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Competition

ABUSE OF DOMINANT POSITIONS


Thomas Näcke

Symposium on Competition Policy in a Global Economy

Taipei,

19.4.1995


1. VERTICAL DOMINANCE (Kodak)

About dominance in proprietary aftermarkets.

2. DOMINANCE AND STANDARDIZATION (ETSI)

About 'essential technology'. Are we approaching the age of essential facilities ?

3. INTELLECTUAL PROPERTY AND ABUSE (Magill)

Access to basic information : Access to new markets !

4. THE TECHNOLOGY DRIVE (Microsoft)

About 'tipping the market'

5. LOWERING THE THRESHOLD OF DOMINANCE ?

New concepts to widen the scope for regulatory review in a grey area ?

Mr. Chairman, Ladies and Gentlemen, Good morning.

Let me first of all thank you, Mr. Chairman, for your kind words of introduction. I am pleased and honoured to be on the panel this morning and to have the opportunity to share with you some thoughts on the issues of dominance and abuse. As you all know dominance and abuse are concepts which could each fill a whole week of discussion and seminars. Instead of focussing on one particular point in my presentation, I have chosen to mention a number of interesting questions in the recent debate that we are having in Europe and how we try to cope with these questions in our day-to-day work on individual cases. I have chosen those issues in the belief that they are, or will be, of increasing relevance in globally integrated markets.

I would like to comment on the following "hot" issues in the current debate : the issue of vertical dominance, the role of standardization, and the use of intellectual property and its significance in competition law - I will try to share with you some thoughts about the MAGILL-jugdment which the European Court of Justice decided just two weeks ago.

Finally I should like to explore with you whether there are some tendencies widen the scope for regulatory review in those cases where a company cannot be held dominant according to the classical criteria. Is it only wishful thinking of government executives or maybe a nightmare for company lawyers ?

[1] I should like to start with some comments on the issue of vertical dominance. You are all aware of the famous Kodak decision of the US Supreme Court in which Kodak had been accused of violating federal antitrust law by operating an illegal tying-in agreement involving sale and repare of photocopiers (1) . It was alleged that by refusing to sell independent service groups spare parts to fix its copiers, Kodak was trying to squeeze them out of the market. Kodak's policy was to only sell parts to owners of its copiers that had to use Kodak to service the machines, or to perform repairs themselves. Kodak had argued that this was not anticompetitive beause it only controlled a quarter of the market in copier machine sales.

The Supreme Court's rejections of Kodak's arguments was praised by business circles as a decision guaranteeing survival of an independent service industry for all sorts of products such as cars, computers and consumer electronics. Lawyers also praised the decision, but for different reasons. Some interpreted the judgment as a U-turn away from the Chicago school and its - sometimes - blind reliance on economic theory (2).

To be sure, there have been cases concerning vertical dominance brought before the European Court of Justice, and they have been won. In 1979 a British manufacturer of cash registers was found guilty of abusing its dominance in the aftermarket of spare parts for his own products it held not more than 13 % of the total market for cash registers at that time (3). In another case, the Swedish car manufacturer Volvo was said to abuse its position with regard to the supply of spare parts for its own car models for which it held the exclusive design rights (4). However, we have probably not yet seen a decision in Europe in which the criteria to be used in order to establish aftermarket power were developed in such an elaborate manner as in the Kodak judgment delivered by the US Supreme Court. It seems to me that if we in the Commission were faced with cases of this kind in the future, we would probably like to follow a similar line of thinking. One cannot be blind to the realities of a given market by categorically precluding the possible existence of market power in an aftermarket simply because a manufacturer lacks horizontal dominance. Rather, it needs to be established, on a case by case basis, whether the market is sufficiently transparent, whether new customers have sufficient information in order to make an informed choice at the time of the initial investment, and whether they can assess the overall lifetime cost of a given product. In addition, existing customers may be locked into that specific aftermarket because the switching costs to another manufacturer's product are simply too high. It is a common feature to see people lured into a proprietary aftermarket by a manufacturer with special discount offerings and the like. Then the cows are milked for years with consumables, spare parts, repair services and so on. The Kodak judgment has provided a number of useful criteria in order to establish when, in a given case, such commercial practices may be considered an abuse of a dominant position.

[2] Let me now briefly turn to the issue of dominance and standardization. As we enter the age of the information society interoperability of the various technological systems becomes tantamount. This entails some interesting side effects as regards competition laws. While competition usually is played out at the product level, that is at the moment of commercialization, competition nowadays tends to move more and more into the secluded rooms of IPR specialists and technical engineers who sit around a table of a standardization institute arguing about which company's technology should best be included in a future standard. The obvious question is this: if a manufacturer succeeds in having its proprietary technology included in a new standard, doesn' t this put him automatically in a position of dominance vis-à-vis all his actual or potential competitors ? And, if this is so, would Article 86 automatically come into play ? I only want to raise the question. I have no answer to it but it may be interesting for you to know that this issue arose some time ago in the discussions about ETSI, the European Telecommunications Standards Institute (5). Those who drafted ETSI's regulatory framework must have been conscious of the problem. A draft IPR Undertaking which has meanwhile been abandoned provided that a manufacturer could not refuse to give a licence if his technology had been chosen for a standard and if his technology was the only possible way in order to implement that standard. The IPR Undertaking expressly referred to such situation as essential technology. You will all note the striking similarity to the essential facility doctrine under US competition law.

[3] Now I should like to share with you some ideas on the most recent judgment in Europe involving Article 86. On 6 April 1995 the European Court of Justice rendered its long awaited judgment in the Magill Case (6). This case is a true landmark decision, as it establishes a number of important principles concerning the borderline between competition law and intellectual property law. In this case, a number of televison stations in the UK and Ireland published their own weekly television guide covering exclusively their own programs. No comprehensive weekly television guide was available. Each of the TV stations claimed, under Irish and UK legislation, copyright protection for its own weekly program listings in order to prevent their reproduction by third parties. The TV stations only provided their programmes schedules free of charge, on request, to daily and periodical newspapers, accompanied by a licence for which no charge was made, setting out the conditions under which that information could be reproduced. Magill TV guide Ltd attempted to publish a comprehensive weekly televison guide but was prevented from doing so by TV stations which obtained injunctions prohibiting publication of weekly television listings.

The Commission decision of 1988 found this behaviour to be abusive (7). This decision was upheld by the Court of First Instance in 1991 (8), and now by the European Court of Justice, although many people expected a different outcome. The Court endorsed the finding that only those restrictions on freedom of competition which are inherent in the protection of the actual substance of the intellectual property right are permitted in community law. If, in an individual case, the exclusive right to reproduce a protected work is exercised in such ways and circumstances that it in fact pursues an aim manifestly contrary to the objectives of Article 86, then the copyright is no longer being exercised in a manner which corresponds to its essential function which is to protect the moral rights in the work and ensure a reward for the creative effort.

The Court found that the TV stations' refusal to provide basic information as to the channel, day, time and title of programmes based on its reliance on national copyright provisions prevented the appearance of a new product, a comprehensive weekly guide to TV programmes, which the TV stations themselves did not offer and for which there was a potential consumer demand. The Court added that there was no justification for such refusal either in the activity of television broadcasting or in that of publishing TV magazines. Finally, the Court held that the TV stations, by their conduct, reserved to themselves the secondary market of weekly TV guides, by excluding all competition on that market.

The judgment provides food for many legal debates in the weeks to come. On the one hand, the European Court of Justice has taken the opportunity to confirm its earlier jurisprudence that Article 86 can apply to protect competing suppliers of spare parts or services regardless of existing intellectual property protection. It has also confirmed the view of the Commission that the balance between intellectual property protection and competition is not to be left entirely to the legislature. But in my view the judgment leaves at least one crucial question unanswered. What, if the three TV stations in question had decided to publish a comprehensive weekly guide themselves, for example by way of a joint venture ? The parties could then have argued that the consumer demand for such specific product was already met, and that the refusal to grant a licence to competitors was a legitimate means to prevent competitors from undermining their own profit margins. In this respect, the judgment seems to be ambiguous. On the one hand, the fact that the TV stations prevented the appearance of a new product, was considered one of the elements for an abuse. On the other hand, the fact that the TV stations reserved to themselves the secondary market of weekly TV guides would seem to stand on its own feet, irrespective of the question whether or not those TV stations had entered - or planned to enter - the aftermarket themselves or not.

From an IPR perspective, such distinction would seem so be inherent in the system. Many national legislations provide for compulsory licensing in those cases where an IPR holder chooses neither to market his protected property himself nor to give a license to anybody else, but merely uses his property right as a means to block a certain product development or the emergence of a new market. Whether or not, or under which circumstances, competition law has to respect this distinction is, in my view, not finally settled by this case.

[4] Let me now briefly mention some recent Commission cases (9). In 1994 there were three major cases involving Article 86: one formal decision involving the German national railroad company and two in which undertakings given by the companies concerned were sufficient to resolve the problem and to permit the Commission to close the file: Carlsberg/Interbrew and Novell/Microsoft.

While I am not sure that these three cases will add very much to the European case law concerning abuse, I should like to spend a few minutes on the issue of dominance. As you know, once the geographic and product markets have been determined on the basis of real economic choice, the Commission must assess whether dominance exists, in other words, can the company in question behave to an appreciable extent independently of its competitors and customers, and exercise economic power unfettered by the constraints usually operating in markets subject to effective competition. Market shares are very important and, in the absence of exceptional circumstances, market shares between 40 and 65 % are a strong evidence of dominance (10). Nevertheless, if it is to assess whether real economic power can exist, the Commission cannot limit its analysis to market shares only. In particular it must also examine barriers to entry: whether producers outside the product or geographic market could make a timely and significant entry so as to create an effective counterweight to incumbents already operating on the market. The Commission must assess whether such entry is likely and not merely a remote theoretical possibility.

The Microsoft case, though not having resulted in a formal decision, is a quite significant illustration of some new tendencies (11). In this case, because the vast majority of all PCs are being shipped with a preinstalled version of MS-DOS and WINDOWS, the operating systems provided by Microsoft, the economic power indicated by high market shares in this case would seem to be determined not so much by production capacity rather than by other criteria such as compatibility to hardware and, maybe most importantly of all, availability of application software. Physical output of existing or new producers can usually be expended rapidly as reproduction is easy. The main barriers to entry and therefore determinant of dominance are the existence of Intellectual Property Rights and the fact that the systems in question have become de facto industry standards. These standards appeal to both software and hardware producers who want the widest accepted standard, and end users who want the widest choice of software. To create an acceptable alternative to MS-DOS or WINDOWS would require massive investment and involve huge risks.

The Microsoft Saga also raises another interesting issue which has, however, not been part of the proceedings last summer, neither in Brussels nor in Washington D.C. What if a company would try to leverage its predominance in an existing product generation into the next one ? And if this were to be the case, could this be said to be to the detriment of other competitors ? The basic way in which new technologies are accepted in high-tech areas is well known. When a new technology is launched, everybody will wait for somebody else to make the first step. Economists refer to this phenomenon as excess inertia. As soon as a critical mass of followers is reached, everybody hurries to jump on the boat, thus generating excess momentum. Starting from this basic idea some American scholars have developed the concept of market tipping (12). Indeed, some companies seem to develop more and more sophisticated marketing methods in order to tilt a market in their favour even before a product is being launched at all. I would not be surprised to see some important leading cases in the next years centering around this concept which is so crucial for high-tech industries.

[5] I come to the last point of my presentation. As is the case with most of the competition rules of most legal systems that have competition rules, the EC Treaty also distinguishes between two basic provisions: Article 85 which is concerned with agreements or other concerted practices among competitors, and Article 86 which concerns unilateral behaviour of one or several dominant companies. Since the Commission's Tetra Pak decision (13), there seems to be a growing recognition of the congruence between two models of legal analysis which were traditionally distinguished because of the difference in structure between those articles (14).

The basic logic of Article 85 and 86 is quite similar. Both Articles 85 and 86 contain a proportionality principle. The requirement that the action chosen by a dominant firm to attain a legitimate objective be the least restrictive means available is a striking parallel to the indispensibility requirement set forth in Article 85 pursuant to which restrictive agreements will not be cleared if they contain restrictions of competition which are not indispensible to technical or commercial progress.

During a recent conference on competition law which was organized by the European Commission, a major point of discussion was the non-adaptation of Community law with respect to such situations in which a company was not engaged in agreements or other concerted practices and could also not be held dominant according to the classical criteria. The need for a structural control mechanism in order to combat unwarranted concentration tendencies was illustrated by a number of national regulators. Some Member States have, in the recent years, introduced the notion of economic dependence in their respective cartel legislation which effectively allows them to monitor market developments with a 'double net': one of Article 86, and a second one below the threshold of dominance (15). A parallel in the Community law may be found in the partenaire obligatoire (obligatory partner) concept under which a company may be found guilty of an abuse if those dependant on it cannot substitute, if the abuse is unlikely to to new competitors and if the company is not constrained in its behaviour by competition in wider 'downstream' markets (16). The decision concerning cash registers which I mentioned earlier was critizised partly because the Commission had put a lot of emphasis on the dependency aspect of that case. Nevertheless, it seems to me that the Commission would rather tend to explore further how the existing legal provision of Article 86 can be applied in a more extensive way in order to catch such 'dependency cases' rather than to favour new legislation in this area. I shall not go further into this subject since I would have to overstep my speaking time but I wanted at least to make you aware of these subjects currently under debate in Europe.

Mr. Chairman, Ladies and Gentlemen, thank you very much for your attention.

(1) Eastman Kodak Co. v. Image Technical Services, Inc., 112 S. Ct. 2072, 1992-1 Trade Cas (CCH) ¶69,839

(2) See Ronald S. Katz and Janet S. Arnold, Eastman Kodak v. ITS: The Downfall of the Chicago School, The Computer Lawyer vol. 9 No 7, July 1992, p. 1

(3) Com. Dec. of 8.12.1979, Hugin/Liptons, O.J. 1978 L 22/23; and Case 22/78 Hugin v. Commission [1979] 3 CMLR 345

(4) Volvo v. Veng [1988] ECR 6211. Incidentally, many of the cases in the United States relating to proprietary aftermarkets have also been in the motor vehicle industry. See e.g., International Logistics Group, Ltd v. Chrysler Corp. 884 F. 2d 904 (parts for Chrysler cars); In Re General Motors Corp., 99 F.T.C. 464, 554 (crash parts for General Motors cars); Heatransfer Corp. v. Volkswagenwerk A.G., 553 F. 2d 964 (air conditioners for Volkswagen cars).

(5) ETSI was established in 1988 as a private law entity (Asbl) on the initiative of the European Commission and the European Post and Telecommunications administrations. It is formally recognised as a "European standards institute" (Com Dec 92/400/EEC of 15.7.1992). For an overview on the debate see Diana Good, How Far should IP Rights have to Give Way to Standardisation: The Policy Positions of ETSI and the EC, [1992] 9 EIPR 295; Roger Tuckett: Access to Public Standards: Interoperability Revisited, 1992 12 EIPR 423; Corien Prins and Martin Schiessl, The New European Telecommunications Standards Institute Policy: Conflicts Between Standardisation and Intellectual Property Rights, [1993] 8 EIPR 263

(6) Judgment of 6 April 1995, Joined Cases C-241/ P and C-242/91 P, RTE and IPC v. Commission (not yet reported). For a discussion of this case: see Subiotto, The Right to Deal With Whom One Pleases under EEC Competition law: A Small Contribution to a Necessary Debate, 13 ECLR 234 (1992)

(7) Commission Decision Magill TV Guide/ITP, BBC and RTE, O.J. 1989 L 78/43

(8) Judgment of 10 July 1991, RTE, BBC u. ITP v. Comm.,[1991] 4 CMLR 586

(9) See XXIVth report on Competition Policy (not yet published)

(10) Hoffmann-La Roche, 1979 ECR 461, p. 525-526 (47-66 % market share); United Brands, 1978 ECR 267, 282-285 (40-45 %); ECS/Akzo II, Com. Dec. 15.12.1985, O.J. L 374/1, p. 18 (50 %); Sabena, Com. Dec. 4.11.1988, O.J. L 317, 47, p. 52 (50 %)

(11) The Undertaking made by Microsoft to the European Commission is reported in the Bulletin of the European Union, 1994, vol. 7/8, p. 130

(12) Stanley M. Besen and Joseph Farrell, Choosing How to Compete, J. of Econ. Perspectives, Spring 1994, at 118; Michael Katz and Carl Shapiro, Systems Competition and Networks Effects, J. of Econ. Perspectives, Spring 1994, at 106

(13) Com. Dec. Tetra Pak I, O.J. 1988 L 272/27; 1990-4 CMLR 47

(14) Luc Gyselen, Abuse of Monopoly Power Within the Meaning of Article 86 of the EEC Treaty : Recent Developments, in 1989 Fordham Corporate Law Institute, 597 (B. Hawk ed. 1990)

(15) See section 26(2) of the German Act Against Restraints of Competition (GWB): 'relative dominance' of firm for dependent trading partners. See also Article 8-2 of the French decree 86-1243 of 1.12.1986. In a decision of 13 December 1994 (Dec. no. 94-D-60, not yet reported), the concept of economiuc dependence was discussed (but ultimately rejected) by the Franch Competition Council. The case involved a number of major producers (Colgate-Palmolive, Henkel, Lever, Procter & Gamble) and distributors (Leclerc, Intermarché) in the market for detergents.

(16) Hoffmann-La Roche, 1979 ECR 461, 520 (par.39-41); GVL, 1983 ECR 483, 506 (par.42). See also XVIth report on Competition Policy, pt.340



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