Essential Facilities in Competition Essay

Introduction

While the scope of EC competition law mainly under Article 82 aims at controlling monopolies and abuse of dominant position, it has been termed as going too far as to restrict the flow of commerce and the right to free enterprise¹. The article stipulates that “any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States”². Based on this provision alone, three conditions arise for a firm to be said to infringe Article 82. These are; first the conduct being considered must be that of a dominant undertaking (s). Secondly, it must fall within the definition of ‘abuse’ and lastly, it must bring about a negative effect on trade.

Abuse of dominance seems to be the bane of Competition law and European courts had been very strict on dominant firms to such a level that their right to contract and own property was severely curtailed. The reason for this has been the wide discretion left to the courts to infer the meaning of ‘abuse’. The EC law itself leaves it open while the Community courts have given it a wider scope as was seen in the case of Hoffmann La Roche & Co AG v Commission³ where it was stated to be “an objective concept relating to the behaviour of an undertaking”.

Community courts having being left with sweeping powers to determine what constitutes abuse have formulated the rule that “a course of conduct adopted by a dominant undertaking to exclude a competitor from the market by means other than legitimate competition on the merits may constitute an infringement of Article 82 EC⁴.” When refusal to deal was cited by the ECJ as a component of abuse, the Court opened a floodgate of victimization for dominant firms based on the notion that it was sowing a seed for healthy competition to thrive within the EU market.

In this research paper, I shall argue the case against this wide discretion that threatens to take away the rights to contract, the freedom to choose one’s partners in business and the free flow of commerce. The case of Oscar Bronner v Mediaprint⁵ shall be very crucial since the statement by the honourable judges that “It is apparent that the right to choose one’s trading partners and freely to dispose of one’s property are generally recognised principles… Incursions on those rights require careful justification” forms the basis of my arguments for freer trade. Additionally, the right to dispose of property should be respected rather than controlled. However, we shall see how the Commission is now limiting the intellectual property rights of firms against the principle of freedom of ownership of property.

Commercial Solvents Judgement

In Istituto Chemioterapico Italiano S.p.A. and Commercial Solvents Corporation v Commission, made a ruling that “when an undertaking, which has a dominant position in the market for raw materials, refuses to supply its customer, it abuses dominant position by eliminating all competition on the part of this customer.⁶ The ruling increased the scope of the abuse of dominant position requirement in Article 82. In its obiter, the court added that a refusal to supply entails; “making supplies conditional on control over further processing or marketing and supplying on discriminatory and unfair conditions”, and also the making of a “constructive refusal”.

^{The ruling sought to maintain the notion in the EC competition law that} main aim of the law in trade is to protect the consumer above all else. This is well articulated in the further statement by the court to the effect that the term ‘abuse’ did not only aim at “practices which may cause damage to consumers directly”, but also to those “which are detrimental to them through their impact on an effective competition structure.”

The scope of the last requirement is so wide that firms accused of abuse seem like they cannot escape it. In a subsequent case United Brands Company and United Brands Continental BV v Commission⁷where it was held that “a dominant undertaking may infringe Article 82 by refusing to supply [even] in response to a perceived threat to its commercial interests”. The rule was thus established that “an undertaking in a dominant position… cannot stop supplying a long standing customer who abides by regular commercial practice, if the orders placed by that customer are in no way out of the ordinary”⁸.

The Court in making the above rule stated that a counter attack was an acceptable practice but it must be proportional to the threat or attack while considering both undertaking’s economic strength in the confrontation⁹. Therefore, the rule in Commercial Solvents can be restated to mean that a refusal to supply can only be termed as being abusive where it reduces or prevents competition from “anyone who may wish to use the product or service, unless objectively justified by some proportionate benefit to the competition structure”. The general rule thus remains that a dominant firm shall bear the evidential burden where it refuses to supply to existing customers.

Looking at the above ruling, it becomes quite apparent that the Court of Justice does not fully appreciate the need to balance free enterprise with competition law. As the law stands, very few justifications are allowed for a firm to determine who to sell to or not yet, this is the basis of the freedom to enter into contract. One such justification was given in the BP case¹⁰ where the Commission’s ruling that a dominant firm “could legitimately discriminate between regular and occasional customers but not if this put the latter in danger of going out of business” was overturned by the appellate court which unequivocally stated that BP was well within its rights to treat traditional customers more favourably than occasional ones.

However, while the decision in BP seemed to give firms a sigh of relief, the decision in the subsequent case involving United Brands was adjudged as going “beyond legitimate relations”¹¹. In the case, the company had attempted to protect its commercial interests through discriminating its customers. It is also notable that the ECJ also rejected the rationale by Commercial Solvents that “it wished to enter the market for the derivative products” as a reasonable justification for its discriminating acts. The approach by the courts to reject these justifications has been roundly criticized for preventing business efficacy¹².

Essential Facilities Doctrine

The decision in Commercial Solvents paved the way for the courts to ‘pry open’ monopolies engaging in activities that could be said to deny other undertakings access to key infrastructure or vital services. The essential facilities doctrine has been restated as being a fundamental part of restricting or preventing abuse of dominance by monopolies. It states that “a company which has a dominant position in the provision of facilities which are essential for the supply of goods and services on another market abuses its dominant position if, without objective justification, it refuses access to these facilities”. The doctrine has been used since the 1980s by the EC courts seeking to liberalize the European market¹³.

The courts have gone further as to specify the essential facilities that fall within the scope of the doctrine. One of these is the access to airport and port facilities as evident in the Frankfurt case¹⁴. The court held that “an undertaking holding a dominant position on the market for the provision of aircraft facilities for the landing and take-off of aircraft abuses its dominant position by denying potential competitors in the ramp-handling service access to the ramp.”

Another essential facility that the courts have isolated is the railway service. In the case of European Night Services (ENS) where the Commission argued that through a conditional clearance requiring companies such as ENS “to provide locomotives, train crews and train paths” there was a requirement to provide such services on a non-discriminatory basis to avoid hindering “any other undertaking wishing to compete in the running of a similar service”¹⁵.

This argument was rejected by the Court due to the fact that the Commission did not prove that these facilities were “necessary or essential” and that “the mere fact of [ENS] benefiting from such service does not prevent or hinder downstream competition on the relevant market”. This set the rule and in the next related case, GVG, the Commission successfully proved that by GVG refusing to grant a rival access to its railway and traction services, the firm had abused its dominant position “with foreclosure effects in the downstream market.¹⁶”

In the telecommunication sector, the Commission has successfully relied on the essential facilities doctrine to promote liberalization. The major case in this context is that of BT where the court agreed with the commission that the dominant undertaking had abused its position by preventing certain private agencies from accessing telex messaging services¹⁷. The rule in BT was successfully relied on in the Telemarketing case where a major state broadcaster had denied a telemarketer airtime which was very crucial for it to thrive¹⁸. In both BT and Telemarketing cases, the court found that the acts of the dominant undertaking led to the “foreclosure of the downstream market”.

All in all, the courts have applied the essential facilities doctrine to ensure that certain key development services and infrastructural needs are not hindered by the so-called “natural monopolies” in the European market¹⁹. The Commission has successfully invoked the doctrine in other sectors such as the oil and gas industry that fall under that category. However, it has found it difficult to invoke the doctrine in other types of monopolies.

The Oscar Bronner Case

This case has often been cited as the stumbling block of the essential facilities principle²⁰. In the case, a newspaper firm had demanded access to its rival’s ‘home delivery service’ by arguing that it was an essential facility based on ruling in the Sabena²¹ case. The question was whether such refusal amounted to an abuse of dominant position and the matter was referred to the ECJ. Though the matter was to be settled by the referring Austrian court, the ECJ made several guidelines that sought to limit the scope of the essential facilities doctrine.

In his submissions before the ECJ, Advocate General Jacobs made certain remarks that have come to be recognized as the limitations to the application of Article 82 EC. First, he stated that “the right to choose one’s trading partners and freely to dispose of one’s property was acknowledged as a generally recognised principle.²²” He added that;

“To avoid overextension of Article 82 E.C., interference with a dominant undertaking’s freedom to contract requires a careful balancing of conflicting considerations… an application of essential facilities doctrine… can be justified only in cases in which the dominant undertaking has a genuine stranglehold on the related market”, which might be the case… where duplication of the facility is impossible or extremely difficult owing to physical, geographical or legal constrains or is highly undesirable for reasons of public policy. Therefore, a refusal to grant access should not amount to an abuse of a dominant position, unless it becomes extremely difficult for any other undertaking to compete on the relevant downstream market.”

Jacob’s view was that unchecked and overstretched application of the essential facilities doctrine would “lead the Community and national authorities into detailed regulation of the Community markets, entailing the fixing of prices and conditions for supply in large sectors of economy”. Interestingly, the ECJ agreed with him and stated that the refusal to allow a rival newspaper firm access to a nationwide distribution service could not fall under the doctrine.

The new Essential Facilities doctrine

The ruling in Oscar Bronner led to a restatement of the essential facilities doctrine. Based on the case, there are only three requirements for the courts to find abuse of dominant position under the doctrine. The first is that the refusal to deal must have the direct consequence of eliminating competitors and hence foreclosing the downstream market. Secondly, the service denied forms an indispensable part of the rival’s/competitors’ business with no option for actual or potential substitutes. Finally, the previously recognized requirement of lack of objective justification as stated in Commercial Solvents is the third factor in the new essential facilities doctrine.

Refusal to license

Competition law and intellectual property (IP) rights seem to have a strained relationship especially where the firm holding the IP rights is the dominant undertaking. The two act at crossroads since competition law seeks to encourage innovation by preventing foreclosure of markets while IP law seeks to promote innovation by allowing the holder to “reap monopoly profits”. While competition law is more concerned with behaviour of specific entities, IP law is general and structural since it rewards all holders equally. Based on these differences, the two laws may sometimes collide.

The interference of IP rights through competition law began with the ECJ’s decision to quash the ruling in the RTE case which had held that; “if a conduct of a dominant undertaking consists of the exercise of a right classified by national law as ‘copyright’, such conduct can never be reviewed in relation to Article 82 EC.²³” The Volvo case which came after the RTE one was the first victim of interference of IP rights. The ECJ held that while it recognized the exclusive nature of IP, abusive conduct attached to the enjoyment of IP could still amount to abuse of dominance²⁴.

In the case, the abusive conduct involved; refusal to supply vital spare parts to dealers and repairers, refusal to produce spare parts for vehicles in circulation and finally, unfair price fixing of spare parts.

While the Volvo case had lightly touched on the issue of refusal to license, it was the Magill case that laid the issue bare. The court while making its ruling stated that, “a refusal to licence new entrants constitutes an abuse of a dominant position, if following conditions of an ‘exceptional circumstances test’ are met, namely

• the IPR holder prevents the appearance of a new product which has potential consumer demand,
• the IPR holder effectively reserves to itself a secondary market by excluding all competition on that market and
• the refusal is not objectively justifiable²⁵.

The exceptional circumstances test shows the intention of the courts to disregard the sanctity of IP rights and to call in question the otherwise unfettered freedom to deal with an IP right.

In the Microsoft case, the exceptional circumstances test seemed to be made stronger when the Commission decided that “a refusal to supply interoperability information to the existing competitors in the downstream market constitutes an abuse of a dominant position²⁶.” The argument made was that Microsoft’s failure to supply the information though not eliminating competitors, had a future consequence of bringing about a monopoly judging from the increase in Microsoft’s domination of the sector. The ruling seemed to lay bare the level of the courts’ intentions to limit the stranglehold that monopolies have acquired through possession of IP. The refusal to grant license for a copyrighted product is just one of the abusive practices that courts are willing to prevent within the scope of Article 82 EC.

Conclusion

From the above analysis, it is quite evident that European courts have opted to make incursions into previously ‘immutable’ rights. The statement by Advocate Jacobs that the courts are now purporting to control trade and fix prices is true in the sense that by taking away the right to contract i.e. by preventing one from discriminating business partners or the right to own property i.e. by providing for compulsory licensing of IP rights by their holders, the courts have ‘crossed the line’²⁷. The behaviour of the courts seems to encourage ‘free riders’ in the economic system who benefit from their ‘underdog’ status under the pretext of protection from the dominant undertaking. One is left to imagine the kind of economic situation that would prevail had the Oscar Bronner case been held otherwise.

Bibliography

AB Volvo v Erik Beng [1988] E.C.R. 6211 Anderman, S, “Does the Microsoft Case Offer a New Paradigm for the ‘Exceptional Circumstances’ Test and Compulsory Copyright Licenses under EC Competition Law?” C.L.R. Vol. 1, Issue 2, 2004, pp. 435-67.

Article 82 EC [2002] O.J. C 325/35. British Telecommunication 1 C.M.L.R. 457.

Centre Belge D’études de Marché – Télémarketing (CBEM) v SA Compagnie Luxembourgeoise de Télédiffusion (CLT) and Information Publicité Benelux (IPB) [1985] E.C.R. 3261.

European Night Services v Commission [1998] E.C.R. II-3141, 215 GVG/FS O.J. L11/17.

Hoffmann La Roche & Co AG v Commission [1979] E.C.R. 461 Istituto Chemioterapico Italiano S.p.A. and Commercial Solvents Corporation v Commission E.C.R. 223.

London European – Sabena [1988] O.J. L 317/47.

Magill TV Guide v Commission [1989] O.J. L78/43

Microsoft v Commission [2004] COMP/C-3/37.792

Nemirovski, D, ‘Mandatory Dealing in the European Union Law: The Way of Thorns’ International University Audentes Student Law Journal, no. 1, 2005, pp. 104-19.

Oscar Bronner GmbH & Co KG v Mediaprint [1998] E.C.R. I-7791.

Radio Telefis Eireann (RTE) and Independent Television Publications Ltd (ITP) v Commission [1995] E.C.R. I-743.

United Brands Company and United Brands Continental BV v Commission [1978] E.C.R. 207.

Footnotes

1. D Nemirovski, ‘ Mandatory Dealing In The European Union Law: The Way Of Thorns’ International University Audentes Student Law Journal , no. 1, 2005, pp. 104-19.
2. Article 82 EC [2002] O.J. C 325/35.
3. Hoffmann La Roche & Co AG v Commission [1979] E.C.R. 461.
4. ibid.
5. Oscar Bronner GmbH & Co KG v. Mediaprint [1998] ECR I-7791.
6. Istituto Chemioterapico Italiano S.p.A. and Commercial Solvents Corporation v Commission [1974] E.C.R. 223.
7. United Brands Company and United Brands Continental BV v Commission [1978] E.C.R. 207.
8. Istituto Chemioterapico Italiano S.p.A. and Commercial Solvents Corporation v Commission [1974] E.C.R. 223.
9. Nemirovski, p. 105.
10. Benzine en Petroleum Handelsmaatschippij BV v Commission [1978] E.C.R. 1513.
11. United Brands Company and United Brands Continental BV v Commission [1978] E.C.R. 207.
12. Nemirovski, p.105.
13. Ibid, p.106.
14. FAG-Flughafen Frankfurt/Main AG [1998] O.J. L72, 70.
15. European Night Services v Commission [1998] E.C.R. II-3141, 215.
16. GVG/FS [2003] O.J. L11/17.
17. British Telecommunication [1983] 1 C.M.L.R. 457.
18. Centre Belge D’études de Marché – Télémarketing (CBEM) v SA Compagnie Luxembourgeoise de Télédiffusion (CLT) and Information Publicité Benelux (IPB) [1985] E.C.R. 3261.
19. Nemirovski,p.108.
20. Ibid, 109.
21. London European – Sabena [1988] O.J. L 317/47.
22. Oscar Bronner case.
23. Radio Telefis Eireann (RTE) and Independent Television Publications Ltd (ITP) v Commission [1995] E.C.R. I-743.
24. AB Volvo v Erik Beng [1988] E.C.R. 6211.
25. Magill TV Guide v Commission [1989] O.J. L78/43.
26. Microsoft v Commission [2004] COMP/C-3/37.792 , 781.
27. S. Anderman. “Does the Microsoft Case Offer a New Paradigm for the ‘Exceptional Circumstances’ Test and Compulsory Copyright Licenses under EC Competition Law?” C.L.R. Vol. 1, Issue 2, 2004, pp. 435-67.