European Union officials insist that the executive order President Joe Biden signed Oct. 7 to implement a new U.S.-EU data-privacy framework must address European concerns about U.S. agencies’ surveillance practices. Awaited since March, when U.S. and EU officials reached an agreement in principle on a new framework, the order is intended to replace an earlier data-privacy framework that was invalidated in 2020 by the Court of Justice of the European Union (CJEU) in its Schrems IIjudgment.
This post is the first in what will be a series of entries examining whether the new framework satisfies the requirements of EU law or, as some criticsargue, whether it does not. The critics include Max Schrems’ organization NOYB (for “none of your business”), which has announced that it “will likely bring another challenge before the CJEU” if the European Commission officially decides that the new U.S. framework is “adequate.” In this introduction, I will highlight the areas of contention based on NOYB’s “first reaction.”
The overarching legal question that the European Commission (and likely also the CJEU) will need to answer, as spelled out in the Schrems II judgment, is whether the United States “ensures an adequate level of protection for personal data essentially equivalent to that guaranteed in the European Union by the GDPR, read in the light of Articles 7 and 8 of the [EU Charter of Fundamental Rights]” Importantly, as Theodore Christakis, Kenneth Propp, and Peter Swire point out, “adequate level” and “essential equivalence” of protection do not necessarily mean identical protection, either substantively or procedurally. The precise degree of flexibility remains an open question, however, and one that the EU Court may need to clarify to a much greater extent.
Proportionality and Bulk Data Collection
Under Article 52(1) of the EU Charter of Fundamental Rights, restrictions of the right to privacy must meet several conditions. They must be “provided for by law” and “respect the essence” of the right. Moreover, “subject to the principle of proportionality, limitations may be made only if they are necessary” and meet one of the objectives recognized by EU law or “the need to protect the rights and freedoms of others.”
However, despite changing these words, there is no indication that US mass surveillance will change in practice. So-called “bulk surveillance” will continue under the new Executive Order (see Section 2 (c)(ii)) and any data sent to US providers will still end up in programs like PRISM or Upstream, despite of the CJEU declaring US surveillance laws and practices as not “proportionate” (under the European understanding of the word) twice.
It is true that the Schrems II Court held that U.S. law and practices do not “[correlate] to the minimum safeguards resulting, under EU law, from the principle of proportionality.” But it is crucial to note the specific reasons the Court gave for that conclusion. Contrary to what NOYB suggests, the Court did not simply state that bulk collection of data is inherently disproportionate. Instead, the reasons it gave were that “PPD-28 does not grant data subjects actionable rights before the courts against the US authorities” and that, under Executive Order 12333, “access to data in transit to the United States [is possible] without that access being subject to any judicial review.”
CJEU case law does not support the idea that bulk collection of data is inherently disproportionate under EU law; bulk collection may be proportionate, taking into account the procedural safeguards and the magnitude of interests protected in a given case. (For another discussion of safeguards, see the CJEU’s decision in La Quadrature du Net.) Further complicating the legal analysis here is that, as mentioned, it is far from obvious that EU law requires foreign countries offer the same procedural or substantive safeguards that are applicable within the EU.
The Court’s Schrems II conclusion therefore primarily concerns the effective redress available to EU citizens against potential restrictions of their right to privacy from U.S. intelligence activities. The new two-step system proposed by the Biden executive order includes creation of a Data Protection Review Court (DPRC), which would be an independent review body with power to make binding decisions on U.S. intelligence agencies. In a comment pre-dating the executive order, Max Schrems argued that:
It is hard to see how this new body would fulfill the formal requirements of a court or tribunal under Article 47 CFR, especially when compared to ongoing cases and standards applied within the EU (for example in Poland and Hungary).
This comment raises two distinct issues. First, Schrems seems to suggest that an adequacy decision can only be granted if the available redress mechanism satisfies the requirements of Article 47 of the Charter. But this is a hasty conclusion. The CJEU’s phrasing in Schrems II is more cautious:
…Article 47 of the Charter, which also contributes to the required level of protection in the European Union, compliance with which must be determined by the Commission before it adopts an adequacy decision pursuant to Article 45(1) of the GDPR
In arguing that Article 47 “also contributes to the required level of protection,” the Court is not saying that it determines the required level of protection. This is potentially significant, given that the standard of adequacy is “essential equivalence,” not that it be procedurally and substantively identical. Moreover, the Court did not say that the Commission must determine compliance with Article 47 itself, but with the “required level of protection” (which, again, must be “essentially equivalent”).
Second, there is the related but distinct question of whether the redress mechanism is effective under the applicable standard of “required level of protection.” Christakis, Propp, and Swire offered a helpful analysis suggesting that it is, considering the proposed DPRC’s independence, effective investigative powers, and authority to issue binding determinations. I will offer a more detailed analysis of this point in future posts.
Finally, NOYB raised a concern that “judgment by ‘Court’ [is] already spelled out in Executive Order.” This concern seems to be based on the view that a decision of the DPRC (“the judgment”) and what the DPRC communicates to the complainant are the same thing. Or in other words, that legal effects of a DPRC decision are exhausted by providing the individual with the neither-confirm-nor-deny statement set out in Section 3 of the executive order. This is clearly incorrect: the DPRC has power to issue binding directions to intelligence agencies. The actual binding determinations of the DPRC are not predetermined by the executive order, only the information to be provided to the complainant is.
What may call for closer consideration are issues of access to information and data. For example, in La Quadrature du Net, the CJEU looked at the difficult problem of notification of persons whose data has been subject to state surveillance, requiring individual notification “only to the extent that and as soon as it is no longer liable to jeopardise” the law-enforcement tasks in question. Given the “essential equivalence” standard applicable to third-country adequacy assessments, however, it does not automatically follow that individual notification is required in that context.
Moreover, it also does not necessarily follow that adequacy requires that EU citizens have a right to access the data processed by foreign government agencies. The fact that there are significant restrictions on rights to information and to access in some EU member states, though not definitive (after all, those countries may be violating EU law), may be instructive for the purposes of assessing the adequacy of data protection in a third country, where EU law requires only “essential equivalence.”
There are difficult questions of EU law that the European Commission will need to address in the process of deciding whether to issue a new adequacy decision for the United States. It is also clear that an affirmative decision from the Commission will be challenged before the CJEU, although the arguments for such a challenge are not yet well-developed. In future posts I will provide more detailed analysis of the pivotal legal questions. My focus will be to engage with the forthcoming legal analyses from Schrems and NOYB and from other careful observers.
The practice of so-called “self-preferencing” has come to embody the zeitgeist of competition policy for digital markets, as legislative initiatives are undertaken in jurisdictions around the world that to seek, in various ways, to constrain large digital platforms from granting favorable treatment to their own goods and services. The core concern cited by policymakers is that gatekeepers may abuse their dual role—as both an intermediary and a trader operating on the platform—to pursue a strategy of biased intermediation that entrenches their power in core markets (defensive leveraging) and extends it to associated markets (offensive leveraging).
In addition to active interventions by lawmakers, self-preferencing has also emerged as a new theory of harm before European courts and antitrust authorities. Should antitrust enforcers be allowed to pursue such a theory, they would gain significant leeway to bypass the legal standards and evidentiary burdens traditionally required to prove that a given business practice is anticompetitive. This should be of particular concern, given the broad range of practices and types of exclusionary behavior that could be characterized as self-preferencing—only some of which may, in some specific contexts, include exploitative or anticompetitive elements.
In a new working paper for the International Center for Law & Economics (ICLE), I provide an overview of the relevant traditional antitrust theories of harm, as well as the emerging case law, to analyze whether and to what extent self-preferencing should be considered a new standalone offense under EU competition law. The experience to date in European case law suggests that courts have been able to address platforms’ self-preferencing practices under existing theories of harm, and that it may not be sufficiently novel to constitute a standalone theory of harm.
European Case Law on Self-Preferencing
Practices by digital platforms that might be deemed self-preferencing first garnered significant attention from European competition enforcers with the European Commission’s Google Shoppinginvestigation, which examined whether the search engine’s results pages positioned and displayed its own comparison-shopping service more favorably than the websites of rival comparison-shopping services. According to the Commission’s findings, Google’s conduct fell outside the scope of competition on the merits and could have the effect of extending Google’s dominant position in the national markets for general Internet search into adjacent national markets for comparison-shopping services, in addition to protecting Google’s dominance in its core search market.
Rather than explicitly posit that self-preferencing (a term the Commission did not use) constituted a new theory of harm, the Google Shopping ruling described the conduct as belonging to the well-known category of “leveraging.” The Commission therefore did not need to propagate a new legal test, as it held that the conduct fell under a well-established form of abuse. The case did, however, spur debate over whether the legal tests the Commission did apply effectively imposed on Google a principle of equal treatment of rival comparison-shopping services.
But it should be noted that conduct similar to that alleged in the Google Shopping investigation actually came before the High Court of England and Wales several months earlier, this time in a dispute between Google and Streetmap. At issue in that case was favorable search results Google granted to its own maps, rather than to competing online maps. The UK Court held, however, that the complaint should have been appropriately characterized as an allegation of discrimination; it further found that Google’s conduct did not constitute anticompetitive foreclosure. A similar result was reached in May 2020 by the Amsterdam Court of Appeal in the Funda case.
Conversely, in June 2021, the French Competition Authority (AdlC) followed the European Commission into investigating Google’s practices in the digital-advertising sector. Like the Commission, the AdlC did not explicitly refer to self-preferencing, instead describing the conduct as “favoring.”
Given this background and the proliferation of approaches taken by courts and enforcers to address similar conduct, there was significant anticipation for the judgment that the European General Court would ultimately render in the appeal of the Google Shopping ruling. While the General Court upheld the Commission’s decision, it framed self-preferencing as a discriminatory abuse. Further, the Court outlined four criteria that differentiated Google’s self-preferencing from competition on the merits.
Specifically, the Court highlighted the “universal vocation” of Google’s search engine—that it is open to all users and designed to index results containing any possible content; the “superdominant” position that Google holds in the market for general Internet search; the high barriers to entry in the market for general search services; and what the Court deemed Google’s “abnormal” conduct—behaving in a way that defied expectations, given a search engine’s business model, and that changed after the company launched its comparison-shopping service.
While the precise contours of what the Court might consider discriminatory abuse aren’t yet clear, the decision’s listed criteria appear to be narrow in scope. This stands at odds with the much broader application of self-preferencing as a standalone abuse, both by the European Commission itself and by some national competition authorities (NCAs).
Indeed, just a few weeks after the General Court’s ruling, the Italian Competition Authority (AGCM) handed down a mammoth fine against Amazon over preferential treatment granted to third-party sellers who use the company’s own logistics and delivery services. Rather than reflecting the qualified set of criteria laid out by the General Court, the Italian decision was clearly inspired by the Commission’s approach in Google Shopping. Where the Commission described self-preferencing as a new form of leveraging abuse, AGCM characterized Amazon’s practices as tying.
Self-preferencing has also been raised as a potential abuse in the context of data and information practices. In November 2020, the European Commission sent Amazon a statement of objections detailing its preliminary view that the company had infringed antitrust rules by making systematic use of non-public business data, gathered from independent retailers who sell on Amazon’s marketplace, to advantage the company’s own retail business. (Amazon responded with a set of commitments currently under review by the Commission.)
Both the Commission and the U.K. Competition and Markets Authority have lodged similar allegations against Facebook over data gathered from advertisers and then used to compete with those advertisers in markets in which Facebook is active, such as classified ads. The Commission’s antitrust proceeding against Apple over its App Store rules likewise highlights concerns that the company may use its platform position to obtain valuable data about the activities and offers of its competitors, while competing developers may be denied access to important customer data.
These enforcement actions brought by NCAs and the Commission appear at odds with the more bounded criteria set out by the General Court in Google Shopping, and raise tremendous uncertainty regarding the scope and definition of the alleged new theory of harm.
Self-Preferencing, Platform Neutrality, and the Limits of Antitrust Law
The growing tendency to invoke self-preferencing as a standalone theory of antitrust harm could serve two significant goals for European competition enforcers. As mentioned earlier, it offers a convenient shortcut that could allow enforcers to skip the legal standards and evidentiary burdens traditionally required to prove anticompetitive behavior. Moreover, it can function, in practice, as a means to impose a neutrality regime on digital gatekeepers, with the aims of both ensuring a level playing field among competitors and neutralizing the potential conflicts of interests implicated by dual-mode intermediation.
The dual roles performed by some platforms continue to fuel the never-ending debate over vertical integration, as well as related concerns that, by giving preferential treatment to its own products and services, an integrated provider may leverage its dominance in one market to related markets. From this perspective, self-preferencing is an inevitable byproduct of the emergence of ecosystems.
However, as the Australian Competition and Consumer Commission has recognized, self-preferencing conduct is “often benign.” Furthermore, the total value generated by an ecosystem depends on the activities of independent complementors. Those activities are not completely under the platform’s control, although the platform is required to establish and maintain the governance structures regulating access to and interactions around that ecosystem.
Given this reality, a complete ban on self-preferencing may call the very existence of ecosystems into question, challenging their design and monetization strategies. Preferential treatment can take many different forms with many different potential effects, all stemming from platforms’ many different business models. This counsels for a differentiated, case-by-case, and effects-based approach to assessing the alleged competitive harms of self-preferencing.
Antitrust law does not impose on platforms a general duty to ensure neutrality by sharing their competitive advantages with rivals. Moreover, possessing a competitive advantage does not automatically equal an anticompetitive effect. As the European Court of Justice recently stated in Servizio Elettrico Nazionale, competition law is not intended to protect the competitive structure of the market, but rather to protect consumer welfare. Accordingly, not every exclusionary effect is detrimental to competition. Distinctions must be drawn between foreclosure and anticompetitive foreclosure, as only the latter may be penalized under antitrust.
European Union lawmakers appear closeto finalizing a number of legislative proposals that aim to reform the EU’s financial-regulation framework in response to the rise of cryptocurrencies. Prominent within the package are new anti-money laundering and “countering the financing of terrorism” rules (AML/CFT), including an extension of the so-called “travel rule.” The travel rule, which currently applies to wire transfers managed by global banks, would be extended to require crypto-asset service providers to similarly collect and make available details about the originators and beneficiaries of crypto-asset transfers.
This legislative process proceeded with unusual haste in recent months, which partially explains why legal objections to the proposals have not been adequately addressed. The resulting legislation is fundamentally flawed to such an extent that some of its key features are clearly invalid under EU primary (treaty) law and liable to be struck down by the Court of Justice of the European Union (CJEU).
In this post, I will offer a brief overview of some of the concerns, which I also discuss in this recent Twitter thread. I focus primarily on the travel rule, which—in the light of EU primary law—constitutes a broad and indiscriminate surveillance regime for personal data. This characterization also applies to most of AML/CFT.
The CJEU, the EU’s highest court, established a number of conditions that such legally mandated invasions of privacy must satisfy in order to be valid under EU primary law (the EU Charter of Fundamental Rights). The legal consequences of invalidity are illustrated well by the Digital Rights Ireland judgment, in which the CJEU struck down an entire piece of EU legislation (the Data Retention Directive). Alternatively, the CJEU could decide to interpret EU law as if it complied with primary law, even if that is contrary to the text.
The Travel Rule in the Transfer of Funds Regulation
The EU travel rule is currently contained in the 2015 Wire Transfer Regulation (WTR). But at the end of June, EU legislators reached a likely final deal on its replacement, the Transfer of Funds Regulation (TFR; see the original proposal from July 2021). I focus here on the TFR, but much of the argument also applies to the older WTR now in force.
The TFR imposes obligations on payment-system providers and providers of crypto-asset transfers (refer to here, collectively, as “service providers”) to collect, retain, transfer to other service providers, and—in some cases—report to state authorities:
…information on payers and payees, accompanying transfers of funds, in any currency, and the information on originators and beneficiaries, accompanying transfers of crypto-assets, for the purposes of preventing, detecting and investigating money laundering and terrorist financing, where at least one of the payment or crypto-asset service providers involved in the transfer of funds or crypto-assets is established in the Union. (Article 1 TFR)
The TFR’s scope extends to money transfers between bank accounts or other payment accounts, as well as transfers of crypto assets other than peer-to-peer transfers without the involvement of a service provider (Article 2 TFR). Hence, the scope of the TFR includes, but is not limited to, all those who send or receive bank transfers. This constitutes the vast majority of adult EU residents.
The information that service providers are obligated to collect and retain (under Articles 4, 10, 14, and 21 TFR) include data that allow for the identification of both sides of a transfer of funds (the parties’ names, as well as the address, country, official personal document number, customer identification number, or the sender’s date and place of birth) and for linking their identity with the (payment or crypto-asset) account number or crypto-asset wallet address. The TFR also obligates service providers to collect and retain additional data to verify the accuracy of the identifying information “on the basis of documents, data or information obtained from a reliable and independent source” (Articles 4(4), 7(3), 14(5), 16(2) TFR).
The scope of the obligation to collect and retain verification data is vague and is likely to lead service providers to require their customers to provide copies of passports, national ID documents, bank or payment-account statements, and utility bills, as is the case under the WTR and the 5th AML Directive. Such data is overwhelmingly likely to go beyond information on the civil identity of customers and will often, if not almost always, allow inferring even sensitive personal data about the customer.
The data-collection and retention obligations in the TFR are general and indiscriminate. No distinction is made in TFR’s data-collection and retention provisions based on likelihood of a connection with criminal activity, except for verification data in the case of transfers of funds (an exception not applicable to crypto assets). Even, the distinction in the case of verification data for transfers of funds (“has reasonable grounds for suspecting money laundering or terrorist financing”) arguably lacks the precision required under CJEU case law.
Analogies with the CJEU’s Passenger Name Records Decision
In late June, following its established approach in similar cases, the CJEU gave its judgment in the Ligue des droits humainscase, which challenged the EU and Belgian regimes on passenger name records (PNR). The CJEU decided there that the applicable EU law, the PNR Directive, is valid under EU primary law. But it reached that result by interpreting some of the directive’s provisions in ways contrary to their express language and by deciding that some national legal rules implementing the directive are invalid. Some features of the PNR regime that were challenged by the court are strikingly similar to the TFR regime.
First, just like the TFR, the PNR rules imposed a five-year data-retention period for the data of all passengers, even where there is no “objective evidence capable of establishing a risk that relates to terrorist offences or serious crime having an objective link, even if only an indirect one, with those passengers’ air travel.” The court decided that this was a disproportionate restriction of the rights to privacy and to the protection of personal data under Articles 5-7 of the EU Charter of Fundamental Rights. Instead of invalidating the relevant article of the PNR Directive, the CJEU reinterpreted it as if it only allowed for five-year retention in cases where there is evidence of a relevant connection to criminality.
Applying analogous reasoning to the TFR, which imposes an indiscriminate five-year data retention period in its Article 21, the conclusion must be that this TFR provision is invalid under Articles 7-8 of the charter. Article 21 TFR may, at minimum, need to be recast to apply only to that transaction data where there is “objective evidence capable of establishing a risk” that it is connected to serious crime. The court also considered the issue of government access to data that has already been collected. Under the CJEU’s established interpretation of the EU Charter, “it is essential that access to retained data by the competent authorities be subject to a prior review carried out either by a court or by an independent administrative body.” In the PNR regime, at least some countries (such as Belgium) assigned this role to their “passenger information units” (PIUs). The court noted that a PIU is “an authority competent for the prevention, detection, investigation and prosecution of terrorist offences and of serious crime, and that its staff members may be agents seconded from the competent authorities” (e.g. from police or intelligence authorities). But according to the court:
That requirement of independence means that that authority must be a third party in relation to the authority which requests access to the data, in order that the former is able to carry out the review, free from any external influence. In particular, in the criminal field, the requirement of independence entails that the said authority, first, should not be involved in the conduct of the criminal investigation in question and, secondly, must have a neutral stance vis-a-vis the parties to the criminal proceedings …
The CJEU decided that PIUs do not satisfy this requirement of independence and, as such, cannot decide on government access to the retained data.
The TFR (especially its Article 19 on provision of information) does not provide for prior independent review of access to retained data. To the extent that such a review is conducted by Financial Intelligence Units (FIUs) under the AML Directive, concerns arise very similar to the treatment of PIUs under the PNR regime. While Article 32 of the AML Directive requires FIUs to be independent, that doesn’t necessarily mean that they are independent in the ways required of the authority that will decide access to retained data under Articles 7-8 of the EU Charter. For example, the AML Directive does not preclude the possibility of seconding public prosecutors, police, or intelligence officers to FIUs.
It is worth noting that none of the conclusions reached by the CJEU in the PNR case are novel; they are well-grounded in established precedent.
A General Proportionality Argument
Setting aside specific analogies with previous cases, the TFR clearly has not been accompanied by a more general and fundamental reflection on the proportionality of its basic scheme in the light of the EU Charter. A pressing question is whether the TFR’s far-reaching restrictions of the rights established in Articles 7-8 of the EU Charter (and perhaps other rights, like freedom of expression in Article 11) are strictly necessary and proportionate.
Arguably, the AML/CFT regime—including the travel rule—are significantly more costly and more rights-restricting than potential alternatives. The basic problem is that there is no reliable data on the relative effectiveness of measures like the travel rule. Defenders of the current AML/CFT regime focus on evidence that it contributes to preventing or prosecuting some crime. But this is not the relevant question when it comes to proportionality. The relevant question is whether those measures are as effective or more effective than alternative, less costly, and more privacy-preserving alternatives. One conservative estimate holds that AML compliance costs in Europe were “120 times the amount successfully recovered from criminals’ and exceeded the estimated total of criminal funds (including funds not seized or identified).”
The fact that the current AML/CFT regime is a de facto global standard cannot serve as a sufficient justification either, given that EU fundamental law is perfectly comfortable in rejecting non-European law-enforcement practices (see the CJEU’s decision in Schrems). The travel rule has been unquestioningly imported to EU law from U.S. law (via FATF), where the standards of constitutional protection of privacy are much different than under the EU Charter. This fact would likely be noticed by the Court of Justice in any putative challenge to the TFR or other elements of the AML/CFT regime.
Here, I only flag the possibility of a general proportionality challenge. Much more work needs to be done to flesh it out.
Due to the political and resource constraints of the EU legislative process, it is possible that the legislative proposals in the financial-regulation package did not receive sufficient legal scrutiny from the perspective of their compatibility with the EU Charter of Fundamental Rights. This hypothesis would explain the presence of seemingly clear violations, such as the indiscriminate five-year data-retention period. Given that none of the proposals has, as yet, been voted into law, making the legislators aware of the problem may help to address at least some of the issues.
Legal arguments about the AML/CFT regime’s incompatibility with the EU Charter should be accompanied with concrete alternative proposals to achieve the goals of preventing and combating serious crime that, according to the best evidence, the current AML/CFT regime does ineffectively. We need more regulatory imagination. For example, one part of the solution may be to properly staff and equip government agencies tasked with prosecuting financial crime.
But it’s also possible that the proposals, including the TFR, will be adopted broadly without amendment. In that case, the main recourse available to EU citizens (or to any EU government) will be to challenge the legality of the measures before the Court of Justice.
Early last month, the Italian competition authority issued a record 1.128 billion euro fine against Amazon for abuse of dominance under Article 102 of the Treaty on the Functioning of the European Union (TFEU). In its order, the Agenzia Garante della Concorrenza e del Mercato (AGCM) essentially argues that Amazon has combined its Amazon.it marketplace and Fulfillment by Amazon (FBA) services to exclude logistics rivals such as FedEx, DHL, UPS, and Poste Italiane.
The sanctions came exactly one month after the European General Court seconded the European Commission’s “discovery” in the Google Shopping case of a new antitrust infringement known as “self-preferencing,” which also cited Article 102 TFEU. Perhaps not entirely coincidentally, legislation was introduced in the United States earlier this year to prohibit the practice. Meanwhile, the EU’s legislative bodies have been busy taking steps to approve the Digital Markets Act (DMA), which would regulate so-called digital “gatekeepers.”
Italy thus joins a wave of policymakers that have either imposed heavy-handed decisions to “rein in” online platforms, or are seeking to implement ex ante regulations toward that end. Ultimately, the decision is reminiscent of the self-preferencing prohibition contained in Article 6a of the current draft of the DMA and reflects much of what is wrong with the current approach to regulating tech. It presages some of the potential problems with punishing efficient behavior for the sake of protecting competitors through “common carrier antitrust.” However, if this decision is anything to go by, these efforts will end up hurting the very consumers authorities purport to protect and lending color to more general fears over the DMA.
In this post, we discuss how the AGCM’s reasoning departs from sound legal and economic thinking to reach a conclusion at odds with the traditional goal of competition law—i.e., the protection of consumer welfare. Neo-Brandeisians and other competition scholars who dispute the centrality of the consumer welfare standard and would use antitrust to curb “bigness” may find this result acceptable, in principle. But even they must admit that the AGCM decision ultimately serves to benefit large (if less successful) competitors, and not the “small dealers and worthy men” of progressive lore.
Relevant Market Definition
Market definition constitutes a preliminary step in any finding of abuse under Article 102 TFEU. An excessively narrow market definition can result in false positives by treating neutral or efficient conduct as anticompetitive, while an overly broad market definition might allow anticompetitive conduct to slip through the cracks, leading to false negatives.
Amazon Italy may be an example of the former. Here, the AGCM identified two relevant markets: the leveraging market, which it identified as the Italian market for online marketplace intermediation, and the leveraged market, which it identified as the market for e-commerce logistics. The AGCM charges that Amazon is dominant in the former and that it gained an illegal advantage in the latter. It found, in this sense, that online marketplaces constitute a uniquely relevant market that is not substitutable for other offline or online sales channels, such as brick-and-mortar shops, price-comparison websites (e.g., Google Shopping), or dedicated sales websites (e.g., Nike.com/it). Similarly, it concluded that e-commerce logistics are sufficiently different from other forms of logistics as to comprise a separate market.
The AGCM’s findings combine qualitative and quantitative evidence, including retailer surveys and “small but significant and non-transitory increase in price” (SSNIP) tests. They also include a large dose of speculative reasoning.
For instance, the AGCM asserts that online marketplaces are fundamentally different from price-comparison sites because, in the latter case, purchase transactions do not take place on the platform. It asserts that e-commerce logistics are different from traditional logistics because the former require a higher degree of automation for transportation and storage. And in what can only be seen as a normative claim, rather than an objective assessment of substitutability, the Italian watchdog found that marketplaces are simply better than dedicated websites because, e.g., they offer greater visibility and allow retailers to save on marketing costs. While it is unclear what weights the AGCM assigned to each of these considerations when defining the relevant markets, it is reasonable to assume they played some part in defining the nature and scope of Amazon’s market presence in Italy.
In all of these instances, however, while the AGCM carefully delineated superficial distinctions between these markets, it did not actually establish that those differences are relevant to competition. Fetishizing granular but ultimately irrelevant differences between products and services—such as between marketplaces and shopping comparison sites—is a sure way to incur false positives, a misstep tantamount to punishing innocuous or efficient business conduct.
The AGCM found that Amazon was “hyper-dominant” in the online marketplace intermediation market. Dominance was established by looking at revenue from marketplace sales, where Amazon’s share had risen from about 65% in 2016 to 75% in 2019. Taken in isolation, this figure might suggest that Amazon’s competitors cannot thrive in the market. A broader look at the data, however, paints a picture of more generalized growth, with some segments greatly benefiting newcomers and small, innovative marketplaces.
For instance, virtually all companies active in the online marketplace intermediation market have experienced significant growth in terms of monthly visitors. It is true that Amazon’s visitors grew significantly, up 150%, but established competitors like Aliexpress and eBay also saw growth rates of 90% and 25%, respectively. Meanwhile, Wish grew a massive 10,000% from 2016 to 2019; while ManoMano and Zalando grew 450% and 100%, respectively.
In terms of active users (i.e., visits that result in a purchase), relative numbers seem to have stayed roughly the same, although the AGCM claims that eBay saw a 20-30% drop. The number of third-party products Amazon offered through Marketplace grew from between 100 and 500 million to between 500 million and 1 billion, while other marketplaces appear to have remained fairly constant, with some expanding and others contracting.
In sum, while Amazon has undeniably improved its position in practically all of the parameters considered by the AGCM, indicators show that the market as a whole has experienced and is experiencing growth. The improvement in Amazon’s position relative to some competitors—notably eBay, which AGCM asserts is Amazon’s biggest competitor—should therefore not obscure the fact that there is entry and expansion both at the fringes (ManoMano, Wish), and in the center of the market for online marketplace intermediation (Aliexpress).
Amazon’s Allegedly Abusive Conduct
According to the AGCM, Amazon has taken advantage of vertical integration to engage in self-preferencing. Specifically, the charge is that the company offers exclusive and purportedly crucial advantages on the Amazon.it marketplace to sellers who use Amazon’s own e-commerce logistics service, FBA. The purported advantages of this arrangement include, to name a few, the coveted Prime badge, the elimination of negative user feedback on sale or delivery, preferential algorithmic treatment, and exclusive participation in Amazon’s sales promotions (e.g., Black Friday, Cyber Monday). As a result, according to the AGCM, products sold through FBA enjoy more visibility and a better chance to win the “Buy Box.”
The AGCM claims this puts competing logistics operators like FedEx, Poste Italiane, and DHL at a disadvantage, because non-FBA products have less chance to be sold than FBA products, regardless of any efficiency or quality criteria. In the AGCM’s words, “Amazon has stolen demand for other e-commerce logistics operators.”
Indirectly, Amazon’s “self-preferencing” purportedly also harms competing marketplaces like eBay by creating incentives for sellers to single-home—i.e., to sell only through Amazon Marketplace. The argument here is that retailers will not multi-home to avoid duplicative costs associated with FBA, e.g., storing goods in several warehouses.
Although it is not necessary to demonstrate anticompetitive effects under Article 102 TFEU, the AGCM claims that Amazon’s behavior has caused drastic worsening in other marketplaces’ competitive position by constraining their ability to reach the minimum scale needed to enjoy direct and indirect network effects. The Italian authorities summarily assert that this results in consumer harm, although the gargantuan 250-page decision spends scarcely one paragraph on this point.
Intuitively, however, Amazon’s behavior should, in principle, benefit consumers by offering something that most find tremendously valuable: a guarantee of quick delivery for a wide range of goods. Indeed, this is precisely why it is so misguided to condemn self-preferencing by online platforms.
As some have already argued, we cannot assume that something is bad for competition just because it is bad for certain competitors. For instance, a lot of unambiguously procompetitive behavior, like cutting prices, puts competitors at a disadvantage. The same might be true for a digital platform that preferences its own service because it is generally better than the alternatives provided by third-party sellers. In the case at hand, for example, Amazon’s granting marketplace privileges to FBA products may help users to select the products that Amazon can guarantee will best satisfy their needs. This is perfectly plausible, as customers have repeatedly shown that they often prefer less open, less neutral options.
The key question, therefore, should be whether the behavior in question excludes equally efficient rivals in such a way as to harm consumer welfare. Otherwise, we would essentially be asking companies to refrain from offering services that benefit their users in order to make competing products comparatively more attractive. This is antithetical to the nature of competition, which is based on the principle that what is good for consumers is frequently bad for competitors.
AGCM’s Theory of Harm Rests on Four Weak Pillars
Building on the logic that Amazon enjoys “hyper-dominance” in marketplace intermediation; that most online sales are marketplace sales; and that most marketplace sales are, in turn, Amazon.it sales, the AGCM decision finds that succeeding on Amazon.it is indispensable for any online retailer in Italy. This argument hinges largely on whether online and offline retailers are thought of as distinct relevant markets—i.e., whether, from the perspective of the retailer, online and offline sales channels are substitutable (see also the relevant market definition section above).
Ultimately, the AGCM finds that they are not, as online sales enjoy such advantages as lower fixed costs, increased sale flexibility, and better geographical reach. To an outsider, the distinction between the two markets may seem artificial—and it largely is—but such theoretical market segmentation is the bread-and-butter of antitrust analysis. Still, even by EU competition law standards, the relevant market definitions on which the AGCM relies to conclude that selling on Amazon is indispensable appear excessively narrow.
This market distinction also serves to set up the AGCM’s second, more controversial argument: that the benefits extended to products sold through the FBA channel are also indispensable for retailers’ success on the Amazon.it marketplace. Here, the AGCM seeks a middle ground between competitive advantage and indispensability, finally settling on the notion that a sufficiently large competitive advantage itself translates into indispensability.
But how big is too big? The facts that 40-45% of Amazon’s third-party retailers do not use FBA (p. 57 of the decision) and that roughly 40 of the top 100 products sold on Amazon.it are not fulfilled through Amazon’s logistics service (p. 58) would appear to suggest that FBA is more of a convenience than an obligation. At the least, it does not appear that the advantage conferred is so big as to amount to indispensability. This may be because sellers that choose not to use Amazon’s logistics service (including offline, of course) can and do cut prices to compete with FBA-sold products. If anything, this should be counted as a good thing from the perspective of consumer welfare.
Instead, and signaling the decision’s overarching preoccupation with protecting some businesses at the expense of others (and, ultimately, at the expense of consumers), the AGCM has expanded the already bloated notion of a self-preferencing offense to conclude that expecting sellers to compete on pricing parameters would unfairly slash profit margins for non-FBA sellers.
The third pillar of the AGCM’s theory of harm is the claim that the benefits conferred on products sold through FBA are not awarded based on any objective quality criteria, but purely on whether the seller has chosen FBA or third-party logistics. Thus, even if a logistics operator were, in principle, capable of offering a service as efficient as FBA’s, it would not qualify for the same benefits.
But this is a disingenuous line of reasoning. One legitimate reason why Amazon could choose to confer exclusive advantages on products fulfilled by its own logistics operation is because no other service is, in fact, routinely as reliable. This does not necessarily mean that FBA is always superior to the alternatives, but rather that it makes sense for Amazon to adopt this presumption a general rule based on past experience, without spending the resources to constantly evaluate it. In other words, granting exclusive benefits is based on quality criteria, just on a prior measurement of quality rather than an ongoing assessment. This is presumably what a customer-obsessed business that does not want to take chances with consumer satisfaction would do.
Fourth, the AGCM posits that Prime and FBA constitute two separate products that have been artificially tied by Amazon, thereby unfairly excluding third-party logistics operators. Co-opting Amazon’s own terminology, the AGCM claims that the company has created a flywheel of artificial interdependence, wherein Prime benefits increase the number of Prime users, which drives demand for Prime products, which creates demand for Prime-eligible FBA products, and so on.
To support its case, the AGCM repeatedly adduces a 2015 letter in which Jeff Bezos told shareholders that Amazon Marketplace and Prime are “happily and deeply intertwined,” and that FBA is the “glue” that links them together. Instead of taking this for what it likely is—i.e., a case of legitimate, efficiency-enhancing vertical integration—the AGCM has preferred to read into it a case of illicit tying, an established offense under Article 102 TFEU whereby a dominant firm makes the purchase of one product conditional on the purchase of another, unrelated one.
The problem with this narrative is that it is perfectly plausible that Prime and FBA are, in fact, meant to be one product that is more than the sum of its parts. For one, the inventory of sellers who use FBA is stowed in fulfillment centers, meaning that Amazon takes care of all logistics, customer service, and product returns. As Bezos put it in the same 2015 letter, this is a huge efficiency gain. It thus makes sense to nudge consumers towards products that use FBA.
In sum, the AGCM’s case rests on a series of questionable assumptions that build on each other: a narrow relevant market definition; a finding of “hyper-dominance” that downplays competitors’ growth and expansion, as well as competition from outside the narrowly defined market; a contrived notion of indispensability at two levels (Marketplace and FBA); and a refusal to contemplate the possibility that Amazon integrates its marketplace and logistics services in orders to enhance efficiency, rather than to exclude competitors.
The AGCM sees “only one way to restore a level-playing field in e-commerce logistics”: Amazon must redesign its existing Self-Fulfilled Prime (SFP) program in such a way as to grant all logistics operators—FBA or non-FBA—equal treatment on Amazon.it, based on a set of objective, transparent, standard, uniform, and non-discriminatory criteria. Any logistics operator that demonstrates the ability to fulfill such criteria must be awarded SFP status and the accompanying Prime badge, along with all the perks associated with it. Further, SFP- and FBA-sold products must be subject to the same monitoring mechanism with regard to the observance of Prime standards, as well as to the same evaluation standards.
In sum, Amazon Italy now has a duty to treat Marketplace sales fulfilled by third-party operators the same as those fulfilled by its own logistics service. This is a significant step toward “common carrier antitrust.” in which vertically integrated firms are expected to comply with perfect neutrality obligations with respect to customers, suppliers, and competitors.
Beyond the philosophical question of whether successful private companies should be obliged by law to treat competitors analogously to its affiliates (they shouldn’t), the pitfalls of this approach are plain to see. Nearly all consumer-facing services use choice architectures as a means to highlight products that rank favorably in terms of price and quality, and ensuring consumers enjoy a seamless user experience: Supermarkets offer house brands that signal a product has certain desirable features; operating system developers pre-install certain applications to streamline users’ “out of the box “experience; app stores curate the apps that users will view; search engines use specialized boxes that anticipate the motives underlying users’ search queries, etc. Suppressing these practices through heavy-handed neutrality mandates is liable to harm consumers.
Second, monitoring third-party logistics operators’ compliance with the requisite standards is going to come at a cost for Amazon (and, presumably, its customers)—a cost likely much higher than that of monitoring its own operations—while awarding the Prime badge liberally may deteriorate the consumer experience on Amazon Marketplace.
Thus, one way for Amazon to comply with AGCM’s remedies while also minimizing monitoring costs is simply to dilute or even remove the criteria for Prime, thereby allowing sellers using any logistics provider to be eligible for Prime. While this would presumably insulate Amazon from any future claims against exclusionary self-preferencing, it would almost certainly also harm consumer welfare.
A final point worth noting is that vertical integration may well be subsidizing Amazon’s own first-party products. In other words, even if FBA is not fully better than other logistics operators, the revenue that it derives from FBA enables Amazon to offer low prices, as well as a range of other benefits from Prime, such as, e.g., free video. Take that source of revenue away, and those subsidized prices go up and the benefits disappear. This is another reason why it may be legitimate to consider FBA and Prime as a single product.
Of course, this argument is moot if all one cares about is how Amazon’s vertical integration affects competitors, not consumers. But consumers care about the whole package. The rationale at play in the AGCM decision ultimately ends up imposing a narrow, boring business model on all sellers, precluding them from offering interesting consumer benefits to bolster their overall product.
Some have openly applauded AGCM’s use of EU competition law to protect traditional logistics operators like FedEx, Poste Italiane, DHL, and UPS. Others lament the competition authority’s apparent abandonment of the consumer welfare standard in favor of a renewed interest in punishing efficiency to favor laggard competitors under the guise of safekeeping “competition.” Both sides ultimately agree on one thing, however: Amazon Italy is about favoring Amazon’s competitors. If competition authorities insist on continuing down this populist rabbit hole, the best they can hope for is a series of Pyrrhic victories against the businesses that are most bent on customer satisfaction, i.e., the successful ones.
Some may intuitively think that this is fair; that Amazon is just too big and that it strangles small competitors. But Amazon’s “small” competitors are hardly the “worthy men” of Brandeisian mythology. They are FedEx, DHL, UPS, and the state-backed goliath Poste Italiane; they are undeniably successful companies like eBay, Alibaba – or Walmart in the United States. It is, conversely, the smallest retailers and consumers who benefit the most from Amazon’s integrated logistics and marketplace services, as the company’s meteoric rise in popularity in Italy since 2016 attests. But it seems that, in the brave new world of antitrust, such stakeholders are now too small to matter.
U.S. and European competition laws diverge in numerous ways that have important real-world effects. Understanding these differences is vital, particularly as lawmakers in the United States, and the rest of the world, consider adopting a more “European” approach to competition.
In broad terms, the European approach is more centralized and political. The European Commission’s Directorate General for Competition (DG Comp) has significant de facto discretion over how the law is enforced. This contrasts with the common law approach of the United States, in which courts elaborate upon open-ended statutes through an iterative process of case law. In other words, the European system was built from the top down, while U.S. antitrust relies on a bottom-up approach, derived from arguments made by litigants (including the government antitrust agencies) and defendants (usually businesses).
This procedural divergence has significant ramifications for substantive law. European competition law includes more provisions akin to de facto regulation. This is notably the case for the “abuse of dominance” standard, in which a “dominant” business can be prosecuted for “abusing” its position by charging high prices or refusing to deal with competitors. By contrast, the U.S. system places more emphasis on actual consumer outcomes, rather than the nature or “fairness” of an underlying practice.
The American system thus affords firms more leeway to exclude their rivals, so long as this entails superior benefits for consumers. This may make the U.S. system more hospitable to innovation, since there is no built-in regulation of conduct for innovators who acquire a successful market position fairly and through normal competition.
In this post, we discuss some key differences between the two systems—including in areas like predatory pricing and refusals to deal—as well as the discretionary power the European Commission enjoys under the European model.
U.S. antitrust is, by and large, unconcerned with companies charging what some might consider “excessive” prices. The late Associate Justice Antonin Scalia, writing for the Supreme Court majority in the 2003 case Verizon v. Trinko, observed that:
The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth.
This contrasts with European competition-law cases, where firms may be found to have infringed competition law because they charged excessive prices. As the European Court of Justice (ECJ) held in 1978’s United Brands case: “In this case charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied would be such an abuse.”
While United Brands was the EU’s foundational case for excessive pricing, and the European Commission reiterated that these allegedly exploitative abuses were possible when it published its guidance paper on abuse of dominance cases in 2009, the commission had for some time demonstrated apparent disinterest in bringing such cases. In recent years, however, both the European Commission and some national authorities have shown renewed interest in excessive-pricing cases, most notably in the pharmaceutical sector.
European competition law also penalizes so-called “margin squeeze” abuses, in which a dominant upstream supplier charges a price to distributors that is too high for them to compete effectively with that same dominant firm downstream:
[I]t is for the referring court to examine, in essence, whether the pricing practice introduced by TeliaSonera is unfair in so far as it squeezes the margins of its competitors on the retail market for broadband connection services to end users. (Konkurrensverket v TeliaSonera Sverige, 2011)
As Scalia observed in Trinko, forcing firms to charge prices that are below a market’s natural equilibrium affects firms’ incentives to enter markets, notably with innovative products and more efficient means of production. But the problem is not just one of market entry and innovation. Also relevant is the degree to which competition authorities are competent to determine the “right” prices or margins.
As Friedrich Hayek demonstrated in his influential 1945 essay The Use of Knowledge in Society, economic agents use information gleaned from prices to guide their business decisions. It is this distributed activity of thousands or millions of economic actors that enables markets to put resources to their most valuable uses, thereby leading to more efficient societies. By comparison, the efforts of central regulators to set prices and margins is necessarily inferior; there is simply no reasonable way for competition regulators to make such judgments in a consistent and reliable manner.
Given the substantial risk that investigations into purportedly excessive prices will deter market entry, such investigations should be circumscribed. But the court’s precedents, with their myopic focus on ex post prices, do not impose such constraints on the commission. The temptation to “correct” high prices—especially in the politically contentious pharmaceutical industry—may thus induce economically unjustified and ultimately deleterious intervention.
Monopolists must charge prices that are below some measure of their incremental costs; and
There must be a realistic prospect that they will able to recoup these initial losses.
In laying out its approach to predatory pricing, the U.S. Supreme Court has identified the risk of false positives and the clear cost of such errors to consumers. It thus has particularly stressed the importance of the recoupment requirement. As the court found in 1993’s Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., without recoupment, “predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced.”
Accordingly, U.S. authorities must prove that there are constraints that prevent rival firms from entering the market after the predation scheme, or that the scheme itself would effectively foreclose rivals from entering the market in the first place. Otherwise, the predator would be undercut by competitors as soon as it attempts to recoup its losses by charging supra-competitive prices.
Without the strong likelihood that a monopolist will be able to recoup lost revenue from underpricing, the overwhelming weight of economic evidence (to say nothing of simple logic) is that predatory pricing is not a rational business strategy. Thus, apparent cases of predatory pricing are most likely not, in fact, predatory; deterring or punishing them would actually harm consumers.
[I]t does not follow from the case‑law of the Court that proof of the possibility of recoupment of losses suffered by the application, by an undertaking in a dominant position, of prices lower than a certain level of costs constitutes a necessary precondition to establishing that such a pricing policy is abusive. (France Télécom v Commission, 2009).
This aspect of the legal standard has no basis in economic theory or evidence—not even in the “strategic” economic theory that arguably challenges the dominant Chicago School understanding of predatory pricing. Indeed, strategic predatory pricing still requires some form of recoupment, and the refutation of any convincing business justification offered in response. For example, in a 2017 piece for the Antitrust Law Journal, Steven Salop lays out the “raising rivals’ costs” analysis of predation and notes that recoupment still occurs, just at the same time as predation:
[T]he anticompetitive conditional pricing practice does not involve discrete predatory and recoupment periods, as in the case of classical predatory pricing. Instead, the recoupment occurs simultaneously with the conduct. This is because the monopolist is able to maintain its current monopoly power through the exclusionary conduct.
The case of predatory pricing illustrates a crucial distinction between European and American competition law. The recoupment requirement embodied in American antitrust law serves to differentiate aggressive pricing behavior that improves consumer welfare—because it leads to overall price decreases—from predatory pricing that reduces welfare with higher prices. It is, in other words, entirely focused on the welfare of consumers.
The European approach, by contrast, reflects structuralist considerations far removed from a concern for consumer welfare. Its underlying fear is that dominant companies could use aggressive pricing to engender more concentrated markets. It is simply presumed that these more concentrated markets are invariably detrimental to consumers. Both the Tetra Pak and France Télécom cases offer clear illustrations of the ECJ’s reasoning on this point:
[I]t would not be appropriate, in the circumstances of the present case, to require in addition proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalize predatory pricing whenever there is a risk that competitors will be eliminated… The aim pursued, which is to maintain undistorted competition, rules out waiting until such a strategy leads to the actual elimination of competitors. (Tetra Pak v Commission, 1996).
[T]he lack of any possibility of recoupment of losses is not sufficient to prevent the undertaking concerned reinforcing its dominant position, in particular, following the withdrawal from the market of one or a number of its competitors, so that the degree of competition existing on the market, already weakened precisely because of the presence of the undertaking concerned, is further reduced and customers suffer loss as a result of the limitation of the choices available to them. (France Télécom v Commission, 2009).
In short, the European approach leaves less room to analyze the concrete effects of a given pricing scheme, leaving it more prone to false positives than the U.S. standard explicated in the Brooke Group decision. Worse still, the European approach ignores not only the benefits that consumers may derive from lower prices, but also the chilling effect that broad predatory pricing standards may exert on firms that would otherwise seek to use aggressive pricing schemes to attract consumers.
Refusals to Deal
U.S. and EU antitrust law also differ greatly when it comes to refusals to deal. While the United States has limited the ability of either enforcement authorities or rivals to bring such cases, EU competition law sets a far lower threshold for liability.
As Justice Scalia wrote in Trinko:
Aspen Skiing is at or near the outer boundary of §2 liability. The Court there found significance in the defendant’s decision to cease participation in a cooperative venture. The unilateral termination of a voluntary (and thus presumably profitable) course of dealing suggested a willingness to forsake short-term profits to achieve an anticompetitive end. (Verizon v Trinko, 2003.)
This highlights two key features of American antitrust law with regard to refusals to deal. To start, U.S. antitrust law generally does not apply the “essential facilities” doctrine.Accordingly, in the absence of exceptional facts, upstream monopolists are rarely required to supply their product to downstream rivals, even if that supply is “essential” for effective competition in the downstream market. Moreover, as Justice Scalia observed in Trinko, the Aspen Skiing case appears to concern only those limited instances where a firm’s refusal to deal stems from the termination of a preexisting and profitable business relationship.
While even this is not likely the economically appropriate limitation on liability, its impetus—ensuring that liability is found only in situations where procompetitive explanations for the challenged conduct are unlikely—is completely appropriate for a regime concerned with minimizing the cost to consumers of erroneous enforcement decisions.
In practice, however, all of these conditions have been relaxed significantly by EU courts and the commission’s decisional practice. This is best evidenced by the lower court’s Microsoft ruling where, as John Vickers notes:
[T]he Court found easily in favor of the Commission on the IMS Health criteria, which it interpreted surprisingly elastically, and without relying on the special factors emphasized by the Commission. For example, to meet the “new product” condition it was unnecessary to identify a particular new product… thwarted by the refusal to supply but sufficient merely to show limitation of technical development in terms of less incentive for competitors to innovate.
EU competition law thus shows far less concern for its potential chilling effect on firms’ investments than does U.S. antitrust law.
There are vast differences between U.S. and EU competition law relating to vertical restraints—that is, contractual restraints between firms that operate at different levels of the production process.
On the one hand, since the Supreme Court’s Leegin ruling in 2006, even price-related vertical restraints (such as resale price maintenance (RPM), under which a manufacturer can stipulate the prices at which retailers must sell its products) are assessed under the rule of reason in the United States. Some commentators have gone so far as to say that, in practice, U.S. case law on RPM almost amounts to per se legality.
Furthermore, in the Consten and Grundig ruling, the ECJ rejected the consequentialist, and economically grounded, principle that inter-brand competition is the appropriate framework to assess vertical restraints:
This treatment of vertical restrictions flies in the face of longstanding mainstream economic analysis of the subject. As Patrick Rey and Jean Tirole conclude:
Another major contribution of the earlier literature on vertical restraints is to have shown that per se illegality of such restraints has no economic foundations.
Unlike the EU, the U.S. Supreme Court in Leegintook account of the weight of the economic literature, and changed its approach to RPM to ensure that the law no longer simply precluded its arguable consumer benefits, writing: “Though each side of the debate can find sources to support its position, it suffices to say here that economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance.” Further, the court found that the prior approach to resale price maintenance restraints “hinders competition and consumer welfare because manufacturers are forced to engage in second-best alternatives and because consumers are required to shoulder the increased expense of the inferior practices.”
The EU’s continued per se treatment of RPM, by contrast, strongly reflects its “precautionary principle” approach to antitrust. European regulators and courts readily condemn conduct that could conceivably injure consumers, even where such injury is, according to the best economic understanding, exceedingly unlikely. The U.S. approach, which rests on likelihood rather than mere possibility, is far less likely to condemn beneficial conduct erroneously.
Political Discretion in European Competition Law
EU competition law lacks a coherent analytical framework like that found in U.S. law’s reliance on the consumer welfare standard. The EU process is driven by a number of laterally equivalent—and sometimes mutually exclusive—goals, including industrial policy and the perceived need to counteract foreign state ownership and subsidies. Such a wide array of conflicting aims produces lack of clarity for firms seeking to conduct business. Moreover, the discretion that attends this fluid arrangement of goals yields an even larger problem.
The Microsoft case illustrates this problem well. In Microsoft, the commission could have chosen to base its decision on various potential objectives. It notably chose to base its findings on the fact that Microsoft’s behavior reduced “consumer choice.”
The commission, in fact, discounted arguments that economic efficiency may lead to consumer welfare gains, because it determined “consumer choice” among media players was more important:
Another argument relating to reduced transaction costs consists in saying that the economies made by a tied sale of two products saves resources otherwise spent for maintaining a separate distribution system for the second product. These economies would then be passed on to customers who could save costs related to a second purchasing act, including selection and installation of the product. Irrespective of the accuracy of the assumption that distributive efficiency gains are necessarily passed on to consumers, such savings cannot possibly outweigh the distortion of competition in this case. This is because distribution costs in software licensing are insignificant; a copy of a software programme can be duplicated and distributed at no substantial effort. In contrast, the importance of consumer choice and innovation regarding applications such as media players is high. (Commission Decision No. COMP. 37792 (Microsoft)).
It may be true that tying the products in question was unnecessary. But merely dismissing this decision because distribution costs are near-zero is hardly an analytically satisfactory response. There are many more costs involved in creating and distributing complementary software than those associated with hosting and downloading. The commission also simply asserts that consumer choice among some arbitrary number of competing products is necessarily a benefit. This, too, is not necessarily true, and the decision’s implication that any marginal increase in choice is more valuable than any gains from product design or innovation is analytically incoherent.
The Court of First Instance was only too happy to give the commission a pass in its breezy analysis; it saw no objection to these findings. With little substantive reasoning to support its findings, the court fully endorsed the commission’s assessment:
As the Commission correctly observes (see paragraph 1130 above), by such an argument Microsoft is in fact claiming that the integration of Windows Media Player in Windows and the marketing of Windows in that form alone lead to the de facto standardisation of the Windows Media Player platform, which has beneficial effects on the market. Although, generally, standardisation may effectively present certain advantages, it cannot be allowed to be imposed unilaterally by an undertaking in a dominant position by means of tying.
The Court further notes that it cannot be ruled out that third parties will not want the de facto standardisation advocated by Microsoft but will prefer it if different platforms continue to compete, on the ground that that will stimulate innovation between the various platforms. (Microsoft Corp. v Commission, 2007)
Pointing to these conflicting effects of Microsoft’s bundling decision, without weighing either, is a weak basis to uphold the commission’s decision that consumer choice outweighs the benefits of standardization. Moreover, actions undertaken by other firms to enhance consumer choice at the expense of standardization are, on these terms, potentially just as problematic. The dividing line becomes solely which theory the commission prefers to pursue.
What such a practice does is vest the commission with immense discretionary power. Any given case sets up a “heads, I win; tails, you lose” situation in which defendants are easily outflanked by a commission that can change the rules of its analysis as it sees fit. Defendants can play only the cards that they are dealt. Accordingly, Microsoft could not successfully challenge a conclusion that its behavior harmed consumers’ choice by arguing that it improved consumer welfare, on net.
By selecting, in this instance, “consumer choice” as the standard to be judged, the commission was able to evade the constraints that might have been imposed by a more robust welfare standard. Thus, the commission can essentially pick and choose the objectives that best serve its interests in each case. This vastly enlarges the scope of potential antitrust liability, while also substantially decreasing the ability of firms to predict when their behavior may be viewed as problematic. It leads to what, in U.S. courts, would be regarded as an untenable risk of false positives that chill innovative behavior and create nearly unwinnable battles for targeted firms.