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Antitrust in 60 Seconds: What Is the Essential Facilities Doctrine in the EU?

· April 19, 2018

The 60-Second Read:

The essential facilities doctrine in the EU, like in the United States, is a remedy that tackles the abuse of market power by a firm that holds a dominant position and refuses to deal with its rivals foreclosing the markets. Thus, in the EU, as in any market economy, dominant firms do not have an obligation to cooperate with rivals. However, dominant firms do not hold the privilege of choosing not to deal with some specific competitors, as required by the essential facilities doctrine. To determine when dominant firms have to deal with competitors, EU courts have progressively crafted a test that helps determine when a unilateral refusal to deal is illegal.

As explained in our previous “Antitrust in 60 Seconds” piece, the essential facilities doctrine originated in the United States, but has gained clearer traction before the courts in the EU. In fact, whereas the doctrine’s U.S. viability remains debatable, it forms part of the EU competition framework in both theory and practice.

Similar to U.S. competition debates, discussions on the necessity of enforcing the essential facilities doctrine in the EU have focused on the doctrine’s impact on innovation. On the one hand, the European Commission has clearly stated that unilateral refusals to deal with competitors can be subject to antitrust liability in specific instances. On the other hand, there is broad consensus that the imposition of an obligation to deal with competitors should be used sparingly, as it can deter incentives to innovate and impact consumer welfare.  

What is the essential facilities doctrine?

The essential facilities doctrine is a ‘mandatory access remedy’ that forms part of the European competition toolkit. It is used to tackle exceptional cases where a dominant firm leverages its monopoly power and refuses to deal with a competitor by denying access to a so-called essential product or service, thus foreclosing the market. In essence, European competition authorities can impose an obligation on dominant firms to grant access to a facility to ensure that markets are not foreclosed. To do so, enforcers need to conduct a thorough antitrust analysis and comply with a legal test that European courts have crafted through well-established case law.

This doctrine is said to be an exception to the ordinary rule that, in a market economy, a company has no duty to deal with their competitors. So, although authorities can impose an obligation on the monopolist to deal with competitors through the enforcement of the essential facilities doctrine, it is widely accepted that such a remedy should be imposed in very limited circumstances.

Where do the European Union courts stand?

The EU court cases that contributed to the development of the essential facilities doctrine primarily concern vertically integrated companies. Early cases, such as Commercial Solvents, established a broad rule whereby it could be inferred that a firm holding a dominant position had a duty to deal with another firm operating in a downstream market.

But the EU cases evolved and fine-tuned the initial broad prescription. Magill, Oscar Bronner, IMS and Microsoft are, arguably, the primary cases through which European courts have crafted the so-called ‘essential facilities’ test to analyze whether a competition law breach exists when a dominant company refuses to deal with a competitor. In short, the essential facilities test can be summarized as follows:

In order for an authority to impose a duty to deal, under the so-called essential facilities doctrine, the following cumulative circumstances need to exist:

  1. The accused firm must hold a dominant position in an upstream market;
  2. The service or product to which access is being denied must be indispensable to compete in the downstream market;
  3. The refusal to grant access would lead to the elimination of effective competition in the downstream market; and
  4. There is no objective justification for the refusal to supply.

It is important to note that the existence of this test implies that enforcers must carry out an antitrust analysis before imposing any antitrust remedy based on the essential facilities doctrine. In other words, these judgments clarify that there is no presumption that dominant firms have a duty to deal with competitors.

The European Commission’s Guidance Paper

In 2009, the European Commission (EC) published the Guidance Paper on enforcement priorities in applying article 82 of the EC Treaty (now article 102) that touches upon the refusal to deal and the essential facilities doctrine. In the Guidance Paper the EC acknowledges that “[…] generally speaking, any undertaking, whether dominant or not, should have the right to choose its trading partners and to dispose freely of its property.”

This Guidance Paper captures the legal evolution of the essential facilities doctrine before the European courts. As such, it clearly states that, in certain circumstances, a dominant company’s refusal to supply goods or services can amount to an abuse of dominant position subject to antitrust liability. But, for such a practice to qualify as an antitrust infringement, the EC asserts that the four-prong test must be met

It is important to note that this Guidance Paper is not legally binding, and therefore cannot be enforced before the courts. However, it is presumed to capture the EC’s views on the matter and, therefore, one would expect the Commission to follow the Guidance Paper when identifying potential abuses and enforcing the law.

The impact of the essential facilities doctrine on innovation

Similar to the ongoing debates pertaining to the essential facilities doctrine and its potential impact on innovation, the Guidance Paper discusses firms’ incentives to invest and innovate, as well as the doctrine’s negative impact on consumers.  

Interestingly, the EC departs from its analysis regarding the imposition of a duty to supply on dominant firms by acknowledging that intervention on competition law grounds requires careful consideration. The EC is concerned that the imposition of an obligation to supply can undermine a firm’s incentives to invest and innovate, and thus harm consumers. The EC also notes that competitors may be tempted to free ride on investments made by the dominant firm instead of investing themselves, which would ultimately harm consumers as well.

The EC assessment seems to be highly relevant for those companies that depend on innovation, such as Internet companies. In this regard, it is important to highlight the EC’s views on the efficiencies claims that dominant firms can allege:

“the Commission will consider claims by the dominant undertaking that a refusal to supply is necessary to allow the dominant undertaking to realize an adequate return on the investments required to develop its input business, thus generating incentives to continue to invest in the future, taking the risk of failed projects into account. The Commission will also consider claims by the dominant undertaking that its own innovation will be negatively affected by the obligation to supply, or by the structural changes in the market conditions that imposing such an obligation will bring about, including the development of follow-on innovation by competitors.”

The position advanced by the EC in the Guidance Paper — the consideration of competition enforcement and its impact on innovation, as reflected in EU case law as well — seems to run parallel to the evolution of the EU economic structures. Since the 90s, fewer state-owned firms have governed the European economy, where a broader application of the essential facilities doctrine has an economic rationale. However, as the market economy progresses and more companies emerge as a result of the market forces, it seems logical that the essential facilities doctrine in the EU remain an exceptional remedy due to its impact on innovation and harm to consumers. This might become an example of transatlantic convergence after all.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.