Exam time at LSE, here a couple of fresh publications coinciding with revision. I'll post a 'new articles' review shortly, but now just two reports:
OFT on damages: the OFT launched a discussion paper to stimulate debate on private litigation. It starts off with a set of six general principles to inform the evolution of the law and is well worth looking through for some of the latest thinking.
FTC and DOJ: Report on Antitrust and Intellectual Property. Much scepticism on refusal to licence as an antitrust offence. Compare the European attitude to that in this report.
24 April 2007
05 April 2007
American Modernization Commission Report Published
The AMC released its report on 3 April, making several recommendations, a few highlights of relevance are summarised below. The AMC is the latest in a regular review of antitrust laws, one of the more well-kown previos commissions is the 'Neal Report' that had suggested stronger action against oligopoly markets.
The AMC's report finds the state of antitrust law as essentially sound. Importantly the report emphasises that antitrust is not about making markets work better. It is not an industrial policy instrument. As I suggest in my book, EC Competition Law is still seen as forming an important part of the Community's industrial policy.
Highlights of the report include:
1) abolish the Robinson-Patman Act (this is a much disliked statute prohibiting price discrimination).
2) Bundled rebates should be handled differently, suggesting a three stage test: (a) after allocating all discounts and rebates attributable to the entire bundle of products to the competitive product, the defendant sold the competitive product below its incremental cost for the competitive product; (b) the defendant is likely to recoup these short-term losses; and (c) the bundled discount or rebate program has had or is likely to have an adverse effect on competition.
The gist of this is broadly to apply a predatory pricing type test to rebates. This is along similar lines to the EC Commission, although it is a much less aggressive standard than that advocated by the Commission or that applied in British Airways (see earlier post).
3) Facilitate private litigation by allowing law suits by direct and indirect purchasers. The idea is that both types of plaintiffs be able to sue, and that they damages (based on the higher prices charged by the defendant) are divided up between direct and indirect purchasers. This is interesting because there are similar debates in Europe. For example, in Germany the law provides that direct purchasers can sue but indirect purchasers cannot. Is this a matter for Community Law?
The AMC's report finds the state of antitrust law as essentially sound. Importantly the report emphasises that antitrust is not about making markets work better. It is not an industrial policy instrument. As I suggest in my book, EC Competition Law is still seen as forming an important part of the Community's industrial policy.
Highlights of the report include:
1) abolish the Robinson-Patman Act (this is a much disliked statute prohibiting price discrimination).
2) Bundled rebates should be handled differently, suggesting a three stage test: (a) after allocating all discounts and rebates attributable to the entire bundle of products to the competitive product, the defendant sold the competitive product below its incremental cost for the competitive product; (b) the defendant is likely to recoup these short-term losses; and (c) the bundled discount or rebate program has had or is likely to have an adverse effect on competition.
The gist of this is broadly to apply a predatory pricing type test to rebates. This is along similar lines to the EC Commission, although it is a much less aggressive standard than that advocated by the Commission or that applied in British Airways (see earlier post).
3) Facilitate private litigation by allowing law suits by direct and indirect purchasers. The idea is that both types of plaintiffs be able to sue, and that they damages (based on the higher prices charged by the defendant) are divided up between direct and indirect purchasers. This is interesting because there are similar debates in Europe. For example, in Germany the law provides that direct purchasers can sue but indirect purchasers cannot. Is this a matter for Community Law?
03 April 2007
Resale Price Maintenance: the per se rule is going, going...
The US Supreme Court is hearing a case (Leegin Creative Leather Products, Inc. v. PSKS, Inc.) where it is being asked to overrule the rule which makes resale price maintenance agreements per se illegal. Obviously these are also black listed in the EC under the Block Exemption for Vertical Restraints. Some think that the Court will overrule the per se rule established in Dr. Miles, and judging by the transcripts of the oral argument, this seems likely.
I'll debate the minutiae of the rule another time, but I can't help notice that the US government has submitted an amicus brief supporting the overruling of the old cases. This is how antitrust authorities should be getting rid of old doctrines. Not by publishing guidelines in the hope that people will forget the case law. Reform of Article 82 in Europe should follow this track: incremental or radical alterations by the European Court of Justice that erode precedents that are seen as unsuitable.
I'll debate the minutiae of the rule another time, but I can't help notice that the US government has submitted an amicus brief supporting the overruling of the old cases. This is how antitrust authorities should be getting rid of old doctrines. Not by publishing guidelines in the hope that people will forget the case law. Reform of Article 82 in Europe should follow this track: incremental or radical alterations by the European Court of Justice that erode precedents that are seen as unsuitable.
02 April 2007
Discussion Paper in the Doldrums?
In 2005 the Commission announced a review of the application of Article 82 to exclusionary abuses leading to the publication of a Discussion Paper in December 2005. The gist of this was to move enforcement away from the current overly aggressive policy towards an approach based on 'mainstream economics'. Has the Court's recent judgment in Case C-95/04P British Airways v Commission (15 March 2007) killed the Discussion Paper off?
The case addressed BA's rebate scheme to travel agents. Virgin had complained and the Commission found an abuse even though Virgin's market share increased during the period the abuse was taking place. As I explain in Chapter 6 there are several policy reasons that animated the Commission's decision, not least the wish to liberalise air transport. The judgment of the Court is unremarkable, in that it confirms the more thorough analysis of the Court of First Instance, and in so doing confirms how easy it is to prove that rebates are abusive. The Commission needs merely to show that rebates have a loyalty effect, and a tendency that this will restrict competition, which is established by the first step in that competitors are selling less goods because the rebates make retailers loyal to the dominant firm. The burden of proof is very low. I think the Discussion Paper of 2005 would probably require somewhat more evidence before condemning rebates. So is the discussion paper dead after this judgment?
Advocate General Kokott
Her opinion is a must read. It is a reaffirmation of the 'ordoliberal' understanding of competition law, and agree with her or not, she makes a clear case for the status quo. Listen in particular to her general reflections on competition law:
68. The starting-point here must be the protective purpose of Article 82 EC. The provision forms part of a system designed to protect competition within the internal market from distortions (Article 3(1)(g) EC). Accordingly, Article 82 EC, like the other competition rules of the Treaty, is not designed only or primarily to protect the immediate interests of individual competitors or consumers, but to protect the structure of the market and thus competition as such (as an institution), which has already been weakened by the presence of the dominant undertaking on the market. In this way, consumers are also indirectly protected. Because where competition as such is damaged, disadvantages for consumers are also to be feared.
So antitrust in Europe protects an 'institution', or perhaps a market structure. In this light, BA's existing competitors form part of the institution that allows for competition in the airline market. This is not the language of mainstream economics the Commission wishes to embrace. Now track back and listen to her take on the Discussion Paper:
28. In this context it is immaterial how the Commission intends to define its competition policy with regard to Article 82 EC for the future. Any reorientation in the application of Article 82 EC can be of relevance only for future decisions of the Commission, not for the legal assessment of a decision already taken. Moreover, even if its administrative practice were to change, the Commission would still have to act within the framework prescribed for it by Article 82 EC as interpreted by the Court of Justice.
So basically, in her view there is no chance for the Commission to make any significant departure from the case law, since she is quite content that the current case law protects the 'institution' of competition.
The Court of Justice
There is slightly more hope for bits of the Discussion Paper to survive in the Court's judgment. At para.86 the Court accepts an efficiency defence designed along the lines of Article 81(3), which the Discussion Paper also envisaged. But even the Court at paragraph 106 backs up the Advocate General and decides that there is no need to prove consumer harm to find an abuse because an abuse is found when there is an impact on an 'effective competition structure.' And since loyalty rebates make retailers buy less of competitors' goods, market structure is affected.
One thought: in Oscar Bronner, the Court said that the defendant's alleged 'essential facility' was not essential because it was plausible for all competitiors to get together and design an alternative. Should the Court in rebate cases not take a similar line? BA can give deep discounts because of its financial strengths. But then can Virgin not enter into some sort of agreement with other airlines and offer packages of tickets to travl agents? Given that BA's maket share was 40% and falling, it should not have been too hard for say three airlines to offer some form of collective rebate to lure travel agents to promote their tickets. Instead, the law in this case is that no other company, idividually, has a big enough 'financial base' (para.76) to garnt rebates that compete with BA. This line seems to always favour small firms against big ones. As I argue in my book in chapter 5, dominance is too frequently associated with 'commercial power'. This is another manifestation of that approach.
In the national courts
Assume (as is expected) that the Commission publishes Guidelines on Article 82 this summer. Plaintiff wants to take a case in a national court for alleged abusive rebates. Does the national court apply the Guidelines (which may make life harder for plaintiff) or follow the case law? It seems to me that a national court will more likely follow precedent than a soft law measure. If so, even if the Commission follows its own guidelines and stops taking up the kinds of cases it took in the past, the current law on rebates may well live on in national courts.
It would be remarkable if national courts were to enforce Article 82 in one way and the Commission in another, but this is what you get when you try to reform hard law (cases) through soft law (guidelines). The Commission might have been better off admitting that its approach to Art 82 was wrong and start from scratch. But this was politically impossible because when the Discussion Paper was being worked on there were several significant cases going through the Courts (Michelin 2 and BA on rebates, Wanadoo on predatory pricing, and Microsoft on refusals to deal and tying...) With the case law still in development, should one not perhaps have waited before considering reform? (On this last point, and thinking VERY laterally, perhaps one can draw lessons from Giandomenico Majone's important critque of the European Union in his 2005 book Dilemmas of European Integration.)
The case addressed BA's rebate scheme to travel agents. Virgin had complained and the Commission found an abuse even though Virgin's market share increased during the period the abuse was taking place. As I explain in Chapter 6 there are several policy reasons that animated the Commission's decision, not least the wish to liberalise air transport. The judgment of the Court is unremarkable, in that it confirms the more thorough analysis of the Court of First Instance, and in so doing confirms how easy it is to prove that rebates are abusive. The Commission needs merely to show that rebates have a loyalty effect, and a tendency that this will restrict competition, which is established by the first step in that competitors are selling less goods because the rebates make retailers loyal to the dominant firm. The burden of proof is very low. I think the Discussion Paper of 2005 would probably require somewhat more evidence before condemning rebates. So is the discussion paper dead after this judgment?
Advocate General Kokott
Her opinion is a must read. It is a reaffirmation of the 'ordoliberal' understanding of competition law, and agree with her or not, she makes a clear case for the status quo. Listen in particular to her general reflections on competition law:
68. The starting-point here must be the protective purpose of Article 82 EC. The provision forms part of a system designed to protect competition within the internal market from distortions (Article 3(1)(g) EC). Accordingly, Article 82 EC, like the other competition rules of the Treaty, is not designed only or primarily to protect the immediate interests of individual competitors or consumers, but to protect the structure of the market and thus competition as such (as an institution), which has already been weakened by the presence of the dominant undertaking on the market. In this way, consumers are also indirectly protected. Because where competition as such is damaged, disadvantages for consumers are also to be feared.
So antitrust in Europe protects an 'institution', or perhaps a market structure. In this light, BA's existing competitors form part of the institution that allows for competition in the airline market. This is not the language of mainstream economics the Commission wishes to embrace. Now track back and listen to her take on the Discussion Paper:
28. In this context it is immaterial how the Commission intends to define its competition policy with regard to Article 82 EC for the future. Any reorientation in the application of Article 82 EC can be of relevance only for future decisions of the Commission, not for the legal assessment of a decision already taken. Moreover, even if its administrative practice were to change, the Commission would still have to act within the framework prescribed for it by Article 82 EC as interpreted by the Court of Justice.
So basically, in her view there is no chance for the Commission to make any significant departure from the case law, since she is quite content that the current case law protects the 'institution' of competition.
The Court of Justice
There is slightly more hope for bits of the Discussion Paper to survive in the Court's judgment. At para.86 the Court accepts an efficiency defence designed along the lines of Article 81(3), which the Discussion Paper also envisaged. But even the Court at paragraph 106 backs up the Advocate General and decides that there is no need to prove consumer harm to find an abuse because an abuse is found when there is an impact on an 'effective competition structure.' And since loyalty rebates make retailers buy less of competitors' goods, market structure is affected.
One thought: in Oscar Bronner, the Court said that the defendant's alleged 'essential facility' was not essential because it was plausible for all competitiors to get together and design an alternative. Should the Court in rebate cases not take a similar line? BA can give deep discounts because of its financial strengths. But then can Virgin not enter into some sort of agreement with other airlines and offer packages of tickets to travl agents? Given that BA's maket share was 40% and falling, it should not have been too hard for say three airlines to offer some form of collective rebate to lure travel agents to promote their tickets. Instead, the law in this case is that no other company, idividually, has a big enough 'financial base' (para.76) to garnt rebates that compete with BA. This line seems to always favour small firms against big ones. As I argue in my book in chapter 5, dominance is too frequently associated with 'commercial power'. This is another manifestation of that approach.
In the national courts
Assume (as is expected) that the Commission publishes Guidelines on Article 82 this summer. Plaintiff wants to take a case in a national court for alleged abusive rebates. Does the national court apply the Guidelines (which may make life harder for plaintiff) or follow the case law? It seems to me that a national court will more likely follow precedent than a soft law measure. If so, even if the Commission follows its own guidelines and stops taking up the kinds of cases it took in the past, the current law on rebates may well live on in national courts.
It would be remarkable if national courts were to enforce Article 82 in one way and the Commission in another, but this is what you get when you try to reform hard law (cases) through soft law (guidelines). The Commission might have been better off admitting that its approach to Art 82 was wrong and start from scratch. But this was politically impossible because when the Discussion Paper was being worked on there were several significant cases going through the Courts (Michelin 2 and BA on rebates, Wanadoo on predatory pricing, and Microsoft on refusals to deal and tying...) With the case law still in development, should one not perhaps have waited before considering reform? (On this last point, and thinking VERY laterally, perhaps one can draw lessons from Giandomenico Majone's important critque of the European Union in his 2005 book Dilemmas of European Integration.)
28 March 2007
The Chicago School, Pre-Chicago, Post-Chicago
Last year Herbert Hovenkamp published an important book: The Antitrust Enterprise: Principle and Execution. It is a short, accessible overview of US antitrust, ideal both for those wishing to recap US antitrust before an exam, or those new to the subject. There is a good review and some pretty sharp commentary in the University of Chicago Law School Faculty Blog.
However, something about this book left me a little uneasy, and other on line observers have reached similar views: that the book advocates a fairly narrow, conservative vision of antitrust laws. You get this message early on at pp.10-15 where antitrust is described as a residual, reactive regulatory law. To explain why this is worthy of comment we need to track back a little.
In the 1970s two pathbreaking works were published, Richard Posner's Antitrust Law: An Economic Perspective (1976) and Robert Bork's The Antitrust Paradox (1978). The historical significance of these books was that they provided a blueprint (or a manifesto) for what we now call the Chicago School view of antitrust. Both authors were reacting to a 'populist' version of antitrust that seemed to protect the public interest. The effect of those books was to create and capture the intellectual mood of the time and led to the Chicago School approach to antitrust. Before the Chicagoans dominated the courtrooms, the major mainstream economic position was the Harvard School. I discuss key differences between these two schools in Chapter 3 of my book. Essentially, Harvardians believed that concentrated markets were an antitrust problem, while Chicagoans thought that the only problem antitrust laws should be concerned with is collusion, and that the only entry barriers were erected by government. This implied a significantly less aggressive antitrust policy. In 2001, Richard Posner published a second edition of his book, but this time the title was simply Antitrust Law. In the preface he explained that now there was no need for the subtitle, because now the ideological battle had been won: there was no other perspective to embrace.
However, in the 1980s a number of scholars began to speak of a post-Chicago approach to antitrust. In brief, this approach criticised Chicagoans for being too laissez-faire and suggested instead that, with the aid of new economic tools, especially game theory, one could endorse a more aggressive antitrust policy based on economic principles.
With Posner, I think it is best to treat these three schools of antitrust as historical labels representing the dominant economic paradigms rather than ideologies, so with some rough dates indicating the enforcement high-water marks:
However, I think that there is space for debate, there is room to assert a more aggressive antitrust policy. In fact, a close comparison suggests that Hovenkamp's 'new Harvard' might be a little more aggressive than the more conservative position of the new Chicago, for example Hovenkamp supports the failed attempt by the Department of Justice to challenge the predatory practices by American Airways to oust new entrants, which the courts rejected (I discuss this case in chapter 3, and see Aaron Edlin's on line comments). Perhaps what might have helped Hovenkamp's book is a more emphatic assertion of the key distinguishing features between his 'new Harvard' approach and the more conservative elements of the post-Chicago school. A nice textbook written with a more aggressive antitrust streak is Sullivan and Grimes' The Law of Antitrust: An Integrated Handbook (2nd ed 2006).
One reason many antitrust scholars might be a little wary of espousing aggressive antitrust policy these days is that they risk being criticised for returning antitrust to the pre-economic, populist approach, which perhaps still lingers on in European antitrust circles...
However, something about this book left me a little uneasy, and other on line observers have reached similar views: that the book advocates a fairly narrow, conservative vision of antitrust laws. You get this message early on at pp.10-15 where antitrust is described as a residual, reactive regulatory law. To explain why this is worthy of comment we need to track back a little.
In the 1970s two pathbreaking works were published, Richard Posner's Antitrust Law: An Economic Perspective (1976) and Robert Bork's The Antitrust Paradox (1978). The historical significance of these books was that they provided a blueprint (or a manifesto) for what we now call the Chicago School view of antitrust. Both authors were reacting to a 'populist' version of antitrust that seemed to protect the public interest. The effect of those books was to create and capture the intellectual mood of the time and led to the Chicago School approach to antitrust. Before the Chicagoans dominated the courtrooms, the major mainstream economic position was the Harvard School. I discuss key differences between these two schools in Chapter 3 of my book. Essentially, Harvardians believed that concentrated markets were an antitrust problem, while Chicagoans thought that the only problem antitrust laws should be concerned with is collusion, and that the only entry barriers were erected by government. This implied a significantly less aggressive antitrust policy. In 2001, Richard Posner published a second edition of his book, but this time the title was simply Antitrust Law. In the preface he explained that now there was no need for the subtitle, because now the ideological battle had been won: there was no other perspective to embrace.
However, in the 1980s a number of scholars began to speak of a post-Chicago approach to antitrust. In brief, this approach criticised Chicagoans for being too laissez-faire and suggested instead that, with the aid of new economic tools, especially game theory, one could endorse a more aggressive antitrust policy based on economic principles.
With Posner, I think it is best to treat these three schools of antitrust as historical labels representing the dominant economic paradigms rather than ideologies, so with some rough dates indicating the enforcement high-water marks:
- Harvard (1960-mid 70s)
- Chicago (mid 70s to mid 80s)
- Post-Chicago (late 80s onwards)
However, I think that there is space for debate, there is room to assert a more aggressive antitrust policy. In fact, a close comparison suggests that Hovenkamp's 'new Harvard' might be a little more aggressive than the more conservative position of the new Chicago, for example Hovenkamp supports the failed attempt by the Department of Justice to challenge the predatory practices by American Airways to oust new entrants, which the courts rejected (I discuss this case in chapter 3, and see Aaron Edlin's on line comments). Perhaps what might have helped Hovenkamp's book is a more emphatic assertion of the key distinguishing features between his 'new Harvard' approach and the more conservative elements of the post-Chicago school. A nice textbook written with a more aggressive antitrust streak is Sullivan and Grimes' The Law of Antitrust: An Integrated Handbook (2nd ed 2006).
One reason many antitrust scholars might be a little wary of espousing aggressive antitrust policy these days is that they risk being criticised for returning antitrust to the pre-economic, populist approach, which perhaps still lingers on in European antitrust circles...
22 February 2007
The Supreme Court and predatory bidding - lessons for the EU
Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. Inc. (20 February 2007)
Defendant and plaintiff were competitors, both operated sawmills and purchased red alder sawlogs for their mills. Some of the logs are purchased through long term contracts, some are obtained from the mill owner’s property, and some are acquired through bidding. Plaintiff alleged that defendant placed bids at very high prices, forcing the price of logs to go up, thereby forcing plaintiff to pay more for his logs too, which forced plaintiff to increase his sales prices. The result was that defendant’s predatory strategy drove plaintiff out of business. In the lower courts plaintiff was successful in an action based on s.2 Sherman Act, in particular the courts did not think that predatory bidding was comparable to predatory pricing, so the strict standards set out by the Supreme Court in Brooke Group (1993) did not apply.
The Supreme Court disagreed, ruled that predatory bidding is judged by the same standards as predatory pricing, and because plaintiff admitted it was unable to prove the elements required by Brooke Group, the claim was unsuccessful. The judgment comes a short time after the CFI ruled on predatory pricing (see earlier entry in this blog) and holds two lessons for the EU: (1) how to use economics to analyse disputes; (2) how to write judgments.
(1) The use of economics
First, the Court explored whether predatory bidding (the exercise of monopsony power; that is, buyer power) is comparable to predatory pricing. The logic is similar: in a first period the predator engages in a measure that raises rivals’ costs (here by bidding high, increasing the price of the inputs and forcing competitors to pay more); in a second period, once competitors have been driven out of business, the predator uses its monopsony power to force sellers of input to lower the prices. As with predatory pricing, the first period represent’s the predator’s ‘investment’ – he suffers losses of profit and his dominance allows him to survive while competitors go out of business. The second period is when he recovers that investment by getting low prices for the inputs, recovering the losses made in the first. Accordingly, the legal standard for predatory bidding should be the same as that for predatory pricing.
Second, the Court held that aggressive commercial tactics are the very essence of competition, and that there were a myriad of reasons why buying inputs at high prices could be innocent, or even pro-competitive: (1) miscalculation of input needs; (2) a response to increased consumer demand; (3) a more efficient firm might bid up input prices to gain market share in the output market; (4) a firm that adopted an input intensive production process might bid to increase the inputs; (5) a firm might buy a lot of inputs today to hedge against future shortages. ‘There is nothing illicit about these bidding decisions. Indeed, this sort of high bidding is essential to competition and innovation.’
Third, the Court noted that like predatory pricing, a failed attempt of predatory bidding is benign. The monopsonist who buys more goods, will be in a position to sell more to consumers, and provided he does not have monopoly power on the selling side, this means that consumers get more goods at competitive prices.
Two things follow from this analysis: (a) predatory bidding is a high risk strategy that has many efficiency justifications; (b) a failed attempt to achieve the rival’s exclusion does not harm consumers. Therefore, a high standard of proof is necessary or there is a ‘risk of chilling pro-competitive behaviour with too law a liability standard.’
The legal test therefore is the same as for predatory pricing: (1) the predatory bidding results in below cost output sales; (2) there is a dangerous probability that the losses in the first period will be recouped through the exercise of monopsony power.
When will European courts think about aggressive commercial behaviour in this way?
Even those who think that a more lenient standard should apply and that Europe is right to be tougher on predators might take an interest in the lower court’s decision. The 9th Circuit held that three things needed proof: anticompetitive conduct through predatory overbidding, intended specifically to eliminate competition, and a dangerous probability of achieving monopoly power .
On intention, the court used evidence which in my mind is more compelling than that in the Wanadoo case. The court used three types of evidence: (1) Defendant’s anticompetitive conduct itself, (2) the testimony of Defendant’s employees, and (3) Defendant’s business projections regarding sawlog prices. Note that (2) is trial based testimony, not internal memoranda. Note also how items (1) and (3) show that Defendant had calculated what it would take to outs plaintiff. This evidence is much more specific than that which the CFI relied upon.
(2) Judicial Style
This decision is 16 pages of a pdf file. The first paragraph is a concise statement of the key points. The facts are examined in a succinct manner. Quotes from previous cases are brief and to the point. Academic literature is mentioned. The case can easily be read, and understood, while commuting on the tube. It is unfortunate that the style of judgment in the European Courts cannot be as clear and as concise.
Interestingly perhaps, the Court eschews mention of wider debates about the nature of S.2 monopolisation claims, a topical issue in light of the current hearings on single firm conduct. Perhaps the Court thinks it best if the law develops incrementally rather than setting out general standards for anticompetitive behaviour like the no economic sense test, or the as efficient competitor test.
Defendant and plaintiff were competitors, both operated sawmills and purchased red alder sawlogs for their mills. Some of the logs are purchased through long term contracts, some are obtained from the mill owner’s property, and some are acquired through bidding. Plaintiff alleged that defendant placed bids at very high prices, forcing the price of logs to go up, thereby forcing plaintiff to pay more for his logs too, which forced plaintiff to increase his sales prices. The result was that defendant’s predatory strategy drove plaintiff out of business. In the lower courts plaintiff was successful in an action based on s.2 Sherman Act, in particular the courts did not think that predatory bidding was comparable to predatory pricing, so the strict standards set out by the Supreme Court in Brooke Group (1993) did not apply.
The Supreme Court disagreed, ruled that predatory bidding is judged by the same standards as predatory pricing, and because plaintiff admitted it was unable to prove the elements required by Brooke Group, the claim was unsuccessful. The judgment comes a short time after the CFI ruled on predatory pricing (see earlier entry in this blog) and holds two lessons for the EU: (1) how to use economics to analyse disputes; (2) how to write judgments.
(1) The use of economics
First, the Court explored whether predatory bidding (the exercise of monopsony power; that is, buyer power) is comparable to predatory pricing. The logic is similar: in a first period the predator engages in a measure that raises rivals’ costs (here by bidding high, increasing the price of the inputs and forcing competitors to pay more); in a second period, once competitors have been driven out of business, the predator uses its monopsony power to force sellers of input to lower the prices. As with predatory pricing, the first period represent’s the predator’s ‘investment’ – he suffers losses of profit and his dominance allows him to survive while competitors go out of business. The second period is when he recovers that investment by getting low prices for the inputs, recovering the losses made in the first. Accordingly, the legal standard for predatory bidding should be the same as that for predatory pricing.
Second, the Court held that aggressive commercial tactics are the very essence of competition, and that there were a myriad of reasons why buying inputs at high prices could be innocent, or even pro-competitive: (1) miscalculation of input needs; (2) a response to increased consumer demand; (3) a more efficient firm might bid up input prices to gain market share in the output market; (4) a firm that adopted an input intensive production process might bid to increase the inputs; (5) a firm might buy a lot of inputs today to hedge against future shortages. ‘There is nothing illicit about these bidding decisions. Indeed, this sort of high bidding is essential to competition and innovation.’
Third, the Court noted that like predatory pricing, a failed attempt of predatory bidding is benign. The monopsonist who buys more goods, will be in a position to sell more to consumers, and provided he does not have monopoly power on the selling side, this means that consumers get more goods at competitive prices.
Two things follow from this analysis: (a) predatory bidding is a high risk strategy that has many efficiency justifications; (b) a failed attempt to achieve the rival’s exclusion does not harm consumers. Therefore, a high standard of proof is necessary or there is a ‘risk of chilling pro-competitive behaviour with too law a liability standard.’
The legal test therefore is the same as for predatory pricing: (1) the predatory bidding results in below cost output sales; (2) there is a dangerous probability that the losses in the first period will be recouped through the exercise of monopsony power.
When will European courts think about aggressive commercial behaviour in this way?
Even those who think that a more lenient standard should apply and that Europe is right to be tougher on predators might take an interest in the lower court’s decision. The 9th Circuit held that three things needed proof: anticompetitive conduct through predatory overbidding, intended specifically to eliminate competition, and a dangerous probability of achieving monopoly power .
On intention, the court used evidence which in my mind is more compelling than that in the Wanadoo case. The court used three types of evidence: (1) Defendant’s anticompetitive conduct itself, (2) the testimony of Defendant’s employees, and (3) Defendant’s business projections regarding sawlog prices. Note that (2) is trial based testimony, not internal memoranda. Note also how items (1) and (3) show that Defendant had calculated what it would take to outs plaintiff. This evidence is much more specific than that which the CFI relied upon.
(2) Judicial Style
This decision is 16 pages of a pdf file. The first paragraph is a concise statement of the key points. The facts are examined in a succinct manner. Quotes from previous cases are brief and to the point. Academic literature is mentioned. The case can easily be read, and understood, while commuting on the tube. It is unfortunate that the style of judgment in the European Courts cannot be as clear and as concise.
Interestingly perhaps, the Court eschews mention of wider debates about the nature of S.2 monopolisation claims, a topical issue in light of the current hearings on single firm conduct. Perhaps the Court thinks it best if the law develops incrementally rather than setting out general standards for anticompetitive behaviour like the no economic sense test, or the as efficient competitor test.
12 February 2007
Predatory Pricing - bad intentions and no economic sense
Case T-340/03 France Télécom v Commission (judgment of 30 January 2007)
The Commission’s Wandoo decision fining the firm for predatory pricing in the sale of high-speed internet access, was affirmed by the Court of First Instance. The Commission immediately issued a press release to show its delight. In this press release is an important passage: “Broadband is a strategic sector highly important to the European economy and the Commission's strategy for growth and jobs. The Commission is determined to prevent exclusionary practices by incumbent operators on strategic markets.” This is in line with its 2004 Communication, which sought to align competition law enforcement with the Lisbon Strategy (a bold attempt to make Europe more competitive). This is the ‘Community interest’ that guides competition enforcement post-modernisation. But if the pursuit of this interest leads to decisions like this one, we must wonder whether Europe is not made less competitive by competition law enforcement.
After a hundred or so paragraphs where the CFI rejects procedural points and checks the Commission’s arithmetic, the Court wrestles with several interesting points of principle that Wanadoo raised. Their rejection shows a complete failure to understand predatory pricing.
Meeting competition
There is some doubt as to whether a dominant firm can react aggressively when challenged by competitors. The CFI said that the dominant firm “cannot 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.” (para.187)
This is not novel, but it confirms that there is no meeting competition ‘defence’ in EC competition law. The only defence is for the dominant firm to prove that there was no abuse. But it is too easy for the Commission to prove abuse.
Intention
Prices above average variable cost (AVC) and below average total cost (ATC) are abusive only if there is a plan to eliminate competition. More clearly than in earlier cases, the CFI states that this requires proof of ‘intention’.
In this case, the Commission proves intention with a raft of internal documents where the dominant firm’s management explained how it wished to pre-empt the challenge of new entrants by selling goods more cheaply. The firm’s intention to acquire and hold on to market power is evidence of abuse. This is unwise. In previous cases, intent was shown by selective price cuts designed to harm certain rivals, this was a little more probative. In contrast here, intent is proven by evidence that I suspect we can find in any company. What company does not want to beat its competitors? To gain and hold on to a higher market share? Is the intention to compete evidence of abuse? Yes, it seems.
Admittedly Wanadoo was somewhat unwise to write in language that so fits the Commission’s legal standards, look at this note: ‘The high-speed and ADSL market will, for the next few years, continue to be conquest-driven, the strategic objective being to gain a dominant position in terms of market share, the period of profitability only coming later.’ (cited at 215) Nevertheless, can this really be sufficient evidence of anticompetitive intent?
Recoupment
Perhaps as a last throw of the dice, the defendant thought that if the Commission’s burden of proof is so light in showing intention, that the Court would see sense and rectify this by requiring proof that predatory pricing would create a dominant position and that Wanadoo would be able to recoup its losses. No such luck. In Tetra Pak 2 the ECJ said that on the facts of that case recoupment need not be shown. The CFI says that there is never any need to prove recoupment. (227). This removes the caution of the ECJ and is in line with the Advocate General’s view in Tetra Pak 2 that all predatory pricing should be condemned without the need to show the possibility of recouping losses.
Predatory pricing standards and the Lisbon strategy
To be clear, I am not suggesting predatory pricing should not go unpunished, nor that Wanadoo was not trying to harm its competitors. Rather, that the court sets such a low threshold of illegality that dominant firms are deprived of any incentive to compete hard. First, the fact that
recoupment need not be shown, is economically irrational: if a predator cannot recover the loss of profits, it means predation was unsuccessful, and competitors have not been harmed, so the predator is punished by the market for his irrational attempt to exclude rivals. Second, flimsy evidence of intention makes findings too easy, creating further risks of over enforcement. If dominant firms cannot respond aggressively to maintain their position (Wanadoo has to pay a fine of 10.35 million euros), what incentives are there to be successful?
The Commission’s Wandoo decision fining the firm for predatory pricing in the sale of high-speed internet access, was affirmed by the Court of First Instance. The Commission immediately issued a press release to show its delight. In this press release is an important passage: “Broadband is a strategic sector highly important to the European economy and the Commission's strategy for growth and jobs. The Commission is determined to prevent exclusionary practices by incumbent operators on strategic markets.” This is in line with its 2004 Communication, which sought to align competition law enforcement with the Lisbon Strategy (a bold attempt to make Europe more competitive). This is the ‘Community interest’ that guides competition enforcement post-modernisation. But if the pursuit of this interest leads to decisions like this one, we must wonder whether Europe is not made less competitive by competition law enforcement.
After a hundred or so paragraphs where the CFI rejects procedural points and checks the Commission’s arithmetic, the Court wrestles with several interesting points of principle that Wanadoo raised. Their rejection shows a complete failure to understand predatory pricing.
Meeting competition
There is some doubt as to whether a dominant firm can react aggressively when challenged by competitors. The CFI said that the dominant firm “cannot 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.” (para.187)
This is not novel, but it confirms that there is no meeting competition ‘defence’ in EC competition law. The only defence is for the dominant firm to prove that there was no abuse. But it is too easy for the Commission to prove abuse.
Intention
Prices above average variable cost (AVC) and below average total cost (ATC) are abusive only if there is a plan to eliminate competition. More clearly than in earlier cases, the CFI states that this requires proof of ‘intention’.
In this case, the Commission proves intention with a raft of internal documents where the dominant firm’s management explained how it wished to pre-empt the challenge of new entrants by selling goods more cheaply. The firm’s intention to acquire and hold on to market power is evidence of abuse. This is unwise. In previous cases, intent was shown by selective price cuts designed to harm certain rivals, this was a little more probative. In contrast here, intent is proven by evidence that I suspect we can find in any company. What company does not want to beat its competitors? To gain and hold on to a higher market share? Is the intention to compete evidence of abuse? Yes, it seems.
Admittedly Wanadoo was somewhat unwise to write in language that so fits the Commission’s legal standards, look at this note: ‘The high-speed and ADSL market will, for the next few years, continue to be conquest-driven, the strategic objective being to gain a dominant position in terms of market share, the period of profitability only coming later.’ (cited at 215) Nevertheless, can this really be sufficient evidence of anticompetitive intent?
Recoupment
Perhaps as a last throw of the dice, the defendant thought that if the Commission’s burden of proof is so light in showing intention, that the Court would see sense and rectify this by requiring proof that predatory pricing would create a dominant position and that Wanadoo would be able to recoup its losses. No such luck. In Tetra Pak 2 the ECJ said that on the facts of that case recoupment need not be shown. The CFI says that there is never any need to prove recoupment. (227). This removes the caution of the ECJ and is in line with the Advocate General’s view in Tetra Pak 2 that all predatory pricing should be condemned without the need to show the possibility of recouping losses.
Predatory pricing standards and the Lisbon strategy
To be clear, I am not suggesting predatory pricing should not go unpunished, nor that Wanadoo was not trying to harm its competitors. Rather, that the court sets such a low threshold of illegality that dominant firms are deprived of any incentive to compete hard. First, the fact that
recoupment need not be shown, is economically irrational: if a predator cannot recover the loss of profits, it means predation was unsuccessful, and competitors have not been harmed, so the predator is punished by the market for his irrational attempt to exclude rivals. Second, flimsy evidence of intention makes findings too easy, creating further risks of over enforcement. If dominant firms cannot respond aggressively to maintain their position (Wanadoo has to pay a fine of 10.35 million euros), what incentives are there to be successful?
10 February 2007
Information Exchanges and the Consumer Interest
Case C-238/05 Asnef-Equifax v. Ausbanc judgment of 26 November 2006
Spanish banks agreed to set up an electronic register of credit information that would disclose the credit history of potential customers. The effect is that each bank is aware of each potential client’s credit history and takes this into account when negotiating further loans. A horizontal agreement no doubt, but was it contrary to Article 81? The Spanish Court was in doubt and asked two questions of the ECJ.
Does the agreement restrict competition?
Wisely the Court noted that prima facie the agreement made for more competitive markets, since lenders were now better placed to offer loans based on a more informed understanding of each client’s credit risk (so the solvent client would get preferential loans, and the very risky clients no loans at all, thus preventing him from accumulating even more debt). Moreover, clients can now obtain credit more easily from financial institutions other than the ones from which they have borrowed historically, since all banks have their credit histories.
However, an anticompetitive effect might arise, said the Court, and three factors were relevant (this is not a cumulative test):
(1) The degree of market concentration (that is, how many banks are there, a few or many?)
(2) Whether the register discloses information that allows competitors to see the business strategy of other lenders (accordingly it is imperative that the names of lenders be invisible)
(3) Whether all lenders are able to have access to the register
Condition 3: making markets work better?
The ECJ rightly noted that the agreement, if anything, was more likely to benefit consumers than to harm them. Nevertheless, it is troubling that the Court said that the agreement was lawful only because any lender could join the scheme set up by the parties. The condition makes sense for all lenders because the more lenders join, the more information all have about the credit history of clients. But the Court’s analysis is slightly troubling because even if the first two criteria are met (the market is not concentrated and the information does not allow for parties to understand each other’s business strategies) the exchange of information is lawful only if it is open for newcomers, but the first two conditions are sufficient to prove that the agreement does not restrict competition. The third condition is designed to allow the market to grow, providing opportunities for new lenders to enter. But this is regulation, not the application of competition law.
The Consumer interest
Should the national court find (highly unlikely given the above reasoning) that the agreement restricts competition, the Court offered some guidance on how the consumer benefit test in Article 81(3) might be applied. The Court did not refer to the Guidelines on Article 81(3) that roughly have the same as the judgment: Paragraph 87: ‘The decisive factor is the overall impact on consumers of the products within the relevant market and not the impact on individual members of this group of consumers.’
But after stating that one should look at the benefits for consumers generally, the Court muddies the water, saying that two groups of consumers benefit: those who get better loans, and those who do not get loans because of their bad credit scores, and this is a benefit because it avoids over indebtedness. It is a little patronising for the Court to say that, but also one wonders why a private agreement is necessary to avoid over indebtedness, as surely this is a task for the legislature, not competitors. But this wider conception of consumer interest is part of the Commission’s practice – recall how reduced electricity consumption benefited all members of society in CECED.
In sum, this judgment shows the Court in full regulatory mode: it designs markets to ensure they facilitate the entry of new players, and suggests that agreements can be exempted if big spenders are denied loans, competition law as a device to protect improvident consumers. Real antitrust law shoudl be more humble about its capacities and its scope.
Spanish banks agreed to set up an electronic register of credit information that would disclose the credit history of potential customers. The effect is that each bank is aware of each potential client’s credit history and takes this into account when negotiating further loans. A horizontal agreement no doubt, but was it contrary to Article 81? The Spanish Court was in doubt and asked two questions of the ECJ.
Does the agreement restrict competition?
Wisely the Court noted that prima facie the agreement made for more competitive markets, since lenders were now better placed to offer loans based on a more informed understanding of each client’s credit risk (so the solvent client would get preferential loans, and the very risky clients no loans at all, thus preventing him from accumulating even more debt). Moreover, clients can now obtain credit more easily from financial institutions other than the ones from which they have borrowed historically, since all banks have their credit histories.
However, an anticompetitive effect might arise, said the Court, and three factors were relevant (this is not a cumulative test):
(1) The degree of market concentration (that is, how many banks are there, a few or many?)
(2) Whether the register discloses information that allows competitors to see the business strategy of other lenders (accordingly it is imperative that the names of lenders be invisible)
(3) Whether all lenders are able to have access to the register
Condition 3: making markets work better?
The ECJ rightly noted that the agreement, if anything, was more likely to benefit consumers than to harm them. Nevertheless, it is troubling that the Court said that the agreement was lawful only because any lender could join the scheme set up by the parties. The condition makes sense for all lenders because the more lenders join, the more information all have about the credit history of clients. But the Court’s analysis is slightly troubling because even if the first two criteria are met (the market is not concentrated and the information does not allow for parties to understand each other’s business strategies) the exchange of information is lawful only if it is open for newcomers, but the first two conditions are sufficient to prove that the agreement does not restrict competition. The third condition is designed to allow the market to grow, providing opportunities for new lenders to enter. But this is regulation, not the application of competition law.
The Consumer interest
Should the national court find (highly unlikely given the above reasoning) that the agreement restricts competition, the Court offered some guidance on how the consumer benefit test in Article 81(3) might be applied. The Court did not refer to the Guidelines on Article 81(3) that roughly have the same as the judgment: Paragraph 87: ‘The decisive factor is the overall impact on consumers of the products within the relevant market and not the impact on individual members of this group of consumers.’
But after stating that one should look at the benefits for consumers generally, the Court muddies the water, saying that two groups of consumers benefit: those who get better loans, and those who do not get loans because of their bad credit scores, and this is a benefit because it avoids over indebtedness. It is a little patronising for the Court to say that, but also one wonders why a private agreement is necessary to avoid over indebtedness, as surely this is a task for the legislature, not competitors. But this wider conception of consumer interest is part of the Commission’s practice – recall how reduced electricity consumption benefited all members of society in CECED.
In sum, this judgment shows the Court in full regulatory mode: it designs markets to ensure they facilitate the entry of new players, and suggests that agreements can be exempted if big spenders are denied loans, competition law as a device to protect improvident consumers. Real antitrust law shoudl be more humble about its capacities and its scope.
13 November 2006
Case T-186/01 GlaxoSmithKline v Commission (27 September 2006)
All change for Article 81?
In this groundbreaking judgment, the Court of First Instance explains: that not all agreements that segment the internal market infringe Article 81(1); that dynamic efficiencies may be considered in the application of Article 81(3); and finally that the aim of Article 81 is to protect the welfare of the end user. Even though the Commission lost the case, calling for it to seriously rethink its policy against pharmaceutical firms’ attempts to segment the market, these general points confirm much of the Commission’s recent policy on the application of Article 81.
The facts
GSK notified its sales policy for a number of medicines sold to wholesalers on the Spanish market. This provided (in clause 4) for a low sale price for medicines that the wholesalers resold on to the Spanish health authorities, and a higher price for medicines that the wholesalers were likely to sell abroad. The rationale behind this price discrimination is that medicines are bought by national health authorities at fixed prices. The price fixed in Spain is less than that fixed for the UK, and this creates an incentive for Spanish wholesalers to buy extra medicines and ship them to the UK (parallel imports). This causes GSK losses on the British market. Clause 4 was designed t thwart parallel imports. (This is a more direct strategy than that which another pharmaceutical company (Bayer) had tried a few years back, where it reduced the numbers of medicines sold to Spanish wholesalers. In this instance the Commission charged Bayer with entering into an agreement with Spanish wholesalers containing an export ban, but the CFI and ECJ had found that there was no agreement between the parties, only a unilateral move by Bayer).
It is little wonder that the Commission should seek to prevent this behaviour, as it partitions market, thus contrary to the creation of a single market.
The CFI’s assessment of Article 81(1): restrictions by object
The Commission found that the agreement had as its object the restriction of competition. Based on previous case law, this finding seemed unremarkable but the CFI disagreed.
The court said (118) that the objective of Art 81(1) is to prevent firms from restricting competition between themselves or with third parties from reducing the welfare of the final consumer.
The CFI cites three authorities in support of this assertion. It is important to read these closely to see how the CFI supports this statement.
First the CFI cites paragraph 115 of its judgment in Cases T-213 and 214/01 of 7 June 2006 where it said that the competition rules as a whole are there to improve the welfare of the consumer.
Second, it cites Consten and Grundig at page 493 (this page reference must be an error because the law report does not run to that page).
Third, it cites Case 28/77 Tepea where the ECJ ruled that an agreement that restricted intra-brand competition infringes Article 81(1) by harming consumer interests. The CFI generalises this ruling.
So no precedent seemed to support this conclusion directly but the CFI’s statement must surely be welcomed as in line with today’s economic approach to competition law. It is however curious that the court states that protecting consumer welfare is the objective of Article 81(1), and not of Article 81 as a whole (so there is a small but significant difference between this case and T-231/01). The significance is that if Art 81(1) is there to protect consumer welfare then is Art 81(3) there to protect some other interest?
The Court went on to say that not every agreement which partitions the market can be found to have an anticompetitive object: ‘while it is accepted that an agreement intended to limit parallel trade must in principle be considered to have as its object the restriction of competition, that applies insofar as the agreement may be presumed to deprive final consumers of those advantages.’ (para.121) Which means that sometimes agreements which partition the market might not harm consumers and s escape Article 81(1). This is a U-turn from the well-understood rule that these kinds of agreement are ‘hard-core restraints’. The court explained that in this sector, parallel trade was not going to lead to price competition and lower prices for consumers because their prices are fixed under national law. At the end of its discussion the court reminds us that this factual matrix was an unprecedented situation (147), which suggests that in most other goods and services, a ban on parallel trade will e deemed to have an anticompetitive object.
The implication of the court’s reasoning is that the anticompetitive object of an agreement must be looked at in its factual context. But then what is the difference between object and effect?
The CFI’s assessment of the effects of the clause
This part of the decision is peculiar because the court finds that the agreement might harm consumers… by transforming the definition of consumer. Recall how in the object category the emphasis was on the patient. Here (at 184) the court discovers an additional consumer – the sickness insurance schemes who, it says, suffer loss as a result of a diminution in intra brand competition. That is, the ability of Spanish wholesalers to export would have led to these consumers paying slightly lower prices, and in some Member States this might have led to lower prices for patients too.
This is puzzling. In the ‘object’ discussion the consumer is only the patient and the court says that his losses are not self evident after analysing the facts. Then in the ‘effect’ discussion, the consumers are the health insurance bodies and the patient, and both benefit from intra brand competition. This blurs the line between object and effect so much that it is invisible.
Article 81(3)
This segment focuses n the first condition ‘improving the production or distribution of goods or promoting technical and economic progress.’
Two interesting points here.
First, the court accepts the validity of GSK’s argument: restrictions on parallel trade can serve to allow it to raise money to finance research, and in this market, the key to inter-brand competition is innovation. The Commission was bound to trade off the improvements in efficiency stemming from innovation against the modest losses that some buyers suffered as a result of higher prices caused by the restriction in competition.
Second, in setting out some preliminaries we get this passage (244)
The Commission has, in particular, a margin of discretion which is subject to a restricted judicial review, in the operation consisting, once it has been ascertained that one of the criteria on which Article 81(3) EC makes provision for an exemption was satisfied, in weighing up the advantages expected from the implementation of the agreement and the disadvantages which the agreement entails for the final consumer owing to its impact on competition, which takes the form of a balancing exercise carried out in the light of the general interest appraised at Community level.
What is the general interest? (I doubt the court was quoting from Rousseau) does it mean that in 81(3) we look at more than just consumer benefits? This passage may be an aberration, later on the court ( like the Commission) reads the first condition of 81(3) as being about efficiencies.
The remaining questions
What does this case mean for the split between 81(1) and 81(3)?
(1) Maybe Odudu is right in suggesting that under Art 81(1) one shows a loss in allocative efficiency and in Art 81(3) one proves a gain in productive efficiency. See his recent book The Boundaries of EC Competition LawThe Scope of Article 81. However I don’t find this distinction helpful because an improvement under 81(3) is often one that improves allocative efficiency also, given that there must be a benefit to consumers for the improvement to count. Moreover, the court here suggests that GSK’s arguments were about increasing inter-brand competition. This kind of competition yields allocative efficiency.
(2) Maybe (the view I favour) the Commission looks for any loss of consumer welfare under Art 81(1) and then demands that the other party show any gains in consumer welfare. This allows the Commission to operate a quick look approach when some basic facts suggest a risk to competition.
(3) Maybe (and this is the view I would like to favour) under Art 81(3) we look at wider perspectives than just consumer welfare. After all, if you read paras 118 and 244 one after the other, consumer welfare is the objective for 81(1) and the general interest is the objective under Art 81(3). Public policy in Article 81(3)?
What is the difference between object and effect?
I have no idea after this case. Before, we had a fairly good idea that restrictions on parallel trade had an anticompetitive object. Now it seems that one has to have a perfunctory look at the market before being able to presume that any practice has an anticompetitive object.
Wasn’t notification such a good idea?
Note that notification/exemption (the system that the Commission killed off on 1 May 2004) is alive and kicking for this case and also O2 where the parties have been allowed to re-notify. This proves that a system where controversial cases can be notified ex ante is helpful in competition law. It had been mismanaged under Regulation 17, but a more modest scheme limiting notification to some agreements would have been beneficial.
Will GSK get the exemption now?
No predictions here but three indicators: first there seems to be considerable lobbying in support of clearance; second there seems to be considerable evidence that GSK has a point; but third the Commission has a margin of discretion. The worse thing that could happen is that the case gets settled informally, so that the Commission avoids publishing an uncomfortable precedent. This is the likely outcome.
All change for Article 81?
In this groundbreaking judgment, the Court of First Instance explains: that not all agreements that segment the internal market infringe Article 81(1); that dynamic efficiencies may be considered in the application of Article 81(3); and finally that the aim of Article 81 is to protect the welfare of the end user. Even though the Commission lost the case, calling for it to seriously rethink its policy against pharmaceutical firms’ attempts to segment the market, these general points confirm much of the Commission’s recent policy on the application of Article 81.
The facts
GSK notified its sales policy for a number of medicines sold to wholesalers on the Spanish market. This provided (in clause 4) for a low sale price for medicines that the wholesalers resold on to the Spanish health authorities, and a higher price for medicines that the wholesalers were likely to sell abroad. The rationale behind this price discrimination is that medicines are bought by national health authorities at fixed prices. The price fixed in Spain is less than that fixed for the UK, and this creates an incentive for Spanish wholesalers to buy extra medicines and ship them to the UK (parallel imports). This causes GSK losses on the British market. Clause 4 was designed t thwart parallel imports. (This is a more direct strategy than that which another pharmaceutical company (Bayer) had tried a few years back, where it reduced the numbers of medicines sold to Spanish wholesalers. In this instance the Commission charged Bayer with entering into an agreement with Spanish wholesalers containing an export ban, but the CFI and ECJ had found that there was no agreement between the parties, only a unilateral move by Bayer).
It is little wonder that the Commission should seek to prevent this behaviour, as it partitions market, thus contrary to the creation of a single market.
The CFI’s assessment of Article 81(1): restrictions by object
The Commission found that the agreement had as its object the restriction of competition. Based on previous case law, this finding seemed unremarkable but the CFI disagreed.
The court said (118) that the objective of Art 81(1) is to prevent firms from restricting competition between themselves or with third parties from reducing the welfare of the final consumer.
The CFI cites three authorities in support of this assertion. It is important to read these closely to see how the CFI supports this statement.
First the CFI cites paragraph 115 of its judgment in Cases T-213 and 214/01 of 7 June 2006 where it said that the competition rules as a whole are there to improve the welfare of the consumer.
Second, it cites Consten and Grundig at page 493 (this page reference must be an error because the law report does not run to that page).
Third, it cites Case 28/77 Tepea where the ECJ ruled that an agreement that restricted intra-brand competition infringes Article 81(1) by harming consumer interests. The CFI generalises this ruling.
So no precedent seemed to support this conclusion directly but the CFI’s statement must surely be welcomed as in line with today’s economic approach to competition law. It is however curious that the court states that protecting consumer welfare is the objective of Article 81(1), and not of Article 81 as a whole (so there is a small but significant difference between this case and T-231/01). The significance is that if Art 81(1) is there to protect consumer welfare then is Art 81(3) there to protect some other interest?
The Court went on to say that not every agreement which partitions the market can be found to have an anticompetitive object: ‘while it is accepted that an agreement intended to limit parallel trade must in principle be considered to have as its object the restriction of competition, that applies insofar as the agreement may be presumed to deprive final consumers of those advantages.’ (para.121) Which means that sometimes agreements which partition the market might not harm consumers and s escape Article 81(1). This is a U-turn from the well-understood rule that these kinds of agreement are ‘hard-core restraints’. The court explained that in this sector, parallel trade was not going to lead to price competition and lower prices for consumers because their prices are fixed under national law. At the end of its discussion the court reminds us that this factual matrix was an unprecedented situation (147), which suggests that in most other goods and services, a ban on parallel trade will e deemed to have an anticompetitive object.
The implication of the court’s reasoning is that the anticompetitive object of an agreement must be looked at in its factual context. But then what is the difference between object and effect?
The CFI’s assessment of the effects of the clause
This part of the decision is peculiar because the court finds that the agreement might harm consumers… by transforming the definition of consumer. Recall how in the object category the emphasis was on the patient. Here (at 184) the court discovers an additional consumer – the sickness insurance schemes who, it says, suffer loss as a result of a diminution in intra brand competition. That is, the ability of Spanish wholesalers to export would have led to these consumers paying slightly lower prices, and in some Member States this might have led to lower prices for patients too.
This is puzzling. In the ‘object’ discussion the consumer is only the patient and the court says that his losses are not self evident after analysing the facts. Then in the ‘effect’ discussion, the consumers are the health insurance bodies and the patient, and both benefit from intra brand competition. This blurs the line between object and effect so much that it is invisible.
Article 81(3)
This segment focuses n the first condition ‘improving the production or distribution of goods or promoting technical and economic progress.’
Two interesting points here.
First, the court accepts the validity of GSK’s argument: restrictions on parallel trade can serve to allow it to raise money to finance research, and in this market, the key to inter-brand competition is innovation. The Commission was bound to trade off the improvements in efficiency stemming from innovation against the modest losses that some buyers suffered as a result of higher prices caused by the restriction in competition.
Second, in setting out some preliminaries we get this passage (244)
The Commission has, in particular, a margin of discretion which is subject to a restricted judicial review, in the operation consisting, once it has been ascertained that one of the criteria on which Article 81(3) EC makes provision for an exemption was satisfied, in weighing up the advantages expected from the implementation of the agreement and the disadvantages which the agreement entails for the final consumer owing to its impact on competition, which takes the form of a balancing exercise carried out in the light of the general interest appraised at Community level.
What is the general interest? (I doubt the court was quoting from Rousseau) does it mean that in 81(3) we look at more than just consumer benefits? This passage may be an aberration, later on the court ( like the Commission) reads the first condition of 81(3) as being about efficiencies.
The remaining questions
What does this case mean for the split between 81(1) and 81(3)?
(1) Maybe Odudu is right in suggesting that under Art 81(1) one shows a loss in allocative efficiency and in Art 81(3) one proves a gain in productive efficiency. See his recent book The Boundaries of EC Competition LawThe Scope of Article 81. However I don’t find this distinction helpful because an improvement under 81(3) is often one that improves allocative efficiency also, given that there must be a benefit to consumers for the improvement to count. Moreover, the court here suggests that GSK’s arguments were about increasing inter-brand competition. This kind of competition yields allocative efficiency.
(2) Maybe (the view I favour) the Commission looks for any loss of consumer welfare under Art 81(1) and then demands that the other party show any gains in consumer welfare. This allows the Commission to operate a quick look approach when some basic facts suggest a risk to competition.
(3) Maybe (and this is the view I would like to favour) under Art 81(3) we look at wider perspectives than just consumer welfare. After all, if you read paras 118 and 244 one after the other, consumer welfare is the objective for 81(1) and the general interest is the objective under Art 81(3). Public policy in Article 81(3)?
What is the difference between object and effect?
I have no idea after this case. Before, we had a fairly good idea that restrictions on parallel trade had an anticompetitive object. Now it seems that one has to have a perfunctory look at the market before being able to presume that any practice has an anticompetitive object.
Wasn’t notification such a good idea?
Note that notification/exemption (the system that the Commission killed off on 1 May 2004) is alive and kicking for this case and also O2 where the parties have been allowed to re-notify. This proves that a system where controversial cases can be notified ex ante is helpful in competition law. It had been mismanaged under Regulation 17, but a more modest scheme limiting notification to some agreements would have been beneficial.
Will GSK get the exemption now?
No predictions here but three indicators: first there seems to be considerable lobbying in support of clearance; second there seems to be considerable evidence that GSK has a point; but third the Commission has a margin of discretion. The worse thing that could happen is that the case gets settled informally, so that the Commission avoids publishing an uncomfortable precedent. This is the likely outcome.
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