On June 28, 2024, the French Competition Authority issued its opinion on the competitive functioning of the generative artificial intelligence sector

On February 8, 2024, the French Competition Authority announced that it was asking for its own opinion on the competitive functioning of the fast-developing generative artificial intelligence ("AI") sector, and launching a public consultation. After gathering the views of some forty players and a dozen associations, the French Competition Authority published a long-awaited opinion on the subject barely a few months later, with the aim of providing industry players with an analysis of the competitive functioning of this market, which is the subject of "increased attention worldwide".

The opinion provides a welcome overview of this "complex" sector, its characteristics and the players in the generative AI value chain. It focuses mainly on the strategies implemented upstream (design, training and model inference), by major digital players, aimed at strengthening their position in these markets, or taking advantage of them to expand in this booming sector.

In its opinion, the French Competition Authority explains that generative AI requires three essential inputs: computing power, data and talent. It notes the existence of numerous barriers to entry, linked to the possession of or access to these inputs:

• The use of graphics processors or other specialized processors for AI is essential: models must be trainable, and the chips used must offer the capacity and computing power to carry out a very large number of operations with high precision, in order to determine several billion parameters. However, these processors, which are essential for developing a foundation model, are very expensive, and this sector has been characterized for the past two years by supply difficulties due to an explosion in demand;
• Cloud services are "a must" for accessing the computing power needed for model training;
• Market players need to have access to large volumes of data, of sufficient quality (text, images, etc.) to be able to train the models;
• The design of foundation models requires rare and highly sought-after data science skills, some of which can only be acquired with experience in the relevant fields; and
• The development of foundation models is accompanied by heavy investments that must be continually renewed. The French Competition Authority notes that investments in the sector have been multiplied by almost six between 2022 and 2023.

However, the French Competition Authority considers that technical or organizational developments, as well as certain public policies, can help limit these barriers to entry. This is the case for (i) public supercomputers, which can be used free of charge in return for a contribution to open science, (ii) the emergence of technological innovations that reduce the need for computing power and data, such as the use of synthetic data or small-scale models, and (iii) the use of open-source models, which other players can reuse or specialize in.

In its opinion, the French Competition Authority also points out that certain digital companies benefiting from privileged access to the inputs required to train and develop models could enjoy advantages linked to their activities on other digital markets, not easily replicated by competing foundation model developers who do not have the same access to inputs. Indeed, the French Competition Authority notes that these major players have easy access to computing power (as partners and competitors of processor suppliers), to a large volume of data (thanks in particular to their services and financial power), to many talents (since they offer attractive salaries and interesting job prospects) and benefit from advantages linked to their vertical and conglomerate integration (access to businesses, users and consumers, economies of scale and scope, or cumulative network effects).

Although the French Competition Authority does not draw any definitive conclusions on the definition of relevant markets and the market power of certain players, it does call for vigilance with regard to access to key inputs by these major digital players, and to the advantages derived from their vertical and conglomerate integration, which can lead to a high degree of concentration to their benefit and reinforce their power on related or connected markets (online advertising, search engines, etc.). It therefore insists on the relevance of carrying out a competitive analysis on the constitution or reinforcement of ecosystems, rather than engaging in a market-by-market analysis.

In the remainder of its opinion, the French Competition Authority identifies various restrictions on competition, including risks of abuse at the level of IT components (such as discriminatory behavior, price-fixing, supply restrictions), risks of foreclosure by major cloud service providers, restrictions on access to data (e.g. refusal or discriminatory access), or practices linked to access to skilled labor (e.g. wage-fixing agreements, no-poaching agreements, recruitment of entire teams or attempted exclusions).

The French Competition Authority is also looking into minority shareholdings and partnerships by digital giants. While the French Competition Authority recognizes that investments and partnerships between digital giants and innovative start-ups are not in themselves reprehensible, and can, in particular, encourage innovation, it calls for vigilance here too. It points out that these agreements and partnerships present significant competitive risks, since they can weaken the competitive intensity between the entities concerned, increase transparency, lead to vertical effects or even lock out certain players. It points out that these agreements and partnerships may be subject to various forms of scrutiny under competition law: notification of transactions exceeding thresholds when they confer de facto control, scrutiny under Articles 101 and 102 TFEU, abuse of a collective dominant position, or assessment of the acquisition of a minority shareholding as part of the analysis of an acquisition of exclusive control, for example.

Finally, the French Competition Authority makes ten recommendations that do not require legislative initiatives. For more details on this opinion, please consult the following link.

The French Competition Authority publishes its first informal guidelines on sustainable development

In view of the specific features and recent challenges involved in taking sustainable development issues into account in competitive analysis, the French Competition Authority now wishes to support companies and business associations in examining their projects that pursue sustainable development objectives.

Legal context: adoption of the notice on the French Competition Authority's informal guidelines on sustainable development

It was in these circumstances that the French Competition Authority issued its notice on informal guidance in the area of sustainability (the "Notice") on May 27, 2024.

With this Notice, the French Competition Authority invited companies to contact the General Rapporteur to inform him of their projects and obtain informal guidance on them. However, this is only possible if three cumulative conditions are met:

• The project is at a stage where it can be examined;
• The project pursues one or several sustainable development objectives; and
• The project has a potential impact on all or part of mainland France and its overseas departments and regions.

The application submitted to the General Rapporteur must also contain a number of documents and information listed in the Notice, such as a description of the project, a description of the activities carried out by the applicants, relevant economic information, a self-assessment of the project and supporting documents.

Applicants are guaranteed prompt feedback from the General Rapporteur. The time limits for processing requests are strictly defined: within one month of submitting the request, the General Rapporteur must inform the applicants whether or not he intends to provide informal guidance and, if so, issue an informal guidance letter within a maximum period of four months.

It is important to note, however, that this possibility of informal guidance does not call into question the principle of self-assessment, under which companies must refer to public tools (case law, guidelines, regulations, etc.) in order to assess on their own, if they can, the compliance of their projects with competition rules.

Finally, the Notice specifies that the General Rapporteur's letter of guidance is not binding on the French Competition Authority’s board, which will therefore have to make its own analysis of the project should it be seized of any conduct relating to the implementation of the said project. The French Competition Authority’s board will, however, take the existence of such informal guidance into account in its analysis.

Informal guidelines of June 14, 2024 on a harmonized methodology for measuring the environmental footprint in the animal nutrition sector

On June 14, 2024, in accordance with the Notice, the General Rapporteur issued his first guidelines for a harmonized methodology to measure the environmental footprint in the animal nutrition sector.

Nutrition Animale de la Coopération Agricole and Syndicat National de l'Industrie de la Nutrition Animale, two professional organizations representing players in the animal nutrition sector, have referred the matter to the French Competition Authority’s General Rapporteur. They wish to set up a draft guide proposing a harmonized method for calculating carbon footprints.

The General Rapporteur considered that their request was admissible and ruled that the project complied with competition rules.

He held that a guide containing a methodology for calculating the carbon footprint could be considered as a standardization agreement within the meaning of chapter 9 of the European Commission's guidelines on vertical restraints, and recalled that no sensitive information should be exchanged between competitors. He also pointed out that it was important for the guide to be published, firstly, on an indicative basis, which meant that companies could go further than what was set out in it, and secondly, on a non-exclusive basis, so that non-member companies could use it. Furthermore, there must be no ambiguity about the fact that it concerns the carbon footprint and not the greenhouse gas footprint or the environmental footprint in general. Finally, he reiterated that reliable scientific data must be used to determine the methodology and design the guide.

The French Supreme Court clarifies the concept of "retail trade" to assess the validity of post-contractual non-competition clauses in franchise agreements

Article L.341-2 of the French Commercial Code, which must be read in conjunction with Article L341-2 of the same code, strictly governs the validity of post-contractual non-competition clauses contained in commercial contracts in the retail sector. A non-competition clause is only valid if (i) it concerns goods and services in competition with those which are the subject of the contract, (ii) it is limited to the land and premises from which the operator carries on its business during the term of the contract, (iii) it is essential to the protection of the substantial, specific and secret know-how transmitted under the contract with those which are the subject of the contract, and (iv) its duration does not exceed one year after the expiry of the contract.

However, the law does not define what is meant by "retail trade" (“commerce de detail” in French), and the question arose as to whether, for example, it should be limited to the rather restrictive definition of "retail trade" used by the French Competition Authority in its merger control guidelines.

This was the question the French Supreme Court had to answer in a dispute between a French company operating a real estate agency franchise network and one of its franchisees. The contracts entered into by the two parties contained a post-contractual non-reaffiliation clause, under which the franchisee undertook not to affiliate with a competing chain or to set one up himself in the department(s) in which he had his agency or any branches for a period of one year after termination of the contract. However, after terminating his contracts with the franchisor, the franchisee joined a competing franchise network.

It was therefore necessary to determine whether a real estate agency activity could fall within the scope of the retail trade (knowing that the French Competition Authority excludes it, for example).

The French Supreme Court has interpreted the concept of “retail trade” in the light of the purpose of Articles L.341-1 and L.341-2 of the French Commercial Code. It considers that the aim of these texts is to prevent commercial distribution networks from restricting the entrepreneurial freedom of their affiliates by dissuading them from changing their trade name.

As a result, the French Supreme Court has ruled that the term "retail trade" must be understood as covering both the sale of goods and the provision of services to private individuals, such as real estate agency activities.

The French Supreme Court's broad appraisal of the notion of "retail trade" means that the strict conditions governing the validity of post-contractual non-competition clauses in distribution or franchise agreements apply to many B-to-C sectors.