Rebates by dominant firms: when they are abusive?

Granting discounts and rebates to customers is commonplace in a market economy. In the European Union, however, rebate schemes implemented by dominant companies (dominance concerns can arise from market shares between 40-50%) have traditionally been the subject of a restrictive case-law by the European courts as regards their compatibility with Article 102 TFEU, which prohibits the abuse of a dominant position.

In the recent and long-awaited Post Danmark II judgment¹, the European Court of Justice generally confirmed its previous case law, which has been criticized for a formalistic approach detached from the economic reality. The judgment is nevertheless welcome for clarifying the criteria for applying Article 102 TFEU to discount schemes practiced by dominant companies and attempting (somewhat timidly) to move towards an analysis based on the effects of the conduct of companies in the market.

The facts

The judgment results from a referral for preliminary ruling from the Danish commercial court in relation to a scheme of retroactive rebates implemented by Post Danmark (the operator of the universal postal service in Denmark) for direct advertising bulk mail, which had been declared contrary Article 102 TFEU by the Danish competition authority.

The discounts at stake ranged from 6% to 16% and depended on the customer reaching certain targets (in terms of number of issued letters or delivery charges value) during the reference period of one year. At the end of the year, Post Danmark adjusted the price initially paid by the customers, taking into account the volumes actually shipped. The rebates were applied to all customers of Post Danmark, regardless of whether distribution took place in areas not covered by other operators.

Criteria for determining the abusive nature of rebate schemes

The first question posed by the Danish court concerned the criteria for analysing under Article 102 TFEU a scheme of conditional rebates as implemented by Post Danmark. Clarifying previous case-law, the judgment identifies three categories of rebates, to which different criteria apply:

• Quantity rebates, which are linked solely to the volume of purchases from the supplier in a certain individual order, are admissible, to the extent that they correspond to savings achieved by the dominant undertaking;
• Loyalty rebates, granted to customers who commit to purchase all or most of their requirements from the dominant company, are considered unfair, unless it can be objectively justified by the dominant undertaking (demonstration virtually impossible or very difficult).
• Other rebates not included in the previous two categories, in particular conditional rebates, granted to the client for achieving certain purchasing targets over a given period, should be assessed taking into account all relevant circumstances to determine whether the rebate is likely to have an anti-competitive foreclosure effect, by restricting or impeding access to the market by other competitors or restricting the buyer’s freedom to choose his sources of supply.

With respect to the third category (in which the rebates at issue were included), the Court confirmed the existing case law, according to which the criteria and rules governing the grant of the rebate should be analysed, as well as the extent of the dominant position and the particular conditions of competition in the relevant market (such as regulatory barriers).

In this context, the Court concluded that rebates operated by Post Danmark tended to make it more difficult for customers to obtain supplies from competing undertakings, producing an anti-competitive exclusionary effect. Applying previous case-law on the criteria and rules governing the rebates, the Court considered that:

• The rebates at issue were retroactive (the rebate applied to all correspondence sent over the reference period) and not progressive (where the rebate is granted only to products purchased exceeding the threshold initially estimated). This made the contractual obligations of customers of the dominant undertaking and the pressure exerted on them to be “particularly strong”;
• The reference period of one year was a “relatively long period”, which has the inherent effect of increasing the pressure on the buyer to reach the purchase volume required to obtain the rebate, or to avoid suffering the expected loss for the entire the reference period.

Turning to the analysis of the dominant position and the specific competitive conditions of the market (which nevertheless suggests a closer analysis of the likely effects of the practice on competition in the market), the Court noted that Post Danmark had a 95% share the market, which was characterized by high entry barriers, including regulatory constraints and significant economies of scale. The company also enjoyed structural advantages, notably resulting from the legal monopoly of the universal postal service, which covered 70% of the distributed mail, and a unique geographical coverage that encompassed the entire Danish territory.

On the other hand, questioned about the fact that the rebates concern most of the customers on the market, the Court held that this circumstance in itself does not constitute evidence of an abusive conduct, although it can be a useful indication of the importance of this practice and its impact on the market, as it may bear out the likelihood of an anti-competitive exclusionary effect.

Finally, the Court recalled that, despite the exclusionary effect, Post Danmark could provide an objective justification for its conduct, in particular by demonstrating that the exclusionary effect could be counterbalanced, or even outweighed, by efficiency gains which could also benefit the consumer (this demonstration, however, is very difficult in practice).

The use of the “as-efficient competitor test”

The Court was also asked about the relevance of the “as-efficient competitor” test in the assessment of a rebate scheme under Article 102 TFEU.

This test, which has been used by case-law for price-based abusive conduct (predatory pricing, selective prices or margin squeeze), aims to determine whether the prices are predatory, that is, whether they are likely to exclude a competitor as efficient as the dominant company. For this purpose, the prices charged by the dominant company are compared with the variable costs borne by that company (or an equivalent measure).

The application of this test to discounts schemes is widely supported by scholars and commentators, and the test was adopted by the European Commission in its 2009 Guidance Communication on enforcement priorities in applying Article 102 TFEU to exclusionary conduct².

The Court did not exclude the recourse to the “as-efficient competitor” test to ascertain whether a rebate scheme is abusive. According to the Court, this test should be considered “an instrument among others”, but it does not constitute a necessary condition for finding an abusive rebate.

The Court, however, rejected the application of the “as-efficient competitor” test in the specific circumstances of Post Danmark II, finding that it had no relevance in view of the structure and characteristics of the relevant market, which made virtually impossible the existence of a competing as efficient as Post Danmark: the Danish postal incumbent had a very high market share and enjoyed structural advantages not replicable by other competitors as a result of legal monopoly it enjoyed in respect of 70% of the relevant market.

Likelihood and magnitude of the exclusionary effect

The Court reaffirmed the earlier case-law according to which it is not necessary that the competition authorities demonstrate a concrete exclusionary effect. At any rate, the judgment clarified that only behaviours likely to have an actual or probable anti-competitive foreclosure effect are covered by Article 102 TFEU, which is in line with the Commission’s 2009 Communication.

As regards the serious or appreciable nature of the exclusionary effect, the Court refused to fix a threshold below which the behaviour of dominant companies do not have an appreciable effect (de minimis), which is in contrast to established practice under Article 101 TFEU, where it is assumed that agreements and practices among undertakings with minor market positions and do not involve serious restrictions do not produce an appreciable effect on competition. According to the Court, the structure of the market is already weakened by the presence of a dominant undertaking, so that any further weakening of that structure is liable to constitute an abuse of a dominant position. The judgment also recalled in this context the particular responsibility of a dominant undertaking not to undermine, through their behaviour, competition in the relevant market, i.e., not to engage in abusive behaviour in the light of Article 102 TFEU.

Conclusion

While indicating the need to demonstrate the likelihood of anti-competitive exclusionary effect and a detailed analysis of the characteristics of the relevant market for determining the existence of an abusive discount, the Post Danmark II judgment represents a line of continuity with the previous restrictive law the Court of Justice on standardised discount schemes (those applicable to all customers of the dominant undertaking), maintaining a mistrust over retroactive rebates and “relatively long” reference periods.

In this respect, the judgment is in sharp contrast with Post Danmark I, which covered selective discounts (granted to specific customers of the dominant firm)³, and in which the Court had recognized that Article 102 is not intended to ensure the permanence on the market of competitors less efficient than the dominant company.

The Court did not exclude the “as-efficient competitor” test in the assessment of rebates schemes under Article 102 TFEU, and the European Commission is itself bound to apply such criteria in accordance with its 2009 Communication, which remains fully applicable. However, as the Court pointed out, the Commission’s guidance is not binding on competition authorities and national courts, and therefore uncertainty remains as to the application of Article 102 TFEU (and its national equivalents) to the rebates schemes operated by dominant companiess.

_______________________