Under Art. 82 of the Treaty, there are essentially three different tests for duties to assist competitors, one for termination, and two for refusals to start de novo supply.

I. Abusive termination under Art. 82 (1) Dominant position (2) Abusive conduct

• Termination
• Harm to downstream competition, usually defined as “eliminating all competition in a neighboring market.”

(3) No objective justification.

II. Abusive refusal to start supplying under Art. 82 (1) Dominant position (2) Abusive conduct

• Refusal to start supplying
• Harm to downstream competition
• Indispensability, i.e., no one could economically replicate the essential facility.

(3) No objective justification.

III. Abusive refusal to start supplying Intellectual Property under Art. 82 (1) Dominant position (2) Abusive conduct

• Refusal to start supplying
• Harm to downstream competition
• Indispensability
• Prevents emergence of a new product, i.e., offering a mere “me too” product is not sufficient.

(3) No objective justification.

One of the most significant aspects of the Microsoft v. Commission decision is the relaxation of the “harm to downstream competition” criterion. In Commercial Solvents (1974), the court required behavior that “risks eliminating all competition.” In Magill (1995), the refusal to license TV listings “exclud[ed] all competition in that market,” and in Bronner (1998), the court required that the conduct “was likely to exclude all competition in the secondary market.” In other words, harm to downstream competition used to require (i) some degree of likelihood; and (ii) a threat to all competition. In Microsoft, the CFI held that the survival of some competition is not a defense, and that the “all competition” language should be replaced with “all effective competition.”

The court lays out the new formulation of the test in paragraphs 331-334.

[331] It follows from the case-law cited above that the refusal by an undertaking holding a dominant position to license a third party to use a product covered by an intellectual property right cannot in itself constitute an abuse of a dominant position within the meaning of Article 82 EC. It is only in exceptional circumstances that the exercise of the exclusive right by the owner of the intellectual property right may give rise to such an abuse. [332] It also follows from that case-law that the following circumstances, in particular, must be considered to be exceptional:

• in the first place, the refusal relates to a product or service indispensable to the exercise of a particular activity on a neighbouring market;
• in the second place, the refusal is of such a kind as to exclude any effective competition on that neighbouring market;
• in the third place, the refusal prevents the appearance of a new product for which there is potential consumer demand.

[333] Once it is established that such circumstances are present, the refusal by the holder of a dominant position to grant a licence may infringe Article 82 EC unless the refusal is objectively justified.

Note how the “any effective competition” language replaced the traditional “all competition” standard. In paragraphs 561-563 the court explains that the apparent change is no departure from past precedent.

[561] The Court finds that Microsoft’s complaint is purely one of terminology and is wholly irrelevant. The expressions ‘risk of elimination of competition’ and ‘likely to eliminate competition’ are used without distinction by the Community judicature to reflect the same idea, namely that Article 82 EC does not apply only from the time when there is no more, or practically no more, competition on the market. If the Commission were required to wait until competitors were eliminated from the market, or until their elimination was sufficiently imminent, before being able to take action under Article 82 EC, that would clearly run counter to the objective of that provision, which is to maintain undistorted competition in the common market and, in particular, to safeguard the competition that still exists on the relevant market. [562] In this case, the Commission had all the more reason to apply Article 82 EC before the elimination of competition on the work group server operating systems market had become a reality because that market is characterised by significant network effects and because the elimination of competition would therefore be difficult to reverse (see recitals 515 to 522 and 533 to the contested decision). [563] Nor is it necessary to demonstrate that all competition on the market would be eliminated. What matters, for the purpose of establishing an infringement of Article 82 EC, is that the refusal at issue is liable to, or is likely to, eliminate all effective competition on the market. It must be made clear that the fact that the competitors of the dominant undertaking retain a marginal presence in certain niches on the market cannot suffice to substantiate the existence of such competition.

I’m not convinced that the difference is merely one of terminology. A threat to “all competition” is of a very different nature than a threat to “any effective competition,” particularly if, at the same time, the probability requirements for the harm to competition are being relaxed. The Microsoft decision, in effect, turns Art. 82 into a full-fledged incipiency statute. The result, in my view, may well be justified in the context of interoperability disclosure and undeniable network effects. But the underlying reasoning would have been more convincing had the court expressly stated its departure from the (very restrictive) “all competition” standard.

Technorati Tags: antitrust, microsoft

I’d almost forgotten that Linux saved the moribund mainframe market from obsolsecence a while ago. (COBOL anyone?) In the wake of the Microsoft decision, one of the “New Mainframe” companies now seeks to take its struggle against IBM to Brussels.

PSI, which has been trying to break into the mainframe computer business, already has a private antitrust suit against IBM pending in the US. At the end of last week it was hinting heavily that it would now try to ride the Microsoft ruling all the way to Brussels. “I’d say the EU is the perfect place for us to push this right now,” PSI said. “Europe has definitely changed the game. This ruling opens up opportunities for other companies.”

Technorati Tags: antitrust, mainframe

Yesterday, Apple made its case in a closed door hearing before the European Commission in a matter involving iTunes. According to Bloomberg:

Eddy Cue, Apple’s vice president of iTunes, defended the company’s use of national online music stores, which charge different prices for songs downloaded in the United Kingdom and the rest of the 27-nation EU. During a closed-door hearing Wednesday in Brussels, Belgium, Apple blamed national laws for preventing the company from reaching its goal of operating a pan-European iTunes store, said Alan Hely, an Apple spokesman in the U.K.

“We think anyone should be able to buy from any store,” Apple Chief Executive Steve Jobs said at the news conference in Berlin. “We agree completely with the European Commission’s view that anyone in Europe should be able to buy music in any other stores.”

The commission, the EU’s antitrust regulator, said in April that Apple and the four largest music companies illegally restrict where iTunes customers can buy songs. Under EU rules, companies can be fined as much as 10 percent of annual sales for agreeing to restrict competition along national markets.

Apple said it is prevented from operating a pan-European iTunes store because of copyright restrictions.

“Unfortunately, the music and publishing companies said they couldn’t license us their music on terms that would enable us to achieve this,” Hely said. “Apple is simply abiding by these licensing terms and national copyright laws.”

In response to AAG (and ex-Microsoft antitrust lawyer) Tom Barnett’s comment that the CFI’s “lengthy and complex” ruling might have “the unfortunate consequence of harming consumers by chilling innovation and discouraging competition,” in other words, that the judges, in addition to being wordy, had no idea what they were doing, Neelie Kroes went on record stating that:

It is totally unacceptable that a representative of the U.S. administration criticized an independent court of law outside its jurisdiction. … The European Commission does not pass judgment on rulings by U.S. courts, and we expect the same degree of respect.

Monopolization is one of the last high-profile areas of significant disagreement between the US and the EU in antitrust matters. What makes this transatlantic spat/pillow fight particularly juicy is, of course, that the EU case against Microsoft is a tributary of the US case, which DOJ won in court only to subsequently lose it at the negotiation table. In many ways, the CFI’s decision therefore completes or at least complements the original DOJ case against Microsoft. In her public remarks, Neelie Kroes understandably kept the focus on server-to-server interoperability and compulsory licensing, not on the ill-fated Windows XP Edition N (for “not with media player”), which to this date sold a whooping 1,500 copies. (I like to think that most of the demand came from antitrust lawyers who absolutely had to have the first consumer product designed by a competition agency on their shelves.) According to Kroes, interoperability will be a big issue going forward.

In confirming the interoperability part of the Commission’s decision, the Court has confirmed the importance of interoperability for consumer choice and innovation in high tech industries. If competitors are unable to make their products “talk to” or work properly with a dominant company’s products, they are prevented from bringing new innovative products onto the market, and customers are locked into the products of the existing provider. Consumers want interoperable products, and companies that want to meet consumers’ demands should be able to provide them.

Technorati Tags: antitrust, monopolization, microsoft

The New York Times reports that the ruling may bode ill for other companies: “Software and legal experts said the European ruling might signal problems for companies like Apple, Intel and Qualcomm, whose market dominance in online music downloads, computer chips and mobile phone technology is also being scrutinized by the European Commission.”

An updated Microsoft statement and Q&A is available online.

In a statement, Thomas Barnett, the assistant attorney general for antitrust, criticized the ruling, say that “we” are:

concerned that the standard applied to unilateral conduct by the CFI, rather than helping consumers, may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition.

In the United States, the antitrust laws are enforced to protect consumers by protecting competition, not competitors. In the absence of demonstrable consumer harm, all companies, including dominant firms, are encouraged to compete vigorously. U.S. courts recognize the potential benefits to consumers when a company, including a dominant company, makes unilateral business decisions, for example to add features to its popular products or license its intellectual property to rivals, or to refuse to do so.

At the Antitrust & Competition Policy Blog, Bill Page notes that “there is little to report of interest other than the result—an endorsement of the commission’s position on every substantive issue. The court’s pattern appears to be, on each point, to repeat the Commission’s 2004 decision, describe the position of the parties in great detail, and then to endorse the Commission’s position.”

Randy Picker, at the University of Chicago Law School Blog, posts his initial thoughts and notes that:

The European Commission required Microsoft to offer separate with and without versions of Windows: one version that could include the Windows Media Player and one that would come without it. Microsoft and the EU tussled over the name of the reduced technology version—I think Microsoft wanted to call it “Windows, the Junky Version Required by the EU”—but as the European Commission did not require Microsoft to charge a reduced price for the reduced function version, it has had little market impact.

On a more serious note, he argues that the only remedy likely to have any market impact is the required interoperability disclosure in the work group server operating systems market.

At the Management R&D Blog, Luke Ford argues that “the Court failed to articulate a principle that would tell firms when they are going to violate the increasingly murky European antitrust rules about dominant firm behavior. And, in an unfortunate choice of words that invites criticism from those who remember the bad old days of antitrust, the Court seemed to admit that Microsoft is a target because it is successful.”

Additional reaction from Valleywag, Engadget, Blawgletter, the Wall Street Journal, and Business Week.

p.s. this would have been up sooner but for #%! Apple.

According to the Washington Post:

A European court today upheld a record $689 million antitrust fine against Microsoft, another in a string of defeats for the company’s business practices and one that narrows the options in its decade-long battle with continental regulators.

The European Court of First Instance said that the European Commission was correct in 2004 when it concluded that Microsoft had abused its market dominance by refusing some technical information from competitors and by bundling the Windows Media Player with its Internet Explorer. In both cases, the court found, Microsoft used its position as the largest supplier of computer operating systems to hinder competition for competing media players and other applications.

Decision available here (top link).

[Update: Microsoft’s initial response is here and the Commission’s press release is here (via Antitrust & Competition Policy Blog.]

More to come.

The European Commission has confirmed that a Statement of Objections was issued to Rambus on July 30. The claim is for an abuse of a dominant position by “claiming unreasonable royalties for the use of certain patents” for DRAM chips. From the press release:

DRAMs have been standardised by an industry-wide US based standard setting organisation – JEDEC. Rambus owns and is asserting patents which it claims cover the technology included in these JEDEC standards. Therefore, every manufacturer wishing to produce synchronous DRAM chips or chipsets consequently must either acquire a licence from Rambus or litigate its asserted patent rights. The SO outlines the Commission’s preliminary view that Rambus engaged in intentional deceptive conduct in the context of the standard-setting process, for example by not disclosing the existence of the patents which it later claimed were relevant to the adopted standard. This type of behaviour is known as a “patent ambush”. Against this background, the Commission provisionally considers that Rambus breached the EC Treaty’s rules on abuse of a dominant market position (Article 82) by subsequently claiming unreasonable royalties for the use of those relevant patents. The Commission’s preliminary view is that without its “patent ambush”, Rambus would not have been able to charge the royalty rates it currently does. This is the first time that the Commission is dealing with a “patent ambush” under EC antitrust law, but the approach reflects well-established general case-law under Article 82 of the Treaty.

The European Commission’s SO follows the FTC’s administrative proceedings against Rambus. In June 2002, the FTC had charged Rambus with violating federal antitrust laws by deliberately engaging in a pattern of anticompetitive acts to deceive an industry standard-setting organization (JEDEC). The FTC had issued a final opinion and order back in February, in which it sets maximum royalties that Rambus may charge:

[T]he Commission has previously declared, and we agree, that ‘where the circumstances justify such relief, the Commission has the authority to require royalty-free licensing.’ . . . We conclude, however, that Complaint Counsel have not satisfied their burden of demonstrating that a royalty-free remedy is necessary to restore the competition that would have existed in the ‘but for’ world – i.e., that absent Rambus’s deception, JEDEC would not have standardized Rambus technologies, thus leaving Rambus with no royalties. . . .We have examined the record for the proof that the courts have found necessary to impose royalty-free licensing, but do not find it. We therefore are left with the task of determining the maximum reasonable royalty rate that Rambus may charge those practicing the SDRAM and DDR-SDRAM standards. Royalty rates unquestionably are better set in the marketplace, but Rambus’s deceptive conduct has made that impossible. Although we do not relish imposing a compulsory licensing remedy, the facts presented make that relief appropriate and indeed necessary to restore competition.

All FTC documents relating to the Rambus matter, including Rambus’s motion to reconsider, an interesting amicus curae brief, and the FTC’s order and opinion on that motion, can be found here.

According to the AP (via the Washington Post):

EU regulators said Friday they have charged Intel Corp. with monopoly abuse for blocking rival computer chipmaker Advanced Micro Devices Inc.’s access to customers. Intel immediately said its conduct had been lawful and said it welcomed the chance to finally respond to allegations made by its main competitor. The European Commission claimed that Intel gave “substantial rebates” to computer makers for buying most of their x86 computer processing units, or CPUs, from Intel; that it made payments to manufacturers to get them to delay or cancel product lines using AMD chips; and that it sold its own chips below cost on average to strategic server customers on bids against AMD products to try to muscle into that business. It said each of these alone broke EU law by shutting out AMD from the market. Together they amounted to a strategy that damaged the rules of fair play in an effort to keep AMD from eroding Intel’s market leadership, it said. The Commission also considers at this stage of its analysis that the three types of conduct reinforce each other and are part of a single overall anticompetitive strategy,” it said.

Intel has released a statement from Bruce Sewell, Intel’s senior vice president and general counsel:

We are confident that the microprocessor market segment is functioning normally and that Intel’s conduct has been lawful, pro-competitive, and beneficial to consumers. While we would certainly have preferred to avoid the cost and inconvenience of establishing that our competitive conduct in Europe has been lawful, the Commission’s decision to issue a Statement of Objections means that at last Intel will have the opportunity to hear and respond to the allegations made by our primary competitor. The case is based on complaints from a direct competitor rather than customers or consumers. The Commission has an obligation to investigate those complaints. However, a Statement of Objections contains only preliminary allegations and does not itself amount to a finding that there has been a violation of European Union law. Intel will now be given the chance to respond directly to the Commission’s concerns as part of the administrative process. The evidence that this industry is fiercely competitive and working is compelling. When competitors perform and execute the market rewards them. When they falter and under-perform the market responds accordingly.

In 2001, the Commission declared illegal the acquisition of Legrand by Schneider. In 2002, the Commission ordered a diverstiture. Schneider complied and sold Legrand to KKR. Subsequently, Schneider appealed the decision to the Court of First Instance and won. Then, Schneider sued the Commission for damages - and won.

The Court holds that the illegality vitiating the decision of incompatibility confers on Schneider a right to compensation in respect of two categories of financial losses incurred by it. The first comprises the expenses incurred by Schneider relating to its participation in the resumed merger control procedure which was undertaken by the Commission following the annulments pronounced by the Court on 22 October 2002. The second represents the reduction in the divestiture price which Schneider had to concede to Wendel/KKR in order to obtain a postponement of the execution of that divestiture. Two-thirds of the latter loss is to be compensated, since the Court considers that Schneider had itself contributed to its own loss by assuming the real risk that the merger would subsequently be declared incompatible and that resale of the shareholding in Legrand would be the inevitable consequence. The parties must inform the Court of the amount of the first category of loss within a period of three months from the date of delivery of the judgment. The second category of loss shall be assessed by an expert.

The virtually unqualified doctrine of sovereign immunity in the U.S. is both of questionable origin and of questionable contemporary value. Holding governments (in addition to individual government officials) accountable for their actions, not just politically and by way of injunction but also in civil actions for damages, is consistent with and (under certain circumstances) compelled by a government under the rule of law. This is a case to watch. The press release is here. The decision is here.

Technorati Tags: antitrust, EU

The Financial Times reports:

The European Union’s 50-year-old commitment to “undistorted competition” has been scrapped from a list of the bloc’s objectives in a French coup that lawyers argue could undermine Brussels’ fight against protectionism and illegal state aid. Nicolas Sarkozy, French president, secured the change, on the eve of an already tense Brussels summit to allay concerns in his country that the EU has become too “Anglo-Saxon”. The surprise move came as EU leaders gathered in Brussels to try to agree a revamped version of the bloc’s moribund constitutional treaty. The new text would update the Union’s rules and create a new EU president and foreign minister. Mario Monti, the former EU competition commissioner who clashed with Mr Sarkozy over the French bail-out of the engineering giant Alstom, said the change would undermine the Commission’s role as an antitrust watchdog, including taking on multinational giants, including ones based in the US. … In the original constitution, one of the Union’s main objectives was listed as “an internal market where competition is free and undistorted”. France has now persuaded Berlin to put a full stop after the words “internal market” in the new treaty. … By contrast “full employment and social progress” will remain Union objectives, offering possible cover to a country wanting to prop up a failing company or engineer a merger of “national champions”.

(HT to Damien Geradin for the link).

Technorati Tags: antitrust, EU

A couple of weeks ago I heard Bill Kovacic speak about “The Role of Intellectual Leadership in Competition Policy,” and the need to persuade others around the world with the unforced force of the better argument. I have to admit, it was a bit of a “West Wing” moment, a reminder of how rare such displays of intellectual integrity and passion have become. But others are taking notice, too! According to the Financial Times:

The European Commission, Britain’s Competition Commission and the US Federal Trade Commission have been crowned the best antitrust enforcement agencies in the world, according to a survey published on Monday. The three regulators were declared the “elite” among 38 competition agencies examined in the latest edition of an annual survey by Global Competition Review, a specialist publication. Though the principal European, UK and US agencies often pursue different policies and cases, the lawyers, academics and economists interviewed found little difference in the analytical skills of the three bodies.

Congratulations!

Technorati Tags: antitrust, FTC

DG Comp posted this highly readable guide to competition and competition law in the EU.

I am delighted to introduce this consumers guide to European competition policy. Open competition in Europe is important. It helps to lower prices and increases choice for European consumers. This guide explains how the European Commission, together with national competition authorities, aims to ensure that there is free and fair competition in the European Union. It explains how they:

• take action against business practices which restrict competition;
• examine mergers to see if they reduce competition;
• open up competition in areas previously controlled by State-run monopolies;
• vet financial support given to companies by EU national governments;
• cooperate with other competition authorities around the world.

Note how consumer choice gets top billing right next to price. And even though we usually don’t give design advice on this blog: please, please, please get some new stock photographs! I must have seen these random, energetic, happy people enjoying the fruits of competition while shaking hands a dozen times by now. It only takes one trip to flickr to cure that malaise.

Technorati Tags: antitrust, competition law

A new paper analyzes US and and EU merger enforcement. Of particular note is that two of the co-authors are Malcolm Coate and Shawn Ulrick of the Federal Trade Commission. According to the abstract:

Merger regulation affects large transactions in the market for corporate control in both the European Union (EU) and the United States (US). This paper compares the merger enforcement policies of the two regions using descriptions of the merger investigations prepared by the staff of the EU and the Federal Trade Commission. The policies are found to share a common foundation with substantial weight being placed on both the market structure characteristics and the likelihood of effective entry. US enforcement was broader-based in that it scrutinized markets that might be characterized as raising oligopoly, unilateral, and dominant firm concerns, while the EU policy focused largely on market dominance. Neither regime is found to be stricter in all circumstances, since the market and firm characteristics impact the enforcement decisions differently. However, we find that the US regime is more predictable (given our measures of the explanatory variables), tougher on strong dominance cases and oligopoly cases, but more permissive on weak dominance cases.

Download it while it is hot.

Here is a guest post by Pascal Berghe on current developments in Europe.

Consultations on merger remedies

The EU Commission released a draft notice to replace the current Merger Remedies Notice dating of 2001. The draft notice takes into account the conclusions of the Commission’s 2005 study on the implementation and effectiveness of merger remedies and recent case-law. It also realises the necessary adaptation to bring the notice in line with the new regulation EC Merger Regulation adopted in 2004 (Regulation 139/2004). The implementing regulation (Reg. 802/2004) is slightly amended as well, with the creation of a “Form RM” to describe the commitments proposed by the parties. Upon a first quick glance, the 35-page draft notice discusses in much more detail what type of remedies may be suitable (divestiture of a viable and competitive business, divestiture of crown jewels, and other remedies such as access remedies and change in long-term exclusive contracts). It also recommends the inclusion of a review clause in the proposed commitments. With regard to procedure, it addresses separately the necessary requirements that commitments must meet when submitted during Phase I or Phase II. Lastly, it provides guidance on the different phases of the implementation process (including the role of the trustee and post-implementation monitoring). Clearly, the document is worth a closer analysis. If reading the document inspires any comments, they may be submitted to the Commission until June 3, 2007.

Consultation on state aid reform

If you are not interested in mergers, the Commission launched a second consultation on the same day on simplified rules for block exemptions in state aid. State aid reform has been one of the Commission’s priorities. The new draft Block Exemption Regulation (BER) consolidates the five existing BERs and creates new eligible categories of aids (environmental aid, risk capital aid and extension of R&D aid to large undertakings). In implementing its 2005 State Aid Action Plan, the Commission’s general motto is to promote “less and better targeted aid” that achieves horizontal (ie non sector specific) objectives. The deadline for comments is also June 3, 2007.

Technorati Tags: antitrust, competition law

Here is a guest post by Pascal Berghe on current developments in Europe. Pascal showed up for our rowdy bloggers meetup. Thanks, Pascal!

While most of us were in Washington DC for the ABA Spring Meeting, some interesting developments occurred last week on the other side of the Atlantic:

• The Commission imposed its largest fine ever on an individual undertaking for participation in a cartel limited to one Member State (the fine also enters the top ten largest fines by company or by cartel). Heineken was fined €273,283,000.00 ($341,603,750.00) in the Dutch Beer case. The Commission granted a €100,000 reduction due to the extremely lengthy investigation, which lasted seven years. Three similar beers cartels had been previously unearthed in Belgium, France and Luxembourg… Who said that competition law does not tackle problems that affect citizens?
• The UK Office of Fair Trading released a discussion paper on private enforcement. The paper focuses on enabling collective and representative actions. It seeks to alleviate the plaintiff’s burden of proof and also encourages out-of-court settlements. The paper is a follow-up of the Commission’s 2005 Green Paper, while waiting for a White Paper (more concrete proposals). Any comments should be submitted by 13 June 2007…
• The French Competition Council issued a document revising its 2001 leniency programme to align it with the ECN Model Leniency Programme. The amendments include the creation of a marker system and the clarification of the substantive and procedural requirements.