CFI on Rule of Reason and Counterfactual Analysis

The CFI recently delivered a very interesting judgment in the context of Article 81 EC. In 2002, O2 and T-Mobile, two mobile telephony operators entered into a network sharing agreement in Germany with a view to roll out third generation network. Recall that the costs of the UMTS spectrum licences had largely affected operators' investments capacities, and in turn, their ability to rapidly build physical networks.

This agreement was notified to the European Commission which, pursuant to the old 17/62 procedure (réserve d'autorisation), had the duty to assess its compatibility with Article 8 EC1.

In substance, the Commission adopted a decision where it:

• decided that the provisions of the agreement relating to site sharing, to the information exchange necessary to enable site sharing, and to the restriction on the resale of national roaming access rights to other licensed network operators were compatible with Article 81(1);
• decided that the provisions on national roaming (parrties use each other’s network to provide services to their own customers) were restrictive of competition pursuant to Article 81(1) but nonetheless decided to grant a provisionnal exemption, the duration of which varied in accordance with the locations concerned (rural areas, urban areas etc.).

O2 appealed the exemption side of the decision before the CFI. Of course, on face value, the decision was good news for the applicant as it granted an exemption. However, the decision also held national roaming to be restrictive of competition in the meaning of Article 81(1). This finding had the effect of limiting mobile operators' possibilities to conclude national roaming agreements. In addition, the exemption granted was only of a provisional nature.

O2 thus challenged the Commission's decision before the CFI on the basis that the agreements did not restrict competition. It argued that the Commission did not analyse the actual effects of the agreement on competition. The applicant pretended that the Commission failed to apply the proper counterfactual analysis  required in these kind of cases: The Commission did not examine what the conditions of competition would have been in the absence of the agreement.

This argument brings the CFI to give interesting guidance on the test applicable pursuant to Article 81(1). Of course, these guidelines are present in former Courts' cases. However, to my knowledge, the ruling contains (at §§66-71) the clearest case law statements in that respect (in bold, the most important parts):

"In order to assess whether an agreement is compatible with the common market in the light of the prohibition laid down in Article 81(1) EC, it is necessary to examine the economic and legal context in which the agreement was concluded (Case 22/71 Béguelin Import [1971] ECR 949, paragraph 13), its object, its effects, and whether it affects intra-Community trade taking into account in particular the economic context in which the undertakings operate, the products or services covered by the agreement, and the structure of the market concerned and the actual conditions in which it functions (Case C‑399/93 Oude Littikhuis and Others [1995] ECR I‑4515, paragraph 10).

That method of analysis is of general application and is not confined to a category of agreements (see, as regards different types of agreements, Case 56/65 Société minière et technique [1966] ECR 235, at 249-250; Case C‑250/92 DLG [1994] ECR I‑5641, paragraph 31; Case T‑35/92 John Deere v Commission [1994] ECR II‑957, paragraphs 51 and 52; and Joined Cases T‑374/94, T‑375/94, T‑384/94 and T‑388/94 European Night Services and Others v Commission [1998] ECR II‑3141, paragraphs 136 and 137).

Moreover, in a case such as this, where it is accepted that the agreement does not have as its object a restriction of competition, the effects of the agreement should be considered and for it to be caught by the prohibition it is necessary to find that those factors are present which show that competition has in fact been prevented or restricted or distorted to an appreciable extent. The competition in question must be understood within the actual context in which it would occur in the absence of the agreement in dispute; the interference with competition may in particular be doubted if the agreement seems really necessary for the penetration of a new area by an undertaking (Société minière et technique at 249-250).

Such a method of analysis, as regards in particular the taking into account of the competition situation that would exist in the absence of the agreement, does not amount to carrying out an assessment of the pro- and anti-competitive effects of the agreement and thus to applying a rule of reason, which the Community judicature has not deemed to have its place under Article 81(1) EC (Case C‑235/92 P Montecatini v Commission [1999] ECR I‑4539, paragraph 133; M6 and Others v Commission, paragraphs 72 to 77; and Case T‑65/98 Van den Bergh Foods v Commission [2002] ECR II‑4653, paragraphs 106 and 107).

In this respect, to submit, as the applicant does, that the Commission failed to carry out a full analysis by not examining what the competitive situation would have been in the absence of the agreement does not mean that an assessment of the positive and negative effects of the agreement from the point of view of competition must be carried out at the stage of Article 81(1) EC. Contrary to the defendant’s interpretation of the applicant’s arguments, the applicant relies only on the method of analysis required by settled case-law.

The examination required in the light of Article 81(1) EC consists essentially in taking account of the impact of the agreement on existing and potential competition (see, to that effect, Case C‑234/89 Delimitis [1991] ECR I‑935, paragraph 21) and the competition situation in the absence of the agreement (Société minière et technique at 249-250), those two factors being intrinsically linked".

The CFI then proceeds with examining whether the twofold counterfactual examination had been properly carried out: ( (i) future competition on the market with the agreement and (ii) future competition in the market absent the agreement. It comes to a harsh conclusion:

"[...] the Decision [...] suffers from insufficient analysis, first, in that it contains no objective discussion of what the competition situation would have been in the absence of the agreement, which distorts the assessment of the actual and potential effects of the agreement on competition and, second, in that it does not demonstrate, in concrete terms, in the context of the relevant emerging market, that the provisions of the agreement on roaming have restrictive effects on competition, but is confined, in this respect, to a petitio principii and to broad and general statements".

A few points worth underlining:

• First, the CFI clearly dismisses the existence of the rule of reason doctrine under EC competition law. It already did in past cases, but the language used in the present case is extremely straightforward. This is worth mentioning, as many textbooks and articles on EC competition law continue to refer to the rule of reason analysis.
• Second, the CFI clearly sets out the economic test for the appraisal of the anticompetitive effects of agreements. The counterfactual methodology is the one to apply. It consists in comparing the degree of market competition in the future with and absent the agreement. This methodology is also applied in the field of horizontal mergers (see EC guidelines on horizontal mergers, at §9). However, the heavy evidentiary burden it places on the Commission explains why the latter is still reluctant to carry out, in casu, such an assessment.
• Finally, the decision being in part struck down by the CFI, the Commission will have to adopt a new decision. The Commission had expressed doubts on its ability to adopt a new decision on the ground that the Decision, which granted O2 an exemption, provided O2 with legal certainty which would be lost in case of an annulment. Indeed, the Commission would not be able to issue a new decision, since Council Regulation 1/2003 brought to an end the system of prior notification of agreements for the purpose of exemption. The CFI answered in the negative, recalling that the annulment judgment had a retroactive effect. Therefore, it had the effect of placing the parties back in the past, on the day when the notification was lodged. Thus, the Commission can issue a new decision on the basis of Regulation 17/62.

A few years ago, I published a  paper in the ECLR where I discussed the Commission's decisions on network infrastructure sharing. See here for the working paper version.

Comments

[José A. Pacheco]

But in the end, not applying the rule of reason and carrying out those analysis about the anti competitive effects is a contradiction. If you strike down the rule of reason, all you have left is a criminal tipicity, such as per sé rule where once the illicit practice is verified, you have an infraction. So, it seems the rule of reason is been struck down formally, but in practice it remains a powerful tool for dealing with antitrust. One must remember that in essence any contract restrains the parts, because it binds, so it should always be analised the properness and legality of such restrains.