Refusals To Deal Supply In The Eu And Us

Comparison of the EU Art. 82 Guidance treatment of the practice of refusal to deal/supply with the US Department of Justice‘s approach that emerges from the recent Report on „Single Firm Conduct Under Section 2 of the Sherman Act“ .

1) The development of EU Competition Law and US Antitrust Law

United States Antitrust law and European Community Competition law are the two largest and most influential systems of competition regulation nowadays.

The Antitrust law begins with the United States legislation by the Sherman Act signed in 1890. Although there were made some amendments to this law (e.g. the Clayton Act in 1914), the legislation has strong historical roots.

On contrary, the modern Competition law in European Union has begun much later. The first major decision concerning anticompetitive behaviour was taken by the Commission in 1964. However, due to the resistance of Member states governments for legal changes, the formation of Competition rules in EU was much more complicated. The final modification has been made in December 2002, when EU Council Regulation 1/2003 places National Competition Authorities and Member State national Courts at the heart of the enforcement of Arts 81 & 82 of the Treaty.

2) The main differences between US and EU legislation

The basic difference between US and EU law is in methodological approach to the legislative examination. The law of the European Union is the unique legal system which operates alongside the laws of Member States of the European Union (EU). The law of Member states comes from civil law approach, where legislation is seen as the primary source of law.

On contrary, the United States common law refers to law and the corresponding legal system developed through decisions of courts and similar tribunals. The cases are measured and judged according to the previous decisions in similar situations.

These two different approaches can be also seen in judging practices about refusal to deal/supply with rivals according to US Antitrust Law and EU Competition Law. While EU Competition Law lists the general examples of anticompetitive behaviour, the US Antitrust Law is implementing its legislation by the specific cases. However, both legislations have the same aim: to find the right balance between enabling undertaking to choose its trading partners and at the same time keep the competitive environment and protect the consumers´ welfare.

3) Approaches in refusal to deal/supply according to EU Art. 82 Guidance and Single Firm Conduct of the Sherman Act

Summary of EU Art. 82 Guidance

The refusal to supply by undertaking includes a wide range of practices. The most typical refusals are:
a) refusal to supply products to existing or new customers,
b) rejection to license intellectual property rights,
c) limitation in access to an essential facility or a network.

The EU Guidance is describing 3 possibilities of behaviour of undertakings on the market:
a) the dominant undertaking refuses to supply with the buyer on the downstream market (“the term downstream market is used to refer to the market for which the refused input is needed in order to manufacture a product or provide a service” (2) );
b) undertaking charges a price for the product on the upstream market (“the term upstream market is specified as market at the previous stage of the production/distribution chain” (1) ), which compared to the price it charge on the downstream market does not allow other competitors to trade profitably (margin squeeze);
c) the price in the upstream market is regulated, the price in the downstream market is not regulated and the dominant undertaking is able to extract more profits in the unregulated downstream market, by excluding competitors on the downstream market through a refusal to supply.

„The Commission will consider these practices as an enforcement priority if the following circumstances are present:
• the refusal relates to a product or service that is objectively necessary to be able to
compete effectively on a downstream market;
• the refusal is likely to lead to the elimination of effective competition on the
downstream market; and
• the refusal is likely to lead to consumer harm.“ (2)

The Commission will analyze the substitutability of the product which was by dominant undertaking refused to supply. Furthermore the Commission will make an assessment whether competitors can create an alternative source of efficient supply, which would be capable to be disposed in the downstream market.

The Commission always makes decisions with consideration for the consumers´ welfare. In the decision-making process are included both short-term and long-term effects (long-term effects prevail).

During the decision-making process the Commission considers also claims made by the dominant undertaking aiming at justifying its refusal to supply. The reasonable arguments made by dominant undertaking can include: lost of an adequate return on the investments, elimination of potential innovations and structural market changes . However, the dominant undertaking has to claim on the basis of these negative impacts (the Commission is not obliged to make analysis about that).

Summary of Single Firm Conduct of the Sherman Act

According to the Sherman Act the focus of antitrust is not on the refusal to deal, but on the competitive consequences such as conditions (e.g. tying or exclusivity). Although a firm can refuse to deal with its competitors, this refusal has to be substantiated by legitimate competitive reasons.

Furthermore the Law also mentions that: “the patent holder may enforce the statutory right to exclude others from making, using, or selling the claimed invention free from liability under the antitrust laws”. However, this statement was criticized due to the lack of a coherent analytical framework.

The main aim of antitrust law is:
a) protect the competitive process for the benefit of consumers;
b) not to restrict a firm´s right to choose those with which it will deal, in order to keep the incentives for the monopolist to innovate.

In case of existence refusal to deal, the suffered undertaking must prove four elements:
• there is a control of the essential facility by a monopolist;
• competitor is not able to practically duplicate the essential facility;
• the use of the facility is denied to the competitor;
• the feasibility of providing the facility.

This doctrine was criticized due to the fail to provide clear guidance. Some of the weak points are that:
• doctrine is considering harm on competitors (not on competition);
• a flaw of deciding whether a unilateral, unconditional refusal to deal harms competition;
• there is no full consideration of legitimate business justifications.

During the decision-making process the US Antitrust law has to consider also the consumers´ welfare from static and dynamic points of view. For example, if a monopolist would be forced to deal with a rival, consumers may immediately benefit from short-term prices reductions or additional product options. However, these static benefits can lead to a lost of long term efficiencies (diminishing of potential future innovations).

As a conclusion the Department believes that: “there is a significant risk of long-run harm to consumers from antitrust intervention against unilateral, unconditional refusals to deal with rivals, particularly considering the effects of economy-wide disincentives and remedial difficulties.” (4)

4) Conclusion

Both US Antitrust Law and EU Competition Law intervene when the refusal to supply/deal leads to distortion on the market and to harm of consumers´ welfare.

However it is very important to be careful in imposing an obligation to the dominant firm to deal/supply with rival, because this may undermine firms´ incentives to invest and innovate in the future. This dilemma strongly relates to the Intellectual property rights. If undertaking would be forced to share a successful innovation, then it will probably start to consider the potential future returns on the investments, which might be diminished. Then the relationship between intention of Competition Law and Intellectual Property rights raise conflict. So the need for critical analysis of every case is very important. The legislation should not consider only the harm of consumers´ welfare, but also economic consequences, as the innovation is the most important key for increasing general welfare.

This problematic is very sensitive and depends on the point of view (e.g. economic versus legislative approach). On contrary, enabling the dominant undertaking to refuse to supply can cause distortion on market, which may lead to reduction in innovation too. The reason is that by this we would enforce the undertaking position on the market even more and it might lose incentive to further innovate.

In spite of the fact that there are many differences in approach to the case from US Antitrust law side and EU Competition law side (e.g. Microsoft case), the future of both legislations will be in trying to converge. One of the reasons is the need for simplifying the dynamic competition environment due to the fact of growing globalization. Because multinational undertakings operate worldwide nowadays, the convergence would ease to solve the number of problematic issues within the competition market.

5) References

(1) Concurrences, Institute of Competition Law
(2) Commission of the European Communities (2008) „Guidance on the Commission's Enforcement Priorities in Applying
Article 82 EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings“
(3) Open Encyclopedia Wikipedia:
(4) U.S. Department of Justice (2008) „Single-firm Conduct Under Section 2 of the Sherman Act“

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License