Chillin'Competition

My new paper, on AG Wahl’s Opinion in Intel, is available for download on SSRN here. It is not new in the sense that it is the write-up and polishing of some of the ideas discussed in an event organised by Concurrences back in October. Info and materials on the event, in which I presented together with Luc Gyselen and Damien Neven, can be found here.

I understand that Concurrences will be publishing several short papers on the Opinion together with mine and Nicolas Petit’s (see here). I chose to focus on what is, in my view, the single most important aspect of the Opinion: the emphasis placed on the virtues of realism and consistency in law-making.

Realism in law-making

A legal rule that is divorced from business realities makes bad law. When a rule ignores reality, it may be difficult to understand and anticipate. This is one key message conveyed by AG Wahl in his Opinion.

The summa divisio between loyalty rebates, on the one hand, and quantity-based schemes, on the other, has been with us since Hoffmann-La Roche. It does not capture, however, the reality of business transactions, which, as the case law shows, defies such a ready and stark categorisation.

What is more, the divide between loyalty and quantity rebates is premised on the idea that the two practices are fundamentally different in their nature, objective purpose and potential effects. Again, decades of case law provide empirical evidence showing that the reality is far more nuanced.

What happens when a rule is at odds with business realities? As AG Wahl explains, a gap opens between what courts say and what they do. Formally, courts may prefer to stick to the divide between loyalty and quantity rebates. In practice, however, they may do something very different. The analysis of ‘all the circumstances’ in cases like Michelin I and British Airways is simply an attempt to bridge the gap between rhetoric and reality.

A gap between what courts say and do is only good for academic lawyers like myself, who make a living trying to develop a systematic understanding of the field. It is bad for everybody else. Obscuring the reasoning of a ruling, or failing to make explicit the aspects that determine the outcome of a case is not conducive to legal certainty. In my view, Michelin II and British Airways exemplify the legal uncertainty created by this case law particularly well (I wrote about it here).

Consistency in law-making

AG Wahl’s Opinion also emphasises the value of consistency. Legal certainty cannot be meaningfully achieved if like practices are not treated alike. The Opinion proposes to achieve consistency both in the context of rebates and Article 102 TFEU as a whole.

In line with the Opinion, I have already pointed out that, if the case law has taught us something over the past thirty years, it is that the difference between the various types of rebate schemes is one of degree, not of principle. As a result, there should be no reason why they should be treated differently. All rebate schemes should be prohibited by object and/or by effect in accordance with the same criteria.

The Opinion distils a unifying legal framework that can apply across all potentially abusive practices. This framework revolves around a two-step test. According to AG Wahl, only the most serious infringements should be prohibited by object under the first step. The legality of all other practices should be subject to the second step. The two-step test must be performed in light of the economic and legal context of which the practice is part.

This aspect of the Opinion finds support in the case law. As I explained back in October, there are clear traces of a two-step test in past rulings. Post Danmark I is a good example in this sense. Selective price cuts can be abusive either when they are predatory within the meaning of AKZO (first step) or when they have exclusionary effects (second step). In Deutsche Telekom and TeliaSonera, the Court suggested that the first step is not sufficient to establish the abusive nature of a ‘margin squeeze’. Such a practice is only prohibited when it has exclusionary effects (that is, under the second step). Finally, a careful reading of Post Danmark II also suggests that a two-step approach was followed.

If 2016 taught us anything is that voters always get things…well, never mind. But what is undeniable is that it does suit 2017 to start it off with a vote. The list of nominated publications for the Antitrust Writing Awards is now closed, and you can start voting for the best antitrust writings of the year.

Pablo and I are jointly nominated for the award on the “Academic/General Antitrust” category for our article On the Notion of Restriction of Competition (it could hardly be more general….). Pablo also has a standalone nomination for the “Academic/Unilateral Conduct” award for this piece.

We encourage you to click on the links above and vote for your favorite articles and also for ours (in case you have little time simply voting for ours will suffice). Although, actually, we are not too concerned, as our friends Dmitry and Evgeny have assured us that everything is being taken care of…. 😉

I look back at the past few posts I have written and realise (well, I sort of knew that already) that they tend to be critical. In a sense, this is inevitable. We pick controversial matters and, as an academic, I instinctively focus– and always will – on the issues which I find to be inconsistent with my understanding of the law.

As positive thinking is in vogue at this time of the year, however, I thought the first post of 2017 would be devoted to three aspects of EU competition law that are seen by many as controversial and that are often criticised (or have often been criticised)… but with which I have no problem at all. Before I forget about it in the next couple of weeks in the same way others (not me!) forget about dieting and exercising, here’s to the power of positive thinking:

Market integration as an objective of EU competition law. This is a classic. Many people believe that EU competition law should not be enforced to achieve market integration, as it has been since Consten-Grundig. This policy goal, the argument goes, is not really about competition; it is a political one. I do not see things this way. Market integration is in fact where we come from, and the very reason we have a competition law system in Europe. Does it mean that our competition law is less ‘pure’ – whatever that means – as a result? Maybe, but I can certainly live with that.

Recoupment and predatory pricing: It is sometimes criticised that predatory pricing can be an abuse without evidence of the ability of the dominant firm to recoup its losses. I have little trouble with this rule. Pricing below average variable costs is in principle an irrational strategy for a firm to adopt. In this sense, it is the closest we can get to a ‘by object’ infringement in the context of Article 102 TFEU. And we know that it is not necessary to show the effects of a practice when it is restrictive by object.

Information exchanges under Article 101 TFEU: T-Mobile is a more recent judgment, but it has attracted a great deal of criticism. Does it make sense to prohibit as restrictive by object an exchange of information in the circumstances of that case, or in a situation like the one at stake in Bananas? Of course. There is no good reason why companies would get together to engage in such discussions. This is something that, as a company, you just do not do. It is true that fines, if imposed at all, should be proportionate to the gravity of the infringements (which means that in cases like T-Mobile and Bananas they should be modest). However, the fact that such exchanges are unlikely to have anticompetitive effects should not influence their qualification as ‘by object’ infringements.

Happy 2017 to all!

This morning the ECJ annulled the General Court’s Judgments which in turn had quashed the Commission’ decisions in the Spanish financial goodwill cases. As some readers may know, my firm represents the parties that prevailed in first instance.

We had commented on this case before (most recently here) and Pablo’s statistical analysis predicted the outcome (actually, some of the comments in my last post could also be read in conjunction with today’s news).

We are getting a pretty significant number of calls and emails asking about the implications of this Judgment, so here go my personal main comments in this regard:

–The implications for the specific cases considered in the Judgment are actually limited. The cases now go back to the General Court, which (as acknowledged in para. 123 of today’s Judgment) had only examined the first part of only one of the four pleas presented to it. It is therefore pretty evident that the Judgment has in no way”fully upheld the two Commission decisions” as surprisingly claimed in the Commission’s Press release.  The game is still on.

–The implications for the Apple cases and other cases concerning tax rulings are not evident, and most likely non-existent. Whereas establishing links can be good for headlines and the Commission may have had an interest in linking these cases to raise the stakes before the ECJ, the cases share little more than a wide interpretation of the notion of selectivity.

-The implications for State aid aw and tax law, and for institutional equilibrium between the Commission and Member States are simply huge:

The Judgment creates the concept of “behavioural selectivity” and thus places us in a brave new world.

From now onwards any tax measure conditioned on a behaviour (e.g an investment; i.e most tax measures) will automatically be considered as meeting the first of the three step test. In practice, this means that the European Commission becomes a tax co-legislator (some Member States did note that at the hearing and so did AG Kokott in the parallel Finanzlamt case), a role which it may nevertheless not want to assume (or at least not always, or not regarding every Member State).

Pablo is putting pressure on me to write an article on selectivity during the holidays, so perhaps we’ll develop our thoughts there.

-For law firms specialized in State aid, this means tons of new work…

–For the general interest, well, the news are perhaps not so great.

We have received literally hundreds of memes for our competition memes competition. Below you will find the very last selection. For the previous ones see here, here, here and here.

Since we have had a good laught with these, if any of you ever has any brilliant idea about memes related to current events or to our posts, please do send them our way! We will take care of seamlessly integrating them into our posts 😉

A committee of my colleagues will now pick the winner/s. If you have a favorite meme please feel free to say so as a comment to this post; any comments received will be considered in the final assessment.

The (Extended) Fourth Chamber of the General Court annulled on Tuesday, for the first time, a Commission’s cartel settlement decision.The unusually brief Judgment is available here.

What happened in the case is essentially that, as if often happens with mono-product companies, the potential fines would have in principle exceeded the 10% turnover cap. In order not to exceed the said cap, the Commission granted reductions that ensured the fines would remain below it. The reductions granted were different for every company, but the fact is that the precise rates of reductions were undisclosed and that the decision did not explain the reasons for those differences (there was also one non-mono product company that benefited from an adjustment for equity reasons).The decreases in the fine resulted in adjusted basic amounts that revealed important discrepancies in terms of percentage as regards the 10% maximum.

According to yesterday’s Judgment, the Commission failed to meet its obligation to state reasons regarding the “weighting and assessment of the various factors taken into account in determining the amount of fines”, particularly when acting outside the framework set in the fining guidelines and in light of the obligation to have due regard to the principle of equal treatment. Since on the basis of this reasoning the parties would not have been able to dispute the merits of the decision with regard to the principle of equal treatment nor to ascertain whether equal treatment of different situations were objectively justified, the General Court annuls the decision.

A few comments beyond the newsletter headline:

A first, really? Actually, the issue had been brought to Court before in another settlement case (Euro Interest Rate Derivatives) but the appeal (by Société Générale) was withdrawn following an amended decision. It was then reported, however, that SG had submitted wrong turnover figures and that the new fine was calculated using new data but the same methodology as the earlier one. A related issue nevertheless did arise in Pilkington before the ECJ (see comment below) although it related to the General Court’s full jurisdiction rather than to the Commission’s fining powers.

–Is the General Court in annulment mood following the shortage of antitrust cases (only 11 last year)? Several judges (including Ian Forrester at the Chillin’Competition Conference) have recently encouraged more competition appeals and conveyed the message that companies and lawyers should not lose faith in the Courts and that appealing might well pay off. This could perhaps be seen as one more signal creating incentives.. Things may be different in the State aid front, particularly these days, given the political implications often at stake (some will understand what I mean).

-On the context and the effects on the Commission’s current policy. That fines reached the 10% used to be a bit of an oddity, but not so much for mono-product companies following the latest revision of the fining guidelines. This has given rise to concerns about compliance with the principle of non-discrimination between mono-product and non-mono product companies. Perhaps you remember that the impact of the current fining method was of particular concern to Commissioner Almunia. Back in 2011 he said in a few speeches that he was “examining how the mono-product ratio of companies – usually SME’s – can be taken into account when setting fines, so that they will not be treated in a discriminatory way”. The issue even attracted the attention of the European Parliament, which in a Resolution of February 2012 on the Commission’s competition annual report indicated that it “[a]waits an adaptation of the fining guidelines concerning ‘mono-product’ undertakings and SMEs, as announced by Commission Vice-President Joaquín Almunia“.In several cases (settlement or not) the Commission made sure to say that in those situations fines were reduced “taking into account the mono-product nature of the companies and their different degrees of involvement in the cartel” (see e.g. the window mountings). The policy, however, changed and the Commission does not do this anymore.

What now? The Commission is placed at a tough spot now if it wishes to grant reductions to mono-product companies or small and medium enterprises. And even if it does not, it still finds itself between a sword and a hard place in this case: what should it now do with the fine in this case? Paras 60-68 (in particular para. 66) of the Pilkington ECJ Judgment from September 2016 (which in a way may have anticipated this ruling) further complicate the issue as they could even suggest that reductions to mono-product companies are illegal (“the difference in the proportion represented by the fine in relation to the total turnover of the undertakings concerned does not, as such, constitute a sufficient justification for departing from the method of calculation that the Commission imposed on itself. That would be tantamount to conferring an advantage on the least diversified undertakings on the basis of criteria that are irrelevant in the light of the gravity and the duration of the infringement. When the amount of the fine is determined, there cannot, by the application of different methods of calculation, be any discrimination between the undertakings which have participated in an agreement or a concerted practice”). Admittedly the case law is not a paradigm of clarity in this regard.

–Reinterpreting the 10% limit? What it has seemingly done until recently is to (more or less, and in an admittedly opaque way) grant the reductions necessary for all companies to be below the cap (which necessarily implies very different reductions that are more related to turnover than to participation) and then, I guess, do some more or less sophisticated adjustments to reduce manifest differences in treatment between the different fined companies. The problem, of course, is that this reduction method may perhaps be commendable but cannot be exactly objective and proportionate and is therefore very hard to explain, as this case shows.

If from now onwards the Commission the Commission still wanted to reduce fines in this way (which, again, does not seem to be the case), then it would arguably have to set the max fine of 10% for the undertaking with the greatest turnover and participation, and none of the others could also reach the cap (unless their situation is pretty much the same as that of the “worst offender” in every case). Effectively, what this means is that at the very least in these cases the 10% limit would cease being a cap and will become the upper limit for the “worst” infringer. And this would somehow approach the re-interpretation of the limit to the interpretation given by the German Federal Supreme Court reinterpreted the cap in February 2013. As you may remember, despite the German cap being worded mirroring the EU text, the cap was reinterpreted as the maximum fining range precisely out of concern for discrimination of mono-product companies and SMEs (with the result that SMEs are now likely to face smaller fines and large companies, conversely, much larger fines).

In any event, and thinking about the bigger picture, it is pretty obvious that the 10% cap doesn’t guarantee that fines are no excessive or disproportionate to the finances of the sanctioned entity as it only looks at one –sometimes not useful- parameter of its financial status. Is it really a useful cap or should we think of alternatives?

–Judicial bias, really? -The reporting Judge in the case is Viktor Kreutschik, a former member of the Commission’s legal service whose appointment was doubted by some comments in this blog out of concern for a possible bias in favor of the Commission. As I wrote back then, it could actually be the other way around (see “Revolving doors: a contrarian view) and this Judgment suggests I may have had a point (for once). To be sure, I do have an issue with Judgments being annulled only for more or less important case-specific technicalities (I already said this not long ago, see here) and not so much when they deal with fundamental issues of principle and the stakes seem to be high (more on this coming soon).

–Want more? In the unlikely case that this post opened you appetite for more readings on fines, we suggest (aside from our usual self-promoted writings) that you take a look at this very recent OECD document.

-It’s all about the general principles. All these developments, by the way, confirm what I always say in my lectures on EU competition procedure, that when it comes to Court cases procedure (or rather general principles of law) often matters more than substance. So for more on this, we invite you to register for our module on procedure at the BSC 😉

Many of you will remember the post I wrote on AG Wahl’s Opinion in Intel. One of the questions that were examined in the Opinion related to the standard of effects that applies in the context of Article 102 TFEU. Are potentially abusive practices prohibited when they are capable of having exclusionary effects? Or is it necessary to show, in addition, that they are likely to have an anticompetitive effect? Is there a difference between capability and likelihood? Does it matter?

If you have read the opinion, you will remember that, according to the Commission, there is a difference between capability and likelihood, and the difference matters. According to AG Wahl, such difference does not exist (and thus it does not matter). In addition, the Opinion defends that the bar is very high. AG Wahl suggests that the standard of capability/likelihood is met when it can be shown that, in all likelihood, a practice will have anticompetitive effects.

It seems to me that the Commission is right on this point of law. There is a difference between capability and likelihood, and this difference is a relevant one in practice. As the Commission seems to be arguing in Intel, it would be desirable to make the difference more explicit in the case law. This is in fact what I explained with Alfonso in our paper on the notion of restriction of competition.

When does the standard of capability apply? The standard of capability applies to restrictions of competition by object. As the law stands, this category includes, inter alia, cartels, pricing below average variable costs and exclusivity obligations imposed by a dominant firm.

It is not necessary to show that a practice is capable of restricting competition. When a practice is qualified as restrictive by object, the assessment of capability is implicit. If an authority concludes that an agreement amounts to a cartel, there is no point in showing, in addition, that it is capable of restricting competition. A cartel, by definition, can have anticompetitive effects.

What does capability mean? The case law suggests that the standard of capability is fairly low. As I understand the relevant judgments, it is sufficient that anticompetitive effects are plausible for the prohibition to apply. Even when the probability of anticompetitive effects is not very high, the practice will still be prohibited.

A clear example in this sense is Bananas. There is no doubt that the practices at stake in the case were not particularly likely to have anticompetitive effects. This is something that Alfonso (rightly) pointed out, and what Dole argued in its appeal. True, the exchange of information in question might not have affected prices in the end. As I understand the case law, however, this does not matter. After all, it is certainly plausible that an exchange such as the one examined by the Court in Bananas has anticompetitive effects. Therefore, there is every reason to prohibit it as restrictive by object under Article 101(1) TFEU.

Another example is found in Article 102 TFEU case law. It is plausible that an exclusivity obligation has anticompetitive effects when applied by a dominant firm, even though it covers a small part of the market. After all, Article 102 TFEU comes into play in instances where the conditions of competition are already weakened. What if the coverage of the practice is limited? It does not matter, as the Court pointed out in Tomra.

Tomra and Bananas have been criticised, but seem to be entirely consistent with the case law and with the way in which the EU courts understand the notion of capability.

Is it possible to show that a practice is NOT capable of having restrictive effects? When a practice is restrictive by object, it is not necessary to show that it has restrictive effects on competition. Is it possible to escape the prohibition? Several examples from the case law suggest that it is indeed possible. For instance, the parties can show that the agreement does not restrict competition that would have existed in its absence (i.e. in light of the counterfactual).

Take an example inspired from E.On Ruhrgas. A market sharing agreement between competitors is, very often, restrictive by object. It is possible to think of instances, however, when such an agreement is not capable of having restrictive effects on competition and is thus not restrictive by object. This would be the case when market entry is precluded by a (de iure or de facto) legal monopoly. In such circumstances, the agreement would fall outside the scope of Article 101(1) TFEU altogether.

When does the standard of likelihood apply? The standard of likelihood seems to apply to practices that are not restrictive by object. The category includes, inter alia, exclusive dealing (in the context of Article 101 TFEU) and (in the context of Article 102 TFEU) ‘margin squeeze’ abuses, selective price cuts – Post Danmark I – as well as standardised rebate schemes – Post Danmark II.

What does likelihood mean? I agree with the Commission that the standard of likelihood is higher. However, the meaning of the concept is not entirely clear from the case law. I am inclined to agree with AG Kokott. My impression is that the standard of likelihood is satisfied when it can be shown that it is more likely than not that the behaviour will have an anticompetitive effects. In other words, it would be necessary to show that the probability of an anticompetitive effect is above 50%.

Is it possible to show that a practice is NOT likely of having restrictive effects? The case law provides plenty of interesting hints of the instances in which a practice does not satisfy the standard of likelihood. It would be necessary to examine the issue by reference to several indicators. If the coverage of a practice is limited (<30-40%?) it is unlikely to have restrictive effects (see in this sense Post Danmark II). The same is true when the duration of the agreements is short (<3-6 months?), or when there is evidence suggesting that rivals have been able to remain on the market and gain back some customers (as in Post Danmark I).

And here goes the third selection of brilliant candidates for our competition memes competition. For the previous sets see here and here. We’ll have more for you next week. Enjoy them, and have a great weekend!

We are getting lots of excellent competition memes for our competition, so many that there here goes a second selection. For the first tranche, see here; we will be posting a third set tomorrow

I hope you enjoy it as much as my colleagues, who might need to catch up on billables over the weekend to compensate for all the time they’ve spent discussing memes today (I hear them from my office even if they don’t realize…)  😉