Europe’s Exceptional Circumstances Test
In the European Union unilateral refusals to license fall to be considered under the open-ended prohibition against abuse of market dominance in Article 102 TFEU1 (ex Article 82 EC).2 Although fleshier than its skeletal United States counterpart (section 2 of the Sherman Act), it nowhere alludes in its non-exhaustive list of examples of anti-competitive conduct to unilateral refusals to deal in general, let alone to refusals to license intellectual property in particular.3 Exactly when refusals to license are unlawful under Article 102 remains an intractable question, despite decades of intensive judicial, regulatory and academic analysis. The European Commission has recently attempted to make it less so by issuing the communication Guidance on the Commission’s Enforcement Priorities in Applying [Article 102 TFEU] to Abusive Exclusionary Conduct by Dominant Undertakings (the ‘Guidance’).4 That initiative, like all such regulatory guidelines, is a ‘soft law’ instrument.5 The Commission cannot usurp the role of the General Court and the Court of Justice as definitive interpreter and synthesiser of the substantive law. The Guidance articulates the circumstances in which the Commission is, or is not, likely to intervene, and provides details of the economic methodology it proposes to introduce into future cases in which it does opt to intervene to enforce the TFEU’s abuse of dominance provision. Indeed the phenomenon of some regulatory guidelines, while never binding on courts, ending up institutionalised and framing anti-competitive discourse6 has not escaped the notice of commentators,7 and there is an intermittently applied tradition of deference to the regulator by European judicial bodies, the decision in Microsoft8 being the most recent example. At least one commentator has pointed out that the Commission considers its initiative to be the basis for a future substantive reinterpretation of Article 102 TFEU,9 while another has ventured that describing the Guidance as merely setting out ‘enforcement priorities’ creates a false dichotomy, because it is in reality offering an interpretation of the law.10 Of course, the Guidance remains, like any form of soft law, susceptible to challenge11 if its interpretations of substantive law are clearly at variance with those laid down by the European courts.12
In this chapter, therefore, we have at least to entertain the possibility that the Guidance could be instrumental, if only in a roundabout way, in engineering a shift in the European Union’s abusive unilateral conduct grundnorm. Were such a shift to occur, future refusals to license cases would be treated by the Commission in a more hands-off fashion; but in the event regulators did intervene in a particular case, parties can expect a more energetic deployment of economic methodology and analysis by the Commission in its assessment of the effects of the practice under scrutiny. While taking these developments into account where appropriate, this chapter will focus for the most part on the current substantive law on unilateral refusals to license which have led to their special treatment by the courts and the evolution of a body of European jurisprudence built up around what has become Europe’s signature ‘special circumstances’ test.
While European Union case law relating to refusals to deal shares several traits with that of the other jurisdictions analysed in this book, it nevertheless bears its own idiosyncratic stamp. The jurisprudence has tended to develop silo-style, with much depending on whether that which is denied is tangible or intangible but also on other factors, such as lack of an objective or competitively neutral justification for the refusal and a history of previous supply. Reconciling these different strands of authority is not something which either the General Court or the Court of Justice has so far felt the need to take on in the absence of a more malleable set of facts. (Indeed to date the only serious attempts at synthesis have been by way of academic commentary13 and soft law in the form of the Guidance.)
There has never been in European law any legislative or regulatory presumption that possession per se of an intellectual property right necessarily confers a dominant position on the holder.14 Neither, on the other hand, is there any explicit disavowal of that proposition in the manner of Illinois Tool.15 Indeed the Court of Justice adroitly bypassed any real dissection of this issue when asked by the United Kingdom High Court in Volvo v Veng16 whether mere ownership of an exclusive registered design right over a Volvo car front-wing panel was enough in itself to give the owner a dominant position in the market for manufacturing and importing such a product. The establishment of the existence of a dominant position remains one for factual confirmation for owners and non-owners of intellectual property alike, said the Court, applying the now well-established test for dominance that it laid down in United Brands v Commission17 and Hoffmann-La Roche & Co v Commission.18 Absent any definition in the Treaty itself as to what constitutes a ‘dominant position’, the Court held in the former case that it is a position of19
economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately … consumers.
What seems clear, however, from Volvo v Veng20 (and later endorsed by the Court of Justice in IMS Health GmbH v NDC Health GmbH21) is that a refusal to grant a licence by an undertaking in a dominant position cannot in itself be abusive without proof of something more. It is in the description of that something more that the uniqueness and difficulty of the exceptional circumstances approach lies.
One key feature of European refusals jurisprudence relates to the extent to which the essential facilities doctrine has both taken hold and continued to thrive in contrast to its post-Trinko22 decline in the United States. The concept (dubbed a ‘powerful tool to pry open markets’ by one commentator23) was first formally recognised by name in Sealink/B&I–Holyhead,24 in which the Commission referred to an essential facility as ‘a facility or infrastructure without access to which competitors cannot provide services to their customers’ (emphasis added).25 It was not, however, until Tiercé Ladbroke SA v European Commission26 that the parameters of the essential facilities doctrine were explored in express terms by the General Court. The case involved two French copyright owners’ refusal to license the right to transmit televised pictures and sound commentaries relating to horse races in France to Tiercé Ladbroke which ran betting shops in Belgium. The General Court held that Pari Mutuel Urbain Français (PMU) and Pari Mutuel International (PMI) (collectively les sociétés de courses) were not competing in the Belgian betting market at all, and that since Tiercé Ladbroke already had the largest share in that market, the refusal did not result in any restriction of competition in it. As the Court noted27:
The refusal to supply the applicant could not fall within the prohibition laid down by [Article 102 TFEU] unless it concerned a product or service which was either essential for the exercise of the activity in question, in that there was no real or potential substitute, or was a new product whose introduction might be prevented, despite specific, constant and regular potential demand on the part of consumers.
Precisely why the doctrine found such great favour with both courts and regulators28 (albeit in a heavily contextualised way) is not altogether clear, since there never was, after all, any early European embrace of the Colgate principle29 to be beaten back into its box. Indeed in Europe, the conduct of dominant undertakings has always tended to be subject to more searching scrutiny than that of non-dominant undertakings.30 In addition, European notions of what constitutes an essential facility have been allowed to expand beyond physical infrastructure, so that it now can easily accommodate all features of today’s broadband- and satellite-based economy, and recognise the role of economic factors such as network31 and lock-in effects as well as sophisticated technological standards.
Whatever the reasons for its overall acceptance,32 the essential facilities doctrine has taken on a distinctly European cast, splitting off into several other discrete but interwoven lines of authority. One of these seemingly stand-alone lines (seen at its less-tangled and most-developed in cases such as Radio Telefis Eireann and Independent Television Publications v European Commission33 and IMS34) applies a version of the doctrine where intellectual property rights are involved. The so-called ‘exceptionality’ test that has emerged from this body of precedent, while in some ways heavily reliant on essential facility-type reasoning, moves beyond that reasoning in ways that are potentially more restrictive than in other contexts.
Notwithstanding Europe’s regulatory and judicial love affair with the essential facilities doctrine (not always under that name), it should not be thought that the highly contextual resort to its concepts evident in the cases ever resulted in the doctrine being erected into the sort of rule of general application that it became in the United States during its heyday. Nor, unfortunately, has it become intellectually coherent enough to offer an easy exit from the problem of how a competition regime should approach refusals to license intangibles. One reason for this is obvious. European judges have in the main been content to employ methodology applying the doctrine that merely asks a series of questions derived from common ground between the leading essential facilities cases, without troubling unduly as to whether these are in essence emanations of a single unitary principle or discrete situation-dependent rules. A good example here is Etherton J’s methodology, seen at work at first instance in the United Kingdom High Court decision in Attheraces Ltd v The British Horseracing Board Ltd,35 in which he found information in the form of race data (unprotected by any form of intellectual property) to be an essential facility. Although the case was subsequently overturned by the United Kingdom Court of Appeal,36 this particular finding was not disturbed. Indeed Mummery J, delivering the judgment of the court, observed37:
Abuse of a dominant position by refusal to supply may occur … as a result of the cutting off of an existing customer, or refusing to grant access to an essential facility, unless the act or refusal is objectively justified. It may also consist of the refusal to grant a licence of an IP right.
Article 102 TFEU contains no stipulation that the use of a dominant position be restricted to the dominated market. This has allowed leveraging theory to flourish. The concept of cross-market leveraging was clearly articulated (if not by name) by the Court of Justice in Télémarketing,38 where it was said liability for breach of Article 102 TFEU could arise
Where without any objective necessity, an undertaking holding a dominant position in a particular market reserves for itself [or maybe a subsidiary] an ancillary activity which might be carried out by another undertaking as part of its activities in a neighbouring market with the possibility of eliminating all competition from such an undertaking.
Subsequently, as discussed later in this chapter, the Court of Justice, in deciding the outcome of the long-running nine-year litigation in Magill,39 famously fleshed out the concept of leveraging as part of the a three-step test for abuse of market power.40 Not only did the Magill Court recognise that leveraging was a viable commercial strategy (after finding in the case that the refused party’s comprehensive weekly TV guide, would have competed with the three standalone weekly guides for individual television channels to which access had been denied), it also expressed itself in a way that strongly suggested that in future refusals to license cases, it was the effect on the downstream market that counted. This has led some commentators to suggest that the effects on competition in the upstream market covered by the intellectual property right must be ignored unless there are also effects in the downstream market. This may be reading too much into Magill’s highly constraining facts.
Post-Magill, however, dedicated judicial adherence to the actuality of leverage and determination by the Court of Justice that the conditions in Magill were cumulative41 have led to a ready acceptance (especially in relation to refusal to license intangibles) of even the faintest spectre of a secondary market.42 This is an approach that opens up more questions than it can answer. The literature remains deeply divided as to whether the refusing party has to reserve the secondary market (whether hypothetical or real) for its own exploitation or must leverage its advantage onto a secondary market, or whether it will merely suffice that a secondary market is foreclosed to competition. One thing remains clear, however, European courts remain wedded to the view that market power can be leveraged from one market to another, a clear rejection of the notion popular in Chicago circles43 and endorsed by the United States Supreme Court in Trinko44 that leveraging power across markets is so economically irrational as to be unsustainable.
In a line of cases during the 1970s and 1980s, the Court of Justice at first strongly suggested and then bluntly insisted in United Brands45 that there was a duty on dominant firms to continue to supply a claimant if it is ‘a long standing customer who abides by regular commercial practice if the orders placed by the customer are in no way out of the ordinary’.46 This was softened somewhat by other decisions establishing that a dominant undertaking may be justified in refusing to supply a previous customer if its own reputation or commercial interests are at stake. In such cases, however, the dominant firm’s response must be fair and proportionate to the threatened or actual commercial harm done, and not motivated by any anti-competitive purpose.47
The Commission (upheld by the General Court) developed this line of authority even further in Liptons Cash Registers v Hugin,48 holding that an undertaking (not dominant in the market for cash registers but dominant in the much narrower market for its own spare parts) acted anti-competitively when it refused without objective justification to supply spare parts to a firm in the business of repairing its machines.49 Lack of objective justification was also a pivotal factor in Boosey v Hawkes,50 in which the General Court was not dissuaded from finding abuse where a dominant party refused to supply products by way of reprisal against a customer who had had the temerity to associate itself with a potential competitor of the dominant party.
One tantalising question raised (albeit much later) by the Greek competition regulator (Epitropi Antagonismou) in Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and others v Glaxosmithkline AEVE (Syfait),51 but not addressed for want of jurisdiction by the Court of Justice,52 was whether the refusal by Glaxosmithkline’s Greek subsidiary to satisfy in full orders it had received from wholesalers could be seen to be objectively justified if the dominant company had intended by that mechanism to limit parallel trade in its pharmaceuticals in the European Union. In his opinion Advocate General Jacobs considered the refusal could be deemed reasonable if done in order to defend the dominant undertaking’s commercial interests. He went on to narrow this, however, by saying that53
conduct by a dominant pharmaceutical undertaking which more clearly and directly partitioned the common market would not be open to a similar line of defence [thus clarifying that] a restriction of supply by a dominant pharmaceutical undertaking might fall foul of … established case-law on refusal to supply if it had negative consequences for competition arising other than as a consequence of its restriction of parallel trade.
With these cases, the shift seems to have been made from outcomes based on found facts to a definitive legal duty to supply in the absence of any objective justification for the refusal.54 It is at this point, however, that other lines of authority surface to confuse matters.
As early as 1974 an undertaking was held liable by the Court of Justice under Article 102 TFEU (then Article 82 EC) for refusing to continue to supply a raw chemical substance to a former customer, Zoja. This was in Istituto Chemioterapico Italiano SpA & Commercial Solvents Corp v European Commission,55 and the chemical in question (aminobutanol) was necessary for the downstream production of an anti-tubercular drug (ethambutol). Not only was Zoja a former customer but it was also a competitor of the firm, since both parties were active in that derivative market. As the Court found in a much-quoted passage:
[A]n undertaking which has a dominant position in the market in raw materials and which, with the object of reserving such raw material for manufacturing its own derivatives, refuses to supply a customer, which is itself a manufacturer of these derivatives, and therefore risks eliminating all competition on the part of this customer, is abusing its dominant position.
Typically for the time, neither efficiency considerations nor consumer benefit or harm56 (as those terms are variously defined) figure at all in the judgment. Pivotal to that first finding of an anti-competitive refusal were three factors:
b) the defendant had the upstream market completely sewn up; and
c) there was no apparent objective justification for the refusal on the part of the defendant.
Relatively early on, European competition authorities seemed as willing to find refusals anti-competitive in relation to intangibles as they did in relation to tangible property. Thus, the Commission had little hesitation finding in London-European Airways v Sabena,57 for example, that Sabena had breached Article 102 TFEU by denying London-European access to its computer reservation system ‘Saphir’ by means of which the undertaking had been able to dominate the market in Belgium for computerised air travel reservations.58 In another case, also in the 1980s, it intervened when International Business Machines (IBM), once dominant in the computer industry, refused to provide interface information (it regarded as involving trade secrets) to other firms to allow development of interoperable components and systems, and made frequent changes to its interfaces, causing licensees’ previously compatible technologies to be less compatible or wholly incompatible. IBM settled the lawsuit by agreeing to pre-disclose changes to its interfaces to aid other firms in adapting their products in a timely manner.
The General Court did not feel any need to articulate or explore the tangible versus intangible theme in Clearstream Banking AG v Clearstream International SA59 (a case involving denial of access to an intangible in the form of primary banking clearing and settlement services as well as delays in service provision). It simply came to the conclusion that a refusal would be judged anti-competitive if it was ‘likely to eliminate all competition on the market on the part of the person requesting the service’ and that ‘such refusal must not be capable of being objectively justified, and the service must in itself be indispensable to carrying on that person’s business.’60
What is noteworthy about these cases is that they appear to make no distinction between different forms of property right, or even between property and non-property (the computer reservation system in Sabena, or the bank clearing services in Clearstream). Nor did anyone think that the trade secret aspect of the IBM settlement merited a different approach, even though trade secrets are generally, if not entirely accurately, subsumed under the intellectual property label. Neither the General Court nor the Commission showed any desire to classify technological or organisational advantages according to any private law categories.
Court of Justice jurisprudence on the intersection of competition law and intellectual property under Article 102 TFEU, while prepared to allow that even dominant intellectual property-owning firms should be free to choose their licensees, also concedes that ‘exceptional circumstances’ might nevertheless exist in which a refusal to license intellectual property rights might constitute an abuse of dominant position. The case law has evolved in such a way, however, that while the presence of certain factors may be said with some (if not complete) certainty to meet the test of exceptionality, it is less clear is whether it is only these factors that can satisfy that test or whether there exist any other, as yet unstated sets of exceptional circumstances. The position is further confused by the fact that the Court of Justice has also yet definitively to bless (or reject) some interpretations of its decisions by the General Court and the Commission.
It will be recalled that the Court of Justice in Volvo v Veng61 baulked at finding any duty on the part of a registered design right owner to license the design right in car parts to manufacturers desirous of making and selling such parts. The Court held the right to deny third parties ‘constitutes the very subject matter [or scope of the grant] of that exclusive [design] right’. The Court, however, went on to qualify the exercise of this right by postulating three hypothetical situations in which a refusal to supply might constitute abusive conduct, ie:62
the arbitrary refusal to supply spare parts to independent repairers, the fixing of prices for spare parts at an unfair level or a decision no longer to produce spare parts for a particular model even though many cars of that model are still in circulation provided that such conduct is liable to affect trade between Member States.
In the result, the Court of Justice found that none of the circumstances thus described were present on the facts before it. Nevertheless the so-called ‘spare parts cases’ provoked an outpouring of academic commentary. While many commentators readily identified a dichotomy between the existence of intellectual property rights (not anti-competitive in themselves) and the exercise of such rights (that could be), their general explanations remained largely inconclusive and unsupported by authority.63
Further stoking of the existence/exercise debate was to follow when the Court of Justice handed down its decision in Magill.64 This appeared to open a wider window of opportunity for those on the receiving end of a refusal to license who might wish to attack that refusal by owners of copyright (and arguably of other kinds of intellectual property too) under Article 102 TFEU. The outcome in Magill was an expansion of the concept of ‘exceptional circumstances’ by the Court of Justice, which treated copyrighted material as something like an essential facility and imposed liability for refusal to supply it. On the facts of the case, Magill had published a comprehensive weekly guide to three television channels received in Ireland and Northern Ireland, but had been successfully sued for copyright infringement by the three television stations which had for some time been publishing stand-alone guides to their own programmes. On appeal, both the General Court and the Court of Justice upheld the decision of the European Commission against the three television stations for abusing their dominant position in relation to the information contained in their separate guides. Both Courts found that a refusal to license copyrighted material, but nothing more, established neither dominance nor abuse, but if the former was proven by other means, the latter might be present under exceptional circumstances. For the Magill Court, exceptionality lay in65
The [television channels’] refusal to provide basic information by relying on national copyright provisions which thus prevented the appearance of a new product, a comprehensive weekly guide to television programmes, which the appellants did not offer and for which there was potential consumer demand.
In the view of the Court of Justice, the requirements of a ‘new product’ and ‘potential consumer demand’ for it, in conjunction with the television channels’ failure to offer the new product themselves, had clear resonance in the actual text of Article 102(b) TFEU (ex Article 82(b) EC) which stipulates that abuse may arise by ‘limiting production, markets or technical development to the prejudice of consumers’. However, it should in no way be inferred from this that the Court of Justice intended to lay down that all future cases involving refusal to license copyrighted material necessarily had to be brought within the terms of Article 102(b); that, after all, is only one of four non-exhaustive illustrations of the ways in which dominance may be abused.
The scope of the ‘exceptional circumstances’ exception in Magill was subsequently parsed and construed in two other refusals cases: first by the General Court in Tiercé Ladbroke,66 and then by the Court of Justice in Oscar Bronner.67 Judicial, regulatory68 and academic69 uncertainty lingered for some time both as to whether the criteria were to be read cumulatively (did ‘and’ really mean ‘and’?) or disjunctively (could ‘and’ be construed as meaning ‘or’?), and as to whether the list of circumstances was exhaustive or merely illustrative. The Court of Justice addressed and attempted to clarify these issues in IMS.70
IMS Health GmbH was a company that for some time had been providing pharmaceutical manufacturers with a detailed analysis of retail sales of pharmaceutical products in Germany. In order to produce these regular breakdowns, it used a sales-tracking map it had designed in cooperation with customers and adapted to many of their internal marketing and data retrieval systems. This ‘brick structure’ (as it came to be dubbed) divided the country into 1,860 segments based on political boundaries, postcodes and retail distribution systems. Use of the brick structure extended well beyond IMS’s immediate customers to doctors, retail pharmacies and health insurers, whose use of it IMS neither charged for nor objected to. For any potential competitor of IMS, the brick structure posed a formidable barrier to entry, given the evident and unsurprising reluctance of IMS’s customers to accept anything other than reports based on it. In effect the brick structure had become the industry standard. When a competitor devised a look-alike reporting methodology to shield users from the cost of switching to its system, IMS claimed copyright ownership in the brick structure and sued its rival for infringement in the German courts, which, after granting IMS interim relief and finding it dominant in the market for pharmaceutical sales data in Germany, asked the Court of Justice for a preliminary ruling as to whether IMS’s refusal to license its brick structure amounted to abuse in terms of Article 102 TFEU (ex Article 82 EC).
In IMS the Court of Justice treated the exceptional circumstances as laid down in Magill as cumulative, in the limited sense that if all factors were present there was a breach of Article 102 TFEU. It then laid down its conditions of its own (conditions alternatively described as ‘sufficient’ or ‘determinative’) to formulate its own five-point test under which a refusal to license copyright by its dominant owner would be anti-competitive if:
a) a copyright license was essential for carrying on the would-be licensee’s business;
b) that business was in a separate (secondary) market from the (primary) market in which the copyrighted material might be sold, although one or both markets might remain purely hypothetical until the license issue was resolved;
c) the refusal prevented the emergence of a new product that the copyright owner does not offer and for which there is a potential consumer demand;
d) there was no ‘objective’ justification for the refusal;
e) the refusal foreclosed all competition in the secondary market.
What was not clarified, and indeed still awaits clarification, was whether the cumulative five-point test was intended to be exhaustive.71 The IMS decision is also silent as to whether refusals could be constructive.72 Another key issue left to be probed and resolved by future courts and regulators was the newness of a product or process, and whether the question whether it was ‘new’ should be judged objectively, subjectively or subjectively through an objective lens. Although it seems clear that the Court of Justice was not mandating that the ‘new’ product or process had to meet patent law’s high standard of novelty and non-obviousness, it is far from clear whether a product that looks and feels much the same as an existing product but is more technically advanced or cheaper would meet the ‘newness’ test. Also left up in the air was whether a product is to be considered ‘new’ merely because it competes directly with one offered by the intellectual property right owner, or whether ‘new’ in this context can simply mean non-substitutable.
The Court of Justice was not much more forthcoming on how one should decide when it can be said that a withheld licence was essential for carrying on the would-be licensee’s business in the secondary market. Does ‘essential’ mean technically irreplaceable or merely unaffordable; and if the latter, what, if anything, should turn on whether the denied party is a large or small player, or what its chances might be of surviving in the market even with a licence? Another pivotal issue left under-explored was how newness and essentialness were to be accurately assessed in markets that had yet to materialise and that might remain forever hypothetical. The Court’s only thoughts on this subject were to flirt inconclusively with the idea of a notional market for the copyright itself, even though the putative copyright subsisting in the sales data itself73 was not ‘sold’ to any user, nor indeed was it ever intended to be. For future cases, the approach adopted by the Court appears to render the two-market requirement irrelevant. If the secondary market identified can be, as the Court of Justice accepted, potential or even hypothetical,74 to what extent will it matter that the second-comer’s intentions to produce something not offered by the intellectual property owner is insincere, or if sincere, impossible for it to achieve or improbable even if possible?
Again, how pivotal was it in IMS that it was a competitor who had sought the access denied? If it was so, subsequent litigation in at least one national court has pointed up that this can be a hard distinction to make, and an artificial one if made.75
Even before the finding by the General Court in Microsoft,76 some judges and national competition regulators in European Union Member States77 were not entirely reluctant to apply the essential facilities doctrine to refusals to license intellectual property, or to acknowledge the emergence of a so-called ‘competition law defence’ or ‘euro defence’ to a patent infringement claim brought by a market-dominating patentee, a defence that enables the defendant to claim that the dominant owner of an essential patent was obliged to license its patents under FRAND terms, and that the owner’s refusal amounted to abuse under Article 102 TFEU or its national law equivalent. Thus, in Standard-Spundfass,78 the Bundesgerichtshof