Article 102 of the Treaty on the Functioning of the European Union

Application

The wording of the provision gives rise to a number of issues to consider in the application of Article 102; namely, the concept of  ‘one or more undertaking’, ‘Relevant market’, ‘Dominant position’ and ‘Effect on trade between member states’.

Undertaking

An entity must be an ‘undertaking’ to be subject to Community competition law and therefore Article 102. The European Court of Justice (ECJ) in Hofner v Elser states that “The concept of an undertaking encompasses every entity engaged in economic activity regardless of the legal status of the entity and the way in which it is financed.”  The European courts have ruled that Acts of, solidarity (such as the provision of public health care),  public interest (such as the improvement of air navigation safety),  and the protection of the environment  are not economic in nature and therefore fall outside the application of European Community competition rules. Article 102 is not confined to actions of single undertakings as the inclusion of the phrase 'one or more undertaking' leads to the inclusion of collective dominance.

Definition

Collective dominance occurs when two or more businesses with some degree of connection influence the structure of a market through their conduct or through concerted strategic decisions.

Threshold

The necessary degree of connection or relationship between the entities that would be sufficient for a finding of collective dominance would depend on whether a broad or narrow interpretation is adopted. As illustrated through case law, businesses within the same corporate group, such as a business conglomerate, or within a single economic entity, such as a multi-national company with subsidiaries, can be regarded as having an adequate connection to establish the presence of  collective dominance. This reflects a narrow interpretation of what would constitute collective dominance for the purpose of art 102 TFEU.
An alternative approach to establishing a relationship between two or more entities for the purposes of determining collective dominance could include a broad interpretation. This would encapsulate legally and economically independent firms within a specific market with some type of economic link such as an agreement or a licence.
In Almelo, the court explicitly stated that a relationship can be found between two or more entities by the presence of identical conduct on the market.

Burden of proof

As asserted in Microsoft v Commission the burden of proof rests on the defendants/alleged firm(s) to provide objective justification – which cannot be vague or theoretical arguments – to disprove a claim of collective dominance brought before the court.
Where such a justification is raised, it rests on the Commission to disprove the arguments and evidence relied on by the dominant firms.

Relevant Market

Defining the relevant market is a vital precondition to assessing dominance.  Market definition can be used to establish the boundaries of competition between undertakings, with the purpose of identifying the competitive constraints faced by the firms.
The commission measures these competitive constrains in both the Market and Geographical dimension. With the relevant market within which to assess competition being a combination of both approaches. With the competitive constraints assessed via demand substitution, supply substitution and potential competition.

The Geographical Market

The Commission defines Geographical market as a "market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area."

Cellophane Fallacy

The existence of the cellophane fallacy implies that market definition in Article 102 cases needs to be particularly carefully considered and that any single method of market definition, including in particular the SSNIP-test, is likely to be inadequate. It is necessary to rely on a variety of methods for checking the robustness of possible alternative market definitions.

Dominance

A finding of dominance requires a two stage process. First, consideration must be had to the relevant market to which the undertaking operates upon: both the relevant product market and the relevant geographic market. Second, one the market has been established, the Commission must decipher whether the undertaking enjoys a dominant position upon the given market. A fining of dominance derives from a combination of several factors, Paragraph 12 of the Commission's guidance highlights three factors that the Commission will consider:
“(1) constraints imposed by the existing suppliers from, and the position on the market of, actual competitors.
(2) constraints imposed by the credible threat of future expansion by actual competitors or entry by potential competitors."

(3) constraints imposed by the bargaining strength of the undertakings customers.”

Potential Competitors

Paragraph 16 of the Commission’s guidance emphasises that the Commission will consider the potential impact of entry by new customers onto the market as well as the expansion of existing competitors. In doing so, the Commission must consider whether the entry to the market, or expansion within the market, (or threat to), is ‘likely, timely and sufficient’ enough for the undertaking to change its behaviour.
Paragraphs 16 and 17 of the Commission’s guidance gives clarification on how the criteria are to be applied
To be ‘likely’, the Commission must look at how possible it is that the expansion, or entry into the market, will occur. The Commission must take into account barriers to the market: where there are barriers in place, it is difficult for a new entity to enter the market. Types of barriers that the Commission may consider are listed in Paragraph 17. Richard Whish summaries these as “legal barriers, economic advantages enjoyed by the dominant undertaking, costs and network effects that impede customers from switching from one supplier to another and the dominant firm’s own conduct and performance".
To be ‘timely’, the entry or expansion must be ‘sufficiently swift’ to act as a deterrence upon the undertaking from exercising dominance.
To be ‘sufficient’, the entry or expansion must have a significant impact to which it would deter the undertaking from exercising its dominance. The entry or expansion cannot be based on a small scale to which its impact would be limited.

Countervailing Buyer Power

Paragraph 18 of the Commission’s guidance acknowledges that customers, as well as competitors, have the power to constrain competition. In doing so, the Commission must look at the ‘sufficient bargaining strength of the customer’: Paragraph 18 sets out features that may be discussed to decipher a customer’s bargaining power: 
“the customers size or their commercial significance for the dominant undertaking and their ability to switch quickly to competing suppliers, to promote new entry or to vertically integrate, and to credibly threaten to do so."
In application, Richard Whish acknowledges that it is “more likely that large and sophisticated customers will have this kind of countervailing buyer power than smaller firms in a fragmented industry".
The Commission’s guidance goes on to clarify, in Paragraph 18, that the countervailing buyer power will not be considered a sufficient restraint where only a particular, or limited, number of customers are shielded from the market share exercised by the dominant undertaking.
Motorola:
The case considered the significance of countervailing buyer power. Motorola presented the argument that it was not a dominant undertaking due the countervailing buyer power of Apple. Whilst the Commission recognised the need to consider customer’s buying power, the Commission, in finding Motorola to be dominant reinforced the guidance that whilst a customer may have significant buying power, this may not protect all of the undertaking’s customers.

Summary

Following Paragraph 13 of the Commission’s guidance, where the three conditions are satisfied, it is likely, the Commission will find the undertaking to be dominant. Paragraph 1 of the Commission’s guidance reinforces that whilst dominance in itself is not illegal, once dominant, the undertaking adopts"a special responsibility not to allow its conduct to impair competition on the common market".

Commissions enforcement priorities

The way in which the commission in the EU deals with cases of dominance is vastly different to that of their US counterparts. The EU commission take a very active stance on the prevention of the abuse of dominance, whereas the US Government take a much more ‘Laissez-Faire’  approach and leave the markets to their own devices unless they need to step in to sort out problems. Outlined in the Guidance of enforcement priorities for Article 102 of the TFEU. The EU commission takes all sufficient factors into account when trying to enforce Article 102 , and they can come to a conclusion on whether or not to put their time into a case taken to them by the effected parties. The German concept of ordoliberablism is put to effect by the EU commission by them using all of their powers to aide the market into running as efficiently as it possibly can. This concept of commission intervention is not used in the United States, and by the EU using it this shows how the two differ in their ideologies and concepts.
Generally, price based exclusionary conduct is seen as beneficial to the consumer, as they will get lower prices for goods and services when firms compete to be the cheapest. However, when the price strategies of a firm may be seen to be hampering competition from competitors which are considered to be as efficient as the dominant undertaking , then the government would step in to change this. Other types of undertakings such as exclusive dealing  or predatory pricing  will be intervened upon much sooner than competitive pricing as they are more serious and can cause a much higher risk to consumers in the market.

Summary

Using the Guidance on Enforcement priorities for Article 102, it outlines the many different types of ways that a ruling body should step in to stop a myriad of strategies that firms use to abuse a position of dominance. The commission is unable to bind the European courts when applying the law, The two step case is used as shown in Paragraph 9  to aide the government in penalising firms that abuse their position of dominance. There are some commenters that have suggested that the guidelines should be removed as all cases are individual and require a full observation of the scenario before a decision has been made. However, using Advocate General Mazak’s opinion in TeliaSonera, the commissions guidance may be used as a ‘useful point of reference’, without having the ability to bind the courts to a decision.

Effect on trade between member states

The court of justice ruled in Commercial solvents  that the requirement of an appreciable effect on trade between member states would be satisfied where conduct brought about an altercation in the structure of competition in the internal market.
The commission provides further guidelines on the effect of trade concept contained in Articles 101 and 102 TFEU, detailing the general principles,  the concept of trade between member states. The notion of May effect  and the concept of appreciability.

1. Exclusionary abuse

The definition of exclusionary abuse is characterised as “conduct engaged in, by a dominant undertaking which is capable of preventing competitors … from profitability entering or remaining active in a given market”, meaning that it will have an indirect effect on consumers. The conduct will either ‘competes on the downstream market and is acting to foreclose that market to its own advantage’ or ‘distorts competition on the upstream market between itself and its competitors by introducing exclusive purchasing obligation.

Limiting production

Under Article 102(b), "limiting production, markets or technical development to the prejudice of consumers" is considered an abuse by a dominant undertaking. An example was found in Porto di Genova [1991], where a shipping port refused to raise expenditure and update technology. This limited the amount of cargo that the port could deal with to the detriment of some of its users.

Price discrimination

Price discrimination falls under Article 102(c), whereby an abuse is "applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage". An example of this could be offering rebates to industrial customers who export your company's sugar, but not to Irish customers who are selling their goods in the same market as you are in. Investopedia provides that price discrimination charges customers different prices for the same product or service, for example where consumers buy airline tickets several months in advance in comparison to those buying last minute. In United Brands v Commission, the Court of Justice recognised that a dominant firm may charge different prices to reflect the competitive market.

Tying

Under Article 102(d) "tying" is defined as "making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts." Tying one product into the sale of another can be considered abuse too, being restrictive of consumer choice and depriving competitors of outlets. This was the alleged case in Microsoft v. Commission leading to an eventual fine of €497 million for including its Windows Media Player with the Microsoft Windows platform. A refusal to supply a facility which is essential for all businesses attempting to compete to use can constitute an abuse. One example was in a case involving a medical company named Commercial Solvents. When it set up its own rival in the tuberculosis drugs market, Commercial Solvents was forced to continue supplying a company named Zoja with the raw materials for the drug. Zoja was the only market competitor, so without the court forcing supply, all competition would have been eliminated.

Bundling

Bundling and tying are very similar, Whish indicates that bundling arises in a situation where two products are sold together in a single package at a single price. Bundling differs from tying merely because it lacks the element of compulsion. Issues of bundling have emerged in a series of complaints in Streetmap EU Ltd v Google Inc & Ors. Streetmap involved the interaction of competition between online search engines and competition between suppliers of online mapping services. The Court concluded that the creation of ‘OneBox’ did not have an appreciable effect on Streetmap’s ability to compete. However, in a more recent decision, in 2018 the Commission fined Google €4.34 billion for illegal practices regarding Android mobile devices to strengthen dominance of Google's search engine. Earlier this year Google were fined a third time by the European Commission for abusing its market dominance by restricting third-party rivals from displaying search advertisements.

Predatory pricing

Predatory pricing is a controversial category. This is the practice of dropping prices of a product below costs so that one's smaller competitors cannot cover their costs and leave the market. The Chicago School holds predatory pricing to be impossible, because if it were then banks would lend money to finance it. However, in France Telecom SA v Commission a broadband internet company was forced to pay €10.35 Million for dropping its prices below its own production costs. It had "no interest in applying such prices except that of eliminating competitors" and was being subsidised to capture the bigger share of a booming market.In contrast to France Telecom, Tetra Pak International SA illustrates an extension of European creativity in finding that Tetra Pak had abused its dominant position even though it was dominant in one market but not dominant in the market in which the abuse took place. The Court of Justice held that the abusive behaviour was intended to benefit Tetra Pak’s position in the market. This was based on the mere fact that there were ‘very close associative links’ between the two markets in which Tetra Pak operated.

Margin squeeze

Margin squeeze was considered in the case of KonKurrensverket v TeliaSonera Sverige, where the Court of Justice established that it exists in its own independent right. Advocate General Mazak considered that the abusive nature derived from the unfair nature of the spread between the dominant undertaking’s prices for wholesale access and its retail prices and the fact that the undertaking’s wholesale products are indispensable to competition on the downstream market. This is similar to Slovak Telecom v Commission, by where the Commission found that the undertaking formed by Slovak Telekom and Deutsche Telekom had committed a single and continuous infringement concerning broadband services in Slovakia between 12 August 2005 and 31 December 2010.

Rebates

Article 102 does not state that offering rebates to customers is abuse, however in the case of Intel v Commission it may occur. The Commission found that Intel acted unlawfully by granting rebates to four computer manufacturers (Dell, Lenovo, HP, and NEC) on condition that they purchased from Intel. In its decision it fined Intel €1.06 billion for abuse of dominance through exclusivity rebates. This also illustrated the Courts recognition for an effects based approach despite the relatively recent cases of Solvay and ICI, where the Court has seemed reluctant to move away from a formalistic approach.

Exclusive dealing agreements

An agreement whereby a customer is required to purchase all or most of a particular type of goods or services from a dominant supplier and is prevented from buying from any supplier other than the dominant firm. In Hoffmann the Court of Justice held that it may be abusive for a dominant firm to require a customer to buy ‘most of its requirements’ from that firm. The case of Soda-ash, the Commission fined Solvay €20 million and ICI €10 million for requiring customers to enter into long-term indefinite requirements contracts.

Refusal to Supply

The Court of Justice gives as an example ‘an undertaking which has a dominant position in the upstream market in refuses to supply a new or existing customer on a  downstream market on which it is also present risks eliminating all competition on the part of this customer’. The Guidance is only concerned with refusals to supply which risk vertical foreclosure, however, refusals to supply can also be a concern with respect to horizontal foreclosure; refusal to supply a distributor as a disciplining measure for instance.

Refusal to supply intellectual property rights

Refusing to license intellectual property rights or providing interoperability informationis regarded as improper exercise of intellectual property rights by a dominant firm. The factors that inform the Commission’s enforcement are explained in its Guidance.

Miscellaneous other non-pricing abuses

Conduct that does not fit within the scope of the aforementioned categories. Examples include harming the competitive structure of the market, vexatious litigation and preferential treatment.

2. Exploitative abuse

This type occurs whereby a dominant firm using dominant position to exploit consumers without losing them through conduct like price increase and production limitation. There is no legal definition of ‘exploitative abuse’ under Article 102 but it can be taken as ‘any conduct that directly causes harm to the customers of the dominant undertaking’. Without barriers to entry, the market is likely to be self-corrected by competition because monopoly profits will attract new competitors to enter the market. However, the Guidance does suggest that the Commission will intervene where the conduct is directly exploitative of consumers (for example, charging excessively high prices). Some examples of exploitative conduct include:
Unfair trading conditions
Imposition of conditions on its customers that directly harm them. Such as exploitation of copyrights imposes unnecessary obligations on its members. The Commission also condemned ticket selling arrangement which was held to be unfair to consumers who are not French.
Excessive price
Price set significantly above the competitive level. Article 102 explicitly bans unfair pricing which has been understood as to cover the excessive pricing. The charged price must be excessive and unfair to be abusive. The test used was stated in the United Brands case that whether the charged price has no reasonable relation to the economic value of the product supplied and exceeds what the dominant undertaking would have obtained in a normal and sufficiently competitive market.
Collecting societies
Organization with the authority to licence copyrights collects royalties from users of the copyright and distributes them to copyright owners for a fee. Abusive behaviour that has been banned by the Commission under Article 102 includes discriminating undertakings from other member states; charging excessive royalties; unreasonably restricting an author’s unilateral behaviour by clauses.

3. Single Market Abuse

Behaviours detrimental to principles of the internal market such as intra-brand competition jeopardise the single market imperative and are therefore caught by Article 102.
Single market abuse is presented in the case of British Leyland, by where a dominant firm carried out excessive pricing, which not only had an exploitative effect but may also prevent parallel imports and limit intra-brand competition.
Other examples of condemned pricing practices harmful to the single market include geographic price discrimination and rebates (and similar pricing practices) that hinder imports and exports.
Non-pricing practices harmful to the internal market will also be held to infringe Article 102; in United Brands v Commission, UB was also condemned for including clauses in contracts with distributors with the effect of preventing parallel imports between countries by imposing a restriction on the export of un-ripened bananas.

Defences

Whilst Article 102 does not expressly provide statutory defences, the court has stressed that a dominant firm may seek, on their own accord, to justify their behaviour,‘either by demonstrating that its conduct is objectively necessary or by demonstrating that its conduct produces substantial efficiencies which outweigh any anti-competitive effects on consumers.’
For objective justification to be applicable, the conduct complained of must be proportionate and founded on external factors such as health and safety considerations.
To abrogate a claim on efficiency grounds, the Commission has expressed four cumulative conditions that must be satisfied:
1.    the efficiencies would have to be realised, or be likely to be realised, as a result of the conduct in question;
2.    the conduct would have to be indispensable to the realisation of those efficiencies;
3.    the efficiencies would have to outweigh any negative effects on competition and consumer welfare in the affected markets; and
4.    the conduct must not eliminate all effective competition.

Consequences of Breach

Where an abuse of dominance is established, the Commission may impose a fine and order the dominant undertaking to cease its abusive conduct, this may include requiring positive action. It can also divest an undertaking of its assets if this would be the proportionate behavioural response.
Decisions establishing an abuse of dominance may also lead to follow-on actions where claimants may also choose to have recourse to the courts to vindicate their rights on a ‘standalone’ basis.