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Tweaking the AEC Test: Fostering Sustainability by Discounting Costs Associated with Sustainability Efforts

[Swagat Ahuja and Anmol Aggarwal are third year students at Rajiv Gandhi National University of Law, Patiala]


Introduction


The debate regarding sustainability in Competition Law in recent times has been heated, to say the least. While the concept of sustainability has mostly evolved in advanced Antitrust regimes like the European Union. In recent times Indian Competition regime has also been traversing the paths to integrate sustainability considerations, which also comes with certain issues which the authors will address in this article. Literature regarding sustainability in relation to the applicability of the As-Efficient Competitor (AEC) test is relatively sparse. The discussion seems to have been focused mostly on concentrations and anti-competitive agreements, while having missed the need to preserve proper incentives for firms to strive to be sustainable. This is especially true in the context of abuse of dominance cases where there exist the objective criteria of assessing the efficiency of the competitor i.e., the AEC test who is being foreclosed. Although the AEC test is a credible test to assess whether the conduct is abusive or not, it can be counterproductive when considered in the context of sustainability. Further, the authors advocate for the implementation of appropriate mechanisms to ensure that firms prioritising sustainability are duly recognized and incentivized, even if they demonstrate lower efficiency compared to equally efficient competitors who do not prioritise sustainability in their operations.


The AEC Test and its Scope


The AEC test is often used in the cases of abuse of dominance to answer the question of whether protection should be granted to a smaller firm against foreclosure by another dominant firm or not. This principle exists because as a general principle of Competition Law, protection against foreclosure is only afforded to a firm if it is as efficient as the dominant undertaking. This test aims to determine if the foreclosure of the firm is due to the actions of the dominant firm. It specifically ensures that dominant firms are not penalized for the foreclosure of less efficient competitors, who may be unable to keep up with innovations, developments, and general competition.


Further, for a long time the AEC test was limited to pricing abuses. However, this is not the position anymore as the Court of Justice of the European Union (CJEU) case law has clarified in cases like Servizio Elettrico Nazionale (SEN), which was of the view that the AEC test is a broader criterion and extends to non-pricing abuses as well. This means that even where the abuse is non-price related such as tying, exclusive dealing, and refusal to supply among others, the courts may consider the criterion of relative efficiency in determining the existence of an abuse.


Weighing Sustainability Under the AEC Test


The problem that can arise with applying the AEC test in situations involving firms practising sustainability is that the AEC test takes into account only the economic efficiencies of the firm being foreclosed generally without looking into the source thereof. There can exist many situations where a firm is less-efficient because of its sustainable business practices since sustainability usually comes at a cost. Limiting considerations to economic factors may result in sustainably operating firms being inadequately protected under Competition Law. According to the existing framework, less economically efficient firms, despite prioritising sustainability, are not protected against foreclosure by dominant firms.


Incorporating an additional factor into the AEC test necessitates the consideration of any inefficiencies stemming from a firm’s action to adopt more sustainable practices. Essentially, competition law should not preclude a firm from protection against the risk of foreclosure solely on the grounds of its inefficiency, provided it can demonstrate that such inefficiency primarily arises from its efforts to enhance sustainability.


Illustration: For instance, let us consider a dominant entity that has recently integrated vertically to penetrate the market of its downstream purchasers and subsequently refuses to supply to them to favour its own undertaking in an attempt to capture their market share. In such circumstances, it is imperative to demonstrate that competitors of the downstream entity are at least as efficient as the dominant entity itself to warrant protection under competition law. However, if it emerges that competing entities are less efficient due to their pursuit of sustainable practices—for instance, adopting measures such as planting trees for every 10 units sold—this disparity must be discounted. The AEC test should be applied assuming the efficiency of the firm, had there been no differences attributable to sustainability efforts.


Suggestions Addressing Incentive Disparities


In the absence of discounting inefficiencies resulting from variances in sustainability endeavours during the application of the AEC test, there arises the risk of fostering counterproductive incentives for firms to forsake their sustainability initiatives in favour of maintaining perceived objective efficiency standards. Consequently, it is imperative that inefficiencies stemming from disparities in sustainability endeavours be duly discounted in favour of entities demonstrating a higher degree of sustainability. One potential way to incentivize positive behaviour in this regard is to designate the more sustainable firm as inherently more efficient compared to its less sustainable counterpart. Such an approach not only addresses existing negative incentives but also promotes a proactive stance towards sustainability. Moving forward, a comprehensive evaluation of the parameters for assessing sustainability is warranted should courts opt to acknowledge differences in sustainability practices positively. Recent amendments to the “Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakingsunderscore the relevance of the AEC test, advocating for the provision of protection against foreclosure to less efficient firms. This highlights the dynamic nature of the AEC test, which continues to evolve. This can also be supplemented to include the consideration of discounting inefficiency which is attributable wholly to indulgence in sustainability efforts.

 

 

 

 

 

 

 

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