The relevant service market and product market
(83) DNS radio signals are not really interchangeable in terms of characteristics and use with other radio signals and more generally with other navigation aids (for instance charts, compasses) (paragraph 7 above).
(a) In the relevant geographical market (paragraph 88 below) some commercial vessels and naval ships for the purpose of navigating offshore and/or on long routes and for fishing, tracking or repeating fishing positions require an accuracy in the determination of their navigating position which only DNS can provide. Racal Decca has referred to other types of radio signals but they either cannot provide the same accuracy or are not sufficiently available for these uses in the relevant geographic market, because of lack of geographic coverage or transmission range.
(b) The owners of DNS-only compatible receivers installed in other categories of boats, namely pleasure-boat receivers, cannot change to other signals unless they buy or hire different receivers instead of those compatible with DNS. This can only be expected to happen towards the end of the life of the DNS receiver.
(84) Because of the lack of real interchangeability with other services or products for a substantial number of users, the transmission of DNS signals constitutes a separate service market.
(85) For the purposes of those vessels mentioned above, DNS compatible receivers (not downgraded) are not interchangeable with other receivers to any extent, in terms of use and characteristics, for the reasons explained above, as the transmission of DNS signals is not interchangeable with the transmission of other signals.
DNS compatible receivers for commercial use (hereinafter called 'commercial receivers') therefore constitute a separate product market.
Racal Decca has argued that the DNS is a system which consists of various elements (transmitting stations, signals and receivers) which cannot be considered separately from an economic point of view. However, the existence of two different markets, the DNS service market and the DNS commercial receiver market, can hardly be refuted on the basis of Racal Decca's arguments for the following reasons.
As to the DNS transmission market
(86) (a) Racal Decca has alleged that DNS transmissions alone without a DNS-compatible receiver are of no value whatsoever as a navigation aid. However, this has not prevented the development of a distinct demand for DNS receivers and, consequently, a distinct supply of these receivers in competition with Racal Decca's own receivers.
The fact that in Denmark and the United Kingdom the DNS transmission is not provided separately from the Racal Decca receivers is not objectively an economic feature, but is due to Racal Decca's deliberate refusal to so provide it. This subjective element cannot be relevant for the definition of the market which can only be based on objective considerations. Contrary to Racal Decca's allegations, the 'price' element (which is a market feature) is not lacking on objective grounds, but is the result of Racal Decca's own behaviour. As shown in paragraph 113, there were, in fact, means available to Racal Decca to receive a payment for the supply of the signals transmission. Moreover, Racal Decca has explained its refusal to supply DNS signals separately from its receivers on the grounds of the impossibility of obtaining a payment (which it called a 'contribution to the costs' but which, in fact, includes an element of profit). Racal Decca's own behaviour implies the recognition of the existence of a distinct market for the DNS transmission.
The lack of direct contact by Racal Decca with users is irrelevant in so far as a payment could have been obtained indirectly, inter alia through the schemes indicated in paragraphs 74 and 113.
Finally, in other countries, the DNS transmission is supplied by the State and, thus, separately from the receivers. This confirms the existence of a distinct market for transmissions, as the definition of a market cannot be made dependent upon the public or private nature of the supplies and/or the existence of a public service.
(b) In the report on the importance of the DNS in Denmark (paragraph 12 above), reference is made to the service and to its general use, and not to a system in which DNS signals and Decca DNS receivers are inseparable. The Danish Court of Appeal has confirmed this concept (paragraph 48 above).
As to the market for DNS commercial receivers
(87) In respect of receivers, not only producers but also Racal Decca have behaved as if these receivers constituted a separate market or at least an economic arena in which to face competition, as shown by the following facts:
(i) Racal Decca itself has started to sell multifunction receivers, which are compatible with DNS, Loran C, Omega and Transit. This receiver is not entirely dependent upon any of these systems and can enter into competition with any other receiver compatible with each of these systems, irrespective of the lack of interchangeability between the systems themselves (paragraph 15 above).
(ii) In the Racal Decca internal meeting on 12 March 1981, the chairman proposed to sell the receivers at the best possible price in order to maintain its market share (paragraph 21 above).
The relevant geographical market
(88) The relevant geographical market for DNS service was that part of the Community where signals transmitted from the United Kingdom and Denmark were received until 1 April 1987 and July 1987, respectively. This was the geographical area where (i) the criticized behaviour took place and (ii) in respect of the service supplied, the conditions of competition were similar.
In this area, the conditions of competition were similar because:
- the DNS service was supplied by an undertaking and not by a public authority,
- for the users of commercial vessels, signals which were interchangeable with DNS, or DNS signals from other chains, could not be received in most parts of this area.
(89) This area is a substantial part of the common market. The relevant DNS chains in the United Kingdom and Denmark represent about 20 % of DNS chains for transmission of DNS signals in the Community.
(90) In respect of commercial receivers the relevant geographical market is the Community. In this area conditions of competition are similar for all competitors. Like other receivers the commercial receivers are, or can be, traded in most Member States, no matter where DNS signals are received (paragraph 7).
The dominant position
(91) Racal Decca had a dominant position in each of the markets (i) for DNS signals, until April 1987 at least, and (ii) for commercial receivers, in the relevant geographical areas as defined above. It had a position of economic strength which enabled it to prevent effective competition from being maintained in each of these markets by giving it the power to behave, to an appreciable extent, independently of its competitors and its customers.
(92) Racal Decca's dominant position results from the following:
As to the market for the transmission of DNS signals:
(i) Racal Decca was the only supplier of DNS signals (paragraph 9); (ii) there was no potential competitor for Racal Decca, considering the high administrative and financial barriers to entry (paragraph 8).
(93) Racal Decca has argued that it did not have customers for DNS signals transmission which is not a market and, in any event, it could not behave independently from them, as it had no effective way of even monitoring, let alone forcing, any direct payment from them. However, Racal Decca as the sole supplier of DNS signals could act independently of customers, i.e. users of these signals, in terms of investment, production, and also price, as it did have means to obtain a payment, at least by encoding the signals (paragraphs 74 and 113), over which customers, i.e. users, had no influence. The fact that the payment could not be obtained directly is irrelevant.
(94) In any event the users of DNS signals, for whom the transmission of the latter is not interchangeable with other services or products, were dependent on the sole supplier of them. This is sufficient for finding that Racal Decca held a dominant position vis-à-vis these customers, independent of the definition of a market for DNS signals transmission.
As to the market for commercial receivers
(95) The total market consists of all commercial DNS-compatible receivers sold and hired out. Racal Decca had a legal monopoly for these receivers, covered by patent. After the patents expired, Racal Decca held a de facto near-monopoly until 1982.
(96) Racal Decca's market shares in each of the years from 1982 to 1987 by themselves sufficed to give Racal Decca a dominant position. This dominant position was strengthened by the fact that Racal Decca was the only supplier of the signals transmission. The arguments put forward by Racal Decca against that finding, as also the Commission position in this respect, are indicated hereinafter.
(i) According to Racal Decca, figures for rental and sale should be treated differently. Sale has an effect on competition from hiring (but not sale) not only in the year of sale but also in subsequent years. Therefore, the sales of Racal Decca's competitors should be aggregated with sales made in earlier years to determine the total number of such receivers in the market in any one year.
According to the Commission, the method consisting in measuring each year the market strength of the competing undertakings for DNS commercial receivers enables the evolution of this power in the relevant period to be known. For this purpose the demand during any one year and how much of it is covered by each undertaking should be determined. In this case, the demand originates not only from new users of DNS commercial receivers but also from renters of these receivers from Racal Decca at the expiration of their contracts. In any event, the approach of measuring market shares in terms of value, which does not raise this question, confirms the dominant position of Racal Decca.
(ii) Racal Decca has argued that the Commission cannot reach any conclusion on dominance without examining the number of those users for which the DNS commercial receivers have no alternative.
Such an investigation, even if feasible within a reasonable time and able to produce reliable results (which the Commission contests), appears to be unnecessary and even disproportionate for the purpose of the present proceedings. In any event, the number of commercial vessels for which the DNS is interchangeable with other navigation aids is not significant. Sooner or later commercial vessels navigate offshore or through the Channel, areas in which they have no alternative to DNS, and fishing vessels using DNS seek to repeat fishing positions or to discover the vessel track, these being uses for which there is no alternative to DNS.
Racal Decca itself, in its memorandum of 4 March 1985 to the Commission's announcement of a decision under Article 15 (6) of Regulation No 17, stated
'3.19. Marine users of DNS receivers fall into two general categories. - Commercial marine users - for many of whom a navigational aid such as DNS is practically essential; . . .'.
The result of the approach defended by Racal Decca would only be a slight reduction of its market share. It would still be sufficient to give Racal Decca a dominant position.
The abuse
(97) The following actions constituted abuse of Racal Decca's dominant position and were therefore an infringement of Article 86:
(a) The conduct leading up to and including the conclusion of all the agreements entered into with AP and PE-Navstar respectively;
(b) The changes in signals made for the purpose of impeding the functioning of competing receivers.
(98) By the above conduct, Racal Decca aimed at protecting the monopoly position it enjoyed for commercial receivers.
By the agreements under (a) Racal Decca intended to exclude those competitors with which it entered into such agreements from the market for commercial receivers. By the conduct under (b) it obstructed and coerced those competitors who were unwilling to enter into such agreements.
(99) By so doing, Racal Decca abused its dominant position, not because it defended this position, but because the actions it took for this purpose went beyond normal competitive behaviour. Normal competitive behaviour would have been to compete with the newcomers in the market for commercial receivers in terms of price, quality and after-sales service. Moreover, Racal Decca's behaviour prejudiced users because it limited their freedom of choice in that market.
(a) The agreements with AP and with PE-Navstar
(100) The object and the effect of the agreements with AP, taken as a whole, were to allocate the respective outlets for commercial receivers and for pleasure-boat receivers between the parties to the agreements. By the undertaking not to compete with each other and Racal Decca's obligation to discuss with AP before granting any licence to a third party, Racal Decca:
(i) reserved for itself the market for commercial receivers; and
(ii) gave to the other party, on a non-exclusive basis, substantial protection from competition for sales of DNS-compatible receivers for use in pleasure-boats only.
The agreements with PE-Navstar, taken as a whole, had the same object and substantially the same effect as under (i) above.
(101) Technical and economic progress was severely limited by the AP and PE-Navstar agreements. They eliminated all innovative competition for commercial receivers, and reduced such competition for pleasure-boat receivers by obliging AP and PE to supply only downgraded features.
(102) The fact that the agreements between Racal Decca and AP and Racal Decca and PE-Navstar had the object and the effect described above is confirmed by the following:
(a) the contents themselves of the several agreements in question, and in particular because the following provisions provided for an allocation of the markets (paragraphs 36 to 44 and 61 to 66):
(i) the obligation on AP and PE-Navstar to restrict their sales to pleasure-boat receivers only;
(ii) the obligation on Racal Decca not to produce or sell pleasure-boat receivers except as a distributor of AP receivers;
(iii) the features specification (downgrading) which ensured an easy control of the market partitioning by ensuring that the AP and PE-Navstar pleasure-boat receivers were virtually useless for at least a major proportion of the commercial users;
(iv) the retention of ownership in receivers supplied by AP and PE-Navstar as a means of recovering possession of a pleasure-boat receiver if it came into the possession of an allegedly unauthorized user;
(v) the obligation on Racal Decca to pay damages to AP for commercial Racal Decca receivers supplied for use on pleasure-boats.
(103) (b) During the negotiations the parties, Racal Decca and AP themselves, spoke expressly about 'dividing the markets' and some statements in the minutes of the meetings between them in the course of the negotiations show that this was the real intent (paragraphs) 31 to 34). This intent was also confirmed by AP to their dealers (paragraph 43).
- Copyright and other proprietary rights
(104) In spite of the name 'licence agreement', the substance of the main agreements between Racal Decca and AP and PE-Navstar respectively has no relation to a real licence agreement. Certainly, in the preamble to these agreements it is stated that Racal Decca 'owns copyright and other proprietary rights' which, nonetheless, are not more precisely defined.
As to those 'other proprietary rights', however, Racal Decca no longer holds any industrial property rights, its patents having lapsed; nor can it, nor does it, hold other proprietary rights; there is no legal property in the transmission of the signals, which is a service supplied, but only in the equipment, i.e. the chains. It cannot be seen, therefore, on what proprietary rights the licence is based.
As to the copyrights claimed by Racal Decca, it is not necessary to ascertain whether those copyrights really exist. The substance of the copyright alleged does not justify an agreement containing such far-reaching restrictions of competition. In any event, the object of these agreements is to allocate the markets. The principle established in respect of trademarks in the judgment of the Court of Justice of the European Communities of 30 January 1985 in Case 35/83, BAT Cigaretten-Fabriken GmbH v. Commission ([1985] ECR 375), applies also to the present case with regard to copyright. The Community system of competition does not allow an improper use of rights under national copyright laws which frustrates Community competition law.
(105) Racal Decca argues that it had 'perfectly legitimate commercial reasons for pursuing its claims to copyright protection', inter alia by ensuring that 'the infringing parties entered into agreements making an appropriate contribution to the DNS chain costs' and that 'the essential problem was how to secure adequate funding for the operation and maintenance of those parts of DNS owned and operated by Racal Decca at its own expense. Whether Racal Decca had rights was irrelevant to that need'. This confirms that the object and the effect of the agreements were not those of a normal licence agreement, but those criticised in paragraph 98.
(106) The other parties to the agreements were also doubtful as to the validity of the grounds for Racal Decca rights (paragraphs 50, 51 and 60). They were led to enter into agreements with Racal Decca above all under pressure of changes in the signals by Racal Decca, but also because of the commercial interest of sharing markets (paragraphs 30 to 34). In particular, these doubts led AP to consider seriously terminating the agreements (paragraphs 50 and 51).
(107) Subsequent to the Racal Decca-AP agreements of 1983, several AP distributors were also unconvinced of the soundness of Racal Decca copyrights (paragraph 43).
(b) Changes in the DNS signals
(108) The changes in DNS signals were abusive in that they were deliberately made in such a way as to cause the malfunctioning of the devices sold by unlicensed competitors. The intent to do so is proved by the following facts:
- on the entry of AP to the market, the alteration of signals was taken as a move by Racal Decca to defend itself against AP (paragraphs 24 and 27) as 'the best method of preventing AP sales' (paragraph 25), because it was its 'strongest weapon' (paragraph 27),
- this alteration of signals was used as an argument in Racal Decca's letters to RS as a means of discouraging them from entering the market (paragraph 46), and when it was actually carried out Racal Decca gave express warning to users about the consequent inaccuracy of RS 4000 receivers (paragraph 52),
- in the case brought against RS in Denmark, Racal Decca admitted the real reason for the changes (paragraph 52) as well as in its reply to the statement of objections.
(109) Complaints were made about the changes by customers (including users of Racal Decca devices) on several occasions, by governments within the IMO and by the International Association of Lighthouse Authorities, which pointed out what the real purpose of these changes was (paragraphs 53 to 55).
(110) The changes were effective and caused losses to customers (paragraph 53). In a Philips report on possible countermeasures, the conclusion was reached that the adaptation of the device, through the software, would take at least two months from the date of the signal change (paragraph 29). The attractiveness of a radio navigation receiver which might malfunction for two months after a signal change is necessarily seriously reduced.
As to Racal Decca's claim of contribution to DNS costs
(111) Racal Decca claims that:
(i) it required a very large sum of money to operate the DNS; and that
(ii) it needed to maintain its annual income from the hiring out of its own DNS receivers to pay the costs of transmissions.
(112) The Commission accepts that Racal Decca, which supplied a service, was prepared to do so only if it could obtain a price covering the costs of this service and a reasonable profit. For this purpose, however, Racal Decca, which had a dominant position for this service, was not entitled to use means which were illegal under Article 86 in as much as their object and/or effect were:
- the maintenance or the strengthening of its dominant position for DNS commercial receivers in a manner which is restrictive of competition, - the limitation of the access of third parties to the market for DNS commercial receivers and of the freedom of choice of the consumer.
(113) No undertaking has the right to ensure the continuation of its business by means which infringe existing laws, inter alia competition law. Therefore, the criticized behaviour remains abusive even if there were no other alternatives to those of ceasing to supply and abandoning the market for DNS transmissions. However, other means were in fact available to Racal Decca to enable it to receive a reasonable price for the supply of the signal transmissions. This issue was limited to the recovery of the relevant costs of running the chains in the United Kingdom and in Denmark. In other EEC countries the chains were already operated at no cost to Racal Decca. The alternatives were at least the following:
(a) the take-over of the chain by the State, which was already the case in most countries and which would have permitted Racal Decca to continue that business for which it could obtain a remuneration (the operating of the chains and the sale of the DNS receivers). Until 1986, however, Racal Decca did not pursue as far as it could this possibility for either the United Kingdom or Denmark (paragraphs 70 to 74);
(b) the proposal made by PE in 1984, to insert a yearly renewable integrated circuit (a decoder) so as to ensure a continuous income for Racal Decca, was not accepted (paragraph 60), but a similar proposal was made by Racal Decca to the Commission services in 1986, after the latter had expressed informal objections to its behaviour (paragraph 74).
The fact alleged by Racal Decca that British government officials did not consider encoding a desirable solution is not sufficient, in the absence of further evidence, to prove that this opinion (a) was definitive, (b) was binding and (c) could not be overcome, for example, by proposing variations of the basic solution. Moreover, Racal Decca has alleged that encoding would have produced the same result as the transmission changes considered abusive by the Commission, i.e. the malfunctioning of 'non-contributing' receivers. This argument is not founded as, though used to seek the same results, the way is different. In the case of encoding, this is equivalent to obtaining a price contractually agreed on by the customer for a device with certain features. In the latter case, extra-contractual behaviour caused harm to devices, bought legitimately and in good faith on the market, and also had the object of monopolizing the market for commercial receivers.
Effects of the abuse
(114) The effects of the abusive behaviour are considerable, inter alia because the ancillary measures reinforcing the market-sharing also concern the independent distributors and thus directly affect users (retention of ownership, user cards provided for in Racal Decca agreements with AP and PE-Navstar). The success of the pressure exerted by transmission changes is demonstrated by the severe reduction of RS market share from 1983 (the year following the commencement of the infringement) to 1986 inclusive. From 1986 the market share rose again following the termination of the infringement (paragraph 19).
Trade between Member States
(115) Commercial and pleasure-boat receivers are traded throughout the EEC. The reduction in the supply of DNS receivers both for commercial and pleasure-boat use, which has been caused by Racal Decca's abusive behaviour, is apt therefore to affect trade between Member States.
(116) Moreover, Racal Decca's behaviour also has the effect of modifying the patterns of competition within the EEC. Investments, production capacities, and thus the number and impact of competitors, are altered. For these reasons, therefore, trade between Member States is affected.
