MJ O'Connor Solicitors

The Brief

05.10.2007

Competition Law - Recent Supreme Court Ruling

Introduction
In its landmark decision of 8 May 2007 in Competition Authority –v- O’ Regan and others the Supreme Court reversed the High Court ruling that the Irish League of Credit Unions (“the League”) had abused a dominant position contrary to Section 5 of the Competition Act 2002, by refusing access by disaffiliated credit unions to a special stabilisation scheme, (the Savings Protection Scheme) established by the League to assist credit unions which fall into financial difficulty. This case was the first time that the Supreme Court has adjudicated on substantive competition law issues and the judgement provides very helpful analysis as to the identification of the relevant product market and the proof required to establish breach of competition law. The decision has important implications, not only for abuse of dominance cases under Section 5, but also for cases of general anti-competitive market behaviour contrary to Section 4 of the Competition Act 2002. The case has direct relevance for trade and representative associations such as professional and representative bodies and trade unions which are engaged in the “tying in” of core services by requiring members to purchase related services and excluding services to non members.

The Competition Authority (“the Authority”)
Following enhancement of its powers and resources under the Competition Act 2002, the Authority is empowered to bring enforcement proceedings in respect of anti-competitive agreements, anti-competitive decisions and concerted practices which are prohibited under Section 4 of the Competition Act 2002, and to take enforcement proceedings in respect of the abuse of a dominant position under Section 5. These provisions provide, by way of analogy with Articles 81 and 82 of the European Treaty, for the prevention of activities which restrict or distort competition in trade or which constitute an abuse of a dominant position in trade in Ireland.

Anti-Competitive Behaviour
Section 4 replicates Article 81(1) of the European Treaty and provides that all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in goods or services in Ireland or in any part are prohibited and void including those which:-

• directly or indirectly fix purchase or selling
prices or any other trading conditions,
• limit or control production, markets, technical
development or investment,
• share markets or sources of supply,
• apply dissimilar conditions to equivalent
transactions with other trading parties thereby
placing them at a competitive disadvantage,
• make the conclusion of contracts subject to
acceptance by other parties of supplementary
obligations which by their nature or according to
commercial usage have no connection with the
subject of such contacts.

Abuse of Dominance
Section 5 replicates Article 82 of the European Treaty and provides that any abuse by one or more undertakings of a dominant position in trade for any goods or services in Ireland or in any part is prohibited. Abuse of dominance under Section 5 may include:-

• imposing unfair purchase or selling prices or
other unfair trading conditions,
• limiting production, markets or technical
development to the prejudice of consumers,
• applying dissimilar conditions to equivalent
transactions with other trading parties, thereby
placing them at a competitive disadvantage,
• making the conclusion of contracts subject to the
acceptance by other parties of supplementary
obligations which by their nature or according to
commercial usage have no connection with the
subject of such contracts.

This case concerned the last of such prohibited conduct as the Authority argued that the League abused its dominant position in the market for credit union stabilisation services by refusing to provide access to the League’s Savings Protection Scheme to credit unions which leave or are expelled from the League.

The League and its Services
The League was established in 1960 for the purpose of ensuring that credit unions conduct their affairs on the basis of a set of agreed operating principles and to present a united front to Government and State agencies in relation to the legislative environment in which Ireland’s credit unions operate. The League was established as, and remains, a voluntary association. Through the adoption of a set of standardised rules for credit unions all affiliated credit unions have adopted and follow the League’s standard rules. The League has 437 member credit unions and operates throughout the island of Ireland. Membership of the League is open to any credit union agreeing to adopt these standard rules and to abide by the League’s rules, bye-laws and resolutions. The activities of the League include (a) providing representation services for its credit union members in dealing with Government and legislative matters, (b) providing insurance (particularly loan protection and life savings insurance) for members of credit unions and for credit unions themselves and (c) providing a stabilisation fund through a Savings Protection Scheme (which was the key issue in this case).

The Savings Protection Scheme (“SPS”)
The SPS was established in 1968 to provide some assurance of financial stability for credit unions in a similar way to schemes applicable within the banking and financial services sectors. This is achieved by the League performing (a) an inspection service of credit unions, (b) an advisory service to monitor compliance and (c) the maintenance of the SPS reserve or fund which the League can use at its discretion to assist credit unions in financial trouble. Over the years the SPS has saved three credit unions from financial collapse without the loss of members’ savings (in a similar way to the Bank of England scheme available for depositors with Northern Rock).

All credit unions established after 2001 are now required to operate a saving protection scheme to protect the savings of members in the event of insolvency of a credit union. The rules of the League require credit unions which are members of the League to contribute to and participate in the SPS. Under the League’s rules only members of the League may participate in and benefit from the SPS and its assistance fund which stands at over €70m.

In recent times some of the credit unions became unhappy with the levels of premiums payable for loan protection (“LP”) and life cover (“LC”) insurance services which members of the League must put in place for both borrowers from a credit union and the credit union itself and, as a result, some credit unions voluntarily disaffiliated from the League. Others who sought LP/LS cover outside of the League were threatened with expulsion from the League. As a result a new association representing the disaffiliated members was established, which lodged a complaint with the Authority which, in due course, lead to legal proceedings being instituted by the Authority against the League under Section 5.

The Authority’s Position
The Authority contended that the League was abusing its dominant position in the Irish stabilisation market by imposing a condition on the supply of that service, the condition being that a purchaser of the stabilisation service from the League must purchase the League’s other representation services. The Authority also contended that such conduct was anti-competitive as it constituted an abusive refusal to supply a service (the SPS service) by a dominant undertaking and that it constituted a breach of Section 4 of the Act.

This approach caused some alarm particularly since in 1995 the Authority had ruled that the League’s requirement that member credit unions purchase LP/LS insurance from the League did not constitute anti-competitive behaviour. The Authority had then ruled that a member credit union had the choice of simply leaving the League and purchasing LP/LS elsewhere (the League’s share of the LP/LS market being a mere 0.6% of total life assurance premiums). Accordingly the Authority concluded that the League’s requirement for member credit unions to purchase LP/LS insurance from the League did not prevent, restrict or distort competition.

However in the intervening period the disaffiliated credit unions had begun to formulate their complaint on the fact that the real penalty was not disaffiliation from the League as such but the consequential withdrawal or denial of the protection afforded by the SPS. In response to such complaint the Authority revisited its earlier market approach and, in 2002, revoked its 1995 decision, shifted its focus from Section 4 to Section 5 and contended for the first time that the relevant product market is “savings protection in the State” and that the League held a dominant position in that market by representing a very high proportion of all credit unions (90% to 95% of credit union assets). Using a very narrow market definition the Authority then issued proceedings against the League under Section 5 on the grounds that the denial of access to SPS or to a refund of contributions made by the disaffiliated members constituted an abuse of its dominant position in the relevant market for savings protection. In departing from its previous product market analysis the Authority sought to apply a very narrow market definition for the relevant market. (Naturally a narrower market definition makes it easier to establish the existence of a dominant position in that market).

]Abusive “Tying” Arrangements[
In order for the Authority’s argument to succeed it had to establish that the League was engaged in an abusive “tying” arrangement and that the League occupied a dominant position in the market for SPS and that it abused its position by “tying” the supply of the SPS to the supply of its representation service to members. In other words before it could succeed it had to establish two separate and distinct product markets i.e. the market for credit union representation and the market for SPS. However, for the reasons set out below, the Authority ultimately failed as it was not able to establish that two separate product markets existed, the Supreme Court being satisfied that the SPS and the provision of representative services were “mutually interdependent”. In other words the Supreme Court accepted that for the League to provide the SPS it necessarily entailed the provision of the representation services to its member credit unions.

The Supreme Court Case
In its analysis the Supreme Court brought much required clarification to the issues. It held that the potentially determinative issue is the identification of the relevant product market. If there are truly distinct markets for the supply of the two services identified by the Authority, namely representation services and SPS, then the League enjoys an exceptionally large market share in each of them (respectively 80 – 85% of the market for representation services and 100% of the market for SPS). While a very high market share may in certain circumstances exist without a seller having that market power which is the essential characteristic of a dominant position it is clear that a large market share is always regarded as strongly indicative of dominance. If it could be established that the League enjoys that position of dominance in a distinct product market for SPS the Court conceded that it is probably inescapable that it is engaged in abusive tying activity. Considerable focus was then given to determining whether representation services and SPS are separate products and whether they are in separate product markets. The Court noted that the SPS fund and the accompanying regulatory regime are mutually inter-dependant and that member credit unions do not purchase stabilisation services from the League as an arms length seller and that this is part of an invariable practice throughout the world. The Court accepted the League’s case that there was no evidence, either in Ireland or anywhere else in the world of an independently-supplied SPS stabilisation service. Firstly no insurance company provided such a service, even in the United States where there has been a strong credit union movement for many years. Secondly in the United States stabilisation schemes were set up by credit union leagues which schemes were confined to their members. No anti-trust enforcement action had ever been taken against any such league on the basis that this activity was anti-competitive. Thirdly precisely the same situation prevails in Ireland. The Court also noted that the Authority had proffered little or no analysis as to whether SPS is in a separate product market and no quantitative analysis at all by reference to established economic formulae in support of its contention. Fennelly J. placed considerable emphasis on the fact that cases such as the present which require direct assessment of the market effects of allegedly anti-competitive conduct are a virtual novelty in the Irish Courts and the appeal to the Supreme Court was the first occasion on which the Court had been faced with the need to assess the economic effects of market behaviour and to decide substantive issues of competition law. Recognising that the Courts are required to integrate economic principles into law is not an easy task and judges are not all familiar with economic principles. Fennelly J also noted that economic theory is in a state of constant development and techniques of economic analysis vary and are sometimes contested between economists. The boundaries between economic theory and public policy vary over time and from one Member State to another. He emphasised that there is no prima-facie legal presumption in favour of the Authority’s view and the Authority therefore carries the normal civil burden of proof in establishing breach of Section 5. In Fennelly J’s words: “The entire aim and object of competition law is consumer welfare. Competitive markets must serve the consumer. That is their sole purpose. Competition law, as is often said, is about protecting competition not competitors even if it is competitors who most frequently invoke it. Its guiding principle is that open and fair competition between producers of goods and services will favour the most efficient producers who will thereby be encouraged to satisfy consumer demand for better quality products, wider choice and lower prices. Their reward is a greater market share ……….. Competition law does not outlaw economic power, only its abuse. It is not the existence but the abuse of a dominant position which offends principles of free and open competition. It is obvious that these principles are in frequent and general tension and that competition authorities must strike a balance between competing considerations. Complex economic relationships need analysis before a conclusion may be reached as to whether particular impugned behaviour is injurious to or beneficial to competition and to the consumer. Undertakings compete in the provision of goods and services so that the notion of the product is necessarily central to market analysis. Identification of the relevant products and markets are the necessary starting point in every case”.

Referring to the Microsoft case Fennelly J noted that for it to be held by the European Commission that Microsoft was engaged in abusive “tying” it had to decide whether Microsoft’s streaming media player and its operating system were two separate products. He cited with approval the analysis of the European Commission in that case (which was subsequently upheld in the European Court of First Instance on 17 September 2007) noting in particular that products that are not distinct cannot be tied in a way that constitutes abusive tying and that the distinctiveness of products for the purposes of the analysis has to be assessed with a view to consumer demand. If there is no independent demand for an allegedly tied product then the products at issue are not distinct and a tying charge cannot be established. Accordingly it is a pre condition to establishing abusive tying that the League’s representation services and the SPS provided by the League to its members are economically to be regarded as separate products. On the facts Fennelly J found that the SPS constitutes a service provided only to those member credit unions and it was never offered or provided to any other person. Furthermore there has never been any other stabilisation fund in Ireland other than the SPS and no such fund has ever been available for sale on a commercial basis. He also accepted the evidence of various financial services and insurance undertakings that no company in the market provided or was willing to provide a stabilisation service such as the SPS which evidence was accepted as pointing very strongly to a conclusion that SPS is not a commercially saleable product. He also accepted evidence from the United States that all stabilisation funds available to credit unions in the United States were operated by leagues of credit unions and no such services were provided by bodies other than the leagues.

The Court reached the clear conclusion on the facts that the Authority had not established that SPS constituted a separate distinct product. Moreover the SPS had always existed as an integral part of the bundle of services that the League has provided to its own members and has never been provided independently in Ireland. Monitoring and inspection of the finances of the member credit unions is the quintessence of the stabilisation fund arrangements. Nobody had produced any evidence to the Court of the existence of an independent commercially provided SPS anywhere. It has never existed in Ireland and the evidence showed without contradiction that many stabilisation funds had existed in the United States and that all were provided by leagues of credit unions only to their members. No such service existed in the insurance market and no insurer was willing to provide it. Fennelly J concluded that the Authority had failed to provide a convincing analysis of the League’s activities as being anti-competitive indeed the history showed that the Authority had changed its position in relation to the League on several occasions and the radical change of position had demonstrated the lack of credibility in the Authority’s case which, in the view of Fennelly J, undermined confidence in the Authority’s consistency. Fennelly J. then concluded that as SPS and representation services are not distinct products in distinct product markets the Authority’s case for tying abuse failed and therefore it was not necessary to consider the issue of dominant position or its abuse or foreclosure and there could be no question of an abusive refusal to supply. The appeal was allowed and the Supreme Court set aside the order of the High Court in its entirety and dismissed the claim of the Authority.

Conclusion
The lesson here is that in order to successfully mount a claim that an undertaking has abused a position of dominance contrary to Section 5, rather than proffering assertions concerning the anti-competitive effect of restrictions, a full economic and credible analysis must be presented and, in cases of conflict on the issue, the Court will appoint its own economic experts to report to the Court (as had been appointed by the High Court in this case). While this case provides some degree of comfort for trade and representative associations which require members to receive related services they should be mindful of the fact that in the future the Authority and other persons aggrieved by alleged anti-competitive behaviour will no doubt undertake a more consistent and detailed economic analysis before instituting abuse of dominance cases under Section 5.


Sean Nolan
Solicitor and Partner
M. J. O’Connor
Solicitors

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