III. The Regulatory Framework: US and EU Competition Law

III. The Regulatory Framework: US and EU Competition Law

equally important factors in their respective telecommunications market, they have fundamental differences that alter their effectiveness. The procedural and substantive differences between the two laws are attributed to the significant difference in basic philosophies.

Although EU competition law is generally “patterned on” US antitrust law, there is one fundamental difference.³⁸ The EU wants to eliminate the national barriers which have resulted in state owned monopolies and have created competition laws that will help lead to the formation of a single market.³⁹ This is not an issue the US must deal with since national barriers ceased to exist in the US following the formation of the republic and a single American market. From this basic philosophic difference comes the two varying sets of laws. US antitrust law is based on an interest in protecting the consumer while promoting optimal output.⁴⁰ EU competition law, on the other hand, focuses on open markets and business opportunities, with its main concerns being abuse of dominance and relationships between companies.⁴¹ It promotes competition by controlling abuse, promoting fairness in the marketplace and fostering growth of small and mid-sized firms.⁴² In short, the EU envisions itself as the “anchor of stability from the ship of a friendly neighbor,” because the EU believes it must play a large role in the fight for competition or the Member States will continue to remain divided. Its goal is to do whatever it takes to “prevent anticompetitive conduct from hindering integration.”⁴³ In marked contrast, US

antitrust law encourages less government involvement and is therefore more flexible than its EU counterpart.⁴⁴

From their basic philosophies, US and EU competition law were developed. In the US, two major statutes control a vast assortment of business transactions and practices.⁴⁵ Together, they establish that competition is the national economic policy and that competition-spurred efficiency maximizes social welfare. By bidding down the price to marginal cost, resources will achieve their most productive use without passing on hefty prices to the consumers. Therefore, US antitrust law focuses on the two factors upon which competition takes place, price and quality. The Sherman and Clayton Acts promote this philosophy. Section 1 of the Sherman Act states that “every contract, combination . . . or conspiracy in restraint of trade” is per se illegal.⁴⁶ Therefore, section 1 prevents companies from joining together to harm competition.⁴⁷ Section 2, in turn, prohibits a single firm from causing the same harm to competition by declaring monopolization and its attempt as per se illegal.⁴⁸

Finally, section 7 of the Clayton Act regulates how a company acquires or merges other businesses.⁴⁹ Furthermore, it has the power to control how firms form joint ventures.⁵⁰ Section 7 prohibits a company from acquiring the assets of another company, or merging with another company, if the effect of such actions will be to lessen competition or create a monopoly.⁵¹ To assist the courts in determining whether business activities violate antitrust laws, two forms of analysis are provided. The first is a simple per se test. Certain actions are considered per se offenses of antitrust laws and their very existence means the laws have been violated.⁵² The second, and more complicated test, is the rule of reason analysis. Under this analysis, courts must use all the relevant factors of the transaction under consideration to determine whether the anticompetitive results of the transaction outweigh any procompetitive results.⁵³ This particular analysis requires considerable time and money, thereby making US antitrust law rather complex and, at times, inconsistent.⁵⁴

Both the Sherman and Clayton Acts are very broad, thereby giving the parties involved and the courts great power and discretion.⁵⁵ The Acts grant power to both public and private parties by providing them with a variety of actions they may file suit under, including tort action, equity action and criminal action.⁵⁶ Likewise, the courts can cite among their powers the wide range of sanctions they may levy on a company. In the US, antitrust remedies take a remedial approach, allowing for civil, criminal and regulatory penalties.⁵⁷

The difference in the power and deference granted to all those involved in competition issues is just one of the many substantive and procedural differences between US and EU competition law. The number and variety of remedies and actions afforded the courts in the EU is substantially less than in the US.⁵⁸ Furthermore, US antitrust law is not as centralized as in the EU. US antitrust law consists of many statutes which are to be used by a number of enforcement agencies.⁵⁹ EU competition law, however, is addressed in three Treaty articles and is enforced primarily by the Commission, which is given, through a number of regulations, a big role in the “formulation and execution of competition laws” and the regulation of large mergers and acquisitions in Europe that affect the Common Market.⁶⁰

The basic principles of EU competition law are established in Articles 81, 82 and 86 of the Treaty of Rome.⁶¹ Article 81 prohibits companies from entering into agreements and practices that are anticompetitive in nature.⁶² This article focuses in particular on practices such as price fixing, and limiting or controlling markets.⁶³ Article 81(3) also provides an exemption to its prohibition for agreements and practices that are considered economically progressive or beneficial to consumers.⁶⁴ Article 82 prevents companies from abusing any dominant positions they may have in a market.⁶⁵ It does so by prohibiting any conduct by a company with a dominant position that affects trade between Member States or is incompatible with the Common Market.⁶⁶ Together, Articles 81 and 82 have a very important role in EU competition law. They jointly establish the EU’s competition rules and how they apply to undertakings.⁶⁷ They also establish where they can be applied. They are applicable to non-Community enterprises, to arrangements that are “wholly or partially carried out outside the territorial boundaries of the Common Market” and have an extraterritorial reach.⁶⁸

Finally, Article 86 prohibits Member States from specifically favoring undertakings that act in violation of EU competition rules.⁶⁹ Like Article 82, Article 86 has an exemption for undertakings that can show that the EU competition laws affect their ability to perform a particular task that they are required to provide.⁷⁰ Article 86 also serves another important purpose. It provides the Commission with the power “to legislate directives to ensure the application of the [A]rticle.”⁷¹ It is with this power that the Commission passes directives regarding the telecommunications market and others where competition is in question. The Merger Regulation, adopted in 1990, adds another dimension to the EU competition law and in some ways is “of greater practical significance” than Articles 81 and 82.⁷² It operates as a preventative measure to keep markets unconcentrated by requiring parties to alert the Commission before any transactions which meet certain criteria.⁷³ If the Commission so chooses, it can stop these transactions from taking place if the Commission strongly believes it can have anticompetitive effects such as creating or strengthening a dominant position.⁷⁴ However, Articles 81 and 82 retain particular power because they “continue to govern concentrations in the public sector” which include the state owned monopolies in the telecommunications sector.⁷⁵

The test used to analyze transactions and practices under EU competition law is somewhat similar to its American counterpart. The inclusion of the exemptions to Articles 81 and 86 requires EU competition law to be analyzed using a two-step test.⁷⁶ Under this analysis, the first step is to determine whether the agreement violates Article 81 or Article 86 by restricting or distorting competition. If it does, the second part of the test then determines whether the agreement nonetheless produces the appropriate benefits that qualify it for the particular exemption.⁷⁷ However, the very existence of exemptions goes against the EU’s goal of integration. So long as certain undertakings can claim being exempt from competition law, the EU will not achieve complete integration. In theory, the Articles are seen as “an important tool used to advance the economic and social goals set out in the EEC Treaty.”⁷⁸ Whether it would effectively address the problem with competition in the telecommunications market remained to be seen. As in the US, the Commission would combine case law and regulatory decisions to inject competition in the market. As in the US, it was a major undertaking.

To introduce competition into the telecommunications sector, the Commission would have to rely on the power it had to issue directives under Article 86. First, it was necessary to deconstruct the language of Article 86 to determine whether the state monopolies were exempt from any Commission action against it. Article 86(1) states that “in the case of public undertakings and undertakings to which Member States grant special or exclusive rights, Member States shall neither enact nor maintain in force any measure contrary to the rules contained in this Treaty.”⁷⁹ Although the Treaty does not define the term “public undertaking,” it is clear by the use of the word public that it refers to undertakings owned by the State. The Commission made clear that it defined “public undertakings” as an undertaking under the control of or dominantly influenced by public authorities.⁸⁰ Furthermore, it said that such influence is presumed when public authorities directly or indirectly hold the major part of the undertakings capital, control the majority of votes, or has the power to appoint more than half of the members of the undertakings supervisory and administrative body.⁸¹

There is no question that the state owned

telecommunication companies fall under the definition of public undertakings. The point was settled in the key British Telecom⁸² case which held that telecommunication organizations fall under EC competition rules because they are “economic operators with a business activity.”⁸³ In this particular case, a private British message forwarding company found itself unable to transmit telexes because of restrictions placed by the state monopoly, British Telecom.⁸⁴ Since British Telecom imposed restrictions pursuant to British legislation, the private message forwarding company lodged a complaint with the Commission against the British telecommunications authority.⁸⁵ When the Commission decided that said restrictions were an abuse of a dominant position in violation of Article 82, the Italian government brought an action to the European Court of Justice (“Court”) challenging the Commission’s decision.⁸⁶

This case marked the beginning of major changes in the EU’s handling of competition matters. By declaring that the Treaty’s competition rules applied to the telecommunications market, including the state owned monopolies, the EU knew it had the power with which to enact its ambitious program to inject competition into its telecommunications sector. The Commission viewed Article 86(1) as a way to indicate to state owned monopolies that the dominant position they hold in a market is unacceptable if it is contrary to Treaty rules, even though their position was given to them as a matter of right. The Commission could then use Article 82 to show the

actual violation of abuse of a dominant position if a state owned monopoly refused to allow other companies to compete with them. This would constitute an infringement of Articles 82 and 86(1) and the Commission would be free to go after the state owned monopoly in question. In the case of telecommunications, any number of issues could give rise to Article 82 and Article 86(1) concerns. As court cases later showed, this was indeed the case.

Article 86(2) allows for derogation from Treaty rules regarding undertakings such as the telecommunication monopolies if they are able to show that these rules obstruct their performance of the particular services they are assigned to provide. Generally, undertakings have been granted deference when claims have been made regarding violations of competition laws.⁸⁷ The Court briefly addressed Article 86(2) in the British Telecom case, holding that British Telecom could not use the derogation claim because the service in question (telex forwarding) could not be considered part of their economic interest.”⁸⁸ However, another case raised the issue of whether Article 86(2) derogation applied to monopolies at al. In the RTT⁸⁹ case, the Belgian telephone company had a monopoly over establishing and operating the public telecommunications network, including authorizing the equipment to be installed and used.⁹⁰ As a result, RTT controlled which companies could provide and connect their equipment to the network.⁹¹ The Court held that the RTT monopoly in general provided a service of general economic interest and therefore fell under Article 86(2).⁹² However, their attempt to extend their power to telephone equipment violated the EU competition laws because the Court did not consider RTT’s dealings with telephone equipment part of their service of general economic interest.⁹³ As a result of the Court’s decision, Article 86 is interpreted to prohibit any extension to a monopoly without any justification.⁹⁴ Just because a monopoly’s main service falls under the Article 86(2) exemption does not mean all of its dealings are protected as well.

Article 86(3) is just as important as the other two paragraphs in the Article. It grants the Commission a legal basis upon which they can adopt directives to enforce the

competition rules laid out in the Treaty.⁹⁵ The British Telecom case also addressed this particular section of the Article after the Italian government argued that the Member State, and not the Commission, had discretion when deciding which areas it would exempt from the EU competition laws under Article 86(2).⁹⁶ The Court disagreed, holding that Article 86(3) provided power to the Commission, and not the Member States, to determine whether state monopolies were violating the competition rules.⁹⁷ The British Telecom ruling empowered the Commission to begin a study of the European telecommunications market. This study was a more comprehensive version of a study done by the Commission following the AT&T divestiture. The 1984 Telecommunications Action Programme⁹⁸, in which the Commission detailed their “new liberal policy approach towards the telecommunications sector.⁹⁹ The follow up Green Paper¹⁰⁰ not only echoed the liberal sentiment of the earlier report but established a “comprehensive policy framework” upon which the EU could build.¹⁰¹ Adopted by the European Council (“Council”) in a resolution one year later, the Green Paper was the beginning of the Commission’s goal of liberalizing and harmonizing the telecommunications sector in Europe through application of competition rules.

The decision to liberalize and harmonize the telecommunications sector led to a number of Article 86(3) directives implementing these policies. Nearly every directive adopted by the Commission was met with some sort of legal resistance by Member States. In 1988, the Commission adopted a Directive¹⁰² on competition in the terminal equipment market.¹⁰³ The purpose of this Directive was to separate telecommunication services from telecommunication equipment. This was an issue in the US AT&T case and was also a critical aspect of the British Telecom case. Ten years later, France, supported by other Member States, challenged the Commission’s right to issue the Directive under Article 86(3) on the grounds that the Commission did not have the authority to issue the Directive.¹⁰⁴ The Court went farther than it did in the British Telecom case. Rather than just state whether the Commission had the right to issue directives in these particular circumstance, it held that in such cases, the interest of the Member States in using its monopolies as instruments of economic policy must be weighed against the EU policy of competition, as promoted by the Treaty.¹⁰⁵ In this case, the Court upheld the Commission’s authority.¹⁰⁶

Another significant directive was issued in 1990. The Services Directive required telecommunications services to become open to competition by January 1, 1998.¹⁰⁷ The one exception made was for basic voice telephone services but the Directive was amended to include that in 1993.¹⁰⁸ Other directives soon followed which served to widen the category of services required to open to competition, and in turn, narrowed the services that the Member States could protect from the requirement.¹⁰⁹ Collectively, the Directives marked the Commission’s confidence in their new liberalization and harmonization plan. However, it still remained to be seen whether competition could be achieved as a result of the Commission’s actions.

IV. The Big Three Alliances

The telecommunications market is one of the most rapidly changing sectors in the world. High-technology services such as telecommunications has developed quickly over the last ten years. The state owned monopolies found themselves not only challenging new private companies for basic telephone service, but also trying to get a foothold in the new services technology introduced. The opening of competition meant faster, better service and lower prices. It also meant declining profit margins for the state owned monopolies.¹¹⁰ As a result, state monopolies looked to form alliances in order to provide new services while maintaining their former markets.¹¹¹ With the large long-distance providers experiencing the same situation in the US, companies such as MCI, Sprint and AT&T (“The Big Three”) also sought to form new alliances in order to enter new markets.¹¹² It was logical for US and EU telecommunication companies to look to each other for the answer to their problems. Three main issues were raised by this. First was the question of what kinds of antitrust issues would be raised by any such alliance. Next, whether the Commission would approve this type of alliance despite such antitrust implications. And finally, the telecommunications market in both the US and EU could not help but wonder if this was the start of an entirely new telecommunications market, one with international, rather than state owned, monopolies.

The first international strategic alliance in the telecommunications field saw the joining of British Telecommunications (“BT”) with MCI in 1993. In this alliance, BT took twenty percent of MCI and became in effect its largest shareholder. They formed a separate joint-venture company to which each would contribute their international network facilities and outsourcing business.¹¹³ This alliance brought together the fourth and fifth largest telecommunications companies in the world in terms of traffic.¹¹⁴ The first step in the Commission’s analysis was to determine whether the individual companies, as well as the new joint-venture, qualified for the Article 81(3) exemption. It ruled that BT and MCI were potential competitors as well as joint-venturers and would be potential competitors to the newly formed joint-venture as well.¹¹⁵ As a result, the Commission granted the merger a negative authorization under the competition laws but did approve the joint-venture as exempt under Article 81(3) once the parent companies agreed to withdraw from certain markets and allow the joint-venture to provide the services.¹¹⁶

The Commission’s decision to grant BT and MCI Article 81(3) exemptions required a lot of consideration. First, the Commission refused to consider granting an exemption until the restrictions BT and MCI had placed on one another were removed from the agreement.¹¹⁷ In the original agreement, BT was made the exclusive provider of the joint-venture services in Europe. In addition, MCI was to be kept from entering sectors of the EU market that the joint-venture did not service.¹¹⁸ With those restrictions removed, the Commission felt that the arrangement would preserve the competition between the parent companies and between them and the joint-venture. With the restrictions removed, the Commission proceeded to determine any benefits the alliance would bring to the European market. The potential for lower costs, quicker and better services, a “seamless network of services,” along with the strengthening of the EU’s competitive edge in the market was enough for the Commission to approve of the alliance and grant it an Article 81(3) exemption.¹¹⁹

In the US, similar analysis was being done by the DOJ. The federal government was concerned about foreign market access being hampered by the merger and as a result the DOJ challenged BT’s twenty percent acquisition of MCI under Section 7 of the Clayton Act.¹²⁰ The DOJ alleged that MCI’s favorable position in the United Kingdom would destroy MCI’s competitor’s chances of offering similar services in that market.¹²¹ The alliance was approved in the US only after BT and MCI were ordered to disclose information about BT services, including prices and conditions.¹²² In addition, BT was not allowed to give MCI a competitive advantage by providing it with information about its competitors.¹²³

The approval of the BT-MCI alliance marked a turning point in the telecommunications market. It was clear that international alliances could be approved if it met certain conditions placed on it by US and EU competition rules despite the potential for monopolization due to its large size. The Commission seemed determined to allow these alliances to form in a way that would support, rather than hamper, their liberalization and harmonization plans.

The next alliance to form involved Sprint and several state owned monopolies. Deutsche Telecom (DT) and France Telecom formed a strategic alliance in 1994 named Atlas.¹²⁴ In a separate joint-venture, they intended to join with Sprint to form Phoenix in order to provide worldwide telecommunication services.¹²⁵ Both the US and EU expressed concerns over the alliances and conducted their own analyses of the situation. The Commission determined that it would grant an Article 82(3) exemption for both Atlas and Phoenix for many of the same reasons it granted exemption status to BT-MCI. Both the French and German governments agreed to insert legislation that would introduce competition into their national telecommunications markets by 1998.¹²⁶ This alleviated any concerns the Commission had about the state owned monopolies retaining and even increasing their dominant position following the mergers. In the US, the DOJ also approved of the alliances following the steps taken by the German and French governments to assure competition in their markets.¹²⁷ The FCC also developed a formula for determining whether an alliance of this sort would not hurt market access by foreign companies.¹²⁸ This indicated that alliances such as these would no doubt continue to occur and the US needed to be prepared to perform quick and accurate analyses of them.

The final alliance involving a Big Three company was between Unisource and AT&T. Like the BT-MCI alliance, this one intended to combine the existing services of each in order to provide “one stop shopping” for multinational companies by creating a new joint-venture called Uniworld.¹²⁹ Once again, the idea of a seamless network appealed to the Commission. Furthermore, because Unisource was already a venture between the state monopolies of Sweden, the Netherlands and Switzerland, there was a potential for a trans-European network which would provide better and cheaper services throughout Europe.¹³⁰ Finally, as in the BT-MCI alliance, the EU’s competitive edge would increase because competitors could access Unisource’s networks as allowed by the Directives issued earlier. Therefore, it granted an exemption under Article 85(3) but only for five years.¹³¹ Although it currently liked what it saw, the Commission wanted to retain control over the situation to prevent competition from weakening later. The Commission remained weary of ventures involving huge corporations and former state owned monopolies, since all had monopolistic traits prior to the alliance. However, the Commission was beginning to realize that smaller and medium-sized companies could really benefit from joining together to compete with larger firms.

With the Big Three international alliances approved and exempted, it is necessary to determine why they occurred and what kind of impact they have on the market and the Commission’s competition policy. The formation of such alliances was conceived when the Commission issued its Directives on the telecommunication markets because the Directives allowed the state-owned monopolies to maintain control over their infrastructure.¹³² This meant that the state owned monopolies retained the one thing that gave them an advantage over their competitors.¹³³ As a result, when the Big Three sought to merge with European providers, they naturally gravitated towards the companies with the infrastructure.¹³⁴ Since the Directives allowed Member States to maintain their stakes in the telecommunication companies following the end of the state owned monopolies, the Member States continued to be involved in the new alliances. The Directives even consented to Member States holding shares in the new private companies.¹³⁵ By allowing Member States to retain some power in the new telecommunications market, it is questionable whether the market could ever truly be liberalized and harmonized.

The formation of these alliances also raises a number of antitrust concerns. First, and most obvious, is the fact that more mergers means less competitors. Since the goal of the EU is to increase competition, the alliances seem to work against the very purpose of the Commission’s policy. With less competition come less sources of innovation and more chances of coordination between competitors to fix prices, limit outputs or not compete. Therefore, the question remains: why have the Big Three alliances been approved? The answer essentially is that the Commission has not fully approved the alliances. Since these alliances are new, the Commission intends to keep an eye on their development to ensure that their impact is positive and not negative. Furthermore, with the telecommunications market changing constantly, there is no way to tell today what the market will be like tomorrow. As a result, the Commission can only continue to watch the situation in the market and keep an open mind with regard to EU competition rules. The EU will be best served if the Commission continues to change right along with the telecommunications market.