Deontological Implications of Holding a Dominant Position
Overview
Article 102 of the TFEU prohibits companies holding “dominant positions” from “abusing” these positions, in ways that impact trade between member states—this has been held to create a “special responsibility” that companies hold toward consumers and the market as a whole.
What is “Abuse” of a Dominant Position?
Merely holding a dominant position is not enough to show that a company is engaged in anti-competitive behavior. In Michelin v. Commission, the European Court of Justice succinctly states that, “A finding that an undertaking has a dominant position is not in itself a recrimination but simply means that … the undertaking concerned has a special responsibility not to allow its conduct to impair genuine undistorted competition on the common market.” C-322/81, Michelin v. Commission, 1981 E.C.R. I-3466, 3511.
Despite the European Union being, at that time, almost entirely a civil law jurisdiction, this in effect created (in much the same manner as in a common law jurisdiction) the doctrine that dominant undertakings hold a special responsibility—a doctrine which is not in the text of TFEU Article 102. But what does this “special responsibility” entail? How does the existence of this “special responsibility” influence what is considered to be legally actionable anti-competitive behavior? And, in a broader sense, to whom is this “special responsibility” owed—the other companies competing with a company that holds a dominant position, or consumers?
What is the nature of a dominant company’s “special responsibility”?
Later case law has provided short description of what the “special responsibility” entails: it is a responsibility for a company “not to allow its conduct to impair genuine undistorted competition on the common market.” T-83/91, TetraPak v. Commission, E.C.R. II-755, 5. But what behaviors have been ruled to impair competition in such a way?
In 2009, the European Commission published a communication designed to provide information on how the Commission would go about enforcing TFEU Article 102. As part of this communication, the Commission outlined practices it generally regards as a breach of the “special responsibility” a company in a dominant position holds. 2009 O.J (C 45/02) 32-90. These practices include the following:
- Exclusive dealing. These are agreements or sales systems which attempt to “bind” customers to a particular company, such as exclusive purchase agreements, rebates that are predicated on consistent purchasing behaviors, or bonuses and discounts predicated on the same. In British Airways v. Commission, British Airways was found to be abusing its dominant position by offering bonuses to travel agents not based on total BA tickets sold, but on how much they increased BA ticket sales from one year to the next—thus, bonuses predicated on consistent, growing purchasing behavior. C-95/04, British Airways v. Commission, 2007 E.C.R. I-2331, 3. Similarly, in Michelin v. Commission, tire dealers were assigned sales targets by Michelin in order to receive bonuses, with more successful dealers being assigned higher targets; this, as such, provided an incentive for the dealers to continue selling Michelin tires. Michelin at 3471. The British Airways case in particular clarifies that these behaviors are abusive because they aim to create long-term customer loyalty through market manipulation. British Airways at 138. In the United States, to contrast, effects upon consumers are emphasized—both exclusive dealing that is explicitly agreed upon between a dominant company and another business, and exclusive dealing which is encouraged through discounts and rebates, are granted numerous legal safe harbors, and must be analyzed based on their potential pro-competitive benefits, due to the assumption that these behaviors can create better consumer outcomes. S. Dep’t of Justice, Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act (2008) at 105, 141.
- Tying and bundling. “Tying” refers to cases in which, when customers purchase one product from a dominant company, they are also required to purchase another product. “Bundling” refers to cases in which a dominant undertaking is only willing to sell products in fixed proportions. In Microsoft v. Commission, Microsoft was found to have engaged in anti-competitive behavior by not ensuring that its server products were interoperable with the products of competitors—an example of “technical tying”, in which the nature of the product forces the customer to buy all further products from the dominant company. T-201/04, Microsoft v. Commission, 2007 E.C.R. II-3601, 225. In US law, tying was for a long period considered to be per se illegal, as courts considered it to have no possible pro-competitive value whatsoever; this approach, however, is changing, with many lower courts now open to the idea that tying may be acceptable or even beneficial. Christian Ahlborn, David S. Evans & A. Jorge Padilla, The Antitrust Economics of Tying: A Farewell to Per Se Illegality, Antitrust Bulletin, Spring 2004, 49, 1/2, 287 at 288.
- Predatory Pricing. This refers to practices in which a dominant company deliberately lowers prices to below profitability in order to undercut competitors and prevent them market access—such was the case in TetraPak v. Commission. The court in TetraPak held a dominant position in the manufacture and sale of aseptic containers for milk and other liquids, and was held liable for abuse of that position by pricing its products so low in the Italian market that competing companies could not reasonably hope to enter the market. TetraPak at 16. In the United States, the standard for predatory pricing is much more stringent—not only must a company impede competition from less-dominant firms through its pricing strategy, but the prices must be so low that the dominant company is selling at a loss, and the dominant company must be in a position to recoup this loss through the anti-competitive effects of the pricing. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 223 (1993).
- Refusal to Deal. Cases in which a dominant company refuses to sell products, license intellectual property, or grant access to essential facilities to a competitor—or charges unreasonable prices to that competitor—can also constitute anti-competitive abuse. An example of this can be seen in Instituto Chemioterapico Italiano and Commercial Solvents Corporation v. Commission, in which a pair of co-owned companies held dominant positions in the markets for raw manufacturing materials (specifically nitro-paraffins), and which also dealt in the derivative manufactured products made from those materials (specifically ethambutol), refused to deal in the raw materials market with other companies engaged in the production of the derivative products. Joined cases 6 and 7-73, Instituto Chemioterapico Italiano and Commercial Solvents Corporation v. Commission, 1974 E.C.R. 223, 7. In the United States, in contrast, refusal to deal is less likely to be held as anti-competitive behavior—while there is some case law stating that refusal to deal can be a violation of the Sherman Act, there is not a strong consensus among courts and a good deal of controversy among legal scholars about its impact, leading the Department of Justice to recommend against prosecuting companies for refusal to deal. S. Dep’t of Justice at 129.
However, it is an affirmative defense for a company in a dominant position to show that engaging in any one of these behaviors is necessary in order to create greater efficiencies in production or distribution, which may in turn benefit customers; and that this necessity is proportional to the practices’ anti-competitive effect. 2009 O.J (C 45/02) 28-31. It is worth noting once again that these affirmative defenses are not in the text of TFEU Article 102 and instead come from subsequent case law, created in much the same “common law” way as the special responsibility doctrine was in the first place. Finally, the contrasts between EU law and US law, as noted above, can in large part be explained by the fact that there is no “special responsibility” doctrine in US law—therefore, while US law focuses on the harm that anti-competitive behavior causes to consumers, EU focuses on both the consumers and the state of the market and competition as a whole. Ahlborn et al. at 317.
To Whom is this “Special Responsibility” Owed?
The Communication discussed above makes it clear that the overall purpose of TFEU Article 102 is the protection of consumers, under the theory that promoting more effective competition between companies will result in better consumer outcomes. 2009 O.J (C 45/02) 5. However, neither the Communication itself nor the cases cited within it directly address adverse effects on consumers; rather, they focus on the adverse effects that abuse of a dominant position can have on competing companies. This illustrates what was noted above: that, unlike in the US, EU law focuses on the effects of anti-competitive behavior not only on consumers, but on the overall state of market competition. These two focuses can be understood by referring to as abuse impacting consumers as “exploitative” abuse, and abuse impacting the market and competing companies as “exclusionary” abuse. Pinar Akman, The Theory of Abuse in Google Search: A Positive and Normative Assessment Under EU Competition Law, Journal of Law, Technology & Policy, 2017 No. 2 at 357.
While most case law concerning abuse of a dominant position concerns whether the dominant firm was engaged in exclusionary abuse, it is nonetheless a requirement under TFEU Article 102 that the abuse must also be exploitative—therefore, a special responsibility is owed to both consumers and competitors. Id. Using this framework, in Akman’s analysis of the Commission’s investigations into possible abuse of dominant position by Google, due to Google’s prioritization of its own shopping services over competing companies’ services in its user search results, she found that Google’s behavior was neither exploitative not exclusionary, and therefore not in violation of TFEU Article 102. Specifically, Google’s behavior was not exploitative to consumers because some factual findings indicated that it led to higher savings and efficiencies for shoppers using the services. Id at 362. Google’s behavior was also not exclusionary to competitors because, even if certain competitors found their search results de-prioritized, competition as a whole was actually encouraged by Google’s practices, since they led to an overall increased in the diversity of shopping platforms present in search results—a reminder that it is not harm to any specific competitor that is abuse, but harm to free and open competition as a whole. Id at 364.
This dual requirement of exploitative and exclusionary abuse has led Akman to propose that the distinction between the two should be abandoned. Rather, the proper test for what constitutes abuse of a dominant position should be whether any behavior’s exploitative impact on consumers—which could or could not come to pass through exclusion of competitors—is necessary and proportional with any increase in efficiency caused by that behavior and its benefit to consumers. Pinar Akman, The Concept of Abuse in EU Competition Law: Law and Economic Approaches, 300-27 (2012). However, this framework has not been adopted by courts.
Conclusion
Companies holding dominant market positions have a “special responsibility” to not use that dominant position to distort the fairness of genuine competition in the European common market. As pointed out by both the Commission and Akman, this has the goal of promoting consumer welfare, under the theory that more open competition between companies will lead to increased consumer freedom. The Michelin case, in turn, relates this consumer freedom to the even broader goal of the European Union of “the creation of an area without internal frontiers, through the strengthening of economic and social cohesion”—greater consumer freedom means that consumers have the ability to patronize companies from anywhere within the common market, thus reducing barriers within the common market and bringing EU member states closer together. Michelin at 3475; Treaty on European Union, art. B, July 29, 1992, O.J. (C-191) 1. The “special responsibility” that dominant companies hold, therefore, is a responsibility to the EU as a whole.
By: Aiden Bonner