The Roles of Innovation in Competition Law analysis [1 ed.] 2018946032, 9781788972444, 9781788972437

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© To the Editors and contributors severally 2018 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2018946032 This book is available electronically in the Law subject collection DOI 10.4337/9781788972444

ISBN 978 1 78897 243 7 (cased) ISBN 978 1 78897 244 4 (eBook)

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Contents List of contributors Preface Table of cases Table of legislation PART I

vii ix xiv xxii

INNOVATION THROUGHOUT COMPETITION LAW ANALYSIS

1. Innovation in competition law analysis: making sense of on-going academic and policy debates Pieter Van Cleynenbreugel

2

2. The effects of mergers on innovation: economic framework and empirical evidence John Kwoka

13

3. Innovation by dominant firms in the market: damned if you don’t … but damned if you do? Francisco Marcos

33

4. Protecting innovation from unfair practices Juha Vesala PART II

50

INNOVATION AND REGULATION: CHALLENGES FOR COMPETITION LAW AND POLICY

5. Data protection considerations in EU competition law: funnel or straightjacket for innovation? Nicolo Zingales

79

6. Healthcare systems and competition: challenges and boundaries for the application of competition law in the EU healthcare sector Claudia Seitz

131

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7. Competition policy and the development of big data and artificial intelligence Shuya Hayashi, Kunlin Wu and Benjawan Tangsatapornpan PART III

162

COMPETITION LAW AND INTELLECTUAL PROPERTY LAW: MAKING INNOVATION WORK?

8. Joint research and development collaborations under competition law Björn Lundqvist

179

9. Patent settlements in the pharmaceutical industry: what can we learn from economic analysis? Jonas Severin Frank and Wolfgang Kerber

215

10. Access to justice as abuse of market power? Injunctive relief for standard-essential patents under US antitrust and EU competition law Viktoria HSE Robertson and Marco Botta 11. The abuse of rights in EU competition law and beyond Mariateresa Maggiolino and Maria Lillà Montagnani PART IV

246 274

THE PLATFORM ECONOMY: INNOVATION AND COMPETITION LAW AT CROSSROADS?

12. The digital economy: a challenge for competition policy? Daniel Zimmer

299

13. Tying and two-sided digital platforms Petri Kuoppamäki

307

14. Online platforms, rate parity and the free-riding defence Simonetta Vezzoso

341

Appendix Index

377 379

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Contributors Marco Botta, Senior Research Fellow, Max Planck Institute for Innovation and Competition, Munich (Germany) Jonas Severin Frank, Research Fellow in Economics, PhilippsUniversity Marburg (Germany) Shuya Hayashi, Professor of Law, Nagoya University Graduate School of Law (Japan) Wolfgang Kerber, Professor of Economics, Philipps-University Marburg (Germany) Petri Kuoppamäki, Professor of Law, Aalto University, School of Business (Finland) John Kwoka, Professor of Economics, Northeastern University (United States) Björn Lundqvist, Associate Professor of Law, Stockholm University (Sweden) Mariateresa Maggiolino, Associate Professor of Law, Bocconi University, Milan (Italy) Francisco Marcos, Professor of Law, IE University, Madrid (Spain) Maria Lillà Montagnani, Associate Professor of Law, Bocconi University, Milan (Italy) Paul Nihoul, Professor of Law, UC Louvain (Belgium); Court of Justice of the European Union Viktoria HSE Robertson, Assistant Professor of Law, University of Graz (Austria) Claudia Seitz, Max Geldner Assistant Professor of Life Sciences Law, University of Basel (Switzerland) Benjawan Tangsatapornpan, LL.D. Candidate, Nagoya University Graduate School of Law (Japan) vii Paul Nihoul and Pieter Van Cleynenbreugel - 9781788972444 Downloaded from Elgar Online at 03/15/2021 10:34:33PM via Universita Degli Studi Roma Tre

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Pieter Van Cleynenbreugel, Professor of Law, University of Liège (Belgium) Juha Vesala, Post-doctoral Researcher in Law, University of Helsinki (Finland) Simonetta Vezzoso, Professor for Competition Policy and Intellectual Property and Senior Researcher, Department of Economics and Management, Trento University (Italy) Kunlin Wu, LL.D. Candidate, Nagoya University Graduate School of Law (Japan) Daniel Zimmer, Professor of Law, University of Bonn (Germany) Nicolo Zingales, Lecturer in Law, Sussex University (United Kingdom)

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Preface In today’s society, innovation has become a key driver for economic policymaking. When trying to shape an innovative market environment, competition law can intervene in various ways. Approaching the subject from multiple angles and disciplines, the different chapters in this volume all focus in one way or another on the complex and varied relationship between competition law and innovation. Part I, entitled ‘Innovation throughout competition law analysis’, focuses on the appearance and relevance of innovation as an instrument throughout competition law analysis. The part contains four chapters, which explore to what extent references to innovation feature and are granted room within existing competition law analytical frameworks. Chapter 1 by Pieter Van Cleynenbreugel demonstrates that innovation appears at different stages throughout competition law analysis. Both as a phenomenon exogenous to competition law analysis and as a tool embedded in competition analysis, references have been made to innovation. The author therefore calls for a more explicit differentiation between different types of competition law and innovation analysis, in order better to structure and understand academic debates in this context. Subsequent chapters within Part I deal with how innovation concerns have appeared throughout specific subtypes of competition law analysis. In the context of mergers, Chapter 2 by John Kwoka successfully shows that, within the context of pharmaceutical industry mergers, the scope for innovative business practices and research and development investments has diminished. That analysis concludes that the current analytical frameworks in place in the context of merger control do not necessarily and sufficiently take innovation into account. The author therefore calls for a more explicit attention to innovation in this regard. That sentiment is confirmed by Francisco Marcos in Chapter 3, who highlights the inherent tensions that dominant firms face both to innovate and to refrain from innovating. The current setup of competition law frameworks does not necessarily and automatically allow pro-innovation arguments to enter the realm of abuse regulation enforcement. Therefore, the author calls upon considering dynamic efficiency as the parameter for analysing firms’ behaviour. Taking up this challenge, Juha Vesala, in Chapter 4, ix Paul Nihoul and Pieter Van Cleynenbreugel - 9781788972444 Downloaded from Elgar Online at 03/15/2021 10:34:40PM via Universita Degli Studi Roma Tre

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argues that certain theories of harm informing antitrust authorities have seemingly considered antitrust harm to be present when other firms are deprived of innovation opportunities as a result of other than exclusionary conduct. Given that it is difficult to establish clearly and unambiguously when this is the case, the author calls for caution. He therefore proposes, in order to avoid deterring practices that overall promote innovation and consumer welfare, an enforcer’s assessment framework under which anti-competitive effects on innovation have to be established as likely and the conduct either as not reasonably necessary for attaining redeeming or pro-competitive benefits or as unlikely to produce pro-competitive benefits that outweigh the anti-competitive effects. Proposing a test to that extent, the author argues, would allow better integration of innovationoriented arguments in a competition law framework focused on tackling abusive practices. Part II of the book, entitled ‘Innovation and regulation: challenges for competition law and policy’, complements Part I in exploring the relationship between competition law analysis on the one hand and regulation adopted in an attempt to structure, guide and promote technological innovation on the other hand. It is the case indeed that innovations are not only left to the market, but also become the object of specific regulatory instruments. The regulation of innovation poses new challenges for competition law and policy, as Part II demonstrates. In the field of the new economy, data and data protection regulation have been playing a major role in that regard. In Chapter 5, Nicolo Zingales explores the intricate relationship between data protection regulation and competition law. Focusing predominantly on the regulatory initiatives taken at European Union level, Zingales shows that both regulatory frameworks do not operate in a sufficiently coordinated fashion in order to avoid different approaches towards law and innovation to subsist in this regard. He therefore proposes interinstitutional coordination mechanisms to better streamline the application and enforcement of both types of regulation. A similar conclusion can be drawn in the context of health care services, where innovations tend also to be subject to significant degrees of regulation. As Claudia Seitz demonstrates in Chapter 6, attention to the streamlining health care regulation and competition law could also be improved. In Chapter 7, Shuya Hayashi and co-authors show that similar problems may also require more explicit attention in the context of the regulation of artificial intelligence. In that field, the use of data is a necessity in order for firms to innovate. Calling for a regulatory framework on data portability and standardisation that is more reflective of competition law concerns, the authors show that more reflection is needed on how to attune artificial intelligence and big data

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policies and proposed regulations in that field to the framework set up by antitrust law. The different chapters throughout the first two parts of the book conclude preliminarily that, on a more abstract level, innovation concerns are present yet not necessarily fully and directly taken into consideration within the framework of antitrust analysis itself. That lack of direct consideration could be explained partially by the fact that innovation as a generally applicable notion is relatively difficult to grasp in all its varieties. Parts III and IV of the edited volume therefore explore two more specific contexts in which innovation-related arguments come most explicitly to the foreground: the intersection between competition law and intellectual property law on the one hand and the application of competition law to digital platforms on the other hand. Both topics have gained relevance in recent years, although many open questions remain at this stage. The contributions in Parts II and III frame those questions and offer some tentative answers to them. Part III, entitled ‘Competition law and intellectual property law: making innovation work?’, focuses on the relationship between competition law and intellectual property law and the room granted for innovation-related arguments in that context. On the one hand, intellectual property law is meant to protect the fruits of one’s innovative practices. On the other hand, competition law aims to guarantee that markets continue to foster and stimulate innovation. It goes without saying that the confrontations between both fields of law make sense of the role of innovation in competition law analysis. Part III contains four chapters that deal with the thorny relationship between competition law and intellectual property law. In Chapter 8, Björn Lundqvist explores the issue of joint research and development agreements and their treatment under competition law. Criticising the all-too-often backward-looking focus of antitrust agencies in relation to such agreements, the author explores ways in which a forward looking perception, targeted towards what will happen when two firms collaborate in R&D, can take shape. In Chapter 9, Severin Frank and Wolfgang Kerber focus on patent settlements and their impact on antitrust analysis from an economic point of view. Identifying several gaps in the current analytical framework, the authors propose a way forward in fine-tuning patent law and antitrust analysis. Within the same realm, Viktoria Robertson and Marco Botta in Chapter 10 deal with the vexed topic of so-called standard-essential patents and their treatment under competition law. Those patents, the use of which is necessary in order to guarantee the safety of a new product relying on patented technology, in a certain way limit the possibilities to engage in innovative techniques and features, all the more when patent

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holders engage in litigation with potential and willing licensees. Focusing on litigation in both the United States and, above all, the European Union, both authors argue that the different tests applicable on both sides of the Atlantic result in different approaches towards the subject-matter. Without calling for a complete streamlining of tests, the authors at the very least look at ways to harmonise in some ways the treatment of standard-essential patents under competition law. The final chapter of this part, Chapter 11, touches upon the more general issue of abuse of rights in antitrust law. The different innovations and protective mechanisms put in place may have as a consequence seemingly to stimulate abusive exercises of rights conferred by antitrust law. Against the background of the previous chapters, Mariateresa Maggiolino and Maria Lillà Montagnani analyse what law can do to prevent and avoid such abusive applications of rights aimed at addressing anticompetitive behavior. Part IV of the edited volume focuses on the challenges raised by digital platforms as a matter of competition law. Entitled ‘The platform economy – innovation and competition law at crossroads?’, it contains three chapters. In Chapter 12, Daniel Zimmer offers a general analysis as to whether competition law is ready to deal with the challenges of the platform economy. Building upon his work within the German Monopolies Commission and the report prepared by it, Zimmer offers a set of strategies that would enable competition law better to deal with the challenges of digital platforms. In Chapter 13, Petri Kuoppamäki, focuses specifically on the practice of tying in the context of two-sided digital platforms. Kuoppamäki analyses when tying by digital platforms is considered problematic from a competition law point of view. Identifying the difficulties in establishing competition law infringements, the author also reflects on what is possible within the legal frameworks currently in place. Chapter 14, by Simonetta Vezzoso, discusses yet another innovation-triggered and potentially anticompetitive phenomenon online platforms engage in: so-called online rate parity clauses prohibiting hotels from charging lower prices for reservations made directly on their websites and not via the intermediary of a platform such as booking.com. Dissecting the approaches national competition authorities have taken on the subject-matter, Vezzoso analyses the possibilities and limits of competition law enforcement against that background. The different chapters aim to offer an overview of the varieties of competition law and innovation analysis currently in place, simultaneously hoping to stimulate debates on how the legal framework can be adapted or improved in this regard. For assistance during the preparation stages of the book, we would like to acknowledge the much appreciated help of Ms Audrey Zians, Ms Nathalie Defossé and Mr Brieuc Geuzaine,

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research assistants at the University of Liège, who have reread all the chapters and have ensured consistency in footnoting. We are most grateful for their availability, support and their enthusiasm throughout the final stages of this book project. Paul Nihoul and Pieter Van Cleynenbreugel

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Table of cases EUROPEAN UNION Aéroports de Paris v Commission, Case T-128/98, ECLI:EU:T:2000:290 ...... 277 AG2R Prévoyance v Beaudout Père et Fils Sarl, Case C-437/09, EU:C: 2011:112 .......................................................................... 149–50, 160 Airtours v Commission, Case 342/99 [2002] ECR II-02585 ........................... 208 Allianz Hungária Biztosító and Others, Case C-32/11 EU:C:2013:160 ........... 89 Altmark Trans GmbH, Case C-280/00 [2003] ECR I-7810 ......................... 157–8 AOK-Bundesverband and Others, Joined Cases C-264/01, C-306/01, C-354/01 and C-355/01 [2004] ECR I-2524 ............................. 146, 148–50 API-Anonima Petroli Italiana SpA, Joined Cases C-184/13 to C-187/13, C-194/13, C-195/13 and C-208/13 ECLI:EU:C:2014:2147 ...................... 93 Asnef-Equifax v Ausbanc, Case C-238/05 [2006] ECR I-11125 ....................... 97 AstraZeneca (Case COMP/A.37.507/F3) Commission Decision C(2005) 1757 final ........................................................................................ 53, 276–9 AstraZeneca v Commission, Case C-457/10 P, EU:C:2012:770 ......... 103–4, 155, 276–9 AstraZeneca v Commission, Case T-321/05, ECLI:EU:T:2010:266 ............ 276–9 Atlantic Container [1983] ECR I-3461, [2003] ECR II-03275 ......................... 99 Belgische Radio en Televisie and société belge des auteurs, compositeurs et éditeurs v SV SABAM and NV Fonior, Case 127/73 [1974] ECR 313; EU:C:1974:25 ....................................................................................... 52, 75 BPB Industries and British Gypsum v Commission, Case T-65/89 [1993] ECR II-389 ................................................................................................ 102 British Airways v Commission, Case C-95/04 P [2007] ECR I-2331 ........ 85, 99, 326 British Airways v Commission, Case T-219/99 [2003] ECR II- 5917 ............. 102 Bronner v Mediaprint, Case C-7/97, [1998] ECR I-7791 ............................... 170 Budìjovický Budvar, národní podnik v AnheuserBusch, C-482/ 09, ECLI:EU:C:2011:605 ................................................................................ 292 Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, C-196/04, ECLI: EU:C:2006:544. ......................................................................................... 290 CBEM v CLT and IPB, Case 311/84 [1985] ECR 3261 ................................. 315 CECED (Case IV.F.I/36.718) Commission Decision 2000/475/EC [2000] OJ L187/47 .................................................................................................. 95 Centrafarm v Sterling Drug, Case C-15/74, ECLI:EU:C:1974:114 ................ 288 Centros, Case C-212/97, ECLI:EU:C:1999:126 ...................................... 290, 294 Clair, Case 123/83 [1985] ECR 391 ................................................................. 104 xiv Paul Nihoul and Pieter Van Cleynenbreugel - 9781788972444 Downloaded from Elgar Online at 03/15/2021 10:34:48PM via Universita Degli Studi Roma Tre

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Coditel SA v Cine Vog Films SA (No. 2), Case 262/81 [1982] [2001] ECR II-024 ........................................................................................................... 92 Compagnie Générale Maritime and Others v Commission, Case T-86/95 [2002] ECR II-1011 ............................................................................ 96, 371 Competition Authority v Beef Industry Development Society Ltd and Barry Brothers (Carrigmore) Meats Ltd (BIDS), Case C-209/07 [2008] ECR I-08637 ............................................................................................... 89 Consiglio Nazionale degli Ingegneri v Ministero della Giustizia and Marco Cavallera, C-311/06, ECLI:EU:C:2009:37 .............................................. 292 Consiglio nazionale dei geologi v Autorità garante della concorrenza e del mercato and Autorità garante della concorrenza e del mercato v Consiglio nazionale dei geologi, Case C-136/12 [2013] 5 CMLR 40 ..... 93 Consten and Grundig, Joined Cases 56/64 and 58/66 [1966] ECR 429 ........... 90 Consten and Grundig v Commission, C-56/64 and C-58/64, ECLI:EU:C:1966:41 .................................................................................. 288 Continental/ United/Lufthansa/Air Canada and Alexander Italiener, Commission Decision of 23 May 2013 (Case COMP/AT.39595) [2013] OJ C 201/8 .............................................................................. 96, 371 Dansk Rørindustri, Joined Cases C-189, 202, 205, 208 and 213/02 [2005] ECR I-5425 ............................................................................................... 106 David Meca-Medina and Igor Majcen v Commission, Case C-519/04 P [2006] ECR I-06991 ............................................................................... 93–4 Decker, Case C-120/95 [1998] ECR I-1871 ..................................................... 138 Deutsche Grammophon v Metro, C-78/70, ECLI:EU:C:1971:59 .................... 288 Deutsche Telekom, Case C-280/08 [2010] ECR I-9555 .......................... 102, 104 Diamantis, C-373/97, ECLI:EU:C:2000:150 ........................................... 290, 294 Donaldson Filtration Deutschland GmbH v Ultra Air GmbH, C-450/13 P, ECLI:EU:C:2014:2016. ......................................................................... 292–3 Eichsfelder Schlachtbetrieb, C-515/03, ECLI:EU: C:2005:49 ......................... 292 Emsland·Stärke, C-110/99, ECLI:EU: C:2000:695. ................................... 290–95 E’tablissements Rimbaud SA v Directeur général des impôts and Directeur des services fiscaux d’Aix-en-Provence, C-72/09, ECLI:EU:C:2010: 645 ............................................................................................................. 290 Eurofix-Bauco v Hilti, Commission Decision 88/138/EEC of 22 December 1987 relating to a proceeding under Article 86 of the EEC Treaty (IV/30.787 and 31.488) [1988] OJ L 65/19 .............................. 314–15, 331 European Night Service v Commission, Joined Cases T-374 to T-388/94 [1988] ECR II-3141 .............................................................................. 208–9 Europemballage and Continental Can v Commission, C-6/72, ECLI:EU:C:1975 ....................................................................................... 277 Exxon/Shell (Case IV.33.640) Commission Decision 94/322/EC [1994] OJ L144/20 ....................................................................................................... 95 Facebook/WhatsApp (Case COMP/M.7217) Commission Decision 2014/C 297/04 [2014] OJ C297/13 ....................................................................... 173 Facebook/WhatsApp (Case COMP/M.7271) Commission Decision C(2014) 7239 [2014] OJ C417/4, ........................................................................... 303 FAG-Flughafen Frankfurt/Main AG, Commission Decision of 14 January 1998 (Case IV/34.801) [1998] OJ L72/30 ............................................... 101

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Federación Española de Empresas de Tecnología Sanitaria (Fenin) v EU Commission, Case C-205/03 P [2006] ECR I-6320 ............................ 151–2 Ferrero SpA against Harald Wohlfahrt, Decision of 27 May 2009 (No B 668 600) Judgment of 22 September 2011 (OHIM) ................................ 292 Football Association Premier League Ltd and Others v QC Leisure and Others and Karen Murphy v Media Protection Services Ltd, Joined Cases C-403/08 and C-429/08 [2011] ECR I-9083, .................................. 87 Ford/ Volkswagen (Case IV/33.814) Commission Decision 93/49/EC [1993] OJ L20/14 .................................................................................................... 95 France Télécom, Case C-202/07 [2009] ECR I-2369 ........................................ 99 GlaxoSmith-Kline Services and Others v Commission, Joined Cases C-501/06 P, C-513/06 P, C-515/06 P and C-519/06 P [2009] ECR I-9291 .................................................................................................. 85, 359 GlaxoSmithKline Services v Commission, Case T-168/1 [2006] ECR II-2969 ................................................................................................. 96, 371 Google, Commission Decision of 27 June 2017 (Case COMP/39470) [2018] OJ C 9/11 .................................................................................................. 124 Google/Motorola Mobility (COMP/M.6381) Commission Decision C(2012) 1068 of 13 February 2012 [2012] OJ C 75/1 ..................... 56, 256 Groupement des cartes bancaires (CB) v European Commission, Case C-67/13 P EU:C:2014:2204 ......................................................... 89–90, 356 Halifax and Others v Commissioners for Custom & Excise, C-255/02, ECLI:EU:C:2005:200. ................................................................ 290–92, 294 Herrera, Case C-466/04 [2006] ECR I-5359 ................................................... 138 Hilti v Commission, Case-53/92 P [1994] ECR I-667 .............. 314–15, 331, 337 Hilti v Commission, Case T-30/89 [1991] ECR II-1439 ... 101, 314–15, 320, 331 Hoffman La Roche AG v Commission, Case 85/76 [1979] ECR 461 ........ 85, 88, 98, 323–4 Höfner and Elser, Case C-41/90 [1990] ECR I-2010 ...................................... 146 Huawei v ZTE, Case C-170/13, EU:C:2015:477 ............... 74, 208–9, 248, 266–8 Hungary v Slovakia, C-364/10, ECLI:EU:C:2012:630, ................................... 291 Imperial Chemical Industries v Commission, Case 48/69 [1972] ECR 619 ... 208 IMS Health v NDC Health GmbH & Co, Case C-418/01 [2004] ECR I-5039 ........................................................................................................ 170 IMS Health v NDC Health GmbH & Co, Case T-418/01 [2001] ECR II-3193 ....................................................................................................... 210 Intel Corp, Commission Decision of 13 May 2009, COMP/C- 37.990 [2009] OJ C 227/13 .......................................................... 53, 316–17, 323–4 Intel Corp v Commission, Case C-413/14 P, EU:C:2017:632 ..................... 323–4 Intel Corp v Commission, Case T-286/09, ECLI:EU:T:2014:547 ....... 323–4, 337 Internetportal und Marketing GmbH v Richard Schlicht, C-569/08, ECLI:EU:C:2010:311 ................................................................................ 292 Ioannidis, Case C-326/00 [2003] ECR I-172 ................................................... 138 ITT Promedia NV/Commission, T-111/96, EU:T:1998:183 ............................. 264 Kanal 5 Ltd and TV 4 AB v Föreningen Svenska Tonsättares Internationella Musikbyrå (STIM) upa., Case C-52/07 [2008] EU:C:2008:703 ......... 52, 75 Klaus Höfner and Fritz Elser v Macrotron GmbH, Case C-41/90 [1991] EU:C:1991:161 ............................................................................................ 61

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Kohll, Case C-158/96 [1998] ECR I-1936 ....................................................... 138 Konkurrensverket v Telia Sonera Sverige AB, Case C-52/09 [2011] ECR I-527 ................................................................................... 75, 102, 104 Lair v Universität Hannover, C-39/86, ECLI:EU:C:1988:322 .................. 289–90 Lammers & Van Cleeff NV v Belgische Staat, C-105/07, ECLI:EU:C:2008:24 .................................................................................. 290 Lancôme parfums et beauté & Cie v OHIM, Case C-593/12 P, ECLI:EU:C:2013:707 ................................................................................ 292 Lancôme parfums et beauté & Cie v OHIM, Case T-204/10, ECLI:EU:T:2012:523 ................................................................................ 292 McCarthy v Secretary of State for the Home Department, Case C-202/13, ECLI:EU:C:2014:2450 .............................................................................. 291 Mag. Lic. Robert Koller, Case C-118/09, ECLI:EU:C:2010:306 ..................... 292 Manufacture française des pneumatiques Michelin v Commission (Michelin II), Case T-203/01 [2003] ECR II-4071 ............................ 99, 326 MasterCard and Others v Commission, Case C-382/12 P, EU:C:2014:2201 ............................................................... 92–3, 96, 360, 372 Merci convenzionali porto di Genova SpA v Siderurgica Gabrielli SpA Case C-179/90 [1991] EU:C:1991:464 ............................................................... 61 Métropole télévision (M6) and others, Case T-112/99 [2001] ECR II-2459 ..................................................................................................... 91–2 Microsoft (Case COMP/C-3/37.792), Commission Decision C(2004) 900 ..... 53, 284 Microsoft (tying) (Case COMP/C-3/39530) Commission Decision of 16 December 2009 (C(2009) 10033) ......................................................... 53 Microsoft, Commission Decision 2007/53/EC relating to a proceeding pursuant to Article 82 of the EC Treaty and Article 54 of the EEA Agreement against Microsoft Corporation, 24 March 2004 [2007] OJ L 32/23 .......................................................................................... 319–22 Microsoft/Skype (Case COMP/M.6281) Commission Decision C(2011)7279 [2011] OJ C341/2 ........................................................... 301–2 Microsoft v Commission (Microsoft I), Case T-201/04 [2007] ECR II-3601 ... 99, 170, 314–16, 319–21, 327–8, 330–35 Molenaar, Case C-160/96 [1996] ECR I-843 ................................................... 138 Motorola – GPRS standard essential patents (Case AT.39985) EC, decision C(2014) 2892 final of 29 April 2014 ... 53, 54, 56, 57, 58, 74, 75–6, 265–6 Nungesser KG and Kurt Eisele v Commission, Case 258/78 [1982] ECR 2015 ............................................................................................................. 92 NV Nederlandsche Banden Industrie Michelin v Commission (Michelin I), Case C-322/81 [1983] ECR 3461 .......................................... 43, 85, 99, 326 O and B, C-456/12, ECLI:EU:C:2014:135 ...................................................... 291 Ordem dos Técnicos Oficiais de Contas v Autoridade da Concorrência, Case C-1/12, [2013] 4 CMLR 20 ............................................................... 93 Perindopril (Servier) (Case AT.39612), EC, decision C(2014) 4955 final of 9 July 2014 .................................................................................................. 53 Pharmaceuticals, Commission Decision of 15 January 2008 (Case No COMP/D2/39.514) .................................................................................... 154

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Port of Genoa, Commission Decision 97/745/EC of 21 October 1997 relating to a proceeding pursuant to Article 90(3) of the EC Treaty regarding the tariffs for piloting in the Port of Genoa [1997] OJ L301/27 .................. 101 Portuguese airports, Commission Decision 1999/199/EC of 10 February 1999 relating to proceeding pursuant to Article 90 of the Treaty (Case No IV/35.703) [1999] OJ L69/31 ............................................................. 101 Post Danmark A/S v Konkurrencerådet (Post Danmark I), Case C-209/10 EU:C:2012:172 .......................................... 75, 85, 99–100, 102–3, 324, 326 Post Danmark A/S v Konkurrencerådet (Post Danmark II), Case C-23/14 EU:C:2015:651 ...................................................................................... 325–6 Prokent/Tomra (Case COMP/E-1/38113) Commisison Decision C(2006)734 of 29 March 2006 ....................................................................................... 53 Protimonopolný úrad Slovenskej republiky v Slovenská sporitel’#òa as, Case C-68/12, EU:C:2013:71 [2013] OJ C 114/27 ............................................ 94 Rambus (Case COMP/38636) Commission Decision of 9 December 2009 [2010] OJ C 30/17 .................................................................................. 53–4 Remia and Others v Commission, Case 42/84 [1985] ECR 2545 ............ 87, 359 Rio Tinto Alcan (Case COMP/39230) Commission Decision C(2012) 9439 final of 20 December 2012 [2013] OJ C 89/5 ........................................... 53 Samsung – UMTS (Case AT.39939) Commission Decision C(2014) 2891 final [2014] OJ C350/8 ................................................................... 54, 256, 263–5 Shaw, Case T-131/99 [2002] ECR II-2023 ......................................................... 96 Société Technique Minière v Maschinenbau Ulm GmbH, Case 56/65 [1966] ECR 235 ...................................................................................................... 92 Solvay/Honeywell, Case C-616/10, EU:C:2012:445 ......................................... 253 Sot Lelos kai Sia v GlaxoSmithKline, Joined Cases C-468/06 to 478/06 [2008] ECR I-7139 ................................................................... 87, 98, 101–2 Standard & Poor’s (Case COMP/39592) Commission Decision C(2011) 8209 final of 15 November 2011 [2012] OJ C 31/8 .......................................... 53 Stichting Baksteen (Case IV/34.456) Commission Decision 94/296/EC [1994] OJ L131/15 .................................................................................................. 95 Syntehtic Fibers (Case IV/30.810) Commission Decision 84/380/EEC [1984] OJ L207/17, ................................................................................................. 95 Telecom Development, Commission Decision [1999] OJ L 218/24 ................ 208 TeliaSonera, Case C-52/09, [2011] ECR I-527 .................................................. 99 Test Claimants in the Thin Cap Group Litigation v Commissioners of Inland Revenue, C-524/04, ECLI:EU:C:2007:161 .............................................. 290 Tetra Pak II, Commission Decision 92/163/EEC (Case IV/31043) [1992] OJ L 72/1 ............................................................................................ 314–16 Tetra Pak International v Commission (Tetra Pak II), Case T-83/91 [1994] ECR II-755 ................................................................. 101, 314–16, 320, 331 Tetra Pak v Commission, Case C-333/94 P [1996] ECR I-5951 ...... 314–15, 316, 331 The Publishers Association v Commission, Case C-360/92 P [1995] ECR I-23 .............................................................................................................. 96 Tiercé Ladbroke v Commission, Case T-504/93 [1997] ECR II-923 ........... 208–9 Tietosuojavaltuutettu v Satakunnan Markkinapörssi OY, Satamedia, Case C-73/07, [2008] ECR I-09831 .................................................................. 105

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TV10 SA v Commissariaat voor de Media, C-23/93, ECLI:EU:C:1994: 362, ............................................................................................................ 289 United Brands v Commission, Case 27/76 [1978] ECR 207 ............ 52, 102, 338 Van Binsbergen v Bestuur van de Bedrijfsvereniging, Case C-33/74, ECLI:EU:C:1974:131 ................................................................................ 289 Van den Bergh Foods, Case T-522/03 [2003] ECR II-04653 ............................ 91 Vanbraekl, Case C-368/98 [2001] ECR I-5382 ................................................ 138 Zhu and Chen, C-200/02, ECLI:EU:C:2004:639. ............................................ 289

FRANCE Booking.com, Autorité de la concurrence, Case 15-D-06 ....... 342, 351, 354, 362 Google et al. v Evermaps, Case No. 2009061231, Tribunal de Commerce de Paris (31 January 2012) .............................................................................. 59

GERMANY Booking.com, Bundeskartellamt Case B 9-121/13 .......... 342, 355, 358–9, 362–3 Bundesverband Deutscher Privatkliniken (BDPK)/ Landkreis Calw, Supreme Court Ref. 2 U 11/14 ................................................................................ 151 Google Inc. Case 92 O 5/14 Kart, Landgericht Berlin (19 February 2016) ..... 69 Google Inc. Case 408 HKO 36/13, Landgericht Hamburg (4 April 2013) ....... 59 Google/VG Media (Case B6-126/14) German Competition Authority (GCA)(8 September 2015) .......................................................................... 69 HRS, Bundeskartellamt Case B 9-66/10 ................. 342, 351–6, 358–9, 362, 365 HRS, Dusseldorf Higher Regional Court (OLG), VI – Kart. 1/14 (V) .......... 342, 365, 367 Orange-Book-Standard, 6 May 2009, Bundesgerichtshof, KZR 39/06 .......... 266, 268–9

ITALY Booking.com, Autorità Garante della Concorrenza e del Mercato, Case 1779 B ..................................................................................... 342, 351, 354 Ratiopharm/Pfizer Agcm Decision no. 23194 of 11 January 2012 ........... 280–82 Ratiopharm/Pfizer Consiglio di Stato, Decision no. 693 of 12 February 2014 ....................................................................................................... 281–2 Ratiopharm/Pfizer; Tar Lazio, Decision no. 7467 of 3 September 2012 ..................................................................................................... 280–82

SWEDEN Booking.com , Konkurrensverket, Case 596/2013 .................. 342, 351, 354, 356

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UNITED KINGDOM Allen v Flood [1898] AC 1 ............................................................................... 274 Mayor of Bradford v Pickles [1895] AC 587 ................................................... 274 Streetmap.EU Ltd v Google Inc. et al. [2016] EWHC 253 (Ch), [2016] All ER (D) 129 (Feb) ................................................................................. 59 UK v Les Servier Laboratories [High Court of Justice, Chancery Division. Patents Court] [2011] EWHC 730 (Pat) .................................................. 155 Unwired Planet International v Huawei Technologies [2017] EWHC 711 (Pat) ........................................................................................................... 269

UNITED STATES Addamax Corporation v Open Software Foundation, Inc., 152 F.3d 40, 50 n.3 (1st Cir. 1998) ..................................................................................... 200 American Home Prods. Corp., Proposed Consent Agreement with Analysis to Aid Public Comment, 59 Fed. Reg. 60 ................................................ 201 Apple Inc and NeXT Software Inc v Motorola Inc (25 April 2014) 2012-1548, 1549 US Court of Appeals for the Federal Circuit .......... 261–2 Apple Inc and NeXT Software Inc v Motorola Inc and Motorola Mobility Inc (22 June 2012) No. 1:11-cv-08540 District Court for the Northern District of Illinois Eastern Division ..................................................... 261–2 Associated Press v United States, 326 US 1 (1945) ........................................ 208 Boise Cascade Corp. v FTC, 637 F2d 573 (9th Cir 1980) ............................... 52 Bosch (Robert Bosch GmbH), In the matter of (File No. 121 0081) FTC, Docket No. C-4377; ............................................................... 53, 57, 259–62 Continental TV v GTE Sylvania Inc, 433 US 36 (1977) ................................. 358 Credit Suisse Securities LLC v Billing, 551 US 264 (2007) ........................... 284 eBay v MercExchange, 547 US 388 (2006) ................................................. 248–9 E.I. du Pont de Nemours & Co. v FTC, 729 F.2d 128 (2d Cir. 1984) .............. 52 FTC v Actavis Inc 570 US 756 (2013) ........................................ 216, 238, 243–4 FTC v Cement Inst, 333 US 683 (1948) .......................................................... 259 FTC v Indiana Federation of Dentists, 476 U.S. 447, 454 (1986) ................... 52 FTC v RF Keppel & Bros, Inc, 291 US 304 (1934) ........................................ 259 FTC v Sperry & Hutchinson Co., 405 US 233 (1972) .............................. 52, 259 General Motors, In re 103 F.T.C. 374 (1984) .................................................. 200 General Motors, In re 116 F.T.C. 1276 (1993) ................................................ 200 Genzyme/ Novazyme, In the matter of, Docket c 4126 File no 0410083 (2005) .................................................................................... 188, 197, 206–7 Google Inc., In the matter of, FTC file 121-0120 (3 January 2013) ......... 260–62 Independent Service Organizations Antitrust Litigation, In re, 203 F.3d 1322 (Fed. Cir. 2000) ......................................................................................... 284 Intel Corporation, In the matter of (File No. 951 0028) FTC, Complaint of 8 June 1998, Docket No. 9288 ................................................................... 54

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Motorola Mobility LLC, and Google Inc., In the matter of (File No. 121 0120) FTC, Complaint of 24 July 2013, Docket No. C-4410 ....... 53–4, 56, 57–8, 74–6 Negotiated Data Solutions LLC, In the matter of (File No. 051 0094) FTC, Complaint of 23 September 2008, Docket No. C-4234 .............. 52–4, 57–8 Official Airline Guides, Inc v FTC, 630 F.2d 920, 927 (2d Cir. 1980) ............. 52 Rambus v FTC, 522 F.3d 456 ............................................................................. 54 Samsung/ Apple Third Party FTC’s Statement on the Public Interest in the matter of certain wireless communications devices. Inv. No. 337-TA-745 (6 June 2012) ................................................................... 262–3 Spectrum Sports, Inc v McQuillan, 506 US 447 (1993) .................................. 258 United States v American Express Co., 2015 WL 728563 .............................. 356 United States v Grinnell Corp, 384 US 563 (1966) ........................................ 258 Verizon Communications Inc v Law Offices of Curtis V Trinko LLP 540 US 398 (2004) ............................................................................ 43, 259, 284 Wright Med. Tech., Inc., Proposed Consent Agreement with Analysis to Aid Public Comment, 60 Fed. Reg. 460 ......................................................... 201

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Table of legislation art art art art art art art art art art art art

EUROPEAN UNION Treaties and Agreements Agreement on a Unified Patent Court 2013 [2013] OJ C 175/1 .................................. 253–4 Charter of Fundamental Rights ....... 82 art 35 .................................... 140–41 art 51 ................................. 102, 125 EC Treaty art 82 ........................................ 52–3 art 85 .......................................... 194 art 85(1) ..................................... 194 art 85(3) ..................................... 194 European Patent Convention 1973 ................................... 251–2 Treaty of the EU art 4 ............................................ 159 Treaty of the Functioning of the EU art 7 .............................................. 87 art 8-16 ........................................ 87 art 12 .......................................... 135 art 12(2) ..................................... 135 art 26 ................................. 135, 139 art 53(1) ..................................... 139 art 101 .......... 89–98, 145–6, 158–9, 194, 205, 208, 372–3 art 101(1) ... 89–94, 90, 101–2, 342, 349, 370 art 101(3) .............. 90–91, 94–5, 97, 99–100, 179, 202, 212, 224, 342, 359–60, 367–73 art 102 ........ 51, 54, 74, 89, 98–105, 129, 145–6, 150, 158–9, 247, 258, 265–8, 280, 318–23, 331–2, 336–40 art 102(2)(d) .............................. 314 art 102(a) ..................................... 53

104 ........................................ 370 106 .......................................... 61 106(1) ................................... 149 106(2) ........................... 149, 158 107 .................................... 145–6 108 .................................... 145–6 109 ........................... 145–6, 149 114 .................................... 135–6 168 ............................... 133, 141 168(1) ................................... 134 168(7) ............................... 133–4 169 .................................... 133–5

Directives Directive 65/65/EEC of 26 January 1965 on the approximation of provisions laid down by Law, Regulation or Administrative Action relating to proprietary medicinal products [1965] OJ L22/369 ............... 103–4, 276 Directive 89/105/EEC of 21 December 1988 relating to the transparency of measures regulating the pricing of medicinal products for human use and their inclusion within the scope of national health insurance systems [1989] OJ L 40/8 .............................. 136 Directive 93/42/EEC of 14 June 1993 concerning medical devices and Directive 98/79/EC of the European Parliament and of the Council of 27 October 1998 on in vitro diagnostic medical devices [1993] OJ L 169/1 ... 136

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Table of legislation

Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data [1995] OJ L281/31 ................... 105, 137 art 6 ............................................ 108 art 6(1)(b) .................................. 112 art 6(1)(f) ................................... 116 art 7 ............................................ 109 art 7(e) ....................................... 113 art 15 .......................................... 117 Directive 98/44/EC of the European Parliament and of the Council of 6 July 1998 on the legal protection of biotechnological inventions [1998] OJ L 213/13 .................................... 136 Directive 2001/20/EC of the European Parliament and of the Council of 4 April 2001 on the approximation of the laws, regulations and administrative provisions of the Member States relating to the implementation of good clinical practice in the conduct of clinical trials on medicinal products for human use [2001] OJ L 121/34 ....... 136 Directive 2001/83/EC of the European Parliament and of the Council of 6 November 2001 on the Community code relating to medicinal products for human use [2001] OJ L 311/67 ....... 136 Directive 2002/98/EC of the European Parliament and of the Council of 27 January 2003 setting standards of quality and safety for the collection, testing, processing, storage and distribution of human blood and blood components and amending Directive 2001/83/EC [2003] OJ L 33/3 .............................. 136

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Directive 2003/94/EC of 8 October 2003 laying down the principles and guidelines of good manufacturing practice in respect of medicinal precuts for human use and investigational medicinal products for human use [2013] OJ L 262/22 .......................... 136 Directive 2004/23/EC of the European Parliament and of the Council of 31 March 2004 on setting standards of quality and safety for the donation of 31 March 2004 on setting standards of quality and safety for the donation, procurement, testing, processing, preservation, storage and distribution of human tissues and cells [2004] OJ L 102/48 ................................ 136–7 Directive 2004/48/EC of 29 April 2004 on the enforcement of intellectual property rights [2004] OJ L195/16 art 1 ............................................ 252 art 3(2) ....................................... 252 art 9(1) ....................................... 252 art 11 .......................................... 252 art 12 ...................................... 252–3 art 13 .......................................... 253 recital 7 ...................................... 252 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) [2009] OJ L 335/1 ................ 137 Directive 2011/24/EU of the European Parliament and of the Council of 9 March 2011 on the application of patients’ rights in cross-border healthcare [2001] OJ L 88/45 ................................ 139–40 art 3 ............................................ 140

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Directive 2013/55/EU of the European Parliament and of the Council of 20 November 2013 amending Directive 2005/36/EC on the recognition of professional qualifications and Regulation (EU) No 1024/2012 on administrative cooperation through the Internal Market Information System entered into force on 20 November 2013 [2013] OJ L 354/132 ............ 139 Directive 2014/40/EU of the European Parliament and of the Council of 3 April 2014 on the approximation of the laws, regulations and administrative provisions of the Member States concerning the manufacture, presentation and sale of tobacco and related products and repealing Directive 2001/37/EC [2014] OJ L 127/1 ................ 136

Regulations Regulation 1612/68 on freedom of movement for workers [1968] OJ L 257/2 art 7(2) ....................................... 289 Regulation 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty [2003] OJ L1/1 ........................... 158–9, 264 art 2 ............................................ 359 art 7 ............................................ 305 art 9 ............................................ 304 Regulation 139/2004 of 20 January 2004 on the control of concentrations between undertakings [2004] OJ L24/1 art 1(2) ....................................... 303 art 3 ............................................ 304

Regulation 833/2004 of the European Parliament and the Council of 29 April 2004 on the coordination of social security systems [2004] OJ L 166/1 ................ 140 Regulation 207/2009 on the European Union trade mark [2009] OJ L 78/1 art 7 ............................................ 293 Regulation 987/2009 of the European Parliament and of the Council of 16 September 2009 laying down the procedure for implementing Regulation (EC) No 883/2004 on the coordination of the social security systems [2009] OJ L 284/1 ...................................... 140 Regulation 1217/2010 of 14 December 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to certain categories of research and development agreements, OJ 2010 L 335/36 ............. 202–3 art 3 ............................................ 203 Regulation 330/2012 of 20 April 2010 on the application of Article 101(3) of the Treaty of the Functioning of the European Union to categories of vertical agreements [2010] OJ L 102/1 ...................................... 360 Regulation 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters [2012] OJ L351/1 art 5 ............................................ 253 art 15 .......................................... 253 art 24(4) ..................................... 253 art 35 .......................................... 253 art 62 .......................................... 253 art 63 .......................................... 253

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Table of legislation

Regulation 2016/679 of 27 April 2016, General Data Protection Regulation (GDPR) [2016] OJ L 119/1 .................... 105, 306 art 4(4) ....................................... 117 art 4(5) ....................................... 107 art 4(7) ....................................... 109 art 5(1) ............................... 106, 110 art 5(1)(b) .......................... 108, 112 art 5(1)(e) ................................... 108 art 5(2) ............................... 108, 110 art 5(b) ....................................... 109 art 6 ............................................ 109 art 6(1)(f) ........................... 109, 113 art 6(4) ......................... 112, 114–15 art 7(4) ....................................... 110 art 9 ............................................ 113 art 10 .......................................... 113 art 11 .......................................... 107 art 13 .................................... 118–19 art 13(1)(d) ................................ 110 art 14 ........................... 107, 118–19 art 14(2)(b) ................................ 110 art 15 ........................... 107, 118–19 art 16 .......................................... 107 art 17 .......................................... 107 art 18 .......................................... 107 art 20 .......................................... 126 art 21 .......................................... 107 art 22 ................. 106, 112, 117, 128 art 22(1) ..................................... 118 art 22(2) ..................................... 118 art 22(3) ..................................... 118 art 23 .......................................... 113 art 24 .......................................... 111 art 24(3) ..................................... 112 art 36 .......................................... 111 art 37 .......................................... 111 art 43 .......................................... 110 art 89 .......................................... 112 art 89(1) ................................. 107–8 recital 26 .................................... 106 recital 71 .................................... 118 recital 75 .................................... 111 recital 78 .................................... 110 recital 81 .................................... 110 recital 89 .................................... 111 recital 91 .................................... 111

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recital 156 .................................. 108 recital 159 .................................. 107 recital 162 .................................. 107

International Treaties Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) 1994 art 2(1) ....................................... 249 art 8(2) ....................................... 265 art 39 .......................................... 171 art 40(2) ............................. 249, 265 art 44(1) ..................................... 249 art 44(2) ..................................... 249 art 50 .......................................... 249 Paris Convention for the Protection of Industrial Property 1883 art 4A ......................................... 248 Universal Declaration of Human Rights 1948 art 27 .......................................... 248

UNITED STATES Drug Price Competition and Patent Term Restoration Act 1984 (Hatch-Waxman Act) ........... 225, 238–9 Federal Trade Commission Act 1914 s 2 .............................................. 258 s 5 ........... 51–4, 59–60, 65–6, 74–5, 258–9 s 45 ................................ 247, 258–9 s 45(a)(1) ..................................... 51 Hatch-Waxman Act 1984 ............. 225, 238–9 National Cooperative Research Act 1984 .................... 189–90, 192–4 s 3 .............................................. 193 National Cooperative Research and Production Act 1993 ........ 193–5, 197, 199–205, 207, 211 s 4301(a)(6) ... 193–5, 197, 199–205 s 4302 ........................................ 201

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Patent Act ...................................... 249 s 283 .......................................... 249 Sherman Act 1890 s 2 .................................... 52, 258–9

Standards Development Organization Advancement Act 2004 .... 197–8 Tariff Act 1930 s 337 ........................ 250–51, 262–3

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1. Innovation in competition law analysis: making sense of on-going academic and policy debates Pieter Van Cleynenbreugel 1. INTRODUCTION Although it is widely believed that market economies characterised by undistorted competition contribute directly to innovation,1 the relationship between innovation and competition law remains mysterious. As a result, scholars have grappled with the notion of innovation and its place within the competition law analytical framework. Analyses have varied between claims that no place should be awarded to innovation in competition law analysis2 and proposals to develop or fine-tune new economic tests grounded directly in innovation-related arguments.3 In the same way, competition authorities seem to have either excluded different innovation-related testing frameworks or have – often cautiously – proposed a more innovation-focused analytical framework or theory of competitive harm. Confronted with that variety of approaches in covering the relationship between innovation and competition law analysis, one may be inclined to find it difficult to distinguish the forest from the trees throughout those debates. In an attempt at making sense of the different takes on the relationship between competition law analysis and innovation, this brief 1 See in general, G. M. Peter Swann, The Economics of Innovation. An introduction (Edward Elgar Publishing, Cheltenham, 2009), 8–20. 2 Pablo Ibanez Colomo, ‘Restrictions on innovation in EU competition law’, European Law Review (2016) 41 (2), 201–219. 3 Nicolas Petit, ‘Innovation Competition, Unilateral Effects and Merger Control Policy’, working paper available at https://papers.ssrn.com/sol3/papers. cfm?abstract_id=3113077; Thibault Schrepel, ‘Predatory Innovation: The Definite Need for Legal Recognition’, available at https://papers.ssrn.com/sol3/papers. cfm?abstract_id=2997586.

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introductory chapter undertakes to offer a framework categorising the different competition law and innovation approaches into four different yet complementary analytical boxes, prior to categorising the different chapters in this volume into one of those boxes. In order to develop this framework, section 2 of this chapter briefly restates the basics derived from economic analysis that determine or could determine roles granted to innovation in competition law analysis. Section 3 actually distinguishes four different approaches towards competition law and innovation, proposing a table composed of four different yet complementary analytical boxes able to capture those varieties in scholarship. Building upon that analysis, section 4 categorises the different chapters in this volume within one of the four identified competition law and innovation boxes. It should be clear at the outset that the purpose of this chapter is not to propose a way forward in competition law and innovation analysis. It rather aims to offer a brief overview of different scholarly approaches linking innovation to competition law in order better to frame, understand and compare the roles of innovation in competition law analysis and the contributions the different chapters included in this volume make to that analysis. As such, the chapter is above all to be read as an introduction to both the body of scholarship dedicated to competition law and its relationship to innovation in general and to the different and varied chapters included in this volume.

2. INNOVATION, COMPETITIVE MARKETS AND COMPETITION LAW: BETWEEN SCHUMPETER AND ARROW Innovation in and of itself remains an open-ended notion. In essence, it encompasses the commercialisation of newly invented or upgraded products (product innovation) or production and distribution processes (process innovation). Such innovation can take place in a most disruptive way, creating an entirely new market for a new product or can be rather incremental, changing the dynamics on an existing market.4 What is clear, however, is that no matter what definition of innovation one adheres to, it has the potential to shake up markets or to at least change 4

See European Commission, Competition policy brief, EU merger control and innovation, April 2016, available at http://ec.europa.eu/competition/ publications/cpb/2016/2016_001_en.pdf, p. 2.

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the competitive dynamics within those markets. The relationship between competitive markets and innovation has therefore been the subject of vigorous debate among economists. In that particular context, discussions on the relationship between competitive markets and innovation almost always also start from the contrast between so-called Schumpeterian and Arrowian approaches towards innovation in competitive markets. According to the teachings of Joseph Schumpeter, product innovation is guaranteed best by less competition than more.5 In line with his ideas on creative destruction and the replacement of old products with completely new ones at some point in time, Schumpeter argues that less competition provides more incentives to a business to engage in product innovation, as the incumbent business may be afraid that its products will be replaced by a newer and better product that would result in the creation of a new market and the destruction of the old product market. As the European Commission summarised Schumpeter’s thoughts in 2016: Less competition increases the post-innovation rewards for the innovator, which in turn will increase the incentives to engage in research and development (R&D). Even if there is little price competition in the market, innovation competition from firms seeking to take over the leading supplier’s role (competition for the market) will goad the current market leader to invest in innovation to stay ahead, or else lose its market position to rivals.6

Product competition, or at least the risk of it, stimulates innovation in that understanding. Kenneth Arrow, on the other hand, argues that vigorous price competition rather than product competition serves as a means to stimulate innovation. In his opinion, the more pressure businesses feel with regard to their pricing decisions because of competitors also trying to capture demand, the more incentives to innovate will remain with the businesses concerned.7 Again according to the European Commission: In a competitive environment, a newly invented product will not cannibalise the firm’s own profit as much as it would under a less competitive market structure. In a competitive market, an invention will allow the inventor to gain 5

Joseph A. Schumpeter, Capitalism, Socialism and Democracy (Routledge, Abingdon, 2010), 82–83. 6 European Commission, n. 4, p. 1 (emphasis in original). 7 Kenneth Arrow, ‘Economic Welfare and the Allocation of Resources for Invention’, RAND Paper 1959, available at https://www.rand.org/pubs/papers/ P1856.html, pp. 15–20.

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sales from competitors and will therefore be applied to a higher output. Innovation incentives depend not on post-innovation profits per se but on the difference between post-innovation and pre-innovation rents. For these reasons, less competition in the market would reduce the incentives to innovate.8

As such, the threat of competition in itself incentivises businesses to engage in more innovative practices, both in terms of disruptive or incremental product innovation and in terms of less intensive process innovation, in which new production or distribution processes are commercialised. Both approaches towards competitive markets and innovation are not mutually exclusive, as economist Carl Shapiro has demonstrated.9 Indeed, both Schumpeter and Arrow essentially agree on the fact that markets need to be contestable, meaning that they need to enable new entrants to gain market access and to use that market access to contest incumbent businesses. In addition, in order to stimulate innovation, synergies between complementary products or services have to be recognised and realised, as bringing together such synergetic products may increase the likeliness of innovations to take shape in the future.10 Competition law plays a key role in that regard, as it offers tools to take action against market foreclosure and the competitive harm resulting directly or indirectly therefrom and to justify synergies that complementary products or services can bring in an attempt to stimulate innovation. At the same time, both positions also agree that businesses need to be able to capture the value of their innovation and to benefit from the competitive advantage obtained from their innovative actions. They have to be able to appropriate the value of their innovation.11 To do so, the recognition of certain types of intellectual property rights protection and ways to keep relying on their innovations are to be stimulated in that regard. Again, competition law can play a clear role in allowing such rights to be recognised and exercised within a framework also favouring undistorted competition.

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European Commission, n. 4, p. 2 (emphasis in original). Carl Shapiro, ‘Competition and Innovation. Did Arrow Hit the Bull’s Eye?’, in Josh Lerner and Scott Stern, The Rate and Direction of Inventive Activity Revisited (NBER 2012), 361–410. 10 European Commission, n. 4, p. 2. 11 See in a particular context, Dirk Auer, ‘Appropriability and the European Commission’s Android Investigation’, Columbia Journal of European Law (2017) 23, 647–680. 9

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It is clear from the foregoing basic overview that innovation as such can benefit from a competition law framework that ensures the contestability of markets, acknowledges the potential to appropriate certain benefits and stimulates synergies between complementary products. In that understanding, competition law serves above all as an instrument to enable and facilitate innovation in markets, either at the level of individual products or at the level of competitive markets as a whole. At the same time, competition law should serve as an instrument to act against innovations that have as a consequence the foreclosure – and diminished contestability – of markets or the abuse of appropriation tools acknowledged by law. On a whole, competition law should thus be considered an instrument making possible innovation competition both in specific product markets and beyond.

3. DEFINING THE ROLES OF INNOVATION IN COMPETITION LAW ANALYSIS: A FRAMEWORK It follows from the previous section that competition law can serve as a tool to allow for innovations to take place and as a means to protect against certain excesses of innovation. Although it is clear that competition law can play a role in the innovative process, a question that has not been answered in economic studies concerns the extent to which competition law should or could incorporate directly or indirectly innovation-structured arguments into its analytical framework. In essence, competition law targets certain practices that harm undistorted competition. As such, it operates on the basis of a ‘theory of harm’ that allows enforcement authorities and businesses to have some kind of certainty as to what practices are considered anticompetitive and what practices can be justified by virtue of offsetting procompetitive or efficiency-oriented items. Although competition law scholarship has largely centred on such theories of harm and has related them to innovation arguments, no singularly clear picture emerges from an even superficial survey of the practices and writings of competition authorities and scholars working in the field. At a general level of competition law and innovation scholarship, studies on the relationship between innovation and competition law focus on whether innovation-related arguments could be integrated in those theories of harm. Two different positions can be distinguished in that respect, differentiating the extent to which innovation-related concerns are to be included directly or indirectly in the applicable theory of harm underlying the application of competition law in a given jurisdiction.

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A first group of policy and scholarship documents suggests that innovation remains a value exogenous or external to competition law. Competition law focuses on market behaviour and the structure of the market and innovation can be considered a consequence directly flowing from that structure. At the same time, innovation as such is not a value directly protected by competition law itself. As such, protection or enabling of innovation cannot be invoked as a justification to otherwise anticompetitive types of behaviour or as a way to determine the presence or not of a restriction on competition. To the extent that innovation is considered as an exogenous value to competition, one may either consider innovation as a positive value, worthy of protection under competition law, or as a negative value, bringing new problems and issues that require remedial action within the scope of competition law. + An example of the first tendency would seem to be the European Commission’s willingness to refer to the impact of anticompetitive behaviour on innovation as an illustration of competitive harm caused by such behaviour.12 In doing so, the European Commission does not consider innovation to be the only or even key core value requiring protection, but rather a policy value that could be at stake in a supplementary way when defining or condemning anticompetitive practices.13 As such, innovation is a value that deserves protection and that is considered as a positive thing to happen in a market environment. At the same time, however, such innovation does not need to be part of the analytical framework of competition law in itself. The mere presence of a limit on the ability of businesses to compete is considered also to have repercussions on the ability of undertakings to innovate. From that point of view, protecting competition indirectly also means protecting innovation. At the same time, however, the competition law framework does not in itself incorporate innovation-related arguments directly into the assessment of anticompetitive behaviour. + In a similar fashion, competition law is also confronted with innovation as a negative exogenous value requiring to be addressed partially through competition law. The emergence of big data is a key example of this tendency. Big data result in the ability of certain businesses to collect, use and determine pricing decisions 12 See Communication from the Commission – Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements [2011] OJ C11/1, para. 27. 13 See for that argument, Colomo, n. 2.

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beyond what was previously possible or feasible. Doing so may result in anticompetitive behaviour being facilitated or in certain businesses being deprived of opportunities because of unwillingness of data holders to share certain kinds of information. To overcome those challenges, one often sees a tendency to adopt specific regulatory instruments that determine, more or less explicitly, their relationship to competition law. The emergence of EU data protection regulation and the multitude of reflections on how this regulation relates to competition law demonstrate to what extent this is the case.14 In that understanding, innovation in data collection and retention technologies triggers potential competition law concerns, which have to be addressed. From that point of view, studies question the roles competition law can play in addition to or as a substitute for specific instruments of regulation in innovative industries. A second line of policy and scholarship starts from the opposite position. Given that innovation is an aim to be reached through competitive markets, nothing would seem to impede that innovation as a value could be invoked as a policy value to justify certain types of behaviour or to determine the restrictive nature of certain types of behaviour. In that understanding, behaviour enabling or limiting that policy value could be approved or prohibited on the basis of competition law. From that point of view, innovation would become a value endogenous or internal to competition law, requiring authorities to take innovation arguments into account directly into their competition law analysis. + In this framework, innovation can again be considered a positive value to be protected. Within that understanding, competition law analysis should incorporate specific attention to innovation as a value worthy of protection under competition law. In the field of merger control, one witnesses a tendency to that extent in both US and EU law. The impact mergers have on research and development investment in a given product15 or even on the overall existence or 14 Inge Graef, EU Competition Law, Data Protection and Online Platforms: Data as Essential Facility (Kluwer, The Hague, 2016). 15 See Justus Haucap and Joel Stiebale, ‘How Mergers Affect Innovation: Theory and Evidence from the Pharmaceutical Industry’, Discussion Paper No. 218, Düsseldorf Institute of Competition Economics, April 2016, available at http://www.dice.hhu.de/fileadmin/redaktion/Fakultaeten/Wirtschaftswissenschaft liche_Fakultaet/DICE/Discussion_Paper/218_Haucap_Stiebale.pdf.

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development of innovation markets16 has seeped through explicitly in scholarly analyses of this kind. At the EU level, the introduction of a significant impediment to innovation competition test has been identified – and criticised – in this context.17 Scholarly studies identifying this kind of direct innovation relationship do not always agree with this stance. They generally explore whether and to what extent such tests would be compatible with the legal framework in place and ask whether modifications to that framework are considered necessary in that respect. + In the same vein, the excesses or negative effects on competition of innovation or innovative technologies have also been recognised. In those settings, the question has arisen as to whether certain innovations, which facilitate abusive or other anticompetitive action, should be recognised specifically as such, in order to avoid the difficulties of having to classify them under more traditional banners of competition law. From that point of view, the introduction of a specific predatory innovation abuse has been proposed, as have other elements of anticompetitive innovative behaviour.18 The overall picture that emerges, therefore, is one of a diversity of approaches and studies, each proposing either an exogenous or an endogenous take on the competition law and innovation relationship. Within those studies, a difference is made between whether innovation is seen as a negative value or as a positive value. It deserves to be clarified in that respect that scholars having a positive or negative take on innovation do not necessarily and generally consider all kinds of innovation negative or positive. Instead, they generally propose an analytical framework to deal with particular instances of innovation that have been valued either positively or negatively. From that point of view, they reflect on the law is it is and as it could be when taking innovation evolutions or threats seriously. The following scheme summarises the different elements identified in competition law scholarship. From that perspective, a table with four quadrants structured along the exogenous-endogenous attributes and positive-negative values can be identified (Table 1.1). In each of the 16 See Markus Glader, Innovation Markets and Competition Analysis. EU Competition Law and US Antitrust Law (Edward Elgar Publishing, Cheltenham, 2016). 17 Petit, n. 3. 18 Schrepel, n. 3.

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quadrants, I have added, by ways of example, an illustration of scholarship or competition law arguments made reflecting how innovation as a value is perceived throughout and integrated in competition law analysis. Table 1.1 Proposed innovation and competition law analytical matrix Innovation as a value

Exogenous to competition law analysis

Endogenous to competition law analysis

Positive value

European Commission Article 101/102 TFEU analysis currently in place (Data protection) Regulation and competition scholarship

Mergers and innovation – new economic and legal tests Predatory innovation proposals

Negative value

The diversity in policy and scholarly approaches thus identified attests to a variety of research perspectives in the relationship between competition law and innovation. It goes without saying that there is no one right approach to tackling the relationship and that it falls upon responsible policymakers to think through the implications of that relationship in all its varieties. The endogenous-exogenous and positive-negative distinctions nevertheless help at classifying research and at structuring debates regarding competition law and innovation into subcategories allowing for a more informed debate in each of those subcategories. Without necessarily proposing a single way forward, studies in each of the quadrants offer food for thought for policymakers grappling with innovative industries and thinking about using competition law as an instrument to structure, enable or restrain innovative developments in certain situations.

4. FRAMING THE OTHER CHAPTERS OF THIS BOOK WITHIN THE PROPOSED FRAMEWORK The chapters in this volume can each be categorised in one of the four quadrants distinguished in Table 1.1. Although the book is not structured according to those quadrants, it may be helpful to understand the scope of the different arguments by relating the chapters to those quadrants. Doing so enables better understanding of where and how the arguments made throughout this book intersect, differ or can be considered as complementing each other. It is interesting to note at the outset that none of the chapters included in this volume considers innovation to be a negative value to be

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addressed directly by competition law. On the contrary, all authors consider innovation to be a positive value worthy of protection. As a result, none of the chapters falls within the endogenous-negative quadrant of Table 1.1. Different authors have nevertheless sought to identify the possibilities of considering innovation as an endogenous positive value worthy of competition law protection. Within that framework, they have looked at whether competition law could grant ‘innovation as a positive value’ a direct place in its analytical framework. The chapters by John Kwoka, Francisco Marcos and Juha Vesala – all in Part I of this volume – particularly engage in this analysis. In the same way, the chapters by Björn Lundqvist and Severin Frank and Wolfgang Kerber in Part III raise similar questions to that extent. To say that the other authors of this volume have a normative preference for keeping innovation-based arguments out of traditional competition law analysis would be an overstatement. What one can nevertheless infer from their chapters is that they do not directly target innovation as an endogenous value that competition law does or should protect in this context. They rather see innovation as an exogenous value being affected potentially by anticompetitive behaviour and therefore worthy of protection through the existing tools and frameworks characteristic of competition law. In that respect, the authors of the chapters in Part II of the volume – Nicolo Zingales, Claudia Seitz and Shuya Hayashi, Kunlin Wu and Benjawan Tangsatapornpan – particularly consider innovation to generate potentially negative consequences, which competition law could serve to address. The same reflection is made by Daniel Zimmer in Chapter 12 on challenges of competition law in the digital economy. In the same way, other authors view innovation as a positive value exogenous to competition law analysis. Nevertheless, the classical tools and instruments of competition law analysis (market definition, analysis of market foreclosure, economic efficiencies and the particular enforcement system in place) could be relied on to contribute – albeit indirectly – to innovation-oriented markets. From that perspective, the chapters by Viktoria Robertson and Marco Botta, Mariateresa Maggiolino and Maria Lillà Montagnani, Petri Kuoppamäki and Simonetta Vezzoso analyse the ways in which the existing legal framework deals with innovation-related arguments, without necessarily proposing the integration of innovation in the existing analytical framework of competition law. The variety of perspectives on the competition law and innovation relationship present in the following chapters thus give an overall picture of the current and ongoing debates in competition law and innovation

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scholarship. At the same time, the chapters often make important new contributions to one of the quadrants identified in this chapter, showing that debates on the relationship between competition law and innovation analysis are still in full swing and continue to benefit from new insights along the way. It is hoped that the chapters in this volume contribute to further stimulating academic debate and policy actions in this domain.

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2. The effects of mergers on innovation: economic framework and empirical evidence John Kwoka1 1. INTRODUCTION Over the past 25 years, economics has made major contributions to the analysis of the competitive effects of mergers. These contributions include methods for defining markets, alternative measures of concentration, formalization of unilateral effects, efficiencies analysis, passthrough, and diversion ratios, among others. Notably, all of these advances have been directed at the static efficiency effects of mergers and the concern that they may cause price increases, deadweight loss, and consumer harm in the immediate market for goods and services. There has been no similar set of advances in the analysis of the dynamic effects of mergers, including such issues as product changes, investment and technological progress. This is not for lack of effort: these latter issues are inherently more complex, leaving policy with less operational guidance. This gap is particularly unfortunate for two reasons. The first is that in some cases these dynamic effects may well be more important than static efficiency and, worse yet, their preconditions may be in conflict. A familiar demonstration of the former involves technological progress.2 Suppose that a merger might cause a 10 percent loss in static efficiency per year, but that the resulting larger firm increases its growth rate from 1 I am grateful to many individuals for helpful conversations and comments. I would especially like to thank William Comanor and Wolfgang Kerber for their comments and Ben Colb for excellent research assistance. Opinions and remaining errors are solely my responsibility. 2 This example is an adaptation of that in Frederic M. Scherer, Industrial Market Structure and Industry Performance (3rd edn, Houghton Mifflin Company 1990) 31.

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innovation from 3 percent per year if it had not merged to 5 percent per year. Simple math makes clear that the static efficiency loss will be recouped by faster industry growth in about five years and thereafter will result in a net gain that grows indefinitely. Put differently, a staticefficiency oriented competition policy runs a risk of adversely affecting technological progress, to the long-run detriment of the very consumers it professes to protect – assuming, of course, these facts obtain. The second reason is that mergers raising issues of technological progress, investment and growth have, if anything, become more common. In the US, parties to the recent cable/telecom mergers and merger proposals have argued that they would increase investment directed at both faster rollout of existing technologies and quicker development of new technologies. Pharmaceutical mergers are routinely defended as beneficial – indeed, sometimes necessary – in order to continue the rapid pace of new drug discovery and development. In non-merger settings, conduct by prominent technology companies such as Google, Apple and, classically, Microsoft have all been characterized as necessary to advance the technologies on which the success of these companies has been built. These issues naturally raise the question of what in fact current economics teaches about the role of mergers and market concentration on dynamic efficiency, and specifically on technological progress or innovation (we use these terms synonymously). This chapter will address three related issues. First, it will provide a synthesis of the standard economic literature on concentration, mergers and innovation. This will include the threshold issue of measuring innovation itself, the causal relationship between concentration and innovation and finally the specific effect of mergers – not just concentration – on innovation. The second issue will be a detailed examination of some newer evidence on this last key question, namely, the effect of mergers on innovation. This new evidence comes from the growing ‘merger retrospective’ literature, which focuses on specific mergers and their effects on performance variables of interest, such as price and innovation. Finally, given the attention to the pharmaceutical industry in many of these economic studies, we offer some further evidence about the trajectory of mergers and innovation in one of the most innovation-oriented industries. Throughout, the focus will be on current understanding, rather than the long history of controversy, and on empirical findings, since much theory in this area has significant ambiguities. This will ensure attention to economically sound insights for understanding of and policy toward innovation-based industries.

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2. CONCENTRATION, MERGERS, AND INNOVATION The backdrop to discussion of mergers and innovation is the question of the relationship between market structure and innovation. This section discusses the latter issue, beginning with some comments on the nature, definition and measurement of innovation. Research, Development, Innovation, and Technological Progress It is useful to distinguish between the terms research, development, innovation, and technological progress.3 Research, or basic research, represents the pure science that underlies the process; research adds to the stock of scientific knowledge regardless of its practical application or marketability. Development is defined as the conversion and adaptation of a scientific or research advance into operational form that makes clear its practical uses. Commercialization is the next step, as a well-formed and practical concept is turned into a marketable new product or process. Innovation and technological progress is the culmination of this process, whereby the new product or process effectively permits more output per unit of input, or a new and higher-valued product altogether, in either case shifting the production possibility frontier outward. It is that shift that constitutes technological progress. Some of these concepts are more observable and quantifiable than others. Research output, for example, is difficult to quantify since it essentially consists of new ideas. The latter can scarcely be enumerated, much less summed up in any meaningful way. The shifting of the production possibility frontier for an economy or sector is unobservable. For these reasons, empirical study of the innovation process and productivity rely heavily on some observable correlates. Common among these is research and development (R&D) effort. A company’s R&D effort can be measured by dollars spent on R&D, or by the number of scientists, engineers, or simply employees in those divisions of a company. These have the advantage of being measurable over time and across companies, and provide insight into the resource commitment to R&D. The principal problem with R&D, of course, is that it measures input into the innovation process and not output. To approximate output, some studies have attempted to use the number of patents or the number of ‘important patents’ or patent citations as an indicator of importance. Simple patent count data encounter several issues, including different 3

See Scherer, n. 2, ch. 17, for extended discussion.

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propensities to patent across industries, difficulty in specifying a patent’s importance, and the time lags associated with patenting that make determination of the causal connections difficult.4 That said, these problems do not make use of such data impossible. For example, there is a well-established empirical relationship between R&D and productivity growth,5 so that, on average, greater investment in R&D will predictably result in greater productivity growth. Deviations from the average and other limitations are, however, important to bear in mind. As one illustration of these latter concerns, suppose R&D expenditures decline as a result of a merger. This could signal a socially harmful reduction in commitment to innovation, but it could also reflect a more efficient use of R&D dollars than was previously the case. Without more, it may not be possible to disentangle the different implications of a simple reduction in R&D expenditures. Careful studies routinely note such caveats, but these and other complications should be borne in mind in assessing the literature. The Role of Concentration The relationship between concentration and innovation has been described as the second most thoroughly investigated empirical relationship in industrial organization – second only to that between concentration and profits or prices. In many ways it is more complex. That complexity is evident in the seminal research in this area – research due to Schumpeter and to Arrow. Schumpeter famously argued that competition is not the market structure best suited to technological progress.6 Rather, he said, the process requires the resources of larger firms and the ability to recoup investment that higher concentration brings. Equally famously, Arrow emphasized the monopolist’s reduced incentive to innovate since its incremental gain would necessarily be smaller. His

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Scherer, n. 2. Richard Gilbert, ‘Looking for Mr. Schumpeter: Where Are We in the Competition-Innovation Debate’ in Adam Jaffe, Josh Lerner and Scott Stern (eds), Innovation Policy and the Economy (Vol 6, University of Chicago Press 2006). 6 Joseph Schumpeter, Capitalism, Socialism, and Democracy (Routledge 1942). 5

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work underscored the role of competition in ensuring full attention to new products and processes.7 There was – and is – truth both in Schumpeter’s view, which focused on the appropriability of returns, and in that of Arrow, which emphasized incentive effects. Both views play key roles in the modern economic understanding of concentration and innovation. For an understanding of the major relationships, we rely on a number of helpful surveys and syntheses of a vast literature, specifically, those due to Gilbert,8 Baker9 and Shapiro.10 Each of these distills the literature and offers a series of propositions that capture its major findings. Here we emphasize Gilbert’s review, noting, however, that all three of these are in broad agreement. Preliminarily, Gilbert identifies two factors that affect these relationships in theory and in empirical work. The first of these is the distinction between product and process innovations. The latter are, of course, cost savings associated with producing an unchanged product, while the former involve altering an existing product or adding to a product portfolio. We shall see that different economic forces affect these two types of innovation. The other factor concerns the degree of protection of the intellectual property associated with a new innovation. Clearly, stronger protection would logically be associated with a greater degree of appropriability of returns, and hence stronger incentives to innovate. The complexity arises since intellectual property protection can take many forms, including some – but not all – patents, and other methods. Gilbert’s review of economic theory and empirical research leads to the following observations: (1)

For a new process invention that results in a reduction in marginal cost, the return to innovation is (roughly) the cost reduction multiplied by total output. If intellectual property is fully protected, the inventor can secure the full return by licensing the invention to all producers who benefit. Absent such protection, the inventor’s

7 Kenneth Arrow, ‘Economic Welfare and the Allocation of Resources to Invention’ in Josh Lerner and Scott Stern (eds), The Rate and Direction of Inventive Activity (Princeton University Press NBER 1962). 8 Gilbert, n. 5. 9 Jonathan Baker, ‘Beyond Schumpeter vs. Arrow: How Antitrust Fosters Innovation’ (2007) 74 Antitrust Law Journal 575. 10 Carl Shapiro, ‘Competition and Innovation: Did Arrow Hit the Bullseye?’ in Josh Lerner and Scott Stern (eds), The Rate and Direction of Inventive Activity Revisited (University of Chicago Press NBER 2012).

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return is at best limited to its own output of the relevant product, and perhaps even less to the extent that the inventor cannot prevent imitation. In the absence of secure intellectual property rights, rivals who separately invent and adopt a new process technology reduce its value to the original inventor. In the limit, an ever-larger number of such firms – that is, ‘competition’ – may simply be a handicap for innovation, and worse yet, may even result in ‘excessive’ R&D from a societal point of view as too many rivals chase limited returns. For product innovations as opposed to process innovations, ‘competition’ in the form of numerous rivals does not generally eliminate the incentive to innovate. To the contrary, a new differentiated product will attract at least some customers and yield corresponding profits – i.e. incentives to innovate – to the innovator. In fact, if ex ante competition is intense and margins low, a product innovator stands to gain more than when ex ante competition is muted, since the innovator may gain substantial share and profit, assuming strong intellectual property protection. Absent strong protection for intellectual property, incentives for firms to invest in R&D depend on the strength of ex post competition – that is, among the firms that develop the new technology. Timing matters: if one firm has already led in inventing and adopting, then a second firm might rationally choose not to pursue the innovation at all, out of concern that post-adoption competition would be so strong as to eliminate all profit. That scenario would leave the first innovator with unchallenged returns. Economies of scale in R&D extend up to some point, largely due to the fact that the risks associated with such expenditures result in informational advantages to the firm investing in R&D. That said, a substantial body of empirical evidence makes clear that these economies are exhausted at a modest scale.11 This finding rejects the strong version of Schumpeter’s case for the advantages to larger size firms. Studies of the statistical relationship between R&D and concentration (as distinct from sheer size) have been the source of evolving understanding. Some early studies suggested that R&D intensity was less at both extremes of concentration – small under more competitive conditions, then rising before ultimately declining

(2)

(3)

(4)

(5)

(6)

11

Gilbert, n. 5.

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again at high concentration. Subsequent research appeared to find that this largely reflected industry-specific differences in appropriability, although more recent work by Aghion et al has resurrected the nonlinear relationship.12 Suffice it to say that empirical research on the exact shape of the relationship remains ambiguous, although there is some agreement that at both very low and very high levels of concentration, R&D is likely to suffer. The Role of Mergers The effect of a merger on innovation is not necessarily identical to that from a comparison of high versus low levels of concentration, even if that is what a merger causes. The reason for the difference is simply that concentration is a snapshot of market structure, whereas a merger represents a firm-specific change in market structure. That is, a merger represents the pairing of specific competitors that have chosen to consolidate operations. Hence, they can be expected to have effects on innovation and other dimensions of performance that are different from other causes of higher concentration, such as internal growth of one or more pre-merger firms. In reviewing the economic literature on the effects of mergers on innovation, we draw on a helpful review of the literature and evidence. Katz and Shelanski13 describe two major ways in which innovation issues can affect merger analysis. The first is that innovation may complicate product market definition in that technological change may alter or blur market boundaries identified in a static analysis. A new or modified product inevitably affects consumer choices and substitutability, crucial to defining markets and, without well-defined markets, meaningful market shares and concentration cannot be calculated. Since those are central to standard merger review for price and other effects, that paradigm is jeopardized. More fundamentally, innovation itself may be affected by the merger, and not all of those effects and causal linkages may match up with static efficiency considerations. There may be efficiency advantages from greater scale or scope in R&D, from integrating upstream research and 12

Philippe Aghion et al, ‘Competition and Innovation: An Inverted-U Relationship’ (2005) 120 Quarterly Journal of Economics 701–728. 13 Michael Katz and Howard Shelanski, ‘Mergers and Innovation’ (2007) 74 Antitrust Law Journal 1. The present chapter does not address the question of intellectual property protection except insofar as it affects conclusions with respect to mergers.

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downstream development, and from appropriating greater returns from the merged company’s total sales. On the other hand, a merger may adversely affect incentives that the larger firm has to innovate, or shrink the number of alternative paths being pursued to a given innovation. Relevant factors include the production process for innovation in this industry, the nature of post-merger competition, the strength of intellectual property rights, and the relationship between products and innovation in this industry. The factors highlighted by Katz and Shelanski are central to the policy challenges raised by mergers and innovation. They allude to literature that finds effects of concentration on innovation but also reports an array of other considerations that makes that relationship only a part of the causation mechanism. Their review leads them to recommend full integration of innovation effects into standard merger analysis, but with significant variations. They call for a presumption that a merger will be neutral with respect to innovation, except for the case of merger to monopoly, and in any event subject to a full fact-based inquiry into the effects in each specific case. A corollary recommendation is to avoid bright-line tests and sharp market boundaries and instead to emphasize an effects-based assessment with due attention to the uncertainties that pervade the innovation process.

3. MERGER RETROSPECTIVES AND INNOVATION These economic and policy issues are illuminated especially well in studies examining specific mergers and their effects on R&D and innovation. To that we now turn, beginning with a discussion of the relevant methodology. Merger Retrospectives The now-standard method of evaluating the effects of a merger is a technique known as difference-in-differences (DID). This method can be explained as follows: supposing that the focus of attention is on the price effect of a particular merger; data on price before and after the merger correctly capture that change only if no other relevant factor also changes. In general, of course, that is unlikely to be the case and certainly cannot be assumed. The DID methodology controls for those other factors by examining the change in the price of an otherwise similar product over the same time period. In this context ‘otherwise similar’ means a product that is subject to the same demand, cost, and other

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forces as the product in question, but – crucially – is not affected by the merger. Now the difference in the price of the product of the merging firms before and after their merger can be adjusted for the difference in the price of the ‘otherwise similar’ product in order to get the net effect of the merger. For example, suppose that the pre-merger price of the relevant product is 100, and its post-merger price is 110. Before concluding that the merger is responsible for a 10 percent price increase, DID would examine the price change for an otherwise similar product unaffected by the merger. If this latter price rose by 7 percent – an increase not due to the merger, but to other factors that also affected the merging firms – then the 10 percent gross difference should be netted of the 7 percent increase that presumably would have occurred anyway. The difference in these differences is 3 percent – which is the increase properly attributed to the merger. Assuming the control product is correctly chosen – and that is crucial – and with attention to certain other considerations,14 the DID technique can provide reliable evidence of the effect of a merger on price or other dimensions of performance without the need for elaborate modeling, collection of data on control variables not of direct interest and choice of functional forms. It has become the preferred technique for ex post merger analysis and, over the past 30 years, dozens of merger retrospectives have been published. While most of these have focused on price, several have examined the nonprice effects of mergers. Those nonprice effects include quality, costs and (especially in pharmaceuticals) R&D expenditures.15 We next examine the studies focusing on R&D. Mergers and Innovation Here we proceed to examine a few major studies of the R&D effects of mergers, primarily in the pharmaceutical industry where the key strategic variable in the past has been innovation rather than price.16 Two merger retrospectives in particular merit further description – that by Danzon, Epstein, and Nicholson (2007) and the other by Ornaghi (2009). Subsequent to that, we review other evidence from the literature. 14

For a technical review, see Daniel Greenfield, ‘Guide to Merger Analysis Using Difference in Differences’ in John Kwoka, Mergers, Market Power, and Remedies (MIT Press 2015). 15 Greenfield, n. 14. 16 For reasons to be discussed in the next section, this emphasis on R&D may no longer hold.

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Danzon et al analyze the determinants and effects of 165 significant mergers and acquisitions across the pharmaceutical and biotech industry over the period 1988 to 2000.17 They restrict their analysis to so-called ‘transforming’ mergers that are large and required post-merger efforts at integration and reorganization. They create a data base consisting of pharmaceutical and biotech firms from various sources – some of them ‘control’ observations, the others participants in mergers. They employ DID analysis plus a method to control for the likelihood that certain firms will merge, and then investigate the motives for merger and their effects on firms’ performance in terms of R&D spending, profits, and other measures. First, with respect to the motivation for merging, Danzon et al find important differences between large and small pharmaceutical companies. For large firms, they report that mergers are often a response to expected excess capacity due to patent expirations and gaps in a firm’s product pipeline, whereas for small firms, mergers are primarily an exit strategy in response to financial trouble. Significantly, both of these effects are defensive in nature. They are not designed to exploit any advantages of the merging parties that would enhance innovative effort or output. Moreover, their results show that, after controlling for merger propensity, in most respects large merging firms are not significantly different from non-merging firms in terms of growth in enterprise value, sales, employees, and R&D expenses in the three years after a merger. One exception is that large firms experience distinctly slower growth in operating profit in the third post-merger year, a result they interpret as reflecting the resource requirements of the merger itself. For smaller merging firms, Danzon et al find relatively low rates of growth in R&D and in employees regardless of whether the firms merged, but controlling for that propensity leads to the finding that merger reduces the growth rate of R&D as well as sales and employees, by approximately 29, 10, and 11 percent, respectively, in the first year after merger compared to similar non-merging firms. Since this effect dies out in subsequent years, it is viewed as evidence of diversion of resources from R&D in the immediate aftermath of a merger. Overall, Danzon et al conclude, ‘[a]lthough merger in the pharma-biotech industry is a response to being 17

Patricia Danzon, Andrew Epstein, and Sean Nicholson, ‘Mergers and Acquisitions in the Pharmaceutical and Biotech Industries’ (2007) 28 Managerial and Decision Economics 307.

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in trouble for both large and small firms, there is no evidence it is a solution’.18 Ornaghi’s study analyzes the effects of 27 significant mergers and acquisitions on R&D activities in the pharmaceutical industry over the period 1988 to 2004.19 These include the high-profile mergers between Pfizer and Warner Lambert, Glaxo Wellcome and Smithkline Beecham, and Sanofi and Aventis. Consistent with theory, Ornaghi notes that a merger could either increase or decrease R&D inputs, output, and performance depending on the forces that dominate the consolidation process. He uses a DID analysis to isolate the effects of these mergers on various outcomes, including firms’ innovation, relative to a control group. Ornaghi finds that mergers have a statistically significant and negative impact on the growth of R&D inputs (dollars), output (patents), and research productivity (patents/R&D). The effects on output and productivity are especially noteworthy since even if R&D dollars were appropriately reduced because of redundancy, merger-related further reduction in productivity or output would unambiguously represent adverse effects of the merger. In the cases studied by Ornaghi, by the third post-merger year the growth of R&D inputs, output, and productivity fall by 6.3 percent, 26.8 percent, and 1.46 percent, respectively – the first two of these statistically significant. He further reports that if the products of the merging parties are related, this has a positive (beneficial) effect on the post-merger outcomes, while relatedness of technology seems to have an adverse impact. Ornaghi concludes that his ‘findings contradict the idea that mergers can deliver relevant economies of scope and knowledge synergies’ in the innovation function.20 Rather, his results suggest that factors such as human capital dissipation reduce post-merger performance, and those adverse effects persist even if the merged parties’ technologies are correlated. These two important studies – both using state-of-the-art methodologies and analyzing nearly 200 pharmaceutical mergers – come to broadly similar conclusions. Neither offers support for the proposition that mergers, at least in this key sector, result in increases in R&D expenditures or innovation output, or for that matter, other common metrics of post-merger performance. Indeed, these suggest that various metrics for 18

Danzon, Epstein and Nicholson, n. 17, p. 326. Carmine Ornaghi, ‘Mergers and Innovation in Big Pharma’ (2009) 27 International Journal of Industrial Organization 70. 20 Ornaghi, n. 19, p. 71. 19

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innovation on average decline by several percentage points in the first few years after merger.21 There are a number of other studies of mergers and innovation, some but not all in the pharmaceutical sector, that deserve mention.22 While none employ the same careful methodological controls as those just summarized, and so perhaps should not be given the same weight, they nonetheless help inform the analysis. We briefly note several. Grabowski and Kyle examine the speed with which drugs in various stages of development progress after pharmaceutical firms engage in merger, as a method of focusing on outcomes rather than simply R&D expenditures.23 With a data base of 4500 firms between 1990 and 2007, they report that large merging firms in fact do move their projects along more quickly, whereas for smaller firms that is not the case. Bertrand and Zuniga24 examine R&D by domestic and cross-border mergers in several industries. They find ambiguous effects on R&D overall, although there appears to be some tendency for cross-border mergers to have greater R&D in ‘medium-technology’ industries but less in ‘low-technology’ cases. The reasons for this are unclear. Cassiman et al use a case study method to examine the effects of 31 mergers and acquisitions on innovation.25 Their results suggest that R&D as well as R&D efficiency are both higher when merging firms have complementary technologies, but otherwise they fall. This latter effect – the fall in R&D and R&D efficiency – is especially pronounced in cases where the merging firms are rivals in their product market.

21 Most merger retrospectives have a similar time frame. A period longer than three or four years tends to introduce other influences that are increasingly difficult to control for. 22 An analysis of the effects of mergers and merger decisions in the EU sought evidence on innovation in that jurisdiction. An analysis of mergers in the EU also sought evidence on the effects of mergers on innovation, but it ultimately concluded that the studies lacked the necessary counterfactual for sound analysis. European Commission, ‘A Review of Merger Decisions in the EU: What Can We Learn from Ex-Post Evaluations?’, Brussels, July 2015. 23 Henry Grabowski and Margaret Kyle, ‘Mergers and Alliances in Pharmaceuticals: Effects on Innovation and R&D Productivity’ in Klaus Gugler and B. Burchin Yurtoglu (eds), The Economics of Corporate Governance and Mergers (Edward Elgar Publishing 2008). 24 Olivier Bertrand and Pluvia Zuniga, ‘R&D and M&A: Are Cross-Border M&A Different?’ (2006) 24 International Journal of Industrial Organization 401. 25 Bruno Cassimen et al, ‘The Impact of M&A on the R&D Process’ (2005) 34 Research Policy 195.

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Despite well-known limitations of stock market event studies,26 two additional studies have employed this methodology to investigate the purposes and effects of pharmaceutical mergers. Ravenscraft and Long examine 65 pharmaceutical mergers and find that while target and acquiring companies experience different effects, on average the combined merged firm’s stock price shows no significant effects, positive or negative, from merger.27 For a subset of large cross-border mergers, however, the net effect is positive, suggesting gains to the merged firm. Higgins and Rodriguez also use stock price data and report, among other things, that deterioration of a company’s research pipeline of new drugs and looming expiration of its patents on existing drugs are associated with increased merger activity in the pharmaceutical sector.28 They find that in a large fraction of cases, mergers do in fact help to stabilize or even reverse those declines. They also observe that premerger alliances between companies are an effective method of reducing informational asymmetries and increasing the value of the transactions. Leheyda, Beschorner, and Huschelrath examine the merger between Pfizer and Pharmacia and, further, assess the adequacy of the review of this merger conducted by the Swiss Competition Commission.29 With respect to R&D, they take a simple before-and-after approach, comparing performance in the pre-merger years 2000–2001 and that in post-merger 2003–2005. They report virtually unchanged amounts and ratios and conclude that the merger did not alter the firms’ performance. It should be noted that this comparison does not include the controls for other possible causal factors. Munos30 has also examined the pharmaceutical industry, focusing on the effects of 30 mergers and acquisitions on innovation. He estimates parameters of their new molecular entity (NME) output function, and 26

For a review, see A. Craig MacKinlay, ‘Event Studies in Economics and Finance’ (1997) 35 Journal of Economic Literature 13. 27 David Ravenscraft and William Long, ‘Paths to Creating Value in Pharmaceutical Mergers’ in Steven Kaplan (ed.), Mergers and Productivity (University of Chicago 2000). 28 Matthew Higgins and Daniel Rodriguez, ‘The Outsourcing of R&D through Acquisitions in the Pharmaceutical Industry’ (2006) 80 Journal of Finance 351. This finding echoes that of Danzon et al. 29 Nina Leheyda, Patrick Beschorner and Kai Hüschelrath, ‘Ex-post Assessment of Merger Effects: The Case of Pfizer and Pharmacia (2003)’, Center for European Economic Research Discussion Paper 11-035, 28, . 30 Bernard Munos, ‘Lessons from 60 Years of Pharmaceutical Innovation’ (2009) 8 Nature Reviews: Drug Discovery 959.

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projects the effect of a merger to be the sum of the NME record of the merging firms. He finds that, overall, mergers do not significantly alter the innovation output of merged firms. There is, however, slight evidence of benefit from small firm mergers, and equally slight evidence of disadvantage to large firms that engage in merger. Among firms, he finds that companies that have engaged in lots of M&A activity in fact lag those that have not. He concludes by observing that while mergers have been touted as a method to compensate for a dwindling pipeline, there is no systematic evidence that this is the case. Summary While these studies of the specific effects of mergers on aspects of innovative performance vary in methodology and conclusiveness, overall they do not support the proposition that mergers generally enhance the amount or productivity of R&D or other measures of innovation. If anything, there are some indications that the opposite may hold, at least in some circumstances and time periods.

4. INNOVATION IN THE PHARMACEUTICAL SECTOR It is no coincidence that much of the empirical literature concerning innovation and mergers focuses on the pharmaceutical sector in the US. The history of this industry over the past 20 years has been characterized by much activity on both fronts. This section will briefly review some other facts and literature on pharmaceuticals that bear on the central questions of this chapter. Pharmaceutical Company Mergers The pharmaceutical industry has undergone a fundamental transformation in the past 20 years, and part of that has involved a massive consolidation. The transformation has been the result of a shift in the technological and business model that formed the basis of the industry for most of the last century. That model involved conducting research to identify simple molecular compounds that treated large numbers of people, patenting the resulting products, charging prices that generated substantial profits, and (more or less) plowing those profits back into R&D. While there was disagreement about the actual costs of R&D, controversy about prices, and criticism about drug company profits, there was little dispute about

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the productivity of this paradigm.31 Over the past 15 years, however, the pace of discovery of conventional new drug therapies has slowed dramatically, the consensus being that this is most likely the result of exhaustion of that technology. In addition, there has been a major policy shift in favor of generic drugs. Legislation has eased the process of entry of generic drugs, and insurer and government efforts have resulted in a large fraction of prescriptions now being filled with generic equivalents to patented drugs. These forces have combined to shrink the traditional revenue streams of big drug companies and prompted a number of fundamental changes in their business models. The major structural changes have involved the following: + Major drug company acquisitions of small biotech firms that have increasingly become the source of advances in drug therapies. Biotech relies on a different technology model involving the manufacture of large molecules within animal cells or microorganisms such as bacteria. Finding itself at a comparative disadvantage in this new type of research, big pharma have either outsourced this function or acquired those biotech companies that do it. + Major drug companies mergers seeking to reduce costs of their existing operations. With the research function increasingly performed elsewhere, the major companies have refocused their attention and resources on drug development, commercialization, and marketing. Some of this has been accomplished by internal reorganization, but mergers have also been a common strategy. + Major pharmaceutical companies’ acquisitions of generic firms. These mergers do not involve complementarity between R&D, or other cost saving. Rather, they appear to be a repositioning of the major companies in the growing part of the overall business. + Mergers between generic firms themselves. Most of these have been permitted by antitrust authorities on the theory that entry into the markets served by generics is sufficiently easy. There is,

31 This description also makes clear that there is generally no clear or necessary relationship between the cost of a drug’s development and its price. Price is set to generate internal funds for future R&D. Internal financing arguably helps resolve informational asymmetries associated with high-risk projects.

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however, increasing evidence that generic prices themselves have begun rising.32 Among these several different types of mergers in the pharmaceutical sector, those between big pharma companies have attracted the most attention and policy scrutiny. Prominent among these have been the $112 billion merger between Pfizer and Warner-Lambert, the $80 billion merger between SmithKline Beecham and Glaxo Wellcome (each the result of prior mergers), and the $54 billion merger between ScheringPlough and Merck. This overall merger wave, described in Figure A.1 in the Appendix, reduced the number of major pharmaceutical companies from 60 to just 10 or 11 between 1995 and 2015.33 Indeed, total membership in the trade association of the major drug companies – PhRMA – plummeted from 42 in 1988 to those 11 at present. Other evidence of this consolidation can be found on the outcome side. Of the 261 companies that have registered, at least one new molecular entity (NME) – a standard measure of innovation – since 1950, fully 60 percent, disappeared by 2009, mostly via merger.34 Perhaps more telling, of the 21 companies responsible for half of the total NMEs approved by the Food and Drug Administration (FDA) during this period, all but 11 ceased to exist by the end of this period. The industry that existed 20 years ago cannot be found in the present structure or performance. Mergers and Innovation in Pharmaceuticals The corollary issue is whether this enormous consolidation of the pharmaceutical industry has had a positive impact on its innovation record. A quick glance at one metric might suggest an affirmative answer. Over this same period of time, R&D expenditures by the companies in 32 Priyanka Dayal McCluskey, ‘As Competition Wanes, Prices for Generics Skyrocket’, Boston Globe (Boston, 6 November 2015). See also David Reiffen and Michael Ward, ‘Generic Drug Industry Dynamics’ (2005) 87 Review of Economics and Statistics 37; William Comanor and Diana Moss, ‘An Examination of the Proposed Teva-Allergan Merger’ (2016) 1 CPI Antitrust Chronicle . 33 ‘Pharma Industry Merger and Acquisition Analysis: 1995 to 2005’ (Revenues and profits) . 34 Munos, n. 30. See also Andrew Ward, ‘No End in Sight to Wave of Pharma Dealmaking’, Financial Times (London, 26 April 2015).

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the pharmaceutical industry have increased substantially. A recent analysis has estimated that inflation-adjusted R&D dollars in this industry has risen at a rate in excess of 7 percent per year over the past 40 years – a truly enormous rate of persistent growth.35 Indeed, at present pharmaceutical R&D totals about $50 billion per year, representing about one-sixth of total private R&D in the country, and in the ranking of industries, second only to computer and electronic products. But the reality is more complex. The large increase in R&D expenditures has simply not been matched by a similar increase in output in the form of new drug approvals. A count of new drug approvals has in fact been essentially constant over these past 20 years, so that the growth in inputs (R&D dollars) has not resulted in a similar – or indeed, any – rise in output. Moreover, as a logical implication, with constant output but rising input cost, the cost per NME has in fact increased substantially.36 The actual magnitude of this increase in cost per NME is very much in dispute,37 but there is a substantial agreement that this has been the result of technology exhaustion. In this context, mergers might accomplish what incumbent management perhaps does not grasp, namely, that paring back excessive or even redundant expenditures may be appropriate.38 Before too much credence is placed on that scenario, however, an alternative version of events has been provided in particularly dramatic fashion by Pfizer. Over the past 15 years, Pfizer has acquired numerous companies, at a combined cost in excess of $250 billion.39 During this time, its total R&D expenditures have been less than half that amount, and in percentage terms declining throughout. A candid account of the 35

Scherer, n.2. ‘Pharmaceuticals. The Price of Failure’, The Economist (London, 27 November 2014). See also Munos, n. 30, who runs a regression on firms’ new drug approvals, and finds no difference over time whether or not the firm engaged in many mergers. 37 See Frederic M. Scherer, ‘R&D Costs and Productivity in Biopharmaceuticals’ (2011) Regulatory Policy Program Working Paper, RPP-2011-10, Harvard Kennedy School, . 38 Alternatively, of course, such a reduction in expenditures might represent the same kind of exercise of market power that conventionally occurs with joint control of comparable products, only with respect to the quantity of R&D effort and innovation. 39 Pfizer paid approximately $110 billion for Warner-Lambert, $60 billion for Pharmacia, and $68 billion for Wyeth. Subsequently, it acquired Hospira for $15 billion and King Pharmaceuticals for $4 billion. In addition, Pfizer sought, but failed, to acquire Allergan for $160 billion. 36

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outcome of these two forces has been provided by the former president of Pfizer’s Global Research and Development, John LaMattina. Writing in 2011, LaMattina’s description of the outcomes of major pharmaceutical mergers is worth quoting at length:40 … not only are R&D cuts made, but entire research sites are eliminated. Nowhere is this more evident that with Pfizer. Before 1999, Pfizer had never made a major acquisition. Over the next decade, it acquired three large companies – Warner-Lambert (in 2000), Pharmacia (in 2003), and Wyeth (in 2009) – and multiple smaller companies … Over this time frame, to meet its business objectives (a euphemism for raising its stock price) Pfizer closed numerous research sites in the United States, including those at Kalamazoo, Michigan (formerly a site for Upjohn), Ann Arbor, Michigan (formerly a site for Warner-Lambert) and Skokie, Illinois (formerly a site for Searle). It has also recently announced the closure of the Sandwich site in the UK. These sites housed thousands of scientists, and many major drugs … were discovered there. The same pattern has been observed after most of the mergers and acquisitions by other major pharmaceutical companies during the past decade. Historically, the pharmaceutical industry has prided itself on investing more in R&D (as a percentage of revenues) than any other industry. At times, companies have invested as much as 20% of top-line revenues into their pipeline. However, Pfizer now projects that in 2012 the figure will only be 11% (between US $6.5 and $7 billion). The extent of this decrease is further emphasized by comparison with the pre-merger R&D expenses of Pfizer and Wyeth in 2008: $7.95 billion and $3.37 billion, respectively, and $11.3 billion in total.

This is a particularly telling example of how R&D dollars represent an easy target for post-merger cost reductions that create the appearance of tighter management but possibly with adverse effects on innovation. Additional data on the major pharmaceutical companies cast these issues in a more systematic light. Table 2.1 lists the largest pharmaceutical companies ranked by revenues in 2014. While these rankings vary from year to year, there is considerable stability in the identities of the largest companies over time. The next column reports each firm’s R&D expenditures as a percent of its revenues. As is evident, the rankings within each listing are altogether different, with companies such as Novatis and Pfizer at the top of the size rankings but well down in terms of the percent of revenues devoted to R&D. Indeed, Lilly – which has recently slipped out of the top 10 in size – now outranks all other companies in terms of its R&D intensity. 40 John L LaMattina, ‘The Impact of Mergers on Pharmaceutical R&D’ (2011) 10 Nature Reviews: Drug Discovery 559.

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Table 2.1 Sales, R&D intensity, and R&D productivity Company

Sales Revenues ($M)

R&D/Sales

Patents/$1M R&D

(a)

(b)

(c)

1 Novartis 2 Pfizer 3 Roche 4 Sanofi 5 Merck & Co. 6 Johnson & Johnson 7 GlaxoSmithKline 8 AstraZeneca 9 Gilead Sciences 10 Takeda

47101 45708 39120 36437 36042 32313 29580 26095 24474 20446

20.2 16.1 21.5 16.2 17.8 20.2 16.9 19.2 11.2 27.0

0.05 0.11 0.09 0.09 0.08 0.07 0.09 0.10 0.16

11 AbbVie 12 Amgen 13 Teva 14 Lilly 15 Bristol{Myers Squibb 16 Bayer

20207 19327 18374 17266 15879 15486

16.4 21.3 n/a 26.8 32.7 15.3

0.12 0.09 n/a 0.05 0.22 0.07

Sources: (a) http://www.pmlive.com/top_pharma_list/global_revenues (b) http://www.statista.com/statistics/309471/randd{spending{share{of{top{pharmaceuticalcompanies/ (c) http://www.forbes.com/sites/matthewherper/2014/05/22/new{report{ranks{22{drug{ companies{based{ on{rd/#355733ef4c75/

The final column reports a further measure – patents per million dollars of R&D expenditures.41 This listing is headed by Bristol-Myers Squibb, the fifteenth largest company, while those heading the prior lists – Pfizer for its size, and Lilly for its R&D intensity – are well down this list of R&D productivity. Some explanatory factors, such as the degree to which some companies now essentially rely on biotech companies for their R&D, are undoubtedly influential, but it also seems clear that there is wide variation in companies’ R&D strategies and productivity. 41

As previously noted, patent count data have their own limitations. Here, a three-year moving average has been used, and secondary patents are eliminated from the count. These adjustments improve the reliability of the count.

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More generally, we would note that if these mergers were necessary, or even important, for the objective of maintaining innovation productivity in the pharmaceutical sector, a relationship would be expected between the pace of industry consolidation and innovation output. The evidence reviewed here does not support this.42 Over the past 20 or more years of the merger wave in pharmaceuticals, the overall rate of NME introductions has not changed. Although it is possible that the rate would have been lower absent the mergers, available evidence provides no real support for the proposition that mergers have somehow improved the productivity and output of pharmaceutical R&D.43

5. CONCLUSIONS This chapter has reviewed the economic framework and surveyed available evidence on the effects of mergers on innovation. This has highlighted several factors that create linkages between the two, and focused on empirical studies that have attempted to test and measure those linkages. Overall, the careful economic studies in the literature as well as other relevant evidence do not support the proposition that industry consolidation results in more R&D or greater R&D efficiency. In fact, there is evidence in the best of these studies that suggests that these mergers may adversely affect R&D or R&D productivity. This appears to hold true not only overall, but in the important pharmaceutical and biotech sector. There, the recent wave of major mergers has not resulted in any measurable increase in the output of new drug therapies even as it has transformed the industry’s structure. That now consists of a small number of very large pharmaceutical companies, with important relationships to a vibrant biotech research sector, and confronting equally important competition from generic manufacturers. It is unclear if that is the optimal long-run configuration for innovation from this important sector.

42

Munos, n. 30. We do not address the policy aspects of this merger wave. For analysis and evidence on those issues, see among many sources, Benjamin Kern, Ralf Dewenter, and Wolfgang Kerber, ‘Empirical Analysis of the Assessment of Innovation Effects in U.S. Merger Cases’ (2015) 16 Journal of Industrial Competition and Trade 373; Benjamin Kern, ‘Innovation Markets, Future Markets, or Potential Competition: How Should Competition Authorities Account for Innovation Competition in Merger Review’ (2014) 37 World Competition: Law and Economics Review 173. 43

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3. Innovation by dominant firms in the market: damned if you don’t … but damned if you do? Francisco Marcos1 [T]he ratio of what is known to what is unknown with respect to the relationship between innovation, competition, and regulatory policy is staggeringly low. In addition to this uncertainty concerning the relationships between regulation, innovation, and economic growth, the process of innovation itself is not well understood. The regulation of innovation and the optimal design of legal institutions in this environment of uncertainty are two of the most important policy challenges of the twenty-first century.2

1. INTRODUCTION Competition law enforcement aims at maximizing consumer welfare through guaranteeing free functioning of markets. By ensuring that businesses are able to compete freely, consumers can choose a variety of goods and services in the market. Markets are not only capable of satisfying consumers’ desires but also induce businesses to be efficient, by producing goods and services of different qualities and prices that meet consumer demands.

1 Earlier versions of the argument more fully developed in this chapter were presented at the CLASF Forum held at Faculdade de Direito da Universidade de Lisboa (‘Competition and regulatory trends in digital markets’, Lisbon, 14 April 2016) and at the International Conference organized by Bar Illan University and Ono College (‘The Many Faces of Innovation’, Tel Aviv, 5 January 2016). Comments by participants in those meetings are gratefully acknowledged; mistakes and opinions are my own. 2 Geoffrey A Manne and Joshua D Wright, ‘Introduction’ in Geoffrey A Manne and Joshua D Wright (eds), Competition Policy and Patent Law under Uncertainty: Regulating Innovation (CUP 2011) 1.

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Current times have stressed the need for innovation by businesses to keep apace of competition and to satisfy consumers’ desires. It is no longer enough for them to supply markets with a choice of cheap quality products: consumers also constantly demand new products. Innovation has changed the competitive landscape in almost every industry. Not only has it led to the introduction of new goods and technologies that were previously unknown to consumers and better quality of existing goods, but it has also introduced new business methods for manufacturing, marketing and distributing goods in more efficient ways, including contractual innovations that have eased business and customers’ relationships. These novel features pervade business performance in network and web-based industries, where the New Economy has dramatically changed how businesses compete.3 But they have also changed the competitive landscape in every industry, increasing firms’ incentives to innovate.4 Presumably this shift should influence the assessment of businesses’ behavior using competition law.5 Conventional antitrust interventions in all sorts of anticompetitive conduct need to be adapted to the new reality. Though most of the antitrust rules have been in force for decades (if not a century), they are featured as open-ended prohibitions or standards that give enforcers wide room to take into account the new realities.6 Other tools of competition authorities worldwide (advocacy/promotion) have also provided enforcers with fresh insights that may be helpful in exploring these new features of business behavior. This chapter will look at the enforcement of the prohibition of single firm anticompetitive conduct (abuse of dominance/monopolization) as one of the realms in which business innovations challenge competition law enforcers. Section 1 will analyze how innovation fits in the competitive landscape and how it affects, in general, the assessment done by 3 David S Evans, ‘Antitrust Issues Raised by the Emerging Global Internet Economy’ (2008) 102 Northwestern University Law Review 285. 4 Thomas M Jorde and David M Teece, ‘Innovation, dynamic competition and antitrust policy’ (1990) Regulation: Cato Review of Business & Government 35, 35–36. 5 Throughout this article ‘antitrust law’ and ‘competition law’ will be used to refer to the same reality: those rules that proscribe or regulate certain types of potential anticompetitive market behavior. However, there are relevant differences between them: see Wolfgang Pape, ‘Socio-Cultural Differences and International Competition Law’ (1999) 5(4) European Law Journal 438. 6 See Robert Pitofsky, ‘Challenges of the New Economy: Issues at the Intersection of Antitrust and Intellectual Property’ (2001) 68 Antitrust Law Journal 913, 913–915.

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competition law. Section 2 will move into the core issues dealt with in this chapter, looking particularly at the substantive rule against unilateral restraints and the numerous difficulties faced in enforcing it, taking into account the relevant changes that innovation may introduce in the business competitive landscape. Finally, section 3 will consider some potential changes in the institutional settings of competition law enforcement that may assist enforcers in deciding whether and how to intervene in business environments in which innovation is prevalent.

2. COMPETITION AND INNOVATION The relevance of innovation in business productivity and for economic growth is a well-known fact.7 Although this applies to every industry, in many high-technology sectors (pharmaceuticals, biotechnology, computers) it is undoubtedly the main driver of business performance. Firms operating in those industries must innovate to survive and to succeed. Moreover, legal systems worldwide provide several tools through intellectual property (IP) law that award protection for innovations that meet some requirements. IP law gives firms additional incentives to invest in R&D that leads to innovation. Though the presence of IP rights has traditionally made more intricate the enforcement of competition law, it generally has not changed enforcers’ scrutiny of potential anticompetitive conduct. Of course, innovation is also good for society. Consumers are better off by being able to access new products created by business firms. Thus, innovation is not only crucial for businesses to keep apace of rivals, but in many industries it is also the only way to satisfy the demands of consumers, who demand new products in addition to variety and quality. For some industries, the New Economy has meant that businesses are under pressure to innovate in order to survive and succeed; this is clear in high technology industries but also in the internet-based economy. Products or services of a nature previously unknown are being developed 7 Joseph A Schumpeter, Capitalism, Socialism and Democracy (3rd edn, Harper Perennial 1950) 84: ‘in capitalist reality as distinguished from its textbook picture, it is not [price competition] which counts but the competition from the new commodity. The new technology, the new source of supply, the new type of organization … competition which commands a decisive cost or quality advantages and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives’.

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and successfully marketed. To succeed, traditional price competition is not sufficient; aggressive and disruptive innovations are also needed. On the other hand, competition law enforcement is primarily concerned with consumer welfare by preserving market competition as a way to increase surplus by keeping product prices low, guaranteeing choice among a variety of competing products, ameliorating product quality and augmenting output.8 Therefore, consumer harm through price fixing, market sharing or output restriction are the themes of traditional antitrust enforcement. Being an additional attribute of the business competitive process, enforcers can take into account innovation considerations when they enforce competition law, and this has occurred in different jurisdictions.9 Naturally, from another perspective, and due partially to the new reality that business innovative strategies and products have introduced, the effectiveness of national antitrust enforcement may be reduced as territorial boundaries have ceased to be relevant.10 Innovation can be included as an additional element in the assessment of business conduct that can be deemed to violate competition law.11 Ultimately, business restraints to innovation can be more harmful than the typical restraints to competition.12 8 See, e.g. Jonathan B Baker, ‘Beyond Schumpeter vs. Arrow: How Antitrust Fosters Innovation’ (2007) 74 Antitrust Law Journal 575, 577: ‘Competition is good because it leads firms to make more and better goods and sell them for less’. 9 In the US, see ibid, 590–600. In the EU see Pablo Ibáñez Colomo, ‘Restriction on Innovation in EU Competition Law’ (2016) 41(2) European Competition Law Review 201 (cited here from LSE Law, Society & Economy WP 22/2015), who provides evidence that innovation has been indirectly taken into account by the Commission in the enforcement of EU competition law, but argues against the need to incorporate direct innovation considerations in the rules as this would introduce too much uncertainty (however, Colomo examines how the enforcement action took place, never questioning whether it should have occurred in the first place). 10 Michal S Gal and Spencer Weber Waller, ‘Antitrust in High Technology Industries: A Symposium Introduction’ (2012) 8(3) Journal of Competition Law & Economics 449, 452. 11 However, it is doubtful whether this is enough: see Joshua D Wright, ‘Antitrust, Multi-dimensional Competition, and Innovation: Do We Have an Antitrust Relevant Theory of Competition Now?’ in Geoffrey A Manne and Joshua D Wright (eds), Competition Policy and Patent Law under Uncertainty: Regulating Innovation (CUP 2011) 228. 12 See Herbert Hovenkamp, ‘Restraints on Innovation’ (2007) 29 Cardozo Law Review 248, 254: ‘Restraints on innovation are very likely even more

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At the same time it may well be that the nature of business innovations introduces further difficulties for competition enforcers.13 Some high-tech industries are based on virtual realities, with strong network effects, involving IP rights that make antitrust law enforcement more complex.14 In that overall context, competition law enforcement should neither aspire to directly foster innovation (other tools are available with that aim) nor deter it. It should not adopt a more relaxed/deferential or forgiving approach to those cases in which innovation is the main issue at play (and not price),15 but it should be careful not to intervene mistakenly in cases where there is not a clear or foreseeable restraint to competition that is harming consumer welfare.

harmful than traditional price cartels, which we usually consider to be the most harmful anticompetitive practice. Innovation restraints are almost certainly more harmful than a great many of the exclusionary practices that antitrust has condemned, often without fully understanding them’. 13 Not only deciding if an anticompetitive action and consumer harm exists but also when antitrust intervention should take place, see Tim Wu, ‘Taking Innovation Seriously: Antitrust Enforcement If Innovation Mattered Most’ (2012) 78 Antitrust Law Journal 313, 325, 326, 328. See also David S Evans and Keith N Hylton, ‘The Lawful Acquisition and Exercise of Monopoly Power and Its Implications for the Objectives of Antitrust’ (2008) 4 Competition Policy International 203. 14 See Michal Gal and Spencer Waller Weber, ‘Antitrust in High-Technology Industries: A Symposium Introduction’ (2012) 8(3) Journal of Competition Law & Economics 449, 450. 15 See Spencer Weber Waller and Matthew Sag, ‘Promoting Innovation’ (2015) 100 Iowa Law Review 2223, 2224. Arguments have been made to incorporate innovation concerns in the enforcement equation to reduce the amount of sanctions and increase consumer welfare in the long run: see Keith N Hylton, ‘A Unified Framework for Competition Policy and Innovation Policy’ (13 December 2013, reviewed on 11 June 2014) Boston University School of Law Working Paper No. 13–55 10: ‘asymmetric treatment of the innovation benefit and the consumer harm is a reflection of the relative importance of innovation to social welfare. Innovation is necessary in order for any consumer benefit to be realized. The model therefore implies that the optimal penalty should be constrained in order to maintain the innovation incentive’; and Keith W Hylton and Haizhen Lin, ‘Innovation and Optimal Punishment, with Antitrust Implications’ (2014) 10 Journal of Competition Law & Economics 1.

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The enforcers’ lack of knowledge and experience (track record) of these issues and the unavailability of information and supporting (contrasted) theories on the implications of many of the new products and services may turn competition law enforcement into a risky venture.16 Overcoming price-based static antitrust enforcement is a necessity, but difficulties abound in making a quantified assessment of innovative business conducts’ impact (or lack of) on consumer and social welfare.17 Due to the existing tension between competition law enforcement and the many unknown features affecting business decisions and strategies in the field of innovation, there is the risk that mistakes will lead to condemnation of pro-competitive business conduct, with the corresponding effect of chilling innovation (Type 2 error).18 Nevertheless, given the available evidence,19 it is probably excessive to talk about an antitrust bias against innovative practices or

16

For example it is difficult to foresee the impact of platform-centered industries in traditional businesses: Tim Wu, ‘Taking Innovation Seriously: Antitrust Enforcement If Innovation Mattered Most’ (2012) 78 Antitrust Law Journal 313, 322; see also 324: ‘There must be important allowances for both non-arbitrary exclusion and for platforms that are closed or semi-closed to begin with, and stay that way. The platform that declares itself closed from the outset does not gain the advantages of inviting development on an open platform. The problem is with platforms that gain dominance based on a practice of serving as the entire industry’s basis for innovation and then later use that position to destroy any threats to their dominance’. 17 See Alan Devlin and Michael Jacobs, ‘Antitrust Error’ (2010) 52 William & Mary Law Review 75, 91 (‘dynamic analysis and error inevitably go hand in hand’); and Herbert J Hovenkamp, ‘Schumpeterian Competition and Antitrust’ (2008) University of Iowa Legal Studies Research Paper, Working Paper No. 08-43. For a quantification attempt see Thomas Cheng, ‘Putting Innovation Incentives Back in the Patent-Antitrust Interface’ (2013) 11(5) Northwestern Journal of Technology and Intellectual Property 383. 18 Distinguished from Type 1 error (false exoneration) anticompetitive conduct continues by the decision not to intervene: see Frank H Easterbrook, ‘The Limits of Antitrust’ (1984) 63 Texas Law Review 1. Indeed, in the past, mistakes have been shown to occur if patents or other IP rights are involved: see, e.g., criticizing anti-patent bias of authorities, Robin Jacob, ‘Competition Authorities Support Grasshoppers: Competition Law as a Threat to Innovation’ (2013) 9(2) Competition Policy International 15. 19 It is difficult to make an overall assessment, but according to Alan Devlin and Michael Jacobs, ‘Antitrust Error’ (2010) 52 William & Mary Law Review 75, 88: ‘the recent history of antitrust litigation has demonstrated beyond dispute that novel practices undertaken by dominant firms can disrupt market stability and harm smaller rivals. In the process, they may sometimes generate enormous

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products.20 Likewise, it may be too optimistic to think that potential under-enforcement of competition law (Type 1 errors) would always be corrected by exuberant market competition itself if there are no barriers to entry.21

3. SINGLE FIRM CONDUCT AND INNOVATION Although innovation influences the analysis of multilateral restraints to competition22 and mergers,23 unilateral anticompetitive conduct is benefits for consumers, but on occasions they may prove harmful to consumer interest’. 20 But see Geoffrey A Manne and Joshua D Wright, ‘Innovation and the Limits of Antitrust’ (2010) 6 Journal of Competition Law & Economics 153, 153–202: ‘innovation is closely related to antitrust error’; ‘antitrust is hostile to innovation’; ‘inhospitable antitrust rules in the face of technological innovation’; ‘historical and persistent bias embedded in antitrust institutions tends toward a higher probability of erroneous intervention in the presence of innovation’; and, concerning specifically the Microsoft case, see David McGowan, ‘Between Logic and Experience: Error Costs and United States v. Microsoft Corp.’ (2005) 20 Berkeley Technology Law Journal 1185. 21 See Jonathan B Baker, ‘Taking the Error out of the “Error Cost” Analysis: What’s wrong with Antitrust’s Right’ (2015) 80 Antitrust Law Journal 1. See also Alan Devlin and Michael Jacobs, ‘Anticompetitive Innovation and the Quality of Invention’ (2014) 27 Berkeley Technology Law Journal 1, 40: ‘1. A System That Favors False Negatives Is Preferable. First, because the severity of a Type I error rises in proportion with the value of the erroneously condemned invention, a bias in favor of Type II errors is justified when a court finds that an impugned innovation entails a material improvement over the prior art. As a result, a defendant should be able to defeat antitrust liability by establishing that its product design carries significant technical advantages. Even though some such inventions may generate negative consequences that exceed the relevant benefits, those cases are so limited and the nature of a Type I error so much more severe that a systemic preference in favor of false negatives is appropriate’. 22 Such as cooperative agreements between rivals or joint-ventures for innovation: see Thomas M Jorde and David J Teece, ‘Innovation and Cooperation: Implications for Competition and Antitrust’ (1998) 28 Journal Reprints in Antitrust Law & Economics 735, and ‘Rule of reason analysis of horizontal arrangements: Agreements designed to advance innovation and commercialize technology’ (1992) 61 Antitrust Law Journal 579. 23 See Michael L Katz and Howard A Shelanski, ‘Mergers and Innovation’ (2007) 74 Antitrust Law Journal 1, and ‘Merger Policy and Innovation: Must Enforcement Change to Account for Technological Change?’ in Adam B Jaffe, Josh Lerner and Scott Stern (eds), Innovation Policy and the Economy (Vol 5, MIT Press 2005) 109.

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probably the realm within antitrust law most severely affected by innovation and its features.24 The New Economy provides some illustrative examples of firms that have managed to create new markets through innovative strategies and successfully hoard them. Companies in these industries have benefitted from their leadership (though this tends to be identified with market domination)25 and have done nothing more (and nothing less!) than benefit from their first-mover advantage, causing disruption to innovation and efficient performance and capturing large shares of the market.26 In such a situation the successful firm may abuse its position in the market by either exploiting consumers or excluding new players from the market.27 However, being novel and rapidly changing industries, enforcers are faced with problems in obtaining information, and lack experience in conducting antitrust assessments of business practices and identifying and quantifying benefits and costs to consumers.28 Of course, that does not mean that monopolization is non-existent,29 but given the lack of information and experience, and the unavailability of evidence on actual harm to consumers, enforcement actions should be modest and carefully planned.30 24

See Spencer Weber Waller and Matthew Sag, ‘Promoting Innovation’ (2015) 100 Iowa Law Review 2223, 2229. 25 See Federico Etro, ‘Competition Policy: Toward a New Approach’ (2006) 2(1) European Competition Journal 29, 40. 26 Ibid 43. 27 See Richard A Posner, ‘Antitrust in the New Economy’ (2001) 68 Antitrust Law Journal 925, 938: ‘The focus of concern with the application of antitrust law to the new economy is on the methods by which a firm that has a monopoly share of some market in a new-economy industry might seek to ward off new entrants’. 28 Due to ignorance about (yet) unknown future developments, ‘protecting competition in innovation is a very difficult task for competition law enforcers’: Josef Drexl, ‘Anticompetitive Stumbling Stones on the way to a cleaner world: protecting competition in innovation without a market’ (2012) 8(3) Journal of Competition Law & Economics 507, 512 (proposing the need to reform EU law to be able to adequately tackle challenges posed by innovation). See also Josef Drexl, ‘Real Knowledge is to Know the Extent of One’s Own Ignorance: On the Consumer Harm Approach in Innovation-Related Competition Cases’ (2010) 76 Antitrust Law Journal 677. 29 See Richard A Posner, ‘Antitrust in the New Economy’ (2001) 68 Antitrust Law Journal 925, 932–933 (who is skeptical). 30 See Ronald A Cass, ‘Antitrust for High-Tech and Low: Regulation, Innovation, and Risk’ (2012) 9(2) Journal of Law, Economics and Policy 169, 169: ‘Antitrust authorities need to exercise special care in making enforcement

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In order to conclude that anticompetitive unilateral conduct has occurred, competition law assessment defines the relevant market (§2.1 below), then looks at the alleged position of power on that market of the firm (§2.2 below) and, finally, examines its presumably abusive behavior (§2.3 below). As the following subsections underline, none of the three exercises runs smoothly in markets disrupted by innovation. Definition of Relevant Market and Innovation In order to set the playground in which the antitrust assessment of a potential anticompetitive business action is carried out, the relevant market must be defined.31 The classical approach is static and relies strongly on price elasticity of demand to identify product substitutability and define product market, which can be problematic in markets in the New Economy industries.32 Despite having solid theoretical foundations, decisions respecting high-technology industries, starting with appreciation of the potential pitfalls of all regulatory schemes – including antitrust. Traditional problems of regulation generally and of antitrust enforcement specifically are exaggerated in high-technology sectors, where antitrust enforcers’ abilities to understand and predict industry evolution are most limited and where enforcement actions are most likely to rest on debatable predicates about the effects of specific conduct’; and Howard A Shelanski, ‘Information, innovation, and competition policy for the Internet’ (2013) 161 University of Pennsylvania Law Review 1663, 1668: ‘competition policy for digital platforms should start with caution in its application of existing tools but should not end there’; and ibid, 1705: ‘competition policy should be cautious in addressing digital platforms, but … antitrust enforcement should also change in ways that make competition analysis more suitable to the characteristics of the Internet and its associate industries’. 31 Commission, ‘Commission Notice on the definition of relevant market for the purposes of Community competition law’ (97/C 372/03) OJ C372/5, para 2: ‘Market definition is a tool to identify and define the boundaries of competition between firms. It serves to establish the framework within which the competition policy is applied’. 32 See Raymond Hartman, David J Teece, William Mitchell and Thomas Jorde, ‘Assessing Market Power in Regimes of Rapid Technological Change’ (1993) 2 Industrial and Corporate Change 317, 321–323; David J Teece and Mary Coleman, ‘The meaning of monopoly: antitrust analysis in high-technology industries’ [1998] Antitrust Bulletin 801, 826; J Gregory Sidak and David J Teece, ‘Dynamic competition and antitrust law’ (2009) 5(4) Journal of Competition Law & Economics 581, 612–614. See also Pablo Ibáñez Colomo, ‘Restriction on Innovation in EU Competition Law’ (2016) 41(2) European Competition Law Review 201 (cited from LSE Law, Society & Economy WP 22/2015, 8): ‘Where firms compete primarily – if not exclusively – for the

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the ‘hypothetical monopolist test and the SSNIP test (Small but Significant Non transitory Increase in Price)’ do not inform much in hightechnology industries given its static nature and their obliviousness to the dynamic features of competition in these markets.33 For those reasons, market definition based on static criteria and which tend to be influenced by prosecutorial incentives would normally lead to too narrow markets being defined. This is not a recipe for good competition law assessment. Moreover, given the nature of markets for innovation goods and services, which may have platform features (multiple sides) and in which free products or services may be provided, market definition in this context is complex and controversial.34 Therein, it may be difficult to look at market evolution and to account for potential competition from new products or services (not-yet existing markets).35 Allegedly, market definition problems pervaded the cases against IBM and Microsoft,36 and seem to be one of the most controversial elements in the Google case.37

development of new products (or the improvement of existing ones), it may not always be possible to make sense of the impact of a practice by examining the operation of the relevant market. Market definition may prove an impossible exercise. This fact does not mean that firms do not constrain the behavior of one another’ (emphasis added). 33 See Christopher Pleatsikas and David J Teece, ‘The analysis of market definition and market power in the context of rapid innovation’ (2001) 19 International Journal of Industrial Organization 665, 669–672. 34 See Howard A Shelanski, ‘Information, innovation, and competition policy for the Internet’ (2013) 161 University of Pennsylvania Law Review 1663, 1666. 35 See Josef Drexl, ‘Anticompetitive Stumbling Stones on the way to a cleaner world: protecting competition in innovation without a market’ (2012) 8(3) Journal of Competition Law & Economics 507, 510 (competition without a market or for a future market); and Ronald A Cass, ‘Antitrust for High-Tech and Low: Regulation, Innovation, and Risk’ (2012) 9(2) Journal of Law, Economics and Policy 169, 194 (‘market definition problem reflects more than the fact that officials so frequently cannot see changes coming that will dramatically alter competitive conditions in an industry’). 36 See Ronald A Cass, ‘Antitrust for High-Tech and Low: Regulation, Innovation, and Risk’ (2012) 9(2) Journal of Law, Economics and Policy 169, 191–199. 37 See Geoffrey A Manne and William Rinehart, ‘The Market Realities that Undermined the FTC’s Antitrust Case Against Google’ [2013] Harvard Journal of Law & Technology 7; and Brian J Smith, ‘Vertical vs. Core Search: Defining Google’s Market in a Monopolization Case’ (2012) 9 New York University Journal of Law and Business 331, 342–355.

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Market Dominance/Power and Innovation Unilateral restraints on competition are prohibited when a firm holds a position of dominance or monopoly in the relevant market that allows it to behave independently of its customers, competitors and suppliers.38 The assessment of market power faces similar difficulties.39 The same issues of the New Economy industries that hamper relevant market definition complicate the assessment of market power. A powerful and leading innovation-driven company does not necessarily mean it is a monopolist. Conventionally, competition law enforcement has relied heavily on presumptions based on market structure (market shares and market concentration) as proxies for market power and dominance, but that may not be operative in this context.40 However, many of the new products or services in the New Economy show the features of ‘winnertakes-all’ or ‘winner-takes-most markets’41 and, using the conventional tools, this makes them possible antitrust law enforcers. However, successful innovative firms are unlikely to be unconstrained price-setters that can profitably increase prices without losing sales, which is the criterion for dominance or monopoly to exist.42 Moreover, even if dominance and market power exist, that does not mean much if entrance by new competitors in the market is not difficult, 38

Judgment of 9 November 1983, NV Nederlandsche Banden Industrie Michelin v EC Commission, C-322/81, ECLI:EU:C:1983:313, para 30: ‘A position of economic strength enjoyed by an under-taking which enables it to hinder the maintenance of effective competition on the relevant market by allowing it to behave to an appreciable extent independently of its competitors and customers and ultimately of consumers’. 39 See J Gregory Sidak and David J Teece, ‘Dynamic competition and antitrust law’ (2009) 5(4) Journal of Competition Law & Economics 581, 614–616 (analysis should be forward-looking and searching for potential competitors); and Richard A Posner, ‘Antitrust in the New Economy’ (2001) 68 Antitrust Law Journal 925, 938 (‘The combination of intellectual property, network externalities, and rapid growth in consumer demand creates difficult questions involving the ascertainment and measurement of monopoly’). 40 See Rafael Alves de Almeida, ‘Market dominance in the New Economy’ (2006) 2(2) Revista Direito GV 67, 76, 84, 86; and Michele Messina, ‘Article 82 and the New Economy: Need for Modernization’ (2006) 2(2) Competition Law Review 73, 81–82. 41 See David S Evans and Richard Schmalensee, ‘Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries’ in Adam B Jaffe, Josh Lerner and Scott Stern (eds), Innovation Policy and the Economy (Vol 2, MIT Press 2002) 1, 10–12. 42 See ibid, 19–20.

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making dominance/monopoly contestable. Therefore, market power can be short-run and vulnerable. Additionally, the analysis of potential entry barriers in many of the New Economy markets is not realistic and is highly speculative. Although there may be high fixed/sunk costs in these industries, marginal costs of production are frequently close to zero. Finally, it is true that the presence of IP rights may hinder market access by rivals.43 Even though network effects may foreclose the market and discourage further innovation by the dominant firm,44 this would not be the case in most instances.45 Ultimately, aggressive competition is at play in these industries and constant/rapid changes in the market may quickly and easily erode the position that a firm holds in the market.46 For that same reason, everything that extoled the innovative firm in the market would presumably incentivize it to follow up investments in innovation.47 43 Occasionally, the most critical asset that gives these innovative firms dominance is the huge amount of customer information and data some of the firms are able to amass: see Howard A Shelanski, ‘Information, innovation, and competition policy for the Internet’ (2013) 161 University of Pennsylvania Law Review 1663, 1678–1682. 44 See Richard A Posner, ‘Antitrust in the New Economy’ (2001) 68 Antitrust Law Journal 925, 939. Moreover, potential network effects could be further strengthened by any switching costs (thus, aiding the preservation of market power), if customers incur costs if they switch from one product to another: see David J Teece and Mary Coleman, ‘The meaning of monopoly: antitrust analysis in high-technology industries’ [1998] Antitrust Bulletin 801, 828–831. 45 See, concerning technological change, Daniel F Spulber, ‘Unlocking Technology: Antitrust and Innovation’ (2008) 4(4) Journal of Competition Law & Economics 915 (given that markets provide incentives for firms’ coordination and interoperability). In general, see Frank H Easterbrook, ‘Information and Antitrust’ [2000] University of Chicago Legal Forum 1, 6–7; and Cento Veljanovski, ‘EC Antitrust in the New Economy: Is the European Commission’s View of the Network Economy Right?’ (2001) 22 European Competition Law Review 115, 116–117. 46 See David J Teece and Mary Coleman, ‘The meaning of monopoly: antitrust analysis in high-technology industries’ [1998] Antitrust Bulletin 801, 808: ‘antitrust authorities need to be cognizant of the self-corrective nature of dominance engendered by regime shifts’. 47 See Ronald A Cass, ‘Antitrust for High-Tech and Low: Regulation, Innovation, and Risk’ (2012) 9(2) Journal of Law, Economics and Policy 169, 194: ‘exceedingly difficult for government officials to discern the critical factors that explain what actually makes a particular firm dominant, the factors that affect the durability of dominance, or the kinds of change in the market (either on the demand side or the supply side) that could dramatically erode that dominance’.

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Conduct Analysis and Innovation As is widely known, the mere fact that a firm holds a dominant position is not forbidden by competition law: indeed, that is regarded as one of the incentives for firms for intense competition in markets.48 As with other ordinary firms (which do not have a dominant position), successful innovative firms should not be precluded from competing freely in the market. Therefore, decisions to prosecute them for conduct suspected to be anticompetitive need to be based in factual evidence of harm and on solid economic theory.49 Even taking for granted the risks of a defective market definition and a mistaken assessment of market power (§§2.1 and 2.2 above), monopolizing the market that a firm has managed to create through innovation – eventually gaining IP rights – leading to the exclusion of competitors cannot always be deemed to constitute an infringement of antitrust law; only exceptionally should the innovating monopolist be forced to share access to it.50 In the analysis of conduct that can be deemed abusive, competition law suffers from the same problems as when defining the market and finding market power. At first, it appears that pricing abuses should not be expected and, if there are, they tend to be intricate predatory pricing cases. In analyzing potential predation the economic characteristics of the New Economy industries make traditional cost analysis useless, and commonly it seems that the required abuse element in the long run

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‘The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices – at least for a short period – is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct’: Verizon Communications Inc v Law Offices of Curtis V Trinko LLP 540 US 398, 410–411 (Scalia) (emphasis added). 49 See Joshua D Wright, ‘Evidence-based antitrust enforcement in the Technology Sector’ (March 2013) CPI Antitrust Chronicle 1. 50 Regarding EU law, see Pablo Ibáñez Colomo, ‘Restriction on Innovation in EU Competition Law’ (2016) 41(2) European Competition Law Review 201 (cited here from LSE Law, Society & Economy WP 22/2015, 17).

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cannot be met.51 Any predation would have to do with innovation rather than with prices.52 Since it is difficult to craft a plausible test of what inventions are deemed anticompetitive, predatory or exclusionary condemnation should be reserved for those cases in which technological improvement forecloses competition (and not merely reduces it53) and cannot be considered a genuine innovation.54 The harmful effects of innovations without technological merit increase in networked markets and in the pharmaceutical industry, where negative consequences are propagated (either to multiple users or, in time, due to the extension of the duration of the patent).55 Moreover, other conduct that is efficient and makes business sense may simultaneously raise rival costs, without necessarily being deemed anticompetitive.56 That is the case, for example, for decisions concerning the integration of different and separate products (through tying or bundling), which may be efficient (innovative and cost reducing) and also benefit 51

See David S Evans and Richard Schmalensee, ‘Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries’ in Adam B Jaffe, Josh Lerner and Scott Stern (eds), Innovation Policy and the Economy (Vol 2, MIT Press 2002) 1, 22–25. 52 See Richard Gilbert, ‘Holding innovation to an Antitrust Standard’ (2007) 3(1) Competition Policy International 47, 77: ‘While these analytical approaches differ, they wind up essentially in the same place: innovation by a single firm is not anticompetitive if it has a plausible business justification and is not accompanied by other anticompetitive conduct. Indeed, this is what most courts have concluded when faced with allegations of predatory innovation’. 53 Aside from other structural factors in the market that make it possible, such conduct forces competitors to exit the market and it is its only justification (i.e. profit): see Januz A Ordover and Robert D Willig, ‘An Economic Definition of Predation: Pricing and Product Innovation’ (1981) 91(1) Yale Law Journal 8, 25–26, 29–30 (though with non-price decisions generally, data to make such an assessment will be scarce). But see J Gregory Sidak, ‘Debunking Predatory Innovation’ (1983) 83(5) Columbia Law Review 1121. 54 See Alan Devlin and Michael Jacobs, ‘Anticompetitive Innovation and the Quality of Invention’ (2014) 27 Berkeley Technology Law Journal 1, 34–42. 55 See Jonathan Jacobson, Scott Sher and Edward Holman, ‘Predatory Innovation: An Analysis of Allied Orthopedic v. Tyco in the Context of Section 2 Jurisprudence’ (2010) 23 Loyola Consumer Law Review 1, 8–10. 56 See Ronald A Cass, ‘Antitrust for High-Tech and Low: Regulation, Innovation, and Risk’ (2012) 9(2) Journal of Law, Economics and Policy 169, 175: ‘antitrust enforcement authorities can essentially initiate action against any leading firm for conduct that on its face is not readily distinguished from the ordinary business operations of a competitive firm’.

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consumers.57 Occasionally this could occur for exclusionary/predatory reasons, the assessment depending on the competition conditions in both markets: and even then it may well have a pro-competitive explanation (efficiency) and be good for consumers.58 In sum, it seems sound that any conduct analysis should overcome any form-based approach (automatic illegality) and instead be cautious (as there may be pro-competitive explanations), focused and based on the observed markets effects of conducts.59

4. COMPETITION LAW ENFORCEMENT AND INNOVATION: INSTITUTIONAL IMPLICATIONS Antitrust rules and doctrines governing anticompetitive conduct have been in place for decades, but their enforcement can be adapted to the particularities of the industries driven by innovation.60 Given the 57 See Dennis W Carlton and Michael Waldman, ‘Tying’ [2008] 3 Issues in Competition Law and Policy (ABA Section of Antitrust Law) 1859; David S Evans and Michael Salinger, ‘Why do firms bundle and tie? Evidence from competitive markets and Implications for Tying Law’ (2005) 20 Yale Journal on Regulation 37; and David S Evans and Richard Schmalensee, ‘Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries’ in Adam B Jaffe, Josh Lerner and Scott Stern (eds), Innovation Policy and the Economy (Vol 2, MIT Press 2002) 1, 22–25. In the merger context, see Commission, ‘Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings’ (2008/C 265/07) OJ C265/6, para 93: ‘Tying and bundling as such are common practices that often have no anticompetitive consequences. Companies engage in tying and bundling in order to provide their customers with better products or offerings in costeffective ways. Nevertheless, in certain circumstances, these practices may lead to a reduction in actual or potential rivals’ ability or incentive to compete. This may reduce the competitive pressure on the merged entity allowing it to increase prices’. 58 See Federico Etro, ‘Competition Policy: Toward a New Approach’ (2006) 2(1) European Competition Journal 29, 44. 59 See Josef Drexl, ‘Real Knowledge is to Know the Extent of One’s Own Ignorance: On the Consumer Harm Approach in Innovation-Related Competition Cases’ (2010) 76 Antitrust Law Journal 677, 708; and Howard A Shelanski, ‘Information, innovation, and competition policy for the Internet’ (2013) 161 University of Pennsylvania Law Review 1663, 1673. 60 The main problem may have more to do with enforcement than with the antitrust rules themselves: see Mark A Lemley, ‘Industry-Specific Antitrust Policy for Innovation’ [2011] Columbia Business Law Review 637; and Richard A Posner, ‘Antitrust in the New Economy’ (2001) 68 Antitrust Law Journal 925.

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openness of competition rules and the incentives rival firms may have to use them as a weapon to earn what the market denies them, enforcement needs to be very prudent.61 Incorporating dynamic analysis is a difficult task in which antitrust enforcers will have to process data and information concerning the current situation of industries and their likely evolution in the future.62 They will have to deal with complex evidence and only act upon the clear indication of anticompetitive behavior. Indeed, given the uncertainty that surrounds the assessment of business behavior regarding innovation and in order to minimize potential errors of unjustified intervention, enforcement can be re-structured to become an experimental process that adequately manages this uncertainty.63 That can affect the way the investigation is conducted by the enforcers and also how they make their assessment, introducing some flexibility in the potential remedies adopted. The experimental features of the process would introduce a collaborative joint learning approach in enforcement. Procedures should be introduced to incentivize defendants to share information and its implications for market competition with the enforcing authorities, while ensuring that defendants are not overwhelmed by requests, and preventing assessment failures. Naturally, the prosecutorial features of enforcement actions would require the introduction of adequate safeguards to guarantee defendants’ rights, but the flexibility would run in their favor. Given the lack of information and rapid evolution of these industries, similar difficulties affect the design and oversight of any potential remedies decided in competition enforcement actions. The peculiar features of innovation-driven industries make the task of competition agencies more difficult.64 For that very reason, antitrust enforcers should

61 Especially in private claims, see Alan Devlin and Michael Jacobs, ‘Antitrust Error’ (2010) 52 William & Mary Law Review 75, 81, 127–128. 62 See Douglas H Ginsburg and Joshua D Wright, ‘Dynamic Analysis and the Limits of Antitrust Institutions’ (2012) 78 Antitrust Law Journal 1, 2: ‘The practical value of proposals to increase the use of dynamic analysis must be evaluated with an eye to the institutional limitations that antitrust agencies and courts face when engaged in predictive fact-finding’. 63 In the merger review context, referring to decision theory (with references to older works), see Matthew Jennejohn, ‘Innovation and the Institutional Design of Merger Control’ (2015) 41 Journal of Corporation Law 101. 64 See Spencer Weber Waller, ‘Access and Information Remedies in HighTech Antitrust’ (2012) 8(3) Journal of Competition Law & Economics 575.

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be modest in their goals of merely preventing and correcting anticompetitive actions; otherwise, they risk turning antitrust into something different (regulation).65

5. CONCLUSIONS Competition law enforcement covers all industries and has been an effective and beneficial tool to deter anticompetitive behavior and enhance consumer welfare worldwide. In the past, enforcers dealt well with practices where the anticompetitive conduct had a clear or potential impact on prices and output. Introducing innovation in the assessment of anticompetitive conduct is a challenge that calls upon considering dynamic efficiency as the parameter for analyzing firms’ behavior. Unilateral conduct by dominant players in the New Economy is one of the realms in which competition enforcers face a more difficult task. This chapter has looked at the different stages in which enforcement may run afoul – from defining the relevant markets and examining the competitive restraints and whether a firm holds market dominance, to scrutinizing business actions that may have a negative (but non-price) effect on consumer welfare. Given the lack of information and experience enforcers have on these novel markets and the negative effects that overenforcement may provoke in deterring conduct that is not clearly anticompetitive and bad for consumers, but actually the contrary, it seems preferable to call for a cautious and prudent approach in which sanctions or other remedies are only imposed when negative effects in the market can clearly be ascertained. Finally, the institutional settings for enforcement of competition law could also be adapted to take into account the new realities.

65 See Alan Devlin, ‘Antitrust as Regulation’ [2012] 49 San Diego Law Review 823.

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4. Protecting innovation from unfair practices Juha Vesala 1. INTRODUCTION A considerable share of unilateral (single-firm) conduct, in which the European Commission (“EC”) and US Federal Trade Commission (“FTC”) have recently intervened in order to address concerns about innovation, has involved anticompetitive concerns based on conduct threatening other firms’ rewards for innovation and incentives to innovate through mechanisms, other than foreclosure of rivals. To address these concerns, the EC and FTC have relied on their powers that also extend to certain unfair practices (e.g. EU exploitative abuses or US stand-alone unfair methods of competition). This chapter examines the theories of non-exclusionary innovation harm that can be gleaned from recent interventions and ongoing investigations by the EC and FTC. Examples of such harm to innovation can be found in cases dealing with the exercise of standard-essential patents (“SEPs”) and aspects of Google’s specialized search services. In essence, the concern in these cases is that the conduct threatens other firms’ incentives to innovate by depriving them of appropriate rewards for innovation rather than by excluding them from the market. Concerns based on insufficient rewards harming innovation are unusual for antitrust, but could amount to anti-competitive harm when harm to innovation stems from the exercise of market power. However, anticompetitive effects of that kind are theoretically and empirically uncertain, and the practices examined have significant inherent pro-competitive aspects. To avoid deterring practices that overall promote innovation and consumer welfare, anti-competitive effects on innovation should be established as likely, and pro-competitive aspects of conduct as either disproportionate or insufficient in magnitude. The chapter proceeds as follows. First, it examines reliance by the EC and the FTC on theories of harm that go beyond anti-competitive 50 Juha Vesala - 9781788972444 Downloaded from Elgar Online at 03/15/2021 10:36:20PM via Universita Degli Studi Roma Tre

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foreclosure and/or more conventional antitrust standards for exclusionary conduct (section 2). Second, cases dealing with SEPs and Google’s specialized search services in the EU and US dealing with these alleged or suspected anti-competitive effects on innovation are examined and aspects of non-exclusionary theories of innovation harm raised in them are discussed (section 3). Third, the chapter considers whether and under what conditions these unconventional theories of harm to innovation could justify antitrust liability (section 4). Lastly, conclusions are presented (section 5).

2. USE OF UNFAIRNESS POWERS IN THE EU AND US IN ANTITRUST ENFORCERS’ INTERVENTIONS IN UNILATERAL PRACTICES ALLEGEDLY THREATENING INNOVATION US and EU Antitrust Law Powers to Address Unilateral Practices Beyond Exclusionary Conduct Antitrust law in the US and EU empowers public enforcers to remedy anti-competitive single-firm conduct.1 Article 102 TFEU,2 which the EC can enforce, covers abuse of a dominant position, and section 5 of the FTC Act,3 which the FTC can enforce, prohibits unfair methods of competition. Both prohibitions cover exclusionary conduct expected to involve anti-competitive effects based on exclusion of rivals from the 1 In this chapter, the focus is on public enforcement of antitrust law by the EC and the FTC; private reliance on unfairness powers is beyond the scope of the chapter. Nevertheless, it can be mentioned that in the EU, the relevant unfairness powers under Art. 102 TFEU can also be relied on by private litigants, as indeed is regularly the case. By contrast, in the US, only the FTC can enforce § 5 FTC Act, whereas private litigants or other public antitrust enforcers cannot base their claims directly on it. 2 Article 102 of the Treaty on the Functioning of the European Union (“TFEU”) (“Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States”). 3 15 U.S.C. § 45 Sec. (a)(1) (“Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful”). This chapter focuses solely on unfair methods of competition, thus leaving unfair and deceptive practices (raised in several of the FTC cases discussed) outside its scope.

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market (anti-competitive foreclosure) as well as certain other unilateral practices that produce anti-competitive effects through other mechanisms. For instance, the EU concept of abuse also covers the imposition of excessively high prices or unreasonable terms on customers (exploitative abuses) that do not involve foreclosure from the market.4 Moreover, the US concept of unfair methods of competition extends beyond exclusionary conduct under section 2 of the Sherman Act (monopolization and attempted monopolization).5 The EC and FTC can thus address unilateral conduct even when it does not involve anti-competitive foreclosure or is not unlawful under antitrust standards concerning exclusionary conduct (e.g. exclusionary abuses or monopolization). Exercise of Unfairness Powers to Protect Innovation: Interventions in Unilateral Practices by the EC and the FTC In the area of single-firm conduct, the focus of both EU and US enforcers is on practices that anti-competitively foreclose rivals from the market.6 4 See e.g. Case 27/76 United Brands v Commission [1978] EU:C:1978:22; Case C-52/07 Kanal 5 Ltd and TV 4 AB v Föreningen Svenska Tonsättares Internationella Musikbyrå (STIM) upa. [2008] EU:C:2008:703; Case 127/73 Belgische Radio en Televisie and société belge des auteurs, compositeurs et éditeurs v SV SABAM and NV Fonior [1974] EU:C:1974:25. 5 The US Supreme Court has recognized the broad potential reach of § 5 FTC Act that goes beyond Sherman Act § 1 and § 2 violations. See e.g. FTC v Indiana Federation of Dentists, 476 U.S. 447, 454 (1986); FTC v Sperry & Hutchinson Co., 405 U.S. 233, 244 (1972). However, US Courts of Appeal have required that the FTC employs standards that allow firms to distinguish unlawful conduct from legitimate practices in a predictable manner. See e.g. Official Airline Guides, Inc v FTC, 630 F.2d 920, 927 (2d Cir. 1980); Boise Cascade Corp. v FTC, 637 F2d 573, 582 (9th Cir 1980); E.I. du Pont de Nemours & Co. v FTC, 729 F.2d 128, 139 (2d Cir. 1984). See for FTC view of the standards and reliance on standalone application beyond the scope of the Sherman and Clayton Acts, FTC, “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the Federal Trade Commission Act” (Commission policy statement), Federal Register Vol. 80, No. 182, p. 57056 [2015]. For an example of an alleged stand-alone violation involving no exclusion but failure to uphold a licensing commitment, see In the matter of Negotiated Data Solutions LLC. (File No. 051 0094) FTC, Complaint of 23 September 2008, Docket No. C-4234. Moreover, even the Sherman Act covers certain exploitative aspects. Harry First, “Exploitative Abuses of Intellectual Property Rights”, New York University Law and Economics Working Papers (2016), Paper 446. 6 See e.g. EC, “Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by

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Nevertheless, a significant share of cases where the EC and FTC have intervened in unilateral practices (cases that were closed either by a decision finding infringement,7 with a binding settlement8 or upon the firm altering its conduct9) involves other than foreclosure concerns or conduct prohibited as exclusionary conduct. Of the EC and FTC interventions in which some kind of anticompetitive harm to innovation was mentioned in the case documents (e.g. decision or complaint), a considerable share involves explicit allegations of unfair conduct (exploitative abuses under Article 102(a) TFEU in the EU or stand-alone violations of section 5 FTC Act).10 Some dominant undertakings” [2009] OJ C 45/7, paras 6–7. During approximately the past 10 years (2005–2015), the EC and FTC have indeed mostly focused on exclusionary conduct (e.g. unlawful as exclusionary abuses in the EU or monopolization in the US). For EC cases that can be characterized as involving exclusionary abuses or other abuses based on foreclosure concerns, see e.g. Intel (Case COMP/C-3/37990) EC, decision D(2009) 3726 final of 13 May 2009; Astra Zeneca (Case COMP/A.37507/F3) EC, decision 2006/857/EC of 15 June 2005 (C(2005) 1757); Microsoft (Case COMP/C-3/37792) EC, decision C(2004) 900 final of 24 March 2004; Microsoft (tying) (Case COMP/C-3/39530) EC, decision of 16 December 2009 (C(2009) 10033); Prokent/Tomra (Case COMP/ E-1/38113) EC, decision C(2006)734 of 29 March 2006; Rio Tinto Alcan (Case COMP/39230) EC, decision C(2012) 9439 final of 20 December 2012; Perindopril (Servier) (Case AT.39612), EC, decision C(2014) 4955 final of 9 July 2014. EC, “Ten Years of Antitrust Enforcement under Regulation 1/2003: Achievements and Future Perspectives” (COM(2014/453) final, 9 July 2014) (between May 2004 and December 2013, 84% of Art. 102 TFEU cases involved exclusionary abuses and 16% exploitative abuses). 7 See e.g. Motorola – Enforcement of GPRS standard essential patents (Case AT.39985) EC, decision C(2014) 2892 final of 29 April 2014 (finding infringement but not imposing fines). 8 Indeed, most of the unilateral cases examined below were closed with a commitment decision (EC) or a consent order (FTC). 9 See e.g. EC, “Antitrust: Commission welcomes improved market entry for lung disease treatments” (Press release IP/11/842, 6 July 2011); FTC, “Statement of the Federal Trade Commission Regarding Google’s Search Practices In the Matter of Google Inc. File No. 111-0163” (Statement, 3 January 2013), available at . 10 For FTC cases involving stand-alone § 5 FTC Act violations, see e.g. In the matter of Motorola Mobility LLC, and Google Inc. (File No. 121 0120) FTC, Docket No. C-4410; In the matter of Bosch (Robert Bosch GmbH) (File No. 121 0081) FTC, Docket No. C-4377; In the matter of Negotiated Data Solutions LLC. (File No. 051 0094) FTC, Docket No. C-4234. For EC decisions based on exploitative abuses, see e.g. Rambus (Case COMP/38636) EC, decision of

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of these unfairness allegations are raised independently, that is, without claims of exclusionary conduct or foreclosure concerns.11 However, some of these cases seem to be “gap” cases where exclusionary concerns may have been involved, but were remedied under unfairness powers.12 Further, in various cases, foreclosure and non-foreclosure theories of harm were cited either as parallel or alternative concerns. For instance, in EC and FTC cases concerning SEPs, several of the enumerated competition concerns relate to the effects of higher royalties or other disadvantageous terms of licensing on consumers, innovation and standardization, either in addition to or as alternatives to effects based on exclusion of standard-compliant products from the market (see section 3.1 below for details).13 In some cases, the legal characterization of antitrust infringement is not explicit or clear (whether an exclusionary or some other kind of antitrust violation is invoked), but the conduct challenged, anti-competitive effects mentioned, remedies sought or commitments offered suggest competition concerns that are not confined to anti-competitive foreclosure. For instance, as explained below (section 3.2), some of the concerns in EC

9 December 2009; Standard & Poor’s (Case COMP/39592) EC, decision C(2011) 8209 final of 15 November 2011. 11 See e.g. In the matter of Negotiated Data Solutions LLC. (File No. 051 0094) FTC, Docket No. C-4234; Rambus (Case COMP/38636) EC, decision of 9 December 2009. 12 See e.g. Rambus (Case COMP/38636) EC, decision of 9 December 2009. In this case, royalties were alleged as excessive in view of patent ambush, which itself potentially could have been addressed as an exclusionary abuse had Rambus been dominant at that time as required under Art. 102 TFEU. 13 For EC cases involving both the risk of exclusion of products from the market and other kinds of competition concern (e.g. imposition of disadvantageous licensing terms), see e.g. Motorola – Enforcement of GPRS standard essential patents (Case AT.39985) EC, decision C(2014) 2892 final of 29 April 2014; Samsung – Enforcement of UMTS standard essential patents (Case AT.39939) EC, decision C(2014) 2891 final of 29 April 2014. For FTC cases involving both foreclosure and other kinds of concern (stand-alone § 5 FTC Act unfair methods of competition of both an exclusionary and non-exclusionary nature), see e.g. In the matter of Motorola Mobility LLC, and Google Inc. (File No. 121 0120) FTC, Complaint of 24 July 2013, at 38; In the matter of Rambus Inc. (File No. 011 0017) FTC, Complaint of 18 June 2002, Docket No. 9302 (claiming alternatively monopolization or unfair methods of competition – questioned by the US Court of Appeals for the District of Columbia in Rambus v FTC, 522 F.3d 456).

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and FTC Google investigations extend beyond anti-competitive foreclosure of rivals that either does not constitute established form of exclusionary conduct (e.g. exclusionary abuse or monopolization) or seems to extend beyond foreclosure concerns altogether.14

3. THEORIES OF NON-EXCLUSIONARY INNOVATION HARM IN CASES CONCERNING STANDARDS-ESSENTIAL PATENTS AND GOOGLE’S SPECIALIZED SEARCH SERVICES In a sizeable share of their enforcement activities seeking to protect and promote innovation, as noted above, the EC and FTC have employed theories of harm and infringement that go beyond established legal standards for exclusionary conduct and concerns about anti-competitive foreclosure. Below, these aspects of EC and FTC cases dealing with the enforcement and licensing of patents essential to industry standards and Google’s specialized search services are discussed. Licensing and Enforcement of SEPs The EC and FTC have both been active in the field of enforcement and licensing practices of SEP holders. Interventions by the EC and by the US FTC in these practices are not solely based on foreclosure from product or technology markets, but also involve concerns about exploitation of hold-up or market power otherwise threatening innovation. Moreover, the latter concerns may be more generally applicable, as argued below.

14 Examples can also be found in other types of case. For instance, the FTC’s concerns regarding Intel’s licensing practices seem to have features that appear to extend to aspects not limited to foreclosure but ensuring “fair” opportunities for firms that are not confined to concerns about anti-competitive foreclosure of actual or potential competitors. See e.g. In the matter of Intel Corporation (File No. 951 0028) FTC, Complaint of 8 June 1998, Docket No. 9288, para. 15 (“A natural and probable effect of Intel’s conduct is to diminish the incentives of those three Intel customers – as well as other firms that are Intel customers or otherwise commercially dependent upon Intel – to develop new innovations relating to microprocessor technology. Intel’s coercive business tactics effectively undermine the patent rights of such firms and reduce their incentives to develop new technologies relating to microprocessors”).

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Potential exclusionary effects of enjoining products infringing SEPs Seeking and obtaining injunctive relief for infringement of an SEP can result in exclusion from the market of infringing standard-compliant products, but does not necessarily result in anti-competitive foreclosure. First, although an SEP holder may have the ability to exclude an infringing product from the market (if infringement is established and an injunction granted), an SEP holder may lack the incentive to exclude when it is better off concluding a licensing agreement.15 Therefore, exclusion of an infringer from the product market may be avoided altogether or be short lived if a licensing agreement is concluded once an injunction is granted. Second, the effects of enjoining the sales of a particular infringing product may have modest market-wide effects on any parameter of competition (e.g. price or quality) and ultimately on consumer welfare if other firms are offering competing alternatives.16 Third, the ability of an SEP holder to obtain an injunction is limited to begin with. It depends, in particular, on whether a court finds a patent infringement and grants an injunction. Threats to innovation of exploiting market and hold-up power While recourse to injunctive relief by an SEP holder can result in anti-competitive foreclosure, as noted above, it may also be avoided or remain limited in magnitude. Regardless of whether or not such foreclosure concerns are likely, concerns based on exploitation of market and/or hold-up power can nonetheless arise. 15 See e.g. Google/Motorola Mobility (COMP/M.6381) EC, decision C(2012) 1068 of 13 February 2012 (examining concerns whether following the transaction there would be the ability and incentive to exclude rivals with SEPs). 16 Nevertheless, depriving consumers of a specific product could be interpreted as such an effect of excluding that particular product and thus reducing consumer choice. See e.g. Motorola – Enforcement of GPRS standard essential patents (Case AT.39985) EC, decision C(2014) 2892 final of 29 April 2014, para. 312 (“By seeking and enforcing an injunction, a SEP holder may be able to exclude even the most innovative standard-compliant products from the market as, by definition, the patented technology cannot be worked around. In turn, the elimination of competing products from the market may limit consumer choice and partially eliminate downstream competition”); In the matter of Motorola Mobility LLC, and Google Inc. (File No. 121 0120) FTC, Complaint of 24 July 2013, Docket No. C-4410, para. 28 (a) (listing among alleged anti-competitive effects “Depriving end consumers of competing products that comply with the Relevant Technology Standards, including mobile phones, tablet computers, and ‘smart’ devices providing internet access such as gaming systems, laptops, and set-top boxes”).

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Indeed, the EC and FTC have recognized and cited such nonexclusionary concerns in their interventions in SEP holders’ conduct. First, they note in the cases that exploitation of market and hold-up power may harm consumer welfare to the extent that royalties are raised and higher licensing costs are passed on to customers of standardcompliant products.17 Those higher licensing costs may also dull competition among manufacturers of standard-compliant products.18 Second, sought or attained higher licensing fees or other disadvantageous terms of licensing that amount to exploitation of hold-up or market power have been recognized by the FTC and EC as potentially threatening innovation. In principle, disadvantageous licensing terms could threaten the incentives of producers of standard-compliant products, whose incentives to innovate in those products may be reduced if SEP holders demand excessive licensing fees. SEP holder claims for excessive rewards can thus threaten the incentives of other innovators by denying the latter’s rewards for value created by their innovations (e.g. innovations regarding implementation of a standard and in features of standard-compliant products).19 Moreover, hold-up and opportunism can 17 See e.g. In the matter of Motorola Mobility LLC, and Google Inc. (File No. 121 0120) FTC, Complaint of 24 July 2013, Docket No. C-4410, para. 28(b) (mentioning as an anti-competitive effect “Increasing costs to produce consumer devices that comply with the Relevant Technology Standards, which manufacturers will likely pass through to consumers”); In the matter of Negotiated Data Solutions LLC (File No. 051 0094) FTC, Complaint of 23 September 2008, Docket No. C-4234, para. 37 (b) (alleged anti-competitive effects include “increases in price and/or reductions in the use or output of products that implement an IEEE standard enabling autonegotiation by or with 802.3 compliant products”). See also Motorola – Enforcement of GPRS standard essential patents (Case AT.39985) EC, decision C(2014) 2892 final of 29 April 2014, paras 377 and 387 (noting how certain disadvantageous provisions may ultimately raise prices of products). 18 See e.g. In the matter of Motorola Mobility LLC, and Google Inc. (File No. 121 0120) FTC, Complaint of 24 July 2013, Docket No. C-4410, para. 28 (d) (mentioning as an alleged anti-competitive effect “Raising the costs of Google’s competitors and thereby dampening competition between Google and makers of competing products, including, but not limited to, mobile phone operating systems, mobile phones, video compression technologies, and devices providing home internet access”). 19 See e.g. In the matter of Motorola Mobility LLC, and Google Inc. (File No. 121 0120) FTC, Complaint of 24 July 2013, Docket No. C-4410, para. 3 (“This conduct will deter innovation by increasing the costs of manufacturing to a standard”); In the matter of Bosch (Robert Bosch GmbH) (File No. 121 0081) FTC, Statement of the FTC of 24 April 2013, p. 2 (“By threatening to exclude

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more generally undermine willingness to participate in and contribute to development of standards as well as implementation of standards. Therefore, leaving hold-up unremedied in antitrust and other areas of law can undermine achievement of innovation and other benefits of standardsetting cooperation.20 These kinds of negative effects on innovation by attempted or potential hold-up or exploitation of market power by SEP holders are examples of anti-competitive effects invoked by the EC and FTC that are not based on exclusion from the relevant product or technology markets. Instead, innovation concerns stem from the risk of licensees being forced to accept onerous terms of licensing that prevent them from appropriately benefiting from their own innovations and the threat of hold-up undermining investment in the development and implementation of standards.

standard-compliant products from the marketplace, a SEP holder can demand and realize royalty payments that reflect the investments firms make to develop and implement the standard, rather than the economic value of the technology itself”). Concerns about follow-on innovation of disadvantageous licensing terms also appear to be included by more general concerns about hold-up deterring development and implementation of standards, as noted in the following footnote and the accompanying text. 20 See e.g. Motorola – Enforcement of GPRS standard essential patents (Case AT.39985) EC, decision C(2014) 2892 final of 29 April 2014, paras 415–418 (e.g. noting at para. 415: “Motorola’s seeking and enforcement of an injunction against Apple in Germany on the basis of its Cudak GPRS SEP may in addition undermine confidence in the standard-setting process and deprive consumers of its benefits”); In the matter of Motorola Mobility LLC, and Google Inc. (File No. 121 0120) FTC, Complaint of 24 July 2013, Docket No. C-4410, para. 28(c) (noting as an alleged anti-competitive effect “Undermining the integrity and efficiency of the standard-setting process and decreasing the incentives to participate in the process and adopt published standards”) and para. 4 (“Left unchecked, such conduct may in the future cause or threaten to cause substantial injury to competition and to consumers”); In the matter of Negotiated Data Solutions LLC. (File No. 051 0094) FTC, Complaint of 23 September 2008, Docket No. C-4234, paras 37 (c)–(e) (listing as alleged anti-competitive effects “c. decreased incentives on the part of semiconductor chip and LAN equipment manufacturers to produce products that implement IEEE standards enabling autonegotiation by or with 802.3 compliant products; d. decreased incentives on the part of semiconductor chip and LAN equipment manufacturers and others to participate in IEEE or other standard setting activities; and e. both within and outside the semiconductor chip and LAN equipment industries decreased reliance, or willingness to rely, on standards established by industry standard setting organizations”).

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Google’s specialized search allegations European and US investigations into alleged priority given to specialized Google services, use of content without prior consent in those services and the conditions under which content is used in services present another example of innovation concerns based other than on theories of anti-competitive foreclosure. While in these cases the concern that rival specialized search services are disadvantaged plays a significant role, the concerns extend beyond foreclosure of Google’s specialized search rivals in various respects. As discussed below, the concerns are in part based on these practices, in a more limited manner, depriving other innovators of rewards and thus potentially harming their incentives to innovate and create.21 Favorable treatment of Google’s own specialized search services The FTC has investigated and the EC is investigating allegations that Google improperly gives priority to its own specialized search services. Since the FTC decided not to pursue those claims further, the focus will be on the concerns underpinning the still ongoing EC investigation.22 21 Interestingly, allegations against similar practices based on claims of unlawful exclusionary conduct have not fared well. See e.g. Streetmap.EU Ltd v Google Inc. et al. [2016] EWHC 253 (Ch), [2016] All ER (D) 129 (Feb); Google et al. v Evermaps, Case No. 2009061231, Tribunal de Commerce de Paris (31 January 2012); Google Inc. et al. Case 408 HKO 36/13, Landgericht Hamburg (4 April 2013). On the Google allegations and the concept of abuse under Art. 102 TFEU, see e.g. Andrea Renda, “Searching for harm or harming search? A look at the European Commission’s antitrust investigation against Google”, CEPS Special Report (2015) No. 118; Renato Nazzini, “Google and the (Ever-stretching) Boundaries of Article 102 TFUE” Journal of European Competition Law & Practice (2015) Vol. 6 (5), 301–314. 22 By contrast, the FTC has decided to close its investigation into these concerns, citing in particular the difficulties of second guessing product design decisions that potentially offer consumer benefits. FTC, “Statement of the Federal Trade Commission Regarding Google’s Search Practices In the Matter of Google Inc. File No. 111-0163” (Statement, 3 January 2013), available at (“Challenging Google’s product design decisions in this case would require the Commission – or a court – to second-guess a firm’s product design decisions where plausible procompetitive justifications have been offered, and where those justifications are supported by ample evidence. Based on this evidence, we do not find Google’s business practices with respect to the claimed search bias to be, on balance, demonstrably anticompetitive, and do not at this time have reason to believe that these practices violate Section 5”, ibid., 3). Moreover, the thrust of the FTC inquiry seems to

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Concerns expressed by the EC regarding Google giving priority to its own specialized search services relate to rival specialized search services being improperly disadvantaged. However, these concerns also extend to Google potentially misleading customers by not informing them about the priority given to Google’s own specialized search results, thus making more relevant search results less visible and less likely to be visited. According to the EC Due to the favourable treatment of Google’s own services, consumers are more likely to not make use of potentially more relevant competing services. First, users are not aware of the promotion of Google’s offer within the search results. Second, competitors’ results that are potentially more relevant are less visible and even sometimes not directly visible to users – they are more difficult for the user to find, for instance because the user has to scroll down the screen to see them or has to go to a subsequent search results web page. The Commission is concerned that this practice unduly diverts traffic away from Google’s competitors in specialised search towards Google’s own specialised search services. It therefore reduces the ability of consumers to find a potentially more relevant choice of specialised search services.23 (emphases added)

As an anti-competitive effect, this aspect of EC concerns would appear to be a direct consequence of exploiting market power to the detriment of consumers through reduction in quality of the service – not based on any foreclosure of, or disadvantage to, rivals. This would seem to reflect a

have focused on whether the design was seeking to exclude rival potential competitive threats, that is, not necessarily concerns based on other than anti-competitive foreclosure (“A key issue for the Commission was to determine whether Google changed its search results primarily to exclude actual or potential competitors and inhibit the competitive process, or on the other hand, to improve the quality of its search product and the overall user experience”), ibid., 2. 23 EC, “Commission seeks feedback on commitments offered by Google to address competition concerns – questions and answers” (MEMO/13/383, 25 April 2013). See also EC, “Antitrust: Commission obtains from Google comparable display of specialised search rivals – Frequently asked questions” (MEMO/ 14/87, 5 February 2014) (“Within its web search results, Google displays its own specialised search services more favourably than competing services. In many instances, relevant competing services are as a consequence more difficult for the user to find. Users are not informed of this favourable treatment of Google’s own services”, emphasis added).

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duty to design the service in a transparent (non-misleading) and objectively justifiable way that would allow consumers to optimally find potentially more relevant alternative rival services among the search results.24 In addition to this immediate negative consumer welfare effect of allegedly sub-optimal service design, the EC is concerned about traffic being unduly diverted from rival specialized search services and its impact on competitors’ incentives to innovate in specialized search services: “Since Google is an important source of traffic for competing specialised search services, this may reduce competitors’ incentives to innovate in specialised search”25 (emphasis added). Later, in relation to a statement of objections issued regarding shopping comparison results, the EC similarly stated: Google’s conduct has a negative impact on consumers and innovation. It means that users do not necessarily see the most relevant comparison shopping results in response to their queries, and that incentives to innovate from rivals are lowered as they know that however good their product, they will not benefit from the same prominence as Google’s product.26 (emphasis added)

These concerns are not limited to conventional foreclosure concerns. First, it does not seem that the concern would be that rivals were actually or potentially excluded from the market, or that hindering rivals’ ability to compete would result in competitive harm. Rather, the concerns are limited to reduction of incentives to innovate in specialized search services, not anti-competitive effects resulting from market foreclosure or reduction of rivalry caused by the conduct. Second, the concerns may also not be limited to disadvantages caused by the conduct to rival specialized search services. The Google commitments offered, examined next, illustrate this tendency. 24

This type of antitrust duty appears novel in EU law. See for possibilities of abuse consisting of failing to satisfy demand or adopt new technologies in the context of state-granted exclusive rights (Art. 106 TFEU) e.g. Case C-41/90 Klaus Höfner and Fritz Elser v Macrotron GmbH [1991] EU:C:1991:161; Case C-179/90 Merci convenzionali porto di Genova SpA v Siderurgica Gabrielli SpA [1991] EU:C:1991:464. 25 EC, “Commission seeks feedback on commitments offered by Google to address competition concerns – questions and answers” (MEMO/13/383, 25 April 2013). 26 EC, “Antitrust: Commission sends Statement of Objections to Google on comparison shopping service” (Fact Sheet MEMO/15/4781, 15 April 2015).

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In 2013, Google offered to address concerns in the following way: To address these concerns, Google offers for a period of 5 years to: –

label promoted links to its own specialised search services so that users can distinguish them from natural web search results, clearly separate these promoted links from other web search results by clear graphical features (such as a frame), and display links to three rival specialised search services close to its own services, in a place that is clearly visible to users27 (emphases added)

– –

Moreover, according to the EC, in relation to commitments offered by Google in 2014: In its proposal, Google has now accepted to guarantee that whenever it promotes its own specialised search services on its web page (e.g. for products, hotels, restaurants, etc.), the services of three rivals, selected through an objective method, will also be displayed in a way that is clearly visible to users and comparable to the way in which Google displays its own services (see also MEMO/14/87). This principle will apply not only for existing specialised search services, but also to changes in the presentation of those services and for future services.28 (emphasis added)

And as to the commitments offered in 2014 according to the EC: To address this concern, Google proposes to implement a threefold remedy for all its current and future specialised search services and for all search entry points (i.e. irrespective of how the search query is made). + + +

Users will be informed by a label of the fact that Google’s own specialised search services are promoted. These services will be graphically separated from other search results, so the distinction with normal web search results will be clear. For relevant specialised search services, Google will display prominent links to three rival specialised search services in a format which is visually comparable to that of links to its own services. For instance, if the Google links have images, the rival links will have images as well, including on mobile devices.29 (emphases added)

27

EC, “Antitrust: Commission seeks feedback on commitments offered by Google to address competition concerns” (Press release IP/13/371, 25 April 2013). 28 EC, “Antitrust: Commission obtains from Google comparable display of specialised search rivals” (Press release IP/14/116, 5 February 2014). 29 EC, “Antitrust: Commission obtains from Google comparable display of specialised search rivals – Frequently asked questions” (MEMO/14/87, 5 February 2014).

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Finally, as to remedies sought by the EC for shopping comparison (a category of specialized search) in 2015: The Statement of Objections takes the preliminary view that in order to remedy the conduct, Google should treat its own comparison shopping service and those of rivals in the same way. This would not interfere with either the algorithms Google applies or how it designs its search results pages. It would, however, mean that when Google shows comparison shopping services in response to a user’s query, the most relevant service or services would be selected to appear in Google’s search results pages.30 (emphasis added)

While the commitments previously proposed by Google and remedies now envisaged by the EC are primarily designed for the benefit of rival specialized search services, they also seem to benefit other kinds of websites by providing safeguards against undue traffic diversion from a much broader class of websites. In particular, the proposed labeling and graphic separation remedies would seem to have protected all kinds of websites by addressing the concern that users are not aware of promotion by Google of its own services and thus are less likely to visit those sites. By addressing that risk of unawareness among users of the prioritization of Google’s specialized search results, various kinds of websites could similarly have benefited by the proposed commitments.31 Use of content without prior authorization (scraping) Both the EC and a group of FTC commissioners have expressed concerns about Google’s use of content of specialized search services without consent. The EC is still investigating this concern,32 whereas the US FTC

30

EC, “Antitrust: Commission sends Statement of Objections to Google on comparison shopping service” (Fact Sheet MEMO/15/4781, 15 April 2015). 31 Moreover, the commitment proposed by Google to display links in search results to three rival specialized search services and the remedy sought by the EC to ban preferential treatment of Google’s own shopping comparison (see above) could in practice also safeguard websites other than Google’s specialized search rivals, understood in an antitrust sense. However, it is difficult on the basis of publicly available information to evaluate what those commitments and remedies legally and technically specifically entail. 32 EC, “Antitrust: Commission sends Statement of Objections to Google on comparison shopping service” (Fact Sheet MEMO/15/4781, 15 April 2015). See text below for the concerns expressed by the European Commission with regard to scraping. Several complaints have reportedly been filed in this respect. See e.g. Getty Images, “Getty Images to file competition law complaint against

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closed its investigation following Google committing to certain changes in its practices.33 The Italian competition authority has also settled similar concerns by means of a commitment decision.34 Competition concerns about use of content without prior consent are largely based on the theory that if content from third party websites is shown in Google’s (specialized) search service results, traffic to other websites from which the content originates is reduced. This could reduce the incentives of other websites to invest in creation of content and innovation in their services. The EC characterizes the scraping conduct investigated in the following manner: The second competition concern relates to the way Google uses without consent content from competing specialised search services in its own offerings. Google uses on its own specialised search services original material taken from the websites of its competitors, such as for instance user reviews. Google thereby benefits from the investments of competitors, sometimes against their explicit will. Competitors who have objected to the use of their information in Google’s specialised search services have been told that the only way for their information not to appear in Google’s specialised search service would be to opt out of Google’s services, including Google’s web search, which is not a sustainable business option for most web sites.35 (emphases added) Google” available at ; Stephanie Bodoni and Aoife White, “News Corp. Adds to Google Antitrust Woes on Android, Search” (Bloomberg, 18 April 2016), available at ; Center of the Picture Industry, “CEPIC submits EU antitrust complaint against Google Images” (CEPIC, 14 November 2013), available at . 33 FTC, “Statement of the Federal Trade Commission Regarding Google’s Search Practices In the Matter of Google Inc. File No. 111-0163” (Statement, 3 January 2013), available at ; David Drummond, on behalf of Google Inc., Letter of Commitment to the FTC in the case Google Inc. (27 December 2012), available at . 34 Italian Competition Authority (Autorità Garante della Concorrenza e del Mercato), “Antitrust authority accepts Google commitments and implores Parliament to update copyright laws” (Press Release A420 – AS787, 17 January 2010). 35 EC, “Commission seeks feedback on commitments offered by Google to address competition concerns – questions and answers” (MEMO/13/383, 25 April 2013). See similarly EC, “Antitrust: Commission obtains from Google

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The EC expressed the following concerns with respect to the conduct: The Commission is concerned that the practice of using third party content to promote Google’s own services may reduce competitors’ incentives to invest in the creation of original content for the benefit of internet users. Indeed, if users know that Google’s specialised search services contain all the relevant information that is posted on the web, their incentives to visit other sites which contain only a part of that information will be significantly reduced, even if these were the sites from which that information originates.36 (emphases added)

Moreover, the EC justified the need for an antitrust investigation as follows: If Google’s market position in web search gives it the ability to copy and use all relevant information available on the web on its own specialised search services, users may no longer have incentives to visit competing services. Competitors of Google may lose the incentive to innovate or invest in the generation of original content. This competition concern arises whether or not the information copied and used by Google is covered by IP rights.37 (emphasis added)

Three FTC commissioners also expressed strong concerns about the conduct and its potential negative effects on other websites’ incentives to innovate: The Commission also investigated allegations that Google had unfairly “scraped,” or misappropriated, the content of certain competing websites, passed this content off as its own, and then threatened to delist these rivals entirely from Google’s search results when they protested the misappropriation of their content. The Commission considered whether this conduct could comparable display of specialised search rivals – Frequently asked questions” (MEMO/14/87, 5 February 2014) (“The second concern relates to the way Google uses content from competing specialised search services in its own offerings. Google uses on its own specialised search sites material such as user reviews from the websites of its competitors, thereby benefiting from the investments of competitors without their prior authorisation – and sometimes even against their explicit will. The Commission has not expressed a concern about the appropriate remuneration for copyright-protected material”). 36 EC, “Commission seeks feedback on commitments offered by Google to address competition concerns – questions and answers” (MEMO/13/383, 25 April 2013). 37 EC, “Commission seeks feedback on commitments offered by Google to address competition concerns – questions and answers” (MEMO/13/383, 25 April 2013).

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have diminished the incentive of Google’s rivals to invest in bringing new and innovative content and services to the Internet in the future or reduced Google’s own incentive to innovate in the relevant markets, and if so whether this conduct was actionable as an unfair method of competition within the meaning of Section 5 of the FTC Act, 15 U.S.C. § 45. Chairman Leibowitz, Commissioner Brill and Commissioner Ramirez found the record evidence to support strong concerns about Google’s conduct in this regard, and Google has committed to refrain from this conduct in the future.38 (emphases added)

As with regard to traffic diversion concerns, while the focus of these concerns is on detrimental effects on rival specialized search services, here too concerns do not appear to be based on complete or significant foreclosure of Google’s rivals from the market, or the effects of such exclusion on innovation. Instead, the concerns appear to be limited to reduction of incentives to invest in content creation and to innovate by other specialized search services resulting from diversion of traffic caused by direct presentation of content in Google’s search results. As in the case of self-prioritization concerns discussed above, the scraping concern also seems to extend beyond harming innovation incentives of rivals to Google’s specialized search services. Many kinds of websites, not necessarily only those that can be characterized as specialized search services or as actual or potential competitors of Google, would be safeguarded. Judging by the commitments offered by Google to the EC and FTC, the enforcers’ concerns appear to go beyond incentives of rival specialized search services. For example, Google’s commitments that the US FTC deemed sufficient to close its investigation into scraping concerns and the commitments Google offered to the EC would allow various kinds of websites (not only rival specialized search services) to designate to what extent and how their content can be used in Google’s specialized search services.39 For instance, according to the commitments offered by Google in 2013 to the EC, Google would:

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FTC, “Statement of the Federal Trade Commission Regarding Google’s Search Practices In the Matter of Google Inc. File No. 111-0163” (Statement, 3 January 2013), footnote 2. 39 See also Italian Competition Authority (Autorità Garante della Concorrenza e del Mercato), “Antitrust authority accepts Google commitments and implores Parliament to update copyright laws” (Press Release A420 – AS787, 17 January 2010) (accepting commitments allowing publishers to selectively opt out from Google News without penalization in general Google search).

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(ii) – offer all websites the option to opt-out from the use of all their content in Google’s specialised search services, while ensuring that any opt-out does not unduly affect the ranking of those web sites in Google’s general web search results, – offer all specialised search web sites that focus on product search or local search the option to mark certain categories of information in such a way that such information is not indexed or used by Google, – provide newspaper publishers with a mechanism allowing them to control on a web page per web page basis the display of their content in Google News40 (emphases added)

Similarly, the EC explained commitments offered in 2014 as follows: To address this concern, Google proposes to allow third parties to opt out from the use of their content in Google’s specialised search services without undue impact on their ranking in Google’s general search results or on their ranking in Google’s AdWords programme. A general opt-out will be open to all web sites, on a subdomain by subdomain basis. A more specific opt-out with finer granularity and more control over content will be accessible to news publishers only, for the control of the use of their content in Google News41 (emphasis added)

Google also made a similar but more limited commitment to the FTC: Within 90 days, Google will make available a web-based notice form that provides website owners with the option to opt out from display on Google’s Covered Webpages of content from their website that has been crawled by Google. When a website owner exercises this option, Google will cease displaying crawled content from the domain name designated by the website owner on Covered Webpages on the google.com domain in the United States. Website owners will be able to exercise the opt-out described above by completing a web-based notice form. Google will implement the opt-out within 30 business days of receiving a properly completed notice form.42 (footnotes omitted and emphasis added) 40 EC, “Antitrust: Commission seeks feedback on commitments offered by Google to address competition concerns” (Press release IP/13/371, 25 April 2013). 41 EC, “Antitrust: Commission obtains from Google comparable display of specialised search rivals – Frequently asked questions” (MEMO/14/87, 5 February 2014). 42 David Drummond, on behalf of Google Inc., Letter of Commitment to the FTC in the case Google Inc. (27 December 2012), available at .

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Thus, although the competition concerns expressed by the EC and three FTC commissioners highlight the potential detrimental effects of scraping on innovation incentives of special search rivals of Google, the commitments offered and accepted appear to address concerns about incentives of a significantly broader set of firms (all websites, all specialized search websites and newspaper publishers) to create and innovate, regardless of the nature of their activities and competitive relationship to Google. Terms concerning use of content in specialized search services Allegations about unfairness of the conditions under which content from other websites can be used, particularly in the Google News service, have been examined by national courts and authorities in the EU.43 The EC has stated that its scraping concerns do not extend to this question,44 which differs from scraping concerns (see section 3.2.2 above) in that here the concern is not the use of content without consent, but the terms that websites need to accept in order to appear fully or at all in Google News results (or in order otherwise to avoid penalization in Google’s search services).45 43

In the US, there appear not to have been antitrust investigations or private antitrust suits based solely on the unfair nature of licensing terms for creators of content. However, allegations about the unfairness of certain practices of Amazon have been made to the Department of Justice, Antitrust Division by a group of authors. Roxana Robinson, “A Call to Investigate Amazon” (The Authors Guild, 13 July 2015), available at . 44 EC, “Commission seeks feedback on commitments offered by Google to address competition concerns – questions and answers” (MEMO/13/383, 25 April 2013) (“The Commission’s concerns cover the fact that Google uses original third party information on its specialised search results services without prior authorisation, including the information of newspaper publishers. But they do not cover monetary considerations in this respect. The Commission considers that the issue of payment of third party content is more directly tied to Intellectual Property law”). However, the EC is considering whether other action to ensure fair allocation of value should be safeguarded as one of its initiatives concerning the Digital Single Market. Communication from the EC of 9 December 2015, “Towards a modern, more European copyright framework”, COM(2015) 626 final. The EC has recently proposed that authors and performers be given protection in contractual relationships. EC, “Proposal for a Directive of the European Parliament and of the Council on copyright in the Digital Single Market” (COM(2016)593 final, 14 September 2016). 45 Nevertheless, complaints claiming that the terms are unfair have reportedly been lodged before the EC. See e.g. Verband Deutscher Zeitschriftenverleger,

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Allegations about abusive unfairness of the conditions that full visibility of snippets of text and preview photos in Google News require acceptance of their royalty-free use (or failing acceptance, limited visibility) have been addressed by the German Competition Authority (Bundeskartellamt, “GCA”) and the Berlin regional court (LG Berlin). Both dismissed the allegation that the requirement of acquiescing to royalty-free use was abusive due to being unfair (excessively low). The GCA considered that avoidance of risk of infringing neighboring rights provided under German law in any event would constitute an objective justification for alleged unfairness of the terms.46 LG Berlin reasoned that a finding of abuse could not be justified because other than royalty-free terms would upset the mutually beneficial balance between news publishers, Google, and consumers.47 These concerns as to the conditions under which content from a third party website is displayed on Google News are essentially about the fairness of rewards for creators of content. However, there is little

“Verlegerverbände bündeln ‘Google-Beschwerden’ in Brüssel” (VDZ, 27 February 2012) available at ; Independent Music Companies Association, “Dispute Between YouTube and Independent Music Companies – Formal Process Starts in Brussels” (IMPALA, 27 June 2014), available at . 46 Google/VG Media et al. (Case B6-126/14) German Competition Authority (GCA), decision of 8 September 2015, paras 221–225. The GCA also questioned whether Google required royalty-free use explicitly or in practice: see paras 218–220. Moreover, according to the GCA an abuse based on refusal to agree to compensation for use of related rights was also highly unlikely, as no duty to deal in that manner could be assumed: see paras 209–217. Also abusive discrimination of publishers who did not consent to royalty-free use was unlikely given the legitimate interest in avoiding the risk of infringing neighboring rights: see paras 186–208. 47 Google Inc. Case 92 O 5/14 Kart, Landgericht Berlin (19 February 2016), 16. Nor was there unjustified discrimination: ibid, 10–16. Relatedly, the Italian competition authority, in the commitment decision mentioned above, ensured that Google is more transparent as to what share of advertising income websites are entitled and that websites can independently monitor use of their site affecting advertising revenues. This would appear to address fairness in the sense of foreseeability and monitoring. Italian Competition Authority (Autorità Garante della Concorrenza e del Mercato), “Antitrust authority accepts Google commitments and implores Parliament to update copyright laws” (Press Release A420 – AS787, 17 January 2010).

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discussion in the decisions as to whether the practices could harm rewards of news publishers (apart from recognizing that search services also provide benefits to news publishers) or ultimately their incentives to create content.48

4. STANDARDS FOR ANTITRUST CONDEMNATION OF NON-EXCLUSIONARY INNOVATION RESTRAINTS The EC and FTC investigations discussed above illustrate antitrust concerns in essence based on conduct depriving other innovators of rewards and thus potentially harming their incentives to innovate. In the case of SEP enforcement and licensing, innovation could be threatened by exploitation of market and/or hold-up power to impose disadvantageous licensing terms. As regards Google’s specialized search services, incentives of other websites could be threatened by reduced traffic and no or low compensation for use of content. These concerns about unilateral conduct lowering rewards for innovation are not usual for antitrust to the extent that they exhibit market failures such as public goods (e.g. free-riding on others’ innovations) or transaction costs (e.g. risks of hold-up to investment). This unusual nature of competitive harm prompts the question whether alleged negative effects on innovation based on such mechanisms can form a basis for an antitrust infringement as well as what standards should be applied to judge them. Below, these challenges of identifying unilateral nonexclusionary practices warranting antitrust condemnation are discussed. Anti-competitive Effect Based on a Non-exclusionary Theory of Innovation Harm Nature of non-exclusionary effects on innovation as anti-competitive harm A common feature of theories of innovation harm discussed above is that they exhibit the concern that the conduct of a dominant firm threatens the 48 The issue itself could in the EU be relegated to copyright law following a proposal by the EC to give publishers a neighboring right to press publications and otherwise give safeguards to copyright holders in contracting. EC, “Proposal for a Directive of the European Parliament and of the Council on copyright in the Digital Single Market” (COM(2016)593 FINAL, 14 September 2016).

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rewards of other innovators and thereby ultimately incentives to innovate in the market. No conventional exclusionary conduct involving anticompetitive foreclosure might be present (see section 3 above) and concern about unfairness is not about static welfare or distributive effects (e.g. deadweight loss or transfer of consumer welfare to producers). Instead, the concerns examined are based on the premise that the expected rewards of other innovators may be reduced to the detriment of incentives to innovate in the market. In this way, non-exclusionary theories of harm based on innovation being harmed would fit the mission of antitrust to protect the effective functioning of markets (in the dimension of innovation) in the interest of ultimately promoting consumer welfare. However, not all inefficiencies in the market render associated conduct anti-competitive, as antitrust is primarily concerned with the negative effects of market power. Nevertheless, when claimed, harmful effects on innovation are based on exploitation of market power, non-exclusionary effects on innovation can be similar in nature, origin and outcome as in established types of antitrust violation.49 In this respect, both in the case of SEP licensing practices and search practices, the concerns of the EC and FTC seem not to be based on hold-up or free-riding on its own, but the market power of firms that could be exercised in ways that harm the functioning of the markets in terms of producing innovation due to disincentives caused by hold-up and free-riding. It is thus not solely hold-up or misappropriation that is questioned but exercise of market power potentially involving them.50 Moreover, the mechanisms by which markets are claimed to operate inefficiently and ultimately to result in harm to consumer welfare are similar to established types of antitrust infringement. Theories of nonexclusionary innovation harm share elements with both exclusionary conduct (e.g. exclusionary abuses and monopolization) distorting the 49 By contrast, were unilateral conduct undesirable for innovation solely on the grounds of market failures other than market power (such as externalities, transaction costs or information asymmetries) it would be difficult to justify the use of antitrust to address innovation concerns raised by such conduct. 50 For instance, the EC investigation in scraping seems to be premised on the market position of Google enabling the potentially problematic conduct – not scraping conduct as such. EC, “Commission seeks feedback on commitments offered by Google to address competition concerns – questions and answers” (MEMO/13/383, 25 April 2013) (“If Google’s market position in web search gives it the ability to copy and use all relevant information available on the web on its own specialised search services, users may no longer have incentives to visit competing services”, emphasis added).

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functioning of the market by reducing rivalry and with otherwise unlawful unilateral conduct (e.g. exploiting market power in EU antitrust and stand-alone unfair methods of competition in the US) involving exploitation of market power harming economic welfare more directly. To the extent, for instance, that EU antitrust law condemns exploitative abuses on the basis of static welfare effects (e.g. excessive prices), it would a fortiori be justified to condemn practices exploiting market power that harms innovation, as the latter type of effects can be more detrimental to consumer welfare and economic growth than mere static welfare losses.51 Likelihood of anti-competitive harm to innovation A challenge with the non-exclusionary innovation harm theories examined in this chapter is that negative effects on innovation are theoretically and empirically highly ambiguous and thus only likely to be borne out by specific circumstances.52 To begin with, it is not obvious whether the above-examined practices are likely to reduce expected rewards of other innovators overall as the conduct may also enhance their rewards (e.g. by increasing web traffic) so that the net effect is ambiguous. Further, negative effects on rewards of other innovators do not necessarily equate with reduced incentives to innovate on the market. For instance, if a dominant firm is an important source of innovation or if in any event effective rivalry in innovation remains despite some innovators being disadvantaged, no market-wide harm to innovation might result.

51 As discussed above, in many of the cases examined, alleged or suspected anti-competitive effects involve both non-exclusionary and exclusionary aspects. The exclusionary aspects could bring non-exclusionary aspects to familiar antitrust ground. Interestingly, some recent allegations seem to be based on an allegation that dominance is maintained or enhanced by improper means (by using content without authorization), but without necessarily involving the conduct contested excluding rivals from the market. See e.g. Getty Images, “Getty Images to file competition law complaint against Google”, available at ; Stephanie Bodoni and Aoife White, “News Corp. Adds to Google Antitrust Woes on Android, Search” (Bloomberg, 18 April 2016), available at http://www.bloomberg.com/news/articles/2016-04-18/news-corp-addsto-google-s-antitrust-woes-over-android-search. Whether strengthening a dominant position based on practices other than exclusion of rivals could form the basis for an infringement is, however, beyond the scope of this chapter. 52 Arguably, at least these concerns are more ambiguous than in the case of conventional anti-competitive foreclosure prohibited as exclusionary conduct.

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Interestingly, some of the concerns about innovation being harmed by the practices examined in this chapter are causally distant from conduct and to a significant degree have to do with the general prevailing legal and economic conditions for innovation. For instance, concerns that opportunism in SEP licensing threatens investment in standardization may stem more from the general risk of hold-up (e.g. enabled and not deterred under other laws) than from the actual conduct of an SEP holder.53 Similarly, in the case of the search allegations, it can be argued that reduced rewards are caused by changes in the communications technology that enhance competition between creators of content, lower costs of free-riding and alter existing business models.54 In the cases both of such SEP and scraping concerns, it may be questioned to what extent the cause of alleged sub-optimal incentives for investment and innovation can be found, for instance, within IP law that may allow injunctive relief for SEP infringements in problematic situations and not provide sufficient protection against some scraping practices, instead of being caused by the conduct.55 For example, it may be problematic to establish that conduct of an SEP holder would causally harm standards-development in organizations or sectors other than those where the SEP holder is active. Pro-competitive Aspects of Conduct as Justifications Another challenge with the allegations examined relating to SEPs and specialized search is that the practices are capable of promoting innovation and consumer welfare. First, innovation in the design of specialized search services can provide immediate benefits to their users, such as by directly enhancing the quality of the service to users. For example, quicker and more conveniently presented search results can save consumers time and effort. Second, the conduct may be a means to be rewarded for innovation and thereby form a basis for a firm’s incentives to innovate. For instance, SEP holders’ incentives to innovate crucially depend on their ability to conclude licensing agreements compliant with their licensing commitments (e.g. FRAND), which can be difficult without the possibility of obtaining injunctive relief in case would-be licensees do not accept these licensing demands. Similarly, competitive advantages and commercial 53

See section 3.1.2 above. See section 3.2.2 above. 55 However, as discussed above in section 4.1.1, when concerns are attributable to the exploitation of market power, it may be the conduct, not merely the presence of market failures, that gives rise to anti-competitive effects. 54

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value provided by service design that attracts users underlies investments to innovate in such services. The practices examined in this chapter could, therefore, remain overall desirable to innovation and consumer welfare to the extent that they can be justified by such immediate or indirect innovation-related benefits. However, that does not mean that the practices are always justified from an antitrust policy point of view. In particular, while the practices are capable of producing such innovation benefits, conduct that goes further than necessary to attain the benefits may lack justification.56 For instance, while SEP holders are generally entitled to seek terms of licensing that comply with the licensing commitments they have made,57 conduct by SEP holders to refuse licenses on committed terms and attempts to seek higher rewards may render conduct unjustifiable.58 Both the EC and FTC thus acknowledge these rights and legitimate interests of SEP holders, while questioning injunctive relief and licensing demands that are not in line with the licensing commitments the SEP holder itself has voluntarily given as a precondition for its technology to be incorporated into a standard. Similarly, the design of a specialized search service that harms innovation by others in a way that is disproportionate or unjustified in view of immediate or indirect benefits to consumers could be rendered unjustified. In this regard, concerns expressed by the EC may suggest a more stringent standard of a dominant firm being required to design

56 Under Art. 102 TFEU and § 5 FTC Act, these desirable aspects may avoid triggering potential antitrust liability in the first place (e.g. prevent characterization as an unfair method of competition or abuse) or may justify prima facie infringing conduct on the basis of the pro-competitive benefits it produces, or other arguments applicable in the US or EU (e.g. as forming a privileged exercise of intellectual property rights (IPRs), being objectively justified or constituting reasonable protection of legitimate interests). 57 See for conditions under which an SEP holder avoids committing an abuse in the EU while seeking injunctive remedies Case C-170/13 Huawei Technologies [2015] EU:C:2015:477. 58 See e.g. Motorola – Enforcement of GPRS standard essential patents (Case AT.39985) EC, decision C(2014) 2892 final of 29 April 2014; In the matter of Motorola Mobility LLC, and Google Inc. (File No. 121 0120) FTC, Docket No. C-4410. See also Margrethe Vestager, EU Competition Commissioner, “How competition supports innovation”, available at (noting that SEP holders are not prevented from seeking fair rewards, but cannot refuse licenses to those willing to pay a fair price for the use of patents).

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services in a way that is not less desirable for consumers than justified,59 whereas the FTC has indicated that it is not willing to second-guess product design choices that have plausible pro-competitive benefits.60 Standards for Condemning Practices on the Basis of Their Alleged Non-exclusionary Innovation Effects The uncertainty about non-exclusionary anti-competitive effects on innovation and the presence of redeeming and pro-competitive aspects of the practices examined warrant greater caution than in the case of many established types of unilateral antitrust infringement, as discussed above. To avoid undermining innovation in antitrust enforcement in individual cases and promulgation of generally applicable antitrust standards, it would be warranted to require a likelihood and magnitude of alleged anti-competitive effects that in view of the pro-competitive aspects of the conduct justify the risks associated with deterring wholly benign (no anti-competitive effects) and overall pro-competitive practices. The strongest case for finding infringement on the basis of alleged nonexclusionary anti-competitive effects would be when conduct deemed likely to harm innovation lacks any pro-competitive aspects or is disproportionate for attaining pro-competitive benefits.61 In these situations, 59

See e.g. EC, “Commission seeks feedback on commitments offered by Google to address competition concerns – questions and answers” (MEMO/13/ 383, 25 April 2013). 60 FTC, “Statement of the Federal Trade Commission Regarding Google’s Search Practices In the Matter of Google Inc. File No. 111-0163” (Statement, 3 January 2013), available at . 61 This would appear to be in line with the approach of the US FTC and characterizations of the general concept of abuse by the CJEU. See FTC, “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the Federal Trade Commission Act” (Commission policy statement), Federal Register Vol. 80, No. 182, p. 57056 [2015] (anticompetitive effects and pro-competitive justifications); Case C-52/09 Konkurrensverket v TeliaSonera Sverige AB [2011] ECLI:EU:C:2011:83 (requisite need for anti-competitive effects); Case C-209/10 Post Danmark A/S v Konkurrencerådet [2012] ECLI:EU:C:2012:172 (efficiency justifications). However, it is not clear if in the case of purely exploitative abuses actual or potential anticompetitive effects need to be established, as in such cases the CJEU has focused on whether conduct is proportional to legitimate aims or economic value, not the effects of conduct. See e.g. Case C-52/07 Kanal 5 Ltd and TV 4 AB v Föreningen Svenska Tonsättares Internationella Musikbyrå (STIM) upa. [2008] EU:C:2008: 703; Case 127/73 Belgische Radio en Televisie and société belge des auteurs,

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such conduct could in principle be condemned while leaving undeterred less harmful practices capable of producing similar pro-competitive benefits. When conduct is reasonable with a view to attaining procompetitive benefits, antitrust might be better off avoiding condemnation unless it is confident that the anti-competitive effects of the conduct on innovation outweigh the pro-competitive aspects. To summarize, where conduct (1) is likely to produce anti-competitive effects and either (2(a)) is not reasonably necessary to attain pro-competitive benefits or (2(b)) its anti-competitive effects clearly outweigh its pro-competitive effects, antitrust condemnation can safeguard innovation in markets to the ultimate benefit of consumer welfare.

5. CONCLUSIONS Several cases in which the EC and the FTC have recently intervened in unilateral conduct entail allegations of innovation being anticompetitively harmed on the basis of theories of harm other than anti-competitive foreclosure. Instead of rivals being excluded from the market, alleged or suspected anti-competitive harm to innovation in these cases is based on a dominant firm improperly depriving other innovators of appropriate rewards (e.g. by unduly diverting web traffic from innovators or by imposing disadvantageous licensing terms on innovators). To the extent that these negative effects on innovation result from the exercise of market power, they could be characterized as anti-competitive effects that can form the basis for an antitrust infringement. However, theories of depressed rewards are subject to considerable theoretical and empirical uncertainty, subjecting them to a heightened risk of erroneous deterrence. The practices examined also possess innovation-related redeeming aspects that up to a point can justify conduct as not overall harmful to innovation. In order for antitrust to avoid erroneously deterring conduct that does not overall harm innovation and consumer welfare, compositeurs et éditeurs v SV SABAM and NV Fonior [1974] EU:C:1974:25. For instance, in the FTC interventions examined above, the FTC claimed there was no legitimate efficiency justification for the conduct. See e.g. In the matter of Motorola Mobility LLC, and Google Inc. (File No. 121 0120) FTC, Complaint of 24 July 2013, Docket No. C-4410, para. 29 (“There is no legitimate efficiency justification sufficient to outweigh the harm to competition and consumers threatened by Google’s conduct”). Similarly, the EC rejected objective justifications argued in Motorola – Enforcement of GPRS standard essential patents (Case AT.39985) EC, decision C(2014) 2892 final of 29 April 2014, paras 412–491.

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first, alleged anti-competitive effects based on non-exclusionary theories of harm should be established as likely. Second, the conduct should either fail to be reasonably necessary for attaining redeeming or procompetitive benefits or it should be unlikely to produce pro-competitive benefits that outweigh the anti-competitive effects.

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5. Data protection considerations in EU competition law: funnel or straightjacket for innovation? Nicolo Zingales As the advancement of digital technologies dramatically reduced the costs for data collection and processing, a variety of companies have been seizing the opportunity to provide personalized products or services. The pattern is simple: data on consumer behavior and preferences is collected from a variety of sources and collated into comprehensive databases, which are then used to identify relevant consumer characteristics and enable a better targeting. The potential of garnering and using data to improve productivity and customization is the central promise of the so-called “big data revolution”,1 which tends to favor actors with greater capacity to collect, retain and analyze consumer data. In this context, where data constitutes a valuable input for the attainment of efficiencies and a driver of competitive dynamics, competition law inevitably complements data protection law as an instrument to prevent entities with access to strategic datasets to abuse their position to the detriment of consumers, and individuals more generally. Needless to say, these instruments differ significantly in their goals and methods of operation. Most importantly for purposes of this chapter, their differences are significant when it comes to the evaluation of the justifications offered by the undertakings processing those datasets. A comparison of the legal tests applied in these two different areas in the EU exposes two contrasting approaches to the incorporation of innovation into legal analysis, with important consequences for competition

1 V. Mayer-Schonberger, Big Data: A Revolution That Will Transform How We Live, Work, and Think (Eamon Dolan/Mariner Books, 2014).

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enforcement. The significance of those differences implies that great caution should be exercised in the implementation of rising “integrationist” theories of data protection and competition law, advanced among others by the European Data Protection Supervisor (EDPS).2 In other words, this chapter hits on a blind spot of this emerging “integrationist” trend, suggesting that collapsing competition and data protection assessments could have negative effects on the concepts of “data-driven innovation” and “data protection innovation”. At the same time, recognizing that the fundamental right to data protection and the type of innovation it encourages cannot be ignored by competition enforcers, it calls for the definition of a comprehensive framework of cooperation between competition and data protection authorities. Section 1 describes the ecosystem created by the valorization of personal data, in particular explaining the two novel types of innovation introduced by this ecosystem: data-driven innovation and data protection innovation. Section 2 observes that the current framework for innovation defences in EU competition law is deficient when it comes to these forms of innovation. Section 3 provides an overview of the legal bases for data-driven innovation in EU data protection law. Section 4 maps out the possible intersections between data protection and competition analysis in this regard, identifying different needs and scenarios for the cooperation between competition and data protection authorities. Finally, section 5 summarizes the key points of this contribution and concludes.

1. THE RISE OF DATA INNOVATION Though it might not be apparent yet, we are living in what the World Economic Forum has called the fourth industrial revolution.3 After the breakthrough technological advancements generated by the mechanization of production, electricity and automation, we are now in the midst

2 EDPS, Preliminary Opinion n. 10/14 (“Privacy and competitiveness in an age of big data”), available at . 3 Klaus Schwab, “The Fourth Industrial Revolution: what it means, how to respond”, available at .

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of a transition to a world where digital technologies are becoming embedded into physical objects, enabling the control or monitoring of their activity through the use of algorithms. While part of this transition can be ascribed to the third industrial revolution, which consisted in the automation of production through electronics and information technologies, two distinctive features suggest that we are witnessing a different phenomenon: the innovation produced over the last few years by this technological paradigm is occurring at a much higher pace, and is affecting and increasingly disrupting all industries.4 This shift has been dubbed “industry 4.0”, which involves redefining the dynamics of manufacturing along the above-mentioned lines. This process is enabled by a number of factors. Without doubt, the increased capacity and the lower cost of computing, the subsequent deployment of increasingly intelligent robots and machines and the expansion of wireless communications and networks play a pivotal role in this ecosystem.5 But it would be disingenuous to overlook that this technological advancement is fueled by the boost in collection and processing of data, generated by the continuous interaction of humans with machines and between machines themselves. With the rise of artificial intelligence and the exponential growth of so called “big data”,6 increasingly advanced techniques of data analytics are being put to the service of businesses across a variety of sectors. Data and the ability to make sense of them constitute an essential asset to enable businesses to adjust their offerings to demand and attain one of the key attributes of industry 4.0: mass customization.7 Data innovation has also made its strides outside manufacturing. Researchers from MIT reported that companies in the top third of their

4

Ibid. European Parliament, “Industry 4.0”, available at . 6 Although the definition of “big data” is contested, there seems to be unanimity with regard to its reference to the three “Vs” i.e. Velocity, Variety and Volume. It is generally understood as referring to large amounts of different types of data, produced at high speed from multiple sources, whose handling and analysis require new and more powerful processors and algorithms. See Autorité de la Concurrence and Bundeskartellamt, “Joint Report on Competition Law and Data” (10 May 2016), available at ; European Data Protection Supervisor, available at . 7 European Parliament, note 5 above, p. 5. 5

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industry in the use of data-driven decision making were, on average, 5% more productive and 6% more profitable than their competitors.8 In the B2C environment, digitization and connectivity have transformed the way in which products and services are sold and marketed to consumers. Not only does the “digital footprint” left behind by consumers when surfing online allow businesses to make customized offers, obtaining a better match to their preferences; increasingly, it enables a variety of business models dependent on advertising, which becomes more profitable when specifically targeted to consumer preferences. In sum, the current ecosystem both for production and distribution depends heavily on data collection and analysis, which in turn are favored by the ability of the technologies that we deploy to automatically generate data. However, this seemingly virtuous circle finds important limits in its reliance on personal data, i.e. any information relating to an identified or identifiable individual.9 The individuals to whom those data relate (so called “data subjects”) enjoy a panoply of rights with regard to the processing (a word that refers broadly to “any operation or set of operations performed upon personal data”10) and are entitled to hold data processing actors liable for breaches of those rights and of the general principles of data protection, as well as prevent non-compliant processing. Since the Lisbon Treaty, rights and principles of data protection law are firmly grounded on the fundamental right to data protection enshrined in article 8 of the EU Charter of Fundamental Rights.11 Moreover, the increasing salience of data protection law in our society is generating a compliance culture, evidenced by several instances of market players

8 Andrew McAfee and Erik Brynjolfsson, “Big Data: The Management Revolution” (2012) Harvard Business Review 61. 9 See Data Protection Directive, art. 2 (a). 10 Ibid. 11 See Juliane Kokott and Christoph Sobotta, “The distinction between privacy and data protection in the jurisprudence of the CJEU and the ECtHR” (2013) 3 (4) International Data Privacy Law 222; Raphaël Gellert and Serge Gutwirth, “The legal construction of privacy and data protection” (2013) 29 (5) Computer Law & Security Review 522; Maria Tzanou, “Data protection as a fundamental right next to privacy? ‘Reconstructing’ a not so new right” 2013 3 International Data Privacy Law 88; Orla Lynskey, The Foundations of EU Data Protection Law (OUP, 2015), pp. 89–132.

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using greater privacy12 (or the more vague term of “data ethics”) as a differentiator and source of competitive advantage.13 In addition to limits arising from data protection law, the regime of data processing chosen by a particular company can be constrained by the operation of competition law: if data constitutes the lifeblood of the information economy, it should not come as a surprise that competition authorities pay particular attention to the possible exploitative or exclusionary consequences of a given data processing practice. Due to the recent and fast-moving rise of the data-driven economy, this is a relatively unchartered area for competition enforcers; but surely one of increasing attention. In this ecosystem, it becomes important to define a consistent process for competition authorities to identify the benefits generated by data practices, in order to distinguish between desirable and undesirable conduct. This challenge also brings to the fore one important question: to what extent should authorities account for data protection considerations in competition analysis? While only scratching the surface of these broad regulatory challenges, this chapter aims to illustrate one specific reason why developing an answer to this question is important: competition and data protection law have very different mechanisms to account for innovation in relation to the use of data. To appreciate this point, it is helpful to distinguish two types of innovative data practices: data-driven innovation and data protection innovation. While data-driven innovation can be broadly characterized as the use of big data to improve production or distribution and better match customer preferences, data protection innovation creates market value through greater protection of personal data, directly responding to the concerns of mischiefs associated with the so called “surveillance capitalism”.14 Before addressing in the following section how these two types of innovation can be accounted for in competition analysis, two disclaimers

12 In this chapter, the term “privacy” is used as shorthand for “data privacy”, which is the international version of the European concept of “data protection”. The terms “privacy” and “data protection” are therefore used interchangeably in the text, unless specific reference is made to “privacy and data protection”, which refer to the broader universe of the fundamental rights enshrined in arts 7 and 8 of the EU Charter of fundamental rights. 13 For an example in this sense, see Rana Forhooar, “Privacy is a competitive advantage”, Financial Times (15 October 2017). 14 Shoshana Zuboff, “Big Other: Surveillance Capitalism and the Prospects of an Information Civilization” (2015) 30 Journal of Information Technology 75.

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are in order: first, the focus will be exclusively on formal defences that can be used to advance data-related innovation in EU competition law, disregarding the flexibilities available within more general tools, such as market definition, market power and the construction of the applicable theory of harm.15 This focus is purportedly restricted in order to illustrate the challenges in relying on the current instrumentarium for innovation justifications in a world where competition is entangled with data protection considerations. Second, the analysis is limited to data protection considerations in what is often referred to as antitrust analysis, although the broader term “competition law” will be used here. The role of data protection considerations in merger control is outside the scope of this chapter, due to its substantially different type of analysis (inherently prospective and administrative in nature) and the different form of integration between the two disciplines in that context.

2. COMPETITION LAW: WHAT ROOM FOR INNOVATION CONSIDERATIONS? Efficiency and the (Other?) Goals of Competition Law There are conflicting views in the literature and the case law concerning the aims that EU competition law is supposed to serve. According to the European Commission, competition law’s ultimate aim is to protect consumer welfare and promote the efficient allocation of resources.16 However, the European Court of Justice has endorsed a different formulation of this goal, emphasizing that competition law protects “the

15 See for instance Marcus Glader, Innovation Markets and Competition Analysis: EU Competition Law and US (Edward Elgar Publishing, 2006). Pablo Ibáñez Colomo, “Restrictions on Innovation in EU Competition Law” (2016) 41 (2) European Law Review 201; Howard Shelanski, “Information, Innovation, and Competition Policy for the Internet” (2013) 161 University of Pennsylvania Law Review 1663. 16 See Commission Notice: Guidelines on the application of Article 81(3) of the Treaty [2004] OJ C101/97, para. 13; see also Commission Notice: Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements [2004] OJ C101/2, para. 5. See also Victoria Daskalova, “Consumer Welfare in EU Competition Law: What Is It (Not) About?” (2015) 11 (1) Competition Law Review 131.

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structure of the market”,17 “competition as an institution”,18 or “competition as such”.19 This formulation aligns with the conventional interpretation of the Treaty rules,20 and is reinforced by recent EU Commission references to parallel Treaty goals that found protection through competition law, such as supporting growth, jobs and the competitiveness of the EU economy and fostering a competition culture.21 In the face of the open question in economic theory on the nature of the relationship between market structure and innovation,22 Larouche and 17

See e.g. Case 85/76, Hoffman La Roche AG v Commission [1979] ECR 461, para. 91; NV Nederlandsche Banden Industrie Michelin v Commission of the European Communities (Michelin I) [1983] ECR 3461, para. 70. 18 Opinion of Advocate General Kokott, Case C-95/04, British Airways v Commission [2007] ECR I-2331, para. 69. 19 See e.g. Case C-501/06 P, GlaxoSmithKline Services Unlimited tegen Commissie van de Europese Gemeenschappen [2009] ECR I-09291, para. 63; Case C-209/10, Post Danmark, ECLI:EU:C:2012:172, paras 21–24. 20 See, for instance: Ioannis Lianos, “Some Reflections on the Question of the Goals of EU Competition Law”, in Ioannis Lianos and Damien Geradin (eds), Handbook on European Competition Law: Substantive Aspects (Edward Elgar Publishing, 2013); Oles Andriychuk, “Rediscovering the Spirit of Competition: On the Normative Value of the Competitive Process” (2010) 6 (3) European Competition Journal 575; Eugène Buttigieg, Competition Law: Safeguarding the Consumer Interest. A Comparative Analysis of US Antitrust Law and EC Competition Law (Wouters Kluwer, 2009); Josef Drexl, Wolfgang Kerber and Ruppercht Podszun (eds), Competition Policy and the Economic Approach – Foundations and Limitations (Edward Elgar Publishing, 2010); Paul Nihoul, “‘Freedom of Choice’: The Emergence of a Powerful Concept in European Competition Law” (2012) 3 (12) Concurrences 55; Okeoghene Odudu, “The Wider Concerns of Competition Law” (2010) 30 (3) Oxford Journal of Legal Studies 599; Christopher Townley, Article 81 EC and Public Policy (Hart Publishing, 2009); Ben van Rompuy, Economic Efficiency: The Sole Concern of Modern Antitrust Policy? Non-Efficiency Considerations under Article 101 TFEU (Wouters Kluwer, 2012); D. Zimmer (ed.) The Goals of Competition Law (Edward Elgar Publishing, 2012). 21 See Commission Staff Working Paper Accompanying the Report From The Commission on Competition Policy 2011, p. 3; Joaquin Almunia, “Competition policy for the post-crisis world: A perspective”, available at . For more detail, see Victoria Daskalova, “Consumer Welfare in EU Competition Law: what is it (not) about? (2015) 1 The Competition Law Review 11, 14. 22 See in particular Joseph Schumpeter, Capitalism, Socialism and Democracy (Harper & Row, 1947); Kenneth J. Arrow, “Economic Welfare and the Allocation of Resources for Invention”, in R. Nelson (ed.), The Rate and Direction of Inventive Activities: Economic and Social Factors (Princeton University Press, 1962); Philippe Aghion et al., “Competition and Innovation: An

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Schinkel submit that the EU’s focus on the competitive process is precisely what gives competition enforcers sufficient latitude to protect “innovation paths”, ensuring that firms have the ability to present new products and services to their customers.23 Key to their argument is the recognition that for each success story, there are many similar undertakings that fail to win the favor of their customers; and that for this reason, it is important that competition law preserves the ability of those undertakings to “find their way to the market”.24 In this sense, what has been called “freedom to compete”25 may constitute an important element of innovation policy, under the assumption that it will produce dynamic efficiencies. Accepting this premise, the question becomes whether this comprehensive notion of “competition” can be pinned down to more specific benchmarks. The debate in this respect has been framed as one of whether competition law should protect any value other than economic efficiency,26 or whether broader public policy objectives should enter competition analysis.27 While contributions to the debate have been insightful, one can observe a tendency to abstract from the economic character of competition law, quickly leading to the argument that competition enforcers should also protect other values.28 In the author’s view, this argument conflates the two different issues of definition of economic efficiency in EU competition law, on the one hand, and Inverted-U Relationship” (2005) 120 Quarterly Journal of Economics 701; Jonathan B. Baker, “Beyond Schumpeter vs. Arrow: How Competition Fosters Innovation” (2007) 3 Antitrust Law Journal 575. 23 Pierre Larouche and Marteen Pieter Schinkel, “Continental Drift in the Treatment of Dominant Firms: Article 102 TFEU in contrast to Section 2 Sherman Act”, in Daniel Sokol (ed.), Oxford Handbook of International Antitrust Economics (Oxford University Press, 2014). 24 Ibid. 25 Pinar Akman, “The Role of Freedom in Competition Law” (2014) 34 (2) Oxford Journal of Legal Studies 183; Liza Lovdahl Gormsen, A Principled Approach to Abuse of Dominance in European Competition Law (CUP, 2012). 26 See in this regard, the 2014 annual conference held at the American Antitrust Institute entitled “The Inefficiencies of Efficiency”, and the related paper and supporting materials, at . See also van Rompuy, note 20 above. 27 See Townley, note 20 above; Giorgio Monti, “Article 81 EC and Public Policy” 39 (2002) 5 Common Market Law Review 1057. 28 See e.g. van Rompuy, note 20 above; Suzanne Kingston, Greening Competition Policy (CUP, 2012); Federico Ferretti, EU Competition Law, the Consumer Interest and Data Protection: The Exchange of Consumer Information in the Financial Sector (Springer, 2014).

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institutional coherence of the EU, on the other. The latter in particular is ensured by the general policy-linking clause of article 7 TFEU,29 as well as more specific clauses of articles 8 to 16 TFEU, which prevent the Union from disregarding objectives that may have little or even nothing to do with competition analysis. It is therefore only as a matter of enforcement that these additional policies become relevant, requiring the enforcing institution (a category that includes the judiciary) to consider the impact on additional values. Yet, it is submitted that this does not allow the enforcers to imbue competition analysis with broader public policy objectives: their ultimate duty is to apply the rules so that competition in the internal market is not distorted,30 which is ostensibly an economic objective.31 A different question, which remains open, is how that economic objective should be pursued in individual cases: for example, when do choice considerations outweigh the benefits of price cuts? When (that is, with reference to what interference threshold) does the goal of the internal market trump a “pure” competition analysis? While the latter question has found some specific answers in the case law,32 we are still in the dark when it comes to the meaning of “undistorted competition” as a trade-off between static and dynamic efficiencies. Certainly, the preoccupation with the distortion of the competitive process is a central component of EU competition law. The key to understanding the notion of “competitive process” is not to be fixated on a static notion of economic efficiency, which is typically measured via price, quantity or even quality parameters given the prevailing market 29 “The Union shall ensure consistency between its policies and activities, taking all of its objectives into account and in accordance with the principle of conferral of powers”. 30 See Treaty on the Functioning of the European Union, Protocol (n. 27) on the Internal Market and Competition. 31 One may of course contend that laws and regulations contribute to the definition of the type of “competition” that is permitted in the internal market (e.g. outlawing conduct that constitutes a financial or environmental offence), thereby injecting public policy considerations into the analysis. However, the effect of those public policy considerations is to constrain the interpretation of the enforcer, rather than creating discretionary mechanisms for policy leverage. 32 See for example Case 42/84, Remia and Others v Commission [1985] ECR 2545, para 22; Joined Cases C-403/08 and C-429/08, Football Association Premier League Ltd and Others v QC Leisure and Others and Karen Murphy v Media Protection Services Ltd [2011] ECR I-9083, para 139; Joined Cases C-468/06 to C-478/06, Sot. Lélos kai Sia and Others [2008] ECR I-7139, para. 65.

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conditions. Taking into account dynamic efficiencies requires the adoption of a more complex “consumer choice” or “consumer sovereignty” approach, which has been defined as enabling customers to choose the products they consider as best to fit their needs33 and to influence the competitive process acting according to their preferences.34 This means that competition law should not protect only the consumers of a particular product: doing so may be in conflict with the interest of the consumers of other actual or potential products that would otherwise be brought to the market. As illustrated by Nihoul, this line of reasoning can be found in several cases, starting from Hoffman La Roche where the Court expressed its concern for: … the objective of undistorted competition within the common market, because – unless there are exceptional circumstances which may make an agreement between undertakings in the context of article 85 and in particular of paragraph (3) of that article permissible, [these practices] are not based on an economic transaction which justifies this burden or benefit but are designed to deprive the purchaser or restrict his possible choices of sources of supply and to deny other producers access to the market.35

However, this choice-based perspective does not provide an exhaustive answer to the question of how much these dynamic considerations ought to be weighed in competition analysis. This in itself seems appropriate, given that the weight of innovation may vary significantly depending on the industry and the specific conduct at issue.36 What is more problematic, however, is that such trade-offs are typically made in a “black box”, without an effective ability of the concerned undertakings to contest the 33 Paul Nihoul, “The Emergence of a Powerful Concept in European Competition Law”, available at or , p. 5. 34 Ioannis Lianos, “The Price/Non Price Exclusionary Abuses Dichotomy: A Critical Appraisal” (2009) 2 Concurrences Review, para. 10, citing by way of comparison the different formulation by Neil Averitt and Robert Lande, “Consumer Sovereignty: A unified theory of Antitrust and Consumer Protection Law” (1997) 65 Antitrust Law Journal 713 (“the set of societal arrangements that causes that economy to act primarily in response to aggregate signals of consumer demand, rather than in response to government directives or the preferences of individual businesses”). 35 ECJ judgment of 13 February 1979, Case 85/76, Hoffmann-La Roche & Co. AG v Commission [1979] ECR 46, at 90 (emphasis added). 36 See Mark Lemley, “Antitrust-Specific Policy for Innovation” (2011) Columbia Business Law Review 637.

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innovation theory put forward against it. This is due in no insignificant part to the limited room for defences within articles 101 and 102. Given EU competition law’s preoccupation with the competitive process in preserving consumers’ ability to choose potentially new products or services, one would expect innovation considerations to be integral part of competition analysis. From a structural perspective, however, this is not the case: for both article 101 and article 102 TFEU, innovation arguments are relegated to the tail end of the enquiry. Recognizing this structural bias in competition analysis is important given the advantage that the European Commission (or the relevant competition authority) has in framing the case, imposing on the defendant the burden of rebutting the allegations. Due the burden imposed on defending undertakings and the limited review conducted by the EU’s judicature,37 legal battles are often lost over the admissibility and success of defences to alleged infringements of EU competition law. The Place for Innovation Considerations in Article 101 Article 101(1) prohibits agreements or concerted practices that have as their object or effect the prevention, restriction or distortion of competition. This means that there are two types of restrictions: one where sufficient proof of likely anticompetitive effects must be produced (restriction by effect); and the second where such effects are presumed (restriction by object). The latter category is reserved to restrictions are revealed to be “sufficiently deleterious” to competition in light of the legal and economic context.38 The Opinion of Advocate General Wahl in Cartes Bancaires39 suggests that such revelation occurs on the basis of two alternative factors, i.e. economic science and the experience gathered 37

For a holistic assessment, see Nicolas Petit and Damien Geradin, “Judicial Review in European Union Competition Law: A Quantitative and Qualitative Assessment” in Massimo Merola and Jacques Derenne (eds), The Role of the Court of Justice of the EU in Competition Law Cases (Bruylant, 2012); Heike Schweitzer, “Judicial Review in EU Competition Law”, in Damien Geradin and Ioannis Lianos (eds), Research Handbook on EU Antitrust Law (Edward Elgar Publishing, 2014). 38 See Case C-67/13 P, Groupement des cartes bancaires (CB) v European Commission, EU:C:2014:2204, paras 359 and 360; Case C-209/07, Competition Authority v Beef Industry Development Society Ltd and Barry Brothers (Carrigmore) Meats Ltd (BIDS) [2008] ECR I-08637, para. 15; Case C-32/11, Allianz Hungária Biztosító and Others, EU:C:2013:160, para. 34 and the case law cited. 39 Case C-67/13 P, Groupement des cartes bancaires (CB) v European Commission, EU:C:2014:2204.

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by the court. Furthermore, the Commission observes that (nonexhaustive) guidance in this respect can be found in its block exemption regulations, guidelines and notices – in particular, suggesting that “blacklisted” or “hardcore” restrictions in those documents would generally be considered “by object”. In the former category, a balancing takes place to determine whether the loss in intra-brand competition as a result of the agreement is necessary to improve inter-brand competition, or vice versa.40 If this is the case, then the agreement falls outside article 101(1) because it does not produce likely anticompetitive effects. However, when an agreement between undertakings falls within the prohibition of article 101(1), it can still be exempted under article 101(3) under the following well-known conditions: (a)

the agreement must contribute to improving the production or distribution of goods or contribute to promoting technical or economic progress; the agreement should allow consumers a fair share of the resulting benefits; the restrictions must be indispensable to the attainment of these objectives; and the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

(b) (c) (d)

The articulation of each of these conditions has been addressed in detail by the Commission Guidelines, its case law, and expanded upon by scholarly contributions on the subject.41 For purposes of this discussion, it suffices to highlight an important difference between the balancing conducted under article 101(1) and the similar exercise undertaken pursuant to article 101(3). As clearly stated by the Commission42 and

40

See Joined Cases 56/64 and 58/66, Consten and Grundig [1966] ECR 429. See also Commission Notice: Guidelines on the application of Article 81(3) of the Treaty [2004] OJ C101/97, para. 17. 41 See e.g. van Rompuy, note 20 above; Saskia King, Agreements that restrict competition by object under Article 101(1) TFEU: past, present and future. PhD thesis, The London School of Economics and Political Science, available at . 42 See Commission Guidelines, para. 11.

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the Courts,43 it is exclusively within article 101(3) that an assessment is made of the pro-competitive benefits produced by that agreement, and of whether they outweigh the anti-competitive effects. Thus, the exercise conducted under article 101(1) is one of different nature. The Guidelines provide more specific insight on what that exercise entails: first, it requires a comparison of the state of competition in the absence of the agreement with the one resulting from the existence of the same: the so-called “counterfactual”.44 Second, for the purposes of analyzing the restrictive effects of an agreement, the Commission explains that it is normally necessary to define the relevant market,45 and to assess inter alia “the nature of the products, the market position of the parties, the market position of competitors, the market position of buyers, the existence of potential competitors and the level of entry barriers”. One may not call this analysis “balancing” in a technical sense,46 but it is in practice a multi-factor test with the same logic, where each element can weigh in favor or against a finding of anticompetitiveness. Although according to the Commission this exercise does not evaluate the benefits to competition stemming from the agreement, this type of evaluation is in fact often implicit in weighing different dimensions of competition, such as interbrand versus intrabrand. However, this test explicitly weeds out the assessment of improvements in quality, productivity, and dynamic efficiencies more generally, even though those may well have significant implications on interbrand and intrabrand competition. On the other hand, the test incorporates an additional component that recognizes the necessity of certain restrictions of competition as a means to obtain legitimate objectives. This so-called “ancillarity” concept has 43

See Case T-522/03, Van den Bergh Foods [2003] ECR II-04653, para. 107; Case T-112/99, Métropole télévision (M6) and others [2001] ECR II-2459, para. 74. 44 See e.g. Damien Geradin and Ianis Girgenson, “The Counterfactual Method in EU Competition Law: The Cornerstone of the Effects-Based Approach” in Jacques Bourgeois and Denis Waelbroeck (eds), Ten Years of Effects-based Approach in EU Competition Law (Bruylant, 2013). 45 However, the Guidelines also skip market definition and show anticompetitive effects directly, by analyzing the conduct of the parties to the agreement on the mark. See Guidelines, para. 27. However, it is clear that such assessment can be done only for very serious violations, and always by adopting a tentative and hypothetical market definition to initiate the assessment. 46 From a narrow definitional standpoint, balancing means “considering the competing interests of the litigants (or of society more generally) and giving judgment for the side with the weightier interests”. See Patrick M. McFadden, “The Balancing Test” (1988) 29 Boston College Law Review 585.

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been implicitly part of EU competition law since Société Technique Miniere v Mascinenabau Ulm, where the Court held that an exclusive license to a distributor does not infringe article 101(1) to the extent that it is “really necessary for the penetration of a new area by an undertaking”.47 The issue of necessity was also central in evaluating the ancillarity of exclusive licensing to intellectual property in Nungesser KG v Commission48 and Coditel v Cine Vog Films Sa (No. 2),49 both revolving around the appropriate amount of exclusivity that would attract sufficient investment. Thus, an observation of these early cases suggested that, by allowing the imposition of restrictions commensurate to securing the appropriate incentive for investment, the Court effectively incorporated dynamic considerations through the backdoor of article 101(1). However, subsequent case law significantly narrowed the room for this dynamic interpretation: distilling the concept of ancillarity from the guidelines for the assessment of joint ventures (and in particular, the notices on ancillary restrictions50 and on joint ventures51), the General Court ruled in Metropole that “ancillary restraints” refer to those that are “objectively necessary” to implement an operation.52 Specifically, the evaluation of “necessity” cannot imply an assessment, in the light of the competitive situation on the relevant market, of whether the restriction is indispensable to the commercial success of the main operation,53 or the establishment of the undertaking on the market on a long-term basis.54 In other words, it appears that indispensability cannot be used to justify restrictions that secure profits going beyond short-term commercial viability. This rigid approach to the interpretation of necessity was confirmed by the recent judgment in Mastercard v Commission, where 47

Case 56/65, Société Technique Minie′re v Maschinenbau Ulm [1966] ECR 235, para. 250. 48 Case 258/78, Nungesser KG and Kurt Eisele v Commission [1982] ECR 2015. 49 Case 262/81, Coditel SA v Cine Vog Films SA (No. 2) [1982] [2001] ECR II-02459. 50 Commission Notice on restrictions directly related and necessary to concentrations [2005] OJ C56/24. 51 Commission Notice on the concept of full-function joint ventures under Council Regulation (EEC) No. 4064/89 on the control of concentrations between undertakings [1998] OJ C66/1. 52 Case T-112/99, Métropole télévision (M6), Suez-Lyonnaise des eaux, France Télécom and Télévision française 1 SA (TF1) v Commission of the European Communities [2001] ECR II-02459, para. 109. 53 Ibid., para. 115. 54 Ibid., para. 120.

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the Court held that the mere fact that the operation is more difficult to implement without the restriction, or even less profitable, cannot justify a claim “objective necessity”.55 Clearly, this stringent notion of “indispensability” does not bode well with the uncertainty that is intrinsic to innovation processes, or with their non-linear ability to generate additional consumer demand. As a result, using this limited escape permitted under article 101(1) seems inappropriate in the absence of an ability to provide the decision-maker with a detailed plan of quantification, a timeline for materialization of the expected gains, and an explanation of why the restriction(s) would be indispensable to that end. There is also another possible line of defence with regard to ancillarity. Whereas the majority of cases referred to a notion of ancillarity based on necessity for a commercial transaction, a few of them revolved around necessity for the fulfillment of a regulatory function entrusted to a particular private entity. The Court considered that account must be taken of the objectives pursued by the decision of the association, which it found to be connected “with the need to make rules relating to organization, qualifications, professional ethics, supervision and liability, in order to ensure that the ultimate consumer of legal services and the sound administration of justice are provided with the necessary guarantees in relation to integrity and experience”. Subsequent cases have held this “regulatory ancillarity” doctrine applicable to other public authorities, such as the Portuguese Order of Chartered Accountants (Oficiais de Conta),56 the Association of Italian Geologists (Italian Geologists)57 and the Italian Observatory for road traffic safety and social security (Consulta generale per l’autotrasporto e la logistica).58 The notion of public authority has been extended to international regulatory bodies recognized by international law, such as the International Olympic Committee (Meca 55 Case C-382/12, MasterCard Inc. and Others v European Commission (not yet published), para. 91. Note that this seems to overrule the standard proposed by the Commission in its Guidelines, which refers to difficulty in implementation of the non-restrictive transaction as a valid basis for ancillarity claims. See See Commission Notice: Guidelines on the application of Article 81(3) of the Treaty [2004] OJ C101/97, para. 31. 56 Case C-1/12, Ordem dos Técnicos Oficiais de Contas v Autoridade da Concorrência [2013] 4 CMLR 20. 57 Case C-136/12, Consiglio nazionale dei geologi v Autorità garante della concorrenza e del mercato and Autorità garante della concorrenza e del mercato v Consiglio nazionale dei geologi [2013] 5 CMLR 40. 58 Joined Cases C-184/13 to C-187/13, C-194/13, C-195/13 and C-208/13, API – Anonima Petroli Italiana SpA, ECLI:EU:C:2014:2147.

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Medina).59 However, it is more controversial whether such doctrine can be invoked by private organizations that have not been officially entrusted with authority by the State.60 There is no case law supporting this interpretation, and the ECJ ruling in Slovak Banks seems to suggest otherwise, clarifying that it is not for private undertaking to take steps to ensure compliance with legal requirements.61 This would seem to apply a fortiori where undertakings appeal to the pursuit of self-proclaimed public interests in order to take actions that amount to an infringment of competition law. It is therefore through article 101(3) that innovation can more realistically be pleaded as a defence to what would otherwise constitute an agreement in violation of article 101. Although the test of article 101(3) appears on its face as demanding as article 101(1) when it comes to indispensability, the Commission has suggested a more flexible interpretation, by referring to any restriction being “reasonably necessary” for the efficiency in question.62 Importantly, the focus of this analysis is not whether in the absence of the restriction the agreement would not have been concluded (as in the case of ancillarity), but rather whether more efficiencies are produced with the agreement or restriction than in the absence of the agreement or restriction.63 Furthermore, the Guidelines specify that the Commission will not use (potentially demanding) hypothetical or theoretical alternatives as benchmarks for the counterfactual. Counterfactuals offered by the undertakings will be readily accepted, unless “it is reasonably clear that there are realistic and attainable alternatives”.64 Nevertheless, the test under article 101(3) presents at least four significant obstacles for the incorporation of data protection and datadriven innovation. First, it is too deterministic for the kind of innovation that is generated today by the accumulation and use of data. In particular, the test requires under its first prong to “describe and explain in detail what is the nature of the efficiencies and how and why they constitute an 59 Case C-519/04 P, David Meca-Medina and Igor Majcen v Commission of the European Communities [2006] ECR I-06991. 60 In this sense, see Richard Wish and David Bailey, Competition Law (5th edn, OUP, 2015), p. 141. Cf. Katarina Pijetlovic, EU Sports Law and Breakaway Leagues in Football (Springer 2015), pp. 153–154. 61 Case C-68/12, Protimonopolný úrad Slovenskej republiky v Slovenská sporiteľňa as, EU:C:2013:71, para. 20. 62 Commission Guidelines, para. 73. 63 Ibid., para. 74. 64 Ibid., para. 75 (emphasis added).

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objective economic benefit”.65 Where the agreement has yet to be fully implemented, the explanation must include any projections as to the date from which the efficiencies will become operational so as to have a significant positive impact in the market.66 In the case of data-driven innovation, this seems like fitting a square peg into a round hole: since it is claimed that big data is reversing the direction of discovery, using data to foster hypotheses rather than “prove” existing hypotheses,67 the idea of predetermining the outcome of the innovation process seems irreconcilable with the very concept of big data – at least as long as a competition authority will not relax the requirements of specificity and quantifiability.68 In the case of data protection innovation, the main problem is again one of quantifiability and commensurability: without a specific value attributed to enhanced data protection, how can it be balanced against a restriction of competition? A second hurdle is the narrow focus on economic efficiency for the purposes of the first prong of this test. The Guidelines limit the pursuit of goals of other Treaty provisions to the extent that they cannot be subsumed under the four conditions of article 101(3).69 In fact, the practice of the Commission is to frame broader welfare benefits such as environmental protection,70 sustainable development71 and employment72 as part of the efficiency test. Unfortunately, a canonic interpretation of economic efficiency as the maximization of welfare would fail to capture the improvement in privacy protection generated for consumers, unless a market for the product with additional privacy can be readily 65

Ibid., para. 57. Ibid., para. 58. 67 Victor Mayer-Schoenberger and Yann Padova, “Regime Change? Enabling Big Data through Europe’s New Data Protection Regulation” (2016) 17 Columbia Science and Technology Law Review 315, 319. 68 For a recommendation in this sense, see Miguel De la Mano, “For the customer’s sake: The competitive effects of efficiencies on the European merger control”, 11 (2009) European Commission’s Enterprise Directorate-General Enterprise Papers, para. 52. 69 Commission Guidelines, para. 42. 70 Exxon/Shell (Case IV.33.640) Commission Decision 94/322/EC [1994] OJ L144/20. 71 CECED (Case IV.F.I/36.718) Commission Decision 2000/475/EC [2000] OJ L187/47. 72 Synthetic Fibers (Case IV/30.810) Commission Decision 84/380/EEC [1984] OJ L207/17, paras 37–38; Stichting Baksteen (Case IV/34.456) Commission Decision 94/296/EC [1994] OJ L131/15, paras 27–28; Ford/Volkswagen (Case IV/33.814) Commission Decision 93/49/EC [1993] OJ L20/14. 66

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identified.73 Although one could make speculations about the desire of consumers to receive such protections, in the absence of specific surveys or other measurement techniques, they are likely to be dismissed as unsubstantiated.74 A third obstacle lies in the heterogeneous preferences of consumers, in relation to the requirement to pass on a fair share of the benefits to consumers. While the Commission has taken (in line with the case law) a broad interpretation that includes final and intermediate consumers,75 less flexibility is provided with regard to the identification of the group of consumers to which the benefits must accrue. In particular, the Commission requires the efficiencies generated by the restrictive agreement within a relevant market to be sufficient to outweigh the anti-competitive effects produced by the agreement within that same relevant market. Only in the case of substantial consumer commonality with the market affected by the restriction, can the efficiencies achieved in a separate market be taken into account.76 It should be noted that the EU case law does not offer consistent support for this requirement,77 and most recently in Mastercard expanded the scope for cross-market efficiency analysis by accepting efficiencies in a connected market even in the absence of consumer commonality, as long as those benefits produce “objective advantages” for the consumers in the market concerned.78 73

A fitting example to give an idea of this type of complexity is the “Chickens for Tomorrow” case decided in 2015 by the Dutch competition authority. The authority released a full paper explaining the economic analysis it conducted to attribute a market value to increased animal welfare. See Authority for Consumers and Markets, “ACM’s analysis of the sustainability arrangements concerning the ‘Chicken of Tomorrow’” (26 January 2015), available at . 74 For the same reason, Townley advocates for the incorporation into the assessment of wider social and environmental costs and benefits, for which there is no market price. See Townley, note 20 above. 75 Commission Guidelines, para. 84. 76 See ibid., para. 43, referring to Case T-131/99, Shaw [2002] ECR II-2023, para. 163; Case C-360/92 P, The Publishers Association v Commission [1995] ECR I-23, para. 29. See also Continental/United/Lufthansa/Air Canada (Case COMP/39.595) Commission Decision of 23 May 2013. 77 See Case T-86/95, Compagnie Générale Maritime and Others [2002] ECR II-1011, paras 343–345; Case T-168/1, GlaxoSmithKline Services Unlimited v Commission [2006] ECR II-2969, para. 248. 78 Case C-382/12P, Mastercard and Others v Commission, EU:C:2014:2201, para. 241.

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However, while the feedback effects generating the objective advantages in that judgment were grounded on the clear interdependency between two-sided payment markets, it seems harder to claim such objective advantage where the product in one market is simply used as “bait” for acquiring customer data to be used in a variety of different markets, often unbeknown to consumers and for different purposes than those upon which they agreed to the disclosure. On a more positive note, the “objective advantage” formulation opens the possibility to consider broader benefits than the efficiencies described in the Guidelines, though it remains to be seen whether the advantage must materialize on the other side of a two-sided market. What this implies for terms of data-driven innovation, in particular when it comes to personal data, is that the test will not be satisfied in the absence of a feedback loop going back to the market in which the customer data was collected. The benefit does not need to accrue to each and every consumer of that group,79 but one may wonder whether there would be a sufficient number of consumers that for instance consider behaviorally targeted advertising an “objective advantage”. Finally, the fourth obstacle to the incorporation of innovation considerations within article 101(3) is the fulfillment of its fourth condition (no elimination of competition). While this condition provides a safeguard against efficiencies that undermine the competitive process, the challenge lies in fitting into this notion of competition a dynamic perspective – competition for the market as opposed to competition in the market. This seems to be disfavored by the Commission’s reliance on the presumption that when competition is eliminated, the agreement’s long-term welfare losses will outweigh short-term efficiency gains.80 The challenge presented by this condition for the incorporation of dynamic considerations is also apparent in the case for restrictive agreements that could potentially be justified on data-driven innovation grounds: for example, a shared data repository among competitors to keep track of trends and predict future prices on the basis of recent historical data might increase industry know-how, but also constitute a red flag for its facilitation of collusion. A different reasoning would apply to apparently anticompetitive conduct that produces important data protection innovation, such as a boycott among browser vendors against websites that track users across the web. In that context, it can be argued that the condition 79

See Commission Guidelines, para. 86; and Case C-238/05, Asnef-Equifax v Ausbanc [2006] ECR I-11125, para. 70. 80 Commission Guidelines, para. 105.

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of “no elimination of competition” militates against granting an article 101(3) exemption for an action that proactively shapes a particular consumer demand for privacy (as it eliminates price competition that would otherwise exist), but legitimates one aimed at satisfying an existing demand for it (as the reduction in price competition is outweighed by the increase in another existing dimension of competition). The Place for Innovation Considerations Within Article 102 Article 102 TFEU prohibits undertakings from abusing their dominant position in the market, making reference to an indicative list of abusive practices. However, that list is incomplete on the conditions under which such practices materialize. It has therefore been the task of the Commission and the Courts to give content to such categories. This has led to the identification of a number of categories of conduct falling within the definition of so called ‘prima facie’ abuse. This characterization, in recognition of the inherent difficulty in the area of unilateral conduct to distinguish between aggressive competition from conduct that harms consumers, rules out the existence of so-called “per se” or “object” abuses under article 102.81 The conclusive establishment of abuse can indeed be avoided by a defendant, either showing efficiency benefits that outweigh any anticompetitive effects, or alleging an objective justification for that conduct. This bi-partite structure of article 102, where efficiencies are not assessed as an integral part of the initial assessment but on a separate and additional step, is not immune from criticism. It is typically justified on the premise that a dominant undertaking has the special responsibility not to distort competition, which is already endangered by the presence of the undertaking in question.82 This section does not aim to make sense of the test devised for prima facie abuses, which has been discussed at length in the literature.83 In contrast, it provides highlights of 81 See in this sense, the Opinion of AG Colomer in Joined Cases C-468/06 to C-478/06, Sot. Lélos kai Sia v GlaxoSmithKline [2008] ECR I-7139, para. 75. 82 See Case 85/76, Hoffman La Roche AG v Commission [1979] ECR 461, para. 91. 83 See, among the many excellent contributions, Pinar Akman, The Concept of Abuse (Hart Publishing, 2012); Ekatrina Rousseva, Rethinking Exclusionary Abuses in EU Competition Law: Rethinking Article 82 of the EC Treaty (Hart Publishing, 2010); Renato Nazzini, The Foundations of European Union Competition Law: The Objective and Principles of Article 102 (OUP, 2011); Liza

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the difficulties faced by defendants in raising such considerations as justifications. The first, most obvious ground for defence is the efficiency justification. While the case law has not always been consistent on the admissibility of such justifications,84 it is now well settled that in an abuse of dominance inquiry, “it has to be determined whether the exclusionary effect … may be counterbalanced, or outweighed, by advantages in terms of efficiency which also benefit the consumer”.85 Furthermore, since its 2009 Guidance Paper, the Commission offered a framework for evaluating efficiencies within article 102 that bears a striking resemblance to article 101(3). Its four conditions are: (a) (b) (c)

(d)

the efficiencies have been, or are likely to be, realized as a result of the conduct; the conduct is indispensable to the realization of those efficiencies; the likely efficiencies brought about by the conduct outweigh any likely negative effects on competition and consumer welfare in the affected markets; and the conduct does not eliminate effective competition, by removing all or most existing sources of actual or potential competition.86

This framework, subsequently endorsed by the Court of Justice in Post Danmark and Telia Sonera87 was hailed as a welcome step towards the legalization of a more economic approach to article 102.88 But not without some criticism for the high bar imposed on defendants for

Lovdahl-Gormsen, A Principle Approach to Abuse of Dominance (Cambridge University Press, 2012). 84 Compare: Case 322/81, Michelin I [1983] ECR I-3461, para. 85; Case C-202/07, France Télécom [2009] ECR I-2369, para. 217; Atlantic Container [1983] ECR I-3461, [2003] ECR II-03275, para. 1112; with Case T-203/01, Michelin II [2003] ECR II-4071, para. 98; Case C-95/04 P, British Airways plc [2007] ECR I-2331, paras 69 and 86; Case T-201/04, Microsoft [2007] ECR II-3601, para. 1135; Case C-52/09, TeliaSonera [2011] ECR I-527, para. 76. 85 Case C-95/04 P, British Airways plc v Commission [2007] ECR I-2331. 86 Guidance Paper, para. 30. 87 Case C-209/10, Post Danmark v Konkurrencerådet, ECLI:EU:C:2012: 172, para. 42; Case C-52/09, TeliaSonera [2011] ECR I-527, para. 76. 88 Christian Alborn and Jorge Padilla, “From Fairness To Welfare: Implications for the Assessment of Unilateral Conduct under EC Competition Law”, in Mel Marquis and Claus-Dieter Ehlermann, European Competition Law Annual 2007: A Reformed Approach to Article 82 EC (OUP, 2008).

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efficiency claims:89 due to it being essentially a replication of article 101(3), it carries with it many of the problems illustrated in section 2.2 above. Instead of repeating the same analysis conducted there, it is sufficient to make two observations: first, the conditions for efficiency under article 102 do not contain a requirement of “fair share” of benefits to consumers. While this appears to be a relaxation of the bar imposed in article 101(3), the Guidance Paper in fact suggests that this is inextricably linked to, and arguably subsumed within, the fourth condition: “In [the] absence [of rivalry between undertakings] the dominant undertaking will lack adequate incentives to continue to create and pass on efficiency gains”.90 Second, the requirement of no elimination of effective competition appears to be significantly more restrictive in the case of a dominant company. The Paper’s assertions that “Where there is no residual competition and no foreseeable threat of entry, the protection of rivalry and the competitive process outweighs possible efficiency gains”91 reveal a fundamental distrust for innovations carried out by dominant firms that can act unconstrained from competition in the relevant market. This is only partly mitigated by the statement that “[E]xclusionary conduct which maintains, creates or strengthens a market position approaching that of a monopoly can normally not be justified on the grounds that it also creates efficiency gains”.92 All in all, the wording suggests that the conduct of a dominant firm (at least when it approaches a monopoly) will be scrutinized under article 102 for any potential exclusionary effects it may cause – even where it is proven to generate immediate and substantial efficiencies. In addition to efficiency, a firm can raise a defence based on an objective justification. This defence relates to public policy concerns or other objective factors, i.e. that are beyond the control of the undertaking, which force it to take a particular course of conduct.93 For example, a refusal to deal could be justified by a legitimate concern that sharing a 89 See e.g. John Temple Lang, “Judicial review of competition decisions under the European Convention on Human Rights and the importance of the EFTA court: the Norway Post judgment” (2012) 38 European Law Review 464, 487; Hans W Friederiszick and Linda Gratz, “Dominant and Efficient – On the Relevance of Efficiencies in Abuse of Dominance Cases”, in OECD Policy Roundtables, The Role of Efficiency Claims in Antitrust Proceedings 2012 (DAF/COMP(2012)23), p. 38. 90 Guidance Paper, para. 30. 91 Ibid., para. 31. 92 Ibid. (emphasis added). 93 Ekatrina Rousseva, “The Concept of Objective Justification” (2006) 2 Competition Law Review 27, 28–29.

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facility would undermine its quality, security, or safety.94 Likewise, a restriction of parallel trade can be justified on the basis of differences in national regulation, to the extent that (a) State intervention is one of the factors liable to create the opportunities for parallel trade in the first place and (b) a different interpretation of article 102, rejecting any possibility of justification, would have left dominant firms only the choice “not to place its medicines on the market at all in a Member State where the prices of those products are set at a relatively low level”.95 Along the same lines, one can infer from the Commission’s decision in Port of Genoa96 and Spanish Airports97 that the protection of the environment may constitute an objective justification to a prima facie abuse.98 Potentially, this justification is highly valuable for a dominant undertaking in the data-driven economy, as it opens the door for the incorporation of data protection innovation so long as this is not disproportionate (for example, installing automatic browser ad blocking which by default blocks all domains from a competitor). However, it is important to bear in mind that not all actions can be taken by an undertaking in the name of objective necessity: the Commission warns in its Guidance Paper that proof of whether conduct of this kind is objectively necessary must take into account the competences defined by the applicable regulatory framework, for example recognizing that it is normally the task of public authorities to set and enforce public health and safety standards.99 As the Court explained in Hilti, “it is not the task of a dominant undertaking to take steps on its own initiative to exclude products which it regards, rightly or wrongly, as dangerous or inferior to its own product”.100 This 94

FAG-Flughafen Frankfurt/Main AG [1998] OJ L72/30. Joined Cases C-468/06 to 478/06, Sot Lelos kai Sia v GlaxoSmithKline [2008] ECR I-7139, paras 67–68. 96 Commission Decision 97/745/EC of 21 October 1997 relating to a proceeding pursuant to Article 90(3) of the EC Treaty regarding the tariffs for piloting in the Port of Genoa [1997] OJ L301/27. 97 Commission Decision 1999/199/EC of 10 February 1999 relating to a proceeding pursuant to Article 90 of the Treaty (Case No IV/35.703 – Portuguese airports) (notified under document number C(1999) 243 [1999] OJ L69/31. 98 T. Vijver, Objective justification and Prima Facie anti-competitive unilateral conduct: an exploration of EU Law and beyond. University of Leiden Dissertation (2014), available at . 99 Guidance Paper, para. 29. 100 Case T-30/89, Hilti v Commission [1991] ECR II-1439, paras 118–119; See also Case T-83/91, Tetra Pak International v Commission (Tetra Pak II) [1994] ECR II-755, paras 83, 84, 138. 95

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line of cases seems to suggest that, somewhat in parallel with article 101(1), the use of public policy as a justification is confined within the competences that are attributed to undertakings under the existing regulatory framework. Unlike article 101(1), however, this defence seems to leave room for undertakings who have not been officially entrusted with a public function to take initiative for the protection of public policy, to the extent that this is recognized as a valid public policy and does not clash with the regulatory system in place. Once again, the concept of justification implies that the measures taken must be proportionate, meaning that they will not be considered valid if there are less restrictive alternatives. From a data protection innovation standpoint, it will be interesting to see whether a broader concept of restrictiveness could be used, which is not limited to the effects on competition, but considers the impact of a measure on conflicting rights and interests protected by the Treaty (such as freedom of expression, for instance). Perhaps one way to reconcile the test with the importance of human rights in the EU is by reading the requirement of respect for fundamental rights into the notion of competition that the Treaty protects (as would be required by article 51 of the Charter of Fundamental Rights).101 A particular example of objective justification is the conduct of “competition on the merits”. By this term, courts generally refer to conduct whereby an undertaking takes reasonable and proportionate steps to protect its own commercial interests, even if such protective measures might have some exclusionary effect.102 It is thus apparent that this concept provides more leeway than the above-mentioned efficiency defence. The ruling of the Court in Post Danmark I offered a more telling characterization of the concept: 101

According to art. 51, “The provisions of this Charter are addressed to the institutions and bodies of the Union with due regard for the principle of subsidiarity and to the Member States only when they are implementing Union law. They shall therefore respect the rights, observe the principles and promote the application thereof in accordance with their respective powers” (emphasis added). 102 See e.g. Case 27/76, United Brands, EU:C:1978:22, para. 189. See also e.g. Joined Cases C-468/06 to C-478/06, Sot. Lélos kai Sia v GlaxoSmithKline [2008] ECR I-7139, para. 69; Case T-65/89, BPB Industries and British Gypsum v Commission [1993] ECR II-389, para. 9; Case C-280/08, Deutsche Telekom [2010] ECR I-9555, para. 177; Case C-457/10, AstraZeneca AB and AstraZeneca plc v European Commission, ECLI:EU:C:2012:770, para. 130; Konkurrensverket v Telia Sonera Sverige AB [2011] ECR I-527, para. 24; Case T-219/99, British Airways v Commission [2003] ECR II- 5917, para. 243.

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[N]ot every exclusionary effect is necessarily detrimental to competition … Competition on the merits may, by definition, lead to the departure from the market or the marginalisation of competitors that are less efficient and so less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation.103

It follows that any conduct appealing to customers on the basis of price, choice, quality and innovation constitutes competition on the merits, as long as the pursuit of those dimensions of competition is accomplished through reasonable and proportionate measures by the dominant firm. Arguably, the special responsibility attributed to such firms by EU competition law justifies a finding of infringement where the exclusionary effect of a measure outweighs its pro-competitive impact on any of those dimensions. This explains the “proportionate” part of the defence; however, it still leaves us with the open question of what constitute “reasonable” steps, which seems to imply a balancing test. While it is impossible in the absence of clarifying decisions to forecast all possible flavors of “unreasonableness”, one discerning line to narrow down the ranges of conduct that are admissible to protect one’s own commercial interest could be found in the violation of other laws. It is true, in that respect, that the Court ruled in AstraZeneca that “the illegality of abusive conduct under Article 102 TFEU is unrelated to its compliance or non-compliance with other legal rules and, in the majority of cases, abuses of a dominant position consist of behaviour which is otherwise lawful under branches of law other than competition law”.104 However, AstraZeneca concerned the different scenario where an undertaking had not infringed the law applicable in addition to competition law – but rather had used that law strategically. As a result, it is arguable that the “unrelated” characterization in that ruling should not be interpreted per se as a bar to considering non-compliance with “extra-competition” rules as a factor in determining whether a particular conduct constitutes competition on the merits. In that judgment, the Court highlighted the difference between the objective of article 102 and the primary purpose of the EU legislation invoked by the defendant (Directive 65/65/EEC).105 This difference of objectives prevented compliance with pharmaceutical regulation from 103

Case C-209/10, Post Danmark, ECLI:EU:C:2012:172, para. 19. Case C-457/10, AstraZeneca AB and AstraZeneca plc v European Commission, ECLI:EU:C:2012:770, para. 132 (emphasis added). 105 Council Directive 65/65/EEC of 26 January 1965 on the approximation of provisions laid down by Law, Regulation or Administrative Action relating to proprietary medicinal products [1965] OJ L22/369. 104

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being used as a “safe harbor” for purposes of enforcement of competition law, which would otherwise be required from a ne bis in idem perspective. This aligned with previous cases where the Court rejected the idea of non-intervention by competition law into the self-contained regime for telecom regulation, by holding that even the encouragement of a given practice by the regulator could not absolve the dominant company from its special responsibility under article 102.106 However, the Court also explicitly recognized in Telia Sonera the inapplicability of article 102 TFEU to conduct that is explicitly required by national legislation, or where the legal framework eliminates any possibility of competitive activity.107 This means that competition law will apply irrespective of the obligations imposed by national legislation, so long as those obligations do not force undertakings to engage in conduct that prevents, restricts or distorts competition.108 If competition law is not required (except for those isolated circumstances) to take into account the regulatory frameworks in assessing the conduct of an undertaking, nothing seems to prevent competition authorities from doing so to give content to the concept of “competition on the merits”, a concept to which neither the Commission’s Guidelines nor the case law have given substantive meaning (despite the recommendations made by the OECD in this sense).109 This is a powerful instrument to encourage innovation alongside the boundaries of legitimacy offered by concurrently applicable regulatory frameworks. However, it does not provide a silver bullet for all possible interactions between competition and data protection laws (a point developed more in depth in section 4 below) and may well result in adverse effects on data protection or even on competition, if not used properly. As will become clear in the following section, there are significant specificities in the concept of innovation recognized under data protection law, suggesting that the

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Case C-280/08, Deutsche Telekom [2010] ECR I-9555, para. 84. See also Case 123/83, Clair [1985] ECR 391, para. 23 (finding that the mere fact that an agreement has been sanctioned by the public authority, thereby making it binding, cannot remove it from art. 101(1)). 107 Case C-52/09, Konkurrensverket v Telia Sonera Sverige AB [2011] ECR I-527, para. 49 (emphasis added). 108 Ibid., para. 50. 109 Wolf Souter, Coherence in Competition Law (OUP, 2015) pp. 110–111; referring to OECD Roundtables on Competition Policy Working Paper No. 56 (OECD Publications, 2005), available at .

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analysis undertaken in that context may not always be transposable in the competition field, and vice versa.

3. THE PLACE FOR INNOVATION IN DATA PROTECTION LAW A Helicopter View of EU Data Protection Law: Spotting Innovation Honey Pots Data protection law is an expanding body of EU law. The legal instrument upon which it has been based for over 20 years is the Data Protection Directive (DPD),110 which stipulates a dual objective: first, protecting the fundamental rights of individuals, and in particular the right to privacy with respect to the protection of personal data; second, the free flow of personal data in the internal market.111 The Directive sets the standards for data protection by EU Member States, thereby preventing such grounds from being raised as a barrier to data flows.112 On 25 May 2018, the Directive will be replaced with Regulation (EU) No. 2016/679, also known as the General Data Protection Regulation (GDPR), which strengthens the level of protection and introduces important changes to the existing regulatory regime.113 It should also be noted that, much like in EU competition law, a number of guiding documents have been issued to assist in the interpretation of key concepts. These guidelines are offered in the form of “advisory opinions” by the advisory body called “Article 29 Working Party” (hereinafter “A29WP”), composed of representatives of different data protection authorities in 110

Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data [1995] OJ L281/31. 111 Orla Lynskey, The Foundations of EU Data Protection Law (OUP, 2015), pp. 46–88. 112 In practice, conflicts between the two objectives may arise, for example with regard to how Member States define the implementation of the rules or the exceptions that can be invoked. See e.g. Case C-73/07, Tietosuojavaltuutettu v Satakunnan Markkinapörssi OY, Satamedia [2008] ECR I-09831. 113 Although the current analysis takes into account both of these instruments, for a comprehensive picture one should also take into account the situation in different Member States. There are indeed many areas where Member States are given wide latitude, even under the GDPR, to implement EU data protection law.

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Europe,114 and which after entry into force of the GDPR will be replaced by a similar body with expanded competences – the European Data Protection Board. By way of introduction, it should be borne in mind that data protection law applies to the processing of personal data. This means that data processing entities will not be required to follow the rules set forth in the Regulation whenever the data being processed “does not relate to an identified or identifiable natural person” (in technical jargon, a “data subject”115) or is “rendered anonymous in such a way that the data subject is no longer identifiable”.116 It follows that complete anonymization of the data collected would in principle represent a viable strategy for companies to engage in limited profiling informing their strategies, to the extent that such profiling does not raise to a level of specificity enabling the identification of any particular individual.117 However, recent studies of re-identification have shown that true anonymization is extremely hard to attain in a world of big and widely available data: simply stripping the data of some identifiers is unlikely to do the job.118 Escaping the application of data protection rules requires the deployment of “state of the art” anonymization techniques, possibly involving a combination of multiple measures. Moreover, while these techniques preserve the ability to derive insights from aggregate data, they may lessen the utility of the datasets concerned to provide correlations 114 One can question whether the same effect can be ascribed to the soft law produced by this body as with the various Guidelines and Notices in EU competition law, which the European Court of Justice has found to trigger legitimate expectations (see e.g. Joined Cases C-189, 202, 205, 208 and 213/02, Dansk Rørindustri, para. 223). Nevertheless, this chapter proceeds on the assumption that such guidelines will be followed, to the extent they have not been superseded by the GDPR. 115 See art. 4(1) GDPR. 116 To make this determination, the Regulation focuses on “whether means are reasonably likely to be used to identify the natural person, account should be taken of all objective factors, such as the costs of and the amount of time required for identification, taking into consideration the available technology at the time of the processing and technological developments”. See recital 26 GDPR. 117 Importantly, such profiling may be used only in limited circumstances to take decisions based on automated processing that significantly affect individuals. See art. 22 GDPR, and the discussion in section 3.3 below. 118 See Paul Ohm, “Broken Promises of Privacy: Responding to the Surprising Failure of Anonymization” (2010) 57 UCLA Law Review 1701. See also .

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between relevant attributes and observed or inferred behavior, which enable segmentation of population on the basis of common patterns. Recognizing the challenge, the Regulation addresses a half-baked form of anonymization, called “pseudonymization”, which consists of “the processing of personal data in such a manner that the personal data can no longer be attributed to a specific data subject without the use of additional information, provided that such additional information is kept separately and is subject to technical and organisational measures to ensure that the personal data are not attributed to an identified or identifiable natural person”.119 This will typically be the case for statistical research, which is defined as “any operation of collection and the processing of personal data necessary for statistical surveys or for the production of statistical results” and presupposes that its results or the personal data used to obtain them are not used in support of decisions regarding any particular legal person.120 For all research, including the broad category of scientific research,121 pseudonymization is merely one of the possible technical and organizational measures to be adopted in order to ensure data minimization, where the ultimate goal is to have in place appropriate safeguards for the rights and freedom of the data subject.122 Nevertheless, the Regulation is clear that, where possible, research purposes should be fulfilled anonymizing any further processing of the dataset.123 In return for these obligations, processing for research purposes benefits from a number of derogations, some of which are directly applicable124 while others depend on Member State implementation.125 Additionally, if an organization adopts pseudonymization, it will be exempted from compliance with a number of obligations under the Regulation, such as providing data subjects with access, rectification, erasure or data portability possibilities.126 However, these exemptions do 119

See art. 4(5) GDPR. Recital 162 GDPR. 121 The term is not defined by the Regulation but the examples provided refer to a wide range of scenarios, such as technological development and demonstration, fundamental research, applied research, and privately funded research. See recital 159 GDPR. 122 Article 89(1) GDPR. 123 Ibid. 124 See arts 14 (information to be provided), 17 (right to erasure) and 21 (right to object) GDPR. 125 In particular, the rights established in arts 15 (right to access), 16 (rectification), 18 (restriction of processing) and 21 (object), in accordance with art. 89(2) GDPR. 126 See art. 11. 120

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not relieve organizations from meeting all the remaining obligations, which include, most notably, the need to identify a legitimate legal basis for processing and the compliance with the principles of data protection: namely, the principles of lawfulness, fairness and transparency, purpose limitation, data minimization, storage limitation, and integrity and confidentiality.127 The only exception to such principles is provided by article 5(1)(b) and 5(1)(e) for processing done for research purposes, and concerns the applicability of the principles of purpose limitation and storage limitation: given that it is not always possible to identify the purpose of processing in research, further processing and longer periods of processing are admissible when done solely for research purposes. This constitutes an important concession from an innovation standpoint, although conditional on the adoption of adequate safeguards measures in accordance with article 89(1).128 Unfortunately, the absence of further details on the notion of appropriate safeguards for research purposes makes it difficult at present to assess the scope of application of the research exemption (i.e. what type of research and under what conditions), as that will largely depend on the national implementation of the GDPR. Outside the special cases of anonymization and processing for research purposes, the key hurdle for the permissibility of data-driven innovation under EU data protection law is the existence of a valid legal basis for processing. Data protection law sets out a permission-based regime for the processing of personal data: unlike competition law, where business activity is permitted unless specifically forbidden, the regime for data protection law is one of authorization: data processing is forbidden, unless specifically permitted by law. Entities intending to process personal data must therefore identify a legal basis justifying their processing, in addition to the other requirements imposed by data protection law. Consent of consumers to the processing of data for a specific purpose 127

Most notably, the principles of data quality listed in arts 6 DPD and 5 GDPR. Such principles include lawfulness, fairness and transparency; purpose limitation; accuracy; data minimization; storage minimization; integrity and confidentiality. To these, the Regulation adds a general obligation of “accountability”, which implies the ability of each data controller to demonstrate compliance with all the above-mentioned principles. See art. 5(2) GDPR. 128 In this respect, recital 156 GDPR refers to technical and organizational measures aimed at minimizing the processing of personal data in pursuance of the proportionality and necessity principles. It also specifies that the processing of personal data for scientific purposes should comply with other relevant legislation, such as that on clinical trials.

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constitutes merely one of the possible justifications for “lawful processing”.129 Aside from special cases in which processing is necessary for the exercise of a public function or to protect the vital interest of an individual, two frequently used grounds exist that may not be immediately ascertainable from the terms and conditions governing the relationship between a data subject and a “data controller” (i.e. the entity that defines the means and purpose of processing130). First, processing is lawful whenever it is “necessary for the performance of a contract to which the data subject is party, or in order to take steps at the request of the data subject prior to entering into a contract”.131 This means that essentially any processing that is implicit and instrumental to a contract will not require an additional consent to that required for the establishment of the object of the parties’ agreement: an example often used is the use of one’s name and address for the delivery of an online purchase. Since innovation presumes an alteration of existing products, services or operations, the claim that a new processing of personal data is essential appears to be weak or difficult to maintain at best, if the contract could be previously established or performed in a satisfactory way without such personal information. The interpretation of “necessity” by the article 29 Working Party is stringent, and seems unlikely to be able to accommodate any collection or use of personal data that could not be reasonably inferred from the stated purpose of processing.132 Second, and most importantly from an innovation perspective, processing can be justified if it is “necessary for the purposes of the legitimate interests pursued by the controller or by a third party, except where such interests are overridden by the interests for fundamental rights and freedoms of the data subject”.133 This caveat is slightly modified under the GDPR, which extends it to the interests or fundamental rights and freedoms of the data subject,134 expanding the range of elements that may be balanced against the interests of the controller or third parties.135 129

See art. 7 DPD and art. 6 GDPR. See art. 4(7) GDPR. 131 See art. 5(b) GDPR. 132 Article 29 Working Party Opinion 06/14 on Legitimate Interest, pp. 16–17. 133 See art. 6(1)(f) GDPR. 134 This is simply the correction of a mistake in transcription made with the DPD, as noted by the A29WP contrasting the official text in different languages. See A29WP, WP 217, p. 29. 135 Article 6(1)(f) GDPR also indicates that this assessment is particularly delicate where the data subject is a child. 130

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The “legitimate interest” ground undoubtedly constitutes an appealing alternative to consent for innovations that are difficult to predict at the beginning of a contractual relationship, and especially so after the GDPR has introduced a “freely given” requirement for consent, clarifying that it is insufficient to justify processing when there is a significant imbalance between the position of the data subject and the controller136 and that utmost account will be taken of whether the performance of a contract is conditional on the processing of personal data that is not necessary for the performance of the contract.137 Thus, the legitimate interest offers the advantage of enabling data controllers to do away with those stringent requirements of data subject permission, provided they can show any interest that is real (non-speculative), sufficiently specific and “accepted by law”,138 as long as they adopt safeguards that sufficiently protect the interests or fundamental rights of the data subject. At the same time, however, the reliance on legitimate interest does not exempt the data controller from the need to declare that interest in order to ensure fair and transparent processing,139 and to conduct the balance of that interest with the interests or fundamental rights and freedoms of the data subjects. This means that the more significant implication of relying on this ground for processing is the greater “responsibilization” of data controllers, who are accountable for their self-assessment on the adequacy of the balancing, in addition to being expected to adopt technical and organizational measures to ensure the continued adequacy of their processing.140 Such responsibilization aligns with the so-called “risk-based approach”,141 according to which data controllers are required to adopt protective measures commensurate to the level of risk of harm to the rights and freedoms of the data subject arising from the

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Recital 43 GDPR. Article 7(4) GDPR. 138 See A29WP Opinion 06/14, note 132 above, p. 25. 139 See arts 13(1)(d) and 14(2)(b) GDPR. 140 This is a corollary of the principle of accountability established in art. 5(2) GDPR, which requires data controllers to be responsible for, and to be able to demonstrate, compliance with the principles relating to the processing of personal data listed in art. 5(1) GDPR. See also recitals 78 and 81 GDPR. 141 For an overview of the role of risk assessment in data protection and beyond, see Niels van Dijka, Raphaël Gellert and Kjetil Rommetveit, “A risk to a right? Beyond data protection risk assessments” (2016) 32 (2) Computer Law and Security Review 286. 137

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data processing activities in question.142 The calibration of the responsibilities of controllers on “the nature, scope, context and purposes of processing as well as the risks of varying likelihood and severity for the rights and freedoms of natural persons”143 implicates the emergence of a differentiated regime of compliance with data protection law, with enhanced transparency and administrative requirements for data controllers involved in high risk processing. The GDPR offers guidance on risk assessment by detailing the type of risks at stake (falling into the three categories of physical, material and non-material damage)144 and providing examples of high risk situations.145 However, it does not dictate what level of risks is acceptable, or what measures should be taken by data controllers to 142

The GDPR builds the foundations for risk assessment and risk management by charging data controllers with obligations that are dependent on the level of risk of the activity they conduct: for example, those with high level of risk must have prior consultation with the DPA, who may decide to enjoin the conduct (see art. 36 GDPR). They are also required to notify both the DPA and the data subjects of any data breaches that are likely to result in a risk for the rights and freedoms of the individual, unless they have adopted appropriate organizational or subsequent measures to mitigate the risk, or the notification involves disproportionate effort (art. 37 GDPR). 143 Recital 89 and art. 24 GDPR. 144 In particular: “where the processing may give rise to discrimination, identity theft or fraud, financial loss, damage to the reputation, loss of confidentiality of personal data protected by professional secrecy, unauthorised reversal of pseudonymization, or any other significant economic or social disadvantage; where data subjects might be deprived of their rights and freedoms or prevented from exercising control over their personal data; where personal data are processed which reveal racial or ethnic origin, political opinions, religion or philosophical beliefs, trade union membership, and the processing of genetic data, data concerning health or data concerning sex life or criminal convictions and offences or related security measures; where personal aspects are evaluated, in particular analysing or predicting aspects concerning performance at work, economic situation, health, personal preferences or interests, reliability or behaviour, location or movements, in order to create or use personal profiles; where personal data of vulnerable natural persons, in particular of children, are processed; or where processing involves a large amount of personal data and affects a large number of data subjects”: see recital 75 GDPR. 145 Namely “systematic and extensive evaluation of personal aspects relating to natural persons which is based on automated processing, including profiling, and on which decisions are based that produce legal effects concerning the individual or similarly significantly affect the individual”, “processing on a large scale of special categories of data” and “systematic monitoring of a publicly accessible area on a large scale”: see recital 91 GDPR.

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prevent or mitigate certain risks. In other words, the standards of risk management remain largely unexplored. One suggestion in that regard is that EU data protection law should adopt a precautionary approach, prohibiting certain operations unless the controller can provide evidence of the innocuousness of the practice in question.146 While adopting a precautionary approach may be seen as in tension with the force of innovation,147 such an approach would arguably be in line with the text and spirit of the GDPR when it comes to high-risk situations.148 From this perspective, the role of codes of conduct and certification mechanisms will be crucial in providing data controllers with a minimum degree of legal certainty when undertaking such high-risk processing, by serving as parameters to demonstrate compliance.149 A third and last possible avenue to justify data-driven innovation is to rely on the notion of “compatible use” in the further processing of legitimately acquired data. Despite the requirement that it be “not incompatible” with the purpose(s) of the original processing, this notion leaves some room for creative interpretation. First, the purpose limitation principle has a specific exception for archiving purposes in the public interest, scientific or historical research purposes or statistical purposes, as long as Member States provide appropriate safeguards.150 Thus, having legitimately acquired the data may be sufficient to allow any scientific or historical research, and even a statistical analysis for business purposes. Second, and equally important, article 6(4) of the GDPR suggests that the assessment of compatibility with the original purpose(s) is flexible, where the further processing is not based on the 146

Raphaël Gellert, “Data protection: a risk regulation? Between the risk management of everything and the precautionary alternative” (2015) 5 (1) International Data Privacy Law 3, 18. 147 See for instance Adam Thierer, “Privacy Law’s Precautionary Principle Problem” (2014) 66 (2) Maine Law Review 467; Tal Zarsky, “The Privacy– Innovation Conundrum” (2015) 19 (1) Lewis & Clark Law Review 115. 148 See Article 29 Working Party, “Guidelines on Data Protection Impact Assessment (DPIA) and determining whether processing is ‘likely to result in a high risk’ for the purposes of Regulation 2016/679” (WP 248 rev.01, 4 October 2017). See also art. 22 GDPR discussed in section 3.3 below, establishing that an additional layer of safeguards applies for automated decisions that significantly affect individuals. 149 See art. 24(3) GDPR. 150 See arts 6(1)(b) DPD and 5(1)(b) GDPR; and art. 89 GDPR. In particular, recital 29 requires that such safeguards “rule out the use of the data in support of measures or decisions regarding any particular individual”.

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data subject’s consent or on a specific Member State law.151 In particular, the exercise takes into account the following criteria: (a) (b)

(c)

(d) (e)

any link between the purposes for which the personal data has been collected and the purposes of the intended further processing; the context in which the personal data has been collected, in particular regarding the relationship between data subjects and the controller; “the nature of the personal data, in particular whether special categories of personal data are processed, pursuant to Article 9” (special categories of data), “or whether personal data related to criminal convictions and offences are processed, pursuant to Article 10”; the possible consequences of the intended further processing for data subjects; and the existence of appropriate safeguards, which may include encryption or pseudonymization.

In practice, this assessment consists of an open-ended balancing, closely resembling the exercise conducted by data controllers to determine whether they have a valid legitimate interest.152 Those two balancing exercises will thus be conveniently dealt together in the following section. A Closer Look at the Two Key Balancing Provisions So far, we have seen the room available within data protection law to process data for the pursuit of research and development, concluding that the possible avenues are: (1) anonymization; (2) research purposes; (3) legitimate interest; and (4) compatible use. The assessment of (1) typically involves the balancing of factors of a technical nature, which will not be discussed here as it falls outside of legal competence. With regard to (2), one may recall that the balancing concerns the purposes of research, on the one hand, and appropriate safeguards for the rights and freedoms of the data subject(s), on the other. Importantly, there is significant room for derogations from certain articles of the GDPR as long as this is necessary for the fulfillment of research 151 The specific Member State law must have been designed to attain one of the objectives listed in art. 23 GDPR, which include national security, defence, law enforcement purposes (among others). 152 See art. 6(1)(f) GDPR and 7(e) DPD.

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purposes without serious impairment. This alleviates the burden weighing on the shoulder of researchers, who must in any event adopt appropriate safeguards and respect all principles of data protection, including being grounded on a legitimate legal basis. It will be remembered that processing for research purposes benefits from an exemption to the purpose limitation principle, which significantly softens the rigidity of the mechanisms designed around the preservation of the contextual integrity of consent and legitimate interest.153 As a result, balancing will be required when further uses rely on those legal grounds, although it will be significantly facilitated. For this reason, and because it is not certain that innovation can always be channeled through a scientific process of research, it is important to examine the process for the establishment of (3) and (4), both of which involve the weighing and balancing of very similar factors. Formal guidance in this area was only recently provided by the A29 WP, through its Opinions 3/2013154 and 6/2014,155 and only in part incorporated into the GDPR. The former Opinion, with specific regard to the compatibility assessment of further processing, refers to the following factors: (a)

the relationship between the purposes for which the data has been collected and the purposes of further processing; the context in which the data has been collected and the reasonable expectations of the data subjects as to their further use; the nature of the data and the impact of the further processing on the data subjects; and the safeguards applied by the controller to ensure fair processing and to prevent any undue impact on the data subjects.

(b) (c) (d)

As is apparent, these factors are slightly different from those subsequently adopted in the aforementioned article 6(4) of the Regulation:156 namely, the latter version subsumed the notion of “reasonable expectations” of criterion (b) into the broader concept of the “relationship 153 Contextual integrity is used here to refer to the idea of preventing the breach of the reasonable expectations of the data subject at the moment of collection of personal data. For a more in-depth discussion of the role of contextual integrity in privacy law, see Helen Nissembaum, Privacy In Context: Technology, Policy, and the Integrity of Social Life (Stanford University Press, 2010). 154 Article 29 Working Party, Opinion 03/2013 on Purpose Limitation. 155 Article 29 Working Party, Opinion 06/2014, note 132 above. 156 See section 3.3 below.

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between the data subjects and the controller”; and criterion (c) was divided in two parts, separating the nature of the data being processed from the impact on the data subject – and thereby clarifying that the latter does not necessarily depend (only) on the former. Although no criterion appears dispositive in the overall assessment, it is clearly the last element of the test that distinguishes the assessment from other types of balancing found in the law, including in the competition realm, for providing great latitude to data controllers to tilt the balance in favor of compatibility. The A29WP identified a number of safeguards that can be aptly used to that end: first of all, a necessary (but not always sufficient) condition towards ensuring compatibility is to re-specify the purposes. An additional notice to the data subjects and giving an opportunity to allow them to opt-in or opt-out is a second type of safeguard that may be required in certain situations.157 In the extreme, one could also imagine a situation where the balance in the compatibility assessment weighs in favor of incompatibility, but the request of a specific separate consent helps to compensate for the further purpose. Finally, the A29WP referred to an additional element which, depending on the situation and thus the type of concern arising from further use, may contribute to rebalancing the assessment in favor of compatibility – the adoption of technical and organizational measures aimed to attain the goals of data security (in particular, availability, integrity, and confidentiality of the data) and data protection (in particular transparency, isolation158 and intervenability159). Although this list is not exhaustive, it provides key benchmarks not only for the self-assessment of data controllers, but also for subsequent measures that can be adopted or imposed to “normalize” a situation of violation of data protection principles. The test conducted for purposes of identifying a legitimate interest and balancing it with the interests of the data subject is slightly more elaborated. Once again, the A29WP does not provide exhaustive guidance, rather highlighting its focus on the necessity and proportionality of the interference with the data subjects’ rights or interests. At one end of the scale, significant weight is attributed to the pursuit of an interest that pertains to a wider community (as opposed to merely the data controller), or which meets “cultural and societal expectations – even when not 157

See Opinion 03/2013, note 154 above, p. 26. Isolation refers to the “adequate governance of the rights and roles for accessing personal data”. See Article 29 Working Party Opinion 05/12 on Cloud Computing, p. 16. 159 Intervenability refers to the ability of the data subject to manage the data in terms of, e.g., access, deletion or correction of data. 158

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reflected directly in legislative or regulatory instruments”.160 At the other end of the scale, the impact on the data subject is considered as focusing on the nature of the data processed, the way in which it is being processed (e.g. the scale at which it is made available and whether it is combined with other data), and importantly, the reasonable expectations of the data subject.161 Reasonable expectations play a pivotal role in determining the risks associated with the unauthorized use or disclosure of data, which explicitly include intangible harms “such as the irritation, fear and distress that may result from a data subject losing control over personal information, or realising that it has been or may be misused or compromised”.162 It is therefore unnecessary to identify a concrete “theory of harm” to invoke the breach of a reasonable expectation preventing reliance on article 6(1)(f) DPD: in line with the risk-based approach, it will be sufficient to point to the intrinsic risk posed to the rights and interests of the data subject by a certain type of processing. However, at the same time it should be noted that the determination of “reasonable expectations” is specifically linked to “the status of the data controller, the nature of the relationship or the service provided, and the applicable legal or contractual obligations (or other promises made at the time of collection)”.163 This suggests that the contractual relationship between data controllers and data subjects will be closely observed to determine the bounds of “reasonable expectations”, enabling data controllers to contractually shape their ability to rely on legitimate interest, at least to a significant extent.164 Finally, in line with the analysis conducted for the compatibility assessment of further processing, the overall balance is heavily impacted by the existence of appropriate safeguard measures, which include: increased transparency; privacy by design; privacy impact assessments; extensive use of anonymization techniques; data portability; unconditional right to opt out; and technical and organizational measures to ensure that the data cannot be used to take decisions or other actions with respect to individuals (“functional separation”). Data controllers thus find in these exemplary safeguards a range of tools in order to address the 160

Opinion 06/14, note 132 above, p. 35. Ibid., p. 24. 162 Ibid., p. 37. 163 Ibid., p. 40. 164 It is arguable that relative factors such as the market power of the data controller and the vulnerability of the data subject could play a significant role in this determination, potentially sufficient to override the expectations created through the contractual agreement. 161

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data protection risks triggered by a specific type of data processing. Differently from the case of compatible use in further processing, however, such safeguards pertain to the balancing justifying the collection (and processing) of data in the first place, and cannot be introduced at a later stage in the data lifecycle. Risk management will therefore need to be conducted prior to collection, potentially leading a number of businesses to forego or delay innovative products or services to prevent or minimize risks. Once again, the risk management implications of the GDPR are far from clear, but the possibility of using adherence to codes of conduct as an indicator of compliance provides an incentive to align with the safeguards provided by those mechanisms. A Cautionary Note: The Additional Limitations on Automated Decision-making In addition to the framework described so far, it is important to bear in mind that data protection (and in particular, article 22 of the GDPR) provides an additional safeguard for human dignity and individual autonomy, which goes beyond the mere collection and use of a data subject’s personal data and extends protection to situations where individuals can be impacted by decisions based on fully automated processing, including profiling. “Profiling” is defined in the Regulation as “any form of automated processing of personal data consisting of the use of personal data to evaluate certain personal aspects relating to a natural person, in particular to analyse or predict aspects concerning that natural person’s performance at work, economic situation, health, personal preferences, interests, reliability, behaviour, location or movements”.165 Profiling is here used merely as an illustration of a situation where a decision may be based on the processing of some personal data, yet such data is not sufficient to identify the individual subjected to the decision according to the definition of personal data under article 4 of the GDPR. Without this additional protection, data controllers would be able to take decisions significantly impacting individuals’ rights and freedoms without being constrained by the GDPR. In fact, the rationale for protection can be traced back to the explanatory memorandum of the equivalent provision under the Data Protection Directive (article 15), pointing to a concern that humans maintain the primary role in “constituting” themselves instead of relying entirely on (possibly erroneous) 165

See art. 4(4) GDPR.

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mechanical determinations based on their “data shadow”.166 Thus, to prevent that situation, EU data protection law prohibits such decisions167 except in limited circumstances, specifically if (a) they are based on the data subject’s explicit consent; (b) they are necessary for entering into a contract or performance thereof; or (c) they are authorized by Union or Member State law to which the controller is subject and which also lays down suitable measures to safeguard the data subject’s rights and freedoms and legitimate interests.168 To complement that, the article specifies that “suitable measures” must be adopted also in the case of (a) and (c), including at a minimum the right of the data subject “to obtain human intervention on the part of the controller, to express his or her point of view and to contest the decision”.169 Although one could view the right to contest a decision as logically implying the prior right to obtain an explanation for that decision, this additional right contemplated in recital 71 of the Regulation was not eventually enshrined in article 22(3), generating some discussion as to whether data controllers are in fact subject to an obligation to provide an explanation for their decisions falling into this category.170 Regardless of the binding nature of this obligation in relation to an individual measure, it must be recognized that the transparency requirements detailing the information and access rights of data subjects (in articles 13–15 of the 166

Explanatory text for Proposal for a Council Directive concerning the protection of individuals in relation to the processing of personal data, COM (90) 314 final – SYN 287, p. 29. See in this sense Isak Mendoza and Lee A. Bygrave, “The Right not to be Subject to Automated Decisions based on Profiling”, in Tatiana-Eleni Synodinou, Philippe Jougleux, Christiana Markou and Thalia Prastitou (eds), EU Internet Law: Regulation and Enforcement (Springer 2017). 167 Article 22(1) GDPR. There has been some controversy regarding whether the “right not to be subject to a decision based solely on automated processing” established under this article confers a right to object to any such decisions, or rather amounts to a prohibition for data controllers to engage in such decisions in the first place. However, the Article 29 Working Party has recently settled the debate in favor of the latter interpretation in its Guidelines on Automated individual decision-making and Profiling for the purposes of Regulation 2016/ 679, WP 251, Revised and Adopted on 6 February 2018. 168 Article 22(2) GDPR. 169 Article 22(3) GDPR. 170 See e.g. Sandra Wachter, Bernt Mittelstadt and Luciano Floridi, “Why a right to explanation of automated decision-making does not exist in the General Data Protection Regulation”, SSRN preprint, ssrn:2903469; forthcoming, IDPL (2017). Lilian Edwards and Michael Veale, “Slave to the algorithm? Why a ‘right to an explanation’ is probably not the remedy you are looking for”, preprint, ssrn:2972855 (2017); Mendoza and Bygrave, note 166 above.

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GDPR) do entail an explanation of the logic involved in any automated decision-making, the significance and the envisaged consequences of such processing for the data subject.171 This means that EU data protection takes a clear stance on innovation involving decisions based on automated processing, requiring the individual to be adequately informed and put in the condition to meaningfully participate. Although the interpretation of the concepts of “solely automated” and “significantly impact” will constrain the application of this provision, the Article 29 Working Party has favored a broad understanding of the prohibition.172 This limits to a large extent the scope of permissible innovation by requiring data controllers to trade off efficiency with explainability, contestability and human intervention, and thus potentially preventing several types of unsupervised machine learning techniques that are often put forward as examples of data-driven innovation.

4. MAPPING THE INTERACTIONS: COULD THE TWO POLICIES BE UNITED IN DIVERSITY? As the previous sections have shown, competition law and data protection law vastly differ on the space they assign within their rules to the pursuit of innovation. In particular, competition law is centered around the freedom to conduct business: while on the one hand it imposes general limits to that freedom by outlawing certain conducts, on the other hand it enables undertakings to overcome those limits through two main avenues. First, it identifies specific types of (economic) efficiencies that can be used to outweigh anticompetitive effects, imposing stringent conditions for such trade-offs to occur. Second, it recognizes the possibility for undertakings to adopt reasonable and proportionate measures to protect their own commercial interests, which may include the pursuit of non-economic goals. However, it is important to note that in the case of coordinated conduct, the “objective justification” line of defence in the

171

Andrew Selbst and Julia Powles, “Meaningful information and the right to explanation” (2017) 7 (4) International Data Privacy Law 233; Gianclaudio Malgieri and Giovanni Commande, “Why a Right to Legibility of Automated Decision-Making Exists in the General Data Protection Regulation” (2017) International Data Privacy Law 243. 172 A29WP, Guidelines WP251, note 167 above.

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pursuit of non-economic objectives is only applicable if the concerned undertakings have been tasked by public authorities with that mandate. In contrast, data protection law is based on the idea of requiring a justification for the processing of personal data, given its potential impact on the rights and freedoms of data subjects, and to that end imposes the fulfillment of specific conditions upfront. Aside from the option to escape those conditions by using effective anonymization techniques and the possible exemption from certain requirements in case of scientific research activity, data-driven innovation can be accommodated under two different notions: “legitimate interest”, which implies no judgment on the type of interest pursued by the controller, so long as that interest is acceptable (i.e. legal) under the applicable law; and “compatible use” for further processing, which requires a link between the purposes for which the data has been collected and the purposes of the intended further processing. Both notions heavily depend on the context, including the nature of the data concerned, the potential impact on the data subject and the reasonable expectations of the data subject. In addition, it is important to bear in mind that data protection law does make a judgment call when it comes to innovations involving decisions based on automated processing that significantly impact individuals, prioritizing explainability, contestability and human intervention over efficiency. On reflection, even if both competition and data protection law rely on some form of balancing for the introduction of innovation, the inquiry has a substantially different focus: in competition law, the balancing test is based on a counterfactual of the competitive process, which refers to the general market conditions in the absence of the conduct. In data protection law, balancing revolves around the fulfillment of the reasonable expectations of the data subject, which depend on the individualistic benchmark of his or her relationship with the data controller. While the former test is not able to account for the serendipity that often drives innovation in the big data era, the latter does little to identify and address situations of abuse triggered by market concentration. There are also a number of additional shortcomings under the tests used by competition law to incorporate data-driven innovation (DDI) and data protection innovation (DPI), as explained in the text above and illustrated in Table 5.1 below. This list of shortcomings highlights how difficult it can be to escape liability under competition law for what would generally be perceived as welfare-enhancing data practices, that are legitimate under data protection if carried out with the appropriate safeguards for data subjects. As a corollary of this misalignment between competition defences and data innovation (in both of its manifestations), it is submitted that data

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Table 5.1 Innovation defences in competition law: challenges for data-driven innovation and data protection innovation EFFICIENCY 101

OBJECTIVE JUSTIFICATON

Permitted: Improvements in quality, productivity and dynamic efficiencies. + Public policies framed in competitive terms.

Permitted: Trade-off between interbrand and intrabrand competition. + Necessary and proportionate measures in pursuit of commercial self-interest. + Necessary and proportionate measures in pursuit of legitimate regulatory function. Obstacles: + DDI: proportionality (indispensability). + DPI: “entrustment”.

+

102

+

Obstacles: + DDI: determinism. + DPI: quantifiability and measurability; “objective advantage” requirement for cross-market efficiencies (particularly where “advantage” implies the use of personal data for additional purposes). + Both: no elimination of competition. Legitimate: + Improvements in quality, productivity and dynamic efficiencies. + Public policies framed in competitive terms.

Legitimate: Reasonable and proportionate measure in pursuit of commercial self-interest (to improve price, quality, choice and innovation). + Reasonable and proportionate regulatory interest (provided no clash with competences defined by relevant regulations). Obstacles: + DDI: proportionality (indispensability). +

Obstacles: + DDI: determinism. + DPI: quantifiability and measurability. + Both: no elimination of competition.

innovation justifications may deserve some sort of special consideration, bringing to bear the weight attached by the European Union to the protection of personal data. The notion of “competition on the merits”, which emerged as a way to incorporate extra-competition rules into the concept of objective justifications, can in fact provide one trigger for such special consideration. Another mechanism could then be established for the

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assessment of data innovation as efficiency justification, in order to overcome the problems of incommensurability and potentially neglect of privacy spillover. A specific form of cooperation could resolve these problems by building on the expertise of the data protection authority to assist the competition decision-maker, as well as take any further action deemed necessary for the pursuit of objectives that are squarely within its own mandate. Accordingly, it is submitted that a special procedure could be defined for cases where a defendant to a competition proceeding raises a data innovation justification, enabling the authority with the relevant expertise to consider not only the merits of the claim, but also any further action that it deems necessary to prevent negative spillovers on data protection. The framework would need to account for different forms of cooperation between a competition authority (CA) and a data protection authority (DPA), depending on the needs arising from the situation in question. Table 5.2 provides a diagram of the possible interactions of privacy (P) and competition (C), whereby “+” indicates a practice whose net effect is to increase the intensity of the value at stake (P or C), “Ø” indicates a practice whose net effect neither increases nor decreases that intensity, and “–” indicates a practice whose net effect is to decrease it. Table 5.2 Interactions of competition and privacy P+

PØ

P–

C+

C+, P+

C+, PØ

CØ

CØ, P+

CØ, PØ

C–

C–, P+ Cooperation need: CA to request DPA’s assessment of DP-related defences

C–, PØ Cooperation need: DPA tipping CA. Consultation of CA for market definition and market power. Consultation for remedy.

C+, P– Cooperation need: CA tipping DPA. Consider DP-friendly remedies? CØ, P– Cooperation need: DPA tipping CA. Request preliminary ruling from CA to DPA on whether DP is infringed. C–, P– Cooperation need: Coordination at remedy stage.

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Four possible scenarios (those with a shade of gray in the backdrop) should in principle be immune from raising concerns for either a CA or a DPA, much less trigger a tension between the two, and therefore do not call for coordination of their actions. The remaining five scenarios are more complex and raise different kinds of coordination problems, as discussed below. C–, P+ This is a case where a practice is put in place that improves the privacy, yet negatively affects competition in the relevant market(s). One example is adblocking, a mechanism conceived to promote an ecosystem with less invasive ads and without behavioral tracking, but which can also be abused to deny market access and extract rents from websites and advertisers. Imagine a dominant browser vendor173 committing not to serve any webpage that does not meet a self-proclaimed “Acceptable ads” policy, yet exempting from such policy the ads being served by the websites of its own and its affiliates.174 The browser vendor could try to justify the exclusion of competitors by raising an efficiency defence, but this would require viewing the improved privacy as a quality that significantly affects competition for users’ attention among homogeneous types of websites (i.e. newspapers, social networks, etc.). This is a hard route to follow, not only due to the measurement issues, but also (and most importantly) because it appears that, at the present time, users are generally driven by the content of pages, rather than the associated amount of ads and trackers.175 The browser company could then claim that the policy constitutes a reasonable commercial step to protect the fundamental right to data protection of its own users, which is endangered by the widespread use of pre-formulated declarations of consent extracted from individuals through standardized terms of service. This 173 Currently, Chrome could be a good candidate for such position on mobile, where it reaches 40% (see ). 174 Such discriminatory behavior was recently found illegal in Germany under unfair competition law, irrespective of the fact that it had been put in place by a non-dominant and non-integrated player. Specifically, Adblocking service provider Adblock Plus engaged in discriminatory treatment vis á vis the biggest German publisher Axel Springer. See “Adblock Plus business model ruled illegal by German court” (Block Adblock, 26 June 2016), available at . 175 So far, companies branding their services as offering privacy-preserving in the space for social networks (Ello) and search engines (DuckDuckGo) do not seem to exert significant pressure on their incumbent competitors.

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defence would appear to be valid, to the extent that the ad blocker programme does not impose unreasonable or discriminate conditions for “whitelisting” (i.e. escape the application of the block). What is a competition authority to do in such cases? On the one hand, ignoring the potential benefit brought about by the programme would amount to disregarding the importance of the fundamental rights to privacy and data protection. On the other hand, acritically accepting the claimed efficiency would mean giving a free pass to undertakings using the public policy card, without adequate inquiry into the merits of such defence. For this reason, the most appropriate form of coordination would be to request the competent data protection authority to intervene and assess the legitimacy of innovation defences involving data protection, for example by examining the criteria and procedures established for “whitelisting”, to ensure they are not being used as a cover for exploitative or exclusionary practices. C–, PØ This is a case where the relevant practice is prejudicial to competition, but indifferent for data protection purposes. As explained in section 2.3, the case law has spoken clearly: competition law does not owe deference to other laws, unless those laws already effectively preclude the undertaking from distorting competition. Outside those limited circumstances, there is technically no limit to the ability of competition authorities to enjoin or even mandate a certain data practice on competition grounds; however, at the practical level the range of actions available to the competition authority should be constrained by the limits imposed by the Charter of Fundamental Rights, including not to unduly interfere with the rights to privacy and data protection of the data subjects involved. If, for example, the European Commission were to order Google in the context of its Google Search investigation176 to enable advertisers to use the data of their campaigns with third parties, this would increase the sharing of data concerning identifiable individuals with more parties – which may be problematic from a data protection perspective. In order to avow negative spillovers, it is thus particularly important to have a mechanism for consultation between public authorities before the implementation of any impactful data-related remedy. This ensures that competition remedies do not “balance out” the essence of the right to data protection for the achievement of economic welfare gains. 176 Case COMP/39470, see the documents available at .

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At the same time, it is important for data protection authorities to appreciate the competitive implications of their decisions. This is even more delicate where the state of competition in the market contributes to determining the legality of a given practice under data protection law, for example the “significant imbalance” in determining the validity of consent177 or the market position of the controller claiming the existence of a “legitimate interest” for the processing of specific personal data.178 For this reason, it should also be possible for the DPA to consult with the relevant competition authority over the course of an investigation, at the very least in relation to market definition and the measurement of market power. CØ, P– This is the opposite scenario, where a given practice is detrimental to privacy, but indifferent from a competition standpoint. That is, firms are not competing on privacy, but intervention of the competition authority could improve the situation of data subjects. Clearly, there is a problem of mandate here, preventing the authority from conducting an investigation or imposing a remedy merely on the basis of data protection considerations.179 At the same time, failing to give sufficient attention to data protection concerns would be inconsistent with the positive obligations imposed by article 51 of the Charter.180 For this reason, it is necessary to ensure that the case-team at a competition authority investigating such types of cases can “tip” their colleagues at the data protection authority that they have discovered what they think might be a data protection issue, and transfer the case-file where 177

See notes 136–137 above and corresponding text. This assessment is relevant to determining the reasonable expectations of the data subject: see the Article 29 Working Party Opinion 04/14 referred to at note 163 above. 179 The only possible theory to justify addressing data protection considerations under those circumstances would be that the company engaged in the practices in question is unfairly taking advantage of the cost saving arising from non-compliance with data protection law, thereby putting competitors at a disadvantage. It is worth noting that under this approach competition law could be invoked in multiple cases in which an undertaking does not comply with other laws, for example environmental protection or anti-discrimination law. 180 According to art. 51, “The provisions of this Charter are addressed to the institutions and bodies of the Union with due regard for the principle of subsidiarity and to the Member States only when they are implementing Union law. They shall therefore respect the rights, observe the principles and promote the application thereof in accordance with their respective powers” (emphasis added). 178

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warranted. On a similar basis, to the extent that lawfulness under data protection law can be considered to justify a particular data practice (for example, on grounds of efficiency), competition authorities ought to be able to request a preliminary ruling to the relevant DPA to appropriately gauge the data protection considerations in competition analysis. The mechanism of preliminary ruling can be relatively informal (e.g. not necessarily detailed) but it needs to be under a “fast-track” procedure, for otherwise the administration of this mechanism could hamper the effectiveness of competition enforcement. C+, P– This is a similar scenario to the one above, where a practice raises privacy concerns and has not only neutral, but even positive effects on competition. An example would be a doctor who decides to utilize the data of his patients, without appropriate consent, to create customized health insurance policies which he then offers to current and former patients. While this type of vertical integration may be efficient, it is also clear that competition authorities cannot simply condone breaches of data protection law for the sake of efficiency – and should thus be able to refer to a DPA any facts they think raise concerns from a data protection perspective. C–, P– Finally, there is a situation where one or more data practices are found to be detrimental not only to data protection, but also to competition. This may occur where the conduct prescribed under the two laws align, and in particular in the two following scenarios: first, most obviously, where there is an overlap of the prohibited conduct in the two legal fields in question – for example, this may happen when both data protection law and competition law require portability181 of data that constitutes an essential facility, or was being used to eliminate competition in a secondary market; second, where committing a given data protection violation also confers a competitive advantage over other undertakings – this may be simply because it allows the firm to save compliance costs, but it may also be due to the advantages derived from data-driven innovation, for example by enabling the firm to combine data across different sources without the necessary opt-in. In this context, it is of utmost importance that any remedy imposed by the competition 181 According to newly established right to data portability, a data subject has under certain circumstances the right “to receive the personal data concerning him or her, which he or she has provided to a controller, in a structured, commonly used and machine-readable format and have the right to transmit those data to another controller without hindrance”: see art. 20 GDPR.

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authority duly considers data protection, so as not to alter the balance of power between the affected data subjects and the data controller(s) in question. It thus calls for a mechanism of coordination between the two authorities at the remedy stage.

5. CONCLUSION This chapter has discussed the role of innovation defences in EU competition analysis, critically reviewing the extent to which they are apt to accommodate the rising phenomenon of data innovation, which can be related to two different concepts: “data-driven innovation”, where big data is used to improve production or distribution and better match customer preferences; and “data protection innovation”, where market value is created through greater protection of data privacy. With regard to both concepts, it was concluded that competition law ought to be modernized by relaxing the stringency of the requirements for the success of those defences, in recognition of the intrinsic difficulties in predicting and quantifying efficiencies of this type. This is likely to be a major problem in the case of data-driven research, which effectively reverses the (deductive) process of scientific discovery by offering hypothesis on the basis of observation of empirical data. On the other hand, when it comes to data protection innovation, the main problem resides in the absence of benchmarks for the assessment of privacy benefits. In particular, the complexity of the analysis transcends the identification and quantification of unmet demand for greater data privacy; it also requires an explanation of the extent to which satisfying such demand outweighs any restriction of competition. In other words, competition law requires innovators to engage in a comparison of apples and oranges, and with particular stringency and exactitude when data innovation constitutes the proffered efficiency justification for coordinated behavior. The objective justification defence appears more likely to succeed for data innovation defences, especially if raised in the context of unilateral conduct, but requires an examination of the merits of the extra-competition claims. The need to consider the merits of data protection justifications in competition analysis prompted a second inquiry, relating to the formal mechanisms within EU data protection law to take into account datadriven efficiencies. This inquiry resulted in the identification of four possible avenues, the first of which (anonymization) fundamentally reduces the potential of data-driven innovation, while the second (research purposes) depends on the ability to formalize one’s activity as

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“research” and on the adoption of “adequate safeguards” for the rights and interests of data subjects. The two remaining avenues revolve around a multi-factor and context-dependent balancing exercise. It was recognized that this generates a differentiated regime of permission for data-driven innovation, and that co-regulatory mechanisms such as code of conducts and certification represent a valuable tool to enhance legal certainty for data controllers in that regard. Finally, it was noted that article 22 of the GDPR provides a backstop against innovations based on certain automated decisions that prioritize efficiency over explainability, contestability and human intervention. This limit and the different focus of the balancing exercise for the assessment of data-driven efficiencies fundamentally distinguish the nature of the innovation formally recognized in EU competition and data protection law. This suggests that the question of whether data protection considerations in competition analysis promote or hinder innovation is simplistic – it all depends on the notion of innovation that we look at. EU data protection law addresses different concerns than competition law; therefore, data protection considerations may, on the one hand, constrain the breadth of permissible innovation defences in competition analysis and, on the other hand, engender a different kind of innovation, which can be further stimulated through competition in the market. Having ascertained these differences and reviewed the obstacles to data innovation defences in competition analysis, the chapter suggested that a special procedure could be established for a coordinated assessment of data innovation defences in competition law. It then moved on to consider the possible intersections between competition and data protection issues in competition enforcement, identifying a more comprehensive framework for cooperation. On the basis of the nature of the effects (positive, neutral and negative) of a given practice on competition and on privacy, a competition authority can expect to be confronted with data protection considerations in different ways. The mapping presented nine possible scenarios, five of which raise challenges of inter-institutional coordination. Ultimately, the substantive suggestion provided by this chapter is one of creating a specific mechanism for inter-institutional cooperation for specific cases involving data innovation defences,182 with a view to 182 This specific type of cooperation should be distinguished from the more general collaboration taking place in the Digital Clearinghouse, a framework for periodic meetings between contact points of authorities responsible for the regulation of digital services focusing on the following activities: (1) discussing (but not allocating) the most appropriate legal regime for pursuing specific cases

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enabling competition and data protection agencies to strengthen – rather than undermine – each other’s function. While the contours of this ad hoc procedure were sketched alongside the five complex types of interactions identified in this chapter, the framework could incorporate additional considerations to ensure steady and effective cooperation in more specific contingencies. Clearly, the details of the special procedure would need to be formalized in specific rules, including at a minimum a rule that establishes a legal basis for the exchange of information between the relevant authorities. The recent introduction of such a rule in Germany through an amendment to the German Competition Act183 is a welcome or complaints related to services online, especially for cross-border cases where there is a possible violation of more than one legal framework, and identifying potential coordinated actions or awareness initiatives at European level which could stop or deter harmful practices; (2) using data protection and consumer protection standards to determine “theories of harm” relevant to merger control cases and to cases of exploitative abuse as understood by competition law under article 102 TFEU, with a view to developing guidance similar to what already exists for abusive exclusionary conduct; (3) discussing regulatory solutions for certain markets where personal data is a key input as an efficient alternative to legislation on digital markets that might stifle innovation; (4) assessing the impact on digital rights and interests of the individual of sanctions and remedies that are proposed to resolve specific cases; (5) generally identifying synergies and fostering cooperation between enforcement bodies and their mutual understanding of the applicable legal frameworks. See EDPS Opinion 8/2016 on coherent enforcement of fundamental rights in the age of big data of 23 September 2016, p. 15. 183 At the time of writing, a bill was pending before the German parliament to amend art. 50 of the German competition act (“Gesetz gegen Wettbewerbsbeschränkungen”) by extending the ability of competition authorities to exchange information beyond consumer protection agencies, and specifically with the Federal Commissioner for Data Protection and Freedom of Information and the Data Protection Commissioners of the federal states. The German government proposed a specific norm, § 50c (1) (1), for the cooperation of competition agency and data protection agencies as part of the Ninth Comprehensive Amendment of the German Act against Restraints of Competition, available at . The norm, which entered into force in June 2017, provides that it is discretion of the authorities to exchange information that this is necessary for the performance of their respective functions, and use such information in their proceedings, as long as such information is not confidential (either as a business secret or because received by another authority for the application of art. 101 or 102 TFEU). I am indebted to Rupprecht Podszun for bringing this amendment to my attention.

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step towards effective and coherent enforcement of EU competition and data protection law, but other jurisdictions could define a more elaborated mechanism along the lines sketched above. In an era of big data and artificial intelligence, a regulatory framework failing to ensure coordination of competition and data protection enforcement runs contrary to the duty of EU institutions and Member States not only to respect and observe, but also to promote the rights and principles of EU law.184

184 See art. 51 of the Charter, note 101 above. See also Inge Graef, Data protection and online platforms. Data as essential facility? (Wolters Kluwer 2016) distinguishing between negative and positive duties of competition authorities to respect and guarantee the effectiveness of data protection rights.

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6. Healthcare systems and competition: challenges and boundaries for the application of competition law in the EU healthcare sector Claudia Seitz 1. INTRODUCTION The healthcare sector is characterised by various opportunities and different challenges. The development and composition of societies in almost all Western countries is influenced by a demographic change resulting from an ageing population.1 This development leads to increasing life spans but also to higher expectations of the population since patients are asking for new medical opportunities and improved chances of recovery.2 Although this development is very positive and appreciated on the one hand it is also linked to increasing healthcare costs and the question of financing on the other hand. As a consequence of increasing expenditures the healthcare sector has come under critical scrutiny in various countries, especially if much of the expenditure is funded from public sources. In 2013 the German health expenditure, for example, amounted to a total of €314.9 billion, which was an increase of €12.1 billion or 4% from 2012.3 The health expenditure per inhabitant

1 See for additional information: ‘The health-care challenges posed by population ageing’ (2012) 90(2) Bulletin of the World Health Organization . 2 See e.g. Johan J. Polder et al., ‘Health care costs in the last year of life – The Dutch experience’ (2006) 63 Social Science & Medicine 1720. 3 Statistics of the German Statistisches Bundesamt Destatis .

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amounted to €3.91.4 The expenditures increase the pressure put on governments seeking to control public spending on healthcare costs. Due to the high expenditure in the healthcare system, tools to decrease costs could be seen in an economisation of healthcare as well as in the liberalisation of the healthcare system.5 Both tools have become new trends and influence the healthcare sector. The liberalisation of the healthcare system to a certain extent creates ‘healthcare markets’. The approach behind this liberalisation is the assumption that this development could lead to decreasing healthcare costs by introducing competition in these markets. The introduction of competition in these markets should lead primarily to price competition resulting in lower prices but also to better healthcare products and services. In order to liberalise the healthcare sector certain public tasks have already been delegated from public entities to private undertakings in some Member States. Private undertakings have been active in order to provide healthcare products and services and public entities have been acting as undertakings for specific services in the last decade in many Member States. This development has widened the scope of competition and has thus increased the importance of competition law. The application of competition law in the regulated healthcare sector in turn also raises several questions, for example whether the entities in question can be classified as an undertaking and to what extent competition law is applicable in the healthcare sector as well as what role social policy objectives, such as the principle of solidarity, play in this context.

2. HEALTH PROTECTION IN THE EU LEGAL SYSTEM Principle of Health Protection as a National Task of the Member States The treaties that constitute the EU only grant very limited health policy power to the EU. Health policy and as a consequence healthcare systems

4 German Statistisches Bundesamt Destatis . 5 Thomas Lübbig and Max Klasse, Kartellrecht im Pharma- und Gesundheitssektor (2nd edn, Nomos 2015) 30.

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are principally the responsibility of the Member States.6 So far the Member States have never intended to pass significant health policy powers to the EU. Thus, the healthcare systems differ from Member State to Member State. Moreover, the Member States have to finance their national healthcare systems themselves. As a consequence the healthcare systems of the Member States are based on national legislation and are embedded in the national legal system. Therefore, the national healthcare systems differ considerably from Member State to Member State. Organising the healthcare sector, delivering healthcare services and products as well as financing the healthcare system are all the responsibilities of the national governments. These tasks are influenced by social and health policy objectives, such as free access to healthcare for (almost) all citizens and the principle of solidarity. Usually the healthcare policy is embedded in the national social system and needs to take into account welfare state principles as well as social policy goals and the principle of solidarity. Since the national health policy differs from state to state the healthcare system varies widely from a more to a less regulated system. Thus, the financing system, the degree of economization and the level of liberalization of the healthcare sector differs from Member State to Member State. Absence of EU Healthcare Harmonisation In general there is no EU harmonisation of the healthcare systems in the Member States. The only competences regarding health law that can be found in the EU primary law are the specific provisions on health comprised in the Article 168 TFEU on public health and Article 169 TFEU on consumer protection. Article 168 TFEU sets out the objectives of the EU health policy and the underlying legal principles emphasising co-ordination and co-operation, especially in order to prevent major health threats such as human illness and diseases and other health-related threats. The relationship between the tasks of the EU and the Member States is stipulated in Article 168(7) TFEU. According to this sectorspecific subsidiarity clause the ‘Union action shall respect the responsibilities of the Member States for the definition of their health policy and for the organisation and delivery of health services and medical care. The responsibilities of the Member States shall include the management of 6 Concerning the situation in the US see e.g. Randall R. Bovbjerg et al., ‘State and Federal Roles in Health Care – Rationales for Allocating Responsibilities’, .

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health services and medical care and the allocation of the resources assigned to them’. According to the above-mentioned principle the Member States have not specifically transferred competences to the EU and have defined their healthcare systems on a national basis. As a result there is in principle (almost) no EU harmonisation of healthcare. The practical significance of Article 169 TFEU is low, especially if compared to the basic freedoms of the internal market.7 Although Article 168(1) TFEU emphasises that a ‘high level of human health protection shall be ensured in the definition and implementation of all Union policies and activities’, the competencies of the EU competence in the area of healthcare are also limited pursuant to this article. The tasks of the EU in the context of healthcare are in principle mainly those of coordinating and supporting the cooperation between the EU and its Member States as well as between the Member States themselves.8 Whereas organising, delivering and financing healthcare is the responsibility of the Member States and their national governments, the role of the EU in the healthcare sector is of minor significance as a result of the distribution of competence according to Article 168(7) TFEU. Thus it is restricted to tasks that complement the national policies of the Member States. The support of the EU to complement national policies comprises for example the assistance to ‘achieve shared objectives’, ‘generate economies of scale, by pooling resources’ or help Member States ‘tackle common challenges – such as pandemics, chronic diseases or the impact of increased life expectancy on healthcare systems’.9 As a result the influence of EU law based on Articles 168 and 169 TFEU on the national healthcare legislation of the Member States is low.

7

See Kathleen Gutman, The Constitutional Foundations of European Contract Law: A Comparative Analysis (OUP 2014) 380, 398: ‘As things stand at present, there is a striking paradox underlying the use of Article 169 TFEU by the Union institutions: while there is a steady stream of institutional documents extolling the importance of Article 169 TFEU and encouraging greater recourse to this provision in theory, Article 169 TFEU is rarely resorted to in practice’. 8 As already pointed out, the scope of EU legislation based on article 168 TFEU is limited. However, the EU Commission has adopted several incentive measures in order to prevent health threats and promote health within the EU. The Commission has also adopted the Health Program 2014–2020 in order to provide EU funding. 9 See EU and EU Commission, ‘The EU works to protect and improve the health of all Europeans throughout their lives’, .

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Internal Market Regulation and Free Movement Principles Products Compared to Articles 168 and 169 TFEU on public health and consumer protection, Articles 26 et seq. TFEU on the internal market are of much greater importance for the healthcare sector in the EU. The four fundamental freedoms – the free movement of goods, persons, services and capital in the internal market – also play a decisive role in the healthcare sectors of the Member States. Pursuant to Article 12(2) TFEU the ‘internal market shall comprise an area without internal frontiers in which the free movement of goods, persons and capital is ensured in accordance with the provisions of the Treaty’. Although there is no general EU harmonisation in healthcare there are certain areas of the healthcare sector that are subject to EU regulation. The EU has taken over the responsibility for setting policy on certain pharmaceutical products, plant and animal health as well as food safety, which are areas that have implications for human health.10 The EU also pursues the protection of human health through activities in other policy areas. This harmonisation is, however, based on consumer protection and the freedoms within the internal market, especially the free movement of goods. According to Article 169 TFEU the consumer protection policy is intended to promote, amongst others, the health, safety and economic interests of consumers as well as their right to information. The requirements of consumer protection are taken into account by the EU when defining other EU policies according to Article 12 TFEU. Thus ‘consumer protection requirements shall be taken into account in defining and implementing other Union policies and activities’. In principle, consumer protection is a shared area of tasks and responsibility between the EU and its Member States. Based on the internal market provisions of Article 114 TFEU the EU adopted various regulations.11 A most recent example is the revision of the Tobacco

10 Together with public health and consumer policy these tasks are the responsibility of the EU Health Commissioner supported by the Directorate General for Health and Consumers (DG Sanco). 11 See Kathleen Gutman, The Constitutional Foundations of European Contract Law: A Comparative Analysis (OUP 2014), 380 et seq.

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Products Directive.12 Other areas of harmonisation include food and consumer products as well as medicinal products. In addition, the EU adopted comprehensive secondary law legislation, directives and regulations for pharmaceuticals (e.g. research & development,13 manufacturing,14 market authorisation and pharmacovigilance,15 intellectual property16 and pricing17), medical devices,18 blood19 and human tissues,

12

Directive 2014/40/EU of the European Parliament and of the Council of 3 April 2014 on the approximation of the laws, regulations and administrative provisions of the Member States concerning the manufacture, presentation and sale of tobacco and related products and repealing Directive 2001/37/EC [2014] OJ L 127, p. 1. 13 See for example Directive 2001/20/EC of the European Parliament and of the Council of 4 April 2001 on the approximation of the laws, regulations and administrative provisions of the Member States relating to the implementation of good clinical practice in the conduct of clinical trials on medicinal products for human use [2001] OJ L 121, p. 34. 14 Commission Directive 2003/94/EC of 8 October 2003 laying down the principles and guidelines of good manufacturing practice in respect of medicinal precuts for human use and investigational medicinal products for human use [2013] OJ L 262, p. 22. 15 See for example Directive 2001/83/EC of the European Parliament and of the Council of 6 November 2001 on the Community code relating to medicinal products for human use [2001] OJ L 311, p. 67. 16 See for example Directive 98/44/EC of the European Parliament and of the Council of 6 July 1998 on the legal protection of biotechnological inventions [1998] OJ L 213, p. 13. 17 Council Directive 89/105/EEC of 21 December 1988 relating to the transparence of measures regulating the pricing of medicinal products for human use and their inclusion within the scope of national health insurance systems [1989] OJ L 40, p. 8. 18 See for example Council Directive 93/42/EEC of 14 June 1993 concerning medical devices and Directive 98/79/EC of the European Parliament and of the Council of 27 October 1998 on in vitro diagnostic medical devices [1993] OJ L 169, p. 1. 19 See for example Directive 2002/98/EC of the European Parliament and of the Council of 27 January 2003 setting standards of quality and safety for the collection, testing, processing, storage and distribution of human blood and blood components and amending Directive 2001/83/EC [2003] OJ L 33, p. 3.

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cells and organs.20 Harmonisation on the basis of secondary law through directives and regulations is limited to certain products in the healthcare area and includes some healthcare services such as insurances21 and regulates data protection regarding personal data of patients and the free movement of such data.22 Services The principle of free movement of services within the internal market of the EU is of decisive influence for the cross-border supply of medical services and patients from one Member State seeking medical treatment and obtaining medical services and products in another Member State. Despite the lack of harmonisation of healthcare systems in the EU the ECJ has delivered a number of important judgments that include mainly patients’ rights especially concerning the reimbursement for healthcare services or products obtained in other Member States by their national health insurers.23 Well-known judgments of the ECJ include for example

20

See Directive 2004/23/EC of the European Parliament and of the Council of 31 March 2004 on setting standards of quality and safety for the donation, procurement, testing, processing, preservation, storage and distribution of human tissues and cells [2004] OJ L 102, p. 48. 21 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) [2009] OJ L 335, p. 1. 22 Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data [1995] OJ L 281, p. 31. 23 See for example Pedro Cabral, ‘Cross-border medical care in the European Union – bringing down a first wall’ [1999] European Law Review 387; Rose Langer‚ ‘Grenzüberschreitende Behandlungsleistungen: Reformbedarf für die Verordnung 1408/71’ [1999] NZS 537; Werner Berg, ‘Grenzüberschreitende Krankenversicherungsleistungen in der EU’ [1999] EuZW 587; Carsten Nowak and Jörg Schnitzler, ‘Erweiterte Rechtfertigungsmöglichkeiten für mitgliedstaatliche Beschränkungen der EG-Grundfreiheiten’ [2000] EuZW 627; Ingo Heberlein, ‘Europa und die Gesetzliche Krankenversicherung’ [2001] NVwZ 3601; Kurt Faßbender, ‘Grenzüberschreitende Krankenversicherung versus Sachleistungsprinzip im Lichte der EG-Grundfreiheiten und ein “zurückrudernder” Generalanwalt’ [2002] NJW 3601.

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the cases Kohll,24 Decker,25 Molenaar,26 Vanbraekl,27 Ionnidis28 and Herrera.29

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Case C-158/96 Kohll [1998] ECR I-1936, concerning the justification of a prior authorisation in order to maintain a medical and hospital service for all on the grounds of public health protection. See also Ute Kötter, ‘Die Urteile des Gerichtshofs der Europäischen Gemeinschaften in den Rechtssachen Decker und Kohll: Der Vorhang zu und alle Fragen offen?’ [1998] VSSR 233; Sean van Raepenbusch, ‘Le libre choix par les citoyens européens des produits médicaux et des prestations de soins, conséquence sociale du marché intérieur’ [1998] Cahiers de droit européen 683; Ulrich Becker, Die EuGH-Entscheidungen Decker und Kohll und deren Bedeutung für die gesetzliche Krankenversicherung, Grenzüberschreitende Inanspruchnahme von Gesundheitsleistungen (Nomos 2003) 51 et seq. 25 Case C-120/95 Decker [1998] ECR I-1871, concerning the general prohibition of requiring prior permission for getting medical treatment in another Member State. See also Meinhard Novak, ‘Bewilligungspflicht von ärztlichen Behandlungen in einem anderen Mitgliedstaat’ [1998] European Law Reporter 245, 245; Ulrich Becker, ‘Brillen aus Luxemburg und Zahnbehandlung in Brüssel: Die Gesetzliche Krankenversicherung im europäischen Binnenmarkt’ [1998] NSZ 359; Jean-Philippe Lhernould, ‘Une caisse de sécurité sociale est-elle tenue de rembourser les frais médicaux engagés par un assuré dans un autre Etat membre?’ [1998] Revue de droit sanitaire et social 616. 26 Case C-160/96 Molenaar [1996] ECR I-843, concerning care allowance where the patient is in the territory of another Member State. See also Meinhard Novak, ‘Export von deutschem Pflegegeld’ [1998] European Law Reporter 128, 129; Klaus Füßer, ‘Die Vereinigung Europas und das Sozialversicherungsrecht: Konsequenzen der Molenaar-Entscheidung des EuGH’ [1998] NJW 1762; Ulrich M. Gassner, ‘Pflegeversicherung und Arbeitnehmerfreizügigkeit’ [1998] NZS 313; Eberhard Eichenhofer, ‘Europäische Wirksamkeit der Pflegeversicherung’ [1998] NZA 742, 743. 27 Case C-368/98 Vanbraekl [2001] ECR I-5382, concerning the right to get the most advantageous refunding tariff. See also Meinhard Novak, ‘Spezialbehandlung im Ausland’ [2001] European Law Reporter 242; Thorsten Kingreen, ‘Zur Inanspruchnahme von Gesundheitsleistungen im europäischen Binnenmarkt’ [2001] NJW 3382; Jean-Philippe Lhernould and Francis Kessler, ‘La prise en charge des soins de santé programmés dans l’espace communautaire’ [2001] Revue de jurisprudence sociale 751; Christopher Hermann, ‘Grenzüberschreitende Inanspruchnahme von Krankenhausleistungen: Ökonomische Folgen der EuGH-Rechtsprechung zur Dienstleistungsfreiheit bei stationären Leistungen’ [2004] ZESAR 370. 28 Case C-326/00 Ioannidis [2003] ECR I-1725, concerning the obligation to get permission for medical treatment of pensioners abroad. See also Christoph Kürner, ‘Krankenbehandlung von Rentnern im Ausland’ [2003] European Law Reporter 221. 29 Case C-466/04 Herrera [2006] ECR I-5359, concerning travel costs that do not fall under the category of medical services.

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The legal background of these cases is the principle of free movement of services, which applies to the mobility of patients and medical services. As such, each EU citizen is allowed to seek medical treatment and to obtain medical products and services from another Member State, whereas the national health insurance is obliged to reimburse the costs.30 EU patient mobility legislation Although the EU has no significant powers in regard to the healthcare sector, the EU has regulated parts of the healthcare system based on the free movement principles. The EU harmonised for example the professional qualifications.31 In addition, the ECJ began applying internal market laws to healthcare. The first decisions of the ECJ concerned patient mobility and the reimbursement of medical costs for treatment in a Member State received in another Member State.32 Based on existing case law of the ECJ and in order to increase patient mobility within the EU, the EU Commission adopted an EU Directive on Patients’ Rights.33 The objectives of this Directive focus on the clarification of patients’ rights with regard to accessing cross-border healthcare provisions, the guarantee of safety, quality and efficiency of care that patients receive in other Member States and the promotion of cooperation between Member States on healthcare matters.34 The Directive focuses on patients’ rights to access healthcare treatment across EU borders and be reimbursed for 30

See Willy Palm and Irene A. Glinos, ‘Enabling patient mobility in the EU: between free movement and coordination’ in Elias Mossialos et al. (eds), Health Systems Governance in Europe: The Role of European Union Law and Policy (Cambridge University Press 2010) 509 et seq. 31 Article 53(1) TFEU provides that the mutual recognition of the diplomas and other qualifications required in each Member State for access to regulated professions can be used to facilitate freedom of establishment and provision of services. Based on articles 26 and 53 TFEU, Directive 2013/55/EU of the European Parliament and of the Council of 20 November 2013 amending Directive 2005/36/EC on the recognition of professional qualifications and Regulation (EU) No 1024/2012 on administrative cooperation through the Internal Market Information System entered into force on 20 November 2013 [2013] OJ L 354, p. 132. 32 Scott L. Greer, ‘Global health policy: governing health systems across borders’ in Kiran Walshe and Judith Smith (eds), Healthcare Management (2nd edn, Berkshire 2011) 120, 128. 33 Directive 2011/24/EU of the European Parliament and of the Council of 9 March 2011 on the application of patients’ rights in cross-border healthcare [2001] OJ L 88, p. 45. 34 See .

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it.35 The Directive comprises comprehensive provisions concerning crossborder healthcare and in Article 3 defines healthcare as ‘health services provided by health professionals to patients to assess, maintain or restore their state of health, including the prescription, dispensation and provision of medicinal products and medical devices’. The Directive can be seen in the light of the ECJ’s jurisprudence, in that it constructs patients’ rights largely as internal market entitlements.36 According to the Directive on Patients’ Rights the EU Commission has issued a Regulation concerning the coordination of social security systems which also covers the reimbursement of healthcare payments in another Member State between health insurers.37 Recently the EU Commission issued a Regulation concerning a European Health Insurance Card (EHIC) for unplanned healthcare treatment received in other Member States.38 According to this Regulation expenses are reimbursed according to the rules and rates of the country in which the treatment was received. The insurer, however, may alternatively decide to reimburse the full cost according to its own rules. Healthcare in the EU Charter of Fundamental Rights The EU Charter of Fundamental Rights comprises a specific provision for a right to health in Article 35. This article provides that: ‘Everyone has the right of access to preventive healthcare and the right to benefit from medical treatment under the conditions established by national laws and practices. A high level of human health protection shall be ensured by the definition and implementation of all Union policies and activities’. In the context of the existing EU case law of the ECJ the ‘right to healthcare’ could be interpreted in the sense of the provisions of the internal market regulation and the free movement principles as an 35 For a detailed overview see Wolf Sauter, ‘Harmonisation in Healthcare: The EU Patients’ Rights Directive’ (2011) 30 TILEC Discussion Paper . 36 Jean McHale, Fundamental Rights and Health Care (Cambridge University Press 2010) 282, 303. 37 Regulation (EC) No 833/2004 of the European Parliament and the Council of 29 April 2004 on the coordination of social security systems [2004] OJ L 166, p. 1. 38 Regulation (EC) No 987/2009 of the European Parliament and of the Council of 16 September 2009 laying down the procedure for implementing Regulation (EC) No 883/2004 on the coordination of the social security systems [2009] OJ L 284, p. 1.

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‘economic free movement principle’ rather than a ‘human right principle’. As a result the Charter of Fundamental Rights includes a general requirement of the EU that health should be protected in all Community policies. The institutions of the EU are bound to this requirement concerning all activities in other policy areas. Conclusion The healthcare system is within the national responsibility, regulated by the laws of the Member States and embedded in their national legal systems. The legal provisions as well as the structure and the financial concepts may differ from Member State to Member State. Although healthcare is based in the primary law in Article 168 TFEU and even in the EU Charter on Fundamental Rights in Article 35, the healthcare system itself is not subject to harmonised EU law. The Member States have not transferred competences to a significant extent to the EU. However, the inclusion of healthcare in the EU Charter of Fundamental Rights indicates the importance of the ‘right to health’ and the protection of health as one principle of the EU. Whereas the healthcare provisions are not harmonised by EU law, competition is regulated mainly by harmonised EU law. The question is how the relationship between healthcare, on the one side, and competition, on the other side, is characterised. In the following paragraph the exposure of healthcare systems to competition law will be analysed in more detail.

3. INCREASING EXPOSURE OF HEALTHCARE SYSTEMS TO COMPETITION LAW Importance of Healthcare Policy The healthcare system is one of the most important areas of public policy on a national level. Besides the question of financing the national healthcare system there are other aspects that play an important role, such as health risks and specific needs of the population, the structure of civil society and the private sector. In most states the healthcare sector is characterised by public policy objectives, social policy goals and the principle of solidarity. Healthcare products and services as well as access to medical care are very often the focus of disputes on social equality and justice.

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In addition, it is the main task of a state to protect its society and the health of its population. Based on social policy objectives, political decisions and safety regulations the healthcare sector is highly regulated. Pharmaceutical products, for example, not only cause effects but also cause side effects and thus need a market authorisation for their marketability. Moreover, medicinal products very often have to be prescribed and there are detailed provisions under what circumstances health insurance funds must pay the cost of a medical treatment directly. Thus, these products are subject to a complex regulation procedure that includes even further pharmacovigilance obligations once the pharmaceuticals are on the market. Economic Importance and Economisation Technological change may reduce costs when it increases the productivity of healthcare resources by providing less costly production methods for existing products, or it may increase costs when it promotes new and expensive products.39 Technological progress very often leads to new treatment methods, pharmaceutical products and other developments that improve the treatment of diseases and the quality of life. Innovations in the health sciences have resulted in dramatic changes in the ability to treat diseases and improve the quality of life.40 Since the late 1990s expenditures on pharmaceutical products has grown faster compared to other major components of the healthcare system.41 As pointed out above, almost all states are confronted with a forward-looking provision of medical services for their population, a nationwide supply with healthcare services, questions of equal access and the question how to finance the national healthcare system. The demographic change as well as the increased demand of an ageing population, new technological possibilities, treatment and care options, on the one hand, and limited resources, on the other hand, may result in 39

See Nilmini Wickramasinghe and Eliezer Geisler (eds), Encyclopedia of Healthcare Information Systems (Information Science Reference (IGI Global) 2008) 292. They also mention how difficult it is to measure the costs of treatments in cases of technological changes: ‘Measuring the cost of a medical treatment when such “process innovations” and “product innovations” change the access to care and the treatment is not easy’. 40 See from a US perspective, Joseph A. DiMasi et al., ‘The price of innovation: new estimates of drug development costs’ (2003) 22 Journal of Health Economics 151. 41 See Joseph A. DiMasi et al., ‘The price of innovation: new estimates of drug development costs’ [2003] 22 Journal of Health Economics 151.

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unsustainable healthcare policies in the near future. Ensuring access to healthcare for all citizens, not just for those who can afford it, is one of the main goals of social policy. Cost restraints, however, could jeopardise these goals. The funding of sustainable healthcare systems is thus one of the main objectives in maintaining general access to healthcare. Simultaneously the healthcare system is challenged by increasing costs and financing issues. Life expectancy has increased significantly over the last 50 years. At the same time healthcare expenditures have also increased dramatically.42 Very often parts of the healthcare sector are not organised as market systems where patients may ‘buy’ healthcare services or products. Instead, in free markets such products are frequently delivered by publicly owned or controlled entities and their activities are not purely efficiency-driven.43 Therefore, in some areas of the healthcare sector it is difficult to introduce the elements of economisation and liberalisation. In some areas, however, these tools have already been introduced. The systems of Diagnosis Related Groups in Germany and Switzerland, for example, shifted the remuneration for hospital treatments from a costbased scheme to a per-case flat rate scheme, which also made it necessary to regulate the financial flows between the suppliers. Tendencies of Liberalisation and Competition Almost all EU Member States and also Switzerland are faced with increasing costs for healthcare. Many states are engaged in cost reduction efforts. Besides strict cost containment an increasing economisation of parts of the healthcare sector may reduce costs by creating competition 42

See from an economic point of view Stefan Felder, ‘Managing the Healthcare System: The Impact of Demographic Change on Healthcare Expenditure’ (2013) 1 CESifo DICE Report 3, . From an economic point of view Felder discusses the relationship between longer lives and future healthcare expenditures: ‘Overall, empirical studies suggest that the impact of a longer life on future healthcare expenditure will be quite moderate because of the high costs of dying and the compression of mortality and morbidity in old age. If proximity to death, and not age per se, determines the bulk of expenditure, a shift in the mortality risk to higher ages will not significantly affect lifetime healthcare expenditure, as death occurs only once in every life’. 43 See Claudia Landwehr and Dorothea Klinnert, ‘Value Congruence in Health Care Priority Setting: Social Values, Institutions and Decisions in three Countries’ [2015] Cambridge Journals 113.

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between different providers of healthcare services and products. Liberalisation leads to certain ‘markets’ in the healthcare sector. Competition in these markets aims at decreasing costs. In countries where the healthcare sectors are less regulated or even dominated by private undertakings, competition law plays a much larger role. The regulation of healthcare in the US, for example, is different compared to several European countries. Healthcare in the US is provided by many distinct organisations whereas healthcare facilities are largely owned and operated by private sector businesses. Against this background the healthcare market is dominated by private undertakings and competition. As a consequence, competition law plays an important role in cost control. According to the US Federal Trade Commission (FTC), ‘competition in healthcare markets benefits to consumers because it helps contain costs, improve quality, and encourage innovation’.44 Players in these healthcare markets are, in the view of the FTC, not only pharmaceutical companies but also all market participants, ‘including physicians and other health professionals, hospitals and other institutional providers, pharmaceutical companies and other sellers of healthcare products, and insurers’.45 When tasks are delegated from state-owned or controlled entities to private companies this liberalises the healthcare sector and establishes the necessary preconditions for competition. This may, however, result in tension between competition law and healthcare law, social policy goals and the principle of solidarity.46 Conclusion The healthcare system in Western countries is characterised by increasing costs and the problem of financing. Economisation, liberalisation as well as privatisation may be used to increase competition and reduce healthcare costs. The more liberalisation leads to (new) markets, the more competition law may apply to protect competition from distortions and 44 Federal Trade Commission, Competition in the Health Care Marketplace . 45 Federal Trade Commission, Competition in the Health Care Marketplace . 46 See Rolf Schmucker, ‘Solidarität in der europäisierten Gesundheitspolitik? Zum Verhältnis von Wettbewerb und Solidarität im europäischen Binnenmarktprojekt’ in Roman Böckmann (ed), Gesundheitsversorgung zwischen Solidarität und Wettbewerb (Springer 2009) 203 et seq.

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restrictions. The more tasks are delegated by publicly owned entities to private undertakings the more competition law provisions may apply. The questions, however, remain whether competition law is applicable in all areas of the healthcare sector and to what extent competition law may be applicable. These questions will be assessed in more detail in the following paragraphs, with a special focus on EU law and some examples of the national law of EU Member States.

4. APPLICABILITY OF COMPETITION LAW IN THE HEALTHCARE SECTOR Public Entities or Private Undertakings? There is no dispute that competition law applies to all business sectors and as such also to the healthcare sector. Competition law addresses the distortion or restriction of competition by private undertakings. Thus, competition law provisions apply exclusively to undertakings. This results from their purpose to complement the internal market freedoms that apply to the EU Member States’ authorities in order to prevent barriers to trade.47 Whereas the competition law provisions of Articles 101 and 102 TFEU directly refer to ‘undertakings’ as addressees, the provisions of Article 107–109 TFEU regarding state aid are addressed to the EU Member States.48 The healthcare sector is, however, regulated to a large extent by public policy. Hospitals and care facilities are very often state-owned and state-controlled; other facilities are subject to state subsidies and other players in the healthcare sector, such as health insurers, are regulated, whereas in the most states at least parts of health insurance is financed by ‘public’ means in the form of insurance fees or taxes. In addition and from an economic point of view, the providers of products and services in the healthcare sector are confronted with very low demand elasticity. Demand for certain healthcare products and services is significantly less or even not price sensitive at all compared to other markets. Thus, consumers or patients will not ask for additional products or services even if the prices in the healthcare sector go down. Since competition law only addresses the market conduct of private 47 Wolf Sauter, ‘Health Insurance and EU Law’ (2011) 21 Tilburg Law School Legal Studies Research Paper 2. 48 See Jürgen Schwarze, ‘Der Staat als Adressat des europäischen Wettbewerbsrechts’ [2001] EuZW 613.

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undertakings, the question is whether the players in the healthcare system may be classified as private undertakings.49 In the following paragraphs EU case law concerning the term ‘undertaking’ in healthcare systems will be analysed in more detail. Since competition law is applicable to the healthcare sector and social policy goals are in general no justification for the non-application of competition law, the question whether an entity of the healthcare sector can be classified as an undertaking for the application of competition law is very often highly debated in individual cases. Concept of the Undertaking Difficulties of the concept in the healthcare sector Although Articles 101, 102, 107–109 TFEU and the EU Merger Control Regulation refer to undertakings, this term is not defined in the Treaties. However, its meaning has already been defined as a result of the case law of the EU Courts. As such, an undertaking can be defined as any entity engaged in an economic activity consisting in offering goods or services on a given market, regardless of its legal status and the way in which it is financed. According to consistent case law no intention to earn profits is required to qualify for an undertaking. Also public bodies are not by definition excluded and state ownership does not exclude the qualification of an entity as an undertaking in terms of competition law. In summary and according to the case law of the EU Courts the definition of an undertaking covers any entity engaged in an economic activity, regardless of its legal status and the way in which it is financed.50 The only criterion that qualifies an entity as an undertaking is the question whether the entity is engaged in an economic activity. The question whether there is such an economic activity must be assessed on a case-by-case basis. Thus, an entity may be completely under state 49

For a detailed overview see L Hancher and W Sauter, ‘EU Competition and Internal Market Law in the Healthcare Sector’ [2012] Oxford, Part III, 7. 50 See for example Case C-41/90 Höfner and Elser [1990] ECR I-2010; Joined Cases C-264/01, C-306/01, C-354/01 and C-355/01 AOK-Bundesverband and Others [2004] ECR I-2524. For comment on the judgment in Höfner and Elser see Stefan Speyer, ‘Disparität zwischen gesetzlichem Vermittlungsmonopol und Marktausfüllung als Missbrauchstatbestand’ [1991] EuZW 399; Ulrich Ehricke, ‘Staatliches Arbeitsvermittlungsmonopol und Gemeinschaftsrecht’ [1991] WuW 970; Christian Koenig, ‘Marktmissbrauch durch Monopolversagen – der Urteilsklassiker Höfner und Elser als Bedrohung der letzten öffentlichen Dinosaurier’ [2009] EWS I.

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control and not intend to make profits, but can be classified as an undertaking for a specific activity if this activity is an economic activity. An economic activity may be defined as offering goods or services on a specific market. If this is the case, the entity may be classified as an undertaking – even if this is only partially true or applies only to a certain part of its activities and regardless of the legal status of the entity and the way it is financed. The main criterion to assess whether an entity can be qualified as an undertaking is its activity. When determining whether an entity is an undertaking and therefore competition law applies, the specific activity has to be assessed. There is no general rule for clear cut decisions and the case law of the EU Courts is inhomogeneous. Some examples will be assessed in more detail in the following paragraphs to illustrate the existing EU case law. Since service providers vary in their tasks the relevant case law will be analysed in terms of the categories of health insurances, hospitals and other care facilities as well as healthcare and medical associations. Health insurances In general there is no reason why insurers in the healthcare sectors should not be classified as undertakings in the context of competition law. If a specific entity offers insurance services in the context of healthcare in a specific market this entity may qualify as an undertaking.51 If an insurer acts as a private undertaking providing marketbased healthcare insurance in a specific market it will be classified as an undertaking. In this regard competition law rules may apply. Health insurers, however, can also provide services of general economic interest which could restrict or even exclude the application of competition law. In EU Commission Communication 2001/C 17/0452 health insurance systems fulfil a specific task. The EU Commission noticed that ‘services such as … compulsory basic social security schemes are also excluded from the application of competition law and internal market rules’. If a state, for example, is maintaining a specific insurance system and is not seeking to engage in gainful economic activity but is fulfilling its duty towards its own population in the social, cultural and educational fields its classification as an entity under these circumstances is not that clear. 51 See for an overview on healthcare insurance systems in the EU, see Wolf Sauter, ‘Health Insurance and EU law’, . 52 Communication from the Commission C 17/04 [2001] OJ C-17.

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In the case Bundesverband AOK and others the ECJ in a preliminary ruling had to answer the question whether certain sickness funds (Krankenkassen) of the German statutory health insurance system qualify as undertakings, before examining the question whether groups representing those bodies, such as the fund associations, must be regarded as associations of undertakings when they determine binding maximum amounts.53 In its judgment the ECJ refers first to the concept of an undertaking as developed in previous cases.54 The concept of an undertaking in competition law covers any entity engaged in economic activity, regardless of the legal status of the entity

53 Joined Cases C-264/01, C-306/01, C-354/01 and C-355/01 AOK Bundesverband der Betriebskassen (BKK), Bundesverband der Innungskrankenkassen, Bundesverband der landwirtschaftlichen Krankenkassen and others [2004] ECR I-2524. 54 For this judgement see Daniel Riedel, ‘Krankenkassen keine Unternehmen i. S. des Wettbewerbsrechts – Arzneimittelfestbeträge zulässig’ [2004] EuZW 245; Marion Viol, ‘Zusammenschlüsse von Krankenkassen, Festsetzung von Höchstbeträgen für Arzneimittel und das Wettbewerbsrecht’ [2004] European Law Reporter 126; Sonja Mühlenbruch and Tillmann Schmidt, ‘Zur Einordnung der Tätigkeit von Krankenkassen hinsichtlich europäischem Wettbewerbsrecht und Dienstleistungsfreiheit’ [2004] ZESAR 171; Markus Krajewski, ‘Festbetragsregelung, Krankenkassen und europäisches Wettbewerbsrecht’ [2004] EWS 256; K.P.E. Lasok, ‘When is an Undertaking not an Undertaking?’ [2004] ELR 383; Jennifer Skilbeck, ‘The EC Judgement in AOK: Can a Major Public Sector Purchaser Control the Prices it Pays or is it Subject to the Competition Act?’ [2004] Public Procurement Law Review NA 95; Jean-Philippe Lhernould, ‘La fixation du taux de remboursement des médicaments est-elle contraire aux règles du droit de la concurrence?’ [2004] Revue de jurisprudence sociale 440; Ulrich M. Gassner, ‘Arzneimittel-Festbeträge: Luxemburg locuta – causa finita’ [2004] WuW 1028; Ralf P. Schenke, ‘Die AOK-Bundesverband-Entscheidung des EuGH und die Reform der gesetzlichen Krankenversicherung’ [2004] VersR 1360; Christian Koenig and Christina Engelmann, ‘Das Festbetrags-Urteil des EuGH: Endlich Klarheit über den gemeinschaftlichen Unternehmensbegriff im Bereich der Sozialversicherung?’ [2004] EUZW 682; Somaya Belhaj and Johan W. van de Gronden, ‘Some Room for Competition Does Not Make a Sickness Fund an Undertaking – Is EC Competition Law Applicable to the Health Care Sector?’ [2004] ECLR 682; Markus Krajewski and Martin Farley, ‘Limited competition in national health systems and the application of competition law: the AOK Bundesverband case’ [2004] ELR 842; Marc Reysen and Günter Bauer, ‘Health Insurance and European Competition Law’ [2004] ZWeR 568; Laurence Idot, ‘Champ d’application – Retour sur la notion d’entreprise à propos des caisses allemandes de maladie’ (2004) Europe 2004 N 14 26; Wolfgang Jaeger, ‘Die gesetzlichen Krankenkaussen als Nachfrager im Wettbewerb’ [2005] ZWeR 31.

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or the way in which it is financed. Concerning the social security system the Court pointed out that: In the field of social security, the Court has held that certain bodies entrusted with the management of statutory health insurance and old-age insurance schemes pursue an exclusively social objective and do not engage in economic activity. The Court has found that to be so in the case of sickness funds which merely apply the law and cannot influence the amount of the contributions, the use of assets or the fixing of the level of benefits. Their activity, based on the principle of national solidarity, is entirely non-profitmaking and the benefits paid are statutory benefits bearing no relation to the amount of the contributions.’55

As a result the ECJ held that the German sickness funds fulfilled an exclusively social function that was based on the principle of solidarity and it was entirely non-profit making. Under these circumstances EU competition law is not applicable to the core activities of such funds. This also includes the cooperation between these funds when determining binding contributions payable by themselves for the purchase of medical products.56 The ECJ clarified the criteria for a health insurer to constitute an undertaking in the AG2R in which the Court had to assess the scheme for supplementary reimbursement of healthcare costs.57 In France, healthcare costs incurred by employees in the event of illness or accident are reimbursed in part by the basic social security scheme, whereas the portion of the costs that remains to be paid by the insured person may be reimbursed in part by supplementary health insurance. The Court drew attention in the first place to Article 106(1) TFEU, according to which in the ‘case of public undertakings and undertakings to which Member States grand special or exclusive rights, Member States may neither enact nor maintain in force any measure contrary to the rules contained in the Treaties, in particular to those rules provided for in Article 18 TFEU and in Articles 109 TFEU to 109 TFEU, subject to Article 106(2)’.58 55 Joined Cases C-264/01, C-306/01, C-354/01 and C-355/01 AOK Bundesverband der Betriebskassen (BKK), Bundesverband der Innungskrankenkassen, Bundesverband der landwirtschaftlichen Krankenkassen and others [2004] ECR I-2524, para. 47. 56 See also M. Reysen and G. Bauer, ‘Health Insurance and European Competition Law’ [2004] ZWeR 568. 57 Case C-437/09 AG2R Prévoyance v Beaudout Père et Fils Sarl EU:C: 2011:112. 58 Ibid., para. 29.

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Paying special attention to the misuse of market dominance according to Article 102 TFEU the Court pointed out that ‘with regard to the interpretation of Article 102 TFEU, it is necessary to establish whether an institution such as AG2R is an undertaking for the purpose of that provision’.59 The Court clarified that in ‘the context of EU competition law, the concept of an undertaking covers any entity engaged in an economic activity, irrespective of its legal status and the way in which it is financed’.60 Furthermore, it is clear that ‘any activity consisting in offering goods and services on a given market is an economic activity’.61 The Court concluded that it followed from the French Social Security Code that AG2R was a ‘non-profit making legal person which is governed by private law and has as its object the provision of cover for physical injury caused by accident or sickness’.62 As a consequence the Court noted that ‘inasmuch as it provides compulsory supplementary social protection for all employees within a particular economic sector, a scheme for supplementary reimbursement of healthcare costs … pursues a social objective’.63 It should be pointed out and clarified in this context that the ECJ has not excluded certain German or French sickness funds or health insurers from the applicability of competition law. On the contrary, the decision of the ECJ was a decision based on the assessment of an economic activity in the specific case. Hospitals and care facilities Within the categories of hospitals and care facilities two types of entities can be distinguished: publicly owned entities and private undertakings. Whereas it is less difficult to classify private hospitals as private undertakings, publicly owned entities are difficult to assess. In some Member States publicly owned hospitals are very often linked to public universities and do not engage in economic activities. Member States finance these public universities, research institutes and hospitals whose main purpose is in research in order to fulfil a public supply healthcare mandate and not the offer of goods or services in a specific market. In practice, it is not easy to determine exactly whether the activities carried out by a university or a hospital can be considered to be economic 59

Ibid., Ibid., Ibid., Ibid., Ibid.,

60 61 62 63

para. para. para. para. para.

40. 41. 42. 43. 44.

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and whether the entity concerned can be classified as an undertaking. This question is even more difficult to assess if a publicly owned entity receives subsidies from the state, especially if the subsidy is linked to a specific public supply mandate. In Germany, for example, there is a case currently pending in which the question of such a supply mandate has been brought before the German Supreme Court (Bundesgerichtshof). In the case Bundesverband Deutscher Privatkliniken (BDPK), the federal association of privately owned hospitals in Germany, has filed a lawsuit against the Landkreis Calw on the grounds that the District Calw had paid subsidies to certain local state-owned hospitals whereas privately owned hospitals had not received such subsidies.64 The District pointed out that the subsidies had been granted to the state-owned hospitals in order to allow them to fulfil a public supply mandate. The private-owned hospitals argued in return that they were also helping to fulfil this public supply mandate and that the subsidy could restrict or distort competition for hospital services in that District. The case is still pending and the German Supreme Court has not yet resolved the case. Although this case does not focus on the question whether an entity may be classified as an undertaking it illustrates the complexity of public supply mandates and the question whether there is an economic activity. Healthcare and medical associations The question concerning the classification of an entity as an undertaking also arises in relation to associations or other medical organisations. In the Fenin case the ECJ had to decide whether Fenin, a medical association, represented an undertaking within the meaning of competition law.65 Fenin was an association that comprised the majority of 64

Supreme Court, Bundesverband Deutscher Privatkliniken (BDPK)/ Landkreis Calw, Ref. 2 U 11/14. 65 Case C-205/03 P Federación Española de Empresas de Tecnología Sanitaria (Fenin) v EU Commission [2006] ECR I-6320. See also Joachim Bornkamm, ‘Der Unternehmensbegriff im europäischen und deutschen Kartellrecht – “FENIN” Revisited, Einheit und Vielheit im Unternehmensrecht’ in Peter Jung et. al. (eds), Einheit und Vielfalt im Unternehmensrecht – Festschrift für Ume Blaurock zum 70. Geburtstag (Mohr Siebeck 2013) 41 et seq.; Ilja Baudisch, ‘Zum Unternehmensbegriff des EG-Wettbewerbsrechts’ [2007] European Law Reporter 20; M. Krajewski and M. Farley, ‘Non-economic activities in upstream and downstream markets and the scope of competition law after FENIN’ [2007] European Law Review 111; Laurence Idot, ‘Activité d’achat et application du droit des pratiques anticoncurrentielles’ [2006] Europe 2006 N 10 23.

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the undertakings marketing medical goods and equipment, particularly medical instruments used in Spanish hospitals. The members of the association were selling those goods, inter alia, to the SNS management bodies. The SNS management bodies consisted of several public bodies including three ministries that run the national healthcare system, Sistema Nacional de Salud (SNS). The sales of medical goods and equipment to the SNS management bodies represented more than 80% of the undertakings’ turnover, which undertakings were members of Fenin. The ECJ stated that in accordance with the criteria of existing case law Fenin’s activity comprised offering goods and services on a given market, which is the characteristic feature of an economic activity.66 As a result Fenin was considered as an undertaking and the competition law provisions applied. Conclusion Competition law applies only to private undertakings. An entity may be qualified as an undertaking if it pursues economic activities in a specific market. This is a question that needs to be assessed on a case-by-case basis. The criterion of an economic activity is not only complex but also very difficult to assess. If a (public) entity performs tasks within a social security system, competition law may not apply to the activities of this entity as such tasks are not considered as economic activities. In several ECJ jurisdictions within the last ten years the Court had to assess the question whether health insurers or medical organisations could be classified as private undertakings, which are within the scope of competition law application. The ECJ defined some criteria and guidelines in order to assess the question whether an entity could be considered as an undertaking. The ECJ, however, did not take into account the principle of national solidarity as such, but only in the context of an economic activity. Thus, the question of non-profit making and the correlation between benefits paid and the amount of the contributions have to be seen in the context of economic activity. In some cases, especially the AG2R case, the ECJ showed a tendency to analyse the applicability of competition law in the social security law

66 Case C-205/03 P Federación Española de Empresas de Tecnología Sanitaria (Fenin) v EU Commission [2006] ECR I-6320, para. 26.

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context under Article 106(2) TFEU rather than considering whether a social security service provider is an undertaking under competition law.67

5. SECTOR SPECIFIC RESTRICTIONS OF COMPETITION? Sectors and Forms of Restrictions of Competition If an entity that provides products or services in the healthcare sector is qualified as an undertaking, competition law applies in principle. The question in this context is whether there are any specific forms of restriction of competition that are characteristic of the healthcare sector. The US Federal Trade Commission has been investigating specific forms of restrictions and has identified restrictions such as ‘mergers amongst hospitals’, ‘providers’ collective provision of non-fee-related information to purchasers of health care services, ‘providers’ collective provision of fee-related information to purchasers of health care services, ‘provider participation in exchange of price and cost information’, as well as ‘joint purchasing arrangements among health care providers’, ‘physician network joint ventures’ and ‘multiprovider networks’.68 The way in which competition is restricted by undertakings differs from sector to sector and from state to state depending on the structure of the healthcare system, the level of state intervention and the scope for liberalisation of the various healthcare markets, which may influence the question of economic activity. Cartels Cartels within the healthcare sector have been subject to the comprehensive assessment of the pharmaceutical sector following a sector inquiry to investigate the competition of the pharmaceutical sector launched by the EU Commission in January 2008 – the so-called ‘Pharma Sector 67

See also Christian Kersting, ‘Social Security and Competition Law – ECJ focuses on Art. 106 (2) TFEU’ [2011] JECLAP 473. 68 US Department of Justice and the Federal Trade Commission, Statements of Antitrust Enforcement Policy in Health Care, August 1996 .

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Inquiry’.69 The EU Commission started this inquiry to find out the reasons why fewer new medicines were launched on the market and the entry of generic medicines sometimes seemed to be delayed. This inquiry began after a number of parallel trade cases. Following the sector inquiry the EU Commission issued statements of objections against pharmaceutical companies in two cases. In the Citalopram case the EU Commission investigated whether the pharmaceutical company Lundbeck and several generic competitors had entered into agreements in order to block the market entry of the generic citalopram.70 In the Perindopril case, the EU Commission fined the pharmaceutical company Les Laboratoires Servier and several generic competitors who had entered into agreements, which may have hindered the market entry of the generic perindopril into markets in the EU.71 The medical devices sector has also been the subject of an investigation of the EU Commission in a cartel case. The EU Commission adopted its first antitrust decision on the market for medical devices in 2010 and imposed a fine of €5 million on the Ordre National des Pharmaciens (ONP) for imposing minimum prices on the French market for clinical laboratory tests, and hindering the development of laboratory groups. Abuse of Market Dominance Pharmaceuticals In the healthcare sector most of the cases concerning an abuse of market dominance are linked to intellectual property rights such as patents, or other rights with an exclusionary effect, like data exclusivity resulting from pharmaceutical registration.72 There have been several cases of abuse of a market dominant position resulting from intellectual property rights on a national and an EU level. 69

See Commission Decision of 15 January 2008 initiating an inquiry into the pharmaceutical sector pursuant to Article 17 of Council Regulation (EC) No 1/2003 (Case No COMP/D2/39.514), . 70 See the press release of the EU Commission of 25 July 2012, . 71 See the press release of the EU Commission of 30 July 2012 . 72 See Josef Drexl and Nari Lee (eds), Pharmaceutical Innovation, Competition and Patent Law – A Trilateral Perspective (Edward Elgar Publishing 2013).

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The leading case of an abuse of market dominance pursuant to Article 102 TFEU is the AstraZeneca Losec case.73 On 6 December 2012 the ECJ dismissed the appeal of AstraZeneca and upheld the General Court’s judgment of 1 July 2010 that Astra Zeneca had abused its dominant position by preventing the marketing of generic products for Losec. The ECJ confirmed the abusive behaviour regarding the misuse of the patent system to obtain supplementary protection certificates and the misuse of the regulatory system by selective withdrawal of certain marketing authorisations. It emphasised that EU competition law prohibits a dominant undertaking from eliminating a competitor by using methods other than those that come within the scope of competition on the merits.74 Similar cases also exist on a national level. In June 2011 the UK government launched a lawsuit against the French pharmaceutical company Les Servier Laboratories Ltd for abusing its dominant position.75 Les Servier Laboratories was accused of having caused a delay to competitors who wanted to launch their own generic product of a blood pressure drug. Special situation for the healthcare sector? If providers of services or products of the healthcare sector are qualified as an undertaking and if they are in a market dominant position – either single or collective dominance – their market conduct is within the assessment of misuse of market dominance. Pharmaceutical companies 73

Case C-457/10 P AstraZeneca v Commission EU:C:2012:770. See Claudia Seitz, ‘Klare Grenzlinie und Minenfeld: Die Marktmissbrauchskontrolle im Arzneimittelsektor nach dem AstraZeneca-Urteil des EuGH’ [2013] EuZW 377; Rupprecht Podszun, ‘Can Competition Law Repair Patent Law and Administrative Procedures? AstraZeneca’ [2014] CMLR 281; Marc Besen, ‘EuGH: “AstraZeneca”-Entscheidung des EuGH: Konsequenzen für die Missbrauchskontrolle’ [2013] GRUR Prax 33; P. van Malleghem and W. Devroe, ‘AstraZeneca: Court of Justice Upholds First Decision Finding Abuse of Dominant Position in Pharmaceutical Sector’ [2013] JECLAP 228; Michele Giannino, ‘The EU Court of Justice Upholds the AstraZeneca Condemnation for Misusing Patent Law Procedures’ [2013] JECLAP 317; Adrian Spillmann, ‘Transparency Obligation for Holders of EU IP assets in the Pharmaceutical Industry’ [2014] JECLAP 125; B. Batchelor and M. Hearly, ‘CJUE AstraZeneca Judgement: Groping Towards a Test for Patent Office Dealings’ [2013] ECLR 171; Laurence Idot, ‘Abus de position dominante dans le secteur pharmaceutique. La Cour confirme que le détournement de procedures réglementaires pour retarder l’entrée de génériques sur le marché peut être constitutive d’abus’ [2013] Europe 2013 N 2 37. 75 High Court of Justice, Chancery Division. Patents Court, [2011] EWHC 730 (Pat), Case No: 06C3050. 74

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are subject to investigations by the EU Commission and the national competition authorities in cartel cases as well as in cases of market dominance abuse.76 The same applies to health services and medical devices. Although the EU Commission has pointed out that the organisation of the healthcare sectors is primarily the responsibility of the Member States, ‘activities that involve offering goods and services on the market, including the provision of healthcare goods and services, are generally subject to EU competition rules’.77 Even in relation to market dominance the healthcare sector may be described by some special characteristics that do not exist in other markets. Many firms, classified as undertakings, find themselves in a market dominant position because of former public market regulations. In addition, the markets in question are very often characterised by several high market entry barriers such as the existing infrastructure, the need for capacity utilisation of hospitals or care facilities or significant investment costs. In such circumstances it is relatively easy to obtain a market dominant position. Accordingly there are numerous opportunities for different forms of abusive behaviour. On a national level the Polish case of Narodoqy Fundusz Zdrowia (NFZ) concerned the abusive behaviour of a national health fund. The Polish Court of Appeal upheld a decision of the Office of Competition to fine NFZ for its abuse of market dominance. NFZ was the national health fund and as such the only public provider of health services. The Court considered NFZ to be an undertaking and held that it had abused its dominant position by including continuity clauses in its tenders that unfairly favoured companies that had cooperated with NFZ in the past. Conclusion Although the pharmaceutical sector is not so different from other sectors, there are some characteristics that result from the interplay of pharmaceutical law, regulatory law and IP protection. The pharmaceutical sector is not as difficult to assess as other parts of the healthcare sector. Even more questions concerning the application of competition law may arise concerning undertakings that have taken over tasks which are in the public interest or which have to fulfill a public mandate. Thus the question may arise whether and to what extent the entity offers goods or services in a specific market. What needs to be assessed is whether 76

See sections 5.1 and 5.2 above. See EU Commission, . 77

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providing services is equal to offering services and whether there is a specific market.

6. RELATIONSHIP BETWEEN EU COMPETITION LAW AND NATIONAL HEALTHCARE LAWS Healthcare Services as Services of Economic Interest Several segments of the healthcare sector have been in the focus of EU competition law in the context of the EU state aid rules. In this regard the doctrine of services of general economic interest has been developed. Services of general economic interest (SGEI) are economic activities that public authorities identify as being of particular importance to citizens and that would not be supplied or would be supplied under different conditions if there were no public intervention.78 Public intervention consists of financial help, which does not constitute state aid in the context of Article 107 TFEU.79 In its judgment in Altmark 80 the ECJ 78 For the term of services of general economic interest (SGEI) see the definition of the EU Commission . 79 See also C. Seitz and S. Breitenmoser, ‘Rechtsentwicklungen für Dienstleistungen von allgemeinem wirtschaftlichen Interesse im europäischen Beihilferecht: Neuer Qualitätsrahmen der EU-Kommission unter besonderer Berücksichtigung der Investitionsförderung im Krankenhausbereich’ (2012) 201 SJER 445. 80 Case C-280/00 Altmark Trans GmbH [2003] ECR I-7810. See Michael Jürgen Werner, EuGH: ‘Ausgleich gemeinwirtschaftlicher Verpflichtungen im öffentlichen Personennahverkehr’ [2003] EuZW 503; Sascha Michaels, ‘Europäische ÖPNV-Systeme im Lichte der europäischen Reformtendenzen’ [2003] EuZW 520; Adinda Sinnaeve, ‘State Financing of Public Services: The Court’s Dilemma in the Altmark Case’ [2003] European State Aid Quarterly 351; Ulrich Schnelle, ‘Bidding Procedures in EC State Aid Surveillance over Public Services after Altmark Trans’ [2003] European State Aid Law Quarterly 411; Michael Sánchez Rydelski, ‘Compensation for Discharging Public Service Obligations: State Aid or not State Aid? – That was the Question’ [2013] European Law Reporter 318; Noël Travers, ‘Public Service Obligations and State Aid: Is all really clear after Altmark?’ [2013] European State Aid Law Quarterly 387; Carsten Jennert, ‘Finanzierung und Wettbewerb in der Daseinsvorsorge nach Altmark Trans’ [2004] NVwZ 425; J. Werner and P. Quante, ‘Altmark Trans: Wendepunkt im Beihilfenrecht der nationalen Daseinsvorsorge?’ [2004] ZEuS 83; Andreas Bartosch, ‘Die Kommissionspraxis nach dem Urteil des EuGH in

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developed criteria to classify certain services as SGEI.81 In December 2011 the EU Commission adopted a legislation package, the Altmark II Package, which comprises several exemptions for social and healthcare services.82 According to Article 106(2) TFEU the provision of SGEI excludes the application of competition law. Article 106(2) TFEU states: ‘Undertakings entrusted with the operation of services of general economic interest … shall be subject to the rules contained in the Treaties, in particular to the rules on competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them’. As such, the question whether an undertaking provides SGEI also plays a decisive role in the question whether competition law provisions apply. Indirect Effects on National Healthcare Laws by Competition Law EU competition law is the result of the internal market rules of the EU in order to guarantee free market access for all undertakings and to protect competition from restrictions and distortions. Competition law rules are public interventions in order to achieve these results. EU competition law addresses the market behaviour of all undertakings in order to govern market access and to protect competition. Competition law includes public intervention to achieve these objectives. Competition law is applicable to the healthcare sector. Competition law of the Members States is based on EU competition law and to a large extent is identical to EU competition law. Regulation 1/2003 has harmonised the competition law regimes of the Member States with EU competition law.83 According to Article 6 of Regulation 1/2003 national der Rechtssache Altmark – Worin liegt das Neue?’ [2004] EuZW 295; Michael Ronellenfitsch, ‘Das Altmark-Urteil des Europäischen Gerichtshofs’ [2004] Verwaltungsarchiv 425; R. Wernsmann and T. Loscher, ‘Dienstleistungen von allgemeinem wirtschaftlichen Interesse im EU-Beihilfenrecht’ [2014] NVwZ 976. 81 See B. Allibert and A. Sikora, ‘La Commission applique pour la première fois la jurisprudence Altmark dans le domaine d’électricité’ (2004) 1 Competition Policy Newsletter 83. 82 See S. Hirsbrunner and I. Litzenberger, ‘Ein bisschen Almunia im MontiKroes-Paket? Die Reform der beihilferechtlichen Vorschriften betreffend Dienstleistungen von allgemeinem wirtschaftlichen Interesse, Europäische Zeitschrift für Wirtschaftsrecht’ [2011] EuZW 742. 83 Council Regulation (EC) No. 1/2003 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty [2002] OJ L 1, p. 1.

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courts shall have the power to apply Articles 101 and 102 TFEU. Because of the supremacy of EU law, EU competition law applies in all Member States in all sectors. According to Article 4 TEU Member States are obligated to facilitate the achievements of the Union’s tasks. This follows from their duty of cooperation. If there is an undertaking in the sense of competition law the application of competition law provisions is opened. Measures of Member States to Steer Application of Competition Law On the other side the healthcare sector is the responsibility of the Member States. As a result the scope for the application of competition law to the healthcare sector depends to a large extent on the organisation of the national healthcare system. If a part of the healthcare sector does not allow an economic activity in a specific market there is no scope for the application of competition law, neither EU competition law nor Member States law. As such the application of competition law provisions on a national level may vary from Member State to Member State. The healthcare system lays in the responsibility and competence of each Member State. The degree of liberalisation of the healthcare sector correlates with the scope in which competition law applies. If Member States decide to liberalise markets and to abolish restrictions of competition by the state this competition needs to be protected from new restrictions by private undertakings. The states may to some extent ‘steer’ the influence of competition law and as such the influence of EU law. Conclusion Undertakings carrying out an economic activity may not circumvent the application of competition law. The competition law of the Member States is harmonised law and to a large extent identical to EU competition law. Because of the supremacy of EU law the Member States may not restrict the application of EU law by creating special provisions in their national healthcare law to prevent the application of EU law. Since the EU has almost no competences in the healthcare sector regarding health law this is different concerning competition law. The Member States, however, may steer the application of competition law by varying the level of liberalisation. If there is no specific market in the healthcare sector an entity may not pursue an economic activity in a

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specific market. Since there is no undertaking as an addressee for competition law provisions, competition law may not apply.

7. SUMMARY The most significant objectives within the healthcare systems of the Member States and the EU can be seen in the goals of universal coverage of all people within a Member State or the EU, the principle of solidarity and the high standard and high quality of treatment.84 In particular, the principle of solidarity constitutes a reason for the classification of an entity as an undertaking and thus for excluding the application of competition law. The ECJ has applied the principle of solidarity as a criterion for example in the AG2R case. As regards the application of the principle of solidarity, an overall assessment of the scheme has shown that it is financed by fixed-rate contributions and that these rates are not proportionate to the risk insured.85 In this regard the principle of solidarity is an indication of the fulfilment of social tasks, which excludes the classification as an undertaking and as a consequence the application of competition law. There is no doubt that competition law of the EU and the Member States applies to all economic sectors including the healthcare sector. There are, however, significant exceptions from the general application of competition law. The healthcare sector is characterised by an unusually high degree of regulation and specific obligations. The Member States may not exclude parts of their national healthcare sector from the application of competition law – either by social policy objectives or by other objectives. This also applies despite the fact that the healthcare sector is the responsibility of the Member States. If an entity acts as an undertaking, competition law will apply. This follows from the supremacy of EU law and the duty of cooperation of the Member States. The relationship between competition law and the healthcare laws, however, is subject to several characteristics. Whereas competition law in the Member States is based on EU law and harmonised to a large extent, the healthcare laws are not harmonised at all. The application of harmonised law may have effects on the healthcare systems. Member 84 Johan Willem van de Gronden, ‘The Treaty Provisions on Competition and Health Care’ in Johan Willem van de Gronden et al. (eds), Health Care and EU Law (Springer 2011) 267. 85 Case C-437/09 AG2R Prévoyance v Beaudout Père et Fils Sarl [2011], para. 47.

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States, however, may ‘steer’ the application of (harmonised) competition law; and the influence of EU law has, by definition, the scope of liberalisation of the healthcare sector. If an entity in the healthcare sector does not pursue an economic activity it will not be qualified as an undertaking and as such is not subject to competition law, which only applies to undertakings. This leaves room for the Member States to solve the conflict of goals between market economy principles and competition law, on the one hand, and a centrally planned healthcare system, on the other hand. It remains a difficult task for the future to find the right balance between economisation, liberalisation and social policy objectives in the healthcare sector in order to reduce costs and to guarantee access to affordable medicine and healthcare. The outcome of this balance may influence the extent to which competition law will apply.

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7. Competition policy and the development of big data and artificial intelligence Shuya Hayashi, Kunlin Wu and Benjawan Tangsatapornpan 1. INTRODUCTION Information distributed and processed on information and communication technology (ICT) networks continues expanding and diversifying as a result of the evolution and widespread use of mobile devices and the progress of Internet of Things (IoT) technologies – a robust network of devices embedded with electronics, software and sensors that enable them to exchange and analyse data. In light of the quantitative and qualitative expansion of information use, many advanced research projects have been undertaken for the purpose of understanding how to extract the value of data using big data analytics and artificial intelligence (AI)-based technologies. The future vision of big data and AI is however not yet clearly defined. For example, how to connect big data and artificial intelligence (AI) with the ICT networks and create new services and how to make it easier for the public to work alongside technology to enable them to concentrate their talents on creative works rather than technical issues, are part of the evolving issues associated with big data and AI. At the same time, security and privacy issues are becoming more of a concern to consumers. What is clear, however, is that the advancement of AI networks creates new problems from a competition law point of view. Those problems relate directly to the large data concentration and retention possibilities that AI networks generate. The purpose of this chapter is to address how AI network developments and innovations are likely to run into competition law issues. Section 2 of this chapter highlights the nature of the pressure created by the data collection potential of AI networks. Section 3 looks at how the AI network and competition ecosystem interact with 162 Shuya Hayashi, Kunlin Wu and Benjawan Tangsatapornpan - 9781788972444 Downloaded from Elgar Online at 04/20/2020 09:07:06AM via Universita Degli Studi Roma Tre

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each other in their development process and what challenges this interaction brings for competition law. As part of this analysis, the chapter also considers how to strengthen Japan’s international competitiveness in this field, proposing some recommendations on future strategies in that regard.

2. THE UNPRECEDENTED DATA CONCENTRATION POTENTIAL OF AI NETWORKS Artificial intelligence networking refers to a phenomenon where AI systems connect to an information communication network (e.g. the Internet) and are utilised in conjunction with other AI and non-AI systems. The AI network in that regard refers to an information communication network system that includes an AI system connected to an information communication network, the information communication network itself, and other systems connected to the information communication network. As part of that network, an ‘AI platform’ constitutes the basis for mediating the functions of an AI network for other people through the information communication network. In the ICT sector, mechanisms are being developed to efficiently transmit small but various amounts of data and to aggregate networks or apply distributed processing methods. In the fields of data processing and utilisation, AI developments have dramatically streamlined the data processing system and new methods centred on cognitive process have become reality. However, to make those developments happen, there is a need for closer cooperation among the following ongoing developments: (1) accelerated improvement of the capacity of central processing units (CPUs), storage, and communication networks; (2) advancement of AI; (3) conversion of everything into data; and (4) distributed data processing. Many cyber-physical systems (CPSs),1 based on IoT/big data/AI technologies, are established far and wide to analyse results of data collected from real space and then immediately providing feedback to the 1

A cyber-physical system (CPS) is a mechanism that is controlled or monitored by computer-based algorithms, tightly integrated with the Internet and its users. In cyber-physical systems, physical and software components are deeply intertwined, each operating on different spatial and temporal scales, exhibiting multiple and distinct behavioural modalities, and interacting with each other in a myriad of ways that change with context. See US National Science Foundation, ‘Cyber-Physical Systems (CPS)’ .

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real space automatically. For instance, by connecting AI systems with other systems, a collaborative infrastructure may be applicable in the AI platform and enable benefits, including: (1) utilisation of the AI system using the data output by the other systems, (2) usage of the data output by the AI system to operate the other systems, (3) usage of the AI system, (4) utilisation of the AI system operation from the other systems, (5) creating an advance function by combining individual AI systems, (6) data network effects – AI service becomes more intelligent by acquiring more data from the users via machine learning. Concerning artificial intelligence advancements, coordination seems to be the starting point and is indispensable for the progress of AI networks. Since the late twentieth century, the progress of AI networks has been made thanks to advancements in information and communication technologies. These advancements mainly include: (1) development of sensor technology and audio/video recognition technology (perception device), (2) expansion of big data on the Internet, (3) development of advanced information-processing technologies including machine-learning techniques (deep learning), and (4) progress of artificial sound/image creation technology and robot technology. All these advancements facilitate the realisation of an AI-networked society. With the dissemination of AI technology, the fourth industrial revolution characterised by a fusion of advance technologies2 is expected to create a data-driven society3 in which data is the key to success in competition. Data collection and data coordination are essential features of artificial intelligence, and the ability to have at its disposal or to use those data makes AI-networks potentially powerful market players. From this perspective, the ability to collect and use those data generates concerns from a competition law point of view and will be analysed in the next section.

3. DATA CONCENTRATION, AI AND COMPETITION LAW From the perspective of competition law, it is currently unclear how to accurately evaluate the importance of data generated in an AI context. 2 These technologies include IoT, cloud computing, machine-to-machine (M2M) communications, 3D printing, and big data. 3 A data-driven society refers to a society in which data creates new value through cyber-physical systems, which are made possible by the development of communications technologies including M2M and IoT.

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Generally, the first step in a competition analysis is to delineate a relevant market where the anticompetitive effects occur. It is possible, for example, to imagine a scenario in which data (e.g. customer data collected by home appliance manufacturers) is the main target of a proposed merger, but the question that should first be asked and answered is whether data could be deemed to be the subject of a proposed transaction. Other possible scenarios include defining the relevant market as the market for data accumulation or storage and then determining whether a company’s behaviour constitutes an abuse of its market power. Another question that arises is whether data could constitute an ‘essential facility’ in a competition law context. Theoretically, it is possible, though not likely in practice, to consider data to be an ‘essential facility’ in specific circumstances.4 It is submitted that those data-related competition issues create challenges for competition regulators in the digital economy. To take one example, the Japanese government has begun to discuss data-related competition issues.5 The Ministry of Economy, Trade and Industry (METI), having jurisdiction over Japan’s industrial policies, established the ‘Study Group for Ideal Approaches to Competition Policies for the Fourth Industrial Revolution’ and published a study report in 2017.6 In the meantime, the Japan Fair Trade Commission (Japan’s competition agency) established the ‘Study Group on Data and Competition Policy’ to clarify the competition issues relating to accumulation and use of data, and also published a study report.7 A similar trend is observed in academic discussions. Big data and Competition Policy,8 a first-of-itskind book discussing the issues of data monopolies, attracted much 4

For a detailed discussion on the possibility of applying the essential facilities doctrine to data, see Inge Graef, EU Competition Law, Data Protection and Online Platforms: Data as Essential Facility (Wolters Kluwer 2016). 5 For a discussion on big data and related competition issues raised by French and German competition agencies, see Autorité de la concurrence German and Bundeskartellamt, Competition Law and Data (2016) . 6 Ministry of Economy, Trade and Industry, Report of the Study Group for Ideal Approaches to Competition Policies for the Fourth Industrial Revolution – Towards the realization of Connected Industries (Provisional translation, 2017) . 7 Japan Fair Trade Commission, Report of Study Group on Data and Competition Policy (Tentative translation, 2017) . 8 Maurice E. Stucke and Allen P. Grunes, Big Data and Competition Policy (OUP 2016).

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attention on its publication in 2016 and has been referred to frequently by competition law scholars all over the world, including Japan. This section will focus on the six topics in the context of data accumulation and use, depicting a whole picture of the issues: market power (3.1), market definition (3.2), abuse of dominance (3.3), merger review (3.4), protection of personal data and competition policy (3.5), and data ownership and data portability (3.6). Measuring Market Power in Data-related Markets The most relevant determinant of a company’s market power in a data-related market is the volume of data it possesses. The possession of big data might strengthen market power since it ensures a company’s competitiveness on the market, irrespective of whether or not the product or service provided to customers is free. Yet so far there is no consensus on how to define relevant markets nor on how to qualitatively or quantitatively measure market power in a data-related competition analysis. Apart from the difficulties arising directly from the intangible nature of data, another concern is that there are various types of data, such as online transaction data, that can be used to identify customers, and real-time spatial data indispensable for IoT. Different types of data have different uses and values, which may also vary depending on the sector in which the data owner operates. All these things make the market power issue more complex. Many data-related markets involve zero-price products or services. Companies generally provide zero-price products or services in exchange for data. However, traditional methods of market definition (such as hypothetical monopolist test) often reveal themselves as inoperative in assessing market power in these markets. Even if modified traditional methods might be found operable in some cases, such methods are likely to lead to an underestimate of market power in specific circumstances.9 It is important to note that the offer of zero-price products or services may be part of a profit-maximising business strategy to attract price-sensitive consumers.10 Companies may employ such a strategy to accrue market 9 Kate Collyer, Hugh Mullan and Natalie Timan, ‘Measuring market power in multi-sided markets’ (2017) Summer 1(3) CPI Antitrust Chronicle, 8 . 10 Organisation for Economic Co-operation and Development (OECD), Big data: Bringing competition policy to the digital era (DAF/COMP(2016)14) para. 48 .

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power, and then exercise that power over other customers (e.g. consumers paying for the products or services) or even leverage the market power into another market.11 On the other hand, ‘data is new currency’. To illustrate, personal data has become the most valuable currency in today’s information economy. It is therefore necessary, to some extent, to compare the expanding collection of personal data to the increasing price of personal data.12 Another related point is that consumers pay for zero-price products or services (e.g. Internet search services with information created or inputted by users, such as search keywords). The collection and use of data may in principle promote consumer welfare by providing better customised services to consumers; however, due to data network effects it may also form a feedback loop of data and profit. Such feedback loop raises competition concerns where it could make big companies bigger and thus create barriers to market entry. The possession of data does not necessarily endow a company with market power. In some circumstances, data possession is a prerequisite to provide innovative services, which might encourage and stimulate market competition. However, the possession of data may also lead to the creation, maintenance or strengthening of market power under the following circumstances:13 (1) a company engages in exclusionary conduct as a way of preventing competitors from accessing and using data, e.g. by means of exclusive licenses, exclusive dealing arrangements and/or other controlling methods; (2) dominant companies exist in a data-related market and new entrants have difficulties in accessing or collecting data due to the cost structure; (3) the mechanism of a two-sided market works in the relevant market and links between the two or multi sides of the market are strong, particularly in cases where 11 For example, a nightclub might host a ladies night where women can get in free and enjoy free drinks but men need to pay the full cover charge. In this case, the nightclub is a two-sided market, the mechanism of which attracts and links different groups of customers (male and female customers). The nightclub owner would build its market power with this mechanism and then exert the power over the group of male customers. 12 Organisation for Economic Co-operation and Development (OECD), Big data: Bringing competition policy to the digital era (DAF/COMP(2016)14) para. 56 . 13 Competition and Markets Authority, The Commercial Use of Consumer Data – Report on the CMA’s Call for Information (CMA38, 2015) para. 3.73 .

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consumers are single homing. These circumstances involve a risk of generating barriers to market entry and thus raise competition concerns. Market Definition Digital platforms, headed by Google, Amazon, Facebook and Apple (GAFA), are blooming and have become dominant in one or more market industries. These successful platform-based high-tech companies have demonstrated that key factors determining a company’s market position in the digital economy are no longer natural resources or other traditional production factors, but data and innovation. The massive collection of data, as input goods for digital platforms, has contributed to the strengthening of a company’s market position in many service markets. In light of the value of data, scholars and practitioners have proposed to delineate a relevant data market so as to adequately measure ongoing competition among digital platforms.14 However, competition agencies would face difficulties in defining such relevant market due to the lack of enforcement experience in the field associated with data or AI. Concerning the available quantitative tools for delineating data or AI-related markets, the first step is to figure out what product or service is offered, and who demands and who supplies the product or service. Unlike typical situations, this is difficult because traditional market definition tools, such as a small but significant and non-transitory increase in price (SSNIP) test, are not applicable and need to be modified to fit the particular conditions of a data or AI-related market. Many data or AI-related markets are two- or multi-sided markets and contain at least one side that involves zero-price offers. Traditional market definition tools are thus not useful due to the dependence on the price of a product or service. A small but significant non-transitory decrease in quality (SSNDQ) test might be a potential solution, but has so far been

14 For example, FTC Commissioner Pamela Jones Harbour noted in her dissenting opinion in the matter of Google/Doubleclick that, ‘The Commission is uniquely situated to evaluate the implications of this kind of data merger, from a competition as well as a consumer protection perspective. The Commission should maximize its opportunity to do so, especially where the merged firm will be capable of dominating the “Database of Intentions”’. See Pamela Jones Harbour, Dissenting Statement Of Commissioner Pamela Jones Harbour – In The Matter Of Google/Doubleclick F.T.C. File No. 071-0170 (Federal Trade Commission, 2007) 4 .

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considered inoperable in practice.15 In view of the fact that data or AI-related markets are complicated ecosystems involving a collection of various data sets derived from multiple products and services, competition agencies would find it difficult, if not impossible, to objectively identify and measure the correlation between data quality and competition.16 Moreover, the quality of a product or service is a subjective factor and has different dimensions depending on the purposes of use. Competition agencies would face the challenge of deciding which parameters should be taken into account when delineating a data-related relevant market. A similar dilemma emerges in the case of a small but significant and non-transitory increase in costs (SSNIC) test.17 Abuse of Dominance: Could Data Constitute an ‘Essential Facility’? High concentration of data can lead to competitive pressures. Examples of abuse of market power in a data-related market include: (1) obstructing or denying the rival’s access to essential data sets; (2) preventing rivals from accessing data through exclusive agreements with data providers so that the data cannot be shared or transferred; (3) leveraging its dominant market power, which results from the possession of data, into another market so as to exclude rivals. This will generate more concern when few substitutes of the data are available and the data is essential to the production process.18 Regarding abuse of market power, 15 ‘The SSNDQ test faces criticism that in practice it is unworkable, given the inherent difficulties of measuring quality alongside the existing complications of applying the SSNIP test itself within real market situations. See Organisation for Economic Co-operation and Development (OECD), The Role and Measurement of Quality in Competition Analysis (DAF/COMP(2013)17) 9 . 16 In addition, scholars have described some scenarios where competition and quality are not necessarily positively correlated. See Ariel Ezrachi and Maurice E. Stucke, ‘The Curious Case of Competition and Quality’ (2015) 3 Journal of Antitrust Enforcement 227. 17 The SSNIC test is based on the hypothetical monopolist test but replaces the price variable with the relevant information (which may include privacy) and/or attention costs of customers. That is, competition agencies apply the SSNIC test to see whether a hypothetical monopolistic firm would be able to profitably impose a small but significant and non-transitory increase in costs on customers. However there are many potential issues that can arise in practice. See John M. Newman, ‘Antitrust in Zero-Price Markets: Applications’ (2016) 94 Wash U L Rev. 49, 64–69. 18 Europe Economics, ‘Big Data: What does it really mean for competition policy?’ .

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German and French competition agencies suggested in a joint report that the essential facilities doctrine is in principle applicable to data. ‘Refusal to access to data can be anticompetitive if the data are an “essential facility” to the activity of the undertaking asking for access’.19 According to ECJ precedents,20 the essential facilities doctrine would be theoretically applicable if the data possessed by a firm is unique, indispensable for carrying on the business in question, and if there are no alternative data and there are technical, legal or economic obstacles that make it impossible or unreasonably difficult for a competitor to obtain the data by itself. These requirements are however difficult to meet in practice and no related decisions have been made so far. Yet, with the rapid development of AI, it is possible that certain data sets will soon be indispensable for developing certain AI applications, e.g. connected devices equipped with AI. For example, real-time data about the access to base stations, which could be collected only by wireless carriers, might be required for machine learning (e.g. to develop a sophisticated system capable of fully autonomous driving) and thus deemed to be an essential facility for competitors conducting R&D on AI algorithms. In this context, it could be problematic if the data collected and possessed by a monopolistic incumbent is used exclusively by the monopoly, or if a rival’s access to such data is substantially limited. In such exceptional circumstances, the monopolist’s conduct might constitute a form of foreclosure of an essential input (data) and have anticompetitive effects. At the same time, competition agencies need to pay attention to concerns about competitor’s free riding, and avoid impeding incentives to collect and use data. Particularly in regard to data that would not be under legal protection once it becomes open and accessible to competitors, competition agencies should be mindful of the free-riding concerns when imposing an obligation on a company to provide competitors with access to the data it possesses, or when ordering a company to license its data sets on fair, reasonable and non-discriminatory (FRAND) terms. Moreover, if a data set is protected by a company as its trade

19 Autorité de la concurrence German and Bundeskartellamt, Competition Law and Data (2016) 17 . 20 Case C-7/97, Bronner v Mediaprint [1998] ECR I-7791, paras 44–45; Case C-418/01, IMS Health GmbH & Co. OHG v NDC Health GmbH & Co. KG [2004] ECR I-5039, paras 34–52; Case T-201/04, Microsoft v Commission [2007] ECR II-3601, paras 320–336.

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secret,21 competition agencies need to take into account the potential conflict between competition and unfair competition law from an enforcement perspective.22 Therefore, it is no surprise that open questions remain regarding the application of the essential facilities doctrine to data. For those companies whose dominance is the result of efficient use of their accumulated data, their investment and R&D incentives would be reduced, or even eliminated, if the data or analytical tools are deemed to be essential facilities and would be made available to their competitors notwithstanding the fact that they collected the data or developed the analytics tools by themselves. In view of such risk, prudence is thus necessary when a competition agency evaluates competition and market power regarding data-related competition concerns, and companies are recommended to analyse the value of data collected and owned by them from an integrated perspective of business strategy and competition law compliance. Standard for Merger Review: Does Privacy Constitute a Competition Concern? Data-driven mergers will generally not fall within the traditional classification of horizontal or vertical mergers. This is due to the fact that a traditional merger assessment usually examines the effect on price and, as the products and services in the data-driven industries are generally free of charge, the traditional analysis cannot be applied.23 The number of merger and acquisition cases, in which debates have occurred with respect to consumer privacy protection, is on the rise. Although the introduction of a privacy dimension into competition policy is not a consensual practice, competition agencies may be justified in considering privacy a competition concern.24 There thus exists an urgent need for 21

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), art 39. 22 Another related issue here is the possibility of market entry of new competitors. In the data-driven society, data network effects may lead to winner-takes-all outcomes, which makes it extremely difficult for any potential market participant to enter a data or AI-related market where dominant incumbents exist. It is however unclear how to quantitatively assess the possibility of market entry in a data or AI-related market, because the concept of competition in a data or AI-related market remains partly ambiguous as stated above. 23 Ibid. 24 Organisation for Economic Co-operation and Development (OECD), Big data: Bringing competition policy to the digital era (DAF/COMP(2016)14) paras 55–56 .

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competition agencies to study and clarify whether there is any anticompetitive privacy-related practices existing in the data-oriented industry. The collection and possession of consumer data may result in the loss of privacy for consumers. An imaginary scenario illustrating the potential concerns inherent in data-related merger cases is as follows. A Japanese electronic appliance manufacturing company wants to sell its healthcare/ medical device division to a foreign company. The division develops an electronic medical record system, which has been introduced into many hospitals in Japan, and keeps a backup of all medical data. To illustrate, a data set containing Japanese patients’ medical records would be put under the control of a foreign company if the acquisition were cleared by competition authorities. Such a scenario is usually associated with data protection concerns; however, some competition agencies have begun to look at possible competition issues in similar scenarios.25 A well-known case is the Google/DoubleClick merger. Pamela Jones Harbour, a former FTC Commissioner, expressed her concerns in her dissenting statement in that case,26 highlighting consumers’ privacy in the context of competition policy: The parties claim to place a high value on protecting consumer privacy … . I am uncomfortable accepting the merging parties’ nonbinding representations at face value. The truth is, we really do not know what Google/DoubleClick can or will do with its trove of information about consumers’ Internet habits … . Traditional competition analysis of Google’s acquisition of DoubleClick fails to capture the interests of all the relevant parties … this analysis does not reflect the values of the consumers whose data will be gathered and analysed … . There is no adequate proxy for the consumers whose privacy is at stake, because consumers have no business relationship with Google or DoubleClick.

25 There are however arguments against introducing privacy into the merger review process as a relevant parameter of non-price competition. See e.g. Ben Holles de Peyer, ‘EU Merger Control and Big Data’ Journal of Competition Law & Economics . 26 Pamela Jones Harbour, Dissenting Statement Of Commissioner Pamela Jones Harbour – In The Matter Of Google/Doubleclick F.T.C. File No. 071-0170 (Federal Trade Commission, 2007) 9–12 .

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Protection of Personal Data and Competition Policy When firms or enterprises collect a sufficient amount of personal data, the problem arises whether the firm or enterprise will provide enough protection to consumers and further whether the abuse of the personal data is overlooked or even unnoticed.27 The utilisation of big data has therefore raised concerns about consumer data privacy. There are however different views among countries on what approach – competition law or consumer (privacy) law – should be adopted to address these concerns. Competition agencies originally in place to protect consumers are facing challenges to enforce competition laws in the zero-price data market. The reason is that it is difficult to measure direct economic damage using the figures in competition analysis. Also, there is no absolute definition of privacy in the first place. This is because privacy has multiple profiles. Moreover, it is possible that a competition agency may consider that the issue of personal data does not fall within its duty, leaving this to the judgment of other agencies. Assuming that privacy protection is related to competition law and to the authority, the question of how to keep a balance between ensuring appropriate competition and protecting privacy is still unclear. On the one hand, by ensuring that competition is given priority, protecting privacy is likely to become less important. On the other hand, do consumers have strong concerns about the protection of their privacy, or is the protection of privacy not as important in the case of zero-price? The reason why agencies have not given enough consideration to the influence of big data is simply because it is very difficult to add to competition analysis the noneconomic damage caused by invasion of privacy, which is not connected to direct economic damage. Even if the authority does give consideration to the damage to privacy issue, the problem of how it or the court will keep a balance between issues of privacy and other interests still remains. The acquisition of Facebook/WhatsApp28 will bring massive and a variety of data to the conglomerate in the future. Enterprises may make the data open to the public or promise not to use it in behaviour targeting advertisements. However, if the merger increases market dominance, the enterprise may be able to revoke its promises about privacy. The level of 27 Harry van Til , Nicolai van Gorp and Katelyn Price, ‘Big data and competition’ (2017) . 28 Facebook/WhatsApp (Case COMP/M.7217) Commission Decision 2014/C 297/04 [2014] OJ C297/13.

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privacy protection may also decrease. Assume that WhatsApp collects user data and only uses it within the company for the purpose of improving technical performances. After its acquisition by Facebook, WhatsApp users may be worried that Facebook can now get access to their data at any time. It is possible that Facebook’s acquisition of WhatsApp will lower people’s sense of security with regards to personal data; however, such anxiety, or sense of insecurity, may not fall under the category of the privacy law. When personal data is used by the enterprise against that person’s own will, the issue arises whether the authority should establish a complex economic analysis regarding the evil associated with privacy invasion. Sometimes it will be difficult for the authority to substantiate issues of the insubstantial noneconomic damage caused by privacy invasion and add them to the analysis. Data Ownership and Data Portability Data ownership and data portability play an important role in restricting market dominance. The European Commission has provided users’ rights regarding data portability (to download the user’s own data stored on a certain platform and transfer it to another company’s platform) in the general rules on data protection. With regards to data portability, making it an obligation on enterprises possessing market dominance or making it a general obligation on all enterprises will result in significantly different effects on competition. This depends on interpretation and operation. Imposing a general obligation on all enterprises may carry a risk that dominant enterprises will become even bigger. Preparation of a global criterion regarding data ownership and portability is also necessary. Either way, it is important to enable consumers to gain access to the information about data collection and utilisation and to choose enterprises that will use their data appropriately. It is also important to ensure that consumers understand the value of their own data better. If consumers understand the value of their data, they are more likely to demand better protection of it and market dominance can be restricted in this way. Ownership of the data is uncertain without a specific solution. There are concerns that the more data portability is promoted, which consequently makes the incentive of enterprises to innovate increase, the more small enterprises’ data management will be lessened or interrupted. In the future, some obligations of data portability might be imposed on private enterprises even in Japan. Apart from the concern about outflow of data collected with the burden of cost, it is assumed that the burden of user correspondence and system development and utilisation will become more substantial when obligations are imposed. Although it is very likely

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that such kind of rules will be imposed only on large-scale enterprises, it is extremely important to draw the line between enterprises that are obligated and enterprises that are not.

4. FUTURE CHALLENGES Based on the use of electronic commerce, search engines and communication sites, massive data (purchase history, web browsing history, communication history and moving history, etc.) are stored on enterprises’ hard disks and clouds. The IT technologies that are used in monitoring the status of machines and devices – from aircraft engines fitted with sensors, to turbines in wind power stations – make massive data accessible to enterprises. AI technology can analyse such big data, provide better products, services and information to consumers, and show its power even in maintenance work like conserving and replacing parts of a device. It is expected that such technologies can be widely utilised not only in the traditional manufacturing industries, but also in service industries like finance, medicine and nursing. However, there are also challenges. First, together with the acceleration of ICT intelligentisation and data accumulation, development of products and services utilising the data collected, analysed, generated and accumulated by the intelligent ICT will not be exclusive to a single enterprise in the future, and new entries will take part, which support an innovation. When data is accumulated and stored, under what circumstances should the accumulated data be accessible and disclosed? The criterion of disclosure should be clear. In the future, as more importance is attached to the application of data, ventures that no longer search for solutions independently and own the technology and data that potentially should have been analysed by them may be taken over by big enterprises or foreign investments. Second, electronic integration of IT enterprises means an increase in number of skilled AI and IoT operators in order to improve research and development capabilities. The market dominance of those operators is shown not only in their patent rights and intellectual property, but also in their abilities. However, a method to convert such abilities into an index of market dominance is yet to be developed. Third, cooperation among multiple enterprises that own these technologies is necessary to develop and utilise AI and IoT technologies such as autonomous vehicles and nursing care robots. Technology

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standardisation29 will probably be implemented. Therefrom, the standard essential patent (SEP) discharges, and by making the FRAND declaration a condition of license, license negotiation will start from the expectation that the patent technology can be implemented. At that time, if the owner of the SEP with FRAND declaration (patent essential to implement specifications) refuses to license to or files for an injunction against the potential new owner of the license who accepts the FRAND condition,30 and if the owner’s act in general makes it difficult to develop, produce and sell the product, thus substantially restricting competition in the specific market, his act may fall under the antimonopoly act (private monopolisation and unfair trade practices).31 Finally, the communisation of API (Application Programming Interface: specification of the interface used in the interchange of software components) has great significance for the success of AI networking. In the field of finance, API is used in FinTech industry. Clearly, although massive data exists in information held by banks and credit card companies, such data has not been accessible so far. On the contrary, banks have the obligation to protect customers’ details, to the extent that some data could not be released even to the customers themselves. However, open API that publishes the connection specification of bank systems is developing in foreign countries. In order to improve the settlement service of banks, especially to encourage non-banks and players to provide more convenient services by using the settlement system of banks as a platform (even in Japan, financial institutions, IT 29 A standard is a document providing requirements, specifications, guidelines or characteristics that can be used consistently to ensure that materials, products, processes and services are fit for their purpose. Non-binding from a legal point of view, standards nevertheless determine how a product will function. Standards are generally adopted by international organisations such as the International Organization for Standardization (ISO); see also https://www. iso.org/standards.html. 30 Whether or not the person intends to accept the license on FRAND terms is judged based on the individual case according to the corresponding situations of both the parties to the license negotiation (for example, whether the fact and the state of infringement of a specific standard essential patent are established, whether the license condition and its reasonable basis are shown, the response to the reasonable counter proposal to the presentation, and whether the correspondence is honest according to commercial usage). 31 Japan Fair Trade Commission, Guidelines for the Use of Intellectual Property under the Antimonopoly Act (Tentative translation, 2016) .

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companies, and the finance administrative authorities being able to participate), the appropriate role of open API has been under discussion from a security perspective in the Financial Services Agency and the Japanese Bankers Association since 2016. Although FinTech will not be addressed in this chapter, one of the challenges of open API originates from the competition environment. For example, if data disclosure is beneficial to users within a sufficiently competitive environment, enterprises should be given incentives to disclose such information in a proper format in order to benefit from the competitive dynamics on the market concerned. However, it will be hard to realise such incentives in an industry with strong entry regulations. The argument for disclosure is difficult because there are strict security requirements when the information is sensitive. Finally, the development of international standards will become increasingly important as a way of incentivising cooperating players to benefit from the market dynamics that artificial intelligence makes possible. The necessity of intervention from the government making data portability an obligation should also be examined and industry standardisation of API in the industrial world should also be considered.

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8. Joint research and development collaborations under competition law Björn Lundqvist 1. INTRODUCTION The objective of this chapter is to dissect the antitrust treatment in the US and under EU law of joint research and development agreements (joint R&D), discussing issues such as innovation and competition in innovation, and whether these issues are taken into consideration when scrutinising R&D collaborations. The idea is to try to detect what considerations (or theory) have influenced the competition law treatment of R&D collaborations. Is it industrial economic game theoretical considerations, valuing identification of anticompetitive effects, that has been in the driving seat when antitrust agencies established safe harbours and rules for evaluating these collaborations; or is it innovation economics, neo-Schumpeterian and Austrian economic school theory, viewing competition of new innovations as a dynamic process that have been the guiding principle; or perhaps something else? The chapter is divided into two parts: the US antitrust regulation and case law for R&D collaborations and the EU competition rules and case law applying to the same collaborations. The case law is analysed so that the contemporary rules and principles in both jurisdictions are presented in light of the relevant background. Under US antitrust law, I will analyse the few (older) cases regarding joint R&D and the enactment and development of the National Cooperative Research (and Production) Act. The Act, creating immunity for R&D collaborations under US antitrust laws, has an interesting legal history displaying the interface between industry policy and competition policy in reference to promoting innovations. Under EU competition law, the development of the R&D block exemption will be presented. The case law originating from the EU Commission, under the old exemption procedure (mainly Article 85(3) Rome Treaty, now Article 101(3) TFEU), and the scant more modern 179 Björn Lundqvist - 9781788972444 Downloaded from Elgar Online at 03/15/2021 10:38:06PM via Universita Degli Studi Roma Tre

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case law of EU courts and investigations by the EU Commission will be analysed. The antitrust regulation of R&D collaborations in the two jurisdictions is then compared. The general conclusion of the chapter is that R&D collaborations have been, historically and contemporarily, treated leniently under both US and EU antitrust rules. This could indicate that the ‘Schumpeterian’ notion of what creates most innovations has been embraced and that R&D collaborations to create monopoly positions on future markets have been allowed, even promoted, to form on both sides of the Atlantic. That is to some extent true. However, when analysing R&D collaboration cases, it is soon clear that what has thwarted the authorities are difficulties of identifying and establishing proof of anticompetitive effects on existing and future markets. Since the innovation process is difficult to predict, and the difficulties vary immensely between different industries, making predictions about the potential anticompetitive effects of R&D collaborations is notoriously problematic, especially when the relevant market is not yet present. Analysis often focuses on the potential effects collaborations may have on future product markets, while efforts have been invested in coming up with a test to analyse how R&D collaboration may have exclusionary or ‘collusionary’ effects on research and development markets, or R&D as such. Scholars and competition authorities have come up with concepts such as ‘innovation market’ in attempts to have some kind of test or benchmark for identifying dominance and market power in the innovation process. While the notion of ‘the innovation market’ has not been used by competition authorities since the 1990s, and generally these efforts diminished by the beginning of 2000, some scholars still discuss and promote the concept of ‘innovation market’.1 In fact, the ‘innovation market’ seems today to have made some kind of revival in the scholarly debate in reference to analysis of mergers in the pharma sector.2 This chapter will discuss the concept of innovation markets and the current revival of the concept. Moreover, the fact that the 2010 EU R&D block exemption presented further strict rules compared to its predecessor, and that the EU Commission has initiated investigations into R&D collaborations, indicates that the EU Commission shows a nascent interest in the 1

Moreover, it still included in the 2017 Licensing Guidelines: DOJ, Antitrust Guidelines for International Enforcement and Cooperation, 12 January 2017, pp. 11 et seq. 2 Michal A. Carrier, Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law (Oxford Scholarship Online, 2009), 303 et seq.

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anticompetitive and anti-innovation effects of exclusionary R&D collaborations. The chapter concludes that R&D collaborations would possibly benefit from a more intense antitrust scrutiny in reference to certain industries and certain conduct, while generally the lenient attitude should remain. It seems clear that neither legal nor economic research has been able to present and agree on a test that can distinguish the ‘bad’ R&D collaborations from the ‘good’. Before we have such a test, antitrust authorities should tread with ease.

2. INNOVATION ECONOMICS Greatest prosperity for society is created by the daily development of new and improved products and services, and not by daily competition to pursue efficiencies for the production and sale of the cheapest products. Thus, it seems that there is a general consensus that unfettered innovation far exceeds the potential gain of making markets more competitive by driving prices closer to marginal costs.3 In light of this, it seems that an obvious issue to contemplate would be whether practitioners of competition law should take hampering of the development of creating innovations into consideration. Von Hayek is normally considered as being the source of the notion that competition is a procedure or process to find out new knowledge. Even though it is somewhat obvious, innovation as a process is based on the method of ‘trial and error’, with often several errors before a short period of success. Starting with the assumption that the best products, competitive tools and solutions to the problem of gaining wealth are often not known, competition is viewed as an evolutionary trial and error process, in which firms try out different problem solutions and can learn from the feedback of the market which of their specific products and technological solutions are the superior ones. Several conclusions can be drawn from this. First, industrial economic models based on the notion of perfect information, i.e. that all market participants know everything, do not correlate von Hayek’s notion of competition as a discovery procedure. Second, the multiplicity and diversity of the (parallel trials of the) firms might be crucial for the 3 Phillip Areeda and Herbert Hovenkamp, Antitrust Law – An Analysis of Antitrust Principles and Their Application (Aspen Publishers, 2005), 113 with many references. See also Monopolkommission, Huaptgutachten: Wettbewerbspolitik vor neuen Herausforderungen (Nomos Baden-Baden, 1990), 342 et seq.

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effectiveness of competition as a discovery procedure.4 Third, von Hayek admitted that his notion of competition was expensive. He stated ‘If anyone actually knew everything that [industrial] economic theory designated as “data”, competition would indeed be a highly wasteful method of securing adjustment to these facts’.5 Notwithstanding this, von Hayek did not purport totally unfettered competition. He still valued regulations so to establish an orderly work and markets and general rules for the game.6 Interestingly, von Hayek’s ideas and theories are extremely well known and widespread, while little economical research seems to be devoted to pursuing his ideas.7 In addition, von Hayek seemed to have been a supporter of the (earlier) Schumpeterian notion of competition as an innovation-imitation process. Schumpeter’s view of competition as an innovation-imitation process has been very influential under the concept of dynamic competition in innovation economics and seems to have had an influence on the EU competition law concept of effective competition.8 However, even though the Schumpeterian notion of dynamic competition has lost some of its value in competition economics, his (earlier) ideas are still very influential in innovation economics regarding disruptive innovations. It is ‘the later’ Schumpeter, displayed in Capitalism, Socialism, and Democracy, that has a profound impact on the current state of mind of several researchers. The later Schumpeter conceived technological progress as emanating from the large industrial research laboratories. In the laboratories of the large firms, creativity, invention and innovation, in a linear fashion, were conducted. Large firms created wealth and innovation because they enjoyed positions of static market power. He argued 4 Friedrich A. von Hayek, ‘The Meaning of Competition’, in Friedrich A. von Hayek (ed.), Individualism and Economic Order (University of Chicago Press, 1948), 92. 5 Marcellus S. Snow is professor emeritus at the University of Hawaii at Manoa; [email protected]. This is a translation from German of F.A. Hayek’s ‘Der Wettbewerb als Entdeckungsverfahren’, a 1968 lecture sponsored by the Institut für Weltwirtschaft at the University of Kiel. It was published as No. 56 in the series Kieler Vorträge: The Quarterly Journal of Austrian Economics (FALL 2002): 9–23. 6 Ibid., p. 14 7 Wolfgang Kerber, ‘Competition, Innovation and Maintaining Diversity Through Competition Law’, in J. Drexl, W. Kerber and R. Podszun (eds), Economic Approaches to Competition Law: Foundation and Limitations (Edward Elgar Publishing, 2010.), 7, available at https://ssrn.com/abstract=1543725. 8 Ibid., 5.

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that such firms would use their economic profits to finance risky, large-scale R&D activity that would simultaneously leave society better off, in a dynamic sense, and allow the firms to maintain positions of static product-market dominance.9 R&D for Schumpeter seems to have been based on trial and error: As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the doors of the large concerns … and a shocking suspicion dawns upon us that big business may have had more to do with creating that standard of life than with keeping it down.10

Today, the opposing view to Schumpeter is normally attributed to Kenneth Arrow. Arrow famously argued that a monopolist’s incentive to innovate is less than that of a competing firm, due to the monopolist’s disincentive to cannibalise on his pre-existing monopoly. An a contrario interpretation of Arrow’s viewpoint would be that firms not holding market power would have higher incentives to innovate so to acquire market power, thus, competition spurs innovation since the firms that innovate hope to obtain appropriability by gaining market power.11 9

Stephen Martin and John T. Scott, ‘The nature of innovation market failure and the design of public support for private innovation’, (1999) 29 Research Policy, 437, 437 et seq. 10 Joseph Schumpeter, Capitalism, Socialism and Democracy (George Allen & Unwin, 1976 (first published in 1943)), 82. It is clear that Schumpeter in this section of his book discussed the downfall of capitalism as such, as an intermediate stop to a wholly foreclosed society for entrepreneurs and where freedom is lost; nonetheless, he purports that large firms are able to innovate more efficiently than smaller firms. Such firms would be more capable of financing investment in innovation, could take advantage of such economies of scale as might exist in the R&D process, and, because they typically produce a diversified range of products, would be more likely to find commercially viable applications for new technological developments. He also viewed risk as an inherent aspect of research, development and commercialisation, and saw market power as a way of providing ‘insurance’ against such risk. Cf. Stephen Martin and John T. Scott, ‘The nature of innovation market failure and the design of public support for private innovation’, (1999) 29 Research Policy, 437, 437 et seq. 11 Kenneth Arrow, ‘Economic Welfare and the Allocation of Resources for Invention’, in R. Nelson (ed.), The Rate and Direction of Inventive Activity: Economic and Social Factors (National Bureau of Economic Research, 1962), 620 et seq.

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While these two viewpoints are not necessarily in disharmony,12 a large strain of the innovation economic debate seems to have focused on proving whom of these two ‘heavyweights’ was right. In fact, as Peritz points out,13 later researchers use Arrow’s and Schumpeter’s findings and views without showing that they did not wholeheartedly commit to either competition or monopoly. Instead, they made both of these researchers into caricatures and patron saints of two different strands in the academic debate. Several economists have theorised about whether innovation is promoted or restricted by collaborative research, and when collaborators are dominant enough to find that the diminishing competitive pressure would reduce their incentive to innovate.14 Some state that as long as the technical development is fast, joint R&D promotes social welfare irrespective of market power.15 Other economists are more careful.16 Part of

12 Carl Shapiro, ‘Competition and Innovation: Did Arrow Hit the Bull’s Eye?’, in Josh Lerner and Scott Stern (eds), The Rate & Direction of Economic Activity Revisited (University of Chicago Press, 2012), 363 et seq. 13 Rudolph J.R. Peritz, ‘Thinking about economic progress: Arrow and Schumpeter in time and space’, in Josef Drexl (ed.), Technologie et Concurrence – Liber Amicorum Hanns Ullrich (Bruxelles: Larcier Pub., 2009), 627. 14 Cf. e.g. Josh Lerner and Robert Merges, ‘The Control of Technology Alliances: An Empirical Analysis of the Biotechnology Industry’, (1998) 46 Journal of Industrial Economics, 125; Michael Katz, ‘An Analysis of Cooperative Research and Development’, (1986) 17 Rand Journal of Economics, 527; Thomas Jorde and David Teece, ‘Innovation and Cooperation: Implications for Competition and Antitrust’, (1990) 4 Journal of Economic Perspectives, 75; Thomas Jorde and David Teece, ‘Rule of Reason Analysis of Horizontal Arrangements: Agreements Designed to Advance Innovation and Commercialize Technology’, (1993) Winter Antitrust Law Journal, 579; Thomas Jorde and David Teece, ‘Acceptable Cooperation among Competitors in the Face of Growing International Competition’, (1989) Antitrust Law Journal, 529; and generally Gene Grossman and Carl Shapiro, ‘Research Joint Ventures: An Antitrust Analysis’, (1986) 2 J. L. Econ. & Org., 315. 15 See e.g. Thomas Jorde and David Teece, ‘Innovation and Cooperation: Implications for Competition and Antitrust’, (1990) 4 Journal of Economic Perspectives, 75, 85 et seq.; Thomas Jorde and David Teece, ‘Rule of Reason Analysis of Horizontal Arrangements: Agreements Designed to Advance Innovation and Commercialize Technology’, (1993) Winter Antitrust Law Journal, 579, 600 et seq.; Thomas Jorde and David Teece, ‘Acceptable Cooperation among Competitors in the Face of Growing International Competition’, (1989) 58 Antitrust Law Journal, 529, 543 et seq. 16 See, e.g., Josh Lerner and Robert Merges, ‘The Control of Technology Alliances: An Empirical Analysis of the Biotechnology Industry’, (1998) 46 Journal of Industrial Economics, 125, 132 et seq.; Michael Katz, ‘An Analysis of

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their research indicates that collaborations among product market competitors, at least in the old economy, under certain strict circumstances are beneficial. They are beneficial when (i) the degree of product market competition is low, (ii) there is a large R&D spillover in the absence of the cooperation, (iii) a high degree of sharing is technologically feasible, and (iv) the agreement concerns basic research rather than development activities.17 The exemptions for R&D collaborations under US and EU antitrust law do not seem to be narrow enough to carve out these industries only, and the collaborative research that has, according to empirical research, been conducted since R&D exemptions were enacted is in industries that already showed a high degree of R&D spending before the exemptions were enacted. Apart from theoretical work, there has been much empirical research. It seems almost, generally stated, as if theories of industrial organisation typically predict that innovation should decline with competition; empirical work finds that it increases.18 Actually, the early stages of the modern economic innovation literature on R&D were largely devoted to sorting out the implications of these two divergent positions purported by, on the one side, theorists and, on the other, empirical researchers, respectively. The debate remains a lively one.19 Some prominent researchers (using both arguments based on theory and empirical findings) argue the existence of an inverted U between competition and innovation.20 Thus, the innovation rate is low when there is ‘too much’ competition or ‘too much’ monopoly power, while the golden middle way generates most innovation and wealth. It seems that Frederic M. Scherer was the first, in the 1950s, to launch the idea that the interplay between competition and innovation could be

Cooperative Research and Development’, (1986) 17 Rand Journal of Economics, 527, 537 et seq. 17 Michael Katz, ‘An Analysis of Cooperative Research and Development’, (1986) 17 Rand Journal of Economics, 527, 527, 542 et seq. 18 Philippe Aghion, et al., ‘Competition and Innovation: An Inverted-U relationship’, (2005) May The Quarterly Journal of Economics, 701, 701, with many references. 19 Stephen Martin and John T. Scott, ‘The nature of innovation market failure and the design of public support for private innovation’, (1999) 29 Research Policy, 437, 437 et seq. with references. 20 Philippe Aghion, et al., ‘Competition and Innovation: An Inverted-U relationship’, (2005) May The Quarterly Journal of Economics, 701, 701, with many references.

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compared with an inverted U.21 Scherer introduced the idea that competitive pressure forces firms to invest more in R&D until the point where the competition is so intense that the anticipated post-innovation profit is so unlikely that it causes the firms to stop innovating altogether. In fact, by using the inverted U, both Schumpeter’s and Arrow’s underlying ideas seem to be able to fit in the same model. Schumpeter argues that if there is (almost or close to perfect) competition in a market the firms will not possess the opportunity to innovate because they will not make any form of (supra competitive) profit to be able to break the permanent condition of perfect allocation of resources. Only if that condition is breached will the firms at least have an incentive to innovate. Where the situation of perfect competition is breached and there is incentive to innovate, the rate of innovation will increase with opportunity and appropriability – the rate of market power held by the firm on the market – until the point that the market tilts to a monopoly. Even though the monopolist will have the opportunity to innovate through obtaining competitive profits, the incentive will not exist because any new innovation would cannibalise on the monopolist’s current sales. Of course, if there were potential entrants, that is, a contestable market, perhaps the monopolist would continue to innovate, otherwise the literature seems to suggest that the innovation rate would tumble when there is a monopolist in the market. In addition, perhaps there could also be a difference in what sort of innovations the firms breaking out of a situation of perfect competition, on the one hand, and, on the other hand, a monopolist, would market. In fact, the literature seems to suggest that monopolistic and even oligopolistic conduct supports incremental innovations. Large firms have a high level of employees who are specialised in parts of the innovation process, while that may not be inductive for radical innovation, but rather incremental innovations. Furthermore, incremental innovations will not cannibalise on current sales to the same degree as radical innovations, and the monopolist may also use its current market presence to defend market positions and gain shares. A new entrant or firms that would like to break out of the situation of perfect competition would prefer a radical 21

Frederic M. Scherer, ‘Firm Size, Market Structure, Opportunity, and the Output of Patented Inventions’, (1965) 55 Am. Econ. Rev. 1097; Frederic M. Scherer, ‘Market Structure and the Employment of Scientists and Engineers’, (1967) 57 Am. Econ. Rev., 524; Frederic M. Scherer, ‘Research and Development Resource Allocation under Rivalry’, (1967) 81 The Quarterly Journal of Economics, 359.

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or disruptive innovation based perhaps on a new invention to create a new market. So should the idea of the inverted U be accepted as a basis for developing a regulation of R&D collaborations under antitrust law? Carl Shapiro has dissected in detail the innovation literature in an article regarding competition policy in merger regulation.22 Thus, Shapiro is not writing about looser forms of collaboration. Nonetheless, Shapiro raises some noteworthy aspects. Interestingly, Shapiro points to the fact that many industrial economists define competition or competitive pressure as inter alia ‘less product differentiation’. According to Shapiro, their economic models therefore were never designed to study rivalry or competition to develop new and improved products and processes. They may help us to understand why we have many brands of toothpaste, but not innovation in the definition preferred by Shapiro.23 Shapiro rejects not only a definition of competition as ‘more imitation’, but also more specifically the work based on the existence of an inverted U relationship between ‘competition’ and innovation. Shapiro states that increased imitation implies reduced appropriability for the inventor. Likewise, ‘less product differentiation’ implies less appropriability. He concludes that if imitation is allowed under a judicial system, it reduces incentive to innovate. That is no surprise. But more imitation is not equivalent to, or comparable with, increased competition. Moreover, it is also not a basis for claiming that increased competition would reduce innovation. Increased competition is not the same as or equivalent to ‘less product differentiation’. Shapiro seems to be arguing that the research of several of these industrial economists (including Aghion), which Shapiro criticises, in fact implies that intellectual property should be protected against imitation, while it does not ‘hit the bull’s eye’ according to Shapiro when it comes to creating a competition policy that increases innovation.24 Shapiro seems to make the compelling argument that antitrust law should primarily protect competition by substitute products or innovations, while competition through imitation should be a violation of intellectual property law. It should be acknowledged that Shapiro discusses merger regulation (and not collaborative R&D), and should be read as criticism of a US 22 Carl Shapiro, ‘Competition and Innovation: Did Arrow Hit the Bull’s Eye?’, in Josh Lerner and Scott Stern (eds), The Rate & Direction of Economic Activity Revisited (University of Chicago Press, 2012). 23 Ibid., 371. 24 Ibid., 373 et seq.

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merger case, Genzyme/Novazyme.25 In this case, it seems that the US Federal Trade Commission (FTC) ended the experiment with the use of ‘innovation market’ in merger cases. This case may moreover be viewed as an acknowledgement of a Schumpeterian view of how innovation is best promoted, that is, by creating firms with market power, while neither synergy effects nor even efficiencies seem to have compelled the Justice Department to reach its decisions in this case.26 Clearly, Shapiro is critical of the Justice Department’s conclusions and of the general trend of not acknowledging that competition spurs innovation.27 Some of Shapiro’s (explicit and implicit) conclusions may be transferred into the area of regulating R&D joint ventures. First, if the legal system (for example patent law) prevents competition by imitation, the incentive to compete by investing in R&D should increase. Therefore, under the assumption that the patent law system works (which, everyone knows by now, it perhaps does not), there should not be an inverted U relationship between competition and innovation. Increasing competition by and between substitute products or innovations should not discourage investment in R&D, rather the opposite, while patent law should, generally, prevent competition by imitation (which may decrease the incentive to innovate). In these situations competition and appropriability can both co-exist. Second, ‘competition’ in the view of Shapiro is rivalry; perhaps even rivalry in a von Hayek meaning of competition as a discovery procedure. That is revealing. It would imply that competition law should also be applicable before any existing relevant markets exist. Third, even though promoting rivalry, Shapiro is not orthodox; he still argues that a collaboration that restricts rivalry in R&D may still be benign from a competition law perspective because of synergy effects (for example that the parties may create new innovations that they may

25

Ibid., 368, referring to US Federal Trade Commission (FTC) review of the merger between Genzyme and Novazyme. The case is discussed below. 26 See also the US Horizontal Merger Guidelines, which stipulate that the antitrust authorities may accept a merger even though it is clear that prices will increase in the short term if innovation is promoted long term: Justice Department and FTC, Horizontal Merger Guidelines (DOJ, FTC, 2010), sections 6; 6.4; and 10. 27 Criticising Massimo Motta for doubting that competition spurs innovation. See Carl Shapiro, ‘Competition and Innovation: Did Arrow Hit the Bull’s Eye?’, in Josh Lerner and Scott Stern (eds), The Rate & Direction of Economic Activity Revisited (University of Chicago Press 2012), 366.

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not achieve independently) and/or increase appropriability (for example economy of scale on R&D).28 In light of the above, it seems that the economists are not in agreement about what market structures foster the greatest innovations. Even though Shapiro is critical of the idea of an inverted U regarding the interaction between innovation and competition, neither supporters of the inverted U relationship nor, clearly, Shapiro argue(s) that competition or rivalry should be protected under antitrust law. Few economists, not even Schumpeter, seem to imply that the total elimination of competitive pressure from substitute innovations would increase the incentive to innovate. Indeed, for a layman or lawyer, the findings of the economists seem difficult to mediate. However, some conclusions can be drawn: + According to the economists referred to above, competition may be promoted when innovators get something in return for these innovations, and that innovators should be able to, at least, have a possibility to try to prevent imitation or copying of innovations. Thus, imitation of innovation should under certain requirements be in violation of property laws, i.e. intellectual property laws. + Rivalry before markets are established should also be taken into consideration and current market share on existing markets may not work as a proxy to identify restriction of competition in the procedure to create new knowledge/innovations and products, i.e. pre-market. + Market shares in current markets may, however, be a good proxy when establishing whether to allow R&D collaborations for incremental innovations of current existing products on current markets; while here joint development programs that enhance the efficient development of new goods or create synergies should be considered procompetitive.29 28

Ibid., 368. It should be mentioned that Jorde and Teece, by arguing that research is not done in a linear sequence anymore but instead in dynamic fashion with interaction between research, application, manufacturing and even commercialisation, gave the principal reasons why the National Cooperative Research and Production Act (NCRPA) should not differentiate between basic science and applied research. According to Jorde and Teece, the old National Collaboration and Research Act (NCRA) was not sufficiently permissive. The NCRA implicitly accepted the serial model and not the dynamic or simultaneous model of innovation, paying no attention to the special characteristics of the innovation 29

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+ Competition law must presumably also have a forward-looking perception, what will happen when two firms collaborate in R&D, and while not being competitors when entering the R&D collaborations, will be competitors when the collaborations end. Several economists could probably agree to the bullet points above; however, in a contemporary setting we need to add some new insights. In addition to the above, it should be acknowledged that in a deregulated global market place, multinational technology-driven firms want two legal results derived from their successful R&D: intellectual property rights and technology standards. Those two goals are what firms strive to obtain by conducting R&D and this creates an incentive to collaborate. Baron and Pohlmann’s in-depth research seems to support this conclusion. It shows that firms with substitutable R&D programmes or patent portfolios are more likely to be members of the same pre-standardisation consortium (i.e. collaborations that could be similar to the competition law definition of joint R&D).30 In fact, Baron and Pohlmann’s research, based on a database including all ICT standards issued between 1992 and 2009, shows that consortia have been formed for all standards with an unusually high number of patent holders.31 Baron and Pohlman also warn that if the major economic function of consortia is to reduce technological rivalry by agreeing on technology to research and develop, competition authorities should monitor Standard Development process in quickly changing industries. Accordingly, Jorde and Teece argued that the basic notion should instead be that collaboration in industries with rapid technology change is unlikely to injure competition at all. Cf., e.g., Thomas Jorde and David Teece, ‘Innovation, Cooperation and Antitrust’, (1989) 4 High Tech Law Journal, 1, 13 et seq.; Thomas Jorde and David Teece, ‘Innovation and Cooperation: Implications for Competition and Antitrust’, (1990) 4 Journal of Economic Perspectives, 75, 86. See also Thomas Jorde and David Teece, ‘Innovation, Cooperation and Antitrust’, (1989) 4 High Tech Law Journal, 1, 4 et seq. See Joseph Broadly, commenting on the Jorde and Teece article and proposition by stating that he can find no economic or legal academic consensus supporting the conclusion that high technology markets are immune to anticompetitive risk: Joseph Brodley, ‘Antitrust Law and Innovation Cooperation’, (1990) 4 Journal of Economic Perspective, 97, 98. 30 Justus Baron and Tim Pohlmann, ‘Who Cooperates in Standard Consortia – Rivals or Complementors’, (2013) 9 Journal of Competition Law & Economics, 905, 921, 928. 31 Justus Baron and Tim Pohlmann, ‘Who Cooperates in Standard Consortia – Rivals or Complementors’, (2013) 9 Journal of Competition Law & Economics, 905, 912, 921 et seq., 928.

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Organisation (SDO) cooperation with standards consortia carefully.32 Taking the above in consideration, i.e. that de jure technology standards might be agreed upon by incumbent firms with market power, competition law in light of the findings of economists in reference to joint R&D should strive to facilitate: competition between substitute/competing innovations, while if a de jure standard is agreed upon or the market fails, or it is an exceptional circumstance, competition law may also in these situations possibly protect competition by allowing for imitation and access to essential intellectual property rights.

It is clear that competition law has a problem with the conduct that takes place before and during the standard-setting procedure. There is no real relevant market. An innovation ‘market’ is theoretically wrong, while still at least useful as a concept. Several commentators argue that agreement on a research path or on technology may be exclusionary and/or collusive conduct, although the problem is that there is no market yet to show actual market effect.33 Then it becomes too speculative to be taken into consideration. If the notion of an innovation market is not accepted, there are no relevant markets to establish anti-competitive effects.34 Establishing a standard is furthermore clearly not a rigorous, scientific process driven by identifying the ‘best’ technology in a particular field.35 Technology is selected to become a standard through a collaborative process. Based on prior R&D and former standards, the selection of a new standard may involve evaluation of, or selection and even compromise among, competing technical approaches.36 While we may analyse, with the help of engineers, whether intellectual properties reflect substitute technologies,37 it is very difficult to establish what constitutes the best technology and what might not be competition on the merits, especially, when it comes to interoperability standards for the new 32

Ibid., 928. See Jonathan J. Rubin, ‘Patents, Antitrust, and Rivalry in StandardSetting’, (2007) 38 Rutgers Law Journal, 509, 520. 34 Björn Lundqvist, Standardization under EU Competition Rules and US Antitrust Laws – The Rise and the Limits of Self-Regulation (Edward Elgar Publishing, 2014), 402 et seq. 35 See Jonathan J. Rubin, ‘Patents, Antitrust, and Rivalry in StandardSetting’, (2007) 38 Rutgers Law Journal, 509, 520. 36 Ibid. 37 Identifying substitute technologies may be very difficult, which the analysis of the several pools has shown. 33

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economy. We just do not know what should be considered procompetitive or anticompetitive.38 Notwithstanding the above, we should still not lose sight of the ‘but for’ case. For product standards specifically, a situation without a standard would imply competition between different R&D results and technologies. Even with reference to interoperability standards, the ‘but for’ reality is competition between technologies. Perhaps it is not the competition we want, because one firm will probably gain monopoly power due to network effects; but it will, at least, be in competition and rivalry with other firms.39 As for the single bullet point above, that is an issue for a different work. This chapter only deals with competition law issues and the question is whether the rules in reference to R&D collaborations reflect the other four bullet points stated above, and moreover, whether the competition law acknowledges the interface between joint R&D and standardization.

3. US AND EU ANTITRUST TREATMENT OF R&D COLLABORATIONS Introduction It is clear that in the field of R&D competition policy, the United States, with the introduction of the National Collaboration and Research Act (NCRA) in 1984, took command of what should be regarded as benign collusion in the area of R&D collaborations.40 The NCRA was the first 38 Björn Lundqvist, Standardization under EU Competition Rules and US Antitrust Laws – The Rise and the Limits of Self-Regulation (Edward Elgar Publishing, 2014), 402 et seq. 39 Ibid. 40 For analyses of the Act, see Alan H. Blankenheimer, ‘Strategic Alliances: Antitrust Issues’, 1002 PLI/CORP 547 (July 1997); John A. Maher, ‘National Cooperative Production Amendments of 1993: Limited Cartelism Invited!’, (1994) 12 Dick. J. Int’l., 195; John A. Maher and Nancy J. LaMont, ‘National Cooperative Research Act of 1984: Cartelism for High-Tech Ventures (and Others?)’, (1988) 7 Dick. J. Int’l., 1; Foster et al., ‘The National Cooperative Research Act of 1984 as a Shield From the Antitrust Laws’, (1985) 5 J.L. & Commerce, 347; Veronica M. Dougherty, ‘Antitrust advantages to joint ventures under the National Cooperative Research and Production Act’, (1999) Winter The Antitrust Bulletin, 1007, with references. See also Hanns Ullrich, Kooperative Forschung and Kartellrecht (Verlag Recht und Wirtschaft 1988), 91 et seq.;

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antitrust statute to address joint research cooperation. The Act was amended in 1993 to include joint production ventures, and the word ‘production’ was added to the name, that is, National Cooperative Research and Production Act (NCRPA). The Act clarified that courts had to measure joint R&D ventures against the rule of reason standard on an R&D or innovation market, regardless of whether the joint research was attacked under federal or state antitrust laws. It introduced that a plaintiff needed to prove anticompetitive restraints on an R&D market.41 Moreover, the Act stipulated inter alia that if the Attorney General or the US Federal Trade Commission (FTC) was notified about the joint venture, the parties were not obliged to pay treble damages should the joint venture eventually be regarded as anticompetitive in a court of law. Instead, they would be liable for actual damages, caused by the anticompetitive harm, created by the collaboration.42 Finally, the NCRA stipulated provisions obliging the losing plaintiff to pay the attorneys’ fees of the prevailing defendant. These changes had profound effects. It was not only a clear theoretical break with the previous application of antitrust law to R&D collaborations. Private antitrust enforcement in the area of R&D collaboration was also severely limited. From the very beginning, it should have been clear to Congress that the Act eliminated the incentive for private plaintiffs and limited the incentives for the antitrust enforcement agencies to launch any suits based on antitrust law in the field of R&D. Congress created a ‘safe harbour’ for R&D collaboration. The US initiative was triggered by the competitive fear of the perceived collaborative Japanese industry. When analysing the different bills regarding an exemption from antitrust law that were in circulation Andreas Fuchs, Kartellrechtliche Grenzen der Forschungskooperation (Nomos Verlaggesellschaft, 1989), 92 et seq. 41 The relevant legal text states, ‘such conduct shall be judged on the basis of its reasonableness, taking account all relevant factors affecting competition, including, but not limited to, effects on competition in properly defined, relevant R&D markets’. See section 3 NCRA. The text seemed to imply that an R&D market always needs to be identified where at least some anticompetitive conduct is manifest. The text was later altered in the NCRPA: see discussion in Björn Lundqvist, Joint Research and Development under US Antitrust and EU Competition Law (Edward Elgar Publishing, 2015), section 3.2.3(v). 42 An amendment provided that a plaintiff could still obtain treble damages in circumstances in which a joint venture violated not only the antitrust laws but also a court or FTC order concerning the conduct of the joint venture. See Thomas W. Queen, ‘Recent Development in Federal Antitrust Legislation’, (1984–1985) 53 Antitrust Law Journal, 443, 448.

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during this period on Capitol Hill, it is obvious that for several senators, and the Reagan administration, the aim was not only to create an exemption for joint intellectual property creation, that is, research, but also for collective exploitation of intellectual property rights. Thus, the liberation from the per se threat for collaborations as such was an objective irrespective of whether or not they originated from joint R&D. During the legislative process in 1983 and 1984 the NCRPA was, however, limited to joint R&D (and the joint licensing of the R&D result).43 The EU quickly followed suit with the first R&D block exemption in 1984. Ironically, the 1984 block exemption, by following the then standard structure of EU block exemptions, actually imposed a more stringent analysis of R&D collaborations than was previously the case under the old doctrine. Scrutiny was also tightened since pure R&D collaborations needed to adhere to the block exemption to be exempted in some cases.44 On a general level, the approach taken by the EU in the area of antitrust scrutiny of R&D collaborations seems to have been, and still is, to place the level of benign collusion as close to the US application of antitrust law to joint R&D efforts as possible, but still be a bit more lenient. Under the old regime, this policy was foremost implemented on a case-by-case level under the exemption procedure under paragraph 3 of Article 85 EC Treaty (now Article 101 TFEU). Unfortunately, the internal disagreements within the EU antitrust community on the general system of the application of Article 85 EC Treaty, which emerged after 1985 especially concerning the breadth of Article 85(1), interrupted this strategy and a new form for the implementation of EU antitrust policy towards, for example, R&D collaborations needed to be invented.45 43

Björn Lundqvist, Joint Research and Development under US Antitrust and EU Competition Law (Edward Elgar Publishing, 2015), section 3.2. 44 Ibid., section 3.3. 45 The combination of the block exemptions and the exemption procedure under the first paragraph were in 1985 considered a straitjacket. For example, only R&D agreements including white-listed covenants were per se legal under the R&D block exemption. If the parties wanted to have other covenants not listed in the white list in the R&D block exemption, they had to make use of the individual exemption procedure. However, to obtain an individual exemption could take some time. The long period firms had to wait to obtain an exemption under the third paragraph was therefore a problem. The block exemption procedure, on the whole, was perhaps too legalistic and rigid. It created straitjackets in certain areas. However, it would still take some time before the general system of the block exemptions, and thus the broad

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The 1993 amendment to the NCR(P)A to also include joint production was inter alia inspired by the fact that the EU block exemption included joint production from the beginning of 1985.46 Interestingly, in the same year, 1993, the EU R&D block exemption was amended to include joint distribution or joint sales up to a combined market share of 10 per cent. Correspondingly, the R&D block exemption became again slightly more lenient than its US equivalent, the NCRPA.47 However, joint distribution may ‘slip’ under the NCRPA.48 The intertwined development of the US and EU R&D antitrust policy after 1993 has continued both under the NCRPA and the R&D block exemption. The US Licensing Guidelines re-adopted the safe harbour or safe zone of the four technologies threshold in 1995 and the general safe harbour of 20 per cent market share.49 This was followed by the four technology thresholds in the EU Technology Transfer Guidelines published in 2000. That same year the R&D block exemption was introduced.50 In the block exemption the Commission increased the ceiling of the safe harbour from 20 per cent for joint R&D and 10 per cent for joint distribution to 25 per cent market share on the relevant product market. Moreover, it implemented the paradigm shift that joint R&D should be presumed pro-competitive rather than presumed anticompetitive. In 2000

application of the first paragraph, was overhauled and changed. See Björn Lundqvist, Joint Research and Development under US Antitrust and EU Competition Law (Edward Elgar Publishing, 2015), sections 3.3.2(iii) and 3.3.2(v). 46 Jorde and Teece argued to this effect: cf., e.g., Thomas Jorde and David Teece, ‘Innovation, Cooperation and Antitrust’, (1989) 4 High Tech Law Journal, 1; Thomas Jorde and David Teece, ‘Acceptable Cooperation among Competitors in the Face of Growing International Competition’, (1989) Antitrust Law Journal, 529; Thomas Jorde and David Teece, ‘Innovation and Cooperation: Implications for Competition and Antitrust’, (1990) 4 Journal of Economic Perspectives, 75; and Thomas Jorde and David Teece, ‘Innovation, Cooperation, and Antitrust’, in Thomas Jorde and David Teece (eds), Antitrust, Innovation, and Competitiveness (Oxford University Press, 1992), 47 et seq. 47 John T. Scott purports that joint ventures under the NCRPA can conduct joint sales: see John Scott, ‘The National Cooperative Research and Production Act’, in ABA (ed.), Issues in Competition Law and Policy (ABA Section of Antitrust Law, 2008), 1316. 48 Ibid. 49 See Björn Lundqvist, Joint Research and Development under US Antitrust and EU Competition Law (Edward Elgar Publishing, 2015), section 3.2.3(vii). 50 See ibid., section 3.3.3.

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the US Justice Department and the FTC in the Collaboration Guidelines51 increased the safe zone for R&D collaborations by decreasing the remaining free technologies needed on an innovation market to three technologies instead of four.52 The new generation US Guidelines and EU block exemptions and guidelines from 2010 onward do not make any material changes to these rules. In 1995 the innovation market concept was (re-)introduced by the Justice Department’s Guidelines for licensing and the efforts by Gilbert and Sunshine (hereinafter ‘Licensing Guidelines’).53 Several cases followed where the innovation market was used foremost by the FTC in mergers in the pharmaceutical sector. The wide innovation market as envisioned in the legal history of the NCRPA was in practice not utilised. Neither was the test drawn up by Gilbert and Sunshine.54 Instead, in the 10–15 cases in which it was used during the 1990s, the FTC and the Justice Department focused on clear cases of correlation between identified future markets and innovations that would potentially or likely lead to dominance or monopoly position on these markets. There were exemptions to this rule, but mostly the antitrust agencies focused on the merger where it seemed that rivalry would be exchanged for monopoly position, and where there would only be one or few innovation efforts pursued. The FTC and Justice Department during this period were more ambitious than the Commission and several cases that were prohibited by the FTC were cleared by the Commission. The effort to make use of the 51

Justice Department and FTC, Antitrust Guidelines for Collaborations Among Competitors, 2010 (hereinafter ‘Collaboration Guidelines’). 52 See Björn Lundqvist, Joint Research and Development under US Antitrust and EU Competition Law (Edward Elgar Publishing, 2015), section 3.2.3(vii). 53 DOJ/FTC, Antitrust Guidelines for the Licensing of Intellectual Property issued 1995. New Guidelines were issued in 2017, also including a chapter about what is now called research and development markets. 54 Two Deputy Assistant Attorneys initiated the discussion in an article, outlining the innovation market concept: see Richard Gilbert and Steven Sunshine, ‘Incorporating Dynamic Efficiency Concerns in Merger Analysis: the Use of Innovation Markets’, (1995) 63 Antitrust Law Journal, 569, 574 et seq. Several commentators have commented and criticised their views. See, e.g., Robert Hoerner, ‘Innovation Markets: New Wine in Old Bottles?’, (1995–1996) 64 Antitrust Law Journal, 49; George Hay, ‘Innovations in Antitrust Enforcement’, (1995–1996) 64 Antitrust Law Journal, 7; and Richard Rapp, ‘The Misapplication of Innovation Market Approach to Merger Analysis’, (1995– 1996) 64 Antitrust Law Journal, 19. See also Gilbert and Sunshine’s reply: Richard Gilbert and Steven Sunshine, ‘The Use of Innovation Markets: A Reply to Hay, Rapp, and Hoerner’, (1995–1996) 64 Antitrust Law Journal, 79.

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innovation market concept, at least by the FTC and the Justice Department, seems to have died down with the Genzyme/Novazyme55 case. In 2004, the US enacted the Standards Development Organization Advancement Act, which gave SDOs access to the NCRPA. The implications of the latest amendment are difficult to establish without case law. ‘Standard-setting activities’ include a great variety of conduct disconnected from R&D. A special reference is made to intellectual property rights. SDOs’ handling of intellectual property rights is semi-immune under the Act. Does that imply that setting up ex post a patent pool under a technology standard may be included under the NCRPA? Or, at least, that a horizontal agreement, negotiations or public declarations regarding the terms on which access to essential patents should be granted ex ante the decision of the SDO is included as standard-setting activities? Standard-setting activities in the pre-standardisation phase under SDOs were already included under both the NCRPA and the R&D block exemption.56 Indeed, firms joining up in consortia to conduct or outsource R&D so as to match a contemplated standard were encompassed by the NCRPA and the R&D block exemption, respectively.57 Given this practice, the issue is what value the latest amendment added. The 2004 amendment was enacted to include SDOs under the NCRPA. An additional reason was to include ‘standard-setting activities’ under the NCRPA, activities that are not connected to or derived from joint R&D whatsoever. The SDOs are semi-immune under the NCRPA for such activities, while the members are not. However, presumably the members of the SDO are also immune if they are joint R&D ventures.58 55 See press release 13 January 2004, FTC Closes its Investigation of Genzyme Corporation’s 2001 Acquisition of Novazyme Pharmaceuticals, Inc., available at http://www.ftc.gov/news-events/press-releases/2004/01/ftc-closes-itsinvestigation-genzyme-corporations-2001. See also In the Matter of Genzyme Corp. Docket c 4126 File no 0410083 (2005). 56 See discussion in Björn Lundqvist, Joint Research and Development under US Antitrust and EU Competition Law (Edward Elgar Publishing, 2015), sections 3.2.4 and 3.3.5, respectively. 57 Cf. Carl Cargill, ‘Intellectual Property Rights and Standard Setting Organizations: An Overview of Failed Evolution’, (2002) 27 March FTC/DOJ Hearings on Competition and Intellectual Property Law and Policy in the KnowledgeBased Economy, 1 regarding the NCRPA; and Maurits Dolmans, ‘Standards for Standards’, (2002) 26 Fordham International Law Journal, 163, 166 et seq. and 172, regarding the R&D block exemption. 58 Even if horizontal agreement between joint R&D ventures on the terms for licensing are not exempted under the NCRPA, the joint ventures might set up a patent pool in accordance with the rules from the patent pool business review

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At least granting of licenses, under the notion of joint venture in the NCRPA, could include agreement, negotiations and public declarations of terms of licensing.59 That would imply that as well as SDOs and joint ventures, the interaction between joint R&D and SDOs is also immune from antitrust suits. Whether Congress actually took notice of the fact that the members of a SDO could be the already semi-exempted joint venture is not clear. This is also a point where the legislators and the antitrust agencies have failed to address the whole picture of the model of innovation business, even though actually inserting all conduct under an act. The changes to the US antitrust policy possibly influenced the 2010 R&D block exemption and 2010 Horizontal Guidelines.60 The EU Commission acknowledged that the result of joint R&D is not only intellectual property rights but also technology standards. Thus, standalone technology standardisation agreements without connection to joint R&D have been exempted under the Horizontal Guidelines.61 The historical interaction between the US and EU legal development in reference to Antitrust treatment of R&D ventures may be depicted as: + US NCRA 1984 – enacted as an exemption for pure R&D collaborations; + EU R&D block exemption 1984 – not only exempted pure R&D collaborations but also joint production; + amendment to include joint production in US NCR(P)A 1993; + amendment to include joint sales in EU R&D block exemption 1993; + four technology safe zones in US Licensing Guidelines 1995; + four technology thresholds in the EU Licensing Guidelines 2000;

letters from the end of the 1990s and then also be (per se) legal. See RFID business review letter from Thomas O. Barnett to William F. Dolan and Geoffrey Oliver dated 21 October 2008, 8. 59 See discussion in Björn Lundqvist, Joint Research and Development under US Antitrust and EU Competition Law (Edward Elgar Publishing, 2015), section 3.2.3(xii). 60 Communication from the Commission – Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, OJ 2011 C 11/1 (hereinafter ‘Horizontal Guidelines’). 61 Ibid., paras 280 et seq.

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+ R&D block exemption 2000 – 25 per cent ceiling for R&D collaborations, but a seven-year total exemption for breakthrough R&D; + three technology safe zones in US Licensing Guidelines 2000; + in 2004, the US Standard Development Organization Advancement Act includes standard-setting activities with IP arrangements under the NCRPA; + horizontal guidelines and block exemptions for R&D and specialisation agreements in 2010/11, developing the exemption for standardisation agreements; + Technology Transfer Block Exemption (TTBER) and TT Guidelines in 2014; and + US Licensing Guidelines in 2017. The above is a short and general historical exposé of the intertwined development of R&D competition law on both sides of the Atlantic. There certainly are differences between the US and the EU application of competition law to R&D collaborations, of which the recognition of the innovation market under US law is the most prominent. Nonetheless, the general notion that these collaborations are promoted under US and EU law rather than restricted is obvious. However, in more detail, if the two policies are juxtaposed, what is similar and what is different? The General Exempted Area – Is R&D Rivalry Protected? The NCRPA is both an exemption and a safe harbour. It is an exemption in the sense that private parties are discouraged from launching any suits against conducts encompassed by the Act. Collaborators become immune from private litigation because of the mix of the required use of rule of reason, the innovation market concept, no treble damages and the possibility of having to pay the winning party’s litigation costs. The incentives for challenging anticompetitive conduct are thereby eliminated. The NCRPA is moreover a reflection of a safe harbour because neither the US Department of Justice (DOJ) nor the FTC seems to address joint R&D ventures that fall inside the NCRPA. The applicable guidelines stipulate a four or three technologies safe harbour implying that if at least three other R&D collaborations exist in the world the scrutinised collaboration should not be considered having market power. Moreover, the parties to a collaborative joint R&D may also file for a business review letter, so as to be able to get some head notice whether the DOJ would disagree to the collaboration.

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The NCRPA defines ‘joint ventures’ widely, as a group of activities engaged in by two or more legal persons for the purpose of:62 (i) theoretical analysis, experimentation, or systematic study of phenomena or observable facts; (ii) the development or testing of basic engineering techniques; (iii) the extension of investigative findings or theory of a scientific or technical nature into practical application for experimental and demonstration purposes, including the experimental production and testing of models, prototypes, equipment, materials, and processes; (iv) the production of a product, process, or services;63 (v) the testing in connection with the production of a product, process, or services by such venture; (vi) the collection, exchange, and analysis of research or production information; or (vii) any combination of the purposes specified in the paragraphs above, and may include the establishment and operation of facilities for the conducting of such a venture, on a protected and proprietary basis, and the prosecution of applications for patents and the granting of licenses for the results of such ventures.

There is no limitation on how long a venture may utilise the NCRPA. However, after 10 years the ventures should, presumably, be notified as a merger.64 The First Circuit noted in Addamax Corporation v Open Software Foundation that the phrase joint venture is ‘often used to describe a venture, other than one engaged in naked per se violations (like a price-fixing cartel), that represents a collaborative effort between companies – who may or may not be competitors – to achieve a particular end (e.g., joint research and development, production of an individual product, or efficient joint purchasing)’.65

62

15 U.S.C.A § 4301(a)(6). Production was added with the 1993 amendment; see the National Cooperative Production Amendments of 1993, Pub. L. No. 103-42, amended the National Cooperative Research Act of 1984, Pub L. No. 98-462, renamed it the National Cooperative Research and Production Act of 1993. For the leading production joint venture precedents, see In re General Motors 103 F.T.C. 374 (1984) and see In re General Motors 116 F.T.C. 1276 (1993). 64 Collaboration Guidelines, 5, fn. 10. As a comparison, the EU block exemption for R&D ventures limits the collaboration to seven years: see Art 4(1). 65 Addamax Corporation v Open Software Foundation, Inc., 152 F.3d 40, 50 n.3 (1st Cir. 1998). 63

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As stated above, the US innovation or R&D market concept seems to have been forgotten.66 Interestingly, the NCRPA seem to oblige the plaintiff to show some kind of market power on an R&D or innovation market in its suit, or otherwise risk losing the case. The relevant section of the NCRPA states: In any action under the antitrust laws, or under any State law similar to the antitrust laws, the conduct of any person in making or performing a contract to carry out a joint venture shall not be deemed illegal per se; such conduct shall be judged on the basis of its reasonableness, taking into account all relevant factors affecting competition, including, but not limited to, effects on competition in properly defined, relevant research, development, product, process, and service markets. For the purpose of determining a properly defined, relevant market, worldwide capacity shall be considered to the extent that it may be appropriate in the circumstances.67 (emphases added)

Interestingly, the legal mix making up the NCRPA exemption exists as a general rule under EU competition law. There is no treble damages rule under EU competition law and normally in civil law countries the losing party has to pay the litigation costs of the winning party. The counterweight in such systems is that public bodies, such as the EU Commission, should be able to protect competition on the behalf of citizens. Under the EU block exemption the definition of R&D (agreements) is wide: (i) joint research and development of contract products or contract technologies and joint exploitation of the results of that research and development; (ii) joint exploitation of the results of research and development of contract products or contract technologies jointly carried out pursuant to a prior agreement between the same parties; 66 As stated above, it is still included in the 2017 Licensing Guidelines: DOJ, Antitrust Guidelines for International Enforcement and Cooperation, 12 January 2017, pp. 11 et seq. The FTC case law to which the guidelines refer are however old: Complaint, Amgen Inc., 134 F.T.C. 333, 337–339 (2002) (identifying a research and development market for inhibitors of cytokines that promote the inflammation of human tissue); Wright Med. Tech., Inc., Proposed Consent Agreement with Analysis to Aid Public Comment, 60 Fed. Reg. 460, 463 (4 January 1995) (identifying a R&D market for orthopedic implants for use in human hands); Am. Home Prods. Corp., Proposed Consent Agreement with Analysis to Aid Public Comment, 59 Fed. Reg. 60,807, 60,815 (28 November 1994) (identifying a R&D market for, among other things, rotavirus vaccines). 67 See 15 U.S.C.A § 4302.

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(iii) joint research and development of contract products or contract technologies excluding joint exploitation of the results; (iv) paid-for research and development of contract products or contract technologies and joint exploitation of the results of that research and development; (v) joint exploitation of the results of paid-for research and development of contract products or contract technologies pursuant to a prior agreement between the same parties; or (vi) paid-for research and development of contract products or contract technologies.

The innovation market concept – as originally envisioned by the legislator of the NCRPA or by Gilbert and Sunshine – does not exist under EU competition law, and by disregarding the concept of the innovation market implies that anticompetitive conduct on such markets is exempted. The EU R&D block exemption verifies this by exempting any firms from collaborating for seven years after initiating production and sales, if the aim of the R&D collaboration is something that will create a whole new market. Then the market share ceiling is not applicable. In reference to incremental innovations, there is a difference between the NCRPA and the R&D block exemption. The NCRPA does not make any difference between the new innovations and incremental innovations, while the R&D block exemption has a market share ceiling when the aim of the joint R&D is to create a product on the relevant market on which the parties are active, or potentially active. Indeed, the EU competition law still views R&D as a linear process, while possibly the US development sees the R&D process as circular.68 The EU exemption for R&D is mainly made up of the R&D block exemption. On 14 December 2010, the current block exemption for the application of Article 101(3) to R&D agreements was introduced.69 It reaffirmed the amendment made in 1993 and 2000 so as to create a safe harbour for firms entering agreements to cooperate in the whole process from research for acquiring new knowledge to the distribution of the end products. Indeed, the parties agree not only to conduct research but also to manufacture and distribute the products under the R&D block exemption. The block exemptions published after the introduction of the more 68

See discussion in fn. 32. Commission Regulation (EU) No. 1217/2010 of 14 December 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to certain categories of research and development agreements, OJ 2010 L 335/36 (defined earlier as the R&D block exemption). 69

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economic approach are built on the presumption that all R&D agreements, including joint production and sales, even though including restrictive clauses, are pro-competitive if they do not include the so-called ‘black clauses’ stipulated in the block exemption. For example, field of use restrictions even between competitors are today presumably pro-competitive according to the R&D block exemption since they are not encompassed by the black list.70 Judging from the black lists, the EU Commission is more interested in ex post competition. Indeed, the EU block exemption seems to take into consideration that the parties to the joint R&D may start as noncompetitors, but when the collaborations end, they will be competitors. EU Commission’s ex post view is proven, for example, by the fact that non-access for the parties to the joint R&D to the R&D result is black-listed.71 See also Table 8.1. Moreover small intensive R&D-only firms have access to the result of the joint or outsourced R&D ex post the joint venture collaboration has ended, for further research only. This is actually the most pro-rivalry stipulation of the whole R&D block exemption, and should be extended. If an R&D-intensive firm enters into a joint exclusive development agreement with a firm focused on, for example, the clinical testing for getting a drug approved by national or regional drug authorities, or on standard-setting activities in SDOs, it should be protected from this firm ‘shelving’ or stalling the development of the innovation. If an innovation is shelved or it is clear that one party to an exclusive development agreement is stalling the process for a period of, for example, three years, the block exemption should no longer be available. Any comparable rules protecting R&D-intensive firms are missing from the NCRPA. The US Congress was more concerned with the fact that a joint R&D venture can be used as a vehicle for cartels (cf. the restriction on covenants for transferring information under the joint R&D venture), even though also stating that participants must be free to conduct research unilaterally and in combination with other firms. Competitors are also prevented from dividing the market between them. Nonetheless, the parties under the NCRPA can restrict the use of the result to only one party.72 70

Not included in the black list in Art 3 of the R&D block exemption. However, in comparison with the 2000 R&D block exemption, nonchallenge clauses are not black-listed but grey-listed. 72 Björn Lundqvist, Standardization under EU Competition Rules and US Antitrust Laws – The Rise and the Limits of Self-Regulation (Edward Elgar Publishing, 2014). 71

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Table 8.1

Black lists – protect ex post competition?

Covenants making the NCRPA non-applicable: (i) the obligation to exchange commercial information, e.g. costs, and prices, of any product sold by the parties if not reasonably necessary to conduct the research; (ii) restrictions regarding the marketing or distribution of products, other than distribution of goods from the venture to the parents or the commercialisation of intellectual property; (iii) restrictions limiting the output of other products, services or innovation not produced by the venture and also requiring the sale, licensing or sharing of other innovations not encompassed by the venture (restricting grant-backs); (iv) restricting the parties from doing research if not appropriate to restrict the use of proprietary information contributed by one party to the venture, or to require that party to do certain research; (v) agreement on allocation of markets with a competitor; (vi) the obligation to exchange information regarding the production of products or services other than that produced by the venture; (vii) requirements to use existing facilities to produce the product, service or process in question unless it involves the production of a new product or technology; and (viii) apart from (ii), (iii) and (vii), restricting or requiring participation of a participant in the joint effort of unilateral or joint activity, if not reasonably required.

Objective restrictions under EU antitrust law: (i) except when R&D is outsourced, price-fixing when selling the contract product or licensing the contracted technologies to third parties; (ii) limitations of output or sales, with several exemptions focusing on outsourced R&D and limiting the members of a joint R&D venture; (iii) naked allocations of market or customers after the seven-year immunity period; (iv) prohibition of passive sales into territories reserved for the other party; (v) restrictions of the freedom of the parties to carry out R&D independently or in cooperation with others in fields disconnected from the contemplated R&D venture or, after the joint effort’s completion, in the field which relates or is connected to the field of the joint R&D. (vi) obligations to refuse to meet offers to sell to customers in territories devoted to the other party; (vii) non-access to the result for participants in joint R&D or prohibition to exploit, except in some exceptional cases, creates non-application of exemption (grey); (viii) requirements to make it difficult for users or resellers to obtain products from other resellers within the common market, and in particular to exercise intellectual property rights to foreclose parallel trade.

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In general, the black lists are short given that the NCRPA and to a lesser degree the R&D block exemption include many different types of conduct: from the creation of an idea until the exploitation of intellectual property rights under patent pools and thereto connected agreements on joint royalty fees, technology and access for third parties. The black lists have also gained in importance. Joint R&D is, for good reasons, now considered pro-competitive both under US and EU antitrust laws. In other words, the definitions of joint venture, research or joint R&D are not conclusively determining what collaborations are encompassed by the more lenient approach under either the NCRPA or the R&D block exemption. Instead, the black lists should be read e contrario. Only then can the collaborations encompassed by the Acts be determined. Outside the Safe Zones It is clear that falling outside the safe harbours stipulated in the NCRPA or the R&D block exemption does not automatically cause the collaboration to be anticompetitive.73 On the contrary, the US rule of reason should still apply on the off chance that the NCRPA is not applicable or the EU effect doctrine requires that the parties have enough market power so that anticompetitive conduct actually has the potential of being successfully implemented. This would generally require at least 40 per cent market share in a technology or product market. Thus, the general thresholds from the merger regulation or dominance/monopolisation could be used by analogy.74 Moreover, there are general safe harbours connected to the number of technologies available, globally. The 2017 US Licensing Guidelines re-adopted the safe harbour or safe zone of the four technologies threshold that appeared in the 1995 Guidelines.75 The four-technology threshold in the EU TT Guidelines was first published in 2000, but is now available in the 2014 TT Guidelines.76 73

For a different view see fn. 37 in the 1995 Licensing Guidelines. Compare for example the definition of market power in the Horizontal Guidelines, paras 39 et seq., with the definition of dominance in Communication from the Commission – Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings OJ 2009 C 45/7, paras 11 et seq. 75 DOJ, Antitrust Guidelines for International Enforcement and Cooperation, 12 January 2017, pp. 12 et seq. 76 Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements, 2014/C 89/03. 74

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Furthermore, for example, the Horizontal Guidelines stipulate what constitutes antitrust harm and how to address these cases: In the first scenario, which is, for instance, present in the pharmaceutical industry, the process of innovation is structured in such a way that it is possible at an early stage to identify competing R&D poles. Competing R&D poles are R&D efforts directed towards a certain new product or technology, and the substitutes for that R&D, that is to say, R&D aimed at developing substitutable products or technology for those developed by the co-operation and having similar timing. In this case, it can be analysed whether after the agreement there will be a sufficient number of remaining R&D poles. The starting point of the analysis is the R&D of the parties. Then credible competing R&D poles have to be identified. In order to assess the credibility of competing poles, the following aspects have to be taken into account: the nature, scope and size of any other R&D efforts, their access to financial and human resources, know-how/patents, or other specialised assets as well as their timing and their capability to exploit possible results. An R&D pole is not a credible competitor if it cannot be regarded as a close substitute for the parties’ R&D effort from the viewpoint of, for instance, access to resources or timing. Besides the direct effect on the innovation itself, the co-operation may also affect a new product market. It will often be difficult to analyse the effects on such a market directly as by its very nature it does not yet exist. The analysis of such markets will therefore often be implicitly incorporated in the analysis of competition in innovation. However, it may be necessary to consider directly the effects on such a market of aspects of the agreement that go beyond the R&D stage. An R&D agreement that includes joint production and commercialisation on the new product market may, for instance, be assessed differently than a pure R&D agreement.

Many US antitrust lawyers would probably agree that combining R&D efforts may lessen rivalry and create dominance pre-market, and that may be considered anticompetitive collusive or exclusionary conduct. However, will the notion of innovation market be applicable? In the US, an example is a case from 2004, Genzyme/Novazyme,77 where the FTC analysed innovation competition in reference to two firms being the only source of research for a treatment for the rare Pompe disease. While both firms were in pre-clinical testing for a drug/treatment against Pompe disease, the FTC Commissioners were not in agreement 77 See Press Release of 13 January 2004, ‘FTC Closes its Investigation of Genzyme Corporation’s 2001 Acquisition of Novazyme Pharmaceuticals, Inc.’, available at http://www.ftc.gov/news-events/press-releases/2004/01/ftc-closes-itsinvestigation-genzyme-corporations-2001. See also In the Matter of Genzyme Corp. Docket c 4126 File no 0410083 (2005).

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and the FTC decision to close the case without remedies was heavily criticised by the dissenting commissioner and abstinent commissioner. The majority pointed to the fact that the FTC could not decline a merger simply based on the number of independent R&D programmes: ‘[t]he Commission has been cautious in using innovation market analysis’, Chairman Muris stated, because ‘economic theory and empirical investigations have not established a general causal relationship between innovation and competition’. Rather, a ‘careful, intense factual investigation is necessary’ to ‘distinguish between pro-competitive and anticompetitive combinations of innovation efforts’. Furthermore, there were substantial efficiencies to be gained by the merger. Perhaps, the FTC did something similar as to what is now stipulated in the Horizontal Guidelines, while the majority also found great efficiencies in this specific merger. However, Genzyme/Novazyme can also be read as throwing the concept of innovation market overboard. Is there a Right to Access R&D Joint Ventures or the Result of Such Ventures? When introducing the NCRA, Congress clarified that joint R&D may not be overly inclusive.78 It is necessary to ensure adequate R&D competition when applying the rule of reason. Interestingly, by not commenting on right to access either the research or the result, Congress indicated a departure from the previous general doctrine. Previously, there seems to have been a right to access, which arguably is derived from the per se rule regarding group boycotts, i.e. a right to free ride and duplicate the result of the R&D in certain incidents.79 Joint R&D ventures, especially research efforts creating externalities, were, for example, obliged to publish their findings.80 The 1995 Licensing Guidelines erase the notion of any right of access to the result of joint research as was envisioned in the 1980 Guide concerning research and development joint venture.81 According to the 1995, and now the 2017, Licensing Guidelines, the agencies will not require the owner of intellectual property to create competition in its own 78

S. REP. 98-427, 1984 U.S.C.C.A.N. 3105, 9 et seq. Joseph Brodley, ‘Joint Ventures and Antitrust Policy’, (1981–1982) 95 Harvard Law Review, 1521, 1533 et seq. 80 US Department of Justice, Guide concerning research and development joint venture, 1980, 18 et seq. 81 Ibid. 79

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technology.82 The issue is whether this rule also applies to joint R&D ventures: are joint ventures required to create competition in their ‘own’ technology? One can argue that under US antitrust law concerted refusal to deal or boycotts are per se violations. Therefore, there can be a right to access the result joint efforts under fair and non-discriminatory terms.83 However, that is not certain given the current climate. The case law from the European Courts could be interpreted as saying that Article 101 TFEU also includes the right to access collaborative joint ventures under the TFEU.84 In several decisions regarding joint ventures the Commission required the parties to open up the ventures for third parties.85 One observation is, however, the total lack of any discussion in guidelines or block exemption that third parties should be granted access to joint research ventures. In comparison, both the TT Guidelines, when analysing patent pools, and the Horizontal Guidelines, in respect of standardisation agreements, state that there certainly is a point where the main concern is not to prevent the building-up of market power but to ensure access to the standard-setting organisation or the dominant standard or patent pool for competitors.86 Similarly, the Huawei case87 and the decisions by the Commission in reference to Motorola and Samsung, respectively, stipulate a right to access standard essential patents (SEPs) under industrial standards.88 The Court and the Commission even purport that these cases draw up a ‘safe harbour’ for accessing SEPs as a new exceptional circumstance. Thus, when a technology standard has become essential due to a decision by an SDO and the holder of the essential patents has agreed to license it on 82

1995 Licensing Guidelines, 7; 2017 Licensing Guidelines, section 3.1. See e.g. Associated Press v United States, 326 U.S. 1 (1945). 84 See e.g. Joint Cases T-374 to T-388/94 European Night Service v Commission ECLI:EU:T:1998:198, para. 209. See also Case T-504/93 Tiercé Ladbroke AS v Commission ECLI:EU:T:1997:84, paras 11 et seq. 85 See e.g. Commission Decision Telecom Development OJ 1999 L 218/24, paras 28 and 41. 86 Horizontal Guidelines, paras 257 et seq.; TT Guidelines, para. 226. Regarding the interaction between Arts 101 and 102 there may e.g. be easier to prove concerted practices under the Dyestuff case: see Case 48/69 Imperial Chemical Industries v Commission ECLI:EU:C:1972:70, paras 8 et seq. than collective dominance under the Airtours case: see Case 342/99 Airtours v Commission ECLI:EU:T:2002:146. 87 Case C-170/13 Huawei Technologies, ECLI:EU:C:2015:477 88 See Press Release regarding Samsung and Motorola of 29 April 2014, available at http://europa.eu/rapid/press-release_IP-14-489_en.htm and http:// europa.eu/rapid/press-release_IP-14-490_en.htm. 83

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FRAND terms, the task for competition law is no longer to prevent market power but to prevent abuse by facilitating access for competitors to the essential intellectual property rights. If competition by substitute cannot be upheld due to market failure, competition by imitation must be granted under competition law. This enables the competitors to get access to, at least, the products market, and possibly also the technology market, governed by the standard.89 Thus, the Commission does not acknowledge foreclosure problems at the level of contemplating innovations. Indeed, competitors can only access the result of joint R&D under EU competition law. In academia there seems to be a line of discussion that there must be the possibility to access joint R&D ventures. Both Morais in 2013 and Gutterman in 1997 seem to imply that access to joint R&D ventures in exceptional cases must be granted by the courts, based on the essential facility doctrine.90 However, by only partially accepting the notion of innovation markets, EU competition law facilitates that firms not only jointly dominate the innovation markets but may monopolize them.91 For example, if a joint R&D effort (consortia) in the pre-standardisation phase brings together parties with significant resources to perform repeated research so as to create dominant technologies to create a whole new demand, there is a limited possibility of accessing such a venture for a smaller competitor under EU competition law.92 They will only be able to access the result, the standard. Probably a court would not agree and perhaps only in exceptional cases open up a joint R&D venture for non-wanted entrants. For 89 See Case T-504/93 Tiercé Ladbroke v Commission ECLI:EU:T:1997:84, para. 131; Case T-374/94 European Night Service et al v Commission ECLI: EU:T:1998:198, para. 209. 90 Luis Silva Morais, Joint Venture and EU Competition Law (Hart Publishing, 2013), 257. Alan S. Gutterman, Innovation and Competition policy – A Comparative Study of the Regulation of Patent Licensing and Collaborative Research & Development in the United States and the European Community (Kluwer Law International, 1997), 339 et seq. 91 Correspondingly, the US approach not to oblige a party to create competition in its own technology might prevent a third party from getting access at least to one firm’s research effort (see above). However, when discussing collaborative joint efforts there should be, theoretically, some right to access based on the notion of innovation markets and the antitrust violation group boycott. For discussion see above. 92 Baumol technology consortia are thus legally benign under EU competition law. Cf. William Baumol, The Free-Market Innovation Machine (Princeton University Press, 2002), 73 et seq.

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example, the exceptional circumstance test stipulated in IMS Health for accessing intellectual property rights could become applicable through analogy under Article 101 TFEU for accessing R&D collaborations, but it seems unlikely.93 Moreover, perhaps, the Huawei line of cases regarding accessing SEPs may also by analogy be applicable to certain consortia in the pre-standardisation phase, but this also seems unlikely. Interestingly, access to SEPs seems also to be possible under US law, albeit then under IP law and not antitrust law.94

4. CONCLUSION As stated above, for a layman the findings of the economists in reference to innovation creation and economics seem difficult to grasp. There are many different and opposing views and findings. Nonetheless, some conclusions can be drawn: + According to the economists referred to above, competition may be helped when innovators get something in return for their innovations, and innovators should be able to, at least, have a possibility to try to prevent imitation or copying of innovations under a property law system. Thus, imitation of innovation should under certain requirements be in violation of intellectual property laws. This is not a competition law regulation issue, but when the intellectual property law system fails or the market fails, competition law may become applicable. + Rivalry, also before markets are established, should be taken into consideration and current market share on existing markets may not work as a proxy to identify restriction of competition in the procedure to create new knowledge/innovations and products or 93 Case C-418/01 IMS Health Inc & Co v NDC Health GmbH & Co ECLI:EU:C:2004:257. See also the interesting German case, Federal Supreme Court (Bundesgerichtshof) 13 July 2004 – Case No. KZR 40/02 (‘Tight-Head Drum’ (Standard-Spundfass)) where a patentee who set up a standard together with three other firms was obliged to license a foreign entrant an essential patent under the standard. For comments, cf. Matthias Leistner, ‘Federal Supreme Court (Bundesgerichthof)’, (2005) 6 IIC, 741. Such a right could be based on the reasoning of the IMS Health case. See also Commission Decision Konsortium ECR 900 OJ 1990 L 228/31. 94 Björn Lundqvist, Standardization under EU Competition Rules and US Antitrust Laws – The Rise and the Limits of Self-Regulation (Edward Elgar Publishing, 2014), Ch. 6.

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disruptive innovations. Moreover, since pre-market competition especially in the New Economy is clearly on the rise, competition law and practitioners need to find a way to address the anticompetitive conducts taking place pre-market. Otherwise, competition law will be applicable too late – indeed, when the market is already monopolised. + Market shares in current markets may, however, be a proxy when establishing whether to allow R&D collaborations for incremental innovations of current existing products on current markets; while here joint development programs that enhance the efficient development of a new good should be considered procompetitive.95 + Competition law must presumably also have a forward-looking perception, i.e. what will happen when two firms collaborate in R&D, and while not being competitors when entering the R&D collaborations, will be competitors when the collaborations ends? + Competition between substitute/competing innovations is to be preferred, while if the market fails, or it is an exceptional circumstance, competition law may in these rare situations possibly protect competition by allowing for imitation of the dominant firm’s innovation or product by allowing access to the intellectual property right. From the analysis above, whether EU and US antitrust laws address these bullet points, several interesting conclusion may be drawn. There are 95

It should be mentioned that Jorde and Teece, by arguing that research is no longer carried out in a linear sequence but instead in dynamic fashion with interaction between research, application, manufacturing and even commercialisation, gave the principal reasons for why the NCRPA should not differentiate between basic science and applied research. According to Jorde and Teece, the old NCRA was not sufficiently permissive. The NCRA implicitly accepted the serial model and not the dynamic or simultaneous model of innovation, paying no attention to the special characteristics of the innovation process in quickly changing industries. Accordingly, Jorde and Teece argued that the basic notion should instead be that collaboration in industries with rapid technology change is unlikely to injure competition at all. Cf., e.g., Thomas Jorde and David Teece, ‘Innovation, Cooperation and Antitrust’, (1989) 4 High Tech Law Journal, 1, 4 et seq., 13 et seq.; Thomas Jorde and David Teece, ‘Innovation and Cooperation: Implications for Competition and Antitrust’, (1990) 4 Journal of Economic Perspectives, 75, 86. See Joseph Broadly, commenting on the Jorde and Teece article and proposition by stating that he can find no economic or legal academic consensus supporting the conclusion that high technology markets are immune to anticompetitive risk: Joseph Brodley, ‘Antitrust Law and Innovation Cooperation’, (1990) 4 Journal of Economic Perspective, 97, 98.

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differences between the EU and the US jurisdictions in the application of competition law to R&D collaborations. For example, under EU law the joint research may also include joint sales for a period of seven years after the sale of the first contemplated products, while there is no such corresponding exemption under US law. There is no market ceiling for when the NCRPA should not be applicable, whereas there is a 25 per cent cap on the EU block exemption if the parties decide to jointly pursue an incremental R&D project. However, the question is whether this is actually a true indication of different attitudes towards R&D collaborations. First, joint sales may be ‘exempted’ under the US business review letter procedure or even without having recourse to that scheme. Second, from a close reading of the block exemption, it is evident that the market share threshold does not reflect the true upper limit after which Article 101(3) TFEU is not applicable, even when dealing with joint R&D into incremental innovations. Possibly, there is a difference in approach concerning whether the research is of basic or applied type. The EU approach is still based on the notion that research develops in a linear fashion, starting with basic research. Cooperation in basic research would then be less suspicious than joint applied research. However, the competition law analysis is based on a legal test, not depending on the difference between basic and applied science, but whether or not a new market is created by the outcome of the R&D project. These analyses may differ in outcome. In the US, after the implementation of a more complex innovation model not acknowledging linear innovation processes, this is no longer true. Whether this difference actually makes a distinction is unclear. Both EU and US jurisdictions take such a lenient approach to joint research that the difference can be neglected. Moreover, the now more academic difference between the innovation market of the US and the innovation competition of the EU could imply a difference if the US antitrust agencies had embraced the large innovation market as they were stated in, for example, the License Guidelines, and even more so in the NCRPA. However, that has not happened, and after the 1990s the concept of, at least, the ‘large’ innovation market has vanished. Presumably, the remaining differences are negligible. The preferred result in both jurisdictions seems not to be to increase the amount of research carried out, but to increase joint R&D and the creation of intellectual property rights. Both jurisdictions therefore have a lenient attitude, or even an encouraging attitude towards R&D collaborations. It is also evident that the level of protection of competition decreased on

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both sides of the Atlantic from 1985 and onwards. Joint efforts that previously were considered anticompetitive are today declared benign or even pro-competitive. On the whole, market power is tolerated, or, perhaps, even encouraged. Possibly, Schumpeterian ideas have influenced this outcome. However, it seems clear that economic research has been able to present and agree on a test that is able to distinguish the ‘bad’ R&D collaborations from the ‘good’. Before we have such a test, antitrust authorities should of course tread with ease. The outcome of a lenient approach, especially given the increase and importance of premarket competition in the New Economy, is that monopolies and exclusionary collaboration may be tolerated. However, as the bullet points above suggest, we know a bit about what stimulates innovation. Perhaps society would be better off trying to pursue at least the idea that competition spurs innovation, to some small degree, even though treading lightly and softly. Finally, the very latest development shows that the Commission possibly has a nascent interest in R&D collaborations. The current block exemption is in some ways more stringent than the 2000 block exemption and the Commission has actually initiated investigations into development agreements. In October 2014, the Commission also sent a Statement of Objection to Honeywell and DuPont and stated it had concerns that a series of agreements concluded between Honeywell and DuPont in 2010 may have hindered competition on the market for new refrigerant for airconditioning systems in cars, R-1234yf.96 The selection of 1234yf as the standard was the result of a process conducted under the auspices of the Society of Automotive Engineers, which represents the interests of all groups involved in the automotive sector.97 Honeywell’s and DuPont’s agreements relate notably to both the development and production arrangements of the R-1234yf.98 According to the Commission, Honeywell and DuPont are the only two suppliers of R-1234yf to car makers. The Commission’s provisional finding is that the cooperation between Honeywell and DuPont on production of R-1234yf has reduced their decision-making independence and resulted in restrictive effects on competition. These effects include a limitation of the available quantities of the new refrigerant that would 96 See EU Commission press release, available at http://europa.eu/rapid/ press-release_IP-14-1186_en.htm. 97 Ibid. 98 See EU Commission press release, available at http://europa.eu/rapid/ press-release_IP-11-1560_en.htm?locale=en.

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have otherwise been brought to the market, as well as a limitation of related technical development. Indeed, the Commission seems to address R&D collaborations and the interface R&D collaborations, standardisation and production, and conclude that the parties agreed to restrict development.

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9. Patent settlements in the pharmaceutical industry: what can we learn from economic analysis? Jonas Severin Frank and Wolfgang Kerber* 1. INTRODUCTION Patent settlements between originator firms and generic firms in the pharmaceutical industry have been one of the most disputed topics in competition and antitrust law discussions in recent years.1 In particular, * The authors would like to thank the participants of the Brown Bag Seminar at NYU Law School (1 April 2015), the Hohenheimer Oberseminar (Weimar, 17 April 2015), and the EALE Conference (Vienna, 18 September 2015) for their critical feedback on a draft version developing the argument made more fully in this chapter. 1 Mark D Janis, Herbert Hovenkamp and Mark A Lemley, ‘Anticompetitive Settlement of Intellectual Property Disputes’ (2003) 87 Minnesota Law Review 1719; Jeremy Bulow, ‘The Gaming of Pharmaceutical Patents’ in Adam B Jaffe, Josh Lerner and Scott Stern (eds), Innovation Policy and the Economy (MIT Press 2004) 145; Scott Hemphill, ‘An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition’ (2009) 109(4) Columbia Law Review 629; Christopher M Holman, ‘Do Reverse Payment Settlements Violate The Antitrust Laws?’ (2007) 23 Santa Clara Computer & High Technology Law Journal 489; Michael Carrier, ‘Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality’ (2009) 108 Michigan Law Review 37; Sean-Paul Brankin, ‘Patent settlements and competition law: where is the European Commission going?’ (2010) 5 Journal of Intellectual Property Law & Practice 23; Aaron Edlin, Scott Hemphill, Herbert Hovenkamp and Carl Shapiro, ‘Activating Actavis’ (2013) 28(1) Antitrust 16; Severin Frank and Wolfgang Kerber, ‘Patent Settlements in the Pharmaceutical Industry: An Antitrust Perspective’ in Ralf Dewenter, Justus Haucap and Christiane Kehder (eds), Wettbewerb und Regulierung in Medien, Politik und Märkten, Festschrift für Jörn Kruse zum 65. Geburtstag (Baden-Baden 2013) 385; Zhenghui Wang, ‘Reanalyzing Reverse-Payment Settlements: A Solution to the Patentee’s Dilemma’ (2014) 99 Cornell Law Review 1227. 215 Jonas Severin Frank and Wolfgang Kerber - 9781788972444 Downloaded from Elgar Online at 03/15/2021 10:38:16PM via Universita Degli Studi Roma Tre

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patent settlements with ‘agreed entry dates’ in combination with ‘reverse payments’ to generic firms (‘pay-for-delay’) have been challenged by antitrust authorities in the US and the EU as anticompetitive collusive behaviour between originators and generics delaying price competition through generic entry and harming consumers. Since settlement outcomes with large reverse payments can only occur in cases of potentially invalid patents (‘weak patents’), this question is deeply linked to fundamental problems in the patent system. The controversies about patent settlements focus primarily on the role of reverse payments, i.e. whether they should be deemed as per se illegal, whether a (strong) presumption of illegality (with possibilities of rebuttals) should be applied or whether, due to possible efficiency effects, a rule of reason approach would be appropriate. Both in the US and the EU, so far no consensus has been reached among legal and economic scholars about the most appropriate antitrust solution. In the US, the Federal Trade Commission (FTC) has challenged patent settlements with reverse payments in the pharmaceutical industry since 1999. The position of the FTC was and still is that patent settlements with reverse payments should be presumed as illegal with the possibility of a rebuttal by the parties, e.g. through litigation costs or other efficiencies (quick look rule).2 When this FTC policy came up against resistance in the US courts (with contradictory decisions and reasonings3), the Actavis decision of the Supreme Court clarified that a large unexplained reverse payment can be a sign of a weak patent and therefore the anticompetitiveness and illegality of such patent settlements. However, the Supreme Court also rejected the presumption of illegality approach of the FTC and wants the US courts to apply a rule of reason approach, which also takes into account possible explanations for any value transfer from the originator to the generic firms.4 In the EU, the European Commission classified patent settlements and argued that 2

FTC, ‘Generic Drug Entry Prior to Patent Expiration’ (Staff Study) (2002) 7; FTC v Actavis Inc 470 US (2013) 20; Sean-Paul Brankin, ‘Patent settlements and competition law: where is the European Commission going?’ (2010) 5 Journal of Intellectual Property Law & Practice 24; FTC, ‘Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions’ (Staff Study) (2010) 9. 3 Michael A Carrier, ‘Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality’ (2009) 108 Michigan Law Review 37. 4 FTC v Actavis Inc 470 US (2013); Aaron Edlin, Scott Hemphill, Herbert Hovenkamp and Carl Shapiro, ‘Activating Actavis’ (2013) 28 Antitrust 16; Zhenghui Wang, ‘Reanalyzing Reverse-Payment Settlements: A Solution to the Patentee’s Dilemma’ (2014) 99 Cornell Law Review 1227.

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the group of patent settlements with a restriction of entry and with a reverse value transfer requires closer competition policy scrutiny.5 This led the Commission to put this group of patent settlements under a special antitrust scrutiny in the newly adapted guidelines for the application of Article 101(3) TFEU to technology transfer agreements, and challenge and prohibit several patent settlements with reverse payments (e.g. in the case Lundbeck). Although the EU Commission acknowledges that settlements can have efficiency advantages like saving of litigation costs, time, and the resolution of uncertainty, it also emphasizes that society has an interest in removing wrongly granted patents to promote competition and innovation.6 How can the state of the academic discussion be briefly summarized? The large majority of scholars claim that patent settlements can be anticompetitive through delaying or impeding market entry and therefore restricting generic competition.7 There is a nearly unanimous consensus 5

Commission, ‘Pharmaceutical Sector Inquiry’ (Final Report) 270. Commission, ‘Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements’ OJ 2014/C 89/3 44. 7 David A Balto, ‘Pharmaceutical Patent Settlements: The Antitrust Risk’ (2000) 55 Food and Drug Law Journal 321; Daniel A Crane, ‘Exit Payments in Settlement of Patent Infringement Lawsuits: Antitrust Rules And Economic Implications’ (2002) 54 Florida Law Review 747; Howard M Morse, ‘Settlement of Intellectual Property Disputes in the Pharmaceutical and Medical Device Industries: Antitrust Rules’ (2002) 10 George Mason Law Review 359; Mark D Janis, Herbert Hovenkamp and Mark A Lemley, ‘Anticompetitive Settlement of Intellectual Property Disputes’ (2003) 87 Minnesota Law Review 1719; Kevin D McDonald, ‘Hatch-Waxman Patent Settlements and Antitrust: On “Probabilistic” Patent Rights and False Positives’ (2003) 17 Antitrust 68; Jeremy Bulow, ‘The Gaming of Pharmaceutical Patents’ in Adam B Jaffe, Josh Lerner and Scott Stern (eds), Innovation Policy and the Economy (MIT Press 2004) 145; Keith Leffler and Christopher Leffler, ‘Efficiency Trade-Offs in Patent Litigation Settlements: Analysis Gone Astray?’ (2004) 39 University of San Francisco Law Review 33; Scott C Hemphill, ‘Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem’ (2006) 81 New York University Law Review 1553; James F Ponsoldt and Hennen W Ehrenclou, ‘The Antitrust Legality of Pharmaceutical Patent Litigation Settlements’ [2006] Journal of Law, Technology & Policy 37; Christopher M Holman, ‘Do Reverse Payment Settlements Violate The Antitrust Laws?’ (2007) 23 Santa Clara Computer & High Technology Law Journal 489; Thomas B Leary, ‘Antitrust Issues in the Settlement of Pharmaceutical Patent Disputes’ (2007) 30 Seattle University Law Review 377; Joshua P Davis, ‘Applying Litigation Economics to Patent Settlements: Why Reverse Payments Should be Per Se Illegal’ (2009) 41 Rutgers Law Journal 255; Michael A Carrier, ‘Unsettling Drug Patent Settlements: A Framework for Presumptive 6

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among these scholars that the size of reverse payments is a crucial criterion for its anticompetitive effects. The main discussion refers to the question whether a presumption of illegality of patent settlements with reverse payments should be used, or whether a rule of reason approach should be applied. Although nobody denies the possibility of efficiency advantages of patent settlements,8 there is a wide range of opinions whether a stronger or weaker presumption of illegality of patent settlements with reverse payments (with a smaller or larger set of possible rebuttals) or a full-blown rule of reason with a deep case-specific analysis should be recommended.9 There also seems to be a broad consensus that, vice versa, patent settlements are not seen as being anticompetitive, if the parties only agree on future entry dates without a reverse net value transfer.10 Illegality’ (2009) 108 Michigan Law Review 37; Sean-Paul Brankin, ‘Patent settlements and competition law: where is the European Commission going?’ (2010) 5 Journal of Intellectual Property Law & Practice 23; Linda Gratz, ‘Economic Analysis of Pay-for-delay Settlements and their Legal Ruling’, Munich Discussion Paper 2012-6; Aaron Edlin, Scott Hemphill, Herbert Hovenkamp and Carl Shapiro, ‘Activating Actavis’ (2013) 28 Antitrust 16; Peter Picht, ‘New Law on Reverse Payment Settlements – The Agenda for Courts and the Legislature After the Supreme Court’s Actavis Ruling’ (2013) 16 Tulane Journal of Technology & Intellectual Property 1; Michael A Carrier, ‘A Response to Chief Justice Roberts: Why Antitrust Must Play a Role in the Analysis of Drug Patent Settlements’ (2014) 15 Minnesota Journal of Law, Science & Technology 31; Thomas F Cotter, ‘FTC v. Actavis, Inc.: When Is the Rule of Reason Not the Rule of Reason?’ (2014) 15 Minnesota Journal of Law, Science & Technology 41; Robin Feldman, ‘Ending Patent Exceptionalism and Structuring the Rule of Reason: The Supreme Court Opens the Door for Both’ (2014) 15 Minnesota Journal of Law, Science & Technology 61. 8 Scott C Hemphill, ‘Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem’ (2006) 81 New York University Law Review 1553; Bret Dickey, Jonathan Orszag and Laura Tyson, ‘An Economic Assessment of Patent Settlements in the Pharmaceutical Industry’ (2010) 19 Annals of Health Law 367, 375; Sean-Paul Brankin, ‘Patent settlements and competition law: where is the European Commission going?’ (2010) 5 Journal of Intellectual Property Law & Practice 23, 23; Sumanth Addanki and Henry N Butler, ‘Activating Actavis: Economic Issues in Applying the Rule of Reason to Reverse Payment Settlements’ (2014) 15 Minnesota Journal of Law, Science & Technology 13. 9 See, e.g., the ‘Actavis inference’ as the most recent variant, Aaron Edlin, Scott Hemphill, Herbert Hovenkamp and Carl Shapiro, ‘The Actavis Inference: Theory And Practice’ (2015) 67 Rutgers University Law Review 585. 10 FTC, ‘Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions’ (Staff Study) (2010) 1; Commission, ‘Guidelines on the application of

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There are only a limited number of articles about patent settlements in which explicit economic analyses can be found. Some articles address the problem of patent settlements in the pharmaceutical industry directly (either with economic models,11 or at least with explicit economic reasonings12). But other economic contributions about the broader problems of weak (‘probabilistic’) patents and the design of the patent system are relevant for this patent settlement problem.13 This chapter will critically analyze what economic analyses have so far contributed to our knowledge about the effects of patent settlements in the pharmaceutical industry and the possible rules for their antitrust treatment. On the one hand, this entails a critical analysis of these economic models themselves (and the claims made by them), and, on the other hand, an analysis of the gaps in our knowledge and the open research questions. One crucial Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements’ OJ 2014/C 89/3 44; Commission, ‘Pharmaceutical Sector Inquiry’ (Final Report) 524, para 1573. 11 Robert D Willig and John P Bigelow, ‘Antitrust policy toward agreements that settle patent litigation’ (2004) 49 The Antitrust Bulletin 655; Einer Elhauge and Alex Krüger, ‘Solving the Patent Settlement Puzzle’ (2012) 91 Texas Law Review 283; Linda Gratz, ‘Economic Analysis of Pay-for-delay Settlements and their Legal Ruling’, Munich Discussion Paper 2012-6; Sumanth Addanki and Alan J Daskin, ‘Patent Settlement Agreements’ (2009) 3 Issues in Competition Law and Policy 2127; Xiang Yu and Anjan Chatterji, ‘Why Brand Pharmaceutical Companies Choose to Pay Generics in Settling Patent Disputes: A Systematic Evaluation of the Asymmetric Risks in Litigation’ (2011) 10 Northwestern Journal of Technology and Intellectual Property 18. 12 Marc G Schildkraut, ‘Patent-Splitting Settlements and the Reverse Payment Fallacy’ (2004) 71 Antitrust Law Journal 1033; Scott C Hemphill, ‘Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem’ (2006) 81 New York University Law Review 1553; Michael A Carrier, ‘Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality’ (2009) 108 Michigan Law Review 37; Joshua P Davis, ‘Applying Litigation Economics to Patent Settlements: Why Reverse Payments Should be Per Se Illegal’ (2009) 41 Rutgers Law Journal 255; Bruce H Kobayashi, Joshua D Wright, Douglas H Ginsburg and Joanna Tsai, ‘Actavis and Multiple ANDA Entrants: Beyond the Temporary Duopoly’ (2015) 29 Antitrust 89; Aaron Edlin, Scott Hemphill, Herbert Hovenkamp and Carl Shapiro, ‘The Actavis Inference: Theory and Practice’ (2015) 67 Rutgers University Law Review 1. 13 Carl Shapiro, ‘Antitrust limits to patent settlements’ (2003) 34 RAND Journal of Economics 391; Mark A Lemley and Carl Shapiro, ‘Probabilistic Patents’ (2005) 19 Journal of Economic Perspectives 75; Joseph Farrell and Carl Shapiro, ‘How Strong Are Weak Patents?’ (2008) 98 American Economic Review 1347; David Encaoua and Yassine Lefouili, ‘Licensing weak patents’ (2009) 57 Journal of Industrial Economics 492.

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claim of this chapter is that the problem of patent settlements can only be understood if we not only analyze it from a narrow antitrust perspective, but also take into account its deep interrelationship with the (economics of the) patent system.14 The chapter is structured as follows. Section 2 will present the general problem of weak patents as part of the discussion about the problems of the patent system. Section 3 will focus on the relevant normative antitrust standard (consumer welfare) and distinguish three channels of possible effects of patent settlements on consumer welfare. Section 4 will discuss the effects on consumers via price competition, as patent settlements with reverse payments might harm consumers through the delay of generic entry. However, relevant for consumer welfare are also the effects of patent settlements on innovation incentives (section 5) and the incentives for generics to challenge potentially invalid patents (section 6). The final section 7 will summarize our results, identify gaps of research, and discuss policy conclusions.

2. THE BACKGROUND PROBLEM: WEAK PATENTS AND DEFECTS OF THE DESIGN OF THE PATENT SYSTEM The problem of patent settlements in the pharmaceutical industry stems from the fact that a large number of granted patents are found invalid in patent litigation, which gives patent holders large incentives to defend their weak patents through settlements with reverse payments to challenging generic firms. An important reason is that patent offices do not invest enough time and resources in patent examination (especially in regard to ‘prior art’) and therefore tend to grant too many patents that often would not survive a challenge in patent litigation (‘weak patents’). Empirical studies show that litigated patents are found invalid in 50% (or more) of all cases.15 This result could be interpreted as a defect of the patent system. However, Lemley argued from an economic perspective that such a result might also be efficient, because it might not be 14 Please note that this is a general discussion about patent settlements in the pharmaceutical industry. Therefore, it does not take into account the specific institutional conditions of different legal and regulatory systems, for example the Hatch-Waxman Act in the US or the specific institutional characteristics in the EU. Therefore, we do not derive specific policy conclusions in that regard. 15 Mark A Lemley and Carl Shapiro, ‘Probabilistic Patents’ (2005) 19 Journal of Economic Perspectives 75, 76.

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worthwhile to make deep and costly examinations of all patent applications as many of the granted patents turn out not to be valuable (rationally ignorant patent offices).16 But both interpretations lead to the conclusion that it is necessary that the patent system has effective legal instruments for challenging and weeding out invalid patents. It is an open question in the patent literature whether and to what extent the institutional design of the entire patent system (with all its rules about granting, opposing and challenging patents in courts) leads to an efficient patent system or – as in the meantime most legal and economic scholars claim – that the existing patent systems are deeply flawed and suffer from serious problems.17 An economic perspective on this problem of weak patents has led to the development of the concept of ‘probabilistic’ patents or ‘partial property rights’, which has played a major role in the patent settlement discussion.18 The basic idea is simple: whereas from a legal perspective a patent right is either valid or not, the economic value of a granted patent right before litigation depends also crucially on the expected probability of defending it in patent litigation. If this probability is, e.g., θ = 0.25, then the expected value of the patent for the patent owner is much lower than the value of a fully defendable (iron-clad) patent right. This probability θ is used for defining the strength of a patent. This ‘probabilistic’ character of a patent has been used in the patent settlement discussion in two different ways: since the patent strength θ reflects the winning probabilities of the settling parties in patent litigation, it influences the ranges of the settlements (in regard to agreed entry dates and/or the size of reverse payments). In the economic models but also in argumentations of legal scholars, this has led to conclusions that a 25% chance of defending a patent against a challenging generic firm would lead to a settlement on an agreed entry date without reverse payment of 16 Mark A Lemley, ‘Rational Ignorance at the Patent Office’ (2001) 95 Northwestern University Law Review 1497. 17 Carl Shapiro, ‘Patent System Reform: Economic Analysis and Critique’ (2004) 19 Berkeley Technology Law Journal 1017, 1018; Bronwyn H Hall and Dietmar Harhoff, ‘Post-Grant Reviews in the U.S. Patent System-Design Choices and Expected Impact’ (2004) 19 Berkeley Technology Law Journal 989. 18 Ian Ayres and Paul Klemperer, ‘Limiting Patentees’ Market Power Without Reducing Innovation Incentives: The Perverse Benefits of Uncertainty and NonInjunctive Remedies’ (1999) 97 Michigan Law Review 985; Carl Shapiro, ‘Antitrust limits to patent settlements’ (2003) 34 RAND Journal of Economics 391; Joseph Farrell and Carl Shapiro, ‘How Strong Are Weak Patents?’ (2008) 98 American Economic Review 1347.

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25% of the remaining patent duration.19 However, it can also be used for the analysis of the innovation incentives that such a probabilistic patent offers (e.g. how large the incentives are for an innovation that allows for a patent with a patent strength of 25%). In their seminal paper ‘How Strong are Weak Patents?’, Farrell and Shapiro assume that innovation incentives for probabilistic patents are optimal if the proportionality principle is fulfilled, i.e. that incentives for an innovation from a probabilistic patent are proportional to its patent strength – in other words, that the rents from a patent with θ = 0.5 should be half of the rents of an iron-clad patent (θ = 1) and twice the rents for a patent with θ = 0.25.20 Farrell and Shapiro have suggested that profits from weak patents might be relatively too large in comparison to stronger patents, leading to a distortion of innovation incentives in favour of ‘innovations’ that only with a small probability are true innovations that should be rewarded by patent protection (see section 5 below). It is well known that the challenging of potentially invalid patents can suffer from serious incentive problems. Since all patent systems rely on private litigation for challenging patents, the private incentives for challenging patents suffer from a public good problem, because the costs and risks of patent litigation are borne by the challenging firm, whereas the benefits of having eliminated an invalid patent right accrues to everybody.21 This externality of challenging patents leads to too small 19

Einer Elhauge and Alex Krüger, ‘Solving the Patent Settlement Puzzle’ (2012) 91 Texas Law Review 283, 295. 20 Joseph Farrell and Carl Shapiro, ‘How Strong Are Weak Patents?’ (2008) 98 American Economic Review 1347, 1348. 21 Joseph Farrell and Robert P Merges, ‘Incentives to Challenge and Defend Patents: Why Litigation Won’t Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help’ (2004) 19 Berkeley Technology Law Journal 943, 952; Scott C Hemphill, ‘Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem’ (2006) 81 New York University Law Review 1553. This is the reason why in the US the Hatch-Waxman Act intended to increase the incentives of generic firms by giving the first challenging firm a 180-day exclusivity right in regard to market access (in comparison to other generic firms). However, the 180-day mechanism is also critically discussed, since it might open opportunities for making collusive settlement agreements with the first filer while others are excluded: see Mark D Janis, Herbert Hovenkamp and Mark A Lemley, ‘Anticompetitive Settlement of Intellectual Property Disputes’ (2003) 87 Minnesota Law Review 1719, 1755; Scott C Hemphill, ‘Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem’ (2006) 81 New York University Law Review 1553; Michael A Carrier, ‘Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality’ (2009) 108 Michigan Law Review 37, 61.

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incentives for challenging firms, but also implies that patent settlements between originator and generic firms can have negative (external) effects on third parties, because the settlement helps to maintain an unjustified exclusive right. Due to these third-party effects, the usual normative notion that private parties should be free to settle their conflicts in private litigation is problematic in the case of patent litigation. Therefore rules for critically scrutinizing and limiting the scope of patent settlements are justified also from an economic perspective. However, this is not only a problem of patent settlements. Shapiro showed that patent owners can achieve the same result of defending their weak patents also through licensing agreements (with too low license fees), mergers and patent pools, leading him to the conclusion that all of these transactions should be put under antitrust scrutiny.22

3. ASSESSING ANTITRUST RULES FOR PATENT SETTLEMENTS: NORMATIVE QUESTIONS AND THE DISTINCTION BETWEEN THREE GROUPS OF EFFECTS What is the correct normative criterion for assessing antitrust rules for patent settlements? Most influential, and representing also the ex- or implicit opinions of many other scholars, is the criterion that a patent settlement should not lead to a lower consumer welfare than can be expected from litigation.23 According to Shapiro, ‘consumers have a “property right” to the level of competition that would have prevailed, on average, had the two parties litigated the patent dispute to a resolution in the courts. So long as the consumers’ rights to this level of competition/ 22

Closely related to this problem is also the discussion about the antitrust assessment of ‘non-challenge clauses’ in licensing agreements: see Mark D Janis, Herbert Hovenkamp and Mark A Lemley, ‘Anticompetitive Settlement of Intellectual Property Disputes’ (2003) 87 Minnesota Law Review 1719, 1721. 23 Carl Shapiro, ‘Antitrust limits to patent settlements’ (2003) 34 RAND Journal of Economics 391, 396. See, e.g. Roger D Blair and Thomas F Cotter, ‘Are settlements of patent disputes illegal per se?’ (2002) 47 Antitrust Bulletin 491; Mark D Janis, Herbert Hovenkamp and Mark A Lemley, ‘Anticompetitive Settlement of Intellectual Property Disputes’ (2003) 87 Minnesota Law Review 1719; Marc G Schildkraut, ‘Patent-Splitting Settlements and the Reverse Payment Fallacy’ (2004) 71 Antitrust Law Journal 1033; Einer Elhauge and Alex Krüger, ‘Solving the Patent Settlement Puzzle’ (2012) 91 Texas Law Review 283; Linda Gratz, ‘Economic Analysis of Pay-for-delay Settlements and their Legal Ruling’, Munich Discussion Paper 2012-6.

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benefits are respected, the two parties are permitted to negotiate more profitable arrangements that they each prefer to litigation’.24 In line with the ‘probabilistic’ perspective on patents, this also implies that ‘patent holders are not entitled to the same level of profits that would result from an ironclad patent covering the same patent claims’.25 The manifold effects of antitrust rules for patent settlements can affect the welfare of consumers through three different channels: (1)

The discussion so far has focussed mainly on the (static) price effects through the potential delay of competition by generic entry. The question here usually is whether patent settlements lead to such a late entry of generics that the benefits of future lower prices through generic competition for consumers are less than what could be expected in the case of patent litigation. Antitrust rules on patent settlements can also influence innovation incentives, i.e. the question is whether more restrictive rules for defending patents through reverse payments might lead to lower innovation incentives for originator firms (dynamic efficiency) and therefore also harm consumers in the future. The third channel for effects on consumer welfare is the effects of antitrust rules on patent settlements for the incentives of generics to challenge weak patents. If patent settlements, for example through reverse payments, can also increase the incentives for challenging potentially invalid patents, then a lower number of monopolistic market positions is protected by unjustified patents until the expiration date, leading to higher consumer welfare through more generic competition.

(2)

(3)

Should the last two groups of effects be relevant for an assessment of patent settlements from an antitrust perspective? The argument might be made that they relate both to effects on innovation and the patent system, and should therefore not be a concern of competition law. However, the problem is more complex. First, although the main discussion focuses on the static price effects, the other effects have also been discussed as relevant both by legal and economic scholars in the antitrust debate about patent settlements. In the EC Guidelines on Technology Transfer Agreements the ‘general public interest to remove invalid intellectual property 24 However, this is not the same as the ‘least-restrictive alternative’ standard, which is also used in Art. 101(3) of the European competition rules. 25 Carl Shapiro, ‘Antitrust limits to patent settlements’ (2003) 34 RAND Journal of Economics 391.

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rights as an unmerited barrier to innovation and economic activity’26 was explicitly mentioned. In the US, the Hatch-Waxman Act was explicitly intended to increase the incentives of generic firms to challenge invalid patents of originator firms. Therefore the second and third group of effects have always been present in this discussion. Second, from an economic perspective, the criterion of using consumer welfare as a normative standard would also entail the effects on innovation incentives and incentives to challenge invalid patents. However, this touches upon the difficult and hotly disputed issue of the proper delineation between problems that should be dealt with in competition law or in patent law. We will come back to this discussion at the end of this chapter.

4. EFFECTS ON CONSUMER WELFARE VIA PRICES Nearly the entire literature on patent settlements in the pharmaceutical industry has focussed on the effects that settlements with or without reverse payments might have on the entry date of generics and therefore on the question of when generic competition does lead to lower prices for drugs. Since there is a broad consensus that settlements should be preferred to litigation due to litigation costs, the crucial question concerns the antitrust limits that should be set for settlements in order to avoid negative effects for consumers via prices. In the following, we summarize and analyze the results of this discussion from an economic perspective. It is surprising that – despite all the controversies – most of the contributions both from economic and legal scholars use roughly the same basic economic model, either explicitly or implicitly.27 Therefore it is useful to present briefly the assumptions, reasonings and conclusions of this basic model. 26 Commission, ‘Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements’ OJ 2014/C 89/3 44, para 235. 27 Bret Dickey, Jonathan Orszag and Laura Tyson, ‘An Economic Assessment of Patent Settlements in the Pharmaceutical Industry’ (2010) 19 Annals of Health Law 367; Einer Elhauge and Alex Krüger, ‘Solving the Patent Settlement Puzzle’ (2012) 91 Texas Law Review 283; Xiang Yu and Anjan Chatterji, ‘Why Brand Pharmaceutical Companies Choose to Pay Generics in Settling Patent Disputes: A Systematic Evaluation of the Asymmetric Risks in Litigation’ (2011) 10 Northwestern Journal of Technology and Intellectual Property 18; Linda Gratz, ‘Economic Analysis of Pay-for-delay Settlements and their Legal Ruling’, Munich Discussion Paper 2012-6; Aaron Edlin, Scott Hemphill, Herbert Hovenkamp and Carl Shapiro, ‘Activating Actavis’ (2013) 28 Antitrust 16.

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The Basic Patent Settlement Model It is assumed that an originator firm A has a patent that allows for annual monopoly profits MA for the remaining patent duration T, and there is only one firm B that can challenge the patent. If this generic firm B would enter the market at entry date E, both firms have annual duopoly profits DA and DB.28 Since duopoly prices are lower than monopoly prices, the annual welfare of consumers under duopoly (WD) is larger than under monopoly (WM). If we assume that the true patent strength (probability of defending successfully the patent in litigation) is θ, then consumers can expect with probability θ a lower consumer welfare due to high monopoly prices and with probability 1 – θ a higher consumer welfare due to lower duopoly prices after revocation of the patent.29 According to the normative criterion of Shapiro, consumer welfare in the settlement case should not be smaller than in the litigation case (WS ≥ WL). If in the settlement both parties have agreed on an entry date E (e.g. in two years), consumer welfare in the case of settlements is WS = E WM + (T – E) WD, i.e. for two years consumers suffer from low consumer welfare under monopoly prices before their welfare is increased through lower duopoly prices for the rest of the patent duration. This implies that under these assumptions the normative criterion is fulfilled, if the entry date of the generic is not later than the strength of the patent θ multiplied by the remaining patent duration T (i.e. E ≤ θ T (for the following analysis, we define: E* = θ T). For example, this would mean that a patent strength of 20% would translate into an entry date after 20% of the remaining patent duration T, i.e. if T = 10 years, i.e. generic entry should not be later than in two years. What are the results of a patent settlement between both firms? From the law and economics of settlements we know that the settlement range between both firms is determined by the outside options and these are the expected values of litigation of both parties. In this simple version of the model we assume that both firms know the true patent strength θ and

28 The sum of the two duopoly profits is smaller than the monopoly profit (DA + DB < MA). 29 Therefore, the expected consumer welfare in case of litigation is: WL = θ T WM + (1 – θ) T WD. Note that the consumer welfare in the litigation solution depends on the true patent strength θ and not on the subjective estimations of the firms A and B about the strength of the patent, i.e. θA and θB. This is often overlooked in the literature.

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have litigation costs cA and cB.30 In the settlement the parties can agree on an entry date E and a reverse payment R that is paid by the patent holder to the generic firm. What settlement would be optimal for both firms, if there were no antitrust limits? It can easily be shown that joint profit maximization would lead to a settlement, in which both firms agree to delay market entry of the generic firm until the expiration of the patent (i.e. E > E* = θ T). The joint profits would be identical to the monopoly profits of an iron-clad patent with a patent strength θ = 1. The generic would need to get a reverse payment that is not lower than its expected value of litigation. Consumers would be worse off compared to litigation, and the loss of consumer welfare through such patent settlements increases with the weakness of the patents.31 If the firms are not allowed to maximize their joint profits in the settlement due to antitrust limits, we can analyze the relation between the agreed entry date E and the reverse payment R. The earliest entry date that the originator would accept (Emin) as well as the latest entry date acceptable for the generic (Emax) depends on the expected monopoly and duopoly profits, the litigation costs, and the reverse payment. Most influential for the entire discussion is the result of the model that in the case of the absence of reverse payments (R = 0), an agreed entry date can be expected that is very close to the normatively correct entry date E* = θ T. And: the higher the reverse

30 Then the expected value of litigation is for A: VLA = θ T MA + (1 – θ) (T DA) – cA; and for B: VLB = (1 – θ) (T DB) – cB. 31 The value of the settlement solution would be for firm A: VSA = E MA + (T – E) DA – R; and for firm B: VSB = (T – E) DB + R. If both firms maximize their joint profits for finding the most profitable settlement solution, their joint profit would be: VSAB = VSA + VSB = E MA + (T – E) (DA + DB). Since DA + DB < MA, it is optimal for both of them to agree delaying the generic market entry until the expiration of the patent, i.e. E = T (with VSAB = T MA). For agreeing to this settlement the generic firm would at least need a reverse payment that equals its value of litigation: Rmin = VLB = (1 – θ) (T DB) – cB. Vice versa, the maximal reverse payment that the patent holder A would be willing to pay equals its monopoly profits minus its value of litigation: Rmax = T MA – VLA = (1 – θ) T (MA – DA) + cA. Therefore, the range for the reverse payment R would be: (1 – θ) (T DB) – cB ≤ R ≤ (1 – θ) T (MA – DA) + cA. Economically, the benefits of such a settlement for both parties consist of the additional profits (because MA > DA + DB) plus the saved litigation costs cA and cB. The consumer welfare in this case, WS = T WM, is identical to the case where the patent holder can get monopoly profits for the entire duration of its patent. Therefore, it is considerably smaller than under litigation: WS – WL = T WM – [θ T WM + (1 – θ) T WD] = (1 – θ) T (WM – WD) < 0.

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payment R, the later is the generic entry and therefore the welfare losses for consumers.32 From this basic model several conclusions can be derived that have been very influential in the policy discussion: (1)

The normative criterion that patent settlements should not harm consumers compared to patent litigation translates into the criterion that generic entry should not be later than E* = θ T, i.e. the agreed time of generic entry should be strictly proportional to patent strength. If there are no reverse payments, then the bargaining would lead to a settlement range around this optimal entry date E* = θ T. As soon as the reverse payment R is larger than the litigation costs of the originator (i.e. R > cA), the agreed entry date E is later than the optimal entry date E* and therefore anticompetitive. Reverse payments are a very effective instrument for restricting price competition through generic entry. Increasing reverse payments leads directly to later entry dates and higher joint profits and higher welfare losses for consumers compared to patent litigation. Without antitrust limits for patent settlements, the settling parties would agree on an entry date at the end of patent duration T, i.e. weak patents would lead to the same profits and consumer welfare as iron-clad patents with a patent strength θ = 1. This model also suggests that patent settlements without reverse payments are not anticompetitive, because they usually lead to the correct entry date.33

(2)

(3)

(4)

(5)

32 The earliest entry date, Emin, that the patent holder would accept is Emin = θ T – cA / (MA – DA) + R / (MA – DA), and the latest acceptable entry date for firm B is Emax = θ T + cB / DB + R / DB. We see that increasing the reverse payments R shifts the settlement range in the direction of later entry dates, which would increase profits and reduce consumer welfare. If, however, there are no reverse payments (R = 0), we get a settlement range θ T – cA / (MA – DA) ≤ E ≤ θ T + cB / DB around the optimal entry date E* = θ T, and the range on both sides depends only on the litigation costs of both parties (divided by the profit changes through the entry). If, in addition to that, there would be no litigation costs (cA = cB = 0), then the agreed entry date in the settlement would exactly equal the normatively correct one: E = E* = θ T. 33 See, e.g. Carl Shapiro, ‘Antitrust limits to patent settlements’ (2003) 34 RAND Journal of Economics 391; Bret Dickey, Jonathan Orszag and Laura Tyson, ‘An Economic Assessment of Patent Settlements in the Pharmaceutical Industry’ (2010) 19 Annals of Health Law 367, 379.

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From these results, it can easily be understood why antitrust scholars are so concerned about reverse payments, and why antitrust rules were proposed that prohibit reverse payments (beyond litigation costs) or recommend at least a strong presumption of their illegality. However, the decisive question from an economic perspective is whether these results still hold, if we take into account that the conditions on pharmaceutical markets and in settlement processes are in reality much more complex than represented by the very simple assumptions of this model. This is the starting-point of primarily economic papers that can show that under more realistic assumptions these simple conclusions do not hold and therefore patent settlements with reverse payments (beyond litigation costs) can be efficiency-enhancing and do not harm consumers, supporting the calls for a rule of reason approach.34 In the following, we cannot discuss all these specific reasonings, but provide a broader assessment of the consequences of relaxing the strict assumptions of this model.35 Implications of More Realistic Assumptions One example is knowledge assumptions about patent strength. Since nearly the entire literature assumes that the true patent strength θ is unknown, it cannot be assumed as in the basic model that the firms know the true patent strength or that they have the same subjective estimates about the patent strength. A number of papers have focussed on the analysis of settlement outcomes, if the patent holder and the entrant have different estimates about patent strength (optimistic/pessimistic).36 Depending on the specific assumptions, the settlement ranges in these cases can get broader (and making settlement easier) or smaller. They can even be negative, which despite the saving of litigation costs might make 34

Robert D Willig and John P Bigelow, ‘Antitrust policy toward agreements that settle patent litigation’ (2004) 49 Antitrust Bulletin 655. 35 For caveats in regard to the conclusions from the basic settlement model, if more realistic assumptions are considered, see Carl Shapiro, ‘Antitrust limits to patent settlements’ (2003) 34 RAND Journal of Economics 391, 410. He explicitly mentioned multiple challengers, asymmetric information, signaling, risk aversion, and also the existence of a portfolio of patents as unresolved topics. 36 Robert D Willig and John P Bigelow, ‘Antitrust policy toward agreements that settle patent litigation’ (2004) 49 Antitrust Bulletin 655, 672; Joshua P Davis, ‘Applying Litigation Economics to Patent Settlements: Why Reverse Payments Should be Per Se Illegal’ (2009) 41 Rutgers Law Journal 255, 292; Marc G Schildkraut, ‘Patent-Splitting Settlements and the Reverse Payment Fallacy’ (2004) 71 Antitrust Law Journal 1033, 1064.

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a settlement impossible without reverse payments.37 The other possibility is that both parties might generally over- or underestimate the patent strength. If the parties overestimate the patent strength (i.e. θA = θB > θ), then even without reverse payments the agreed entry date will be later than the normatively optimal one (E > E*), rendering this patent settlement anticompetitive. Vice versa, in the case of an underestimation of the patent strength (θA = θB < θ), the agreed entry date (with R = 0) will be earlier than the optimal one (E < E*), which would allow positive reverse payments (beyond litigation costs) without making the patent settlement anticompetitive. Similar results can be derived if one or both firms make wrong predictions about future market conditions (market demand, new substitutes, market shares of brand name and generic products, co-payment rules of insurances, etc.), and therefore their expected future monopoly and duopoly profits. For example, in the case of underestimation of the duopoly profits DB and no reverse payments (R = 0), a generic firm would accept later entry, which might lead to an anticompetitive patent settlement (despite the absence of reverse payments).38 Note that in the basic model it was assumed that both firms A and B have the same and correct predictions about future market conditions, which are very unrealistic assumptions. Any kind of wrong and/or different predictions and other information asymmetries will lead to different settlement outcomes in respect to agreed entry, which might be far from the optimal entry date (as derived in the basic model). One of these cases was modelled by Willig/ Bigelow.39 They can show that in a case of asymmetric information about the value of a patent a procompetitive settlement is only possible with a reverse payment. 37 Robert D Willig and John P Bigelow, ‘Antitrust policy toward agreements that settle patent litigation’ (2004) 49 Antitrust Bulletin 655, 672 analyzed such a case. They assume that the incumbent patent holder knows the true patent strength and the entrant is over-optimistic, i.e. assumes a too low patent strength (θ = θA > θB). Willig and Bigelow are right that this is a case in which the wrong estimate of the entrant makes a pro-competitive settlement without a reverse payment impossible. However, if a competition authority or court does not know the true patent strength, then this case cannot be distinguished from another case, in which the entrant knows the true patent strength and the patent holder is over-optimistic (θA > θB = θ), and in which a settlement with reverse payment would clearly lead to a too late entry and therefore would be anticompetitive. 38 For R = 0: Emax = θ T + cB / DB; therefore, an underestimation of the profits DB leads to a higher upper bound of the settlement range Emax. 39 Robert D Willig and John P Bigelow, ‘Antitrust policy toward agreements that settle patent litigation’ (2004) 49 Antitrust Bulletin 655, 667.

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Settlement outcomes can also change due to other factors. In the basic model it was assumed that both parties are risk-neutral. In the case of risk-averse originators or entrants, settlement economics shows that the settlement ranges and therefore also the agreed entry dates and/or reverse payments change.40 There is a discussion in the literature that originator firms might be particularly risk-averse in respect to their probabilistic patents, implying that they would accept early generic entry despite making reverse payments.41 So far not sufficiently analyzed in economic models about patent settlements are strategic considerations of originator or generic firms. Since both the originator and often also the generic firms are usually large firms that are active in many markets and producing and selling a number of products and have a portfolio of patents, there might be other relevant strategic considerations for the decision about litigation or settlement in regard to a specific patent than only the future monopoly or duopoly profits of this one product. This also can change settlement ranges and therefore influence agreed entry dates and reverse payments.42 Analyzing the effects of strategic considerations, especially in multi-product and/or multi-market contexts, would be an interesting field of further research. The Multiple Challenger/Entrant Problem A particular problem of all economic models concerning patent settlement outcomes is that – contrary to the assumption in the basic model – more than one generic firm can challenge and enter the market. If originator firms are aware of multiple potential generic entrants, then they have to consider in their settlements with the first challenger that they might have to make several settlements for defending their weak 40

Robert D Willig and John P Bigelow, ‘Antitrust policy toward agreements that settle patent litigation’ (2004) 49 Antitrust Bulletin 655, 666. 41 Marc G Schildkraut, ‘Patent-Splitting Settlements and the Reverse Payment Fallacy’ (2004) 71 Antitrust Law Journal 1033, 1061; for an explanation of risk aversion of firms through risk aversion of managers see Robert D Willig and John P Bigelow, ‘Antitrust policy toward agreements that settle patent litigation’ (2004) 49 Antitrust Bulletin 655, 666, fn 10 and the critique in Einer Elhauge and Alex Krüger, ‘Solving the Patent Settlement Puzzle’ (2012) 91 Texas Law Review 283, 312. 42 Strategic considerations and patent portfolios are mentioned in Carl Shapiro, ‘Antitrust limits to patent settlements’ (2003) 34 RAND Journal of Economics 391, 410 and Joshua P Davis, ‘Applying Litigation Economics to Patent Settlements: Why Reverse Payments Should be Per Se Illegal’ (2009) 41 Rutgers Law Journal 255, 292.

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patents; and the generic firm has to take into account the expected entry of more generic firms. This will change both the upper and lower limits of the settlement ranges, and also leads to the consequence that the patent settlements with several generics are no longer independent from each other. This multiple challenger/entrant problem, which is also directly linked to the public good problem of challenging weak patents, has not been analyzed broadly.43 It is also linked to the problem that generally competition among generic firms in regard to challenging and market entry has not been analyzed sufficiently.44, 45 Therefore the implications of the existence of multiple challengers on the assessment of patent settlements are unclear, although such a situation seems to be empirically more relevant than assuming only one potential entrant.46 Conclusions If we take into account that in reality the assumptions of the basic model are not fulfilled (due to information problems about patent strength and 43

Emil Palikot and Matias Pietola, ‘Pay-for-Delay with Settlement Externalities’ . 44 Robert D Willig and John P Bigelow, ‘Antitrust policy toward agreements that settle patent litigation’ (2004) 49 Antitrust Bulletin 655, 673 – analysis of an additional entrant is not a case of an additional challenger, because the entrant offers a substitute product (which does not infringe the patent). Aaron Edlin, Scott Hemphill, Herbert Hovenkamp and Carl Shapiro, ‘The Actavis Inference: Theory and Practice’ (2015) 67 Rutgers University Law Review 1, 19 do not analyze the multiple challenger problem. Their analysis refers to the consequences of more price competition, if after the 180-day exclusivity period for the first generic entry (in the US Hatch-Waxman framework) several additional entrants enter instead of only one. The analysis of Bruce H Kobayashi, Joshua D Wright, Douglas H Ginsburg and Joanna Tsai, ‘Actavis and Multiple ANDA Entrants: Beyond The Temporary Duopoly’ (2015) 29 Antitrust 89 also focuses on the US institutional framework and the effects of free entry after the invalidation of a patent on patent settlements. The model of Linda Gratz, ‘Economic Analysis of Pay-for-delay Settlements and their Legal Ruling’, Munich Discussion Paper 2012-61 includes a second generic entrant with a second settlement, but without addressing the multiple challenger problem. 45 In the US, this problem is deeply influenced by the Hatch-Waxman Act due to the 180-day market exclusivity for the first entrant, which both protects the first generic against the competition of other generics and protects the originator against more challenges from other generics: see FTC, ‘Generic Drug Entry Prior to Patent Expiration’ (Staff Study) (2002) vi. 46 Henry G Grabowski and Margaret Kyle, ‘Generic Competition and Market Exclusivity Periods in Pharmaceuticals’ (2007) 28 Managerial Decision Economics 491, 500.

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future market conditions, risk aversion, strategic considerations, and the existence of multiple potential entrants), then we can expect that in most cases the patent settlement outcome will not correspond to the outcome of patent litigation (even in the case of no reverse payments).47 Depending on the specific conditions the agreed entry dates might be earlier or later, and therefore consumer welfare may also be higher or lower.48 Especially problematic is that in regard to important aspects we so far do not have enough economic research. This leads to the following preliminary conclusions: (1)

(2)

(3)

(4)

There will be a number of patent settlements without reverse payments, which harm consumers in comparison to litigation and are therefore anticompetitive, because the agreed entry date is later than the optimal date (E > E*). Therefore the prohibition of reverse payments does not ensure that patent settlements are not anticompetitive.49 There will also be a number of patent settlements with a certain amount of reverse payments (even beyond litigation costs), which will not harm consumers, i.e. the entry date will be not later than the optimal date (E ≤ E*). In some of these cases, reverse payments might be necessary for achieving litigation cost-saving settlements. Although both results imply that the observed size (or absence) of reverse payments is not a very reliable indicator for assessing the (il)legality of the patent settlements, economists would agree that even under more realistic conditions than in the basic model, reverse payments can be a very effective and easily applicable instrument for restricting competition between originators and generic firms. Therefore it is justified that (high) reverse payments should raise (serious) antitrust concerns. Another additional problem of using the size of reverse payments as an important criterion is that originator and generic firms can hide

47 Especially Joshua P Davis, ‘Applying Litigation Economics to Patent Settlements: Why Reverse Payments Should be Per Se Illegal’ (2009) 41 Rutgers Law Journal 255 also emphasized the range of possible outcomes in settlement processes due to a number of ‘imperfections’ of the settlement process. 48 This also implies that the settlement results (e.g. the agreed entry dates) do not allow reliable conclusions to be drawn about the true patent strength as it is suggested by the basic model. 49 See also Einer Elhauge and Alex Krüger, ‘Solving the Patent Settlement Puzzle’ (2012) 91 Texas Law Review 283 who even try to show that on average patent settlements without reverse payments are anticompetitive.

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the (size of) reverse payments through complex package deals (e.g. licensing agreements, deliveries of ingredients), which require difficult and error-prone evaluations for determining the correct net value transfer.50

5. EFFECTS ON CONSUMER WELFARE VIA INNOVATION INCENTIVES In the patent settlement discussion the question was asked whether restrictive antitrust rules on patent settlements with reverse payments might have negative effects on innovation incentives for the originators and therefore also harm consumers in the long run as a result of less development of new drugs.51 Since it is a well-established insight in the economics of patents that innovation incentives through patents should not be too small but also not too large (leading to the notion of optimal length and breadth of patents),52 it is clear that it cannot simply be argued that the fact that the prohibition of reverse payments would lead to lower profits for the originator firms would mean that the innovation incentives are smaller than optimal. Since innovation incentives can also be too large, a much deeper economic analysis is necessary. In regard to the economic contributions to the patent settlement problem in the pharmaceutical industry, Elhauge and Krüger explicitly presented a model in which they analyze both static price effects and innovation incentive effects.53 In regard to patent settlements they prefer a strong presumption against patent settlements with reverse payments 50

In regard to the problem of side deals, see Scott C Hemphill, ‘An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition’ (2009) 109(4) Columbia Law Review 629. Very interesting is his proposal of a presumption of the problematic character of a patent settlement, if it is embedded into a package of side-deals, whose existence is unusual in the absence of a patent settlement. 51 Daniel A Crane, ‘Exit Payments in Settlement of Patent Infringement Lawsuits: Antitrust Rules and Economic Implications’ (2002) 54 Florida Law Review 747, 760; Carl Shapiro, ‘Antitrust limits to patent settlements’ (2003) 34 RAND Journal of Economics 391, 396; Robert D Willig and John P Bigelow, ‘Antitrust policy toward agreements that settle patent litigation’ (2004) 49 Antitrust Bulletin 655, 656, fn 3. 52 Richard Gilbert and Carl Shapiro, ‘Optimal Patent Length and Breadth’ (1990) 21 The RAND Journal of Economics 106. 53 Einer Elhauge and Alex Krüger, ‘Solving the Patent Settlement Puzzle’ (2012) 91 Texas Law Review 283, 283.

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(that are larger than litigation costs of the originator) with only a few possibilities of rebuttals. They want to show that such a rule would not lead to a trade off between static price effects on consumers and effects on innovation incentives. Whereas their analysis of price effects uses (a variant of) the basic model (as presented in section 4 above), it is their analysis of the effects of patent settlements on innovation incentives that is relevant here. Starting from the above-mentioned insight that both a too long and a too short exclusion period through patents is not optimal from an innovation economics perspective,54 they apply an innovationincentive perspective on the concept of probabilistic patents. They explicitly assume that a patent with a strength of θ = 0.25 should from an innovation incentives perspective be equal to an ironclad patent of five years (25% of the patent duration of 20 years), i.e. the innovation incentives that should be granted to an innovation by a probabilistic patent should be proportional to the patent strength55 and can be translated into a share of the patent duration. Although a lot of assumptions have to be made for defending such a linear transformation in years of patent duration,56 the basic idea is in line with such an innovation incentive interpretation of probabilistic patents. However, in our view, in their next step Elhauge and Krüger make a serious mistake. From an innovation economics perspective, the optimal entry date in a patent settlement needs to be calculated in regard to the entire patent duration of 20 years, i.e. a patent with a patent strength of 25% should lead to a generic entry after five years of the entire patent duration. Instead Elhauge and Krüger erroneously define their normative benchmark for the optimal innovation incentives perspective as a percentage of the remaining (!) patent duration at the time of the settlement. This, however, ignores that the originator already earned monopoly profits from the date of granting the patent until the date of the patent challenge and settlement. If, for example, a patent with a patent strength of 25% is challenged after five years of its patent duration, then the originator firm has already reaped all the necessary rewards for its innovation (according to the innovation incentive interpretation of probabilistic patents) and any more delay of generic entry would lead to too high innovation incentives. Therefore their normative benchmark about 54

Einer Elhauge and Alex Krüger, ‘Solving the Patent Settlement Puzzle’ (2012) 91 Texas Law Review 283, 293. 55 Joseph Farrell and Carl Shapiro, ‘How Strong are Weak Patents?’ (2008) 98 American Economic Review 1347. 56 This would assume constant rents from the innovation over time and the absence of the need of discounting future revenues.

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optimal innovation incentives for patent settlements is flawed, because it would allow for too large innovation incentives (except the extreme case that a patent is challenged right at the beginning of the patent duration).57 Because of this mistake at the beginning of their otherwise convincing analysis, the conclusions of Elhauge and Krüger do not hold that there may be no conflict between dynamic and static effects on consumers under their proposed rule of presumptive illegality of patent settlements. Based upon an adaptation of the standard optimal patent term model, Woodcock analyzes whether the delay of generic entry through patent settlements would increase consumer welfare through higher innovation incentives.58 After calibrating the model with US drug market data, he finds that settlements delaying entry for more than 15 months will harm consumers. Therefore, he is also sceptical that patent settlements will increase consumer welfare via more innovation incentives, even in cases without reverse payments.59 How can the economic knowledge about the innovation incentive effects of patent settlements be summarized? (1)

Most important is that much more research is needed before reliable answers can be given. With the exception of Elhauge/ Krüger and Woodcock, all other contributions from an economic perspective did not analyze and take into account the innovation incentive effects at all.

57 If D is the number of years the patent holder could reap monopoly profits before the settlement (with D + T = 20), then the optimal entry date from an innovation incentive perspective under the proportionality principle would be E* = θ 20 – D, which is always smaller than the agreed entry date in a settlement, E = D + θ T (as long as D > 0) and can also be negative (if D > θ 20). However, there is one specific effect, especially in regard to pharmaceutical products, that also has to be considered: if the originator firms can sell their products only after a certain period of time (due to clinical tests and getting market approval), then this period would also have to be considered. 58 Ramsi A Woodcock, ‘Innovation, Litigation, and New Drugs’ . 59 See also Ramsi A Woodcock, ‘Innovation and Reserve Payments’ . Keith Leffler and Christopher Leffler, ‘Efficiency Trade-Offs in Patent Litigation Settlements: Analysis Gone Astray?’ (2004) 39 University of San Francisco Law Review 33 are also critical about too large innovation incentives and argue that patent settlements increase expected profits of patent holders compared to litigation by preventing patent challenges. If patent challenges (and settlements) are part of the institutional design of the patent system this would lead to innovation incentives larger than granted by the patent (at 38).

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From the analysis of Elhauge/Krüger one specific thesis can be suggested. Since their results are systematically biased in one direction, it might be suggested from our critique above that the agreed entry dates in patent settlements without reverse payments might be leading to too large innovation incentives for the originator firms. This analysis also shows that from an innovation economics perspective the date of the challenge and settlement within the lifetime of the patent is becoming important, which so far has not played any role in the antitrust discussion about patent settlements. This would imply that patent settlements without reverse payments may also be anticompetitive due to too large innovation incentives. Therefore trade offs between the static price effects and the dynamic innovation incentive effects cannot be excluded, and they may be much more severe for (a) patents that are challenged late in their patent life and/or (b) weaker patents. This last point is directly linked to the important general analysis of Farrell and Shapiro. In their model they show that under certain conditions weak patents might lead to disproportionately too high innovation incentives compared to innovations that allow for patents with a higher patent strength.60 This might lead to too large incentives for investing in pseudo or trivial innovation activities and therefore discourage the search for true innovations. In addition, in regard to this problem much more research is needed. Although the results of these analyses are very preliminary and should be viewed with cautiousness, it is remarkable that they all tend to lead to the conclusion that antitrust authorities and courts perhaps should not be too worried about curbing innovation incentives, if they pursue a restrictive approach to reverse payments and patent settlements in general.

60 The reason is that downstream firms’ incentives to challenge probabilistic patents could be smaller than optimal since other downstream firms as well as consumers could free-ride on a challenge: see Joseph Farrell and Carl Shapiro, ‘How Strong are Weak Patents?’ (2008) 98 American Economic Review 1347, 1349. A follow-up paper of David Encaoua and Yassine Lefouili, ‘Licensing weak patents’ (2009) 57 Journal of Industrial Economics 492 confirmed these results but questioned their robustness under different settings.

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6. EFFECTS ON CONSUMER WELFARE VIA INCENTIVES FOR CHALLENGING PATENTS In the patent settlement discussion a number of authors have raised the question whether prohibiting or limiting reverse payments would reduce the incentives of generics for challenging potentially invalid patents, e.g. Chief Justice Roberts in his dissenting opinion in the Actavis Supreme Court decision.61 Since in the EU guidelines for licensing agreements the relevance of removing invalid patents is mentioned in regard to the assessment of patent settlements, the incentives for challenging weak patents are also important for the EU Commission. In section 2 we saw that these challenging incentives would not be so important if the patent offices did not grant so many weak patents and if the patent system did not rely so much on private litigation for weeding out invalid patents. So far most of the economic contributions dealing with patent settlements have not taken into account the effects on the incentives to challenge weak patents. The models of Gratz62 and Böhme/Frank/Kerber63 offer integrated analyses of the static price and challenging incentive effects of patent settlements. Challenging weak patents and weeding out potentially invalid patents through patent opposition and litigation requires resources that in a system of private litigation have to be borne by private parties. Since consumers are the victims of unjustified monopoly positions of originator firms in the case of invalid but unchallenged patents, generic firms can be viewed as agents of consumers, who challenge these patents and drive down prices through generic entry. Since generics need profits that also cover the challenging costs, it is the consumers who ultimately have to bear the costs of incentivizing generics for challenging patents. In the US, the solution of the Hatch-Waxman Act of granting the first entrant a 61 FTC v Actavis Inc 470 US (2013), Chief Justice Roberts, dissenting opinion 17; see also Bret Dickey, Jonathan Orszag and Laura Tyson, ‘An Economic Assessment of Patent Settlements in the Pharmaceutical Industry’ (2010) 19 Annals of Health Law 367, 399; Linda Gratz, ‘Economic Analysis of Pay-for-delay Settlements and their Legal Ruling’, Munich Discussion Paper 2012-6 1, 15. 62 Linda Gratz, ‘Economic Analysis of Pay-for-delay Settlements and their Legal Ruling’, Munich Discussion Paper 2012-6. 63 Enrico Böhme, Jonas Severin Frank and Wolfgang Kerber, ‘Optimal Incentives for Patent Challenges in the Pharmaceutical Industry’ (2017) MAGKS Joint Discussion Paper Series in Economics. Available at .

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180-day exclusivity period for solving the public good problem can be interpreted in that way: consumers pay higher prices due to less generic competition during the 180-day exclusivity period for the challenging incentives for generics. This idea of a trade off for consumers between lower prices through earlier generic entry and higher challenging incentives for generics can also be applied directly to the antitrust treatment of patent settlements. The basic idea is that it might be worthwhile for consumers if competition law allowed patent settlements with a later generic entry date than the optimal entry date E* (derived in section 4 when only price effects were considered). Since the generics would participate in the higher joint profits through the delay of generic entry (which might require reverse payments), their incentives for challenging more weak patents increase. This would lead to more generic entry and lower prices for consumers in regard to other pharmaceuticals whose protection through weak patents would otherwise remain unchallenged. From that perspective the question can be raised whether and to what extent competition authorities and courts should be more lenient towards pay-for-delay settlements and ensuing reverse payments, and allow for an additional period of delay.64 In their model, Böhme, Frank and Kerber analyze this question directly by asking for the optimal additional delay that would maximize consumer welfare by taking into account both the negative effects through the additional delay and the positive effects on consumer welfare through challenging more patents. The structure of their model is partly based upon the model of Gratz, who was the first to offer an integrated analysis of price and challenging incentive effects. In both models there are originator firms with patents of different strengths (0 ≤ θ ≤ 1) and two generic firms that can challenge patents (with fixed challenging costs) and enter the market sequentially at different future dates. A later agreed entry date in the ensuing settlements leads to larger joint profits and therefore to more challenging incentives for generics. However, Gratz assumes that the courts unintentionally accept patent settlements with later generic entry because, under a rule-of-reason approach, she assumes that the court would make errors due to information problems. Therefore her positive effect on challenging incentives is caused by judicial errors due to the application of a rule-of-reason approach.65 Instead, Böhme, 64 See also Anton-Giulio Manganelli, ‘Delay Competition to Increase Competition: Should Reverse Payments be Banned per se?’ . 65 The analysis of Linda Gratz, ‘Economic Analysis of Pay-for-delay Settlements and their Legal Ruling’, Munich Discussion Paper 2012-6, about the

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Frank and Kerber treat the additional delay in their model as a policy parameter, which competition authorities and courts can intentionally take into account in their antitrust assessment of patent settlements (with agreed entry dates and reverse payments). They can show that if the challenging costs are not too low, such a delay would increase the welfare of consumers under relatively general conditions. The optimal additional delay of entry increases with the size of challenging costs, the intensity of competition (after generic market entry), and the length of time between the first and second generic entry. However, their model shows that – depending on parameter constellations – this policy parameter can also be negative. This would mean that under the litigation solution the challenging incentives are already too high and therefore consumer welfare could be increased by earlier generic entry than expected under litigation. In this case patent settlement without reverse payments would also lead to a too long collusion period. Since originators and generics always have the right to litigate, it would not be possible to force the parties through antitrust limits of patent settlements to agree on an earlier generic entry that would maximize consumer welfare. Therefore their model shows that it depends on parameter constellations whether increasing challenging incentives can be an argument for allowing an additional entry delay (and therefore might justify reverse payments). The policy conclusions that can be drawn from specific economic models are always limited. We would not recommend that, based upon the results of such a model competition, authorities or the courts should allow for a specific additional period of collusion between originators and generics (and accept the additional reverse payments). However, we would claim that the models show the existence of such a trade off, and that scholars, who were concerned that a prohibition of reverse payments might lead to fewer incentives for challenges by generics, might have some support in economic analysis.66 However, much more research is necessary for clarifying further the link between the antitrust rules about patent settlements (with or without reverse payments) and the incentives superiority of a rule of reason is not convincing because (1) it is unclear why the effects from judicial errors in her model only lead to the acceptance of more anticompetitive patent settlements and not also to the rejection of more procompetitive patent settlements, and (2) usually a rule of reason leads to less error costs and not more as in her model. 66 Bret Dickey, Jonathan Orszag and Laura Tyson, ‘An Economic Assessment of Patent Settlements in the Pharmaceutical Industry’ (2010) 19 Annals of Health Law 367, 399.

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for challenging patents. What is missing in the analysis of these models is the integration of the public good problem. Another, so far neglected question refers to the problem of competition between generic firms in regard to the challenge of weak patents.

7.

WHAT CAN WE LEARN FROM ECONOMICS? INSIGHTS, OPEN QUESTIONS AND POLICY CONCLUSIONS

In sections 4 to 6 above we have analyzed what we know from economics about how antitrust rules about patent settlements might influence the welfare of consumers of pharmaceuticals and where there are still significant gaps in research. In regard to effects via prices, a basic settlement model with simplified assumptions can show that the agreed date of generic entry in patent settlements without reverse payments would lead to settlement outcomes whose consumer welfare implications are close to those of the outcome of litigation. However, economists would also agree that in reality the bargaining situations between originator and generic firms are much more complex and might suffer from a number of imperfections not considered in this basic model. In particular, information problems in regard to patent strength and future market conditions as well as risk aversion, strategic considerations and the implications of multiple generic challengers and competition among generic entrants will lead to settlement outcomes that can be far away from the normatively optimal entry dates. Only a small part of these problems have been analyzed so far.67 However, it seems clear that these deviations can lead in both directions, i.e. they can render patent settlements without reverse payments anticompetitive as well as allow, to some extent, reverse payments without harming consumers. The latter can be the result of explicit efficiencies (as e.g. saving litigation costs) but can also be the result of the ‘imperfections’ of the bargaining situations in which efficiency-enhancing settlements would fail without the possibility of reverse payments. The gaps in research are even larger in regard to the other two channels of effects, i.e. innovation incentives and incentives to challenge patents. Particularly problematic is the lack of research on innovation incentives. 67 Robert D Willig and John P Bigelow, ‘Antitrust policy toward agreements that settle patent litigation’ (2004) 49 Antitrust Bulletin 655; Einer Elhauge and Alex Krüger, ‘Solving the Patent Settlement Puzzle’ (2012) 91 Texas Law Review 283.

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Although the analysis of innovation incentives in Elhauge and Krüger suffers from a serious flaw, a further analysis based on their results, as well as the study of Woodcock, provide preliminary hints that patent settlements without reverse payments may lead to too large innovation incentives, especially in the case of weak patents and settlements in the later stages of the life of patents. More research on this problem can also be linked to the contribution of Farrell and Shapiro with their analysis of whether weak patents may lead to disproportionately large innovation incentives. Also the problem of challenging incentives still lacks a lot of research. Gratz, Manganelli, and Böhme, Frank and Kerber show that there may be a trade off between promoting a faster generic entry by prohibiting pay-for-delay patent settlements and increasing the incentives for challenging patents through generics. This leads Böhme, Frank and Kerber to analyze this trade off and ask for the determinants of an optimal additional delay of generic entry for increasing challenging incentives. However, many other aspects of the challenging incentive problem have not been taken into account in patent settlement models. What can we learn from these economic insights in regard to the antitrust rules for patent settlements in the pharmaceutical industry? First, we have to consider that there might be trade offs between all three groups of effects (price, innovation and challenging effects) on consumer welfare. Whereas the first preliminary results of the analysis of challenging incentives may give some support for allowing longer delays, the effects on innovation incentives could lead to the opposite result. These results lead to a further relativization of the results of the basic model in section 4 and its main conclusion that patent settlements without reverse payments would lead to an optimal agreed generic entry. Does this result lead to the recommendation of a rule-of-reason approach instead of a presumption of illegality of patent settlements with reverse payments, because it would allow the analysis and consideration of all anticompetitive and efficiency effects under the circumstances of the specific case? From a law and economics perspective, this is not clear, because such a claim would require an error-cost analysis, which would make a comparative analysis of the different regulatory options in regard to the size of decision errors (false positives, false negatives) and direct and indirect regulation costs.68 Would a full-blown rule of reason, a 68 For the error-cost approach in law and economics, see Frank H Easterbrook, ‘Ignorance and Antitrust’, in Thomas M Jorde and David J Teece, Antitrust, Innovation and Competitiveness (Oxford University Press 1992) 119; Arndt Christiansen and Wolfgang Kerber, ‘Competition Policy with Optimally

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per se prohibition of patent settlements with reverse payments, a presumption of illegality (with a limited number of options for rebuttals), or another form of structured rule of reason lead on average to a minimization of the sum of regulatory costs and welfare costs of decision errors and therefore to higher welfare for consumers? Although a number of authors have mentioned and partly used arguments from an error-cost perspective,69 so far only Davis has tried to analyze the problem of patent settlements in a systematic way from an error-cost framework by assessing error and transaction costs.70 In regard to his analysis, which leads him to the recommendation of a general ban of reverse payments (even without the possibilities for rebuttals), a number of critical questions can be raised, which cannot be discussed here. However, much more research from such a perspective is necessary before an economically well-substantiated answer can be offered on what an appropriately structured antitrust rule should look like.71 The question that ultimately has to be answered is to what extent a further differentiation in more case groups beyond the distinction between patent settlements with or without reverse payments is worthwhile for better assessing patent settlements. So far this question has not been answered. This chapter cannot give a detailed assessment of the current policy in regard to patent settlements. However, based upon the existing economic knowledge the current competition policy in the US (after the Actavis decision of the US Supreme Court) and the EU can be defended to some extent, although we think that it may still be a little too cautious in regard to patent settlements. Since it is undisputed that reverse payments are a very effective instrument for delaying generic entry (also in more Differentiated Rules Instead of “Per se Rules vs. Rule of Reason”’ (2006) 2 Journal of Competition Law and Economics 215, with many references. 69 See, e.g. Daniel A Crane, ‘Exit Payments on Settlement of Patent Infringement Lawsuits: Antitrust Rules and Economic Implications’ (2002) 54 Florida Law Review 747; Kevin D McDonald, ‘Hatch-Waxman Patent Settlements and Antitrust: On “Probabilistic” Patent Rights and False Positives’ [2003] Antitrust 68; Aaron Edlin, Scott Hemphill, Herbert Hovenkamp and Carl Shapiro, ‘Actavis and Error Costs: A Reply to Critics’ [2014] The Antitrust Source 1. 70 Joshua P Davis, ‘Applying Litigation Economics to Patent Settlements: Why Reverse Payments Should be Per Se Illegal’ (2009) 41 Rutgers Law Journal 255. 71 Since such an analysis of decision errors also needs information about the frequency of certain types of patent settlements and empirical studies about patent settlements, articles such as Scott C Hemphill, ‘An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition’ (2009) 109(4) Columbia Law Review 629 are important.

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realistic and complex bargaining contexts), the strategy to focus the analysis primarily on (the size of) reverse payments is a correct one. From this perspective also a presumption of the illegality of reverse payments, which can be rebutted with a limited number of reasonings, can be defended. In that respect, such a presumption need not be too far away from the approach of the US Supreme Court, which sees the necessity that a large reverse payment has to be explained for viewing such patent settlements as complying with antitrust rules.72 However, this need not mean that these assessments are becoming easy and simple. Since reverse payments in settlement cases can be hidden in a complex package of side-deals (e.g. licensing agreements and supply of ingredients), even proving the existence and size of reverse payments may require a deep case analysis. However, vice versa, we also would not recommend that the lack of reverse payments in patent settlements should be viewed as a strong indicator for their compatibility with competition law.73 The complexity of a correct antitrust assessment of patent settlements that might protect unjustified monopoly positions through potentially invalid patents raises the question whether more suitable policy solutions could be found by directly addressing the underlying problem of the fundamental defects of a patent system that produces too many weak patents. This is in line with Farrell and Shapiro, and Encaoua and Lefouili,74 who discuss the weak patent problem in the context of the optimal design of the patent system. From that perspective the entire discussion about patent reform for dealing with the many problems and

72 See the recent proposal of an ‘Actavis inference’ by Aaron Edlin, Scott Hemphill, Herbert Hovenkamp and Carl Shapiro, ‘The Actavis Inference: Theory and Practice’ (2015) 67 Rutgers University Law Review 1; a proposed framework in light of the Actavis ruling by Michael A Carrier, ‘Payment after Actavis’ (2014) 100(7) Iowa Law Review 7; as well as a critical analysis by Bruce H Kobayashi, Joshua D Wright, Douglas H Ginsburg and Joanna Tsai, ‘Actavis and Multiple ANDA Entrants: Beyond The Temporary Duopoly’ (2015) 29 Antitrust 89. 73 This is also in line with the Actavis decisions of the US Supreme Court, which did not explicitly constitute a safe harbour rule for patent settlements without reverse payments: see Joshua D Wright, ‘FTC v. Actavis and the Future of Reverse Payment Cases’, Concurrences Journal Annual Dinner, New York, September 2013. 74 David Encaoua and Yassine Lefouili, ‘Licensing weak patents’ (2009) 57 Journal of Industrial Economics 492.

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defects of the current patent system is relevant.75 This can encompass the strengthening of patent examination in patent offices (as Farrell and Shapiro suggest for certain groups of patents) with the objective of directly reducing the number of weak valuable patents, e.g. by including competitors and other interested firms already in the process of granting patents.76 Another option is the facilitating and strengthening of the possibilities of weeding out invalid patents through patent opposition and patent litigation.77 Other proposals refer to the idea of solving the challenging incentive problem by subsidizing patent challenges, e.g. through a cashbounty program, or allowing joint challenges by several generic entrants.78 As our analysis of the three channels of effects (price, innovation and challenging incentive effects) of patent settlements has shown, from an economic perspective an integrated view of competition and patent law is necessary. Therefore we should search for the best combination of policy solutions in competition and patent law for solving competition and innovation problems through weak patents.

75 Nancy Gaillini, ‘The Economics of Patents: Lessons from Recent U.S. Patent Reform’ (2002) 16 Journal of Economic Perspectives 131; Carl Shapiro, ‘Patent System Reform: Economic Analysis and Critique’ (2004) 19 Berkeley Technology Law Journal 1017; James Bessen and Michael J Meurer, ‘Lessons for Patent Policy from Empirical Research on Patent Litigation’ (2005) 9 Lewis And Clark Law Review 1; Joseph Farrell and Carl Shapiro, ‘How Strong are Weak Patents?’ (2008) 98 American Economic Review 1347. 76 Joseph Farrell and Carl Shapiro, ‘How Strong are Weak Patents?’ (2008) 98 American Economic Review 1347, 1361. 77 Joseph Farrell and Carl Shapiro, ‘How Strong are Weak Patents?’ (2008) 98 American Economic Review 1347, 1361; Filipe Fischmann, ‘“Reverse Payments” als Mittel zur Beilegung von Patentstreitigkeiten – Ein Verstoß gegen das Kartellrecht?’ (2016) 34 Münchner Schriften zum Europäischen und Internationalen Kartellrecht 480. 78 Joseph Scott Miller, ‘Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents’ (2004) 19 Berkeley Technology Law Journal 667; David Encaoua and Yassine Lefouili, ‘Licensing weak patents’ (2009) 57 Journal of Industrial Economics 492.

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10. Access to justice as abuse of market power? Injunctive relief for standard-essential patents under US antitrust and EU competition law Viktoria HSE Robertson and Marco Botta 1. INTRODUCTION Industries often establish technical standards via standard-setting organizations (SSOs) in order to ensure the interoperability of products and future innovations, so-called formal standards. Industry standards can also emerge from the market, in which case they will be referred to as de facto standards.1 Many of these formal or de facto standards rely on a wide range of innovations that are protected by patent law. Patents that read on technical standards are referred to as standard-essential patents (SEPs). Standards are widely regarded as being pro-competitive, especially as they can encourage further innovation.2 However, there can also be reasons for competitive concern in relation to standards: as other intellectual property rights, SEPs establish an exclusive right of exploitation for 1 On this distinction see David Telyas, The Interface between Competition Law, Patents and Technical Standards (Kluwer 2014) 33 ff. 2 On the many positive aspects of standards, see, for instance, Mark A Lemley, ‘Intellectual Property Rights and Standard-Setting Organizations’ [2002] California L Rev 1889, 1896 ff; Edith Ramirez, ‘Standard-Essential Patents and Licensing: An Antitrust Enforcement Perspective’ (10 September 2014) ; Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (‘EU Horizontal Guidelines’) [2011] OJ C11/1, para 263 (citing the following positive effects of standardization: promotion of economic interpenetration on the internal market, encouragement of new/improved products/markets, improvement of supply conditions).

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the patent owner. Within formal standard-setting procedures, a mechanism has been adopted in order to avoid a potential restriction of competition in the market: the SEP owner usually offers to the SSO its ‘commitment’ to license its SEPs to any interested third party under fair, reasonable and non-discriminatory (FRAND) terms and conditions. In the case of de facto standards, no such commitment is made. Both within the European Union (EU) and the United States (US), the question increasingly debated concerns the consequences of the failure by the SEP owner to conclude a licensing agreement with an interested third party. In spite of the lack of conclusion of the licensing agreement, the third party would continue marketing its products covered by the standard, thereby breaching the exclusive rights of the patent owner. The SEP owner can protect itself from these infringing actions by applying for a preliminary or permanent injunction with a court. From a competition law perspective, the question is whether the request for a prohibitory injunction submitted by the SEP owner in a national court vis-à-vis the third party could be considered an abuse of its market power deriving from the SEP. In the following, this chapter starts by looking at the vital role that injunctive relief plays in intellectual property law in order to safeguard the patent owner’s exclusive rights. Against this background, it discusses possible anti-competitive consequences that injunctive relief might bring about both in terms of exploitative and exclusionary effects. Thereafter, it analyses whether and under which conditions the seeking of injunctive relief by the SEP owner could represent an abuse of market power, in breach of section 5 of the Federal Trade Commission Act (FTCA)3 and Art 102 of the Treaty on the Functioning of the European Union (TFEU).4 Finally, section 4 discusses the diverging treatment of SEP injunctions on both sides of the Atlantic. This chapter adopts a comparative legal perspective in order to highlight the possible convergences or divergences of the approaches taken so far in the US and in the EU on this issue, and the possible cases of mutual learning. The findings are also of interest for other competition law jurisdictions, since the standards adopted by SSOs have an international dimension, and SEP owners increasingly ask for injunctions in various national courts in order to safeguard their rights. Taking into consideration that most of the countries in the world nowadays prohibit the abuse of market power, the current American and European debates 3

Federal Trade Commission Act (FTCA), 15 USC § 45, as amended. Consolidated Version of the Treaty on the Functioning of the European Union (TFEU) [2016] OJ C202/47. 4

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on the compatibility of prohibitory injunctions with antitrust/competition law is likely to take place in other countries of the world in the near future. In particular, the test that was defined by the CJEU in the Huawei v ZTE ruling5 could be an inspiration for courts and competition authorities of other jurisdictions called to assess similar issues.6

2. INJUNCTIVE RELIEF AS A REMEDY UNDER PATENT LAW While the existence of patents is internationally accepted, one has to acknowledge that a patent right is only as strong as its protection. For this reason, the patent laws foresee various measures to safeguard the patent owner’s rights. One of these is injunctive relief, i.e. a court order preventing the use of the patent owner’s SEP. International Framework In 1883, the Paris Convention established a right of priority for patent applications from other countries of the Paris Union.7 While the Convention contains a section requiring countries to foresee appropriate legal remedies against trademark infringements in its Art 10ter, it does not contain such a provision for patents. As the US Supreme Court has observed in the context of patent law, ‘the creation of a right is distinct from the provision of remedies for violations of that right’.8 Art 27 of the Universal Declaration of Human Rights, in its second paragraph, safeguards an individual right to the ‘protection of the moral and material interests resulting from any scientific … production’.9 This, one can argue, provides the universal basis for patent protection, but again does not refer to any legal remedies in case of infringement. The WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) of 1994 changed this: while explicitly incorporating 5

Judgment of 16 July 2015, Huawei v ZTE, C-170/13, EU:C:2015:477. For instance, it has been held that the EU and US jurisprudence have influenced the assessment of SEP issues in Japan; see Toshiaki Takigawa, ‘Standard-Essential Patents and the Japanese Competition Law in Comparison with China, the U.S., and the EU’ [2017] Antitrust Bulletin 483, 488–489. 7 Art 4.A of the Paris Convention for the Protection of Industrial Property of 20 March 1883, as last amended on 28 September 1979. 8 eBay v MercExchange, 547 US 388 (2006). 9 Universal Declaration of Human Rights 1948, Art 27. 6

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the Paris Convention (see Art 2:1), TRIPs extended the signatories’ obligations related to patent law, which must now contain the exclusive right of the patent owner to prevent third parties from making, using, offering for sale or selling the patented product or process (Art 28:11). According to Art 44:1 TRIPs, judicial authorities in WTO countries must in principle be able to grant injunctions against patent infringers. However, where injunctions are inconsistent with a country’s law, declaratory judgments and adequate compensation are deemed appropriate remedies (Art 44:2 second sentence TRIPs). Article 50 TRIPs states that judicial authorities must also be able to order provisional measures, even if the other party has not been heard. On the other hand, Art 8:2 TRIPs explicitly states that it is one of the Treaty’s principles that States may adopt measures to prevent abuses of intellectual property rights that represent restraints of trade. Furthermore, Art 40:2 TRIPs acknowledges that States may foresee that specific licensing practices constitute an abuse of intellectual property rights by having an anti-competitive effect on the relevant market(s). It has not yet been settled whether the competition law-based denial of injunctive relief for SEPs would indeed be in line with obligations arising from TRIPs.10 United States In the US, the Patent Act11 foresees in its section 283 that courts ‘may grant injunctions in accordance with the principles of equity’. In eBay v MercExchange, the Supreme Court unanimously decided that the fourfactor test, which determines if a permanent injunction should be issued, also applies to patent law. Therefore, a plaintiff must show that (1) it has suffered irreparable injury; (2) remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) considering the balance of hardships between the parties, a remedy in equity is warranted; and (4) the public interest would not be disserved by a permanent injunction.12 In his concurring opinion in eBay v MercExchange, Chief Justice Roberts underlined the fact that US courts have been granting injunctive relief after finding a patent infringement since the beginning of the nineteenth century. The availability of injunctive relief for patent owners is thus a well-established principle of 10 This concern has also been voiced by Peter Camesasca, Gregor Langus, Damien Neven and Pat Treacy, ‘Injunctions for Standard-Essential Patents: Justice Is Not Blind’ [2013] JCL&E 285, 287, n 7. 11 US Patent Law, 35 USC as of January 2018. 12 eBay v MercExchange, 547 US 388 (2006).

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US patent law. However, in his concurring opinion Justice Kennedy pointed out that ‘[w]hen the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest’.13 Injunctive relief is also a remedy provided by section 337 of the 1930 Tariff Act.14 The International Trade Commission (ITC) may issue an exclusion order prohibiting the import of goods that breach a trademark or a patent registered in the US.15 Alternatively, the ITC can adopt a cease and desist decision ordering the patent infringer to stop certain actions.16 The ITC decision has the same effects as injunctive relief adopted by a federal court due to a violation of a registered patent.17 However, the ITC just assesses the evidence put forward by the complainant concerning the validity of a patent and its breach by the defendant; the ITC is not bound by the eBay test. The ITC is an independent federal authority, which follows administrative proceedings similar to the Federal Trade Commission (FTC). A complaint concerning a patent violation is heard by an Administrative Law Judge, whose ruling can be submitted to review by the ITC Board of Commissioners.18 The final ITC decision can be appealed to the US Court of Appeals for the Federal Circuit and later to the Supreme Court a certiorari. Since the ITC decision has an impact on US trade policy, the US President has 60 days in which to disapprove (i.e. veto) the decision.19 The President usually delegates such power to the US Trade Representative (USTR).

13 In this respect, it is interesting to point out that it has been held elsewhere that allowing SEP owners to obtain damages from SEP infringers might have a negative impact on innovation: see Bernhard Ganglmair, Luke M Froeb and Gregory J Werden, ‘Patent Hold-Up and Antitrust: How A Well-Intentioned Rule Could Retard Innovation’ [2012] Journal of Industrial Economics 249. 14 19 USC 1337 – Unfair Practices in Import Trade. 15 19 USC 1337 (d). 16 19 USC 1337 (f). 17 ITC, Section 337 Investigations, publication n 4105 (March 2009) . 18 Database of the investigations conducted by the ITC under section 337 . 19 19 USC 1337 (j).

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Over the past years, companies have increasingly relied on section 337 proceedings to safeguard their patent rights.20 The increased reliance on this procedure is due to a number of reasons. First, section 337 provides a clear timeframe, whereby the ITC adopts its final decision within approximately 15 months of the beginning of the investigations.21 Second, the complaint is heard by a specialized Administrative Law Judge within the ITC, rather than by the jury in a federal court. Third, the ITC can adopt either an exclusion or a cease and desist order, but it cannot award damage compensation.22 Fourth, the ITC follows procedural rules that are similar to the Federal Rules of Civil Procedure;23 in particular, the parties can settle the case at any time during the proceedings. Finally, the increasing relevance of section 337 is linked with the growth of international trade in the past two decades: nowadays, most of the products distributed in the US are either partially or entirely manufactured abroad. Therefore, section 337 does not affect only foreign companies that export their goods to the US, but also US companies that manufacture their products abroad and later import them to the US territory. In the US, patent owners can therefore rely on two alternative systems to obtain injunctive relief against the patent infringer: they can either bring a claim to a federal court under section 283 or submit a complaint to the ITC under section 337. Over the last few years both federal courts and the ITC have been increasingly asked by SEP owners to issue injunctive relief against patent infringers. However, as discussed in section 3 below, the different tests applied by federal courts and the ITC may lead to diverging results concerning the possibility of granting injunctive relief for a breach of an SEP. European Union The European Patent Convention (EPC) of 1973, to which all 28 EU Member States adhere, does not contain any remedies for patent infringements, as a European patent confers the same rights on the patent owner

20 Colleen V Chien and Mark A Lemley, ‘Patent Holdup, the ITC and the Public Interest’ [2012] Cornell L Rev 1, 8 ff. 21 ITC TLA, FAQs . 22 Chien and Lemley (n 20) 14. 23 ibid.

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in each Contracting State as a national patent granted in that State, and any infringement must be dealt with by national law.24 In the EU’s Member States, injunctive relief is a regular feature of the national patent law systems:25 EU Member States have to implement Directive 2004/48/EC on the enforcement of intellectual property rights, which harmonizes many aspects of patent enforcement across the 28 Member States.26 This Directive is based, among others, on the fact that Member States provide very different regimes for provisional measures such as injunctions.27 According to Art 3:2 of the Directive, remedies foreseen by the Directive must ‘be effective, proportionate and dissuasive and shall … avoid the creation of barriers to legitimate trade and … provide safeguards against their abuse’. The Directive foresees in Art 9:1 that judicial authorities must be able to issue interlocutory injunctions against patent infringers to prevent imminent infringement, to forbid an ongoing infringement or to ensure the potential infringer issues guarantees for the patent owner’s compensation if it wants to keep using the patent. Where a patent infringement has been found, Art 11 states that judicial authorities must be able to issue a permanent injunction to prohibit the infringement’s continuation. Article 12 of Directive 2004/48/EC opens up a possibility for Member States to foresee that, in appropriate cases and at the infringer’s request, pecuniary compensation shall be ordered instead of the granting of an injunction. This, however, is only possible if three cumulative conditions are fulfilled: (a) the infringer acted unintentionally and without negligence, (b) an injunction would cause the infringer disproportionate harm, and (c) pecuniary compensation to the injured party appears reasonably satisfactory. Implementation of such a rule is at the Member States’ discretion. Where they implement it, it could often serve SEP infringers as an argument against the granting of an injunction in cases where the infringer is unaware of a certain SEP reading on a technical standard 24 See Art 64 of the European Patent Convention (EPC) of 5 October 1973, as last amended on 27 October 2005. 25 On this, see Michael Fröhlich (ed), AIPPI Report: Availability of injunctive relief for FRAND-committed standard essential patents, incl. FRANDdefence in patent infringement proceedings (2014) . 26 The Directive makes specific mention of the fact that industrial property rights, such as patents, are covered by its scope: see Art 1 of Directive 2004/48/EC of 29 April 2004 on the enforcement of intellectual property rights [2004] OJ L195/16. 27 Directive 2004/48/EC, preamble, recital 7.

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incorporated in the infringer’s product. In addition, there must be a possibility of awarding damages to the patent owner whose right was infringed (Art 13). The CJEU found in 2012 that national courts can issue a preliminary injunction with EU-wide effect for an alleged patent infringement, even if the defendant invokes the patent’s invalidity.28 However, if a case concerns a final decision on the validity of a patent, then the national court in which the patent was issued has exclusive jurisdiction – even if the patent was originally filed as an EPC patent.29 Therefore, if an SEP’s validity is at stake, or if a permanent injunction is requested, then injunctive relief will have to be sought separately in all 28 Member States. This may now be set to change. By Regulation (EC) No 1257/2012, the vast majority of EU Member States entered into an enhanced cooperation in order to create unitary patent protection.30 A European patent with unitary effect gives its owner uniform protection throughout the EU Member States that are participating in this enhanced cooperation (Art 5). The Regulation does not interfere with the application of competition law to patents (Art 15). The Agreement on the Unified Patent Court (UPC) states that the UPC will have the power to grant both provisional (Art 62) and permanent (Art 63) injunctions against patent infringers.31 The new unitary patent system would therefore entail the possibility of (quasi) EU-wide injunctions

28

Judgment of 12 July 2012, Solvay/Honeywell, C-616/10, EU:C:2012:445, paras 31, 51. What is now Art 35 of Regulation 1215/2012 therefore applies to preliminary injunctions based on patent law: see Regulation (EU) No 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters [2012] OJ L351/1. 29 Judgment of 12 July 2012, Solvay/Honeywell, C-616/10, EU:C:2012:445, para 50; Judgment of 13 July 2006, GAT/LUK, C-4/03, EU:C:2006:457, para 24. What is now Art 24:4 of Regulation 1215/2012 foresees exclusive jurisdiction in proceedings on the validity of patents for the court in which the patent is registered; this rule is explicitly extended to European patents issued under the EPC. 30 Regulation (EU) No 1257/2012 of 17 December 2012 implementing enhanced cooperation in the area of the creation of unitary patent protection [2012] OJ L361/1. 31 Agreement on a Unified Patent Court [2013] OJ C175/1. The UK’s imminent departure from the European Union will undoubtedly raise new questions in relation to the UPC; see for instance Matthias Leistner and Philipp Simon, ‘Auswirkungen des Brexit auf das europäische Patentsystem’ [2017] GRUR 825.

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against SEP infringers.32 It is at present unclear to what extent the UPC will be willing to take a defendant’s counterclaim based on competition law into account.33 Overall, it can be seen that the availability of injunctive relief for patent owners against patent infringers is a principle that is well embedded in European patent law. However, the conditions for issuing injunctions can vary considerably in different Member States. In some Member States, judges are not bound to issue an injunction even where a patent infringement can be proven. The CJEU has already recognized that the preliminary injunctions issued by a national court can have an EU-wide dimension; the envisaged system of unitary patent protection will also give permanent injunctions an (almost) EU-wide scope.

3. INJUNCTIVE RELIEF AS AN ABUSE OF MARKET POWER? Having observed that patent law generally foresees the availability of injunctive relief against patent infringers, the following will analyse to what extent the latter can be restricted for reasons of competition law in both the US and the EU. FRAND Commitments, Market Power and Possible Competitive Harm When asking whether requests for injunctive relief can be considered an abuse of market power, one must differentiate between SEPs that are FRAND-encumbered, i.e. for which the patent owner has committed to licensing on fair, reasonable and non-discriminatory (FRAND) terms, and SEPs that are not. Usually, SEPs that read on formal standards originating from SSOs will be FRAND-encumbered, while SEPs reading on de facto standards that have emerged from the market will not. A FRAND commitment may be decisive when it comes to the question whether or not the request for injunctive relief can be considered anti-competitive, as 32 On the fears that the UPC system could enable a bifurcation that can lead to an injunction gap, see Anja Lunze and Paul England, ‘Mind the injunction gap’ [2014] Intellectual Property Magazine 42. 33 On similar thoughts relating to compulsory licenses, see Clement Salung Petersen, Thomas Riis and Jens Schovsbo, ‘The Unified Patent Court (UPC), Compulsory Licensing and Competition Law’ (29 August 2014) 16.

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it creates additional obligations for the SEP owner and legitimate expectations on behalf of potential licensees. There is considerable disagreement in the literature over whether or not a FRAND commitment contains an automatic waiver of injunctive relief.34 As a large number of SEPs – sometimes several thousand – can read on one single standard, granting an injunction to one of the SEP owners has been called highly disproportionate.35 Others have expressed the view that a correct interpretation of FRAND commitments under contract law would not allow the latter to be constructed as a basis for a waiver of injunctive relief.36 However, one can discern a ‘common ground that injunctive relief would be inappropriate where a patentee has failed to honor its [F]RAND licensing commitment’.37 Where a potential licensee can be considered to be genuinely willing to license the SEP on FRAND terms, injunctive relief should therefore not be available.38 Before it can be established whether – and under which circumstances – a request for injunctive relief can be construed as an abuse of market power on the patent owner’s side, one should ask when a SEP owner has significant market power, and why access to justice should come under competition law scrutiny to begin with. As for market power, it is 34

In favor, for instance: Joseph S Miller, ‘Standard Setting, Patents, and Access Lock-in: RAND Licensing and the Theory of the Firm’ (2007) 40 Indiana L Rev 351, 358; Joseph Farrell, John Hayes, Carl Shapiro and Theresa Sullivan, ‘Standard Setting, Patents, and Hold-up’ [2007] Antitrust LJ 603, 638 (also citing the latter). Arguing against a waiver: Damien Geradin, Anne Layne-Farrar and A Jorge Padilla, ‘The Complements Problem within Standard Setting: Assessing the Evidence on Royalty Stacking’ [2008] BU J Sci & Tech L 144, 174 ff; Damien Geradin and Miguel Rato, ‘Can Standard-Setting Lead to Exploitative Abuse? A Dissonant View on Patent Hold-up, Royalty-Stacking and the Meaning of FRAND’ [2007] Eur Comp LJ 101, 118. 35 Michael A Lindsay, ‘Safeguarding the standard: Standards organizations, patent hold-up, and other forms of capture’ [2012] Antitrust Bulletin 17, 53. 36 Roger B Brooks and Damien Geradin, ‘Taking Contracts Seriously: The Meaning of the Voluntary Commitment to License Essential Patents on “Fair and Reasonable” Terms’ in Steven D Anderman and Ariel Ezrachi (eds), Intellectual Property and Competition Law: New Frontiers (OUP 2011) 408. 37 For an overview of the debate, see James Ratliff and Daniel L Rubinfeld, ‘The Use and Threat of Injunctions in the RAND Context’ [2013] JCL&E 1, 6–7 (direct quote at 7); also relating to this ‘broad consensus’, Alison Jones, ‘Standard-Essential Patents: Frand Commitments, Injunctions and the Smartphone Wars’ [2014] Euro Comp J 1, 1. 38 Damien Geradin, ‘The European Commission Policy Towards the Licensing of Standard-Essential Patents: Where Do We Stand?’ [2013] JCL&E 1125, 1129.

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well-established that the owner of an SEP does not necessarily derive strong market power from the mere fact that it owns an SEP, although SEP ownership can play an important role in the determination of market power.39 In particular, it will be relevant how successful the standard that the SEP reads on actually is. However, as this question is beyond the scope of our current analysis, market power shall be presumed in the following. What competitive harm can flow from threatening, seeking or enforcing injunctive relief when one’s SEP has been infringed? As the European Commission underlines, ‘recourse to injunctive relief is generally a legitimate remedy for patent holders in case of patent infringements’.40 This conclusion was also reached above (see section 2), where it was seen that the availability of injunctive relief is a well-established principle of international patent law. However, when an SEP owner with considerable market power seeks or enforces injunctions against SEP infringers, both exploitative and exclusionary effects might be the consequence. Various hold-up problems might result from the SEP owner’s actions: one concern is that SEP owners might use their SEPs that read on a successful standard in order to request disproportionate licensing fees from potential licensees. Other onerous licensing conditions might also be requested, such as a commitment not to contest the SEP’s validity, its essentiality (for the standard) or its infringement by the potential licensee.41 An injunction would also give the SEP owner the ability to exclude one or more competitors from the market, and most notably the downstream market.42 Another concern relates to SEP owners that might be put in a position of strength in which they can require their potential licensees to cross-license patents that do not read on a standard, and that the potential licensee might not want to license out.43 Disproportionately onerous licensing terms and foreclosure of competitors may both significantly dampen competition on the market(s) concerned.44 39

Urška Petrovcˇicˇ, Competition Law and Standard Essential Patents: A Transatlantic Perspective (Kluwer 2014) 50; Telyas (n 1) 45. This is also recognized by the European Commission: EU Horizontal Guidelines, para 269 (no presumption of market power for SEP owners). 40 MEMO/14/322, 29 April 2014. 41 ibid. 42 On this, see Samsung – UMTS (Case AT.39939) Commission Decision [2014] OJ C350/8, para 62; Jones (n 37) 19. 43 On this concern, see Google/MMI (Case COMP/M.6381) Commission Decision [2012] OJ C75/1, para 107. 44 EU Horizontal Guidelines, para 268.

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Overall, allowing an SEP owner to seek injunctions for FRAND-pledged SEPs might also negatively affect standard-setting as such and its positive effects.45 Indeed, it is not only the seeking and enforcing of injunctions that can lead to competitive harm, but the mere threat of such an injunction might already suffice to make potential licensees agree to onerous licensing terms: as licensees often depend on the use of a certain standard – and thus all the SEPs reading on it – their bargaining power will typically be reduced, especially if they do not hold valuable patents themselves (or if they do not want to license these). The result would thus be competitive harm which, ultimately, would adversely affect consumers through higher prices, lower interoperability of products resulting in less product choice and less innovation. Economists generally agree with each other that (the threat of) seeking an injunction can lead to a hold-up problem.46 Some economists, however, warn that there can also be anti-competitive effects on the side of the SEP owner, taking the form of reverse hold-up: where an SEP owner is not sufficiently rewarded for its innovations, it might refrain from innovating – or from participating in standard-setting procedures – in the future.47 This is an argument that would need to be borne in mind. United States The request for injunctive relief by the SEP owner has been assessed as a potential abuse of market power by US antitrust authorities. In January 2013, the Department of Justice (DoJ) and the US Patent & Trademark Office (USPTO) jointly issued a Policy Statement on available remedies for the violation of a standard essential patent subject to a FRAND commitment.48 The paper recognizes that injunctive relief is a standard remedy for a patent violation.49 Nevertheless, ‘in some circumstances, the remedy of an injunction or exclusion order may be inconsistent with the 45

Jones (n 37) 19. See e.g. Mark A Lemley and Carl Shapiro, ‘Patent Holdup and Royalty Stacking’ [2007] Texas L Rev 1991, 1993. 47 See e.g. Camesasca, Langus, Neven and Treacy (n 10) 306; Gregor Langus, Vilen Lipatov and Damien Neven, ‘Standard-Essential Patents: Who Is Really Holding Up (and When)?’ [2013] JCL&E 253, 277; Ratliff and Rubinfeld (n 37) 2, 22. 48 US Department of Justice and US Patent & Trademark Office, Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary FRAND Commitments (8 January 2013) . 49 ibid 2. 46

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public interest test’.50 Such exceptional circumstances would arise, for instance, if the request for the injunction were incompatible with the FRAND licensing commitment agreed on between the patent holder and the SSO (i.e. if the patent holder had withdrawn its right to ask for an injunction under the terms agreed with the SSO).51 On the other hand, an injunction would be justified if the potential licensee would either refuse to pay a royalty determined as ‘fair’ by either a court ruling or an arbitral award, or in case the potential licensee refused to start negotiations.52 The Policy Statement recognizes that the potential licensee’s refusal to conduct negotiations ‘could take the form of a constructive refusal to negotiate, insisting on terms clearly outside the bounds of what could reasonably be considered to be FRAND terms’. The Policy Statement is a soft law document, aiming at providing guidance to public enforcers and federal courts on how to assess requests of injunctive relief by SEP owners. The document provides a nonexhaustive list of exceptional circumstances in which the request of an injunction by the SEP owner could represent an abuse of market power. On the other hand, the Policy Statement does not provide general criteria on how to assess the ‘willingness’ and the ability to pay the requested royalty by the potential licensee. Therefore, it remains questionable how relevant the Policy Statement is in guiding the enforcement action by US public authorities and federal courts. Under US antitrust law, two legal bases could be relied upon to challenge injunctive relief as an abuse of market power, namely section 2 Sherman Act53 and section 5 FTCA.54 Section 2 Sherman Act is usually considered the counterpart of Art 102 TFEU in the US, since it sanctions both cases of monopolization and attempts to monopolize. The US Supreme Court has introduced similar tests in relation to both types of offences under section 2:55 the plaintiff has to prove that the defendant has achieved/attempted to achieve monopoly power via an anticompetitive conduct with the intent to monopolize the market. As argued by Petrovcˇicˇ, section 2 Sherman Act is not suitable to sanction the abuse 50

ibid 6. ibid 7. 52 ibid 7. 53 15 USC § 2 – Monopolizing Trade a Felony; Penalty. 54 Federal Trade Commission Act (FTCA), 15 USC § 45, as amended. 55 See US Supreme Court, United States v Grinnell Corp, 384 US 563 (1966); US Supreme Court, Spectrum Sports, Inc v McQuillan, 506 US 447 (1993). 51

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of market power by SEP owners.56 First, according to the case law of the US Supreme Court, section 2 only sanctions exclusionary rather than exploitative conduct.57 Therefore, section 2 could not be relied upon to sanction the ‘excessive’ royalties demanded by the SEP owner to license its patent. Second, an SEP grants to its owner market power, but not necessarily a monopoly power in the market. The patent owner declares that its patent is ‘essential’ to comply with the standard without any control by the SSO. Due to the fact that a standard usually covers several similar patents, the potential licensee could implement the standard without necessarily having to rely on every patent declared essential.58 Finally, the intent of monopolization would hardly be demonstrated: the SEP owner could ask for a court injunction in order to legitimately safeguard its exclusive patent rights, rather than to exclude a competitor from the market.59 Due to the limits in the scope of application of section 2, this provision has never been successfully invoked in the past years in order to sanction the request of an injunction by an SEP owner as an abuse of market power. On the other hand, the FTC has relied on section 5 FTCA to sanction SEP owners that breached their FRAND commitment to license the patent. The latter provision, in fact, sanctions any ‘unfair method of competition, including unfair or deceptive acts’.60 Although the US Supreme Court has recognized that section 5 sanctions the same anticompetitive conduct that could be sanctioned under section 2,61 the FTCA has a broader scope of application than the Sherman Act: the FTC does not have to prove either the monopolization or the anti-competitive intent of the infringer. The FTC has sanctioned under section 5 FTCA two cases of injunctive relief requested by an SEP owner. In Bosch, the FTC authorized the 56 Urška Petrovcˇicˇ, ‘Patent Hold-Up and the Limits of Competition Law: a Transatlantic Perspective’ [2013] CMLRev 1363, 1375 ff. 57 US Supreme Court, Verizon Communications Inc v Law Offices of Curtis v Trinko LLP, 540 US 398, 407 (2004). 58 Joesph Kattan, ‘FRAND Wars and Section 2’ [2013] Antitrust Bulletin 30, 33. 59 ibid. 60 15 USC § 45 – Unfair Methods of Competition Unlawful; Prevention by Commission. 61 See US Supreme Court, FTC v RF Keppel & Bros, Inc, 291 US 304, 310–313 (1934); US Supreme Court, FTC v Cement Inst, 333 US 683, 693 and n 6 (1948); US Supreme Court, FTC v Sperry & Hutchinson Co, 405 US 233, 241–244 (1972).

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acquisition of SPX by Bosch subject to a number of remedies.62 Among the behavioural remedies agreed with the FTC, Bosch agreed to abandon a request of injunctive relief previously started by SPX in relation to the breach of an SEP by a potential licensee. Similarly, in January 2013 Google agreed with the FTC to withdraw the claim of injunctive relief started by Motorola against a potential SEP licensee before being acquired by Google.63 The Bosch and Google-Motorola cases represent landmark decisions that show that ‘in appropriate cases the FTC can and will challenge this conduct as an unfair method of competition under section 5 FTC Act’.64 However, both decisions were adopted by a majority vote of the FTC Commissioners, with strong dissenting statements by Commissioner Ohlhausen.65 The main criticism put forward by the Commissioner in her dissenting statements can be summarized as follows: (1)

The FTC concluded both cases via commitment decisions, which settled the Bosch and Google-Motorola cases but left a number of questions unanswered.66 In particular, the FTC decisions did not clarify when a licensee is truly unwilling to negotiate, and thus an injunctive relief is justified. According to Commissioner Ohlhausen, in sanctioning the request of injunctive relief by an SEP owner, the FTC enforced section 5 beyond its scope of application, thus showing a ‘lack of regulatory humility’:67 rather than safeguarding free competition in the market,

(2)

62 FTC, Statement in the matter of Robert Bosch GmbH. FTC file 121-0081 . 63 FTC, Statement in the matter of Google Inc. FTC file 121-0120 (3 January 2013) . 64 FTC Statement in Bosch (n 62) 2. 65 FTC, Dissenting Statement of Commissioner Maureen K Ohlhausen in the matter of Robert Bosch GmbH, FTC file 121-0081 ; FTC, Dissenting Statement of Commissioner Maureen K Ohlhausen in the matter of Motorola Mobility LLC and Google Inc, FTC file 121-0120 (3 January 2013) . 66 Ohlhausen, Dissenting Statement in Google (n 65) 1. 67 Ohlhausen, Dissenting Statement in Bosch (n 65) 2.

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the FTC entered into bilateral contractual disputes between patent owner and licensee.68 The Commissioner also noted that by prohibiting an injunctive relief the FTC did not increase consumer welfare. On the contrary, by limiting the ownership rights of the patent owner the FTC hampered incentives to innovate.69 Federal courts and the ITC were better equipped to assess the legitimacy of the request of injunctive relief than the FTC, and they could balance the different interests at stake.70 SPX and Motorola had previously agreed with the SSO to license their patents under FRAND terms. However, the companies did not agree to waive their right to ask for injunctive relief in case of a patent violation by the potential licensee.71

(3)

(4)

(5)

The Commissioner’s dissenting statements in Bosch and GoogleMotorola well summarize the main criticisms vis-à-vis the approach followed by the FTC. Since both cases were concluded by the FTC via consent decrees with the parties, they were not subject to judicial review by US federal courts. In the face of the lack of jurisprudence by the US Supreme Court on the treatment of injunctive relief requested by SEP owners, federal courts have followed diverging standards in this regard. A well-known example of the different approaches followed by federal courts is represented by Motorola v Apple. In the first instance ruling, the District Court for the Northern District of Illinois excluded the possibility that the SEP owner (i.e. Motorola) could ask for an injunction against the patent infringer (i.e. Apple).72 According to the District Court, Motorola could not ask for any injunction since it ‘committed to license its patent to anyone willing to pay a FRAND royalty’.73 Only in case ‘Apple refuses to pay a royalty that meets the FRAND requirement’ would the injunction be justified.74 The Court of Appeals for the Federal Circuit, on the contrary, reached a different conclusion in relation to the possibility 68

ibid 3. Ohlhausen, Dissenting Statement in Google (n 65) 4. 70 ibid 3. 71 ibid 5. 72 US District Court for the Northern District of Illinois Eastern Division, Apple Inc and NeXT Software Inc v Motorola Inc and Motorola Mobility Inc (22 June 2012) No. 1:11-cv-08540 . 73 ibid 18. 74 ibid. 69

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of granting an injunction.75 The Court of Appeals ruled that the District Court erred in concluding that injunctions are per se unavailable for SEPs.76 Referring to the DoJ-USPTO Policy Statement, the Court of Appeals ruled that the SEP owner could ask for an injunction when the patent infringer ‘unilaterally refuses a FRAND royalty or unreasonably delays the negotiations to the same effect’.77 Therefore, the ruling of the Court of Appeals was more accommodating towards the SEP owner than the first instance court ruling, accepting an injunction for a patent infringement in spite of the FRAND commitment previously agreed on between the patent owner and the SSO. Another interesting case of diverging views among US public authorities concerning the availability of injunctive relief for SEP owners is represented by the ITC decision in Samsung-Apple. In August 2011, the ITC opened a section 337 investigation concerning an alleged patent infringement by Apple on a complaint submitted by Samsung. According to the complaint, Apple breached an SEP owned by Samsung in relation to 3G technology, relying on Samsung’s patent in old iPhone and iPad models without concluding a license agreement with Samsung. In June 2012, the FTC submitted a third party statement in the case, suggesting that the ITC ‘refrain from imposing Section 337 remedies in conflict with the public interest’.78 In particular, the FTC argued that a ban on imports of iPads and iPhones would harm consumers and the ‘competitive conditions in the United States economy’.79 In spite of this FTC third party statement and although the Administrative Law Judge did not find a patent violation by Apple, in June 2013 the ITC adopted an exclusion order under section 337: Apple was prohibited from importing to the US old models of iPhones and iPads that breached the Samsung patent.80 As 75 US Court of Appeals for the Federal Circuit, Apple Inc and NeXT Software Inc v Motorola Inc (25 April 2014) 2012-1548,-1549 . 76 ibid 71. 77 ibid 72. 78 ITC, Third Party FTC’s Statement on the Public Interest in the matter of certain wireless communications devices. Inv. No. 337-TA-745 (6 June 2012) . 79 ibid 4. 80 ITC, Notice of the Commission’s Final Determination Finding a Violation of Section 337 in the matter of certain wireless electronic devices. Inv. No. 337-TA-794 (4 June 2013) .

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mentioned in section 2 above, ITC decisions can be disapproved by the US President within 60 days of their adoption. Nevertheless, the USTR, delegated by the President to monitor the work of the ITC, rarely relies on this option. The ITC decision in Samsung-Apple represents an exception in this respect: in August 2013, the USTR sent a letter to the ITC, disapproving its previous decision.81 In the letter, the USTR referred to the DoJ-USPTO Policy Statement to justify its decision.82 In addition, similarly to the FTC third party statement, the USTR argued that the ITC decision negatively affected the competitive conditions in the US economy and the interests of consumers.83 The diverging positions among US public authorities in Motorola v Apple and Samsung v Apple well represent the diverging views on this issue in the US. Due to the lack of jurisprudence by the US Supreme Court, a number of US federal authorities had to balance the different considerations at stake. The institutional mission of each authority has an influence on its assessment: while the ITC gives priority to the SEP owner’s right to ask for an injunction, the FTC and DoJ adopt a more sceptical view on the possibility to allow an injunction that could cause hold-up problems in the market. These divergences show that the DoJ-USPTO Policy Statement has not clarified a number of issues on how to conduct such a delicate balancing test. European Union In the EU, the seeking of injunctive relief as a competition law offence has also appeared on the agenda of the EU’s main competition law enforcers: after referring to injunctive relief for SEPs in a merger decision of 2012,84 the European Commission concluded two SEP cases in 2014 and the Court of Justice of the European Union (CJEU) issued its first preliminary ruling on SEPs in July 2015. In the Samsung case, the Commission accused Samsung of having abused its dominant position by enforcing its SEPs relating to the UMTS standard through injunctions against Apple in various EU Member States, amongst others France, Germany, the Netherlands and the UK. Samsung 81

USTR, Disapproval of the US ITC’s Determination in the matter of certain electronic devices, including wireless communication devices (3 August 2013) . 82 ibid 2. 83 ibid 3. 84 Google/MMI (n 43); this case will not be discussed in detail.

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had committed to FRAND licensing during the standard-setting procedure at the European Telecommunications Standards Institute (ETSI).85 In September 2013, Samsung proposed initial commitments to the Commission pursuant to Art 9 of Regulation (EC) No 1/2003.86 These commitments contained a comprehensive licensing framework based on which any willing licensee should be able to obtain a license on FRAND terms.87 After a consultation phase (‘market testing’), the Commission accepted Samsung’s slightly modified commitments as binding by a commitment decision of 29 April 2014.88 These binding commitments now foresee that licensees will remain free to challenge the SEP’s validity, the SEP’s essentiality for the standard, and the licensee’s infringement of the SEP.89 It is interesting to note that the Commission did not consider it relevant that anti-competitive effects would only arise once a court had granted the injunction.90 One might add that the mere threat of an injunction can be enough to bring about anti-competitive effects. The General Court (then Court of First Instance) has previously found that access to justice, such as access to injunctive relief, may only be regarded as an abuse under EU competition law ‘in wholly exceptional circumstances’.91 In Samsung, the Commission held that such exceptional circumstances arose from two facts: (a) the UMTS standard-setting procedure; and (b) the incumbent’s FRAND commitments towards the SSO.92 It also found that there were no objective justifications for Samsung’s behaviour, in particular, Apple as the potential licensee could not be found to be an unwilling licensee.93 The Commission assumed that a decision finding that Samsung had abused its market power would

85

Samsung – UMTS (n 42) paras 2, 54. Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty [2003] OJ L1/1. 87 On this, see Viktoria HSE Robertson, ‘Enforcement of Standard-Essential Patents and Abuse of Dominance: The Samsung, Motorola and Huawei v ZTE Cases’ [2014] Comp Law 44, 45 ff. 88 Samsung – UMTS (n 42) art 1. 89 ibid para 99. 90 ibid para 63. 91 Judgment of 17 July 1998, ITT Promedia NV/Commission, T-111/96, EU:T:1998:183, para 60. 92 See Samsung – UMTS (n 42) para 56. 93 ibid paras 67.3 and 68. 86

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not run counter to the EU’s obligations under the TRIPs,94 but did not provide any more details on why it reached this conclusion. In Motorola, the Commission found that Motorola had infringed Art 102 TFEU by seeking and enforcing an injunction against its competitor Apple in German courts, based on an SEP it owned related to the General Packet Radio Service (GPRS) standard.95 The Commission concluded that the exceptional circumstances that justified the finding of an abuse lay in the fact that Motorola had (a) participated in the GPRS standard-setting procedure, and (b) committed to FRAND-licensing of the SEPs in question towards the SSO.96 It could not find any valid objective justifications for Motorola’s legal actions, and held that the mere fact that Motorola was entitled, under national German law, to seek and enforce the injunctions under scrutiny did not absolve it from its special responsibility under Art 102 TFEU.97 The Motorola decision outlines under which circumstances an SEP owner might safely seek injunctive relief, e.g. when the potential licensee is in financial difficulties, when damages might be impossible to obtain because of the location of the potential licensee’s assets, or when the potential licensee is unwilling to license on FRAND terms.98 None of these circumstances were held to be present in the given case. The Commission found that its decision was justified under Arts 8:2 and 40:2 TRIPs and did therefore not run counter to the EU’s obligations under that international treaty.99 The Commission chose not to impose a fine on Motorola because EU case law had never before ruled on whether injunctions for SEPs could represent an abuse of market power, and also because case law in the Member States had reached different verdicts in this respect.100 Motorola has been criticised on the basis that it unsettles the negotiating balance between the SEP owner – which normally has the option to seek injunctive relief – and the potential licensee – which normally has the option to claim invalidity, non-essentiality or non-infringement. With the SEP owner’s option of seeking injunctive relief ruled out on the basis 94

ibid para 71. Motorola – GPRS (Case AT.39985) Commission Decision [2014] OJ C344/6, para 1. 96 ibid paras 281 ff, reiterated at para 493 (‘specific Union competition law obligations relating to that SEP’). 97 ibid paras 465 ff, 468. 98 ibid para 427. 99 ibid paras 497–499. 100 ibid para 561. 95

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of competition law, SEP owners might actually choose to charge higher licensing fees in order to compensate for their lost option.101 This interpretation perhaps overlooks the fact that the SEP owner has voluntarily agreed to FRAND licensing in exchange for having its invention incorporated in the standard. This particular position gives the SEP owner a leverage over not only its own invention, but in fact the whole standard – an unjustified leverage for which a waiver of injunctive relief could act as a counter-balance. So far, the CJEU has only been confronted with questions on injunctive relief as an abuse under Art 102 TFEU on one single occasion: the request for a preliminary ruling that the Düsseldorf District Court submitted to the CJEU in the case Huawei v ZTE (C-170/13), essentially asking for the criteria when a patent holder may not enforce its SEPs through injunctions.102 The case centred on what constitutes a willing licensee, as it is only willing licensees against whom injunctions may not be sought by owners of FRAND-encumbered SEPs. The case has to be seen against the national case law that has developed on the issue in Germany, and that will only be sketched out for present purposes. In Orange-Book-Standard, the German Federal Court of Justice concluded that a potential licensee can only oppose an injunction applied for by the patent owner where (a) the potential licensee made an unconditional offer to license that the patent owner cannot reject without abusing its dominant position, and (b) the potential licensee acts as if the license had been concluded.103 An important point to note is that the standard at issue in Orange-Book-Standard was a de facto standard, which was therefore devoid of FRAND commitments on the patent owner’s part.104 On 16 July 2015, the CJEU delivered its much-awaited ruling in Huawei v ZTE.105 The Court pointed out that the Long Term Evolution (LTE) standard to which the SEP in question relates is composed of over 101 Pierre Larouche and Nicolo Zingales, ‘Injunctive Relief in Disputes Related to Standard-Essential Patents: Time for the CJEU to Set Fair and Reasonable Presumptions’ [2014] European Comp J 551, 583 ff. 102 See Request for a preliminary ruling from the Landgericht Düsseldorf (Germany) lodged on 5 April 2013, Huawei v ZTE, C-170/13, [2013] OJ C215/5. 103 Bundesgerichtshof, KZR 39/06, Orange-Book-Standard, 6 May 2009, paras 29, 33. For more detail, see Robertson (n 87) 49 ff. 104 Torsten Körber, Standard Essential Patents, FRAND Commitments and Competition Law (Nomos 2013) 255; MEMO/13/403. 105 Judgment of 16 July 2015, Huawei v ZTE, C-170/13, EU:C:2015:477.

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4,700 SEPs, all of which are FRAND-encumbered.106 In assessing whether the request for an injunction for infringement of an SEP is abusive under Art 102 TFEU, a balance must be struck between maintaining free competition and safeguarding the SEP owner’s intellectual property rights and its right to effective judicial protection.107 The CJEU emphasized that only in exceptional circumstances may the exercise of an intellectual property right constitute an abuse of a dominant position.108 In the case at issue, the fact that the patent concerned is standard-essential and that the SEP owner has irrevocably committed to FRAND licensing constitute particular circumstances that could lead to the finding of an abuse of dominance, especially as FRAND commitments create legitimate expectations.109 Such an abuse could be raised as a defence against a prohibitory injunction or the recall of products.110 The CJEU then set out a negotiating framework that must be observed by the parties: first, the SEP owner must notify the potential licensee of the alleged infringement, designating the SEP and the way in which it was infringed. Once the potential licensee has stated its willingness to conclude a licensing agreement on FRAND terms, the SEP owner must present to it a ‘specific’, written licensing offer on FRAND terms, including inter alia the amount of the royalty and the method for its calculation. Thereafter, the potential licensee must diligently respond to that offer without delay, observing commercial practices in the field and good faith. Should it not wish to accept it, the potential licensee can make a specific counter-offer to the SEP owner, which must be submitted promptly and in writing and conform to FRAND terms. Should the counter-offer be rejected, and the potential licensee is already using the teachings of the SEP, the potential licensee must provide appropriate security to the SEP owner and render accounts. Where no agreement can be reached on the licensing terms, the parties can ask an independent third party to determine them. In addition, alleged infringers must at all times remain free to challenge the SEP’s validity, essentiality or infringement.111 Only where this framework has been observed may the SEP owner bring an action for an injunction or the recall of products.112 The alleged infringer may not raise a competition law defence against the 106 107 108 109 110 111 112

ibid ibid ibid ibid ibid ibid ibid

para 40. paras 42, 57 ff. para 47. paras 48–53. para 54. paras 61–69. para 71.

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SEP owner’s request for a prohibitory injunction where it has not made the counter-offer as outlined above.113 Should the SEP owner request the rendering of accounts or damages, on the other hand, there is no direct impact on standard-compliant products, and therefore no abuse of dominance can be found.114 The CJEU’s preliminary ruling closely follows the Commission’s proposed approach to SEPs, although it perhaps adopts an even stricter stance than the latter. The CJEU proposes a clearly worded test for establishing an abuse on the SEP owner’s behalf, including obligations for the SEP owner as well as for the potential licensee. It can now be said that under EU competition law, an SEP owner that is in a dominant position, has participated in the standard-setting procedure and has committed to FRAND-licensing for the SEPs concerned, may not seek – or threaten to seek – injunctive relief or the recall of products against (alleged) SEP infringers that are ‘willing’ to license the SEP on FRAND terms. The willingness of a potential licensee is construed broadly, and must be demonstrated during the licensing negotiations. The potential licensee may always challenge the SEP’s validity, essentiality or infringement; this will not be interpreted as showing unwillingness. Overall, therefore, the standard of the potential licensee’s willingness is much more lenient than under previous national case law from Germany. In Huawei, the CJEU introduced a very detailed negotiation framework to assess whether and to what extent the potential licensee is effectively ‘willing’ to license. In the ruling, the CJEU tried to find a compromise between the Orange-Book case law, which privileged the SEP owner’s right to ask for an injunction, and the EU Commission approach in Samsung and Motorola, which was more friendly vis-à-vis potential licensees. Huawei has clarified several issues concerning FRAND negotiations; however, it has also left a number of questions open. A first question concerns the relationship between Huawei and Orange-Book. As noted by Schweitzer,115 Huawei does not overrule Orange-Book, since the latter concerned the compatibility of a patent injunction with German competition law and referred to a de facto standard; therefore, the patent owner did not have any obligation to license under FRAND terms. For this very reason, a number of German 113

ibid para 66. ibid paras 74 ff. 115 Heike Schweitzer, ‘Standard-Essential Patents and Abusive Patent Injunctions – the Interplay between German Courts and the CJEU’ in Pier Luigi Parcu, Giorgio Monti and Marco Botta (eds), Abuse of Dominance in EU Competition Law: Emerging Trends (Edward Elgar Publishing 2017) 95. 114

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courts still rely on Orange-Book in the aftermath of Huawei.116 The two strands of case law thus continue to co-exist in German courts. A second question concerns the degree of ‘flexibility’ that national courts have in applying the Huawei conditions. In other words, the question is whether communications and meetings between the parties would be sufficient to satisfy Huawei negotiation steps. In the recent case of Unwired Planet v Huawei, the High Court of England and Wales ruled that ‘the CJEU in Huawei did not seek to set out a series of rigid predefined rules (in relation to the negotiation steps)’.117 In the specific case, the meetings and exchange of communications between the SEP owner and the potential licensee during the three years of negotiations were sufficient for the High Court to conclude that Huawei negotiation steps had been complied with, even if no party had explicitly made a written binding offer.118 Until the issue comes before the CJEU again, it is for national courts to decide how strictly to apply the negotiation steps indicated by the CJEU in Huawei. A similar open issue concerns the meaning of the FRAND royalty rate. In Huawei, the CJEU did not enter into this complex issue, leaving it to national courts and arbitrators to decide. In fact, it would be hard for the CJEU to define general criteria on how to estimate the appropriate royalty rate, since industry specificities and technical expertise are essential for this calculation. In the aftermath of Huawei, however, a number of German and British courts have assessed the ‘fairness’ of the royalty rate proposed by the parties.119 Although the rulings assess the specific factual circumstances of each case, a number of general legal principles are evolving. For instance, in Unwired Planet v Huawei, the High Court pointed out that when the SEP has a worldwide scope of

116 See e.g. LG Düsseldorf, judgment of 22 January 2014 – Case No 4a O 127/14; LG Mannheim, judgment of 10 March 2015 – Case No 2 O 103/14; LG Düsseldorf, judgment of 26 March 2015 – Case No 4b O 140/13; OLG Karlsruhe, judgment of 23 April 2015 – Case No 6 U 44/15; LG Düsseldorf, judgment of 11 June 2015 – Case No 4a O 44/14; LG Düsseldorf, judgment of 11 June 2015 – Case No 4a O 45/14. 117 High Court of Justice of England and Wales, Unwired Planet International v Huawei Technologies and others, 5 April 2017, Case No HP-201400005, para 741. 118 ibid para 751. 119 A summary of the recent rulings by German courts in relation to SEPs is available at .

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protection, the license should also have a worldwide scope of application.120 The court thus rejected the licensee’s request to calculate the royalty rate on a country-by-country basis. A final issue closely linked to the determination of the FRAND royalty rate concerns the role of SSOs. Traditionally, SSOs have not influenced the bilateral negotiations between the parties concerning the license of a SEP, since SSOs include both patent owners and implementers. However, a recent EU Commission Communication published in November 2017 calls for SSOs to have a more active role in this area, in order to avoid judicial disputes between the parties.121 In particular, every SSO should establish an updated database including a detailed list of SEPs applicable to each industry standard.122 Second, SEP declaration should be sufficiently detailed to clarify the exact scope of application of the patent vis-à-vis the standard.123 Finally, ‘SEPs should be subject to reliable scrutiny of their essentiality for a standard’124 – i.e. the SSOs would thus be required to check the ‘essentiality’ declaration put forward by the patent owner. The Communication is a soft law instrument that does not create binding obligations for SSOs. However, it is worth noting that the EU Commission for the first time calls on SSOs to be more actively engaged in this area. It remains to be seen whether the EU Commission will in the future propose a Directive/Regulation to introduce binding obligations on SSOs in this regard. In conclusion, Huawei is welcome since it has clarified to what extent the request of injunctive relief for a breach of an SEP could breach EU competition law. However, a number of issues remain pending. While a detailed assessment of national jurisprudence post-Huawei goes beyond the scope of this chapter, it is worth noting that the emerging national case law might lead to inconsistencies among national courts; therefore, it is plausible to assume that the CJEU will in the near future be asked to return to this subject via a preliminary request. On such an occasion, the CJEU will have to decide either to harmonize national approaches on this issue (like in Huawei), or to accept national inconsistencies as the inevitable consequence of the fact-intensive assessment that national courts are required to carry out in every case. 120

Unwired Planet International (n 117), paras 535–543. Commission, ‘Setting out the EU Approach to Standard Essential Patents’ COM(2017) 712 final. 122 ibid para 1.1. 123 ibid para 1.2.1. 124 ibid para 1.2.3. 121

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4. CONCLUDING REMARKS: THE TRANSATLANTIC DIVIDE IN THE COMPETITION LAW TREATMENT OF INJUNCTIONS FOR SEPs This chapter compared the treatment of SEP injunctions under US antitrust and EU competition rules. Injunctions are a standard remedy under IP law, recognized both within the US and the EU legal systems. SEP owners might rely on (the threat of) a court injunction in order to strengthen their bargaining power vis-à-vis a potential licensee, in order to ask for higher licensing fees or to deny a license to certain competitors. Over the past years, both the US and the EU have recognized that the request for an injunction by an SEP owner may represent an abuse of market power, sanctioned under section 5 FTCA and Art 102 TFEU. However, the two jurisdictions seem to move in different directions in designing the standard of assessment for abusive injunctions. The US has given priority to the right of the SEP owner to ask for a court injunction; the request for an injunction has only been considered in breach of antitrust rules in exceptional circumstances. The DoJUSPTO Policy Statement has recognized that an injunction may represent an abuse of market power only in a number of limited cases – when the SEP owner waived its right to ask for an injunction under FRAND terms agreed with the SSO. US authors have argued that antitrust law should not be used as a tool to ‘correct for the over-enforcement of IP rights’, since patent law in itself is well-equipped to do so.125 US authorities have preferred to assess when a SEP injunction may represent an abuse of market power on a case-by-case basis. Even the DoJ-USPTO Policy Statement does not provide general criteria of when an injunction may be considered abusive; instead, the document offers examples of injunctions considered abusive. The EU, on the other hand, seems to follow an opposite approach: generally, the SEP owner cannot ask for an injunction due to FRAND commitments agreed on with the SSO, unless the potential licensee shows to be ‘unwilling’ to negotiate. Rather than providing examples of situations when the licensee is considered to be unwilling, the EU has tried to elaborate general criteria of assessment. The test elaborated by the CJEU in Huawei v ZTE is a good example in this regard. 125

Thomas F Cotter, ‘Reining in Remedies in Patent Litigation: Three (Increasingly Immodest) Proposals’ [2013] Santa Clara High Tech LJ 1, 10, 16 (direct quote at 16).

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While this issue goes beyond the scope of this chapter, it is worth noting that the possibility for a SEP owner to obtain a court injunction against a potential licensee also raises important fundamental rights questions, as the SEP owner enjoys a right of private property vis-à-vis its patent.126 The different approaches followed by the EU and the US in relation to the treatment of SEP injunctions have led some authors to conclude that while the US tends to prioritize the IP rights of the SEP owner, the EU tends to safeguard free competition in the market.127 A number of reasons may explain the different approaches followed in the US and the EU in relation to the treatment of SEP injunctions. In terms of hierarchy of norms, EU competition rules have a ‘constitutional value’ in the EU, since Arts 101–102 are included in the Treaty. On the other hand, the remedies for IP violations are included in Directive 2004/48/EC: an act of secondary legislation subordinated to the Treaty. In the US, section 2 Sherman Act and section 5 FTCA are both secondary legislation, which have the same legal rank as section 283 Patent Act and section 337 of the 1930 Tariff Act. Second, the institutional mission of the different authorities involved in assessing disputes related to SEP injunctions might have an influence on their assessment. For example, in the case of Samsung-Apple the ITC gave priority to the right of the SEP owner to obtain injunctive relief without taking into consideration the FTC claims concerning the possible distortion of competition caused by an injunction ordered under section 337. The different institutional missions of the FTC and ITC might have led the two agencies to diverging assessments: while the FTC has prioritized safeguarding free competition, by authorizing an exclusion order under section 337, the ITC has primarily safeguarded the IP right of the SEP owner. The CJEU ruling in Huawei v ZTE has provided a complex test to assess SEP injunctions under EU competition rules. Under US antitrust rules, on the other hand, there is, as of now, no such definitive test. Until a ruling of the Supreme Court addresses this topic, the US authorities

126 This is an issue that the authors have discussed elsewhere: see Marco Botta and Viktoria HSE Robertson, ‘Competition Law Analysis of StandardEssential Patents after Huawei v ZTE: A New European Approach?’ [2016] Austrian Competition J 96, 102–104. 127 See e.g. Björn Lundqvist, Standardization under EU Competition Rules and US Antitrust Laws: The Rise and Limits of Self-Regulation (Edward Elgar Publishing 2014) 341.

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will continue to follow diverging approaches in this regard. For this reason, the treatment of SEP injunctions is still an issue far from being settled, and is expected to animate the antitrust and intellectual property law debate for years to come.128

128

For a recent publication on the issue, see Jorge L Contreras (ed), The Cambridge Handbook of Technical Standardization Law: Competition, Antitrust, and Patents (Cambridge University Press 2017).

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11. The abuse of rights in EU competition law and beyond Mariateresa Maggiolino and Maria Lillà Montagnani* 1. INTRODUCTION This chapter examines how the abuse of rights fits within the twofold framework of EU competition law and Union law to investigate the actual scope of this long-standing general principle of law. Indeed, on the one hand, ‘no one shall abuse their rights’1 is the simple, almost intuitive, prohibition that today has gained room among national and supranational legal systems, mainly because it is perceived as a necessary (and * Although this chapter results from a common elaboration, sections 1–4 are attributed to the first author, and sections 5–8 to the second author. 1 A full analysis of the origins of the abuse of rights goes beyond the scope of this chapter. Nevertheless, in brief, although it traces back to the medieval doctrine of aemulatio, the abuse of (subjective) rights did not appear in many codes of the nineteenth century, mainly because of legal positivism and the idea that no ethic-social value could ever take a right away from an individual. In the twentieth century, however, the abuse of rights was either introduced in some national codes, such as the German, Swiss, Greek, Dutch and Spanish codes, or established by national courts, as in France and Italy. As to the Anglo-American experiences, instead, whereas the House of Lords rejected the abuse of rights in two landmark cases – see Mayor of Bradford v Pickles [1895] AC 587 and Allen v Flood [1898] AC 1 – the abuse of rights is somehow reproduced in the US through other doctrines such as that of nuisance, duress, good faith, economic waste, IP misuse, lack of business purpose in tax law and others. In addition, the abuse of (fundamental) rights has been included in the Convention of Human Rights and Fundamental Liberties and in the Charter of Fundamental Rights of the European Union. For a more detailed discussion, see Federico Losurdo, ‘The prohibition of the abuse of rights in the judicial dialogue in Europe’ (2009) available at http://www.academia.edu, with further references to national doctrines. 274 Mariateresa Maggiolino and Maria Lillà Montagnani - 9781788972444 Downloaded from Elgar Online at 04/20/2020 09:07:51AM via Universita Degli Studi Roma Tre

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opportune) tool against barren formalism and overreaching individualism.2 On the other hand, notwithstanding such a straightforward and reasonable wording, the scope of this principle still needs to be outlined in detail to avoid vague and wide-ranging interpretation that would impair legal certainty and fairness.3 To this end, the chapter begins by analyzing the EU case law to identify the conditions under which a firm abuses its rights and violates EU competition law (section 2). Then, taking inspiration from the US antitrust law, the chapter maintains not only that the case of the abuse of rights should be distinguished from the case of the conflict of laws (section 3), but also that the psychological inquiry about the intent motivating abusive business practices should be kept separate from the objective examination of the reasons explaining and justifying abusive behaviors (section 4). The chapter then discusses the EU case law that, moving from the analysis of many and diverse legal provisions, has over the years shaped the principle of the abuse of rights that is now applied in the European Union. In particular, the chapter elicits the problems connected to the subjective (section 5) and objective (section 6) elements of the actual definition of the abuse of rights to then conclude by comparing the tests adopted in EU competition law and in the Union law (section 7). Section 8 concludes.

2

See, e.g., Michael Byers, ‘Abuse of Rights: An Old Principle, A New Age’ (2002) 47 McGill Law Journal 389 (focusing on the international perspective); Joseph M Perillo, ‘Abuse of Rights: A Pervasive Legal Concept’ (2015) 27 Pac. LJ. 37 (focusing on the experience of common law countries); and Annekatrien Lenaerts, ‘The General Principle of the Prohibition of Abuse of Rights: A Critical Position on Its Role in a Codified European Contract Law’ (2010) 6 European Review of Private Law 1121. 3 In other words, the abuse of rights prohibition is a matter of substantive justice and equity. It arises from the idea that the mere compliance with the letter of the law may not be enough to prevent individuals from using the same law to damage other individuals and the public good. However, since the twin-concepts affirming that ‘nobody is above the law’ and that ‘the law is equal for all’ are the antibodies that Western democracies use against arbitrariness, the cases where ex post rights are made ineffective must be clearly indicated. See, e.g., Gianluigi Palombella, ‘The Abuse of Rights and The Rule of Law’, in Andras Sajo (ed), The Dark Side of Fundamental Rights (Eleven International 2006).

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2. THE ABUSE OF RIGHTS IN EU COMPETITION LAW CASES EU competition law has come across abuse of rights scenarios in dealing with the conduct of dominant firms,4 and in particular, in contesting their defences. In this regard, the AstraZeneca case is emblematic5 and the description of its facts will be detailed briefly. During the 1990s, the EU pharmaceutical legislation (Directive 65/65/EEC)6 was aimed at protecting public health without hindering market development. Thus, on the one hand, it required that the commercialization of any drug follow the issuance of a market authorization which, in turn, was conditioned to the submission of pharmacological tests and clinical trials called to ensure the quality, safety and efficacy of the drug that was going to be marketed. On the other hand, the same legislation granted generic drugs companies an abridged procedure to market generic versions of branded drugs. Generic drugs companies had the right to market their products without providing the results of their own pharmacological tests and clinical trials, if the generic drug was essentially similar to the original product of reference, if six to 10 years had passed since the branded company submitted the above-mentioned scientific data, and if the original branded product was still marketed when the generic application was filed.7 In such context, at the end of the 1990s, the pharmaceutical company AstraZeneca, which dominated the market for omeprazole with its branded drug Losec, whose patent was about to expire, substituted Losec capsules with Losec tablets (the so-called Losec MUPS) and withdrew 4

Mariateresa Maggiolino, Intellectual Property and Antitrust, A Comparative Economic Analysis of US and EU Law (Edward Elgar Publishing 2011). 5 See AstraZeneca (Case COMP/A.37.507/F3) Commission Decision C(2005) 1757 final (hereinafter ‘AstraZeneca decision’). In 2010, the General Court upheld the Commission Decision, see Judgment of 1 July 2010, AstraZeneca v Commission, T-321/05, ECLI:EU:T:2010:266 (hereinafter ‘AstraZeneca judgment’). Then, the CJEU upheld the General Court Decision, see Judgment of 6 December 2012, AstraZeneca v Commission, C-457/10 P, ECLI:EU:C:2012:770 (hereinafter ‘AstraZeneca Court judgment’). 6 Council Directive 65/65/EEC of 26 January 1965 on the approximation of provisions laid down by law, regulation or administrative action relating to medicinal products [1965] OJ L22/369 (hereinafter ‘Directive 65/65/EEC’). 7 Directive 65/65/EEC guaranteed the so-called ‘data exclusivity’ for six or 10 years from the moment the manufacturer of the original drug obtains its first marketing authorization in order to guarantee it the profitability of its tests. In the AstraZeneca case, this period was already expired. See AstraZeneca judgment, para 621 and AstraZeneca Court judgment, para 151.

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the market authorizations for marketing Losec capsules in some Member States (Denmark, Norway and Sweden). Consequently the Losec capsules were prevented from being authorized to be marketed when the generic application was filed; AstraZeneca barred the generics from enjoying the above-mentioned abridged procedure and de facto unduly prolonged its exclusive right to make use of the results of its tests and trials in those Member States.8 The European Commission found that the withdrawal of commercial authorizations was an abuse of dominance, by applying the usual test inherent in Article 102 of the Treaty on the Functioning of the European Union: the withdrawal not only strengthened the dominant position of AstraZeneca by prolonging it,9 but also harmed competition by preventing the price of Losec from reducing. However, this is not pertinent to this chapter. Material for our discussion instead is that AstraZeneca tried to present the case as a conflict of norms: it argued that it had the right to withdraw the commercial authorizations covering Losec capsules and, hence, that the European Commission could not use competition law to characterize as unlawful a practice that another piece of EU legislation allowed. Nevertheless, the European Commission first answered that the existence of a piece of EU law allowing a specific conduct could not exempt that conduct from the application of EU competition law, if and when that conduct resulted from the misuse of a right and produced anticompetitive effects.10 Second, the European Commission discussed under what conditions the misuse of rights could occur. By interpreting 8

Mariateresa Maggiolino and Marial Lillà Montagnani, ‘Astrazeneca’s Abuse of IPR-Related Procedures: A Hypothesis of Anti-Trust Offence, Abuse of Rights, and IPR Misuse’ (2011) 34 World Competition 245. 9 Even before the Astrazeneca case, the CJEU held that strengthening of position of an undertaking may be an abuse and prohibited under Article 102 TFEU (ex 82 TEC), regardless of the means and procedure by which it is achieved, and even irrespective of any fault. See Judgment of 18 April 1975, Europemballage and Continental Can v Commission, C-6/72, ECLI:EU:C:1975: 50, paras 27, 29 and Judgment of 12 December 2000, Aéroports de Paris v Commission, T-128/98, ECLI:EU:T:2000:290, para 170. 10 See the AstraZeneca decision (n 5), para 328, which reads as follows: ‘[t]he use of public procedures and regulations, including administrative and judicial processes, may also, in specific circumstances, constitute an abuse, as the concept of abuse is not limited to behavior in the market only, and misuse of public procedures and regulations may result in serious anticompetitive effects on the market’.

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some documentary evidence11 and by focusing upon the very same selective nature of the withdrawal planned by AstraZeneca,12 the Commission specified that the AstraZeneca conduct did not represent a standard industrial practice.13 Neither did it find any autonomous business justification: it did not find any explanation other than that of hindering competition.14 The withdrawal, indeed, was not motivated by intentions to save money or to protect consumers from a drug that had turned out to be unsafe and/or ineffective.15 It was only an additional hurdle exploited by AstraZeneca to raise competitors’ costs.16 Likewise, the General Court observed that, although AstraZeneca was entitled to request the withdrawal of commercial authorization for Losec capsules, such conduct was not based in any way on a credible business justification or on the legitimate protection of an investment – two explanations that came within the scope of competition on the merits.17 For example, the commercial authorizations should have been withdrawn to protect public health,18 or – as AstraZeneca maintained, albeit belatedly – to save undue costs.19 Instead, according to the General Court, it 11

ibid, paras 794–799. ibid, paras 800–806. 13 ibid, paras 791 and 829, where the Commission clarifies that the industry used to withdraw market authorizations for reasons connected to public health. 14 ibid, para 790. 15 The objective of the generic procedure is to enable generic manufacturers to demonstrate that their products fully comply with all requirements of safety, quality and efficacy without the need for the generic manufacturers to take their products through preclinical and clinical tests and submit the relevant data to the competent national authority. By its requests for the deregistration AstraZeneca in fact seeks to undermine the very raison d’être of the generic procedure and to extend de facto the protection afforded by the data exclusivity well beyond the period provided for in the applicable rules – AstraZeneca decision (n 5), para 841. 16 ibid, para 842. 17 AstraZeneca judgment (n 5), para 672. 18 ibid, para 670. 19 ibid, para 685. The applicants claimed that AstraZeneca no longer had a commercial interest in selling Losec capsules but only in maintaining the commercial authorization of the said capsules where such maintenance required and imposed continuous ‘updating’ and pharmacological vigilance obligations. Yet, the General Court specified that AstraZeneca should have proved – in due time – that, if it had not deregistered the marketing authorizations in Denmark, Norway and Sweden, it would have suffered an additional burden that, differently, the still valid marketing authorizations in Germany, Austria, Spain, France, Italy and the Netherlands did not entail – AstraZeneca judgment (n 5), para 689. 12

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was apparent that the selective deregistration of the market authorizations in Denmark, Norway and Sweden was only aimed at preventing the penetration of generics into the relevant market.20 In this regard, in developing its analysis, the General Court clearly separated the above list of possible objective justifications that could have explained AstraZeneca’s conduct, from the motivating intentions, that is to say, from the existence of intent to cause competitive harm.21 The Court of Justice of the European Union (CJEU) affirmed the rulings of the General Court, though (unfortunately) it framed the AstraZeneca case as if it were a case of conflict of norms, by stating that ‘the illegality of abusive conduct under Article 82 EC is unrelated to its compliance or non-compliance with other legal rules and, in the majority of cases, abuses of dominant positions consist of behaviour which is otherwise lawful under branches of law other than competition law’.22 In fact, the CJEU could have been clearer in affirming that the gist of the AstraZeneca case was not that antitrust law prevails over other pieces of legislation whenever anticompetitive effects occur. This is simply false. Had AstraZeneca withdrawn the market authorizations for Losec capsules to either protect public health or for a genuine industrial interest, the withdrawal would have been a legitimate exercise of one of its rights and, hence, would not have represented an abuse of dominance, regardless of any anticompetitive effect. The same approach emerges from another EU competition law case, the Italian Pfizer case concerning a pharmaceutical company requesting a divisional patent.23 A divisional patent, as set forth by the European Patent Convention, stems from a previous main patent when the use of the original invention can be patented separately from the main invention. Divisional patents, whose submission dates and durations conform to those of the main patents, grant patent holders the right to request supplementary protection certificates (SPCs) that will have the same duration as the SPCs obtained for the main patents. In the 2000s, Pfizer was the dominant producer of Xalatan, a drug for the treatment of glaucoma. The main patent connected to Xalatan, EP 417, was due to expire on 17 July 2011 in almost all the European States adhering to the 20

ibid, para 676. ibid, para 813. 22 AstraZeneca Court judgment (n 5), para 118. 23 Agcm Decision no. 23194 of 11 January 2012, Ratiopharm/Pfizer; Tar Lazio, Decision no. 7467 of 3 September 2012 (hereinafter ‘Tar judgment’); and Consiglio di Stato, Decision no. 693 of 12 February 2014 (hereinafter ‘CdS judgment’). 21

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European Patent Convention. Because of the failure to request the relative SPCs, the Italian and the Spanish EP 417 patents would have expired in September 2009. Thus, in January 2009, Pfizer, after obtaining the divisional patent, EP 418, stemming from its EP 417, requested and obtained the SPCs for Italy and Spain so as to eliminate the misalignment as to the European duration of the patent protection of Xalatan. In 2012, the Italian Competition Authority (ICA) applied Article 102 against Pfizer holding that, to delay generics’ entry, Pfizer spuriously extended the duration of the Italian and Spanish patents for Xalatan by first applying for the divisional patent EP 418 and then requesting the Italian and Spanish SPCs. In particular, the ICA maintained that, as the perfect overlap of their respective scopes showed, the application for the divisional patent EP 418 was not meant to protect any therapeutic use other than the uses already covered by the main patent EP 417.24 Rather, the divisional patent application was a mere tool, a stratagem, to obtain the renewed possibility to ask for the Italian and Spanish SPCs that would have covered not only the divisional patent but also the main one, EP417, with the ultimate result of aligning the Italian and Spanish protection systems to those of the other European countries. In other words, according to the ICA, the request for the divisional patent EP 418 had no justification other than that of harming competition, as many empirical pieces of evidence showed, such as documentary evidence,25 the timing of the divisional application, the fact that EP 418 was validated only in Italy and Spain, the fact that the related SPCs were requested only for Italy and Spain, and the fact that the corresponding divisional drugs were never marketed in those two countries.26 In fact, when it was proven that there had been a manipulation of the procedure, the ICA applied Article 102 because Pfizer’s actions caused the exclusion of competitors in the relevant market and the subsequent harm to consumer welfare.27 24

Tar judgment (n 23), para 193. ibid, paras 219–221. 26 ibid, para 203. 27 The Tar Lazio – the Italian administrative tribunal in charge of the appeals against the decisions of the Italian Competition Authority – reversed the ruling observing that, as a matter of fact, the ICA did not provide enough evidence to conclude that Pfizer misused the application for the divisional patent EP 418. Nevertheless, putting this evidentiary issue to one side, the Tar Lazio clarified that to enforce EU competition law against firms holding the right to use some governmental procedures, one must show first and foremost that the procedures have been somehow manipulated and, thus, that the related rights have been 25

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The Consiglio di Stato, the ultimate Italian administrative court, on reviewing the rulings of the ICA, affirmed the latter’s decision, maintaining that the abuse of rights occurs when the right holder makes an opportunistic use of his/her right, that is to say, when he/she uses the right in a way which is not consistent with the goal for the pursuit of which the legislator assigned the right in question.28 In particular, elaborating on the elements that show the Pfizer request for the divisional patent to be abusive, the Consiglio di Stato observed that, not only did the never commercialized divisional patent protect the same therapeutic use already covered by the main patent, but the request for that divisional patent was also made in a particular scenario in which the patent holder had the opportunity to extend the duration of the main patent via the SPC following the divisional patent.29 In summary, according to the Consiglio di Stato, the Pfizer request for the divisional patent EP 418 did not aim at achieving the goal for the pursuit of which the patent law rule about divisional patents exists: it did not aim to protect a new invention, because the invention in this case was already protected by the main patent EP 417. That request aimed at pursuing only another and different goal: to extend the duration of EP 417 and, thus, exploit the inherent exclusionary effect of patents, consequently harming competition in the already monopolized Xatalan market. Again, there was no inquiry over Pfizer’s motivations and intentions, but a straightforward examination of the facts and circumstances surrounding the allegedly abusive conduct.

misused. In other words, the Tar Lazio made a point in arguing that, in the absence of such a quid pluris – that is to say, a lack of additional evidence about the misuse of the procedures under scrutiny – the application of EU law according to its specific liability conditions would amount to nothing different from the mere dis-application of the rule granting the right to use the procedures in question. See Tar judgment (n 23), para 4.1. 28 CdS judgment (n 23), para C. Indeed, in a different decision, which was not related to antitrust law, the Consiglio di Stato had already specified that a right is abused when: (i) the law does not dictate how the right holder must actually carry out that right; (ii) the practical exercise of that right, although formally consistent with the law, violates another principle of law; and (iii) the benefit that the right holder gains from that concrete exercise of the right is unduly higher than the sacrifice it casts upon the others. In other words, the Consiglio di Stato maintained that the abuse of rights offence, far from implying an apparent violation of the right in question, requires that it be used to achieve a goal different from the one for the pursuit of which the legislator assigned the right. See Consiglio di Stato, Decision no. 2857 of 17 May 2012. 29 CdS judgment (n 23).

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Indeed, other EU cases could be mentioned.30 Yet, three fundamental points group all of them with the above AstraZeneza and Pfizer cases. First, according to antitrust enforcers, a right holder abuses of his/her right when he/she uses it only to pursue the anticompetitive effects that the application of the right happens to produce in the given scenario under scrutiny. Second, the misused right in itself does not consist in an antitrust violation. The misused right falls within the scope of the antitrust prohibitions if and when it also meets the liability conditions fixed by the antitrust rule. Finally, two tricky issues hide in the folds of the EU antitrust approach to the abuse of rights. Not only do antitrust enforcers run the risk of treating the cases of abuse of rights as if they were cases of conflicts of laws;31 they also risk treating the analysis of the reasons explaining and justifying a business behavior as if it were equal to the examination of the intent motivating the conduct of the involved firms.32 The following paragraphs discuss these two slippery slopes.

30 See, in particular, the Italian case Novartis/LaRoche regarding an Article 101 case – Agcm Decision n. 24823, I-760, 27 February 2014, Novartis/ LaRoche. The ICA analyzed a market division agreement between two pharmaceutical companies, Novartis and La Roche, both operating in the market for the treatment of glaucoma. Whereas Novartis produced Lucentis, a very expensive drug, whose primary and specific function was the treatment of glaucoma, La Roche offered Avastin, a relatively cheap drug, that, though meant to cure intestine cancers, was capable of improving the health conditions of glaucoma patients. Yet, according to the pharmaceutical legislation in force, Italian physicians were authorized to use Avastin for the treatment of glaucoma as long as this use of the drug was included in a specific list – the list of off-labels uses. Therefore, in order to prevent Avastin competing with Lucentis, Novartis and La Roche agreed that La Roche would exercise the right to delist Avastin from the list of the off-label uses. Clearly, absent such an agreement, La Roche would never have used the delisting procedure. Rather, it would have wanted to increase the off-label sales of Avastin. Again, the defendants argued that the delisting procedure was used with the purpose of protecting public health, because of scientific studies demonstrating the dangerousness of Avastin. This argument was clearly meant to show that the procedure, pursuing the goal for which it had been established, had not been abused. Yet, as a matter of evidence, the ICA did not find the argument grounded or well-supported. 31 Consiglio di Stato, judgment no. 01673 of 8 April 2014 (quoting the CJEU idea that often the practices that antitrust law forbids are instead lawful according to other rules). 32 ibid (observing that the presence of an ‘intent to exclude’ is (still) necessary in order to integrate an anti-competitive offense).

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3. CONFLICTS OF LAWS AND ABUSES OF RIGHTS IN ANTITRUST LAW: SUGGESTIONS FROM THE US EXPERIENCE Since legal orders stem from a complex and dense interaction of rights and obligations, it may happen that an individual who exercises a legitimate right aimed at guaranteeing one or more interests may harm another value protected by a different piece of law. Within the antitrust realm, for example, a legal rule may recognize a firm’s right to undertake a specific practice that competition law would otherwise forbid according to its own criteria and liability conditions. As a way of illustration, assume that A, a firm dominating the market, M, has the genuine right to use a governmental procedure, P, which produces a twofold result: on the one hand, it accomplishes a public interest, such as innovation development or public health protection and, on the other hand, it allows A to become the only firm having access to a certain resource, R, or offering a specific good, G. Furthermore, suppose that, because of these prohibitions to use R or supply G, A’s rivals are excluded from M and a consumer welfare reduction occurs. Given that Article 102 of the TFEU (as well as section 2 of the US Sherman Act) bans dominant firms from strengthening their positions via practices that harm consumer welfare, antitrust law would prevent A from applying P. Yet, the legislature has assigned A the genuine right to use the procedure P to pursue a common good. In such a situation, a conflict of norms occurs and begs the question which of the two rules should prevail: does A retain the genuine right to use P, even when A holds a dominant position and P is an exclusionary procedure that reduces consumer welfare? In each domestic system, many criteria have been elaborated to solve these kinds of conflict and restore consistency33 – criteria ranging from the traditional lex superior, lex posterior and lex specialis,34 to other sophisticated policy argumentations that, applied to two different norms performing different functions, try to establish which piece of law is in the best position to manage the

33

See Ken Kress, ‘Coherence’ in Dennis Patterson (ed.), A Companion to Philosophy of Law and Legal Theory (Oxford University Press 1996). 34 According to the first criterion, the hierarchically superior rule trumps the hierarchically inferior rule. Instead, where no such hierarchy of sources exists and rules are enacted in the same field, the other two criteria can be applied: either the rule with the more specific scope or the later rule.

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interests at stake in the specific case under scrutiny. For example,35 one may argue that antitrust law must prevail over conflicting sector regulations only when: (i) the practice at stake does not lie at the very heart of the business carried out in the regulated industry and (ii) there is no regulator that (iii) has the authority to manage and (iv) is actually used to taking into account the anticompetitive concerns characterizing the industry.36 When no sector regulation exists but still there exist two pieces of law pursuing somehow different goals, like public health and competition, or innovation and competition, one may argue that it is not up to antitrust authorities and judges to establish that the defense of competition is preordained to the protection of public health or innovation. The separation of powers principle, indeed, prevents antitrust enforcers from second guessing the choices of those who wrote the specific rules, like pharmaceutical and patent laws, that either neglect the protection of competition completely or consider it less relevant than the other interests justifying the existence of the very same law.37 In the opposite case, one may argue that the pieces of law endorsing a general, ex ante approach, such as IP laws and pharmaceutical regulations granting rights to firms irrespective of their market positions, should yield to antitrust law just because antitrust law is meant to endorse an ex post, case-by-case analysis of the competitive pros and cons that characterize any given situation.38 Nevertheless, when A uses the procedure P spuriously the discussion of these difficult policy arguments becomes superfluous. By way of 35 See, for the same example, Ralph Michaels and Joost Pauwelyn, ‘Conflict of Norms or Conflict of Laws?: Different Techniques in the Fragmentation of International Law’ in Tomer Broude and Yuval Shany (eds), Multi-Sourced Equivalent Norms in International Law (Hart Publishing 2010). 36 Typically, this is the main criterion according to which the US courts solve the potential conflict between federal antitrust law and federal sector regulations. See Credit Suisse Securities LLC v Billing, 551 U.S. 264 (2007) and Verizon Communications, Inc v Law Offices of Curtis v Trinko, LLP, 540 U.S. 398 (2008). 37 For example, this set of arguments can be used to argue that antitrust authorities should not second guess the choices of the IP legislators. See In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322 (Fed. Cir. 2000). 38 For example, once it is agreed that both antitrust law and IP laws aim at protecting innovation and competition, the distinction between the ex ante/ generalist approach of IP laws and the ex post/specific approach of antitrust law supports the imposition of duties to license to dominant firms holding IPRs. See Microsoft (Case COMP/C-3/37.792), Commission Decision C(2004) 900.

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illustration, assume that P is legitimate but the way in which A employs it is not. In such a case, the discussion of the above policy arguments to solve the conflict between antitrust provisions and other legal rules is unnecessary, because the same conflict does not exist. Since the procedure is misused, there is plenty of room to argue that nobody is entitled to take advantage of it and that the government did not want anybody to benefit from the array of effects that the procedure entails. The spurious use of P makes A lose its right to use P and, thus, eliminates the conflict between the right to use P and the antitrust provision focusing on P. At that point, therefore, the use of P is like any other practice that must be forbidden when – as happens in our initial setting about monopolistic practices – it strengthens market power and reduces consumer welfare. In summary, when a firm abuses one of its rights, antitrust enforcers do not need to establish whether antitrust law must prevail over the assigned right. They can take a step back, as if the case of the abuse of rights displaced the case of the conflicts of law. Once the focus shifts from the conflict between laws to the abuse of a right, it becomes crucial to detect the conditions under which a firm uses one of its rights spuriously. The fraudulent use of the procedure P clearly squares the case of the spurious use of P. Suppose, for example, that A must meet some standards or conditions to gain the right to use P. If A cheats about its compliance with those standards or its meeting of those conditions, then A is a usurper who does not deserve to use P and to benefit from whatever effects P produces. In such a case, therefore, antitrust law applies over the law granting P, because, once the fraudulent use of P pierces the veil of the exercised right, what remains is nothing more than a chargeable practice that will be forbidden if it strengthens market power and produces anticompetitive effects.39 Another possibility – that we consider as the real abuse of rights case addressed in the above Astrazeneca and Pfizer cases – arises when the spurious use of P consists in the fact that, absent the anticompetitive effects of the procedure, the dominant firm would not have exercised it. In other words, A is said to spuriously use the procedure P when, since the firm does not pursue the social good for which the procedure stands, the occurrence of the procedure’s anticompetitive effects result as the

39

This was, indeed, the case of the first abuse contested in AstraZeneca

(n 5).

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only reason why the dominant firm decides to use P.40 In such a situation, therefore, the opportunistic and perverse use of the procedure strips the right to use it away from the dominant firm, so that (again) what remains is nothing more than a practice that deserves to be forbidden if it strengthens market power and produces anticompetitive effects. Some formulas describing the rational choice of dominant firms help explain the ‘only-reason-why’ test, that is, the idea that a firm abuses its right when it uses it only to pursue its anticompetitive purposes.

4. THE ANTITRUST ABUSE OF RIGHTS IS A MATTER OF RATIONAL CHOICE AND NOT OF INTENT Assume that P is meant to produce a great array of effects, i.e. precompetitive, neutral and anticompetitive. Therefore, the following statements are true at the same time: P ⇒ procompetitive or neutral effects, say E+(P), and P ⟹ exclusionary and anticompetitive effects, say E–(P) According to antitrust law, firms are rational agents that undertake only those behaviors entailing more benefits than costs. Thus, call CA(P) the costs and expenses that P casts upon A and BA(P) the benefits that A gains from the application of P; the dominant firm decides to use the procedure P when: BA(P) ≥ CA(P)

(11.1)

Now, consider that the benefits that the dominant firm gains from P depend on both the procompetitive and anticompetitive effects that P itself causes on market functioning. Namely, suppose that: BA(P) = ℱ[E+(P)] + ℱ[E–(P)]

(11.2)

40

Consider, indeed, what the European Commission said about the use of patent clusters and divisional applications: ‘both patent clusters and divisionals seemingly serve to prevent or delay generic entry. While this, during the period of exclusivity, is generally in line with the underlying objectives of patent systems, it may in certain cases only be aimed at excluding competition and not at safeguarding a viable commercial development of own innovation covered by the clusters’: Commission, ‘Reports on the Monitoring of Patent Settlements’ (8 July 2009), para 523.

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Given this assumption, three scenarios are possible: (α) the benefits ℱ[E+(P)] that A receives from the procompetitive effects caused by P are large enough to overcome the costs, CA(P), that P casts upon A. In this case, A would choose to employ P even in the absence of any benefit, ℱ[E–(P)], deriving from the anticompetitive effects that P may bring about. In other words, in this scenario it would be true that: {

ℱ[E+(P)] ≥ CA(P)

⇒ BA(P) ≥ CA(P)

ℱ[E–(P)] = 0

(11.3)

(β) the benefits ℱ[E-(P)] and ℱ[E+(P)] that A receives from the procompetitive and anticompetitive effects caused by P are both necessary to overcome the costs, CA(P), that P casts upon A. In this case A would choose to employ P because of the summary of all the effects that it produces. In other words, it would be true that: ℱ[E+(P)] ≤ CA(P) { ℱ[E–(P)] ≤ CA(P)

⇒ BA(P) ≥ CA(P) (11.4)

ℱ[E (P)] + ℱ[E (P)] ≥ CA(P) +

–

(γ) A does not gain any benefit because of the procompetitive consequences of P but gets ℱ[E–(P)] that are large enough to overcome CA(P). In other words, the benefits resulting from the anticompetitive impact of P are the only effects making the procedure P worthwhile for the dominant firm. Thus, it is true that: {

ℱ[E–(P)] ≥ CA(P) ℱ[E+(P)] = 0

⇒ BA(P) ≥ CA(P)

(11.5)

In this last case, therefore, the interest of the dominant firm is not aligned to that of the market (or the social planner), because the dominant firm undertakes a behavior that is profitable for itself and not for the whole market. Whereas in (α) and (β) the procompetitive and neutral effects of the procedure redeem its anticompetitive impact and, thus, justify its use by whomever (dominant firms included), in (γ) there is no reason to allow any firm to use the procedure and dominant firms to use the procedure to harm market functioning when no social good arises from the use of the procedure. In the (γ) case, therefore, the social reasons justifying the existence of A’s right to employ P disappear and, as a consequence, A’s right should succumb to antitrust law. No wonder then

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that the (γ) case is just the situation when the dominant firm uses P with no other justifications than the pursuit of the anticompetitive effects. It must be acknowledged that this focus on the rational justifications of the business conduct is what makes the above analysis a matter of logic, facts and circumstances and not a matter of intentions and psychological states of mind. In other words, the real object of the will of the firm, that is to say, whether or not it wanted to misuse the procedure, is not (and consistently with the traditional antitrust approach should not be) an issue. The misuse has to occur irrespective of the specific result that the firm wanted to produce via the exercise of its right. A firm should be held liable of abusing one of its rights even if it did not want to manipulate it, or even in the case where it was not aware of the fact that the procedure at stake would have produced no consequences other than anticompetitive effects. Rather, what must be proved to find out an abuse is that any rational agent in the place of the firm under scrutiny, meaning in that market on that time, would have identified the competitive harm as the sole consequence resulting from the use of the procedure in question. That said, the time is ripe to shift the discussion on a more general level, looking at how Union law has shaped the test to detect cases of abuse of rights.

5. THE CASE OF THE ABUSE OF RIGHTS IN THE UNION LAW Over the years, EU courts struggled to find a proper definition of abuse of rights. Everything began in the 1960s with some IP cases.41 There, EU courts had established not only that national IP rights were misused when used beyond their scope, but also that the legitimate exercise of such rights could be forbidden if and when it harmed some further protected interests, such as the process for the creation of the Single Market.42 Subsequently, EU courts dealt with a second stream of cases regarding the interaction between national and European provisions, as well as the 41

Anne Flanagan, Federico Ghezzi and Maria Lillà Montagnani, ‘The search for EU boundaries: IPR exercise and enforcement as “Misuse”’ in Anne Flanagan and Maria Lillà Montagnani (eds), Intellectual Property Law: Economic and Social Justice Perspectives (Edward Elgar Publishing 2010). 42 Judgment of 13 July 1966, Consten and Grundig v Commission, C-56/64 and C-58/64, ECLI:EU:C:1966:41; Judgment of 8 June 1971, Deutsche Grammophon v Metro, C-78/70, ECLI:EU:C:1971:59; Judgment of 31 October 1974, Centrafarm v Sterling Drug, C-15/74, ECLI:EU:C:1974:114.

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relationships between the national rules of the different Member States. In the former cases, individuals attempted to circumvent the application of national rules by invoking the enforcement of European fundamental freedoms. Yet, in the TV10 decision on broadcasting services,43 the CJEU ruled that individuals cannot benefit from the advantages granted by European law when they adopt ad hoc conducts that, albeit compliant with the community rules, have the sole purpose of avoiding the enforcement of less favourable national laws.44 In the latter cases, instead, individuals did not exactly attempt to avoid the application of national provisions, but rather use the principles informing European law to unduly benefit from the national rules of other Member States. However, in the Lair v Universitat Hannover case,45 the CJEU conceded that a Member State is entitled to forbid any opportunistic use of the principle of freedom of movement, when the individual applying to EU law actually seeks an undue advantage and is objectively motivated by 43

Judgment of 5 October 1994, TV10 SA v Commissariaat voor de Media, C-23/93, ECLI:EU:C:1994:362, para 133, where the CJEU stated that ‘the Treaty provisions on freedom to provide services are to be interpreted as not precluding a Member State from treating as a domestic broadcaster a broadcasting body constituted under the law of another Member State and established in that State but whose activities are wholly or principally directed towards the territory of the first Member State, if that broadcasting body was established there in order to enable it to avoid the rules which would be applicable to it if it were established within the first State’. 44 See also Karsten Engsig Sørensen, ‘Abuse of rights in Community law: A principle of substance or merely rhetoric?’ (2006) 43(2) CMLR 423, 423. If Van Binsbergen is characterized as an abuse of rights case, then it could be placed in this first stream of cases. See judgment of 3 December 1974, Van Binsbergen v Bestuur van de Bedrijfsvereniging, C-33/74, ECLI:EU:C:1974:131. 45 Judgment of 21 June 1988, Lair v Universität Hannover, C-39/86, ECLI:EU:C:1988:322; Judgment of 19 October 2004, Zhu and Chen, C-200/02, ECLI:EU:C:2004:639. Here, a French student relied on the freedom of movement principle to benefit from the Hannover University grants provided to nationals as well as to foreign workers who had been employed for at least five years within the country. In the case brought to the CJEU, in its preliminary ruling, it was stated that a national of another Member State who undertakes university studies in the host State leading to a professional qualification, after having engaged in occupational activity in that State, must be regarded as having retained his/her status as a worker and is entitled as such to the benefit of Article 7(2) of Regulation (EC) No 1612/68, provided there is a link between the previous occupational activity and the studies in question. At the same time the host Member State cannot make the right to social advantages provided for in Article 7(2) of Regulation 1612/68 conditional upon a minimum period of prior occupational activity within the territory of that State.

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such intent.46 In summary, in the 1990s, it was considered an abuse of rights if the individual spuriously relied on this right to either circumvent a national law47 or gain an undue advantage from the national law of another Member State.48 A few years later, it was in the Centros49 and Diamantis50 decisions that the CJEU clearly placed the abuses of EU provisions at the core of the abuse of rights doctrine. It distinguished, indeed, the above scenarios dealing with national laws from the cases where individuals invoke EU norms to pursue improper advantages conflicting with, or manifestly contrary to, the objectives for the achievement of which those EU provisions were enacted.51 Then, in the subsequent Emsland·Stärke ruling52 the CJEU partially changed this early definition of the abuse of rights, by claiming that such abuse occurs when the individual seeks to obtain an advantage from the Community rules by artificially creating the conditions laid down for obtaining the advantage,53 when in fact the purpose of those Community rules has not been achieved.54

46

Sørensen (n 44), 446. TV10 (n 43). 48 Lair v Universität Hannover (n 45). 49 Judgment of 9 March 1999, Centros, C-212/97, ECLI:EU:C:1999:126. 50 Judgment of 23 March 2000, Diamantis, C-373/97, ECLI:EU:C:2000:150. 51 As Advocate General MP Maduro explained in paragraph 63 of his Opinion in Halifax and Others v Commissioners for Custom & Excise, C-255/02, ECLI:EU:C:2005:200. 52 Judgment of 14 December 2000, Emsland·Stärke, C-110/99, ECLI:EU: C:2000:695. 53 In the recent Cadbury Schweppes case in particular, the CJEU distinguished between the case where the abused provision is simply circumvented and the case where the abuser undertakes wholly artificial arrangements to conclude that only in the latter circumstance there is room for an abuse to occur. See Judgment of 12 September 2006, Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, C-196/04, ECLI: EU:C:2006:544. For the same approach, see Judgment of 13 March 2007, Test Claimants in the Thin Cap Group Litigation v Commissioners of Inland Revenue, C-524/04, ECLI:EU:C:2007:161, para 74; Judgment of 17 January 2008, Lammers & Van Cleeff NV v Belgische Staat, C-105/07, ECLI:EU:C:2008:24, para 26; Judgment of 28 October 2010, Établissements Rimbaud SA v Directeur général des impôts and Directeur des services fiscaux d’Aix-en-Provence, C-72/09, ECLI:EU:C:2010:645, para 34. 54 Emsland·Stärke (n 52), paras 52–53. 47

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Just as the case law following Emsland·Stärke shows us,55 these two conditions are nowadays referred to as the subjective and objective elements of the EU abuse of rights principle, which in summary state that abuse of rights occurs when the individual does not want to (subjective element) and does not (objective element) pursue the objectives of the EU provisions, but literally follows these provisions merely to opportunistically gain the advantages thereof. This definition of the principle of abuse of rights calls for some observations.

6. THE PROBLEM WITH THE SUBJECTIVE ELEMENT OF THE EMSLAND·STÄRKE DEFINITION Emsland·Stärke’s focus on the individual’s intention to obtain an advantage from the allegedly abused EU rule paves the way for an investigation that is more uncertain than the kind of scrutiny that could have been adopted if the CJEU had embraced the recommendations made by Advocate General Maduro in his 2006 Halifax opinion.56 To determine a shift towards an objective interpretation of the abuse of rights, Advocate Maduro wrote that an abuse exists when ‘the right invoked derives from activities for which there is no other explanation than the creation of the right claimed’,57 or – in other words – ‘whenever the activity in question cannot possibly have any other purpose or justification than to trigger the application of Community law provisions in a manner contrary to their purpose’.58 By focusing on the rational justifications for the conduct in question and by introducing the ‘no-other-than test’ as to the possible motivations of the actual practice, Maduro’s analysis becomes a matter of logic, facts and circumstances and not a matter of will and psychological states of mind. In fact, the CJEU actually endorsed this approach in its Halifax preliminary ruling where, distancing itself from Emsland·Stärke,

55

See, e.g., Judgment of 16 October 2012, Hungary v Slovakia, C-364/10, ECLI:EU:C:2012:630, para 58; Judgment of 12 March 2014, O and B, C-456/12, ECLI:EU:C:2014:135, para 58; Judgment of 18 December 2014, McCarthy v Secretary of State for the Home Department, C-202/13, ECLI:EU:C:2014:2450, para 54. 56 Opinion of Advocate General Maduro (n 51). 57 ibid, para 91 (emphasis added). 58 ibid, para 70 (emphasis added).

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it talked about the purpose and not about the intention of the individual abusing the EU provision.59 Nevertheless, as previously recalled, after many rulings conforming to the Emsland·Stärke definition of abuse of rights, Maduro’s request for objectivity lost its significance, even for the same advocate.60 Hence, today, not only does the subjective element still play a crucial role, but the rejection of the ‘no-other-than test’ leaves it unclear as to what degree the intention behind the allegedly abused right has to deviate from the underlying purpose of the EU provision in order to justify the occurrence of the abuse of rights. Indeed, such a vague definition of the subjective element has created the opportunity for its unscrupulous and fraudulent use. This, at least, is what emerges from the reading of the abuse of rights case law regarding community trademarks (CTMs). Among the many others,61 the Donaldson Filtration Deutschland v Ultra Air saga62 deserves a mention because, in this case, the General Court first, and the CJEU later, were forced to decide on the abuse of a right granted on behalf of public interest to the individual who exercises such right also for the pursuit of his/her own personal interest. This saga started in 2008 when Ultra Air claimed the invalidity of the CTM of one of its competitors in order to use it for its own business. The OHIM claimed that Ultra Air was abusing its right, because its invalidity action was not 59

Judgment of 21 February 2006, Halifax plc and Others, C-255/02, ECLI:EU:C:2006:121, paras 74–75. 60 For example, in Cavallera, even Advocate General Maduro recognized the importance of the subjective element – see Judgment of 29 January 2009, Consiglio Nazionale degli Ingegneri v Ministero della Giustizia and Marco Cavallera, C-311/06, ECLI:EU:C:2009:37 and the Opinion of AG Maduro, ECLI:EU:C:2008:130, para 44. For the same approach, see the Opinion of Advocate General Trstenjak in Internetportal und Marketing GmbH v Richard Schlicht, C-569/08, ECLI:EU:C:2010:311 and the Opinion of Advocate General Trstenjak in Mag. Lic. Robert Koller, C-118/09, ECLI:EU:C:2010:306. 61 Many decisions remain at the level of OHIM scrutiny, while few others reach the EU courts. See, e.g., OHIM, Ferrero SpA against Harald Wohlfahrt, Decision of 27 May 2009 ruling on opposition No B 668 600; Judgment of 22 September 2011, Budějovický Budvar, národní podnik v AnheuserBusch, C-482/ 09, ECLI:EU:C:2011:605, and the Opinion of Advocate General Trstenjak, ECLI:EU:C:2011:46; Judgment of 5 October 2012, Lancôme parfums et beauté & Cie v OHIM, T-204/10, ECLI:EU:T:2012:523; Order of 24 October 2013, Lancôme parfums et beauté & Cie v OHIM, C-593/12 P, ECLI:EU:C:2013:707; Judgment of 21 July 2005, Eichsfelder Schlachtbetrieb, C-515/03, ECLI:EU: C:2005:491, para 39 and the case law cited therein. 62 Order of 19 June 2014, Donaldson Filtration Deutschland GmbH v Ultra Air GmbH, C-450/13 P, ECLI:EU:C:2014:2016.

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meant for achieving objectives of public interest63 as provided in Article 7 of the CTM Regulations,64 but for other interests – i.e. personal ones. In 2013, the General Court did not uphold the OHIM decision. It clarified that the personal motivations and earlier conduct of the applicant cannot affect the legitimacy of an invalidity action as long as the personal interest converges towards public interest to avoid having an invalid trademark in the market.65 Yet, if the Emsland·Stärke’s subjective element had been replaced by Maduro’s ‘no-other-than test’, this opportunistic use of the principle of abuse of rights would not have occurred. Indeed, the invalidity action would have admitted another legitimate explanation rather than having no justification other than its opportunistic use. The successful antitrust experience relies on a test similar to Maduro’s ‘no-other-than test’, as section 7 will show.

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The public interest underlying Article 7 of Regulation (EC) No 207/2009 is that of ensuring that descriptive signs relating to one or more characteristics of the goods or services in respect of which registration as a mark is sought, may be freely used by all traders offering such goods or services. 64 Cancellation Division of OHIM, Decision of 29 January 2010. Besides, according to the OHIM Board of Appeal Decision of 18 May 2011, Case R 374/2010-4, Ultra Air resorted to the application for invalidity only after its own application for registration of a figurative CTM comprising the word ‘ultrafilter’ had been rejected. That was deemed as evidence of the objective element of the abuse of rights, whereas evidence of hidden intentions of Ultra Air came from the fact that the manager of the applicant had previously defended the distinctive character acquired by the contested trademark through use, when he was a manager of the CTM’s owner – see, the venire contra factum proprium argument. 65 The same reasoning was confirmed in 2014 by the CJEU’s Court Order, which rejected the appellant’s argument that the General Court had erroneously affirmed that an alleged abuse of rights in an invalidity proceeding would not have been relevant without substantiation and without taking into consideration the EU case law on abuse of rights. What the General Court meant – as the Court order pinpoints – is that OHIM’s task is to assess whether a trademark under examination is descriptive and/or devoid of distinctive character in light of the rules governing the registrability of trademarks, without considering the applicant’s motivations and earlier conduct regarding the declaration. Specifically, the Court affirmed that ‘because OHIM’s assessment must be made exclusively in light of the public interest underlying in Article 7(1)(b) and (c) and Article 56(1)(a) of Regulation No 207/2009, the potential or actual economic interest pursued by the applicant for a declaration of invalidity is not relevant and, consequently, there can be no question of an “abuse of rights” on the part of the applicant for a declaration of invalidity, as the General Court was entitled to rule’: paras 42–45.

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7. THE PROBLEMS WITH THE OBJECTIVE ELEMENT OF THE EMSLAND·STÄRKE DEFINITION The Emsland·Stärke decision broadens the scope of the abuse of rights principle by considering an abuse of rights to take place any time the purpose of the right at stake is not achieved. While in the Centros, Diamantis and Halifax66 decisions, it is an abuse of rights when the individual pursues a goal in conflict with, manifestly contrary to, or capable to frustrate, the real goal of the provision in question, with the Emsland·Stärke ruling and its progeny, is an abuse of rights occurs when the individual simply does not achieve the purpose of the rule in question. This is an important difference. In Centros, Diamantis and Halifax the abuse of rights prohibition translated into practice endorses the idea that an individual should be entitled to enjoy the advantages resulting from his/her rights as long as the spirit of those rights is not distorted. This is because the abuse of rights rule intends to prevent individuals from opportunistically using their rights to harm either third parties or the public good. Conversely, in the Emsland·Stärke decision, this attention towards the ‘distortion’ was replaced with the idea that an individual should be entitled to enjoy the advantages resulting from his/her rights as long as that individual is pursuing the goals for the accomplishment of which those rights were granted. This is because the Emsland·Stärke abuse of rights rule aims to prevent individuals from opportunistically using their rights to achieve goals other than the goal associated with that provision. The consequences following from these diverse definitions of the objective element are twofold. First, the Emsland·Stärke decision broadens the scope of the principle of abuse of rights by enabling the ban of all those conducts not realizing the provisions’ purpose, while the Halifax ruling had the merit to keep such a scope limited only to the practices in conflict with the provision’s goal. Second, the Emsland·Stärke notion of abuse seems to have created the case of individuals who are legitimate right holders inasmuch as they are at the service of the law, while the initial abuse of rights doctrine stemmed from the need to distinguish genuine clashes of rights from those conflicts construed by individuals exercising their rights opportunistically. In fact, the latter looks like a new development of the abuse of rights prohibition. In any case, the Emsland·Stärke definition of the objective element does share a controversial feature with the other CJEU precedents. Like 66

Opinion of Advocate General Maduro (n 51), para 91.

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the latter, it is necessary to know the real goal pursued by the allegedly abused provision, even when such an end is not clearly stated in the law. This makes the job of interpreters and judges difficult and its outcome uncertain – a problem that, again, the competition law experience does not bear.

8. CONCLUSIONS Away from cases of conflicts of laws, many kinds of misuse are possible. Clearly, we can consider both the case of the excess of rights, in which the individual uses his/her right beyond its legal limits and, thus, harms the interests of another or of the public good,67 and the more apparent, though rare, case of the fraudulent use of rights, in which the individual cheats on his/her compliance with the standards required for the legitimate exercise of the said rights and, again, causes private/public prejudice.68 But one more case is possible: the case of someone who exercises his/her right without pursuing the goal for the realization of which that right was recognized. In other words, in a time when legal orders embrace diverse, sometimes conflicting, interests and values, no legal system could accept barren formalism and overreaching individualism. Mere compliance with the letter of the law in the absence of a full endorsement of the spirit of the law is meaningless and counterproductive to the social coexistence. Therefore, there is the need to assert that when one obeys the letter of the law but not the spirit, she is abusing the rights that has been granted by the law, despite other private or public interests and values. In the EU, such a principle has been developed to prohibit individuals from taking advantage of their rights in apparent conformity with the rule granting those rights but without producing the outcome of the pursuit for which the said rights were established. 67 This notion of misuse recalls the US IP misuse doctrine and the French abus de droit notion. Indeed, the former is described as an excessive use of the IPR that expands it beyond the scope of the statutory grant and the latter is defined as the exercise by a person of his/her rights in an excessive manner that causes harm to another. See, e.g., Thomas F Cotter, ‘Misuse’ (2007) 44 Houston Law Review 901; and Jacques Ghestin and Gilles Goubeaux, Traité de droit civil. Introduction générale (LGDJ 1990). 68 Even aside from the application of EU competition law, this could have been the proper characterization of what AstraZeneca did, when it gave false information to unduly obtain the SPCs. See the AstraZeneca decision (n 5).

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Nevertheless, as shown above, this formulation of the abuse of rights prohibition is vague and wide-ranging in detriment to legal certainty and fairness. Indeed, its current subjective element, very much focused on the individual’s will and intention, leaves it still unclear as to what degree the motive behind the allegedly abused right has to deviate from the underlying purpose of the EU provision in order to justify the occurrence of the abuse of rights. Similarly, its current objective element introduces the idea that an individual should be entitled to enjoy the advantages resulting from her rights as long as that individual is pursuing the goals for the accomplishment of which those rights were granted. This broadens the scope of the principle of the abuse of rights beyond the case in which an individual pursues a goal in conflict with, manifestly contrary to, or capable to frustrate, the real aim of the provision in question. In addition, the antitrust experience, which distinguishes itself for its consistency and inherent rationality, confirms the above conclusions and sheds light on the limits of the EU abuse of rights principle. First, it shows that the subjective element is redundant by demonstrating that judges can identify abusive exercises of rights even without relying on an inquiry into the wills and intentions. They can focus on facts and circumstances to elicit the logic underpinning the behaviour under scrutiny. Second, it unveils the unavoidable structural problem inherent in the objective element of the abuse of rights. Competition law enforcers may identify an abuse of rights even when they do not know the goals of the abused rule, because for them it is enough to verify that the allegedly abused conduct does not admit any explanation other than the harm to competition. On the contrary, in the context of the EU abuse of rights, the analysis that is carried out follows the opposite paradigm. Whatever the chosen objective element may be, judges are always required to identify the purpose of the allegedly abused rule, to then establish whether or not the abuser pursued this scope; whether she accomplished a manifestly contrary goal or simply another goal is a further and different issue that could narrow the objective element but not eliminate the problem. Indeed, the Halifax formulation of the test was far more stringent and apt to narrow the scope of the principle. In summary, the principle of the abuse of rights is a powerful tool that may undermine the exercise of rights. Therefore, it may have an enormous impact on the legal order. It reduces the risks of opportunistic and deceitful use of the law – which in turn increases the trust that citizens have in a legal system devoid of tricks and stratagems. Yet, given the increasing importance of the subjective element and the wider definition of the objective element, the same principle generates uncertainty of law to the extent that, in a very perverse way, it becomes

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one of those stratagems and tricks that it is supposed to fight. The absence of a clear statement on the objectives of the EU provisions leads to the principle of abuse of rights often being invoked cunningly, as the recent stream of failed abuse of rights cases regarding European trademarks shows.

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12. The digital economy: a challenge for competition policy?* Daniel Zimmer Many people are concerned about the strong market position of certain individual companies of the digital economy. The largest search engine processes about 90 percent of all queries from Europe. The largest social network receives 15 times as many clicks as the second-largest. How can this strong market concentration be explained? And is it cause for concern? Market concentration can oftentimes be explained by economic conditions – and can sometimes seem to be a kind of natural market result. With some services, a strong market concentration can be explained by certain cost structures: creating a digital infrastructure, such as that of a platform, for instance, can be very expensive, whereas extending that infrastructure to more and more users can cost very little. In such a situation, it is easy for an established platform to expand to cover more users, though it can be difficult for competitors entering the market later to achieve a significant market share.1 In addition, network effects2 must be taken into account: the more users a social network has, for example, the more attractive that network becomes for users.3 Such concentration on one large social network can also be beneficial for the users: they need not search for their friends on various different platforms. Moreover, the quality of some services also increases with a growing number of users: the largest search engine does a quicker and better job * The chapter is in part based on the Monopolies Commission’s Special Report issued in June 2015, Competition policy: The challenge of digital markets, Special Report No 68 and on Chapter I of the Biennial Report XX, 2012/2013 issued in July 2014. 1 Cf on economies of scale, regularly closely related to network effects, Monopolies Commission, Biennial Report XX, 2012/2013 (2014) para 18. 2 See, inter alia, Martin Blaschczok, Kartellrecht in zweiseitigen Wirtschaftszweigen (NOMOS 2015) 29 et seq. 3 Monopolies Commission, Biennial Report XX, 2012/2013 (2014) para 15. 299 Daniel Zimmer - 9781788972444 Downloaded from Elgar Online at 04/20/2020 09:07:22AM via Universita Degli Studi Roma Tre

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than any other of learning what is relevant for people when dealing with an immense body of searches – and what is not relevant. An automated processing of which links in a list of results the users prefer to click on allows the large search engine to improve its service to users constantly.4 If as a result high market concentrations with certain services can appear to be, so to speak, a natural market result – how must this be evaluated in competition-policy terms? In June 2015 the German Monopolies Commission presented a report on competition in digital markets that assessed some of the policy recommendations that have been expressed in the public debate. The report advised against reducing the size of large platforms (for instance by dividing them up) so as to make room for competition between several smaller providers, for it is precisely the large user base, in part, that creates benefits for the users. From an economics perspective, one central question arises: is a market position vulnerable or not? As long as a provider has to worry that a competitor could gain a significant portion of its customers, it must continue to vie for these customers – for example with innovative products and good quality. In digital markets, where technology is the driver, this is the kind of competition we find: large companies try again and again to edge in on the others’ domains, and that is why even very successful companies make constant efforts to innovate and ensure good product quality.5

4 With regard to search engines, so-called indirect network effects are of particular importance. The search engine utilises data related to the behaviour of a user to improve search results for all other users. Thus, the benefit of a search engine generally increases with the number of users (queries). When further optimising the search engine, however, the marginal benefit resulting from information gained on additional users decreases; cf Justus Haucap and Christiane Kehder, ‘Suchmaschinen zwischen Wettbewerb und Monopol: Der Fall Google’ (2013) 44 Düsseldorf Institute for Competition Economics (DICE) Ordnungspolitische Perspektiven 6, available at . 5 For this reason, market shares are not well suited to assess market power on highly dynamic markets. High market shares can be lost within a short period of time due to innovations of other undertakings and presumably low market shares can quickly lead to a dominant position on the market due to own innovation of the undertaking concerned. See, with references to the practice of the European Commission, Ulrich Schwalbe and Daniel Zimmer, Kartellrecht und Ökonomie (2nd edn, RIW 2011) 180 et seq.

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Does all this mean that there is no reason to worry about competition with regard to the digital economy? No. It is paramount that companies that are strong on certain markets remain vulnerable to competition,6 and that they are not able to insulate themselves from competition by means of their own doing. That means: competition law must on the one hand prevent firms with market strength from buying the competition off the market. On the other hand, it must prevent them from sealing off the market by means of conduct such as abusive contracts. To keep pace with the development of digital markets, competition law and its application need to be modernised. What does that mean in practice? First, the existing rules of competition law need to be applied in a coherent and stringent way. The special characteristics of two- or multi-sided platforms constitute a challenge for competition policy.7 The fundamental contexts and the complexity of multi-sided platforms need to be taken into consideration by competition authorities and courts when assessing specific cases under competition law.8 It is important to include all sides of a platform in the analysis, and to capture both direct and indirect network effects in terms of their economic significance. The assessment of the competitive situation on multi-sided platforms requires an overall view to be taken in which greater importance is to be attributed to other factors than market

6 The theory of contestable markets placing the focus on potential competition as a means to discipline dominant undertakings was founded by William J Baumol, John C Panzar and Robert D Willig, Contestable Markets and the Theory of Industry Structure (Harcourt Brace Jovanovich 1982). On the importance of vulnerability of dominant positions see also Microsoft/Skype (Case COMP/M.6281) Commission Decision C(2011)7279 [2011] OJ C341/2 in which a combined market share of approximately 90 percent in the segment of video telephony has been seen as non-critical, since this market has been characterised as contestable. 7 Monopolies Commission, Competition policy: The challenge of digital markets, Special Report No 68 (2015) para 62. 8 A comprehensive overview of the current status of the discussion is provided in the Federal Cartel Office’s Background Paper for the Meeting of the Working Group on Competition Law, Digitale Ökonomie – Internetplattformen zwischen Wettbewerbsrecht, Privatsphäre und Verbraucherschutz (2015), available in German at .

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shares,9 such as network effects, the availability of user data and the dynamic nature of the market observed. In particular, with regard to the definition of markets, greater attention should be paid to the characteristics of multi-sided platforms.10 Traditional methods that have been developed for market definition on one-sided markets (such as the so-called SSNIP test)11 are not always suitable in the context of two-sided (or multi-sided) platforms.12 There is also a need to call into question the sub-division of online advertising into search-based and non-search-based advertising. Technical improvements have caused these two forms of advertising to become more similar. In former times, search engines used to have an advantage with respect to targeted advertising: they could – and still can – offer advertising corresponding to the search terms and thus to the interests of the individual internet user. However, due to modern techniques, it has become possible to use display advertising in a targeted manner. To give an example, firms place so-called cookies on a user’s web browser and thus can identify that user in the future. One might argue that both forms of advertising become more and more interchangeable and are in competition with each other. Furthermore, attention should be paid to possible substitution relationships between online and offline advertising. Moreover, the Monopolies Commission recommended two concrete amendments in the context of merger control and the rules on abuse of 9 Cf Microsoft/Skype (Case COMP/M.6281) Commission Decision C(2011)7279 [2011] OJ C341/2, para 78: ‘Market shares only provide a limited indication of competitive strength in the consumer communications services markets. … communications services are a nascent and dynamic sector and market shares can change quickly within a short period of time.’ 10 Monopolies Commission (n 7) paras 54 et seq; Federal Cartel Office (n 8) 16 et seq; Torsten Körber, ‘Analoges Kartellrecht für digitale Märkte?’ [2015] WuW 120, 125 et seq; on market definition with regard to search engines see Boris P Paal, ‘Internet-Suchmaschinen im Kartellrecht’ [2015] GRUR Int 997, 1000. 11 The SSNIP test (small but significant and nontransitory increase in price) analyses consumers’ reaction to an assumed SSNIP for the products concerned. See, for example, Schwalbe and Zimmer (n 5) 120 et seq. 12 For proposals on modifications of the SSNIP test see, for example, Lapo Filistrucchi, Damien Geradin, Eric van Damme and Pauline Affeldt, ‘Market Definition in two-sided markets: theory and practice’ (2014) 10(2) Journal of Competition Law & Economics 293; critically on such modifications, Ralf Dewenter, Jürgen Rösch and Anna Terschüren, ‘Abgrenzung zweiseitiger Märkte am Beispiel von Internetsuchmaschinen’ (2014) Helmut Schmidt University Hamburg Discussion Paper No 151, 10.

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dominance. First, the scope of application of merger control should be extended to include mergers of firms that have heretofore shown only modest annual turnovers, but evidently have a high market potential, which is expressed by a high sales price.13 Prior to the publication of the Monopolies Commission’s report, European and German merger control applied only in cases in which the firms involved had already realised significant annual turnovers. The European Merger Control Regulation14 requires that the undertakings involved have a turnover of (altogether) €2.5 billion (Article 1(3) of the European Merger Control Regulation). Additionally, more than one firm must have realised multi-million turnovers in the EU (cf. Article 1(3) lit. c, d; Article 1(2) lit. b of the European Merger Control Regulation). However, in the digital economy many firms are sold in a very early stage of development when they have not yet realised significant turnovers. Sometimes acquirers pay millions of dollars for so-called start-ups because they hope to earn a lot of money in the future. In the absence of a high turnover such acquisitions cannot be checked by the European Commission. The example of the acquisition of the messenger service WhatsApp by Facebook demonstrates that this legal situation is unsatisfactory. With regard to the annual turnovers the transaction was neither subject to the European nor to the German merger control. The merger has been assessed by the European Commission only due to the fact that it had to be notified with three authorities in EU Member States that do not have high turnover requirements, such as that of the European Union and Germany.15 In the digital economy a company’s potential is often better expressed by the price offered or paid for it than in the turnovers it previously achieved. For this reason, the Monopolies Commission recommended complementing the existing merger thresholds based on turnover by additional notification requirements based on the transaction volume. Such rules appeared necessary in order to close loop-holes: the acquisition of companies that have not yet realised high turnovers may nevertheless have significant effects on competition – for example if a market leader acquires a newcomer that might otherwise become an important competitor. In its report of 2015, the Monopolies Commission thus made the proposal to introduce a new merger control threshold 13

Monopolies Commission (n 7) paras 453 et seq; see also Federal Cartel Office (n 8) 26. 14 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings [2004] OJ L24/1. 15 Facebook/WhatsApp (Case COMP/M.7271) Commission Decision C(2014)7239 [2014] OJ C417/4, paras 9 et seq.

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based on the transaction value, and in 2017 the German legislator adopted this proposal. Prior to the Amendment of 2017 the provisions on the control of concentrations applied only in cases in which in the last business year preceding the concentration (1) the combined aggregate worldwide turnover of all the undertakings concerned was more than EUR 500 million, and (2) the domestic turnover of at least one undertaking concerned was more than EUR 25 million and that of another undertaking concerned was more than EUR 5 million. Under this rule a transaction was exempt from merger control if one of the parties – for example a recently founded target company – did not achieve a turnover of at least EUR 5 million in Germany. Under the new law, a transaction has to be notified if the value of the consideration offered exceeds EUR 400 million – even if the target has not yet achieved any turnover at all. The Monopolies Commission has made the proposal to amend the European Merger Control Regulation in a similar way.16 A further reform proposal of the Monopolies Commission relates to the rules on abuse of dominance:17 in the view of the Commission, proceedings in abuse cases should not go on for such a long time that market-dominant companies may reinforce their position by means of continued abuse during the procedure. With Article 9 of Regulation 1/2003,18 the option to end proceedings through commitments by the

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The Monopolies Commission made the proposal to add a new paragraph 6 to Article 3 of the European Merger Control Regulation: ‘The turnover thresholds of paragraph 2 shall also be deemed to have been exceeded if the value added by an undertaking concerned is more than EUR 5 billion and an aggregate Community-wide turnover of more than EUR 250 million is achieved by at least one of the undertakings concerned. The turnover thresholds of paragraph 3 shall also be deemed to have been exceeded if the value added by an undertaking concerned is more than EUR 2.5 billion, the aggregate turnover of all undertakings concerned exceeds EUR 100 million each in at least three Member States, the aggregate turnover of at least one of the undertakings concerned is more than EUR 25 million in each of at least three of these Member States, and the aggregate Community-wide turnover of at least one undertaking concerned exceeds EUR 100 million.’ 17 See Monopolies Commission (n 7) paras 480 et seq; Federal Cartel Office (n 8) 28 et seq; on potentially abusive behaviour of search engine operators see Paal (n 10) 1001 et seq. 18 Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty [2004] OJ L1/1.

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companies has been expressly recognised in order to expedite proceedings. But the opposite has happened: commitment proceedings can last even longer than dispute proceedings. To name one such case, the Commission case against Google lasted a total of four-and-a-half years due to negotiations on commitments proposed by Google, and the case is still pending today. The Monopolies Commission makes proposals on how to create incentives for quick closure of abuse cases. The report recommends that the European Commission put the instrument of interim measures to more frequent use in cases of abuse in digital markets.19 Further, it suggests an amendment to the procedural rules to the effect that, after a reasonable period, a commitment proceeding should automatically become a dispute proceeding pursuant to Article 7 of Regulation 1/2003.20 This could create an incentive for the Commission and the companies to put an end to the prosecuted violation by commitment measures within a limited time-frame. Otherwise, there is no alternative to the Commission’s reaching a decision in dispute proceedings. The Monopolies Commission does not consider separate regulation for search engines to be appropriate, at least not at present.21 Any public control over search algorithms would, provided it were technically feasible,22 require considerable public funds. And even if technology allowed algorithms to be reviewed, it would still be difficult to prove such manipulation of the algorithm. In that context, it must be considered that the operator of a given search engine does not need to manipulate the search algorithm in order to take advantage of the preferential display of its own services: knowing the algorithm already enables the operator to design the websites for its own services so that they rank high up in the generic list of results. Similarly, an obligation to disclose the search algorithm cannot be recommended.23 If the search algorithm were publicly known, website operators would be able to optimise their sites in such a way that would considerably impair the display of search results according to their relevance. Finally, an obligation to disclose or share 19

Monopolies Commission (n 7) paras 509 et seq. ibid para 513. 21 ibid paras 260 et seq, para 587; with regard to the political discussion concerning the introduction of regulatory measures for search engines see, for example, the Federal Government’s Statement on the Monopolies Commission’s Biennial Report XX, Printed Matters of the Parliament (Bundestags-Drucksache) 18/4721 para 17; Commission, ‘A Digital Single Market Strategy for Europe’ (Communication) COM(2015) 192 final, 10 et seq. 22 This is also doubted by Körber (n 10) 120, 131. 23 Monopolies Commission (n 7) paras 260 et seq, para 588. 20

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the web index with competing search engines cannot be recommended because this would remove incentives to create and update the index on an ongoing basis. In the Monopolies Commission’s view, the separation of general and specialised search services, as is occasionally proposed,24 would not be an adequate measure to effectively mitigate potential market distortions. It also appears to be currently disproportionate.25 A divestiture could at most be considered if a search platform has irreversibly robust market power. In contrast, as long as chances exist for the stimulation of competitive forces, one must advise against such a serious intrusion into existing company structures, since rationalisation advantages would be foreclosed and existing advantages of scale and scope, though being to users’ benefit, would disappear. The European General Data Protection Regulation26 is to be welcomed from the perspective of competition policy.27 As of May 2018, it will be applicable to companies from third-party states as well as to companies from Europe, and it will provide for drastic sanctions in cases of violation – at a similar magnitude as in European competition law. The users’ right provided for in the Regulation to move data from one company to another – so-called data portability – can enhance competition: if users are able to take their data with them, they will no longer be trapped within certain company’s ‘ecosystem’, as is currently the case.

24 See European Parliament, ‘European Parliament resolution of 27 November 2014 on supporting consumer rights in the digital single market’ 2014/ 2973(RSP) item 15. The resolution shall be treated only as recommendatory. 25 Monopolies Commission (n 7) paras 261 et seq. 26 Regulation (EU) No 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation) [2016] OJ L119/1. 27 Monopolies Commission (n 7) para 96.

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13. Tying and two-sided digital platforms Petri Kuoppamäki 1. INTRODUCTION The aim of this chapter is to analyze the application of the tying provision in Article 102 TFEU to two-sided digital platforms. Article 102 cases require detailed analysis. In digital industries additional complexity is created by the fact that we are dealing with a “two-sided” or “multi-sided” market.1

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In an OECD study the following characterization is given to two-sided markets: “Firms operating in two-sided markets are more aptly called ‘twosided platforms’ because of their differences with firms that operate in one-sided markets. A two-sided platform is characterized by three elements. The first element is that there are two distinct groups of consumers who need each other in some way and who rely on the platform to intermediate transactions between them. A two-sided platform provides goods or services simultaneously to these two groups. The second element is the existence of indirect externalities across groups of consumers. That means that the value that a customer on one side realizes from the platform increases with the number of customers on the other side. For example, a search platform is more valuable to advertisers if it is more likely that it will reach a larger number of potential buyers. At the same time, it is more valuable to potential buyers if the platform has more advertisers because that makes it more likely that a buyer will see a relevant advertisement. The third element is non-neutrality of the price structure, i.e., the price structure of the platform affects the level of transactions. The price structure is the way prices are distributed between consumers on the two sides of the market. The platform can affect the volume of transactions by charging more to one side of the market and reducing the price paid by the other side by an equal amount. Since the price structure matters, the platform must design it so as to induce both sides to join the platform” (emphasis added): see OECD Policy Roundtables 2009, Two-Sided Markets, p. 11, http://www.oecd.org/daf/competition/44445730.pdf. 307 Petri Kuoppamäki - 9781788972444 Downloaded from Elgar Online at 03/15/2021 10:38:59PM via Universita Degli Studi Roma Tre

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The last three decades have witnessed a significant growth in high-tech, often internet-based media and communication “network industries”, such as video games, computers, social networking and e-commerce shopping malls. These industries are often organized around physical or virtual platforms that enable distinct groups of agents to interact with one another. Digital platforms function as intermediary economic actors and users. These include, for example, online search platforms, PC operating systems, video game platforms, smartphone platforms, online shopping malls, as well as social media platforms.2 Digital platforms are normally organized around physical or virtual platforms that enable distinct groups of agents to interact with one another. Often, one side of the market is subsidized with income from the other side of the market. Many of the digital platforms operate by attracting eyeballs with (in case of social networks self-generated) content and by selling access to those eyeballs and/or information gathered to advertisers. The concept of multi-sided markets is not new. Consider, for instance, a medieval market place connecting customers with producers, e.g. citizen and farmers. Note also credit card companies operating between banks, merchants and consumers. What constitutes an evolution here is the central role that digital media platforms play in the so-called “new economy” markets, in particular in the software, communication and media industries. An increasing number of modern businesses belonging to these sectors are two or multi-sided 2 As these examples clearly show there are different kinds of digital platforms. Many definitions of digital platforms have been tried. For the purposes of this chapter we can adopt Shelanski’s definition and characterize “digital platforms as products or services through which end users and a wide variety of complementary products, services, or information (“applications”) can interact. Platforms therefore include devices (e.g., phones and tablets), software (e.g., operating systems and browsers), and services (e.g, search engines, social networks, and e-commerce sites). The common thread … is that the platform provides a gateway between consumers and many diverse applications well beyond the specific product or service that constitutes the platform itself. Platforms serve to expand and aggregate functionality and to enhance consumers’ access to the aggregated applications. In addition, they serve as ‘enablers’ of innovation by providing common interfaces through which entrepreneurs can connect their complementary products to critical masses of consumers”: see Howard A. Shelanski, “Information, Innovation, and Competition Policy for the Internet” (2013) 161 University of Pennsylvania Law Review 1663, 1665–1666.

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platforms as a result of technological changes that have drastically lowered the costs and increased the benefits of connecting diverse customer groups on a single platform.3 It is submitted that the “multi-sidedness” of the products and services by its nature requires a certain level of tying that may make a traditional tying analysis insufficient. On the other hand these kinds of markets are also prone to monopolizing due to the importance of installed base as well as direct and indirect network effects. In such situations tying practices can effectively foreclose the market. This chapter aims to provide some rules of thumb for the kind of situations where intervention is likely to be necessary.

2. TWO-SIDED PLATFORMS IN DIGITAL INDUSTRIES According to a standard economic definition a market is two-sided if the platform can affect the volume of transactions by charging more to one side of the market and reducing the price paid to the other side by an equal amount; in other words the price structure matters, and platforms must design it so as to bring both sides on board.4 Two- or multi-sided

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Digital platforms and Internet markets in general are often both R&D intensive and fast moving. While innovation is at least to some degree relevant in any industry, for many digital platforms R&D is a central input of production. For instance, in the telephone handset industry there is no clear difference between R&D and production as most of the R&D is brought to markets within a couple of years. R&D and production processes can be seen almost as the same thing for many products and services related to the digital platforms. 4 Jean-Charles Rochet and Jean Tirole, “Two-Sided Markets: A Progress Report”, The RAND Journal of Economics (2006) 35(3) 645, 645. The authors note that because all markets involve transactions between two (or more) parties and therefore are potential two-sided markets, it is useful to circumscribe the scope of the two-sided-markets theory. The market is one-sided if the end-users negotiate away the actual allocation of the burden, in other words the Coase theorem applies. The market is also one-sided in the presence of asymmetric information between buyer and seller, if the transaction between buyer and seller involves a price determined through bargaining or monopoly price setting, provided there are no membership externalities. Factors making a market two-sided include (i) transaction costs among end-users or more generally absence of, or limits on the bilateral setting of prices between buyer and seller, (ii) platform-imposed constraints on pricing between end-users, and (iii) membership fixed costs or fixed fees.

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platforms aim5 to create value by bringing two or more different types of economic agents together and facilitating interactions between them that, so the theory goes, “make all agents better off”.6 The owners of two- or multi-sided platforms must determine the optimal pricing structure – how best to allocate the costs of the platform in order to attract as many customers as possible on each side of the platform. They may for instance choose to finance the platform by exclusively charging one side of the platform (and thereby subsidizing the other side or sides of the platform). In two-sided markets, pricing below production cost on one side of the market may overall be profitable and the most efficient way to serve both sides of the market. This cross-subsidization from one side of the platform to the other, in practice, can benefit both sides of the platform. For instance in search advertising, Google and Bing are attracting consumers (“eyeballs”) with a “free” search engine on the search market, while information is collected about consumers’ habits, behavior, likes and dislikes; and that information is then is sold to the advertisers on the search advertising market. In other words, when a consumer is using a search engine she is at the same time a “customer” and a “trade asset” although she might not be fully aware of the second aspect when conducting the search. If this data collection, analysis, compilation and leasing to data users (advertisers) did not take place, the two-sided services as a whole would not gain the same attraction7 and that valuable context-based user data, the gold and platinum of the information society, could not be utilized in full. In less flashy terms, customer information is a critical asset in two-sided digital platforms because digital platforms generally have much greater access than traditional businesses to a broad range of information about their consumers, and digital platforms are better placed to process and use that data for a variety of purposes. This detailed information on online behavior is used to affect the demand of 5 It appears that in the literature the terms “two-sided platforms” and “multi-sided platforms” are used more or less synonymously. The same applies to terms “two-sided markets” and “multi-sided markets”. See e.g. David S. Evans, Platform Economics: Essays on Multi-Sided Businesses (Competition Policy International, 2011) s. 2; David S. Evans and Richard Schmalensee, “The Antitrust Analysis of Multi-Sided Platform Businesses” in Roger Blair and Daniel Sokol (eds), Oxford Handbook on International Antitrust Economics (Oxford University Press 2013), http://papers.ssrn.com/sol3/papers.cfm?abstract_ id=2185373 6 See e.g. Evans and Schmalensee (n 5), p. 2. 7 For instance, if Google or Bing started charging consumers who use the search engine, consumers would most likely switch to another search engine.

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customers with tailor-made offers and, even more importantly, it has become a commodity that is sold at a high price to advertisers and other user groups that can use the information in their own business. As a result, in a two-sided digital platform each participant group’s behavior indirectly affects the other participant groups’ behavior (“network effects”) and together they contribute to the overall success of a platform. Typically, two-sided digital platforms display substantial economies of scale arising from large fixed costs in developing and maintaining a platform and relatively low marginal costs in serving both sets of customers. Where substantial economies of scale exist, platforms with more customers on one side are more valuable to customers on the other side and become more valuable as the demand from each side grows. In a digital platform unit costs often fall as demand grows. This creates a natural advantage for first-movers, which, combined with economies of scale, means that competition may turn a race for the market8 (“winner takes it all”). Moreover it is worth noting that once one player has gained a dominant share, multi-sided digital platforms can tip easily. Buyers (users) will tend to prefer (all other things equal) the platform that offers access to the most sellers (service providers), and sellers (service providers) will tend to prefer the platform that offers access to the most buyers (users). Such network effects can tip the market towards being served by just one or two platforms. There is a risk that the asymmetric pricing structure described above could further increase the likelihood of such tipping occurring. In this context, successful market foreclosure resulting from exclusionary conduct of the dominant player can have serious anti-competitive effects, with little hope that the market will self-correct within a reasonable period. Another characteristic of two-sided digital markets is that the company running the digital platform must not only attract consumers, but also application developers, who need to develop applications that are compatible with the platform. This triangular relationship is a key element of platform competition, because the number of (high class) developers attracted to the platform in combination with the network effects creates a virtuous (vicious) circle: the more successful applications for a given platform are being developed, the more consumers are tipped towards that platform.9 Thus an installed base consists not only of customers but 8 This can also be described as “competition for the market” as distinguished from a traditional price and quality “competition on the market”. 9 If, say, 90% of the developer’s market is covered by writing the software for just one (or two) operating systems, it may no longer make economic sense for the developer to write software for a second (or third) operating system,

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also of the large developer community (typically thousands or tens of thousands of developers) attracted to the platform. Once an installed base has been created, the slogan “Ubiquity beats quality” may even be true but there may also be a positive correlation between the high market share and the “positive feedback loop”. This also means that when the first market entrant is able to maintain its pioneer position for a period long enough to attract both consumers and developers, it will find itself in a very comfortable position to defend its market dominance vis-à-vis later market entrants. Furthermore, the feedback mechanism thus created may cause larger networks to grow even bigger and smaller networks to shrink and eventually disappear (tipping effect).10 The main conclusion of the literature on two-sided markets seems to be that we need to understand the pricing logic and contractual practices and look into both sides of the platform. In cases involving two-sided platforms, one needs to consider how conduct on one side of the market affects the other side of the market. While in digital markets the multi-sidedness of the market can explain pricing behavior, it can also accelerate the tipping effect and make it much more difficult, if not impossible, to challenge the dominant player. Then again, market dynamism can lead to disruptive new products or service that start the platform game anew. However, even if there is potential for new investments, these are less likely if entry is restricted. Successfully foreclosing a competitor on one side of a market can also prevent that firm from succeeding on the other side, and thereby deter platform entry. Success normally requires the ability to challenge the incumbent on both sides of the market. The result may be a durable quasi-monopoly causing significant consumer harm. As regards potential abuse, the practical difficulty lies in trying to work out when a case involves normal because the incremental new revenues will not cover the incremental and opportunity costs of serving a smaller platform alongside the dominant platform. 10 On the other hand, it is clear that the presence of network, feedback and lock-in effects does not necessarily lead to market dominance. There is no automatism in business life and certainly no automatism as regards two-sided digital platforms. Network effects can be shared among rivals if the rival platforms interconnect with each other or in some other way share the source of the positive network externality. Feedback effects can exist for multiple platforms simultaneously. Sometimes technology and pricing can help to overcome switching costs. See e.g. Shelanski (n 2), p. 1684. Nevertheless, these effects can contribute to a durable platform’s market dominance and, under the right conditions, lead to a durable quasi-monopoly of a given digital platform. Lacking interconnectivity and/or interoperability between platforms can contribute to the tipping of the market towards one quasi-monopoly.

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legitimate pricing behavior in a multi-sided market and when there may be circumstances that may be regarded as abuse by a dominant company in its attempt to eliminate competition.

3.

TYING

We see tying practices everywhere in the economy. Without significant market power tying can be regarded as either a pro-competitive or a benign business strategy.11 Without significant market power consumers can go elsewhere if they do not like the idea of buying the products together. However, dominant companies may use tying as an exclusionary strategy because the choice of customers is restricted as a result of market dominance and competitors are not strong enough to react effectively.12 First, a firm that is dominant in the market for the tying product may seek to extend its market power into the market for the tied 11 There is a vast literature on tying and bundling. For a variety of views, see, e.g.: Christian Ahlborn, David S. Evans and A. Jorge Padilla, “The Antitrust Economics of Tying: A Farewell to Per Se Illegality” (2004) 49 Antitrust Bulletin 287; Dennis W. Carlton and Michael Waldman, “The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries” (2002) 33 Rand J. Econ. 194; Daniel A. Crane, “Mixed Bundling, Profit Sacrifice and Consumer Welfare” (2006) 55 Emory L.J. 423, 429; Nicolas Economides, “Tying, bundling and loyalty/requirement rebates” in Einer Elhauge (ed.), Research Handbook on the Economics of Antitrust Law (Edward Elgar Publishing, 2012); Benjamin Edelman (2015), “Does Google Leverage Market Power through Tying and Bundling? (2015) 11(2) Journal of Competition Law & Economics 365; Einer Elhauge, “Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory” (2009) 123 Harv. L. Rev. 397; David S. Evans and Michael Salinger, “Why Do Firms Bundle and Tie? Evidence from Competitive Markets and Implications for Tying Law” (2005) 22 Yale J. on Reg. 37; David S. Evans and A. Jorge Padilla, “Designing Antitrust Rules for Assessing Unilateral Practices: A Neo-Chicago Approach” (2005) 72 U. Chi. L. Rev. 73; Andrej Fatur, EU Competition Law and the Information and Communication Technology Network Industries (Hart Publishing, 2012) 159–169; Erik Hovenkamp and Herbert Hovenkamp, “Tying Arrangements and Antitrust Harm” (2010) 52 Arix. L. Rev. 925; Erik Hovenkamp and Herbert Hovenkamp, “Tying Arrangements” in Roger Blair and Daniel Sokol (eds), Oxford Handbook of International Antitrust Economics (Vol II, Oxford University Press, 2015) 329–350; Keith N. Hylton and Michael Salinger, “Tying Law and Policy: A Decision-Theoretic Approach” (2001) 69 Antitrust Law Review 469; Barry Nalebuff, “Exclusionary Bundling” (2005) 50 Antitrust Bull. 321; Michael D. Whinston, “Tying, Foreclosure, and Exclusion” (1990) 80 American Economic Review 837. 12 See e.g. Hovenkamp and Hovenkamp (2015) (n 11), pp. 329–350.

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product. Since consumers must obtain the tying product from the dominant firm, the firm can expand its dominance by tying the purchase of the two goods together.13 If the firm ties a complementary product to its monopoly product, customers can only buy the monopoly product if they also purchase the tied product. As a result, customers are less willing to purchase a separate (redundant) tied product from an independent supplier, foreclosing competition in the otherwise competitive market for the complementary product. Second, there may be circumstances where tying protects dominance in the tying product market.14 Article 102(2)(d) of the TFEU expressly prohibits practices of a dominant company where “making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts”. This abuse is commonly referred to as tying. Under Article 102(2)(d) “tying” is defined as “making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts”. Tying one product into the sale of another can also be considered abuse, being restrictive of consumer choice and depriving competitors of outlets Tying was one of the key elements in Microsoft v Commission.15 According to the existing case law relating to traditional tying cases, for instance in

13 Ibid, p. 330. See also e.g. Einer Elhauge and Damien Geradin, Global Antitrust Law and Economics (2nd edn, Hart Publishing, 2011) 562. 14 See e.g. Robin Cooper Feldman, “Defensive Leveraging in Antitrust” (1999) 87 Geo. L.J. 2079, available at http://repository.uchastings.edu/faculty_ scholarship/167. Compare e.g. Hovenkamp and Hovenkamp (2015) (n 11), pp. 333–334, who see the leveraging theory as failed. 15 Case T-201/04 Microsoft v Commission [2007] ECR II-3601, para 868. See, to that effect, Commission Decision 88/138/EEC of 22 December 1987 relating to a proceeding under Article 86 of the EEC Treaty (IV/30.787 and 31.488 – Eurofix-Bauco v Hilti) (OJ L 65, 11.3.1988, p. 19), upheld in Case T-30/89 Hilti v Commission [1991] ECR II-1439, itself confirmed by the Court of Justice in Case-53/92 P Hilti v Commission [1994] ECR I-667. See also Commission Decision 92/163/EEC of 24 July 1991 relating to a proceeding pursuant to Article 86 of the EEC Treaty (IV/31043 – Tetra Pak II) (OJ L 72, 18.3.1992, p. 1), upheld in Case T-83/91 Tetra Pak v Commission [1994] ECR II-755, itself confirmed by the Court of Justice in Case C-333/94 P Tetra Pak v Commission [1996] ECR I-5951.

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Hilti16 and Tetra Pak II,17 it has been assumed that the tying of a specific product and a dominant product has, by its nature, a foreclosure effect. Tying is often connected to a refusal to deal with the aim of leveraging market power from one already dominated market to another. For instance, a refusal to supply a product that is essential for all businesses attempting to compete can constitute an abuse. Different Types of Tying Generally speaking, tying can be characterized as a practice where a supplier of one product, the tying product, is requiring the buyer to buy a second product, the tied product. In this case it is important to note that tying may take various forms: (1)

(2)

(3)

Contractual tying may be the result of a contractual stipulation. For instance in the Hilti case18 Hilti required users of its nail guns and nail cartridges to purchase nails exclusively from it. Refusal to supply: the effect of a tie may be achieved where a dominant undertaking refuses to supply the tying products or services unless the customer purchases the tied product or service.19 Withdrawal or withholding a benefit: a dominant supplier may achieve the effect of a tie by withdrawing or withholding a benefit, for instance a rebate, a provision, a guarantee or attestation of technical conformity, unless a customer or contract partner uses suppliers’ components as opposed to those of a third party.20

16 Eurofix-Bauco v Hilti (OJ L 65, 11.3.1988, p. 19), upheld in Case T-30/89 Hilti v Commission [1991] ECR II-1439, and Case-53/92 P Hilti v Commission [1994] ECR I-667. 17 Commission Decision 92/163/EEC of 24 July 1991 relating to a proceeding pursuant to Article 86 of the EEC Treaty (IV/31043 – Tetra Pak II) (OJ L 72, 18.3.1992, p. 1), upheld in Case T-83/91 Tetra Pak v Commission [1994] ECR II-755, itself confirmed by the Court of Justice in Case C-333/94 P Tetra Pak v Commission [1996] ECR I-5951. 18 Eurofix-Bauco v Hilti (OJ L 65, 11.3.1988, p. 19), upheld in Case T-30/89 Hilti v Commission [1991] ECR II-1439 and Case-53/92 P Hilti v Commission [1994] ECR I-667. 19 See e.g. Hilti (ibid); and Case 311/84 CBEM v CLT and IPB [1985] ECR 3261 (“Télémarketing”). 20 See e.g. Novo Nordisk, XXVIth Report on Competition Policy (1996) 142–143.

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(4)

Technical tying occurs where the tied product is physically integrated into the tying product so that it is impossible to take the product without the other. This was the situation in the Microsoft case.21 Bundling is closely related to the idea of tying. It refers to a situation in which two products are sold as a single package at a single price. Here the difference can be seen between pure bundling, where it is only possible to buy the two products together, and mixed bundling, where the two products are sold separately but when the customer purchases them together a discount is granted as compared to the price that is charged if they were purchased separately. Tying as part of a broader predatory offence occurs, for instance, when a dominant company combines a strategy to raise rivals’ costs with a predatory pricing campaign. Here the dominant company is simultaneously raising rivals’ costs and degrading competitors’ sales margins, which can form a particularly effective foreclosure strategy. This happened, for instance, in the case Tetra Pak II.22

(5)

(6)

21

Case T-201/04 Microsoft v Commission [2007] ECR II-3601. In Tetra Pak II Tetra Pak had demanded that customers to whom it supplied equipment used for the packaging of liquid or semi-liquid food products also purchase from it the cartons that were required for manufacturing the liquid packages. The Commission found that it is not usual to tie the products in question to each other and no technological considerations could be found for it either. The General Court confirmed the Commission’s finding about the separate markets and about Tetra Pak being guilty not only of tying but also of predatory pricing to eliminate competition. It is also noteworthy in the Court’s judgment that although there may exist a natural connection between the products or they would appear together in commercial usage, their tied selling still may, depending on the context, imply an abuse of dominant position. It appears that the courts were analyzing Tetra Pak’s practices as one continuum of abuses. See Commission Decision 92/163/EEC of 24 July 1991 relating to a proceeding pursuant to Article 86 of the EEC Treaty (IV/31043 – Tetra Pak II) (OJ L 72, 18.3.1992, p. 1); Case T-83/91 Tetra Pak International v Commission [1994] ECR II-755; Case C-333/94 P Tetra Pak International v Commission [1996] ECR I-5951. The Intel case is also of interest here because it shows that there is an increased focus on how predatory strategies of incumbent companies evolve. Although Intel was a rebates case, the European Commission applied a test of pricing below average avoidable costs, concentrating the analysis on how competition on the market can actually develop. In order to find this out, the Commission looked at the “contestable share of the market”, i.e. that part of the market that in the Commission’s opinion was genuinely open to competition, and 22

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This list shows that in fact, tying can occur in many different forms. Rather than “putting labels” on a certain practice and trying to resolve the case solely by its “legal classification”, it is important to have a consistent theory of harm that explains the potential harm to competition, to market structure and ultimately to consumers, whether they are end users or industrial customers.

4. TYING CASES IN TWO-SIDED MARKETS What are the Competitive Risks of Tying in Digital Markets? Two-sided markets offer an interesting point of discussion. While some sort of tying is normal or even a condition sine qua non in two-sided markets because otherwise it might be impossible to monetize the business operations on the subsidized side of the market, in cases of market dominance the monopoly explanation may trump explanations relating to the two-sided business logic. At the outset it seems that if a product is offered for free, surely the price for it needs to be collected on the other side of the two-sided market. This is indeed the normal situation but there are exceptions to this situation. The higher the market power of the company that is utilizing tying as a business strategy, other things staying the same, the more likely it becomes that consumer harm may result. Harm may occur even if online users are not asked to pay directly for the tying product or the tied product. A provider of free online services may have an incentive to extend its dominance in the provision of some services (the tying services) to other services (the tied services) in order to improve its capacity to monetize the services it provides on the paying side of the platform, for instance advertising.23 A digital platform

not simply at the market as a whole. The Commission concluded that Intel’s main competitor, AMD, could not realistically attack the whole market but only part of it. Hence the exclusionary effect of Intel’s rebate scheme was analyzed on the basis of whether AMD could match Intel’s prices on the segment where it could compete. The Commission concluded that the rebate scheme had an exclusionary effect. See Commission Decision of 13 May 2009, COMP/C37.990-Intel), OJ 227, 22.9.2009, p. 13. 23 Rochet and Tirole note that to succeed, platforms in industries such as software, portals and media, payment systems and the Internet, must “get both sides of the market on board”. Accordingly, platforms devote much attention to their business model, that is, to how they court each side while making money

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operator may provide services to one set of users without a direct charge, choosing instead to profit from fees charged to others. For example, it may find that it can increase its advertising revenue by controlling a greater share of online services. Reputational effects may also play a role. If tying makes the success of a dominant firm’s tied product more likely, and the success of others’ offerings less likely, tying can change adoption expectations. This is a particularly important factor in two-sided markets where users choose services in light of beliefs about what others will choose. The key to success in platform competition is “getting both sides on board”.24 Competitive harm can accrue in situations involving actual market foreclosure or when ties enable dominant companies to retain their market position as one technology rolls into the next.25 Tying practices may prevent the challenger from getting “all sides on board” irrespective of the potential of the technological innovation. As a result, high entry barriers for new market entrants may be created that are apt at creating durable dominance. Not only are consumers not likely to switch to an operating system that is not compatible with the range of applications already available for their first operating system, but software developers are not likely to develop products for an operating system that is not widely spread amongst consumers. Even if consumers and developers were willing to give up the multitude of applications and the consumer-network already available in order to use a technologically superior operating system, the switch to a new operating system would involve considerable costs that could not be born by smaller developers and consumers. The only option left to compete with a company that enjoys all these network advantages could be a paradigmatic change: a whole new product. Competition becomes “Schumpeterian”, for the market and not in the market.26 While dynamic competition is great for consumers, Article 102 TFEU and corresponding overall. See Jean-Charles Rochet and Jean Tirole, “Platform Competition in Two-Sided Markets” (2003) 1(4) Journal of the European Economic Association 990. 24 Ibid, pp. 990, 1017–1020. 25 See e.g. Hovenkamp and Hovenkamp (2015) (n 11), p. 348. 26 See e.g. Gregory J. Werden, “Network Effects and Conditions of Entry: Lessons from the Microsoft Case” (2001) 69 Antitrust L.J. 87. Shelanski mentions that competition is thus more sequential than simultaneous. Shelanski (n 2), p. 1669. While this is generally true when dynamic (technology) competition is compared to price competition, the durability of a dominant position needs to be explained by other factors than just competition being sequential.

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provisions are needed to keep the markets open and to ensure that the “Schumpeterian monopoly” remains only temporary and is sooner or later replaced by an innovative newcomer that, according to the storyline,27 is bound to replace the first monopolist. While the dominant position may have been well deserved historically, if the market has become very concentrated tying-practices may also limit the possibilities to challenge the dominant player with new innovations. Hence, while the market dynamism generally suggests that competition authorities do not intervene and allow markets to selfcorrect, it is possible that this will not happen. If Schumpeter’s creative destruction is used as an argument against intervention in cases where markets are likely to self-correct, then it must also be true that practices of incumbent players that limit entry may decrease innovation and consumer welfare.28 Is there a Legal Difference between “Traditional” Tying Cases and “New Economy” Tying Cases? In terms of EU competition law the seminal Microsoft Media Player case is still the most important precedent when we look at the legal rules on tying under Article 102 TFEU.29 In its decision in 2004 the European Commission30 stated, inter alia, that Microsoft abused its dominant 27

Joseph Schumpeter, Capitalism Socialism and Democracy (Harper & Brothers 1947) 83–84. 28 See e.g. Shelanski (n 2), p. 1693. 29 There is a vast literature on the European Microsoft cases. See e.g. Keith N. Hylton and Michael A. Salinger, “Tying Law and Policy: A DecisionTheoretic Approach” (2001) 69 Antitrust Law Journal 469, 516; Horbath McMahon, Kai-Uwe Kühn, Robert Stillman and Christina Caffarra, “Economic Theories of Bundling and their Policy Implications in Abuse Cases: An Assessment in Light of the Microsoft Case” (2005) 1 European Competition Journal 85, 111–112; D. Howarth and K. McMahon, “‘Windows has performed an illegal operation’: the General Court’s judgment in Microsoft v Commission”, European Competition Law Review (2008) 29(2) 117; C. Ahlborn and S. Evans, “The Microsoft Judgment and its Implications for Competition Policy towards Dominant Firms in Europe” (2009) Antitrust Law Journal 24. On the comparative approach see e.g. Nicholas Economides and Ioannis Lianos, “The Elusive Antitrust Standard on Bundling in Europe and in the United States in the Aftermath of the Microsoft Cases” (2009) Antitrust Law Journal 483; Herbert Hovenkamp, The Antitrust Enterprise (Harvard University Press, 2005) 292–304. See also literature in n 13. 30 European Commission, Decision 2007/53/EC relating to a proceeding pursuant to Article 82 of the EC Treaty and Article 54 of the EEA Agreement

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position by tying its Windows Media Player (WMP) to the dominant PC operating system. In its decision, the Commission recognized that it was not dealing with a classical tying case and took a more effects-based approach in this case than it did in Hilti and Tetra Pak II. Hence, the Commission departed from the form-based approach established by previous case law and took a “rule of reason” approach to tying. The Commission emphasized the impact of indirect network effects on the maintenance of an effective competitive structure. To show that even a rule of reason analysis warranted an intervention, the Commission argued that the tying of Windows Media Player afforded Microsoft unmatched ubiquity on client PCs worldwide, which would lead to a situation in which content providers and software developers increasingly used the WMP format to the detriment of competitors and their technologies. Due to direct and indirect network effects the market would then ultimately “tip” to WMP. Indeed, before a final decision could be reached by the Commission, the market had tipped in favor of Microsoft, not least due to the “superdominance” of Microsoft in the market for PC operation systems with a durable global market share in excess of 90%.31 On appeal in 2007, the General Court (then CFI) confirmed that Microsoft’s tying was abusive. However, the General Court rejected the Commission’s invitation to move from a per se type of illegality towards a rule of reason that would assess positive and negative economic effects of tying and any actual or likely harm to consumers in detail. It reasoned that having established both market dominance and the various elements of a tying offence, the Commission’s findings were in themselves sufficient to establish that there had been a foreclosure of competition, and, once it is demonstrated that there is an advantage from tying over competitors, the impact of such an advantage on competition and consumer welfare will be presumed to be negative without a necessity to engage in a detailed rule of reason analysis. As to the legal standard of illegal tying, the General Court confirmed in the Microsoft Media Player case32 that a tying abuse requires the following elements:

against Microsoft Corporation, 24 March 2004, available at http://www.ec. europa.eu (“Microsoft Decision”); and Case T-201/04 Microsoft v Commission [2007] ECR II-3601 (“Microsoft I judgment”). 31 Microsoft Decision (n 30), para. 841. 32 Microsoft I judgment (n 30).

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the tying and tied goods must be two separate products; the company concerned must be dominant in the tying product market; the company concerned must not refuse customers the choice to obtain the tying product without the tied product; the tying must foreclose competition; and the tying must not be objectively justified.33

These elements of an abusive tying (except dominance) will be discussed in more detail below. The decision of the General Court in Microsoft has been interpreted in several ways. Some authors have seen this rejection as a sign of the Court’s unwillingness to move towards an “effects based” application of Article 102 TFEU.34 Other authors have seen more room for a “rule of reason” approach.35 It has also been pointed out that the General Court gave its decision (which may have been a close call due to a division of opinion) before the Article 102 Guidance Paper on exclusionary abuses was published and that DG Competition has applied a more lenient test in subsequent cases, in particular in the Microsoft EU web browser case.36 According to the Article 102 Guidance Paper the Commission will normally take action under Article 102(i) where an undertaking is dominant in the tying market and where, in addition, the following conditions are fulfilled: (ii) the tying and tied products are distinct products, and (iii) the tying practice is likely to lead to anti-competitive foreclosure.37 When considering anti-competitive foreclosure in the context of tying, the Commission will look in particular at the following factors:

33 See Microsoft I judgment (n 30), paras 842, 869 and 1058. See also Communication from the Commission, Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, OJ 2009/C 45/02, pp. 47–62. 34 See e.g. Ahlborn and Evans (n 29). 35 See e.g. Ekaterina Rousseva, Rethinking Exclusionary Abuses in EU Competition Law (Hart Publishing, 2010) 250. 36 See e.g. R. O’Donoghue and J. Padilla, The Law and Economics of Article 102 TFEU (2nd edn, Hart Publishing, 2013) 612–615. 37 See Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, OJ 2009/C 45/02, pp. 34 and 35.

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the degree of permanency of the effects of the tying: the risk of anti-competitive foreclosure is expected to be greater where the dominant undertaking makes its tying or bundling strategy a lasting one, for example through technical tying; the greater the number of products in a bundle within which the undertaking is dominant, the stronger the likely anti-competitive foreclosure; the degree of demand for the tied product: if there is insufficient demand for the tied product alone to sustain competitors who offer alternatives to the tied product, the tying can lead to those customers facing higher prices; and the degree to which the dominant undertaking can prevent a decrease in demand for the tied products by tying it to the tying products.38

(2)

(3)

(4)

The question, however, arises, whether showing “foreclosure” is legally required under Article 102 TFEU. Traditionally the EU courts have, to

38 In the Microsoft Media Player case the Commission presented a threestage argument of how the tying conduct would foreclose competition: (1) because it was bundled with Windows, WMP had an “unparalleled presence” on PCs (ubiquity), and means of distributing competing media players (such as agreements with original equipment manufacturers (OEMs) or downloading via the Internet) were less efficient bundling with Windows; (2) because of ubiquity, content providers and software developers focus their development efforts on the WMP format, making competing media players less attractive to consumers (“indirect network effect”); and (3) the result, as evidenced by market data, was that WMP’s market share increased at the expense of other players. Microsoft countered this argument in court by stating that OEMs were free to install competing players and, on average, users installed more than one media player. Furthermore, consumers could easily download the media player of their choice. The Court nevertheless held that there was a reasonable likelihood that tying Windows and WMP would lead to a lessening of competition so that the maintenance of an effective competition structure would not be ensured in the foreseeable future. See Microsoft I judgment (n 30), para. 1089. In the Microsoft European browser case, which was settled with a commitment decision in December 2009, the Commission followed the same reasoning as in the Microsoft Media Player case. In addition, to confirm that the tying of Microsoft’s web browser (Internet Explorer) to its dominant client PC operating system (Windows) was indeed abusive, the Commission relied on empirical analyses indicating that more than half of Windows’ users, and about two-thirds of Windows’ users having Internet Explorer as their main web browser, did not download web browsers from the internet or were reluctant to do so.

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say the least, been reluctant to consider a more “effects based” application of Article 102 TFEU. Recently, the case law seems to be moving away from strict “per se” standards under Article 102 TFEU. That being said there is still tension between a more lenient, effects-based approach looking at whether the practice has the effect or capability of foreclosing the market to as-efficient competitors, and a stricter, traditional, rulebased approach stressing form and predictability. The Intel case is an illustration of that tension.39 The case itself concerned exclusionary rebates. On appeal, the main issue was the application of the as-efficient competitor test (AEC test), which aims at finding out whether the contested practice had the effect or capability of foreclosing the market to the dominant’s player’s as-efficient competitors, which makes the Intel case interesting from a tying perspective. The Commission had indicated in its decision that it had found abuse that the rebates in question were “by their very nature” capable of restricting competition such that examining all the circumstances of the case and conducting an AEC test were not necessary.40 Nevertheless, it conducted an AEC test to show that Intel’s rebates had exclusionary effects.41 On appeal Intel strongly criticized the Commission’s AEC test. However, the General Court42 did not consider it necessary to conduct a detailed foreclosure analysis in a case relating to exclusionary rebates. In its judgment the General Court largely relied on the formalistic case law of the CJEU citing Hoffman La Roche,43 finding that loyalty rebates were quasi-per se illegal and considering that it was not necessary to consider whether the Commission had performed the AEC in an accurate manner.44 In addition, there has been harsh criticism of the effects-based test even by a prominent law and economics scholar.45 39 Commission decision relating to a proceeding under Article 82 of the EC Treaty and Article 54 of the EEA Agreement (COMP/C-3 /37.990 – Intel), para. 65; Case T-286/09 Intel Corp v Commission (2014), Decision of the General Court, 12 June 2014; Case C-413/14 P Intel v Commission, EU:C:2017:632. 40 Commission decision relating to a proceeding under Article 82 of the EC Treaty and Article 54 of the EEA Agreement (COMP/C-3 /37.990 – Intel), para. 65. 41 Ibid, paras 1002 et seq. 42 Case T-286/09 Intel Corp v Commission (2014), Decision of the General Court, 12 June 2014. 43 Case 85/76 Hoffmann-La Roche & Co AG v Commission of the European Communities, EU:C:1979:36. 44 Ibid, paras 77 and 151. 45 P. Wouter and J. Wils, “The Judgment of the EU General Court in Intel and the So-Called ‘More Economic Approach’ to Abuse of Dominance (2014)

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Against that background, the judgment of the CJEU was very much awaited. It was open whether the Court would stick to its Hoffman La Roche case law or, as proposed by Advocate General Wahl,46 take a more economic approach to the assessment of loyalty rebates. The CJEU followed Advocate General Wahl. Yet, the decision must be seen as more evolution than revolution. In its decision47 the CJEU makes the following main observations. First, the CJEU emphasizes the principles that it had already developed in Post Danmark I,48 whereby the purpose of Article 102 TFEU is not to protect inefficient competitors, but to prevent a dominant firm from adopting pricing practices that will have an exclusionary effect on as-efficient competitors by using methods other than those that are part of competition on the merits.49 This statement is nothing new and it is widely accepted. Second, and more fundamentally, the CJEU indicates that the Hoffman La Roche case law, which has often been cited to suggest that loyalty rebates should be analysed under a quasi-per se rule of illegality, should be “further clarified” in the case where the undertaking concerned submits, based on supporting evidence, that the conduct is not capable of restricting competition and producing anticompetitive effects.50 However, even if the AEC test fails to show foreclosure, the practice may still be illegal under the “all circumstances test”. In that case, the CJEU considers that: the Commission is not only required to analyse, first, the extent of the undertaking’s dominant position on the relevant market and, secondly, the share of the market covered by the challenged practice, as well as the conditions and arrangements for granting the rebates in question, their duration and their amount; it is also required to assess the possible existence

37(4) World Competition: Law and Economics Review 405, available at http:// ssrn.com/abstract=2498407. 46 Opinion of AG Wahl in Case C-413/14 P Intel v Commission, EU:C:2016:788, para. 170: “the General Court erred in law by not considering the AEC analysis carried out by the Commission in the decision at issue as a part of the assessment of all the circumstances” (emphasis added). 47 Case C-413/14 P Intel v Commission, EU:C:2017:632. 48 Case C-209/10 Post Danmark A/S v Konkurrencerådet, EU:C:2012:172 (“Post Danmark I”). 49 See Case C-413/14 P Intel v Commission, EU:C:2017:632, paras 133–136. 50 Ibid, paras 137–139.

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of a strategy aiming to exclude competitors that are at least as efficient as the dominant undertaking from the market.51

Third, the CJEU hints that rebates may be “objectively justified” and that “it has to be determined whether the exclusionary effect arising from such a system, which is disadvantageous for competition, may be counterbalanced, or outweighed, by advantages in terms of efficiency which also benefit the consumer”. This balancing analysis should, however, be carried out “only after an analysis of the intrinsic capacity of that practice to foreclose competitors which are at least as efficient as the dominant undertaking”.52 In terms of procedural law the key to understanding the decision is that the Commission had conducted an AEC analysis itself. Yet, in its final decision and before the General Court the Commission had contested the legal significance of the AEC test. This kind of “playing with two sets of cards” was not accepted by the CJEU. The CJEU stressed that the General Court had a duty to review Intel’s arguments challenging the way in which the Commission applied the AEC test. Since the Commission had carried out an AEC test as part of its assessment, the General Court could not fail to consider Intel’s criticism of that test. It must be borne in mind that the Intel judgment does not say that the Commission must conduct an AEC test as part of its assessment under Article 102 TFEU. As noted above, the CJEU merely states that if the Commission carries out such a test and the way in which it has been conducted is criticized by the dominant company in its appeal, the General Court cannot ignore these criticisms in its review of the Commission decision. This means that the CJEU maintains the position it held in Post Danmark II, where it adjudicated that, while the Commission is free to carry out an AEC test as part of its assessment, conducting such a test does not constitute a necessary condition for a finding that the contested practice is abusive.53 It also is interesting to note that, legally, even where the AEC test leads to a conclusion that there is no foreclosure effect, the practice can still amount to an abuse under Article 102 TFEU. In such situations the 51

Ibid, para. 139. Ibid, para. 140. 53 Case C-23/14 Post Danmark A/S v Konkurrencerådet, EU:C:2015:651, para. 57 (“Post Danmark II”): “it is not possible to infer from Article 82 EC or the case-law of the Court that there is a legal obligation requiring a finding to the effect that a rebate scheme operated by a dominant undertaking is abusive to be based always on the as-efficient-competitor test”. 52

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Commission should also look at “all the circumstances” of the case, including the extent of the undertaking’s dominant position on the relevant market and, second, the share of the market covered by the challenged practice, as well as the conditions and arrangements for granting the rebates in question, their duration and their amount. The need for enforcement authorities to look at all the circumstances of the case is, as such, not new as it could already be found in earlier cases, such as Michelin I and Michelin II,54 British Airways,55 and Post Danmark I and II.56 Looking at all the circumstances of the case adds value as it allows the enforcement authority to develop a complete picture of the rebates’ capacity to foreclose. Yet, it should be noted that the CJEU does not set a minimum market coverage threshold for a rebates regime to fall under Article 102 TFEU. Thus, while it is generally accepted that the larger the coverage of the rebates, the greater the likelihood the rebates will have a negative impact on competition, the CJEU does not address the question of whether a minimum coverage is needed to trigger the application of Article 102 TFEU, although it was invited to do so by Intel.57 It is not yet clear what will be the implications of the Intel judgment going forward. This will be clarified in the years to come. Taking into account the fairly general statements of the Court it is likely that the decision will also have implications outside of rebates, and for tying cases. While there is a movement away from the per se standards, the Intel decision cannot be seen as a fully-fledged adoption of an effectsbased test either. In any case, in competition law there is always a trade-off between legal certainty and flexibility. The more flexibility is given to legal norms, the less predictable they become. The more we may win on economic insights, the more we may lose in terms of time and process cost. While antitrust has rightly become a fact-intensive endeavor in the 54 Case 322/81 NV Nederlandsche Banden Industrie Michelin v Commission [1983] ECR 3461 (“Michelin I”) and Case T-203/01 Manufacture française des pneumatiques Michelin v Commission [2003] ECR II-4071 (“Michelin II”). 55 Case C-95/04 P British Airways v Commission [2007] ECR I-2331. 56 Case C-209/10 Post Danmark A/S v Konkurrencerådet, EU:C:2012:172 (“Post Danmark I”); and Case C-23/14 Post Danmark A/S v Konkurrencerådet, EU:C:2015:651 (“Post Danmark II”). 57 See Venit, James, “The judgment of the European Court of Justice in Intel v. Commission: a procedural answer to a substantive question?” (2017) European Competition Journal 15.

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post-Chicago world, we are still searching for the optimum between predictability and accuracy and are likely to continue as long as antitrust is around. It can be argued that a rule of reason approach is the correct policy choice since, in digital markets, product boundaries are often unclear and change over time or rapidly and, due to economics of scope and scale, bundling practices can bring concrete advantages to consumers. Furthermore, product integration and other technology decisions are in most cases better left to companies themselves. That being said, in cases where competitive harm can be demonstrated it is paramount that the intervention happens early enough and that competition authorities are not required to wait until the tipping has actually occurred. If it were otherwise, dominant undertakings would actually be given the time to achieve the very objective of tying and any meaningful intervention would be too late. In this sense it is problematic that often Article 102 enforcement cases take several years, which is bound to affect the effectiveness of the competition rules. Tying Criteria in Two-sided Markets Tying and tied goods must be two separate products In Microsoft the Commission stated that the question of separate products must be answered by considering “the reality of the marketplace”. The distinctness of products for the purpose of an analysis under Article 102 therefore has to be assessed with a view to consumer demand.58 If there is no independent demand for the allegedly “tied” product, then the products at issue are not distinct and a tying charge will be to no avail. A key question remains whether the separate product criteria has to be analyzed on the basis of the tying product, the tied product, or both. Two aspects are significant: first the focus is on whether the tied product is sold separately and, second, the existence of demand for that product is deduced from the existence of suppliers. 58 With regard to the requirement of separate products, the Commission’s Guidance Paper states as follows: “Whether the products will be considered by the Commission to be distinct depends on customer demand. Two products are distinct if, in the absence of tying or bundling, a substantial number of customers would purchase or would have purchased the tying product without also buying the tied product from the same supplier, thereby allowing stand-alone production for both the tying and the tied product”. This would seem to imply that two products are considered separate if there is separate consumer demand for both the tying and the tied product.

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Microsoft had argued that the correct inquiry is whether the tying product is ever sold without the tied product. Both the Commission and the General Court rejected Microsoft’s argument. The Commission argued that on the market there were undertakings specialized in the manufacture or sale of the tied product without the tying product. This was deemed to be sufficient to fulfill the separate product requirement. Hence, it seems that it is not necessary to establish the existence of separate demand for the tying product alone. The fact that the market provided media players separately was deemed to prove that there is separate consumer demand for media players that is distinguishable from the demand for client PC operating systems.59 The General Court (then CFI) added that Microsoft’s argument would imply that no complementary products would ever be considered separate.60 Then again, in the Microsoft case the separate product test was relatively easy to show: media players had been clearly sold as separate products at the point of time the abuse started and still were at the market when the Commission’s decision was made (and in fact still are today). The market had seen more and more concentration as a result of Microsoft’s practices as regards for example internet browsers and word processing software, so a legal precedent on illegal tying was clearly needed from the EU institutions to avoid type II mistakes (too lenient application). The separate product test is often difficult to apply two-sided to digital platforms because the boundaries of different products are often blurred. In digital markets products and consumer demand often change rapidly. It may be that, at a certain point, there is separate demand for the tied product without the tying product, but no separate demand for the tying product without the tied product. Digital products are normally upgraded to include new features. This often leads to situations where there is still separate demand for the tied product but consumers are no longer interested in buying the tying product without the allegedly tied feature.61 59 See the Microsoft Decision (n 30), para. 809; confirmed in Microsoft I judgment (n 30), paras 921–923. This was particularly likely, the Commission found, where original equipment manufacturers (OEMs) act as intermediaries by combining different hardware and software components. 60 Microsoft I judgment (n 30), para. 921. 61 Consider, for instance, present-day mobile phone markets where most consumers today prefer to have a smartphone integrated browser, email services, camera, media player, and so on. As discussed above, Windows can be perceived as a multi-sided platform that provides a foundation for software applications like word processing, multimedia applications and email programs. Microsoft

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This can make market definition a very challenging task. The distinct characteristics of two-sided digital markets need to be taken into account in antitrust analysis. Sticking to old tools has been criticized for good reasons.62 Research is underway and more suitable tools have been suggested.63

had argued that Windows Media Player has to be considered as a new functionality that has been integrated into Windows in response to technological advances and changes in customer demand. However, that argument was (correctly) dismissed due to the separate demand of the products. 62 For instance, Hovenkamp notes that when market power is measured by traditional antitrust tools, firms with high fixed costs appear to have significant amounts of market power. Hovenkamp argues that antitrust should not draw an inference of substantial market power unless returns over a fairly long run are excessive. Digital products are often sold in differentiated markets and product differentiation largely explains prices above marginal cost as well as differences in pricing. Measuring market power in multi-sided markets poses special difficulties because of “feedback” effects that occur when a price change in one side affects size and revenue on a different side. Market multi-sidedness can also make traditional market share measures much less valuable. These problems are further exacerbated by the fact that in most multi-sided platform markets fixed costs are high, limiting the use of price-cost margins to assess power. See Herbert Hovenkamp, “Antitrust and Information Technologies”, available at https://scholarship.law.ufl.edu/flr/vol68/iss2/9/. However, it may be added that equating market power with profits is also a very risky exercise in traditional industries because high profits can be caused not only by monopoly power but also by higher efficiency. 63 For instance, drawing from the economics of two-sided markets, Filistrucchi, Geradin, van Damme and Affeldt provide suggestions for the definition of the relevant market in cases involving two-sided platforms, such as media outlets, online intermediaries, payment cards companies, and auction houses. The authors also discuss when a one-sided approach may be harmless and when instead it can potentially lead to a wrong decision: “We then show that the current practice of market definition in two-sided markets is only in part consistent with the above suggestions. Divergence between our suggestions and practice is due to the failure to fully incorporate the lessons from the economic theory of two-sided markets, to the desire to be consistent with previous practice, and to the higher data requirements and the higher complexity of empirical analysis in cases involving two-sided platforms. In particular, competition authorities have failed to recognize the crucial difference between two-sided transaction and nontransaction markets and have been misled by the traditional argument that where there is no price, there is no market.” See Lapo Filistrucchi, Damien Geradin, Eric van Damme and Pauline Affeldt, “Market Definition in two-sided markets: Theory and Practise” (2014) 10(2) Journal of Competition Law & Economics 293, available at http://jcle.oxfordjournals.org/content/10/2/293.full.pdf+html.

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“Coercion” or limiting the supply of the tying product without the tied product The “refusal to deal” or “coercion” element on a tying abuse means that the dominant company must in one way or another limit the choice of its contracting parties by offering the tied product only in exchange for the customer taking the tied product as well. The dominant seller may exploit consumers of the dominant undertaking when they purchase supplementary products, which they do not actually need. On the other hand, coercion may restrict the customers’ freedom of choice between different supplementary products, which they do need but where their preference would have been another vendor. This may lead to the foreclosure of competing manufacturers of the tied product, since the customer is automatically locked into the dominant undertaking’s tied product. The customer concerned no longer has the resources or incentives (in terms of money, space, time) to purchase substitute products supplied by competitors. While limiting customer choice is normally easier to shoe in “classical” tying cases,64 the elusive boundaries of digital markets make the analysis more complicated. It was held in the Microsoft Media Player case that it is not required that there needs to be “coercion” in the strict sense of the word but it suffices that in practice only one choice is offered to the contracting party. In that sense “coercion” can be contractual (buying the tying and tied product together is mandated in a contract), economic (buying the tying and tied product together is economically the only viable alternative) or factual (the customer is left no other choice than buying both products together). It can also be a mixture of these. Hence, in business life restricting customer choice may be a more appropriate angle than “coercion”, which creates the image of mental or physical force being used. In particular when dealing with customers, business practices are subtler, and actions of “brute force” must be avoided even by companies in a legal monopoly position.65 64 “Classical” tying means that the customer is coerced to buy distinct she does not really want, for instance apples are sold only if the consumer agrees to buy oranges as well from the same seller. In many cases “bad bundling” boils down to a “refusal to deal”. 65 In the Microsoft media player and browser cases it was deemed that what is preinstalled in the PC is also what consumers in most cases actually use. It seems that if an application is preloaded on a device as a default service this increases significantly the likelihood of the consumer ending up using that service. The Commission equated coercion with a lack of consumer choice about whether or not to obtain the tied product from the supplier of the tying product.

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Yet, the key in restricting choice in Microsoft seems to be that the media player was not offered for free but it was tied with the Windows OS and there was a relatively high price for this product. Under these conditions it must be presumed that part of the price of the Windows OS covered the functionality of the Microsoft Media Player, which was “baked” into the bundled price. Hence, the coercion existed as regards the OEMs and not consumers. On the other hand, indirectly consumers’ choice was also pre-empted by the software integration: the consumers had to pay for the media player when they bought the Windows OS either separately or bundled to a PC. This was found to be enough to cause a negative effect on competition. Tying must foreclose competition According to the existing case law relating to traditional tying cases under Article 102 TFEU, for instance in Hilti and Tetra Pak, it has been assumed that the tying of a specific product and a dominant product has, by its nature, a foreclosure effect. As discussed above, this formalistic per se-type statement was repeated by the General Court in Microsoft 66 although the Commission had proposed a rule of reason test that it considered more appropriate for digital software markets. This was easily made out because Windows was only available with WMP installed (usually through OEMs) and it could not be uninstalled. Microsoft argued that this approach did not meet the requirement of Article 102(d) that “the conclusion of contracts must be made subject to acceptance by the other parties of supplementary obligations”. Consumers, Microsoft argued, were not under a “supplementary obligation” because there was neither an additional charge for WMP, nor were consumers required to use WMP if they preferred a competing product. The General Court rejected this approach. It said that because a separate price was not apparent did not mean that it was not present; it was simply included in the price of Windows. In any event, it agreed with the Commission that the case law did not require either an additional charge or an obligation to use the tied product. The Court argued that “users who find [Windows Media Player] pre-installed on their client PCs are indeed in general less likely to use alternative media players as they already have an application which delivers media streaming and playback functionality”: Microsoft I judgment (n 30), para. 971. 66 Microsoft I judgment (n 30), para. 868; Eurofix-Bauco v Hilti (OJ L 65, 11.3.1988, p. 19), upheld in Case T-30/89 Hilti v Commission [1991] ECR II-1439, itself confirmed by the Court of Justice in Case-53/92 P Hilti v Commission [1994] ECR I-667; Case T-83/91 Tetra Pak v Commission [1994] ECR II-755, itself confirmed by the Court of Justice in Case C-333/94 P Tetra Pak v Commission [1996] ECR I-5951.

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In Microsoft Media Player Microsoft argued that consumers remained free to use the media player of their choice. Hence, there could be no real foreclosure as competing products always remained available even if they were not preinstalled on Windows. Competition was only “one click away”. The Commission and the Court rejected this argument with reference to the fact that due to “consumer inertia” most consumers did not bother to download another media player even when they were readily available and easy to download. In fact, the statistics showed that most consumers continued to use the media player that had been pre-installed. Later, the same argumentation was used by the Commission in the EU Microsoft web browser case. Indeed, one may ask why consumers are so “reluctant” to behave “rationally”. In these two-sided markets consumers can download media players and search machines for free. In general, one might assume that where customers face only nominal costs to switch products, then tying or bundling is unlikely to lead to foreclosure. However, behavioral economics suggests that even small switching costs can have significant effects on consumer behavior in the presence of consumer inertia, endowment effects and default bias.67 It might be argued that there is nothing surprising in this. First, many consumers stick to a product as long as it works “reasonably well”, both as regards traditional products and online products. Second, there is nothing surprising if a modern-day consumer decides to spend her increasingly sparse free time on music, gardening, sports or spending time with the family instead of downloading “the latest gadgets” on the home computer. In fact, this kind of consumer behavior is rational; the only thing that is not rational is the insistence on “rational choice” modeling even in situations where it does not correspond with the empirical realities. In antitrust demand, analysis must always be based on empirical facts. This is even more so in

67 See generally e.g. Justus Haucap, “Bounded Rationality and Competition Policy” in Josef Drexl, Wolfgang Kerber and Rupprecht Podszun (eds), Competition Policy and the Economic Approach. Foundations and Limitations (Edward Elgar Publishing, 2011). Behavioral economics likewise suggests that the behavior of firms is (for many different reasons relating to human motives and uncertainties) not always “profit maximizing”. See e.g. Mark Armstrong and Steffen Huck, “Behavioral Economics and Antitrust”, in Roger Blair and Daniel Sokol (eds), The Oxford Handbook of International Antitrust Economics (Vol I, Oxford University Press, 2015) 205–228.

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complicated two-sided markets where seemingly small details can have a great effect on the outcome of the case.68 It is interesting to note that one of the key defense arguments of Microsoft and Google has been that competition is effective because consumers can freely download a competing product if they wish to do so, which would mean that competition is only “one click away”. Hence, it could be argued, there can be no foreclosure as the switching costs are close to zero. While “bounded rationality” or “consumer inertia”, if supported by empirical evidence, can shift the balance towards intervention, it cannot be denied that in software markets from the buyers’ perspective, barriers to change the provider can be much lower than in traditional industries due to the speedy and cost-effective distribution possibilities. However, there are other issues that may limit switching opportunities, like application barriers to entry or lack of interoperability with the products of the incumbent that can effectively block entry or cause a smaller competitor to exit the market. In the Microsoft case interoperability abuse relating to work group servers was dealt with in the second part of the General Court’s decision of 2007. It can be argued that in two-sided software markets the acquisition of the tied product will often not prevent or limit the acquisition of other, substitutable products. This argument seems to be particularly convincing if the downloading is easy and can be done with low or no extra cost.

68 The importance of pre-installed applications also means that while theoretically speaking competition is “only one click away”, in practice it is not. Naturally, there is more competition for consumers when they can switch from one provider to another or use both at the same time. In this particular case this defense argument seems to have significant weaknesses. First, it is a well-known feature of multi-sided platforms that they often tend to lock in customers. They can do so by offering exclusivity agreements as well as bundling and tying their services. Modern PCs, laptops, tablets and smartphones have become distribution platforms for all kinds of normally apps-based digital services as they have started offering a plethora of online and offline tools, like navigation, email, calendar, search, photo, video, internet services, time management etc. Consequently, pre-installment of certain services becomes a fait accompli even if – technically speaking – switching, say, to another media player can be done simply by downloading the relevant software and signing in to the new service. On the contrary, the ballot screen remedy seems to have worked much better as the “sleepy consumer” is “woken up” from time to time and is forced to take a position on which browser to use.

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Also, due to the growing usage and storage capacity of today’s computers, laptops and smartphones, multi-homing has become more and more an option.69 In two-sided digital markets tying may still cause harmful effects, for instance when the dominant player uses tying practices to force traffic to its own network and to correspondingly exclude competing platforms. If the monetizing mechanism is based on advertising, digital platforms are actually competing for “consumer eyeballs”, i.e. visits to the website and the highly valuable customer data that can be collected on these visits, which will then be sold to the advertisers (for the most lucrative advertising contracts and not for consumers’ money). A dominant operator of a multi-sided digital platform can engage in tying and other exclusionary contract terms (e.g. exclusivity) in the “upstream” B2B markets to force traffic into its own network in the “downstream” consumer markets. The effect of this is “sucking” most of the customers to the incumbent’s network and “drying” the competitor’s network. This on its own turn will further limit consumer choice downstream and potentially also prevent innovations from entering the market. In this context the issue of “coercion”, i.e. whether or not the consumer product is offered for free, may be totally beside the point. In these cases the tie or “coercion” is in the upstream OEM market, not in the downstream consumer market. The key question as regards tying is whether OEM customers or advertisers are tied to the dominant two-sided platform in a way that is too restrictive and leads to foreclosure, and further, how entry is affected. Tying must not be objectively justified It is well known that tying can produce significant efficiencies. In the case of digital platforms this is obvious: offering a product for free on one side of the market will by its nature necessitate a certain degree of tying, i.e. that the customer will, for instance, buy another product or, in case of a search machine or social network, allow her user data to be utilized commercially. Microsoft claimed that three related efficiencies justified tying. First, the integration of new functions was part of its Windows business model, which allegedly made it a more useful and attractive platform for 69 In Microsoft Media Player the General Court agreed with the Commission that “users who find [Windows Media Player] pre-installed on their client PCs are indeed in general less likely to use alternative media players as they already have an application which delivers media streaming and playback functionality”: Microsoft I judgment, para. 971.

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developers and resulted in lower consumer transaction costs. Second, the integration of WMP meant that developers, content providers and consumers could rely on standard media functionality being available. Third, removing WMP would degrade the performance of Windows generally. Both the Commission and the Court rejected the first claim on the grounds that the efficiencies could be achieved without tying: consumer demand for pre-installed media players would be satisfied by OEMs installing one prior to delivery.70 As regards standardization, the Commission held that rather than being an efficiency argument, this was exactly the competition problem it sought to address.71 The Court agreed with the Commission that there was insufficient evidence to support Microsoft’s claim that unbundling was not possible or that technical performance of Windows would be degraded by removing WMP.72 While it was agreed that tying and bundling could lead to efficiencies, an argument that a dominant position is required to provide maximal efficiency benefits was met with skepticism. The Commission’s Guidelines on the application of Article 102 TFEU explicitly recognize many of the factors that appear critical in assessing competition in two-sided platforms. The Commission emphasizes that both barriers to entry and exit as well as efficiency arguments do play a role in a decision whether or not to bring an enforcement action: [T]his includes the conditions of entry and expansion, such as the existence of economies of scale and/or scope and network effects. Economies of scale mean that competitors are less likely to enter or stay in the market if the dominant undertaking forecloses a significant part of the relevant market. Similarly, the conduct may allow the dominant undertaking to tip a market

70 See Microsoft Decision (n 30), paras 956–961; Microsoft I judgment (n 30), para. 1155. 71 See Microsoft Decision (n 30), para. 969. The Court concluded that claiming efficiencies on the basis that only one company would provide the service for all the consumers came close to stating that monopoly should be preferred: Microsoft I judgment (n 30), paras 1151–1153. 72 See Microsoft I judgment, para. 1163; Microsoft decision, para. 1026. It may also be added that the complainants had proven technically at the Commission oral hearing that, contrary to the claims of Microsoft, the media player could be removed with ease from Windows and that both software products worked perfectly well after the unbundling. This was demonstrated with a “technical showcase” on a big screen for the audience in the oral hearing. In retrospect, this may have affected the credibility of the efficiency defense overall.

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characterized by network effects in its favor or to further entrench its position on such a market.73

The Commission may also consider whether tying and bundling practices allow the supplier to pass on efficiencies arising from its production or purchase of large quantities of the tied product.74 However, according to the Commission Guidance Paper any such justification necessitates a demonstration that the conduct is objectively necessary or that by its conduct produces substantial efficiencies, which outweigh any anti-competitive effects on consumers. To be permitted, the conduct in question needs to be indispensable and proportionate to the goal allegedly pursued by the dominant undertaking.75 The dominant company bears the burden of proof for any efficiency benefits. It then falls to the Commission to make the ultimate assessment of whether the conduct concerned is not objectively necessary and, based on a weighing-up of any apparent anti-competitive effects against any advanced and substantiated efficiencies, is likely to result in consumer harm.76 Under Article 102 TFEU any competitive harm must be compensated by clearly established and proven efficiency benefits that not only compensate consumers, but also that only such means are used that are proportionate and do not exclude all competition.77 73

See Communication from the Commission, Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, OJ 2009/C 45/02, p. 20. 74 The Commission may also consider whether such practices reduce transaction costs for customers, who would otherwise be forced to buy the components separately, and enable substantial savings on packaging and distribution costs for suppliers. It may also examine whether combining two independent products into a new, single product might enhance the ability to bring such a product to the market to the benefit of consumers. See Communication from the Commission, Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, OJ 2009/C 45/02, p. 62. 75 See ibid, p. 28. 76 Ibid, p. 31. 77 As stated above, the burden of proof lies on the defendant to show that the positive effects outweigh the anticompetitive effects. There are several justifications possible, which are regularly argued by the accused undertaking. Often arguments relating to economies of scale and scope, or complementarities, are made. However, if these arguments are directly or indirectly based on an assumption of a bigger portion of the market being taken as a result of the tying practice, they run into difficulties. One justification often referred to is that the tying is necessary in the context of quality, usage or safety of the product. The

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The scope of an efficiency defense is succinctly reduced in the Guidance Paper: Rivalry between undertakings is an essential driver of economic efficiency, including dynamic efficiencies in the form of innovation. In its absence the dominant undertaking will lack adequate incentives to continue to create and pass on efficiency gains. Where there is no residual competition and no foreseeable threat of entry, the protection of rivalry and the competitive process outweighs possible efficiency gains. In the Commission’s view, exclusionary conduct which maintains, creates or strengthens a market position approaching that of a monopoly can normally not be justified on the grounds that it also creates efficiency gains.78

The recent judgment of the EU General Court in the Intel case seems to put strict limits on an efficiency defense under Article 102 tying case, although that case dealt mainly with exclusivity and exclusionary rebates.79 Winning an efficiency defense in an Article 102 case remains a tall order. No doubt, as regards digital platforms, arguments can be made that there are complementarities and some efficiency benefits if an incumbent provides all or most of the services to the consumer. That argument was, unsuccessfully, tried in the Microsoft case. As the General Court remarked, while there may be some efficiency benefits, overall dynamic efficiency is best served if choice is left to consumers.80 In other words, safety argument was raised in the Hilti case but it was turned down as it is “not the dominant company’s responsibility to guarantee the safety of other company’s products”: Case C-53/92P Hilti AG v Commission [1994] ECR I-667, pp. 102–107. Generally speaking, EU courts have taken a restrictive approach towards tying defenses. 78 Communication from the Commission, Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, OJ 2009/C 45/02, p. 30. 79 See Case T-286/09 Intel Corp v Commission (2014), Decision of the General Court, 12 June 2014, paras 75, 86 and 93. 80 “Next, the Court considers that Microsoft is not entitled to rely on the fact that the bundling ensures the uniform presence of media functionality in Windows, which enables software developers and Internet site creators to avoid the need to include in their products mechanisms which make it possible to ascertain what media player is present on a particular client PC and where necessary to install the necessary functionality (see paragraphs 1107, 1111 and 1115 above). The fact that tying enables software developers and Internet site creators to be sure that Windows Media Player is present on virtually all client PCs in the world is precisely one of the main reasons why the Commission correctly took the view that the bundling led to the foreclosure of competing

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competition is preferred to monopoly and efficiencies will not suffice, and in particular not where there are other less restrictive means to achieve the same kind of efficiency. This is understandable from a policy point of view. EU competition law, like US antitrust law, aims to protect “consumer welfare” as distinguished from “total welfare”. As a policy proposition the consumer welfare standard presupposes that the claimed efficiency benefits are also passed on to consumers at least to some extent. If there is only little or no competition left, this is unlikely to happen. Hence, it is logical to set a baseline where real and convincing possibilities to challenge the incumbent still exist because only remaining competitive pressure forces the incumbent to pass on the benefits to consumers. Then again, at least if the bar is set high (enough) to prove market dominance, the very existence of a dominant position81 normally may well indicate that this does not happen. A silent consequence of this

media players from the market. Although the uniform presence to which Microsoft refers may have advantages for those operators that cannot suffice to offset the anti-competitive effects of the tying at issue. As the Commission correctly observes (see paragraph 1130 above), by such an argument Microsoft is in fact claiming that the integration of Windows Media Player in Windows and the marketing of Windows in that form alone lead to the de facto standardization of the Windows Media Player platform, which has beneficial effects on the market. Although, generally, standardization may effectively present certain advantages, standards cannot be allowed to be imposed unilaterally by an undertaking in a dominant position by means of tying. The Court further notes that it cannot be ruled out that third parties will not want the de facto standardization advocated by Microsoft but will prefer it if different platforms continue to compete, on the ground that that will stimulate innovation between the various platforms”: Microsoft I judgment, paras 1151–1153. 81 As is very well known, in the seminal United Brands case (Case 27/76 United Brands v Commission [1978] ECR 207) the European Court of Justice gave the definition of market dominance, which is still used nowadays: “[the dominant position] relates to a position of economic strength enjoyed by an undertaking, which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers. Such a position does not preclude some competition, which it does where there is a monopoly or quasi-monopoly, but enables the undertaking, which profits by it, if not to determine, at least to have an appreciable influence on the conditions under which that competition will develop, and in any case to act largely in disregard of it so long as such conduct does not operate to its detriment”. This independence criterion, if taken seriously, may well mean that there is no necessity to pass the efficiency benefits to customers and ultimate consumers.

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policy choice has been so far that efficiency defense has not played a significant role in EU cases. It seems that, in a case of trade-off, according to the Court’s case law relating to Article 102 TFEU competition is put before efficiency arguments, not least because it is believed that the competitive process, if held intact, will find efficient solutions without the necessity of the Court to engage in complicated balancing actions. Efficiency arguments seem to play a relatively significant role when the Commission services (including the chief economist) are taking decisions on which cases are brought forward. Then again, if these enforcement cases move to courts, more traditional legal standards based on established old case law and “semi-structural” analysis are applied. This means that efficiency arguments play a much larger role “in the middle” of the antitrust enforcement process whereas their importance is reduced “at the tail end” of it in EU courts. It remains to be seen whether the Intel judgment of the CJEU will increase the role of the efficiency defense under Article 102 TFEU in the coming years. The next opportunity to develop the case law on tying as regards digital platforms might be the Google Android case.82

5. CONCLUSION Although there are some initially plausible arguments that digital markets are too difficult for competition authorities to deal with and should be left largely outside the scope of antitrust enforcement due to high error costs and the dynamic and sometimes unpredictable nature of digital markets,83 the author of this chapter finds such policy recommendations largely unconvincing. First, it is true that in digital markets there is a greater dynamism than in many other markets but the markets can go in both directions, i.e. both towards new competition emerging as well as towards durable market dominance. Second, while it is true that old 82 See EU Commission’s press release on alleged tying concerns, http:// europa.eu/rapid/press-release_IP-16-1492_en.htm. 83 See e.g. Geoffrey A. Manne and Joshua D. Wright, “Google and the Limits of Antitrust: The Case Against Google” (2011) 34 Harv. J.L. & Pub. Pol’y 171, 244; David McGowan, “Between Logic and Experience: Error Costs and United States v. Microsoft Corp.” (2005) 20 Berkeley Tech. L.J. 1185, 1189–90; Miguel Rato and Nicolas Petit, “Abuse of Dominance in Technology-Enabled Markets: Established Standards Reconsidered” (2013) 9(1) European Competition Journal 1.

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structural measurement tools are neither fully reliable nor sufficient (even) in high tech markets, this only means that new, more dynamic tools, including innovation and information analysis, need to be applied. Third, while there are valid arguments that false positives might kill innovation, likewise there are valid arguments that false negatives might kill innovation. Fourth, while it is true that digital markets might be hard to understand, there are also other complicated industries that regulators need to deal with. The key is always to really understand the value chain of a given industry as well as the key parameters that decide on success and failure. Fifth, a large portion of economic growth comes from innovation and high tech industries. Therefore, if high tech industries are left off the radar screen this is another way of arguing a laissez-fair policy towards application of antitrust in important business sectors. If antitrust law is to make a positive societal contribution it will need to deal also with difficult sectors where the stakes are high from a consumer welfare point of view. Sixth, if Schumpeter’s creative destruction is used as an argument against intervention in cases where markets are likely to self-correct, then it must also be true that dominant companies may have a motive to try to prevent this from happening and that practices of incumbents that limit entry may also decrease innovation and consumer welfare. There is (still) a lot of confusion around the question of how to deal with two-sided platforms in an Article 102 context. On the one hand, there are situations where the two-sidedness of the market explains why it makes perfect sense in terms of business to provide the service “below cost” or even “for free” or why it is necessary to “tie” the customer. If this element is disregarded it would lead to the wrong conclusion that there is an abuse even though we are dealing with a normal characteristic of the market (type I mistake). On the other hand, the two-sidedness of the market does not lead to immunity from competition laws. It would be wrong to assume that because a market is a two-sided market, showing some complementarities would suffice to make tying that prevents market entry legal. While this kind of hands-off approach is sometimes suggested in the literature, in practice if adopted it would lead to a serious under-enforcement of competition rules (type II mistake). Hence, there is a need to apply antitrust law to harmful tying practices of two-sided digital platforms. Harm can occur, for instance, if the two-sided market and contractual practices are such that market access is hindered.

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14. Online platforms, rate parity and the free-riding defence Simonetta Vezzoso 1. INTRODUCTION Online platforms characterize today’s digital landscape, and their triumphal march throughout the world1 and into a growing number of economic sectors coincides with an increasing focus on their regulation.2 Horizontal and vertical restraints, abuses of dominant position, and merger cases involving online platform businesses are all equally high on the enforcement agendas of competition authorities. As with other competition restraints, vertical agreements in digital markets create particular enforcement challenges.3 This is illustrated clearly also by the recent online hotel booking cases in the EU, in which national competition authorities (NCAs) have investigated so-called rate parity clauses in the contracts between the three largest online travel agents (OTAs) and their hotel partners. These are contract clauses laying down the hotelier’s obligation to display the same room prices across sales channels. In January 2010, the German NCA (Bundeskartellamt) began an investigation into a rate parity obligation found in the contracts between Hotel Reservation Service Robert Ragge GmbH (HRS), an 1 See Peter C. Evans and Annabelle Gawer, ‘The Rise of the Platform Enterprise: A Global Survey’ (2016), The Center for Global Enterprise, http:// thecge.net/wp-content/uploads/2016/01/PDF-WEB-Platform-Survey_01_12.pdf. 2 See European Commission, ‘Online Platforms and the Digital Single Market Opportunities and Challenges for Europe, Communication’, 25 May 2016, COM(2016) 288 final. 3 See Josefine Hederström and Luc Peeperkorn, ‘Vertical Restraints in On-line Sales: Comments on Some Recent Developments’ (2016) 7 Journal of European Competition Law & Practice 14. In particular, the authors identify three essential characteristics of online sales that may create new challenges for the competition assessment of vertical restraints, namely service-ization, de-passivization, and platformization. The focus of this chapter is on the latter.

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online hotel booking portal, and its hotel partners. In July 2013, the Bundeskartellamt concluded4 that the rate parity clause between HRS and hoteliers was a vertical agreement restricting competition under Article 101(1) TFEU, and that neither the Vertical Block Exemption Regulation5 applied, nor there were reasons to justify an individual exemption under Article 101(3) TFEU. The Bundeskartellamt therefore ordered HRS to remove the rate parity clauses from its contracts with hotels and also launched investigations into similar agreements concluded by Expedia and Booking, the other two main OTAs operating on the German market. HRS appealed the decision to the Düsseldorf Higher Regional Court, and the appeal was rejected in January 2015.6 Although similar competition concerns were expressed by the French NCA (Autorité de la concurrence), the Italian NCA (Autorità Garante della Concorrenza e del Mercato), and the Swedish NCA (Konkurrensverket) in their respective investigations into Booking’s rate parity clauses, the triad of NCAs decided, in strict cooperation with the European Commission,7 to accept identical commitments from the OTA to restrict the scope of the rate parity obligation.8 Following the decisions of the triad of NCAs, Booking unilaterally extended the implementation of the commitments to its contracts with hoteliers throughout the EU,9 followed by Expedia. However, in December 2015, the German NCA decided to prohibit the same ‘minor’ rate parity clause that Booking agreed with the other NCAs within the framework of their respective commitment proceedings.10 The online hotel booking saga was closely followed in the EU and beyond, in particular because of its potential to clarify a number of key assessment issues concerning a category of commercial practices already widely spread in online markets.11 The parallel investigations conducted by NCAs revealed an array of serious anticompetitive effects stemming 4

Bundeskartellamt, Hotel Reservation Service (HRS), Case B 9-66/10. OJ L 102, 23.04.2010, pp. 1–7. 6 Dusseldorf Higher Regional Court (OLG), VI – Kart. 1/14 (V). 7 So-called ‘enhanced cooperation’ was established between the French, Italian and Swedish authorities to investigate the Booking case as a priority, coordinated by the European Commission. 8 Autorité de la concurrence, Case 15-D-06; Konkurrensverket, Case 596/ 2013; Autorità Garante della Concorrenza e del Mercato, Case I779 B. 9 Cf. Booking.com, ‘Booking.com to Amend Parity Provisions Throughout Europe’, 25 June 2015, https://news.booking.com/bookingcom-to-amend-parityprovisions-throughout-europe/. 10 Bundeskartellamt, Booking, Case B 9-121/13 (appeal is pending). 11 See ICN, ‘Online Vertical Restraints Special Project Report’ (2015), http://www.internationalcompetitionnetwork.org/uploads/library/doc1070.pdf. 5

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from rate parity obligations. In their defence, the OTAs alleged, inter alia, that without rate parity their specific efforts and investments aimed at matching the two market sides, namely hoteliers and prospective travellers, could be exploited by free-riders. In the HRS and Booking decisions, the German NCA concluded that there was insufficient evidence of the efficiency gains of rate parity obligations. Instead, by accepting the commitments, the three competition authorities implicitly recognized that some sort of protection against free-riding was indeed warranted.12 Given the discrepancies in the decisions taken by NCAs in the EU, concerns were expressed about regulatory fragmentation, and valuable suggestions have been made about how to clarify the legal status of rate parity clauses in the EU.13 While regrettable especially in terms of the legal uncertainty caused,14 the current divergence between NCAs within the EU is not totally surprising, in particular due to the novelty of many of the issues involved.15 In-depth analyses of the NCAs’ findings in the online hotel booking cases are now needed, in particular in view of an The report indicated a relatively higher degree of concern about rate parity clauses in the EU than elsewhere among ICN members. 12 See the French contribution to the OECD Hearing on across platform parity agreements (2015), § 47 (‘several factors suggest that in the total absence of an APPA there would be a real risk of free riding in the online hotel booking sector, but this risk would vary depending on the distribution channel’). 13 See UK House of Lords, ‘Online Platforms and the Digital Single Market’, 10th Report of Session 2015–2016 (2016), http://www.publications. parliament.uk/pa/ld201516/ldselect/ldeucom/129/129.pdf; N. Sahuguet, J. Steenbergen, T. Vergé and A. Walckiers, ‘Vertical Restraints: Towards Guidance to Iron Out Perceived Enforcement Discrepancies Across Europe?’ (2016) 7 Journal of European Competition Law & Practice 274; Pinar Akman, ‘A Competition Law Assessment of Platform Most-Favoured-Customer Clauses’, Working Paper, University of Leeds (2015). 14 While NCAs could not agree on some ingredients of the assessment, this might have encouraged national legislators to intervene and take sides on this politically sensitive debate. Thus, in July 2015 France passed legislation outlawing retail most favoured nation (MFN) clauses in the hotel sector: see Loi No 2015-990 du 6 août 2015 pour la croissance, l’activité et l’égalité des chances économiques, Article L.311-5-1 (‘hoteliers remain free to grant their customers any rebate or tariff advantage, and any clause to the contrary shall be deemed null and void’). Legislators in other countries, in particular Italy and Austria, are currently discussing the introduction of an outright ban on rate party. 15 Possibly, the dissent among NCAs could even be of some value, especially in terms of transparency and potential contribution to the broader scientific debate. Usually, well-founded and intellectually engaging differentials between competition authorities are discussed only behind the impenetrable doors of the European Competition Network.

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effective antitrust-based platform regulation.16 Besides helping promote a timely debate on some of the more general issues, the main contribution of this chapter is to illustrate some of challenges of applying the traditional free-riding defence to rate parity clauses.

2. THE ONLINE HOTEL BOOKING CASES: RATE PARITY ON THE RADAR OF COMPETITION AUTHORITIES Online Travel Agents and Retail Most Favoured Nation Clauses The constant and unrelenting flow of innovations in the field of digital technologies is deeply affecting the competitive dynamics of most economic sectors. As to the hospitality industry in particular, new technologies have prompted the rise of a specific breed of online platforms called online travel agents (OTAs).17 Online platforms are ‘intermediaries bringing together various groups of users so that they can interact economically or socially’.18 The basic idea behind the rise of these businesses in the digital economy is that it is not always profitable to charge a (direct) price to all the end-users of the services that an undertaking can provide. In the case of a search platform, for instance, instead of charging platform users for the search services, it makes economic sense to charge those who seek access to the users, in particular advertisers. In this setting, a business is successful when it can ensure that those different user groups interact and create value in the (technological) environment created by the platform itself. This in turn is 16 See also OECD Hearing (note 12 above) and ICN Special Project (note 11 above). 17 In 1996, Microsoft launched the first OTA, Expedia Travel Services, allowing customers to book hotel rooms online: see ‘Microsoft Expedia Travel Services Debuts on the Web’, http://news.microsoft.com/1996/10/22/microsoftexpedia-travel-services-debuts-on-the-web/. Microsoft sold Expedia in 2001 to USA Networks: see ‘Microsoft Sells Expedia Stake, Learns Lesson’ (Forbes, 16 July 2001). Prior to Microsoft, Sabre Corporation – a former American Airlines subsidiary – launched Travelocity, the first portal on which consumers could book and purchase airline tickets online. In 2015, Expedia acquired Travelocity from Sabre for $280 million: see Sabre’s press announcement, http://www. sabre.com/insights/releases/sabre-and-expedia-announce-expedias-acquisition-oftravelocity/. 18 See UK House of Lords (note 13 above), p. 189 (citing the testimony provided by the German Monopolies Commission).

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strengthened by the presence of network effects, meaning that the more users the platform has, the more valuable the platform becomes to other users. Furthermore, mining and processing of user data can increase the experience of the services provided by the platform to one or more user groups (e.g. better search results and/or more effective targeted advertisement campaigns).19 OTAs are profoundly different from traditional travel agents securing an inventory of rooms at wholesale rates from hotels and reselling them at a marked-up retail rate.20 OTAs provide a technologically enabled interface between different groups of users, namely the hoteliers and the prospective travellers, allowing them to find each other and to transact. While the platform provides matchmaking services to both groups of users, OTAs in the online hotel booking market have currently opted for a business model that does not charge final consumers directly21 for such services, but levies a commission fee (cost-per-acquisition (CPA) fee) on hotels when transactions are executed. Hoteliers unilaterally set retail prices to final consumers, whereas OTA-to-hotel negotiations determine the level of the CPA fees. In the course of their respective investigations, NCAs revealed that the contracts between Booking, Expedia and HRS (the three largest OTAs) and their hotel partners contained retail most favoured nation (MFN) clauses.22 A wide retail MFN agreement requires a hotelier not to 19

Amidst the most recent contributions on online platforms in general, see European Commission, ‘Staff Working Document on Online Platforms and the Digital Single Market’, 25 May 2016, SWD(2016) 172; and Bundeskartellamt, ‘Marktmacht von Plattformen und Netzwerken’, Working Paper, June 2016. 20 In the relatively short space of two decades, the distribution in the hospitality industry has shifted from a merchant model to a commission-based (or agency) model. Under the formerly dominant merchant model, the travel agent had control over the entire retail transaction, from setting the retail rate of the hotel room and collecting the payment, to establishing the cancellation policy and providing customer service. 21 It has already become commonplace to hold that users of online platforms pay allegedly free services with their personal data: see UK House of Lords (note 13 above), p. 4 (‘Consumers seem to be unaware that they trade their personal data in exchange for access to many of the so-called “free services” that online platforms provide’). 22 A retail MFN agreement requiring the hotel to price its rooms on the partner platform no higher than on other platforms could also be called an across-platforms parity agreement (APPA): see LEAR, ‘Can “Fair” Prices Be Unfair? A Review of Price Relationship Agreements’ (2012), p. 94 ff., http:// www.learlab.com/wp-content/uploads/2016/04/Can-%E2%80%98Fair%E2%80% 99-Prices-Be-Unfair_-A-Review-of-Price-Relationship-Agreements.pdf.

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advertise the same room for the same night at a lower price through any alternative OTA, or any other sales channel, including the hotel’s own website and offline booking facilities. Where a wide retail MFN applies, a prospective customer of a specific hotel retains the choice to book her room directly from the hotelier, or indirectly through competing platforms and other distribution channels. Whatever the route taken, however, by virtue of the wide retail MFN in place between the OTA and the hotelier, the consumer pays exactly the same price for her hotel stay (full rate parity).23 Instead, a narrow retail MFN requires the hotelier to charge the same price to consumers via its own website, by phone, at the hotel desk, etc., as the hotelier offers through the partner platform, but does not restrict the hotelier from displaying a lower room price on other platforms (limited rate parity). This means that under narrow retail MFN the hotel can in principle display different prices for the same room on competing platforms. If the hotelier wishes to increase the price of the room displayed on the partner platform benefiting from a narrow MFN

23 More precisely, the ‘best price’ clause employed by HRS and investigated in the context of the German proceedings obliged the partner hotels to always offer on the booking platform the hotel’s lowest room price (inclusive of all taxes, such as VAT, city tax, etc.), alongside maximum room capacity, and the most favourable booking and cancellation conditions available on other booking and travel platforms on the internet. Moreover, the partner hotels could not offer cheaper hotel rates and better conditions via the hotel’s own websites – and, after January 2012, to customers direct via telephone sales and at the hotel’s front desk. Instead, the ‘availability guarantee’ only applied across platforms, the hotel remaining free to make rooms directly available to customers (via the hotel’s own website, by telephone, and face-to-face at the hotel’s reception) that were not available on any other platform. Similarly, Booking’s standard contracts investigated first by the French, Italian and Swedish NCAs contained the hotel’s obligation to offer the same or a better price for a room via Booking compared to the price offered by the hotel’s own sales channel, both online (website, apps, etc.) and offline (telephone sales and at the hotel’s front desk) or via another competing online travel agency and other online and offline intermediaries. The same applied to different conditions with respect to the room or the booking, for example cancellation rules or inclusion of breakfast in the room price. Furthermore, the contracts contained terms obliging hotels to provide Booking with access to the same or a greater number of rooms as provided to Booking’s competitors and other third parties. As in the case of HRS, availability parity only applied across platforms (and other distribution channels). Finally, with regard to Expedia, the Italian NCA, whose proceedings involved both Booking and Expedia, did not mention any difference in the substance of the MFN clauses practiced by these OTAs.

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clause, however, this increase should be reflected on the room rates available on the hotel’s website and on the other own sales channels. While retail MFN clauses can also in principle be found in offline environments,24 it is much more practical to enforce a contractual condition of this sort in online markets, where economic agents are already routinely tracking the prices of competing offers algorithmically. An OTA can effortlessly check whether the prices the partner hotels charge to buyers via its platform are higher than the prices the same hotel charges on competing platforms and on the hotel’s own websites. It follows that a retail MFN obligation is materially different not only from other vertical restraints in general25 but also from another type of MFN clause with which competition authorities are already much more familiar.26 A most-favoured customer clause (MFC) embodies the seller’s promise to treat a specific buyer at least as favourably as any other party in an analogous position, i.e. as the seller treats her most-favoured customer. Unlike the retail MFN clauses discussed in this chapter, these agreements set identical prices across different buyers rather than across different sales channels (or outlets). Typically, MFC clauses are employed in markets for intermediate goods, and warrant that the buyer at a certain stage of the supply chain will pay a specific input no more than any other customer of the same supplier (called ‘wholesale’ MFN clauses).27 Whereas an MFC clause ensures that the buyer does not pay 24

In the offline world, a narrow retail MFN clause between a supplier and a shopping mall (i.e. a physical marketplace) would establish, for instance, that a supplier cannot price below what it charges for its products at the shopping mall in any of the supplier’s own high street shops. 25 See ICN (note 11 above), p. 66 (‘A new form of vertical restraint between suppliers and online platforms has emerged in online markets’). While platforms act as intermediaries and not as typical retailers, retail MFN clauses have a clear vertical dimension in the sense that the parties involved operate at different levels of the value chain (in this respect, of course, the use of the term ‘retail’ is also misleading). In any case, who is the ‘buyer’ and who the ‘seller’, and who is ‘upstream’ and who is ‘downstream’, largely depends on the specific circumstances of the case under analysis. 26 Some MFN clauses that have attracted the attention of competition policy enforcers concerned the sale of turbine generators, lead-based anti-knock gasoline additives, synthetic substances belonging to groups of vitamins, the distribution of digital music and of gas, and were found also in dental plan contracts between dental care service providers and dental practices and in healthcare contracts between health insurance providers and hospitals 27 For instance, a brewer agrees with a bottle maker that if the bottle maker cuts the price of bottles to any other brewer, the MFC beneficiary will have the price difference refunded. If the bottle maker wants to grant a price discount to

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more than any competitor for the same products or services, a retail MFN agreement dictates rate (price) parity among platforms and other sales channels. Anticompetitive Effects of Retail MFN Clauses We have seen in the previous subsection that retail MFN clauses, both wide and narrow, affect the relative level of the price the hotelier charges to the final consumer via the online booking platform, insofar as the room price set by the hotelier for the partner platform is conditioned on the room price displayed on competing platforms and/or on the hotel’s own channels. This introduces a legally binding horizontal element into the vertical agreement between the OTA and the hotelier.28 Moreover, a wide retail MFN clause amounts in practice to the strict implementation of minimum sale prices, as the hotelier must ensure that the room price displayed on the partner platform (the minimum retail price) is not undercut by competing platforms, third party distribution channels, and the supplier’s own online and offline direct offerings to prospective travellers. It is not surprising, therefore, that NCAs in the EU and beyond29 are considering with great care the retail MFN clauses commonly employed in a number of digital markets.30 The assessment, however, poses any of her brewer-customers, she will therefore need to apply the same discount to the brewer covered by the MFC clause. In this respect, an MFC clause raises the bottle maker’s cost of cutting prices. The economics literature has identified some potentials for competitive harms deriving from what has been called an effective ‘tax’ or penalty on discounting: see J. Baker and J. Chevalier, ‘The Competitive Consequences of Most-Favored Nation Provisions’ (2013) 27 Antitrust 20, 23. If the MFC beneficiary, however, accounts for a small fraction of the MFC grantor’s overall sales, discounting is not likely to be deterred because it will be considered too costly. 28 Cf. Anne Fletcher and Morten Hviid, ‘Retail Price MFNs: Are they RPM “at its worst?”’, CCP Working Paper 14-5, 2015. 29 See in particular the detailed decision issued by the Swiss Competition Authority, Wettbewerbskommission, Booking, HRS, Expedia, Verfügung, 19 October 2015, https://www.weko.admin.ch/dam/weko/de/dokumente/2016/02/on line-buchungsplattformenverfuegungvom19oktober2015.1.pdf.download.pdf/on line-buchungsplattformenverfuegungvom19oktober2015.pdf. 30 Besides the online hotel booking market discussed here and the UK and German investigations into Amazon’s marketplace, the European Commission in June 2015 opened a formal investigation into parity obligations contained in Amazon’s contracts with publishers: see EC Press Release, 11 June 2015, http://europa.eu/ rapid/press-release_IP-15-5166_en.htm.

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significant challenges such as, first, that what we have learned in more than one hundred years of competition enforcement about the typical wholesale relationship between supplier and retailer could be of only limited help when online platforms are involved. Second, while the mighty platforms of the digital economy have no say in the suppliers’ (users’) pricing decision, they are separate legal entities that have very little in common with the typical passive ‘agent’ under competition law. Third, and related, online platforms invest substantially in demandenhancing features. Fourth, as mentioned above, there is a complex interplay between the vertical supplier/platform relationship, on the one side, and the horizontal element of the price matching promise, on the other. Fifth, the vertical element of the retail MFN clause (i.e. the price control exercised by the supplier) looks suspiciously similar to (de facto) resale price maintenance,31 which is considered a restriction by object under EU competition law. Sixth, it can be difficult for competition authorities to gain an in-depth understanding of the peculiarities of the business models under which online platforms operate, especially against the background of rapidly changing market scenarios. Despite theoretical and empirical challenges, the NCAs involved in the online hotel booking cases, comforted by recent economic analysis,32 agree that retail MFN clauses in principle can produce an array of anticompetitive effects. It should be highlighted, however, that while the findings of the German NCA are contained in a formal decision and, at least in the HRS case, already confirmed by the judiciary,33 the triad of NCAs investigating Booking have merely assessed the platform’s commitments and therefore their competition decisions do not contain any definite findings on the existence of an infringement. Still, these decisions, taken together, provide suitable guidance in explaining whether and how this type of vertical arrangement can infringe Article 101(1) TFEU.34 31

Fletcher and Hviid (note 28 above). LEAR (note 22 above); see also the in-depth literature overview prepared for the recent OECD Hearing on Across Platform Parity Agreements: Morten Hviid, ‘Vertical Agreements Between Suppliers and Retailers That Specify a Relative Price Relationship Between Competing Products or Competing Retailers’, 27–28 October 2015, http://www.oecd.org/officialdocuments/publicdisplay documentpdf/?cote=DAF/COMP(2015)6&doclanguage=en. 33 OLG Düsseldorf (note 6 above). 34 Further guidance is offered by the results of the UK inquiry with regard to retail MFN clauses in the private motor insurance sector: see in particular 32

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Much in line with mainstream economic theory, there were two types of likely anticompetitive effects of rate parity that were broadly acknowledged by all four competition authorities, namely softening of competition (a) and entry foreclosure (b). The assessment of narrow MFNs, instead, was much more controversial (c). (a) Softening of competition Under retail MFN clauses, OTAs have little incentive to compete among themselves by offering better (lower) CPA fees.35 An OTA benefiting from a retail MFN can raise the commission fees it charges to hotels with little fear that the hotels might retaliate by increasing the advertised prices on the OTA relative to the prices advertised on competing platforms and/or other sales channels. Conversely, OTAs under rate parity have less incentives to lower commission fees. The core argument highlighting this type of anticompetitive effect is intuitive. The Autorité de la concurrence explains that this softening of competition occurs because of what can be called a dilution (thinningout) mechanism.36 For example, one double room in the Parisian hotel X for 19 June 2018 costs 200 Euro and the commission fee paid to the OTA is 18%. Pursuant to the rate parity obligation, if the OTA decides to raise the commission fees by 2%, hotel X is practically prevented from increasing the room’s retail price as advertised on the now more expensive OTA by an amount that entirely covers the commission fee’s increase. In fact, if hotel X raises the room’s rate displayed on the more expensive OTA, it has to increase the published rate on all other sales channels covered by the retail MFN clause. Instead, in the absence of a retail MFN, a platform is likely to be constrained in the commission fee it charges to hotels by the fear that a higher fee would lead to higher hotel room prices displayed on its own platform and therefore to a potential loss of market share relative to competitive sales channels. In this respect, retail MFN clauses sever the link that normally exists between the price asked by a market actor and the demand addressing the Competition Commission, ‘Private Motor Insurance Market Investigation: Provisional Findings Report’ (2013), https://assets.digital.cabinet-office.gov.uk/media/ 5329dec5ed915d0e5d00029f/provisional_findings_report.pdf. 35 LEAR (note 22 above), pp. 99 ff.; Autorité de la concurrence, Booking. com, § 116; Bundeskartellamt, HRS, § 60, § 156; OLG, HRS, § 107; Autorità della Concorrenza e del Mercato, Booking.com, § 7; Konkurrensverket, Booking. com, § 21. 36 Autorité de la concurrence, Booking.com, § 117.

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same market actor. Overall, competition among platforms is “dampened”37 in the absence of an explicit agreement: there is less incentive to reduce commission fees, as there is less incentive not to raise them. (b) Entry foreclosure Retail MFNs may also foreclose the entry of efficient, innovative OTAs into the market. Imagine that an OTA wishing to enter the market is willing to offer lower commission fees to its hotel partners, in the hope that hotels will be offering lower hotel room prices to consumers, and, as a consequence, the OTA will increase its trade volume. However, this specific entry strategy envisaged by the more cost effective OTA is bound to fail because the hotelier wishing to discount its rooms on the entrant’s platform needs to offer that same discount to consumers shopping on all other platforms and sales channels under a rate parity obligation.38 In this regard, competition authorities stress that the foreclosing effect is strengthened by the fact that the lion’s share of the relevant hotel portal market is covered by MFN clauses, as the MFN agreements of HRS, Booking and Expedia cover almost the entire market.39 Moreover, the foreclosure effect here can be particularly serious considering the presence of so-called indirect network effects. The literature on two-sided markets explains that a platform entering the market must attract a critical mass of both suppliers and customers (the ‘chicken-egg’ problem) if it wants to succeed.40 The retail MFN clause makes it practically impossible for the new platform to adopt an aggressive, low-price commercial strategy, because hotels cannot charge lower prices on the new platform.41 The argument could be made, however, that under retail MFN a small or new entrant can offer to its own customers room rates that are as ‘good’ as the ones offered by established platforms and that this could facilitate market entry. While competition between OTAs on the level of commission fees is hampered, platforms would still compete by engaging in non-price marketing strategies, such as investing in brand recognition and online visibility. The Autorité de la concurrence notes, however, that 37

See Baker and Chevalier (note 27 above). Cf. LEAR (note 22 above), pp. 98 ff. 39 Bundeskartellamt, HRS, § 174; Autorité de la concurrence, Booking.com, § 129; Autorità Garante della Concorrenza e del Mercato, Booking.com, § 8; Konkurrensverket, Booking.com, § 22. 40 Bernard Caillaud and Bruno Jullien, ‘Chicken & egg: competition among intermediation service providers’ (2003) 34 RAND Journal of Economics 309. 41 See Autorité de la concurrence, Booking.com, § 125. 38

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it would be very difficult for a small platform or a new entrant to compete on these non-price-based terms with established OTAs. In particular, incumbent OTAs invest massively in online advertising. Instead, if OTAs were able to compete on the level of commission fees, a small or new OTA could acquire immediate online visibility through its offering of convenient room rates, in particular as listed by metasearch engines. OTAs are not only cost-effective but also innovative, and are prevented from entering the market because of retail MFN clauses. Better ideas, marketing tools and technology could further reduce users transaction costs, and provide final customers with more attractive deals.42 Retail MFN clauses prevent hoteliers from rewarding more innovative platforms by agreeing on a different pricing model, thus reducing the incentives for incumbents and entrants to innovate. For instance, a specific OTA could be in a position to offer quality-based innovations to hotels, and this would justify a lower price for consumers using that platform than if they used another platform. Such innovation would enable lower hotel prices to be offered on that platform, reflecting the cost savings and the other benefits to the hotelier due to the platform’s innovation, with the prospect of generating more sales for the platform. However, if the hotels cannot offer cheaper hotel rooms via innovative platforms because of the existence of retail MFN obligations with well-established platforms, this would reduce the incentive for a platform to innovate as the platform could not receive a greater market share from offering cheaper hotel rooms relative to its competitors. Hoteliers could still reward innovative platforms with higher commission fees in exchange for a better quality, but this would not lead to increased trade volumes and a higher platform’s market share. Put differently, the benefits of the platform’s innovation could be passed on to the hotel partners, possibly, but not to final consumers.

42

The Bundeskartellamt mentions that the platforms (applications) JustBook and BookitNow regarded their access to the market as being hindered by the MFN clauses employed by HRS: see Bundeskartellamt, HRS, § 235. The CMA identifies at least one instance in which entry into the price comparison websites (PCWs) market was prevented by the presence of retail MFNs: see Competition & Markets Authority (CMA), ‘Private motor insurance market investigation’, Final report (2014), https://assets.digital.cabinet-office.gov.uk/ media/5421c2ade5274a1314000001/Final_report.pdf, §§ 8.69 ff.

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(c) The anticompetitive effects of narrow retail MFN clauses The two types of negative effects considered above, chiefly affecting competition among OTAs (i.e. intrabrand), were recognised by all four competition authorities. Instead, national NCAs did not present a united front on two other major issues, namely the effects of rate parity on interbrand competition and the likely competitive implications of narrow retail MFN clauses in particular. As regards the first issue, possible anticompetitive effects of rate parity beyond intrabrand restrictions were acknowledged only by the German NCA.43 Whereas the hotels under rate parity control the price of the rooms they offer, they cannot adjust those prices flexibly in reaction to differences in the costs of using alternative distribution channels, their own included, or to changes in the broader competitive landscape. According to the Bundeskartellamt, this negatively affects interbrand competition among hotels. As mentioned in the Introduction above, the NCAs’ split on the second issue was fraught with far-reaching consequences. As of July 2015, Booking amended its rate parity clauses according to the commitments with the three competition authorities. While narrow MFN was still in place for online reservations on the hotel’s own website and other similar sales channels, price and conditions parities were no longer demanded for offline reservations (at the hotel reception, via phone/email, via a travel agency, etc.). Moreover, hotels were allowed to offer more favourable terms to their loyalty programme customers and to other customers provided that these discounts were not marketed or advertised online to the general public. However, according to the German NCA, even narrow retail MFN clauses with such a reduced scope would significantly limit hotels’ incentives to grant better rates to individual hotel portals in exchange for lower commissions from OTAs. The reason for this is that hotels would want to prevent a so-called cannibalization effect, that is, the negative impact of online sales via OTAs (under rate parity) on the hotels’ own, more profitable, sales channel. In other words, hotels would not grant better rates to specific OTAs if this had substantial adverse consequences for the competitiveness of the direct online channel and their overall profitability. Consider again that narrow retail MFNs do not in principle prevent hotels from displaying different prices on different OTAs; and competition between OTAs for market share should lead them to seek to list the best hotel rates, putting pressure on CPA fees. A narrow retail MFN 43

Bundeskartellamt, HRS, pp. 59 ff.

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clause merely requires a hotel’s own-website room rate to be higher than, or equal to, the room rate displayed on the partner OTA. In other words, a narrow MFN prevents the hotel’s direct channel from undercutting the OTA. At the same time, however, the hotelier wants to maintain the competitiveness of the rooms distributed through its direct sales channel because these are the most profitable sales (no commission is paid). Let us imagine that OTA1 requires a commission fee of 18%, OTA2 of 15% and OTA3 of 16%, whereas the distribution cost via the hotel’s own website is 5%. Given the same ‘gross’ room price of 100, therefore, if would be expected that, without rate parity, the price displayed on OTA1 would roughly be 118, on OTA2 115, on OTA3 116, and on the hotel’s direct channel 104. If the hotel agrees a narrow MFN clause with OTA1, this prevents the hotel offering the same room via its own website for less than 118. As a consequence, in order to avoid cannibalization of its online direct channel, the hotel will set prices on competing OTA2 and OTA3 to be at least equal to the price on the OTA1. In this respect, a single narrow retail MFN between a hotel and an OTA imposes a floor price for the hotel’s rooms on any OTA that is equal to the hotel’s website price, just as a wide retail MFN would. In this respect, any OTA benefits from every single narrow MFN that is entered into across the online hotel booking market, regardless of whether the OTA is a party to that MFN (network effect44). While the French, Italian and Swedish NCAs also recognise the relevance of the cannibalization effect,45 views between them and the German NCA differ as to the impact on the analysis of the hotel’s actual share of sales via the hotel’s own channel. It is not disputed that a hotel’s incentives to offer a lower price via an OTA than in the hotel’s own channel in principle increase if the share of sales not covered in the narrow retail MFN clause decreases. As the NCAs triad finds that this applies only to a small number of hotels in their respective geographical market, it is estimated that the cannibalization effect remains limited.46 Instead, the German NCA, based on a more dynamic reasoning supported by the results of a hotel survey conducted in June 2015,47

44

Competition Commission (note 34 above) §§ 9.41 ff. See Autorité de la concurrence, Booking.com, §§ 302 f. 46 Ibid. 47 Apparently, based on the results of this survey, the German NCA changed the opinion previously expressed in the HRS decision that hotels’ own websites 45

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convincingly concludes that the risk that price parity between online travel agencies will continue to apply in practice cannot be seen as effectively removed.48 The Bundeskartellamt considers that the online direct channel (with real-time booking option) is increasingly crucial for hotels,49 and for certain hotels around half of their online bookings already comes via their own websites.50 Moreover, it cannot be excluded that, if only a relatively small share of hotel sales is actually covered by the narrow retail MFN clause, this should be seen (also) as a consequence of the broad application of rate parity by OTAs in the recent past. As a hotel’s own online presence could never be the cheapest distribution channel, small and medium hotels in particular had very few incentives to invest in developing and improving it.51 Finally, it should also be noted that rapid innovations in ICT technologies and related business models make the real-time booking option increasingly convenient and promising for hotels. Similarly, under limited rate parity, market entry by more cost-effective OTAs would be more unlikely.52 If an entrant, low-commission OTA wished to display cheaper hotel rooms than the incumbent OTAs, hotels under retail MFN would generally not wish to encourage it, because the obligation requires them to maintain their direct sales price above the price on the entrant OTA and that would take sales away from their own, increasingly important direct channels. Thus, low-commission-fee entry would be significantly discouraged, much as happens under wide MFN clauses. The Free-riding Defence Confronted with the serious allegations of anticompetitive behaviour seen in the previous subsection, the OTAs involved in the proceedings before the NCAs in the EU emphasize in their defence the increased risks of were (still) largely irrelevant as distribution channels with respect to the largely small and medium-sized hoteliers in Germany: see Bundeskartellamt, HRS, § 204. 48 Moreover, the anti-competitive effects of narrow MFN are strengthened by other clauses in the contracts with Booking relating to minimum availability and the best price guarantee: see Bundeskartellamt, Booking, §§ 217–219. 49 Three main reasons for this: price structure, easier customer service, and platform-incompatibility of some marketing formats preferred by some hoteliers: ibid, §§ 196 ff. 50 Ibid, § 194. 51 Ibid, § 195. 52 Ibid, §§ 220–223.

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free-riders they are facing in a transparent environment such as the internet.53 OTAs, as seen above, provide services to connect buyers and sellers for mutually advantageous transactions and charge CPA fees for their services. If the parties consummate the exchange off of the platform and avoid the transaction fees, this potentially affects investments into the platform. The OTAs involved in the proceedings therefore argue that MFN clauses enable the platform to make investments that benefit the hoteliers without facing the risk that the latter will opportunistically refuse to bear the costs of these investments after they have been made. It should be noted in this regard that it is hardly the first time that this type of defence is invoked in a competition proceeding involving multi-sided platforms.54 In fact, it is generally accepted that the traditional efficiency justifications for vertical restraints might also apply to multi-sided platforms.55 The special form of free-riding investigated in the online hotel booking cases is the so-called hold-up problem. In this context, MFN clauses could be used to induce investments in situations in which there is a form of vertical externality56 that derives from independent decisions on investments.57 If an OTA invested in advertising a hotel’s room on its platform, but consumers discovered that the hotel rooms offered on the OTA were available cheaper if booked directly with the hotel, consumers might use the services offered by the platform but not book the hotel room through the OTA (also called risk of disintermediation58). In fact, 53

Bundeskartellamt, HRS, § 199; Autorité de la concurrence, Booking.com, § 64 ; Konkurrensverket, Booking, § 29. 54 See e.g. Case C-67/13 P Groupement des Cartes Bancaires v Commission, EU:C:2014:2204; United States v Am. Express Co., 2015 WL 728563, at 6 (EDNY 19 February 2015). 55 David Evans, ‘Economics of Vertical Restraints for Multi-Sided Platforms’, University of Chicago Institute for Law & Economics Olin Research Paper No. 626 (2013), p. 12 and fn. 23, http://papers.ssrn.com/sol3/papers.cfm ?abstract_id=2195778. 56 An externality arises whenever a party making a decision does not take (full) account of the decision’s effects on other parties. An externality is vertical when it affects undertakings at different levels of the value chain. 57 Rather than from independent decisions on linear pricing: see Peter Davis and Eliana Garcés, Quantitative Techniques for Competition and Antitrust Analysis (Princeton University Press: Princeton, 2010), p. 507 (‘Double marginalization … can be understood as a vertical pricing externality’). 58 See Andrei Hagiu and Julian Wright, ‘Multi-sided Platforms’, Harvard Business School Working Paper 12-024 (2011), pp. 28–29; ICN (note 11 above), p. 6.

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the cost of staying at a specific hotel can easily be compared on the internet once the hotel has been chosen. The hotel, selected on the platform and contacted by the customer directly, would then be able to offer a better price than the one displayed on the platform’s website because the hotel would be bypassing the platform fee. Crucially, the internet user could find the website of the hotel that it previously selected on the OTA without significant investment from the hotelier in terms of internet visibility.59 It is well-known that the free-riding defence is one of the pillars of the so-called more economic approach in competition policy. Economic theory explains, in fact, that individual undertakings producing complementary goods or services can experience coordination failures. Where a retailer provides valuable pre-sale services, for instance, consumers are likely to buy extra units on which the manufacturer earns a margin. Moreover, pre-sale services that boost the demand for a product can also benefit other distributors of the same product. The retailer, however, may decide not to provide pre-sale services that consumers value if this decision does not increase the retailer’s own profits, despite an increase in the profits jointly earned by the manufacturer and the retailer. Specifically, the retailer may desist from committing to those investments in the anticipation of a free-riding risk, namely that consumers may enjoy the retailer’s pre-sales services but subsequently buy the products from cheaper sources.60 Concisely put, the risk is that other undertakings could cash in on the retailer’s efforts to provide pre-sale services. The consequence of the paradigmatic free-rider scenario, in which an undertaking such as a retailer does not reap the full benefits of the efforts it provides to consumers, is that her efforts are likely to be underprovided. Recognizing this, undertakings along the value chain could engage in more sophisticated contractual relationships than simple spot arrangements, providing suitable economic incentives to exert the required level of sales effort.61 Along the same lines, courts and other

59 Instead, a competing OTA would have to incur significant investments in order to gain internet visibility. This argument would of course be relevant if a horizontal free-riding problem were at issue in the investigation. 60 Typical examples of free-rideable services are presale onsite services such as retailer demonstrations, consumer education, special showrooms, product testing, etc. Thus, for example, pure internet players could free-ride on the services provided by traditional ‘brick and mortar’ stores. 61 L. Telser, ‘Why Should Manufacturers Want Fair Trade?’ (1960) 3 Journal of Law and Economics 86; B. Klein and A. Lerner, ‘The Expanded Economics of

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competition law enforcers have long recognized that vertical restraints may remedy this type of market imperfection. Absent suitable provisions between retailers and manufacturers, services that enhance interbrand competition might be underprovided because discounting retailers can free-ride on retailers ‘who furnish services and then capture some of the increased demand those services generate’.62 In the scenario analysed by competition authorities in the online hotel booking cases, new bookings are likely to generate revenues for both the hoteliers (room price) and the platform (commission fee). The specific effort exerted by the platform can be the most efficient way to increase bookings, such as providing good search capabilities and satisfactory client support. Despite being an intermediary, the overall quality of the good or service provided to consumers may depend on inputs provided by the platform, i.e. an undertaking that, together with the hotelier, has a direct relationship with the consumers. However, since the platform will only take into account its own benefits when choosing the level of the service efforts provided, the level is likely to be suboptimal. If the costs of the service are borne solely by the OTA, it may not be willing to invest in sales efforts that accrue also to the hotel and on which the hotel makes a positive margin. In this context, a retail MFN clause could stop hotels from free-riding on the platform’s investment, because hotels would be prevented from selling at lower prices direct to customers. The probability that an OTA is used for searching but is not the recipient of the commission fee (and therefore is not able to recoup the platform’s investment) is lower if the chance of finding the same product cheaper on the hotel’s website is excluded. Platforms therefore argue that possible higher prices and other anticompetitive effects allegedly produced by retail MFN in the end do not harm consumers, as the practice is necessary to generate services that most consumers judge to be beneficial to them and which could not be provided in a less wasteful way. Despite finding the free-riding defence plausible at first sight,63 in the two separate decisions involving HRS and Booking respectively, the German competition authority concluded that there was insufficient Free-Riding: How Exclusive Dealing Prevents Free-Riding and Creates Undivided Loyalty’(2007) 74 Antitrust Law Journal 473; H. Marvel and S. McCafferty, ‘Resale Price Maintenance and Quality Certification’ (1984) 15 RAND Journal of Economics 346. 62 Continental TV v GTE Sylvania Inc, 433 US 36, 55 (1977). 63 See German contribution to the OECD Hearing on across platform parity agreements (2015).

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evidence of the efficiency gains of retail MFN clauses.64 In particular, efficiencies were likely to be small compared to the anticompetitive effects revealed in the course of the Bundeskartellamt’s investigation. Instead, the French, Italian and Swedish competition authorities considered that in the total absence of rate parity there would be a real risk of free-riding in the online hotel booking sector.65 The remainder of this chapter will highlight and discuss some peculiarities and challenges related to the application of the free-riding defence in the contest of the online hotel booking investigations.

3. THE EFFICIENCY DEFENCE AS APPLIED TO RETAIL MFN CLAUSES According to EU competition law, any vertical agreement that restricts competition may in principle benefit from an exemption under Article 101(3) TFEU, provided that four cumulative conditions are satisfied, namely the agreement must contribute to improving the production or distribution of goods or to promoting technical or economic progress, a fair share of the resulting benefits must go the consumers, the restrictions must be indispensable to the attainment of these objectives, and the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question. Article 2 of Regulation 1/200366 provides that it is for the party claiming the application of the exemption to prove, ‘by means of convincing arguments and evidence’,67 that the conditions laid down in paragraph 3 of Article 101 TFEU are fulfilled. Under the first condition of Article 101(3) TFEU, agreements that may be exempted must ‘[contribute] to improving the production or distribution of goods or to promoting technical or economic progress’. Whereas the Treaty provision does not refer specifically to ‘efficiencies’, the Guidelines on the application of Article 101(3)68 state, unequivocally, 64

See notes 4 and 10 above. OECD/France (note 12 above), § 47. 66 Council Regulation (EC) No. 1/2003 of 16 December 2002 on the implementation of the rules on competition, OJ L 1, 04.01.2003, pp. 1–25. 67 Cf. Case 42/84 Remia and Others v Commission [1985] ECR 2545, § 45; Joined Cases C-501/06 P, C-513/06 P, C-515/06 P and C-519/06 P GlaxoSmithKline Services and Others v Commission and Others [2009] ECR I-9291, § 82. 68 Guidelines on the application of Article 101(3) of the Treaty (‘101(3) Guidelines’), OJ C 101, 27.4.2004. 65

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that the ‘purpose of the first condition of Article 101(3) is to define the types of efficiency gains that can be taken into account and subject to the further tests of the second and third conditions of Article 101(3)’ (§ 50). The efficiency gains must be objective, i.e. not assessed from the subjective point of view of the parties (§ 49). Moreover, efficiency claims need to be substantiated so that they can be verified, in particular in their size and likelihood (§ 55). Finally, the parties have to prove the causal link between the restraint and the claimed efficiencies.69 Importantly, when examining the advantages flowing from retail MFN clauses, and balancing them with negative effects within the framework of Article 101(3) TFEU, competition enforcers have to take into account the two-sided nature of the undertaking under investigation.70 The 2010 Guidelines on vertical restraints, however, do not offer any specific guidance concerning the application of the free-riding defence to practices instigated by online platforms.71 Moreover, while the competition authorities, the investigated parties and other stakeholders could already rely on some important economic contributions highlighting the likely anticompetitive effects of retail MFN clauses,72 the analysis of their possible efficiencies is still much less developed.73 Efficiency Gains and the Free-riding Problem As noted above, eliminating a free-rider distortion is viewed as one of the main categories of efficiency that exempt vertical agreements from prohibition. More specifically, the Guidelines on vertical restraints indicate that, among the principal reasons that may justify the exemption of certain vertical restraints, there is the solution to a free-rider problem, of both a horizontal and vertical nature.74 First, the Commission refers to forms of horizontal free-riding on the promotion efforts of distributors, but also at the level of suppliers investing in promotion at the buyer’s premises. For a genuine free-rider issue to emerge, however, some 69

Ibid, § 54. Case C-382/12 P MasterCard and Others v Commission, EU:C:2014: 2201, §§ 237 ff. 71 It is not until 2022 that the revision of the current Block Exemption Regulation on vertical restraints is planned: see Commission Regulation No. 330/3012, OJ L 102, 23.4.2010, pp. 1–7. 72 See section 2.2 above. 73 Evans (note 55 above) offers one of the very few analyses of possible efficiencies of vertical restraints in the context of two-sided businesses. 74 European Commission, Guidelines on vertical restraints, [2010] OJ C130/1, § 107 (hereafter Commission guidelines on vertical restraints). 70

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conditions should be satisfied: (1) free-riding among retailers occurs on promotional services and activities for which the customer cannot be charged individually; (2) the customer does not well know what she wants, as the product or service benefiting from the promotional efforts is relatively new, technically complex, or for which reputation is a major demand factor; (3) the product of service must be of a reasonably high value, so as to make it worthwhile for a customer to go to one shop for information and to another to buy; (4) it is not practical for the supplier to impose contractual obligation to buyers to provide the required promotional efforts.75 Besides expressly mentioning two further, more specific, instances of horizontal free-riding (‘open up or enter new markets’ and ‘certification free-riding’), the Commission has indicated that the application of certain vertical restraints may be justified also by the solution provided to a vertical free-riding, or hold-up, problem. Client-specific investments by the supplier or the customer could be underprovided unless specific vertical restraints are allowed. For the risk of underinvestment to be real or significant, however, some conditions must be fulfilled: (1) the investment is relationship-specific; (2) the investment is long-term and cannot be recouped in the short run; (3) the investment is asymmetric in the sense that one party to the contract invests more that the other party. When these conditions are met, a vertical restraint may be justified for the duration necessary to depreciate the investment. When putting forward a free-riding defence, the parties should therefore demonstrate that the vertical restraint achieved the objective efficiencies of solving a genuine, and relevant, free-riding problem. This is conditional on two main variables, i.e. the magnitude of the investment made by the online platform in order to increase demand (a) and the likelihood that the investment will be free-ridden (b). (a) OTAs’ investments A free-rider problem can only exist when there is something on which to free-ride. Arguably, the OTAs involved in the recent rate parity cases invest substantial amounts of resources in expanding the services offered 75 Moreover, a footnote to the text referring to the general free-riding problem mentions an estimate of welfare benefits to new customers who did not previously have sufficient information to make an informed choice relative to already informed customers. In other words, aggregate consumer welfare may be reduced despite higher levels of promotional activities and greater output, and this is part of the analysis to be conducted under Article 101(3) TFEU: see Commission guidelines on vertical restraints, fn. 38.

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to both consumers and hoteliers, as they need to increase demand on both sides of the market (‘to get both sides on board’). In other words, both groups, or populations, of the customer base are crucial to the platform.76 In the online hotel booking cases, competition authorities identified three main categories of investments made by OTAs, i.e. investments aimed at improving the profile of the hotel establishment on the platform’s website, increasing the functionality of the OTA, and promoting the online visibility of the platform. The first category consists of promotional activities to which the OTA is contractually bound with the hoteliers. The platform curates hotel descriptions (providing tools for text-editing, for enhancing the visual presentation or appearance of the hotel, etc.), produces translations of the hotel descriptions in a number of foreign languages, makes available customer services via local teams responsible for managing the relationship with the hotels, etc.77 These investments may well be sunk insofar as they cannot be used for the distribution of accommodation services of other hotel companies.78 However, according to the evidence gathered by the Bundeskartellamt both in the HRS and the Booking investigations, these one-off activities carried out by the platform are not particularly costly. The German NCA points out in this regard that the average annual commission income that HRS earns per hotel is substantially larger than HRS’ one-off expenditure per hotel, and the platform is therefore able to recoup its relationship-specific investments even if the parties decide to terminate the contract after just one year.79 Moreover, OTAs undertake non-contract-specific investments aimed at improving the usefulness and utility of the platform, such as optimizing 76

See David Evans, ‘The Antitrust Economics of Two-Sided Markets’ (2003) 20 Yale Journal on Regulation 325. Besides platform’s investments on both sides, it should be noted that very often at least one user group is also required to make some sort of investments in order to join a platform, for instance in order to acquire the technical knowledge necessary to develop chat bots for a specific messaging app. 77 Bundeskartellamt, HRS, § 204; Autorité de la concurrence, Booking.com, § 18, fn. 36. Thus, the HRS website explains that, among other things, hotel descriptions are translated into more than 10 languages and that more than 300 HRS experts worldwide support hotels optimizing their online presence: see http://www.hrs.com/web3/showCmsPage.do?clientId=ZGVfX05FWFQ-&cid=493&pageId=partner. 78 See Commission guidelines on vertical restraints, § 107. 79 Bundeskartellamt, HRS, § 204; Bundeskartellamt, Booking, § 276. Moreover, the hotels often provided OTAs with pictures, videos and descriptions themselves.

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the search functions and increasing trust by platform users (e.g. making available tools for online review and providing individual support to booking customers). The third and by far most substantial category of investments made by OTAs, however, is targeted at the promotion of the overall visibility of the platform, and consists mainly of advertising and marketing expenditures aimed at increasing the general awareness of the specific OTA and attracting users to the platform. Allegedly, these considerable expenditures can be explained by the gatekeeper role in the internet played by horizontal (general) search engines (e.g. Google, Bing, etc.) and travelspecific metasearch engines (e.g. Skyscanner, Tripadvisor, Trivago, Kayak, Google Hotel Finder etc.). Thus, in order to gain online visibility, OTAs invest significantly in bidding search keywords such as ‘hotels in Trento’ and ‘Hotel Accademia’ (so-called name bidding or name grabbing).80 Moreover, OTAs make substantial pay-per-click (PPC) payments to metasearch engines. For instance, Booking indicated that its PPC expenses for Google and metasearch engines in Germany constituted between 30 and 60% of its German commission revenue from bookings issued from PPC advertising on those online platforms.81 (b) Are platform’s investments subject to free-riding? Whether the investments made by the platform are subject to free-riding by other market participants is the second factual element to be assessed with a view to substantiating this type of efficiency gains. OTAs maintain that investments enhancing the quality of their services, and intensifying the quality dimension of competition among platforms, would be recovered only insufficiently as a result of the lower room prices offered directly by hotels. Deprived of the protection granted by rate parity, OTAs’ investments would not be compensated for by adequate commission earnings. At first glance, the likelihood of free-riding by hoteliers is very high. As discussed above, hoteliers set themselves the room rates displayed on the platform. It follows that a hotelier could easily divert visitors from the OTA to its own website by undercutting platforms on price, i.e. by 80 Via Adwords bidding and other forms of online advertising, the major OTAs alone contribute to an appreciable extent to Google’s overall advertising income: see ‘Google Checks In to the Hotel Business’, Wall Street Journal, 8 April 2014 (‘Online travel agencies are among Google’s biggest advertisers. Priceline Group will spend more than $1.5 billion in 2014 on Google advertising and Expedia could spend another $1 billion, mainly to attract hotel bookings’). 81 Bundeskartellamt, Booking, § 277.

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decreasing the sale price of the rooms displayed on the hotel’s own sales channel. A broader and more in-depth look, however, reveals that the real extent of the free-riding problem is much more uncertain. First, it is important to understand on what exactly hoteliers would be free-riding. Thus, hoteliers could benefit from some services and tools provided by the platform and aimed at increasing online visibility and attraction, such as advertising and marketing, alongside web and mobile analytics derived from the large troves of data collected by the OTAs in their capacity as intermediaries. Similarly, hoteliers could be free-riding on the platform’s image and branding. In this respect, OTAs have been claiming that, simply by being displayed on the platform, hotels would benefit from a ‘halo’, ‘billboard’ or ‘showrooming’ effect, causing a significant increase in direct bookings.82 However, this reasoning seems to assume that OTAs represent a predominant source of information about hotel companies for prospective guests, while in reality there are countless ways the ‘customer journey’ starts off and moves on (blogs, articles in on- and offline newspapers and reviews, meta search engines, friends, etc.). It is equally important to note that being displayed on the online booking platform does not necessarily indicate that a hotel is a preferred establishment, has a high level of customer service, or is of outstanding quality. In fact, OTAs like Booking, Expedia and HRS generally do not decline to list hotels based on the results of any sort of quality screening, so that platform’s listing cannot be seen as an endorsement from which a significant halo effect could eventually emanate.83 Second, free-riding has a negative impact on incentives to invest only if the platform is prevented from realistically recovering its expenditure. This means that where investments are low and therefore can be recouped in a relatively short time, as in the case of the contract-specific, 82 Cf. C. Anderson, ‘The billboard effect: Online travel agent impact on non-OTA reservation volume’ (2009) 9 Cornell Hospitality Report No. 16, and further studies by the same author sponsored by Expedia. A more recent survey sponsored by a US hotel association arrives at completely different results: see ‘The Billboard Effect is dead, says a study of hotels listed on OTAs’ (Tnooz, 30 July 2015), https://www.tnooz.com/article/the-billboard-effect-is-dead-says-astudy-of-hotels-listed-on-otas/. The Swiss competition authority notes that the alleged billboard effect, at least with regard to the national hospitality market, is manifestly contradicted by the facts: see Wettbewerbskommission, Booking, HRS, Expedia (note 29 above), § 380. 83 Instead, in the case of Tripadvisor, a brand ‘halo effect’ could be more likely. In fact, hotels blithely display Tripadvisor logos on their premises, own websites, etc., bearing witness to the positive reviews left by the platform’s users.

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promotional, one-off services provided by platforms to hotels, free-riding can hardly be an issue. Along the same lines, investments that can be used profitably in alternative uses are per se non free-rideable. It follows that OTAs have to prove that their investments in quality services would largely be ineffective due to free-riding. It is conceivable and indeed realistic that, to the extent that hoteliers would be less willing to pay cost-per-click (CPC) fees to OTAs, and instead prefer to make investments in their own online presence, this could constrain the investments in the quality of the platform’s services. According to the German NCA, however, despite some customer leakage, the rationale for OTAs’ investments into quality services would not be adversely affected.84 In fact, given the importance of the indirect network effect in two-sided markets, the overall expenditure in quality services is a crucial competitive variable that is also used profitably outside of specific contracts with hoteliers. Thus, investments into the platform’s functionality and convenience of use are an essential qualitative element of the platform’s popularity among users, namely both for the traveller’s decision to book a room on a specific platform and for the hotel’s decision to join a specific platform.85 As the constant improvement of the quality of all these specific services is one of the essential characteristics of online platforms, there are distinct incentives for the OTAs to continue investing in them. Interestingly, without the protection afforded by rate parity, OTAs may even choose to increase their investments with regard to the platform’s overall attractiveness and convenience of use, as this could make prospective travellers more resistant to the temptation to switch to competing sales channels and book there.86 Third, genuine free-riding arises only where the hotelier gets something for free instead of having to pay for it. In so far as some prospective travellers are attracted to the OTA’s website because of the valuable overview of the commercial propositions made available by hoteliers directly, the data so generated can have economic value for the platform (e.g. online advertising, trend analysis, etc.) despite ensuing 84 Bundeskartellamt, HRS, § 207; Bundeskartellamt, Booking, § 267. Similarly, the Düsseldorf Higher Regional Court, in upholding the Bundeskartellamt decision, concluded that it would be in the OTA’s commercial interest to improve its market position through investment in quality, special offers and promotional activities. In fact, the more users a platform attracts, on both the supply side and the demand side, the more appealing it becomes for new users in turn: see OLG, HRS, § 188. 85 Bundeskartellamt, HRS, § 207. 86 Düsseldorf Higher Regional Court (note 6 above).

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consumer leakage to other sale channels. In a similar vein, even bidding on keywords that refer to specific hotels (e.g. ‘Hotel Accademia Trento’) dovetails nicely with the platform’s interest, as it is an effective means of attracting prospective travellers to the platform’s website, where they are likely to be subject to all sorts of discrete nudges in order to steer their final choices (e.g. by the often very opaque ways in which rankings of search results are presented, by fine-tuning visual enhancements of website pages, etc.) away from their initial preferences. In this case, it is highly questionable whether the platform has invested in keyword advertising with the main intention of helping deliver the consumer to a specific hotel. Fourth, it is clear that investments made by the platform, and at risk of been free-ridden by other market participants, could be entitled to safeguards under competition law as long as they show a competitionpromoting effect. In general, hoteliers appreciate the marketing and advertising services that OTAs provide.87 The assumption here is that bundling advertising is in principle beneficial to small and medium-sized hotels. While a hotel can recoup PPC advertisement costs if a consumer books a room in that specific hotel after having clicked on a sponsored link,88 it is far from certain that the user will make a booking in that specific hotel. Instead, for an OTA, it suffices if the consumer books any of the many hotels connected to the platform. An OTA can therefore in general achieve a much higher conversion ratio from bidding on search terms such as ‘hotels in Trento’ than any individual hotel.89 Furthermore, small and medium-sized hotels are unlikely to possess the skills necessary to make a successful bidding on keywords on search engines. It is not at all clear, however, that OTAs’ online advertising services are so beneficial to individual hotels, and ultimately to end consumers, as it is argued. In particular, because of ‘name grabbing’, namely the purchase by OTAs from search engines of specific hotel names combined with the 87

See also the results of a survey conducted by the German competition authority as part of the Booking’s investigation: Bundeskartellamt, Booking, §§ 43 ff. 88 See also Ariel Ezrachi, ‘The Competitive Effects of Parity Clauses on Online Commerce’ (2015), OECD Hearing on Across Platform Parity Agreements, p. 9 (‘search terms such as “Hotel Paris” … may go up to EUR 25 per click, regardless of whether that click led to a subsequent sale’), http://www. oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP(2015) 11&doclanguage=en. 89 See the Swedish contribution to the OECD Hearing on across platform parity agreements (2015), p. 2.

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corresponding location information, the organic link to the hotel website (actually looked for by the customer) is not among the first results to appear on the search results page. Arguably, this makes it less likely for the end consumer to click on the direct link to the hotel’s website.90 In a sort of vicious circle, higher OTAs’ advertising investments translate into hotels’ stronger dependency, spiralling up commission fees, and inflated hotel room prices to the detriment of final customers. A last and more general point is that, while withholding investments from which consumers would benefit can point to some form of suboptimality, even amidst the turmoil of the digital economy this could be a strong indicator of another type of flaw. The predicted fall in turnover, and the consequent draining of platforms’ investments into quality service, are premised on the assumption that, after the demise of the rate parity clause, the remuneration model would not change. Instead, as the Düsseldorf Higher Regional Court noted with regard to HRS, the platform had already successfully introduced a two-part system and there was no apparent decline in turnover.91 This shows that, despite the imperative to promote critical mass, the platform in many instances could react to the fact that users on one side profit from services for which they do not pay simply by mending the underlying business model.92 Clearly, the risk to avoid here is to bestow legitimacy on platforms and business models that happen to be profitable and viable thanks to some form of competition restriction or other unfair practices. Fair Share The second condition in Article 101(3) TFEU requires that, in order for a restrictive agreement to benefit from the exemption provided for in that provision, a ‘fair share’ of the efficiency gains resulting from anticompetitive agreements must be passed on to consumers. According to the Commission’s 101(3) Guidelines, the concept of ‘fair share’ implies that the pass-on of benefits must at least compensate consumers fully and effectively for any actual or likely negative impact caused to them by the restriction of competition. 90

Bundeskartellamt, Booking, § 279. Dusseldorf Higher Regional Court (note 6 above). 92 Cf. B. Warrington, ‘Chasing the Uber model is killing a lot of on-demand companies’ (Venture Beat, 8 May 2016), http://venturebeat.com/2016/05/ 08/chasing-the-uber-model-is-killing-a-lot-of-on-demand-companies. See also section 3.3 below. 91

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In its basic form, the ‘pass-on’ requirement reflects the need for efficiencies gains to redeem anti-competitive effects, and avoid unmitigated distribution of wealth from consumers to producers. In this respect, it is generally recognized that the second leg of Article 101(3) TFEU expresses a clear concern with distributional effects.93 At the same time, the consumer considered here is not only the final consumer, i.e. a natural person who is acting for purposes that are outside her trade or profession.94 In fact, the concept of consumers encompasses all direct or indirect users of the products or services covered by the agreement, such as final consumers, but also buyers of products for further processing and retailers. In a first step, the ‘pass-on’ condition requires identification of the specific group of consumers in the relevant market affected by anticompetitive effects. As seen above, the rate parity clauses investigated in multiple competition regimes are to be found in the contracts between the OTAs and their respective partner hotels. The hoteliers demand intermediary services (‘search, compare and book’ bundle) from online platforms. In this market, where the OTAs are the suppliers and the hoteliers are the customers, the hoteliers pay for these advertising, comparison and brokerage services via a CPA fee that is levied every time a transaction (successful booking) takes place between the two user groups. The price structure is such that hoteliers bear all the costs for the services provided by the platforms to users on both sides of the business. In this context, the likely effect of the rate parity obligation is to increase prices of hotel rooms for final consumers.95 In this context, it is presumed that the benefit from lower commission fees for the hotels would instead be passed on to hotel customers as final consumers. Consumers affected by the vertical restraint in the relevant market are therefore hoteliers as direct users of the advertising, comparison and

93

Francesco Ducci, ‘Out-Of-Market Efficiencies, Two-Sided Platforms and Consumer Welfare: A Legal and Economic Analysis’, Master Thesis, University of Toronto (2015), https://tspace.library.utoronto.ca/bitstream/1807/70296/3/ Ducci_Francesco_201511_LLM_thesis.pdf; Ioannis Lianos, ‘Some Reflections on the Question of the Goals of EU Competition Law’, CLES Working Paper Series 3/2013 (2013); Laura Parret, ‘The Multiple Personalities of EU Competition Law: Time for a Comprehensive Debate on its Objectives’, in D. Zimmer (ed.), The Goals of Competition Law (Cheltenham: Edward Elgar Publishing, 2012). 94 101(3) Guidelines, § 84. 95 See section 2.2 above.

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brokerage services offered by OTAs, alongside hotel customers as final consumers. In a second step, the ‘pass-on’ condition requires balancing the competitive harm, namely the increased commission fees and hotel rooms, with the quality improvements. The 101(3) Guidelines specify that the claimed qualitative efficiencies (better services) should create ‘real value’ for consumers in that market so as to compensate for the adverse effects of the restriction of competition. The second leg of the free-riding defence under Article 101(3) TFEU is satisfied if the benefits for platform users in terms of better service quality outweigh the negative effects on competition. This is likely to boil down to a value or ‘rough’96 judgment, as the precise measurement of quality remains a difficult enterprise.97 While the optimal level of quality for customers and, accordingly, their willingness to pay for the quality services cannot be determined reliably, the Bundeskartellamt deems it unlikely that customers would be willing to pay every price, or those prices allowing OTAs to recover all the investments they considered necessary to succeed in the market.98 A preliminary question in this context, however, is what are the quality services provided by the platform that could potentially outweigh anticompetitive effects? As seen above, an OTA commits substantial investments to the services directed to both hotels and customers, directly and indirectly. Consumers benefit from the investments made by the OTAs, in the sense that they appreciate the services provided by the online booking platforms. Clearly, customers benefit directly from investments in the functionality of the platform, such as having a better performing search engine. Thus, for instance, reduced search costs are at the core of the general value that the OTA provides to final consumers. These types of advantages provided by platforms, however, are not decisive for the question whether consumers reasonably participate in the efficiencies generated by the vertical restraint under Article 101 (3) TFEU. In fact, not all investments withheld because of alleged free-riding can be considered part of the quality services that could outweigh anticompetitive effects. Consumer benefits in terms of Article 101(3) TFEU 96 Herbert Hovenkamp, Antitrust Law (Kluwer, New York, 3rd edn, 2011) (‘[t]he set of rough judgments we make in antitrust litigation does not even come close to this “balancing” metaphor’). 97 EU Contribution to the OECD Roundtable on the Role and Measurement of Quality in Competition Analysis (2013), p. 81, http://www.oecd.org/ competition/Quality-in-competition-analysis-2013.pdf. 98 OECD/Germany (note 63 above), § 22.

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are those deriving directly from the MFN clause and not from the general value of the platform. More precisely, these should be investments that are first enabled by the MFN clause. Because of the market failure, investments are withheld from which consumers could otherwise benefit in terms of better services. However, it can be doubted whether rate parity clauses by their very nature are suitable to reinforce the already existing quality competition between OTAs and substantially increase the quality of the services provided by the platform for the real benefit of final consumers. Relatedly, final consumers in particular would generally benefit from services providing them with valuable information. It is very difficult, however, to find out exactly how consumers gather information about a specific accommodation offer. In specific contexts, those informational services could be more valuable, especially when alternative information service sources are scarce and/or complex. At any rate, it is highly questionable whether and to what extent consumers could benefit from the high advertising expenditures of OTAs. This is true also for hoteliers since, in some instances, high advertising expenditures by platforms can increase hoteliers’ dependency and inflate commission fees. Finally, the more serious the restriction of competition found under Article 101(1), the greater must be the efficiencies and the pass-on to consumers.99 As seen above, retail MFN clauses in practice may have the same effects as a price fixing agreement.100 Therefore, it could generally be difficult to exempt them on the ground that they foster competition on some non-price dimensions, and in particular advertising, whose positive effects for consumers are already uncertain.101

99 Commission guidelines on vertical restraints, § 104 (‘In cases where the likely effect of the agreement is to increase prices for consumers within the relevant market it must be carefully assessed whether the claimed (qualitative) efficiencies create real value for consumers in that market so as to compensate for the adverse effects of the restriction of competition’). 100 See section 2 above. 101 OECD/Germany (note 63 above) § 25. See also Paolo Buccirossi, ‘Parity clauses: Economic incentives, theories of harm and efficiency justifications’ (2015) 1 Competition Law & Policy Debate, Symposium Parity Clauses, p. 43 (‘After all, the same justification could also be provided for a cartel: the cartelists could argue that their price fixing agreement is aimed at fostering competition in non-price dimensions that require investments on which rivals can free-ride’).

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The Broader Question of Out-of-market Efficiencies As seen above, the definition of ‘consumer’ under the second leg of Article 101(3) TFEU includes both intermediate customers (users) and final consumers. Interestingly, an OTA is an example of a two-sided platform where one group of users represents final consumers and the other intermediate customers, namely hoteliers who acquire a bundle of services from the platform and pay CPA fees. The question inevitably arises whether, in order for the exemption provided for in Article 101(3) TFEU to be applicable in such a context, it is necessary that the fair share of the profit resulting from the advantages arising from the agreement is reserved for the consumers, both intermediate and final, of the services provided on the market on which the restrictive effects for competition are produced, or whether it can be considered that the restrictive effects harming those consumers may be compensated by the advantages in favour of consumers of the services provided on a related market. Competition enforcers have long recognized the possible multisidedness, or ‘out-of-marketness’, of efficiencies.102 According to settled case law going back to a pre-digital era, it is possible to take into consideration the advantages of the agreement that occur on a different market from that on which the agreement produces the restrictive effects.103 According to the 101(3) Guidelines, such advantages can be taken into consideration where the category of consumers affected by the agreement and benefiting from the efficiency on the two separate markets are substantially the same.104 Arguably, there was uneasiness about the fact that consumers affected by the negative effects of a restraint should pay for the benefits of other consumers in related markets. This underlies the rationale of allowing aggregation across markets exclusively when consumers are substantially the same. 102

The Commission acknowledged out-of-market efficiencies under Article 101(3) TFEU for the first time in the Star Alliance commitment decision: see Commission Decision of 23 May 2013 in Case COMP/AT.39595 Continental/ United/Lufthansa/Air Canada and Alexander Italiener, ‘Competitor agreements under EU competition law’ (2013) 40th Annual Conference on International Antitrust Law and Policy, Fordham Competition Law Institute, New York, p. 11, http://ec.europa.eu/competition/speeches/text/sp2013_07_en.pdf. 103 Case T-86/95 Compagnie générale maritime and Others v Commission [2002] ECR II-1011, § 343; and Case T-168/01 GlaxoSmithKline Services v Commission [2006] ECR II-2969, § 248. 104 101(3) Guidelines, § 43.

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More recently, the CJEU has made clear that, in the case of a two-sided platform, in order to assess whether an arrangement can fulfil the first condition laid down in Article 101(3) TFEU, it is necessary to take into account, where appropriate, all the objective advantages flowing from that measure not only on the market in respect of which the restriction has been established, but also on the market that includes the other group of users on the separate but connected market.105 It is indeed the very essence of online platforms to take into consideration, and mediate between, the interests of different user groups linked through indirect network effects;106 and the balancing exercise that multi-sided platforms typically carry out can generate conspicuous efficiencies.107 Therefore, it would seem inevitable, in view of the competition assessment of vertical restraints under Article 101(3) TFEU, to consider also the effects of agreements from which users on different sides of the platform would benefit directly. By broadening the scope of the efficiency assessment to be conducted under Article 101(3) TFEU when online platforms are involved108 the CJEU has contributed to the alignment of Article 101 TFEU with the ever-more influential economics of two-sided markets. More specifically, the recent MasterCard judgment109 states that, when examining the first condition laid down in Article 101(3) TFEU, it is necessary to take into account all the objective advantages flowing from the restraint, not only on the relevant market, but also on separate but connected market(s). Should it be found that there were ‘appreciable objective advantages’ flowing from the restraint on the user group on the relevant market, even if those advantages did not in themselves prove sufficient to compensate for the restrictive effects identified pursuant to Article 101(1) TFEU, all the advantages for both user groups of an online platform could, if necessary, still justify the agreement if, taken together, those advantages were of such a character as to compensate for the restrictive effects.110 Conversely, if there are no appreciable objective 105

MasterCard and Others v Commission (note 70 above), § 237. Bundeskartellamt (note 19 above), p. 14. 107 David Evans and Richard Schmalensee, ‘The Antitrust Analysis of Multi-Sided Platform Businesses’ (2013) NBER Working Paper 18783. 108 Cf. Andreas Scordamaglia-Tousis and Claire-Marie Carrega, ‘The Application of Article 101(3) in the Context of Multi-Sided Markets Following MasterCard’ (2014) Competition Policy International, https://www.competition policyinternational.com/assets/Uploads/EUDec14-2.pdf. 109 MasterCard and Others v Commission (note 70 above). 110 Ibid, § 241. 106

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advantages for users on the relevant market, any advantages for the users on the connected market cannot in themselves sufficiently compensate for the restrictive effects, unless users in the two markets are substantially the same. In their respective analyses, competition authorities involved in the hotel booking cases have generally considered that there are strong indirect network effects between hoteliers and end customers. The larger the choice of hotels for a given destination, the more attractive an OTA is for prospective travellers; the larger the number of prospective travellers using an OTA, the more attractive the online booking platform is for hoteliers. However, there was no attempt to quantify any related type of efficiency. At any rate, it is very unlikely that the ‘appreciability’ threshold could have been reached in the online hotel booking cases. In other balancing scenarios, however, two-sided-specific efficiency claims could become more relevant to competition assessment under Article 101(3) TFEU.111 Alternatives to the Retail MFN Clause A further condition to be fulfilled for a successful free-riding defence is that the vertical restraint has to be indispensable within the meaning of Article 101(3) TFEU. In other words, the efficiency gains produced by the vertical restraint could not have been achieved through less restrictive means. For the cases under analysis, this means that the prerequisite condition for indispensability is that the rate parity obligation is reasonably necessary to achieve the efficiency gains. Conversely, justifications offered by OTAs based upon the efficiency of rate parity in inducing investments that promote competition may be rebutted where competitively less restrictive alternatives are found to be reasonably available. Therefore, in a first step, it is necessary to assess whether there are realistic alternatives to rate parity that are less competition-restricting (a). In this regard, whether these models have already been actually put into practice in the relevant market should not be conclusive, as alternative business models might not have flourished on the relevant market because of the effects of the competition restraint. Second, 111 For example, it could be argued that users on one side of the market (hoteliers) may accept higher commission fees or other types of restrictive effect, because such restrictions are accompanied by better conditions to another user group that make the latter more likely to use the platform, so that the negative effects are offset by increased use.

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despite the existence of realistic, less restrictive alternatives, indispensability is proved if those alternatives would result in significant losses of efficiency (b) (a) Realistic alternatives There are many alternative ways to solve a free-riding problem in the complex reality of two-sided businesses. The German competition authority considered an array of alternative business models, and came to the conclusion that they were realistic, partly because they were practised in similarly structured markets. For instance, OTAs could provide services to hotels irrespective of the sales they generate, and hoteliers could pay for this service directly, for example by way of ‘minimum guaranteed CPA rates’. In this way, the amount of the compensation granted to the OTA could be structured as a function of the scope of the services actually rendered. To the extent that at least some hotels benefit from the ‘billboard effect’ discussed above, they may be willing to pay such a fixed fee. A further alternative would be a business model that combines a fixed (lump-sum) fee for listing with variable compensation per booking, in addition to online advertising, as is already common for price comparison websites in other sectors.112 Moreover, other business models in the hospitality industry already allow the accommodation guest to pay a fee for the platform services (e.g. Airbnb). Finally, more technological solutions to the free-riding problem could envisage the adoption of online tracking technologies similar to those already broadly employed by platforms in order to harness user data. In this way, a hotel that has received a booking via its own website following a guest’s visit to the platform could share the costs of the ‘search and compare’ services previously used by the guest.

112 Cf. UK Financial Conduct Authority, ‘Credit Card Market Study’, Interim Report: Annex 7 – A Review of Price Comparison Websites (PCWs) (2015), http://www.fca.org.uk/static/documents/market-studies/ms14-6-2-ccms-annex-7. pdf, § 1.20 (‘PCWs may also promote specific credit card providers or their products in paid-for search and banner advertising and can be included in direct marketing by the PCW … Arrangements are in place to ensure that PCWs receive commission for their services even if a consumer does not click through the link they provide (by the use of tracking cookies) … There is a range of commission relationships, including payment on the number of click-throughs, a payment per application and payment per acquisition’).

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(b) Realistic and equally efficient alternatives Once alternatives are identified, the party has to demonstrate that those alternative models would be significantly less efficient than the previously used commission model. Clearly, the requirement is not met simply by demonstrating that most OTAs in the market are using it, in particular because this does not exclude that other, more efficient business models could have emerged in a market setting not vitiated by competition restraints. More efficient business models could emerge only after elimination of the vertical restraint. Thus, with narrow retail MFN in place, the commission model currently employed by Booking, Expedia, HRS and other hotel online booking platforms is surely the most profitable. Once rate parity is eliminated, however, it is possible that OTAs would develop other remuneration models, or other solutions in general, in order to prevent free-riding in an equal or even more efficient way, in particular exploiting the almost boundless potentials of new digital technologies.

4. CONCLUSION: THE FREE-RIDING DEFENCE IN THE DIGITAL ECONOMY Two-sided platform businesses are at the core of the digital economy. As to OTAs, this new breed of intermediary has already disrupted longestablished business practices in the hospitality industry. Given the many proven benefits of online platforms in general, extra caution is required when regulating these, and this applies also to competition policy. Competition on digital markets cannot be protected in an effective way without first gaining in-depth insights into its concrete operation, and then providing adequate enforcement tools to fight its restraints. One of the main challenges faced by competition enforcers in this respect is that, given the current pace of technological innovation, market characteristics tend to evolve quickly. By the time the enforcer’s arrow hits the target, the risk is that it might be too late to effectively wipe out the already ossified anticompetitive effects produced on the relevant market. From this perspective, the online hotel booking cases provided an important and timely opportunity to fine-tune the appropriate regulatory response to vertical restraints instigated by online platforms; and the learning curve faced by all the parties involved has been steep. In fact, the competition assessment of rate parity clauses poses many difficulties, and this chapter has highlighted at least some of them. Not only is retail MFN a new type of vertical restraint, but, more importantly, the actual relationship between the hotelier and the OTA does not have

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much in common with the traditional manufacturer/retailer setting on which the competition policy on vertical restraints is firmly grounded. Despite sailing in predominantly uncharted waters, NCAs in the EU have been able convincingly to demonstrate that retail MFN clauses under certain circumstances can restrict competition among OTAs. This restriction causes an inflation of commission fees paid by hotels and, very likely, higher room prices for travellers. The NCAs, however, disagreed on the level of possible efficiency gains ensuing from narrow MFN clauses. In particular, the German authority, unlike the other NCAs, was unconvinced that this type of rate parity could effectively solve an alleged free-riding problem under the conditions set by Article 101(3) TFEU. This chapter comes to the conclusion that the free-riding defence put forward by the OTAs in the online hotel booking cases was weak. Under different circumstances, however, this justification could still successfully apply to vertical restraints, even between online platforms and their users. Moreover, novel efficiency defences are likely to apply to two-sided platform business. While not a swan song for the free-riding defence, the hotel online booking saga makes it clear once again that efficiency allegations of this type need to be carefully and thoroughly assessed.

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Appendix

Source: ‘Pharma Industry Merger and Acquisition Analysis: 1995 to 2005,’ revenuesand profits.com (viewed 28 April 2016). © revenuesandprofits.com. Permission to use this figure as illustration obtained by the author of Chapter 2.

Figure A.1 Pharma industry M&A 1995–2005 377 Paul Nihoul and Pieter Van Cleynenbreugel - 9781788972444 Downloaded from Elgar Online at 03/15/2021 10:39:18PM via Universita Degli Studi Roma Tre

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Index abuse of dominant position Art 102 restrictions competition on the merits 102–3, 121–2 consumer benefit, and 99–100 criticism of 98–9 efficiency justifications 98–105 ‘extra-competition rules,’ non-compliance with 103–4 innovation, and 98–105 parallel trade 100–101 ‘per se’ or ‘object’ abuses 98 proportionality 103 refusal to deal 100–101 safe harbors 103–4 state intervention 100–101 data-related markets, in 169–71 digital economy, and challenges for 304–5 use in 313–14 health care sector 154–6 pharmaceutical sector 154–6 abuse of market power patent injunctions as 254–70 Bosch 259–61 EU law 263–73 exclusionary vs. exploitative conduct 258–9 FRAND commitments 254–61, 263–70 Google-Motorola 260–61 Huawei v ZTE 266–71 judicial inconsistencies 260–63 Motorola-Apple 261–2 Motorola-GPRS 265–6 Orange-Book-Standard 266, 268–9 Samsung-Apple 262–3, 272 Samsung-UMTS 263–4

SSO regulatory role 270 Unwired Planet v Huawei 269–70 US law 257–63, 271–2 abuse of rights competition law, in Astra-Zeneca 276–9 commercial authorization, withdrawal of 276–9 competition on the merits 278–9, 283–4 conflict of laws, and 283–6, 288–91 divisional patents 279–82 EU law 276–83, 288–91 intention to obtain advantage 278–9, 286–8, 291–3, 295–7 Ratiopharm/Pfizer 280–82 supplementary protection certificates 279–82 US law 283–6 interpretation development 288–90 Emsland·Stärke 290–95 excess of rights 295 exercise or rights without pursuing goal 295–6 intention to obtain advantage 291–3, 295–7 no other than test 291–3 objective approach 294–5 prohibition, principle of 274–5, 294–7 subjective approach 291–3, 296–7 TV10 broadcasting decision 289 Union vs. Member State law, conflicts 288–91 Aghion, Philippe 19 379

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all circumstances test 324–5 Amazon 348 analytical framework 6–10 anonymization 107–9 anti-competitive conduct see also tying and bundling; unfair practices assessment criteria conduct analysis 45–7 market dominance/power 43–4 multi-sided features 42–3, 307 new technologies, challenges of 42–3, 45–6, 48–9 relevant market 41–2 innovation influences on 39–40 intellectual property rights, and 44 new market entry, and 43–4 new technologies 42–3, 45–6, 48–9 Type I and Type II errors 38 antitrust law (US) consumer welfare vs. total welfare 338 innovation markets approach 188–9 Merger Guidelines 188 R&D collaborations, and background 179, 192–4 blacklisting 203–5 DOJ Licensing Guidelines 196–7, 201, 205, 207–8 dominance thresholds, and 205 EU approach, compared 198–9, 204, 211–13 innovation market concept 169–97, 188–9, 202, 206–7, 212 joint ventures, applicability to 193–5, 200–201, 211–13 law reform 193–4, 197–9 limitations 185, 200, 204 market power requirement 200–201 NCRPA, protections under 199–205 proof of anti-competitive restraints 193

right of access to R&D joint ventures 207–9 rule of reason 205, 207 safe harbor provisions 193, 195–6, 199 safe zone, conduct outside 205–7 standard-setting procedures 197–8 summary of 198–9 Apple 261–4, 272 Arrow, Kenneth 4–5, 16–17, 183–4, 186 Article 29 Working Party advisory opinions 105–6, 114–16, 118–19 artificial intelligence see also data-related markets Application Programming Interfaces 176–7 competition law, and anti-competitive conduct, analysis of 165–6 legislative challenges 164–5, 175–7 standard essential patents 175–6 coordination, need for 164, 175–6 cyber-physical systems (CPS) 163 development, impact of 81 law, implications for 162, 175–7 network potential 163–4, 176–7 platforms 163 as efficient competitor test 323–6 AstraZeneca 276–9 Baker, Jonathan B. 17, 39 Baron, Justus 190–91 Bertrand, Olivier 24 Big Data aims 79 challenges 173–4 definition 81 innovation, negative value 7–8 legislative challenges 162 privacy implications 173–4 biotechnology industry mergers, innovation impact studies 21–3 block exemptions

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Guidelines 90–92 R&D collaborations, and background 179–80, 194, 202–3 blacklisting 203–5 damages rules 201 definitions 201–2 dominance thresholds, and 205 effect doctrine applicability 205 effects on future markets 180–81 ex post view 203–4 Honeywell and DuPont 213–14 Horizontal Guidelines 198, 205–6, 208 innovation market concept 202, 212 joint ventures, applicability to 195, 211–13 limitations 185, 203–4 right of access to R&D joint ventures 208–9 safe harbor provisions 195–6, 202–3 safe zone, conduct outside 205–6 standard-setting, and 208 summary of 198–9 Technology Transfer Guidelines, and 195, 205–6, 208 US approach, compared 198–9, 204, 211–13 sufficiently deleterious restrictions 89–90 Böhme, Enrico 238–40, 242 Booking.com 343, 345–6 BookitNow 352 Bosch 259–61 Cass, Ronald A. 40–41, 44 Cassimen, Bruno 24 Charter of Fundamental Rights right to health and health care 140–41 Coleman, Mary 44 collaborations see R&D collaborations Colomo, Pablo Ibáñez 36, 41 competition analysis abuse of dominance 98–105

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ancillarity concept 91–4 balancing 91–2 consumer choice 96–100 economic science vs. court experience 89–90 exclusivity 92 exemption Guidelines 90–92, 95–6 ‘extra-competition,’ compliance with 103–4 incentive to innovate 183 innovation limitation 182–3 inter-brand competition vs. intra-brand competition 90–91 necessity test 92–5 regulatory frameworks, relevance of 104–5 relevant markets 91 sufficiently deleterious restrictions 89–90 trial and error innovation, as 181–3 wealth creation, and 182–3 economic efficiency, and definition 86–7 online travel sector, retail MFN clauses 359–75 role of 84–9, 95–6, 98–105 two-sided markets, in 334–9 tying and bundling, and 334–9 sufficiently deleterious restrictions 89–90 theories of 181–6 innovation, and 182–3, 185–8 R&D collaboration, and 187–8 undistorted competition 87–8 competition law see also TFEU art 101; TFEU art 102 enforcement effectiveness and efficiency 36, 49 innovation considerations 36–9 institutional implications 47–9 new technology, challenges of 37–8, 49 purpose 36–7 free-riding defence 357–9

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innovation, role in Arrowian approach 4–5, 16–17, 183–4, 186 Article 101 restrictions 89–98 Article 102 restrictions 98–105 benefits of 5–6, 34–5 consumer influences 34 efficiency justifications 98–105 endogenous value 8–10 exogenous value 7–8, 10 framework for 6–10 generally 2–3, 5–6 indirect influence on policy 36 influence assessments 38–9 market efficiency 84–9 mergers, and 19–20 negative value 7–10 positive value 7–10 price competition 4–5 product competition 4–5 scholarship trends 3–9 Schumpterian approach 4–5, 16–17, 182–4, 186, 188 theories of harm 6–8 Type I and Type II errors 38–9 von Hayek’s approach 181–2 purpose 33, 36, 84–5 consumer choice 88–9, 96–8 consumer protection 36 freedom to compete 86–7 market efficiency 84–9, 95–6 consumer behaviour competition and innovation, influences on 34 digital industry, role in 332–3 consumer choice 88–9, 96–100 consumer data see also data protection competition and innovation, influences on 7–8, 79 data-related markets data ownership 174 data portability 174–5 mergers and privacy 171–4 consumer protection 36, 135–7 consumer rights patent settlements, and 223–5 consumer welfare effects

patent settlements 180-day exclusivity period 238–9 innovation incentives, and 234–7, 241–2 patent challenges incentives, and 237–40, 242 price effects 234–5 research limitations 241–2 consumers, definition 368, 371 creative destruction 4 cyber-physical systems (CPS) 162 Danzon, Patricia 21–3 data ethics 82–3 data innovation customization, and 81–2 data as currency 167 data driven innovation vs. data protection innovation 80, 83–4, 93–8, 107–13, 127–30 development 80–84 Fourth Industrial Revolution, as 80–81 obstacles to 93–8 productivity impacts 81–2 surveillance capitalism, and 83 data protection competition and innovation, and anonymization 107–9, 127 automated profiling 117–19, 128 balancing test 120 compatible use of data 112–17, 120 consent restrictions 108–10 data protection innovation vs. data driven innovation 80, 83–4, 93–8, 107–13, 127–30 data-related markets, in 172–4 discrimination 111 economic efficiency, and 119, 121–2 enforcement challenges 83 implications for 82–3 influences on 7–8, 79 lawful processing requirements 108–9

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legitimate interest 109–11, 113–16, 120–21 necessity, and 109–10 objective justifications 119–24 obstacles to 93–8 policy conflicts 119–27 possible interactions model 122–30 privacy, and 122–6 research purposes 108, 113–14, 127–8 whitelisting 123–4 data ownership 174 data portability 174–5 data privacy, and 83, 173–4 data subjects 106 balancing interests of 115–16 data shadows 118 dignity and autonomy of 117–19 fundamental rights of 82, 124 profiling 117–19 European Data Protection Supervisors 80 pseudonymization 107–8 data protection law advisory opinions 105–6, 114–16, 118–19, 125 applicability 106–7 competition and innovation, and anonymization 107–9, 127 automated profiling 117–19, 128 balancing test 120 compatible use of data 112–17, 120 competition on the merits 102–3, 121–2 economic efficiency, and 119, 121–2 legitimate interest 109–11, 113–16, 120–21 objective justifications 119–24 policy conflicts 119–27 possible interactions model 122–30 privacy 122–6, 173–4 research purposes 108, 113–14, 127–8 whitelisting 123–4

383

development 105 exclusions 106–7 GDPR 306 adequate safeguards 108, 115–17, 127–8 anonymization and pseudonymization 107–9 Article 29 Working Party opinions 105–6, 114–16, 118–19, 125 automated profiling 117–19, 128 changes following 105–6 compatible use of data 112–17 data breach notifications 111 data quality 108 freedoms of natural persons 110–111 human dignity and autonomy protection 117–19 legitimate interest 109–11, 113–16 processing, justifications for 108–11 provisions 105 research purposes 108, 113–14 risk assessment guidance 111–16 purpose 120 data-related markets abuse of dominance 169–71 data as an essential facility 169–71 data as currency 167 data ownership 174 data portability 174–5 exclusive use of data 170–71 FRAND declarations in 175–6 market definition, and 166–9 market power analysis 166–8 data possession, and 167–8 mergers competition law applicability 171–2 privacy implications 171–4 R&D incentives 170–71 SSNDQ test 168–9 standard essential patents, role in 175–6

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The roles of innovation in competition law analysis

zero-price products or services 166–7 Davis, Joshua P. 243 difference-in-differences method 20–21 Digital Clearinghouse 128–9 digital economy business principles of 344–5 competition in abuse of dominance rules 304–5 effective protection 375–6 German MMC report on 300–306 implications of 300–302 law, challenges for 339–40 merger control challenges 300–302 merger thresholds, proposed amendments 303–4 search-based vs. non-search-based advertising 302 search engines, regulation of 305–6 SSNIP test, and 302 tying and bundling 304–5, 313–14 innovation, importance of 300 market concentration 299–300 market development 308–9, 344–5 network effects 299–300, 310–311 digital platforms competition, and law, challenges for 301–2, 312–13, 341–2 for the market vs. on the market 311, 318–19 online travel sector, in 341–4 rate parity clauses 341–4 tying, effects of 317–19 definition 308–9 market definition, and 168–9, 328–9 multi-sided platforms assessment criteria 42–3, 307 asymmetric pricing 310–313 competition law challenges 301–2, 312–13 cross-subsidization 310–311 economies of scale 311

features of 308–13 feedback mechanisms 311–12 functions 309–10 network effects 310–311 out-of-market efficiencies 371–3 online travel sector cannibalization effects 353–5 competition dilution mechanisms 350–51 entry foreclosure 351–2 features of 344–5 free riding defence 355–70 hold-up problem 356–7 horizontal and vertical restraints 348–9 most favoured customer clauses 347–8 most favoured nation clauses 344–55 network effects 353–5 rate parity clauses 341–4, 350, 353–4 retail MFN clauses alternatives to 373–5 retail MFN clauses anti-competitive effects 348–55, 375–6 retail MFN clauses efficiency defence 359–75 retail MFN obligations 346–7 wide vs. narrow MFN clauses 345–8, 353–5 price comparison websites 352, 374 SSNIP test, and 302 two-sided platforms 309–13, 375–6 dominant position see abuse of dominant position DuPont 213–14 economic efficiencies competition law, role in 84–9 definition 86–7 online travel sector, retail MFN clauses 359–75 two-sided markets, in 334–9 tying and bundling, and 334–9 Elhauge, Einer 234–7, 241

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Emsland·Stärke 290–95 Encaoua, David 244 European Data Protection Supervisor, role of 80 exclusionary conduct see abuse of dominant position; tying and bundling; unfair practices Expedia 344, 346 Facebook 173–4, 303 Farrell, Joseph 222, 237, 242, 244–5 FinTech sector 176–7 FRAND declarations data-related markets, in 175–6 free riding defence, principles of 357–9 efficiency gains, and 360–70 fair share, and 367–70 halo effect 364 hold-up problem, and 356–7, 361 horizontal free riding 361 investment incentives, impact on 364–5 investment, scope and extent of 361–3 likelihood of 363–7 online travel sector, in 355–70 pass on requirement 367–70 two-sided markets, and 375–6 General Data Protection Regulation 306 adequate safeguards 108, 115–17, 127–8 anonymization and pseudonymization 107–9 Article 29 Working Party opinions 105–6, 114–16, 118–19, 125 automated profiling 117–19, 128 changes following 105–6 compatible use of data 112–17 data breach notifications 111 data quality 108 freedoms of natural persons 110–11 human dignity and autonomy protection 117–19 legitimate interest 109–11, 113–16

385

processing, justifications for 108–11 provisions 105 research purposes 108, 113–14 risk assessment guidance 111–16 generic competition delay, and innovation incentives 234–7, 241–2 patent challenge incentives 237–40, 242 effects trade-offs 242 implications for 225 multiple challenger/entrant problem 231–2 optimal delay 242 Germany competition in digital markets, MMC report 300, 302–6 competition law, amendment proposals 129–30 Google case 59, 69 information exchange rules 129–30 Gilbert, Richard 17–18, 46, 196–7 Ginsburg, Douglas H. 48 Glaxo Wellcome 28 Google 42, 50, 54–5, 339, 363 merger 172 non-exclusionary innovation harm 59–75 specialized search services 59–70, 74–5 using content without authorization (scraping) 63–8, 71, 73 Google AdWords 67 Google-Motorola 260–61 Google News 67–70 Grabowski, Henry 24 Gratz, Linda 238–40, 242 Gutterman, Alan S. 209 harm, theories of 6–8, 50–51 health care policy competition influences on 143–4 consumer protection, and 135–7 EU role and powers 132–4 Charter of Fundamental Rights, and 140–41

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The roles of innovation in competition law analysis

harmonisation, lack of 133–4 importance of economic controls 142–3 social policy objectives 141–2 internal market and free movement principles medical services 137–9 medicinal products 135–7 patient mobility 139–40 national financing requirements 133 secondary legislation 136–7 social influences on 133 health care sector ageing population, and 131–2, 142–3 competition, and abuse of dominant position 154–6 applicability to 145–53, 160–61 cartels 153–4 indirect effects on national law 158–9 influences of 143–4 national laws, relationship with 157–60 pharmaceutical companies 154–6 public regulation 145–6 public vs private entities, role of 145–7, 150–53 service of economic interest 157–8 specific restrictions 153–7 state aid provisions 145 undertakings, concept of 146–7 expenditure trends 131–2, 142–5 liberalisation 132, 143–5 principles 160 private undertakings, role of 132 undertakings health insurance 147–50 hospitals and care facilities 150–51 interpretation difficulties 146–8, 152–3 medical associations 151–2 private undertakings, role of 132, 145–7, 150–53 Higgins, Matthew 25 hold-up problem 56–8, 356–7, 361

Honeywell 213–14 Hovenkamp, Herbert 36–7, 329 HRS 341–3, 345–6 Huawei 266–71 Hylton, Keith N. 37 hypothetical monopolist test 41–2 IBM 42 injunctive relief abuse of market power, as 254–70 availability 248–54 Bosch 259–61 EU law 251–4, 263–73 exclusionary vs. exploitative conduct 258–9 FRAND commitments 254–61, 263–70 Google-Motorola 260–61 Huawei v ZTE 266–71 international conventions 248–9 Motorola-Apple 261–2 Motorola-GPRS 265–6 Orange-Book-Standard 266, 268–9 pecuniary compensation 252–3 preliminary injunctions 253 Samsung-Apple 262–3, 262–4, 272 Samsung-UMTS 263–4 SSO regulatory role 270 Unitary Patents 253–4 Unwired Planet v Huwaei 269–70 US law 249–51, 257–63, 271–2 innovation anti-competitive effects assessment of 46–9 dynamic analysis 46–9 new technologies 42–3, 45–6, 48–9 single firm conduct 39–41 vs. efficiency 46–7 benefits of 34–5, 181–2 business productivity, and 34–5 competition, and endogenous value 8–10 exogenous value 7–8, 10 negative value 7–10 positive value 7–10 concentration, and 16–19

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definition 3–4, 46 intellectual property protection, and 17–18, 35 market structure, and 85–6 measuring, approaches to 14 mergers, impact of 14, 19–20 difference-in-differences method 20–21 merger retrospectives 20–26 motivations 22–3 pharmaceutical industry, in 28–9 pressures regarding 35–6 product vs. process innovation 17–18 value of 7–10 Intel 323–6, 337, 339 intellectual property see also patents; standard essential patents importance of 5 innovation, and 17–18, 35, 44 intention to obtain advantage 278–9, 286–8, 291–3, 295–7 Internet of Things technologies 162 Japan 165 Just-Book 352 Katz, Michael 19–20 Krüger, Alex 234–7, 241 Kyle, Margaret 24 LaMattina, John 30 Larouche, Pierre 85–6 Lefouili, Yassine 244 Leheyda, Nina 25 Lemley, Mark A. 220–21 Long, William 25 Manne, Geoffrey A. 39 market concentration, influences on 299–300 market definition digital platforms, and 302, 307–9 two-sided platforms 309–13 multi-sided platforms 308–10 new economy markets 308–9 SSNDQ test 168–9

387

SSNIP test 41–2, 168, 302 market dominance, conduct analysis 45–7 market foreclosure competition protections against 5–6 foreclosure theories of harm 54–5 innovation, influences on 44 online travel sector, in 351–2 two-sided markets, in 330–34 tying, and 321–3, 330–34 market power, abuse of see abuse of market power markets, generally see also data-related markets contestability, need for 5 definitions 167 data-related markets, difficulties with 166–8 innovation market 180–81 relevant market 41–2, 168–9 synergies in 5–6 Merck 28 mergers competition, and concentration 16–19 data-related markets, applicability to 171–2 digital economy, challenges for 302–3 dynamic effects 13–14 economic analysis 13–14 privacy implications 171–4 R&D impacts 8–9, 17–19 static effects 13–14 thresholds, proposed amendments 303–4 concentration, impacts on 16–19 innovation, impacts on 14, 19–20 difference-in-differences method 20–21 merger retrospectives 20–26 motivations 22–3 pharmaceutical industry, in 28–9 technological progress, relevance for 13–14, 16–17 trends 14 Microsoft 42, 314–16, 319–22, 327–8, 330–35

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The roles of innovation in competition law analysis

monopolization innovation incentives, theories of 16–17, 183 Morais, Luis Silva 209 most favoured nation clauses travel industry, in 344–55 retail MFN clauses alternatives to 373–5 anti-competitive effects of 348–55, 375–6 efficiency defence 359–75 retail MFN obligations 346–7 wide vs. narrow MFN clauses 345–8, 353–5 Motorola 260–62, 265–6 multi-sided platforms see digital platforms Munos, Bernard 25–6 Narodoqy Fundusz Zdrowia (NFZ) 156 non-exclusionary innovation harm anti-competitive harm likelihood of 72–3 whether 70–72 basis for 50, 76–7 challenges/analysis difficulties with 50 Google specialized search services 59–70, 74–5 hold-up power 56–8 incentives to innovate, and 73–4 pro-competitive conduct, justifications for 73–5 standard essential patents, and 55–8 standards for condemnation of 75–6 theories of 70–72 use of content without prior authorization (scraping) 63–8, 71, 73 online travel industry most favoured nation clauses 344–55 cannibalization effects 353–5 competition dilution mechanisms 350–51

entry foreclosure 351–2 free riding defence 355–70 hold-up problem 356–7 horizontal and vertical restraints 348–9 most favoured customer clauses 347–8 network effects 353–5 wide vs. narrow MFN clauses 345–8, 353–5 rate parity clauses 341–4, 350 alternatives to 373–5 retail MFN clauses alternatives to 373–5 anti-competitive effects 348–55, 375–6 efficiency defence 359–75 obligations 346–7 Orange 266, 268–9 Ornaghi, Carmine 21, 23–4 patent settlements anti-competitiveness debate 215–19 reverse payments 228–9 classification 216–17 competition analysis 223–5 knowledge assumptions 229–31 consumer rights, and 223–5 consumer welfare effects 180-day exclusivity period 238–9 innovation incentives, and 234–7, 241–2 patent challenges incentives, and 237–40, 242 price effects 234–5 research limitations 241–2 EU position guidelines 216–17 technology transfers, and 224–5 generic pharmaceuticals delay, innovation incentives 234–7, 241–2 delay, patent challenge incentives 237–40, 242 effects trade-offs 242 implications for 225

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multiple challenger/entrant problem 231–2 optimal delay 242 illegality, presumption of 243–4 invalid patents incentive problems 222–3, 237–9, 244–5 less restrictive alternative standard 223–4 limitations 232–4, 243–4 litigated patents, invalidity trends 220 model for 226–9, 238–40 pay for delay 215–18 probabalistic patents 221–2, 235 reverse payments anti-competitive effects of 228–9 ban, implications of 243 illegality, presumption of 243–4 innovation incentives, and 234–7, 241–2 US challenges 215–16, 243–4 rule of reason approach 216–18, 242–3 error-cost analysis, and 242–3 weak patents challenge incentives 237–40 problem of 216–17, 220–23, 244–5 patents injunctive relief abuse of market power, as 254–70 availability 248–54 EU law 251–4 FRAND commitments 254–7 US law 249–51 protection provisions EU law 251–4 import exclusion orders 250 injunctions, availability 248–54 international conventions 248–9 pecuniary compensation 252–3 preliminary injunctions 253 Unitary Patents 253–4 US law 249–51 ‘per se’ or ‘object’ abuses 98 Peritz, Rudolph 184

389

personal data see data protection Petrovcˇicˇ, Urška 258–9 Pfizer 279–82 pharmaceutical industry see also patent settlements abuse of dominant position 154–6 abuse of rights Astra-Zeneca 276–9 commercial authorization, withdrawal of 276–9 competition on the merits 278–9, 283–4 conflict of laws, and 283–6, 288–91 divisional patents 279–82 EU law 276–83, 288–91 intention to obtain advantage 278–9, 286–8, 291–3, 295–7 Ratiopharm/Pfizer 280–82 supplementary protection certificates 279–82 US law 283–6 generic drugs entry dates, influences on 228–9 impact of 26–7 legislative incentives 225 mergers, and 27 multiple challenger/entrant problem 231–2 patent settlements, impact on 225, 228–9 testing procedures 276 mergers generic drugs, and 27 innovation impact studies 21–6, 28–9, 32 R&D, impacts on 29–30 trends 26–8 new molecular entity (NME) innovation 26–8 output trends 29 patent settlements anti-competitiveness, debate 215–19 classification 216–17 EU guidelines 216–17 generic entry date implications 225, 228–9

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The roles of innovation in competition law analysis

knowledge assumptions 229–31 litigated patents, invalidity trends 220 multiple challenger/entrant problem 231–2 pay for delay 215–18 probabalistic patents 221–2 reverse payments, anti-competitive effects of 228–9 rule of reason approach 216–18 US reverse payments challenges 215–16 weak patents, problem of 216–17, 220–23 R&D expenditure trends 28–31 structural changes 27–8 testing procedures and requirements 276 Pharmacia 25 Pohlmann, Tim 190–91 Posner, Richard A. 40 privacy data protection, and 83, 173–4 definition 83 probabilistic patents 221–2, 235 pseudonymization 107–9 public authorities regulatory ancillarity doctrine 93–4 Ratiopharm 280–82 Ravenscraft, David 25 R&D aims of 190–91 commercialization, and 15 competition, and mergers, impacts of 8–9 standard-setting, role of 190–92 definitions 15 digital industry, in 309–10 input quantification 15 mergers competition, impacts on 8–9 expenditure trends following 29–30 innovation, impacts on 20–24, 32 output quantification 15–16

pharmaceutical industry expenditure trends 28–31 mergers, impacts of 21–30 productivity growth, and 16 R&D collaborations benefits of 185–6, 188–9, 210–11 competition, theories of 181–6 competition by imitation 187–8 innovation, links with 185–9 EU block exemptions approach background 179–80, 194, 202–3 blacklisting 203–5 damages rules 201 definitions 201–2 dominance thresholds, and 205 effect doctrine applicability 205 effects on future markets 180–81 ex post view 203–4 Honeywell and DuPont 213–14 Horizontal Guidelines 198, 205–6, 208 innovation market concept 202, 212 joint ventures, applicability to 195, 211–13 limitations 185, 203–4 right of access to R&D joint ventures 208–9 safe harbor provisions 195–6, 202–3 safe zone, conduct outside 205–6 standard-setting, and 208 summary of 198–9 Technology Transfer Guidelines, and 195, 205–6, 208 US approach, compared 198–9, 204, 211–13 regulatory treatment, generally 180–81, 189–92 right of access to 207–10 standard essential patents, and 208–10 standard-setting procedures, and 190–92, 197–8, 208 US antitrust law approach background 179, 192–4 blacklisting 203–5

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DOJ Licensing Guidelines 196–7, 201, 205, 207–8 dominance thresholds, and 205 EU approach, compared 198–9, 204, 211–13 innovation market concept 169–97, 188–9, 202, 206–7, 212 joint ventures, applicability to 193–5, 200–201, 211–13 law reform 193–4, 197–9 limitations 185, 200, 204 market power requirement 200–201 NCRPA, protections under 199–205 proof of anti-competitive restraints 193 right of access to R&D join ventures 207–9 rule of reason 205, 207 safe harbor provisions 193, 195–6, 199 safe zone, conduct outside 205–7 standard-setting procedures 197–8 summary of 198–9 relevant market, definition 41–2, 168–9 Rodriguez, Daniel 25 rule of reason approach error-cost analysis, and 242–3 patent settlements 216–18, 242–3 R&D collaborations, and 205, 207 tying and bundling, analysis of 327 US antitrust law, in 205, 207 Samsung 262–4, 272 Scherer, Frederic M. 185–6 Schering-Plough 28 Schinkel, Marteen Pieter 85–6 Schumpeter, Joseph A. 4–5, 16–17, 35, 182–4, 186, 188 Shapiro, Carl 5, 17, 187–8, 222–4, 237, 242, 244–5 Shelanski, Howard 19–20, 41

391

Small but Significant Non-decrease in Quality Price see SSNDQ test Small but Significant Non-transitory Increase in Costs see SSNIC test Small but Significant Non-transitory Increase in Price see SSNIP test SmithKline Beecham 28 SSNDQ test 168–9 SSNIC test 169 SSNIP test 41–2, 168, 302 standard essential patents competition implications 246–7 data-related markets, in 175–6 injunctive relief abuse of market power, as 254–70 availability 248–54 Bosch 259–61 EU law 251–4, 263–73 exclusionary vs. exploitative conduct 258–9 FRAND commitments 254–61, 263–70 Google-Motorola 260–61 Huawei v ZTE 266–71 international conventions 248–9 Motorola-Apple 261–2 Motorola-GPRS 265–6 Orange-Book-Standard 266, 268–9 pecuniary compensation 252–3 preliminary injunctions 253 Samsung-Apple 262–3, 262–4, 272 Samsung-UMTS 263–4 SSO regulatory role 270 Unitary Patents 253–4 Unwired Planet v Huawei 269–70 US law 249–51, 257–63, 271–2 non-exclusionary innovation harm, and 55–8 enjoining products infringing SEPs 56 harm, likelihood of 73 hold-up power 56–8 incentives to innovate, and 73–4 refusal to grant licenses 74

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The roles of innovation in competition law analysis

threats to innovation of exploiting market 56–8 purpose 246–7 right of access to R&D joint ventures, and 208–10 standard-setting see also standard essential patents competition implications 190–92, 246–7 FRAND terms 247, 254–7 licensing agreement conflicts 247 purpose 246 R&D collaborations competition implications 190–92 EU block exemptions approach 208 US antitrust law approach 197–8 Sunshine, Steven 196–7 Technology Transfer Guidelines 195, 205–6, 208 Teece, David J. 44 TFEU art 101 efficiency gains fair share/ pass on requirement 367–70 interpretation 359–60 out-of-market efficiencies 371–3 exemptions conditions 359–60 free riding, and 360–61 guidelines 90–92, 95–6, 359–60, 371 innovation restrictions 89–98 intra-brand competition vs. inter-brand competition 90–91 online travel sector, retail MFN clauses in 349, 369–70 TFEU art 102 tying, prohibition of 314–15 all circumstances test 324–5 anti-competitive foreclosure 321–3 distinctness of products 327 effects-based application 320–27 efficiency defence 334–9 as efficient competitor test 323–6

Guidelines 321–2, 335–7 Intel 323–6, 339 loyalty rebates 323–6 Microsoft 314–16, 319–22, 327–8, 330–35 objective justification 325, 334–9 rule of reason approach 327 travel industry see online travel industry Tripadvisor 364 two-sided markets 309–13 free riding defence, and 375–6 market definition challenges 328–9 out-of-market efficiencies 371–3 retail MFN clauses, anti-competitive effects of 351–2, 375–6 tying in burden of proof 336 coercion or refusal to deal 330–31 Commission Guidelines 335–6 competitive risks of 317–18, 334 foreclosure as result of 330–34 objective justification, and 334–9 separate products criteria 327–9 tying and bundling 46–7 abuse of dominance, as 313–14 art 102 TFEU prohibition 314–15 all circumstances test 324–5 anti-competitive foreclosure 321–3 burden of proof 336 distinctness of products 327 effects-based application 320–27 efficiency defence 334–9 as efficient competitor test 323–6 Guidelines 321–2, 335–7 Intel 323–6, 337, 339 loyalty rebates 323–6 Microsoft 314–16, 319–22, 327–8, 330–35 objective justification 325, 334–9 rule of reason approach 327 contractual tying 315, 330 definition 314–15, 330 digital industry, in 313–14 alternative products, availability of 332–3

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competitive risks 317–19, 334 consumer behaviour, and 332–3 law, challenges for 339–40 new market entrants, barriers for 318–19 reputational effects 318 general effects of 313–14 predatory pricing, and 316 refusal to supply 315, 330–31 technical tying 316 two-sided markets, in burden of proof 336 coercion or refusal to deal 330–31 competitive risks of 317–18 efficiency defence 334–9 foreclosure as result of 330–34 Microsoft 327–8, 330–35 objective justification, and 325, 334–9 separate products criteria 327–9 types and features 315–17 withdrawal or witholding benefits 315 undertakings definition 146–9 health care sector concept difficulties for 146–8 health insurance 146–50 unfair practices see also abuse of dominant position; tying and bundling law enforcement powers definitions of anti-competitive conduct 51–2 foreclosure theories of harm, and 54–5 Google case 59–70 interventions in unilateral practices 52–5

393

private enforcement 51 SEPs, licensing and enforcement 55–8 unilateral practices beyond exclusionary conduct 51–2 non-exclusionary innovation harm anti-competitive harm, likelihood of 72–3 anti-competitive harm, whether 70–72 basis for 50, 76–7 challenges/analysis difficulties with 50 Google specialized search services 59–70, 74–5 hold-up power 56–8 incentives to innovate, and 73–4 pro-competitive conduct, justifications for 73–5 standard essential patents, and 55–8 standards for condemnation of 75–6 theories of 70–72 use of content without prior authorization (scraping) 63–8, 71, 73 Unwired Planet 269–70 von Hayek, Friedrich 181–2 Warner-Lambert 28 weak patents challenge incentives 237–40 problem of 216–17, 220–23, 244–5 WhatsApp 173–4, 303 Woodcock, Ramsi A. 236 Wright, Joshua D, 39, 48 Wu, Tim 38 Zuniga, Pluvia 24

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