Yesterday, the European Court of Justice (ECJ) handed down its judgment on a preliminary reference from the Danish Supreme Court regarding the rules on selective discounts and below-cost selling under the competition law prohibition of the abuse of a dominant market position.

The abuse prohibition is found at Article 102 of the Treaty on the Functioning of the European Union. This judgment contains significant clarification of key aspects of abusive pricing under Article 102. Above all, it explains the basis on which selective discounts can be found to be abusive, by stating that price discrimination cannot of itself indicate abusive exclusion of competition. 

The background: the Danish market for unaddressed mail

The case concerns the pricing practices of Post Danmark, the principal Danish postal services operator, in 2003 and 2004.

At the time of the alleged abusive conduct, Post Danmark enjoyed a monopoly of the Danish market for the delivery of letters and small parcels and was also held to be dominant on the separate market for unaddressed mail in Denmark, with just one major competitor, Forbruger-Kontakt.

In late 2003, Post Danmark concluded contracts with three of Forbruger-Kontakt’s main customers, all of which were large grocery retail chains, for the delivery of their unaddressed mail. With the Danish Coop group specifically, Post Danmark had conducted negotiations in parallel with Forbruger-Kontakt and its pricing offer to the Coop group had marginally undercut the latter’s offer. 

The relevance of cost benchmarks

For an understanding of the legal findings in this case, it helps at the outset to understand what the relevant cost benchmarks are and how they apply to the case:

  • Post Danmark’s offer to Coop group did not allow it to cover its average total costs of providing the service to the Coop, but did allow it to cover its average incremental costs. The pricing it offered to the other two Forbruger-Kontakt customers, although lower than prices offered to Post Danmark’s pre-existing customers, nonetheless allowed it to cover total costs.
  • “Incremental” costs are all costs linked to the product which is the subject of the abuse allegation. They are always above variable costs (since they include fixed costs incurred before the period of the alleged abuse), but usually below total costs (assuming a portion of fixed costs can be allocated to other products).
  • Here, the level of costs described as “incremental” was high, since the Danish competition authority counted as incremental certain fixed costs common to all Post Danmark’s services, but the level was still lower than total costs.
  • Previous ECJ judgments set out clear principles to determine when low pricing constitutes abusive predation: a price is assumed to be predatory where it does not cover the variable costs of producing the relevant product; where the price is above variable, but below fixed costs, predation is possible, but the investigating authority must base any finding of predation on evidence of an anti-competitive strategy. 

The Danish legal background

In two different decisions in late 2004, the Danish competition authority issued the following findings on the possible abuse of a dominant position:

  • Post Danmark had not abused its dominant position on the unaddressed mail market by reason of predatory pricing. Again, because its prices exceeded variable costs, evidence of a strategy to foreclose competition was required. The authority concluded that there was no such evidence.  This finding was subsequently upheld on appeal.
  • Post Danmark had, however, abused its dominant position by adopting a pricing policy with regard to its competitor’s three main customers which was different from its policy for its pre-existing customers, without being able to justify the difference in terms of a saving in its own costs. 

The second finding – of abusive pricing discrimination – was upheld twice on appeal (by the Danish competition appeals tribunal and then by a regional court) before a third appeal was made to the Danish Supreme Court, which referred two questions to the ECJ for a preliminary ruling:

  • Is it possible in principle that selective price reductions to a level lower than average total costs, but higher than average incremental costs, constitute an exclusionary abuse, if it is established that the prices were not set at that level for the purpose of driving out a competitor?
  • If yes, what circumstances should the national courts take into account in determining the possibility of actual abuse?

The ECJ’s conclusions

The ECJ’s conclusion on the first question was that offering low prices to certain customers is not an exclusionary abuse merely because the prices are between fixed and incremental costs.

In responding to references from a national court for a preliminary ruling, the ECJ does not rule on the specifics of the case in question. It therefore answered the second question with the general observation that, in order to assess anti-competitive effects in such a situation, the national court should consider “whether that pricing policy, without objective justification, produces an actual or likely exclusionary effect, to the detriment of competition and, thereby, of consumers’ interests”.

The ECJ’s judgment contains two particularly significant observations:

  • Price discrimination “cannot of itself suggest that there exists an exclusionary abuse”, whatever form the discrimination takes. This means that there is a low risk of an abuse finding either for differential deals offered to customers in the same position or uniform deals offered to customers in varying positions (in the absence, of course, of exclusionary effect).
  • Where a dominant undertaking sets its prices at a level which covers most of its costs, “as a general rule” equally efficient competitors can be expected to be in a position to offer sustainable competition.

Key impact on rules for selective discounts

There has long been notable uncertainty around the application of the rules on abusive discrimination. Article 102 prohibits the application of “dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage”, yet until now the precise status of the “competitive disadvantage” requirement has not been wholly clear.  This has made many dominant companies cautious in offering specific deals to individual customers which may trigger accusations of illegal discrimination.

The Post Danmark case affirms loud and clear that, in the absence of predation, a finding of discrimination is unlikely if there is no competitor exclusion.  It may still be difficult to establish whether or not there is actual evidence of exclusion and there may still be room for theoretical debate about whether abuse can arise outside of an “exclusionary” abuse.  However, this case provides helpful guidance to companies with a strong market position who wish to negotiate freely with their customers and who are confident that their customer deals will have no adverse impact on their competitors.