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Rebates under EU Law: The Current State of Play and Policy Implications - James S. Venit - Skadden Arps - June 2016 OECD discussion

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This presentation by James S. Venit - Skadden Arps, was made during a roundtable discussion on Fidelity Rebates held at the 125th meeting of the OECD Competition Committee on 16 June 2014. More papers, presentations and contributions from delegations on the topic can be found out at www.oecd.org/daf/competition/fidelity-rebates.htm

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Rebates under EU Law: The Current State of Play and Policy Implications - James S. Venit - Skadden Arps - June 2016 OECD discussion

  1. 1. 1Edit on Slide Master •Rebates under EU Law: The Current State of Play and Policy Implications •16 June 2016 OECD •James S. Venit •Skadden Arps
  2. 2. 2Edit on Slide Master Overview of EU Approach to Rebates •Split between the Courts and the Commission: • Courts apply strict per se approach to unjustified exclusive or loyalty-inducing rebates − General Court judgment in Intel (2014) and ECJ judgment in Post Danmark II (2016) • Post Danmark II specifically adresses actual effects -- the significance of the number of affected customers (NOAC) − Applying the traditional approaches to dominance and abuse, the ECJ held that NOAC is not relevant to the existence of an abuse but only to its gravity thereby rejecting the relevance of actual effects and the need for a de minimis threshold as concerns the existence of an infringement
  3. 3. 3Edit on Slide Master The Courts’ Approach to the AEC Test • In Intel the GC said that the AEC test was too lenient because it would permit pricing conduct that makes market access more difficult • In Post Danmark II the ECJ accepted that the AEC test was « one tool amongst others » for assessing whether rebates are abusive − BUT the ECJ’s ruling that NOAC cannot be used as a defense to a finding of abuse suggests that the AEC test could also not be used as a defense if the rebate is exclusive or induces loyalty − Consistent with strict per se approach to unjustified loyalty/exclusive rebates • But creates a situation in which Commission may have little incentive to pursue cases with limited actual effects since fines (or large fines) may not be possible under HCR − PD II may thus support the discretionary approach to case selection advocated in the Guidance Paper
  4. 4. 4Edit on Slide Master Commission’s Approach •The Commission favors use of a price/cost test as a screening device in order to set enforcement priorities • Article 82 Guidance Paper: “…the Commission intends to investigate, to the extent that the data are available and reliable, whether the rebate system is capable of hindering expansion or entry even by competitors that are equally efficient by making it more difficult for them to supply part of the requirements of individual customers. In this context the Commission will estimate what price a competitor would have to offer in order to compensate the customer for the loss of the conditional rebate if the latter would switch part of its demand (‘the relevant range’) away from the dominant undertaking." (Guidance Paper § 41)
  5. 5. 5Edit on Slide Master The AEC Test •The Underlying Theory: • "The as efficient competitor analysis assesses the price at which a competitor which is as efficient as the dominant company - but which is not dominant – would have to offer its products in order to compensate the customer for the loss of the conditional benefits granted by the dominant company and which would result from that customer's switching the contestable share of its supply needs away from the dominant company to the hypothetical as efficient competitor."
  6. 6. 6Edit on Slide Master The AEC Test •Notwithstanding Intel and Post Danmark II the Commission continues to use the AEC test as a screening device for purposes of determining its enforcement priorities • Unclear whether this use of the AEC test would be upheld by EU courts − Intel said AEC test too lenient − Post Danmark II may preclude AEC test as a defense − But Post Danmark II may increase likelihood EU court’s would uphold use of AEC as screening device since the Commission has little interest in enforcement where the impact of the rebate is limited and fine is low or non-existent
  7. 7. 7Edit on Slide Master Rationale for the Courts’ Per Se Approach •Analytic component • Dominance is absolute not a relative concept • Once dominance exists no further restrictions of competition can be accepted and firms have special obligations •Ideological component • Consistency with fundamental goals of EU Treaty − Per se approach is effects-based and economically sound because it considers the impact of exclusionary rebates on the goal of preserving undistorted competition (as opposed to enhancing consumer welfare) and best protects the «discovery value» of competition − AEC test is inconsistent with the objectives of the EU Treaties because it would tolerate exclusion of competitors that are not sufficiently efficient » The competitive process is also harmed if rivals’ profitability is reduced or their market access is made more difficult •Policy implications: − An effects-based analysis should consider not only the effects of the business practice but also other effects such as enforcement costs, legal certainty and the allocation of risk » The Courts’ standards are clear, predictable and administerable > The AEC test is resource-intensive and hard to administer
  8. 8. 8Edit on Slide Master Rationale for the Commission’s Position •Traditional approach to dominance may make sense for State monopolies but not for firms that have earned their market positions •Discounts are normally pro-competitive and beneficial − Discounting should not be discouraged absent clear consumer harm •Price/Cost test needed to avoid chilling effect by distinguishing ‘good’ (pro- competitive) from ‘bad’ (exclusionary) discounts
  9. 9. 9Edit on Slide Master Legal Issues •The two approaches raise the following legal questions: • Q-1: Does the Treaty preclude an effects-based approach? • Q-2: What does ‘preserving undistorted competition’ mean • Q-1 The reference to ‘preserving undistorted competition’ neither mandates a per se approach nor precludes an ad hoc effects-based approach • Q-2: ‘Preserving undistorted competition’ is a form of words that must be given content and providing that content raises policy not legal issues: − What is the goal of antitrust enforcement? » Maximizing individual freedom » Protecting smaller competitors » Protecting the competitive process » Enhancing efficiency and consumer welfare » Enhancing total welfare
  10. 10. 10Edit on Slide Master Policy Considerations •Even assuming the correct goal is to protect the competitive process does intervention absent evidence of harm best achieve that goal? • "The standard for assessing whether a given practice is detrimental to ‘competition’ • or whether it is a legitimate tool of ‘competition’ should be derived from the effects • of the practice on consumers. If we think of ‘competition’ as a regime in which the • different suppliers contend to sell their products to participants on the other side of • the market, then the benefits reaped by the other side of the market will themselves • provide a measure of how well ‘competition’ works." • Report of the Economic Advisory Group on Competition Policy (EAGCP), "An Economic Approach to Article 82" (July 2005),
  11. 11. 11Edit on Slide Master Policy Considerations • What is the proper balance between legal certainty and avoiding chilling effects? • Hard to answer these questions in the abstract − What impact did the Intel decision have?
  12. 12. 12Edit on Slide Master Policy Considerations •Is EU institutional design capable of incorporating an effects-based approach? • AEC test has 3 key moveable parts − Dominant firm’s avoidable cost » If high more likely to fail Test » Classification/accounting/economics issue » Most detailed and analytically challenging but relatively limited impact on outcome of the Test • Conditional part of discount (% of sales lost if customer does not buy 100%) − If high more likely to fail Test − Evidentiary issue if no written agreement − Important metric in determining outcome of the Test • Contestable share − If small more likely to fail Test − Evidentiary issue often based on internal documents unknown to dominant firm − Most powerful metric in determining outcome of the Test
  13. 13. 13Edit on Slide Master Policy Considerations •Commission’s incentives when applying AEC Test • Inflate variable cost • Inflate conditional part of discount • Reduce contestable share •Is the AEC test desirable given EU institutional design • • In practice, the EU system is prosecutorial and inquisitorial rather than adversarial − Commission decisions have the force of law − The Commission acts as prosecutor, judge and jury − The Commission controls the file • Uneven scope of judicial review and pre-HRC deference to the Commission’s complex economic assessments

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