Clifford Chance

The judgment is a rare full annulment in an abuse of dominance case, and the first of an Article 102 TFEU decision adopted by Commissioner Margrethe Vestager. 

Background

On 24 January 2018, the European Commission (EC) imposed a fine of EUR 997 million on Qualcomm for breaching Article 102 TFEU. Baseband chipsets enable smartphones and tablets to connect to cellular networks and are used both for voice and data transmission. Chipsets can be compatible with one or more cellular communication standards, such as Universal Mobile Telecommunications System (UMTS) or Long-Term Evolution (LTE) standards. The EC found that Qualcomm held a dominant position in the global market for 4G LTE baseband chipsets and that Qualcomm abused that market dominance between February 2011 and September 2016 by agreeing to make significant payments to Apple, on condition that it would exclusively use Qualcomm chipsets in its iPhone and iPad devices (the Decision). On 6 April 2018, Qualcomm appealed the Decision.

The General Court's judgment

The General Court found that the EC committed procedural breaches

The EC failed to keep notes or sufficiently detailed notes of meetings and conference calls with third parties

With regard to a number of meetings and interviews held with third parties throughout the investigation, the General Court ruled that:

• The EC breached Article 19 of Regulation 1/2003 by not including proper records of those interviews in the case file. In addition, the notes that the EC did provide after it adopted its Decision, and following a request from Qualcomm, were deemed incomplete, since they did not give any indication of the content of the discussion held during the interviews. The General Court recalled that established case-law requires the EC to record, in particular, the nature of the information provided on the subjects addressed during the interviews.
• This failure breached Qualcomm's rights of defence as the undisclosed information could have been relevant to Qualcomm's strategy of defence.

The EC narrowed the scope of the Statement of Objections and the Decision and failed to afford Qualcomm the opportunity to respond to new evidence

In response to the preliminary Statement of Objections (SO), Qualcomm presented a critical margin analysis which sought to demonstrate that its conduct was not capable of having foreclosure effects on the LTE and UMTS chipsets markets.

• Qualcomm argued that the SO and the Decision differed on key aspects, in particular the practices concerned UMTS chipsets and LTE chipsets but the Decision, unlike the SO, only referred to abuse on the market for LTE chipsets and relied on a revised critical margin analysis. Qualcomm argued that, despite the fact that the Decision diverged substantially from the SO, it did not have the opportunity to address the criticisms of the critical margin analysis or to correct the EC’s revised analysis.
• While the General Court recognises that the EC is entitled to modify and reduce the scope of the objections in favour of the defendant, Qualcomm was not able to exercise its rights of defence effectively given that the EC did not bring this change to Qualcomm's attention who was not given the opportunity to adapt its economic analysis.

The General Court found that the EC committed errors in assessing anticompetitive effects

The EC failed to assess all circumstances - iPhones

The General Court recalled that the analysis of whether the payments concerned were capable of restricting competition and, in particular, of foreclosing at least as-efficient competitors must be carried out in the light of all the relevant factual circumstances surrounding that conduct.

• Qualcomm argued that the EC did not provide evidence that the agreements were capable of leading to anticompetitive foreclosure and that it had failed to prove that Intel (or any other rival) was capable of meeting Apple's exact technical and scheduling requirements, despite the Decision acknowledging that no competitor was capable of supplying LTE chipsets for use in iPhones throughout the period concerned.
• The General Court sided with Qualcomm judging that the EC relied on an analysis which was not carried out in the light of all the relevant factual circumstances and was therefore unlawful.
  • The EC failed to take into account of the fact that Apple could not switch to any other supplier to fulfil its technical requirements for a very large part of its LTE chipset demand (corresponding to iPhones).
  • The EC could not legitimately conclude that the payments concerned had reduced Apple's incentives to switch to Qualcomm's competitors for all its requirements related to iPhones and iPads.
• Moreover, during the hearing before the Court, the EC attempted to modify its theory of harm by arguing that even if Qualcomm's competitors could technically not provide supply for iPhones, Qualcomm had been able to leverage the non-contestable share of Apple's demand related to iPhones to foreclose competitors on the contestable share of demand related to iPads. The General Court ruled that this did not align with the theory of harm set out in the Decision but that, in any event, the EC did not bring any evidence to support this argument.

The EC failed to demonstrate anticompetitive effects - iPads

Qualcomm argued that the EC failed to demonstrate that the agreements between Qualcomm and Apple influenced Apple's sourcing decisions concerning 2014 and 2015 iPads. The General Court agreed and found that the EC's assessment did not show that Qualcomm's payments had actual anticompetitive effects, i.e., that they reduced Apple’s incentives to switch to competing suppliers for certain iPad models to be launched in 2014 and 2015.

Conclusion and takeaways

The General Court's judgment is a significant blow to the EC. The General Court could have sufficed to point out the procedural errors to overturn the Decision, but went out of its way to rebuke the EC with regard to its substantive assessment as well.

Procedural discipline. Amplifying the message the Court of Justice conveyed to the EC in its 2017 Intel judgement, the General Court requires that the EC must use its powers to collect evidence judiciously with respect of the defendant's right of defence. Where the EC has meetings with complainants or third parties, it is required to take sufficiently detailed notes of these meetings to enable defendants to assess what was discussed and whether the discussions included exculpatory evidence.

In this regard, the judgment may constrain the ability for firms to raise concerns informally with the EC and remain in the background (e.g., for fear of retaliation); although the EC continues to accept redactions of notes on this basis, it is at times difficult completely to obscure the identity of the EC's interlocutor in redacted notes ultimately potentially accessible to the defendant because of the type of concerns raised and the concentrated nature of the industry.

More generally, the judgment shows that the defendant's rights of defence are to be taken seriously and that accumulated irregularities throughout the administrative procedure can lead to the annulment of an entire decision.

Analytical rigour. With regard to the substantive analysis, the Court emphasizes that in determining whether payments to procure exclusivity are capable of restricting competition, the EC must consider all relevant circumstances and not just those that fit its theory of harm. The EC cannot cherry-pick facts and evidence from the complainant to support its case, but must also take into account circumstances indicating that the payments involved were not capable of restricting competition, such as in this case, the inability of alternative suppliers to meet Apple's requirements.

In general, the judgment indicates that the General Court will thoroughly scrutinise whether a conduct is capable of having anticompetitive effects and imposes further analytical rigour on the EC. It remains to be seen if the judgment stands how its requirements will impact the EC's general appetite aggressively to pursue cases against dominant firms. For gatekeeper online platforms such as Google and Facebook, the judgment might mean that the EC is likely to focus even more heavily than already anticipated on the specific infringements provided for in the Digital Markets Act (DMA) rather than bespoke abuse of dominance antitrust enforcement, given how the DMA exonerates the EC from establishing anticompetitive effects of an infringement.

The EC can now leave the case as is, adopt a new decision vis-à-vis Qualcomm or appeal the General Court's judgment.