Peter Scott: On the 6th of September, the Court of Justice issued its eagerly awaited decision in Intel. This is a case, of course, that concerns the legality of rebate schemes, where Intel was fined over a billion Euros back in 2009 because their scheme had been found by the European Commission to be an abuse of a dominant position. But, rather than bringing this long running saga to an end, the Court of Justice has in fact extended the case by referring it back to the General Court to apply the correct legal test. And here to discuss the implications of the Court of Justice’s decision are Professor Richard Whish and Dr Adrian Majumdar from RBB Economics. Thank you both for joining us.
Richard, I would like to start with you. At the heart of this case is the extent to which the European Commission has to look beyond the form of the rebate scheme and actually examine the effect that it has on the market. Could you briefly explain where the Court of Justice decision lands on this key issue.
Richard Whish: Yes, certainly, I think it is an extremely interesting judgment. The controversy in this area concerns certain rebates when given in return for exclusivity. That is to say, where a customer is required to buy all or most of its requirements from dominant firm. There are rules that stretch back to Hoffmann La Roche v Commission in 1979 that are really rather formalistic in nature and, indeed, in this case, the General Court had said that an exclusivity rebate is presumptively unlawful unless there are some efficiency justifications for them. Now, that rule is repeated in paragraph 137 of the Court of Justice’s Judgment but then we have the very fascinating paragraph 138 where the Court of Justice said “However, that case law of Hoffmann La Roche must be further clarified in the case where the undertaking concerned submits - on the basis of supporting evidence - that its conduct was not capable of restricting competition and in particular, of producing the alleged foreclosure effects”. This seems to me to be a fascinating paragraph. Clearly it means that effect analysis is admissible in conditional rebate cases and, to that extent, it seems to me that this moves the case forward. It rather seems to me like a ship navigating in shallow waters that has become beached on rocks with nowhere to go and, subsequently, a large wave comes along, lifts the ship off the rocks and it starts to move forward again. I think that’s what this judgment has done.
Peter Scott: Richard, where would you say the decision now leaves the Guidance Paper that was issued by the Commission also back in 2009?
Richard Whish: It seems to me that the Guidance Paper comes out of this rather well, because that document was an attempt by the Commission itself to move analysis towards a more effects-based system and the Commission - in paragraph 20 - suggested a whole series of economic indicia that it thought were relevant to effects-based analysis. If one reads paragraph 139 of the Court judgment its says that the Commission should look, when reviewing the dominant firm’s evidence, at the undertaking’s dominant position on the relevant market, its share of the market covered by the challenged practice, as well as the conditions and arrangements for granting the rebates in question and so on. These are precisely the kind of things that the Commission itself had talked about in paragraph 20 of its Guidance so I think the Guidance Paper comes out rather well.
Peter Scott: Adrian, moving now to look at the even more central role I think we can now anticipate economic analysis having when looking at dominance cases - particularly rebate cases - can you start by explaining what effects-based analysis really means?
Adrian Majumdar: So, simply put, effects-based analysis means that an abuse is decided not on the form of the rebate or the practice but on its actual or likely effects on competition. Typically, proponents of effects-based analysis add on some bells and whistles to that. So they would say that the adverse effect must at least be likely or even very likely as opposed to just capable or probable. They would also frequently say that in terms of foreclosure one would need a consistent approach across, not just abuses, but also agreements and mergers and that the foreclosed party should be at least as efficient as the dominant firm.
Peter Scott: Now, of course the emphasis is going to be on the allegedly dominant company to proactively raise in their defence why their conduct has not had a detrimental effect. When it comes to advancing that sort of argument, do you have any practical tips for companies?
Adrian Majumdar: Firstly, the dominant firm would ideally pass the “as efficient competitor” test on all of its customers and, in so doing, it would take a long run measure of cost. That is to say, ensure its price is above, for example, long run average incremental cost. Second, I would suggest that the dominant firm should consider the customers that are being targeted by the rebates scheme. If those customers are important routes to market for rivals or new entrants, that could be an aggravating factor that the authorities would be more concerned about. I also think coverage is key, that’s to say, coverage of the rebate scheme. Where the rebate scheme covers a large part of the market and in particular a large part of the shares that you might say are contestable - that is to say genuinely open to competition - again, that would be an aggravating factor. The flip side is if the coverage is limited there may be plenty of room for rivals to achieve an efficient scale and hence constrain the dominant firm. To the extent possible, if evidence is available on “before” and “after” one may be able to show that the impact of the scheme was negligible on the dominant firm’s rivals. And, finally, and I think importantly, if a dominant firm is to choose a form of rebate scheme that in the past has been presumed to be abusive, then for sure they need a good reason to tell the authority. A good pro-competitive reason for adopting that structure of rebate scheme.
Peter Scott: Richard, Adrian has been talking about “as efficient” competitors, have you got nything to add from a more legal perspective as to the application of the “as efficient competitor” test?
Richard Whish: Yes, I think that this is really interesting because the Court of Justice in this judgment refers, several times actually, to the “as efficient competitor” and they have done in other recent judgments as well, Post Danmark I and II and so on. I think it is helpful to distinguish two different senses in which this term is used. One, the big question, what is Article 102 for? And it seems to me that we have reached the point where quite clearly the Commission and the EU Courts recognise that 102 is not there to protect less efficient or inefficient competitors. It is only interested in the protection of “as efficient” competitors. So, big picture, Article 102 is about efficient competition and efficient competitors. The term is used differently, I think, when an economist is looking at economic evidence and specifically price cost analysis. Now that’s sort of a technical use of the idea of the “as efficient competitor” test and I think it’s the right one to use. But I think it’s helpful to distinguish the two ways in which the term is used.
Peter Scott: Richard, there are two other, I think, interesting points to arise out of the judgment. One is on the extent of the Commission’s jurisdiction and secondly, quite an interesting and important point on process. Starting with the Commission’s jurisdiction, could you explain how the Court determined that the Commission had jurisdiction to investigate this matter even though it affected chips that were put into computers outside of the EU.
Richard Whish: Well, specifically of course, that Intel was supplying chips to Lenovo in China so the question there is ‘how could that supply arrangement engage the jurisdiction of the European Commission?’. Clearly that is not an agreement that was implemented in the EU in any sense. You can use this implementation doctrine for cartels but not for a unilateral practice of Intel supplying Lenovo. What the Court of Justice has done here, finally, because it has never done it before, is to adopt the so called “qualified effects doctrine” and it begins by saying that these effects have to be direct, foreseeable and appreciable. And it also says that we don’t mean the effects of the specific supply agreement between Intel and Lenovo, we are actually looking at the totality of Intel’s conduct. We’re looking, if you like, at a single overall abuse and asking whether that conduct could have such effects in the EU and the Court of Justice said here, yes they could.
Peter Scott: A final question, picking up that procedural point that the Commission was rebuked for not properly recording an interview that they described as “informal”. What implications do you think that rebuke will have on Commission practice going forward?
Richard Whish: Well it is an important point because of course Article 19 of Regulation 1 says that the Commission can conduct interviews as part of its procedure. And here there had been an interview with an employee of Dell, a five hour interview it has to be said, and the Commission did not make a formal record of that interview and it did not obviously therefore provide Intel a record of that interview. The Commission then said, well this was an informal interview. And it’s an interesting judgment because the Court says there is no distinction between a formal and an informal interview. Any interview that takes place does so within the terms of Article 19 and the Commission must make a full record of it available and must disclose that record to the defendant. On the facts of this case, the Court says that the interview - in the end – did not influence the outcome of the case so for that reason we are not going to annul the Commission’s decision. Well that’s about this particular case, but it seems to be going forward that this is immensely important and the Commission, I assume more so national competition authorities, will have to be much more careful about the way in which they use the power of interview.
Peter Scott: Richard, Adrian thank you both very much.