Commission issues Discussion Paper on Art. 82 EC and Green Paper on Damages Actions for Breach of EC Antitrust Rules

On 19 December 2005, the European Commission (DG Competition) issued a Discussion Paper on the application of Article 82 EC Treaty to exclusionary practices. The following day, on 20 December 2005, the Commission published a Green Paper on Damages actions for breach of EC antitrust rules. Both papers are likely to dominate the discussion on European competition policy in 2006 and will result in substantial changes in the EC system of public and private antitrust enforcement.

The European Commission has asked for comments on the Article 82 discussion paper by 31 March 2006 and on the Green Paper on Damages actions by 21 April 2006.

Crowell & Moring’s Antitrust Group will provide comments on both papers to the European Commission. We would be more than pleased to include comments you may have in our paper and be at your disposal to discuss with you how the proposed changes may affect your business.

In the following we briefly describe the key points in the Commission’s papers. You will find references to all relevant documents at the end of the respective section.

1. Discussion Paper on the application of Art. 82 EC

The Discussion Paper describes a general framework for analyzing abusive exclusionary conduct by dominant undertakings. In a nutshell, the Discussion Paper suggests strengthening economic analysis in Article 82 cases, and sets out methodologies for the assessment of some of the most common abusive practices, such as predatory pricing, single branding and rebates, tying and bundling and refusals to deal. The discussion paper deals only with these exclusionary abuses. Other forms of abuse, such as discriminatory and exploitative conduct, will be the subject of further analysis by the Commission in 2006. It is expected that the European Commission will subsequently adopt a formal paper, probably in the form of a Commission Notice .

In line with the “more economic approach” to the new Merger Regulation and to the application of Article 81 EC, the Commission put forward an effects-based approach to abuses under Article 82 EC, based on economic analysis. The main goal will be to ensure that more in-depth economic analysis is achieved while at the same time safeguarding legal certainty and predictability. The ultimate objective is to establish workable enforcement rules for competition authorities, which also provide clear guidance for dominant or near-dominant companies as to whether their conduct is legal.

As regards the dominance test, the Discussion Paper clarifies that market shares are seen as a useful first indication of dominance, but are not on their own sufficient to conclude that a dominant position exists. The decisive factor is rather market power, and the dominance analysis will therefore need to go beyond market shares. Other factors such as barriers to entry or expansion, and the market position of competitors and buyers, must also be taken into account.

The Discussion Paper further clarifies that the purpose of Article 82 EC is not to protect competitors from dominant firms' genuine competition based on factors such as higher quality, innovation or better performance, but to ensure that these competitors are also able to compete on the merits. The central concern of Article 82 with regard to exclusionary conduct is foreclosure that hinders competition and thereby harms consumers. According to the Discussion Paper, only conduct that would risk the exclusion of equally efficient competitors should be considered as abusive. The Commission proposes the relevant test should be whether the conduct would exclude an 'as efficient competitor', described as a hypothetical competitor having the same costs as the dominant company.

The Commission is prepared to accept three types of defenses: two objective justifications and an efficiency defense. The first objective justification is where the dominant company is able to show that the otherwise-abusive conduct is actually necessary based on factors external to the parties involved and in particular external to the dominant company (‘objective necessity defense’). The second objective justification is where the dominant company is able to show that the otherwise abusive conduct is actually a loss-minimizing reaction to competition from others (‘meeting competition defense’).

The paper further considers whether and to what extent efficiencies should be taken into account in Article 82 EC cases. For this defense the dominant company must demonstrate that the following conditions are fulfilled:

i) that efficiencies are realized or likely to be realized as a result of the conduct concerned;

ii) that the conduct concerned is indispensable to realize these efficiencies;

iii) that the efficiencies benefit consumers;

iv) that competition in respect of a substantial part of the products concerned is not eliminated.

The Commission considers that where all four conditions are fulfilled the net effect of such conduct is to promote the very essence of the competitive process, namely to win customers by offering better products or better prices than those offered by rivals. This defense may open up opportunities to justify conduct that would have been prohibited under the form-based approach to date.

Finally, the Commission provides more detailed analyses applying its new approach to specific exclusionary abuses: predatory pricing, single branding and rebates, tying and bundling and refusal to supply. The paper further contains a specific section on aftermarkets.

Conclusion

The discussion paper clearly shows the Commission's approach moving from a purely “form-based” to a rather “effects based” application of Article 82 EC. In principle, this new approach should be welcomed since it guarantees a "more economic" handling of Article 82 cases and allows for a more comprehensive and in-depth assessment of the economic circumstances of each individual case. The downside, however, may be an increased level of legal uncertainty for the undertakings concerned. The efficiency test as proposed by the Commission is highly complex and requires the analysis of a variety of different aspects. Not all of these aspects can be easily assessed by the undertakings concerned and the final decision whether a given restriction on competition is outweighed by potential efficiency aspects is largely discretionary - for the Commission.

The DG Competition Discussion Paper.

2. Green Paper on Damages actions

To date, there have been very few damages claims before the courts of the Member States for breach of the competition rules. The Commission, however, holds that strengthening damages claims by companies and consumers would have several advantages: (i) it ensures that businesses and consumers harmed by anti-competitive activity are compensated for their losses, (ii) it enhances the overall level of respect for the EC competition rules by discouraging companies from engaging in anti-competitive activity (iii) it brings the benefits of Community law closer to the citizen.

The Commission’s Green Paper on Damages actions therefore aims at facilitating such actions for damages caused by violations of EC competition rules on restrictive business practices and abuses of dominant market positions. The Green Paper builds on the reform of Regulation 1/2003. It’s stated aim is to look at ways in which damages actions before national courts for breaches of EC competition rules may be facilitated so as to better compensate victims and complement the enforcement activities of public enforcement authorities. By publishing the Green Paper, the Commission wants to foster an open debate about the issue of private enforcement of EC Treaty competition law and about damages actions in particular.

The Green Paper identifies the main obstacles to a more efficient system for bringing damages claims, such as limited access to evidence, the burden of proof in general, the requirement to prove fault in particular, the passing-on-defense, the quantification of damages, and the lack of punitive damages. The Green Paper also identifies certain procedural burdens such as short limitation periods, legal uncertainty as regards the applicable laws, the lack of collective (or “class”) actions, costs of the court proceedings, and potential conflicts with public enforcement (e.g. leniency applications).

For each of these obstacles, the paper sets out different options to improve damage actions both for follow-on actions and stand-alone actions. The options set out in the Green Paper seek to ensure that the advantages of private enforcement can be achieved, while avoiding vexatious claims at the same time. A Commission Staff Working Paper is attached to the actual Green Paper. In that Working Paper, the considerations underlying the options presented in the Green Paper and the sources taken into account by the Commission are explained more fully.

The Green Paper reflects the Commission’s awareness that the debate on how private enforcement could be facilitated should carefully consider the costs which are associated with furthering private competition law litigation in the case of unmeritorious or not well founded claims. The ultimate objective is to foster a competition culture, not a litigation culture.

Claims to recover damages caused by infringements of EC competition law have been a theoretical possibility for some time, but such claims must now be regarded as a commercial reality. The Green Paper demonstrates a strong commitment on the part of the Commission to promoting and facilitating private enforcement throughout the EU. The Commission even considers taking the necessary measures at a Community level. Businesses operating in Europe need to face this change and assess the risks and opportunities that it creates.

Conclusion

While the Commission has not yet decided whether it will take further – legislative or administrative – actions after this consultation, the rise of EU-based damages actions appears inevitable. The companies best positioned to deal with this new challenge -whether European-based companies or US companies with significant European operations - will be those with internal compliance programs designed to minimize antitrust risks associated with those European operations. Those companies will find themselves in the enviable position of reducing antitrust risk, while at the same time positioning themselves to identify and pursue recovery opportunities from suppliers that may have overcharged them through cartel activity. Large multinationals who are used to being targets of antitrust claims are increasingly finding themselves on the other side of the case when they are the victims of cartel activity. Our experience with these companies is they recognize recovery opportunities as important ways to make the legal department a profit center. But such activity must be done carefully so as not to backfire in other cases.

The DG Competition Green Paper and the Commission Staff Working Paper.