Article 102 of the Treaty on the Functioning of the European Union (TFEU) prohibits behaviour by a dominant undertaking that is capable of harming competition. The notion of ‘capability to harm competition’ has been at the centre of the legal and economic debate for many years. A strict interpretation of ‘capability’ would require evidence of actual or quasi-actual effects on the market in the form of, for example, the exit of existing competitors or sustained price increases. A lax interpretation of capability could make it possible to enforce competition rules also in circumstances where harm to competition is purely hypothetical and not supported by concrete evidence. This discussion – which is ultimately about the level of the standard of proof – not only influences the likelihood of Type 1 and Type 2 letters, but also the amount of resources that administrative agencies needs to devote to individual enforcement cases. Modulating this impact are presumptions, which can lead to significant savings in terms of resources dedicated to enforcement action and increased procedural efficiency.
This paper, available here, reviews how such presumptions impact competition enforcement against exclusive discounting practices following the Intel judgment. This judgment confirms that a presumption of anticompetitive effects applies to exclusivity rebates; but it also makes clear that, in cases where a dominant undertaking submits that its conduct was incapable of producing an exclusionary effect, competition authorities need to assess the capability of the rebate scheme to foreclose competition.
The author argues that, in these circumstances, the Intel judgment leaves a margin of appreciation for enforcing authorities in deciding which tools to use to prove an infringement, and provides examples of tools used in other cases.
Section II discusses how to address rebates in the context of an effects’ based approach.
Since Hoffman La Roche, the CJEU’s case law on exclusive rebates has expressed what many have interpreted as a presumption of anticompetitive effects for exclusivity rebates by a dominant company. The courts have, through the years, extended this presumption to various types of fidelity inducing rebates, such as targeted rebates, rebates conditional on certain targets and year-to-year increase of purchases, as well as standardised retroactive rebates granted over a certain period.
This formalistic approach eventually became a source of some concern since, as a matter of economics, rebates can have both pro- and anticompetitive effects. The Commission started a reflection process that culminated in the adoption of its Guidance on Enforcement Priorities for Article 102 TFEU. In endorsing a more economic approach, the Guidance on Enforcement Priorities included a reference to a price-cost ‘as-efficient competitor’ test (‘AEC test’) – an economic methodology that seeks to calculate whether it is possible for a hypothetical as-efficient competitor with the same cost structure as the dominant undertaking to match a given rebate scheme.
Shortly after the Guidance was issued, the Commission adopted its well-known decision in the Intel case – the basic outline of which can be found here. In short, the Commission found that, absent objective justification, the mere characterisation of Intel’s rebates as conditional on exclusivity was sufficient to find them illegal. However, the Commission also showed that Intel’s conduct was ‘capable of causing or likely to cause anticompetitive foreclosure’ by a number of different means. This included not only an AEC test, but also a demonstration that the computer manufacturers targeted by Intel’s rebates were strategically important, with a stronger presence in the more profitable parts of the market and the ability to legitimise new CPU manufacturers.
Section III focuses on the Intel judgments.
The Commission’s decision was followed by a well-publicised sequence of appeals, which focused largely on whether the presumption of anticompetitive effects for certain types of rebates remained good law. The General Court found that exclusivity rebates by a dominant undertaking are presumed to be abusive in the absence of an objective justification. The General Court therefore decided to disregard Intel’s arguments concerning the AEC test, insofar as they were unable to affect the lawfulness of the infringement decision. This triggered an intense debate over whether the General Court’s formalism was appropriate, while also providing one of the bases for Intel’s appeal to the CJEU. Building on this debate, AG Wahl’s opinion was that a presumption of unlawfulness was inappropriate – instead, a distinction should be drawn between volume-based rebates that are presumptively legal, and other types of rebates which require an assessment of all circumstances.
The CJEU eventually issued a judgment annulling the General Court’s decision. The Court of Justice recalled the general principle that dominance is not unlawful as such, and that EU competition law is not designed to protect less efficient competitors. However, adopting pricing practices that have an exclusionary effect on competitors as efficient as a dominant company, and strengthening a dominant position by using methods other than those of competition on the merits, is abusive. The court made clear that, while there is a presumption that exclusive rebates by a dominant company are anticompetitive, such a presumption is rebuttable. If the dominant undertaking during the administrative procedure submits that its conduct was not capable of restricting competition, the Commission will be required to engage in an analysis of the capability of the conduct to restrict competition. The Court of Justice listed a number of elements that the Commission is required to analyse in this respect. Further, the Court of Justice considered that the General Court ought to have examined Intel’s arguments concerning the AEC test carried out by Commission because, in the circumstances of this specific case, such a test played an important role in the Commission’s assessment of whether Intel’s exclusivity rebates were capable of restricting competition. This failure to evaluate the AEC test was the reason why the ECJ annulled the General Court judgment and referred the case back to the General Court.
Section IV focuses on European Commission enforcement after the Intel judgment.
The CJEU’s Intel judgment confirms that a (rebuttable) presumption of anticompetitive effects applies to exclusivity rebates. On the other hand, the judgment also makes clear that the existence of such a presumption does not mean that competition authorities should shy away from a potential effects analysis—quite the opposite, such an analysis becomes central in cases where the dominant undertaking submits, on the basis of supporting evidence, that its conduct was incapable of producing an exclusionary effect. This is in line with a legal standard of ‘capability to restrict competition’ – as opposed to the ‘in all likelihood’ standard advocated by AG Wahl and Intel.
In practice, the impact of Intel on the Commission’s decisional practice will not be revolutionary, given that the Commission has always looked at the capability of rebates to restrict competition in its cases. What the judgment does is to require competition authorities to assess effects when they are argued, while leaving the door open for enforcers to choose and evaluate different sources of evidence. Unlike what some have argued, the Intel judgment does not require the Commission to apply an AEC test. Instead, it leaves to the Commission’s discretion whether such a test is appropriate. This is fully in line with Post Danmark II, in which the Court of Justice concluded that the AEC test is merely one tool among others. It is also in line with the fact that the Intel judgment does not preclude the Commission from considering any particular sources, evidence or factors in its assessment. While the court listed different elements to be considered in the capability analysis, the ruling does not dictate a hierarchy between those elements.
Since Intel, the Commission has adopted two decisions involving exclusivity rebates: Qualcomm and Google Android. These decisions show that a range of possible evidentiary sources can be used to prove the capability of an exclusivity rebate scheme to foreclose competition. Moreover, they illustrate how, depending on the circumstances, certain tools or sources of evidence can be more suitable or useful than others.
- Qualcomm concerned agreements between Qualcomm and one of its major customers, Apple, pursuant to which, between 2011 and 2016, Qualcomm paid significant amounts of money in exchange for Apple exclusively incorporating Qualcomm LTE chipsets for 4G communication in its iPhone and iPad devices. In line with these agreements, Apple sourced LTE chipsets exclusively from Qualcomm between 2011 and the second half of 2016. Only on September 2016, when the agreements were about to expire and the cost of switching was limited, did Apple start to source part of its LTE chipset requirements from one of Qualcomm’s competitors— Intel. Applying the Intel judgment framework, the Commission began by establishing that Qualcomm’s payments amounted to presumptively anticompetitive exclusivity payments within the meaning of the relevant case law. Nevertheless, in light of Qualcomm’s submission that its exclusivity payments were incapable of restricting competition, the Commission then assessed the capability of Qualcomm’s payments to restrict competition. In doing so, it took into account the following factors: the extent of Qualcomm’s dominance, the duration of Qualcomm’s payments, the share of the LTE chipset market covered by these payments, the fact that Apple was a key customer for baseband chipset suppliers, and evidence that Apple considered switching but refrained from doing so in light inter alia of Qualcomm’s payments. While considering that an AEC test was unnecessary, the Commission also considered the AEC submission by Qualcomm and concluded it was flawed. Finally, the Commission dismissed Qualcomm’s efficiency claims concerning its incentives to design and produce tailor-made LTE chipsets for Apple, on the grounds that they were unrelated to the payments.
- Regarding Google Android, the author focuses on the so-called ‘revenue-sharing agreements’ (RSAs) pursuant to which Google shared part of its search-related revenues with OEMs and mobile network operators (‘MNOs’) on an ongoing basis, conditional on the exclusive pre-installation of Google Search on all smartphones and tablets within an agreed portfolio. This portfolio typically comprised all or almost all Android devices shipped by OEMs. As in the Qualcomm case, the Commission concluded that Google’s revenue share payments amounted to exclusivity payments presumed to be unlawful. In addition, the Commission engaged in an effects’ analysis and concluded that Google’s exclusivity payments were capable of restricting competition in light of a number of factors. First, Google’s revenue-sharing payments reduced the incentives of OEMs and MNOs to pre-install competing general search services. Second, the ‘portfolio effect’ of Google’s revenue sharing payments – i.e. the fact that a OEM or MNO foregoing installation in one device implied foregoing Google payments on the whole portfolio – increased the capacity of the payments to foreclose competition. Third, Google’s revenue-sharing payments prevented the pre-installation of competing general search services, as competitors would have been unable to offer OEMs or MNOs a sufficient amount of revenues to compensate them for the loss of Google’s exclusivity payments across their entire portfolio of Android smartphones and tablets. Fourth, Google’s revenue-sharing payments covered an important part of the relevant markets by targeting large OEM and MNOs, which could have represented strategic entry points for rival general search services. Fifth, while the effects of exclusive pre-installation by OEMs and MNOs could have been offset by a sufficient amount of competing app downloads by final users, the evidence led to the conclusion that competing general search services could not offset the competitive advantage that Google obtained from its revenue-sharing payments by other means. Sixth, Google’s exclusivity payments harmed innovation as they prevented the launch of Android devices with general search services other than Google Search pre-installed. Lastly, the Commission dismissed Google’s claim that its revenue-sharing payments were necessary to convince OEMs and MNOs to produce devices for the Android ecosystem.
Perhaps unsurprisingly given his affiliation, the author adopts arguably the most enforcement-friendly possible interpretation of the Intel decision – but I have to say that this is not miles away from my personal take on the judgment. In any event, such an approach is controversial and will undoubtedly be tested in the various appeals that the General Court will hear in the coming months.
In the meantime, I like how the article links this case law with the question of the appropriate standard of proof – even if I think the author could have distinguished between the applicable legal test and the standard of proof to meet that test more clearly. For those not interested in such theoretical matters, the paper is nonetheless valuable for its detailed descriptions of recent cases and developments concerning fidelity-enhancing rebates and payments.