Forms of abuse of a dominant position: prohibited practices and legal risks

Abuse of a dominant position is a major infringement of competition law. Penalties can amount to 10% of the offending company's worldwide turnover. It is therefore crucial to understand these sanctions and defence mechanisms to limit the legal and financial risks. Recent examples include Google (€2.4 billion), EDF (€1.8 billion) and Intel (€1.06 billion). These examples underline the importance of understanding the principles of fair competitionthe cornerstone of competition law.

The authorities distinguish between two main categories of abuse: exclusionary abuse and exploitative abuse. Exclusionary abuses aim to drive competitors out of business. The latter seek to take advantage of a dominant position to the detriment of commercial partners. The classification of such abuse is based on basic conceptsThis distinction determines the analysis carried out by the competition authorities and the defence strategies they adopt. This distinction determines the competition authorities' analysis and defence strategies.

Let's look at the main practices that have been condemned and how companies can assess their legal risks.

Exclusionary abuses: practices aimed at eliminating competitors

Abuse of exclusion refers to behaviour by a dominant undertaking that influences the structure of a market already weakened by its presence. These practices hinder the maintenance or development of competition by means other than normal competition.

Commercial exclusivities imposed on partners

An exclusivity agreement is not abusive in itself. Its classification depends on a number of factors:

• Its duration
• Its scope
• Cancellation conditions
• The market context

The authorities analyse whether the exclusivity forecloses the market. A simple practice can become illegal when it emanates from a dominant company.

Exclusive purchasing agreements

Exclusive supply commitments oblige a buyer to obtain supplies only from the dominant undertaking.

In the Hoffmann-La Roche judgment (1979), the Court of Justice ruled that "binding purchasers by an obligation to obtain all or a considerable proportion of their requirements exclusively from the dominant undertaking constitutes an abuse".

These practices prevent buyers from diversifying their sources of supply and deny other producers access to the market.

Loyalty discounts often accompany these exclusive agreements. They offer a price reduction in return for exclusive supply. The French Competition Authority has condemned similar practices in the press distribution sector (decision 09-D-04).

Exclusivity can also result from surveillance measures, threats or reprisals. In this way, the Autorité sanctioned a manufacturer who had required resellers to charge fixed prices under threat of retaliation (decision 17-D-02).

Tying and bundling

These practices consist of making the sale of one product conditional on the purchase of another distinct product. Article 102 of the TFEU prohibits "making the conclusion of contracts subject to acceptance of supplementary obligations unconnected with the subject-matter of such contracts".

For a tied sale to constitute an abuse, four conditions must be met:

1. The company must be dominant on the binder product market
2. The binding and bonded products must be two distinct products
3. The company cannot obtain the binding product without the bound product
4. The practice must restrict competition

The European Commission has fined Microsoft for integrating its Internet Explorer browser into Windows. This practice allowed the browser to benefit from the ubiquity of the operating system.

Abusive pricing practices

Predatory pricing

Predation means selling at a loss to eliminate competitors. The dominant company deliberately sets its prices at a level that causes it to incur losses in the short term. Its aim is to drive competitors out of business and then raise its prices once it is alone on the market.

To identify predatory pricing, the authorities compare the price charged with the company's costs:

• Black zone: prices below average avoidable costs - presumed abusive
• Grey zone: prices lower than total costs but higher than variable costs - abusive if part of a predatory plan
• White zone: prices above average total costs - presumed lawful

Predation is only economically rational if the company can recoup its losses at a later date.

Discriminatory pricing

Price discrimination involves charging different prices to buyers in equivalent situations. This practice becomes abusive when it emanates from a dominant undertaking and aims to distort competition.

One emblematic case concerns the differentiation between "on net" calls (within the same network) and "off net" calls (to other networks) in mobile telephony. The Autorité sanctioned these practices because they reinforced the "club effect" of the major operators and put smaller competitors at a disadvantage.

The price squeeze

This mechanism concerns companies operating on both an upstream and a downstream market. The dominant undertaking sets:

• A high price on the upstream market where it supplies its competitors
• A low price on the downstream market where it competes with them

As a result, competitors cannot be profitable even if they are just as efficient.

For example, the Autorité has condemned France Télécom for charging retail tariffs that were lower than the prices of the network offers needed to prepare these offers (decision 09-D-24).

Refusal of commercial relations

Refusal to sell

A dominant company may refuse to sell in certain circumstances. But this refusal becomes abusive if it is aimed at eliminating a competitor and strengthening its dominant position.

Refusal is particularly problematic when it concerns a product that is essential to the exercise of a competitive activity. The Autorité sanctioned a manufacturer that refused to sell a component that it alone manufactured to a competitor (decision 10-D-39).

Denial of access to essential infrastructure

An infrastructure is "essential" when:

1. It cannot be reproduced under reasonable conditions
2. Access is refused or restricted
3. Access is technically possible
4. Access is essential for competitive activity

Typical examples include a seaport, a rail network or a critical database.

The company managing such an infrastructure must grant access on transparent and non-discriminatory terms.

Unfair termination of commercial relations

Breach of contract is normally a matter for commercial litigation. But it becomes an abuse of a dominant position if it has an anti-competitive purpose or effect.

The French Competition Council sanctioned a practice that led to the disappearance of a retailer and destabilised a downstream market (decision 04-D-26).

Other exclusionary practices

Withholding information

The Autorité has sanctioned practices involving late, imprecise or incomplete communication of information to competitors. For example, TDF was condemned for being late in providing essential information to its competitors during a call for tenders (decision 15-D-10).

This practice creates an asymmetry of information that puts competitors at a disadvantage.

Denigrating competitors

Denigration consists of publicly discrediting a competitor. To qualify as abuse, it must:

• Originating from a dominant company
• Aim to exclude a competitor
• Be based on unverified assertions

The Autorité has condemned pharmaceutical laboratories that instilled doubts about the quality of competing generic medicines (decision 13-D-11).

Exploitative abuses: practices designed to take advantage of a dominant position

Abuse of exploitation occurs when a dominant undertaking uses its power "to obtain advantages from transactions which it would not have obtained in the case of practicable and sufficiently effective competition" (ECJ, United Brands, 1978).

Excessive pricing practices

Excessively high prices

An excessive price is "unreasonable in relation to the economic value of the service provided". There are two ways of proving this:

• By comparison with equivalent market situations
• By analysing the disproportion between selling price and production costs

The Autorité condemned France Télécom for maintaining a tariff for connections between Réunion and mainland France that showed a "manifest disproportion" between the price and the value of the service (decision 09-D-24).

Prices charged to retailers

The Autorité fined a manufacturer of pétanque boules for imposing resale prices on its distributors. This practice deprived retailers of "an essential means of boosting their sales" and consumers of price competition between retailers (decision 17-D-02).

Unbalanced contractual conditions

Unfair terms

Certain contractual clauses may constitute abuses of exploitation. For example, a priority clause obliging a partner to give preference to the dominant company on equal terms. This clause creates asymmetry in negotiations and artificially limits competition.

Discriminatory pricing

Discriminatory practices may also constitute abuse of exploitation when they place certain customers at a competitive disadvantage in their own market.

The Autorité considers that the dominant undertaking is therefore undermining the proper functioning of the markets beyond its own interests (decision 10-D-30).

The competition authorities' new approach

Economic doctrine has influenced the practice of competition authorities. A "new approach" emphasises the actual effects of practices rather than their formal classification.

The move towards economic analysis

The European Commission and the French Competition Authority are now analysing the situation:

• The practical effects of the practices on competition
• Their impact on consumer well-being
• Potential efficiency gains

This approach allows a more nuanced characterisation of behaviour.

Possibilities of objective justification

Two types of justification can be accepted:

1. Objective necessity: the behaviour is objectively necessary
2. Efficiency gains: the practice produces efficiency gains that outweigh the anti-competitive effects.

Article L. 420-4, III, of the French Commercial Code now states that practices may be justified "by objective reasons relating to economic efficiency and which allow consumers a fair share of the resulting benefit".

This development gives dominant companies leeway to justify certain practices.

How can you protect yourself against legal risks?

Given the complexity of the rules and the severity of the penalties, companies in a dominant position must adopt a preventive approach.

The first step is to determine whether your company occupies a dominant position on a market. If this is the case, certain usual commercial practices may become risky. You need to be particularly vigilant:

• Pricing policies (discounts, differential pricing)
• Exclusivity clauses
• Refusal to sell
• Commercial communication (risk of denigration)

Regular analysis of your commercial practices in the light of competition law will enable you to identify and correct potentially abusive behaviour. Our team of lawyers, experts in competition law, can support you in this process and help you secure your commercial strategy. Do not hesitate to contact us for a expert legal assistance and a personalised assessment of your situation.

Sources

• French Commercial Code, Article L. 420-2
• Treaty on the Functioning of the European Union, Article 102
• Decisions of the French Competition Authority
• Case law of the Court of Justice of the European Union