The Opening of the Door: is Excessive Pricing Control under Article

102 TFEU coming back into vogue

Commentary on Commissioner Vestagers speech
Trevor Soames
Commissioner Vestagers speech delivered at Chillin Competition on 21
November 20161 entitled Protecting consumers from exploitation
spent much time discussing the application of Article 102 TFEU to
excessive pricing. A video of the speech is available on the Chillin
Competition website, together with the Q&A in which the Commissioner
said that she is taking a door which was almost closed and opening it a
little.2
This short note provides a brief commentary on the subject of excessive
pricing, European Commission enforcement policy, the examples cited
by the Commissioner and what all this may mean for the application of
Article 102 TFEU.
Excessive pricing control under Article 102 TFEU has been a fraught
subject ever since the United Brands judgment of the CJEU.3 For our US
cousins, the very idea that antitrust law could apply to excessive pricing
must seem more than passing strange. The Supreme Court made its
views on the subject very clear in Justice Scalias opinion where he
argued 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.4

1
http://ec.europa.eu/commission/2014-2019/vestager/announcements/protectingconsumers-exploitation_en

2
https://chillingcompetition.com The sound recording of the Commissioners keynote
speech is acceptable, though it is all but impossible to hear the questions, including mine, as
there were no microphones. The Q&A is at 14.50, my comment and question at 16.30 and
the Commissioners response at 18.55.

3
http://curia.europa.eu/juris/showPdf.jsf?text=&docid=89300&pageIndex=0&doclang=EN&
mode=lst&dir=&occ=first&part=1&cid=610784

4
Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 US 398, 407
(2004), https://supreme.justia.com/cases/federal/us/540/02-682/

The European Commission, to its great credit, has exercised great

restraint in applying Article 102 TFEU in this area. A critical step in this
process of increasing self-restraint was the adoption of the two
Helsingborg complaint rejection decisions in 2014 which, unusually for
such decisions, made a finding not merely that there was no Community
interest in investigating the case further but rather, and more strongly,
that there was insufficient evidence to conclude that the prices
chargedare unfair/excessive and thus constitute an abuse within the
meaning of article 82 of the Treaty.5 The decision is worth (re-)reading.
Since that time there have been very few cases of excessive pricing at
EU level. Except for a handful of exceptional cases, those which have
been investigated as such have been terminated by the Commission
without findings of infringement.
The European Commission emphasised its cautious and restrained
approach to the application of Article 102 TFEU to alleged excessive
pricing in its written submission to the OECD of 7 October 2011.6 The
paper provides a useful summary of its enforcement policy, the rationale
behind its emphasis on exclusionary practices and the problems that
would be encountered in taking on excessive pricing cases. Given that
this subject has raised its head again, re-reading this carefully written
paper is well worthwhile. The position was well summarised at para.
42, as follows:
It seems that enforcement action against excessive prices has
only been considered as a last resort, in markets where high prices
and high profits do not have their usual signalling function to
attract entry and expansion because of very high and long lasting
barriers to entry and expansion. This recognises that even though
in many markets prices may be temporarily high, due to a
mismatch of demand and supply or the exercise of market power,
it is preferable to give market forces the time to play out and entry
and expansion to take place, thereby bringing prices back to more
normal levels. We have not seen enforcement activity in such


5
https://www.scribd.com/document/332146295/Helsingborg and
https://www.scribd.com/document/332146383/Helsingborg-II

6
http://ec.europa.eu/competition/international/multilateral/2011_oct_excessive_prices.pdf

markets, recognising that it would be unwise to run the risk of

taking a wrong decision and furthermore spend enforcement
resources on solving a problem that would solve itself over time
anyway. This is so even in markets characterised by sufficient
entry barriers where there can be dominant firms. Of course, it
may be that a dominant firm tries to prevent this process of entry
and expansion taking place by artificially raising entry barriers.
However, in such a situation it is more efficient for the
competition authority to tackle the raising of these entry barriers
directly since this will likely amount to an exclusionary abuse. If,
however, the market is characterized by such entry barriers that
it is unlikely that market forces over time will bring prices down,
enforcement actions aimed directly against excessive prices may
indeed be appropriate.
We have seen, however, a greater willingness by some member states
with less self-control than the Commission to develop cases in this area.
We have also seen other non-EU competition jurisdictions which look to
the EU for inspiration in the area of dominance control seeking to utilise
their domestic Article 102 equivalents to attack what they see as
excessive pricing or unfair terms. Some of these cases have been
notorious in terms of the intellectual contortions and use (sometimes
misuse) of EU case law relied on to reach their conclusions.
Although the Commissioner identified a few limits to the application of
excessive pricing control, she gave a clear message. Namely, that the
European Commission is open for business in this area in a manner not
seen for many years. In response to my question, she confirmed that a
door which had been almost closed has now been opened, at least to
some degree. She said ...were still bound to come across cases where
competition hasnt been enough to provide a real choice. Where
dominant businesses are exploiting their customers, by charging
excessive prices or imposing unfair terms. Rightly, she emphasised
caution saying that we have to be careful in the way we deal with those
situations. Because sometimes, a company is dominant simply because
its better than its competitors. And when thats the case, its only fair
that it should get the rewards of its efforts. But we also need to be
careful that we dont end up with competition authorities taking the
place of the market. The last thing we should be doing is to set ourselves
up as a regulator, deciding on the right price.
However, there can still be times when we need to intervene. In
closing the Commissioner said that we need to act carefully when we

deal with excessive prices. The best defence against exploitation

remains the ability to walk away. So, we can often protect consumers
just by stopping powerful companies from driving their rivals out of the
market. But we still have the option of acting directly against excessive
prices. Because we have a responsibility to the public. And we should
be willing to use every means we have to fulfil that responsibility.
For me, it is those last two sentences that gave some cause for concern
and indicated that the door was being opened, as was indeed confirmed.
Now, it is true, that the Commissioner stated that excessive pricing
control should only be used where there is no ability for the
customer/consumer to walk away. The product or service being
charged for does not need to be an essential facility in the manner
normally used, namely whether access to the deemed essential facility
is denied to a competitor, or is granted only on discriminatory terms,
but rather whether the customer/consumer has a choice (note that the
Commissioner didnt use the essential facility concept, the application
of which has been limited after Oscar Bronner7). Furthermore, the
Commissioner says that although there may be future cases where
alleged excessive pricing may be investigated and, indeed, decided
upon, the Commission would not be a price regulator and would not
decide on the right price. That is all very well and it sounds
comforting, but what it really means is that the Commission would
merely decide that the price charged was unlawful, explain the grounds
on which it so held and no doubt order that the price be adjusted so that
it was reasonable. Little guidance may be provided by the Commission
as to what it considers reasonable in the particular circumstances and if
the allegedly dominant company gets its pricing wrong, it will be fined
for having failed to comply with the Commissions order without being
able to seek clarity from a Court. So, although the Commission would
indeed not set the price, its actions would undoubtedly change the
pricing levels set and the impugned and allegedly company would need
to be cautious. De facto the Commission will therefore be a price
regulator, whatever it may claim.

7
http://curia.europa.eu/juris/document/document.jsf;jsessionid=9ea7d0f130d65c9bfad998
6449a49032c2cfa08d2c89.e34KaxiLc3eQc40LaxqMbN4Pah4Qe0?text=&docid=43749&pageI
ndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=610742

Let us turn (briefly) to the three examples of excessive pricing identified

by the Commissioner, Gazprom, pharmaceuticals and Standard Essential
Patents (SEPs):
Gazprom: this is not a pure excessive pricing case at all and seems
a strange example to choose. The Commissions allegations
revolve around a series of exclusionary behaviours, territorial
restrictions and market partitioning including export bans,
destination clauses and measures that prevent the cross-border
flow of gas, the combination of which has resulted in higher gas
prices and the segmentation of gas markets along national borders.

Pharmaceuticals: the Commissioner seemed to be focussed on a

number of examples of off-patent drugs having been subject to
significant price increases. A notorious example was the 5,000%
price increase implemented by Turing Pharmaceuticals and its CEO
Martin Shkreli for Daraprim, a 62 year old medication.8 In addition
there have been a number of NCA investigations as referred to by
the Commissioner, including the likely imminent Article 102 TFEU
decision of the UK CMA regarding alleged excessive pricing for
phenytoin sodium capsules.9 These cases warrant a lengthier
discussion than is possible in this note, but there are special
circumstances at play in the pharmaceutical sector due to
Government imposed price regulation that create a somewhat
unique environment within which competition law operates. One
might have thought, along the lines of Justice Scalias reasoning in
Trinko, that an off patent drug which is subject to a substantial
price increase would incentivise new entrants to generate
competitive alternatives. This would be consistent with para. 61
of the European Commissions 2011 OECD paper where it stated
that enforcement against excessive prices is generally only
contemplated in markets with an entrenched dominant position
where entry and expansion of competitors cannot be expected to
ensure effective competition in the foreseeable future, that is
markets where high prices and high profits do not have their usual
signalling function to attract entry and expansion.

8
http://www.bbc.com/news/world-us-canada-34320413

9
https://www.gov.uk/cma-cases/investigation-into-the-supply-of-pharmaceutical-products
The CMA website states that the decision is estimated to be issued in November 2016.

 SEPs: this is yet another strange example to have been included in

the Commissioners list as it relates to an alleged phenomenon

(royalty stacking and hold-up) for which there is no evidence at
all. Unlike the Gazprom and pharmaceutical examples cited by
the Commissioner, the claimed phenomenon is entirely
hypothetical and there is no empirical evidence that shows or
proves that it exists. The speech claims that a recent study shows
that 120 dollars of the cost of each smartphone comes from paying
royalties for the patents it contains. This is untrue. The study
cited by the Commissioner10 is based on a purely hypothetical
analysis as its authors themselves said when they caveated the
report by stating that we estimate potential patent royalties in
excess of $120 on a hypothetical $400 smartphone. Even Professor
Carl Shapiro, one of the leading proponents of the royalty stacking
and hold up theory was unable in his 2015 IEEE paper to provide
any such evidence.11 There are multiple recent studies on this
subject12 that elaborate on the utter and complete absence of any
empirical evidence and, indeed, in the case of one important
paper by Padilla and Llobet on The Inverse Cournot Effect in
Royalty Negotiations with Complementary Patents seeks to
explain, in a rigorous manner, why royalty stacking is not observed
in real, as opposed to hypothetical, life.13 I hope that readers dip
into the papers listed at fn 11 to 13, below. In other words, the
Commissioners SEP example of alleged excessive pricing is no
example at all.

10
https://www.wilmerhale.com/uploadedFiles/Shared_Content/Editorial/Publications/Docu
ments/The-Smartphone-Royalty-Stack-Armstrong-Mueller-Syrett.pdf

11
See the note I posted on this subject at https://www.linkedin.com/pulse/patent-hold-upfallacies-theory-trevor-soames?trk=hp-feed-article-title-publish

12
https://www.scribd.com/document/332754276/WiseHarbor-Mallinson-IBC-Stds-PatentsCompetition-Dec-2015-Amended, https://www.scribd.com/document/332754407/TheFallacies-of-Patent-Hold-Up-Theory,
https://www.scribd.com/document/332754530/Royalty-stacking-and-SEPs,


13
https://www.scribd.com/document/332754598/Inverse-Cournot-Effect-and-RoyaltyStacking

In conclusion, I cannot recall a Competition Commissioners speech on

excessive pricing in recent times. It was clearly delivered for a purpose
and as the Commissioner confirmed it would seem that a door which
was almost closed has now been opened a little. But what does that
mean? Some of the statements made, as well as examples used, give
cause for concern. We will have to wait and see how this policy initiative
develops, both at the Commission and at member state level. My sense
is that there is a greater potential for investigation and intervention in
this area than for many years and a political willingness to go into
territory only rarely entered into previously.
Trevor Soames
Solicitor-Advocate & Barrister
Barreau de Bruxelles E List
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