George Mason Law Review Symposium

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George Mason Law Review Symposium

• Emil Paulis
• Director, Policy Strategic Support
• DG Competition, European Commission
• Washington, 20 September 2005

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• U.S.
• After more than 100 years of enforcement no
  agreement on the standard to apply Section 2
  State of unpredictability
• E.U.
• After 45 years of enforcement, case law is clear
  high predictability
• Focus on conduct as such, effects are presumed
  risk of false positives and false negatives

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EU Policy Review of Art. 82

• Nothing prevents case law from evolving and
  nothing prevents case law from moving from
  presumed effects to an analysis of likely/actual
  effects
• The Emperor is not naked but we want to give the
  emperor better clothes

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Areas of broad consensusin the EU

• Overall objective of Art. 82
• Consumer welfare standard
• Protection of competition and consumers, not
  protection of competitors against competition
• Equal right of dominant firms and of residual
  competitors to compete on the merits

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• Likely and actual foreclosure effects
• Short-term and longer-term negative effects
• Direct and indirect negative effects

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Areas of soul searching

• Level of market power to establish dominance?
• Art. 81(1) test some degree of market power
• Merger control test SIEC test
• Art. 82 test dominance substantial market
  power power to behave to a large extent
  independently of competitors and consumers
• Dominance requires full market analysis

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• Test for illegal unilateral conduct?
• Definition of abuse in Hoffmann La Roche
• An objective concept relating to the behaviour
  of an undertaking in a dominant position which is
  such as to influence the structure of a market
  and which, through recourse to methods different
  from those which condition normal competition in
  products or services on basis of the transaction
  of commercial operators, has the effect of
  hindering the maintenance of the degree of
  competition still existing in the market or the
  growth of that competition

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• Concept of competition on the merits
• Need to prove effect on the market
• Need to prove hindrance to maintenance of
  residual competition in the market or hindrance
  to growth of residual competition

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• Link with maintenance or increase of market power
  of dominant firm (influence on structure of the
  market)
• Causal link required between conduct and market
  power? Effects-based analysis normally implies
  link between conduct and maintenance/increase of
  market power

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What is, or is not, competitionon the merits?

• Different tests advanced for different abuses
  (profit sacrifice test, as efficient competitor
  test, etc.)
• Illegal conduct does not result from elimination
  of competitors as such (can be the result of
  competition)
• Illegal conduct requires something more related
  to the means of elimination of competition

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• Role of intent? Both illegal exclusion and legal
  exclusion are intended need to look at
  foreclosing effect but proof of improper intent
  can be an important element
• Test based on efficiencies (Elhauge)
• Foreclosure resulting from enhanced own
  efficiency v. foreclosure based on impairing
  efficiencies of rivals (i.e. foreclosure not
  necessary to increase own efficiency)

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3 categories of conduct

• Conduct the sole effect of which is to raise
  efficiency of dominant firm
• Conduct the sole effect of which is to raise
  barriers for competitors
• Conduct with dual effect efficiency enhancing
  and foreclosure of rivals

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• Only protection of efficient competitors to
  avoid protection of inefficient competitors?
  (efficiency would be measured against some cost
  benchmark of dominant firm)
• Or a more dynamic approach to also include
  potentially efficient firms? (i.e. new
  entrants, still expanding firms, economies of
  scale, learning curve, incumbent advantages, etc.)

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How much foreclosure is required to violate Art.
82?

• 82 requires pre-existing dominance, i.e. high
  level of power over price does not cover
  conduct attempting to acquire dominance
• Likelihood and significance of foreclosure
  depends on
• Pre-existing market power/barriers to entry
• Inherent potential of conduct to foreclose
• Market coverage
• Importance of customers or competitors in case of
  selective foreclosure

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• Sliding scale based on above 4 variables
• Ultimate test likelihood to impact negatively on
• Price
• Output
• Quality
• Innovation

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• Specific types of abuses
• Predation
• AKZO rule
• Below AVC/AAC rebuttable presumption of abuse
• Between AVC ATC need to prove strategy of
  foreclosure
• Other cost benchmarks used in markets with high
  fixed and low variable costs (e.g. LAIC)
• No requirement to prove recoupment

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• In addition to AKZO rule, need to prove likely
  foreclosure effect on the market?
• Recoupment is an essential element of a credible
  predation story
• Separate requirement under Section 2
• Where dominance exists already, normally
  possibility of recoupment is built in, but there
  may be specific cases in which recoupment needs
  to be checked

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• Rebates
• Pure quantity rebates offered to all potential
  buyers on a non-discriminatory basis are
  unproblematic (benefit consumers in general
  output expansion)
• Problem areas
• Rebates linked to a share of total purchases of
  the buyer
• Rebates over all past sales
• Bundling rebates

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• These rebates can have both a potential of
  exclusion/foreclosure a potential of
  efficiencies
• Debate about whether to apply a cost standard or
  some other more dynamic standard
• Predation standard has attractions and
  deficiencies some above cost rebate schemes
  could exclude even efficient competitors
• Ultimate question could efficient rivals match
  the rebate of the dominant firm?

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• Refusals to deal
• Some degree of convergence between EU-US
• Courts have never admitted that an IPR holder can
  always refuse to deal, but conditions are
  different
• Competition authorities are very cautious and
  only rarely impose an obligation to deal, even
  more exceptionally in the field of IPR

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• EU IMS decision sets out 3 criteria for IPR
  cases
• Indispensability of access to the right
• Risk of elimination of all competition
• Prevention of emergence of new products or
  services for which there is a potential consumer
  demand
• Need to carefully examine impact of compulsory
  supply on incentives to innovate and invest on
  original and follow-on markets

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• Scope of efficiency defence?
• Already objective justification if conduct is
  necessary and proportionate
• Efficiency defence available with other
  instruments
• Compatible with Article 82? (compare Article
  81(3))
• Article 81 for restrictive agreements
• Merger control rules

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• The higher market power, the stricter the
  conditions for efficiency defence
• In the long run it is safer to rely on
  competition than to count on pass-on of
  efficiencies there is a level where
  efficiencies can no longer prevail
• At the other end, the lower the level of
  dominance, the greater the need to take account
  of efficiencies
• What types of efficiencies? conduct specific
  efficiencies

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• If efficiencies become a defence, then need to
  balance efficiencies against the negative effects
  on competition
• Efficiencies cannot automatically prevail over
  the negative effects on competition
• Burden of proof of efficiencies has to lie with
  the dominant company

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• What type of enforcement rules?
• Need to have enforcement rules which remain
  workable while reducing to the minimum false
  positives and false negatives
• Need to strike the right balance between general
  rules and effects analysis on a case by case basis

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• Need certain safe harbours/bright lines (e.g.
  pure quantity rebates offered on a
  non-discriminatory basis to all potential buyers,
  pricing above certain cost benchmarks, others?)
• No form based rules of prohibition but depending
  on market power not always an efficiency defence
  available
• Need to carefully design burden of proof,
  efficiency defence, rebuttable presumptions

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• Need to achieve rapid decisions to be able to
  influence market developments (e.g. interim
  injunctions)
• Will we get guidelines and when will they come?
• Ask my Director General
• END