Member Article

On 15 March 2007, the European Court of Justice confirmed that the European Commission had been correct to fine British Airways £6.8 million for abusing its dominant position by operating loyalty enhancing performance bonus schemes for travel agents since the schemes had the effect of excluding competitors without any objective economic justification.

This is good news for smaller players faced with a dominant undertaking which is using discount schemes to unfairly retain or enhance its market power.

The timing of the judgment is somewhat ironic, though, as it essentially reinforces the Commission’s traditional enforcement policy at a time when it is seeking to move towards a more effects-based approach. Notwithstanding this apparent conflict, the Commission will still be free to prioritise its enforcement policy such that only those abuses which have an actual effect are investigated.

The initial complaint
Virgin Atlantic Airways Limited (Virgin), the then new entrant, complained to the Commission in July 1993 about a BA bonus scheme. BA’s scheme provided travel agents with a basic commission for the sale of BA tickets and a separate additional performance bonus calculated by reference to the increase in sales compared to the previous year. The performance bonus was payable on all BA tickets sold, not just those above the target sales threshold.

BA changed the bonus scheme in 1998, the main difference being that the travel agent’s performance was measured by reference to its sales in that month compared to sales in the same month of the previous year. Virgin also made a complaint in respect of this revised scheme.

The law
Article 82 of the EC treaty prohibits undertakings from abusing their dominant position. It also lists examples of prohibited conduct. This includes the application of dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage.

In addition, previous case law (such as Hoffmann-La Roche) has held that loyalty rebate schemes are contrary to article 82 where the rebates cause customers to purchase all or most of their requirements from the dominant undertakings without
any corresponding economic efficiencies.

The Commission decision
The Commission found that both BA performance bonus schemes amounted to an abuse of its dominant position by rewarding loyalty from travel agents and by discriminating between travel agents with the object and effect of excluding BA’s competitors from the UK market for air transport. In consequence, the Commission imposed a fine of £6.8 million in 1999.

BA’s appeal before the Court of First Instance
BA appealed this decision to the Court of First Instance in 2003.In support of its appeal, BA submitted eight pleas in law. These ranged from alleging that the Commission lacked competence to those claiming that there was no abuse of a dominant position. Each plea was, however, rejected by the CFI.

In particular, as regards whether there was an abuse of a dominant position, the CFI found that:

* the Commission was correct to define the relevant market as air ticket distribution services in the UK;
* BA held a dominant position in this market;
* BA had applied dissimilar conditions to equivalent transactions given that different agents would receive different levels of commission for exactly the same level of revenue; and
* the loyalty enhancing scheme limited the access of BA’s competitors without any economic justification.

It therefore upheld the Commission’s decision that BA had breached article 82.

Appeal to the ECJ
Following the CFI’s decision, BA appealed to the ECJ but only on whether there had been an abuse of a dominant position. There were five main grounds to this appeal, all of which were rejected as being inadmissible or lacking in foundation (in accordance with the advocate general’s recommendation).

Looking at the substantive findings:

* Wrong test in assessing exclusionary effects. The ECJ rejected BA’s argument that the CFI and Commission had used the wrong test in assessing the exclusionary effects of the bonus schemes and concluding that they had no objective economic justification. In particular, the ECJ rejected the argument that the CFI should have based its findings on the practices contained in article 82. This was on the basis that such practices are not an exhaustive list.

It also concluded that the bonuses and discounts schemes considered in the cases of Michelin and Hoffman-La Roche are only examples of anticompetitive debates/discounts and not an exhaustive.

The ECJ, unsurprisingly, found that the correct approach is to consider the underlying factors which have guided previous case law. It followed that in considering whether a system of discounts or bonuses constitutes an abuse, it first has to be determined whether those discounts or bonuses can produce an exclusionary effect.

The relevant questions, according to the ECJ, are whether the discounts or bonuses are capable, firstly, of making market entry very difficult or impossible for competitors of the dominant undertaking and, secondly, of making it more difficult or impossible for its customers to choose between various sources of supply or commercial partners.

BA loyalty rebates
If this “exclusionary effects” condition is fulfilled, consideration must then be given to whether there is an objective economic justification for the bonuses granted. For this, it has to be determined whether the exclusionary effect may be counterbalanced, or outweighed, by advantages in terms of efficiency which also benefit the consumer. If not, that system must be regarded as an abuse.

Applying this to the facts of the case, the ECJ held that the CFI was correct to examine and find that BA’s bonus schemes had a loyalty enhancing effect capable of producing an exclusionary effect and was without economic objective justification.

In particular, it noted in respect of the “exclusionary effect” condition that the CFI had correctly considered the following three features:

* The schemes were based on individual targets, dependent on growth in turnover of individual agents over a particular period.
* The schemes rewarded the whole turnover achieved from BA sales, not just the increase of turnover above the performance threshold. As a result, even small changes in sales could have a disproportionate effect and this provided a strong incentive not to switch.
* Other airlines would have to offer disproportionately higher rebates to persuade travel agents to switch from BA. Given the structure of the market and BA’s position, other competitors were not able to do so.

Although not exhaustive, these features will clearly be useful in assessing other types of discount or bonus schemes.

This ground of appeal was therefore dismissed.

* Disregarding evidence that schemes had no material effect. BA also claimed that the CFI had erred in law by disregarding evidence which BA claimed to show that there was no material effect on its competitors.

The CFI was held not to have committed any error of law in concluding that the bonus schemes had a fidelity-building effect. It had examined the schemes by, for example, emphasising the very noticeable effect at the margin. As such, BA could not claim that the CFI did not examine the probable effects of those schemes.

The ECJ was also satisfied that the CFI did take into account all relevant circumstances, reiterating that it cannot substitute its appraisal of market conditions and the competitive situation for that of the CFI.

* Prejudice to consumers. The ECJ quickly dismissed BA’s argument that the CFI did not properly take account of whether consumers suffered prejudice as a result of the schemes. It stated that article 82 is designed to protect the structure of the market. Accordingly, it applies not only to conduct which can directly prejudice consumers but also which indirectly prejudices them by conduct that is detrimental to the state of effective competition (emphasis added). The ECJ also found that this assessment should not be altered by article 82(b), which refers to prejudice to consumers, as this is only an example of conduct. BA’s third plea was therefore rejected.

* Discriminatory effects. BA claimed that the CFI had misapplied article 82(c) which prohibits dominant undertakings from applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage.

BA alleged that the CFI was incorrect to assume that certain travel agents sales could be seen as equivalent transactions and not to give detailed finding as to the existence of competitive disadvantage.

The ECJ rejected these arguments. It held that it was appropriate for the CFI to find that the schemes resulted in different travel agents receiving different rewards in return for the sale of an identical number of tickets (depending on whether the sales targets were met and exceeded).

The ECJ also found that the CFI had been justified in concluding that, for there to be abusive discrimination, the abuse must hinder the position of business partners of the dominant undertaking, with no requirement of actual quantifiable deterioration in the competitive position of individual companies (emphasis added). It therefore held that the CFI was correct in concluding (without further analysis) that agents’ ability to
compete had been affected by the schemes due to discriminatory treatment of equivalent transactions.

Comment
Although the terms of the ECJ’s decision was as expected, the clarity given in this judgment will not only be good news for smaller airlines which are trying to target new markets or new routes dominated by one or two incumbents, but will also be good news for any smaller player faced with a dominant company that is using its discount or rebate structure to protect its market power.

The timing of the judgment is, however, somewhat ironic as it essentially reinforces the Commission’s traditional enforcement policy at time when it is seeking to move towards a more effects-based approach. Notwithstanding this apparent conflict, the Commission will still be free to prioritise its enforcement policy such that only those abuses which have an actual effect are investigated.

In that regard, it is worthwhile to note the terms of Advocate General Kokott’s opinion that ”Any reorientation in the application of article 82 EC can be of relevance only for future decisions of the Commission, not for the legal assessment of a decision already taken. Moreover, even if its administrative practice were to change, the Commission would still have to act within the framework prescribed for it by article 82 EC as interpreted by the Court of Justice.”

It will therefore be interesting to monitor whether there is any shift from the discussion paper published by the Commission in 2005 which presented an economic and effects-based framework for analysing exclusionary abuses and the enforcement policy of the Commission going forward.

Joanne McDowall and Dawn Henry are solicitors specialising in competition law with UK law firm Shepherd and Wedderburn