Recalibrating functional claiming: A way forward
What are the misconceptions and what should be done to recalibrate functional claiming standards accordingly?
On 6 October 2015, the European Court of Justice (the Court) issued its preliminary ruling in Post Danmark A/S v Konkurrencerådet (Competition Council)1, which concerns the antitrust treatment of a retroactive rebate scheme in the market for the distribution of bulk mail. The case is another significant milestone in a series of cases on the role of economic analysis in abuse-of-dominance cases under EU law.
To the disappointment of many, the Court rejected Post-Danmark’s argument that the Konkurrencerådet should have applied the so-called as-efficient-competitor test and endorsed a more formalistic, traditional approach to the assessment of rebate schemes. The Court also confirmed that there is no de minimis or appreciability requirement for the finding of an abuse of a dominant position.
The Court’s Post Danmark decision confirms that companies potentially holding a dominant position in EU market(s) need to be very careful in designing rebate schemes, even if such schemes appear to have no appreciable effect on competition.
The background of the case, and the Court’s analysis are summarized below.
In January 2014, the ECJ received a request for a preliminary ruling from the Sø- og Handelsretten (Denmark), in proceedings between Post Danmark A/S and the Konkurrencerådet concerning a retroactive rebate scheme Post Danmark implemented in 2007 and 2008, when Post Danmark was controlled by the Danish State.
To offset the universal service obligation and the uniform tariff scheme to which it was subject, Post Danmark had a statutory monopoly on the distribution of letters, including, in the case of bulk mail, direct advertising mail weighing up to 50 grams. In January 2007, Bring Citymail Danmark A/S began to deliver business mail, including direct advertising mail not covered by Post Danmark’s monopoly, but it exited the market in 2010 after suffering heavy losses.
Following a complaint by Bring Citymail, the Konkurrencerådet found that Post Danmark abused its dominant position on the market for the distribution of bulk mail by applying rebates that effectively tied customers and foreclosed the market.
The rebate scheme operated by Post Danmark in 2007 and 2008 had three main features.
The Konkurrencerådet found, inter alia, that Post Danmark was an unavoidable trading partner because it held over 95% of a market characterised by high barriers to entry and economies of scale. Post Danmark also enjoyed significant structural advantages through its statutory monopoly, which covered over 70% of all bulk mail in Denmark. According to the Konkurrencerådet, those factors obliged customers to turn to Post Danmark for 70% of the mail in respect of which the latter held an exclusive right and for the significant proportion of bulk mail that was to be distributed beyond Bring Citymail’s geographical coverage, so that in its own geographical area, Bring Citymail could compete on only approximately 30% of the market.
The Konkurrencerådet concluded that the scheme had an anti-competitive exclusionary effect on the market and held that it was not appropriate to base the assessment of the rebate scheme’s anti-competitive exclusionary effect on the as-efficient-competitor test, in light of the particular characteristics of the relevant market.
After the Konkurrenceankenævnet (Competition Appeals Tribunal) upheld the Konkurrencerådet’s decision, Post Danmark brought the case before the Sø- og Handelsretten (Maritime and Commercial Court), which took the view that there was uncertainty as to the criteria to be applied in assessing the rebate scheme’s exclusionary effect. The Sø- og Handelsretten decided to stay the proceedings pending a preliminary ruling by the Court of Justice.
As reformulated by the Court, the Danish court asked for clarification on three main points:
The Court’s analysis of each of the three (reformulated) questions referred to it are summarized below.
The Court noted that it in assessing the legality of a rebate scheme, it is necessary to consider all the circumstances, particularly the criteria governing the grant of the rebate, and to investigate whether, in providing an advantage not based on any economic service justifying it, the rebate tends to remove or restrict the buyer’s freedom, to exclude competitors from the market, to apply dissimilar conditions to equivalent transactions or to strengthen its dominant position by distorting competition.
In the case at hand, it was also necessary to take into account the extent of Post Danmark’s dominant position and the particular conditions of competition prevailing on the relevant market.
In that regard, the Court noted that it was necessary to determine whether those rebates could produce an exclusionary effect, that is to say whether they were capable, first, of making market entry very difficult or impossible for competitors of the undertaking in a dominant position and, secondly, of making it more difficult or impossible for customers to choose between various sources of supply or commercial partners.
The Court stressed the exclusionary impact of the retroactive nature of Post Danmark’s rebates, where a discount does not relate solely to the growth in purchases during the period under consideration, but extends to aggregate purchases, so that relatively modest sales variations can have disproportionate effects on customers.
The Court also stressed that the one-year reference period was relatively long, increasing the pressure on the buyer to reach the purchase figure needed to obtain the discount or to avoid suffering the expected loss for the entire period.
For 25 of Post Danmark’s largest customers, representing approximately one-half of the volume of transactions on the relevant market during the period at issue, approximately two-thirds of mail sent in the form of direct advertising mail not covered by the monopoly could not be transferred from Post Danmark to Bring Citymail without an adverse impact on the scale of the rebates. In those circumstances, customers’ incentives to obtain all or a substantial proportion of their supplies from Post Danmark would be particularly strong, significantly reducing customers’ freedom of choice.
As regards the effect of standardisation of the rebate scale, although the rebate scheme did not result in the application of dissimilar conditions to equivalent transactions, that fact did not preclude its having an exclusionary effect.
As regards Post Danmark’s dominant position and the conditions of competition on the market, Post Danmark held 95% of the market, access to which was protected by high barriers and characterised by significant economies of scale. Post Danmark also enjoyed structural advantages conferred by the statutory monopoly on the distribution of letters weighing up to 50 grams, which covered 70% of all bulk mail. In addition, Post Danmark enjoyed unique geographical coverage encompassing all of Denmark.
The Court noted that an undertaking with a very large market share has a position of strength which makes it an unavoidable trading partner and which secures for it freedom of action. In those circumstances, it is particularly difficult for competitors to outbid it in the face of discounts based on overall sales volume.
In this case, competition on the market was already very limited. In those circumstances, a rebate scheme operated by an undertaking, which, without tying customers to that undertaking by a formal obligation, tends to make it more difficult for customers to obtain supplies from competing undertakings and produces an anti-competitive exclusionary effect.
The fact that the rebates concerned a large proportion of customers on the market did not, in itself, constitute evidence of abusive conduct by Post Danmark, but could be an indication as to the extent of that practice and its impact on the market, which in turn may bear out the likelihood of an anti-competitive exclusionary effect.
In conclusion, the Court held that to determine whether a rebate scheme such as Post Danmark’s is capable of having an exclusionary effect, it is necessary to examine all the circumstances of the case, in particular the criteria governing the grant of the rebates, the extent of the dominant position and the prevailing conditions of competition. The fact that the rebate scheme covered the majority of customers on the market was not determinative of an abuse but could constitute a useful indication as to the extent of that practice and its impact on the market.
The Court noted that application of the as-efficient-competitor test consists in examining whether the pricing practices of a dominant undertaking could drive an equally efficient competitor from the market. That test is based on a comparison of the prices charged by a dominant undertaking and certain costs incurred by that undertaking as well as its strategy.
The Court noted that the as-efficient-competitor test has been specifically applied by the Court to low-pricing practices in the form of selective prices or predatory prices. However, the Court has not held that assessment of a rebate scheme operated by a dominant undertaking must be based on the as-efficient-competitor test. In fact, because Post Danmark had a very large market share and structural advantages, the as-efficient-competitor test was irrelevant since the structure of the market made the emergence of an as-efficient competitor practically impossible.
The Court further noted that the presence even of a less efficient competitor might increase competitive pressure and, therefore, constrain the dominant undertaking. The as-efficient-competitor test must thus be regarded as one tool amongst others for the purposes of assessing whether there is an abuse of a dominant position in the context of a rebate scheme.
The Court noted that the Commission’s communication “Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings”, which advocates the use of the as-efficient-competitor test to assess exclusionary conduct, sets out the Commission’s approach as to the choice of cases that it intends to pursue as a matter of priority but is not binding on national competition authorities and courts.
Finally, the Court considered whether an appreciability test or de minimis threshold could be applied in an assessment of an alleged abuse of a dominant position. The Court held that to establish whether a practice is abusive, that practice must have an anti-competitive effect on the market, but the effect does not necessarily have to be concrete. It is sufficient to demonstrate that there is an anti-competitive effect which may potentially exclude competitors who are at least as efficient as the dominant undertaking.
In such a situation, the structure of competition on the market has already been weakened. Any further weakening of the structure of competition may constitute an abuse of a dominant position.
Consequently, the Court thus found that fixing an appreciability or de minimis threshold for the purposes of determining whether there is an abuse of a dominant position is not justified. The anti-competitive practice is, by its very nature, liable to give rise to not insignificant restrictions of competition, or even of eliminating competition on the market on which the undertaking concerned operates.
In summary, to constitute an abuse, the anti-competitive effect of a rebate scheme operated by a dominant undertaking must be probable, but there is no need to show that it is of a serious or appreciable nature.
Judgment of the Court (Second Chamber), 6 October 2015
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