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Be careful with rebate schemes – the recent EU judgment in Tomra
The judgment confirms that the European Courts apply a near per se prohibition of rebate schemes applied by dominant firms that are linked to targets amounting to all or most of a customer's requirements, at least where those targets are determined individually and the rebates are payable on all purchases.
It reveals a continuing rift between the European Commission's current preference for a case-by-case assessment of the actual effects of allegedly abusive conduct, and the traditional approach of the European Courts, which is to examine whether the nature of the conduct and the surrounding circumstances indicate that the conduct is liable to foreclose competition. In this environment, firms with strong market positions need to exercise caution in devising their discount and rebate arrangements, and should not simply rely on the policy statements of the European Commission.
The background In March 2006, the Commission found that Tomra had infringed Article 82 EC (now Article 102 TFEU) by implementing an exclusionary strategy to prevent market entry or expansion by smaller rivals in reverse-vending machine markets in Germany, the Netherlands, Austria, Sweden and Norway. The strategy involved (i) exclusive supply agreements, (ii) individualized quantity commitments, and/or (iii) individualised, retroactive rebate schemes in which the discount earned by reaching a specified target was applied retroactively to all purchases and not just to the purchases above the target. The Commission fined Tomra EUR 24 million.
Tomra challenged the Commission's decision before the General Court, without success. The General Court considered that, for the purposes of Article 102, it was sufficient for the Commission to show that the abusive conduct by the dominant undertaking tended to restrict competition, or that it was capable of having that effect. It stated that the Commission did not have to demonstrate the actual effect of the agreements on the market.
Tomra appealed the General Court's judgment before the Court of Justice.
The judgment The Court dismissed all five grounds of appeal raised by Tomra. The main points emerging from its judgment are these:
- Individualised target rebates payable on all purchases, where the target is all or most of the customer's requirements, are likely to be illegal for a dominant firm. The Court insisted that, where a dominant firm applies rebates conditional on a customer achieving a target that amounts to all or most of its requirements, it is still necessary to show that this tends to remove the customer's freedom to choose its sources of supply, to bar competitors from the market, or strengthen the dominant position by distorting competition. The Court found that Tomra's rebate scheme was indeed anti-competitive, and focused in particular on the fact that the rebates were payable on all purchases and not merely on those exceeding the relevant threshold, and that the schemes were individual to each customer with targets established in light of its estimated requirements or previous purchases.
- Anti-competitive intent is relevant. The Court confirmed that the notion of abuse is an objective concept – an intention to compete on the merits is no defence. However, it is legitimate for the Commission to examine subjective factors, including the motives underlying the business strategy in question. The existence of an anti-competitive intent may be taken into account, in particular when considering whether the conduct is liable to foreclose competition.
- Actual effects need not be shown. The Court confirmed that it is sufficient to show that the abusive conduct of a dominant company tends to restrict competition or that the conduct is capable of having that effect.
- The degree of market foreclosure is not relevant. The Court rejected Tomra's argument that its competitors were free to compete for those customers not covered by its rebate schemes, and that these were sufficient for a competitor to achieve a "minimum viable scale" to remain on the market. The Court insisted that competitors should be able to compete on the merits for the entire market and not just for a part of it.
- It need not be shown that prices are below the dominant firm's costs. The Court rejected Tomra's argument that the Commission should have proven that its rebates forced competitors to offer prices which were lower than Tomra's costs. Thus a predation finding is not necessary if the rebates are found to be anti-competitive because of their characteristics and other circumstances.
Implications The Commission issued its Tomra decision in 2006. The Commission's framework for analysing rebates has developed since then with the issue of its Article 102 Enforcement Guidelines and the recent Intel decision. The Commission would now, for example, look more closely at the actual economic effects of the conduct in question, apply a costs analysis, and assess whether rivals could effectively compete against the dominant firm with their own discounts. In principle, business should take some comfort from the case-by-case approach followed by the Commission in its enforcement practice.
On the other hand, business should be aware that the European Courts maintain their traditional approach, which makes it much more likely that certain forms of rebate schemes will be held anti-competitive. It is difficult to predict whether a national court or competition authority will prefer the approach of the European courts or the European Commission. But in any event a national court dealing with a rebate scheme – whether in a civil claim for damages or an injunction, or a challenge to a national competition authority decision – is bound in principle to apply the law as declared by the Court of Justice. Thus the position of the European Courts cannot be ignored.
The analysis of rebate schemes remains one of the most complex areas of EU competition law. Companies with strong market positions should continue to exercise caution in how they design and implement any rebate scheme.
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