The prohibition against anti-competitive behavior is one of the fundamental principles of European law, and is enshrined in Article 101 of the Treaty on the Functioning of the European Union (the EU Treaty). Its provisions are intended to protect the consumer against sharp practices by business, such as price fixing, dividing up the market and artificially limiting production. However, under Article 102, businesses that find themselves in a dominant position in their markets have additional obligations to ensure that they do not abuse that position.
What is a dominant position?
Dominance is determined with reference to the “market” in which a business operates. Whether Article 102 applies to a business will turn on how this is defined. The “market” has two aspects: (a) the products or services being provided (the product market); and (b) the territory in which the business operates (the geographic market).
When determining the product market, the authorities will look at what a consumer would buy instead if the price of the product went up. All such “substitute” products, provided they were of sufficient volume, would be included in the definition of “market”. The test for the geographic market follows a similar principle. Once the market is established, an assessment of dominance can be made.
In the United Brands case in 1978, the European Court of Justice defined dominance as: “a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.” In applying this test of dominance, the authorities will consider factors such as the market share, the existence of competitors, and the potential of future competition (i.e. the barriers there are to entering the market).
What constitutes abuse?
Dominance itself is not a violation of Article 102. There must be an abuse of that position to contravene the law. Traditionally, the abusive behavior is perpetrated by one company, but the EU has made it clear that it is possible for more than one organization, acting in concert, to collectively abuse a dominant position.
Although the Article lists a number of examples – such as conditional sales, excessively low or high pricing, draconian contractual terms and conditions, or treating customers for the same products differently – these are not meant to be exhaustive. The law is “effects” based – in other words, the EU is more concerned with the effect of dominant behavior on the consumer, rather than the specific form that the behavior takes.
What’s the damage?
Companies suspected of breach of Article 102 may face an EU competition investigation. In the UK, the Office of Fair Trading may take the lead, or run an investigation concurrently with the European Commission. Apart from damage to a company’s reputation, a significant fine of up to ten percent (10%) of the company’s annual turnover in the previous business year can be levied by the EU. As a cautionary example, US-based company Intel was fined over one billion Euro (US $1.43 billion) for abusing their dominant position in 2009, and most recently (though less dramatically) Polish company TPSA was handed a fine of 127 million Euro (US $180 million) for abuses between 2005 and 2009.