Moving firmly towards an effects-based analysis

Speed read

On 19 April 2018, the EU’s Court of Justice delivered its judgment in the MEO case, the latest in a recent line of rulings endorsing an effects-based analysis for abuse of dominance cases.

EU competition law requires dominant companies not to discriminate between different customers or suppliers for equivalent transactions, if this leads to a competitive disadvantage for a customer or supplier in its own market. Previous cases had been quick to conclude that a competitive disadvantage arose from price discrimination, with only superficial consideration of the likely impact on the customer or supplier’s competitive position.

The Court has confirmed that price discrimination is not in itself an abuse of dominance in breach of EU competition law. When considering whether this type of ‘second line discrimination’ affecting competition between trading partners of the dominant company and their competitors amounts to an abuse, it is necessary to establish that the discriminatory conduct is capable of producing a distortion of competition for the trading party. This requires a review of all relevant circumstances, including the effect on the trading party’s costs and profits. The less impact caused by the dominant company’s prices, the less likely there is to be a breach of the law.

The ruling does not establish any safe harbours, but it does reduce the pressure in some circumstances on dominant companies to apply uniform tariffs to all customers and suppliers.

The dispute

The case was referred to the Court of Justice by a court in Portugal, and related to a challenge brought by MEO, a Portuguese Pay-TV operator, against a decision of the Portuguese Competition Authority (PCA). The PCA had rejected a complaint filed by MEO alleging that GDA, a non-profit collecting society managing the rights of artists and performers on an exclusive basis, had abused its dominant position. MEO argued that GDA had applied higher prices to MEO than to MEO’s main Pay-TV competitor, in breach of Article 102(c) of the Treaty on the Functioning of the European Union (TFEU), which states that a dominant company abuses its dominant position if it applies ‘dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage’.

The PCA concluded that the differentiation in the tariffs had no restrictive effect on MEO’s competitive position, since the difference in tariffs was modest in comparison with MEO’s average costs (i.e., MEO could absorb the difference) and had not prevented MEO from growing its market share in the time period in question. MEO contested the PCA’s decision, saying that the PCA should not have investigated whether there was a significant and quantifiable distortion of competition, but should have examined whether the conduct at issue was capable of distorting competition.

The position taken by the Court

The Court articulated three key conclusions in this judgment:

  1. Discriminatory pricing can only be an abuse of a dominant position under Article 102(c) TFEU if that conduct causes a ‘competitive disadvantage’ to one of the dominant company’s trading partners. In the case of price discrimination between customers, this requires that such conduct tends to distort competition between those trading partners in the downstream market;
  2. It is not necessary to find evidence of an actual and quantifiable deterioration of the trading partner's competitive position. Nor is there any de minimis threshold for the purposes of determining whether there is an abuse of a dominant position.
  3. However, it is necessary to analyse all relevant circumstances of the case in order to determine whether the discriminatory conduct produces or is capable of producing a ‘competitive disadvantage’. This requires an effect on the costs, profits or other relevant interests of the trading partners sufficient to affect its competitive position.

The implications for dominant companies

Discriminatory pricing is not, in itself, an abuse

This judgment is the latest in a line of cases setting out the view that it is necessary to establish at least potentially distortive effects in order to establish the existence of an abuse. Advocate General Wahl stated very clearly in his opinion to the Court that Article 102 TFEU does not compel dominant undertakings to apply uniform tariffs to their trading partners. The opinion also alluded to the learning that price discrimination could be pro-competitive, allowing, for example, the dominant undertaking to offer its goods and services to a greater number of customers, including customers with less purchasing power.

The Court of Justice stops short of making similar sweeping statements, but it is clear from the judgment that price discrimination is not necessarily abusive. It is equally clear from the Court’s judgment that there is no presumption of distortion of competition (and, therefore, of abuse) following from the fact that a dominant company’s trading partner suffers an immediate disadvantage by being charged more than its competitors. A finding of competitive disadvantage requires more.

Consistent approach to price discrimination

Unlike most discrimination cases, the MEO case concerns a pure ‘secondary line discrimination’ issue: given that GDA is effectively a monopolist, its conduct is not capable of affecting competition in the market in which it is active (as there is none), but only in the downstream Pay-TV market. Most discrimination cases concern conduct which can affect competition both between the dominant company and its competitors and between its trading partners themselves.

The Court's 2012 Post Danmark judgment had set out the approach to discriminatory conduct which affects competition between the dominant company and its direct competitors (‘primary line discrimination’). In that case, the Court confirmed that discrimination is not automatically an abuse and that it is necessary to assess all relevant circumstances to determine whether the conduct is capable of distorting competition. The MEO judgment completes the picture by applying similar principles to a pure ‘secondary line discrimination’ case, thereby providing comfort that an effects analysis will be required in both primary and secondary line discrimination cases.

Is Intel the new legal standard to demonstrate potential effects of exclusionary behaviour?

The cornerstone of the potential effects test outlined in the MEO judgment is the assessment of all relevant circumstances of the case to determine if the conduct is capable of distorting competition. Perhaps unexpectedly, when explaining this concept further and listing the factors which may be relevant for that assessment, the Court draws from its 2017 Intel judgment on rebates, including a reference to the existence of a strategy to exclude from a downstream market a trading partner which is at least as efficient as its competitors.

This signals that the approach taken in Intel has wider application – beyond rebates – and could emerge as the legal standard for exclusionary abuse cases more generally. While helpful to have a consistent framework for abuse of dominance cases, the ‘as efficient competitor’ approach poses some challenges when referring to an impact on the competitive position of a customer (which is active on a different market) rather than a competitor of the dominant company.

In conclusion

The MEO ruling does not create a bright line rule as to when price discrimination is or is not permissible. However, it does dispel the assumption that dominant companies have no choice but to adopt uniform pricing and creates a framework allowing dominant companies to carry out a self-assessment of the legality of their pricing behaviour. It is still necessary to tread carefully when considering differentiated pricing, but there is now more scope to do so.