The
Council of State Dismissed Tüpraş's Appeal against the Turkish Competition Authority's
Record Fine for Abuse of Dominance

I.          Introduction

On October 15, 2017, the Council of State ("Court")
upheld[1]
the Turkish Competition Board's ("Board") 2014 decision on Türkiye
Petrol Rafinerileri A.Ş. ("Tüpraş").[2]
The Board had imposed a fine on Tüpraş for abuse of dominance, which amounted
to 1% of Tüpraş's total turnover in the previous financial year (approximately
EUR 141.6 million).[3] This
is the highest fine ever imposed on a single undertaking by the Board.

Tüpraş appealed against the Board's
decision, which had found that Tüpraş was dominant in the markets for the
wholesale (i) unleaded gasoline, (ii) diesel, and (iii) black petroleum
products. According to the Board's decision, Tüpraş had abused its dominance by
(i) pricing unleaded gasoline and diesel excessively for a period of three
months between October 2008 and December 2008, and (ii) tying rural diesel with
other products, including gasoline, fuel oil and jet oil for OMV Petrol Ofisi
A.Ş. ("POAŞ") and tying black liquid petroleum products (i.e., fuel oil and heating oil) with
white liquid petroleum products (i.e.,
gasoline, diesel, gas oil and jet fuel) for Altınbaş Petrol ve Ticaret A.Ş. ("Alpet").

The Court's judgment includes a detailed
analysis with respect to both procedural and substantial arguments put forth by
Tüpraş, and a number of its findings are
particularly noteworthy. The Court assessed, inter alia, (i) whether using "such as" in Article 5(2) of
the Regulation on Fines to Apply in Cases of Agreements, Concerted Practices
and Decisions Limiting Competition, and Abuse of Dominant Position ("Regulation
on Fines") complies with the law, given that this phrase allows the
Board to determine the fine amount based on factors other than those listed in
this provision, (ii) whether the Board had a quorum to determine the fine
amount, (iii) the legal test to be applied for establishing excessive pricing,
and (iv) the legal test to be applied for establishing unlawful tying.

I.          Whether the Unlimited Criteria in Article
5(2) of the Regulation on Fines for Determining the Base Fine Complies with the
Law

Article 5(2) of the Regulation on Fines sets out a non-exhaustive list of criteria for determining
the base fine against anti-competitive practices. This list includes "issues such as the market power of
the undertakings or associations of undertakings concerned, and the gravity of
the damage which has occurred or is likely to occur as a result of the
violation shall be taken into account" (emphasis added). Tüpraş claimed that using "such as" herein, and not
limiting the criteria that will factor into the calculation of the fine amount,
violates the principle of legality and leads to uncertainties regarding the application
of the law.

In its assessment, the Court cited Article 124 of the
Turkish Constitution, which entitles public entities to issue by-laws in order to implement laws, provided that these
by-laws do not contradict the underlying laws. Accordingly, the Turkish
Competition Authority ("Authority") has discretion to adopt
regulations to provide and establish the criteria that are applicable to the fine
calculation. The Court further held that the same criteria that the Board
adopted in Article 5(2) of the Regulation on Fines are also listed in Article
16 of the Law No. 4054 on the Protection of
Competition ("Law No. 4054"), and therefore, these criteria had already been recognized
by the law. The Court also decided that the Regulation complied with Article
17 of the Law of Misdemeanors No. 5326 applicable to administrative fines,
which provides that "when determining the
amount of the fine, the wrongfulness of the misdemeanor and the perpetrator's culpability
and economic condition will be taken into account." Accordingly, the Court concluded that the Authority had not exceeded
its discretion, and thus the provision did not violate
the principle of legality, nor did it lead to any legal uncertainties.

Since the Regulation on Fines entered into force in
2009, the Council of State has dealt with, and dismissed, numerous requests for
the annulment of this regulation in part or in whole.[1]
In the case at hand, the phrase "such as"
in Article 5(2) of the Regulation on Fines was specifically challenged
and, not surprisingly, the Council of State once again refused to annul a
provision of the regulation.

II.          Whether the Board had a Quorum to Determine
the Fine Amount

Tüpraş's main
plea on procedure is related to the quorum required for the Board to decide on
an administrative fine for competition law infringements. In the Tüpraş case,
seven members attended the Board meeting for the final decision and five
attendees voted in favor of a ruling that a violation of Article 6 of the Law
No. 4054 had occurred. Of these five attendees, three voted for a fine of 1% of
Tüpraş's total turnover in the previous financial year, one Board member voted
for a fine of 0.5%, and one Board member voted for a higher fine. As the Board
members did not reach a consensus on the fine amount, Tüpraş claimed that the
Board had lacked a quorum to determine the fine amount.

Under Article 51 of the Law No. 4054, for
final decisions, at least five Board members-including the Chairman or the
Deputy Chairman-must be present at the Board meeting, and at least four members
must be in agreement (i.e., vote the
same way) in order to reach a valid decision. The law, however, does not
provide any guidance on how the requirement that "at least four board
members shall vote the same" should be interpreted when the Board members'
view on the appropriate fine amount is too diverse to achieve the required
majority.

As the Law No.4054 is silent on this particular
matter, the Court held that Article 229 of the Code of Criminal Procedure No.
5271 shall apply by analogy, and that the least favorable vote for the
defendant shall be added to the votes on the closest fine amount until the
required majority is achieved. In the case at hand, as three members had voted
for a fine of 1% of Tüpraş's turnover, one member had voted for 0.5% and
another member had voted for a higher
fine, the Court decided that the last vote should be added to the votes
favoring 1% fine. After applying this methodology, the Court found that the
threshold for imposing 1% fine had been met and, therefore, dismissed Tüpraş's
plea.

The Law of Misdemeanors No. 5326, which sets forth the
general principles applicable to administrative fines, refers to the Code of Criminal Procedure No. 5271 in certain provisions.[2]
Applying criminal law principles to administrative procedures is therefore not
uncommon in Turkish law. Procedural rules related to imposing administrative
fines, however, are not among those referring to the criminal procedure. The
Court therefore expanded the scope of criminal law principles applicable to
administrative law procedures. Further, this is the first decision where the
Court applied the Code of Criminal Procedure No. 5271 to an issue related to
competition law.

 III.         The Legal Test for Establishing Excessive
Pricing

Tüpraş asserted a number of pleas related
to the Board's excessive pricing analysis. In theory, excessive pricing may
distort competition and thus can be prohibited as an abuse of dominance under
Turkish competition law. In practice, however, the Authority follows a similar
approach as its counterparts in most other jurisdictions and is usually
reluctant to intervene against businesses' pricing strategies. Indeed, so far the
Authority has considered such a practice an infringement only in a few cases
with exceptional circumstances.[3]
The Turkish courts affirmed that the Authority's intervention in excessive
pricing may be justified in "markets
where there is no competition, the market cannot correct itself, excessive
pricing does not encourage new entry, barriers to entry are high, and
information flow is not homogeneous."[4]

In the present case, the Board found
Tüpraş dominant in all the three relevant markets where Tüpraş's market shares
were 56%, 91% and 97.8%, barriers to entry were high and there was no
significant countervailing buyer power. Further, following a price comparison
analysis based on Platts Italy CIF Med (i.e., an international company
providing reference prices for petroleum trade) prices and export market prices
as a benchmark, the Authority concluded that Tüpraş's domestic market refinery sales
prices were approximately 15% - 20% higher than the market prices for the last
three months of 2008, and thus excessive.

On appeal, Tüpraş first challenged the Board's
dominance analysis and argued that the Board had failed to consult other actors
in the market such as importers and distributors. Second, Tüpraş claimed that the
Board's excessive pricing analysis had been flawed because (i) excessive
pricing could only be applied by legal or natural monopolies, (ii) due to the
nature of the industry, the most accurate cost metric the Board should have
used in its price-cost analysis was "total costs" instead of "product-based
costs" (iii) for excessive pricing to occur, the relevant pricing policy should
continue for a long period of time, whereas Tüpraş had allegedly applied excessive
prices for only three months, (iv) there is no generally accepted benchmark
that can be used to determine whether a price is excessive, and further, in its
previous decisions, the Board had found profit margins that were higher than those
of Tüpraş to not be excessive, (v) the Board should have conducted a price
comparison analysis by reference to adjacent geographical markets with similar
conditions, instead of comparing Tüpraş's prices in a domestic market with Platts
Italy CIF Med and export prices, and (vii) the Board's decision did not account
for the economic crises in 2008, which lead to fluctuations in petroleum prices
as well as exchange rates, and ultimately caused Tüpraş to suffer a financial
loss during the relevant time period.

The Court dismissed all these pleas and affirmed
the Board's finding that Tüpraş is dominant in the markets and abused its
dominance. In its assessment, the Court held that (i) Tüpraş had maintained a
high market share in the relevant markets despite fluctuations over the years,
(ii) the relevant markets were characterized by substantially high barriers to entry,
(iii) distributors did not possess significant countervailing buyer power against
Tüpraş, and that (iv) Tüpraş was the only player in the petroleum refining market
in Turkey.

As regards the arguments against the Board's
excessive pricing analysis, the Court found the Board's price comparison
methodology valid as the market conditions did not allow a geographic price
comparison due to dissimilar market conditions in adjacent markets. In its assessment,
the Court first cited Article 10 of the Law No. 5015 on the Petroleum Market,
which provides that "the pricing for the
purchase and sales of petroleum shall be determined according to the nearest
accessible global free market conditions." Second, the Court emphasized
that the European Court of Justice ("ECJ") had not limited the methodology
for the Economic Value Test and, on the contrary, had acknowledged that other
methods can also be used for price comparisons. The Court also rejected
the argument that the Board cannot deviate from the time period and profit-margin
levels it used to assess excessive pricing in previous cases, and held that
these factors would be considered on a case-by-case basis.[5]

Besides upholding a record fine for an
exceptional type of infringement, this Court decision is also prominent given
its detailed assessment of the legal test applicable to excessive pricing cases.
In order to determine whether the Authority's test was accurate, the Court used
the approach employed in the EU as a reference point. In particular, the Court cited
the ECJ's United Brands decision, where
excessive pricing was characterized as a strategy where the price charged "has no reasonable relation to the economic
value of the product supplied."[6]
This ECJ decision sets out a two-step test: (i) whether the difference between
the actual costs and the price is excessive, and if so, (ii) whether the price
is either unfair in itself or when compared to competing products. For the
second step of the test, prices are usually compared geographically (e.g., United Brands,[7]
Lucazeau[8]),
and across competitors' prices (e.g.,
United Brands, British Leyland[9]).

The Court emphasized that the Turkish
competition law regime usually applies a two-step test as well, but unlike the
European approach, the Board prioritizes price comparison over a price-cost
analysis and only compares prices with costs if costs can be calculated with
certainty.[10] Moreover,
the Court noted the lack of EU and Turkish precedent regarding a standard duration
or profit margin that would be applicable to all cases for assessing whether a price
is excessive, and that the competition authorities do a case-by-case analysis.
In this respect, the Court affirmed the Board's methodology, which demonstrated
that Tüpraş's prices had been approximately 15%-20% higher on average than Platts
Italy CIF Med prices for about three months.

Another noteworthy aspect of the decision
is the Court's finding that a dominant firm can abuse its position regardless
of whether it recorded profit or loss in the relevant period. The Court declared
that the assessment of excessive pricing allegations should focus on whether
consumers were harmed by the investigated practice rather than whether the company
made a profit or sustained a financial loss during the relevant period. This
approach is in line with previous Board decisions on excessive pricing, where the
Board rejected financial loss defenses and determined that such pricing
practices may harm consumers even if the relevant undertaking did not earn a profit
in the relevant period.[11]

 IV.        The Legal Test for Establishing Tying

The Court's
decision also includes an extensive analysis on Tüpraş's pleas against the
Board's findings with respect to tying practices. Tüpraş argued that (i) the
Board's assessment on tying practices had been based on an inadequate review,
(ii) the Board had not specifically identified tying and tied products, (iii)
the Board had not investigated whether Tüpraş's alleged tying practices foreclosed
the market, (iv) the relevant practices concerned issues of contract law rather
than competition law, and (v) Tüpraş's practices had aimed to maintain refinery
production balances and thus had an objective justification.

In line with the
Board's recent decisions[12] and Paragraph
86 of the Authority's Guidelines on Exclusionary Practices of Dominant Firms of
2014 ("Dominance Guidelines"), the Court held that the following three
conditions must be cumulatively met for tying practices to be prohibited as an abuse
of dominance: (i) the undertaking must be dominant in the market for the tying
product, (ii) there must be separate markets for the tied and tying products, and
(iii) tying practices must carry a potential of foreclosing the market. The
Court also referred to the recent change in the Board's decisional practice regarding
the third condition and affirmed that, for tying practices to be deemed unlawful,
the Board must prove actual or potential foreclosure of the relevant market.[13]

As Tüpraş's
dominant position had already been established through the excessive pricing
analysis, the Court focused on the other two conditions and referred to the
Board's findings with respect to the business strategies that Tüpraş had
employed against POAŞ and Alpet from 2007 to 2009. According to the Board's
decision, Tüpraş had repeatedly warned POAŞ that unless it purchased a certain
amount of rural diesel from Tüpraş, Tüpraş would not supply other products in
the amounts that POAŞ had requested. Since POAŞ had not increased its rural
diesel purchases, Tüpraş restricted the supply of certain products to POAŞ, including
gasoline, jet fuel and fuel oil. The Board further found that POAŞ had not been
able to find an alternative supplier in a reasonable time, and thus, had been
unable to sell certain products to its customers and failed to fulfill its
obligation to maintain national reserves. Consequently, POAŞ had agreed to
increase its rural diesel purchases from Tüpraş, and only then did Tüpraş end
its supply restrictions against POAŞ. By the end of the year, POAŞ was forced
to increase its purchases to the amount that had been specified by Tüpraş.

As regards Tüpraş's
other customer (Alpet), the Board found that Tüpraş warned Alpet to purchase both
black liquid and white liquid petroleum products in similar amounts. Given that
Alpet's white liquid petroleum product purchases were lower than what Tüpraş
had requested for the relevant period, Tüpraş subsequently decreased the
quantity of its supply to Alpet for all products by 20%, except for heating oil.
After continuing this supply restriction strategy for approximately three
months, Tüpraş informed Alpet that if Alpet did not buy white liquid petroleum products
in the amounts that Tüpraş specified, Tüpraş would stop selling heating oil to
Alpet in the amounts that Alpet requested as well. Consequently, Alpet was forced
to significantly increase its purchases of white liquid petroleum products compared
to previous months.

Based on these
findings, the Court first held that the Board had explicitly identified the tying
product and the tied product separately and dismissed Tüpraş's plea. The Court
also upheld the Board's conclusion that Tüpraş's tying practices had anti-competitive
effects because Tüpraş's customers had to make their purchases from Tüpraş
instead of being able to switch to alternative suppliers.[14] In light of
these findings, the Court held that all three conditions for an unlawful tying practice
had been satisfied in the case at hand. Furthermore, the Court did not find Tüpraş's
objective justification defense plausible.

V.         Conclusion

The Court's Tüpraş decision not only upheld the
highest fine ever imposed on a single undertaking in Turkish competition law
history, but also shed light upon crucial and (to a certain extent)
unprecedented procedural and substantive issues in abuse of dominance cases, as
well as competition law practice in general.

This decision may pave the way to filling certain procedural
gaps in the Law No. 4054 on the Protection of Competition and the application
of criminal law principles to administrative law proceedings. Given the
detailed analysis in the decision with respect to the two legal tests used for
abuse of dominance assessments, it would also be reasonable to expect that the
Court will not shy away from similar complex discussions in the near future and
will continue to critically review the Board's substantive analyses.

This decision is particularly important due to its
emphasis on a less interventionist and more effects-based approach to tying
practices. It also recognizes the Authority's discretion to choose the
appropriate methodology that should be employed in excessive pricing cases, to
determine what price level should be considered excessive in a given market,
and how long the pricing strategy should continue for the conduct to be found
to restrict competition.

Authors: Gönenç Gürkaynak,
Esq., Burcu Can, Esq., Baran Baş, Ceren Göktürk and Deniz Benli, ELIG,
Attorneys-at-Law

(First
published in Mondaq on March 13, 2018)

[1]
See
e.g., Council of State, 13th Division, Decision no. E.
2011/4084, Decision no. E.2011/2500, Decision no. E.
2011/2499, Decision no. E. 2013/225, Decision no. E. 2011/4484, Decision no. E.
2012/337.

[2]
Articles 22(4), 28(5), 29(1), 29(5),
40(2) of the Law of Misdemeanors No. 5326.

[3]     Tüpraş, Board's Decision of January
17, 2014, no. 14-03/60-24; Tüpraş, Board's
Decision of November 4, 2009, no. 09-2/1246-315; Ataköy Marina, Board's Decision of April 24, 2008, no.
08-30/373-123; Belko, Board's Decision
of July 8, 2009, no. 09-32/703-163, OTAŞ/EGO/İZGAZ/İGDAŞ,
Board's Decision of March 08, 2002, no. 02-13/127-54; Çakıroğlu, Board's Decision of May 12, 2010, no. 10-36/577-207; TMST, Board's Decision of June 10, 2010, no. 10-42/756-243; and Bereket Jeotermal, Board's Decision of
February 14, 2008, no. 08-15/146-49.

[4]        Decision of the 10th Chamber of the Court, dated December 5, 2003,
and numbered 2001/4817 E., 2003/4770 K.

[5]
Tüpraş also argued that the petroleum market
is regulated by the Turkish Energy Market Regulator (EPDK), and therefore, the
Authority did not have jurisdiction in this case, and that the EPDK had
investigated the same allegations but had not found a violation of the law. The
Court dismissed this plea stating that the Turkish Competition Authority still had
jurisdiction in competition-law-related matters in the energy market, even
though the market is regulated by another public body. Furthermore, the Court
noted that Tüpraş had been free to set the prices for the relevant products because
they had not been subject to the EPDK's 2006 tariffs for petroleum.

[6]     ECJ Case 27/76 United
Brands, 14 February 1978.

[7]
Ibid.

[8]
Judgment of 13 July 1989, Lucazeau and Others v Sacem and Others,
Joined C: 110/88, 241/88, 242/88, EU:C:1989:326.

[9]
Judgment of 11 November 1986, British Leyland Public Limited Company v
Commission, C: 226/84, EU:C:1986:42.

[10]  For instance, in the Soda decision (Board's Decision of April 20, 2016, no.
16-14/205-89), the Board compared the prices of Soda with its competitors' prices
in order to assess whether Soda's prices were excessive. A similar methodology
was applied in other decisions, such as Belko
and Tüpraş.

[11]
See,
e.g., Belko, Board's Decision of
April 6, 2001, no. 01-17/150-39; Congresium,
Board's Decision of October 27, 2016, no. 16-35/604-269.

[12]  See
e.g., Google, Board's Decision of December 28, 2015, no. 15-46/766-281;
TFF, Board's
Decision of November 26, 2014, no.14-46/834-375; Coca-Cola, Board's Decision of February
26, 2014, no. 14-08/159-69; Ziraat
Bankası, Board's Decision of December 5, 2013,
no. 13-69/935-395; Siemens, Board's Decision of November 15, 2012, no. 12-57/1540-553;
TTNET, Board's
Decision of September 30, 2010, no. 10-62/1287-488.

[13]
In a number of decisions in the past,
the Board had referred only to the first two conditions and had found tying practices
to be unlawful regardless of their actual or potential foreclosure effects (see, e.g., Digitürk, Board's Decision of September 7, 2006, no.
06-61/822-237). However, in its recent case law as well as in the Dominance
Guidelines, the Board has adopted a more effects-based approach and has acknowledged
that tying practices must at least have a potential to foreclose the relevant
market in order to infringe competition law rules.

[14]  It should be
noted that, following the Authority's investigation, two of the five case
handlers dissented from the majority view that Tüpraş's tying practices were
unlawful. The Board decision does not elaborate on or provide the reasoning of
the dissenting opinions.