Chillin'Competition

It has been reported today (see here) that Commissioner Vestager may announce tomorrow that the Commission will be addressing Google a Statement of Objections.

This move, that many (including ourselves) would not have anticipated only a few months ago, has been the subject of rumors for some weeks. We have been asked about our opinion a myriad times these past days, and, frankly, we cannot say much more than what we have said in our many posts on the subject (too many to be linked to now), all written in the light of the very scarce publicly available information.

The good news of this whole story is that the law may now take center stage. I wrote recently that this was a perfect case study to discuss the limits of Article 102 (see the end of this post for my own recent case study on the subject for the Brussels School of Competition), but it is also a perfect case study on the huge importance of non-legal factors in competition cases in which the law is unclear (as it’s arguably always the case, save in -some- cartel cases) (for our previous reflections on this, see here or here).

The decision to pursue the case, at least for now, is likely to bring to the fore some fascinating legal questions. The arguments of both parties are by know well known, but it will be interesting to see how the Commission will frame its theory of harm. The stakes couldn’t be higher for Google, for the complainants resorting to competition law as a major competitive tool, and for the Commission, which was left in an uncomfortable position by the last minute decision to halt the commitment negotiations, which generally has the winning hand in these cases and which has, until know, always succeeded in all its 102 cases, including all previous high-stakes tech ones.

Whereas the parties’ submissions will, in principle, not be made public, their arguments have recently been publicly championed by commentators who give us a good taste of what is to come. The latest round of comments has been made by two reputed experts who have held some of the highest possible roles in the competition community, namely President of the General Court (Bo Vesterdorf) and Emeritus editor of Chillin’Competition (Nicolas Petit).

Mr. Vesterdorf’s piece (based on research done for Google but expressing his own views) has very recently received a reply from Nicolas (his research has been financed by iComp, a complainant in the case, but he also expresses his own views). We suggest that you read both.

Pablo and myself -who, believe or not, for better or worse, and despite the hours invested, must certainly be among the few who haven’t made any money out of this case in over 4 years…- are most curious about the many conceivable scenarios that now open up, but we won’t give our take on what is to happen. Why? Because as the recent evolution of the case shows, in proceedings with so many non-legal ancillary factors, predictions are doomed to fail; anything is possible.

We are back. This time, with a post that is not voluntarily humorous (nevermind the picture above). A good opportunity to prove ourselves, dear readers, that there is (some) room for (at least some) serious discussions in Chillin’ Competition. I have been meaning to write about the ECJ ruling in Bananas (hence the picture above). I am now out of excuses to avoid doing so given that I cannot (and really should not) keep myself busy forever discussing Alfonso’s posts.

The appeal judgment in Bananas is interesting in that it addresses the status of exchanges of information under Article 101(1) TFEU. Because the nature and the context of such exchanges may vary widely from one case to another, it is probably the practice that exemplifies better than any other the approach taken by the ECJ when drawing the line between restrictions by object and by effect. You know from previous posts that I find the relevant case law to be very sensible. More importantly, it is clear to me the Court has been consistent over time in its approach to the question.

The key arguments raised by Dole in its appeal are familiar ones. An exchange of information may not have an actual impact on future prices. For instance, as argued by Dole in the case, the employees discussing prices may lack the power to set them. It may also be the case that the nature of the exchange does not completely eliminate uncertainty about the behaviour of competitors. The Court clearly dismissed these arguments and held that the exchange at stake in the case amounted to a restriction of competition by object. What lessons can one draw from this case? A couple of them. Nothing, I am afraid, that you have not seen in one way or the other in the blog.

Formal categories are not particularly useful

Are exchanges of information restrictive of competition by object? Well, it depends. Sometimes they are, as in Bananas. Sometimes they fall outside the scope of Article 101(1) TFEU altogether, as in Asnef-Equifax. It all depends on the nature and purpose of the exchange in the context in which it is implemented. The formal category is as such not particularly useful. This has always been the problem with the so-called ‘object box’ and with similar attempts to capture the essence of the case law. Labels (‘exchange of information’, ‘price fixing’, ‘market sharing’) mean virtually nothing in themselves and can even be misleading.

Sometimes, an exchange of information is an ingredient in a cartel-like arrangement. In such a case, the exchange lacks pro-competitive virtues and is therefore deemed restrictive by its very nature. Sometimes, it can improve the functioning of markets and as such potentially beneficial for consumers and the economy. It is clear from the case law that the analysis of the nature and purpose of the agreement needs to be carried out on a case-by-case basis. This sort analysis is not about actual or likely effects (more on this below) but about the rationale behind the agreement.

Bananas provides an interesting example of the above. I welcome your views on the ruling, but it seems clear to me that the Court essentially considers whether the relevant exchange pursued a ‘legitimate objective’ (to take the expression found in Cartes Bancaires, which, unsurprisingly, is abundantly cited in the judgment). In this case, it was found that the purpose of the exchange was simply to remove uncertainty about the behaviour of rivals.

The ‘by object’ category is not a presumption of anticompetitive effects

It has become popular to present the ‘by object’ category as a presumption of anticompetitive effects. The likelihood of such effects is so high in the case of some restraints, the argument goes, that it makes sense to prohibit them irrespective of their actual impact on competition. This view is not unreasonable. The problem is that it is contradicted by the case law.

Bananas shows, again, that an agreement can be deemed to restrict competition by object even if it is not clear that it would have resulted in higher prices. In paragraph 123, the Court holds that ‘a concerted practice may have an anticompetitive object even though there is no direct connection between that practice and consumer prices’. Along the same lines, it is stated in paragraph 125 that ‘there does not need to be a direct link between [a concerted practice] and consumer prices’.

In light of the above, it seems clear to me that determining whether an agreement is restrictive by object has little to do with setting a presumption about its likely impact on competition. As explained above, this assessment is about something else. This also means that there is no real overlap between establishing the anticompetitive nature of the agreement (i.e. understanding its object) and showing its restrictive effects. The first test is about determining whether the agreement is plausibly pro-competitive; the second is about showing, in concreto, its negative effects. This is another major source of misunderstandings. I hope the clear statements of the Court in Bananas will prove helpful in this regard.

More on State aid and investments.

Remember my post on State aid and investment arbitration? The Commission has ordered Romania to recover the compensation to the investors following the award of an arbitration tribunal. More to follow, I am sure!

Yes, our last post –“Breaking News: Joaquín Almunia to be EU Judge”, was a spoof, a hoax, a “poisson d’Avril” as they say in Belgium, our contribution to April Fools’ day 2015. We improvised it after reading a couple of weird news stories that morning and realizing the date in which we were. Some people, and even some news agencies, took it seriously, and after a few hours Mr. Lucky Namoodia  Joaquín Almunia himself commented about it on Twitter (@AlmuniaJoaquin), confirming that it was a hoax and stating that “It’s a pity indeed”.

If anyone felt disappointed by our misinformation, we are sorry, and we apologize, like we have done before when needed (see here for an example of deficient coverage on our part).

In any event, this has helped us realize that people who read this blog care less about substantive issues (there are indeed very good reasons why no one should give a damn of what Pablo or I think about exclusivity arrangements), than about us posting nonsense (we are better at that, and competition law is a fertile ground to find nonsensical stuff). Point taken. In that spirit, we thought of offering you this post April’s Fools Day Special, with some of the best hoaxes and law or antitrust-related jokes of recent times:

• One of our all-time favourites is one that we already covered in Chillin’Competition. A hoax published in a Belgian newspaper concerning Charleroi Airport actually fooled the European Commission, leading DG Comp to send a request for information on the basis of the pretty absurd piece (see here).
• Now that rumour has it that an SO is in the pipeline this very funny piece is particularly timely “EU Google Probe to be Based Entirely on Google Searches“.
• In the U.S. there was a tradition of very good April Fools jokes from the American Antitrust Institute here, my favorite ones being Antitrust Controlled by Jerks, Says New Evolutionary Biology Report, As US Attorney General Gonzales Confidentially Reports, There’s Nothing Funny About Antitrust, and President Bush’s proposal to merge antitrust agencies with the Department for Homeland Security.
• A more recent one was reported these days by Abovethelaw, and has to do with the April Fools’ Day email sent to all workers of a BigLaw firm concerning life-work balance that was apparently not well received by many (see here).
• Also at Chillin’Competition we have done this before. We did it, although not on the right day, when we announced that we were facing a legal challenge following the Google Spain Judgment (see here) or when we announced on-side beach inspections by DG Comp (see here) ; Nico did it when he announced we were closing this blog (see here). Then there were others which did not pretend to be serious in spite of their accuracy, such as this post on Microsoft’s Contribution to the EU Budget. Another joke worth mentioning if only for the number of absurd comments it elicited was Nicolas’ Chuck Norris Antitrust Facts.
• Then of course you never know, because some stories that seem a hoax end up being true (see here).

Very trustworthy sources in Spain confirmed to us last night that rumours were true, and that former competition Commissioner Joaquín Almunia is poised to be a judge at the EU General Court. The news has now also been confirmed by at least M-Lex and Bloomberg.

The appointment would take place within the timely addition to the Court of 12 more judges, just when the existing ones had managed to clear the backlog.

Chillin’Competition has been able to talk to Mr. Almunia via a former intern at his cabinet. Mr. Almunia has acknowledged that he will indeed take up this new role, which he considers as a new challenge that comes at the right moment of his life, given that his stint at DG Comp has provided him with a unique viewpoint that is different from that of his colleagues to be. The former Commissioner and Judge-to be also noted that his background in economics might contribute to shifting the case-law towards a more economics based approach.

An economist and lawyer by training, Mr. Almunia will be able to join the General Court pursuant to a controverted provision included in the new Spanish Law regulating the selection procedures for candidates to EU judgeships (see here). This provision states that politicians having held office in EU institutions for more than 8 years, as well as former national ministers who do not find a suitable occupation within 12 months of leaving office, could now be considered for a post at the Constitutional Court. Whereas some claim this may be a legal subterfuge conceived only to enable them to be appointed to EU Courts (indeed the EU rule is that candidates are suitable when they can be appointed for the highest judicial role in their Member State), the Spanish Government has replied that in reality this provision only codifies, and even narrows down, previous practice, adding that customs and precedents are also sources of law. A government spokesperson is quoted today by Lewis Crofts in M-Lex stating as well as in the Spanish newspaper El Mundo Today stating that “Chancellor Merkel supports us on this one, so we are not concerned”.

In his new job Mr. Almunia is very likely to encounter some of the cases that he dealt with as Competition Commissioner. Asked about the risk of any possible conflicts of interest,  Mr. Almunia responded that, “as rightly noted by Professor Nicolas Petit, fortunately there are no public rules on how conflicts of interests are dealt with at the Court, so I cannot speak about that yet. However, I see no possible conflict of interest. If you are referring to the Google case, people are wrong to believe I was closely associated to the investigation. I had nothing to do with it; that said, I would have solved it all had I had a few months more in office”  (N.B. the translation from Spanish is ours).

Mr. Almunia also wondered whether we had any question for him concerning Greece and the monetary union, but we did not.

Mr. Almunia’s predecessor as Competition Commissioner, Neelie Kroes, has complained to Aoife White, from Bloomberg, that the merits-based system for EU Court appointments used in The Netherlands (and that led to the appointments of Sacha Prechal and Marc van der Woude) does not offer equal chances to valuable and experienced politicians and should hence be replaced. “If we are going to have a more political Commission, I don´t see why we cannot have a more political Court”, she added.

There is so much about which I want to write that I should not indulge in commenting on Alfonso’s last post. And I really did not want to. But it is happening. It is not often the case that I choose the topics of my posts. They start writing themselves in my head and before I realise I find myself typing, as I am now. So blame the topic, not me. And blame my co-blogger for starting it all with his initial question 😉 . Rest assured that a couple of posts on information exchanges and geo-blocking will start writing themselves in my head soon (primarily because I have much to say about the two).

The fact that I disagree with Alfonso’s last post does not mean that it is not an entirely reasonable one. He says that he does not regard the case law on exclusive dealing and loyalty rebates as the ‘epitome of absurdity’. I do not think it is. It is actually very far from being so. The argument (at least mine) has never been that it is absurd (because it is not), but that it is difficult to reconcile with other aspects of the case law and as such a permanent challenge for the coherence of the competition law system as a whole. Why do we disagree, then? Let us take a look at some of his arguments.

Experience and economic analysis (the Cartes Bancaires test)

The lessons of experience: Alfonso is right to say that the case law assumes that exclusive dealing and loyalty rebates always have restrictive effects on competition. He refers to the Cartes Bancaires test but he does not discuss the lessons of experience, which are valuable ones. Experience shows that that rebate schemes rewarding loyalty do not necessarily prevent the rivals of a dominant firm from thriving or even increasing their market share. This is the fundamental lesson to draw from British Airways and Michelin II. If, as in these cases, there is cogent evidence showing that competition has not been restricted as a consequence of these practices, then it is safe to claim that negative effects cannot simply be assumed to be the necessary consequence of exclusive dealing and loyalty rebates. Unless, of course, one refers to a particular type of negative effects that cannot be seen or proved but is nevertheless there in some form, like a supernatural entity.

The lessons of economic analysis: In relation to the lessons to draw from economic analysis, Alfonso says that he does not know enough about it to conclude whether it suggests that the assumptions underlying the case law need to be refined. What can we conclude from (both theoretical and empirical) economic research? These lessons are elegantly summarised in the Commission Guidance and the EAGCP Report of 2005. I always recommend Massimo Motta’s careful dissection of Michelin II because it is a lucid and accessible piece addressing the question. Against this background, it seems safe to claim that it would be inappropriate to presume that dominant firms implement exclusive dealing and loyalty rebates with the aim of excluding competition. Economic research also shows that negative effects on competition cannot simply be assumed to result from these practices. This is, therefore, one of these areas where the experience of the case law and economic analysis go hand in hand.

I have written elsewhere that EU courts have consistently displayed remarkable intuition about the motives behind business practices. Delimitis is one of the rulings that is very much in line with formal economic analysis. In this remarkable judgment (discussed by Alexander Italianer in the speech he gave back in December), the ECJ concluded that exclusive dealing cannot be considered to be anticompetitive by its very nature (in other words, anticompetitive motivations cannot be presumed) and that its restrictive effects cannot simply be assumed to be the consequence of the fact that access to some outlets is foreclosed. The cumulative effects of similar arrangements may lead to such effects in a particular context, but this is something to be established on a case by case basis. I fail to see why the finding that exclusive analysis is not restrictive by its very nature would not be relevant in the context of Article 102 TFEU. This insight, which relates to the rationale behind the practice, seems to apply irrespective of the degree of market power enjoyed by a particular company.

The lessons of economic analysis have been embraced by EU courts. To name a few, they played a fundamental role in Cartes Bancaires (two-sided markets), in Airtours (in relation to collective dominance), in Tetra Laval (in relation to conglomerate mergers), or in Woodpulp II (concerning the notion of concerted practice). With these precedents in mind, the question arises of why the insights of professional economists would be ignored in relation to a given set of practices if they have informed the case law in other areas.

The ‘making life more difficult’ standard

Alfonso suggests that it is appropriate to prohibit prima facie under Article 102 TFEU any practices that are assumed to make competitors’ life more difficult. Again, this is a defensible position, and one that is very far from being the ‘epitome of absurdity’. That is not the issue. The issue is that practices that in theory always make competitors’ life more difficult are not always prohibited prima facie in the case law. Below-cost pricing by a dominant firm always makes rivals’ life more difficult, but it is not always prohibited as abusive under Article 102 TFEU (just take a look at AKZO and Post Danmark I). Similarly, the ECJ made it clear in Deutsche Telekom and TeliaSonera that it cannot simply be assumed that a margin squeeze always makes competitors’ life more difficult. It would be necessary to establish the likely effects of the practice on rivals’ ability to trade in the retail market in the context of a particular case. In this regard, the ECJ did not follow the Commission decision in Deutsche Telekom.

As can be seen, the real issue here is that Article 102 TFEU case law does not follow a uniform approach, not that the approach followed in relation to exclusive dealing and loyalty rebates is the ‘epitome of absurdity’. The fundamental claim I made in my paper is that the case law, as it stands, does not treat practices that are comparable in their nature and likely effects in the same way. It is, in other words, a matter of legal coherence. In my view, the most sensible way to address the observed tension in the case law is to embrace the lessons of experience and economic analysis across the board.

Administrability vs ‘hordes of public officials, and countless hours of lawyers and economic consultants’

The case law on exclusive dealing and rebates is defended because it is easier to administer than the alternative, which would require ‘hordes of public officials, and countless hours of lawyers and economic consultants’. The administrability of legal tests is an important factor for any lawyer and for any economist who is aware of the demands of legal practice. If I disagree with this point is because, first, he seems to assume that standards to establish, on a case-by-case basis, the likely impact of a practice are very difficult to administer and impossibly demanding in terms of resources. This is clearly not the case.

My second objection to his argument about administrability relates to the coherence of the competition law system as a whole. If Alfonso’s argument applied in the context of merger control, then all conglomerate mergers involving a dominant firm with the ability to foreclose competition (as in, say, Microsoft/Skype) would be prima facie prohibited irrespective of their likely effects on competition. The fact is that the likely effects of conglomerate (and horizontal, and vertical) mergers are routinely examined in concreto. Nobody seems to object to it as an impracticable model or one imposing an unjustified drain on the resources of the Commission. Why, then, would it be a problem for the Commission to establish the likely effects of potentially abusive practices in accordance with the principles that the authority has committed to follow in the Guidance?

Alternatives to exclusive dealing

Finally, Alfonso takes the view that the prima facie prohibition of exclusive dealing and loyalty rebates is not an issue insofar as the same objectives of these practices can be ‘achieved through other, perfectly legitimate and less risky, means’. Is that really the case? What are these other perfectly legitimate means? Tying? Clearly not, as it is also prohibited prima facie. Are quantity rebates perfectly legitimate? Maybe, or maybe not. Possibly, maybe sometimes. As I argued earlier this month, it is far from clear when and why quantity rebates are acceptable under the case law. The pending ruling in Post Danmark II shows that, indeed, it is difficult to say that this route is really less risky for dominant firms.

On my response

As far as I am concerned, this will be the last post on this most interesting (at least for me) exchange. I know, however, that some people did not like the answer I gave. The only way forward of which I can think is to create a new section in the blog, called ‘Choose your favourite Article 102 TFEU decision’. Readers are all invited to send via email the name of a Commission decision of which they are particularly fond (whatever that means). And I hereby commit to discuss its legal, policy and economic aspects 😉 .

I laughed when Alfonso asked whether there is an Article 102 TFEU decision adopted by the Commission that I like. I laughed in part because I understand why someone might come up with such a question, but also because the image of an academic curmudgeon grumbling from an ivory tower is undeniably comical. After the healthy dose of laughter, I realised the question was more interesting than I initially thought. As is often the case with jokes, it is one that raises pretty fundamental issues. The short answer, and the sad truth, is that I do not see Commission decisions that way. I will elaborate a bit to make sure Alfonso feels compelled to answer the question that I have for him and that you will find at the bottom of the post.

I am not interested in the outcome of individual cases. Really not. I am not even sure that it is possible or meaningful to like or dislike a particular decision examined in isolation. The many posts I have written in relation to the Google investigation would have been written in any other context giving rise to the same issues. When I wrote about the GC ruling in Intel, I never sought to argue that the company had not breached Article 102 TFEU. I am interested in the way in which the law is shaped and evolves over time, and not so much in the ‘who wins’ or ‘who loses’ a specific case. These questions are necessarily relevant for civil servants and practitioners, but matter little to me.

Just take a look at what Alfonso and I wrote about Intel to illustrate the above. He presents the ruling as a ‘victory’ for the Commission and explains how the General Court carefully crafted the judgment in anticipation of the appeal. My entry, on the other hand, was devoted to the key assumption underpinning 35 years of case law on exclusive dealing and loyalty rebates. After reading my paper on these issues, a friend told me, only half-jokingly, that the title was misleading, as it was not really about Intel, but about everything. Well, exactly.

The question is also valuable in that it provides an opportunity to emphasise the difference – that can never be emphasised enough – between law and policy-making. A case may well be sound from a policy standpoint, but this fact alone does not mean that it is necessarily justified from a legal one. It is not unusual to hear people say that a particular case ‘must be right’ because the company in question is superdominant or has done something that looks mischievous. Some people have reacted to my posts on the Post Danmark saga by saying that action by the Danish competition authority was justified because it concerned the behaviour of an incumbent in a recently liberalised industry. Again, this is not the point, and it is not the reason why I wrote about the case. More important, these are dangerous arguments.

Ignoring the law to focus on the outcomes of individual cases is, and has always been, a recipe for disaster. A particular rule may seem unproblematic, from a policy-making standpoint, if it is confined to an exceptional case arising in very particular circumstances. We know well by now that, once a rule is laid down, it is only a matter of time before it is expanded in other contexts that have little to do with the specific factual scenario in which it seemed appropriate and innocuous. Alfonso likes to quote Areeda emphasising the importance of defining sensible limiting principles to enforcement in competition law. As you can see, I like to do so too. It is indeed one of the most important lessons to draw from decades of enforcement.

Just think of Intel again. I never argued that the outcome was wrong. In fact, the case is particularly interesting in that it exemplifies the commitment of the Commission to devote its resources to cases where negative effects on competition are likely. As a result of this commitment, reflected in the Guidance, it may well be the case that the prima facie prohibition of exclusive dealing and loyalty rebates does not make a practical difference when action by the Commission is at stake. This fact does not mean, however, that the perpetuation of a rule that fails to capture the lessons of experience and economic analysis is unproblematic.

The Commission may carefully choose to intervene in clear-cut cases, but what if a national court is asked to intervene in a case where anticompetitive effects are implausible? In the era of private enforcement and decentralisation, it is simply no longer possible to rely alone on the expertise of the Commission and its ability to prioritise cases. Whether or not the authority ‘gets it right’ in a particular case is not the only relevant question anymore. As the Post Danmark saga shows, much has changed since Hoffmann-La Roche, and rules and standards need to be crafted to ensure that they are accurate and administrable. These are the concerns that prompted my paper on Intel and my many posts on Article 102 TFEU. Nothing to do, as you can see, with whether I like or dislike a specific decision.

In light of this extensive answer, I feel entitled to ask Alfonso whether he believes exclusive dealing should be prohibited absent an objective justification or whether, instead, Article 102 TFEU enforcement should follow the principles set out by the Commission in the Guidance and by the Court in Delimitis. Alfonso?

My blogging inactivity over the past few days has to do with spending two weeks in Luxembourg for hearings with a short visit to Madrid for this seminar, which, btw, exceeded the already high expectations. In intense weeks like these ones I tend not to post even stuff I’ve written before because the downside of having your own clients read your blog is that they may get the impression that you’re blogging instead of preparing [Note to them: don’t worry, nothing further from the truth…].

This is all to justify say that today’s post will not be very brainy; here is just a compendium of short reflections spurred by recent experience:

On litigation. I’ve always said that litigation is the most fun part of my job. The problem now is that with the prevailing “amicable” solutions in antitrust (settlements and commitments) the scope for litigation is getting narrower and narrower (as clearly reflected in the joint slides by Judge Van der Woude & Nicolas Petit available here). The result is that most competition-related litigation nowadays is State-aid related. I, for one, am involved now in over 30 ongoing State aid appeals. I guess it’s a consolation that at least one area of competition law is still within the realm of judges.

On state aid. State aid now gives rise not only to most litigation, but also represents a higher percentage of the output of DG COMP than mergers, cartels or abuse of dominance. Nevertheless, it receives much less attention from the people who typically comment on antitrust issues. In previous posts I’ve given my view of the possible causes for this (see here) but today I’ll focus on a consequence: in State aid the Commission can get away with some absurd arguable or inconsistent decisions with no one even noticing. Fortunately, EU Courts are trying to remedy that with some sensible case-law, which also goes similarly unnoticed.

On the Legal Service. Some time ago I also wrote a post on the Legal Service (see here) which earned me some criticism from fellow practitioners who thought I was being too nice to “the enemy”. After some recent hearings in which I’ve been opposing and disagreeing with them I have to stand firm on commending their work, particularly given the acts that they sometimes are obliged to defend 🙂

On the press and competition law. In the past few weeks there were also a few cases on which I have worked that appeared in the general press, and this also triggered a reflection. The coverage that non-specialized press often does of competition cases is shameful subject to improvement, often trying to present everything under a simplistic light attempting to give the impression that everything is a scandal (what they have done with the alleged dairy cartel in Spain is a very good illustration of this). This makes me wonder whether that is also the case with regard to other issues that I don’t know first-hand. Like with lawyers, the differences between good and bad journalists can be enormous, and in Brussels there are competition journalists who know more about competition law than many lawyers, but at the national level…  Considering the increased politicization of competition law (see here), the messages conveyed to the general public are increasingly important, and wrong messages may well lead to wrong decisions.

On Spanish competition law. Some of you have recently inquired about why, despite being two Spaniards, Pablo and I don’t comment on Spanish competition law developments. Well, aside from the fact that the scope of the blog is wider, we’ll comment on those whenever we have something positive to say… The only recent welcome development which deserves a comment is the sensible Supreme Court Judgment on fines on which we still have to comment (I’m waiting to see whether the consequences are the apparently intended ones). This Judgment, by the way, reminded me of something that is applicable to many debates on competition law enforcement and judicial review: much more than institutional arrangements, what matters is having prudent and knowledgeable people doing the work.

On Pablo’s most recent posts: A few of you reacted in private to Pablo’s recent posts on Post Danmark II asking whether he’s ever liked any abuse of dominance case ever done by the European Commission. I thought that was a very good question (and have been teasing him with it for a few days) and one that it’d be interesting to pose him in public. So, Pablo?

I explained last week why it is difficult to infer from the case law an operational test for the assessment of standardised rebates. The purpose of this second post is to start a discussion about the principles that should guide the definition of such a test. I do not believe a single approach is possible or conceivable, and I welcome your views on the question. As in other areas, there is more than one substantive standard that would appropriately capture the principles underlying the case law. Regardless of one’s stance, I see the following ideas as a sensible starting point for a discussion around the definition of a legal test:

• The ECJ presumes since Hoffmann-La Roche that quantity rebates are pro-competitive (or, if one prefers, a valid form of competition on the merits). Any legal test should be devised in a way that is compatible with this principle (both in theory and in practice).
• Quantity rebates do not always have a negative impact on the competitive process. One of the fundamental lessons to draw from Michelin II is that exclusionary effects are not an inevitable consequence of the implementation by a dominant firm of a system of quantity rebates.
• In Post Danmark I, the Court considered that the award of selective price cuts to attract the customers of a competitor is not abusive by its very nature. Absent evidence of predatory pricing within the meaning of AKZO, it is necessary to show that the practice has (or is likely to have) exclusionary effects.

Standardised rebates vs. selective price cuts. I would conclude from the above that a system of standardised rebates like the one examined in Post Danmark II should only be deemed abusive under Article 102 TFEU where there is evidence of its actual or likely exclusionary effects. This is the substantive standard that applies to selective price cuts à la Post Danmark I. I cannot think of a reason why a scheme of standardised quantity rebates should be subject to a more stringent test. In Post Danmark I, the price cuts were specifically devised to attract the customers of a rival. What would justify a stricter treatment of price reductions that apply uniformly across the board?

If anything, a system of standardised rebates is clearly less suspicious and more obviously pro-competitive than the application of selective price cuts. In the case of quantity rebates, price reductions are the consequence of an increase in the amount acquired from the dominant firm. Selective price cuts, instead, reward a decision to switch suppliers. It is therefore safer to presume that the former reflect the cost savings made by the dominant firm. If this is so, I would claim that the need to provide evidence of an exclusionary effect in the case of quantity rebates became inevitable the moment Post Danmark I required evidence in this sense in relation to selective price cuts.

Establishing exclusionary effects in practice. The next question is of course that of how exclusionary effects are established in the context of a particular case. The issue can be approached in two ways. One possible approach is to assume the exclusionary effects of a rebate scheme from the fact that it is ‘loyalty-inducing’. This legal test would be problematic for several reasons, some of which have already been mentioned above and in last week’s post.

• One reason is that we know from the case law (the ‘experience’ mentioned by the Court in paragraph 51 of Groupement des Cartes Bancaires) that the exclusionary effects of rebate schemes cannot simply be assumed from their ‘loyalty-inducing’ nature, even when applied by dominant firms. They may or may not be manifested in the context of a particular case.
• Another reason is that the point of the selective price cuts examined in Post Danmark I was not conceptually different from that of ‘loyalty-inducing’ rebates. The price cuts in question sought to attract the customers of a rival. In other words, they sought to reward disloyalty. I cannot think of a valid reason why ‘loyalty-inducing’ rebates would be prima facie prohibited irrespective of the effects they produce and ‘disloyalty-inducing’ price cuts allowed absent evidence of exclusionary effects.
• Finally, one should bear in mind that all rebates are, at least to some extent, ‘loyalty-inducing’. Rebates, irrespective of their nature and objective, provide an incentive to buy more from a particular supplier. As a result, it seems possible to argue in virtually every instance that a given scheme is ‘loyalty-inducing’ and as such should be prohibited. Thus, not only would this approach fail to provide the basis for a practicable legal test but it would also contradict the principle whereby quantity rebates are presumed to be pro-competitive.

A second possibility is to endorse the logic underlying the Court ruling in Post Danmark I. In essence, this approach would involve showing that the practice it at least likely to harm the ability and the incentive to compete of equally efficient rivals. A legal test revolving around this question would have the advantage of consistency. The same substantive standard would apply to all practices that are not deemed abusive by their very nature. In the current state of the case law, this category includes not only quantity rebates and selective price cuts, but other practices like ‘margin squeezes’, the abusive nature of which is established in accordance with the same principles.

There are several ways in which the impact of a system of quantity rebates on rivals’ ability and incentive to compete can be established. The Court held in Post Danmark I that equally efficient competitors are unlikely to be excluded where the dominant firm charges above-cost prices. Accordingly, it would be necessary to show that the system of quantity rebates is in some way predatory (that is, that it forces rivals to sell below cost). I welcome views on the question, but I struggle to find how it would otherwise be possible to establish the exclusionary effects of schemes like the one examined by the Court in Post Danmark II. Such schemes do not seek to reward loyalty, nor are they conditional upon customers buying a certain share of their needs from the dominant firm. AKZO and Post Danmark I (as opposed to Hoffmann-La Roche and Delimitis) therefore look like the closest precedents.

A legal test based on these principles would not only have the advantage of consistency but would be infinitely easier to administer than the existing unstructured standard. We tend to forget, when thinking about these matters, that the AKZO test was developed by the Court, not the Commission. In its decision, the latter favoured an unstructured standard based on a range of factors. According to the Commission in AKZO, pricing below cost would not be a decisive criterion to establish the abusive nature of a predatory pricing campaign. The Court rejected this approach and crafted a substantive test confining administrative action within a set of boundaries well-defined in advance. Post Danmark II raises, in my view, the exact same issues.