12 May 2009

Forthcoming Art 82 case

Apparently tomorrow the Commission will issue its Intel decision. Anticipating a finding of abuse, there is a working paper anticipating the decision from the AAI, here.

Bar the size of the undertaking, I am not sure that this decision raises any big legal issues. What will be interesting to observe is how much more sophisticated the analysis will be. It seems the likely abuses are pretty standard exclusionary stuff designed to foreclose the entry of a particular firm.

Good luck to those who will read it - it will likely be as long as the Microsoft decision. Legal issues and analysis hidden/blurred by countless passages of technological information.

21 April 2009

No recoupment in predatory pricing claims

In France Télécom v Commission (Case C-202/07 P, judgment of 2 April 2007), the ECJ disagreed with the Advocate General and agreed with my earlier blog posting (I am under no illusion that the ECJ is aware of my blog) that recoupment is not a pre requisite for a finding of price predation. There are three salient points in this judgment.

1. Objective evidence of a plan to eliminate competition
The Court confirms that you can use an undertaking's internal documents to furnish evidence of a predatory strategy. Wrong, I think.

2. A restatement of Article 82 principles
Paragraphs 103-114 are at the heart of the issue under appeal and also offer a restatement of the ECJ's approach to Article 82. I leave it to others to reflect on how much the ECJ's view tallies with that in the Commission's Guidance Paper.

3. Recoupment
The basic reason why recoupment isn't needed is that the aim of Article 82 is to protect a competitive market structure. Thus harm to the competitive process, not harm to consumer welfare is the factor that motivates Article 82, contrary to the views of the Advocate General.
Unfortunately the Court also inserted paragraph 111 which says that the Commission may find a reason to use proof of likely recoupment in certain cases: (a) when pricing is below AVC and the defendant advances an objective justifictaion, the likelihood of recoupment may be used to deny the defence (highly unlikely); (b) when prices are below ATC and above AVC then proof of recoupment can serve to show that there is eliminatory intent. (This I think is wrong because it does not sit well with the principle that you want to protect the competitive process. Though you might argue that if one is keen to punish predation when it threatens the competitive process, any proof of a 'plan' to damage competition is unnecessary because it is a poor proxy.

14 April 2009

The Speeches of Commisioner Kroes

The speeches of Neelie Kroes are hard hitting and delivered with good humor. Of late the outgoing Commissioner has upped the entertainment value in her public pronouncements. Those wanting punchy quotes to adorn their essays would do well to look at the speech she gave on 30 March 2009 at the Economic Club of Toronto: 'The crisis and the road to recovery.' The layout is like a free verse poem, here are some of the more quirky lines:

"It may seem crazy to draw a line between this belief in a shared humanity and competition policy, but if you will indulge me – that is what I will try to do this morning." (candidate for a future exam question)

"Do we have complete answers to the current problems? No, I would be a rich woman if I did have the answers!" (not as good as the 'known unknowns' of another gifted speaker)

"We cut down the red tape and favoured pragmatism over some of the ideas and processes that had put competition policy in a ghetto marked 'for lawyers only'." (but a pretty well remunerated ghetto of practitioners)

"After four years – when the financial and then economic crisis hit - the systems were lean and fast and ready to deal with a moving target. It's an approach that Wayne Gretzky calls 'skating to where the puck is going to be, not to where it has been.'" (the speech has another quote from the great man, plus a reference to Margaret Atwood)

"We aren't about to let EU Member States create inefficient national champions so they can patch up their pride.
Nor do we want to see two struggling banks cripple each other through a botched merger, or create another bank that is 'too big to fail.'
So it is business as usual in merger control – for all our sakes."
(serious point here - line 2. The Commission does not necessarily have the power to prevent a merger that causes a bank to become too big to fail. Such a bank need not have market power but is so interconnected in the financial system that its failure would spell disaster across the banking sector. So, is she hinting that the Commission may be prepared to intervene in a case where the merger does not substantially impede effective competition but where the merged entity is too big to fail?')

'Tough love is certainly the way to describe our subsidy control in banking and other sectors.' (another future exam question)

'We are working like hell to make recovery happen in Europe.' (puzzled looks from the audience)

'I want us to be able to turn around and look our grandchildren in the eyes and say that we did the right thing by them. ' (audience by now wiping tears away)

26 September 2008

France Telecom judgment in peril?

Advocate Ganeral Mazák has issued a call for less aggressive use of predatory pricing in his Opinion of 25 September 2008 relating to the Wanadoo decision where the Commission found that the appellant charged predatory prices below variable costs (AVC) until August 2001, and above AVC but below average total cost (ATC) from August 2001 onwards, as part of a plan to pre-empt the market in high-speed internet access during a key phase in its development. However, I think his views should not be followed by the ECJ.

Essentially the appellant won on three grounds:
1) CFI failed to state reasons when commenting on a dominant firm's right to align prices
2) CFI falied to state reasons why recoupment need not be shown
3) Likely recoupment must be demonstrated by the Commission in predatory pricing cases

In addition the AG also said that in his view a dominant firm should, on occasion, be allowed to align its prices with those of competitors.

Each of these four conclusions can be criticised.

1) Failure to state reasons regarding the dominant firm's right to align prices to competitors.
The passage of the CFI under appeal is this: "WIN cannot therefore rely on an absolute right to align its prices on those of its competitors in order to justify its conduct. Even if alignment of prices by a dominant undertaking on those of its competitors is not in itself abusive or objectionable, it might become so where it is aimed not only at protecting its interests but also at strengthening and abusing its dominant position." [187]

The AG's criticism was scathing because the CFI did not apply this paragraph to the facts at hand. In his words the CFI "should therefore have assessed whether or not that (new) formulation applied to the facts in the instant case, something which it manifestly did not do." [49]
With respect, this is wrong. Look at the passage in bold above and the facts of the case. On the facts of the case the CFI ruled that the firm's condct was predatory (below AVC for a period and between AVC and ATC with intention for another period). Therefore the pricing fell squarely withing AKZO [71 and 72]. So the behaviour is in itself abusive. Accordingly there was no need for the CFI to assess the formulation. It is merely an obiter dicta as to what the law is.

2) Failure to state reasons about recoupment
Here the AG notes that in Tetra Pak 2 the ECJ held that proof of likely recoupment was unnecessary "in the circumstances of that particular case" and criticises the CFI for not expaining whether there are also circumstances in this case that allow a finding of predatory pricing without recoupment. [58-60 of the Opinion]
This is a plausible line of attack, but another view can be taken of what the CFI said. It is worth quoting the CFI in France Telecom at length:
226 In relation to the recoupment of losses, the Court of Justice (in Tetra Pak 2) added, in paragraph 44 of that judgment: ‘[I]t would not be appropriate, in the circumstances of the present case, to require in addition proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalise predatory pricing whenever there is a risk that competitors will be eliminated. The Court of First Instance found, at paragraphs 151 and 191 of its judgment, that there was such a risk in this case. The aim pursued, which is to maintain undistorted competition, rules out waiting until such a strategy leads to the actual elimination of competitors.’
227 In line with Community case-law, the Commission was therefore able to regard as abusive prices below average variable costs. In that case, the eliminatory nature of such pricing is presumed. In relation to full costs, the Commission had also to provide evidence that WIN’s predatory pricing formed part of a plan to ‘pre-empt’ the market. In the two situations, it was not necessary to establish in addition proof that WIN had a realistic chance of recouping its losses.

So the reason why in Tetra Pak 2 proof of likely recoupment was unnecessary was because the Commission had proved that there was a risk that a competitor would be eliminated. This means that the risk that a competitor would be eliminated by predatory pricing one relevant circumstance when proof of likely recoupment is unnecessary. And at [227] the CFI gives reasons in conformity with this because the facts showed that the competitor was put at risk.

Of course you can argue that this is a bad reason. It is bad because it means that as soon as you satisfy the conditions set out in AKZO [71 or 72] then you have shown a risk of elimination and so you never need recoupment. But then perhaps this is what AKZO actually stands for (see below)

3) Likely recoupment in predatory pricing cases
This point is the most relevant for future cases. The AG takes the view that "case-law requires the possibility of recoupment of losses to be proven." [69] The reasoning is based on the fact that because the ECJ in Tetra Pak 2 said that proof of likely recoupment was unnecessary on the facts of that case, that it must mean that as a general rule proof of likely recoupment is necessary.
I think this is wrong. The bold part of para 44 of Tetra Pak 2 (see above) tells you that the rationale for penalising predtory pricing is to avoid the risk that a competitor is eliminated. Therefore whether the dominant company recoups or not is unnecessary, it is the risk to competitors that is the Court's concern.

The AG says that proof of likely recoupmet is supported by AKZO [71]. Let us consider this passage in full:
"Prices below average variable costs (that is to say, those which vary depending on the quantities produced) by means of which a dominant undertaking seeks to eliminate a competitor must be regarded as abusive. A dominant undertaking has no interest in applying such prices except that of eliminating competitors so as to enable it subsequently to raise its prices by taking advantage of its monopolistic position, since each sale generates a loss, namely the total amount of the fixed costs (that is to say, those which remain constant regardless of the quantities produced) and, at least, part of the variable costs relating to the unit produced. "

The passage in bold would seem to me to indicate that there is a presumption that recoupment is likely if a firm prices below cost. A presumption that does not therefore require the Commission to show likley recoupment. But, perhaps, a presumption that may be rebutted by the dominant firm who could try and say that recoupment is unlikely because, for example, it is selling off old stock.

Nor does Hoffmann La Roche [91] support the necessity of recoupment, quite the opposite: it supports a finding of abuse whenever the degree of competition in the market is hindered. This occurs once the rival leaves.

One can however feel for the AG because he aligns himself with the views of AG Jacobs in Bronner that the purpose of Art 82 is to protect consumers, not individual competitors. However not all Advocates General believe this (see AG Kokott for instance).

4) Price alignment by a dominant firm
Should a dominant firm be entitle dto align its prices with those of competitors? The plea is inadmissible, but the AG suggests that "one should allow for circumstances where a dominant undertaking is exceptionally permitted to show that its pricing below average variable cost is objectively justified. " [95]
True, most commentators would say that one such circumstance is when the dominant firm is selling off old stock. The difficult question is whether the dominant firm should do this when it is doing so with the clear intention of damaging a new entrant in a market where it was the incumbent for many years.

The AG is calling for a major change in the law on below cost pricing, by placing a greater focus on the impact on consumer welfare and less on the economic freedom of market participants. The problem is that the case law which seemingly creates the basis for this shift does not support it. AKZO and Tetra Pak 2 are clearly cases where the dominant concern is the preservation of rivalry, of a competitive process. The radical change called for here should be made by advising the Court to change its approach rather than by asking the court to reinterpret its case law.

I hope the ECJ does not follow the AG on the first two points, the CFI gave reasons that can be understood. That they are bad reasons is another matter, so perhaps the ECJ could require proof of likely recoupment. Though it might want to note that the requirement to show this in the US has led to no successfu predatory pricing prosecution as far as I know. Is the ECJ so Chicagoan to want this result?

04 May 2008

Limits to Competition

A peculiar leader in The Guardian of 26 April 2007, When Low Prices Come a a Cost. Commenting on the OFT's recent investigation of price fixing in tobacco and the Competition Commission's emergent thinking on BAA (holder of exclusive rights to several UK airports), it notes how while competition law enforcement might reduce prices and increase consumption, there is a doubtful public interest in encouraging smoking and more flying. It suggests that sometimes competition enforcement that is blind to the negative spillovers of the market being regulated might need tempering. Three responses are possible:
1) Rubbish: it is up to other regulatory fora to deal with the externalities directly.
2) Agreed, and the solution is to give the competition authority a degree of prosecutorial discretion where it can choose not to take a case where the overall balance of the result is negative - so prosecute a cartel in vitamins but not one in the tobacco market. (But a weak line of argument.)
3) Agreed, bu in UK competition law the Competition Act 1998 provides for how this kind of issue should be dealt with. Schedule 3, Paragraph 7 Competition Act 1998 empowers the government to determine that the applicaion of competition law to a given sector can be excluded when 'exceptional and compelling reasons of public policy' exist.
(a) An existing exclusion exists in the context of firms involved in the the development of 'complex weapons', the Competition Act 1998 (Public Policy Exclusion) Order 2007.
(b) The government appear to be considering an exclusion for off licence shops to allow them to compete less aggressively as a means of reducing alcohol consumption, or to allow supermarkets to collude to agree to stop heavy discounts. (Can anyone find some of the Home Office or Dept of Health studies upon which these proposals are based?)

Two questions about this legal basis:
(i) is an exclusion compatible with EC competition law? (cf. Article 3, Regulation 1/2003, internal market laws, Arts 3(1)(g), 10 and 81 EC).
(ii) can the government really secure an exclusion to allow alcohol retailers to restrict competition? Is public health comparable to military security as a public interest ground?

19 April 2008

Wanted: Cartels - reward £100,000 (maybe)

The OFT has recently announced that it is prepared to offer financial rewards of up to £100,000 (in exceptional circumstances) for information about cartel activity.

The sceme is innovative. In the literature I think some had suggested paying the firms, but this scheme is more clever because it pays individuals. Two problems strike me in reading the OFT announcement.

1) The award is entirely at the discretion of the OFT - there may be no investigation if the OFT decides it is not a priority case (no investigation, no reward); and the level of the award is up to them. From an economic analysis of incentives the certainty of a good reward is what gets people interested in taking a risk, so perhaps the OFT is too stingy.
2) The intersection between leniency policy and this 'bounty' scheme. The OFT says that an employee who is involved in the cartel will not (normally) get a bounty but should apply for leniency. But then this is qualified further by suggesting that employees with peripheral involvement with a cartel may get a bounty anyway. Given that leniency works well, do we really want to mess with it?

There is obviously a third risk: revenge. The name Stanley Adams comes to mind, see here for more detail. And there is a good book too: S. Adams Roche v Adams (Jonathan Cape, 1984) which was then made into a film, A Song for Europe, starring David Suchet.

One wonders whether an employee's best interests are to report the cartel to his manager, so that he helps the company deal with the cartel in the best way possible (e.g. apply for leniency etc.) The rewards of such loyalty may be worth more than the uncertain bounty coupled with the risks inherent in calling the OFT.

11 April 2008

Snails in Bottles

After two heavy postings, here is something lighter, and not competition law related; the future of law assignments maybe?

Donoghue v Stevenson

If you aren't an English or Scots lawyer, this is the case being discussed.