Servizio, competition on the merits, and Google Shopping

This is the second post on the CJEU’s judgment in Servizio, a preliminary ruling concerning the interpretation of Article 102 TFEU (see here for the first post discussing the relevance of consumer welfare and actual effects in establishing an abuse under Article 102 TFEU). In this post I would like to discuss the concept of competition on the merits.

By way of background, the referring court had asked the Court whether a practice of a dominant undertaking can be considered as abusive solely on the basis of its potential anticompetitive effects, or whether it is also necessary to show that the practice departs from “normal competition” (also referred to as “competition on the merits”) – and if yes, how to determine if conduct is in line with competition on the merits.

This is arguably the most interesting (and most complex) part of the judgment. After all, competition on the merits featured prominently on the General Court’s landmark ruling in Google Shopping (currently on appeal), where it was held that the Commission had to establish that Google’s conduct, besides having (at least potential) effects, deviated from competition on the merits. As argued below, the General Court in Shopping and the Court in Servizio seem to approach competition on the merits from a different perspective, but this does not necessarily give rise to an inconsistency.

What is competition on the merits?

The concept of competition on the merits has always been a bit nebulous in the case-law – and this despite the fact that the Court has long used similar phrases such as “normal competition” when defining abusive conduct (see e.g., the definition of abuse in Hoffman La-Roche). As AG Rantos noted in his Opinion, “the concept of ‘competition on the merits’ is therefore abstract, since it does not correspond to a specific form of practices and cannot be defined in such a way as to make it possible to determine in advance whether or not particular conduct comes within the scope of such competition.”

For this reason alone, it would not be wise to put forward an exhaustive definition of competition on the merits. Both AG Rantos and the Court are cognizant of this, hence they prefer to provide examples of conduct departing from/falling within competition on the merits.

In general terms, recent case-law (Post Danmark I and Intel) has drawn a link between the concept of competition on the merits and the principle (sometimes referred to as the “As Efficient Competitor principle”) according to which Article 102 TFEU does not protect less efficient competitors, in that competition on the merits may by definition lead to the departure from the market of less efficient rivals. The implication is that if certain conduct excludes an as efficient rival, then the conduct in question is not competition on the merits. The AEC test, used in pricing practices (e.g., predation, margin squeeze), is an economic manifestation of the AEC principle.

In Servizio, the Court seems to affirm this link, stating that when determining if conduct falls within the scope of competition on the merits, one of the criteria that can be used is whether the practice can be replicated by a (hypothetical) as efficient competitor (para. 82; another criterion mentioned in para. 77 is whether the conduct serves no economic interest other than to eliminate competition). The Court here largely follows the reasoning of AG Rantos. After examining past case-law on pricing and non-pricing practices in paras. 69-71 of his Opinion, AG Rantos considers that in principle, conduct that can be replicated by an as efficient rival is competition on the merits (and thus not abusive).

The phrase “in principle” is key, however, in that there can be situations where conduct can be replicated by as efficient rivals and still fall outside the scope of competition on the merits – the prime example being AstraZeneca (fn 52 of AG Rantos’ Opinion). I think it is important not to lose sight of these nuances in the Opinion of AG Rantos when reading the Court’s judgment, as otherwise there is a risk some passages in the Court’s judgment (e.g., paragraph 78, which cites the Opinion AG Rantos) could be misread.

Seen in this light, the Court in Servizio does not break new ground; it affirms the relevance, when examining conduct under Article 102 TFEU, of that conduct’s impact on equally efficient rivals, in line with Post Danmark I and Intel. The concept of replicability is used as a proxy for determining the impact on equally efficient rivals. At the same time, the Court is careful to state that this is one of the criteria that can be used to classify conduct as departing from competition on the merits.

Do competition authorities need to show that conduct deviates from competition on the merits? If not, where does Google Shopping fit?

It has been argued (see e.g., here) that there is no need for an authority to show that the dominant undertaking’s practice is not in keeping with competition on the merits. On the other hand, in Google Shopping the General Court repeatedly held that, besides establishing (at least potential) effects, the Commission had to also show that Google’s conduct departed from competition on the merits. So, is an authority required to show that conduct deviates from competition on the merits?

I think the response to this question depends on how one understands competition on the merits. To the extent competition on the merits is linked to the AEC principle mentioned above, there is no need to examine it separately. It suffices to show that the conduct is capable of excluding an as efficient rival (as in that case the conduct will be deemed as falling outside the scope of competition on the merits).

Even so, there may be cases in which the AEC principle can be irrelevant – when for instance, the characteristics of the market make the appearance of an as efficient rival impossible (see e.g., Post Danmark II for case law, or the remarks of Gaudin and Mantzari for literature). This is likely to be the case in many digital markets exhibiting high economies of scale, data-driven advantages, and strong network externalities. In such a setting, assessing unilateral conduct by reference to an as efficient competitor (that cannot exist) would be tantamount to turning a blind eye to market reality.

In such cases, “competition on the merits” could replace the AEC principle and serve as an additional requirement for establishing an abuse, beyond that of showing anticompetitive effects. This seems to me to be the approach taken by the General Court in Google Shopping.

Recall that in that case Google had argued that the Commission had failed to identify features distinguishing the practices at issue from competition on the merits. In its judgment, the General Court started its reasoning by recalling that not every exclusionary effect is necessarily detrimental to competition, and competition on the merits may by definition lead to the departure from the market of rivals that are less attractive to consumers (para. 157, citing Intel). However, and contrary to what one might have expected, the General Court did not state that, to distinguish between “accepted” and “prohibited” exclusionary effects, regard should be had to the conduct’s effects on as efficient rivals.

Instead, to make this distinction, the General Court had recourse to a (somewhat undefined) notion of “competition on the merits”, which it considered as an additional requirement under Article 102 TFEU (see e.g., paras 161-162 and 195). Seen in this light, the General Court may have had recourse to a somewhat broader concept of “competition on the merits” to make up for the fact that the analytical framework it applied did not involve the examination of effects on as efficient rivals.

Now, the reality is that the General Court did not provide much guidance as to what “competition on the merits” meant. In that case, the General Court agreed with the Commission that Google’s conduct departed from competition on the merits based on three circumstances: (i) the importance of Google traffic from its general search pages; (ii) the behaviour of users when searching online; and (iii) the fact that the diverted traffic could not be effectively replaced (para. 196). One could say that these three circumstances all related to the effects of Google’s conduct. In addition, the General Court also considered relevant (iv) the fact that a search engine would normally not have the incentive to engage in self-preferencing (hence Google’s conduct involved a certain “abnormality”); (v) the non-discrimination obligation imposed by the EU legislature on internet service providers; and (vi) the fact that Google had altered its conduct following the initial failure of “Froogle” (its original comparison-shopping webpage).

Unfortunately, the fact-specific approach adopted by the General Court makes it hard to distill general guidance for future cases. In that sense, it does not seem to contribute to legal certainty. On the other hand, the General Court’s approach has the obvious benefit of flexibility (as said at the outset, it would not be wise to exhaustively define competition on the merits). In any event, one could say that the General Court’s approach can only reduce the risk of false positives (to the benefit of the investigated undertaking), in that it requires the competition authority to satisfy an additional requirement to establish a breach of Article 102 TFEU (namely, that the conduct departs from competition on the merits). One may thus overlook the recourse to a somewhat undefined concept of “competition on the merits”.

Is Servizio limited to cases of liberalized markets? If not, is the General Court’s ruling in Google Shopping at risk of being reversed on appeal?

It has been suggested that the Court’s judgment in Servizio should be limited to cases of liberalized markets, where the case-law has historically been quite strict when assessing the conduct of incumbents that were former legal monopolies.

In my view, there is no basis for limiting the scope of Servizio to liberalized markets. True, the Court seems to have ultimately decided the case taking into account the fact that Servizio previously benefited from a legal monopoly (see in particular para. 91, where the Court cites case-law on dominant undertakings using their statutory monopoly to extend to adjacent markets). But this does not detract from the fact that the Court, following AG Rantos, laid down its analytical framework for assessing conduct under Article 102 TFEU in general terms, without limiting it in any respect to cases of liberalized markets (see paras. 65-86, citing general Article 102 TFEU case-law).

So, does this mean that the General Court’s ruling in Google Shopping (which seems to have approached competition on the merits from a different perspective) could be at risk of being reversed on appeal? While we can only wait and see, my first reaction is probably no. As noted above, the Court in Servizio was careful not to put forward an exhaustive definition of competition on the merits. In other words, the Court (and AG Rantos) tried to provide general guidance on Article 102 TFEU, while still allowing for flexibility. There is thus no inconsistency between Servizio and Google Shopping.

Photo by Thomas Despeyroux on Unsplash

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