Abuse of Dominant Position: Economic Constraints and Legal Constraints

The Competition Act 1998, s18 prohibits abuse of a dominant position. Such prohibition s also found under EC Treaty, Article 82 and TFEU, Article 101. A dominant undertaking with economic strength can prevent effective competition. Undertaking having very large shares is evidence of a dominant position. This constitutes actual constraints Potential constraints are imposed by an undertaking’s expansion or new market entry. Legal constraint includes statutory monopoly, licensing requirements, or intellectual property rights. For instance, a range of patents contributed to barriers. Economic constraint is instance economies of scale or substantial sunk costs; or vertical integration where undertaking operates at various levels of the market chain. Countervailing buyer power also forms constraint where customers of considerable size and commercial significance impose constraints. They can switch quickly to competing suppliers, promote new entry; vertically integrate, or credibly threaten to do so.

Cases involving abuses are fact sensitive. This applies to evaluating whether there was a “concerted practice”, as is stated in Article 101 of TFEU. Firstly, “co-ordination between undertakings which, without having reached the stage where an agreement, properly so called, has been concluded, knowingly substitutes practical co-operation between them for the risks of competition” is prohibited. Secondly, direct or indirect contact between operators influences conduct on the market and effects actual or potential competitors, or discloses to them the course of conduct where they have to decide to adopt or contemplate to adopt the market. Mental consensus substituting practical cooperation for competition is needed. If concerted practice is the only plausible explanation for abuse, a parallel conduct between the parties exists. Parallel conduct is found in oligopoly, where few firms supply most of the products within the market without any of them ascending over the others. Undertakings “contribute to the common objectives pursued by all” and was “aware of the offending conduct planned or put into effect” by others or “could reasonably have foreseen it and was prepared to take the risk”.

In exclusive dealing, an undertaking mainly secures all or most of the business of the customers subject to its practice. Customers commit to exclusivity obligations or purchase and are provided conditional discounts or rebates through pricing policies that award single sourcing. A dominant undertaking that ties purchasers, even at the request of the customers, by “an obligation or promise on their part to obtain all or most of their requirements exclusively from the said undertaking abuses its dominant position”. The “exercise of an exclusive right by the proprietor may, in exceptional circumstances involve abusive conduct.” For example, protected information was an “indispensable raw material”, the refusal to licence IP “prevented the appearance of a new product” for which there was no “actual or potential substitute” and “specific, regular, and constant demand”, and there was no justification for the refusal. This exercise of IP rights will become an abuse of dominant position within the meaning of TFEU, Article 102 if exceptional circumstances exist.

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1. United Brands v. Commission [1978] ECR 207.
2. Hoffmann – La Roche v Commission Case 85/76 [1979] ECR 461; Akzo Chemie BV v Commission (C-62/86) [1991] ECR I-3359.
3. Official Journal of the European Union, ‘Communication from the Commission — Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings’ (2009/C 45/02) supra n 7.
4. Servier v Commission (Case T 691/14).
5. Flynn Pharma Ltd and Flynn Pharma (Holdings) Ltd v Competition and Markets Authority 1275/1/12/17.
6. Kirsty Middleton, Blackstone's UK & EU Competition Documents (Oxford University Press 2015) 400.
7. Whish and Bailey, Competition Law (9th edn., Oxford University Press 2018) 390.
8. ICI v Commission Case 48/69 [1972] ECR 619.
9. Suiker Unie v Commission Cases 40/73 etc [1975] ECR 1663.
10. Whish and Bailey, Competition Law, supra n 11, 118.
11. Cases C-89/85 etc A Ahlstrom Oy v Commission [1993] ECR I-1307.
12. Whish and Bailey, Competition Law, supra n 11, 118.
13. Case C-286/13 P Dole Food v Commission.

In the current case, the four firms are the only firms that supply most of the products within the EU market. There is a possibility of a parallel concerted conduct between them as they hold the only authorisation, which is preventing new products to come to the market. This constitutes actual constraints. Article 101 TFEU prohibits co-ordination of such kind. If collusive and other concerted practise exists, they may infringe prohibition. Their market shares for Tonic and their array of intellectual property (“IP”) rights and business location are proof of their dominant position. Adopting similar application to the current concerns around Panacea, it is a dominant product with exclusive right to manufacture. Further, nationalised healthcare systems across Europe and Europe are the relevant markets for the product. So, applying the tests in Akzo and Hoffmann-La Roche, Alfa is the only shareholder of Panacea in this market. Due to its long dominance, there are actual and legal constraints being caused by Alfa. Alfa’s exercise of exclusive right could be treated exceptional and abusive in nature and as such it is prohibited under the Competition Act and TFEU.

Any potential to unlawfully impede competition sufficiently establishes breach of competition law. Submission of misleading information to public authorities restricts competition as it leads the authority to an error-decision, which can grant an exclusive right not untitled to the undertaking, or entitled to a shorter duration. Such abuse does not require to proof the conduct is deliberate and the bad faith of the undertaking. In AstraZeneca, AstraZeneca was fined €60 million for submitting misleading information to patent offices and courts in order to gain extra protection for its IP. AstraZeneca was not entitled and its conduct delayed market entry of generics. The court held that it did not matter even if the authorities were not actually misled; fraudulent IP rights were not enforced, direct evidence of eliminating competition was absent, or remedies existed in IP law. So, if the rumour and the allegation regarding Alfa’s IP were true, Alfa would be liable to penalty and for unlawfully impeding competition.

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14. Alison Jones, Brenda Sufrin and Niamh Dunne, Jones & Sufrin's EU Competition Law: Texts, Cases and Materials (7th edn, Oxford University Press 2019) 432.
15. Hoffmann, supra n 5.
16. Magill [1995] E.C.R. I-743, paras 48-56.
17. Rafal Sikorski, ‘Enforcing patent pledges under EU law’ in Jorge L. Contreras and Meredith Jacob (eds.) Patent pledges: global perspectives on patent law’s private ordering frontier (Edward Elgar Publishing 2017). 175.
18. Case T-321/05 AstraZeneca v Commission [2010] ECLI:EU:T:2010:266, n. 357.
19. Andreas Heinemann, ‘Abusive filing of IP rights’ in Duncan Matthews and Herbert Zech (eds.) Research handbook on intellectual property and the life sciences (Edward Elgar Publishing 2017) 473.
20. AstraZeneca, supra n 27.

Tying and Bundling are abusive conducts in certain circumstances. In tying, customers purchase the tying product but are required to purchase another product from the dominant undertaking, as was held in Hilti, In bundling, the products are sold jointly in fixed proportions and in mixed bundling, they are offered separately, but the bundled price is lesser than the sum of the prices when sold separately. Article 102 prohibits such pricing practices that exclusively affect its equally efficient actual or potential rivals. The test is whether the offering aims to exclude rivals that are at least as efficient as the dominant undertaking. Tying causes foreclosure of rivals when an undertaking is dominant in regard to the tying product which causes difficulty to customers to go elsewhere. Bundling has potential to foreclose rivals when the undertaking offers price on the tied product or market that the rivals cannot offer.

In the current case, Alfa with its 45% market share is dominant. The first part of its pricing strategy constitutes tying, which constitutes abuse using pricing. It could foreclose and exclude rivals where the strategy presents absence of guarantee if Panacea were taken with Bravo, Charlie, or Delta’s rival brands of Tonic. Tonic is a dominant product, and the tying can causes difficulty to customers to go elsewhere. Alfa could apply a pricing theory based on the Chicago School. This could be considered a competitive conduct, as it will enable market to self correct imperfections including monopolies. Per this theory, if a dominant firm earns high profits, new entries will erode this dominance. Whether a conduct is competitive or not depends not on structural analysis, but on whether it is economically efficient. The consideration will be whether rebates are likely to have the effect of excluding an as-efficient competitor. The Chicago School presents a relationship between law and economics in antitrust area. For determining legality, it is not only considering substantive economic outcomes but rather post effects-based analysis. This will ensure that Alfa as a dominant undertaking do not impair effective competition by foreclosing their competitors in an anti-competitive way, and do not cause adverse impact on consumer welfare.

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21. Jones, Sufrin and Dunne, Jones & Sufrin's EU Competition Law: Texts, Cases and Materials, supra n 20, 466.
22. Eurofix-Bauco / Hilti [1988] OJ L65/19.
23. Official Journal of the European Union, ‘Communication from the Commission — Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings’ (2009/C 45/02) supra n 7.
24. Deutsche Telekom AG v Commission (2010) C-280/08.
25. Jones, Sufrin and Dunne, Jones & Sufrin's EU Competition Law: Texts, Cases and Materials, supra n 20.
26. Ibid, 466.
27. Jones, Sufrin and Dunne, Jones & Sufrin's EU Competition Law: Texts, Cases and Materials, supra n 20, 466.
28. Roger J. Van den Bergh, Comparative competition law and economics (Edward Elgar Publishing 2017).
29. Official Journal of the European Union, ‘Communication from the Commission — Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings’ (2009/C 45/02) supra n 7.
30. Ryan R. Stones, ‘The Chicago School and the Formal Rule of Law’ (2018) 14(4) Journal of Competition Law & Economics 527-567.

The current concern around the proposal of Alfa to purchase 48% of the shares and voting rights in Echo has to be dealt with referring to exclusion of or justification for prohibitive conducts from prohibition of abusing dominant positions.

The Enterprise Act 2002, part 3 prohibits mergers and acquisitions that lead to significant lessening in competition. For example, Section 67 provides for Secretary of State to intervene in relevant merger situation in order to protect legitimate interests, such as public interest consideration. The SIEC (“significant impeding of effective competition”) test provides that if a concentration significantly impedes effective competition, either in the common market or in the substantial part of it, due to the creation or strengthening of dominant positions, it is incompatible with the common market. Anti-competitive practices are those conducts that restrict, distort, or prevent competition in respect to production, supply or purchase of goods or supply or securing services in the UK. Section 35 and Section 36 of the Enterprise Act 2002 provides for determining whether a relevant merger situation “has resulted, or may be expected to result, in a substantial lessening of competition”.

The possibility of justification to abuses to escape prohibition is recognised since the case of United Brands. There is an abuse if the dominant undertaking uses opportunities from its positions in a way, other than a normal and sufficiently effective competition, to reap the trading benefits. Post Danmark case identifies two justifications, which are objective necessity and efficiencies. An abuse is committed where the dominant undertaking commits certain conduct “without any objective necessity” and any conduct of refusal to supply is justifiable through technical or commercial requirement. Applying the test of proportionality in its strict sense, “the greater the harm caused by restricting competition, the greater the benefits must be to outweigh the harm.” The attack must be proportionate to the threat considering the economic strength of the firms confronting each other.

The broader test is whether an agreement, concerted practice or decision, within the meaning of Article 101 of TFEU, has any effect on inter-state trade. Consideration be given to a possibility to foresee within a sufficient degree of probability subject to existence of interferences with the trade pattern between members or with effective competitive structure of the internal market. Specific exclusions may be conduct resulting in a concentration with a Community dimension, which is further subject to EC Merger Regulation. There are certain immunities from financial penalties in case of violation of infringements under the Competition Act 1998 to the extent that it is a minor significance where the annual turnover of the undertaking does not exceed £50 million.

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31. Catalin Stefan Rusu, European merger control: the challenges raised by twenty years of enforcement experience (Kluwer Law International BV 2010).
32. The Competition Act 1998, Section 2.
33. United Brands, supra n 4.
34. Peter Willis, Introduction to EU competition law (CRC Press 2013).
35. Case C-209+/10, Post Danmark A/S v Konkurrenceradet (Post Danmark I) EU:C:2012:172, para. 21.
36. Case 311/84, Centre Belge d’Etudes du Marche-Telemarketing v Compagnie Luemburgeoise de Teledeiffusion SA and Information Publicite Benelux SA (Telemarketing) EU:C:1985:394.
37. Eirik Østerud, Identifying exclusionary abuses by dominant undertakings under EU competition law: the spectrum of tests (Kluwer Law International BV 2010) 284.
38. United Brands, supra n 4, para 190.
39. Societe Technique Miniere v Maschinenbau Ulm, Case No. 56/65 [1996] ECR 235, p249.
40. Alina Tryfonidou, Reverse discrimination in EC law (Kluwer Law International BV 2009) 69.

Article 82 applies to conduct that may affect trades between member states and the question relates to whether the dominant position is within the appropriate territory. It must be within the common market or in a substantial part of it. Abuses can be exclusionary where the undertaking excludes a rival by strengthening its position and also potentially exploiting consumers in the long-term. Horizontal co-operation agreements may cause competition problems. For example, if firms agree to fix prices or share markets, or if such co-operation between the firms enables them to maintain, gain, or increase their market power, and as such they may likely increase negative market effects to that effect. In Post Danmark case, CJI observed that any practice that causes harm to consumers through the impact of the practice on the competition. There are certain types of conduct that are excluded from effect of Article 82. One of them is that the conduct would result in “a concentration with a Community dimension and thereby be subject to Council Regulation (EC) No 139/2004. The regulation prohibits mergers and acquisitions that would significantly reduce competition. There are certain turnover thresholds to be met by the firms. The merging firm may offer remedies or commitments in the form of modifications guaranteeing continued competition if the Commission finds concerns in the proposed the merger. Concentration occurs when there is lasting change in control. Remedies can be either structural or behavioural remedies. The former causes a permanent change in the structure of the market concerned. The latter involves commitment by the firms not to act in a manner in future. The Commission prefers the former as they are easier to implement with no requirement of medium or long-term monitoring measures.

In the current case, the current proposal has potential of restricting, distorting, or preventing competition with respect to supply of Elixir. Applying the SIEC test, the acquisition of 48% of shares in Echo may lead to a concentration that will significantly impedes effective competition in the EU market. Such concentration of dominant position will attract intervention from the Secretary of State to protect legitimate interests, such as public interest consideration, as per Section 67 of Enterprise Act 2002. The acquisition, if it happens, would strengthen Alfa’s dominant position, which is prohibited under Enterprise Act 2002, part 3. It will exclude the other rivals, which are atleast as efficient as the Alfa. In the current case, applying the test of whether the offering aims to exclude rivals that are at least as efficient as the dominant undertaking, Bravo and Charlie are efficient as Alfa given that supply market size of Elixir with 95% of the EU demand is from all three of them, and based on Alfa’s claim that Echo currently makes three times more profit from the sale of Elixir to Bravo and Charlie than Alfa. In all fairness, whether the proposed acquisition leads to a substantial lessening of competition or not has to be done in its entirety as per Section 35 and Section 36.

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41. The Competition Act 1998 (Small Agreements and Conduct of Minor Significance) 2000, s4.
42. Office of Fair Trading, ‘Abuse of a dominant position: Understanding competition law’ Competition law 2004, supra n 50.
43. Jones, Sufrin and Dunne, Jones & Sufrin's EU Competition Law: Texts, Cases and Materials, supra n 20, 361.
44. Post Danmark, supra n 44.
45. Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings OJ L24, 29.1.04, p. 1–22.
46. Geoff Yates and Mike Hinchliffe, A practical guide to private equity transactions (Cambridge University Press, 2010).
47. European Commission, ‘Merger control procedures’, supra 57.

There are certain circumstances where Alfa can escape anti-competition prohibition if it would be able to abide to principles laid down in United Brands, Article 81(3), the Competition Act 1998, Post Danmark, STM and the test of proportionality. For this to happen, Alfa must use its dominant opportunities in a normal and sufficiently effective competition. It must show that the proposed commercial relation with Echo intends to meet objective necessity and efficiencies. In the current case, such objective necessity and efficiencies could be achieved by showing that the proposal intends to allow Alfa to use its expertise in pharmaceuticals to research whether Elixir could also be used in other products. This may also prove to be a justifiable technical requirement, which could be demonstrated by showing inapplicability of the test of proportionality. Alfa should be able to show that there is no harm caused to the rivals, including Bravo and Charlie through the proposed arrangement. It can present facts and figures demonstrating that Echo currently makes three times more profit from the sale of Elixir to Bravo and Charlie than Alfa would as the sole manufacturer of Tonic.

However, alternative argument could be presented by Bravo and Charlie that the proposed acquisition would lead to a possibility to foresee interferences with the pattern of trade between member states or states, or interference with effective competitive structure of the internal market. In this respect, Alfa could cite rules around Community dimension and demonstrate that the proposed acquisition does not contain any exclusionary provisions or effects that would exclude rivals and exploit consumers in the long-term in the common market or in a substantial part of it. It also needs to demonstrate that the acquisition would not lead to exceeding annual turnover of £50 million. Alfa is also legally permitted to offer remedies or commitments in the form of modifications guaranteeing continued competition if the Commission finds concerns in the proposed the merger. Accordingly, Alfa can provide either structural or behavioural remedies, preferably with structural remedies, which will save its time in implementing the remedies.

Legislations

The Competition Act 1998

The Competition Act 1998 (Small Agreements and Conduct of Minor Significance) The Competition Act 1998 (Small Agreements and Conduct of Minor Significance) Regulations 2000

The Enterprise Act 2002

Cases

Akzo Chemie BV v Commission (C-62/86) [1991] ECR I-3359.

Cases C-89/85 etc A Ahlstrom Oy v Commission [1993] ECR I-1307.

Case C-286/13 P Dole Food v Commission.

Case T-321/05 AstraZeneca v Commission [2010] ECLI:EU:T:2010:266, n. 357.

Case C-209+/10, Post Danmark A/S v Konkurrenceradet (Post Danmark I) EU:C:2012:172, para. 21.

Case 311/84, Centre Belge d’Etudes du Marche-Telemarketing v Compagnie Luemburgeoise de Teledeiffusion

Deutsche Telekom AG v Commission (2010) C-280/08.

Eurofix-Bauco / Hilti [1988] OJ L65/19.

Flynn Pharma Ltd and Flynn Pharma (Holdings) Ltd v Competition and Markets Authority 1275/1/12/17.

Fresh Del Monte v Commission Case T-587/08 EU:T:2013:129

Hoffmann – La Roche v Commission Case 85/76 [1979] ECR 461.

Hoffmann – La Roche v Commission Case 85/76 [1979] ECR 461.

ICI v Commission Case 48/69 [1972] ECR 619.

Magill [1995] E.C.R. I-743, paras 48-56.

National Grid v Gas and Electricity Markets Authority [2010] EWCA Civ. 114, [2010] UKCLR 386.

SA and Information Publicite Benelux SA (Telemarketing) EU:C:1985:394.

Servier v Commission (Case T 691/14).

Societe Technique Miniere v Maschinenbau Ulm, Case No. 56/65 [1996] ECR 235, p249.

Suiker Unie v Commission Cases 40/73 etc [1975] ECR 1663.

United Brands v. Commission [1978] ECR 207, para 190.

Books

Bergh RJVD, Comparative competition law and economics (Edward Elgar Publishing 2017).

Ezrachi A, EU competition law: an analytical guide to the leading cases (Bloomsbury Publishing 2018).

Jones A, Brenda Sufrin and Niamh Dunne, Jones & Sufrin's EU Competition Law: Texts, Cases and Materials (7th edn, Oxford University Press 2019) 361.

Heinemann A, ‘Abusive filing of IP rights’ in Duncan Matthews and Herbert Zech (eds.) Research handbook on intellectual property and the life sciences (Edward Elgar Publishing 2017) 473.

Këllezi P, Bruce Kilpatrick and Pierre Kobel, Abuse of Dominant Position and Globalization & Protection and Disclosure of Trade Secrets and Know-How (Springer 2017).

Looking for further insights on Absence In Child Development? Click here.

Male S, ‘Corruption, collusion or cartel structures in construction’ in Michael Murray and Andrew Dainty (eds.), Corporate social responsibility in the construction industry (Routledge 2013) 175.

Middleton K, Blackstone's UK & EU Competition Documents (Oxford University Press 2015) 400.

Østerud E, Identifying exclusionary abuses by dominant undertakings under EU competition law: the spectrum of tests (Kluwer Law International BV 2010) 284.

Whish R and David Bailey, Competition Law (9th edn., Oxford University Press 2018) 390.

Rusu CS, European merger control: the challenges raised by twenty years of enforcement experience (Kluwer Law International BV 2010).

Sikorski R, ‘Enforcing patent pledges under EU law’ in Jorge L. Contreras and Meredith Jacob (eds.) Patent pledges: global perspectives on patent law’s private ordering frontier (Edward Elgar Publishing 2017). 175.

Tryfonidou A, Reverse discrimination in EC law (Kluwer Law International BV 2009) 69.

Willis P, Introduction to EU competition law (CRC Press 2013).

Yates G and Mike Hinchliffe, A practical guide to private equity transactions (Cambridge University Press, 2010).

Journals

Stones RR, ‘The Chicago School and the Formal Rule of Law’ (2018) 14(4) Journal of Competition Law & Economics 527-567.