The complexity of assessing potential competition

The question of whether two companies are potential competitors is key for the antitrust assessment of agreements and cooperations between those companies. While the assessment of potential competition is often not straightforward, the question has significant practical implications – not least with a view to the transformation in many industries and the corresponding number of potential new players. Earlier this month, Advocate General (AG) Athanasios Rantos issued an opinion dealing with the assessment of potential competition.

The opinion of AG Rantos concerns the case AdC/EDP, which relates to a EUR 38 million fine imposed by the Portuguese Competition Authority (AdC) on two companies in 2017. A key question of the case is whether the two companies are potential competitors.

What is the case about?

The story goes as follows: The companies concerned are Portugal’s biggest electricity supplier Energias de Portugal (EDP) and the food retailer Sonae. In 2012, EDP and Sonae entered into an association agreement which provided price reductions to customers holding a discount card issued by Sonae. In case those customers concluded an additional contract with EDP, they were granted a 10% reduction on electricity provided by EDP.

The association agreement included an ‚Exclusivity‘ clause. In this clause, EDP and Sonae committed not to enter their respective markets for the duration of the association agreement and one year thereafter.

In May 2017, the AdC ordered the companies to pay a fine of EUR 38.3 million. The regulator found that the non-competition clause in the association agreement could be qualified as an agreement with the object of market sharing, the affected markets being the markets in Portugal for (i) the supply of electricity, (ii) the supply of natural gas, and (iii) retail distribution of food.

Upon appeal, the fines were slightly reduced by 10%. The appeal decision was itself appealed to the Court of Appeal, which decided to stay the proceeding and to refer certain questions to the ECJ. These questions revolved around how to assess whether EDP and Sonae are potential competitors.

What AG Rantos thinks

In his opinion, which is not binding for the ECJ, AG Rantos first clarifies (and sometimes it’s helpful to state the obvious, too) that for a restriction of competition, competition must exist in the first place. This includes actual as well as potential competition, whereby the latter is “the degree of competitive constraints exercised” by an undertaking not active on the same product or geographic market. According to AG Rantos, a forward-looking analysis is required to assess potential competition.

In a second step, AG Rantos differentiates between potential competition of undertakings active on the same, although geographically distinct, product markets and undertakings present on different product markets. EDP and Sonae argued that it is easier to establish potential competition between undertakings which are active on the same product but different geographic markets. Thus, the standard of proof required to demonstrate potential competition between undertakings active in different product markets should be stricter. This is denied by AG Rantos, who – taking into account the Generics Judgement of the ECJ – finds that no stricter criteria should be applied.

After setting the scene, AG Rantos turns to the core of the case – the assessment of whether EDP and Sonae are potential competitors. And, to manage expectations already at this stage, the assessment remains difficult. According to AG Rantos, all the evidence – even when not decisive in itself – must be assessed together in order to establish whether it leads to a sufficient demonstration of the existence of potential competition. This includes:

  • The intention to enter the relevant market. However, according to AG Rantos this is a supplementary and not an essential factor to demonstrate potential competition.
  • Preparatory steps taken with a view to entering the market, but not as a standalone requirement and to be analysed together with the ability to enter the market. AG Rantos held that the factor is of limited relevance where the market concerned is contestable.
  • The perception of the incumbent, with the non-competition clause being a strong indication that potential competition exists.  
  • The activities of other undertakings in the group of the (potential) market entrant (even when these activities were ceased).
  • The activities of the potential market entrant on the upstream market for of the relevant market in question, provided that those activities are capable of conferring real and concrete advantages for entering this market.

AG Rantos also noted (in what I consider a helpful clarification) that agreements as the one between EDP and Sonae do not fall within the concept of ‘vertical agreements’, irrespective of whether the undertakings concerned are actual or potential competitors, since the agreement concerns the same market level. Furthermore, he emphasized that a non-competition clause is only ancillary in the context of an overall agreement if that clause is objectively necessary for the implementation of the agreement and proportionate to the objectives pursued by it.

Key takeaways and practical implications

AG Rantos ultimately left it for the referring court to assess whether the evidence, taken together, constitutes a sufficient demonstration of potential competition. However, in practice, it is precisely the interplay of individual factors that can make it very difficult to assess whether companies actually are potential competitors.

To say it out loud: This can be a problem. Many scenarios have to be assessed differently from an antitrust perspective if companies are (potential) competitors. For example, in the case of a cooperation between companies that are actually active on different markets, the question often arises whether they could be potential competitors. The answer to this question regularly determines whether a specific cooperation is feasible.

If I could wish for something from the upcoming ECJ judgement, it would be clear and restrictively interpreted criteria for the assessment of potential competition. Otherwise, the assessment – especially in view of the undergoing transformation in many industries – will remain an increasingly difficult obstacle to overcome in practice with a view to cooperations between undertakings. 

Picture by Jennifer Chen on Unsplash