Chillin'Competition

Until today, I had avoided commenting publicly on the ex ante regulatory instrument that the Commission is considering for “platforms acting as gatekeepers”. There were three reasons for this. First, unlike the New Competition Tool, I did not see this initiative as a threat to competition law as we know it. Second, I do understand that there is a certain public anxiety about digital markets (to some degree justified, to some degree exaggerated by interested stakeholders), and a margin for regulation to legitimately address that anxiety and improve things. Third, my opinions could be legitimately criticized as biased because an important part of my work is to advise and represent companies targeted by this initiative. My thinking was that there were already enough people with professional interests making noise in all directions for me to contribute to the cacophony.

Alas, my reasoning on those three fronts has changed after reading the bold leaked drafts that circulate widely since last week. First, I now see a risk that the ex ante rules might have a much greater impact on competition law than I had anticipated. Second, it seems that the current plans might not always be addressed at the issues causing public anxiety, but to a large extent target issues at the core of pending competition cases. Third, I will not falsely pretend my opinions are neutral, but I hope they might add some value to the debate. Experts working against my clients have also  authored some of the influential reports that the leaked documents cite as evidence supporting the need for intervention and, to be sure, I don’t think their views should be disqualified. In addition, given that the rules appear to be crafted to affect only a remarkably limited number of services, it is likely that a majority of stakeholders will feel relieved and/or might not have incentives to voice out concerns, so you might not be exposed to many contrarian views. And even if you are, a lot of the commentary out there seems somewhat radical.

As in other matters, there is excessive polarization here, and even a tendency to look at things through myopic and binary (progressive vs conservative) lenses. Some partisans of regulation invoke “progressive” attitudes as a reason to favor these initiatives. Others claim that they oppose them in line with “conservative” principles. In reality, though, this debate has very little to do with politics. There are media companies who support Trump, Brexit and deny climate change that also support these initiatives (provided they only target their rivals, of course). There are also conservatives who want more regulation and antitrust intervention (even if arguably not always for the right reasons; e.g. at a recent antitrust hearing a Republican Congressman claim Google should be regulated because it favours WHO health advice over Trump’s…). And then there is a vast majority of other perfectly reasonable companies or stakeholders who have legitimate commercial/professional interests in these initiatives passing, or not passing, regardless of politics.

Instead of simply shouting “this is great” or “this is rubbish”, I’ll try to reason my concerns through. Confronting (hopefully) reasonable views should (hopefully) contribute to progress. The public debate should not belong only to those shouting the most (and you should see my Twitter feed…). I said before that we can do better, and I will try to play my part by being assertive, but as constructive as possible. It is not easy to decide where to start, but here are some questions:

1-.Why The Focus on 4 Key Services?  The current drafts indicate that the broader options have already been discarded, and that the plan is to focus only on 4 companies “key services”, namely “online intermediation services (market places, app stores and social networks), (ii) online search engines, (iii) operating systems and (iv) cloud services”. Queries: What were the criteria to concentrate on these? Can other “information society services” be excluded from the potential scope of application of the rules, even in the presence of “gatekeeping” features?  Are these the services of the economy where consumers are getting the worst deal in terms of price/innovation/quality/R&D investment? Are these the services with the greatest risk of consumer lock-in or with the highest switching costs? Are these services that have escaped competition law scrutiny? Or are these the intermediary services that have succeeded in creating greater opportunities for third party business users? 

2-. Unavoidable = Indispensable = Market Power? Perhaps the questions above are irrelevant, because the drafts show that the concern is that some services may be “de facto unavoidable for business users”. That does not necessarily mean the initiative is less legitimate, but it raises questions worth asking. Queries:

·   The assessment of market power depends on the competitive constraints faced by the company under examination. Under this alternative standard, however, “gatekeepers” subject to these rules would be identified judging solely from the perspective of whether (all? some? how many?) business partners have (other? equally convenient?) alternatives, regardless of the possible exercise of market power. Should that be the right approach? Should we adapt our thinking about identifying market power, or should we only make a carve-out for these 4 services? And if the concern is not market power but the “economic dependency” of certain users, can the proposed remedies go beyond that and constrain, for instance, product design decisions?

·   Does “de facto unavoidable” mean the same as indispensable within the meaning of EU Law, also beyond competition? Consider, for example, paragraph 55 of the recent CJEU Airbnb ruling. Would accomodation intermediaries, for example, be covered by these ex ante rules in spite of the Court’s observations? 

.   Rather than simply identifying “key services” and designating them as “gatekeepers” (which could arguably risk looking like reverse-engineering), would it make sense to craft some sort of normative or objective criteria to decide whether a given service might have “gatekeeper status” (e.g. on the basis of market shares, shares of traffic or other objective parameters)? What would be the process to identify the services with gatekeeper status? Would companies have opportunities to make their views known? Should there be consultations like in telecom?  How often would this status be reviewed?

3-.A Gap in Competition Law or An Overlap With Competition Law? I had the impression that the ex ante rules would cover matters falling outside the scope of competition law, and that this is what could lend legitimacy to the initiative (competition law is not everything after all). I was wrong. The list of “black” and “grey” practices in the leaked documents cover three categories: (i) data practices; (ii) self-preferencing; and (iii) tying and bundling. The practices in the list pretty much coincide with the same very practices that the Commission and NCAs have recently investigated, or are currently investigating, in cases concerning mainly Amazon, Apple, Booking, Facebook, Google and Microsoft. 

This means that (unless the EU Courts rule otherwise), this is all conduct that currently falls within the scope of the competition rules. Some of the practices in the draft lists in fact contain the actual wording of some of the examples included in Art. 102; others reproduce the wording and terminology used in recent decisions. Queries: To the extent that the rules would apply to practices falling within the scope of the competition rules, and only to companies that the Commission believes are dominant, then would this initiative fill a gap? Or would it rather replace case-by-case evidence-based assessments by outright bans when it comes to a handful of companies? Given the clear overlaps, wouldn’t it make sense for the enforcement of these rules to sit with DG Comp in order to ensure consistency with existing enforcement tools and with a possible NCT?

4-. Why Now? The Commission has spent years building cases, presumably challenging what it considers to be the most egregious instances of “black-listed” conduct. It is perfectly reasonable for the Commission to build its legislative proposal on “evidence derived from competition enforcement practice” as the drafts seek to do. But shouldn’t we then wait until those cases are over? The Commission has often said that what lends legitimacy to the fact-finding and enforcement process is judicial review. And EU Courts have now been called to render Judgments assessing the effects of some of these practices on the basis of actual evidence. Queries: Would upcoming Judgments concerning practices in the black list be rendered irrelevant before they are decided? Would that be that an unintended consequence? Would that be good thing? Would we accept this process in all areas of the law, or should we have an exception for matters that affect only a few companies? Would regulation be better or worse if it were also informed by the findings of the Courts in relation to the cases brought by the Commission? 

5-. Harmonization as the Goal? According to the leaked documents, “the objective of the intervention is to harmonise rules in Member States relating to unfair behaviour in gatekeeper platforms”. Query: To the extent that competition laws, unfair competition laws, the P2B Regulation, and other initiatives at the national or EU level would remain in place, would the ex ante rules harmonize national legislation or would they rather be adding one more tool to the toolkit?

6-.What About the NCT? If these rules were to enter into force, an NCT would arguably not add much value with respect to these 4 “key services”. Most people thought, however, that these were precisely the services that an NCT would target. Query: Does this mean that the NCT will be deployed mostly in relation to other services?

7- The “black list”. The list is “based on CNET/GROW” evidence gathering. The legitimacy of the initiative would arguably be enhanced if that evidence were identified and made public. As explained above, it would appear that most of the practices in the black list target conduct at the core of recent or pending cases. It is commonly accepted that many of those practices (e.g. MFNs) are competitively ambiguous; they might have pro- or anti-competitive implications depending on the circumstances. Not even complainants in “self-preferencing” cases argued that self-preferencing should be prohibited in all circumstances. The drafts recognize that this practice is widespread and states that “in offline situations, such behaviour is not generally considered anticompetitive”. Queries: Should practices like self-preferencing be treated differently in offline vs online situations? Are practices included in the black list because (a) there is evidence that procompetitive aspects disappear, or are always outweighed, (only) in relation to these 4 key services/companies?; or (b) we can’t be bothered to assess this question in relation to the 4 key services/ companies? 

8-. The added value of the “grey list”? The grey list contains a list of practices “where intervention by the competent regulator is required”. Query: Would intervention in these cases take place through standard procedures (e.g. a competition investigation?) subject to established standards? The merit of a grey list may arguably streamline and accelerate the process and could provide some sort of ex ante guidance, but then again, which would be the competent regulator? Given the clear overlaps with possible competition cases (and the need for coordination with national authorities), wouldn’t it be preferable for DG Comp to be in charge of enforcing the rules? That would also enable the Commission to coordinate with national authorities through tested channels like the ECN.

9-. Are you trying to say that there is nothing to do and that we should never regulate? Not at all. There is probably merit in the idea of having some sort of ex ante rules. The digital economy, like any sector of the economy, needs rules. Like in any sector of the economy, rules should be objective, not subjective, and a result of careful evidence-based reflection. Rules do not need to be only (or mostly) about efficiency, there are certainly other higher values. Rules can and should change, they can be creative; they can go against precedents and even be harsh when needed. But they should ideally be sensible, they should benefit the most (not the few), and they should be crafted to pursue their goals while minimizing the risk of undesirable outcomes. Leaving room for nuance and flexibility is often wise, particularly in the case of forward-looking rules. It would be a mistake to craft these rule to target only specific practices seen so far, because these will also be the applicable rules for future platforms. As Pablo explained in a previous post, building on the experience acquired in telecoms, a business-neutral, principles-based regime and the possibility of case-by-case assessments would seem much more flexible, adaptable and sensible than the alternative “black list” approach.

I have just uploaded on ssrn (see here) a new version of my paper on ‘Anticompetitive effects in EU competition law’. I am really grateful to Fernando Castillo de la Torre, Andriani Kalintiri, Gianni De Stefano and Alfonso Lamadrid de Pablo for their helpful comments on the previous versions. Their thoughts greatly improved the piece.

What is new about the piece? Some aspects had to do with recent developments. As you all know, CK Telecoms came out a couple of weeks after I finished the first version. The implications of the judgment are now considered (in particular in relation to appreciability and unilateral effects).

I have also worked hard on some bits, where I thought the ideas could transpire more clearly. In particular, I sought to emphasise a key aspect of the case law, which is that a limitation of a firm’s freedom of action and/or a competitive disadvantage do not in themselves amount to anticompetitive effects.

Experience leads us to these conclusion: cases like Microsoft/Skype or Post Danmark I show that a competitive advantage, even an unparalleled one (as in Microsoft/Skype), does not necessarily affect firms’ ability and/or incentive to compete. In fact, it may actually spur competition.

Remember Post Danmark I? The dominant firm’s rival lost market share, but was able to gain back two customers. On those grounds, the Court of Justice concluded that the practice did not amount to a breach of Article 102 TFEU.

I have also expanded the section devoted to frictions. Following conversations with the great people acknowledged above, I realised that there tends to be a confusion between the time dimension (actual or potential effects) and the threshold of effects (capability, likelihood and so on).

According to the case law, considering the ‘actual’ effects of a practice means taking into account the actual context in which it took place: what actually happened, and how the market operated, during the implementation of the practice. However, it is sometimes assumed (both by claimants and defendants) that it means ‘certainty of effects’.

Finally (and this will not come as a surprise to those following the blog, who know already I am a visual person), I have added a few figures to ensure that some ideas transpire as clearly as possible.

A figure concerns the role of anticompetitive effect in ‘by object’-style conduct (that is, conduct prohibited irrespective of its effects). As you see below, conduct of this nature is presumed to be capable of having anticompetitive effects (both under Articles 101 and 102 TFEU).

The presumption can be rebutted in three ways. A firm can show that the absence of competition would be attributable to the regulatory context, not the practice (the ‘Generics/Toshiba defence’); that the practice is objectively necessary to attain a pro-competitive aim (the ‘Société Technique Minière defence’); or that anticompetitive effects are implausible in the relevant economic context (the ‘Intel defence’).

I also have another figure addressing the relevant steps to evaluate the effects of a practice or transaction.

I very much look forward to your comments on this new version. Something has not changed since May: I did not have anything to disclose then, and do not have anything to disclose now.

Competition law is undergoing an exciting – perhaps unprecedented – period of reform and change. Public bodies and academic institutions are evaluating, from Australia to Germany (and indeed the EU), whether it is necessary to introduce adjustments to the discipline to ensure that it is up to emerging challenges, namely digital and sustainable development. The perception that it may not be able to adapt to a changing landscape is driving the demand for broader, faster and more intrusive competition law.

The desire to move fast and decisively to tackle perceived threats to the competitive process is understandable. The wish to improve the system for the better, in turn, is commendable. The fact that competition law is deemed to be a major part of the response to some of the most pressing concerns in society, finally, says a lot about the continuing relevance of a field that was introduced in a different economic and technological landscape and that has proved capable of adapting to new demands.

The zeal for change, however, sometimes goes as far as to question some of the pillars of the field. The fact that competition policy is enforced through law is now openly criticised in some quarters. The argument is relatively straightforward: freed from the legal shackles, intervention would be faster, more effective and more responsive. Underpinning this position there is the idea that the law is inherently conservative and insufficiently reactive to emerging issues. It sees with suspicion the EU courts’ dislike of sweeping changes and preference for incremental adjustments to legal doctrines.

The solutions, according to these proposals? Increase the resources and the leeway given to competition authorities. Where the law requires a finding of infringement, the said infringement should, if at all, be presumed; thus, it would be for firms to show either that the practice or transaction does not adversely affect competition or that its positive aspects weigh more than any anticompetitive effects. Courts, on the other hand, would not interfere with the choices made by authorities absent manifest errors of assessment.

These proposals, in essence, amount to turning competition policy, a field traditionally driven by law, into one driven by discretion. Such an approach would afford authorities a virtually unconstrained margin of appreciation to decide when to intervene, and how. Insofar as they do, these ideas advocate a Copernican transformation of the field: the centre would move away from the courts towards administrative agencies.

It is difficult to avoid the conclusion that doing away with the law – and, in effect, changing an essential feature of the system – would be too high a price to attain the policy objectives sought by the most ardent reformers, no matter how noble their intentions. It would make the discipline more contentious, more prone to errors and less effective. Perhaps worse, the perceived legitimacy of intervention would inevitably suffer – for how can it be otherwise, if administrative action cannot be meaningfully challenged?

It is occasionally forgotten, but the purpose of the law is not to slow down policy making, or to check whether intervention fits within a set of pre-defined pigeonholes. Its point is instead to ensure that it is sound and in the general interest.

One cannot deny that the case law, as defined by the Court of Justice over the years, limits intervention by competition authorities. It is also true that the case law evolves at a relatively slow pace. These constraints, however inconvenient in individual cases, are far from capricious. They reflect the lessons of experience, which are incrementally incorporated into the acquis of the discipline. They also reflect an awareness of what competition law can realistically achieve in practice.

Removing these constraints would give a false sense of freedom to authorities. In some respects, doing away with legal boundaries to administrative action would make these same authorities realise that, even if not limited by law, they will always struggle when implementing complex and demanding remedies for which they are not adequately equipped. In other words, the law, rather than a barrier, often signals the barrier itself. There is wisdom underpinning the judgments in Magill and Bronner, whether or not this wisdom is enshrined in law. Regulating the terms and conditions of access to an input will always be a daunting task for a competition authority.

In other respects, the perceived sense of freedom would make authorities less able to resist pressure from stakeholders and, similarly, to manage their resources effectively. Experience and expertise, as reflected in the law, are precious assets to prevent regulatory capture – capture implies a loss of freedom, and a far more problematic one from the perspective of the general interest. Once an authority is nominally able to achieve virtually any outcome and to intervene in virtually any instance, the expectation that it can and will take action against every perceived or actual concern will be created sooner or later.

Finally, doing away with the law significantly increases the risk that intervention will not be based on the best available evidence. Over the years, the Court of Justice has crafted the law in a way that ensures that action by competition authorities reflects mainstream consensus positions. Mere concerns or conjectures that are insufficiently supported by theoretical and empirical evidence are not deemed robust enough to justify intervention. And for good reasons: if conjectures warranted action, there would be no effective limits to intervention by competition authorities.

One can try and make the argument that waiting for a consensus to emerge is a luxury that society cannot and should not afford. Ultimately, however, this argument is one based on faith, not on evidence. The concerns expressed may or may not materialise as described. The hard evidence may or may not be eventually available. It is certain, on the other hand, that transforming the institutional setup to turn competition policy into a discretionary tool to achieve the desired outcomes without effective judicial review is an even more extravagant luxury into which society should not even contemplate indulging.

I have just uploaded on ssrn (see here) a paper discussing the Court of Justice’s ruling in Generics (Paroxetine). It is a case note commissioned by the Common Market Law Review earlier this year. Hopefully it provides a clear and useful overview of the judgment and its implications. There is also a cameo appearance of Budapest Bank, which was issued shortly afterwards and could not be left out of the analysis.

Before I say anything about the piece: I am really grateful to Fernando Castillo de la Torre (Legal Service), who shared his comments on a previous version and definitely improved the end product. Thanks so much again!

I have written several (almost certainly too many) posts on a legal issue which I continue to find fascinating. But I tell myself that it is worth emphasising the points that follow.

Pay-for-delay and minimisation of Type I and Type II errors

The more I think about it, the more I tell myself that Generics (Paroxetine) achieved an optimal balance to minimise the risk of both Type I and Type II errors.

It is true that the Court defines the notion of potential competition in a relatively broad manner. It is sufficient to show that there are ‘real concrete possibilites’ of entry (as opposed to the likelihood of entry). What is more, potential competition can be established by proxy, on the basis of indirect indicia.

On the other hand, the Court is careful to point out that pay-for-delay agreements are not always restrictive by object, and that it is necessary to consider the specific circumstances of each case to come to conclusions about whether a given settlement is prima facie unlawful irrespective of its effects.

Intellectual property and insurmountable barriers to entry

Part of the interest of the preliminary reference in the case came from the fact that the UK Competition Appeal Tribunal openly invited the Court to think in probabilistic terms about intellectual property titles. Instead of seeing them as presumptively valid exclusive rights, the tribunal suggested that the probability of them being declared invalid could be incorporated in the assessment.

The Court did not follow the path suggested or implied in the reference. This is not surprising, considering that there is a consistent line of case law, dating back to the very early days of Consten-Grundig, according to which EU law does not question the existence of intellectual property rights, but only their exercise.

What I found interesting (but also not surprising) is that the Court declares that, in the specific circumstances of the case, intellectual property rights were not deemed an ‘insurmountable barrier to entry’.

The question for future rulings is that of when intellectual property will be deemed an ‘insurmountable’ barrier. The Court suggests it is an issue to be decided on a case-by-case basis in light of the relevant economic and legal context.

On restrictions by object

On the notion of restriction of competition by object, I have already explained that Generics (Paroxetine) will be remembered as a seminal ruling, together with Budapest Bank.

The two confirm that the identification of the object of an agreement is a context-specific inquiry. In addition, they (in particular Generics) made it explicit that the pro-competitive aspects of a practices are part of this assessment.

Another point that I have addressed at length is the counterfactual: in the two judgments, the conditions of competition that would have prevailed in the absence of the practice play a role in the evaluation of the object of the agreement. Insofar as this is the case, it seems difficult to argue that the counterfactual is merely confined to the assessment of effects.

The analysis of effects under Article 102 TFEU

Finally, Generics (Paroxetine) is particularly valuable in the contributions it makes to the clarification of the notion of anticompetitive effects under Article 102 TFEU.

In this regard, the Court confirms that the evaluation of this question under Article 102 TFEU is not different from that undertaken under Article 101 TFEU or indeed merger control (which is not only welcome but natural).

Accordingly, it is necessary to assess effects by reference to the market as a whole. By the same token, the impact of the practice would need to go beyond that consequences it has for the freedom of action of individual undertakings.

In reality, the Court’s approach is not any different from that laid down in Delimitis (an Article 101 TFEU case) and sketched in Post Danmark II and Intel (where the Court placed an emphasis on the coverage of the practice as a factor).

AG Saugmandsgaard Øe’s Opinion in Slovak Telekom came out earlier this week (see here). Those interested in the outcome of cases will not see anything particularly remarkable. As expected, the Opinion concludes that indispensability should not be an element of the legal test in the circumstances of the case (I suggested this is the most probable outcome here). Those interested in drastic changes in the law will also fail to find anything remarkable. The Opinion sticks to the letter and spirit of both Bronner and TeliaSonera and shows that the two judgments can be easily reconciled.

The Opinion is important insofar as it addresses and explains some key issues and hints at a meaningful analytical framework. In particular, AG Saugmandsgaard Øe explains when and why indispensability is an element of the legal test. In addition, he introduces a useful distinction between (i) a refusal to make available and (ii) the terms of an agreement when it comes to the application of Article 102 TFEU.

There are other issues that are not explicitly addressed in the Opinion and that will have to wait for future developments as a result. In any event, AG Saugmandsgaard Øe’s provides a useful framework for the clarification of these points.

When is indispensability an element of the legal test? And why? The ‘make available’ doctrine

It has long been known that, in certain circumstances, indispensability is a precondition for the application of Article 102 TFEU. According to the case law, indispensability is an element of the legal test, inter alia, in cases like Magill, Bronner and IMS Health.

When is indispensability an element of the legal test?

The case law suggests, and the Advocate General confirms, that the abovementioned judgments concern a ‘refusal to make available, which amounts to requiring a firm to conclude an agreement’ (para 68). Thus, the key seems to be whether intervention would involve mandating a firm to deal with third parties with which it has not chosen to deal.

This position is not surprising in light of the judgments cited in the Opinion, including TeliaSonera and Van den Bergh Foods. It is an approach to the question that places substance above form (as the Court has always done). It matters little how the practice is labelled (AG Saugmandsgaard Øe is rightly wary of labels). What matters is what intervention involves. Finally, this conclusion shows how intimately linked remedies and legal tests are (which is a question to which I have devoted a few thoughts, as you can see here).

Why is indispensability an element of the legal test in ‘refusal to make available’ cases?

The second crucial question addressed in the Opinion is why indispensability is an element of the legal test in refusal to make available cases. In this regard, AG Saugmandsgaard Øe builds on AG Jacobs’ memorable Opinion in Bronner.

Experience and economic analysis suggest that forcing firms to deal with rivals can be expected to have a negative impact on firm’s incentives to invest and innovate and thus on long-run competition.

AG Saugmandsgaard Øe also mentions that the right to property is generally recognised as a fundamental right. As I see it, this is another way of expressing the same idea. If the right to property has a special status, this is precisely because it is widely understood to be an essential ingredient to achieve freedom and prosperity.

When is indispensability NOT an element of the legal test?

The Opinion distinguishes between ‘refusal to make available’ cases and ‘unfair contract terms’ ones. Indispensability would not be an element of the legal test in the case of the latter.

This position is in line with TeliaSonera and Van den Bergh Foods and as such not surprising. It also provides the key to the outcome in Slovak Telekom. The dominant firm in the case ‘imposed unfair conditions on undertakings wishing to access it’ (para 100). Therefore, one cannot argue that indispensability should have been established by the European Commission.

AG Saugmandsgaard Øe’s concludes that the concept of a ‘constructive’ or ‘implicit’ refusal to deal is not particularly useful. This position is in line with his general wariness of formal labels, in particular those that would lack clear boundaries or explanatory power.

Whether or not there is sector-specific regulation imposing a duty to deal is not a relevant consideration, according to the Advocate General (paras 110-111). This is a sensible position and one that is unsurprising. One should bear in mind that the Court attached no importance to this factor in TeliaSonera.

Sector-specific regulation may impose access obligations in circumstances where competition law would not. The objectives of the ex ante regime may be compatible with competition law, but not necessarily identical. Thus, the fact that the former imposes access obligations cannot be decisive.

Open questions after the Opinion

There are some issues that did not come up in Slovak Telekom. Accordingly, one can only speculate how the logic underpinning the Opinion may apply to them. For definitive answers, however, we will have to wait for future cases.

What if the behaviour is unilateral?

AG Saugmandsgaard Øe distinguishes between a refusal to make available and unfair contract terms cases. There is a scenario that is not contemplated in the Opinion: what if the behaviour is strictly unilateral? What, for instance, if the case is about the design of a complex product (think of the integration of two products, as in the example of the camera and the smartphone)?

Even though not expressly addressed, the Opinion provides, in my view, sufficient elements to give an answer to the question.

If intervention in the case would interfere with the firm’s right to deal with whom it pleases (and thus to conclude an agreement with third parties with whom it has not chosen to deal), then indispensability would be an element of the legal test.

What about a structural separation (or an obligation to close a division)? ‘Reverse refusals to make available’

It is not often mentioned, but cases like Bronner or Magill can be remedied in three different (and equally effective) ways. One approach is to force the firm to deal with third parties on the adjacent market. A second remedy is to impose a structural separation and split the upstream and downstream divisions of the firm. A third way is to require the firm to close its upstream or downstream division.

Since all three remedies are interchangeable, and since they would all interfere with the firm’s right to property, it seems inevitable to conclude that indispensability would also be a precondition where intervention would require a firm to sell some of its assets (or otherwise dispose of them by closing a division). Arguably, Van den Bergh Foods already provides the answer in this regard (it makes an explicit reference to the sale of assets).

What about principles-based remedies? What if the authority’s decision leaves the choice of the remedy to the firm?

A final question, not addressed in the Opinion, has to do with authorities’ decisions that take a ‘principles-based’ approach to remedies. This technique seems to be on the rise. Since the remedy (‘requiring an undertaking to conclude an agreement’) is typically the key to understand whether indispensability is an element of the legal test, a ‘principles-based approach’ can be used by an authority to circumvent the stricter legal test.

There are two possible responses to this conundrum: the ‘substance’ response and the ‘form’ response. I have already explained why we should place substance above form in this (and every other) regard.

What matters is what intervention involves in substance, not what the authority formally requires. Accordingly, if intervention amounts in effect to ‘requiring an undertaking to conclude an agreement’ (or, I would add, a structural separation, or an obligation to close a division) then indispensability would be an element of the legal test. It is irrelevant that this obligation is concealed behind a ‘principles-based’ approach.

If we were to rely on what the decision formally requires, it would be very easy for any authority to circumvent the indispensability condition. In a case like Magill, for instance, the Commission could avoid the indispensability threshold by asking the firms to bring the infringement to an end without specifying how. This does not come across as the most reasonable way to interpret the case law (if only because it would turn an issue of law into one of discretion).

The American Bar Association’s Antitrust Law Section now has a weekly podcast program, called Our Curious Amalgam. I was the guest in an episode released yesterday where we discuss the General Court’s Apple Judgment. Coincidentally, the episode was released as I was participating in a hearing at the Grand Chamber of the CJEU where we also discussed fiscal State aid (fifth and hopefully final hearing in the Santander-World Duty free saga…). The podcast is available here.

We recorded this podcast over my summer holidays, and I made sure to listen to quite a few episodes before. It was a great use of time. Each podcast is about 20-25 minutes. They cover everything related to antitrust, consumer protection, data, and privacy and there are very insightful conversations freely available to anyone interested.

To catch new episodes that drop on each Monday, you can subscribe “Our Curious Amalgam” on Google Podcasts, Apple Podcasts, and Spotify.

Many thanks to Matthew Hall, Christina Ma and John Roberti for the invitation and the chat!

[The second installment of this series of guest blog posts is devoted to the Qualcomm decision on exclusivity payments, which was (finally) made public in June. The post has been prepared by Max Kadar, Deputy Head of Unit at the European Commission and Visiting Professor at King’s College London. He is uniquely placed to provide an overview of this landmark development. Thanks so much for accepting the invitation, Max!]

I confess that when Pablo got in touch a few days ago to invite me to write a blog post on the Qualcomm (Exclusivity Payments) decision, my instinctive reaction has been something along the lines of “after having spent the past months locked up at home, there’s no way that I am going to spend my holidays writing another article”. After some time reflecting on the matter, I ended up doing the only logical thing that I could have done in these circumstances: politely but firmly refusing the kind invitation writing the piece before going for holidays.

Before starting, I should say that I have a conflict of interest to declare, as I was part of the case team working on the Qualcomm (Exclusivity Payments) decision. In addition, as usual, I should say that my views in the following are personal and may not necessarily reflect the position of the European Commission.

The Qualcomm (Exclusivity Payments) decision adopted on 24 January 2018 (and a public version of which was published on the Commission’s website a couple of weeks ago) constitutes the first example of a Commission decision dealing with exclusivity rebates under Article 102 adopted after the Court of Justice’s Intel judgment.

As a brief reminder, in Intel, the Court of Justice clarified the Hoffmann-La Roche case law with regard to exclusivity rebates and stated that while such rebates by a dominant undertaking are subject to a presumption of anti-competitive effects, this presumption is a rebuttable one. In particular, if the dominant undertaking submits, “during the administrative procedure, on the basis of supporting evidence”, that its exclusivity rebates do not have the capability to restrict competition, the Commission will be required to engage in an analysis of such capability.

In the aftermath of the Intel judgment, academics and practitioners have engaged in an extensive debate on what exactly the Commission needs to show and how (my take on this here). Against this background, the Qualcomm (Exclusivity Payments) decision is important as it sheds light on the way the Commission interprets the standard of proof it has to satisfy under the Intel case law and in particular under paragraph 139 thereof.

The case concerns agreements between Qualcomm and one of its main customers, Apple. In a nutshell, pursuant to these agreements, Qualcomm granted significant rebates (in the form of direct payments) to Apple, in exchange for Apple exclusively incorporating Qualcomm baseband chipsets compliant with the LTE cellular communication standards (so-called “LTE chipsets”) in its iPhones and iPads. Such conduct was at the centre of the European Commission’s investigation in this case but was also pursued by the US FTC as part of its wider case against Qualcomm.

Qualcomm has historically been a leader in the supply of baseband chipsets and, at the time of the challenged conduct, was by far the world’s largest supplier of LTE chipsets, with market shares in the range of 90% or more for most of the infringement period. Although certain of Qualcomm’s customers were large companies such as Apple and Samsung, the Commission found that even these customers were to a large extent dependent on Qualcomm during the infringement period.

At first sight, one can say that the agreements between Qualcomm and Apple were similar to those challenged by the Commission in previous decisions on exclusivity rebates. On closer inspection, though, the agreements contained loyalty-inducing mechanisms that went even further. In particular, if Apple had incorporated LTE chipsets from a competitor of Qualcomm in some of its iPhone or iPad devices, it would not only (1) have lost all future payments from Qualcomm; but also (2) in the central years covered by the agreements (2013-2015), have had to return to Qualcomm a large part of the payments it had already received in the past (so-called “clawback” provision). Thus, it is perhaps not surprising that throughout almost the entire duration of the agreements, Apple sourced LTE chipsets exclusively from Qualcomm. Only in September 2016, when the agreements were about to expire and the cost of switching was reduced due to the limited future payments left and the termination of the clawback provision, did Apple start to source part of its LTE chipset requirements from one of Qualcomm’s competitors – Intel.

Building on these basic facts, the Commission decision first establishes that Qualcomm’s payments amounted to exclusivity payments or rebates within the meaning of the case law (see Section 11.3 of the decision). As a second step, the Commission analysed the capability of such payments to restrict competition on the basis of several elements (see Section 11.4 of the decision), namely: (i) the extent of Qualcomm’s dominance; (ii) the long duration (from 2011 until 2016) of the payments and their significance, both in absolute terms and as a percentage of Apple’s LTE chipset expenditure; (iii) the fact that Apple’s demand affected by the exclusivity payments covered a significant share of the LTE chipset market (up to roughly half of the worldwide market); (iv) the fact that Apple was a key customer for baseband chipset suppliers; and (v) a broad range of contemporaneous evidence, including Apple’s internal documents, showing that Apple gave serious consideration to switching part of its LTE chipset requirements for iPads to Intel but refrained from doing so, the loss of Qualcomm’s payments being a material factor in Apple’s decision-making.

As one can clearly see, the elements above are in line with those referred to by the Court of Justice at paragraph 139 of the Intel judgment to establish whether exclusivity rebates are capable of restricting competition. Notably, when it comes to the last point, one may even say that the Commission engaged in a form of actual effects analysis, which goes beyond the requirements of the case law.

As regards the so-called “as-efficient competitor” (AEC) test, the Intel judgment does not require the Commission to run such a price-cost test to prove an infringement of Article 102 (as recently confirmed by the UK CAT in Royal Mail). Against this background, the Commission did not have to rely on an “own” AEC test to establish that Qualcomm’s payments were capable of restricting competition. Nevertheless, in the decision, the Commission did analyse and rebut an AEC test that had been prepared and submitted by Qualcomm (see Section 11.5 of the decision).

In addition to submitting an AEC test, Qualcomm had also argued that by failing to carrying out an AEC test, the Commission breached Qualcomm’s legitimate expectations concerning the application of the Guidance Paper on Enforcement Priorities (see Section 11.7 of the decision). In this regard, the decision notes that Qualcomm had failed to submit contemporaneous evidence that it had indeed relied on the Guidance Paper in any way. For example, the AEC test submitted by Qualcomm was prepared specifically for the purposes of the proceedings and not at the time of the negotiations with Apple. In any case, the decision dismisses Qualcomm’s arguments, pointing inter alia to the fact that the AEC test is merely a tool that the Commission can use to establish its enforcement priorities and that in this case, there were many other clear reasons why the case should be handled as a priority (on a strictly personal level, I find it very difficult to argue that an agreement of the type at hand between two leading technology companies in a multi-billion market should not be investigated by the Commission as a matter of priority).

A final but important part of the decision’s effects analysis relates to Qualcomm’s claimed efficiencies (Section 11.6 of the decision). In essence, Qualcomm argued that its conduct was justified because the exclusivity was necessary to allow Qualcomm to recoup the alleged investments required for the design and production of tailor-made LTE chipsets for Apple. As is usual in Article 102 cases (see here), the Commission examined these claims in detail: there is indeed no doubt that efficiencies may outweigh the effects of anti-competitive conduct and it is the Commission’s task to look into this after having received a properly substantiated efficiency submission. In this case, however, the decision concludes that Qualcomm failed to prove the link between the exclusivity and the alleged need to recoup investments for tailor-made products. Once again, the decision also refers to the fact that Qualcomm failed to submit any contemporaneous evidence supporting its claims.

As a concluding remark, I note that, while the Commission adopted a Statement of Objections (SO) in this case well before the Court of Justice’s Intel judgment, the SO already contained an analysis on the capability of Qualcomm’s payments to restrict competition. This allowed the Commission to proceed to a final decision without the need to issue a supplementary SO after publication of the Intel judgment, which would have likely dragged on the proceedings for at least several more months. While the end-result was certainly good from an administrative perspective (as I hope we all share the importance of avoiding unnecessarily protracted legal procedures), it was certainly not a departure from the Commission’s recent decisional practice. Those who have been following the Commission’s approach closely know well that, regardless of whether the Commission is legally required to assess the potential effects of a given practice on competition, such an assessment is always included in the Commission’s decisions. While I would not go as far as saying that the debate between “by object” and “by effect” in Article 102 is purely of academic interest, I do think that the practical importance of such a debate should not be overstated.

What is in my mind, however, highly relevant, is the type of evidence that a competition agency can use to prove a case and the robustness of such evidence. The Qualcomm (Exclusivity Payments) decision confirms that the elements of evidence that can be taken into account to prove effects are many and varied. Furthermore, it confirms that there is no pre-determined hierarchy of importance between those elements. Depending on the specific circumstances in each case, its factual background and investigative history, a given element of the analysis may play a more important role than another. In this respect, one can say that the different types of evidence are like bricks used to build a wall: what matters is not whether they are of a given colour or shape, but rather that the wall in the end is solid and robust. Whether this was the case in this decision is a matter for the General Court to decide, in the context of the ongoing appeal of the decision by Qualcomm. In the meantime, one can only expect that exclusivity arrangements entered into by dominant firms, which have the potential of harming competition, will remain high on the Commission’s agenda, as shown for example by the ongoing Broadcom case.

[In the course of the coming weeks we will be publishing a number of guests posts on different topics (feel free to send ideas our way!). We start this series of guest posts with a contribution from Daniel Beard QC and Jack Williams on discrimination concerns underlying new regulatory initiatives]

Language is both beguiling and dangerous.  Being an author would be no fun if it were otherwise.  But being an author and being a regulator are very different jobs.  Sometimes compelling words and rhetoric can distract from the regulatory job at hand. The political force of a cri de coeur risks losing sight of the raison d’être.

The mood of regulators and governments across the EU is that, in relation to digital technology and the operation of competition law, something must be done.  All sorts of interesting suggestions are being made, from new governmental inquiry units and changes in merger scrutiny to whole new competition tools. 

Amongst the myriad reports and studies one thing comes out loud and clear: discrimination is bad. It is particularly bad where the discrimination is by a dominant undertaking in a digital industry characterised by high entry costs, low marginal costs, and network effects. Indeed, it is so obviously bad that a new ex ante regulatory regime is needed so we can make sure it never happens in the first place.

The level of support for this idea is striking. Perhaps it comes from the language itself: who is going to say that preventing “discrimination” is wrong?  After all, when we first think about the notion of discrimination, we do not think about digital service self-preferencing; we think, for example, about powerful struggles for freedom from race or gender inequality.  Legal battles to protect people from discrimination on the basis of the colour of their skin or their sex, religion, physical ability or sexual orientation have been long and hard fought. It is easy, and obviously right, instinctively to think discrimination wrong when that is our starting point.

Yet, transferring the concept of discrimination away from recognised status cases involving individuals, the analysis becomes problematic and the effective use of ex ante tools even harder to gauge. There are three types of issue: substantive difficulty; procedural complexity; and fairness.

Substantively, discrimination analysis can confuse as much as enlighten. If you want to change the way that electricity transmission pricing works, can you treat low carbon, renewables and traditional generators in the same way? The electricity they produce is the same.  The way they do it is not.  Does that mean that you say all the generators are similar? If they are comparably similar, is there a justification for different treatment?  The test in such economic cases is whether you are treating like cases differently (or different cases the same way) without justification.

The problem is that the same essential considerations are used for assessing whether the cases are alike and whether there is a justification for differential treatment. What is really being asked is whether the particular benefits of renewable generators mean that arrangements for charging them differently from, for example, gas fired plant is reasonable overall.  It is an assessment of priorities and objectives within the sector. Labelling the issue as discrimination does not itself assist the substantive analysis of whether the changes properly pursue the legitimate aims of the sectoral regulation. Indeed, using the language of discrimination in economic contexts may ultimately distract from the key policy issues which a measure is trying to address.

It might well be because discrimination assessments outside recognised status cases are hard that until recently we had not seen as many cases as we might otherwise expect applying Articles 101(c) or 102(c) TFEU.  Broadly, those provisions prevent agreements or provisions by dominant entities applying different conditions to equivalent transactions – stopping discrimination.  Aside from various music collecting societies cases these apparently very powerful tools have not historically been wielded frequently.  Plainly things have changed more recently with cases such as MEO, Google Shoppingor Royal Mail v Ofcom.  Yet none of those cases is an advert for the clarity and simplicity of using discrimination as a key tool.

Ex ante non-discrimination provisions are applied to regulate utility industries.  Where a legacy incumbent inherits a system monopoly such that they have significant market power, non-discrimination requirements are a standard feature of the regulatory regimes. Those requirements often focus on criteria and terms for access to established networks: what information has to be provided for a connection? How are connections to be made and paid for?

However, there is a real difference in assessing discrimination – and justification – where networks have built through investment and competition (rather than bequeathed), where the nature of the services being provided by the dominant entity are changing, and where the criteria for assessment have to consider different business models and types of demand.  The substantive difficulties involved in applying discrimination outside status cases are all the greater in dynamic rather than mature industries. And that is in addition to setting the thresholds for what sorts of entity are going to be subject to the ex ante tools in the first place. 

In addition to these substantive concerns about using discrimination as a key tool, there is the second problem of a new regulatory process introducing complexity and inertia. Experience shows that building a novel regulatory infrastructure can itself create another layer of definitional disputes and uncertainties. 

Sponsoring lawyers and compliance departments to be involved in extensive exchanges with regulators is an excellent means of shifting resources from technology developers to professional services providers.  But it is far from clear that social utility and consumer welfare is enhanced by such a process.  It can increase the risk of undue intervention by regulators. It can encourage undue conservatism on the part of operators.  In a fast-moving industry a complex regulatory process can be a real impediment to innovation. 

Such a regime may offer particular protection to a cautious undertaking.  After all, if it can reach agreement with a regulator on an ex ante approach, the prospects of ex post fines under existing rules must diminish. Affecting the dynamism and risk taking of large companies can damage innovation.   It cannot be assumed that the best and fastest development always comes from start-ups or scrappy mavericks.   Does having a prior regulatory clearance mechanism mean better outcomes for consumers or simply a slower digital industry in Europe? 

Then there is a third issue: fairness. It is perhaps not going to cause people to rally to the barricades (or blogs) where the new process is directed primarily at large multinational firms, but the rule of law should not pick and choose. 

If companies are required to pre-justify conduct, that is effectively a shift in the burden of proof: they are being required to prove what they are doing is acceptable rather than a regulator having to show the contrary later.   There is a reason the burden is placed on regulators.  It is not just to make their life hard.  It is because it is generally accepted to be unfair to assume that someone is doing wrong unless they can show otherwise. The use of presumptions against people is something to be cautious about.  The fact that they would be used in the complex and confusing territory of discrimination assessments might make that all the more concerning. 

Whatever course is to be taken on ex ante regulation it needs to recognise that big themes and buzz words do not equal good law. We must not get carried away with an easy reliance on prejudicial language.  Perhaps we need to be more discriminating on discrimination in order to decide what new tools we really need.

I have just uploaded on ssrn a new paper (see here) on the legal status of vertical restraints following Generics and Budapest Bank. It is part of a series of short contributions on the topic that is forthcoming in Concurrences and that has been coordinated by Mario Marques Mendes (thanks very much for the invitation to contribute!).

I have already discussed the implications of these two landmark rulings on the blog (for instance here). The key conclusion I draw from them is that, as a rule, an agreement that is capable of having pro-competitive effects is not restrictive of competition by object.

This conclusion is consistent with the legal treatment of vertical restraints in the Court’s case law over the years. My paper focuses on two traditional pro-competitive justifications for vertical restraints: brand protection and the fight against free riding.

Free riding considerations are particularly relevant in the context of MFN clauses. As evidenced in the Support studies for the evaluation of the VBER prepared for the Commission (see here), this pro-competitive justification is valid both in relation to the ‘wide’ and ‘narrow’ varieties of the restraint.

Accordingly, there seems to be little support for treating MFN clauses as ‘by object’ infringements and/or hardcore restrictions within the meaning of the Block Exemption Regulation. One can imagine, however, ways in which the future Regulation could provide for some bright lines in relation to ‘wide’ MFNs (for instance, by treating them as excluded Article 5 restrictions above the 30% threshold).

As far as brand protection is concerned, the paper focuses on online selective distribution. Some clauses, such as a ban on the use of online marketplaces and/or of price comparison sites serve a brand protection purpose. In this sense, they are not different from other restraints typically found in selective distribution systems.

Accordingly, there seems to be no reason to give such clauses (specifically tailored to the needs of online distribution) a different (stricter) legal treatment. The conclusion would be the same irrespective of whether the good is a luxury or a non-luxury one (experience and economic analysis show that brand protection can be relevant also in relation to the latter).

I very much look forward to your thoughts. I am happy to clarify, as ever, that I have nothing to disclose.

Teaching State aid at LSE is a particularly enjoyable experience. I will have to wait an academic year, alas, to do so again. I tell myself it is a sensible arrangement (even if not one I chose): 12 months from now the module will have become either a niche irrelevance for most students or an exciting window to explore an emerging legal regime (in the UK, that is).

The background story is well known. The EU has consistently insisted on the importance of a system for the control of subsidies and similar measures in any EU-UK trade agreement. State aid is the most salient feature of the so-called ‘level playing field’ provisions deemed necessary as part of the future relationship between the two sides.

The UK government is not inclined to remain bound by the substantive or institutional aspects of the EU system (and is very public about it). The idea of setting up a technocratic body that would constrain public authorities’ discretion to award subsidies and similar measures is resisted (see here). From a substantive standpoint, the UK government does not seem keen to make its domestic regime revolve around Article 107(1) TFEU (as interpreted by the Court of Justice over the years).

I was inspired to prepare this post after realising that the logic of the EU’s position does not come across very clearly on this side of the Channel. It is true that there are frequent references to the protection of the ‘integrity of the internal (single) market’. However, something tells me that these references sound so abstract that they are probably seen as suspicious pretexts to constrain the UK’s regulatory freedom post-Brexit.

The truth is that it is difficult to see how the EU State aid system would survive if the UK were allowed to depart from it in any significant way. For the same reason, one can understand why Member States may believe that giving up their own internal State aid regime is too high a price for a trade agreement with the UK.

State aid: a remarkable (and fragile) achievement of integration-by-law

My guess is that anybody who is reasonably familiar with the EU State aid regime marvels when thinking about the remarkable achievement it is (even if one disagrees about its pertinence).

A group of States decided to give up their discretion to award subsidies and similar measures and entrust a supranational authority with the task of deciding when they are in the interest of the community as a whole (as opposed to the interest of its individual members).

What is more, the boundaries of the system – the definition of what State aid is – are defined by law, not discretion. It is ultimately for the Court of Justice to decide whether a measure falls within the scope of Article 107(1) TFEU – a central question, for instance, in the recent Apple case, discussed by Alfonso here.

It is so unusual to see States agree such a regime that no similar system exists even within the US (see here). And precisely because it is so unusual it is also uniquely fragile. The temptation to abandon it and/or relax the rules is always present – every now and then, Member States float the idea of ‘decentralising’ State aid control (which is code for loosening it).

Can the EU State aid regime survive if the UK departs from it?

Hopefully the above gives an idea of why the Commission, and EU Member States, insist so much on State aid in the context of the EU-UK trade agreement. If the UK obtains a deal without an ex ante regime that is in essence similar to that applying within the EU, it will achieve what some EU Member States have always secretly – and not so secretly – wanted.

In other words: the one State leaving the bloc would enjoy greater leeway to engage in regulatory competition than EU Member States themselves. I find it difficult to imagine how the EU State aid system, as we know it, would survive in such circumstances. The pressure to abandon it, or to change it beyond recognition would be too strong. (And no, the issues raised by the trade agreements concluded with Canada and Japan are not comparable in this regard.)

Some may argue that the EU regime may need to change – there are commentators that claim that the notion of State aid is too broad and encompasses too many measures that fail to affect trade. Even if one assumes that this view is correct, it is probably not wise to amend the system to make sure that a trade agreement is reached with the UK. The impetus would have to come from within, not from an external stressor.

No easy way out

The above was an attempt to give an idea of what I believe are the reasons why State aid is seen as so fundamental from an EU perspective. It is not so much about emotions or curtailing the UK’s freedom as it is about making sure the EU’s own State aid regime survives the trade negotiations with the UK.

One may take the view that the EU is asking too high a price for a trade agreement and that the UK may be better off with no agreement and the regulatory freedom that comes with it. It is certainly a defensible one. On the other hand, I do not believe the EU’s demand is unreasonable, as sometimes suggested. It is reasonable to protect one’s fragile supranational arrangements.

If one takes account of the above, it becomes clear there is no obvious solution to the current situation. It makes no sense to try and anticipate the future, given the many issues at stake and given that both sides know that it is in their interest to reach an agreement (which is why they may both be prone to making compromises that would have seemed implausible ex ante).

In any event, I very much struggle to imagine a trade deal in which the UK does not agree to set up a regime that essentially mirrors the acquis on Article 107(1) TFEU and is enforced by an independent agency with powers comparable to those of the European Commission in the field. We will soon find out whether a compromise can be achieved.