Abusive marketing strategies

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Brief : 193232 Delivery Date : 26/02/2007 Title: Alpha, a large German firm, is the leading provider in the EU of VCMP tuning box.. VCMP tuning box is essential for the operation of video and satellite phones. Alpha has a market share in the EU of 58%. It has few competitors. The largest among them holds a market share of 15%. VCMP tuning box requires substantial research and development as well as a significant amount of know-how. Alpha has invested a lot of money on it in the last five years. VMCP tuning box cannot be performed without a spare tool known in the sector as 'the link'. Alpha produces its own version of this tool, 'Key', which has proved to be much more reliable than those tools produced by Alpha's competitors. Alpha sells Key to a variety of customers. The formula of Key is protected by patents in the majority of the Member states on the EU. Key tool is compatible only with VCMP tuning box.. Beta, a UK firm and one of Alpha's competitors, has come to learn about the following behaviour on the part of Alpha: a) Alpha refuses to provide VCMP tuning boxes to customers who purchase 'the link' from another source b) Alpha reduces its prices to customers which Alpha suspects are about to switch to obtain tuning boxes from other competitors c) Alpha enjoys a market share of 98% in Spain, where it has developed a very sophisticated distribution network. Alpha denies access to its distribution network by its competitors.. d) Alpha offers substantial discounts to French customers if they exceed the number of 'Key' tools purchased in the preceding year. Advise Alpha whether any of its arrangements might infringe Article 82 EC Treaty. What further information would you require from Alpha? ANSWER Alpha can be advised that Article 82 of the Treaty of Rome[1] controls the unilateral conduct of firms which have an economically powerful or so-called dominant position in the markets in which they participate. Article 82 provides that:[2] “Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States.. Such abuse may, in particular, consist in a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; b) limiting production, markets or technical development to the prejudice of consumers; c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; d) 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.” Alpha should note that dominance is not unlawful per se under Article 82. However, business that are found to be in a dominant position within at least a substantial part of the Single Market may contravene Article 82 if they are deemed to abuse their market power so as to obtain exorbitant profits or a competitive advantage of some kind. In order to consider Alpha’s potential liability under Article 82 it is first necessary to define the relevant market that will be considered by the European Commission and ultimately the Court of Justice. The relevant market is comprised of two aspects: the relevant product market and the relevant geographic market. The relevant product market in this case will be defined as the market in the VCMP tuning box alone, given that the box is essential for the operation of video and satellite phones and according to the facts presented there are no alternative or substitutable products available. If any substitutable products are available these may form part of the product market. As Michelin v EC Commission[3] indicates, an Article 82 product market will be deemed to include any product which is “equivalent to or interchangeable for the specific product being marketed by the dominant company”. It is in the Commission’s interests to define the product market as narrowly as possible because this facilitates the task of finding dominance and Alpha should be advised that it will need to raise a strong argument to seek to expand the product market in this case. Given that the VCMP tuning box cannot readily be substituted or replaced by any alternative product, it will be treated as forming a relevant product market of its own. Europemballage Corp and Continental Can v EC Commission[4] confirms this advice. The geographic market in question will be viewed as the European Union market as a whole in relation to the first two issues under consideration (a) and (b), given that Alpha’s behaviour in those instances is apparently the same across the EU. Often only parts of the EU market are considered in isolation but in this case given Alpha’s huge EU-wide market share this will not be deemed necessary. In relation to part (c) the geographic market under consideration will be Spain only, given that Alpha’s behaviour in that specific context is exclusive to that territory.. In relation to part (d) the relevant geographic market will be deemed to be the territory of France only, given that its behaviour is confined to that state. It is submitted that both France and Spain individually will be deemed substantial parts of the EU market necessary to justify the application of Article 82. There is a fairly low threshold for substantiality in this context. In Suiker Unie v Commission[5] the small states of Belgium and Luxembourg were deemed a sufficiently substantial part of the Community and in Corsica Ferries Italia Ltd v Corpo dei Piloti del Porto di Genova[6] the single port of Genoa was found to qualify.[7] Given that Alpha enjoys a massive 58 per cent market share across the entirety of the European Union there is no doubt that the company will be found to enjoy a dominant position.. In the case United Brands v Commission[8], which concerned abuse of a dominant position on the EEC[9] banana market by a company with a market share of 40 per cent, the Commission and the Court had no difficulty in finding dominance. Moreover, given that the remainder of the market is fragmented, with the largest of its competitors commanding a market share of only 15 per cent, Alpha’s 58 per cent share will be viewed as even more dominant in the EU market than if it competed against one other company with a very large market share. In addition, the fact that the VCMP tuning box requires substantial research and development as well as a significant amount of know-how and that Alpha has invested a lot of money on this in the last five years, serves only to buttress the dominance enjoyed by Alpha. The huge R&D start up costs present a formidable barrier to entry for potential new competitors and this factor was taken into account in cases such as Tetra Pak Rausing SA (II) v Commission[10]. In summary of the above it is possible to advise Alpha that it will be deemed dominant in all four relevant product markets that will be isolated in order to evaluate its behaviour identified in parts (a) to (d). These specific instances of conduct will now be examined on that basis. a) Alpha refuses to provide VCMP tuning boxes to customers who purchase 'the link' from another source It is noted that Alpha produces its own version of this tool, 'Key', and that the Key has proved to be much more reliable than those tools produced by Alpha's competitors. However, Alpha must be advised that this conduct is highly likely to be viewed as anti-competitive and in contravention of Article 82 EC by both the Commission and the European Court of Justice. Article 82 provides the following express example of anti-competitive abuse: “d) 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.” It is therefore prima facie unlawful to make the conclusion of a contract to provide VCMP tuning boxes subject to a contract to purchase the Key. It is of no relevance that the Key is more reliable than its competitors’ links. The Commission will argue that such trading behaviour is unnecessary and that the Key should be allowed to assert its natural superiority while leaving customers free to choose. The economic freedom of consumers is jealously and strictly guarded in the Single Market.[11] Alpha can be advised that its behaviour in this context will be viewed as an attempt to force so-called tying-in agreements on its customers. Such agreements tie the purchase of certain goods to the purchase of other goods. It is considered blatant abuse of Article 82. The case Hoffman La Roche v Commission[12] saw such tying-in agreements heavily penalised and the case Boosey & Hawkes[13] saw refusals to supply goods fined. There appears to be no objective justification for Alpha’s behaviour in this regard and trade between member states is certainly being affected given the EU-wide scope of this practice. In conclusion, Alpha is liable to be sanctioned by the Commission for this behaviour and that sanction is most likely to be upheld by the Court. b) Alpha reduces its prices to customers which Alpha suspects are about to switch to obtain tuning boxes from other competitors Alpha can be advised that Article 82 sets down the following example of abusive activity: “c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;” If Alpha is reducing its prices to certain customers it fears are about to move their business then it is subjecting its other more loyal customers to a competitive disadvantage, because they are still required to pay a higher price. This form of price discrimination is unacceptable anti-competitive conduct and will be penalised by the Commission.. Moreover this strategy may be treated as predatory pricing by the Commission.. Predatory pricing occurs where a dominant undertaking temporarily reduces its prices to an uneconomic level, possibly below cost price, in order to undercut its rivals and prevent an increase in the competition it faces. Typically once the rival has been deterred from the market and customer loyalty is secured prices are raised again and the company can return to reaping de facto monopoly profits by increasing its prices again. The Commission has sanctioned predatory pricing practices in numerous cases, such as AKZO Chemie BV v Commission[14] and Alpha must be advised that it is also liable to be penalised for this policy. Furthermore, looking at the scenario from the perspective that this reduction in price strategy could be viewed as a system of loyalty rebates, the Commission will most likely come to the same conclusion and sanction Alpha. Loyalty rebates have been found to create discriminatory pricing and penalised in cases including Hoffman La Roche v Commission[15] c) Alpha enjoys a market share of 98% in Spain, where it has developed a very sophisticated distribution network. Alpha denies access to its distribution network by its competitors.. Alpha has almost total dominance and a rare pure monopoly in the Spanish market. The European Commission may conclude that the sophisticated distribution network it has managed to establish as a consequence of this dominance should be treated as what is known as an “essential facility”. The doctrine of essential facilities provides that where a dominant undertaking owns or controls a facility that is necessary to conduct a business, but which could not practically be reproduced by a competing undertaking or a potentially competing undertaking, the dominant undertaking may be obliged, in the absence of objective justification, to make the facility available to the competitor on reasonable terms. This doctrine has typically been applied in the case of permitting access to sea ports on fair terms, for example by ferry operators which obviously require such access in order to carry out their business, and a case in point is B & I Line plc v Sealink[16]. In the B & I Line case the dominant operator of the essential facility was ordered to allow a competitor access to the port in question, and that access was required to be provided on fair and reasonable terms so as to facilitate fully competitive activity. Alpha can be advised that this situation may be deemed analogous to its monopolistic distribution network, without access to which competitors may be unable to enter the Spanish market and trade profitably. Alpha can attempt to defend its position and reserve its exclusive right to use the network by raising an objective justification.[17] The company could argue that if it were forced to open up its distribution network to competitors it would be less inclined to make the necessary investments to maintain its sophistication, efficiency and integrity given that other firms will be benefiting from that investment. Further particulars are sought on this issue before concrete advice can be offered. Alpha must also be advised that this scenario could be viewed as a refusal to supply a service.. This has been considered abusive activity in such cases as Belgian Telemarketing[18]. Such an activity will in particular be held to infringe Article 82 where supply is essential to the trade or where refusal prevents the introduction of new products in demand as in the case Tiercƒ© Ladbroke v Commission.[19] d) Alpha offers substantial discounts to French customers if they exceed the number of 'Key' tools purchased in the preceding year. Alpha can be advised that Article 82 expressly states that abusive activity includes: “c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;” This practice of discriminatory pricing is prima facie unlawful given that customers who do not exceed former purchasing levels are penalised in equivalent transactions in relation to customers that have met Alpha’s conditions. It is conceivably possible that Alpha could objectively justify this strategy as rewarding improved performance or on grounds of passing on economies of scale, but further particulars must be sought as to Alpha’s full commercial justification for this pricing policy.. Moreover, it is noted that these discounts are apparently only available to French customers.. Further particulars are sought on this matter, because if customers in other member states are denied this discount then regardless of any argument to objectively justify the practice in France it will almost certainly be deemed unlawful if it is not applied uniformly across the EU.[20] Differential pricing strategies based on national markets were rejected as abusive in, for example, United Brands v Commission[21]. In Summary This paper has provided specific advice to Alpha as to the Article 82 EC enforcement mechanism and its application to these facts. Abusive and potentially abusive conduct has been identified under the specified heads of activity and further information has been requested on various points. THE END EXACT WORD COUNT FOR ANSWER ONLY : 1987 (excluding footnotes) GLOBAL DOCUMENT WORD COUNT : 2615 NB. The full text cite of Article 82 is provided for information purposes only and has not been included in the answer word count for this paper. BIBLIOGRAPHY Consolidated version of the Treaty establishing the European Economic Community: http://europa..eu.int/eurlex/lex/en/treaties/dat/12002E/htm/C_2002325EN.003301.htm EC Legislation 2005-2006, Foster (2005) Blackstone’s Statutes Law of the European Union, Kent, P., (2001) Longman Textbook on EC Law, Steiner and Woods, (1998) Blackstone Publishing EU Law- Text Cases and Materials, Craig and de Burca, (2003), Oxford University Press Recent Guidance on Fining Policy, Spink, P., [1999] European Competition Law Review, 101-108. Cases as footnoted, checked and verified against original law reports. 1
[1] Consolidated version of the Treaty establishing the European Economic Community: EC Legislation 2005-2006, Foster (2005) Blackstones Statutes: http://europa.eu.int/eurlex/lex/en/treaties/dat/12002E/htm/C_2002325EN.003301.htm. [2] The text of Article 82 is provided for information purposes only and is not included in the word count. [3] Case 322/81 [1983] ECR 3461. [4] Case 6/72 [1973] ECR 215. [5] Cases 40/73 [1976] 1 CMLR 295. [6] Case 18/93 [1994] ECR I-1783. [7] For further comment see: Law of the European Union, Kent, P., (2001) Longman, page 254. [8] Case 27/76 [1978] ECR 207. [9] The European Economic Community as it then was, prior to the establishment of the EC and the Single Market. [10] T-51/89 [1991] 4 CMLR 334. [11] For an insightful general overview see: Textbook on EC Law, Steiner and Woods, (1998) Blackstone, page 236. [12] Case 85/76, [1979] ECR 461. [13] OJ 1987 L286/36. [14] Case 62/86, [1987] 1 CMLR 225. [15] Case 85/76, [1979] ECR 461. [16] [1992] 5 CMLR 255. [17] There is no derogation provision in Article 82 such as is provided in Article 81 by Article 81(3). The concept of objective justification is the case law alternative available under Article 82. See for an overview: EU Law- Text Cases and Materials, Craig and de Burca, (2003), Oxford University Press. [18] Case 311/84 [1986] 2 CLRR 588. [19] Case T-504/93 [1997] ECR II-923. [20] See for specific guidance: Recent Guidance on Fining Policy, Spink, P., [1999] European Competition Law Review, 101-108, p.106. [21] C27/76 [1978] ECR 207.
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