On January 30, 2007, the European Court of First Instance (CFI) rejected the
appeal lodged by France Telecom, parent company of the Internet Service
Provider Wanadoo, against a decision of the European Commission of July 16,
2003 imposing a €10.35million fine on Wanadoo for allegedly charging
predatory prices in breach of Article 82 of the EC Treaty.

The CFI issued its judgment at a time when the European Commission (the Commission) is
considering adopting a more economic and dynamic approach in its assessment of dominant
firms’ conduct under Article 82 of the EC Treaty. The CFI’s analysis tends to lend support to
the ‘static’, form-based approach adopted by the Commission in the past, at least in relation to
predatory pricing. Whether the judgment will affect the next steps of the Commission’s Article
82 reform remains an open and interesting question.

As a first point, the CFI endorsed the ‘old’ predatory pricing test defined by the Commission
and European courts almost 20 years ago in the Akzo case, i.e., when practised by a dominant
undertaking: 

  •  prices below average variable costs (AVC) are per se predatory and abusive, and
  • prices below average total costs (ATC) but above average variable costs are
    considered predatory only if evidence of an intent to eliminate competitors can be
    adduced.

The CFI confirmed that this test is still valid to evaluate predatory pricing and noted that "prices
below average variable costs must always be considered abusive." In this respect, the
judgment diverges from the approach adopted by the U.S. and French antitrust authorities,
which requires that the predatory pricing test should also include the company’s ability to
recoup initial losses. Under this approach, if there was no expectation of recouping losses,
selling below cost would not be abusive behavior. The U.S. and French authorities’ approach
also takes account of potential competition and future market entry in the assessment of
predatory pricing since dominant firms would not be expected to recoup losses in markets with
low barriers to entry, which other companies could quickly penetrate in order to undercut any
attempt to increase prices.

Secondly, the CFI judgment interestingly concludes that dominance can also occur in a
dynamic emerging market, such as the ADSL market at the time of Wanadoo’s practices. The
CFI considered that even the existence of lively competition on a particular market does not
rule out the possibility of a dominant position. The CFI again applied a ‘static’ test and found
that (i) very large shares usually are in themselves evidence of the existence of a dominant
position, and that (ii) potential competition is not in itself a decisive factor in the assessment of
such a position.

Thirdly, the CFI emphasized that, even though, in principle, dominant companies have a right
to compete and therefore align their prices on those of their competitors, such alignment might
become abusive when it is practised not only with the intention of protecting the firm’s
legitimate commercial interests but also of strengthening a dominant position. In this context,
the CFI confirmed the European Commission’s findings that Wanadoo could not rely on an
absolute right to align its prices on those of its competitors in order to justify its conduct.