December 2017: Antitrust & Competition Update

IntelJudgment Hinting at EU Departure from Per Se Treatment for Loyalty Rebates Highlights Continued Difference in EU/US Approaches to Market Power. On September 6, 2017 the Court of Justice of the European Union set aside a judgement by the General Court which had upheld a EUR 1.06 billion fine imposed by the European Commission on microchip manufacturer Intel for abusing its dominant position through the issuance of certain loyalty rebates. The Court of Justice ruled that the European Commission may not conclude that a rebate scheme operated by a dominant company is per se illegal if the company contends that its conduct is not capable of restricting competition. Instead, the Commission must assess a number of economic and legal factors to determine whether the dominant company’s conduct amounts to a breach of EU competition law.

In adopting this nuanced approach to rebates, the Court of Justice displayed the continued differences between the EU approach and that of the United States, which views loyalty rebates as inherently procompetitive unless predatory under Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.

Case Background. In 2009 the European Commission imposed a then record EUR 1.06 billion fine on Intel after finding that the microchip manufacturer had abused its dominant position on the market for x86 central processing units (CPU) in breach of the prohibition under Article 102 of the Treaty for the Functioning of the European Union (TFEU).The Commission concluded that Intel had operated rebate schemes which foreclosed rival x86CPU suppliers, preventing them from competing with Intel on the merits of their products alone. This foreclosure reduced competition and the incentive to innovate on the x86 CPU market.

Intel appealed the Commission’s decision to the General Court of the European Union. After its appeal failed at first instance, Intel referred points of law to the Court of Justice of the European Union, which ruled in Intel’s favor on a number of counts, which are discussed below. The Court of Justice has referred the case back to the General Court for consideration in light of its ruling.

Intel’s First Appeal. In its judgment the General Court identified three types of rebate schemes:

• Category 1: Volume rebates, which are presumed to be lawful as they account for efficiency gains and/or economies of scale;
• Category 2: Exclusivity rebates, which are conditional on a customer buying all, or most, of its requirements from the dominant supplier; and
• Category 3: All other rebates, which may or may not be lawful, depending on the economic and legal context.

Intel had awarded two rebate schemes: one to major computer manufacturers on condition that they purchase all, or almost all (80-90%), of their x86 CPUs from Intel; and one to a reseller, on the basis that it exclusively supply computers containing Intel’s x86 CPU. The General Court classified both schemes as exclusivity rebates.

Relying on its judgement in Hoffmann-La Roche (Hoffmann-La Roche v Commission, 85/76, EU:C:1979:36, paragraph 89) the General Court upheld the Commission’s decision that exclusivity rebates offered by a dominant company are by their very nature capable of restricting competition and foreclosing competitors. The Court’s reasoning in Hoffmann is based on the observation that exclusivity rebates are not linked to an economic burden or benefit for either party – they are designed to prevent a customer from choosing between suppliers (Hoffmann, paragraph 90). The Commission does not need to determine, by reference to the relevant facts and circumstances, that the rebates are actually capable of restricting competition to find that they are unlawful.

Strictly speaking, the General Court in Intel did not categorize exclusivity rebates as unlawful per se, only presumptively so– it acknowledged that it is open to the dominant company to prove that its use of exclusivity rebates is objectively justified, or outweighed by advantages that benefit consumers. However the General Court effectively ruled out this line of defense for dominant companies, noting that exclusivity rebates are only capable of having beneficial effects “in a normal situation on a competitive market”, not in a market where “precisely because of the dominant position of one of the economic operators, competition is already restricted”(Intel Corporation v Commission, Case T-286/09 paragraph 94) .

Intel’s Second Appeal. On appeal from the General Court, Intel submitted it was not possible for the Commission to conclude loyalty rebates were unlawful without taking into account the relevant legal and economic circumstances. The Court of Justice agreed with Intel.

The Court of Justice noted that it is not the purpose of Article 102 TFEU to prevent a company from acquiring a position of dominance, nor to assist a less efficient competitor in remaining on the market. Market exit is not detrimental to competition if the excluded player is not efficient or attractive to customers.

The Court of Justice initially quoted the General Court’s reasoning under Hoffmann with approval, noting that loyalty rebates offered by a dominant company fall within the prohibition under Article 102 TFEU. However the Court of Justice went on to clarify that the Commission may not conclude that there has been an infringement of competition law if the dominant company submits “on the basis of supporting evidence, that its conduct was not capable of restricting competition, and in particular, of producing the alleged foreclosure effects.” If so, the Commission must then review the following evidence to determine whether the conduct is unlawful:

• The extent of the company’s dominant position on the relevant market;
• The share of the market affected by the loyalty rebate;
• The conditions and arrangements for granting the rebate;
• The duration and amount of the rebate; and
• Whether a strategy possibly existed to exclude competitors at least as efficient as the dominant company.

The Court of Justice did not specify the threshold for determining whether conduct by a dominant company restricts competition. In his Opinion Advocate General Wahl suggests that a rebate scheme may be unlawful when “in all likelihood” it has anticompetitive, “foreclosure” effects—this is a higher threshold than “more likely than not” (Opinion of Advocate General Wahl, 20 October 2016, Intel v European Commission, paragraph 117). If a rebatescheme does have foreclosure effects the Commission must then decide if these are outweighed by any advantages which benefit the consumer.

The Court of Justice’s judgment forms a continuum with prior case law. Advocate General Wahl noted that the General Court’s decision in Intel was one of the very few cases in which rebates were assessed in the abstract, without reference to their legal and economic context. In Hoffmann the Court had concluded that the rebates were unlawful after a careful review of: (i) the conditions in which the rebates were granted; and (ii) the share of the market affected. The General Court sought to distinguish the rebate schemes in Intel on the basis that they were conditioned on exclusivity. Although the Court of Justice did not rule on this issue, the Advocate General notes that EU case law only recognizes two types of rebates: Category 1 rebates which are presumed to be lawful; and all loyalty rebates, which are presumed to be unlawful whether conditional on exclusivity or not. Either way legality is determined by assessing the legal and economic context of the rebate scheme.

The Court of Justice’s judgment also appears to endorse the use of the “as efficient competitor” (AEC) test, which assesses on economic terms whether a competitor as efficient as the dominant company would be able to continue to compete in light of the dominant company’s rebates. In principle, if the AEC test is met, the dominant company’s rebate scheme does not infringe competition law.

US Approach. The Intel judgment highlights the difference in approaches to loyalty rebates taken by the United States and the European Union. Historically, in the United States, loyalty rebates or discounts have been treated as procompetitive. Such discounts are recognized as netting benefits for consumers unless the discount renders prices so low that they run afoul of the test outlined for predatory pricing. Courts evaluating loyalty discounts therefore typically use the framework set forth in the guiding U.S. Supreme Court case on predatory pricing, Brooke Group Ltd. v. Brown & Williamson Tobacco Corp, 509 U.S. 209 (1993).

Under Brooke Group, a plaintiff must prove (1) “that the prices complained of are below an appropriate measure of its rival’s costs[,]” and (2) “that the competitor had a reasonable prospect...or dangerous probability of recouping its investment in below-cost prices.” Id. at 222, 224. Following the logic of Brooke Group, without this prospect of recoupment, loyalty discounts “produce[] lower aggregate prices in the market, and consumer welfare is enhanced.” Id. at 224. The Court noted, “[t]hat below-cost pricing may impose painful losses on its target is of no moment to the antitrust laws if competition is not injured: It is axiomatic that the antitrust laws were passed ‘for the protection of competition, not competitors.’” Id. (quoting Brown Shoe Co. v. United States, 370 US 294, 320 (1962)), (emphasis in original). Ultimately, a defendant’s degree of dominance is unlikely to be important in an evaluation of loyalty rebates under the Brooke Group test.

Some courts however have looked at loyalty discounts under an exclusive dealing analysis. When the discounts are explicitly contingent on exclusivity, they “are often treated as the legal equivalent of exclusive dealing contracts.” 1 ABA SECTION OF ANTITRUST LAW, ANTITRUST LAW DEVELOPMENTS 253 (8th ed. 2017). In that situation the discounts are subject to a rule of reason analysis, which would “focus on a number of factors, including: the defendant’s market power; the degree of foreclosure from the market; barriers to entry; the duration of the contracts; whether exclusivity has the potential to raise competitors’ costs; the presence of actual or likely anticompetitive effects; and legitimate business justifications.” Lauren N. Norris, Exclusive Dealing: An Antitrust Analysis, American Bar Association, https://www.americanbar.org/groups/young_lawyers/publications/the_101_201_practice_series/exclusive_dealing_an_antitrust_analysis.html (last visited Dec. 28, 2017). Here, a competitor’s market power could be important, as “[c]ourts have held that a monopolist may be held to a different standard than a non-dominant firm in the context of exclusive dealing arrangements.” Where the loyalty discounts “do not require exclusivity but only provide financial inducements to distributors to purchase most or all of their needs from the defendant” – sometimes referred to as “de facto exclusive dealing” – courts are split on what standard should apply. ANTITRUST LAW DEVELOPMENTS at 253.

The Court of Justice’s judgment in Intel hints at the continued divergence between US and EU views on loyalty discounts, since the Brooke Group test remains the most likely barometer on the subject in the United States. Though the Court of Justice in Intel rejected the General Court’s per se-like treatment and adopted a more nuanced approach, EU competition law’s attention to abuse of market power or dominance in the context of loyalty rebates is still more aggressive than the US approach, which under Brooke Group appears indifferent to the magnitude of the defendant’s power. Moreover, while the EU post-Intel will allow the challenged company to rebut a rebate’s anti-competitive nature, the EU approach remains distant from that of the United States, which views loyalty rebates as inherently procompetitive unless unlawful under the predatory pricing framework.