Chillin'Competition

The Canal+ judgment raised important issues relating to the interpretation of Article 9 of Regulation 1/2003. These were covered yesterday by Alfonso.

The substantive question underpinning the original Pay-TV case was equally important (and, to a certain extent, also novel). As I explained when commenting on AG Pitruzzella’s Opinion (see here), the challenge against the Paramount decision focused on contractual clauses limiting Sky’s ability, as a TV provider, to offer copyright-protected content across borders.

Of these, the clauses prohibiting Sky from making available, via the Internet, licensed content to customers outside the UK were by far the most interesting from a theoretical and a practical standpoint. These have been widely referred to as the ‘geo-blocking clauses’. I will focus my comments on these (leaving satellite aside).

In yesterday’s judgment, the Court did not rule on whether such contractual obligations are restrictive by object. It did not and could not. One should bear in mind that a commitment decision adopted in accordance with Article 9 of Regulation 1/2003 does not rule on whether Articles 101 and/or 102 TFEU have been infringed. By the same token, the Commission’s analysis in this context is limited to identifying concerns justifying an investigation.

The Court’s analysis in Canal+ was thus confined to whether the General Court had erred in law when it concluded that the clauses limiting the cross-border transmission of content justified the concerns raised by the Commission in the context of its preliminary assessment (paras 51-54).

In fact, the Court is careful to clarify that there is no ‘definitive’ conclusion as to whether there is an infringement. The press release issued by the institution expressly ‘emphasises the preliminary nature of the assessment of the anticompetitive nature of the conduct at issue in the context of a decision adopted under Article 9 of Regulation No 1/2003‘. This is a valuable clarification, as the preliminary assessment in a commitment decision (or a Court ruling reviewing it) can be (and is) mistaken for a statement of the law.

Are the geo-blocking clauses restrictive by object?

Even though we do not have a definitive answer to whether the geo-blocking clauses are restrictive by object, it looks like that the most recent developments in the case law provide the necessary framework to evaluate the question. Of these developments, Generics is probably the most significant one (see here for my case note, recently published in the Common Market Law Review).

It has long been clear that the qualification of an agreement as a ‘by object’ infringement requires an analysis of the economic and legal context of which it is a part. In Generics, the regulatory context (and in particular the intellectual property system) featured prominently.

It is clear from that judgment that, if there are ‘insurmountable barriers’ to entry, there would be no restriction, whether by object or effect. It is a good illustration of how the counterfactual operates at the ‘by object’ stage: if the absence of competition is attributable to the regulatory context (as opposed to the agreement), Article 101(1) TFEU would not be infringed.

Against this background, the question one should be asking is whether, in the economic and legal context of which the geo-blocking clauses were a part, there were ‘insurmountable barriers’ preventing Sky from offering copyright-protected content, via the Internet, outside the territories covered by its licence.

If you read the Commission’s preliminary asessment in Paramount, you will realise that this crucial question is never addressed (which is why it never came to a definitive conclusion about whether there was an infringement and why the Court could not rule on the matter). The full evaluation of the economic and legal context would have to wait for an infringement decision (or, why not, an Article 10 decision declaring there is no infringement after all).

Does the copyright system raise ‘insurmountable barriers’ to entry?

If one considers the applicable copyright regime, it is difficult to avoid the conclusion that it would be unlawful for Sky (or any other licensee) to offer protected content, via the Internet, outside the territory covered by the licence.

The Commission itself comes to this very conclusion in its first short-term review of the geo-blocking Regulation, published last month. As explained in the document, the lawful communication to the public of copyright-protected content online necessitates a licence in every territory in which the said content is made available.

Crucially for the Pay-TV case, the Commission confirms, in its review, that the above is true irrespective of whether the sale is ‘active’ or ‘passive’ (you may remember that Paramount focused on the fact that geo-blocking precludes passive sales; as the law stands, a transmission is not any less unlawful merely because it qualifies as a passive sale).

This is the background against which it would be necessary to evaluate whether the geo-blocking clauses raise ‘insurmountable barriers’ to the cross-border provision of content and thus whether they amount to a restriction by object.

The analysis comes across as more straightforward than in Generics. In the latter, there was a process patent that may or may not have been valid, which may or may not have prevented lawful entry by generic producers. In the Pay-TV case, on the other hand, it is not seriously questioned that providing content outside the territory covered by the licence would amount to a copyright infringement.

If so, one could reasonably argue that any absence of competition is attributable to the copyright regime, not to the geo-blocking clauses. However, we would have to wait and see (if the matter ever reaches the Court after a Commission decision or following a preliminary reference).

I will be addressing this and other matters in the forthcoming proceedings of the GCLC conference on vertical agreements that took place in January this year (that is, geologic eras ago). I presented on market integration (see here for my slide deck), which remains a fascinating and topical question (in particular when it overlaps with intellectual property). In this same vein, you may also remember my post on Ping written a few months ago too.

Here is the 4th batch of 2020 competition memes (click here for the first, second and third posts in these series). Given the very large number of contributions received we will not be able to post all of of them on the blog (the jury will see them all, though; we feel sorry for them…). Please remain assured that the selection below has been made pursuant to unfair, unreasonable and discriminatory criteria (and by a committee, which makes it even worse).

Ruling today on the Canal+ case (click here for the Judgment, not yet available in English) the CJEU has effectively corrected some of the excesses of its 2009 Alrosa Judgment, whose effects on competition enforcement over the past decade are difficult to understate. Today’s Judgment is equally poised to have a major impact on future competition law enforcement.

In Alrosa, the CJEU quashed a GC ruling that had, in turn, annulled a Commission decision for (i) failing to comply with the principle of proportionality, and (ii) for failing to respect Alrosa’s right to be heard on the proportionality of the individual commitments offered by De Beers (the GC took the view that the complete prohibition of all commercial relations between the two parties with effect from 2009 was manifestly disproportionate).

On appeal, the CJEU held that in the context of commitment decisions the principle of proportionality plays a different role than in infringement decisions, requiring only that the Commission ascertain that the commitments addressed its concerns. The Alrosa Judgment enabled the Commission to make binging remedies that would go beyond what would have been possible in infringement decisions and, in a way, changed our mindsets about how far competition law could reach.

Today’s Judgment nuances, and in a way implicitly reverses, part of the Alrosa ruling. The CJEU again quashes the GC’s Judgment in first instance, but this time for the opposite reason; that is, for failing fully to consider the impact of the commitments on the contractual rights of third parties.

The CJEU does not explicitly recognize that this Judgment in any way corrects Alrosa. AG Pitruzella’s Opinion, however, hinted that the Court’s interpretation of the principle of proportionality in Alrosa had been particularly restrictive (para. 120) (for Pablo’s comments on the Opinion, see here).

The CJEU’s reasoning, in fact, is that today’s Judgment does not necessarily depart from the letter of Alrosa. At para. 106 the Judgment makes a distinction between assessing proportionality by reference to the Commission’s competition concerns (where Alrosa would still apply) and assessing proportionality by reference to the impact on the contractual rights of third parties (where, as explained below, today’s Judgment kicks in). This is in line with the AG’s Opinion (para. 122). Admittedly, the Alrosa Judgment did make the point that third parties rights should be taken into consideration.

Specifically, today’s Judgment observes that Paramount’s commitments in the Pay-TV case (on which we commented here and here) automatically imply that it would not fulfill its contractual obligations, vis-à-vis third parties, like Canal+. In the circumstances of the case, this meant that Paramount would not be able to act against any violations of the territorial exclusivity obligations protecting its licensees.

The Commission had argued, and the GC had accepted, that this would not be a problem, because affected third parties could always seek to enforce their contractual rights against Paramount before a national Court. After all, as you know, and as made further clear in Gasorba, the existence of a commitment decision to address competition concerns created by certain practices does not prevent national competition authorities and national courts from assessing the compatibility of those same practices with Articles 101 and 102.

The CJEU, following the recommendation of the AG, finds that this possibility cannot ensure an adequate and effective protection of third parties’ contractual rights. This is because pursuant to the Masterfoods case law, now codified in Art. 16 of Regulation 1/2003, national courts would not be able to require an undertaking to contravene commitments made binding by a Commission Decision.

Importantly, the Judgment makes use of the possibility to directly rule on the merits of the case instead of remanding the case to the GC. This is because the commitments accepted by the Commission affected an essential element to the balance of the contracts at issue (para. 126) that would devoid of substance the contractual rights conferred upon Canal + (para. 127).

A few additional comments:

• It is clear that going forward the Judgment will constrain the Commission’s discretion to accept commitments (as well as the proposal of those commitments by undertakings) and that it will increase the relevance of third parties. The extent to which this will have a material effect is hard to anticipate. It is possible that the Courts may generally defer to the Commission’s analysis of proportionality, but the very obligation to conduct a proportionality assessment is likely to result in better-designed remedies (and possibly in more litigation).
• Today’s Judgment, and notably the idea that remedies altering the essential balance of contracts are by definition disproportionate, could arguably have some implications beyond Art.9 commitment cases. Proportionality nonetheless would need to be checked against the public interest, and the situation will arguably be different in cases involving clear infringements.
• The commitments offered by other Hollywood Studios in this very same investigation, which were made binding by a different Commission decision, are the subject of a separate pending Canal+ appeal before the GC in Case T-358/19. It seems safe to say these are now doomed.
• A particularly interesting question is whether this Judgment may have an impact on other pre-existing commitment decisions, but this is one that requires some more reflection.
• This is a Judgment from the CJEU’s Second Chamber, including competition experts like Nils Wahl and, importantly, featuring President Lenaerts acting as a Judge.

DISCLAIMER: I have represented PACT, the UK Producers Alliance for Cinema and Television, one of the third parties affected by the Commission’s Decision, whose members might be directly affected by today’s Judgment.

The question of the legal basis might be the single most important legal and political issue when it comes to the design and adoption of the future Digital Markets Act (as anticipated here). Yet, it has been largely overlooked by external observers.

The desire to come up with a new tool that would enable enforcers to operate free from the constraints imposed by the competition case law may have obscured the fact that EU legislators also operate under legal constraints. These constraints are not the bread-and-butter of most competition lawyers (much less economists) so it is only understandable that many commentators might have missed it. Unsurprisingly, these legal concerns have not escaped the Commission’s internal reviewers.

Press reports (see here) suggest that the Commission’s proposal may have been delayed and somewhat watered down due to internal “legal basis concerns”. These were to be expected. In my view, it is impossible to properly understand or discuss the upcoming DMA proposal absent some context about the legal basis debate.

This should hopefully help you understand what is happening, and anticipate what might happen going forward:

What is the issue?

The EU can only legislate within the confines of the powers conferred upon it by the Treaties. Each legislative proposal needs to have a “legal basis” in the Treaty. Different Treaty provisions provide the legal basis for legislative action in each area. The choice of the legal basis will determine the legislative procedure (including who acts as legislator) and the possible scope of the act.

In the field of competition law, Art. 103 TFEU enables the Council, on a Commission proposal, to legislate in order to “give effect to the principles set out in Articles 101 and 102”. That legal basis, however, would not allow the EU to go beyond Arts. 101 and 102, which was precisely the idea here. So this legal basis would, at least in itself, be insufficient.

The Treaty contains a specific Protocol (Protocol 27, on the internal market and competition) indicating that, should the EU need new powers to protect competition in the internal market, it can resort to Art. 352 TFEU. This is a legal basis envisaged precisely for situations like the one at issue here. It was actually the legal basis used for the adoption of the merger regulation, which was also adopted to fill gaps in Arts. 101 and 102 TFEU. Art. 352 TFEU would, evidently, appear to be the appropriate legal basis for the creation of new and far-reaching powers. BUT, it requires unanimity among Member States, and it would not enable the Parliament to act as co-legislator. Either to bypass the unanimity requirement or because the Commission wants to involve the Parliament, the Commission prefers an alternative legal basis: Art. 114 TFEU. It seems clear that this will be the legal basis of the proposed Regulation.

What the Commission can (and cannot) do under Article 114 TFEU

Art. 114 TFEU enables the EU to adopt “measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market”. Under Art. 114 TFEU, the proposal would be dealt with under the ordinary legislative procedure (with Council and Parliament acting as co-legislators), and it would not require unanimity among Member States. The choice of this legal basis nonetheless carries some constraints.

There is plenty of EU case law on Art. 114. This case law makes clear that measures which do not harmonize national rules (e.g. because they aim at introducing new legal forms and/or leave unchanged the different national laws in existence) cannot be adopted under Art. 114 TFEU. And even when reliance on Art. 114 as a legal basis is justified, any legislative measure should comply with the principle of proportionality (i.e. the measure must be appropriate for attaining the objective pursued and not go beyond what is necessary to achieve it).

The Commission is obviously aware of this (awareness may be particularly acute within the Legal Service and the Regulatory Scrutiny Board). To rely on Art. 114 TFEU as the legal basis and avoid the unanimity requirement, the Commission needs to argue that the proposed legislation’s primary aim is not about protecting competition beyond Arts 101 and 102 (which was widely assumed to be the goal of the proposal, as also suggested by the digital reports and the myriad webinars on this new legislation) but to harmonize national rules. In recent weeks the Commission has made all possible efforts to emphasize this message (for two examples, see here and here; there are many more).

For this to be correct, the proposal would need to (i) show a risk of likely regulatory fragmentation liable to distort competition; (ii) be designed to prevent regulatory fragmentation within the internal market; and (iii) not go beyond what is necessary to attain that goal.

What to look for in the proposal

At this stage it is unclear how the adoption of the DMA would prevent Member States from adopting or maintaining in force divergent national rules (e.g. German plans to amend national competition rules). In fact, some competition authorities such as the CNMC have warned (see here) that the new EU rules themselves could cause, rather than prevent, regulatory fragmentation. To validly rely on Art. 114 TFEU, the DMA would need to set limits for Member States to deviate from the DMA’s provisions. Keep an eye peeled for that.

The Commission has some discretion to choose the specific harmonization method, and this may include preventive measures and even imposing obligations upon private parties. To validly rely on Art. 114 TFEU, however, the proposal would also need to ensure that the eventual provisions of the DMA do not go beyond what is necessary to address appreciable distortions arising from regulatory fragmentation. The proportionality analysis may be particularly relevant in relation to both the definition of the DMA’s scope and the articulation of the more far-reaching measures proposed (e.g. “blacklisted” practices). The Nordic competition authorities and the CNMC, among others, have also expressed doubts about the proportionality of such an approach, so it will be interesting to see how this will be framed in the upcoming proposal.

What can the European Parliament do?

The Parliament is arguably the Institution with the greatest interest in operating under Art. 114 TFEU to preserve its role as co-legislator (under Art. 352 TFEU the Parliament would only be able to give or deny its consent to the Proposal). The Parliament, understandably, has a history of pushing for Art. 114 TFEU in the face of doubt. The need to remain within the confines of this provision might rule out the most far-reaching amendments that some may have had in mind. If anything, the Parliament would need to ensure the proportionality of the Act by reference to its stated aim.

And then what?

Until the proposal is out and these details (among others) are clear, it would not be prudent to express an opinion about the chances that it might withstand Court scrutiny, if it ever comes that.

[DISCLAIMER: As explained here, I advise a number of companies that could be affected by the new rules. The views in this post are exclusively mine and while they may coincide with the advice I have provided to clients, they do not in any way reflect any client’s views].

Thanks so much for your interest in (the memes) competition (click here for the first and second posts in these series). We have continued to receive excellent contributions, and also a few others 😉 Here is batch 3:

“CFO after receiving the Commission decision”

On 18 November, the General Court delivered the long-awaited ruling in Lithuanian Railways. The interest of the case did not lie in the outcome, which was widely anticipated. As I explained here, it is perhaps the most blatant abuse that the European Commission has ever considered.

Lithuanian Railways is valuable in that it engages with some of the key aspects underpinning Article 102 TFEU analysis. First (and most unusually), the case concerns a practice that could well be (and arguably should be) abusive by object. Second, it defines the conditions in which indispensability is an element of the legal test. Third, it engages with the analysis of effects.

In this first part I will address the first two points (abuse by object and indispensability). While the outcome is uncontroversial (and the thorough analysis of effects particularly valuable), the reasoning seems to deviate in some respects from the Court’s case law (and, indeed, from AG Saugmandsgaard Øe’s Opinion in Slovak Telekom).

As explained below, the GC suggests that, if there is regulation imposing an access obligation on a firm, indispensability would not be required under Article 102 TFEU. This position, which amounts to importing the standards and objectives of another regime, is not obvious to reconcile with TeliaSonera.

An abuse by object: why were effects considered?

Lithuanian Railways is a rare example in competition law. As the facts presented by the GC show, the removal of the track, in the economic and legal context of the case, had no plausible purpose other than the restriction of competition.

In other words: dismantling 19 kilometres of railway had, as its object, the restriction of competition. None of the reasons alleged by the applicant before the Commission and the GC change this conclusion. In this regard, the behaviour was similar to pricing below average variable costs, which is prima facie abusive irrespective of its effects (AKZO).

Against this background, the first question raised by the case relates to the legal test. Arguably, the fact that the removal of the track had no purpose other than the restriction of competition should have been enough to declare that it amounts to a breach of Article 102 TFEU.

Since the practice is inherently anticompetitive, it should be deemed prima facie abusive without it being necessary to carry out an analysis of effects (just like cartels and predatory pricing within the meaning of AKZO).

This approach is in line with the case law, which recognises a category of abuses ‘by object’ (most recently in Generics; see also here). It is also the most sensible way forward. Since Articles 101 and 102 TFEU can sometimes apply to the very same practice, it would be difficult to justify why effects would be evaluated under one provision but not the other.

The GC does not consider, as a matter of law, whether the practice should have been deemed prima facie unlawful irrespective of its effects. It simply notes that the authority had concluded that the behaviour was capable of having such an impact (paras 219 and 220; see also paras 82-85).

The review of the analysis of effects by the GC made the judgment ‘Intel-proof’ (remember that a firm can provide evidence showing that a practice is incapable of having anticompetitive effects even when it is prima facie abusive). I will address this review in Part II of this series.

On indispensability

The legal test issue was not addressed in relation to the abusive object of the practice. However, it was thoroughly considered when evaluating whether indispensability should have been assessed by the Commission.

I understand why the applicant might want to raise the issue of indispensability, even though the removal of a track has little to do with the issues at stake in Bronner (that is, whether a refusal to grant access to an infrastructure amounts to an abuse). It is therefore unsurprising that the argument was rejected.

Much more interesting is the question of why it was rejected. The GC advances two reasons, each of which sufficient to conclude that indispensability is not an element of the legal test (para 91).

One of the reasons is that, in the context of the case, there was a regulatory obligation to give access to third parties. Another reason relates to the fact that the infrastructure had been developed with public funds and/or under a statutory monopoly.

Regulatory obligations in light of TeliaSonera and Slovak Telekom

The GC holds, in para 92, that ‘[w]here there is a legal duty to supply, the necessary balancing of the economic incentives, the protection of which justifies the application of the exceptional circumstances developed in the judgment of 26 November 1998, Bronner (C‑7/97, EU:C:1998:569), has already been carried out by the legislature at the point when such a duty was imposed‘.

The GC does not provide any judgment in support of this position (other than its own in Slovak Telekom, under appeal). One should note, in this regard, that the Court has never given any weight to the legal obligations in place when considering whether indispensability should be an element of the legal test.

There was no such regulatory obligation in TeliaSonera. This factor, however, did not have any impact on the outcome of the case. Similarly, AG Saugmandsgaard Øe did not give any weight to the obligations imposed under sector-specific regulation in Slovak Telekom.

It is not wholly uncontroversial to state that legal obligations imposed under another piece of legislation should determine the relevance of indispensability under Article 102 TFEU.

Regulation imposing access obligations does not necessarily share the objectives of Article 102 TFEU. For instance, access obligations under the EU telecoms regime can be imposed under conditions that are considerably less stringent. Why? Because the objective of that regime is to eliminate dominant positions (unlike Article 102 TFEU, the objective of which is to prevent the abuse of such positions).

Thus, if we accept that the EU telecoms regime can or should determine whether indispensability is required under Article 102 TFEU, we would be accepting that EU competition law can be used as a vehicle to attain the objectives of sector-specific regulation (eliminate dominance), not its own (prevent abuses). We would also be accepting that the objectives of competition law may change whenever it overlaps with a sector-specific regime.

The consequences of Article 102 TFEU embracing the objectives of other regulatory regimes can hardly be overstated. Almost inevitably, this interpretation of the provision would lead to inconsistent enforcement and the fragmentation of the EU competition law system.

Such outcomes would be all the more controversial if one considers that Article 102 TFEU is primary EU law and sector-specific regulation is either secondary EU law or national law.

Fortunately, it will not take long before the Court addresses this point in Slovak Telekom.

I very much look forward to your comments. I will address effects next week.

We are happy to feature the last instalment of the symposium of Nicolas Petit’s book on Big Tech & The Digital Economy. A grand finale with four wonderful contributions. Enjoy!

Moligopoly as the Coexistence of Structural Monopoly with Cognitive Oligopoly or An Inquiry into the Theory of the Apologetic Com(Petit)ion, by Oles Andriychuk

The Moligopoly Scenario as a research agenda, by Pierre Larouche

Protecting the competitive process, not a competitive structure, by Frédéric Marty

Beyond a bananas approach to antitrust: Understanding competition in tech, by Renato Nazzini

Thank you all for your enthusiasm about the 2020 Competition Memes Competition (if only you were so enthusiastic when we discuss hybrid settlements, selectivity, or the actual implementation of the AEC test…).

We have so far received an impressive number of great contributions (keep them coming!). For your own good, we will be rationing them on a weekly basis. Here is the second batch:

“Commission officials are here! They asked for your phone and your laptop!“

Competition lawyer after explaining the RPM concept to the client’s sales department.

If you thought nothing else bad could happen in 2020, well… you were wrong. We thought a bit of humor could do us all well, and if there is one good thing about the competition field, it is that it offers plenty of opportunities to laugh about ourselves.

So… following the success of our 2016 competition memes contest and of our 2018 classical memes competition, we are now launching the 2020 Competition Memes Competition. It will feature some of the worst jokes you have ever seen.

We have assembled a team of reputed specialized journalists with vast experience in bad jokes to serve on the Jury, namely Lewis Crofts (Mlex), Foo Yun Chee (Reuters), Javier Espinoza (Financial Times), Thibault Larger (Politico) and Aoife White (Bloomberg).

Candidate submissions can include memes, gifs, classical memes, captions, or pretty much any other blog-friendly format that you please. You can send your contributions to chillingcompetition@gmail.com

Over the coming weeks we will be sharing on the blog a selection of the best memes received. We will announce the winners by 17 December.

Below you can find the first batch, just to get the ball rolling:

Abuse of dominance in digital markets will feature prominently in this year’s OECD Global Forum on Competition Law, to take place between 7-10 December 2020 (see here for the programme).

I will be privileged to discuss the subject alongside Cristina Caffarra (CRA), Amelia Fletcher (UEA) and Lina Khan (Columbia Law School).

If you are intrigued by the topic, the OECD has had the great idea of releasing a wealth of materials ahead of the event, including an extensive Report.

They have also asked the speakers to prepare a short blog post and a video clip. You can find mine here and here. My presentation is also available, as a pdf, here.

The point I make will be familiar to those reading the blog. I argue that there is something distinctive about abuse cases in digital markets. Insofar as it is, I do not believe one can argue that they are business as usual.

To illustrate this idea, I show (as I have done in the past) that traditional competition law cases deal with how products are sold. In digital markets, competition authorities find themselves venturing into the ‘black box’ and interfering with how products are made.

Intervention of that kind is more controversial, demands more resources and is more prone to errors. It is not a surprise that competition law was deferential vis-a-vis product design and/or business model choices. Thus, it only rarely went opened the proverbial ‘black box’.

Two questions arise, against this background. From a legal perspective, the question is whether it is wise to depart from the legal tests that have so far limited the system’s exposure to proactive intervention. From a policy standpoint, the question is how often, and in what circumstances, competition authorities want to interfere with how products are made.