Abuse of Refusal to Supply under Article 82EC

The abuse of refusal to supply is quite wide in its scope but certain elements are fundamental to its application. Discuss.

The refusal to supply seems to be a right that companies would have, because service establishments have the right to refuse and bar service; however this is not the actual state of affairs because the refusal to supply goods is a breach of EU Commercial and Competition law. Under Article 82EC holds that refusal to supply is an abuse when it is an action taken by a dominant company in order to stifle competition. The abuse in this case would be imposing unfair trading conditions upon weaker companies via refusing to supply or trade; another example of this would be that the dominant company would impose higher pricing or unfair pricing on competitors; therefore the first part of this discussion will consider what constitutes refusal to supply and whether there are rigid rules of application, or rather if there is a principle to uphold so the elements are broad in nature. This first section will consider the position of refusing essential services and apply this to competition law. This discussion will also consider what constitutes abuse under Article 82EC, as well as consider the fundamentals of the cases that deal with this abuse of this article. Also the impacts on consumers will be considered in order to relate why there is a law governing the refusal to supply within the EU and other markets. The conclusion will focus on why the elements dealing with the abuse of refusal to supply are broad in nature to fit a wide scenario of circumstances in order to ensure that dominant companies do not distort the market.

Elements of Refusal to Supply:

The essential facility suggests an obligation to supply a service or good because if this good or service was not supplied then the standard of living will be reduced. Essential services include medical care, the supply of clean water, electricity and heating energy. If these services were not supplied to the basic individual then their basic needs would not be satisfied. Under the law essential services involve the basic principle that there is a contract obligation to supply and not to discriminate in this supply. The reason why the EU is broad in its interpretation with respect to the abuse of the refusal to supply is that the market is not fully integrated and there needs to regulation in order to fully promote competition; as well as ensuring domestic laws are not facilitating the right for companies to refuse the supply of essential services. This is also true in the likelihood that each state will allow refusal to supply on protectionist grounds, in respect to only promoting domestic essential goods and services; therefore leaving consumers at the mercy of this domestic pricing because these consumers must have these essential services and goods. The reason why this is especially bad in the realm of essential services, such as energy, water, medical and public transport regimes is that they are state-owned or subsidised by the state; therefore promoting monopolies rather than competition. In respect to an essential service the EU is narrow in its interpretation, which does not only include basic services but also any service or good that is protected by domestic laws to bar the access of competitors, where the lack of competition would create serious and permanent harm to consumers therefore making the actions of the state and/or company uneconomic. EU law has inferred that the role of the plaintiff must be an essential player in ensuring that competition would be promoted; however it is also just as likely that the actions of the defendant would be inhibitive regardless of the role of the plaintiff. Therefore EU law’s interpretation of the elements to the abuse of the refusal to supply is very broad because it is a principle that is being applied to ensure that states and/or companies are not barring competition to essential services. This has since been broadened to include any good or service where the state laws of company practices are so protectionist in the market that competition is barred. Finally the EU has included this to include the refusal of dominant companies refusing to supply to competitors, which results a refusal in their dominant position is anti-competitive practice. The reason why EU law takes such a hard line is that the presence of protectionist and state owned companies are a lot more prevalent . If one compared this to the US a different less restrictive approach to dominance and monopolies are taken, because the market is based on competitive principles and these monopolies have resulted not from state owned companies and protectionist policies but from the nature of a competitive market. In the US there is only abuse in the refusal to supply when a dominant competitor uses unfair trading practises between rivals, i.e. is discriminatory by charging different prices and/or imposing restrictions on certain rivals and not others . Under US law there is no duty to supply; whereas under EU law there is a positive duty to supply, which is a result of European countries protectionist regimes and the EU had to counter this favouritism to ensure true market integration and promote competition practises. Therefore in respect to specific elements there is no set formula under EU law rather the strict adherence to a certain set of principles . The following discussion will consider Article 82EC which specifically deals with the abuse of the refusal to supply in dominant company situations, which will further illustrate the promotion of true competition in the EU market.

Article 82EC:

The key point of this article is that the abuse can only be done by a dominant company and as Hoffman La Roche states the objective of this article is to determine whether the company in a dominant position’s actions are done in order to influence the structure of the market and impede competition. The types of abuse are; exploitation; anti-competitive an exclusionary acts; excessive pricing; predatory pricing; price discrimination; rolling loyalty and quantity rebates; tying, i.e. if you want product A must but B therefore preventing independent manufacturers and sellers of product B; and refusal to supply or deal. Therefore the key aim is to ensure that there is freedom of movement, production and supply by companies of all sizes and different member states without large companies creating an exploitative and abusive market for consumers and breaching the basic competition laws of the EU.

Refusal to Supply or Deal:

If the refusal is committed by a dominant company in order to create an unfair market then there is a threat is threat of punishment; however unlike the basic articles there is a broad interpretation in respect to the defences available. These defences are; responses to shortages; result of forward integration and it is normal competitive behaviour, which is a very broad defence and seems to be limitless. For example in the case of United Brands the ban the reselling of the product was held to be permissible because the aim was to protect the brand name and ensure the quality for the consumer. Therefore the key question to ask is whether the refusal can be objectively justified. Therefore a genuine shortage of stock is justifiable because how can a company supply what they do not have. In respect to prospective versus existing customers if there are shortages it is better not to supply to prospective than existing customers. In the situation of promoting rivalry and competition in the case of BBI/Boosey & Hawkes it was held that a dominant company is allowed to review and end a relationship with a customer; however in United Brands held that in a longer customer relationship it is difficult to end and can be a breach of this article. In this case it was because the aim of United Brands was to send a threatening message to competitors. If a customer has poor/bad credit then it is acceptable not to supply goods. If a distributor fails to meet proper requirements as per distribution agreements a company can refuse to supply. The final defence of forward integration which is an accepted method of expansion for businesses, i.e. this is when a company merges takes over a company closer to the retail stage. The problem is, are the decisions made restricting competition, i.e. not supplying to competitors of companies at the same stage as their new acquisition. In Commercial Solvents it was held refusing to supply to a competitor of its Italian subsidiary was abuse of refusal to supply because it restricted competition. Also in Polaroid ISS Europe it was held that refusing to supply because the customer ordered too much was abuse, i.e. they had to supply what they could. However in British Midland v Aer Lingus the argument that there was abuse was rejected because the company had to use a specified computer caused potential revenue loss and impeded competition. Also in Suiker Unie the argument that refusing to supply on the basis that the company refused to follow the regular rules of the supplier equated to abuse was also rejected. Therefore the key point of this article is that the abuse is found when there is deliberate or a high potential that the acts of the dominant company will create a near-monopoly and restrict competition amongst suppliers and distributors. This is highly important because if a monopoly was created then it would cause a position of exploitation for the supplier against the consumer as well as distort the premise of the basic competition laws of the EC, which were illustrated in the discussion of Articles 28EC, 30EC and 49EC. Like these articles the fundamental basis of Article 82EC and the punishment of the abuse by the refusal to supply is to promote competition, allowing for new suppliers to enter the market and to protect consumers from abusive and exploitative monopolies; as well as allowing companies from other member-states to trade within the state where a possible monopoly is present.

Case-Study – Microsoft Case:

This case was based upon the refusal to supply an interface so the Windows Media Player can work on other operating systems, rather than Windows Based Operating Systems. The issues that the European Commission were dealing with were; had Microsoft breached Article 82EC by refusing to supply the interface to PC manufacturers so that that the Windows Media Player would work on other Operating Systems; and whether providing the Windows Media Player as a bundle on the Windows Operating System breached Article 82EC by monopolizing the market of media programmes and making the market difficult for independent media player manufactures to enter the market. The first issue was held as a definite breach because it excluded competition for other Operating System manufacturers. One of the most important factors in this case was the dominant position of Microsoft holding 95% of the market, i.e. a near monopoly. If it were not for this status of near-monopoly the Commission would probably not investigated as it would not create a closed market for competition. It was found that without supplying the interface to competitors it would restrict the market for competition, as well as restricting the versatility of these competitors. Microsoft defended its position by using the Software Directive whereby it was argued that not allowing the restriction would breach their copyright protection.

Microsoft argued that the Directive establishes a balance between copyright law and competition law, and that the Commission would be departing from that balance by pursuing its interoperability concerns. Moreover, Microsoft did not deny that it refuses to provide the interface specifications to competitors necessary for them to be able to achieve interoperability as defined by the Commission.

In respect to the bundling of software it was held this was a tied product and therefore breached Article 82EC ss(d) where it was held in line with EC Case Law:

Even where tied sales of two products are in accordance with commercial usage or where is a natural link between the two products in question, such sales may still constitute abuse within the meaning of article unless they are objectively justified.
In defence the argument was weak and not unique as in the previous charge whereby Microsoft argued that the Windows Media Player was not a separate product. In both counts the defence was dismissed and Microsoft had been found to breach the Article 82EC on the basis of refusal to supply where the fine was considerable and not just a mere slap on the wrist, where the fine amounted to 497.2 Million. Therefore this case illustrates the extent that the Commission will go to punish those who refuse to supply and in doing so restrict the fundamental precepts of competition law.

Conclusion:

The basics of this discussion relay that Article 82EC must be directly complied with by member states, therefore the elements of refusal to supply may be broad in its application, but this is to ensure that competition is not stifled and distorted.. Also the essence of competition, non-discrimination, the abolition of obstacles to trade, i.e. taxes, restrictions, requirements and tariffs, in member-states must be upheld. This logic led to classing the refusal to supply by companies a breach of this law because it allows a situation where there are barriers of trade for small companies or companies from other member-states. The following discussion will consider this closely. Also punishment will occur when the monopoly is made horizontally creating subsidiaries and acquiring interests closer to the distribution level. This can be seen in the Bayer Case which dealt with parallel trading where refusal to supply will be punished if it breaches the basic principles of competition law and create a system where there is rampant abuse of supplying only to those who do not pose a threat and create a monopolistic situation. In light of this case Riedel has proposed guidelines in order to reduce exposure to breaching Article 81EC and 82EC in respect to parallel and horizontal trading, i.e. ensuring that the basic precepts of the above discussed competition law is protected. These guidelines can be applied with minor adjustment to companies in all cases of refusal to supply and will ensure competition law is protected and companies are not in breach of Article 82EC:

• before imposing a stock quota system, a manufacturer should be satisfied that it is not dominant, since a refusal to supply by a dominant manufacturer may be a breach of article 82
• a stock quota system should be a policy pursued independently by the manufacturer, not incorporated in distribution agreements
• a manufacturer may not take steps to restrict the destination of sales by its distributors
• a system for monitoring the destination of sales entails risk: it may indicate to the regulator that an anticompetitive agreement exists
• to the extent that parties even engage in discussions about the destination of sales, this also entails risk, as it could create an inference that there is an anticompetitive agreement
• where manufacturers and distributors work closely together in relation to the distribution of the manufacturers’ goods, it may in practice be more difficult for a manufacturer to claim that it has engaged in a unilateral policy, in line with Bayer.

Bibliography:

N. Bridge, 2004, Directors Behaving Badly, NLJ 154(7129)

Charlesworth and Morse, 1999, Company Law, Sweet & Maxwell

Department of Trade and Industry can be found at: www.dti.gov.uk

Farrar et al, 1998, Farrar’s Company Law 4th Edition, Butterworths

The Insolvency Service can be found at: www.insolvency.gov.uk

Jones & Sufrin, 2004, EC Competition Law, Oxford University Press

Keenan and Bisacre, 1999, Company Law (with Scottish supplement), Prentice Hall

Lang, John Temple, Defining Legitimate Competition: Companies’ Duties To Supply Competitors, And Access To Essential Facilities, EXCERPTS, which can be found at: http://www.hyperlaw.com/lang.htm

Pillans and Bourne, 1999, Scottish Company Law, Cavendish

Riedel, 2004, Distribution Agreements – The ECJ Ruling in Bayer: Commission Suffers Set-Back in its Pursuit of the Single Market, CLI 13(3)