OBJECT OR EFFECT: WHERE DO COMPETITION AUTHORITIES NEED TO DRAW THE LINE?

Transcription

1 OBJECT OR EFFECT: WHERE DO COMPETITION AUTHORITIES NEED TO DRAW THE LINE? John Kwan Behavioural economics tells us that giving up something one already owns is twice as painful as gaining something equally good is pleasurable. 1 This perhaps explains the rather irrational attachment to the predominant interpretation of Article 101(1)TFEU as giving rise to an object/effect dichotomy. Such interpretation post-dates the Treaty and is not necessitated by it. More fundamentally, the formalistic dichotomy is ill-suited to keeping up with the advancement of economic theories in recent decades and should be discarded. In its place, Article 101(1) should be seen as a spectrum dotted with presumptions, with object and effect playing distinct roles along the spectrum; there is no clear line between the two, and both can be applicable to one and the same analysis. Object/effect dichotomy Article 101(1) prohibits agreements between undertakings which have as their object or effect the restriction of competition. The established view is that these are alternative requirements 2 : once an agreement is found to be restrictive of competition by object, a costly examination of the concrete effects is not required. 3 In light of the considerable procedural economies consequent on a finding of object infringement 4, competition authorities seeming readiness to make such findings, particularly in increasingly favoured settlement procedures 5, has understandably been viewed with skepticism. 6 It would be tempting to cast the present uncertainty revolving around the scope of the object concept chiefly as a consequence of competition authorities abusive expansion of the concept. Indeed, many 7 welcomed the Cartes Bancaires judgment where the CJEU warned that an over-reliance on the object concept would result in the Commission being exempted from the obligation to prove actual effects, and emphatically rejected the suggestion that the object concept is not to be interpreted restrictively. 8 Such a simplistic view, however, belies the complexity of the status of the law. Three views of the object concept E.g. D Kahneman, Thinking, Fast and Slow (Penguin, 2011). Société Technique Minière v Maschinenbau Ulm GmbH (56/65) [1966] E.C.R. 235, p.249. Consten and Grundig v Commission (56/64) [1966] E.C.R. 299, p.342. Such advantage was acknowledged by A.G. Wahl in Groupement des Cartes Bancaires v Commission (C-67/13P), at [28]-[31]. E.g. the integrated transatlantic flights cases: COMP BA/AA/IB; COMP/AT Continental/United/Lufthansa/Air Canada; COMP Air France-KLM/Alitalia/Delta (this object assessment is made post Cartes Bancaires). E.g. Latham & Watkins, By object restrictions of competition revisited: European Court of Justice endorses narrow interpretation, Client Alert News Flash Number E.g. King & Wood Mallesons SJ Berwin, ECJ overturns object finding in Cartes Bancaires cardfees case, Community Week Newsletter & Alert. Groupement des Cartes Bancaires v Commission (C-67/13P), at [55]-[58].

2 The utility of a concept should be judged by its (i) coherence; (ii) explanatory power; (iii) predictive power; and (iv) persuasiveness. There are at least three different views on the meaning of the object concept but they are all deficient in one way or another. First, there are those who subscribe to the object box approach 9, including the Commission in certain cases 10, under which agreements are conclusively presumed to restrict competition by object if they contain obvious restrictions of competition. 11 Whilst its simplicity has the potential of promoting legal certainty for undertakings and ease of enforcement for competition authorities, it fails to explain a considerable body of case law. For instance, the refusal by a musical works copyright licensing society to license only part (as opposed to the whole) of the repertoire represented by it was held not to restrict competition by object, even though it directly restricted output. 12 In another case, the CJEU referred to the need to assess the effects of an agreement and analysed the undertakings market positions, even though the relevant agreement involved price-fixing and market-sharing. 13 Under the second view, a limited contextual analysis is required to determine whether or not an agreement has the object of restricting competition. 14 The leading case GSK concerned a dual pricing mechanism that resulted in pharmaceutical products intended for export being priced higher than those sold domestically. 15 The General Court rejected the Commission s finding that the mechanism amounted to an export ban and therefore by analogy to previous case law must have had as its object the restriction of competition. 16 Crucially, it emphasised the need to take into account the legal and economic context 17 in analysing an arrangement and noted, in this regard, the characteristics of the pharmaceutical sector, where prices of medicines are state-controlled and parallel trade does not guarantee the reduction of prices for final consumers. 18 Thus, special circumstances in a relevant market can prevent agreements found to be restrictive of object in (most) other contexts from being held to be so in that particular market. However, this view fails to explain clear-cut infringement cases where no such contextual analysis was conducted. The third view is exemplified by the CJEU s decision in Allianz Hungária 19, which stipulated an ever-broader enquiry before object infringement could be found. In particular, the CJEU Graphically illustrated in R Whish and D Bailey, Competition Law (Oxford University Press, 7 th edition, 2012), p.124. E.g. evident in its Guidelines on the application of Article 81(3) of the Treaty [2004] OJ C101/97 which lists price fixing and market sharing as restrictions by object, at [21]. European Night Services v Commission (T-374) [1998] E.C.R. II-1341, at [136]. Ministère Public v Jean-Louis Tournier (395/87) [1989] E.C.R ACF Chemiefarma v Commission (C-41/69) [1970] E.C.R. 661, at [114] and [155]. E.g. O Kolstad, Object contra effect in Swedish and European competition law, (2009) Swedish Competition Authority. GlaxoSmithKline Services Unlimited v Commission (T-168/01) [2006] E.C.R. II Ibid, at [138]. Ibid, at [117]. Ibid, at [147]. N.b. the CJEU (GlaxoSmithKline Services Unlimited v Commission (C-501/06) [2009] E.C.R. I-9291) ultimately reversed the General Court s decision but did not question the General Court s contextual approach. Allianz Hungária Biztositó and Others (C-32/11) [2013] E.C.R. I

3 stated that the structure of the market, the existence of alternative distribution channels and their respective importance and the market power of the companies concerned must be examined. 20 Given the breadth of the enquiry, it has to be questioned how this differs from that conducted under an effects analysis 21 ; it also challenges the raison d être of the object/effect dichotomy and nullifies the supposed benefit of the object/effect dichotomy i.e. legal certainty. The right question? The diverse views make any attempt to draw a clear line between object and effect extremely difficult. More fundamentally, it should be questioned whether any attempt to draw the line between object and effect is even a meaningful exercise. It is submitted that the roles of both object and effect as mere gateways to the finding of Article 101(1) infringement should be emphasised, and that the proper focus should rather be on whether there is Article 101(1) infringement. Article 101(1) as a spectrum It is a truism that competition authorities do not have a carte blanche to rewrite Article 101(1). Although the words object and effect themselves cannot simply be replaced or disregarded, the object/effect dichotomy is neither necessitated by the Treaty nor the inevitable interpretation of the case law. Rather, a spectral approach, analogous to developments in the US, should be preferred. Starting with GTE Sylvania 22 in the 1970s, the US Supreme Court steadily subjected more and more restraints previously judged as per se illegal to a rule of reason analysis and declared that there was no categorical line between per se restraints and those subject to a rule of reason analysis. 23 To a large extent, this stemmed from its increasing receptiveness to economic evidence. In parallel, the EU s embrace of a more economic approach should lead to a similar rethink. 24 Instructively, the Supreme Court talked about devising presumptions and rules for offering proof through experience to make the rule of reason analysis more efficient, in place of the stark per se/rule of reason dichotomy. 25 The analysis below recasts Article 101(1) as a spectrum, with a number of presumptions of Article 101(1) infringement positioned across it. It is conceptually preferable to the dichotomy and at the same time, firmly grounded in case law. Crucially, the experience gleaned throughout decades is used to inform the contours of those presumptions, notably through the exploitation of the established object box. This avoids the reinvention of the wheel and acknowledges the positive aspect of the object box i.e. its formation was Ibid., at [48]. E.g. C Graham, Methods for determining whether an agreement restricts competition: comment on Allianz Hungária, (2013) 38 E.L.Rev.542. Continental T.V. Inc. v GTE Sylvania Inc., 433 U.S. 36 (1977). California Dental Association v FTC, 526 U.S. 756 (1999), p.780. E.g. Philip Lowe s speech, Consumer welfare and efficiency new guiding principles of competition policy?, Munich, 27 March Leegin Creative Leather Products Inc. v PSKS Inc., 551 U.S. 877 (2007). 3

4 informed by years of experience that certain restrictions have a high potential of producing negative effects on the market. 26 At one end of the spectrum, the focus is on the natural meaning of the word object i.e. aim 27 or purpose 28 of the agreement. 29 Even though intent, either subjectively or objectively determined, is neither a necessary nor sufficient factor, case law does not prevent it from being taken into account. 30 Where it is proven that the primary intent (this factor tips the balance) is to engage in an obvious restriction within the object box, there should be an almost irrebuttable presumption that Article 101(1) is infringed. The next point along the spectrum covers where the intent to engage in the obvious restrictions is only secondary. Here, the presumption is easier to dislodge, albeit only through (i) the limited contextual analysis described above 31 and/or (ii) objective justifications 32 (discussed further below). The distinction between primary and secondary intent is intended to capture the difference in culpability (reflecting the public policy aim to deter deliberate breaches) between (i) secretive cartels where primary intent can be conclusively assumed; and (ii) open cartels or agreements where there is no attempt to conceal the arrangement, such as the grouping of French banks in Cartes Bancaires 33, and the open refusal by a copyright licensing society to licence only part of the repertoire. 34 This difference in treatment is apparent in case law. 35 Further along the spectrum, the focus is on the presence of object box restrictions. This covers case law which defines object restraints as those that by their very nature is injurious to competition but ignores the intent element 36 ; the lack of intent justifies this positioning. With this approach, the conflicting definitions of object ( aim vs. by their very nature ) are reconciled. Next, the presumptions just described are replicated (with intent cases coming before the presence cases) for agreements with hardcore restrictions 37 under the vertical agreement block exemption regulation 38, which are not also within the object The Guidelines on the application of Article 81(3) of the Treaty [2004] OJ C101/97, at [21]. CRAM v Commission (C-29/83) [1984] E.C.R. 1679, at [26]. ANSEAU v Commission (C-96/82) [1983] E.C.R See S King, The Object Box: Law, Policy or Myth?, 6 European Competition Journal 7 (2010) 269 for a similar analysis. General Motors v Commission (C-551/03P), at [77] and [78]. The subjective intention of the party to restrict parallel trade was held relevant to the question whether the agreement has an anti-competitive object. Société Technique Minière v Maschinenbau Ulm GmbH (56/65) [1966] E.C.R. 235, p.249. The objective justification analysis under Article 101(1)TFEU as discussed in Pierre Fabre Dermo- Cosmétique SAS v Président de l Autorité de la concurrence (C-439/09). In fact, the Commission was notified of the measures pursuant to the old notification regime. Ministère Public v Jean-Louis Tournier (395/87) [1989] E.C.R E.g. Copper fittings cartel (COMP/F-1/38.121). Competition Authority v Beef Industry Development Society (C-209/07) [2008] E.C.R. I-8637, at [17]. This article agrees with the analysis that object restrictions are distinct from hardcore restrictions. See e.g. J Goyder, Cet Obscur Objet, (2012) 2 Journal of European Competition Law and Practice 327. Commission Regulation (EU) 330/

5 box. 39 That these hardcore restrictions automatically fall outside the safe harbour suggests that they are likely to infringe Article 101(1), albeit not as likely as object box restrictions. An escalating scale of effects analysis (discussed further below) is applicable to all the presumptions. At the other end of the spectrum, for cases to which no presumption applies, a full-blown effects analysis is required. The spectral approach outlined above is consistent with case law and provides a persuasive explanatory framework. Its beauty consists in its flexibility in accommodating (i) new presumptions; (ii) new evidence capable of displacing the presumptions; and (iii) new restraints to be introduced into the existing presumptions, in stark contrast with the rigidity of the dichotomy. Sliding scale of effects analysis The factors that can be taken into account in an effects analysis are wide-ranging, for example, the determination of the relevant market, the effect of a network of similar contracts in their totality, the number and the size of competitors, customer fidelity, market position of the parties and access to the market. 40 This provides fertile ground for devising varied levels of effects analysis. Insofar as the limited contextual analysis requires consideration of the economic context, it contains elements of an effects analysis, such as the examination of the relevant market. This kind of assessment was described as truncated by Advocate General Mazák in Pierre Fabre 41 and arguably constitutes the lowest end of an effects analysis. At the next level, the Commission s parallel effects analysis in cases where it has found object infringement are typically abridged. Take one of the integrated transatlantic flights cases as an example 42 : the Commission defined a narrow premium air travel market, consisting only of first and business classes travels, and attributed high market shares to the parties. There was no Such as resale price maintenance (Binon v SA Agence (243/83) [1985] E.C.R. 2015). Delimitis v Henniger Brau (C-234/89) [1991] E.C.R. I-935, at [16]-[26]. E.g. A.G. Mazák in Pierre Fabre Dermo-Cosmétique SAS v Président de l Autorité de la concurrence (C-439/09), at [27]. COMP BA/AA/IB. 5

6 indication that it conducted any price elasticity analysis in relation to the passengers and it simply assumed that first and business classes passengers are less price-sensitive due to the weight they place on travel comfort. In cases with more novel restraints, full-scale effects analysis tends to be carried out e.g. the Commission in Cartes Bancaires actually conducted an in-depth effects analysis, arguably betraying the shaky ground for its object restriction finding. These illustrate that, even under the current approach, the effects analysis is not uniform in all cases and its intensity correlates negatively with the strength of a presumption that Article 101(1) is infringed. The spectral approach merely expands on this, although the precise level of effects analysis accompanying each presumption will need to be developed incrementally through cases. Article 101(1) vs. Article 101(3) The spectral approach provides for the use of objective justification alongside the limited contextual analysis to displace a presumption of Article 101(1) infringement. This is related to the debate over the interaction between the analysis under Article 101(1) and Article 101(3), on which the author agrees with Advocate General Trstenjak s statement in Beef Industry that only elements which could cast doubt on the existence of a restriction of competition are to be taken into account under Article 101(1) whilst any other factors may only be taken into account under Article 101(3). 43 Cases such as Pierre Fabre 44, which referred to the possibility of clauses that would otherwise restrict competition by object being objectively justified 45, should be understood as being concerned with the (non-)existence of a restriction of competition. 46 Thus understood, such assessment 47 rightly falls under Article 101(1) and the spectral approach accommodates this. Importantly, the spectral approach makes clear that objective justification only partly displaces the infringement presumption and a further effects analysis is still required. Such a point was overlooked by the CJEU in Louis Euraw 48 where it held that the licensing agreement in question fell outside Article 101(1) altogether simply because the export ban, long considered to be an object restriction, was objectively justified. There is no principled ground for holding that once an agreement is not restrictive of competition by object, it should fall outside Article 101(1) altogether without an effects analysis. The spectral approach goes a long way in preventing this by putting the focus on Article 101(1) infringement A.G. Trstenjak in Competition Authority v Beef Industry Development Society (C-209/07) [2008] E.C.R. I-8637, at [50] and [55]. Pierre Fabre Dermo-Cosmétique SAS v Président de l Autorité de la concurrence (C-439/09). Louis Erauw-Jacquery v La Hesbignonne SC (27/87) [1988] E.C.R See D Bailey, Restrictions of Competition by Object under Article 101TFEU, (2012) 49 C.M.L.Rev.550 for more on this analysis. The precise scope of such objective justifications remains uncertain. At present, it also seems to encompass some public policy aims (e.g. Wouters v Algemene Raad van de Nederlandse Orde van Advocaten (C-309/99) [2002] E.C.R. I-1577). The main point to be made here is simply that the spectral approach is well equipped to accommodate such a concept, as and when it is fully developed. Louis Erauw-Jacquery v La Hesbignonne SC (27/87) [1988] E.C.R

7 For completeness, Article 101(3) will be applicable across the whole of the spectrum after a finding of Article 101(1) infringement and its focus is on weighing the pro- and anticompetitive effects of a restriction. Even though there is no basis for varying the standards of the application of Article 101(3) to different Article 101(1) infringements, it has been observed that it is far more difficult to justify an infringement by object on efficiency grounds. 49 With the spectral approach, courts will no longer be unduly influenced by an object infringement finding and will be more likely to conduct a wholly independent Article 101(3) analysis. Expanding effects analysis? Critics of the spectral approach might argue that it expands effects analysis to cases which are not otherwise required under the object/effect dichotomy, thus undermining the effectiveness of the Treaty and legal certainty. Such arguments are misguided. First, effectiveness of enforcement in itself can never justify a confused and out-of-date legal construct. Second, the uncertainty of the dichotomy is spawning more and more drawn-out litigation, undermining the legal certainty claim. Third, effects analysis is never completely irrelevant and is in fact part and parcel of every Article 101(1) infringement finding: for there to be an Article 101(1) infringement, effects analysis is required to (i) assess whether an agreement has an appreciable/more than a de minimis effect on the markets 50 ; (ii) substantiate claims that pro-competitive effects outweigh the anti-competitive effects under Article 101(3); and (iii) assess the appropriate level of fine that is ultimately imposed. 51 Concluding remark The spectral approach as outlined above is consistent with case law and draws upon the existing object box, which derives from many years of aggregate experience. It has the flexibility of accommodating new presumptions, as well as new economic or other evidence displacing such presumptions. As a switch to the spectral approach will introduce a considerable degree of clarity to Article 101(1) analysis, it is only rational and beneficial to discard the object/effect dichotomy. Under the spectral approach, object and effect have concurrent roles in the analysis of the restraints; it is not meaningful to locate the point where the one ends and the other begins E.g. A Jones, Left behind by modernisation? Restrictions by object under Article 101(1), 6 European Competition Journal (2010). Franz Völk v SPRL Est J Vervaecke (5/69) [1969] E.C.R At [7], the CJEU said that this, in particular, required the market position of the party to be taken into account. Guidelines on the method of setting fines, O.J. 2006, C210/02, at [22]. 7