The article has been written by Ayush Verma, 2nd year student at Dr. Ram Manohar Lohiya National Law University. This article provides an overview of Article 102 of the TFEU.

Table of Contents

Introduction

Article 102 of the Treaty on the Functioning of the European Union {TFEU} (formerly under Article 82 of the European Community Treaty (EC)) prohibits dominant undertakings from abusing their position within an internal market or in a substantial part of it, as incompatible with the internal market in so far as it affects trade between member states. Such abuse may consist of:

  • Imposing unfair purchase or selling prices, or unfair trade conditions, directly or indirectly.
  • Restraining production, markets or technical development which might be detrimental to the customers.
  • Discriminating between the trade parties by placing dissimilar conditions to equivalent transactions.
  • Making the original contract subject to acceptance of supplementary obligations which by their nature or commercial usage, have no connection with the subject of such contracts.

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Commission’s Guidance on Article 102 Enforcement Priorities

Adoption of the Commission’s Guidance on Article 102 Enforcement Priorities

It is important to understand the context in which reforms have been brought in the EU Competition law. Historically, it has been criticized because it followed a form-based approach, placing too much reliance on the form of the conduct rather than its effects.

Adoption of effects approach in Discussion paper on exclusionary abuses

The modernizing of the Article 102 can be traced back to the speech of the Commissioner Kroes at the Fordham International Antitrust Conference in 2005, where she said that “market power should be assessed on the effects it creates on the market, acknowledging the exceptions such as per se illegality of horizontal price-fixing. […] Article 82 EC (now 102 TFEU) should focus on realistic problems in competition; behaviors that have restrictive effects on the market, and harm consumers.” Her speech was followed in a discussion paper on Article 82 EC, in which the effects-based approach was taken.

There was a lot of uncertainty regarding the new approach in modernizing Article 102, which was led by a series of judgments based on the old formalistic approach. To cater to all this, Commission in 2009, therefore, adopted the guidance on enforcement priorities.

Undertakings

A The undertakings that are talked about in Article 102 are those who have a ‘dominant position’ in the market or where two or more undertakings are ‘collectively dominant’. The European Court of Justice in the case of Hofner v Elser said that an “undertaking” includes any entity engaged in economic activity regardless of the legal status and the way it is financed.

Effect on Inter-State Trade

The concept of “Effect on trade” has been brought to give context to the law governing competition. The law applies to every agreement in the European Union that may affect trade between member states. However, it must be regarded that the abuse may have a direct or indirect influence on the trade between member states, and it must be decided on the objective factors.

Dominant Position

The Court of Justice in United Brands v Commikssion defined the dominant position as a position of economic strength enjoyed by an undertaking which gives it power to prevent effective competition in the relevant market, and to behave independently of its competitors, customers and consumers.

Actual competitors

Commission’s guidance provides that ‘market share’ actually determines the status of various undertakings active in the market. It further emphasizes that dominance is not likely if the undertaking’s share is below 40% in the relevant market. It also states that the time for which the larger market share is kept would be the deciding factor while considering the ‘dominant position’ by the commission.

Relevance of market shares

The Court of Justice’s judgement in Hoffmann-La Roche v Commission. 

In this case, the court held that the dominant position does not prevent such competition, where there is a monopoly or quasi-monopoly, which is profiting but is effectively promoting competition unless it is a detriment to it. Also, it does not apply where there is an oligopolistic market, in which undertakings having market power can react to each other’s conduct in a similar way.

The AKZO presumption of dominance

In this case, the court was of the view that an undertaking having a market share larger than 50% would be considered to be in a dominant position, leaving exceptional circumstances.

Findings of dominance below a market share of 50 per cent

In the case of United Brands, the court considered even 41% to 45% to be a large market share, to ascertain the dominant position. In the case of Hoffman-La Roche, court acknowledged that presence of 40% market share is reflective of dominance when considered with other factors.

Potential competitors

Paragraph 16 of the Commission’s guidance says that competition is a dynamic process and undertakings can not be restrained solely based on the existing market situation/shares. Expansion of the existing undertakings and the entry of potential competitors, including the threat of such expansion or entry is also relevant. An undertaking may be restrained from increasing prices if such expansion of entry is likely, timely and sufficient.

To ascertain such likelihood, the commission must look if such expansion or entry is profitable to the competitor or entrant, and should take into account barriers to such expansion or entry, the likely reactions of the allegedly dominant undertakings and the risks and costs of failure.

For considering ‘timely’, such expansion or entry must be ‘sufficiently swift’ to deter the exercise of dominance. 

For ‘sufficiently’, it must be of such magnitude to deter the dominant undertaking from increasing prices, and not to be a small scale entry.

Other barriers to entry or expansion

Legal barriers

In addition to the above barriers, undertakings might also impose some legal barriers in the form of tariffs and quotas that may be imposed by the undertakings.

Economic advantages

There are economic advantages like economies of scale, ‘privileged’ access to inputs, resources, and technologies, or an established distribution or sales network that are enjoyed by dominant undertakings.

Costs and network effects

Barriers also include costs and networks that restrict consumers from switching suppliers.

Conduct 

The conduct of the undertakings may also contribute to the barriers to expansion or entry. That conduct may be in the form of the investments that undertaking has made which would have to be matched by the competitors or entrants and where it has made long term agreements with its customers that may have a foreclosing effect.

Countervailing buyer power

It supports the view that consumers also have the power to restrict competition by exercising their bargaining power. Such power may be the result of magnitude of customers that are involved, their ability to switch to other suppliers, to promote the entry of new competitors or to threaten to do so.

This power when exercised by the high magnitude of customers results in restraining the undertaking from increasing prices. Also, if such restraint is only limited to a particular segment of the consumer, then that power would not be considered to have exercised an effective restraint.

The degree of market power and super-dominance

Assessing the market power that the dominant undertaking holds becomes important for the application of Article 102 of the functioning of the EU. Commission has asked that the three factors need to be considered while assessing the market power.

  • Constraints imposed by supplies from, and the position of the existing competitors.
  • Constraints imposed by the threat or expansion or entry by the actual or potential competitors.
  • Constraints imposed by the bargaining strength of  the customers.

There might be some companies that have ‘super dominance’. Though there is no particular legal definition as to what ‘super dominance’ is, but it is generally taken where an undertaking’s position is so strong in a given market that any residual competition is, at best, marginal. It is on this basis that some have suggested that such a company (one with a very high market share and evident economic strength) has an even greater ‘responsibility’ to the market.

Substantial Part of the Internal Market

The dominant position of an undertaking must be held within a substantial part of the internal market. This is the acknowledgement of geographical scope for finding dominance. To determine whether a territory amounts to a “substantial part of the internal market”, the volume of consumption and production of the said product of an undertaking need to be assessed, in addition to this, habits and economic opportunities of the vendors and buyers must also be considered.

Small Firms and Narrow Market

Small firms

A small firm has less number of employees and there is a limited flow of finances and materials than a regular-sized corporation.

Narrow market

A market where there is less number of buyers and sellers is called a narrow market. Here the price is highly volatile and low liquidity of assets because fewer transactions take place.

Abuse

Introduction

Any conduct of an undertaking that is not based on merits and impedes effective competition would qualify as abuse.

Three preliminary points

The ‘special responsibility’ of dominant firms

The dominant undertaking has a ‘special responsibility’ not to undermine undistorted competition in the common market. The dominant undertaking should not engage in such pricing practices that makes it earn more profit than it would have earned if there were effective competition.

Article 102 contains non-exhaustive list of what amounts to abuse

There is no legal definition of abuse in the legislation but Article 102 contains a non-exhaustive list of examples in clauses (a) to (d) which can be inferred as abuse.

Avoiding false positives and false negatives

The concept of false positives and false negatives is aimed at promoting accuracy while determining abuse.

Avoiding false positives/ Type 1 errors – this says that the abuse should not be determined in a way that it restricts the dominant undertakings from competing effectively for the benefit of consumers, even if it harms the competitors.

Avoiding false negatives/ Type 2 errors – this says that the abuse should allow dominant undertakings to involve in anti-competitive behaviour that may harm consumers.

What is the purpose of Article 102?

Protection of competitors or protection of competition?

It is an area of critique because the provision protects the competitors, including those who are inefficient, rather than the competition. This is based on the view that Article 102 subjects dominant firms to a handicap; that competitive acts such as a reduction in prices and bundling of products that are not allowed to the dominant firms are permitted to the firms which are not dominant. Rationale behind this is that the firms which are already dominant should give way for small and inefficient firms.

Article 102 protects competition; competition is for the benefit of the consumers

While applying Article 102 to the conduct of the dominant undertakings, the Commission looks on those conducts that might prove harmful to the consumers. Consumers benefit from a market where there are low prices, better quality and ample choices of goods available to them. The commission, therefore, checks whether a market is functioning properly, and consumers are benefiting from efficiency and productivity, which is a result of effective competition between undertakings. Hence, the commission needs to ensure the safeguarding of the internal market and the competitive process.

Jurisprudence on the meaning of abuse

Hoffmann-La Roche v Commission

In this case, the court said that the abuse is an objective concept where an undertaking engages in such conduct to influence the market structure, due to which the degree of competition is weakened and the growth of the competition is affected, by using methods that deviate from normal. 

Competition on the merits

Conduct which is not based on the merits is abusive conduct, and the undertaking is prohibited to involve in such practices. Commission’s guidance gives an example of merits as  “lower prices, better quality and wider choices of new goods and services.” A competition that is not based on merits is likely to cause harm to customers.

Different approaches under Article 102

Are per se rules present under Article 102?

Conduct that has an anti-competitive object is presumed as having an anti-competitive effect. Finding a restriction of competition by the object has, therefore, great consequences as the burden of showing a concrete anti-competitive effect is removed. An important question is, therefore, whether this equals as per se abuse. This has been discussed in the case laws given below.

In the case of Intel v Commission, the General Court held that the conditional rebates on a customer in which requirements are obtained from a dominant firm are per se abuses of dominance in contravention with Article 102 TFEU and whether such rebates have anti-competitive effect or not should not be considered by the commission while finding of infringement.

However, in the case of GlaxoSmithKline Services and others, where though the European Court of Justice did not explicitly address it  but General Advocate addressed the issue. He was of the opinion that it is not possible to have a per se rule since it does not conform well with Article 102 TEFU even when the circumstances are such that the intent and anti-competitive effect is clear.

Effects analysis or effects-based approach

An effect analysis focuses on assessing outcome rather than practices, assessing legitimacy by reference to consumer impact, preference of rule of reason over per se and preference for limited intervention targeting exclusionary conduct (barriers to entry).

In the case of Konkurrensverket v. Telia Sonera, the court laid down the principle of effects analysis, that while determining the anti-competitive behaviour, the effect of the conduct is to be determined rather than the degree of dominance being enjoyed by the firm.

The per se view taken by the General Court in the Intel v Commission was rejected by the European Court of Justice (ECJ) when Intel appealed against the decision of the General Court. Here, ECJ welcomed the “effects analysis” for all types of rebates. The court said that where the dominant undertaking has submitted that its conduct was not capable of excluding competitors, the commission must look out for the effect of such conduct.

De minimis doctrine under Article 102

The doctrine of de minimis means “the law does not concern itself with trifles.” It warns the parties the parties should not come to the court with matters that are too immaterial for the court to consider.

There have been various case laws that have dealt with the issue of de minimis doctrine. In the case of Franz Völk v S.P.R.L, the court acknowledged the de minimis rule and held that agreements having ‘insignificant effects on the market’ are not covered under Article 101 TFEU. Considering this, it can be inferred that this rule also falls out of Article 102.

However, in the case of Post Danmark A/S v Konkurrencerådet, the court said that it is not justified to set a de minimis threshold in the context of Article 102.

Similarly, in the case of the Intel, where the Intel argued that its conduct was only concerned with a small part of the market, the court held that the de minimis threshold is not applicable.

Types of abuse

There are generally three types of abuse: Exploitative, Exclusionary and Single market abuse.

Exploitative abuse

These abuses are concerned with exploiting the consumers directly by charging excess prices or other unfair trading conditions. The dominant firms may also use their market power by extracting rents higher than that are normally achievable.

These abuses also involve discriminating between customers by charging different prices or dissimilar terms to similarly placed customers, where there is no justification for such difference in prices. They may also use a tying arrangement where customers are compelled to buy a secondary product with the primary one and that secondary product is charged at excessive prices.

Exclusionary abuses

Exclusionary abuses are those abuses where the conduct of dominant undertakings prevents competitors from entering into the market, or limits profiting of the existing competitors which as a result harms the customers.

These abuses are considered as more detrimental as they can undermine the competition over a long period by limiting the new or small competitors to challenge the dominant firm which in turn reduces the choices available to the customers.

Continental Can v Commission

In this case, the court held that the abuses given in Article 102 TFEU are not exhaustive. It further held that abuse does not only cover direct harm that may be caused to effective competition but also includes indirect harm in the form of conduct that can adversely affect the market structure. 

Causation 

Following elements need to be there to cause exclusionary conduct within Article 102:

  • The conduct of the dominant undertaking must hamper or eliminate rivals’ access to supplies or the market.
  • The abusive conduct of the undertaking must cause the anti-competitive effects.
  • The anti-competitive effects must be reasonably likely.
  • The anti-competitive effects must be significant in creating or reinforcing market power.

Foreclosure

Market foreclosure is conducted by a dominant undertaking which may lead to anti-competitive effects. Conduct that may cause actual or potential competitors to lose profitability in the market, likely to hinder the existing competition in the market or inhibit the growth of such competition is said to have a disclosure effect, leading to an increase in prices.

Foreclosure can be of two types: Horizontal or Vertical foreclosure.

Horizontal foreclosure consists of non-price based exclusions like single branding and tying, and price based exclusions like mixed bundling, loyalty rebates, and predatory pricing. Here the dominant company attempts to exclude, or marginalize its rivals by preventing the customers to access their market. 

Also, ‘upstream’ and ‘downstream’ market is used to distinguish between two different levels, which is based on the concept that where a consumer is more closer to the market, the more ‘downstream’ it is.

In upstream foreclosure, a downstream buyer is denied access to an upstream supplier and in downstream foreclosure, an upstream supplier is denied access to downstream buyers.

Vertical foreclosure consists of non-price based exclusions like refusal to supply, and price based exclusions like margin squeeze.

Abuse in different markets

Michelin v Commission

Here the court said that the dominant position of an undertaking is not an incrimination in itself, irrespective of the reason for such a position, the undertaking has a “special responsibility” that its conduct must not impair genuine undistorted competition in the market.

Commercial Solvents

This case dealt with the refusal to supply. The producer in order to increase the supply of its finished products (derivatives) refused to supply the raw materials for making that product, to certain parties to facilitate its access in the derivatives market.

The court said that since the party is in a dominant position in case of the supply of raw materials and therefore able to control its supply to manufacturers, cannot just because it itself wants to start manufacturing those derivatives, eliminate other principal manufacturers of those derivatives.

De Post-La Poste

In this case, De post-La Poste had abused their dominant position by operating a tying policy, the undertaking having a statutory monopoly over general letter mail service made it subject to the acceptance of a supplementary contract in which they covered a new business to business service. This policy of tying one service to the other was considered as an abuse.

Telemarketing 

In this case, the European Court of Justice held that abuse is committed where a dominant undertaking, without any objective necessity, reserved for itself an ancillary activity which might be carried out by another undertaking in a neighbouring but separate market, with the possibility of eliminating competition from such undertaking.

Sealink/B&I – Holyhead: Interim Measures

In this case, the court was of the view that an undertaking which is dominant in providing an essential facility and itself uses that facility, and refuses other companies to use that facility, without any objective justification, and grants such access on less favourable terms than it gives to itself, infringes Article 102.

British Gypsum v Commission

In this case, British Gypsum had committed abuse on British and Irish plasterboard makers by offering conditional rebates upon the customers to buy exclusively from the British Gypsum. Therefore such conditional rebates were taken as abuse.

Tetra Pak II

Here the Court of First instance noticed that if a dominant undertaking ties its customers with an exclusive supply obligation, it denies the customer to freely choose his supplier and deprives other manufacturers to access the market, and this constitutes abuse.

Examples of exclusionary abuses

  • Predatory Pricing: It is a technique used by dominant undertakings where they decrease the prices for a short term to attract consumers towards them, due to which small firms cannot recover their costs and decide to leave the market. Once the dominant undertakings get successful in eliminating the existing or potential competitors from the market, they can charge supra-competitive prices and may degrade the offerings to get profits.
  • Refusal to Supply: Here the dominant undertakings may refuse to supply to the consumers, certain essential inputs, IP or facility to eliminate all competition on the part of the consumer. The practice may be used to force a retailer from discounting the product or to sell a product to a specific class only. 
  • Margin Squeeze: An undertaking may supply inputs to those wholesale customers who are also retail competitors, to eliminate competition from the retail (downstream) market. In this way, competitors ‘squeezes’ the competition from the downstream market by charging high prices to the wholesalers or low retail prices or both.
  • Loyalty Rebates: This is a way of encouraging the customers for purchasing the products from a particular firm by giving a refund if they buy a threshold quantity of products for a particular period. In this way, customers instead of splitting their orders buy products from a single firm only.
  • Tying: It is defined in Article 102(d) TFEU as making the parties accept supplementary obligations along with the original agreement, which by their nature or commercial usage have no connection with such contracts. It is generally tying of one product to the other which restricts the consumer’s free choice.
  • Bundling: It is somewhat similar to tying in a way that two products are sold in a single package at a discount. A consumer here is compelled to buy the entire package as a whole.
  • Exclusive Dealing Agreements: Here a customer is bound to purchase all the products of a particular type from a dominant firm thereby restricting to buy from any other supplier. A customer is therefore prohibited from having a similar agreement with a third party.
  • Abuse of intellectual property rights: In this, an undertaking uses its intellectual property rights in such a way that the entry of new competitors gets restricted, to strengthen their dominant position. 

Single market abuse

These abuses are exercised by the dominant undertakings to prevent the flow of goods across member states. It is aimed at maintaining dominance in a particular member state by barring competitors from another state.

Defences

Objective necessity

Any conduct of the dominant undertaking may escape the prohibition under Article 102 TFEU if it can give an objective justification of its behaviour. The dominant undertaking needs to show that its conduct was necessary based on external factors such as health or safety concerns. On the basis of these factors, it needs to be shown that without such conduct, the concerned product cannot be produced.

Efficiencies

The undertaking need to show that the following conditions are fulfilled for efficiency defence:

  • That the conduct would lead to efficiencies. They may include improving production or distribution of goods, promoting economic or technological process or reducing the cost of production or other efficiencies.
  • That there is no other alternative to achieve the claimed efficiencies besides such conduct.
  • That their conduct has resulted in less harm to the consumers than they might otherwise have and the efficiencies brought outweighed the likely negative effects of the competition.
  • That effective competition is not eliminated by such conduct. This is a recognition of the fact that the rivalry between undertakings leads to economic efficiencies, including dynamic efficiencies in shaping innovation. In its absence, dominant undertakings will lack incentives to continue to create efficiency gains. Ultimately the protection of rivalry and competitive process is given priority over efficiency gains.

Abuse relating to proprietary rights

This is used as a defence where a dominant undertaking refuses access to its property or proprietary rights and may also involve refusing access to its intellectual property or physical property. A dominant firm may use this defence if it can show that the restriction was necessary for protection of competition.

Burden of proof

In the case of Microsoft v. Commission, the court held that the burden of proof lies on the dominant undertaking to give the objective justification of its conduct and to produce evidence and arguments to support such justification. However, the commission has to show the abuse of dominant position by the undertaking and that the justification given on the basis of evidence and arguments is not proper.

Consequences of Infringing Article 102

If the commission can establish that there is an abuse of dominant position by the undertakings, it has the authority to impose behavioral and structural remedies on such undertakings:

Behavioural remedies:

  • Asking the dominant firm to stop such abusive conduct and there may be a further requirement of positive action by the firm.
  • Imposing a fine on such firms for their abusive behaviour.

Structural remedies:

  • Depriving a business of its assets.
  • Mandating a breaking up of such business.

Public enforcement

In public enforcement, antitrust rules are made enforceable by the state authorities. They are vested with special powers and procedures, which they use to investigate the infringement.

Private enforcement

This type of enforcement is initiated by an individual, as a stand-alone or follow up action, for getting remedy against the infringement of Article 102.

Conclusion 

It is now clear that Article 102 of the TFEU has been brought to prevent the abuse by the dominant undertakings. It is aimed at promoting effective competition in the market and for the benefit of customers.

References

https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52009XC0224(01)

http://beccle.no/files/2015/04/Anders-Fl%C3%B8jstrup-Jessen-Exploring-Restrictions-by-OBject-within-Article-102-TFEU.pdf

https://ec.europa.eu/competition/antitrust/art82/discpaper2005.pdf

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