Introduction
The conflict between effective competition and economic freedom of action is perhaps most apparent when an undertaking’s right to choose its trading partners and how it disposes of its property - fundamental principles of free-market economy enshrined in the legal orders of the EU Member States- are superseded by an obligation to contract against their will, ostensibly to protect market-structure or consumer welfare.[1] The doctrine of essential facilities developed under Article 82 EC which prohibits abuse of market power by one or more dominate undertakings, must therefore balance short-term benefits to market structure against long-term harm from reduced investment; free enterprise against over-regulation and interventionism, if it is to benefit consumer welfare.[2] This balancing act is played-out in the case-law where conflicting approaches pose new questions for each answered.[3] By examining the doctrine from its beginnings in America through to the Commission’s 2009 Guidance while highlighting key criticisms, this paper offers a basic discussion of the EU doctrine of essential facilities as applied to non-IP rights.
Origins
American practice supplied the basic concepts of the doctrine,[4] which debuted in US v Terminal Railroad Association[5] where owners of a rail-network denied other railroads access to their facilities. Seventy years later, following its heavily-criticized expansion[6], the US Court of Appeal imposed a limiting four-fold test for its application whereby there must be control of the facility by a monopolist; an inability to duplicate the facility; a denial of access; and reasonable feasibility of access.[7] In a recent review, the Supreme Court found the doctrine “at or near the outer boundary of section 2 [Sherman Act] liability” and in addition to the previous test required there be a lack of oversight by a regulatory body capable of compelling the monopolist to give access[8].
First expressly invoked in EU law in Sealink/B&I[9] the doctrine was defined as follows:
“A dominant undertaking which both owns or controls and itself uses an essential facility, ie, a facility or infrastructure without access to which competitors cannot provide services to their customers, which refuses its competitors access…or grants access … only on terms less favourable than those which it gives it own services, infringes Article [82] if the other conditions…are met”[10]
In Sea Containers/Stena[11] and Port of Rødby,[12] the doctrine was extended to refusals to new, as well as existing customers, and in Morlaix,[13] to cases where, in contrast to American law, the dominant undertaking was not competing downstream. Transportation figured prominently in early case-law with landing-lanes,[14] refuelling-pipes,[15] reservation systems,[16] and interlining[17] all found to be essential facilities and denial of access to them abusive.
Although markets are liberalized via legislation not litigation, the doctrine, a creature of case-law, has been invoked in regulations regarding the telecommunications and energy sectors where the rules governing access to networks and other infrastructure incorporate elements of the doctrine[18].
Form of Refusal
Withdrawing access can constitute abuse as easily as refusing a new customer.[19] No ‘actual’ refusal need occur; ‘constructive refusals’ such as the imposition of unreasonable conditions or a margin squeeze (when upstream prices, compared to downstream prices market would prevent profitable operation by even an equally efficient competitor)[20] are sufficient.[21]
Enforcement
The Commission’s principle enforcement tool is Article 7 of Regulation 1/2003, which empowers it among other things to order what an undertaking must supply and to whom it must supply it.[22]
Limitation
Since the late 1990s, EU courts have followed American practice and limited the doctrine’s scope.[23] Ladbroke marked the beginning of limitation when the CFI distinguished between desirable access and access essential to operating on a market[24] holding that a refusal concerning the former would not normally be abusive.[25] Unfortunately for Ladbroke, a lack of French horse racing broadcasts was not held to preclude their principal business, bookmaking. Furthermore, Ladbroke was unable to rely upon Commercial Solvents as Ladbroke and the Societé de Courses (the party refusing access) were not competing on the same market.[26]
Applying Ladbroke in ENS,[27] the CFI held that a facility “cannot be considered necessary or essential unless there is no real or potential substitute” and that essentiality required access be needed for competitors to “penetrate the relevant market or to continue operating on it.”[28]
Later that year the ECJ further restricted the doctrine in Bronner.[29] Following Commercial Solvents, the ECJ ruled conduct was generally abusive only if it eliminated, not merely restricted, all downstream competition.[30] In examining if IP case-law could apply to other forms of property, the ECJ found Magill[31] to be an exceptional case on the fact that the refusal there concerned the supply of a copyrighted material essential to producing the desired product; (i.e. without access it would be impossible to produce the product) the fact that the refusal prevented the creation of a new product with potential consumer demand; and the fact that it excluded all competition on a secondary market.[32] As the facts of Bronner were sufficiently different from Magill the ECJ did not examine the applicability of IP case-law to other forms of refusal.[33] Most importantly, indispensability and duplicability were defined narrowly:
“44. … it does not appear that there are … obstacles capable of making it impossible, or even unreasonably difficult, for any other publisher… to establish… its own nationwide home-delivery scheme...
45. … in order to demonstrate that the creation of such a system is not a realistic potential alternative… it is not enough to argue that it is not economically viable by reason of the small circulation….
46. For such access to be capable of being regarded as indispensable, it would be necessary at the very least to establish… that it is not economically viable to create a second home-delivery scheme … with a circulation comparable to that of the daily newspapers distributed by the existing scheme.”
This narrow interpretation has since been followed in relation to both failure to license IP rights[34] and failure to supply essential input goods.[35]
While Bronner has generally been well received, Bergman observes that a strict application of the duplicability test results in a ‘catch-22 situation’, because “it may be impossible for [a] competitor to attain a market share of fifty percent even if …it would be possible to create and operate the essential facility once that market share is reached” which restricts the doctrine to markets where only a single undertaking can be viable, so called ‘inevitable monopolies’.[36]Bergman explains that if additional undertakings can only survive in the ‘artificial habitat’ created by the doctrine, then it has been transformed into an instrument of price regulation.[37]
Market Definition
Success in many essential facilities cases relies upon a narrow definition of the downstream market.[38] The Commission’s definition of the downstream market has generally been so restricted, that access to the facility in question was inexorably essential to allowing competition.[39] Flughafen Frankfurt demonstrates how market definition effectively forced a particular conclusion: the market being defined as ramp handling services at Frankfurt airport, it predictably followed that denial of access to said ramp would exclude competition.[40]
One might suppose a specific airport or harbour would not constitute the ‘substantial’ part of the common market required by Article 82. The Commission sidesteps this by claiming somewhat unsatisfactorily, that “…a port, an airport, or any other facility, even if it is not itself a substantial part of the common market, may be considered as such in so far as access… is indispensable for the exploitation of a transport route which is substantial.”[41]
Downstream Presence
Pre-Bronner decisions embraced a broader doctrine where a denial of access could constitute an abuse even if its owner was not making use of its facility and competing with the access seeker.[42] In Georg/Ferrovie the Commission described the doctrine as applying when the dominant undertaking is itself using the facility to which access has been denied;[43] in keeping with Bronner and Germany practice where an abuse exists when a dominant undertaking:
‘… refuses to allow another undertaking access to its own networks or other infrastructure facilities against adequate remuneration, provided that without such concurrent use the other undertaking is unable for legal or factual reasons to operate as a competitor of the dominant undertaking on the upstream or downstream market….’[44]
Even so the doctrine cannot be stated in such absolute terms however, as even if the dominant undertaking is not operating downstream, but its refusal were to for example, prevent the emergence of a new product for which a potential demand exists, then such a refusal may be abusive[45].
Defences
The Commission and the courts have adopted a ‘two-stage’ analysis, which provides that conduct which is prima facie abusive can be excused by virtue of some form of ‘objective justification’ a term not defined in Article 82.[46] This definition of ‘objective justification’ has been on an ad hoc basis in the case-law and does not constitute a systematic doctrine describing when or according to what tests ostensibly abusive behaviour would be excused, this is detrimental as there is no clear guidance on the potential scope of the defence.[47]
Three sub-categories of objective justification have emerged: ‘objective necessity’, ‘pro-consumer welfare efficiencies’ and ‘meeting competition’.[48]
‘Objective necessity’ requires that the allegedly abusive refusal is necessary on the basis of factors external to the parties,[49] and can be raised on grounds such as acute shortages of an upstream input for the dominant undertaking, safety considerations, poor creditworthiness, and that innovation will be negatively affected by the obligation to supply.[50] The onus of demonstrating the negative impact on these or other relevant factors such as the recuperation of investment falls upon the undertaking raising the defence.[51] An undertaking’s previous granting of access however rebuts such claims.[52]
Otherwise abusive conduct may be justified if it produces sufficient efficiencies so as to cause no net-harm to consumers. This defence has three cumulative conditions: “the efficiencies have been, or are likely to be, realised as a result of the conduct; the conduct is indispensable to the realisation of those efficiencies: there must be no less anti-competitive alternatives; the conduct does not eliminate effective competition, by removing all or most existing sources of actual or potential competition.”[53] Efficiency claims are defeated by an elimination of residual competition and “the foreseeable threat of entry” downstream; the preservation of competition outweighing the potential efficiency gains and in the Commission's view, a refusal that maintains, creates or bolsters a position approaching a monopoly invalidates the defence[54].
The ‘meeting competition’ defence stems from the principle that protecting commercial and economic interests in response to a competitor’s actions can be a legitimate business practice.[55] This cannot however, “legitimise a margin squeeze that enables the vertically integrated company to impose losses on its competitors that it does not incur itself” nor can it “legitimise a behaviour whose effect is to leverage and abuse an upstream dominance”.[56] This defence only applies if the actions of the dominant undertaking are ‘suitable, indispensable and proportionate’ with ‘no other economically practicable and less anti-competitive alternatives.’[57] Mertikopoulu argues that accepting “meeting competition” as a defence entails an “unwarranted introduction of an analysis akin to that of Article 81(3), a position rejected by the courts”.[58] Respectfully, the principle underlying this defence is that which underlies Article 82 itself, that the competitive process is the ultimate guarantor of consumer welfare.
Economic Criticism
In their report on Article 82, the EAGCP identified various reasons, many also identified by AG Jacobs in Bronner[59], why even if a refusal may cause short-term consumer harm, the long-term effects of forced dealing will cause greater harm:
I. Protecting reputations, which could suffer from competitors’ conduct.
II. In certain cases, such as innovation-driven markets monopolies can be the most effective promoter of investment, increasing consumer surplus and industry profitability.
III. Technological concerns/compatibility.
IV. Unjust expropriation of returns on investment.
V. Vertically integrated firms may produce goods more efficiently.
VI. The threat of legal intervention alters the bargaining position of non-dominant undertakings who can use this to coerce better terms.
VII. Downstream-undertakings may ‘free ride’ on the marketing, innovation, and investment of upstream-undertakings, reducing their incentive to invest.
VIII. IP rights are granted to reward innovators with market power; it is inconsistent to then interfere and reduce rightly earned benefits.
IX. A refusal can only increase the market power of an undertaking if it was unable to fully exploit its power pre-refusal.[60]
While not embracing the concept that dominant undertakings must supply all comers, the doctrine has been criticised in its handling, or in some cases, silence regarding capacity constraints[61]. For example, the essential facility may already be used to its full capacity rendering it impossible to give additional competitors access. Where several competitors and the owner are all already using the facility it is unnecessary for access to be given to an additional competitor to protect competition.[62] In cases where there is only capacity for a single additional user but several interested, the case-law provides no clear guidance. Similarly the EU courts have not settled if the doctrine creates a positive duty to increase capacity to allow for additional users.[63] If, according to the courts, Article 82 imposes an obligation on dominant undertakings to conduct themselves to a different standard[64] then there is a danger that an overzealous application of the doctrine could force dominant undertakings to effectively subsidize their competitors.
2009 Guidance
Explaining the Commission’s analysis the guidance is a ‘road map’ to assist undertakings[65] in determining which conduct may result in intervention.[66] The Commission states it will likely intervene if a refusal relates to a facility ‘objectively necessary’ for a competitor to ‘compete effectively’, and which may result in the elimination of competition leading to consumer harm’;[67] or if the refusal is part a deliberately exclusionary strategy;[68]all principles enumerated in Bronner. Being able to ‘compete effectively’ does not however, mean ‘compete at all’ which implies a wider approach than Bronner. Duplicability is explained as the ‘means [to create] an alternative source of efficient supply that is capable of allowing competitors to exert a competitive constraint on the dominant undertaking’,[69] again broadly similar to Bronner. The Guidance suggests an abuse may occur where an upstream market is subject to price-regulation, and the downstream market not, exclusion of downstream competition may harm consumers as higher prices than would otherwise be possible could be charged;[70] a circumstance not discussed in Bronner. In cases where regulation already imposes an obligation to supply or where the undertaking’s dominance is a result of state-financing or exclusive-rights, the Commission considers that imposing an obligation to supply “is manifestly not capable of having negative effects on … incentives to invest and innovate’ a stance in keeping with the role the doctrine has played in market liberalisation.”[71]
Conclusion
Under the doctrine, a dominant undertaking commits an abuse if it actually or constructively refuses without objective justification, access to a product, facility or service, which is both indispensible, in that no substitute, even if inferior, exists to accessing a downstream market upon which it competes, and is impossible for an equally efficient competitor to duplicate, and if as a result of said refusal, competition is eliminated. The courts have substantially restrained the doctrine’s application although its operation remains controversial, and many of the fundamental economic criticism levelled against it have gone unanswered, particularly in relation to capacity concerns. While the variety and theoretical quality of available defences has increased, their practical effect remains dubious at this time[72]. It is clear from the Commission’s latest guidance that even the narrower post-Bronner doctrine remains a powerful and relevant tool in promoting consumer welfare and market liberalisation.
Bibliography
Legislation and Treaties
Article 82 EC Treaty (Treaty of Rome) 1957 (Now Article 102 TFEU)
Gesetz gegen Wettbewerbsbeschränkungen BGBl. I S. 2521
Sherman Antitrust Act (ch. 647, 26 Stat. 209, 15 U.S.C. § 1–7)
DG Competition Publications
23rd Report on Comeptition Policy (1994)
DG Competition Guidance on the Commission's Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings. OJ C 45, 24.2.2009
DG Competition discussion paper on the application of Article 82 of the Treaty to Exclusionary Abuses. 2005
Notice on the Application of the Competition Rules to Access Agreements in the Telecommunications sector (1998) OJ C265/02
Report by the Economic Advisory Group for Competition Policy: An economic approach to Article 82 - 07.2005
Cases and Commission Decisions
Commercial Solvents v Commission [1974] ECR 223
ENI SpA COMP/37.811 1997
European Night Services v Commission [1998] ECR II-3141
Flughafen Frankfurt/Main AG [1998] 4 CMLR 779
Georg/Ferrovie [2004] CMLR 1446.
IMS Health v NDC Health [2004] ECR I-5039
Irish Continental Group v CCI Morlaix [1995] 5 CMLR 77
London European-Sabena [1988] OJ L317/47
MCI v AT&T 708 F2d 1081 (1983)
Morlaix (Port of Roscoff) [1995] CMLR 177
Oscar Bronner v Mediaprint [1998] ECR I-7792
Port of Rødby, [1994] OJ L55/52
Radio Telefis Eireann & Independent Television Publications v Commission [1995] ECR I-743
Sea Containers Ltd/Stena Sealink,[1994] OJ L15/8 [1995] 4 CMLR 84
Sealink/B&I Holyhead: Interim Measures [1992] 5 CMLR 255
Tiercé Ladbroke v Commission [1997] ECR II-923
United States v Terminal Railroad Association of St. Louis 224 U.S. 383 (1912)
Verizon v Trinko, 540 U.S. 398 (2004)
Wanadoo España vs. Telefónica COMP/38.784 04.07.2007
Books and Articles
Svend Albae and others, ‘Article 82’ in Jonathan Faull and Ali Nikpay (eds), Faull and Nikpay: The EC Law of Competition (Second Edition, OUP, Oxford 2007)
Albertina Albors-Llorens, ‘The Role of Objective Justification and Efficiencies in the Application of Article 82 EC’ (2007) 44 CMLR 1727-1761
Phillip Areeda, ‘Essential Facilities: An Epithet in Need of Limiting Principles’ (1989) 58 Antitrust L.J. 841
Mats Bergman ‘The Bronner Case - A Turning Point for the Essential Facilities Doctrine’ (2000) 21(2) ECLR 59-63
Mark Furse, Competition Law of the EC and UK (Sixth Edition, OUP, Oxford 2008)
Michele Giannino, ‘The Application of the Doctrine of Essential Facilities in the European Rail Transport Sector: Has the 7th Cavalry Finally Arrived?’
Allison Jones and Brenda Sufrin, EC Competition Law: Text Cases and Materials (Third Edition, OUP, Oxford 2008)
Yannis S. Katsoulacos, ’Optimal Legal Standards For Refusals to License Intellectual Property: A Welfare-based Analysis’ (2009) JCL&E 5(2), 269-295
George Karydis and Nikolaos Zevgolis ‘Regulation 1400/2002 and access to technical information: necessity of convergent interpretation with the principles established by the relevant case law’ (2009) ECLR 30(2), 95-101
Victoria Mertikopoulou, ‘DG Competition's discussion paper on the application of Article 82 of the EC Treaty to exclusionary abuses: the proposed economic reform from a legal point of view.’ (2007) ECLR 2007, 28(4), 241-251
Csongor Istvan Nagy ‘Refusal to Deal and the Doctrine of Essential Facilities in US and EC Competition Law: a Comparative Perspective and a Proposal For a Workable Analytical Framework.’ (2007) ELRev 32(5), 664-685
Burton Ong, ‘Building brick barricades and other barriers to entry: abusing a dominant position by refusing to licence intellectual property rights’ (2005) ECLR 2005 26(4) 215-224
Rhodri Thompson and John O’Flaherty in Peter Roth and Vivien Rose (eds), Bellamy and Child: European Community Law of Competition (Sixth Edition, OUP, Oxford 2008)
Andras Toth ‘Protection of investments in European abuse of dominance cases’ (2008) ECLR, 29(12), 710-716
Richard Whish, Competition Law (Sixth Edition, OUP, Oxford 2009)
[1] Svend Albae and others, ‘Article 82’ in Faull and Nikpay: The EC Law of Competition (Second Edition, OUP, Oxford 2007) 353 (Hereafter “F&N”)
[2] Allison Jones and Brenda Sufrin, EC Competition Law: Text Cases and Materials (Third Edition, OUP, Oxford 2008) 609 (Hereafter, “J&S”)
[3] J&S 542
[4] Mark Furse, Competition Law of the EC and UK (Sixth Edition, OUP, Oxford 2008) 535
[5] 224 US 383 (1912)
[6] Phillip Areeda, ‘Essential Facilities: An Epithet in Need of Limiting Principles’ (1989) 58 Antitrust LJ 842
[7] MCI v AT&T 708 F.2d 1081
[8] Verizon v Trinko 540 U.S. 398 (2004)
[9] F&N 358
[10] [1992] 5 CMLR 255 para.41 (Hereafter B&I)
[11][1995] 4 CMLR 84
[12] [1994] OJ L55/52
[13] Morlaix (Port of Roscoff) [1995] CMLR 177
[14] Flughafen Frankfurt/Main AG [1998] 4 CMLR 779 (Hereafter “Flughafen Frankfurt”)
[15] Disma, 23rd Report on Comeptition Policy (1994) p.80
[16] London European-Sabena [1988] OJ L317/47
[17] British Midlands/Aer Lingus [1993] 4 CMLR 596 paras.25-30
[18] Rhodri Thompson and John O’Flaherty in Peter Roth and Vivien Rose (eds), Bellamy and Child: European Community Law of Competition (Sixth Edition, OUP, Oxford 2008) 1020 (Hereafter “B&C”)
[19] IMS Health v NDC Health [2004] ECR I-5039, para.44.
[20] Guidance on the Commission's enforcement priorities in applying Article 82 OJ C 45, (2009) (Hereafter “Guidance”) para.80
[21] Guidance, para.79
[22] J&S 530
[23] Richard Whish, Competition Law (Sixth Edition, OUP, Oxford 2009) 694-955 (Hereafter, “Whish”)
[24] Tiercé Ladbroke v Commission [1997] ECR II-923
[25] Ibid.para.132
[26] Ibid.para.33
[27] European Night Services v Commission [1998] ECR II-3141
[28] Ibid.paras.208-212
[29] Oscar Bronner v Mediaprint [1998] ECR I-7792 (Hereafter “Bronner”)
[30] Bronner para.38
[31] RTE and ITP Ltd v Commission [1995] ECR I-743
[32] Bronner para.40
[33] Ibid.para.42
[34] IMS Health v NDC Health [2004] ECR I-5039
[35] Info-Lab/Ricoh, Competition Policy Newsletter (1999) para.35-37
[36] Mats Bergman ‘The Bronner Case - A Turning Point for the Essential Facilities Doctrine’ (2000) 21(2) ECLR 61
[37] Ibid.
[38] B&C 1018
[39] Ibid.
[40] Flughafen Frankfurt para.54
[41] B&I para.21
[42] Morlaix [1995] 5 CMLR 77 para.59
[43] Georg/Ferrovie [2004] CMLR 1446
[44] GWB s19(4).4.
[45] B&C 1019
[46] Albertina Albors-Llorens, ‘The Role of Objective Justification and Efficiencies in the Application of Article 82’ (2007) 44 CMLR 1727 (Hereafter “Albors”) 1726
[47] Albors 1734
[48]Guidance para.21
[49]Albors 1755
[50]Guidance para.89
[51]Ibid.para.90
[52]Ibid.
[53]Ibid.28-30
[54]Ibid.31
[55] Wanadoo España vs. Telefónica COMP/38.784 para.638
[56] Ibid.para.639
[57] Ibid.
[58] Victoria Mertikopoulou, (2007) ECLR 28(4) 247
[59] Bronner 56-58
[60] Report by the EAGCP: An economic approach to Article 82 07.2005 paras.207-223
[61] Whish 697
[62] Ibid.
[63] Ibid, but see: COMP/37.811
[64] F&N 316
[65] Article 82 applies to either individual or collective dominance, but the guidance only to individually dominant undertakings.
[66] Guidance para.1-2
[67] Ibid.81
[68] Ibid.20
[69] Ibid.83
[70] Ibid.88
[71] Ibid.82
[72] Mertikopoulou 247
