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AG Kokott in Post Danmark II: a legal test for quantity rebates

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I mentioned earlier this week that the legal test proposed by AG Kokott is likely to prove more controversial than the broad principles discussed in the opinion. I can think of at least two reasons for this. The test is, first, difficult to reconcile with some aspects of the relevant case law. In addition, it is based on an unstructured set of indicators that might prove difficult to apply by a national court. For the same reasons, it may not allow for the effective judicial review of administrative action.

The test proposed is difficult to reconcile with Hoffmann-La Roche and Michelin I

Are categories relevant in rebate cases?

AG Kokott states in paragraph 29 of the opinion that categories are ‘ultimately immaterial’ when determining whether a rebate scheme is abusive. This is a sensible argument – the Commission Guidance is based on a similar idea – but it is a normative claim, not a positive one. Formal categories (neatly presented by the GC in Intel) were relied upon in Hoffmann-La Roche, and the Court derived clear legal consequences from them.

I have the impression, moreover, that paragraphs 28 and 29 of the opinion are somewhat contradictory. AG Kokott relies upon formal categories to claim that loyalty rebates and target discounts are abusive by their very nature. If categories are deemed relevant to conclude that some practices are prima facie abusive, it is not easy to understand why they would be ‘ultimately immaterial’ when determining whether prima facie lawful conduct is in breach of Article 102 TFEU. The legal test should adapt to the categories crafted in the case law, not vice versa.

Quantity rebates in Hoffmann-La Roche

Since Hoffmann-La Roche, quantity rebates are deemed to have a valid economic justification. The underlying presumption is that they reflect the cost savings made by the dominant firm. Against this background, a legal test for quantity rebates should probably start by ascertaining whether the scheme under consideration is inconsistent with a cost saving rationale and thus abusive by its very nature. It would be for the competition authority or the private claimant to show that the scheme does not have a valid economic justification (the opposite is required from dominant firms once a prima facie abuse is established).

That a quantity rebate scheme is abusive by object could be established, for instance, when it is shown to be predatory within the meaning of AKZO (pricing below average variable cost can be safely presumed to be an irrational strategy for a firm to pursue). On the other hand, I fail to see why the factors identified by AG Kokott are inconsistent with a cost saving story. Why would the award of retroactive quantity rebates over a period of one year not be credible in an industry with high fixed costs?

The assessment of ‘all the circumstances’ in Michelin I

AG Kokott proposes to assess the lawfulness of quantity rebates in light of ‘all the circumstances’ relating to the scheme in question. This test is drawn from Michelin I, but it was not conceived for quantity rebates. The Court examined in that case the legal status of schemes that are not formally conditional upon exclusivity but that are not quantity rebates either. As a result, one cannot conclude, without more, that this test can or should be extended to other categories of rebates. Michelin II, which was not appealed before the ECJ, seems to be the only quantity rebates case to which reference is made in the opinion (at least in relation to this question; Portugal v Commission, also cited, was about exploitative discrimination). 

More generally, AG Kokott often cites the case law on loyalty rebates in support of her conclusions, which I believe many commentators will find controversial. This is conduct that is abusive by its very nature and for which an analysis of its exclusionary effects is not necessary. As a result, many aspects of the case law relating to them are virtually irrelevant in relation to practices, such as quantity rebates, that are only abusive insofar as they have an anticompetitive effect. In that respect, Post Danmark II is much closer to Post Danmark I and TeliaSonera than to Tomra, and there would be every reason to craft a legal test accordingly.

The test proposed is difficult to reconcile with, inter alia, AKZO and TeliaSonera

The administrability of the ‘as efficient competitor’ test

The ‘as efficient competitor’ test is not a fad. It is an integral part of Article 102 TFEU case law. It is particularly relevant in cases where the Court requires evidence of an anticompetitive effect as part of the assessment. AKZO makes an explicit reference to the ability of as efficient rivals to match the prices of the dominant firm. The analysis of ‘margin squeeze’ practices is based on the test. Post Danmark I made more general statements suggesting that Article 102 TFEU is concerned with the exclusion of rivals as efficient as the dominant firm.

Even though, as can be seen, there is support for the use of the ‘as efficient competitor’ test, AG Kokott is openly sceptical about its relevance in quantity rebates cases. She points out that cost-based tests are open to interpretation and may be difficult to implement and to administer in practice. These are valid arguments. However, they avoid the real question.

Claiming, in the abstract, that the ‘as efficient competitor’ test may be difficult to administer means very little. The key issue is whether, in spite of its undeniable problems (perfection is not of this world), the ‘as efficient competitor’ test is more accurate and easier to administer than an alternative one. This fundamental question is not addressed in the opinion.

The set of criteria proposed by AG Kokott are in fact far from easy to administer. As I pointed out a few months ago, it is not even clear how they are supposed to be weighed against one another in practice. I do not find in the opinion any bright lines that would allow dominant firms to tell in advance whether a quantity rebate scheme is likely to be found abusive.

The various factors identified by AG Kokott need to be considered in light of the circumstances of each case. If legal certainty is a relevant factor in the definition of a test – and AG Kokott believes it is – the unstructured standard she favours is not an obvious choice. Moreover, the factors she identifies are all open to endless interpretation. Is a one-year reference period always too long? Sometimes? Only where the rebates are retroactive? What is the basis for any conclusions in this sense? When is a market prone to foreclosure? There is no quick and ready, let alone univocal, answer to any of these questions.

The unstructured standard found in the opinion is also problematic in the sense that it may not effectively constrain administrative action. One can always find features in a rebate scheme that are ‘fidelity-building’. The Court has already acknowledged that it is in the very nature of all rebate schemes to induce the customer to buy more from the supplier. As a result, a dominant firm may find it virtually impossible to dispute claims that a given scheme has exclusionary effects due to its ‘loyalty-inducing’ dimension. By the same token, an unstructured standard may make it difficult for review courts to ensure that administrative action remains within a set of legal boundaries defined in advance.

Is the ‘as efficient competitor’ test too reductionist?

AG Kokott expresses scepticism about the ‘as efficient competitor’ test because it would be too reductionist. A focus on prices and costs would fail to capture the full picture of the rebate scheme in question, which can only be considered in light of ‘all the circumstances’ relating to its implementation.

This is an interesting argument. Even more interesting, however, is the fact that virtually the same point was made by the Commission in AKZO. You certainly remember that the authority argued in that case that costs were not a decisive criterion when establishing the abusive nature of predatory pricing. The Commission favoured a more ‘holistic’ assessment for the same reasons advanced by AG Kokott. And you certainly remember that this approach was not endorsed by the ECJ, which favoured one based on prices and costs (essentially a variation on the Areeda-Turner test).

If AG Kokott’s line of argument was rejected back in 1991, I am inclined to believe that it should not be given any weight now. It may be true that we miss part of the picture when applying a test based on prices and costs (again, perfection is not of this world). But, as the opinion rightly points out, administrability and legal certainty (to which I would add effective judicial review) should also be considered when defining the instances in which quantity rebates are abusive.

Written by Pablo Ibanez Colomo

28 May 2015 at 6:52 pm

Posted in Uncategorized

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