July 22, 2014

EU Court Says Loyalty Discounts Betray Competition: Ruling Underlines U.S. Differences

Intel's use of loyalty discounts and rebates to computer manufacturers and other actions directed at competitor Advanced Micro Devices violated EU competition law, according to the European Union's (EU) General Court. The opinion, announced June 12, upheld the European Commission's highest fine ever assessed to a single company for a competition law violation: €1.06 billion. The decision reinforces the equivalent per se violation of a sales technique common to, and generally lawful in, the United States, and underlines the caution required in adapting common U.S. sales methods to other parts of the world – especially the EU. Intel Corp. v. European Commission, No. T-286/09, 106 BNA ATRR 837.

Background

In 2009, the commission imposed a record €1.06 billion fine on Intel for violating Section 102 of the Treaty on the Functioning of the European Union (TFEU). The offense? Intel abused its dominant 80 percent market position by:

  1. Offering loyalty rebates to computer manufacturers which purchased all, or the majority of their central processing units (CPUs) from Intel
  2. Paying certain customers to stop or delay products incorporating competitive CPUs from AMD
  3. Making payments to Europe's largest electronics retailer to handle only computers containing Intel CPUs

Finding that Intel was "dominant" in the market, the commission determined AMD had been abusively foreclosed from the market.

Loyalty Rebates in Europe and the United States

Loyalty rebates have been successfully challenged by the European Commission, with the full support of the courts, for a number of years. According to the General Court's opinion: "Such exclusivity rebates, when applied by an undertaking in a dominant position, are incompatible with the objective of undistorted competition within the common market, because they are not based — save in exceptional circumstances — on an economic transaction which justifies this burden or benefit but are designed to remove or restrict the purchaser's freedom to choose his sources of supply and to deny other producers access to the market. Such rebates are designed, through the grant of a financial advantage, to prevent customers from obtaining their supplies from competing producers" (citations omitted; at para. 77). This analysis does not consider the effect of the rebate on other market participants. Dominant firms can be found to have abused their position regardless of whether competitors suffered or were likely to have suffered foreclosure or other adverse effects.

While the limitation upon loyalty discounts seems well-established in the EU, a new debate regarding their status is emerging in the U.S. 

Until recently, loyalty rebates in the U.S. have been generally above reproach when the seller's net price, taking into account the rebate, remained "above cost." Based on the Supreme Court's Brooke Group decision, this has been the law for more than 20 years even where such discounts allegedly excluded competitors of the dominant firm from the market. However, there is now a caveat in the Third Circuit where recent decisions in ZF Meritor v. Eaton Corp. and LePage v. 3M have abandoned the "price-cost" safe harbor, assigning liability to dominant sellers even where their discounts are "above cost" and non-predatory. At least in the Third Circuit, the competitive strategies previously enjoyed by dominant sellers may not be protected.

What This Means

  1. June's Intel decision by the General Court makes it crystal clear that loyalty discounts by a dominant seller will be treated as per se violations of Article 102 without any case by case showing that they facilitate exclusion or are capable of restricting competition. Will the decision be upheld on appeal? Intel has one remaining appeal to the EU Court of Justice. However, history has shown the Court of Justice generally acts to affirm the General Court. 
  2. The status of loyalty discounts by dominant sellers in the EU stands in stark contrast to their status in the majority of the U.S. where — as long as the net price remains above some appropriate cost measure — they are lawful. Even in the Third Circuit, where recent decisions have cast doubt on the majority rule, legality is dependent upon a rule of reason analysis that focuses on whether the pricing practice raises rivals' costs or forecloses rivals' abilities to compete effectively.
  3. Will the Intel decision have any "follow on" effects? This is a legitimate concern because some other international jurisdictions — like China — closely follow EU competition law.
  4. The era of assuming a pricing program is legal in a foreign jurisdiction simply because it does not raise antitrust issues in the United States is over. Nowhere is this truer than Intel's experience with loyalty discounts in the EU. Now, more than ever, "world" pricing strategies have to be adapted to individual jurisdictions.
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