The Destiny of Essential Facilities in India

The Competition Commission of India (CCI) in the last three years has pro-actively adjudicated a large number of matters and has made the industry sit up and take notice of the huge penalties it has imposed.[1] The role of CCI in the days to come may have an impact not only on the competitors who are the subject of an antitrust scrutiny but may well pave the way for changes in the manner of operations of enterprises, the structures of different ‘markets’ and inevitably influence the market forces in our economy. Time will determine the role it will play. It will be interesting to see how the CCI will address several key policy and regulatory issues that it will face in the days to come. There are numerous issues that it will have to face but a leader in the pack amongst these issues would be its treatment of the vexed and often litigious issue of ‘essential facilities’.[2] This issue goes right down to the theoretical underpinnings of the free market system as it will decisively pave the way for not only antitrust jurisprudence in our country but also shape the market system.

International Application of the Doctrine

The genesis of this doctrine is normally traced back to the Terminal Railroad Association case[3], a US Supreme Court decision rendered a century ago in 1912.[4] The Terminal Railroad Association case concerned a fact situation wherein a terminal railroad association obtained control of every means of railroad access to St. Louis and the Court had to consider whether such a system by which every terminal railroad facility was controlled by the association and thereby controlled the movement of traffic into and out of St Louis would be a combination in restraint of trade.[5] In addressing this question, the Court found that the geographical and topographical situation was such that it was impossible for any railroad to pass through or even enter St. Louis without using the facilities controlled by the terminal company.[6] Furthermore, it was observed by the Court that the facilities could only be used by the members of the Association and non-members could only be admitted upon a unanimous consent of all the existing members.[7] It would also be relevant to note that the Supreme Court had identified that the terminal companies were of the greatest public utility[8] and in the extraordinary physical and topographical conditions that existed unless the terminal company was to operate as an impartial agent of all, interstate trade and commerce would be significantly impeded.[9] Finally, the Court found that the practices of terminal company were operating to the disadvantage of commerce that had to cross the river at St. Louis.[10] In this background the Court observed that it would be best to provide non-discriminatory access to the terminal facilities to non-members as well.[11] An analysis of the judgment would reveal that the Supreme Court never specifically identified the ‘essential facilities doctrine’ but however, felt that in the extraordinary physical and topographical conditions as it was practically impossible to access St Louis and as the facilities were of greatest public utility to ensure freedom of commerce it was necessary that the non-members should be allowed to the combined ownership of the facilities on just and reasonable terms. It should also be borne in mind that this was the situation at the beginning of the last century and the economic and social conditions were vastly different at that particular point of time.

The next important case on the aspect of essential facilities is the Associated Press case[12]. The case revolved around the admission policy in the Associated Press (AP), an organisation consisting of the membership of 1200 newspapers. The By Laws of the Associated Press mandated that news shall not be sold to non-AP members. Therefore, to have access to the news it was necessary to become members and restrictions (in the form of additional conditions) were imposed on the competitors of the members of the Association from gaining admission to AP.[13] The majority opinion rendered by Justice Black opined that the action was contrary to the provisions of competition and the effect of the action was to limit the opportunity of newspapers to enter new cities and the effect was to destruct competition and block new entrants into the market.[14] The Supreme Court held that by the combinations the members had surrendered completely to the association and the restraint was designed in the interest of preventing competition.[15] However, Justice Frankfurter who joined in the majority (who provided indications of the essential facilities doctrine) observed that the AP unlike other commercial entities that worked for profit had a relation to public interest in dissemination of information and further turned down the objection that this would turn AP into a public utility (as opposed to a private club) because such a categorization should not come in the way of access to news and information.[16]

Finally, in the year 2004, the US Supreme Court in the case of Verizon Communications Inc v. Law Offices of Curtis v Trinko LLP[17] held that the Supreme Court has never recognised the essential facilities doctrine.[18] The challenge under the Trinko Judgment was the denial to share network mandated under the Telecommunications Act, 1996 to competitors. Under the Telecommunications Act of 1996 local exchange carriers were mandated to provide access to their networks to competitors or new entrants and it was argued that the Verizon was providing access to its network on a discriminatory manner to the detriment of the competitors and was therefore acting contrary to the provisions of the Sherman Act. In this context the Court ruled that for an attempt to monopolise it is necessary to show in addition to the possession of monopoly power in the relevant market[19], “the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.[20] The Court further observed that directing / compelling firms to share their infrastructure would not be in line with the underlying purpose of competition law as it may lessen the incentive for enterprises to invest in economically beneficial facilities. Furthermore, it will also require the Court to act as the central planners for the industry[21] and could facilitate collusion among the parties[22] and thereby impeding the objective of the Sherman Act. The Court also noted that because of these uncertain virtues, very cautiously and only under very limited exceptional circumstances will sharing be mandated. The Court noted that the case did not fall within these exceptions.[23] In this context the Court noted that even under the essential facilities doctrine (which the Supreme Court did not feel the need to recognise) the challenge will not succeed. The Court held that the in-dispensable requirement for invoking the doctrine is the unavailability of access to the “essential facilities” and where access exists, the doctrine serves no purpose. Specifically in this case the Court held that since the Telecommunications Act of 1996 provides for sharing, there was access to facility. Therefore, in effect the Supreme Court did not even feel the need to recognise the doctrine and provided a very narrow compass for its application even in the event if it were to apply. The position of essential facilities in the European Community jurisprudence is different and is discussed below.

The concept of mandating access to facilities in Europe originated from leveraging and the special status assigned to dominant undertakings under Article 82. The first case where the reference to essential facility was used was the case of Sealink/B&I Holyhead: Interim Measures.[24] In this case Sealink owned as well as ran ferries in the Holyhead Port. B&I was also running ferries from this port and challenged the change in the time table proposed by Sealink as it would adversely disrupt the operations of B&I. In this regard, the Commission adopted interim measure and observed that Article 82[25] would be infringed if a dominant undertaking which both owns and uses an essential facility ( defined as a facility without access to which competitors cannot provide services to their customers) and refuses competitors access to that facility or grants access to competitors only on terms less favourable than it gives its own services.[26] The Commission observed that the dominant undertaking should not leverage its dominant position in one market to protect its position in another market (as in the present case operating harbours and running ferries) and where the competitor is already subject to certain level of disruption by the dominant undertaking there is a duty on the dominant undertaking not to take any action which will result in further disruption.[27] The Commission observed finally that a competitive disadvantage could not be imposed by the dominant undertaking by altering its own schedule.

Next is the landmark judgment of Magill[28] wherein the TV broadcasters obtained an injunction against Magill TV Guide Ltd from publishing comprehensive TV weekly guides. The actions of the TV broadcasters in refusing to grant licenses for weekly TV listings was successfully challenged by Magill as an abuse of a dominant position. The European Court of Justice held that the TV broadcasters were the only sources of the basic information (copyrighted TV guide) which was indispensable for the emergence of the new product (viz. weekly TV Guide) for which there was consumer demand. Furthermore, the Court found that there was no substitute for the said product and there was no justification for the refusal by the TV broadcasters and by doing so they were reserving the entire secondary market of weekly TV guides to themselves. Therefore, in directing the action of the broadcasters to be abusive the Court observed specifically that the information was indispensible and the only source and which also had significant consumer demand and thereby provided a parameter for the ‘essentiality’ of the essential facilities. Furthermore, it will be significant to note that the Court relied upon the earlier cases on refusal to deal relating to downstream markets[29] to hold that the competition in the downstream market for weekly TV Guides was reserved to themselves. Therefore, in this way they also identified the circumstance under which the doctrine had to be applied.

The next important judgment was the Oscar Bronner case[30] decided once again by the ECJ. The challenge in this case pertains to the denial by Mediaprint to allow Oscar Bronner to be part of its home delivery system for distribution of newspapers. It was argued that access to the nationwide system for distribution was essential for sale of its newspaper.[31] The Court observed that the refusal to supply raw materials or services, which were indispensible to carry on the rival’s business, to an undertaking competing with the dominant undertaking was previously held abusive by the ECJ in the context where the conduct was likely to eliminate all competition on that part of the undertaking. Further referring to the Magill Case, the Court observed that even if that test were to be applied to the case at hand other modes for distributing newspaper even though less advantageous existed and was used by other newspaper publishers[32] and there were no technical, legal or economic obstacle for the newspaper publishers to develop their own nationwide home delivery scheme for distributing newspapers.[33] Finally the Court held that to demonstrate that developing a potential alternative distribution system was not realistic or not economically viable and therefore the system was indispensible, it was necessary to demonstrate that it is not economically viable to create a second home-delivery scheme for the distribution of daily newspapers with a circulation comparable to that of the daily newspapers distributed by the existing scheme[34] as opposed to saying that it was not economically viable as a result of the small circulation of the newspapers to be circulated.[35] In this background, it was held that the refusal by the dominant undertaking to access to its distribution / home delivery system was not an abuse of a dominant position.

Finally, we shall discuss the Court of First Instance (CFI) Judgment in the Microsoft case[36], wherein the case related to the non-disclosure by Microsoft of interoperable information. While addressing the indispensability requirement or the degree of interoperability that was required the Court held that the standard that has to be used is with reference to what is necessary to remain viably on the market.[37] The CFI justified this on the interpretation that Article 82 deals with conduct that hinder the maintenance of effective competition on the market and that furthermore the jurisprudence of ECJ imposed a special responsibility on the dominant undertakings not to impair genuine undistorted competition in the market.[38] The CFI then found that the finding of the Commission that the ‘interoperability with the client PC operating system is of significant competitive importance in the market for work group server operating systems’ was correct and Microsoft could not prove otherwise.[39] Microsoft also argued that the test applied by the Commission was incorrect[40] in the light of the earlier cases pertaining to abuse of dominance where the refusal should have been likely to eliminate all competition or in other words there is a high probability that the conduct will have such a result.[41] The CFI held that this was only a matter of terminology[42] and that the objective of Article 82 would not be served if the Commission were to wait till there is no competition in the market. Furthermore, the CFI held that the standard that needs to be demonstrated is the refusal is likely to eliminate ‘all effective competition’ on the market.[43] Finally the Court observed that the practice of not granting interoperable information would amount to an abuse of a dominant position. It will be relevant to observe that the Microsoft judgment has to be viewed in the light of the specific market situation it dealt with (viz. software and high technology market which was characterised by network effects) and what would be the effect of the actions of Microsoft in future on such a market where it is necessary to have interoperable information.

Applicability of the Doctrine in India

The political, economic and social milieu of India has been very distinct from the western countries and this remains a very important parameter when a doctrine that has its genesis in the western world has to be applied in our context. Since independence in 1947 till the early 1990s India remained under the License Raj and the industries were regulated and tied down by various government policies. The industries could develop only in accordance with the dictates of the Government and their development and regulation was significantly kept under control by New Delhi. Furthermore, the Government also gave special impetus to Public Sector Enterprises to grow and serve the dual role of free enterprise and welfare state. During this time the Government through the Public Sector Enterprises has developed infrastructure and various facilities. Post the liberalisation era, the industries were de-regulated and private participation and investment has vastly increased. However, a natural distortion existed in the level playing field as the Public Sector Enterprises had access to their own resources and which were not immediately available to the new private entrants. It will also be worthwhile to mention that since the early days of privatisation various private players have also made significant investments into various facilities. At this juncture, various entities operating or looking to enter into a market may want to have access to the various facilities and infrastructures developed by PSUs and various private enterprises who had invested in infrastructure. The question would be whether the essential facilities doctrine should be applicable in India? This is an interesting question that CCI will face.

The issues will range from the applicability of the doctrine itself in the first case. Section 4 of the Competition Act provides that limiting markets, practices resulting in denial of market access and leverage to protect another market are specific instances of abuse of dominant position. Whether essential facilities will be covered under any of these categories will be at the forefront of the applicability of the doctrine in India. The US Supreme Court has already felt the need not to recognise the doctrine. The US SC in Verizon has also identified that there are uncertain virtues in forced sharing.[44] Therefore, the principle question would be whether the doctrine should actually be applied in India. Furthermore, the Courts in India have time and again cautioned from applying principles that have been developed outside India to be applied in the Indian context. Should a doctrine actually originating outside India be applied in India and that too which has not been recognised in US (seen as a leader in antitrust jurisprudence). Furthermore, regard should be had to the fact that the courts in Europe have applied the essential facilities doctrine in the background of the Special Responsibility of the Dominant Undertaking (a concept that is alien to Indian jurisprudence) and in the light of teleological interpretation adopted to protect the common market in Europe and the overall purpose of integration of Europe.

If at all the doctrine should be applied under what circumstances should the doctrine be applied will be the next question – should the infrastructure be a public utility or be of great public importance for the development of commerce and trade in India. Furthermore, the more important question would be on the determination of 'essentiality'. Should the facility be indispensable (impracticable to replicate as observed in Terminal Railroad or facility without which services cannot be provided as observed in Sealink or indispensable to provide a product as mentioned in the Magill case) or should it be viable for competition (as observed by CFI in the Microsoft judgment). This would be a key factor and it is necessary before arriving at such a decision to balance the interest of the innovators and the investors of infrastructure else free riders may take undue advantage. Last but not the least would be to check after determining ‘essentiality’ when can the doctrine be applied – is it in a situation when the conduct is likely to eliminate all competition (Magill or Oscar Bronner) or it is likely to eliminate all effective competition in the market (as in Microsoft Judgment). In addition, crucial to the determination of this issue would be the determination of the relevant market and whether the features of essentiality and applicability of other conditions are applicable in that particular relevant market. A key ingredient for determining the abuse of dominant position under Section 4 is the relevant market. Economic tools and data will have to be clearly adduced to suggest in determining the relevant market and further it has to be used in determining the viability or essentiality of a facility.

It will also not be out of place to mention that the Indian legislators / policy makers too have, whenever felt necessary mandated access to information / resources like in the case of the interconnection agreements for telecom and open access in the case of the electricity distribution. Therefore, the CCI in this circumstance when it seeks to apply the essential facilities doctrine would not only be donning the role of adjudging the illegal practices on the market but may also have to wear the cap of a policy maker. It will be interesting to see how the CCI applies this doctrine and instead of applying the doctrine in the form developed in the western jurisdictions, the Indian economic, social and market conditions should be taken into consideration while adjudging upon the access to ‘essential facilities’ for this is where the destiny of the essential infrastructure in India lies.

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[1] Notably among these being the DLF case and the recent cement cartelisation case

[2] In an ongoing CCI investigation the issue of access to essential facilities has already been raised

[3] 224 US 383

[4] Although the case by itself does not refer to the essential facilities doctrine

[5] Supra note 3 at Pg 394

[6] Id at Pg 397

[7] Id at 399-400

[8] Id at Pg 402

[9] Id at Pg 405; In this regard, the Supreme Court relied upon the evidence of an expert witness who had stated that the unification of the terminal systems should be the agent of every company and that it would be the greatest public utility and of immeasurable advantage to commerce, state and interstate Id at Pg 405-406

[10] Ibid

[11] Id at Pg 411

[12] 326 US 1

[13] Id at Pg 10-11

[14] Id at Pg 13-14

[15] Id at 19

[16] Id at Pg 29

[17] 540 US 398

[18] Id at Pg 410 and 411 – The Court observed they have never recognised such a doctrine (as in the essential facilities doctrine) but also observed that they do not feel the need to recognise it or to repudiate it in the circumstances of the case at hand.

[19] Comparable to the dominant position under Section 4 of the Competition Act, 2002

[20] Id at Pg 407

[21] Court observed that in such a role the Court will have to identify the proper price, quantity, and other terms of dealing-a role for which they are ill suited

[22] Id at Pg 407 – 408. Furthermore, the Court also observed that the virtues of forced sharing are uncertain and it is difficult to identify and remedy the anticompetitive

[23] Id at Pg 409-410

[24] [1992] 5 CMLR 255

[25] Provision similar to Section 4 relating to abuse of dominant position

[26] Para 41,

[27] Id at Para 41 and 42

[28] Cases C-241/-1/91, P, RTE & ITP v Commission [1995] 4 CMLR 718

[29] Joined Cases 6/73 and 7/73 Commercial Solvents v Commission [1974] ECR 223, Para 25

[30] Case C-7/97, Oscar Bronner GmbH & Co KG v Mediaprint [1999] 4 CMLR 112

[31] Id at Para 37

[32] Id at Para 43

[33] Id at Para 44

[34] Id at Para 46

[35] Id at Para 45

[36] Case T-201/04, Microsoft v Commission [2007] ECR II-2601

[37] Id at Para 229

[38] Ibid

[39] Id at Para 381

[40] The Commission used the test whether the refusal gave risk of elimination of competition

[41] Id at Para 560

[42] Id at Para 561

[43] Id at Para 563

[44] Noted Antitrust Commentator Philip Areeda has commented in his famous article that no case provides a consistent rationale for essential facilities or explores the social costs and benefit of requiring a creator to share with a rival, See his article Essential Facilities: An Epithet in need of limiting Principles, 58 Antitrust LJ 841