On 6 October 2015, the CJEU handed down its keenly awaited ruling on the Post Danmark case, providing revised guidance on how rebate schemes employed by dominant companies should be assessed under the European dominance rules (Article 102 TFEU and the national equivalents). The case was referred to the CJEU by a Danish court, which is considering whether the Danish competition authority correctly assessed the dominant company’s rebate scheme.
The decision comes amid a number of other recent and on-going investigations involving rebates used by dominant undertakings. These cases suggest a lowering of the evidential burden on the part of the competition authorities in proving abuse. The clear message is that dominant firms must be wary of any non-linear rebate system, particularly where the level of rebate is not demonstrably linked to actual savings.
It is well-established that dominant companies can employ standardised, volume-based rebate schemes where the discounts are linked to genuine economic efficiencies achieved though supplying larger volumes.
Rebate schemes used by dominant firms can, however, be abusive if their effect is to lock in a substantial proportion of market demand to the dominant company, which may then have an exclusionary effect on competitors.
The Post Danmark Decision gives fresh guidance on how and when a competition authority will find an exclusionary effect.
Key takeaways for dominant companies employing rebate schemes:
There is no de minimis threshold. The exclusionary effect must simply be “probable” (i.e. more likely than not) and “not insignificant”.
This means that it would be relatively easy for a court or competition authority to find a rebate scheme abusive.
Competition authorities are not obliged to apply the as-efficient competitor (AEC) test – the prevailing economic test which, broadly speaking, considers whether a well-placed competitor could profitably compete at the dominant firm’s price-point, taking into account the rebate.
The decision may give competition authorities greater confidence in reaching an infringement decision without the need to undertake an AEC test, which is
time-consuming and an expensive exercise, particularly where other factors clearly point towards abuse. Interestingly, the UK’s CMA recently (June 2015) dropped an investigation into retroactive rebates used in the pharmaceuticals sector largely on grounds of expense.
A retrospective rebate increases the risk of exclusionary effects
A retrospective rebate is one in which each incremental level of rebate applies to the entire volume purchased during the reference period, not just the incremental increase in volume. This means that each new level triggers a much higher discount, and hence greatly increases the loyalty-enhancing (and hence exclusionary) effect.
A rebate scheme applied to a high proportion of customers is more likely to have exclusionary effects
This does not mean, however, that a dominant company can reduce risk of infringement by applying the rebate system to selective customers. A dominant company that employs different pricing models for similarly placed customers (without objective justification) risks a finding of abusive discriminatory pricing,
Facts of the Post Danmark case
- Post Danmarkhad a 95% share of the market of the Danish “bulk mail” market.
- It operated a volume-based rebate scheme, with aseries of tiers starting at 30,000 letters, offering rebates starting at 6%(for 30,000 letters) increasing by 1% increments until the final two tiers,
which increased by 2% increments. The final tier rebate was 16%.
- The rebate applied retroactively to all previousvolumes in the reference period, not only to the increment.
- The scheme applied equally to all customers.
A little more detail: When is it (in)appropriate for an authority to apply an AEC test?
The CJEU concluded that there is no legal obligation on a court or competition authority to apply the AEC test in order to find that a rebate scheme has an (abusive) exclusionary effect but continued to state:
“Nevertheless, that conclusion ought not to have the effect of excluding, on principle, recourse to the as-efficient-competitor test in cases involving a rebate scheme for the purposes of examining its compatibility with Article 82 EC.”
While economic analysis clearly has a role in the assessment of exclusionary effect, the question is: “when does the AEC test need to be applied?”
The CJEU decided that it may not be appropriate to apply the AEC test where:
i. the dominant company has a very large market share
“[I]n a situation such as that in the main proceedings, characterised by the holding by the dominant undertaking of a very large market share and by structural advantages conferred, inter alia, by that undertaking’s statutory monopoly … applying the as-efficient-competitor test is of no relevance inasmuch as the structure of the market makes the emergence of an as-efficient competitor practically impossible.”
ii. A less-efficient competitor might actually exert competitive constraints on the dominant company in the market context
“[I]n a market such as that at issue in the main proceedings, access to which is protected by high barriers, the presence of a less efficient competitor might contribute to intensifying the competitive pressure on that market and, therefore, to exerting a constraint on the conduct of the dominant undertaking.”
Whilst the AEC is clearly not rendered redundant by the judgment (indeed, we would expect that the authorities will continue to use AEC as a measure exclusionary effect in “standard cases”), it is conceivable that there will exist a number of other circumstances in which a court or competition authority might consider it inappropriate to apply the AEC test.
Other recent and on-going investigations into dominance rebates
In 2012, the European Commission imposed a fine of €1.6 billion on Intel for operating a range of abusive conditional rebates relating to sales of its x86 CPUs.
The rebate scheme operated by Intel differed from those used by Post Danmark in that Intel expressly required customers to concentrate most (80-95%) of their x86 requirements with Intel. The rebates in Post Danmark merely had the indirect effect of incentivising customers to concentrate a significant proportion of their requirements – there was no express obligation.
This distinction is important. In Intel, the Commission (and the General court) held that these “explicit” rebates are “by object” infringements of competition law, i.e. there is no need to assess whether the rebates actually foreclosed the market to competitors in practice.
The decision marked an erosion of the historically-deployed economic / effects based assessment of rebates and made it easier for competition authorities to issue infringement decisions without requiring them to undertake costly and time consuming economic analysis.
The European Commission is presently investigating rebates provided by Qualcomm for customers of its chipsets. The nature of the rebates
under examination (explicit, as in Intel, or indirect, as in Post Danmark) is not yet clear. Further details, and the Commission’s analysis, are awaited with keen interest.