This paper – which can be found here – is structured as follows:
- It begins by recalling the context of the Intel case.
In the past, EU case law tended to follow a form-based approach: first determine dominance; then assess the form of the conduct. Once a company was found to be dominant, its ‘special responsibility’ not to impair competition meant that it could not engage in certain forms of behaviour, such as offering loyalty rebates. Little consideration was given to the likely effects of these practices on competition and consumer welfare in a given case.
The Intel case, however, came after the Commission started promoting effects-based analysis in abuse of dominance cases. The idea was that practices that have the same effect on the market should be treated in the same way, regardless of their form. This took the form of a Guidance Paper, which was followed by a series of Commission cases and EU court judgments that ranged from accepting an effects-based approach (e.g. the CJEU’s Post Danmark I judgment), to being unclear about the role of effects-based analysis (e.g. the CJEU’s decision in Post Danmark II), to completely rejecting effects analysis (the General Court in Intel). Such was the scenario by the time Intel was decided by the CJEU.
- Section 2 explains what exclusive and loyalty rebates are, when they may be anticompetitive and why they are used.
It begins by distinguishing between three types of rebates: quantity rebates, exclusivity rebates and loyalty rebates (as the General Court did in Intel). Quantity rebates are generally deemed benign even if offered by a dominant company, since they tend to reflect gains in efficiency at higher volumes. Exclusivity and loyalty rebates, however, are more problematic.
Loyalty rebates are granted to customers according to their purchasing behaviour. In such cases, the percentage rebate given to a customer increases, when its purchase volumes exceed a certain target level. Often these target levels are set specifically for that customer, and are based on an increment above its purchases during a previous reference period. The form of loyalty rebate that has received most attention in competition law – see the British Airways and Michelin II judgments – is the retroactive rebate, which applies not only to the customer’s incremental purchases above the target, but retroactively to all purchases.
Exclusivity rebates – called fidelity rebates in Hoffman La Roche – are closely related to loyalty rebates. They are conditional on the customer obtaining all or nearly all of its requirements from the dominant company. In its most extreme version, the rebates are explicitly conditional on full exclusivity. In softer versions, the condition refers to some majority proportion of the customer’s requirements.
Rebates can have anticompetitive effects when competitors of the dominant firm no longer can have access to enough of the customers’ demand to operate in the market, despite being fundamentally as efficient as the dominant firm. By entering into exclusive agreements with customers, the dominant company prevents competitors from selling certain amounts to its competitors and thereby foreclose competition for the contestable share of demand. In such cases, the competitors’ only alternative is to try and win the customer’s entire demand, which can be difficult when the dominant firm is an unavoidable trading partner, has a must-have product, or is the only one with enough scale to supply large volumes.
- The third section looks at the CJEU’s Intel decision.
The rebates in Intel were exclusivity rebates. According to the authors, the CJEU departed from its previous case-law by holding that, if the dominant firm proves that its exclusivity rebates are not capable of foreclosing competition, they should not be deemed illegal (by object or effect). In other words, while the Court held that exclusivity rebates are presumed to be anticompetitive, that presumption is rebuttable by the dominant firm.
The decision raises an important question. Is the judgment calling for more ‘effects-based’ analysis, or simply for a few sanity checks? The CJEU seemed to agree with the Commission’s argument that there is a difference between capability and likelihood of having anti-competitive effects. It also seemed to endorse ‘capability’ as the relevant threshold for the assessment of rebates. Capacity to foreclose is a lower threshold which applies to object cases, while likelihood is a threshold better suited for effects cases.
As such, the authors argue that the judgment does not require the Commission to identify anticompetitive effects when faced with exclusive rebates. Instead, Intel introduces the possibility for the dominant firm to demonstrate that its practice does not have anticompetitive effects, and requires the Commission to take into account elements put forward by the dominant firm to this effect. Given that, in practice, most firms accused of an abuse of dominance will seek to defend themselves by means of an effects-based analysis—and in particular the AEC test as applied to rebates—it is likely that the European Commission will also apply such tests more often going forward.
An important point that the authors note is that the possibility of showing that the practices are not ‘capable’ of restricting competition is different from the concept of ‘objective justification’. The former is required to establish that there has been a prima facie anticompetitive conduct. ‘Objective justifications’ can be used to mitigate the anticompetitive impact, and therefore come at a later stage in the assessment. This has implications for the type of analysis that the Commission will, from now, be required to undertake in cases involving exclusive rebates.
- In the fourth section, the authors explain the type of additional analysis the CJEU expects when assessing whether rebates are capable of having anticompetitive effects in the market. In practice, and given the prospect of defendant’s adducing evidence of absence of anticompetitive effect, the Commission will have to look into the economic context of rebates. This will require it to look at the extent of the company’s dominant position in the relevant market (e.g. super-dominance); the share of the market covered by the challenged practice; the conditions and arrangements for granting the rebates, their duration and their amount; and the possible existence of a strategy aiming to exclude competitors that are at least as efficient as the dominant company. The authors do not dwell on the implications of this, but note that these considerations make sense from an economic perspective.
- Finally, the authors turn to the CJEU’s treatment of the as-efficient-competitor (AEC) test. The AEC test, as explained in the 2008 guidance paper, is an economic test designed to determine quantitatively whether an as-efficient competitor could compete when the dominant firm undertakes particular behaviours (whether pricing or non-pricing practices).
In this case, the test addresses specifically the question of whether an as-efficient competitor could match the dominant firm’s rebates without making a loss. As you may remember, the Commission conducted an AEC analysis, which the General Court did not look at because it considered it superfluous given that exclusive rebates can be deemed abusive without looking into the effects of individual rebates. The CJEU disagreed with this, and required the General Court to review the Commission’s application of the AEC test. In doing this, the CJEU acknowledges that the AEC test is a relevant piece of analysis for the purpose of assessing the economic circumstances around rebate schemes.
However, the authors consider that the AEC test is only one possible option to assess the potential anticompetitive effects of a practice. They argue that this position finds support in the decision. In it, the Court refers to the principle of protecting as-efficient competitors, and argues that looking at circumstances surrounding the practice may be enough to determine whether it may foreclose as effective competitors. The formal, economic version of the AEC test is a potentially relevant, but not always necessary tool to identify whether a conduct by a dominant company can foreclose as effective competitors.
- In conclusion, the authors consider that the Intel judgment opens the door for more emphasis to be placed on the circumstances surrounding rebates, even when they are presumed illegal. However, it is still uncertain where the rules on abuse of dominance will ultimately end up. Ongoing cases in Europe are likely to become tests of this new doctrine (including Qualcomm, Google, and pay-for-delay cases).
Comment: I think this paper provides a good overview of the wider context in which Intel was decided – namely, how to evaluate discounting practices under EU competition law, and what role the AEC test should play in this.
I agree with the authors’ conclusion that even if the Intel decision introduced effects-based considerations into the analysis of exclusive rebates, this does not seem to require a full-blown effects analysis to be conducted by the competition authority (or, for that matter, court). Instead, it would perhaps be best to understand the decision as crystallising a presumption of anticompetitive effects of exclusive rebates (contra the General Court, which construed previous case law as creating a quasi per se rule of illegality). In this context, an effects analysis would have to be conducted if – and only if – evidence is adduced by the defendant of absence of restrictive effects. This would, at an initial stage, be limited to an (abbreviated) analysis to determine whether the evidence provided by the defendant can indeed support a claim of absence of foreclosure effects. Only if the evidence provided by the defendant meets this threshold would the Commission then be under an obligation to conduct a full-blown effects analysis of the effects of the individual exclusivity rebate.
A similar analysis may also be required for objective justifications / efficiency defences. In both cases, the defendant must prove, to the adequate legal standard, that the rebate either: (i) did not have foreclosure effect; (ii) while it had foreclosure effects, they were outweighed by objective reasons / efficiencies.
In other words, it could be argued that the CJEU introduced a burden shifting analysis for exclusive rebates. This interpretation of the decision would explain why the CJEU required that: ‘when the Commission carries 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’. It also explains why the CJEU required that the General Court deal with the Commission’s analysis of the AEC – because ‘the AEC test played an important role in the Commission’s assessment of whether the rebate scheme at issue was capable of having foreclosure effects on as efficient competitors.’
In this burden shifting analysis, the Commission is not required to conduct an effects’ analysis from the start, or to demonstrate that the rebate has anticompetitive effects. Instead, when the Commission identifies an exclusive/loyalty rebate the burden shifts to the defendant to submit evidence that the rebate is not capable of having foreclosure effects. If the defendant submits such evidence, the Commission then needs to determine whether the evidence adduced by the defendant provides prima facie evidence of absence of foreclosure effects. Only if this is the case will the Commission have to pursue a detailed effects analysis to demonstrate that the rebate has anticompetitive effects.
It is as regards this need to assess whether Intel submitted enough evidence to dispel the conclusion that the rebate is capable of foreclosing competition that the pursuit of the AEC test by the Commission seems to have been relevant to the CJEU (para. 143: ‘It follows that, in the decision at issue, the AEC test played an important role in the Commission’s assessment of whether the rebate scheme at issue was capable of having foreclosure effects on as efficient competitors). Since the EU courts have a duty to subject all operative parts of a Commission decision to judicial review, it follows that the General Court should review the Commission’s analysis of the AEC test (para. 144: ‘In those circumstances, the General Court was required to examine all of Intel’s arguments concerning that test.’)