The H&R Block case involved H&R Block’s proposed acquisition of 2nd Story Software, the maker of TaxACT digital tax software, for approximately $287 million.  H&R Block and TaxACT are the second and third largest sellers of digital tax software, but each is dwarfed by the size of industry leader Intuit’s TurboTax business, which constitutes more than 60% of the digital tax business.  H&R Block is much better known for its storefront tax preparation business than for its digital tax offerings.  TaxACT is an upstart digital-only player whose prices are frequently much lower than its Intuit’s and H&R Block’s.  H&R Block argued that its acquisition of TaxACT would make it a more efficient and formidable competitor to Intuit, and broaden its offerings to include the “value” (lower price) end of the business.  H&R Block also contended that the prices of digital tax preparation software are constrained by many other types of tax preparation methods, including the use of accountants or storefront tax preparation services (i.e., “assisted tax preparation”) and the ability of taxpayers to fill out tax forms on their own.  The DOJ, however, defined the market to be limited to digital products, and viewed the transaction as an anticompetitive 3 to 2 merger.  The DOJ also contended that the transaction threatened to eliminate a “maverick” low priced player, and would have left only two major digital competitors – Intuit and H&R Block – which the DOJ argued could coordinate post-merger.  The court ultimately accepted the DOJ’s view, and on October 31, 2011 issued a decision enjoining the merger.  (As a matter of full disclosure, the author was part of the team representing the merging parties in this transaction).

In the second transaction, AT&T sought to acquire T-Mobile USA, a competitor that some considered a maverick in the industry, from Deutsch Telecom for approximately $39 billion.  AT&T similarly contended that acquiring T-Mobile would make it a more effective competitor – in particular, it needed access to the “spectrum” that T-Mobile controlled in order to relieve its congested network and provide faster data services to smart phone users.  In this transaction as well, however, the DOJ argued that the deal would result in two major players dominating the industry – AT&T and Verizon Wireless.  One notable distinction from the H&R Block transaction was that AT&T was the industry leader prior to the proposed merger, whereas H&R Block – even if combined with TaxACT – would still have been less than half the size of TurboTax.  The AT&T/T-Mobile transaction also involved a question of how to define the relevant market: the DOJ complaint focused on the implications of the transaction on competition nationwide, while the more traditional method of analyzing telecommunications-related markets is to assess competition on a more local basis (e.g., the NY metro area).  In the face of the DOJ complaint and additional scrutiny from the Federal Communications Commission, the parties abandoned the transaction on December 19, 2011.

As noted, these aggressive actions by the DOJ illustrate an increased willingness to go to court, as well as a resistance to accepting concessions proposed by the parties in horizontal mergers.  The economic effect of the DOJ’s success in blocking the massive $39 billion AT&T/T-Mobile transaction dwarfs the impact of the H&R Block transaction.  Indeed, the $4 billion break-up fee alone paid by AT&T to T-Mobile is more than 12 times the size of the purchase price H&R Block proposed to pay for TaxACT.   But as far as legal impact is concerned, in the long run it may be the H&R Block decision that has the greater impact.  Because the parties abandoned the AT&T/T-Mobile transaction prior to a court ruling, that transaction provides no legal precedent for the DOJ to rely upon in future cases.  In contrast, the more than 80-page decision from the federal judge in H&R Block provides a strongly pro-government precedent in the very district (Washington, D.C.) where the DOJ is likely to bring most of its future cases.  Accordingly, even after the world has forgotten that there was a failed AT&T/T-Mobile transaction, U.S. antitrust enforcers may still be talking about digital tax preparation.

The Authority’s decision goes considerably further than the General Court’s AstraZeneca judgment in qualifying patent related conduct as abusive. The Authority does not identify aspects of Pfizer’s conduct that went beyond the use of legal instruments provided by the patent system. Instead, the Authority appears to suggest that reliance on such patent instruments can in itself constitute an abuse. This contrasts with AstraZeneca where the conduct at issue was not the use of patent instruments as such, put the provision of misleading information to patent authorities. The approach chosen by the Italian Authority therefore raises important questions about the limits for the application of Article 102 TFEU to patent related conduct.

At the origin of the case was a divisional patent filing that Pharmacia, which was later acquired by Pfizer, made in 2002 for a patent protecting the glaucoma medicine Xalatan. The divisional patent was granted in 2009. This then enabled Pfizer to apply for a supplementary protection certificate (“SPC”) in Italy on the basis of the divisional patent, even though Pharmacia had missed the original SPC deadline in Italy for the parent patent. Pfizer’s SPC application for the divisional patent did not prolong the SPC period that Pfizer could have obtained under the parent patent. It merely enabled Pfizer to heal the failure to apply in time for an SPC under the parent patent.

Nonetheless, the filing of a divisional patent and Pfizer’s reliance on that patent to secure an SPC in Italy seem to have been at the heart of the Italian Authority’s objections. It is however unclear what the legal basis for these objections is.

As regards divisional filings, the European Commission expressly recognized in its report on the Pharma Sector Inquiry that divisional patent filings are “a legitimate way to split an initial parent application”. The Authority takes issue that Pfizer’s divisional patent did not cover any additional innovation and did not lead to the launch of new products. But this misunderstands the nature of divisional patents. Divisional patents by definition cannot exceed the scope of the parent patent. They therefore do not serve to introduce new inventions, but serve procedural purposes (e.g., ensuring unity of invention, accelerating individual patent claims, and addressing formal issues).

The Authority also claims that Pfizer’s conduct would have undermined “legitimate expectations” of generic manufacturers as to the duration of patent protection in Italy. This is hard to understand. The mere circumstance that Pfizer missed the deadline for an SPC application for the parent patent could not have created “legitimate expectations” that it would not introduce an SPC application for its divisional patent. While the Authority suggests in one passage that Pfizer may not have acted in a fully transparent manner, this is not substantiated or explained in any way.

Ultimately, much of the Authority’s case turns on internal communications from the period around 2009 that according to the Authority evidence an intention by Pfizer to delay generic entry. Yet, relying on documents showing an intention to delay generics as a basis for a finding of abuse, especially in connection with an application for an SPC, is highly problematic. This is because the very purpose of an SPC is to extend the original patent period and thereby delay generic entry. It should therefore not be particularly surprising to find internal documents discussing delay of generic entry in connection with an SPC. Nor does this suggest an anti-competitive objective.

What remains then is the fact that by relying on a divisional filing, Pfizer was able to undo its failure of meeting the deadline for an SPC application under the parent patent. In effect, the Italian Authority seems to imply that it is unlawful for a dominant pharma company to rely on divisional patents to meet SPC filing deadlines. But nothing in the relevant EU Regulation precludes such an approach. Nor is there an inherent reason why this should be so, particularly given that an SPC for a divisional patent does not prolong the SPC period that is available under the parent patent.

The intervention of the Italian Authority therefore expands the application of Article 102 TFEU to patent related conduct in a manner that deprives Article 102 TFEU of meaningful limiting principles. It does not identify improper conduct that is distinct from and goes beyond the lawful use of patent instruments provided by the patent system. If the decision were to stand this would therefore considerably increase legal uncertainty and potentially deter the use of legal instruments that EU law has introduced to stimulate innovation. If aspects of the patent system are considered unsatisfactory, the better way to address this is through legislative change, rather than antitrust intervention.

The language above is quoted from paragraph 55 of the Commission’s Best Practices on submission of economic evidence, the most recent version of which was published last October.

In an increasing number of more complex concentrations, the Commission’s Chief Economist Team (CET) routinely requests large sets of detailed information at a very early stage, including during pre-notification. Such information typically includes detailed data on past customer sales transactions, bidding data, and product-level price, margin and fixed/variable cost information over an extended period of time.

This type of information cannot be characterized as being “of a more general nature and aimed primarily at better understanding the functioning of the market in question.” Therefore, in cases where the CET requests and receives such detailed information at the pre-notification stage or early in Phase I, it is preferable, if the parties so desire, to start the dialogue with the parties and their economists as soon as the data are requested. In addition, the dialogue should go beyond an explanation of “the analysis that [CET] intends to perform with the requested data in order to improve the efficiency of the data collecting process and to ensure the data is of adequate quality.” It is best if the CET can share and discuss the results of its analyses with the parties.

With regard to the types of analyses and models which the CET can run on the basis of the above information requested at the pre-notification stage or in Phase I, I understand from speaking with a number of economists that this is not the main question. While it is always a good idea to confirm with the CET, economists are generally fairly comfortable that they know what the CET will do with such information.

There are two reasons why the dialogue should go beyond a discussion of which analysis is performed.

First, as paragraph 14 of the Best Practices indicates, “otherwise valid economic analysis may not always produce unambiguous results when applied to the facts of a competition or merger case. Contradictions may result from differences in the data, differences in the approach to economic modelling or in the assumptions used to interpret the data or differences in the empirical techniques and methodologies.” While it may be clear which analysis or model the CET will typically run on the basis of a given set of data, there always exist different possibilities in terms of approach, assumptions chosen and variables used. Such differences can be outcome-determinative. Presumably, the parties will have an informed view on which assumptions and variables best capture the reality of the markets and industry concerned, and a discussion with the parties and their economists can only help the CET in choosing the most appropriate way forward.

The second reason why an early detailed CET data request should also trigger a close dialogue with the parties is a more general matter of policy. Often, the Commission reaches an initial view as to whether a transaction is likely to raise competition problems at a relatively early stage in the proceedings. In cases where the CET performs detailed analyses and runs models on the basis of a sizeable dataset received from the parties in pre-notification or in Phase I, its conclusions can have an important impact on the Commission’s initial reactions. It is therefore important that the parties have a chance to provide input on such conclusions, if possible replicate the CET’s analysis and discuss possible differences in approach. As a general matter, the EU Merger Regulation is an administrative (as opposed to adversarial) process, whose goal is to come to the correct outcome in the most efficient way possible. As such, open, early and continuous discussions between the Commission and the parties should always be encouraged. This is a clearly one example where such discussions are desirable.

Is there an argument that discussions between the parties and the CET are a waste of resources, in that the CET requests the information at an early stage largely to get acquainted with the markets involved and will not necessarily use them to come to important conclusions? Not really. As described above, the CET’s early data requests are very detailed and require the companies involved to dedicate significant resources to gather the information. Presumably, the CET invests time and resources to process the data and run one or more analyses and models relevant for the assessment of the notified concentration. The additional step of sharing the analysis and results with the parties should require only a comparatively limited investment.

Given the CET’s practice of sending detailed data requests to parties at an early stage in the merger proceedings, it would be a good idea to formulate more clearly the principle of an early, detailed and ongoing dialogue with the parties in the next version of the Best Practices.

For example, car manufacturers in China typically prohibit authorized car parts suppliers from selling genuine car parts to independent repairers or distributors. Genuine car parts are often exclusively distributed through authorized car dealers, which both sell new cars and provide after-sales services. Consumers frequently raise complaints about the high prices for the spare parts as well as the maintenance and repair services as charged by authorized car dealers. At the same time, the lack of access to genuine car parts has limited independent repairers’ abilities to compete effectively with authorized car dealers in providing repair and maintenance services. Issues in the Dongfeng Nissan case has demonstrated the gaps in China’s competition law to deal with the potential vertical problems in the car aftermarket.

The Dongfeng Nissan Case

The plaintiff, Mr Liu Dahua, is the owner of a passenger car manufactured by Dongfeng Nissan Passenger Vehicle Company (Dongfeng Nissan). Liu claimed that Hunan Huayuan Industry Corporation Ltd. (Huayuan), a Dongfeng Nissan’s authorized dealer, had charged excessively high prices for spare parts and repair services and had tied the supply of repair services with the sales of spare parts. However, Huayuan told Liu that Dongfeng Nissan prohibited its authorized dealers from selling spare parts to end users without also providing the related services. Furthermore, except for Dongfeng Nissan’s authorized dealers, there was no supply of genuine Dongfeng Nissan car parts in the market. In his complaint, Liu alleged that Dongfeng Nissan and Huayuan, through monopolizing the supply of spare parts for Nissan passenger cars, had engaged in excessive pricing and tying, and such conduct had constituted the abuse of a dominant position in violation of the AML.

On 15 December 2011, the Changsha Intermediate People’s Court (Changsha Court) dismissed Liu’s complaint. The Changsha Court held that the plaintiff had failed to produce sufficient evidence to establish that the defendants held a dominant position and had abused that position. The Changsha Court also held that the plaintiff had failed to sufficiently investigate the market for the supply of car parts and repair services and that the defendants’ management of the car aftermarket did not necessarily have a restrictive effect on competition. The plaintiff is appealing the ruling of the Changsha Court.

As this case demonstrated, relying on Article 17 of the AML that prohibits abuse of dominance could be a very demanding task on the plaintiff. The plaintiff will need to first define the relevant market and prove the existence of a dominant position in the relevant market, and then prove the actual abuse of the dominant position. The Chinese courts have imposed strict burdens of proof for each of these steps in this case and in all the previous dominance cases. Obviously, it would be very difficult, if not impossible, for an average consumer to collect sufficient evidence of such highly technical and legal nature. To date, where judgments were rendered for lawsuits challenging alleged abuse of dominance, the claims were all dismissed because of the plaintiffs’ failures in meeting these burdens. The Dongfeng Nissan case again demonstrated that the Chinese courts are reluctant to rule in favour of the plaintiffs who fail to meet the strict burdens of proof and that abuse of dominance allegations are not an easy option for plaintiffs to obtain redress.

The Gaps in the AML Vertical Rules

In the Dongfeng Nissan case, the plaintiff unsuccessfully challenged the pricing and tying conduct by trying to rely on the AML’s prohibition on abuse of dominance. The disputed conduct was in essence the result of typical vertical arrangements in relation to the supply of spare parts in China’s car aftermarket. The underlying vertical arrangements could have been challenged as suspected anticompetitive vertical agreements under the AML. However, the AML does not provide sufficient certainties for the scope and implementation of the relevant vertical rules.

The applicable vertical rules in the AML are Articles 14 and 15. Article 14 prohibits fixing resale prices or setting minimum resale prices. It also provides a catch-all clause that prohibits ‘other types of vertical agreements as determined by the anti-monopoly enforcement agencies (AMEAs)’. The sweeping scope of the clause means that, in addition to resale price maintenance (RPM), the AMEAs could investigate non-price vertical restraints such as territorial and customer restrictions, exclusive distribution, tying, and assess their legalities under the AML. Article 15 exempts horizontal and vertical agreements that meet a set of broad criteria. Generally speaking, a vertical agreement will be exempted from the Article 14 prohibitions if the parties to the agreement prove that the purpose of the agreement is to achieve certain specified beneficial purposes, and at the same time, the agreement does not materially restrict competition in the relevant market, and can enable consumers to share the benefits derived from the agreement. To date, the AMEAs have neither published any decisions in relation to vertical restraints nor issued implementing regulations to clarify Articles 14 and 15 of the AML. For example，it is still unclear whether RPM will be considered as a non-exemptible hardcore restriction, or how non-price vertical restraints will be treated under the AML.

Under the AML, private parties can bring civil litigation to challenge alleged anticompetitive conduct and to claim damages. The relevant court practice has indicated that in general follow-on and stand-alone antitrust lawsuits are both allowed. To date, no court decision has addressed vertical restraints. Whether the courts will accept stand-alone litigation challenging non-price vertical restraints and to what extent the courts will play a role in interpreting the AML vertical rules remain to be seen.

In sum, relying on Articles 14 and 15 could be difficult because of the above-mentioned legal uncertainties and the lack of guidance from the AMEAs and the courts.

Other Potential Claims

It is also noteworthy that China’s Anti-Unfair Competition Law (AUCL) prohibits tying against the will of purchasers and the Price Law prohibits collusion to manipulate prices to the detriment of the consumer interest. Both prohibitions do not require a presence of a dominant position. One should not ignore that the AUCL regulates unfair trading practice and tends to protect interests of individual competitors and consumers, and the Price Law is mainly a piece of price control legislation. Both are unsuited to assess complicated competition concerns. However, in light of the difficulties mentioned above, one might argue that, from the litigants’ point of view, the plaintiff in the Dongfeng Nissan case would have been in a strategically better place if he had relied on the AUCL and the Price Law instead of the AML.

Closing Remarks

It is generally recognized that vertical restraints could have many beneficial and pro-competitive effects. Further, restraints placed on vertical business partners’ freedom to contract do not automatically equate to illegal restrictions on competition. However, the potential anticompetitive effects of vertical restraints that foreclose the market, reduce rivalry and facilitate collusion, and create obstacles to an open domestic market should not be left unattended. Based on the AMEAs’ track record, vertical restraints are not among the current enforcement priorities. The Dongfeng Nissan case highlights the gaps of China’s competition law regime in assessing and dealing with vertical restraints and the needs of the regime to develop further in this regard.

Acknowledgments

The author would like to thank Ms Wei Lily Zhou for valuable comments on this article.

For more information on the Dongfeng Nissan case, see China Competition Bulletin, Edition 16, December 2011, 3-4, available at: http://www.anzsog.edu.au/content.asp?pageId=261

French president Nicolas Sarkozy secured the change. The suppression of the reference to undistorted competition originated in the aborted Treaty on a Constitutional for Europe, which for the first time expressed competition as an objective in its own right (rather than an activity). Sarkozy opposed, arguing that the belief in the merits of competition had become dogmatic. Following the negotiations leading to the Lisbon Treaty, he triumphantly declared: “we have obtained a major reorientation of the objectives of the Union. Competition is no longer an objective of the Union, or an end in itself, but a means to serve the internal market” (my translation). The European Commission defiantly responded that an objective that never existed could not be lost: the Lisbon Treaty merely affirmed the status quo (see MEMO/07/250) .

Nonetheless, several commentators feared that the replacement of Article 3(1)(g) EC, in substance, by an obscure protocol would downgrade the constitutional status of the competition rules within the EU legal order. In a judgment delivered this week, the Court of Justice of the European Union (CJEU) allayed the worries of the scaremongers.

What did we know?

The new catalogue of aims contained in Article 3 TEU simply states: “the Union shall establish an internal market”. The Treaties no longer make reference to the principle that the internal market includes a system ensuring that competition within the internal market is not distorted. The principle only appears in the Protocol (No 27) on Internal Market and Competition: “the internal market as set out in Article 3 of the Treaty on European Union includes a system ensuring that competition is not distorted”.

According to Article 51 TEU, protocols form an integral part of the Treaties. The legally binding nature of the protocol was therefore undisputed. Many commentators, however, rightly pointed out that the EU courts frequently relied on Article 3(1)(g) EC as interpretative guidance to support an expansive reading of the competition rules as fundamental provisions essential for the accomplishment of the Treaty objectives. Most famously, in Continental Can (Case 6/72) , the CJEU explicitly referred to Article (3)(1)(g) EC as a requirement “so essential that without it numerous provisions of the Treaty would be pointless”. Accordingly, the Court supported the Commission’s attack of a merger on the basis of Article 102 TFEU – long before the adoption of the first Merger Control Regulation.

The fear was that the removal of commitment to “undistorted competition” from the interpretative provisions of the Treaty could inform the EU courts to depart from the pre-Lisbon case law. Surely a protocol could not achieve the same interpretative status as the preamble and the first few Treaty articles? The resolution of this debate required the CJEU to rule on the status of the Protocol on the Internal Market and Competition.

What do we know now?

On 17 November, the CJEU rendered its judgment in Commission v. Italian Republic (Case C-496/09) , finding that Italy, by not fully recovering unlawful State aid from its beneficiaries, failed to comply with an earlier judgment. In a remarkable paragraph of the judgment, the Court reiterates the vital nature of the Treaty rules on competition:

“As to the seriousness of the infringement, the vital nature of the Treaty rules on competition must be recalled, in particular those on State aid, which are the expression of one of the essential tasks with which the European Union is entrusted. At the time of the Court’s assessment of the appropriateness and the amount of the present penalty payment, that vital nature is apparent from Article 3(3) TEU, namely the establishment of an internal market, and from Protocol No 27 on the internal market and competition, which forms an integral part of the Treaties in accordance with Article 51 TEU, and states that the internal market includes a system ensuring that competition is not distorted.”

In another recent judgment, Teliasonera (Case C-52/09) , the CJEU also read the substantive content of the Protocol together with the objective of establishing an internal market set out in Article 3 TEU –authenticating the interpretative value of the Protocol. In the present judgment, however, the Court goes one step further. To emphasize the seriousness of Italy’s infringement, the Court affirms that the requirement of undistorted competition belongs to the fundamental principles of the economic constitutional law of the EU.

The French coup is a momentous reminder of the political opposition competition policy can attract. Yet, so far, the excise of Article 3(1)(g) EC seems to be no more than symbolic.

The most important addition to the new version is the inclusion of some guidance on consumer surveys. This guidance mainly deals (at par. 30 and 31) with the way respondents to surveys should be sampled in order to avoid biased survey results. In addition, the BP contains some guidance on how survey results should be disclosed to the Commission (par. 39) and also notes that when conducting large scale surveys to address a case-specific issue, the parties “might want” to involve the Commission in the questionnaire development and design (par. 48).

However, while the BP’s guidance on surveys is of course welcome, it suffers from two major shortcomings.

First, the guidance is largely restricted to sampling issues and is completely silent on the actual design of the survey. Unrepresentative samples can reduce the reliability of survey results, as the BP acknowledges, but the scope for the actual survey questions to give rise to biases is similar or perhaps even greater. For example, biases can occur as a result of the way survey questions are phrased (the question “do you agree that the merger will give rise to higher prices” is a leading question that is highly unlikely to produce objective outcomes), as a result of the order in which the questions appear, as a result of the way response categories are organised (for example, respondents are more likely to select the first response given than the second), etc. The consumer surveys that the Commission occasionally commissions itself (e.g. in phase II merger cases) are frequently subject to such biases and it is therefore perhaps unsurprising that the Commission has chosen not to give any guidance in this area. However, this is obviously unsatisfactory. The recently published joint guidance on survey design in merger inquiries by the OFT and the Competition Commission does a much better job in this area and represents a model for the Commission to follow.

Second, the BP is at pains to point out that its guidance only applies to large-scale consumer surveys, not to the “qualitative” or “documentary” evidence obtained from the Commission’s own market investigations. As the BP points out, “whilst the evidential value of replies to information requests from market participants lies in the substance of the information provided by players with intrinsic industry of market knowledge, the specific purpose of large-scale surveys of final consumers is to obtain statistically significant data”. It is correct that respondents to a market investigation by the Commission may be fewer in number and more diverse than respondents to a large-scale consumer survey. However, this does not excuse the Commission from the need to draw objective inferences from the results of market investigations. For example, in the Oracle/Sun investigation, the Commission initially suggested that the transaction would be anticompetitive because, among other reasons, a total of seven customers appeared to have raised concerns. But the vast majority of consumers did not see any problems and many explicitly stated that the transaction would be pro-competitive. A large-scale consumer survey would in such a case have pointed to the conclusion that the transaction would not be anticompetitive and the Commission should clearly have drawn the same conclusion from its market investigation.

A further key change in the BP reflects an apparent increased willingness by the Commission to accept economic analyses that are subject to limitations. Economic analyses can never be a perfect reflection of underlying market realities and it is therefore appropriate that the Commission has softened its previous stance in certain areas. For example, par. 37 now explicitly recognises that economic analyses can be useful even if they only show approximate results or are subject to a certain degree of inaccuracy or bias. Indeed, techniques exist with which inaccuracy or biases can be contained (for example by providing confidence intervals or upper bound estimates) and the BP helpfully recognises these.

The new version of the BP also adopts a revised stance on statistical significance. In the previous version, the BP required statistical significance in principle to be shown at a pretty strict level (the “5%-level”), with a less strict level (the “10%-level”) only deemed acceptable in specific circumstances. By contrast, the new version quotes both the 5% and 10% levels as possible ways in which statistical significance can be shown without expressing a preference. Moreover, a new statement has been added that “just because some hypothesis cannot be rejected in a statistical sense does not necessarily mean that the empirical analysis has no evidentiary value”. This is in principle a welcome statement. When only limited data are available, it may not be possible to show that particular effects are significant in the statistical sense, even though they may be highly significant from an economic point of view. Moreover, the Commission has in the past sometimes been overly concerned about statistical significance without paying sufficient attention to the economic context of its findings.

However, there is always a risk that the Commission will primarily use such looser requirements to increase its own margin of discretion. Indeed, a further set of changes explicitly appears to go in this direction. In particular:

• An explicit warning has been added (par. 15) that the Commission may give less weight to economic submissions that do not strictly meet the standards set out in the BP, or may discard such submissions altogether.
• In par. 8, which previously stated that the specificity of an individual case may require a deviation from the BP, a sentence has been added that the BP should moreover be interpreted “in light of procedural and resource constraints”.
• A new footnote (footnote 2) has been added that economic models or econometric analysis will rarely, if ever, prove conclusive by themselves, leading into a statement that “the Commission can always take into account different items of evidence”.

Finally, the BP contains a small but significant (and welcome) change relating to the role of economic analysis in cases involving restrictions by object versus restrictions by effect. In its original version, the BP stated (footnote 1) that infringements by object do not require any substantive economic analysis “because empirical evidence has shown that they generally lead to serious anticompetitive effects”. By contrast, the original version stated that infringements by effect often require a complex economic assessment. The revised version still makes the point regarding the need for economic analysis in by effect infringements, but, interestingly, has dropped the point regarding the absence of any need for economic analysis in assessing infringements by object. This is consistent with the Commission’s position in other documents. For example, when discussing information exchanges in the recently published horizontal cooperation guidelines, the Commission has stated that in assessing whether an information exchange constitutes a restriction of competition by object, the Commission “will take into account whether the information exchange, by its very nature, may possibly lead to a restriction of competition”. In other words, the Commission has set itself a condition that requires it to pass an economic test before concluding that information exchanges are restrictions by object. This arguably does not require a full quantification of competitive effects, but does imply that economics has some role to play even in certain “by object” cases.

In short, the revised version of the BP generally represents a further improvement on what already was a very useful document. As before, the key question is to what extent the Commission will also apply the guidance to its own analysis of the data and responses that it receives during the course of its investigations. The key area to look out for in future versions of the BP is guidance on the actual design of consumer surveys.

Report on Authorized Generics

On August 31, the FTC issued its final report analyzing the competitive significance of authorized generics. In the U.S., generic pharmaceutical products are typically sold by pharmaceutical manufacturers that receive authorization from the U.S. Food and Drug Administration (“FDA”) to manufacture and sell a generic copy of an existing brand name drug sold by another firm. The term “authorized generic” is generally used to describe a generic pharmaceutical product that is sold not by a separate firm under a generic drug authorization, but rather by the brand name manufacturer itself (or its licensee) under the brand name drug authorization. This is important because under U.S. law, the first generic drug to reach the market is generally entitled to 180 days of exclusivity – which constitutes a major incentive to challenge the brand name manufacturer’s patents and rush one’s generic drug to market. But that marketing exclusivity only applies to standard generic products — it does not preclude the brand name manufacturer from launching its own “authorized generic” during the exclusivity period. A brand name manufacturer’s ability to launch an authorized generic during that period is therefore a major threat to the first generic’s profits, and generic firms have argued that this serves as a significant disincentive to bringing new generics to market.

The FTC drew a number of conclusions about authorized generics in its final report. First, it found that the launching of an authorized generic during the 180 day exclusivity period results in “modestly” lower generic prices for consumers. Second, the FTC found that this entry also has the effect of substantially reducing the profits of the first generic entrant – possibly as much as 40%-50%. While noting that this decreased profitability could diminish the incentives of generic firms to challenge patents and seek to bring their products to market, the FTC found little to no empirical evidence that authorized generics were actually having this effect.

The FTC also concluded – in what its Chairman called its “clearest and most disturbing finding” – that “some brand companies may be using the threat of launching an authorized generic as a powerful inducement for generic companies to delay bringing their drugs to market.” In other words, the FTC is linking authorized generics to its overall concern with what it refers to as “pay-for-delay” patent settlements (sometimes called “reverse payment” patent settlements). Analogizing a promise not to launch an authorized generic as a “reverse payment” from the brand name manufacturer to the generic company, the FTC argues that brand name manufacturers are using the leverage of an authorized generic to convince generic companies to agree to compromise entry dates that are later than they would have agreed to in the absence of the commitment not to launch an authorized generic.

Report on Pharmaceutical Patent Settlements

The FTC’s recent report on pharmaceutical patent settlements also highlights the role of authorized generics in pharmaceutical patent settlements. In the U.S., certain types of pharmaceutical patent settlements must be filed with the FTC, and the FTC periodically releases reports summarizing their content. On October 25, 2011, the FTC released its latest report, which found that out of 156 total settlements filed with the FTC in the past fiscal year, 28 such settlements were “potential pay-for-delay” deals. In other words, in 28 settlements, a generic manufacturer had agreed to a specific compromise date for entry, and the deal also included a term that the FTC believed might constitute consideration to the generic company (which the FTC believes could have influenced — i.e., delayed — the compromise entry date). The FTC found that 10 of these 28 settlements included a commitment by the brand name manufacturer not to launch an authorized generic (or an agreement that the generic company would have the “exclusive” right to sell an authorized generic).

Implications

These statements and findings by the FTC are noteworthy because they illustrate significant FTC opposition to a practice that has never been found illegal – and which is being undertaken openly by pharmaceutical companies that know that they will have to file these agreements with the FTC. Given all of the difficulties that the FTC has faced in proving that patent settlements with consideration flowing to the generic manufacturer (so-called “reverse payments”) violate the antitrust laws, it is far from clear that the FTC would be able to convince a court that a promise not launch an authorized generic (or the granting of an exclusive authorized generic license) in the same context violates the U.S. antitrust laws. This may explain why the FTC has not brought any test cases in court, and is instead seeking to change the law in the U.S. Congress. But given all of the FTC attention and concern regarding this issue, it is likely that the FTC is actively looking for opportunities to act against these types of deals.

On the recent development

In recent years, public discussion on the role of market definition has largely been inspired by two issues, in particular: The birth of new quantitative techniques to analyse the competitive effects from proposed mergers and the issuing of new merger guidelines; the US merger guidelines in 2010, in particular.

A couple years ago, new quantitative assessment techniques, such as the UPP (Upward Pricing Pressure) and IPR (Indicative Price Rise) tests focusing more directly on the unilateral effects of the merger, came to challenge the traditional approach relying on market definition as useful – and practically necessary – elements of the analysis in mergers involving differentiated products. Though they were certainly not the first quantitative techniques to challenge the traditional status quo of market definition in the assessment, they probably represent the most serious attempt so far.

The discussion on the actual role of market definition in merger assessment was considerably further intensified by the issuing of the new US Merger Guidelines in 2010. Along with the discussion regarding the possible adoption of the UPP test in the 2010 guidelines, the wording of the guidelines raised considerable debate as to whether this actually meant that it was possible to set aside market definition in the decision-making.

The growing interest as to the merger’s unilateral effects (in the differentiated products industries) in the academic literature and the hereto related modern economic techniques, such as the UPP test, to analyse such effects has also challenged the traditional role of market concentration. One has started to question the rationale of market concentration in merger assessment all the more, both as to the screening of potentially anticompetitive transactions and the assessment of competitive effects. This development is now also visible e.g. in the 2010 guidelines, which expressly note the potential meaninglessness of the calculation of market shares and concentration in the assessment (See section 6.1).

Structural assumption today

The debate as to the assessment of competitive effects is nothing new as such, as from the theoretical point of view, it has raised interest for ages (think e.g. the battle between the traditional Chicagoan and Harvardian Schools). The issue is recognizable in the development of the US merger guidelines during the years, whereby also a change in the role of structural measures clearly comes out. One only needs to compare the 1968 US Merger Guidelines to the USMG 2010 to realise this. Long before the 2010 guidelines we have moved far away e.g. from the assumptions of 1968 Merger Guidelines, which gave considerably more meaningful – sometimes perhaps even rather decisive – role to Concentration Ratios, in particular.

The 2010 guidelines clarify that HHI’s and market shares are but one assessment factor, assessed “in conjunction with other evidence”. They can sometimes play only a minor role or maybe even have no meaningful role at all as to the final enforcement decision. This certainly seems a meaningful clarification particularly as to the differentiated products mergers, in which a firm’s market share may give rather a false picture of its market power. But rather than demonstrating anything fundamentally new, it clarifies the status quo.

More importantly, the discussion regarding new quantitative techniques and the wording of the 2010 guidelines have again reminded us that HHI’s and market shares do not necessarily provide such good screening devices. In other words, there clearly are situations in the differentiated products industries where deciding on whether or not we should proceed to a more in-depth (“Phase II”) analysis merely on the basis of traditional structural measures does not offer a practical option, effectively.

Today the traditional role of competitive effects and market definition is somewhat blurred. To what extent this is due to the recently issued merger guidelines (such as the US 2010 guidelines), however, probably depends on one’s point of comparison. On the one hand, a rigorous step-wise approach has really not corresponded to the practice for a long time anymore, not at least regarding the “grey zone” cases, in which the competitive problem is not immediately visible. Despite of the formulation of the traditional merger decisions, in such cases one typically cannot proceed in a rigorous step-wise manner by first determining the relevant market and then moving to the competitive effects. On the contrary, the merger assessment typically requires keeping “all the pieces of the puzzle” on the table throughout the analysis, whereby market definition et cetera are interrelated “elements” of the analysis rather than separate “steps”. Moreover, assessing unilateral effects in the differentiated products mergers rigorously step-wise – by first defining products either “in” or “out” of the market (which is often arbitrary) then considering the market concentration and assessing the potential competitive effects in the traditional way – may simply offer a meaningless approach. In this respect, the role of market definition and competitive effects has de facto been partly redefined a long time before the recently issued merger guidelines, such as the US 2010 guidelines.

On the other hand, comparison of the wordings of the US 1992 and 2010 guidelines certainly leaves some room for speculation as to whether the new wording was indeed meant as a statement of de facto superfluous market definition. However, the fairly intense public debate seems to indicate that this view is far from reality, at least if one considers the relevant US (and EU) case law. One can hardly consider making a prohibition decision or a conditional merger approval without also including a section dealing with the delineation of the relevant market. The tradition lives deep. Considering that the function of the merger guidelines is to describe the competition authorities’ past experience in the decision-making rather than to explain theoretical constructions that may one day come true, it may well be argued that this was not the true aim of the 2010 US guidelines.

One may still wonder why so confusing a formulation of the wording? One explanation is that the guidelines in fact aim to describe the authorities’ practice in that in some cases (i.e. certain differentiated products mergers) the market definition indeed has not got anything to offer to the analysis, expect for the formal reasons if one needs to go to the court. The situation is clearly unsatisfactory if this is true. This probably gives bit too rosy a picture of the true usefulness of quantitative techniques in the analysis. As the fairly intense public debate during the last years seems to show, all quantitative techniques suggested so far are subject to problems. Further, any application of quantitative techniques is always also subject to the consideration of other factors such as entry and product repositioning. And how can one consider entry if one does not have a market for the entry to take place in? In other words, market definition is not done only for the market shares and HHI’s.

Another explanation relates to the differences on the approaches of economists and lawyers. The increasing influence of economics and economists is clearly visible in the 2010 guidelines, for example. This is natural considering that economics is an integral and valuable constituent of competition policy. However, in the end it is the approach of law and especially that of the courts that counts. In competition policy making, one faces serious problems if one forgets that. In point of fact, should one consider e.g. Commissioner Thomas J. Rosch’s statement on the release of the 2010 horizontal merger guidelines (http://www.ftc.gov/os/2010/08/100819hmgrosch.pdf), this is what may very well have happened in the formulation of the 2010 guidelines.

Should this be true, the confusion relating to the recent debate particularly on the role of market definition well shows how competition policy making is practically married to two disciplines – economics and law. This may sometimes be troublesome since the approach among the practitioners of these disciplines may, indeed, sometimes be rather different. Yet, the author’s personal experience is that the coexistence and cooperation is falling better into place year by year. In the end, it is probably merely a matter of finding a correct “wavelength” to the working.

All in all, the structural assumption is still very much alive in today’s competition policy, although it has been redefined from what it used to be back in the old days. In practice, we still do not seem to have tools to analyse mergers without paying sufficient attention to the relevant market. This also applies to the use of quantitative techniques. In today’s merger analysis, quantitative analysis rather offers complementary tools to the qualitative evidence. It also requires other than mere theoretical developments for the quantitative techniques to make market definition useless. In practice, the final keys of change are in many respects in the hands of courts and judges who decide the cases.

Mrs Murphy is the landlady of the Red, White and Blue pub in Southsea, Hampshire in southern England. She showed live Premier League football – including 3pm games on a Saturday, which are subject to a media blackout in the UK in a bid to protect attendances at matches – through a Greek satellite system. This broke domestic legal rules as it bypassed a licence granted to Sky and ESPN, allowing only those broadcasters to screen live football matches domestically.

She was ordered to pay almost £8,000 in fines and costs and was sued by the Premier League. She appealed all the way up to the ECJ, arguing that she should be free to buy a subscription package from anywhere in the European Economic Area. The ECJ has now agreed with her, albeit largely for the benefit of domestic households.

This is a story that has everything for the British. Mrs Murphy is a gutsy underdog running an old-fashioned pub with an old-fashioned patriotic name. No-one imagines for a moment that Sky and ESPN are going to lie down under this temporary reverse for very long. In any case, pubs will still have to get the rights holder’s permission to show games since they are being screened in a place of “a profit-making nature” (ie a pub).

However, this rule apparently only covers things like the opening programme sequence or the Premier League anthem rather than the matches themselves. This naturally lends itself to lots of very English legal jokes about not turning the TV on until the game starts or keeping the volume turned down. But the jokes are being told as a bitter defence against dwindling attendances at football matches and an accompanying fear that we’re inexorably moving towards a tiny number of Mancelona United size teams and the death of all the others. For many people, this (or something like it) is where competition law often ends up.

So much for the big. The small comes from Australia, where the Australian Competition and Consumer Commission (ACCC) recently launched its Recalls Australia iPhone app to give consumers readily accessible information on recalled consumer goods. According to the ACCC’s deputy chairman Peter Kell, the app also allows people to report products they consider are unsafe directly to the ACCC.

The beauty of this product is its potential application to competition law. Imagine how easy it would make life – how much time, effort and money would be saved in terms of investigations and court appearances – if one could just click on an app, report a breach and go straight to the answer. It would certainly have saved Mrs Murphy, Sky and the others a lot of bother, that’s for sure. It’s not as if you’d have to do anything old-fashioned like prove something. You just click and go.

Talking of which, Professor Allyson Pollock of Queen Mary, University of London has been so antediluvian as to expect accurate research from the UK government over its controversial health and social care bill. She has challenged government claims that competition has actually improved quality in the NHS and saved lives, telling the press that the government-sponsored study underpinning the claims is “littered with errors”.

The study concluded that mortality rates for heart-attack patients were lower in cases where more hospitals were within travelling distance of the patient’s GP surgery. It also examined the results of certain types of routine surgery and came to the view that a greater choice of hospital led to better results for heart attacks.

But this did not explain, said Professor Pollock, why the availability of choice over routine surgery should have any effect on whether heart-attack patients live or die. Since heart attacks are by definition an emergency, most patients do not get to choose where they’re treated. The study “simply doesn’t prove either cause or effect between patient choice and death rates,” she added.

However, just as the jokes about Sky and Mrs Murphy are a way of warding off one kind of fear, Professor Pollock’s criticisms are seen as a potential weapon in another battle that also frightens the British public. They’re worried that the health and social care bill is, in reality, the first step towards the private sector finally defeating a much-loved free universal service. And that too, sadly, is what lots of people think competition law is really all about.

It seems that VK Mühlen AG fully cooperated with the FCO during the investigation under the leniency program and could thus secure a fine reduction. In addition, the company agreed to a settlement with the FCO, which further lowered the fine. (Typically the settlement “bonus” can be up to 10% of the fine). However, no details on the amount of the reductions are published.

The settlement decision is noteworthy because the FCO apparently allowed VK Mühlen AG to pay the amount in five annual installments. The FCO press release does not explicitly mention this. However, it highlights that a fine is determined not only based on the duration and the seriousness of the infringement, but that the FCO also takes into account the economic viability of the company concerned and may allow installments and/or deferral of the fine payment. This reference is unusual. VK Mühlen AG in turn mentioned to the press that the FCO granted the five year installments for paying the fine due to limited economic viability. It also seems that the installment mechanism was part of the settlement. (And indeed, it may be easier to obtain this type of payment modality in a settlement context.)

While this is probably not the first case in which the FCO allowed installment payments, it is among the first cases in which this element became public. Compared to the European Commission, the FCO has provided very little to no guidance yet on how it addresses claims of inability to pay or financial difficulties. The topic is, however, on the agenda, given that the FCO continues to impose ever increasing fines and given the impact of the financial crisis. While the FCO acknowledges this phenomenon, it only briefly deals with the issue in its most recent Annual Report 2009/2010: The FCO clarifies that due to the highly detrimental effect of cartels on the economy and consumer welfare, it is not possible to refrain from adequately sanctioning these infringements. However, the FCO states that in calculating the fine, it would always take into account the company’s economic viability so that no company would be driven into insolvency because of a cartel fine. To the extent that the company concerned can prove liquidity problems, the FCO can allow payment through installments or deferral.

This statement remains rather superficial, and most of the Commission’s recent press releases on cartel fines include more guidance on the elements that are relevant for assessing inability to pay claims. It would be helpful if the FCO could outline its approach in more detail, both regarding the payment modalities as well as a possible reduction of the fine. While the approach may still be evolving, updates on the current thinking would at least increase transparency on the topic. So far, there is no case published that the FCO has ever lowered a fine due to inability to pay – which is another difference to the European Commission. From a policy perspective, it would be desirable to have a more or less harmonized approach in this respect throughout the ECN. Otherwise, the amount and payment terms of fines for the infringement of Article 101 TFEU may vary according to which authority deals with the case.