The document summarizes the differing approaches of EU courts and competition authorities to rebates offered by dominant firms. The courts apply a strict per se approach finding rebates that induce loyalty to be an abuse of dominance. The Commission favors using an effects-based "as efficient competitor" test to screen for enforcement priorities. There is uncertainty around whether the Commission's use of this test would be upheld in courts given recent rulings suggesting rebates cannot be justified based on their actual effects. The appropriate treatment of rebates raises debates around balancing legal certainty with avoiding over-enforcement that chills pro-competitive behavior.

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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