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How can Coca-Cola help us understand the essential facilities doctrine?

· December 19, 2018

Avid Coca-Cola drinkers may know that in different markets, the omnipresent cola beverage tastes different.  This is true in the Transatlantic context as well; a Coke in Washington is not the same as a Coke in Brussels, despite the common branding.  As expert witnesses give testimony to the Senate Judiciary Committee today on the Transatlantic antitrust relationship, the Coke example is illustrative of competing flavors of similarly branded competition law concepts.  This is particularly the case with the “essential facilities” doctrines in the EU and the U.S., a subject DisCo has covered before.

As DisCo explained in prior “Antitrust in 60 Seconds” blog posts [1, 2], the essential facilities doctrine refers to a mandatory access remedy that imposes an obligation on a monopolist firm to deal with competitors by requiring “a monopolist to provide access to a facility that the monopolist controls and that is deemed necessary for effective competition.”

The essential facilities doctrine originated in the U.S., but has gained more traction in the EU.  In fact, it remains debatable whether in the U.S. the doctrine remains valid. The Supreme Court has never explicitly recognized it.  In contrast, in the EU, it is easier than in the U.S. for antitrust authorities to subject dominant firms to antitrust liability and therefore, compel dominant firms to do business with their competitors.

The different approaches in the enforcement of the essential facilities doctrine rest at the core of the reasons why the EU and the U.S. have become more divergent when tackling monopolistic behaviors.  The key factor rests on the importance that each system gives to innovation and consumer welfare and the different approaches to preserve them.

Indeed, both competition systems understand that the imposition of an obligation to deal can deter incentives to innovate and eventually impact consumer welfare.  However, the EU has determined that the exceptional use of the essential facilities doctrine is necessary even when the welfare of consumers might be impacted, mainly to ensure that former public monopolies would compete on the merits in the EU markets.  Due to the number of formerly state-owned enterprises in Europe, such a rule has considerable significance. The climate in the U.S. is different.  First, the U.S. economy lacks a history of numerous state-owned businesses being privatized. The legal landscape is also different, due in large part to the viewpoint of Phillip Areeda, a prominent legal scholar and expert on antitrust, and his concerns on the negative impact that the use of the essential facilities doctrine may have on companies’ incentives to innovate.  This is the main reason why, in the U.S., the essential facilities doctrine is used in limited occasions.

In the EU, the essential facilities doctrine has been repeatedly distilled through the case law (Magill, Oscar Bronner, IMS and Microsoft). This expansion of the essential facilities doctrine extended into markets that are hardly “essential”, and not the ones for which the doctrine had been originally crafted: utilities.  

Coke isn’t just a metaphor here; The beverage maker was itself the subject of an ‘essential facilities’ ruling.  In an investigation that the European Commission (EC) opened against alleged abuse of dominance by Coca-Cola, the EC required that Coca-Cola give commitments including: “20% of free space in Coca-Cola’s coolers. Where Coca-Cola provides a free cooler and there is no other chilled beverage capacity in the outlet to which the consumer has direct access, the outlet operator will be free to use at least 20% of the cooler provided by Coca-Cola for any product of its choosing.”

So it might be argued that the EU has adopted a wide application of what was presumably intended to be a narrow exception to market competition.  

And why might this EU viewpoint on the enforcement of essential facilities doctrine be of concern in the digital economy?

As some expert witnesses may explain today to the Senators, on the 30th anniversary of Areeda’s leading article on the essential facilities doctrine, “Essential Facilities: An Epithet in Need of Limiting Principles,” his conclusions remain more relevant than ever.  As Areeda pointed out, an aggressive essential facilities doctrine might discourage companies from investing in vital assets in the first place.

Areeda concluded that: “No court should impose a duty to deal that it cannot explain or adequately and reasonably supervise. The problem should be deemed irremedia[ble] by antitrust law when compulsory access requires the court to assume the day-to-day controls characteristic of a regulatory agency.”  

Should EU antitrust enforcers adopt an expansive use of the essential facilities doctrine in digital markets, they risk becoming the “day-to-day” regulators that Areeda cautioned against, erecting a barrier that will impede growth in the digital economy.  Due to the cross-border nature of Internet commerce, online consumer welfare demands that global competition policy converge, with a focus on enhancing benefits to consumers and preserving incentives to innovate. A contrary approach risks driving global companies back from the edge of innovation, to the detriment of consumers.

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.