Chillin'Competition

I have finally read the report jointly issued by the Autorité de la Concurrence and the Competition & Markets Authority on the economics of open and closed systems and published about a month ago. The topic is exciting, the timing ideal and the initiative itself most interesting for several (both substantive and institutional) reasons. It remains to be seen whether joint action of this kind will become more frequent in the years to come.

The report seems to be broadly in line with consensus positions. Both relatively open (say, Android) and relatively closed (say, iOS) systems can have pro- or anticompetitive effects depending on the circumstances. As a result, there is no reason, from a competition law standpoint, to favour one over the other, or to seek an allegedly optimal level of openness. The fact that the report restates these commonly known principles does not make it any less interesting or relevant. Well-established positions tend to be forgotten all too often, and it is reassuring that two leading authorities embrace them publicly.

My only criticism (admittedly an incredibly unfair one!) of the report is that it is too abstract and avoids the use of concrete examples. When it is said that prohibiting closed systems could lead to substantial efficiency losses, advocates of open systems tend not to take the warning very seriously. Efficiency, when dealt with as an abstract concept, seems to be inherently suspicious and as such can be disposed of very easily. ‘Who wants efficiency when you can have freedom?’ has become a fairly frequent argument, even in published work.

It is only by referring to concrete examples that a discussion about these matters becomes meaningful. Apple launched its iPhone as a relatively closed system. It was even more closed in the early days than it is now – remember that Apple preferred to offer the phone through a single mobile provider in each country. It would be difficult to deny that the iPhone and the revolution in mobile telephony to which it gave rise have been immensely beneficial for consumers and society as whole (and please note that this statement comes from a never-ever-Apple person!).

Cable television was created as a closed system (something that was deemed problematic during the 1970s in the US). We may never have witnessed the dawn of a new ‘golden age’ in television if network providers had been prevented from keeping tight control of content. HBO was not created as a stand-alone venture, but at the initiative of a cable operator that wanted to attract subscribers to its system. The phenomenal growth of satellite pay television in countries like the UK during the mid-1990s owes much to the integration between the two activities.

Now that the battle seems to have been lost forever in the context of telecommunications regulation – net neutrality without a compelling theory, I am afraid, is here to stay – we can only hope that competition authorities do not fall into the trap of making sweeping assumptions or favouring across-the-board remedies. This is a risk that I have already identified in some of my pieces. I see a worrying tendency to assume – both in abuse of dominance and in merger cases – that the creation of a ‘level playing field’ in vertical settings is by definition conducive to more competition and innovation. This is not necessarily the case, and, as I say above, the report is a fine reminder that things are far more complex in practice.

– On Friday 30 January we, at the IEB course, will be holding a seminar in Madrid, coordinated by Fernando Castillo and Eric Gippini, which will feature three panels: one on judicial review in competition cases (with Manuel Campos -Spanish Supreme Court-, Santiago Soldevila -former GC judge, now at the Spanish Audiencia Nacional- and Helmut Brokelmann -MLAB-; another on the application of competition law to public conduct (with Francisco Marcos -IE Law School-, Fernando Castillo – EC’s legal service- and José Luis Buendía -Garrigues-); and a third one on “Life after Cartes Bancaires“ (with Nicholas Khan -EC’s Legal Service-, Xavier Ruiz Calzado -Latham & Watkins- and a handsome lawyer going by the name of Alfonso Lamadrid -Garrigues-). For more info please click here or send an email to competencia@ieb.es.

– On Friday 6 February the editors of the Competition Law Journal will hold the 9th Junior Competition Conference, which will have two themes, namely “Control of unilateral conduct and ‘the Goldilocks dilemma’: too much, too little or just right?” and “The new frontier: competition law in the financial services sector”. The conference programme can be found here. Those interesting in attending may contact the organizers at operations@catribunal.org.uk

– On Thursday 19 February ERA will host a workshop in Brussels on “Dawn Raids in Practice: Developments in Case Law and Enforcement”. The workshop will examine the latest enforcement trends and the impact of recent case law from the CJEU and the ECtHR on the conduct of dawn raids by the European Commission and national competition authorities. More info is available here.

– On Friday 20 February we, again at the IEB in Madrid, will host a seminar on recent developments in abuse of dominance and merger control coordinated by Cecilio Madero -Deputy Director General, DG Comp-, Nicholas Banasevic -Head of Unit at DG COMP- and Milan Kristof -Référendaire at the ECJ-.

– A bit later, on 15 May, the University of Leeds will hold a (free) conference on Contemporary Challenges in Competition Law featuring, among top-notch speakers, Pablo and Nicolas. More info is available here.

– And, in a few days, Chillin’Competition will be resuming its Friday Slot section with a quite special interview. More info coming soon…

 (by Sam Villiers, Garrigues, Brussels, not pictured below)

With the Golden Globes this weekend and the Oscars fast approaching, the 2014 awards season is officially upon us. In this light, the FT ran an interesting piece yesterday (see here) on the highlights of 2014….in the world of cartel fines. I don’t know whether one can accurately describe there being ‘winners’ and ‘losers’ in cartels, but the article – based on a report by A&O (see here) – certainly highlights some interesting general trends in global cartel fining.

The report explains that total cartel fines dished out by the world’s competition authorities in 2014 reached a new level of $5.3bn, up 31% on the previous year’s (record breaking) total. And the nominees are…..sorry, I mean…the markets handing out the most fines in 2014 are:

• Europe leads the way, having handed out €1.7 bn ($2.3 bn), although didn’t quite make it to the giddy heights of its 2013 level of €2.5bn. The report picks out the German and French competition authorities as having enjoyed particularly vintage years.
• Brazil’s CADE (Administrative Council for Economic Defense) had a record-breaking year, with cartel fines totaling $1.6 bn. This figure includes the imposition of the second largest fine ever given by a competition watchdog, that of $1.39 bn for a decades-long cement cartel.
• South Korea’s KFTC also broke its fining record, doling out an impressive $1.01 bn worth of fines.
• In the 2014 fiscal year, the US DOJ Antitrust Division imposed a modest $861m of fines, 15% down from the previous year. Plus, the lion’s share of this total came from fines handed out to the auto parts cartelists.

It is quite hard to discern too many long-term trends from these isolated 2014 numbers as cartel investigations are characterised by such long gestation periods; the time between the opening of a case file and the final decision by an authority or court can take years. It would perhaps be more indicative of general trends if one could look at the total fines given over 5 or 10 year cycles. In any case, the numbers are interesting in themselves.

One general trend that did particularly catch my eye – in the context of the debates around reform of competition enforcement in Europe – is the seemingly large number of jurisdictions allowing individual offenders to face prison sentences. It is interesting to note that in 2014 a Brazilian court imposed a 10 year prison sentence (and a $156m fine) on an executive for bid rigging. At the level of DG Comp, I would imagine that we are some time away from this.

Oh, and one final point: according to the FT, bistros (the noisy, French variety one would presume – easier not to be overheard ;-)) and hotels were shown to be the preferred cartelist meeting spots. Not surprising I guess, but zero points for imagination…  That said, if anyone reading this is in search of a cartel venue, I hear Alfonso’s parents have a special offer for cartellists at their hotel 😉

Ideas originating in North America cross the Atlantic sooner or later. The view that competition law should be concerned with choice, rather than with a particular measure of welfare, or another objective, seems to be gaining popularity in the EU. In addition to the references to choice found in Commission decisions and other statements of policy, there is a growing strand of literature emphasising the importance of choice in the competitive process.

You have certainly guessed from the title that I am quite sceptical about this move, and that I find express reliance on choice by competition authorities to be problematic in certain instances. More than anything, I see this trend as the repetition of past mistakes. As such, it also provides a suitable topic for the first post of the year, when we all think about resolutions. Indeed, ‘don’t repeat past mistakes’ is probably the best resolution of which one can think. Before I forget, by the way: happy 2015 to all!

There is already quite a lot written on competition law (or antitrust) and choice, which means that the main arguments are already well-known. Saying that competition law should be about choice amounts in a way to stating the obvious. Preserving the sources of competitive pressure to which firms are subject can be expected to lead to increase choice for consumers, in the same way it can be expected to lead to lower prices.

It is also abundantly clear that the competitive process often leads to what look like choice restrictions. By definition, selective distribution limits choice for consumers, insofar as they may only be able buy the product in question from certain retailers. Yet such systems are known to be pro-competitive (they tend to promote competition and thus choice). They fall outside the scope of Article 101(1) TFEU altogether in certain instances. The same can be said of franchising. It would certainly enhance choice to have McDonald’s hamburgers sold alongside Pizza Hut products. However, the ECJ held very clearly in Pronuptia that franchisors may take steps to protect their know-how and their reputation without infringing Article 101(1) TFEU.

In light of the above, it is not clear why choice as such would be advocated after the experience acquired over many decades. I do not believe choice advocates claim that we should prohibit altogether selective distribution, franchising or other vertical restraints. I am certain that they accept free-riding as a concern that can justify choice restrictions in such and other instances, and I am also sure that they accept the idea that the protection of the competitive process tends to lead to increased choice. In this same vein, I do not think they have in mind an alternative, internally coherent and fully-fledged standard revolving around choice.

What are we left with, then? It is difficult to tell. My impression is that choice could be useful in practice as something akin to a ‘back-up’ quasi-standard; that is, as a contemporary abracadabra that would allow for intervention when conventional analysis would not. Remedial action is not warranted under the established framework? Well, one can always resort to the vague idea of choice to make a case for intervention. It may not be as robust as a properly articulated theory of harm, but it may sound plausible and, hey, sure nobody is heartless enough to be against consumer choice.

If this is really what is going on, there is every reason to be concerned. It shows, first and foremost, that the lessons of history are easy to forget. We have come a long way to make enforcement sensible and predictable. It would seem, however, that the temptation to rely on nebulous concepts will never fade. Expanding the boundaries of intervention will always be appealing. The good news is that EU competition law is now much better equipped to deal with insufficiently robust and/or poorly articulated claims.

The revived interest in exclusive dealing and rebates forces us to come back to some of the concepts around which debates revolved in the mid-2000s. I had not anticipated that there would still be some confusion about the meaning of some of these concepts. In particular, I thought it was clear what lawyers and economists meant when they referred to the ‘form-based’ approach to Article 102 TFEU. I now realise that a post on the matter is not only appropriate but even necessary to help the ongoing discussions (which I hope will remain as lively as they have been in the past few months).

The prohibitions set out in Articles 101 and 102 TFEU may be triggered (i) by the practice itself; or (ii) by the effects of the said practice. Under the first approach, the practice, if established by an authority or a private claimant, will be prohibited unless the dominant firm is able to put forward an objective justification or unless the parties to the agreement are able to show that the conditions set out in Article 101(3) TFEU are fulfilled. Under the second approach, it would be necessary to show that the practice under consideration has, or is likely to have, anticompetitive effects. To be sure, it would still be possible to justify the conduct even under this second approach.

The expression ‘form-based’ is used (and, as far as I understand, has always been used) to refer to the first of these two approaches. A ‘form-based’ approach to some practices seems wholly uncontroversial. Cartels, for instance, are prima facie prohibited regardless of their effects (and irrespective of whether they have actually been implemented). Thus, any claims that the cartel is on the whole pro-competitive (as in BIDS) would have to be considered under Article 101(3) TFEU. The same is true of agreements aimed at restricting parallel trade, as confirmed by the ECJ in Glaxo Spain (more about parallel trade restrictions soon).

Some practices, including exclusive dealing and loyalty rebates, are treated like cartels under Article 102 TFEU (but not under Article 101 TFEU). In other words, their legality is established in accordance with a ‘form-based’ approach. If some aspects of the case law have been criticised, this is because exclusive dealing and loyalty rebates differ significantly in their purpose and effects from cartels. As I explain in my paper, experience and economic analysis show that it is appropriate to presume an anticompetitive intent in the case of a cartel, but not in relation to exclusive dealing and loyalty rebates. Similarly, one can safely assume that, if implemented, a cartel will have anticompetitive effects. As cases like Michelin II and British Airways show, the same cannot be said of exclusive dealing and rebates.

As can be seen, references to the ‘form-based’ approach sometimes followed by EU courts in Article 102 TFEU cases have nothing to do with the fact that legal analysis involves by definition the use of categories and bright-lines, nor are they a plea for the unstructured balancing, on a case-by-case basis, of the pro- and anticompetitive effects of a practice. These references are simply used to convey the idea, enshrined in the Commission Guidance, that a ‘form-based’ approach to enforcement is not appropriate for the most common categories of potentially abusive conduct.

[I took the above picture this morning on my way to the LSE. Londoners should be able to guess where!]

A great initiative right before the weekend. Professor Alison Jones and her colleagues at King’s College London have launched a Competition Law Moot. We are convinced it will be a great success. I hope LSE will send a team. Alfonso, in turn, is hoping to set up Chillin’ Competition Team with postgraduate students from all over Europe. Do not hesitate to contact him. Please see below for details (about the moot, not about Alfonso’s idea):

The Dickson Poon School of Law, King’s College London is very proud to offer students from across the world the opportunity to participate in the Herbert Smith Freehills Competition Law Moot, the first international competition law mooting competition to be held at King’s. The competition is generously sponsored by Herbert Smith Freehills, one of the world’s leading law firms.

In 2015, we will invite 12 teams to compete in a moot competition in the home of The Dickson Poon School of Law, Somerset House East Wing, London. The competition will provide an excellent opportunity for students to practise and improve advocacy skills in front of a judging panel, drawn from international competition law specialists.

Problem question.

Rules.

Timeline.