Institut d'Études Politiques de ToulouseMémoire de recherche présenté par M. Romain HenrioDirecteur du mémoire: Me Michel AttalDate: 2012

Tying under European competition rules

Do current anti-tying rules make European consumers better-off? An analysis of the Digital case

Romain Henrio

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Institut d'Études Politiques de ToulouseMémoire de recherche présenté par M. Romain HenrioDirecteur du mémoire: Me Michel AttalDate: 2012

Tying under European competition rules

Do current anti-tying rules make European consumers better-off? An analysis of the Digital case

Romain Henrio

Foreword

I would like to thank Me Michel ATTAL, Attorney-at-law at the Toulouse Bar and adviser of this dissertation, for the help he gave me in defining its subject and for his advices and recommendations throughout its writing.

I also wish to thank all those who, directly or indirectly, have participated in this dissertation, notably M. Mehdi MEZAGUER, Ph.D. candidate at the University of Toulouse, for his help with the bibliography.

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Avertissement: L’IEP de Toulouse n’entend donner aucune approbation, ni improbation dans les mémoires de recherche. Ces opinions doivent être considérées comme propres à leur auteur(e).

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Table of contents

Introduction.......................................................................................................7

I Tying, an abuse of domination prohibited by EU competition law..............12

A Defining tying.........................................................................12

B Apprehending tying through article 102 TFEU.......................16

II The application of article 102 for tying.......................................................20

A The steady "hard law" implementation procedure...................20

B The shifting "soft law" application procedure.........................25

III The Digital case.........................................................................................28

A Background..............................................................................29

B Markets....................................................................................30

C Tying practice..........................................................................34

D Settlement................................................................................37

Conclusion......................................................................................................39

Appendices.....................................................................................................41

Bibliography...................................................................................................50

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"Efficiency, as I define the term, is an adequate concept of justice that can plausibly be imputed to judges"

Richard Posner

Introduction

Law and economics serve a common purpose: protecting and increasing people's welfare.

It could easily be divided in several components, so as to understand the broad range of elements

that must be taken into account if one is to understand the complexity and diversity of the notion

of public welfare. For instance, a book about people's welfare written by an American author1

discovers five areas where legislation is needed to achieve well-being for all: the regulation of

public safety, the policing of public space, the safeguard of public morals, the guaranteeing of

public health and the construction of public economy.

Constructing public economy, as a maximization of people's welfare, can be said to entail

two major concepts, two antonyms which are the two flips of the same coin: freedom and

restraint. An economy is said to be the most efficient where the market structure is characterized

by "perfect competition," i.e. where2 (a) firms sell identical products, (b) firms are price takers,

(c) no firm has a big market share, (d) all information is known by consumers and (e) there is

freedom of entry and exit. Economic efficiency's main features would therefore be the freedom

of companies to produce, the freedom of consumers to choose between different firms, and the

absence of restraint on these freedoms: no firm is dominant, no law fixes prices or imposes

obligations.

1 William J. Novak, The people's welfare: law and regulation in nineteenth-century America, Introduction: "Governance, Police, and American Liberal Mythology", p1-2

2 http://www.investopedia.com/terms/p/perfectcompetition.asp

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To put in a nutshell: in the interest of the people, let the market do. Yet, there was the

Standard Oil Co. case.3 This colossal American oil company, founded by John D. Rockefeller in

1870, began growing exponentially from that date on until it had bought up all other competing

firms in 1872.4 Right after this expansion, Standard Oil had control of all major refining centres

in the USA,5 had created a monopoly, made restraints of commerce, used unfair methods such as

predatory-pricing so as to drive its competitors out of business, etc. It is the perfect illustration of

Henri Lacordaire's old say:6 "Between the weak and the strong, (…) it is freedom which

oppresses and the law which sets free."

Since that time, the law, by its restraints, has endeavoured to bring freedom back into

monopoly-driven markets. Sections 1 and 2 of the Sherman Antitrust Act were enacted to

prohibit respectively unlawful restraints of trade and monopolies. In the European Union, articles

101 and 102 of the Treaty on the Functioning of the European Union (TFEU) are roughly the

translation of the Sherman act and other American anti-trust acts. Article 101 concerns more

specifically agreements between undertakings which affect and distort competition, whereas

article 102 deals with dominant position and the abuses thereof. Although theoretically, both

articles can be entitled to rule over a tying case (they can even apply simultaneously),7 as most

case involve a single company and thus prevent the application of article 102, this paper will be

centred on the latter article.

In this paper, I will focus on one particular type of abuses of dominant position prohibited

by article 102:8 tying. Briefly, tying can be defined as the practice of making the purchase of one

3 Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911) 4 http://www.u-s-history.com/pages/h1804.html5 http://www.bgsu.edu/departments/acs/1890s/rockefeller/bio2.htm6 52th Conference de Notre-Dame, 04/16/1848, "Du double travail de l'homme"7 Discussion paper on the application of article 82, DG Competition p.58 "Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial

part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in:

(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;

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product conditional on the purchase of another, unrelated product that is also available

individually. It is the case where, for instance, no computer can be bought without an operating

system being sold alongside with the computer. In this case, the computer is regarded as the

"tying product" whereas the operating system is the "tied product."

Although European cases on tying are not so numerous, the existing cases have had a

great impact on both the public and firms. In the Microsoft case,9 Microsoft was charged of

unlawfully tying "Windows Media Player," its self-made video player, with the selling of its own

operating system, Windows. The case led to the then largest fine ever handed out by the

European Union: €899 million.

Yet tying and the punishing thereof raise the same controversies and debates the whole

competition policy of modern States does. To some extent, section 1 of the Sherman Act could be

interpreted as prohibiting any agreement between firms,10 so what should be qualified as

unlawful agreement and what should not?

In researching for this paper, there are a number of questions I have asked myself with

regard to tying. When should it be prohibited and when should it not be? When does tying have

anti-competitive effects? How dominant must the firm be, how distinct should the products be,

how foreclosed should other competitors be for an anti-competitive practice to be ascertained?

Above all, what if tying has in fact pro-competitive effects and is beneficial to consumers? How

to distinguish this situation from a consumer-detrimental one?

(b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a

competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations

which, by their nature or according to commercial usage, have no connection with the subject of such contracts."9 Court of First Instance, 09/17/2007, Microsoft Corp. v Commission of the European Communities, T-201/0410 Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911)

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It appeared to me that the way European authorities deal with tying has not been uniform

throughout their decisions and recommendations, but has evolved over time. In particular, the set

of tools available to the central players in competition issues, namely the Commission and the

European Commission, has changed. At the roots of this evolution seems to be the development

of competition economics and its reception by scholars and the judiciary. In particular, the 2005

report of the Economic Advisory Group for Competition Policy (EAGCP),11 a discussion forum

which is part of the Directorates General for Competition, insisted in putting consumer welfare at

the heart of competition policy: "An economic approach to Article 82 focused on improved

consumer welfare, in so doing, avoids confusing the protection of competition with the

protection of competitors and it stresses that the ultimate yardstick of competition policy is in the

satisfaction of consumer needs."12

Building up on the assumption that consumer welfare is what competition policy should

aim at, and applying it to the particular case of tying, the purpose of this paper will be to find out

whether the current application of article 102 anti-tying rules ultimately increases Europeans'

welfare.

In order to do so, it is central to discuss how pro-competitive and anti-competitive effects

of tying are weighed and, perhaps more importantly, if the tools currently used to determine

these effects are adequate. Crucial to this debate will be the analysis of the modus operandi used

by the Commission and the European Court of Justice to apprehend tying cases.

Whereas this paper does not ambition to give any definite solution to the issues it raises,

it will seek to both show the complexity of a particular point of competition law and shed some

light on the European way of apprehending tying. In a first part, I will give a general view of

tying as an abuse of domination prohibited by EU competition law by first putting tying into

context, and then detailing the European conception of this offence. In a second part, I will

11 EAGCP, An economic approach to article 8212 Idem, p.2

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discuss how article 102 is applied in the case of tying, and how this very application has varied

over time: this will be done by taking a looking at the implementation procedure, according both

to binding instruments and to non-binding ones, and by analysing its evolution over different

cases. In a third part, I will analyse the Digital case and show how illustrative it is of the pulling

away of the European Authorities from a strictly legal approach of tying, and of the resulting

broader focus on consumer welfare.

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I Tying, an abuse of domination prohibited by EU

competition law

Tying is a business practice widely used by firms in both competitive and non-

competitive markets. As it may endanger competition, EU law applies to prohibit dangerous

practices. To explain this, I will first define tying, and then I will show how EU law analyses it.

A Defining tying

Tying is the practice of making the purchase of one product, let us say product A,

conditional on the purchase of another product, let us say product B. Product A cannot be bought

without product B; on the contrary, product B can be purchased individually. Product A is called

the "tying product," whereas product B is the "tied product." In the field of services, a good

example of a tying practice would be the impossibility for a consumer to buy a car without

buying a car insurance along.

Tying must be distinguished from two other practices of selling products together, which

are pure bundling and mixed bundling. Pure bundling is where, for instance, products A and B

are sold together and none of them could be sold individually. The sale of pairs of shoes falls

under this category. Mixed bundling is where products A and B are sold together and where each

of them is also available individually. The purpose of mixed bundling is to sell at a lower price so

to sell more. An example is when a cartridge producer, selling black ink at €10 and colour ink at

€10, sells a pack of both inks at €15.

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From these definitions, the first reaction would be to see tying as having two features

which would set it apart from bundling: it would be unnecessary, unlike pure bundling, and

without benefit to the consumer such as lower price, unlike mixed bundling. Such a vision would

nevertheless be simplistic. To illustrate this, let us introduce a distinction between technological

tying and contractual tying.13 Technological tying is when a product is integrated into another

and cannot easily be removed without harming the whole product itself: buying a house without

buying its walls would, of course, endanger the house as a whole. This counters the argument

that tying is always unnecessary. Contractual tying, on the other hand, is when the purchase of

one product involves a contractual obligation to also purchase another, the removal of one

product not harming the other. Therefore, tying them is not strictly necessary. Yet does this mean

it is not desirable? In the Microsoft case,14 Microsoft's argument for selling its video player,

Windows Media Player, along with its Operating System, was that consumers want a full-

equipped, ready-to-use system without the need to download other softwares. Therefore, tying

does not necessarily diminish consumer welfare.

To complete this overview of tying, let us now take a look at its effects. As

aforementioned, the reasons why a firm would tie the sale of a product to that of another one or

to the acceptance of supplementary obligations are various. There are mainly two kinds of

consequences tying may have: foreclosure effects and pro-competitive effects.15

Foreclosure exists when one firm, thanks to the use of certain practices, manages to drive

competitors out of business or succeeds in putting high entry barriers to a market. In other words,

"demand is shifted away from competitors"16 because rivals cannot compete in the demand for

the tied product. It necessarily follows from this definition that the effects of tying will be

substantial only if the consumers who buy the tied product, also called "tied customers,"

13 Hedvig Schmidt, Competition law, innovation and antitrust: an analysis of tying and technological integration, p.57

14 Court of First Instance, 09/17/2007, Microsoft Corp. v Commission of the European Communities, T-201/0415 Penelope Papandropoulos, 06/06/2006, Competition Law Insight, Article 82: Tying and bundling. A half step

forward?16 Idem, p.2

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represent a large proportion of the market for this tied product, also called "tied market." It is the

case in the market for Operating Systems: only a very limited number of customers buy an OS at

a moment different than that of the purchase of a computer.

The other possible outcome of tying is pro-competitive effects. This is especially

understandable in the case of tying on competitive markets: if there were no competitive

advantage to tie products, then the tying firm would undoubtedly lose money; and yet tying in

competitive markets does exist. The efficiency gains mainly come from a situation known to all

economists: economies of scale. Economies of scale happen when "the cost of producing an

additional unit of output (i.e., the marginal cost) of a product (i.e., a good or service) decreases as

the volume of output (i.e., the scale of production) increases."17 The more goods produced, the

less each one costs, as in this figure:18

17 http://www.linfo.org/economies_of_scale.html18 http://www.mindtools.com/media/Diagrams/EconsofScale1.jpg

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Thanks to economies of scale, a firm will be able to produce at cheaper prices and, as a

consequence, to sell at cheaper prices as well. It is a pro-competitive effect that increases

consumer welfare. It applies to tying when selling the two products tied together increases the

demand for both.19

A similar principle which may give rise to competitive advantages is economies of scope.

It happens when the production of two or more products by a single firm is more cost-efficient

than when several firms produce one product each. It is especially true if the methods of

production of each product are similar: this is obvious in the case of IT firms which develop all

sets of softwares.

Another indirect, subtler pro-competitive effect of tying practices is the protection or the

improvement of the brand mark of the firm and its products. This happens when a firm chooses

to ensure that the main product will be used properly and with quality complements, which can

be consumables for the main product or related items. In the field of video game consoles, there

is no single console producer which does not require consumers to buy one or two game pads

along with the console. This strategy prevents the purchase and use by gamers of game pads

from other, perhaps less-reliable firms.

19 Nalebuff 2003:78-82.

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B Apprehending tying through article 102 TFEU

It may be worthwhile to say a few words about the general grounds of the EU for its

competition policy. The provision from which all other derives is article 3 of the Treaty on

European Union. Subparagraph 3 states: "The Union shall establish an internal market. It shall

work for the sustainable development of Europe based on balanced economic growth and price

stability, a highly competitive social market economy, aiming at full employment and social

progress." Therefore, from the very beginning of European law, economic considerations

regarding efficiency and competition were taken into account.

Yet such vague provisions obviously lack practical value, and could not be regarded as

the European equivalent of the Sherman Act and following antitrust acts. This is why additional

provisions were enacted in the Treaty on the Functioning of the European Union: Chapter 1

"Rules on competition" and its articles 101 to 109 regulate competition in the EU.

Before explaining in a more detailed manner how the offence of tying is dealt with, it can

prove useful to have a more general picture of abuses of domination. Article 102 states that:

"Any abuse by one or more undertakings of a dominant position within the common market or in

a substantial part of it shall be prohibited as incompatible with the common market insofar as it

may affect trade between Member States."

We thus have four main elements for an offence to be constituted under article 102: an

undertaking, a dominant position, an abuse and a potential affectation of trade. Let us first define

what the terms mean.

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Although mentioned in article 101 as well as article 102, the word "undertaking" is

defined in neither article. The European Court of Justice defined it in several cases, the main

definition being: "An undertaking is constituted by a single organization of personal, tangible

and intangible elements attached to an autonomous legal entity, and pursuing a given long-term

economic aim."20

Dominant position does not have a precise legal definition, it mainly comes from

economic considerations. Indeed, as Alden F. Abbott rightfully observed, European and

American antitrust policies alike "increasingly employ a common vocabulary rooted in

economics."21 Dominant position means possession of sufficient market power to allow a firm to

stop worrying about market constraints and to be able to influence competitor's behaviour. This

is contrary to the second and third conditions of perfect competition: the firm becomes price-

maker (holding market power means to be able to change prices above the prices of a

competitive market without fearing the reaction of competitors) and holds a substantial share of

the market.

Having a dominant situation on a market is not unlawful per se; in European Union law,

it is only the abuse of such a situation which is prohibited. Indeed, there are markets in which

entrance costs are so high that they only allow a limited number of firms or even a single one. An

intelligible example of this is the French civil nuclear market, where a single firm, Areva,

controls the market. Therefore, to achieve economic efficiency, dominant situations should not

be punished but only the unnecessary abuses of it.

There is absolutely no definition of what an abuse of domination is, neither under the

Treaty on the European Union, nor under the Treaty on the Functioning of the European Union.

Indeed, article 102 TFEU merely provides examples of abuses in its subparagraph (2): imposing

20 European Court of Justice, 1962, Mannesman, 19/6121 Alden F. Abbott, The University of Oxford Centre for Competition Law and Policy, The Competition Law &

Policy Guest Lecture Programme – Paper (L) 02/05, p.21

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unfair trading conditions, limiting development to the prejudice of consumers, discriminating in

transactions to inhibit competition and making the conclusion of a contract subject to acceptance

of supplementary obligations (i.e. exclusive dealing and tying).

In its Hoffman – La Roche decision,22 the European Court of Justice gave a general

definition for it: an abuse of domination is "an objective concept related to the behaviour of an

undertaking in a dominant position, which is such as to influence the structure of a market where,

as a result of the very presence of the undertaking in question, the degree of competition is

weakened, and which, through methods and recourses different from those which condition

normal competition in products or services on the basis of the transactions of commercial

operators, has the effect of hindering the maintenance of the degree of competition still existing

in the market or the growth of that competition." This abuse can be made without any

requirement of a fault or of an intentional behaviour of the company.23

Of course, as for all EU competition rules, article 102 can only apply if interstate trade is

affected. Yet it is not hard to establish this effect, actually or theoretically: even a behaviour in a

single Member-State can potentially fall under the scope of it.24

The particular issue of tying is mainly tackled by article 102 on abuses of domination,

subparagraph (d): "Such abuse may, in particular, consist in: making the conclusion of contracts

subject to acceptance by the other parties of supplementary obligations which, by their nature or

according to commercial usage, have no connection with the subject of such contracts."

At this point, an important precision must be made. Although article 102 is the most

22 European Court of Justice, 02/13/1979, Hoffmann – La Roche & Co. AG v Commission of the European Communities, 85/76

23 European Court of Jutice, 2008, Kanal 5 v. TV4, C-52/0724 Steiner & Woods 2003:452

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widely used article in cases of tying, it is not the only one able to apply. Indeed, tying may also

constitute a vertical restraint falling under article 101,25 that is between firms at different levels of

the supply chain, where the result of tying is a single branding26 type of obligation (the buyer

orders the product to a single supplier). The Commission has given guidelines27 for the

transposition of article 102 case-law and Commission practices to this article. The most

interesting point of tying under article 101 is that, unlike article 102, exemptions can be made

through article 101, subparagraph 328 and Block Exemptions Regulation. Indeed, tying is block

exempted when the market shares of the supplier and the buyer, on the markets of both the tied

product and the tying one, do not exceed 30%.29 This is impossible in the case of article 102 type

of tying.

25 1.The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:

(e)make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

26 Commission notice, Guidelines on vertical restraints, SEC(2010)411, p.41: "Under the heading of "single branding" come those agreements which have as their main element that the buyer is obliged or induced to concentrate his orders for a particular type of product with one supplier"

27 Idem, subparagraph 214 to subparagraph 22228 The provisions of paragraph 1 may, however, be declared inapplicable in the case of:

–any agreement or category of agreements between undertakings, –any decision or category of decisions by associations of undertakings, –any concerted practice or category of concerted practices, which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a)impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b)afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question

29 Commission notice, Guidelines on vertical restraints, SEC(2010)411, subparagraph 218

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II The application of article 102 for tying

Now that tying has been identified both from an economic and a legal point of view, we

shall see how the European rules are applied to it. Since 2003, the power of implementing both

articles 101 and 102 of the Treaty on the Functioning of the European Union is recognised not

only to European institutions but also to national authorities30 and national courts.31 Since this

paper deals with tying under European competition rules as a whole, we shall first see how

article 102 is to be implemented under the binding European instruments, then how "soft"

European law has stepped in to fill in the gaps and given anti-tying regulation a new face.

A The steady "hard law" implementation procedure

The implementation of article 102 is mainly governed by Council Regulation 1/2003. It

mostly sets the articulation between national laws and European Union law, between national

and European authorities and defines the Commission's powers in dealing with the

infringements.32 Article 733 of this regulation provides that the Commission may act on its own

initiative or on the basis of a complaint filed by a third party, either a natural or a legal person

30 Council Regulation (EC) No 1/2003 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, 12/16/2002, article 5: The competition authorities of the Member States shall have the power to apply Articles 81 and 82 of the Treaty in individual cases

31 Idem, article 6: National courts shall have the power to apply Articles 81 and 82 of the Treaty32 Council Regulation (EC) No 1/2003, Chapter III: Commission decisions33 Full text: "1. Where the Commission, acting on a complaint or on its own initiative, finds that there is an

infringement of Article 81 or of Article 82 of the Treaty, it may by decision require the undertakings and associations of undertakings concerned to bring such infringement to an end. For this purpose, it may impose on them any behavioural or structural remedies which are proportionate to the infringement committed and necessary to bring the infringement effectively to an end. Structural remedies can only be imposed either where there is no equally effective behavioural remedy or where any equally effective behavioural remedy would be more burdensome for the undertaking concerned than the structural remedy. If the Commission has a legitimate interest in doing so, it may also find that an infringement has been committed in the past. 2. Those entitled to lodge a complaint for the purposes of paragraph 1 are natural or legal persons who can show a legitimate interest and Member States."

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(provided it can show a legitimate interest in the matter) or by a Member-State. For instance, in

the case of tying Tetra Pak v Commission,34 the packaging company Elopak Italia filed a

complaint with the Commission against its main competitor, Tetra Pak Italiana, on the grounds

that Tetra Pak had "attempted over the years to reduce Elopak's competitiveness in Italy by

engaging in trading practices amounting to an abuse within the meaning of article 86."35

When the Commission chooses to take action, it has the power to collect information and

to investigate based on article 337 of the TFEU36 and on Regulation 1/2003, which specifies its

investigation powers for competition law. The Commission may find evidence itself or helped by

the plaintiff. The whole Chapter VI of the regulation gives the Commission a power to request

information from undertakings (article 18), take statements from any natural or legal person who

consents to be interviewed (article 19), and carry out its inspection duties if it deems it necessary

(article 20). The decision of the Commission will then contain the statement of objection,37 the

undertaking's remarks, the appraisal the Commission makes and the penalties it fines. Once a

decision is taken, it can be challenged thanks to article 263 of the TFEU38 first before the Court

of First Instance, and then before the European Court of Justice if need be.

However, before the Commission issues a binding decision on the company alleged of

restraint of competition, the company can try to find a settlement with it. If successful, this

settlement will be achieved by submitting to the Commission an "undertaking" which the

Commission is free to accept or reject. The term "undertaking" here must not be confused with

34 Court of First Instance (Second Chamber), 10/06/1994, Tetra Pak International SA v Commission of the European Communities, T-83/91

35 Idem, subparagraph 1636 "The Commission may, within the limits and under conditions laid down by the Council acting by a simple

majority in accordance with the provisions of the Treaties, collect any information and carry out any checks required for the performance of the tasks entrusted to it."

37 Written communication which the Commission has to address to persons or undertakings before adopting a decision that negatively affects their rights

38 "The Court of Justice of the European Union shall review the legality of legislative acts, of acts of the Council, of the Commission and of the European Central Bank, other than recommendations and opinions, and of acts of the European Parliament and of the European Council intended to produce legal effects vis-à-vis third parties. It shall also review the legality of acts of bodies, offices or agencies of the Union intended to produce legal effects vis-à-vis third parties."

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its primary definition; here, it refers to a "settlement with a regulator."39 The case will then be

closed without further action from any party.

As previously mentioned, in order to find a tying infringement, the Commission will have

to discover a dominant position on the market. The first question to ask thus relates to the finding

of the relevant market: should it be the one for the tied product or the one for the tying product?

This question if of high practical importance, as a shoemaker tying its shoes with laces may

dominate the market for shoes but not the one for shoelaces, and vice-versa. The Directorate

General of the Commission considers40 that "for tying to be abusive, the company concerned

needs to be dominant in the tying market." This is understandable as consumer demand, when

buying the tied products, focuses more on the tying product (which is also the most expensive

one in most cases). However, dominance in the tied market too makes "the finding of an abuse

more likely." Therefore, both relevant markets of the tying product and of the tied product must

be defined before assessing the offence of tying.

A specific issue arises when one considers equipment that requires the use of a long-term

product coupled with the use of short-term ones, usually called consumables. It is for instance

the case of photocopiers which require toner cartridges to work, razors and razor blades, lamps

and bulbs. Whereas there is no problem when durable goods and consumables can be bought

separately, the situation becomes problematic when the same supplier sells both when and

customers, in a way or another, are forced to trade only with this supplier. In such situations, "the

market for the consumables is described as an 'aftermarket,' while the durable equipment is sold

in the 'beforemarket.'"41

Not only are aftermarkets likely to lead to abuse of dominance allegations, but they

complicate the assessment of market definition and market power: are the aftermarket and the

39 English as a legal language, Chapter on EC Competition law, p.19140 DG Competition discussion paper on the application of article 82 of the Treaty to exclusionary abuses, p.5541 European Competition Law Review, 1998, Cristina Caffarra and Bill Bishop, p.265

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beforemarket independent enough as to be considered separate markets, or do they constitute one

big system market? The Commission has so far given no answer. If we take razors and razor

blades, compatibility issues with blades of other suppliers will for instance suggest that there is

one single market. On the contrary, the markets for shoes and shoelaces, which can be considered

as consumables, are separated. Concerning market power, it is unclear whether it should be

assessed on the basis of the sales of the durable good or of the consumables. This question is of

high practical importance as it will determine whether a firm is dominant, and if so, on which

market(s) it is dominant.

This very notion of "relevant market" has been defined by the Commission in a 1997

notice.42 It distinguishes between the "relevant product market" and the "relevant geographical

market."

The relevant product market encompasses "all those products and/or services which are

regarded as interchangeable or substitutable by the consumer, by reason of the products'

characteristics, their prices and their intended use."43 These conditions of interchangeability and

substitutability are checked thanks to the economic notion of cross price elasticity of demand.

This elasticity measures the responsiveness of demand for good A following a change in the

price of good B (a related good).44 If products are substitutable, then an increase in the price of

good B will lead to an increase in the demand for good A, as in this figure:45

42 Commission Notice on the definition of relevant market for the purposes of Community competition law (97/C 372/03)

43 Commission Notice on the Definition of the Relevant Market Paragraph 744 http://tutor2u.net/economics/revision-notes/as-markets-crossprice-elasticity-of-demand.html45 http://www.yigitoglu.org/articles/1052212/as-markets-crossprice-elasticity-of-demand_clip_image003.gif

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As regards the relevant geographic market, it is said to comprise "the area in which the

undertakings concerned are involved in the supply and demand of products or services, in which

the conditions of competition are sufficiently homogeneous and which can be distinguished from

neighbouring areas because the conditions of competition are appreciably different in those

areas."46 This area can very well be worldwide:47 concerning tying, this could be the case of an

airline company operating worldwide that only sells aircraft tickets with the provision of a meal

during the flight.

After defining the relevant markets for both the tying and the tied products, as

aforementioned, dominance will have to be proved in the tying market only. For instance, in the

Microsoft case, the Commission did not look at the position of Microsoft on the market for

media players, but only found that Microsoft had had a dominant position on the client PC

operating systems market (over 90% of market share) for a long time48 to find that the tying of

Windows with Windows Media player constituted a tying abuse restricting competition on the

media players market.49

46 Commission Notice on the Definition of the Relevant Market, paragraph 847 ECJ, 1987, 142 and 156/84 British American tobacco and Reynolds tobacco v. Phillip Morris 48 Court of First Instance, 09/17/2007, Microsoft Corp. v Commission of the European Communities, T-201/04,

paragraphs 32 and 3349 Idem, paragraph 44

24

B The shifting "soft law" application procedure

As we have seen, unlike under article 101, there is no exception possible under article

102. It would logically follow from the treaty that any tying made by a firm in a dominant

position, and that would potentially affect interstate trade, is unlawful without any further

consideration. This is the approach first used by the Commission under the name "form-based

approach": it is enough to establish that (i) a firm is dominant and (ii) the firm practices a certain

behaviour, tying, for this tying to be an offence. Therefore, tying by a dominant firm was

generally held as a per se offence.

Undoubtedly, such a test was faulty. It missed the fact that companies often use tying to

provide their customers with either better products or regular products but in a more cost-

effective way. Tying may have very pro-competitive effects such as better matching consumer

demand, reducing consumer transaction costs, guaranteeing that the two products are compatible

in the case of consumables, etc. In two cases, GE/Honeywell50 and Tetra Laval/Sidel,51 the

Commission started to shift from the form-based approach to an approach taking more into

account the effects of the tying practice. The Economic Advisory Group for Competition Policy

(EAGCP), in a 2005 report,52 pushed on for a more radical change in this direction by the

Commission. The report explains that with a form-based approach, there is a risk that EU

statutory provisions lead to "unduly thwart[ing] pro-competitive strategies."53 It proposed an

economic approach that would lead to a case-by-case analysis of the pro- and anti-competitive

effects of each article 102 offence, including tying, so as only to condemn overall anti-

competitive practices.

50 Commission decision declaring a concentration to be incompatible with the common market and the EEA Agreement, Case No COMP/M.2220 – General Electric/Honeywell, Regulation (EEC) No 4064/89

51 Commission Regulation (EEC) No 4064/89, Case No COMP/M.2416 – Tetra Laval/Sidel52 EAGCP, An economic approach to article 8253 Idem, p.2

25

The report was acknowledged by the Commission in two documents: a 2005 DG

Competition discussion paper54 and a 2009 Communication setting the guidelines of the

Commission.55 To the requirement of a dominant position, the documents added two other

conditions for tying to constitute an abuse: (i) the tying and tied products must be distinct and (ii)

the tying must lead to anti-competitive foreclosure. Moreover, (iii) efficiencies arising out of the

tying are now taken into account and can save the firm from being fined.

The condition of distinctiveness is checked through two simple tests the Commission

uses:56

– The demand test: would customers purchase each product separately if available?

– The supply test: do smaller competitors offer the products separately? Do some

manufacturers produce the tied good only?

Although implied in the previous decisions of the Commission, formulating this

requirement of distinctiveness of the products give the Commission tools to determine whether

there is tying or not. It is however doubtful that these simple tests will be sufficient to cover all

tying issues. In the Microsoft case, for instance, there was no demand for an operating system

without a web-browser.57 On the contrary, a smaller manufacturer like Mozilla does not produce

an operating system but produces a web-browser. In this case, the demand test and the supply test

would lead to opposite results.

The second requirement is an anti-competitive foreclosure. Here we can see a real change

in the Commission's policy towards tying, and a real abandon of the per se rule: only if there are

sufficient anti-competitive effects that may distort the market and ultimately decrease people's

54 DG Competition discussion paper on the application of article 82 of the Treaty to exclusionary abuses55 Communication from the Commission — Guidance on the Commission's enforcement priorities in applying

Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings , 2009/C 45/0256 Penelope Papandropoulos, 06/06/2006, Competition Law Insight, Article 82: Tying and bundling. A half step

forward?, p.257 Randal C. Picker, Microsoft in the EU, 2011 Course at the University of Chicago

26

welfare will the Commission remedy to the situation by fining the tying firm. Although a real

improvement, one may regret that the Commission does not consider other potential anti-

competitive effects than foreclosure, such as price discrimination.58 It is however true that

foreclosure represents the greatest impediment to a competitive market.

Finally, the Commission will now use the rule of reason, although not explicitly named

that way, when considering whether tying amounts to an offence. Indeed, section III.D of the

2009 Communication provides that "a dominant undertaking may [claim that its conduct is

justified] either by demonstrating that its conduct is objectively necessary or by demonstrating

that its conduct produces substantial efficiencies which outweigh any anti- competitive effects on

consumers." The Commission will now weigh pro- and anti-competitive effects: "In this context,

the Commission will assess whether the conduct in question is indispensable and proportionate

to the goal allegedly pursued by the dominant undertaking." Paragraph 62 applies this "rule of

reason" to the case of tying.

58 Perloff 2004:388-9

27

III The Digital case

In November 1995, the Commission investigated the premises of Digital Equipment

Corporation (thereafter referred to as "Digital"), an American company involved in the trade of

computer systems, softwares and peripherals across the world. Two third-party maintenance

companies ("TPMs"), i.e. companies competing with Digital in the servicing of hardware to

computer systems, had lodged a complaint with the Commission for restraint of competition and

abusive practices. The complaints led to a formal statement of objections59 in March 1977 which

alleged the abusive practices, and then to a press release in October 199760 stating that the

Commission had "accepted an undertaking from Digital (...) concerning its European policy

regarding the supply and the pricing of software and hardware maintenance services for Digital

computer systems."61

This section of the essay will focus on understanding the Digital case, which is unusual

both by its form and by its content. Will be discussed as well its contribution to anti-tying rules

and how it fits into the broader frame of the Commission's way of dealing with prohibited

economic practices.

First, the background of the Digital case will be explained so that the reader can grasp the

ins and outs of it. Then, we will study successively the market definition and structure, and the

approach of tying used by the Commission. As the Digital case is highly unusual and therefore

interesting in both aspects, the findings of the Commission will be discussed and compared with

other relevant cases and the broader European competition policy. Lastly, we will analyse the

settlement of this case and try to answer the question of this essay in wondering whether the

Commission's set of decisions ultimately tend to improve consumers welfare.59 Here it might be of use to the reader to remember that a statement of objections is a written communication

which the Commission has to address to persons or undertakings before adopting a decision that negatively affects their rights

60 Commission Press Release IP/97/868 of October 10, 199761 Idem, paragraph 1

28

A Background

Digital, now part of the Hewlett-Packard group since their merger in 2002, was one of the

largest hardware and software manufacturers for computer systems in the world. The company

made business in Asia, North and South America, Oceania and Europe,62 and had been highly

successful with products such as the VAX computer architecture and the Alpha computer

systems.

In a number of European countries, Digital offered two services which are at the heart of

its dispute with the Commission: a hardware service and a software one. Whereas Digital was

also selling them separately, it offered its customers to purchase both of them at the same time in

what it named a "DSS package" at a reduced price. The price of this package was extremely

competitive compared to the price of buying the two services independently.

Two of Digital competitors, the so-called TPMs, were engaged in the supply of hardware

services and worried that this method of selling its products would deter customers from using

their services. To understand this argument, it is necessary to explain the range of products each

company offers its customers. While Digital proposed both hardware and software services, the

TPMs sold only hardware services. Their worry was that if the price of the DSS package was so

low compared to the price of the separate products, nearly all customers would buy the package

and none would buy the TPMs products.

The Commission conducted dawn raids on Digital's offices in November 1995, taking a

variety of documents such as in-house counsel files and computer files in three different

62 http://www.secinfo.com/dsvRx.83Pe.7.htm#1stPage

29

European countries: Germany, the United Kingdom and the Netherlands.63 Following the raids,

Digital decided to revise its offer of services so as to "adapt to changing customer demand and

other market conditions in the area of multi-vendor computer services."64 This revision occurred

in 1996 and led to Digital submitting a draft undertaking65 in January 1997.66

In spite thereof, and after a further investigation, the Commission issued a statement of

objections in March 1997 where it alleged an abuse of dominant position in three different ways:

– The tying of hardware and software services

– The practice of discriminatory practices by offering similar transactions at highly

different prices

– Other exclusionary practices aimed at reducing the business of the TPMs, including

unjustified exclusion from Digital's distribution network and unlawful ban on

distributor's supplying of software licences and updates

This paper will solely focus on the tying charges against Digital. Digital replied to the

statement of objections in June 1997 and contested it thoroughly, claiming there was neither

abuse of dominant position nor dominant position itself.

B Markets

To find and abuse of dominant position, the Commission must first define the relevant

market(s), then establish a dominant position, then establish and abuse thereof. Here we will

follow this method by defining the markets and their structure in this chapter, while in Chapter C

we will try to find what the abuse consists of.

63 EY Reuter Briefing of November 30, 1995, “Digital faces investigation as E.C. anti-trust row rages”64 European Competition Law Review, 1998, 19(2), p.109, Pickering and Dolmans65 As mentioned in Part II, an undertaking means here a proposal of settlement made by a company to the

Commission in relation to a legal dispute66 The full text of this undertaking is available in appendix of this essay

30

In order to find the relevant markets, let us clarify the diverse markets at stake. The

primary market here is the market for computer systems, i.e. laptops and fixed computers. Back

in 1997, as well as today, there was a remarkable intensity of competition between the various

information technology firms. Digital manufactured such computer systems and sold hardware

and software services on top of it, while the TPMs only sold hardware services. It seems

therefore logical to conclude the existence of three relevant markets: the one for computer

systems, the one for hardware services and the one for software services. Yet it is not the

Commission's view, as expressed in its 1997 Press release67 closing the case.

Indeed, the Commission defined the relevant markets as "the market for Digital software

support services and the market for Digital hardware maintenance services".68 Before going

further into the analysis, the fact that the intense competition in the primary market for

computers was not held by the Commission to render superfluous the definition of relevant

markets must be discussed. In this primary market, it is undisputed that Digital was facing strong

competition. The early decisions of the Commission69 concerning primary markets was that,

despite low market share, companies could be held to be in a dominant position on them, which

is completely contrary to economic theories. The Commission then changed its mind: according

to the rationale used by the Commission in the 1996 case Pelikan v Kyocera,70 any strong

primary competition is sufficient to protect consumers against aftermarket exploitation.

Strangely enough, in Digital, the Commission's view was that primary market

competition is not sufficient in itself to protect consumers in the secondary markets. It is easy to

distinguish the Digital case from the Hugin and Hilti ones, as the relevant market in these latter

67 Appendix 268 European Competition Law Review, 1998, "Aftermarket power in the computer services market: the digital

undertaking," p.17869 Liptons Cash Registers and Business Equipment Ltd v. Hugin Kassaregister AB (Case 68/78) [1978] 1 C.M.L.R.

D19 ("Hugin" case), and Eurofix Ltd and Bauco (U.K.) Ltd v. Hilti AG (Case 138/88) [1989] 4 C.M.L.R. 677 ("Hilti" case)

70 See Pelikan/Kyocera, XXVth Report on Competition Policy, p. 41, COM(96)126

31

was the primary market, whereas in Digital it is the secondary markets (the markets for hardware

and software services). Yet it is harder to distinguish Digital from Pelikan v Kyocera: why is

competition in the primary market enough to prevent abuse of dominant position in Pelikan and

not in Digital? As the Digital case led to no official decision, but just to a settlement, this

question has, to date, no definite answer.

In his paper, "Aftermarket power in the computer services market: the digital

undertaking,"71 Philip Andrews argues it may be a problem of transparency in the aftermarkets:

total prices (prices of the primary and secondary products) were easier to figure out by the

consumer in the case of printers and cartridges (the Pelikan case) than in the case of computers

systems and computer services. Put in another way, intense competition in the primary market

only protects the consumer if the consumer is able to understand the total price of the primary

and secondary products. If not, then then firm might abuse of its position in the secondary

market. Although this is a very interesting argument, it must be kept in mind that the

Commission's intent in distinguishing Digital from Pelikan is not certain.

Setting aside the issue of the primary market, we can move to the relevant markets as

defined by the Commission: the market for Digital software support services and the market for

Digital hardware maintenance services. Why were these markets not construed as being a single

market instead of two different ones, and why were they deemed to be relevant by the

Commission? In all likelihood, the Commission deemed that hardware and software services

were not interchangeable, which hints that they constitute two separate markets. Moreover, since

TPMs deal with hardware and software services provision and not with computer systems as

such, it follows that the only markets capable of restraint of competition in this case are the

hardware and software services markets.

It must be noted that the approach by the Commission of relevant markets here is much

71 European Competition Law Review, 1998, "Aftermarket power in the computer services market: the digital undertaking," p.178

32

narrower than will be used in the Microsoft case72: in Digital, the relevant markets are not

general markets, such as the market for operating systems or web-browsers, but brand-related

markets. Therefore, following Caffarra and Bishop's theory of aftermarkets,73 Digital has a

monopoly on the beforemarket of Digital computer systems, and is in competition with TPMs on

the aftermarket of hardware and software services.

Now that we know what the relevant markets are, we must examine their structure. How

to find market power in the case of beforemarkets and aftermarkets? As the Commission issued

no decision on the Digital case, we have to look at previous decisions to understand how the

Commission held Digital to have a dominant position on the aftermarkets.74 In the Pelikan case,

the Commission took into account three factors:

– The proportional cost of the consumables compared to the total cost of the

consumables and the durable good

– The level of transparency in the price of the consumables

– The cost of switching to another durable good compared to the cost of the

consumables

As we know, the Commission deemed these conditions to be fulfilled. Indeed, the cost of

computers was relatively high at that time compared to the cost of maintenance services, the

transparency of the price was dubious due to high discrepancies between the price of the DSS

package and the price of the softwares and hardwares separately, and the cost of switching from

one computer to another was, for the reason mentioned above, high. This can be brought near to

the views of London Economics, an economic consultancy firm, which warns regulators that

"action may be needed to ensure that contracts for aftermarket services are sufficiently

transparent to ensure that primary market competition alone is sufficient to protect consumers."75

Here, rather than contracts, the Commission's view is that prices and packages were not

72 Court of First Instance, 09/17/2007, Microsoft Corp. v Commission of the European Communities, T-201/0473 European Competition Law Review, 1998, Cristina Caffarra and Bill Bishop, p.26574 Commission Press Release, Appendix 275 London Economics, The Single Market Review, Sub-series V: Impact on Competition and Scale Effects, vol.3:

Competition Issues (1997) Ch.14, p.277-278

33

transparent enough to rely on the competition in the primary market alone.

Conclusively, for the Commission, Digital enjoyed a dominant position in the markets for

software and hardware support. In its reply to the statement of objections in June 1997, Digital

gave two main reasons why this dominant position was economically neutral. To better weigh the

pros and the cons, which the absence of a decision of the Commission makes harder, let us take a

look at them:

– First, the intense competition in the computer market and the ability of customers to

calculate the overall cost of owning a computer (which is a point disputed by the

Commission) prevented Digital from charging supra-competitive prices

– Second, it is not Digital's strategy which is anti-economical but the TPMs's strategy:

by concentrating on the servicing of few brands of computers systems, which makes

TPMs vulnerable to any change in these brands' strategy. Here, the case raises the

classical dilemma concerning the role of competition law: is it aimed at protecting the

consumers, or the competitors?

C Tying practice

As stated in both the March 1997 statement of objections and the October 1997 Press

Release, the Commission alleged that Digital had tied the supply of its hardware services with

the supply of its software services, "inter alia due to the prices of software services being

considerably more attractive when included into a hardware and software service package than

when sold on a stand-alone basis,"76 thus foreclosing competition. These very few words are

what make the Digital case a precedent, or, as Vincent Pickering and Maurits Dolmans put it,77

presents "novel and potentially far-reaching competition and policy issues."

76 Commission Press Release, Appendix 277 European Competition Law Review, 1998, 19(2), p.109, Pickering and Dolmans

34

To understand this novelty, let us get back to the practice itself. Digital sold its customers

hardware and software services both independently and jointly, in a "DSS package" at a reduced

price. The price of this package was extremely competitive compared to the cost of purchasing

both services independently. In the classical economic theory, this practice is not to be called

tying, as tying only occurs when product A cannot be bought without product B. Here, the

hardware services can be bought without buying the software services, and vice-versa. An

orthodox view would suggest Digital practised mixed bundling: products A and B are sold

independently as well as in a bundling, so as to sell at a lower price.

Therefore, in the Digital case, there is theoretically no tying and Digital cannot be sued

on this basis. Yet this is where the Commission innovates: by establishing that "the prices of

software services [are] considerably more attractive when included in a hardware and software

package than when sold on a stand-alone basis,"78 it did no less than creating a new form of

tying: the "economic" tying,79 also called "financial" tying.80 According to this case, tying not

only happens when product A cannot be bought without buying product B ("contractual" tying),

but also when the discrepancy in prices between products A and B separately on the one hand,

and a package of both products on the other hand, is so high that most customers will choose to

buy the package.

It is possible that the real concern of the Commission was that Digital's DSS package

practice was priced such as to foreclose competition in the aftermarket for Digital computer

systems: TPMs would not be in a position to sell their own hardware services. Therefore,

considering contractual tying was not able to achieve the goal of preventing this foreclosure, the

Commission may have decided to create a new means to achieve its broader goals.

78 Commission Press Release, Appendix 279 European Competition Law Review, 1998, "Aftermarket power in the computer services market: the digital

undertaking," p.17980 European Competition Law Review, 1998, 19(2), p.110, Pickering and Dolmans

35

At this point, it is helpful to notice that, although the Commission does not specify it, the

market for software services is the tying market, whilst the market for hardware services is the

tied market where foreclosure is deemed to happen (the TPMs work in the hardware market).

Once again, it is interesting in this aspect to distinguish the Digital case from the Microsoft one:

in the Microsoft case, the tied product was the software (the Internet Explorer web-browser),

whilst the tying product was the hardware (the Windows Operating System).81 This shows us that

the appreciation by the Commission of the tying practices truly occur on a case-by-case basis.

As Andrews notes,82 the Commission does not go as far as denying that bundling a range

of products together can be more efficient than offering them separately. Indeed, if a firm

(whether dominant or not) is able to pass the value of its greater efficiency to the customer by

offering lower prices, this must be allowed, as it drives competition. Any decision contrary to

this would be anti-economic. However, in certain circumstances, unlawful tying occurs when a

package discount is so high as to make an uneconomical for customers to deal with a third party

for any one of the packaged services. "For any one of the packaged services" means either for the

tying or the tied markets. It is interesting to see that this traditional, full of consequences

distinction between tied and tying products is, in the view of some scholars, losing relevance. In

any case, the Digital case should not be construed as meaning that "every discount or rebate

offered by a dominant undertaking is per se illegal, for (…) even a dominant undertaking may

compete on the merits."83

The Digital company did compete on the merits. In its reply to the statement of

objections, it argued that its DSS package could not be caught by article 102 as tying could only

occur if:

– Digital is dominant in the tying market, i.e. the market for software services

– The customer is de facto forced to buy the tied product (therefore, Digital refused the

81 Court of First Instance, 09/17/2007, Microsoft Corp. v Commission of the European Communities, T-201/0482 European Competition Law Review, 1998, "Aftermarket power in the computer services market: the digital

undertaking," p.17983 Eugène Buttigieg, Competition Law: safeguarding the consumer interest, Kluwer Law International, 2009, p.226

36

notion of economic tying)

– There is sufficient foreclosure in the tied market

– There is no justification for the DSS package price reduction

For Digital, finding economic coercion to buy its products and foreclosure in the tied

market would have required proof that the price of the DSS package was at least below average

variable cost. As the result of the Commission's investigations were unfortunately not made

public, it is impossible to say if this was the case. However, the justification for the DSS package

discount is easy to find: cost savings and countervailing benefits to the consumer resulting from

offering and delivering the complete suite of services. It would have been interesting to see how

the Commission would have nowadays taken into account this justification in applying its "rule

of reason," as defined by section III.D of its 2009 Communication, which reads that "a dominant

undertaking may [claim that its conduct is justified] either by demonstrating that its conduct is

objectively necessary or by demonstrating that its conduct produces substantial efficiencies

which outweigh any anti-competitive effects on consumers."

D Settlement

Following the November 1995 raids on its offices, and before the issuance of any official

statement of objections, Digital submitted a draft undertaking84 to the Commission in January

1997. It is worth noticing that even though it denied practising any abuse of dominant position in

its June 1997 reply to the March 1997 statement of objections, Digital was also willing to solve

the dispute before a formal decision would be issued by the Commission and therefore

acknowledged, in a way, that the complaints of the TPMs may have beeb founded on real anti-

competitive practices. As the language of the undertaking suggests,85 in its foreword, if it was to

be signed by the Commission it would be "in consideration for the closure of [Digital-related]

cases." It can therefore be construed as an attempt to bargain with the Commission on terms

84 A proposition of undertaking85 Digital undertaking, Appendix 1

37

known to Digital, rather than risking the issuance of a decision which would affect Digital's

rights to an unforeseeable extent.

The draft undertaking consisted mainly in a revision of Digital's service portfolio. It is

composed of five articles, each of which we will briefly describe in their relation to the tying

allegations:

– Article 1: Digital undertakes to continue to offer its services both separately and in a

DSS package in such a way that the Commission's concerns about restraint of

competition will be met. The price of the DSS package will be no less than 90 per

cent of the sum of the hardware and software services bought separately, so that the

DSS package remains attractive to the consumer, but not to such an extent that it may

harm competition in the aftermarket for Digital computer systems. Digital also

undertakes to publish more transparent quotations for its products

– Articles 2 and 3: any future discount or allowance policy on Digital products will be

made "regardless of whether the customer elects to maintain its own systems or

obtain hardware support, software support or any other services from a TPM." This

article is the assurance that TPMs will not be foreclosed from the aftermarket

– Article 4: Digital denies that it holds a dominant position or engages in abusive

conduct, and provides that it can bring modifications to the undertaking after

informing the Commission. It also states that the undertaking expires in January 2003.

In my research, I was not able to find any further piece of information concerning the

future of the undertaking

– Article 5: the article is a mere definition of the technical terms used in the

undertaking

On October 8, 1997, after a period of negotiations, the Commission signed the

undertaking and decided "not to pursue its case against Digital for alleged breaches of EU

competition law."86

86 Commission Press Release, Appendix 2

38

Conclusion

In this paper, we have asked ourselves whether European competition rules with respect

to tying practices are ultimately beneficial to the European consumer. In doing so, we have found

that:

(i) Contrary to what is often assumed, tying is not anti-competitive per

se. Whereas in some cases it may indeed lead to the foreclosure of the tied market,

in others tying may very well have pro-competitive effects, such as economies of

scale, economies of scope and improvement of a brand value. Therefore, while

certain forms of tying must be prohibited, other forms should be encouraged

(ii) Article 102 TFEU fails to distinguish between the forms of tying

which benefit the consumer (which must be encouraged) and the forms of

tying which lead to a diminution of the opportunities of both competitors and

consumers (which should be prohibited). This would suppose to determine

clearly what a dominant position is, what an abuse thereof is, and how tying fits

into that particular frame. In its early days of dealing with tying cases, the

Commission and the Court of Justice were faced with a lack of practical texts and

methods to define the offences article 102 was to punish. To fill this void, the

Commission defined strict conditions to be met before an offence would be

discovered, such as a dominant position in the tying market, an abuse of that

position and a potential affectation of trade

(iii) The approach first taken by the Commission has been overly

prosaic and thus harmful to the consumer. As soon as these conditions were

met, the undertaking would be fined and its practice reprehended, irrespective of

the potential impact of that decision on consumer welfare. In the view of many

scholars, this textual and conceptual shortage led to a series of anti-economic

decisions due to an approach too strictly legal, for which an offence is an offence

as such and does not depend on its effects, its impact on the market and its

consequences on customer welfare

39

(iv) This approach has evolved to allow tying practices that are pro-

competitive and beneficial to consumers. As a whole, EU competition law,

through cases and doctrine, has focused more and more on the impact of its

decisions from an economic point of view, and has departed from other legal

fields in that it is no more autonomous. Indeed, economics and competition law

have been intertwined through the use of concepts such as cross elasticity of

demand, pro and anti-competitive effects and economies of scale. The particular

analysis of tying has evolved, mostly through the Commission's 2005 paper and

the 2009 Guidelines on the application of article 102, so that it now seems broad

enough to capture any harmful tying, and narrow enough not to target efficient,

pro-competitive practices. The Commission's departure from a rather rash, literal

application of anti-tying rules shows a willingness to balance more the damaging

effects of tying with their potential benefits to consumers. On the whole, it seems

safe to say that the reform of tying rules is sufficient to ensure that anti-

competitive practices will be punished while pro-competitive ones will not

As demonstrated by the Digital case, the Commission is also willing to extend the scope

of application of article 102 to engage with practices that would not be caught by it under the

classical theory, but which practical effect is ultimately detrimental to the consumer. This proves

that putting more economics into law does not necessarily mean less application of the law at the

end of the day; au contraire, it can also develop the law and its use to punish anti-competitive

practices.

It is however unfortunate that the Digital case did not lead to a binding decision by the

Commission, but to the mere signature of an undertaking. In consequence, the notion of

economic tying is still shrouded in uncertainty. In particular, as it was brought forward at the

stage of an early press release, the Commission had not yet endeavoured to set up a test to

formally discover the offence. What will fall within the scope of economic tying will therefore

be a matter of concern to many firms whose tying practices are legitimate, and which would have

been relieved by an enumeration of the conditions to constitute a tying offence.

40

Appendices

Appendix 1: Undertaking by Digital Equipment Corporation

Appendix 2: Press Release of the European Commission concerning the

acceptance of the Undertaking by Digital Equipment Corporation

41

Appendix 1

Undertaking by Digital Equipment Corporation

In response to inquiries made by the Commission of the European Communities (the “Commission”) in Cases IV/35.471, IV/35.532 and IV/36.005, and in consideration for the closure of these cases, Digital Equipment Corporation and Digital Equipment Co. Limited, on behalf of themselves, and their European subsidiaries (collectively “Digital”), undertake in good faith as follows:

Article 1--Computer Service Offerings for Digital Systems 1.1. Separate availability. Digital will offer standard HWS, SWS, and LS services for Digital Systems as separately available and separately priced products. The current service descriptions to be used for this HWS, SWS, and LS are attached as Annex 1.

1.2. Pricing for LS and SWS. Digital will price SWS service at a single flat fee per CPU. Digital will price LS service at a reasonable competitive percentage of the then-current price for an initial license for the corresponding software product. Prices for SWS and LS may be different for different types or sizes of Digital Systems and the corresponding software products.

1.3. DSS and pricing thereof. Digital may offer DSS service for Digital Systems. The current summary of this DSS offering is attached as Annex 2. DSS service and the fee therefor will not include any services not included in the HWS, SWS and LS offerings for the relevant Digital System configuration. DSS service in each Member State will be priced at no less than 90 per cent of the sum of the published list prices in that Member State for the HWS, SWS and LS services included in the DSS service (before application of all applicable Discounts as defined in Article 2.1 below). Should Digital become aware that the cost savings and countervailing benefits associated with DSS in the Territory fall below 10 per cent of the sum of the list prices of the included services, Digital shall modify the DSS price formula accordingly.

1.4. Software service package pricing. Whenever Digital offers DSS service for a Digital System, Digital will also advise customers of the availability of a corresponding package of SWS and LS which will be priced at no more than 95% of the sum of the published list prices in that Member State for the SWS and LS services included in the software service package (before application of all applicable Discounts as defined in Article 2.1 below) to reflect a reasonable portion of the cost savings associated with the combination of LS and SWS.

1.5. Published price lists. Digital will make price lists for and current descriptions of its HWS, SWS, LS and prices for DSS services on Digital Systems for each Member State available to the public at a reasonable fee.

1.6. Transparent quotes. All customer quotations which Digital provides for DSS service on Digital Systems will also include separate quotations for the included HWS, SWS and LS services.

1.7. LS distribution. To ensure wide availability of license subscription to customers of TPMs, Digital will, provided in every case that the Digital System is properly licensed to use the

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relevant software,

(a) continue to permit TPMs to submit purchase orders for LS services in the name and on behalf of properly licensed owners of Digital Systems provided the TPM service provider is properly authorised by the owner;

(b) permit Service Referrers that meet Digital's criteria to submit purchase orders for LS services in the name and on behalf of properly licensed owners of Digital Systems;

(c) not object to co-operation in the marketing of LS services between TPM service providers and Service Referrers in compliance with the latters' agreements with Digital.

(d) not restrict authorised distributors of Digital systems software from sublicensing updates of such software to any person properly licensed to use the relevant software on a Digital System; and

(e) not restrict authorised distributors of Digital services from sublicensing updates of Digital systems software or LS to any person properly licensed to use the relevant software on a Digital System.

1.8. Digital Service Distributors and LS Service Referrers. Digital will select authorised distributors of SWS and LS, as well as Service Referrers mentioned in Article 1.7(b) above through the non-discriminatory application of objectively verifiable eligibility criteria. No entity will be excluded from becoming or remaining an authorised distributor of SWS and LS or an LS Service Referrer because it (or an affiliate) is also a TPM offering services for Digital Systems.

1.9. Patches. Digital shall continue to make all Patches available to owners of properly licensed Digital Systems on a non-discriminatory basis (which may include a fee), in compliance with all applicable legislation, including U.S. and E.U. export control regulations.

Article 2--Discount Programs and Policies for Certain Services for Digital Systems 2.1. Principles. Digital may offer owners of Digital Systems standard reductions (“Discounts”) from the list prices for HWS, SWS, LS and DSS services only if and to the extent these reflect: (a) reasonable estimates of average cost savings or countervailing benefits; (b) special customer status (e.g. Digital employees, affiliated companies, global and multinational accounts, educational and nonprofit institutions, or government institutions); (c) short term promotional programs; or (d) value-based attributes, such as prepayments, multi-year service, and firstlevel customer call screening.

2.2. Publication and non-discrimination. Digital will publish or otherwise make the eligibility provisions for all Discount programs known to customers and potential customers of HWS, SWS, LS and DSS services. Discounts will be available on a non-discriminatory basis to all owners of Digital Systems that meet the relevant eligibility requirements, regardless of whether the customer elects to maintain its own systems or obtain hardware support, software support or any other services from a TPM.

2.3. No discount bundling. Discounts on HWS, SWS, LS and DSS services will be available to owners of Digital Systems (if they meet the relevant eligibility criteria) regardless of whether they elect to purchase any other service or product from Digital. Thus, the application of Discount rules on HWS and SWS

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(a) shall not be contingent on any requirement that the customer also take, respectively, SWS and HWS or any other service or product from Digital, and

(b) shall not have the effect of encouraging customers also to take, respectively, SWS and HWS, or DSS, so as to foreclose TPMs.

2.4. Discounted prices above costs. The prices for HWS, SWS, LS and DSS, after deduction of Discounts (as defined above) shall be above average total cost.

2.5. Transparency. When providing a price quotation with a Discount for DSS, Digital shall also offer the same Discount to the relevant component services of DSS if taken separately.10

Article 3--Allowance Policies for Certain Services for Digital Systems 3.1. Principles. Digital may offer owners of Digital Systems (a) non-standard reductions from the list prices of HWS, SWS and LS services on Digital Systems; and (b) enhancements to such services without a corresponding increase in price (together, “Allowances”) to meet comparable service offerings of a competitor. No Allowance shall be offered until Digital has completed an internal review process designed to verify that the proposed Allowance is offered in good faith as a proportional response to real or (based upon information from the customer or other reliable sources) reasonably anticipated competitive offerings and will not result in a foreclosure or distortion of competition for the servicing of Digital Systems in any Member State. These are the only circumstances, other than those described in Article 4.1 below, under which Digital customers will be offered prices for services other than list prices (discounted in accordance with Article 2).

3.2. No Allowances on DSS. Digital will not offer or grant Allowances to reduce prices for DSS services.

3.3. No conditional Allowances. Allowances on SWS, HWS and LS shall not be contingent on any requirement that the customer also take, respectively, HWS, SWS, LS, DSS, or any other service or product from Digital.

3.4. No other price reductions. Digital will not offer owners of Digital Systems any reductions from the applicable list prices for HWS, SWS, LS or DSS other than Discounts and Allowances as described in Articles 2 and 3 of this Undertaking.

3.5. Digital acknowledges, without prejudice to paragraph 4.4, that the Commission may initiate proceedings if in specific cases Allowances for services referred to in paragraph 3.1 of this Undertaking result in prices below average total costs.

Article 4--General Provisions 4.1. Special cases and complementary services. Nothing in this Undertaking will (a) preclude Digital from offering any customised or non-standard service in case of contracts individually negotiated with customers who customarily or given special requirements or circumstances refuse to deal with Digital except on the basis of such a contract; (b) prejudice Digital's freedom to offer complementary services or other services not included in DSS, at normal commercial conditions; or (c) preclude Digital from taking such action as is required under local law.

4.2. Profit orientation. Digital shall conduct its HWS business in the Territory with a view to

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making a profit. Digital shall maintain internal records separately reflecting revenues and expenses of its HWS business in the Territory.

4.3. Modifications. Digital reserves the right to make reasonable, lawful, and non-discriminatory changes to the service offerings, business practices and policies covered by this Undertaking, provided that these remain in compliance with the principles laid down in this Undertaking. Digital will provide the Commission with notice 90 days in advance of any material change in the service offerings, business practices or policies described in this Undertaking.

4.4. No admission. This Undertaking, and all related correspondence, memoranda and other documents, is made without prejudice and without any admission by Digital that it holds a dominant position within the common market or any part of it, has engaged in abusive conduct that has adversely affected competition within the common market or trade between Member States, or has engaged in conduct intended to eliminate competitors.

4.5. Continued application of Articles 85 and 86. This Undertaking shall not be enforceable by any other natural or legal person or any national authority or agency. By accepting this Undertaking, the Commission confirms the statements in paragraphs 4.1, 4.3, 4.4 and 4.5 of this Undertaking and that in any further or future proceedings the Commission will rely exclusively upon Articles 85 and 86 of the Treaty and not upon this Undertaking.

4.6. Implementation. Digital shall use its best endeavours to ensure that the actions described in Articles 1, 2, and 3 of this Undertaking are implemented within the Territory within two months from the date of signature hereof.

4.7. Compliance certification. So long as this Undertaking is in effect, Digital will (without prejudice to confidentiality of business secrets vis-à-vis third parties)

(a) within 90 days from each anniversary of this Undertaking file with the Commission a certification that Digital has, during the preceding year, conducted its Multi-Vendor Customer Services business within the Territory in compliance with this Undertaking. This certification will be based on an internal review of Digital's operating policies and procedures and a representative sampling of customer transactions and will note any variances from the obligations described in Articles 1, 2 and 3 of this Undertaking and any action taken to remedy such variances;

(b) retain the Allowance request forms and relevant attachments related to the internal review process referred to in paragraph 3.1 above for a period of two years and supply such forms and attachments to the Commission upon request;

(c) provide to the Commission, upon request, any other information the Commission may from time to time reasonably require for the purpose of enabling the Commission to determine the manner and the extent of Digital's compliance with this Undertaking.

4.8. Renegotiation of service agreements. In the case of service contracts for the supply of hardware support or software support for Digital Systems entered into between Digital and a customer before October 1, 1997 and which expire after October 1, 1998, the customer shall be granted the opportunity after October 1, 1998, in its sole discretion, to terminate the contract on thirty days' notice without any penalty that is not contractually provided and related to duration.

4.9. Duration. This Undertaking expires on January 1, 2003. After January 1, 2000, Digital may request the Commission to give due consideration to permitting the modification, amendment or

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termination of this Undertaking if there have been relevant, material, objective changes in the structure of competition or other circumstances that justify such a modification, amendment, or termination. Digital's request shall contain an explanation of the material and objective changes in question.

Article 5--Other Defined Terms

5.1 “Alpha” A family of Digital computer systems incorporating a 64 bit architecture designed by Digital.

5.2 “CPU” Central Processing Unit--the component of a computer system where information processing occurs.

5.3 “Digital Subsidiary”

The subsidiary of Digital Equipment Corporation providing HWS, SWS, LS and DSS services in a Member State.

5.4 “Digital Systems”

Digital's VAX and Alpha computer systems (including associated Digital peripherals) running Digital-proprietary operating system software (including VMS, Ultrix, and Digital Unix).

5.5 “DSS” Digital Systems Support Subscription--an integrated service agreement to provide HWS, SWS and LS services for Digital Systems.

5.6 “HWS”Hardware Support Subscription--a service agreement for the diagnosis, remedial maintenance, and operational support of the physical components of Digital Systems which store, process or transfer information.

5.7 “LS”

License Subscription--a service agreement which provides licensees of certain Digital software products used on Digital Systems with a license to use updated versions of the licensed software issued during the contract period.

5.8 “Member State”

A country which is part of the European Economic Area, except Greece, Iceland and Liechtenstein.

5.9 “Patch”Additions or changes to software for Digital Systems prepared, tested and distributed by Digital to licensees of the affected software in order to remedy malfunctions in the software prior to the release of the next version.

5.10 “SWS”

Software Support Subscription--a service agreement to provide licensees of certain Digital software products used on Digital Systems with technical support, including the diagnosis and resolution of operational problems, and remedial maintenance of software.

5.11 “Service Referrer”

Any Digital Gold Key partner. A Service Referrer refers service contracts to Digital for Digital Systems and receives a commission therefor.

5.12 “Territory” The EEA, except Greece, Liechtenstein and Iceland.

5.13 “TPM”Third-Party Maintenance firm; any entity that provides hardware or software maintenance and associated services and products to third parties, for computer systems and associated products and software not manufactured by

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it.

5.14 “VAX” A family of Digital computer systems incorporating a 32 bit architecture designed by Digital.

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Appendix 2ip/97/868

Brussels, 10th October 1997

The European Commission accepts an undertaking from Digital concerning its supply and pricing practices in the field of computer maintenance servicesMr. Karel Van Miert, the Commissioner responsible for competition policy, has accepted an undertaking from Digital signed on 8th October 1997 concerning its European policy regarding the supply and the pricing of software and hardware maintenance services for Digital computer systems. This followed a period of negotiations between Digital and the Commission. As a result, the Commission has decided not to pursue its case against Digital for alleged breaches of EU competition law.

Digital's Undertaking

Digital's service portfolio Digital Equipment Corporation (Digital) undertakes to offer hardware maintenance services for Digital systems on a stand-alone basis and to implement a pricing policy for its software support services based on a single flat fee per Central Processing Unit. Whereas it will continue to offer a software and hardware service package (so-called "DSS" package), the price of the DSS package will not be less than 90% of the sum of the list prices of the individual component services; the difference of up to 10% allows cost savings or other benefits to be passed on to system users while ensuring the maintenance of effective competition in the supply of hardware services. In addition, Digital will introduce a new software service package consisting of software support and license update services.

Digital will make its price list publicly available and will include in all customer quotations for Digital's DSS package separate quotations for each of the individual component services thereof.

Discount and allowance policy

Digital undertakes to ensure a transparent and non-discriminatory discount policy and to publish or otherwise make known the eligibility provisions for all discount programs. When offering a discount for its DSS package, it will also offer the same discount on the component services of the package if taken separately. All discounted prices will remain above average total costs.

Whereas Digital reserves the right to grant non-standard price reductions to meet competition (allowances), the price reductions will not be granted on the DSS package but only on the individual component services, which will remain separately available, and Digital undertakes to verify that they are proportionate and do not foreclose or distort competition. Digital acknowledges that the Commission may initiate proceedings, if in specific cases allowances result in service prices below its average total costs.

Distribution of services

Digital undertakes not to restrict its distributors from distributing software updates and services to any person properly licensed to use the relevant software and to select its service distributors through the non-discriminatory application of objectively verifiable criteria, with the result that

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no entity will be excluded from becoming or remaining an authorised distributor because it is also a TPM offering services for Digital systems.

Duration of the Undertaking and renegotiation of long-term service contracts

The undertaking will expire on 1 January 2003, with Digital being granted the right after 1 January 2000 to request that the Commission give due consideration to permitting its modification or termination if justified. It provides that existing long-term maintenance service contracts be terminated at the user's option after 1 October 1998.

Background

The Commission's investigation was initiated by two complaints lodged against Digital by Third Party Maintenance companies (TPMs), which were concerned that Digital's practices prevented effective competition in the supply of hardware maintenance services for Digital systems. The Commission takes the view that Digital's Undertaking will address these concerns by giving Digital system users a wider and more transparent choice and Digital's competitors more opportunities than have so far existed.

The Commission intends to rigorously monitor Digital's compliance with the Undertaking. It will also carefully examine the conditions under which Digital will offer competitive price reductions, to ensure that they are always offered as a proportional response to competition and do not foreclose or otherwise distort competition on the market.

Digital is one of the largest hardware and software suppliers in the world, the product line of which includes VAX and Alpha computer systems. It also supplies software and hardware maintenance services for its own systems and those of other manufacturers.

After investigations had been carried out at Digital's premises in Germany, the Netherlands and the United Kingdom in November 1995, a formal statement of objections was addressed to Digital in March 1997.

In that document, the Commission alleged that Digital had abused its dominant position in the EU markets for Digital software services and hardware services for Digital systems 1) by tying the supply of hardware services and software services, i.a due to the prices of software services being considerably more attractive when included into a hardware and software service package than when sold on a stand-alone basis, 2) by engaging in discriminatory practices, i.a by offering, in the supply of software support services, highly different transactions at the same price and almost similar transactions at very different prices, and 3) by adopting exclusionary practices targeted at the business of TPMs.

The Commission also alleged that Digital's distribution agreements in respect of computer services infringed Article 85(1) of the EC Treaty by limiting the customer base of Digital's distributors and excluding without justifiable reasons certain companies, including TPMs, from Digital's distribution network.

Although contesting the Commission's market definition and its allegations about dominance and infringements of EU competition law, Digital modified its supply and pricing policy in the field of computer maintenance services, and offered to resolve the case by offering an undertaking.

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Bibliography

Cases

Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911)

Court of First Instance, 09/17/2007, Microsoft Corp. v Commission of the European

Communities, T-201/04

European Court of Justice, 1962, Mannesman, 19/61

European Court of Justice, 02/13/1979, Hoffmann – La Roche & Co. AG v Commission of the

European Communities, 85/76

European Court of Jutice, 2008, Kanal 5 v. TV4, C-52/07

European Court of Justice, 1978, Case 68/78, Liptons Cash Registers and Business Equipment

Ltd v. Hugin Kassaregister AB

European Court of Justice, 1989, Case 138/88), Eurofix Ltd and Bauco (U.K.) Ltd v. Hilti AG

Court of First Instance (Second Chamber), 10/06/1994, Tetra Pak International SA v

Commission of the European Communities, T-83/91

Books and Journals

William J. Novak, The people's welfare: law and regulation in nineteenth-century America

Hedvig Schmidt, Competition law, innovation and antitrust: an analysis of tying and

technological integration

Penelope Papandropoulos, 06/06/2006, Competition Law Insight, Article 82: Tying and

bundling. A half step forward?

Alden F. Abbott, The University of Oxford Centre for Competition Law and Policy, The

Competition Law & Policy Guest Lecture Programme – Paper (L) 02/05

Randal C. Picker, Microsoft in the EU

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EY Reuter Briefing of November 30, 1995, “Digital faces investigation as E.C. anti-trust row

rages”

Philip Andrews, European Competition Law Review, 1998, 19(2) , "Aftermarket power in the

computer services market: the digital undertaking," p.198

London Economics, The Single Market Review, Sub-series V: Impact on Competition and Scale

Effects, vol.3: Competition Issues (1997) Ch.14, p.277-278

Commission documents

Discussion paper on the application of article 82, DG Competition

Commission notice, Guidelines on vertical restraints, SEC (2010)411

Council Regulation (EC) No 1/2003 on the implementation of the rules on competition laid down

in Articles 81 and 82 of the Treaty, 12/16/2002

Commission Notice on the definition of relevant market for the purposes of Community

competition law (97/C 372/03)

Commission Notice on the Definition of the Relevant Market

EAGCP, An economic approach to article 82

Commission decision declaring a concentration to be incompatible with the common market and

the EEA Agreement, Case No COMP/M.2220 – General Electric/Honeywell, Regulation (EEC)

No 4064/89

Commission Regulation (EEC) No 4064/89, Case No COMP/M.2416 – Tetra Laval/Sidel

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Websites

http://www.investopedia.com

http://www.u-s-history.com

http://www.bgsu.edu

http://www.linfo.org

http://www.mindtools.com

http://tutor2u.net

http://www.secinfo.com

http://www.yigitoglu.org

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Introduction.......................................................................................................7

I Tying, an abuse of domination prohibited by EU competition law..............12

A Defining tying.........................................................................12

B Apprehending tying through article 102 TFEU.......................16

II The application of article 102 for tying.......................................................20

A The steady "hard law" implementation procedure...................20

B The shifting "soft law" application procedure.........................25

III The Digital case.........................................................................................28

A Background..............................................................................29

B Markets....................................................................................30

C Tying practice..........................................................................34

D Settlement................................................................................37

Conclusion......................................................................................................39

Appendices.....................................................................................................41

Bibliography...................................................................................................50

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Institut d'Études Politiques de ToulouseMémoire de recherche présenté par M. Romain HenrioDirecteur du mémoire: Me Michel AttalDate: 2012

Tying under European competition rules

Do current anti-tying rules make European consumers better-off? An

analysis of the Digital case

Abstract: This paper considers a particular competition offence under article 102 of the Treaty on the

Functioning of the European Union, the practice of tying together products which could potentially be

sold individually. It goes into some detail in explaining this practice and distinguishing its forms and

effects. It also considers the various legal instruments, both hard and soft law, and cases brought before

the European Court of Justice that have added to the set of anti-tying rules. In particular, this paper

focuses on the Digital case, which sets a precedent by enacting a new form of tying offence called

"economic" tying. It will be used as a cornerstone to argue that while the Commission and the Court

have initially applied rules in a too stringent way, to such an extent that decisions were then largely

anti-economical, it has now moved to an effect-based approach to tying cases that will conceivably

enhance consumer welfare in Europe.

Keywords: Competition, Law, Tying, Commission, Digital, Market, 102