EU competition law does not apply a single legal test. However, the existence of various legal tests is not commonly acknowledged, nor has it been studied systematically. This paper, available here, seeks to bridge this gap.
(c) Pablo Ibanez Colomo
One of the objectives of this paper is to draw a map of the existing legal tests, and to clarify where each of the practices stands along a spectrum ranging from those deemed prohibited irrespective of their effects and those deemed lawful. According to the author, legal tests in EU competition law can be grouped into four main categories. First, some practices are prima facie unlawful irrespective of their effects. Secondly, some conducts are deemed prima facie lawful. Thirdly, some behaviour is subject to a ‘standard effects’ test, which seeks to ascertain whether it has, or is likely to have, anticompetitive effects in the economic and legal context in which it is implemented. Finally, an ‘enhanced effects’ test applies in some instances which requires showing – at the very least – that the input to which access is requested is indispensable to compete on a neighbouring market.
A second objective of this paper is to explain the operation of these tests – that is, how they work in practice. In addition, a third and last objective of this paper is to explain the logic behind the application of a legal test to specific practices.
The paper pursues these goals as follows:
Section 2 identifies the legal tests that apply under EU competition law.
Legal tests to establish liability under Articles 101 and 102 TFEU fall somewhere along a spectrum from presumptively illegal to presumptively legal, based on the expected economic effects of business conduct as inferred from prevailing market conditions. On one extreme, there is conduct that is prima facie unlawful irrespective of its effects on competition – evidence that these practices have been implemented is in principle sufficient for establishing an infringement. At the other end, there are practices that are deemed legal from a competition standpoint, i.e. that are subject to a presumptive lawfulness rule. In between these two ends of the spectrum, there is conduct that is neither prohibited by its very nature nor prima facie lawful. As far as these practices are concerned, a claimant or authority has to show not only that they have been implemented, but that they have, or are likely to have, a negative impact on competition in the specific context in which they are implemented. However, pure effects’ tests are rare – instead, legal tests are calibrated to bring these practices closer to one or the other ends of the spectrum.
As the law stands, the spectrum of legal tests under Article 101 TFEU is relatively straightforward. At one end of the spectrum, there are three broad categories of practices that are subject to a prohibition rule, and thus prima facie unlawful irrespective of their effects: cartels, agreements that are aimed at limiting or eliminating cross-border trade (particularly provisions granting absolute territorial protection to distributors) and vertical price-fixing. At the other end of the spectrum one can find certain types of arrangements that do not infringe competition law, such as selective distribution systems and other ancillary restraints. In the middle, there are practices that are only prohibited where a claimant or authority can show, to the requisite legal standard, that they have, or are likely to have, restrictive effects on competition.
Unlike what some rhetoric may lead one to believe, this spectrum also operates in the context of Article 102 TFEU regarding abusive practices. Business practices that amount to prima facie abuses of dominance irrespective of their effects include exclusivity agreements, a number of rebate schemes and predatory pricing. Examples of such conduct are rebates conditional upon exclusivity or quasi-exclusivity (Hoffman-LaRoche); rebate schemes that set individual targets corresponding to individual customer needs (Michelin I); tying (Hilti, Microsoft); and predatory pricing below average variable costs, or below average total costs in the context of an exclusionary strategy (Akzo). There are also a number of conducts which are legal per se, such as pure quantity rebates insofar as the rebates are given in respect of each individual order and reflect the cost savings made by the dominant supplier (Post Danmark II); and aggressive pricing strategies as long as prices remain above average total cost.
In between, there is a rich spectrum of behaviour which can be subject to different legal treatment under Article 102 TFEU. On the one hand, there are a number of practices that are subject to a ‘standards effects’ analysis, such as many rebates and margin squeeze. However, there are also a number of behaviours that are closer to the per se legality side of the spectrum, such as refusals to supply. These will only amount to an infringement when it is shown that the input to which access is requested is indispensable to compete in a neighbouring market (Oscar Bronner); furthermore, in certain circumstances it may be additionally required that the refusal to supply prevent the emergence of a new product (Magill).
Section 3 seeks to explain why some practices are deemed prima facie unlawful irrespective of their effects.
As a matter of principle, practices are prima facie prohibited irrespective of their effects where two cumulative conditions are fulfilled. The first condition is that the practices are deemed not to have any plausible pro-competitive effects. The second conditions is that it is at least plausible that a restriction of competition would result from the implementation of the business practice. It is safe to presume that a practice that has no plausible purpose other than the restriction of competition is at least capable of having anticompetitive effects. Since such a practice would lack credible pro-competitive benefits, a rational, profit-maximising firm can only be expected to engage in it if the prospect of restricting competition were at least a plausible one–in the sense that such a prospect would be compatible with the lessons of experience and/or economic analysis.
Under the Murphy case law under Article 101 TFEU, and Intel in relation to Article 102 TFEU, these prima facie prohibitions can be rebutted by firms bringing forward evidence showing that the investigated behaviour is incapable of restricting competition – in other words, that anticompetitive effects are implausible in the economic and legal context of which it is a part. This is an analysis that precedes recourse to Art. 101(3) or objective justifications under Article 102 TFEU – in other words, they are about the anticompetitive effects of the investigated conduct. There are two ways in which firms can rebut this presumption of illegality. First, firms can show that any actual or potential effects on competition would not be attributable to their behaviour – i.e. they can deny a causal link between their conduct and the purported effects. More generally, it is possible for firms to show that harm to competition is implausible in light of the practice and the features of the relevant market.
Section 4 tries to clarify why some practices are prima facie compatible with European competition law.
To begin with, there is behaviour that falls outside the scope of competition law because no actual or potential anticompetitive effects would flow from such behaviour. This is the case, for example, of market exit caused by the dominant firm’s superior efficiency or by the dominant firm simply engaging in aggressive pricing above total average cost. Secondly, there is behaviour that is objectively necessary to achieve the objectives of a pro-competitive transaction.
When faced with a presumption of lawful conduct, an authority or claimant should be able to show that a practice that is in principle lawful should nonetheless be prohibited. One can identify three main scenarios in this regard. First, the claimant or the authority can, bearing the burden of proof and persuasion, show that, in a specific economic and legal context, some of the principles underpinning a presumption of lawfulness should not apply. For example, the authority can argue that, in certain circumstances, the analysis of effects should not be based on the position of an equally efficient competitor; or that above-cost pricing is problematic because there are strong network effects. A second scenario in which prima facie lawful conduct could be prohibited is where the premises underlying the presumption of lawfulness are absent, and hence the presumption should quite simply not apply. For example, quantity rebates may be anticompetitive when they are not based on efficiency savings, and selective distribution arrangements may infringe competition law when they include clauses which are not objectively necessary. There is, finally, a third scenario in which it may be possible to establish liability in relation to a prima facie lawful practice. This occurs when a party brings forward factors that are not inherent to the prima facie lawful conduct which indicate that there are anticompetitive effects in the specific circumstances of a case. For instance, even though selective distribution systems are presumed to be lawful, they may have a restrictive impact on competition where the cumulative implementation of parallel networks leads to foreclosure or to the softening of competition among suppliers or distributors.
Section 5 tackles practices subject to a case-by-case assessment of their effects on competition.
The co-existence of different legal tests is a source of uncertainty in practice. It is not always easy to separate practices that are subject to different legal tests, as exemplified by practices that can be categorised as ‘margin squeeze’ and refusal to deal, or tying and refusal to deal. As a result of these difficulties, there may be instances in which two or more legal tests are potentially applicable to a factual scenario.
While there are conceptual and practical difficulties in delineating the boundaries between different legal tests, in practice it seems that competition authorities distinguish between different ‘types’ of infringement on the basis of the applicable remedies. For example, while the factual scenario behind margin squeeze and refusal to deal is similar – and it is reasonable to view ‘margin squeeze’ as a specific manifestation of a refusal to deal – they are typically subject to different remedies. A finding of refusal to deal requires the imposition of positive obligations – an obligation to supply, assorted with other conditions relating, typically, to the price at which supplies are to take place – while margin squeeze merely require a negative cease-and-desist order. Given the difficulties of designing, implementing and/or monitoring pro-active remedies, this may also justify the adoption of a more stringent test for practices that trigger such remedies. A legal filter such as the indispensability condition ensures that, where intervention is proactive in nature (that is, where remedial action takes the form of positive obligations), liability is only established in exceptional circumstances
This is a valuable piece, particularly in how it cuts across the somewhat sterile – and surely misleading – debate between form and effects’ analysis as the only two possible legal tests in competition law. As the author correctly explains, in reality a variety of legal tests requiring different levels of scrutiny applicable to a wide range of conducts co-exist. The analytical framework the author develops to assess the various types of conducts falling within the scope of EU competition law is particularly useful, even if one can disagree with some elements of it. For example, I am not sure I would identify four legal tests under EU competition law; or that quantity rebates are best seen as being subject to a rule of legality, particularly when such a rule is subject to a requirement that the discount must match a specific type of efficiencies.
It is also not clear to me whether there is a difference between substantive rules and evidentiary presumptions in this analytical framework, despite this distinction being of great practical and analytical importance. After all, it seems that all rules identified by the author operate presumptively, which begs the question of whether they are substantive rules with exceptions, rebuttable evidentiary presumptions, or something in between. My (not very well thought through view) is that different tests take different configurations, which have particular implications for how certain infringements are established and how the parties can defend themselves.
I am also not fully convinced by the reasons presented as underpinning the rules of prima facie lawfulness and unlawfulness. This is a topic on which there have been important studies (mainly regarding the nature of presumptions in competition law), with which this paper does not engage but which I think could have enriched the discussion. Lastly, I am not sure I agree that the differences between legal tests can be fully justified by reference to remedies. This may be descriptively true as regards refusal to deal, but one would have thought that the imposition of a more stringent legal test for such practices relates to normative arguments arguing that this practice should only be prohibited in exceptional circumstances. Normatively, one would expect the remedy to be imposed in light of the nature of the infringement, and not the other way around.
In any event, these concerns are mere quibbles about potential refinements of what already is a very interesting piece.