Cooperation, Initiative and Regulation A Cross Cultural Inquiry

Transcription

1 James S. Venit Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates Brussels, Belgium Cooperation, Initiative and Regulation A Cross Cultural Inquiry European University Institute Robert Schuman Centre for Advanced Studies 2007 EU Competition Law and Policy Workshop/Proceedings To be published in the following volume: Claus-Dieter Ehlermann and Mel Marquis (eds.), European Competition Law Annual 2007: A Reformed Approach to Article 82 EC, Hart Publishing, Oxford/Portland, Oregon (in preparation). Please do not quote or circulate without permission James S. Venit. All rights reserved.

2 EUI-RSCAS/Competition 2007/Proceedings 1/25 12th Annual Competition Law and Policy Workshop Robert Schuman Centre, 8-9 June 2007 EUI, Florence James S. Venit* Cooperation, Initiative and Regulation a Cross Cultural Inquiry 30 May 2007 Nietzsche begins his essay on history 1 by describing some decidedly ahistorical cows ruminating in a field. Men are not cows. A humble private in the trenches of the first world war suddenly begins to consume history books and when asked why points to the shells landing around him and replies I am trying to understand how the devil I got here. The here I would like to explore is the paradox of our European antitrust law and why it has gone in directions, particularly as concerns single firm conduct, that themselves appear to be anti-competitive. In what follows I shall seek to develop three ideas: First, the EU and US antitrust agencies do not always mean the same thing when they speak of competition, and this is particularly but not exclusively the case when it comes to dealing with single firm conduct in the context of Section 2 of the Sherman Act and Article 82. Second, the difference in approach may not primarily be driven by the difference between a focus on short versus long-term effects, but rather by differences in cultural attitudes about the propriety and social implications of aggressive, individualistic competition and the ability of markets to solve their own problems in the long run. Third, societies that have not experienced robust competition and unrestricted markets tend to have less confidence in both and thus are prone to adopting regulatory approaches that not only reflect this lack of confidence but also tend to reinforce the lack of competition with the negative consequences common to non virtuous circles. In Europe this has led to the formulation of a set of very restrictive rules that appear better designed for regulating the conduct of public monopolies than that of firms who have had to earn their success by competing. Before beginning, two health warnings. First, generalizations and stereotypes are always dangerous, probably the more so as their apparent accuracy increases. This is particularly the case because trends in enforcement change. The US agencies and courts of the 1960s have also been criticized as too interventionist, and there is no guarantee that * Partner Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates. 1 Untimely Meditations: On the Uses and Disadvantages of History for Life (R.J. Hollingdale, trans.), Cambridge University Press, 1983.

3 EUI-RSCAS/Competition 2007/Proceedings 2/25 current attitudes will remain fixed in either Europe or the US. 2 Second although what follows may reflect my view that the current European approach to single firm conduct is too interventionist, this article is not an argument for or against one type of social philosophy. Rather it is an attempt to understand, by looking backward and with some sensitivity to cultural biases, how we got to where we currently are. I. Nineteenth Century Attitudes Toward Cartels and Competition in Germany To understand modern European attitudes toward competition and the role of competition law, it is important to understand the cultural attitude toward cooperation and unbridled competition that evolved in the 19th Century. This story largely centres on Germany and Austria partly because cartelization does not appear to have been regarded as favourably elsewhere and partly because German historical and cultural attitudes are of particular importance given Germany s position as the intellectual source for much of what came to be enshrined in the competition provisions of the Treaty of Rome. Review of this history reveals a pervasive cultural attitude toward cartels and single firm economic power whose traces are still present in European antitrust law today. This cultural attitude is reflected in the contrast between cooperation and organization, which were viewed as positive attributes as opposed to individualism and conflict which were not. As will be seen from the discussion that follows, this attitude gave rise to a greater tolerance of cartels in Austria and even more so in Germany during the 19th Century and to hostility to the exercise of single firm economic power which can be traced to modern European law by such manifestations as the decision not to criminalize cartel conduct, reliance on abuse control and the view that single firms exercising economic power have special obligations and should be subjected to special controls. At the beginning of the twentieth century it is estimated that there were about 400 cartels in Germany, which had become known as The Land of Cartels, 3 with many of these including industrial leaders rather than defensive alliances of smaller firms. 4 The pervasiveness of German cartelization can be traced to a number of economic, political and cultural factors. Among the most important were the sheer speed of German industrialization, The fluidity in US attitudes is not inconsistent with the thesis that culturally the US has a greater tolerance than Europe for aggressive individualism. Populism is also an important constituent of the US cultural experience and is not unrelated to the tendency of the US legal system to act as a vehicle for redistributing wealth. Indeed, the very fluidity of US attitudes is supportive of the view that mobility, both social and individual has played a greater role in the US than here. David Gerber, Law and Competition in Twentieth Century Europe, Oxford University Press, 1998, p. 75. Möschel estimates that by 1907, 82% of the coal industry, 50% of crude steel, 90% of the paper industry and 48% of the cement industry were, according to a Reichstag report, cartelized. Government rationing gave a further impetus to cartelization during the First World War, and a Cartel Ordnance adopted in 1923 at the height of German hyper-inflation generally encouraged cartels, as did the National Socialists who saw them as useful for planning production. See Wernhard Möschel, Competition Policy from an Ordo Point of View, in Alan Peacock and Hans Wilgerodt, eds., German Neo-Liberals and the Social Market Economy, St. Martin's Press, 1989, p Gerber, cited supra note 3, at 74.

4 EUI-RSCAS/Competition 2007/Proceedings 3/25 the central role played in the German economy by industries well suited for cartel activity such as chemicals, coal and iron, the high degree of industrial concentration, vertical integration, the role of German banks, who preferred stable market conditions, and a high proportion of German export activity which led cartelists to defend their existence as necessary to ensure global competitiveness. 5 Added to these factors were political elements the general historical weakness of German liberalism, 6 the belief in the necessity of organizing the economy, the alliance between business and the State in the task of unification and thereafter a perceived tie between German economic performance and military strength. 7 Other forces also contributed to the positive evaluation of cartels. Especially important was the fact that cartelization was largely seen as a positive phenomenon by 19th Century German economists. These economists, all of whom belonged to the historical school 8 eschewed theoretical approaches and opposed what they referred to as Manchesterism, a reductionist version of classical liberal, Anglo-Saxon economics. For these German economists, cartels were both an appropriate and natural response to over-production and instability and were thus regarded as useful in combating unwanted cyclical fluctuations of the economy. 9 There was also an ethical or social perspective to these economists evaluation of cartels which led to their being viewed as a positive expression of a cooperative social spirit that reduced class conflict. 10 Although these economists were fully aware of the negative economic consequences of cartelization, they nevertheless viewed cartels as encouraging positive attributes such as restraint and concern for weaker competitors, and they contrasted this more ethical approach with the American trusts, which were viewed as purely exploitative. 11 This attitude was also manifested in a notable hostility to monopoly, which in economic theory seems difficult to reconcile with a favourable attitude toward cartels. This inconsistency appears to have been the result of the unique ethical and social lens through which cartels were being evaluated, and may have in it the seeds of more modern European theories of economic dependency and the special obligations of dominant firms The generally favourable view of cartels was also shared by the first German court judgment on the subject, the Saxon Wood Pulp case, decided in In this judgment, the highest German court, relying on the economic literature, concluded in language that anticipates the crisis cartels of the 1970s and 1980s under the Coal and Steel Treaty, that Ibid. at Ibid. at Ibid. at 75 Academic life was sufficiently well organized and supported by the Prussian state that economists who did not share the views of the historical school but were, interested in a theoretical approach, were unable to secure university appointments in Germany. See ibid. at 83 (citing Friedrich Lutz, Verstehen und Verständigung in der Wirtshaftswisesenshaft, Tubingen, 1967, p. 18). Ibid. at 86. Ibid. at 87. Ibid. at Reichsgericht, [1897] 38 RGZ 155 (Sächsisches Holzstoffkartel).

5 EUI-RSCAS/Competition 2007/Proceedings 4/25 cartels were beneficial in that they preserved firms from bankruptcy and enabled them to maintain adequate prices. As the court put it: if the firms in a particular branch band together to eliminate or control price reductions among themselves, their cooperation can be seen not only as a justified application of the drive to self-preservation, but also as a general rule a service to the public, provided that such prices are continuously so low that economic ruin threatens the firms. 13 The Reichsgericht did, however, note that cartels might be illegal in two circumstances: (i) where they were obviously intended to establish an actual monopoly and to exploit consumers unfairly; or (ii) where these results were actually achieved by the cartel agreements. 14 Attitudes in Austria were similar. There too, at the fin de siècle, one finds a similar cultural preference for cooperation and a distrust of unbridled competition. In the case of Austria, these choices were anchored in the collectivist values of Austrian society fostered by cultural and political traditions, not least among them, the Catholic church. 15 What is important for the discussion that follows is the connection between a positive cultural disposition toward cartels as an ethical manifestation of a benign collectivist and social spirit and thus as a beneficial form of cooperation and a hostility toward unrestrained competition and a general condemnation of aggressive, individualistic conduct, which, as noted above, was frequently associated with American trusts. As Gerber puts it: cartels were basically [viewed as] positive institutions. They were seen as superior to both excessive competition and alternate forms of organization such as trusts, because they assured and rewarded important social values such as co-operation rather than baser forces such as individualism and egoism, thus reducing conflicts among competitors and protecting rather than exploiting the weak. This basic perception of cartels and the competitive process persisted in many parts of Europe until recently, and its echoes continue to reverberate. 16 As we shall see, these reverberations continue to be felt most forcefully today not in the area of cartel conduct, which is now generally viewed as exploitative (although generally not worthy, on the continent, of criminal condemnation outside the area of public bid rigging), but more importantly in the attitude toward aggressive and individualistic competition by single firms Ibid. at 157, cited in Gerber, supra note 3, at 92. Supra note 12 at 158, cited in Gerber, supra note 3, at 93. Gerber, supra note 3, at 64. Ibid. at 111.

6 EUI-RSCAS/Competition 2007/Proceedings 5/25 II. The German Influence on EU Competition Law The special attitude towards cooperation and unbridled competition takes on importance because the road to modern European competition law passes, as should by now be well known, through Germany. And although the rise of the Third Reich, the Second World War and its aftermath were watershed events that strongly influenced the development of German competition law and shook it loose from a large part of its earlier heritage, some elements remained. As we shall see, these reappeared in the competition law which emerged in Germany and which, in turn, largely dominated the development of European competition law in both its formative and subsequent stages. There is, of course, an irony in the current transatlantic discussion about EU and US enforcement standards, since the United States played a significant role in the introduction of a modern competition law to the German legal order following the Second World War. However, German law took its own form and, once it had been adopted, its own direction. The German experience, in turn, had a massive influence on the content and interpretation given to Community law as first formulated in Articles 85 and 86 of the Treaty of Rome and in Regulation 17/62. Although Germany s adoption of an effective competition law was strongly influenced by the victorious western allies, the forced adoption of decartelization measures imposed by the US and British authorities during the early years of the occupation never fully uprooted or replaced indigenous competition law traditions. As a result, the German antitrust law that was finally adopted in 1957, the same year as the Treaty of Rome, does not strongly resemble US law. Conversely, although there are signs that this influence is now finally weakening, German law and German thinking had a decisive formative influence on the development and early interpretation of EU antitrust law. The story is told, inter alia, by David Gerber in his 1998 book Law and Competition in Twentieth Century Europe: Protecting Prometheus, 17 and is more or less as follows: Once the US abandoned the so-called Morgenthau plan, which would have reduced Germany to an agrarian economy, the US and British occupying forces imposed decartelization measures which remained in force until the German competition law was adopted in 1957 after a prolonged, nearly decade-long period of gestation and debate. The law entered into force on 1 January See supra note 3. For a shorter version, see also David Gerber, Constitutionalizing the Economy: German Neoliberalism, Competition Law and the New Europe, 42 American Journal of Comparative Law 25 (1994). These decartelization measures were unpopular to the extent they were perceived as victors justice, and some German academics and officials feared that they had a negative effect on German acceptance of forceful indigenous anti-cartel laws. However, inasmuch as industrial resistance to strong anti-cartel legislation delayed its adoption for nearly a decade and resulted in a somewhat watered down version of the original proposal, it is fair to say that there was some fairly entrenched resistance to anti-cartel measures at least on the side of German industry.

7 EUI-RSCAS/Competition 2007/Proceedings 6/25 The interim US- and British-imposed anti-cartel legislation was nearly identical. The US version provided that [e]xcessive concentrations of German economic power, whether within or without Germany and whatever their form or character are prohibited, their activities are declared illegal and they shall be eliminated except where approved by the military government. Excessive concentration of power included cartels, combines, syndicates, trusts, associations or any other form of understanding or concerted action between persons which have the purpose or effect of retraining, or of fostering monopolistic control of, domestic or international trade or other economic activity. 19 The reason for the insistence on a strong antitrust law as part of the new post-war order was the perception, shared by many Germans including, as we shall see, the Freiburg school of Ordoliberals, that the pre-war domination of the highly regulated German economy by cartels and powerful single firms had fostered an essentially anti-democratic spirit that had contributed to the rise of National Socialism and eventually the War. 20 The fact that German industrial barons had thrown their support behind Hitler at a period when he was still struggling for political legitimacy did nothing to dispel this view. The introduction of a strong competition law was thus seen by the US occupation authority as one of the pillars that would anchor Germany in the western alliance and stimulate both democracy and economic recovery. Many progressive Germans in the academic world and legal profession (particularly the Freiburg school Ordoliberals, who had been brooding on these issues at their own risk even prior to and during the war) 21 shared this view and also viewed laws that would curb undue economic power as part of the creation of a rule of law that had been missing under previous regimes. This explains the constitutional anchoring of the competition system and the importance of legal certainty for German thinkers and antitrust pioneers in the post-war period. As discussed below, it also accounts for the importance attached to small and medium-sized firms as the backbone of a democratic market economy and as a counterbalance to the monopolistic and perceived anti-democratic tendencies of large firms. American insistence on the adoption of strong antitrust law as part of the new postwar order did not extend to specifying the terms of that law. As a result, the law that was finally adopted in 1957 nearly a decade after the debate on the new law started 22 reflected See Prohibition of Excessive Economic Concentration of Economic Power, Law No. 56 (1947) (Germ.). As noted above, by 1907, 82% of the coal industry, 50% of crude steel, 90% of the paper industry and 48% of the cement industry were, according to a Reichstag report, cartelized. Government rationing gave a further impetus to cartelization during the First World War, and a Cartel Ordnance adopted in 1923 at the height of German hyper-inflation generally encouraged cartels, as did the National Socialists who saw them as useful for planning production. See Möschel, supra note 3 at 143. The general favourable 19th Century attitude toward cartels was accompanied by a hostile attitude toward monopoly which, in economic theory, seems difficult to reconcile absent the unique ethical and social lens through which cartels were evaluated. This hostility to single firm power appears also to have been the forerunner of modern European theories of economic dependency and the special obligations of dominant firms. Gerber, supra note 3, at The original leading Ordoliberal thinkers were the economist Walter Eucken and two lawyers, Franz Böhm and Hans Grossman-Doerth. The reason for the delay was the resistance of German industry to a tough anti cartel law. This resistance led to the inclusion of certain statutory exemptions for export cartels, specialization cartels, and cooperation between small and medium firms that weakened the basic prohibition principle.

8 EUI-RSCAS/Competition 2007/Proceedings 7/25 unique German perspectives and traditions and thus bore little conceptual or theoretical resemblance to US antitrust law. 23 Concern about the causal relationship between excessive concentration of economic power and anti-democratic tendencies had already found particularly fertile ground among the intellectuals and academics who comprised the Freiburg school during the War and these thinkers succeeded in implanting many of their philosophical concerns and approaches in the German competition law that was ultimately adopted. Some of the Ordoliberals fundamental assumptions, particularly concerning single-firm economic power, appear to have had their roots in some of the collectivist socio-ethical attitudes toward competition discussed above, which involved a strong distrust of aggressive, individualistic competition, as well as the distrust of large firms which stemmed, inter alia, from the perceived role of those firms in assisting Hitler s rise to power. The first component may be explained by the fact that Ordoliberalism s focus was primarily humanistic rather than being rooted in efficiency or economic values. 24 The second is the product of one of the twentieth century s great disasters. Ordoliberalism s four constituent elements have recently been described as: (i) a competition policy primarily oriented toward the goal of securing individual freedom of action as a value in itself, from which the goal of economic efficiency is merely derived; (ii) a strong role for the State in the preservation of the prerequisites of the competitive system but hesitancy towards overt price regulation; (iii) the shaping of competition policy into a rule of law rather than a mechanism for discretionary decisions; and (iv) the embedding of competition policy into the economic order of a free and open society. 25 In particular, Ordoliberal values do not rely on the long-term process of self-healing of the overall This despite the fact that, as in the Sherman Act, two of the key provisions of the Gesetz gegen Wettbewerbsbeschränkungen (the GWB ) dealt with horizontal agreements and single firm conduct, with the third treating vertical agreements. Gerber describes the GWB as a hybrid that reflected, in addition to ordoliberal ideas, contacts with the US antitrust law and residual influences from prior German experience. Gerber, supra note 3, at 277. When a number of German officials charged with enforcing the new law visited their US colleagues in the 1950s, one of their primary interests, other than the practicalities and tactics of enforcement, were the price discrimination provisions of the Robinson-Patman Act. See Gerber, supra note 3, at According to Gerber, the assumption that the Allied decartelization laws were the model for the German competition statute adopted in 1957 is highly misleading : The role of the decartelization laws in the shaping of the German competition law should not be overestimated. The decartelization laws did not become the new German competition law in the sense that the laws were identical or even similar, as even a cursory look at the texts reveals. The decartelization laws were not referred to as a model for the new law, and at least in the legislative debates they were seldom used as a reference point for discussion. In addition, the laws were often not strictly enforced. [n]or did they become part of German legal culture, retaining for many the odor of an imposed system. Finally, they did not introduce German decision-makers to the idea of a strong, prohibition-based competition n law; this was done by the Ordoliberals, whose ideas were already at the center of discussions of competition law. Ibid. at However, it also appears that the US model was frequently cited in defence of the need for a strict anti-cartel law during the long debate between the submission of the first German draft in 1949 and its adoption in See ibid. at 271. But see also Möschel, who takes the view that [t]he practical application of the GWB was closely modeled on the antitrust legislation of the United States and it never lost its stigma as a foreign law imposed by the occupation powers. Möschel, supra note 3, at 145. Gerber, supra note 3, at 36. See Möschel, supra note 3, at 142.

9 EUI-RSCAS/Competition 2007/Proceedings 8/25 society. Instead, they protect the individual economic freedom of action as a value in itself against any impairment of excessive economic power. 26 Many of the same Ordoliberal thinkers who played a central role in the adoption and implementation of German antitrust law also very heavily influenced the drafting and interpretation of the competition provisions of the Treaty of Rome. 27 This helps explain why the protection of individual freedom of action as a value in itself and the concept of performance-based competition have played such central roles in the interpretation of Articles 81 and 82 of the EC Treaty and continue to play a major role in German competition law to this day. The Ordoliberals contribution also helps explain the unique European approach to single-firm conduct. For, although the Ordoliberals certainly did not share the positive view of cartels that prevailed in Germany in the late 19th Century, their attitudes towards single-firm conduct do reflect some of the distrust of aggressive competition that underlay German attitudes toward competition, as well as the specificities of their own historical situation. Recent defenders of the Ordoliberal school have made clear how central the preservation of freedom of action and what they describe as the competitive process is to their approach to competition law. 28 As Professor Giorgio Monti, presumably no relation to the former Commissioner, has phrased it, "competition is a process whereby market actors participate in the economy without overwhelming constraints from private and public power. Accordingly, the aim of competition policy is 'the protection of individual economic freedom of action as a value in itself' According to this view, economic efficiency is the result of the freedom which competition law preserves. [O]rdoliberalism values individual freedom as an end in itself. A restriction of competition within the meaning of Article 81(1) is an undue restriction of the economic freedom of the parties or a restriction on other market participants. 29 In the context of Article 82, Ordoliberalism gave birth to the doctrines of performance-based competition. This concept springs from a distinction drawn by a German scholar, H.C. Nipperdey, between performance-based competiton (Leistungswettbewerb) and impediment competition (Behinderungswettbewerb). According Ibid. at 147. Or as was said by Walter Adams: The freedom of the sheep to coexist with the wolf is meaningless in the absence of a shepherd. Walter Adams, Antitrust, Laissez-faire and Economic Power, in Fritz Neumark et al., eds., Wettbewerb, Konzentration, und wirtschaftliche Macht, Duncker & Humboldt, 1976, at 13. Gerber quotes Otto Schlecht, a leading Germany economic policy official at this time, as claiming that, [w]ithout this battle [for the GWB] there probably never would have been the prohibition of cartels or the abuse supervision in the EC Treaty. Gerber, supra note 3, at 344 (citing Otto Schlecht, Macht und Ohnmacht der Ordnungspolitik Eine Bilanz nach 40 Jahren Sozialer Marktwirtschaft, 40 ORDO (1989)). See Giorgio Monti, Article 81 EC and Public Policy, 39 Common Market Law Review 1057, 1059 (2002). Ibid. at (footnotes omitted). Historically, Ordoliberalism can be viewed as a response to excessive concentration of economic power. This reaction manifests itself in its concern for preserving what are perceived as "competitive" market structures and a lack of confidence in the ability of markets to selfregulate. The result is often an over-willingness to intervene in order to save competition from itself or to save competitors from their more successful rivals.

10 EUI-RSCAS/Competition 2007/Proceedings 9/25 to Professor Gerber, the former included conduct that made a firm s products more attractive to consumers, typically by improving their characteristics or lowering their prices, while the latter referred to conduct designed to impede a rival s capacity to perform. 30 European law has embraced the concept of performance-based competition 31 but it has also embraced other concepts, traceable to Ordoliberal thought such as the special obligations of the dominant firm and the need to protect the competitive structure against competition from strong rivals. As one of the modern Ordoliberal proponents puts it: A system of undistorted competition should be understood as a market system in which superior business performance is the decisive factor for the success of an undertaking (principle of competition on the merits ). 32 That objective is ultimately pursued for the benefit of the consumer, and consumer welfare 33 is thus one, if not the foremost, rationale of abuse control. 34 Nonetheless, it should not be considered a Gerber, supra note 3, at 53. Behinderungswettberwerb is best translated as impediment competition, rather than exclusionary competition. As discussed below, the poles of the contrast between performancebased competition and impediment competition are not dissimilar to the two standards identified by Professor Einer Elhauge in, respectively, his Yale and Stanford law review articles: conduct that enhances the efficiency of the firm engaging in it and conduct that limits other firms efficiency (although this raises the issue of how to treat conduct that both enhances a firm s efficiency and decreases that of its rivals). Einer Elhauge, Why Above-Cost Price Cuts to Drive out Entrants are Not Predatory and the Implications for Defining Costs and Market Power, 112 Yale Law Journal 681 (2003); Einer Elhauge, Defining Better Monopolization Standards, 56 Stanford Law Review 253 (2003). The concept of "means other than normal competition on the basis of the performance of commercial operators, which is central to the notion of abuse under Article 82 as articulated first in Case 85/76, Hoffman-La Roche v Commission [1979] ECR 461, was developed by Professor Peter Ulmer of Heidelberg University in the mid-1970s. Gerber, supra note 3, at 313. According to Ulmer, the conduct of a firm constituted an abuse when it satisfied two conditions: (i) the conduct was non-performance based competition, i.e., competition that is not based on the merits ; and (ii) it must restrict what residual competition remains in the market in which the dominant position is held. See also John Kallaugher and Brian Sher, Rebates Revisited: Anti-Competitive Effects and Exclusionary Abuse under Article 82, 25 European Competition Law Review 263, 269 (2004). Case 85/76, Hoffman-La Roche v Commission cited in previous footnote, at para. 91; Case C-62/86, AKZO v Commission [1991] ECR I-3359, at para. 69; Case T-65/98, Van den Bergh Foods v Commission [2003] ECR II-4653, at para. 157; Case T-51/89, Tetra Pak Rausing v Commission [1990] ECR II-309, at para. 23; Case 322/81, Michelin v Commission (Michelin I) [1983] ECR 3461, at para. 70; Case T-111/96, ITT Promedia v Commission [1998] ECR II-2937, at para. 138; Case 31/80, L Oreal v PVBA De Nieuwe Amck [1980] ECR 3775, at para. 27; Case T-219/99, British Airways v Commission [2003] ECR II-5917, at para. 241; Case T-203/01, Michelin v Commission (Michelin II) [2003] ECR II-4071, at paras. 54 and 97; Case T- 228/97, Irish Sugar v Commission [1999] ECR II-2969, at para. 111; Case T-65/89, BPB Industries and British Gypsum v Commission [1993] ECR II-389, at paras. 94 and 118. In a judgment dated 27 September 2006, which has now been contested before the ECJ (on appeal: Cases C- 501/06, C-513/06, C-515/06 & C-519/06), the Court of First Instance identified consumer welfare as the key goal of competition law (without drawing any distinction between Articles 81 and 82) and placed this consideration at the forefront of its analysis of whether there was a restriction of competition by object. Case T-168/01, GlaxoSmithKline Services Unlimited v Commission, not yet reported. This judgment suggests that Professor Eilmansberger s conclusion that consumer welfare is not the goal of competition law no longer reflects Community law as it has now developed. See Thomas Eilmansberger, How to distinguish good from bad competition under Article 82 EC: In search of clearer and more coherent standards for anti-competitive abuses, Common Market Law Review 129 (2005). Certainly, Professor Eilmansberger s interpretation is also out of step with the Commission s guidelines on the application of Article 81(3), [2004] OJ C101/97, which also places consumer welfare at the centre of the analysis under both Articles 81(1) and 81(3). See discussion below. Consumer welfare here refers to the real, not the Chicago, sense of the term. See Alison Jones and Brenda Sufrin, EC Competition Law, Oxford University Press, 2004, 39 et seq.; Commission guidelines on vertical

11 EUI-RSCAS/Competition 2007/Proceedings 10/25 direct requirement of the types of abuse of interest here (anticompetitive abuses). As was repeatedly confirmed by the Court, Article 82 applies not only to practices directly damaging consumers, but also to conduct which is detrimental to them by its impact on an effective competition structure. 35 The protection of the competitive process is thus a goal in itself. 36 The underlying idea is that consumers are best served if firms are forced to compete and, at the same time, are protected in their efforts to succeed on the merits. 37 The cited passages accurately reflect the two cornerstones of the Ordoliberal approach: the application of Article 81(1) to restrictions on economic freedom and the application of Article 82 to conduct that is perceived as deviating from normal competition on the merits and thereby threatening the competitive structure (which Professor Eilmansberger, perhaps with a nod to Professor Fox, 38 now extends to include the competitive process). However, the attempt to relate the superior business performance which is the decisive factor for the success of an undertaking with the principle of competition on the merits should cause some surprise to the initiated reader. For both competition on the merits and its opposite means other than normal competition on the basis of the performance of commercial operators have acquired very special, indeed, one could say coded meanings under Community law and those meanings appear unrelated to conventional notions of superior business performance. 39 To take one example, in the field of discounts, competition on the merits does not include the granting of rebates that restraints, [2000] OJ C291/1, at para. 7; Commission guidelines on the application of Article 81(3), cited in previous footnote, at para. 13. Case 6/72, Continental Can v Commission [1973] ECR 215, at para. 26; Hoffman LaRoche, supra note 31 at paras. 89 et seq. and 125; British Airways, supra note 32 at para. 244; Cases 40/73 to 48/73, 50/73, 54/73 to 56/73, 111/73, 113/73 and 114/73, Suiker Unie and Others v Commission [1975] ECR 1663, at para. 518; Michelin I, supra note 32 at para. 71; BPB Industries and British Gypsum, supra note 32 at para. 120; Case T-54/99, max.mobil Telekommunikation v Commission [2002] ECR II-313, at para. 52; Irish Sugar, supra note 32 at para. 232; also Case C-418/01, IMS Health v NDC Health [2004] ECR I-5039, at para. 48. Drexl proposes to explain such consumer emphasis with the concept of dynamic efficiency. See Josef Drexl, Intellectual Property and Antitrust Law-IMS Health and Trinko-Antitrust Placebo for Consumers Instead of Sound Economics in Refusal-to-Deal Cases, 35 ICC: International Review of Intellectual Property and Competition Law 788, 802, 804 et seq. (2004). See Luc Gyselen, Rebates-Competition on the Merits or Exclusionary Practice?, in Claus-Dieter Ehlermann and Isabela Atanasiu, eds., 2003 European Competition Law Annual What is an Abuse of a Dominant Position?, Hart Publishing, 2006, p. 287; Eleanor Fox, Abuse of Dominance and Monopolisation: How to Protect Competition Without Protecting Competitors, in ibid. at 69; Eleanor Fox, We Protect Competition, You Protect Competitors, 26 World Competition 155 (2003). Philip Lowe, DG Competition s Review of the Policy on Abuse of Dominance, in Annual Proceedings of the Fordham Corporate Law Institute (2004); Gyselen, supra note 36 at 287; Duncan Sinclair, Abuse of Dominance at a Crossroads: Potential Effect, Object and Appreciability Under Article 82 EC, 25 European Competition Law Review 491, 494 (2004). See both articles by Professor Fox, supra note 36. As discussed more fully below, competition on the merits, as the term has been used and defined in Community law, bears very little resemblance to the robust form of aggressive competition that is more readily accepted and encouraged in the United States. To cite just one example that will be developed more fully below, in the context of rebates, competition on the merits does not extend to, or take into account, factors such as the value to the buyer of its customer s business performance. Rather, it has been confined to a very narrow supply-side, cost-based justification which in practice makes it impossible to defend rebate schemes against allegations of exclusion and discrimination. For examples in the case law, see Michelin II and British Airways, each cited supra note 32.

12 EUI-RSCAS/Competition 2007/Proceedings 11/25 incentivize output or enhance distributors performance or reflect the value to a supplier of the superior performance of a party entrusted with the sale of its goods. Rather, normal competition on the basis of performance and competition on the merits have meant that rebates granted by a dominant firm can only be justified when they correspond to very precise cost savings realized by the firm. 40 This has led one astute observer to remark that European Community case law applicable to above-cost discounting is "rooted in nineteenth-century economic theory which relied on a cost-based theory of value from Ricardo to Marx". 41 A better feel for the classical Ordoliberal position in practice this time dealing with the special obligations of dominant firms and the extent to which it is necessary to assess the actual effects of competition that is not based on the merits can be gained from the following passages taken from the Advocate General s opinion in the recent British Airways case: The conduct of a dominant undertaking is not, therefore, to be regarded as abusive within the meaning of Article 82 EC only once it has concrete effects on individual market participants, be they competitors or consumers. Rather, a line of conduct of a dominant undertaking is abusive as soon as it runs counter to the purpose of protecting competition in the internal market from distortions (Article 3(1)(g) EC). 43 That is because, as already mentioned, a dominant undertaking bears a particular responsibility to ensure that effective and undistorted competition in the common market is not undermined by its conduct What is to be proved is, rather, the mere likelihood of the conduct in question hindering the maintenance or development of competition still existing in the market by means other than competition on the merits, thereby prejudicing the goal of effective and undistorted competition in the common market. With regard, therefore, to rebates and bonuses of a dominant undertaking, it has to be proved that they are capable 45 of making it difficult or impossible for that undertaking s competitors to As a result, it is not possible to justify discounts by such obvious factors as their ability to incentivize output or reward the performance of the supplier s distributors. David Spector, Loyalty Rebates and Related Pricing Practices: When Should Competition Authorities Worry, forthcoming in World Competition. Opinion of Advocate General Kokott delivered on 23 February 2006, Case C-95/04 P, British Airways v Commission. This passage is cited not because it constitutes good law but rather for its presentation of the Ordoliberal approach. Joined Cases 6/73 and 7/73, Istituto Chemioterapico Italiano and Commercial Solvents v Commission [1974] ECR 223, at para. 25. Michelin I, supra note 32, at para. 57. Suiker Unie, supra note 35 at para. 526; Hoffmann-La Roche, supra note 32 at para. 90; Michelin I, supra note 32 at para. 73, second sentence, and para. 85, first sentence. On the criterion of likelihood, see also Case C-7/97, Bronner [1998] ECR I-7791, at para. 38.

13 EUI-RSCAS/Competition 2007/Proceedings 12/25 have access to the market and its business partners to choose between various sources of supply. 87. It is thus sufficient to demonstrate that the rebate or bonus scheme of a dominant undertaking is likely to make it difficult or impossible for its competitors to gain access to the market and its business partners to choose between various sources of supply or business partners, unless there is an objective economic justification for it. Where there is such a hindrance to remaining competition, it can be assumed that, indirectly, consumers are also disadvantaged However, proof that quantifiable damage or an actual, quantifiable worsening of the competitive position of individual trading partners of the dominant undertaking actually took place cannot be demanded. That is because, as already stated, Article 82 EC serves primarily to protect competition as an institution. 46 Therefore, under subparagraph (c) of the second paragraph also, discrimination amongst trading partners in competition with each other can be regarded as abusive once the conduct of the dominant undertaking is likely in the circumstances of the individual case to cause competition amongst those trading partners to be distorted. The inability of normative language to provide guidance in monopolization cases has recently been noted by several commentators. 47 To their critique of the inadequacy of vague standards, I would add the treacherous use of important words about whose fundamental meaning there is no agreement. Or to put it more bluntly, it should not be surprising that the practical significance of words is destroyed by the evocation of the virtues of protecting competition and the competitive process when those advocating these goals do so on the basis of very different understandings of what they mean by competition or the competitive process. 48 Linguistically, we are in a situation analogous to the one described by Abraham Lincoln in his second inaugural address near the end of the north American Civil War when he noted of the two opposing sides that Both read the same Bible and pray to the same God; Footnote omitted. See Einer Elhauge, Defining Better Monopolization Standards, supra note 30, at 255 (2003). Elhauge writes: "We ve all gotten used to a little vagueness in law. Sometimes you just can t foresee or account for the full complexity of life, and, when that is so, the best the law can do is to define some general guidelines for courts and juries to apply to particular facts. But for decades monopolization doctrine has been governed by standards that are not just vague but vacuous. See also Barry E. Hawk, Article 82 and Section 2: Abuse and Monopolizing Conduct, in Wayne D. Collins, ed., Issues in Competition Law and Policy, ABA Section of Antitrust Law, forthcoming According to Hawk, [t]hese definitions offer mostly conclusory labels and provide no firm guidance in hard cases involving competitively ambiguous conduct (like reduced pricing, refusals to deal and product innovations). Robert Bork has provided the following alternative definitions of what might be meant by competition : (i) the process of rivalry; (ii) the absence of restraint over one person s or firm s economic activities by any other person or firm; (iii) that state of the market in which the individual buyer or seller does not influence the price by his purchases or sales; (iv) the existence of fragmented industries and markets; or (v) a shorthand expression or term of art, designating any state of affairs in which consumer welfare cannot be increased by moving to an alternative state of affairs through judicial decree. Robert H. Bork, The Antirust Paradox A Policy at War with Itself, Basic Books, 1978, pp

14 EUI-RSCAS/Competition 2007/Proceedings 13/25 and each invokes His aid against the other. 49 In that conflict, it was relatively easy to distinguish the antagonists well in advance by the colour of their uniforms. That may not always be the case when, for one party to the debate, the competitive process means the Schumpeterian striving for and destruction of monopoly power through innovation while for the other it means the protection of the competitive structure and smaller competitors against the competitive threat represented by a larger rival. 50 III. The Anticompetitive Paradox Prior to the actual attainment of a monopoly, single firm conduct poses the greatest difficulty for antitrust law because the conduct of the firm resembles and indeed may constitute the embodiment of desirable competition. 51 The attitude of antitrust law to this striving for success is contradictory: we want and encourage firms to compete aggressively but we are not always sure whether or when to intervene when they have done too good a job of it. For those who have faith in market forces, there is a reluctance to intervene which is not shared by those who prefer to defend what they perceive as the competitive process. 52 I use the language of belief intentionally because behind either commitment lie very different visions of what competition is. 53 Those who trust the action of market forces tend to rely on the same forces to rectify the situation that may result from an excess of temporary success, at least where entry barriers are not absolute. 54 Those who do not have such trust favour In that particular case, as Lincoln goes on to note, the indignant Deity visited a considerable plague on the houses of both sides. No economist has so ably anticipated what was for him the future as did Josef Schumpeter. His repatriation would be a welcome event. See Hawk, supra note 47 ( Application of antitrust law to dominant firm conduct implicates the highly difficult task of reconciling competing and conflicting policy considerations, including the various tensions among consumer welfare, fairness, and market integration ). William Baxter was the Assistant Attorney General in the Antitrust Division of the Justice Department who took the decision to close down the DOJ s Section 2 investigation of IBM s alleged monopolization of computers. I once had the pleasure of being on a panel with Baxter in the mid-1980s. The former Attorney General expressed satisfaction over the handling of the IBM case before we went onstage, noting Well, we certainly got that one right, didn t we? See Hawk, supra note 47 ( Differing historical contexts such as the greater role of public companies and state-created monopolies in the EU, differing policy considerations such as the EU's traditional embrace of fairness, and differing underlying economic and juridical assumptions about, among others, market erosion and the capability of authorities and courts to identify and remedy anticompetitive conduct all explain the traditionally broader scope of Article 82 compared with Section 2. ). Hawk identifies the forces that result in these differences as differing historical experiences and differing assumptions about the market and governmental intervention. He also cites Geradin s well-made observation that one possible explanation for the greater general willingness in the EC to impose duties to deal on monopolists is that, compared to the United States, more of the monopolies in Europe were created by regulations, government subsidies, or permitted combinations rather than by innovation or other investments. Damien Geradin, Limiting the scope of Article 82 EC: What can the EU learn from the U.S. Supreme Court's judgment in Trinko in the wake of Microsoft, IMS, and Deutsche Telekom?, 41 Common Market Law Review 1519 (2004). As then-judge Bork said in Rothery Storage, [i]f it is clear that Atlas [a furniture moving company] and its agents by eliminating competition among themselves are not attempting to restrict industry output, then their agreement must be designed to make the conduct of their business more effective. No third possibility suggests itself. Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210 (D.C. Cir. 1986), cert.

15 EUI-RSCAS/Competition 2007/Proceedings 14/25 intervention, even though this may mean imposing limits on the successful firm s ability to compete and thus may hinder rather than advance the competitive process. Thus, for one side, the quest to dominate and destroy one s rivals is the engine of the competitive process and should not be trammelled. 55 For the other it is a destructive force that must be constrained. In either case, cant about protecting competition or the competitive process serves as a convenient but uninformative smoke screen. Little wonder that language buckles under the strain and becomes vacuous. No word can simultaneously designate itself and its polar opposite, and no meaningful guidance can be given with words that have lost their descriptive and normative power because they mean diametrically opposite things to those employing them. How we have come to have such diverse views about the meaning of competition (including the lack of consensus even within the same legal culture) is another question. If one were to distinguish historically, almost anthropologically the American from the continental European perspective one might well start with the difference between a society whose formative experience was the frontier 56 and one whose first enduring social form after the fall of Rome was feudalism. From these very different starting points, there is a line of development 57 which, notwithstanding its deviations, individual exceptions and the untold specific mutations of its DNA, can be traced to different attitudes toward individual initiative, respect for hierarchy and order, the use and misuse of public and private power and ultimately, views about what constitutes competition and the extent to which it is necessary to intervene in markets. This difference in attitudes yields different results not merely as concerns substantive interpretations but also in enforcement modalities, and indeed the uses denied, 479 U.S (1987). Similarly, Bork said in The Antitrust Paradox, supra note 48, that [i]mproper exclusion is always deliberately predatory and inefficient, which is rare; otherwise, the exclusion is the product of superior efficiency. There is no intermediate case of exclusion See Bork, The Antitrust Paradox, supra note 48. One very useful way to distinguish between competitive and anticompetitive agreements is to ask whether the firms agreement is consistent with the unilateral drive for monopoly. The exercise points to the critical differences between competition and cooperation. It also suggests that the distrust of aggressive competition may have its origins not in distrust of private power but rather in distrust of aggressive business conduct, initiative and innovation. Against this background, it is not unreasonable to question whether intervention aimed at single firm conduct does not produce a cooperative solution that betrays the essence of competition and may not be the most beneficial one for consumers. Those interested in curbing single-firm conduct in spheres that go beyond output restrictions and consumer exploitation would of course argue that their interventions are designed to protect competition, but that merely raises the question of what one means by competition. Although no longer universally accepted, the Turner thesis on the role of the frontier is well known to students of American history. See Frederick Jackson Turner, The Significance of the Frontier in American History (1883). One could liken the incessant expansion of successive frontiers of which Turner spoke to the creative destruction of the entrepreneurs that drives Schumpeter s model of monopolistic innovation. One might also add to the Turner thesis other individualistic elements the emigration of those who preferred to exchange the known and the familiar for the new and take their chances, and the absence of an entrenched, inherited aristocracy. We must be careful of over-generalization. Feudalism itself took different forms in different countries in the middle ages and the developmental path of countries such as France, with its early strong centralized administration and 16 th Century mercantilist approach which later translated into dirigisme, is very different from that of Germany or England. And other contrasts must be drawn on a nation-by-nation basis. Nevertheless, awareness of the differences between the European and American developmental line is not without value in understanding differences in attitudes and results.