This article has been written by Lakshmi. V. Pillai of 5th year pursuing B.A. LL.B from GLS Law College, Ahmedabad.
Under the European Union law, in the Treaty on the Functioning of the European Union (TFEU) under the provisions of Article 102, the concept of Abuse of Dominance is laid down.
As per the EU law, a company/undertaking will not be considered as abusing its dominant position per se just because it is dominant in the market. There are precedents that layout the factors which are counted as an abuse of dominant position by the company.
The factors are as follows:
- The undertaking using its dominance is acting independently.
- And the independent act of the undertaking is adversely affecting the consumers and competitors.
By acting independently we understand that the undertaking is in such a position wherein it need not consider the consumers and competitors. As it carries a huge market share which gives it the liberty to act independently as per its need. And this independent act from the dominant adversely affects the competitors and consumers which results in the distortion of the fair competition in the market, which subsequently turns out to be ‘abuse of dominant position’.
While considering the Abuse of Dominant Position the points which need to be considered are:
- The substantial market power of the undertaking;
- The ability of the undertaking to control entry conditions;
- And the degree of buyer power from the undertaker’s customers.
To assess whether the undertaking concerned is dominant or not, it is important to understand the relevant market. To determine the relevant market of the undertaking the product market and the geographic market are considered.
By product market, it means the availability of the substitute or the interchangeable product in the relevant product market to the consumer based on characteristics of the products or services, their prices and intended use. If there are no substitutes then that means the undertaking is enjoying the dominance in the market. This happens when the competitor does not have any substitute or a similar product to sell in the market. So if any other substitute is available then the consumer has an option to opt which cuts down the market share of the undertaking.
By geographic market, it means relevant geographic market comprises the area in which the conditions of competition for the supply of goods or provision of services or demand of goods or services are distinctly homogeneous and can be distinguished from the conditions prevailing in the neighbouring area. The factors which are considered under these criteria are regulatory trade barriers, local specification requirements, national procurement policies, adequate distribution facilities, transport costs, language, consumer preferences and need for secure or regular supplies or rapid after-sales services.
Another important factor that is considered while determining the dominance of the undertaking is the market shares. Under the EU law if the company has more than 40% of market share, then it is considered to be a preliminary indication of dominance.
As per Article 102 of the TFEU, under the following grounds the abuse can be determined:
(a) when there is direct or indirect imposing unfair purchase or selling prices or other unfair trading conditions to the product in the market;
(b) limiting production, markets or technical development to the prejudice of consumers by the dominant undertaking;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
By reading Article 102 of the TEFU the Abuse of Dominance can be categorized into two major practices:
- Pricing practices:
This practice is performed by the undertaking by controlling the pricing of the products and services in the relevant market abusing its dominant position in the market. Article 102 (a) of the TFEU specifically deals with the pricing practice.
- Non-pricing practices:
These practices do not have a direct impact on the pricing of the products in the relevant market however, the dominant undertaking performs such acts that can affect the consumer and competitor directly or indirectly. By putting restrictions on the dealings of the seller, tying products, by putting conditions on the seller to refuse the supply of the product to particular consumers or market. The sub-clauses (b), (c) and (d) of Article 102 of the TFEU deals with the non-pricing practices.
Exceptions to certain acts under the TFEU
However, it is to be noted the TFEU provides some exceptions which will not be considered as an act of Abuse of Dominant Position. The burden of proof is on the defendant in such cases.
“Any agreement or category of agreements between undertakings, any decision or category of decisions by associations of undertakings and any concerted practice or category of concerted practices:
- which contributes to improving the production or distribution of goods or;
- to promote technical or economic progress;
While allowing consumers a fair share of the resulting benefit, and which does not:
- impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;
- afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question”.
Till the time the United Kingdom is a part of the European Union, the courts of the UK need to consider its Competition Act with parlance to the EU Treaty.
Section 18 (Chapter II Prohibition) of the Competition Act 1998 states that ‘any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom’.
However, there are two major differences between EU and UK law:
- Under UK law, no cross border effect needs to be proven;
- There is no minimum threshold mentioned under UK law.
To check and regulate the anti-competitive activities in the UK, there is a non-ministerial government department- Competition and Market Authority (CMA). It is responsible for strengthening fair competition in the business/market of the UK. The CMA is the successor of the Competition Commission and the Office of Fair Trading and it started fully operating on 1 April 2014.
Exclusive Dealing Agreements
In Exclusive Dealing Agreements, the customers are tied up in a contractual obligation wherein they are required to purchase specific goods or services exclusively from a particular supplier for a particular period of time. The time duration can vary from case to case. This kind of obligation prevents customers from exploring other suppliers. And this results in the creation of barriers to the competitors of the undertaking to enter into the market and provide service to the customers.
As per paragraph 32 of the Guidance of the Commission, the ‘Exclusive Dealing Agreement’ is defined as “A dominant undertaking may try to foreclose its competitors by hindering them from selling to customers through the use of exclusive purchasing obligations or rebates, together referred to as exclusive dealing. This section sets out the circumstances which are most likely to prompt intervention by the Commission in respect of exclusive dealing arrangements entered into by dominant undertakings.”
Hoffmann-LaRoche v Commission of the European Communities– It is a landmark case which laid down the principles of Abuse of Dominant Position. A dominant undertaking said to be abusing its dominant position “when that ties purchases, even if does so at their request, by an obligation or promise on their part to obtain all or most of their requirements exclusively from the said undertaking.”
The application of Article 102 TFEU to exclusive dealing agreements.
In the EU law under Article 102 (2) (c) of the TFEU deals particularly about exclusive dealing agreements.
Meaning of exclusivity
The exclusive dealing agreements can be of two types:
1) Exclusive supply obligation– In this type of obligation, the supplier is restricted from supplying the service or goods to any other party other than the specific downstream customers.
2) Exclusive purchasing obligation– In this, the purchaser/customer is restricted from acquiring the goods or services other than a specific supplier.
The perfect example for exclusive purchasing obligation is the Intel v Commission case, wherein the General Court held that the requirement on the part of the customer to buy 80% of CPU’’s requirements from the Intel results into the agreement which is analogous to the abuse of dominant position.
However, there are some factors to which we can look into wherein we can understand what can lead to an exclusive dealing agreement. The elements for exclusive dealing are well established and comparable to other abuse of dominance cases:
- Market power by at least one party to the arrangement;
- Conduct that forecloses rivals from the opportunity to compete; and
- The absence of overriding legitimate business justification.
As per Article 102 of EU law, market share is always an important determining factor. But in various cases of EU courts, the thresholds of determining the dominance of the company varied which certainly make confusion in the minds of the people. Except in some cases, the other factor which carries prudent weight is foreclosing the opportunity to the entrants. By understanding various cases adjudicated by the EU courts the points which are essential to consider an act as an abuse of dominant position under the exclusive dealing agreement will be comprehensible.
Judgments in the EU Courts
Konkurrensverket v TeliaSonera Sverige 
Konkurrensverket v TeliaSonera Sverige is the first case in which the Stockholm District Court penalized the highest fine of a total amount of SEK 144 million due to a violation of Chapter 2, Section 7 of the Swedish Competition Act and Article 102 TFEU respectively. In the year 2004, the Swedish Competition Authority (Competition Authority) brought an action against TeliaSonera, a telecom operator. The District Court found that TeliaSonera had abused its dominant position by a margin squeeze by offering wholesale and end-user services for broadband connections at prices where the margin between the wholesale price and the price to households was insufficient to cover TeliaSonera’s costs for offering broadband to households. The price squeeze had occurred on the Swedish market during the period April 2000 through to January 2003.
According to the District Court, TeliaSonera had, in several cases, applied higher prices towards competitors than private customers. The marginal squeeze resulted in no entry of the new entrants and forced them to make their prices extremely less which them not able to do active marketing.
However on 30 January 2009, the Court stayed the proceedings and referred the matter to the ECJ. The ECJ answered the referred questions through a preliminary ruling on 17 February 2011.
The ECJ stated that in the absence of any objective justification, the fact that a vertically integrated undertaking, enjoying a dominant position on the wholesale market for ADSL input services, applies a pricing practice of such a kind that the spread between the prices applied on that market and those applied in the retail market for broadband connection services to end-users, was not sufficient to cover the specific costs which that undertaking must incur in order to gain access to that retail market, may constitute an abuse within the meaning of Article 102 TFEU.
Post Danmark A/S v Konkurrencerådet 
In Post Danmark case the CJEU ruled that: “Article 82 EC [now Article 102 TFEU] must be interpreted as meaning that a policy by which a dominant undertaking charges low prices to certain major customers of a competitor may not be considered to amount to an exclusionary abuse merely because the price that undertaking charges one of those customers is lower than the average total costs attributed to the activity concerned but higher than the average incremental costs pertaining to that activity, as estimated in the procedure giving rise to the case in the main proceedings.”
Therefore, if the dominant firm charges prices below average total cost (ATC) but above average variable cost (AVC) to attract a rival’s customers is not in itself an infringement, even if the discount is selectively made to target rivals’ customers. To constitute abuse, the selective price-cutting must be shown to be part of a scheme to dominate and to be capable of having that effect, rather than merely reflecting competition for customers.
The Commission’s approach to exclusive purchasing agreements
As from the above cases, we can understand that the commission majorly focuses on one aspect, i.e. whether the act of reducing prices or having a contractual obligation with customers is hindering the entrance of the competitors or new entrants in the market. If the dominant company is making barrier through various strategies which distort the fair competition in the market then that will ultimately be considered as an abuse of dominance.
However, in the case of TeliaSonera the commission had laid down a test called “efficient competitor-test” as per paragraph 40 of the case the court observed that- “Where an undertaking introduces a pricing policy intended to drive from the market competitors who are perhaps as efficient as that dominant undertaking but who, because of their smaller financial resources, are incapable of withstanding the competition waged against them, that undertaking is, accordingly, abusing its dominant position.”
There is a methodology laid down by the commission to determine whether the dominant undertaking is abusing its position or not.
The method is as follows:
- Firstly, determine the margin of the input price and the price of the derived product of the dominant undertaking.
- Secondly, compare the undertakings own cost of processing the input product to the derived product. If the margin of the second outcome is lower than the first one then that means there is an abuse of dominance.
Article 102 applies to de facto as well as to contractual exclusivity
Article 102 applies to de facto as well as contractual exclusivity. The de facto exclusivity results when there is no stipulation regarding exclusivity upfront, however, the act of the undertaking is as such which results in exclusivity.
In the case of Van Den Bergh Foods, the commission noted that Van Den Berg is exclusively providing free freezers to the retailers with a condition that they will store any other ice cream other than Van De Berg’s ice cream. the result of this practice was de facto the Van Den Berg able to close the outlets for other competitors and took control of all retailer outlets. Under para 33 of the Guidance on Article 102 Enforcement Priorities- ‘stocking requirements’ are considered as a practice which can lead to anti-competitive behaviour.
Is there an objective justification for a long-term agreement?
In recent cases like Distrigaz case (2007) and EDF case (2010), long-term contracts were considered as harming the fair competition in the market. In both cases the firms were having the public monopoly in the market, the EDF had a monopoly in the supply of electricity to large industrial customers and Distrigaz had a monopoly in the supply of gas to large customers. The Commission has taken a hard stand regarding dominant firms and their long term contracts. the term of the contracts was varying from 8-10 years. The firms need to prove that the long term contracts are not deterring the rivals from entering the market. The main concern for the commission was long term contracts between energy companies and their customers which was leading to customer foreclosure. Whether exclusive contracts are foreclosing often presents an interesting issue. Courts and regulators typically look to some combination of the percentage of the available customer base to whom the contracts applied and their duration.
There is no as such objective justification, as a company applying dominance in the market varies from case to case. The important fact is that the dominant power of the company affected the competitor.
The potential for harm to competition from exclusive contracts increases with:
(1) The length of the contract term;
(2) The more outlets or sources covered; and
(3) The fewer alternative outlets or sources not covered.
The Commission also provides Guidelines on exclusive dealing which states that ‘in general, the longer the duration of the obligation, the greater the likely foreclosure effect’.
The Commission’s Guidelines on Vertical Restraints give a little more specific time duration under which the act of the dominant can be considered as an Abuse of Dominant position. The Guideline is as follows “single branding obligations exceeding five years are for most types of investments not considered necessary to achieve the claimed efficiencies or the efficiencies are not sufficient to outweigh their foreclosure effect’. However, it is important to understand that the quote points are rebuttable presumption and the burden of proof is on the respondents to prove that they do not come under the ambit of anti-competitive behaviour.
In the matter of exclusive dealing agreement there are a series of cases which we can refer to:
The Arriva v Luton Airport case, Luton Airport’s decision to grant National Express exclusive right to provide bus service from the airport to various London locations for seven years. It was also combined with a right to refuse new routes. This was held to anti-competitive by the High Court in 2014.
A similar case was there in the Court of Appeal in the matter of National Grid, the provisions regarding meter readers that lasted for many years, adding charges for early termination and a clause which required to maintain a proportion of National Grid’s meters at the end of each year. The terms by National Grid in their agreements were considered as exclusionary by the commission.
There was another case of EWS Coal Haulage Contracts in which the Office of Rail Regulation (ORR) noticed that the EWS Coal Haulage was entering into long term agreement which is approximately 10 years with the owners of power stations. It has been also noted that in certain cases they are supplying all of their coal rail haulages to the parties. Such agreements were also considered as anti-competitive agreements.
The case concerning exclusivity through commitments has also been looked after by the CMA.
In Western Isle Road Fuels they made a five-year exclusive deal agreement with the customers which is made terminable on three months’ notice, this was considered as an anti-competitive agreement.
Terminology and illustrations of tying
As per the Commission’s Guidelines, the tying “refers to situations where customers that purchase one product (the tying product) are required also to purchase another product from the dominant undertaking (the tied product).”
The Tying can take place on two basis:
- Technical basis
It occurs when the tying product is designed in such a way that it only works properly with the tied product (and not with the alternatives offered by competitors).
- Contractual basis
It occurs when the customer who purchases the tying product undertakes also to purchase the tied product (and not the alternatives offered by competitors).
The term bundling is usually used interchangeably with the term tying, however, it is important to understand that in general terms bundling is considered as legal with certain conditions but tying is illegal. Bundling basically “refers to the way products are offered and priced by the dominant undertaking.”Another important thing to note is Indian law differentiates between tying and bundling but the EU law, UK law, and US law does not differentiate the two terms.
In bundling is also there are two types:
- Pure bundling– In the case of pure bundling the products are only sold jointly in fixed proportions.
- Mixed bundling– In the case of mixed bundling, often referred to as a multi-product rebate, the products are also made available separately, but the sum of the prices, when sold separately, is higher than the bundled price.
This practice is performed to provide customers with better service at less cost. A dominant undertaking may try to foreclose its competitors by tying or bundling. Product bundling may not only squeeze existing competitors out of the market but also deter potential competitors from entering the market.
For example: If an IT manufacturer bundled the charger with the laptop then it is not coercing the buyer to buy anything unrelated to the product. However, if a webcam is tied with the laptop, that coerces the buyer to take the product which is something not needed to run a laptop. Therefore such agreements can be considered as anti-competitive.
Policy considerations: arguments for and against tying
The reason behind the objection of the tying practice is basically because leveraging its position as a dominant firm in relation to the tying product can increase their sales and therefore they can extend their market power. and this practice can be an example of horizontal foreclosure. This is so powerful that earlier in the US law it was held to be per se illegal.
However, over time this kind of approach was subjected to sustained criticism. The ‘Chicago School’ of economists was one of them who made the central thrust for this criticism. Their viewpoint was that a monopoly can make a profit on product A for a particular duration but it can not extend the same leverage to product B after the completion of the duration. This insight was quite persuasive and thereby the US law subjected this anti-competitive behaviour under the ‘rule of reason’, which requires the commission to probe into the matter, giving full analysis to the behaviour of the dominant considering likelihood of competitive harm.
So, today tying is not per se considered as illegal. Rather it is considered as a normal feature of commercial life, wherein things are tie-up so that customers can get the benefit of the product wholly.
The benefits of tying are as follows:
1) By tying the components are integrated into one product and this leads to significant economic efficiency to the firm.
2) It results in lowering the cost:
- the product;
- the production;
- the distribution.
3) It improves the quality of the product.
4) It can increase the efficiency of the product.
Under the EU law Article 101 (1) (e) and Article 102 (2) (d) deals with the tie-in arrangement agreements. Article 101 applies to vertical agreements (para 214-222), however, Article 102 is based on those tie-in arrangements which is created by Dominant undertaking. Article 102 (2) (d) states tie-in arrangements as follows “making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.”
However, in various cases, the Court of Justice held that if the act does not precisely come under the ambit of Article 102(2) (d) then it can be considered under Article 102. In the case of Tetra Pak v. Commission, the court observed that there was an unlawful tie in which products were connected by commercial usage and such a connection is not expressly mentioned in the phrasing of Article 102(2)(d), still that was considered to be a part of tying under abuse of dominance (para 37 of the judgment). However, the same observation was made by the General Court in the case of Microsoft Corp. v. Commission but it concluded that the act of the firm fell under the ambit of Article 102 (2)(d).
While determining infringement under Article 102 following issues must be considered:
a) Does the accused undertaking has a dominant position?
b) Is the dominant undertaking guilty of tying two distinct products?
c) Was the customer coerced to purchase both the tying and tied products?
d) Could the tie have an anticompetitive foreclosure effect?
e) Is there an objective justification for the tie?
Does the accused undertaking have a dominant position?
The ambit of Article 102 is itself all about dominance in the market, so if any firm/ undertaking is in dominant position then only their actions can be covered under the infringement otherwise it is not possible. As per the guidance of the Commission the undertaking need to be dominant in the tying market rather than in the tied market. This means the tying product is the main product to which another product i.e. the tied product is attached. If the undertaking dominates the tying product then only it can coerce the consumer to buy the tied product. For example, Apple Company has a monopoly in manufacturing laptops or mobile phone, however, the headphones of apple are not in monopoly, in such cases the Apple can have tying agreement. Therefore, as per the Guidance of the Commission, a monopoly in the tying market will suffice. However, in the bundling market having the monopoly in one of the bundled markets will be enough. The undertaking should be dominant in the tying market, though not necessarily in the tied market. In bundling cases, the undertaking needs to be dominant in one of the bundled markets. But in some ‘special’ cases in the aftermarket of tying market dominance can be in tying as well as in the tied product.
Is the dominant undertaking guilty of tying two distinct products?
To determine, whether the dominant is guilty of the tying of two distinct products, it is important to understand what can be a distinct product.
The distinct product generally means the customer would have bought the tying product without purchasing the tied product. Therefore, this leads to stand-alone production of both the products. The commission considered the demand of the customer to determine the tying of two distinct products. There can be two types of evidence to determine the same:
1) Direct evidence: In this, the customer has purchased the tying products separately from different sources of supply if given a chance.
2) Indirect evidence: There are various to determine indirect evidence, they are as follows:
- The presence of the undertaking which is specialized in manufacture or sale of the tied product in the market without tying product; or
- number of each product which is bundled by the undertaking; or
- evidence which shows that undertakings which have little power in the market as are not bundling or tying similar products.
By this, we understand that when customers are forced to purchase as a product with another product which they are intended to purchase then such practice turns out to be an abuse of dominant position by the undertaking.
For example, you want to buy a car, the manufacturer or seller gives you four tyres with the car. Now this as such cannot be called tying. Further, a spare tyre is also provided by the seller, which can also be considered as fair practice. But if the seller tells you to purchase a radio or have insurance from a particular insurance company then that will be considered as tying.
Therefore in each case, the situation will differ, and it is on the circumstances and evidence we can determine that particular product tied is infringing Article 102. Generally, in such cases, the burden of proof lies on the authority or claimant.
Euro fix-Bauco v Hilti
In the Euro fix-Bauco v Hilti case, Hilti was accused of doing the sale of nails (tied product) with nail gun (tying product) upon the customer. The tying was not absolute the customers were given a discount if they buy nails with nail guns. The Commission held that Hilti’s practices (para 75) “leave the consumer with no choice over the source of his nails and as such abusively exploit him.” The Hilti appeal to the General court. The argument made by the Hilti was that they want to protect their customers. The point made by Hilti was the nails provided by the other company did not comply with the nail guns provided by the other companies. The General Court invalidated the argument, as there was no valid evidence for the same and the commission also stated that it is not Hilti’s responsibility to take care of their customers towards other products.
Tetra Pak International SA v Commission
In the Tetra Pak International SA v Commission case, Tetra Pak was forcing its customers to only use Tetra Pak cartons while packaging Tetra Pak machines. And it was made mandatory to obtain the cartoons exclusively from Tetra Pak. The General Court held that “where an undertaking in a dominant position directly or indirectly ties its customers by an exclusive supply obligation, that constitutes an abuse since it deprives the customer of the ability to choose his sources of supply and denies other producers access to the market.” And the same was upheld by the ECJ (European Court of Justice) in the appeal made by Tetra Pak.
Microsoft Corp v Commission
The case Microsoft Corp v Commission was filed in 1998, the Sun Microsystems filed a complaint against Microsoft. The complaint was based on the Abuse of domain position by Microsoft. They were tying their media player (tied product) with the Operating system(tying product). Customers do not have the choice to purchase the tying product without the tied products. The court observed that the Operating system and the media player are two distinct products and therefore it is not a part of technological advancement. The Commission fined €497 million and as a remedy appointment of Independent, Monitoring Trustee was made. The commission order was appealed in the Court of First Instance (Grand Chamber). On 17 September 2007, the judgment of the Commission was upheld by the Court.
In January 2008, again the Commission initiated fresh proceeding against Microsoft. The Opera was the complainant, who was a competing browser. The complainant alleged that Microsoft’s inclusion of the Internet Explorer needs to be considered as an illegal tie. In December 2010 the Commission announced that Microsoft had accepted the commitments under Article 9 of Regulation 1/2003. And under the commitment, Microsoft accepted to allow its users of Windows to choose different web browsers. However, a fine of €561 million from May 2011 to July 2012.
Was the customer coerced to purchase both the tying and tied products?
The phrasing of Article 102 (2) (d) is clearly states that when two distinct objects which actually do not need to be tied up is tied up by the company by giving discounts or putting conditions as we saw in the case of Tetra Pak that the tying product is only available if the tied product is purchased by the customer. Hence, the result is the customer is coerced to purchase both the tying and tied products.
Could the tie have an anti-competitive foreclosure effect?
In Microsoft case, one of the factors on which the Court emphasized was the tie-in arrangement which will result in the foreclosure effect on the competitors. Attaching media player with the Operating system was per se restricting the other media player of competitors was creating a detriment effect on the competitors. The operating system of Microsoft in the year 2002 had 90% market share, the users who get pre-installed media player with the Operating system would be less likely to opt for the media player system of competitors.
In the case of Napier Brown/British Sugar,(Commission Decision of 18 July 1988), the commission held that the foreclosure effect resulted in tie-in arrangement considered as an infringement of Article 102. Napier Brown was the leading sugar supplier in the UK. However, they put a condition that sugar will only be sold if the right to transport of sugar is given to them. This eliminated the market of other competitive transporters, therefore the Commission held it as an act of infringement to Article 102(2) (d).
Is there an objective justification for the tie?
The dominant firm can make an argument by saying that the tying was made to make the product more efficient. However, this argument made by the firms is not considered normal by the Commission, as in the Microsoft case and Hilti case it was evident.
In paragraph 62 of the Guidance of the Commission, the Commission will look into the claims of Dominant undertakings if:
1) They benefit the consumers;
2) They reduce the transaction costs;
3) Combining two independent products will enhance the product;
4) The supplier wants to pass efficiencies arising from its production to consumers.
If the above claims are made and proved with evidence by the Undertaking then that will be considered as objective justification.
Under the UK Law Chapter II Sec 18 (2) (d) of the Competition Act, 1998 deals with the tie-in arrangements.
“making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts.”
However, there is a small difference between the application of Article 102 of the TFEU and Chapter II of the UK Competition Act, 1998. Under Chapter II, even the firm having a Dominant Position in a fairly small area of the UK, then that will be also considered as dominance.
Refusal to Supply
Refusal to supply per se is not anti-competitive in the eyes of Competition laws. A firm can refuse to supply if it has certain objective justifications. Consider for example if an oil pipeline company refuses to give pipeline service to an oil producer then there can be some rationale behind the refusal. the reasons can the oil producer produce bad oil or no good reputation in the market regarding oil production, management concerns or peak load concerns. Such reasons are justifiable, but if the pipeline company does not give supply to an additional customer, then there the question arises why, and the Commission will look into the matter thereafter.
As per Commission’s Guidance para 78 the concept of refusal to supply covers a broad range of practices. They are as follows:
- A refusal to supply products to existing or new customers;
- Refusal to license intellectual property rights;
- Refusal to grant access to an essential facility or a network.
Refusal to supply can be vertical as well as horizontal. By using this practice by the vertically integrated dominant undertaking it can lead to a potential strategy in the market. In the vertical refusal to supply a dominant firm tries to eliminate the competitors from the downstream market and thereby it protects its market share and prevents itself from effective competition. This is generally practiced by refusing supply or access to the competitors to an input in which the undertaking is in a dominant position. For example, it can deny to give access or refuse to give raw material, pipeline services, harbor facility services, etc.
However, in the horizontal refusal to supply it directly stops to give supply or service to the competitors or tries to stop distributors from giving service to the competitors. In the United Brands Company and United Brands Continentaal BV v Commission of the European Communities (Judgment of the Court of 14 February 1978) (Case 27/76), they tried to stop distributors to participate in an advertising campaign of the competitors which was considered as an act against Article 102.
Vertical foreclosure: competitive harm in a downstream market
Is there a refusal to supply?
There are various factors the Commission looks after in the case of refusal to supply. As per the Commission’s Guidance paragraph 79 it is not necessary that refused product is in the market, even if the product is in demand from potential purchasers and there is stake in the potential market on the input of the product that will suffice the conditions to put the dominant undertaking in a position to refuse the supply of the product.
Another type of refusal to supply is ‘constructive refusal’. Upfront when we see the practice we can not conclude it as a refusal to supply, however, this is a tactic by the undertaking in which they make such conditions where the other party itself withdraws from the contract. For example by unduly delaying the supply of the product, or else providing a degraded product, or to impose unreasonable impositions or conditions at the party.
However, the Commission under the following conditions will strictly give enforcement priority if mentioned all circumstances are present in the refusal to supply (as per paragraph 81, Communication from the Commission — Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings(2009/C 45/02):
- If the refusal of service or product sufficiently effects the effective competition on the downstream market;
- If refusal leads to the elimination of effective competition on the downstream market;
- If the consumer is likely to be affected by the refusal.
In the case of Commercial Solvents v Commission– As per paragraph 25 of the Judgment, “An undertaking which has a dominant position in the market in raw materials which, with the object of reserving such raw material for manufacturing its own derivatives, refuses to supply a customer, which is itself a manufacturer of these derivatives, and therefore risks eliminating all competition on the part of this customer, is abusing its dominant position”.
Further, in the case of Bronner v Mediaprint, it was held that when there is no potential or actual substitute and the refusal creates concern on business due to indispensable input, then such refusal is likely to eliminate the competition and such refusals can not be objectively justified.
However as per paragraph 77 of Commission’s Guidance, certain actions by the undertaking will not be considered as a refusal to supply, those practices will be dealt under exclusive dealing and tying and bundling:
- When supply is halted in order to punish the customers as they are dealing with competitors;
- Refusal to supply when the customers do not comply with tying arrangements, likewise.
Does the accused undertaking have a dominant position in an upstream market?
As per Article 102, one of the important factors which need to be fulfilled is that the undertaking is in a dominant position. When the undertaking has a dominant position in the upstream market then only it can refuse to give supply or restrict its supply to the downstream market.
In De Montis Catering Roma v. Aeroporti di Roma, the Rome airport was fully controlled by a state-owned company. They were exclusively providing maintenance and ground services. When another company asked for permission for catering services the state-owned company denied to give rights to them. This was observed by the Italian Antitrust Authority and they found that refusal with no justification by Aeroporti di Roma leads to the extent of its monopoly. Refusing the consumers from getting good services from new entrants is also anti-competitive. Thereby, we can understand that a dominant undertaking can create such circumstances which can result in anti-competitive behavior.
Is the product to which the access is sought indispensable to someone wishing to compete in the downstream market?
When a dominant firm refuses to give access to the input in the downstream market which is indispensable for the downstream for the work, the firm creates a monopoly in the market by refusal and thereby it increases its monopoly strength. By creating scarcity to its services at the downstream market the monopolist finds it profitable, as it can overcome the regulatory constraints and also at the same time it can create a barrier to the competitor. Thereby the competitor turns to be incompetent to provide service and this leads to the elimination of the competition.
Would a refusal to grant access lead to the elimination of effective competition in the downstream market?
The paragraph 85 of the Commission’s Guidance clearly says that a refusal by a dominant undertaking over time or immediately can lead to the elimination of effective competition. We can understand this by an example, there are two dominant undertaking- Du1 and Du 2. Du 1 has 40 % market share and Du2 have 60% market share in two different relevant markets.
If Du2 refuses to supply to its downstream competitors, the elimination of effective competition is double compared to Du1 refusal to supply. Thereby, we can understand that if a dominant undertaking who have greater market share refuse to supply the downstream competitors will be having less option to opt with, and this scarcity in the market creates the monopoly of the dominant undertaking. This results in the foreclosure of the competitors, they will divert away from the market and this will advantage the dominant undertaking.
Is there an objective justification for the refusal to supply?
Some objective justifications are argued by the dominant firm regarding its refusal to supply. As per paragraph 89 and 90 Commission’s Guidance on Article 102, the Commission can consider the points if they are as follows:
1) When it is necessary for the operator to compete effectively on the market, which means the operators can refuse to supply to competitors in case if they feel that there are chances of Duplication. However, the Commission will make an effective assessment of the capacity of the competitor to make such duplicated of the operator’s product.
2) The operator can refuse to supply it the other party is not giving adequate compensation to the operator. Such situations can include wherein:
- The customer is credit risk;
- The customer is a bad debtor;
- The customer will use the product for illegal purposes;
- The customer failed to observe the contractual obligations.
However, de novo refusals are different from the above situation. De novo refusal means when from the initiation the operator refuses to supply to a particular party. But it is to be noted that refusing an existing agreement considered as more abusive compared to the de novo refusal, therefore it is on the firm to justify their action.
Fine and injunctions are some remedies that are available if there is an infringement of Article 102. However it is noticed that to make the judgment implement it takes quite a long time, an example is Microsoft case, wherein it took three years and two decisions for the application of the obligation terms by the Microsoft case.
Refusal to supply a distributor as a disciplining measure
In the case of United Brands Company and United Brands Continentaal BV v Commission of the European Communities (Judgment of the Court of 14 February 1978), United Brands trying to put a disciplinary measure on the distributor as they were distributing the competitor’s product as well. The act of the United Brands to prevent the distributor from participating from the advertisement campaign of the competitor even when there was no exclusive purchasing obligation held to be an Abuse of Dominant Position by United Brands. This will be considered as horizontal foreclosure as the United Brands were trying to stop the contract between the distributor and competitor.
Refusal to supply a potential competitor in the supplier’s market
As an exclusionary tactic, if a supplier immediately refuses to supply the product to a customer who can become a potential competitor who is trying to enter an upstream market, it can be considered as an abuse. The Commission found that in BBI Boosey & Hawkes: Interim Measures case (Commission Decision of 29 July 1987), the act dominant to refuse the supply of brass band instruments altogether immediately to a distributor who was intending to be the manufacturer of such instruments in the future was an abuse of Dominant Position. The Commission said that taking reasonable steps by the Dominant need to be proportional and fair, however withholding all supply suddenly is abusing its dominant position in the market
Refusal to supply on the basis of nationality
As per Article 18 of TFEU, discrimination on the grounds of nationality is considered as a discriminatory practice. In the case of Football World Cup 1998 Commission Decision of 20 July 1999, the Commission investigated the arrangements of ticketing as it was discriminating French residents. The Court of Justice in the GVL v Commission case held that to refuse to give membership to other nationals in national copyright collecting society is discriminatory.
Refusal to supply to prevent parallel imports and exports
In the case of BL v Commission, the BL was refusing to give certificates to the metro cars to be imported to the market, which was considered to be a restriction on parallel imports and the Court held that BL had abused its dominant position by doing such practice. Further, in the case of the United Brands v. Commission, the UB made a ‘green banana clause’ with distributors by preventing them to export unripened bananas to the other places. In this case, also the court held that UB having 45% share market abused its dominant position by imposing such clauses with the distributors.
UK case law
In the case of JJ Burgess & Sons v Office of Fair Trading, the CAT (Competition Appellate Tribunal) concluded that the W Austin & Sons (“Austin”) had Abuse of Dominant position by refusing to grant of Harwood Park Crematorium to JJ Burgess & Sons (“Burgess”). This was the case that was brought on an appeal by Burgess against the order of the OFT dated June 29, 2004, in which they held that Austins were not held liable for the Abuse of Dominant position. However when it was taken to appeal the CAT observed that Burgess are in competition with Austin in the downstream market for funeral directing services, hence to protect its market they abused their dominant position. The CAT surveyed the whole case and formulated some propositions which were sufficient to reach a finding on the facts of the case. The propositions can not be held as exhaustive, however, they are determinative to conclude whether it is a refusal to supply or not.
Non-Pricing Abuses that are Harmful to the Internal Market
British Leyland Public Limited Company v Commission of the European Communities (Judgment of the Court (Fifth Chamber) of 11 November 1986)- parallel import- this was the case which was upheld by the Court of Justice of the European Union when an appeal filed against the Commission. In this case, BL was trying to discourage the parallel import of the Metro cars from the continent by refusing to supply type-approval certificates. The Court held that BL is abusing its dominant position by refusing to give approvals for the certificate.
United Brands Company and United Brands Continentaal BV v Commission of the European Communities (Judgment of the Court of 14 February 1978)- export ban- United Brands committed an abuse by restricting its distributors to impose ban on the exportation of the green and unripened bananas and this practice lead to export ban as ripened bananas can be exported. UB had 45% market share which made it amount to be in ‘dominant position’ in the market. The UB inserted a “green banana clause” which effectively resulted in the prevention of exporting Chiquita bananas. Therefore, this practice of UB by the Court in the case against appeal of the order of the Commission was held to be anti-competitive and breach of Article 102.
Miscellaneous Other Non-Pricing Abuses
Harming the competitive structure of the market
In the case of Tetra Pak I (BTG licence), as per paragraph (59) (44), it has been observed by the court that Tetra Pak has 91.8 % of market share, in the EEC (European Economic Community) market and has automated technology which was able to supply cartoons in continuous form. The other competitor was PKL which had the technology which was only able to supply individual flattened blanks. Therefore, Tetra’s technology was already superior to its competitor. Furthermore, an acquisition of an exclusive license from BTG (British Technology Group ) will fully eliminate the competition in the market. Because of this elimination of the competition how consumers will be allowed to get fair pricing or share in any benefits was also a question. By these observations, the Court concluded that an argument from the TetraPak that exclusive license will increase its efficiency is not sufficient enough to avoid that point that it can drastically harm the competitive structure of the market.
The litigations which are filed to ‘Abuse’ of the process can be called as Vexatious litigation. In the US this is termed as ‘Sham litigation’. The abuse of process can be done by making a misrepresentation in the regulatory process or fraudulently using the regulatory process before patent offices. This can also be done by instigating litigation with a collateral purpose to harm the competition in the market.
In the case of ITT Promedia NV v Commission of the European Communities (Judgment of the Court of First Instance (Fourth Chamber, extended composition) of 17 July 1998), the court observed that in order to determine whether the party is abusing legal proceeding there are two criteria, “the two cumulative criteria”:
- The undertaking has taken the litigation step just to harass the opposite party and these criteria need to be manifestly unfounded;
- The main plan of the undertaking is to eliminate the competition.
By understanding various non-pricing practices under the Abuse of Dominance we observed the approach of the Commission, the EU and the UK in various circumstances. The main aim of Article 102 is to prevent the factors which can eliminate the effective competition structure in the market and foreclosure the ways of the consumer, the new entrants and existing competitors to access the market and other sources. Being dominant in the market is per se is not anti-competitive. However, abusing a dominant position in the market by hindering ways to consumer and competitor is anti-competitive.
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