Prof. Dr. Andreas Weitbrecht / Trier Üniversitesi, Germa
Thank you all very much for inviting me to this highly stimulating conference on Consumer Law. As a competition lawyer I will speak on “The Role of European Competition Law in protecting the European Consumer”.
Much of the focus of this conference is on Europe and this fact explains that the word “European” comes up twice in my title. Nevertheless, you can strike European and replace it by Turkish, German, Austrian, Korean or Brazilian, or you can simply strike it without any replacement – my remarks would be hardly changed: the principles that I describe – and I will only deal with principles and neglect all details – apply all over the world.
In my brief remarks I will show how competition law works to protect the consumer. I will first outline the concept of competition on the merits as it is the basis of all free market economies and the source of benefits to the consumer. I will then secondly address the distortions of competition on the merits that emanate from the companies themselves and that competition law seeks to prevent. I will conclude by outlining the remedies that competition law uses in order to protect the consumer from these distortions; I will also briefly compare these remedies to the remedies principally used by consumer protection law. (1)
1. Free market Economy – Informed Decision-Making in an Environment of Undistorted Competition
Both competition law and consumer law are integral parts of a free market economy. Free market economy is fundamental to the European Union and according to the constitution also to the Republic of Turkey. It is the prevailing model in almost all nations around the world today – save for a few, however important, exceptions such as China.
Decisions made freely on the basis of self-interest. In the free market economy all players – producers, traders, the final consumer – make their decisions freely and autonomously, on the basis of what they perceive to be in their own best interest. The consumer decides on her own whether to buy a new television set or whether to save more money until she can buy an automobile. If she then decides to buy an automobile, she can choose between several sizes, models of different producers and again make an autonomous decision based upon quality, price and suitability.
Incentives for producers. How does it happen that there are so many cars offered to the consumer, various sizes, qualities and prices? The reason is simple: there are numerous players, i.e. companies, engaged in the free market economy, and all of these players also make autonomous decisions on what they want to produce and where to put a new factory and where to buy steel from, whether to develop a new electrically powered car. Their incentive is to produce products that consumers want and for which they are willing to pay a good price – all with the ultimate goal of the producer to maximize its profit.
Numerous players engaged in price competition. Now Of course our car producer has many sources from which to buy steel – a number of steel producers are competing with their offers, in the case of steel where quality has been standardized mostly on the basis of price. And the car producer is of course also itself subject to competition on price when he wants to sell its cars to the consumer.
Additional parameters of competition – quality and innovation. However, competition takes places not only on the basis of price, but also on the basis of quality and innovation. The company of that produces better quality cars, can command a higher price. And there are extremely strong incentives on companies to innovate, because successful innovation will give them a – temporary or permanent – advantage over their competitors. The most striking example for innovation is of course the IT-industry, which in its present form did not exist 30 years ago and which has produced numerous innovations over the past 30 years.
The legal tool – contracts. The legal tool by which the market functions and by which the exchange of goods and money takes place is the contract. And here again the foundation of our entire contract law is that contracts are entered intro freely by autonomous individuals – what in German is called “Privatautonomie” (private autonomy). Consumer law seeks to ensure that inequality of bargaining power and lack of commercial experience will not distort the consumers’ decision-making.
The invisible hand of competition. So we see that competition and autonomous decisions taken by all players – from the mining company that mines the iron to the car company that produces a wonderful car, to the final consumer that has an enormous choice – are central to the free market economy. As the economists ever since Adam Smith (2) have put it, competition acts like an invisible hand to achieve the best results for everyone, including at the end of the chain for the consumer. But these decisions, in order to have the effect of steering the economy, indeed our lives, must be made on the merits of the offerings and decisions must not be affected by deceit, inequality of barging power or corruption, all of which will mean that the invisible hand does not function properly.
2. Market Failure – The Way in Which Companies Can Distort Competition
We will now turn to the particular market failure that competition law is designed to address.
The strains of competition. The market failures that competition law seeks to prevent do not originate from the exchange between business and consumer or from the corrupt behaviour of individuals; rather, they originate from the businesses themselves. Why would companies want to limit competition and produce a market failure? The answer is simple: Competition produces wonderful results for society as a whole, but it is stressful for those engaged in competition. You do not know whether your company will prevail in the competitive market or whether it will go under. Therefore, companies, if left to their own devices and acting on the basis of self-interest, are likely to produce results that are dictated by their self-interest and not by free market competition – they will tend to try to limit competition in order to have a better life for themselves and for managers to reach greater rewards.
Three basic types of distortion of competition. There are three basic ways in which companies can distort competition to the detriment of the consumer and these three principal areas are reflected in the legal norms of all competition law systems, including the first competition law system, the antitrust laws of the United States. These three principal problem areas are addressed by Article 101 TFEU, Article 102 TFEU and the Merger Control Regulation of the European Union as well as – if I understand this correctly – by Articles 4, 5 and 7 of the Turkish Competition Law. I will deal with each of them in turn.
a) Collusion among competitors – Hardcore Cartels – Article 101 TFEU
Practices employed by hard core cartels. The simplest and at the same time most pernicious way in which companies can limit competition to the detriment of the consumer is by agreeing with their competitors on prices, allocating geographic markets, allocating customers or by rigging bids. In this way, companies can operate to frustrate the competitive process and as a result, they will pocket more money for themselves – and their shareholders – that otherwise would have belonged to the consumers.
Example: Car glass cartel. A particularly egregious example – if you go back to the automobile industry that we used an example before – is the car glass cartel sanctioned by the European Commission in late 2008 to the total sum of more than € 1.3 billion. (3) The producers of car glass sold in the EU had eliminated competition among themselves by allocating contracts for the supply of car glass to all major car manufacturers in the EU, through coordination of pricing policies and supply strategies aimed at maintaining an overall stability of the parties’ position on the market for car glass.
Criminal offences in some jurisdictions. Because they are such a clear violation of the principle of competition without any countervailing benefit for customers and consumers and because of their devastating effect on competition, hardcore cartels are a criminal offence in a number of countries such as in the United States, Canada and more recently in the United Kingdom. In other jurisdictions they are subject to heavy fines, This is the case in the EU where hard core cartels violate Article 101 TFEU and are subject to fines pursuant to Article 23 para II of Regulation 1/2003:
b) Abuse of Dominant Position –Article 102 TFEU
The position of dominance. When companies are in a dominant position on a particular market, they enjoy a position that is fundamentally different from what companies usually are faced with: A company is considered dominant if its behaviour on the market is not sufficiently constrained by competitors and customers. This will usually be the case where it has a market share of 50 % or more and/or has very few and very weak competitors. The extreme case of dominance is a monopoly, where a company has no competitors whatsoever on its market.
Damage to competition. A dominant company can exploit this dominant position to the detriment of consumers by charging higher prices than would be charged in a competitive environment. In general, it will not be subject to the constraints of competition in the same way as are non-dominant companies; the dominant company will have less incentive to innovate – all of which can damage the consumer. The dominant company can also engage in practices that will harm competitors and thus further solidify and entrench their dominant position.
Example: Intel. A recent and prominent example in the EU is the conduct of Intel, which is dominant in the market for central processing units (CPUs) in personal computers using the x86 architecture. In order to damage and perhaps even drive out of business its only remaining competitor for processors, AMD, Intel, according to the Commission, engaged in anticompetitive rebates that created incentives for the manufacturers of computers to concentrate their purchases of CPUs on Intel; according to the Commission, the company also engaged in so-called naked restrictions, such as making payments to customers for their promise to delay the introduction of computers using CPUs manufactured by AMD. The Commission fined Intel more than € 1 billion. (4)
c) Mergers – EU Merger Control Regulation
Economic effects of mergers. Mergers between undertakings are generally considered to be economically beneficial because they may create economies of scale and/or scope for the merged entity, thus allowing the merged entity to operate more efficiently by producing a higher output of identical or similar products at a lower cost per unit. At the same time, mergers may also seriously harm competition because they will often reduce the number of players active in a particular market and thus may create market power or – worse – a dominant player on the market.
Ex ante control of mergers. Even though in general mergers are therefore considered a good thing for competition, mergers between companies are therefore subject to advance review by the competition authorities in most countries. Very few mergers are ultimately prohibited, but merger control is today an extremely important part of competition law and it protects the consumer by ensuring that competitive market structures will be preserved.
3. Remedies and sanctions
In the legal discussion remedies and sanctions are a subject that is often neglected. Most of the time the focus lies on the elements of legal norms (“Tatbestand”). Nevertheless remedies are an extremely important and interesting subject and I will conclude with a few remarks on remedies and sanctions in competition and consumer law.
a) Remedies and sanctions in general
The basic distinction between private and public enforcement. The principal dividing line as far as enforcement of legal norms is concerned is, of course, between private and public enforcement.
Public enforcement. One can draw further distinctions within public enforcement between administrative enforcement without fines (except for violation of administrative decrees) and more severe sanctions such as non-criminal fines which in the EU can go as high as 10% of annual group turnover. Mere administrative enforcement without fines will usually be appropriate where it is difficult for the company of individual to judge whether a certain behaviour violates a legal norm or not. On the side of severe sanctions, criminal fines against companies and criminal sanctions against individuals such as incarceration are part of the arsenal that is available to public enforcement authorities in the United States, Canada and the United Kingdom for blatant violations of the competition laws.
Private law remedies. On the private side one can distinguish between actions to enjoin conduct that violates the respective substantive law, actions to force the defendant to do something, e.g. compulsory licensing, and finally actions for damages (monetary damages).
General considerations when choosing remedies and sanctions. The legislator will normally prefer private enforcement where state interests are not particularly at stake (except for the residual interest of the state to have citizens respecting its laws). Where observance of a particular norm is considered to be of special importance for the state, public enforcement will usually be the remedy of choice. In addition, one can usually deduce from the kind of sanctions that a legislator chooses how important the legislator considers the particular norm to be. Clearly the killing of a human being by another human being, if done willfully and not merely out of negligence, is considered to be the most important norm in almost all legal systems and still carries the death penalty in some jurisdictions.
b) Remedies and sanctions for violations of EU competition Law
Competition law uses almost all remedies that are available, both public and private.
Administrative cease-and-desist orders. In the EU there are administrative decisions available to force a company to cease and desist from a conduct which infringes Articles 101/102 TFEU. (5) This remedy is particularly important where it is not immediately clear, whether a certain conduct violates the norm or not, as is often the case with respect to Article 102 TFEU.
Fines. More important and of much greater effect are the quasi-criminal fines that are imposed by the European Commission and by national competition authorities for violations of EU competition law. These fines can be very high. (6) This makes it important for companies to carefully review their conduct for compliance with European competition law because anything else is likely to subject the company to heavy fines.
Private law sanctions. In addition, the European competition law uses a number of private sanctions in order to secure observance of the law. Not to be overlooked is the private law sanction of Article 101 paragraph 2 TFEU, according to which agreements that violate Article 101 TFEU are null and void and unenforceable. This norm likewise has the effect of requiring company to carefully review the legality of their conduct under Article 101 TFEU, at least where agreements and the enforceability of agreements are at stake. Companies harmed by the anticompetitive conduct of another company can also obtain cease-and-desist judgments from the civil courts as well as judgments ordering the defendant to supply the claimant with a certain product or to license a product against a reasonable fee. Of increasing importance is finally the remedy of damages for violations of articles 101 and 102 which has been created – in the absence of a civil law at EU level – by the European Court of Justice. (7)
c) Remedies for violations of consumer law
Sanctions much less severe. Compared to the remedies and sanctions that are triggered by infringements of competition law, the remedies and sanctions for non-compliance with consumer law are far less severe. Administrative sanctions or fines are not required by the EU directives and in a number of countries virtually unknown.
Private law remedies. The general trend has been to rely on civil litigation, i.e. private law enforcement in order to ensure compliance. The remedy of nullity is frequently used, with nullity either limited to the offensive clause or alternatively extending to the entire contract. A particularly important remedy is the consumer’s right to rescind a contract within a certain period following its conclusion, without any particular reason. Damages for violations of consumer law are almost nonexistent except in such areas – if one wants to count them as part of consumer law – as product liability, where nullity of contract is of course not an appropriate remedy.
Actions by representative bodies. A major remedy in consumer law is a procedural one: Representative bodies charged with protecting the consumer and enforcing consumer laws are empowered to start proceedings against an undertaking that infringes consumer law with the aim of having certain clauses declared invalid and/or infringing behaviour stopped (cease-and-desist). These remedies, however, as far as can be seen, have not proven to be very effective.
Competition law ensures that the exchanges between businesses and consumers take place in a competitive environment so that consumers may get the best possible product offering at the best possible price. Consumer law ensures that the contractual dealings between businesses and the final consumer are fair both in substantial outcome and in procedure and are not distorted by unequal bargaining power or asymmetrical levels of information and sophistication. Remedies for violations of competition law are much more severe than those for violations of consumer law, reflecting the legislator’s view that competition law is a particularly important part of the legal order.
*Bu metin, 24-25 Kasım 2011 tarihinde gerçekleştirilen Uluslararası Tüketici Hukuku Sempozyumu‘nun 2 . Gün 2. Oturumunda Trier Üniversitesi’nden Prof. Dr. Andreas Weitbrecht tarafından sunulmuştur.
(1) I will use the terms “consumer law” and “consumer protection law” synonymously.
(2) An Inquiry into the Nature and Causes of the Wealth of Nations, 5th ed. London, 1789.
(3) Decision of 12 November 2008, Case COMP/39.125 – car glass -, summary publication in OJ C 173 of 25 July 2009, pp 13-17. The French company Saint Gobain was fines by far the highest amount, € 896 million.
(4) Decision of 13 May 2009, Case COMP/C-3/37.990 – Intel -, summary publication in OJ C 227 of 22 September 2009, pages 13-17.
(5) Article 7 of Regulation 1/2003.
(6) See above fines against Saint Gobain (note 3) and Intel (note 4).
(7) See the judgments Courage/Crehan and Manfredi, 2001 ECR I-6313 and 2006 ECR I-6619 respectively. For a recent overview of the German law on this subject see Weitbrecht, Neue Juristische Wochenschrift 2012, 881.