On 12 June 2014, the General Court of the European Union (General Court) dismissed the appeal by Intel against the decision of the European Commission (Commission) which imposed Intel a record €1.06 billion fine for having abused its dominant position on the market for x86 central processing units (CPU). The General Court held that exclusive rebates granted by Intel between 2002 and 2007 were, by their very nature, anticompetitive and as such illegal since Intel did not provide any objective justification for granting them. According to the General Court, the only rebates that must be subject to a thorough analysis of their effects are rebates which are not purely “quantitative” or, as in this case, “exclusive”. Although the General Court was not bound by the more “economic” analysis grid recommended in the Guidelines for the application of Article 102 TFEU to abusive exclusionary conduct by dominant undertakings (Guidelines) – the investigation of the Commission having begun before their publication in 2009 – some of the principles outlined by the General Court (although the costs test seems to be less important in its analysis) are in line with the methodology set out in the Guidelines.
On 13 May 2009 the Commission imposed a fine of €1.06 billion on Intel – a record for an individual fine – for having abused its dominant position (approximately 70%) on the market for x86 CPU. Between 2002 and 2007, according to the Commission and the General Court, Intel implemented an anticompetitive foreclosure policy by (i) granting rebates to four computer manufacturers (Dell, Lenovo, HP and NEC) on the condition that they purchase from Intel all or almost all of their processors, (ii) paying a large retailer (Media Saturn) so that the latter would exclusively sell computers containing Intel’s processors and (iii) paying three computer manufacturers so that they would cancel or postpone the launch of their computers functioning under AMD’s processors, Intel’s main competitor. According to the Commission, by implementing such commercial policy, Intel aimed to retain the concerned trading partners and, thus, significantly diminished the ability of Intel’s competitors to compete on the merits of their x86 processors. Confirming this analysis, the General Court found that the rebates granted to the four computer manufacturers were exclusive rebates subject to the condition that the partner purchases all or a substantial portion of its requirements from the dominant company. Such rebates are per se abusive without an objective justification, thus, the Commission was not required to verify whether they had the effect of closing the market to Intel’s competitors.
The General Court points out that the analysis of rebates under Article 102 of the Treaty on the Functioning of the European Union (TFEU) depends on their characteristics, three types of rebates being distinguished in this regard. Exclusive rebates such as those provided by Intel are presumed unlawful unless objectively justified. On the contrary, purely “quantitative” rebates reflecting efficiencies are per se legal. Between these two poles, the other types of rebates of the so-called “third category” are subject to an in-depth analysis in the light of all relevant circumstances.
The presumption of illegality of exclusive rebates
According to the General Court, exclusive rebates such as those provided by Intel are per se capable of distorting competition and making an assessment in order to determine whether they have a potential effect of foreclosing competition is thus not necessary; such rebates being, by their very nature, capable of restricting competition. In the case at hand, the General Court found the exclusive rebates to be illegal, in the absence of any objective justification raised by InteI. For the General Court, this strict approach of exclusive rebates – introduced by the Hoffmann-La Roche Judgment – is justified by the fact that they do not constitute a stricto sensu pricing practice – whose effects on competition must be analyzed in concreto – but the reward of an exclusivity obligation.
The presumption of legality of quantitative rebates
Conversely, the so-called “quantitative” rebates exclusively related to the volume of purchases from the dominant company are presumed to be lawful as long as they represent the efficiency gains and economies of scale achieved by the dominant undertaking.
In-depth analysis of the effect of the other rebates in the light of the circumstances
Finally, rebates from “the third category” are subject to the “by effect” analysis considering all the circumstances, including the criteria and conditions for granting the rebate.
In this regard, the General Court made a useful and practical clarification of the role played by the “as efficient competitor test” (AEC test) in this analysis. Defined in the Commission guidelines, this test aims to determine whether the rebates granted are likely to foreclose a competitor as efficient as the dominant operator – Intel in this case. In concrete terms, the test determines the price at which a competitor as efficient as Intel would have had to offer its CPU in order to compensate a computer manufacturer for the loss of the rebates granted by Intel. As such, the Commission verifies whether or not the price charged by the dominant firm is lower than its costs. Two cost thresholds are mainly used to perform this analysis: the average avoidable cost (AAC) and the long-run average total cost (LRAC).
On this basis, the AAC test is divided in three parts:
- Rebates below the AAC are deemed unlawful;
- Prices above the AAC but below the LRAC are deemed abusive if they (i) are part of a plan aiming to eliminate competitors and (ii) are capable of foreclosing as efficient competitors; and
- Prices above the LRAC are deemed lawful unless under exceptional circumstances.
While excluding an automatic application of this test, the General Court pointed out that it only represents one element among many in the context of the analysis of third category rebates. The General Court indicated that the AEC test only allows to check whether the access to the market is impossible, not to evaluate whether this access is made more difficult. This difference is crucial insofar as an exclusionary effect exists not only when market access for competitors is made impossible, but also when it is made “more difficult”, which the AEC test cannot preclude on its own. In this case, the General Court took into consideration, among other relevant circumstances, the particular characteristics of the market (the high market concentration and the low operating margins of competitors). The analysis of the circumstances will be relevant, particularly in cases where the price less the rebates will be located above the AAC but below the LRAC.
Even more radically, the General Court indicated that it is not even “necessary” to perform an AEC test to assess the legality of the third-category rebates, the existence of a “mechanism of loyalty” can come from other factors related to their characteristics – for example, retroactive rebates. In other words, the AEC test cannot preclude on its own the risk of abuse from the dominant undertaking. Moreover, this solution is not entirely different from the analysis recommended in the Guidelines of the Commission, which simply state that it is “unlikely” that the Commission will intervene when prices are above the LRAC.
Finally, although the formalistic approach adopted by the General Court in Intel may seem more stringent than the one from the Guidelines, it does not seem that different at first. Pending further clarification, dominant companies will in any case be advised not to limit the assessment of their rebates to the AEC test, especially when the context in which rebates are granted (significant dominant position, arrival of new competitors, patent expiring etc.) specifically calls for caution.