14 October 2014

Loyalty rebates, form-based abuse and a record €1.06 billion fine – what are the implications of the General Court’s Intel judgment?

UK Insight

This article was written by Amanda Butler and Victoria Keenan

In a landmark judgment, on 12 July 2014 the European General Court (the Union’s first tier court) upheld the European Commission’s record €1.06b fine against Intel. This is the largest individual fine ever imposed on a company for a competition law infringement under EU law.

What stands out from the judgment is the Court’s rigid adherence to a traditional form-based rule in assessing the legality of exclusivity-linked rebate schemes. This approach is in stark contrast to the stance advocated by the European Commission in recent years and leaves some uncertainty for businesses holding a strong market presence in the EU as to the business practices they can safely undertake.

The Commission’s decision

In May 2009, the Commission imposed a €1.06b fine on Intel for applying abusive rebates in breach of Article 102 TFEU. Intel was found to be dominant in the worldwide market for a particular type of computer processing chip (CPU) holding a market share of at least 70%.

Intel agreed to grant substantial rebates to customers (mainly computer manufacturers, such as Dell) in return for them purchasing all or almost all of their CPU requirements from Intel (amounting to 80-100% of their needs). These exclusivity-linked rebates were referred to as ‘exclusivity’ or ‘loyalty rebates’ and amounted in some cases to hundreds of millions of dollars. The Commission found that Intel’s business strategy was specifically aimed at excluding its main competitor, Advanced Micro Devices (AMD), from the CPU market.

The appeal

Intel appealed arguing that its conditional rebates were not abusive per se. It claimed that the Commission had failed to establish that Intel’s discounts were actually able to foreclose competition in practice given “the reality of a highly competitive microprocessor marketplace” and that there was “absolutely zero harm to consumers”.

The Commission said that it was under no legal requirement to show actual or potential adverse effects of the rebates on competition. Despite this, the Commission did in fact also carry out an analysis of the effects of the rebates (applying its ‘as-efficient competitor test’) in line with its increasingly economic approach to analysing unilateral conduct.

The Court’s judgment

The Court dismissed Intel’s appeal in full, holding the strict line that exclusivity-linked rebate schemes are “by their very nature” capable of restricting competition. The Court accordingly dismissed all of Intel’s arguments relating to the context of the scheme. It held that the level of the rebate, the fact that the rebate schemes were for a short duration, that no pressure had been put on the customers and that the customers were powerful buyers were all irrelevant factors. Further, the Court dismissed the fact that Intel’s rival, AMD, actually experienced substantial growth during the relevant period.

The Court reasoned that where a company holds a dominant position “any financial incentive to purchase exclusively constitutes additional interference with the structure of competition on a market and must therefore be regarded as abusive.”

The wider implications

The Court’s decision firmly supports traditional EU case law that exclusivity rebates should be considered as anticompetitive by their very nature when undertaken by a company in a dominant position.

This formalistic approach is in contrast to the European Commission’s 2009 Guidance Paper, which sets out how companies can adopt rebate schemes without breaching EU competition rules. The guidance promotes using an effects-based analysis to determine whether a rebate scheme might foreclose competition. This is in line with a general economics based trend by anti-trust authorities worldwide towards assessing abusive conduct.

Although the Guidance Paper was adopted after the Commission issued its Intel decision, it had been hoped that the Court in Intel would broadly support this effects based trend. However, in adopting its decision, the Court warned that the Commission’s ‘as-efficient competitor test’ could not on its own provide any legal assurance.

Next steps?

Following the Court’s hard-line judgment, there is now some doubt as to how the Commission and national competition authorities in Europe will enforce exclusivity rebates in the future. The Commission may carry out a dual analysis and prioritise those cases that are likely to have exclusionary effects, although the position is unclear. Private actions in national courts will, on the other hand, follow the EU Court’s stricter position. It is also unclear where the line between an ‘exclusivity’ rebate and other weaker forms of ‘loyalty-inducing’ rebate will be drawn.

For now, offering rebates in return for securing all or near all of a customer’s business is a high risk strategy and companies operating in Europe that have a strong market presence in any market need to be alert to the risk.

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