No "paradigm shift"
On 12 June 2014, the General Court ("GC") rendered its judgment in the Intel case (T-286/09). Many observers had awaited a paradigm shift in the assessment of rebates by dominant firms under Article 102 TFEU. This expectation was grounded in the adoption of the 2009 Commission Guidance Paper on enforcement priorities in applying Article 102 TFEU describing a shift in focus on the part of the Commission towards the effects of certain conduct rather than the mere form of the practice (or the predefined category in which the conduct falls).
The Commission fined Intel over 1 billion euro's for applying abusive rebates. The Commission applied an "effects-based" analysis of Intel's conduct in addition to relying on existing EU case law reflecting an unfavorable and form-based stance particularly towards rebates conditioned upon the purchaser obtaining all or most of its requirements from the dominant firm ("exclusivity" rebates).
The big question was whether the GC would seize the opportunity to also adopt a more effects-based approach in the judicial review of exclusivity rebates thereby departing from, or at least nuancing, existing case law that condemns those rebates effectively on a per se basis (see further below).
The GC, ruling on the matter in extended composition, does no such thing. In essence, the judgment relies on the existing case law and rejects the notion that the Commission should prove anti-competitive effects resulting from Intel's use of the exclusivity rebates. The judgment did not bring any simplification of the complex landscape governing compliance questions surrounding such rebates: the Commission may very well prioritize on the basis of the effects of certain behavior but the GC continues to deny that the (absence of such) effects affects the legality of the rebate scheme.
The decision describes two types of conduct by chipmaker Intel vis-à-vis its trading partners, namely conditional rebates and ‘naked restrictions’. This article focuses on the former category.
According to the contested decision, Intel awarded four Original Equipment Manufacturers ("OEMs"), namely Dell, Lenovo, HP and NEC, rebates which were conditioned on these OEMs purchasing all or almost all of their requirements for specific computer chips from Intel. Similarly, Intel awarded payments to MSH, which were conditioned on MSH selling exclusively computers containing Intel’s chips.
The contested decision concludes that the conditional rebates granted by Intel were fidelity rebates constituting abusive conduct in violation of Article 102 TFEU.
The contested decision also conducts an economic analysis of the capability of the rebates to foreclose a hypothetical competitor as efficient as Intel (as-efficient-competitor test; ‘the AEC test’), albeit not dominant. More precisely, the test establishes at what price a competitor as efficient as Intel would have had to offer CPUs in order to compensate an OEM for the loss of an Intel rebate. The same kind of analysis was conducted for the Intel payments to MSH.
The evidence gathered by the Commission led it to the conclusion that Intel’s conditional rebates and payments induced the loyalty of the key OEMs and of MSH. The effects of these practices were complementary, in that they significantly diminished competitors’ ability to compete on the merits.
The GC judgment
The GC commences its assessment by recalling established case law noting that where it concerns the potential abusive nature of a rebate grant, a distinction should be drawn between three categories of rebates:
First, quantity rebate systems linked solely to the volume of purchases made from an undertaking occupying a dominant position are generally considered not to have the foreclosure effect prohibited by Article 102 TFEU. If increasing the quantity supplied results in lower costs for the supplier, the latter is entitled to pass on that reduction to the customer in the form of a more favourable price. Quantity rebates are therefore deemed to reflect gains in efficiency and economies of scale made by the undertaking in a dominant position (see Case T‑203/01 Michelin v Commission (‘Michelin II’), paragraph 58 and the case-law cited).
Second, there are rebates which are conditional on the customer obtaining all or most of its requirements from the undertaking in a dominant position. Such exclusivity rebates are considered by the Court of Justice to violate Article 102 TFEU because they are not based — save in exceptional circumstances — on an economic transaction which justifies this burden or benefit but are designed to remove or restrict the purchaser’s freedom to choose his sources of supply and to deny other producers access to the market. According to the Court of Justice such rebates are designed, through the grant of a financial advantage, to prevent customers from obtaining their supplies from competing producers (Hoffmann-La Roche, paragraph 90, and Case T‑155/06 Tomra, paragraph 210).
Third, there are other rebate systems where the grant of a financial incentive is not directly linked to a condition of exclusive or quasi-exclusive supply from the undertaking in a dominant position but where the mechanism for granting the rebate may also have a fidelity-building effect. That category of rebates includesinter alia rebate systems depending on the attainment of individual sales objectives which do not constitute exclusivity rebates, since those systems do not contain any obligation to obtain all or a given proportion of supplies from the dominant undertaking.
Arguably the key issue in the judgment is the GC's response to Intel's argument that also in relation to exclusivity rebates (2nd category above) establishing a (potential) foreclosure effect would be required for a finding that Article 102 TFEU has been violated.
The GC's answer, however, is in the negative:
"It follows from Hoffmann-La Roche, paragraph 71 above (paragraphs 89 and 90), that that type of rebate constitutes an abuse of a dominant position if there is no objective justification for granting it. The Court of Justice did not require proof of a capacity to restrict competition depending on the circumstances of the case."
The GC recalls that only in relation to rebates categorized in the 3rd category (above) that it is necessary to consider "all the circumstances [of a case], particularly the criteria and rules governing the grant of the rebate, and to investigate whether, in providing an advantage not based on any economic service justifying it, that rebate tends to remove or restrict the buyer’s freedom to choose his sources of supply, to bar competitors from access to the market [...] ".
This continues to render exclusivity rebates pretty much per se illegal for companies with a dominant position, with the caveat that in exceptional circumstances an objective justification for the rebate scheme (i.e. efficiencies benefitting consumers) may outweigh the foreclosure concerns found to be inherent in these rebates. The judgment does not offer any guidance on the exact scope of such potential justification now that "the applicant has put forward no argument in that regard" (paragraph 94).
Following the implications of the selected approach, the GC notes that there is also no need to examine whether the rebates could have been matched by a hypothetical competitor "as efficient" as the dominant firm (en passant the GC also rejects this test for rebates of the 3rd category above which were not at issue in this case; see paragraph 146).
Finally, Intel's arguments related to the Commission's Guidance Paper are rejected by the Court: as the Intelcase pre-dates the entry into force of this Paper it can have no relevance in this case.
Dominant firms or firms that operate under a presumption of dominance would be wise to avoid rebate schemes that run the risk of being qualified as such.
This outcome already is the subject of criticism (as the form-based approach has been for a long time also prior to this case) as it bans rebate schemes that may on balance be beneficial to consumers and may chill legitimate business behavior. Other voices refer to the positive effects of legal clarity ("exclusivity rebates are a no-go"), as well as the so far unexplored possibility to adduce efficiencies as part of the objective justification-route.
The wide gap between what the Commission claims should be seen as problematic rebates in its 102 Guidance Paper and the form-based approach of the EU Courts has not been reconciled.