Article 102 of the Treaty on the Functioning of the European Union states “abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited….in so far as it may affect trade between Member States.”
The court has repeatedly held that a dominant undertaking has a special responsibility not to allow its behaviour to impair genuine, undistorted competition within the internal market. The concept is clear, but the scope of its application is not so clear. Article 102 gives rise to complex questions: How do you determine whether a firm is dominant? What type of conduct might constitute an abuse?
To determine dominance you need to ascertain what the relevant market is. Only once the relevant market has been defined can the market shares be determined, which again is likely to be a difficult and onerous task. Whilst it is obvious that the narrower the market, the larger the market share will be, only in the very clearest of cases will a high market share alone equate to market dominance. Usually additional factors such as existing market constraints and market dynamics must also be considered.
And then there is the question of conduct. Whilst there is no general assumption of abuse, rebate schemes included in supply agreements can sometimes conceal anti-competitive practices. Where a scheme has as its object or result the discrimination of customers or foreclosure of competition, it will be considered to infringe Article 102.
Some of the highest fines for breach of EU law have involved infringements of Article 102. Other sanctions for breach can include orders to terminate an agreement, orders to cease and desist from withholding supplies, and/or structural or behavioural remedies proportionate to the infringement committed.
Further a third party can bring action for damages where a breach of Article 102 has been found. Whilst claims for damages have been far and few between, the Commission has focused on ways of reducing obstacles faced by claimants in bringing proceedings. In 2013 the Commission published a proposal for a directive on certain rules governing actions for damages under national law for infringements of competition law. The Directive was published in December 2014 with a deadline for implementation by the member states of 27 December 2016.
Given the Directive is intended to incentivise victims of infringements of competition law to bring claims for compensation, companies might now more than ever consider reviewing their rebate schemes more carefully.
Efficient or Abusive?
It is recognised case law that quantity rebates linked solely to the volume of purchases and therefore corresponding with the cost savings made by the supplier, do not normally have anti-competitive effects. A rebate of this kind is not abusive even when granted by dominant undertakings.
On the other hand, financial advantages such as loyalty rebates or target discounts, which dominant undertakings offer customers in an attempt to tie themselves to their own customers and attract the customers of their competitors do constitute an abuse within the meaning of Article 102.
Then there are rebates which cannot simply be regarded as one or the other, and these have to be assessed on a case by case basis.
Following the referral of Case C-23/14 by the Maritime and Commercial Court of Denmark, the European Court of Justice has provided useful guidance for determining whether rebate schemes falling between the ‘’gap’ might be deemed to be an abuse of a dominant position when granted by such an undertaking. The guidance covered the following.
The criteria and rules governing the grant of the rebate
Are the rebates capable, firstly of making market entry very difficult or impossible for competitors and secondly, of making it more difficult or impossible for the co-contractors of that undertaking to choose between the various sources of supply or commercial partners?
For example, where a rebate is ‘retroactive’ i.e. it applies to all purchases across a referenced period as opposed to those purchases exceeding certain threshold(s), the pressure exerted upon the co-contractor is likely to be particularly strong.
Where the reference period is relatively long (for example a year), it also has the effect of increasing the pressure on the buyer towards the end of the period to reach the purchase figure needed to obtain the discount or to avoid suffering the expected loss for the entire period (the ‘suction’ effect). As a result it makes it easier for the dominant undertaking to tie its own customers.
In addition, assess whether there is a standardised rebate scale, whereby all the customers are entitled to receive the same rebate on the basis of their aggregate purchases, or whether the dominant undertaking has applied dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage.
The extent of the dominant position of the undertaking within the relevant market(s)
Are there particular conditions of competition prevailing on the relevant market, for example is the market protected by barriers to entry (e.g. structural, geographical etc.) and/or is there the existence of economies of scale?
For example, competitors of an undertaking with a large market share will most likely struggle to compete with discounts based on overall sales volume provided by a dominant undertaking. Inevitably, the dominant undertaking becomes an unavoidable business partner which produces an anti-competitive exclusionary effect.
The likelihood of the rebate having an anti-competitive effect on the market
Is the anti-competitive effect more than purely hypothetical?
However, beyond establishing that the anti-competitive effect is probable, there is no need to show that it is of a serious or appreciable nature.
It is worth noting that where an exclusionary effect is found to arise from the conduct of the dominant undertaking, the dominant undertaking is not precluded from demonstrating that the effect may be counterbalanced, or outweighed by advantages in terms of efficiency which also benefit the consumer.
A rebate justified by an economic service will simply pass on the cost savings to the customer. Where a dominant undertaking wishes to ‘reward’ customers in the form of rebates which are not justified by the economic service, the undertaking is advised to take a step back and consider whether such rebate is likely (i) to remove or restrict the buyer’s freedom to choose his sources of supply, (ii) to bar competitors to the market, to apply dissimilar conditions to equivalent transactions with other trading parties or (iii) to strengthen the dominant position by distorting competition.