On 2 February 2007, the Court of Appeal ("CA") gave judgment in the long-running litigation between Attheraces ("ATR") and the British Horseracing Board ("BHB"). The CA overturned the earlier finding of the High Court that BHB had abused its dominant position by charging excessive and discriminatory prices for the supply of pre-race data to ATR. The CA upheld the first instance judgment in respect of the relevant product and geographical market and BHB's dominance in that market, but found that the prices levied by BHB were not unfair so as to infringe Article 82EC or the Chapter II prohibition of the Competition Act 1998. In doing so, the CA provided some important guidance on the principles of excessive and discriminatory pricing.

Background

BHB is the administrator and governing body of British racing. Pre-race data is information from BHB's database in relation to each horseracing fixture, including name and time of race, course, race distance and information about horses and jockeys. ATR purchases this data from BHB and then supplies the data, together with television footage, to websites and television channels for use by bookmakers and punters. Certain proposed changes to the governance and funding of British horseracing resulted in BHB having to fund racing generally without the continued benefit of the levy previously imposed by the Horserace Betting Levy Board. As a result, BHB proposed to set the price to ATR as a share of ATR's net profit from the sale of its services to bookmakers and other outlets outside the UK and Ireland (the dispute did not concern the supply of pre-race data to ATR for use on its website or satellite channel). ATR objected to the proposed price on a number of grounds, including that the price was excessive and an abuse of a dominant position under Article 82 EC and/or the Chapter II prohibition.

On 21 December 2005, the Chancery Division (Etherton J, [2005] EWHC 3015 (Ch)) held that BHB had abused its dominant position in the supply of pre-race data to ATR by charging prices for an essential facility controlled by it that were both excessive and discriminatory. The judge found that the prices charged by BHB "were significantly in excess of the economic value of BHB's pre-race data… The economic value of the data is to be measured … by the cost to BHB of the producing the Database… together with a reasonable return on that cost" (the "cost+" measure).

Judgment of the CA

The CA (Mummery, Sedley and Lloyd LJJ) started by acknowledging that the case presented factual an legal questions that were regarded as very difficult even by specialist lawyers and economists. Consequently, it noted, when negotiations break down between parties about access to an essential facility, the problems might be more satisfactorily resolved "by arbitration or by a specialist body with appropriate expertise and flexible powers".

Excessive pricing

The CA started its analysis with the leading case at Community level, United Brands, which, it cautioned, should not be read too literally, but should be read and applied with care. The CA derived four principles from this case (paragraphs 114-119):

The case raises two different questions namely: 

  • whether the difference between costs actually incurred and the price actually charged is excessive; and 
  • if the answer to (a) is yes, has a price been imposed which is either unfair in itself or when compared with competing products

The central concept in excessive and unfair pricing cases is not the cost of producing the product or the profits made by selling it, but rather the economic value of the product supplied. A price would only be excessive if it bore no reasonable relation to this economic value.

The ECJ did not rule that economic value should always be calculated on the basis of cost+; it merely gave this measure as one example of the basis for assessing excessiveness.

The law on abuse of dominance is about distortion of competition and safeguarding the interests of consumers, and not a prohibition on making "excess profits" by selling at a price higher than cost+.

As regards which costs should be taken into account, BHB argued that pre-race data was not a "standalone product", but a secondary product of British racing generally; it was therefore justified to attribute to the costs of pre-race data some of the costs of ensuring the quality and integrity – and hence value – of British racing, rather than simply the costs of maintaining the database. The CA accepted this submission and held that it would be "too restrictive" to take account only of direct costs of the database (paragraphs 174 and 181); this clearly leaves scope for some allocation of fixed and common costs.

In distinguishing the two limbs of the test in United Brands, the CA accepts that a price might be "excessive" without being "unfair" (and therefore abusive). The necessary element of "unfairness" would only be present if the excessive price had the result of restricting or distorting competition, which it did not do in this case.

The most important findings of the CA are in respect of economic value (paragraphs 203-218). On this subject the CA found itself in sympathy with BHB's argument that economic value looks to the demand side, rather than only to the supply side, i.e. economic value means value to the customer, not cost to the seller. The CA concluded that "There is nothing in the Article [82] or its jurisprudence to suggest that the index of abuse is the extent of departure from the cost+ criterion". It described the argument that cost+ should be the competitive price and pricing above would be excessive as "at best a rule of thumb" and recognised that even in a hypothetically competitive market, rates of profit may be above or below cost+. Hence, it found, "exceeding cost+ is a necessary, but in no way a sufficient, test of abuse of a dominant position".

This did not amount to carte blanche to dominant undertakings to charge whatever price the market would reasonably bear. But the threshold above which a given price would become abusive, would not be a cost+ measure, but rather the level at which the ability of customers to compete would be compromised (in this instance the CA found that there was no evidence that ATR's ability to compete would be compromised). The CA found that there was "no single methodology or litmus test of abuse: the court has a choice of methods, but not an unlimited one.

One of the critical features of this case was that it was effectively a dispute about rent-sharing: ATR derives profits from the use of the pre-race data in products it supplies to bookmakers and others outside the UK and Ireland and the dispute was about the proportion in which these profits should be shared between ATR and BHB. The dispute had no bearing on the price that would ultimately be paid by customers of ATR. In this context, the CA reiterated the principle that Article 82 seeks the protection of competition and consumers, and not of competitors

The CA postulated a hypothetical example of a monopoly producer that supplies a supermarket at a price equal to cost+, only to find that the supermarket applies a mark-up of 500%. In those circumstances, the CA accepted BHB's analysis that the supermarket will have established the economic value of the product and it would be legitimate for the monopolist to try and secure as much as possible of the final price to consumers. The CA continued in colourful language

"We appreciate that this theoretical answer leaves the realistic possibility of a monopoly supplier not quite killing the goose that lays the golden eggs, but coming close to throttling her. We do not exclude the possibility that this could be held to be abusive, not least because of its potential impact on the consumer. But Article 82, as we said earlier, is not a general provision for the regulation of prices. It seeks to prevent the abuse of dominant market positions with the object of protecting and promoting competition. The evidence and findings here do not show ATR's competitiveness to have been, or to be at risk of being, materially compromised by the terms of the arrangements with or specified by BHB."

Discriminatory pricing

In addition to the complaint of excessive pricing, ATR also complained of discriminatory pricing by BHB. The discrimination alleged consisted in BHB seeking to secure 50% of ATR's net revenue as the price for the pre-race data, while supplying the same data to a competitor at a lower revenue share of 30%.

The CA held that differential pricing was by definition discriminatory, but that not all forms of discrimination would fall foul of Article 82/Chapter II (paragraphs 265-278). The CA accepted that the differential pricing would reduce ATR's profitability, but found that this was not the same as limiting is competitiveness. It stated that "None of this [negotiating differential prices with different customers at the same time] is attractive. But the question is whether it was unlawful. No principle of law suggests that differential pricing by a monopoly supplier, even if duplicitously conducted, amounts by itself to an abuse of its market position."

The CA went on to find that, once it is accepted that the product may have a different economic value to different customers due to those customers' own downstream operations, it had to be accepted that a price differential may be discriminatory, but would not be abusive per se. Discriminatory pricing would only be abusive if it restricted downstream competition. Discrimination and distortion of competition are therefore not indistinguishable, but are in fact distinct and sequential matters.

Comment

The impact of this judgment on enforcement and generally will only become apparent in time. But a number of points can be highlighted:

The CA's approach makes clear that there is no presumption of abuse when pricing exceeds cost+ and, at first sight, allows dominant undertakings greater pricing freedom. Dominant undertakings can now price up to the economic value of their product without infringing competition law.

How real this enhanced freedom will be in practice remains to be seen. While offering greater freedom of conduct, the judgment does not provide any greater legal certainty as to the threshold for abuse, since the concept of "economic value" to the customer remains nebulous and difficult to apply.

In the absence of any exclusionary element to a finding of excessive pricing, it may be that UK regulators would need to consider more carefully whether the uncertainty implied by the judgment would militate against the imposition of fines in specific instances.

However, a crucial feature in the present case, which will not be replicated in all cases, is that the allegedly "abusive" price had no impact on the price at which ATR sold to its customers. In other words, it was simply a rent-sharing dispute. Whilst the principles enunciated by the CA should apply in all cases, the courts may afford dominant undertakings less leeway where prices to consumers will be adversely affected.

The judgment makes clear that an effect on competition cannot be assumed from either excessive or discriminatory prices: since the purpose of Article 82/Chapter II is to protect competition and consumers, rather than competitors, distortion of competition must be proved separately.