In 2012 the first Post Danmark case(1) resulted in a modest antitrust revolution in relation to Article 102 of the Treaty on the Functioning of the European Union. Rarefied economic concepts were confirmed and price discrimination as a standalone abuse was all but confined to a historical footnote in antitrust textbooks, to be replaced by a predation-type test. Article 102 was ripe for overhaul and Post Danmark provided the vehicle.
Economic test at stake
Commentators expecting the same much-needed revamp of Article 102 rebates case law from Post Danmark II(2) will be disappointed. The European Commission's much-vaunted Article 102 Enforcement Priorities Guidance approach to rebates was at stake. It advocated a hard-nosed economic approach: if smaller rivals could match a dominant company's rebate scheme by staying above that company's cost – after adjusting it to take account of the small rival's much lower volume of sales (known as the 'contestable share') – then antitrust intervention was not required. This constituted aggressive price competition and should be encouraged. It was an 'as-efficient-competitor' test and the cornerstone of the Enforcement Priorities Guidance approach to rebates.
Field trials of the commission's guidelines ended in disappointment and acrimony as the commission was accused of misapplying or disregarding its new economic theories in Tomra(3) and Intel,(4) even though national authorities and courts seemed keen to apply them.(5)
The scene was set in Post Danmark II for the European Court of Justice (ECJ) to consider the Enforcement Priorities Guidance and finally to offer clarity. However, the result was underwhelming.
The ECJ confirmed that the following three types of rebate scheme exist:
- exclusivity or near-exclusivity rebates, which are generally illegal;
- quantity-related rebates reflective of cost savings (a near-impossible category); and
- third-category rebate schemes, which must be analysed in the round.
This categorisation was proposed by the General Court in Intel and now has the ECJ's blessing.
The Post Danmark II scheme fell into the third category and failed the in-the-round test. As Post Danmark was a statutory monopolist of 70% of the market, with an overall market share of 95% and a single rival (with a 5% share), the application of a (modestly) aggressive retroactive rebate scheme covering most major customers meant that there were sufficient indicators of exclusion.
That being the case, there was no need to apply the Enforcement Priorities Guidance. Indeed, to do so would have been counterproductive. Given the statutory monopoly, it was highly unlikely that a rival would be able to make the same infrastructure investments to enter at Danish Post's scale and with corresponding cost economies. The cost structures of a small entrant and incumbent legal monopolist would never be comparable.
The Enforcement Priorities Guidance remains a tool (but only one of many) with which to consider exclusion. However, an in-the-round assessment did not require its use, particularly on facts such as these.
The court stated that there is no de minimis threshold for abuse. Nonetheless, competition authorities must demonstrate that a rebate scheme is at least likely to produce exclusionary effects. This may offer a chink of light for a backdoor de minimis test, since the court stated that "the number of customers concerned" by the rebate scheme will be a necessary part of assessing its likely effects.
The Enforcement Priorities Guidance continues to survive; but it remains guidance, not law. While authorities may wish to use it to add economic rigour to their assessments, there is no obligation to do so. The commission may be bound to use the guidance as a first filter for its caseload while the guidance remains in place, but it can depart from the guidance where circumstances make it inapposite.
Counselling on rebate schemes using the guidance gives some regulatory comfort to companies that guidance-compliant schemes are at least not EU enforcement priorities. But risk remains that national courts or agencies may differ in approach. Practitioners cannot just focus on the mathematical niceties of margins and contestable share under the guidance. They must also ask questions about:
- barriers to entry;
- relative size of competitors; and
- dynamics of competition in the sector.
In highly regulated sectors, particularly those with state monopolist incumbents, companies can expect rebate schemes to receive greater scrutiny.
How could the test solve the problem? Despite the court's reticence, a simple calculation shows that an as-efficient-competitor test would have led to the same result – indeed, rather more quickly than an in-the-round assessment.
Facts Post Danmark's standardised volume rebate scheme applied to all customers, with a series of tiers starting at 30,000 letters. The scheme offered increasing rebates starting at 6% (for 30,000 letters) and increasing by 1% increments until the final two tiers, which increased by 2% increments. The final tier rebate was 16%. Post Danmark had a 95% share and its only rival had a 5% share.
Analysis The rule for tiered rebates is to take the highest increment (2%), divide it by the contestable share (using the rival's 5% share as proxy) and add the second-to-last rebate in the scheme (14% – which is 2% less than the final tier rebate of 16%). This means that a competitor would face an effective discount of (2/5 x 100) +14 = 54%. It is difficult to believe that a state monopolist postal system could achieve margins in excess of 50%. As a result, this scheme was always likely to be illegal under a price-cost test.
For further information on this topic please contact Bill Batchelor at Baker & McKenzie by telephone (+32 2 639 36 11) or email (firstname.lastname@example.org). The Baker & McKenzie website can be accessed at www.bakermckenzie.com.
(3) See commission decision, March 2003: http://ec.europa.eu/competition/antitrust/cases/dec_docs/38113/38113_250_8.pdf; see also Case T-286/09: http://curia.europa.eu/juris/document/document.jsf?text=&docid=153543&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=121654.
(4) See commission decision, May 2009: http://ec.europa.eu/competition/antitrust/cases/dec_docs/37990/37990_3581_18.pdf; see also Case T-155/06: http://curia.europa.eu/juris/celex.jsf?celex=62006TJ0155&lang1=en&type=TXT&ancre=, and Case C-549/10 P: http://curia.europa.eu/juris/document/document.jsf?text=&docid=121747&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=123685.
(5) See for example the Competition and Markets Authority decision closing an investigation into a suspected breach of competition law in the pharmaceutical sector: https://assets.digital.cabinet-office.gov.uk/media/558c2743e5274a1559000004/Pharmaceutical_sector_investigation_closure_statement.pdf.
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