An extract from The Dominance and Monopolies Review - 7th edition

Abuse

i Overview

Holding or acquiring a dominant position is not in itself unlawful under EU competition law. A dominant company only infringes Article 102 TFEU if it abuses its dominant position to restrict competition.

The classic formulation of an abuse is from Hoffmann-La Roche:

The concept of an 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 and which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operator, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.
ii Exclusionary abuses

An exclusionary abuse takes place if a dominant company forecloses competitors in an anticompetitive manner. Not every foreclosure of competitors is anticompetitive. It is a normal (and desirable) part of the competitive process that competitors that have less to offer to customers may leave the market. This has been recognised in the Guidance Paper, and has now been affirmed by the Court of Justice in Post Danmark I and Intel, where the Court stressed that 'not every exclusionary effect is necessarily detrimental competition' and that 'it is in no way the purpose of Article 102 TFEU to . . . ensure that competitors less efficient than the undertaking with the dominant position should remain on the market'. To the contrary: 'Competition on the merits may, by definition, lead to the departure from the market or the marginalisation of competitors that are less efficient and so less attractive to consumers from the point of view of, inter alia, price, choice, quality or innovation.' The key task in an abuse analysis is therefore to distinguish between anticompetitive conduct and competition on the merits.

Article 102 TFEU lists a number of abusive practices, but these are not exhaustive: sui generis abuses can be identified in individual cases. The Guidance Paper discusses legal criteria for categories of exclusionary abuses that have been identified in past cases. These legal criteria serve as successive filters to distinguish between abusive behaviour and legitimate pro-competitive conduct.

Outside the abuse categories discussed in the Guidance Paper, conduct must be assessed based on general principles. New abuses cannot be postulated without limitation: if a type of conduct falls within an existing category of abuse (such as refusal to supply or tying), the legal conditions necessary to establish that abuse need to be satisfied.

The case law qualifies certain categories of conduct as 'by nature' abuses (e.g., discounts conditioned on exclusivity, as discussed below). The Intel judgment brings important clarity to the treatment of these abuses: by nature, abuses remain presumptively unlawful, but if a dominant firm submits evidence that its conduct is not capable of restricting competition, the Commission must assess all the circumstances to decide whether the conduct is abusive. This entails, in particular, an assessment of rivals' efficiency, because competition law does not seek to protect inefficient rivals.

Outside the 'by nature' exceptions, a 'fully fledged analysis of effects has to be performed'. This fully fledged analysis requires proving at least the following five elements:

  1. the dominant company's abusive conduct must hamper or eliminate rivals' access to supplies or markets;
  2. the abusive conduct must cause the anticompetitive effects. Proving causation requires comparing prevailing competitive conditions with an appropriate counterfactual where the conduct does not occur;
  3. the anticompetitive effects must be reasonably likely. If conduct has been ongoing for some time without observable anticompetitive effects, that suggests the conduct is not likely to cause anticompetitive effects in the first place;
  4. anticompetitive foreclosure must be determined by reference to equally efficient competitors. Any possible foreclosure of competitors can only conceivably be anticompetitive if it is liable to exclude competitors that are at least as efficient as the dominant company; and
  5. the anticompetitive effects must be sufficiently significant to create or reinforce market power.

Even if a company abuses its dominance, it retains the possibility to justify its conduct – even for 'by nature' abuses (referred to as 'objective justification'). To do so, the company must show that the conduct is either objectively necessary or produces efficiencies that outweigh restrictive effects on consumers. If a dominant company raises evidence of objective justification, it 'falls to the Commission . . . to show that . . . the justification put forward cannot be accepted'.

These general principles are discussed in relation to various different types of abuse below.

Predatory pricing

Predatory pricing arises where a dominant company prices its products below costs such that even equally efficient competitors cannot viably remain on the market. In Akzo, the Court of Justice established a two-test rule for the assessment of predatory pricing conduct under Article 102 TFEU: pricing below average variable cost (AVC) is presumptively abusive; and pricing below average total cost (ATC) but above AVC is abusive if it is shown that this is part of a plan to eliminate a competitor. The principle set out in the Guidance Paper in assessing predatory pricing conduct is that of a profit sacrifice (i.e., the dominant company deliberately foregoes profits in the short term so as to foreclose competitors with a view to strengthening market power). There may be cases where alternative benchmarks, such as average incremental costs, are more appropriate, where, for example, an industry is characterised by high fixed costs and very low variable costs.

Margin squeeze

A margin squeeze occurs when a vertically integrated company sells an input to its downstream competitors at a high price and at the same time prices its own downstream product at a low price such that its competitors are left with insufficient margin to compete viably in the downstream market. This is abusive in EU law when 'the difference between the retail price charged by a dominant undertaking and the wholesale prices it charges its competitors for comparable services is negative, or insufficient to cover the product-specific costs to the dominant operator of providing its own retail services on the downstream market'.

Margin-squeeze cases were originally viewed as instances of a constructive refusal to supply. The Court's judgments in TeliaSonera and Telefonica have held that it is not necessary to establish the legal conditions for an abusive refusal to supply in such cases. These judgments treat margin-squeeze practices as akin to predatory pricing behaviour, particularly as they analyse the margin squeeze under Article 102(a) TFEU. To end the margin squeeze, the dominant company is not required to provide access to its facilities; it only needs to change the level of prices to remove the squeeze.

Exclusive dealing

The Guidance Paper describes exclusive dealing as an action by a dominant undertaking 'to foreclose its competitors by hindering them from selling to customers through use of exclusive purchasing obligations or rebates'. Both Articles 101 TFEU and 102 TFEU can apply to exclusive dealing, although traditionally the approach under Article 101 TFEU has been more economic, while under Article 102 TFEU, exclusive dealing has historically been treated as presumptively unlawful. The Intel judgment clarifies that this presumption remains, but if firms submit evidence that the conduct is not capable of restricting competition, the Commission must then assess all the circumstances to determine whether the conduct is abusive.

Exclusive purchasing

An exclusive purchasing obligation requires a customer to purchase all or a large majority of its needs for a specific product from one supplier. The current approach of the Commission and the courts is to look closely at the actual or likely effects of a particular agreement on the relevant market and assess whether it harms consumers. Factors the Commission will take into account include the duration of the obligation, customers' switching costs and whether the dominant undertaking is an unavoidable trading partner.

Exclusionary discounts

While the grant of discounts (also known as rebates) is generally pro-competitive, certain forms of discounts may constitute an abuse if applied by a dominant company. The concern is that the dominant company leverages its larger base of sales for calculating discounts in ways that preclude smaller (but equally efficient) competitors from competing for the contestable portion of a customer's demand. While the discount remains above costs for the dominant company because it can spread the discount across a larger base of sales, smaller competitors would be forced to price below costs to match the discounts since they would have to amortise it over a smaller base.

The case law generally distinguishes between three categories of rebates:

  1. volume-based rebates that pay out based on the volume of a customer's purchases: reflecting gains in efficiency and economies of scale, volume-based rebates are presumptively lawful;
  2. rebates conditioned on exclusivity, which require a customer to obtain all or most of its requirements from the dominant company in order to get the rebate, are presumptively unlawful (Hoffmann-La Roche, Michelin, British Airways and Tomra). The Intel judgment clarifies that while exclusive dealing remains presumptively unlawful, if firms submit evidence that the conduct is not capable of restricting competition, the Commission must assess all the circumstances to decide whether the conduct is abusive; and
  3. fidelity-building rebates that possess a loyalty-building mechanism without being directly linked to exclusive or quasi-exclusive supply:
    • whether the rebates are individualised or standardised;
    • the length of the reference period;
    • the conditions of competition prevailing on the relevant market;
    • the proportion of customers covered by the rebate; and
    • whether a rebate is retroactive or incremental.
Tying

Tying occurs when a supplier sells one product, the 'tying product', only together with another product, the 'tied product'. The seminal case on tying involved Microsoft's tying of its Windows operating system with its Windows Media Player. The Court found that Microsoft's tying of Windows Media Player (a qualitatively inferior product) to Windows, the ubiquitous operating system, degraded the quality of the Windows operation system and foreclosed original equipment manufacturers as a distribution channel for rival media players. Rival means of distribution, notably internet downloads, were not viable because they were slow, difficult and prone to failure. The Commission, upheld by the General Court, identified five conditions for an abusive tying:

  1. the tying and tied goods are two separate products;
  2. the undertaking concerned is dominant in the tying product market;
  3. customers have no choice but to obtain both products together;
  4. the tying forecloses competition; and
  5. there is no objective and proportionate justification for the tie.

A central element of a tying analysis is to establish whether two components constitute separate products or an integrated whole. In Microsoft, the General Court held that such an assessment must be based on 'a series of factors', including 'the nature and technical features of the products concerned, the facts observed on the market, the history of the development of the products concerned and . . . commercial practice'.

A dominant company may achieve the same effect as tying by ostensibly offering a stand-alone version of the dominant tying product alongside a bundled version, but at a price that renders it commercially unrealistic for customers to take the stand-alone version. Past cases have condemned the grant of discounts on dominant products that are conditioned on customers also taking non-dominant products. In the Guidance Paper, the Commission takes the position that such bundled discounts must be assessed by allocating the discounts fully to the price of the non-dominant 'tied' product. If that calculation results in a price below the dominant company's long-run average incremental costs of supplying the 'tied' product, the discount is anticompetitive (unless rivals are able to replicate the bundle).

Refusal to deal

As a general rule, companies, including dominant companies, are free to decide whether to deal with a counterparty. As Advocate General Jacobs confirmed in Bronner, it is 'generally pro-competitive and in the interest of consumers to allow a company to retain for its own use facilities which it has developed for the purpose of its business'. A refusal by a dominant undertaking to supply its products can therefore amount to an abuse under Article 102 TFEU only in exceptional circumstances. According to established case law, the following general conditions must be met for a refusal to supply to be abusive: the requested input must be indispensable to compete viably; the refusal is likely to eliminate all competition in the downstream market; and there is no objective justification for the refusal.

The indispensability requirement is a high threshold: the input must be essential for a commercially viable business to compete on the downstream market. The test is whether there are 'technical, legal or economic obstacles capable of making it impossible or at least unreasonably difficult' to create alternatives, or to create them within a reasonable time frame. If there are 'less advantageous' alternatives, that means the input is not indispensable. For example, in Bronner, access to newspaper distributor Mediaprint's delivery network was not indispensable because Bronner could have used kiosks, shops and post (even though these were less advantageous). Mediaprint's refusal to grant access was, therefore, not abusive.

In its Google Shopping decision, the Commission appears to have imposed a duty on Google to grant rival comparison shopping services access to its search results pages, without establishing a duty to supply by reference to the Bronner criteria. Google has challenged this apparent change in the law in its pending appeal.

If the refusal involves intellectual property rights (i.e., a refusal to license), it is moreover necessary to demonstrate that the refusal would prevent the emergence of a new product, or would hinder technical development and innovation more generally.

iii Discrimination

Unlawful discrimination under Article 102(c) TFEU may arise if a dominant company applies different terms to different customers for equivalent transactions. However, such abusive 'price discrimination' requires proof that similar situations are being treated in a dissimilar manner without legitimate commercial reasons; and that some customers are placed at a 'competitive disadvantage' relative to other customers to such a degree that it creates a risk of foreclosing equally efficient competitors. In MEO, the Court of Justice confirmed that establishing a discrimination abuse under Article 102(c) TFEU requires the Commission to demonstrate – 'having regard to the whole circumstances of the case' – that the conduct leads to a distortion of competition.

Not every different treatment is discriminatory. As a general matter, the EU courts have recognised that differences arising from individual negotiations of terms can be explained by legitimate commercial reasons. Other considerations that may be taken into account include, for example, whether the transactions involve similar products, costs or timing. Moreover, even if there is 'discrimination', the Court of Justice's Post Danmark judgment has made clear that such discrimination is only abusive if it is liable to foreclose equally efficient companies. 'Pure' discrimination cases are quite rare. In past cases, discrimination-type concerns have typically been raised as an 'added' consideration in connection with abusive exclusionary pricing practices, such as retroactive volume rebates.

iv Exploitative abuses

Article 102(a) TFEU provides that an abuse may consist of 'directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions'. The difficulty in determining a benchmark by which prices can be assessed as being unfair has led to a dearth of decisional practice on this issue, although the Commission and national authorities have begun to pursue more exploitative abuse cases. In Scandlines Sverige, the Commission set out what it considers the most appropriate methodology for assessing unfair prices. The questions to be determined are whether the difference between the costs actually incurred and the price actually charged is excessive; and, if the answer to that is yes, then whether a price has been imposed that is either unfair in itself or when compared to the price of competing products.

In AKKA-LAA, the Court of Justice provided guidance on the conditions under which the imposition of high prices by a dominant firm might infringe Article 102(a) TFEU. The Court found that to identify unfair prices, comparisons with prices in neighbouring Member States may be appropriate, provided that the reference countries are selected 'in accordance with objective, appropriate and verifiable criteria and that the comparisons are made on a consistent basis'. The Court also confirmed that excessive prices need to be significantly and persistently above the competitive level for there to be an exploitative abuse. Advocate General Wahl's opinion appeared to set a higher threshold, advising that:

in its practice, the Commission has been extremely reluctant to make use of that provision against (allegedly) high prices practiced by dominant undertakings. Rightly so, in my view. In particular, there is simply no need to apply that provision in a free and competitive market: with no barriers to entry, high prices should normally attract new entrants. The market would accordingly self-correct.