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Dirk Auer Before the UK House of Lords on the UK’s Digital Markets Bill

Presentations & Interviews ICLE Director of Competition Policy Dirk Auer testified before the UK House of Lords’ Communications and Digital Committee in a May 23, 2023 hearing reviewing . . .

ICLE Director of Competition Policy Dirk Auer testified before the UK House of Lords’ Communications and Digital Committee in a May 23, 2023 hearing reviewing the Digital Markets, Consumer and Competition Bill. Videos of his answers to the Lords’ questions are embedded below.

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Antitrust & Consumer Protection

If the UK Wants to Remain a Tech Leader, It Needs Less Regulation, Not More

TOTM Brexit was supposed to free the United Kingdom from Brussels’ heavy-handed regulation and red tape. But dreams of a Singapore-on-the-Thames are slowly giving way to . . .

Brexit was supposed to free the United Kingdom from Brussels’ heavy-handed regulation and red tape. But dreams of a Singapore-on-the-Thames are slowly giving way to ill-considered regulation that threatens to erode Britain’s position as one of the world’s leading tech hubs.

The UK Competition and Markets Authority’s recent decision to block the merger of Microsoft and game-maker Activision-Blizzard offers a case in point. Less than a month after the CMA formally announced its opposition to the deal, the European Commission has thrown a spanner in the works. Looking at the same facts, the commission—no paragon of free-market thinking—concluded the merger would benefit competition and consumers, paving the way for it to move ahead in the Old Continent.

Read the full piece here.

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Antitrust & Consumer Protection

Regulating the Metaverse: Putting the Meta-Cart Before the Meta-Horse

Written Testimonies & Filings Introduction We welcome the opportunity to comment on the European Commission’s call for evidence on “Virtual worlds (metaverses) – a vision for openness, safety and . . .

Introduction

We welcome the opportunity to comment on the European Commission’s call for evidence on “Virtual worlds (metaverses) – a vision for openness, safety and respect.”[1]

The metaverse is an exciting and rapidly evolving set of virtual worlds. As with any new technology, concerns about the potential risks and negative consequences that the metaverse may bring have moved policymakers to explore how best to regulate this new space.

In its call for evidence, the commission suggests that preemptive regulatory steps may be needed to avoid the metaverse becoming “a more closed ecosystem with the prevalence of proprietary systems and gatekeepers.”[2] But this diagnosis rests on dubious premises.

From the outset, it is important to recognize that simply because the metaverse is new does not mean that it is unregulated. Existing regulations may not explicitly or exclusively target metaverse ecosystems, but a vast regulatory apparatus already covers most aspects of business in virtual worlds. As we explain in greater detail (Section I), this includes European competition law, the Digital Markets Act (“DMA”), the General Data Protection Act (“GDPR), the Digital Services Act (“DSA”), and many more. Before it enacts any new rules, the commission should carefully consider whether there are any metaverse-specific problems not already addressed by these legal provisions.

This sense that the metaverse is already adequately regulated is reinforced by two important factors.

The first is that competition appears particularly intense in this space (Section II). There are currently multiple firms vying to offer compelling virtual worlds. At the time of writing, however, none appears close to dominating the market. In turn, this intense competition will encourage platforms to design services that meet consumers’ demands, notably in terms of safety and privacy. Nor does the market appear likely to fall into the hands of one of the big tech firms that command a sizeable share of more traditional internet services. Meta notoriously has poured more than $3.99 billion into its metaverse offerings during the first quarter of 2023, in addition to $13.72 billion the previous calendar year.[3] Despite these vast investments and a strategic focus on metaverse services, the company has, thus far, struggled to achieve meaningful traction in the space.[4]

Second, the commission’s primary concern appears to be that metaverses will become insufficiently “open and interoperable”.[5] But to the extent that these ecosystems do, indeed, become closed and proprietary, there is no reason to believe this to be a problem. Closed and proprietary ecosystems have several features that may be attractive to consumers and developers (Section III). These include improved product safety, performance, and ease of development. This is certainly not to say that closed ecosystems are always better than more open ones, but rather that the commission is wrong to assume that one model or the other is optimal. Instead, the proper balance depends on tradeoffs that markets are better placed to decide.

Finally, timing is of the essence (Section IV). The commission’s call for evidence appears to assume that, by acting preemptively, it can shape the metaverse industry according to its idiosyncratic preferences:

It is crucial for the EU to be present in the development of virtual worlds and their governance, and lead the way through important challenges such as setting standards, building infrastructure, and addressing legal, economic, societal and ethical aspects.[6]

The commission has further expressed hopes that this will enable European firms to thrive:

The initiative is expected to create more opportunities for EU industrial players along the value chain, such as for EU providers of hardware and software components, system integrators and content creators.[7]

But intervening so early in a fledgling industry’s life cycle is like shooting a moving target from a mile away. New rules might end up being irrelevant. Worse, by signaling that metaverses will be subject to heightened regulatory scrutiny for the foreseeable future, the commission may chill investment from the very firms is purports to support. In short, the commission should resist the urge to intervene so long as the industry is not fully mature.

I.        Old Rules for a New Frontier

The commission’s call for evidence appears to be premised on the idea there is something new and unique about metaverse ecosystems that warrants industry-specific rules and regulations.

Against this backdrop, Frank Easterbrook’s seminal piece “Cyberspace and the Law of the Horse” seems more relevant than ever.[8] In his article, Easterbrook analogized the then-emerging field of cyberspace law to the “law of the horse.” He argued, in essence, that legal incidents involving horses are best understood by studying general legal disciplines like torts and property law, rather than studying all the legal incidents involving horses:

Lots of cases deal with sales of horses; others deal with people kicked by horses; still more deal with the licensing and racing of horses, or with the care veterinarians give to horses, or with prizes at horse shows. Any effort to collect these strands into a course on “The Law of the Horse” is doomed to be shallow and to miss unifying principles.

From a policy standpoint, Easterbrook’s intuition is clear. Policymakers should be less worried about developing new bodies of law to regulate legal disputes in cyberspace and, instead, concentrate their efforts on understanding how traditional rules apply to the disputes that arise in this space:

When asked to talk about “Property in Cyberspace,” my immediate reaction was, “Isn’t this just the law of the horse?”… This leads directly to my principal conclusion: Develop a sound law of intellectual property, then apply it to computer networks.[9]

Easterbrook’s intuition would appear even more appropriate to law in the metaverse. Policymakers often assume that, because the metaverse is new and not covered by specific regulations, it must surely be a lawless area where few rules apply and companies are free to exclude their competitors and exploit consumers. As the commission puts it, drawing an analogy to the emergence of the first big tech companies:

The first wave of the Internet developed mostly in an uncoordinated and unregulated manner leading to a more closed ecosystem with the prevalence of proprietary systems and gatekeepers.

Although virtual worlds and the transition to Web 4.0 are still in the early stages, we are witnessing the dawn of a similar situation, where global corporations are massively investing in core technologies, filing trademarks, and setting de facto standards as early movers…[10]

A.                  The Internet Was Never an Unregulated World

Unfortunately, this assertion both rewrites the history of the internet and ignores the plethora of regulations that currently apply to metaverse services, particularly when they operate in the European Union.

For a start, it is important to recognize that digital platforms fall under several pieces of European legislation. Chief among these is European competition law, which has long applied to tech firms. After all, the Microsoft competition cases date back to the early 2000s and the commission opened its competition cases against Google way back in 2011.[11] These early cases were followed by investigations into online platforms like Apple’s iPhone and App Store, as well as Amazon’s online marketplace.[12] It is simply not true that the internet emerged in an unregulated environment (at least in terms of competition policy). EU oversight of digital platforms has also grown steadily more capacious, including through the recent passage of the DMA, which will arguably apply to metaverse worlds when they reach a certain size.[13]

And it is not just competition law that has directly shaped the European internet as we know it today. The e-Commerce Directive has governed how online platforms conduct business since it entered into force in 2000.[14] Oversimplifying, the directive shields online intermediaries from liability when illegal content is hosted on their platforms, conditional on them fulfilling certain limited obligations.[15] In turn, this has enabled online platforms to grow without fear of being held liable for their users’ behavior, while guaranteeing some level of safety and compliance with existing laws. More recent legislation, such as the DSA, will only reinforce the extent to which online markets (including virtual worlds) must maintain high standards of safety and content curation. [16]

B.                  Metaverse’s Regulatory Framework Is Already in Place

Existing laws and regulations that govern such areas as intellectual property, contracts, consumer protection, and online safety are equally applicable to the metaverse. The metaverse is not a separate and unique realm, but rather an extension of the physical world we already inhabit. Or, to put it differently, the metaverse is populated by real consumers and firms who are bound by the laws that are applicable in their jurisdictions.

The commission’s call for evidence appears to recognize this much, although it doesn’t appears to consider the possibility that—given this large body of existing laws—more regulation might not be the answer:

Furthermore, the EU already has a strong regulatory framework to address potential impacts that virtual worlds may have on aspects such as competition, cybersecurity, artistic creation and privacy. EU legislation such as the General Data Protection Regulation, Digital Services Act, Digital Markets Act, Net Neutrality Regulation and the Unfair Commercial Practices Directive will ensure that users are protected in relation to several aspects and that EU small and medium-sized enterprises are not driven out of the market. The revised Directive on Security of Network and Information Systems will strengthen supply chain cybersecurity while the upcoming EU Digital ID will give full control to users over their identity and data.[17]

To put this in more concrete terms, a virtual item or avatar created within the metaverse is subject to the same copyright and trademark laws as a physical product. Property over those creations may be transferred, subject to the metaverse platform’s terms of service, which are governed by existing contract and consumer-protection laws. For example, the terms of use governing Decentraland (a blockchain-based virtual world) include a detailed section on how ownership of copyright-protected works may or may not be transferred from users to the platform.[18] In turn, these terms are subject to the same consumer-protection laws that apply to the physical world.

Of course, the application of existing laws to the metaverse is not always straightforward. There are some unique challenges and complexities that arise in this new space. The enforceability of some existing laws may, for example, be complicated in virtual worlds (like Decentraland) that rely on blockchain technology. Indeed, blockchains often have characteristics—such as immutability, decentralized ownership, and a reliance on pseudonymity or anonymity—that complicate legal enforcement.[19] These potential obstacles are specific to blockchain technology, however, not to metaverses.

Indeed, there is no reason to believe that all, or even most, successful metaverse services will be blockchain-based. In fact, two of the most successful virtual worlds do not rely on the blockchain.[20] The upshot is that enacting metaverse-specific rules to deal with blockchain-specific issues is almost certainly the wrong way to proceed.

C.                  New Rules Are Not Always the Best Path Forward

More fundamentally, even if metaverses do give rise to legal blind spots, this does not necessarily mean that new regulation is warranted.

In his seminal rebuttal to Easterbrook’s “Law of the Horse”, Lawrence Lessig cited two examples of cyberspace law that, in his opinion, fell under the radar of existing legal provisions and necessitated the creation of internet-specific laws: the widespread accessibility of pornographic content and firms’ ability to track users’ behavior online.[21] No champion of free markets, Lessig nonetheless argued that blinds spots of this sort do not necessarily warrant the adoption of new regulations (though, in those two cases, that is largely what the European Union decided to do[22]). Instead, he argued four main factors constrain firms’ behavior in cyberspace. Legal provisions are only one of those four constraints—the others being norms, markets, and code.[23] If other constraints are operating, then what may appear to be a legal blind spot may not, in fact, give rise to problematic behavior or outcomes. And because regulation may sometimes be over-inclusive, it will sometimes be better for regulators to adopt a laissez-faire approach.[24]

This intuition is perhaps best understood with reference to Ronald Coase. In his Nobel-winning work on “The Problem of Social Cost”, Coase essentially argued that governments need not worry about the initial allocation of rights (and, by extension, externalities) when they are well-delimited and transaction costs are low:

It is always possible to modify by transactions on the market the initial legal delimitation of rights. And, of course, if such market transactions are costless such a rearrangement of rights will always take place if it would lead to an increase in the value of production.[25]

This has important ramifications for the regulation of business in the metaverse. Even if it were true that existing laws were inapplicable in the metaverse, this is not sufficient justification for passing new regulations. Instead, the real question is whether various frictions prevent consumers and businesses from reaching agreements that grow the value of these online ecosystems. If these agreements can take place, then the scope for beneficial government intervention is more limited. As things stand, there is little reason to believe that frictions of this sort prevent consumers, platforms, and content creators from concluding such deals in the metaverse context—for example, determining how the rights over metaverse creations are allocated.

Finally, even if the commission surmised that there are currently market failures in the metaverse, this does not necessarily mean that entirely new regulations are appropriate. Indeed, it may be preferrable to adapt existing legal principles, rather than enact new rules. As explained in Section IV, creating new regulations that are specific to the metaverse could be counterproductive. They could create uncertainty and additional compliance costs for businesses, without necessarily achieving any meaningful improvements in consumer protection or other regulatory goals. Furthermore, new rules could stifle innovation and limit the potential of this exciting new technology.

In short, there is little to suggest that new rules are required to govern the metaverse. The existing legal framework appears largely sufficient to address most concerns that may arise in this space. Policymakers should instead focus on adapting and refining this existing framework, as necessary.

II.      Competing for Consumer Trust

As suggested above, the extent to which metaverse services compete with each other (and continue to do so in the future) will largely determine whether they fulfil consumers’ expectations and meet the safety and trustworthiness requirements to which the commission aspires. As even the left-leaning Lessig put it:

Markets regulate behavior in cyberspace too. Prices structures often constrain access, and if they do not, then busy signals do. (America Online (AOL) learned this lesson when it shifted from an hourly to a flat-rate pricing plan.) Some sites on the web charge for access, as on-line services like AOL have for some time. Advertisers reward popular sites; online services drop unpopular forums. These behaviors are all a function of market constraints and market opportunity, and they all reflect the regulatory role of the market.[26]

The commission’s call for evidence implicitly recognizes the important role that competition plays, although it frames the subject primarily in terms of the problems that would arise if competition ceased to operate:

There is a risk of having a small number of big players becoming future gatekeepers of virtual worlds, creating market entry barriers and shutting out EU start-ups and SMEs from this emerging market. Such a closed ecosystem with the prevalence of proprietary systems can negatively affect the protection of personal information and data, the cybersecurity and the freedom and openness of virtual worlds at the same time.[27]

It is thus necessary to ask whether there is robust competition in the market for metaverse services. The short answer is a resounding yes.

A.                  Competition Without Tipping

While there is no precise definition of what constitutes a metaverse—much less a precise definition of the relevant market—available data suggests the space is highly competitive. This is evident in the fact that even a major global firm like Meta—having invested billions of dollars in its metaverse branch (and having rebranded the company accordingly)—has struggled to gain traction.[28]

Other major players in the space include the likes of Roblox, Fortnite, and Minecraft, which all have somewhere between 70 and 200 million active users.[29] This likely explains why Meta’s much-anticipated virtual world struggled to gain meaningful traction with consumers, stalling at around 300,000 active users.[30] Alongside these traditional players, there are also several decentralized platforms that are underpinned by blockchain technology. While these platforms have attracted massive investments, they are largely peripheral in terms of active users, with numbers often only in the low thousands.[31]

There are several inferences that can be drawn from these limited datasets. For one, it is clear that the metaverse industry is not yet fully mature. There are still multiple paradigms competing for consumer attention: game-based platforms versus social-network platforms; traditional platforms versus blockchain platforms, etc. In the terminology developed by David Teece, the metaverse industry has not yet reached a “paradigmatic” stage. It is fair to assume there is still significant scope for the entry of differentiated firms.[32]

It is also worth noting that metaverse competition does not appear to exhibit the same sort of network effects and tipping that is sometimes associated with more traditional social networks.[33] Despite competing for nearly a decade, no single metaverse project appears to be running away with the market.[34] This lack of tipping might be because these projects are highly differentiated.[35] It may also be due to the ease of multi-homing among them.[36]

More broadly, it is far from clear that competition will lead to a single metaverse for all uses. Different types of metaverse services may benefit from different user interfaces, graphics, and physics engines. This cuts in favor of multiple metaverses coexisting, rather than all services coordinating within a single ecosystem. Competition therefore appears likely lead to the emergence of multiple differentiated metaverses, rather than a single winner.

Ultimately, competition in the metaverse industry is strong and there is little sense these markets are about to tip towards a single firm in the year future.

B.                  Competing for Consumer Trust

As alluded to in the previous subsection, the world’s largest and most successful metaverse entrants to date are traditional videogaming platforms that have various marketplaces and currencies attached.[37] In other words, decentralized virtual worlds built upon blockchain technology remain marginal.

This has important policy implications. The primary legal issues raised by metaverses are the same as those encountered on other digital marketplaces. This includes issues like minor fraud, scams, and children buying content without their parents’ authorization.[38] To the extent these harms are not adequately deterred by existing laws, metaverse platforms themselves have important incentives to police them. In turn, these incentives may be compounded by strong competition among platforms.

Metaverses are generally multi-sided platforms that bring together distinct groups of users, including consumers and content creators. In order to maximize the value of their ecosystems, platforms have an incentive to balance the interests of these distinct groups.[39] In practice, this will often mean offering consumers various forms of protection against fraud and scams and actively policing platforms’ marketplaces. As David Evans puts it:

But as with any community, there are numerous opportunities for people and businesses to create negative externalities, or engage in other bad behavior, that can reduce economic efficiency and, in the extreme, lead to the tragedy of the commons. Multi-sided platforms, acting selfishly to maximize their own profits, often develop governance mechanisms to reduce harmful behavior. They also develop rules to manage many of the same kinds of problems that beset communities subject to public laws and regulations. They enforce these rules through the exercise of property rights and, most importantly, through the “Bouncer’s Right” to exclude agents from some quantum of the platform, including prohibiting some agents from the platform entirely…[40]

While there is little economic research to suggest that competition directly increases hosts’ incentive to policy their platforms, it stands to reason that doing so effectively can help platforms to expand the appeal of their ecosystems. This is particularly important for metaverse services whose userbases remain just a fraction of the size they could ultimately reach. While 100 or 200 million users already comprises a vast ecosystem, it pales in comparison to the sometimes billions of users that “traditional” online platforms attract.

The bottom line is that the market for metaverses is growing. This likely compounds platforms’ incentives to weed out undesirable behavior, thereby complementing government efforts to achieve the same goal.

III.    Opening Platforms or Opening Pandora’s Box?

In its call for evidence, the commission implicitly assumes that open ecosystems are better for consumers than closed ones. Indeed, the commission laments that a lack of regulation made the Internet less open than it would otherwise have been. In its own words:

The first wave of the Internet developed mostly in an uncoordinated and unregulated manner leading to a more closed ecosystem with the prevalence of proprietary systems and gatekeepers.[41]

According to the commission, it would be detrimental to consumers if metaverse competition led to closed and proprietary ecosystems:

Such a closed ecosystem with the prevalence of proprietary systems can negatively affect the protection of personal information and data, the cybersecurity and the freedom and openness of virtual worlds at the same time.[42]

But this assumption is simply wrong. There are many benefits to closed ecosystems. Choosing the optimal degree of openness entails tradeoffs. At the very least, this suggests that policymakers should be careful not to assume that opening platforms up will systematically provide net benefits to consumers.

A.      Antitrust Enforcement and Regulatory Initiatives

To understand why open (and highly propertized) platforms are not always better for consumers, it is worth looking at past competition enforcement in the online space. Recent interventions by competition authorities have generally attempted (or are attempting) to move platforms toward more openness and less propertization. For their part, these platforms are already tremendously open (as the “platform” terminology implies) and attempt to achieve a delicate balance between centralization and decentralization.

The Microsoft cases and the Apple investigation both sought or seek to bring more openness and less propertization to those respective platforms. Microsoft was made to share proprietary data with third parties (less propertization) and to open its platform to rival media players and web browsers (more openness).[43] The same applies to Apple. Plaintiffs in private antitrust litigation brought in the United States[44] and government enforcement actions in Europe[45] are seeking to limit the fees that Apple can extract from downstream rivals (less propertization), as well as to ensure that it cannot exclude rival mobile-payments solutions from its platform (more openness).

The various cases that were brought by EU and U.S. authorities against Qualcomm broadly sought to limit the extent to which it was monetizing its intellectual property.[46] The European Union’s Amazon investigation centers on the ways in which the company uses data from third-party sellers (and, ultimately, the distribution of revenue between those sellers and Amazon).[47] In both cases, authorities are ultimately trying to limit the extent to which firms can propertize their assets.

Finally, both of the EU’s Google cases sought to bring more openness to the company’s main platform. The Google Shopping decision sanctioned Google for purportedly placing its services more favorably than those of its rivals.[48] The separate Android decision sought to facilitate rival search engines’ and browsers’ access to the Android ecosystem. The same appears to be true of ongoing litigation brought by state attorneys general in the United States.[49]

Much of the same can be said of the numerous regulatory initiatives pertaining to digital markets. Indeed, draft regulations being contemplated around the globe mimic the features of the antitrust/competition interventions discussed above. For instance, it is widely accepted that Europe’s DMA effectively transposes and streamlines the enforcement of the theories harm described above.[50] Similarly, several scholars have argued that the proposed American Innovation and Choice Online Act (“AICOA”) in the United States largely mimics European competition policy.[51] The legislation would ultimately require firms to open up their platforms, most notably by forcing them to treat rival services as they would their own and to make their services more interoperable with those rivals.[52]

What is striking about these decisions and investigations is the extent to which authorities are pushing back against the very features that distinguish the platforms they are investigating. Closed (or relatively closed) platforms are forced to open up, and firms with highly propertized assets are made to share them (or, at the very least, monetize them less aggressively).

B.      The Empty Quadrant

All of this would not be very interesting if it weren’t for a final piece of the puzzle: the model of open and shared platforms that authorities apparently favor has traditionally struggled to gain traction with consumers. Indeed, there seem to be vanishingly few successful consumer-oriented products and services in this space.

There have been numerous attempts to introduce truly open consumer-oriented operating systems in both the mobile and desktop segments. Most have ended in failure. Ubuntu and other flavors of the Linux operating system remain fringe products. There have been attempts to create open-source search engines, but they have not met with success.[53] The picture is similar in the online retail space. Amazon appears to have beaten eBay, despite the latter being more open and less propertized. Indeed, Amazon has historically charged higher fees than eBay and offers sellers much less freedom in the ways in which they may sell their goods.[54]

This theme is repeated in the standardization space. There have been innumerable attempts to impose open, royalty-free standards. At least in the mobile-internet industry, few (if any) of these have taken off. Instead, proprietary standards such as 5G and WiFi have been far more successful. That pattern is repeated in other highly standardized industries, like digital-video formats. Most recently, the proprietary Dolby Vision format seems to be winning the war against the open HDR10+ format.[55]

This is not to say that there haven’t been any successful examples of open, royalty-free standards. Internet protocols, blockchain, and Wikipedia all come to mind. Nor does it mean that we will not see more decentralized goods in the future. But by and large, firms and consumers have not yet taken to the idea of fully open and shared platforms. Or, at least, those platforms have not yet achieved widespread success in the marketplace (potentially due to supply-side considerations, such as the difficulty of managing open platforms or the potentially lower returns to innovation in weakly propertized ones).[56] And while some “open” projects have achieved tremendous scale, the consumer-facing side of these platforms is often dominated by intermediaries that opt for much more traditional business models (think of Coinbase in the blockchain space, or Android’s use of Linux).

C.      Potential Explanations

The preceding section posited a recurring reality: the digital platforms that competition authorities wish to bring into existence are fundamentally different from those that emerge organically. But why have authorities’ ideal platforms, so far, failed to achieve truly meaningful success?

Three potential explanations come to mind. First, “closed” and “propertized” platforms might systematically—and perhaps anticompetitively—thwart their “open” and “shared” rivals. Second, shared platforms might fail to persist (or grow pervasive) because they are much harder to monetize, and there is thus less incentive to invest in them. This is essentially a supply-side explanation. Finally, consumers might opt for relatively closed systems precisely because they prefer these platforms to marginally more open ones—i.e., a demand-side explanation.

In evaluating the first conjecture, the key question is whether successful “closed” and “propertized” platforms overcame their rivals before or after they achieved some measure of market dominance. If success preceded dominance, then anticompetitive foreclosure alone cannot explain the proliferation of the “closed” and “propertized” model.[57]

Many of today’s dominant platforms, however, often overcame open/shared rivals, well before they achieved their current size. It is thus difficult to make the case that the early success of their business models was due to anticompetitive behavior. This is not to say these business models cannot raise antitrust issues, but rather that anticompetitive behavior is not a good explanation for their emergence.

Both the second and the third conjectures essentially ask whether “closed” and “propertized” might be better adapted to their environment than “open” and “shared” rivals.

In that respect, it is not unreasonable to surmise that highly propertized platforms would generally be easier to monetize than shared ones. For example, to monetize open-source platforms often requires relying on complementarities, which tend to be vulnerable to outside competition and free-riding.[58] There is thus a natural incentive for firms to invest and innovate in more propertized environments. In turn, competition enforcement that limits a platform’s ability to propertize their assets may harm innovation.

Similarly, authorities should reflect on whether consumers really want the more “competitive” ecosystems that they are trying to design. The European Commission, for example, has a long track record of seeking to open digital platforms, notably by requiring that platform owners do not preinstall their own web browsers (the Microsoft decisions are perhaps the most salient example). And yet, even after these interventions, new firms have kept using the very business model that the commission reprimanded, rather than the “pro-consumer” model it sought to impose on the industry. For example, Apple tied the Safari browser to its iPhones; Google went to some length to ensure that Chrome was preloaded on devices; and Samsung phones come with Samsung Internet as default.[59] Yet this has not ostensibly steered consumers away from those platforms.

Along similar lines, a sizable share of consumers opt for Apple’s iPhone, which is even more centrally curated than Microsoft Windows ever was (and the same is true of Apple’s MacOS). In other words, it is hard to claim that opening platforms is inherently good for consumers when those same consumers routinely opt for platforms with the very features that policymakers are trying to eliminate.

Finally, it is worth noting that the remedies imposed by competition authorities have been anything but successes. Windows XP N (the version of Windows that came without Windows Media Player) was an unmitigated flop, selling a paltry 1,787 copies.[60] Likewise, the internet-browser “ballot box” imposed by the commission was so irrelevant to consumers that it took months for authorities to notice that Microsoft had removed it, in violation of the commission’s decision.[61]

One potential inference is that consumers do not value competition interventions that make dominant ecosystems marginally more open and less propertized. There are also many reasons why consumers might prefer “closed” systems (at least, relative to the model favored by many policymakers), even when they must pay a premium for them.

Take the example of app stores. Maintaining some control over the apps that can access the store enables platforms to easily weed out bad actors. Similarly, controlling the hardware resources that each app can use may greatly improve device performance. Indeed, it may be that a measure of control facilitates the very innovations that consumers demand. Therefore, “authorities and courts should not underestimate the indispensable role control plays in achieving coordination and coherence in the context of systemic ef?ciencies. Without it, the attempted novelties and strategies might collapse under their own complexity.”[62]

Relatively centralized platforms can eliminate negative externalities that “bad” apps impose on rival apps and consumers.[63] This is especially true when consumers will tend to attribute dips in performance to the overall platform, rather than to a particular app.[64] At the same time, they can take advantage of positive externalities to improve the quality of the overall platform.

And it is surely the case that consumers prefer to make many of their decisions at the inter-platform level, rather than within each platform. In simple terms, users arguably make their most important decision when they choose between an Apple or Android smartphone (or a Mac and a PC, etc.). In doing so, they can select their preferred app suite with one simple decision. They might thus purchase an iPhone because they like the secure App Store, or an Android smartphone because they like the Chrome Browser and Google Search. Absent false information at the time of the initial platform decision, this decision will effectively incorporate expectations about subsequent constraints.[65]

Furthermore, forcing users to make too many “within-platform” choices may undermine a product’s attractiveness. Indeed, it is difficult to create a high-quality reputation if each user’s experience is fundamentally different.[66] In short, contrary to what antitrust authorities appear to believe, closed platforms might give most users exactly what they desire.

All of this suggests that consumers and firms often gravitate spontaneously toward both closed and highly propertized platforms, the opposite of what the commission and other competition authorities tend to favor. The reasons for this trend are still misunderstood, and mostly ignored. Too often it is simply assumed that consumers benefit from more openness, and that shared/open platforms are the natural order of things. Instead, what some regard as “market failures” may in fact be features that explain the rapid emergence of the digital economy.

When considering potential policy reforms targeting the metaverse, policymakers would be wrong to assume openness (notably, in the form of interoperability) and weak propertization are always objectively superior. Instead, these platform designs entail important tradeoffs. Closed metaverse ecosystems may lead to higher consumer safety and better performance, while interoperable systems may reduce the frictions consumers face when moving from one service to another. There is little reason to believe policymakers are in a better position to weigh these tradeoffs than consumers, who vote with their virtual feet.

IV.    Conclusion

A final important argument against intervening today is that the metaverse industry is nowhere near mature. Tomorrow’s challenges and market failures might not be the same as today’s. This makes it exceedingly difficult for policymakers to design appropriate regulation and increases the risk that regulation might harm innovation.

At the time of writing, the entire metaverse industry (both hardware and software) is estimated to be worth somewhere in the vicinity of $80 billion, and projections suggest this could grow by a factor of 10 by 2030.[67] Growth projections of this sort are notoriously unreliable. But in this case, they do suggest there is some consensus that the industry is not fully fledged.

Along similar lines, it remains unclear what types of metaverse services will gain the most traction with consumers, what sorts of hardware consumers will use to access these services, and what technologies will underpin the most successful metaverse platforms. In fact, it is still an open question whether the metaverse industry will foster any services that achieve widespread consumer adoption in the foreseeable future.[68] In other words, it is not exactly clear what products and services metaverse-specific rules would end up covering.

Given these uncertainties—and the other arguments against regulation discussed in the previous sections—it would be premature to enact metaverse-specific rules. And yet, that is precisely what the commission appears to be contemplating.

In its call for evidence, the commission suggests that acting now will enable it to shape the metaverse industry to fit its own preferences, while guaranteeing that European firms are central to metaverse ecosystems:

The EU is well positioned to shape this next evolution, reflecting the EU‘s vision for the Digital Decade 20302 and in line with the European Declaration on Digital Rights and Principles , from the outset: open, interoperable, trusted, secure, privacy preserving, virtual worlds, respecting our legislation.[69]

But this outcome is anything but certain. Intervening so early in the industry’s life cycle is like aiming at a moving target. New rules or guidelines might end up being irrelevant before they have any influence on the products that firms develop. More worryingly, acting now signals that the metaverse industry will be subject to heightened regulatory scrutiny for the foreseeable future. In turn, this may deter large platforms from investing in the European market. It also may funnel venture-capital investments away from the European continent.

The core problem is that, without a clear sense of the market failures that need to be fixed, there is little apparent upside to offset the costs of regulation. The best evidence concerning these potential costs comes from the GDPR. While privacy regulation is obviously not the same as other types of economic regulation, the evidence concerning the GDPR suggests that regulation may, at least in some instances, slow down innovation and reduce competition.

The most-cited empirical evidence concerning the effects of the GDPR comes from a paper by Garrett Johnson and co-authors, who link the GDPR to widespread increases to market concentration, particularly in the short-term:

We show that websites’ vendor use falls after the European Union’s (EU’s) General Data Protection Regulation (GDPR), but that market concentration also increases among technology vendors that provide support services to websites…. The week after the GDPR’s enforcement, website use of web technology vendors falls by 15% for EU residents. Websites are relatively more likely to retain top vendors, which increases the concentration of the vendor market by 17%. Increased concentration predominantly arises among vendors that use personal data, such as cookies, and from the increased relative shares of Facebook and Google-owned vendors, but not from website consent requests. Although the aggregate changes in vendor use and vendor concentration dissipate by the end of 2018, we find that the GDPR impact persists in the advertising vendor category most scrutinized by regulators.[70]

Along similar lines, an NBER working paper by Jian Jia and co-authors finds that enactment of the GDPR markedly reduced venture-capital investments in Europe:

Our findings indicate a negative differential effect on EU ventures after the rollout of GDPR relative to their US counterparts. These negative effects manifest in the overall number of financing rounds, the overall dollar amount raised across rounds, and in the dollar amount raised per individual round. Specifically, our findings suggest a $3.38 million decrease in the aggregate dollars raised by EU ventures per state per crude industry category per week, a 17.6% reduction in the number of weekly venture deals, and a 39.6% decrease in the amount raised in an average deal following the rollout of GDPR.[71]

In another paper, Samuel Goldberg and co-authors find that the GDPR led to a roughly 12% reduction in website pageviews and e-commerce revenue in Europe.[72] Finally, Rebecca Janssen and her co-authors show that the GDPR decreased the number of apps offered on Google’s Play Store between 2016 and 2019:

Using data on 4.1 million apps at the Google Play Store from 2016 to 2019, we document that GDPR induced the exit of about a third of available apps; and in the quarters following implementation, entry of new apps fell by half.[73]

Of course, the body of evidence concerning the GDPR’s effects is not entirely unambiguous. For example, Rajkumar Vekatesean and co-authors find that the GDPR had mixed effects on the returns of different types of firms.[74] Other papers also show similarly mixed effects.[75]

Ultimately, the empirical literature concerning the effects of the GDPR shows that regulation—in this case, privacy protection—is no free lunch. Of course, this does not mean that regulating the metaverse would necessarily have these same effects. But in the absence of a clear market failure to solve, it is unclear why policymakers should run such a risk in the first place.

In the end, regulating the metaverse is unlikely to be costless. The metaverse is still in its infancy, regulation could deter essential innovation, and the commission has thus far failed to identify any serious market failures that warrant public intervention. The result is that the commission’s call for evidence appears premature or, in other words, that the commission is putting the meta-cart before the meta-horse.

[1] Virtual Worlds (Metaverses) – A Vision for Openness, Safety and Respect, European Commission, https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13757-Virtual-worlds-metaverses-a-vision-for-openness-safety-and-respect/feedback_en?p_id=31962299H (hereafter, “Call for Evidence”).

[2] Id.

[3] Jonathan Vaian, Meta’s Reality Labs Records $3.99 Billion Quarterly Loss as Zuckerberg Pumps More Cash into Metaverse, CNBC (Apr. 26, 2023), https://www.cnbc.com/2023/04/26/metas-reality-labs-unit-records-3point99-billion-first-quarter-loss-.html.

[4] Alan Truly, Horizon Worlds Leak: Only 1 in 10 Users Return & Web Launch Is Coming, Mixed News (Mar. 3, 2023), https://mixed-news.com/en/horizon-worlds-leak-only-1-in-10-users-return-web-launch-coming; Kevin Hurler, Hey Fellow Kids: Meta Is Revamping Horizon Worlds to Attract More Teen Users, Gizmodo (Feb. 7, 2023), https://gizmodo.com/meta-metaverse-facebook-horizon-worlds-vr-1850082068; Emma Roth, Meta’s Horizon Worlds VR Platform Is Reportedly Struggling to Keep Users, The Verge (Oct. 15, 2022),
https://www.theverge.com/2022/10/15/23405811/meta-horizon-worlds-losing-users-report; Paul Tassi, Meta’s ‘Horizon Worlds’ Has Somehow Lost 100,000 Players in Eight Months, Forbes, (Oct. 17, 2022), https://www.forbes.com/sites/paultassi/2022/10/17/metas-horizon-worlds-has-somehow-lost-100000-players-in-eight-months/?sh=57242b862a1b.

[5] Call for Evidence, supra note 1.

[6] Id.

[7] Id.

[8] Frank H. Easterbrook, Cyberspace and the Law of the Horse, 1996 U. Chi. Legal F. 207 (1996).

[9] Id. at 208.

[10] Call for Evidence, supra note 1.

[11] See Case COMP/C-3/37.792, Microsoft, OJ L 32 (May 24, 2004); see also, Case COMP/39.530, Microsoft (Tying), OJ C 120 (Apr. 26, 2013); Case AT.39740, Google Search (Shopping), 2017 E.R.C. I-379; Case AT.40099 Google Android, 2018 E.R.C.

[12] See European Commission Press Release IP/20/1073, Antitrust: Commission Opens Investigations into Apple’s App Store Rules (Jun. 16, 2020); European Commission Press Release IP/20/1075, Antitrust: Commission Opens Investigation into Apple Practices Regarding Apple Pay (Jun. 16, 2020); European Commission Press Release IP/19/4291, Antitrust: Commission Opens Investigation into Possible Anti-Competitive Conduct of Amazon (Jul. 17, 2019).

[13] Regulation (EU) No 2022/1925 of the European Parliament and of the Council of 14 September 2022 on contestable and fair markets in the digital sector and amending Directives (EU) 2019/1937 and (EU) 2020/1828 (Digital Markets Act), https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32022R1925.

[14] Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on Certain Legal Aspects of Information Society Services, in Particular Electronic Commerce, in the Internal Market (hereafter, “eCommerce Directive”), https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A32000L0031.

[15] Id. art. 12 to 15.

[16] Regulation EU 2022/2065 of the European Parliament and of the Council of 19 October 2022 on a Single Market For Digital Services and Amending Directive 2000/31/EC (Digital Services Act), https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32022R2065 (hereafter, “DSA”).

[17] Call for Evidence, supra note 1.

[18] Terms of Use, Decentraland, https://decentraland.org/terms (last visited May 2, 2023).

[19] Andrew N. Choi & Cynthia A. Gierhart, Intellectual Property Enforcement in the Metaverse, Part 2, Holland & Knight (Oct. 13, 2022), https://www.hklaw.com/en/insights/publications/2022/10/intellectual-property-enforcement-in-the-metaverse-part-2; see, more generally, Thibault Schrepel, Blockchain + Antitrust (Elgar, 2021).

[20] Aron Garst, Fortnite and Roblox Are Dueling for the Future of User-Built Games, The Verge (Apr. 7, 2023), https://www.theverge.com/23674121/fortnite-roblox-user-generated-games.

[21] Lawrence Lessig, The Law of the Horse: What Cyberlaw Might Teach, 113 Harv. L. Rev. 510 (1999).

[22] Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the Protection of Natural Persons with Regard to the Processing of Personal Data and on the Free Movement of Such Data, and Repealing Directive 95/46/EC (General Data Protection Regulation); DSA, supra note 16; eCommerce Directive, supra note 14

[23] Lessig, supra note 22, at 507 (“Behavior, we might say, is regulated by four kinds of constraints. Law is just one of those constraints. Law (in at least one of its aspects) orders people to behave in certain ways; it threatens punishment if they do not obey. The law tells me not to buy certain drugs, not to sell cigarettes without a license, and not to trade across international borders without first filing a customs form. It promises strict punishments if these orders are not followed. In this way, we say that law regulates. But not only law regulates in this sense. Social norms do as well. Norms control where I can smoke; they affect how I behave with members of the opposite sex; they limit what I may wear; they influence whether I will pay my taxes. Like law, norms regulate by threatening punishment ex post. But unlike law, the punishments of norms are not centralized. Norms are enforced (if at all) by a community, not by a government. In this way, norms constrain, and therefore regulate. Markets, too, regulate. They regulate by price. The price of gasoline limits the amount one drives – more so in Europe than in the United States. The price of subway tickets affects the use of public transportation – more so in Europe than in the United States. Of course the market is able to constrain in this manner only because of other constraints of law and social norms: property and contract law govern markets; markets operate within the domain permitted by social norms. But given these norms, and given this law, the market presents another set of constraints on individual and collective behavior. And finally, there is a fourth feature of real space that regulates behavior – “architecture.””).

[24] Id. at 538-541; see also, Frank H. Easterbrook, Limits of Antitrust, 63 Tex. L. Rev. 1 (1984); Geoffrey A. Manne & Joshua D. Wright, Innovation and the Limits of Antitrust, 6 J. Comp. L. & Econ. 153 (2010); Geoffrey A. Manne, Error Costs in Digital Markets, 3 GAI Report on Competition in Digital Markets 33 (2020).

[25] R. H. Coase, The Problem of Social Cost, 9 J.L. & Econ. 15 (1960).

[26] Lessig, supra note 22, at 508.

[27] Call for Evidence, supra note 1.

[28] Catherine Thorbecke, What Metaverse? Meta Says Its Single Largest Investment Is Now in ‘Advancing AI’, CNN Business (Mar. 15, 2023), https://www.cnn.com/2023/03/15/tech/meta-ai-investment-priority/index.html; Ben Marlow, Mark Zuckerberg’s Metaverse Is Shattering into a Million Pieces, The Telegraph (Apr. 23, 2023), https://www.telegraph.co.uk/business/2023/04/21/mark-zuckerbergs-metaverse-shattering-million-pieces; Will Gendron, Meta Has Reportedly Stopped Pitching Advertisers on the Metaverse, BusinessInsider (Apr. 18, 2023), https://www.businessinsider.com/meta-zuckerberg-stopped-pitching-advertisers-metaverse-focus-reels-ai-report-2023-4.

[29] Mansoor Iqbal, Fortnite Usage and Revenue Statistics, Business of Apps (Jan. 9, 2023), https://www.businessofapps.com/data/fortnite-statistics; Matija Ferjan, 76 Little-Known Metaverse Statistics & Facts (2023 Data), Headphones Addict (Feb. 13, 2023), https://headphonesaddict.com/metaverse-statistics.

[30] James Batchelor, Meta’s Flagship Metaverse Horizon Worlds Struggling to Attract and Retain Users, Games Industry (Oct. 17, 2022), https://www.gamesindustry.biz/metas-flagship-metaverse-horizon-worlds-struggling-to-attract-and-retain-users; Ferjan, id.

[31] Richard Lawler, Decentraland’s Billion-Dollar ‘Metaverse’ Reportedly Had 38 Active Users in One Day, The Verge (Oct. 13, 2022), https://www.theverge.com/2022/10/13/23402418/decentraland-metaverse-empty-38-users-dappradar-wallet-data; The Sandbox, DappRadar, https://dappradar.com/multichain/games/the-sandbox (last visited May 3, 2023); Decentraland, DappRadar, https://dappradar.com/multichain/social/decentraland (last visited May 3, 2023).

[32] David J. Teece, Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy, 15 Research Policy 285-305 (1986), https://www.sciencedirect.com/science/article/abs/pii/0048733386900272.

[33] Geoffrey Manne & Dirk Auer, Antitrust Dystopia and Antitrust Nostalgia: Alarmist Theories of Harm in Digital Markets and Their Origins, 28 Geo. Mason L. Rev. 1279 (2021).

[34] Roblox, Wikipedia, https://en.wikipedia.org/wiki/Roblox (last visited May 3, 2023); Minecraft, Wikipedia, https://en.wikipedia.org/wiki/Minecraft (last visited May 3, 2023); Fortnite, Wikipedia, https://en.wikipedia.org/wiki/Fortnite (last visited May 3, 2023); see Fiza Chowdhury, Minecraft vs Roblox vs Fortnite: Which Is Better?, Metagreats (Feb. 20, 2023), https://www.metagreats.com/minecraft-vs-roblox-vs-fortnite.

[35]  Marc Rysman, The Economics of Two-Sided Markets, 13 J. Econ. Perspectives 134 (2009) (“First, if standards can differentiate from each other, they may be able to successfully coexist (Chou and Shy, 1990; Church and Gandal, 1992). Arguably, Apple and Microsoft operating systems have both survived by specializing in different markets: Microsoft in business and Apple in graphics and education. Magazines are an obvious example of platforms that differentiate in many dimensions and hence coexist.”).

[36] Id. at 134 (“Second, tipping is less likely if agents can easily use multiple standards. Corts and Lederman (forthcoming) show that the fixed cost of producing a video game for one more standard have reduced over time relative to the overall fixed costs of producing a game, which has led to increased distribution of games across multiple game systems (for example, PlayStation, Nintendo, and Xbox) and a less-concentrated game system market.”).

[37] What Are Fortnite, Roblox, Minecraft and Among Us? A Parent’s Guide to the Most Popular Online Games Kids Are Playing, FTC Business (Oct. 5, 2021), https://www.ftc.net/blog/what-are-fortnite-roblox-minecraft-and-among-us-a-parents-guide-to-the-most-popular-online-games-kids-are-playing; Jay Peters, Epic Is Merging Its Digital Asset Stores into One Huge Marketplace, The Verge (Mar. 22, 2023), https://www.theverge.com/2023/3/22/23645601/epic-games-fab-asset-marketplace-state-of-unreal-2023-gdc.

[38] Luke Winkie, Inside Roblox’s Criminal Underworld, Where Kids Are Scamming Kids, IGN (Jan. 2, 2023), https://www.ign.com/articles/inside-robloxs-criminal-underworld-where-kids-are-scamming-kids; Fake Minecraft Updates Pose Threat to Users, Tribune (Sept. 11, 2022), https://tribune.com.pk/story/2376087/fake-minecraft-updates-pose-threat-to-users; Ana Diaz, Roblox and the Wild West of Teenage Scammers, Polygon (Aug. 24, 2019) https://www.polygon.com/2019/8/24/20812218/roblox-teenage-developers-controversy-scammers-prison-roleplay; Rebecca Alter, Fortnite Tries Not to Scam Children and Face $520 Million in FTC Fines Challenge, Vulture (Dec. 19, 2022), https://www.vulture.com/2022/12/fortnite-epic-games-ftc-fines-privacy.html; Leonid Grustniy, Swindle Royale: Fortnite Scammers Get Busy, Kaspersky Daily (Dec. 3, 2020), https://www.kaspersky.com/blog/top-four-fortnite-scams/37896.

[39] See, generally, David Evans & Richard Schmalensee, Matchmakers: The New Economics of Multisided Platforms (Harvard Business Review Press, 2016).

[40] David S. Evans, Governing Bad Behaviour By Users of Multi-Sided Platforms, Berkley Technology Law Journal 27:2 (2012), 1201.

[41] Call for Evidence, supra note 1.

[42] Id.

[43] See Case COMP/C-3/37.792, Microsoft, OJ L 32 (May 24, 2004). See also, Case COMP/39.530, Microsoft (Tying), OJ C 120 (Apr. 26, 2013).

[44] See Complaint, Epic Games, Inc. v. Apple Inc., 493 F. Supp. 3d 817 (N.D. Cal. 2020) (4:20-cv-05640-YGR).

[45] See European Commission Press Release IP/20/1073, Antitrust: Commission Opens Investigations into Apple’s App Store Rules (Jun. 16, 2020); European Commission Press Release IP/20/1075, Antitrust: Commission Opens Investigation into Apple Practices Regarding Apple Pay (Jun. 16, 2020).

[46] See European Commission Press Release IP/18/421, Antitrust: Commission Fines Qualcomm €997 Million for Abuse of Dominant Market Position (Jan. 24, 2018); Federal Trade Commission v. Qualcomm Inc., 969 F.3d 974 (9th Cir. 2020).

[47] See European Commission Press Release IP/19/4291, Antitrust: Commission Opens Investigation into Possible Anti-Competitive Conduct of Amazon (Jul. 17, 2019).

[48] See Case AT.39740, Google Search (Shopping), 2017 E.R.C. I-379. See also, Case AT.40099 (Google Android), 2018 E.R.C.

[49] See Complaint, United States v. Google, LLC, (2020), https://www.justice.gov/opa/pr/justice-department-sues-monopolist-google-violating-antitrust-laws; see also, Complaint, Colorado et al. v. Google, LLC, (2020), available at https://coag.gov/app/uploads/2020/12/Colorado-et-al.-v.-Google-PUBLIC-REDACTED-Complaint.pdf.

[50] See, e.g., Giorgio Monti, The Digital Markets Act: Institutional Design and Suggestions for Improvement, Tillburg L. & Econ. Ctr., Discussion Paper No. 2021-04 (2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3797730 (“In sum, the DMA is more than an enhanced and simplified application of Article 102 TFEU: while the obligations may be criticised as being based on existing competition concerns, they are forward-looking in trying to create a regulatory environment where gatekeeper power is contained and perhaps even reduced.”) (Emphasis added).

[51] See, e.g., Aurelien Portuese, “Please, Help Yourself”: Toward a Taxonomy of Self-Preferencing, Information Technology & Innovation Foundation (Oct. 25, 2021), available at https://itif.org/sites/default/files/2021-self-preferencing-taxonomy.pdf. (“The latest example of such weaponization of self-preferencing by antitrust populists is provided by Sens. Amy Klobuchar (D-MN) and Chuck Grassley (R-IA). They introduced legislation in October 2021 aimed at prohibiting the practice.2 However, the legislation would ban self-preferencing only for a handful of designated companies—the so-called “covered platforms,” not the thousands of brick-and-mortar sellers that daily self-preference for the benefit of consumers. Mimicking the European Commission’s Digital Markets Act prohibiting self-preferencing, Senate and the House bills would degrade consumers’ experience and undermine competition, since self-preferencing often benefits consumers and constitutes an integral part, rather than an abnormality, of the process of competition.”).

[52] Efforts to saddle platforms with “non-discrimination” constraints are tantamount to mandating openness. See Geoffrey A. Manne, Against the Vertical Discrimination Presumption, Foreword, Concurrences No. 2-2020 (2020) at 2 (“The notion that platforms should be forced to allow complementors to compete on their own terms, free of constraints or competition from platforms is a species of the idea that platforms are most socially valuable when they are most ‘open.’ But mandating openness is not without costs, most importantly in terms of the effective operation of the platform and its own incentives for innovation.”).

[53] See, e.g., Klint Finley, Your Own Private Google: The Quest for an Open Source Search Engine, Wired (Jul. 12, 2021), https://www.wired.com/2012/12/solar-elasticsearch-google.

[54] See Brian Connolly, Selling on Amazon vs. eBay in 2021: Which Is Better?, JungleScout (Jan. 12, 2021), https://www.junglescout.com/blog/amazon-vs-ebay; Crucial Differences Between Amazon and eBay, SaleHOO, https://www.salehoo.com/educate/selling-on-amazon/crucial-differences-between-amazon-and-ebay (last visited Feb. 8, 2021).

[55] See, e.g., Dolby Vision Is Winning the War Against HDR10 +, It Requires a Single Standard, Tech Smart, https://voonze.com/dolby-vision-is-winning-the-war-against-hdr10-it-requires-a-single-standard (last visited June 6, 2022).

[56] On the importance of managers, see, e.g., Nicolai J Foss & Peter G Klein, Why Managers Still Matter, 56 MIT Sloan Mgmt. Rev., 73 (2014) (“In today’s knowledge-based economy, managerial authority is supposedly in decline. But there is still a strong need for someone to define and implement the organizational rules of the game.”).

[57] It is generally agreed upon that anticompetitive foreclosure is possible only when a firm enjoys some degree of market power. Frank H. Easterbrook, Limits of Antitrust, 63 Tex. L. Rev. 1, 20 (1984) (“Firms that lack power cannot injure competition no matter how hard they try. They may injure a few consumers, or a few rivals, or themselves (see (2) below) by selecting ‘anticompetitive’ tactics. When the firms lack market power, though, they cannot persist in deleterious practices. Rival firms will offer the consumers better deals. Rivals’ better offers will stamp out bad practices faster than the judicial process can. For these and other reasons many lower courts have held that proof of market power is an indispensable first step in any case under the Rule of Reason. The Supreme Court has established a market power hurdle in tying cases, despite the nominally per se character of the tying offense, on the same ground offered here: if the defendant lacks market power, other firms can offer the customer a better deal, and there is no need for judicial intervention.”).

[58] See, e.g., Josh Lerner & Jean Tirole, Some Simple Economics of Open Source, 50 J. Indus. Econ. 197 (2002).

[59] See Matthew Miller, Thanks, Samsung: Android’s Best Mobile Browser Now Available to All, ZDNet (Aug. 11, 2017), https://www.zdnet.com/article/thanks-samsung-androids-best-mobile-browser-now-available-to-all.

[60] FACT SHEET: Windows XP N Sales, RegMedia (Jun. 12, 2009), available at https://regmedia.co.uk/2009/06/12/microsoft_windows_xp_n_fact_sheet.pdf.

[61] See Case COMP/39.530, Microsoft (Tying), OJ C 120 (Apr. 26, 2013).

[62] Konstantinos Stylianou, Systemic Efficiencies in Competition Law: Evidence from the ICT Industry, 12 J. Competition L. & Econ. 557 (2016).

[63] See, e.g., Steven Sinofsky, The App Store Debate: A Story of Ecosystems, Medium (Jun. 21, 2020), https://medium.learningbyshipping.com/the-app-store-debate-a-story-of-ecosystems-938424eeef74.

[64] Id.

[65] See, e.g., Benjamin Klein, Market Power in Aftermarkets, 17 Managerial & Decision Econ. 143 (1996).

[66] See, e.g., Simon Hill, What Is Android Fragmentation, and Can Google Ever Fix It?, DigitalTrends (Oct. 31, 2018), https://www.digitaltrends.com/mobile/what-is-android-fragmentation-and-can-google-ever-fix-it.

[67] Metaverse Market Revenue Worldwide from 2022 to 2030, Statista, https://www.statista.com/statistics/1295784/metaverse-market-size (last visited May 3, 2023); Metaverse Market by Component (Hardware, Software (Extended Reality Software, Gaming Engine, 3D Mapping, Modeling & Reconstruction, Metaverse Platform, Financial Platform), and Professional Services), Vertical and Region – Global Forecast to 2027, Markets and Markets (Apr. 27, 2023), https://www.marketsandmarkets.com/Market-Reports/metaverse-market-166893905.html; see also, Press Release, Metaverse Market Size Worth $ 824.53 Billion, Globally, by 2030 at 39.1% CAGR, Verified Market Research (Jul. 13, 2022), https://www.prnewswire.com/news-releases/metaverse-market-size-worth–824-53-billion-globally-by-2030-at-39-1-cagr-verified-market-research-301585725.html.

[68] See, e.g., Megan Farokhmanesh, Will the Metaverse Live Up to the Hype? Game Developers Aren’t Impressed, Wired (Jan. 19, 2023), https://www.wired.com/story/metaverse-video-games-fortnite-zuckerberg; see also Mitch Wagner, The Metaverse Hype Bubble Has Popped. What Now?, Fierce Electronics (Feb. 24, 2023), https://www.fierceelectronics.com/embedded/metaverse-hype-bubble-has-popped-what-now.

[69] Call for Evidence, supra note 1.

[70] Garret A. Johnson, et al., Privacy and Market Concentration: Intended and Unintended Consequences of the GDPR, Forthcoming Management Science 1 (2023).

[71] Jian Jia, et al., The Short-Run Effects of GDPR on Technology Venture Investment, NBER Working Paper 25248, 4 (2018), available at https://www.nber.org/system/files/working_papers/w25248/w25248.pdf.

[72] Samuel G. Goldberg, Garrett A. Johnson, & Scott K. Shriver, Regulating Privacy Online: An Economic Evaluation of GDPR (2021), available at https://www.ftc.gov/system/files/documents/public_events/1588356/johnsongoldbergshriver.pdf.

[73] Rebecca Janßen, Reinhold Kesler, Michael Kummer, & Joel Waldfogel, GDPR and the Lost Generation of Innovative Apps, Nber Working Paper 30028, 2 (2022), available at https://www.nber.org/system/files/working_papers/w30028/w30028.pdf.

[74] Rajkumar Venkatesan, S. Arunachalam & Kiran Pedada, Short Run Effects of Generalized Data Protection Act on Returns from AI Acquisitions, University of Virginia Working Paper 6 (2022), available at: https://conference.nber.org/conf_papers/f161612.pdf. (“On average, GDPR exposure reduces the ROA of firms. We also find that GDPR exposure increases the ROA of firms that make AI acquisitions for improving customer experience, and cybersecurity. Returns on AI investments in innovation and operational efficiencies are unaffected by GDPR.”)

[75] For a detailed discussion of the empirical literature concerning the GDPR, see Garrett Johnson, Economic Research on Privacy Regulation: Lessons From the GDPR And Beyond, NBER Working Paper 30705 (2022), available at https://www.nber.org/system/files/working_papers/w30705/w30705.pdf.

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Antitrust & Consumer Protection

The EU’s ChatGPT Panic Is Emblematic of Its Flailing Tech Policy

Popular Media The European Union dreams of being a leading hub for tech innovation. But it is increasingly clear this is wishful thinking. Heavy-handed regulation is making . . .

The European Union dreams of being a leading hub for tech innovation. But it is increasingly clear this is wishful thinking. Heavy-handed regulation is making the bloc inhospitable to innovation, and investors are looking elsewhere. The EU’s recent pushback against ChatGPT is just the latest sign that this is not going to change.

Read the full piece here.

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Antitrust & Consumer Protection

Europe’s New SEP Regulation: All Quiet on the Patent Front?

TL;DR Background: The European Commission is about to unveil draft regulation that will more tightly regulate how patents are incorporated into technology standards. The Commission’s expert . . .

Background: The European Commission is about to unveil draft regulation that will more tightly regulate how patents are incorporated into technology standards. The Commission’s expert report and call for comments suggest that it wants to create a regime of third-party checks that would verify whether inventors’ patents are truly essential to a technology standard (i.e., “essentiality checks”). The goal ultimately is to ensure that standard-essential patents (SEPs) are adequately disclosed to would-be licensees. There are thousands of SEPs that underpin the technologies powering the digital economy, thus making it essential that firms coordinate to develop and implement these technologies.

However… It is unclear that such regulation would improve upon the status quo. While it might not be perfect, the existing approach to essentially checks has seen SEP-reliant industries provide countless technological breakthroughs. This has led industries where SEPs are particularly relevant to occupy key geostrategic positions. By contrast, imposing heavy-handed regulation risks not only that there will be harm to consumers, but the potential that the West’s strategic position relative to adversarial foreign powers like China or Russia may be weakened.

THE ROLE OF ESSENTIALITY CHECKS

Technical standards (e.g., 5G, WiFi, USB-C, etc.) often rely on hundreds—sometimes thousands—of distinct inventions that can each be covered by multiple patents. 

Firms that commercialize goods incorporating these technologies need to know which patents are essential to those standards—thus avoiding situations where license fees are paid for technologies that are not necessary to practice a given standard.

Essentiality checks can potentially streamline this process, thereby limiting the over- and/or under-disclosure of SEPs. But this is a complex and costly endeavor. The benefits of achieving perfect disclosure of SEPs—be it via market forces or regulation—are thus unlikely to outweigh the costs.

WHO SHOULD ASSESS ESSENTIALITY?

As things stand, a patent’s essentiality is determined in various ways. These include the use of patent pools, self-assessments by inventors, and evaluations outsourced to third-party experts. 

Whatever one thinks of that heterogeneous approach, it is clear that the SEP industry has thrived under this laissez-faire paradigm, and that competition among the various inventors, implementers, and standards-development organizations (who bring inventors and implementers together) has played a useful role in optimizing these processes. Regulators should thus be wary not to upset the apple cart.

In contrast, the Commission’s expert report and its call for comments both suggest that it favors a more centralized system in which government institutions, such as patent offices, would act as backstops for essentiality checks. 

Such a system would not be without risks. Indeed, there is little evidence that SEP-heavy industries are underperforming. Any reform thus risks creating more friction than it removes.

WHAT ABOUT SANCTIONS?

There are fears that excessive sanctions for failing to adequately disclose essential patents could tilt the bargaining power in SEP-reliant industries toward implementers. In turn, this could undermine inventors’ incentive to produce new technologies.

In recent years, courts around the world have sought to strike an appropriate balance between the interests of inventors and implementers. In doing so, they have foiled attempts by several regulators to limit the royalties that inventors can extract; to prevent them from obtaining injunctions against infringers of their patents; and to determine the level of the value chain at which royalties are to be calculated. 

One concern is that the draft regulation may seek to forward those goals by assessing penalties for failing to comply with its provisions. For instance, inventors may lose the ability to bring injunctions against infringers if a third party deems their patent to be non-essential. Given the vital role that these injunctions play, such a policy would be misguided.

GEOSTRATEGIC IMPACT 

Finally, overburdening firms that are active in the SEP space could erode the West’s technological leadership relative to states with manufacturing-reliant economies whose political leaders routinely undermine the intellectual property rights of foreign firms.

Many SEPs, particularly those relevant to the telecommunications sector, are held by companies in the West and specifically in the United States. The lion’s share of implementers, by contrast, are based in China. Policies that impose significant costs on inventors and benefit implementers may thus amount to a subsidy to Chinese firms and a tax on Western innovation.

These harmful consequences are magnified in light of China’s strategic effort to shape international technology standards. With European firms systematically deterred from participating in the development of open technology standards, Chinese firms—directed by their government authorities—will gain significant control of the technologies that underpin tomorrow’s digital goods and services. The consequences are potentially catastrophic.

For more on this issue, see ICLE’s academic output on standard essential patents here and here, and our response to the Commission’s recent consultation here

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Intellectual Property & Licensing

Killer Acquisition or Leveling Up: The Use of Mergers to Enter Adjacent Markets

TOTM In the world of video games, the process by which players train themselves or their characters in order to overcome a difficult “boss battle” is . . .

In the world of video games, the process by which players train themselves or their characters in order to overcome a difficult “boss battle” is called “leveling up.” I find that the phrase also serves as a useful metaphor in the context of corporate mergers. Here, “leveling up” can be thought of as acquiring another firm in order to enter or reinforce one’s presence in an adjacent market where a larger and more successful incumbent is already active.

Read the full piece here.

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Antitrust & Consumer Protection

Brief of ICLE and Law & Economics Scholars in Deslandes v. McDonald’s

Amicus Brief Interest of Amicus Curiae[1] The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center aimed at building the . . .

Interest of Amicus Curiae[1]

The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center aimed at building the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law and economics methodologies to inform public policy debates and has longstanding expertise in antitrust law.

Amici also include twenty scholars of antitrust, law, and economics at leading universities and research institutions across the United States. Their names, titles, and academic affiliations are listed in Appendix A. All have longstanding expertise in antitrust law and economics.

Amici respectfully submit that their amicus brief will aid the Court in reviewing the order of dismissal by explaining that Plaintiffs did not plead and could not prove any plausible product or geographic market. This is a point that Plaintiffs attempt to elide in their appellate brief that warrants this Court’s attention. The foundation of almost every antitrust claim is a plausible market definition, yet Plaintiffs’ claims in this case are premised on a labor market—limited to one company (McDonald’s), but nationwide in scope—that has no basis in economic reality.

In addition, amici explain why Plaintiffs’ claims are subject to rule of reason scrutiny. This case involves a vertical, intrabrand restraint between McDonald’s and its franchisees, which promoted interbrand competition. It was not a naked restraint on trade, but rather an ancillary restriction that furthered McDonald’s procompetitive goal of creating a strong and stable brand. Treating such a restraint as per se unlawful, as Plaintiffs ask this Court to do, would stifle the type of legitimate cooperation that facilitates output and would ultimately harm consumers.

INTRODUCTION AND SUMMARY OF ARGUMENT

Until 2017, McDonald’s franchise agreements included a provision that prevented franchisees from hiring workers from other McDonald’s restaurants within the six-month period immediately following the workers’ prior employment. Two employees sued McDonald’s in a putative class action, alleging that this provision—which the parties refer to as “Paragraph 14”—was an unlawful agreement under Section 1 of the Sherman Act, 15 U.S.C. § 1, that harmed competition by artificially suppressing wages. Plaintiffs argued that Paragraph 14 was per se unlawful or failed “quick look” review; on appeal (but not below), Plaintiffs also argue that Paragraph 14 fails scrutiny under the rule of reason. Brief of Appellants at 31-33, Deslandes v. McDonald’s USA LLC, No. 22-2333 & 22-2334 (7th Cir.) (“App. Br.”).

Under the rule of reason, Plaintiffs had the burden to plead and prove the relevant product and geographic markets within which McDonald’s allegedly exerted market power and caused the alleged anticompetitive effects. Plaintiffs’ claim has always been premised—explicitly or implicitly—on a single-brand and nationwide labor market for McDonald’s employees. (§ I.A). Although Plaintiffs shy away from that market on appeal, it is the only one discernible from the record and the only one on which Plaintiffs’ claims could possibly be premised. But that market is fatally flawed along the two axes that typically delineate antitrust markets: (1) geography and (2) products or services.

First, the relevant labor market is local: there is no national market for fast-food restaurant employees, as Plaintiffs suggest. Low-skilled restaurant workers sell their labor in local markets, primarily to avoid long commutes or relocation. The economic (and commonsense) reality is that a person applying for a McDonald’s job in Chicago, Illinois is not also looking for a McDonald’s job in Florida or Montana; nor are local McDonald’s restaurants recruiting employees nationwide. (§ I.B). Second, there is no McDonald’s-specific labor market for restaurant employees. McDonald’s restaurants compete vigorously with other fast-food and quick-service restaurants—and with firms outside the restaurant industry—for labor. Empirical economic evidence refutes Plaintiffs’ arguments to the contrary. (§ I.C).

Further, Plaintiffs cannot avoid the rule of reason (or their burden to plead and prove a relevant market) by invoking per se scrutiny. (§ II). First, Paragraph 14 was not a horizontal restraint; it was a vertical, intrabrand restraint between McDonald’s and its franchisees. (§ II.A). Second, Paragraph 14 was not a naked restraint on trade but was instead “ancillary” to McDonald’s procompetitive endeavor of developing its brand. (§ II.B). Third, Paragraph 14 does not fall in the narrow class of restrictions—like price fixing—universally condemned as anticompetitive. Nor are there sufficient economic studies showing that restraints like Paragraph 14 have a demonstrable and negative impact on trade, such that there would be a basis to depart from the default rule of reason standard. (§ II.C).

I.             There is no Nationwide, Single-Brand Market for McDonald’s Employment

Market definition enables courts to determine whether firms possess market power capable of restricting competition. The market provides a locus for the assessment of that market power and of whether that power has been exploited to harm competition and consumers.

Accordingly, “courts usually cannot properly apply the rule of reason without an accurate definition of the relevant market.” Ohio v. Am. Express Co., 138 S. Ct. 2274, 2285 (2018). The rule of reason requires a court to assess the “actual effect” that a defendant’s conduct has on competition. Id. at 2284 (quoting Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 768 (1984)). And without knowing the relevant market, “there is no way to measure the defendant’s ability to lessen or destroy competition.” Id. at 2285 (quoting Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965)).[2]

A.             Plaintiffs Must Allege and Prove a Relevant Market

In the district court, Plaintiffs did not clearly define the relevant market in which Paragraph 14 allegedly harmed competition; and that failure defeats their claim under the rule of reason. See Agnew v. Nat’l Collegiate Athletic Ass’n, 683 F.3d 328, 347 (7th Cir. 2012) (affirming dismissal where “[p]laintiffs appear to have made the strategic decision to forgo identifying a specific relevant market,” and rejecting “post hoc arguments attempting to illuminate a buried market allegation”).

Plaintiffs are wrong to assert that they can rely on “direct evidence” of anticompetitive harm to avoid establishing a relevant market. App. Br. at 31. Even if they had such evidence, Plaintiffs would still have the burden to sketch out the “rough contours” of the relevant market and to show that McDonald’s commanded a substantial share of that market. See Republic Tobacco Co. v. N. Atl. Trading Co., 381 F.3d 717, 737 (7th Cir. 2004) (“[I]f a plaintiff can show the rough contours of a relevant market, and show that the defendant commands a substantial share of the market, then direct evidence of anticompetitive effects can establish the defendant’s market power[.]” (emphases added)). But Plaintiffs never inform this Court what product or geographic markets are involved here, even “roughly” speaking. Accordingly, Plaintiffs’ references to their supposed “direct evidence” of anticompetitive harm, without regard to any market boundaries, App. Br. at 31-32, do not suffice.[3]

Rather than define a market, Plaintiffs fault the district court for assuming that their claim “depended upon a single, nationwide geographic market.” App. Br. at 31. But that assumption came not from the district court but from Plaintiffs themselves—as that was the only market potentially discernible in their complaints. See First Am. Compl. ¶¶ 1, 117; Turner Compl. ¶¶ 109-13 (implying a single-brand, nationwide market). While Plaintiffs try to obscure their single-brand, nationwide market for McDonald’s labor on appeal, that is the only one that Plaintiffs rely upon in their opening brief, albeit obliquely. See App. Br. at 31 (arguing that Paragraph 14 “suppressed worker pay nationwide”); id. at 33 (arguing that McDonald’s and its franchisees were the “discrete group of buyers” that were able to “hold down wages”).

Plaintiffs’ proposed market is both implausible and economically unsound. Antitrust markets typically have two dimensions: (1) a geographic market and (2) a product or services market. See Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962). Plaintiffs’ single-brand, nationwide market fails along both dimensions.

B.        The Relevant Market is Local, not National

First, to identify a relevant geographic market, the court must make a “careful selection of the market area in which the seller operates, and to which the purchaser can practicably turn for supplies.” Republic Tobacco, 381 F.3d at 738 (citing Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961)). In labor markets, the “sellers” are workers or job applicants selling their services (like Plaintiffs), and “purchasers” are employers (like McDonald’s) that compete with other firms to hire, employ, and retain the workers.

As the district court correctly found, low-wage restaurant employees sell their labor locally and McDonald’s restaurants compete only with geographically proximate employers to purchase that labor. See D.E. 372 (“Class Cert. Op.”) at 20-21. Fast-food and quick-serve restaurant employees are generally low-skilled and/or entry-level workers who “are looking for a position in the geographic area in which they already live and work, not a position requiring a long commute or a move.” Id. at 21.

While some employees might relocate for other reasons first, and then seek a restaurant job, it is not economically plausible that they would “search long distances for a low-skill job with the idea of then moving closer to the job.” Id. The costs of relocation—in economic terms, the “search” costs and “transition” costs—would far exceed any cost-adjusted increases in pay and benefits.

In practical terms, an hourly McDonald’s worker in Apopka, Florida who does not otherwise desire to move to California would not uproot her life, and leave family and friends, for a McDonald’s job in Los Angeles—even if the Los Angeles franchisee offers to raise her wages a few dollars per hour. The employee has many alternative opportunities that do not require relocation and, in any event, the higher cost of living in Los Angeles would negate the benefits of the wage increase. The total costs of relocation likely outweigh the marginal wage gain.

For similar reasons, an employee is unlikely to commute long distances—for example, from Urbana to Chicago, Illinois—to work at a McDonald’s, even if the McDonald’s in Chicago pays slightly higher wages than the one in Urbana. A marginal wage increase would not offset the time and “commuting costs”—i.e., gas and mileage. See Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application ¶ 552 (5th ed. 2022) (explaining that “commuting costs” limit a supplier’s ability to operate in a distant geographic market).

Nor is it plausible that a McDonald’s franchisee in Apopka, Florida would recruit workers nationwide. That franchisee also faces search costs in the labor market. It must advertise its job openings, hire recruiters, and interview applicants, among other things. It would not be worthwhile to incur the substantial costs of a nationwide search for employees, when those employees would likely remain at the job for a relatively short time, and when there are many local workers with similar skills who could fill the role.

To be sure, some highly skilled employees in other industries—for example, corporate executives or professional athletes—undoubtedly search for high-paying or prestigious jobs nationwide. And their potential employers recruit nationwide. For those types of job-seekers, their decisions turn on the scarcity of those jobs, the substantial personal and financial investments (“sunk costs”) they have made to be qualified for such positions (which essentially “lock” them into the nationwide market), and the high salaries or total compensation that make relocation worthwhile. Likewise, for the hiring firm, the search is justified by the small number of qualified candidates, widely distributed across the country, and by the expected benefits. For example, it would be worthwhile for a firm to  search far and wide for a new CEO, knowing that there are only a few people in the country with the skills and leadership ability to lead the company out of financial troubles.

These rarefied exceptions confirm that the vast majority of labor markets are “geographically quite small.” Herbert Hovenkamp, Competition Policy for Labour Markets, U. Pa. Inst. L. & Econ. ¶ 12 (May 17, 2019). Applicants for low paying and fungible jobs have fundamentally different incentives than do corporate executives and professional athletes. The former do not have adequate incentives for a national search, given the substantial costs, plus relocation or long-distance commuting.

These intuitive points are supported by data and established economic methods. Several recent economic studies demonstrate that, “in a wide range of industries[,] geographic markets for employment are rather small,” and that this is “particularly true of low-wage employees.” Areeda & Hovenkamp, supra ¶ 550b (collecting studies). One empirical study shows that “more than 80% of [all] job applications occur where the applicant and prospective employer are within the same ‘commuting zone.’” Ioana Marinescu & Roland Rathelot, Mismatch Unemployment and the Geography of Job Search, 10(3) Am. Econ. J. Macro. 42 (2018).

The U.S. Bureau of Labor Statistics (“BLS”) employs a methodology that confirms the district court’s findings with respect to localized markets. When BLS collects employment and unemployment statistics, it examines the “economically integrated geographic area within which individuals can reside and find employment within a reasonable distance or can readily change employment without changing their place of residence.” BLS, Local Area Unemployment Statistics Geographic Concepts, (Mar. 20, 2020). According to BLS, metropolitan and micropolitan areas are the “major” “labor market areas” (LMAs)—not the country as a whole. Id. The balance of the nation’s LMAs comprise a larger number of smaller geographic areas. Id. BLS identifies thousands of these small LMAs for each decennial census, based on its analysis of highly localized commuting flows. Id; see also Data.Gov, Commuting Zones and Labor Market Areas,  (Nov. 10, 2020).

Plaintiffs’ own expert witnesses acknowledged that a nationwide market was implausible in this case. Dr. Peter Capelli conceded that restaurant workers are employed in local geographic markets, defined by commuting distances. Class Cert. Op at 22-23 (citing Capelli Dep. at 235-36, D.E. 302-1 at 608-09) (“My testimony is that for the restaurant employees in particular, the crew employees, there may be labor markets of different geographic size and that the key issue there might not even be size, it might be commuting distance.”). And Dr. Hal Singer calculated that only 8% of McDonald’s employees commute ten or more miles to work. Id. at 23 (citing Singer Rep. ¶ 64, D.E. 271-5 at 54).

Other evidence in this case also demonstrates that market conditions vary substantially by location. McDonald’s own guidelines on worker pay account for local conditions. D.E. 302-19 at -997; D.E. 302-19 at -432, -444; see also D.E. 380 ¶¶ 40-50. The guidelines do not set forth a single, rigid nationwide formula—which one would expect to see if McDonald’s understood that its franchisees were competing for labor nationwide.

As this Court recently explained, “[t]he antitrust statutes require a ‘pragmatic’ and ‘factual’ approach to defining the geographic market,” and “[t]he market must ‘correspond to the commercial realities of the industry.’” Sharif Pharmacy, Inc. v. Prime Therapeutics, LLC, 950 F.3d 911, 917 (7th Cir. 2020) (quoting Brown Shoe, 370 U.S. at 336). Plaintiffs’ proposed nationwide market is neither pragmatic nor factual. It ignores the obvious commercial reality that local McDonald’s franchisees do not compete nationwide for low-skilled labor, and it ignores the empirical evidence that McDonald’s employees (and similarly situated low-wage employees) do not commute long distances or relocate for these types of jobs.

C.        The Market is not McDonald’s-Specific

The outer boundaries of a product market are defined by the “reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.” Sharif Pharmacy, 950 F.3d at 918 (quoting Brown Shoe, 370 U.S. at 325). Cross-elasticity of demand, here, reflects the degree to which a significant increase or decrease in wages paid by alternative employers changes the number of workers hired or hours worked (quantity demanded) at the employer in question. In the classic company town, the cross-elasticity of demand is zero. When there are substitutes, it is positive, indicating that “consumers would respond to a slight increase in the price of one product by switching to another product.” Todd v. Exxon Corp., 275 F.3d 191, 201-02 (2d Cir. 2001); IIA Areeda & Hovenkamp, supra ¶ 562a.

In a “buyer-side” labor monopsony, such as Plaintiffs have alleged, the market is defined not by the competing sellers (employees), but by the availability of competing buyers (employers). See Todd, 275 F.3d at 201 (citing Roger D. Blair & Jeffrey L. Harrison, Antitrust Policy and Monopsony, 76 Cornell L. Rev. 297, 297-301, 308 (1991)). Thus, the key question is whether employees would see the various employers as reasonable substitutes for one another, such that they would respond to compensation changes by seeking those substitutes. Id. If so, then any of the reasonable substitutes must fall within the market definition for the plaintiff’s market to be plausible. See Rock v. Nat’l Collegiate Athletic Ass’n, 928 F. Supp. 2d 1010, 1021 (S.D. Ind. 2013) (“Plaintiffs’ proposed market is impermissibly narrow because it ignores the existence of [substitutes].”).

In a properly defined labor market, the greater the availability of substitute employers, the less “market power” each employer can have, as employees can go elsewhere when one employer lowers its wages or fails to meet wage increases by others. When a labor market is highly concentrated, by contrast, the employer may be able to exert monopsony buying power. For example, a pure labor monopsony might exist in the classic “company town,” where there is only one large employer—such as a lumber mill or coal mine—that has wide discretion to set wages without employees leaving for other jobs. Those employees are, in effect, “locked in” to selling their labor to the single employer. Cf. Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 472-73, 476 (1992) (seller can “lock in” customer to aftermarket for equipment repairs, if customers already purchased equipment in the foremarket and switching costs are high). In the modern economy, however, such examples are rare; and the market for hourly restaurant employees bears no resemblance to a company town.

Nevertheless, Plaintiffs here allege that McDonald’s is a monopsony buyer of labor—not just in a highly concentrated market, but in a single-brand market for McDonald’s labor. App. Br. at 7. In other words, McDonald’s allegedly has monopsony power to set the wages at which it hires and retains employees because employees (or applicants) generally would not see any non-McDonald’s employment opportunities as reasonable substitutes.

Plaintiffs’ theory thus depends upon implausible assumptions about McDonald’s market power and the elasticity of demand: that substantial wage increases by alternative local employers—including, but not limited to, fast food or quick-service restaurants like Wendy’s, Burger King, KFC, and Subway—would have little or no impact on the ability of a local McDonald’s franchise to hire or retain workers at a given antecedent wage. That is not only implausible in this case, but there is no evidence that it is the norm across low-wage labor markets. See, e.g., Jordan D. Matsudaira, Monopsony in the Low-Wage Labor Market? Evidence from Minimum Nurse Staffing Regulations, 96(1) Rev. Econ. & Statistics 92, 102 (2014) (empirical data in low-wage labor markets are “difficult to reconcile with the notion that low-wage labor markets such as those for fast food workers are monopsonist”).

These assumptions underlying Plaintiffs’ alleged market defy basic economic principles and common sense. Courts are highly skeptical of alleged single-brand markets with no substitutes at all, as those markets are almost always artificial and litigation-driven. See, e.g., Sheridan v. Marathon Petroleum Co., 530 F.3d 590, 595 (7th Cir. 2008) (rejecting single-brand market); Todd, 275 F.3d at 200 & n.3 (“Cases in which dismissal on the pleadings is appropriate frequently involve . . . failed attempts to limit a product market to a single brand, franchise, institution, or comparable entity….” (collecting cases)).

McDonald’s does not have monopsony power in any relevant market because, from an employee’s perspective, there are many reasonable substitutes in the geographic areas in which a given McDonald’s franchisee operates. McDonald’s franchisees compete vigorously for labor with other local employers within and without the quick-service industry. As the district court observed, there are multitudes of adequate, substitute employers for low-wage employees—including (1) other quick-serve restaurants, like Burger King, Wendy’s, Arby’s, KFC, Taco Bell, Chick-fil-A, Chipotle, and Jimmy John’s; (2) other restaurants, like Applebee’s; (3) larger retailers, like Walmart, Sam’s Club, and Costco; and (4) a host of other businesses like grocery stores and hotels. Class Cert. Op. at 21-22.

Even narrowing substitutes to just quick-service restaurants, the district court found numerous (even hundreds of) substitute employers within close geographic proximity to each of the named Plaintiffs, and the number of alternative quick-service restaurants dwarfed the number of McDonald’s franchises in the same area. Id. at 6.

Plaintiffs’ claim of monopsony buying power thus depends on the far-fetched premise that McDonald’s can suppress wages, notwithstanding hundreds of non-McDonald’s quick-service restaurants—and numerous other alternative employers—near Plaintiffs and other putative class members. In reality, if McDonald’s lowered its wages (or other employers raised theirs, and McDonald’s did not match), McDonald’s would lose its supply of labor. See Madison 92nd St. Assocs., LLC v. Courtyard Mgmt. Corp., 624 F. App’x 23, 29 (2d Cir. 2015) (in labor markets involving entry-level work, “it is beyond doubt that [employers] would have to increase their wages to retain any employees” if nearby employers “suddenly doubled the wages they paid to their employees”).

To evade this economic and commonsense reality, Plaintiffs and their expert, Dr. Singer, attempted to attribute monopsony power to McDonald’s as a structural feature of the labor economy in general. In other words, in their view, all employers of low-wage workers enjoy monopsony power in their labor markets, and, ipso facto, McDonald’s has market power in a single-brand market nationwide (or in each and every local labor market) because it employs low-wage workers.

In his expert report, for example, Dr. Singer characterizes economic literature as arguing that the ability of firms to suppress wages is “surprisingly common throughout the economy.” D.E. 271-5 (Singer Rep. ¶ 17). Thus, he stated, it “would be consistent with this literature . . . [t]hat McDonald’s-branded restaurant owners also face a low elasticity of labor supply[.]” Id.; see also id. ¶ 39 (“In light of [the economic literature], it is likely that both McDonald’s Franchisees and the McOpCos would continue to exercise some degree of monopsony power over their employees, even in the absence of the No-Hire Agreement.”).

On appeal, Plaintiffs point to Dr. Singer’s opinions about labor monopsonies, in general, as evidence that McDonald’s, specifically, had market power and could suppress wages in a proposed single-brand market for McDonald’s labor. See App. Br. at 30-33 (arguing that Plaintiffs “buttressed their direct proof of detrimental effects with substantial economic scholarship showing that low?wage employers, including those in the fast food sector, possess market power over their employees”); see also id. at 51 (arguing that “an overview of economic research demonstrat[es] that employers exercise significant monopsony power over their employees”).

Whatever the “structural” features of broader markets—comprising many low-wage employers and firms—those features say nothing about one company’s individual market power and ability to harm competition in a properly defined market. In any event, even if such a sweeping claim could suffice to carry one’s burden of proof as to a specific defendant, the claim is still inaccurate and inconsistent with the economic features of the quick-service restaurant industry. That industry is characterized by low barriers to entry for employees, extremely high turnover rates, and substantial wage growth.[4]

First, “[f]ood and beverage serving and related workers typically have no requirements for formal education or work experience to enter the occupation.” BLS, Occupational Outlook Handbook, Food and Beverage Serving and Related Workers, (Sept. 8, 2022). Unlike corporate executives and professional athletes, fast-food restaurant employees do not make large investments to obtain restaurant positions. Thus, they are not “locked in” to any one restaurant or even the restaurant industry, contrary to Plaintiffs’ argument that there are “high switching costs” for restaurant employees. App. Br. at 34.

Indeed, recent data show that the turnover in the quick-service sector is incredibly high, at around 144%—which means that if a restaurant has a total of 30 people on staff at any given time, it faced about 43 departures in the last year alone. See Daily Pay, The Turnover and Retention Rates for QSR Businesses (Nov. 15, 2022). BLS also recently found that the seasonally-adjusted “quit rate” for the accommodation and food services industry was 5.8% as of October 2022—higher than any other industry. See BLS, Economic News Release, Job Openings and Labor Turnover, Table 4, Quits levels and rates by industry and region, seasonally adjusted (Jan. 4, 2023). When restaurant workers quit, moreover, they frequently leave the restaurant industry altogether, creating high numbers of job openings for new entrants into restaurant sector employment. See BLS, Occupational Outlook Handbook, Food and Beverage Serving and Related Workers, (Sept. 8, 2022).

Moreover, fast-food workers in 2021, on average, benefitted from a 10% wage increase from 2020. See Dominick Reuter and Madison Hoff, A 10% pay increase and 8 other stats show how crazy it is to work in fast food right now, Business Insider (Aug. 24, 2021). Such rapid wage growth undermines Plaintiffs’ claim that monopsony power is a structural feature of the restaurant industry. To the contrary, this wage growth suggests that normal market factors of supply and demand are at play. Cf. Richard A. Epstein, Antitrust Overreach in Labor Markets: A Response to Eric Posner, 15 NYU J. L. & Liberty 407, 432 (2022) (“There is no global evidence, given the chronic fluctuations and frequent shortages, to believe that labor markets are rife with hidden pockets of monopsony power that function as economic black holes.”).

Finally, the most robust study of the relationship between wages and hours worked in fast-food labor markets yielded results that are consistent with competitive labor markets, rather than a monopsony model. See David Neumark and William Wascher, Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment, 90 Am. Econ. Rev. 1362, 1382 (2000) (critiquing the famous Card & Krueger minimum-wage study using direct data, rather than surveys, and looking at hours worked rather than overall employment; and finding that fast-food employers make wage and hour decisions consistent with “the prediction of the textbook [competitive] model”); see also David Neumark and William L. Wascher, Minimum Wages 106 (MIT Press 2007) (reviewing literature on low-wage restaurant workers and concluding that “the low-wage labor market can be reasonably approximated by the neoclassical competitive model”).

Overall, the empirical data show that the labor markets in which restaurants participate are dynamic and competitive, not dominated by monopsonists with the power to suppress wages at will.

II.         Paragraph 14 is Subject to the Rule of Reason

Plaintiffs cannot avoid their burden to plead and prove a market by insisting on per se analysis or even “quick look” review of Paragraph 14. The rule of reason governs Plaintiffs’ antitrust claims with respect to Paragraph 14 for at least three reasons. First, the restriction was a vertical, intrabrand restraint, not a horizontal one. Second, even if it were horizontal, it was still ancillary to the procompetitive franchise agreement. Third, Paragraph 14 does not fall within that narrow class of restrictions—such as price fixing—universally and historically condemned as anticompetitive. See Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. 2141, 2155-56 (2021) (explaining “spectrum” of antitrust analysis).

As noted above, McDonald’s vigorously competes with numerous firms in both labor markets and the output market. Its competitive efforts have included various intrabrand restraints among its franchisees that foster a strong, consistent brand identity, along with shared marketing and product development. That successful brand identity is what attracts individual franchisees to open and operate McDonald’s restaurants. Because Paragraph 14 was such a vertical restraint, and ancillary to McDonald’s procompetitive objectives, it cannot be per se unlawful. Rather, it is subject to full rule of reason analysis.

A.        Paragraph 14 is a Vertical, Intrabrand Restraint

Paragraph 14 is a vertical, not horizontal, restraint. It was conceived and imposed by the franchisor, McDonald’s—not competing franchisees.

In 1955, McDonald’s included in its franchise agreement the predecessor to the Paragraph 14 restriction as part of an initial bundle of brand standards. That original franchise agreement also included limits on, among other things, product offerings and territorial exclusivity, as many franchise agreements do. D.E. 380-20. The terms of the agreement were consistent across franchisees, and were designed, insisted upon, and monitored by McDonald’s itself. Paragraph 14 was not created as part of an agreement among horizontal competitors, nationally or in any particular geographic labor market. Indeed, the large national (and subsequently international) network of McDonald’s franchises did not yet exist when the key elements of the franchise agreement were established.

Plaintiffs suggest the restraint was per se unlawful because corporate-owned restaurants, McOpCos, were horizontal competitors with independently owned franchisees. See App. Br. at 25, 44. In those local markets comprising both McOpCos and independently owned franchises, the district court found the restraint horizontal, but ancillary and subject to the rule of reason. Op. at 9. But the district court also identified vertical aspects to the terms that, in fact, obtain in most geographic markets. Id. at 4-5.

Paragraph 14 was necessarily a vertical restraint in the twenty states in which there were no McOpCo restaurants at all. Class Cert. Op. 17. In the remaining states, Paragraph 14 still operated as a vertical restraint in the local labor markets that had only independently owned franchisees or McOpCos, but not both. In other words, it was impossible for the restraint to operate horizontally on a national level, because the putative competition between independent franchisees and McOpCos could not have occurred in the many labor markets in which there were no McOpCos. Id. (finding that Plaintiffs have “not [ ] put forth evidence that McOpCos compete with franchisees in every part of the United States”).

Vertical restraints, like Paragraph 14, are generally evaluated under the rule of reason because they often foster interbrand competition. Thus, for decades, the Supreme Court has whittled down the types of vertical restraints that are subject to per se condemnation. In 1977, the Court refused to extend per se illegality to vertical non-price restraints, noting that vertical restrictions tend to promote interbrand competition, “the primary concern of antitrust law.” Cont’l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49, 52 n.19, 58 (1977). A decade later, the Court observed that “a rule of per se illegality for vertical nonprice restraints was not needed or effective to protect intra brand competition.” Bus. Elecs. Corp. v. Sharp Elects. Corp., 485 U.S. 717, 725 (1988). And, in 2007, the Court repudiated the prohibition of vertical price restraints that it had adopted nearly a century earlier. See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (overruling Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), and subjecting vertical price restraints to rule of reason analysis).

In these decisions, the Court repeatedly emphasized that any departure from the rule of reason “must be based on demonstrable economic effect, rather than . . . upon formalistic line drawing.” Bus. Elecs., 485 U.S. at 724; see also Leegin, 551 U.S. at 889 (applying rule of reason in part because “economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance”).

While Plaintiffs seek a departure from the rule of reason here, economic research confirms that vertical restraints—including franchisor-franchisee restraints—tend to be procompetitive. Reviewing the empirical and theoretical literature on vertical restraints, Lafontaine and Slade observed that:

[T]he empirical evidence concerning the e?ects of vertical restraints on consumer wellbeing is surprisingly consistent. Speci?cally, it appears that when manufacturers choose to impose such restraints, not only do they make themselves better o? but they also typically allow consumers to bene?t from higher quality products and better service provision.

Francine Lafontaine & Margaret Slade, Exclusive Contracts and Vertical Restraints: Empirical Evidence and Public Policy, 10 Handbook of Antitrust Economics 391, 408-09 (Buccirossi ed., 2008); see also Francine Lafontaine & Margaret E. Slade, Transaction Cost Economics and Vertical Market Restrictions—Evidence, 55(3) The Antitrust Bulletin 587 (2010).

The rule of reason is especially appropriate here because Paragraph 14 is not only a vertical restraint, but an intrabrand one as well. And intra-franchise no-hire agreements are fundamentally different from inter-company restraints for two principal reasons.

First, intra-franchise labor restraints do not restrict output or price in the labor market because they do not affect the ability of alternative employers to compete for workers—whether those employers operate other types of quick-service restaurants or any of the myriad establishments that compete for the same pool of lower-skilled workers.

Second, even if McDonald’s did have the ability to confer labor monopsony power on local franchisees (it does not, see infra), it had no economic incentive to do so. Creating local labor monopsonies would suppress wages in those areas. That would reduce the quantity of labor employed and, in turn, suppress output in the downstream product market (i.e., food sales). See, e.g., Herbert J. Hovenkamp, Worker Welfare and Antitrust, __ U. Chi. L. Rev. 1, 10, 13 (2022) (“[T]he demand for labor as an input is closely correlated with the amount of product or service output that the firm is generating.”). But McDonald’s as a franchisor depends on product output for royalties; it has no desire to reduce its royalties by creating dysfunction in the labor market.

Because Paragraph 14 is a vertical and intrabrand restraint, it must be subject to the rule of reason.

B.        Paragraph 14 is Ancillary to the Franchise Agreement

Paragraph 14 is also subject to scrutiny under the rule of reason (rather than per se or quick look analysis) because it was “ancillary” to a procompetitive franchise agreement. In other words, there was a clear procompetitive rationale for the entire bundle of vertically imposed restraints embodied in the McDonald’s franchise agreement: brand quality and consistency. Paragraph 14 promoted that larger endeavor and was not a naked restraint on trade.

For example, Paragraph 14 limited the ability of individual franchisees to free-ride on training investments by McDonald’s and other franchisees. That in turn encouraged investment in employee development and training, and in the McDonald’s system and brand more generally. Limits on intrabrand employee raiding foster brand consistency and stability, which also are advantageous for the growth of a nationwide brand. See, e.g., Gregory J. Werden, The Ancillary Restraints Doctrine after Dagher, 8 Sedona Conf. J. 17, 21 (2007).

Plaintiffs nonetheless argue that Paragraph 14 cannot be regarded as ancillary because it was not “reasonably necessary” to the procompetitive goals of the franchise agreement, purportedly demonstrated by the fact that the cessation of the restraint in 2017 was not fatal to McDonald’s franchise system. App. Br. at 23. That argument claims too much and shows too little.

As a legal matter, ancillarity does not require a showing that restraints are strictly necessary, but only that they “may contribute to the success of a cooperative venture.” Polk Bros., Inc. v. Forest City Enters., Inc., 776 F.2d 185, 189 (7th Cir. 1985). A restraint is ancillary, in other words, if, “at the time it was adopted,” it bears a reasonable relationship to the joint venture’s success. Id. (emphasis added); see also Major League Baseball Props., Inc. v. Salvino, Inc., 542 F.3d 290, 339-40 (2d Cir. 2008) (Sotomayor, J., concurring). By pointing to the fact that McDonald’s was still able to sign franchisees after 2017, Plaintiffs implicitly argue that a restraint can be ancillary only if its removal destroys the entire endeavor. That is not the law. In other words, a company’s decision to remove one part of a bundle of its practices does not mean the part that was removed never contributed to success of the business. Moreover, to require that businesses precisely calibrate the timing of their policy changes and the substance of those changes would chill the ability of businesses to develop and test new policies and business models. Cf. Werden, supra, at 23-24 (comprehensive analysis by DOJ economist rejecting strict-necessity test).

C.        Paragraph 14 Does not Fall in the Narrow Category of Per Se Unlawful Conduct

Paragraph 14 is not one of those few restrictions—such as price fixing and boycotts—that have been universally and historically condemned as anticompetitive; we are aware of no cases holding that this restraint is per se unlawful, and Plaintiffs cite none. See App. Br. at 25 (citing only inapposite decisions and Arrington v. Burger King Worldwide, Inc., 47 F.4th 1247, 1257 (11th Cir. 2022), which held that a no-hire agreement was “concerted activity” under Section 1 of the Sherman Act but instructed the district court “in the first instance” to determine the level of scrutiny). Accordingly, there is a strong presumption that the rule of reason applies. Bus. Elecs., 485 U.S. at 726; see also Alan J. Meese, In Praise of All or Nothing Dichotomous Categories: Why Antitrust Law Should Reject the Quick Look, 104 Geo. L.J. 835, 878-79 (2016) (“Declaring all horizontal restraints inherently suspect would presumptively condemn all manner of cooperation necessary to allocate resources to their highest valued use, relegating economic actors to cooperation achieved through atomistic interaction in the spot market or complete integration.”).

Plaintiffs do not offer any reason to depart from that standard, nor is there one. As the Supreme Court has held, a departure from rule of reason must be “justified by demonstrable economic effect.” Id. Yet there is a dearth of economic studies on the effects of this type of intrabrand no-hire or no-poach agreement on the labor market. Indeed, the Ashenfelter and Krueger study, on which Plaintiffs’ expert relied, states that “systematic evidence on the impact of no-poaching agreements on workers’ pay and within-franchise job mobility is unavailable.” Ashenfelter & Krueger, supra n.4, at 21. Moreover, to evaluate the impact of no-poach agreements on pay and mobility, one would have to control for a number of important variables—e.g., inter-firm variation in the terms of no-poach agreements, inter-firm variation in the bundling of employment restrictions, and interstate variation in the enforceability of employment restrictions. The only study we are aware of that attempts to do so concludes that elimination of no-poach clauses “causes minimal reductions in job concentration and no increase in wages.” Daniel S. Levy, et al., No-Poaching Clauses, Job Concentration and Wages: A Natural Experiment Generated by a State Attorney General, Advanced Analytical Consulting Group, Inc., at 1 (Jan. 23, 2020).

While the Court has said that a departure from the rule of reason should not be based on “formalistic line drawing,” that is precisely what Plaintiffs (and amici Federal Trade Commission and U.S. Dept. of Justice) propose. For example, Plaintiffs argue that per se treatment is appropriate because (1) in a small number of geographic markets, there are both McOpCos and independently owned franchisees,[5] and (2) interbrand no-poach agreements have been found by some courts analogous to market allocation agreements. App. Br. at 25, 44. But two analogies do not an equivalence make. Even in the limited and atypical markets comprising both McOpCos and independently owned McDonald’s franchises, there is still no evidence of monopsony power over the labor market. As the district court noted regarding Plaintiff Deslandes, alternative employers outnumbered McDonald’s franchises by more than a factor of twenty.

Judicial inexperience and limited economic literature, as well as the facts on the ground, all suggest that this was precisely the type of business practice for which more elaborate economic study is needed before subjecting it to per se condemnation.

Conclusion

For the foregoing reasons, this Court should affirm.

APPENDIX A

Amici Scholars of Law and Economics

Dirk Auer is the Director of Competition Policy at the International Center for Law & Economics and Adjunct Professor at the University of Liege in Belgium.

Jonathan M. Barnett is the Torrey H. Webb Professor of Law at the University of Southern California Gould School of Law.

James C. Cooper is a Professor of Law at George Mason University School of Law.

Richard A. Epstein is the Laurence A. Tisch Professor of Law at New York University School of Law.

Luke M. Froeb is the William C. Oehmig Chair in Free Enterprise and Entrepreneurship at Vanderbilt University Owen School of Management.

Harold Furchtgott-Roth is a former commissioner of the Federal Communications Commission and a senior fellow at the Hudson Institute.

Daniel J. Gilman is a Senior Scholar at the International Center of Law & Economics.

Janice Hauge is a Professor of Economics at the University of North Texas Department of Economics.

Justin (Gus) Hurwitz is a Professor of Law at the University of Nebraska College of Law.

Stan J. Liebowitz is the Ashbel Smith Professor of Economics at the University of Texas at Dallas.

Abbott (Tad) Lipsky, Jr. is an Adjunct Professor at George Mason University School of Law.

Daniel A. Lyons is a Professor & Associate Dean for Academic Affairs at Boston College Law School.

Geoffrey A. Manne is President and Founder of the International Center for Law & Economics and a Distinguished Fellow at the Northwestern University Center on Law, Business & Economics.

Scott E. Masten is a Professor of Business Economics and Public Policy at the University of Michigan Ross School of Business.

Alan Meese is the Ball Professor of Law and Dean’s Faculty Fellow at William & Mary Law School.

Paul H. Rubin is the Samuel Candler Dobbs Professor of Economic Emeritus at the Emory University Department of Economics and Law School.

Vernon L. Smith is the George L. Argyros Endowed Chair in Finance and Economics at the Chapman University Argyros School of Business of Economics. Professor Smith was awarded the Nobel Memorial Prize in Economic Sciences in 2022.

Michael E. Sykuta is an Associate Professor of Economics at the University of Missouri.

Gregory J. Werden is a retired economist at the U.S. Department of Justice, Antitrust Division.

John M. Yun is an Associate Professor of Law at George Mason University School of Law.

[1] All parties have consented to the filing of this brief. Pursuant to Federal Rule of Appellate Procedure 29(a)(4)(E), counsel for ICLE represents that no counsel for any of the parties authored any portion of this brief and that no entity, other than amicus curiae or its counsel, monetarily contributed to the preparation or submission of this brief.

[2] See Gregory J. Werden, Why (Ever) Define Markets? An Answer to Professor Kaplow, 78 Antitrust L.J. 729, 741 (2013) (“Alleging the relevant market in an antitrust case . . . identifies the competitive process alleged to be harmed.”); Jonathan B. Baker, Market Definition: An Analytical Overview, 74 Antitrust L.J. 129, 129 (2007) (“Market definition is often the most critical step in evaluating market power and determining whether business conduct has or likely will have anticompetitive effects.”).

[3] Cf. Toys “R” Us, Inc. v. FTC, 221 F.3d 928, 937 (7th Cir. 2000) (“direct evidence” suffices where the parties agreed on a nationwide market, and the defendant held “20% of the national wholesale market and up to 49% of some local wholesale markets”).

[4] Dr. Singer misconstrues a key study in the limited economic literature regarding franchise hiring terms. That study—Orley Ashenfelter & Alan B. Krueger, Theory and Evidence on Employer Collusion in the Franchise Sector, IZA Discussion Paper, No. 11672 (July 2018) (cited at Singer Rep. ¶¶ 20, 23)—did not employ a causal design, and it did not establish—nor even purport to establish—that employers generally have or exercise antitrust-relevant market power, as Dr. Singer suggests. Singer Rep. ¶ 23. The study also found widespread use of no-poach terms among many brands that did not enjoy significant market, indicating that market power is not a prerequisite for a franchise to impose no-poach agreements.

[5] FTC and DOJ argue that assessing the horizontality of “employee-allocation agreements in the franchise context . . . requires a fact-bound evaluation of whether the agreement limits rivalry between actual or potential competitors.” DOJ & FTC Br. at 26-27 n.8. But, as noted above, there is undisputed evidence that in several states and local markets there was no competition between independently owned franchisees and McOpCos. Class Cert. Op. 17.

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Antitrust & Consumer Protection

Implementing the DMA: Great Power Requires Great Procedural Safeguards

TL;DR Background… In December 2022, the European Commission launched a public consultation on the regulation to implement the Digital Markets Act, including how the DMA will . . .

Background…

In December 2022, the European Commission launched a public consultation on the regulation to implement the Digital Markets Act, including how the DMA will be enforced procedurally. Among the issues the regulation covers are parties’ rights to be heard, firms’ deadlines to submit documents to the Commission, access to those documents and to the Commission’s case file, and how confidentiality will be protected.

However…

While reasonable people may disagree about the merits of digital-markets regulation, appropriate procedural rules that safeguard parties’ rights and create legal certainty are essential. The timing, background, and content of the Implementing Regulation, however, all raise legitimate concerns and underscore broader issues in the DMA.

Read the full explainer here.

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Antitrust & Consumer Protection

The Growing Legacy of Intel

Scholarship Bullet Points Starting with the Intel ruling, the European judiciary has slowly crafted a coherent framework for Article 102 enforcement. However, doubts persist concerning the . . .

Bullet Points

  • Starting with the Intel ruling, the European judiciary has slowly crafted a coherent framework for Article 102 enforcement.
  • However, doubts persist concerning the exact scope of Intel and whether it is truly the lodestar that some make it out to be.
  • It is arguably still unclear whether “non-price” conduct, such as self-preferencing, should be assessed under the general framework laid out in Intel, which concerned price-rebate schemes.
  • With this in mind, the upcoming Google Shopping ruling will likely be the bellwether that reveals the true legacy of Intel and the future direction of European competition law.

Introduction

Competition cases routinely hinge on the fundamental distinction between conduct that anti-competitively serves to exclude competitors, on the one hand, and competition on the merits that may lead firms to exit the market, on the other.[1] While even first-year law students intuitively understand this critical distinction, it can prove challenging to distinguish between the two in real-world cases. The reason is simple: anticompetitive foreclosure and competition on the merits both ultimately result in the same observable outcome: namely, that rivals exit the market. In order to draw the line, policymakers must infer both the root causes and the effects of firms’ market exit.

Against this backdrop, it is becoming increasingly clear that the 2017 Intel ruling marked a crucial turning point in the enforcement of Article 102 TFEU.[2] The ruling’s powerful legacy notably looms large over other recent court cases, such as the European Court of Justice’s (“ECJ”) ruling in Servizio Elettrico Nazionale and Others, as well as the General Court’s (“GC”) Intel Renvoi and Qualcomm judgments.[3] In these Intel-inspired rulings, the European judiciary appears to have settled largely on a workable effects-based standard that sorts the wheat from the chaff in all Article 102 TFEU cases. It does this, notably, by looking at the effect that a firm’s behaviour has on “as-efficient competitors”, while also creating an administrable standard of proof to govern such proceedings.

This is not to say that Article 102 TFEU case law is entirely settled—far from it. For instance, it is arguably still unclear whether “non-price” conduct, such as self-preferencing, should be assessed under the general framework laid out in Intel, which concerned price-rebate schemes. To wit, the GC’s Google Shopping judgment marks a clear departure from the Intel framework under the justification that “[i]n the present case, the practices at issue are not pricing practices”.[4] Despite nominally looking into the effects of Google’s “self-preferencing”, the GC eschewed key aspects of the Intel framework, such as the effect of Google’s behaviour on “as efficient competitors”.[5] This and other aspects of the ruling led to criticism that the GC failed to establish a clear boundary between anticompetitive self-preferencing and permissible instances of firms favoring their own products. As Elias Deutscher has observed:

Although the Court considered various pathways to determine the legality of self-preferencing, it failed to articulate a clear legal test that establishes limiting principles as to when self-preferencing by a dominant firm violates EU competition law.[6]

With this in mind, the pending Google Shopping appeal ruling offers the ECJ a unique opportunity to settle the debate. Namely, the ECJ may confirm that the lessons from the Intel strand of case law apply across the board, and reaffirm the dividing line between anticompetitive and benign conduct, including self-preferencing under Article 102 TFEU. This may prove a politically fraught endeavor, as the Digital Markets Act (“DMA”) will essentially outlaw the same behaviour—at least for so-called “gatekeeper” firms.[7] It is, however, vital to safeguard the internal consistency of competition enforcement under Article 102 TFEU.

     I.        Intel and the analysis of foreclosure

The history leading up to the Intel cases is well-known. In 2009, the European Commission (“commission”) found that rebates granted by Intel to certain original equipment manufacturers (“OEMs”) foreclosed its competitor AMD from the market.[8] During the administrative procedure, the Commission claimed it did not need to take into account the effects of the practice, as the exclusivity rebates in question were automatically illegal under Article 102 TFEU.[9] The Commission nevertheless carried out an “as efficient competitor” (“AEC”) test “for the sake of completeness”.[10] In a nutshell, the AEC test inquires whether a rebate scheme is able to exclude competitors from the market that are at least as efficient as the dominant firm.

During the subsequent annulment proceedings, Intel claimed the Commission had failed to apply the AEC test correctly. The GC dismissed Intel’s appeal on grounds that its conduct was per se illegal. The Commission was thus not required to assess the effects of the exclusivity rebates.[11]

Intel took the case to the ECJ, which overturned the GC’s ruling and found that—while the Commission can, under certain circumstances, rely on a presumption of illegality—exclusivity rebates are not automatically illegal under Article 102 TFEU.[12] In other words, the anticompetitive effects of a practice must always be assessed, regardless of how the burden of proof is allocated.

The ECJ laid out the standard of proof that parties must meet in such cases. It held that:

138. [W]here the undertaking concerned submits, during the administrative procedure, on the basis of supporting evidence, that its conduct was not capable of restricting competition and, in particular, of producing the alleged foreclosure effects.…

139. [T]he Commission is not only required to analyse, first, the extent of the undertaking’s dominant position on the relevant market and, secondly, the share of the market covered by the challenged practice, as well as the conditions and arrangements for granting the rebates in question, their duration and their amount; it is also required to assess the possible existence of a strategy aiming to exclude competitors that are at least as efficient as the dominant undertaking from the market (see, by analogy, judgment of 27 March 2012, Post Danmark, C?209/10, EU:C:2012:172, paragraph 29).[13]

The underlying standard appears rather straightforward: if and when a defendant raises such an objection, the Commission must show that the firm’s conduct is capable of excluding “as efficient” competitors. The focus on AECs is repeated in the following paragraph:

140. That balancing of the favourable and unfavourable effects of the practice in question on competition can be carried out in the Commission’s decision only after an analysis of the intrinsic capacity of that practice to foreclose competitors which are at least as efficient as the dominant undertaking.[14]

The ECJ’s ruling sparked numerous debates. Scholars notably questioned how it would be interpreted by the lower court when it reexamined the case. The key question was whether Intel should be read mostly as a procedural ruling—in which case, the main problem was merely that the Commission and GC did not appropriately respond to certain of Intel’s claims, something that could be corrected upon reexamination[15]—or whether, instead, the ECJ had ultimately outlined a substantive framework to assess (at least) rebates under Article 102 TFEU.[16]

While the finer points of its so-called “renvoi” ruling are beyond the scope of this article, the GC appears to have opted for a maximalist interpretation of Intel. It examined the effects of Intel’s rebates in great detail, following each step of the ECJ’s framework. As it explained:

125. Having regard to the wording of paragraph 139 of the judgment on the appeal, the Commission is, as a minimum, required to examine those five criteria for the purposes of assessing the foreclosure capability of a system of rebates, such as that at issue in the present case.[17]

Following this logic, the GC examined several aspects of Intel’s rebates under a detailed-effects analysis, including their duration, market coverage, and age, as well as their effect on AECs (three of the five criteria set out in Intel).[18]

The Intel framework was also central to the GC’s more recent Qualcomm ruling, which appears to confirm and develop insights from Intel.[19] In the judgment, the GC quashed a EUR 1 billion fine the Commission imposed on Qualcomm under Article 102 TFEU. Under scrutiny was an agreement pursuant to which Apple received payments conditional upon sourcing all of its LTE chips from Qualcomm. According to the Commission, such “exclusivity payments” were capable of foreclosing competition, in that they reduced the incentives of a major purchaser of baseband chipsets to switch to competing producers.[20]

The GC ultimately overturned the Commission’s decision on both procedural and substantive grounds. It notably found that the Commission had carried out an improper analysis of anticompetitive effects. According to the Court, the Commission failed to show that Apple would not have sourced all its LTE chips from Qualcomm absent the impugned agreement. In fact, at the time of the “exclusive payment” agreement (2011-2015, and half of 2016), Qualcomm was the only company capable of satisfying Apple’s demand for LTE chips.[21] Accordingly, Qualcomm’s decision to buy exclusively from Qualcomm could easily be attributed to “competition on the merits”, rather than anticompetitive conduct.[22]

The GC reiterated that the Commission must consider all the relevant facts of the case, as well as the supporting evidence submitted by Qualcomm that its conduct could not restrict competition and, in particular, could not have the alleged foreclosure effects.[23] As the Court put it:

Indeed, if such conduct is to be characterised as abusive, that presupposes that that conduct was capable of restricting competition and, in particular, producing the alleged exclusionary effects, and that assessment must be undertaken having regard to all the relevant facts surrounding that conduct (see judgment of 30 January 2020, Generics (UK) and Others, C?307/18, EU:C:2020:52, paragraph 154 and the case-law cited).[24]

The upshot is that Qualcomm’s exclusivity payments were incapable of excluding competitors, as there were no competitors to exclude in the first place.[25] By failing to make the link between the relevant factual circumstances and its theory of harm (i.e., the alleged lessening of Apple’s incentives to switch to a competitor to source all its LTE chipset requirements for iPhones), the Commission had fallen afoul of a line of case law, epitomized by Post Danmark, establishing that competition-law analysis cannot be purely hypothetical.[26]

Throughout its judgment, the Qualcomm court makes numerous references to Intel and its key finding that anticompetitive behaviour must be capable of excluding as efficient competitors.[27] For instance, in paragraph 356 of the judgment, the GC states that:

the Court must examine all of the applicant’s arguments seeking to call into question the validity of the Commission’s findings as to the foreclosure capacity of competitors that are at least as efficient, relating to the practice in question (see, to that effect, judgment of 6 September 2017, Intel v Commission, C?413/14 P, EU:C:2017:632, paragraph 141).[28]

The judgment also highlighted the importance of identifying the difference between anticompetitive conduct and competition on the merits. The Commission had conflated the two, and it had cost it the case. As the GC found:

The fact – which was not properly taken into account in the contested decision – that Apple sourced LTE chipsets from the applicant, and not from the applicant’s competitors, in the light of the absence of alternatives fulfilling its own technical requirements could fall within competition on the merits, and not an anticompetitive foreclosure effect resulting from the payments concerned.[29] (emphasis added)

It had also failed to show how the conduct in question prevented competitors that were as efficient as Qualcomm from developing products that fulfilled Apple’s requirements, but “that Apple’s incentives to switch to the applicant’s competitors for all its LTE chipset requirements had been reduced”.[30]

Taken together, the two Intel rulings and Qualcomm mark a clear rejection of the forms-based approach that initially enabled the Commission to ignore the economic arguments put forward by firms like Intel and Qualcomm. At least as far as rebates are concerned, the rulings marked the end of a policy of excessively deferential judicial review that turned a blind eye to, arguably, important errors of economic analysis.

   II.        The Intel reasoning is not confined to the realm of price-related conduct

The preceding paragraphs raise an important question that goes to the very foundations of European competition law. Since its adoption in 2017, there have, broadly speaking, been two competing views concerning the ECJ’s Intel ruling.

The first view held that Intel was a contained statement of the law applying to rebates.[31] For instance, Marc Van der Woude, a judge at the GC, has argued that the Google Shopping case was correctly decided, among other things, because the Intel case law had little bearing on it. As reported by Mlex:

He said… [t]he Intel case involved the application of a framework set out by the EU’s top court, while “Google is a new phenomenon.”

Van der Woude said… that the Commission did not always need to delve into economics. “It depends on the theory of harm you will develop as a regulator.”.[32]

Conversely, the second view contends that the Intel court was actually fleshing out a framework that undergirds all European competition law under Article 102 TFEU.[33] According to this interpretation, Intel is but the latest in a series of rulings, including Post Danmark and Cartes Bancaires, that seek to bring economic clarity to European competition law.[34]

There are important reasons to believe this second view is most likely the correct one. First, the GC’s Intel Renvoi and Google Shopping rulings appear to imply that Intel is not merely a rebate-specific rule. The Intel Renvoi ruling, while ostensibly dealing with the topic of rebates, ultimately rests on what appears to be a more generalized framework of presumptions and effects analysis:

124   [A]lthough a system of rebates set up by an undertaking in a dominant position on the market may be characterised as a restriction of competition, since, given its nature, it may be assumed to have restrictive effects on competition, the fact remains that what is involved is, in that regard, a mere presumption and not a per se infringement of Article 102 TFEU, which would relieve the Commission in all cases of the obligation to conduct an effects analysis.[35]

Second, the GC’s Google Shopping ruling adds two important pieces to this puzzle. The court notably reaffirms the idea that there are no “per se” or “by object” infringements under Article 102 TFEU, suggesting that the Shopping case should be assessed under an effects-based framework similar to the one laid out in Intel:

435    [U]nlike Article 101 TFEU, Article 102 TFEU does not distinguish forms of conduct that have as their object the prevention, restriction or distortion of competition from those which do not have that object but nevertheless have that effect.

Google Shopping also contains several important references to Intel. This is a clear sign the GC believes Intel is relevant outside the realm of rebates:

[W]here, in order to classify a practice in the light of the provisions of Article 102 TFEU, the Commission attaches real importance to an economic analysis, the Courts of the European Union are required to examine all of the arguments put forward by the undertaking penalised concerning that analysis (see, to that effect, judgment of 6 September 2017, Intel v Commission, C?413/14 P, EU:C:2017:632, paragraphs 141 to 144).[36]

157    Thus, not every exclusionary effect is necessarily detrimental to competition. Competition on the merits may, by definition, lead to the departure from the market or the marginalisation of competitors that are less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation (see judgment of 6 September 2017, Intel v Commission, C?413/14 P, EU:C:2017:632, paragraph 134 and the case-law cited).[37]

Along similar lines, Advocate General Nils Wahl had, in his Intel opinion, unequivocally endorsed the notion that effects analysis undergirds all of Article 102 TFEU enforcement—and not just rebate cases.[38] The AG notably surmised that “ an abuse of dominance is never established in the abstract”, and that courts should consider “the legal and economic context of the impugned conduct”. That AG Wahl subsequently uses predatory pricing (in a rebates case) to illustrate his point is further confirmation of this broad reading.[39]

Finally, and perhaps most dispositively, the ECJ’s recent Servizio Elettrico Nazionale and Others ruling, while pertaining to non-price conduct, is replete with references to Intel and to the notion that behaviour is only anticompetitive if it is capable of foreclosing competitors that are at least as efficient[40]:

En revanche, ainsi que la Cour l’a déjà souligné, ladite disposition ne s’oppose pas à ce que, du fait d’une concurrence par les mérites, disparaissent ou soient marginalisés sur le marché en cause des concurrents moins efficaces et donc moins intéressants pour les consommateurs du point de vue, notamment, des prix, du choix, de la qualité ou de l’innovation (arrêt du 6 septembre 2017, Intel/Commission, C?413/14 P, EU:C:2017:632, point 134 et jurisprudence citée).[41]

As if this reference to Intel—the passage is originally from the Post Danmark ruling, which also concerned rebates[42]—was not sufficiently clear, the judgment explicitly states that a practice’s effect on “as-efficient competitors” is a key part of the legal test for both price and non-price restrictions of competition. According to the court, it is this criterion, among others, that differentiates competition on the merits that forces less-efficient firms to exit the market from anticompetitive foreclosure that causes as-efficient ones to exit, too:

La pertinence de l’impossibilité, matérielle ou rationnelle, pour un hypothétique concurrent aussi efficace, mais n’étant pas en position dominante, d’imiter la pratique en cause, aux fins de déterminer si cette dernière repose sur des moyens relevant d’une concurrence fondée sur les mérites, ressort de la jurisprudence relative aux pratiques tant tarifaires que non tarifaires. [The case has not yet been translated to English][43]

This interpretation finds further support in the opinion issued by AG Rantos, who writes that:

[T]he case-law of the Court, in my view, confirms that exclusionary conduct of a dominant undertaking which can be replicated by equally efficient competitors does not represent, in principle, conduct that may lead to anticompetitive foreclosure and therefore comes within the scope of competition on the merits.

[A]s regards exclusionary practices not related to pricing – such as, for example, refusal to supply – the case-law seems to confirm the relevance of the test as regards the possibility of replication, inasmuch as a dominant undertaking’s decision to reserve for itself its own distribution network does not constitute a refusal to supply contrary to Article 102 TFEU when a competitor is able to create a second distribution network of a comparable size. In other words, there is no abuse if inputs refused by the dominant undertaking can be duplicated by equally efficient undertakings by purchasing them from other suppliers or developing them themselves.[44]

The Servizio Elettrico Nazionale and Others ruling thus appears to confirm the substantive importance of Intel; clearly, it is not just a procedural ruling. It also appears to confirm Intel’s significance for Article 102 TFEU enforcement beyond rebates. Indeed, the numerous important references to Intel and its analytical framework would suggest that the case marks a clear turning point for European competition law. Moreover, the court explicitly acknowledges that the Intel framework also applies to “non-price” conduct.

All of this reinforces the sense that all Article 102 TFEU cases are ultimately subject to an effects analysis, with the implication that the Commission and courts cannot summarily disregard economic arguments put forward by the parties. None of this is entirely new, of course. Several scholars have observed that other cases, like Post Danmark and Cartes Bancaires, already went a long way toward bringing European competition law more in line with economic analysis.[45] However, the Intel cases crystallize this trend in a way that increasingly looks like a general framework for all Article 102 TFEU cases.

 III.        The Implications of Intel as a General Principle of European Union Competition Law

Subjecting all Article 102 TFEU cases to the Intel framework has far-reaching implications, including for ongoing cases such as Google Shopping. At its heart, the Intel framework ultimately seeks to ascertain whether conduct that can eliminate competitors is also anticompetitive. As the ECJ has explained in cases such as TeliaSonera and Post Danmark:

Not every exclusionary effect is necessarily detrimental to competition […]. Competition on the merits may, by definition, lead to the departure from the market or the marginalisation of competitors that are less efficient and so less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation.[46]

In the Intel proceedings, the AEC test was one of the relevant tools used to establish whether that was indeed the case. However, under different circumstances, other tools may well be more useful in separating conduct that disadvantages or even eliminates competitors—and is also anticompetitive—from conduct that has essentially the same effect but is not. The Court of Justice says this much in its Servizio Elettrico Nazionale and Others ruling:

[L]’importance généralement accordée audit test, lorsque celui?ci est réalisable, n’en démontre pas moins que l’incapacité qu’aurait un hypothétique concurrent aussi efficace de répliquer le comportement de l’entreprise dominante constitue, s’agissant des pratiques d’éviction, l’un des critères permettant de déterminer si ce comportement doit être considéré comme étant ou non fondé sur l’utilisation de moyens relevant d’une concurrence normale.[47]

Several recent cases fall short in this respect, making them vulnerable to challenges under Intel. Google Shopping is a prime example. In its ruling, the GC appears to suggest that it is anticompetitive for a dominant platform to favor its downstream services if doing so reduces web traffic to rivals:

445. [T]he Commission was fully entitled to conclude… that those practices had led to a reduction of that traffic for almost all competing comparison shopping services and, secondly, that those practices had led to an increase in traffic to Google’s comparison shopping service…. and it may be concluded that the Commission established actual effects that are more or less pronounced, depending on the country, but in any event significant.

But unlike the detailed effects analysis of Intel, the GC’s approach is tantamount to a per se condemnation of so-called “self-preferencing”. Indeed, favoring one’s own services necessarily puts competitors at a disadvantage, some of whom might even exit the market. As Pablo Ibáñez Colomo has written:

If the notion of anticompetitive effects were equated with a competitive disadvantage, then self-preferencing would become, de facto and by definition, prima facie unlawful[48].

This forms-based analysis withers under the Intel framework. Indeed, in what would later turn out to be a direct contradiction of the upper court’s Servizio Elettrico Nazionale and Others ruling, the GC consciously ignores whether foreclosed rivals are as efficient as the dominant company:

538. The use of the as-efficient-competitor test is warranted in the case of pricing practices (predatory pricing or a margin squeeze, for example)…. In the present case, the practices at issue are not pricing practices.

We believe this is an unduly narrow reading of Intel. In Intel, the ECJ carefully distinguished the AEC test from the notion of “less attractive” or “less efficient” rivals. While the former is rightly confined to the realm of pricing practices, the latter offers a framework for deciding a much broader range of competition cases.

Few would argue it is desirable for less attractive websites to be displayed as prominently as more attractive ones, or that less efficient firms should be shielded from market exit if they cannot profitably compete in an auction (as is the case for rivals complaining about the Google Shopping remedy).[49] Focusing on efficiency (or attractiveness, to use the ECJ’s words) is critical to draw the line between market exit that occurs due to consumer demand and that stemming from an anticompetitive strategy that harms consumers. The standard outlined in Google Shopping ignores this distinction.

This error has important consequences. Practices whereby some firms—including dominant ones—give a leg up to their own products or services often result from competition on the merits.[50] This is especially true when one considers the Servizio Elettrico Nazionale and Others finding—quoted in full above[51]—that a dominant firm’s conduct is more likely to result from competition on the merits when non-dominant firms deploy similar strategies. Unfortunately, this very argument was rejected by the GC in Google Shopping:

Secondly, even if, as Google indicates in the application, ‘Bing’s product ads must link to pages where users can purchase the offer’, that does not address the competition concern identified. What is at issue in the present case is not Microsoft’s conduct via its Bing search engine, which, moreover, is not in a dominant position on the market for general search services, but Google’s conduct. The fact that Bing’s ads also link internet users to merchants does not preclude Google’s conduct from being anticompetitive.[52]

To be clear, nothing in the case law we have discussed suggests that non-dominant firms implementing the same practice as a dominant firm is dispositive proof that the conduct belongs to competition on the merits. It does, however, suggest that the GC was wrong to dismiss Google’s claim out of hand. Indeed, as explained above, whether non-dominant firms also implement a practice is part of the appropriate analysis to determine whether it amounts to competition on the merits. Ultimately, however, the clearest dividing line is whether the dominant firm’s conduct is capable of excluding as-efficient rivals.

This has important ramifications for policy. Allowing firms to exploit advantages obtained on the market—as opposed to government-granted privileges—may be precisely what stimulates those firms and their rivals to compete and innovate in the first place.[53] Self-preferencing is also at the core of certain franchising agreements, which have the advantage of allowing the rapid expansion of a successful brand.[54] In the specific case of Google, the “Google Shopping Box” may provide a better experience by giving users a more direct answer, instead of forcing them to scour through hyperlinks and retype their query.[55] All of these scenarios may be procompetitive.

In his opinion in Intel, AG Wahl argued that:

Experience and economic analysis do not unequivocally suggest that loyalty rebates are, as a rule, harmful or anticompetitive, even when offered by dominant undertakings. That is because rebates enhance rivalry, the very essence of competition[56].

If there remains insufficient empirical evidence to condemn an age-old practice like rebates without properly examining its ability to foreclose competitors, then policymakers should be particularly careful when drawing the boundaries for such comparatively novel practices as self-preferencing in digital markets.

In short, the Google Shopping ruling appears incompatible with the effects analysis that underpins Article 102 TFEU. It essentially rests on a per se prohibition that does not distinguish procompetitive and anticompetitive exclusion, rather than the efficiency analysis imposed by Intel. It thus provides no way to draw a line in the sand separating self-preferencing practices that disadvantage competitors and are also anticompetitive from instances in which dominant undertakings favor their own (usually downstream) products to the disadvantage of competitors but are not anticompetitive.

At the time of writing, Google has appealed the GC’s ruling.[57] It is more than likely that these distinctions will be pivotal to that case. Among other things, Google argues that:

The General Court erred in upholding the Decision despite the Decision’s failure to identify conduct that deviated from competition on the merits.… The General Court’s additional reasons as to why Google did not compete on the merits are legally invalid. [58]

Given what precedes, it goes without saying that the ECJ’s conclusions on this point will be pivotal for the future of European competition law. In light of its Intel and Servizio Elettrico Nazionale and Others rulings, the ECJ’s upper court has essentially two options.

The first would be to affirm the lower court’s distinction between price and non-price conduct. This would be unfortunate. From a purely legal standpoint, it would amount to no less than a soft renunciation of Servizio Elettrico Nazionale and Others and a pruning of Intel. It would further convey that the court’s Article 102 case law has no clear direction and is not guided by clear overarching principles. From a more substantive perspective, this first path would create an unfortunate distinction between price-related conduct—assessed under a single unified framework—and the rest of Article 102, in which formalistic distinctions determine what idiosyncratic criteria under which types of conduct are ultimately assessed.

The second option would be for the court to confirm that the potential exclusion of as-efficient competitors is a key part of the legal test for all conduct under Article 102. Not only would this conclusion safeguard the consistency of Article 102, but it would also give lower courts and competition authorities some guiding principle to assess whether novel conduct—such as self-preferencing—does or does not stem from competition on the merits. It would be insufficient for the Commission to prove (a) that a vertically integrated undertaking favors its own downstream products and (b) that this reduces the incentives of consumers to buy competing products. Accordingly, this second outcome would likely tee up so-called renvoi proceedings, where the General Court would reassess whether the Commission adduced sufficient evidence of anticompetitive foreclosure.

In short, there is every reason to believe that, when it is finally decided, the Google Shopping appeal will be a huge milestone for European competition enforcement.

Conclusion

European competition law has come a long way. From early cases like United Brands and Hoffman Laroche—widely derided for their lack of economic literacy—the European judiciary has slowly crafted a coherent framework for Article 102 enforcement.

Although many failed to recognize it at the time, it is increasingly clear that the 2017 Intel ruling was a major catalyst of this upheaval. The ruling indicates that, for any given conduct under EU competition law, there needs to be a way to discern competition on the merits from anticompetitive conduct. In most cases, this includes asking whether the conduct under investigation is capable of excluding as-efficient competitors. However, as we have explained throughout this article, this judicial revolution is not yet complete. Doubts persist concerning the exact scope of Intel and whether it is truly the lodestar that some (including us) make it out to be.

The upcoming Google Shopping ruling will likely be the bellwether that reveals the true legacy of Intel and the future direction of European competition law. The ECJ has an opportunity to clarify when self-preferencing is illegal under Article 102 TFEU. To do so, it must look at the broader implications and recognize that self-preferencing practices that disadvantage some competitors may nevertheless still be procompetitive, and that the two must be differentiated.

Such an outcome might, however, prove somewhat bittersweet. With the Digital Markets Act (“DMA”) just around the corner, careful assessment of effects under the Intel framework will largely be a thing of the past in most digital markets. For instance, both Article 102 and the DMA cover “self-preferencing practices”, but under Article 102, a prohibition is subject to different standards, a higher burden of proof, and certain limiting principles that the DMA does not possess. By its own admission, the DMA cares little about the distinction between procompetitive and anticompetitive conduct, or between competition on the merits and foreclosure, which it replaces with concepts such as fairness and contestability:

The purpose of this Regulation is to contribute to the proper functioning of the internal market by laying down rules to ensure contestability and fairness for the markets in the digital sector in general, and for business users and end users of core platform services provided by gatekeepers in particular.[59]

This does not make Intel and its legacy any less important. With the DMA in force, it will be even more important for competition policymakers to understand the difference between self-preferencing under Article 102 TFEU, which is not per se prohibited and which aims to protect competition to the benefit of consumers, and self-preferencing under the DMA, which aims to protect downstream competitors (“fairness”). By the DMA’s own admission, these are two different things. The DMA’s standards should not be unduly grafted unto competition law, even if it would be politically convenient to interpret longstanding EU competition-law principles in this still nascent and uncertain light.[60]

The stage is thus set for the European Court of Justice to put the finishing touches on the Intel framework, thereby bringing much-needed clarity and consistency to Article 102. This would complete a remarkable turnaround for a body of law that has often been criticized for its lack of unity and economic proficiency. Whether or not this will ultimately prove to be a swan song—with the DMA attracting the bulk of enforcement—is another question.

[1] Case C 209/10 Post Danmark, EU:C:2012:172, para 22; Case C?52/09 TeliaSonera, ECLI:EU:C:2011:83, para 43.

[2] Case C-413/14 P Intel v Commission, ECLI:EU:C:2017:788.

[3] Case C-377/20 Servizio Elettrico Nazionale and Others, ECLI:EU:C:2022:379 (“Servizio Elettrico Nazionale and Others”); Case T-286/09 RENV Intel v Commission, ECLI:EU:T:2022:19 ; Case T-235/18 Qualcomm v Commission, ECLI:EU:T:2022:358.

[4] Case T-612/17 – Google Shopping, ECLI:EU:T:2021:763.

[5] Id., para 538 (“[A]s regards the arguments summarised in paragraph 514 above, according to which the Commission failed to demonstrate that competing comparison shopping services that had experienced difficulties were as efficient as Google, when in fact they are not, the Commission is correct in maintaining that it was not required to prove this. The use of the as-efficient-competitor test is warranted in the case of pricing practices (predatory pricing or a margin squeeze, for example), in order, in essence, to assess whether a competitor that is as efficient as the dominant undertaking allegedly responsible for those pricing practices, and which, in order not to be driven immediately from the market, would charge its customers the same prices as those charged by that undertaking, would have to do so at a loss and accentuating that loss, causing it to leave the market in the longer term…. In the present case, the practices at issue are not pricing practices.”).

[6] Elias Deutscher, ‘Google Shopping and the Quest for a Legal Test for Self-preferencing Under Article 102 TFEU’ (2022) 6 European Papers, 1345-1361; see also Pablo Ibañez Colomo, ‘Self-Preferencing: Yet Another Epithet in need of Limiting Principles’ (2020) 43 World Competition, 417, 443.

[7] Regulation (EU) 2022/1925 of the European Parliament and of the Council of 14 September 2022 on contestable and fair markets in the digital sector and amending Directives (EU) 2019/1937 and (EU) 2020/1828 (Digital Markets Act) [2022] OJ L 265; on the potential overlaps and conflicts between EU competition law and the Digital Markets Act, see Giuseppe Colangelo, ‘The European Digital Markets Act and Antitrust Enforcement: A Liaison Dangereuse’ (2022) ICLE White Paper. A revised version of the paper is forthcoming in European Law Review, Available at SSRN: https://ssrn.com/abstract=4070310 or http://dx.doi.org/10.2139/ssrn.4070310.

[8] Intel (COMP/C-3/37.990) Commission Decision of 13 May 2009.

[9] Id., paras 920-24; 1760-61. See e.g., at 1760: “thirdly, the as efficient competitor analysis conducted in section VII.4.2.3 is not relevant for the purpose of deciding whether the Commission should impose a fine or for determining its level as it does not relate to the existence of the infringement or to the question whether it was committed intentionally or by negligence, or to its gravity within the meaning of Article 23(2)(a) of Regulation (EC) No 1/2003 and of the Guidelines, in particular points 19 to 23 thereof”.

[10] Id., paras 1002-1153.

[11] Case T-286/09 Intel v Commission, 145 and 152.

[12] Case C-413/14 P Intel v Commission.

[13] Id.

[14] Id.

[15] See, e.g., Ruppert Podszun, ‘The Role of Economics in Competition Law: The “Effects-Based Approach” After the Intel Judgment of the CJEU’ (2018) 7 Journal of European Consumer and Market Law 57, 64 . “Intel does not reconceptualise Article 102 TFEU. It is a case on procedural fairness. It does not call for an effects-based approach in competition law”.

[16] See, e.g., Pablo Ibáñez Colomo, ‘The Future of Article 102 TFEU after Intel’ (2018) 9 Journal of European Competition Law & Practice 293.

[17] Case T-286/09 RENV Intel v Commission.

[18] Id., para 128 et seq.

[19] Qualcomm v Commission.

[20] Qualcomm (Case COMP/AT.40220) Commission Decision of 24 January 2018.

[21] Id., para 405-417.

[22] Id., para 414

[23] Id., paras 354, 396.

[24] Id., para 355.

[25] Id., para. 410. (“The undisputed fact that, on the relevant market, there was no technical alternative to the applicant’s LTE chipsets for a very large part of Apple’s requirements during the period concerned is a relevant factual circumstance which must be taken into account when analysing the capability of the payments concerned to have foreclosure effects, since the Commission found that capability in the light of Apple’s total requirements for LTE chipsets and, in particular, in the light of the reduction of Apple’s incentives to switch to the applicant’s competitors for all its requirements.”).

[26] Id., paras 397, 412, 415; see also Case C?23/14 Post Danmark, EU:C:2015:651, para 65-68.

[27] For instance, id., para349-356.

[28] Commission v. Qualcomm, para 356.

[31] Nicholas Hirst, “Intel, Google Shopping Rules Don’t Conflict, Top EU Judge Says”, (Mlex, 31 March 2022), available at https://mlexmarketinsight.com/news/insight/intel-google-shopping-rulings-don-t-conflict-top-eu-judge-says.

[32] Id.

[33] See, e.g., Ibáñez Colomo (2018) 293. “The Court of Justice (hereinafter, the ‘Court’ or the ‘ECJ’) introduced an important clarification that will have a significant impact on the analysis of abusive practices under Article 102 TFEU…. Intel makes two fundamental contributions to our understanding of the notion of abuse.”

[34] Post Danmark; Case C?67/13 P Cartes Bancaires, ECLI:EU:C:2014:2204.

[35] Case T-286/09 RENV Intel v Commission, para 124.

[36] Google Shopping, para 131.

[37] Google Shopping, para 157.

[38] Opinion of AG Wahl in Case C-413/14 P Intel v Commission, ECLI:EU:C:2016:788, para 73. “In this section, I shall explain why an abuse of dominance is never established in the abstract: even in the case of presumptively unlawful practices, the Court has consistently examined the legal and economic context of the impugned conduct. In that sense, the assessment of the context of the conduct scrutinised constitutes a necessary corollary to determining whether an abuse of dominance has taken place. That is not surprising. The conduct scrutinised must, at the very least, be able to foreclose competitors from the market in order to fall under the prohibition laid down in Article 102 TFEU.”

[39] Id., para 78. “As I see it, the analysis of ‘context’—or ‘all the circumstances’, as it is termed in the Court’s case-law —aims simply but crucially to ascertain that it has been established, to the requisite legal standard, that an undertaking has abused its dominant position. Even in the case of seemingly evident exclusionary behaviour, such as pricing below cost, context cannot be overlooked. Otherwise, conduct which, on occasion, is simply not capable of restricting competition would be caught by a blanket prohibition. Such a blanket prohibition would also risk catching and penalising pro-competitive conduct” (footnotes omitted for ease of reading).

[40] Servizio Elettrico Nazionale and Others, paras 45, 46, 51, 73, 74 & 86.

[41] Id. para 45.

[42] Post Danmark, para 22.

[43] Id., para 79.

[44] Opinion of AG Rantos in Case C-377/20 Servizio Elettrico Nazionale and Others, paras 69-74.

[45] See, e.g., Jao Cardoso Pereira, ‘Groupement des Cartes Bancaires: Reshaping the Object Box’ (2015) 18 Competition and Regulation 265, 266. “This judgment shows how economic analysis plays an increasing role in shaping the boundaries of competition policy. In this judgment, the ECJ has taken insights from recent advances in the economic analysis of two-sided markets to reach the conclusion that the pricing measures adopted by the Groupement could not be treated as a restriction of competition by object.” See also, Dirk Auer & Nicolas Petit, ‘Two-Sided Markets and the Challenge of Turning Economic Theory into Antitrust Policy’ (2015) 60 The Antitrust Bulletin, 447.

[46] Post Danmark, para 22.

[47] Servizio Elettrico Nazionale and Others, para 82.

[48] Pablo Ibañez Colomo, ‘Self-Preferencing: Yet Another Epithet in need of Limiting Principles’ (2020) 43 World Competition, 417, 443.

[49] Dirk Auer, “Case Closed: Google Wins (for now)” (Truth on the Market, 19 November 2021), available at  https://truthonthemarket.com/2021/11/19/case-closed-google-wins-for-now/.

[50] See. e.g., Geoffrey Manne, “Against the Vertical Discrimination Presumption” (2020) 2-2020 Concurrences 1. “The notion that self-preferencing by platforms is harmful to innovation is entirely speculative. Moreover, it is flatly contrary to a range of studies showing that the opposite is likely true. In reality, platform competition is more complicated than simple theories of vertical discrimination would have it, and there is certainly no basis for a presumption of harm.”

[51] Servizio Elettrico Nazionale and Others, para 79.

[52] Google Shopping, para. 354.

[53] Forcing those firms to share such advantages with rivals’ might encourage them to slack off and free-load. See, in this respect, Opinion of AG Jacobs’ opinion in Case C-7/97 Oscar Bronner, EU:C:1998:264. For a more detailed discussion, see. e.g., Dirk Auer, ‘Appropriability and the European Commission’s Android Investigation’ (2017) 23 Columbia Journal of European Law 647.

[54] Case 161/84 Pronuptia, EU:C:1986:41, para 15.

[55] Jakob Kucharczyk, “When Product Innovation Becomes a Competition Law Infringement: Preliminary Thoughts on the Google Shopping Decision”, (2017) 1 European Competition and Regulatory Law Review 193; see also Geoffrey Manne, “The Real Reason Foundem Foundered” (2018) ICLE Antitrust & Consumer Protection Research ProgramWhite Paper 2018-2, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3384297.

[56] Opinion of AG Wahl in Case C-413/14 P Intel v Commission, para 90.

[57] Appeal brought on 20 January 2022 by Google LLC and Alphabet, Inc. against the judgment of the General Court (Ninth Chamber, Extended Composition) delivered on 10 November 2021 in Case T-612/17, Google and Alphabet v Commission (Case C-48/22 P)

[58] Id.

[59] Regulation of the European Parliament and of the Council on contestable and fair markets in the digital sector (Digital Markets Act), point (7) of the preamble.

[60] Margethe Vestager has recently claimed the Apple Pay investigation would “inform the future application of the Digital Markets Act. It will set a precedent with regard to the analysis of the security concerns, and a recipe for effective and proportionate access to NFC for mobile payments.” See European Commission, “Remarks by Executive Vice-President Vestager on the Statement of Objections sent to Apple over practices regarding Apple Pay” (Brussels, 2 May, 2022), available at https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_22_2773.

 

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