The doctrine of essential facilities

 IV. The refusal to supply and intellectual property rights: Is Magill an essential facility   case?

A more controversial area, where the Court has obliged a dominant company to share its assets with a third party seeking to compete with the former, is that of intellectual property rights. There is an inherent tension when applying competition law and in particular the refusal to supply in the field of intellectual property law. While competition law tries to promote economic efficiency through the prohibition of abuse by a dominant undertaking, intellectual property law seems to seek to achieve the same goal by hindering competition, through the grant of exclusive intellectual property rights.

This controversy was analysed by the ECJ in the Magill case, where it was held that the refusal by BBC, ITP and RTE to make available the television programme listings to Magill in the ancillary market of weekly TV guides and thus preventing the appearance of a new product, constituted an abuse of a dominant position. The ECJ in a rather vague way held that the refusal to license an intellectual property right could not be in itself be an abuse, but the exercise of the exclusive right might be an abuse in particular circumstances.

The decision in Magill triggered fierce criticism as it was suggested that the Commission would now have the power to oblige companies to share their assets and more importantly intellectual property rights, with competitors, in spite of the social and economic costs involved.  Furthermore, it was seen as a potentially dangerous intervention of the Court through the application of competition law into the field of intellectual property rights. Some commentators even suggest that the Magill case was in fact a clear example of the application of the essential facilities doctrine in the intellectual property rights field and thus it could possibly be applicable in a wider ambit.

It should be borne in mind, however, that the Magill case was an exceptional one, as the TV-listings were considered a by-product of another activity (TV broadcasting) rather than a reward for creative effort. As Glasl suggests the intellectual property right in question cannot be deemed an essential facility.  This fear was alleviated in the subsequent case of Oscar Bronner, where the Court limited the application of the Magill doctrine. However, before examining the latter case, it is indispensable to analyze the essential facilities doctrine, as developed through the cases dealt by the Community authorities.

            V. The application of the essential facilities doctrine in EU cases

The process of liberalization and demonopolization of EU markets, which started in the early 80s with the initiative of the European authorities, has paved the way for the attainment of free competition. Nevertheless, there is an existing danger that, after the process will be completed, the legal monopolies will be replaced by de facto ones. This is due to the so-called bottleneck problem, which occurs when one firm can deter others from operating on the market by denying access to the facility, which is essential and cannot be duplicated.

Facilities such as ports, airports, pipelines and telecommunications networks are considered essential for a new competitor in order to compete effectively in the market. The market situation underlying the essential facility problem is one involving two related activities, both of which form components of the product that is purchased by the end consumer. In 1987, the Commission was stating “there is no obligation placed on a dominant producer to subsidize competition itself”.                             However, in the subsequent years, in order to deal with the bottleneck problem and based on the Commercial Solvent doctrine, the Commission and the Court developed their practice in such a way as to regard a refusal to allow access to an essential facility an abuse of a dominant position.

In the British Midland/Aer Lingus case, the Commission, without explicitly mentioning the essential facilities doctrine, held that the withdrawal by Aer Lingus from its interlining arrangements with British Midlands amounted to an abuse of a dominant position. New entrants had the right to have access to such facilities especially in the initial stage of their operation but this access should be limited to the time, which was necessary for them to become established in the market. Rigyard regarded this decision as a form of artificial assistance to the new entrant, which was necessary in order to liberalize the difficult market of aviation.

The first Commission decision to refer explicitly to the essential facilities doctrine was B&I Holyhead/Sealink: Interim Measures. The Commission distinguished between Sealink as harbor owner and as competing car ferry operator. After holding that as a dominant operator it was not free to discriminate in favor of its own car ferry activities, in para. 41 it stated that “ a dominant undertaking which both owns or controls and itself uses an essential facility ie a facility or infrastructure without access to which competitors cannot provide services to their customers, and which refuses its competitors access to that facility or grants access to competitors only on terms less favourable than those which it gives its own services, thereby placing the competitors at a competitive disadvantage, infringes Article 82 if the other conditions of that Article are met”.

In the second Sealink case, the Commission made clear that the doctrine could be also applicable when the competitor, who seeks access is a new entrant into the relevant market.

In another case, Port of Rodby, it was decided that the port of Rodby was an essential facility but the wide definition of the duties of the owner of the essential facilities by the Commission was criticized on the basis that the Commission did not examine whether the refusal was an absolute barrier for the competitors to compete.

It should be noted that in another port case, that of Morlaix (Port of Roscoff), the Commission stated that it would still condemn the refusal of the owner of the facility, even if it had had no stake in a ferry operator.

The first definition of an essential facility by the Court of First Instance was at the Ladbroke case. The CFI took a narrow view of what amounts to an essential facility and held that the alleged facility- pictures was not indispensable, since Ladbroke had entered the betting market without it. Moreover, it stated that the refusal to sell was not an abuse if the firm, which refuses to give access, is not present on the market where the requesting party wishes to operate. The case was different from Magill in that access to the pictures would not allow a new service to be created and from Commercial Solvents, since the owners of the intellectual property rights were not present on the relevant downstream market.

           VI. The turning point: Oscar Bronner

As mentioned earlier, the decision in Magill created much uncertainty as regards the definition of the dominant undertaking’ s duty to supply a competitor. The ECJ, seizing the opportunity in Oscar Bronner, which involved a refusal to allow Bronner access to Mediaprint's home newspapers delivery service, tried to limit the circumstances, where the Magill doctrine could be held applicable.

The Advocate General in his Opinion made some important observations related to the essential facilities doctrine. Undertakings, he stated, should have the right to choose their trading partners freely. Incursions of these rights require careful justification. Secondly, an over-enthousiastic application of the doctrine could remove the incentive to invest in essential facilities. Thirdly, the primary purpose of Article 82 is to protect consumers and not to protect the position of particular competitors, thus the question was whether consumers would be harmed by the refusal. This would be the case only if “ the dominant undertaking` s final product is sufficiently insulated from competition to give it market power”.

Emphasis should be given also on the position of the firm in the downstream market. There was no reason for interfering unless the dominant undertaking has “a genuine stranglehold on the related market, […] that might be the case where duplication of the facility is impossible owning to physical, geographical or legal constraints”. As regards intellectual property rights, he held that in assessing conflicting interests, particular care is required where the goals, services, or facilities to which access is demanded represent the fruit of substantial investment.  

The ECJ, in its decision, dealt with the previous decisions in Commercial Solvents and Magill. After distinguishing the facts in the Magill case from the present facts in Oscar Bronner, it went on to say that even if Magill could apply to all forms of property, it should be shown that: “not only that the refusal of the service comprised in home delivery be likely to eliminate all competition in the daily newspaper market on the part of the person requesting the service and that such refusal be incapable of being objectively justified, but also that the service in itself be indispensable to carrying on the person’ s business, inasmuch as there is no actual or potential substitute in existence for that home-delivery scheme”.

In para. 43, the Court added the important element that “For such access to be capable of being regarded as indispensable, it would be necessary at the very least […] that it is not economically viable to create a second-home delivery scheme for the distribution of daily newspapers with a circulation comparable to that of the daily newspapers distributed by the existing schemes”.

           VII. Assessment of the Bronner decision

The decision in Oscar Bronner paved the way for a more limited application of the essential facilities doctrine in competition cases. The ECJ recognized that Article 82 should be applicable with care, in order not to destroy the incentives for private investments and innovation. A distinction should be drawn between what may be considered as essential for competition and what for competitors, as the latter may be not enough for holding a refusal to allow access an abuse. Competition law, therefore, should be not used as a means of levelling the playing field between competitors but as a means of protecting the competition process and ultimately the end consumers.

A three-part test was established in order for a refusal to be an abuse: first, it must be likely to eliminate all competition in the newspaper market on the part of the person requesting the service; secondly the refusal cannot be justified objectively; and thirdly, the product in question must be indispensable to carrying on the applicant’ s business as there is no actual or potential substitute in existence.

As regards the criterion of indispensability, the test established in Bronner is whether it is impossible to duplicate the facility in question. Concerning economic restraints, it must be impossible even for an undertaking comparable in size to the holder of the alleged essential facility. But, as Bergman suggests, this requirement will have the effect of limiting the application of the doctrine only to natural monopolies, that is when a firm` s cost decline as output increases so that a single firm operates more efficiently than two would operate. This would result in an undesirable situation where, due to the inability of small firms to reach a position, which would enable them to create an alternative infrastructure, the competitive structure would be impaired.

The second condition, that of elimination of competition, requires a careful definition of the market in question and of the position of the undertaking. As Doherty points out, it will be usually the downstream market from which competition is to be eliminated. In the Holyhead port cases, the Commission did not examine the downstream market. The effect of this omission was the narrow construction of the upstream market and thus the finding that the port was an essential facility . Considering the position of the defendant undertaking in the market, AG made clear in Bronner that it must be dominant or at least have a strong position on the downstream market in order for the refusal to be abusive. However, Nikolinakos in explaining the Commission’ s approach on the downstream market, as stated in the Access Notice, presumes that it is not a precondition for the application of the doctrine that the company in question is also dominant in the downstream market. It is enough that it is dominant in the upstream market and simultaneously, there is no effective competition downstream.

Finally, there must not be objective justification. A defense based on intellectual property rights, as long as they do not deserve exceptional protection, will be useful in denying that the refusal constitutes an abuse. As business justification is regarded, there is an ambiguity as to whether an obligation of the dominant company’ s exists to reduce the operations in case new competitors marketing new products seek to enter the market. According to Temple Lang, it is on the dominant undertaking` s discretion to decide whom to serve, but this decision must be based on rational reasons.

           VIII. Essential facilities doctrine: a critique

The essential facilities doctrine has been subjected to much criticism both in Europe and in the United States. Areeda states “you will not find any case that provides a consistent rationale for the doctrine or that explores the social costs and benefits or the administrative costs of requiring the creator of an asset to share it with a rival. It is less a doctrine than an epithet, indicating some exception to the right to keep one` s creation to oneself, but not telling us what those exceptions are”.

The disincentive to investment is emphasized as a major weakness of the use of the doctrine. Ridyard cautions that an over-zealous application of the doctrine may cause enormous damage to the system of dynamic incentives to economic efficiency. There is a danger that requiring access, while it may be seem pro-competitive in the short-term, it will have negative effects on a dynamic economy, because it will discourage investment in the creation of new essential facilities or in the creation of alternatives ones by the undertakings seeking access to the existing facilities. Undertakings may conclude that the costs invested in the creation of new facilities will not be recouped and equally potential competitors will not have an interest in creating substitute facilities since they can rely on a much more efficient means, that of the doctrine. Thus, the competitors will be able to free ride and expropriate the benefit of investment made by other firms in the market.

Moreover, the finding that a facility is essential suggests a more interventionist approach by the regulatory authorities. As Areeda and Hovenkamp point out, the use of the doctrine is more rational where the competition authority has also the power to regulate the level of prices and the conditions for the access. Indeed, it may be the case that once the authorities have concluded that a company, that owns such a facility, has the duty to grant access to competitors, it will be necessary to regulate the terms and conditions of the access. Thus, the regulatory authorities will get too involved in the running of the economy and there is the danger of obstructing the free evolution of the markets.

Korah is concerned that “the competition rules are used… to protect smaller and medium sized enterprises at the expense of efficient or larger firms… The interests of consumers, and the economy as a whole, in the encouragement of efficiency by firms of any size is being subordinated to the interests of small traders”. The application of the essential facilities doctrine by the European authorities has been proved to raise such concerns, since the Commission and the Court have been eager to hold that a facility is essential without a proper definition of the relevant markets and thus ruling in favour of potential competitors.

Some scholars suggest that the essential facilities doctrine may not exist at all and that all the cases could be dealt under the existing refusal to deal principles. However, in the light of the ongoing liberalization of the markets, the doctrine is of major importance, as it can grant the competitors access to facilities, which are used exclusively by the owner. This is especially the case, where the facility was not the result of private investment but instead it was created based on public funds and with the benefit of monopoly rights conferred by the State. The latter case can be discerned in the telecommunications sector, as recognised in the Access Notice, where the doctrine is deemed to be important to the complete liberalization of the market.

Nevertheless, in order to minimize the negative effect of its use, some principles must be drawn. The Bronner decision provides the basis for such an assessment, since it limited rather effectively the application of the doctrine. Thus, it should be noted that the doctrine should only be applicable in cases where the owner of the facility is not subject to effective competition and the competition cannot be expected to work. It is necessary, moreover, to identify precisely the relevant market and the possible benefits of the end consumer, since the major aim of competition policy is the protection of the latter.

Once the essential facility has been identified, it is indispensable that a proper definition of the access terms should be given in order to avoid types of “confiscation” of property rights. After all the owner of an essential facility has the right to receive payment for it. Provided that such an definition is made, the dynamic efficiency and the motivation to invest in essential facilities will not be eliminated.

 

            IX. Conclusion

As Bork has stated, “the presumption of freedom to deal seems appropriate to a free market economy”. An undertaking has the choice of deciding with whom it would like to trade and the right to retain for its own use the facilities it has created. All the same, a dominant company cannot make use of its power as owner of a facility to give itself advantage as a competitor. Compulsory access should be required if the effect on competition of the refusal to grant access is serious enough and that would be usually the case when there is no effective competition on the downstream market.

It is therefore indispensable to make a distinction between cases where investment may be put at risk and cases where no significant risks exist but on the opposite, the grant of access will promote effective competition.

 It is the duty of the legislator and the competition authorities to provide a clear and coherent context, where the doctrine will be held applicable. This will ultimately lead to the interest of the market and subsequently to that of the consumers.

   

BIBLIOGRAPHY

BOOKS:

• Areeda P. and Hovenkamp H., Antitrust Law (Supp. 1993).
• Craig P. and De Burca G., EU Law: Text, Cases and Materials, 2nd ed. Oxford University Press, 1998.
• Hansen H. (ed.), Intellectual Property Law and Policy Vol.2 (Juris Publications and Sweet & Maxwell).
• Rogder J. B. and MacCulloch A., Competition Law and Policy in the European   Community and United Kingdom, 2nd ed., Cavendish Publishing Limited, 2001.
• Whish R., Competition Law, 4th ed., Butterwoths, 2001.

JOURNALS:

• Areeda P., “Essential facilities: an epithet in need of limiting principles”, (1989) 58 Antitrust L.J. 841
• Bergman M., “The Bronner case- a turning point for the essential facilities doctrine” (2000) 21(2) ECLR 59
• Capobianco A., “The essential facility doctrine: similarities and differences between the   American and the European approach”, (2001) 26(6) ELR 548
• Cotter “Intellectual property and the essential facilities doctrine” (1999) 44 Antitrust Bulletin 211
• Doherty B., “Just what are essential facilities?” (2001) 38 CMLR 397
• Gerber David J. “Rethinking the monopolist` s duty to deal: a legal and economic                critique of the doctrine of “essential facilities”, (1998) 74 Va.L.Rev. 1069
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• Furse M., “The essential facilites doctrine in Community Law”, (1995) 16(8) ECLR 469
• Korah V., “The Ladbroke saga”, (1998) 19(3) ECLR 169
• Nikolinakos N., “Access agreements in the telecommunications sector-refusal to supply and the essential facilities doctrine under EC Competition Law”, (1999) 20(8) ECLR 399
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• Stothers C., “Refusal to supply as abuse of a dominant position: essential facilities in the European Union”, (2001) 22(7) ECLR 256  
• Subiotto R., “The right to deal with whom one pleases under EEC Competition Law: a small contribution to a necessary debate”, (1992) 13(6) ECLR 234
• Temple Lang J., “Defining legitimate competition: companies’ duties to supply competitors and access to essential facilities” (1994) 18 Fordham Int. L. J. 437
• Temple Lang J., “Competition Law and regulation from an EC perspective”, (2000) 23 Fordham Int. L.J. 116
• Treacy P., “Essential facilities- is the tide turning”, (1998) 19(8) ECLR 501
• Venit S. James and Kallaugher J. John, “Essential facilities: A Comparative Law Approach”, in B. E. Hawk Annual Proceedings of the Fordham Corporate Law Institute: International Antitrust Law & Policy (1994), Juris, Irvington on Hudson, New York 1995.
• Wooldridge F., “The essential facilities doctrine and Magill II: the decision of the ECJ in Oscar Bronner”, (1999) 2 Intel. Prop. Quart. 256

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