On October 6, 2015, the EU Court of Justice (CoJ) handed down its long awaited preliminary ruling in the Post Danmark II case (C-23/14). While the judgment attempts to clarify the circumstances where a rebate is exclusionary, and therefore prohibited under Article 102 of the Treaty on the Functioning of the European Union (TFEU), it may have actually created more questions than answers. The CoJ has cast doubt on several crucial issues, and left lawyers and businesses wondering: (i) what is the applicable substantive test to assess whether a rebate is permissible and (ii) what use is the European Commission (EC)’s Guidance on enforcement priorities in applying Article 102 TFEU to abusive exclusionary conduct by dominant undertakings (the Guidance Paper)?
Background to the Dispute
On June 24, 2009, the Danish Competition Authority (DCA) found that Post Danmark had abused its dominant position on the market for the distribution of bulk mail by applying, in 2007 and 2008, a rebate scheme to a sub-segment of the market, namely direct advertising mail.
The rebate scheme consisted of Post Danmark offering a 6 to 16% discount to all its customers, on the basis of the overall volume of direct advertising mail that they would send over a reference period of one year. The rebate was: (i) standardized, in that it applied to all customers; (ii) conditional, since the discount would be conditional upon the volume of mail sent over the one year reference period; and (iii) retroactive, because the discount was applied at the end of the year to all mailing sent during the one year period.
The DCA found that:
- Post Danmark was dominant on the market for the distribution of bulk mail since it enjoyed: (i) a 95% market share, on a market characterized by high barriers to entry and economies of scale; (ii) a legal monopoly that covered 70% of the market; and (iii) unique geographical coverage, encompassing all of Denmark; and
- The rebate scheme resulted in an anti-competitive exclusionary effect on the market since: (i) it was retroactive; (ii) it was based on a one-year reference period; and (iii) the rebate rates were significant, i.e. between 6 and 16%.
Post Danmark lodged an appeal against the DCA’s decision. According to the company, the DCA had failed to prove that the rebate scheme was abusive. It should have assessed the legality of the rebate on the basis of the “as-efficient-competitor” (AEC) test set out in the Guidance Paper. On May 10, 2010, the Competition Appeal Tribunal dismissed the appeal.
Post Danmark then brought the case before the Maritime and Commercial Court, which referred a number of questions to the CoJ. We examine them below.
First Question: Relevant Criteria for Assessing Dominant Undertakings’ Rebate Schemes
As a preliminary point, the CoJ recalled that the case-law distinguishes between two categories of rebates, which are situated at the two ends of the spectrum:
- Purely quantity-based rebates: these are linked solely to the volume purchased and correspond to the cost savings the supplier gains. In principle, such rebates are compatible with EU competition law.
- Exclusive rebates: these oblige or encourage customers to place all of their orders with a single supplier. Such rebates are abusive – arguably falling into the same category as restrictions by object under Article 101 TFEU, although the judgment does not explicitly mention it.
The CoJ noted that Post Danmark’s rebate did not fall squarely within one of these categories. It was not a harmless quantity rebate since it was granted on the basis of the aggregate orders placed over a year rather than individual orders; and it was not an exclusive rebate because it did not oblige or incentivize customers to deal exclusively with Post Danmark. Therefore, according to the CoJ, the existence of an abuse had to be determined by reference to “all of the relevant circumstances” of the case, in particular the potential exclusionary effect of the rebate.
The CoJ then ruled that, in order to assess whether a rebate is exclusionary, regard must be had to:
- The criteria and rules governing the granting of the rebates. According to the CoJ, a rebate will be all the more exclusionary if it is:
- Based on a relatively long reference period - the CoJ implied that a reference period of less than a year could still be too long
- Conditional upon the customer meeting the projected volumes for the year, i.e. the customer would have to reimburse the supplier if it failed to meet its target
- Applicable to the entire market, that is to say, the part of the market under Post Danmark’s legal monopoly and the part of the market open to competition, i.e. the so-called “contestable” part of the market
- The CoJ noted that the fact that the rebate is standardized and thus non-discriminatory does not prevent it from having an abusive exclusionary effect.
- The extent of the undertaking’s dominant position and the particular conditions of competition prevailing in the market.
The CoJ did not close the door on possible justifications for the alleged abuse: once the exclusionary effect is established, the undertaking may demonstrate that this effect is counterbalanced by efficiency gains. However, it is well-known that the evidentiary threshold to succeed with this defense is very high. Defendants have thus far been unsuccessful in arguing an efficiency defense to support what is otherwise characterized as an anti-competitive exclusionary rebate.
Second Question: Relevance of the AEC Test
The Guidance Paper’s AEC test aims to determine whether a dominant undertaking is engaging in below-cost pricing, thereby preventing an as-efficient-competitor, even a hypothetical one, from competing without incurring losses. The CoJ has previously applied it to price-based practices such as predatory pricing (for instance in AKZO v Commission, C-62/86) and margin squeeze (for instance in TeliaSonera Sverige, C-52/09).
The Danish court asked whether it was under an obligation to apply this test to establish the existence of an abuse. In response to this question, the CoJ ruled that:
- Since the Guidance Paper is not binding on national competition authorities and national courts, there is no obligation to apply the AEC test. Instead, this document “merely sets out the Commission’s approach as to the choices of cases that it intends to pursue as a matter of priority.”
- Recourse to the AEC test should nevertheless not be excluded. It must be regarded as one possible tool amongst others to establish the existence of an abuse.
- In this particular case, the AEC test is irrelevant for assessing the existence of an abuse. This is because:
- Given the structure of the market (i.e. Post Danmark’s super dominance and legal monopoly), the emergence of an as-efficient-competitor was practically impossible
- Even a less-efficient competitor (i.e. a competitor incurring higher costs) might constrain Post Danmark’s behavior, since the market is protected by high barriers to entry
Third Question: Degree of Likelihood and Seriousness (De Minimis) of the Rebate’s Exclusionary Effect
Finally, the Danish court asked whether the rebate scheme’s exclusionary effect must be: (i) probable and (ii) serious or appreciable. On this last question, the CoJ ruled that it must be “probable” that the dominant undertaking’s rebate scheme will have an anti-competitive effect. It cannot be purely hypothetical. However, it is unnecessary to also determine that the anti-competitive effect is or would be serious or appreciable.
The Situation Post - Post Danmark II: Now What?
It is undeniable that assessing the legality of rebates under Article 102 TFEU is a headache for companies in search of practical solutions that provide a level of legal certainty. Over the years, the administrative practice and the jurisprudence have considered different approaches to that end. Under one approach, a rebate must be regarded as abusive if it is “loyalty-enhancing,” regardless of its concrete effects on the market. This rather formalistic approach stems from established case-law, which includes Michelin II and British Airways. A second, more economic approach consists of assessing the practical effects of the rebate through economic tests, which allows for a quantitative measure of the rebate’s impact on competition. Arguably, such an economic effect-based approach can provide greater legal certainty to dominant undertakings that are willing to grant rebates to their customers.
In this context, the Guidance Paper’s recognition of the AEC test in 2009 marked a welcomed shift towards the more economic approach. However, Post Danmark II goes in the opposite direction, as the CoJtells us that economic tests: (i) are no more than “one tool amongst others,” and (ii) are even irrelevant in markets such as the one here, that is to say, a market characterized by super dominance, protected by a legal monopoly, with high barriers to entry – which is not uncommon for markets in regulated sectors.
Therefore, while the CoJ does not entirely dismiss the AEC test, it seems to favor the formalistic approach followed in Michelin II and British Airways. Under this more restrictive approach, a rebate shall be deemed abusive if it meets the following requirements:
- The undertaking is super dominant
- Only a limited part of the market is contestable (e.g., the dominant undertaking has to compete against others)
- The rebate scheme contains one or more fidelity-enhancing ingredients (e.g., retroactivity, conditionality, long reference period) and applies to a significant part of the market
In these circumstances, the AEC test is of little use to establish the abuse. This is because, according to the CoJ, this initial screening is deemed satisfactory to reach the conclusion that the rebate scheme is sufficiently deleterious to competition and is therefore prohibited. Arguably, the AEC test is only useful in situations where the rebate scheme would be based on less loyalty enhancing features and/or the undertaking would enjoy a relatively low level of dominance and/or where the contestable share of the market is greater than it was in Post Denmark II, i.e. about 30 %. In short, only less extreme scenarios could warrant a more effect-based approach.
More broadly, the CoJ’s statement that the Guidance Paper “merely sets out the Commission’s approach as to the choice of cases that it intends to pursue as a matter of priority” raises the issue of the value of this document. While some businesses were able to rely on it in order to self-assess certain pricing practices, Post Danmark II suggests that this may not be a safe approach after all. This not only affects rebates, but also margin squeeze and predation, which the Commission assesses on the basis of the same AEC test.
All in all, Post Danmark II generates significant uncertainty regarding the assessment of price-based practices of dominant undertakings. Perhaps, the CoJ may take the opportunity to clarify further its position on this important issue in the upcoming judgments in the Intel and Slovak Telecom cases.