Overview of Article 102 / Chapter II

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

2. 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

3. 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?

4. What does Article 102 cover? • 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

5. Article 102 Guidance • 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

6. 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?

7. 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

8. 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

9. 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?

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. Is the conduct complained of an abuse? – cont’d • 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

18. 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

19. 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

20. 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

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

22. 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

23. 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

24. 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

25. 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?

26. 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?

27. 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?

28. 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 • Noobjective justification

29. Dogbert: Serial Abuser

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