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European Commission Finds Predatory Pricing of Chipsets

For the first time in 16 years, the European Commission has imposed a fine for what the Commission found was an abuse of dominance by predatory pricing. Any company which trades with or competes against a dominant provider should be aware that an argument of predatory pricing may be available to control its behaviour in the dominated or a related market.

The case involved Qualcomm, which was found by the Commission to have held a dominant position in the global market for UMTS baseband chipset between 2009 and 2011. Baseband chipsets enable smartphones and tablets to connect to cellular networks and are used both for voice and data transmission. The case concerned chipsets complying with the Universal Mobile Telecommunications System (UMTS), the third generation (3G) standard.

The dominance finding was based on Qualcomm's market share of approximately 60% (almost three times the market share of its biggest competitor) and what was found to be the high barriers to entry to this market. These include the significant initial investments in research and development to design UMTS chipsets and various barriers related to Qualcomm's intellectual property rights.

It is not illegal under EU competition law to hold a dominant position. However, it is illegal to abuse a dominant position by restricting competition in the market in which dominance is held or in a related market.

Qualcomm was held to have abused its dominance between mid-2009 and mid-2011 by selling certain quantities of three of its UMTS chipsets below cost to Huawei and ZTE, two strategically important customers, with the intention of eliminating Icera, its main rival at the time in the market segment offering advanced data rate performance.

This behaviour – determined by the Commission to be predatory pricing - took place when Icera was becoming a viable supplier of UMTS chipsets providing high data rate performance, thus posing a growing threat to Qualcomm's chipset business, and could not be justified by efficiency arguments. The company was fined €242 million for this behaviour and ordered not to engage in such practices, or similar practices, in the future.

Identifying the correct “cost” in these cases is notoriously difficult. The Commission seems to have settled on using LRAIC (long-run average incremental cost) as the benchmark. This is average variable costs (AVC) plus fixed costs specific to the products in question. Qualcomm was found to have priced below this level and together with its intention to eliminate Icera this was sufficient, according to the Commission, to found the predatory pricing abuse.

EU Imposes Fine for Limiting Cross-Border Sales of “Anthropomorphic Cat Girl”

In recent years, the European Commission has investigated and fined numerous companies for restricting parallel trade within the EU. The latest case concerns a ban Sanrio imposed on traders selling licensed merchandise — products featuring Hello Kitty or other characters owned by Sanrio — to other countries within the European Economic Area (EEA). For this infringement of EU competition law, Sanrio was fined €6.2 million.

Sanrio is a Japanese company that designs, licenses, produces and sells products featuring Hello Kitty, described by the Commission as an “anthropomorphic cat girl also known by her full name Kitty White,” and other popular characters such as My Melody, Little Twin Stars, Keroppi or Chococat. Through its subsidiary Mister Men Limited, Sanrio also holds the intellectual property rights to the “Mr. Men” and “Little Miss” series of animated characters.

The Commission found that Sanrio's non-exclusive agreements with licensees infringed EU competition rules in two ways:

  • Sanrio imposed a number of direct measures restricting out-of-territory sales by licensees, such as clauses explicitly prohibiting these sales, obligations to refer orders for out-of-territory sales to Sanrio and limitations to the languages used on the merchandising products.
  • Sanrio also implemented a series of measures as an indirect way to encourage compliance with the out-of-territory restrictions. These measures included carrying out audits and the non-renewal of contracts if licensees did not respect the out-of-territory restrictions.

These practices, which were in force for approximately 11 years, partitioned the EU’s single market and prevented licensees in Europe from selling products cross-border, to the ultimate detriment of European consumers.

This finding of a competition law infringement and the fine is not surprising. As recently as March 2019, the Commission fined Nike €12.5 million for preventing traders from selling licensed merchandise to other countries within the EEA. Companies need to be aware of the (limited) situations in which cross-border sales within the EU can be restricted.

Do Your Due Diligence: Do Not Buy a State Aid Liability

Due diligence on a corporate acquisition or joint venture or even minority investment should, as a matter of course, cover competition law infringements. Often overlooked is state aid provided by an EU member state. This can be expensive since if it is found that illegal state aid was granted, then the new owner or investor may have to repay the aid (plus interest).

The European Commission provided an example of this on 28 June 2019, when it announced its findings that Finnish bus transport company Helsingin Bussiliikenne Oy (HelB) received €54.2 million of incompatible state aid from Finland.

The Commission had received a complaint alleging that the conditions of loans granted to HelB by the Finnish authorities were not on market terms. Upon investigation, the Commission confirmed that no private market creditor would have granted the loans under these terms and conditions (such as very low interest rates), in particular considering HelB's financial difficulties at the time when the loans were granted. On this basis, the Commission found that the loans constituted state aid under EU rules (aid granted on private market terms is not state aid).

The Commission therefore assessed the measure under state aid rules to determine if it qualified for an exemption. No suitable exemption was identified and therefore the Commission found illegal state aid and ordered Finland to recover the aid from HelB.

During the Commission’s investigation, the assets and business operations of HelB were sold to one of its competitors. The Commission found that this new owner is the economic successor of HelB and is now responsible for repaying the incompatible state aid (plus interest). It is not known whether the purchaser was aware of this issue, but in any event, it will be an unwelcome development for it.

UK Court Finds Competition Law Infringements in “Stand-Alone” Case

On 19 July 2019, the UK Competition Appeal Tribunal (CAT) handed down a judgment finding that certain requirements imposed by Network Rail infringed the Chapter I (ban on anti-competitive agreements) and Chapter II (ban on abuse of dominance) prohibitions of the UK Competition Act 1998. This was on the assumption, to be determined later, that Network Rail holds a dominant position in the market for the operation and provision of access to national rail infrastructure in Great Britain (part of the UK).

The claimant seeks damages for breach of competition law and first had to provide this element of the claim on a stand-alone basis (i.e., without relying on a regulatory decision).

The CAT found that the requirement in the Sentinel Scheme and On-Track Plant Operations Scheme run by Network Rail that suppliers and persons seeking access to its managed infrastructure must obtain supplier assurance only through the Railway Industry Supplier Qualification Scheme (RISQS) (run by the Rail Safety and Standards Board) and not through alternative schemes (such as that run by the claimants) gave rise to these infringements.

The Sentinel Scheme is a passporting system governing access by individuals to Network Rail’s managed infrastructure. The On-Track Plant Operations Scheme sets out processes to support safe planning, control and use of the on-track plant.

The central issue raised in the case was whether a restriction on competition in a safety-critical industry is justified on health and safety grounds. The CAT concluded that the RISQS-only rule was not justified on this basis. It recognised that health and safety is a legitimate purpose capable of justifying conduct which restricts competition.

However, in order to be justified, the restriction must be shown to be indispensable to the achievement of the health and safety purpose. Network Rail failed to establish to the satisfaction of the CAT that the exclusivity of RISQS mandated in the Sentinel Scheme and OTPO Scheme was indispensable to the health and safety purposes of those schemes.

This is an important judgment showing the continuing development of private competition law litigation in the UK and that it is possible to establish competition law infringements on a stand-alone basis.

Additional European competition law news coverage can be found in our news section.