Refusal to deal

 

Author Definition

 

Definition

Refuse to deal with customers or suppliers by an undertaking with a dominant position can be considered as act of abuse when it prevents or threaten competitors on the market to enhance or preserve their market power. The rationale to justify this refusal is evaluated in a case-by-case basis.

 

Commentary

Refuse to deal is not per se illegal since undertakings have in principle the freedom to choose their economic partners. However, under exceptional circumstances, competition laws in the EU and the US (i.e., article 102 TFUE and Section 2 of the Sherman Act) impose undertakings with a dominant position a duty to deal with competitors or customers to preserve competition on the market and avoid act of monopolization that harm consumer welfare.

Under Article 102 of the TFUE, refusal to deal as an act of abuse of a dominance position involves two markets in one of which an undertaking with a dominant position creates or threatens to impose restrictions to competition in the other market unjustifiably. Regarding this conduct, in the United Brands Case (1978), the Court of Justice determined that the justification for the refusal to contract by a company with a dominant position cannot be the mere protection of their own interests when the purpose of the conduct is to reinforce and abuse a dominant position (paragraph 189). Likewise, they pointed out that a dominant supplier cannot stop supplying its long-standing customers without justification (paragraph 182).

In relation to the justifications in the commercial relations between the dominant company and non-competitors, in the BBI / B & H Case (1987), the Commission pointed out that in those cases in which the interests of a dominant company are threatened by the association of a buyer with a competitor or with a potential competitor of said manufacturing company, the latter may take measures commensurate with the threat, but this does not enable the dominant producer to withdraw supplies immediately or to retaliate against the buyer. Thus, the dominant company can even review the commercial relations with the buyer and can terminate their relationship giving adequate notice (paragraph 19).

Regarding the relationships of the dominant company with competitors or potential competitors, in the Commercial Solvents Case (1974), the Court of Justice interpreted Article 102 indicating that the company that has a dominant position in the market of “raw materials” incurs in an abuse of dominance practice when, with the aim of reserving them for its own production of derivative products, it refuses to supply to a buyer who is also a producer of said derivative products, generating the risk of eliminating all competition from this buyer's side. Later, in Telemarketing Case (1985), The Court of Justice pointed out that this rule also applies to a company that occupies a dominant position in the market of an "essential service" for the activities of another company in another market, even when it is different from that of the dominant company (paragraph 26). In these cases, the refusal must also have an objective justification in technical or commercial needs related to the service of the dominant company. Otherwise, when the reservation is given to eliminate the competition of third parties, such behavior will be prohibited as a practice of abuse of a dominant position by article 86 (currently 102 TFEU).

An important case in which the discussion on the doctrine of "essential facilities" was introduced and from which the criterion of the requisiteness of the means of production was developed in greater depth occurred with the Bronner Case (1998). A first outstanding aspect of this ruling is that the Court of Justice expressly indicates the criteria to be evaluated in order to determine the existence of an abuse of dominance position (paragraph 41): (i) the refusal may eliminate all jurisdiction in the market by the applicant, (ii) there is no objective justification and (iii) indispensable service for the person requesting the dominant company. Likewise, it also points out that the analysis of requisiteness assumes that there is no “real or potential alternative” to the service being requested. Moreover, when analyzing whether the distribution service in question ("national newspaper distribution system") was indispensable, the Court of Justice found that in the case this had not been proven because there were other modalities under which the service could be provided (for example, distribution by mail and sale in shops and kiosks) and there were no technical, financial or legal obstacles to creating a new distribution system alone or in collaboration with other competitors.

Furthermore, the position finally adopted by the Court of Justice was largely based on the Opinion of the General Counsel Mr. Jacobs who pointed out that the application of the essential facilities doctrine or the refusal to sell goods or services could be justified when a dominant company has complete dominance in the linked market. Therefore, it is not enough that a company's control over a facility gives it a competitive advantage (paragraph 65). Likewise, it pointed out that, although the duplication of the facility can be a barrier to entry, the existence of abuse requires demonstrating that the level of investment required to replicate the distribution system at the national level of the dominant company would be such that it could disincentive to a competing company to enter the market (paragraph 68).

Now, a matter that it is necessary to point out that the Court has specified that the aforementioned “elimination of all competition” as the effect of the refusal constituting an abusive practice is proven once it has demonstrated that in adjacent or downstream markets there are no substitutes for the means of production to which they do not have access. It is not necessary to wait for the effective and total elimination of the competition.

In comparison to US Competition Law, under Art. 102 TFEU, the EU requires a lower standard of liability for a refusal to deal to be considered anticompetitive. On the one hand, in the case of the EU, market power alone may be sufficient to be compelled to contract if competition in the market is excluded. In contrast, under Section 2 of the Sherman Act of the US, a higher standard is required. While in the case of the EU, a high market share can be considered evidence of the eth existence of a dominant position, in the USA other factors are also considered, such as the ease of entry of competitors into the market. Furthermore, regarding the “exclusory effects” of the anticompetitive conduct, in the EU this is related to the “indispensability” of the facility and the effects that the refusal to access to this facility may have on competition. In the case of the US, case law has required an unjustified change in a course of dealing and qualified anticompetitive effects of profit sacrifice or clear harm to consumer welfare.

 

Case references

Case C-7/97, Oscar Bronner vs. Mediaprint, [1998] ECR I-7791. (“Bronner”)

Case 87/500/EEC: Commission Decision of 29 July 1987 relating to a proceeding under Article 86 of the EEC (“BBI/B&H“)

Case 311/84, Centre belge d’études de marché - Télémarketing (CBEM) v SA Compagnie luxembourgeoise de télédiffusion (CLT) and Information publicité Benelux (IPB), [1985] ECR 3261 (“Telemarketing”)

Case C-27/76, United Brands vs Commission [1978] ECR 207, [1978] 1 CMLR 429 (“United Brands”)

Joined Cases C-6-7/73, Istituto Chemioterapico Italiano S.p.A. and Commercial Solvents Corporation v Commission of the European Communities, [1974] ECR 223. (“Commercial Solvents”)

 

Bibliography

Hou, Liyang, Refusal to Deal within EU Competition Law (June 11, 2010). Available at SSRN: https://ssrn.com/abstract=1623784 or http://dx.doi.org/10.2139/ssrn.1623784.

International Competition Network (2010). Report on the Analysis of Refusal to Deal with a Rival Under Unilateral Conduct Laws.

OCDE (2007). Refusals to deal. DAF/COMP (2007)46.

(Dario Morales and Camila Chamorro - Díez Canseco associates - have also helped in the preparation of the definition above).

Authors

Quotation

Luis Diez Canseco Núñez, Robert Venero Peralta, José Gonzáles Cucho, Refusal to deal , Global Dictionary of Competition Law, Concurrences, Art. N° 85417

Visites 7326

Publisher Concurrences

Date 1 January 1900

Number of pages 500

 

Institution Definition

The practice of refusing or denying supply of a product to a purchaser, usually a retailer or wholesaler. The practice may be adopted in order to force a retailer to engage in resale price maintenance (RPM), i.e., not to discount the product in question, or to support an exclusive dealing arrangement with other purchasers or to sell the product only to a specific class of customers or geographic region. Refusal to deal/sell may also arise if the purchaser is a bad credit risk, does not carry sufficient inventory or provide adequate sales service, product advertising and display, etc. The competitive effects of refusal to deal/sell generally have to be weighed on a case-by-case basis. © OECD

 
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