October 4, 2016
Mind the Gap: The role of public policy in EU competition cases and what it means for business
The European Commission’s landmark decision ordering Ireland to recover $14.5bn in unpaid taxes from Apple Inc. under EU state aid rules has put Europe’s competition watchdog in the global spotlight. From the scrutiny of mergers and acquisitions to distribution, pricing and other business practices, no policy area has such a direct and powerful business impact as the rules and decisions made by DG Competition. More than ever, public policy considerations are playing a key role in competition cases, requiring companies to take a much more strategic approach.
Competition policy is one of the few areas where the EU Commission has exclusive competence, and over the years it has continuously expanded its scope and reach in this respect.
While antitrust investigations still constitute the core of competition policy, it has also become the go-to tool to tackle (perceived) market failures, to break down barriers in the way of cross-border competition and to restrict member states’ abilities to grant subsidies or confer other competitive advantages on companies. Part of competition policy’s success is the near-universal acceptance of its underlying principles (i.e. consumer welfare) and a widespread belief in the objective, legal applicability of competition rules.
In reality, however, competition cases are often considerably less clear-cut and objectively assessable than they are perceived to be. Accurately evaluating the state of competition in a given sector, the dynamics at play, its hidden features, and even the definition of the boundaries of a market can be an extremely complex endeavour. While the traditional legalistic approach has already been replaced by a much more economics-based approach, competition analysis continues to be riddled with assumptions and variables, leaving considerable scope for interpretation. The resulting margin of discretion when taking a decision can be vast, and the result can vary significantly.
If this margin were just a question of interpreting the facts independently of broader objectives, this discretion would play out exclusively in the legal realm. However, competition policy is not an end in itself but is ultimately wielded as an instrument to serve broader public policy objectives – these include consumer welfare but also extend to ensuring the competitiveness of European companies, innovation, and social or ecological considerations. At times, these multiple objectives conflict with the traditional focus on allocative efficiency and price competition.
Three current trends are contributing to a greater role of the public policy dimension in competition cases:
1. Digitisation is pushing the frontier of competition analysis
Digitisation has developed into an unparalleled disruptive force, and is turning markets inside out across the economy. There are very few sectors that are not confronted with new competitors with disruptive business models, fundamentally challenging established industries and market dynamics. Consequently, established economic and legal principles of competition law are reaching their limits in the face of digital change, further widening the space for the Commission’s decisional discretion. For instance, are most-favoured-nation-clauses, which are frequently used by digital platforms, restricting competition or do they even represent the precondition for effective competition in the digital era? How should competition analysis assess non-monetary services that are based on the use of data? And, most difficult of all, should individual pricing concepts be welcomed, given their potential to make products available to wider groups of society, or prohibited given their clearly discriminatory nature?
These issues (of which there are many more) are complex from a legal, economic, and political point of view. Given that the outcome of these debates is pivotal for future markets and business models, companies have to actively engage and participate in this discourse to secure their position.
2. A more political approach by the Commission
The EU’s legitimacy crisis has become the biggest worry for European policy-makers, who are aware that the future of the European project is dependent on its ability to maintain popular support. Upon taking office, Commission President Jean-Claude Juncker emphasised that he would create a more politically motivated Commission, with job creation and growth as the core objectives of the Commission’s actions.
This approach naturally extends to competition policy, given its strong impact and high visibility. A politician by background, Competition Commissioner Margrethe Vestager firmly believes that her portfolio is related to wider political priorities and has to reflect citizens’ interests. Under Vestager’s reign, the Commission is using the tools of competition policy to further its strategic policy objectives: the state aid investigations into preferential tax agreements for companies from Fiat Finance to Starbucks to Apple are one example; its use of targeted sector inquiries to identify and tackle existing barriers in the digital market (broadcasting, e-commerce) is another. In addition, the Commission is seeking to broaden its powers to investigate mergers of fast-growing companies that do not reach the formal revenue thresholds but are clearly relevant for competition by suggesting to introduce additional criteria warranting investigation, such as market capitalization. Finally, major individual cases, ranging from the now three investigations into Google’s potential abuse of its dominant position, to high-profile merger cases such as in the Telco sector or the industrial GE/Alstom marriage, are also part of the Commission’s strategic enforcement agenda.
While Vestager is keen to protect her independence and emphasises that she will not allow individual cases to become politicised, she clearly acknowledges that competition policy is inherently political and needs to balance the sometimes conflicting objectives of consumer welfare, competitiveness, innovation, and social and ecological goals. Consequently, she is willing to engage with relevant stakeholders from the political sphere, as well as from industry and civil society, her stated position being: “I listen to everyone, of course, because antitrust enforcement does not happen in a vacuum.”
3. Increasing involvement of interested parties
Consequently, interested parties and stakeholders are increasingly engaging with competition cases: competitors, customers, NGOs, unions, national governments, regulators and national competition authorities, the European Parliament, and other EU Commissioners and DGs are all motivated by different concerns and seek to infuse their political priorities in the process (which has various formal and informal entry points) to influence how DG Comp uses its margin of discretion.
These three trends are mutually reinforcing, and together they change the way companies need to approach competition cases – be it their own, their competitors’, or a case or issue that might impact their sector.
While legal teams will continue to be at the core of the approach, companies are increasingly taking a broader approach by building project teams that include their Strategy, Investor Relations, Government & Regulatory Affairs, and Communications departments early on in the process. This is further enhanced by the growing pressure from shareholders and supervisory boards who expect management to anticipate and address potential regulatory risks.
To successfully defend their interests or lobby for profit in today’s competition cases, companies need to thoroughly assess their business impact, as well as the competitive and stakeholder landscape. This needs to be complemented by a coherent strategy, a proactive stakeholder outreach, smart timing, and messaging that takes into account the arguments of other stakeholders.