The revised Notice introduces new chapters on market definition in specific circumstances, notably markets characterized by significant R&D, multi-sided platforms, and digital ecosystems.
On 8 February 2024, the European Commission (“Commission”) updated its Market Definition Notice (“Notice”) for the first time since its initial publication in 1997. The revised guidance softens the rigidity of the Commission’s earlier approach and grants it more flexibility in competition assessments – particularly in relation to digital and R&D intensive markets. Companies active in these sectors should see the update as a tool to support the Commission’s stricter enforcement agenda.
A. Background
- The 1997 Notice
The original Notice was published over 25 years ago. It aimed to provide companies with official guidance on how the Commission applies the concepts of relevant product and geographic market in its enforcement of EU competition law. To this day, market definition plays a pivotal role in competition enforcement. Competition authorities define the relevant market as a first step in both behavioral cases and merger control. It provides a framework for analyzing the competitive situation and identifying potential competitive constraints.
- Commission’s evaluation of the 1997 Notice
The Commission acknowledged that, since publication of the 1997 Notice, there have been significant societal and technological changes, including the rise of digitalization. These changes, in conjunction with developments in EU case law and the Commission’s decisional practice, warranted re-evaluation of the Market Definition Notice.
The results of the evaluation were published in July 2021:
- Despite calls from stakeholders for a more progressive approach, the Commission confirmed that, in general, market definition (and the principles on which it rests) will remain of central importance going forward.
- Nevertheless, the Commission recognized the need for changes in, or additions to, individual areas, notably: digitalization, innovation, geographic market definition, and quantitative techniques. This largely follows the direction of EU court case law and the Commission’s own practice.
A revised draft of the Notice was published for consultation in November 2022. More than 100 stakeholders responded. On 8 February 2024, the final version was adopted.
B. Key takeaways of the revised Notice
While the Commission’s fundamental approach to market definition remains the same (i.e., examining demand- and supply-side substitution, product and geographical market), the revised Notice introduces the following key changes:
- Relevance of non-price comparators. While the 1997 Notice focused on price as the main parameter of competition for market definition, the revised Notice adopts a broader approach. For example, it considers that the SSNIP test[1] may be ill-suited to cases where undertakings compete on parameters other than price.[2] In such instances, non-price factors such as product characteristics (including product quality or level of innovation), functionalities and intended use, might be more determinative for demand substitution.[3] This might be particularly relevant in situations involving multi-sided platforms.[4] In such cases, the Commission suggests analyzing switching behavior of customers in response to a Small but Significant Non-transitory Decrease of Quality (“SSNDQ”).[5]
- Forward-looking assessment to capture market dynamics. The revised Notice states that, in markets undergoing structural transition (such as regulatory or technological changes) or where a forward-looking assessment may be appropriate, future market shares may be estimated to reflect those expected changes.[6] This chimes with the Commission’s recent merger control practice. Notably, the revised Notice states that internal ordinary course documents or independent industry reports may be particularly relevant for conducting a forward-looking assessment.[7]
Along with general guidance, the revised Notice also provides specific direction on the Commission’s approach to market definition in cases where there is: (i) significant differentiation, (ii) discrimination between customers or customer groups, (iii) significant R&D, (iv) multi-sided platforms, (v) after-markets, bundles and (digital) ecosystems.
We consider the Commission’s guidance on (iii)-(v) in more detail below.
- Market definition in specific circumstances
(1) Market definition in the presence of significant R&D
Examples of industries characterized by significant R&D include pharmaceuticals, chemicals, electrical equipment, and hardware technology. The Commission explains that, while the specificities of highly innovative industries are usually taken into account during the competitive assessment, they may also be relevant for market definition. In particular, the Commission may factor in various potential outcomes of innovation efforts in its assessment of market definition.
For ‘pipeline’ products (where products are not yet available to customers), the Commission notes that there may be sufficient visibility to establish which other products are likely to be substitutable with the pipeline product. In such cases, the Commission can conclude on whether the pipeline products belong to an existing product market or a new product market.[8] However, where an R&D project is in the early stages of development,[9] the Commission concedes that it may be difficult to identify a relevant product market. However, it may still be possible to delineate the boundaries within which companies compete in early innovation efforts.[10] Factors that may be taken into account include the nature and scope of innovation efforts, the objectives of the research, and the specialization of the teams involved.
(2) Market definition in the presence of multi-sided platforms
The Commission uses the term multi-sided to refer to platforms which support interactions between different groups of users. It considers that often, demand from one group of users will have an influence on demand from others i.e., indirect network effects. Examples include payment card systems, online marketplaces, advertising-sponsored platforms, social networking services, and general search services.
The revised Notice is intended to afford the Commission with the flexibility to define a relevant product market in a way that encompasses all (or multiple) user groups, or to define separate relevant markets for the products offered on each side of the platform.[11] This will depend on factors such as the nature of the platform, the degree of product differentiation on each side, and the behavior of each user group (such as multi-homing i.e., using multiple platforms in parallel), among other things.
The Commission explains that multi-sided platforms often supply products at a monetary price of zero, a fact that it considers will render application of the SSNIP test more challenging. It also highlights that, when a product is supplied at a monetary price of zero, non-price elements become more relevant as does evidence on hypothetical substitution, and barriers or costs of switching such as interoperability.[12]
(3) Market definition in the presence of after-markets, bundles and digital
ecosystems
The Notice defines an after-market as a market where customers who buy a primary product are likely to buy a connected or complementary follow-on (secondary) product. Examples include cars and auto parts/repair services, printers and ink cartridges, etc.[13] In these circumstances, the Commission will also consider the competitive constraints imposed by market conditions in the respective connected markets when defining the relevant market(s).
The Commission lists three possible ways to define relevant product markets in the case of primary and secondary products: (i) as a system market comprising both the primary and the secondary product, (ii) as multiple markets, namely a market for the primary product and separate markets for the secondary products associated with each brand of the primary product, and (iii) as two markets, namely the market for the primary product on the one hand and the market for the secondary product on the other hand.
The Notice also makes reference to digital ecosystems.[14] This section of the revised Notice is likely to play a significant role in the coming years, considering the Commission’s increased scrutiny on interoperability in its recent decisional practice.[15]
C. Conclusion
How markets are defined will continue to play a central role in competition assessments. Market definition will remain the first step in the Commission’s analysis of any proposed transaction and any potential behavioral case. How the Commission views the relevant markets will lay the groundwork for all subsequent analysis, including on the existence of a dominant position and potential anticompetitive effects.
The revised Notice introduces new chapters on market definition in specific circumstances, notably markets characterized by significant R&D, multi-sided platforms, and digital ecosystems. The Notice leaves many questions open and seeks to allow for a less rigorous and more speculative assessment in order for the Commission to enjoy greater flexibility to pursue stricter enforcement in digital and R&D-intensive markets. Time will tell if such speculative analysis will withstand scrutiny from the Courts.
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[1] “Small but Significant and Non-transitory Increase in Price”.
[2] Revised Market Definition Notice, para. 30.
[3] Revised Market Definition Notice, para. 48.
[4] Revised Market Definition Notice, para. 98.
[5] At footnote 54 of the Notice, the Commission refers to case AT.40099 Google Android as an example of a case in which it used the SSNDQ test to determine the boundaries of the relevant market.
[6] Revised Market Definition Notice, para. 113.
[7] Revised Market Definition Notice, para. 77.
[8] At footnotes 121 and 122 of the Notice, the Commission refers to i) case M.7275 Novartis/GlaxoSmithKline Oncology Business as an example of a case in which it included pipeline products still under development in an existing relevant market, alongside products that were already marketed; and, conversely, ii) case M9461 AbbVie/Allergan as an example of a case in which it identified a new relevant market limited to a specific type of inhibitor for the treatment of ulcerative colitis and Crohn’s disease, even though no such inhibitor was, at the time, marketed by any supplier.
[9] The Commission makes clear at footnote 9 of the Notice that the term “product” also covers technologies.
[10] At footnote 125 of the Notice, the Commission refers to case M.7932 Dow/DuPont as an example of a case in which it applied the concept of innovation space to determine that the merging parties were involved in innovation competition.
[11] At footnote 129, the Commission refers to case M.8124 Microsoft/LinkedIn as an example of a case in which it defined a single market which included user groups on either side of the platform.
[12] See for instance Cases M.7217 Facebook/Whatsapp, AT.39740 Google Search (Shopping), M.8124 Microsoft/LinkedIn, AT.40099 Google Android.
[13] OECD, Competition issues in aftermarkets, June 2017 available here.
[14] At footnotes 142 and 143, the Commission refers to i) the judgment in Google and Alphabet v Commission T-604/18, where the General Court defined a digital ecosystem and noted the complementarity/interoperability of the products which would form such an ecosystem, highlighting the potential competitive constraints which such a system may give rise to; and ii) case AT.40099 Google Android as an example of a case where the conditions necessary to give rise to an ecosystem comprising app stores and smartphone operating systems were not present.
[15] E.g., European Commission, Mergers: Commission clears acquisition of VMware by Broadcom, subject to conditions, July 2023 available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Antitrust and Competition, Mergers and Acquisitions, Private Equity or Technology Transactions practice groups:
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Nicholas Banasevic* – Managing Director, Brussels (+32 2 554 72 40, banasevic@gibsondunn.com)
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Private Equity:
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Wim De Vlieger – London (+44 20 7071 4279, wdevlieger@gibsondunn.com)
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Carrie M. LeRoy – New York (+1 650.849.5337, cleroy@gibsondunn.com)
*Nicholas Banasevic, Managing Director in the firm’s Brussels office and an economist by background, is not admitted to practice law.
*Alex O’Donnell, a legal trainee in the Brussels office, is not admitted to practice law.
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Summary
- On 22 October, 2021, Executive Vice President Margrethe Vestager delivered a speech in which she stated for the first time that the European Commission (Commission) is going to expand its cartel enforcement to labor markets, including no-poach and wage-setting agreements.
- The U.S. authorities have already been active in pursuing naked no-poach and other labor market agreements, but to date the Commission has not taken any enforcement action in this area.
- The Commissioner’s statement signals a new enforcement priority and companies should prepare. We recommend that companies review their recruitment policies and HR practices in the EU to identify and remediate potential competition law risks.
- Companies should also expand compliance programs to include anticompetitive conduct in labor markets and ensure human resources personnel are receiving competition law training on a regular basis.
Background
The EU turns its attention to labor market agreements
On 22 October, Margrethe Vestager, the Commission’s Competition Commissioner and Executive Vice President, delivered a speech in which she signaled a new area of cartel enforcement for the Commission: anticompetitive labor market agreements.[1] Vestager highlighted wage-fixing and no-poach agreements as two examples of labor market agreements that could create a cartel. Under a no-poach agreement, companies mutually commit not to recruit and/or hire one another’s workers, or at least certain types of workers. Vestager argued that such arrangements can depress salaries, but she cautioned that labor market agreements could be seen as a broader threat to innovation and market entry. She explicitly shared her belief that labor market agreements can “restrict talent from moving where it serves the economy best” and can “effectively be a promise not to innovate.”
While the Commission has historically not focused its enforcement efforts on labor market arrangements such as naked no-poach agreements, Vestager’s speech is an indication that change is coming in the near future. This is part of a broader action plan with respect to EU cartel enforcement, which has historically given rise to high fines. Companies should be taking steps now to ensure they are prepared.
EU labor market interest follows growing international momentum
Vestager’s interest in labor market cartel enforcement is consistent with the growing enforcement efforts in several other jurisdictions. In 2016, the U.S. became the first jurisdiction to announce that it would treat labor market agreements as a criminal cartel matter.[2] In the subsequent five years, the U.S. Department of Justice (“DOJ”) has pursued numerous criminal investigations into potential wage-fixing, no-poach, and non-solicitation agreements. However, these investigations have only recently led to the first criminal charges, and the DOJ is now preparing for a series of criminal trials in 2022 that will test whether courts agree that such labor market agreements can amount to a cartel.
- Healthcare Providers: In 2021, the DOJ indicted two healthcare providers and a former CEO for their alleged participation in non-solicitation agreements. The DOJ charged both companies and the executive with agreeing not to solicit certain “senior-level employees” from one another. Additionally, the DOJ charged one of the companies and its former CEO with entering a separate agreement in which an unidentified healthcare company agreed not to solicit its employees—without any reciprocal commitment from the other company. Both companies and the executive have filed motions to dismiss the charges, arguing that such labor market agreements should not be treated as a criminal matter under U.S. law and that imposing criminal liability in the absence of judicial precedent would violate due process. The trial courts will first rule on these threshold legal issues and, if the DOJ prevails, the cases are scheduled for trial in March and May 2022, respectively.
- Physical Therapists: Neeraj Jindal and John Rodgers were charged in December 2020 and April 2021, respectively, as part of the DOJ’s first criminal wage-fixing case. Both individuals are alleged to have participated in a conspiracy among companies in northern Texas to lower rates paid to in-home physical therapists. Jindal and Rodgers are also charged with obstruction of justice for their actions during an earlier investigation into the same conduct by the U.S. Federal Trade Commission. The case is currently scheduled for trial in April 2022.
- School Nurses: The DOJ secured criminal charges against VDA OC and its regional manager, Ryan Hee, for participating in a conspiracy to fix wages and restrain their recruitment efforts for school nurses in Las Vegas, Nevada. During a ten-month period that began in October 2016, VDA OC and Hee allegedly agreed with a competitor not to solicit or hire each other’s nurses and to resist nurses’ efforts to increase wages. The case is currently scheduled for trial in late February 2022.
In Europe, the Portuguese Competition Authority moved to the forefront on labor market enforcement earlier this year. On April 13, the Portuguese Competition Authority announced a statement of objections against the Portuguese Professional Football League and 31 of its teams for an alleged agreement not to hire any player who terminated his agreement with another team for reasons related to the pandemic.[3] More importantly, the Portuguese authority used the case as an opportunity to outline its enforcement policies for labor market conduct. The authority released a policy paper on labor market enforcement[4] and published a Good Practice Guide entitled “Prevention of Anticompetitive Agreements in the Labor Market,” which sets out the various ways labor market agreements might be viewed as anticompetitive.[5]
Companies should prepare for a new era of labor market enforcement
Vestager’s comments suggest that the Commission is turning its enforcement efforts to labor markets. Companies should therefore be taking steps now to ensure they are identifying potential risks and working to remediate them before an investigation occurs.
As a starting point, companies should review their recruitment practices in the EU to determine whether their HR teams avoid recruiting or hiring from specific companies. In many instances, these restraints can be identified quickly in communications with external recruiters in which they receive instructions about the company’s specific hiring needs. Any such hiring restraint should be assessed to ensure it is permissible in its specific context. Any hiring restrictions agreed upon between companies or among members of a trade association that are unrelated to a legitimate commercial relationship are particularly high risk.
Companies would also benefit from reviewing their processes for setting employees’ compensation and benefits. Each company should be competing independently in setting its package of cash compensation (e.g., salaries, hourly wages, bonuses) and non-cash benefits (e.g., insurance, vacation and family policies). Any agreements or informal understandings with another company about the amount of compensation or the types of benefits that will be offered should be immediately discussed with legal counsel. Additionally, companies should be cautious about directly exchanging HR-related information with other companies in an effort to benchmark their compensation practices.
Companies should also expand the scope of their antitrust compliance programs, which have historically been focused on sales and marketing personnel and senior executives. As antitrust enforcers move into labor markets, compliance programs should be extended to human resources personnel and any other employees involved in recruiting. The programs themselves must also be updated to ensure the company’s competition law policy addresses labor market risks, competition training materials reflect labor market conduct, and employees have pathways to internally report suspected competition violations.
In the event that companies do encounter a potential antitrust breach, they should immediately seek legal counsel. The European Commission operates a leniency program that encourages companies to self-report a suspected cartel in exchange for full immunity (for the first company to report the breach). If other companies involved in the cartel can provide evidence of “significant added value,” they will be eligible for a fine reduction (between 30% to 50% for the first company, 20% to 30% for the second, and up to 20% thereafter).
Conclusion
Executive Vice-President Vestager’s statement is a clear signal that the Commission is shifting its attention to anticompetitive labor market conduct, such as wage-fixing and no-poach agreements. To prepare, companies must promptly review their HR-related practices to ensure they address any existing conduct that creates competition law risks and educate their HR employees to minimize the risk of a future infringement.
Gibson Dunn will be hosting a Webcast in November to discuss labor market enforcement in the U.S. and other jurisdictions, including the EU, as well as practical steps that companies should be taking to minimize HR-related competition law risks. Invitations to join the Webcast will follow shortly.
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[1] Margrethe Vestager, A new era of cartel enforcement, Speech at the Italian Antitrust Association Annual Conference (Oct. 22, 2021), available at https://ec.europa.eu/commission/commissioners/2019-2024/vestager/announcements/speech-evp-m-vestager-italian-antitrust-association-annual-conference-new-era-cartel-enforcement_en.
[2] U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Guidance for Human Resources Professionals (October 2016), https://www.justice.gov/atr/file/903511/download.
[3] Autoridade da Concorréncia, AdC issues Statements of Objections for anticompetitive agreement in the labour market for the first time (Apr. 18, 2021), https://www.concorrencia.pt/en/articles/adc-issues-statements-objections-anticompetitive-agreement-labour-market-first-time.
[4] Autoridade da Concorréncia, Acordos no Mercado de trabalho e política de concorréncia (Apr. 2021), here.
[5] Autoridade da Concorréncia, Guia De Boas Práticas: Prevenção De Acordos Anticoncorrenciais Nos Mercados De Trabalho (Apr. 2021), here.
The following Gibson Dunn lawyers prepared this client alert: Scott Hammond, Jeremy Robison, Christian Riis-Madsen, Stéphane Frank, Katie Nobbs, and Sarah Akhtar.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Antitrust and Competition or Labor and Employment practice groups:
Antitrust and Competition Group:
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Attila Borsos (+32 2 554 72 11, aborsos@gibsondunn.com)
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