Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

State aid as the single most important obstacle to an EU-UK agreement: making sense of the EU’s position

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On the Level Playing Field - Bruges Group Blog

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.

Written by Pablo Ibanez Colomo

25 August 2020 at 3:53 pm

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Apple’s App Store: a microcosm capturing what digital cases are all about

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Developers using Apple’s App Store have been voicing their grievances for a while. These complaints reached a whole new level last week, when a high-profile developer (or so the younger generations say) very publicly defied Apple’s rules. As expected, the firm – Epic – was expelled from the app store and the confrontation made the headlines (see here).

Reading about this sensational story made me realise it captures effectively what is new and distinctive about disputes in digital markets. There are some patterns that cut across pretty much every case against Big Tech. The point underpinning the complaints – what these seek to achieve – is identical.

The rise of the powerful complainant

Epic is a large and successful firm that offers the most popular videogame these days. It shows. The video accompanying its confrontation with Apple deserves to be watched (here, via, ahem, another platform). It is a play on Apple’s iconic 1984 ad and an astute way of pitching Epic as the outsider siding with ordinary folks against the (fruit-shaped) establishment.

Epic exemplifies the rise of the powerful complainant. This development is perhaps the single most relevant change in the competition law ecosystem over the past decade. Until relatively recently, firms – in particular large and successful ones – were wary of proactive, far-reaching competition law intervention. They all sang to the same cautious tune.

Not anymore. In fact, a few large multinationals keep urging authorities to take risks and, if necessary, depart from the case law and/or introduce new ad hoc rules. ‘Act fast, deal with the unintended consequences later’ is the mantra on the rise. Just like Epic, these players seek to persuade the wider public that these changes do not just suit their agenda but are good for society at large.

The above can hardly be criticised. It would be surprising if firms did not attempt to advance their interests on all fronts, including the legal one. The point is that the changing ecosystem introduces new, fascinating and to some extent unprecedented dynamics [note: if you happen to be a political scientist reading this post, drop me a line!).

It is all about access and rents: the fight for a larger slice of the pie

If one looks at the past and ongoing investigations involving large online platforms, it becomes apparent that there is an overarching theme cutting across all cases. In essence, complainants seek to secure access on improved terms and conditions. More precisely, they intend to capture a larger share of the rents generated by the platform.

This conclusion is obvious to draw from disputes around the App Store. Complainants in these investigations have been candid about the thrust of their claim: they consider that the 30% commission charged is excessive and thus should be entitled to a larger slice of the (apple) pie.

The rest of cases are no different, whether they are said to concern exploitative or exclusionary behaviour.

The interim measures adopted by the French competition authority – and concerning press publishers – are an obvious example (see here). The struggle for ‘equal treatment’ in Google Shopping was in essence a struggle for the traffic (and thus the rents) generated via the search engine.

Even investigations on Amazon’s marketplace are, at their heart, about rents: the data shared by retailers using the marketplace is just part of the price they pay to access the platform. It is, in other words, a fraction of the commission charged by Amazon (and should be analysed as such).

How these cases may change competition law

EU competition law occasionally ventures into the allocation of rents within a value chain. It has never been disputed that Article 102 TFEU applies to exploitative conduct by dominant firms. It is not a secret, on the other hand, that the Commission has always been careful about opening exploitation cases, for very good reasons.

It will never be never easy to determine the appropriate remuneration for a firm developing an input or infrastructure, let alone the optimal allocation of rents across the value chain. The unintended consequences of intervention along these lines are also well known.

These questions – this is not a secret either – are considerably harder when it comes to online platforms. This is so for two reasons. One relates to the dynamic and fast-moving nature of digital markets, which makes the task more prone to errors than, say, getting the access price to the telecoms network right.

The second reason is not always acknowledged. Re-allocating rents across digital markets typically goes much further than tweaking the the price of a medicine or the tariffs of a copyright collecting society. It often involves changing a firm’s product, business models and/or degree of integration.

Just think of the aftermath of Google Shopping (the design of the search engine was modified) and Android (the business model was altered) or of the implications of ruling that Apple may not impose an in-app purchase system (intervention would add an additional layer of modularity).

As already explained (see here), EU competition law is even more careful about imposing remedies leading to such outcomes (which, in turn, is the reason the indispensability condition has traditionally acted as a legal filter to limit the instances in which the system is exposed to them).

As the ‘act fast, deal with the unintended consequences later’ mantra gains traction, the exception comes closer to becoming the rule, and the system closer to dealing, on a routine basis, with the very issues it has avoided for decades. Fascinating times indeed.

Written by Pablo Ibanez Colomo

21 August 2020 at 3:34 pm

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The legal test and the remedy are not two separate steps; they are two sides of the same coin

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Following two of my latest posts – a though experiment on smartphones and cameras, and an update on Slovak Telekom[1]– some of you have contacted me about the central argument I develop in them.

My main point in both is that the remedy is not an afterthought that is irrelevant when establishing an infringement. The remedy – or, more precisely, what a finding of liability would entail – is central to determine whether there is a breach in the first place.

This statement is true as a matter of positive law – Van den Bergh Foods encapsulates the essence of the case law – and is also true from a normative standpoint – as the post on smartphones and cameras sought to explain.

The messages I have received following these posts are certainly sensible. How can the remedy determine the applicable legal test? Is it not getting the case backwards? Should we not establish an infringement first and then figure out the way to remedy it?

These questions, no doubt reasonable, are based on a fundamental assumption, which is that the finding of an infringement and a remedy are two separate steps, independent of one another.

I do not believe this assumption reflects the reality of the interaction between legal tests and remedies. More importantly, I do not believe the Court treats the infringement and the remedy as separate steps. They are rather two sides of the same coin.

The remedy reliably tells us what a case is about, and what the legal test is

A finding of infringement and a remedy are so closely intertwined that the single most reliable way to tell whether there is a competition law breach is to inquire about how to bring the alleged breach to an end.

In other words: to understand what a firm has done (and whether what it has done is prohibited), the best approach is to ask the claimant what the alleged infringer would need to do to comply with the law.

This point can be illustrated by reference to refusal to deal scenarios. These cases are not always easy to spot, and the lines are sometimes blurred between them and other legal categories, including tying and ‘margin squeeze’.

How to tell apart one category from the other? Inquire what the endgame would be. If the endgame is one in which a court or authority mandates (directly or indirectly, implicitly or explicitly) shared access to an input or an infrastructure, then the case raises the issues that are typical of refusal to deal cases. For the same reason, indispensability would be an element of the legal test.

Suppose, conversely, the remedy is a different one. For instance, an obligation on the firm not to require exclusivity from its customers. If so, we would be in Hoffmann-La Roche and Intel territory (where nobody has ever thought of making indispensability an element of the legal test).

These statements are hardly revolutionary. It is, in essence, what the Court held in Van den Bergh Foods and then in TeliaSonera. In Van den Bergh Foods, the firm argued that indispensability was an element of the legal test. Both the General Court and the Court of Justice, in light of the endgame, concluded that the case belonged in the Hoffmann-La Roche/Intel family, and rejected the argument.

The remedy is routinely considered when calibrating the legal test

The history of competition law also teaches us that the remedy (that is, what the case would involve in practice) has been routinely considered when designing the appropriate legal test.

In particular, courts tend to craft strict legal tests where a finding of infringement would demand the administration of a regulatory-like remedy (such as mandating access obligations and setting the terms and conditions under which access is to be granted).

Again, this idea is hardly revolutionary, and is part of our law. Why is indispensability part of the legal test in refusal to deal cases? Magill and Bronner seem to reflect a deep awareness of the implications of a finding of infringement.

Think of Magill. Again, the question is: what is the endgame of ruling that a refusal to license copyright-protected information is abusive? Imposing a duty to license on the right holder. By definition, there is a tension between such an endgame and the logic of intellectual property systems (the very point of which is the right to refuse to license).

It is not a surprise, against this background, that the Court confined to ‘exceptional circumstances’ the instances in which Article 102 TFEU can be relied upon to impose a duty to license (thereby minimising the tension with intellectual property systems).

The uncertainties and complexities of administering a remedy have also been mentioned as factors to consider when crafting a legal test. In his celebrated article on essential facilities, Phillip Areeda – the ultimate centrist in our field – expressed the view that ‘[n]o court should impose a duty to deal that it cannot explain or adequately and reasonably supervise’ and went on to warn against the imposition of regulatory-like obligations.

The EU experience shows that competition authorities do not fare much better than courts when it comes to the administration of these proactive remedies. The failure of the media player remedy in Microsoft I often comes up in these discussions. The principles-based approach to the question in Google Shopping and Android, and the resulting state of limbo (which appears to continue), another one.

Big Tech and legal tests: the question that will not go away

The discussion above gives, hopefully, a sense of what is going on, from a legal standpoint, in relation to Big Tech. Many of these cases demand regulatory-like intervention, and this, more frequently and more intensely than in the past.

It would seem that some competition authorities are more confident than they used to about their ability to redesign products and to tweak business models (other authorities, like the CMA, are more cautious, as the Final Report on digital advertising shows).

This increased confidence tends to trickle down into the interpretation of competition law provisions. The link between the nature of the remedy and the legal test, which acted as a limit on intervention, is now questioned (with the institutional implications that follow, in particular in a decentralised system). Fascinating, and potentially transformative, times.


[1] Speaking of which, AG Saugmandsgaard Øe’s Opinion is out on 9 September.

Written by Pablo Ibanez Colomo

11 August 2020 at 5:33 pm

Posted in Uncategorized

On disclosure and conflicts of interests: three years later, we are in a better place

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A Better Place (@ABPMovie) | Twitter

With so much at stake in competition law disputes, one is hardly surprised by news about corporate funding and/or an academic failing to disclose potential conflicts of interests. These stories are bound to make the headlines every now and then. Two were featured last week (see here and here).

News about potential bad practice (and/or companies fighting by other means) are always concerning. This time around, however, I like to see the glass half full. I am reminded of the situation three years ago, when similar news broke in sensational fashion.

I wrote about disclosures and conflicts of interest at the time (see here) and I invited Cyril Ritter to do the same (see here).

My main concern then (other than the use of academics as fodder in a proxy war) was the absence of guidance: without clear rules on disclosure, any views could be potentially discredited as suspicious (the infamous ‘if you say that, it must be because someone is paying you’).

In that regard, enormous progress has been made. The ASCOLA declaration of ethics, an effort led by Ioannis Lianos, set the tone and defined the gold standard to be followed. Journals – including JECLAP – take the issue much more seriously than in the past (even referees are asked to disclose potential conflicts of interests these days).

A first consequence of the adoption of these guidelines – inspired by the long-standing rules of the American Economic Association – make it easier to identify bad practice.

We have now learned to become suspicious of disclosures that do not tell the whole story. When someone just mentions that they ‘have not received funding for THIS article’ or that they ‘are not involved in THIS matter’, it is typically the case that there is a potential conflict of interest that is being concealed.

A second consequence (and the most important one, in my view) is that clear and meaningful rules protect people that play by them. It is incredibly helpful to be able to clarify from the outset (in a paper or at a conference) that one has nothing to disclose.

Against this background, I am inclined to believe that last week’s news will be, on the whole, a positive development for the competition community. The need to disclose will be taken even more seriously, and I anticipate that key people will be more proactive from now on.

Taking the initiative and directly asking whether there are potential conflicts of interest to disclose will be seen, even more than at present, as the right thing to do (if only because it is fair to those who play by the rules).

The main challenge ahead: consensus and peer review as a safeguard against capture by special interests

The main challenge I see ahead is the risk of capture by special interests. Corporations advance ideas that conform to their agenda and worldview.

These ideas may seek to show that their practices are pro-competitive and/or that someone else’s are anticompetitive. They may also seek to persuade us that the sweeping changes that happen to be in the firm’s interest are also beneficial for society as a whole.

I am not concerned with the dissemination of these theories. It is natural for firms to advance their interests. And it is the case that some of these ideas survive the peer review process because they genuinely advance our understanding of some phenomena.

My fear is that these ideas drive policy before they are subject to proper scrutiny. Peer review and consensus are essential to prevent capture by special interests (something I also mentioned in my feedback on the New Competition Tool). They are the best allies of sound policy in the general interest. It is probably the case that, at this juncture, with so much at stake, peer review and consensus are needed more than ever.

Rushing to make decisions based on ideas that have not undergone proper expert scrutiny is the very opposite of progressive policy: it weakens competition authorities and favours corporate actors with disproportionate access to power and dissemination outlets.

It is true that peer review and the emergence of a consensus take time. Some people who genuinely want to advance the general interest feel that time is of the essence: they believe action is needed as soon as possible.

I understand the frustration some may feel. However, experience teaches us to be cautious: a policy that, on its surface, seems to be in the interest of society as a whole may only serve a small, well-organised pressure group. What is more, the opposite can also be true.

Rules on disclosure will help. Making sure that unscrutinised ideas are treated with the appropriate degree of scepticism, even more so. I am hopeful disclosure will strengthen the latter.

Written by Pablo Ibanez Colomo

29 July 2020 at 5:39 pm

Posted in Uncategorized

On Facebook’s application for the annulment of requests for information (T-451/20 and T-452/20)

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facebook-image-search-1

You may have seen in the news today (Mlex also anticipated it a couple of weeks ago) that Facebook has appealed two European Commission requests for information (RFIs), and that it has now obtained an interim suspension from the President of the General Court (see here).

Neither myself nor my firm have any business interest in this case. I have no detailed information, and therefore no views, on whether Facebook’s appeals are well-founded or not, but I am most interested in the legal questions it raises:

As long-time readers of this blog may remember, some years ago we devoted a number of blog posts to the issue of the legal limits on RFIs. That was partly because I was the lawyer in one of the cases in the cement saga (where the RFI was ultimately annulled by the CJEU and the Commission’s investigation was subsequently closed). Whereas other cases in that saga focused on proportionality and insufficient reasoning, our case revolved around the notion of “‘necessity”. Together with then AG Wahl’s Opinions in Heidelberg and other parallel cases, that case still stands as the main precedent regarding the necessity criterion in Art. 18 of Regulation 1/2003.

In a nutshell, and as I have told Global Competition Review today, the Commission enjoys wide investigative powers and it is certainly entitled to use them in full to confirm any reasonable suspicions of an infringement. The Courts will not get in the way of the Commission gathering sufficient evidence to show a competition infringement, but they might well intervene if the information requested lacks a connection with the presumed infringement, or if the Commission does not have concrete indicia constituting reasonable grounds for suspicion.

In these particular cases, the General Court might have to verify (i) whether the information requested might reasonably help the Commission establish an infringement; (ii) whether there were sufficient safeguards in place to mitigate any privacy concerns linked to the use of broad search terms (the ones regularly used in inspections should generally also be sufficient here).

Facebook must surely know that winning on a “non-necessity” argument will not enable it to shield relevant evidence, so its move could well be motivated by concerns unrelated to the competition investigation.

For more details on the interpretation of the notion of “necessity” in RFIs you can check out our previous posts, available here, here and here. A few years ago I tried to summarize those and explain the legal issues at play in this presentation at the Brussels School of Competition:

Lamadrid_ The Cement Judgments and their impact on future RFIs

Whereas further clarity on the law will be nice to have, the timing of Facebook’s application is somewhat inconvenient; one of my summer plans is to finalize reviewing the proofs of the chapter on RFIs I have co-written for the upcoming edition of the procedural bible, and we will now have to fit this in…

Written by Alfonso Lamadrid

28 July 2020 at 3:47 pm

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On Case C-165/19 P, Slovak Telekom: an upcoming development under the radar

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Under the Radar: How to Protect Against the Insider Threat

These days, attention in competition law circles seems to focus more on the policy dimension – new cases brought by competition authorities, new legislative initiatives – and less on developments before review courts. Keeping an eye on the latter makes sense, if only because major policy initiatives end up challenged.

Slovak Telekom is a key pending case for the future of Article 102 TFEU and the boundaries of the the various legal tests. More precisely, the Court will rule on the scope of the Bronner doctrine (and more precisely of the indispensability condition).

It is one of these cases where the outcome is probably far less relevant than the rationale underpinning the outcome. The former comes across as relatively straightforward, in my view; the latter is far more interesting.

Slovak Telekom: on ‘margin squeeze’ and… ‘margin squeeze’ by other means

Slovak Telekom is a chapter in the long saga of Commission decisions against incumbents in the telecommunications sector.

It is interesting because it involves non-price conduct. The trinity of Deutsche Telekom, Wanadoo and Telefonica revolved around pricing strategies, which were examined under the ‘margin squeeze’ and the predatory pricing labels.

Slovak Telekom, on the other hand, involves price-based strategies (‘margin squeeze’) and non-price-based ones (broadly speaking, unfair terms, such as withholding the necessary information to compete or reducing the scope of its obligation to provide unbundled access to the local loop).

The object and/or effect of both sets of strategies was in any even the same, according to the decision: hinder new entrants’ ability to compete in retail telecommunications markets.

Key point of law: is indispensability an element of the legal test?

The case was decided after TeliaSonera. And TeliaSonera had already clarified that, for better or worse, a ‘margin squeeze’ can be abusive even when the input involved is not ‘indispensable’ within the meaning of Bronner/IMS Health.

The point of law raised in the applications for annulment is interesting: does the TeliaSonera doctrine also apply to non-price-based conduct in a similar economic and legal context (recently liberalised industry subject to sector-specific regulation)?

Following TeliaSonera, it seems to me that indispensability is unlikely to be deemed a pre-requisite for intervention in a case like Slovak Telekom. I fail to see how one can justify applying different legal tests to practices that have the same object and/or effect.

If indispensability is not required for the ‘margin squeeze’ aspect of the overall strategy, I cannot think of a good reason why it would for its non-price aspects.

Explaining the most probable outcome of the case

While it seems relatively easy to anticipate the most probable outcome of the case, teasing out the logic underlying the outcome is far more interesting.

The General Court explored two possible justifications. One the one hand, it argued that, since there is already a regulatory obligation to give access, indispensability would no longer be required. On the other hand, it took the view that the scope of TeliaSonera could be read as applying beyond ‘margin squeeze’ conduct.

I can think of a way to reconcile these two justifications and in which they both make sense. As I have explained before, the key probably lies in Van den Bergh Foods. In the relevant economic and legal context, the Slovak Telekom decision did not amount to mandating the firm to transfer an asset or enter into agreements with persons with whom it has not chosen to contract.

In the circumstances of the case, the infringement could be addressed with an old-fashioned one-off negative obligation (that is, an obligation to cease and desist the conduct).

Because there is a regulatory apparatus in place, there was no need for the Commission to take over the role of a sector-specific agency. For the same reason, the issues raised in cases like Bronner (the imposition of access obligations on regulated terms and conditions) do not arise.

Which takes me to TeliaSonera. In a passage (occasionally criticised), the Court explained that, if indispensability were required in the context of a ‘margin squeeze’, then it would be required in every abuse case.

If you think about it, the passage makes sense. A ‘margin squeeze’, as a practice, typically raises issues that are not fundamentally different from those at stake in predatory pricing cases (as Wanadoo shows, the two labels are sometimes even interchangeable).

If one has never thought of requiring indispensability in a predatory pricing case, there should be no reason why it should be required in the context of a ‘margin squeeze’ (or any other case that would not demand the administration of proactive, regulatory-like remedies à la Bronner).

Summing up: the regulatory context is key, as suggested by the General Court. This is so insofar as, in such a context, a cease-and-desist obligation is enough to bring the infringement to an end. In the same vein: the key in TeliaSonera is not so much the pricing or non-pricing nature of the practice, but the nature of intervention.

Written by Pablo Ibanez Colomo

24 July 2020 at 1:28 pm

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Is it an abuse for Apple to embed a camera in its iPhones? What is special and different about digital cases

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While drafting my latest paper, I asked myself how I could convey what is special and different about cases in digital markets. I do not believe these are ordinary investigations involving a straightforward application of well-known principles. Illustrating the point, however, is not easy.

Once again, I was drawn to the example that I often use with my students. It is even more pertinent following the Android decision and the investigations involving Apple’s practices (see here and here).

This example revolves around a simple question: is it abusive for Apple to embed a camera in its smartphones?

Some of you may have thought ‘certainly not’ and/or that ‘it would make no sense’ to say so. However, if one follows the logic of cases like Microsoft I or Android the inevitable conclusion is that, indeed, embedding a camera in a smartphone is abusive under Article 102 TFEU.

Smartphones, cameras and tying under Article 102 TFEU

I will make my point following the Commission’s interpretation of the conditions that are deemed canonical to show that tying amounts to an abuse.

Dominance

The Android decision and the ongoing investigations involving Apple seem to be based on the idea that the two ecosystems do not compete with one another (I discussed these points here and here). Accordingly, one could conclude, in light of this prevailing interpretation, that Apple is dominant.

Two products

For tying to exist, it is necessary to show that there are at least two separate products – a tying product and a tied product. Can one say that a smartphone and a camera are separate products? Yes, at least following Microsoft I. The interpretation of the ‘two product condition’ given by the Commission survived scrutiny by the General Court.

According to Microsoft I, the question is whether the tied product (in this case, the cameras) is produced independently of the tying product.

Typing ‘digital camera’ on, say, Google will show that the two product condition is indeed fulfilled under this interpretation (take a look at the pic below). There are certainly manufacturers specialised in the production of stand-alone digital cameras sold independently of smartphones.

Coercion

For tying to amount to an abuse, there must be an element of coercion. And there is probably no more effective coercion than physically embedding one product in another one.

Anticompetitive effects

Whether or not anticompetitive effects are an element of the legal test is a matter for debate. If one assumes that they are, the pic below suggests that smartphones have had a substantial impact on the sales of stand-alone cameras.

One could also try and make an argument about the potential dynamic effects of the exclusion of competing camera producers. Such arguments were already made in Microsoft I (harm on follow-on innovation) and have also been advanced in more recent investigations.

Objective justification

It is not difficult to think of the pro-competitive benefits resulting from integrating cameras with smartphones. These arguments, however, have so far not fared very well in proceedings before the Commission.

It is sufficient to take a look at cases like Microsoft I (Windows Media Player), Google Shopping and Android.

It is true that combining complements (for instance, an operating system and an application, or organic and vertical search results) typically makes end-users’ life easier and/or better. However, the Commission has also noted that they come with restrictions: namely, they prevent mixing and matching.

The same arguments could be make in relation to smartphones and cameras. End-users would not have the ability to use the camera of their choice, as Apple’s own choice (perhaps not even the best camera around, or not the one best suited to their needs) is forced upon them.

Implications

As you can see, the mechanical application of traditional tying doctrines, as interpreted by the Commission, inevitably leads to the conclusion that the embedding a camera in a smartphone is abusive.

If you still think that it makes no sense, I agree.

Some of you may think that the above is a purely theoretical discussion, as no competition authority would ever bring such a case.

Is it enough to say that competition authorities would exercise their prosecutorial discretion wisely? I do not believe so. As I have mentioned many times, competition policy is implemented through law, not discretion.

In a decentralised system like the EU one, moreover, one cannot exclude that a national court will be asked to rule in a similar dispute. And national courts cannot hide behind their policy priorities: they have to decide on cases brought before them.

If a national court were confronted with a case like this one, it would inevitably realise the main implication of the above: the legal test conceived for traditional instances of tying is not ideally suited for product design cases.

What is special and different about digital cases

If we agree that the legal test applying to traditional instances of tying is not appropriate, the next question is why. What is the difference between contractually tying the sales of one soft drink to the acquisition of another soft drink, on the one hand; and embedding cameras in smartphones, on the other?

The key is that intervention in the latter case is far more ambitious. A traditional instance of tying involving soft drinks relates to how products are sold. Questioning the integration of complements questions how products are made. In other words, the latter interferes with the heart of a firm’s business model and/or the design of products.

In order to understand the difference between the two cases (and what they involve), it is typically useful to think of the remedy. How can the infringement in a case concerning the contractual tying of soft drinks be brought to an end? A one-off negative obligation would be enough.

What would the remedy be if integrating cameras into smartphones were deemed abusive?

Perhaps, a Microsoft I-style remedy: asking Apple to produce a version of its smartphone without a camera. One could also imagine a Google Shopping-style remedy: several versions of the smartphone, each with a different camera. An auction could be organised to decide which cameras go into the various devices.

Irrespective of the particularities: the remedy would be infinitely more convoluted, and could perhaps fail (as in Microsoft I). This crucial difference is not (and cannot be treated as) an afterthought that is irrelevant to the determination of the appropriate legal test.

In all digital cases, including pending ones, the Commission is venturing more often than in the past with how products are made. It is questioning monetisation strategies (the ongoing investigations into Amazon are a good example) and the appropriate degree of modularity within an ecosystem (investigations appear to question whether integrated firms should keep some activities for themselves, which is what the Apple Pay case seems to be about).

It makes sense to look closely into these matters. But I fail to see how one can pretend that cases in which intervention would interfere with the heart of a business model and/or the design of a product are just like old-fashioned contractual tying cases and do not raise far more complex issues.

For the same reasons, one should not avoid the hard questions about the appropriate legal test to deal with these cases and about the institutional implications of making it easier to interfere more often with how products are made. This is the key message I tried to convey in my paper.

I look forward to your comments. I have repeatedly clarified, and this time is not an exception, that I have nothing to disclose.

Written by Pablo Ibanez Colomo

21 July 2020 at 7:26 pm

Posted in Uncategorized

NEW PAPER | Self-Preferencing: Yet Another Epithet in Need of Limiting Principles

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I have just uploaded on ssrn a paper on Self-Preferencing (see here). Those with a good memory may remember that the paper started its life as a blog post. Given the topicality of the issue and its growing importance, I felt it made sense to expand some of the arguments and revisit other arguments explored in other recent papers of mine.

I advance three main ideas that I believe were worth emphasising in the current environment.

The first is that self-preferencing is, in itself, a manifestation of competition on the merits. Not only is there nothing inherently suspicious in a firm favouring its affiliate, but often it is inextricably linked to the pro-competitive benefits expected from horizontal or vertical integration.

The second idea is that self-preferencing is not a sound legal category. Legal categories are necessary. However, not all of them are useful or meaningful. The fundamental problem with self-preferencing is that it is a catch-all concept that brings together behaviours that are fundamentally different.

In addition, it overlaps totally or partially with well-established categories. In this sense, it is not clear what its added value may be.

Suffice it to think about it for a second. Tying and bundling are forms of self-preferencing (in essence, tying amounts to giving a competitive advantage to an affiliate). A refusal to deal is also a variation on the same theme: the integrated firm refuses to deal with rivals because it intends to favour an affiliate.

These practices are also very different if one takes into account the nature of the intervention to bring the infringement to an end. We know from experience that intervention in some cases requires a court or an authority to change the design of a product and/or change a firm’s business model. Other cases can be addressed by means of a one-off negative obligation.

As you can see, it is difficult to see how the competition law system will improve with the introduction of a legal category that overlaps with existing ones and that obscures the differences between them.

With takes me to my third point: if self-preferencing is going to be embraced, the system would benefit if the implications of doing so were carefully pondered.

I have discussed Van den Bergh Foods in previous papers (see in particular here). Its implications are clear: where intervention in a case would involve forcing a company to transfer an asset or to enter into agreements with third parties, indispensability is an element of the legal test.

This case law makes sense. Indispensability is a sensible filter to limit the instances in which the system is required to the tricky and error-prone tasks of redesigning products and/or changing business models. The institutional implications of abandoning this filter are substantial, and they would need to be addressed.

Finally, there is much talk these days about making self-preferencing prima facie unlawful. This is another issue that deserves careful thought. From a positive perspective (in particular following Generics and Budapest Bank), self-preferencing is not the sort of practice that can be treated as a by object infringement.

From a normative perspective, a robust effects analysis, at the very least, seems necessary. Turning self-preferencing into a by object (or quasi-by object) does not come across as optimal.

I very much look forward to your comments. If you were wondering, I am happy to clarify, in accordance with the ASCOLA declaration of ethics, that I have nothing to disclose.

Written by Pablo Ibanez Colomo

17 July 2020 at 12:23 pm

Posted in Uncategorized

The Apple Judgment in Context (Cases T-778/16 and T-892/16)

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Apple post

The General Court annulled earlier today the Commission’s Apple decision (the full Judgment is available here). This has come as a surprise for many, perhaps not so much to those of us who attended the oral hearing (see here). It may also not have been much of a surprise for readers of this blog following the latest trends in EU judicial review (see below).

This Judgment cannot be examined in isolation. The reasons for, and the implications of, this annulment can be better understood by examining the case within a wider context:

The context of other Judgments on tax rulings. The identity of the company affected and the amounts at stake made this the most visible of the recent cases in which the Commission has challenged tax rulings under State aid rules. That increases the PR repercussions of the defeat. From a strictly legal standpoint, however, the Apple case is not necessarily more relevant than the Fiat and Starbucks Judgments rendered in September 2019 (we commented on those here).

The Apple ruling, like those in Fiat and Starbucks, confirms that it is possible for the Commission to target tax rulings under State aid rules. All three cases bypassed the thorny issue of selectivity and focused the debate on the existence of an advantage. All three cases recognize that the Commission is entitled to rely on the arm’s length principle and on the OECD’s work to determine the existence of an advantage by reference to ordinary taxation. The three Judgments send a consistent message that the Commission’s policy is not wrong as a matter of principle, but that the devil lies in the details, and that it is for the Commission to assess those details.

The context of the wider case law on fiscal State aid. My more detailed technical views on that are outlined here.

The context of EU judicial review. The Apple Judgment will attract more attention than other annulments, but in reality, it is not in any way groundbreaking from a legal standpoint. The reasons, and the reasoning, leading to today’s annulment are exactly the same as the one that has led to the recent annulment of other decisions, including in Frucona Kosice, FC Barcelona, Real Madrid, Naviera Armas, Valencia and Elche cases, among others. In recent years the Courts have consistently insisted on the Commission’s obligation to actively and impartially gather and assess all the relevant evidence in relation to issues where the burden of proof is incumbent upon it. It was all there. Apple had probably won before entering the courtroom.

You might think this is easy to say in retrospect, but we already anticipated all of this here and here. At the time, we said that “it won’t be difficult for the Commission to continue to win cases if it incorporates this logic into its day-to-day. If that does not happen, we are likely to witness a series of annulments based on this logic (…) My bet is that I will be making a few future cross references back to this prediction”. Here’s one more cross reference, probably not the last one.

A paradoxical result? Our previous post on Fiat and Starbucks noted that “paradoxically, the Commission [might have] to do a greater job when Member States do worse. In other words, the Commission cannot simply assume that because the Member State acted in a seemingly arbitrary manner the outcome was wrong.  As Vice President van der Woude noted at the Apple hearing last week, one cannot fully exclude that there may have been a happy coincidence. The message, again, is that nothing is evident and that the Commission cannot take things for granted”.

In the case of the Apple ruling, in sum, the Commission took the view that the existence of a seemingly arbitrary process created a presumption of a selective advantage (i.e. a derogation from normal market conditions), which would place the evidentiary burden on Ireland/Apple to show that the advantage did not exist. Today’s Judgment does not hide the Court’s dislike of that particular negotiation process, but considers that this does not enable the Commission to simply presume the existence of an advantage. The Court’s press release itself states that “the General Court regrets the incomplete and occasionally inconsistent nature of the contested tax rulings”, only to then clarify that “the defects identified by the Commission are not, in themselves, sufficient to prove the existence of an advantage”.

3 Lessons from the Judgment.

1) The Apple Judgment again shows that the EU Courts are ready to give the Commission room for maneuver, provided that it does a thorough job in its assessment of all the relevant circumstances when it bears the burden of proof;

2) Very often, it’s all about the burden of proof. Infringements are established, not presumed. And be mindful that this is a case involving an administrative infringement by Ireland, not Apple; these principles apply even with greater strength in relation to quasi-criminal infringements by undertakings;

3) The EU system of administrative enforcement combined with independent judicial review works, regardless of the identity and nationality of the companies involved and of the economic or political interests at play.

What now? There is nothing humiliating in losing cases; that is a natural part of the work of any authority. The Judgment is more of a problem for the Commission’s PR policy than it is for the Commission’s wider strategy regarding tax rulings.  There is no legal obstacle for Commission to challenge tax rulings under State aid rules; it only needs to do its work thoroughly and with no shortcuts, no matter how tempting or seemingly justified. The Commission may even win other pending cases on this very same area. My bet is also that the chances of success of a Commission appeal would may not be high (an unlikely re-run of the investigation would arguably offer higher chances of success, but resulting in less eye-catching figures).

Like what has (and will) happen in antitrust cases, this defeat may however be used to push for regulation as an alternative. Like in the case of antitrust, this is even if there is arguably no real blind spot under the Commission’s enforcement powers. Unlike in the case of antitrust, regulation in the tax domain might be more desirable.

[Disclosure: I have nothing to disclose. I represented companies in some of the precedents quoted in the Judgment, and I currently represent a large number of companies in dozens of fiscal State aid cases pending before the EU Courts. All of those cases are unrelated to the issues raised in the Apple case]

Written by Alfonso Lamadrid

15 July 2020 at 8:35 pm

Posted in Uncategorized

My feedback on the Ex Ante Regulatory Instrument for online platforms

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Short TED Talk Video: “The secret to giving great feedback ...

[I also provided feedback on Monday on the Ex Ante Regulatory Instrument for online platforms (see here). The main point I make, as you will see below, is that, if this regulation is adopted, it should follow the model of the EU Regulatory Framework for electronic communications. It would be paradoxical if the regime applying to online platforms would be more rigid, less adaptable and less able to cope with economic and technological developments than the one conceived for copper wires back in 2002]

As an independent academic, I welcome the opportunity to provide feedback on the Ex Ante Regulatory Instrument (the ‘Instrument). In accordance with the ASCOLA declaration of ethics, I am happy to clarify that I have nothing to disclose.

There is a range of options considered in the Inception Impact Assessment (‘IIA’). Of these, I will focus on policy option 3, which is the adoption of an ex ante regulatory framework applying to online platforms.

It would be particularly important to draw the lessons from the EU Regulatory Framework for electronic communications (on which I teach and conduct research). The Commission was aware at the time (1999-2002) that telecommunications activities were subject to rapid change and that the regulatory regime had to be flexible enough to adapt to the economic and technological evolution of the industry. There would every reason to craft the Instrument in accordance with the same principles. Not only is change rapid and unpredictable in digital markets; the issues and concerns are much more diverse than in telecommunications.

Accordingly, option 3a (a ‘blacklist approach’) comes across as one that is not suited to digital markets. Any perceived benefits of the approach would be clearly outweighed by the known drawbacks.

The experience of the EU Regulatory Framework shows that it is virtually impossible to anticipate the needs of regulation in evolving industries. Accordingly, capturing, at the time of drafting the instrument, all necessary forms of intervention is unlikely. A more flexible menu of remedies, that allows the regulatory authority to tailor intervention to the demands of each market and to innovate where necessary (as some authorities did with functional separation in the telecommunications sector) is more appropriate.

One should also take into account that unwarranted intervention has major costs for society and as such goes against the public interest. The sort of obligations that are outlined in the IIA (such as a blanket prohibition on self-preferencing) are not neutral on firms’ incentives and can be expected to have an impact on stakeholders’ decisions. Accordingly, requiring such an obligation where negative effects are implausible or unlikely inflicts a net cost on society.

Finally, this regulatory approach makes legislative change more difficult. Once enshrined in an instrument, remedies imposed may prove difficult to amend, whether this is to expand the scope of intervention or to reduce it. A principles-based regime, which leaves the matter to a case-by-case assessment is more appropriate.

Option 3b (case-by-case intervention) is closer to the flexible model. Such a regime would follow the approach already taken in the EU Regulatory Framework for electronic communications:

First, it would be expressly biased against intervention. Remedial action would only be warranted where deemed justified to achieve the objectives of the regime. Similarly, it should not go beyond what is necessary. Particularly far-reaching remedies altering a business model or the structure of an industry would need to meet distinctly strict criteria.

Second, the regime, as already explained, should be flexible and adaptable.

Third, it should be neutral: the regime should not favour some business models over others, in the same way the telecommunications framework is technologically neutral.

Fourth, it should devise a legal test analogous to the three-criteria test in telecommunications. It would define, on a case-by-case basis whether regulatory intervention on a market adjacent to a platform is warranted to preserve competition and innovation. The question that should be asked is whether effective competition on a given market is likely to be preserved in the absence of regulatory obligations imposed at the level of the platform. Similarly, remedies should be rolled back when no longer needed.

Written by Pablo Ibanez Colomo

1 July 2020 at 11:04 am

Posted in Uncategorized