16 June, 2011

Cowboys and Gentlemen: EU v. US Dominant Position Policy

Rob Cellucci

Question and Thesis

✤ In the area of abuse of a dominant position, is EU Competition Policy now more stringent than US Antitrust?

✤ Yes. EU is more stringent, however, both have altered their definition of who or what competition policy should protect. The case law that has applied Article 82 of the Treaty of Rome, is more explicit in placing responsibility on dominant firms to refrain from distorting the playing field to the detriment of less advantaged players.

✤ The primary areas in which the two differ are in Refusal to Deal and Exclusionary Practices.

EU Dominant Position Policy

✤ Articles 81-86 of the Treaty of Rome

✤ Prohibits agreements between firms that distort competition through price fixing, cartels, exclusivity and possible discrimination.

✤ Prohibits a dominant firm from using its position of economic strength to prevent effective competition and acting independently of its competitors, customers and ultimately of its consumers.

✤ Includes Antitrust Regulation, Regulation of State Aides, and Merger Controls.

✤ Strongly influenced by US Antitrust Policy

US Dominant Position Policy

✤ Section 2 of the Sherman Act

✤ Prohibits monopolization and attempts or combinations to monopolize.

✤ In the 1960s antitrust policy “respected diversity, dispersal of power, economic opportunity for firms and entrepreneurs without power, and governance by markets, not powerful firms.”

✤ Criticized as protecting competitors, not competition.

1980s and the Rise of Globalism

✤ The US adopted a new an economic model.

✤ Allowed for a reduction in the scope of antitrust.

✤ With the exception of cartels, firms were able to operate with greater autonomy and fewer risks of incurring liability.

✤ In order to compete with the US and other global partners, the EU was forced to liberalize their Competition Policy.

✤ Attempted to increase efficiency and ensure judgements were based on “sound economics.”

US Non-Intervention Areas

✤ Low pricing or predatory pricing. ✤ The flexibility to price low is the cornerstone of competition. Price

predation is costly and seldom works, therefore not a threat. ✤ Product change, innovation.

✤ What a plaintiff might attack as predatory product change is likely to be innovation. Therefore, unless the product change ostensibly has no merit, courts will not examine it.

✤ Refusals to deal.✤ Duties to deal are duties to assist rivals and duties to assist rivals are

perverse and diminish incentives to invent because the innovator cannot reap the full benefits of its investment.

Refusal to Deal - US Courts

✤ Verizon Communications Inc. v. Law Offices of Curtis V. Trinko L.L.P.

✤ Verizon provided competitors with downgraded or impartial access to lines causing, thus devaluing their product.

✤ Not a violation of Antitrust. Court articulated as a first principle in refusal to deal cases: the freedom to deal or not, as one chooses.

✤ Court stressed that duties to deal are duties to assist rivals, and duties to assist rivals usually harm competition and innovation.

✤ Under the current structure of Section 2, it is difficult to distinguish illicit exclusion from legitimate competition and inference resulting in false condemnations can be costly.

Refusal to Deal - EU Courts

✤ Oscar Bronner GmbH & Co. v. Mediaprint Zeitungs-und Zeitschriftenverlag GmbH & Co.

✤ Major newspaper did not need to provide its small rival, for a fee, access its distribution system.

✤ Conclusion consistent with US law.

✤ Radio Telefis Eireann v. Commission of the European Communities (Magill)

✤ Three Irish TV broadcasters refused to license their TV schedules to Magill, who wanted to publish a TV guide, where none had previously existed and for which there was consumer demand.

✤ ECJ required the broadcasters to provide licenses, citing this was an “exceptional circumstance,” and that any refusal to license must not prevent “the appearance of a new product” for which there is “potential consumer demand.”

Refusal to Deal - EU Cont.

✤ IMS Health GmbH & Co. v. NDC Health GmbH & Co.

✤ Sole supplier of regional sales data to Pharmaceutical Industry. Utilized an 1860 brick formula or a geographic format based on postal codes.

✤ NDC attempted to create a new geographic format, but Pharmaceutical companies resisted.

✤ Requested a license from IMS, but it refused, so NDC simply used the IMS format.

✤ German Court held IMS refusal was an abuse of dominance under Article 82. Referred the case to the ECJ.

✤ ECJ declared that the exercise of an exclusive right might constitute an abuse of dominance only in exceptional circumstances.

IMS Health & Co. v. NDC Health. Continued

✤ “Exceptional Circumstances”

✤ Access to the product, service, or intellectual property must be indispensable to a business to function in a market.

✤ To be indispensable three cumulative conditions must be satisfied

✤ Refusal must be preventing the emergence of a new product for which there is a potential consumers demand, that it is unjustified and such as to exclude any competition on a secondary market.

✤ Different from US Refusal to Deal, in that it was a top-down ruling, not a concept regarding competition and incentives.

Exclusionary Practices

✤ Virgin Atlantic Airways Ltd. v. British Airways P.L.C.

✤ British Airways compensated travel agents in UK for promoting ticket sales.

✤ Virgin claimed these agreements were intended to prevent or impede attempts to expand their services from Heathrow Airport to markets in the US.

✤ U.S. Court of Appeals dismissed the complaint on grounds that bundled rebate cases are low-price cases and therefore must meet the predatory pricing rule.

✤ Virgin complained to the Commission that the incentives were retroactive.

✤ ECJ condemned reward scheme because of the powerful loyalty-inducing effect and the fact that BA had no economic justification for the system.

✤ EU and US reached divergent conclusions.

Exclusionary Practices - Microsoft

✤ Netscape’s Browser

✤ Sun’s Java technologies.

✤ Sun’s Solaris Operating System.

✤ Intel’s Native Signaling Processing software.

✤ Intel’s technical assistance to Sun.

✤ Apple’s QuickTime software for multimedia playback.

✤ RealNetworks’ streaming media technologies.

✤ IBM’s competing operating system and office productivity application.

Exclusionary Practices - EU v. Microsoft✤ Windows Media Player vs. RealNetworks

✤ RealNetworks pioneered the media player. Microsoft later produced WMP, which it was able to bundle with Windows OS and effectively eliminate RealNetworks.

✤ The concern was not just harm caused by bundling, but also the ubiquity of WMP in the distribution of media and digital content over the internet.

✤ “Creates disincentives for OMEs [original equipment manufacturers] to ship third party streaming media players pre- installed on their PCs.”

✤ Important commercial sector for the disbursement of media content over the Internet.

✤ Commission ordered Microsoft either to cease bundling or to offer an unbundled version.

Outcome in the US

✤ What if this case was brought before a US Court?

✤ Court would likely agree that bundling, in a network industry such as PCs and their operating systems, consumers may prefer the tying in of software and doing so may make a product more appealing.

✤ US Courts may observe that,

✤ That the practice makes economic sense, without regard to whether competition in media players persists.

✤ That the practice does not involve a sacrifice of profits.

✤ That competition against pre-installed products could increase innovation.

Exclusionary Practices - US v. Microsoft✤ United States v. Microsoft Corp.

✤ Mixed the code of its OS to prevent the use of the Netscape browser.

✤ The Justice Department accused Microsoft of;

1. Maintaining a monopoly in a relevant market for Intel-compatible PC operating system in violation of § 2 of the Sherman Act;

2. Attempting to monopolize a relevant market for web browsers, also in violation of § 2;

3. Tying the Windows operating system with the Internet Explorer web browser in violation of § 1 of the Sherman Act;

4. Unlawfully restraining trade by means of licensing restraints that allegedly resulted in the foreclosure of certain channels of distribution for web browsing software, also in violation of §1.

✤ The District Court upheld the claims of monopolization, attempted monopolization, and tying; and refuted the Section 1 foreclosure claims.

Conclusion

✤ The US and the EU both condemn restraints by dominant firms that harm market competition and are committed to applying “sound economics.”

✤ US law privileges single-firm action and predominantly fears the development of false positives.

✤ US places more faith in the market’s ability to regulate, then the EU.

✤ EU law privileges the contestability of monopolized markets, especially network markets, and predominantly fears their blockage.

✤ EU is more comfortable predicting effects than the US, making them to more likely to intervene.

✤ “Europeans are gentlemen. Americans are cowboys”