Formalism Effects Rebates and the real world Lia Vitzilaiou April 2016
Formalistic vs Effects ‐ based approach 2 • A rebate is abusive if it is “loyalty enhancing” regardless of its concrete effects on the market (traditional case ‐ law; Michelin II; British Airways etc) • The practical effects of the rebate should be assessed through economic tests and their impact on competition should be measured (EU Commission Guidance; EU Commission decisions; Deutsche Tekelom AG; Intel etc)
Classification of rebates 3 Case C ‐ 23/14, Judgment of the Court of 06 October 2015: a. Quantity rebates linked solely to the volume of purchases. Presumed legal (e.g. Michelin II) b. Loyalty rebates which by offering customers financial advantages lead customers to buy all or most of their requirements from the dominant company. Presumed abusive (e.g. Hoffmann La Roche; Tomra) c. Other rebates (mixed rebates), neither quantity nor loyalty rebates. A detailed analysis is necessary. Does the rebate tend to remove buyer’s freedom of choice and bars competitors from access to the market?
Recent EU Case ‐ Law 4 Tomra (Case C ‐ 549/10, 19 April 2012) Rebate schemes linked to targets amounting to all or most of the customer’s • requirements are presumed abusive. It is unnecessary to analyze the economic effects of the conduct or pricing • structure in question. Intel (Case T ‐ 286/09; 12 June 2014, currently under appeal) Exclusivity rebates granted by dominant firms are by their nature likely to be • anticompetitive. It is unnecessary to demonstrate such effects in the circumstances of the case. • Post Danmark II (Case C ‐ 23/14; 06 October 2015) In order to establish whether a rebate scheme is abusive, it must have an anti ‐ competitive effect on the market. Purely hypothetical anticompetitive effects are not sufficient; actual or likely anticompetitive effects must be demonstrated. The AEC test is to be considered as “ one tool amongst others for the purposes of assessing whether there is an abuse of a dominant position in the context of a rebate scheme. ” (para. 61)
Recent HCC case ‐ law (I) 5 Tasty case (Decision No. 520/VI/2011) The HCC adopted the effects ‐ based approach and extensively analysed actual and • presumed anticompetitive effects of each rebate scheme. It sought to determine the effective price at which an equally efficient competitor • would have to sell its products in order to compete with TASTY prices. It conducted a market study to confirm its findings on anticompetitive effects. • P&G Pampers case (Decision No. 581/VII/2013 ) The decision was taken by majority of 3 to 2. • The main point of disagreement was the adoption of the formalistic or the effects • based approach. The majority held that the P&G rebate scheme had an exclusionary character, it • foreclosed competitors and was abusive, without examining its effects. The minority held that it was not sufficient to examine in abstracto if the rebate • scheme was by its nature capable of affecting competition, nor to presume the possibility of exclusionary effects. Such possibility should be examined and proven.
Recent HCC case ‐ law (II) 6 Amstel case (Decision No. 590/2014) • Market data during the 16 ‐ year investigation period indicated lack of anti ‐ competitive effects: i) AB’s market shares reduced every year and by 2013 it had lost approx. 30% of its m.s.; ii) the market shares of its competitors increased every year; and iii) there was market entry and expansion of competitors. • Nevertheless, the HCC refused to conduct any effects analysis and adopted a rigidly formalistic approach. • The HCC held that the rebates granted by AB were exclusivity rebates and they were prohibited per se as abusive, absent an objective justification. • AB presented an expert’s report with a full economic analysis of its price structure, its rebates, and their effects, which showed that no abuse had taken place. • The HCC rejected such analysis primarily as unnecessary. • The EU courts hesitate to take such a rigid position. Even where the formalistic approach is adopted, the effects of such practices are examined, appraised and quantified in the particular circumstances of the case (see Tomra, Microsoft, British Airways etc ). • The same line was followed by HCC itself in Nestlé and Tasty. • In the Amstel case, the HCC chose to disregard any effects and focus on presumptions.
Why formalism might prove ineffective 7 Different forms of rebates may all lead to foreclosure and may all be procompetitive. The approach to rebates according to their “type” contradicts that to pricing practices ( selective pricing; predatory pricing; margin squeeze etc). Exclusivity rebates: i) no obvious reason to be considered abusive by nature; ii) presumptions of abuse due to exclusionary effect contradicts EU case law. Formalism ignores commercial reality, market conditions and economic theory. Peril of over ‐ enforcement. Against the right to a fair trial and the presumption of innocence. The EU Commission has implicitly but unequivocally acknowledged the inefficiency of formalism by changing its approach after Michelin [Discussion Paper (2005); Guidance (2009) and decisional practice ever since] .
Real ‐ world issues for practitioners 8 More often than not, a client who happens to be dominant does not have exclusionary intent but simply seeks to attract clients. While it is plausible to try to attract customers of competitors it is punishable to foreclose competitors. The borderline between the two is very thin but the classification has very serious effects in practice. Clients submit their commercial policy as a whole and do not normally pursue different goals per practice. How should the lawyer approach such policy? Break it down to price and non ‐ price practices? Suggest that rebates are a practice of their own? Further categorize rebates according to case ‐ law? Impractical to explain to a client that because of certain vague “presumptions of intent” exclusivity rebates will not be appraised according to their effects; mixed rebates will be; quantity rebates will not be etc One should also explain that the client will be better off if the commercial policy is examined by the European Commission; if the same is appraised by EU courts then the client should not be too optimistic; whereas if it is appraised by a NCA then we are not really sure about the approach to be followed.
Concluding remarks 9 Following the Discussion Paper (2005), the Guidance (2009) and the recent decisional practice of the EU Commission, further steps are necessary towards the adoption of a more effects ‐ based approach. Competition Authorities should pursue a more constructive application of Art. 102 TFEU which takes into account economic data of each market, assesses the real impact of business practices on the market and adapts to the complexity of current business transactions. Applying Art. 102 using the same criteria as those expressed decades ago, disregarding all the experience gained in ‐ between and ignoring the development and diversity of business models is counterproductive and prevents the evolution of the law. The decisional practice of C/As which turns a blind eye to reality makes application of competition law a simplistic and mechanical process, deters innovation and practically invites undertakings to adopt the same business policy (e.g. quantity rebates) Case ‐ law evolves and is subject to change. Courts are not legally obliged to follow the EU Commission’s view, but neither are they obliged to follow their own previous rulings.
. 10 Thank you for your attention
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