The European Court of Justice (ECJ) has ruled that a dominant company does not automatically commit an abuse contrary to Article 102 of the Treaty on the Functioning of the European Union (Article 102) by selectively offering prices that are below its average total costs but above the incremental cost of serving the customer concerned. Other factors must be taken into account to establish an abuse, including the company's intention and the effect of the pricing, including the actual or potential exclusion of an equally efficient competitor.
Post Danmark and Forbruger-Kontakt are the two largest distributors in Denmark of unaddressed mail (i.e. items distributed to all addresses, such as brochures, telephone directories, guides, local and regional newspapers etc). Because of Post Danmark's monopoly in the delivery of certain addressed mail (which is a regulated, non-liberalised sector), it controls a nationwide network that it also uses for the delivery of unaddressed mail (a wholly liberalised and unregulated sector). At the time of the alleged infringement, Forbruger-Kontakt had created a competing distribution network for unaddressed mail.
Until 2004, the supermarket companies SuperBest, Spar and Coop were major customers of Forbruger-Kontakt, at which point they were lost to Post Danmark. Forbruger-Kontakt complained to the Danish competition authority (Konkurrencerådet), which held that Post Danmark had abused its dominant position by adopting a selected discounts strategy designed to ensure its customers' loyalty, and by charging the three supermarkets different rates to those applied to its existing customers without being able to justify those different rates by reference to differences in its costs.
The authority's infringement decision was upheld by both the Danish competition appeals tribunal and a regional court. Post Danmark lodged a further appeal with the Danish Supreme Court, which referred two questions to the ECJ for a preliminary ruling:
- Could selective price reductions by a dominant postal undertaking to a level lower than its average total costs, but higher than its average incremental costs, constitute an abuse under Article 102, even if it is established that the price was not set at that level for the purpose of driving out a competitor?
- If the answer to the first question is "yes", what are the circumstances that a national court must take into account in determining whether an exclusionary abuse has actually taken place?
The ECJ handed down its ruling on 27 March 2012.
The ECJ's ruling
Article 102 prohibits both price discrimination (charging customers in a similar position different prices in a manner that distorts competition) and predatory pricing (effectively, pricing at less than the cost of providing the product). Interestingly, the ECJ in this case adopted an analytical approach appropriate to predation cases, rather than adopting one based on discrimination alone. In justifying this approach, it explicitly noted that charging customers different prices for services that cost the same to provide "cannot of itself suggest that there exists an exclusionary abuse". The ECJ also noted that analysis of the likely exclusionary effect of Post Danmark's pricing in this case had to be considered, since it could not be established that Post Danmark had priced in this manner deliberately in order to drive out a competitor.
It is well established in law that: (i) pricing by a dominant company at below its average variable costs must, in principle, be regarded as abusive inasmuch as it is deemed to pursue no economic purpose other than that of driving out its competitors; and (ii) pricing below average total costs, but above average variable costs, must be regarded as abusive if it is part of a plan for eliminating a competitor.
Having estimated Post Danmark's average total and incremental costs of unaddressed mail delivery in this case, the Konkurrencerådet found that the price it offered to Coop did not enable Post Danmark to cover its average total costs, but did enable it to cover the average incremental costs of serving that customer. The prices offered to Spar and SuperBest, in contrast, were assessed to be higher than its average total costs. As a result, those prices could not be considered to have anti-competitive effects and were hence not abusive.
Looking specifically at the price offered to Coop, the ECJ ruled that such a pricing policy cannot be considered to amount to an exclusionary abuse simply because the price charged was lower than the average total costs attributed to the activity concerned, but higher than the average incremental costs. The ECJ noted that, where a dominant company sets its prices at a level that covers most of its costs, as a general rule an equally efficient customer could compete with those prices without suffering losses that are unsustainable in the long term. As a result, such pricing is not inherently abusive.
The Danish Supreme Court must now decide whether to uphold Post Danmark's appeal, following the guidance provided by the ECJ. In particular, it must assess the conduct's actual or likely exclusionary effect. The ECJ emphasised that, if the national court should find that such an exclusionary effect exists, it is still open to Post Danmark to provide justification for its behaviour, such as efficiency gains that are passed on to customers.
Although the ECJ, on a preliminary ruling reference, cannot issue a decision on whether the facts justify a finding of infringement, it made a number of comments that suggest it may not agree entirely with the Konkurrencerådet's findings of fact. The ECJ considered that, in attributing costs between Post Danmark's unaddressed mail delivery and other activities, the method used by the Konkurrencerådet sought to attribute the bulk of the costs to unaddressed mail delivery. This suggests that the ECJ was not convinced that the costs estimates used by the authority were accurate. The ECJ also noted that Forbruger-Kontakt managed to maintain its distribution network despite losing the three customers and has managed to win back Coop's and Spar's custom – which suggests that Post Danmark's pricing practices did not result in significant exclusionary effects. It remains to be seen whether these comments will affect the Supreme Court's decision.
The ruling provides helpful guidance on the assessment of selective discounting under Article 102. It also indicates a welcome willingness on the part of the ECJ to consider the economic effects of pricing decisions before determining their legality, rather than adopting a more rigid, form-based approach. In particular, the court's focus on the potential exclusionary effect of pricing on an equally efficient competitor, closely follows the approach recommended by the European Commission in its 2009 Guidance on Enforcement Priorities when applying Article 102. As a result, this judgement should provide dominant companies with some comfort when negotiating prices, provided that their pricing is not predatory and is not intended, or likely, to have an exclusionary effect on competitors.
The remains a controversial area, however, with significant uncertainty emerging from the case law. This can be seen from the fact that the ECJ's judgment in this case was followed less than three weeks later by its judgment in the Tomra appeal, in which it followed a more formalistic approach to assessing the compatibility of retroactive rebates with Article 102 that took no account of costs. The Tomra judgement stands as a reminder that the move to an effects-based approach is far from uniform across courts or competition authorities within the EU.