European Commission Reviews Rules on Dominance

As part of its programme to modernise competition law, the European Commission has now turned its attentions to Article 82 of the EC Treaty. Article 82 (and its equivalent Chapter II of the Competition Act in the UK) prohibits companies that are in a dominant position from abusing that position.

Article 82 only applies to companies that are in a dominant market position. Even then, it is important to remember that being in a dominant market position is not in itself a breach of competition law. There must also be an abuse (see below). Despite this, there is an onus on dominant companies to take extra care not to abuse their position, otherwise they risk, amongst other things, being fined by the competition authorities. By way of an example, for abusing its position in the personal computer operating systems market, Microsoft recently received a hefty fine of almost €500 million and was made subject to a number of other remedies which it is currently appealing.

The term ‘abuse’ under Article 82 covers a wide variety of conduct relating to pricing and the supply of goods and services. The Commission has therefore chosen to focus the first phase of its review on so-called exclusionary abuses, which it considers to be potentially more damaging. These types of abuses are considered especially harmful as they prevent the competitors of a dominant company from effectively competing with it. Examples of such abuses include discriminatory pricing, exclusive dealing and refusals to supply. Exploitative abuses, such as excessive pricing, will be dealt with in phase two of the Commission's review.

• Commissioner Kroes has been quick to point out that it is consumers, and not competitors, who should be protected by Article 82. She has publicly acknowledged that aggressive competition by dominant companies can ultimately benefit consumers as prices are driven down. The Commission's intention is to focus on the medium and long-term, rather than only the short-term, effects of dominant companies' strategies to help ensure that the interests of consumers are not overlooked.
• In line with the focus on protecting consumers, the Commission is considering whether only pricing abuses which exclude ‘equally efficient’ competitors should be regarded as abusive, to avoid artificially protecting inefficient competitors. In order to measure whether a competitor is as efficient, the Commission is contemplating whether to use the costs incurred by a dominant company as a reference point.

• In many cases, it is enough at the moment for the competition authorities to demonstrate that a company is engaging in a particular course of conduct, for example, predatory pricing (selling at below cost) in order to find a breach of Article 82. As part of the review, Commissioner Kroes has signalled a possible change in policy direction towards this category of so-called ‘per se’ abuses, so that they would only be condemned if actually, or at least potentially, they had anti-competitive effects.

• As part of its proposals, the Commission is also considering introducing an ‘efficiency defence’ to Article 82. Such a change would be consistent with the Commission's acknowledgement that some forms of behaviour, such as the offering of rebates, do actually benefit consumers. This proposal, which should be welcome news for dominant companies, might mean that conduct would be exempt from Article 82 if it fulfilled certain conditions, for example that:-

• the conduct produces, or is likely to produce, economic efficiencies;
• the efficiencies outweigh the negative effects of the conduct;
• consumers will not be harmed;
• the efficiencies could only be attained through the conduct; and
• competition will not be eliminated in a substantial part of the market.

This review should hopefully lead to more clarity about the scope and interpretation of Article 82, which will in turn have significant implications for the application of Chapter II of the Competition Act, which is the analogous provision in UK competition law.

The Commission anticipates producing guidelines before the end of the year setting out the types of behaviour which are/are not permissible under Article 82, which will be to the benefit of all companies. These guidelines should be considered closely by dominant companies because of the sanctions if they breach Article 82 - they could be fined up to a maximum of 10% of their world-wide turnover, they may be subject to third party actions for damages and, if the infringement is by way of an agreement, this could be deemed void as well.

Companies in a dominant position should carry out a ‘health-check’ of their practices. It is likely that, as a result of the review, they will be granted more flexibility in the future, especially with regard to the category of per se abuses referred to above. However, the greater legal clarity arising from these proposals may well encourage customers and smaller competitors to challenge the behaviour of dominant companies.

In the meantime dominant companies should consider inserting a ‘subject to review’ clause in any agreement they are about to conclude if it might be affected by the Commission's review of Article 82.