of them?
In oral argument, many of the Justices were troubled by the tension: surely the best way of regulating a profession is to ask professionals what to do (an example that was used is neurosurgery: surely nobody wants bureaucrats deciding on the best practices for neurosurgery). But this is to misread the debate. The FTC was not claiming that a regulatory board composed of self-interested experts is illegal. It is merely saying that if a State creates such a regulator, it has to actively supervise it and so the State has a duty to be the competition advocate and to ask the regulator to justify restrictive policies.
(3) Procedural Public Interest
North Carolina may still try and ban non-dentists by more direct involvement with the Board. As the majority said, if State can make a claim that an anticompetitive policy is the State’s own choice, then this suffices for antitrust immunity. No substantive test is needed to measure how far the harm caused by an anticompetitive market compares to the benefits of state regulation. The public interest, to recall Harm Schepel’s important paper (’Delegation of Regulatory Powers to Private Parties under EC-Competition Law: Towards a Procedural Public Interest Test’. (2002) 39(1) Common Market Law Review 31) is defined procedurally rather than substantively. Why so?
Perhaps doing this kind of comparison between consumer interests and producer interests is invidious (but isn’t cost-benefit analysis now so widespread?).
Perhaps States value what little residual sovereignty they still have over economic policy (spare a thought for Greece).
Or perhaps it all boils down to this: as the majority noted, if North Carolina wants to ban cheap teeth whitening services it may do so in a way that falls under Parker immunity. It will be for voters to then decide if this was the right policy choice. If so, here is a nice exam question: ‘Democracy can, and should, determine how free markets are. Discuss.’
Writing about the Intel Judgment seems to have become one of the favorite hobbies of some of our leading competition law experts.
One of the most downloaded and talked-about competition law articles of the year was Wouter Wils‘ one on “The Judgment of the EU General Court in Intel and the So-Called “More Economic Approach” to Abuse of Dominance“, which we discussed and first announced here.
Wouter’s piece was followed by other equally interesting ones, like Richard Whish‘s (see here), and like my current co-blogger’s, which also received considerable attention (see here for Pablo Ibañez‘s “Intel and Article 102 TFEU Case Law: Making Sense of a Perpetual Controversy” [Wouter’s and Pablo’s articles are by the way both nominated for the Antitrust Writing Awards (see the “Dominance” category here); for some reason Pablo is also co-nominated in the business category for two other pieces I wrote myself (I now understand why he likes to theorize about free riding…😉 ]
The latest addition to this list of worthy reading is a paper just made available by our friend and founder of this blog, Nicolas Petit. His piece, titled, Intel, Leveraging Rebates and the Goals of Article 102 TFEU discusses the positive law standard applicable to exclusivity rebates following Intel. He finds that the GC’s Judgment sets a modified per se prohibition rule for exclusivity rebates, and endorses the theory of anticompetitive leveraging that formed the core of the Commission’s Guidance Paper on Article 102 TFEU. Nicolas also discusses the purposivist debate that has arisen in the scholarship, and whether it is right that the General Court endorsed a non-welfarist approach to Article 102 TFEU. In his view, this cannot be right, for non welfarist goals cannot be acclimated in moden competition law. Nicolas calls for clear dicta from the ECJ along the lines of Post Danmark.
Those interested in knowing even more (or, rather, in having even more mixed views) about the Intel case should (1) have attended Nick Banasevic’s (who was Case Manager in Intel) excellent talk about the Judgment last Friday in Madrid; and (2) take a look at a new competition law journal (Competition Law & Policy Debate) which, in its first number, features a bunch of Intel-related articles authored by a very impressive line-up of authors (the same issue includes as well an interesting piece on the Google case by the former President of the CFI, Bo Vesterdorf, also available in SSRN).
P.S. Following the publication of this post I have received another piece on the Judgment. This one is authored by Luc Peeperkorn -a European Commission official and one of the main proponents of the effects-based approach, currently on a one-year leave of absence at NYU-, and its title is self-explanatory: “Why the General Court is wrong in Intel and what the Court of Justice can do to rebalance the assessment of rebates“. The piece is also interesting, and unusual, for it is not every day that a Commission official criticizes (although in an academic capacity) a Judgment that the Institution won in first instance and is defending on appeal.