Kings College London Thesis submitted for PhD in law Liza Nette Lovdahl Gormsen 0224334

Is there a tension between the goals of protecting economic freedom and the promotion of consumer welfare in the application of Article 82 EC?

Supervised by Professor Richard Whish David Bailey

London, 20 July 2007

Acknowledgements

The seeds for this thesis were sown during my LL.M. at Kings College London in 2002-2003 where I was taught competition law by Professor Richard Whish and David Bailey who later became my supervisors. My intellectual indebtedness derives from various sources in particular my main supervisor Professor Richard Whish. His intellectual reputation is immense and it is impossible to capture the impressiveness of his capacity and logic in a few lines. In short, it would have been more difficult to write without his probing questions and rigorous criticism. On a personal level, I admire him for his integrity and fine personality. I am also intellectually indebted to my second supervisor David Bailey who has been a helpful mentor and friend throughout the process. His meticulous corrections were always given with incredible sensitivity and intelligent understanding. A number of friends took the time to review, discuss and improve parts of the thesis, including Dr Chris Townley, Anne Aylwin and Francesca Maria Jennings Gibbons. I am also grateful for the many and interesting discussions I have had with Professor Margaret Bloom, Dr Oke Odudu, Professor Alison Jones and all the bright people I have met on my way. I am fortunate to have been a part of the enormous intellectual capacity surrounding the Centre for European Law at Kings College London. Thanks to my dear friend Dr Melanie Smith for wise counselling, encouragement, emotional support and endless conversations about the Freiburg School, legitimate democracy and fundamental human rights.

I wish to acknowledge with gratitude the financial support from the Competition Law Scholar Forum and the Office of Fair Trading. Above all, I thank my partner Fanis who has given me emotional and financial support throughout the three and a half years it has taken me to finish this project. I am grateful for his endless patience and his company. Without him the thesis would have been less fun.

Abstract
Article 82 is traditionally analysed as a tool to integrate and liberalise the European Single Market and to protect competition from distortion. As such there is no comprehensive discussion of the tensions that lie at the centre of the objective of protecting competition in the current rethinking of Article 82. With regard to exclusionary abuses, DG Competition has articulated that the main objective of Article 82 is the protection of competition in the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources. This statement may conflict with some of the case law protecting the economic freedom of the market players derived from ordoliberalism. The latter is a well respected German legal tradition that holds both that government needs to be restrained from abuse of power, and that the free market has its limits. Economic rights deserve protection and vigilance is needed to ensure economic power is not misused or abused, not only in the interests of consumer welfare, but also in the interests of the economic liberty of the individual. This thesis considers the tension between the goals of protecting economic freedom and the promotion of consumer welfare in the application of Article 82. Presupposing that economic freedom and consumer welfare are in opposition to one another, such tension is only set to intensify and must be given appropriate weight in considering the extent to which DG Competition can or should try to move to a consumer welfare standard. Changing the interpretation of protection of competition from economic freedom to consumer welfare within Article 82 can undermine a fundamental right if economic freedom is considered a fundamental right in the Community legal order. However, consumer welfare can also be seen as an opportunity, if properly debated or agreed to by the ECJ, to adopt a more economics-based approach to Article 82.

ACKNOWLEDGEMENTS ............................................................................................................ 2 ABSTRACT ...................................................................................................................................... 4 CHAPTER 1 THESIS INTRODUCTION .............................................................................. 8 INTRODUCTION .............................................................................................................................. 8 1. 2. 3. 4. 5. 6. 7. TOOLS AVAILABLE FOR REFORMING ARTICLE 82 ..................................................15 RESEARCH MOTIVATION ..................................................................................................17 RESEARCH QUESTION .......................................................................................................26 THE RESEARCH PUZZLE ...................................................................................................29 RESEARCH APPROACH ......................................................................................................31 RESEARCH METHOD ...........................................................................................................33 THESIS STRUCTURE ...........................................................................................................33

PART I .............................................................................................................................................36 CHAPTER 2 ORDOLIBERAL ECONOMIC FREEDOM..................................................39 INTRODUCTION .............................................................................................................................39 1. ORDOLIBERALISM ...............................................................................................................39 1.1 1.2 1.3 1.4 2. ORDOLIBERAL IDEOLOGY ................................................................................................40 ORDOLIBERAL COMPETITION POLICY .............................................................................45 COMPLETE COMPETITION ................................................................................................48 SUMMARY .........................................................................................................................50

GERMAN COMPETITION LAW ..........................................................................................52 2.1 THE ORDINANCE AGAINST THE MISUSE OF ECONOMIC POWER ...................................53 2.2 THE ACT AGAINST RESTRAINTS OF COMPETITION ........................................................57 2.2.1 The Josten draft ................................................................................................59 2.2.2 The Government draft ....................................................................................60 2.3 THE APPLICATION OF THE ARC ......................................................................................61 2.4 SUMMARY .........................................................................................................................66

CONCLUSION..................................................................................................................................67 CHAPTER 3 ECONOMIC FREEDOM IN ARTICLE 82: THE EARLY JURISPRUDENCE OF THE EUROPEAN COURT OF JUSTICE ................................68 INTRODUCTION .............................................................................................................................68 1. ORDOLIBERAL INFLUENCE ON THE EC TREATY ......................................................68 1.1 1.2 2. THE SPAAK REPORT .........................................................................................................70 EXPLOITATIVE AND EXCLUSIONARY CONDUCT ..............................................................72

THE APPLICATION OF ARTICLE 82 ...............................................................................79 2.1 CONTINENTAL CAN ..........................................................................................................79 2.1.1 Facts of the case...............................................................................................79 2.1.2 The Commissions decision ...........................................................................80 2.1.3. The ECJs judgment .........................................................................................82

2.1.4 Analysis of the ECJs judgment ...................................................................86 2.2 COMMERCIAL SOLVENTS.................................................................................................87 2.2.1 Facts of the case...............................................................................................87 2.2.2 The Commissions decision ...........................................................................88 2.2.3 The ECJs judgment .........................................................................................89 2.2.4 Analysis of the ECJs judgment ...................................................................91 2.3 HOFFMANN-LA ROCHE ....................................................................................................97 2.3.1 Facts of the case...............................................................................................97 2.3.2 The Commissions decision ...........................................................................98 2.3.3 The ECJs judgment .........................................................................................99 2.3.4 Analysis of the ECJs judgment .................................................................101 2.4 UNITED BRANDS............................................................................................................108 2.4.1 Facts of the case.............................................................................................108 2.4.2 The Commissions decision .........................................................................109 2.4.3 The ECJs judgment .......................................................................................111 2.4.4 Analysis of the ECJs judgment .................................................................115 2.5 MICHELIN I ....................................................................................................................117 2.5.1 Facts of the case.............................................................................................117 2.5.2 The Commissions decision .........................................................................118 2.5.3 The ECJs judgment .......................................................................................120 2.5.4 Analysis of the ECJs judgment .................................................................122 2.6 SUMMARY .......................................................................................................................125 CONCLUSION................................................................................................................................127 PART II .........................................................................................................................................129 CHAPTER 4 CONSUMER WELFARE .................................................................................131 INTRODUCTION ...........................................................................................................................131 1. EFFICIENCY AND THE CLASSICAL ECONOMIC MODELS OF MONOPOLY AND PERFECT COMPETITION ...........................................................................................................134 1.1 1.2 1.3 1.4 2. 2.1 2.2 3. DYNAMIC, ALLOCATIVE AND PRODUCTIVE EFFICIENCY ...............................................135 PERFECT COMPETITION .................................................................................................138 MONOPOLY SITUATION ..................................................................................................140 THE CORRELATION BETWEEN EFFICIENCY AND WELFARE STANDARDS ......................142 THE THEORETICAL FOUNDATION OF THE CHICAGO SCHOOL .....................................147 MAIN CRITIQUE OF THE CHICAGO SCHOOL ................................................................149

THE CHICAGO SCHOOLS DEFINITION OF CONSUMER WELFARE .................144

THE COMMUNITY WELFARE STANDARD ...................................................................152 3.1 CONSUMER WELFARE ....................................................................................................152 3.2 THE MEASUREMENT OF CONSUMER HARM....................................................................156 3.3 MICROSOFT ....................................................................................................................159 3.3.1 Facts of the case.............................................................................................159 3.3.2 The Commissions decision .........................................................................160 3.3.3 Analysis of Commissions decision ...........................................................162 3.4 WANADOO......................................................................................................................172 3.4.1 Facts of the case.............................................................................................172 3.4.2 The Commissions decision .........................................................................173 3.4.3 The CFIs judgment .......................................................................................175 3.4.4 Analysis of CFIs judgment .........................................................................178

4.

EFFICIENCY CONSIDERATIONS UNDER ARTICLE 82 ..........................................181 4.1 4.2 4.3 THE STRUCTURE OF ARTICLE 82..................................................................................182 EFFICIENCIES AS A DEFENCE ........................................................................................185 BALANCING EFFICIENCIES ............................................................................................188

CONCLUSION................................................................................................................................192 PART III .......................................................................................................................................194 CHAPTER 5 ECONOMIC FREEDOM IN THE COMMUNITY LEGAL ORDER...196 INTRODUCTION ...........................................................................................................................196 1. 2. THE CONSTITUTIONALITY OF THE EC TREATY ......................................................199 1.1 THE ORDOLIBERAL ECONOMIC CONSTITUTION............................................................204 THE GENERAL PRINCIPLES OF THE EU .....................................................................207 2.1 ECONOMIC FREEDOM AS PART OF THE GENERAL PRINCIPLES OF THE EU .................211 2.1.1 Freedom of competition .............................................................................213 3. 4. THE GERMAN CONSTITUTION ......................................................................................217 SUMMARY .............................................................................................................................220

CONCLUSION................................................................................................................................221 CHAPTER 6 THE RELATIONSHIP BETWEEN ECONOMIC FREEDOM & CONSUMER WELFARE ...........................................................................................................222 INTRODUCTION ...........................................................................................................................222 1. 2. ECONOMIC FREEDOM AS UNDERSTOOD BY ORDOLIBERALS ..........................222 ECONOMIC FREEDOM DOES NOT EQUAL CONSUMER WELFARE ....................227

3. PROTECTING ECONOMIC FREEDOM INTRINSICALLY OR INSTRUMENTALLY.......................................................................................................................233 3.1 4. CHOICE .........................................................................................................................237 ECONOMIC FREEDOM IN THE EC TREATY ...............................................................240

CONCLUSION................................................................................................................................246 CHAPTER 7 THESIS CONCLUSION .................................................................................248 1. 2. 3. 4. 5. SUMMARY OF FINDINGS ................................................................................................248 ELABORATION OF FINDINGS ........................................................................................250 CONSEQUENCES OF ADOPTING A CONSUMER WELFARE STANDARD .........255 GUIDELINES ........................................................................................................................258 CONTRIBUTION TO THE ARTICLE 82 DISCUSSION .............................................261

BIBLIOGRAPHY ........................................................................................................................263

Chapter 1 Thesis Introduction Introduction

Article 82 EC (formerly Article 86)1 is the mechanism used in the European Community (the EC)2 to control the abuse of a dominant position. The provision is aimed at eliminating abusive conduct by prohibiting any abuse by one or more undertakings of a dominant position in a market in so far as it affects trade between Member States. It forms part of the competition provisions established by the Treaty of Rome in 1957 (the EC Treaty),3 along with Articles 81 EC and 83-89

1 For simplicity this thesis will refer to Article 82 throughout notwithstanding that some of the cases mentioned in the thesis refer to Article 86 as the article was numbered before the enactment of the Treaty of Amsterdam on 1 May 1999. Quotations will remain in their original form. 2 In the 1950s, Germany, France, Italy and the Benelux Countries (the Netherlands, Belgium and Luxemburg) decided to establish a system of joint decision-making on economic issues. They formed the European Coal and Steel Community (ECSC), the European Atomic Energy Community (Euratom) and the European Economic Community (EEC). These three communities collectively known as the European communities formed the basis of what is today the European Union (the EU). The European Community, which is the most important of the three European communities, was originally founded on 25 March 1957 by the signing of the Treaty of Rome under the name of European Economic Community. The Economic was removed from its name by the Maastricht Treaty in 1992, which also established the EU. The Maastricht Treaty effectively made the European Community the first of three pillars of the EU, called the Community (or Communities) pillar. The first pillar corresponds to the European Community, the second comprises the common foreign and security policy (CFSP) and the European security and defence policy (ESDP) and the third consists of police and judicial cooperation in criminal matters. The establishment of the EU in 1992 did not cause the European Community to disappear. It remains part of the EU under the designation European Community. In keeping with the prevailing practice and the ordinary scope of the Court of Justice's jurisdiction, this thesis will mainly refer to Community or EC law, rather than European Union or EU law, notwithstanding the formation of the EU in 1992. The European Court of Justice, for its part, continues to be known as the Court of Justice of the European Communities. Community law is defined as [t]he law governing the structure, organs, and fu nctioning of the Council of Europe and other European organizations or institutions; further the law contained in the conventions and agreements of the Council of Europe and the instruments of other European organizations or institutions, see Frits Willem Hondius, The New Architecture of Europe and ius commune earopaeum in Bruno de Witte and Caroline Forder (eds), The Common Law of Europe and the Future of Legal Education (Deventer, 1992) page 215. 3 It is the consolidated version of the EC Treaty which is referred to in this thesis.

EC.4 Article 82 is at the pinnacle of this study, with discussion of the other provisions included only where relevant. The text of Article 82 is as follows:
Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

Article 82 is a framework provision and the central terms dominance and abuse are inherently vague. Neither the concept of abuse nor that of dominance is defined in the EC Treaty. The European Commission (the Commission) has not sought to publish general secondary legislation or practical guidance.5 Although the travaux prparatoires were released in the 1990s, the European Court of Justice (the ECJ) and the European
4 The provisions in the EC Treaty will be referred to hereinafter by simple number alone rather than providing the full reference. The complete reference will be included when referring to articles for the first time, or when referring to provisions from other Treaties. 5 Even though the Commission has published guidance in specific sectors such as postal services and telecommunications. Some insight into the identification of market power can be gained by analogy from OJ [2002] C165/03 Commission Guidelines on Market Analysis and Assessment of Significant Market Power under the Community Regulatory Framework for Electronic Communications Networks and Services, paragraph 70, and EC Directive 2002/21 on a Common Regulatory Framework for Electronic Communication Service (the Framework Directive) Article 14(2) where significant market power is equated with dominance under Article 82. Commission Issues Market Power Assessment Guidelines for Electronic Communications, press release of 9 July 2002 IP/02/1016. Available at: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/02/1016&format=HTML&aged=1&lang uage=EN&guiLanguage=en.

Court of First Instance (the CFI)6 rarely focus on the intent of the drafters of the EC Treaty. The meaning of the concepts of dominance and abuse has been left to emerge from the case law and practice of the Commission and the Community Courts. This allows the concepts to develop to fit the contours of a particular decision and new learning to be integrated into the case law in an ever-changing economy. A systematic approach to the interpretation of Article 82 also requires that the analysis of the provision is constantly updated, as interpretations that seemed adequate years ago may no longer be suitable. An explicit definition of each of the concepts in the EC Treaty could have a limiting effect on its interpretation, because every decision or judgment would have to fit within the definition. However, the lack of general guidance as to what does and does not constitute an abuse has led to an ad hoc process, swayed by the specific facts that come before the authorities or the courts. It is hard to see a single unifying theory underpinning the interpretation of Article 82.7 The law of Article 82 seems to be the function of the cases brought before the Community Courts. This has led to legal uncertainty resulting from the way in which the provision is being applied in practice and the way in which the legal framework is written. This uncertainty may create a feeling of discontent amongst dominant undertakings having to regard the special responsibility8 resulting in
6 For the sake of clarity, the thesis will refer to the ECJ or CFI individually where appropriate. The term Community Courts will be used when referring to the CFI and the ECJ when they are discussed together. 7 Dabbah highlights that the ECJ has created a jurisprudence under Article 82 which makes it difficult to understand the real aim of Article 82, see Maher M Dabbah, Conduct, Dominance and Abuse in Market Relationship: Analysis of Some Conceptual Issues under Article 82 21(1) European Competition Law Review (2000) 45. 8 Case 322/81 Nederlansche Banden-Industrie Michelin NV v Commission [1983] ECR 3461, [1985] 1 CMLR 282, paragraph 57.

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less aggressive competition in the market. However, formalistic rules, as to what does and does not constitute an abuse in the market, are not helpful or desirable either. It may not be appropriate to rely on case law decided decades ago in todays markets which are characterised by very rapid technological changes, creation and exploitation of intellectual property rights and a high degree of technical complexity.9 In general, concepts like dominance and abuse cannot be applied mechanically in todays economic environment and many of the traditional presumptions do not hold in this context. Article 82 is a legal provision, and one that has been shaped by the interpretation of the Community Courts. The Community is not a static legal environment and the EC Treaty is a living instrument, where the interpretation of text is always evolving. While the Community legal system has changed enormously since Article 82 was conceived, the provision itself has remained unchanged since 1957.10 At the 8th annual conference of the European University Institute in Fiesole in June 2003 Mario Monti, then the Competition Commissioner, announced that the Commission had started an internal review of its policy on abuse of a dominant position.11 One of the primary reasons for initiating the review was a greater appreciation of micro-economic theory on the part of the policy-makers and the need to ensure that the
9 Christian Ahlborn, Competition Policy in the New Economy: Is European Competition Law up to the Challenge 22(5) European Competition Law Review (2001) 156; Michele Messina, Article 82 and the New Economy: Need for Modernisation? 2(2) Competition Law Review (2005). 10 There have been some procedural changes to Article 82, for example, OJ [2003] L1/1 Council Regulation 1/2003 On the Implementation of the Rules on Competition Laid Down in Article 81 and 82 of the Treaty. Council Regulation 1/2003 has been in force since 1 May 2004, repealing Council Regulation 17/62 OJ special edition 1962, No 204/62, page 87 as amended by Council Regulation (EC) 1216/1999, OJ [1999] L148/5. This thesis will only consider procedural issues where relevant, for example in chapter four where efficiency as a defence is discussed. 11 That an internal review was initiated was confirmed in October 2003 by DG Competitions Director General Philip Lowe at the annual conference of the Fordham Corporate Law Institute, speech available at: http://europa.eu.int/comm/competition/speeches/text/sp2003_040_en.pdf.

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rules under Article 82 are sufficiently responsive to sound economics. One of the overall conclusions from the annual conference in Fiesole was that the concept of abuse does not lend itself easily to per se rules, and that a rule of reason approach is normally preferable. Another conclusion was that legal formalism should be abandoned in favour of the analysis and evaluation of economic effects.12 The initiation of the policy review came after growing criticism of the application of Article 82 and, in particular, the insufficient attention to economic principles and the rigour of the Commission's policy in this area of law.13 The great intellectual confusion over the proper standard of liability governing allegedly exclusionary conduct in practice and case law under Article 82,14 led DG Competition to publish its Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses in December 2005 (the Discussion Paper).15 While DG Competition published the Discussion Paper, as it is responsible for competition policy, the Commission will be responsible for applying the principles described in the Discussion Paper if these principles are later adopted in a Notice.16
12 Claus-Dieter Ehlermann and Isabela Atanasiu (eds), European Competition Law Annual What is an Abuse of a Dominant Position? (Hart, 2006). 13 The debate is not new and has been going on for years, but the latest case law and the modernisation program, in force since 1 May 2004, have intensified the debate. 14 This is no criticism, as it is probably the most difficult question in competition law to determine what conduct is competition on the merits and therefore legal, and what is anti-competitive conduct and therefore illegal, as the two kinds of conduct often look identical in practice. According to Arthur Hadley to control the abuses without destroying the industries is a matter of the utmost difficulty see Hadley in Frederic M Scherer, Competition Policies for an Integrated Work Economy (The Brookings Institution Washington DC, 1944) page 19, and according to Franz Bhm [i]t is easier to hold a greased pig by the tail than to control a firm for abuse of a dominant position see Bhm in Frederic M Scherer, ibid. page 70. 15 DG Competition Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses (December, 2005). Available at: http://www.europa.eu.int/comm/competition/antitrust/others/discpaper2005.pdf. DG Competition has received 107 replies to the public consultation on the Discussion Paper, these are available at: http://www.europa.eu.int/comm/competition/antitrust/others/article_82_contributions.hml. 16 DG Competition is the policy branch within the Commission. The main responsibility of DG Competition is making competition policy and the main responsibilities of the Commission are factfinding, taking action against the infringement of the law and imposing penalties. For a detailed

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The Discussion Paper sets out DG Competitions agenda for developing and explaining theories of harm to consumers on the basis of a sound economic assessment of the most frequent types of abusive behaviour.17 The Discussion Paper focuses upon four general themes: dominance, general principles, abusive practices and defences. Through its general framework,18 DG Competition pinpoints the way in which exclusionary conduct may lead to the foreclosure of rivals, and proposes a two-step analysis for assessing whether a particular conduct is exclusionary. The specific conduct in question (1) must be capable of foreclosing the market, but (2) will only be considered abusive where it can be established that the conduct has a market-distorting foreclosure effect. The latter is a new development compared to the case law, but more importantly, DG Competition declares:19
With regard to exclusionary abuses the objective of Article 82 is the protection of competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources.

Whilst DG Competition embraces the objective of consumer welfare, its success in practice depends on whether DG Competition can reconcile the objective of consumer welfare with other possible conflicting objectives pursued under Article 82. Besides the possible conflict with other objectives, choosing a consumer welfare standard will require the Commission to assess whether the exclusionary conduct is likely to produce anti-competitive effects in the

description of the difference between DG Competition and the Commission, see Richard Whish, Competition Law (LexisNexis Butterworth, 5th ed, 2003) pages 53-54. 17 Commission Discussion Paper on Abuse of Dominance - Frequently Asked Questions, MEMO of 19 December 2005 MEMO/05/486. Available at: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/05/486&format=HTML&aged=1&l anguage=EN&guiLanguage=en. 18 Discussion Paper, supra note 15, section 5. 19 Ibid. paragraphs 4 and 54.

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market, which harm consumers directly or indirectly.20 Depending on the standard of proof, where it is required to demonstrate adverse effects on consumers the enforcement of Article 82 is likely to create more type I errors or fewer type II errors.21 A type I error is where a given hypothesis, i.e. that an undertaking has committed an infringement, is rejected although it is true. A type II error is where a hypothesis is accepted, but an alternative hypothesis, i.e. that an undertaking has not committed the infringement, is true.22 In the first situation the competition authorities have substantial confidence in the robustness of markets to withstand abuse of a dominant position and do not intervene although intervention would have been justified. The boundary of public power is set as far ahead as possible to see whether the market can take care of itself and thereby accept the risk of private power. In the second situation the competition authorities have little faith in the robustness of the market and seek to prevent the risk of private power emerging and thereby run the risk of intrusion by public power by activating intervention in the markets earlier.23 Competition authorities intervene in circumstances where intervention is not justified. When enforcing Article 82, the Commission has been criticised for being too intrusive to prevent

20 Harm to interim buyers will be presumed to harm end consumers. 21 These are sometimes also known respectively as false negatives and false positives. 22 Some scholars have identified a type III error which occurs when you get the right answer to the wrong question. In competition law terms, this can be equated with wrong enforcement priority decisions. Type III errors risk over-enthusiastic enforcement activities and can give rise to spurious or speculative complaints from competitors. This in turn gives rise to a form of regulatory drag which is, in principle, just as harmful as unnecessary regulation, wasting resources ultimately to the detriment of consumers. It is also problematic in terms of business planning and strategy, since enforcement which is unpredictable has a cooling effect on commercial behaviour. See Report from IBC conference on Advanced EC Competition Law (4-5 May, 2006) pages 64-65. 23 Former Competition Commissioner Mario Monti has said: [E]nshrined in the Treaty is an open market economy with free competition. Personally I believe that an open market economy does not imply an attitude of unconditional faith with respect to the operation of market mechanisms see Mario Monti, European Competition Policy for the 21st Century in International Antitrust Law and Policy (Fordham Corporate Law Institute, 2000) page 257.

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the risk of private power from emerging.24 In other words, the Commission has been criticised for making type II errors.

1.

Tools Available for Reforming Article 82

Reforming Article 82 is not a simple matter and the tools available are limited. Reform of Article 82 is different from the reform of Article 81, because there is no general secondary legislation or practical guidance on the application of Article 82.25 Moreover, Article 82 does not, unlike Article 81, allow the possibility of exemption. The absence of a provision like Article 81(3) means that it is not easy, even though theoretically possible given Article 83 EC, to adopt block exemptions on certain types of conduct, thereby making that type of conduct permissible. Amendments of the text of Article 82 are unlikely. The Treaty Establishing a Constitution for Europe maintained the original text of the provision.26 Although the Treaty Establishing a Constitution for Europe has been abandon, it will be introduced into the existing Treaties, which remain in force.27 The text of Article 82, however, remains the same28 and, unless the Treaty is amended, reform of Article 82 will depend upon the ECJ reconsidering its case law and/or the Commission changing its enforcement policy. It is unlikely that earlier case law will be overruled to the effect that those who would like to see a reorientation of the law were disappointed
24 A criticism acknowledged by DG Competitions Director General Philip Lowe, New Challenges in Europe, speech given on 24 June 2005, Kings College London. 25 Apart from the guidance in specific sectors mentioned above, supra note 5. 26 The Treaty Establishing a Constitution for Europe is available at: http://europa.eu.int/constitution/en/lstoc1_en.htm. 27 See the Presidency Conclusions of the Brussels European Council, Annex I page 15. European Council Document No 11177/07 of 21-22 June 2007. Available at: http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/94932.pdf. 28 Ibid.

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that the Community Courts did not take the opportunity in British Airways29 and Michelin II.30 Although the ECJs judgment in British Airways contains some promising indications, such as the need to establish some form of competitive impact and an appreciation of economic benefits, these judgments confirm that reform of Article 82 is not going to happen immediately. It is a reminder that if the Commissions enforcement policy is to become more economics-based, the impetus cannot be expected to come from the Community Courts alone. It will have to come from the Commission itself and from the national competition authorities, whether through future enforcement decisions or through guidelines. Although guidelines are not legally binding,31 they would help create a unified body of decisions, rather than a set of individual ad hoc and inconsistent measures. As a result, the underlying objectives are more likely to be realised.32 The Commission is not precluded from regarding a more economicsbased approach simply because the ECJ has endorsed its old form-based approach. However, the Commission must use its prosecutorial discretion within the framework of Community case law. This was highlighted by Advocate General Kokott in her Opinion of 23 February 2006:33
[E]ven if its [the Commission] administrative practice were to change, the Commission would still have to act within the framework prescribed for it by Article 82 EC as interpreted by the Court of Justice.

29 Case C-95/04P British Airways plc v Commission. 30 Case T-203/01 Manufacture Franaise des Pneumatiques Michelin v Commission (Michelin II). 31 According to Article 249 EC only regulations, directives and decisions are legally binding measures in the Community. 32 Commission Report on the Action Plan for Consumer Policy 1999-2001 and on the General Framework for Community Activities in Favour of Consumers 1999-2003 COM(2001) 486, pages 1719. 33 Advocate General Kokott in her Opinion in British Airways, supra note 29, delivered on 23 February 2006, paragraph 28.

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2.

Research Motivation

The traditional approach to Article 82 has been criticised, as it is supposedly not sufficiently effects-based and in general not founded on sound economics.34 It is argued that the interpretation of Article 82 is still influenced by old-fashioned formalistic and legalistic principles attributed to ordoliberalism.35 This criticism goes to the heart of the objective of economic freedom, which played a central role in the ordoliberal conception of competition policy.36 Many commentators believe that the underlying principles of Article 82 could be clearer,37 and some observers point out that the Commission and the Community Courts often place too much emphasis on the form

34 For example, John Ratliff, Abuse of Dominant Position and Pricing Practices A Practitioners Viewpoint and Derek Ridyard, Article 82 Price Abuses Towards a More Economic Approach in Ehlermann and Atanasiu (eds), supra note 12; Dennis Waelbroeck, Michelin II: A Per Se Rule against Rebates by Dominant Companies? 1(1) Journal of Competition Law & Economics (2005) 149, page 151. 35 John Kallaugher and Brian Sher, Rebates Revisited: Anti-Competitive Effects and Exclusionary Abuse Under Article 82 5 European Competition Law Review (2004) 263, page 268; see also David Gerber, Law and Competition in Twentieth Century Europe: Protecting Prometheus (Clarendon Press Oxford, 1998); Wernhard Mschel, Competition Policy from an Ordo Point of View in Alan Peacock and Hans Willgerodt (eds), German Neo-Liberals and the Social Market Economy (Macmillan, 1989) page 142. 36 Not all share the view that case law and practice do not, or even should in all respects, reflect modern economic thinking. Professor Eilmansberger is one of them even though he criticises the lack of a clear coherent conceptual basis in decisions concerning exclusionary abuses, see Thomas Eilmansberger, How to Distinguish Good from Bad Competition under Article 82 EC: in search of Clearer and More Coherent Standards for Anti-competitive Abuses 42 Common Market Law Review (2005) 129, page 131. 37 Eilmansberger, supra note 36; Sir John Vickers, Abuse of Market Power 115 The Economic Journal (2005) F244; Brian Sher, The Last of the Steam-Powered Trains: Modernising Article 82 25 European Competition Law Review (2004) 243, who argues that there is no internal consistency of application, and that there is no longer any coherent policy basis for applying Article 82; Sven Vlcker, Developments in EC Competition Law in 2003: An Overview 41 Common Market Law Review (2004) 1027, page 1048 arguing that Article 82 currently lacks a coherent overall approach and remains largely untouched by the increasing focus on economic analysis that has characterised the development of the law and practice under Article 81.

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of the conduct, and too little on the economic impact, or the effects of the conduct on the market.38 This was also the view presented by the EAGCP, an economic advisory group on competition policy to the Commission, in its report An Economic Approach to Article 82 EC published on 21 July 2005.39 The report suggests that an economicsbased approach to Article 82 must be adopted in order to avoid a confusion of the two objectives protection of competition and protection of competitors.40 In this context, an economics-based approach is understood to be an approach that requires a careful examination of how competition works in each particular market in order to evaluate how specific company strategies affect consumer welfare.41 The schism between protection of competition and protection of competitors presents an interesting paradox which will remain as long as the meaning of protection of competition is not clear.42 On the one hand, Mestmcker argues that protection of competition means the protection of undertakings economic freedom.43 On the other hand, Competition Commissioner Neelie Kroes argues:44
My own philosophy on this is fairly simple. First, it is competition, and not competitors, that is to be protected. Second, ultimately the aim is to avoid consumers harm. I like aggressive competition including by dominant companies - and I dont care if it may hurt competitors as long as it ultimately benefits consumers. That is because the main and ultimate objective of
38 See for example, Ratliff and Ridyard respectively in Ehlermann and Atanasiu (eds), supra note 12; Kallaugher and Sher, supra note 35, page 268; Waelbroeck, supra note 34, page 151. 39 EAGCP Report on An Economic Approach to Article 82 EC (July 2005). Available at: http://europa.eu.int/comm/competition/publications/studies/eagcp_july_21_05.pdf. 40 This was also suggested in the OECD Report on Competition Law and Policy in the European Union (October, 2005) page 30. Available at: http://www.oecd.org/dataoecd/7/41/35908641.pdf. 41 EAGCP Report, supra note 39, page 2. 42 Gerber, supra note 35, section 2 of the preface. 43 Ernst-Joachim Mestmcker, Europisches Wettbewerbsrecht (Mnchen Beck, 1974). 44 Neelie Kroes, Preliminary Thoughts on Policy Review of Article 82, speech given on 23 September 2005 at the Fordham Corporate Law Institute New York, speech available at: europa.eu.int/comm/competition/speeches.

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Article 82 is to protect consumers, and this does, of course, require the protection of an undistorted competitive process on the market.

This view, in favour of protection of competition to protect the welfare of consumers,45 is supported in early legal scholarship on Article 82. A study by Joliet in the late 1960s argued that the protection of competition means prohibiting exploitative behaviour,46 which harms consumers.47 Joliet specifically argued that it did not mean preventing competitors exclusion from the market.48 This view was contradicted in the case law where the ECJ has confirmed that Article 82 can be applied to prohibit conduct affecting the structure of the market.49 In Continental Can the ECJ held:50
The provision [Article 82] is not only aimed at practices which may cause damage to consumers directly, but also at those which are detrimental to them through their impact on an effective competition structure, such as is mentioned in Article 3(1)(g) of the Treaty.

45 This view is also supported by Advocate General Jacobs in his Opinion in Case C-7/97 Oscar Bronner GmbH & Co KG and Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co KG, Mediaprint Zeitungsvertriebsgesellschaft mbH & Co KG, Mediaprint Anzeigengesellschaft mbH & Co KG [1998] ECR I-7791, delivered on 28 May 1998, paragraph 58: [I]n assessing this issue [access to a competitors facility] it is important not to lose sight of the fact that the primary purpose of Article 86 [Article 82] is to prevent distortion of competition - and in particular to safeguard the interests of consumers - rather than to protect the position of particular competitors. 46 Ren Joliet, Monopolization and Abuse of Dominant Position (Martinus Nijhoff, 1970) pages 250251. 47 A consumer may not only mean a member of the public who purchases goods for personal use but also those who purchase goods in the course of their trade, see Whish, supra note 16, page 156. 48 Joliets study was comparative in scope in particular a comparative analysis of Section 2 of the Sherman Act and Article 82 and consisted of three parts: American law on single-firm monopolies, a survey of the national laws of the Common Market countries and of Great Britain and lastly, an analysis of the system of abuse of dominant position under Article 82. 49 Case 85/76 Hoffmann-La Roche AG v Commission [1979] ECR 461, [1979] 3 CMLR 211, paragraph 91 and Michelin, supra note 8, paragraph 70. 50 Case 6/72 Europemballage Corpn and Continental Can Co Inc v Commission [1973] ECR 215, [1973] CMLR 199, paragraph 26.

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Neither economic freedom nor consumer welfare is defined in the EC Treaty, and the Community Courts rarely articulate these objectives. The uncertainty about whether the protection of competition means consumer welfare, economic freedom or something else is hardly surprising given that neither the EC Treaty, nor the Community Courts, nor the Commission has defined the protection of competition with certainty. This is not a criticism of any of these institutions or the drafters of the EC Treaty as the meaning and interpretation of protection of competition may change over time given that the economy changes over time. It is nevertheless essential to understand the meaning of protection of competition for at least two reasons. First, Article 82 has been and continues to be interpreted in the light of the objective of protection of competition; and second, in order to give the provision an adequate level of predictability and consistency in its application so that undertakings can understand how Article 82 is applied by national courts and competition authorities. Traditionally, the Community Courts have interpreted the basic objective of protection of competition by adopting a teleological interpretation, as opposed to a literal, historical or contextual interpretation.51 The ECJ has used this method of interpretation under Article 82 since Continental Can,52 where the Court interpreted Article 82 in the light of Article 3(1)(g).53 The teleological interpretation has given the Community Courts an opportunity to develop the law and implement suitable

51 For a general explanation of the different methods of interpretation, see Stephen Weatherill and Paul Beaumont, EU Law (Penguin Books, 3rd ed, 1999) page 184ff. The ECJ has been accused of being rather political in its purposive interpretation and has been criticised by Paul Joan George Kapteyn and Pieter Verloren Van Thematt in Lawrence W Gormley (ed), Introduction to the Law of the European Communities after the Coming into Force of the Single European Act (Graham & Trotman, 2nd ed, 1990) pages 169-173; Hjalte Rasmussen, Between Self-Restraint and Activism: A Judicial Policy for the European Court 13 European Law Review (1988) 28, pages 28 -29 and 37. 52 Continental Can, supra note 50. 53 Article 3(1)(g) A system ensuring that competition in the internal market is not distorted.

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objectives,54 and according to the Court it has been indispensable for the achievement of the Communitys tasks.55 The protection of competition against distortion is necessary to promote a high degree of competitiveness; however promoting competition is not an end in itself,56 but a means of achieving the broader objectives of the EC Treaty.57 The aim of promoting a high degree of competitiveness is to guarantee freedom of action, as stated by the Commission in Report on Competition Policy in 1971 competition is the best stimulant of economic activity since it guarantees the widest possible freedom of action to all.58 Gerber identifies four basic conceptions of what it means to protect competition in Community competition law. These are economic freedom, economic efficiency, prevention of economic power and finally, the reduction or elimination of obstacles to economic change and development.59 Protecting competition by reducing or eliminating the obstacles to economic change and development is fundamental to the broader political aim of the Community, which is the process of

54 The Community Courts continue to apply a teleological interpretation of the competition rules, for example, Case T-83/91 Tetra Pak International SA v Commission [1994] ECR II-755, [1997] 4 CMLR 726, paragraph 114: Article 86 of the Treaty must accordingly be interpreted by reference to its object and purpose as they have been described by the Court of Justice, in accordance with the general objective set out in Article 3(f) [Article 3(1)(g)] of the Treaty as it was then worded. 55 Continental Can, supra note 50, paragraph 23. 56 Karel Van Miert, Competition Policy in the 1990s, speech given on 11 May 1993 to the Royal Institute of International Affairs, speech available at: europa.eu.int/comm/competition/speeches; Mario Monti in his foreword to the Commissions 33rd Report on Competition Policy (2003). 57 Under Article 2 EC, the Community has as its task to promote a harmonious, balanced and sustainable development of economic activities, a high level of employment and of social protection, equality between men and women, sustainable and non-inflationary growth, a high degree of competitiveness and convergence of economic performance, a high level of protection and improvement of the quality of the environment, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States. One of the means of obtaining these goals is by ensuring that competition in the common market is not distorted. 58 1st Report on Competition Policy (1971), page 11. 59 Gerber, supra note 35, section 2 of the preface.

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integration in economic unions and free trade areas. This goal is articulated in the EC Treaty60 as well as being judicially recognised.61 Broadly speaking, these conceptions of protecting competition can be divided into three main categories of goals: 1. socio-economic goals, which include economic freedom; 2. economic goals, which include economic efficiency in the form of consumer welfare; and 3. political goals, for example, market integration. It is hard to avoid generalisations in categorising the goals of Article 82. Each of the three categories concerns issues other than the ones falling under their headlines, and Article 82 applies to some situations, besides the mentioned categories, which are not easily categorised. For example, Article 82 has been used as a tool in the Commissions broader effort to liberalise markets in sectors which were previously monopolies, one example is the postal sector.62 Liberalisation is not easily categorised because it is a process for achieving an open market by allowing undertakings the economic freedom to enter markets, and a process for enhancing competition, which may in turn ensure consumer welfare. When assessing exclusionary abuses, DG Competition has said that the protection of competition will be interpreted as a means of enhancing consumer welfare.63 This economic efficiency objective runs counter to the non-economic objective of economic freedom as understood by
60 Articles 2 and 3 EC. 61 For example, Case 226/84 British Leyland plc v Commission [1986] ECR 3263, [1987] 1 CMLR 185; Case 26/75 General Motors Continental NV v Commission [1975] ECR 1367, [1976] 1 CMLR 95; Case 27/76 United Brands Company v Commission [1978] ECR 207, [1978] 1 CMLR 429. These are just a few of the cases where market integration considerations had an influence on the outcome. 62 Deutsche Post AG OJ [2001] L331/40, [2002] 4 CMLR 598. 63 Discussion Paper, supra note 15, paragraphs 4 and 54.

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ordoliberals. For ordoliberals the aim of competition policy was a limitation and control of private power, or at least its harmful effects,64 to protect the economic freedom of undertakings in the market in the interest of a free and fair political and social order.65 According to one of the founding fathers of ordoliberalism Franz Bhm:66
The real motives behind the enactment of antitrust law were not economic efficiency and the effectiveness of economic control, but social justice and civil liberties which were held to be threatened by monopolies.

Set against this search for how best to protect competition, the onedimensional view focusing on maximising economic efficiency in form of consumer welfare, as defined in this thesis, raises a myriad of problems. First, consumer welfare may conflict with fairness and the protection of individual competitors, values which are expressed in the language of the Treaty itself.67 Second, consumer welfare is not entirely in tune with Community case law. An exclusive dedication to the objective of consumer welfare is a departure from the jurisprudence analysed in chapter three. Amongst other objectives, the ECJ has interpreted the protection of competition in the market as protection of the economic freedom of market participants. As between economic freedom and consumer welfare, the former has clearly received the most emphasis in Europe. The Commission and Community Courts have tended to equate an abuse with a restriction of economic freedom, by which is meant restrictions on the rights and opportunities of market operators. This is evident in, for
64 Gerber, supra note 35, page 251. 65 Mschel, supra note 35, page 146. 66 Franz Bhm, Democracy and Economic Power in Cartel and Monopoly in Modern Law (CF Muller Karlsruhe, 1961) page 28. 67 Barry E Hawk, Article 82 and Section 2 in OECD Report on Competition on the Merits (March, 2006). Available at: http://www.oecd.org/dataoecd/7/13/35911017.pdf.

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example, those cases where the dominant undertaking prevented firms from sourcing relevant products from other suppliers.68 Third, focusing on economic efficiency in the form of consumer welfare may not, as argued by Cruz, be in tune with the normative structure of the Community competition rules:69
As the law now stands, however, the competition rules contained in the Treaty have a constitutional status and may be interpreted as shaping a law of economic liberty from restraints of competition and abuses of private economic power, not only a law of economic efficiency. Thus, an efficiency-orientated approach to the Community competition rules may not be in tune with the current normative structure.

Fourth, a focus on consumer welfare arguably runs counter to the ordoliberals understanding of competition law as illustrated by Franz Bhm, quoted above. For ordoliberals competition is best protected by protecting the economic freedom of undertakings access to the market and their economic freedom in the market as a fundamental right. The theory of ordoliberalism as defined in this thesis cannot be ignored as it has had a considerable influence on Community competition law.70

68 Continental Can, supra note 50, paragraph 26; Hoffmann-La Roche, supra note 49, paragraphs 89ff and 125; Case T-219/99 British Airways plc v Commission [2003] ECR II-5917, paragraph 244; Joined Cases 40-114/73 Cooperative Vereniging Suiker Unie U.A. and Others v Commission [1975] ECR 1663, [1976] 1 CMLR 295, paragraph 518; Michelin, supra note 8, paragraph 71; Case T65/89 BPB Industries v Commission [1993] ECR II-389, paragraph 120; Case T-228/97 Irish Sugar v Commission [1999] ECR II-2969, [1999] 5 CMLR 1300, paragraph 232. 69 Julio Baquero Cruz, Between Competition and Free Movement, The Economic Constitutional Law of the European Community (Hart, 2002) page 1. 70 Philip Lowe, Consumer Welfare and Efficiency New Guiding Principles of Competition Policy?, speech given on 27 March 2007 at the 13th International Conference on Competition and 14th European Competition Day, page 2, speech available at: http://ec.europa.eu/comm/competition/speeches/text/sp2007_02_en.pdf; David Evans, Roundtable Discussion about the US Supreme Courts decision in Verizon v Trinko Global Competition Review (2004) page 26; OECD paper on Competition on the Merits, supra note 67, page 253; David Gerber, Constitutionalizing the Economy: German Neo -liberalism, Competition Law and the New Europe 42 American Journal of Comparative Law (1994) 25, page 73.

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Even if economic freedom is a key objective in the analysis of Article 82, there are clear reasons why the Commission is keen to depart from this approach. The aim of DG Competitions policy review of Article 82 is to bring the law in line with mainstream economics.71 Whether DG Competition is willing to depart from past decisions in order to accommodate the objective of consumer welfare is far from certain. When asked whether it is prepared to depart from earlier decisions, DG Competition replies:72
There is nothing in the discussion paper that calls into question any of the Commissions past decisions. At the same time, the Commission must always work to improve its decisions and its policies. The review is about a better focus and a better argumentation in future cases. Furthermore, the fact that if the discussion paper leads to a more refined economic analysis, the Commission would in future argue a case in a different way than in the past, does not mean that the decision taken in a past case was wrong, only that the argumentation would today have been different.

In the late 1990s, when the Commission was discussing the reform of Article 81, a leading academic in competition policy said:73
[T]he reasons why reform or modernization in this area [Article 81] is such a delicate task is the temptation to adjust the rules in light of past disappointments and to open a Pandoras box of new interest and power balancing.

A similar concern can be advanced about the review of Article 82, as it is not unthinkable that some may be tempted to argue that the Commission and the ECJ were pursuing an objective of consumer welfare in the early cases in order to defend DG Competitions commitment to

71 Philip Lowe DG Competitions Review of the Policy on Abuse of Dominance in Barry E Hawk (ed), Annual Proceedings of the Fordham Corporate Law Institute: International Antitrust Law & Policy (New York: Juris, 2004) page 165. 72 MEMO/05/486, supra note 17. 73 Ernst-Joachim Mestmcker, The EC Commissions Modernization of Competition Policy: A Challenge to the Communitys Constitutional order 1 European Business Organization Law Review (2000) 401, page 413.

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consumer welfare.74 The challenge to the policy review of Article 82 comes where economic freedom which is related to fairness conflicts with the efficiency-maximising consumer welfare goal highlighted by Hawk:75
The major policy issue concerns the possible tension between efficiency considerations on the one hand and the Article 86 [now Article 82] market integration and fairness policies on the other hand. To date that tension has largely been resolved in favour of the latter. Whether this will continue may depend on the EEC's willingness to acknowledge the tension and resultant possible trade-offs between allocative efficiency (or consumer welfare according to many economists) and protection of individual firms (or distributive concerns according to many economists) .

Despite comprehensive discussions of the review of Article 82, there is a lack of thorough debate about the potential conflict a focus on consumer welfare may create. If the consumer welfare agenda and a more economics-based approach to Article 82 are to be taken seriously, the first step must be to examine whether consumer welfare conflicts with economic freedom. Furthermore, it need not be the case that the protection of economic freedom and promoting consumer welfare are seen as polar opposites, even though they do not necessarily have to be polar opposites to be in conflict.

3.

Research Question

The thesis does not purport to explain how Article 82 applies generally or to discuss all possible objectives pursued under the provision, but

74 See for example Neelie Kroes, European Competition Policy in a Changing World and Globalised Economy: Fundamentals, New Objectives and Challenges Ahead, speech given on 5 June 2007 at GCLC/College of Europe Conference on "50 years of EC Competition Law" Brussels, speech available at: europa.eu.int/comm/competition/speeches. This is however contradicted by Director General Philip Lowe who argues that case law and decisional practice have been influenced by ordoliberalism, see below page 69. 75 Barry E Hawk, The American (Anti-trust) Revolution: Lessons for the EEC 9(1) European Competition Law Review (1988) 53, page 81.

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questions whether there is a tension between the two objectives of protecting economic freedom and the promotion of consumer welfare in the application of Article 82. The aim is to assess the legitimacy of DG Competitions current aspirations of consumer welfare. There are various concepts and doctrines within Article 82, but this specific focus has been chosen in order to assess the legitimacy of DG Competitions commitment to consumer welfare in its policy review on Article 82. Even though the Commission and Community Courts have interpreted case law in the light of many objectives (for example, market integration, efficiency, economic freedom and liberalisation) this thesis focuses on the objectives of economic freedom and consumer welfare only. Market integration and liberalisation will not be discussed as they are arguably intermediate objectives;76 they are not an end in themselves. When assessing whether market integration is effected it is arguably to assess whether consumer welfare and an efficient allocation of resources are enhanced. Market integration is believed by some scholars to be a rationale for efficiency.77 This view is supported by Waelbroeck who believes that the original focus on the free movement of goods in the Spaak Report,78 prepared by the Intergovernmental Committee on European Integration, was a means of increasing competition, which itself was seen as a means of enhancing economic

76 Market integration is an intermediate objective, see Case T-168/01 GlaxoSmithKline v Commission, paragraph 118 and OJ [2000] C291/1 Commission Guidelines on Vertical Restraints, paragraph 7. 77 Roger Van Den Bergh, Modern Industrial Organisation versus Old-fashioned European Competition Law 17(2) European Competition Law Review (1996) 75, pages 76 -80. 78 Rapport des Chefs de Dlgation aux Ministres des Affaires Etrangres (in English: Report of the Heads of Delegation of the Governmental Committee) set up by the Messina Conference, named after Paul-Henri Spaak, then the Belgian prime minister, was presented on 21 April 1956 and led to the Treaty of Rome of 1957. Available at: http://aei.pitt.edu/archive/00000995/01/Spaak_report.pdf.

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efficiency.79 Liberalisation is arguably also a means to an end, as it is a process for achieving an open market and allowing other competitors access to the market to ensure economic freedom as well as enhancing competition. The discussion of objectives is not new, but it is necessary, as pointed out by Giuliano Amato:80
[I]t requires a frank discussion [discussion of goals of competition], because it is doubtful that we all agree on the goals of competition. Generally, however, we refrain from discussing it openly, and ambiguities remain.

Economic freedom and consumer welfare will not be examined in a legal vacuum. The former will be considered in the light of ordoliberalism, German competition law and, where appropriate, Community case law. The latter will be examined in the light of DG Competitions policy review of Article 82. The main research question, outlined above, is approached by asking the following questions: What is the theory behind the objective of economic freedom? What is the theory behind the objective of consumer welfare? Which of the two objectives actively shaped the law and policy of Article 82? And has this theory influenced judicial decision-making under Article 82 in the early judgments where the law of Article 82 is to be found? How does this theory fit with DG Competitions current aspirations of ensuring consumer welfare?

79 Michel Waelbroeck, Competition, Integration and Economic Efficiency in the EEC from the Point of View of the Private Firm in Festschrift zu Ehren von Eric Stein (Nomos Verlagsgesellshaft, 1987) page 302. 80 Panel discussion on Competition Policy Objectives in Claus-Dieter Ehlermann & Laraine L Laudati (eds), European Competition Law Annual The Objectives of Competition Policy (Hart, 1998) page 3.

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4.

The Research Puzzle

This study will contribute to the scholarly discussion of Article 82 by starting from the basic standpoint of questioning the legitimacy of DG Competitions priority of consumer welfare, given the impact ordoliberalism has had on Article 82. This study begins from the proposition that the objective of protection of competition encompasses many different conceptions, two of which are economic freedom and consumer welfare. It evaluates whether there is a tension between the protection of economic freedom and the promotion of consumer welfare, as any tension must be identified and explored before a useful evaluation of the legitimacy of DG Competitions aims can be undertaken. Some contemporary literature under Article 82 identifies this tension, but does not deal with it comprehensively.81 Although analysis has expanded to consider the role of economics within the scope of Article 82,82 which is also apparent in the policy review of Article 82,83 historically the centre of most academic debate on the subject and the bedrock of Article 82 scholarship is legal analysis of the wording of the EC Treaty and the case law of the Community Courts.84 To comprehend whether there is a tension between protecting economic freedom and promoting consumer welfare, it is essential to fully understand the fundamentally different values consumer welfare and economic freedom are trying to achieve. By defining each concept it
81 Robert ODonoghue and A Jorge Padilla, The Law and Economics of Article 82 EC (Hart, 2006). 82 EAGCP Report, supra note 39; ODonoghue and Padilla, supra note 81. 83 Ehlermann and Atanasiu (eds), supra note 12. 84 For example, Joliet, supra note 46; Samkalden and Druker, Legal problems relating to Article 86 of the Rome Treaty Common Market Law Review (1965) 158; Vogelenzang, Abuse of Dominant Position in Article 86; The problem of Causality and Some Applications 13 Common Market Law Review (1976) 63; Eilmansberger, supra note 36.

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becomes clear that consumer welfare takes a neo-classical position whereas economic freedom, as derived from ordoliberalism, values individual economic freedom in the market as a fundamental right. Despite the conceptual difference, it is essential to assess whether economic freedom is considered a fundamental right in the Community legal order or is used to enhance consumer welfare. If economic freedom is considered a fundamental right in the ordoliberal sense, then DG Competition is replacing a fundamental right with a utilitarian goal of consumer welfare. This would be a violation of a fundamental right. If economic freedom is used to enhance consumer welfare then economic freedom is a means to the end of consumer welfare. A third possible outcome is that economic freedom is an end in itself without being a fundamental right in the Community legal order. The legitimacy of DG Competitions decision to give priority to consumer welfare depends on which of these outcomes applies. Seeking to protect the economic freedom of undertakings may give rise to competitor concerns. This inevitably brings competition authorities into conflict with their goal of protecting consumer welfare and creates a dilemma: which category of rights to protect at the expense of which other rights. To what extent should the manner in which a large firm exerts its market power to the detriment of competitors, as opposed to the detriment of consumer welfare (or competition) at large, be the concern of competition authorities? Indeed, it is a fine distinction, because by protecting competition and the competitive process, competitors, who make up the fabric of competitive markets, are in fact being protected. If there are no competitors, there is no competitive process to protect. Importantly, these views are reflected in decisions and case law where the Commission and the Community Courts continuously have held that conduct by dominant undertakings

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constitutes an abuse where it hinders the production of competitors, i.e. hinders their economic freedom in the market.85

5.

Research Approach

The potential tension between economic freedom and consumer welfare can only be understood by defining these concepts and understanding that they are quite distinct. This study does not analyse the evolution of case law under Article 82, as it is a conceptual study of two potentially conflicting objectives under Article 82. Judicial practice and case law will be considered only where it is necessary in order to assess whether economic freedom and consumer welfare have been pursued by the Commission and the Community Courts. This study is a conceptual thesis involving discussions of economics, politics and law. It will touch upon economic history, politics and some contemporary economic thinking, but is written from a legal perspective. This study seeks to move academic discussions about the individual abuses within Article 82 to an examination of some of the concepts of the provision, given DG Competitions commitment to consumer welfare. The research approach is illustrated below in figure one.

85 Case 6-7/73 Istituto Chemioterapico Italiano SpA and Commercial Solvents Corporation v Commission of the European Communities [1974] ECR 223, [1974] 1 CMLR 309, paragraph 25; Case 53/87 Consorzio Italiano della Componentistica di Ricambio per Autoveicoli and Maxicar v Rgie Nationale des Usines Renault [1988] ECR 6039, [1990] 4 CMLR 265, paragraph 16; Case 238/87 AB Volvo v Erik Veng (UK) Ltd [1988] ECR 6211, 4 CMLR 122, paragraph 9; Cases C-241242/91P Radio Telefis Eireann (RTE) and Independent Television Publications Ltd v Commission [1995] ECR I-743, [1995] 4 CMLR 718, paragraph 54; Irish Sugar PLC OJ [1997] L258/1, [1997] 5 CMLR 666, paragraph 134; British Midland v Aer Lingus OJ [1992] L96/34, [1993] 4 CMLR 596, paragraph 25; Decca Navigator System OJ [1989] L43/27, [1990] 4 CMLR 627, paragraph 97ff.

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Figure 1:

An illustration of the research approach.86

Inquiry:

What is the theory of economic freedom?

Research aim: To identify the concept of economic freedom. Examines: Ordoliberalism and its competition law model and its influence on German competition law. Chapter two. Has ordoliberalism influenced jurisprudence under Article 82?

Carried out: Inquiry:

Research aim: To establish which legal doctrine influenced the development of Article 82. Examines: Carried out: Inquiry: Relevant case law, the Spaak Report and Reports on Competition Policy. Chapter three. What is the theory of consumer welfare?

Intellectual framework

Research aim: To identify the concept of consumer welfare. Examines:

Empirical investigation and analysis

The Chicago School s understanding of consumer welfare; the concepts of allocative, productive and dynamic efficiency, and the Commissions understanding of consumer welfare. Relevant Community case law. Chapter four. How does the objective of economic freedom fit with DG Competitions current aspirations of consumer welfare?

Carried out: Inquiry:

Research aim: To examine whether there is a tension between economic freedom and consumer welfare in order to assess DG Competitions legitimacy of prioritising consumer welfare. Examines: Whether economic freedom is a fundamental right in the Community legal order and whether economic freedom is a means to the end of consumer welfare. Chapter five and chapter six.

Carried out:

86 I have drawn inspiration for the format of this model from Dorte Sindbjerg Martinsen, European Institutionalisation of Social Security Rights: A Two-layered Process of Integration (European University Institute, Florence, PhD Thesis, 2004) page 13.

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6.

Research Method

The primary research method employed in this study is examination and analysis of primary and secondary documentary material. In order to evaluate the appropriate legal context, the approach of the Community Courts has been evaluated including, where appropriate, specific judgments of the Community Courts. The political context, and in particular the initiative of the policy review of Article 82, has been analysed in some parts with reference to DG Competitions Discussion Paper.87 The Discussion Paper provides useful information on DG Competitions current thinking on Article 82. This primary research material is however necessarily one-sided as it presents Article 82 from the perspective of DG Competition alone. In order to uncover another perspective on the approach to Article 82, specific judgments of the Community Courts have been analysed. The secondary documentary material comprises scholarly works in the disciplines of law, politics and economics.

7.

Thesis Structure

The thesis is divided into seven chapters. Chapter one introduces the thesis puzzle and explains the research approach and motivation. It contextualises the study in the broader perspective of Article 82. Chapter two begins the examination of ordoliberalism that affected the development of German competition law, focusing on the ordoliberal conception of competition of economic policy. freedom It analyses the ordoliberal German understanding and explores how

competition law has been influenced by ordoliberal orthodoxy. The

87 Discussion Paper, supra note 15.

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analysis of German competition law is necessary as it has had an impact on Community competition law and the interpretation of Article 82. The analysis of ordoliberalism is essential as the concept of economic freedom is derived from ordoliberalism. The analysis is necessary for the discussion of early case law in chapter three and for the comparison with the concept of consumer welfare in chapter six. Chapter three continues the examination of ordoliberalism. It analyses how ordoliberalism can be traced in the Spaak Report.88 It considers whether the Commission and the ECJ were pursuing an objective of economic freedom in some of the fundamental cases decided under Article 82 in the 1970s and 1980s. Chapter three relies on case law as there is no general secondary legislation or practical guidance under Article 82. The law of Article 82 is therefore to be found in the case law of the Community Courts and, in particular, the early cases analysed in chapter three. Chapter four attempts to provide a definition of consumer welfare and explains the concepts of allocative, dynamic and productive efficiency. This is essential for the thesis question and for the analysis in chapter six where it is considered whether economic freedom is a means to the end of consumer welfare. Even though DG Competition has declared that consumer welfare is the main objective when considering exclusionary abuses under Article 82, it has not assigned a precise meaning to the objective in its Discussion Paper. The chapter identifies the Chicago Schools definition of consumer welfare and the Commissions perception of the concept. It considers some recent practice to examine whether the Commission and the Community Courts are adopting an analysis which focuses on economic efficiency.

88 The Spaak Report, supra note 78.

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Chapter five explains how economic freedom and consumer welfare are conceptually quite distinct. It examines whether the EC Treaty is based on the ordoliberal economic constitution. Moreover, whether economic freedom forms part of the general principles of the EU by looking at the European Convention on Human Rights, the Charter of Fundamental Rights of the European Union and the German Constitution. Chapter six questions whether economic freedom is considered an aim in itself or a means to the end of consumer welfare. This is essential to assess the legitimacy of DG Competitions move to consumer welfare as the main aim when assessing exclusionary abuses under Article 82. Chapter seven outlines the findings and conclusions of the thesis. Based on the findings, it presents an answer to the research question.

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PART I
Part I of this thesis consists of two chapters: chapter two Ordoliberal Economic Freedom and chapter three Economic Freedom in Article 82: the Early Jurisprudence of the European Court of Justice. Chapter two considers the German legal tradition of ordoliberalism.1 The ideology behind Germanys post-war social market approach was ordoliberalism (also associated with the Freiburg School). This ideology asserted that individual economic rights deserve protection, and that vigilance is needed to ensure economic power is not misused or abused in the interests of the economic liberty of the individual. Chapter two describes the ordoliberal competition law model which it contrasts with the competition law model that was derived from Germanys first but non-sustainable competition law, the Ordinance against the Misuse of Economic Power of 1923 in German Verordnung gegen Missbrauch wirtschaftlicher Machtstellungen.2 The contrast between the two models shows that German competition law developed from an abuse system to a prohibition system which is the system adopted in the current German competition law Act against Restraints of Competition in German Gesetz gegen Wettbewerbsbeschrnkungen.3 It also examines how the German equivalent provision to Article 82 has been applied in some German cases.
1 There is no definition of the term ordoliberalism, but the term ordo was chosen by Walter Eucken (a leading exponent of the theory) to establish the link between the German neo-liberal concept of economic order and the medieval idea of ordo, that is the natural and harmonious state of affairs to be detected by scholarly discussion and to be approached in reality by appropriate policies see Herbert Giersch, Karl-Heinz Paque and Holger Schmieding, The Fading Miracle: Four Decades of Market Economy in Germany (Cambridge University Press, 1992) page 26, footnote 30. 2 Verordnung gegen Missbrauch wirtschaftlicher Machtstellungen, 1923 Reichsgesetzblatt [RGB1.] I 1067 (2 November 1923). An English translation can be found in Robert Leifman, Cartels, Concerns and Trusts (London, Methuen & Co Ltd, 1932) pages 351-357. 3 Gesetz gegen Wettbewerbsbeschrnkungen [GWB], 1957 Bundesgesetsblatt [BGB1.] I 1081 (West Germany). An English translation can be found in the German journal Wirtschaft und Wettbewerb (Dsseldorf, Handelsblatt).

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Chapter three examines whether ordoliberalism is a doctrine which has had an influence on Article 82 by analysing the Spaak Report, the EC Treaty and the case law. It establishes that, in addition to the wellknown market integration objective,4 the protection of the individual economic freedom of competitors has been of central concern to the Commission and Community Courts.5 The Community Courts rarely embrace the language of economic freedom, but prohibit conduct that interferes with the structure of markets.6 The accessibility and openness of markets have been seen as necessary tools to achieve greater individual economic freedom, by increasing the opportunities for market participants. The conduct of dominant undertakings, which detracts from the openness of markets, has in some cases been condemned by the Community Courts under Article 82.7 Moreover, an undertaking with a

4 For example, Case 226/84 British Leyland plc v Commission [1986] ECR 3263, [1987] 1 CMLR 185; Case 26/75 General Motors Continental NV v Commission [1975] ECR 1367, [1976] 1 CMLR 95; Case 27/76 United Brands Company v Commission [1978] ECR 207, [1978] 1 CMLR 429, are just a few of the cases where market integration considerations had an influence on the outcome. Market integration does no longer seem to be the over-arching goal in the Community as pointed out by the CFI in Case T-168/01 GlaxoSmithKline v Commission, paragraph 118. It is however worth noting that there are four appeals against the CFI judgment (Case C-501/06 GlaxoSmithKline v Commission, Case C-513/06 Commission v GlaxoSmithKline, Case C-515/06 European Association of Euro Pharmaceutical Companies and Case C-519/06 Asociacin de exportadores espaoles de productos farmacuticos) so this point is far from certain. 5 Merit E Janow, International Perspectives on Abuse of Dominance in OECD paper GD(96)131 on Abuse of Dominance and Monopolisation 1996, page 34. 6 As recently emphasised by Advocate General Kokott in her Opinion in Case C-95/04P British Airways plc v Commission, delivered on 23 February 2006, paragraph 73: Article 82 EC, like the other competition rules of the Treaty, is not designed only or primarily to protect the immediate interests of individual competitors or consumers, but to protect the structure of the market and thus competition as such (as an institution), which has already been weakened by the presence of the dominant undertaking on the market. 7 For example, Case 6/72 Europemballage Corpn and Continental Can Co Inc v Commission [1973] ECR 215, [1973] CMLR 199; Case T-83/91 Tetra Pak International SA v Commission [1994] ECR II755, [1997] 4 CMLR 726.

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dominant position has a special responsibility not to allow its conduct to impair genuine undistorted competition in the common market.8 Chapter three goes on to argue that the focus on damage to the competitive market structure is inherent in the very definition of abuse, as articulated by the ECJ in Hoffmann-La Roche.9 The aim of protecting the structures within which firms compete, is that effective competition amongst competitors is maintained so that no firm or firms become too influential.10 The chapter examines some of the early cases under Article 82 which laid down the foundation of the provision. It shows that the Commission and the Community Courts have required prohibition whenever the market freedom of market participants was endangered. This understanding of competition law may be viewed as protecting smaller competitors from the aggregation of economic power.11

8 Case 322/81 Nederlansche Banden-Industrie Michelin NV v Commission [1983] ECR 3461, [1985] 1 CMLR 282, paragraph 57. 9 Case 85/76 Hoffmann-La Roche AG v Commission [1979] ECR 461, [1979] 3 CMLR 211. 10 Janow, supra note 5, page 33ff. 11 Giuliano Amato, Antitrust and the Bounds of Power (Hart, 1997) page 69; Eleanor Fox, Monopolization and Dominance in the United States and the European Community: Efficiency, Opportunity, and Fairness 61 Notre Dame Lawyer (1986) 981.

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Chapter 2 Ordoliberal Economic Freedom Introduction

The argument advanced in chapter two is that German competition law took a different turn after World War II, namely a turn away from a law based on administrative measures, towards a law based on judicial measures protecting individual economic freedom as a fundamental right due to ordoliberalism. Section one conducts a theoretical analysis of ordoliberalism and its competition law model. This is done in a legal vacuum. The aim of section one is to understand the ordoliberal conception of competition law and its main objective of individual economic freedom as a fundamental right. Section two describes the Ordinance against the Misuse of Economic Power of 1923. This represents a different competition law model from the ordoliberal competition law model, in that it is based on administrative measures pursuing an objective of public interest. Section two examines the main, and current, German competition law: the Act against Restraints of Competition, which is based on the ordoliberal competition law model. It discusses how the abuse provision of the Act against Restraints of Competition has been interpreted in some German cases.

1.

Ordoliberalism

The ideas of ordoliberalism took shape in response to the economic, political and social crises starting with the fall of the Weimar Republic in 1933 and the rise of Nazi Germany.1 One of the greatest European calamities resulted from the totalitarian Nazi regime misusing the
1 Nazi economic policy was not concerned with protecting the process of competition but with the elimination, or at least marginalisation, of it.

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powerful iron and steel industry (the German Schwerindustrie)2 by turning private economic power into political power. Well-run cartels3 and monopolies resulted in powerful economic concentration in conjunction with great accumulation of political power, which led to the abandonment of democratic principles.4 Ordoliberals disliked both totalitarianism and socialism, because they considered that these ideologies were contrary to the principles of private property, freemarket economy, and paid little attention to the rule of law.5 Ordoliberals rejected notions of both totalitarianism and socialism, and developed the idea of the social market economy (Soziale Marktwirtschaft).

1.1

Ordoliberal ideology

Ordoliberalism is an ideology developed in the 1930s and 1940s by a group of neo-liberals at Freiburg University in Germany.6 Their ideologies were grouped together under the term ordoliberalism, which became shorthand for the underlying set of ideas behind the social market economy.7
2 Wilhelm Rpke, German Commercial Policy (Longmans, 1934) pages 24-27. 3 Especially the chemical cartel Interssen Gemeinschaft Farben (I.G. Farben), from which the major source of Hitler's power derived. Germany processed large quantities of coal and a German scientist discovered the process of converting coal into gasoline in 1909, but the technology was not completely developed during World War I. In August 1927, the US company Standard Oil agreed to embark on a cooperative program of research and development of the hydrogenation process to refine the oil and on 9 November 1929, Standard Oil and IG Farben signed a cartel agreement, see Joseph Borkin, The Crime and Punishment of I.G. Farben (London: Deutsch, 1979). 4 Rpke, supra note 2, pages 24-27. 5 Svetozar Pejovich, From Socialism to the Market Economy: Post-war West Germany versus Post1989 East Bloc 1 The Independent Review (2001) 27. 6 The founders of the Freiburg School were economist Walter Eucken, lawyer Franz Bhm and lawyer Hans Grossmann-Doerth. Some protagonists of ordoliberalism were Wilhelm Rpke, Alexander Rstow, Alfred Mller-Armack and Leonhard Miksch. 7 Herbert Giersch, Karl-Heinz Paque and Holger Schmieding, The Fading Miracle: Four Decades of Market Economy in Germany (Cambridge University Press, 1992) page 31.

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If we trace the theoretical roots of the social market economy, we find that the idea originated from neoliberal economics, in other words, the new study of economics that drew attention to the important function of competition while trying to create a competitive order that deviated from paloliberalism and was in line with the ideas of Walter 8;9 Eucken and Franz Bhm.

In developing the social market economy, Eucken advanced the idea of order-based fundamental policy (Ordnungspolitik) One was which the to consisted of two orders. transaction the first economy order (the

(verkehrswirtschaft) and the other was the administered economy (zentralverwaltungswirtschaft). According transaction economy) economic conduct was organised through private transactional decision-making. Private companies could act on the basis of incentives and disincentives created by economic competition. According to the second order (the administered economy) economic activity was organised according to criteria external to the economic system.10 These two fundamental orders were incompatible, as the transaction economy would be harmed by governmental intervention and the administered economy would be harmed without governmental intervention. According to Eucken, the failure to recognise the incompatibility of the two orders was a major problem of the twentieth century.11 In order to avoid the repetition of history and to prevent private economic power turning into political power, it was imperative for the ordoliberals to establish the appropriate economic order, protected by the appropriate legal framework.

8 Alfred Mller-Armack, Wirtschaftslenkung und Marktwirtschaft (Hamburg, 1946) translation from German to English is taken from: http://admin.fnst.universum.de/uploads/900/MarketEconomy.pdf. 9 Paloliberalism is a term used by Wilhelm Rpke to describe the failures of nineteenth century economic liberalism, see Erich Mende, Studien und Berichte der Katholischen Akademie in Bayern in Eric Voegelin et al. Christentum und Liberalismus (Karl Zink, 1960) page 149ff. 10 David Gerber, Constitutionalizing the Economy: German Neo-liberalism, Competition Law and the New Europe 42 American Journal of Comparative Law (1994) 25, page 42. 11 Ibid. page 43.

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The governments policies should be designed to create and maintain the chosen economic order through Ordnungspolitik.12 If the economic constitution calls for a transaction economy, then the Ordnungspolitik must ensure the creation of conditions within an industrialised economy, which allow the development of a functioning and humane economic order.13 The task of the Ordnungspolitik is to search for a normative order.14 The ordoliberal approach is a program of freedom embedded in and subordinated to a constitutionally theoretical set of conditions where order becomes a prerequisite for freedom. Ordoliberalism was dedicated to achieving an economic order a competitive order which was able to control private economic power and political power in order to ensure a prosperous and humane society which guaranteed individual economic freedom and price stability.15 Price stability was seen as essential for a society where long-term contracts would act as the cement for civil society, whilst the competitive order was seen as necessary both to prevent the accumulation of private economic power in too few hands and to sustain economic development.16 The higher the level of competition in the economy, the more effectively the system functioned. The social market economy became the name for the economic order, the competitive order, underlying the transaction economy. The individual characteristics of the transaction economy were private property, the protection of economic freedom and low barriers to entry
12 David Gerber, Law and Competition in Twentieth Century Europe: Protecting Prometheus (Clarendon Press Oxford, 1998) page 246. 13 Walter Eucken, Die Wettbewerbsordnung und ihre Werwirklichung 2 ORDO 1949, page 21. (An English translation of this article can be found in 2(2) Competition Policy International (2006) 219. This thesis will be referring to the original German article). 14 Walter Eucken, Grundstze der Wirtschaftspolitik (Tbingen, 1952) page 14. 15 Ibid. page 290ff. 16 Ray Barrell and Karen Dury, Choosing the Regime: Macroeconomic Effects of UK Entry into EMU NIESR Discussion Paper No 168 (2000) page 5.

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into markets. These characteristics tended to reinforce each other and thereby increase the effectiveness of the system as a whole.17 The social market economy advocated by ordoliberals, became the actual economic system created in (the then) West Germany by Ludwig Erhard.18 The social market economy represented the ordoliberal vision of society, where individual economic freedom and competition were sources of political freedom, and represented the economic constitution of society. Ordoliberals intertwined legal and economic perspectives and discourses by arguing that the characteristics and effectiveness of the economy depended on its relationship with the political and legal systems. This view is based on a belief that the economic order was formed through political and legal decision-making. Ordoliberals believed that the institutional framework that constituted a well-functioning market could not be expected to arise naturally, but rather was a matter of adequate constitutional choice. The economic constitution emphasised the need for competition laws to control the economic power of private firms and prohibit conduct by firms with power, which would otherwise interfere with the process of competition.19 The economic constitution was by definition not political as it was not subject to political intervention. It was committed to economic rationality and a system of undistorted competition implemented and protected by a legal framework. The legal framework would regulate and limit the emergence of private economic power by prohibiting cartels, the growth of economic power and contracts that created unjustified limits on the competitive autonomy of firms. From the ordoliberal perspective, private
17 Gerber, supra note 10, page 42. 18 Niels Goldsmith & Arnold Berndt: Leonhard Miksch (1901-1950) A Forgotten Member of the Freiburg School Freiburg Discussion Paper on Constitutional Economics No 3 (2002). 19 This concept of economic power is one of the features of German and European competition law thinking that most clearly distinguishes it from US antitrust law analogues, see Gerber, supra note 10, page 51.

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economic power threatened the competitive process, so the primary function of competition law was to eliminate private economic power in order to protect the process of competition. When a system had chosen a transaction economy in its economic constitution, then that choice required the government to make the system function effectively. In order to function effectively the government should adopt an orderbased policy as suggested by Eucken, with the legal system, constructed in such a way that it could maintain conditions of complete competition.20 Complete competition exists in a market where no firm has the power to coerce conduct of other firms.21 A firm with market power would have the power to hinder the performance of its rivals and that was structurally inconsistent with complete competition. Therefore the conduct of a firm with economic power was to be limited so as not to harm its competitors or society in general.22 Complete competition will be described in more detail in section 1.3 below. Competition law was the main pillar of the social market economy and was represented as constitutional in scope.23 Competition was viewed as the most ingenious instrument of deprivation of power in history and needed to be protected by law.24 Ordoliberals saw competition as a process whereby market actors participate in the economy without being disproportionately constrained by either private or public power. Under the ordoliberal competition law model the aim is the protection of individual economic freedom of action as a value in itself, or vice versa, the restraint of undue economic power.25 Ordoliberals would prefer a
20 Gerber, supra note 12, pages 246-247. 21 Eucken, supra note 13, page 23. 22 Gerber, supra note 10, page 52. 23 Gerber, supra note 12, pages 277 and 282. 24 Eucken, supra note 13, page 23. 25 Wernhard Mschel, The Proper Scope of Government Viewed from an Ordoliberal Perspective: the Example of Competition Policy 157 Journal of Institutional and Theoretical Economics (2001) 3; Wernhard Mschel, Competition Policy from an Ordo Point of View in Hans Willgerodt & Alan Peacock (eds), German Neo-liberals and the Social Market Economy (Macmillan, 1989) page 146.

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state of inefficiency coupled with freedom rather than a totalitarian, but efficient, state.26 Effectively every power whether political or economic must be associated with checks, constraints and countervailing forces. When it comes to political and economic power, ordoliberals argue strongly for representative democracy and against the economic power of firms as their conduct could hinder the performance of rivals. Their dislike of power was due to their belief that individual economic freedom was eroded from within by the rise of private economic power. The deprivation of power was one of the core ideas of ordoliberalism:27
The one who has power has no right to be free and the one who wants to be free should have no power .

Ordoliberals believed that the accumulation of power resulted from the inability of the legal system to prevent the creation and misuse of private economic power.28 They alleged that both the lack of adequate safeguards against the rise of private economic power and the weakness of the state ultimately replaced economic and political freedom with an unrestrained dictatorship, which became unstoppable and led to World War II.29

1.2

Ordoliberal competition policy

The theory of ordoliberalism breaks competition policy down to four main points. First, the primary goal of competition policy is individual economic freedom. Second, the state retains a strong role in protecting the basic parameters of the system of competition, but with strict limits

26 Christian Watrin, Germanys Social Market Economy in Alastair Kilmarnock (ed), The Social Market and the State (The Social Market Foundation, 1999) pages 91-95. 27 Franz Bhm, Stenographische Berichte des 2. Deutschen Bundestages 76 Sitzung Bonn (Bonn: Hans Heger 1955) page 4217; Ernst-Joachim Mestmcker, Competition Policy and Antitrust: Some Comparative Observations 136 Zeitschrift fr die gesamte Staatswissenschaft (1980) page 387. 28 Gerber, supra note 10, page 29. 29 Giersch, Paque and Schmieding, supra note 7, pages 27-28.

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on more direct intervention. Third, competition policy is shaped by the rule of law rather than by ad hoc political decision-making. Fourth, competition policy is embedded in the economic order of a free and open society.30 The theory has two basic starting points: first, that individual economic freedom is an essential accompaniment to political freedom and second, that competition is necessary for the economic liberty of the individual.31 In the so-called ordoliberal view of society, individual economic freedom and competition are the source not only of prosperity, but also of political freedom. Thus, the legal framework, the economic constitution, should include basic principles to counteract any tendencies that neutralise competition. It should regulate and limit the emergence of private economic power by prohibiting cartels, the growth of single firm economic power and contracts that create unjustified limits on the competitive autonomy of firms. The legal framework should protect the competitive order by allowing liberal state intervention (but without intervening to achieve particular results).32 Intervention should control the accumulation of economic power to prevent the hindrance of competition, and thereby individual economic freedom, from being endangered. Ordoliberalism did not regard capitalism (pure economic liberalism) as a self-generating, selfequilibrating, and self-correcting system, but believed that the state should intervene to cure market failures. Eucken was concerned with securing and maintaining the competitive order and argued in favour of state intervention directed at securing the order of the economy, not at

30 Mschel, Competition Policy from an Ordo Point of View, supra note 25, page 142. 31 Friedrich A Hayek, New Studies in Philosophy, Politics, Economics and the History of Ideas (University of Chicago Press, 1978) pages 179190. 32 The idea of liberal state intervention makes ordoliberalism decidedly different from other liberal strands, see Niels Goldsmith & Arnold Berndt, supra note 18, page 12.

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the steering of the economic process.33 Eucken declared that the economic system cannot be left to organize itself,34 and Rpke called pure economic liberalism undiluted capitalism and regarded it as intolerable.35 They argued that a free economic market is good in theory but may have undesirable outcomes in practice. Rpke was concerned with the undesirable social consequences of the pure market mechanism, despite being pro-market.36 He argued in favour of state intervention to correct the outcome of the market process through, for example, direct transfers and subsidies.37 However, he argued against interference with the market mechanism itself, for example, he was not in favour of fixing prices and quantities.38 Miksch argued that a free economy can only be an economy which is organized by the state according to liberal principles. Thus, competition is a game that is regulated by the state.39 Ordoliberal theorists acknowledged that both individuals and society need to be protected from the misuse of power. Thus, the framework assigned a positive role to the state in the form of power to intervene in the market to protect the autonomy of the individual, and to guarantee private contractual autonomy, freedom of occupation and trade, individual property rights and free movement of persons, by imposing restrictions on cartels and abusive behaviour by dominant companies.40 Besides imposing restrictions on the players in the market, the legal framework should impose restrictions on the political system in order to
33 Eucken, supra note 14, page 336. 34 Walter Eucken, The Unsuccessful Age (Edinburgh: William Hodge, 1951) page 93. 35 Wilhelm Rpke, Social Crisis of Our Time (London: Thames and Hudson, 1958) page 119. 36 Wilhelm Rpke, Civitas Humana. Grundfragen der Gesellschafts- und Wirtschaftsreform (Erlenbach-Zurich, 1944). 37 Wilhelm Rpke, Die Gesellschaftskrisis der Gegenwart (Erlenbach-Zrich, 1942) pages 252-258. 38 Giersch, Paque and Schmieding, supra note 7, page 31. 39 Leonhard Miksch, Wettbewerb als Aufgabe. Grundstze einer Wettbewerbsordnung (Godesberg, 2nd ed, 1947) page 9. 40 Philip Manow, Ordoliberalismus als komische Ordnungstheologie in Leviathan (2001) page 179.

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protect the free market against political intrusion.41 The legal framework should be respected both by the political system, to avoid opportunism under the pressure of socio-economic forces exerted by political parties, and by private cartels and undertakings with economic power. Whilst traditional liberalism maintained that the rule of law was mainly to protect the individual against government coercion (political power),42 ordoliberalism attached equal importance to safeguarding individual economic freedom from intrusion by private undertakings economic power. Ordoliberalism thereby differentiates itself from traditional classical liberalism in two respects: first, that an unregulated free market is not the most efficient means of allocating resources, and second, that individual economic freedom needs to be protected from both political power and the misuse of private economic power. Ordoliberalism considers free enterprise and free competition as being inseparable from the concepts of liberty and prosperity.

1.3

Complete competition

The competitive order underlying the transaction economy, was the only economic order ordoliberals considered capable of achieving the beneficial result of a democratic and humane society. They considered that only complete competition could produce this beneficial outcome. Where complete competition exists, therefore certain kinds of behaviour which could potentially amount to an abuse, such as predatory pricing or loyalty rebates, would not constitute an abuse. Instead, such behaviour would constitute performance competition, as the firm engaging in pricing below cost or offering the rebate would not have power to

41 Franz Bhm, Wirtschaftsordnung und Staatsverfassung (Tbingen Mohr, 1950). 42 Bruno Leoni, Freedom and the Law (Liberty Fund, 3rd ed, 1991).

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foreclose competition.43 Complete competition could be achieved through competition on both the supply and demand sides of the market.44 To have competition on both sides of the market would require that no market player on either the supply or the demand side of the market was restricted by foreclosure in their freedom to compete. It was therefore imperative to protect the individuals freedom to compete. The complete competition model has similarities with the model of perfect competition,45 but the complete competition model is different from the neo-classical price theory based on perfect competition,46 as complete competition requires that no firm has the power to coerce other firms.47

43 The term competition on the basis of performance or performance competition is interrelated with the term competition on the merits. Some scholars think that it is no more than a semantic difference, but the ECJ seems to mean that it is the same in substance, for example in Hoffmann-La Roche, supra note 9, paragraph 91 where the text discusses competition on the basis of commercial operators. This is a poor translation of the authentic German version in which the Court used the term leistungswettbewerbs auf der grundlage der leistungen der marktbrger abweichen where leistungswettbewerb is the legal concept of competition on the basis of performance. A better translation would therefore have been competition on the basis of performance. In Case 62/86 AKZO Chemie BV v Commission [1991] ECR-I 3359, [1993] 5 CMLR 215, paragraph 70 the text mentions competition on the basis of quality whereas in the original French version the term concurrence par les mrites was used. A better translation therefore would have been competition on the merits. 44 Eucken, supra note 13, page 26. 45 An explanation of the model of perfect competition can be found in chapter four. 46 The term complete competition in German is vollstandiger Wettbewerb. It is generally translated as perfect competition. However, as noted by Mschel: the scholars of ordoliberalism have also used economic models for the description of their ideas, for instance, the model of perfect competition as it was developed in the traditional theory of competition. Such models, however, served only for the description of general effects of a market system, illustrating them in what might be called a chemically pure form. That did not imply, however, that those partly unreal premises were to be integrated as goals into practical competition policy. Any attempts to disprove or ridicule the ordoliberal concepts of competition as unrealistic miss the point see Mschel, Competition Policy from an Ordo Point of View, supra note 25, page 146. 47 Mschel, Competition Policy from an Ordo Point of View, supra note 25, page 157 footnote 16.

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Where an individual firm has economic power it must be controlled, as it is otherwise capable of obstructing social justice. An independent competition authority should impose a positive obligation on such a dominant undertaking in order for it to conduct itself as-if it were faced with complete competition.48 It was believed that the dominant undertaking would thereby be forced to compete on performance in order to be profitable, rather than use its power to gain an unfair advantage over rivals.49 The dominant undertaking would therefore have an obligation not to impair its rivals freedom and right to compete. Ordoliberals assumed that the as-if standard would provide clear guidelines for applying the abuse concept by basing it on the proposition that economic science could effectively use perfect competition as a model against which to measure actual economic behaviour.50

1.4

Summary

The origin of ordoliberalism was in humanist values rather than economic efficiency.51 The ordoliberal theorists set out to create a tolerant and humane society that would protect human dignity and personal freedom. To protect individual freedoms from the public power of government as well as from the power of private companies, ordoliberals advanced a political and legal framework, the economic constitution. This constitution had to guarantee an efficient functioning of the competitive order by allowing liberal state intervention to correct market failure. The economic constitution should achieve a market which functioned in a way that all members of society perceived as fair, and
48 Dieter Schmidtchen, German Ordnungspolitik as Institutional Choice 140 Zeitschrift fr die gesamte Staatswissenschaft (1984) 60. 49 The use of the as-if standard requires a comparison between markets with and without players having market power. According to Miksch such a comparison could be made by using the equilibrium-theoretical analyses of Alfred Marshall and Lon Walras, see Goldsmith & Berndt, supra note 18, page 4. 50 Gerber, supra note 12, page 308. 51 Gerber, supra note 10, page 36.

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provided equal opportunities for participation. To achieve this objective, political power and private economic power had to be limited by establishing a competitive order based on a model of complete competition in order to protect individual economic freedom as a value in itself. By emphasising individual economic freedom as the overriding law to

normative

principle,52

ordoliberals

connected

competition

fundamental rights.53 The latter point will be elaborated in chapter six. They viewed competition law as a matter of rights and individual freedoms. They believed that competition within the economy provided the basis for the economic order they envisioned: a free market economy. They also believed that competition provided the best way to organise social change.54 The ordoliberals encouraged open access to the market, as they believed that this would be the best control of private and political power. In their view the aim of competition policy was not economic efficiency, but rather the limitation and control of private power, or at least of its harmful effects,55 in order to protect individual economic freedom in the interest of a free and fair political and social order.56 For ordoliberals the economic constitution had constitutional status and should protect the individual's freedom to compete. Competition law was a part of the social market economy, which represented the ordoliberal vision of society, where economic freedom
52 Giersch, Paque and Schmieding, supra note 7, page 28. 53 Ordoliberals saw individual economic freedom as a fundamental right. Economic freedom has been important for others than ordoliberals, see for example the US Supreme Court in US v Topco Assocs [405 US 596 1972] page 610: Antitrust laws in general are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our free-enterprise system as the Bill of Rights is to the protection of our fundamental personal freedoms. And the freedom guaranteed each and every business, no matter how small, is the freedom to compete. 54 Giersch, Paque and Schmieding, supra note 7, page 32. 55 Gerber, supra note 12, page 251. 56 Mschel, Competition Policy from an Ordo Point of View, supra note 25, page 146.

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and competition were sources of political freedom, and represented the economic constitution of society. Ordoliberal theorists intertwined legal and economic perspectives and discourses by arguing that the characteristics and the effectiveness of the economy depended on its relationship to the political and legal system.

2.

German Competition Law

Germanys competition law inspired and developed primarily by ordoliberals has led European, if not world, developments in combatting restraints on competition.57

Given the influence from German competition law, it will be explored in some depth in this section in order to examine how it was influenced by ordoliberalism and in turn influenced EC competition law. That German competition law has played an essential role in the evolution and shaping of Community competition law has been acknowledged by former Competition Commissioner Karel Van Miert:58

We all know now what a success story it [German competition law] has been. It has been a successful export too. The fact that the competition rules were made a cornerstone of the EEC Treaty from the very beginning was due not least to the influence of Germany, where the same subject was occupying minds at the same time. It is largely thanks to Germany, therefore, that the EEC attached so much importance to competition from the outset, to the point where it became almost a constitutional principle. Again and again since then German politicians and competition specialists have taken a leading role in the shaping and practical development of the European competition rules.

Before exploring the principal and current German competition law the Act against Restraints of Competition (the ARC)

57 Gerber, supra note 10, page 68. 58 Karel Van Miert, The Future of European Competition Policy, speech given on 17 September 1998 at the Ludwig Erhard Foundation in Bonn (speech/98/1351), speech available at: europa.eu.int/comm/competition/speeches.

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Germanys first competition law the Ordinance against the Misuse of Economic Power (the Abuse Regulation) will be discussed.59

2.1

The Ordinance against the misuse of economic power

The Abuse Regulation has historical significance because it was modelled and was the first initiative in Germany to control the private economic power of undertakings. It was also the first general competition legislation in Europe which was specifically aimed at protecting the competitive process.60 The Abuse Regulation relied on administrative measures which

authorised officials to control the conduct of economically powerful firms to avoid harm to the public interest. This objective gave the German Federal Cartel Office (the FCO)61 power to exercise discretionary authority in the name of public interest. This is, as discussed below, fundamentally different from the objective of individual economic freedom pursued under the ARC. During industrialisation in the late nineteenth century, the number of cartels and powerful businesses in Germany increased, in particular in the steel and coal industries. At the beginning of the twentieth century, restraints on competition in the form of cartels were deemed legitimate. World War I gave an additional impetus to cartelisation (so-called war

59 Verordnung gegen Missbrauch wirtschaftlicher Machtstellungen, 1923 Reichsgesetzblatt [RGB1.] I 1067 (2 November 1923). 60 OECD Report, The Role of Competition Policy in Regulatory Reform, prepared for the OECD Review of Regulatory Reform in Germany (July 2004) page 8. 61 For a general discussion of the German Federal Cartel Office, see A ndre R Fiebig, The German Federal Cartel Office and the Application of Competition Law in Reunified Germany 14 University of Pennsylvania Journal of International Business Law (1993) 373.

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cartels) because of government rationing policy. Germany became the country of cartels.62 Historically, cartels were regarded very positively; cartels had long shown themselves to be a valuable means of stabilising economic development. They were also politically useful, as the government used cartels to control industry. The government found it easier to control the activity of a relatively small number of cartels than a large number of independent firms. For politicians, cartels were necessary for the economy to recover from hyper-inflation.63 By pursuing an objective of public interest, the government could still allow cartel activity if it turned out to be beneficial for its policies. The German use of the term cartel referred to any kind of agreement between competitors about production or distribution that involved or affected competition.64 The term cartel covered agreements used to protect cartel members from the impact of inflation by agreeing that the prices charged by the cartel members should automatically be increased in response to an increase in the price of the goods or services they purchased. As a result, producers were able to shift the burden of inflation to their purchasers and, ultimately, to consumers. Thus, cartels were highly desirable for German industries. German industrys positive view of cartels changed slightly after World War I when cartels became associated with the potentially harmful effects of big businesses. The years after World War I were characterised

62 Mschel, Competition Policy from an Ordo Point of View, supra note 25, page 143. 63 Hyper-inflation is a term used to describe levels of inflation that are very high. This was the case in Germany in the period 19191923. 64 An analysis of the German use of the term cartel is offered by Theodore F Marburg, Government and Businesses in Germany: Public Policy towards Cartels 38(1) The Business History Review (1964) 78. He argues that the German use of the term cartel was broader then than it is today under Article 81.

54

by political instability and hyper-inflation. As inflation accelerated, cartels became recognised as being harmful as it was believed that they contributed to inflation. The pressure for legislation to control cartels increased. Since 1920, small businesses and consumer interests had been demanding legislation. A cartel advisory committee was set up in 1922 as hyper-inflation reached catastrophic heights, with devastating results.65 The Abuse Regulation was enacted in 1923 as a response to big businesses cartel agreements66 and the post-World War I hyperinflation. By enacting the Abuse Regulation, the Weimar Government67 hoped to free the economy from unproductive restraints, increase production and thereby control inflation in the interest of the public welfare.68 The Abuse Regulation was ratified by the Weimar Government, but was not approved by the Parliament. It lacked democratic legitimacy, which impaired its effectiveness.69 Chancellor Gustav Stresemann,70 who promulgated the Abuse Regulation, had been a pre-war advocate of controls on large-firm abuse in order to protect small businesses, but at the time of its enactment, the Weimar Government only had limited power. In order to avoid too much resistance from German industry, Stresemann described the Abuse Regulation in liberal terms. He argued that by removing the restraints imposed by cartels, production would increase and inflation would be reduced.

65 Detlev J K Peukert, The Weimar Republic (Penguin Books, 1993) page 249. 66 OECD Report, supra note 60, page 6. 67 Named after the town of Weimar where meetings of the elected National Assembly were held. 68 Wilhelm Rpke, Welfare, Freedom and Inflation (University of Alabama Press, 1964) page 9; Gerber, supra note 12, pages 123-124. 69 Gerber, supra note 12, page 124. 70 German politician and statesman during the Weimar Republic and one of the first to talk about European economic integration.

55

The objective of the Abuse Regulation was to protect public interest.71 To fulfil that purpose, it contained provisions to control the conduct of cartels and reduce the coercive power of cartels that harmed public interest. However, it did not prohibit cartel agreements directly, but could reduce the power of the cartels indirectly by giving members of the cartel the possibility to withdraw from the cartel arrangement.72 Paragraph 4 in conjunction with paragraph 10 of the Abuse Regulation authorised administrative enforcement measures to be taken prospectively against any conduct of a cartel which endangered the public interest, by suggesting changes to that conduct. The objective of public interest made it acceptable to violate the economic rights of the individual; if cartels turned out to be beneficial for public interest then they would be allowed regardless of the violation of the individuals economic rights. Thus, the Abuse Regulation was a weak legislative measure from an ordoliberal perspective. The Abuse Regulation was annulled by the Nazi regime in the 1930s. It was not in line with Nazi totalitarian economic legislation, for example, price fixing, rationing of consumer goods, central allocation of labour, raw materials and major commodities.73 Despite the fact that the Abuse Regulation was repealed, it became central to the discourse of competition law in Germany as well as Europe, after World War II.74 In the years after World War II, competition law took a new turn in Germany, one that was to play a key role in the process of European integration and which was to have extraordinary consequences for the

71 Abuse Regulation, supra note 59, paragraph 4. 72 Abuse Regulation, supra note 59, paragraph 8 sought to reduce the power of the cartel over its members by allowing the cartelists to get out of the cartel agreement, if they had an urgent cause. 73 Giersch, Paque and Schmieding, supra note 7, page 19. 74 Gerber, supra note 12, page 127.

56

course of post-war European history.75 Germany fundamentally changed its conception of competition law by linking competition law with political responsibility and fundamental rights.76

2.2

The Act against restraints of competition

The purpose of the ARC is to protect freedom of competition and to eliminate economic power whenever it impairs effectiveness of competition.77 This is in essence the core of the ordoliberal competition model described above in section one. As will be explained in this section, the underlying principles of the ARC were heavily influenced by the ordoliberal concept of competition policy. According to Gerber:78
Enactment of the GWB [ARC] probably ranks as the most important political victory for ordoliberalism.

The preparation of the ARC had already started in 1948, but Germany had to wait until 1957 before the ARC was enacted.79 The enactment was the result of an intense battle between two possible models of competition law. One model was the one known from the Abuse Regulation, which was based on a model of administrative control where conduct by economically powerful firms could be controlled, but not prohibited, in order to protect public interest. The other model was the ordoliberal competition law model, which the ARC rely on. It represented a hybrid between an administrative competition law model known from the Abuse Regulation and a judicial competition law model. It is
75 Manfred E Streit, Economic Order, Private Law and Public Policy: the Freiburg School of Law and Economics 148 Journal of Institutional and Theoretical Economics (1992) 675. 76 Wolfgang G Friedman, Anti-trust Laws: A comparative symposium (London: Stevens, 1956) page 233. 77 Bundesgerichtshof [BGH], lfeldrohre, WuW/E BGH 1276 (1973). 78 Gerber, supra note 10, page 66. 79 For a detailed description, see Rudolf Mueller, Martin Heidenhain and Hannes Schneider, German Antitrust Law: An Introduction to the German Antitrust Law with German Text and Synopsis (Frankfurt am Main: Fritz Knapp, 1981) page 189ff.

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administrative

in

that

an

administrative

authority,

the

FCO,

is

responsible for enforcing it. It is judicial in that the FCOs decisions can be appealed to the ordinary courts operating according to judicial principles and procedures.80 The ordinary courts have the power to apply the ARC and where the courts interpretation is inconsistent with that of the FCO, the courts can overturn the decisions made by the FCO.81 Like the ordoliberal competition law model, the ARC is based on a prohibition system and operates according to judicial principles rather than administrative discretion, in order to protect the individuals freedom to compete. The preparation of the ARC started as a response to the Nazi totalitarian system, which built on ineffective administrative allocation of resources, illegal markets and excess liquidity in the face of rigidly fixed prices, giving rise to widespread inefficient production, very high transaction costs and a very unfavourable ratio of stocks to output in an economy desperately short of raw materials.82 After this totalitarian system collapsed there was a need to protect the general market order of the economy. The traumatic experience of Nazism had shown that political freedom and economic freedom are inseparably linked, and that maintaining competition and fighting restraints of competition not only gives individuals freedom to compete, but also secures political freedom. The battle for the ARC will be discussed in the following section. It is interesting, because as a leading German economic official Otto Schlecht has argued:83

80 David Gerber, The Transformation of European Community Competition Law 35 Harvard International Law Journal (1994) 97, page 98. 81 David Gerber, Two Models of Competition Law in Hanns Ullrich, Comparative Competition Law: Approaching an International System of Antitrust Law (Nomos, 1998) page 113. 82 Giersch, Paque and Schmieding, supra note 7, page 21. 83 Otto Schlecht, Macht und Ohnmacht der Ordnungpolitik Eine Bilanz nach 40 Jahren Sozialer Marktwirtschaft 40 ORDO (1989) 303.

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Without the battle for GWB [ARC] there would probably never have been the prohibition of cartels or the abuse supervision in the EC Treaty.

2.2.1

The Josten draft

The first draft of the ARC was the Draft of an Act to Protect Competition Based on Performance and an Act Concerning the Monopoly Office.84 In German the draft was known as the Josten-Entwurf as it was prepared by Paul Josten.85 Josten had previously been the head of the cartel section of the Economic Ministry where he worked with one of the founding fathers of ordoliberalism, Franz Bhm. Bhm was a member of the Josten committee and had a huge impact on the draft,86 which represented an elaboration of ordoliberal competition policy. The Josten Draft proposed a total ban on cartels. The ordoliberal theorists preferred a total ban on cartels because they believed the individuals freedom to compete was limited by cartel activity. This proposal was a dramatic change from the Abuse Regulation, which did not contain a total ban on cartels, but merely tried to indirectly reduce the coercive power of cartels over their members. German industry was opposed to a total ban on cartels and preferred an administrative control competition law model as in the Abuse Regulation;87 it preferred an abuse system enforced by administrative officials to a prohibition system enforced by the court.88

84 Entwurf zu einem Gesetz zur Sicherung des Leistungswettbewerbs und zu einem Gesetz uber das Monopolamt (Bundeswirtschaftsminister publication, Bonn, 1949). 85 In English the draft is known as the Josten Draft. This is the name that will be used in the thesis. 86 Knut W Norr, Die Leiden des Privatrechts (Tubingen, 1994) page 163. 87 Gerber, supra note 12, page 271. 88 In contrast with a prohibition system where conduct can be prohibited, an abuse system does not prohibit conduct, but rather investigates conduct. Changes can be put in place prospectively, but not prohibited.

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On 5 July 1949, the Josten Draft was presented to the Federal Minister of Economics, Ludwig Erhard. He supported the idea of the social market economy,89 but his philosophy was not entirely identical to those of the Freiburg School.90 Erhard was a determined opponent of cartels,91 but decided against the Josten Draft as he saw the total ban as too controversial at the time. He was a newly appointed minister and his position was far from stable.92 Having decided against the Josten Draft, Erhard gave Roland Risse,93 the head of the Price and Decartelisation Department in the Economic Ministry, the responsibility for the continuing drafting of the ARC.

2.2.2

The Government draft

Risse was not as hostile towards cartels as the ordoliberals and tried to outline a more politically acceptable draft by incorporating some exemptions to the cartel prohibition. Risse submitted the so-called Government Draft in 1952. It was a watered-down version of the Josten Draft, but it was still influenced by ordoliberalism with the aim of achieving complete competition. It contained the ordoliberal as-if standard and a ban on cartels.94 Equally responsible for the Government Draft was Eberhard Gnther,95 who had the same attitude towards cartels as the ordoliberals.
89 Gerber, supra note 12, page 260. 90 Volker Rolf Berghahn, The Americanisation of West Germany Industry (Leamington Spa, 1986) page 159. 91 Volker Rolf Berghahn, Modern Germany: Society, Economy and Politics in the Twentieth Century (Cambridge University Press, 2nd ed, 1987) page 156. 92 Dr Gerrit Meijer, Some Aspects of the Relationship between the Freiburg School and the Austrian School (1999) page 13. Available at: http://www-edocs.unimaas.nl/abs/rm99001.htm. 93 In 1950, Risse was the German delegate in the Schuman Plan negotiations leading to the ECSC Treaty. For further information see: http://www.eu-history.leidenuniv.nl/index.php3?m=&c=54. 94 Volker Rolf Berghahn, Ideas into Politics: the case of Ludwig Erhard in RJ Bullen, H Pogge von Strandmann, and AB Polonsky (eds), Ideas into Politics: Aspects of European History, 1880 to 1950 (London: Croom Helm, 1984) pages 159-161. 95 Gnther was later to become the first president of the BundesKartellAmt.

60

The Government Draft was fiercely attacked by German industry which was very powerful. Erhard tried to negotiate the different interests as he needed support from industry in order to remain in politics in the longer term. A major debate took place on 24 and 31 March 1955 where the central question discussed was whether cartels and other restrictive practices were to be regarded as bad in principle, or only because of specific objectionable behaviour.96 A compromise was reached. German industry accepted the cartel prohibition and in return Erhard agreed to accept some exemptions such as rationalisation cartels, crises cartels and export cartels. The Government Draft was accepted and the final version of what became the ARC97 was ratified on 27 July 1957 and came into force on 1 January 1958.98

2.3

The application of the ARC

As shown in previous section, the underlying principles of the ARC are heavily influenced by ordoliberalism. The main objective of the ARC is the protection of economic freedom,99 as will be shown in the brief summary of the following cases. The Vitamin B12 case concerned excessive pricing where vitamins in Germany were sold at prices above those in the countries around Germany.100 The German Supreme Court emphasised that the abuse provision in section 22 of the ARC (now section 19) could be used to determine whether prices above the competitive price level were abusive. The Supreme Court concluded that the abuse provision was violated as prices were excessive and upheld the FCOs decision
96 Friedman, supra note 76, page 190. 97 The ARC contained provisions on horizontal restraints, vertical restraints and abuse of marketdominating position. Merger control was not added until 1973. 98 Gesetz gegen Wettbewerbsbeschrnkungen [GWB], 1957 Bundesgesetsblatt [BGB1.] I 1081 (West Germany). 99 lfeldrohre, supra note 77. 100 BGH Vitamin B-12, WuW/E BGH 1435 (1976).

61

requiring the defendant to reduce its prices to the competitive price level. According to the Supreme Court, this requirement to reduce prices did not interfere with the defendants economic freedom; it merely established a limit beyond which prices could be considered abusive. In order to establish that the prices were abusive, the FCO had compared German prices with prices in the neighbouring countries. The Supreme Court held that in comparing prices, it is necessary to assess what the prices would have been, if the dominant undertaking had behaved as-if it were constrained by complete competition. To make a comparison between the actual market conditions and the market conditions which would prevail if substantial competition existed is very difficult. The difficulties in determining exploitative abuses resulted in few cases reaching the German courts and a widespread belief in Germany that the concept of exploitative abuse was ill-conceived and illadapted to judicial application.101 Besides exploitative abuses, the abuse provision is used to prohibit exclusionary abuses or, in other terms, impediment competition. The main objective when considering impediment competition is to protect freedom of competition by protecting the process of competition. Priority is given to the process of competition, and this is an exact replica of ordoliberal thinking, where the benefit of competition is a market characterised by a desirable process, and the end result does not matter. This objective could be achieved by preventing dominant undertakings from using their power to harm competitors and other market participants. This objective makes it difficult to distinguish between impediment competition and performance competition, as also performance competition can exclude rivals. Thus, early cases concerning impediment competition struggled to find an effective

101 Gerber, supra note 12, page 312.

62

analysis

to

distinguish

between

impediment

competition

and

performance competition.102 Professor Peter Ulmer of the University of Heidelberg suggested a test to analyse impediment competition, which was adopted by the German courts. Ulmer proposed a cumulative two-step test, which was heavily inspired by ordoliberalism. First, the conduct must constitute nonperformance competition and second, the conduct must restrict the remaining competition in the dominated market.103 The key to the application of Ulmers test is whether or not the conduct can be linked to the undertakings performance.104 Conduct such as offering lower prices, better quality and other forms of consumer benefits is not automatically performance competition; the benefits to the consumer must be linked to the undertakings performance. If the court finds that a certain conduct is based on the economic power of a company, which endangers the economic freedom of rivals, then the conduct is considered nonperformance competition. Conduct based on economic power can be condemned only where there is not complete competition in the market. If the first limb of the test is satisfied, it is necessary to consider the second limb of the test, which is whether the conduct restricts the remaining competition in the dominated market, that is to say the structure of the market. Several factors indicate that Ulmers performance-based competition test was modelled upon the ordoliberal notion of competition law. First, competition on the basis of performance was central for ordoliberals, who linked the notion of performance competition with complete competition by arguing that complete competition will ensure

102 Ibid. page 313. 103 Peter Ulmer, Schranken zulssigen Wetttbewerbs marktbeherrschender Unternehmen (NomosVerlagsgesellschaft, 1977) page 147. 104 John Kallaugher and Brian Sher, Rebates Revisited: Anti-Competitive Effects and Exclusionary Abuse under Article 82 5 European Competition Law Review (2004) 263, page 271.

63

performance-based competition as no firm has economic power and thus cannot use its power to impede economic freedom of rivals. In the ordoliberal view complete competition exists in a market in which none of the players has any economic power to coerce the conduct of other firms. Second, one of the founders of ordoliberalism, Franz Bhm, decades before Ulmer, had provided a theoretical basis for applying the abuse provision and based on the distinction between This impediment was competition performance competition.105 distinction

perceived by scholar Hans Carl Nipperdey,106 who used it in applying the German statutes against unfair competition. According to Bhm, it would be impediment competition if the conduct in question was designed to for example impede a rivals capacity to perform. Where a firm with economic power used its power to impede the performance of a rival, for example, by excluding the rival from the market, this would be an interference with the competitive process and such conduct should be prevented.107 Ulmers test was applied in the Combination Price Schedule case.108 A publishing company in Berlin owned two different newspapers. One newspaper was dominant in the market and the other was struggling financially to stay in that market. The publishing company listed the advertising fees for the two newspapers in combination. Any potential customers wanting to advertise in the dominant newspaper was bound also to advertise in the struggling newspaper for the combined price. The FCO argued that it was a tying agreement, which interfered with advertisers freedom to advertise in the dominant newspaper only, as they were bound to advertise in the other non-dominant newspaper as well. This tying constituted an abuse and infringement of the abuse provision, section 22 of the ARC.
105 Franz Bhm, Wettbewerb und Monopolkampf (Berlin Heymann, 1933) page 253. 106 Hans Carl Nipperdey, Wettbewerb und Existenzvernichtung 28 Kartell-Rundschau (1930) 127. 107 Gerber, supra note 10, page 53. 108 BGH Kombinationstarif WuW/E OLG 1767 (1977).

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The infringement decision was appealed to the Supreme Court. The Court held that the first step of Ulmers test was fulfilled, as the combined price schedule improved sales of the tied product (the struggling newspaper) by using the power of the tying product (dominant newspaper) rather than through improved performance. It was not competition based on performance, but conduct which was possible only due to economic power. The Court found that the first step of Ulmers test was met. However, the Court did not consider that the second step of Ulmers test was met, as the conduct had not been substantial enough to significantly foreclose and alter the structure of the market. The Court emphasised that undertakings with economic power should be subject to a standard of conduct higher than that of firms without power. However, it required that abuse should be found only where the conduct led to the destruction, or serious impairment, of the market structure.109 According to the Court, this meant that there must be a detrimental change in the structure of the market and that was not the case in this particular situation. The Court held that only conduct which seriously impaired the remaining competition in the market should be prohibited. This is to avoid interfering with a dominant undertakings right to use its power in the market.110 This case indicated that pursuing an objective of economic freedom meant that the Court would find an abuse only where the economic freedom of other market participants had been impaired by foreclosure which seriously changed the structure of the market. Focusing on foreclosure and the structure of the market involves considering whether the competitive process actually reduces the capacity of firms to coerce the behaviour of other firms.

109 Ibid. page 1772. 110 Gerber, supra note 12, page 314.

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2.4

Summary

After World War II German competition law moved in a new direction that would fundamentally alter the path of competition law in Europe.111 Germany adopted the ordoliberal competition law model according to which competition law should operate as a fundamental protection of the competitive process and of the economic freedom of individual market players.112 According to ordoliberal ideas, competition law should have

constitutional status and play a leading role in promoting fundamental rights, such as individual economic freedom. It should protect structures within which firms compete so that effective competition amongst competitors is maintained and no firm or firms become too influential. 113 By adopting the ordoliberal competition law model, competition law was given constitutional status in Germany. Competition law should promote basic values and protect fundamental rights.114 It should operate according to judicial and constitutional principles rather than administrative discretion. The application of the abuse provision of the ARC, in early cases concerning impediment competition, was based on a test suggested by Professor Ulmer. Ulmers test was heavily inspired by ordoliberalism. In applying the test, the Court focused on the impairment of the structure of the market. This meant that only conduct which led to serious structural impairment of the remaining competition in the market, would be considered a violation of the abuse provision.

111 Ibid. page 266. 112 Gerber, supra note 12, page 271. 113 Merit E Janow, International Perspectives on Abuse of Dominance in OECD paper GD(96)131 on Abuse of Dominance and Monopolisation 1996, page 33ff. 114 Gerber, supra note 12, page 266.

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Conclusion
Chapter two concludes that ordoliberalism holds both that government needs to be restrained from abuse of power, and that the free market has its limits. Ordoliberalism has played a key role in the adoption of German competition law and that has influenced the process of European integration and has had extraordinary consequences for the course of post-war European history.115 The ARC is based on the ordoliberal competition law model. The models focus is on the protection of economic freedom and on the markets role as an integrative aspect in society rather than a creator of aggregate wealth. It is fundamentally different from the competition law model that was adopted by Germany before World War II, which was based on the objective of public interest. Unlike the Abuse Regulation, which was based on administrative discretion, the ARC is based on judicial principles. This was considered appropriate by ordoliberals, for whom competition law was the main pillar of the social market economy.

115 Streit, supra note 75.

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Chapter 3 Economic Freedom in Article 82: the Early Jurisprudence of the European Court of Justice

Introduction
This chapter discusses the extent to which Article 82 protects economic freedom by protecting the competitive structures of a market as a goal derived from the ordoliberal tradition. The chapter contains two sections. Section one examines whether ordoliberalism has had a profound influence on the structure of Article 82. This entails looking at the distinction between exploitative and exclusionary abuses. Section two considers whether cases such as Continental Can, Commercial Solvents, United Brands, Hoffmann-La Roche and Michelin I reflect an emphasis on rivalry apparently without rigorous inquiry into relative efficiency, as in the ordoliberal approach.

1.

Ordoliberal Influence on the EC Treaty

The idea that ordoliberalism has had a profound influence on Community competition law is relatively uncontroversial1 and is supported by the structure of the competition provisions in the EC Treaty.2 According to Gerber, the ordoliberal creation of competition law has evolved into the European concept of competition law, and without it [ordoliberalism] the

1 David Evans, Roundtable discussion about US Supreme Courts decision in Verizon v Trinko Global Competition Review (2004) page 26; Barry E Hawk Article 82 and Section 2 in OECD paper on Competition on the Merits, page 253. Available at: http://www.oecd.org/dataoecd/7/13/ 35911017.pdf; David Gerber, Constitutionalizing the Economy: German Neo-liberalism, Competition Law and the New Europe 42 American Journal of Comparative Law (1994) 25, page 73. 2 Articles 81 and 82 are not a replica of ordoliberal thought, but their structure bears the imprint of ordoliberal political philosophy, see Karel Van Miert, The Future of European Competition Policy, speech given on 17 September 1998 at the Ludwig Erhard Foundation in Bonn (speech/98/1351), speech available at: europa.eu.int/comm/competition/speeches; David Gerber, Law and Competition in Twentieth Century Europe: Protecting Prometheus (Clarendon Press Oxford, 1998) chapter 9.

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development of the European Community is unimaginable.3 Judicial practice has been influenced by ordoliberalism as acknowledged by DG Competitions Director General Philip Lowe:4
The case-law of the European courts and also the decisional practice of the Commission were initially influenced by ordoliberal thought which has its origin in the so-called Freiburg School. Their members advocated a strict legal framework and a strong role for the state in protecting the basic parameters of competition. Competition was understood as a process of economic coordination on the basis of freedom of action. The protection of individual economic freedom as a value in itself was regarded as the primary objective of competition policy.

Despite this, there is little discussion in the legal literature about how ordoliberal theory influenced the EC Treaty and in particular the jurisprudence of Article 82.5 Traces of ordoliberalism can be found in the report prepared by the Intergovernmental Committee on European Integration, which unofficially is referred to as the Spaak Report.6 This report gives an interesting insight to the historical background and the influence of ordoliberal ideas which will be discussed briefly in the following section. The point of the section is not to given an exhaustive analysis of the Spaak Report, but to show briefly that this document, predating the Treaty, bears imprint of ordoliberalism.

3 Gerber, supra note 1, page 49. 4 Philip Lowe, Consumer Welfare and Efficiency New Guiding Principles of Competition Policy?, speech given on 27 March 2007 at the 13th International Conference on Competition and 14th European Competition Day, page 2, speech available at: http://ec.europa.eu/comm/competition/speeches/text/sp2007_02_en.pdf. 5 There is plenty of literature which discusses ordoliberalism, but little discussion about the influence of the doctrine on Community law and specific cases under Article 82. 6 The Spaak Report Rapport des Chefs de Dlgation aux Ministres des Affaires Etrangres (in English: Report of the Heads of Delegation of the Governmental Committee) set up by the Messina Conference, named after Paul-Henri Spaak, then the Belgian prime minister. Paul-Henri Spaak was the chairman of the preparatory committee in charge of its preparation. The Report was presented on 21 April 1956 and led to the Treaty of Rome of 1957, which came into force 1 January 1958. Available at: http://aei.pitt.edu/archive/00000995/01/Spaak_report.pdf.

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1.1 By

The Spaak report 1955 the idea of moving toward economic integration and

establishing a European Economic Community (EEC) led to delegates from France, Italy and Germany drafting a report on the common European market.7 The Spaak Report still relevant if we want to understand ordoliberal influences on the EC Treaty. Even if the Spaak Report was drafted so many years ago it paved the way for the EC Treaty and is one of the public documents predating the EC Treaty. The Spaak Report can be seen as a kind of white paper. Also, as pointed out by Ludwig von Mises: if we wish to understand contemporary events, we would do well to read the books written 20 or 30 years ago.8 The Spaak Report had two main objectives: one political and one economic. The political objective was to reduce the possibility of conflicts and wars.9 The economic objective was to increase prosperity in Europe by reducing barriers to trade between the European states.10 To ensure the establishment of a common market and ensure economic rights and freedoms in the form of the freedom to provide services, free movement of goods and freedom of establishment, barriers to trade had to be abolished and undistorted competition ensured. The free movement should be ensured by enforcing rules opening the markets between Member States, and rules on competition to make sure that private undertakings did not close the markets again by distorting competition.

7 Prior to the formation of the EEC, the European Coal and Steel Community (ECSC) was established between (the then) West Germany, France, Italy and the Benelux countries (Belgium, the Netherlands and Luxembourg) by the Treaty of Paris, ratified in April 1951 and in force from July 1952. The formation of the ECSC arose from an increasing need for European integration to secure lasting peace between European countries after World War II. The ECSC was a significant achievement in organising the coal and steel market, but further integration was considered necessary. 8 Quoted by Ludwig Von Mises in Democracy and Economic Power in Cartel and Monopoly in Modern Law (CF Mller Karlsruhe, 1961) page 36. 9 Spaak Report, supra note 6, page 5. 10 Ibid. page 8.

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There was a general agreement that the elimination of barriers would not be achieved if private agreements or economically powerful firms were permitted to manipulate, or not prevented from manipulating, the flow of trade. The Spaak Report highlighted the need for the EC Treaty to prevent monopolies or monopolistic practices from impeding the fundamental aims of the common market.11 However, this was never implemented in the Treaty which prohibits an abuse of dominance. Some of the key delegates preparing the text of the EC Treaty strongly believed in ordoliberalism. One of the German delegates, Walter Hallstein, a law professor from University of Frankfurt who later became the first President of the Commission,12 espoused the ideas of ordoliberalism.13 The chairman of the common market Group, Hans von der Groeben, strongly believed in ordoliberalism, in particular that the abuse of power must be prohibited.14 This view was echoed by another delegate, the German Professor in economics, Alfred Mller-Armack, who represented the German Federal Government as chief negotiator for the EC Treaty.15 As a concept ordoliberalism appeared suitable to integration. The basic principles laid down in the EC Treaty, for example, the four freedoms,16

11 Spaak Report, supra note 6, pages 44-45. 12 A critique of Walter Hallstein as the Commissions first president can be found in John Gillingham, European Integration, 1950-2003: Superstate or New Market Economy? (New York: Cambridge University Press, 2003) page 74. 13 Gerber, supra note 2, page 343; Manfred E Streit, Economic Order, Private Law and Public Policy: the Freiburg School of Law and Economics in Perspective 148 Journal of International and Theoretical Economics (1992) 675. 14 Note of 26 October 1956 by Hans Von der Groeber, Council Archives CM3/NEGO/217, Document MAE468 f/56. 15 Mmo interne, 7 September 1956, Fascicule 5, Council Archives CM3/NEGO/236, Document MAE/Sec. 29/56; Christian Joerges and Florian Rdl, Social Market Economy as Europes Social Model? EUI Working Paper Law No 2004/8 (2004) page 14. 16 Free movement of goods: Article 28; free movement of workers: Article 39; free right of establishment: Article 43; and free movement of capital: Article 56.

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the

non-discrimination

principle17

and

the

system

of

undistorted

competition matched ordoliberal conceptions of the economic order they proposed for the market system as described in chapter two. The protection of economic liberties in the form of freedom of trade supported by competition and non-discrimination rules,18 matched the ordoliberal view of protecting competition in the market and free access to the market in order to maintain a stable liberal market economy and to guarantee individual economic freedom.

1.2

Exploitative and exclusionary conduct

It has been argued that the competition provisions of the EC Treaty, Articles 81 and 82, bear the imprint of ordoliberal political philosophy.19 This section will assess this argument in relation to Article 82 in particular.20 In terms of Article 82(1), any abuse by one or more undertakings in a dominant position within the common market or in a substantial part of it shall be prohibited. Article 82(2) lists some examples of conduct by dominant undertakings which may be considered abusive. The list contains different categories of abuses: exploitative, exclusionary and discriminatory, meaning that the prohibition covers both exploitative and exclusionary abuses. The distinction between exploitative and exclusionary conduct is not expressly made in the Treaty, perhaps

17 The general non-discrimination principle is set out in Article 12. 18 Grinne De Brca, The Constitutional Challenge of New Governance in the European Union 28(6) European Law Review (2003) 814, page 817; Philip Manow, Armin Schafer and Hendrik Zorn European Social Policy and Europes Party-Political Center of Gravity, 1957-2003 MPIFG Discussion Paper No 6 (October 2004) page 20. 19 See Gerber, supra note 2, chapter 9 and Van Miert, supra note 2. 20 A similar assessment in relation to Article 81 has been made by Giorgio Monti, Article 81 EC and Public Policy 39 Common Market Law Review (2002) 1057, page 1061.

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because most exclusionary practices are indirectly exploitative.21 Unlike Article 81(1), Article 82 contains no reference to the anti-competitive effects of the practice referred to as conduct will be regarded as abusive only if it restricts competition.22 The reason is that if such a requirement had been inserted, only exclusionary abuses would have been considered abusive under Article 82, because there is nothing inherent in exploitative abuses, for example, excessive pricing to a final consumer to distort the process of competition.23 Exploitative abuse is where the dominant undertaking takes excessive advantages of its market power and obtains a benefit by placing an unfair burden upon its customers or consumers. This is only possible because there are not many alternative undertakings to which the consumer can turn for supply. Exploitative abuses are prohibited directly in Article 82(2)(a) and (b), and indirectly in Article 82(2)(c) and (d). Indent (a) concerns exploitative abuses, where the dominant undertaking takes excessive advantage of its market power; indent (b) concerns limitation of production, markets or technical development to the prejudice of consumers; indent (c) concerns discriminatory abuses, where the dominant undertaking differentiates seriously and unjustifiably between companies with which it is contracting; and indent (d) concerns tying, where the dominant undertaking makes one obligation subject to a supplementary obligation in circumstances where the obligations have no connection.

21 This argument was put forward by Eleanor Fox, What is Harm to Competition? Exclusionary Practices and Anti-Competitive Effect 70 Antitrust Law Journal (2002-2003) 371, and reiterated by Advocate General Kokott in her Opinion in Case C-95/04P British Airways plc v Commission, delivered on 23 February 2006, paragraph 68. 22 Case T-203/01 Manufacture franaise des pneumatiques Michelin v Commission [2003] ECR II4071, paragraph 237. 23 Duncan Sinclair, Abuse of Dominance at a Crossroads: Potential Effect, Object and Appreciability under Article 82 EC 25(8) European Competition Law Review (2004) 491, page 493.

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Ren Joliet (later to become a judge at the ECJ)24 argued a couple of years before the ECJ reached its judgment in Continental Can25 that Article 82 should be interpreted to catch exploitative behaviour only, which directly harms consumers. His reason for wanting to leave out exclusionary conduct from the scope of Article 82 was that preventing competitors exclusion from the market goes beyond the objective of protecting the competitive process.26 Joliets argument has some merits if it is accepted that most exclusionary abuses are exploitative. Joliet argued that exclusionary conduct will eventually be caught by prohibiting exploitation because the point of driving competitors out of the market is that the dominant undertaking can acquire the market power necessary to charge monopoly profits. The very question of whether exclusionary abuses are captured by Article 82 was considered by Advocate General Roemer in his Opinion in Continental Can:27
The only question of interest in the present caseis purely whether Article 86 [now Article 82] also applies if an undertaking in a dominant position on the market, by means of the acquisition of another undertaking reinforces its position on the market, to such an extent that in practice nothing remains in the way of competition of economic significance.

By using the word also, Advocate General Roemer assessed whether Article 82, in addition to practices where the undertaking uses its power (exploitation), applies to practices where the undertaking simply strengthens its dominant position (for example by exclusion). Advocate General Roemer argued that Article 82 was not the appropriate tool for controlling mergers and concluded that there was no legal basis in Article 82 for such an interpretation. He based his answer on several
24 Ren Joliet served on the ECJ between 1984 and 1995. 25 Case 6/72 Europemballage Corpn and Continental Can Co Inc v Commission [1973] ECR 215, [1973] CMLR 199. 26 Ren Joliet, Monopolization and Abuse of Dominant Position (Martinus Nijhoff, 1970) pages 250251. 27 Opinion of Advocate General Roemer in Continental Can, supra note 25, delivered on 21 November 1972, page 254.

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observations including that Article 82 does not distinguish between different degrees of dominance. Further, that it does not contain a provision such as the merger provision in Article 66 of the ECSC Treaty, that effective competition must not be hindered. Finally, unlike Article 81(3)(b), Article 82 does not state that there must be no possibility of eliminating competition in respect of a substantial part of the products in question. Advocate General Roemers final observation emphasises that the dominant undertaking cannot abuse its position and then be exempted, if its behaviour increases efficiency, by arguing that its behaviour does not eliminate competition in respect of a substantial part of the products. This reflects ordoliberal concern about the accumulation of economic power. Advocate General Roemers interpretation that Article 82 does not contain a provision that effective competition must not be hindered seems to be in tune with the ordoliberal view and the intentions of some of the drafters of the Treaty. For example, Alfred Mller-Armack and Hans Von der Groeben held that the hindrance of competition should not be prohibited,28 only the abuse of a dominant position:29
With regard to monopolies, on the one hand, the more complete the monopoly, the less probable is it that any competition likely to be compromised or eliminated will exist. As a result, what should be prohibited in the case of monopolies is not the

28 Monopolies and oligopolies are not necessarilyincompatible with the competition regime. What must be abolished [are] the abuses to which certain monopolistic situations might lead. Ian S Forrester, The Modernisation of EC Antitrust Policy: Compatibility, Efficiency, Legal Security in Claus-Dieter Ehlermann and Isabela Atanasiu (eds), The Modernisation of EC Antitrust Policy (Hart publishing, 2001). 29 Document MAE468 f/56, supra note 14.

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hindrance of competition but only abuse of a dominant position in the market.30

Von der Groeben is saying that hindrance of competition is acceptable, but abuse must be prohibited. This supports Advocate General Roemers interpretation even though it is not entirely clear whether the term abuse only refers to exploitation. Even if he meant exploitation only, which is unclear, then what about exclusionary conduct which indirectly leads to exploitation? An answer to this question was given in Continental Can.31 The ECJ held that not only exclusionary conduct which directly harms consumers (exploitation), but also conduct which indirectly harms consumers (exclusion) is prohibited:32
[T]he condition imposed by Article 86 is to be interpreted whereby in order to come within the prohibition a dominant position must have been abused. The provision states a certain number of abusive practices, which it prohibits. The list merely gives examples, not an exhaustive enumeration of the sort of abuses of a dominant position prohibited by the treaty. As may further be seen from letters (c) and (d) of Article 86(2), the provision is not only aimed at practices which may cause damage to consumers directly, but also at those which are detrimental to them through their impact on an effective competition structure, such as is mentioned in Article 3(f) of the Treaty. Abuse may therefore occur if an undertaking in a dominant position strengthens such position in such a way that the degree of dominance reached substantially fetters competition, i.e. that only undertakings remain in the market whose behaviour depends on the dominant one.

The ECJ decided that the scope of Article 82 would be limited, if it could be used only to address practices where the concerned undertaking used its dominant position and not practices where the undertaking

30 En revanche, en ce qui concerne les monopoles, ce nest pas le fait dentraver la concurrence, mais bien seulement labus de la position dominante sur le march qui pourra faire lobjet dune interdiction. Translation from Ian S Forrester, supra note 28. 31 Continental Can, supra note 25. 32 Ibid. paragraph 26.

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strengthened its dominance. Thus, not only conduct which harms consumers directly, but also conduct which harms consumers indirectly, by altering the structure of the market, is prohibited by Article 82. This is presumably because the restriction of competition by altering the structure and dynamics of the market can limit intra-brand or interbrand competition. A possible consequence of prohibiting an alteration of the market structure or foreclosure only, which may or may not lead to indirect consumer harm, may be protection of the competitive opportunities of another firm. If the aim of the Court was not only to protect consumers indirectly, but also to ensure that the exercise of power does not impair competitors ability to compete, then that goes back to the ordoliberal concern that competition should be protected by making sure that no firm becomes powerful enough to impair the competitive process. That the main goal of Article 82 is to protect the competitive process is an assumption supported by Professor Thomas Eilmansberger.33 DG Competitions Director General Philip Lowe is also willing to protect the competitive process, but only as an outcome and not in itself:34
[C]onsumer welfare and efficiency are the new guiding principles of EU competition policy. Whilst the competitive process is important as an instrument, and whilst in many instances the distortion of this process leads to consumer harm, its protection is not an aim in itself. The ultimate aim is the protection of consumer welfare, as an outcome of the competitive process.

33 Thomas Eilmansberger, How to Distinguish Good from Bad Competition under Article 82 EC: in Search of Clearer and More Coherent Standards for Anti-competitive Abuses 42 Common Market Law Review (2005) 129, page 133; Thomas Eilmansberger, Dominance the Lost Child? How Effects-Based Rules Could and Should Change Dominance Analysis European Competition Journal (2006) 15, page 18. 34 Lowe, supra note 4, page 9.

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Lowe has argued elsewhere that Article 82 does not prevent dominant undertakings from competing on the merits.35 Without having a precise definition of competition on the merits, Lowes argument is taken to mean that he is only willing to protect the outcome of the competitive process rather than the process itself. This is far removed from the ordoliberals reasons for protecting the process of competition. As established in chapter two, ordoliberals focus on the need to protect the conditions of competition rather than its short-term consumer welfare. The competitive process should be protected whether or not it is inefficient, as efficiencies are rejected in principle. Put simply, the difference is whether the competitive process is protected as an end in itself or protected as a means to an end. It is also a question of whether the conduct in question is considered in a shortterm or long-term To perspective. Ordoliberals in the take a long-term protecting perspective.36 term. The question is whether some of the decisions of the Commission and the ECJ take the long-term perspective with an emphasis on rivalry without apparently rigorous inquiry into their relative efficiency, which reflects the ordoliberal approach. This question will be addressed by analysing fundamental cases decided under Article 82 such as Continental Can, Commercial Solvents, United Brands, Hoffmann-La Roche and Michelin I. These cases are chosen because the law on Article 82 is to be found in the early cases. ensure competition long-run,

competitors is more important than protecting efficiencies in the short-

35 Philip Lowe at the thirteen Annual Conference on International Antitrust Policy, speech given on 23 October 2003 at the Fordham Antitrust Conference in Washington, page 5, speech available at: http://ec.europa.eu/comm/competition/speeches. 36 Gerber, supra note 1, page 78.

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2.

The Application of Article 82

Over time, the conduct of dominant undertakings has been assessed in the light of the overall objectives of the EC Treaty,37 in particular, the creation of a single European market. Apart from this well-known market integration goal,38 Article 82 has been applied to achieve a variety of other objectives; most importantly,
39

the

objective

of

protecting

competition from distortion.

In some of the cases however, it is very

difficult to assess whether the Community Courts think competition is best protected from distortion by protecting the process of competition and thereby the economic freedom of the market participants, or by protecting consumer welfare. This difficulty arises because the ECJ has decided that Article 82 is not only aimed at practices which may cause damage to consumers directly, but also at practices that are detrimental to consumers
40

through

their

impact

on

an

effective

competitive

structure.

2.1 2.1.1

Continental Can Facts of the case

The American metal-packing company Continental Can, the worlds largest producer of metal containers,41 acquired 91 per cent interest in a Dutch metal can manufacturer Carnaud of France and Thomassen &
37 Case 6-7/73 Istituto Chemioterapico Italiano SpA and Commercial Solvents Corporation v Commission of the European Communities [1974] ECR 223, [1974] 1 CMLR 309, paragraph 32; Continental Can, supra note 25, paragraphs 24 and 26; Case 27/76 United Brands Company v Commission [1978] ECR 207, [1978] 1 CMLR 429, paragraph 183; Case 85/76 Hoffmann-La Roche AG v Commission [1979] ECR 461, [1979] 3 CMLR 211, paragraph 90. 38 For example, Case 226/84 British Leyland plc v Commission [1986] ECR 3263, [1987] 1 CMLR 185; Case 26/75 General Motors Continental NV v Commission [1975] ECR 1367, [1976] 1 CMLR 95; United Brands, supra note 37. These are a few of the cases where market integration considerations had a large impact on the outcome. 39 Continental Can, supra note 25. See also Eilmansberger, supra note 33, page 132ff. 40 Continental Can, supra note 25, paragraph 26. 41 Founded in 1904 and incorporated in New York in 1913.

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Drijver-verblifa NV (TDV) through its holding company Europemballage Corporation (Europemballage). Continental Can had transferred its 85 per cent share of a Germany company Schmalbach-Lubeca-Werke AG (SLW) to Europemballage to buy the shares of TDV.

2.1.2

The Commissions decision

The Commission opened proceedings against the merger in April 1970 on its own initiative.42 The Commission found that Europemballage held a dominant position in the markets for light metal open-top containers for meat and fish and lids for glass jars. In December 1971, it concluded that the merger with TDV constituted an abuse of a dominant position and thus violated Article 82.43 The Commission argued that Europemballage had rendered any future competition between TDV and SLW impossible and thereby distorted competition in West Germany and the Benelux countries, which represented a substantial part of the common market.44 Its decision was based on five points: 1. the very large market share already held by SLW; 2. the weak position of the remaining competitors; 3. the weak position of the buyers compared to the strength of the merged company; 4. the numerous ties already existing between Continental Can and potential competitors; and 5. the financial and technical problems of entering this highly concentrated market.45

42 Paul W Johnson, Use of Article 86 to Invalidate Mergers 15 Harvard International Law Journal (1974) 333, page 336. 43 At the time that this case and the other cases subject to analysis in this section were decided, Article 82 was numbered Article 86. To avoid confusion Article 82 will be used throughout, except in quotations. 44 Continental Can OJ [1972] L7/25; 2 CCH Comm. Mkt. Rep. 8171 (1973). 45 Ibid. page 8301.

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The Commissions Report on Competition Policy in 1971,46 which was written in the same year as the Commission reached its decision in Continental Can, seemed concerned with consumer welfare:
Through the interplay of decentralised decision-making machinery, competition enables enterprises continuously to improve their efficiency, which is the sine qua non for a steady improvement in living standards and employment prospects within the countries of the Community. From this point of view, competition policy is an essential means for satisfying to a great extent the individual and collective needs of our society . Competition policyencourages the best possible use of productive resources for the greatest possible benefit of the economy as a whole and the benefit, in particular, of the consumer.

Whilst the Commissions Report on Competition Policy seemed concerned with the welfare of consumers, its decision did not reflect that concern. The Commission based its conclusion on academic literature47 and on a Commission Memorandum from 1966: A Problem of Concentration in the Common Market.48 According to the memorandum, a merger of an enterprise holding a dominant position with another enterprise, so that a monopoly situation is brought about by the removal of any remaining competition on the market, may in itself constitute an abuse within the meaning of Article 82.49 This is based on the assumption that the closer the merging undertakings are to holding a monopoly, the more likely it is that the merger will violate Article 82, as suggested by Hans von der Groeben, one of the drafters of the EC Treaty, in 1965.50 This
46 1st Report on Competition Policy (1971), pages 11-12. 47 Ernst-Joachim Mestmcker, Die Beurteilung von Unternehmenszusammenschlssen nach Artikel 86 des EWG-Vertrages in Festschrift fr Walter Hallstein zu seinem 60: Probleme des Europischen Rechts (1966); Verloren Van Themaat, Zusammenschlsse ber die Grenze im Rahmen des EWGBereichs Conference Paper of the 4th International Conference on European Law (Rome, 1968). 48 Commission of the EEC, Le Problem De La Concentration Dans Le March Commun 21 (1966). 49 Ibid. page 26. 50 Hans von der Groeben, Competition Policy within the Framework of the Common Market (16 June 1965) European Parliament docs. No 79, page 107.

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assumption operates more against monopolies than mergers and seems to be a concern about size and large concentrations of economic power.51 If the Commissions prime concern was the size of Continental Can, then that explains why the Commission did not consider the effects of the merger on competition. On 9 February 1972, Continental Can appealed the decision to the ECJ seeking annulment.

2.1.3. The ECJs judgment On 21 February 1973, the ECJ handed down its judgment.52 On appeal, Continental Can put forward the following arguments in relation to the substantive points: 1. the very wording of the statute, especially when compared to the ECSC Treaty, reveals a legislative intention that Article 82 does not bar mergers; 2. because Article 82 does not prohibit the existence of a dominant position, but only the abusive exploitation thereof, even a monopoly is permitted; 3. a mere increase in market share is permissible; 4. reference to general provisions of the EC Treaty is not permissible; 5. a broad interpretation would leave Article 82 meaningless, since any type of conduct could be abusive; 6. a causal relationship must exist between the market dominance and the abusive exploitation thereof; and 7. the appropriate policy consideration is to enable Community enterprises to compete with those from third party states. The Commission put forward the following arguments:
51 Robert S Singley, Abuse of a Dominant Position by Acquisition in the Common Market: the Continental Can Cases 12 The Columbia Journal of Transnational Law (1973) 359, page 386. 52 A comment on the case can be found in WMH Haubert II, Continental Can New Strength for Common Market Anti-Trust 11 San Diego Law Review (1973-1974) 227.

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1. the basic aim of the Treaty is to ensure competition; 2. Article 82(2)(b) together with Article 3(1)(g) constitutes a broad mandate to prohibit the effect of prejudice to consumers; 3. a change in the structure of competition which reduces the consumers market alternatives is an effect which is prohibited as prejudicial; and 4. because it is the effect of reducing competition that is abusive, neither the type of conduct nor the existence of a causal relationship between the dominance and that conduct is relevant to proving an abuse. Broadly speaking, the ECJ had to assess whether a dominant position realised through a merger falls within the scope of Article 82. This would require the Court to examine whether the word abuse could refer also to changes in the structure of an undertaking, which led to the disturbance of competition in the common market.53 A merger is a structural change that often strengthens the position of an undertaking, but it is not necessarily intended directly to eliminate competition. The first argument put forward by Continental Can was that, since the EC Treaty does not contain a merger provision like that of the ECSC Treaty, the drafters of the EC Treaty deliberately chose not to prohibit mergers. This is in essence an attempt to discern the legislative intent of the drafters of the Treaty. The ECJ avoided basing its reasoning on legislative intent, and held that the question could not be solved by comparing Article 82 to the provisions of the ECSC Treaty.54 The second point put forward by Continental Can was that dominance is not in itself prohibited by Article 82 therefore it must be permitted indirectly. Moreover, the provision does not distinguish between different
53 Continental Can, supra note 25, paragraph 20. 54 Ibid. paragraph 22.

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degrees of dominance, a point also put forward by Advocate General Roemer,55 thus even a monopoly is permitted. The consequence of the second point is, that the effect of a merger is an increase in the undertakings dominance (its market share) and that such an increase is not an abuse (Continental Cans third point). The Court responded by relying on a teleological interpretation. It interpreted Article 82 in the light of Article 3(1)(g),56 according to which it must be ensured that competition is not distorted.57 Interpreting Article 82 in the light of the general principle of undistorted competition meant that examining whether there is an abuse of a dominant position cannot be done in isolation. Such an interpretation implies that a merger can, by its effects, become an abuse prohibited by Article 82. In relation to Continental Cans fourth point, the Court dismissed the argument that it is not permissible to refer to the general provisions of the Treaty. It rightly held that the requirement of ensuring that competition in the common market is not distorted is essential, as without it numerous provisions in the Treaty would be pointless.58 With its fifth argument, Continental Can tried to encourage the Court to take a narrow interpretation of Article 82, a view that was supported by Advocate General Roemer.59 The Court rejected a narrow interpretation of Article 82. It emphasised that abuse was not limited to conduct which is likely to cause harm to consumers directly, but also to conduct which is detrimental to consumers indirectly, because its effect on the
55 Opinion of Advocate General Roemer, supra note 27. 56 Continental Can, supra note 25, paragraph 23. 57 The Community Courts continue to apply a teleological interpretation of the competition rules, see for example Case C-95/04P British Airways plc v Commission, paragraph 143 and Joined Case C-147/97 and C-148/98 Deutsche Post AG and Gesellschaft fr Zahlungssysteme mbH (GZS), Citicorp Kartenservice GmbH [2000] ECR I-825, paragraph 60. 58 Continental Can, supra note 25, paragraph 24. 59 Opinion of Advocate General Roemer, supra note 27. See also section 1.2 above page 77 setting out Advocate General Roemers grounds for adopting a narrower interpretation of Article 82.

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competitive structure of actual competition may be harmful.60 The Court held that:61
If it can, irrespective of any fault, be regarded as an abuse if an undertaking holds a position so dominant that the objectives of the treaty are circumvented by an alteration to the supply structure which seriously endangers the consumer's freedom of action in the market, such a case necessarily exists, if practically all competition is eliminated. Such a narrow precondition as the elimination of all competition need not exist in all cases. But the Commission, basing its decision on such elimination of competition, had to state legally sufficient reasons or, at least, had to prove that competition was so essentially affected that the remaining competitors could no longer provide a sufficient counterweight.

By referring to the counterweight of competitors, the Court confirmed that Article 82 does not require absolute dominance by an undertaking, but rather a strong economic position relative to its competitors such that a competitive counterweight is no longer present. In relation to Continental Cans sixth argument about causality, the ECJ held that when it comes to strengthening the position of an undertaking, there may be an abuse if the effect is to prevent effective competition.62 The Court did not comment upon the seventh argument put forward by Continental Can. In conclusion, the ECJ supported the Commissions legal interpretation of Article 82 that both exploitative and exclusionary conduct can constitute an abuse of dominance. However, the Court criticised the Commissions market definition in that the Commission had not fully shown how the three markets (light metal open-top containers for meat and fish and lids for glass jars) were distinguished from the market for light metal containers generally. Consequently, the Court found that the

60 Continental Can, supra note 25, paragraph 26. 61 Ibid. paragraph 29. 62 Continental Can, supra note 25, paragraph 27.

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Commissions market definition was faulty and found in favour of Continental Can.63

2.1.4

Analysis of the ECJs judgment

The Court seemed concerned with prejudice to consumers. Interpreting Article 82 in the light of Article 3(1)(g) meant that conduct of a dominant undertaking is abusive if it runs counter to the purpose of protecting competition in the common market from distortions. Accordingly, Article 82 is also designed to protect the structure of the market and competition as such, which is an important step towards protecting competition. The Court held that by protecting the structure of competition, consumers would be protected indirectly, presumably because where competition is impaired, disadvantages for consumers are also to be feared. At first sight, it may appear that the ECJ is concerned about consumer welfare, but the Court does not enter into an analysis of efficiencies. Instead, it talks of an alteration to the supply structure which seriously endangers the consumer's freedom of action in the market.64 This highlights the Courts concern for the consumers competitive freedom. This does not necessarily mean the final consumer as defined in chapter four, but may concern both the purchaser on the wholesale level (a customer) and the consumer of a product on the retail level (final consumer) in downstream markets. Regardless of whether the Court was concerned about the final consumer or the customer, it is clearly concerned about the consumers freedom of action and, arguably, Article 82 could be used to keep the power of Continental Can in check and thereby protect the freedom of other market participants from the misuse of such power. Thus, it is not entirely clear whether the Court was addressing consumer welfare or individual economic freedom.
63 The Courts judgment was at the time described as arguably the most impo rtant test case in EEC legal history by The Times under the headline: Continental Can wins European Court Appeal against the Commission, 22 February 1973. 64 Continental Can, supra note 25, paragraph 29.

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2.2 2.2.1

Commercial Solvents Facts of the case

Commercial Solvents Corporation (CSC), an American corporation, produced 1-nitropropane (nitropropane) and a derivative thereof, 2 amino-1-butanol (aminobutanol), an intermediate product for the production of ethambutol. The latter was a compound used in the treatment of pulmonary tuberculosis. CSC supplied aminobutanol to customers in the common market through its Italian subsidiary, Instituto Chemioterapico Italiano SpA Istituto (ICI) of which it owned 51 per cent of the shares.65 At the time, the three main producers of ethambutol in the common market were the American company Cyanamid Company (acting through its Italian subsidiary Cyanamid Italia), CSC/ICI (ICI acted as a re-seller for CSC in the common market) and an Italian company Laboratorio Chimico Farmaceutico Giorgio Zoja (Zoja). To successfully produce ethambutol, aminobutanol is an essential material. CSC used to have a patent in the method of production of nitropropane for the use of producing aminobutanol. The patent had expired, but CSC held a de facto monopoly due to its know-how and high barriers to entry to the market in the form of high costs and the complexity of the necessary equipment. From 1966 to November 1969, Zoja got its aminobutanol, for its ethambutol production, from CSC/ICI. Due to a price increase for aminobutanol charged by CSC/ICI, Zoja found alternative suppliers for aminobutanol. These suppliers used aminobutanol for paint, not for pharmaceuticals. In 1970, these alternative suppliers would no longer

65 CSC acquired 51 per cent of the voting shares in ICI in 1962.

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supply Zoja as CSC had commanded them not to.66 When Zoja tried to get supply from other suppliers, Zoja was told that CSC had ceased to deliver or forbidden them to sell the raw material for pharmaceutical use.67 Zoja, which used to be the main customer of ICI, returned to ICI for supply, but ICI then refused to supply it. Zoja complained to the Commission that CSC and ICI had infringed Articles 81 and 82. On 25 April 1972, the Commission opened an investigation against CSC/ICI alleging an infringement of Article 82.

2.2.2

The Commissions decision

Broadly, the Commission had to decide whether CSC/ICI had abused its dominant position contrary to Article 82 by refusing to supply an existing customer Zoja, one of the principal producers of ethambutol in the common market, with aminobutanol.68 The Commission found that the CSC group, which included ICI (a question on appeal was whether CSC/ICI belonged to the same economic entity, a question which will not be dealt with here) had a dominant position in the market for the raw materials (nitropropane and aminobutanol) in the common market. The basis of this finding was that CSC enjoyed a world monopoly in the production and supply of nitropropane and aminobutanol. CSC was found to have abused its dominant position in ceasing to supply Zoja with aminobutanol for the production of ethambutol in the common market, as the conduct led to the elimination of Zoja and so to a
66 Eleanor Fox, Monopolization and Dominance in the United States and the European Community: Efficiency, Opportunity, and Fairness 61 Notre Dame Lawyer (1986) 981, page 994. 67 Valentine Korah, Instituto Chemioterapico Italiano SpA and Commercial Solvents Corporation v Commission of the European Communities 11 Common Market Law Review (1974) 248, page 249. 68 Instituto Chemioterapico Italiano SpA and Commercial Solvents Corporation OJ [1972] L299/51.

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reduction in competition. As a remedy, the Commission ordered CSC/ICI to supply Zoja with a specific quantity of aminobutanol at a price which was no higher than the maximum price charged to other customers. The Commission also imposed a fine on CSC/ICI. On 17 February 1973, both CSC and ICI appealed the decision to the ECJ seeking annulment of the Commissions decision. The ECJ assessed both cases together and issued a single judgment.

2.2.3

The ECJs judgment

On 6 March 1974, the ECJ handed down its judgment. On appeal, the appellants CSC and ICI had put forward the following arguments in relation to the substantive issues:69 1. the relevant market for ethambutol did not exist, since

ethambutol was only a part of a larger market in anti-tuberculosis drugs;70 2. the CSC group did not hold a dominant position in the common market for the raw materials necessary for the manufacture of ethambutol;71 3. 4. refusal to supply Zoja with aminobutanol was not an abuse, but a change in commercial policy;72 trade between Member States was not affected as Zoja sold 90 per cent of its products outside the common market;73 and

69 Case 6-7/73 Istituto Chemioterapico Italiano SpA and Commercial Solvents Corporation v Commission of the European Communities [1974] ECR 223, [1974] 1 CMLR 309. 70 Ibid. paragraph 19. 71 Commercial Solvents, supra note 69, paragraphs 9-10. 72 Ibid. paragraph 23. 73 Commercial Solvents, supra note 69, paragraph 30.

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5.

CSC was not responsible for ICIs conduct and vice versa, as CSC and ICI did not form an economic unit because they acted independently of each other.74

The ECJ rejected all the arguments put forward by CSC/ICI and upheld the Commissions decision almost in its entirety, but reduced the fine imposed by the Commission by 50 per cent. In considering the question of abuse, the ECJ found that the evidence showed that in 1970, ICI started manufacturing its own product based on aminobutanol. To facilitate its own access to the market for that product, CSC decided not to supply Zoja when it reapplied for supply.75 CSC was able to leverage its market power on the upstream market to eliminate one of ICIs competitors (Zoja) on the downstream market.76 By cutting off the supply to Zoja, CSC improved ICIs position and indirectly its own position in Europe on the downstream market. The latter was a market with extremely low supply-side substitutability. Thus, the ECJ specifically rejected claims that other nascent technologies in the trial stage were substitutes for CSCs raw materials.77 Instead, the Court held the refusal to supply risked eliminating all competition on the part of Zoja:78
[A]n undertaking being in a dominant position as regards the production of raw material and therefore able to control the supply to manufacturers of derivatives cannot, just because it decides to start manufacturing these derivatives (in competition with its former customers), act in such a way as to eliminate their competition which, in the case in question, would have amounted
74 Ibid. paragraph 36. 75 Commercial Solvents, supra note 69, paragraph 24. 76 One must be careful not to use Commercial Solvents as authority for the proposition that Article 82 may be applied to an act committed by a dominant company on a market separate from the market of dominance, because the abuse the refusal to supply raw materials took place in the market where CSC was dominant. 77 Commercial Solvents, supra note 69, paragraph 15. 78 Ibid. paragraph 25.

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to eliminating one of the principal manufacturers of ethambutol in the common market . . . [A]n undertaking which has a dominant position in the market in raw materials and which, with the object of reserving such raw material for manufacturing its own derivatives, refuses to supply a customer, which is itself a manufacturer of these derivatives, and therefore risks eliminating all competition on the part of this customer, is abusing its dominant position within the meaning of Article 86.

2.2.4

Analysis of the ECJs judgment

The ECJ found there had been an abuse, based on the observations made in paragraph 25 as quoted above, and held that: 1. CSC was a vertically integrated firm; 2. CSC controlled an essential raw material (an indispensable derivative); 3. CSC eliminated all competition on the market on the part of Zoja; 4. there was no objective justification for its behaviour; and 5. it reserved the downstream market in its entirety. In essence the Court was saying that refusal to supply Zoja was harmful, as it eliminated all competition on the part of Zoja. The question is whether the refusal to supply was considered harmful because it could damage the consumer welfare of tubercular patients directly or indirectly, as held by the ECJ in Continental Can? If the Court was concerned about consumer welfare, then it should have examined whether the elimination of competition on the part of Zoja harmed consumers either by an increase in price, lowering product quality or lack of choice. Did the Court do that? Arguably, the Court did not consider whether consumer welfare was harmed. It did not engage in an explicit analysis of the economic efficiencies that might have arisen from vertical integration in great detail. Basically, it did nothing more than point out that CSCs conduct

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had been adopted to reserve the raw material to itself. Was that harmful for consumer welfare? It would only be bad for consumer welfare if tubercular patients could not get their drugs equally efficiently and readily at a similar price and quality from CSC/ICI. First, would CSCs conduct be likely to limit consumer choice? The refusal to supply meant that ICI replaced Zoja in the downstream market. From that point of view, CSCs conduct would not have given consumers more or less choice. If the Court assumed that CSC/ICI would have entered the downstream market anyway, even if there had been no refusal to supply, then arguably consumers would have had more choice. However, the Court did not examine the likelihood of CSCs successful entrance on the downstream market while supplying Zoja. In fairness to the Court, CSC did not argue that a continued supply to Zoja would have imposed inefficiency upon CSC, for example, in the form of lost economies of scale in distribution.79 Moreover, CSC did not challenge the Commissions finding that the refusal to supply could not be justified due to insufficient productive capacity to supply Zoja.80 This might indicate that CSC would have been able to supply Zoja while entering the downstream market, but would CSC/ICIs entry on the downstream market have been equally successful? If so, then why did CSC/ICI not enter the market before? Second, would CSCs conduct have caused a likely price increase to the detriment of consumers? Unless CSC/ICIs vertical integration itself raised barriers to entry, the price charged to consumers after the integration was likely to be no higher than the price to consumers before

79 Economies of scale is a phase describing the changes in unit costs that result from operating a process at differing outputs, see Jack Hirshleifer, The Firms Cost Function: A Successful Reconstruction 35 The Journal of Business (1962) 235. 80 Commercial Solvents, supra note 69, paragraph 28.

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the integration.81 Economists usually argue that vertical integration does not increase barriers to entry to the market, because it is often a means of exerting greater quality control over suppliers.82 Moreover, it is argued that vertical integration gets rid of protracted bargaining costs by reducing opportunism; it involves economies of information or observational economies arising out of a need for only a single set of observations or data for a related series of production stages, which makes self-evaluation by a company of its performance less costly and more reliable.83 According to the Commissions decision, there were high barriers to entry in the form of high costs and the complexity of the necessary equipment and industry know-how. These barriers were however not established because of the integration they already existed before the integration. The most likely hindrance caused by CSCs conduct would have been that trading parties were unable to get the essential raw material to produce ethambutol. According to Stiglers definition of a barrier to entry this conduct would not have qualified as a barrier to entry.84 In any case, the Court did not decide whether this acted as a barrier to entry in the first place, perhaps because the Commission had already presupposed barriers to entry by finding dominance.85 It would be for CSC/ICI to prove that this was the most efficient supply structure in the market and that its integration would not increase price to the detriment of consumers. For example, it could have argued that
81 Fox, supra note 66, page 1002. 82 George Joseph Stigler, The Organization of Industry (RD Irwin, 1968); Basil Selig Yamey, Economies of Industrial Structure (Harmondsworth: Penguin Education, 1973). 83 Anand S Pathak, Articles 85 and 86 and Anti-Competitive Exclusion in EEC Competition Law: Part 1 10(1) European Competition Law Review (1989) 74, page 81. 84 Stigler, supra note 82, page 67 defines a barrier to entry as a cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry. 85 CW Baden Fuller, Article 86 EEC: Economic Analysis of the Existence of a Dominant Position 4 European Law Review (1979) 423, page 428.

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given that ICI was CSCs subsidiary, CSC would have sold aminobutanol more cheaply to ICI than it had done to Zoja. A lower cost price could mean a lower retail price, to the benefit of consumers. Given that CSC used to have a patent on nitropropane, and still more or less held a de facto monopoly in the production and sale of nitropropane and aminobutanol even after its patent expired, this showed that CSC had market power both before and after ceasing to supply Zoja.86 In 1968, CSC increased its price, which was the reason for Zoja seeking alternative suppliers in the first place. This price rise demonstrated that CSC was willing to use its market power, which creates a presumption against CSC lowering its prices to the benefit of consumers. Finally, would CSCs conduct be likely to have lowered product quality? The Court did not consider the likelihood of this. In the light of the above considerations, the Court was probably right in finding an abuse of a dominant position,87 but what goal did the Court pursue in reaching its conclusion? As discussed above, it is difficult to see that the Court pursued an objective of consumer welfare as it did not consider the economic efficiencies that might have arisen from vertical integration in great detail. Instead, the Court, at best, based its judgment on assumptions of consumer harm. One may question whether it is wrong to base a judgment on an assumption of consumer harm. Assumptions are necessary, but they must, at the very least, be based on welldocumented theory indicating likely consumer harm. Unfortunately, this
86 OJ [2004] C101/97 Commission Notice Guidelines on the Application of Article 81(3) of the Treaty, paragraph 25 defines market power as the ability to maintain prices above competitive levels for a significant period of time or to maintain output in terms of product quantities, product quality and variety or innovation below competitive levels for a significant period of time. 87 One might wonder why the Court did not consider Article 81 as CSC had made an agreement with its customers in the paint market not to resell nitropropane and aminobutanol to Zoja. Such a clause, prohibiting resale of nitropropane and aminobutanol, could have been considered a restriction of competition.

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was not the case in this judgment. By pointing out that CSCs conduct would eliminate all competition on the part of Zoja, without considering the likely effect on consumers, the Court did no more than point out that there was a restriction of Zojas economic freedom. If the Court was pursuing an objective of economic freedom then this is a perfectly reasonable conclusion. Judge Pescatore, then President of the ECJ, later confirmed in a speech that the Court had intended to protect a small firm, rather than free competition.88 While this is an interesting insight and it could indicate that the ECJ reached its conclusion by pursuing the objective of economic freedom, one ought to be careful not to put too much emphasis on such statements. That said, some commentators have supported Judge Pescatores viewpoint89 and so has the Commission. In the Commissions Report on Competition Policy in 1978, it appeared to be the Commissions view that it had to attack dominant companies which refused to supply long-standing customers.90 This was in order to guarantee equality of opportunity, freedom of access to business and freedom of choice within the common market.91 With regard to the ECJs upholding the Commissions decision, it is not unlikely that this was because Zoja was economically dependent on CSC, meaning that Zoja did not have other sufficient and reasonable possibilities to find another supplier. At the time that the ECJ reached its judgment in Commercial Solvents, Article 82 was a provision rarely used so case law was sparse. Thus, it is not implausible that the judges of the ECJ looked to the Member States with more developed national

88 Valentine Korah, The Interface between Intellectual Property Rights and Antitrust: the European Experience 69 Antitrust Law Journal (2002) 801, page 808. 89 Pathak, supra note 83, page 88. 90 8th Report on Competition Policy (1978), page 9. 91 Ibid.

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competition law.92 At the time, Italy did not have a competition statute,93 but Germany and France did,94 and the concept of economic dependency was incorporated in both German and French competition law.95 Germany had section 26 of the ARC, which was applicable to firms on which other firms were dependent.96 The section applied particularly to dominant enterprises vis--vis small and medium-sized enterprises lacking reasonable opportunities to change to other suppliers, as was the case in Commercial Solvents. France had Ordinance n 45-1483 of 1945, provision 36-2, according to which refusals to sell between commercial entities were per se anti-competitive. A supplier who refused to sell to a distributor or a customer would have to justify its refusal to supply by identifying an objective motive, such as the unusual character of the order or the existence of exclusive, quasi-exclusive or selective distribution networks.97 In 1986, Ordinance n 45-1483 of 1945, provision 36-2 was replaced by Ordinance n 86-1243 of 1986, provision 36-5,98 but the concept of economic dependency was kept.99
92 At the time, the Community consisted of the Netherlands, Belgium, Luxemburg, Italy, Germany and France. These original signatories of the EC Treaty were all part of the civil law tradition. 93 Italy did not enact its first competition statute until 1990: Act of 27 September 1990, Law No 287/1990 Norme par la tutela della concorrenza e del mercato OJ No 240 of 13 October 1990 (in English: Provisions for the Protection of Competition and the Market). 94 Germany had Gesetz gegen Wettbewerbsbeschrnkungen [GWB] and France had Ordinance n 45-1483 of 1945. 95 Dominique Brault, Politique et pratique du droit de la concurrence en France (LGDJ, 2004); the French Competition Commissions decision Avis de la Commission de la concurrence du 14 Mars 1985 sur les Super-Centrales d'Achat and section 26 of the ARC. 96 Gerber, supra note 2, page 315. 97 Melanie Thill-Tayara, Developments in French Competition Law 18(2) European Competition Law Review (1997) 113. 98 French competition law underwent a major overhaul in 1986 when its main statutory component, Ordinance n 45-1483 of 1945, was abrogated by Ordinance n 86-1243 of 1986, Journal Officiel de la Rpublique Franaise of 9 December 1986. Decret dapplication No 86-1309 of 29 December 1986. 99 The French Competition Council had been reluctant to apply the concept of economic dependency, which caused the French legislature to transfer and incorporate the competition rule of abuse of economic dependency to Title IV in Chapter II of the French Code of Commerce, see Brault, supra note 95, page 104. According to Article L 442-6 I of the French Code of Commerce,

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2.3 2.3.1

Hoffmann-La Roche Facts of the case

Hoffmann-La Roche & CO AG (HLR), a multinational group whose parent company was based in Basel in Switzerland, manufactured and sold bulk synthetic substances belonging to 13 groups of vitamins: A, B1, B2, B12, C, D, E, K, PP, pantheotic acid (B3), biotin (H) and folic acid (M). HLR is the worlds leading vitamin manufacturer and at the time was the largest pharmaceutical group. HLRs customers would process the vitamins for use in feeding-stuffs and food and only a small percentage of the vitamins would not be processed, but sold as vitamins for end consumers. HLR had entered into about 30 contracts (some being renewals) with 22 large purchasers of vitamins under which the purchasers contracted to buy all or most of their requirements of vitamins or of certain vitamins from HLR in return for a rebate. The duration of most of these contracts was for an indefinite period, either according to the terms of the contract or because of the operation of a clause providing for renewal by tacit agreement. The Commissions investigation was initiated after a former employee of HLR, Stanley Adams, wrote to the Commission in April 1973 alleging that HLR was in breach of the competition rules by virtue of their pricing practices within the Community.100

formerly provision 36-5 of the 1986 Ordinance, an undertaking may be guilty an abuse if it suddenly decides to discontinue supplies where the distributor is economically dependent on the supply, with no written advance notice. 100 TJ Bennett, Hoffmann-La Roche: Abuse of Dominance on the Vitamins Market Confirmed 4 European Law Review (1979) 210, page 212.

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2.3.2

The Commissions decision

On 9 June 1976, the Commission issued its decision.101 It found that there were separate product markets for a number of different groups of vitamins and that HLR had a dominant position in seven of the eight markets of vitamins in which it was active. In finding dominance, the Commission relied on HLRs market share in each individual market, its wide range of vitamins compared to that of its competitors, that HLR was the worlds largest manufacturer of all vitamins, that its turnover exceeded all the other producers turnover, its technical and commercial advantages, and the financial and technical barriers to entry for new competitors.102 The Commission found that the aim of the contracts was to tie the most important buyers of bulk vitamins to HLR and thus to prevent its main competitors from supplying them to these customers. The substantive issue in the decision was whether the granting of fidelity rebates was incompatible with the common market. The Commission relied on the ECJs judgment in the Sugar cases103 where the Court had found that fidelity rebates, which may reinforce dominance, are incompatible with Article 82. On 27 August 1976, HLR appealed, seeking annulment of the decision.

101 Vitamins OJ [1976] L223/27, [1976] 2 CMLR D25. 102 Ibid. recitals 5-6 and 21. 103 Joined Cases 40-114/73 Cooperative Vereniging Suiker Unie U.A. and Others v Commission [1975] ECR1663, [1976] 1 CMLR 295.

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2.3.3

The ECJs judgment

On 13 February 1979, the ECJ confirmed the Commissions decision in all its essential points, but reduced the fine by one third.104 On appeal, the appellant HLR put forward the following arguments: 1. by imposing a penalty the Commission had infringed the fundamental principle that rules relating to penalties must be certain and foreseeable; 2. the decision had several formal defects as a result of irregularities in the administrative procedure upon which the conclusion relied; 3. the Commission had inaccurately applied the concepts of a dominant position and of the abuse of a dominant position which may affect trade between Member States; and 4. the Commission had infringed Article 15(2) of Regulation no 17/62 by imposing a fine, as the alleged infringements, insofar as they might be found to exist, were not committed either intentionally or negligently. Only the substantive point (point three) will be dealt with here. The Court upheld the Commissions market definition.105 It also upheld the Commissions finding of dominance in all but one of the relevant markets.106 The Court considered whether the Commission was correct in finding that HLR had abused its dominant position. The Court noted in its preliminary observations that the Commission had found about 30 contracts with 22 large purchasers of vitamins under which either the purchasers contracted to buy all or most of their requirements of vitamins or of certain vitamins from HLR or under which
104 Hoffmann-La Roche, supra note 37. 105 Ibid. paragraph 30. 106 Hoffmann-La Roche, supra note 37, paragraph 79.

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the purchasers had an incentive to do so due to the promise of a discount which the Commission classifies as a fidelity rebate.107 The Court divided these contracts into three categories.108 First, those contracts which contained a specific undertaking by the purchaser to obtain exclusively from HLR either: 1. all or almost all of its requirements of bulk vitamins manufactured by HLR; or 2. all its requirements of certain vitamins (expressly mentioned in the contract); or 3. a percentage stipulated in the contract of its total requirements (either 75 or 80 per cent); or 4. the major part of its requirements of vitamins or certain vitamins. Second, those contracts leave as is the purchaser undertook to give preference to HLR or expressed its intention to obtain its supplies exclusively from HLR or agreed to recommend to its subsidiaries to do the same, either in respect of all their vitamin requirements or of certain vitamins therein specified, or in relation to a fixed percentage of their total requirements (for example 80 per cent). Third, the contracts between HLR and Merck, and HLR and Unilever, respectively, had special features and the Court therefore examined them separately. The ECJ held that the duration of most of these contracts in all three categories was for an indefinite period, either according to the terms of the contract or because of the operation of a clause providing for renewal by tacit agreement, and they were clearly designed to establish
107 Ibid. paragraph 80. 108 Hoffmann-La Roche, supra note 37, paragraph 82.

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trading relations for several years.109 All the contracts in question, except for those with Unilever, contained provisions granting to the purchaser discounts or rebates calculated on the total purchases during a given period usually of a year or six months.110 In relation to six of the customers, the percentage of the rebates was not fixed but increased, generally from one to three per cent, according to the amounts purchased every year. The Court considered whether, by entering into these contracts, HLR had abused its dominant position on the relevant markets. It held that HLR had abused its dominant position both by entering into exclusive purchasing agreements with some of its customers and also by offering them loyalty rebates. The Court stated that if a dominant undertaking ties purchasers to obtain all or most of their requirements exclusively from [the dominant undertaking] then that is an abuse under Article 82, whether the obligation in question is stipulated without further qualification or whether it is undertaken in consideration of the grant of a rebate.111

2.3.4

Analysis of the ECJs judgment

The Court held that the distortion of competition was due to the fact that the fidelity rebates given were conditional upon exclusivity or near exclusivity to HLR:112
Obligations of this kind to obtain supplies exclusively from a particular undertaking are incompatible with the objective of undistorted competition within the common market, because they are not based on an economic transaction which justifies this burden or benefit but are designed to deprive the purchaser

109 Ibid. paragraph 86. 110 Hoffmann-La Roche, supra note 37, paragraph 87. 111 Ibid. paragraph 89. 112 Hoffmann-La Roche, supra note 37, paragraph 90.

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of or restrict his possible choices of sources of supply and to deny other producers access to the market.

The reasoning that the rebates were not based on an economic transaction is based on the fact that HLRs rebate was fixed not merely with regard to the quantity purchased from HLR, but also the quantity not purchased from it. But the reasoning that the rebates were designed to deprive the purchaser of or restrict his possible choice of source of supply is more difficult to comprehend. It could be argued that since purchasers were not forced to get their supply from HLR, their choice was not restricted, but this was not the approach taken by the Court. Those customers who entered into HLRs rebate agreements were paid for their loyalty, but were not harmed by the agreements. Even if they would be better off buying their vitamins from other suppliers, they were free to do so and forego the rebates. Even those customers who had entered into contracts obliging them to purchase a specified percentage of their requirements from HLR could purchase elsewhere. Their only risk was losing the rebate. Since HLR did not pay the rebates in advance, the customers never had to refund HLR. However, the Court found that a dominant position can also be abused even where the customers are not obliged to obtain all their supplies from the dominant undertaking, but are induced to take supply by means of fidelity rebates.113 The Court further held:114
[T]he effect of fidelity rebates is to apply dissimilar conditions to equivalent transactions with other trading parties in that two purchasers pay a different price for the same quantity of the same product depending on whether they obtain their supplies exclusively from the undertaking in a dominant position or have several sources of supply.

113 Eric L White, Some Important Aspects of the Hoffmann-La Roche Judgment 77 The Law Societys Gazette (1980) 246. 114 Hoffmann-La Roche, supra note 37, paragraph 90.

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For Article 82(2)(c) to be violated the supplier must apply dissimilar conditions to equivalent transactions with other trading parties to place them at a competitive disadvantage. It is difficult to see how other trading parties are placed at a competitive disadvantage if HLR did not apply dissimilar conditions to equivalent transactions. The Court argued that HLR applied different conditions to equivalent transactions as two purchasers would pay a different price for the same quantity. However, the Court did not consider the point that the price is only different because one of the purchasers gets a rebate and the other one does not, but again this is because the purchaser that gets the rebates gets vitamins in return for exclusivity whereas the other purchaser just gets vitamins. It would only place HLRs trading parties at a competitive disadvantage if both purchasers got the same quantity of vitamins in return for exclusivity, but only one of them got the rebate. The Court did not engage in an analysis of the competitive situation downstream, as required under Article 82(2)(c), in order to examine whether the appellants trading parties (its 22 customers) had been placed at a competitive disadvantage. Instead the Court held:115
[S]ince the course of conduct under consideration is that of an undertaking occupying a dominant position on a market where for this reason the structure of competition has already been weakened, within the field of application of article 86 any further weakening of the structure of competition may constitute an abuse of a dominant position.

The ECJ's reference to the weakening of the structure of competition on the market confirms that the Court was concerned with primary-line discrimination. This means discrimination used to expand or maintain a dominant position to the disadvantage of its competitors. This indicates that the Court was concerned about the fate of smaller competitors faced with a powerful dominant undertaking, reflecting the objective of fairness in the market place. Pursuing the objective of fairness was

115 Ibid. paragraph 123.

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clearly important at the time as highlighted in the Commissions Report on Competition Policy in 1979:116
[T]he competition system instituted by the Treaty requires that the conditions under which competition takes place remain subject to the principle of fairness in the market place. In the Commissions view, this principle is of prime importance.

The Court further held:117

The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of the market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition in products or services on the basis of commercial operators has the effect of hindering the maintenance of the degree of competition still existing on the market or the growth of that competition.

This reasoning is opaque as it is not clear what is meant by normal competition. It has been suggested that it is fair to assume that normal competition is the same thing as competition on the merits.118 However, the latter terminology is not really helpful as no one really knows what competition on the merits means either. The terminology is not used descriptively to indicate common or usual practices, but normatively. But what are the norms of the Court and Commission? Perhaps normal competition is competition without fidelity rebates and exclusive contracts. The latter form of contract contains a sufficient incentive to reserve to Roche the sole right to supply the purchaser for them to be, for this reason alone, an abuse.119 Maybe normal competition is competition without any exclusive contact, as where exclusivity has been formally accepted the granting or not of a rebate is
116 9th Report on Competition Policy (1979), page 10. 117 Hoffmann-La Roche, supra note 37, paragraph 91. 118 OECD paper, supra note 1, page 22. 119 Hoffmann-La Roche, supra note 37, paragraph 111.

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in the final analysis irrelevant.120 Perhaps, normal competition cannot exist between two parties where one of them is dominant. In that case, competition on the merits is close to the ordoliberal concept of complete competition, described in chapter two. The Court also condemned reciprocal dealing between HLR and Merck,121 which implies that any contract or sales method which provides an incentive for purchasers to buy exclusively from the dominant firm is abusive. Finally, the Court challenged conduct hindering the maintenance or growth of competition. But how did the Court define competition? In discussing the so-called English clause122 contained in most of HLRs rebate agreements, the Court said that HLR had the power to decide whether it would permit competition.123 This indicates that for the Court, competition meant the instances of commercial rivalry in which the nondominant competitor gets the business. If the dominant undertaking wins, for example, by offering a better price than its competitors, what has taken place is not competition, but anti-competitive conduct. This is not to say that the outcome of the judgment is not correct, as the across-the-board fidelity rebates offered by HLR may have had significant anti-competitive effects by foreclosing sales by other vitamin manufacturers, but if that is the case it is hard to follow the Courts reasoning. Even if the Court was pursuing the objective of consumer welfare, it would have been insufficient to examine how much of the market is foreclosed. It is not enough to point to market foreclosure; the Court would require to assess whether the foreclosure harms consumer

120 Ibid. paragraph 95. 121 Hoffmann-La Roche, supra note 37, paragraphs 114-115. 122 An English clause is a contractual agreement in the context of single branding arrangements between a supplier and its customer (for example a retailer), allowing the latter to purchase a good from other suppliers on more favourable terms, unless the exclusive supplier accepts to supply the good on the same advantageous conditions. 123 Hoffmann-La Roche, supra note 37, paragraphs 107-108.

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welfare if it were serious about consumer welfare. This is because foreclosure does not necessarily cause competitive harm. The Court did not examine whether the loyalty-enhancing effect led to competitive harm for consumers. Instead, the Courts reasoning was based on the conducts effect on the structure of the market and HLRs ability to hinder the maintenance of the degree of competition still existing on the market.124 This focus on HLRs ability to coerce the behaviour of other firms in the market shows the Courts concern with preserving competitors economic freedom in order to protect the remaining competition in the market. The Courts test for abuse that the dominant undertakings conduct must be different from those which condition normal competition in products or services on the basis of the transactions of commercial operators and must have the effect of hindering the maintenance of the degree of competition still existing on the market or the growth of that competition. This is a replica of Professor Ulmers ordoliberal-inspired test,125 which focus on foreclosure only and not anti-competitive foreclosure, adopted by the German Supreme Court in the Combination Price Schedule case.126 Perhaps, the Court was influenced by German ordoliberal decisionmaking practice on fidelity rebates. Why would the ECJ concern itself with German competition law? Most of HLRs subsidiaries were in Germany and HLR itself referred to section 22 of the ARC to argue that the abusive conduct of an undertaking in a dominant position is not per se punishable by a fine.127

124 Hoffmann-La Roche, supra note 37, paragraph 91. 125 Professor Ulmers test is described in detail in chapter two, section 2.3. 126 BGH Kombinationstarif, WuW/E OLG 1767 (1977). 127 Section 22 of the ARC, at the time, provided: 1. Insofar as an enterprise has no competitor or is not exposed to any substantial competition in a certain type of goods or commercial service, it is market-dominating within the meaning of this Law.

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Advocate General Reischl also referred to German competition law to argue that fidelity rebates are regarded very critically in national competition law.128 It is not unlikely that the Court was aware that fidelity rebates were prohibited under German competition law, as it argued that HLR ought to have considered the probability or at least the possibility that Article 82 could apply to fidelity rebates, since these were prohibited under the law of some Member States, including Germany.129 Furthermore, the ECJs judgment came just after the German Supreme Court had decided the Combination Price Schedule case,130 which was arguably based on Professor Ulmers ordoliberal-inspired test. The ECJs reasoning, that fidelity rebates which are not based on an economic transaction are abusive, seems to be an adoption of the first part of Ulmers test that the conduct must constitute non-performance competition to be abusive. The fact that the rebates were linked to exclusivity or near exclusivity meant that the ECJ considered the rebates to be based on non-performance, which can drive even efficient competitors out of the market. The Courts reasoning in paragraph 91, quoted above, that behaviour which influences the structure of the market has the effect of hindering the maintenance of the degree of competition still existing on the market or the growth of that competition, seems to be an adoption of the second part of Professor Ulmers test. Such conduct results in the remaining competition being restricted in the dominated market where the structure of the market affects conduct, which in turns affects performance. The ECJ reiterated that once a dominant position has arisen, the market structures will
2. Two or more enterprises are deemed market-dominating insofar as, in regard to certain types of goods or commercial service, no substantial competition exists in fact between them in general or in specific markets, and they jointly meet the requirements of subsection (1). 128 Opinion of Advocate General Reischl in Hoffmann-La Roche, supra note 37, delivered on 19 September 1978, page 587. 129 Hoffmann-La Roche, supra note 37, paragraph 132. 130 A summary of the case is set out in chapter two.

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change and the effectiveness of competition as a market regulator will be lost.131 Thus, the dominant undertaking should compete on performance, not on measures to hinder its rivals. Whether the Court did rely on Professor Ulmers test or whether it was nothing but a remarkable coincidence remains unknown, but what is clear is that the Court was concerned with protecting the remaining competition in the market and the restraint of undue economic power.

2.4 2.4.1

United Brands Facts of the case

A merger between United Fruit Company (the developer of the Cavendish/Valery variety of bananas) and AMK Corporation (American Seal-Kap), a major meat producer, resulted in United Brands Company (UBC). At the time of the proceedings, UBC was the largest seller of bananas in the world. It was a conglomerate, which derived 20 per cent of its total turnover from the sale of bananas. UBC was unique in that it packed its bananas in boxes at the plantation to enable wholesalers to employ more scientific ripening procedures and produce more uniformly ripened bananas. UBC sold its bananas under the brand name Chiquita. It was the first producer to brand its bananas, but other banana companies followed suit. UBCs main ports for delivery of Chiquita bananas within the Community were Bremerhaven, Rotterdam, Antwerp and Hamburg. From these ports distributors would transport the bananas to their ripening facilities throughout the common market. The prices charged by each distributor depended upon the country in which the distributor operated, for

131 Samkalden and Druker, Legal Problems Relating to Article 86 of the Rome Treaty Common Market Law Review (1966) 158, page 167.

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example, the price charged in Ireland was the lowest and the prices charged in Belgium and Denmark were the highest. Following two complaints against UBC in spring 1974, one from Olesen in Denmark and one from Tropical Fruits in Ireland, on 19 March 1975 the Commission initiated proceedings against UBC.

2.4.2

The Commissions decision

On 17 December 1975, the Commission issued its decision.132 It found that the relevant product market consisted of bananas of all varieties, whether branded or unbranded, and the geographic market was the Benelux countries, Denmark, Germany, and Ireland. It held that UBC was dominant on that market. The Commission gathered data which showed that there were

substantial differences of 30-50 per cent between the highest and lowest prices charged to customers in the various Member States during some weeks. The largest difference of 138 per cent was between the price paid by customers in Ireland and that paid by customers in Denmark. The Commission argued that all the bananas marketed by the brand name Chiquita on the relevant market had the same geographical origin, belonged to the same variety and were of almost the same quality. They were unloaded in two main ports, Rotterdam and Bremerhaven, where unloading costs differed only by a few cents on the dollar per box of 20 kilograms, and were resold, except to Ireland, subject to the same conditions of sale and terms of payment. The costs of carriage from the unloading ports to the ripening installations and the amount of any duty payable under the Common Customs Tariff were borne by the purchasers except in Ireland. The price charged varied in accordance with the destination of the product. The way in which UBC controlled the
132 Chiquita OJ [1976] L95/1.

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arbitrage between the high-priced and low-priced Member States was by having a clause in its contracts with distributors prohibiting the resale of green bananas.133 The Commission found that prices charged for the substantial quantities sold to customers in Germany, Denmark, and the Benelux countries were considerably higher, sometimes by as much as 100 per cent, than the prices charged to customers in Ireland, and accordingly produced a very substantial profit. It held that UBC's prices were excessive in relation to the economic value of the product supplied.134 The Commissions conclusion was based on a price comparison between Chiquita bananas and UBC's unbranded bananas and between Chiquita and other companies' brands of bananas. According to the Commission, the difference in quality between Chiquita bananas and UBC's unbranded bananas was insignificant. Considering both the quality difference and UBC's extra cost of advertising the Chiquita brand, the Commission found that only half of the price difference was objectively justified.135 The Commission did not consider the extra costs of selecting, branding, and ripening, which UBC alleged were incurred to produce consistently higher quality Chiquita bananas. In October 1973 UBC informed the Danish ripener/distributor Olesen that its supplies of Chiquita bananas were to be discontinued, because it had taken part in a campaign mounted by Castle and Cooke to promote Dole bananas. Olesen tried to obtain Chiquita bananas from some of UBC's other ripener/distributors in Denmark and from a company in Germany called Scipio, but without success. The Commission held that UBC's refusal to supply Olesen would discourage other

133 This is in effect an export ban, because once bananas are yellow they are perishable and soft, which means that it is impossible to transport them without damaging them. It is slightly surprising that the Commission did not consider the export ban under Article 81. 134 Chiquita, supra note 132, recital 3 (c). 135 Ibid. recital 3 (c).

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ripener/distributors from actively promoting competing brands. UBC argued that Olesen, which had been a major customer of UBC since 1967, had become the exclusive distributor of Dole bananas in 1969, and thereafter sold fewer Chiquita bananas and had taken less trouble in ripening them than it took with bananas of other brands. The Commission found UBC guilty of violating Article 82 in four ways:136 1. UBC had required its ripeners/distributors in the relevant Member States to refrain from reselling green bananas (export ban) which it had supplied to them; 2. with regard to its Chiquita brand of bananas UBC had charged other trading parties dissimilar prices in respect of equivalent transactions; 3. UBC had charged unfair prices for Chiquita bananas; and 4. from 10 October 1973 to 11 February 1975, UBC had wrongfully refused to supply bananas to its former longstanding customer, the Danish ripener/distributor Olesen. On 15 March 1975, UBC and its Belgian subsidiary United Brands Continentaal BV appealed the decision to the ECJ.

2.4.3

The ECJs judgment

On 14 February 1978, the ECJ handed down its judgment.137 On appeal UBC and its subsidiary put forward the following arguments in relation to the substantive part of the decision: 1. the Commissions analysis of the relevant product market and the geographic market was wrong; 2. UBC did not hold a dominant position on the relevant product and geographic market;
136 Chiquita, supra note 132, article 1 of the decision. 137 United Brands, supra note 37.

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3. the clause relating to the conditions of sale of green bananas was justified by the need to safeguard the quality of the product sold to the consumer; 4. UBCs refusal to supply Olesen was justified; 5. it did not charge unfair prices; and 6. it did not charge discriminatory prices. The Court upheld the Commissions market definition. Like the

Commission it found that UBC was dominant, but developed the Commission definition on dominance.138 UBC stated that the purpose of the clause prohibiting distributors from reselling green bananas was to protect its brand name. The latter would be protected by ensuring that the quality of the products was exemplary by allowing only experienced ripeners who had ripening installations to carry the brand name.139 Distributors without these installations would be unable to guarantee the quality of UBSs bananas to the consumer and that would lead to the collapse of its entire commercial policy. 140 The ECJ did not deny the possibility of pursuing a policy of quality, but held that such a practice could only be justified where it did not raise obstacles which went beyond the objective to be attained. The Court found that that was not the case.141 UBCs justification for refusing to supply Olesen in Denmark was that the refusal did not affect the actual competition on the Danish market.142 This was rejected by the Court, which held that although UBC was allowed to protect its own commercial interests by taking reasonable steps to protect its interests, such steps could not interfere with the
138 Ibid. paragraph 65. 139 United Brands, supra note 37, paragraph 142. 140 Ibid. paragraph 150. 141 United Brands, supra note 37, paragraphs 158-159. 142 Ibid. paragraph 178.

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independence of small and medium-sized firms in their commercial relations with the undertaking in a dominant position.143 The part of the judgment concerning refusal to supply is slightly different from the way in which refusal to supply was dealt with in Commercial Solvents. In the latter, the Court found an abuse where there was elimination of a competitor from the market and therefore a threat to the structure of competition, whereas in United Brands the Court found the refusal to supply Olesen abusive, because it had the potential, if repeated, to drive other firms from the market. Regardless of this difference, arguably the key issue in United Brands was UBCs power and the protection of smaller customers economic freedom. The ECJ reversed the Commission's finding that UBCs prices were unfair under Article 82(2)(a). The Court did not criticise the Commission's understanding of the law, but its methodology.144 The Court found that the main deficiency in the Commission's decision was its reliance upon the comparison between Continental European prices and Irish prices to support its finding that Continental prices were unfair. In reversing the Commissions finding of excessive pricing, the Court based its conclusion partly on the test for unfair pricing it had laid down in General Motors.145 It held that charging a price which is excessive because it has no reasonable relation to the economic value of the product is a violation of Article 82.146 The first step in considering whether a price is unfair is to compare the selling price of the product in question and its cost of production to determine the dominant firm's profit margin. This margin objectively determines whether the price

143 United Brands, supra note 37, paragraph 193. 144 Ibid. paragraph 251. 145 Case 26/75 General Motors Continental NV v Commission [1975] ECR 1367, [1976] 1 CMLR 95. 146 United Brands, supra note 37, paragraph 250.

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charged by the dominant firm is excessive.147 If the margin is excessive then it must be determined whether the excessive price was unfair either in itself or when compared to competing products.148 The Court did not explain when an excessive price would be unfair in itself. In the light of the ECJs test for excessive pricing, it was c lear that the Commission had not carefully considered UBCs profit margin, which meant that the factual basis for considering whether UBCs prices were unfair was insufficient. The Court upheld the Commissions finding that UBC had violated Article 82(2)(c) by pricing differently in different Member States and required UBC to discontinue that practice.149 UBC argued that it was justified due to anticipated changes in the market price.150 The ECJ rejected this justification and held in paragraph 228:
Once it can be grasped that differences in transport costs, taxation, customs duties, the wages of the labour force, the conditions of marketing, the differences in the parity of currencies, the density of competition may eventually culminate in different retail selling price levels according to the member states, then it follows those differences are factors which UBC only has to take into account to a limited extent since it sells a product which is always the same and at the same place to ripener/distributors who - alone - bear the risks of the consumers' market.151

This indicates that UBC can only to a limited extent rely on these factors, since UBC did not bear the risk of these factors.

147 Ibid. paragraph 251. 148 United Brands, supra note 37, paragraph 252. 149 Price discrimination is a term that economists use to describe the practice of selling the same product to different customers at different prices even though the cost of sale is the same to each of them. More precisely, it is selling at a price or prices such that the ratio of price to marginal costs is different in different sales. Richard Posner, Antitrust Law (University of Chicago Press, 2nd ed, 2001) pages 79-80. 150 United Brands, supra note 37, paragraphs 218-220. 151 Italics added by the author.

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2.4.4 In

Analysis of the ECJs judgment the Commissions finding that UBCs prices were

upholding

discriminatory, the ECJ held:152

Although the responsibility for establishing the single banana market does not lie with the applicant, it can only endeavour to take what the market can bear provided that it complies with the rules for the regulation and coordination of the market laid down by the Treaty. These discriminatory prices, which varied according to the circumstances of the member states, were just so many obstacles to the free movement of goods and their effect was intensified by the clause forbidding the resale of bananas while still green and by reducing the deliveries of the quantities ordered. A rigid partitioning of national markets was thus created at price levels, which were artificially different, placing certain distributor/ripeners at a competitive disadvantage, since compared with what it should have been competition had thereby been distorted.

For ripener/distributors to be placed at a competitive disadvantage there must be dissimilar conditions, which are applied to equivalent transactions. Even though the Court recognised that UBC did not bear the responsibility for establishing a single banana market, it held that UBCs conduct of discriminatory pricing would partition national markets. Arguably, the transactions are not equivalent from the ripener/distributors viewpoint as they evaluate the transactions in terms of resale opportunity in the different markets. The Court did not consider this, which made one commentator, Lucio Zanon, argue that the Court appears more inclined to protect existing competitors rather than competition and that the Court did not make consumers better off, nor did it pursue efficiency.153

152 United Brands, supra note 37, paragraphs 227 and 232-233. 153 Lucio Zanon, Price Discrimination under Article 86 of the EEC Treaty: the United Brands Case 31 International and Comparative Law Quarterly (1982) 36, pages 50-51.

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The consequence of this judgment is that a dominant undertaking has to adopt the same prices in different Member States with due allowance for differences in cost. The question is whether this benefits consumers. The answer is that it benefits the wealthier consumers but not the poorer consumers. Before, UBC could charge high prices in high-income countries, for example Denmark and Germany, and lower prices in lowincome countries for example Ireland. Because UBC could no longer do this, but would have to charge a similar non-discriminatory price, the price would probably be an average price between the lowest and the highest price of the discriminatory price it could charge. In that case, the price in the higher-income countries would be lower than when UBC could discriminate, and some consumers, who did not buy bananas before, might start buying bananas at the lower price. Thus, consumers in high-income countries such as Germany and Denmark would be better off than before. However, the price in the lower-income countries such as Ireland, would be higher than when UBC could discriminate if the assumption of the average price holds. Some Irish consumers might no longer want to buy bananas because of the price increase, and the ones still buying bananas would have to pay a higher price for the same quality as before. These consumers would be worse off than before the judgment. The distributional effect is that income is distributed away from a poorer part of Europe to a wealthier part of Europe. This has led one commentator, William Bishop, to argue that a ban on geographic price discrimination can lead to undesirable distributive consequences.154

154 William Bishop, Price Discrimination under Article 86: Political Economy in the European Court 44 The Modern Law Review (1981) 282, pages 287-288.

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2.5 2.5.1

Michelin I Facts of the case Banden-Industrie-Michelin NV (Michelin), a Dutch

Nederlansche

subsidiary of the French Michelin group, manufactured and supplied tyres for trucks, cars and buses. Michelin supplied heavy vehicle new replacement tyres to tyre dealers who sold both Michelin tyres and competing brands. It ran a fixed invoice discount and a cash discount for early payment, which were the same for all dealers. Michelin also offered a discount linked to an annual sales target, but did not require its dealers to purchase all or most of their requirements from it. Each dealers target was personal to that dealer. A proportion of this discount was paid in advance, initially every month and then every four months, as an advance on the annual sum. The full sum became payable only if the dealer attained a predetermined sales target. A Michelin sales representative fixed the target for each dealer at the beginning of each year. The discount was basically geared to turnover and to the proportion of Michelin tyres sold and the aim was to ensure that the dealer sold more Michelin tyres than in the previous year although sometimes it was equal to the prior years sales. Towards the end of each sales year Michelins sales representatives would urge the dealer to place an order large enough to obtain the full discount. In 1977, the Commission received a complaint regarding Michelin from a Dutch tyre dealer.155 The complaint concerned firstly, Michelins takeover of a tyre retailing company and secondly, its policies towards tyre dealers, especially its system of discounts and bonuses. The Commission

155 WL Snijders, Nederlansche Banden-Industrie Michelin v Commission 23 Common Market Law Review (1986) 193.

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opened an investigation into the second part of the complaint regarding Michelins discounts and bonuses.

2.5.2

The Commissions decision

On 7 October 1981, the Commission issued its decision.156 It found that Michelins bonus scheme infringed Article 82 and imposed a fine of 680,000 ECU.157 The Commission found that the relevant product market was that of new replacement tyres for trucks, buses and similar vehicles and the geographic market was the Netherlands.158 It found that Michelin held a dominant position relied on on this market.159 In finding share dominance, and that of the its Commission Michelins market

competitors, plus the technical advances made by Michelin.160 The Commission found Michelins annual bonus plan was abusive on two grounds. First, it tended to tie the dealers to Michelin, thereby foreclosing Michelin's competitors. Second, it constituted discrimination having adverse secondary-line effects. In addition, the Commission condemned a special 5 per cent bonus on the combined purchases of truck and automobile tyres in 1977. Because the 1977 bonus could only be earned by meeting a target for the purchase of car tyres, the Commission characterised it as using Michelin's stronger position in the

156 Bandengroothandel Frieschebrug BV/NV Nederlansche Banden-Industrie-Michelin OJ [1981] L353/33. 157 Ibid. recital 63. 158 Michelin, supra note 156, recitals 31 and 34. 159 The Commission did not discuss barriers to entry and it is interesting to see that the Commissions appreciation of dominance is not that of an economist. For further discus sion see Josephine Shaw Competition and Industrial Property European Law Review (1984) 116, page 120. 160 Michelin, supra note 156, recitals 35-36.

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bus and truck tyre market to promote sales of its automobile tyre market.161 The Commission cited the requirements of discrimination in Article 82(2)(c) and held that each of them was satisfied.162 It reiterated that discrimination between dealers strengthened Michelins dominant position, and because the difference in the bonuses was not negligible, it found an adverse effect on competition.163 In assessing the effects on competition, the Commission held that Michelins conduct distorts the competition between tyre producers and impedes access to the Netherlands market for [Michelins] competitors.164 The Commission was concerned with primary-line discrimination by finding that discrimination between dealers strengthened Michelins dominant position. Finally, the Commission argued that it was clear that a discount system under which, through financial benefits, an undertaking in a dominant position attempts to prevent supplies being obtained from competitors is in conflict with Article 86 [Article 82].165 This is a very broad test and it basically means that most discount systems would violate Article 82, since no rational firm would adopt a discount system that it did not expect would increase its sales, necessarily preventing those supplies being obtained from its competitors. On 28 December 1981, Michelin appealed the decision to the ECJ seeking annulment or at least reduction of the fine imposed.

161 Ibid. recital 50. 162 Michelin, supra note 156, recital 41. 163 Ibid. recital 43. 164 Michelin, supra note 156, recital 49. 165 Ibid. recital 56.

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2.5.3

The ECJs judgment

On 9 November 1983, the ECJ handed down its judgment.166 The Court upheld the Commissions finding that Michelin had infringed Article 82 by tying Dutch tyre dealers to it through a bonus scheme, as this foreclosed the market for competitors and helped Michelin maintain its dominant position. The Court, however, followed Advocate General VerLoren van Themaats Opinion and determined that the Commission had not established discrimination under Article 82(2)(c). It rejected the Commissions attack on the 1977 bonus,167 and reduced the fine by more than 50 per cent. In examining whether Michelin had abused its position, the ECJ began its analysis by stating that:168
A finding that an undertaking has a dominant position is not in itself a recrimination but simply means that, irrespective of the reasons for which it has such a dominant position, the undertaking concerned has a special responsibility not to allow its conduct to impair genuine undistorted competition on the common market.

The Court continued by holding that it was necessary to investigate whether:169

[T]he discounts tend to remove or restrict the buyers freedom to choose his sources of supply, to bar competition from access to the market, to apply dissimilar conditions to equivalent transactions with other trading partners or to strengthen the dominant position [of Michelin] by distorting competition.

166 Case 322/81 Nederlansche Banden-Industrie Michelin NV v Commission [1983] ECR 3461, [1985] 1 CMLR 282. 167 Ibid. paragraphs 91 and 98. 168 Michelin, supra note 166, paragraph 57. 169 Ibid. paragraph 73.

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The Court noted that Michelins discount system was based on an annual reference period and stated that: 170
[A]ny system under which discounts are granted according to the quantities sold during a relatively long reference period has the inherent effect, at the end of that period, of increasing pressure on the buyer to reach the purchase figure needed to obtain the discount in this case the variations in the rate of discount over a year as a result of one last order, even a small one, affected the dealers margin of profit on the whole years sales of Michelin heavy-vehicle tyres.

The ECJ also stated that the wide divergence between Michelins market share and those of its main competitors meant that if a competitor wished to induce a dealer to place an order, especially at the end of the year-long reference period, the competitor had to give a much higher percentage discount than Michelins discount.171 Another factor was the lack of transparency of Michelins discount system. The rules of the system had changed on several occasions and neither the scale of the discounts nor the sales targets or discounts relating to them were communicated in writing to the dealers. This meant that the dealers were left in uncertainty and on the whole could not predict with any confidence the effect of attaining their targets or failing to do so.172 The Court considered that restricting the buyers freedom to choose his sources of supply, a long reference period and the lack of transparency meant that the discount system would put dealers under considerable pressure, especially towards the end of the year, to attain Michelins sales targets or else lose the discount. It held that competitors would not be able to make offers that would compensate for this loss of discount easily.
170 Michelin, supra note 166, paragraph 81. 171 Ibid. paragraph 82. 172 Michelin, supra note 166, paragraph 83.

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2.5.4

Analysis of the ECJs judgment

The Court held that Michelins conduct was abusive as it limited the dealers choice of supplier and made access to the market more difficult for competitors without any countervailing advantages which could be economically justified.173 The ECJ stated that neither the wish to sell more nor the wish to spread production more evenly can justify such a restriction of the customers freedom of choice and independence.174 The Court concluded that the system operated to put pressure on the dealers, to make them more dependent upon Michelin, and to foreclose Michelin's competitors.175 The Court did not say that foreclosure should only be condemned where clear harm to consumers is shown. The Court did not examine what percentage of the market and of incremental demand was effectively foreclosed by Michelins conduct. Neither did it assess the size necessary for a producer to achieve an efficient scale of production. For the Court, anti-competitive foreclosure was certainly not the thing that mattered; instead foreclosure in itself was seen as interference in the competitive process with regard to the degree to which competition, access and opportunities were foreclosed. This could indicate that the Court was concerned to preserve the competitive process, the economic freedom of other market participants and freedom of competition for smaller competitors in the market. Looking at the Commissions Report on Competition Policy in 1981, written as the Court reached its judgment, it is clear that there were concerns at the time about protecting small and medium-sized companies:176

173 Ibid. paragraph 85. 174 Michelin, supra note 166. 175 Ibid. paragraph 76. 176 11th Report on Competition Policy (1981), page 33.

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To the extent that it really makes it possible to maintain or reestablish a competitive structure, competition policy helps create a legal and economic environment in which SME [small and medium-sized enterprises] can compete, if not on equal terms, at least with the maximum chance of success, with large firms, both private and public, national and multinational, operating in the same market.

Moreover:177
[W]here they [small and medium-sized enterprises] depend for their growth, if not their survival, on the behaviour of undertakings in a dominant position, SME also benefit from action by the Commission to put an end to abusive practices such as discriminatory pricing, refusals to sell, or attempts to maintain a dominant position by various ploys designed to retain customers (fidelity rebates, differential discounts, etc).

The Court held that Michelin (a dominant undertaking) had a special responsibility to ensure that its conduct did not undermine effective and undistorted competition in the common market. This is because its unilateral behaviour carried an inherent risk for the market structure, competitors, customers and ultimately consumers, since its impact determined the level of competition in the market. The special responsibility prohibits dominant undertakings from certain kinds of conduct that would have been unobjectionable if done by non-dominant undertakings.178 Besides this distinction between dominant and nondominant undertakings, the Community Courts have not specified the scope or meaning of the special responsibility, but said that the actual scope of the special responsibility must be considered in the light of the specific circumstances of each case.179 This statement is not entirely satisfactory and several questions arise in relation to the meaning of the

177 Ibid. page 35. 178 Case T-111/96 ITT Promedia v Commission [1998] ECR II-2937, [1998] 5 CMLR 491, paragraph 139. 179 Joined Cases C-395-396/96P Compagnie Maritime Belge Transport v Commission [2000] ECR 1365, [2000] 4 CMLR 1076, paragraph 114 and Case C-333/94P Tetra Pak International SA v Commission [1996] ECR I-5951, [1997] 4 CMLR 662, paragraph 24.

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special responsibility. Firstly, does the special responsibility imposed on a dominant firm have the effect of protecting competitors? Secondly, to whom is the dominant undertaking responsible? Thirdly, is the special responsibility progressive with the growth of an undertakings dominance? And finally, can the behaviour of a dominant firm be categorised as abusive if it ignores/neglects its special responsibility? The point is not to answer theses questions, but to highlight that such a statement is not particularly helpful.180 On the special responsibility, it has been suggested that it builds on the belief that once an undertaking has a dominant position in the market, the market structures will change and the effectiveness of competition as a market regulator will be lost.181 The idea here is that in the absence of effective competition dominant undertakings have a degree of mobility and freedom to decide their market policy independently of the market. By imposing a special responsibility on a dominant undertaking, the Court imposes an obligation not to negatively affect an already weakened competitive structure. The special responsibility can be linked to the ordoliberal as if standard, where dominant undertakings must conduct themselves as if they were faced with complete competition.182 This suggests that dominant undertakings must refrain from any conduct that impairs undistorted competition, including conduct that could harm competitors. The idea behind the as if standard was to make dominant companies compete on performance rather than use their power to gain an unfair advantage
180 It is worth noting that the Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses (December, 2005) does not mention the special responsibility. According to a Commission official this is not an omission, but a positive decision not to deal with special responsibility, because some in the Commission believe that it is nothing but a normal responsibility for a dominant undertaking. 181 Samkalden and Druker, supra note 131, page 167. 182 Dieter Schmidtchen, German Ordnungspolitik as Institutional Choice 140 Zeitschrift fr die gesamte Staatswissenschaft (1984) page 60.

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over rivals. Non-performance competition was seen as inconsistent with a competitive economy as it allowed dominant undertakings to use their power to distort the competitive process.183

2.6

Summary

Continental Can concerned a merger. The Court held that eliminating competition by acquiring a competing firm was an abuse. Rather than limiting the concept of abuse to exploitative abuses only, the ECJ adopted the broader concept, which is concerned with conduct leading to changes in market structure. The Court reached that conclusion by relying on a teleological interpretation where Article 82 was interpreted in the light of Article 3(1)(g). According to the latter, it must be ensured that competition in the common market is not distorted, and the ECJ interpreted distortion as meaning any change in the market structure that lessened competition. Commercial Solvents concerned refusal to supply a long-standing customer with the raw material aminobutanol, for which the Court held that there was no commercially available substitute. As in Continental Can, the ECJ adopted a teleological interpretation. It held that Article 82 must be interpreted and applied in the light of Article 3(1)(g). The Court invoked Articles 82 and 3(1)(g) to protect the economic freedom of Zoja and did not attempt an examination of the possible economic effects on the consumer. United Brands concerned excessive pricing of bananas, discriminatory prices between Member States and refusal to supply. The latter point was dealt with in a slightly different way than the refusal to supply in Commercial Solvents. In Commercial Solvents the Court found an abuse
183 David Gerber, Law and the Abuse of Economic Power in Europe 62 Tulane Law Review (1987) 57, page 74.

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where there was an elimination of a competitor from the market and thus a threat to the structure of competition. In United Brands the Court found that the refusal to supply a customer (Olesen) was abusive, because it had the potential, if repeated, to drive other firms from the market. This arguably showed a concern with UBCs power and the protection of a smaller customers economic freedom. Hoffmann-La Roche concerned rebates the granting of which was, for the most part, expressly linked to the condition that the customer was to cover all its requirements for particular vitamins, or at any rate the predominant part of those requirements, with Hoffmann-La Roche during a reference period normally a year or half a year. The Court held that fidelity rebates, unlike quantity rebates exclusively linked with the volume of purchases from the producer concerned, are designed, through the grant of a financial advantage, to prevent customers from obtaining their supplies from competing producers. The Court regarded such a rebate system as an abuse of a dominant position because its purpose was to give the purchaser an incentive to obtain its supplies exclusively from the undertaking in a dominant position, and that is incompatible with the objective of undistorted competition within the common market. Michelin I also concerned the granting of rebates, but unlike in Hoffmann-La Roche, the customers of Michelin were not obliged to obtain all, or a specified part, of their supplies from that undertaking. Nevertheless, the annual rebates granted by Michelin took the form of target rebates. To enjoy the latter, Michelins customers had to attain individual sales targets, which were determined according to the turnover in Michelin tyres which the customer had achieved the previous year. The Court imposed a special responsibility on dominant undertakings and regarded the rebate system as an abuse of a dominant market position by relying on a series of factors such as a relatively long

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reference period of one year, the non-transparent way in which the system functioned, and the ratio between Michelins market shares and that of its main competitors taken together.

Conclusion
The analysis of the fundamental cases decided under Article 82 in the early days found that the ECJ interpreted Article 82 as part of a system designed to protect competition in the common market from distortion. The Court made sure that it was understood that Article 82 was not intended only or primarily to protect the immediate interests of individual competitors or consumers, but to protect the structure of the market and thus competition as such, which is weakened by the very presence of the dominant undertaking on the market. As a result of that weakness, the dominant company has a special responsibility towards competition in the market. The cases show that the Court has interpreted Article 82 to protect economic freedom, freedom of competition and the process of competition, which are all cornerstones of ordoliberalism. The essence of the competitive process is to allow competitors to enter the market to compete within the market. When competitors exit the market, the competitive pressure on the dominant undertaking is less, which is harmful for competition in the market. The Court did not reach its conclusions by considering the wording of Article 82 alone, but by adopting a teleological interpretation centred on the needs and objectives of the Community in order to support the Commissions enforcement action. The Commission and the ECJ did not analyse the welfare implications of the conduct in question on the consumer in form of consumer welfare loss. They did not engage in any efficiency analyses. It appears, therefore, that little thought was given to economic reasoning and

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analysis in the cases in which the law on Article 82 is to be found. These cases are however still referred to and relied upon by the ECJ.

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PART II
Part II of this thesis consists of one chapter: chapter four Consumer Welfare. The chapter is divided into four sections: section one discusses efficiency and the classical economic models of monopoly and perfect competition, section two examines the Chicago Schools definition of consumer welfare, section three assesses the Community consumer welfare standard and section four reflects on the efficiency considerations under Article 82. Part I of the thesis showed that Article 82, as interpreted by the Commission and the ECJ, demands that economic freedom should be considered within the provision although DG Competitions recent policy statement implies otherwise. Whilst DG Competitions policy statement, that exclusionary abuses within Article 82 should be interpreted mainly to protect competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources, may be in line with economic theory, it marginalises non-efficiency objectives such as economic freedom. Given that the consideration of economic freedom has been a significant objective in the jurisprudence of Article 82 in the fundamental cases as well as its potential in future case law, it may conflict with DG Competitions current aspirations for consumer welfare unless economic freedom is the means to the end of consumer welfare. Before it can be considered whether economic freedom is an objective used to enhance consumer welfare, it is necessary to clarify what is meant by consumer welfare. Neither the EC Treaty nor DG Competitions

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Discussion Paper has assigned a specific meaning to the concept of consumer welfare and its meaning is not entirely clear, which underlines the need for research in this area. Part II of the thesis will examine what welfare standard is adopted by the Commission and whether this is the same welfare standard as the one advanced by the Chicago School. These sections of chapter four are relatively descriptive, but they are necessary for the discussion in part III of the thesis. The idea that consumer welfare has a place within Article 82 is not denied, but the way in which it is implemented without a proper debate as to its consistency with economic freedom is contested.

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Chapter 4 Consumer Welfare Introduction

Section one describes three types of efficiency and uses the classical economic models to show market outcomes where efficiency is achieved and where it is not. It explains the correlation between the different types of efficiency and the various welfare standards. Section two outlines the Chicago Schools definition of consumer welfare, its theoretical foundation and the main criticism of the Chicago School. The aim is to show that the Chicago School defines consumer welfare as total welfare. This is important for section three, which defines the Community welfare standard and shows the divergence between the welfare standards espoused by the Chicago School and the Community. Having distinguished the total welfare standard from the consumer welfare standard, section four argues that adopting a consumer welfare standard requires an analysis of effects and efficiencies as both effects and efficiencies are tied to the analysis of the conducts competitive effects on consumers. It analyses whether there is scope for efficiencies within Article 82 and if so, questions whether efficiencies should be advanced as a defence to a challenge under Article 82. It considers how to balance efficiencies given that Article 82 does not contain an exemption provision.

For the Commission, consumer welfare has been on the agenda at least since Sir Leon Brittan became Competition Commissioner in 1989. The introduction to the Commissions Report on Competition Policy in 1990 specifically highlights the importance of an efficient allocation of resources and economic growth, which will maximise consumer welfare. 1 Moreover, it states that Member States must develop along the lines
1 20th Report on Competition Policy (1990), page 11.

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dictated by economic efficiency.2 Despite this, former Competition Commissioner Mario Monti said in his foreword to the Commissions Report on Competition Policy in 2000:3
While it is generally understood that competition policy improves overall economic efficiency, it is surprising that its most evident effect, that on consumers, is often neglected. Consumers should be better informed of, more closely taken into account and more directly involved in competition matters. In turn, this helps competition policy to focus more clearly on actions, which are ultimately beneficial to consumers interests.

Specifically

in

relation

to

Article

82,

the

current

Competition

Commissioner Neelie Kroes has said:4

My own philosophy on this is fairly simple. First, it is competition, and not competitors, that is to be protected. Second, ultimately the aim is to avoid consumers harm. I like aggressive competition including by dominant companies and I dont care if it may hurt competitors as long as it ultimately benefits consumers. That is because the main and ultimate objective of Article 82 is to protect consumers, and this does, of course, require the protection of an undistorted competitive process on the market.

There is no precise definition of the term consumer welfare. The EC Treaty has not assigned a specific meaning to the concept of consumer welfare, or other variants of welfare, and its meaning is not entirely clear. The term consumer welfare has several interpretations and it has sometimes been misunderstood in competition law analysis.5 Consequently and in order to answer the research question, the term consumer welfare requires clarification and more precise definition.

2 Ibid. page 12. 3 30th Report on Competition Policy (2000), page 1. 4 Neelie Kroes, Preliminary Thoughts on Policy Review of Article 82, speech given on 23 September 2005 at the Fordham Corporate Law Institute New York (speech/05/537), speech available at: http://ec.europa.eu/comm/competition/speeches. 5 Joseph F Brodley, The Economic Goals of Antitrust: Efficiency, Consumer Welfare and Technological Progress 62 New York University Law Review (1987) 1020, page 1032.

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Consumer welfare is an economic term, but is increasingly used in the legal sphere including the sphere of Community competition law, where the Commission has devoted itself to a more economic approach in respect of competition law.6 The marrying of economics and law is not new, but can be found in the work of, for example, Posner and Bork.7 These scholars, among others, are concerned with welfare economics8 (or normative economics)9 and aim to identify situations where efficiencies are not achieved and to prescribe corrective solutions. According to one commentator [i]n antitrust, the beginning of all wisdom is understanding the true nature of consumer welfare10 and by true he meant the way in which the Chicago School has articulated consumer welfare. Before discussing the Chicago School and the different welfare standards, three types of efficiency will be explained and illustrated by the classical economic models of monopoly and perfect competition.

6 Commissions White Paper on Modernisation of the Rules Implementing Articles 85 and 86 of the EC Treaty, point 78. Available at: http://ec.europa.eu/comm/competition/antitrust/wp_modern_en.pdf; the EAGCP Report on An Economic Approach to Article 82 EC (July 2005) has suggested an economics-based approach to Article 82; note on the EAGCP Report available at: http://ec.europa.eu/comm/competition/publications/studies/note_eagcp_july_05.pdf. 7 Richard Posner, Antitrust Law (University of Chicago Press, 2nd ed, 2001); Robert Bork, The Antitrust Paradox: A Policy at War with Itself (The Free Press, 1993). 8 Welfare economics view the social desirability of alternative arrangements of economic activities and allocation of resources. It is, in effect, the analysis of the optimal behaviour of individual consumers rather than of society as a whole. For an in-depth definition see Graham Bannock et al., Dictionary of Economics (Bloomberg Press, 4th ed, 2003) page 302. 9 As opposed to positive economics, which views economics exclusively as an empirical science, i.e. without reference to value judgements. 10 Charles F (Rick) Rule, Consumer Welfare, Efficiencies, and Mergers, speech given on 17 November 2005 at the hearing of the Antitrust Modernization Commission, page 14.

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1.

Efficiency and the Classical Economic Models of Monopoly and Perfect Competition

This section describes three different types of efficiency: allocative, productive and dynamic efficiency. It analytically illustrates, with the model of perfect competition, how economic resources are most efficiently allocated in order to maximise the consumer surplus, which is the aggregate measure of surplus of all consumers,11 and allocate products to consumers who value them most. It also illustrates, with the model showing a monopoly situation, how a non-competitive market achieves neither allocative nor productive efficiency. The models of monopoly and perfect competition present two extreme market outcomes, which bear little relation to reality, but they are theoretically useful to illustrate a situation of economic efficiency and one of economic inefficiency. Efficiency and consumer welfare are discussed together in this chapter, because they are closely related. Depending on which welfare standard (consumer surplus, producer surplus or total surplus) a system is seeking to pursue, the different types of efficiency can explain whether welfare is increased or not. It is believed that an economy is operating at maximum efficiency when society is squeezing the greatest value the highest level of welfare out of its scarce resources.12

11 Consumers surplus on each unit consumed is the difference between the market price and the maximum price the consumer would pay to obtain the unit. The total consumers surplus is therefore the sum of all individual consumers surplus see for example Richard Lipsey, An Introduction to Positive Economics (Weidenfeld and Nicolson, 7th ed, 1989) page 90; Massimo Motta, Competition Policy: Theory and Practice (Cambridge University Press, 2004) page 18. 12 Philip Lowe, Consumer Welfare and Efficiency New Guiding Principles of Competition Policy?, speech given on 27 March 2007 at the 13th International Conference on Competition and 14th European Competition Day, page 2, speech available at: http://ec.europa.eu/comm/competition/speeches/text/sp2007_02_en.pdf.

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1.1

Dynamic, allocative and productive efficiency

One type of efficiency is allocative efficiency.13 It refers to the way in which competition serves to allocate resources to their highest and best use by creating incentives for producers to compete to expand output in a market until the cost of the last unit of output (marginal cost MC)14 equals the price consumers are willing to pay for the product (marginal revenue MR).15 At that point, the market is allocating the optimal amount of societys total resources to production of that markets good or service.16 As shown in figure 1 below, allocative efficiency is harmed when producers agree directly or indirectly to raise a price from the price consumers are willing to pay for a given product the competitive price (Pc) to a monopoly price (Pm). Allocative efficiency is also harmed when a producer with market power reduces market output (Q) from the quantity it would have produced under competition (Qc) to the quantity produced where output is restricted (Qm) in order to keep the price above competitive levels. Producers engaging in such conduct expect to obtain more surplus from consumers than would be possible if competition prevailed, as they shift surplus from the markets consumers to themselves. This will lead to allocative inefficiency, which in economic terms is called the dead weight loss as illustrated by the triangle (A) in

13 In the broad sense allocative efficiency encompasses efficient pricing on both the input and the output side of the market; in the narrow sense it focuses solely on the se llers behaviour in output markets. 14 The increase in the total costs of a firm caused by increasing its output by one extra unit. If all costs are fixed, the marginal cost of the first unit of output will be very high, but all subsequent units can be made for nothing. 15 Bork, supra note 7, page 91. 16 According to Bork, supra note 7, allocative efficiency is not well suited as a policy guideline, since it is difficult to achieve in practice.

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figure 1 below. The dead weight is the cost to society of a market which does not operate efficiently.17 Figure 1: An illustration of deadweight loss.18

17 The dead weight loss refers to the amount above costs that consumers would be willing to pay for the lost output. In other words, the marginal cost of producing a good is less than the marginal willingness of consumers to pay for it, see Dennis W Carlton and Jeffrey M Perloff, Modern Industrial Organization (Pearson: Addison Wesley, 4th ed, 2005) pages 71-72. 18 I have drawn inspiration for the format of this model from Carlton and Perloff, supra note 17, page 72.

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Another type of efficiency is productive efficiency. It refers to the effective use of resources by a particular firm, meaning that a given set of products is produced at the lowest possible cost, given the current technology.19 Productive efficiency is generated when production is improved to produce the same level of output using fewer resources or to produce more valuable output of better quality using the same resources. Unlike allocative efficiency, which is a static concept that is maximised when the price consumers are willing to pay equals marginal cost and cannot be improved beyond that point, productive efficiency is a dynamic concept that can always be improved and never maximised. If technical progress is improved, productive efficiency will improve by freeing up resources to expand the economys output and providing the means for deriving more value from the existing use of resources.20 A third type of efficiency is dynamic efficiency. This type of efficiency refers to the extent to which a company introduces new products or new processes of production.21 An undertaking has the possibility to adopt a process of innovation if it can produce at a lower marginal cost compared to the current cost by paying a fixed cost.22 If the undertaking does not innovate, because it has no incentive either because it has a monopoly or because competition is too strong, it will lead to dynamic inefficiency and result in a welfare loss. If competition is too strong it can reduce the incentive to innovate in that a system pursuing a consumer welfare standard is trying to improve allocative efficiency by forcing prices down to marginal cost.23 This may reduce the possibility

19 Simon Bishop and Mike Walker, The Economics of EC Competition Law (Sweet & Maxwell, 2nd ed, 2002) page 20. 20 Bork, supra note 7, page 91. 21 Bishop and Walker, supra note 19, pages 36-39; Motta, supra note 11, pages 55-64. 22 Motta, supra note 11, page 56. 23 Once produced, an idea can be used by an infinite number of people indefinitely with little or any additional cost. As the cost of producing the idea remains fixed, regardless of how many people consume it, there is a zero marginal cost in allowing additional consumption. Hence, if marginal cost

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of appropriating the results of the investment. To avoid dynamic efficiency being undermined over time, it is important that a system favouring a consumer welfare standard is balanced between the longterm need for innovation and short-term loss in allocative efficiency. In the short-term, there may be loss in allocative efficiency if prices rises above marginal cost in order to pay for the investment, but in the longterm, allocative benefits may increase due to the innovation. Allocative and productive efficiency are predicated on the static economic model of perfect competition,24 which will be explained in the following sub-section. Allocative efficiency occurs when price (P) is equal to marginal cost (MC), at which point the good or service is available to the consumer at the lowest possible price. Productive efficiency occurs when the firm produces at the lowest point on the average cost curve (AC),25 implying it cannot produce the goods any more cheaply. This would be achieved in perfect competition, since if a firm was not producing at a lower price another firm would be able to undercut it by selling products at a lower price.

1.2

Perfect competition

The model of perfect competition, as illustrated in figure 2 below, is a useful theoretical model.26 It is based on the assumption that competitive markets achieve efficiency and it can be used to measure whether a market, operating under a given set of assumptions, is

pricing were enforced in relation to ideas, the cost of producing the idea could never be recovered and there would be no incentive to come up with it. 24 Bishop and Walker, supra note 19, page 20. 25 Total production costs per unit of output (total fixed costs plus total variable costs divided by number of units produced). 26 In short, in perfect competition demand and supply is satisfied, there is an equilibrium: everyone is satisfied. An in-depth description of perfect competition can be found in Graham Bannock et al., Dictionary of Economics (Bloomberg Press, 4th ed, 2003) page 295ff.

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competitive.27 With the model of perfect competition, it can be shown analytically how economic resources are most efficiently allocated so as to maximise the consumer surplus and allocate products to consumers who value them most. It can also analytically show when a firm produces at the lowest point on the average cost curve (AC) and productive efficiency occurs. In a market characterised by perfect competition,28 there are many players acting in the market to buy and sell homogeneous products. The theory is that there are no barriers to entry or exit and, because of the free entry of other firms, competition amongst firms will push prices (P1) down to the lowest point in each firms average cost (AC) curve. This is the level of output where average cost (AC) and marginal cost (MC) meet. Figure 2: An illustration of perfect competition.29

Price

Marginal costs (MC)

Average costs (AC)

P1

P=MR

Q1

Quantity

27 It is important to notice that the theory of perfect competition does not indicate whether specific markets are efficient, only that a market operating under a set of assumptions is. 28 The model of perfect competition was developed in the nineteenth century by neo-classical authors like Augustin Cournot and Alfred Marshall, see Lynne Pepall, Daniel Richards and George Norman, Industrial Organization: Contemporary Theory and Practice (South Western, 1999) page 236ff. 29 I have drawn inspiration for the format of this model from Carlton and Perloff, supra note 17, page 59.

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In a market characterised by perfect competition, production methods and prices are transparent. Because of transparency, any firm that is able to lower its average cost of production will, in the short term, earn a supernormal profit.30 Any firm that is able to lower its average cost of production in the longer term will earn normal profit,31 as it is assumed that other firms will copy its new production method and bid the price down to the new lowest point on the average cost curve. In a market which is assumed to be perfectly competitive there will be no divergence between average cost and marginal revenue, because no firm can restrict output and set output short of the lowest point.

1.3

Monopoly situation

The opposite to the model of perfect competition is the model of a monopoly situation.32 This model is a useful tool to show a noncompetitive market where neither allocative nor productive efficiency is achieved. The model, as shown in figure 3 below, shows a downward sloping demand curve, which indicates that the incumbent is able to influence price via output restrictions. The rationale behind limiting output is that the incumbent wants to maximise profit. To maximise profit in the short term, the incumbent will set output at the profit maximising point where marginal cost (MC) meets marginal revenue (MR). The consequence of restricting output is that price will be above marginal cost, and therefore higher, and output lower, than would be the case under perfect competition.33 In this situation, there will necessarily be a divergence between average cost (AC) and marginal
30 Any profit over and above normal profit. 31 Opportunity cost for the entrepreneur, i.e. the minimum amount necessary to attract the entrepreneur to an activity or to provide the incumbent with an inducement to remain in it. 32 An in-depth description of perfect competition can be found in Graham Bannock et al., Dictionary of Economics (Bloomberg Press, 4th ed, 2003) page 262ff. 33 Edward H Chamberlin, The Theory of Monopolistic Competition (Harvard University Press, 7th ed, 1956); Joan Robinson, The Economics of Imperfect Competition (Cambridge University Press, 1933).

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revenue (MR).34 An incumbent that is able to limit output will earn monopoly profit in the long run, provided that there are barriers to entry. This profit is a pure surplus, serving no efficiency purpose. Figure 3: Illustration of a monopoly situation.35

Price

Marginal cost (MC) Average cost (AC)

Monopoly Profit

Marginal revenue (MR) Profit Max Output MR-MC

Quantity

The examination of the different types of efficiency, and the economic models upon which they rely, is useful information for considering the relationship between these efficiencies and the different welfare standards. Knowing the different benefits of the various types of efficiency, the question is which welfare standard to pursue. The answer depends on an assessment of whether it is more important to protect the interests of consumers or producers or both. This will be explored in the following sub-section.

34 The increase in the total revenue received by a firm from the sale of one extra unit of its output. 35 I have drawn inspiration for the format of this model from Carlton and Perloff, supra note 17, page 91.

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1.4

The correlation between efficiency and welfare standards

Competition law systems favouring the total welfare standard, which is defined by most economists as the sum of producer surplus and consumer surplus,36 will choose to protect productive and dynamic efficiency more than allocative efficiency.37 This is because these systems believe that improvements in productive and dynamic efficiency, either by an increase in output in the market where the asset is deployed, or by freeing up resources in order to increase output in other markets, will lead to an increase in total welfare. Even if an improvement in efficiency leaves price unchanged and end consumers (i.e. consumers in that particular market) do not benefit directly, end consumers will benefit indirectly. This is because those consumers are able to consume incremental goods and services produced in other markets from the freed-up resources. A system believing in total welfare opposes exclusionary conduct,38 because it reduces production and innovative efficiency by raising the costs or lowering the return of rival firms with no offsetting benefits to society. In a competition law system favouring the consumer welfare standard in the form of consumer surplus, productive efficiencies are irrelevant unless they translate into lower prices and are converted into consumer surplus. Gain in producer welfare would only be acceptable under the
36 W Kip Viscusi, Joseph M Vernon and Joseph Emmett Harrington, Economics of Regulation and Antitrust (The MIT Press England, 2nd ed, 1995) page 63; Bishop and Walker, supra note 19, pages 23-27; Posner, supra note 7, page 23; and Motta, supra note 11, page 20. 37 One commentator has argued that productive and innovative efficiency, not allocative efficiency, should be the first priority, as the aim is to force prices closer to marginal cost and thereby increase allocative efficiency through increased output, see Brodley, supra note 5, page 1025. 38 Exclusionary conduct is defined in DG Competitions Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses (December, 2005), paragraph 1, as action to deny rivals access to the market or expansion in the market without offsetting benefits to consumers: [b]y exclusionary abuses are meant behaviours by dominant firms which are likely to have a foreclosure effect on the market, i.e. which are likely to completely or partially deny profitable expansion in or access to a market to actual or potential competitors and which ultimately harm consumers.

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consumer welfare standard, if there were sufficient competition to force the producers to pass such benefits on to consumers. For systems pursuing a consumer welfare standard, reductions in allocative efficiency are unacceptable, because consumers suffer. Thus, unless producer welfare is translated into lower prices or gains which are passed on to consumers, the beneficial effect on producer welfare is irrelevant. However, as argued above, focusing on allocative efficiency gains in the short-term can risk reducing the scope for investment in research and development long-term as prices fall to marginal cost. Thus, it is important to balance long-term gain in dynamic and productive efficiency with short-term loss in allocative efficiency, as consumers may favour a reduction in allocative efficiency in the short-term in order to achieve dynamic efficiencies in the long-term. In a competitive market, producers will in the long-term be forced to pass on any cost savings to consumers. The consequence of consumer welfare is that the gain in consumer surplus is not a gain to society as a whole, because it comes at the expense of a corresponding loss in producers profits. Proponents of the producer welfare standard and the total welfare standard argue that there is no economic reason for favouring a dollar in the hands of consumers of the products over a dollar in the hands of the producers or their shareholders, who are, after all, also consumers.39 Moreover, they argue that the consumer welfare standard does not discriminate among consumers, i.e. between relatively poor and relatively well-off consumers, therefore profit may end up in the pockets of consumers that are already wealthy.40 Having introduced the different welfare standards and their correlation with the different forms of efficiency, the following section will describe
39 Charles F (Rick) Rule, supra note 10, page 6. 40 Critics of the total welfare standard argue that it treats consumers and shareholders alike even when they are different.

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the Chicago Schools definition of consumer welfare as it was the Chicago School which originally promoted the economic welfare approach in antitrust law.41

2.

The Chicago Schools Definition of Consumer Welfare

The Chicago Schools antitrust mantra is that the ultimate goal of US antitrust law is the maximisation of consumer welfare.42 The Chicago Schools definition of consumer welfare cannot be ignored as it made its way into US antitrust,43 a system to which the Commission pays attention. The US Supreme Court implemented the Chicago School philosophy generously during the 1970s, 1980s and 1990s.44 It even cited Robert Bork, a leading articulator of the Chicago Schools view of antitrust, in Reiter v Sono-tone.45 Bork said in his famous book The Antitrust Paradox:46
[T]he whole task of antitrust can be summed up as the effort to improve allocative efficiency without impairing productive

41 Competition law is the usual term for this form of law in many legal systems. In the US, it is known as antitrust law. 42 Fox and Sullivan have pointed out that consumer welfare in the Chicagoan sense is not consumer welfare at all, see Eleanor Fox and Lawrence Sullivan, Antitrust Retrospective and Prospective: Where are we coming from? Where are we going? 62 New York University Law Review (1987) 936, page 946. 43 United States submission to OECD The Objectives of Competition Law and Policy, CCNM/GF/COMP (2003); Hovenkamp in Claus-Dieter Ehlermann & Laraine L Laudati (eds), European Competition Law Annual The Objectives of Competition Policy (Hart, 1998) page 328. The Chicago School started in the 1960s and culminated in the 1970s and 1980s. Besides Bork, some of its originators are Stigler, Demsetz and Brozen. 44 For example, Continental TV Inc v GTE Sylvania Inc 433 US 36 (1977) pages 50-59 and footnote 21; Illinois Brick Co v Illinois 431 US 720 (1977) pages 731-744; Brooke Group Ltd v Brown & Williamson Tobacco Corporation 509 US 209 (1993). 45 Reiter v Sono-tone Corporation 442 US 330 (1979) page 343 Congress designed the Sherman Act as a consumer welfare prescription followed by citing Borks The Antitrust Paradox. 46 Bork, supra note 7, page 91 and page 427.

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efficiency so greatly as to produce either no gain or a net loss in 47 consumer welfare. The argument of this book [The Antitrust Paradox], of course, is that competition must be understood as the maximization of consumer welfare, or, if you prefer, economic efficiency.

Bork discussed maximisation of consumer welfare or economic efficiency which he equated with consumer welfare. He identified consumer welfare as improving allocative efficiency without impairing productive efficiency. Consumer welfare is explicitly concerned with consumer gain.48 Thus, to avoid any conceptual confusion, it must be stressed that when Bork speaks about improving allocative efficiency without impairing productive efficiency, he is concerned about total welfare and not consumer welfare.49 This is because, if the goal is to maximise consumer welfare, then this standard seeks to maximise consumer surplus only. Systems which favour consumer surplus are not concerned with productive efficiencies as they are irrelevant, unless they translate into lower prices and are converted into consumer surplus. Thus, identifying consumer welfare as improving allocative efficiency without impairing productive efficiency (or economic efficiency) is strictly speaking a contradiction.50 The difference between consumer welfare and total welfare must be made clear in order to understand that Bork was talking about total welfare. A competition law system favouring the consumer welfare
47 Bork reiterated this in Robert Bork, Legislative Intent and The Policy of The Sherman Act 9 Journal of Law & Economics (1966) 7. 48 Richard Whish, Competition Law (LexisNexis Butterworth, 5th ed, 2003) page 3; Brodley, supra note 5, pages 1020-1021. 49 See discussion and critique of Borks definition of consumer welfare in Robert H Lande, The Rise and (Coming) Fall of Efficiency as the Rule of Antitrust 33 Antitrust Bulletin (1988) 429, pages 4 33435. 50 It is one thing to believe that it is best for consumers if both allocative and productive welfare (i.e. total welfare) is protected and quite another to equate consumer welfare with allocative and productive efficiency.

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standard takes the view that competition is protected for the benefit of consumers and that consumer's benefit from low prices. According to this standard, which focuses on allocative efficiency, the law should prohibit conduct that results in increased prices. On the contrary, a system which favours productive efficiency cares about producer welfare (producer surplus), which is the aggregated measure of the surplus made by all producers. Bork cares about total welfare which implicitly takes the view that the identity of the winners and losers is unimportant as long as it is ensured that there are more gains than losses.51 Thus, Bork does not favour productive efficiency over allocative efficiency, but is concerned about improving allocative efficiency without impairing productive efficiency. This is about favouring both consumer and producer surplus or, in other terms, total welfare. A total welfare standard is concerned with increasing the gains for society as a whole. It does not consider the issue of income distribution between consumers and producers, nor anything giving preference to consumers over producers or vice versa.52 Thus, believing in improving allocative efficiency without impairing productive efficiency can be equated with economic efficiency, which is based on the total welfare standard that seeks to maximise total surplus. It is important to distinguish between total welfare and consumer welfare, because the implication of the choice of welfare standard is significant. For example, an exclusive buying arrangement that lowers the price of a good or service to the end consumer by 10, but raises a

51 One critique is that the total welfare standard ignores marginal utility. Marginal utility describes the additional benefit derived from an additional unit of wealth, and after a point diminishes with each additional unit. 52 Motta, supra note 11, page 18; Bork, supra note 7, page 111; Frederic M Scherer, Antitrust, Efficiency, and Progress 63 New York University Law Review (1987) 998, pages 998 -999; Oliver E Williamson, Economies as an Antitrust Defense Revisited 125 University of Pennsylvania Law Review (1977) 699, page 710.

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rivals cost by 30 would be lawful under a consumer surplus standard but not necessarily under a total welfare standard. After this initial clarification of the difference between total welfare and consumer welfare and their connection with the different types of efficiency, the following sub-section will succinctly highlight some points of the theoretical foundation of the Chicago School in order to explain how the School linked behaviour in the market place with efficiency.

2.1

The theoretical foundation of the Chicago School

The Chicago School rejected the structuralist approach, which was the prevailing approach in US antitrust during the 1950s and 1960s, advocated by the so-called Harvard School.53 The Harvard School believed that high concentration enables the exercise of market power and high profits. In rejecting this line of thinking, the Chicago School argued that existing market structure reflects efficiency. Higher profits are due to the lower costs of larger firms, because they have economies of scale. Even if dominant undertakings had the ability to leverage their market power, they would have no interest in doing so as there is only a single monopoly profit. Persistent market concentration is the result of
53 The Harvard School developed a mono-causal and mono-dimensional relationship between structure, conduct and performance. The structure-conduct-performance paradigm states that market structure determines companies market behaviour, which in turn determines market performance while conduct is not really taken into account. The competitive ideal was the concept of workable competition. The Harvard School relied on empirical studies and rejected the model of perfect competition. It believed in multiple goals for antitrust because there is scope for other values than efficiency as favourable economic results could be obtained in terms of efficiency, equity and progress. Antitrust must preserve the competitive process as such; prescribe norms of fair conduct; and restrict the growth of large firms. Antitrust authorities should have large discretionary powers because markets are fragile and prone to failure; firms can be expected to collude in concentrated markets; and there are many and high barriers to entry. This led to a very interventionist competition law embracing per se rules and divestitures in highly concentrated markets, see Leonard W Weiss, The Structure-Conduct-Performance Paradigm and Antitrust 127 University of Pennsylvania Law Review (1979) 1104, page 1105; Joe S Bain, Industrial Organization (Wiley, 2nd ed, 1968) pages 462-463.

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minimum efficient firm size. Moreover, there are no or few artificial barriers to entry, thus private monopoly can only be temporary.54 The Chicago School believed that the basic tenets of firms were rationality and profit maximisation.55 For example, firms would engage in vertical price fixing to avoid free-riding. Vertical price fixing should not be prohibited, as it guarantees better services to consumers. In relation to predation, the Chicago School believed that aggressive prices are generally pro-competitive and enhance consumer welfare, except in rare situations where the predator has sufficient market power to recoup its losses through long-term, supra-competitive prices achieved after its rivals have been eliminated.56 Thus, rational firms will not engage in predatory pricing since they cannot be successful and hence, it should be of no concern for competition policy. Finally, the Chicago School believed that collusion is difficult to enforce for market players and thus unlikely, except in regulated industries. The Chicago School reviewed business practices in terms of their effects on efficiency and prices. It relied on the neo-classical price theory, which developed models of perfect competition and monopoly, to explain firms behaviour and practices in real-life markets.57 Bork argued that it was only workable to view markets from an economic efficiency point of view, since the social-political framework was so amorphous.58 Indeed,

54 Michael S Jacobs, An Essay on the Normative Foundations of Antitrust Economics 74 North Carolina Law Review (1995) 219, pages 228-232. 55 The Chicago School relied on neo-classical economics which relies on three assumptions: people have rational preferences among outcomes that can be identified and associated with a value; individuals maximise utility and firms maximise profits; and people act independently on the basis of full and relevant information. 56 The Chicago Schools economic analysis of predation was accepted by the US Supreme Court in 1992 in Brook Group, supra note 44. 57 Jacobs, supra note 54, pages 228-229. 58 The proponents of one single objective (that of economic efficiency) do not all necessarily mean to imply any disparagement of other objectives, such as more equitable distribution of income and

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Bork even pronounced all contrary views as being so incapable of use as to be unconstitutional.59 The Chicago Schools focus on making the law effective made Judge Easterbrook rename it The Workable Antitrust Policy School.60 Like the Chicago School, Easterbrook also favoured the single goal of economic efficiency.61 The assumptions upon which the Chicago School built its theory have led to some criticism.62 The main points of this criticism will be elaborated in the following section in order to highlight some of the drawbacks of the theory.

2.2

Main critique of the Chicago School

The Chicago School relied on neo-classical economics in order to make the enforcement of competition law objective and to exclude political values from competition law. Neo-classical economics have been criticised for relying on unrealistic assumptions,63 which fail to explain strategic behaviours taking advantage of market imperfections, where firms can make profits without being efficient.64 This and the Chicago

the diffusion of economic power. They simply believe that a competition policy concentrated on the efficiency objective is likely to be applied more consistently and effectively. 59 Robert Bork, The Role of the Courts in Applying Economics 54 Antitrust Law Journal (1985) 21, page 24. 60 Frank H Easterbrook, Workable Antitrust Policy 84 Michigan Law Review (1986) 1696, page 1700. 61 This is supported by William Baxter (former Assistant Attorney General in Antitrust Division, DOJ) who said that the sole goal of antitrust is economic efficiency in the Wall Street Journal on 4 March 1982, page 28, but opposed by Hans B Thorelli who concluded that, in the absence of a single-minded legislative intent to pursue efficiency goals, antitrust should manifest concern for other social values, see Hans Birger Thorelli, The Federal Antitrust Policy (Johns Hopkins Press, 1955). 62 The so-called Chicago School critique, see for example the Report by the EACGP, supra note 6. 63 See supra note 55. 64 Herbert Hovenkamp, Antitrust Policy after Chicago 84 Michigan Law Review (1985) 213, page 261.

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Schools

philosophy

that

antitrust

should

only

protect

economic

efficiency have led to some criticism.65 First, applying economic theory only and excluding political values when assessing possible competition law problems is hardly desirable or possible,66 because economics itself is arguably not value-neutral, as it reflects political preference. Second, it is illogical to have economic efficiency as the only goal as economic efficiency is not verifiable.67 Third, the Chicago School adopted the concept of economic efficiency without defining it in such a way that it could be quantified. Bork acknowledged that economic performance is difficult if not impossible to measure scientifically:68
[T]he real objection to performance tests and efficiency defenses in antitrust law is that they are spurious. They cannot measure the factors relevant to consumer welfare, so that after the economic extravaganza was completed we should know no more than before we began.

Thus, Bork applied Stiglers definition of competitive effectiveness to assess whether total welfare was increased. By applying competitive effectiveness, it would be possible to find the most efficient firm in the market by examining which firm had the most success in the market place without collusion or predation.69 Finally, the confusion between consumer and total welfare, as highlighted above, is exaggerated.70

65 For example, Robert H Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: the Efficiency Interpretation Challenged 34 Hastings Law Journal (1982) 65; James May, Antitrust in the Formative Era: Political and Economic Theory in Constitutional and Antitrust Analysis, 1880-1918 50 Ohio State Law Journal (1989) 257, page 260; Rudolph J Peritz, A Counter-History of Antitrust Law 1990 Duke Law Journal 263, pages 272 -274. 66 Robert Pitofsky, The Political Content of Antitrust 127 University of Pennsylvania Law Review (1979) 1051. 67 Hovenkamp, supra note 64, page 234. 68 Bork, supra note 7, page 124. 69 Ibid. page 192. 70 Brodley, supra note 5, page 1033.

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The

Chicago

School

applied

the

neo-classical

model

of

perfect

competition and relied on price theory.71 The Chicagoan line of thinking relied on price only, which excludes the phases of production of goods and services by considering exclusively the exchange between suppliers and consumers.72 This reduces the importance of enforcement to measure welfare in terms of economics only, and excludes the specific interests of the firm, which would normally be considered a part of the legal analysis. This was no coincidence, as the Chicago School wanted to make competition law enforcement objective by excluding political values. But, as said above, it is questionable whether such a model of welfare is value neutral. Hovenkamp, for example, has argued that wealth maximization must include everything to which people assign a value.73 Section two has outlined the Chicago Schools definition of consumer welfare, its theoretical foundation and the main criticism of the School. It is clear that the Chicago School relied on a total welfare standard. The question of which welfare standard is the best one for a given system depends on an assessment of whether it is more important to protect the interests of consumers, or producers, or both. This in turn depends on which efficiencies are considered most beneficial. Having described the Chicago Schools definition of consumer welfare (which is important as the School promoted the economic welfare approach) it is essential to acknowledge that the Chicago Schools model of competition law does not need to concern itself with creating a single market. Rather, it presupposes the existence of an integrated market.74
71 Richard Posner, The Chicago School of Antitrust Analysis 127 University of Pennsylvania Law Review (1979) 925. 72 Paul McNulty, Economic Theory and the Meaning of Competition 82(4) The Quarterly Journal of Economics (1968) 639, page 646. 73 Hovenkamp, supra note 64, page 242. 74 Lowe, supra note 12, page 3.

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The following section will examine how the concept of consumer welfare is defined and applied at Community level, as it is different from the way in which the Chicago School defined the concept.

3.
3.1

The Community Welfare Standard

Consumer welfare

Most jurisdictions embracing competition law clearly state that the objective is to improve consumer welfare.75 This is also an objective in Community competition law,76 where there is a general agreement that competition policy should strive to maintain a competitive market.77 There is a great deal of debate about which welfare standard is the best.78 The Community Courts have determined that the best welfare standard under Community law is consumer welfare in form of consumer gain. In GlaxoSmithKline, the CFI confirmed that consumer welfare is the objective of Article 81(1):79
In effect, the objective assigned to Article 81(1) EC, which constitutes a fundamental provision indispensable for the achievement of the missions entrusted to the Community is to prevent undertakings, by restricting competition
75 UNCTAD, Objectives of Competition Law and Policy: towards a Coherent Strategy for Promoting Competition and Development page 4 submitted for the OECD in 2003. Doc. CCNM/GF/COMP/WD (2003)31. 76 Merit E Janow, International Perspectives on Abuse of Dominance in OECD paper GD(96)131 on Abuse of Dominance and Monopolisation (1996) page 34; OJ [2004] C101/97 Commission Notice Guidelines on the Application of Article 81(3) of the EC Treaty, paragraph 33; OJ [2000] C291/1 Commission Notice Guidelines on Vertical Restraints, paragraph 7; Mario Monti, Comments to the speech given by Hew Pate, Assistant Attorney General, US Department of Justice, at the Conference Antitrust in a Transatlantic Context, speech given on 7 June 2004 in Brussels, page 7, speech available at: http://ec.europa.eu/comm/competition/speeches/text/sp2004_005_en.pdf. 77 29th Report on Competition Policy (1999), page 6. 78 For example, Bishop and Walker, supra note 19, pages 25-27; Motta, supra note 11, pages 1822; Whish, supra note 48, pages 18-20. 79 Case T-168/01 GlaxoSmithKline Services Unlimited v Commission, paragraph 118.

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between themselves or with third parties, from reducing the welfare of the final consumer of the products in question. The Commission emphasised on a number of occasions that it was from that perspective that it had carried out its examination in the present case, initially concluding that the General Sales Conditions clearly restricted the welfare of consumers, then considering whether that restriction would be offset by increased efficiency which would itself benefit consumers.

The CFI specified that it is the welfare of the final consumer which must be considered. Before continuing discussing the Community welfare standard it is questioned who the final consumer is? The term consumer is not defined in the EC Treaty. The Commission has attempted to clarify the position in its Guidelines on the Application of Article 81(3) of the Treaty where it states in paragraph 84:80
The concept of consumers encompasses all direct or indirect users of the products covered by the agreement, including producers that use the products as an input, wholesalers, retailers and final consumers, i.e. natural persons who are acting for purposes which can be regarded as outside their trade or profession. In other words, consumers within the meaning of Article 81(3) are the customers of the parties to the agreement and subsequent purchasers.

According to this statement, consumers are all direct and indirect users of the product covered by the agreement and the final consumer is a natural person who is acting for purposes which can be regarded as outside his/her trade or profession.81 Thus, in downstream markets the final consumer can be both the purchaser on the wholesale level82 and

80 Guidelines on the Application of Article 81(3) of the EC Treaty, supra note 76. 81 This is also supported in OJ [1975] L222/34 Kabel unde Metallwerke Neumeyer AG and Etablissements Luchaire SA Agreement. 82 Most cases on the Community level concern the wholesale level.

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the consumer of a product on the retail level,83 but not the output producer. This is a clear commitment to the consumer welfare standard. Specifically in relation to Article 82, the ECJ held in British Airways that in order to determine whether a system must be regarded as an abuse, the benefit to consumers must be considered:84
It has to be determined whether the exclusionary effect arising from such a system, which is disadvantageous for competition, may be counterbalanced, or outweighed, by advantages in terms of efficiency which also benefit the consumer. If the exclusionary effect of that system bears no relation to advantages for the market and consumers, or if it goes beyond what is necessary in order to attain those advantages, that system must be regarded as an abuse.

The ECJ makes clear that when considering efficiencies consumers must benefit, but without specifying who the consumer is. Given that consumers include purchasers on both the wholesale and retail level, but not the output producer, in stating that consumers must benefit, the ECJ dedicates itself (theoretically) to the consumer welfare standard and not total welfare. This is in line with the policy statement coming from DG Competition in its Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses:85
With regard to exclusionary abuses the objective of Article 82 is the protection of competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources. Effective competition brings benefits to consumers, such as low prices, high quality products, a wide
83 According to the Commissions Report on Competition Policy (2005) consumers can be both individuals and businesses, point 727 page 191: the Competition DGs guiding principles as regards enforcement will continue to be prioritisation of enforcement actions according to the degree of harmfulness of anti-competitive practices vis--vis consumers, both business and individuals. Priority will be given to those actions that address competition problems with the highest negative impact on consumer welfare, account being taken of the volume of spending affected by the anticompetitive practice and the nature of the conduct. The existence of a significant impact on the competitive process (market foreclosure) can be used as a proxy for consumer harm. 84 Case C-95/04P British Airways plc v Commission, paragraph 86. 85 Discussion Paper, supra note 38, paragraph 4.

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selection of goods and services, and innovation. Competition and market integration serve these ends since the creation and preservation of an open single market promotes an efficient allocation of resources throughout the Community for the benefit of consumers. In applying Article 82, the Commission will adopt an approach which is based on the likely effects on the market.

The statement makes clear that between total welfare and consumer welfare, in the form of consumer surplus, consumer welfare will prevail. Although the Discussion Paper does not offer an explicit definition of consumer welfare, DG Competition makes it clear that it considers allocative efficiency to be more important than productive or dynamic efficiency. Despite this, one commentator has said it is difficult to say whether competition authorities and courts favour in practice a consumer welfare or total welfare objective.86 According to the Chicago School, this is because a policy of maximising total welfare will most effectively accomplish the goal of protecting consumers interests. Whilst this may be true where monopolies are easily broken up or unstable, this is not the case for markets characterised by stable monopolies. In a society with stable monopolies, a competition policy pursuing a total welfare standard87 would mean that it would be legitimate for a monopoly to keep the gain of any cost savings even though consumers would have to pay higher prices while the producer would gain. By choosing to pursue a consumer standard as opposed to a total welfare standard, DG Competition has made it clear that the aim of its competition policy is the interests of consumers, and thus it favours consumers over producers.88

86 Motta, supra note 11, page 19. 87 Recalling that, when pursuing an objective of total welfare, it does not make a difference whether producers or consumers gain from wealth maximisation as long as society as a whole is better off. 88 This is also a politically wise choice in order to get popular support for competition policy, which could dissolve if consumers did not think that the law protected their interests. The consumer

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The chosen welfare standard in Community competition policy is consumer welfare in the form of consumer gain, which is not synonymous with economic efficiency in the Chicagoan sense. The question is whether consumer harms are measured in terms of output only, meaning that consumers are harmed where price increase and output are restricted, or whether non-price considerations, such as choice, quality and innovation, are also taken into account. This will be analysed in the following section.

3.2

The measurement of consumer harm

Consumer welfare measured solely in terms of output, measures whether consumers benefit by protecting market mechanisms that ultimately generate lower prices. Consumer harm is measured in terms of increased price and restricted output. Measuring consumer harm in the form of price only may end up allowing exclusionary conduct that drives rivals, selling similar products at higher prices but better quality, out of the market without violating competition law if consumers enjoy lower prices. Consumer welfare judged by measures other than price includes non-price considerations such as quality, choice and innovation. Measuring consumer harm in this way goes beyond output and is extended to harm to the competitive process. DG Competition explains that consumers must benefit in the form of lower prices, high quality products, a wide selection of goods and

welfare standard seems to be a better standard in a society where consumers are less wealthy than producers, because if consumers are wealthier than producers then society would be better off with a total welfare standard. The latter standard allows wealth transfers from consumers to producers and does not cause problem for society, because neither consumers nor producers are the better off group to begin with. In countries with a deprived economy it matters less where the wealth is transferred to as long as it benefits society as a whole. In a situation where a company has market power, in theory, the firm is better off than the consumers, thus in the Article 82 regime a consumer welfare standard is preferable to a total welfare standard.

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services, and innovation.89 Former Competition Commissioner Monti recognised:90

[T]he goal of competition policy, in all its aspects, is to protect consumer welfare by maintaining a high degree of competition in the common market. Competition should lead to lower prices, a wider choice of goods, and technological innovation, all in the interest of the consumers.91

The practice of the Commission also supports this position.92 Price competition is not the only form of competition worthy of protection, competition which relates to other factors is also worthy of protection.93 According to the Commissions Guidelines on the Application of Article 81(3) of the Treaty, consumer benefits must include other efficiencies than lower price.94 The guidelines provides that consumer pass-on can also take the form of qualitative efficiencies such as new and improved
89 Discussion Paper, supra note 38, paragraph 4. 90 Mario Monti, The Future for Competition Policy in the European Union, speech given on 9 July 2001 at Merchant Taylor's Hall London (speech/01/340), speech available at: http://europa.eu.int/rapid/pressReleasesAction.do?reference=SPEECH/01/340&format=HTML&aged =0&language=EN&guiLanguage=en. 91 Mario Monti continued his consumer crusade in a speech given less than a year later where he gave various examples of how the Commission defends the consumer interest; see Mario Monti, Competition and the Consumer: What are the Aims of European Competition Policy?, speech given on 26 February 2002, European Competition Day in Madrid, speech available at: http://ec.europa.eu/comm/competition/speeches. In another speech Monti said: The Commission is committed to a proactive, modern and effective competition policy. Not only will this ensure that the market functions in such a way as to maximise benefits for consumers, but it also gives consumers an unparalleled opportunity to participate in the fight against violations of the competition rules see Mario Monti, Proactive Competition Policy and the Role of the Consumer, speech given on 29 April 2004, Competition Day in Dublin, speech available at: http://ec.europa.eu/comm/competition/speeches. 92 For example, in the Microsoft decision, the Commission engaged in a balancing process between Microsofts interests in protecting its investment in IPRs and the benefits (in terms of innovation) that would be derived from mandating Microsoft to give access to the information requested, see Commission decision of 24 March 2004 in Microsoft, COMP/C-3/37.792, paragraph 783. 93 Case 26/76 Metro SB-Gromrkte GmbH & Co KG v Commission [1977] ECR 1875, [1978] 2 CMLR 1, paragraph 21. 94 Guidelines on the Application of article 81(3) of the EC Treaty, supra note 76, paragraph 96 and point 3.4.3. of paragraph 102.

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products, creating sufficient value for consumers to compensate for the anti-competitive effects of the agreement, including a price increase.95 Even though the Commission recognises that qualitative efficiencies can be difficult to measure, it clearly states that [t]he availability of new and improved welfare.96 The Guidelines on the Assessment of Horizontal Mergers under the Council Regulation on the Control of Concentrations between Undertakings97 provide that the relevant benchmark in assessing efficiency claims is that consumers will not be worse off as a result of the merger98 and a part of that assessment is whether research and development, and innovation, are among the resulting efficiency gains.99 Measuring consumer harm beyond price considerations can complicate things. For example, a potential conflict can arise between price on the one hand and choice on the other. According to Lande, such a conflict can be resolved by giving priority to choice.100 The argument is that where consumers have choice they have the power to define their own wants and the ability to satisfy these wants at competitive prices, and where there is no choice there are probably neither competitive prices nor quality.101 Simply put, Lande is arguing that lower prices and better quality follow from the existence of consumer choice. This argument will be challenged in chapter six. products constitutes an important source of consumer

95 Ibid. paragraph 102. 96 Guidelines on the Application of article 81(3) of the EC Treaty, supra note 76, paragraph 104. 97 OJ [2004] C31/5 Guidelines on the Assessment of Horizontal Mergers under the Council Regulation on the Control of Concentrations between Undertakings. 98 Ibid. paragraph 79. 99 Guidelines on the Assessment of Horizontal Mergers, supra note 97, paragraph 80. 100 Robert H Lande, Consumer Choice as the Ultimate Goal of Antitrust 62 University of Pittsburgh Law Review (2001) 503. 101 Ibid.

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There is no doubt that the Commission is keen to adopt an objective of consumer welfare. The consequence of this welfare standard is that the Commission must examine the effects of a specific conduct on consumers. However, it is one thing to commit to a consumer welfare objective in theory and another to adopt such a welfare standard in practice, since it requires a close examination of the effects of the conduct. In order to examine how the Commission is engaging in an analysis of effects, the following section provides a short analysis of the Commissions decision in Microsoft102 followed by an analysis of the Wanadoo case.103 These two cases are chosen because they started when Competition Commissioner Mario Monti was responsible for competition enforcement at the Commission. As described in the beginning of this chapter, Mario Monti argued in favour of a consumer welfare approach. An analysis of the cases will reveal whether the Commission actually pursued an objective of consumer welfare.

3.3 3.3.1

Microsoft Facts of the case

The Microsoft Corporation (Microsoft) was founded in 1975. It is based in Redmond, in the state of Washington, USA. It is the worldwide leader in software, services and solutions. In August 2000, the Commission formally started an investigation against Microsoft.104 The Commissions action followed a complaint received in December 1998 by another American software company Sun

102 Microsoft, supra note 92. 103 Case T-340/03 Wanadoo Interactive SA v Commission. 104 Commission Opens Proceedings against Microsoft's Alleged Discriminatory Licensing and Refusal to Supply Software Information, press release of 3 August 2000 IP/00/906. Available at: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/00/906&format=HTML&aged=0&langu age=EN&guiLanguage=en.

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Microsystems.105 The latter alleged that Microsoft breached Article 82 by engaging in discriminatory licensing and by refusing to supply essential information on its Windows operating systems. Following the launch of the investigation, announced in August 2000, the Commission sent its first statement of objections alleging that Microsoft was abusing its dominant position in the market for personal computer operating systems (PC OS) software by leveraging its power into the market for server software. In August 2001, a subsequent statement of objections was sent to Microsoft expanding the formal proceedings to include concerns about the effects of the tying of Microsoft's Windows Media Player (WMP) with Windows 2000. In August 2003, the Commission issued an additional statement of objections, giving Microsoft a final chance to comment on the results of its investigation and to consider a package of proposed remedies.106 Microsoft and the Commission were unable to settle without a formal decision,107 so the Commission issued a formal decision on 24 March 2004.108

3.3.2

The Commissions decision

The decision found that Microsoft had infringed Article 82 by leveraging its dominant position in the PC OS market into the market for work group server operating systems and into the market for WMP. The
105 The investigation launched in August 2000 was merged with an investigation initiated by the Commission ex officio in February 2000 alleging abuse of dominance linked to Microsoft s Windows 2000 software. Commission Examines the Impact of Windows 2000 on Competition, press release of 10 February 2000 IP/00/141. Available at: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/00/141&format=HTML&aged=0&langu age=EN&guiLanguage=en. 106 Commission Gives Microsoft Last Opportunity to Comment Before Concluding its Antitrust Probe, press release of 6 August 2003 IP/03/1150. Available at: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/03/1150&format=HTML&aged=0&lang uage=EN&guiLanguage=en. 107 There have been settlements without formal decisions, see for example, Olifiat, 17th Report on Competition Policy (1987), page 77 and Digital Equipment Corporation, 27th Report on Competition Policy (1997), page 34. 108 Microsoft, supra note 92.

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Commission imposed a financial penalty of Euro 497 million and some behavioural remedies.109 It ordered Microsoft to disclose interface information to rivals110 and to offer a version of its Windows operating system without its WMP. Broadly speaking, the decision was based on five points: 1. Microsofts very large market share, which was persistently above 90 per cent in the client PC OS; 2. Microsofts refusal to supply interface information between Windows PCs and non-Microsoft work group server operating systems; 3. the link between Microsoft's interoperability advantage and the increase in its market share; 4. Microsofts ability to eliminate competition in the market for work group server operating systems; 5. Microsofts foreclosure of the market for media player software to competitors by the tying of its WMP to its Windows 2000 PC OS. In order to bring the abuses to an end and to establish clear principles for the future conduct of the company, the Commission imposed two behavioural remedies on Microsoft. First, Microsoft had to disclose complete and accurate interface information necessary to allow nonMicrosoft work group servers to achieve full interoperability with Windows PCs and servers, excluding the Windows source code.111 The Commission emphasised that the disclosed information must be updated each time Microsoft introduces new versions of its products. Interface
109 This is the highest fine ever imposed by the Commission on an individual company for breach of the Community competition rules and is over six times larger than the largest previously imposed for breach of Article 82, which was a fine of 75 million Euro on Tetra Pak in 1996 for abusive tying and predatory pricing. 110 Interface information is information about how software and hardware elements interact and such information is needed to implement compatible interfaces between software and hardware. 111 Source code refers to the "before" version of a computer programme that is compiled before it is ready to run in a computer. The source code consists of the programming statements that are created by a programmer with a text editor or a visual programming tool and then saved in a file.

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information protected by intellectual property rights in the EEA also had to be disclosed in return for reasonable remuneration.112 Second, Microsoft was required to offer a version of its Windows client PC OS without WMP to manufacturers of its PCs, although Microsoft retained its right to offer a version including WMP.113 The Commission prohibited Microsoft from offering any terms that made the unbundled version less attractive or offering discounts conditional on purchasing the combined package.

In relation to the first remedy, the Commission believed that it would enable competitors to develop rival work group server operating systems on a level playing field. In relation to the second remedy, the Commission believed that PC manufacturers would be able to put together a package of operating systems and media player software that best meets their customers needs and demands.

3.3.3

Analysis of Commissions decision

The Microsoft decision falls into two parts. The first part of the decision concerns refusal to supply interface information, recitals 547 to 791, and the second part of the decision concerns tying of WMP, recitals 793 to 993. In relation to the first part of the decision concerning the refusal to supply, the Commission decided that Microsoft was abusing its dominant position by refusing to supply Sun and other undertakings with the specifications for the protocols used by Windows work group servers in order to provide file, print and group and user administration services to Windows work group networks, and allow these undertakings to implement such specifications for the purpose of developing and distributing interoperable work group server operating system

112 Microsoft, supra note 92, article 5 of the decision. 113 Ibid. article 6 of the decision.

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products.114 In relation to the second part of the decision concerning tying of WMP with Windows, the Commission found that Microsoft infringes Article 82 of the Treaty, in particular paragraph (d) thereof, by tying Windows Media Player (WMP) with the Windows PC operating system.115 Only the second part of the decision will be subject to analysis in this section, as it illustrates the point being made, which is whether the Commission does engage in a more detailed examination of the likely effects of the tying practice. The second part of the decision is also interesting as it was argued in terms of consumer choice. Before examining the Commissions analysis of effects, the main arguments advanced by the Commission and by Microsoft will be highlighted. The Commissions analysis of tying started by outlining four

requirements necessary for tying to violate Article 82:116

Tying prohibited under Article 82 of the Treaty requires the presence of the following elements: (i) the tying and tied goods are two separate products; (ii) the undertaking concerned is dominant in the tying product market; (iii) the undertaking concerned does not give customers a choice to obtain the tying product without the tied product; and (iv) tying forecloses competition.

The Commission found that Microsofts conduct fulfilled all the conditions for tying in Article 82(2)(d).117 In relation to the first condition, Microsoft argued that WMP is an integral part of Windows and not a product distinct from Windows products. Products that are not distinct cannot be tied in a way that is contrary to Article 82.118 To support its argument, Microsoft claimed that it had tied WMP to Windows since 1992, but the
114 Microsoft, supra note 92, recital 546. 115 Ibid. recital 792. 116 Microsoft, supra note 92, recital 794. 117 Ibid. recital 795. 118 Microsoft, supra note 92, recital 800.

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fact that the Commission had not pursued the conduct before 1999 showed that the Commission accepted that WMP was an integrated part of Windows. If that argument was not accepted, then the tying of a streaming media player with the operating system was normal commercial practice.119 The Commission rejected this argument and concluded that client PC operating systems and media players are distinct products for the purposes of Community competition law.120 To support this conclusion, the Commission referred to evidence of other suppliers providing media players separately and evidence which showed a separate consumer demand for media players, distinguishable from the demand for client PC operating systems.121 The Commission argued this point by referring to the ECJs judgments in Tetra Pak II and Hilti.122 The Commission further rejected the argument that the two products were an integrated product, because it had not pursued the infringement before 1999. If such an argument was accepted, any dominant company could distort competition in adjacent markets simply by not becoming the target of enforcement action for long enough to establish a track record.123 Finally, the Commission rejected the argument that tying was normal commercial practice as other suppliers independently supplied their media players or made them removable.124 In relation to the second condition, the Commission argued that Microsoft used its dominance in the client PC OS market by tying WMP

119 Ibid. section 5.3.2.1.2.2, page 217. 120 Microsoft, supra note 92, recital 825. 121 Ibid. recitals 801-804. 122 Case C-333/94 Tetra Pak International SA v Commission [1996] ECR I-5951, [1997] 4 CMLR 662; Case C-53/92 Hilti AG v Commission [1994] ECR I-667, [1994] 4 CMLR 614. 123 Microsoft, supra note 92, recital 815. 124 Ibid. recitals 822-823.

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with Windows and by distributing Windows only together with WMP.125 The dominance part of the case will not be subject to analysis here, as it is less relevant to the point being made on effects. As to the third condition, consumer choice, the Commission argued that Microsoft did not give customers the choice of obtaining Windows without WMP. According to Microsoft, consumers did not have to pay extra for having the WMP as they got it for free.126 The Commission rejected this argument by referring to the fact that the wording of Article 82(2)(d) does not include a reference to paying. Moreover, connecting tying to a payment would limit the application of Article 82 to tying cases where customers had to buy something extra. According to the Commission, such an interpretation suggests the absence of competitive harm if customers do not have to spend money for the tied product, and that would conflate the coercion and foreclosure of competition elements of tying.127 In relation to the latter point, the Commission said:128
[T]hat the harmful effects on consumers from tying WMP (also) derive from undermining the structure of competition in media players which is liable to result in deterrence of innovation and eventual reduction in choice of competing media players. In particular, it will be shown that inasmuch as tying risks foreclosing competitors, it is immaterial that consumers are not forced to purchase or use WMP. As long as consumers automatically obtain WMP - even if for free - alternative suppliers are at a competitive disadvantage.

Harmful effect on competition relates to the fourth condition for tying. The Commission argued that Microsofts tying of WMP foreclosed competition in the market for media players.129 In dealing with foreclosure, the Commission referred to the ECJs judgment in

125 Microsoft, supra note 92, recital 799. 126 Ibid. recital 830. 127 Microsoft, supra note 92, recital 831. 128 Ibid. recitals 832-833. 129 Microsoft, supra note 92, section 5.3.2.1.4, page 220.

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Hoffmann-La Roche,130 to show that the ECJ found that the rebate scheme offered by Hoffmann-La Roche constituted an abuse even where Hoffmann-La Roche did not contractually force its customers to purchase anything extra. The Commission also referred to the CFIs judgment in Van den Bergh Foods,131 to establish that foreclosure does not have to reach the level of complete foreclosure as long as the foreclosure is not insignificant, and to CFIs judgments in Michelin II132 and British Airways133 to stress that foreclosure effects do not have to be concrete foreclosure effects.134 Microsoft contended that its conduct had negative effect on competition.135 In the Questions and Answers on the Commission Decision, the Commission alleged that it had applied a rule of reason approach to its assessment of whether WMP should be unbundled by considering whether the anti-competitive effects of the tie outweighed any possible pro-competitive benefits.136 The Commission did not employ the term rule of reason in its decision, but said in paragraph 841:
There are indeed circumstances relating to the tying of WMP which warrant a closer examination of the effects that tying has on competition in this case. While in classical tying cases, the Commission and the Courts considered the foreclosure effect for competing vendors to be demonstrated by the bundling of a separate product with the dominant product, in the case at issue, users can and do to a certain extent obtain third party media players through the Internet, sometimes for free. There are therefore indeed good reasons not to assume without further
130 Case 85/76 Hoffmann-La Roche AG v Commission [1979] ECR 461, [1979] 3 CMLR 211. 131 Case T-65/98 Van den Bergh Foods v Commission [2003] ECR II-4653. 132 Case T-203/01 Manufacture franaise des pneumatiques Michelin v Commission [2003] ECR II4071. 133 Case T-219/99 British Airways plc v Commission [2003] ECR II-5917. 134 Microsoft, supra note 92, recital 838. 135 Ibid. recital 840. 136 Microsoft Questions and Answers on Commission Decision, MEMO of 24 March 2004 MEMO/04/70. Available at: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/04/70&format=HTML&aged=0&la nguage=EN&guiLanguage=en.

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analysis that tying WMP constitutes conduct which by its very nature is liable to foreclose competition.

The Commission acknowledged that tying WMP to Windows could not automatically be assumed to foreclose competition, so a closer examination of effects was necessary. It recognised that a detailed analysis of effects required examination of whether the efficiencies arising from tying WMP to Windows outweighed any possible anticompetitive effects from tying WMP.137 This is a development compared to the approach in Tetra Pak II and Hilti, referred to above, where the Commission found an abuse where consumers were deprived of the choice of buying the tied product from other suppliers. One of the efficiencies advanced by Microsoft was the lowering of transaction costs for consumers, to reduce time and confusion by having a set of default options in a personal computer.138 The reduction of transaction costs consisted in the economies made by a tied sale of two products, which saves resources otherwise spent on maintaining a separate distribution system for the second product. The Commission rejected the possibility of distributive efficiency by stating that such costs are insignificant in software licensing.139 Another efficiency advanced by Microsoft was that WMP was an indispensable condition for simplifying the work of applications developers.140 This argument was also rejected, because the Commission claimed that Microsoft was unable to substantiate it with evidence. Ultimately, the Commission concluded that the efficiencies advanced by Microsoft could not outweigh the distortion of competition. This does not necessarily mean that the Commission does not accept any efficiencies, but it could mean that the Commission is unlikely to accept efficiency gains, where a company has

137 Microsoft, supra note 92, recital 955. 138 Ibid. recital 956. 139 Microsoft, supra note 92, recital 958. 140 Ibid. recital 962.

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a market share persistently over 90 per cent. In cases where a company approaches a near-monopoly, it is likely that the Commission is giving the process of rivalry priority over possible pro-competitive efficiency gains.141 The remedy requiring Microsoft to offer to manufacturers of PCs a version of its Windows client PC operating system without WMP raises the question of the implications of this remedy for consumers. It is unclear whether consumers would actually benefit from this remedy. It does not appear from article 6 of the decision whether consumers would have to pay more for the bundled version than for the version without WMP. If it is assumed that they have to pay a higher price for the bundled version, then consumers are potentially disadvantaged. Before the decision, consumers could get at least one media player for free the WMP. At that time, the consumers had the choice of other media players as well, but these were not free. Following the decision, consumers would have to pay to get a media player whether it was WMP or any other media player. Had consumer welfare been measured solely on the basis of price, then this remedy would harm consumers. However, as noted above, the measure of consumer harm is extended beyond price considerations. In that case, did the remedy benefit consumers if consumer welfare includes non-price considerations such as choice? Before the decision, consumers could choose to buy other media players, so they did have the choice to switch to another supplier. Perhaps they were reluctant to use their choice, as they would have to pay if they chose to install another media player than WMP, but they had the choice. If the purpose of the remedy was to avert a lack of consumer choice in the future (because all other manufacturers of media players would have left the market eventually) insofar as Microsoft continued to
141 This is also DG Competitions stance in its Discussion Paper, supra note 85, paragraph 91.

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tie its WMP to its Windows software, then that potential future lack of choice would have been the situation consumers preferred. The Commission seems to see Microsoft's conduct as effectively foreclosing consumers opportunity to make a reasoned choice in the marketplace, but it was a choice they had already made. The consumer choice in this case was a choice between purchasing Windows with WMP and Windows without WMP. If the above presumption is correct and consumers would have to pay more for the bundled version than for the version without WMP then the situation created by the Commission is more expensive for consumers. Before the Commissions decision consumers could get WMP for free. After the Commissions decision consumers would have to purchase a media player whether that being WMP or any other media player. While this may result in consumers actually considering which media player to buy instead of just using WMP out of convenience, because it is preinstalled in Windows, it is doubtful whether this is consumer welfare. If the above presumption is incorrect and consumers do not have to pay a higher price for the bundled version, then what difference does the remedy make? The only difference would be that consumers have the choice of getting Windows software without a WMP, but does that choice really matter if the price is the same? Following the decision, Microsoft said in its press release: we [Microsoft] believe that the Commission's decision would actually reduce consumer choice and hurt European software developers.142 The WMP part of the decision was argued in terms of consumer choice, which illustrates that choice is emerging as an explicit paradigm for

142 Microsoft Says Proposed Settlement Would Have Been Better For European Consumers , Microsoft press release of 24 March 2004. Available at: http://www.microsoft.com/presspass/press/2004/mar04/03-24ECRemedyPR.mspx.

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Community competition law. This raises the question whether the Commission was protecting choice to protect the welfare of consumers, or to protect the process of competition and thereby competitors?143 According to the Commission:144
Under Community competition law an undistorted competition process constitutes a value in itself as it generates efficiencies and creates a climate conducive to innovation.

If the Commission believes that protecting the process of competition is a value in itself, because it generates efficiencies, then it needs to create a framework on how to protect the process of competition to the point where it generates efficiencies without protecting competitors. As will be explained in chapter six, protecting the process of competition does not necessarily guarantee efficiencies to the benefit of consumers. Guaranteeing efficiencies requires that the process of competition is protected only to the point where it is productively and allocatively beneficial to do. On efficiencies, the Commission said that Microsoft had not submitted adequate evidence that tying WMP was objectively justified by procompetitive effects that would outweigh the distortion of competition, caused by it.145 Thus, it concluded that Microsofts tying of its WMP to its Windows 2000 PC OS was not indispensable for the developer and consumer benefits, that it artificially reduced competitors incentives to develop competing software,146 and therefore that competition in the media player market was considerably weakened.147
143 When asked whether the Commission was seeking to protect competitors, the Commissions answer was: the Commission does not look at the specific interests of individual companies, but is charged with ensuring that competition on the merits is safeguarded. This creates an environment where consumers can benefit and where innovation can flourish. MEMO/04/70, supra note 136. 144 Microsoft, supra note 92, recital 969. 145 Ibid. recital 970. 146 Microsoft, supra note 92, recital 983. 147 Ibid. recital 984.

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This is not to say that the Commission does not appreciate efficiencies that can lead to lower prices and better quality for consumers, but that the Commission found that Microsofts competitors would not be able to compete with an efficient Microsoft. As data showed the increasing importance of media player software and technology in consumer choices, the Commission was concerned that the linkage between WMP and Windows would result in the market being tipped definitively in Microsoft's favour.148 The Commission said that this would enable Microsoft to obtain control of related markets in the digital media sector. Although the Commission talked about effects and efficiencies in its decision, it is still unclear whether the legal test is harmful effects on consumers or on competitors. This may be clarified on appeal.149

148 Microsoft, supra note 92, recital 975. 149 Case T-201/04 Microsoft Corporation v Commission (judgment pending). On appeal in relation to the interoperability part of the decision, Microsoft claims that the Commission erred in finding that it infringed Article 82 by refusing to supply communications protocols to competitors and to allow the use of that proprietary technology in competing work group server operating systems. It argues that the technology which it is ordered to license is not indispensable to achieve interoperability with Microsoft PC operating systems. Moreover, that the refusal to supply the technology did not prevent the emergence of new products on a secondary market, and did not have the effect of excluding competition on a secondary market. The conditions for imposing compulsory licensing on a dominant company are not therefore met. Microsoft claims that the Commission wrongly denied that Microsoft could rely on its IPR as an objective justification for its alleged refusal to supply the technology and instead advanced a new and legally defective balancing test invoking public interest in disclosure. In relation to the media player part of the case, Microsoft argues that the Commission erred in determining that Microsoft infringed Article 82 by making the availability of its PC operating systems conditional on the simultaneous acquisition of media functionality. It claims that the Commission's decision is based on a speculative foreclosure theory, which is inconsistent with the Commission's own decision in OJ [2001] L268/28 AOL/Time Warner. Microsoft argues that Windows and its media functionality are not two separate products, see OJ [2004] C179/18.

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3.4 3.4.1

Wanadoo Facts of the case

In September 2001, the Commission launched an investigation under Article 82 into Wanadoo Interactive SAs (Wanadoo) pricing practices. On 19 December 2001, it sent a statement of objection to Wanadoo.150 On 9 August 2002, a subsequent statement of objection was sent.151 At the time, Wanadoo was a 72 per cent owned subsidiary of France Tlcom, the incumbent operator, which operated nearly all ADSL lines in France.152 No other cable operator was in a position to compress a national network comparable to France Tlcoms ADSL facilities. The Commission reached its decision on 16 July 2003.153 It adopted a decision against Wanadoo finding that it had violated Article 82 by marketing its ADSL services, known as Wanadoo ADSL and eXtense, at prices below average variable costs (AVC) from the end of 1999 to October 2002. Moreover, that Wanadoo was unable to cover its average total costs (ATC) from August 2003 onwards, as part of a plan to preempt the market in high-speed internet access during a key phase in its development. The Commission imposed a financial penalty of Euro 10.35 million.

150 High-speed Internet Access: Commission Suspects Wanadoo (France) of Abusing its Dominant Position, press release of 21 December 2001 IP/01/1899. Available at: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/01/1899&format=HTML&aged=1&lang uage=EN&guiLanguage=en. 151 Wanadoo Interactive COMP/38.233, recital 156. 152 ADSL is an abbreviation of asymmetric digital subscriber line and is the main available technology in France for the provision of high-speed internet access to residential and small office/home office customers. It allows the provision of broadband services over the traditional telephone copper pair linking local exchanges to the customers premises. 153 Wanadoo, supra note 151; High-speed Internet: the Commission Imposes a Fine on Wanadoo for Abuse of a Dominant Position, press Release of 16 July 2003 IP/03/1025. Available at: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/03/1025&format=HTML&aged=1&lang uage=EN&guiLanguage=en.

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3.4.2

The Commissions decision

The decision reiterated two possible tests for finding an abuse in the form of predatory pricing.154 The first is where AVC is not covered and the second is where AVC is covered, but the pricing forms part of a plan to eliminate competitors.155 If prices are below AVC they are assumed to be abusive whereas intention must be shown if prices are above AVC. The Commission carried out adjustments to costs and revenue so as to take account of the characteristics of a strongly growing market.156 It found that the prices charged by Wanadoo were well below AVC until August 2001.157 Hereafter the prices were approximately equivalent to AVC, but significantly still below ATC. It found that Wanadoo suffered substantial losses as a result of this practice and meanwhile France Tlcom, which at that time held a virtual monopoly in the market for wholesale ADSL services for internet service providers, was anticipating considerable profits on its own wholesale ADSL products. In addition, the Commission found intention.158 Wanadoo claimed that by selling its services below full cost, it had acted in a rational manner, with the objective of developing a new market and to reach profitability in the medium term.159 Wanadoo submitted calculations designed to prove that for each new subscriber the discounted cash flows of the services sold at a loss would be positive over a period of less than five years. However, the Commission found that even if the discounted cash-flows generated by a single subscriber were to be admitted as positive in the medium term, the ongoing
154 Wanadoo, supra note 151, recitals 81 and 256. 155 Case 62/86 AKZO Chemie BV v Commission [1994] ECR I-3439, paragraphs 71-72. 156 Wanadoo, supra note 151, recital 73ff. The AVC costs were also adjusted by spreading customer acquisition costs, see recital 81. 157 Ibid. recital 83. 158 Wanadoo, supra note 151, recital 278ff. 159 Ibid. recital 260.

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volume of acquisition costs on an expanding market were such that the whole activity might well continue for a long time to be unprofitable. The Commission did not accept that the calculations submitted by Wanadoo were a relevant tool in assessing whether the behaviour of a dominant company did or did not amount to predatory pricing. The Commission argued that the recoupment of initial losses over a certain period of time is, in the most common settings, the very objective of predatory pricing behaviour. The firm expects, after evicting or disciplining its rivals, to be in a position to increase its profit margin in order to make up for the losses incurred during the predatory pricing period.160 Demonstrating that acquiring an ADSL customer is rational, since it provides a positive deflated income over five years, simply shows that the predatory pricing strategy will pay off. Admitting Wanadoos reasoning in this respect would have led to the conclusion that in essence predatory pricing simply cannot exist. Another reason for the Commission to reject Wanadoos contention was linked to the specific facts of the case. What matters for the firm and its shareholders are not necessarily the individual net revenues produced by a single subscriber, but perhaps the overall assessment of the financial situation of the activity at stake.161 Juergen Mensching from the Commission said in a speech following the decision:162
Wanadoos predatory pricing strategy was designed to take the lions share of the market for ADSL services in France, at the expense of other competitors. The Commission intervened against
160 Wanadoo, supra note 151, recital 293. 161 Ibid. recital 334. 162 Juergen Mensching, Competition Policy: Commercial and Consumer Paybacks. The European Dimension, speech given on 30 September 1 October 2003 at the International Institute of Communications 34th annual conference, page 7, speech available at: http://ec.europa.eu/comm/competition/speeches/text/sp2003_026_en.pdf.

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these foreclosure practices even if there was a risk that final customers might suffer in the short term. However in the case, a remedy was found reduction of France Telecoms wholesale rates that benefited both Wanadoos competitors and the final customer.

On 2 October 2003, Wanadoo appealed the Commissions decision to the CFI.163 Whilst the Commissions decision did not endorse an objective of consumer welfare, it is worth examining whether the CFI supported a consumer welfare approach.

3.4.3

The CFIs judgment

On 30 January 2007, the CFI dismissed the appeal and upheld the Commissions decision.164 In upholding the decision and the fine imposed by the Commission, the CFI reaffirmed previous ECJ case law on predatory pricing. On appeal, the appellant Wanadoo advanced the following substantive arguments:165 1. the Commission used the wrong market definition and was incorrect in finding Wanadoo to be dominant; 2. in finding an abuse, the Commission applied the wrong cost recovery test and incorrectly calculated costs; 3. in concluding that Wanadoo's prices were predatory, the Commission denied Wanadoo the right to align its prices with those of its competitors; and finally 4. the Commission wrongly found a plan of predation and wrongly maintained that it was not necessary to prove recoupment of losses.

163 OJ [2003] C289/34. 164 Wanadoo, supra note 103. 165 Ibid. paragraph 72.

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In relation to the first point, the Commission's finding of dominance, the CFI observed that Wanadoo's very high market share proved, save in exceptional circumstances, that it had a dominant position, consistent with previous case law.166 From January 2001 to September 2002, Wanadoos market share rose by nearly 30 per cent to between 65-75 per cent of the market and resulted in Wanadoo having a dominant position. As regards the second point on cost recovery, Wanadoo argued that a discounted cash-flow method should be used in calculating rates of cost recovery.167 The CFI noted that the assessment represented a complex economic assessment in which the Commission must be allowed a broad discretion and the Court should limit its review to traditional judicial review grounds.168 The CFI accepted the principle in Wanadoo's argument that a discounted cash-flow method should be used in calculating rates of cost recovery, but held that this did not show a manifest error in the Commission's chosen method. On the substantive test of predation, the appeal raised three significant issues: the right to align prices with competitors (the meeting competition defence), the need to show a predatory strategy, and the relevance of recoupment of losses. In relation to the meeting competition defence, the Commission had decided that a dominant operator was not entitled to align its prices with those of a competitor, if this would result in costs not being recovered. Wanadoo argued that the Commission denied it a fundamental right to align its conduct with that of its competitors.169 The CFI did not use the terminology of a fundamental right, but used the term absolute right. It
166 Wanadoo, supra note 103, paragraph 100. 167 Ibid. paragraph 125. 168 Wanadoo, supra note 103, paragraph 129. 169 Ibid. paragraph 72.

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held that there was no absolute right to align prices,170 this conduct being impermissible where it was aimed not only at protecting the undertakings commercial interests, but also at strengthening and abusing its dominant position:171
[Wanadoo] cannot therefore rely on an absolute right to align its prices on those of its competitors in order to justify its conduct. Even if alignment of prices by a dominant undertaking on those of its competitors is not in itself abusive or objectionable, it might become so where it is aimed not only at protecting its interests but also at strengthening and abusing its dominant position.

On the need to show predatory strategy, the CFI reiterated the principles set out in Akzo, Compagnie Maritime Belge and Tetra Pak II.172 These principles are that prices below AVC are abusive in themselves, because the only interest in applying such prices can be the elimination of a competitor; that prices above AVC but below ATC are abusive if they are determined as part of a plan for eliminating a competitor; and that failure to achieve the predatory object is not sufficient to prevent the conduct from being an abuse.173 On the point of recoupment, the Commission found that Wanadoo had not covered AVC until April 2001 or ATC until October 2002. Therefore, Wanadoo was obliged, in respect of the latter period, to provide sound evidence that its conduct was not part of a strategy of pre-empting the market. Wanadoo claimed that the Commission had erred in law by maintaining that it was not necessary to prove recoupment.174 The

170 This conclusion on price alignment is not wholly out of line with the Discussion Paper, supra note 38, which suggests that a meeting competition defence would not normally be available for pricing below average avoidable cost. 171 Wanadoo, supra note 103, paragraph 187. 172 AKZO, supra note 155, paragraphs 71-72; Tetra Pak II, supra note 122; Joined Cases C-395 and 396/96P Compagnie Maritime Belge Transport v Commission [2000] ECR 1365, [2000] 4 CMLR 1076. 173 Wanadoo, supra note 103, paragraph 130. 174 Ibid. paragraph 221.

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Commission rejected the argument that it had to prove recoupment.175 This was upheld by the CFI, which recognised that the Commission was right to take the view that proof of recoupment of losses was not a precondition to making a finding of predatory pricing.176 Contrary to the legal position in the US,177 there is no recoupment requirement in relation to predatory pricing under Article 82.178 In order to justify its pricing below cost, Wandoo claimed that by charging prices below cost it would enjoy economies of scale and learning effects on account of increased production. The CFI held that the economies of scale and learning effects could not exempt Wanadoo from liability under Article 82. This is because an undertaking which charges predatory prices may enjoy economies of scale and learning effects on account of increased production precisely because of pricing below costs.179

3.4.4

Analysis of CFIs judgment

On appeal, the Commission claimed that demonstrating the specific effects of Wanadoos predatory pricing is not decisive for the purposes of finding the infringement in question. Moreover, that Article 82 must be applied where there is a risk of eliminating competition, without having to wait for the object of driving out competition to be achieved.180 This contrasts with the signal sent out by DG Competition in its Discussion Paper, according to which the Commission will adopt an approach based on the likely effects on the market when applying Article 82.181 This favours an approach to the enforcement of Article 82 based on sound
175 Wanadoo, supra note 103, paragraph 223. 176 Ibid. paragraph 228. 177 Brooke Group, supra note 44. 178 Tetra Pak, supra note 122. 179 Ibid. paragraph 217. 180 Wanadoo, supra note 103, paragraph 193. 181 Discussion Paper, supra note 38, paragraph 4.

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economic analysis of the effects of the conduct in question, including the effects on consumers. While the Discussion Paper tries to encourage a move away from the rigid rules based on the form of the conduct and the protection of competitors, this judgment represents no change in the established analysis of predatory pricing under Article 82. The CFI endorsed every aspect of the Commissions decision, especially on recoupment and meeting competition. The CFI continues to focus to a considerable extent upon the intentions of the dominant undertaking, rather than the effects of its conduct. Although the Discussion Paper does not abandon the concept of presumptions based upon the relationship between a dominant undertakings prices and costs, it does recognise the possibility that such pricing may not always have exclusionary effects. Where prices are above AVC but below ATC, emphasis is placed upon the need for objective evidence that the strategy will have foreclosure effects and the possibility of a defence based upon objective justification is accepted.182 If DG Competition's objective is to adopt an economic approach rooted in consumer welfare, then this case merely serves to demonstrate the extent to which the CFI's approach must also alter, if such a transformation in the application of Article 82 is to be successful. A mechanical application of price and cost comparisons, may lead to the paradoxical result that a company breaches Article 82, just because it did not properly anticipate the level of demand for a new product and therefore gained a dominant position in the market. Whether Article 82 ought to have a recoupment requirement is an issue which has been debated often. This thesis will not revisit this debate, but will briefly highlight some of the arguments for and against taking recoupment into consideration. As seen above, Bork argued that there was no reason to condemn predatory pricing, because offering prices
182 Ibid. paragraph 112ff.

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below cost will create losses for the predator while practising predation, but benefit the consumers.183 The predator has to raise prices again later recoup and at that point there will be room for competition.184 Article 82 condemns predatory pricing, because prices below cost can eliminate a significant number of competitors in the market, with the result that there will be no room for competition when raising price, because there are no competitors left. Arguably, in trying to recoup, a firm raises prices, which might encourage potential competitors to enter the market. However, there may be high barriers to entry or even no potential competitors. Even if there are potential competitors, they may be unwilling to enter the market if the incumbent has established a reputation for predation. In any case, according to the Discussion Paper the possibility of recoupment is assumed where dominance is proven:185
It will in general be sufficient to show the likelihood of recoupment by investigating the entry barriers to the market, the (strengthened) position of the company and foreseeable changes to the future structure of the market. As dominance is already established this normally means that entry barriers are sufficiently high to presume the possibility to recoup. The Commission does therefore not consider it is necessary to provide further separate proof of recoupment in order to find an abuse.

Neither the Commissions decision nor the CFIs judgment was about consumer welfare. While the Competition Commissioner at the time of the decision, Mario Monti, was arguing in favour of consumer welfare, the actual decision, which was upheld by the CFI, was not about the consumer welfare at all. This may not be the final outcome as France Tlcom has appealed the judgment on 16 April 2007.186

183 See section 2.1 above. 184 Giuliano Amato, Antitrust and the Bounds of Power (Hart publishing, 1997) page 21. 185 Discussion Paper, supra note 38, paragraph 122. 186 Case C-202/07P France Tlcom SA v Commission. On appeal France Tlcom claims that CFI failed to comply with its duty to provide reasons both as regards the possibility for recoupment and as regards the right to align prices with those of competitors. It infringed Article 82 by refusing Wanadoo the right, enshrined in both EC and French law, to align its prices, in good faith, with those

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4.

Efficiency Considerations under Article 82

The wording of Article 82 is silent on efficiencies and there is no secondary legislation or other legislative document embracing efficiencies under Article 82. This is not to say that efficiencies have been ignored in the analysis of Article 82, but rather that efficiency concerns have been considered less important and have not been considered an aim in themselves.187 This is probably because of the historical concern with preventing increases in industrial concentration and the possible political ramifications of conjoining economic and political power.188 However, in a system which favours consumer welfare, the question whether the effects of the particular conduct harm consumers must be assessed. Examining the impact of the effects on consumers naturally requires a consideration of efficiencies. If recognisable efficiency gains are so large that the conduct can no longer be said to harm consumers, then the Commission must be prepared to accept the conduct. In this way, the analysis of efficiencies is directly tied to the analysis of the conducts competitive effects on consumers.

of its competitors. The CFI infringed Article 82 by failing to find fault with the Commission's method for calculating cost recovery, which involved a distortion of the test of predation required by the ECJ. The method which the Commission used made it impossible to know whether the Wanadoo subscribers generated a profit or loss for that business during their subscription period. The CFI misconstrued both Article 82 and its duty to provide reasons when deciding that the costs and revenues subsequent to the period of the alleged infringement should not be taken into account. The CFI infringed Article 82 and its duty to give reasons by holding that a price may be predatory even when it is accompanied by a considerable reduction in the market share of the relevant undertaking. The CFI distorted the facts and the evidence submitted for its consideration in relation to the alleged plan of predation. The CFI infringed Article 82 in holding that proving the possibility for recoupment of losses was not a pre-requisite for finding predatory pricing and also in confusing the Commission's evidence on the possibility of recoupment of those losses with the relevant undertaking's evidence on the impossibility of recoupment of those losses. 187 Eleanor Fox, Monopolization and Dominance in the United States and the European Community: Efficiency, Opportunity, and Fairness 61 Notre Dame Law (1986) 981, page 985; Thomas Eilmansberger, How to Distinguish Good from Bad Competition under Article 82 EC: in Search of Clearer and More Coherent Standards for Anti-Competitive Abuses 42 Common Market Law Review (2005) 129, page 136. 188 As described in chapter two.

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Section four considers briefly how, and the extent to which, efficiencies should be taken into account in competition analysis under Article 82. It also questions whether efficiencies should be advanced as a defence to an abuse. It considers how to balance efficiencies against abuse given that Article 82 does not contain an exemption provision.

4.1

The structure of Article 82

Whereas Article 81 contains a framework for the assessment of possible efficiency benefits,189 Article 82 does not do so explicitly. Article 82 is not bifurcated like Article 81,190 as explained by the ECJ in Continental Can:191
Article 86 [Article 82] does not contain the same explicit provisions, but this can be explained by the fact that the system fixed there for dominant positions, unlike Article 81(3), does not recognise any exemption from the prohibition.

189 Article 81(3): The provisions of paragraph 1 may, however, be declared inapplicable in the case of: any agreement or category of agreements between undertakings, any decision or category of decisions by associations of undertakings, any concerted practice or category of concerted practices, which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. 190 If an agreement restricts competition and therefore violates Article 81(1), the undertaking must, in order to assess whether the agreement creates any efficiencies examine whether the agreement has economic benefits. The party must prove that the agreement restricting competition improves production, distribution or technical and economic progress and does not impose unnecessary conditions, and that consumers get a fair share of the benefits, and that the agreement does not eliminate competition. The notification for agreements for individual exemption was abandoned after 1 May 2004 so there is no longer any such thing as an individual exemption. The undertakings must now conduct their own self-assessment of the application of Article 81(3), see Whish, supra note 48, page 168. 191 Case 6/72 Europemballage Corpn and Continental Can Co Inc v Commission [1973] ECR 215, [1973] CMLR 199, paragraph 25.

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This was further elaborated by the CFI in Atlantic Container Line AB and others (TACA):192
[I]t must be noted at the outset that there is no exception to the principle in Community competition law prohibiting abuse of a dominant position. Unlike Article 85 of the Treaty [now Article 81], Article 86 of the Treaty [now Article 82] does not allow undertakings in a dominant position to seek to obtain exemption for their abusive practices. Furthermore, according to the caselaw, dominant undertakings have a special responsibility not to allow their conduct to impair genuine undistorted competition on the common market. Consequently, there can be no exceptions to the prohibition of abuse by dominant undertakings.

It is clear that Article 82 does not contain a statutory or a case lawdeveloped exemption provision like that of Article 81. The question is whether efficiency considerations are excluded from Article 82, simply because the provision does not contain a specific exemption provision. In other words, can there only be an efficiency defence if there is a specific exemption provision? According to Competition commissioner Neelie Kroes the answer is probably no:193
Article 82 does not expressly foresee the possibility of exempting abusive behaviour under Article 82 because of efficiencies. However, we must find a way to include efficiencies in our analysis. We must take into account that the same type of conduct can have efficiency-enhancing as well as foreclosure effects. This should be reflected in our analytical framework.

According to this policy statement, efficiencies do have a place in Article 82 even though Article 82 does not contain an exemption provision. This is not an unreasonable position to take as the notion of objective justification has made its way into the Article 82 analysis through the

192 Joined Cases T-191/98 and T-212-214/98 Atlantic Container Line AB and others v Commission (TACA), paragraph 1109. 193 Neelie Kroes, supra note 4, page 5.

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notion of abuse.194 Moreover, it would be peculiar if efficiencies were not recognised to some extent under Article 82, as efficiencies are recognised under both Article 81 and in the European Merger Control Regulation.195 While this may be a reasonable position to take, it is ultimately for the Community Courts to decide whether or not there is scope for efficiencies within Article 82. While the case law referred to above makes clear that Article 82 does not contain a case law developed exemption provision, it does not appear, in theory, to exclude the possibility of assessing efficiencies as one of the factors to be considered in the main assessment of abuse. In Irish Sugar,196 the CFI held that a dominant undertaking is allowed to protect its commercial position197 where it is based on economic efficiency and in the interest of consumers:198
[E]ven if the existence of a dominant position does not deprive an undertaking placed in that position of the right to protect its own commercial interests when they are threatened, the protection of the commercial position of an undertaking in a dominant position with the characteristics of that of the applicant at the time in question must, at the very least, in order to be lawful, be based on criteria of economic efficiency and consistent with the interests of consumers.

In British Airways,199 the CFI reiterated that economic efficiency can be taken into consideration.200 That said, the Community Courts have never
194 Case 27/76 United Brands Company v Commission [1978] ECR 207, [1978] 1 CMLR 429; Case 311/84 Centre Belger dEtudes de Marche Telemarketing v CLT and IPB [1985] ECR 3261, [1986] 2 CMLR 558, paragraphs 25-27; Case T-30/89 Hilti AG v Commission [1991] ECR I-1439, [1992] 4 CMLR 16, paragraphs 105-107; Case C-333/94 Tetra Pak International SA v Commission [1996] ECR I-5951, [1997] 4 CMLR 662, paragraph 79. 195 OJ [2004] L24/1 Council Regulation No 139/2004 on the Control of Concentrations Between Undertakings. 196 Case T-228/97 Irish Sugar plc v Commission [1999] ECR II-2969, [1999] 5 CMLR 1300. 197 If it does not interfere with the independence of a small customer, see United Brands, supra note 194, paragraphs 189-194. 198 Irish Sugar, supra note 196, paragraph 189. 199 Case T-219/99 British Airways plc v Commission [2003] ECR II-5917.

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justified an exclusionary conduct on the grounds of efficiency gains and the concept has been interpreted by the Community Courts very narrowly.201 In some cases, quantity rebates have been considered lawful where based on a genuine cost saving for the supplier.202 However, the cost saving itself reflects the efficiency gains and economies of scale made by the dominant undertaking and thus this is not considered a justification.203 Having established that there is scope for considering economic efficiencies within Article 82, the following section will consider whether it is correct to regard efficiencies as a defence before considering a possible way to balance efficiencies.

4.2

Efficiencies as a defence

DG Competitions Discussion Paper suggests including efficiencies in Article 82 as a defence.204 Although it has no legal status and is therefore not binding, it reveals DG Competitions thinking on the

200 Ibid. paragraph 280. 201 Telemarketing, supra note 194, paragraphs 25-27; Case C-418/01 IMS Health GmbH & Co OHG v NDC Health GmbH & Co KG [2002] ECR I-3401, [2002] 5 CMLR 44, paragraph 38; Hilti, supra note 194, paragraphs 105-107; Tetra Pak, supra note 194, paragraph 79; However, the Commission has justified exclusionary behaviour based on economic grounds in its decision of 26 April 1989 in Filtrona/Tabacalera, where it rejected a complaint under Article 82 based on economic grounds from a Spanish cigarette filter producer against the Spanish tobacco monopoly holder. The latter had increased its own production of cigarette filters from 44 to 100 per cent, but justified its behaviour in vertical integration on the economic grounds that producing all its filter requirements would allow it to achieve economies of scale and generally reduce its production costs. 202 Luc Gyselen, Rebates: Competition on the Merits or Exclusionary Practices? in Claus -Dieter Ehlermann and Isabela Atansiu (eds), The European Competition Law Annual 2003: What Is an Abuse of a Dominant Position? (Hart Publishing, 2006). 203 Case T-203/01 Nederlansche Banden-Industrie Michelin v Commission, paragraph 58; Case C163/99 Portuguese Republic v Commission [2001] ECR I-2613, [2002] 2 CMLR 1319, paragraphs 50-52. 204 Discussion Paper, supra note 38, section 5.5.

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issue.205 The evidential burden of proving a possible defence lies on the dominant undertaking, as stated in the Discussion Paper: [i]n relation to the efficiency defence the dominant company must be able to show that the efficiencies brought about by the conduct concerned outweigh the likely negative effects on competition resulting from the conduct and therewith the likely harm to consumers that the conduct might otherwise have.206 The use of the term defence gives rise to a procedural issue regarding the burden of proof.207 DG Competition says that it is for the dominant undertaking to prove that there will be efficiencies as a defence to its behaviour, which seems to reverse the burden of proof. Regulation 1/2003 Article 2 establishes that it should be for the authority or the party alleging an infringement of Articles 81(1) and 82 to prove the infringement and there is no legal basis for reversing the legal burden of proof. It is important to distinguish between the legal and the evidential burden of proof, as only the latter can switch between the parties whereas the legal burden of proof will always be on the party alleging an infringement. This raises the question whether defence refers to a rebuttal presumption of a first order inference from a portion of the evidence (meaning that the presumption is based on reality) that the conduct is anti-competitive, or whether it is a defence to a final conclusion. In the light of Regulation 1/2003, it is not enough that the Commission establishes a series of presumptions, and thereafter requires the dominant undertaking to disprove these presumptions, but rather the Commission must prove the alleged infringement. In order to

205 The conditions proposed in the Discussion Paper paragraph 84 are clearly modelled upon Article 81(3) although not in the same order. 206 Discussion Paper, supra note 38, paragraph 79. 207 For a general discussion of the burden of proof within the scope of Article 82 see Renato Nazzini, The Wood began to Move: An Essay on Consumer Welfare, Evidence and Burden of Proof in Article 82 31(4) European Law Review (2006) 518, page 523ff.

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clarify the issue, acting deputy director for DG Competition Emil Paulis has said:208
A defence to a violation of a statute is not only an express defence stated in the law or in the text book. Any countervailing factor such as objective justifications or efficiencies which render Article 82 inapplicable can qualify as a defence, for which the burden of proof normally has to be on the person invoking such defence. The fact that the countervailing factor has to be brought forward by the defending party does not preclude a global integrated assessment and balancing of all effects under Article 82. It does not either change the fact that the authority has the burden of proving the ultimate violation of Article 82. This means that if the defendant comes forward with sufficient evidence of facts which contradict the facts alleged by the authority or which outweigh or neutralise the negative effects identified by the authority, the authority/plaintiff either accepts this outcome or has to prove with further evidence that the evidence put up by the dominant firm is not sufficient to outweigh the negative effects shown by the authority.

Paulis acknowledges that the authority has the burden of proof, but also that it is for the party advancing efficiencies to neutralise the negative effects identified by the authority. It is assumed that the word identified means proved otherwise it is nothing more than a presumption that reverses the burden of proof. Paulis does not talk about creating a framework where efficiencies are considered a defence and thereby creating a two-stage analysis, but does refer to a global integrated assessment. This is similar to the framework for analysing objective justifications suggested by Advocate General Jacobs in his Opinion in Syfait:209
I would add that the two-stage analysis suggested by the distinction between an abuse and its objective justification is to my mind somewhat artificial. Article 82, by contrast with Article 81 EC, does not contain any explicit provision for the exemption of conduct otherwise falling within it. Indeed, the very fact that
208 Emil Paulis, The Burden of Proof in Article 82 Cases, speech give on 13 September 2006 at the Fordham Corporate Law Institute New York, page 5, speech available at: http://ec.europa.eu/comm/competition/speeches. 209 Advocate General Jacobs Opinion in Case C-53/03 Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and others v GlaxoSmithKline AEVE, delivered on 28 October 2004, paragraph 72.

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conduct is characterised as an abuse suggests that a negative conclusion has already been reached, by contrast with the more neutral terminology of prevention, restriction, or distortion of competition under Article 81 EC. In my view, it is therefore more accurate to say that certain types of conduct on the part of a dominant undertaking do not fall within the category of abuse at 210 all.

Case law has dealt with objective justifications by making them a part of the overall assessment of conduct.211 There is no reason why efficiencies should be treated any differently. Thus, where the efficiencies outweigh the conduct in question, an abuse ought not be found in the first place.212 Although DG Competition speaks of a defence, it is not as a defence to a final conclusion that conduct is anti-competitive. Rather, the defence terminology refers to the rebuttal of a first-order inference from a portion of the evidence that proves the conduct is anti-competitive and violates Article 82. It is a defence to a prima facie case, not a defence to a final conclusion. This requires that the abuse analysis, for which the legal burden of proof is on the competition authority, should be a balancing act of efficiencies.

4.3

Balancing efficiencies

If efficiencies should be considered as a part of the overall assessment of abuse, how should this be done?
210 This was also the view of Advocate General Kokott in her Opinion in British Airways, supra note 84, delivered on 23 February 2006, paragraphs 42-43, which consider an objective justification as a part of showing unlawful conduct not as a defence. 211 For example, Case T-83/91 Tetra Pak International SA v Commission [1994] ECR II-755, [1997] 4 CMLR 726; Case C-333/94 Tetra Pak International SA v Commission [1996] ECR I-5951, [1997] 4 CMLR 662; Irish Sugar, supra note 198; Portuguese Republic, supra note 203; Michelin, supra note 203; Case T-65/98 Van den Bergh Foods v Commission [1998] ECR II-2641, [1998] 5 CMLR 475; Microsoft, supra note 92; Hilti, supra note 194. Objective justifications not discussed on appeal to the ECJ Case C-53/92P Hilti AG v Commission [1994] ECR I-667, [1994] 4 CMLR 614. 212 See for example Commission decision of 26 April 1989 in Filtrona/Tabacalera, supra note 201.

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In British Airways, the ECJ tied the analysis of efficiencies directly to the analysis of the conducts competitive effects on consumers:213
It has to be determined whether the exclusionary effect arising from such a system [discount system], which is disadvantageous for competition, may be counterbalanced, or outweighed, by advantages in terms of efficiency which also benefit the consumer. If the exclusionary effect of that system bears no relation to advantages for the market and consumers, or if it goes beyond what is necessary in order to attain those advantages, that system must be regarded as an abuse.

The ECJ acknowledged that the discount that may foreclose may bring efficiencies, which is a step towards a more economics-based approach. Even though an economics-based approach naturally lends itself to a rule of reason approach to competition policy,214 the Court does not employ the language of a rule of reason and it appears that the Court is trying to adopt a similar analysis to the one adopted in Article 81. The Court requires a balance between anti-competitive effects and efficiencies, where the Commission must consider efficiencies as part of their assessment of the competitive effects of the conduct. Accordingly, if the recognisable efficiency gains are so large that the conduct can no longer be said to harm consumers, then the Commission must be prepared to accept this conduct. In this sense, efficiency gains must cleanse the conduct in order for the conduct not to be deemed anti-competitive in the first place. In this fashion, the analysis of efficiencies is directly tied to the analysis of the conducts competitive effects on consumers. Only when the Commission is convinced that the negative effects have been eliminated will it decline to prohibit the conduct. Having said that, measuring efficiency gains can be a difficult task, as Posner acknowledges:215

213 British Airways, supra note 84, paragraph 86. 214 EAGCP Report, supra note 6, page 3. 215 Posner, supra note 7, page 29.

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[I]t is very difficult to measure the efficiency consequences of a challenged practice. And so throughout this book [Antitrust Law 2001] we shall be continually be searching for ways of avoiding prohibiting efficient, albeit noncompetitive, practices without having to compare directly the gains and losses from a challenged practice.

The difficulty arises because balancing anti-competitive effects and efficiencies clearly involves a trade-off between gains in efficiency and the effects of the anti-competitive conduct. It raises the matter of incommensurability. The Commission will have to make a judgment between the effects of anti-competitive conduct, on the one hand, and gains in efficiency, which are real savings to consumers, on the other hand. These are not comparable, because one involves a redistribution of income whereas the other involves real gains in terms of the savings of resources. What is to be done about this trade-off? The Economic Advisory Group for Competition Policy, the EAGCP, admits that trade-offs involve an element of redistribution between groups of consumers. It suggests that when faced with such trade-offs, which require making a choice, the competition authority must exercise its judgment, which necessarily involves a certain element of subjectivity. The latter should however not absolve the competition authority from the requirement to be clear about the trade-offs themselves and to indicate precisely what consumer welfare effects are relevant to its decision. 216 The consequence of deciding that the main objective of Article 82 is consumer welfare is that DG Competition has decided that consumers are more deserving than producers.217 The dominant undertaking must show that the conduct in question creates efficiencies, which outweigh the negative effects on competition and that these efficiency benefits are

216 Ibid. page 10. 217 Fox, supra note 187, footnote 138.

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passed on to consumers. Passing on is needed in order to ensure that consumers are not harmed by the effects of the anti-competitive conduct and is thereby directly tied to the analysis of the conducts competitive effects on consumers. Passing on is one of the four cumulative criteria218 that DG Competition has suggested for efficiency gains to be realised:219
The Community competition rules protect competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources. This requires that the pass-on of benefits must at least compensate consumers for any actual or likely negative impact caused to them by the conduct concerned. If consumers in an affected relevant market are worse off following the exclusionary conduct, that conduct can not be justified on efficiency grounds.

Unlike Article 81(3), there is no requirement that consumers must get a fair share, but just that the efficiencies must benefit consumers. This makes it hard to know how much it takes to benefit consumers, in particular, because the Community Courts have never justified exclusionary conduct on the grounds of efficiency gains within Article 82. Getting a fair share implies that the passing on benefits must at least compensate consumers for any actual or likely negative impact caused to them by the restriction of competition found under Article 81(1).220 Although, there is no fair share requirement, it must be assumed that consumers benefits cannot be negative, meaning that they must gain more than they lose by the anti-competitive conduct.221 This is of course not much comfort given the Commission has a lot of discretion. Only time will show how the Commission will exercise its discretion in

218 The other three are that efficiencies are realised or are likely to be realised as a result of the conduct concerned; that the conduct concerned is indispensable to realise these efficiencies; and that competition in respect of a substantial part of the products concerned is not eliminated, see Discussion Paper, supra note 38, paragraph 84. 219 Discussion Paper, supra note 38, paragraph 88. 220 Guidelines on the Application of Article 81(3) of the EC Treaty, supra note 76, paragraph 85. 221 See an analogy to mergers in the Guidelines on the Assessment of Horizontal Mergers, supra note 97, paragraph 79.

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assessing the passing on criterion as well as the other criteria for assessing efficiencies under Article 82.

Conclusion
Chapter four addressed three questions. Is consumer welfare an objective in Article 82? If so, how is that welfare standard defined by the Commission? And what are the consequences of adopting a consumer welfare standard? The answer to the first question was that Community competition policy invariably has a welfare objective and it is that of consumer welfare in the form of consumer surplus. No judgment under Article 82 has clearly articulated the objective or used the terminology of consumer welfare. Before the second question, how does the Commission define consumer welfare, was answered a theoretical analysis explaining the difference between the total welfare standard and consumer welfare standard was conducted. The Chicago Schools theory of consumer welfare was used as a starting point. The chapter established that consumer welfare in the Chicagoan sense means total welfare. A theoretical examination was then conducted of the correlation between the different welfare standards proponents and of the various efficiencies. The chapter allocative found that consumer welfare consider inefficiency

unacceptable, because consumers suffer. In general, proponents of consumer welfare want more competition, which forces producers to sell close to marginal costs. It also found that proponents of the producer welfare standard are concerned with productive and dynamic efficiency, which relate to gains to producers. It concluded that the Community welfare standard is defined as consumer welfare in the form of consumer surplus, which must ensure efficient allocation of resources. This definition extends beyond price and takes non-price considerations into

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account. It found that the Community welfare standard is not measured solely in the form of price, but also in the form of higher quality, choice and innovation. The third question considered the consequences of adopting a consumer welfare standard. It concluded that one of the consequences of a system favouring consumer welfare is that the question whether the effects of the particular conduct harm consumers must be assessed. It conducted an analysis of the Commissions decision in Microsoft and the CFIs judgment in Wanadoo to examine whether the Commission and/or the CFI did examine effects. It found that the WMP part of the Microsoft case was argued in terms of consumer choice, which illustrates that choice is emerging as an explicit paradigm for Community competition law. Moreover, the Commission believes that protecting the process of competition is a value in itself, because it generates efficiencies. However, the Commission did not create a framework for how to protect the process of competition to the point where it generates efficiencies without protecting inefficient competitors. In Wanadoo, it found that the CFI continues to focus to a considerable extent upon the form of the dominants undertaking conduct, rather than the effects of its conduct. An examination of the effects on consumers naturally requires a consideration of efficiencies. The chapter found that the structure of Article 82 does not contain an exemption provision, but that that does not prevent efficiencies being considered under Article 82. The chapter questioned whether efficiency gains should be advanced as a defence to a conclusion of abuse. The chapter argued against such a methodology, as it would be an implementation of an exemption provision, and not supported by case law. Instead it concluded that efficiencies must be considered as a part of the overall assessment of abuse.

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PART III
Part III of this thesis consists of two chapters: chapter five Economic Freedom in the Community Legal Order and chapter six The Relationship between Economic Freedom & Consumer Welfare. Part III of the thesis considers the status of economic freedom in the Community legal order and the purpose of economic freedom as interpreted by the Community Courts respectively. Economic freedom is considered a fundamental right by ordoliberals. By understanding ordoliberalism and its ideology of economic freedom, one will come a great deal closer to understanding that Article 82 (at least in the past) was not about economic efficiency. This is vital for the assessment of the legitimacy of DG Competitions giving priority to the objective of consumer welfare. If economic freedom is considered a fundamental right in the ordoliberal sense in the Community legal order, then a change from economic freedom to consumer welfare would undermine a fundamental right. Besides violating a fundamental right, it would be a departure from the case law which protects economic freedom. This would require support from the Community Courts. Chapter five considers whether economic freedom is considered a fundamental right in the ordoliberal sense in the Community legal order and therefore is to be protected as a right of a higher rank.1 In contrast to chapter two which examined ordoliberalism and the ordoliberal competition law model in general, this chapter specifically analyses the status of economic freedom in Community law. It examines whether the EC Treaty is based on the ordoliberal economic constitution as described in chapter two. If the EC Treaty is based on the ordoliberal economic
1 Jason Coppel and Aidan ONeill, The European Court of Justice: taking Rights Seriously? 29 Common Market Law Review (1992) 669, page 682.

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constitution where economic freedom has status as a fundamental right, it becomes difficult to argue that economic freedom should not have a similar status at Community level. Chapter five shows that fundamental rights form part of the general principles of the EU and examines whether economic freedom is considered a part of those general principles. This is done by considering the European Convention on Human Rights (the ECHR)2 and the Charter of Fundamental Rights of the European Union (the Charter)3 and the German constitution. Case law is considered where relevant. Chapter six considers whether economic freedom is used to enhance consumer welfare by explaining how economic freedom is perceived by ordoliberal theorists. Their understanding of the objective of economic freedom is then compared with the objective of consumer welfare. Chapter six examines whether the two objectives overlap and finds that there is a certain overlap when it comes to choice. Choice can improve the competitive process, but the question is whether the competitive process is to be protected intrinsically or instrumentally.

2 The European Convention for the Protection of Human Rights and Fundamental Freedoms, signed in Rome on 4 November 1950 and enforced in 1953. It is legally binding for the European Court of Human Rights. Available at: http://conventions.coe.int/treaty/en/Treaties/Html/005.htm. 3 The Charter of Fundamental Rights of the European Union, 2000/C 364/01. Available at: http://www.europarl.europa.eu/charter/pdf/text_en.pdf.

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Chapter 5 Economic Freedom in the Community Legal Order Introduction

The argument advanced in chapter five is that if economic freedom is considered a fundamental right in the Community legal order, then a change from economic freedom to consumer welfare would undermine a fundamental right and be a violation of the Community legal order. Consumer welfare is a utilitarian rule so the scenario is not that DG Competition is giving priority to one fundamental right over another fundamental right in the normative hierarchy of laws. If economic freedom has status as a fundamental right in the Community legal order, then DG Competitions suggestion of adopting consumer welfare as the main objective when assessing exclusionary abuses under Article 82 is a change from a fundamental rights-based approach to a utilitarian approach. This would have to be properly debated and require support from the Community Courts, as it would be a constitutional change. Even if a constitutional change would be acceptable, meaning that such a change would be possible from a Community perspective, it would have to be recognised as such.

The case law analysis carried out in chapter three showed that original case law doctrines about abuse of dominance rested on the concept of distortion of competition, from Article 3(1)(g) EC. Thus, the acquisition of a competitor could be a prohibited abuse because the dominant position distorted the market structure.1 A refusal to supply a competitor might be treated as adversely affecting the structure of the market by

1 Case 6/72 Europemballage Corpn and Continental Can Co Inc v Commission [1973] ECR 215, [1973] CMLR 199.

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destroying the competitors capacity to compete effectively.2 The United Brands case focuses on how the dominant firms strategies limited the independence of a smaller business, implying that coercion could demonstrate abuse regardless of the actual effect on the competitive process.3 It condemned restraints that limit markets to the prejudice of consumers. The Hoffmann-La Roche4 and Michelin I5 cases banned fidelity rebates that pressurised firms into dealing with a dominant firm unless there was economic equivalency in the transactions and there was no significant effect on the structure of competition. The approach implied by the ECJ concerned preserving the positions and economic freedom of customers and competitors. Despite this, DG Competition states in its Discussion Paper:6
With regard to exclusionary abuses the objective of Article 82 is the protection of competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources.

This policy statement indicates that DG Competition believes that competition is best protected by protecting consumer welfare and by ensuring an efficient allocation of resources in terms of Article 82. As noted, this runs counter to some of the case law analysed, which saw competition best protected by protecting the process of competition in order to protect the economic freedom of the market participants. This one-dimensional view focusing on maximising economic efficiency arguably excludes a focus on, for example, the non-efficiency objective
2 Case 6-7/73 Istituto Chemioterapico Italiano SpA and Commercial Solvents Corporation v Commission of the European Communities [1974] ECR 223, [1974] 1 CMLR 309. 3 Case 27/76 United Brands Company v Commission [1978] ECR 207, [1978] 1 CMLR 429. 4 Case 85/76 Hoffmann-La Roche AG v Commission [1979] ECR 461, [1979] 3 CMLR 211. 5 Case 322/81 Nederlansche Banden-Industrie Michelin NV v Commission [1983] ECR 3461, [1985] 1 CMLR 282. 6 Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses (December 2005), paragraph 4.

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of economic freedom, unless the latter has an impact on consumer welfare. Consumer welfare takes a neo-classical position which values welfare without any consideration of the position of individuals in its utilitarian calculus.7 According to this utilitarian majoritarian value, safeguarding economic freedom is not a relevant consideration.8 Instead, the test of legality is whether the effects of the undertakings behaviour contribute to improving consumer welfare. This is contrary to the ordoliberals understanding of competition law. Ordoliberals believed that competition was best protected by protecting economic freedom in the market as a fundamental individual right. Ordoliberalism cannot be disregarded, as it has had an impact on the Community institutions interpretation and application of Article 82 as argued in chapter three.9 It can be seen from chapter two and chapter four that economic freedom and consumer welfare pursue fundamentally different values. A potential and serious conflict can arise between the two objectives where the protection of effective competition amongst competitors does not benefit allocative efficiency (the type of efficiency that DG Competition is suggesting should be pursued), or where conduct benefiting consumer
7 Wernhard Mschel, Competition Policy from an Ordo Point of View in Hans Willgerodt & Alan Peacock (eds), German Neo-liberals and the Social Market Economy (Macmillan, 1989) pages 148149. 8 The rule of utility is that good is whatever brings the greatest happiness to the greatest number of people. Since utilitarians judge all actions by their ability to maximise good consequences, any harm to one individual can always be justified by a greater gain to other individuals. This is true even if the loss for the one individual is large and the gain for the others is marginal, as long as enough individuals receive the small benefit. Some critics reject utilitarianism on the basis that it seems to be incompatible with human rights. For example, if slavery or torture is beneficial for the population as a whole, it could theoretically be justified by utilitarianism. Utilitarian theory thus seems to overlook the rights of the individual, see Jeremy Waldron, Rights in Robert E Goodin and Philip Pettit (eds), A Companion to Contemporary Political Philosophy (Blackwell Publishing, 1995) page 581. 9 This has also been argued elsewhere. See for example Liza Lovdahl Gormsen, Article 82 EC: where are We Coming From and Where are We Going To? 2 (2) Competition Law Review (2005); Christian Ahlborn and Carsten Grave, Walter Eucken and Ordoliberalism: an Introduction from a Consumer Welfare Perspective 2(2) Competition Policy International (2006).

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welfare

does

not protect

the

economic

freedom

of

the

market

participants. For example, the exclusion of some small and mediumsized companies, which lack economies of scale and thus will be unlikely to guarantee consumer welfare, would not harm consumer welfare. However, it could harm the economic freedom of small and mediumsized companies, which must be protected if the aim is to protect the process of competition in the long-run. The conflict becomes even more serious if economic freedom is a fundamental right, as argued by ordoliberals, and not merely a legal concept used to assess whether the conduct in question reduces allocative efficiency. It is therefore important to understand why economic freedom is pursued. Is it for example to protect a fundamental right in the ordoliberal sense or is it to enhance consumer welfare in form of allocative efficiency?

1.

The Constitutionality of the EC Treaty

Section one examines whether the EC Treaty has constitutional status and that naturally leads to considering what kind of constitution it is. 10 The section does not seek to engage in a significant constitutional debate, however interesting. Instead, it hopes to provide some basic answers useful for the wider debate about the status of economic freedom in the Community legal order. Before assessing the status of economic freedom, it is necessary to narrow down the focus from the Community legal order generally to some key elements characterising a constitution. This is needed as it cannot automatically be assumed that the EC Treaty has constitutional status, because the Community is
10 The term constitution has always been politically sensitive due to its connotations of potential federal statehood. Inherent in the German Maastricht decision was the premise that the basic documents of the Community remain international treaties of which the Member States are the masters. This reflects the deeply entrenched understanding within the mindset of national constitutional law that the notion of a constitution is inherently bound to the nation-state, which renders inappropriate its use in the context of the Community. See Anneli Albi and Peter Van Elsuwege, The EU Constitution, National Constitutions and Sovereignty: an Assessment of a European Constitutional Order 29 European Law Review (2004) 741.

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neither a federal state nor similar to one.11 It has no independent sovereignty and is not self-sufficient but complements the Member States.12 The Community is a supranational13 organisation authorised by the Member States and it gains its legitimacy by validation ratification by its Member States rather than by its people.14 However, there is some debate as to whether the Community is an international agreement or a federal type of organisation.15 The Community has a supreme legal order, which binds the Member States in relation to EC law, and subjects them to the jurisdiction of a supranational authority (the ECJ) should the Member States not fulfil their obligations under the Treaty. This is different from the traditional format of international agreements based on the consent of sovereign actors, characterised as intergovernmental co-operation.16 Some policy sectors however remain intergovernmental in nature; they are non-binding areas of political cooperation.17 There has not been a simple progression from an international collaboration of Member States to a supranational entity and the so-called variable geometry has to some extent always been present.18 The state of integration of different actors, institutions and

11 Hjalte Rasmussen, EU-Ret i Kontekst (GadJura, 3rd ed, 1998) page 365ff. 12 Edward T Swaine, Subsidiarity and Self-Interest: Federalism at the European Court of Justice 41 Harvard International Law Journal (2000) 1, page 10. 13 Supranational means government above, or beyond, the state level of government where states do not wield individual vetoes. 14 Joseph Weiler, The Transformation of Europe 100 Yale Law Journal (1991) 2403, pages 2423 and 2433. 15 There have been numerous attempts to understand and explain the constitutional reflection of the Community stretching from a functionalist perspective, to neo-functionalism and the intergovernmental/supranational dichotomy, to contemporary debates about the multi-level governance, see Paul Craig and Grinne De Brca, EU Law Text, Cases and Materials (Oxford University Press, 3rd ed, 2003) pages 5-12. See generally Weiler, supra note 14. 16 Intergovernmental means international co-operation based solely on the consent of each state involved. 17 Mainly found in the second pillar comprising the common foreign and security policy (CFSP) and the European security and defence policy (ESDP). 18 The phrase variable geometry relates to the opt-in or opt-out policy sectors contained in the Treaties allowing some Member States to co-operate without all Member States agreeing to new

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policy sectors has been, and continues to be, variable.19 This debate will not be elaborated further here, instead this chapter takes the view that the Community is a unique system sui generis and has no model as such to be compared with. EC law does have important elements which are to be found in a constitution defined in the broader sense as, the basic principles and laws of a nation, state, or social group that determine the powers and duties of the government and guarantee certain rights to the people.20 For example, the Community has exclusive competence in a wide range of matters and the EU institutions do have functions comparable to those of a government.21 The EU institutions are limited by the rule of law, which is a basic idea of constitutionalism. Moreover, the ECJ has helped to constitutionalise the Community by establishing the supremacy of EC law in fundamental cases such as Costa v ENEL,22 Simmenthal23 and Factortame.24 The ECJ has also established the direct effect of Community law in Van Gend en Loos.25 Both the doctrine of supremacy and that of direct effect are keystones of European constitutionality.26

policy initiatives. See John A Usher, Variable Geometry or Concentric Circles: patterns for the EU 46 International and Comparative Law Quarterly (1997) 243. 19 Joseph Weiler, The Community System: the Dual Character of Supranationalism in Yearbook of European Law (Oxford University Press, 1981). 20 David M Walker, The Oxford Companion to Law (Clarendon Press, 1980). 21 Sionaidh Douglas-Scott, Constitutional Law of the European Union (Longman, 2002) page 516. 22 Case 6/64 Costa Flaminio v ENEL [1964] ECR 585, [1964] CMLR 425. 23 Case 106/77 Amministrazione delle Finanze dello Stato v Simmenthal SpA [1978] ECR 629, [1978] 3 CMLR 263. 24 Case C-213/89 R v Secretary of State for Transport, ex Parte Factortame Ltd [1990] ECR I-2433, [1990] 3 CMLR 1. 25 Case 26/62 Van Gend en Loos v Administratie der Belastingen [1963] ECR 1. 26 Douglas-Scott, supra note 21, page 517; Joerges disagrees, he thinks it is insufficient to point to direct effect and supremacy as core elements of EC law to characterise the system as constitutional, see Christian Joerges, What is Left of the European Economic Constitution? EUI Working Paper Law No 2004/13 (2004) page 9. This paper is also published in a shorter version in 30(4) European Law Review (2005) 461.

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Another step in its constitutionality has been the adoption of the Charter, albeit legally non-binding.27 However, Eeckhout argues:28
[T]here can be little doubt that counsel for parties involved in litigation with a human rights dimension before the European Courts will try to find support for their case in the text of the Charter. They will not argue that the Charter applies as such, but they will refer to it in support of their arguments. Although the Charter is not legally binding the courts can use it as confirmation of rather than the legal basis of their rulings on fundamental rights issues. And it is well-known that courts are very able at playing with those notions; in other words it is relatively easy for courts to characterise an element of law as mere confirmation of the courts reasoning whereas that element was effectively the basis for the Courts decision.

The CFI frequently refers to the Charter, but until now the ECJ has only done so once in the family reunification case.29

27 The Charter of Fundamental Rights of the European Union, 2000/C 364/01 will have the same legal value as the Treaties, see the Presidency Conclusions of the Brussels European Council, Annex I page 25. European Council Document No 11177/07 of 21-22 June 2007. Available at: http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/94932.pdf. 28 Piet Eeckhout, The Proposed EU Charter: some Reflections on its Effects in the Legal Systems of the EU and of its Member States in Kim Feus (ed), The EU Charter of Fundamental Rights (London: Federal Trust for Education and Research, 2000) pages 104-105. 29 Case C-540/03 European Parliament v Council of the European Union [2006] ECR I-5769. According to the European Parliament, the Council adopted Council Directive 2003/86/EC of 22 September 2003 on the Right to Family Reunification without consulting the Parliament, thereby infringing this essentially procedural requirement. The European Parliament was not given the opportunity to examine the new version of the Directive or to present its comments and observations. This was the first instance in which the judicial procedure specified in Article 230 was going to be used to deal with human rights issues. Of relevance to the question discussed in this chapter, the ECJ held in paragraph 38: the Charter was solemnly proclaimed by the Parliament, the Council and the Commission in Nice on 7 December 2000. While the Charter is not a legally binding instrument, the Community legislature did, however, acknowledge its importance by stating, in the second recital in the preamble to the Directive, that the Directive observes the principles recognised not only by Article 8 of the ECHR but also in the Charter. Furthermore, the principal aim of the Charter, as is apparent from its preamble, is to reaffirm rights as they result, in particular, from the constitutional traditions and international obligations common to the Member States, the Treaty on European Union, the Community Treaties, the [ECHR], the Social Charters adopted by the Community and by the Council of Europe and the case-law of the Court and of the European Court of Human Rights.

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Returning to the discussion of the constitutionality of the EC Treaty, Cruz argues that the EC Treaty is not a constitution in the normal sense,30 even though he adds that the rules on free movement and the rules on competition have constitutional status.31 The EC Treaty is not a constitution in the normal sense because the constitutionalisation of the EC Treaty derived from the ECJs development of the doctrines of supremacy and direct effect.32 Moreover, the Court has adopted a wide interpretation of the four freedoms, including the exemption provision Article 30 (formerly Article 36).33 Cruz defends his position by arguing that the rules on free movement and the rules on competition are ensured through directly applicable treaty provisions, while the other objectives outlined in Article 3 are announced in the EC Treaty by provisions conferring competence on EU institutions through secondary legislation.34 Even if the EC Treaty is not a constitution in the traditional sense, it is generally accepted that the EC Treaty, as interpreted by the Community Courts, forms the constitution of the EU.35 This is also supported by the ECJ in the Les Verts case, where the ECJ called the EC

30 The ECJ has called the EC Treaty the constitutional charter of a community based on the rule of law, see Ernst-Joachim Mestmcker, Can there be a European law? 2 European Review (1994) 1, page 6. 31 Julio Baquero Cruz, Between Competition and Free Movement, the Economic Constitutional Law of the European Community (Hart, 2002) page 79. 32 Mestmcker argues that the four freedoms and the rules of competition would not have been incorporated in the EC Treaty by Member States had they foreseen the pervasive effects these rules, as interpreted by the ECJ, were going to have on the political and economic order of Member States, see Ernst-Joachim Mestmcker, The EC Commissions Modernization of Competition Policy: a Challenge to the Communitys Constitutional Order 1 European Business Organization Law Review (2000) 401, pages 413-414. 33 Cruz, supra note 31, page 40. 34 Ibid. page 78. 35 Joseph Weiler, The Reformation of European Constitutionalism 35(1) Journal of Common Market Studies (1997) 97; Christian Joerges, The Law in the Process of Constitutionalising Europe EUI Working Paper Law No 2002/4 (2002) page 9; Theodor Schilling, The Autonomy of the Community Legal Order: an Analysis of Possible Foundations 37 Harvard International Law Journal [1996] 389, page 392.

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Treaty the basic constitutional charter of the Community.36 If it is accepted that the EC Treaty is a constitution, then what kind of constitution is it? Is it a constitution based on the ordoliberal economic constitution where competition law is the key part of that order?

1.1

The ordoliberal economic constitution

The answer to this question is necessary for the overall discussion of the status of economic freedom in the Community legal order. If the Community legal order is based upon an ordoliberal economic constitution, competition is considered a value in its own right. This goes beyond considerations of efficiency, as the economic constitution serves to guarantee equality of individuals as economic subjects, private law is backed up by public authority, and civil liberties must be protected.37 A core element of the ordoliberal constitutional message was that the economic constitution should respect the interdependence of a system of undistorted competition, individual economic freedoms and the rule of law. It should protect these principles and rights against discretionary politics.38 Another implication of the EC Treaty being an ordoliberal economic constitution is that elaborating any policy outside the parameters of the economic constitution, for example consumer welfare, is considered illegitimate.39 Before continuing, it is important to distinguish between, on the one hand a Treaty being considered an economic constitution in general,40
36 Case 294/83 Parti cologiste Les Verts v European Parliament [1986] ECR 1339, paragraph 23. 37 Wolf Sauter, Competition Law and Industrial Policy in the EU (Clarendon Press Oxford, 2003) page 28. 38 According to Joerges, supra note 26, page 13. 39 Ulrich Immenga, Wettbewerbspolitik contra Industriepolitik nach Maastricht 14 Europaische Zeitschrift fur Wirtschaftsrecht (1994). 40 For a definition of the term economic constitution see Manfred E Streit, The Economic Constitution of the European Community: from Rome to Maastricht 1(1) European Law Journal (1995) 5, pages 5-7.

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because it consists of rules dealing with economic matters,41 and, on the other hand a Treaty being considered an economic constitution founded on the ordoliberal tradition. According to Gerber, the interpretation of the EC Treaty as a constitution has channelled the evolution of the Community and this interpretation undoubtedly owes much to ordoliberal thought.42 Sauter agrees that ordoliberals have made a major contribution to the constitutional theory of the EU.43 Mestmcker goes further and argues that the Community legal order is founded on the ordoliberal economic constitution, because competition is the guiding principle of the economic constitution of the Community.44 Despite this, only a few lawyers outside Germany have systematically used the concept of economic constitution.45 Also a majority of scholars of constitutional law and administrative law in Germany have not taken the ordoliberal constitutionalisation of the economy seriously.46 Important in the debate about the economic constitution is the fact that the German Federal Constitutional Court (Bundesverfassungsgericht) has denied economic liberalism constitutional status in Germany.47 The German Federal Constitutional Court is not the only body to reject the concept of the economic constitution, others have rejected it too.48
41 Cruz, supra note 31, page 29. 42 David Gerber, Law and Competition in Twentieth Century Europe: Protecting Prometheus (Clarendon Press Oxford, 1998) page 264, footnote 106. 43 Sauter, supra note 37, page 49. 44 Ernst-Joachim Mestmcker, Sur Anwendung der Wettbewerbsregeln auf die Mitgliedstaaten und auf die Europaischen Gemeinschaft in Jurgen F Baur, Peter-Christian Muller-Graff and Manfred Zuleeg (eds), Europarecht, Energierecht, Wirtschaftsrecht: Festschrift fur Bodo Borner sum 70. Geburstag (Koln: Carl Heymanns Verlag, 1992). 45 Sauter, supra note 37, page 30; Joerges, supra note 35, page 6. 46 Joerges, supra note 35, page 13. 47 Wolf Sauter, The Economic Constitution of the European Union 4 Columbia Journal of European Law (1998) 27, pages 48-49. 48 Cruz, supra note 31, page 28.

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Some even argue there is not much left of the economic constitution anyway whether it was ordoliberal or not.49 This, in conjunction with the ECJs dictum in Van Gend en Loos that the Community constitutes a new legal order,50 makes it unlikely that the EC Treaty is based on the ordoliberal economic constitution. This conclusion however does not deny the considerable influence of ordoliberalism. If the finding had been that the Community legal order was based on the ordoliberal economic constitution, it would have been safe to argue that economic freedom in the Community is a fundamental right in the ordoliberal sense. The fact that the Community legal order is not based on the ordoliberal economic constitution necessarily prompts the question whether that excludes economic freedom from having status as a fundamental right in the Community legal order. The answer is in the negative. Regardless of its constitutional deficit, if economic freedom is being considered a fundamental right in Germany and respected by the German Federal Constitutional Court as a fundamental right, then it could possibly be a fundamental right in the Community legal order too. Such an argument was advanced by Advocate General Warner in his Opinion
51

in

Socit

IRCA

Amministrazione delle Finanze dello Stato:

[A] fundamental right recognised and protected by the Constitution of any Member State must be recognised and protected also in the Community. The reason lies in the fact that, as has often been held by the Court Community law owes its very existence to a partial transfer of sovereignty by each of the Member States to the Community. No Member State can be hel d to have included in that transfer of power for the Community to legislate in infringement of rights protected by its own Constitution. To hold otherwise would involve attributing to a Member State the capacity,
49 Joerges, supra note 26, page 8. 50 Van Gend en Loos, supra note 25, II B. 51 Opinion of Advocate General Warner in Case 7/76 Socit IRCA (Industria romana carni e affini SpA) v Amministrazione delle Finanze dello Stato, delivered on 22 June 1976, page 1237.

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when ratifying the Treaty, the power to flout its own Constitution, which seems to me impossible.

If Advocate General Warners thesis is accepted,52 then that allows economic freedom to be protected in the Community legal order if the German constitution (Grundgesezt) protects it. Before analysing the German constitution, it will be considered whether economic freedom is protected in the ECHR or the Charter, as a discussion of the German constitution only becomes necessary insofar as economic freedom is not already protected by either the ECHR or the Charter. This will be discussed in the following section.

2.

The General Principles of the EU

The original EC Treaty did not contain any explicit reference to basic fundamental rights and values,53 but around 1969, the ECJ recognised that it too might have to protect fundamental rights.54 In the absence of any treaty provisions, it was prepared to resort to general principles of

52 Hartley argues that the Community Courts have never accepted this thesis, see Trevor C Hartley, European Union Law in a Global Context: Text, Cases and Materials (Cambridge University Press, 2004) page 299. 53 The Treaty of Amsterdam has strengthened the constitutional basis for the protection of fundamental rights by the Union itself. Article 46 (formerly Article L) TEU has extended the exercise of the Court's powers to Article 6 (formerly Article F) (2) of that Treaty with regard to action of the institutions, in so far as the Court has jurisdiction under the Treaties establishing the European Communities and under this Treaty. Article 6(2) provides that the Union shall respect fundamental rights, as guaranteed by the European Convention for the Protection of Human Rights and Fundamental Freedoms signed in Rome on 4 November 1950 and as they result from the constitutional traditions common to the Member States, as general principles of Community law. 54 One commentator has said: the European Court of Justice deserves immense credit f or pioneering the protection of fundamental human rights within the legal order of the Community when the Treaties themselves were silent on this matter. It has been the Court that has put in place the fundamental principles of respect for human rights which underlie all subsequent developments, see The European Union and Human Rights: Final Project Report on an Agenda for the Year 2000, cited by Anthony Arnull, The European Union and its Court of Justice (Oxford University Press, 1999) page 223.

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law.55 The general principles include, but are not limited to, human rights principles.56 The Stauder case57 affirmed that fundamental rights form an integrated part of the general principles of Community law.58 The case was an Article 234 reference from Germany. It concerned a claim that the implementation of a provision of Community legislation constituted an infringement of the applicants right to dignity. The ECJ was able to provide an interpretation which resolved the difficulty, and for the first time recognised the issue of fundamental rights if only in a significant obiter dictum:59
Interpreted in this way the provision at issue contains nothing capable of prejudicing the fundamental human rights enshrined in the general principles of Community law and protected by the Court.

Having established that fundamental rights were a part of the general principles of Community law, the ECJ decided that for this purpose it would draw inspiration from the Member States constitutional traditions.

55 Advocate General Jacobs has said: confusion can be caused here by the concept of "general principles of law". Different general principles may have different functions, they may have different effects, and they may differ in their scope. While the ECJ made a great advance years ago by including the protection of fundamental rights within the scope of general principles of law, and thus ensuring such protection in the absence of any Treaty provisions, the time may now have come to recognise the very diverse character and scope of the different general principles, see Francis G Jacobs, Human Rights in the European Union: the Role of the Court of Justice 26(4) European Competition Law Review (2001) 331, page 337. 56 The most established general principles are those that protect fundamental (human) rights, legal certainty, including the concept of legitimate expectations, proportionality, and equality in the form of non-discrimination, but also administrative principles such as the right to a fair hearing and transparency are part of the general principles. 57 Case 29/69 Stauder v City of Ulm [1969] ECR 419, paragraph 7. 58 For a discussion of the evolution of the general principles of EU law, see Trevor C Hartley, The Foundations of European Community Law (Oxford University Press, 5th ed, 2003) and Craig and De Brca, supra note 15. 59 Stauder, supra note 57, paragraph 7.

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That said, the ECJ made clear that those traditions would be considered within the framework of the Community structure and objectives:60
Recourse to the legal rules or concepts of national law in order to judge the validity of measures adopted by the institutions of the community would have an adverse effect on the uniformity and efficacy of community law. The validity of such measures can only be judged in the light of Community law. In fact, the law stemming from the Treaty, an independent source of law, cannot because of its very nature be overridden by rules of national law, however framed, without being deprived of its character as community law and without the legal basis of the community itself being called in question. Therefore the validity of a community measure or its effect within a member state cannot be affected by allegations that it runs counter to either fundamental rights as formulated by the constitution of that state or the principles of a national constitutional structure. [R]espect for fundamental rights forms an integral part of the general principles of law protected by the Court of Justice. The protection of such rights, whilst inspired by the constitutional traditions common to the Member States, must be ensured within the framework of the structure and objectives of the Community. It must therefore be ascertained, in the light of the doubts expressed by the Verwaltungsgericht, whether the system of deposits has infringed rights of a fundamental nature, respect for which must be ensured in the Community legal system.

This was too much for the German Federal Constitutional Court, which in 1974 introduced a restriction on the effectiveness of Community law on German soil in the so-called Solange I case.61 The Court held that as long as integration within the Community had not resulted in a catalogue of fundamental rights approved by a parliament, set in force and adequate to the catalogue of fundamental rights of the German constitution, a German court had to refuse the application of a relevant Community provision in case of a collision with the fundamental rights

60 Case 11/70 Internationale Handelsgesellschaft mbH v Einfuhr- und Vorratsstelle fr Getreide und Futtermittel [1970] ECR 1125, paragraphs 3-4. 61 Judgment of 29 May 1974, 37 BVerfGE 271 Solange I (1974). An English comment on the case can be found at: http://www.ucl.ac.uk/laws/global_law/german-cases/cases_bverg.shtml/29may1974.

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protected by the German constitution.62 The decision was severely criticised.63 The main argument against the decision was that a national court might needlessly jeopardise the uniform application of Community law in the Member States.64 Some years later, the German Federal Constitutional Court revised its position in the Solange II case.65 Ordoliberals would have supported the position taken in Solange I, as they believed that fundamental rights and competition impose strict constitutional constraints on Community policy,66 meaning that Community policy cannot infringe fundamental rights and competition, which enjoy national constitutional protection. One may wonder why the German Federal Constitutional Court in Solange I felt the need to object. The ECJ had already developed guarantees at EU level equivalent to those of German constitutional law, and had especially safeguarded fundamental rights so that protection at state level was no longer necessary.67 Moreover, the ECJ acknowledged in Nold Kohlen68 that fundamental rights, which are protected in the different Member States constitutions, must be safeguarded by ending measures incompatible with those fundamental rights:69

62 For a detailed discussion of the case see Manfred Zuleeg, The European Constitution under Constitutional Constraints: the German Scenario 22(1) European Law Review (1997) 19, pages 2425. 63 Jochen Frowein, Europaisches Gemeinschaftsrecht und Grundgesetz in Christian Starck (ed), Bundesverfassungsgericht und Grundgesetz (Paul Siebeck, 1976) pages 188, 205 and 213. 64 Craig and De Brca, supra note 15, page 291. 65 Judgment of 22 October 1986, 73 BVerfGE 339 Solange II (1986). That case stated that as long as the EU, and especially ECJ case law, guarantee an effective protection of fundamental rights against the power of the EU in general, and this protection is in its essential parts equivalent to the fundamental rights of the German Constitution, the Federal Constitutional Court would no longer review the acts of the EU institutions using the fundamental rights of the Constitution as a measure. 66 Sauter, supra note 37, pages 43-44. 67 Internationale Handelsgesellschaft, supra note 60, page 1135. 68 Case 4/73 Nold Kohlen v Commission [1974] ECR 491, [1974] 2 CMLR 338. 69 Ibid. paragraph 13.

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As the Court has already stated, fundamental rights form an integrated part of the general principles of law, the observance of which it ensures. In safeguarding these rights, the Court is bound to draw inspiration from constitutional traditions common to the Member States, and it cannot therefore uphold measures which are incompatible with fundamental rights recognised and protected by the constitutions of those states.

Having concluded that Community legislation must respect fundamental rights, the Court went on to limit the scope of fundamental rights to property rights. It held that fundamental rights must be subject to limitations laid down in accordance with the public interest.70 Unlike the general principles of EU law, which are regarded as a primary source of law, the common constitutional traditions of the Member States and the international treaties for the protection of human rights, to which the ECJ resorts as sources of inspiration, do not constitute a primary source of law in the Community legal order. They are mere sources of recognition of law,71 which offer inspiration and guidance and can help to ascertain the fundamental rights of the Community legal order. The Communitys protection of fundamental rights is, nevertheless, autonomous in the sense that its interpretation has to be consistent with the framework of the structure and objectives of the Community.72

2.1

Economic freedom as part of the general principles of the EU The above section outlined how fundamental rights became a part of the general principles of the Community legal order. It is now appropriate to
70 Nold Kohlen, supra note 68, paragraph 14. 71 Manfred Dauses, The protection of Fundamental Rights in the Community Legal Order 10 European Law Review (1985) 398, page 411. 72 Takis Tridimas, The General Principles of EC Law (New York: Oxford University Press, 1999) page 4.

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consider in more detail whether economic freedom forms part of the general principles of the Community legal order. This is to provide an illustration of the type of right present in order to compare it with consumer welfare in chapter six. The fundamental rights of EC law are not restricted to those contained in the ECHR,73 but the ECHR is a significant source:
[F]undamental rights form an integral part of the general principles of Community law whose observance it ensures. For that purpose, the Court draws inspiration from the constitutional traditions common to the Member States and from the guidelines supplied by international treaties for the protection of human rights on which the Member States have collaborated or of which they are signatories. The ECHR has special significance in that respect.74

In addition to the ECHR, the Charter provides a convenient point of reference to identify what rights are fundamental, although they are not legally binding.75 As noted above, the ECHR acts as a source of inspiration for the ECJ,76 when deciding what fundamental rights are protected as part of the general principles of Community law. An example is the Hauer case,77 where the ECJ specifically referred to the EHCR.78 The case regarded a Council regulation, which prohibited the new planting of vines for a period of three years, the aim of which was to control wine surpluses. Mrs Hauer appealed to the German Administration Court (Verwaltungsgericht) arguing that the Council

73 Case 36/75 Rutili v Minister for the Interior [1975] ECR 1219. 74 Case C-299/95 Friedrich Kremzow v Republik sterreich [1997] ECR I-2629, paragraph 14. 75 Essentially the Charter, supra note 27, includes a full catalogue of the classical civil and political rights; social and economic rights; and under the heading "Citizens' rights" the specific fundamental rights granted by EC law to citizens of the Community. 76 Craig and De Brca, supra note 15, page 327. 77 Case 44/79 Liselotte Hauer v Land Rheinland-Pfalz [1979] ECR 3727. 78 Ibid. paragraphs 15 and 17.

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regulation was incompatible with the German constitution,79 as the regulation infringed fundamental rights, specifically the right to property and the right to trade.80 The German Administrative Court made an Article 234 reference to the ECJ, which accepted that there was an interference with property rights, but found that the interference was justified.81 The fact that economic freedom is not listed as a fundamental right in the ECHR does not mean that the ECJ automatically refuses legal status to that right.82 Moreover, the Charter does not directly protect economic freedom either, but it does protect the right to choose an occupation, to conduct a business and the right to property, which are all economic freedom rights.83 While economic freedom is not mentioned in the EC Treaty, the ECHR or the Charter, freedom of competition (or free competition) is a principle of the EC Treaty. The question is whether freedom of competition is considered a fundamental principle in the Community legal order. If the answer is affirmative, then a subsequent question is whether freedom of competition can be equated with economic freedom so that economic freedom can be considered a fundamental principle in the Community legal order.

2.1.1

Freedom of competition

The ECJ has said that freedom of competition is a general principle of Community law and, as shown above, fundamental rights form an

79 The Grundgesetz, promulgated by the Parliamentary Council on 23 May 1949. English version available at: http://www.bundestag.de/htdocs_e/parliament/function/legal/germanbasiclaw.pdf. 80 The Grundgesetz, Article 14(2). 81 Hauer, supra note 77, paragraph 19. 82 Case 155/79 AM & S Europe Ltd v Commission [1982] ECR 1575, [1982] 2 CMLR 264. 83 The Charter, supra note 27, Articles 15-17.

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integrated part of the general principles. The ECJ held in Procureur de la Rpublique v Association de Dfense des Brleurs d'Huiles Usages:84
The national court asks whether the system of permits is compatible with the principles of free trade, free movement of goods and freedom of competition, but does not elaborate further. In that connection it should be borne in mind that the principles of free movement of goods and freedom of competition, together with freedom of trade as a fundamental right, are general principles of community law of which the Court ensures observance.

Freedom of competition has also been considered a fundamental principle specifically in relation to Article 82. For example, in Michelin I, the ECJ held:85
[A]part from the extra bonus granted in 1977, the discount system had an adverse effect on free competition within the common market, which is a fundamental principle of the Treaty, even though the variation in the discount was relatively slight and it has not been proved that the system was applied in a discriminatory manner.

It is however controversial to consider freedom of competition a fundamental principle and Coppel and ONeill have pointed out:86
The invocation of the idea of fundamental rights by the European Court does not set essential limits to lawful executive action, because executive action which has as its object the promotion of the four market freedoms is itself, in the vocabulary of the European Court, instantiating a fundamental right. A claim to violation of certain fundamental human rights, hence, ceases to be a trump-card against executive action. It is no longer possible to speak of a validation of a lower norm by a higher norm. Instead two norms of equal qualitative significance are balanced against the other.

84 Case 240/83 Procureur de la Rpublique v Association de Dfense des Brleurs d'Huiles Usages (ADBHU) [1985] ECR 531, paragraph 9. 85 Michelin I, supra note 5, paragraph 113. 86 Jason Coppel and Aidan ONeill, The European Court of Justice: Taking Rights Seriously? 29 Common Market Law Review (1992) 669, page 690.

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Let alone being controversial, the ECJ seems to accept that freedom of competition can be restricted by other Community objectives. For example, in ITP v Commission the CFI held:87
[I]n order to resolve the conflict between copyright on the one hand and the rules on, inter alia, freedom of competition on the other, the proper approach is to identify in each particular case the specific subject-matter of the intellectual property right, which alone merits special protection within the Community legal order and thereby justifies certain encroachments on the Community rules.

The CFI engaged in a balancing act between the protection of the right, an intellectual property right, on the one hand, and the protection of free competition, on the other hand. The CFI held that the intellectual property right, in this case a copyright, enjoyed special protection, and that the right must be balanced against freedom of competition. It concluded:88
[A]lthough the programme listings were at the material time protected by copyright as laid down by national law, which still determined the rules governing that protection, the conduct at issue [denial of access to the basic information which is the raw material indispensable for the compilation of a TV guide] could not qualify for such protection within the framework of the necessary reconciliation between intellectual property rights and the fundamental principles of the Treaty concerning the free movement of goods and freedom of competition. The aim of that conduct was clearly incompatible with the objectives of Article 86 89 [Article 82].

Even though the CFI held that the free movement of goods and freedom of competition are fundamental principles of the Treaty, the ECJ specified in the IMS Health case,90 that as between the protection of the
87 Case T-76/89 Independent Television Publications Ltd v Commission [1991] ECR II-575, paragraph 28. 88 Ibid. paragraph 60. 89 This conclusion was reiterated in Case C-241/91P RTE and ITP v Commission [1995] ECR I-743, [1995] 4 CMLR 718, paragraph 31. 90 Case C-418/01 IMS Health GmbH & Co OHG v NDC Health GmbH & Co KG [2002] ECR I-3401, [2002] 5 CMLR 44.

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intellectual property right and free competition, it was only willing to give priority to free competition, if consumers would otherwise be harmed. In reaching this conclusion, the Court referred to Advocate General Tizzanos Opinion91 and held:92
[T]hat condition [emergence of a new product] relates to the consideration that, in the balancing of the interest in protection of the intellectual property right and the economic freedom of its owner against the interest in protection of free competition, the latter can prevail only where refusal to grant a licence prevents the development of the secondary market to the detriment of consumers.

In a question between the interest of the owner of an intellectual property right and the protection of free competition, the Court appears to be willing to give priority to free competition only if there would otherwise be harm to consumers. If this means that free competition requires the likelihood of consumer detriment in order to trump an intellectual property right, then freedom of competition does not seem to have reached the status of being a fundamental right. Instead, it appears to be no more than a right to be balanced against other rights. Sauter even calls free competition a political right as oppose to a legal right.93 Free competition appears in several provisions of the EC Treaty,94 so it is difficult to disregard the concept. However, these provisions are explicitly linked to provisions on economic and monetary union and form

91 Advocate General Tizzanos Opinion in IMS Health, supra note 90, delivered on 2 October 2003, paragraph 62: [e]ven where those circumstances obtain, in weighing the balance between the interest in protection of the intellectual property right and the economic freedom of its owner, on the one hand, and the interest in protection of free competition, on the other, the balance may in my view come down in favour of the latter interest only if the refusal to grant the licence prevents the development of the secondary market to the detriment of consumers. 92 Ibid. paragraph 48. 93 Sauter, supra note 47, page 41. 94 Articles 4, 98 and 105.

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political principles which cannot be invoked directly by individuals against the Member States. Besides being controversial, it is not entirely clear that freedom of competition is actually considered a fundamental right. Given this finding, it is not necessary to examine whether freedom of competition equates to economic freedom. Given that it cannot safely be concluded that freedom of competition or economic freedom enjoys constitutional status in the Community legal order, it is necessary to examine whether economic freedom is protected in the German constitution. The ECJ is prepared to protect fundamental rights in the Community legal order, which are recognised and protected by the constitutions of the Member States.95 This leaves economic freedom to be protected in the Community legal order if it is protected by the German constitution, unless Germany is the only Member State which protects economic freedom, as it is unlikely that a right which is protected by just one Member State would be recognised as a fundamental right in Community law.96 The next section will examine whether economic freedom is considered a fundamental right in the German constitution.

3.

The German Constitution

Neither economic freedom nor freedom of competition is directly protected in the German constitution, but a general right to liberty is guaranteed.97

95 It must be emphasised that the general principles of the Community neither retain the same function and definition that they once did in the original Member States, nor are they applied in the same manner. 96 Joseph Weiler, The Constitution of Europe (Cambridge University Press, 1999) chapter 3. 97 Robert Alexy, A Theory of Constitutional Rights (Oxford University Press, 2002) page 223.

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The German Federal Constitutional Court has interpreted the right to free development of personality protected in the German Grundgesezt Article 2,98 commonly known as the Basic Law, as a right to general freedom of action.99 The question addressed in this section is whether economic freedom is an implied liberty included in the general right to liberty. If the general right to liberty in the German constitution only includes freedom of competition then such a finding would not be conclusive for the overall analysis of the status of economic freedom as a fundamental right, unless freedom of competition equates to economic freedom. This section assumes that freedom of competition equates to economic freedom as ordoliberals equated freedom of competition to economic freedom. This assumption is far from certain, but if it is right then that would be a strong argument for giving economic freedom constitutional status if freedom of competition has constitutional status in the German constitution. As shown in chapter two, freedom of competition is deeply rooted in ordoliberalism and ordoliberal theories were applied in the German constitution.100 If that is accepted, then perhaps the general right to liberty guaranteed in the German constitution includes the ordoliberal programme of freedom. This programme meant that intervention in the market should be allowed to protect the autonomy of the individual, to protect individual economic freedom, to guarantee private contractual autonomy, to guarantee freedom of occupation and trade, individual property rights and free movement of persons.
98 German Basic Law Article 2: (1) Every person shall have the right to free development of his personality insofar as he does not violate the rights of others or offend against the constitutional order or the moral law. (2) Every person shall have the right to life and physical integrity. Freedom of the person shall be inviolable. These rights may be interfered with only pursuant to a law. 99 6 BVerfGE 32 Elfes (1957), which regarded the refusal of a passport as an interference with the right to free movement. A translation of the case from German to English can be found on: http://www.iuscomp.org/gla/judgments/tgcm/velfes.htm. 100 Sauter, supra note 37, page 29.

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From a constitutional point of view, it was important for ordoliberals that competition was not confined to its functional relevance as a discovery procedure. Competition also had to be a controlling device for economic power, which they saw as inseparable from the evolutionary market process. As a consequence, competition contributes to the general acceptance of private autonomy as a constitutional principle.101 According to ordoliberal theory, competition law should have

constitutional status and play a leading role in promoting individual fundamental rights, such as economic freedom. German competition law was the main pillar of the social market economy and was represented as constitutional in scope.102 If this view is accepted, then freedom of competition, which ordoliberals equate to economic freedom, is an integrated part of the general right to liberty and a constitutional principle in its own right. However, the problem with that is that any limitations on general freedom of action may end up being prohibited. This is far-reaching and can have undesirable consequences for competition in the market because almost any action in the market, in particular in a very competitive market, may have a limiting effect on someones freedom in the market. Instead of freedom of action, which is a constitutional right in Germany, one should really only speak of freedom from the interference of abusive conduct, which does not have constitutional status. That point aside, the German Federal Constitutional Court has adopted an extremely wide and subjective interpretation of the general right to liberty.103 It is therefore likely that it also protects freedom of competition.

101 Streit, supra note 40, page 9. 102 Gerber, supra note 42, page 277. 103 Alexy, supra note 97, page 224.

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4.

Summary

Chapter five discussed whether economic freedom is considered a fundamental right in the Community legal order with a view to assessing whether a change from economic freedom to consumer welfare would undermine a fundamental right and thereby violate the Community legal order, which will be discussed in chapter six. Section one examined whether economic freedom is protected in the EC Treaty, but found that economic freedom is not even mentioned in the EC Treaty. It analysed whether the EC Treaty was based on the ordoliberal economic constitution where economic freedom is protected as a fundamental individual right. It found that whilst Community competition law is influenced by ordoliberalism, it is not an implementation of ordoliberalism and the EC Treaty is not a Treaty based on the ordoliberal economic constitution. Following from this finding, economic freedom could be considered a fundamental right in the Community legal order only if it formed part of the general principles of the EU either directly or indirectly via the German constitution. In order to examine whether a given principle forms part of the general principles of the EU, the ECJ draws inspiration from the ECHR, the Charter and the common constitutional traditions of the Member States. While these are not a primary source of law, they are sources of inspiration for the Community Courts. Section two examined whether economic freedom was protected by the ECHR and/or the Charter and therefore a part of the general principles of the Community legal order. A negative answer required an analysis of the German constitution, as economic freedom may be considered a fundamental right in the Community legal order if it is protected as such in the German constitution. This was examined in section three which found that the German constitution protects a general right to liberty and it is likely that economic freedom falls within this general right to liberty.

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Conclusion
The EC Treaty is not based on the ordoliberal economic constitution although it does not deny the considerable influence of ordoliberalism. Economic freedom is not protected in the EC Treaty, the ECHR or the Charter. While the German constitution protects a general right of liberty, which most likely includes individual economic freedom, this is not enough in itself to include economic freedom in the general principles of the EU. Based on this conclusion, a change from economic freedom to consumer welfare may be contrary to case law, but would not undermine a fundamental right and thereby violate the Community legal order. Whether such a change is in tune with case law depends on whether economic freedom is a means to the end of consumer welfare. This will be examined in chapter six.

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Chapter 6 The Relationship between Economic Freedom & Consumer Welfare Introduction
The core argument advanced in this chapter is to what extent DG Competition can give priority to a utilitarian goal of consumer welfare given that economic freedom, regardless of its constitutional deficit, is considered an important objective in Article 82 jurisprudence. The finding in chapter five that economic freedom is unlikely to be a fundamental right in the Community legal order does not answer the question whether economic freedom is a means to the end of consumer welfare. It is therefore necessary to consider the underlying purpose of economic freedom as the primary purpose may be to improve, for example, allocative efficiency. This is not to argue that only if economic freedom is a means to the end of consumer welfare is it legitimate to give priority to consumer welfare. However, if it is, the change to the interpretation of Article 82 proposed by DG Competition is not a departure from case law and is thus more acceptable. If however the underlying purpose of economic freedom is far removed from economic efficiency then a change to the goal of consumer welfare requires support from the ECJ, as only the ECJ can decide whether its jurisprudence should change. Only if the ECJ decides to support DG Competitions move away from economic freedom and overrule earlier case law will this happen.

1.

Economic Freedom as Understood by Ordoliberals

The assessment of the underlying purpose of economic freedom starts by analysing whether economic freedom, as derived from ordoliberalism, is a legal concept used to assess whether the conduct in question reduces economic efficiency.

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The ordoliberal competitive order, described in chapter two, connected competition law to fundamental rights by making individual freedom and competition the backbone of the economic constitution of society. Ordoliberals viewed competition law as a matter of rights and individual freedoms and believed that competition within the economy provides the basis for the economic order they envision: a free market economy.1 Ordoliberalism remains the dominant school on the economic order in Germany. It describes the relations between the public and private spheres of the economy in terms of an economic constitution.2 To the extent that ordoliberalism seeks to combine open markets and individual freedom with social justice, it is distinct from neo-liberalism, totalitarian corporatism and classic liberalism articulated, for example, by David Hume,3 Adam Smith4 and John Stuart Mill.5 The origin of ordoliberalism was in humanist values rather than economic efficiency.6 The aim of competition law was the limitation and control of private power, or at least its harmful effects,7 to protect individual freedom in the interest of a free and fair political and social

1 Ordoliberals defined the free market economy as an economic system that dispenses with any official control and instead entrusts control of the interplay of economic forces to a mechanism [the market price system] which discharges its control functions automatically, see Franz Bhm, Democracy and Economic Power in Cartel and Monopoly in Modern Law (CF Muller Karlsruhe, 1961) page 25. 2 Mel Kenny, Constructing a European Civil Code: quis Custodiet Ipsos Custodes? 12 Columbia Journal of European Law (2006) 775, page 783. 3 David Hume, A Treatise on Human Nature (1739, republished by Oxford University Press in 1978). 4 Adam Smith, The Wealth of Nations (1776). 5 John Stuart Mill, On Liberty (1859). 6 David Gerber, Constitutionalizing the Economy: German Neo -liberalism, Competition Law and the New Europe 42 American Journal of Comparative Law (1994) 25, page 36. 7 David Gerber, Law and Competition in Twentieth Century Europe: Protecting Prometheus (Clarendon Press Oxford, 1998) page 251.

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order.8 According to one of the founding fathers of ordoliberalism Franz Bhm:9

The real motives behind the enactment of antitrust law were not economic efficiency and the effectiveness of economic control, but social justice and civil liberties which were held to be threatened by monopolies.

Ordoliberals were not against the free market economy, but held that the free market must be liberated from economic power. If that is not possible, then the holders of economic power must be placed under the control of the state and thereby prevented from abusing their dominant positions, otherwise only a system of anarchic welfare will prevail:10

[I]f the law and the government are unable or unwilling to prevent the development of such dominant positions, and if such positions are used by their holders without due regard to the will of the people for any kind of purpose, most of all, however, for their own exclusive material benefit, and nobody exists who can compel them or is competent to compel them to exercise their powers with due regard to the will of the people, then we shall be faced with a situation, which every sensible citizen may consider and must consider a threat to social justice and civil liberties. Such a situation has all the characteristics of an arbitrary system, a system of anarchic welfare.

Bhm believed that the scope of private law made it possible to consider economic power from two different angles, which he called microcosm and macrocosm.11 The former he called a primitive and direct one and the latter he called a complicated and indirect one. The question asked differs depending upon from which angle economic power is considered.12

8 Wernhard Mschel, Competition Policy from an Ordo Point of View in Hans Willgerodt & Alan Peacock (eds), German Neo-liberals and the Social Market Economy (Macmillan, 1989) page 146. 9 Bhm, supra note 1, page 28. 10 Ibid. page 30. 11 Bhm, supra note 1, pages 30-31. 12 Ibid. pages 32-33.

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The microcosm perspective sees the rise of power within the framework of the free market economy and asks the question: does the economic process caused by the emergence of economic power result in plus and minus or just an aliud of economic efficiency? The answer to the question will depend on whether the economic power will result in economic advantages or disadvantages, and if both are the case, then whether the advantages outweigh the disadvantages. The macrocosm perspective sees the rise of power within a sociopolitical framework and asks the question: shall we, as citizens of a democratic state and members of a free system of society, embedded in the rights of the individual, hand over the power to serve to our fellow citizens? Even though Bhm acknowledged that private law made it possible to assess economic power from both a macrocosm and a microcosm perspective, he argued that economic power should be assessed from the macrocosm point of view.13 This was because economic theory was only a means to develop a free order.14 The free order should liberate humanitarian values from their threatened encirclement by chaotic, anarchic and collectivistic forces.15 The battle for a free order for the economy and for society did not emerge from economic theory, but was a battle for the eternal truths of humanity. It is essential to comprehend that ordoliberalism relied on humanist values rather than efficiency or other purely economic concerns.16 They
13 Bhm, supra note 1, pages 32-33. 14 An ordnung provides a framework for a functional free-market mechanism, which not only accommodates development and change, but also ensures human dignity and freedom. 15 Leonard Miksch, Walter Eucken 4 Kyklos (1950) 279. 16 As mentioned in chapter two, economic freedom has been interpreted differently in US antitrust law in US v Topco Assocs [405 US 596 1972] page 610: Antitrust laws in general are the

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believed that Adam Smith's laissez faire economy does not ensure a competitive economy, and will evolve into monopolistic practices, interventionism, and distortions of price relationships. Instead, structural and regulating principles would facilitate a functionally competitive economy with a compatible social policy, characterised by a flexible price mechanism and stable policies.17 The economic constitution, which decides the legal structure of the economic system, should guarantee individual freedom and competition as fundamental rights. The economic constitution should establish a related system of principles that binds economic policy. The state has to protect this economic order by enforcing the economic constitution. Individual rights set out in the economic constitution were directly enforceable.18 In summary, economic freedom, as derived from ordoliberalism, is a fundamental individual right protected by the economic constitution:19
Competition policy [ordoliberal competition policy] serves to protect the evolutionary process of competition as such, and to prevent the concentration of private power to the detriment of the competitive and the political processes. Consequently, competition constitutes a value in its own right, which goes well beyond efficiency considerations. In this view, the economic constitution serves, first, to guarantee the basic equality of individuals as economic subjects; second, to back up the private law society by public authority; and third, to protect civil liberties.

Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our free-enterprise system as the Bill of Rights is to the protection of our fundamental personal freedoms. And the freedom guaranteed each and every business, no matter how small, is the freedom to compete. 17 Siegfried G Karsten, Eucken's 'Social Market Economy' and its Test in Post-War West Germany. The Economist as Social Philosopher Developed Ideas that Paralleled Progressive Thought in America 44(2) American Journal of Economics and Sociology (1985) 169. 18 Wolf Sauter, Competition Law and Industrial Policy in the EU (Clarendon Press Oxford, 2003) page 47. 19 Ibid. page 47.

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Ordoliberals emphasis on the interdependence between economic structures and human values meant that they sought a path to dependable economic strength that was compatible with maximum personal freedom and improved social conditions. Some argue that this objective remains central to social and political thought in Europe.20 If this is accepted, then it becomes even more important to see whether economic freedom and consumer welfare can be reconciled.

2.

Economic Freedom Does Not Equal Consumer Welfare

The question addressed in this section is whether the goal of economic freedom is a means to the end of consumer welfare. As shown in the previous section, economic efficiency was not the goal of ordoliberal competition policy. Ordoliberals placed competition law in a wider, socio-political perspective because limitation and control of private power was in the interest of a free and fair political and social order.21 It was essential to protect the conditions of competition, rather than explicitly focusing on the direct results of competition because their main goal was the limitation of private power to guarantee individual economic freedom. Ordoliberals saw economic efficiency as a generic term for growth and for the encouragement and development of technical progress and for allocative efficiency, but only as an indirect and derived result of individual freedom.22 This opinion is not only shared by ordoliberals, it is also echoed by Adams and Brock, who believe that economic freedom is the main objective of competition policy in US anti-trust:23

20 Gerber, supra note 6, page 76. 21 Gerber, supra note 7, pages 244-251. 22 Mschel, supra note 8, page 146. 23 Walter Adams and James W Brock, Antitrust and Efficiency: a Comment 62 New York University Law Review (1987) 1116.

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The primary purpose of antitrust is to perpetuate and preserve a system of governance for a competitive, free enterprise economy. Efficiency and consumer welfare constitute ancillary benefits that are expected to flow from a system of economic freedom.

Brodley has argued that there is a unity between economic efficiency and the goal of economic freedom.24 This is supported by Elzinga who argued that economic efficiency and equity goals are not always mutually exclusive.25 However, for Brodley and Elzinga the ultimate objective was not consumer welfare in the form of consumer surplus and allocative efficiency, but total welfare. The answer to the question addressed in this section, which is whether the goal of economic freedom is the same as that of advancing consumer welfare, is probably no, as economic freedom is not the same as advancing consumer welfare in economic terms. Standard economics states that by protecting a competitor through the act of curtailing the power of the near monopolist, the consumer may benefit through increased choice and a reallocation of profits from the monopolist to alternative competitors. As these competitors will not have the ability to reap monopoly profits, these profits would be expected to be passed back to the consumer through reduced prices. If these effects outweigh the value of any above-cost discount offered by the near monopolist, consumers would gain from overall price reductions. While the move to protect suppliers may increase choice and potentially improve allocative efficiency through lower prices,26 this is not guaranteed. Nor is it

24 Joseph F Brodley, The Economic Goals of Antitrust: Efficiency, Consumer Welfare, and Technological Progress 62 New York University Law Review (1987) 1020, page 1021. 25 Kenneth G Elzinga, The Goals of Antitrust: other than Competition and Efficiency, What Else Counts? 125 University of Pennsylvania Law Review (1977) 1191, page 1193. 26 Allocative efficiency, as used here, refers to the way in which resources are allocated to the production of the goods and services that society (consumers) most values as defined in chapter four.

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guaranteed that dynamic movements towards productive efficiency27 will be facilitated best in this way.28 In some circumstances, it is plausible that the protected market players will become efficient over time. However, it is also possible that the most productive way of supplying customers will be through one single supplier, particularly when economies of scale are great. Depending on which of these effects is the greatest the consumer could then actually gain or lose from such measures.29 DG Competitions Director General Philip Lowe has argued that the aim of Article 82 is to ensure that the remaining competitors in the market are not prevented from competing on the merits.30 This is taken to mean that the economic freedom of efficient competitors must be protected in order to protect their ability to compete on the merits, but not the economic freedom of inefficient competitors. If this understanding is correct, then it could be argued that economic freedom is a means to the end of consumer welfare. According to Lowes argument, economic freedom is protected only where it benefits consumer welfare, as it is assumed that only efficient competitors can provide efficiencies to the benefit of consumers whereas inefficient competitors cannot. This is, in some aspects, inconsistent with the position taken by DG Competition in its Discussion Paper where it remarks that it may sometimes be necessary in the consumers interest to also protect competitors that are not (yet) as efficient as the dominant firm.31 DG Competition seems to be of the opinion that protecting not yet as efficient competitors means
27 Productive efficiency refers to the effective use (produced at the lowest cost) of resources as defined in chapter four. 28 Dennis W Carlton and Jeffrey M Perloff, Modern Industrial Organization (Pearson, 4th ed, 2005). 29 Sir John Vickers, Abuse of Market Power 115 The Economic Journal (2005) F244, page F256. 30 Philip Lowe at the Thirteenth Annual Conference on International Antitrust and Policy, speech given on 23 October 2003 at the Fordham Antitrust Conference in Washington, page 5, speech available at: http://ec.europa.eu/comm/competition/speeches. 31 Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses (December 2005), paragraph 67.

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there will be more firms in the market. This could potentially mean more competition in the long run, driving prices down and increasing allocative efficiency to the benefit of consumers.32 This argument may however involve a loss of economies of scale which is productively inefficient. 33 Thus, this section argues that pursuing an objective of economic freedom cannot be tweaked to include efficiencies to the benefit of consumer welfare. When pursuing an objective of economic freedom, the process is of intrinsic value and it excludes a change of the overarching principle to protect competitors only to the point where it is productively and allocative efficient to do so. It is not denied that if consumer welfare matters then process matters to a certain degree.34 However, it is important to distinguish between protecting the process of competition in itself and protecting the competitive process only to the extent that it will benefit consumer welfare. As explained above, when pursuing an objective of economic freedom, it is not possible to protect the process of competition only to the point where it is productively and allocative efficient to do so, because the underlying purpose of economic freedom is protection of the process of competition in itself, regardless of that process being inefficient. When trying to use economic freedom as a means to the end of consumer welfare there is a real risk that the result is the protection of
32 This is however not only a complicated analysis, but the concept not yet as efficient competitor also gives the competition authority huge discretion in assessing whether and when a company will be as efficient as the dominant company. 33 Frederic M Scherer, Antitrust, Efficiency, and Progress 63 New York University Law Review (1987) 998, pages 1002-1003. 34 The argument being that consumer welfare should be read in conjunction with harm to the process of competition. This argument does find some support, see Victoria Mertikopoulou, DG Competitions Discussion Paper on the Application of Article 82 of the EC Treaty to Exclusionary Abuses: the Proposed Economic Reform from a Legal Point of View 28(4) European Competition Law review (2007) 241, page 242.

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competitors. It becomes incredibly difficult to know when the protection of economic freedom benefits consumer welfare and when it protects competitors. Competitors should be protected only to the point where it is productively and allocative efficient to do so, but this principle is excluded when pursuing economic freedom where the process of competition is of intrinsic value. In welfare terms, if less efficient firms are protected or subsidised, it can prevent market competition from selecting the best firms, which will actually result in higher prices and lower welfare.35 This is not to say that economic efficiency is not relevant in legal systems pursuing the objective of economic freedom, but that such an objective focuses on the need to protect the process of competition in the long term rather than competitions short-term results. Many of the EC judgments and decisions under Article 82 take a long-term perspective and protect the present competitors instead of short-term efficiencies in order to ensure that there will be competitors in the long run.36 Long-term protection of competition also seems to be at the root of DG Competitions approach in protecting a not yet as efficient competitor. It appears that DG Competition believes that competition in the long run can be protected by protecting not yet as efficient competitors. This is not necessarily a bad idea when pursuing an objective of economic freedom, and it may even be a good idea when liberalising a market dominated by a former state monopoly. In such a market, the former state monopoly will undoubtedly have a huge market share and it can take a couple of years for other competitors to gain a foothold in the market. For example, state monopolies in the telecommunication sector
35 Massimo Motta, Competition Policy: Theory and Practice (Cambridge University Press, 2004) page 51. 36 Barry E Hawk, Article 82 and Section 2 in OECD paper DAF/COMP(2005)27 on Competition on the Merits, page 253.

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have established themselves in the market through the benefit of taxpayers money and gained first mover advantages from benefits that no other company has. Thus, when liberalising a market it may seem sensible to keep a not yet as efficient competitor alive in the market if the aim is economic freedom. A practical problem with this approach is that it would require competition authorities to produce a timeframe for the period they are willing to protect the not yet as efficient competitor, as well as a strategy for the various ways of protecting it. The not yet as efficient competitor test signals that DG Competition is keen to increase the opportunities for other competitors in the market. It is however questionable whether these not yet as efficient competitors will actually generate any efficiency to the benefit of consumer welfare, for example, in the form of innovation. If they do not innovate it may not only be detrimental for consumers, but also for the incumbents incentive to innovate. This issue was pointed out by Advocate General Jacobs in his Opinion in the Bronner case,37 where he explained in paragraph 57:38

In the long term it is generally pro-competitive and in the interest of consumers to allow a company to retain for its own use facilities which it has developed for the purpose of its business. For example, if access to a production, purchasing or distribution facility were allowed too easily there would be no incentive for a competitor to develop competing facilities. Thus while competition was increased in the short term it would be reduced in the long term. Moreover, the incentive for a dominant undertaking to invest in efficient facilities would be reduced if its competitors were, upon request, able to share the benefits. Thus the mere fact that by retaining a facility for its own use a dominant undertaking retains an advantage over a competitor cannot justify requiring access to it.

37 Case C-7/97 Oscar Bronner GmbH & Co KG v Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co KG [1998] ECR I-7791, [1999] 4 CMLR 112. 38 Opinion of Advocate General Jacobs in Oscar Bronner, supra note 37, delivered on 28 May 1998.

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This section showed that economic freedom is conceptually and theoretically distinct from consumer welfare. It found that from a theoretical point of view economic freedom is not a means to the end of consumer welfare. This finding is however not conclusive, as the practical application of economic freedom may be different. It is necessary to assess whether economic freedom has been interpreted under Article 82 as an end in itself or in the fashion suggested by Lowe. This will be examined in the subsequent section.

3.

Protecting Economic Freedom Intrinsically or Instrumentally

Chapter three argued that the Commission and the ECJ pursued the objective of economic freedom in Commercial Solvents, Hoffmann-La Roche, United Brands and Michelin I and possibly also in Continental Can. However, it did not establish whether economic freedom was considered an intermediate aim of consumer welfare, as defined in chapter four, or an aim in itself. This will be considered in this section. Chapter three established that the fundamental cases analysed required prohibition whenever the market freedom of market participants was endangered by an alteration of the competitive market structure. Damage to the competitive market structure is imbued in the very definition of abuse, articulated by the ECJ in Hoffmann-La Roche. In general, by protecting the structure of competition, priority is given to the process of competition not to the outcome. If, by protecting the process of competition, consumers are indirectly protected, then that is a bonus, but not the main aim.39 This is an exact replica of ordoliberal thinking, where the benefit of competition is a market characterised by a desirable process, and the end result does not matter. Ordoliberals
39 Highlighted by Advocate General Kokott in her Opinion in Case C-95/04P British Airways plc v Commission, delivered on 23 February 2006, paragraph 68.

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would prefer a state of inefficiency coupled with freedom to an efficient but totalitarian state.40 Under the ordoliberal model, the aim of competition policy is the protection of individual economic freedom of action as a value in itself, or vice versa, the restraint of undue economic power.41 Thus, the protection of competition against restrictions is intended to safeguard competition as an institution or to guarantee the freedom of the individual.42 This philosophy also underpins Advocate General Kokotts Opinion in British Airways, in particular her reference to competition as an institution.43 In her view, the primary beneficiaries of Article 82 are other firms. Priority is given to the process of competition, and if this indirectly protects consumers, then this is a bonus, but not an aim. If the Court was pursuing economic freedom only to promote consumer welfare in the form of economic efficiency in Hoffmann-La Roche or Michelin I, then it ought to have assessed whether the discounts would likely have led to a decrease or an increase in consumer welfare. For example, would the alteration of the market structure likely have resulted in an increase in price and/or lowering of quality? It is hard to say a priori whether a given form of discount or price discrimination increases or decreases welfare. The response to this question may indeed depend on which type of welfare standard (producer, consumer or total welfare) is actually pursued. An increase in price may well result in an increase in total welfare, but a decrease in consumer welfare. Consumer welfare would likely fall in absolute terms if consumers share of it fell relative to the producers increase in welfare. However, the
40 Christian Watrin, Germanys Social Market Economy in Alastair Kilmarnock (ed), The Social Market and the State (Social Market Foundation, 1999) pages 91-95. 41 Wernhard Mschel, The Proper Scope of Government Viewed from an Ordoliberal Perspective: the Example of Competition Policy 157 Journal of Institutional and Theoretical Economics (2001) 3. 42 Arved Deringer, The Competition Law of the European Economic Community: a Commentary on the EEC Rules of Competition (Articles 85 to 90) Including the Implementing Regulations and Directives (New York: Commerce Clearing House, 1968) page 14. 43 Opinion of Advocate General Kokott in British Airways, supra note 39, paragraph 69.

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conduct could potentially benefit consumer welfare, if there were economies of scale to gain. It is not automatic that such benefits will accrue to customers, as they could equally accrue to shareholders. As shown in chapter three, neither the Commission nor the Court considered any of these consequences in detail in the early cases under Article 82. In addition, prohibiting conduct where firms are seeking to use their economic power to undermine the markets competitive structures, without considering whether such behaviour is likely to harm consumer welfare, may be viewed as nothing more than protecting smaller competitors from aggregation of economic power.44 As explained, the focus on the competitive structure concentrates on the process as accentuated by ordoliberals, who emphasised the need to protect the conditions of competition, rather than the direct results of competition. The question is whether the Commission and the Community Courts have interpreted the process of competition intrinsically like ordoliberals or instrumentally. In the light of DG Competitions policy review and its questionable commitment to consumer welfare, it is not unthinkable that some are tempted to argue that the Commission and the ECJ were pursuing an objective of consumer welfare in Commercial Solvents, Hoffmann-La Roche, United Brands and Michelin I. Given past disappointments this is a tempting argument even though it is difficult to follow, in particular, given the lack of efficiency analysis in these cases. The argument that the Court prohibits conduct which restricts economic freedom only to protect consumer welfare (an argument advanced by Philip Lowe), by assuming consumer harm whenever the economic freedom of market

44 Giuliano Amato, Antitrust and the Bounds of Power (Hart Publishing, 1997) page 69; Eleanor Fox, Monopolization and Dominance in the United States and the European Community: Efficiency, Opportunity, and Fairness 61 Notre Dame Lawyer (1986) 981.

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participants is restricted, is not convincing. This is not to say that the Commission cannot base its decisions on assumptions of consumer harm or should show consumer harm explicitly when pursuing an objective of consumer welfare, but if it does, then these assumptions must be based on either evidence or well-documented theory indicating that such consumer harm is likely to follow. Otherwise, it appears to be nothing more than a protection of economic freedom. If the Commission and the ECJ never intended to protect the economic freedom of the market participants as an aim in itself, but only to the extent it was benefiting consumer welfare, then it is paramount that the Commission changes its methodology by incorporating an analysis of efficiencies. Otherwise, the legitimacy of the judgments is undermined. In Continental Can, Hoffmann-La Roche and Michelin I the Commission and the ECJ equated an abuse with a restriction on the rights and opportunities of market operators.45 For example, in Michelin I the ECJ held the discount tends to remove or restrict the buyer's freedom to choose his sources of supply.46 There was no serious analysis of anticompetitive effects, because as stated by the ECJ in Hoffmann-La Roche the course of conduct [rebates] under consideration is that of an undertaking occupying a dominant position on a market where for this reason the structure of competition has already been weakened, within the field of application of Article 86 [Article 82] any further weakening of
45 These cases are not the only cases under Article 82 where the Community Courts have been concerned about the dominant undertaking preventing firms from sourcing the relevant products from other suppliers. Other cases with a similar concern are Joined Cases 40-114/73 Cooperatieve Vereniging Suiker Unie U.A. and Others v Commission [1975] ECR 1663, [1976] 1 CMLR 295, paragraph 518; Case T-65/89 BPB Industries and British Gypsum Ltd v Commission [1993] ECR II389, [1993] 5 CMLR 32, paragraph 120; Case T-219/99 British Airways plc v Commission [2003] ECR II-5917, paragraphs 244-245 and Eurofix-Bauco/Hilti OJ 1985 L65/19, paragraph 79. 46 Case 322/81 Nederlansche Banden-Industrie Michelin NV v Commission [1983] ECR 3461, [1985] 1 CMLR 282, paragraph 73; similar language was used in Case 85/76 Hoffmann-La Roche AG v Commission [1979] ECR 461, [1979] 3 CMLR 211, paragraph 106 and in Case 6/72 Europemballage Corpn and Continental Can Co Inc v Commission [1973] ECR 215, [1973] CMLR 199, paragraph 29.

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the structure of competition may constitute an abuse of a dominant position.47 At most, the ECJ held that the conduct in question would endanger the customers choice.48 This naturally leads one to ask whether the Court was trying to protect consumer welfare by protecting choice.49

3.1

Choice

Perhaps the Court was trying to protect consumer welfare by protecting choice, but by protecting choice it is even more likely that the ECJ was trying to protect economic freedom, as choice is an overriding goal if one is pursuing an objective of economic freedom.50 Choice means more participants in the market, which therefore improves the process regardless of that process being inefficient, for example because small and medium-sized companies are likely to lack economies of scale. These companies may lack economies of scale and thus will be unlikely to guarantee consumer welfare in the form of lower prices. When it comes to protecting choice, it is admittedly difficult to assess whether the aim is to protect economic freedom or consumer welfare as the two objectives do overlap to a certain degree. This is not to argue that choice is the overriding goal of consumer welfare, but it is a part of the definition as shown in chapter four. In order for there to be economic freedom or a process of competition there must be choice and

47 Hoffmann-La Roche, supra note 46, paragraph 123. 48 A similar argument was adopted by the Commission in its decision in Eurofix-Bauco/Hilti, supra note 45. The Commission concluded that Hilti had abused its dominant position by adopting commercial behaviour designed to prevent or limit the entry of new competitors into the nail market. 49 Choice is not only a concern of the Court, but also a concern of the Commission as an attempt to squeeze competitors out of the market will deprive consumers of choice, see 17th Report on Competition Policy (1988), page 77. 50 Wolfgang G Friedman, Anti-trust Laws: a Comparative Symposium (London: Stevens, 1956) page 233.

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in order to have choice there must be competitors. This comes down to whether choice is considered valid intrinsically or instrumentally.51 Ordoliberals would argue that choice should be protected for its own sake as it is intrinsically valuable and constitutes economic freedom for the customer and consumer. By contrast, the Chicago School considers choice from an instrumental point of view, meaning that it is to be protected as a part of preserving the fruits of a competitive process. Choice must be effective so that customers can move from one supplier to another, even though they would not necessarily use that choice, but at least it would be available to them. From a welfare point of view, choice is only valued if it leads to a better and more efficient outcome for consumers in the form of lower prices and better quality. If choice does not have these benefits, then consumer welfare is not concerned with choice. For example, in a market which is characterised by a natural monopoly there would be no choice. If the natural monopoly is the most efficient supply structure and thus leads to the best outcome for consumers, then it would be totally acceptable from a consumer welfare perspective. From an economic freedom perspective a natural monopoly would not be favoured at all, regardless of the outcome, as there would be no process of competition. Because choice is important when pursuing both an objective of economic freedom and an objective of consumer welfare, it can be difficult to distinguish between which of the two objectives the Commission is pursuing when arguing a case in terms of choice. Due to the difficulties involving choice, the Commission must rely on more than choice when pursuing an objective of consumer welfare. There must be a plausible theory of consumer harm. If the Commission convincingly wants to pursue an objective of consumer welfare, choice cannot be the
51 This is not a distinction the Commission or the Community Courts have adopted within the scope of Article 82, the only point here is to bear this distinction in mind.

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only reference point, as choice is also an overriding goal when pursuing an objective of economic freedom. In the absence of any theory on how consumers will be harmed directly or indirectly through an alteration of an effective competitive structure, will look like nothing more than a protection of economic freedom. This section rejects the idea that the Court was aiming to protect consumer welfare when it stated that the discount tends to remove or restrict the buyer's freedom to choose his sources of supply.52 The Commission and the ECJ did not analyse the welfare implications of the conduct in question or engage in any efficiency analyses. It is therefore difficult to argue that these institutions were concerned with the instrumental value of the process, as they did not treat the restriction of choice synonymously with the restriction on the competitive outcome. Given this argument, the aim of assigning priority to consumer welfare appears to be in conflict with the case law where economic freedom is pursued as an aim in itself. The commitment to consumer welfare in the Discussion Paper could be dismissed by referring to the fact that it is not a legislative document which is legally binding, but at most contains some legally binding principles. If this point is disregarded for the moment, as it is likely that the ECJ will decide to commit to consumer welfare in due course, the implication of giving priority to consumer welfare could be contrary to the wording of Article 82(2)(c). This provision seems to protect the economic freedom of other trading parties. Although DG Competition has the freedom to decide its enforcement policy, it cannot ignore the wording of the Treaty. The wording of Article 82(2)(c) will be analysed in the following section.

52 Supra note 46.

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4.

Economic Freedom in the EC Treaty

Economic freedom is not explicitly incorporated in Article 82, but indent (c) of Article 82 reads: applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage. The question is whether the expression in Article 82(2)(c) thereby placing them at a competitive disadvantage has an independent content, or whether it is merely in the nature of an explanatory addition with declaratory effect. This question will be examined in this section. Strictly speaking, DG Competitions commitment to the objective of consumer welfare only applies to exclusionary abuses, which could exclude Article 82(2)(c).53 However, in practice, it can be difficult to make a clear divide between exploitative and exclusionary abuses, as discriminatory practices may have an exclusionary effect.54 Therefore, it is still relevant to examine Article 82(2)(c). Three conditions have to be fulfilled before Article 82(2)(c) is violated: 1. there must be dissimilar conditions, which 2. are applied to equivalent transactions, and 3. other trading parties must be placed at a competitive disadvantage. The Commission and the Community Courts generally assume dissimilar conditions are applied to equivalent transactions without much analysis,55 but what about the third condition?

53 Discussion Paper, supra note 31, paragraph 1. DG Competition is also reviewing its policy towards exploitative and discriminatory abuses. The latter process is not yet at the stage of public consultation. 54 Discussion Paper, supra note 31, paragraph 53. 55 Damien Geradin and Nicolas Petit, Price Discrimination under EC Competition Law: the Need for a Case-by-Case Approach GCLC working paper 07/05, page 8; Ivo Van Bael & Jean-Francois Bellis, Competition Law of the European Community (Kluwer Law International, 2005) pages 915 and 917.

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The third condition was one of the issues in Deutsche Post AG.56 The Commission held that the term trading partner must be given a slightly different interpretation because Deutsche Post held a monopoly in Germany. It argued that Deutsche Post was to be considered a trading partner of both the UK senders, contracting with the British Post Office (BPO), and with BPO directly. The Commission argued that both customers and a competitor of Deutsche Post were put at a competitive disadvantage.57 This shows that the Commission was considering both primary-line and secondary-line discrimination. The former means discrimination used to expand or maintain a dominant position to the disadvantage of competitors of the discriminator by applying different prices to its own customers.58 The latter means discrimination imposed on one of several customers of the dominant firm as against one or several other customers.59 After finding that Deutsche Post was behaving in a discriminatory manner by charging different prices to equivalent transactions to the disadvantage of trading parties,60 the Commission said that even in the absence of negative effects on trading parties indent (c) of Article 82 was violated where consumers are harmed.61 In reaching that conclusion, the Commission referred to the ECJs judgment in Deutsche Post AG v Citicorp.62 Here, the Court concluded that discriminatory treatment of different mail categories may constitute an abuse under Article 82 without addressing the question whether the sender was a

56 Deutsche Post AG OJ [2001] L331/40, [2002] 4 CMLR 598. 57 Ibid. recital 130. 58 Fox, supra note 44, page 1008. 59 Alison Jones and Brenda Sufrin, EC Competition Law (Oxford University Press, 2nd ed, 2004) page 411. 60 Deutsche Post, supra note 56, recital 127. 61 Ibid. recital 134. 62 Joined Cases C-147-148/97 Deutsche Post AG v Gesellschaft fr Zahlungssysteme mbH and Citicorp Kartenservice GmbH [2000] ECR I-825.

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trading partner of Deutsche Post AG or not.63 By referring to Deutsche Post AG v Citicorp, which did not address the third condition of Article 82(2)(c), it is not entirely clear whether the Commission considered it unnecessary to examine whether trading parties are placed at a competitive disadvantage. If so, then the Commission is basically saying that it is not necessary to apply strictly the conditions imposed by Article 82(2)(c).64 This interpretation has been supported by Advocate General Van Gerven in his Opinion in Corsica Ferries Italia Srl v Corpo dei Piloti del Porto di Genova:65
It appears implicitly from the Community case-law, ...that the Court does not interpret that phrase [other trading parties, thereby placing them at a competitive disadvantage] restrictively, with the result that it is not necessary, in order to apply it, that the trading partners of the undertaking responsible for the abuse should suffer a competitive disadvantage against each other or against the undertaking in the dominant position.

If it is not strictly necessary to apply the conditions imposed by Article 82(2)(c) it means that indent (c) can be applied to dominant firms pricing practices, which have little to do with putting their trading parties at a competitive disadvantage. In that case, one may wonder what competitive disadvantage means. If it means that discrimination, in itself, necessarily implies some kind of competitive disadvantage for the trading parties which are discriminated against, then the question remains why the drafters of the EC Treaty included a requirement of competitive injury if it adds nothing to the essence of discrimination? In Deutsche Post AG the third condition of indent (c) was fulfilled as there was evidence of direct harm to both trading parties and
63 The Court did not address the two other conditions in Article 82(2)(c). Ibid. paragraphs 59-60. 64 Santiago Martinez Lage and Rafael Allendesalazar, Community Policy on Discriminatory Pricing: a Practitioner's Perspective, paper presented at the 2003 Annual EU Competition Law and Policy Workshops - What is an Abuse of a Dominant Position? (Florence) page 15. 65 Opinion of Advocate General Van Gerven in Case C-18/93 Corsica Ferries Italia Srl v Corpo dei Piloti del Porto di Genova, delivered on 9 February 1994, paragraph 34.

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consumers. The Commission made clear that it would have found a violation of Article 82(2)(c) even in the absence of harm to trading parties, if there was harm to consumers. The Commission thereby ensured that in future cases where it is not possible to prove direct harm to trading parties, Article 82(2)(c) is violated if consumer harm can be proven. This is a deviation from the wording of indent (c).66 Unlike indent (b) of Article 82,67 indent (c) does not mention consumers, but trading parties. If it is not necessary to show that trading parties are placed at a competitive disadvantage to breach indent (c), even where trading parties are directly mentioned in the wording, then perhaps it is not necessary to show prejudice to consumers under indent (b) either. The Community Courts have, since Continental Can, held that not only conduct which harms consumers directly, but also conduct which harms consumers indirectly, by altering the structure of the market, is prohibited by Article 82.68 Neither the Community Courts nor the Commission have held that Article 82(2)(b) is violated in the absence of effects (direct or indirect) on the consumer, but only that it is not necessary to show effects on the competitive structure where there is direct prejudice to consumers:69
While the application of Article 82 often requires an assessment of the effect of an undertaking's behaviour on the structure of competition in a given market, its application in the absence of such an effect cannot be excluded. Consumers' interests are protected by Article 82, such protection being achieved either by prohibiting conduct by dominant undertakings which impairs free and undistorted competition or which is directly prejudicial to consumers. Accordingly, and as has been expressly recognised by the Court of Justice, Article 82 can properly be applied, where
66 There is an argument that if consumer harm can be proven then it should be possible to prove harm to trading parties, as it is assumed that it is more difficult to prove consumer harm than harm to trading parties. This argument will be considered later in this section. 67 Article 82(2)(b) limiting production, markets or technical development to the prejudice of consumers. 68 This was recently reiterated in Case C-95/04P British Airways plc v Commission, paragraph 104. 69 1998 Football World Cup OJ [2000] L5/55, recital 100.

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appropriate, to situations in which a dominant undertaking's behaviour direct prejudices the interests of consumers, notwithstanding the absence of any effect on the structure of competition.

The question is whether the Commission intended to get a similar message across in Deutsche Post AG, meaning that it is not necessary in indent (c) to prove that trading parties are placed directly at a competitive disadvantage, but it is enough to show that trading parties are placed at a competitive disadvantage indirectly. In that case, why did the Commission not distinguish between direct and indirect harm to trading parties, let alone prove that in most situations trading parties may be placed at a competitive disadvantage indirectly where consumers are harmed. Instead, the Commission said that in the absence of negative effects on trading parties, indent (c) is violated where consumers are harmed. The Commissions finding in Deutsche Post AG that it would have found a violation of Article 82(2)(c) even in the absence of harm to trading parties was refined by the ECJ in British Airways.70 British Airways fifth ground of appeal was that the Commission had not done enough to show that the third condition of Article 82 competitive disadvantage between travel agents resulting from the reward schemes, was violated.71 The ECJ held:72
[I]n order for the conditions for applying subparagraph (c) of the second paragraph of Article 82 EC to be met, there must be a finding not only that the behaviour of an undertaking in a dominant market position is discriminatory, but also that it tends to distort that competitive relationship, in other words to hinder the competitive position of some of the business partners of that undertaking in relation to the others.

70 British Airways, supra note 68, paragraph 142. 71 Ibid. paragraph 142. 72 British Airways, supra note 68, paragraphs 144-145.

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In that respect, there is nothing to prevent discrimination between business partners who are in a relationship of competition from being regarded as being abusive as soon as the behaviour of the undertaking in a dominant position tends, having regard to the whole of the circumstances of the case, to lead to a distortion of competition between those business partners. In such a situation, it cannot be required in addition that proof be adduced of an actual quantifiable deterioration in the competitive position of the business partners taken individually.

The Court said that discrimination alone is not enough, it must also be shown that the competitive position of the business partners is distorted. This does not have to be an actual quantifiable deterioration of the business partners. It is enough to demonstrate that the reward schemes tend to lead to a distortion of competition between travel agents, and additional proof of an actual quantifiable deterioration is not required. It is sufficient to prove that other trading parties are placed at a competitive disadvantage indirectly. The Court did not link competitive disadvantage to consumer harm, but said that Article 82(2)(c) does not require actual quantifiable competitive disadvantage. This is nothing more than indicating that Article 82(2)(c) is violated where there is an indirect competitive disadvantage on trading parties. This is also the position taken under Article 82(2)(b) where it is enough to show indirect prejudice to consumers. This section has examined whether the expression thereby placing them at a competitive disadvantage has an independent content or just a declaratory effect. The ECJ made clear in British Airways that Article 82(2)(c) is violated where the competitive position of the business partners of the dominant undertaking have been hindered by the discrimination. Despite there being no requirement of actual harm, the third condition of Article 82(2)(c) does have an independent content. The EC Treaty gives competition authorities and courts a direct route to condemn discrimination where it hinders the competitive position of business partners. This has led some to argue that the self-made

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Commission/Court abridged version of Article 82(2)(c) might best be seen in terms of an underlying tendency to seek to preserve an existing market structure, a kind of policy of protecting towards the distributor. If so, this is not a policy that is connected with competition or consumer welfare.73 The Court has determined that Article 82(2)(c) is already infringed when the discriminatory behaviour tends to distort competition between trading parties. If competition authorities ignore this and delay intervention in the market until they have evidence of likely consumer harm, they run the risk of complaints about failure to act from third parties. The failure to act being the lack of enforcement of Article 82(2)(c) where there is evidence of competitive distortion to trading parties.

Conclusion
This chapter found that economic freedom is not used to enhance consumer welfare, because individual economic freedom is an end in itself. The finding is based on five observations. First, economic freedom is conceptually and theoretically distinct from consumer welfare. Second, the ECJ has not interpreted the protection of the competitive process instrumentally by treating the restriction of choice synonymously with the restriction on the competitive outcome. Third, the Court has not protected the economic freedom of the market participants only to the point that it is productively and allocative efficient to do so in order to benefit consumer welfare. Fourth, the Court has interpreted the process of competition intrinsically to protect competition in the long term. Fifth, the wording of Article 82(2)(c) requires trading parties to be protected against discrimination from dominant undertakings.

73 Brian Sher, Price Discounts and Michelin 2: what Goes Around, Comes Around 23(10) European Competition Law Review (2002) 482, pages 487-488.

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These main findings lead to an overall conclusion that only if the ECJ decides to support DG Competitions move away from economic freedom and overrule earlier case law will DG Competitions move to consumer welfare be a reality. The Commission certainly has the freedom to decide its enforcement policy, but if its administrative practice were to change, the Commission would still have to act within the framework prescribed for it by Article 82 as interpreted by the ECJ,74 unless the Community Courts support the Commissions move towards consumer welfare.

74 This was highlighted by Advocate General Kokott in her Opinion in British Airways, supra note 39, paragraph 28.

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Chapter 7 Thesis Conclusion

1.

Summary of Findings

This thesis discussed whether there is a tension between protecting economic freedom and the promotion of consumer welfare in the application of Article 82. The aim of the research question was a consideration of the legitimacy of DG Competitions embracing consumer welfare when considering exclusionary abuses within the terms of Article 82. In order to answer the research question, the thesis considered the theory behind the objective of economic freedom and the theory behind the objective of consumer welfare. It assessed which objective shaped the development of the early jurisprudence where the law of Article 82 is to be found. It finally examined how this fits with current aspirations for consumer welfare. Based on these considerations, the thesis found: 1. the origin of economic freedom, as a concept in the sphere of competition law, is mostly attributable to the theory of ordoliberalism which valued individual economic freedom as a fundamental right; 2. ordoliberalism influenced German competition law which in turn inspired Community competition law; 3. despite influence of ordoliberal theory, Article 82 is not an implementation of ordoliberalism as the EC Treaty is not based on the ordoliberal economic constitution; 4. the case law analysis in this thesis found that Article 82 has been interpreted by the Commission, and upheld by the Community Courts, in such a way as to protect the economic freedom of both customers and competitors;

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5. economic freedom is not considered a fundamental right in the Community legal order as economic freedom is protected by neither the EC Treaty nor the general principles of the EU; 6. economic freedom and consumer welfare pursue fundamentally different values. While economic freedom aims at protecting the individual undertakings economic freedom, consumer welfare takes a neo-classical position which values welfare without giving any consideration to the position of individuals; 7. pursuing an objective of economic freedom focuses on the process of competition, whereas pursuing an objective of consumer welfare focuses on the outcome of competition; 8. pursuing an objective of consumer welfare requires the competition authority to focus on the effects of the conduct on consumers; 9. the Discussion Paper talks about consumer welfare in the form of consumer surplus and allocative efficiency, which is distinct from total welfare where producer and consumer surplus are of equal importance; 10. the practices of the Commission show that it still focuses to a considerable extent upon the form of the dominant undertakings conduct, rather than the effects of its conduct; 11. economic freedom has not been interpreted as a means to the end of consumer welfare; and 12. the Commission and the Community Courts have not protected the economic freedom of the market participants only to the point where it is dynamically, productively and allocative efficient to do so in order to benefit consumer welfare. These findings were fundamental to assessing whether there is a tension between protecting economic freedom and the promotion of consumer welfare in the application of Article 82 and in assessing the legitimacy of the Commissions current aspirations of consumer welfare.

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Based on the findings, the thesis demonstrated that there is such a tension. Given this, it is concluded that if the Commission decides to follow DG Competitions policy statement of consumer welfare when enforcing Article 82, then it is departing from jurisprudence such as Commercial Solvents, Hoffmann-La Roche, United Brands and Michelin I, case law on which the Community Courts still rely heavily. Economic freedom is considered to be an objective under Article 82, because it has not been interpreted as a means to the end of consumer welfare. Departing from the jurisprudence requires support from the ECJ. The Commission certainly has the freedom to decide its enforcement policy, but if its administrative practice were to change, the Commission would still have to act within the framework prescribed for it by Article 82 as interpreted by the ECJ.

2.
In

Elaboration of Findings
order to come to the first finding, chapter two
1

looked

at

ordoliberalism and its competition law model and argued:

Ordoliberals encouraged open access to the market, as they believed that this would be the best control of private and political power. In their view the aim of competition policy was not economic efficiency, but rather the limitation and control of private power, or at least of its harmful effects, in order to protect individual economic freedom in the interest of a free and fair political and social order. The origin of ordoliberalism was in humanist values rather than economic efficiency. For ordoliberals the economic constitution had constitutional status and should protect the individual's freedom to compete.

It also found that the main objective of the ARC was the protection of economic freedom. German competition law, which influenced Community competition law, was influenced by ordoliberalism.

1 See chapter two, pages 50-51.

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While many Community competition scholars and practitioners would agree that ordoliberalism has influenced EC competition law, they argue that, in order to make Article 82 more economics-based, the time has come to depart from the protection of individual economic freedom of action as a value in itself as articulated by ordoliberals. This view has been embraced by DG Competition in its Discussion Paper which states: 2
With regard to exclusionary abuses the objective of Article 82 is the protection of competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources.

Consumer welfare has received some support from the Community Courts when interpreting Article 81,3 but less so under Article 82 where the Commission and the CFI still focus to a considerable extent upon foreclosure only and not anti-competitive foreclosure and the intentions of the dominant undertaking, rather than the effects of its conduct. The Discussion Paper is predicated on the idea that the law is clear and there is no ambiguity as to the goals of Article 82, but, as shown in chapter three, the objective of consumer welfare is not entirely in tune with the case law of Article 82:4
The cases show that the Court has interpreted Article 82 to protect economic freedom, freedom of competition and the process of competition, which are all cornerstones of ordoliberalism. The essence of the competitive process is to allow competitors to enter the market to compete within the market.

Embracing the objective of consumer welfare as the main goal when assessing exclusionary conduct within Article 82 would be a departure from the jurisprudence and according to ordoliberal scholars would
2 Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses (December, 2005) paragraphs 4 and 54. 3 Case T-168/01 GlaxoSmithKline Services Unlimited v Commission, paragraph 118. 4 See chapter three, page 127.

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violate a fundamental right. It would require support from the ECJ as only the Court can decide whether its case law is in need for change and the Commission must act within the framework of the case law. To find support for the Commissions change, many Community lawyers and, in particular, economists argue that economic freedom and consumer welfare do not always contradict each other. The view that economic freedom could be an intermediate objective of economic efficiency in the form of consumer welfare is opposed by a leading ordoliberal scholar who argues:5
The real motives behind the enactment of antitrust law were not economic efficiency and the effectiveness of economic control, but social justice and civil liberties which were held to be threatened by monopolies.

Those who argue that economic freedom and economic efficiency do not necessarily conflict usually assess economic efficiency in the form of total welfare as articulated by the Chicago School. Chapter four showed that the welfare standard suggested by the Commission is not the total welfare standard because the welfare of the output producer is not taken into account:6
Given that consumers include purchasers on both the wholesale and retail level, but not the output producer, in stating that consumers must benefit, the ECJ dedicates itself to the consumer welfare standard.

Having considered the theory behind the objective of consumer welfare as well as that of economic freedom, it became clear that the two objectives pursued fundamentally different values. While economic freedom aims to protect the individual undertaking, consumer welfare takes a neo-classical position which values welfare without taking into
5 Franz Bhm, Democracy and Economic Power in Cartel and Monopoly in Modern Law (CF Muller Karlsruhe, 1961) page 28. 6 See chapter four, page 154.

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consideration the position of individuals. Whilst consumer welfare may ignore the position of the individual undertaking in the market, chapter six considered whether economic freedom could be tweaked to include efficiencies in such a way that economic freedom could be said to enhance consumer welfare. It found:7
Standard economics states that by protecting a competitor through the act of curtailing the power of the near monopolist, the consumer may benefit through increased choice and a reallocation of profits from the monopolist to alternative competitors. As these competitors will not have the ability to reap monopoly profits, these profits would be expected to be passed back to the consumer through reduced prices. If these effects outweigh the value of any above-cost discount offered by the near monopolist, consumers could gain from overall price reductions. While the move to protect suppliers may increase choice and potentially improve allocative efficiency through lower prices, this is not guaranteed. Nor is it guaranteed that dynamic movements towards productive efficiency will be facilitated best in this way. In some circumstances, it is plausible that the protected competitors will become efficient over time. However, it is also possible that the most productive way of supplying customers will be through one single supplier, particularly when economies of scale are great. Depending on which of these effects is the greatest the consumer could then actually gain or lose from such measures.

This led to the finding that there exists a tension between protecting economic freedom and promoting consumer welfare because:8
[P]ursuing an objective of economic freedom cannot be tweaked to include efficiencies to the benefit of consumer welfare. When pursuing an objective of economic freedom, the process is of intrinsic value and it excludes a change of the overarching principle to protect competitors only to the point where it is productively and allocative efficient to do so.

Although this finding established the tension between the two objectives, it was not conclusive as to the status of economic freedom in the Community legal order. Given that chapter two showed that ordoliberal scholars considered economic freedom to be a fundamental right,
7 See chapter six, page 228. 8 Ibid. page 230.

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chapter five had to examine whether the objective of economic freedom had a similar status in the Community legal order. If economic freedom could be considered a fundamental right in the Community legal order, the promotion of consumer welfare would not only be a departure from the jurisprudence, given that economic freedom is not used to enhance consumer welfare, but would also be a violation of a fundamental right in the ordoliberal sense. The analysis of the status of economic freedom in the Community legal order started by examining the EC Treaty and led to the finding:9
[W]hilst Community competition law is influenced by ordoliberalism, it is not an implementation of ordoliberalism and the EC Treaty is not a Treaty based on the ordoliberal economic constitution.

This finding made clear that Article 82 is not a direct replica of ordoliberal ideology, but it did not exclude the possibility of economic freedom being a fundamental right in the Community legal order, where it formed part of the general principles of the EU. Thus, chapter five had to examine the different sources where the ECJ finds inspiration for the general principles of the EU: the ECHR, the Charter and the constitutions of the Member States. The examination found that neither the ECHR nor the Charter protects economic freedom. The ECJ does not automatically refuse legal status to rights which are not expressly protected in the ECHR or the Charter. Thus, it was necessary to examine whether economic freedom was protected in the German constitution, as the ECJ is prepared to protect fundamental rights in the Community legal order if these are recognised and protected by the constitutions of the Member States.

9 See chapter five, page 220.

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Analysing the German constitution, the so-called Basic Law, revealed that economic freedom is not directly protected. Instead the Basic Law protects a general right of liberty. It established that it is most likely that economic freedom is covered by the general right of liberty, as this right has been interpreted broadly. Despite this finding, chapter five concluded that economic freedom is unlikely to have status as a fundamental right in the Community legal order. This conclusion was based on the knowledge that the ECJ is unlikely to elevate a right to have status as a fundamental right, if it is protected only in one Member States constitution.10

3. Consequences of Adopting a Consumer Welfare Standard

The need to protect individual economic freedom grew after World War II. Historically this is not surprising as such a right could not be taken for granted during World War II. Today some argue in favour of a divorce of economic issues such as efficiency and wealth creation from noneconomic issues within the area of competition law.11 In the light of this, the ordoliberal ideology, which emphasises the interdependence between economic structures and human values, may seem less than ideal now compared to how it appeared in a devastated Germany after World War II. Whilst DG Competitions policy must be credible, effective and legitimate and therefore be dynamically shaped to reflect the prevailing market characteristics of the EU at any one point in time, since it is apparent that the successful adoption and application of a particular competition
10 This thesis did not consider other Member States constitutions, not because it would be irrelevant, but because the argument that economic freedom is considered a part of the general principles of the EU would be even harder to make given the finding that the German constitution only protects economic freedom indirectly via the general right of liberty. 11 See for example Simon Bishop and Mike Walker, The Economics of EC Competition Law (Sweet & Maxwell, 2nd ed, 2002); Okeoghene Odudu, The Boundaries of EC Competition Law (OUP, 2006).

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policy is a question of context-specific economic conditions, the ordoliberal influence on Community competition law cannot be denied. Ordoliberalism continues to be a well-respected legal tradition. It holds both that government needs to be restrained from abuse of power, and that the free market has its limits. Economic rights deserve protection, and vigilance is needed to ensure economic power is not misused or abused. Besides ignoring the objective of economic freedom and departing from Article 82 jurisprudence, to focus mainly on consumer welfare would require the application of economic theory to factual situations measuring adverse effects on the market. This would necessitate a caseby-case analysis and it would mean that every case would turn on its own merits. A departure from economic freedom is significant and not merely cosmetic: it can reduce considerably the scope of the abuse concept which may lead to more of the type I errors defined in chapter one.12 A legal system's approach to resolving conflicts between objectives is usually determined by a combination of political preferences and intuitions about the ability of government and markets to correct competitive failures. Successive schools of thought have exercised In the US, the legal considerable influence over these questions.

approach has been influenced by the Chicago School, described in chapter four. The Chicago School has substantial confidence in the robustness of markets to withstand and correct monopolistic distortion and little faith in the ability of governments to intervene in a way that improves upon market outcomes. In that framework, the risk of type I errors is preferable to the risk of type II errors. As noted, by adopting an objective of consumer welfare the Commission enforcement of Article 82

12 See chapter one, page 14.

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is likely to move slightly towards a system where the risk of type I errors is preferable to the risk of type II errors. Once it is accepted that economic freedom is not a means to the end of consumer welfare within Article 82, a substantive test for exclusionary conduct cannot be based on the likely adverse effect of the conduct on consumers. Such a test would be incompatible with the protection of the economic freedom of undertakings, as conduct by dominant undertakings is not regarded as unlawful unless it can be shown to have likely adverse effects on consumers. A test based on likely adverse effects on consumers would ignore the aim of economic freedom, as economic freedom can be restricted without it necessarily having adverse effects on the consumer. DG Competition has already announced in its Discussion Paper that consumer welfare will be the overarching objective when pursuing exclusionary abuse under Article 82. This is nothing more than a policy statement in a discussion paper, which is legally non-binding and has no legal status capable of creating legitimate expectations.13 DG Competition has not committed itself or given any assurance as to the application of the analytical approach described in the Discussion Paper.14 Even so, it is an indication of the Commissions current thinking. If consumer welfare is to be accepted as the main objective when examining exclusionary abuses, it is imperative for its success that the Community Courts support the Commission in its application of this objective. Until and if the Commission gets support from the Community Courts, it is suggested that the Commission should arrive at a clear and
13 According to Article 249 EC only regulations, directives and decisions are legally binding measures in the EU. 14 Discussion Paper, supra note 2, paragraph 2; Case T-209/01 Honeywell International INC v Commission, paragraph 100.

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consistent internal position on how to enforce Article 82 and should issue guidelines. While it may be difficult to produce guidelines on the law compared to guidelines on prosecutorial policy, this is necessary if the Commission wants to change its enforcement on Article 82 to promote consumer welfare. While the adoption of guidelines will not alter the fact that the Commission needs support from the Community Courts, it will show that the Commission is determined to adopt a more economicsbased approach to Article 82. If the Commission does not issue guidelines, it might send the signal that the Commission is not itself ready to commit to a policy of pursuing a consumer welfare objective. A Commission official has stated that if the Commission is going to issue guidelines on Article 82 it will not be guidelines on its prosecutorial discretion, but guidelines on the substance of the law.15

4.

Guidelines

Some argue that it is unacceptable for the Commission to derogate from older case law by means of soft law such as guidelines.16 However, as argued in chapter one, the Community Courts rarely articulate their stand as to the objectives, so ambiguities remain. Given these ambiguities, it is perfectly reasonable for the Commission to take a view by issuing guidelines. If the Community Courts disagree with the Commissions view, they can overturn it in future judgments. Having suggested that guidelines would be a possible way forward, the Commission would be under no obligation to issue guidance and it is still

15 Joint CLF-ECA meeting on 19 April 2005, London. The identity of the official cannot be revealed as the meeting was held under the Chatham House rule. 16 Francis Snyder, Soft Law and Institutional Practice in the European Community in Martin (ed), The Construction of Europe, Essays in Honour of Emil Noel (1994) pages 199201.

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unknown whether guidelines will be issued at a later stage.17 However, if guidelines are issued they would bind the Commission.18 Guidelines will be difficult to produce, but this is exactly what drives the imperative for them. Guidelines would be desirable given that the Commission does not regard itself as being bound by its previous decisions.19 Moreover, chapter one found that the tools available for reforming Article 82 are limited and there is no secondary legislation under Article 82, and suggested the possibility of guidelines. Guidelines should seek to ensure that businesses have sufficient information to arrange their affairs in such a way that the risks of unintentional infringement are minimised as are the costs of unnecessary enforcement action or misconceived complaints. Guidelines would acknowledge the general principle of legal certainty under Community law, which requires that firms should, to the greatest possible extent, be able to judge whether their conduct is legal or not when they decided to engage in it.20 Guidelines would provide greater transparency and predictability in the form of legal certainty to European companies and their advisers.21 Legal certainty is important as it is vital for the undertakings in the market dominant or not to know the legal

17 Commission Discussion Paper on Abuse of Dominance - Frequently Asked Questions, MEMO of 19 December 2005 MEMO/05/486. Available at: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/05/486&format=HTML&aged=1&l anguage=EN&guiLanguage=en. 18 Case C-189/02 Dansk Roerindustri A/S and Others v Commission [2005] ECR I-5425, paragraph 211. 19 Case T-210/01 General Electric v Commission [2005] ECR II-5575, paragraph 118. 20 Takis Tridimas, The General Principles of EC Law (New York: Oxford University Press, 1999) pages 165-166. 21 John Temple Lang, Legal Certainty and Legitimate Expectations as General Principles of Law in Ulf Bernitz and Joakim Nergelius (eds), General Principles of European Community Law (Kluwer Law International, 2000) pages 163-184.

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framework within which they can operate.22 Decisions on innovation and investment involve business risks and undertakings are less likely to be willing to take these risks if they cannot calculate the risk of future legal sanctions. Enhancing legal certainty reduces the legal risks, facilitating innovation and investment.23 For competition policy to be effective it will need support from the business community, which will only happen when businesses understand the Commissions policy. While guidelines would not minimise the tension between the protection of economic freedom and the promotion of consumer welfare, they would make it more likely for the underlying objectives (whether that is consumer welfare or something else) to be realised, as noted in chapter one. Guidance is particularly important in this regard as the national courts and competition authorities of the Member States cannot take decisions running counter to Commission decisions.24 Regardless of the difficulties, it would be advisable for the Commission to issue guidelines if national authorities and courts are to achieve a similar outcome with Community practice in future cases as they will need to know what the Commission is trying to achieve. Moreover, when national courts are called upon to apply Community competition law, they can seek guidance in the case law of the Community Courts or in Commission regulations, decisions, notices and guidelines applying the competition rules.25 Where these tools do not offer sufficient guidance,
22 Case T-51/89 Tetra Pak Rausing SA v Commission [1990] ECR II-309, [1991] 4 CMLR 334, paragraph 36; Joined Cases 212/80 to 217/80 Amministrazione delle Finanze dello Stato v Srl Meridionale Industria Salumi and others; Ditta Italo Orlandi & Figlio and Ditta Vincenzo Divella v Amministrazione delle finanze dello Stato [1981] ECR 2417, paragraph 10; Cases 209/84 to 213/84 Ministre Public v Asjes and Others (Nouvelles Frontires), paragraph 64. 23 OJ [2003] L1/1 Council Regulation on the Implementation of the Rules on Competition Laid Down in Article 81 and 82 of the Treaty, recital 38. 24 Ibid. recital 22 and Article 16. 25 OJ [2004] C101/54 Commission Notice on the Co-operation between the Commission and the Courts of the EU Member States in the Application of Articles 81 and 82 EC , recital 27.

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the national court may ask the Commission for its opinion on questions concerning the application of Community competition law. The national court may ask the Commission for its opinion on economic, factual and legal matters.26 The courts of the Member States may also ask the Commission to transmit to them information in its possession or its opinion on questions concerning the application of the Community competition rules.27 Given that the Commission has not sought to publish general secondary legislation or practical guidance under Article 82, apart from in some specific sectors,28 the number of requests from national courts is likely to increase if the national courts are given insufficient information about how to assess exclusionary conduct by dominant undertakings. Besides asking the Commission for its opinion on economic, factual and legal matters, national courts may refer questions to the ECJ under Article 234 procedure.

5.

Contribution to the Article 82 Discussion

Competition law is supposed to protect competition and not competitors, but the Commission has been criticised for protecting the latter more than the former when enforcing Article 82. It has been suggested that the adoption of a more economics-based approach to Article 82 would ensure that the provision was enforced to protect competition instead of

26 Case C-234/89 Stergios Delimitis v Henninger Bru AG [1991] ECR I-935, paragraph 53; Joined Cases C-319/93, C-40/94 and C-224/94 Hendrik Evert Dijkstra v Friesland (Frico Domo) Coperatie BA and Cornelis van Roessel and others v De coperatieve vereniging Zuivelcoperatie Campina Melkunie VA and Willem de Bie and others v De Coperatieve Zuivelcoperatie Campina Melkunie BA [1995] ECR I-4471, paragraph 34. 27 Council Regulation 1/2003, supra note 23, Article 15. 28 Such as postal services and telecommunications, OJ [2002] C165/03 Commission Guidelines on Market Analysis and Assessment of Significant Market Power under the Community Regulatory Framework for Electronic Communications Networks and Services, paragraph 70, and EC Directive 2002/21 on a Common Regulatory Framework for Electronic Communication Service (the Framework Directive).

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competitors.29 To move towards a more economics-based approach, the DG Competition has suggested that the main objective of Article 82 when assessing exclusionary abuses should be consumer welfare. That suggestion appears to ignore the fact that economic freedom has also been an objective pursued in Article 82 jurisprudence. By revealing that a tension between the protection of economic freedom and the promotion of consumer welfare exists, because the two objectives pursue fundamentally different values, it was possible to clarify that those who think that Article 82 has always been about economic efficiency are mistaken. This does not take away the possibility that the Commission may change its enforcement policy towards Article 82, if it believes that Article 82 should be about economic efficiency in the form of consumer welfare. However, the Commission needs to acknowledge that economic freedom rooted in the ordoliberal tradition has a place in Article 82 and that it must reconcile the tension between the two objectives in order for the policy review of Article 82 to be successful. It would be a mistake to think that the finding that there is a tension between the two objectives also clarifies the conflict between them within the scope of Article 82, but it is hoped that the discussion has moved a great deal closer to understanding that such a tension exists. There is still much work to do. As noted, the Commission must issue guidelines in order to provide a minimum level of clarity in this area of law.

29 This was suggested in the OECD Report on Competition Law and Policy in the European Union (October, 2005) page 30. Available at: http://www.oecd.org/dataoecd/7/41/35908641.pdf.

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C
Coppel, Jason and ONeill, Aidan The European Court of Justice: Taking Rights Seriously? 29 Common Market Law Review (1992) 669

D
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E
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F
Fiebig, Andre R The German Federal Cartel Office and the Application of Competition law in Reunified Germany 14 University of Pennsylvania Journal of International Business Law (1993) 373 Fox, Eleanor What is Harm to Competition? Exclusionary Practices and Anticompetitive Effect 70 Antitrust Law Journal (2002) 371 Fox, Eleanor Monopolization and Dominance in the United States and the European Community: Efficiency, Opportunity, and Fairness 61 Notre Dame Lawyer (1986) 981 Fox, Eleanor and Sullivan, Lawrence Antitrust Retrospective and Prospective: Where are We Coming From? Where are We Going? 62 New York University Law Review (1987) 936

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Kallaugher, John and Sher, Brian Rebates Revisited: Anti-Competitive Effects and Exclusionary Abuse under Article 82 5 European Competition Law Review (2004) 263 Karsten, Siegfried G Eucken's 'Social Market Economy' and Its Test in PostWar West Germany. The Economist as Social Philosopher Developed Ideas that Paralleled Progressive Thought in America 44(2) American Journal of Economics and Sociology (1985) Kenny, Mel Constructing a European Civil Code: Quis Custodiet Ipsos Custodes? 12 Columbia Journal of European Law (2006) 775 Kirkwood, John Consumers, Economics and Antitrust 21 Research in Law & Economics (2004) 1 Korah, Valentine The Interface between Intellectual Property Rights and Antitrust: The European Experience 69 Antitrust Law Journal (2002) 801 Korah, Valentine Instituto Chemioterapico Italiano SpA Istituto and Commercial Solvents Corporation v Commission of the European Communities 11 Common Market Law Review (1974) 248

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R
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T
Thill-Tayara, Melanie Developments in French Competition Law 18(2) European Competition Law Review (1997) 113

U
Usher, John A Variable Geometry or Concentric Circles: Patterns for the EU 46 International and Comparative Law Quarterly (1997) 243

V
Van Den Bergh, Roger Modern Industrial Organisation versus Old-Fashioned European Competition Law 17(2) European Competition Law Review (1996) 75 Vickers, John Abuse of Market Power 115 The Economic Journal (2005) F244 Vogelenzang, P Abuse of Dominant Position in Article 86; The Problem of Causality and Some Applications 13 Common Market Law Review (1976) 63 Vlcker, Sven Developments in EC Competition Law in 2003: An Overview 41 Common Market Law Review (2004) 1027

W
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Z
Zanon, Lucio Price Discrimination under Article 86 of the E.E.C. Treaty: The United Brands Case 31 International and Comparative Law Quarterly (1982) 36 Zuleeg, Manfred The European Constitution under Constitutional Constraints: The German Scenario 22(1) European Law Review (1997) 19

Working & Conference Papers B

Barrell, Ray and Dury, Karen Choosing the Regime: Macroeconomic Effects of UK Entry into EMU NIESR Discussion Paper No 168 (2000)

G
Geradin, Damien and Petit, Nicolas Price Discrimination under EC Competition Law: The Need for a Case-by-Case Approach GCLC working paper (July, 2005) Geradin, Damien; Hofer, Paul; Louis, Frederic; Petit, Nicolas and Walker, Mike The Concept of Dominance GCLC Research Papers (July, 2005) Goldsmith, Niels & Berndt, Arnold Leonhard Miksch (1901-1950) A forgotten Member of the Freiburg School Walter-Eucken-Institute, Freiburg Discussion Papers on Constitutional Economics No 3 (2002)

J
Joerges, Christian The Law in the Process of Constitutionalising Europe EUI Working Paper Law No 4 (2002) Joerges, Christian and Rdl, Florian Social Market Economy as Europes Social Model? EUI Working Paper Law No 2004/8 (2004) Joerges, Christian What is Left of the European Economic Constitution? EUI Working Paper Law No 13 (2004)

276

L
Lage, Santiago Martinez and Allendesalazar, Rafael Community Policy on Discriminatory Pricing: A Practitioner's Perspective presented at the 2003 Annual EU Competition Law and Policy Workshops - What is an Abuse of a Dominant Position? (Florence, 2003)

M
Manow, Philip; Schafer, Armin and Zorn, Hendrik European Social Policy and Europes Party-Political Center of Gravity, 1957-2003 MPIFG Discussion Paper No 6 2004) Meijer, Gerrit Some Aspects of the Relationship between the Freiburg School and the Austrian School EconPapers (1999)

T
Temple Lang, John Fundamental Issues Concerning Abuse under Article 82 presented at the Annual Competition Policy Conference, Oxford, 12 July 2005 Themaat, Verloren Van Zusammenschlsse ber die Grenze im Rahmen des EWG-Bereichs presented at the 4th International Conference on Eu ropean Law (Rome, 1968)

Conference Reports
IBC conference Report on Advanced EC Competition Law (4-5 May, 2006)

Speeches K
Kroes, Neelie Preliminary Thoughts on Policy Review of Article 82, 23 September 2005, Fordham Corporate Law Institute New York (speech/05/537) Kroes, Neelie European Competition Policy in a Changing World and Globalised Economy: Fundamentals, New Objectives and Challenges Ahead, 5 June 2007, GCLC/College of Europe Conference on "50 years of EC Competition Law" Brussels (speech/07/364)

L
Lowe, Philip The Thirteen Annual Conference on International Antitrust and Policy, 23 October 2003, Fordham Antitrust Conference in Washington Lowe, Philip New Challenges in Europe, 24 June 2005, Kings College London

277

Lowe, Philip Preserving and Promoting Competition: A European Response, 11 May 2006, ST Gallen Competition Law Forum Lowe, Philip Consumer Welfare and Efficiency New Guiding Principles of Competition Policy?, 27 March 2007, 13th International Conference on Competition and 14th European Competition Day

M
Mensching, Juergen Competition Policy: Commercial and Consumer Paybacks. The European Dimension, 30 September 1 October 2003, the International Institute of Communications 34th annual conference Monti, Mario The Future for Competition Policy in the European Union, 9 July 2001, Merchant Taylor's Hall (speech/01/340) Monti, Mario Competition and the Consumer: What are the Aims of European Competition Policy?, 26 February 2002, Madrid Casino de Madrid (speech/02/79) Monti, Mario Proactive Competition Policy and the Role of the Consumer, 29 April 2004, Dublin Castle (speech/04/212) Monti, Mario Comments to the Speech given by Hew Pate, Assistant Attorney General, US Department of Justice, at the Conference Antitru st in a Transatlantic context, 7 June 2004, Brussels

P
Paulis, Emil The Burden of Proof in Article 82 Cases, 13 September 2006, Fordham Corporate Law Institute New York

R
Riviere y Marti, Juan Antonio Competition Enforcement and Consumers 29 April 2004, Dublin Castle Rule, Charles F Consumer Welfare, Efficiencies, and Mergers, 17 November 2005, the hearing of the Antitrust Modernization Commission

V
Van Miert, Karel Competition Policy in the 1990s, 11 May 1993, the Royal Institute of International Affairs Van Miert, Karel The Future of European Competition Policy, 17 September 1998 (speech/98/1351)

278

W
Wolf, Dieter Competition Policy in Germany - Experiences and Reform Tendencies, 24 November 1997, South Korea

Non-Community Legislation, Guidelines, Court Judgments and Reports

United States
Continental TV Inc v GTE Sylvania Inc 433 US 36 (1977) Illinois Brick Co v Illinois 431 US 720 (1977) United States v Topco Associates Inc 405 US 596 (1972) Reiter v Sono-tone Corporation 442 US 330 (1979) Brooke Group Ltd v Brown & Williamson Tobacco Corporation 509 US 209 (1993)

France
Ordinance n 45-1483 of 1945 Ordinance n 86-1243 of 1986 Loi n 2001-420 du 15 mai 2001 relative aux Nouvelles Rgulations Economiques, JO n 113 du 16 mai 2001 page 7776 French Competition Commissions decision Avis de la Commission de la concurrence du 14 mars 1985 sur les super-centrales d'achat

Germany
The Grundgesetz, promulgated by the Parliamentary Council on 23 May 1949 The Draft of an Act to Protect Competition Based on Performance and an Act Concerning the Monopoly Office (Bundeswirtschaftsminister publication, Bonn 1949) Verordnung gegen Missbrauch wirtschaftlicher Machtstellungen , Reichsgesetzblatt [RGB1.] I, 1067 (2 November 1923) Gesetz gegen Wettbewerbsbeschrnkungen [GWB], 1957 Bundesgesetsblatt [BGB1.] I 1081 (West Getmany) 6 BVerfGE 32 Elfes (1957) 37 BVerfGE 271 Solange I (1974) WuW/E BGH 1276 lfeldrohre (1973) WUW/E BGH 1435 Vitamin B12 (1976)

279

WUW/E OLG 1767 Kombinationstarif (1977) WUW/E OLG 1983 Rama-Mdchen (1978) 73 BVerfGE 339 Solange II (1986)

OECD Reports
OECD Report on Market Power and the Law (1970) OECD Report on Abuse of Dominance and Monopolisation (1996) OECD Report on The Objectives of Competition Law and Policy (2003) OECD Report on The Role of Competition Policy in Regulatory Reform (2004) OECD Report on Competition on the Merits (2005) OECD Report on Competition Law and Policy in the European Union (2005)

UNICTAD
UNICTAD, Objectives of Competition Law and Policy: Towards a Coherent Strategy for Promoting Competition and Development (OECD, 2003) UNICTAD, Model Law on Competition (United Nations, 2004)

Community Legislation EC Treaties

Treaty establishing the European Coal and Steal Community (ECSC Treaty) Treaty establishing the European Community (EC Treaty) consolidated version [2002] OJ C325/33 The Treaty of Amsterdam OJ [1997] C340/1 Treaty on European Union, consolidated version OJ [2002] C325/5 Treaty establishing a Constitution for Europe OJ [2004] C310/1

EC Directives
EC Directive 2002/21 on a Common Regulatory Framework for Electronic Communication Service (the Framework Directive)

Council Regulations (chronological)

OJ Special Edition [1962] No 204/62 Council Regulation No 17/62 First Regulation Implementing Articles 81 and 82 of the Treaty

280

OJ [1999] L336/21 Commission Regulation No 2790/1999 on the Application of Article 81(3) to Categories of Vertical Agreements and Concerted Practices OJ [2003] L1/1 Council Regulation No 1/2003 of 16 December 2002 on the Implementation of the Rules on Competition Laid Down in Articles 81 and 82 of the Treaty OJ [2004] L123/11 Commission Regulation No 772/2004 of 27 April 2004 on the Application of Article 81(3) of the Treaty to Categories of Technology Transfer Agreements OJ [2004] L24/1 Council Regulation No 139/2004 on the Control of Concentrations between Undertakings

Conventions and Agreements

OJ [2000] C364/1 Charter of Fundamental Rights of the European Union

Commission Notices & Guidelines (chronological)

OJ [1997] C372/5 Commission Notice on the Definition of the Relevant Market for the Purpose of Community Competition Law OJ [2000] C291/1 Commission Notice Guidelines on Vertical Restraints OJ [2001] C3/2 Commission Notice Guidelines on the Applicability of Article 81 of the EC Treaty to Horizontal Co-Operation Agreements OJ [2002] C165/6 Commission Notice Guidelines on Market Analysis and Assessment of Significant Market Power under the Community Regulatory Framework for Electronic Communications Networks and Services OJ [2004] C31/5 Commission Notice Guidelines on the Assessment of Horizontal Mergers under the Council Regulation on the Control of Concentrations between Undertakings OJ [2004] C101/2 Commission Notice Guidelines on the Application of Article 81 of the EC Treaty to Technology Transfer Agreements OJ [2004] C101/43 Commission Notice on Co-Operation within the Network of Competition Authorities OJ [2004] C101/54 Commission Notice on the Co-operation between the Commission and the Courts of the EU Member States in the Application of Articles 81 and 82 EC OJ [2004] C101/65 Commission Notice on the Handling of Complaints by the Commission under Articles 81 and 82 of the EC Treaty OJ [2004] C101/78 Commission Notice on Informal Guidance Relating to Novel Questions Concerning Articles 81 and 82 of the EC Treaty that Arise in Individual Cases

281

OJ [2004] C101/97 Commission Notice Guidelines on the Application of Article 81(3) of the EC Treaty

Commission Press Releases & Memos (chronological)

MEMO of 22 July 1999 MEMO/99/42, Fidelity bonuses by dominant companies are simply not on Press release of 10 February 2000 IP/00/141, Commission examines the impact of Windows 2000 on competition Press release of 3 August 2000 IP/00/906, Commission opens proceedings against Microsoft's alleged discriminatory licensing and refusal to supply software information Press release of 21 December 2001 IP/01/1899, High-speed Internet Access: Commission Suspects Wanadoo (France) of Abusing its Dominant Position Press release of 9 July 2002 IP/02/1016, Commission issues Market Power Assessment Guidelines for Electronic Communications Press Release of 16 July 2003 IP/03/1025, High-speed Internet: the Commission Imposes a Fine on Wanadoo for Abuse of a Dominant Position Press release of 6 August 2003 IP/03/1150, Commission gives Microsoft Last Opportunity to Comment before Concluding its Antitrust Probe Press Release of 24 Marts 2004 IP/04/382, Microsoft Press Release of 19 December 2005 IP/05/1626, Competition: Commission Publishes Discussion Paper on Abuse of Dominance MEMO of 19 December 2005 MEMO/05/486, Commission Discussion Paper on Abuse of Dominance Frequently asked Questions Press Release of 29 March 2006 IP/06/398, Prokent/Tomra MEMO of 24 March 2004 MEMO/04/70, Microsoft Questions and Answers on Commission Decision

Community Reports
Commission General Report on Activities of the European Communities (1966) 1st Report on Competition Policy (1971) 8ht Report on Competition Policy (1978) 9th Report on Competition Policy (1979) 11th Report on Competition Policy (1981) 17th Report on Competition Policy (1987) 20th Report on Competition Policy (1990)

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27th Report on Competition Policy (1997) 29th Report on Competition Policy (1999) 30th Report on Competition Policy (2000) 33rd Report on Competition Policy (2003) Spaak Report The Brussels Report on the General Common Market (June 1952) EAGCP Report An economic Approach to Article 82 EC (July, 2005) Commission Report on the Action Plan for Consumer Policy 1999-2001 and on the General Framework for Community Activities in Favour of Consumers 1999-2003 COM(2001) 486

European Parliament and Community Documents

Competition Policy within the Framework of the Common Market , European Parliament Document No 79/107 of 16 June 1965 Commission Memorandum to the Governments of the Member States: Concentration of Enterprises in the Common Market (December 1965), [1966] CMLR 26, page 8 Survey, Competition series, No 3, Brussels 1966 Competition Policy Newsletter, No 2 (summer 2006) Commission of the EEC, Le Probleme De La Concentration Dans Le Marche Commun No 21 (1966) Note of 26 October 1956 by Hans Von der Groeber, Council Archives, CM3/NEGO/217, Document MAE468 f/56 Mmo interne of 7 September 1956 by Alfred Mller-Armack, Council Archives, CM3/NEGO/236, Document MAE/Sec. 29/56 DG Competition Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses (December 2005) Commission White Paper on Modernisation of the Rules Implementing Articles 85 and 86 of the EC Treaty OJ [1999] C132/1 The Presidency Conclusions of the Brussels European Council , European Council Document No 11177/07 of 21-22 June 2007

Cases from European Court of Justice (chronological)

Case 26/62 Van Gend en Loos v Administratie der Belastingen [1963] ECR 1 Case 6/64 Costa Flaminio v ENEL [1964] ECR 585 Case 29/69 Stauder v City of Ulm [1969] ECR 419 Case 11/70 Internationale Handelsgesellschaft mbH v Einfuhr- und Vorratsstelle fr Getreide und Futtermittel [1970] ECR 1125 Case 6/72 Europemballage Corpn and Continental Can Co Inc Continental Can v Commission [1973] ECR 215

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Case 4/73 Nold Kohlen v Commission [1974] ECR 491 Case 6/73 Istituto Chemioterapico Italiano SpA and Commercial Solvents Corp v Commission [1974] ECR 223 Case 40-114/73 Cooperatieve Vereniging Suiker Unie UA and Others v Commission [1975] ECR 1663 Case 26/75 General Motors Continental NV v Commission [1975] ECR 1367 Case 36/75 Rutili v Minister for the Interior [1975] ECR 1219 Case 26/76 Metro SB-Gromrkte GmbH & Co KG v Commission [1977] ECR 1875 Case 27/76 United Brands Co v Commission [1978] ECR 207 Case 85/76 Hoffmann-La Roche & Co AG v Commission [1979] ECR 461 Case 77/77 Benzine en Petroleum Handelsmaatschappij BV v Commission [1978] ECR 1513 Case 106/77 Amministrazione delle finanze dello Stato v Simmenthal SpA [1978] ECR 629 Case 22/78 Hugin Kassaregister AB and Hugin Cash Registers Ltd v Commission [1979] ECR 1869 Case 44/79 Liselotte Hauer v Land Rheinland-Pfalz [1979] ECR 3727 Case 155/79 AM & S Europe Ltd v Commission [1982] ECR 1575 Joined Cases 212/80 to 217/80 Amministrazione delle finanze dello Stato v Srl Meridionale Industria Salumi and others; Ditta Italo Orlandi & Figlio and Ditta Vincenzo Divella v Amministrazione delle finanze dello Stato [1981] ECR 2417 Case 322/81 Nederlandsche Banden-Industrie Michelin NV v Commission [1983] ECR 3461 Case 7/82 GVL v Commission [1983] ECR 483 Case 240/83 Procureur de la Rpublique v Association de dfense des brleurs d'huiles usages (ADBHU) [1985] ECR 531 Case 294/83 Parti cologiste Les Verts v European Parliament [1986] ECR 1339 Cases 209/84 to 213/84 Ministre public v Asjes and Others (Nouvelles Frontires) Case 311/84 Centre Belger dEtudes de Marche Telemarketing v CLT and IPB [1985] ECR 3261 Case 62/86 AKZO Chemie BV v Commission [1991] ECR-I 3359 Case 66/86 Ahmed Saeed Flugreisen and Silver Line Reisebro [1989] ECR 803 Case 53/87 Consorzio italiano della componentistica di ricambio per autoveicoli and Maxicar v Rgie nationale des usines Renault [1988] ECR 6039 Case 238/87 AB Volvo v Erik Veng (UK) Ltd [1988] ECR 6211 Case C-213/89 The Queen v Secretary of State for Transport, ex parte: Factortame Ltd and others [1990] ECR I-2433

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Case C-234/89 Stergios Delimitis v Henninger Bru AG [1991] ECR I-935 Case C-241-242/91P Radio Telefis Eireann (RTE) and Independent Television Publications Ltd v Commission [1995] ECR I-743 Case C-53/92 Hilti AG v Commission [1994] ECR I-667 Joined Cases C-319/93, C-40/94 and C-224/94 Hendrik Evert Dijkstra v Friesland (Frico Domo) Coperatie BA and Cornelis van Roessel and others v De coperatieve vereniging Zuivelcoperatie Campina Melkunie VA and Willem de Bie and others v De Coperatieve Zuivelcoperatie Campina Melkunie BA [1995] ECR I-4471 Case C-333/94P Tetra Pak v Commission [1996] ECR I-5951 Case C-299/95 Friedrich Kremzow v Republik sterreich [1997] ECR I-2629 Case C-395-396/96P Compagnie Maritime Belge Transport v Commission [2000] ECR 1365 Case C-7/97 Oscar Bronner GmbH & Co KG v Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co KG [1998] ECR I-7791 Joined Cases C-147-148/97 Deutsche Post AG v Gesellschaft fr Zahlungssysteme mbH and Citicorp Kartenservice GmbH [2000] ECR I-825 Case C-163/99 Portuguese Republic v Commission [2001] ECR I-2613 Case C-418/01 NDC Health Corp and NDC Health GmbH & Co KG v IMS Health Inc[2002] ECR I-3401 Case C-189/02 Dansk Roerindustri A/S and Others v Commission [2005] ECR I-5425 Case C-540/03 European Parliament v Council of the European Union [2006] ECR I-5769 Case C-501/06 GlaxoSmithKline v Commission Case C-513/06 Commission v GlaxoSmithKline Case C-515/06 European Association of Euro Pharmaceutical Companies Case C-519/06 Asociacin de exportadores espaoles de productos farmacuticos Case C-202/07P France Tlcom SA v Commission

Advocate Generals Opinions (chronological)

Opinion of Advocate General Roemer in Case 6/72 Continental Can delivered on 21 November 1972 Opinion of Advocate General Warner in Case 7/76 Amministrazione delle finanze dello Stato delivered on 22 June 1976 Opinion of Advocate General Reischl in Case 85/76 Hoffmann-La Roche delivered on 19 September 1978 Opinion of Advocate General Van Gerven in Case C-18/93 Corsica Ferries delivered on 9 February 1994

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Opinion of Advocate General Jacobs in Case C-97/7 Oscar Bronner delivered on 28 May 1998 Opinion of Advocate General Fennelly in Joined Cases C-395-396/96 Compagnie Maritime Belge Transport delivered on 29 October 1998 Opinion of Advocate General Tizzano in Case C-418/01 IMS Health delivered on 2 October 2003 Opinion of Advocate General Jacobs in Case C-53/03 Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and others v GlaxoSmithKline AEVE delivered on 28 October 2004 Opinion of Advocate General Kokott in Case T-95/04P British Airways plc delivered on 23 February 2006

Cases from the European Court of First Instance (chronological)

Case T-30/89 Hilti AG v Commission [1991] ECR I-1439 Case T-65/89 BPB Industries and British Gypsum Ltd v Commission [1993] ECR II-389 Case T-76/89 Independent Television Publications Ltd v Commission [1991] ECR II-575 Case T-83/91 Tetra Pak International Sa v Commission [1994] ECR II-755 Joined Cases T-24-26 and 28/93 Compagnie Maritime Belge Transports NV v Commission [1996] ECR II-1201 Case T-111/96 ITT Promedia NV v Commission [1998] ECR II-2937 Case T-228/97 Irish Sugar plc v Commission [1999] ECR II-2969 Case T-65/98 Van den Bergh Foods Ltd v Commission [1998] ECR II-2641 Joined Cases T-191/98 and T-212/98 to 214/98 Atlantic Container Line AB and others v Commission (TACA) [2003] ECR II-3275 Case T-219/99 British Airways plc v commission [2003] ECR II-5917 Case T-168/01 GlaxoSmithKline Service Unlimited v Commission Case T-203/01 Manufacture franaise des pneumatiques Michelin v Commission ECR II-4071 Case T-209/01 Honeywell International INC v Commission Case T-210/01 General Electric v Commission [2005] ECR II-5575 Case T-340/03 France Tlcom SA v Commission Case T-328/03 O2 (Germany) GmbH & Co OHG v Commission [2006] ECR II-1231 Case T-201/04 Microsoft Corporation v Commission Case T-155/06 Tomra Systems ASA and others v Commission

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Community Commission Decisions (chronological)

GEMA, OJ [1971] L134/15 Continental Can, OJ [1972] L7/25 General Motors Continental NV, OJ [1975] L29/14 Kabel unde Metallwerke Neumeyer AG and Establissements Luchaire SA Agreement, OJ [1975] L222/34 Vitamins, OJ [1976] L223/25 Bandengroothandel Frieschebrug BV/NV Nederlansche Banden-IndustrieMichelin, OJ [1981] L353/33 ECS/AKZO, OJ [1985] L374/1 Eurofix-Bauco/Hilti, OJ [1988] L65/19 Decca Navigator system, OJ [1989] L43/27 Magill TV Guide/ITP, BBC and RTE, OJ [1989] L78/43 Soda-Ash-Solvay, OJ [1991] L152/21 British Midland v Aer Lingus, OJ [1992] L96/34 Irish Sugar PLC, OJ [1997] L258/1 Alpha Flight Service/Aeroports de Paris, OJ [1998] L230/10 Virgin/British Airways, OJ [2000] L30/1 1998 Football World Cup, OJ [2000] L5/55 AOL/Time Warner, OJ [2001] L268/28 Deutsche Post AG, OJ [2001] L331/40 Manufacture franaise des pneumatiques Michelin, OJ [2002] L143/1 Prokent/Tomra, COMP/38.113 Microsoft, COMP/C-3/37.792

Newspaper Articles and other Materials (chronological)

The Times, Continental Can wins European Court Appeal against the Commission, 22 February 1973 Wall Street Journal, Attorney General William Baxter, Antitrust Division at the US DOJ, 4 March 1982 Martinsen, Dorte Sindbjerg European Institutionalisation of Social Security Rights: A Two-layered Process of Integration (European University Institute, Florence, PhD Thesis, 2004) Microsoft Says Proposed Settlement Would Have Been Better for European Consumers, Microsoft press release of 24 March 2004

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