The EU Commission’s Guidance Paper on Art 102 Concurrences with Shearman & Sterling Oxera Pascale Déchamps Partner 22 June 2016

Overview 2 Form vs effect categories of rebate the existing categorisation is not helpful in all cases The role of economics in rebate cases AEC test or no AEC test? likelihood of effects: actual, probable or potential effect? a life with or without the AEC test

22 June 2016 Form vs effects Categories of rebate (I) 3 Three categories of rebate in the case law (non-retroactive) quantity rebates: generally benign analysis of effects 1 exclusivity rebates: generally anti-competitive no analysis of effects 2 loyalty-inducing rebates (incl. retroactive rebates) some analysis of effects but no need to show actual foreclosure or apply an AEC test and no de minimis threshold 3

22 June 2016 Form vs effects Categories of rebate (II) tradition in the case law of considering exclusivity rebates not to be about price but about exclusion they therefore have been treated differently ‘exclusivity rebates granted by an undertaking in a dominant position are by their very nature capable of restricting competition’ (General Court in Intel, ¶85) it does not matter whether a significant/small part of the market would be foreclosed compare with: ‘not every exclusionary effect is necessarily detrimental to competition’ (ECJ in Post Danmark I, ¶44) 4

22 June 2016 Form vs effects The distinction between forms of rebate is not so helpful (I) in Post Danmark II, the ECJ considered Post Danmark’s rebates to be different from quantity rebates because they were not granted with respect to individual orders but computed over a year’s worth of purchases exclusivity comes in degrees (from a majority to the totality of a customer’s purchases) in Intel, it was not obvious that customers understood that rebates were conditional on exclusivity exclusivity rebates are not harmful if provided to very few customers (for example) and can even be pro-competitive as companies compete for entire customer needs instead of marginal sales see Rey and Venit (2015) for an example of pro-competitive exclusivity loyalty-inducing rebates can have the same impact on customer behaviour as exclusivity rebates, but can also be as benign as (non-retroactive) quantity rebates 5

22 June 2016 Form vs effects The distinction between forms of rebate is not so helpful (II) since the Intel judgment, even in cases of non-exclusive (but retroactive) rebates, companies have shown concerns around the form of their rebates (as opposed to their actual impact) the Court in Intel has argued that access to the market should not be made ‘more difficult’ (¶ ) yet, making it ‘more difficult’ for competitors is at the heart of the competitive process (by improving quality, efficiency, decreasing prices, etc.) the Court argued, in Intel, that rather than offering exclusivity, customers would legally request quantity discounts it is highly problematic as a matter of economics that different forms of rebates would be treated differently, even if they end up having the same effect 6

The role of economics in rebate cases AEC test or no AEC test? (I) the Guidance Paper advocates an approach that is more grounded in the analysis of effects of practices (¶ 23) the AEC test is a tool used to screen cases it is also put forward when assessing whether a discounting practice is harmful (¶ 25-27) the General Court, in Intel, has said that the AEC test is not necessary in exclusionary cases the ECJ, in Post Danmark II, stated that it is not necessary to apply the AEC test to show that a (non-exclusive) rebate scheme is anti-competitive it is ‘one tool among others’ (¶60) 22 June

The role of economics in rebate cases AEC test or no AEC test? (II) the ECJ also argues that even a less-efficient competitor might contribute to intensifying competition although this is correct as a matter of principle, it comes dangerously close to protecting competitors instead of competition and should not be generalised an AEC test can easily be modified to take into account differences between small (less efficient) players and large (efficient) players regulators across the EU already take that into account when assessing potential margin squeezes e.g. compare costs assuming an entrant with 25% market share in telecoms cases in France 22 June

The role of economics in rebate cases Actual, probable or potential effect? in Post Danmark I, the ECJ stated that ‘it is necessary to consider whether that pricing policy, without objective justification, produces an actual or likely exclusionary effect’ (¶44) the General Court, in Intel, indicates that ‘where an undertaking in a dominant position actually puts into operation practices which are capable of restricting competition, the fact that that capability does not produce actual effects cannot suffice to prevent the application of Article [102]’ (¶186) in Post Danmark II, the ECJ stated that the anti-competitive effect of a rebate scheme must be ‘probable’, there being ‘no need to show that it is of a serious or appreciable nature’ (¶74) how likely is ‘probable’? how does it compare with the ‘dangerous probability of success’ used in the USA? however, the ECJ said that the anti-competitive effect must not be ‘purely hypothetical’ (¶65) all relevant circumstances are to be looked into, incl. the nature of the rebate scheme and number of customers involved 22 June

The role of economics in rebate cases Don’t be scared of the AEC test—a life with the AEC test recurring concerns around the resources required to run an AEC test the Commission’s Intel decision has 150 pages devoted to the AEC! however, in practice, most cases do not require a lot of data to reach a robust conclusion see Comp/AT and (Deutsche Bahn I and II), December 2013 companies have routinely undertaken an AEC test to check whether their practices might be deemed anti-competitive the test provides some confidence about practices regardless of their form nevertheless, companies have become concerned about exclusive and retroactive rebates, even when they would be considered as benign from an economic perspective 22 June

The role of economics in rebate cases A life without the AEC test even in the absence of an AEC test, assessment of rebates should still be grounded in sound economic principles a number of factual questions can help assess whether a conduct is likely to lead to anti-competitive effects, short of running a full AEC test what is the degree of dominance? what is the degree of foreclosure? is the exclusionary strategy likely to succeed? these are the types of questions that the ECJ has examined in Post Danmark II, short of undertaking an AEC test 22 June

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