1) Introduction

One of the most increasing economic areas is a cyberspace. In this field, Microsoft has absolute market share not only in operating system but also in various office programs. As a result, many cases are filed against Microsoft because of its abuse of a dominant. However it is not clear whether it is good for economic efficiencies to restrict dominant companies especially in cases involving innovative technology. Although it needs proper restrictions to keep a fair competition, excessive controls undermine dominant companies’ incentive to innovate new technology. This article’s purpose is to examine the relationship between competition and innovation. At first, I wish to explain generally about European competition policy, and then to focus on one of the important topics for this purpose,namely the doctrine of ‘essential facilities’.

2) European Competition Policy

The Direct General IV (DG-IV) is one of the most powerful divisions in the European Commission. The main job of DG-IV is to enforce competition policies enacted by the European Council. European competition policy mainly bases on Article 81 and 82 of Amsterdam Treaty and the most important purpose is making the internal market free. Article 81 deals with horizontal agreements and vertical agreements and Article 82 regulates dominant companies’ abuses of its position. This report takes up Article 82, especially the problem of a competitor’s access to dominant company’s essential facilities.

3) Dominant Position

Article 82 provides 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 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;

(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.”

One of the most important and difficult tasks of DG-IV under this Article is to decide whether a company is dominant or not. To deal with this task, DG-IV usually places reliance on the size of the company and the volume of its turnover in a market. It is usually said that if a company has a market share of less than 25 per cent, it seems unlikely to have a dominant position. And if it reaches 45 per cent, it becomes almost impossible to claim that an undertaking lacks power unless there is another undertaking in the same market with a share of equivalent size. More than 65 per cent market share usually makes a presumption of an abuse of dominance.

Before calculating market shares, DG-IV needs to define a market itself. They do from two viewpoints, geographic and product. According to the Commission Notice on Merger Regulation in 19971, a definition of relevant product and geographic markets is laid down as below. A product market is defined as “all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the product’s characteristics, their prices and their intended use.” And a geographic market is “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”

4) Abuse of a dominant position

After deciding that a company is dominant, DG-IV have to consider whether the company makes abuse of its dominant position or not. Although Article 82 enumerates four examples, its definition is not clear. D.G. Goyder, an author of “EC competition Law”, divides abuse of dominant positions into five categories, namely(1) refusal to deal and discriminatory pricing, (2) excessive and predatory pricing, (3) discount and rebates, (4) access to essential facilities and (5) tying2. This paper will mainly deal with the fourth category, access to essential facilities.

The doctrine of ‘essential facilities’ is quite new and developing. Essentially, abuse under this category is “the conduct involved in the refusal by an undertaking, which owns or controls a facility or an infrastructure to which competitors require access in order to provide a service to their customers, to allow that access”3. Essential facility might be a port, harbour or airport, a national telecommunications network, or a grid for electricity or gas.

The earliest case under this doctrine is CBEM v. CLT & IPB4, which was related to telemarketing. Following this case, there were four cases dealing with harbours. In B&I Line v. Sealink Harbours5, the Commission ruled that the relevant port was a substantial part of the Common Market and regards the defendant as dominant. And in the next case, Sea Containers v. Stena Sealink6, the Commission held that any dominant company providing an essential facility to competitors which abuses that facility, and refuses access without objective justification breaches Article 82. In addition to telemarketing and harbours, there are some cases, which deals with essential facilities. For example, Aer Lingus / British Midland Airways7 is a case connected with an air transport sector, and Maritime Container Network8 is one related to a train transport sector.

5) Essential Facilities; its inherent problems

As stated above, the doctrine of essential facilities is quiet new and there are still many discussions about its effectiveness and range. That is to say, although refusal of access to essential facilities may damage competitors, this may be outweighed by undermining incentive for a dominant company to innovate new technology.

Bill Bishop took up this problem at his article9. He picked up the regulation of the U.K. telecommunications regulator to a digital broadcasting. It will regulate the charges made to broadcasters for conditional access (CA) services in digital satellite in the U.K. The regulations anticipate that BSkyB will develop a CA system, access to which will be essential for broadcasters to compete with BSkyB. Although he admitted that the CA system would be an essential facility in some cases, he urged that there still remain some problems. He claimed that the most serious one is that ” it is being applied to a facility which does not even exist and which will require the investment of hundreds of millions of pounds”10. And he continued that ” the essential facilities doctrine should not beapplied to new assets where these have been developed in a risky commercial environment”11.

6) Competition and Innovation

As Bishop suggested, allowing competitors access to essential facilities has a possibility to suppress a dominant company’s incentive for innovation. The relation between competition and innovation raises a very serious question of whether unilateral refusal by a dominant firm to license unused technology could be an abuse of its position under Article 82 or not. This problem was dealt with Magill case12 . In this case, it was discussed whether dominant companies, television broadcasting organisations, could refuse to license its program listings protected by copyright acts or not. In Ireland and Northern Ireland, the television broadcasting organisations produced their own individual weekly television guides. They only licensed newspapers to produce combined listings on a daily basis, and would not license third parties to produce a combined weekly listing. In 1986, an Irish publisher, Magill, starts to publishing, without having obtained licenses, combined weekly basis listing. Although Irish High Court issued an interim injunction restraining Magill from publishing, the Commission found that the broadcasters’ refusal to license to Magill violated EU laws and imposed a compulsory license. The Court of First Instance (CFI) and the European Court of Justice (ECJ) also rejected the appeal by the broadcasters and confirmed that they had abused their dominant position.

Although the Court rejected the appeal in this case, it also confirmed that the mere refusal to license was not in itself abuse. It emphasised this case’s exceptional characters as below:

(1) The broadcasters prevented product innovation to the prejudice of consumers;

(a) Magill’s plan is a new product,

(b) The raw information was “indispensable” to enter a downstream market,

(c) The only possible source of supply is the broadcasters,

(d) There was “specific, constant and regular potential demand from consumers”.

(2) There is no justification.

(3) The refusal invoked exclusion of competition in the downstream market

By analogy of the Magill, a refusal by a dominant firm to license technology could be abuse only in the rarest cases; where the only reason of refusal is an exploitation of consumers and protection of its position, and imposing a compulsory license could not invoke discouragement of innovation13. Based on these analyses, Dolmans suggests that ” the Magill precedent should … as a matter of policy find little application in cases involving innovative technology”14 . And he continued that in Europe ” a refusal is not abuse. Any other conclusion would deprive a firm creating an IPR from the essence of the exclusive right conferred by intellectual property laws”15 .

7) Concluding Remarks

Dr. Herbert Ungerer, a leading Commission official involved in telecoms competition law enforcement, said that radical development in information technology implies “a complete transformation of the core of the economy comparable only to the Industrial Revolution of the nineteenth century. Similar shifts of global economic and market conditions will occur but much more rapidly and dramatically, within a time frame of as little as ten years”16 . One of main parts of this increasing field is computer software sector. As mentioned in introduction, Microsoft has a dominant position in it. And there is a possibility that “the ownership of essential software may become characterised as the ownership of an essential facility”17 . But on the other hands, we also have to remind that cyberspace is a market involving many innovative technologies and, as discussed above, the “essential facilities” doctrine could be applied only in the rarest cases. Who will be a “gatekeeper” and how he should control not to eliminate incentives for innovation depends on case by case. It needs to accumulate more and more precedents in order to find a way to the second Industrial Revolution.

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Notes;
1	1997 OJ C 372/5 [ 9 Dec. 1997 ]
2	D.G. Goyder, EC Competition Law, Oxford EC Law Library, [1998]
3	op. cit. p346
4	Case 311/84[1985]ECR 3261:[1986]2 CMLR 558
5	[1992]5 CMLR 255
6	1994 OJ L 15/8
7	[1992]OJ L 96/34
8	[1994] OJ L 104/34
9	Essential Facilities: The Rising Tide [1998]4 ECLR 183
10	op. cit. 185
11	op. cit. 185
12	Joined Cases C-241/91 & C-242/91, RTE and ITP v. Commission (Magill), 1995 ECR I-743, 4 CMLR 718 [1995]
13	cf. Maurits Dolmans, Restrictions on Innovation: An EU Antitrust Approach, 66 Antitrust Law Journal 455
14	op. cit. 470
15	op. cit. 472
16	Dr Herbert Ungerer, ” Clarifying how recent E.U. policies and decisions will encourage effective competition: who should be Europe’s Digital Gatekeepers?,speech at the European Cable & Satellite Conference, Paris, march 20,1996 17 Philip Ruttley, E.C. Competition Law in Cyberspace: An Overview of Recent Developments, E.C.L.R. [1998] issue 4, p196.