Overview of Article 102 / Chapter II James Marshall & Victoria Newbold 15 September 2015

Article 101 v Article 102 TFEU Article 101 prohibits agreements between independent firms which restrict or distort competition Prohibits agreement or restraints in the agreement: remedial action relatively simple Article 102 prohibits abuse of dominant position Prohibits unilateral conduct: remedial action often more complex Articles 101 and 102 transposed into UK law: Chapters I and II, Competition Act 1998

Why are there specific rules on unilateral conduct by dominant undertakings? Merger control rules unable to constrain use of market power obtained by internal growth Not all anticompetitive conduct results from agreement/concerted practice EU market regulation regime involves limited power to impose remedies Binary nature of dominance = regulatory ‘gap’ in respect of unilateral conduct by near- dominant undertakings?

Article 102 TFEU prohibits: abuse of a dominant market position by an undertaking if it affects trade between Member States Abuse, not existence, of a dominant position is prohibited – position of ‘special responsibility’ Collective dominance possible What does Article 102 cover?

Guidance on Commission’s enforcement priorities under Article 102 (published 2009) Not a set of guidelines on the law under Art 102 Explains Commission’s view of likelihood of harm arising from certain forms of abuse Not binding on EU/Member State courts Remember: conduct not prioritised by the Commission may still amount to an infringement Action by NCAs Exposure to damages claims Article 102 Guidance

Key questions before bringing an Article 102 claim How do you bring an Article 102 claim? What is the relevant market? Is the undertaking dominant? Is the conduct complained of an abuse? Are there any available defences? What are the consequences of establishing abuse?

How do you bring an Article 102 claim? Administrative action or private enforcement Administrative actions: NCA or Commission? Information requirements – “Form C” No damages Limited procedural rules/control over process Private enforcement in national courts: Damages Power to determine contractual consequences Power to award legal costs Greater control and procedural rights, e.g. interim measures

What is the relevant market? Market definition: Not an exact science Vital tool in competitive assessment Used in various areas of competition law, particularly mergers and dominance Useful guidance provided by Commission Notice on market definition

What is the relevant product market? Demand-side substitutability - which products are regarded by customers as effective substitutes? SSNIP test – how will customers respond to a small but significant non-transitory increase (5-10%) in price? NB cellophane fallacy: market defined too widely where monopolist already charges supra-competitive prices, wrongly suggesting substitutability with other products NB banana fallacy: market defined too narrowly where only some customers cannot easily switch to substitute products Supply-side substitutability – can other suppliers easily switch to supplying that product?

What is the relevant geographic market? Geographic market may be: Local, e.g. a specific town National International, e.g. EEA-wide Worldwide Relevant factors include: Past evidence of diversion of orders to other areas National preferences Views of customers and competitors Trade flows, patterns of shipments/purchases Switching costs associated with diverting orders to other areas

What is the relevant market? – other factors Temporal dimension of market, e.g.: Peak vs. off-peak rail tickets Summer fruits in season vs. out of season In dominance cases: Narrower markets = larger market shares  increased likelihood of dominance Precise market definition always required In merger cases: Narrower markets = decreased likelihood of overlap  increased likelihood of clearance Precise market definition frequently left open

Is the undertaking dominant? Classic EU definition of dominance: “power to behave to an appreciable extent independently of competitors and customers and ultimately of consumers” United Brands v Commission Dominance = substantial market power over a period of time (two years) Market power = power to influence market prices, output, innovation, variety or quality of products or other competitive parameters to consumers’ detriment

Is the undertaking dominant? – cont’d Extent to which a firm can behave independently of its competitors depends on degree of competitive constraint exerted by them Competitive constraints: Existing market strength of actual competitors Dependence on supply relationships with competitors Threat of expansion by actual competitors and/or entry by potential competitors Bargaining strength of customers Pressure to innovate in fast-moving markets

Is the undertaking dominant? – cont’d Market shares significant, but not determinative “very large market shares are in themselves, and save in exceptional circumstances, evidence of the existence of a dominant position” - Hoffman-La Roche v Commission Single firm dominance: Unlikely if market share <25% Unlikely but possible if market share 25-40% (‘soft’ safe harbour below 40% under Article 102 Guidance) Possible if market share 40-50% Presumed if market share >50% Possibility of collective dominance

Is the undertaking dominant? – cont’d Individual market analysis essential Market structure Size of competitors (in absolute and relative terms) Overall size and strength of ‘dominant’ firm Barriers to entry, e.g. investment, IP rights Brand/customer loyalty Countervailing buyer power Vertical integration – established sales/distribution network Dominance required in ‘substantial part’ of common market Must be ‘effect on trade’ between Member States

Is the conduct complained of an abuse? No overarching definition of ‘abuse’ Dominant firms have a ‘special responsibility’ not to impair undistorted competition Article 102 sets out a non-exhaustive list of abuses Concept of abuse is objective No need for causation between dominant position and abuse Dominance, abuse and effects may each be in different but related markets

Exclusionary conduct: Using a dominant position to prevent new competitors from entering the market (or expansion by existing competitors) Distinguish competition on the merits from competition involving unfair advantage Intel (2014): form-based apporach Exploitative conduct Using a dominant position to exploit trading partners What is ‘exploitation’? – Commission/CMA reluctant to act as price regulator Do supra-competitive margins incentivise entry? Other abuses, e.g. discrimination, abusive litigation, single market abuses Is the conduct complained of an abuse? – cont’d

Authorities generally more concerned with exclusionary, than with exploitative, abuse Examples of exploitative abuse include: Excessive pricing – unfair selling prices Unfair non-price terms Non-exclusionary abuse facilitated by Member States Dominant positions frequently created by statute, e.g. regulated utilities Statutory monopolists may abuse their position e.g. by failing to modernise, meet existing demand Breach of Article 102 facilitated by Member State also breaches Article 106

Is the conduct complained of an abuse? – cont’d Examples of exclusionary abuse include: Imposing exclusive supply obligations on customers Loyalty rebates and minimum stocking requirements – same effect as exclusive supply obligation Predatory pricing – pricing below cost Tying/bundling – requiring a customer to buy another product with the product they originally wanted Refusal to supply/margin squeeze by vertically integrated dominant undertaking to competitor at downstream level without objective justification (e.g. customer is in debt) Refusing competitors access to an essential facility

Is the conduct complained of an abuse? – cont’d Categories of abuse are not closed Examples of novel abuses include: Applying discriminatory terms to equivalent customer transactions, leading to distortion of competition at level of dominant firm’s customers Acquisition of another firm, enabling dominant undertaking to extend monopoly position Vexatious litigation by dominant firm Obtaining extended patent protection by making false representations to national patent offices ‘Pay for delay’ – preventing entry of generics manufacturers in pharmaceuticals sector

Are there any available defences? Objective justification: no infringement or defence to infringement? Burden of proof on undertaking claiming objective justification

Are there any available defences? – cont’d Commission’s Article 102 Guidance imports Article 101(3) ‘efficiencies’ defence to Article 102 Burden of proof on dominant firm to show: Efficiencies arising from its conduct, sufficient to outweigh negative effects on competition/consumer welfare Indispensability No elimination of effective competition Very difficult to make out defence based on efficiencies

What are the consequences of abuse? Offending clause(s) is/are unenforceable Entire agreement void if clauses are not severable Severability depends on governing law of agreement Fines Divestiture of assets Break-up of undertaking Negotiated settlement - remedies

What are the consequences of abuse? – cont’d Intel (2009): €1.06 billion August 2014 appeal to the ECJ Microsoft (2004) €497 million for infringement €899 million penalty for non-compliance Microsoft (2009) Commitments accepted December 2009 €561 million penalty for non-compliance Telefónica (2007): €151 million Google? Reckitt Benckiser (2011): £10.2 million

Article 102 – Case study Consider the following facts: Jumbo Air is granted permission by the public authorities to build a new airport in an area with no other airport nearby. Jumbo Air uses the airport to provide freight transport services. Tiny Air requests access to the airport to provide its own, competing freight transport services. Jumbo Air refuses, claiming there are no available landing and take- off slots. Tiny Air complains to the competition authority about Jumbo Air’s refusal to grant access. Counsel to Tiny Air – what claim could you bring? Counsel to Jumbo Air – what defences would you raise?

Article 102 – Case study cont’d What are the relevant markets? Tiny Air wishes to purchase airport services from Jumbo Air – are there any available substitutes for these services? Tiny Air wishes to operate freight transport services from the airport – should other modes of transport and/or routes from other airports be included in the ‘market’? What is the geographic scope of the ‘markets’ for airport and freight transport services? Does Jumbo Air have a dominant position in the supply of airport services?

Article 102 – Case study cont’d Does Jumbo Air have the ability to exclude Tiny Air from the downstream market? Is access to the airport an essential input for the provision of freight transport services? Does Jumbo Air have an incentive to exclude Tiny Air from the downstream market? If Jumbo Air has the ability and incentive to exclude Tiny Air from the downstream market, are there any potential benefits to social welfare from vertical foreclosure? What remedies are available?

Article 102 – Case study cont’d Microsoft (CFI decision) Refusal to license IP rights by dominant company generally not abuse in itself Refusal may amount to abuse in ‘exceptional circumstances’ Refusal must relate to a product or service indispensable to carrying out an activity on a neighbouring market Refusal must exclude any effective competition on that market Refusal must prevent the appearance of a new product for which there is potential consumer demand No objective justification

Dogbert: Serial Abuser

Overview of Article 102 / Chapter II James Marshall & Victoria Newbold 15 September 2015