Category Archives: Non classé

Democratic Party “Better Deal” Antitrust Proposals Would be a “Worse Deal” for the American Economy and Consumers

Last week we shared with you news about the Democratic Party’s plan in the US to revamp antitrust law and include considerations other than consumer welfare in the analysis of cases (e.g. wage stagnation due to increased comcentration). This post by Alden Abbott says it’s all nonsense. On the other hand, this Vox article takes a more favorable view: https://www.vox.com/policy-and-politics/2017/7/31/16021844/antitrust-better-deal. The US debate will definitely have global repercussions and we’re sure there’s still more to be said. We will keep you updated.

Truth on the Market

On July 24, as part of their newly-announced “Better Deal” campaign, congressional Democrats released an antitrust proposal (“Better Deal Antitrust Proposal” or BDAP) entitled “Cracking Down on Corporate Monopolies and the Abuse of Economic and Political Power.”  Unfortunately, this antitrust tract is really an “Old Deal” screed that rehashes long-discredited ideas about “bigness is badness” and “corporate abuses,” untethered from serious economic analysis.  (In spirit it echoes the proposal for a renewed emphasis on “fairness” in antitrust made by then Acting Assistant Attorney General Renata Hesse in 2016 – a recommendation that ran counter to sound economics, as I explained in a September 2016 Truth on the Market commentary.)  Implementation of the BDAP’s recommendations would be a “worse deal” for American consumers and for American economic vitality and growth.

The BDAP’s Portrayal of the State of Antitrust Enforcement is Factually Inaccurate, and it Ignores the Real Problems of…

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Between an UBER Rock and an UBER NOT TOO Hard Place.

In this post from LaLibreCompetencia, Carlos Esguerra Cifuentes makes a compelling case on why Uber’s decision to not treat its drivers as employees does not make it vulnerable to price-fixing liability. We recommend this reading of an issue that is likely to appear in many jurisdictions in which the company operates.

Derecho y Política de Libre Competencia en América Latina

I was invited to write in this blog by Mr. Juan David Gutierrez, whom I would like to thank the opportunity and the space to express my ideas.

As a regular reader of Mr. Gutierrez blog, I came across with a very interesting post titled “Between an UBER Rock and an UBER Hard Place” written by Professor Julian Nowag. In said post, Professor Nowag argued that it could be of the best interest of Uber to be seen as the employer of the Uber drivers (the “Drivers”) in order to reduce the risk of being held responsible for price fixing in the market of taxi services.

The core of his argument is that the Uber’s price definition model could be challenged as a “hub and spoke” cartel that coordinates the prices that Drivers charge to consumers, as already happened in Canada. Therefore, Professor Nowag argues that “it…

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Shipping News – China Imposed a Fine on Seven Shipping Companies For Price Collusion

By Maria Koliasta*

China’s National Development and Reform Commission (NDRC) announced its decision on the 28th of December imposing a fine of 407 million yuan ($63 million) on seven shipping lines. The NDRC reached that conclusion after finding the aforementioned companies responsible for price fixing in the transportation of vehicles and heavy equipment. According to NDRC such a price collusion ‘had hurt the interests of China’s importers and exporters, and violated the country’s 2008 anti-monopoly law[1]’.

The companies accused of wrongdoing were Korea’s Eukor Car Carriers Inc., Japan’s Nippon Yusen KK, Kawasaki Kisen Kaisha and Eastern Car Liner Ltd., Mitsui OSK lines, Norway’s Wallenius Wilhelmsen Logistics AS, Chile’s Cia Sud Americana de Vapores SA and its shipping line[2]. The companies acknowledged their responsibility.

The NDRC noted that the eight shipping companies, previously mentioned, were involved in price fixing and sales planning, which involved an exchange of sensitive information. Frequent bilateral or multilateral communications on prices took place, in particular whether one of the companies had the intention of increasing its price and to what extent. In addition, investigators noticed that shippers improperly coordinated bids and routes to maintain prices high. In the light of the foregoing, the NDRC imposed a fine on seven companies. Japan’s Nippon Yusen cooperated with the investigators and was granted full immunity from fines.

In calculating the fine for each of the seven companies, the NDRC took into account the firm’s international shipping sales to and from China. The fine imposed corresponded to 4 – 9% of those sales. The highest fine of approximately $44 million was imposed on Eukor.

The breakdown of the fines imposed to each company for their participation in the cartel is as follows:

Company’s name Fine imposed (Chinese Yuan)
Japan’s Nippon Yusen KK 0 (benefited from immunity)
Mitsui OSK lines 38 million
Kawasaki Kisen Kaisha 23,98 million
Eastern Car Liner Ltd 11.27 million
Norway’s Wallenius Wilhelmsen Logistics AS 45 million
Chile’s Cia. Sud Americana de Vapores SA (CSAV) 3.07 million
CSAV’s roll-on, roll-off shipping unit 1.19 million
Korea’s Eukor Car Carriers Inc 284 million

According to the Bloomberg, Eukor will not dispute the NDRC decision and will pay the fine of 284 million yuan. The company has also carried out a comprehensive competition compliance program[3]. Eastern Car Liner ‘will execute what was directed immediately, said Yoshihisa Inmasu, the general manager of its general affairs department[4]. The firm will initiate more rigorous and detailed legal compliance measures. Kawasaki Kisen ‘is restructuring to carry out compliance, said spokesman Masaya Futakuchi[5].

Lastly, it must be borne in mind that the probe comes behind similar investigations initiated by the European Commission in 2013 and Japan’s Fair Trade Commission. In particular, the European Commission targeted shipping lines (AP Moeller-Maersk A/S, CMA CGM SA and MSC Mediterranean Shipping Co.) in a 2013 probe over hints that a disclosure of their general rate increases allowed companies to coordinate prices. Additionally, Japanese regulators conducted dawn-raids in the offices of five shipping lines in 2013 over suspicions that they discussed increasing the rates together for transporting cars, and fined Nippon Yusen and Kawasaki Kisen in January 2014.

*Stagiare Attorney at WilmerHale (Brussels)
LLM, University of California, Berkeley, School of Law

Disclaimer: the post reflects the author’s own views and by no means those of Wilmer Cutler Pickering Hale and Dorr LLP.

[1] http://www.ibtimes.com/china-fines-7-foreign-shipping-companies-63m-price-fixing-2240695.

[2] NDRC Statement of the 28th of December 2015.

[3] https://gcaptain.com/china-fines-shipping-firms-63-million-for-price-fixing-scheme/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Gcaptain+%28gCaptain.com%29#.VoJ-wvkwjIU

[4] Ibid.

[5] Ibid

What you need to know about the recent air cargo cartel case in India

By Maria Koliasta*

India’s antitrust regulator imposed a fine on Jet Airways (India) Ltd, SpiceJet and IndiGo for fixing fuel surcharges on air cargo.

Jet Airways was fined Rs. 151.69 crores ($22.9m) and IndiGo and SpiceJet were fined Rs. 63.74 crores ($9.6m) and Rs. 42.48 crores ($6.4m ), respectively.

The imposed fines corresponded to 1% of the companies’ average turnover of the last three financial years.

The complaint was raised against Jet Airways, IndiGo, SpiceJet, Air India and GoAir by the Express Industry Council of India, representing 29 parcel transport firms (i.e Blue Dart, FedEx, DHL, First Flight, UPS etc). Nevertheless, no fine was imposed on GoAir and Air India.

According to the Express Industry Council of India, the aforementioned airlines conspired to introduce a fuel surcharge on air cargo. This fuel surcharge was fixed at a uniform rate of Rs.5/ Kg and became effective on May 15, 2008. Essentially, the act of cartelization is reflected in the uniform increase of the FSC rate on the very same date. Vijay Kumar, Chief Operating Officer of the Express Industry Council of India, said ‘What is surprising is that all airlines have chosen to increase the FSC by the same amount more or less at the same time. This has led us to believe that this action has been taken in concert[1]. This uniform increase is harmful not only to the interests of freight companies but also it detrimentally affects consumers since higher costs are constantly passed on to the ultimate consumers. Vijay Kumar also mentioned that ‘Though designed to mitigate the fuel price volatility, FSC has been used as a pricing tool to harm the interests of express companies, freight forwarders and ultimately the end-user[2].

The Indian Competition Commission (ICC) concluded that the three aforementioned airlines operated in collusion in fixing the FSC and, thus, violated the provisions of section 3(1) and section 3(3) of the Competition Act. It, essentially, found that the three airlines had fixed a fuel surcharge at a uniform rate on the very same date and they all increased the surcharge at the same time without any analogous rise in fuel prices. The ICC rejected the airlines’ argument that the fuel surcharge was applied to address the high volatility in aviation turbine fuel (ATF). It noted that the arguments presented by the airlines regarding the changes in FSC rates due to the changes in ATF prices were not sufficient. The three airlines claimed that apart from USD rates and ATF prices there were other factors that are usually considered when FSC is calculated, they failed, however, to provide any cost data to strengthen their arguments.

Then, the ICC examined whether the three airlines acted in a concerted manner while fixing the FSC. Section 2(b) of the Act defines agreement as, ‘any arrangement or understanding or action in concert whether or not formal or in writing or intended to be enforceable by legal proceedings’. The ICC was based on the following data[3]:

Untitled

The table above illustrates that whenever the FSC of one airline was increased it was concurrently followed by the other airlines. Hence, it is evident that the airlines exhibited parallel behaviour. Nevertheless, the ICC noted parallel behaviour of competitors can also be the outcome of intelligent market adaptation in an oligopolistic market. The ICC, thus, examined whether airlines’ conduct could be considered as a market adaptation in an oligopolistic market or if collusion was the only rational interpretation of the airlines’ conduct. Shri K. Rammohan, Senior General Manager of Jet Airways stated ‘that the information on revision of FSC though communicated between their own staff, there’s likelihood of transmission of such information to other competitors by agents though it is understood and implied that confidentiality should be maintained. It was also stated that information on competitor’s price revision on FSC is received through multiple sources and through common agents[4]. Likewise, Mr Raghuraman Venkatraman, Vice President (Cargo) of Spice Jet and Shri Mahesh Kumar Malik, Vice President (Cargo Sales & Services) of Indigo stated ‘that the information on pricing by other airlines including FSC rates are provided by common agents too[5]. Having considered the above, the ICC noted that such a behaviour significantly diminished any doubt since the concerned company could take into consideration such information before shaping its own behavior. The ICC claimed that the airlines were well informed of the changes in FSC rates.

In view of the foregoing, the ICC concluded that the airlines operated in parallel and in collusion in fixing fuel surcharge rates violating section 3 (3)(a) of the Competition Act.

*Stagiare Attorney at WilmerHale (Brussels)
LLM, University of California, Berkeley, School of Law

Disclaimer: the post reflects the author’s own views and by no means those of Wilmer Cutler Pickering Hale and Dorr LLP.

[1] http://www.thehindubusinessline.com/economy/logistics/domestic-airlines-levying-irrational-fuel-surcharge-on-cargo/article4209642.ece

[2] Ibid.

[3] Competition Commission of India, Case No. 30 of 2013, p.40

[4] Competition Commission of India, Case No. 30 of 2013, p.45

[5] Ibid.

The close relationship between the sugar industry and antitrust in Latin America – The Colombian Cartel

In light of the recent decision in Colombia regarding an agreement to block imports of sugar from other Latin American countries, we will present to you our first impressions. This post offers our comments on what we consider to be the issues that make the study of this decision so peculiar.

Amine’s comments:

The sugar industry and antitrust cultivate a very close relationship in Central and South America. One of our previous post analyzes the approach of El Salvador’s competition authority in dealing with this market.

Nowadays, the sugar industry is widely talked about in Colombia. The market is very peculiar since, at the center of the sector, there is a mechanism called FEPA. The main goal of the mechanism is to stabilize the prices of sugar, ensure a fair remuneration to producers, regulate the production and stimulate exports. To achieve those goals, FEPA’s committee enjoys some very interventionist powers that have led to the fixing of prices for sugar.

As you can imagine, much of the problems arising in the present case relates to the role of FEPA and to what the entity can or cannot do in the context of that framework.

This actually appears mainly with regards to the question of the information being exchanged between different undertakings. It is true that Superintendencia de Industria y Comercio (hereinafter SIC) was facing a cartel in the very traditional sense of the word as the involved companies exchanged information directly paying very little attention to the consequences of their acts. However, information was also exchanged indirectly through the FEPA mechanism. In fact, the SIC points out that the information exchanged in the context of the FEPA framework was so detailed and in no way relevant or necessary to concretize its goals.

From this, it appears clearly that SIC embarks in a proportionality test over the content of the information exchanged (necessity / suitability). By doing so, it seems to differentiate between the nature of information exchanged and the FEPA being used as a vehicle for that end. Of course, harm to competition stems from the exchange of information. However, the SIC seems to tackle the problem more radically. It ordered FEPA’s steering committee to amend the instrument. The SIC order goes in the direction of ensuring that the price-stabilization mechanism does not deform again in a platform for exchange of sensible information and the agreement of production quotas. The SIC does not advocate for the abolition of the system even though it points out to its weaknesses.

However, addressing the two problems described in the above paragraph is fundamental. It triggers a crucial question relating to the role and powers of competition authorities in the presence of frameworks such as the one at the heart of the present case. In fact, should competition law in developing countries have two essential dimensions? One that focuses on the protection and the preservation of existing competition and another one that relates to the creation and the construction of markets and competition. SIC’s decision exposes greatly this dual dimension through the FEPA framework.

FEPA, according to the SIC, was the platform that induced associations to share strategic information and then adopt an anticompetitive behavior. At the same time, FEPA, as a tool of state intervention, mainly through the fixing of prices, acts as a barrier to competition. In this case, any intervention has nothing to do with the classical procedure that deals with anticompetitive behavior. Some countries such as Mexico have already considered introducing the concept of “lack of effective competition” that we have discussed in the blog to address such situations where, even if there is no liability for abuse of dominance or a cartel, the authority can enjoin companies from certain behavior or order divestitures. Without discussing the merits of such an approach, we can say that the present case shows that fighting against legal barriers, at east trough advocacy, deserves a central position in Latin America’s agenda.

Francisco’s comments:

The decision will definitely have a long-lasting impact on antitrust in Colombia and the rest of the region. Not only because of the magnitude of the fines (a total of 112 million USD) but also because of how it addresses all of the issues that arose in the case. The decision deals with a wide array of problems that range from the harms of the information exchange, legal immunity from antitrust laws, regional non-competition agreements, to the liability of individual executives. I will only comment briefly on the regional aspect of the agreement and the liability of executives.

As Amine said, the sugar industry and antitrust have a close relationship in most Latin American countries. In the case at hand, it is interesting to see that in the record there was evidence that pointed to an international coordination effort to avoid competition from imported product. Some of the emails show that Salvadoran and Costa Rican producers would notify Colombian sugar manufacturers when they received a request from potential Colombian importers. Other communications show a hardball negotiation with Bolivian producers to deter them from sending their product to Colombian territory.

It is important to take this into consideration because, in other countries such as El Salvador, the antitrust authorities advocate for openness of trade to tackle anticompetitive problems in the sugar industry. The abolition of trade barriers will accomplish little if it is not accompanied by a close watch on a likely collusion at the international level.

Regarding the second point, liability of individuals is an issue that deserves more debate when designing a law enforcement policy. The deterrent effect of antitrust law can be different depending on how aligned are the interests of the management and the shareholders of a company.

Under certain conditions, exposure to fines of the firm alone could not act as a dissuasive factor for the executives and in the end the shareholders would end up with the burden of paying the penalties. Liability of individuals can be a form of aligning the interests of management and owners regarding the desirability of forming a cartel or unlawfully monopolizing a market. In the present case, the fines on individuals were between 17,000 and 380,000 USD, which can be regarded as considerable on average.

Some countries, such as Mexico, have the prospect of criminal liability, and others, such as Brazil, can impose both administrative and criminal penalties to individuals. Others, as El Salvador for example, do not have either a criminal or an administrative sanctions regime for firm executives involved in anticompetitive behavior. Even without taking into account enforcement practice, there is little convergence regarding liability systems in Latin America, which makes it an interesting area for future debate and reforms.

——–

Our comments are just a quick brush around only a part of the issues covered by the decision. Nonetheless, we hope they can be useful in providing more information on what is posed to be one of the highest-profile cases in Latin America this year.

Competition Law in the BRICS Countries and the automotive parts industry

By Amine Mansour*

In a paper published in 2013, M. Connor asks if the Auto Parts market is evolving into a supercartel.

Since then, the industry has witnessed several developments (at the global stage). The most important ones occurred in the BRICS. In this regard, the South African Competition Commission has launched investigations in the automotive industry. The investigations are based on the suspicion that automotive component manufactures colluded when bidding for tenders to supply components to original equipments manufacturers (OEMs). Similar investigations are carried out by the Brazilian CADE since last February. These add to a larger group of investigations conducted by the CADE in the automotive component sector (See here and here ). In China, the NDRC already imposed a $200 million combined fine on 10 Japanese auto-part makers for manipulating prices of spare parts. In August 2014, the Indian Competition Commission imposed €350 million on 14 car companies. However the decision seems to sanction car companies’ abusive conduct that forecloses the after-market for supply of spare parts, not collusive behavior of OEMs. Several other antitrust authorities, mainly the Mexican and the South Korean ones, opened investigations targeting the auto parts industry.

Given all these developments, the question raised by M. Connor becomes, two years later, more and more relevant. The auto parts cartel is undoubtedly going to be remembered as one of the largest international cartels. M. Connor reports that the Auto-part cartel “has already surpassed the former champion, Air Cargo, in terms of number of companies accused and convicted”. However, unlike past cases, the BRICS find themselves not only in the heart of international investigations but also have taken the lead of this process.

In fact, the rapid spread of investigations to BRICS countries is more than a sort of a country to country effect. It is true that the South African Competition Commissioner, Tembinkosi Bonakele, states that “The Commission’s investigation into this pervasive collusive conduct joins similar investigations launched in other jurisdictions internationally”.

However, what is being met here underlines that almost every international antitrust case has an impact on the BRICS, either directly or indirectly. This translates into companies’ actions as they enter into a race in order to take advantage of the whistle blower and leniency programs established in these new/major jurisdictions. Given what is at stake, companies’ actions go beyond simple cooperation to incorporate self reporting of practices detected in adjacent markets. At least, this is what reveals the rapid expansion of investigations, which began in Europe, from one component, wire harness, (EU Commission) to over 121 automotive components in the South African case. A large part of cases were not opened as a consequence of the dissemination, through international cooperation, of information needed to open investigations but more as incentives grow to voluntary self disclosure of collusive conducts with the involvement of economically important markets. As competition agencies in these major markets become more and more proficient, there is a strong possibility that they will play a significant role in detection of international cartels mainly through the incentivizing effect of leniency programs.

Such a self-reporting and self-investigation dynamics are probably what explain the non-coordinated interventions of competition authorities in the BRICS. In South Africa, the case seems to me as a transversal case that affects the whole sector (82 automotive component manufacturers have colluded in respect of 121 automotive components) while in Brazil, CADE’s intervention is rather a disparate one (At least 4 different formal investigations). In the latter case, it appears that the CADE received different information at different intervals of time which translates again to this self investigation and self reporting trend by the involved companies.

The case is not only important in showing the growing importance of BRICS’ competition regimes and subsequently the parallel evolution of antitrust-risk management by companies operating in those markets.

It will also reveal how BRICS’ competition authorities are going to deal and prioritize investigations in markets of primary importance. In this case, the importance of that market results mainly from the growing urbanization and the increased need of mobility in emerging countries which most likely makes telecommunication and transport as expenditure items that experience the biggest growth in households’ portfolios. In this regard, it is legitimate to ask whether this may drive BRICS’ competition authorities to adopt a particular strategy in order to reassure consumers that they focus on markets where they direct or wish to direct their spending.

The South African Competition commission has it own answer. According to Tembinkosi Bonakele, the Competition Commissioner, the Commission “will prioritise the investigation of cases that involve automotive components that are in vehicles assembled in and supplied to the South African market”. Besides focusing mainly on the domestic impact of the considered practices or even adopting a tough line, another option in this case would be to open parallel investigations shedding some light on the secondary market (After-sale Market) or at least explain to the wider public that concerns are unjustified. From the perspective of consumers, these concerns are more than legitimate. It is easy to think that nothing prevents component manufacturers from supplying the same part to the same OEM for the sale on the after-market for a price that is no less than the one charged when colluding for tenders.

Waiting for further developments in these cases, one thing is clear: the BRICS countries have become main players in shaping global markets through their competition policies.

*Co-editor, Developing World Antitrust

The Net Neutrality Debate: Which Path Will the Rest of the World Follow?

By Francisco Beneke*

Regulations that ban paid prioritization have been discussed in different countries around the world. Prioritizing Internet content is either allowing certain data to travel faster, to not count it towards an end user’s maximum consumption cap, or any other form of preference that an Internet Service Provider (ISP) can contract with a content provider. The first country that adopted a ban on paid prioritization was Chile in 2010. Regulation of this type was also adopted in Mexico as part of a reform package in 2012 in the telecommunications sector, which included constitutional reforms that make access to the Internet a constitutional right. Other countries that prohibit prioritization include the Netherlands and Ecuador. The last country to issue such a prohibition has been the United States amidst a heated debate. The nascent trend of regulation and the adoption of such a rule by influential countries in their regions and worldwide can be a catalyst for many other countries to discuss and eventually adopt similar regulations. Therefore, it is important to sketch and analyze the main arguments that surround the debate.

In the US, the Open Internet rules adopted by the Federal Communications Commission (FCC) ban paid prioritization by means of classifying broadband Internet suppliers as common carriers under Title II of the Communications Act. The reclassification means that the services provided as a common carrier are excluded from Federal Trade Commission (FTC) jurisdiction. This is a particularity specific to the United States legal system and, therefore, it is not something that must necessarily be an issue in other countries. Having clarified this, we can move on to the substantive arguments of the debate.

Before the FCC adopted on a divided vote (3-2) the Open Internet rules, a group of scholars wrote a letter to the FTC Commissioners requesting them to advocate against the rules. They argued that the ban on paid prioritization amounts to a per se prohibition and that there is not sufficient evidence that supports the main justifications for instituting such a broad-sweeping rule: the high likelihood of significant harm and the low likelihood of both overlooking possible pro-competitive justifications and deterring pro-competitive behavior.

Another group of scholars reacted to the aforementioned letter and wrote to the Commissioners supporting the ban. On their part, they argued that there is enough evidence on the net benefits to competition that a bright-line prohibition on paid prioritization can have. They point to the fact that the United States Court of Appeals for the D.C. Circuit found the FCC’s position as reasonable and grounded in substantial evidence in Verizon v. Federal Communications Commission, 740 F.3d 623 (D.C. Cir. 2014). In that occasion, the court stroke down the FCC’s ban but on the ground that it had relied on an inadequate statutory basis. The classification of broadband services under Title II solves that problem.

The opponents of the Open Internet rules favor a rule-of-reason kind of approach to paid prioritization. They point to an FTC report in 2007, which states that the broadband industry is a dynamic one and that it is moving towards more competition. The report also points out that it is not clear if ISPs have a clear incentive to discriminate against data from non-affiliated content providers. Furthermore, even if such discrimination takes place, the FTC argues that it is not possible to know a priori if the net effect on consumer welfare will be negative. For the academics that oppose the regulations, price discrimination will lower the costs of content providers that do not need to use a fast lane (such as email services) and only firms that rely on greater speeds need to bear a higher price (e.g. Skype).

Supporters of the regulations, on the other hand, believe that the price discrimination schemes will take an anticompetitive turn because of the gatekeeper position of ISPs.

The argument behind the claim that the effects of paid prioritization need not be anticompetitive relies on competition between ISPs as a force that will discipline the market. There are at least two reasons why on this instance the trust in market forces can be misplaced. One of them has to do with information asymmetries. The bargaining power of the ISP can be higher compared to the content provider even if it does not have a dominant market share. The ISP can bargain hard by lowering the download speeds from, for example, Netflix without fearing that its customers are going to divert to other ISPs. The reason is that it will be hard for end users to distinguish who is to blame for the lower quality of the service and, therefore, they will have a weaker incentive to switch to other ISPs. The second point has to do with switching costs. Even if one assumes that customers have perfect information, it is still costly to switch from one ISP to another because of contract commitments and brand loyalty, among other factors. This is why the supporters of the ban talk about a terminating monopoly or gatekeeping position from the part of ISPs.

In addition, the supporters of the ban argue that a rule-of-reason approach cannot be relied on because, at least in the US, the hurdle to prove exclusionary conduct is high, which will discourage many administrative and judicial complaints. Such an approach would also mean higher administrative costs in adjudicating disputes, which would be avoided by a bright-line ban on paid prioritization.

Both sides of the debate are also divided on the effects that the regulations will have on innovation. For the supporters of the Open Internet rules, the ban will promote innovation from content providers. For the opponents, forbidding paid prioritization will chill innovation on the part of ISPs.

The innovation argument of the supporters’ side is built on the idea of a virtuous cycle that flows in the following direction: when new content or apps are developed by edge providers, more people use the internet, which in turn pushes ISPs to innovate and increase their broadband capacity. In the supporters’ letter to the FTC words: “if the next Facebook has to pay for an Internet fast lane, the next Mark Zuckerberg might go into investment banking instead of creating the next big new thing on the Internet”.

The opponents of the ban do not explain in detail why innovation would be hindered by the regulations but implicit in their stance is that the price discrimination mechanism and the increased profits it can bring might act as an incentive to develop faster broadband technology (an argument akin to what patent rights do to innovators).

The issue of the effects on innovation is complex and it is hard to make a good prediction on how the innovation in these markets really works. Regarding the virtuous cycle described by the supporters of the ban, the causality can feasibly run in a different way. It might be that investments in broadband capacity and innovations that increase traffic speeds incentivize innovation on the content providers’ side. This may be true at least for developers of apps and content who  rely ever increasingly on the speed of networks. On this respect, the course of the innovation cycle is ambiguous from a prospective point of view.

Regarding the opponents’ argument on innovation effects, extracting revenue from content providers as an incentive to improve the network will come as a trade-off with innovation from the content side. In other words, paid prioritization could, in theory, promote innovation from ISPs but at the cost of less innovation from edge providers. On this instance, this is an effect that one can predict with higher certainty because paid prioritization will decrease the appropriability of benefits on the side of developers of apps, web pages, and so on.

The argument of the opponents’ side also makes sense only if the content providers’ demand for higher speeds is more inelastic than the end consumers’ demand. That is, if for every dollar less charged to consumers the ISP can charge more than a dollar to edge providers. In this case, the price discrimination scheme will allow ISPs to increase both their revenues and their incentive to innovate. However, the lower elasticity from the side of content providers can be an argument against the desirability of the trade-off between innovation from ISPs and edge providers from a dynamic perspective.

One reason to think that ISPs face a less elastic demand on the content providers side is because of the terminating monopoly that was explained above. Whereas a certain market share would not grant an ISP market power in the end user market, it could do so in the market for paid prioritization. The reason is that if an ISP is of a certain size, the content provider cannot reasonably succeed if it cannot have access to the network’s users, which in turn weakens its bargaining position against the ISP. Therefore, it is not necessary that the latter enjoy what is conventionally believed to be a dominant market share in order to extract supra-competitive rents from edge providers.

One issue that will not be analyzed in depth in this post is the discussion around the narrowness of antitrust law’s objectives and their inadequacy to protect what is at stake in net neutrality. In this respect, the position of dissenters of the ban has been misunderstood. They do not advocate for antitrust laws to solve the issue from a consumer welfare point of view, but rather for an antitrust law-like approach. They propose a rule-of-reason framework in which all relevant policy objectives must be weighed. Therefore, the criticism that consumer welfare is too narrow to justify the benefits and harms of paid prioritization is not applicable.

Finally, another point of dissention is the freedom of ISPs to manage the traffic on their network. Paying for transiting in a high-speed lane can be viewed as a way of increasing efficiency in the market. Why? Because every content provider that develops an attractive app imposes an externality on previous firms by congesting the highway. Therefore, it would only be fair if a new content provider internalizes part of the cost it causes. Nevertheless, the argument has a weak point. Even without being able to charge content providers for a toll, the ISP can still manage traffic on its network in an efficient way without the incentives of charging monopoly fees to edge providers.

To conclude, although both sides have valid arguments, a rule-of-reason approach to solve the problem causes more costs than benefits. The reliance on a case-by-case ex post solution to the problem can be misplaced because it does not account for the difficulty of developing a system that adequately deters harmful conduct. An ex post law enforcement approach would make more sense if there is reason to believe that the market will generally perform well, which is the argument the opponents of the ban make. However, for the reasons stated above, there is stronger evidence that supports the theory of a terminating monopoly held by ISPs. One can also look into other platform markets where there appeared to be competition but in the end the platforms did enjoy market power against one side of the platforms. Specifically, I am referring to the credit card payment market. Visa and MasterCard where successfully prosecuted for anticompetitive conduct against merchants that accept credit cards, followed by another ruling against American Express on similar grounds. The resemblance of the arguments in the credit card cases and on the debate around the Open Internet rules is hard to miss, and the former sets an example that tilts the balance in favor of banning paid prioritization.

*Co-editor, Developing World Antitrust

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Government-mandated sharing of trade secrets: anticompetitive interference

This post from AfricanAntitrust.com analyses a case that highlights the need for advocacy programs that educate public officials. In this particular instance, the S.A. Minister of Small Business requested companies to engage in conduct that violates the country’s competition law. Although the purpose of this request is to promote other public policy goals, it leaves both the South African Competition Commission (SACC) and the multinational companies in an awkward situation. How should the SACC act in the event of a government-lead antitrust violation? The post, that we highly recommend, provides arguments to find an answer to this question.

African Antitrust & Competition Law

south_africa

Ms. Zulu proposes foreign competitors share trade secrets with SA counterparts

Perhaps it is time for increased advocacy initiatives within the South African government, or at a minimum a basic educational program in competition law for all its sitting ministers.
In what can only be described as startling (and likely positively anticompetitive), Lindiwe Zulu, the S.A. Minister of Small Business, has demanded foreign business owners to reveal their trade secrets to their smaller rivals.
The South African Competition Commission, and perhaps one of the Minister’s own fellow Cabinet members, minister Ebrahim Patel, who is de facto in charge of the competition authorities, can see fit to remind Ms. Zulu that fundamental antitrust law principles (and in particular section 4 of the South African Competition Act), preclude firms in a horizontal relationship from sharing trade secrets that are competitively sensitive – i.e., precisely those types of information…

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Understanding competition law enforcement in China: NDRC v Qualcomm

By Amine Mansour*

China’s competition authorities have the reputation of being aggressive. Qualcomm’s case confirms such reputation. On 10 February 2015, China’s National Development and Reform Commission (NDRC) imposed a fine of 6.088 billion Yuan (975 million dollars) on Qualcomm calculated on the basis of 8% of the company’s 2013 sales in China. This adds to several royalty concessions offered by Qualcomm to local manufacturers. Notwithstanding the significance of the amount of the fine, the highest antimonopoly fine ever exacted in China, Qualcomm decided not to appeal the decision.

According to the NDRC, the company held a dominant position in the CDMA, WCDMA and LTE chipset markets. The official statement (here in Chinese) comes out with very succinct information and characterizes the abuse in extremely broad terms. Below you will find a brief presentation of the case followed by some comments.

The decision

First, the decision points out that Qualcomm was charging excessive royalty fees. In this respect, the company refused to provide its licensees with a list of its available patents from where they could choose and forced them to accept a package that includes out of date patents. Taking this into account, the NDRC held that the price charged was unreasonable. Second, the press statement highlights a tying mechanism in Qualcomm’s patent licensing activity. In particular, the NDRC points out the fact that Qualcomm tied, with no justification, licenses for wireless and non-wireless technology forcing Chinese customers to pay for unwanted licenses. Third, it is stated that Qualcomm abused its dominant position by adding unreasonable conditions on the sale of baseband chips. As a result the NDRC states that “Qualcomm’s acts to eliminate or restrict market competition, hinder and inhibit technological innovation and development and harm the interests of consumers violating China’s anti-monopoly law”. To address those issues, Qualcomm offered a corrective measures package. This package consists of the following actions (details in the Qualcomm press release).

Patent and products covered by Qualcomm’s concessions. One has to bear in mind that what is affected in the present case is a small fraction of Qualcomm’s patented technology. In particular, the decision focuses on the pricing of Qualcomm’s patented technology adopted as a standard for 3G and 4G devices (phones, tablets, laptops…).

Concessions offered. Qualcomm will be offering a separate and less broad license that includes only its 3G and 4G essential Chinese patents. Other essential and non-essential patents will be offered through a separate license. In addition, Qualcomm commits itself to make a list of its patents available to licensees during the negotiation process. Additional concessions focused, first, on grating a fair compensation to Chinese licensees in case of a cross-license agreement and, second, on removing unreasonable terms from license agreements including restrictions on licensees’ ability to challenge terms of their agreements. Interestingly, patents covered by the new commitments will be offered at new terms. These new conditions induce a reduction of the royalty base from 100% of the selling price to 65%. The applied rate will be « 5% for 3G devices (including multimode 3G/4G devices) and 3.5% for 4G devices (including 3-mode LTE-TDD devices) that do not implement CDMA or WCDMA ». The above-mentioned terms apply only to products to be sold for use in China. This means that a licensee’s sales of devices used in the US, EU, Japan or other major market will not, in principle, be impacted by the new terms. Of course, no one doubts that they will be offered to both existing and new licensees that may elect or refuse to take them. However, in the industry, licensees may also act as a contract manufacturer or an original design manufacturer (ODM). It then becomes less clear whether the new terms extend, for instance, to products designed and manufactured for another company. The rectification plans leaves open several implementation issues some of which are discussed in the following comments.

Comments

The decision opens more questions than it solves. From both the NRDC and Qualcomm’s statements it is not clear whether the agreed upon figures constitute the exact new terms to be offered to all existing licensees or whether they constitute a simple starting point for negotiation (royalty cap). Both interpretations give the idea that the NRDC is engaging in a sort of price regulation of intellectual property assets as it condemns the high level of royalties as such. Recently, Qualcomm itself reported that it is being targeted by EU and US regulators, and has been involved in private litigation concerning his licensing practices of its standard-essential patents in the US. In my personal view, it seems unlikely that the FTC will adopt an approach similar to the one put forward by the NRDC.

Regarding the EU, it is not completely clear how things will evolve. The EU Commission was extremely careful when targeting excessive prices especially in the case of immaterial assets. In this respect, the Commission investigations in the Qualcomm case provide a concrete example on how difficult it is to demonstrate that royalties are excessive and thus exploitative within the meaning of Article 102TFEU. On the other hand, there are many similarities between the settlement Rambus negotiated in 2009 in a case also about SEP’s and the corrective measures in the present case, which is an indicator that the Commission favors terms close to the ones in the Qualcomm case in China.

However, there may be an argument that by lowering royalties to be collected for devices sold for use in China, Qualcomm discriminates against branded devices to be exported to the EU and others countries and thus harming consumers in those parts of the world. The signal it may then send to the Commission is that it is charging excessive/unfair royalties for its essential European patents. This may prompt the Commission to intervene in order to bring royalties collected in the case of products sent to the European market to a level similar to the one applied for branded devices sold in China. Again, this seems very unlikely given that Qualcomm’s new terms in the Chinese case were extracted under the threat of a judicial proceeding.

In any case, price regulation (as done by the NRDC) differs from an eventual intervention from competition authorities in the EU or the US. This is to say that any move from the Commission or the FTC may not be as focused on the royalties amount in itself but rather on assessing whether the behavior of the dominant firm is designed as to limit existing or potential competition and as such to maintain the extraction of a supra competitive profits. However the only problem in this case is that there exists no competition and there will be no entry (unless the industry moves from the existing standards). Given the involvement of patents, excessive prices are not going to be challenged by competitors. This is what makes the issue of fairness and reasonableness a pressing one in the present case (the debate over the meaning of the terms “fair” and “reasonable” contained in the FRAND commitments is of critical importance here).

Should the Commission or the FTC intervene as “rate-setting” institutions and thus solve the issue relating to the meaning of the words “fair” and “reasonable”? The real answer should ensure that the likely impact on dynamic gains is fully taken into account. More clearly, profit is the main driver of R&D expenditures. However it appears that NRDC’s ruling added to the ex-ante uncertainty about profit with an ex-post cap. This effect can be better understood if we take the case of the industry’s eventual evolution toward the 5G technology. Firms will be less keen to invest in R&D for the 5G technology knowing that their returns are not only uncertain but will most likely be caped in one of the biggest markets in the world. In the name of fairness and reasonableness, price regulation of intellectual property assets can prove highly counterproductive having a detrimental impact on the evolution of technology.

Another striking aspect of the case is that Qualcomm’s licensing activity may be considered as abusive or not depending on the end user of the affected product. Devices sold for use in China will be subject to a specific regime in which royalties are still collected on the basis of the selling price but at a specific rate. In this way, the decision introduces what can be called the « Chinese consumption » criteria. Royalties applied for devices sold outside China are not considered as excessive (and so, not abusive) simply because they harm foreign consumers. Given that most of the devices are manufactured in China, the resulting mechanism has something that resembles to the idea of indifference toward an export cartel in that the involved practice affects mainly consumers outside the jurisdiction in which the conduct was initiated.

Vis-a-vis to Qualcomm’s licensees, the decision terms regarding royalties will most likely extend to other jurisdictions. It is hardly conceivable that Qualcomm will convince its licensees, at least the new ones, of any rate and base higher than what is adopted for devices sold for use in China. This domino effect is even more likely given that license agreements usually contain the « Most favored royalty rate provision » clause which means that the new terms need to be offered not only to licensees for sales of branded devices for use in China but also for the sales in other locations. In this respect, the NDRC’s decision may initiate a snowball effect that is hard to stop.

*Co-editor, Developing World Antitrust

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An analysis of one of El Salvador’s Landmark Merger Cases in Lalibrecompetencia

Editorial Team, DWA

To our Spanish speaking readers, we recommend a post published in Lalibrecompetencia (which you can find here) by Guillermo Castro. He writes about one of the most interesting aspects in the analysis of merger cases in oligopolistic markets: the identification of maverick firms. Guillermo analyses a sequence of two decisions of the Salvadoran antitrust authority in which the merger between two of the largest telecommunication companies in the country was blocked, in large part because the acquired company was deemed to be a disruptive agent in the market. In the first attempt to merge, the two companies were required to divest a significant portion of the resulting firm’s spectrum holdings (which they refused to do) and in the second decision the transaction was enjoined. It is hard to miss the parallel between the Salvadoran case and the failed AT&T – T-Mobile attempt to merge just a year before. Surely the US case had some influence in the Salvadoran authority’s decision. In both cases, the resulting firm was going to become the biggest player in the market and both involved the acquisition of a firm that was deemed to be the maverick. Without further introduction, we invite our Spanish speaking audience to read Guillermo’s post in Lalibrecompetencia.

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