Chillin'Competition

I had not spoted this before, but this is a good one. To describe the practices at the heart of the  Microsoft II case – the recently settled alleged abusive tying of Internet Explorer with Windows OS – N. Kroes declared that MSFT’s conduct is:

“As if you went to the supermarket and they only offered you one brand of shampoo on the shelf, and all the other choices are hidden out the back, and not everyone knows about them. What we are saying today is that all the brands should be on the shelf“.

The problem here? This colourful metaphor entirely misses its purpose. Rather than conveying the message that there was a competition problem in the market, it stresses that the issue primarily pertains to (poor) consumer information.

From a purely academic point of view, it may be regretted that the judgment was not brought on appeal before the ECJ so Europe’s highest Court could have its final say in the case. However, sooner or later, either through a direct action or through a reference for a preliminary ruling under Article 234 EC, the ECJ may find the occasion to examine and decide on the delicate balance that must be struck between IPRs and competition law.

Regarding the tying part in the judgment, it is probably the case that less people are worried about the consequences of the judgment, even though, also in this respect, it is necessary to bear in mind that the risks entailed in overstretching the concept of tying can become a serious constraint for what otherwise would be valuable development and innovation to the benefit of consumers. As Advocate General Francis Jacobs once put it, competition law is not there to protect competitors but competition and the consumers.

Mario Monti, former competition Commissionner is also reported to have said that the Microsoft case:

“was “certainly” his most difficult case; […] “Not for its technical complexity, but because of the rather drastic trade-off to be made after the long investigation. After three days of intensive negotiations with the CEO to achieve a settlement, a good phase in the mutual negotiations, we concluded that we were interested […] to achieve a precedent“. ( Source: M-Lex, 14 September 2009, “Monti warns of threat to competition policy ‘from within’”, D. LUMDSEN).

This lends credit to the unofficial, “off the record“, story that Monti and Vesterdorf have not been entirely free to call the shots, and that they might have even been placed in a minority position at some stage.

(Image possibly subject to copyrights. Source here)

A quick personal thought. On face value, the current prioritization policy followed by the Commission is slightly confusing. Earlier in the year, the Commission adopted a guidance communication on enforcement priorities under Article 82 EC, which does not cover exploitative abuses, thereby sending the signal that such types of abuses are not really a prime candidate for Article 82 EC enforcement. In line with this, the Commission announced yesterday that it dropped its investigation in the Qualcomm case.

I find it quite problematic to reconcile this prioritization trend with the annoucement, on 19 November, that the Commission sent a Statement of Objections to Standard and Poor’s for alleged unfair pricing for the use of International Securities Identification Numbers (ISINs)…

A plausible explanatory factor: in the field of Article 82 EC, prioritization is currently made on a sectoral basis. Under this interpretation, the Standard and Poor’s case illustrates, in the aftermath of the financial crisis, that the Commission arguably intends to closely scrutinize financial services. This is consistent with the recent announcement of the opening of  formal proceedings against Thomson Reuters concerning use of Reuters Instrument Codes.

(Image possibly subject to copyrights. Source here)

In MyTravel vs. Commission, the CFI provides a good account of the past decisional process within DG COMP.

In the late days of the Commission’s administrative review of the Airtours/FirstChoice transaction, Airtours (now MyTravel) submitted a new commitments proposal to the Merger Task Force (“MTF”). The CFI’s  MyTravel vs. Commission ruling contains evidence that the MTF had prepared a briefing note for the competition Commissioner entitled “defensive points“. The purpose of this note was to debunk the late remedy proposal submitted by Airtours. Here is the relevant § of the CFI’s ruling:

“§114: a note setting out lines to take headed ‘Defensive Points – Offer of Undertakings’ prepared by the MTF for the attention of the Member of the Commission responsible for competition matters intended to enable him to put forward arguments relating in particular to the assessment of the substance of the commitments submitted on 15 September 1999“.

From a legal standpoint, the harsh title of this briefing note is quite surprising. Pursuant to the Merger Regulation, the Commission is supposed to objectively assess whether the proposed commitments will remove competition concerns, not to defend itself against a proposed remedy package.

In reality, this kind of vindicative language illustrates the unnamed adversarial nature of merger proceedings in the days of the MTF. In the Airtours case, which led subsequently to the harsh, notorious, annulment of the Commission’s decision by the CFI, it seems that the Commission had a preferred, pre-determined, bias position against the proposed merger, which it thus sought to “defend”. Since then, the MTF has been dissolved.

On a related issue: I was not aware that the Airtours saga had given rise to litigation before the CFI and ECJ in relation to the access of private parties to some of the Commission’s internal documents. Following the Airtours judgment, the Commission apparently established a working group comprising officials of the DG COMP and the legal service in order to consider whether it was appropriate to bring an appeal against that judgment and to assess the implications of that judgment on the procedures for the control of concentrations or in other areas. MyTravel sought to obtain access to the documents of this working group as well as other documents. The Commission decided to grant access to several of those documents, but refused to grant access to others (or to certain parts of the requested documents). The Commission’s decisions were challenged before the CFI, which annuled them in part only (T-403/05). This ruling is now being challenged before the ECJ (C-506/08 P).

(Image possibly subject to copyrights. Source here)

Not unlike excessive or discriminatory pricing claims, complainants purporting to lodge allegations of abuse of collective dominance face a tough job to convince the Commission to start proceedings.

In a 2005 case that went largely unnoticed (the EMC/European Cement Producers Decision), the Commission held that mere allegations that some firms belong to an association of undertaking and participate to meetings do not, in and of themselves, establish the existence of  “links” within the meaning of the traditional collective dominance case-law (CMB, TACA, and other cases).

“§120: EMC failed to provide substantiated evidence relating to the circumstances in which the Portland cement producers collectively hold a dominant position. Indeed, EMC has not given any indication of the existence of any link or factors which give raise to a connection between the European cement producers. The mere fact that Portland cement producers are members of Cembureau and that their representatives take part in meetings of the Technical Committee of CEN is not sufficient in order to prove the existence of a collective dominant position”

“§44: In the case of collective dominance the undertakings concerned must, from an economic point of view, present themselves or act together on a particular market as a collective entity.

§45: In order to establish the existence of such a collective entity on the market, it is necessary to examine the factors that give rise to a connection between the undertakings concerned. Such factors may flow from the nature and terms of an agreement between the undertakings in question or from the way in which it is implemented, provided that the agreement leads the undertakings in question to present themselves or act together as a collective entity. This may, for instance, be the case if undertakings have concluded cooperation agreements that lead them to coordinate their conduct on the market. It may also be the case if ownership interests and other links in law lead the undertakings concerned to co-ordinate.

The key explanatory factor for this is arguably that the Commission does not want to uphold Article 82 EC allegations as a surrogate for unproven cartel behaviour. In this case, the parties were primarily seeking to establish an Article 81 EC violation and, only ancillarily, had invoked Article 82 EC.

This decision should thus be interpreted as another illustration of the Commission’s reluctance to act upon abuse of collective dominance complaints (to be read also in conjunction with the Laurent Piau case and the Commission’s Guidance Communication on Article 82 EC which leaves collective dominance outside of its enforcement priorities).

(Wikipedia Image. Possibly subject to copyrights. Source here)

1. The fact that the Glaxo case took 11 years to solve irritates me. Is it reasonable to expect market players from both sides – pharmaceutical companies and parallel traders – to remain in a state of commercial uncertainty for so long?

2. In retrospect, the Glaxo saga demonstrates that, for more than ten years, the law of Article 81(3) EC (and also of Article 81(1) EC) has been in a state of flux, thereby  undermining the Commission’s optimistic contention that the law of Article 81(3) EC is – and was at the time of the adoption of Regulation 1 – crystal clear. With such conflicting judgments being handed down every now and then, one may really question whether Article 81(3) exhibits the necessary features to have direct effect (clarity, precision, and unconditional nature).

3. Why is the table of contents of French law books systematically located at the end?  This is really inconvenient.

4. And a note of satisfaction. At the European Competition Day in Sweden (7 October 2009), P. LOWE has apparently endorsed the views presented by the GCLC,  during its last annual conference.

LOWE is reported to have said:

“It is essential for business […] to know what is acceptable and what is not“;

He added:

“we recognise the need for guidance – to know what behaviour is anticompetitive.”

Too bad LOWE is leaving COMP in the next weeks. And thanks to C. HUMPE for the pointer. Christophe and I have been – amongst others – drafting the first chapter of the forthcoming GCLC book on Regulation 1/2003.  Our main area of concern lies in the Commission’s overreliance on negative enforcement, and the absence of any sort of positive enforcement whatsoever.

Image – Source: Wikimedia

11 years ago (!), in the good old times of the notification procedure, Glaxo had notified to the Commission its ‘General sales conditions of pharmaceutical specialities to authorised wholesalers’ with a view to obtaining a negative clearance or an exemption. On 8 May 2001, the Commission (i) found that the notified agreement infringed Article 81(1) EC; and (ii) refused to grant an exemption pursuant to Article 81(3) EC.

Glaxo challenged this decision before the CFI. In an unexpected judgment, the CFI annulled the second part of the Commission’s decision that refused to grant an exemption.

Glaxo, however, lodged a further appeal before the ECJ, seeking to obtain also annulment of the first part of the Commission’s decision that had deemed the agreement unlawful pursuant to Article 81(1) EC.  The Commission lodged a cross-appeal, asking the court to set aside parts of the judgment of the CFI (notably those viewing the refusal to grant an exemption unfounded).

The judgment handed down by the ECJ yesterday in this case exhibits two points of particular importance. First, it delivers an authoritative interpretation of the concept of a “restriction by object” under Article 81(1) EC (I).  Second, it clarifies the burden of proof, in terms of process and substance, under Article 81(3) EC (II).

I. On the concept of a “restriction by object”

Glaxo’s contended that, contrary to the CFI’s view, the agreement was not unlawful pursuant to Article 81(1) EC. In its judgment the CFI had opted for an innovative case-by-case appraisal of the concept of restriction by object. According to the CFI, there was no such thing as a predefinite list of restrictions by object. A restriction can only be deemed a restriction by object upon analysis of its “legal and economic context“. On this basis, the CFI found that the impugned restriction of parallel trade was not restrictive by object (absent obvious proof of consumer harm – parallel traders pocket in the price differential), but was restrictive by effect. Glaxo agreed with the absence of a restriction by object, but contested the existence of a restriction by effect. The Commission, by contrast, challenged the view that there was no restriction by object.

The first important point which the ECJ makes is to reject as erroneous the CFI’s contention that a restriction by object hinges of the identification of consumer harm:

“62 With respect to the Court of First Instance’s statement that, while it is accepted that an agreement intended to limit parallel trade must in principle be considered to have as its object the restriction of competition, that applies in so far as it may be presumed to deprive final consumers of the advantages of effective competition in terms of supply or price, the Court notes that neither the wording of Article 81(1) EC nor the case-law lend support to such a position.

63      First of all, there is nothing in that provision to indicate that only those agreements which deprive consumers of certain advantages may have an anti-competitive object. Secondly, it must be borne in mind that the Court has held that, like other competition rules laid down in the Treaty, Article 81 EC aims to protect not only the interests of competitors or of consumers, but also the structure of the market and, in so doing, competition as such. Consequently, for a finding that an agreement has an anti-competitive object, it is not necessary that final consumers be deprived of the advantages of effective competition in terms of supply or price (see, by analogy, T-Mobile Netherlands and Others, cited above, paragraphs 38 and 39).

64      It follows that, by requiring proof that the agreement entails disadvantages for final consumers as a prerequisite for a finding of anti-competitive object and by not finding that that agreement had such an object, the Court of First Instance committed an error of law”.

The ECJ thus quashes the CFI judgment on this point.  In so doing, the ECJ sticks to a textualist reading of Article 81(1) EC: The wording of Article 81(1) EC does not talk of  consumer harm. The appraisal of the restrictive object of an agreement must thus  be established on the basis of”the content of its provisions, the objectives it seeks to attain and the economic and legal context of which it forms a part“,  and only on this basis.

II. On the burden of proof under Article 81(3) EC

Turning, subsequently to the Commission’s contention that the CFI misapplied the case-law in quashing its decision’s refusal to grant an exemption, the ECJ makes a number of interesting points.

First, as to the burden of proof under Article 81(3), the ECJ upholds my analysis the iterative analysis process:

“82 The Court notes, first, that in paragraphs 233 to 236 of the judgment under appeal, the Court of First Instance referred to the case-law, principles and criteria governing the burden of proof and standard of proof required in relation to requests for exemptions under Article 81(3) EC. It correctly stated that a person who relies on that provision must demonstrate, by means of convincing arguments and evidence, that the conditions for obtaining an exemption are satisfied (see, to that effect, Case 42/84 Remia and Others v Commission [1985] ECR 2545, paragraph 45).

83      The burden of proof thus falls on the undertaking requesting the exemption under Article 81(3) EC. However, the facts relied on by that undertaking may be such as to oblige the other party to provide an explanation or justification, failing which it is permissible to conclude that the burden of proof has been discharged”

Second, the Court seems to relax, to a certain extent, the conditions under which parties may be able to prove in substance that they meet the conditions for an exemption (to date, those conditions, as enshrined in the Article 81(3) Guidelines, are almost impossible to meet in practice).  In its cross appeal, the Commission argued that “that the Court of First Instance committed an error of law in finding that it is sufficient that an undertaking wishing to obtain an exemption under Article 81(3) EC show that it is probable that gains in efficiency may occur”.

In this context, the ECJ notes that:

“92 …  in paragraph 247 of the judgment under appeal the Court of First Instance rightly observed that, in order to be capable of being exempted under Article 81(3) EC, an agreement must contribute to improving the production or distribution of goods or to promoting technical or economic progress. That contribution is not identified with all the advantages which the undertakings participating in the agreement derive from it as regards their activities, but with appreciable objective advantages of such a kind as to compensate for the resulting disadvantages for competition (see, to that effect, Consten and Grundig v Commission, cited above, p. 348 and 349).

93 As the Advocate General observed in point 193 of her Opinion, an exemption granted for a specified period may require a prospective analysis regarding the occurrence of the advantages associated with the agreement, and it is therefore sufficient for the Commission, on the basis of the arguments and evidence in its possession, to arrive at the conviction that the occurrence of the appreciable objective advantage is sufficiently likely in order to presume that the agreement entails such an advantage.

Furthermore, at §94, the ECJ indicates that the standard of proof hinges on the “balance of probabilities (51/49), rather than on a proof “beyond reasonable doubts” standard:

“The Court of First Instance therefore committed no error of law in paragraph 249 of the judgment under appeal in holding that the Commission’s approach may entail ascertaining whether, in the light of the factual arguments and the evidence provided, it seems more likely either that the agreement in question must make it possible to obtain appreciable advantages or that it will not”.

Finally, the Court clarifies  a number of issues related to Article 81(3) EC but which, in my opinion, are of lesser relevance.

As surmised by Alain Ronzano a few days ago, this case holds the potential to influence the ongoing verticals review, where the Commission proposes an inversion of the traditional burden of proof. Here, the ECJ relaxes the conditions for the applicability of Article 81(3) EC and, indicates that restrictions by object require a careful appraisal. Whilst it does not follow the ambitious CFI proposition that a hardcore restriction implies proof of harm to consumer, it nonetheless indicates that a careful prior assessment must be done (my point a few days ago). As far as parallel trade is concerned, the consequence of this judgment is very simple: the “no consumer harm defence” invoked by drug manufacturers to justify their anti parallel trade strategies does not disqualify a finding of restriction by object (this argument hinges on the view that fact that parallel traders pocket-in the margins, and that by virtue of price regulations, parallel trade does not lead to lower prices, and thus has no beneficial effect on consumers).

In brief, a tougher Article 81(1) EC and a laxer 81(3) EC .

(Image possibly subject to copyrights. Source here)