In review: abuse of dominance in Switzerland

An extract from The Dominance and Monopolies Review - Edition 9

Abuse

Given a dominant position of an undertaking, the application of Article 7 of the Cartel Act requires that the undertaking hinders other undertakings from starting or continuing to compete, or disadvantages trading partners by abusing its dominance. Article 7 of the Cartel Act is only applicable if there are no legitimate business reasons for the abusive behaviour of the dominant undertaking. These preconditions have to be met cumulatively.

Paragraph 2 of Article 7 of the Cartel Act contains a non-exhaustive list of examples of types of conduct that may be considered abusive. However, if a certain behaviour is listed in Article 7, Paragraph 2 of the Cartel Act, it is not unlawful per se, because, to constitute abusive behaviour, the preconditions pursuant to Article 7, Paragraph 1 of the Cartel Act have to be met additionally. In other words, Paragraph 2 has to be applied in conjunction with Paragraph 1.¹⁵ Conversely, conduct not covered by one of the examples listed in Paragraph 2 but meeting the preconditions mentioned in Paragraph 1 falls within the scope of this umbrella clause and is, therefore, unlawful. This is, for example, the case for margin squeeze behaviour.¹⁶

Regarding abuse of a dominant position, the Cartel Act does not contain any per se prohibitions. It is therefore necessary to consider the specific circumstances and market conditions of the case at issue when assessing potentially abusive behaviour. In particular, it needs to be analysed whether the conditions of a specific (contractual) relationship diverge significantly from those that could be expected in the context of effective competition. In practice, the authorities analyse both the competitive and the anticompetitive effects of a certain conduct on the market, in particular when the conduct does not fall under at least one of the listed abuses in Article 7, Paragraph 2 of the Cartel Act.

However, the FAC recently held that where a certain conduct fell under Article 7, Paragraph 2 of the Cartel Act, no economic theory of harm had to be examined as such conduct was generally perceived to be unlawful.¹⁷

Nevertheless, even a dominant undertaking needs to be allowed to protect its own legitimate business interests by competing on the merits to maintain its leading market position. Consequently, if the purpose of a certain practice is simply to improve the quality of a product (e.g., by requiring suppliers to respect a certain standard), such practice has to be considered legitimate even if it may eliminate certain suppliers or competitors from the market.

Article 7 of the Cartel Act covers exclusionary as well as exploitative practices. While the first mainly concern competitors, the latter aim at harming commercial patterns or consumers.

Refusal to deal is one of various forms of exclusionary abuse. According to Article 7, Paragraph 2, letter a of the Cartel Act, any refusal to deal (e.g., refusal to supply or to purchase goods) may constitute an abuse of a dominant position. The concept of refusal to deal takes various forms, such as refusal to supply, termination of supply, refusal to access, refusal to licence or exclusion of sales. However, this provision does not constitute a general obligation to contract for dominant undertakings.¹⁸ The refusal to deal is only unlawful if it has (or is likely to have) an anticompetitive foreclosure effect and if it cannot be justified by legitimate business reasons. In particular, a refusal to deal is likely to be held unlawful if a dominant undertaking intends to boycott its business partners or aims at forcing them to behave in a certain way. Under certain circumstances a refusal to deal may also be considered unlawful if a dominant undertaking refuses to grant access to an essential facility.

One of the major cases in which ComCo applied the 'essential facilities doctrine' concerned the SIX Group. ComCo imposed a fine of approximately 7 million Swiss francs on the SIX Group for refusing to supply interface information to competitors and thus rendering their products incompatible with SIX card payment terminals.¹⁹ The FAC later upheld this decision.²⁰ The case is now pending at the Federal Supreme Court.

In 2013, ComCo approved an amicable settlement between the Secretariat and Swatch Group, under which the latter may gradually reduce the supply of third-party customers with mechanical watch movements.²¹ Swatch Group had undertaken to supply certain minimum amounts per year to third-party customers and to treat all customers equally. The supply obligation ended on 31 December 2019.

ComCo fined Swisscom approximately 72 million Swiss francs for having refused to supply certain competitors with broadcasts of live sports for their platforms and for having only granted access to a reduced range of sport content to others.²² An appeal against ComCo's decision is still pending. In a similar case, in 2020, ComCo fined UPC 30 million Swiss francs after finding that UPC abused its market dominance by refusing to supply Swisscom with broadcasts of certain live ice hockey games.

As far as refusal to license is concerned, such refusal is only considered abusive if standard essential patents are concerned. It is, in fact, inherent to IP rights that their holders enjoy some form of exclusivity, which will allow them to act independently on the market to a certain extent. Accordingly, Article 3, Paragraph 2 of the Cartel Act explicitly exempts the effects on competition that result exclusively from the legislation governing IP from the scope of the Cartel Act. Only the modalities to exercise an IP right may be considered abusive, namely if they go beyond the scope of protection conferred by the IP legislation (e.g., registration of patents for the sole purpose of blocking the technical development of competitors). However, the distinction is difficult to make.

Another form of exclusionary abuse is exclusive dealing, a conduct which is not listed in Article 7, Paragraph 2 of the Cartel Act. However, cases of exclusive dealing may fall within the umbrella clause of Article 7, Paragraph 1 of the Act.

Fidelity rebates are considered to be financial benefits, granted to customers for purchasing all or a certain percentage of their demand exclusively from the dominant undertaking. The rebates are granted irrespective of the actual quantity purchased.²³ Such rebate systems are considered to impede the market entry of potential competitors as customers are reluctant to switch from the dominant undertaking granting fidelity rebates to other undertakings.²⁴ Consequently, fidelity rebates are considered unlawful under Article 7, Paragraph 2, letter e of the Cartel Act.

'Target discounts' have a comparable effect. Target discounts are unlawful under the Cartel Act if they are granted under the condition that the customers achieve certain turnover targets set by the dominant undertaking.²⁵

However, quantitative rebates based on cost efficiencies are considered legitimate if the rebates reflect these cost efficiencies correctly.

In a 2017 decision, ComCo found that the Swiss Post rebate system unlawfully hindered its competitor Quickmail. Swiss Post granted additional monthly discounts to those customers who had reached a certain sales target. According to ComCo, due to the complication of Swiss Post's rebate system, customers were almost unable to assess the impact of outsourcing parts of their mail delivery to Quickmail.²⁶ An appeal against the ComCo decision is currently pending.

Even if set by a dominant undertaking, low prices are generally desirable and not illegal per se under cartel law. However, if a dominant undertaking deliberately sets particularly low prices to drive current competitors out of the market or to deter a potential new competitor from entering the market, Article 7, Paragraph 2, letter d of the Cartel Act is fulfilled (predatory pricing).

In cases of predatory pricing, a dominant undertaking would, first undercut prices of competitors until they leave the market, eventually it would re-increase its prices once the competitive pressure has been decreased (or eliminated). In general, the competition authority is likely to assume that prices below average variable costs are aimed at driving competitors out of the market or preventing new competitors to enter the market.²⁷

According to the practice of the authorities, predatory pricing occurs when the following conditions are cumulatively met:

1. predatory strategy: the dominant undertaking deliberately and intentionally attempts to drive a weaker current competitor out of the market or to keep a potential new competitor out of the market; and
2. recoupment: the dominant undertaking is able to raise prices as soon as the competitor has left the market, the threat of market entry has been prevented, or the competitor has been disciplined.²⁸

Price or margin squeeze is a particular form of discrimination between trading partners and may be inferred as abusive market behaviour of a dominant undertaking.

According to the Federal Supreme Court, price or margin squeeze can only occur if the following characteristics are present: (1) a dominant undertaking, (2) vertical integration of the dominant undertaking and (3) competitors depending on the good or service provided by the dominant undertaking on the wholesale market. It further defines price or margin squeeze as a situation where the wholesale price for competitors is set above the price the dominant undertaking sets as retail price on the downstream market. Price squeeze shall also occur if the margin between the wholesale price for competitors and the market price of the dominant undertaking is not sufficient to cover an as-efficient competitor's product-specific costs. In both scenarios, price squeeze occurs if an equally efficient competitor on the retail market could not meet the retail price of the dominant undertaking. To assess whether an efficient competitor could meet the price of the dominant undertaking, a cost-price comparison has to be carried out (as-efficient competitor test).²⁹

In 2009, ComCo imposed a fine of approximately 200 million Swiss francs on the Swiss telecommunications provider Swisscom for abusing its dominant position in the market for broadband internet through margin-squeeze behaviour.³⁰ ComCo held that due to the high prices set by Swisscom on the wholesale market, competitors, with which Swisscom competed on the retail market by offering its asymmetric digital subscriber line broadband internet services to end customers, were unable to profitably offer their services on the retail market. The abusive behaviour would have been corroborated by the fact that while Swisscom generated large profits on the wholesale market, its subsidiary active on the retail market incurred losses. The FAC confirmed ComCo's decision in substance, but reduced the fine imposed to approximately 186 million Swiss francs.³¹ Ultimately, the Swiss Federal Supreme Court upheld this decision.³²

More recently, ComCo has been focusing on the behaviour of Swisscom in the wide area network (WAN) sector. In 2015, ComCo imposed a fine of approximately 7.9 million Swiss francs on Swisscom for, inter alia, a margin squeeze (and other abusive practices).³³ A WAN is a telecommunications or computer network that extends over a large geographical distance. In 2008, Swiss Post organised a public tender for WAN services. Swisscom offered a price for its WAN services to Swiss Post that was – according to ComCo – approximately 30 per cent below the price offered by its next competitor, the latter having to acquire prior facilities from Swisscom at a wholesale price before being able to offer its WAN services. Swisscom's wholesale price for these facilities was allegedly significantly above the price at which Swisscom won the public tender. Hence, the price offered by Swisscom on the wholesale level would not have allowed any competitor to compete on the retail market. An appeal against ComCo's decision is currently pending before the FAC.

Most recently, in 2020, ComCo opened another investigation in the WAN sector. The accusations of price squeeze against Swisscom are similar to those of the 2015 decision, but this time Swisscom allegedly pursued a strategy of price squeezing not only in the Swiss Post public tender but also in the WAN sector in general. ComCo has not yet rendered a decision in this regard.

The purpose of the provision on tying transactions³⁴ is to prevent a dominant undertaking from disadvantaging or hindering other undertakings by making a transaction dependent on another transaction with no reasonable connection to the underlying transaction. Tying practice is generally understood to occur when the dominant undertaking induces a trading partner (supplier or customer) to provide or accept an additional service in the form of goods or services that has no factual connection to the main good or service.³⁵ Such tying can occur on both the supply side and the demand side.

According to the Federal Supreme Court, tying practices within the meaning of Article 7, Paragraph 2, letter f of the Cartel Act occur if the following criteria are met:

1. separate goods;
2. tying;
3. restriction of competition; and
4. lack of objective justification.

Goods are considered to be separate if the additional good or service has no factual connection to the main one. Whether a factual link exists can be assessed based on the market of the additional good or service. The fact that both the main product or service and the tied one belong to the same product market indicates a factual link. Conversely, if separate product markets exist, a factual link between both products or services is unlikely. Tying occurs when the supplier of the tying good makes its supply conditional on the purchase of an additional service. Hence, the customer has no choice but to purchase the tied good as well.

A tying practice is only relevant under antitrust law if it results in a restriction of competition. This is particularly the case if the dominant undertaking uses its position to induce its suppliers or customers to supply or purchase a good that they either do not want to sell or purchase at all or at least not at the terms and conditions stipulated by the dominant undertaking, or if the dominant undertaking uses its dominance on one market to transfer its market power to the market of the tied good on which it is not yet dominant.³⁶

In a particular case, ComCo assessed whether an obligation imposed by the operator of an event location in Zurich upon event organisers to sell at least 50 per cent (de facto resulting in 100 per cent) of all tickets for events in its event location via a specific ticketing provider (Ticketcorner) was unlawful under Article 7, Paragraph 2, letter f of the Cartel Act. While ComCo held that the parties are not dominant in the relevant markets,³⁷ the FAC³⁸ and eventually the Federal Supreme Court³⁹ took a different stand. They found that the operator of the event location abused its dominant position to tie its service to the services of Ticketcorner. It is interesting that an unlawful tying practice within the meaning of Article 7, Paragraph 2, letter f of the Cartel Act may also occur when the dominant undertaking ties its product or service to goods or services of a third party.

According to the Cartel Act, a dominant undertaking is not allowed to treat its trading partners differently with regard to prices and other conditions of trade.⁴⁰ However, the prohibition to discriminate trading partners does not imply a general obligation to treat trading partners equally. Unequal treatment is considered unproblematic from an antitrust point of view as long as it can be objectively justified (e.g., quantity rebates, justified by corresponding economies of scale). According to the authorities, a dominant undertaking is unlawfully discriminating its trading partners if the following criteria are met:

1. unequal treatment;
2. the unequal treatment concerns trading partners;
3. the unequal treatment results in restriction of competition; and
4. there are no legitimate business reasons for treating trading partners differently.

With regard to discriminatory pricing, rebates are of special importance. Rebates may be considered as practices discriminating trading partners and therefore be unlawful under Article 7, Paragraph 2, letter b of the Cartel Act. This is namely the case when only larger customers above a certain turnover threshold may benefit from more favourable conditions.⁴¹

In contrast, quantitative rebates based on cost efficiencies are considered legitimate if the rebates reflects these cost efficiencies correctly.

In a 2017 decision, ComCo fined Swiss Post approximately 23 million Swiss francs for, inter alia, allegedly having discriminated its business customers by granting discounts and special conditions for mail delivery to some but not all customers. Thus, different customers with comparable mailing characteristics would have received different conditions, resulting in some of them being better off than others.⁴²

Discriminatory pricing may also appear in the form of margin or price squeezes (see Section IV.ii).

According to the law, discriminatory practices of dominant undertakings may not only concern prices but also 'other conditions of trade'. The term 'other conditions of trade' is interpreted broadly and covers any actual or contractual obligations entailing an economic advantage or disadvantage for trading partners (e.g., terms of delivery, terms of sale and purchase or terms of payment).⁴³

It is unlawful for dominant undertakings to impose unfair prices or other unfair conditions of trade.⁴⁴ According to this provision, a dominant undertaking behaves unlawful if it benefits from unfair prices or unfair trading conditions towards the opposite market side through coercion. It is still unclear whether it is necessary under Article 7, Paragraph 2, letter c of the Cartel Act to prove the 'imposition' as coercive, or whether it is sufficient to prove the existence of a causal link between the dominant position and the unfair prices.⁴⁵

However, based on the case law of the Federal Supreme Court, the Competition Commission assesses the existence of coercion according to the following criteria:

1. during the period under investigation, alternative options existed for the trading partner in question; and
2. given the negotiating power, the trading partner in question was able to object to the imposition of the prices or other terms and conditions in question.⁴⁶

A price is unreasonable if it is 'disproportionate to the economic value of the service provided'. Conditions of trade, on the other hand, are unreasonable if they are unfair, disproportionate or excessively binding in terms of time or content. Conditions of trade are disproportionate if they do not serve a legitimate interest or are not necessary for this purpose because more moderate means are available. According to ComCo, a price set by a dominant undertaking is unreasonable if it is disproportionate to the consideration and is not an expression of performance competition but of a monopoly-like dominance on the relevant market.⁴⁷

In the above-mentioned WAN sector ComCo decision (see Section IV.ii), ComCo not only held the price or margin squeeze practice of Swisscom as an abuse of its dominance but also the imposition of excessive prices on Swiss Post. ComCo found that Swiss Post had no alternatives to those telecommunications service providers that had submitted an offer, but, rather, would have had to either accept an even more expensive offer or forego a WAN connection for its sites. Since Swiss Post would have had no alternative options available to avoid Swisscom's offer, the element of coercion would have been fulfilled.⁴⁸ An appeal against ComCo's decision is currently pending before the FAC.