The Dominance and Monopolies Review: Editors' Preface
Even before covid-19 disrupted the world as we knew it, competition law was at a crossroads, facing far-reaching and sometimes contradictory calls for reform – including with respect to monopolisation and abuse of dominance. This is driven in large part by developments in the digital sector, as well as an increasing awareness of the urgency of the climate crisis, environmental degradation and loss of biodiversity.
Some, such as President Macron and Chancellor Merkel, have argued that there is too much competition from abroad, and advocate for more permissive enforcement to facilitate 'European champions' to emerge: 'We need to adapt the EU competition law: [It is] too focused on consumer rights and not enough on EU champions' rights.'
Others maintain that there is too little competition, enforcement has been too permissive, and the rules should be tightened. Senator Elizabeth Warren, for example, has argued that 'competition is dying. Consolidation and concentration are on the rise in sector after sector. Concentration threatens our markets, threatens our economy, and threatens our democracy. Evidence of the problem is everywhere.' Similarly, Professor Joseph Stiglitz contends that 'current antitrust laws, as they are enforced and have been interpreted, are not up to the task of ensuring a competitive marketplace'.
A third set of commentators believes that competition policy is misdirected, that the historic focus of competition law has been too narrow, and that the consumer welfare standard should be expanded to take account of social, industrial, environmental and other considerations (sometimes referred to as 'hipster antitrust').
And a fourth critique, voiced by Maurice Stucke and Ariel Ezrachi, maintains that many of today's problems result from too much 'toxic' competition overall, driven by ideologues, lobbyists and privatisation, and that we need to promote a kind of 'noble competition', where rivals mutually strive for excellence.
To address these challenges, a dizzying array of reports has emerged, commissioned by governments in the US, EU, UK, Germany, France, Australia and elsewhere. And from those reports, a constellation of ideas has emerged to overhaul competition law, including: reorienting the goals of antitrust policy away from the consumer welfare standard towards a broader societal welfare test; reversing the burden of proof in merger control; per se bans on certain categories of conduct in the digital sector (including prophylactic controls on vertical integration); lowering the standard of judicial review to give competition authorities more leeway; injecting political oversight into competition law enforcement; loosening the standard to impose duties to share data with rivals; introducing market study regimes; allowing authorities to impose remedies without formally establishing an infringement; and establishing mandatory codes of conduct for digital platforms.
Where does this all leave busy practitioners and businesses that are trying to navigate the complex and constantly evolving rules concerning abuse of dominance? Helpfully, this ninth edition of The Dominance and Monopolies Review seeks to provide some respite, providing an accessible and easily understandable summary of global abuse of dominance rules. As with previous years, each chapter – authored by specialist local experts – summarises the abuse of dominance rules in a jurisdiction, provides a review of the regime's enforcement activity in the past year, and sets out a prediction for future developments. From those thoughtful contributions, we identify three main trends to watch out for over the next year.
Sustainability and abuse of dominance
The past year has seen sustainability become a new and important focus for competition regulators. The Dutch competition authority started the trend by setting 'sustainability' as a key priority and proposing a more permissible review for certain environmental agreements. The Hellenic Competition Commission followed, advocating for far-reaching policy changes to promote sustainability goals across all areas of competition policy. The European Parliament has called on the European Commission to 'urgently take the concrete action needed in order to fight and contain the threat of climate and environmental catastrophe before it is too late'. As Commissioner Vestager has noted, 'everyone is called upon to make our contribution to the necessary change – including enforcers'. The European Commission initiated a consultation, and the Organisation for Economic Co-operation and Development held several events to discuss the integration of climate and environmental goals in competition policy. Chinese competition law already provides an explicit exemption for 'agreements between undertakings which they can prove to be concluded for . . . serving public interests in energy conservation, environmental protection and disaster relief'.
At core, the cause of the climate crisis is a market failure: the cost of pollution of air, water and land, and the damage wrought by greenhouse gas emissions to the climate today and in the future are generally not included in the price of goods and services. Because the market price of a polluting product excludes the social cost, production is higher than the social optimum, taking into account that consumption of natural resources now exceeds what the regenerative capacity of the Earth can sustain.
To address this market failure, the discussion around including environmental goals in competition law has, so far, mostly focused on state aid, horizontal cooperation and merger control. For example, it has been argued that the consumer welfare analysis in merger control could include whether the merger could be expected to raise or lower the environmental price that consumers pay, which is not reflected in the market price in monetary terms or in quality (which could take account of non-market externalities such as emissions). Likewise, horizontal guidelines could be revised to allow cooperation in pursuit of environmental goals, where individual producers are willing to invest in greening production, but may be held back by the fear that they will be undercut by those who do not invest, or by cheaper imports.
There is no inherent reason, however, why sustainability could not be incorporated into an abuse of dominance assessment, too. This could be done in a number of ways.
First, pricing analysis (for example, for loyalty rebates, predatory pricing, margin squeeze) could take into account the actual costs incurred by the dominant company and by society, including not only the total costs of production, but also the environmental cost. A company may be able to price lower than its rivals because it is employing polluting or greenhouse gas emitting technology, at great societal cost, which is not reflected in its traditional variable and fixed costs.
Second, a dominant provider with an incumbent polluting technology might commit an abuse by excluding rival, greener technologies by means other than competition on the merits. Such conduct should already violate dominance rules. In this case, however, 'competition on the merits' should be defined so as to exclude competition that relies on avoidable pollution or greenhouse gas emissions. Also, the assessment should take into account that consumer harm would be even higher from the abuse because of the exclusion of a greener technology. The theory would be not dissimilar to that pursued by the European Commission in its Car Emissions cartel investigation, albeit that case concerns horizontal collusion to restrict competition on innovation for emission cleaning systems.
Third, there may be sui generis abuses that involve unsustainable business practices that also restrict competition. For example, a dominant producer might employ cheap and polluting means of production, and thereby price cheaper than its rivals. A dominant raw materials producer might make misleading representations to an environmental agency to secure a licence to extract minerals. And a dominant chemical producer could illegally dump products in rivers, thereby gaining an advantage over rivals that dispose of waster safely. All these might conceivably be an abuse of dominance because they distort competition, via means other than competition on the merits. The fact that they may also infringe other laws is no bar to bringing an abuse of dominance claim, just as a dominant factory owner burning down a rival's factory can be both arson and an abuse of dominance. Rivals should have a cause of action, especially where environmental rules are inadequate or insufficiently enforced.
Fourth, there may be situations where conduct that might otherwise be abusive could be excused because of sustainability-based objective justification, just as Article 101(3) of the Treaty on the Functioning of the European Union is being considered to exempt otherwise anticompetitive agreements that promote sustainability. For example, a dominant e-commerce platform might prioritise in its ranking green products (including green technologies sold by its downstream subsidiary) over polluting products (sold by its rivals). Provided that greenwashing is avoided, a regulator might consider that even if such conduct has the potential to restrict competition, it should be objectively justified because of the overall benefits it creates for society.
Regulation versus antitrust enforcement
Over the past year, regulators and legislators have moved from consultation to action, as they have set out competing proposals for regulation to address perceived competition problems caused by concentration in digital markets. In broad terms, the concerns with digital markets are that certain market characteristics (such as network effects and tipping, lack of switching, and lock-in effects) lead to high concentration, insurmountable entry barriers and exploitation of market power, especially (but not only) when combined with abusive conduct.
The German 10th Amendment to the Act against Restraints of Competition introduced new rules to tackle companies with 'cross-market significance'. The UK is setting up a digital markets unit to create an enforceable code of conduct for companies with 'strategic market status'. And perhaps most significantly, the EU, with its draft Digital Markets Act (DMA), is formulating ex ante dos and don'ts for large 'gatekeeper' platforms.
It is perhaps understandable that regulators and legislators seek to go down the route of regulation, rather than pursuing individual cases. Regulatory rules can potentially reach quicker outcomes than antitrust cases, which can be long and complex. As Commissioner Vestager has explained as the motivation of the DMA: 'We need regulation to come in before we have illegal behaviour and to be able to say these are the rules of the game and this is what you must do.'
At the same time, regulation can also come with risks to competition and society. This is because ill-crafted or insufficiently flexible regulation can impede innovation, snuffing out pro-competitive conduct before it takes place or raising barriers to entry. As the UK Competition and Markets Authority (CMA) has explained, 'Greater regulation is – on average – associated with less competition. For instance, countries with lower levels of product market regulation tend to have more competitive markets and enjoy higher rates of productivity and economic growth.'
Accordingly, it is particularly important that new rules of the road allow companies the opportunity to justify their behaviour, on the grounds of consumer benefits or that alternatives would lead to harm. For example, the CMA recognises that 'conduct which may in some circumstances be harmful, in others may be permissible or desirable as it produces sufficient countervailing benefits', and it has advised that conduct should be exempted under its new code of conduct if it 'is necessary, or objectively justified, based on the efficiency, innovation, or other competition benefits it brings'. Likewise, the new German rules allow a company to justify its practices.
It is therefore troubling that the draft DMA does not contain any analogous provision. As currently framed, the prohibited behaviours and obligations are extremely broad. They touch on almost all aspects of competition and have far-reaching consequences for consumers in Europe. But the draft DMA includes no safeguards to protect against unintended adverse consequences, even to protect users from privacy violations or exposure to fraudulent activity, or preventing other harmful behaviour. It is difficult to see the benefit of this approach. It is positively harmful.
A proportionality safeguard would be a simple way to improve the draft regulation, without impeding any of its objectives. Including a proportionality safeguard would also be consistent with general principles of EU law. Under Article 16 of the Charter of Fundamental Rights (which is a binding source of EU law under Article 6(1) of the Treaty on European Union), companies (even alleged gatekeeper platforms) have a right to conduct their own business. Interference with that right is only permitted if it is proportionate. By implication, it should therefore be open to companies to justify their practices, on the grounds of proportionality. A blanket refusal to engage with justifications at all is disproportionate to the aims of the DMA, and harmful.
Advocate General Pitruzzella rightly commented in March 2021 on the draft DMA that 'too much rigidity could hinder efficiency and introduce a disproportionate limitation on the freedom to conduct a business'. Rather, rebuttable presumptions together with justification defences strike the balance between 'the need for certainty' and 'the need to avoid false positives in antitrust enforcement and undue limitations of fundamental rights'.
Mandatory arbitration as a mechanism to solve FRAND disputes
A third theme of the past few years' dominance enforcement is the continued global focus on the licensing of standard-essential patents (SEPs) on fair, reasonable and non-discriminatory (FRAND) terms. Refusing a licence or seeking an injunction is considered an abuse of dominance, unless the SEP owner is a 'willing licensor' or the implementer is an 'unwilling licensee'. In August 2020 in the UK, the Supreme Court handed down an important judgment in Unwired Planet, finding that an English court can set the royalty rates and terms of a FRAND licence on a worldwide basis, to determine whether a licensor or licensee is 'willing'. In Europe, the EU Commission's expert group wrote a 230-page report on the licensing and valuation of SEPs on FRAND terms.
A problem has emerged, however, that the current legal framework does not incentivise parties to reach a negotiated outcome as to the FRAND rate. This is because for both implementers and SEP holders, the best alternative to a negotiated agreement (the BATNA) is to litigate: for SEP holders, the BATNA is usually to seek an injunction and offer a high royalty, thus threatening a high penalty while limiting risk by appearing to follow the sequence requirements of the European Court of Justice's Huawei/ZTE judgment. Implementers, on the other hand, may have an incentive to challenge the validity or infringement of the patents at issue. So the BATNA of an implementer may therefore be to seek judgment for invalidity or non-infringement, thus threatening long delays, while limiting risk by also appearing to follow the sequence of the Huawei/ZTE case.
As a result, parties are not incentivised to reach settlements as to the FRAND rate. In our view, the best way to address this problem is to ensure that the BATNA is no longer a positive outcome, but a possible negative one for each party. This could be achieved by ensuring that, absent agreement within a reasonable time period, a third party sets the rate for the parties (for example, by standard-setting organisations requiring arbitration or rate setting as a fallback for the FRAND undertaking). Parties tend to be much more willing to negotiate and ready to reach agreement on a balanced solution if the fallback is someone else deciding the rate.
For this reason, a refusal to agree to rate setting should be seen as rebuttable presumption of being an 'unwilling' licensor (and an abuse of dominance) for the purpose of the question of whether an injunction is available on an SEP. Conversely, an offer to have an independent third party set the rate and key terms should be seen as a rebuttable presumption of being a 'willing' licensor or licensee. The advantage of such mandatory arbitration as a fallback is that it encourages a reasonable outcome. Both parties have an incentive to agree on a rate to avoid an arbitrator setting a rate for them. And even if they cannot agree on a rate, the rate will be set. Abuse of dominance can thus be avoided. Arbitration in this respect is better than litigation because it is faster, more flexible, reduces forum shopping and results in awards that are enforceable worldwide. Arbitration also allows the parties to address IP rights implicating multiple national jurisdictions in a single proceeding. We believe that this solution could solve the endless FRAND disputes and end abusive hold-up and hold-out.
As in previous years, we would like to thank the contributors for taking time away from their busy practices to prepare insightful and informative contributions to this ninth edition of The Dominance and Monopolies Review. We look forward to seeing what the next year holds.
Maurits Dolmans and Henry Mostyn
Cleary Gottlieb Steen & Hamilton LLP