Hristo Hristov
Ralina Georgieva
EUR 324a
The EU and US Divergence on Competition Law
The recent decision of the European Antitrust Court on Microsoft renewed the already heated
debate on the different approaches to antitrust policies in the United States and in Europe. The
categorical claim "We Americans protect competition, while Europeans protect competitors" has
come back onto the scene. Antitrust policy aims to increase economic welfare by creating a level
playing field. No transatlantic discrepancies up to here. In both the United States and Europe, this is
the guiding principle of competition policies. But just how do you best protect consumers’ welfare?
It is here that we are entering controversial territory.
Trusts and monopolies are concentrations of wealth in the hands of a few. Such
conglomerations of economic resources are thought to be injurious to the public and individuals
because such trusts minimize, if not obliterate normal marketplace competition, and yield
undesirable price controls. These, in turn, cause markets to stagnate and sap individual initiative.
Competition law is known in the United States as "antitrust law". The substance and practice of
competition law vary from one jurisdiction to another. Protecting the interests of consumers
(consumer welfare) and ensuring that enterpreneurs have an opportunity to compete in the market
economy are often treated as important objectives.
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The earliest U.S. antitrust laws were adopted after technological changes , most importantly,
the development of a national railway network. These changes turned the U.S. political union into a
single economic market. They were adopted with the stated purposes of preventing collusion and
strategic entry-deterring behavior. The initial application of the antitrust laws relied on a rule of
competition to determine whether business conduct was or was not permitted. The Clayton Antitrust
Act of 1915 was enacted in the United States to add further substance to the U.S. antitrust law
regime. That regime started with the Sherman Antitrust Act of 1890, the first Federal law outlawing
practices considered harmful to consumers (monopolies and cartels). The Sherman Antitrust Act
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was the first United States government action to limit cartels and monopolies. It is the first and
oldest of all U.S., federal, antitrust laws. The Clayton act specified particular prohibited conduct, the
three-level enforcement scheme, exemptions, and remedial measures. Sherman Antitrust Act, 1890,
first measure passed by the U.S. Congress to prohibit trusts; it was named for Senator John Sherman.
Prior to its enactment, various states had passed similar laws, but they were limited to intrastate
businesses.
European Community competition law is one of the areas of authority of the European Union.
Competition law, or antitrust as it is known in the United States, regulates the exercise of market
power by large companies, governments or other economic entities. EU competition policy was
adopted in advance of economic integration. Europe introduced antitrust provisions with its founding
act, the Treaty of Rome. But to be sure, back in 1957, competition policy was not high on the agenda
of European integration. At the time, this was essentially an irrelevant issue. If anything, strong, and
perhaps dominantly, positioned companies were desired in the aftermath of World War II.
Competition policy differed significantly from the traditional policies of the original EC6 member
states when it comes to business behavior. It was adopted with the stated purpose of furthering
1
Sherman Act, July 2, 1890, ch. 647, 26 Stat. 209, 15 U.S.C. § 1–7)
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economic integration and to this end prohibited practices that were seen as distorting competition.
Still, for decades cartels were tolerated, if not supported, in Europe. But the principles were there. It
was only missing a stronger commitment to enforcement. In the last two decades, the European
Commission has firmly pushed forward this commitment to make competition policy one of its
trademark issues on the global stage. The otherwise often criticized lack of political profile and
determination on the part of the European Commission in this case is a strength. A non-politicized
European Commission has been able to lead the implementation of a nonpartisan, time-consistent
competition policy across Europe irrespective of the political leanings of governments in each
country. This has also legitimized EU rulings when national governments have occasionally
attempted to support their domestic industries.
In contrast, politics do matter in the United States. The heads of the regulatory bodies are
politically appointed — and their budgets are decided by the U.S. Congress. The activism of antitrust
policies during the Clinton Administration has been replaced by a laxer approach during the Bush
years, which started out with an agreement to settle the Microsoft case. In contrast, the determination
of Italy’s Mario Monti — the former top EU competition official — has been inherited and
continued by his successor, the Dutch Neelie Kroes. In March, 2008, Kroes said the antitrust policies
of the 27- member state bloc and the US continue to converge. Speaking in Washington, Kroes said:
'I firmly believe that our systems are on a path of convergence.’2 A couple of days later, Bush
administration officials vowed to enforce more strictly antitrust law in their remaining months in
2
Thomson Financial News http://www.forbes.com/afxnewslimited/feeds/afx/2008/03/28/afx4826631.html
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office. Thomas Barnett, the Justice Department's top antitrust official, said the agency will pursue
"aggressive but appropriate merger enforcement."3
Nowadays, competition is an important part of ensuring the completion of the internal
market, meaning the free flow of working people, goods, services and capital in a borderless Europe.
The antitrust area covers two prohibition rules set out in the EC Treaty. First, agreements between
two or more firms which restrict competition are prohibited by Article 81 of the Treaty, subject to
some limited exceptions. This provision covers a wide variety of behaviours. The most obvious
example of illegal conduct infringing Article 81 is a cartel between competitors (which may involve
price-fixing or market sharing). Second, firms in a dominant position may not abuse that position
(Article 82 of the EC Treaty). This is for example the case for predatory pricing aiming at
eliminating competitors from the market. The European Commission has jurisdiction over largescale mergers and acquisitions affecting more than one EU Member State and exceeding certain
thresholds. The Commission can fine antitrust violators. Like the US government, it is entitled to
review mergers between non-EU companies with certain revenue thresholds that conduct significant
business in the EU. Moreover, unlike US antitrust law, EU law also ensures that competition is not
hindered by the intervention of national authorities. In that respect, EU law prohibits state aid
granted by EU members that distorts competition in the Internal Market.
The EU’s September 2007 Microsoft court ruling is an example of how regulations can have
impacts beyond national borders. The EU has taken a much tougher stance against Microsoft Corp.'s
alleged monopolistic conduct than the U.S. has, fining the software giant a total of $2.4 billion in the
past several years. European authorities are also investigating Intel Corp. for alleged anticompetitive
conduct, while the FTC has so far refused to begin a similar probe. Andrew Gavil, an antitrust law
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The Associated Press
http://news.moneycentral.msn.com/ticker/article.aspx?Feed=AP&Date=20080328&ID=8404425&Symbol=TOC
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professor at Howard University, said the Bush administration has been "much more cautious" than
the EU about enforcing competition law against companies such as Microsoft,which dominate their
industries.
Still, the European Commission seeks ways to cooperate with US authorities, such as the
Department of Justice and the Federal Trade Commission. Principal elements of cooperation are
mutual information about enforcement activities, coordination of enforcement activities and
exchange of non-confidential information. The intensity of cooperation is increased if the parties to a
case have granted a waiver allowing the exchange of otherwise protected information. Currently, the
EU and the US are exploring a second-generation agreement, which would allow for the exchange of
confidential information and facilitate cooperation in the fight against cartels.
When it comes to international trade, it is important to mention the existence of the antidumping rules. AD rules have originally been introduced in order to prevent foreign suppliers from
restricting competition on domestic markets. In other words, initially AD rules were a necessary
addendum to national competition laws, which could not be enforced extraterritorially. Frontrunner
were the United States with the adoption of an addendum to the Sherman Antitrust Act of 1890 – the
Wilson Tariff Act which was adopted in 1894 and which indeed was the world’s first AD law. The
Sherman Antitrust Act was adopted to prevent competition restraints in trade between the U.S. states
as well as in international trade from or towards the U.S. In the course of time the AD rules lost sight
of their initial objectives and, furthermore, they also began to deviate substantially from the
commonly accepted norms and standards of competition policy and law.
The EU trade policy instruments and legislation are in line with applicable WTO and other
international agreements on unfair trading practices. The EU takes care that European business and
industries are not disadvantaged by unfair and injurious practices from other trading partners. AD
measures were created to counter dumping practices, the most frequently encountered trade5
distorting practices. Dumping occurs when manufacturers from a non-EU country sell goods in the
EU below the sales price in their domestic market, or below the cost of production. Existing
Community rules were replaced by a new Anti-Dumping regulation which came into force on 1
January 1995. This in turn was updated by Regulation 384/96, which came into force on 6 March
1996. This Regulation incorporates measures agreed in the Uruguay Round of the GATT. It also
imposes strict time limits for the completion of investigations and decision-making to ensure that
complaints are dealt with rapidly and efficiently.
The substantial potential for discrimination, which results from significantly differing
procedural rules of AD versus competition rules has also been largely ignored up to now. To begin
with, in dealing with AD complaints domestic authorities normally follow the factual market
definition of the applicant without conducting analyses of their own. This means that the definition
of the relevant market is de facto left to the suing domestic sector or to the acting suing trade
association, respectively. Furthermore, the country of import normally is considered as the only
geographically relevant market due to non-existence of generally accepted legal guidelines on how to
define it. Finally, in AD trials there is no need to prove that the foreign competitor accused of
dumping enjoys a dominant position in the relevant market (while in competition case sanctions can
only be imposed for the abuse of such a position). This leads to an interesting question: How many
AD cases would lead to the imposition of sanctions, if antitrust rules had been applied instead?
According to an important study by Messerlin, who performed this test on all AD investigations
conducted by the European Commission during the 1980ies, the market share of the foreign
companies was less than five percent in 56 percent of the cases, and less than 25 percent in more
than 90 percent of the cases. A similar study by Niels and Ten Kate, which analysed AD cases of
OECD-member states between 1979 and 1989 and which is not publicly accessible, confirms this
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result. Therefore, if the procedural rules of competition policy would also be applied in AD cases
most complaints would have failed.
Another turning point in considering the differences between AD and competition policies is
the application of fidelity rebates. Fidelity rebates are rewards or discounts given to customers who
purchase all or a specified portion of their requirements for a given product or service from a
dominant firm. In Europe, the Commission and the European Court of Justice have come close to
establishing a per se rule against fidelity rebates granted by a dominant firm, the only exceptions
being short-term discount programs and volume discounts that are cost-justified and open to all
customers on equal terms. In the United States, by contrast, economists tend to view any reduction in
price by a leading firm as moving prices toward the competitive ideal so long as the resulting prices
are not below cost. This difference in approach is illustrated most starkly in the treatment of Virgin
Atlantic’s complaint about British Airways’ incentive system for travel agents, which gave agents
extra commissions in return for meeting or exceeding the previous year’s sales of BA tickets. The
European Commission found BA’s incentive program to be an abuse of dominance. By contrast,
when Virgin sued BA on the same theory in the United States, the trial court granted summary
judgment for BA and that judgment was affirmed on appeal. While Europe's per se approach may
unnecessarily discourage some procompetitive discounting, there are some in the United States who
view the approach of the U.S. courts as too laissez faire.
When it comes to predatory pricing, the U.S. law concerning that matter has been reasonably
clear at least since the Supreme Court decided the Brooke Group v. Brown & Williamson case in
1993. There the Court held that to be found predatory, conduct must satisfy a two-part test: (1) the
allegedly predatory price must be below an appropriate measure of cost, and (2) there must be a
dangerous probability that the alleged predator will be able to recoup its losses through monopoly
prices once its rivals exit the market. The European Court of Justice has adopted the first leg of the
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Brooke Group test, but has expressly declined to adopt the second leg, holding that recoupment is
not a necessary element of predation under Article 82. In addition, whereas most U.S. courts have
held that the appropriate measure of cost is average variable cost, the ECJ left open the possibility of
finding prices above average variable cost but below average total cost predatory if they are “part of
a plan for eliminating a competitor.”
Another area in which we see a potentially significant difference between U.S. and EU
competition law relates to the use of the so-called “essential facilities” doctrine to compel access to
a dominant firm’s facilities. While the essential facilities doctrine originated in the United States, it
was construed very narrowly, limiting it largely to regulated utilities and joint ventures, out of fear
that its overbroad application would both chill incentives to invest and innovate and require antitrust
agencies to undertake the uncomfortable task of having to regulate the terms of access. This issue is
currently a hot topic of debate in the United States due to the seemingly conflicting decisions of the
Ninth Circuit Court of Appeals in ITS v. Kodak and the Federal Circuit in CSU v. Xerox. Both cases
involved the issue of whether a manufacturer of photocopiers could refuse to license its parts to
rivals in the aftermarket. A similar debate is ongoing in Europe as a result of two cases, Magill and
IMS, applying, or attempting to apply, the essential facilities doctrine to intellectual property. In
Magill, the ECJ ordered television stations in Ireland to license their program listings to a competitor
seeking to create a single guide for all channels. In IMS, the Commission concluded preliminarily
that IMS had abused its dominant position by refusing to license to its competitors in Germany its
copyrighted “brick structure” — a system for dividing the country into geographic units for
collecting data on pharmaceutical sales. On appeal, the Court of First Instance (CFI) suspended the
Commission’s interim decision. Supporters of the application of the essential facilities doctrine in
these cases have argued that they both involved “extraordinary circumstances” in that the
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copyrights in question did not involve the kind of creativity copyright law is designed to encourage
and that the decisions therefore should not undercut the incentive to invest and innovate.
The final area of divergence is what is called monopoly leveraging in the United States —
that is, using a dominant position in one market to gain a competitive advantage in another. Most
U.S. courts have held that it is not unlawful for a firm with a monopoly in one market to use its
monopoly power in that market to gain a competitive advantage in neighboring markets, unless by so
doing it serves either to maintain its existing monopoly or to create a dangerous probability of
gaining a monopoly in the adjacent market as well. Under EU law, by contrast, it is an abuse of
dominance for a firm that is dominant in one market to use that position to gain a competitive
advantage in a neighboring market in which it is not dominant even if the conduct is not shown to be
likely to create a dominant position in the second market unless the dominant firm can show a
legitimate business justification for its conduct.
On May 2, 2001, Division of the U.S. Department of Justice announced that it had reached an
agreement in principle with General Electric Company and Honeywell International Inc. That
resolved the Division’s antitrust concerns with the companies’ proposed merger. On May 16, 2001
the Canadian Competition Bureau informed the companies that it would not take any action to
challenge their merger. On July 3, 2001, the European Commission announced that it had determined
to prohibit the transaction. First and foremost, the divergence exposed in GE/Honeywell is rooted in
fundamental substantive and economic differences in doctrine between the United States and EU
merger regimes. In particular, GE/Honeywell makes clear that EU regulators will invoke “portfolio
effects theory” to block conglomerate deals that they fear will cause leading firms to become even
more effective competitors. In contrast, in the United States, lower prices resulting from mergers are
welcome, even when they are predicted to cause leading firms to gain market share. Second, the
procedures in place in Europe contributed to the ability of the Competition Commissioner to block
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the proposed merger of GE and Honeywell based on dubious economic grounds and very weak
evidence. In particular, the absence of timely and independent judicial review of the Commissioner’s
decision that a combination is incompatible with the Common Market gives enormous discretion to
the Competition Commissioner and to the Commission’s Merger Task Force. The case exemplifies
that the EU can find dominance in a bidding market based on the ability of the firm in question to
win bids through aggressive discounting whereas in the United States dominance would be found in
bidding markets when rivals were unable to offer credible, attractive alternatives so that the firm in
question was not forced to compete aggressively to win. These are diametrically opposed approaches
to the assessment of dominance, or monopoly power, in bidding markets. A very similar divergence
occurs around the concept of “foreclosure.” As a matter of economics, we would use the term
“foreclosure” to refer to situations where one firm uses its monopoly power to limit the ability of
others to compete effectively against it. Classic examples of foreclosure by a firm with monopoly
power would be tying and exclusive dealing. Readers of the EU’s final decision in GE/Honeywell
will find a very different usage of the term “foreclosure.” In the EU, a firm that wins by serving
customers’ needs may be characterized as having “foreclosed” its rivals. For example, the Final
Decision states “Indeed, the ability to put together its considerable financial strength . . . and to offer
comprehensive packaged solutions to airlines have given GE the ability to foreclose competition.”
Perhaps more than anything else, divergence in GE/Honeywell can be traced to very different views
of what constitute “efficiencies” in mergers.
The European Union has adopted two major new regulations on antitrust. Both took effect on
May 1, 2004. The first regulation, dealing primarily with competition rules, includes a number of
provisions that considerably strengthen the power of the Competition Commission. The second
important antitrust regulation, which deals with mergers, also took effect on May 1, 2004. The EU
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has authority over any proposed merger, regardless of the nationality of the companies involved, if
the transaction meets two revenue thresholds—if the combined companies would exceed 5 billion
euros in annual revenue worldwide, and if at least two of the merging companies would each have
annual revenue exceeding 250 million euros inside the EU. Prior to 2004, the EU merger test
involved the question of whether the combining companies would create or strengthen a dominant
player (usually meaning the firm with the largest market share) in a particular market, based on the
“abuse of dominant position” concept from Article 82 of the EC Treaty. The new regulation revises
the merger test, allowing the EU to block mergers that “significantly impede effective competition.
This revision brings the EU test closer to the U.S. standard for mergers set by the Clayton Act, which
prohibits mergers when the effect “may be substantially to lessen competition, or to tend to create a
monopoly.” However, an important difference remains in that U.S. antitrust authorities must go to
federal court to request an injunction to block a proposed merger. In contrast, the EU’s Competition
Commissioner can block a merger without prior court involvement. The EU merger reform package
also includes new Horizontal Merger Guidelines providing detailed guidance on how the
Competition Commission will evaluate proposed mergers between current or potential competitors.
These guidelines represent yet another step toward greater conformity with U.S. antitrust law, which
has similar guidelines.Of course, the practical impact of the EU’s revised merger regulation will not
be known with certainty until it has been used in a number of cases.
The latest big step towards transatlantic co-operation concerns EU-US Air Transport
Agreement that took effect on 30 March 2008. For the first time, airlines can fly without any
restrictions between any point in Europe to any point in the US. “The start of a new era”, according
to Jacques Barrot of the European Commission. The EU-US Air Transport Agreement is expected to
enhance competition by allowing, for the first time, EU or US airlines to serve any routes between
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Europe and the United States. The agreement will be applied as of the end of March 2008, pending
ratification. It also calls for the Commission and Dapartment of Transportation to develop a common
understanding of trends in the airline industry in order to promote compatible approaches on
competition issues.
The competition policy of the European Union is a supranational effort to regulate the single
market. Although more recent than American anti-trust regulations, it appears to be a bit more
consolidated. Efficient primary and secondary legislation enforced by the Commission, National
Competition Authorities aided by the ECJ constitute another type system of market regulation and
consumer protection than the American one. Future efforts towards further convergence are required
so that the two system of regulation can benefit from each other.
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