Simonsen Vogt Wiig AS
  September 14, 2017 - Norway

Abuse of Dominance: Important Clarifications by the European Court of Justice

The European Court of Justice makes important clarifications relevant for dominant firms'' pricing and rebate policies in its recent Intel-judgment

Introduction

In recent months, the European Court of Justice (''ECJ'') delivered its long awaited judgment in the Intel appeal case. The judgment sets aside the ruling by the General Court and refers the matter back to that court. The ruling has already triggered quite a lot of commentary in the competition law legal community since the ECJ''s Grand Chamber ruling creates important precedence for future cases involving rebate schemes by dominant companies. It seems evident that the previous ''per se'' approach by competition authorities when assessing specific rebate schemes has to be replaced with a more effects based approach when enforcing the abuse of dominance rules. It thus seems fair to conclude that the ruling makes it more difficult for the competition authorities to pursue rebate cases and that dominant companies may compete on the merits with less risk of intervention.

The Intel Case in a Nutshell

In the contested decision, the Commission had imposed a fine of EUR 1.06 billion upon Intel for two types of abusive conduct, namely conditional rebates and so-called ‘naked restrictions’, intended to exclude a competitor from the market for CPUs. The first type of conduct consisted in the grant of rebates to four OEMs, namely Dell, Lenovo, HP and NEC, which were conditioned on these OEMs purchasing all or almost all of their x86 CPUs from Intel. The second type of conduct consisted in making payments to OEMs so that they would delay, cancel or restrict the marketing of certain products equipped with AMD CPUs.

The General Court found, in essence, that the rebates granted by Intel were exclusivity rebates, since they were conditional upon customers’ purchasing either all their x86 CPU requirements or most of their requirements from Intel. In addition, the General Court held that the question whether such a rebate can be categorised as abusive does not depend on an analysis of the circumstances of the case aimed at establishing the capability of that rebate to restrict competition. Still, the General Court also considered that the Commission had established, to the requisite legal standard and on the basis of an analysis of the circumstances of the case, that the exclusivity rebates and payments that Intel granted to were capable of restricting competition.

The ECJ''s analysis may be summarized as follows, I start with the findings that lead up to the conclusion:

  • It is in no way the purpose of the dominance provision (Article 102 TFEU) to prevent an undertaking from acquiring, on its own merits, the dominant position on a market. Nor does that provision seek to ensure that competitors less efficient than the undertaking with the dominant position should remain on the market.
  • A dominant undertaking, however, still has a special responsibility not to allow its behaviour to impair genuine, undistorted competition.
  • Dominant firms cannot adopt pricing practices that have an exclusionary effect on competitors considered to be as efficient as it is itself and strengthening its dominant position by using methods other than those that are part of competition on the merits. Accordingly, not all competition by means of price may be regarded as legitimate.
  • A dominant undertaking which ties purchasers — even if it does so at their request — by an obligation or promise on their part to obtain all or most of their requirements exclusively from that undertaking abuses its dominant position, whether the obligation is stipulated without further qualification or whether it is undertaken in consideration of the grant of a rebate. The same applies if the undertaking in question, without tying the purchasers by a formal obligation, applies, either under the terms of agreements concluded with these purchasers or unilaterally, a system of loyalty rebates, that is to say, discounts conditional on the customer’s obtaining all or most of its requirements — whether the quantity of its purchases be large or small — from the undertaking in a dominant position.

These findings should come as no surprise to competition lawyers. The interesting part of the ECJ''s reasoning comes in paragraph 138 onwards, where the ECJ finds that the case-law must be further clarified in the case where the undertaking concerned submits, during the administrative procedure (when under investigation by the Commission), that its conduct was not capable of restricting competition and, in particular, of actually producing the alleged foreclosure effects. The ECJ points out that the arguments should be put forward "on the basis of supporting evidence", but does not elaborate further on that point. If the dominant undertaking has submitted a defense supported by evidence during the investigation, the Commission is required to analyze the following elements:

  • The extent of the undertaking’s dominant position on the relevant market.
  • The share of the market covered by the challenged practice, as well as the conditions and arrangements for granting the rebates in question, their duration and their amount.
  • The possible existence of a strategy aiming to exclude competitors which are at least as efficient as the dominant undertaking from the market.

The ECJ goes on stating that the analysis of the capacity to foreclose is also relevant in assessing whether a system of rebates which, in principle, falls within the scope of the prohibition laid down in Article 102 TFEU, may be objectively justified. It has to be determined whether the exclusionary effect arising from such a system, which is disadvantageous for competition, may be counterbalanced, or outweighed, by advantages in terms of efficiency which also benefit the consumer. The balancing of the favorable and unfavorable effects of the practice in question on competition can be carried out in the Commission’s decision only after an analysis of the intrinsic capacity of that practice to foreclose competitors which are at least as efficient as the dominant undertaking.

If the Commission finds a rebate scheme abusive and the Commission had carried out such an analysis, the General Court "must examine all of the applicant’s arguments seeking to call into question the validity of the Commission’s findings concerning the foreclosure capability of the rebate concerned". This, according to the ECJ, the Commission had not done in the Intel case. The Commission had found that the rebates at issue in the case "by their very nature" were capable of restricting competition such that an analysis of all the relevant circumstances were not necessary in order establish the abuse of the dominant position. The Commission relied on this despite the fact that it had carried out a detailed test.

The Commission had carried out a very detailed analysis of the AEC [as efficient competitor] test, which led it to conclude "that an as efficient competitor would have had to offer prices which would not have been viable and that, accordingly, the rebate scheme at issue was capable of having foreclosure effects on such a competitor". Since the AEC test played an important role in the Commission''''''''''''''''s assessment, the General Court should, according to the ECJ have examined all of Intel''''''''''''''''s arguments concerning that test. Consequently, the ECJ concluded that the judgment of the General Court should be set aside because it had not analyzed whether the rebates at issue were capable of restricting competition. The General Court thus wrongly failed to take into consideration Intel’s line of argument seeking to expose alleged errors committed by the Commission in the "as efficient competitor test".

Which conclusions can then be drawn from the Intel judgment?

My reading of the judgment is that one can no longer conclude that there is an almost "per se" rule against exclusivity and loyalty rebates applied by dominant undertakings. Competition authorities must look at the effects of the arrangements and cannot simply base their decisions on the "nature" of the alleged infringement, without first examining the relevant circumstances in individual cases and also assessing the likelihood of the rebate scheme restricting competition in an appreciable manner. The judgment thus overrules the almost per se approach previously taken by the General Court in rebate cases and seems to further build on the Post-Denmark I case law which in my opinion illustrated that dominant firms may meet competition applying selective price reductions. In Post Denmark, the ECJ concluded that a policy by which a dominant undertaking charges low prices to certain major customers of a competitor cannot be classified as an exclusionary abuse merely because the price charged to one customers is lower than the average total costs attributed to the activity concerned, but higher than the average incremental costs pertaining to that activity. In order to assess the existence of anti-competitive effects, the Court stated that it is also necessary to consider whether that pricing policy, without objective justification, produces an actual or likely exclusionary effect, to the detriment of competition and ultimately of consumers'' interests. This seems to be fully in line with the ECJs line of reasoning in the Intel case.

The Intel is good news for competition economists since the signal from the ECJ is that stringent form-based assessment cannot be used as a basis for finding abuse alone: economic evidence is thus key to establishing an infringement in rebate cases.

It is also interesting to note that the ECJ so clearly states that Article 102 TFEU does not seek to ensure that competitors less efficient than the undertaking with the dominant position should remain on the market. The ruling is also good news for dominant undertakings since competition on the merits may involve a more aggressive pricing and rebate strategies as long as the strategy does not enable the dominant undertaking to foreclose competitors which are at least as efficient. In line with the Post Denmark I ruling, the competition authorities must also assess the possible existence of a strategy aiming to exclude efficient competitors.