Dominant undertakings have more freedom to set prices and rebates

Intel and MEO cases: loyalty rebates and discriminatory prices are no longer considered to be harmful to competition per se, even when applied by dominant undertakings.

In the past, it was taken for granted in the European Union (EU) competition law that a dominant undertaking is like a bull in a china shop – every move it makes is dangerous. Therefore, if it was established that a dominant undertaking was applying loyalty rebates or different prices to its customers, the European Commission did not have to prove the possible adverse effect of such conduct on competition (it was presumed) and could immediately proceed to calculating the fine. The Court of Justice of the European Union changed this approach with its judgment in the Intel case (C-413/14 P) in 2017 and confirmed the accuracy of Intel's findings in the MEO case (C-525/16) in 2018. EU competition law is now refusing to fine the bull if it has moved due to natural needs and the harm is not material or, speaking in terms of competition law, the European Commission is now required to assess the possible negative effects.  

A key issue in the current Latvian competition law is whether the Competition Council's findings in the Knauf case, where Knauf and Norgips were fined with EUR 1.3 million for applying loyalty rebates to their major customers Depo, TNK, Rautakesko, Optimera and Krūza from 2009 to 2014 for the supplies of gypsum boards, are still valid.

Intel case: loyalty rebates do not distort competition per se

In 2009, The European Commission fined Intel Corp. with EUR 1.06 billion for abuse of dominant position by granting loyalty rebates to its customers Dell, HP, NEC and Lenovo during the time period from 2002 to 2007 for the purchases of x86 central processing units (CPUs). These rebates were conditioned on those customers purchasing either all or most of their x86 CPUs from Intel. The case was initiated on the basis of a complaint filed by Intel's sole competitor AMD. The fine imposed was record-high at that time.

In 2014, the General Court dismissed Intel's appeal and upheld the European Commission's approach that loyalty rebates can be automatically categorised as abusive and that there is no need to analyse the particular circumstances of the case or how the rebates may have affected competition on the market. The General Court was relying on existing case-law which, firstly, distinguished between pricing and non-pricing practices with rebates belonging to the non-pricing practices. Secondly, the rebates were divided into three categories: (a) volume rebates which were presumed to be legal; (b) loyalty or exclusivity rebates which were presumed to be illegal; and (c) other rebates which required an assessment of their potential adverse effects.

However, on 6 September 2017, the Grand Chamber of the Court of Justice of the EU annulled the judgment of the General Court. The Court of Justice recognised that dominant undertakings have the right to engage in ‘competition on the merits' and that ‘competition on the merits' may, by definition, lead to the departure from the market or the marginalisation of competitors that are less efficient and so less attractive to consumers. The Court of Justice departed from the artificial distinction between pricing and non-pricing practices and stipulated that Article 102 of the Treaty on the Functioning of the European Union (TFEU) prohibits a dominant undertaking from adopting pricing practices (including rebates) that have an exclusionary effect on competitors considered to be as efficient as it is itself (the AEC or ‘as efficient competitor' test). If the dominant undertaking argues that its rebates were not capable of restricting competition and, in particular, of producing market foreclosure effects, before imposing a fine for abuse of a dominant position the European Commission must analyse all the circumstances of the case, including the extent of the undertaking’s dominant position, the share of the market covered by the challenged practice,  as well as the conditions and arrangements for granting the rebates in question, their duration and their amount. The Commission is also required to assess whether the dominant undertaking had a a strategy aiming to exclude from the market competitors that are at least as efficient as the dominant undertaking itself.

MEO case: also different prices do not distort competition per se

The television service provider MEO complained to the Portuguese competition authority that the copyright collecting society GDA had abused its dominant position by applying different tariffs to users of audio-visual material. Namely, that MEO was charged higher tariffs than its competitor, and that thus MEO was placed at a competitive disadvantage. The competition authority closed the case with no result, as it did not consider the tariff differentiation to have had a negative impact on competition in the relevant market. The competition authority noted that the difference in tariffs was low and that the market share of MEO increased during the alleged infringement period.

Following an appeal by MEO, the Portuguese court referred to the Court of Justice of the EU for a preliminary ruling. In its judgment of 19 April 2018, the Court of Justice applied findings from the Intel case to this case about discriminatory prices. The Court established that the dominant supplier’s different treatment of customers competing with each other in a downstream market could be regarded as abusive only if such discrimination could have led to distortion of competition. Less favourable conditions for any of the downstream competitors per se do not mean that competition has been distorted. By analogy with the judgment in the Intel case, the court ruled that the competition authority or court applying Article 102 of TFEU should take into account all the circumstances of the case and consider various factors such as  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 of the dominant undertaking aiming to exclude from the downstream market one of its clients which is at least as efficient as the client’s competitors (the AEC test).

The Court pointed out that in the so-called second-degree price discrimination cases, i.e. when the dominant undertaking does not operate on the downstream market and is not competing with its customers, the undertaking in a dominant position, in principle, has no economic interest in excluding one of its clients from the downstream market.

Impact on the Latvian competition law and the Knauf Case

The Latvian Competition Council and courts are bound by the findings in judgments of the Court of Justice of the eEU in cases where the TFEU is directly applicable, i.e. when the conduct of a dominant undertaking under assessment may have an effect on trade between the EU Member States. If the Competition Council investigates a case only with respect to a possible violation of Section 13 of the Latvian Competition Law, theoretically it can avoid applying the findings in judgments in the Intel and MEO cases, as the Member States are entitled to applying stricter rules in cases of abuse of dominant position than the EU does. However, such approach would be highly questionable, as the findings of the Court of Justice of the EU are based on considerations derived from economics.

Therefore, the question is whether in the future the Competition Council will depart from its 2016 findings in the Knauf case, i.e., that: (i) application of a loyalty-enhancing rebate scheme by a dominant undertaking is in itself restrictive of competition; and (ii) the AEC test is not a prerequisite in order to establish abuse of a dominant position. These findings of the Competition Council are in direct conflict with the findings of the Court of Justice in the Intel case. Unfortunately, the court proceedings regarding the Competition Council's decision in the Knauf case were terminated by an administrative agreement between the parties on 16 June 2017, without awaiting the judgment of the Court of Justice of the EU in the Intel case which was rendered less than three months later. Knauf was granted a 10% fine reduction from EUR 1.3 million to 1.2 million.

 

 

by Debora Pāvila, Partner, Latvia

Related Lawyers

Jūlija Jerņeva

Partner

+371 29 131 597

julija.jerneva@vilgerts.comEmail

Jānis Sarāns

Associate

+371 28 682 043

janis.sarans@vilgerts.comEmail

Related Experience

Successfully defending previous management board member in a litigation against one of the largest Latvian transport building factories. The claim for recovery of losses was brought due to company’s tax debt penalty EUR 0.13 Mio that was imposed for the period while the client held a position in company’s management board.

Providing legal assistance to Estonian company with enforcement of Estonian court’s decision of EUR 1.2 Mio debt recovery. On 7 June 2018 the district court satisfied client’s request and adopted a decision to enforce the Estonian court’s decision in Latvia.

Providing legal assistance to a real estate investment fund in an ongoing litigation against one of the subcontractors for violations in design and construction process which afterwards caused partial collapse of shopping mall’s ceiling. The amount of claim EUR 8.5 Mio.

Representing one of the largest Latvian construction companies in an ongoing litigation against Airport of Riga regarding the failure to pay for construction works. The amount of claim is EUR 0.5 Mio.

Instagram