Waiting for Godot ? Recent Developments in Article 82

1. Danish Competition Law Society 12th June 2008 Waiting for Godot? Recent Developments in Article 82 Dr. A. Jorge Padilla LECG Consulting Copenhagen, June 2008

2. What’s new on the Article 82 front? • No guidelines / no (effects-based) “reform” … • … but lots of activity: • Proceedings initiated against RWE, ENI, EDF, Suez, GdF. • Settlement with Distrigas and potential settlement with E.ON and RWE. • Proceedings initiated against Qualcomm and Microsoft. • SO sent to Alcan. • Hearings on cases involving Intel and Rambus. • Fine imposed on Telefónica. • CFI decisions on Microsoft and Deutsche Telekom. • Inquiry into pharmaceutical sector. • Litigation concerning Tomra.

3. What’s new on the Article 82 front? • Issues: • Tying: Alcan, Microsoft. • Refusals to deal: Microsoft. • Rebates: Intel, Tomra. • Margin squeeze: Telefónica. • Other vertical foreclosure: electricity and gas cases. • FRAND licensing: Rambus, Qualcomm. • Lessons from open cases: • No obvious anti-American bias. • Focus on pan-European sectors and recently liberalized sectors in Member States. • Focus on sectors which are key for economic growth. • Emphasis on exclusionary abuses but also exploitative issues.

4. Do we need a change in policy? • Arguments in favour of a negative answer: • There is no evidence in support of the claim that there are too many type I errors. • Community courts have confirmed Commission’s decisions once and again. • Commission has exhibited considerable restraint in the application of Article 82 • Clarification should come via more cases, more decisions and more judgments. • The so-called effects based approach to Article 82 is (a) contrary to the spirit of Article 82 , (b) will cause too much uncertainty and (c) produce too many type I and type II errors. • In any event, recent Commission decisions and Court judgments already apply an effects-based approach.

5. Do we need a change in policy? • Arguments in favour of a positive answer: • There are (and will be more) too many type I errors. • Efficiency considerations are not take into account. • Effects are presumed despite contradictory evidence. • Article 82 is applied by NCAs and national courts. • Change is unlikely to come from the Community courts. • The so-called effects based approach to Article 82 is (a) consistent with the Commission’s policy in Article 81 and merger control, (b) can be adjusted to minimise its adverse impact on legal certainty and (c) reduce the incidence of both type I and type II errors. • Recent Commission decisions and Court judgments do not apply an effects-based approach.

6. A closer look at the law of the land • Do recent decisions/judgments apply an effects-based approach? • Are there likely to be too many type I errors?

7. Margin squeeze • What is a margin squeeze? • Margin squeeze even when upstream price is not excessive and downstream price is not predatory! • Lower upstream prices even when that entails losses. • Increase downstream prices even when that hurts consumers. • What is the right margin squeeze test? • Period-by-period test is more than enough. • Inferring incentives from a margin squeeze test? • Even when the upstream price is not excessive and the downstream price is not predatory? • Inferring likely effects from a margin squeeze test. • Standard margin squeeze test is a test of likely effects. • What about if the evidence on actual effects contradicts the Commission’s inference?

8. Fidelity rebates • Quasi - per se illegal? • Michelin II and BA/Virgin suggests formalistic approach, though it could be interpreted more generously. • Tomra: rule of reason? • The suction effect • Leveraging assured sales onto contestable sales. • Effective price for contestable share too low, but how low? • The cost standard debate. • Tomra: do you need to compare with costs? • Market level analyses: MES v. size of contestable market. • Do we care about actual effects? • Efficiency defenses?

9. Refusals to license • CFI’s Microsoft judgment “clarifies” the Magill/IMS “exceptional circumstances” test: • Indispensability test – indispensable to be an effective competitor. • Elimination of all competition test – capable of lessening of effective competition. • New product test – capable of reducing incentive to innovate by competitors. • Objective justification – IP not enough, what would be enough? • An effects-based judgment? • Economic analysis supports an “exceptional circumstances” test; is the Magill/IMS test an “exceptional circumstances” test post-Microsoft?

10. Tying • Rule of reason or qualified per se illegality? • Form versus effect • Capable of producing effects • What about evidence of actual effects? • Marginalisation v. foreclosure • Effects presumed from (a) dominance and (b) two product test: • Separate demand for the tied good is enough for two products • Efficiencies? • Economic analysis supports (structured) rule of reason or qualified per se legality, how should the Hilti test post-Microsoft be characterised?

11. Do we still need a change in policy? • We need to enforce Article 82. We all agree. • European economies are still subject to heavy regulation. • Liberalisation of key economic sectors (energy, telecoms) is still underway: • Some liberalisation experiments have not produced the expected results. • In some places, liberalisation started late and timidly. • The Single Market is still under construction in many sectors: • Cross mergers are frequently opposed. • Limited efforts to eliminate barriers to entry.

12. Do we still need a change in policy? • Free markets need not be efficient. • Effective deregulation requires regulatory oversight. • Competition needs to be protected/promoted to ensure that … • the Single market delivers a good deal to consumers; • any position of market power, whether created by law or the result of business foresight and industry, can be contested.

13. Do we still need a change in policy? • Europe is lagging behind in innovation; the adverse technological gap is large and doesn’t seem to be narrowing. • Europe needs significant reforms in its education systems, labor markets, financial markets, bankruptcy laws, etc. • But it also needs to: • Eliminate bottlenecks in key sectors. • Remove barriers to entry where that is possible. • Address market failures that hinder its innovation potential. • Protect its consumers and companies from anticompetitive actions in non-contestable markets.

14. Do we still need a change in policy? • Article 82 has a role to play in the European quest for competitive advantage and growth in a global economy. • Article 82 intervention can and should play a key role in the search for free and fair markets. • It is not the only tool, but it can be a useful tool. • And yet I am convinced that Article 82 policy will not deliver what is needed, unless it is thoroughly reformed.

15. Do we still need a change in policy? • Article 82 is part of a system of deterrence. • Efficient deterrence requires: • Consistent intervention policy, focused on the most pressing and economically significant problems. Using OFT jargon, a policy focused on “outcomes” rather than “outputs”. • Appropriate analytical framework, i.e., set of clear-cut legal rules that: • maximise long-run welfare by minimising the expected cost of errors resulting from condoning harmful practices or condemning beneficial ones; • are easy to administer and enforce; • lead to predictable decisions. • Precedents, clear-cut precedents, consistent precedents.

16. Do we still need a change in policy? • Precedents, clear-cut precedents, consistent precedents? • The unbearable lightness of Article 82. • Milan Kundera’s Unbearable Lightness of Being: • "Einmal ist keinmal" ("once is nonce", i.e., "what happened once might as well have never happened at all"). Therefore, each life is ultimately insignificant; every decision ultimately does not matter. Since decisions do not matter, they are "light": they do not tie us down. But at the same time, the insignificance of our decisions - our lives, or being - is unbearable.

17. Do we still need a change in policy? • Appropriate analytical framework? • Qualified per se illegality rules: • Michelin II, For the purposes of establishing an infringement of Article 82 EC, it is sufficient to show … that the conduct is capable of having that effect. • Microsoft, it is settled case law that Article 82 EC covers not only practices which may prejudice consumers directly but also those which indirectly prejudice them by impairing the an effective competitive structure … In this case, Microsoft impaired the effective competitive structure on the [relevant] market by acquiring a significant market share in that market.

18. Do we still need a change in policy? • Consistent policy? • Opportunistic intervention, • largely driven by competitors • with interests that are not necessarily aligned with (European) consumers … and taxpayers. • Sector enquiries represent a change in the positive direction. Need to be strengthened and improved.

19. Do we still need a change in policy? • We must change the way we analyse unilateral business practices under Article 82 EC. Article 82 EC needs to be reformed. • This doesn’t mean less antitrust, it means better antitrust. • We need a consistent policy which establishes priorities in response to the needs of the European economy. • We need a different analytical framework. Economic analysis strongly supports a change towards (structured) rule of reason or quasi per se legality. • We need DG COMP to clarify its enforcement priorities and the way it enforce Article 82 going forward. We need guidelines.

20. Can we reform Article 82? • Yes, we can!! • It requires adopting a pragmatic approach to antitrust law grounded on solid legal principles as well as on economic theory and evidence. • “The pragmatic attitude is activist — progressive, “can do” — rejecting both the conservative counsel that whatever is is best and the fatalist counsel that all consequences are unintended” ---Posner, Overcoming Law, Harvard, 1995. • DG COMP showed its ability to respond to defeat in merger cases, it needs to show post Wanadoo, Microsoft and Deutsche Telekom that it can meet Triumph as it met Disaster and “treat both impostors just the same”. • And I believe that it will. So unlike in Beckett’s play, I came to tell you it makes sense to wait for Godot because Godot will come in the end.

21. Thank you