Antitrust Alert: European Commission Issues Long Awaited Guidance on Abuse of Dominant Position

On Wednesday, 3 December 2008, the European Commission issued the long awaited Communication on abusive exclusionary conduct by dominant undertakings. This marks the end of an extensive review process, launched in December 2005 by the Commission's Staff Discussion Paper on exclusionary abuses and followed by vigorous public and academic debate. In describing the Commission’s enforcement priorities, the new Communication adopts more rigorous standards than those applied by the Commission in its past practice, but it remains possible for the Commission to challenge a broad range of conduct by dominant firms.

Article 82 of the European Community Treaty prohibits dominant firms from engaging in the exploitation of their market power, for instance by charging excessive or discriminatory prices (so-called exploitative abuses), or from adopting practices that raise barriers to entry thereby eliminating or reducing further competition (so-called exclusionary abuses).

The purpose of the Communication is to provide greater clarity and predictability to the Commission’s policy on the application of Article 82 to exclusionary conduct. The Communication does not cover exploitative abuses or abuses of collective dominance. It is unclear whether the Commission intends to issue future guidance in these areas.

The Communication observes that a company with a market share below 40% is unlikely to have substantial market power or “dominance.” Moreover, the Communication states that the Commission normally will intervene only where, on the basis of cogent and convincing evidence, the allegedly abusive conduct is likely to lead to anticompetitive foreclosure.

In determining whether price-based exclusionary conduct may result in anticompetitive foreclosure, the Communication relies on the so-called “as efficient competitor test”, meaning that the Commission ordinarily will intervene only where the concerned conduct is capable of hampering competition from competitors that are as efficient as the dominant undertaking. This requires a complex assessment of economic data relating to the costs of the dominant undertaking. If such data are not available, then the costs of competitors or other comparable reliable data will be assessed. According to the Communication, this economic-oriented approach should enable the Commission to distinguish between competition on the merits, which is permissible for dominant companies, from pricing conduct that is likely to harm consumers, which is prohibited by Article 82.

Dominant companies can defend their conduct by demonstrating that such conduct is objectively necessary or that it is likely to produce efficiencies. However, the Commission will accept an efficiency defense only if the dominant company demonstrates that the conduct is indispensable to achieve the claimed efficiencies, that the efficiencies will benefit consumers, and that the conduct does not eliminate effective competition.

The Communication describes in detail the legal and economic principles that the Commission intends to apply when dealing with the most common categories of exclusionary abuses, namely, exclusive purchase obligations, rebates granted to enhance customers’ loyalty (so-called conditional rebates), tying and bundling practices, predatory pricing, and abusive refusals to supply. With regard to refusals to supply inputs or share resources with competitors, the Commission has retained freedom to challenge a broad range of practices. The Communication indicates that the concept of refusal to supply may cover refusals to supply products, provide interface information, license intellectual property rights, or grant access to an essential facility or network. This scope of potential liability under Article 82 reaches much further than under comparable U.S. rules and was the most controversial of the topics debated after the Staff Discussion Paper was released.

Many of the principles laid down in the Communication are not novel concepts. However, with regard to price-based exclusionary abuses, the Commission appears to have gone a step further by endorsing a much more rigorous economic analysis and burden of proof than those required by the European Courts case law.

It remains to be seen to what extent this new economic approach will affect public and private enforcement of Article 82 in EU Member States. Indeed, although Commission communications do not bind national authorities, they can have an influential effect on the way in which national enforcement agencies and national courts apply EU competition law.

Read more on the Commission’s announcement at the European Commission Competition web site.

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