BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Article

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Article 82 By Hedvig KS Schmidt 30 -31 March 2005 Expert Workshop in Competition Law for National Judges

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Article 82 Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States. 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 2

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW 5 elements of Article 82 • Undertaking • A dominant position • Must be held within the Common market of a substantial part of it (Relevant market) • An abuse • Affect trade between Member States 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 3

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Defining dominance Michelin v Commission (322/81), para. 30 “A position of economic strength enjoyed by an undertaking which enables it to hinder the maintenance of effective competition on the relevant market by allowing it to behave to an appreciable extent independently of its competitors and customers, and ultimately of consumers” 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 4

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW The Concept of Dominance • Dominance in itself is not illegal – a company can grow into its dominance • Both supplier and buyer can have market power (see United Brands and BA/Virgin), but usually refers to supplier’s power • Dominance is a matter of degree – hence assessment on a case by case • Dominance is ‘the ability to profitably sustain prices above competitive levels or restrict output or quality below competitive levels’ 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 5

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Dominance • Market share + something more = dominance • Market share only shows the company’s current position on the market Not why it has that position: – Produces best quality products to lowest prices – Vulnerable to competitors – Shielded from competition by barriers to entry 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 6

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Hoffmann-La Roche • HLR accused of abusing its dominant position • Had concluded contracts of sale where the purchasers undertook to obtain all or most of their requirements of vitamins or certain vitamins expressly mentioned therein exclusively from HLR or which gave them an incentive to do so by including a promise of a discount. • Classified by the Commission as a fidelity rebate: two customers pay different price for the same goods dependent on whether they buy all their goods with HLR or not (para. 90. ) 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 7

Hoffman-La Roche Products – Number of Vitamins companies in Produced by HLR the markets HLR Market shares A 4 47% (27, 18, 7, 1) Oligopolistic market, technical lead due to patents B 2 3 86% (sufficient B 3(Pantothenic 3 Not sufficient evidence to determine dominance. Had not exceeded 42% over the last three years 8 acid) 30 -31 March 2005 Expert Workshop in Competition Law for National Judges evidence of dominance

Hoffman-La Roche Products – Number of HLR Market Vitamins companies in the shares Produced by HLR markets E -bio nutritive use 4 + technological uses H (biotin) 2 30 -31 March 2005 Expert Workshop in Competition Law for National Judges Comm. 70% - HLR 40%, even if 40% nearest comp. 16, 6, 1% + importer 19% 93 -100% monopoly 9

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Degree of Dominance 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 10

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Special Responsibility Once dominant the company "has a special responsibility not to allow its conduct to impair genuine undistorted competition on the common market. " C-322/81 NV Nerderlandsche Banden. Industrie Michelin v Commission [1983] ECR 3461, [1985] 1 CMLR 282, para. 57. 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 11

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Special Responsibility • The dominant company has already weakened the market by its present • The competition rules ensures that the market is not weaken any further. • ‘Special responsibility' increases with the level of dominance (C-333/94 P Tetra Pak , para 24) • As a result, certain conduct, which would be seen as 'competition on the merits' by a nondominant company would by a dominant company, be abusive. 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 12

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Barriers to Entry A factor which restrict potential competitor from accessing the market. Two economic definitions: • Bain: (Harvard School) Incumbent undertaking can sustain their prices above minimum average cost of production and distribution without inducing potential entrants to enter the market. (effect based – scale of economies incl. ) • Stigler: (Chicago School) A cost which is born by the company entering the market, but is not borne by the companies already in the market. (difference in demand cost conditions between incumbent and entrant) 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 13

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Case law – indicators of dominance • Statutory monopoly / legal regulations (C 30/87 Bodson v. Pompes, British Midland v. Aer Lingus) • Intellectual Property rights (C-22/78 Hugin, T 32/89 Hilti, C- 333/94 P Tetra Pak II) • Superior technology and efficiency (C-27/76 United Brands (§ 75 -95) C-85/76 HLR (superior sales network), C- 322/81 Michelin (§ 58) – NOT a barrier to entry Per se ) 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 14

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Case law – indicators of dominance • Vertical Integration (UB – no indication of whether it was a barrier to entry – but an indicator of dominance) • Economies of scale (cheaper the more units are produced)+ large sunk costs (UB § 122) – sometimes a barrier to entry) • Access to financial resources and the need for investment (UB § 122, HLR § 33 & 49, C-6/72 Continental Can § 13 – has not been developed further by the ECJ) 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 15

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Case law – indicators of dominance • Access to key inputs (C- 6 -7/73 Commercial Solvents) • Advertising, reputation, product differentiation (Commission saw advertising as sunk cost in Case IV/M 190, 1992 Nestle/Perrier, UB § 91 -92 • Overall size and strength and range of products (HLR § 45 -47) – relevant only in certain circumstances, incl. geographic spread of the company e. g. UB having suppliers all over the world – thus less vulnerable to natural disasters. HLR § 33 had the capacity to meet the whole world’s demand, only using 50% of its capacity. 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 16

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Case law – indicators of dominance • Profits – economic strength not measured on profit alone, losses at least temporary if the company has the ability to absorb them – prove of economic strength • Performance indicators (HLR § 48) • Opportunity costs – value of something which must be given up in order to gain something else – absolute cost advantage for the incumbent undertaking (British Midland – Aer Lingus 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 17

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Case Law - indicators of dominance • The company’s own assessment of its position (C-62/86 Akzo world leader in the peroxides market (§ 61) • Unavoidable trading Partner (HLR § 41 and T 219/94 BA v Commission § 217 BA was 'an obligatory business partner' for travel agents) • Conduct (UB – price discrimination and export bans § 121) – ‘evil circle’ – conduct leads to dominance – dominance leads to finding the conduct abusive, because the undertaking is dominant. Some conduct, however, is impossible without dominance. 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 18

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Concept of Abuse – Article 82 “Any abuse…Such abuse may…consist in: a) Directly or indirectly imposing unfair purchasing or selling prices or other unfair trading conditions; b) Limiting production, markets or technical development to the prejudice of consumers; 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 19

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Concept of Abuse – Article 82 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. 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 20

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Abuse • • • Not exhaustive Merely gives examples Abuse is a multi-faced concept: Exploitative and exclusionary abuse Not mutually exclusive – hence an abuse can be both exploitative and exclusionary 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 21

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Exploitative Abuse • Dominant undertaking to exploit the strength of its market power in the market, which directly harms consumers • Examples: excessive pricing British Leyland (fees, left/right hand cars) and unfair trading terms • Economic theory suggests the market should be able to adjust itself depending on barriers to entry to the market 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 22

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Exclusionary Abuse • Aims the harm at other competitors • The effect is the exclusion of one or more competitors from the market • Will in the long-run indirectly harm consumers as well • Although short-term may create lower prices for consumers • Examples: refusal to supply or predation. 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 23

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Definition of Exclusionary Abuse • C-85/76 Hoffman-La Roche, para. 91 “The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 24

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Def. of Exclusionary Abuse cont. and which, through recourse to methods different from those which condition normal competition…has the effect of hindering maintenance of the degree of competition still existing in the market. ” 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 25

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Analysis of abuse • • What is ‘normal competition’? Depends on the level of dominance? No ‘object or effect’ as in Art. 81 Means that the threshold of abuse can be very low. • I. e. dominant companies’ conduct can easily become ‘abusive’ under art. 82. 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 26

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Exclusionary Abuse T-219/99 British Airways, para. 293: “for the purpose of establishing an infringement of art. 82 EC, it is not necessary to demonstrate that the abuse in question had a concrete effect on the markets concerned. It is sufficient in that respect to demonstrate that the abusive conduct of the undertaking in a dominant position tends to restrict competition, or in other words, that the conduct is capable of having, or likely to have, such an effect. ” 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 27

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Examples of Exclusionary Abuse • Exclusive purchasing/ rebates C-85/76 Hoffman-La Roche • Predatory pricing C-62/86 AKZO Chemie • Refusal to supply and tying T-201/04 Microsoft 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 28

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW C-62/86 AKZO Chemie Facts: • Benzoyl peroxide used for production of plastic and as a bleaching agent in flour. • Both ECS a small UK company and Akzo, multinational company produced it, but Akzo focused on plastic and ECS on flour. • ECS decided to expand into the plastic market and started delivering to one of Akzo’s largest customers 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 29

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW C-62/86 AKZO Chemie • As counter-attack Akzo entered into the flour market offering low prices and large discounts to ECS’ best customers. • Upon ECS’ complaint to the Commission, the Commission found Akzo guilty of predatory pricing on the basis of the threats that Akzo had made and suggested that even prices above ATC could be predatory and abusive. 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 30

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW C-62/86 AKZO Chemie • The ECJ stated: “prices below average variable costs…by means of which a dominant undertaking seeks to eliminate a competitor must be regarded as abusive. A dominant undertaking has no interest in applying such prices except that of eliminating competitors so as to enable it subsequently to raise its prices by taking advantage of its position, since each sale generates a loss, namely the total amount of the fixed costs…and, at least, part of the variable costs relating to the unit produced. ” (para. 71) 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 31

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW C-62/86 AKZO Chemie “…[P]rices below average total costs, that is to say fixed costs plus variable costs, but above average variable costs, must be regarded as abusive if they are determined as part of a plan for eliminating a competitor. Such prices can drive from the market undertakings which are perhaps as efficient as the dominant undertaking but which, because of their smaller financial resources, are incapable of withstanding the competition waged against them” (para. 72) 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 32

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW C-62/86 AKZO Chemie Price ATC The Grey area – only predatory if part of a plan AVC Prices below AVC are presumed predatory Quantity 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 33

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW C-62/86 AKZO Chemie • Onus on claimant or Commission to prove intent – there is no request for proof of recouping of losses, although implied in para. 71 • Problems with ECJ’s test: – Difficult to classify costs (fixed or variable) – Rationale reasons for pricing below AVC, for instance launch of new lines, stock clearance – More of an intent test than an effect test as other abuses under 82 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 34

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW The levering Theory • Two markets • Projection of dominance in one market into another • Possibility to gain two monopoly profits • Risk of foreclosure of the secondary market Primary market Secondary market 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 35

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Microsoft Commission Decision • Two abuses: – Refusal to supply – Tying • Both based on the leveraging theory 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 36

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Refusal to Supply • In principle, companies are free to choose with whom to have dealings • However, special situations, where dominant undertakings have an obligation to deal • Three categories: – ‘ordinary refusal to supply’ – United Brands – Essential facilities – Oscar Bronner – Refusal to license IP – Magill/ IMS/ Microsoft 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 37

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Microsoft Commission Decision • Two main markets identified: Work group server market -File Interoperability software -Print -User administration Client PC with Windows operating system 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 38

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Microsoft Commission Decision Dominance – Refusal to Supply • 95% market share on the operating system market and had so for a long time • Microsoft had at least 60% market share on the Group Operating Server Operating System Market • Group Operating Server Operating System Market was found to be a separate market 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 39

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Microsoft Commission Decision The Abuse • Microsoft was abusing its near-monopoly in the Client PC operating system market and its dominance in the Work Group Server market to restrict interoperability between the Windows Operating System and existing non-Microsoft work group servers such as Sun • “…The refusal to supply Sun is part of a broader conduct of not disclosing interoperability information to work group server operating system vendors” (para. 577) • Microsoft had previously disclosed such information • Risk eliminating competition on the Work Group Server market. 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 40

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Microsoft Commission Decision Dominance – Tying • 95% market share on the operating system market and had so for a long time • High barriers to entry due to network effects • Media player was found to be a separate market: - could be installed later - independent producers 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 41

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Microsoft Commission Decision • Two markets identified: Operating system market M dominant with Windows 2000 Streaming media player market Windows Media Player Real. One Player Quick Time Player 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 42

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW • Microsoft Commission Decision Abuse Tying: Microsoft had tied WMP to Windows starting with Windows 98 2 nd ed. And continued in subsequent versions • Microsoft gains an advantage over its competitors in the Media Player market by having the WMP preinstalled with the OS • Risk that the tying will lead content providers only to encode to the WMP • Hence risk of foreclosure of the Media Player market to Microsoft’s advantage 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 43

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Microsoft’s objective justification • Windows Media Player is an integral part of Windows and not a distinct product • Argument rejected by the Commission, due to the findings that there is an independent consumer demand for media players and there are independent producers 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 44

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Remedies in the Microsoft Decision • To disclose all necessary interface information to allow non- MS work group servers to achieve full interoperability with Windows OS and MS work group servers even if copyright protected • “reasonable remuneration for compulsory licences • Keep updating the information with future versions as well • To sell an unbundled version of Windows • A Monitoring Trustee • A fine of of 479 million Euros 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 45

BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW Concluding remarks on Article 82 • Article 82 is currently under review by the Commission to be modernised like Article 81 and the Merger Regulation • A wish for a single policy competition law objective • A wish for a more ‘economy based approach’ – protection of competition on the merits and consumer welfare • But also maintaining legal certainty 30 -31 March 2005 Expert Workshop in Competition Law for National Judges 46