The Intel judgment—old wine in new bottles?

EU antitrust law, rebate schemes and the “as efficient competitor” test

By Dr. Joachim Schütze and Dr. Dimitri Slobodenjuk Clifford Chance, Düsseldorf

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On June 12, 2014, the General Court of the European Union upheld the €1.06 billion fine imposed by the European Commission against U.S. chipmaker Intel for abusing its dominant market position. The ruling is a landmark decision, not least because it represents the first fine exceeding the €1 billion threshold the Commission has imposed against a single party. It is also the first decision in which the Commission and the court applied the “as efficient competitor” test (AEC test).

Background

By decision dated May 13, 2009, the Commission imposed a fine pursuant to Art. 82 of the EC Treaty (now Art. 102 of the Treaty on the Functioning of the European Union, TFEU) of €1.06 billion on Intel for having abused its dominant position on the worldwide market for x86 central processing units (CPUs). Based on the Commission’s findings, Intel abused its dominant market position between October 2002 and 2007 by executing a strategy aimed at foreclosing its only serious competitor, Advanced Micro Devices, Inc. (AMD), from the market. The measures implemented by Intel included rebates to four major computer manufacturers (Dell, Lenovo, HP and NEC) under the condition that they purchase all or almost all of their x86 CPUs from Intel. In addition, the company awarded payments to Media-Saturn-Holding (MSH), a European retailer of electronic equipment, under the condition that it only sell computers containing Intel’s x86 CPUs. Moreover, Intel also made payments to HP, Acer and Lenovo contingent on the cancellation or postponement of launching of AMD’s CPU-based products. According to the Commission, Intel held a market share of roughly 70 percent or even more, which made it extremely difficult for Intel’s competitors to enter the market and/or to expand their business activities. Given this strong market position, the chipmaker was an unavoidable supplier of x86 CPUs since customers had no choice but to cover at a least a portion of their CPU demand with Intel products. The measures imposed by Intel reinforced customers’ loyalty to the chipmaker and significantly reduced its competitors’ ability to compete on the merits of their x86 CPUs. The Commission concluded that Intel’s strategy limited consumer choice and lowered incentives to innovate.

Which rebates can be granted by a market-dominant undertaking?

In its decision to dismiss Intel’s appeal of the fine imposed by the Commission in its entirety, the General Court referred to the established case law on the EU level, stating that a distinction should be drawn between three categories of rebates. The first category comprises so-called quantity rebates that are linked solely to the volume of purchases made from a market-dominant undertaking. Such quantity rebates are generally considered not to have the foreclosure effect prohibited by Art. 102 TFEU. If increasing the supplied quantity leads to lower costs for the supplier, the latter is entitled to pass on that reduction to the customer in the form of a more favorable rate. The quantity rebates are therefore deemed to reflect the gains in efficiency and economies of scale made by the market-dominant undertaking. The second category refers to rebates that are conditioned on the customer’s obtaining all or most of its requirements from the market-dominant undertaking, so-called fidelity or exclusivity rebates. When applied by a market-dominant undertaking, such exclusivity rebates are incompatible with the objective of undistorted competition within the Common Market since they are generally not based on an economic transaction justifying this burden or benefit but are rather designed to remove or restrict purchasers’ freedom to choose their sources of supply and to deny other producers’ access to the market. The Court stated that such rebates create a financial advantage designed to prevent customers from obtaining their supplies from competing producers and are therefore abusive in the sense of Art. 102 TFEU.

>> An analysis of the circumstances of the case is not required to determine whether or not exclusivity rebates exhibit a foreclosure effect <<

The third category relates to rebate systems in which the granting of a financial incentive is not directly contingent on the exclusive or quasi-exclusive supply by the undertaking in a dominant position but in which the mechanism for granting the rebate may also have a fidelity-building effect. These include inter alia rebate systems that are dependent on the attainment of individual sales objectives and that do not constitute exclusivity rebates since they do not contain any obligation to obtain all or a given proportion of supplies from the dominant undertaking. In analyzing whether the application of such a rebate constitutes an abuse of a dominant position, it is necessary to consider all the circumstances, especially the criteria and rules governing the granting of the rebate. In particular, it has to be assessed whether, in providing an advantage not based on any consideration justifying it, the rebate tends to remove or restrict the buyer’s freedom to choose its sources of supply, to bar competitors from access to the market or to strengthen the dominant position by distorting competition. The rebates granted by Intel fall under the second category: exclusivity rebates that are, according to the settled case law, by their very nature capable of restricting competition. In this context, the Court stated that the question of whether or not exclusivity rebates can be categorized as abusive does not depend on an analysis of the circumstances of the case to establish a potential foreclosure effect. As mentioned above, such an assessment is only necessary with regard to rebates within the third category. The Court argued that a rebate granted in consideration of a customer’s obtaining all or most of its requirements from an undertaking in a dominant position creates a financial advantage indirectly designed to prevent customers from sourcing their supplies from competing producers. The Court thus concluded that an examination of the circumstances of the case to determine whether or not the rebate is designed to prevent customers from obtaining their supplies from competitors is therefore not necessary. With regard to the payments granted to MSH, the Court found that the same anticompetitive mechanism was in place as with the measures implemented vis-à-vis the computer manufacturers, but at a stage further down the supply chain. Consequently, the Court was of the opinion that the Commission was only required to demonstrate that Intel had granted a financial incentive subject to an exclusive condition. An assessment of all circumstances of the case was not necessary.

Relevance of the “as efficient competitor” test

In its decision, the Court also found that it was not necessary to conduct an AEC test to determine whether or not the Commission correctly assessed the ability of Intel’s rebates to foreclose a competitor as efficient as Intel. This test, which was introduced by the Commission in its Art. 82 Guidelines from February 2009, establishes the price at which a competitor as efficient as the market-dominant undertaking would have had to offer its products in order to compensate a customer for the loss of the rebate granted by the marketdominant undertaking. The Court concluded— again by referring to the settled case law—that in order to establish a potential anticompetitive effect, it is sufficient to demonstrate the existence of a loyalty mechanism. Therefore, the Commission was not required to demonstrate the foreclosure capability of exclusivity rebates on a caseby- case basis by applying the AEC test. In fact, the Court even stated that if the competitor was still able to cover its costs in spite of the rebates granted, it would not mean the foreclosure effect did not exist. The Court argued that the mechanism of exclusivity rebates as such is capable of making market access more difficult for the market-dominant undertaking’s competitors, even if that access is not economically impossible. Therefore, the Court concluded that the Commission carried out the AEC test only for the sake of completeness and in fact was not bound to follow the Art. 82 Guidelines since the Intel case was initiated before the Art. 82 Guidelines were published.

The end of the more economic approach?

The Court’s decision is in line with the settled case law relating to exclusivity rebates. It can be assumed that, given the circumstances of the case and particularly in light of Intel’s large market share and its systematic approach at all levels of distribution, the Court probably did not see any compelling reason to deviate from this case law. The same applies to the AEC test. Since the Intel case represents the first time the Commission applied the AEC test, the expectations regarding the Court’s decision were particularly high. However, the Court made it clear that the AEC test cannot have any impact on the previous EU case law concerning exclusivity rebates. From the Court’s perspective, the AEC test is apparently just one of the many tools used to assess the abusive character of a rebate system and does not necessarily have to be applied to exclusive rebate schemes given their abusive nature. In this mission’s specific approach with regard to the application of the AEC test in the case at hand had a deterrent effect on the Court’s willingness to address the relevance of the AEC test in more detail remains subject to speculation. It must be noted that the exact amount of the rebates granted by Intel was not explicitly disclosed in the case documentation. This omission forced the Commission to work on the basis of assumptions. In addition, the calculation of such relevant costs as average avoidable costs was apparently subject to uncertainties as well.

>> Rebate schemes are a pricing method that must be carefully analyzed <<

In any event, it seems to be clear that the “more economic approach” reflected in the AEC test will not be applicable with regard to exclusivity rebates imposed by a market-dominant undertaking. This, however, begs the question of which legal framework can be applied to rebates that are not directly linked to a condition of exclusive or quasi-exclusive supply from a market-dominant undertaking but may indeed have a fidelity-building effect. As already mentioned above, this applies, in particular, to rebate systems dependent on the attainment of individual sales objectives. Based on the Court’s conclusions in the Intel case, the Commission—at least in theory—would have had to conduct a full-fledged analysis considering all circumstances and, in particular, whether or not the specific sales objective of the rebate scheme tended to remove or restrict the buyer’s freedom to choose his sources of supply. It can be assumed that at least in cases in which the retroactive rebate constitutes a mere conversion of an exclusivity rebate—for example, when the sales objective clearly constitutes the entire demand requirements of the purchaser, the Commission would most likely treat such a rebate as an exclusivity rebate. However, the above does not mean that the Commission will not apply the AEC test in future investigations. In fact, with regard to rebates within the third category that do not constitute a clear-cut case demonstrating the fidelity-building effect, the Commission would have to conduct a full economic analysis based on its Art. 82 Guidelines to determine whether the rebate factually limits the customer’s ability to buy goods from a competitor of the market-dominant undertaking. Hence, the “more economic approach” remains valid at least for this type of rebate. Nevertheless, it remains—at least from the current perspective—doubtful that the AEC test will play a significant role in the Commission’s future investigations against market-dominant undertakings that grant rebates to their customers. The overall impression conveyed by the Intel ruling is that the AEC test is too complicated from a purely practical perspective, even for the Commission itself.

Practical advice: caution needed

Rebate schemes imposed by marketdominant undertakings have been and still are a pricing method that must be carefully analyzed by the respective companies. This rule does not only apply to exclusivity rebates that—as confirmed by the Court in its Intel decision—constitute an antitrust law infringement regardless of whether or not they led to economic harm. This is also the case with regard to rebate schemes that are linked to the attainment of individual sales objectives and that, depending on the specific circumstances, may have a fidelity-building effect. The latter has to be assessed on a case-by-case basis. With the Intel decision in its pocket, however, the Commission might be more willing to initiate investigations of rebate schemes offered by market-dominant undertakings. This could harm innovative companies that employ rebates as a way of passing on economic advantages to their customers. The respective antitrust-law risks cannot be entirely excluded. Nonetheless, marketdominant undertakings can mitigate them by employing compliance systems that monitor the internal price-building mechanism. In addition, proper documentation of the costs or other advantages passed on to the customer can serve as evidence that objectively justifies the allegedly abusive rebate scheme. All in all, the “old wine” offered in the Intel judgment still leaves enough room to maneuver within the legal framework of EU antitrust law to fulfill the economic expectations of market-dominant undertakings.

joachim.schuetze@cliffordchance.com

dimitri.slobodenjuk@cliffordchance.com