When are rebate schemes abusive under Article 102?

Mark Tricker: Richard, I would like to turn to an area that is often very challenging for clients. When a rebate scheme offered by a dominant company is abusive by Article 102. It is an area that generates a significant amount of debate; an area where we are about to get the latest instalment in that debate with the upcoming Advocate General’s opinion in Intel, and I think that case is probably a very interesting example of how this area can divide opinion. On one hand, it can often be seen as an area that was given some certainty, a case that has given some certainty to this area, providing some legal certainty as to when a rebate scheme might be abusive. But, on the other hand, the criticism that is often levelled at it is that the Court has rejected a more economic-based or effects-based approach to to Article 102. I would be very interested in knowing where you stand in that debate and, also perhaps, where you think the Advocate General and the Court may ultimately come out in the Intel Case.

Richard Whish: Yes, well you are right it is a very controversial case and most of the commentary that has been published on this has been critical of the General Court. I have to say I take a different view of this case. I think it is consistent with what, 40 years of jurisprudence going back as far as the Sugar Cartel judgement actually, in 1976 I think. I think one’s had pretty clear law all the way through and we must discuss this question of whether it is rejecting the more economics-based approach. I personally don’t think it does do that. I think it’s unfair to describe it as, not your words, but those that describe it as unduly formalistic I think that’s an unfair characterisation.

Mark Tricker: Can you perhaps explain a bit more about why you think that’s unfair?

Richard Whish: Well indeed. I think the essence of the argument against Intel would run like this: that a rebate is a price cut, and if it’s a price cut, its legality should depend upon some sort of price cost analysis. Does the cut imply some below costs selling possibly one might take the lyric as the appropriate standard? I, personally, and I am delighted to see that it’s what the General Court and the Court of Justice in Post Danmark II say is that rebates are not pricing abuses. Predatory pricing is, selected price cutting is, margin squeezing is, but the harm that may follow from the rebate is that it induces exclusivity and so the question is (a) does it induce exclusivity?, and if so, (b) is it good or bad exclusivity. But to my mind that does not depend on the price cost relationship.

Mark Tricker: I think, in terms in Intel, I think the outcome is virtually uncontroversial even if the reasoning is and I could probably certainly agree with you on that. An area that is really often very challenging is advising on rebate schemes that fall into that amorphous mass of schemes that are neither clearly exclusive rebates nor the quantity rebates that are OK underlying to. Post Danmark II is the latest in a long line of cases looking at that massive of rebate schemes. Where do you think we are after Post-Danmark II and it’s treatment of the as-efficient-competitor test.

Richard Whish: Well, I think after Post-Danmark II we are where we were before Post-Danmark II, which is to say that if you have a rebate in, let’s call it, the third category, then an examination of all the facts of the case is necessary to determine, firstly, whether the rebate could induce loyalty and, secondly, if so, whether it is so serious in this effect that it amounts to an abusive dominant position and that requires an examination of all the facts of the case. If I look at the facts of Post-Danmark II (I won’t refer to them now) but it seems to me that if ever there were to be a third category rebate scheme that could have an exclusionary effect, I think that that scheme is it.

Mark Tricker: In respect of Post-Danmark II, given the Court didn’t want to get into an analysis of the cost and perhaps the effect or that rebate scheme, there was a slightly more formalistic analysis implying in places that there are certain types of rebate scheme that are very likely to be illegal. For example if they have retroactive effect, where do you think we are in that debate? Are there certain categories in rebate schemes that are very likely to be found illegal, in your view?

Richard Whish: Well, with respect, I don’t think it’s a formalistic reasoning. It goes back to what I said earlier that the Court is saying this is not a pricing abuse case, it’s a case about the exclusivity ,and so, if you want to say yes this rebate scheme is here but it’s a good rebate scheme you do so by advancing evidence that shows that it will have an economic efficiency associated with it. No such claim was made in Post-Danmark II.

Mark Tricker: And, what about reconciling Post-Danmark II with Post-Danmark I? Because some say that those two cases are actually two sides of the same coin in some ways, that they are looking at forms of pricing that are seeking to attract the loyalty of customers whether that be through a rebate scheme or through a selected price cuts. In Post-Danmark I, there was far more of an analysis of net prices versus cost on an effect-based type analysis. Post-Danmark II ,perhaps less so, how do you reconcile those two judgements in your view?

Richard Whish: Well, I reconcile the two on the basis that the price cutting in Post-Danmark I was about the price, the rebate in Post-Danmark II was about the exclusivity or near exclusivity. So, one is a pricing abuse, where you do apply price cost analysis and the as-efficient-competitor test. The other is about the exclusivity where you do not apply price cost analysis. If you want to, you can make use of as- efficient-competitor thinking, but it is not a legal obligation. I, personally, do not see a conflict between these two judgements.

Mark Tricker: Final question, if I may. In terms of those categories of rebate schemes that fall within more the exclusive category then the price cutting category, do you foresee that a company will be able to argue eventually that there is an objective justification for those type of rebate schemes? Or are we in the same area as the efficiency defence in mergers that it is technically available but unlikely to ever actually work?

Richard Whish: Well, I think that an undertaking will be able to argue that there is an objective justification if there is an objective justification. I think it is as simple as that. In a case like Intel, Intel was trying to argue that it wasn’t offering the rebate. Well in those circumstances, of course it didn’t put evidence on the table to justify the rebates that it said it wasn’t giving. But, I think it must be the case that if you have a rebate scheme which you can demonstrate or lead to more efficient production, better investment or whatever, if they evidence is there, put it on the table, and I would hope and expect that the authority would analyse and reach the right conclusion.

Mark Tricker: Richard, thank you very much.