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18 July 2013
The Irish Supreme Court rebuke of the Competition Authority on 8 May this year was an awkward moment. Ireland's free-market regulator was found to have relied on "artificial" and "counter-intuitive" economics in taking a dubious case against the Irish League of Credit Unions (ILCU). For an agency that consistently champions economics as core to its mission, this is a setback.
To be sure, this was a big case to lose. By the Supreme Court's own account, the ILCU case was the first to come before it involving the application of substantive competition law. The Competition Authority itself trumpeted the case as its "first ever" to rule on abuse of dominance, which was outlawed in 1991.
There was also an important issue of substance at stake. The Competition Authority argued that the ILCU was dominant in representing credit unions, including both its own member credit unions as well as unaffiliated credit unions not represented by the ILCU. Indeed, according to the Competition Authority, there existed a market for "credit union representation services" by reference to which ILCU activities could be scrutinised on competition law grounds. That was a radical proposition of potentially enormous precedent-setting value. Clearly, if representation of a particular viewpoint or interest can be an economic market unto itself, there is likely to be a lot of dominant representatives out there needing regulatory scrutiny.
The public policy principle at work here is that if you define a market narrowly enough, you can find a monopolist anywhere. Under competition rules, monopolists have a special responsibility as to how they compete in the market and are subject to more intrusive competition law scrutiny. Thus, a win for the Competition Authority in the ILCU case would have greatly facilitated it in reviewing the activities of representative associations.
More generally, however, it would also have been seen as a strong endorsement of a more activist and interventionist approach by the Competition Authority. Undoubtedly, the ILCU case - initiated before the current chairman Bill Prasifka took office - was founded on an expansive view of competition law.
The aim was to force the ILCU to share its property and facilities with a breakaway group of credit unions named the Credit Union Development Association (Cuda). Since the famous Magill case, which used competition law to mandate forced sharing of property, economists have argued about when, if ever, it makes economic sense to impose an obligation to aid competitors.
Because of the harm that can result, in particular in respect of incentives to innovate and invest, it is generally agreed that any such duty should be imposed only in fairly exceptional circumstances. It does seem questionable whether fostering the emergence of a new association of credit unions to represent those who have fallen out with the ILCU should amount to such exceptional circumstances. That is particularly the case given that the facilities in question did not appear essential to the viability of those credit unions.
It is somewhat surprising that the Competition Authority would seek to impose such a remedy in the relatively novel circumstances of the ILCU case. Certainly, the Competition Authority had difficulty in finding any precedents in which a competition court or agency, either here or in any other jurisdiction, had found a market for "representation services" of a particular viewpoint. That is probably because there is none - at least, not since the Sherman Act in the US was inappropriately used to prosecute a group of socialists in the early part of the last century.
Against this background, Supreme Court clarification of the issues was most welcome. In a clear and insightful analysis, the court dismissed the case, finding that the Competition Authority "failed to provide a convincing analysis of the ILCU's activities as being anticompetitive". In addition, the Supreme Court considered the authority's arguments regarding the existence of a representative services market "troubling". According to Mr Justice Fennelly, who delivered the unanimous judgment, that pursuit "seems to me more naturally to meet the description of common pursuit of common interests" than that of an economic activity to which competition law can apply.
The Supreme Court also appeared concerned by the "radical shifts" in the Competition Authority's core arguments over the course of its prosecution of the case. According to the Supreme Court, the "entire superstructure" of the Competition Authority's case was founded on the market definitions propounded. And yet, over the course of its prosecution of the case, the Competition Authority sought to rely on at least four different and, to a large extent, contradictory market definition theories. Ultimately, that prevarication worked against the Competition Authority. Fennelly J stated: "It seems to me to undermine confidence in the authority's consistency."
Two lessons emerge. First, greater internal checks and balances are probably required within the Competition Authority prior to deciding on the cases to prosecute. More generally, the Supreme Court verdict demonstrates clearly that the courts will consider market behaviour to be anti-competitive only if it has a clear and demonstrable impact on competition in the market - theoretical propositions based on inventive economics will not suffice. Thus, the Supreme Court emphasised that parties wishing to bring competition law cases (including the Competition Authority) would need to support their claims with "cogent factual evidence".
Philip Andrews is a partner at McCann FitzGerald