The modernization process of EC Competition law Essay

The modernization process of EC Competition law Essay

Article 82 of the Treaty Establishing the European Community (EC) has the aim of protecting the integrity of the common market by monitoring the actions of leading firms. However, it does not characterize the abuse of a dominant position. It rather gives in-exclusive conduct examples that may be deemed impudent by an undertaking possessing market power 1. This broad provision has given the EC Competition Authorities discretionary powers in their development and treatment of its provisions. This is reflected in the principle of objective justification as a defense mechanism to the allegation of abusive actions. However, the individualized approach of the Commission and Courts has resulted in an ad hoc application of the law that has undermined its clarity and predictability. Article 82 is therefore in need of a structured reform in order for the modernization process of EC Competition law to be completed 2.

The aim of this essay is to examine the methodology that the EC Competition authorities have used in determining the application of the principle of objective justification in cases of alleged infringement of Article 82. This will be done by analyzing the framework in which the concept operates, its nature and application and its overall utility in shaping the modernization process of Article 82.

Objective justification is a notion that the European competition authorities have developed in order to differentiate between abusive conduct and genuine commercial grounds 3. This is owing to the fact that if the latter can be proven then an abuse would not have been committed. In order to resolve this issue in a case analysis the Courts have developed a modus operandi by which to assess the alleged infringement. Firstly, it has determined the class of firms that the provision would be applicable by defining the concept of dominance in the ‘context of the relevant market’ 4 as “a position of economic strength enjoyed by an undertaking which enables it to hinder the maintenance of effective competition…by allowing it to behave to an appreciable extent independently of its competitors…” 5 The Courts went further by placing a burden of ‘special responsibility’ on dominant firms which means that they have the onus “not to allow its conduct to impair genuine undistorted competition on the common market.” 6 It has been advanced that an ordinary business conduct may be deemed abusive owing to this duty of dominant firms 7. Secondly, the issue of abuse has been seen an “objective concept relating to the behavior of an undertaking in a dominant position where as a result of the very presence of the undertaking in question, the degree of competition is weakened…” 8 The third principle is the low threshold of the effects-based test where the courts consider the “potential rather than the actual [impact] of that conduct on the market.” 9 It is evident from this structure that the concept of objective justification is narrowly confined. The special responsibility, disregard for subjective intent of firms and the sufficiency of the potential impact rather than the actual effects on the market from the conduct in question is the parameters that give rise to the presumption of per se abuses of dominant firms. It therefore makes the concept of objective justification seems inimical to its intended application 10.

This analysis is inline with the ‘ordo-liberal’ perspective of Article 82 that has resulted in a protectionist policy of the EC competition authorities in favor of smaller firms 11. It was therefore to be expected that “not a single instance has either the “Court specifically applied this [objective] defense in favor of a dominant undertaking alleged to have infringed that provision by the Commission” 12. In other instances the Courts have refused to consider the objective justification as advanced by the defense 13. The Commission’s discussion paper would remedy this inconsistency in the law as it proposes a more economics based analysis centering on an effects based approach 14. This is owing to the recommended policy that focuses on “the protection of competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources…and not competitors as such” 15

The notion of objective justification has been seen as a factor taken into account when determing abuse rather than an exception to the abusive conduct 16. Phillip Lowe 17 has characterized objective justification into three legal categories. These are inclusive of competition on the merits 18, pursuit of public interest objective 19 and production of efficiency gains 20. This classification seems illusory as Lowe has conceded that these defenses have not been largely accepted by the courts 21. There is the need for reassessment of this characterization with a clear policy that will ensure predictability in the results and certainty in the law.

Competition on the merits’ is concerned with ‘consumer welfare’ and safeguarding the ‘competitive process’ 22. It includes “cutting off supplies to a bad debtor.” 23 It is a high threshold test that requires proof of a manifest detriment to a business to warrant its application 24. The Commission’s proposal has restricted this defense to pricing policy by a dominant firm and not to collective dominance 25. This creates a stricture for the defense as evidenced in its relevance when a dominant firm minimizes its short run losses directly owing to the actions of competitors 26.

In the Hilti case the Court paid lip service to the health concern defense, where it ruled that health and safety issues are the concern of regulatory bodies and not dominant firms 27. This defense is included in the objective necessity defense that the Commission has proposed. The Commission has clearly determined this provision as having a general application of which a common standard will be determined for all market players 28. However, the firm’s action has to be indispensable to the goal pursued 29. This goal is to ensure uniformity and consistency as individual approaches would undermine the commonality of the market.

 The ‘efficiency defense’ has not been popular by the authorities under Article 82 and as a result there has been a lack of systematic treatment of the issue 30. The uncertainty is reflected in the cases of Michelin II and British Airways where it was held that the efficiency defense is possible but nevertheless it was not applied to the cases 31. These outcomes are inevitable owing to the ‘false negatives’ 32 the EC Competition agencies apply to the conduct of dominant firms. This is in remarked contrast to the United States’ approach where the competition authorities are less restrictive in their control of dominant firm behavior 33. Unites States’ approach is owing to an ‘economics based test’ which “requires proof that the conduct in question lacks the requisite efficiency-enhancing benefits that the anti-trust laws seeks to promote.” 34 It is inline with the policy of the Commission’s discussion paper which requires proof of the actuality or likelihood of efficiency and indispensable conduct that benefit consumers and safeguard competition 35. This method is embedded in economic analysis of the firm’s progress in production, distribution or technical areas, where action is not disproportionate and efficiency outweighs possible harm 36. Efficiency however has its boundaries as it is subjected to the protection of rivalry and the competitive process 37.

An underlying provision of objective justification is that a conduct by a dominant firm will only be defensible if its actions in protecting its commerce are reasonable and proportional to the threat posed to its interests 38. This is evidenced in the case where a total refusal to supply was seen as beating competition rather than meeting it 39. It is seen as a necessity requirement that demands a comparative analysis of the strength of the firms involved 40. However, because of the narrow approach to objective justification, this principle serves to limit the practicality of firms in justifying their actions making the defense difficult to evoke in certain cases. A possible solution to this is to judge proportionality according to the effects or potential effects that the action has on the market itself rather than between the firms themselves. The Commission’s paper has redefined the application of proportionality as the dominant firm has to show that its action was appropriate and indispensable 41.This is grounded in economic theory that includes alternatives that could limit the firm short term losses, through analysis of market conditions and commercial realities 42. A coherent policy objective is reflected as proportionality is judged by weighing the consumer’s interest, interest of the dominant firm to in minimizing its losses and competitors interest to enter the market and expand 43.

One of the confusing issues in the current law is the different approaches to specific abuses such as predatory pricing, refusal to supply and rebates which creates varying tests of objective justification. This results in an incoherent application of the principle and uncertainty in the law. A lucid method would be more appropriate in dealing with anti competitive abuses 44.

Predatory pricing has been defined as “pricing [that] involves some measure of cost for the purpose of eliminating competitors or deterring entry…in the short run thereby reducing competition through higher prices in the long run.” 45 EC competition authority’s two part economic model in determining predatory pricing includes a cost analysis and intent 46. This is evidenced in the AKZOcase where prices below average variable cost is regarded as abusive as such prices will generate sales loss and secondly prices below average total cost but below average variable cost will be regarded as abusive if the company had an intent to eliminate the competitior 47. This seemingly per se application of the test is unacceptable in modern economic thinking as possible defenses are warranted under the current model. This includes product launching in a new market, short term promotional offer, phasing of the product from the market and loss minimizing 48. It has been argued that the recoupment test should be applied in determining whether firms conduct is justified. If a firm cannot regain its losses after pricing below the cost threshold its action should be deemed legitimate 49. It is the test currently used in the United States in determining abusive conduct under section 2 of the Sherman Act if it is a dangerous possibility that a dominant firm will regain its investment 50. This consumer welfare 51 approach was rejected by the European Court of Justice in Tetra Pak II as unnecessary as it is sufficient to “penalize predatory pricing whenever there is a risk that competitors will be eliminated.” 52 This approach avoids market analysis 53 in determining abuse of which recoupment requires and as such places dominant firms in an unfavorable position to other players in the market 54. The method that the Commission took in its discussion paper include pricing below average avoidable cost, pricing above average variable cost but below average avoidable cost with the necessary intent, and pricing below long-run average incremental costs 55. These are based on economic theory of the practicality of the firm recouping its losses. Objective justification is therefore based on the ability of the firm to prove that it is “actually minimizing its losses in the short run.” 56 This includes responses to the conditions of the market 57However, predation is not justified in meeting competition and gaining efficiency owing to the imbalance it creates against consumer welfare in the long run 58.

Dominant firms are not required to supply all their customers, except in the case of existing relationships where they have the burden of proving objective justification to prevent infringement 59. This approach has been criticized as “without any enduring economic analysis to achieve a balance of principles [it] impairs the ability of such undertakings to compete on the merits within the market place.” 60 This balance is tilted in favor of small competitors as efficiency gains are largely restrained as a defense to refusal to supply 61.There are avenues where the defense is possible such as not meeting orders out of the ordinary, reasonable steps to defend commercial interests and differentiated policy between customers owing to scarce supplies 62. However, these are highly restricted as the “court effectively preclude[s] dominant firms from refusing to supply customers who either directly or indirectly wage assault on their business.” 63 Conversely, in the United States’ Trinko case the court advanced that section 2 of the Sherman Act should not be applied to a firm except in limited circumstances owing to the disincentive in forced sharing 64. The case law has therefore used the “but for test which focuses on conduct that would not make economic sense but for a tendency to eliminate or lessen competition.” 65 The Commission’s proposal is linked to this economic line where the dominant firm has to prove that the refusal is owing to the inability of the customer to fulfill its responsibility or the desire of the firm to integrate vertically and provide the services 66. This test requires the firm to prove that it is in the consumer’s best interest owing to a comparative analysis of the ‘would be’ and current situation 67.

Rebates have been defined as “retroactive discounts applicable where a customer exceeds a specified target for sales in a defined period.” 68 The EC authorities have approached the possibility of abuse and its justification in an ad hoc way depending on the type of rebate scheme. The specific cost savings approach 69 where quantity rebates are linked to the volume of the purchase made are seen to be based on efficiency and economies of scale 70. Whereas fidelity rebates based on exchange of exclusivity for the discount 71 is seen as a guise of financial advantage that prevents customers from buying from other suppliers 72. This is regarded as a per se abuse which is artificial as “it does not depend on assessing the effect of the rebate in the particular case.” 73 This form based 74 approach is problematic and “a better test would be to compare the competitive harm resulting from the conduct with the commercial benefit in assessing abuse.” 75 Thus the higher degree of entry barrier would necessitate an increase defense of justification 76. The current approach of a “low threshold for anticompetitive harm coupled with a high standard for business justification is almost guaranteed to protect rivals than rivalry.” 77 This is unlike the US approach which has followed the “policy of avoiding ‘false positives’ by exercising caution before condemning business practices that lead to low prices for consumers.” 78 This is evidenced in the use of the ‘profit sacrifice’ test as evidenced in predatory pricing 79. The Commission’s proposal has based the defense for rebates on the efficiency justification. This includes it being indispensable to pass the advantages of cost to consumers, persuade customers to sell at higher volume or relationship-specific investment of the dominant firm 80. The clarity from this defense by the proposal warrants a satisfactory approach in its application.

The Commission’s proposal is welcomed in EC Competition Law owing to the needed reform of Article 82. The current law distinguishing between legitimate business practices and abusive conducts has proven unsatisfactory in addressing complex economic issues that determine the behavior of dominant firms in the market. This makes it difficult for dominant firms to defend genuine commercial pursuits. A coherent application of the principle of objective justification will ensure legal certainty and predictability 81 in safeguarding the spirit of Article 82.

Bibliography

Arowolo, Oluseye. “Application of the Concept of Barriers to Entry under Article 82 of the EC Treaty: Is there a case for review.” (2005) European Competition Law Review 26 (5) 247-257.

Bloch, Robert et al. (2005) “A Comparative Analysis of Article 82 and Section 2 of the Sherman Act” (October 2005)

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Herbert Smith, (2005) “Consultation on the application of Article 82 to exclusionary abuses” December 2005

Jenkins, Helen et al, “Reform of Article 82: Where the Link Between Dominance and Effects Breaks Down” (2005) European Competition Law Review 26 (11) 605-610

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                            “The last of the Steam-Powered Trains: Modernizing Article 82.” European Competition Law Review (2004)25 (5) 243-246.

Sinclair, Duncan. “Abuse of Dominance at a Cross Roads- Potential Effect, Object and Appreciability under Article 82 EC” (2004) European Competition Law Review 25 (8) 491 -501
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1 Paul-John Loewenthal. The Defense of Objective Justification in the Application of Article 82 EC (2005) World Competition 28 (4) 455-477 at p.455
2 Article 81 has been recently reformed
3 Alison Jones and Breda Sufrin, EC Competition Law Text, Cases and Materials, (2004) Oxford University Press, at p. 282
4 John Fairhurst, Law of the European Union, (2006) Pearson Education Limited, at p. 551
5 United Brands Co and United Brands Continental BV v Commission (Case 27/76) [1978] 1 CMLR 429 at para. 65
6 NV Nederlandsche Bonden-Industrie Michelin v Commission [1985] 1 CMLR 282 para. 57
7 Jones (note 3 supra) 279; see Loewenthal (note 1 supra) at p. 458
8 Hoffman La Roche & Co AG V. Commission (case 85/76) [1979] 3 CMLR 211
9 Loewenthal (note 1 supra) at p. 255; see British Airways plc v Commission [2004] ECR 11 5917 para. 293
10 See (note 6 supra) para 57; see Jones and Suffrin at p. 279
11 Helen Jenkins et al, Reform of Article 82: Where the Link Between Dominance and Effects Breaks Down (2005) European Competition Law Review 26 (11) 605-610 at p. 605
12 Loewenthal (note 1 supra) at p. 456
13 See Istituto Chemioterapico Italiano Spa and Commercial Solvents Corp v Commission [1974] 1 CMLR 309; see Jones (note 3 supra) at p. 469
14 See Herbet Smith, (2005) Consultation on the application of Article 82 to exclusionary abuses December 2005
15 European Commission, Director General discussion paper on the application of Article 82 of the Treaty to exclusionary abuses, (December 2005)
16 Loewenthal (note 1 supra) at p. 462;see Hoffman La Roche & Co AG V. Commission (case 85/76) [1979] 3 CMLR
17 Director General of European Community Competition Law
18 United Brands Co and United Brands Continental BV v Commission (Case 27/76) [1978] 1 CMLR 429
19 See Hilti v Commission [1994] 4 CMLR 614
20 Phillip Lowe, (2005) Antitrust Reform in Europe- A Year in Practice (March 2005)
21 Ibid
22 Loewenthal (note 1 supra) at p. 464
23 BBi Boosey and Hawkes: Interim Measures [1988] 4 CMLR 67; see Jones (note 3 supra) at p.283
24 Ibid
25 (note 15 supra) at para 5.5.1
26 (note 15 supra) at para 5.5.2
27 Hilti v Commission [1994] 4 CMLR 614 para 118
28 (note 15 supra) at para. 5.5.1
29 Ibid
30 Jones and Sufrin (note 3 supra) at p. l 287
31 Robert Bloch al, (2005) A Comparative Analysis of Article 82 and Section 2 of the Sherman Act (October 2005)
32 Bloch (note 31 supra) at p.10
33 Ibid
34 Bloch (note 31 supra) at p.12
35 (note 15 supra) at para. 5.5.3
36 (note 15 supra) at para. 5.5.1
37 Ibid
38 United Brands Co and United Brands Continental BV v Commission (Case 27/76) [1978] 1 CMLR 429 para 189;
39 Jones and Sufrin (note 3 supra) at p. 283; see BBi Boosey and Hawkes: Interim Measures [1988] 4 CMLR 67
40 Loewenthal (note 1 supra) at p.466
41 (note 15 supra) at para 552
42 Ibid
43 Ibid
44 Duncan Sinclair, Abuse of Dominance at a Cross Roads- Potential Effect, Object and Appreciability under Article 82 EC (2004) European Competition Law Review 25 (8) 491 -501 at p. 499
45 John Lang et al, Defining Legitimate Competition: How to Clarify Pricing Abuses under Article 82 EC (2002) Fordham International Law Journal 26 (83) at p. 120
46 Lang (note 45 supra) at p. 124; see AKZO Chemie BV v Commission [1993] 5 CMLR 215
47 AKZO Chemie BV v Commission [1993] 5 CMLR 215 at para 71 and 72
48 Lang (note 45 supra) at pp 146, 147, 151
49 See Duncan (note 44 supra) at p. 499
50 Brooke Group v Brown & Williamson Tobacco Corp 509 US 209 (1993)
51 Jenkins (note 11 supra) at p. 606
52 Tetra Pak International SA v Commission [1997] 4 CMLR 662 at para 44; see Jones (note 3 supra) at p. 399
53 Jones and Sufrin (note 3 supra) at p. 401
54 Ibid
55 (note 15 supra)
56 (note 15 supra) at para. 6.2.5
57 Ibid
58 Ibid
59 Jones and Sufrin (note 3 supra)467
60 Oluseye Arowolo, Application of the Concept of Barriers to Entry under Article 82 of the EC Treaty: Is there a case for review. (2005) European Competition Law Review 26 (5) 247-257 at p. 254
61 Istituto Chemioterapico Italiano Spa and Commercial Solvents Corp v Commission [1974] 1 CMLR
62 Bloch (note 31 supra) at p. 20
63 Jones and Sufrin (note 3 supra) at p. 469
64 Bloch (note 31 supra) at p.22
65 Bloch (note 31 supra) at p. 23
66 (Note 15 supra) at para. 9.2.1.4
67 Ibid
68 Brian Sher et al, Rebates Revisited: Anti-Competitive Effects and Exclusionary Abuse under Article 82. (2204) European Cmpetition Law Review 25 (5) 263-285 at p. 263
69 Jones (note 3 supra) at p. 446
70 Manufacture Francaise Des Pneumatiques Michelin v Commission [2004] 4 CMLR 923 at para 58
71 Sher (note 68 supra) at p. 265
72 Hoffmann-La Roche v Commission [1979] 3 CMLR 211 at para. 90 see ones 425
73 Jones and Sufrin (note 3 supra) 425; see Manufacture Francaise Des Pneumatiques Michelin v Commission [2004] 4 CMLR 923 at para 85
74 Sher (note 68 supra) at p. 271
75 Sher (note 68 supra) at p. 284
76 Sher (note 68 supra) at p. 284
77 Ibid
78 Bloch (note 31 supra) at p.19
79 ibid
80 (note 15 supra) 7.2.5
81 (note 14 supra)

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