Competition Economics Handbook 2019

European Union

Copenhagen Economics

For this year’s edition of the EU chapter, we follow up on some of the questions raised by Brussels lawyers in 2017. One year down the road, Brussels law firms are mostly occupied with the way economic analysis pushes the boundaries of competition law in areas such as merger assessments in research and development (R&D)-intensive sectors or competitive analysis in digital markets.

This chapter is based on conversations with leading representatives of a large number of Brussels-based law practices, in particular Arnold & Porter, Baker Botts, Cleary Gottlieb, Clifford Chance, CMS, DLA Piper, FLINN, Gide Loyrette Nouel, Gleiss Lutz, Grimaldi Studio Legale, Hogan Lovells, Jones Day, Latham & Watkins, Luther, Mannheimer Swartling, Redeker Sellner Dahs, Shearman & Sterling, Skadden, Slaughter and May, Van Bael & Bellis and White & Case. A discussion with representatives of the European Commission’s chief economist team also contributed to this chapter.

Executive summary

Our interviews revealed that the use of economics in competition cases is still expanding. For complex cases, lawyers tend to involve economists at an earlier stage. While the cooperation between lawyers and economists is improving, there is still room for more progress.

This is especially true for the interaction between lawyers and the European Commission.

Most of the lawyers that we interviewed advocate for the European Commission, and economists at large, to adopt a more measured approach to developing novel theories of harm. Lawyers remark that novel theories of harm tend to create more legal uncertainty. In that regard, lawyers question whether Commission cases are the most suitable forum for developing novel theories of harm. They also ask for the development of novel theories of harm to be balanced by the parallel development of theories on efficiencies.

We asked lawyers about EU-level developments on cartel investigations and follow-on damages. Most lawyers agreed that there are fewer cartel investigations at EU level today. While the number of national damage cases across the EU has noticeably increased, lawyers doubt that this is due to the EU Damages Directive.

Finally, we asked lawyers about their opinion on market definition as a formal step in competition assessments. Most lawyers agree that market definition is here to stay, but they also raise a number of methodology questions in relation to market definition that economists should tackle.

Towards improved relationships between lawyers and economists

The role of economics continues to expand

Consistent with last year’s findings, and somewhat unsurprisingly, the majority of law firms find that the use of economic analysis in competition policy is further expanding and will continue to do so in the future.

Economists’ involvement remains most significant in merger and abuse cases, and more modestly in state aid. Still, specialised state aid lawyers note that the use of economic analysis within state aid is still underdeveloped and has not yet reached its full potential. Interestingly, few law firms to date have a habit of using economic analysis in compliance work.

Across instruments, lawyers’ use of economists depends on the complexity of the case at hand. Most law firms indicate that they are proactive in involving economists early when a case, especially a merger case, shows a certain degree of complexity or requires data-intensive tasks. Some lawyers regularly use economists when brainstorming case strategy and theories of harm in the very initial stages of a case. Other lawyers mentioned that economists often directly contribute to their legal submission without submitting a separate economic expert report.

This demonstrates that economists can play an important and active role as part of a case team. In fact, when asked about their relationship with economists, many of this year’s participants remarked that the cooperation between economists and lawyers is steadily improving.

Several law firms noticed that the dialogue with economists is becoming easier as both sides have developed a common understanding of competition issues, have learned each other’s professions better and have come to speak a more similar language. This development might be a direct result of lawyers and economists educating each other, as part of case work, in trainings and courses.

However, there still is room for improvement. In line with last year’s findings, most law firms restated the need for economists to improve the quality of their communication. This is because the inability to convey the results and methods of complex economic analysis in a simple, clear and understandable manner can undermine the relevance and credibility of any economic analysis. Moreover, lawyers highlighted again that economists should refrain from over-­complicating their analysis when a simple and concrete story can be told.

The cooperation between lawyers and the Commission should improve

Efficient and effective interactions between lawyers and the Commission can speed up investigations and lead to better use of resources on both sides. Brussels law firms feel that there is still room for improvement in their communication with the Commission’s case teams. Drawing from their experience in interacting with national competition authorities and the Federal Trade Commission in the US, lawyers presented some practical suggestions on how to improve cooperation with the Commission.

First, lawyers hold that the Commission should apply a more flexible and informative approach when communicating with the parties to a case and the lawyers representing them. According to many lawyers, current communication with the Commission is characterised by more apparent distrust than their communication with national competition authorities. Some law firms stated that the less formalistic approach and open dialogues and exchange of views that they experience with national competition authorities could render cooperation with the Commission more efficient. For instance, lawyers noted that the identification of appropriate remedies in merger cases could benefit from a more direct and informal discussion between lawyers and the Commission. They hold that this could significantly speed up the process and lead to better outcomes for all parties involved.

Second, lawyers call for a clarification of the role of internal documents. Most of the interviewees lamented that the attention to internal documents in merger cases and abuses of dominance has been growing to the current level. Internal documents are very helpful to gain an overview of the case. However, this growth puts pressure on law firms as they are required to review a disproportionate amount of evidence, often within a short time period. In addition, they fear that not all the evidence is attributed the weight it deserves and that the Commission should apply a more balanced approach when scrutinising and assessing internal documents. This is especially relevant in a context where the assessment of a growing number of documents inevitably increases the chances of finding outlier evidence that seen in isolation could be considered proof of an infringement. On a positive note, however, lawyers also foresee that in the near future, the tools to analyse larger amounts of documents will considerably improve and increasingly rely on the use of algorithms. This may decrease the costs of reviewing internal documents and may allow lawyers to focus their attention on the core of their work. Overall, most lawyers agreed that a set of clear guidelines on the use of internal documents could reduce legal uncertainty for both companies and lawyers.

Third, some lawyers recommend to look to the US for inspiration for a less formalistic approach to competition assessments. Lawyers remarked on a substantial difference between the European Commission and the Federal Trade Commission approach: while the former has a rather formalistic approach, the latter appears to be more pragmatic and flexible. For instance, there is usually more room for pragmatic reasoning when defining relevant markets in the US towards the beginning of a case. Along the same lines, lawyers mentioned how US investigations are perceived to be less burdensome, as the focus is precisely on discussions around internal documents rather than on lengthy formal submissions, such as the Form CO (the official form for standard merger notifications). Some lawyers hold that a reduced length and level of detail of the Form CO and a shift towards the US system with less weight on formal submissions seems to be the best way forward, also in the EU.

Towards a more measured approach to novel theories of harm

Over the past few years, the Commission has pushed the evolution of theories of harm and economic thinking around competition issues in certain sectors, such as innovation intensive sectors. Moreover, the Commission has been faced with cases in new markets, such as platform markets and digital, data-driven markets more generally.

Novel theories of harm may increase legal uncertainty

Brussels lawyers agree that when markets evolve, the competitive assessment of markets must follow. According to the lawyers, economists must strike a careful balance between the risk of legal uncertainty and the need for theories of harm to reflect the competitive dynamics in (novel) markets. Two recent examples reflect the difficulty of striking such a balance: the novel theory of harm on innovation effects and the analysis of data-driven markets.

Lawyers find that the assessment of innovation effects has a natural role to play in merger cases, particularly in innovation-intensive sectors. However, many lawyers argue that the current tendency to assess parties’ incentives to innovate in the more distant future entails an immense level of legal (and economic) uncertainty. Consistent with last year’s findings, lawyers expressed that the Commission’s approach in assessing the competitive effects of early-stage innovation projects often does not recognise the level of uncertainty that affects these analyses.

Even though lawyers might blame economists for going too far in pushing economic thinking around theories of harm, they also recognise that new theories of harm need to evolve to reflect new realities. For instance, the development of a new theory might stem from factual evidence detected during the investigation as in the case of Dow/DuPont, where internal documents played a significant role in identifying the direction of the analysis. In such cases, where the analysis of internal documents suggests a new line of investigation, it might become necessary to adjust existing economic theories to allow for a proper assessment of the operation under scrutiny in line with market evidence.

Concerning data-driven markets, there seems to be room for more in-depth analyses. Even though the competitive assessment of digital markets has been widely discussed, nearly all law firms expressed that their work has not yet involved digital markets or, at least not in concrete cases. Nevertheless, lawyers expect that cases on digital markets will have a key role for them in the near future as digitalisation proceeds.

The increasing relevance of multi-sided digital platforms, big data and artificial intelligence require economists to reconsider how to assess these types of markets. For instance, one of the challenges posed by big data and zero-price goods (in monetary terms) relates to the assessment of substitutability: is data a homogenous or heterogeneous good? How do we assess whether two sets of data should be regarded as substitutes? Other open questions relate to whether and how access to big data confers a competitive advantage to a specific firm. In other words, is it access to data per se or the analytical tools developed to transform data into valuable and actionable knowledge that confer a competitive advantage to data driven companies? This series of unanswered questions clearly suggests that a deeper understanding of these innovative markets is necessary in order to tailor economic thinking to the realities in these fast-changing markets.

Economists need to balance harm and efficiencies

Many lawyers were critical of the lack of balance in the development of theories of harm and theories of efficiencies. In recent years, the Commission has pushed the boundaries of traditional theories of harm, including the assessment of competitive effects of innovation in the long-run, while some lawyers perceive that less effort is spent on the development of similar theories on efficiencies. In other words, the effects of a merger are being assessed against the companies’ potential for innovation in the relatively long term, while at the same time it is still complicated to base a defence strategy on the positive effects of efficiencies under Section VII of the Commission’s Guidelines on the assessment of horizontal mergers in the same time frame. There seems to be an agreement among the respondents that a more balanced approach would benefit competition and consumers by avoiding the likely effects of discouraging private investments in R&D.

Do we need more suitable fora to develop theories of harm?

Brussels lawyers did not question the need for developing a better understanding of competitive dynamics in dynamic markets where innovation or digitalisation play an important role. However, they believe that rethinking about the most relevant fora for these developments is necessary.

Lawyers noticed that the Commission has primarily developed new theories of harm during case investigations. According to the lawyers, this risks leading to heavy proceedings that are out of proportion to the relative significance of the case at hand. This, in turn, increases costs for the Commission and the involved parties, as well as exacerbating uncertainty. For instance, developing innovative tools or theories during case investigations goes hand in hand with long and burdensome requests for information. Moreover, designing novel and complex analyses without clear guidance from either case law or guidance papers creates uncertainty for the lawyer’s clients. Therefore, some law firms suggested that special market investigations, similar to those conducted by the UK’s Competition and Markets Authority, as well as expert dialogues, could serve as supplementary tool or even and alternative to case-based development of novel theories of harm.

Cartel investigations have slowed down, private enforcement is growing

Fewer cartel investigations

While there have been many high-profile mergers and abuse cases in Brussels, lawyers remark that the number of cartel investigations taken up by the Commission seems to have decreased. In contrast, national competition authorities have taken up more cartel cases. Some lawyers believe that leniency programmes could play a role in this trend: when fewer companies decide to apply for leniency, fewer cartels are investigated. Lawyers attribute the low level of attractiveness of leniency programmes primarily to the costs that it entails for companies in terms of exposure to follow-on damage claims as well as business-related costs. Another potential explanation for the limited number of European cartel cases could simply be that the Commission uncovered the more easily detectable EU-level cases.

More damage cases, not likely due to the Damage Directive

Lawyers also note that the number of follow-on damage claims continues to increase – an area where economists play a pivotal role. All law firms recognised that they always require economists’ input when dealing with damage claims. One law firm also mentioned that there appears to be a new trend in the choice of economists, in particular the role of more specialised economic consultancies appears to be growing.

Lawyers are skeptical of attributing the increase in damage cases to the EU Directive on Damage Claims. Nevertheless, the Directive will, in their opinion, be beneficial in harmonising the environment at the national level, even if this is probably a long-term effect.

In this context, some law firms mentioned that Brexit may lead to a shift in the choice of jurisdiction with part of the damage cases leaving the UK. Moreover, they note that Brexit could have procedural implications since the findings of the UK and EU competition authorities and courts could diverge from each other. In UK court proceedings, the Commission’s decisions might eventually become a mere piece of evidence. The Commission’s conclusions might even be considered with scepticism, if they result from an investigative process that is fundamentally different from the one in the UK.

Market definition is here to stay

The definition of the relevant market is a key initial step in the assessment of all competition issues. We discussed with law firms what, in their opinion, the role of market definition will be in the near future. The general conclusion is that market definition is not likely to become obsolete any time soon.

On the one hand, lawyers tend to agree that market definition is a somewhat formalistic step in many investigations and can often not be completely separated from the assessment of competitive constraints on the market. On the other hand, lawyers also consider that market definition sets the foundation for the subsequent analyses, as a formal definition of the relevant market allows the identification of competitors and sets the boundaries of the analysis of competitive effects. As such, market definition also provides legal support to the decision and clear guidance for the analysis.

However, this does not imply that market definition as a tool should stay unaltered. As new markets emerge and economic thinking evolves, there might be a need for economists and lawyers to rethink the approach to market definition. For instance, lawyers remark that the current approach relies too strongly on case precedent for market definition, which becomes less and less relevant as more cases in new markets emerge. For example, in highly differentiated markets or markets with zero-price goods, lawyers lack clear guidance and understanding of how relevant markets should be defined for competition cases. Lawyers shared the view that an evolution of the tool and clarifications on its use in new realities would be beneficial.