European Union: European Commission Looks Set To Accept Commitments From IBM In Relation To Alleged Infringements Of Article 102

Last Updated: 25 November 2011
Article by Rachel Iley

On 20 September, the European Commission announced1 that IBM has offered formal commitments to ensure the availability of certain spare parts and technical information on reasonable and non-discriminatory terms.

This follows the Commission's own-initiative investigation, launched 26 July 20102, into alleged infringements of competition law by IBM on the market for mainframe computers.

What is IBM alleged to have done?

IBM is alleged to have infringed Article 102 of the Treaty on the Functioning of the European Union (formerly Article 82 of the EU Treaty). Article 102 prohibits companies with a dominant position on a relevant market from abusing their market power to restrict competition or exploit customers or suppliers.

On 1 August 2011, the Commission adopted a Preliminary Assessment finding that:

  1. IBM may hold a dominant position on the market for certain inputs required to maintain IBM mainframe hardware and software; and
  2. IBM may have abused that dominant position by imposing unreasonable supply conditions for these inputs on its competitors in the maintenance markets. These competitors were existing customers of IBM. The Commission therefore considered that IBM's practices could amount to a constructive refusal to supply.

When does dominance become an issue?

Article 102 does not prohibit the holding of a dominant position. It only regulates the way in which companies with a strong market position use their market power, to ensure that they do not conduct themselves in a manner that is exploitative of / unfair towards customers or suppliers, or excludes competitors.

A company will be regarded as dominant if its market strength enables it to behave to an appreciable extent independently of its competitors, its customers and, ultimately, of consumers. There is no absolute rule as to what amounts to a 'dominant position'. A good starting point is to assess the company's market share. A company is generally presumed to be dominant where it has 50% or more of a particular product/service. It may well be dominant with 40% of the market – and possibly even below this. (E.g. British Airways was found to have a dominant position with 39.7% of the UK market for air travel agency services.)

IBM reportedly supplies the vast majority of mainframes worldwide; perhaps even as much as 90%.

What is the potential concern about IBM's conduct under competition law?

The starting point is that dominant companies, like other undertakings, are generally entitled to determine which trading partners they supply. However, there are circumstances in which a refusal on the part of a dominant company to supply goods can amount to an abuse of a dominant position. 'Refusal' in this context includes outright refusals, as well as constructive refusals, for example by charging unreasonable prices, imposing unfair trading conditions, or by treating a particular customer in a discriminatory way.

The Commission has concerns that IBM may have engaged in discriminatory conduct towards competing suppliers of mainframe maintenance services, with a view to keeping them out of the market, in particular by restricting or delaying access to spare parts, for which IBM is the only source.

What will IBM commit to do? 3

IBM does not agree with the Commission's assessment but has nonetheless offered commitments to meet its concerns.

The commitments apply to all IBM System z machine models 4 and types that have not been withdrawn from service by IBM. IBM will commit to ensure the expeditious availability of certain spare parts and technical information to third party maintainers ("TPMs") for repair purposes, under commercially reasonable and non-discriminatory terms and conditions.

IBM will enter into a framework contract with any TPM interested in providing maintenance services for IBM System z servers in the EEA, which will include an obligation on IBM to:

  1. supply TPMs in an expeditious manner with critical parts without any obligation on TPMs to return the defective part;
  2. maintain the same prices for critical parts to TPMs as IBM offers to self-maintainers, for present and future mainframe models; and
  3. make technical information (including machine code updates) available to TPMs in an expeditious manner.

The framework contract will also include the possibility for TPMs to enforce IBM's obligations in the event of any dispute relating to the agreement. It will provide for specific performance and contractual penalties in case of IBM's late delivery of critical spare parts and technical information. In order to facilitate dealings with TPMs, IBM will create the position of an EU-wide TPM relationship manager.

What is the legal effect of these commitments?

The Commission is empowered to accept binding commitments under Article 9 of Regulation 1/2003 5 from parties suspected of having breached EU competition law. Prior to that, parties could seek to negotiate a settlement with the Commission but there was no formal procedure for doing so, no requirement to consult third parties and the only sanction available to the Commission for non-compliance was to re-open its file. Article 9 is intended to formalise this, and to enhance administrative efficiency and effectiveness.

Under Article 9, parties can submit voluntarily commitments to address the competition concerns identified. Once a party has indicated its willingness to do so, the Commission will summarise in its Preliminary Assessment the main facts of the case and identify the main competition concerns. This serves as the basis for the parties to formulate appropriate commitments. The parties can offer behavioural or structural commitments but commitments are not suitable where the Commission intends to impose a fine.

The Commission is required to market test the commitments before accepting them and interested third parties are invited to submit observations within a fixed time limited (minimum one month).

If the Commission accepts the commitments, it may make them binding on the parties by way of a formal decision and close its investigation. The addressee must comply or risk a fine of up to 10% of its total turnover in the preceding financial year, and the Commission can also impose periodic penalties to compel compliance of up to 5% of average daily turnover in the prior year.

The Commission will not conclude on whether or not there has been an infringement. The Commission is therefore spared the need to prove dominance or anti-competitive conduct and can achieve an early closing of the file, thereby freeing up resources. For the parties, commitments offer a way to reduce negative publicity, eliminate the risk of being fined for their conduct, and save on the time and expense of a full Commission investigation. However, the parties are not immune from investigations by national competition authorities, nor from damages actions brought by third parties. That said, in the absence of an infringement decision, potential claimants face the additional hurdle of establishing that there has actually been a breach of competition law, which may deter some private litigation.

What happens next?

Once the Commission has taken into account comments from third parties, it will decide whether to make the commitments binding on IBM for a period of five years. IBM would then also be required to submit an annual report to the Commission to demonstrate its compliance.

The tying case

Separately, the Commission has been examining allegations of tying of IBM's mainframe hardware with its operating system, as a result of complaints made by rival software vendors T3 and Turbo Hercules and a related later complaint by Neon Enterprise Software. The Commission has now closed that investigation and the complaints have been withdrawn.

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Footnotes

1. Commission Press Release IP/11/1044:http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/1044&format=HTML&aged=0&language=EN&guiLanguage=en

2. Commission press release IP/10/1006: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/1006&format=HTML&aged=0&language=EN&guiLanguage=en

3. Notice published pursuant to Article 27(4) of Council Regulation (EC) No 1/2003 in Case COMP/C-3/39.692/IBM — Maintenance services: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2011:275:0008:0009:EN:PDF; draft commitments:http://ec.europa.eu/competition/antitrust/cases/dec_docs/39692/39692_1181_5.pdf

4. IBM System z means, for the purpose of the commitments, IBM's z800, z900, z890, z990, z9, z10 and zEnterprise server series and successor System z series during the term of the commitments.

5. Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:l:2003:001:0001:0025:en:PDF

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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