This post reviews the recent MEO decision of the CJEU (Case C-525/16 MEO v Portuguese Authority ECLI:EU:C:2018:2700, available at http://curia.europa.eu/juris/document/document.jsf?text=&docid=201264&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=826760). You will excuse me for the length of the analysis below, but I do believe this is an important discussion that merits attention.
Facts of the Case
GDA is the sole body responsible for the collective management of the rights of artists and performers in Portugal. Among the undertakings which pay rights to GDA are television channels such as MEO. Between 2010 and 2013, GDA charged different tariffs to different television channels. The tariffs charged by GDA to MEO were the result of an arbitration decision, which was the required mechanism to deal with failures to arrive at an agreement when rights are negotiated.
In 2014, MEO lodged a complaint with the Portuguese national competition authority (NCA) alleging that GDA had abused its dominant position by: (i) charging excessive prices; (ii) applying to MEO different terms and conditions from those which it charged to the other main provider of television channels in Portugal, NOS. The NCA archived the case on the grounds that the tariff differentiation had no restrictive effect on MEO’s competitive position. MEO then appealed against this decision, and the competent court sent a preliminary reference to the CJEU regarding what type of effects must be identified in order for price discrimination to be anticompetitive.
Article 102(c) identifies as a potential abuse: ‘applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage’.
While price discrimination can amount to an abuse of a dominant position, a finding of abuse requires not only that the behaviour of an undertaking in a dominant market position is discriminatory, but also that it hinders the competitive position of some of the business partners of a dominant undertaking in relation to the others.
The question this raises is, naturally, what does the court mean by ‘hinder the competitive position’. The Court explains that the mere presence of an immediate disadvantage affecting operators who were charged more, compared with the tariffs applied to their competitors for an equivalent service, does not mean that competition is distorted or is capable of being distorted: ‘It is only if the behaviour of the undertaking in a dominant position tends, having regard to the whole of the circumstances of the case, to lead to a distortion of competition between those business partners that the discrimination between trade partners which are in a competitive relationship may be regarded as abusive.’
This raises a subsequent question: what do we mean by ‘distort competition between [a dominant company’s] business partners’? The Court indicates that for discriminatory behaviour to infringe Art. 102, it “must affect the interests of the operator which was charged higher tariffs compared with its competitors”. When determining whether this is the case, all the circumstances of the case must be taken into account – including the undertaking’s dominant position, the negotiating power as regards the tariffs, the conditions and arrangements for charging those tariffs, their duration and their amount, and the possible existence of a strategy aiming to exclude from the downstream market one of the dominant company’s trade partners which is at least as efficient as its competitors.
In its operative part, the judgment seems to interpret this line of reasoning as meaning that price discrimination must lead to a competitive disadvantage in order to be anticompetitive, and that this: ‘covers a situation in which that behaviour is capable of distorting competition between […] trade partners. A finding of such a ‘competitive disadvantage’ does not require proof of actual quantifiable deterioration in the competitive situation, but must be based on an analysis of all the relevant circumstances of the case leading to the conclusion that that behaviour has an effect on the costs, profits or any other relevant interest of one or more of those partners, so that that conduct is such as to affect that situation.’
Looking specifically at the facts of the case, the amounts charged by GDA represented a relatively low percentage of the total costs borne by MEO. As such, the effect of tariff differentiation on the costs borne by MEO was not significant, and it could, in some circumstances, be deduced that that tariff differentiation is not capable of having any effect on the competitive position of that operator.
The AG Opinion
To understand what the CJEU means when it holds that: (i) Art. 102’s provision that an abuse can occur when a dominant company applies dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (ii) that this competitive disadvantage refers to situations when market power is exerted in one market in a way that hinders the competitive position of parties in the downstream market, which in turn means that (iii) it must be determined in the light of all circumstances whether the practice distorts competition between undertakings in the downstream market, which in turn (iv) requires courts and competition agencies to establish whether the practice affects the interests of undertakings at the end of the discriminatory behaviour… it is useful to review AG Wahl’s Opinion, which was endorsed by the Court throughout its judgment.
The AG observed that the parties in this case disagreed as to the whether it may be assumed that price differentiation is likely to distort competition (i.e. either price discrimination is prohibited per se, or there should be a presumption of anticompetitive effects) or whether, on the contrary, the competition authority must demonstrate that the competitiveness of the undertaking placed at a disadvantage has been diminished as a result of the conduct complained of (i.e. an effects’ analysis is required to sanction a company for an abuse of a dominant position, with the burden on the competition authority).
In addressing this question, the AG began by pointing out that discrimination, including discrimination in the charging of prices, is not in itself problematic from the point of view of competition law. The reason for that is that price discrimination is not always harmful to competition. Indeed, it is well established most forms of discrimination, and of differential pricing practices in particular, are ambivalent in terms of its effects on competition. It should only be possible to penalise price discrimination if it creates an actual or potential anticompetitive effect. The identification of such an effect must not be confused with the disadvantage that may immediately be experienced, or suffered, by operators that have been charged the highest prices for goods or services: the fact that an undertaking has been charged a higher price when purchasing goods or services than that applied to one or more of its competitors does not necessarily result in a ‘competitive disadvantage’.
Instead, discrimination is anticompetitive only if it is established that it is likely to restrict competition and diminish the well-being of consumers. In order to conclude that there is such a restriction, it is necessary in every case to examine the actual or potential effects of the measure complained of, having regard to all of the circumstances of the case.
At the same time, the case law is rather laconic and does not, in any event, disclose any clear interpretative guidelines on the identification of a ‘competitive disadvantage’. The AG tries to develop such a framework. He argues that price discrimination may be abusive if (i) it is established that there is a competitive relationship between the trading partners of the dominant undertaking; (ii) it is shown that the conduct of the dominant undertaking is actually likely to distort competition between the undertakings concerned.
As regards this second point, one must differentiate between two different types of price discrimination.
- First degree price discrimination is that which is practised against competitors of the dominant undertaking. Most often, it refers to price discrimination practices which are designed to attract customers of competing operators, such as predatory pricing, differential rates of discount and margin squeezing. More generally, it covers every pricing practice which is designed to foreclose from the market or weaken the competitive position of operators present on the same market and at the same level (vertically speaking) as the dominant undertaking. Such price discrimination practices are, because of the immediate exclusionary effects they are capable of creating, the ones which the competition supervisory authorities and the courts are generally asked to examine.
- Second line price discrimination affects ‘trading partners’ on the market downstream or upstream from the dominant undertaking. This type of price discrimination may be abusive when it distorts competition on an upstream or a downstream market – i.e. between suppliers or customers of that undertaking. Co-contractors of such undertakings must not be favoured or disfavoured in the area of the competition which they practise amongst themselves.
A further distinction is important in this respect:
- When the dominant undertaking is vertically integrated and will therefore have an interest in displacing competitors on the downstream market – here, the application by a dominant undertaking of discriminatory prices on the downstream or upstream market is similar to first degree price discrimination which indirectly affects the undertaking’s competitors.
- When there is no vertical integration – here, it is reasonable to wonder what benefit such an undertaking might hope to derive from discrimination aimed at placing one of its trading partners on the downstream market at a disadvantage. Indeed, the dominant undertaking has every interest in the downstream market being highly competitive, so that it can maintain its negotiating power in its capacity as seller of the goods or services in question.
This explains why, in situations of second line price discrimination where a dominant company is not integrated in the downstream market, monopoly holders or dominant undertakings are not compelled to apply uniform tariffs to their trading partners. On the contrary: “price discrimination exercised by a dominant undertaking with regard to its trading partners may come within the scope of the prohibition of abuses of a dominant position if and only if competition between those trading partners is distorted by that discrimination.’
In the light of this, it is inappropriate to presume that price discrimination by a dominant company is anticompetitive. On the contrary, the requirement that price discrimination must lead to a competitive disadvantage is a requirement to show that a discriminatory pricing practice followed by a dominant undertaking actually leads to anticompetitive effects. Price discrimination, does not lend itself to formalism and systematisation; determining whether price discrimination on the part of an undertaking in a dominant position on a given market is likely to have a real impact on competition on a downstream or upstream market is, and must remain, an exercise that is eminently casuistic.
As a result, the competition supervisory authority to take all of the circumstances of the case submitted to it into account in order to try to determine whether: ‘the price discrimination at issue is likely to have a negative effect on the ability of trading partners that are disfavoured to exert competitive pressure on trading partners that are favoured (…) in the light of all the relevant circumstances’. Among those circumstance is whether the price charged by the dominant undertaking represents a significant proportion of the total costs borne by the disfavoured customer. If so, price discrimination may have an impact not only on the profitability of the customer’s business but also on its competitive position. On the other hand, if the relative significance of the prices charged by the dominant undertaking is minimal, those prices will not be such as to affect the competitive position of the disfavoured customers.
This is an extremely useful judgment as regards the ‘special duty’ incumbent on dominant companies when dealing with companies downstream. Taken together, the judgment and the AG’s Opinion indicate that discriminatory behaviour that leverages market power from one market where a company is dominant to another market where there is no dominance (or even market presence) is not per se anticompetitive. On the contrary, it must be shown that the discriminatory behaviour has certain detrimental effects on competition in the related market; and it is incumbent on the party claiming that such effects exist to prove them.
At the same type, it is recognised that, in markets where the dominant company is vertically integrated, the adoption of rules that reflect the higher probability of discriminatory behaviour being anticompetitive may be justified.
While this is a useful clarification of the law, a number of questions are left open. For example:
- What is the threshold that must be met in order for a discriminatory practice – or, for that matter, for other situations of leveraging of market power – to be found to lead to a ‘competitive disadvantage’, and hence to be anticompetitive?
The Court and the Advocate General adopt a variety of formulas – hindering the competitive position of parties in the downstream market, affecting the interests of undertakings at the end of the discriminatory behaviour, weakening the competitive position of undertakings – but more formulations do not add to a better legal standard. As it stands, and assuming the Advocate General’s arguments were indeed adopted by the court, this seems to require a full blown analysis regarding the ultimate welfare effects of discriminatory pricing conducts.
- Should this legal standard be different depending on whether the dominant undertaking in the primary market is active in the affected upstream or downstream market?
The Advocate General’s opinion seems to indicate that it may be appropriate to presume that certain conducts have anticompetitive effects if the dominant company is also active in the (competitive) downstream market – while, if it is not, a discriminatory pricing practice must be shown to have anticompetitive effects.
An interesting question here is whether such an assumption is purely evidentiary or also substantive. After all, the Advocate General’s examples of first line price discrimination – which, he argues, are situations similar to second line price discrimination when an undertaking is a competitor of the discriminated companies – all follow specific legal doctrines which are the subject of heated debates. These debates, in turn, bleed into discussions on the appropriate standard to identify exclusionary behaviours, and, more controversially, on whether and which exploitative abuses should be caught by the prohibition of abuse.
- Does the reasoning adopted in this decision also apply to conduct which discriminates on matters other than price?
A particularly interesting question is whether this reasoning could extend to situations such as those in the Google case. There is a difference, of course: the discriminatory behaviour by Google favoured its own service. But the debate concerning this decision is ultimately about whether Google’s preferential treatment of its own shopping service should be deemed anticompetitive on its own, or if, instead, such a finding requires proof that the discriminatory conduct had anticompetitive effects. If the latter, an additional question is what type of anticompetitive effects must be proved – in particular, if the threshold for anticompetitive behaviour is below foreclosure, what is the threshold that must be met for an infringement to be identified? This can become an important practical issue as the number of private actions against the actions of internet gatekeepers (such as Google) increase.
The matter of the adequate threshold to identify anticompetitive unilateral conduct is one of the questions that excited the controversy and interest on the Intel cases, which I shall review in a number of posts to published shortly.