The Doctrine of Essential Facilities: How Essential it is, in the Indian Market

Introduction

Assume that there is a law-abiding monopolist who owns the only dairy farm in the city and possesses the means to supply the same in the city. The entire city is dependent on him for their dairy needs. Other players of the market who intend to get an access to this market will have to buy the animals or the dealership to supply the dairy products from him. Exercising the power to impede (or enable) them, the monopolist refuses to sell the facilities (even for reasonable compensation). Should the judiciary levy the duty to deal upon the monopolist?

The monopolist can be made liable under the “doctrine of essential facility”, hereinafter referred as “doctrine”, under two circumstances, (1) where a single monopolist who competes with the facility user in other markets unilaterally controls the facility[1]; and (2) where a monopolistic consortium of firms who are competitors jointly controls the facility.[2] Though the courts usually do not impose the duty to deal on the monopolist, but their refusal to share the “essential[3] facility[4]”, hereinafter referred as “EF”. with the competitors even in the absence of malice is still assumed to be with ill intent. The doctrine has been elaborated under two perspective i.e legal and economic.

As per the economic perspective, if the monopolist has the power to restrict the access to the market or production, the doctrine comes into play.[5] All EF comprises of four prominent features.[6] From the legal perspective, to formulate a definition of the doctrine poses great obstruction. Attempts have been made to frame a definition that shall strike a balance between competition and lawful monopolies. While deciding whether the facilities are “essential”, one needs to look on the facts objectively that how gravely the monopolist’s refusal, affect the competition and the competitors.[7]

Origin and evolution of the doctrine

The doctrine developed through the application of “Sherman Act, 1890”, hereinafter referred as “Act”, in the US. The roots of the doctrine lie in Sections 1[8] and 2[9] of this Act. Though the doctrine surfaced for the first time in 1912 in Terminal Road case[10] in which the Court said that the railroad company must give competitor access to the bridge on equal and non-discriminatory terms and held them liable for abusing Sections 1 and 2 of the Sherman Act. Later in Associated Press case[11], the Court found them liable for violation of the Act on grounds of discrimination against the non-members. Therefore, dictating the Associated Press to remove the offending terms related to the mandatory access for the non-members. The courts continued its trend in Otter Tail (1973)[12], MCI case (1983)[13] and Aspen Skiing (1985)[14].

Applicability of the doctrine in India

The doctrine lacks judicial recognition per se, though its spirit is appreciated in the Indian legislation evidently. The glimpse of the doctrine can be observed in various legislations, Telecom Regulatory Authority of India (TRAI) Act, 1997[15], Patents Act, 1970,[16] the Electricity Act, 2003[17] and the Petroleum and Natural Gas Regulatory Board (PNGRB) Act, 2006[18].

Although there are several examples proving the presence of the doctrine in various laws, the case laws to the executive decision enforcing the same are scarce. The doctrine will come handy while developing the existing market and establishing the new markets, the authority to regulate and supervise the action of the monopolists vests with the Competition Commission under the “Competition Act, 2002”[19]. The Competition Act does not use the term EF, rather explains the concept of the doctrine under Section 4(c) which prohibits the abuse of dominant position by refusing access to market to the contenders. Further under Sections 18[20] and 19[21] of the Competition Act, the Commission is required to eliminate the practices which might have adverse impact on the competition. Sections 19(3) and (4), precisely deals with determining the factors that restrict the emergence of competition. Therefore it can be concluded that given these provisions, the judiciary could invoke the doctrine, augment downstream spillover which enhances social welfare.

Criticism

It is a very practical notion that to develop any goods and services, there has to be some incentive to motivate the same. But application of this doctrine is causing “free riding” of rivals over the facility created by some other.[22] If an entity is denying sharing of scarce resources, does not mean that it is monopolising until it intended to monopolise.[23] It is generally presumed that vertically integrated firm having an essential facility is anticompetitive, but this presumption is contrary to economic theory.[24] It was found that when a firm uses the facility jointly in collusion, they produce efficiencies, which would not be possible if firms were allowed to share the facility and operate individually. Therefore the presumption of anti-competitiveness, if firms are operating jointly in collusion, should be dropped. The monopolisation has to be checked by the intent and operations of firms.[25] If the firm is declaring its own uniform price policy and deny to trade with anyone who refused to follow its policy, was found legal.[26] Compelling the firm to share its facilities would not be consistent with the objective of competition law.[27]

A very simple question which arises is that, why shall the entities be forced to share their facilities, in the name of competition, who spent their remarkable resources on developing a unique and innovative product or service, which other lacks. In mandating the entities to share their exclusive resources is unfair to them as that would imply spoon-feeding the other incompetent entities. In a nutshell the application of this doctrine disincentives and discourage the development of cost reduction facilities, which downstream affect the consumer in the long term.[28]

Suggestion

Taking into account a broader perspective, the function of applying this doctrine shall be consumer welfare. Therefore, “public trust doctrine”[29] can be applied in order to prevent exploitation of consumer and to ensure the sharing of facility and prevention of monopolisation, especially when there is a transfer of resources from Government to private sector.[30]

The monopoly power if acquired used for the purpose of defeating the competition in the market and gain competitive advantage then such power even it was lawfully acquired would remain unlawful.[31]

It is for the judiciary to invoke this doctrine whenever it deems fit. But our suggestion would be to empower Competition Commission of India to take cognizance of Section 18 along with Section 64(1)[32] to devise the policies to provide free access to common facilities under this doctrine.[33]

Conclusion

From the aforesaid discussion it can be concluded that business and competition plane is different, in different jurisdictions. But there is a question which prevails over all i.e. whether this doctrine drives out the competition or the “effective competition”[34] owing to sharing of facilities? There is a need to balance the interest of innovators, investors, and as well as of free riders.

This discussion also makes us think about the emerging and developing economies such as India, where the resources are scarce, due to which duplication may not always be possible and sharing of resources, hampers the efficiencies of a business and creates a deterrent for investors to invest in it.

This doctrine imposes an anti-monopoly obligation on the dominant entities to share their facilities for the greater public good and this becomes a tedious task especially when the duplication of the facility cannot be created or infeasible. In future there will be a greater use of doctrine as the firms are entering into a joint venture format in order to achieve greater competitive advantage along with higher efficiencies. Information being the real asset in today’s era, therefore the application of the doctrine, while deciding the essential nature of the same will be crucial.

Therefore, this doctrine calls for amicable settlement for the solution in case of tussle between firm holding monopoly and others who lacks the same (free riders). This is because, undermining any of the sides, whether monopolisers or free riders, will ultimately affect the competition.


* Lawyer based at Agra.

** Senior Legal Associate, Apisero, Inc., Noida.

[1] Aspen Skiing Co. v. Aspen Highlands Skiing Corpn.,  1985 SCC OnLine US SC 168 : 86 L Ed 2d 467 : 472 US 585 (1985).

[2] Associated Press v. United States, 1945 SCC OnLine US SC 138 : 89 L Ed 2013 : 326 US 1 (1945).

[3] “First, some degree of uniqueness and market control is inherent in the term ‘essential’.” Abbott B. Lipsky Jr. and J. Gregory Sidak, Essential Facilities, (1999) 51 Stanford Law Review, Vol. 51, No. 5 (May 1999), pp. 1187-1248.

[4] “Finally, the term ‘facility’ itself connotes an integrated physical structure or large capital asset with the degree of cost advantage or unique character that usually confers monopoly power and market control by virtue of its superiority for its intended purposes.” Abbott B. Lipsky Jr. and J. Gregory Sidak, Essential Facilities, (1999) 51 Stanford Law Review, Vol. 51, No. 5 (May 1999), pp. 1187-1248.

[5] For better understanding see, Berkey Photo, Inc. v. Eastman Kodak Co., 1980 SCC OnLine US SC 20 : 62 L Ed 2d 783: 444 US 1093 (1980) . “The essential facility at issue in that case was the design for a new camera. Kodak’s refusal to divulge the camera’s specification prevented the plaintiff from timely development of film for the camera.”

[6] “First, the facility must be unique. Second, it must remain unique while its output is widely distributed. Third, it must be centrally located in the path of users’ production. And fourth, it must have the ability to impede or enable the process by which such users do their business.” David J. Gerber, Rethinking the Monopolist’s Duty to Deal: A Legal and Economic Critique of the Doctrine of “Essential Facilities” (1988) 74 Virginia Law Review.

[7] “[t]o be ‘essential’ a facility need not be indispensable; it is enough that duplication of the facility would be economically infeasible and if denial of its use inflicts a severe handicap on potential, market entrant”. Hecht v. Pro-Football [1978] US (US).

[8]Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.”

[9] “Every person who shall monopolise, or attempt to monopolise, or combine or conspire with any other person or persons, to monopolise any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.”

[10] “The Association originated from a joint venture acquire terminal railroads on either side of the two bridges crossing the Mississippi River into and out of St. Louis. The commercial importance of this control was extremely high, in that 24 railroads converged at this junction. Moreover, the cost of constructing a further bridge was one that no individual railroad company could afford. Consequently, by acquiring the terminal railroad companies on either side of the bridges, the Association effectively controlled railroad traffic converging at that point. Part of this joint venture agreement a clause entitling each member railroad to exclude non-member.” Martin Cave and Peter Crowther, Competition Law Approaches to Regulating Access to Utilities: The Essential Facilities Doctrine, (2017) 103 Pubblicazioni dell’Università Cattolica del Sacro Cuore <http://www.jstor.org/stable/41623874> accessed on 23-8-2017. United States of America v. Terminal Railroad. Assn. of St. Louis, 1912 SCC OnLine US SC 114 :  56 L Ed 810 : 224 US 383 (1912).

[11] “Associated Press was a joint venture among roughly 1200 leading general circulation daily newspapers the United States and similar newsgathering organisations throughout the world. Members were obligated to share their original news stories with Association; in return they obtained access to the stories of the other members, and to news obtained directly by Associated Press’s own staff. The Association’s bye-laws permitted any incumbent member to veto applications for membership by its competitors. Thus, for example, a metropolitan daily newspaper could prevent participation in Associated Press by any other newspaper in the same metropolitan area. The provision assured that the incumbent would be the outlet for Associated Press news in that market.” Abbott B. Lipsky Jr. and J. Gregory Sidak, Essential Facilities, (1999) 51 Stanford Law Review, Vol. 51, No. 5 (May 1999), pp. 1187-1248. Associated Press v. United States, 1945 SCC OnLine US SC 138 : 89 L Ed 2013 : 326 US 1 (1945).

[12] “Otter Tail was an integrated utility which generated, transmitted and sold electricity at the retail level. Two municipalities sought to purchase electricity wholesale and distribute the electricity themselves. Otter Tail refused to supply, and the other wholesalers which the municipalities then approached were themselves dependent upon Otter Tail for the transmission of electricity. Although there were some federal regulations concerning electricity, they did not extend to imposing a duty to supply. Therefore, the relevant question was whether the Sherman Act had been breached. The Court held that Otter Tail had violated S. 2 of the Sherman Act. As a result, Otter Tail, the owner of the essential facility (the cables and technical instalations required for distribution), as well as being itself a distributor, had to grant access to the municipalities on equal terms.” Martin Cave and Peter Crowther, Competition Law Approaches to Regulating Access to Utilities: The Essential Facilities Doctrine, (2017) 103 Pubblicazioni dell’Università Cattolica del Sacro Cuore <http://www.jstor.org/stable/41623874> accessed on 23-8-2017, Otter Tail Power Co. v. United States, 1973 SCC OnLine US SC 38 : 35 L Ed 2d 359 : 410 US 366 (1973).

[13] “Case concerned access to telecommunications infrastructure and provides a leading example of the operation of the essential facilities doctrine in US law.” Martin Cave and Peter Crowther, Competition Law Approaches to Regulating Access to Utilities: The Essential Facilities Doctrine, (2017) 103 Pubblicazioni dell’Università Cattolica del Sacro Cuore <http://www.jstor.org/stable/41623874> accessed on 23-8-2017, MCI Commc’ns Corp. v. AT&T, U.S. (1983) 891.

[14] “Corpn. 6 the owner of a number of ski slopes refused to accept the plaintiff’s offer to sell ski passes which would enable skiers to use both parties’ slopes. The plaintiff needed access to the defendant’s slopes because if passes were sold separately, skiers would choose the plaintiff’s passes, since the latter owned more slopes. The Court of Appeal for the Tenth Circuit found that the refusal to engage in a joint marketing arrangement infringed the Sherman Act. It made this finding on two grounds: first, it held that the defendant owned an essential facility; and second that there was monopolistic intent on the part of the defendant in its refusal to deal.” Martin Cave and Peter Crowther, Competition Law Approaches to Regulating Access to Utilities: The Essential Facilities Doctrine, (2017) 103 Pubblicazioni dell’Università Cattolica del Sacro Cuore <http://www.jstor.org/stable/41623874> accessed on 23-8-2017, Aspen Skiing Co. v. Aspen Highlands Skiing Corpn.,  1985 SCC OnLine US SC 168 : 86 L Ed 2d 467 : 472 US 585 (1985), 611.

[15] http://www.scconline.com/DocumentLink/83w6Iv0P

[16]  http://www.scconline.com/DocumentLink/r4qFF5wg

[17] http://www.scconline.com/DocumentLink/p6U2Hq26.

[18] http://www.scconline.com/DocumentLink/XM91Hpi5

[19] http://www.scconline.com/DocumentLink/C1YA2h2H

[20] http://www.scconline.com/DocumentLink/JE75NBsA.

[21] http://www.scconline.com/DocumentLink/82e9O4p7.

[22] George S. Day and Robin Wensley, Assessing Advantage: A Framework For Diagnosing Competitive Superiority, (1988) 52 Journal of Marketing.

[23] “The essential elements for monopolisation were held to include (1) the possession of monopoly power in the relevant market; and (2) the wilful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen or historic accident.” United States v. Grinnell Corpn., 1966 SCC OnLine US SC 114 : 16 L Ed 2d 778 : 384 US 563, 570-571 (1966).

[24] Ward Bowman, Patent and Antitrust Law: A Legal and Economic Appraisal, (1973) 25 Stanford Law Review.

[25] Gregory T. Gundlach and Paul N. Bloom,  The “Essential Facility” Doctrine: Legal Limits and Antitrust Consideration (1993) 12 Journal of Public Policy & Marketing.

[26]In the absence of any purpose to create or maintain a monopoly, the (Sherman) Act does not restrict the long recognised right of trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.” United States v. Colgate & Co., 1919 SCC OnLine US SC 177 : 63 L Ed 992 : 250 US 300 (1919).

[27] Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP,  2004 SCC OnLine US SC 2 : 157 L Ed 2d 823 : 540 US 398 (2004).

[28] Keith N. Hylton, Antitrust Law — Economic Theory and Common Law Evolution (Cambridge University Press, 2003).

[29] “The public trust doctrine provides that government holds title to certain lands and waterways in trust for the public benefit and public use.” Michael Seth Benn, Towards Environmental Entrepreneurship: Restoring the Public Trust Doctrine in New York, (2006) 155 University of Pennsylvania Law Review.

[30] The “Essential Facility” Doctrine: Legal Limits and Antitrust Considerations, JSTOR (Jstor.org, 2017) <http://www.jstor.org/stable/pdf/30000087.pdf?refreqid=excelsior:a24ba8b384eb34fd3bc76df187847b8c> accessed on  9-9-2017.

[31] United States v. Griffith, 1948 SCC OnLine US SC 55 : 92 L Ed 1236 : 334 US 100, 107 (1948).

[32] http://www.scconline.com/DocumentLink/HW2DdCmZ.

[33] Yugank Goyal, Jayant Malik and Gaurav Sharma, Essential Facilities Doctrine.

[34] “Determination of what is workable or effective competition requires that we lay down and identify the conditions or criteria which could at least provide appropriate leads for public policy in assuring to society the substance of the advantages which competition should provide.” A.D.H. Kaplan, Analysis of Chapter VII, Economic Indicia of Competition and Monopoly, (1955) 7 Section of Antitrust Law <http://www.jstor.org/stable/25749966> accessed on 10-9-2017.

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