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Prohibition of Exclusive Purchasing Agreements

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The above excerpt encapsulates the principle articulated by the ECJ in Hoffmann-La Roche (HLR) i.e. exclusive purchasing agreements and loyalty-inducing rebates are abusive by their very nature. The excerpt thus invites the discussions about the current and future development of the case law in the regime of exclusive dealing and conditional rebates, particularly since Intel potentially indicated a departure from the ‘form-based’ approach to a de facto ‘effects-based’ analysis, thus bringing the EU case law closer in line with Commission’s ‘more economic’ approach. Nevertheless, Intel left us with some unresolved uncertainties which would require further clarification.

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As a starting point, HLR established a ‘by object’ prohibition of exclusive purchasing agreements or rebate schemes which encourages exclusivity because these practices can only be explained by the motive to “deprive the purchaser of or restrict his possible choice of sources of supply and to deny other producers access to the market” (HLR). Besides, the ECJ distinguished between two categories of rebates: loyalty rebates (conditional upon exclusivity) and quantity rebates (depend on the volume purchased by the customers). The former is considered prima facie abusive because it seeks to exclude competitors (HLR), whereas the latter is prima facie lawful because it enables dominant undertakings to achieve economies and scale and efficiency gains.

The position has changed since Intel, however, in a peculiar manner as the ECJ strived to provide scope for ‘by effect’ assessments while simultaneously reaffirming the formalistic HLR approach. The CJ made clear that ‘by object’ prohibition remains the default rule, but it is now possible for the dominant undertaking to rebut that presumption by proving that its conduct is incapable of foreclosure of competition. If it can be so established, the burden of proof then shifts back to the Commission to prove the contrary. A non-exhaustive list of factors relevant to this inquiry is identified by the ECJ, including the extent of the dominant position, the coverage of the practice, the terms and conditions of the exclusivity arrangement, the possible existence of a strategy aiming to exclude competitors that are at least as efficient as the dominant undertaking (Intel). The ECJ also highlighted that the AEC test is not a necessary precondition, although it may be a useful tool in determining the likelihood of foreclosure, possibly due to its inherent unpredictability ex ante of the test. If the Commission is able to demonstrate anti-competitive effects, the dominant undertaking can then raise the objective justification defence by arguing that any prima facie restriction of competition is counterbalanced or outweighed by efficiency gains.

In general, the Intel judgment has been welcomed as a positive development of the law in the current regime. The ECJ’s methodology seems to suggest that the HLR approach is now effectively a rebuttable presumption (Colomo). Petit went even further by making a bold statement that HLR is de facto overruled despite the Court’s insistence that ‘by object’ prohibition remains the default rule. Nevertheless, the move away from the form-based approach is desirable since the Court asserted that “not every exclusionary effect is necessarily detrimental to competition”. Indeed, exclusivity practices may lead to foreclosure of competition. For instance, if the market coverage of the practices is high, the competitors may be deprived of the minimum scale to compete at a profit on the relevant market. Notwithstanding that, such a formalistic approach is problematic. First, the distinctions made between exclusive dealing and various rebate schemes are irrelevant as all of these practices share the common goal of securing all or most of the business of customers subject to the scheme, and they are equally capable of creating anti-competitive effects under similar circumstances. Besides, exclusivity practices may be pro-competitive e.g. they allow suppliers to plan production efficiently, to secure the commitment of the distributors to the sale of the product, and to recover the fixed costs involved in the development of a new product. These welfare-enhancing aspects of exclusivity practices had led the CJ in Delimits to conclude that exclusivity should not constitute a prima facie abuse. Thus, it is suggested that the HLR principle potentially generated an “internal inconsistency” within the EU competition rules (Jones). Similarly, AG Wahl criticised that the arbitrary divisions between different categories of rebate scheme do not accurately reflect the market impact.

Nevertheless, the GC responded to the criticism of “internal consistency” by distinguishing Delimitis on on the basis that in a market where competition is already restricted due to the presence of a dominant undertaking (as in HLR), it is unnecessary to assess the effects of the dominant firm’s exclusivity practices on the market. A dominant firm has a special responsibility not to allow its conduct to distort competition in the market (Michelin I). Further, the GC noted that dominant undertakings typically represent ‘unavoidable trading partners’ since customers must obtain at least a portion of their requirements from the dominant undertaking (the non-contestable share) due to factors such as brand loyalty and the competitors’ capacity constraints. Accordingly, the grant of exclusivity rebates enables the dominant firm to leverage its market power on the contestable portion of consumer demand (Guidance Paper). Hence, it became structurally difficult for rivals to compete because they now have to offer attractive conditions to customers in addition to compensation for their loss of the exclusivity rebates.

Additionally, the judgment echoes the Court’s assertion in Post Danmark that “competition on the merits may lead to the exclusion of competitors that are less efficient and so less attractive to consumers in terms of price, choice, quality or innovation”. Petit interpreted this judgment as an endorsement of ‘efficiency’ as the primary objective underlying EU antitrust rules. Similarly, Colomo held the view that Intel made clear that Art. 102 does not seek to protect less efficient rivals, and the exclusion of these less efficient competitors is unproblematic as it is a natural outcome of the competitive process. Further, the confirmation that meeting the AEC test is not required is desirable as it is consistent with the Guidance Paper and the Court’s opinion in Post Danmark that less effective competitors may sometimes exert competitive constraints on dominant undertakings. Besides, in scenarios such as that in Post Danmark, in which the dominant undertaking was a statutory monopoly and held 90% of the market share, the AEC test may be unhelpful since it is impossible for an as-efficient competitor to emerge.

Crucially, the introduction of a non-exhaustive list of factors which are not dictated by a hierarchy in determining the potential effects of the conduct is practicable. It allows the authorities some flexibility in evaluating different sources of evidence and weighing various factors against each other. This is particularly important when differing conclusions may arise depending on the weightages accorded to various factors.

However, several major flaws can be identified from the intel judgment notwithstanding its merits. First and foremost, the Court’s effort in rationalising the law in this regime is arguably not radical enough insofar as it refused to reject the HLR approach entirely. Instead, it introduced more stages of assessment that resemble a ‘ping-pong’ process, which can be extremely time-consuming and costly. While Petit agreed with this point of objection, he nevertheless pointed out that if low enforcement costs were the “alpha and omega of optimal enforcement”, the entire discipline would be governed by rules of per se legality. The relevant question should be whether higher enforcement costs under the rule of reason are justified by lower costs due to the elimination of Type I and Type II errors. Further, he commended the Court for introducing economic literacy and legal consistency in Art. 102 enforcement by establishing a context-dependent framework of analysis. In doing so, the Court avoided the pitfall of endorsing specific and distinct legal standards, hence keeping both the cost and burden of proof manageable for all parties (Petit). Moreover, although the Court opened up the possibility for the dominant undertaking to bring forth supporting evidence to demonstrate that its conduct is incapable of foreclosing competition, the Court, regrettably, failed to provide any guidance on what level of ‘supporting evidence’ is required.

To conclude, Intel has brought about positive development to Art. 102 enforcement by aligning the EU case law with economic realities. In recent cases such as Qualcomm and Google Android, the Commission followed the analysis framework in Intel and conducted thorough assessments of the exclusivity practices in question, taking into account all relevant circumstances, including the market coverage of the practices, the importance of the distributors as a customer for the dominant firm, and the duration of the agreement. The Court arguably should have been more progressive in overhauling the HLR approach as it is incompatible with market realities. In light of the digital economy where the desirability of the products is largely and uniquely defined by network effects, a form-based approach is inapt in restraining alleged anti-competitive conducts undertaken by tech giants. As such, more needs to be done by the authority in the future to overcome the weaknesses prevalent in the current regime.  

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