GCB is a landmark judgment with important implications for the European Commission and member states applying EU competition law, as well as the companies whose arrangements are scrutinised by those agencies. The judgment applies the brakes to the Commission’s expansive approach to the notion of when a restriction is anticompetitive ‘by object’. This is a frequent battleground because EU competition law establishes that, once a restriction has been properly characterised as anticompetitive ‘by object’, there is no need to examine its likely effects. Financial penalties often ensue. The GCB judgment makes it clear that it is no longer enough that a restriction is capable of producing negative effects in order for it to be classified as restrictive ‘by object’. The essential legal criterion can now be understood to be that the arrangement must reveal in itself a “sufficient degree of harm to competition”. This formulation does not introduce a bright-line test and will clearly not enable companies or their advisers to predict with certainty when a proposed restriction carries a risk of being characterised as ‘by object’. But the judgment can be expected to make EU competition authorities tread more carefully when they examine ‘borderline’ or more nuanced fact scenarios. That might be the case in respect of patent settlements, price signalling, restrictions in leases or any other restrictions which involve some kind of competitor coordination and yet which pursue a legitimate objective. The GCB judgment also contains harsh criticism of the General Court for not having engaged in a proper review of the evidence to examine whether it could support the Commission’s conclusions. The Court of Justice warns that “the GC cannot use the margin of discretion which the Commission enjoys …as a basis for dispensing with an in-depth review of the law and of the facts”. But certain aspects of the GCB judgment do not sit neatly with other rulings of the Court of Justice, including T-Mobile, Allianz Hungária and BIDS. This article considers the three key lessons arising out of the judgment and summarises the practical implications for companies. It concludes that the Commission must revert to a more visceral test based on experience which confines the serous consequences of a ‘by object’ classification to ‘obvious’ cases.
GCB: Where did it all begin?
GCB is an economic interest grouping established under French law, comprising over a hundred banks. GCB was created in 1984 to achieve the interoperability of systems for payment and withdrawal by bank cards issued by its members. In 2007, the Commission found that GCB and its management had breached Article 101 TFEU by adopting a number of pricing measures (applying to all its members) which hindered the issuing of cards by other banks at a price lower than that of the large banks. The Commission concluded that the measures had both the object and effect of restricting competition. On appeal to the General Court, GCB argued that the measures should not be characterised as inherently injurious to competition, pointing out that the measures had a legitimate objective – to develop the acquisition activities of member banks in order to balance issuing and acquisition activities within the system. However, the appeal was dismissed in its entirety. The General Court:
- found that the scheme was both anti-competitive by object and by effect. It considered that the anti-competitive object stemmed from the very calculation formulas which it thought would operate so as to hinder new entry
- considered that the fact that the measures at issue pursued a legitimate objective of combatting free-riding of the system did not preclude their being considered anticompetitive by object.
- held that the need for balance between the issuing and acquisition activities within the system did not have to be examined because only the ‘relevant market’ need be taken into account – and that was the downstream market for the issue of payment cards.
Landmark judgment of the Court of Justice of the EU
On 11 September 2014, the Court of Justice overturned the General Court judgment. The judgment contains three important lessons in connection with ‘by object’ restrictions. Lesson #1: a newfound (and higher) threshold for ‘by object’ restrictions The Court of Justice held that, while the General Court explained why the measures at issue were “capable of restricting competition”, it had “in no way explained…contrary to the requirements of the case-law… in what respect that restriction of competition reveals a sufficient degree of harm in order to be characterised as a restriction ‘by object’”. The Court of Justice went on to conclude that the General Court could not meet this ‘sufficient degree of harm’ threshold. The General Court had acknowledged the interaction between issuing and acquiring and that the fees encouraged a given ratio between these activities. It could not then conclude that this was a ‘by object’ infringement. The Court of Justice ruled that the most the General Court could infer was that this was a set of measures that had as their object the imposition of a financial contribution on the members of the grouping who benefitted from the efforts of other members who developed the acquisition activities of the system. The Court of Justice also recalled that the General Court had itself acknowledged that the measures pursued a legitimate objective. The apparent emphasis on the critical formulation – the need for ‘a sufficient degree of harm to competition’ – is an interesting development. Although this formulation is used in the GCB judgment seven times, it is not immediately obvious from the referenced jurisprudence that this has always been the relevant test. For example, BIDS describes ‘by object’ restrictions as being those having “sufficiently deleterious” effects and not even in a manner which suggests that this is the essence of the test. Expedia – the most recent Court of Justice judgment on this topic before GCB – refers to arrangements that are “injurious to the proper functioning of normal competition”. The earlier judgment in T-Mobile suggested an even lower threshold: “the potential to have a negative impact on competition”. This might account for the General Court’s approach in GCB. The lower threshold is also the test put forward (perhaps now erroneously) in the 2010 EU Guidelines on horizontal cooperation agreements. In any event, even if the ‘sufficient degree of harm to competition’ formulation can be regarded as ‘new’, this formulation will not end the debate as to what amounts to a ‘by object’ restriction. It does not make t possible to predict with certainty when a proposed restriction carries a risk of being characterised as ‘by object’. But it does mark a retreat from the high-water mark of T-Mobile which some commentators had interpreted to mean that the mere potential to restrict competition could be enough. That was never really tenable (since that interpretation would mean that the ‘by object’ category would eclipse entirely the ‘by effect’ category). But now the Court of Justice has put the matter beyond doubt. The GCB judgment is a welcome addition to the Court’s own confusing jurisprudence in this area. One might now expect EU competition authorities to tread more carefully when they examine borderline or more nuanced fact scenarios. But aside from setting a higher (and more sensible) threshold than that set out in T-Mobile, what more does the GCB judgment tell us about how to work out whether a restriction is anti-competitive by object? Lesson #2: context is everything In GCB, the Court of Justice emphasizes that, in order to assess whether a restriction is anticompetitive by object, it is necessary to consider “all relevant aspects – having regard, in particular, to the nature of the services at issue, as well as the real conditions of the functioning and structure of the markets – of the economic or legal context in which that coordination takes place, it being immaterial whether or not such an aspect relates to the relevant market”. Critically, the Court of Justice did not accept that the General Court could confine its assessment of the context to the issuing market which was the ‘relevant market’ and therefore the focus of its analysis. The Court of Justice pointed out that the need to consider all relevant aspects is particularly important when there is interaction between the relevant market and a different related market. In support of this, the Court of Justice cites Delimitis and Allianz Hungária. The latter clearly involved different markets: car insurance and car repair services. The relevance of Delimitis is not obvious. Perhaps it is a nod to the fact that the Court looked beyond the market for the distribution of beer to consider market access more generally. The emphasis on the need to look at the wider context is a reminder that the Commission is on notice to think laterally to a certain degree. Multi- sided markets are an obvious example of when this is appropriate. There may be read-across to other commercial environments where there are market interactions. Query whether that ought to have had some currency in the GSK case which arguably involved the interaction between R&D and parallel trade markets. But the need to think laterally and look at other markets also runs the risk that an effects analysis is carried out (which would render the object/ effect distinction irrelevant). In this regard, it is instructive that while the GCB judgment cites certain aspects of the Allianz Hungária judgment (essentially the need to take into consideration the nature of the goods or services affected, as well as the real conditions of the functioning and structure of the market), it stops conspicuously short of reproducing the wording in paragraph 48 of the Allianz Hungária judgment which suggested that the market power of the parties should be considered too. That aspect of the judgment had provoked strong criticism from commentators who argued that an analysis of market power, for example, would involve looking at factors which went well beyond those considered to comprise the economic and legal context in previous case law and would therefore blur the distinction between restrictions by object and by effect. The Court of Justice appears to be selectively recalling – perhaps refining – its judgment in Allianz Hungária. The Court shows that it is alert to this kind of blurring. It considered that the General Court had done precisely that when, in purporting to examine the options left open to members of the payment scheme (as a result of the new tariffs), the General Court actually assessed the potential effects of the measures, analyzing the difficulties that the banks would face in developing acquisition activity. Although it will always be difficult to describe, in the abstract, precisely when an analysis of context bleeds over into an analysis of effects, the GCB judgment does provide a concrete example of when the General Court did just this. This could be a useful precedent or benchmark to bear in mind in situations where there is a concern that the Commission or a competition authority of a member state is using an effects analysis to support its finding that a restriction is anticompetitive ‘by object’. The judgment also suggests that the Court of Justice attaches value to the fact that the measures pursued a legitimate objective. The very strong implication is that the Commission cannot dismiss the importance of an alternative legitimate purpose when determining whether a measure is restrictive ‘by object’. In other words, it should feature in the contextual analysis undertaken in connection with Article 101(1). But it is not completely obvious how to reconcile this conclusion with the Court’s existing jurisprudence – in particular, the Court’s judgment in BIDS where it held that objective justification could only be considered under Article 101(3) TFEU. Alongside these judgments is the Court’s judgment in Pierre Fabre which, like GCB, suggests that legitimate objective it is relevant – arguably crucial – for Art 101(1). Indeed, in Pierre Fabre, the Court makes the point that, without such an objective justification, the distribution system would be anticompetitive ‘by object’. That statement does not appear to fit neatly with statements in GCB that a legitimate objective will not preclude an ‘object’ finding. Different factual contexts (horizontal versus vertical coordination) might account for these approaches but the judgment does not shed light on this. Despite the number of Court judgments in this area, there remains a degree of uncertainty about when legitimate objective is a relevant consideration under Article 101 but the most recent Court of Justice judgment indicates that it is of relevance at the Article 101(1) stage. Lesson #3: Build only on solid foundations The Court of Justice disagreed strongly that the measures at issue could be regarded as being analogous to those examined in BIDS where the Court of Justice concluded that the arrangements between the ten principal beef and veal processors in Ireland had as their object the restriction of competition. The object of the BIDS arrangements was to change the structure of the market through a mechanism intended to encourage the withdrawal of competitors. This measure sought to increase concentration in the sector and eliminate almost 75 per cent of excess production capacity. In contrast, the measures at issue in GCB encouraged the members of the system not to exceed a certain volume of card issuing. The objective of such encouragement was, even according to the General Court’s own findings, not to reduce possible overcapacity, but to achieve a given ratio between the issuing and acquisition activities of the members of the system in order to develop it further. The ill-advised reliance on BIDS as a relevant precedent for the GCB system is perhaps an example of the temptation for competition authorities to build and apply ‘by object’ case law. Proceeding with a by object analysis holds obvious attractions for a resource-constrained competition authority but there are pitfalls. Recently the UK Competition Appeal Tribunal overturned the OFT’s (now the CMA) commitments decision of January 2014 relating to online hotel bookings on the basis that the CMA had failed to sufficiently consider the objections raised by a third party, Skyscanner, during the commitments consultation process. The CMA argued that it had considered Skyscanner’s concerns very carefully but that Skyscanner had provided insufficient evidence to back up its concerns. The CAT disagreed. One of its concerns was that by pursuing the investigation on the basis that it had identified restrictions ‘by object’ the OFT may have deprived itself of the ability properly to appreciate the significance of the role of operators.
The GCB judgment establishes that the essential test of whether a restriction is anticompetitive by object is whether the coordination reveals ‘a sufficient degree of harm to competition that it may be found that there is no need to examine their effects’. The judgment establishes a higher test and emphasises the need for the Commission to consider all relevant aspects, including any objective justification. This might well be enough to preclude a ‘by object’ characterization Of course, the judgment falls short of resolving all uncertainties in this area. The question remains: where is that ‘Goldilocks’ area – where a competition authority carries out just enough analysis to understand the context but not so much that it strays into an effects analysis which renders the distinction meaningless? And how could a company replicate this in a bid to be compliant. In many ways, the challenge which remains even after GCB can be traced back to the earliest case law in this area. In STM, in 1966, the Court of Justice made it clear that a contextual analysis was needed (there being no advance judgment about a category of agreement) but only two weeks later, in Consten and Grundig, the Court recalled the need to consider context and yet proceeded to carry out an abridged assessment of the contract at issue noting that “for the purpose of applying Article 101(1), there is no need to take account of the concrete effects of an agreement once it appears that it has as its object the prevention, restriction or distortion of competition”. Ever since those two seminal judgments, the issue of when and how much context is to be examined has arisen with regularity and tormented the case law. A solution of sorts lies in European Night Services which exemplifies the practical compromise that had to be struck to reconcile these judgments. The Court explained that a full analysis is needed “unless it is an agreement containing obvious restrictions of competition such as price-fixing, market-sharing or the control of outlets”. ‘Obvious’ is not, at first sight, an appealing test for use in a legal context but perhaps it should not be dismissed too quickly. After all, the ‘by object’ notion is itself a nebulous idea, resembling at times a tool of enforcement policy and smacking of pragmatism, rather than being a sound legal construct. The difficulty of describing the obvious has arisen in the US where the Supreme Court judge Mr Stewart Potter famously declared that, while obscenity might be difficult to define, “he knows it when he sees it”. Perhaps, in following the Court of Justice’s latest ruling, the Commission should revert to a more visceral test based on experience: if a restriction is not obviously restrictive – if in other words it needs some extra thought – then that is not a suitable ‘by object’ case. An alternative could see the Commission acknowledging a narrower list of uncontroversial ‘by object’ restrictions (perhaps those in the Working Paper accompanying the recent revisions to the de minimis notice). The Commission might then agree only to expand the list of ‘by object’ restrictions with the approval/confirmation of the Court. In advance of that endorsement, the Commission would need to carry out an effects analysis as well as arguing that it was a ‘by object’ case. This would mean a more gradual, judicially approved development of the case law. Arguably this is how the Commission should proceed. It is only by experience that one recognizes when certain types of arrangements (almost) always have restrictive effects. After sufficient experience and testing, that type of restriction can be characterized as ‘by object’. There is a risk that if the Commission classifies a novel arrangement as ‘by object’ that it will never find out what its effects actually are. The approach of broadening the ‘by object’ category without experience can be contrasted with the approach adopted in relation to block exemptions which the Commission creates “…after sufficient experience has been gained in the light of individual decisions”. In reality, this is highly unlikely to be attractive to the Commission and might be unworkable in practice since the controversial cases are often variations on the existing case law, as opposed to major shifts. GCB, for example, involved in a sense, price-fixing between competitors. So the best way forward may be through the use of the more intuitive test of whether a clause really is obviously restrictive of competition. This should not prove to be too limiting in practice for the Commission. After all, if a competition authority has a strongly held belief that an arrangement is anticompetitive ‘by object’, then it should not be too onerous for that authority to demonstrate likely or actual anticompetitive effects. Surely that much is obvious.