On January 13, 2020, the Council of State upheld the appeals lodged by E.S.TR.A. S.p.A. and its subsidiary E.S.TR.A. Reti Gas S.r.l. (together, “E.S.TR.A.”),[1] and annulled the 2012 decision in which the ICA had fined E.S.TR.A. for abusing its dominant position in a local market for gas distribution, in a case raising novel and complex issues.
Background
On January 25, 2012, the ICA fined E.S.TR.A. in the amount of €276,132 for abusing its legal monopoly in the market for gas distribution in the Municipality of Prato, by initially refusing, and then delaying, the provision to the contracting authority of the information required for the launch of a public tender for the gas distribution services.
On August 1, 2019, the TAR Lazio partially upheld the action for annulment lodged by E.S.TR.A. against the ICA’s decision.[2] E.S.TR.A. had argued that its conduct was lawful in light of a judgment delivered in 2010 by the Regional Administrative Court of Tuscany (the “TAR Tuscany”),[3] which had rejected the action for annulment brought by the Municipality of Prato against E.S.TR.A.’s refusal to provide the requested information. The TAR Tuscany held that the Municipality’s request was not sufficiently specific and, accordingly, ran counter to the rules on access to documents (incidentally, the TAR Tuscany’s ruling was later reversed by the Council of State, which ordered E.S.TR.A. to provide the relevant information to the Prato Municipality).[4] The TAR Lazio dismissed this argument based on the TAR Tuscany’s ruling, restating the principle by which the fact that an undertaking’s conduct may be in line with sector-specific regulations does not necessarily make it legitimate from a competition law perspective.
However, the TAR Lazio partially upheld E.S.TR.A.’s argument that the fine should be re-determined by virtue of the uncertain legal basis of the alleged abuse. On the one hand, the TAR Lazio noted that shortly before the call for tenders, the relevant Italian rules were amended so as to require tenders to cover geographic areas including more than one municipality. In light of this amendment, it was uncertain whether the tender at issue, which was limited to the Municipality of Prato, was lawful. Accordingly, the TAR Lazio ordered the ICA to set the amount of the fine afresh excluding a three- month period between the amendment of the legal provisions concerning tenders, and the date in which the tenders launched in the meantime had been regularized. A further reduction was granted to take into account the favorable ruling of the TAR Tuscany.
The Council of State’s ruling
The Council of State quashed the ICA decision in toto, on the basis of the reasoning set out below.
Abuse of dominance as an abuse of rights
First, the Council of State recalled that, pursuant to settled case law, abuse of dominance represents an example of the broader category of abuse of rights, i.e., the distorted use of a given right by its holder for objectives that differ from those indicated by the legislator. As such, the Council of State noted that the notion of abuse of dominance had been the object of longstanding criticism for violating the principle of legal certainty, as the addressee of the relevant provisions may not be in a position to identify beforehand the conduct forbidden by such provisions (and adjust its behavior accordingly). However, the Council of State underlined that this criticism had been addressed by the CJEU in its 1979 judgment in the Hoffman La Roche case, in which the Court stressed that “a prudent commercial operator is in no doubt that, although possession of large market shares is not necessarily and in every case the only factor establishing the existence of a dominant position, it has however in this [connection] a considerable significance which must of necessity be taken into consideration in relation to his possible conduct on the market”.[5]
Judicial scrutiny and the principle of the presumption of innocence
The Council of State then reaffirmed the principle by which – in the context of the judicial scrutiny of an antitrust decision – the judicature must not only establish whether the evidence put forward by the ICA is factually accurate, reliable and consistent, but must also determine whether that evidence is capable of substantiating the conclusions drawn from it. In this respect, the judge may rely on technical rules and knowledge belonging to the same field of the notions applied by the competition authority. However, the Council of State also stressed that the benefit of doubt must be given to the undertaking to which the decision finding an infringement was addressed, particularly when such decision imposes fines, in light of the principle of the presumption of innocence resulting in particular from Article 6(2) of the Convention for the Protection of Human Rights and Fundamental Freedoms.[6]
The Council of State started its review of the ICA’s assessment of the alleged abuse of dominance, by stating that, in the case at issue, the “technical knowledge” to be taken into account related to law and economics theories, and particularly to theories regarding social costs, such as those developed by economist Ronald Coase and political philosopher Thomas Hobbes (respectively, the “Coase Theorem” and the “Hobbes Theorem”). In particular, under the Coase Theorem, when transaction costs are zero, private bargaining tends to lead to an efficient allocation of resources, regardless of any regulatory intervention by the legislator. On the other hand, according to the Hobbes Theorem, when transaction costs are significant, or for any reasons the parties are unable effectively to negotiate (e.g. due to the dominant position held by one of them), the legislator’s intervention is required; in this respect, economic efficiency is reached when a given right is granted to the party who values it the most. Building on the above principles, the Council of State observed that the theory of abuse of rights represents an application of the Hobbes Theorem: given that the parties may not efficiently bargain, and that the legislator granted to one of them (i.e., the incumbent) a right on the assumption that this may generally represent the most efficient solution, the competition authority must ascertain whether this is actually the case (or, conversely, whether the use by the incumbent of its dominant position does not lead to economic efficiency).
Applying the above principles to the case under review, the Council of State concluded that the ICA’s reasoning in the infringement decision did not allow the decision-maker to “ascertain with reassuring certainty” the existence of an abuse of dominant position. This was so because, first, E.S.TR.A.’s conduct – if assessed in light of other sector-specific criteria – fell within the lawful defense of one’s property (as demonstrated by the fact that E.S.TR.A. appealed the Municipality’s decision to launch a tender before the TAR Tuscany, but complied with the Municipality’s request following the final ruling issued on the matter by the Council of State). Moreover, the Council of State held that the ICA failed adequately to prove that – by recognizing the Municipality’s right to receive the information required for the tender procedure, regardless of E.S.TR.A.’s doubts on the lawfulness of such procedure – greater economic efficiency (to the benefit of consumers) would have been reached.
Accordingly, in light of the principle of the presumption of innocence, the Council of State granted E.S.TR.A.’s appeal.
[1] Council of State, Judgment Nos. 310 and 315/2020.
[2] TAR Lazio, Judgment Nos. 9140 and 9141/2017.
[3] TAR Tuscany, Judgment No. 6714/2010.
[4] Council of State, Judgment No. 3190/2011.
[5] Hoffmann-La Roche v Commission – Case 85/76, ECLI:EU:C:1979:36, §133.
[6] Telefónica and Telefónica de España v Commission – Case T-336/07, ECLI:EU:T:2012:172, §§72-73.