The Eighth Annual Trans-Atlantic Antitrust Dialogue Exclusionary

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The Eighth Annual Trans-Atlantic Antitrust Dialogue Exclusionary Powered By Docstoc
					The Eighth Annual Trans-Atlantic Antitrust
Dialogue

Exclusionary pricing in Article 82 cases – recent
case-law of the Community Courts
15 May 2008

Kyriakos Fountoukakos
Partner, Herbert Smith LLP, EU/Competition Group

Disclaimer: The content of this presentation does not constitute legal advice and should not be
relied on as such. Specific advice should be sought about your specific circumstances.
Summary

• Commission stated desire to move away from per se rules and
  adopt a more effects (and economics) based approach to Article
  82

• Examples of recent case-law of the Community Courts on
  exclusionary pricing abuses

• Existing case-law should not prevent an evolution of the
  Commission’s approach

• Potential issues to consider




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Commission’s stated desire for an evolution in
future approach in respect of Article 82

“In applying Article 82, the Commission will adopt an approach which is based
on the likely effects on the market”.

“With regard to exclusionary abuses the objective of Article 82 is the
protection of competition on the market as a means of enhancing consumer
welfare and of ensuring an efficient allocation of resources”.

“The central concern of Article 82 with regard to exclusionary abuses
is…foreclosure that hinders competition and thereby harms consumers”.

“…in general only conduct which would exclude a hypothetical “as efficient”
competitor is abusive…the question asked is whether the dominant company
itself would be able to survive the exclusionary conduct in the event that it
would be the target”.

DG Competition discussion paper on the application of Article 82 of the Treaty
to exclusionary abuses (December 2005)


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Framework for Commission action

“…even if its administrative practices were to change, the
Commission would still have to act within the framework
prescribed for it by Article 82 as interpreted by the Court of
Justice”

Advocate General Kokott, Case C-95/04 British Airways v
Commission

“…any possible interpretation of Article 82 is without prejudice
to the interpretation that may be given by the Court of Justice
or the Court of First Instance of the European Communities”

DG Competition discussion paper on the application of Article
82 of the Treaty to exclusionary abuses
                                                                   4
ECJ definition of abuse

“The concept of abuse is an objective concept which is such as
to influence the structure of a market where, as a result of the
very presence of the undertaking in question, the degree of
competition is weakened and which, through recourse to
methods different from those which condition normal
competition in products or services on the basis of the
transactions of commercial operators, has the effect of
hindering the maintenance of the degree of competition still
existing in the market or the growth of that competition”

Case 85/76 Hoffman-La Roche v Commission




                                                                   5
Predatory pricing


Case T-340/03 France Telecom v Commission (Wanadoo) (January 2007)
• CFI upholds Commission decision condemning Wanadoo’s pricing policy on the
  high speed internet market
• Reaffirms test in previous case-law (AKZO, Tetra Pak I & II, Compagnie maritime
  belge):
  -       prices below average variable cost give grounds for assuming that a
  pricing practice is eliminatory
  -       prices below average total costs but above average variable costs must
  be regarded as abusive if they are determined as part of a plan for eliminating a
  competitor (Wanadoo’s internal documents being held in this case to provide
  sufficient evidence of such a plan)
• Such conduct is liable to have the effect of restricting competition and therefore
  no demonstration of the actual effects of the practices is required – failure to
  achieve the predatory object is not sufficient to prevent conduct from being an
  abuse


                                                                                       6
Predatory pricing – cont.

• No absolute right to align prices; upholds Commission
  decision that a dominant undertaking should not be permitted
  to align its price where costs would not be recovered

• Proof of recoupment of losses not a precondition for a
  finding of predatory pricing


NB On appeal to the ECJ (Case C-202/07 P) (including on
alignment of prices and recoupment)




                                                             7
Predatory pricing – cont.
CFI in France Telecom v Commission                  Commission discussion paper

•   Presumption that prices below average           •   Presumption that prices below average
                                                        avoidable cost (AAC) are abusive (but
    variable cost (AVC) are abusive                     recognition that possible to rebut)
•   Prices above AVC but below average total        •   Presumption that prices above AAC but
    costs are abusive if they are determined as         below average total costs (ATC) are abusive
    part of a plan for eliminating a competitor –       if the dominant company has a predatory
    i.e. evidence of plan to pre-empt necessary         intent – i.e. objectively speaking it is part of
                                                        a strategy or plan to predate
•   No demonstration of the actual effects of
                                                    •   Absent direct documentary evidence of a
    the practices is required                           predatory strategy or evidence that the
                                                        pricing behaviour only makes commercial
•   Proof of recoupment of losses not                   sense as part of a predatory strategy, it is
    necessary                                           necessary for Commission to show that a
                                                        foreclosure effect is likely
•   No absolute right to align prices – not
    possible to use as justification where          •   Dominant company can rebut by showing
    conduct aimed not only at protecting the            that pricing has not and will not have the
                                                        alleged exclusionary effect
    interests of the dominant company, but also
    at strengthening and abusing its dominant       •   Proof of recoupment of losses not
    position (in this case, where costs would           necessary (as dominance is already
    not be recovered)                                   established this normally means that entry
                                                        barriers are sufficiently high to presume the
                                                        possibility to recoup); dominant company
                                                        can rebut, however, by showing that
                                                        recoupment will never be possible
                                                    •   Meeting competition defence unlikely where
                                                        pricing below AAC                         8
Rebates/bonuses

Case C-95/04 P British Airways v Commission (March 2007)
• ECJ dismisses appeal against CFI judgment affirming Commission decision in
  relation to travel agent commission scheme
• Reaffirms test in previous case law (Michelin):
  -         whether the discounts/bonuses can/tend to produce an exclusionary
  effect, i.e. whether they are capable of: (i) making market entry very difficult or
  impossible for competitors; and (ii) making it more difficult or impossible for
  customers to choose between various sources of supply or commercial
  partners; and
  -      whether there is an objective economic justification for the
  discounts/bonuses
• Relevant factors are stated to be whether the discounts/bonuses relate to the
  purchases of all products in the reference period and whether targets are
  individualised
• The CFI was therefore entitled to hold that the commission scheme did have a
  fidelity-building effect and therefore produced an exclusionary effect


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Rebates/bonuses – cont.

• ECJ does accept that it must be examined whether the in principle exclusionary
  commission scheme had an objective economic justification, and this
  examination must be on the basis of the “whole circumstances of the case”, to
  determine whether any exclusionary effect may be outweighed by advantages in
  terms of efficiency which also benefit the consumer
• No discussion by the ECJ of target thresholds, or of the effective price of the
  products/services as a result of the bonuses and whether in light of this price an
  ‘as efficient’ competitor would be able to compete (despite BA’s arguments)
• Holds BA’s claim that CFI failed to take sufficient account of evidence showing
  no exclusionary effect as inadmissible, given appeal limited to questions of law
  (the CFI concluded that it was not necessary to prove such an effect by
  examining market evidence of exclusion, but that in any event that such an effect
  had been demonstrated by the Commission)
• Does refer to CFI assessment that the progressive nature of the bonuses had a
  ‘very noticeable effect at the margin’, and to the CFI’s assessment that BA’s
  competitors would not have been in a position to operate a similar scheme
• In relation to discrimination, ECJ held that it was sufficient that the practice
  tends to lead to a distortion of competition, rather than it being necessary to
  prove actual quantifiable deterioration in the competition position of the other
  trading party
                                                                                     10
Rebates/bonuses – cont.
ECJ in British Airways v Commission                       Commission discussion paper

•   Two-stage test:                                       •   Commission will look at likely and actual
                                                              foreclosure effects, including possibilities of
    - whether the discounts/bonuses tend to produce a         competitors countering the fidelity enhancing
    fidelity building and therefore exclusionary effect       potential of the dominant company's conduct (i.e.
    (i.e. whether they are capable of (i) making market       whether an as efficient competitor is hindered from
    entry very difficult or impossible for competitors        supplying commercially viable amounts to the
    and (ii) making it more difficult or impossible for       customers)
    customers to choose between various sources of        •   When looking at potential negative/foreclosure
    supply or commercial partners); and                       effects Commission will consider:
    - whether there is an objective economic                  - thresholds for rebate/discount
    justification for the discounts/bonuses
•   On the first aspect, whether targets are                  - whether rebate/discount applies to all purchases
    individualised, and whether rebates apply to all          or only incremental purchases (where the latter,
    purchases or just incremental purchases, are              Commission will conclude there is an abuse only if
    relevant factors                                          resulting price for incremental purchases is a
                                                              predatory price)
•   On the second aspect, objective justification to be       - incidence – size and importance of ‘tied’ market
    assessed on basis of the “whole circumstances of          share (that part sold under the rebate system)
    the case” (including looking at efficiencies)
•   ECJ does not address question of whether effect           - whether goods are homogeneous and whether
    on the market in practice needs to be shown               competitors are capacity constrained
                                                              - effective price of a commercially viable amount
                                                              after rebate/discount and whether this is below
                                                              average total costs; if it is above average total
                                                              costs, unlikely that Commission will conclude that
                                                              there is a foreclosure effect
                                                          •   Possible defences – objective justifications and
                                                              efficiencies


                                                                                                                   11
Margin squeeze

Case T-271/03 Deutsche Telekom v Commission (April 2008)

• CFI upholds Commission decision that Deutsche Telekom implemented an anti-
  competitive margin squeeze in relation to access to its local telecommunications
  network (local loop)
• CFI recalls that its review of complex economic appraisals made by the
  Commission is necessarily limited to verifying whether the relevant rules on
  procedure and on the statement of reasons have been complied with, whether
  the facts have been accurately stated and whether there has been any manifest
  error of appraisal or misuse of powers
• Upholds Commission ‘as efficient’ competitor approach, i.e. whether the pricing
  practices of the dominant undertaking could have the effect of removing from the
  market an economic operator that was just as efficient as the dominant
  undertaking
• Notes that this approach is necessary given principle of legal certainty and the
  need for a dominant undertaking to be in a position to assess the lawfulness of
  its own activities



                                                                                     12
Margin squeeze – cont.

• In response to the argument that the margin squeeze identified had no effect on
  the market the CFI found that:
  -        given DT’s wholesale services are indispensable a margin squeeze
  between its wholesale and retail charges will in principle hinder the growth of
  competition in downstream markets as a potential, ‘as efficient’ competitor
  would not be able to enter the retail market without suffering losses (despite
  possibility of cross-subsidisation)
• CFI does further consider the effects on the market in terms of
  -       small market shares of DT’s competitors
  -      the fall in competitors’ market shares when looking only at analogue
  connections
  -      the fact that competition has developed to a lesser extent in other
  Member States does not show that DT’s pricing practices had no anti-
  competitive effect in Germany

NB Commission decision on margin squeeze in relation to Spanish broadband
market in Case COMP/38.784 Telefónica (which contained a more detailed
discussion on effects on the market) is also on appeal to the CFI (Cases T-336/07
and T-398/07)                                                                       13
Margin squeeze – cont.

CFI decision in Deutsche Telekom v     Commission discussion paper
Commission
• Question is whether the pricing      • A margin squeeze can be
  practices of the dominant              demonstrated by showing that the
  undertaking could have the effect of   input owner’s downstream
  removing from the market an            operations could not trade
  economic operator that was just as     profitably on the basis of the
  efficient as the dominant              upstream price charged to its
  undertaking                            competitors by its upstream
                                         operating arm (benchmark for the
• Given that DT’s wholesale services     reasonably efficient competitor
  are indispensable a margin squeeze     being the input owner)
  between its wholesale and retail
  charges will in principle higher the • Will be abusive where there is likely
  growth of competition in               to be a negative effect on
  downstream markets; however, CFI       competition in the downstream
  does also consider actual market       market
  evidence
                                       • Possible defences - objective
                                         justification and efficiencies

                                                                             14
Example of less formalistic approach in a
non-pricing context
Cases C-468/06 to C-478/06 Sot. Lélos Kai Sia EE (and Others) v
GlaxoSmithKline AEVE (Advocate General’s opinion, April 2008)

• In relation to an alleged abuse by refusal to supply with the
  intention to eliminate parallel trade, Advocate General Dámaso Ruiz-
  Jarabo:

  -     noted that more recent Article 82 case law has moved away
  from per se abuses and the principle that certain behaviour can
  never be justified

  -      stated that it must be possible for an undertaking to defend
  its behaviour on economic grounds, including in terms of economic
  efficiencies and overall consequences for the consumer


                                                                     15
Relationship between existing case-law and
evolution of the Commission’s approach

• Recent case law on exclusionary pricing abuses is not necessarily
  entirely in step with the Commission’s stated wish to adopt an
  evolved effects-based approach

• But - note willingness of CFI to address arguments on effect on
  competition in Deutsche Telekom, and note in a non-pricing
  context the approach of AG in the Sot. Lélos Kai Sia EE case

• Further, in relation to rebates, the ECJ in British Airways accepted
  that it must be examined whether the in principle exclusionary
  commission scheme had an objective economic justification, and
  that this examination must be on the basis of the “whole
  circumstances of the case”, including considering whether the
  exclusionary effects are outweighed by efficiencies which benefit
  the consumer

                                                                     16
Relationship between existing case-law and
evolution of the Commission’s approach – cont.

• Existing case law should not prevent the Commission from
  adopting a more economics and effects based approach when
  assessing allegedly abusive behaviour, within the framework
  established by the Courts as to when the Commission is entitled to
  conclude that there has been an abuse, or when adopting
  enforcement priorities

• Note reluctance of Community Courts to challenge Commission’s
  economic analysis, except in cases of manifest error (Deutsche
  Telekom, Microsoft)

• Commission enforcement policy, and the evidence adduced by the
  Commission in its decisions and in the event of an appeal, will
  influence future case-law
                                                                   17
Issues to consider

• Guidelines on Article 82 (substantive or priority enforcement guidelines)

• How to combine economic and effects based analysis with predictability
  and certainty so that undertakings may assess ex ante whether certain
  behaviour is permissible

• Private enforcement in national courts – Community court case law v
  Commission guidelines/practice

• Possible challenges to non-infringement decisions by complainants

• Case T-282/06 Sun Chemical v Commission (binding effect of merger
  guidelines on Commission)

• Detriment to consumers – not currently addressed specifically in the case
  law (exclusion considered sufficient)


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QUESTIONS?




             19
Contact



Kyriakos Fountoukakos
Partner, Herbert Smith LLP, Brussels
T: +32 2 518 1840
GSM: +44 7920 455155
kyriakos.fountoukakos@herbertsmith.com




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