European Union: European Court Of Justice Issues Preliminary Ruling On Proper Assessment Of Retroactive Rebate Scheme In Post Danmark II Case

On 6 October 2015, the Court of Justice of the European Union ("ECJ") answered a request for a preliminary ruling from Denmark's Maritime and Commercial Court (Danish Sø- og Handelsret) in Post Danmark II, which raised questions about the proper assessment of certain rebate schemes under Article 82 EC (now Article 102 TFEU).

The contested rebate scheme offered by Post Danmark, the Danish postal incumbent, applied incremental discounts on a scale from 6% to 16% depending on volumes purchased, which were standardised across all customers. The discount rate applied retroactively to all purchases when a new volume target was achieved, and applied to purchases made over a one-year period. Prices were set at the beginning of the year based on estimated volumes, and adjusted at the end of the year based on the actual volume of mail sent (with the result that customers may need to pay compensation to Post Danmark).

In its request, the Danish court asked the following three questions:

On 21 May 2015, Advocate General Kokott issued her Opinion on these questions. In her Opinion, the Advocate General considered that a rebate scheme operated by a dominant undertaking breaches Article 82 EC if an overall assessment of all the circumstances of the case shows that the rebates are capable of producing an economically unjustified exclusionary effect. In this respect, the Advocate General noted that particular account should be taken of, inter alia, the criteria and rules governing the grant of the rebate, the conditions of competition prevailing on the relevant market, and the position of the dominant undertaking on that market. In addition, the Advocate General took the view that the "as-efficient competitor" ("AEC") test was not required to establish the abusive nature of the rebate scheme in situations where its abusive nature is shown by an overall assessment of the other circumstances of the case (for further details, see VBB on Competition Law, Volume 2015, No 5, available at www.vbb.com).

In its judgment, the ECJ addressed the Danish court's questions as follows:

1. Response to first and second subparagraphs of Question 1, and the first subparagraph of Question 3

At the outset of its judgment, the ECJ concluded that the rebate scheme applied by Post Danmark could not be regarded as a simple quantity rebate (i.e., a rebate linked solely to the volume purchased and applied to each individual order) or a loyalty rebate (i.e., a rebate coupled with an obligation for, or promise by, purchasers to obtain all or most of their requirements from the supplier). The ECJ further concluded that, in order to determine whether the rebate scheme in question constituted an abuse of dominance, it was necessary to examine all the circumstances, in particular whether the rebate scheme tended to remove or restrict the buyer's freedom to choose his sources of supply, to bar competition from the market, to apply dissimilar conditions to equivalent transactions with other trading partners or to strengthen the dominant position by distorting competition.

In addition, the ECJ considered that it was also necessary to examine the extent of the dominant position and the particular conditions of competition prevailing on the relevant market.

In this respect, two assessments had to be carried out. First, it had to be determined whether the rebate scheme could produce an exclusionary effect by creating barriers to market entry. In the present case, the ECJ noted a number of criteria and rules governing the grant of the rebate that it considered as relevant, including that: (i)the rebate scheme did not relate solely to the incremental growth in purchases of products but extended to all the purchases made by the buyer; (ii) the retroactive rebate scheme covered a relatively long period, which had the inherent effect of increasing the pressure on the buyer to reach the purchase figure needed to obtain the discount; and (iii) the suction effect of the retroactive rebate scheme was further enhanced by the fact that it applied across the contestable and non-contestable parts of the market.

Second, it had to be determined whether the rebate schemes could produce exclusionary effects by making it more difficult or impossible for customers to choose its source of supply. In the present case, the ECJ considered it relevant that Post Danmark was an unavoidable trading partner because it held 95% of the market, and that 70% of the market was not contestable due to its statutory monopoly. Such conditions prevailing on the market made it difficult for Post Danmark's competitors to outbid it because the rebates covered the overall sales volume. This reasoning is interesting because one of the factors relied on, namely the fact that the supplier is an unavoidable trading partner, is already part of the test for dominance.

Interestingly, the ECJ also noted that the fact that the rebate scheme concerned a large proportion of customers on the market does not, in itself, constitute evidence of abusive conduct. However, as noted further below, the court did consider that the number of customers affected was relevant to determining whether the anti-competitive effect of a rebate scheme was probable and therefore contrary to Article 82 EC.

In light of the above considerations, the ECJ answered the first and second subparagraphs of Question 1, and the first subparagraph of Question 3, as follows:

2. Response to third and fourth subparagraphs of Question 1

Next, the ECJ addressed the relevance of the AEC test.

As the ECJ noted, it specifically applied this test to low-pricing practices in the form of selective prices or predatory prices.

However, the ECJ also noted previous judgments concluded that the invoicing of "negative prices" is not a prerequisite of a finding that a retroactive rebate scheme is abusive. Thus, the ECJ reasoned that "it is not possible to infer from Article 82 EC or the case-law of the Court that there is a legal obligation requiring a finding to the effect that a rebate scheme operated by a dominant undertaking is abusive to be based always on the as-efficient-competitor test".

At the same time, the ECJ also added that this conclusion "ought not to have the effect of excluding, on principle, recourse to the as-efficient competitor test in cases involving a rebate scheme for the purposes of examining its compatibility with Article 82 EC". In other words, the ECJ reasoned, the AEC test must be regarded as a 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 ECJ further noted that where, as in the present case, the structure of the market (i.e., the holding of a very large market share coupled with a statutory monopoly) makes the emergence of an as-efficient competitor practically impossible, it was not necessary to apply the test.

In light of the above considerations, the ECJ answered the third and fourth subparagraphs of Question 1 as follows:

3. Response to Question 2 and second subparagraph of Question 3

Finally, the ECJ addressed the issue of whether the anti-competitive effect of a rebate scheme must be probable and serious or appreciable. In this respect, the ECJ considered that the anti-competitive effect of a rebate scheme could not be purely hypothetical, but must be likely.

Although the ECJ stated that the effect need not be concrete, it added that it is sufficient to demonstrate that the effect is such as to potentially exclude competitors who are at least as efficient as the dominant undertaking. Moreover, the ECJ concluded that this assessment must be made in the light of all relevant circumstances, including the rules and criteria governing the grant of the rebates, the number of customers concerned and the characteristics of the market on which the dominant undertaking operates. However, the ECJ refused to fix an appreciability threshold, thus leaving open the issue of how exactly the number of customers concerned are to be taken into account in this assessment.

In light of the above considerations, the ECJ answered Question 2 and the second subparagraph of Question 3 as follows:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.