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Book review: David Lewis, ed., Building New Competition Law Regimes: Selected Essays, Edward Elgar, 2013 (ISBN: 978-1-78195-372-3)

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Book review: David Lewis, ed., Building New Competition Law Regimes: Selected Essays, Edward Elgar, 2013 (ISBN: 978-1-78195-372-3)

Review by Mel Marquis, European University Institute, Florence

 

Mexico, Hungary, South Africa, Thailand and Zambia are featured in this collection. Each country has a story to tell that is partly unique but also partly similar to those of other countries that have undergone the difficult task of introducing a competition law ethos and competition law institutions where there were essentially none before. I can start with a small criticism, which is that a horizontal chapter of lessons, for both new and old jurisdictions, might have served to unify the chapters. But as compensation for this apparent omission, the book contains two bonus chapters, one on international antitrust problems and institutional responses, and one on regional agreements with competition provisions.

A particularly thoughtful chapter on the evolution of competition law and enforcement in Hungary is provided by Csaba Kovács and Andreas Reindl. They fully explore the international influences (with interesting perspectives on Hungary’s accession process and the mixture of ‘reception’ and selective adaptation of EU norms), the domestic political economy and the inter-institutional struggles that have shaped the GVH in its two-decade history. Although one of the authors is a GVH fellow and former long-time official, the chapter does not fail to acknowledge the authority’s own shortcomings and miscues. Competition authority officials should take note of the usefulness of this constructively candid approach, as opposed to the familiar refrain of – ‘Here is where we’ve made tremendous strides, and moreover we’re at the top of our game.’ The chapter does not discuss Hungary’s ‘watermelon’ saga, but the ploys by the Government to throw its weight around, favoring collusion in agriculture and seeking to weaken the GVH, are consistent with the unsettling trends highlighted by the authors. As they conclude, the GVH’s hard-earned effectiveness and accomplishments are fragile, and the increasingly inhospitable political environment in Hungary coupled with the incompleteness of cultural change in surrounding institutions has generated conditions of ‘systemic risk’ (pp. 73-74).

The chapter on Mexico, by Eduardo Pérez Motta and Heidi Claudia Sada Correa, will appeal to anyone interested in ‘triage’ regulatory reform in countries that start from a gloomy State-controlled economy, rife with industry-wide alliances and bloated public enterprises. The authors describe the undoubtedly difficult shift from the basket-case model to a market-based economy with a horizontal rather than vertical industrial policy; and they describe the very active and necessary advocacy efforts of the Federal Competition Commission (now the Federal Economic Competition Commission), as well as important amendments made to Mexico’s competition law in 2006 and 2011. Further significant institutional reforms in Mexico, including the establishment in 2013 of specialized courts to review infringement decisions, were adopted following the completion of the chapter. And indeed, the process of reform has not settled down yet; new proposals were tabled in February 2104. (See Perrot and Komninos, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2404022.)

The next chapter, by Janice Bleazard, discusses South Africa. This chapter stands out from the others in that it is an entirely legal analysis. With reference to the case law of the Competition Appeals Court and South Africa’s Supreme Court of Appeal, Bleazard recounts how, time after time, the courts have clipped the wings of the Competition Commission and the Tribunal. In some cases this was a matter of substantive interpretation, but above all it has resulted from the way the courts have interpreted procedural requirements. The net effect of the jurisprudence is to substantially limit the authorities’ ability to investigate and adjudicate cases in a flexible manner. As Bleazard points out, the formalistic and conservative rulings of the appellate courts (in contrast to the Tribunal’s purposive interpretation) has played into the hands of vested corporate interests, as it has become increasingly difficult to ensure that cases are considered on the merits. Bleazard thus concludes that the courts have frustrated the will of the South African legislator, which had conceived the Competition Act not just as a piece of economic legislation but as a transformative tool of democratization and economic-social inclusion. She adds, however, that the landmark judgment of the Constitutional Court in the Senwes margin squeeze case (generally supporting the Competition Commission’s inquisitorial powers and overruling the SCA’s scrupulous adherence to a technicality) may point the way toward more supple judicial interpretations.

As if to eclipse the sad story from South Africa, Deunden Nikomborirak recounts the dismal failure of the competition law enterprise in Thailand. This country, like others, illustrates the need for stable political and social institutions as a pre-condition for the serious pursuit of competition policy. For Thailand, we must recognize, as of this writing, that such stability is out of the question for the foreseeable future. Since there is little to say about Thai competition law, Nikomborirak turns to discuss the regime in South Korea, which might be used as a source of inspiration for countries which face enormous challenges, as Thailand does, in establishing a credible competition law regime. Nikomborirak recounts some of the South Korean ‘Cinderella’ story and provides a helpful comparative discussion of the different economic environments that have characterized the two countries, the stark differences in their economic structures, political economies and (independence, relevance and capacities of) institutions, and the equally contrasting levels of public support for the competition law enterprise, a cause and effect of price regulation that has tended to keep necessities generally affordable, thereby sustaining the vicious circle.

Turning to Zambia, an overview of the relevant competition law regime and institutional context can be found in Alex Kububa’s 2012 Peer Review Report for UNCTAD (http://unctad.org/en/PublicationsLibrary/ditcclp2012_Zambia_en.pdf). The chapter in the present collection, prepared by Thula Kaira, does not really set out to depict the competition policy framework in Zambia but it contains an in-depth discussion of the structure of Zambia’s economy, with a focus on the role of small, micro and medium sized businesses (SMMEs). SMMEs operate in both the formal and informal sectors. The importance of the informal sector is understandable: Zambia’s economic fortunes turned south in the 1970s as world copper prices declined, and while the country has experienced relatively rapid growth since 2001, poverty and unemployment levels are still staggeringly high. In such conditions one suspects that there are limits to what competition policy can do unless it is accompanied by comprehensive efforts to build sound institutions, even if one can agree that competitive markets tend to encourage desirable wealth transfers and poverty alleviation effects. Be that as it may, Kaira reaches a number of policy conclusions based on Zambia’s economic make-up. For example, he suggests that a competition authority should be concerned with anticompetitive practices that harm informal business operators and formal-sector SMMEs, given their crucial contribution to employment and to some equivalent of social protection. Relying partly on the work of the 2008 OECD Global Forum, he also proposes that the proper way to manage the informal sector is to encourage its formalization through the reduction of regulatory barriers and of the cost of market entry. Kaira’s other recommendations include making refinements to the Competition and Consumer Act in order to secure more explicit recognition of the importance of SMMEs.

Part II of the book, entitled ‘multinational issues and initiatives’, consists of two chapters. The first, written by Eleanor Fox, John Fingleton and Sophie Mitchell, looks at the gaps, overlaps and ‘institutional challenge’ of international antitrust. The first 8 pages review the global competition issues and institutional responses and non-responses since the 1940s; this historical summary is written with the astuteness one would expect from these authors. The remaining 10 pages are more forward-looking and concern the global competition issues that remain unresolved, and the ways in which international institutions, and above all the ICN, might contribute to their amelioration. One sympathizes with the authors’ plea for the governments of major jurisdictions to liberate themselves from their Paleolithic nation-centric interests and to embrace a (non-mutually exclusive) vision of ‘world welfare’, in a manner roughly analogous to a vision of true global cooperation in environmental protection. Such a change of perspective and values would likely bring long-term benefits to all jurisdictions and immediate benefits to developing countries, which cannot act effectively by themselves to solve global competition problems. Although nation-states have a hardwired compulsion to privilege more narrow concepts of self-interest, the authors’ message is perhaps not hopeless: the evolution of international institutions suggests that unpredictable, post-Westphalian initiatives do occasionally gain momentum. In the meantime, productive cooperation can be achieved even without a cosmopolitan shift to concepts of world welfare. In this regard, the authors run through a variety of issues that require attention, such as deliberate or negligent state-imposed barriers to competition and the high cost of multiplicative merger review. Needless to say, the specter of export cartels continues to haunt the international community. With regard to these and other issues, the authors consider that the flexible, low-stakes nature of the ICN’s work will furnish important means for the development of solutions that can later, if necessary, be upgraded to higher levels of commitment. The authors seem to recognize that different instruments, institutions and degrees of obligation will be more or less suited to a given problem. The challenge will be to reach consensus on the means to be used to address the issue at hand, which may involve several layers of controversy, and then implementing, evaluating and improving on those agreed means.

The final chapter is written by Alberto Heimler and Frédéric Jenny. The subject is regional competition law agreements, of which there are many. This chapter too begins with an authoritative summary of the reshaping of the international competition law landscape, especially since the 1990s and with particular attention given to developing countries. The authors recall the unsuccessful campaign to achieve a hard-law WTO agreement on competition law and further recall that ‘south-south’ bilateral cooperation agreements are relatively few. The rest of the chapter is devoted to the main subject, regional agreements. The authors proceed along a simple line: the main regional agreements are summarized (Mercosur, Andean Community, COMESA, CARICOM and the WAEMU), and in each case one or more fatal flaws are identified. The authors’ conclusion that the major regional agreements are in general deficient – due to, for example, design flaws (or in the case of the WAEMU, questionable judicial interpretation that amounts de facto to a design flaw), jurisdictional ambiguity, lack of political will, capacity or financial constraints, etc. – is consistent with the findings of the commendable 2012 edited volume by Drexl, Bakhoum, Fox, Gal and Gerber, published by Elgar. In the final part of the chapter, Heimler and Jenny recall some of the building blocks of the ‘federal’ antitrust enforcement structure in the European Union. The EU is, after all, the only clear success story among the existing regional schemes as far as competition law is concerned. The active contributions from the Commission and the Court of Justice, together with other essential elements can be traced back to important decisions made at critical junctures (such as the negotiation of the Treaty of Rome, the adoption of Regulation 17/62, and, more recently, the design and implementation of Regulation 1/2003) and the working methods of the European Competition Network certainly deserve to be studied by countries seeking to enhance the efficacy of their regional arrangements. Heimler and Jenny also suggest that regional groupings may wish to adapt and emulate the ‘twinning’ projects that enabled experienced EU jurisdictions to train up officials in neighboring and accession countries, generally with positive results.

This collection is not to be used as a quick reference; rather, it is a tool to facilitate a deeper understanding of certain foreign jurisdictions. This implies that its audience may be selective. But each of the chapters is readable, intelligent and rewarding. The chapter on Hungary alone is worth the price. Readers with different needs – those seeking more straightforward presentations of rules, doctrine, practice pointers and so on – will want to look elsewhere.

Avaya v. TLI Gives New Life to Aftermarket Monopolization Litigation A-La-Kodak

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On March 27, 2014, in Avaya, Inc. v. Telecom Labs, Inc., 1:06-cv-2490(JEI) (D.N.J., 2006), a jury sitting in the District Court in Camden, New Jersey found for Telecom Labs, Inc. and Continuant, Inc. (TLI/C) and awarded it $20 million in damages (before trebling). Avaya, a descendent of AT&T, produces enterprise level PBXs as well as maintenance services for them. TLI/C competes in the market for post-warranty maintenance for Avaya PBXs. Avaya sued TLI/C alleging that TLI/C illegally accessed the maintenance commands in Avaya PBXs. Judge Irenas dismissed these claims noting “Avaya appears determined to put TLI/C out of the market for post-warranty maintenance of Avaya PBXs, even though TLI/C occupies only a tiny sliver of that market. Yet, Avaya has not met its burden of proving that anything TLI/C did was illegal, nor has it proven that TLI/C aided its customers in breaking their contracts with Avaya.”

TLI/C countersued on antitrust grounds alleging monopolization and attempted monopolization of the post-warranty maintenance markets for Avaya PBXs and for Avaya Predictive Dialer Systems (PDSs), anticompetitive tying of patches and upgrades to Avaya PBX and PDS maintenance, as well as damages arising from anticompetitive behavior.  After six and a half months of trial, the jury found that relevant antitrust markets exist for post-warranty maintenance of both PBXs and PDSs irrespective of the degree of competition in the primary markets for those systems. It also found that Avaya attempted to monopolize the market for post-warranty maintenance for Avaya PBXs and that Avaya anticompetitively tied the availability of patches for Avaya-brand PDS systems to the purchase of Avaya-brand post-warranty maintenance. Finally, the jury awarded $20 million damages (before trebling) to TLI/C.

This is the first major win for plaintiffs in an aftermarket case since Eastman Kodak Co. v. Image Tech. Services, Inc., 504 U.S. 451 (1992).  The evidence at trial showed that PBXs and PDSs are expensive durable equipment that can last as long as over 20 years in useful life. The maintenance of Avaya PBXs and PDSs is also expensive and Avaya and its Business Partners have overwhelming market shares in post-warranty maintenance. TLI/C, the largest of maintenance companies not affiliated with Avaya had less than 1% market share, and charged 40-50% lower prices than Avaya for post-warranty maintenance. Avaya argued that competition in the primary market for PBX systems, where its market share has dwindled from almost 100% to about 25% over the years, restrained its ability to exercise monopoly power in the aftermarket for post-warranty maintenance of Avaya-brand systems. Avaya made similar arguments regarding PDSs.  TLI/C argued that traditional measures of substitutability and cross elasticity of demand must be used to define post-warranty maintenance as an antitrust aftermarket, and that there was no convincing evidence that PBX buyers accurately calculated costs, including maintenance costs, for the long lifetime of the PBX. The jury found the existence of separate aftermarkets for post-warranty maintenance, and various anticompetitive acts as described above.

This recent case underlines, as Kodak did many years earlier, that manufacturers should exercise caution so as to avoid antitrust liability for actions that may restrict competition by independents for service and maintenance of their branded durable goods.

Nicholas Economides served as an expert on behalf of the defendants/counterclaimants TLI/C in Avaya, Inc. v. Telecom Labs, Inc.

Effects of Leniency program under enforcement errors reconsidered

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Recent works in the field of leniency programs have uncovered many ambiguous effects that these programs can have and some unexpected incentives for firms they may also generate. It is quite a common intuition that low standards of economic analysis can undermine the overall effectiveness of antitrust enforcement. What might be a counterintuitive result is how the treatment of different types of agreements – not just cartels, but vertical, conglomerate and horizontal cooperation agreements – and the standards of their assessment by the antitrust authority can influence the effectiveness of leniency programs.

It is customary to think that leniency programs are targeted at cartels (even predominantly hardcore ones), whereas their use to fight any other type of conduct is dubious. Yet what happens when participants of other types of agreements try to use the program to get fine discounts in exchange for a confession, and what incentives might they have to do so? How should the antitrust authority act in this case? If normally such – “non-cartel” type – agreements would be assessed based on a “rule of reason” approach, it seems that applying the same approach to any agreement brought forward with the help of a leniency program would essentially defeat the aim of the program, which is to minimize investigation costs. And would the antitrust authority even have the necessary incentive to undertake this assessment, given that it has just received a confession of guilt from a participant in the agreement?

These questions may seem purely theoretical, but in fact this is a very real situation that was observed in Russia after a leniency program was first introduced into national antitrust law in 2007. An overview of the results of the leniency program in its first form (as it was later reformed in 2009) shows that the structure of the generated cases is not something you would expect: the number of non-cartel type agreements where leniency was used clearly dominates the number of clean-cut cartel cases.

Our recent study shows that the mechanism that links the standards of economic analysis of agreements to such a unique structure of investigated cases is, in fact, the probability of type I errors. What makes this issue even more interesting is the fact that for some non-obvious reason, type I errors are traditionally ignored by researchers when modelling leniency programs. Perhaps the tradition started with the basic and well-known model of Motta & Polo (2003) that immediately took into account type II enforcement errors but dismissed type I errors – an assumption later reproduced in many other models. The “tradition” has been recently broken by Ghebrihiwet and Motchenkova (2010), but their model seems to focus mainly on pre-trial settlements in the context of leniency rather than leniency itself and therefor provides little insight into the situation we are analyzing.

We decided to focus our research on the issue of horizontal cooperation agreements, as there was reason to think that their treatment in the Russian law at the time being could have encouraged a rather high probability of type I errors. We were prepared to find that given the risk of false conviction some cooperating companies whose conduct was in fact beneficial to social welfare would end up making false confessions and stopping their cooperation to ensure themselves against erroneously imposed fines. But in the end we got more than what we bargained for – we demonstrated two additional effects of introducing leniency programs that should perhaps be taken into account when the probability of type I errors is not negligible. More on our results can be found in a recent research paper from the Higher School of Economics – Economics series http://ssrn.com/abstract=2426143

References

Ghebrihiwet N., Motchenkova E. (2010) Leniency Programs in the Presence of Judicial Errors. Discussion Paper 2010-030. Tilburg University, Tilburg Law and Economic Center.

Motta M., Polo M. (2003) Leniency Programs and Cartel Prosecution. International Journal of Industrial Organization, 21(3), 347-379.