Chillin'Competition

[There is a great deal of (passionate) discussion around sustainability agreements in antitrust these days. Last week, the Commission issued a brief which touched upon this matter, among others relating to Europe’s green agenda. Coincidentally, we featured a guest contribution by Maurits Dolmans (see here). Maarten Pieter Schinkel, Professor of Economics at the University of Amsterdam, has prepared a respose, which we are delighted to publish and which you will find below]

In a recent blog on Chillin’Competition, Maurits Dolmans names me as one of “a few economists” who warn against the perverse incentives of permitting competitors to make agreements in exemption of the cartel prohibition. But all economists know as first principle that incentives matter! See, for example, Cowen & Tabarrok (2021), chapter 1, page 1. Maurits Dolmans is right that its assumptions make a model, and also that their reasonableness for the model’s message should be scrutinized. However, he misrepresents our argument. In fact, none of the assumptions that Maurits Dolmans says we make – and then criticizes – we actually do make. Our latest academic paper – to which he refers, and I appreciate that – speaks for itself. We laid out our argumentation accessible in a chapter in the Concurrences book on sustainability and competition law and in a ProMarket article. Nevertheless, I feel compelled to reply here briefly, following the order of his bullet points.

Just to be clear, I think we all agree that the central question in this debate is whether allowing competitors to make sustainability agreements induces them to take greater effort to produce more sustainably than when they wouldn’t be able to make such agreements and remain in competition without. After all, more sustainable production is the end (which we share), and allowing anticompetitive sustainability agreement is the proposed means (which is on the table). Only if the answer to this central question is reasonably “yes” does it make sense to see how sustainability agreements may be exempted from cartel law and permitted – which is where the exemption requirements come into play.

We arrive at “no, likely not”, on the basis of a solid analysis – and not in the way Maurits Dolmans seems to understand it:

• Maurits Dolmans writes: “Consumers are assumed to be willing to pay as much as is needed to avoid climate damage” This is not true. We need no conditions on WTP: for either positive, zero or negative WTP, firms invest (weakly) more in green when in competition than when they would be allowed to coordinate their green investments. If WTP is not positive, then firms will not invest in green, whether they compete or coordinate on it – period. Yet whenever there is the smallest WTP for more sustainable products, green is promoted more in competition than cooperation. So the answer to the central question is “no” – i.e. not “yes”. The intuition is not that hard: coordination kills the companies’ drive to steal business from each other by offering a greener product.

He continues: “ … and it is always profitable for firms to meet that demand” This is hardly a heroic assumption: firms choose their investments in greener production methods optimally, by weighing the benefits from being able to charge a higher price – resulting from consumers’ willingness to pay more for the greener product – against their green investment costs. This is no different from normal business decisions.

Maybe Maurits Dolmans has some threshold fixed costs for transition in mind, that couldn’t be overcome in competition. But why would firms coordinating their efforts – and not also their prices, mind you, because that is explicitly not allow under the proposed policy – make such loss-making investments?! Hence, green investments are larger in competition than when competitors coordinate their green investments.;

• Maurits Dolmans states: “Regulation is assumed to offer a fully effective solution” This is not true. Our comparison is between competition and (private) coordination – to see if the latter can improve upon a situation in which regulation is suboptimal, for otherwise there is no need. Our point is that allowing competitors to coordinate on doing less green than they would do in competition will make matters worse, not better. So allowing agreements on sustainability is not a fix of government failure to regulate properly.;

• He writes that: “Firms are assumed to benefit only from (and to seek only) short-term profit maximization,” This is not true. We show that also when firms are driven by intrinsic motivation to invest in green (which may be related to long-run business interests), does coordination erode the incentives to invest in greener production methods.

We would also assume that firms: “always collude to minimize green investment or greenwash if they can get away with it”. Yet this is not an assumption, but a finding.

Maybe Maurits Dolmans means to say that companies should be trusted to invest in green collectively against their own commercial interests. But given what is at stake, shouldn’t we have some commitments at least that this is warranted before we do that?! It is perfectly reasonable to take companies’ business interests as the main driver of their corporate behaviors.

• His final bullet point reads: “It is assumed that consumers must be fully compensated for any price increase. Out-of-market benefits or improved access to non-market goods (say, clean air or a safe environment) supposedly do not count as compensation.” – after which he goes on to discuss these (legal) issues at length. Yet this is not true. Our argument does not rely on full (or any) consumer compensation at all. At the end of our paper, we do have a quick look at out-of-market benefits towards satisfying the compensation requirement and suggest a way to assess them – only to conclude that those too are less under coordination of green investments.

Maurits Dolmans concludes his blog with his title promise to offer three criteria to distinguish ‘beneficial cooperation from greenwashing’. Again I am featuring: “Prof. Schinkel has shown that where consumers are willing to pay for green products, firms may have an incentive to collude on greenwashing.” Well, properly understood what we show is that if investments in more sustainable production methods are costly – which no one denies is the case – firms that are allowed to coordinate those investments have incentives to reduce them below their levels in competition, in order to save on those costs. Collaborators will find it optimal to do a binding minimum needed for the exemption – i.e. wherever consumer compensation is required. The policy that Maurits Dolmans advocates, in other words, sets the firms up for greenwashing.

Our advice: drop the policy. But Maurits Dolmans want to keep pursuing it, and somehow curtail its perverse incentive effects: “So, how to distinguish a legitimate sustainability agreement from a cartel?” Alas, his first criterion is no more than “there should be a market failure” – and subsequently the same false logic just debunked. His second criterion is a loose reference to legal conditions for exemption that have nothing to do with our warning for perverse incentives – as said also. The third criterion has some substance. Reference is made to a forthcoming Oxera paper, which constructs some theoretical examples of conditions under which collaboration can increase sustainability investments. The core idea behind those examples is that firms would gain privately, through ‘spillover benefits’ from their rivals’ investments in more sustainable production. That is, firm A would see its profits increase (and/or intrinsically like it a lot) if firm B offered consumers a more sustainable product. If such positive spillovers are large enough to overcome the negative effect on sustainability investments from eliminating business-stealing by offering the greener product, they may lead to higher sustainability levels in collaboration than in competition.

But what would such sizeable spillovers be? Of course we had thought of this possibility too – which is standard in the related R&D literature. In the present matter, however, it is not obvious that there are any such spillovers. Because how exactly would it benefit Procter & Gamble if Unilever reduced its emissions from transportation by offering compressed deodorants first? And would E.ON really accept a profit hit for the warm glow of knowing that Vattenfall poaches its customers by offering green electricity? Rather the opposite is the case: one firm cleaning up its act makes the other firms only look dirtier. They are in product quality competition: consumers increasingly prefer more sustainable products.

Spillover benefits from R&D are that one firm’s inventions give others free ideas on how to improve themselves as well. Yet the green antitrust debate is about transitioning to known cleaner or fairer production methods. That is a private cost-benefit analysis. Few spillovers there. The examples so far presented of green cartels that might work are rather constructed therefore. For claiming sufficiently large spillover effects to justify collaboration, it certainly does not suffice to remark that firms also suffer from the cost of climate change, nor to loosely refer, as Maurits Dolmans does, to corporates supposedly believing today “that it is worthwhile to pursue longer-term survival of our environment and, therefore, themselves, our economy, and society as a whole.” Again, the corporate incentives involved need to be well understood, before proceeding to such drastic measures as permitting the elimination of competition.

There is a lot at stake in this debate. There is a real risk of cartel greenwashing attached to what Maurits Dolmans and other proponents advocate. I share their grave concerns about climate change. Yet if we get this wrong, we risk to worsen, instead of curbing it. I submit that we should be wary of corporate incentives to weaken the cartel prohibition. We contribute: Competition is likely a stronger driver of sustainability investments than cooperation. The assumptions and logic in our analyses are valid and transparent. Maurits Dolmans and I have discussed and corresponded about them extensively. Still I need to correct him here on what we actually say. I am open to further discussion – certainly about spill-overs, which is where Oxera’s Agenda is contributing some fringe examples in which coordination may sometimes work. But a prerequisite to a(ny) fruitful discussion is representing the other’s arguments properly. Only then can we advance our knowledge on these important issues. For now, our findings stand: Green collaboration reduces green efforts under the circumstances at hand.

The deadline to submit your papers for the 2nd edition of the Rubén Perea Award is TOMORROW (15 September, 23.59 Brussels time). If you are under 30, we would very much welcome your contribution (of up to 15,000 words, inclusive of footnotes).

Remember that submissions are to be uploaded via https://mc.manuscriptcentral.com/jeclap (AND do not forget to mention that the article is for a special issue in Step 5 of the process).

More information on the award and on how to participate (and, in particular, on the house style rules with which to comply for the paper to be considered) can be found on the original post (see here).

As Joint General Editor (with Gianni De Stefano) of the Journal of European Competition Law & Practice, I am particularly proud to present this month’s number, which is devoted to the regulation of digital markets (The Digital Markets Act and beyond). The Special Issue can be accessed here.

The Issue includes a contribution by Filomena Chirico, a Member of Thierry Breton’s Cabinet and someone who has been following very closely the legislative development since the early days (on top of being an academically-minded official who worked at Tilburg and the College of Europe prior to joining the European Commission). Her piece is entitled Digital Markets Act: A Regulatory Perspective.

The rest of the Special Issue is made up of a number of submissions we received and which we thought provide high quality, valuable and diverse perspectives on the regulation of digital markets. They are the following:

Sector Regulation of Digital Platforms in Europe: Uno, Nessuno e Centomila, by Marco Botta (EUI and Max Planck Munich).

Digital Platforms and the New 19a Tool in the German Competition Act, by Jens-Uwe Franck and Martin Peitz (Mannheim).

The Proposed Digital Markets Act (DMA): A Legal and Policy Review, by Nicolas Petit (EUI and College of Europe).

The European Digital Markets Act: A Revolution Grounded on Traditions, by Pierre Larouche (Montreal) and Alexandre de Streel (Namur and College of Europe).

Why the Proposed DMA Might Be Illegal under Article 114 TFEU, and How to Fix It, by Alfonso and Nieves Bayón Fernández (Garrigues). Their original submission, discussed on the blog, may be accessed here.

The Draft Digital Markets Act: A Legal and Institutional Analysis, by yours truly. My original submission has been on ssrn for a while and can be downloaded here.

Enjoy the Special Issue! And do not hesitate to contact me if you think a piece of yours could fit in the journal.

Daniel Sarmiento (Universidad Complutense and Uría, previously at the Court of Justice) needs no introduction in our community. He is an illustrious member of an endangered species: the EU law polymath. EU Law Live, of which he is the editor-in-chief, reflects well his broad range of interests. The website has become an inescapable reference for those who want to stay abreast of the case law and beyond. As all of you will know by now, it is an incredibly rich source of information.

As you can imagine, I was delighted when Daniel invited me to discuss, in a podcast, the issues I addressed in The Shaping of EU Competition Law. The podcast can be accessed here and it is about 30 minutes long.

When I wrote the book, I hoped that I would be able to convey to leading EU administrative lawyers like Daniel how many insights they could draw from EU competition law, which after all revolves primarily around an administrative authority entrusted with the power to investigate and decide on potential infringements (and rule on the compatibility of mergers with the internal market).

As I am a bit of a broken record, I have discussed the contents of this book before on the blog (see here for instance, where I cover my presentation with the Amicale des Référendaires). But hopefully Daniel’s great questions and perspectives will add something to ongoing debates. Enjoy the podcast (and the weekend too)!

[Maurits Dolmans delivered one of the talks at our last Chillin’Competition conference, back in December 2019 (video available here). Maurits talked then about Sustainable Competition Policy. This subject has only continued to gain prominence, and today it is one of the hottest topics in contemporary competition policy. The guest post below could not be more timely]

This summer, the Commission adopted “Fit for 55” proposals to deliver the Green Deal, and the Council and Parliament adopted a Climate Law.  There have been calls for a reassessment of competition policy too.  Indeed, DG Comp is considering whether to adopt a more permissive approach to sustainability agreements, in the context of the review of the Guidelines on Horizontal Agreements.  Commissioner Vestager is about to decide.

When speaking early this year on this topic at the OECD Open Day on Sustainable Competition Policy, EC Chief Economist Pierre Regibeau put his finger on a sore spot.  He asked, I hope rhetorically: “Can we allow sustainability deals if that means taxing the people who buy, to benefit those who do not buy?”  

That question is of course exactly the wrong way around.  Producers and consumers impose costs on society – including climate change, large scale pollution, and loss of biodiversity – that are not included in the monetary price consumers pay.  This leads to overconsumption and a “tragedy of the commons”, the degrading of our environment, due to overuse.  These supply- and demand-side market failures are hard to resolve – why should a supplier produce cleanly if that means higher costs and rivals taking market share; why should a consumer buy green at a higher price if the neighbours keep buying polluting goods?  Eminent economist Sir Nicholas Stern said in 2007 that “climate change is a result of the greatest market failure the world has seen”. We all suffer from this collective action problem, including the consumers themselves. 

The Chief Economist should have asked “Why should we allow producers and consumers to impose costs on those who do not consume?”  Or “why should we prohibit agreements that could help reduce the social costs of climate change and pollution, if they may make the polluters pay for the damage they cause?” 

Article 191(2) TFEU leaves the Commission no choice in how to answer that question:  EU policy, including competition policy, “shall be based on the … principles … that environmental damage should as a priority be rectified at source and that the polluter should pay.”  See also here.  Article 11 TFEU demands that “environmental protection requirements must be integrated into the definition and implementation of the Union’s policies and activities, in particular with a view to promoting sustainable development.”  And for the avoidance of doubt, Article 7 TFEU requires the Commission to “ensure consistency between its policies and activities”. 

I could go on citing additional Treaty provisions saying the same (like Articles 3(3) and 3(5) TEU), but the message is clear enough: we should allow agreements that efficiently prevent or reduce greenhouse gas emissions or pollution at source, or that make producers pay for removing past emissions and repair of the environment. 

Some argue that carbon taxation and an adequate emissions trading price are a better answer (although interesting critiques appeared here and here), or prefer regulation.  But regulation is slow, and often ineffective, and carbon taxes especially are deeply unpopular. Carbon trading rights in the EU have gone up from € 25 to more than € 60 recently, but even that level is not enough to compensate for the real (and ever-increasing) social cost of climate change.  More important, carbon trading rights don’t cover all greenhouse gases, including several that are much more potent than CO₂, and cover only a fraction of the world’s economy. The revenues are not dedicated to solving the climate crisis, either.  It is counterproductive to prohibit sustainability agreements on the ground that, in theory, taxation or regulation is a better tool, when that regulation is too little, too late.  We have to use all available tools to reduce emissions, remove excess greenhouse gases, and repair the environment.

Is the threat of private liability part of the solution?  The Dutch “climate tort” judgment recently required Shell to reduce emissions by 45% by 2030 compared to 2019.  But Shell is appealing, arguing it should not be held to a standard that does not apply to its competitors.  A perfect illustration of the collective action problem.  Do we let burglars off the hook because many of their colleagues are not caught and convicted?  If everyone reasoned that way, we would never get anywhere. Would it not be better to solve the problem by allowing oil and gas companies to agree that they will all comply with at least the same standard as Shell?  A “compliance with law” agreement – of course with the right do better than the minimum required by the Paris Agreement?  (Yes, I know that may be wishful thinking, but wouldn’t it be enlightened and set a great example if they did…)  But in the meantime, resolving the Shell litigation and pursuing others will take years.

The Commission is tempted to focus on competition as the solution:  more competition means more innovation, and innovation is the answer to everything.  But as Stiglitz explains, innovation has been suboptimal, and we can’t be sure that some innovator will emerge as deus ex machina to save the world.  And competition is exactly the force that drives firms to use up natural resources and emit greenhouse gases as if there is no tomorrow.  The costs will be borne by our children and our grandchildren.

Competition is the answer only in markets where firms know that enough consumers are willing to pay to eliminate all greenhouse gas emissions (and even then, we still have to repair the damage already done).  In those markets, firms have an incentive to compete not just to be the cheapest and best, but also the cleanest and greenest supplier.  Unfortunately, in many markets, consumers do not have the willingness or the ability to pay.  That’s when cooperation should be allowed, as a complementary tool, to spread the costs, reduce the risks, and speed up reduction of greenhouse gas emissions.

A few economists, such as Prof Maarten Pieter Schinkel, argue that if we give competitors a finger, they will take the whole arm, and try to avoid having to pay for emissions reduction.  They back this up with elegant economic models.  But if competition practitioners know anything about economic models, it is that you have to check the assumptions.   They may not apply universally in the real world.  For instance (and see also here):

• Consumers are assumed to be willing to pay as much as is needed to avoid climate damage, and it is always profitable for firms to meet that demand – whereas in reality, the ICPP warns of tipping points with dramatic effect, as well as extreme weather events, meaning climate damage increases in a non-linear way. Cutting half the emissions does not cut half the climate risk, and many people do not realize the dramatic impact of climate change until it happens to them.  Because of this information asymmetry and other demand-side market failures, many consumers are not willing to pay (or pay enough) for greenhouse-gas-neutral products, and firms may lose more than they gain if they go green individually;

• Regulation is assumed to offer a fully effective solution – which flies in the face of our experience of “regulatory failure” or “political failure” of the last decades;

• Firms are assumed to benefit only from (and to seek only) short-term profit maximization, and always collude to minimise green investment or greenwash if they can get away with it, without regard to the long-term impact on them; and

• It is assumed that consumers must be fully compensated for any price increase.  Out-of-market benefits or improved access to non-market goods (say, clean air or a safe environment) supposedly do not count as compensation. 

Let’s have a closer look at the last two assumptions:

[Chillin’Competition is publishing a series of posts featuring the views of various experts and stakeholders in relation to the European Commission’s proposal for a Digital Markets Act. We have received several contributions and will also be inviting some experts to ensure a plurality of informed views from a variety of perspectives. For our previous posts on the DMA see here (by Pablo), here (by me), here (by Cani Fernández, originally published in JECLAP), here (by Tim Lamb, Facebook) and here by Agustín Reyna (BEUC). Today we are happy to publish the thoughts of our friend Makis Komninos (White & Case).

I am grateful to my friends Alfonso and Pablo for giving me the space to address a topic that has not received much attention in the discussion around the Digital Markets Act (DMA) Proposal. Is there space for private enforcement? And if yes, is this a good or a bad thing? And what would be the optimal solution that safeguards the consistency and effectiveness of the DMA enforcement system? I have just finished a paper on these questions, which will appear in the Liber Amicorum of one of my long-time friends and mentors, Professor Eleanor Fox, to be published by Concurrences.  

In my view there is no doubt that the DMA will give rise to private enforcement. The fact that it says nothing about private enforcement and the role of national courts is not material. It will take the form of a Regulation and Regulations are directly applicable. Of course, its provisions must be sufficiently precise and unconditionalto create rights for individuals (and thus have horizontal direct effect). The provisions of Articles 5 and 6 will satisfy that test. As I explain in my paper, there is no difference between Article 5 and Article 6. The “specification” process for Article 6 does not affect the nature of its rules but only relates to effective compliance measures that are necessary. In other words, the rules of Article 6 are complete and apply, irrespective of a possible “regulatory dialogue” between the Commission and the gatekeeper and a possible “specification” decision.

So, as the DMA Proposal currently stands, private enforcement will be a reality. Apart from adjudicating on claims for damages or other types of relief, national courts would also be competent to grant permanent or interim injunctions and order the gatekeepers to take specific measures of a negative or positive nature. The problem is, however, that such national decisions will inevitably result in a considerable degree of fragmentation within the Union. There will be full decentralisation to the level of countless national courts of a generalist nature, which will be deciding on countless cases, leading to countless “mini-regulations” (with inter partes effects) within the EU. I am not sure people have actually realised that. Such disintegration and fragmentation within the internal market will be distractive and will entail increased compliance costs, since, instead of interacting with 1 centralised enforcer (or even with 1 + 27 enforcers, if national authorities were to be given certain competencies), gatekeepers will need to defend their business practices before an infinite number of courts. The DMA Proposal and its Impact Assessment Report spent pages to highlight the risks that a fully decentralised (to the NCAs) system of enforcement would bring and defended the choice of centralisation at the EU level. Yet, if a risk of fragmentation exists with 27 specialist administrative authorities, surely the risk is much higher with potentially thousands of generalist courts having full decisional powers on Articles 5 and 6.

For these reasons, I believe that the EU legislator should introduce certain proportionate limitations on private enforcement of the DMA rules or a “rule of precedence” for public enforcement. Private enforcement should only be allowed in its “follow-on” form. But public enforcement should have precedence and private enforcement should not be allowed in its “stand-alone” form, i.e. before the Commission has had the chance to declare the infringement of a DMA rule by a gatekeeper and has also possibly ordered specific remedies. Such a rule could be re-examined by the legislator at an appropriate time, e.g. in 10 years’ time, after the Commission and the EU Courts have had a chance to build up a body of precedent. In fact, EU competition law can offer some guidance: although direct effect was recognised in 1974, it took 40 years of case law (1962-2004) for the EU legislator to opt for a full decentralisation of the application of the rules (of Article 101(3) TFEU), with the introduction of Regulation 1/2003. It also took 10 more years for the EU legislator to introduce specific measures aimed at enhancing private antitrust enforcement in Europe, with the Damages Directive. If that was the case with EU competition law, a fortiori a degree of prudence is called for in the case of the novel regime of the DMA.

Can such a limitation would be possible and defendable from an EU law point of view? Yes. Τhe DMA is not primary law. Since it is the product of secondary EU legislation (a Regulation), it is open to EU legislation to introduce limitations on competence and on the direct effect of the legal rules it contains. I explain this further in my paper.

For the avoidance of doubt, I have always been a strong proponent of private enforcement and my 2008 monograph is proof of that. I was also the first commentator who argued 20 years ago that the Courage v Crehan ruling of the Court of Justice was something new – not many EU lawyers back then were ready to acknowledge the EU law basis of the right to damages. So my proposal is not due to any dislike of private enforcement. All I am saying is: let’s make sure that public enforcement of the DMA takes precedence for as long as the DMA is in its infancy and that private enforcement is possible only after the Commission has had the chance to take a decision. From the point of view of EU law, such a solution would be fully appropriate and proportionate. It would ensure the effective and consistent enforcement of the DMA in the Union, while avoiding fragmentation, and would also further the undertakings’ legal certainty.

The Ligue internationale du droit de la concurrence – International League of Competition Law is one of the most venerable institutions in the EU competition law landscape. Its congress, in turn, has long been a classic (and one that brings wonderful personal memories: 10 years ago, time flies, I was awarded the Jacques Lassier Prize for my PhD during their Oxford congress).

This year’s Congress will be organised in hybrid format, the physical bit taking place in Brussels on 22-24 September 2021. All the info on registration and others can be found here: https://www.lidc2021.com/.

You will not fail to notice the most impressive programme that the organisers have been able to put together, with many leading lights from the judiciary, the enforcement agencies and practice. I feel honoured to be taking part in one of the panels on 23 September alongside Lewis Crofts, Eliana Garces, Helen Jenkins, Thomas Kramler and Alex de Streel.

I look forward to seeing many of you there (virtually, alas, in my case). And all the best for the rentrée!

I have uploaded on SSRN a new paper on the notion of abuse from a comparative perspective (see here). It will be published in the Research Handbook on Abuse of Dominance and Monopolization, jointly edited by Pinar Akman, Or Brook and Konstantinos Stylianou (all based at the University of Leeds) and forthcoming with Elgar next year. I am really grateful to them for the invitation to take part in the project.

The paper seeks to provide an overview of the notion of abuse (broadly conceived) from a comparative perspective. It focuses, in particular, on the EU and US case law and administrative practice.

The first point I make is that the notion of ‘competition on the merits’ is not particularly helpful. Not all potentially abusive strategies are inherently anticompetitive or inherently pro-competitive; most conduct may or may not be caught by the prohibition depending on the specific circumstances of each case. It is not a surprise, against this background, that the evaluation of the economic and legal context has acquired an increasingly relevant role in the case law.

Second, the paper seeks to tease out, systematically, the constituent elements of the notion of abuse. The paper differentiates between practices based, inter alia, on whether they are price-based or not; whether they involve the leveraging or the strengthening of a dominant position; and, as far as leveraging strategies are concerned, whether the relevant markets are horizontally or vertically related.

On the basis of this exercise it is possible to understand the controversies and frictions that have become so frequent in this field. Like practices are not always treated alike by courts and/or authorities. There are also ‘grey areas’ in between the most common categories, as Slovak Telekom has recently shown.

Finally, the piece touches upon potentially abusive practices in digital markets. Intervention against online platforms is remarkable (and more intrusive and far-reaching that traditional competition law enforcement) in that it gets into the design of products and business models. Traditionally, authorities were reluctant to venture into such territory. Not anymore. Just compare and contrast the EU Microsoft saga, which left the firm’s business model untouched and Android, which challenged the core of Google’s monetisation strategy.

Given the paucity of precedents, it is not surprising that questions about the applicable legal test in relation to these practices have proved contentious. Slovak Telekom already suggested an approach to navigate the issue (as explained here, the applicable legal test would hinge on whether, in effect, intervention would force the dominant firm to conclude a contract with third parties with which it has chosen not to deal).

I look forward to your comments (as usual, nothing to disclose).

A new paper, entitled ‘EU merger control between law and discretion: when is an impediment to effective competition significant?’ is available on SSRN (see here). It is an attempt to make sense of the different approaches to define the substantive test under Regulation 139/2004 and of the choices made by the General Court in its landmark CK Telecoms ruling (the appeal against which is currently pending before the Court of Justice). Your comments on the draft would be most welcome (as usual, nothing to disclose).

The fundamental point the paper makes is that the Commission, in its Guidelines and administrative practice, has interpreted the substantive test in merger control in a way that it would be fulfilled, in principle, pretty much always and everywhere (at least in relation to transactions involving actual or potential competitors). This is the key reason, it is submitted, behind the annulment of the Commission decision in CK Telecoms (if anything, the standard of proof and the role of quantitative evidence come across as side issues that follow from this core question).

Suffice it to take a look at Hutchison 3G UK/Telefonica UK (Three/O2), which is at the origin of the ruling. The crucial passage is to be found in paragraphs 310-314 and 320-326 of the decision, where the Commission advances its interpretation of Article 2 of Regulation 139/2004. According to the authority, the compatibility of horizontal transactions with the internal market is to be evaluated in light of an unstructured set of factors, each of which may or may not be relevant in the context of a particular case.

Thus, the understanding advanced by the Commission in its decision would give it the leeway to decide the exact criteria against which compatibility of a given transaction would be assessed and how the said factors are weighed against one another. What is more, the decision suggested that an ‘important competitive force’ need not stand out from rivals.

If this approach to the substantive test were to be embraced, any undertaking in a given market would qualify as an ‘important competitive force’ (something noted by the General Court itself in CK Telecoms, para 174). For the same reason, virtually any transaction involving actual or potential competitors could be declared to be prima facie incompatible with the internal market. After all, horizontal mergers lead, by definition, to the elimination of a source of competitive pressure.

Two consequences follow from the interpretation of Article 2 of Regulation 139/2004 favoured by the Commission in Three/O2. First, it is an understanding of the substantive test that does not make it possible to draw a clear line between significant and insignificant impediments to effective competition.

Second, an approach that relies on an unstructured set of criteria (the relevance and weighing of which cannot be anticipated by the parties) is not only a source of legal uncertainty (as noted by the General Court in CK Telecoms, para 175) but amounts, for all intents and purposes, to giving de facto discretion to the administrative authority. One should note, in this regard, that the case-by-case evaluation of the likely effects of concentrations is the privileged realm of ‘complex economic assessments’ in relation to which the authority enjoys a margin of appreciation.

It is submitted that an interpretation of Article 2 that gives the Commission such leeway is not obvious to square with Regulation 139/2004 and, more generally, the division of powers between the administrative authority and the EU courts. Pursuant to Article 2 of the Regulation, the substantive test is an issue of law.

In addition, the approach favoured by the Commission would not allow the EU courts to review administrative action in an effective way. If the substantive test were interpreted in a manner that does not impose meaningful boundaries defined ex ante, judicial control would be confined, in practice, to ‘manifest errors of assessment’. Such a reality would not be easy to reconcile with the fact that the interpretation of issues of law is subject to full review.

This is the background against which the CK Telecoms judgment must be understood. The General Court crafted a substantive test that defines a set of clear legal boundaries to administrative action and that makes it possible to draw the line between significant and insignificant impediments to effective competition. These legal boundaries can be found in the Table below.

CK Telecoms is no different from Airtours in the above regard. In the latter, the Commission had also defined the notion of collective dominance in a way that the test would be satisfied in pretty much any oligopolistic market (by focusing on the incentives to collude and neglecting the ability to do so on a sustainable basis, the authority identified a set of conditions that would rarely ever, if at all, fail to be met).

As was true of Airtours, the interpretation of Article 2 embraced in CK Telecoms ensures that the EU courts can perform their core function.

The attitude towards competition law enforcement has changed significantly over the past two years. For a fraction of our community, the focus should be on prohibiting conduct, and this, as fast as possible. This approach is behind proposals to reduce the constraints on administrative authorities (by means, inter alia, of presumptions and the reversal of the burden of proof) and to limit (even do away with) judicial review.

It is an attitude that has had a substantial impact on the way rule of law ideals are perceived. Not so long ago, there was little dispute about the importance of ensuring that the law is clear and can be anticipated by stakeholders, that firms have the means to defend themselves and that there is a robust mechanism for the review of administrative action (if you are curious about the rule of law in competition law, by the way, I very much recommend Ryan Stones‘ PhD thesis).

In the EU legal order, in particular, there was wide consensus about the improvement brought about by the changes which, over the years, infused the competition law system with principles associated with the rule of law. Such ideals were deemed valuable not only in and of themselves, but also insofar as they enhanced the quality of decisions. The perception (at least until recently) was that administrative action had become more robust and less prone to substantive and procedural errors.

Nothing is forever, alas, and many of the tenets we took for granted are questioned these days. We have read, with a great deal of interest, a number of pieces sowing doubts about some core aspects of the system (including the role of advisers). We have also heard claims suggesting that judicial review delays decision-making and frustrates ambitious enforcement.

According to an emerging view, the ideals of the rule of law are little more than a luxury, if not an inconvenience, that the competition law system cannot afford (or that it can only afford at the price of slower, less decisive intervention). For the same reason, it is occasionally suggested that the system would be better-off if some in-built guarantees were curtailed.

I do not intend to discuss here whether or not these views would change the system for the better (any moderately attentive reader of the blog knows where I stand). I am more interested in identifying the moment when these ideas, marginal until not so long ago, reached the mainstream and enriched the intellectual landscape of our field (definitely less uniform than 10 years ago).

I have the impression that there are two crucial factors behind the rising scepticism vis-a-vis rule of law ideals:

• First, judicial review and procedural guarantees have come to be seen by some as devices to protect the rights of firms subject to competition law investigations. Contrary to this view, however, these mechanisms are there, first and foremost, to advance the public interest.
• Second, there is a clear shift in the priorities of enforcement. What seems to matter is swift action. Enforcement errors are, if at all, a second or third order concern. What justifies intervention, according to this view, is intervention itself.

Judicial review and procedural guarantees advance the public interest

Judicial review has come to be seen with scepticism (and occasional hostility) by some in our community. I have the impression that this position stems from the perception that the control of administrative action by the independent judiciary (as much as procedural guarantees) is a concession that is made to firms subject to an investigation. From this perspective, judicial review would be about balancing the protection of individual rights and the general interest.

This is an understanding of judicial review that has featured prominently in influential documents, including the Furman Report. The idea that the scope and/or the intensity of the control of administrative action should be revisited has emerged as a relatively popular one. Some have even floated the idea of making some administrative decisions ‘unappealable’ (a proposal which, while definitely interesting, seems at odds with primary EU law and the general principles on which it is based).

If this understanding of judicial review is accepted, it makes sense to limit (even do away with) the control of administrative action. It would also make sense to see legal challenges against decisions as dispensable dilatory tactics that, on balance, do more harm than good. The sacrifice would be minimal where judicial involvement is seen through these lenses: does it really matter that large and powerful corporations are not allowed to protect their rights? Is it not better to intervene swiftly to preserve competition and protect consumers?

The problem is that this interpretation of judicial review does not reflect its purpose and importance for the system (and particularly so in continental legal traditions). It is often forgotten that the primary aim of the control of administrative action is to protect the general interest, not the interest of individual firms (juger l’administration, c’est encore administrer, as the old saying goes).

A judgment annulling a decision for misconstruing, say, the notion of restriction by object, or the SIEC test enshrined in Regulation 139/2004, benefits society as a whole, not just (not even primarily) the firms challenging the decision. Similarly, the error-correction role of judicial review advances the general interest by ensuring that administrative action is predictable and consistent (and thus aligned with the ideals of the rule of law).

Is rapid administrative action the goal of rapid administrative action?

The scepticism with which the error-correction function of courts is viewed signals a different attitude vis-a-vis administrative action. According to an emerging school of thought, swift and decisive intervention is what really matters, much more than getting it right. Enacting change, more than carefully pondering whether change is warranted, is seen as the priority. And, the argument follows, the institutional setup should adjust to meet this very vision.

Of course, if one accepts that rapid intervention is to be prioritised, even if it comes at the price of enforcement errors, all the institutional mechanisms to correct the said errors (including judicial review and, more generally, rule of law ideals) become superfluous and/or suspect. In itself, this understanding of administrative action is indicative of a reinterpretation of competition law (its objectives, the rationale underpinning decision-making). As such, it deserves to be widely discussed and analysed.

It would seem that enacting change (namely altering market structures, changing business models and redistributing rents) is, according to this view, the very objective of the system. In other words, remedies would not serve a wider goal (such as the protection of the competitive process); remedies are now seen (at least by some) as the goal itself. The moment administrative action is justified by the fact that it takes place, the possibility of an enforcement error disappears (for how administrative action can be erroneous if it is warranted by its very existence?).