Recidivism: a Commission fining policy that might not be hitting the mark

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Summary

The short version of this very long post is that the Commission’s current policy of applying the concept of recidivism to the highest level parent that exercises decisive influence over the infringing company appears to unduly punish undertakings that sell a large number of different products as compared to undertakings that sell only a small number. The likelihood of being a recidivist is massively influenced by the product range of the company and not by the propensity of the company to cartelise.

For the sake of simplicity the rest of this post assumes the existence of a multi-product firm with each product being sold in a different subsidiary.

The increase in fine for recidivism under the Commission’s 2006 Fines Notice appears to be imposed more because of the extent of the product range of the undertaking than because of the undertaking’s relative culpability (it’s propensity to participate in a cartel). Obviously, all other things being equal, an undertaking with several subsidiaries is more likely to be a recidivist than an undertaking with a single subsidiary; that would not make a recidivism uplift for the multi-product undertaking unfair. But the increased probability of being a recidivist does not increase linearly with an increase in the number of subsidiaries – it increases far more quickly. You might think that an undertaking with ten subsidiaries is ten times more likely to be a recidivist than an undertaking with a single subsidiary. In fact it is fifty times more likely.

It is this lack of linearity that makes the Commission’s current approach to recidivism dubious. The recidivism uplift is going to be applied to companies with more subsidiaries, rather than companies with greater culpability.

What follows tries to explain this using basic probability. Be warned; it is quite long.

For those happier with probabilities and tables, then attached you will find a spreadsheet – Recidivism-probabilities – where you can alter the basic assumptions and see what impact that has on the probabilities.

Here is a static table, setting out the assumptions and probabilities on which the text below is based.

Probability Equivalent to once every…
Probability of infringement per year 0.0100 100 years
Reduction in probability after first infringement 50% 0.0050 200 years
Reduction in probability after third infringement 50% 0.0025 400 years
Number of subsidiaries (assuming for simplicity one sub=one product)
1 10 38 50 100
Probability of undertaking infringing the competition rules sometime in a ten year period 9.6% 63.4% 97.8% 99.3% 99.996%
Probability of the same undertaking also infringing the competition rules in a second ten year period 0.5% 25.0% 83.2% 91.2% 99.3%
Probability of the same undertaking also infringing the competition rules in a third ten year period 0.0% 5.5% 51.1% 65.1% 91.2%

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Introduction

Many competition authorities punish repeat offenders more severely, but authorities are not consistent in what constitutes a repeat offence in terms of:
– whether a repeat offence should be measured by the product, the company, or the corporate group (the “recidivism entity”); and
– the time between the definitive finding of one infringement and the beginning of the next (the “recidivism time period”).

This post looks only at the first of these, the recidivism entity, and for the sake of brevity does not look into the recidivism time period. There are also many other aspects of recidivism policy not covered in this post – whether a cartel followed by a vertical distribution infringement should be regarded as recidivism, whether a national distribution infringement followed by a global abuse should be regarded as recidivism, whether a comparatively small cartel justifies a recidivism uplift in a comparatively large and later cartel, and so on.

Of course, punishing repeat offenders more severely is generally accepted as a good idea and is far from unique to competition enforcement. If someone breaks a law, the penalty is often supposed to both punish the offender for the particular offence, and deter the offender from committing any future offence (and deter others more generally but that’s not relevant here). So if the same offender reoffends, it is reasonable to assume that the punishment for the first offence was not sufficiently deterrent, and the punishment for the second offence should be increased.

When looking at an individual – say a bank robber – the principle is relatively straightforward. An individual who robs a bank, is then caught and punished, and then robs another bank, is a recidivist.

When applied to corporate law-breaking, it is a little more complicated. When looking at whether an offence is a repeat offence, do you look at whether the conduct was carried out by the same employee, the same division, the same legal entity, or the same undertaking? Which recidivism entity you take into account makes a big difference.

The European Commission’s policy on recidivism is not restricted to the legal entity which was involved in a cartel, but extends to the ultimate parent which exercises decisive influence over that entity, and 100% ownership leads to a presumption of decisive influence which is in practice difficult if not impossible to rebut.

A Simplified Example

So how does that policy affect (1) a single product firm as compared to (2) a corporate group with a parent and, say, 100 subsidiaries? The approach I have taken here is to assume all other characteristics of the firms are the same – so eliminating all variables other than the number of the subsidiaries. I assume that the risk of each subsidiary entering into a cartel is the same, the propensity of all of the industries to cartelise is the same, and so on. Then I look at the probability of recidivism for companies with different numbers of subsidiaries.

The Problem with Probability

One of the problems with probability is that for many people, and certainly for me, it is deeply counter-intuitive. If a roulette wheel comes up black three times in a row, I want to bet on red. But if the wheel is true, then the probability of a red after three blacks is the same as the probability of a black after three blacks. So if a roulette wheel comes up black ten times in a row, there’s a temptation to think that the wheel is rigged. But given the number of casinos and roulette wheels in the world, and spins of those roulette wheels every day, I would guess – and I haven’t even tried to work this out – that a roulette wheel hitting black ten times in a row happens every few days. (This is the same idea as an individual winning a lottery twice; it’s very unlikely to happen to any one individual, but given the number of lotteries and players in the world, it’s also very likely to happen to someone.) Thinking otherwise is often called the gambler’s fallacy. This is how casinos make their money, and is one of the reasons I don’t gamble.

The counter-intuitive nature of probability is one of the reasons that in the rest of this post, I try and express the probabilities in different ways: some readers may find one type of example easier to grasp than another. I express the probabilities as a fraction of 1 (1 being certainty), as a percentage, and as a relationship between a large number of – hypothetical – companies and the subset of those companies that would, probabilistically, engage in cartels. For those readers with a better grasp of probability theory than I, this will likely be annoyingly repetitive. My apologies.

A Single Product Company

Take a single-product company’s likelihood of entering into a cartel. There are many factors that might influence this – the type of industry, the health of the economy as a whole, the health of that particular industry, the corporate culture, the company’s emphasis on competition compliance, and so on. All of these could be combined to come up with a measure of how likely that company is to engage in a cartel in any given year.

A hypothetical probability of it entering into a cartel

In the real world there is no way to look at any company and come up with an even vaguely reliable estimate of such a measure. But for the purposes of this post, the precise number does not really matter. All that matters is that we imagine a hypothetical single product company, attribute to it a probability, and attribute that same probability to each product-selling subsidiary of the 100 product undertaking. That gives you an indication of how, controlling for all other factors, the likelihood of companies entering into cartels is related to the number of products that that company sells. In particular this controls for their propensity to cartelise.

The first cartel

So, for example, a company that manufactures widgets might, taking into account all of the factors above, have a probability of 0.01 of engaging in a cartel in a given year. In the same way that rolling a dice gives a 1 in 6 (roughly 0.17) chance of rolling a 6, a probability of 0.01 is a 1 in 100 chance. After six rolls of the dice, you are very likely to have rolled a six; after one hundred years, our widget company is very likely to have engaged in at least one cartel.

Now 1 in 100 years seems a pretty low probability of entering into a cartel (from the perspective of a competition authority, if a company only engaged in one cartel every one hundred years, then they’re probably quite law-abiding). It seems a low estimate for many companies, particularly as very few companies last for a hundred years. But I’m trying to use numbers that are the least favourable to the conclusion that I draw at the end. I should note though that is one of the assumptions in this post I am most concerned about. Some companies seem to have sufficiently good compliance that they simply do not enter into cartels. If the starting assumption is that perfect compliance is possible, then the conclusions of this post may well be completely wrong.

If our single-product company has a probability of 0.01 of entering into a cartel in any given year, then over ten years, the probability of it entering into at least one cartel is about 0.096 or 9.6%. Roughly a 1 in 10 chance. So far, so, perhaps, obvious.

Put another way, if we take 10 000 single-product companies with the same characteristics, then roughly one in ten of them – around 960 – will enter into at least one cartel in any ten year period. The reason for using such a large number of companies as a point of comparison will, I hope, become clear.

The second cartel

Let’s assume that our company is one of the 960. It enters into a cartel sometime in that ten year period, and is caught and punished. As a result, it works hard at educating its employees about the competition rules, and successfully halves its chances of entering into a cartel in the future. So from a 0.01 probability of entering into a cartel – once in a hundred years – it then has a 0.005 probability – once in two hundred years. All of the other 959 companies do the same.

Bear with me.

What are the chances that our company – or any of the other 959 companies – having entered into a cartel in that first ten year period, and then having improved its compliance, nevertheless also enters into at least one cartel in a second ten year period? About 0.0047, or 0.47%. That’s a pretty low percentage; at about 200/1 against, not something anyone would likely bet on.

We started with 10 000 companies. Of these, 960 would enter into that first cartel in the first ten year period, and 47 of those 960 would enter into a second cartel in that second ten year period.

Round three.

The third cartel

Let’s assume that our cartel-prone company – and the 46 others – is caught, again, and punished for this second cartel. And they redouble their compliance efforts. So from a 0.005 probability of entering into a cartel in any given year, any one company now has a 0.0025 probability. One in four hundred years.

So given this further improvement in compliance, what are the chances of our widget company messing it up once again, and entering into at least one more cartel in a third ten year period? About 0.0001 or 0.001%. Or, of the original 10 000 companies, of which 960 entered into a first cartel, of which 47 entered into a second cartel, only 1 entered into the third.

Probability of cartelizing Equivalent to…
First Cartel 9.56% 960 companies out of 10 000
Second Cartel 0.47% 47 companies out of 10 000
Third Cartel 0.0116% 1 company out of 10 000

That looks good. Our single product company – and its 9 999 equivalent companies – has the incentive to keep improving its compliance, and keep reducing the chances of it engaging in cartels. On the above numbers, only 1 in 10 000 will enter into three cartels.

So much for a single-product company. Most companies produce more than just a single product. As we will see, the more products are produced (assuming for simplicity that each product is produced in a separate subsidiary), the greater the likelihood of a company being a recidivist. But the increase is far from linear.

A 100 Product Company

From a single-product company that just produces widgets, let us take an undertaking that produces one hundred different products, each in a different subsidiary.

The same hypothetical probability

Let us assume that the likelihood of each subsidiary entering into a cartel is the same as the widget company described above – 0.01. Let us also assume that if a subsidiary is caught in a cartel, then not only does that subsidiary increase its compliance efforts, but so does the entire group – which is exactly what a competition authority would want to happen.

Let us also assume that whether one subsidiary does not make it any more or less likely that another subsidiary will also enter a cartel (in terms of probability, that they are independent events), save for the undertaking-wide increase in compliance efforts after the fact.

The first cartel

In a ten year period, what are the chances of this 100-subsidiary company entering into at least one cartel in at least one of its subsidiaries? It is probably no surprise that it’s almost certain – over 99.99% (as opposed to about 9.6% for the single-product widget company). So if we imagine 10 000 one hundred product companies, just as we imagined 10 000 single product companies, then in a ten year period, 9 999 of those one hundred product companies will enter into a cartel (as opposed to about 960 single product companies).

Not so good for the 100-subsidiary company.

Note that the probabilities here are roughly linear – a 100-subsidiary company has roughly 100 times the probability of entering into at least one cartel than a one subsidiary company. The linearity breaks down, however, as soon as we look at recidivism.

Let us assume that the 100-subsidiary company puts in place the same additional compliance efforts as the single-subsidiary company, and does so across all 100 subsidiaries. It works just as hard at educating its employees about the competition rules (harder even, given that it has to roll out this compliance in 100 subsidiaries), and successfully halves any subsidiary’s chances of entering into a cartel in the future. So from a 0.01 probability of entering into a cartel – once in a hundred years – each subsidiary has a 0.005 probability – once in two hundred years. (Just as the single subsidiary company above.)

So what are the chances of a 100-subsidiary company entering into at least one cartel in the second ten year period?

The second cartel

We obviously expect to see the likelihood of it engaging in a second cartel after the first to be much less likely. For our single-subsidiary company above, the probability of it engaging in the first cartel was 9.6%, and a second cartel after the first was only 0.47%. But for a 100 subsidiary undertaking we only get a decrease from 99.99% to 99.33%. For every 10 000 undertakings, 9999 would enter into a first cartel, and 9933 would enter into a second. Not great. And bear in mind that this 100 subsidiary undertaking’s compliance efforts in every one of its subsidiaries are equal to that of the single product company.

The third cartel

OK, but what if our 100 subsidiary company redoubles its compliance efforts once again, just like the widget company? What are the chances that it will enter a third cartel in a third ten year period? 91.2%.

If we were faced with 10 000 undertakings, each of which had 100 subsidiaries, then 9999 would enter into a first cartel, 9933 would enter into a second, and 9120 would enter into a third.

Comparing the single product widget company and the 100-subsidiary multinational:

Probability of cartelizing Equivalent to…
First Cartel 9.56% 99.99%
Second Cartel 0.47% 99.33%
Third Cartel 0.0116% 91.2%

Tentative Conclusions

If the law should try to treat like cases alike and different cases differently, then it’s worth asking how compliant would the 100 subsidiary company have to be at the start, to put their probability of entering the third cartel down to the level of the single product company? Roughly 0.00022, or a cartel every five thousand years. Or, if we assume that a company with that kind of compliance record can’t improve it further, and its compliance therefore cannot not improve after each infringement, then 0.00011, or a cartel every ten thousand years. That is a rather tough objective.

You can look at the same numbers from a different perspective. If we again keep the probability of entering into a cartel at 0.01 as for the single product widget company, how many subsidiaries would a company need for it to become more likely than not (a probability of more than 50%) that a multi-subsidiary company will enter into three cartels on the terms described above? About 38.

You can change the assumptions, and I encourage you to do so. You can download the spreadsheet and change the probabilities for the first, second and third cartels, and change the number of subsidiaries, and see what difference that makes.

There may of course be good reasons why larger undertakings should be held to a higher standard and exposed to a greater risk of a fines increase for recidivism: larger corporations can better afford compliance programmes, training and monitoring, for example. But the way the Commission’s recidivism policy operates doesn’t put a slightly higher standard on multi-product companies, it puts an much higher standard on them, possibly an impossibly higher standard.

But going to the opposite extreme, it is fairly clear that a recidivism policy based solely on the product itself would be too narrow. If a CEO was personally implicated in three cartels, then the fact that the cartels were in three different subsidiaries of his/her 100-subsidiary undertaking should not be enough to escape a recidivism uplift for the group as a whole.

A properly drafted recidivism policy that truly identified recidivists, and properly reflected propensity to enter into cartels would have to look at a range of factors. But ignoring the number of products sold by a company means that the current Commission policy when assessing recidivism seems to punish inappropriately multi-product undertakings.

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Defining a single and continuous infringement in cases with asymmetrical participation

Defining a set of conduct as a single and continuous infringement (SCI) has significant consequences for parties to a cartel, in particular for their exposure in follow-on damages actions. It is no surprise, therefore, that the increased prevalence of damages actions in Europe has led to greater scrutiny of the Commission’s findings about SCI.

In several recent judgements the General Court and Court of Justice have grappled with what to do about cases where the Commission has found a particular company to have participated in only part of a broader set of infringements, that broader set constituting – in the Commission’s view – a single and continuous infringement. We may, for example, be looking at a case where a company participated in one product of a two-or-more product cartel, or where it was a fringe player in terms of either its participation, or its geographic reach.

Consequences of a Finding of SCI

As a reminder, the finding of a single and continuous infringement has broadly three potential consequences for a case.

First, prescription: if earlier conduct can be regarded as a single infringement with later conduct, then earlier conduct that might otherwise be prescribed would still be attackable.

Second, fines: if there is one single infringement, then there is one fine, one entry fee and one ten percent cap. If there are two infringements, then there can be two fines, with two entry fees, each subject to the ten percent cap.

Third, damages: participants in a single and continuous infringement are jointly and severally liable for the damage that they have caused.

If this is a classic multilateral around the table cartel, then the characterisation of the SCI and each undertaking’s part in it is relatively straightforward. The difficulties arise when the participation – and liability – is asymmetric.

So a simplified example would be two undertakings who are deeply involved in all aspects of a cartel, compared to a third which is only peripherally involved, whether that peripheral nature is due to geography, product scope or conduct or potentially other factors.

In the past, when public enforcement was essentially the only concern of defendants, then provided that the fine was appropriately tailored to the particular undertaking’s participation, the finding of that undertaking’s participation in an SCI was of little importance to that undertaking.

In an era of damages actions obviously that changes significantly. A small, peripheral player found to have been part of an SCI in a major cartel is potentially on the hook for all of the damages caused by the cartel as a result of its joint and several liability for the SCI. In practice this is very unlikely to happen (as among other things it would likely require the bankruptcy of the other players), but having to pay a greater share of the overall damages than it believes appropriate is a much more likely scenario.

Because of this concern over the implications for private enforcement, we now have a set of cases – Coppens, Aalberts and Soliver – where the Court expressed discontent, in various ways, as to how the Commission characterised the participation of certain undertakings in the single and continuous infringement.

In Coppens, the Court of Justice found that a company had participated in one product of a two product cartel, and was not a part of the two-product single and continuous infringement. Nevertheless a finding of infringement in respect of that one product was upheld.

In Aalberts, the Court took a different approach, finding that a company had only participated in some of the anti-competitive contacts. The Court – relying on the Commission’s characterisation of the contacts as a single indivisible infringement – annulled the entire decision.

Then in Soliver, the Court found that a fringe player carried out acts that fell short of full complicity in the more extensive single infringement carried out by other players, recognised that those acts were clearly anti-competitive, but nevertheless annulled the decision as a whole indicating that although the anti-competitive nature of those acts was clear, the party had not had an opportunity to respond to objections focused explicitly on those anticompetitive acts during the administrative procedure.

These cases taken together raise two distinct issues in terms of Commission decisions.

First, how should the Commission properly characterise the role of fringe players, or players who only participate in some aspects of the anti-competitive conduct. i.e. If we take the facts of, say, Soliver, how should the Commission have written its decisions in order to meet the approval of the Court. And it’s important to bear in mind here that it’s not (necessarily) just a question of how the Soliver decision should have been written, but also how the other decisions related to that cartel – that affecting St Gobain for example – should have been written.

Second, and allowing for the fact that these are complex issues of fact where reasonable people can disagree, should the Commission improve the way it drafts its decisions such that, if the Court disagrees on the particular characterisation of the single and continuous infringement, the entire decision does not necessarily fall but would be upheld in part.

Properly Characterising the Role of Fringe Players

Looking at the first of these, how should the Commission properly characterise the role of fringe players, together with those that are involved in conduct with fringe players. I do not think Soliver is particularly clear on how the subsequent Commission decision should be drafted.

Let’s take the example of two companies who are central to the arrangements, and one peripheral player.

Soliver says that we should not too quickly find that the peripheral player was liable for the single and continuous infringement. But what does that mean for how the infringement should have been drafted in the first place?

We know that for the peripheral player, they should not be described as being part of the SCI. But what should they be described as? Participating in an infringement separate to the SCI is obviously one possibility. But that has implications for the main players and the drafting of their decision? Are they now implicated in two separate infringements? The main one – the previously characterised SCI less that aspect where the fringe player participated – and then a second one with the peripheral player?

If this is right, then in the Soliver case, should St Gobain have been characterised as being in two infringements? This seems to be simple enough and may work in some cases. But what if, from the point of view of St Gobain, the conduct all looks very closely connected? From its point of view it looks like a single infringement? If from St Gobain’s perspective all of the essentially similar conduct covered the same territory, the same product, with the same anti-competitive object, then is it appropriate to regard that as two infringements simply because it also involved a peripheral player?

And here we have potentially the reverse problem of the peripheral player.

As I said, for the peripheral player, the implications of the finding of the SCI may be limited for public enforcement, assuming the fine was appropriately tailored, but the implications for follow on damages may be significant.

For the main player, there may be no real consequence for follow on damages – whether they are sued for damages for two infringements or one may make little difference as the cumulative damage must be the same. But there may be real consequences for public enforcement. For example if the main player was facing a capped fine for the single infringement, is it really open to the Commission to impose two fines, each with their own 10% entry fee and 10% cap simply because there was a peripheral player involved in part of the conduct?

This concern is perhaps clearly evident when looking at an example of an infringement covering multiple Member States. If these were a single infringement, then there would be a single fine; if there were multiple infringements, then there would be multiple fines with multiple 10% caps. If these were long running infringements, then the total fine could be well in excess of 10% of turnover.

That cannot be the correct result. If two multi-national companies are involved in a cartel covering five Member States, and in each of those Member States they cartelised together with a local company, then that should not lead to a finding of five separate infringements, with five fines and five applications of the 10% cap.

So defining multiple infringements may work for the peripheral player, but the main player risks coming out of this rather badly.

So the right answer is not, I think, to simply define multiple infringements.

Rather it is to define one single infringement – assuming the evidence points in that direction for at least one of the players – and then for those companies that are not involved in the full infringement, to define their participation as being of “part of the single infringement” whether that part is in relation to particular products, particular conduct, or particular territories.

So we might have, for example:
Company A liable for an SCI encompassing ten Member States and three products;
Company B liable for an SCI encompassing ten Member States and only one product;
Company C liable for an SCI encompassing five Member States and three products;
And so on.

Now there are two very different judges that have to be satisfied with this formulation:

  • the judge that reviews the public enforcement decision and needs to see if the liability of all players is properly analysed;
  • the judge that is charged with determining damages on the basis of a follow on action where the judge is bound by a finding of joint and several liability in respect of “the infringement”.

For the first, the General Court and Court of Justice have accepted this type of reasoning in the Bananas cases. But for the second, it is an open question – and likely will be for some years – as to whether this formulation would be sufficient for a national judge to delimit the joint and several liability of a cartelist to that “part” of the infringement which the Commission has defined in the decision.

I hope it would be for two reasons.

First, it makes sense to me because it is analogous to participants being involved for different duration, and a judge would deal with that easily enough with no conceptual difficulty of an undertaking being involved in – for example – only the last five years of a ten year cartel. Surely a judge looking at a Commission decision that, for example, finds an undertaking to have participated in a pan-European cartel save for Germany, would find no real conceptual difficulty in excluding that company from damage caused in Germany.

The second reason I hope it would be acceptable is that I don’t see a better alternative.

Drafting a Decision: Protecting Against Total Annulment

So much for how the Commission should draft its decisions to reflect properly each cartelist’s liability.

Now I want to turn to the question of whether the Commission should take greater steps to draft its decisions in such a way that, if a court disagreed with its characterisation of the single infringement, the Commission would not be facing total annulment but only partial.

Now of course making Commission decisions more resistant to Court review is not historically something that the defendant bar is interested in, but here again I think private enforcement is making a difference to incentives.

For example, imagine once again there are three undertakings implicated in a cartel. Two are clearly central players, one is implicated in only part of the infringement (be it the conduct, the product or the geographic area). The Commission decision characterises all as participants in the single and continuous infringement, the Court disagrees and annuls the decision against the third player in its entirety. Essentially what happened in Soliver.

If we assume that the Commission decision will be followed by follow on damages actions, then the defending lawyers of the main players have two objectives. First, to annul the Commission decision as regards their own client. But second, if the annulment action by the main players fail, they want to make sure that the Commission decision against the peripheral player survives – or at least as much of it as possible does.

So you do not want the decision against that defendant to be struck down because the Commission inappropriately characterised the infringement and the liability, and the Commission drafted the decision so that the entire decision falls if part of it does.

When the Court annulled Soliver it did not do so on the basis that Soliver’s conduct was in fact not anti-competitive. Quite the opposite. The Court clearly indicated that that part of the overall conduct in which Soliver was involved was itself anti-competitive. However the Commission had not characterised that part of the conduct as being anti-competitive in the Statement of Objections or the Decision. So Soliver had not been able to exercise its rights of defence in relation to that part of the conduct by itself.

This contrasts with the reasoning used in Aalberts, where the Court relied on the Commission’s own characterisation of the single conduct as a reason to annul the decision in its entirety. In that case, the Court again disagreeing that Aalberts had been involved in a single infringement encompassing all of the anti-competitive conduct, the Court quoted standard text used by the Commission against the decision itself – if it would, as the decision stated, be artificial to split the conduct into separate infringements, then if part falls, it all falls.

Soliver takes this substantive law argument, and turns it into – or possibly adds to it – a procedural one. What Soliver tells us is that unless the defendant has been adequately able to defend itself against the allegation that its conduct – being something less than the full SCI – was nevertheless anti-competitive then the decision will be struck down in its entirety.

So if the Commission defines a single and continuous infringement, it should also address and characterise “parts” of the single and continuous infringement conduct that could be regarded as standalone infringements.

This might get complicated.

What if the conduct covered ten member states, and the Commission considered it to be a single infringement covering all ten? What level of reasoning in the decision is necessary to justify the possibility that each Member State constituted a separate infringement? A full analysis for each individual Member State on a standalone basis?What about combinations? Benelux might be one infringement, Iberian peninsula might be another. How many alternatives do we need to envisage?

Or what if three products were involved, and again the Commission found that this was a single infringement, but the Court disagreed? Three full sets of legal analysis for the alternative that each product was a separate infringement?

What if we combine the two?
Do we then need to do an analysis of the restrictive effects of the conduct in respect of each of the three products in each of the ten Member States? That’s thirty separate infringements even before we get into the question of regional rather than national infringements.

It doesn’t take much imagination to see that even spotting each possible variant is an onerous task. And full analysis of each possible variant would increase the length of Statements of Objections and decisions quite considerably.

It seems unlikely that the Court had this in mind.

I suspect a more efficient approach, while still acceptable, is to make a judgment call on what needs to be done in each case.

If there is substantially the same conduct and market situation in each Member State, for example, then it’s probably acceptable to indicate rather briefly that although the Commission considers the single infringement to cover all ten Member States, conduct in any one member State, or combination of Member States, would similarly be an infringement.

It’s possible to imagine more complex situations, however, that might need greater elaboration.

An argument in favour of this moderate approach in most cases – aside from the sanity of all those involved – is that the very concept of a single infringement necessarily implies the existence of a set of instances of conduct that analysed separately could constitute separate infringements. In most cases, a simple mention of this should be sufficient to put a defendant on notice that in exercising their rights of defence they need to reply to that possibility.

(This presentation was given at events at Lincoln’s Inn in London and Brussels Matters in Brussels in late 2015. I am grateful to Thomas Sharpe QC, James Flynn QC, and Conor Maguire for the invitations to speak.)

Something old and something new

As avid readers of social media, Politico, Chillin Competition and other places will know, I left the Commission at the end of February. On 4 April I joined Covington’s growing competition team in Brussels.

I will continue to write on this blog – though experience has taught me to make no promises as to whether I will write more or less often than before.

What I write about will change. I tend to write about something I have been involved in, even if only to discuss it, rather than something I’ve merely read about happening elsewhere. So in private practice I’ll have different discussions than I had in the Commission and I hope those discussions will generate new perspectives.

If I disagree with the Commission, I’ll say so. But I already did, even when I was still in the Commission. The Commission has extremely generous rules on publications by staff which mean that already on this blog I criticised a merger decision that was – I think – right in terms of the outcome but poor in terms of reasoning.

So don’t expect to see an enormous change. I’m not going to start writing that the Commission is an out of control institution and many aspects of competition enforcement are flawed. Because I don’t believe either to be true. I worked hard in the Commission to get to what I thought was the right outcome on cases, policies and procedures, and I worked with a lot of other people trying to do the same.

An Emerging Competition Law for a New Economy? Introductory Remarks for the Chillin Competition Panel

This is a lightly edited version of a speech I gave at the Chillin’ Competition conference late last year where I gave the opening speech for the panel, “An Emerging Competition Law for a New Economy?


I begin with the usual disclaimer that I’m speaking in a personal capacity and my views are not necessarily those of the European Commission.

In the early years of the “new economy”, lawyers had a strange tendency to use horse metaphors to describe what they thought was going on in the law.

Judge Frank Easterbrook – an excellent jurist and one never short of a strong opinion – speaking at an internet law conference with Lawrence Lessig lambasted the very idea of the conference. There was no “law of the internet” any more than there was a “law of the horse”. There were laws of contract, of animal husbandry, of gambling – there were laws that applied to horses, but there was no law of the horse. And there was no law of the internet. He had a good point.

There is no “new economy” or “internet” law just as there is no law of the horse. There are telecoms laws, intellectual property laws, data protection laws and competition laws. But no new economy law.

Though…

Maybe it’s a little bit more complicated than that…

In all of these areas there have been developments over the last twenty years that are directly caused by the new economy and the internet. Data protection laws have been stretched to deal with the problems of vast amounts of information being moved around the world at the speed of light and in the EU are now being fundamentally reviewed; telecoms laws have to cope with issues such as net neutrality and zero rating; intellectual property laws have had to find answers as to whether linking to copyrighted content or copyright-infringing content is in itself a copyright infringement; and competition laws have had to grapple with a range of problems which – though not unique to the new economy – are more prevalent, more important or simply more complex when applied to the new economy.

To assume that we need only look at competition law, data protection law, telecoms regulation, or intellectual property law as they have historically been cast, and further to assume that they need no reconsideration, no nuancing, no elaboration in the new economy is overly simplistic.

Judge Kollar-Kottelly, the judge charged with finalising the remedies after the Court of Appeal in the US Department of Justice’s action against Microsoft, also invoked a horse metaphor, describing the task of crafting an appropriate future-proof remedy as being like trying to “shoe a galloping horse”.

And yes, technology markets appear fast moving so crafting a remedy of more than merely temporary usefulness appears difficult. But although particular products may change from year to year – think of a new version of Windows, or a new model of iPhone – the underlying technology changes rather more slowly. If there is a competition problem deserving of a remedy, then it will almost certainly be linked to the underlying technology rather than a particular product release. So – for example – the Commission’s Microsoft interoperability remedies continued to apply beyond the version of Windows that was on the market at the time the remedies came into force. And the Federal Trade Commission’s consent decree in relation to Intel applied beyond the products that were on the market at the time.

Both Easterbrook and Kollar-Kottelly were superficially right, but were more fundamentally wrong.

The superficially right answer to the question posed by the title of this panel is that no there need be no new competition law, the existing principles suffice. How can the principles not suffice when they are couched so broadly?

That’s the simple answer, the “law of the horse” answer. Superficially right but more fundamentally wrong.

The principles can only suffice if they are properly understood. And properly applied to what may be novel factual circumstances.

New economy cases may have particular characteristics, alone but more often in combination. There are many-sided markets, markets with network effects, markets with high fixed and low marginal costs, markets where average costs keep decreasing, markets with zero or low cost interoperability both between complements and between competitors. None of these things taken individually are unique to the new economy. You’ll be able to find markets with each of these characteristics in the old economy – though the implications of these characteristics haven’t necessarily been tested in the old economy, so a new economy case may be the first time that particular problems have to be addressed. Perhaps more importantly though, technology markets often put several of these together. The combination quickly becomes complex.

Before we get to that I want to say a few words about the issue of timing of intervention.

On timing, it’s a more complicated version of the Goldilocks problem. If the porridge is too hot, then it may be too early to intervene. If the porridge is too cold, it may be too late.

But when it’s neither too hot nor too cold, neither too early nor too late, there’s another argument that gets used to oppose antitrust intervention: even when the porridge is just right, you still should not eat the porridge because something even better than porridge will come along soon.  The transience of dominance. Market power is temporary and will be undermined in a wave of Schumpeterian destruction.

Maybe. Sometimes.

Let’s look at each of these concerns.

The too early argument I find hard to understand. When has the Commission ever intervened in a technology case at such an early stage that it was difficult to see how the market was going to develop? Or indeed where the market changed radically shortly after the decision such that the underlying competition concern disappeared?

Too late is perhaps more of a concern. As Philip Lowe – the former Director General of DG Competition – used to say, we should not wait until the patient is dead before we begin to operate. The extreme situation of too late to remedy the problem is rare, however. I suppose in those circumstances – if remedial action can’t restore competition to a market – you may instead want to look at behavioural remedies that limit exploitation of that lack of competition but I have not been able to think of a case where that would have been relevant.

The transience argument (you should not intervene even when the porridge is just right) also does not stand up under scrutiny. As I said at the start although products appear to be galloping by, technologies do not. Market power does not.

It is fashionable to think of Microsoft as yesterday’s news in terms of technology, and it is true that Microsoft seems to be more of a complainant than a defendant in technology cases these days. But is that because its market power proved transient?

Many people now use Macs, particularly laptops. So has Microsoft’s market power eroded? Well they still have a market share of over 85% on desktops and laptops and I suspect their share in the business market as distinct from the consumer one is even higher. That is still a pretty good business position.

Admittedly, portable computing devices like smartphones and tablets might change the size of the market – either by reducing it in absolute terms or by limiting its growth compared to what would have happened absent such devices.  But that looks more like what happened to mainframes when desktop computers came along – the relative size of the market changed, but for those customers that needed mainframes, IBM remained a rather important company – hence the IBM interoperability case of just a few years ago. (And mainframes are still not dead – IBM announced a new mainframe product a few weeks ago.)

Another example. Should the Commission have intervened in the Intel case, given the variety of new processors now available, in particular for mobile devices? Intel is not doing so well there. Should the Commission not have been concerned at its practices for desktop and laptop CPUs?

To bring in my own horse metaphor, that’s like saying no-one should have been concerned about a price fixing agreement in the guild of blacksmiths, because at some point Dunlop would invent the car tyre. And again who is to say that for customers that continue to need blacksmiths services – people still use horses today – that a blacksmith’s cartel would not still be of concern? The market would be smaller, but the potential for exploitation as against any individual customer may still be as great.

So overall I do not see evidence of intervention that is too early; or evidence that new economy dominance is transient counselling an excess of caution even when market power exists.

So if the principles remain the same and timing is not too much of a concern, what is difficult about new economy cases?

Because you need new knowledge, and you need to challenge old assumptions.

What do I mean by new knowledge?

I work in cartels at the moment. One of the reasons cartels are outside of the sectoral organisation of most of the rest of DG Competition is that sectoral knowledge is often not that important. A price fixing agreement for a widget is much the same as a price fixing arrangement for a sprogget. (One exception may well be financial services cases where sectoral knowledge is probably more useful.)

For many new economy cases because the markets and products may be new and unfamiliar, you need a strong sectoral understanding. You need to know, for example, whether a request for interoperability information means making public APIs that were previously private, or whether it means writing APIs that don’t yet exist. (And you need to know what APIs are.)

Many years ago I remember trying to interest an MEP in a telecoms policy issue that would affect how consumers used the internet. It became apparent after a while that the MEP had no idea that consumer computers connected to the internet via telephone or cable networks. I’m not entirely sure what magical mechanism he thought allowed him to send an email, but he clearly didn’t have the requisite level of knowledge to have an opinion on telecoms policy. Things have improved since then.

The flipside of needing knowledge is perhaps understanding that not everything that is new is novel. One of the topics of great concern to some people at the moment is the competition law analysis of “big data”. I saw an article a little while ago that pointed out that data could be used as an input in a downstream product. So data about consumer preferences could be combined with data about a product, to create targeted advertising in relation to that product. So data can be an input. Explaining that takes about a paragraph and understanding it takes, I hope, about thirty seconds.

The rest of the multi-page article was devoted to how, assuming data could be an input, data issues could come up in a variety of competition law situations. But if you removed the word “data” and replaced it with “any input” you would have a fairly basic competition law introduction to vertical competition issues.

So you also need enough knowledge to know that even if something is new, it is not necessarily novel.

Aside from new knowledge, you also need to challenge old assumptions, because the characteristics of the new economy markets might mean that the assumptions no longer apply. This is a particular problem of competition law, because it suffers from a loss of nuance over time. Complex economic cases become reduced to black letter rules, rules which may be completely wrong applied to different complex cases. A sensible ruling loses its context and becomes a slogan.

Just as Cartes Bancaires recently told us that context is everything in judging whether a restriction is by object or by effect, so context should be everything in deciding whether and how to apply a legal ruling.

Taking the Magill criteria and applying them to every situation where A is asked to supply B with “something” makes little sense; it’s divorced from the nuances of why the Magill case was decided as it was. Or as Eleanor Fox has pointed out, it takes the fact pattern of the Magill case and calls it a legal rule.

One of my favourite misguided assumptions when it comes to the new economy is in relation to the application of competition law to interoperability problems. Justice Scalia in the US Supreme Court Trinko case set out three potential problems of mandated dealing.

  • First it may reduce investment and innovation incentives for the company obliged to supply;
  • Second, it may require courts and competition authorities to engage in central planning and ongoing price regulation;

  • Third, it may facilitate the “ultimate evil” of antitrust – collusion.

He assumed, as do many, that these are characteristic of any mandated dealing case.

  • But what if the “facility” to which access would be mandated is a by-product? The TV listing information in Magill is an obvious example? By definition there can’t be a reduced incentive to invest in a by-product.
  • What if there is no price that needs to be regulated?
  • What if there is no ongoing relationship between supplier and supplied so that collusion is not a concern? (And of course, they may anyway be in a vertical relationship so collusion seems … not obvious.)

In many interoperability cases, these three concerns may be wholly irrelevant. What then should be the legal test for determining whether a request for access to interoperability information is the right one? Maybe the concept of an essential facility – crafted to determine when it’s right to give access to rivalrous fixed infrastructure like a port – is not necessarily the right one when looking at non-rivalrous interoperability information.

There are plenty of other potentially problematic assumptions.

For example, it is trivially easy on the internet to find examples of pricing below average variable cost – there are plenty of free products out there – which if you simplistically apply Akzo looks predatory if you can find dominance. But if this is a multi-sided market you obviously have to look at all possible sides of the market and look at all revenues before you can draw any conclusions.

There is a flip side to this as well of course – I’ve seen arguments that because a product is given away for free there cannot be consumer harm (who can be harmed by a free product?). That’s equal nonsense for the same reason – you have to look at all sides of the market to see what is happening.

The risk of faulty assumptions do not stop there. Even taking into account the multi-sided nature of markets, you cannot necessarily assume that the predatory pricing test of Akzo is the right one. In high-fixed cost and low-variable cost industries then relying on a variable cost test rule may be as Herbert Hovencamp has argued, a license to predate.

And I have already criticised the assumption that because products change regularly, market power may be transient – flawed because it is often the technology that determines the market power and that changes much more slowly.

So, in summary, we do not need new rules or new principles; we do not need to challenge the fundamentals of competition enforcement. But we do need to understand the markets, understand the legal principles, and understand how to apply the latter to the former. So pretty much standard competition law practice.