Contributions

Growing Pains in EU Antitrust Enforcement

by Jonathan Het­tle­man 1

Antitrust law is noto­ri­ous for vague doc­tri­nal bound­aries. 2 The Unit­ed States Supreme Court and the Euro­pean Court of Jus­tice (ECJ) (the high­est court in the Euro­pean Union (EU) on mat­ters of EU law) have been ret­i­cent to offer con­crete stan­dards that can guide low­er courts, indus­try-mem­bers, and legal coun­sel. In part, this uncer­tain­ty can be attrib­uted to the fact that antitrust statutes tend to be vague and have, there­fore, left the judi­cia­ry to chart its own path towards draw­ing doc­tri­nal bound­aries. 3Per­haps even more impor­tant­ly, much of antitrust law involves spec­u­la­tive pre­dic­tions of the future effects of a firm’s con­duct on com­pe­ti­tion in giv­en mar­kets. 4

A debate has emerged in both the Unit­ed States and the EU over the prop­er method by which courts should assess whether a firm is fore­clos­ing its com­pe­ti­tion in a giv­en mar­ket. 5  More specif­i­cal­ly, this broad­er debate is high­light­ed by the juris­dic­tions’ dif­fer­ing approach­es to var­i­ous kinds of rebate schemes and their rel­a­tive like­li­hood to fore­close com­pe­ti­tion.

Although cir­cuits are split on how best to resolve this issue in the Unit­ed States, 6 most courts, com­men­ta­tors, and reg­u­la­tors favor an approach that seeks to deter­mine whether, after tak­ing account of the rebate, a prod­uct or a bun­dle of prod­ucts is being sold for a price below the cost of their pro­duc­tion such that the price will fore­close equal­ly effi­cient com­peti­tors. 7 In the EU, while the ECJ has con­sis­tent­ly applied a test that asks whether a firm’s con­duct is hypo­thet­i­cal­ly capa­ble of fore­clos­ing its com­peti­tors in the future (regard­less of whether it is being sold below cost), 8 the Euro­pean Com­mis­sion for Com­pe­ti­tion has advo­cat­ed for an approach that is clos­er to the favored approach in the Unit­ed States: 9 specif­i­cal­ly, the Com­mis­sion coun­seled courts in the EU to apply a ver­sion of the effects-based “as effi­cient com­peti­tor” test. 10 While the ECJ has nev­er adopt­ed the approach pro­posed by Com­mis­sion, its rul­ings have slow­ly drift­ed in favor of a more effects-based analy­sis and against the more con­duct-based hypo­thet­i­cal approach. Most recent­ly, for exam­ple, this shift was exem­pli­fied in the ECJ’s rul­ing in Post Dan­mark A/S v. Konkur­rencerådet (here­inafter Post Dan­mark II). 11

This Con­tri­bu­tion will argue that the ECJ should con­tin­ue to favor an effects-based approach in its analy­sis of whether rebates fore­close com­pe­ti­tion: such an approach favors ana­lyz­ing actu­al effects rather than spec­u­la­tion, pro­tects effi­cient com­pa­nies that make pro-com­pet­i­tive busi­ness deci­sions, and pro­vides clar­i­ty.

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His­tor­i­cal­ly, in EU courts, once a firm was found to be dom­i­nant in a par­tic­u­lar mar­ket, it had a height­ened respon­si­bil­i­ty not to impede com­pe­ti­tion. 12 This meant that, by def­i­n­i­tion, non-dom­i­nant firms could engage in behav­ior that would be unlaw­ful for dom­i­nant firms. 13 This height­ened respon­si­bil­i­ty also meant that mar­ket share held by a firm (the extent of a firm’s dom­i­nance) took a back­seat to the bina­ry ques­tion of whether or not a firm was dom­i­nant.

In addi­tion, EU courts explic­it­ly resist­ed inquiry into the degree to which a mar­ket had actu­al­ly been fore­closed. In Intel v. Comm’n, for exam­ple, the court explained that under EU com­pe­ti­tion law, “it is unnec­es­sary to under­take an analy­sis of the actu­al effects of the rebates on com­pe­ti­tion.” 14 In Microsoft v. Comm’n, too, the court made clear that sat­is­fy­ing the anti­com­pet­i­tive fore­clo­sure ele­ment for the pur­pos­es of find­ing an abuse of Arti­cle 102 TFEU – the source of author­i­ty for antitrust reg­u­la­tion in the EU – does not depend on the analy­sis of actu­al fore­clo­sure effects. 15 Instead, for the pur­pos­es of find­ing a rebate to be in vio­la­tion of EU com­pe­ti­tion law, it was suf­fi­cient for the court that the dom­i­nant firm’s behav­ior was capa­ble of fore­clos­ing com­pe­ti­tion.

Instead of apply­ing an equal­ly effi­cient com­peti­tor test based on whether a rebate ren­dered the price of a prod­uct or group of prod­ucts below their cost of pro­duc­tion, courts relied on neb­u­lous fac­tors to try to pre­dict whether the pric­ing scheme was capa­ble of fore­clos­ing com­pe­ti­tion. For exam­ple, the Microsoft court looked to whether com­pe­ti­tion was being dri­ven by price or the mer­its of the prod­ucts or ser­vices being offered. 16 The court found that “if Microsoft had not [tied Win­dows Media Play­er to the Win­dows oper­at­ing sys­tem] com­pe­ti­tion between RealPlay­er and Win­dows Media Play­er would have been decid­ed on the basis of the intrin­sic mer­its of the two prod­ucts.” 17 Ulti­mate­ly, the court in Microsoft found that the company’s suc­cess in sell­ing Win­dows Media Play­er did not “come about because that play­er is of bet­ter qual­i­ty than com­pet­ing play­ers or because those media play­ers … have cer­tain defects.” 18 Instead, the court found that Microsoft’s increased suc­cess in the media play­er mar­ket result­ed from its deci­sion to tie Win­dows Media Play­er to Win­dows (a prod­uct in a mar­ket in which Microsoft was dom­i­nant). 19

Anoth­er fac­tor that the ECJ his­tor­i­cal­ly focused on was whether a rebate scheme induced loy­al­ty. 20 In a sem­i­nal deci­sion in 1979, the ECJ held that rebates that were con­di­tioned on a cus­tomer pur­chas­ing exclu­sive­ly from a spe­cif­ic provider were per se vio­la­tions of EU com­pe­ti­tion law. 21 The ECJ lat­er held that “any loy­al­ty-induc­ing rebate sys­tem applied by an under­tak­ing in a dom­i­nant posi­tion has fore­clo­sure effects pro­hib­it­ed by [EU com­pe­ti­tion law].” 22 But the skep­ti­cism towards loy­al­ty-induc­ing rebates did not stop at those that forced exclu­siv­i­ty. In British Air­ways, for exam­ple, the ECJ held that British Air­ways’ rebate scheme fore­closed com­pe­ti­tion because it was “fideli­ty-build­ing.” 23

In Post Dan­mark II, how­ev­er, the ECJ applied a decid­ed­ly more effects-dri­ven analy­sis to deter­mine whether a rebate scheme fore­closed com­pe­ti­tion. 24 First, the court made clear that, in order for a rebate to be found anti­com­pet­i­tive, it must be “like­ly” to fore­close com­pe­ti­tion. 25 Sec­ond, to deter­mine whether a rebate scheme is like­ly to fore­close com­pe­ti­tion, the Post Dan­mark II court looked to the extent of the dom­i­nance of the firm offer­ing the rebate. 26

In addi­tion, the Post Dan­mark II deci­sion described three cat­e­gories of rebate schemes, pro­vid­ing much-need­ed clar­i­ty on how to assess dif­fer­ent types of rebates. 27 Rebates falling with­in the first cat­e­go­ry, “quan­ti­ty rebates,” are based sole­ly on the vol­ume of pur­chas­es made by a cus­tomer. 28 Quan­ti­ty rebates, accord­ing to the Post Dan­mark II court, are not per se anti­com­pet­i­tive. 29 Sec­ond, “loy­al­ty rebates” are those which force cus­tomers to buy all or near­ly all of their require­ments from the dom­i­nant firm. 30 Rebates that fall with­in this sec­ond cat­e­go­ry are anti­com­pet­i­tive because, by def­i­n­i­tion, they pre­vent cus­tomers from pur­chas­ing all or most of their require­ments from the dom­i­nant firm’s com­peti­tors. 31 Final­ly, the court rec­og­nized a “third cat­e­go­ry” of rebates that can­not sim­ply be cat­e­go­rized as either quan­ti­ty rebates or loy­al­ty rebates. 32 Rebates that fall with­in Post Dan­mark II’s “third cat­e­go­ry” are not per se anti­com­pet­i­tive or per se pro-com­pet­i­tive, but instead require addi­tion­al cir­cum­stan­tial analy­sis. 33When decid­ing whether these “third cat­e­go­ry” rebates are anti­com­pet­i­tive, Post Dan­mark II held that, when deter­min­ing whether a rebate is jus­ti­fied, courts must con­sid­er whether the rebate cre­ates eco­nom­ic effi­cien­cies; whether the rebate restricts the customer’s free­dom to choose a sup­pli­er; whether the rebate pre­vents com­peti­tors from enter­ing the mar­ket; and whether the rebate strength­ens the firm’s dom­i­nant posi­tion. 34

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The ECJ should build on its deci­sion in Post Dan­mark II by con­tin­u­ing to move towards an effects-based approach when decid­ing whether rebate schemes fore­close com­pe­ti­tion for three rea­sons.

First, an effects-based approach forces courts to go beyond mere spec­u­la­tion and instead requires them to deter­mine the actu­al or like­ly effects of a firm’s con­duct – not just whether the pric­ing scheme is capa­ble of fore­clos­ing com­pe­ti­tion at some hypo­thet­i­cal point in the future. Inso­far as it held that a pric­ing scheme must be “like­ly” to fore­close com­pe­ti­tion in order to vio­late EU law, the court in Post Dan­mark II took a step in the right direc­tion towards look­ing at effects of a rebate rather than just focus­ing on a firm’s con­duct. With­out this new require­ment, rebate schemes could be found to be anti­com­pet­i­tive even if there were a very low like­li­hood that such fore­clo­sure would ever occur, so long as a rebate was mere­ly “capa­ble” of fore­clos­ing com­pe­ti­tion. Also, by hold­ing that the extent of a firm’s dom­i­nance is rel­e­vant to the analy­sis of whether a pric­ing scheme is anti­com­pet­i­tive, the ECJ moved towards assess­ing the actu­al like­li­hood that fore­clo­sure will occur: after all, the more mar­ket share a firm holds, the more like­ly it is that its aggres­sive rebate scheme will fore­close its com­pe­ti­tion.

Sec­ond, by look­ing to the effects of a rebate scheme rather than hypoth­e­siz­ing about whether a firm’s con­duct is capa­ble of fore­clos­ing com­pe­ti­tion, the law would pro­tect effi­cient com­pa­nies. Com­pe­ti­tion law does not and should not pro­tect inef­fi­cient com­pa­nies. 35 But requir­ing dom­i­nant firms to “ensure com­pe­ti­tion” is incon­sis­tent with encour­ag­ing com­pa­nies to be as effi­cient as pos­si­ble in order to pro­vide ben­e­fits to con­sumers. 36 If a dom­i­nant firm must pre­serve its com­peti­tors, fore­clos­ing them by being more effi­cient would be a vio­la­tion of its height­ened respon­si­bil­i­ty – a result that would be unques­tion­ably bad for con­sumers, which is why the law does not, and should not, pro­tect inef­fi­cient com­peti­tors. By con­tin­u­ing to elim­i­nate the respon­si­bil­i­ty of dom­i­nant firms to ensure com­pe­ti­tion, and by only requir­ing dom­i­nant firms to avoid fore­clos­ing equal­ly effi­cient com­peti­tors, an effects-based approach pro­tects and encour­ages effi­cient busi­ness.

Third, an effects-based approach pro­vides busi­ness­es, courts, and lawyers with clar­i­ty about what sep­a­rates pro-com­pet­i­tive behav­ior from anti­com­pet­i­tive behav­ior. The ECJ should build on the fac­tors set forth in Post Dan­mark II to ensure that anti­com­pet­i­tive fore­clo­sure is mea­sured by the actu­al or like­ly effects of a giv­en rebate scheme, not just its hypo­thet­i­cal impact on com­pe­ti­tion. This approach would pro­vide clear met­rics, there­by giv­ing clar­i­ty to judges and inter­est­ed par­ties. In turn, the effects-based approach would fos­ter more con­sis­tent deci­sion-mak­ing.

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For decades, EU com­pe­ti­tion law has involved too much spec­u­la­tion. Grad­u­al­ly, the ECJ has begun to move towards ana­lyz­ing the effects of a rebate scheme instead of try­ing to deter­mine whether cer­tain con­duct might hypo­thet­i­cal­ly fore­close com­pe­ti­tion in the future. The Post Dan­mark II case marked progress in mov­ing towards an effects-based analy­sis to deter­mine whether a rebate fore­clos­es com­pe­ti­tion. The ECJ should con­tin­ue to steer the law towards the adop­tion of a pure­ly effects-based analy­sis.

Notes:

  1. Jonathan Het­tle­man is a 2L at New York Uni­ver­si­ty School of Law. This piece is a com­men­tary on the 2017 Prob­lem at the Glob­al Antitrust Insti­tute (GAI) Invi­ta­tion­al Moot Court Com­pe­ti­tion held in Wash­ing­ton, D.C. The prob­lem pre­sent­ed a fact pat­tern focused on whether a bun­dled pric­ing scheme vio­lat­ed either Unit­ed States or Euro­pean Union antitrust laws. The prob­lem asked first whether the bun­dled pric­ing pack­age vio­lat­ed § 2 of the Sher­man Act, and sec­ond whether it vio­lat­ed Arti­cle 102 of the Treaty on the Func­tion­ing of the Euro­pean Union (TFEU). The views expressed in this arti­cle do not nec­es­sar­i­ly rep­re­sent the views of the author on either of these points of law. Rather, this arti­cle is a dis­til­la­tion of one side of an argu­ment assigned to the team the author rep­re­sent­ed at the GAI Invi­ta­tion­al.
  2. See, e.g., Richard A. Pos­ner, How Judges Think 5 (2008) (“Amer­i­can antitrust law is far more the cre­ation of judi­cial deci­sions than of antitrust leg­is­la­tion: the most impor­tant antitrust laws are as skimpy and vague as most pro­vi­sions of the Bill of Rights.”).
  3. Her­bert Hov­enkamp, Fed­er­al Antitrust Pol­i­cy: The Law of Com­pe­ti­tion and Its Prac­tice 69 (5th ed. 2015) (refer­ring to antitrust statutes as “vague and mal­leable”).
  4. See Joshua D. Wright, Comm’r, Fed. Trade Comm’n, Pre­dic­tion in Antitrust is Hard (But Some Pre­dic­tions are Hard­er than Oth­ers), Address at the Wash­ing­ton Bar Association’s 31st Annu­al Antitrust, Con­sumer Pro­tec­tion, and Unfair Busi­ness Prac­tices Sem­i­nar (Nov. 13, 2013) (pre­sen­ta­tion avail­able at https://www.ftc.gov/system/files/documents/public_statements/599051/141117jdw_seminar.pdf) (“Antitrust often requires … agen­cies to make pre­dic­tions about how con­duct today will influ­ence com­pe­ti­tion in the future.”).
  5. See, e.g., Derek W. Moore & Joshua D. Wright, Con­di­tion­al Dis­counts and the Law of Exclu­sive Deal­ing, 22 Geo. Mason L. Rev. 1215, 1 (2015) (“The appro­pri­ate antitrust analy­sis of con­di­tion­al dis­counts remains a sub­ject of con­sid­er­able debate.” (cita­tion omit­ted)).
  6. Com­pare Cas­cade Health Solu­tions v. Peace­Health, 515 F.3d 883 (9th Cir. 2008) (apply­ing a price/cost analy­sis to deter­mine whether the bun­dled rebate is being sold below cost in order to deter­mine whether it fore­clos­es com­pe­ti­tion), with Lepage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) (hold­ing that a bun­dle may be anti­com­pet­i­tive even if its price is not below its cost, if the bun­dle will fore­close com­pe­ti­tion in the future), cert. denied, 124 S. Ct. 2932 (2004).
  7. See Ver­i­zon Communc’ns Inc. v. Law Offices of Cur­tis V. Trinko, LLP, 540 U.S. 398, 414 (2004) (“[A]bove-cost preda­to­ry pric­ing schemes, [are] ‘beyond the prac­ti­cal abil­i­ty of a judi­cial tri­bunal to con­trol,’”) (quot­ing Brook Grp. Ltd. v. Brown & Williamson Tobac­co Corp., 509 U.S. 209, 223 (1993)).
  8. See, e.g., Case 286/09 Intel v. Comm’n, (2014) E.C.R. I___ (deliv­ered June 12, 2014), ¶ 103 (explain­ing that “it is unnec­es­sary to under­take an analy­sis of the actu­al effects of the rebates on com­pe­ti­tion” in order to find that a pric­ing scheme fore­clos­es com­pe­ti­tion in vio­la­tion of Arti­cle 102 of the Treaty on the Func­tion­ing of the Euro­pean Union (TFEU)).
  9. Euro­pean Comm’n, Guid­ance on the Commission’s Enforce­ment Pri­or­i­ties in Apply­ing Arti­cle 82 of the EC Treaty to Abu­sive Exclu­sion­ary Con­duct by Dom­i­nant Under­tak­ings, COM (2009) 864 final, ¶ 50 (Feb. 9, 2009) [here­inafter Guid­ance Paper], avail­able at http://ec.europa.eu/competition/antitrust/art82/guidance_en.pdf (advo­cat­ing that courts apply a price/cost analy­sis in order to deter­mine whether a bun­dled rebate scheme fore­clos­es equal­ly effi­cient com­peti­tors).
  10.  Id.
  11. Case C-23/14 Post Dan­mark A/S v. Konkur­rencerådet, ECLI:EU:C:2015:651 [here­inafter Post Dan­mark II].
  12. See e.g., Case 322/81, NV Ned­er­land­sche Ban­den Indus­trie Miche­lin v. Comm’n (Miche­lin I), (1983) E.C.R. 3461, ¶ 57 (“the under­tak­ing con­cerned has a spe­cial respon­si­bil­i­ty not to allow its con­duct to impair gen­uine undis­tort­ed com­pe­ti­tion on the com­mon mar­ket.”).
  13. See e.g., Case T-219/99, British Air­ways plc v. Comm’n, 2003 E.C.R. I-2331 ¶ 23 (“[A] dom­i­nant under­tak­ing is sub­ject to cer­tain lim­i­ta­tions that do not apply to oth­er under­tak­ings in the same form. Because of the pres­ence of the dom­i­nant under­tak­ing, com­pe­ti­tion on the mar­ket in ques­tion is weak­ened. Therefore—whatever the caus­es of its dom­i­nant position—that under­tak­ing has a par­tic­u­lar respon­si­bil­i­ty to ensure that its con­duct does not under­mine effec­tive and undis­tort­ed com­pe­ti­tion in the com­mon mar­ket. A prac­tice which would be unob­jec­tion­able under nor­mal cir­cum­stances can be an abuse if applied by an under­tak­ing in a dom­i­nant posi­tion.”).
  14. Case 286/09 Intel v. Comm’n, (2014) E.C.R. I___ (deliv­ered June 12, 2014), ¶ 103.
  15. Case T-201/04, Microsoft Corp. v. Comm’n, (2007) E.C.R. II-3601, ¶ 868, 1035 (“…the fact that the Com­mis­sion exam­ined the actu­al effects which the bundling had already had on the mar­ket and the way in which that mar­ket was like­ly to evolve, rather than mere­ly considering—as it nor­mal­ly does in cas­es of abu­sive tying—that the tying has by its nature a fore­clo­sure effect, does not mean that it adopt­ed a new legal the­o­ry.”).
  16. See id. at ¶ 1046.
  17. Id. 
  18. Id. at ¶ 1057.
  19. Id. at ¶ 1046.
  20. See, e.g., British Air­ways, 2003 E.C.R. I-2331, ¶ 271.
  21. Case T-85/86 Hoff­mann-Law Roche v. Comm’n, (1979) E.C.R. 461, ¶ 89 (hold­ing that exclu­siv­i­ty rebates offered by dom­i­nant firms per se fore­close com­pe­ti­tion).
  22. Case T-203/01 Man­u­fac­ture Française des Pneu­ma­tiques Miche­lin v. Comm’n, (2003) E.C.R. II-4071, ¶ 65.
  23. British Air­ways, (2003) E.C.R. I-2331, ¶ 271. The rebate at issue in the British Air­ways case was fideli­ty-build­ing because British Air­ways was offer­ing indi­vid­u­al­ized retroac­tive rebates. In oth­er words, British Air­ways was con­di­tion­ing the rebate on indi­vid­ual tick­et­ing agents meet­ing a spe­cif­ic sales tar­get that was based on their pri­or sales num­bers. Thus, the rebate induced the tick­et­ing agents to pur­chase more and more of their require­ments from British Air­ways in order to meet the tar­get and qual­i­fy for the rebate.
  24. Post Dan­mark II, ECLI:EU:C:2015:651.
  25. Id. at ¶ 67.
  26. Id. at ¶ 39.
  27. Id. at ¶ 27–28.
  28. Id. at ¶ 27.
  29. Id.
  30. Id.
  31. Id.
  32. Id. at ¶ 28.
  33. Id.
  34. Id. at ¶ 29.
  35. Moritz Lorenz, An Intro­duc­tion to EU Com­pe­ti­tion Law 216 (2013).
  36. See, e.g., Miche­lin I, (1983) E.C.R. 3461, ¶ 57 (“the under­tak­ing con­cerned has a spe­cial respon­si­bil­i­ty not to allow its con­duct to impair gen­uine undis­tort­ed com­pe­ti­tion on the com­mon mar­ket.”).