JUDGMENT OF 31. 5. 1979 — CASE 22/78 HUGIN v COMMISSION
In Case 22/78
THE COURT composed of: J. Mertens de Wilmars, President of Chamber Acting President, and Lord Mackenzie Stuart, President of Chamber, P. Pescatore, M. Sørensen, A. O'Keeffe, G. Bosco and A. Touffait, Judges, Advocate General: G. Reischl Registrar: J. A. Pompe, Assistant Registrar
gives the following
JUDGMENT
Facts and Issues
I — Facts and Procedure
B — Factual and legal considerations in the decision
1. Facts
(a) The undertakings
(1) The Hugin group
(2) Liptons
(3) Other producers
(b) The product
(c) After-sales service and repair
(d) The collaboration between Liptons and Hugin
(e) The effect of the refusal to supply spare parts
2. Legal assessment
(a) The alleged dominant position
(b) The alleged abuse
(c) The alleged effects on trade between Member States
(d) The order to supply spare parts
(e) The fine
C — Written procedure
II — Conclusions of the parties
III — Submissions and arguments of the parties
A — The alleged dominant position
1. Hugin's application
2. The Commission's defence
(a) General comments
(b) Observations onHugin's legal argument
3. Hugin's reply
4. The Commission's rejoinder
B — The alleged abuse
1. The refusal to supply spare parts to Liptons did not cause competition to be substantially restricted
2. The refusal to supply was objectively justified
3. The refusal to supply could not affect trade between Member States
4. Article 86 has been misused by the Commission to attack selective distribution and maintenance permitted under Article 85
C — The order to supply spare parts
D — The fine
IV — Oral procedure
Decision
Hugin's position on the market
Hugin's conduct on the market
The effects on trade between the Member States
Costs
I —. Facts and Procedure
A —. By a decision of 8 December 1977 (Official Journal, L 22 of 27 January 1978, p. 23) the Commission, the defendant in these proceedings, declared (Article 1) that Hugin Kassaregister AB (hereinafter referred to as Hugin AB) and Hugin Cash Registers Ltd (hereinafter referred to as Hugin UK)
B —. Factual and legal considerations in the decision
1. Facts
(a). The undertakings
(1). The Hugin group
(2). Liptons
(3). Other producers
(b). The product
(c). After-sales service and repair
(d). The collaboration between Liptons and Hugin
(e). The effect of the refusal to supply spare parts
2. Legal assessment
(a). The alleged dominant position
(b). The alleged abuse
(c). The alleged effects on trade between Member States
(d). The order to supply spare parts
(e). The fine
C —. Written procedure
II —. Conclusions of the parties
A —. Hugin claims that the Court should:
B —. The Commission contends that the Court should:
III —. Submissions and arguments of the parties
A —. The alleged dominant position
1. Hugin's application
2. The Commission's defence
(a). General comments
(b). Observations onHugin's legal argument
3. Hugin's reply
4. The Commission's rejoinder
B —. The alleged abuse
1. The refusal to supply spare parts to Liptons did not cause competition to be substantially restricted
(a). In Hugin's view Liptons cannot reasonably be described as a major competitor of Hugin in a substantial part of the Common Market. Liptons' turnover in 1974 amounted to only £48207; Liptons' share of any market has infinitesimal proportions and the disappearance of Liptons cannot perceptibly affect the competitive structure of any relevant market in the United Kingdom.
(b). The Commission replies, first, that a policy which eliminates all enterprises independent of the Hugin group which were able to maintain and repair Hugin cash registers, and which eliminated the only such enterprise in the whole of the United Kingdom, affects the competitive structure on the markets for maintenance, repair and leasing.
(c). Hugin replies that, contrary to what the Commission is implying, the refusal to supply is not responsible for the fact that Liptons' turnover in 1974 was lower than during the period 1970 to 1972; all undertakings in the sector in question experienced a similar decline in turnover after the end of the decimalization period.
(d). In its rejoinder the Commission observes, first, that it is incorrect to say that there is no meaningful demand for spare parts from maintenance companies. It refers in this respect to declarations, annexed to the rejoinder, by the principal manufacturers of cash registers which show, in its view, that they regularly sell spare parts to maintenance companies, and the Commission recalls that Hugin itself lists 40 firms in the United Kingdom which repair cash registers. The Commission then refers to another annex to the rejoinder which contains a list of larger maintenance companies in the United Kingdom.
2. The refusal to supply was objectively justified
(a). Hugin recalls that Hugin cash registers are built and adapted in order to meet the requirements of individual customers and that as a result there generally exist no more than five or six identical units of each model, other than one particular example. The specialized character of its cash registers and the significance of adequate and rapid maintenance constitute, in Hugin's view, objective justification for Hugin's insistence on having its cash registers serviced only by qualified technicians working in close co-operation with it. In its view consumers would attribute the deficient operation of a cash register resulting from inadequate maintenance to the quality of the cash register itself. Hugin would then find it difficult to face its competitors which are powerful and have a well-established position on the market.
(b). In answer to those arguments the Commission states that Liptons' technicians were adequately trained by Hugin to service and maintain all kinds of Hugin machines, that Hugin's refusal to supply was not based on any deficiency in the service provided by Liptons, that the complexity and diversification of Hugin's registers is at about the same level as those of its major competitors, that the importance of proper maintenance and servicing is shared by Hugin cash registers with other makes and that other cash register manufacturers do not object to their machines being maintained by independent companies.
(c). Hugin replies that it stopped supplies of spare parts to Liptons because Liptons could not maintain the level of excellence which Hugin required from its service network, which employs specialist technicians who work full time on the servicing of Hugin cash registers and who receive continuous training with respect to servicing.
3. The refusal to supply could not affect trade between Member States
(a). In Hugin's view the refusal to supply cannot be considered to affect appreciably the structure of competition within the Common Market. There exists no significant market for spare parts or independent maintenance services for cash registers; in spite of the absence of independent servicing companies Hugin is not sheltered from competition with respect to maintenance of Hugin cash registers, which is one of the important parameters of competition in the cash registers market in which Hugin competes.
(b). The Commission is of the opinion that the elimination of Liptons from the market for maintenance of Hugin machines can affect the structure of competition in the common market. Liptons' share of the market for Hugin spare parts and the market for maintenance of Hugin machines is substantial and it was the only independent company maintaining Hugin machines in the United Kingdom. The Commission recalls that Liptons could export to Ireland, which has the same currency as the United Kingdom, all cash registers without any modification which would be sufficient to cause Article 86 to apply.
4. Article 86 has been misused by the Commission to attack selective distribution and maintenance permitted under Article 85
(a). Hugin maintains that its refusal to supply Liptons is the natural consequence of its sales policy to have its product distributed and maintained through a network of specialized subsidiaries, distributors and dealers.
(b). The Commission replies that in the BMW decision (Official Journal L 29 of 3 February 1975, p. 1), the approval under Article 85 (3) was only given in the light of the fact that there was a substantial amount of intra-brand competition and that all users of BMW cars were free to have them serviced by any garage, since spare parts were freely sold.
(c). Hugin replies that the meaning of the words or through third parties used in paragraph 28 of the Saba decision is explained in paragraph 18 of that decision, which makes it clear that Saba, dealers may subcontract for guarantee and repair service if they so wish and thus not to companies outside Saba's distribution network.
C —. The order to supply spare parts
1. Hugin states that it has informed the Commission that although it disputes the Commission's finding of dominance and abuse, it will sell to Liptons available spare parts. Furthermore, supplies of spare parts by Hugin UK have resumed following the receipt of an order from Liptons. In this connexion Hugin reserves all its rights in connexion with the adverse consequences of the Commission's order.
2. The Commission argues that Hugin is not compelled to give Liptons the same discount as it gives Hugin dealers; in so far as the circumstances, and in particular the obligations Liptons is willing to undertake, are different from those of Hugin dealers, a different level of discount could be justified.
D —. The fine
1. Hugin argues that the imposition of a fine in this case is unwarranted on the following three grounds:
2. In the Commission's view its observations in the present case show that the decision has not created new law, but it adds that even if this were so, a fine could be imposed: Joined Cases 6 and 7/73 Commercial Solvents v Commission and Case 27/76 United Brands v Commission.
IV —. Oral procedure
A —. 1. The Court asked Hugin what evidence there was for its claim that from September 1971 Liptons was kept informed by Hugin GB of the discussions with Hugin AB and the consequences to which those negotiations might lead for Liptons. Hugin replied that on two occasions after the stated date Mr D. Pope, Managing Director of Hugin GB, drew the attention of Mr Lipton to the possible consequences. Hugin further replied that a draft distributorship agreement was presented to Mr Lipton on 14 April 1972. 2. The Court asked the Commission to give a more detailed explanation than that in its decision on the question why Liptons did not accept the offer of Hugin UK, made in April 1972, to appoint it as distributor of Hugin machines for the geographical area of London. The Commission replied that acceptance of that offer by Liptons would have involved a significant reduction of Liptons' sales territory for Hugin cash registers and of its profit on those machines. 3. The Court further invited the Commission to reply to the following question: Why did not Liptons accept Hugin's offer, made in September 1972, to seek an arrangement with regard to the delivery of spare parts intended for reconditioning trade-in machines? According to the Commission Liptons did not accept Hugin's offer because it was an offer of only one consignment of spare parts whereas Liptons needed a continuing supply of spare parts. 4. In reply to a further question by the Court the Commission supplemented the information contained in its decision relating to Lipton's turnover stating in particular, for 1972 and subsequent years, its revenue from the sale and repair of cash registers divided up according to the makes of the machines. 5. The Court also asked the Commission whether Liptons has ever experienced difficulties in obtaining spare parts for the repair — as contrasted with the reconditioning — of apparatus of NCR, Sweda or Chubb Electronics manufacture and what quantities were purchased, if any. The Commission replied that Liptons has never had any such trouble for NCR and Sweda cash registers, but that Liptons does not repair Gross cash registers (Chubb Electronics). In this connexion the Commission gave details of Liptons' expenditure on the spare parts in question. 6. Finally, the Court invited the parties to give their views on the method of calculation indicated in a letter sent by Liptons to the Commission on 29 June 1978 which led to the finding in the decision that Liptons dismantled Hugin cash registers to the value of £9000 in order to use parts of these cash registers as spare parts for other machines. Hugin observes in this connexion that it is clear from the letter that the machines dismantled by Liptons were trade-in second-hand machines. In Hugin's view the figure of £9000 corresponds to a fictitious cost not borne by Liptons, that is to say the cost of reconditioning such machines. Since the machines were not used for refurbishing but only for scrapping purposes, the cost of refurbishing is totally irrelevant in the context of this matter. Hugin contends that the amount of loss which Liptons alleges that it suffered as a result of scrapping second-hand machines is higher than the price at which it would have been able to buy those machines in new condition. Hugin concludes that Liptons did not incur any real loss when purchasing and dismantling the second-hand machines concerned. The Commission states that the figure of £9000 is the average value of the cash registers referred to in the said letter when newly reconditioned. It adds that as no spare parts were available to refurbish those machines Liptons was compelled to dismantle them to use them for spare parts. As a result, the Commission declares, it is not possible to give an accurate estimate of the values of the machines as they stood immediately before they were dismantled.
B —. The applicants, represented by W. van Gerven, and the Commission, represented by its Legal Adviser, J. Temple Lang, presented oral argument at the hearing on 13 March 1979.
C —. The Advocate General delivered his opinion at the hearing on 2 May 1979.
1. By an application lodged on 24 February 1978 the Swedish company Hugin Kassaregister AB and its British subsidiary Hugin Cash Registers Ltd., hereinafter referred to jointly as Hugin, seek primarily, the annulment of the Commission Decision of 8 December 1977 relating to a proceeding under Article 86 of the EEC Treaty (Official Journal, L 22 of 27 January 1978, pp. 23 to 35). In the alternative they seek the cancellation or reduction of the fine imposed on the two companies jointly by that decision.
2. Article 1 of that decision states that Hugin has infringed Article 86 by refusing to supply spare parts for Hugin cash. registers to Liptons Cash Registers and Business Equipment Ltd, which has its registered office in London, as from 1 January 1973. It further states that Hugin Kassaregister AB has also infringed Article 86 by prohibiting its subsidiaries and distributors within the common. market from selling such spare parts outside its distribution network. In the grounds for its decision the Commission states that Hugin occupies a dominant position within the meaning of Article 86, that it has abused that position and that trade between the Member States may be affected thereby.
3. As regards the question whether Hugin occupies a dominant position on the market the Commission takes the view that the facts of the case have shown that while Hugin has only a relatively small share of the cash register market — which is very competitive — it has a monopoly in spare parts for machines made by it and that consequently it occupies a dominant position for the maintenance and repair of Hugin cash registers in relation to independent companies which need a supply of Hugin spare pans. As regards the reconditioning of used machines and the renting out of such machines the Commission also takes the view that Hugin occupies a dominant position as regards cash registers of its own manufacture, since undertakings engaged in such activities depend on supplies of Hugin spare pans.
4. Hugin contests the validity of the Commission's findings on these various points. In its principal argument it states that the supply of spare pans and of maintenance services is certainly not a separate market but is an essential parameter of competition in the market for cash registers as a whole. It states that on that market after-sales service and the quality of repair and maintenance services, including the supply of spare parts, constitute such a significant competitive factor that Hugin runs those services at a loss.
5. To resolve the dispute it is necessary, first, to determine the relevant market. In this respect account must be taken of the fact that the conduct alleged against Hugin consists in the refusal to supply spare parts to Liptons and, generally, to any independent undertaking outside its distribution network. The question is, therefore, whether the supply of spare parts constitutes a specific market or whether it forms part of a wider market. To answer that question it is necessary to determine the category of clients who require such parts.
6. In this respect it is established, on the one hand, that cash registers are of such a technical nature that the user cannot fit the spare parts into the machine but requires the services of a specialized technician and, on the other, that the value of the spare parts is of little significance in relation to the cost of maintenance and repairs. That being the case, users of cash registers do not operate on the market as purchasers of spare parts, however they have their machines maintained and repaired. Whether they avail themselves of Hugin's after-sales service or whether they rely on independent undertakings engaged in maintenance and repair work, their spare pan requirements are not manifested directly and independently on the market. While there certainly exists amongst users a market for maintenance and repairs which is distinct from the market in new cash registers, it is essentially a market for the provision of services and not for the sale of a product such as spare parts, the refusal to supply which forms the subject-matter of the Commission's decision.
7. On the other hand, there exists a separate market for Hugin spare parts at another level, namely that of independent undertakings which specialize in the maintenance and repair of cash registers, in the reconditioning of used machines and in the sale of used machines and the renting out of machines. The role of those undertakings on the market is that of businesses which require spare parts for their various activities. They need such parts in order to provide services for cash register users in the form of maintenance and repairs and for the reconditioning of used machines intended for re-sale or renting out. Finally, they require spare parts for the maintenance and repair of new or used machines belonging to them which are rented out to their clients. It is, moreover, established that there is a specific demand for Hugin spare pans, since those parts are not interchangeable with spare parts for cash registers of other makes.
8. Consequently the market thus constituted by Hugin spare parts required by independent undertakings must be regarded as the relevant market for the purposes of the application of Article 86 of the facts of the case. It is in fact the market on which the alleged abuse was committed.
9. It is necessary to examine next whether Hugin occupies a dominant position on that market. In this respect Hugin admits that it has a monopoly in new spare parts. For commercial reasons any competing production of spare parts which could be used in Hugin cash registers is not conceivable in practice. Hugin argues nevertheless that another source of supply does exist, namely the purchase and dismantling of used machines. The value of that source of supply is disputed by the parties. Although the file appears to show that the practice of dismantling used machines is current in the cash register sector it cannot be regarded as constituting a sufficient alternative source of supply. Indeed the figures relating to Liptons' turnover during the years when Hugin refused to sell spare parts to it show that Liptons' business in the selling, renting out and repairing of Hugin machines diminished considerably, not only when expressed in absolute terms but even more so in real terms, taking inflation into account.
10. On the market for its own spare parts, therefore, Hugin is in a position which enables it to determine its conduct without taking account of competing sources of supply. There is therefore nothing to invalidate the conclusion that it occupies, on that market, a dominant position within the meaning of Article 86.
11. The Comm ission takes the view that Hugin abused its dominant position by refusing to supply spare parts to Liptons and, generally, to any independent undertaking outside its own distribution network. That practice, which results from Hugin's policy of restricting the maintenance and repair of Hugin cash registers to its own technical departments, is said to constitute an abuse in that its effect is to prevent users of Hugin machines from choosing freely the undertaking which is to service and repair those machines and in that it has the effect of excluding any competition, and in particular a substantial competitor, in the sector of the servicing, maintenance, repair, renting out and reconditioning of Hugin machines.
12. Hugin alleges that those statements are unfounded. In its view the practice in question did not substantially restrict competition and has not eliminated Liptons from the market or threatened its existence. That practice is, moreover, objectively justified by legitimate considerations relating to the commercial policy adopted by Hugin, which entails providing maintenance and repair services of the highest quality.
13. More particularly, Hugin states that it seeks to reserve maintenance and repair services to itself not as profitable operations in themselves but in order to maintain the good reputation for reliability of its cash registers in the face of competition from other makes which, it alleges, is evidenced by the fact that it maintains those services at a loss. Hugin explains, furthermore, that it is not engaged in the market in used cash registers or that of renting out cash registers and that it offered to supply Liptons with the spare parts it needed to recondition used machines. Nevertheless, in accordance with its commercial policy, Hugin wishes to reserve to its own technical departments the maintenance and repair of all Hugin cash registers, even those sold second-hand or rented out by independent undertakings.
14. In view of this dispute between the parties it is necessary, in this case, to examine first whether the condition laid down by Article 86 of the Treaty for the conduct in question to be covered by Community law is fulfilled. Article 86 stipulates that the prohibition laid down therein is applicable only in so far as the conduct regarded as an abuse of a dominant position occupied by an undertaking on the market may affect trade between Member States.
15. In its decision the Commission stated that Liptons has been prevented from continuing to expand its business within a substantial part of the common market and is unable to purchase spare parts from other Member States'. According to the Commission the distribution system practised by Hugin has an appreciable effect on the structure of competition within the common market.
16. Hugin contests the validity of those statements. According to Hugin Liptons' activities do not extend beyond a single Member State and there does not really exist a market for spare parts extending beyond the territory of each Member State.
17. The interpretation and application of the condition relating to effects on trade between Member States contained in Articles 85 and 86 of the Treaty must be based on the purpose of that condition which is to define, in the context of the law governing competition, the boundary between the areas respectively covered by Community law and the law of the Member States. Thus Community law covers any agreement or any practice which is capable of constituting a threat to freedom of trade between Member States in a manner which might harm the attainment of the objectives of a single market between the Member States, in particular by partitioning the national markets or by affecting the structure of competition within the common market. On the other hand conduct the effects of which are confined to the territory of a single Member State is governed by the national legal order.
18. For the purpose of applying these criteria to the facts in this case it is necessary to examine separately the effects on Liptons' commercial activities, on the one hand, and on trade in spare parts in general, on the other.
19. It is established that the centre of Liptons' activities is the London region and that, in any event, its commercial activities have never extended beyond the United Kingdom. As regards the future, there is no indication that Liptons envisages extending its activities beyond those geographical limits. That limitation is explained, moreover, by the particular nature of the activities in question. The maintenance, repair and renting out of cash registers and the sale of used machines cannot constitute profitable operations beyond a certain area around the commercial base of an undertaking. This characteristic is reflected in the structure of the undertakings concerned. It appears from the file that in the United Kingdom there exist large numbers of small, local undertakings which specialize in the provision of the services in question. There are grounds for believing that the commercial structure of this trade is the same in the other Member States in which Hugin also applies its policy of not supplying spare parts outside its own distribution network.
20. The conclusion to be drawn from these considerations is therefore that trade between Member States is not affected by the obstacles which Hugin's conduct places in the way of the activities of independent undertakings which specialize in the provision of maintenance services.
21. As regards the distribution of Hugin spare parts as a distinct commercial activity it is established that Liptons has tried in vain to obtain such parts from Hugin distributors in certain other Member States. Moreover, Hugin does not deny that its policy of not supplying spare parts outside its own network, whilst it does not involve a prohibition on exports, necessarily implies that the refusal to supply independent undertakings applies whatever the geographical location of the undertaking.
22. The question is, therefore, whether it may be assumed that trade between Member States in Hugin spare parts would exist if the market conditions were entirely free and not subject to restrictive practices such as those applied by Hugin in this instance.
23. It should be recalled in this respect that the value of the spare parts is in itself relatively insignificant. Accordingly they are not such as to constitute a commodity of commercial interest in trade between Member States, quite apart from the fact that an independent undertaking would derive no economic advantage from buying them from a Hugin subsidiary in another Member State rather than from the parent company. Indeed, it has not been alleged that Hugin applies differentiated prices on the various local markets. It is logical to suppose that an independent undertaking which could not obtain a spare part from the Hugin subsidiary established in its country would turn to the parent company, that is to say, in this instance, to a supplier based in a non-member country, rather than to a subsidiary in another Member State. If the latter course were followed it would constitute an exception rather than a normal commercial transaction.
24. In the present case Liptons turned to Hugin subsidiaries and distributors in certain other Member States precisely because Hugin's restrictive policy prevented it from satisfying its spare parts requirements through normal commercial channels. Its attempts to obtain spare parts in the other Member States can therefore not be regarded as an indication of the existence, whether actual or potential, of a normal pattern of trade between the Member States in spare parts. In other words, if Liptons had been able to obtain spare parts from a Hugin subsidiary in another Member State it would have been because Hugin was willing to sell those parts outside its own distribution network. In such a case, however, it would be customary for Liptons to apply to the Hugin subsidiary in its own country rather than to a subsidiary in another Member State.
25. In those circumstances Hugin's conduct cannot be regarded as having the effect of diverting the movement of goods from its normal channels, taking account of the economic and technical factors peculiar to the sector in question.
26. It must therefore be concluded that Hugin's conduct is not capable of affecting trade between Member States. Consequently the Commission's decision does not satisfy all the conditions laid down by Article 86 of the Treaty. It must therefore be annulled.
27. Article 69 (2) of the Rules of Procedure provides that the unsuccessful party shall be ordered to pay the costs if they have been asked for in the successful party's pleading. Since the Commission has failed in its submissions it should be ordered to pay the costs.
On those grounds, THE COURT hereby:
1 Annuls the Commission Decision of 8 December 1977 relating to a proceeding under Article 86 of the EEC Treaty (IV/29.132 -Hugin/ Liptons).
2 Orders the Commission to pay the costs.