Interview with Cani Fernandez and Jorge Padilla

Cani Fernandez is a partner in Cuatrecasas, a law firm, where she heads the EU and Competition Law groups and the Brussels office. She advises leading Spanish and international companies on Spanish and EU competition law matters, including merger control and antitrust matters. She also advises companies, governments and EU Institutions on wider EU law issues, and has extensive experience litigating before the General Court of the EU and the European Court of Justice. Cani has also been named as one of top lawyers in Spain by several publications over the last few years.

Jorge Padilla is Senior Managing Director and Head of Compass Lexecon Europe. He has given expert testimony before the competition authorities and courts of several EU member states, as well as in cases before the European Commission and the Community Courts. He has also given expert testimony in various civil litigation (damages) and international arbitration cases. Dr Padilla has written numerous papers on competition policy and industrial organization in the Antitrust Law Journal, the Economic Journal, the Journal of Law and Economics and the Rand Journal of Economics. He co-authored The Law and Economics of Article 102 TFEU, a book often cited in legal briefs and judgments. He is married to Cani Fernandez.

They were kind enough to grant us an interview, allowing us to benefit from their legal and economic points of view with regards to antitrust and related issues.

1. Cani, what is the main constraint when dealing with economists and consultants? Jorge, when dealing with (competition) lawyers (including Cani)?

Fernández: For me, working with economists is not an obligation, it is a necessity. Not every competition lawyer is aware of that, but in a field like ours if you don’t work with economists you only get half of the picture. So working with economists in competition law cases is a must. Having said so, the main constraint lawyers face when working with economists is that we speak different languages, even if we have a common objective. I really like when economists take that language barrier into account and help me to understand in plain words what they want to transmit.

Working with economists has also allowed me to understand the economic implications of competition law; something that I grasped only intuitively, and I know I have been able to do a better job as a lawyer because there are economists on my side helping me to understand the concerns of the competition authority from another perspective. The legal concepts I deal with everyday are based on economic principles, so because of my close interaction with economists I now have a better understanding of how to allay the concerns of the competition authorities.

Finally, from a personal perspective, interacting with an economist on a daily basis has opened my mind to a different way of understanding human behaviour and social phenomena and that is valuable as well.

Padilla: There is of course a language barrier that causes misunderstandings and which limits the importance of economics in legal disputes, including on competition policy matters. But I believe the main source of friction in actual cases is that they play – and should play – a different role. They are advocates: their role, their mandate, and their responsibility is to do whatever is best for their clients. We are not advocates. We are, or should be, independent experts and therefore we are constrained by economic theory and evidence in what we can argue. Of course, economists want to help their clients as well but there are clear limits for us that don’t bind lawyers. Because we are not advocates but independent experts, we have to speak to what the data tells us and limit our arguments to what is consistent with economic theory. We can try to develop the best possible arguments for our clients, so as to help the lawyer advance his or her case, but always within the limits of economics.

Not everybody respects those limits unfortunately. But many economists do and that naturally creates tensions because the client and the lawyer – acting as the advocate of the client – want the economists to say whatever is needed so they get off the hook. The economist may not be able to please them because their proposed arguments are fundamentally inconsistent with the principles of economics or the existing evidence, and that obviously creates tensions.

Some lawyers do understand that tension. They understand that if they force the economist to cross the line and become an advocate, it may be detrimental to the client in the end. So they become the allies of the economist vis-à-vis the client. They intermediate between the client and the economist. Some other lawyers don’t understand that tension and are more focused on the short term. They demand the economist to act as a 100% advocate. Those lawyers do not want independent experts but hired guns. Unfortunately, they are not the exception and, regrettably, some economists are willing to play that game.

Coming back to the issue of language barriers, the problem is not just that we speak different jargons. The true difficulty is that economists rely heavily on mathematics. That’s the real issue, mathematics is the big divide. Many people study law because they don’t want to study mathematics – that’s not the only motivation of course, perhaps not the most important one – but for many people it’s important. Nowadays, those lawyers who thought had escaped from maths find themselves doing antitrust law and they have to co-exist with a bunch of nerds who write with Greek letters and make constant reference to the margin. That is a shock! Many of them prefer to live in a state of denial. They reject economics because they cannot understand a formal argument. This is a problem that as economists we need to address. As Cani just mentioned, competition law practice is now embedding economic evidence in a way that is unstoppable. So we need to help those in the legal profession for which this is a drama.

Fernández: Things are indeed changing in the legal profession. For example, in my Cuatrecasas team, we are only hiring lawyers who are knowledgeable in economics as well. The reason is simply that we really need to interact with economists seamlessly. More and more young lawyers have studies dual degrees in law and economics. I expect this to be the norm in the future, at least among those practicing antitrust law.

2. How important is it to understand the historical background when dealing with European institutions?

Padilla: Well, it is absolutely impossible to deal with somebody if you don’t know where that somebody comes from. Unless you understand the historical background, you may get into debates with EU officials that are completely out of context and develop presumptions about how they will react to your arguments that are completely misplaced and unjustified. That will negatively impact on your chances of getting your story though and risks wasting your time and that of your interlocutors at the EU institutions.

In a case, when defending a position, you have a limited number of shots because there is a process and, unlike in our daily interactions in which you can come back to a point or argument once and again, there are only a limited number of opportunities to advance your arguments. Because of these limitations, it is important to understand what the other person thinks.

This is not true just in antitrust law or more broadly in litigation. It is a more general principle. What matters is not what you say, it’s what the others hear, what they believe you meant. And their beliefs are conditioned by the history of their institutions, their own personal backgrounds, the sort of debates that they have had before. If you are unaware of what has happened before, of the historical background of the institution, you may believe your arguments are extremely convincing, but what they are hearing is completely different and unpersuasive.

Fernández: I agree and I would add that everything has to be put into context. If you consider the latest judgements of the European Court of Justice, you will see how the judges make efforts to put their rulings into a historical and institutional context.

The same happens with what we do with our clients, we have to provide them with the best advice and in order to do so we really need to understand not only where they are coming from or the essential elements for the understanding of the matter at hand, but also the result that you have to provide.

I’ve been defending clients before the ECJ and the General Court for many years. If you don’t know very well the background of the case and you don’t understand very well every single element that may be relevant, including how your case relates to cases considered by the courts in the past, you are going to have a very tough time before the Court. While you are given 15 minutes to plead your case, questions from the court can last hours and during those long hours, every single small detail that is relevant for the case is going to be discussed. You have to really be very aware of the whole context to understand what motivates the judges’ questions and how you should answer them to help them make the right decision.

3. There is currently a lively debate in the competition community about the effects of mergers on innovation. Could you tell us a bit about this debate?

Fernández: For me, the issue is very simple, innovation is another element that we have to take into account when investigating mergers in sectors like the pharmaceutical industry, in which the merging parties may have overlapping pipeline products or research and development projects that are duplicative. The impact of mergers on innovation is becoming a hot issue because the European Commission seems to have developed a new theory of harm in the Dow/Dupont merger. I am waiting to see whether the theory of harm in that case will be confirmed in other cases. At this stage I simply do not know yet, whether Dow/Dupont is a standalone case. I know economists are debating that theory of harm. I will follow that debate with interest to see whether a consensus position emerges. If so, I will be better able to advise my clients in future transactions.

Padilla: On the one hand, I find it surprising that so many companies, law firms and economic consultancies complain about the Commission’s analysis of the effects on innovation of the merger between Dow and Dupont. Many of those same companies, law firms and economic consultancies have been arguing for years and years that the Commission was focusing exclusively on static issues, on pricing issues, and ignoring dynamic concerns and efficiencies when reviewing mergers.

Well, innovation is at the core of the dynamics of an industry and so it is only reasonable that the Commission focuses on innovation. So I don’t think there is any reason to be alarmed or particularly concerned, or to develop conspiracy theories of one sort or the other to explain what happened in Dow/Dupont. What we have witnessed in Dow/Dupont, as well as in GE/Alstom and several other recent cases, is the natural evolution of the analysis of the Commission that moves from simpler concerns to more sophisticated ones, among other things, because our industries are becoming more sophisticated and the companies that are merging now not only compete in prices, but fundamentally compete on innovation.

A separate issue is whether the economic theory and evidence that underpins the Dow/Dupont decision is as robust as it has been presented by some members of the Chief Economist Team (CET). In my opinion, it is not very robust. I think that what the CET has done is identify a number of anticompetitive effects that may have been relevant in Dow/Dupont (I wasn’t involved in that case), but may not be relevant in other mergers where innovation is central.

I also believe that their theoretical work, while useful, is incomplete. What we need to do as economists is to look at the issue, analyse different models, see if there are additional effects that need to be taken into account when assessing the innovation impact of horizontal mergers, and start developing a road-map for empirical analysis. Ultimately what we need to do as theorists is to identify many different effects so that empirical economists can ascertain which effects matter most in which circumstances. It is a fascinating research agenda for a number of years. I can see people working on this issue for several years. In the end, we will have a better understanding and more robust results.

I welcome the initiative of the CET. Innovation is key and the impact of mergers on innovation was not well understood, but I believe that their work is just the beginning of a research quest and that we all have to be a little more cautious and not pretend that we have a fully-fledged understanding of the issue because we don’t. You are going to see many new economics papers on this issue in the next months and years. They will qualify the CET results and will clarify when mergers are bad for innovation.

4. What do you think about big tech companies buying smaller innovative companies? Do we have the tools to control mergers like these?

Fernández: For me it’s rather clear that we haven’t been able to grasp what was really at stake in mergers such as Google/DoubleClick, Facebook/Whatsapp, Microsoft/LinkedIn or Microsoft/Skype. Because merger control only concerns transactions where the parties have a relatively large turnover, and mergers are only conditioned when the parties have large market shares measured in value terms, the real impact of those mergers on the markets affected by those deals was not properly assessed.

I am afraid that we may not be sufficiently well equipped to deal with those deals with our existing tools. I feel that, as a result, we may need to regulate industries that have become less competitive due to horizontal and vertical concentrations that fell below the radar screen, but I still don’t know how, whether it should be done using privacy law, consumer protection laws or any other form of sectorial regulation.

Germany has been trying to apply antitrust law to control Facebook. This is highly controversial. It is an initiative to be followed and studied, but I believe that competition laws may prove insufficient and we will need to complement them with other forms of regulation.

Padilla: Companies such as Google, Facebook, Amazon, Microsoft, and Apple are all fantastic companies. They are delivering great services. They are very innovative and have done lots of good things to all of us. Google helps us navigate the web in ways that were clearly impossible many years ago. Facebook has revolutionised the way we use the Internet.

At the same time, we have to be aware that in some of the markets where these companies operate, market power has increased significantly. Some of them are taking advantage of economies of scale and scope, network effects and so on. They are really achieving degrees of market power that are very significant and this could be problematic, not only because they may no longer feel the competitive pressure of some rivals, but also because they’re extending their businesses to adjacent markets, leveraging competitive advantages that are based on their dominance.

Market power is not a problem in itself but it is something to be watched carefully. There are many allegations of abuse by these companies. We need to look at them and investigate them. But we also need to consider whether antitrust is the right tool to deal with them, or we need to start thinking about the possibility of regulation. While the fact that they have been tremendously innovative buys them a lot of credit, it does not give them carte blanche to do whatever they want in the future. We cannot wait until economic theory and empirical evidence are completely developed to see whether we need to intervene. We didn’t wait to have the book of regulation by Laffont and Tirole to start regulating utilities. That of course means that we will make mistakes on the way and that we will have to refine the way in which we intervene in these markets. But I think that given the amount of market power that has been achieved in those markets we cannot stand idle. We need to look carefully to see whether we need to intervene and how, and in parallel we need to develop a better understanding of those markets to refine those regulations and adapt them to the times.

5. How do you see the future of competition law and economics?

Padilla: We need to advance our understanding of markets and strategies. After the gilded age of IO research that culminated with the publication in 1988 of Jean Tirole’s book titled The Theory of Industrial Organisation, and with a few exceptions, most IO work didn’t add much to our understanding of competition. This is changing now, in part due to the emergence of new business models that require understanding, and in part because we deal with lawyers working on difficult cases who approach IO theorists to understand what is going on. This has led to fundamental developments in the theory of multi-sided markets, for example. This makes IO a little bit more similar to labour economics or other fields where economists move from facts to theory. For too long IO was driven by abstract theoretical concerns.

Fernández: Competition law will continue to evolve. There are gaps to close, as I mentioned when responding to your previous questions. But our statutes are sufficiently flexible to provide a useful framework to assess the competitive implications of new company strategies, even in emerging markets. The statutes may not change but the way in which they are enforced will change. We observe change even in areas like the enforcement of Article 102, where we have been stuck with formalistic concepts for over 40 years. The gap between the formalistic way in which the statute was applied and the reality it is meant to regulate is slowly being addressed… Or so I hope!

by Tristan Salmon and Arthur Hill

With thanks to Alexandre de Cornière, Marc Ivaldi, Doh-Shin Jeon, and Yassine Lefouili for their question suggestions.

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