Refusal to Supply and Article 82. Damien Geradin Universities of Liège and Tilburg, and College of Europe, Bruges Howrey, LLP

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1 Refusal to Supply and Article 82 Damien Geradin Universities of Liège and Tilburg, and College of Europe, Bruges Howrey, LLP

2 Ex ante vs ex post incentives! The refusal to supply debate can be framed around the trade-off between ex ante and ex post incentives: " On the one hand, mandating a dominant firm holding an essential facility to share such a facility with one or several competitors will stimulate competition in downstream markets, thus promoting ex post (allocative efficiency). " On the other hand, mandatory sharing may reduce the return of the facility holder and thus decrease its ex ante incentives to invest and compete dynamically.

3 The focus on ex post incentives (allocative effiency)! Despite the largely documented importance of ex ante efficiencies, the Commission and the Community Courts have traditionally focused on the increased allocative efficiency, which would be gained by stimulating competition between the access giver and the access seeker(s) in downstream markets.! There might be good reasons for that. " First, ex post allocative efficiency gains are generally easier to measure than ex ante ones. As far as ex post gains are concerned, mandating access to an essential facility will often lead to significant results identifiable in the short-term, such as increased competition in the downstream market, falling prices, and improved quality of service. " Second, from a public choice standpoint, it seems clear that competition authorities whose time horizon is not necessarily long, will obtain greater immediate rewards by giving access to a bottleneck in terms of showing to the public that they are promoting competitive market structures and protecting consumer welfare.

4 AG Jacobs in Bronner! A reference to the ex ante vs. ex post trade-off can be found in the opinion of Advocate General Jacobs in the Bronner case, where he explained: 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.

5 Refusal to licence IPRs! It is in cases where the essential facility is protected by IPRs that the tension between ex ante and ex post efficiency is the most acute. " The objective of granting IPRs is indeed to reward a firm for the investments made in developing a new process or product. " Exclusion is thus the essence of an IPR, a fact that leads some authors to claim that compulsory licensing should never be forced on IPRs holders.

6 The balancing test in Microsoft! In Microsoft, the Commission engaged in a balancing process between Microsoft s 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 by its competitors and it concluded that: [a] detailed examination of the scope of the disclosure at stake leads to the conclusion that, on balance, the possible negative impact of an order to supply on Microsoft s incentives to innovate its outweighed by its positive impact on the level of innovation of the whole industry (including Microsoft). As such the need to protect Microsoft s incentives to innovate cannot constitute an objective justification that would offset the exceptional circumstances identified.

7 The Commission s discussion paper! The Commission recognizes the importance of protecting ex ante incentives to invest: The main purpose of forcing companies to supply is to improve the competitive situation in the downstream market. However, investment incentives may also be influenced, both negatively and positively. Enforcement policy towards refusals to supply has to take into account both the effect of having more short-run competition and the possible long-run effects on investment incentives. ( 213)

8 The restatement of the Community Court s case-law! Bronner: Article 82 may only apply to a refusal to supply where three conditions are fulfilled: " the refusal of access to a facility must be likely to prevent any competition at all on the applicant s market; " the access must be indispensable or essential for carrying out the applicant s business; and, " the access must be denied without any objective justification.! IMS: Additional condition when IPRs are involved: " the refusal in question must concern a product that is indispensable for the production of a new product for which there is clear and unsatisfied consumer demand Note that IMS also suggests that while refusal to licence cases typically require the identification of upstream and downstream markets, it is sufficient that a «potential» or «hypothetical» upstream market be identified.

9 A «potential» or «hypothetical» upstream market is sufficient! 227 states : In some circumstances, there may not be an existing market for the input in question as it is used only by the owner in a captive market. For example, an IPR may be nothing more than an input that is not marketed separately from the goods and services to which the IPR relates. However, it is sufficient that a captive market, that is, a potential market, or even a hypothetical market, can be identified. Such is the case where there is an actual demand for the input on the part of undertakings seeking to carry out the activity for which the input is indispensable.! While this language directly stems from the IMS Health case decided by the ECJ, it is disappointing that the Commission fails to put it in perspective. " In IMS, the copyrighted 1860 brick structure had become a de facto standard and thus IP guaranteed a wider monopoly (i.e., a monopoly in the market for pharmaceutical data) than the innovation (the 1860 brick structure ) would normally entail. " However, the Discussion Paper s language potentially means that dominant firms may be forced to share every technological advance they have made to improve their production processes with competitors, even if there is no existing market for such technology. A refusal to share an innovation could now be considered as an abuse of a dominant position absent any leveraging attempt.

10 The «new» product test! 239 provides: the refusal by a dominant company to licence access to the IPR could be considered abusive when [the conditions imposed in the ECJ s Bronner case law] are all fulfilled and, furthermore the refusal to grant a licence prevents the development of the market for which the licence is an indispensable input, to the detriment of consumers. This may only be the case if the undertaking which requests the licence does not intend to limit itself essentially to duplicating the goods or services already effect on this market by the owner of the IPR, but intends to produce new goods or services not offered by the owner of the right and for which there is a potential demand. (Emphasis added)

11 The new product test follow on innovation! Not only does the Discussion Paper fails to clarify the new product test, but it also weakens the new product test substantially in a potentially wide set of circumstances. 240 provides: A refusal to licence an IPR protected technology which is indispensable as a basis for follow-on innovation by competitors may be abusive even if the licence is not sought to directly incorporate the technology in clearly identifiable new goods and services. The refusal of licensing of an IPR protected technology should not impair consumers ability to benefit from innovation brought by the dominant undertaking s competitors.! This rule could annihilate the incentives of firms engaging in radical, first-generation innovations for the sake of protecting firms that are merely engaged in exploiting the technological breakthroughs of their competitors.

12 References! For more details, see: " D. Geradin, Limiting the Scope of Article 82 of the EC Treaty: What can the EU learn from the U.S. Supreme Court's Judgment in Trinko in the wake of Microsoft, IMS, and Deutsche Telekom?, 41 (2004) Common Market Law Review 1519 " C. Ahlborn, V. Denicolo, D. Geradin, and J. Padilla, DG Comp s Discussion Paper on Article 82: Implications of the Proposed Framework and Antitrust Rules for Dynamically Competitive Industries, available at t_id=894466