This bulletin is the third in a series of bulletins on developments in competition and foreign investment review law in 2008.

  • Abuse of dominance developments – EU consultation, recent UK cases
  • UK/EU reaction to credit crunch/recession/banks mergers
  • Horizontal arrangements – EU consultation
  • Report on the European Commission Pharmaceutical Sector Inquiry

Abuse of dominance developments – EU consultation, recent UK cases

OFT decision in Cardiff Bus

On 18 November 2008, in its first finding of abuse since 2003, the Office of Fair Trading (OFT) found that Cardiff Bus abused its dominant position by charging below cost prices for its services. Cardiff Bus introduced a low-cost bus service in 2004 to compete with a "no frills" service offered by 2 Travel, a new entrant to the market. When 2 Travel went out of business in 2005, Cardiff Bus removed its low-cost service.

Although there was no fine due to the small market concerned, the case was important as it allows the possibility of private enforcement against Cardiff Bus and further it showed a return to consideration of abuse after a period in which many perceived the OFT’s focus had shifted to cartel activity. The lack of abuse of dominance cases in the UK is contrasted with the situation in the EU; see below.

Follow up on Microsoft

The European Commission’s investigations into whether Microsoft’s behaviour amounts to an abuse of a dominant position continued with two new formal investigations; one in relation to interoperability disclosure and one in relation to software tying of Internet Explorer to its Windows operating system.

On 15 January 2009, the Commission sent Microsoft a Statement of Objection expressing its initial view that the latter practice does operate to limit competition and reduces consumer choice and market innovation because, according to the Statement, other browsers are foreclosed from competing because Windows includes Internet Explorer. The Statement of Objections also states that the remedies put in place by the U.S. courts in 2002 do not make the inclusion of Internet Explorer in Windows lawful under European Union law.

The Statement of Objections is based on the legal and economic principles established in the judgment of the Court of First Instance of 17 September 2007, upholding the earlier Commission decision that Microsoft had abused its dominant position in the PC operating system market by tying Windows Media Player to its Windows PC operating system.

Commission guidance on its enforcement of Article 82

The European Commission published a guidance paper on 3 December 2008 on its enforcement priorities on the application of Article 82 EC Treaty to abusive exclusionary conduct by dominant undertakings. Article 82 prohibits conduct by a dominant position which constitutes an abuse of such dominance. This is the culmination of a 3 year period of review by the Commission on its approach to dominance and abuse and is response to various criticisms about the Commission’s handling of and reasoning in Article 82 cases. For the first time it sets out an economic and effects-based approach to exclusionary conduct (it does not deal separately with exploitative conduct). In a speech given in 2005 explaining the review of Article 82 as it applies to exclusionary conduct, Commissioner Neelie Kroes said that “We simply want to develop and explain theories of harm on the basis of a sound economic assessment for the most frequent types of abusive behaviour to make it easier to understand our policy, not only as stated in policy papers but also in individual decisions based on Article 82.”

The guidance sets out the principles the Commission will apply when enforcing Article 82 and also applies those principles to specific abuses such as exclusive dealing, tying, predation and refusal to supply. It provides a framework for companies both to assess their own competitive behaviour, and to measure the strength of a case they are considering bringing against a dominant company that they believe to be acting abusively.

The Commission will focus its intervention under Article 82 on cases where the conduct in question is the most harmful to consumers. The emphasis is on safeguarding the competitive process in the internal market and to ensure that rivals are not excluded by a dominant undertaking by means other than competing on the merits of the goods and services they provide (it being made clear that the Commission is most concerned with the protection of an effective competitive process and not of competitors themselves).

The guidance provides that the Commission will consider a number of factors in relation to foreclosure, including the position of the dominant undertaking and its competitors, barriers to expansion or entry, the market position of customers and suppliers, significant investments and long-term contracts, the extent of the conduct in terms of time and its effects on sales, and any evidence of actual foreclosure. The Commission will also examine the dominant undertaking’s exclusionary strategies to establish its intent.

The courts – both at the EU and national level – may take a harsher approach, which would result in a number of varying standards being applied across the Community. However, it may be that the Guidance will come to shape the views of other institutions notwithstanding that they are not bound by it.

UK/EU reaction to credit crunch/recession/banks mergers

In these unprecedented times, with the global economy in financial crisis, it seems that the UK government and the European Commission are willing to override established principles by intervening in an attempt to stimulate the economy.  

Mergers  

The UK Government demonstrated its willingness to effectively put competition law on hold in its decision on the proposed merger of Lloyds TSB and HBOS last year. There had been concerns, highlighted in a report published by the Office of Fair Trading (OFT) on 24 October 2008, that the merger of the banks would be anti-competitive and it may well have not escaped referral for further investigation in normal circumstances. The parties would have found it difficult to persuade the UK Competition Commission not to block the merger without agreeing to significant remedies to any competition concerns.

Under current legislation in England, there is a special regime allowing ministerial intervention and decision-making in matters of “public interest” (section 58 of the Act) and the UK Government introduced a new consideration to enable Lloyds TSB/HBOS to be considered as a public interest merger.

On the 31 October 2008 the Secretary of State for Business and Enterprise decided to clear the merger, arguing that the benefits in terms of preserving the stability of the financial system outweighed any anticompetitive concerns. This marked the first time that a merger has been cleared on financial stability grounds.

The European Commission has indicated that it would, in appropriate cases, be willing to take account of the “failing firm defense”, and suspend the mandatory pre-notification requirement to allow deals to complete quickly where there were no a priori competition concerns. The failing firm defense permits the parties to a proposed merger to claim that, because one of the companies is failing, there is no causal link between the merger and the competitive harm that might result. Therefore, if such claim is successful, a merger that would otherwise be blocked because of its negative effect on competition will be permitted where an alternative merger is unavailable.

It is important to note that whilst the European Community Merger Regulation permits Member States to take measures to protect their legitimate interests, this is designed to allow Member States to block deals that do not raise competition concerns. A Member State is not entitled to clear mergers on public interest grounds if the Commission has prohibited it on competition grounds.

Horizontal arrangements – EU consultation

In 2008 the European Commission launched a public consultation on the current rules applicable to restrictions in horizontal agreements. Such agreements, between companies operating at the same level in the market, can lead to competition concerns when the parties agree to fix prices, share markets, or limit output. Certain horizontal agreements such as joint research and development, joint production and joint purchasing agreements can be pro-competitive if they enable companies to respond to increasing competitive pressures.

The instruments under consultation are the research & development block exemption regulation, the specialization block exemption (both due to expire at the end of 2010) and the Commission's Guidelines on the application of Article 81 to horizontal agreements.

European Commission Pharmaceutical Sector Inquiry

In January 2008 the Commission announced that it had launched the inquiry in response to concerns that competition in the sector may be stifled other than by parallel trade restrictions, highlighting the fact that there had been a decline in the number of new products reaching the market and instances of delays in the launch of generic medicines.

The Commission took the unusual step of conducting unannounced inspections (“dawn raids”) at several pharmaceutical companies. This is the first time this instrument has been used in a Commission sector inquiry.

The Preliminary Report, published in November 2008, days after a second series of dawn raids, makes clear that it does not seek to identify wrongdoing, rather that it provides information for the Commission to decide what further steps might be taken. However, its findings caused concern that further action can indeed be expected. Competition Commissioner Neelie Kroes has said “the Commission will not hesitate to open antitrust cases against companies where there are indications that the antitrust rules may have been breached”.

In addition, beyond the inquiry itself, it should be noted that, during her speech given when the report was presented, the Competition Commissioner read out quotes from a number of potentially damaging documents found in the course of the dawn raids, and specifically said that this type of evidence shows the importance of carrying out investigations in this way. This may well indicate that while this was the first sector enquiry to be started in this way, it is unlikely to be the last.