Unfair Trading Practices and the EU Law

Unfair Trading Practices and the EU Law

The objective of the European Community is to establish a common market with a high level of competitiveness and integration of economic performance. The European Commission enacted some rules, so as to promote competitiveness; prevent anti – competitive behaviour and thwart undertakings enjoying a dominant position, from engaging in anti – competitive activities. The European Commission imposed these rules through Article 82 EC.[1]

However, there is no clear definition with regard to dominant position. Experts analyse dominance on the basis of the product market, the geographical market and the temporal factor[2]. The provisions of Article 82 EC do not prohibit companies to be in a dominant position, but they prohibit the abuse of such position or the exploitation of dominance by companies and undertakings[3].

            Dominant position can be construed, in the context of trade; as a position of considerable power, which is enjoyed by a company or undertaking, in order to influence trade relating to a particular product in a geographical market, such as the EU[4]. Article 82 EC concerns the abuse of a dominant position by companies; therefore, in the absence of such dominance there can be no abuse[5].

            The ECJ established the principle of dominant position, for the first time, in the case of United Brands. This case, which is often referred to in the EC Competition law, covers the definition of the market, the notion of a dominant position and other aspects of abuse under Article 82 EC. The United Brands Company was alleged to have abused its dominant position. This company imported unripe Chiquita brand of Latin American bananas into the EU. It supplied these unripe bananas to the wholesale distributors in several Member States of the EU in large quantities. The wholesale distributors purchased these bananas, from the company, while they were green and unripe. Subsequently, they used their own techniques to ripen them and distribute them to retailers. In the year 1975 the European Commission came to the conclusion that the company had violated Article 82 EC. The United Brands Company challenged this decision of the Commission and contended that it did not enjoy dominance. Moreover, it denied the charges of having abused a dominant position[6].

            The case was referred to the ECJ, which held that the company enjoyed a dominant position in the market. It defined the relevant market as the retail market in which the sale of bananas to consumers took place. The company did business with distributors and not with retailers or consumers, which indicated a dominant position. Furthermore, it did not carry out any business terms in the retail market, but engaged in trade terms to supply bananas to wholesale distributors. Therefore, the company had abused its dominant position. The Court based its decision on Article 82 EC, and held that the company had misused its dominant position in the common market to prevent effective competition in the relevant market. Moreover, it was held by the ECJ that the company had acted independently of its competitors, customers and finally of its consumers. The Court also held that United Brands had promoted Chiquita as a brand name. This had compelled the distributors to depend on the company for the supply of bananas[7].

            With regard to its abuse, the Court noted that the company had prohibited the distributors from reselling the bananas while they were green or unripe. This had forced the distributors to sell ripe bananas to the consumers; further, ripe bananas had a short shelf life. This restriction to sell ripe bananas effectively prevented the resellers from making sales in the other Member States. The Court opined that the imposition of such restrictions hindered competition, which had affected inter – state trading within the Community. This was an abuse according to Article 82 EC. The contention of United Brands was that they imposed the restriction to ensure the quality of the product to the consumers; the Court dismissed the contention of the company on the grounds that the restrictions had wider application than what was needed to ensure quality to consumers.

            The other alleged abuse by United Brands was its refusal to supply bananas to an established Denmark distributor namely Olesen. To this charge, United Brands argued that its decision was justified on the grounds that Olesen had been promoting another brand of bananas, Dole, which would be detrimental to the sales of the Chiquita bananas. While acknowledging the right of a company to initiate action to protect its commercial interests, the ECJ held that such an action should be proportionate to the commercial objectives of the company. The third alleged charge of abuse against United Brands was that the company had applied different rates to distributors in different Member States. To this, the company attempted to justify its actions by stating that this variation in price was directly related to the market price in that particular Member State. The Court held that the price variation had affected inter – state trade, which was tantamount to the abuse of a dominant position[8].

            Furthermore, the ECJ had accepted the argument that the conduct of the company was to be considered, while establishing dominance. In that context, the economic status of the company had made the company to adopt a flexible marketing strategy, which had directly affected its competitors[9]. This had been amply illustrated in instances where a company had legitimately offered discriminatory rebates to customers, which had acted as a barrier to new entrants into the common market. The European Commission had pointed out in the Michelin case that price discrimination by companies could be equivalent to dominance. The ECJ held that it could be an indicator of dominance[10]. In Eurofix-Bauco v Hilti, the Commission alleged that the behaviour of the company had demonstrated that it had acted independently on the relevant market, without considering the interests of its competitors or customers[11].

            In AKZO, the Commission found that the company had the ability to either weaken or eliminate competitors from the market. This indicated the dominant position of the company in the common market. The company appealed before the ECJ, which upheld the Commission’s opinion[12].

AKZO Chemie BV v. Commission dealt with predatory pricing by a dominant firm under Article 82 EC. In this case the ECJ held that if the pricing was such that it was above the average variable costs but less than the average total costs, then such pricing was predatory, provided it objective was to eliminate a competitor. It is essential to demonstrate the intention to eliminate a competitor, because such pricing may be necessitated by various legitimate factors like a reduction in demand[13].

Such mala fide intent is established by considering two classes of evidence. The first is based on the documents pertaining to the dominant undertaking and is direct in nature; whereas, the second relies on a number of indirect facts that serve to prove such intent. In the AKZO case, the dominant firm was a manufacturer of organic peroxides, like methyl ethyl ketone peroxide, benzoyl peroxide and acetone peroxide. Benzoyl peroxide is used as a food additive, in order to render wheat flour white[14].

ECS was a major company in this area and its chief activity was in this field. In a series of documents, which the European Commission scrutinized, a strategy to eliminate ECS from the market by fixing the price of the flour additive below the average total costs was unearthed. In addition, threats were issued to the ECS to withdraw from their primary activity or in the alternative to countenance retaliatory measures in its other areas of industrial activity, such as that of plastics. The ECJ concluded that the intention of AKZO was to eliminate ECS from the market[15].

The Gordon Ltd was a Scottish manufacturer of bagpipes. It was in a dominant position as it had eighty percent of the market share. The Aberdeen Ltd and the Dundee Ltd were two other bagpipes manufacturing companies, which used to obtain replacement parts from Gordon Ltd. The latter two companies merged as the Edinburgh Wind Company Ltd, and commenced to sell bagpipes. These bagpipes were cheaper than those sold by Gordon Ltd. A series of measures were adopted by the Gordon Ltd, these were a sudden and drastic reduction in the selling price of bagpipes, to the tune of fifteen percent, so that their bagpipes were much cheaper than those sold by the Edinburgh Wind Company Ltd. This measure served to capture the bagpipes market. Subsequently, Gordon Ltd, discontinued its previous practice of supplying the spare parts on credit to the Edinburgh Wind Company Ltd. Finally, it totally ceased to supply any parts, for the ostensible reason that such parts were required by it for its own purposes.

Clearly, the Gordon Ltd enjoys a dominant position. Moreover, it had indulged in a series of measures aimed at eliminating the Edinburgh Wind Company Ltd, from the bagpipes market. This measure would have affected the trade in bagpipes with the Republic of Ireland, a Member State of the EU.

The case law of the European Court of Justice acts as the source for the integrity of the Community. Article 82, which engenders a free and competitive market, requires four conditions for its application. First, there must be one or more firms that enjoy a dominant position; second, these undertakings must enjoy the dominant position, within the common market to a considerable extent; third, these undertakings must have abused their dominant position and fourth, such abuse by these undertakings should affect cross – border trade[16].

In the United Brands case, the dominant firm had refused to sell to a Danish company. This had been treated as a breach of Article 82 EC by the ECJ. Therefore, the refusal to sell by Gordon Ltd is a breach of Article 82 EC. Furthermore, in the AKZO case, the dominant undertaking had initiated a series of measures, like reducing the cost price of a product that was manufactured by the ECS Company, in order to reduce if not stop its sales and threatening to do so in other areas also, where the ECS was a manufacturer. In that particular case, the ECJ had held the AKZO to have breached Article 82 EC. In the light of these decisions, the Gordon Ltd has violated Article 82 EC.

The European Community Competition law ensures healthy competition in the free market. Member States are required to implement the principles of the Competition law in their national legislation and to ensure that dominant companies do not engage in anti – competitive behaviour.

Bibliography

Case 27/76 United Brands Company and United Brands Continental BV v. Commission of the European Communities [1978] ECR 207

Case 322/81 Nederlandsche Banden-Industrie Michelin v. Commission (1983) ECR 3461

Commission Decision: Eurofix-Bauco v. Hilti OJ (1988) L 65/19

Craig Paul, and De Búrca, Gráinne, EU Law-Text, cases and materials, third edition, 2003,

Great Britain, Oxford University Press

ECS/AKZO OJ [1985] L 374/1 and Case 62/86 AKZO Chemie BV v. Commission (1991) ECR I-3359

Goyder, D.G, EC Competition Law, fourth edition, 2003, Great Britain, Oxford University

Press

Jones, Alison and Sufrin, Brenda, EC Competition Law-Text, cases and materials, second edition, 2004, Great Britain, Oxford University Press

Korah, Valentine, An introductory guide to EC competition law and practice, fifth edition,

1994, Oxford, Sweet and Maxwell Ltd

O’Donoghue, Robert and Padilla, A Jorge, The Law and Economics of Article 82 EC, first

Edition, 2006, Great Britain, Hart Publishing

United Brands (ECJ), retrieved 23 January 2008 from http://www.reckon.co.uk/open/United_Brands

[1] Jones, Alison and Sufrin, Brenda, EC Competition Law-Text, cases and materials, second edition, 2004, Great

  Britain, Oxford University Press. P.1
[2] Craig Paul, and De Burca, Gráinne, EU law-text, cases and materials, third edition, 2003, Great Britain,

   P. 993
[3] Korah, Valentine, An introductory guide to EC competition law and practice, fifth edition, 1994, Oxford, P. 83
[4] Goyder, D.G, EC Competition Law, fourth edition, 2003, Great Britain, P. 268
[5] O’Donoghue, Robert and Padilla, A Jorge, The Law and Economics of Article 82 EC, first edition, 2006,

   Great Britain, P. 107
[6] Case 27/76 United Brands Company and United Brands Continental BV v. Commission of the European

  Communities [1978] ECR 207
[7] Case 27/76 United Brands Company and United Brands Continental BV v. Commission of the European

  Communities [1978] ECR 207
[8] United Brands (ECJ), retrieved 23 January 2008 from http://www.reckon.co.uk/open/United_Brands
[9] Case 27/76 United Brands Company and United Brands Continental BV v. Commission of the European

    Communities [1978] ECR 207 para 121
[10] Case 322/81 Nederlandsche Banden-Industrie Michelin v. Commission (1983) ECR 3461
[11] Commission Decision: Eurofix-Bauco v. Hilti OJ (1988) L 65/19
[12] ECS/AKZO OJ [1985] L 374/1 and Case 62/86 AKZO Chemie BV v. Commission (1991) ECR I-3359
[13] O’Donoghue, Robert and Padilla, Jorge Atilano. The Law and Economics of Article 82 EC. First Edition. 2006. Hart

    Publishing.  P. 249
[14] O’Donoghue, Robert and Padilla, Jorge Atilano. The Law and Economics of Article 82 EC. 2006. Hart Publishing.

    P. 249
[15] O’Donoghue, Robert and Padilla, Jorge Atilano. The Law and Economics of Article 82 EC. 2006. Hart Publishing.

    P. 249
[16] Jones, Alison and Sufrin, Brenda, EC Competition Law-Text, cases and materials, second edition, 2004, Great

  Britain, P. 255