Recent developments on vexatious litigation and misuse of regulatory procedures under EU competition law

There are some forms of abuse of dominant position which raise significant issues in terms of compliance with the principle of legal certainty. Among such behaviours we can surely include conducts like “vexatious litigation” and “misuse of regulatory procedures” , categories developed by courts and not explicitly found in statutes. When competition authorities launch an investigation based on these conducts, companies have good reasons to get worried.

A new investigation in Italy – ICA v. Telecom Italia

Over the past years, the number of cases based on the “abuse of law” concept have risen, and last week the Italian Competition Authority (ICA) opened a new investigation based on this concept. According to the ICA, Telecom Italia would have abused its dominant position under article 102 TFEU by means of vexatious litigation, misuse of regulatory procedures, margin squeeze and lock-in strategies on the national wholesale market for the access to the ultra-broadband network and on the retail market for the supply of ultra-broadband telecommunication services. The ICA considered Telecom Italia dominant both at wholesale (it owns around 95% of the facilities) and retail level (with a market share of 45,9%).

Background to the case

In 2015 the Italian Government launched a public inquiry to identify the geographic areas where stakeholders would have not entirely funded with their resources the ultra-broadband network (the so called “market failure areas”, or “white areas”), in order to arrange a joint private-public investment in those areas under EU State aid law. However, according to the applicable legislation, the Government should have (i) monitored private investments every year and should have subsequently (ii) updated the map of the “white areas”.

In the context of this public enquiry, Telecom Italia and other stakeholders indicated the areas where, in light of alleged low demand for ultra-broadband telecommunication services, they would have invested only in presence of State aid. Those lots were consequently ranked as “white areas”. As a result, the Government launched two tender procedures in June and August 2016 aimed at selecting the general contractors which should have built the “fiber-to-the-home” (FTTH) network therein under a State aid scheme.

Telecom Italia’s conduct

Telecom Italia made an offer. However, at the same time, it brought an action against the tender notice insofar as it considered that some of its provisions were illegal (i.e.: auction base for wholesale prices lower than the prices imposed to Telecom by the regulator; different access conditions for players with substantial market power and the other ones).

Eventually, the Court found Telecom’s claims unfounded and rejected the appeal. At the same time, the adjudication committee awarded the contract to Open Fiber, a company owned by Enel (one of the complainants).

In the course of the second tender procedure, in March 2017, Telecom informed the Government and the market that it had amended its own business plan and that it would have invested its own resources also in the areas which had previously been ranked as “white” to build a “fiber to the cabinet” (FTTC) network.

ICA’s initial assessment

Based on the above, the ICA argues that Telecom pursued an exclusionary strategy by means of vexatious litigation and misuse of regulatory procedures. More specifically, according to the ICA, Telecom had brought several unfounded actions and amended its officially submitted investment plan only to slow down the tender procedures and to make the entry of competitors on the market less profitable. The ground for this conclusion is that the territorial allocation of the demand, that in 2015 had persuaded Telecom to elect some areas as “white”, is unlikely to have substantially changed in slightly more than one year. Furthermore, the ICA points out that the FTTC network that Telecom wants to build entails a worse technology than the FTTH favoured by the Government and, therefore, requires less resources both in terms of time and money.

Moreover, according to the ICA, Telecom Italia would have implemented margin squeeze strategies and would have raised the switching costs for consumers in order to pre-empt the new segment for the supply of retail ultra-broadband telecommunication services.

When are vexatious litigation and misuse of regulatory procedures illegal under EU competition law?

Leaving aside margin squeeze and pre-emption strategies, on which there are not relevant public information at the moment, I think it is worthy to take a closer look at the question above.

Over the last years, the European Commission and national competition authorities have clarified that sometimes dominant firms’ conducts which are perfectly legal in themselves may give rise to an abuse if they have no economic justification other from excluding actual or potential competitors from the market. In other words, dominant companies bear a “special responsibility” under EU competition law and their strategies have to be prompted exclusively by efficiencies.

Of course, it is not easy to assess whether a conduct is economically unfounded, and this is why I say that a company involved in such an investigation should worry about its capacity to counterbalance the discretionary power of competition authorities. Indeed, there were some decisions and subsequent Court rulings both at European (ITT Promedia; AstraZeneca) and Italian level (Ratiopharma/Pfizer; Esselunga/Coop Estense) which triggered an intense debate on whether vexatious litigation and misuse of regulatory procedures may entail a breach of article 102 TFEU.

In the case at issue here, Telecom’s choice to bring an action against the tender notice does not seem irrational, as there were objective grounds for doubting about the legitimacy of some provisions. In this regard, in its final ruling, the Court acknowledged as “worthy of appreciation” Telecom’s interest in submitting an offer with different contents from the ones imposed by the tender notice. Therefore, it is not clear how Telecom’s litigation strategy would be only irrational and exclusionary.

Moving to the alleged “misuse of regulatory procedures”, the ICA does not mention the fact that, according to the applicable legislation, the Government should have (i) monitored private investments every year and should have subsequently (ii) updated the map of the “white areas”. This was never done after 2015.

Furthermore, it is a bit of a paradox that the ICA launched an investigation to prevent Telecom from an investment which would trigger true competition between different players and different technologies (i.e.: FTTC and FTTH).

In sum, striking a balance between (i) freedom of enterprise, (ii) right of access to courts and (iii) enforcement of article 102 TFEU is a very difficult task which should be undertaken with great diligence in order not to discourage investments and to safeguard legal certainty of competition law.

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