The relatively brief reasoning – at a cost of further clarity on the law on burden of proof, presumption of illegality and “capacity”
The judgement leaves unanswered questions on how the ‘as efficient competitor’ (“AEC”) test should be applied in practice
While a useful framework, the AEC is neither a necessary nor sufficient test of abuse of dominance
On September 6, 2017, the European Court of Justice (“CJEU”) published its long awaited judgement in relation to Intel’s appeal against its (then) record-breaking 2009 fine for offering rebates to PC makers in exchange for purchasing almost all their supplies of chips from Intel (the “Judgement”).
Although the CJEU also made important statements on issues of territoriality and procedure, this note will focus on its analysis of the legality of rebates offered by dominant companies. On this point, the CJEU referred Intel’s appeal back to the General Court on the basis that the latter wrongly held that it was not required to assess the ‘as efficient competitor’ (“AEC”) analysis conducted by the Commission.
The Judgement has been hailed as both a “victory for consistency and legal certainty” and, conversely, a “radical change”. There is certainly much to welcome in the Judgement. It makes clear that the Commission cannot apply a purely form-based approach to the analysis of rebates by dominant companies, that efficiency justifications have a role to play under Article 102, and that it is only the foreclosure of equally efficient competitors that should give rise to concern.
However, the relatively brief reasoning leaves unanswered a number of questions and arguably represents a missed opportunity to clarify fully the law in this area. The following questions, at least, remain open for debate:
When does a presumption of illegality arise regarding exclusivity rebates?
The Judgement recalls existing jurisprudence according to which “discounts conditional on the customer’s obtaining all or most of its requirements” from a dominant company are abusive. It then then “clarifies” that, if the defendant submits evidence that its conduct was incapable harming competition, the Commission must conduct further analysis.
This has been interpreted by certain commentators as confirming that exclusivity rebates are presumed to be abusive, and that it is for the defendant to prove that the conduct in question is not capable of harming competition. The Commission may well take the same view.
However, the issue may not be so clear-cut. Certainly, paragraph 137 of the Judgement suggests that a form-based test applies and that, once the Commission has proven both dominance and the existence of exclusivity rebates, it is presumed that the conduct is abusive.
However, paragraph 139 leaves more room for interpretation. In particular, the Court makes clear that once a company has advanced evidence that its conduct lacked the capacity to harm competition, the Commission cannot limit itself to “only” analysing the extent of the dominant position, the share of the market covered by the rebates, and the terms of the rebate; but it must “also” assess possible foreclosure of AECs.
This may suggest that the Commission must consider the extent of the undertaking’s dominant position, share of market covered, etc., of its own motion. The AEC assessment is an additional part of the analysis that the Commission is obliged to conduct only in response to arguments put raised by the defendant.
Support for this position can be found in AG Wahl’s observation that even in the case of Hoffman-La Roche (often cited as a precedent for a form-based approach to rebates) the Commission actually conducted a thorough assessment of the circumstances, including, inter alia, the conditions on which the rebates were granted, and the market coverage thereof.
Such an approach would be more defensible from a policy perspective than a purely form-based presumption of harm that fails to have regard for the effect on efficient competitors. As AG Wahl warned in his opinion to the Court, such a presumption could prove near-impossible to overturn and would further increase the evidential burden that is placed on the defendant.
What burden do defendants bear when asserting that rebates are not capable of restricting competition?
By requiring the defendant undertaking to raise the lack of capacity to harm competition, the CJEU leaves open the question of what exactly the defendant must do to shift the evidential burden back to the Commission.
Again, it could be argued that the Judgement means that it is up to undertakings to “prove” that the conduct in question is incapable of harming competition.
It is submitted that this goes too far. Such an interpretation is supported neither by the wording of the Judgement nor by policy considerations.
The Judgement holds that the Commission’s obligation to conduct a more detailed analysis arises “where an undertaking concerned submits…on the basis of supporting evidence, that its conduct was not capable of restricting competition”. The language suggests a relatively low bar for the undertaking. It must “submit” its argument but not “prove it”, and advance “supporting” but not necessarily “convincing” evidence. It is submitted that it should be sufficient for the undertaking to raise evidence that casts doubt on the capacity of the rebates to harm competition.
This position would be consistent with basic principles of EU law. As Regulation 1/2003 explicitly recognizes, it is “for the party or the authority alleging an infringement of ... [Article 102 TFEU] to prove the existence thereof to the required legal standard”, while the defendant undertaking must prove “a defence against a finding of an infringement”.
The capacity of conduct to harm competition is an essential element of proving an infringement – it is not merely a defence. As such, the burden of showing that a rebate was capable of harming competition must fall upon the Commission. If the defendant raises any evidence putting this in doubt, it is incumbent upon the Commission to assess the matter in full.
What does “capable” mean?
The Court suggests that “capacity to foreclose” AECs is a key part of the legal test for finding that exclusivity rebates infringe Article 102 TFEU (see below on the reference to “strategy” in paragraph 139). However, the Court fails to clarify what level of “capacity” is sufficient.
This question has already been the subject of lively debate. Is the threshold one of technical capability, plausibility (as suggested here), or some degree of likelihood?
According to AG Wahl, the threshold is a high one. The Commission must assess whether “in all likelihood” the rebate has an exclusionary effect. A “more likely than not” standard is insufficient. The AG argued that if “capability” is interpreted as a mere technical or theoretical possibility, then the threshold for intervention against dominant companies will have been “lowered to such an extent as to become virtually non-existent”.
From a practitioners’ perspective, requiring the Commission to actually prove the harmful effects of rebates might be preferable to the inherently difficult notions of “object infringements” and “capability” of harming competition. However, it is difficult to argue that this is what the Court intended.
A threshold of technical or theoretical capability, on the other hand, is clearly too low. It would unjustifiably expose companies to large penalties based on far-fetched theories of harm. There is also a real risk that it could discourage behaviour that is likely to benefit the market – which is considerably greater in relation to rebates than, for example, cartels.
Commentators have suggested “plausibility” as the appropriate threshold. This would also be a relatively low bar that seems to improve on the Commission’s suggested standard of “technical” capability only by excluding purely fanciful theories of harm.
It is submitted that a more suitable middle ground might be found in the “reasonably foreseeable” standard. Still an objective standard, this approach would help increase legal certainty by excluding theories of harm that a reasonable observer would be unable to anticipate in the circumstances of the case.
What is the relevance of a “strategy” to exclude a competitor?
Although the Judgement has been seen by some as requiring the Commission to consider the capacity of rebates to exclude AECs, the wording of paragraph 139 actually refers to the “possible existence of a strategy to exclude competitors that are at least as efficient”. It is unclear what the Court means by its references to a “strategy”, since subsequent paragraphs refer only to the “capacity” to foreclose. It is submitted that the relevant test should relate to capacity (as explained above) and that a strategy to foreclose is neither a necessary nor sufficient element for finding that rebates are abusive. A contrary interpretation would run the risk of sanctioning conduct based solely on the intentions of the undertaking concerned without regard for the actual capacity to harm competition. That must be incorrect.
Economists welcomed the CJEU’s judgement in that its sets forth an effects-based approach. The judgement makes rebuttable the presumption that exclusivity-related practices are abusive. It endorses the relevance of economic evidence in showing anti-competitive effects of the “challenged practice”. The Judgement also requires authorities to consider pro-competitive efficiencies and trade these off against any risk of foreclosure. Such a “balancing” act should be done after the conduct is shown to be exclusionary.
The Judgement upholds the spirit of Article 102 TFEU in that the exclusion of an as efficient rival is the appropriate conceptual framework. The immediate question for economic analysis is whether the AEC test is the only available tool – a question that has also been raised by commentators and academics.
The AEC test provides a useful theoretical framework to analyse foreclosure and consumer harm. But, it is neither a necessary nor a sufficient rule to support abuse of dominance. Rebates which pass the test may still be anticompetitive, for example, the dominant firm may enjoy advantages that it need not price below a relevant measure of cost to foreclose rivals.
Similarly, rebates that fail the test are not necessarily pro-competitive. The focus of economic evidence should be to determine whether the rebates enable the dominant firm to acquire or maintain monopoly power, increase market prices, reduce output, or otherwise harm competition. The judgement itself calls for a wider analysis to ascertain whether the conduct in question has the required features to induce foreclosure such as the share of the market covered, their duration and amount.
An effects analysis must assess the duration of the relevant rebates, entry conditions for the input allegedly foreclosed from rival suppliers, the ability of rivals to compete for contestable sales, and consideration of any procompetitive efficiencies associated with the rebates.
Economists can alternatively also conduct a counterfactual scenario analysis of the degree of foreclosure without the rebates in question (as proposed here).
Even if the AEC were to be considered the holy grail, the judgement leaves unanswered questions on how the AEC should be applied in practice. The fundamental question is what it means to be an equally efficient competitor. The answer to this question determines methodological choices that need to be made with respect to the relevant volume (should the competitor be considered to capture the contestable market or should it be a potential competitor of a similar size to the dominant undertaking), the relevant cost (AAC or LRAIC), product coverage, time horizon. Nevertheless, the test provides a useful theoretical starting point to assess the conditions capable of foreclosure and consumer harm.