Cyprus: EC Competition Law: Article 82 and Abuse of Dominant Position

Thus the first paragraph of Art. 82 (formerly Art. 86) sets out the prohibition of any abuse of a dominant position within the common market if it may affect trade between Member States. The second paragraph (recited below) contains a list of examples of abusive practices.

The wording of Art. 82 makes it clear that it is not market dominance as such that is prohibited, but its abuse. Further, the dominant position may be that of a single company or a collective dominant position, held by several companies.

Dominance is an abstract word, but used in a commercial context it refers to a position of power for an undertaking in relation to a specific product market and within a relevant geographical market.

Fortunately, dominance was considered in detail by both, the European Court of Justice (ECJ) and the Commission. One of the early cases tackled by the ECJ in great length was the United Brands¹ case; the market power of this company (engaged in the large-scale international fruit business) derived substantially from the degree to which it had integrated its various activities. Although it also had a market share in the four relevant Member States of between 40 and 45%, its strength and dominance derived from the fact that at each stage of the production and distribution process it was able from its own resources to accept and react to variations in demand. It alone was capable of carrying over 2/3 of its production in its own fleet of specially designed ships. It alone was able to advertise the ‘Chiquita’ brand name and to revolutionise the commercial exploitation of the banana. Its large capital investment in purchasing and equipping its plantations allowed it to increase its source of supply, so as to overcome any source of disease or bad weather. It was enabled by the scale of its capital investment to introduce a distribution system for a highly perishable commodity through the extensive use of refrigeration facilities, giving it a strategic advantage over all its competitors. The combined effect of these measure led the Court to characterise the concept of dominance as follows:

Not long after, in the Hoffmann-La Roche² case, the Court gave a rather more extended definition to the concept of dominance:

In a Notice³ in 1997, preceded by consultative drafts, the Commission sets out the basis upon which it defines both, relevant product and geographic markets for the purposes of Community legislation. Relevant product markets are defined as comprising ‘all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the product’s characteristics, their prices and their intended use.’ Relevant geographic markets are defined as ‘… the area in which the undertakings concerned are involved in the supply and demand of products and services, in which the conditions of competition are appreciably different in those areas.’ The Commission begins by pointing out that this concept of relevant market is closely related to the particular objectives with which the individual case is concerned. In an Art. 82 case, its focus is on whether the undertaking in question can behave, to an appreciable extent, independently of competitors and its customers; and this ability will often, though not invariably, follow from its possession of a large market share in the supply of products or services. The assessment inevitably has to work backwards in time since the determination of whether a breach of Art. 82 has occurred is not made in the abstract but in respect of a particular past period, which may only cover a few months, but is more frequently a period of some years.

The first limb of the tests to be applied in identifying the relevant market is that of the geographic market. The search for the relevant geographic market begins with the words of the Article: ‘… within the common market or in a substantial part of it …’ Thus, a Member State’s territory will often provide a natural geographic setting equivalent to the commercial area in which competition is taking place. In early cases, the assumption was readily made that geographic markets would be, if not the entire area of the Community, then no smaller than an individual Member State. This tendency was first challenged in the Sugar Cartel case⁴ where the Court accepted the Commission’s contention that a substantial part or region of a Member State could also constitute a market given a substantial volume of sales.

Several other cases have been decided by the Commission and the Courts since the Notice; a recent case is that of Kish Glass & Co Limited v Commission in which Kish complained that another company (Pilkington) had abused its dominant position in the glass market in Ireland. The CFI upheld the Commissions decision that the relevant market was the market for the sale of float glass of all thickness throughout the Community, or at least the northern part of the Community, and not the Irish market which is much narrower. On the geographical extent of the market, the impact of transport costs did not alter the facts that one third of demand in Ireland was met by Continental suppliers and that price differences in various Member States did not indicate the existence of separate markets. Moreover, an analysis of costs did not undermine the Commission’s conclusion.

The term ‘substantial’ ought not to be taken as too high a hurdle, and ought not to be confused with proportions of the overall community market. Where the relevant geographic market was, again, the island of Ireland (that is, the entire territory of one member state and part of the territory of another) it was ‘undeniably’ a substantial part of the common market without it being necessary to consider the share of the Community market in the relevant product represented by the Irish market.⁵

On the other extreme, the Commission identified the relevant geographic market for platinum group metals as the world;⁶ the fluidity of the international market for protection and indemnity insurance in the shipping sector;⁷ produced the same result.

The definition of product markets is, if anything, even more elusive. There are few products for which there are not substitutes of some kind, and the interrelationship of quality, price, and availability is in nearly all cases difficult to analyse with exactness.

As a general rule, of course, a party libelling an abuse of a dominant position will seek to define the product market as narrowly as possible, whilst the undertaking so libelled will seek to define it as broadly as possible in order to minimise its position in it and so escape the burdens of Art. 82.

Cross-elasticity (or substitutability) of demand between substitute products has been at issue in a number of cases, notably United Brands, in which the banana’s unique characteristics were considered in great detail in the context of an ultimately unsuccessful argument that it should be considered as part of a wider product market involving fruit of different kinds. The Court upheld the Commission’s view that in terms of year-round availability, price, suitability for particular types of consumer, notably the very young and very old, and other characteristics, the product market could not be said to include any other kind of fruit, a decision whose effect increased the market shares held by United Brands.

Although Art.82 is frequently applied to the larger undertakings, it is important to note that the relevant product market need not be a large one. In the Hugin⁸ case, the Commission had taken a decision that the non-dominant supplier of cash machines held a dominant position in the market for spare parts for those machines. The Court agreed with the Commission that based on arguments relating to cross-elasticity, the spare parts were not interchangeable with spare parts for other machines, and neither was it reasonable to suggest that a consumer purchase a new cash register from a different supplier as an alternative to fitting a spare part in an existing machine.

The case has been followed since⁹ but it has raised concerns. It may be argued that a consumer choosing an initial purchase (in Hugin a cash register, and in Volvo, a motor car) must consider, as part of that decision, aspects such as costs of maintenance and servicing, of which the availability of spare parts is just one element. In neither the above cases did the undertaking hold a dominant position in the primary market, and as the consumer is able to make a choice at this stage it is very much at the disadvantage of the undertaking if it has thrust upon it unexpected and unwelcome responsibilities in the secondary market, for which it may not have budgeted, following a finding of dominance in that market.

The conditions on the basis of which Art. 82 does or does not apply are assessed by reference to present circumstances and not on the basis of developments that could take place at some unspecified time in the future.¹⁰ Hence, a possible future change in the definition of the market cannot avoid a finding that, on the basis of the present state of the market, the undertaking concerned occupies a dominant position. On the other hand, markets tend to be dynamic rather than static; and there is a temporal dimension to dominance. If the evidence does not suggest that the alleged dominant undertaking is capable of holding on to the emblems of dominance for a sufficiently long period of time, the proper conclusion is likely to be that it is not dominant at all. Under the same line of reasoning, the Commission has correctly pointed out that the fact that an undertaking is not currently in a dominant position is no proof that it never was in a dominant position.¹¹

Obviously, there may also exist a power that is exerted by an undertaking not only in the market, but upon the structure of the market as well. Having established the relevant market (product, geographical area, and time period), the next step is to determine the strength in that market of an undertaking alleged to be dominant. Market strength turns upon a number of indicators, no one of which may necessarily be determinative, but the most important is market share.

The classic statement as to the role of market share in determining dominance is to be found in the Hoffmann-La Roche case, which is worth quoting at length. The ECJ held that:

While Hoffmann-La Roche may serve as a useful guide to the approach likely to be taken to evidence relating to market shares, the Court has not always been consistent in its deliberations. In the AKZO¹² case, for instance, the Court, having first cited Hoffmann-La Roche to make the point that very large market shares may by themselves be conclusive evidence of dominance, held that a share of 50% would satisfy this test. Clearly, where there is a monopoly, whether by virtue of statutory privilege or of simple absolute market dominance, there is by definition no competition, and so necessarily dominance.

In other cases, the Court ruled that an 85% market share is determinative of itself of a dominant position except in wholly exceptional circumstances;¹³ a share of 70-80% is ‘in itself, a clear indication of the dominant position’;¹⁴ in United Brands a market share of 40-45% was held to constitute dominance where the competition was highly fragmented, the next largest undertaking enjoying 15-20% of the market, the rest significantly less; and dominance was found in British Airways¹⁵ with a market share of just under 40%, being 2.2 times the share of its two largest rivals combined; and a share below 40% is highly unlikely to permit the finding of dominance unless other evidence is overwhelming, although the Commission in its 10th Report on Competition Policy has suggested that an undertaking could still be found to enjoy a dominant position with a market share as low as 20%. There is, however, no case in which an undertaking with a market share of below 40% has been held to occupy a dominant position by the ECJ. Further, a market share of 10% has been confirmed by the ECJ as too small to constitute dominance in the absence of exceptional circumstances.¹⁶

If dominance is established, the second stage in the Art.82 analysis asks whether the dominant position that the company holds has been abused. As already pointed out at the very beginning, it is not dominance per se, but the abuse of a dominant position that brings Art. 82 into play. The Article does not contain a comprehensive definition of abuse, but does refer to a non-exhaustive list of examples:

Whilst the language of Art. 82 (‘abuse of … a dominant position’) suggests that there must be a cause and effect between the dominant position and its abusive exploitation, it provides no guidance as to where in the market an abuse occurs. Abuse will occur most frequently directly in the product market in which the undertaking is dominant, but it need not do so in order to be caught by Art. 82. As the ECJ put it in the Tetra Pak case:

Whether or not this is so must be considered in the light of the specific circumstances of each case. A necessary link between dominated market and associated market will be present where an undertaking uses market strength, a function of dominance in one market, in order to reserve a complimentary, ancillary or dependent activity in a neighbouring but distinct associated market in which it is not dominant,¹⁷ or where the associated market is a sub-market of the dominated market.¹⁸

Set aside the exemplicative conduct that is provided in Art. 82, abusive conduct may be of the nature of ‘exploitative’ abuse, simple exploitation of consumers in the relevant market, ‘exclusionary’ abuse, the use of dominance to prevent or hinder competition from other undertakings, or both. It is necessary to show that abuse affects the structure of competition or that it produces financial or competitive advantage to the dominant undertaking, prejudice to the interests of the consumer being sufficient.¹⁹ The concept of abuse is an objective one, so that conduct of a dominant undertaking may be abusive even in the absence of any fault.²⁰

Equally important to bare in mind about Art. 82 is that it applies only to anti-competitive conduct engaged in by undertakings on their own initiative. If such conduct is required of undertakings by national legislation or, if national legislation creates a legal framework which itself eliminates any possibility of competitive activity on the part of undertakings, Art. 82 (like Art. 81) does not apply because the resulting restriction of competition is not attributable to the autonomous conduct of the undertakings concerned. In such a situation, the origin of the distortion of competition on the relevant market lies in the national legislation itself, and the solution lies in attacking that legislation, generally under Art. 10 of the Treaty (formerly Art. 5) combined with the competition rules or any other specific but relevant Treaty provision.

In the case of SS&G,²¹ the Municipality of Copenhagen had arranged for the collection of non-hazardous waste at a particular location. SS&G applied for approval by the Municipality of the recycling of building waste within the boundaries of the Municipality. The latter refused, informing the applicant that building waste should be processed at a particular processing plant. A dispute broke out and was referred to the ECJ with reference to Art. 86 (formerly Art. 90) of the Treaty. So far as the competition issues in the case were concerned, the ECJ concluded that three undertakings within the area of the Municipality had been granted exclusive rights (within the meaning of Art. 86) because they alone were able to process waste in the locality. On the assumption that there might be a dominant position (no reference was made to collective dominance), the ECJ turned to the question of abuse and said that the grand of an exclusive right for part of the national territory does not, in itself, constitute an abuse. The ECJ went on to find that the undertakings in question had been entrusted with a task of general economic interest and that the grant of exclusive rights had been necessary for the performance of that task, even if it led to a restriction of competition. Lastly, the Court also noted that, according to Copenhagen, each undertaking was free to determine its own prices and that if Copenhagen considered them excessive it could request the Danish competition authorities to intervene.

One of the more interesting points in the Compagnie Maritime Belge²² case was whether or not inducement of government action could constitute an abuse. The ECJ thought not because mere inducement could amount to nothing more than an attempt to sway a government body in the exercise of its discretion, the implication being that if the government decision went in a particular way, the responsibility lay with the government and not with the undertakings involved. However, on the facts, the Conference had sought to exercise alleged contractual rights against the government in question and that, the Court decided, was enough to constitute an abuse.

Price lies of course at the heart of competition and is the medium through which it is normally waged.

The opportunity for a dominant firm to hoist its prices freely is perhaps the most immediately obvious attribute of market power and independence from competition. Such pricing needs to be controlled. It is likely to prove inefficient, for it will distort the allocation of resources. It is also likely to prove unacceptable on distribution grounds, for it transfers wealth from the consumer into the hands of the already powerful enterprise.

According to the Commission, United Brands was charging excessively high prices for its branded bananas. Although this point was not found proved by the Court, it nevertheless agreed with the Commission on the matter of principle. An excessive price was defined by the Court as one which bears no reasonable relation to the economic value of the product. However, the Court stopped short and supplied no indication as to what might constitute an ‘excessive’ profit margin or a fair price. In the British Leyland²³ case, the ECJ held the fee demanded by the dominant firm for the performance of an inspection ‘disproportionate to the economic value of the service provided’. This implies an unstructured calculation of economic value uniformed by the price the competitive market would actually stand. What one can be certain about is that even economists would disagree as to what constitutes the economic value of a product, and indeed whether it can be accurately ascertained at all.

Unfair pricing may take forms other than high pricing. Unfairly low pricing may also constitute an abuse. This is the notion of predatory pricing through which an already strong company may seek to protect or enhance its existing market strength by squeezing potential competitors out of the market. In AKZO the ECJ supplied a working definition of predatory pricing as prices set lower than average variable cost. The definition was reapplied subsequently in Tetra Pak II, in which the Court added that predatory pricing was always abusive conduct for it had ‘no conceivable economic purpose other than elimination of a competitor’.

Accordingly, a case-by-case approach is necessary, which can only mean unpredictability, whilst the Court’s ruling in AKZO is likely to mean that in practice the Commission will frequently be able to act informally to control the pricing policies of dominant companies.

Unfair pricing may also extend to pricing policies that tend to treat the Community as divisible into separate national markets. Discriminatory pricing has been condemned under Art. 82 as part of the Community’s market integration policy. United Brands was found to have acted in violation of Art. 82 by setting different price levels in Rotterdam, point of entry into the EC, for customers in different states. The ECJ said that pricing in accordance with local market conditions is permissible only where the company is closely involved with and taking commercial risks on the local market in question. Indeed, Art. 82 does not impose upon dominant undertakings a duty to charge identical prices for all transactions; quantity discounts are, for example, normally unobjectionable. It is the artificial price difference, and certainly price discrimination based upon nationality of the buyer which amounts to abusive conduct unless it can be objectively justified. Attempts further to seal off the home market by offering lower prices in border areas where imports might be more attractive to buyers is equally abusive, as is a policy of ‘export rebates’ whereby rebates are offered to buyers intending to export their final product and is a differential tariff structure offered by a rail carrier so as to distort freight movement to its advantage.²⁴

Closely associated with discriminatory pricing are loyalty or fidelity rebates, whereby a dominant undertaking offers price rebates, bonuses or other form of payment in return for an undertaking from a buyer or agents not to purchase from the formers competitors. In the British Airways/Virgin²⁵ case, the Commission concluded that the commission schemes offered by BA were related to loyalty rather than no efficiencies because, among other things, the maximum commission could be earned even by a travel agent selling an ‘inefficiently small number of tickets’.

Where supplies or services are refused in order to reduce or eliminate competition, such a refusal will constitute abuse. The first case to consider refusal to supply was Commercial Solvents.²⁶ In this case, there was a refusal to supply nitropropane or its derivative, aminobutanol, a raw material for the manufacture of ethambutol. The Commission found that the supplier had ‘a dominant position in the common market for the raw material necessary for the manufacture of ethambutol’ by virtue of its ‘world monopoly in the production and sale of nitropropane and aminobutanol’, and that refusal to supply constituted an abuse under Art. 82. The ECJ confirmed the Commission’s finding of a dominant position, stating explicitly that the question was ‘not whether the party who was refused supplies, by adapting its installations and its manufacturing processes, would have been able to continue its production of ethambutol based on other raw materials’, but rather that ‘only the presence on the market of a raw material which could be substituted without difficulty for nitropropane or aminobutanol for the manufacture of ethambutol … could invalidate the argument that the supplier has a dominant position within the meaning of Art. 82’. Furthermore, the Court said that ‘it is in fact possible to distinguish the market in raw material necessary for the manufacture of a product from the market on which the product is sold’.

Caution must be given with the essential facilities doctrine if it becomes too accessible a remedy for neutralising a legitimate advantage enjoyed by a dominant competitor or justification for seeking access to an infrastructure in which it may have invested heavily to create. In its most recent consideration of an implicit essential facilities doctrine in Bronner²⁷ the ECJ said that an undertaking which controlled a very large share of the daily newspaper market and also the only nation-wide home delivery system for newspapers in a Member State could not be compelled by Art. 82 to provide access to the system to a competitor because of the existence of other distribution systems (post, shops, kiosks) and the possibility of the competitor setting up its own home delivery scheme. The test therefore seems to be that access to the facility must be indispensable- according to the Court, ‘inasmuch as there is no actual or potential substitute in existence’ or, the dominant undertaking has a ‘genuine stranglehold’ on the related market. Whilst the Court has not provided certainty, it has stated a strong case for a more measured use of the Art. 82 powers in this area.

Related to refusal to deal is dealing or supplying on less favourable or discriminatory terms. These fall within the rubrics of ‘unfair trading conditions’ [Art. 82(b)] or ‘applying dissimilar conditions to equivalent transactions’ [Art. 82(c)], and are prohibited. It applies equally to terms for access to essential facilities. According to the 1998 World Cup²⁸ case, dealing on discriminatory terms based upon nationality or residence is a clear breach of Art. 82. In this case the Commission, rather than relying on data, information and facts and applying any tests, merely exercised its judgement/discretion and made a series of statements saying the World Cup was a separate market and then proceeded to state that the requirement of a postal address in France in order to obtain tickets was discriminatory and imposed unfair trading conditions; this caused a limitation of the market, especially since the demand was greater than the number of tickets offered.

Finally, together with Art. 81, Art. 82 is an operative provision of the Treaty giving flesh to the core activity prescribed by Art. 3(1)(g) of creating ‘a system ensuring that competition in the internal market is not distorted’. ‘But’, as the CIF put it in the Tetra Pak case, ‘they nonetheless constitute, in the scheme of the Treaty, two independent legal instruments addressing different situations’.

Notwithstanding the independent operation of the two Articles, the Commission and both Courts have made it clear that the application of one cannot prevent the application of the other. In fact, the ECJ stressed early on, in the Continental Can²⁹ case, that because the two articles ultimately pursue the same objective, they ‘cannot be interpreted in such a way that they contradict each other’.

At all events, from the case-law on the relationship between Art. 81 and 82, it appears that the Commission through experience is now better aware of the type of situation in which it may be able to rely on both Articles to deal with separate aspects of the case.

1Case 27/76 United Brands v Commission, [1978] ECR 207.

2Case 85/76 Hoffmann-La Roche v Commission, [1979] ECR 461.

3OJ 1997 C372/5, Notice of definition of the relevant market for the purposes of Community competition law.

4[1975] ECR 1991. The Court here accepted Southern Germany as a geographic market for sales of sugar.

5Case T-69/89 Radio Telefis Eireann v Commission, [1995] ECR II-485.

6Decision 97/26 (Gencor/Lonrho) OJ 1997 L11, upheld on review as Case T-102/96 Gencor v Commission, [1999] ECR II-753.

7Decision 1999/329 (P&I Clubs) OJ 1999 L125/12.

8Case 22/78 Hugin Kassaregister AB and Hugin Cash Registers Ltd v Commission, [1979] 3 CMLR 345.

9Case 238/87 Volvo AB v Erik Veng (UK) Ltd, [1989] 4 CMLR 122.

10Case 97/181 Gencor v Commission, [1999] ECR II-753.

11Decision 1999/243 Transatlantic Conference Agreement, OJ 1999 No. L95/I.

12Case 62/86 AKZO v Commission, [1991] ECR I-3359.

13Case T-228/97 Irish Sugar v Commission, [1999] ECR II-2696.

14Hilti case, above n.19.

15Decision 2000/74 (British Airways) OJ 2000 L30/1.

16Case 75/84 Metro-SB-Grobmarkte v Commission (No 2), [1986] ECR 3021

17Cases 6, 7/73 Commercial Solvents v Commission, [1974] ECR 223; Decision 98/190 Flughafen Frankfurt/Main, OJ 1998 L72/30.

18AKZO case; Cases C-241, 242/91P RTE & ITP v Commission; [1995] ECR I-743.

19Decision 2000/12 Comite Francais d’Organisation de la Coupe du Monde, OJ 2000 L5/55.

20Hoffmann-La Roche case; Case T-65/89 BPB Industries v Commission [1993] ECR II-389.

21Case C-209/98 Sydhavnens Sten & Grus v Kobenhavns Kommune.

22Cases C-395, 396/96P Compagnie Maritime Belge Transports v Commission, [2000] 4 CMLR 1076.

23Case 226/84 British Leyland v Commission, [1986] ECR 3263.

24Irish Sugar case; Case C-436/97P Deutsche Bahn v Commission, [1999] ECR I-2387

25Decision 2000/74 (British Airways) OJ 2000 L30/1.

26Cases 6, 7/73 Commercial Solvents v Commission, [1974] ECR 223.

27Case C-7/97 Oscar Bronner v Mediaprint, [1998] ECR I-7791.

28Decision 2000/12 (Comite Francais d’Organisation de la Coupe du Monde) OJ [2000] L5/55.

29Case 6/72 Europemballage Corporation & Continental Can Co. Inc. v Commission, [1973] ECR 215