In a long-awaited judgment dated 12 June 2014, the General Court dismissed an appeal by Intel Corp. against a 2009 decision by the European Commission to fine Intel Corp. €1.06 billion for the abuse of a dominant position in breach of Article 102 of the Treaty on the Functioning of the European Union. The judgment’s principal finding is that exclusivity rebates granted by a dominant company are, by their very nature, likely to be anti-competitive and that, as result, there is no requirement to demonstrate anti-competitive effect in the circumstances of an actual case. Such a strict statement of the law can be expected to have a major impact on the commercial strategy of companies with a strong market presence.
Summary of the abuse
The original decision by the European Commission (Commission) had found that Intel Corp (Intel) had abused its dominant position in the market for central processing units, the main hardware component of a computer (CPUs), in two different ways:
- The granting of rebates to PC and server manufacturers conditional on them obtaining all (or almost all) of their supplies from Intel, and payments to a downstream computer retailer conditional on it only selling PCs with Intel CPUs (“exclusivity rebates”).
- The granting of direct payments to three PC manufacturers to halt, delay or limit the launch of specific products incorporating chips from Intel’s only significant rival (so-called “naked restrictions”).
The Commission held that these measures induced the manufacturers’ loyalty and discouraged PC manufacturers from using CPUs made by Intel’s competitors. They also reduced consumer choice by weakening Intel’s competitors’ ability to compete and innovate. Such measures therefore formed part of a strategy through which Intel aimed to exclude its main competitors from the market.
In an earlier Law-Now article, we summarised the key findings of the Commission and the nature of the evidence gathered by it. Our article today explains the position taken by the Court and considers the main points for businesses to take away.
The Court’s analysis of the rebates
Why are exclusivity rebates anti-competitive?
In its decision, the Court fully confirmed the Commission’s findings and agreed with the conclusion that exclusivity rebates granted by a company in a dominant position are incompatible with Article 102 if they are not objectively justified.
The Court distinguished between three categories of rebate:
- “Quantity rebates”, which are linked solely to the volume purchased and are unlikely to be anticompetitive in that they reflect economies of scale.
- “Exclusivity rebates”, i.e. rebates that are conditional on the customer’s obtaining all or most of its requirements from the company in a dominant position. In other words, “exclusivity” for this purpose does not mean full exclusivity. Although there is no definition of the purchase commitment level which would mean “most” and count as “exclusive” for the purpose of these rules, it is notable that the commitment levels in this case were 80% or higher. According to the Court, exclusivity rebates (when granted by a dominant company) are by their very nature capable of restricting competition.
- Other rebates involving a financial incentive. Here, there is no automatic anti-competitive effect and it is necessary to consider all the circumstances of a particular case.
The Court held that the grant of an exclusivity rebate by a company in a dominant position implies that the dominant company is granting a financial advantage designed to prevent customers from obtaining their supplies from competing producers. The capability of tying customers to the dominant company is inherent in these rebates. The financial advantage granted by the rebate is designed to prevent customers from obtaining their supplies from competing producers. Therefore, it is not necessary to assess the circumstances of the case in order to determine whether there is a causal link with actual effects on the market through competitor foreclosure. The fact that customers may have bought from Intel for business reasons (independent from any advantage conferred by the rebate) does not mean that the rebate mechanism is not capable of inducing exclusivity from the customer.
Why did the Commission not need to apply an effects-based approach?
In its appeal, Intel made a number of other arguments to support its primary argument that account should be taken of economic circumstances. For instance, it argued that a rebate scheme of shorter duration is less likely to be anti-competitive and that a scheme applied only to a small number of customers could not really damage competition. These points were rejected: in the Court’s view, an exclusivity rebate has, in principle, an impact on the structure of competition, whatever its duration and coverage.
Intel also submitted that the “as efficient competitor” test (AEC test) is an important factor when establishing the potential foreclosure effect of rebates, since this test shows whether a competitor as efficient as the dominant company could still compete with the dominant company and cover its costs. However, the Court rejected the need to apply the AEC test and found that foreclosure can exist even where a competitor is still able to cover its costs despite the rebates, or where market entry remains possible but is made more difficult. It was for the sake of completeness that the Commission had conducted an AEC test, and the Court found that Intel had no legitimate expectation that the AEC test was essential for the Commission to establish an Article 102 infringement. Even a positive AEC test result could not rule out the potential foreclosure effect which is inherent in the rebate mechanism.
The Commission’s 2009 Guidance Paper on its enforcement priorities in applying Article 102 to abusive exclusionary conduct (Guidance Paper) promotes the AEC test and an “effects-based” assessment. From its Intel decision, the Commission’s approach appeared to be “effects-based” in line with the Guidance Paper. However, the Court dismissed the relevance of any suggestion that the Commission’s decision was not in line with its Guidance Paper, since the Guidance Paper was adopted after the Intel proceedings commenced.
The Court’s analysis of the “naked restrictions”
In relation to the so-called “naked restrictions” Intel argued that the Commission had created a new type of abuse. The General Court rejected this argument that the “naked restriction” abuses were novel and confirmed that characterisation of an abusive practice does not depend on the name given to it. It is clear that limiting the market through the use of these restrictive practices constitutes an abuse, regardless of whether conduct with the same features has been examined in past decisions. This does not limit the Commission’s power to prohibit the practice as unlawful. In any event, the substantive criteria applied to the assessment in this case were not novel, since earlier cases (instanced by the Court in its judgment here) had related to similar marketing restrictions targeted at competing products.
The Court’s assessment of the amount of the fine
The Court upheld the Commission’s decision on the level of the fine and held that such a fine was not disproportionate, particularly because it was equivalent to 4.15% of Intel's annual turnover, which is considerably lower than the 10% threshold for fines.
What are the main implications for enforcement of the abuse rules?
The most striking aspect of this judgment is its robust confirmation that exclusivity rebates granted by a dominant company are, by their very nature, an infringement of the abuse rules and that the Commission is not required to assess the specific circumstances in which such rebates are offered. To many companies, this aspect will be unwelcome in that it reaffirms a strict, form-based approach to exclusivity rebates which derives from previous judgments of the European courts and which, in the light above all of the Guidance Paper, businesses had hoped would be slightly modified in this judgment to allow for a more effects-based approach. There has been speculation that the judgment could embolden national competition authorities, national courts or complainants who wish to take action against dominant companies with established discounting or rebate policies.
The Intel judgment involves two critical areas of legal uncertainty.
- First, its “traditional”, form-based approach arguably represents a stark contradiction of the effects-based approach in the Commission’s Guidance Paper and the uncertainty for the future is how it will influence the Commission’s enforcement practice. The Court’s statement of legal principle, at least as relates to exclusivity rebates, appears to be unequivocal. Although the Commission is at liberty to apply the more flexible approach found in its Guidance Paper to cases started in the future, it has a difficult balancing act if it wishes to respect the ongoing position in case law.
- The judgment does appear to apply only to exclusivity commitments and not to other forms of fidelity-building rebates or to the level of pricing which could be abusive (both of which continue to require an effects-based analysis). The point of uncertainty here arises from the exact point at which a “fidelity-building” rebate becomes an exclusivity rebate and therefore at which stage a rebate scheme becomes subject to the form-based, bright-line rule reiterated in this case.
In any event, the fact that the scope of the judgment’s application may be to exclusivity alone may be little consolation, since financial incentives involving purchasing commitments are widely considered to be a standard commercial practice.
See our earlier Law-Now articles covering the Post Danmark case (regarding the flexible approach to non-exclusivity cases) and the Tomra case (regarding the most recent judgment affirming the traditional view of exclusivity cases).
What are the main implications for business?
Companies in many sectors supply products which a competition authority could consider dominant on their relevant markets. The Court’s judgment in Intel creates an enhanced risk that offering a rebate scheme conditional on exclusivity, or on a purchase commitment close to exclusivity, will be found to be abusive. It is therefore important for companies with potentially dominant products to review their rebate arrangements and to weigh up whether, on a cautious basis, they wish to refrain from offering rebates or other financial advantages in return for exclusivity or quasi-exclusivity. On a practical level, companies with market-leading products may find that implementing a compliant pricing policy in strict terms may be commercially unattractive in some cases.
There is some room for ambiguity in terms of the exact scope of the Intel judgment and above all in how far it may or may not influence future enforcement activity. Nonetheless, at least for now, the legal principle remains that exclusivity rebates risk being found to be anti-competitive when offered by dominant companies, which as a result need to assess the compliance risk of implementing any rebate scheme which rewards a high purchase commitment by their customers.