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Intel judgment: Clarity from the ECJ on exclusivity rebates as an abuse

07 September 2017

The European Court of Justice (ECJ) yesterday delivered its judgment in relation to Intel's appeal from the General Court, and has set aside the General Court's judgment on the basis that it failed to consider certain arguments advanced by Intel.

The General Court had previously upheld the €1.06 billion fine imposed upon Intel by the European Commission (the "Commission") for abuses of dominance, including in relation to Intel's use of exclusivity or 'fidelity' rebates.

In setting aside the General Court's judgment, the ECJ has clarified that:

  • during the course of an investigation, a dominant firm is able to present evidence that its use of exclusivity rebates is not capable of foreclosing competitors;
  • where such evidence is presented, the Commission is required to undertake an analysis of the firm's capacity to foreclose; and
  • even if the use of exclusivity rebates does give rise to foreclosure concerns, a dominant firm remains able to present evidence that its conduct is capable of objective justification.

In addition, the ECJ has confirmed the existence of a broad approach to the extraterritoriality of EU competition law.

This alert explores these aspects in more detail, and considers the possible implications of the judgment for competition law enforcement in the EU.

The Commission decision

Intel is a US-based company that supplies a range of technology products, including certain microprocessors (CPUs).

In May 2004, the Commission opened an investigation into Intel, focussing on suspected abuses of dominance following complaints made by Advanced Micro Devices (AMD), a direct competitor of Intel in relation to the supply of CPUs.

In May 2009, the Commission closed its investigation, and found that Intel had abused its dominant position. The Commission imposed a (then) record fine of €1.06 billion upon Intel for its abusive conduct.

In relation to dominance, the Commission considered that, from 2001 to 2007, Intel held a share of around 70% of the market for the worldwide supply of x86 CPUs (the "x86 CPU market"). During this time, the only meaningful competitor Intel faced was AMD.

In view of Intel's high market shares, and the high barriers to entry and expansion, the Commission concluded that Intel enjoyed a dominant position in the x86 CPU market from at least October 2002 to December 2007.

The Commission held that Intel had abused this dominant position through its use of:

  • Conditional rebates: the Commission found that Intel had awarded rebates to four strategically important original equipment manufacturers ("OEMs"). These rebates were de facto conditional upon the OEMs purchasing all (or almost all) of their requirements for x86 CPUs from Intel. The Commission also found that Intel had made payments to a European retailer, with the payments conditional upon the retailer exclusively selling computers containing Intel's x86 CPUs. The Commission held that the conditional OEM rebates were 'fidelity rebates'[1] (with the conditional payments to the retailer having the equivalent effect of 'fidelity rebates'), and were not capable of being objectively justified. This was on the basis that the rebates restricted the choices of the OEMs and the retailer.
  • In view of the existing EU case law, given the absence of objective justification, these 'fidelity rebates' in themselves constituted an abuse of dominance.[2] However, in view of Intel's submissions, the Commission undertook a specific analysis of the effects of the rebates in question. For these purposes, the Commission applied the 'As Efficient Competitor' test detailed in its guidance on enforcement priorities[3] (the 'AEC Methodology') this sought to ascertain whether a competitor that was 'as efficient' as Intel (i.e. in terms of supplying x86 CPUs) would be foreclosed from the market.
  • Using the AEC Methodology, the Commission held that Intel's 'fidelity rebates' were capable of causing foreclosure, leading to consumer harm.
  • 'Naked' restrictions: the Commission found that Intel had made payments to three OEMs which were conditional upon the OEMs restricting the commercialisation of specific products that utilised AMD CPUs. As a consequence, these OEMs ceased the commercialisation of the products, resulting in less choice for consumers, and competitive harm. The Commission held that these restrictions were incapable of objective justification.

Moreover, the Commission held that, while the each of the arrangements constituted an abuse in and of itself, the arrangements formed part of an overall strategy, which had the goal of foreclosing AMD from the x86 CPU market.

Accordingly, the Commission concluded that the arrangements formed part of a single continuous infringement of EU competition law, and took the length of this infringement into account when calculating the level of the fine imposed upon Intel.

The General Court judgment

Intel subsequently challenged the Commission's decision before the General Court on several grounds, including that the Commission:

  • failed to analyse whether Intel's arrangements were implemented in the EU and/or had an immediate, substantial and foreseeable effect within the EU;
  • erred in law by finding that the conditional rebates were abusive per se, and that there was no need to establish an actual capability to foreclose competitors;
  • made numerous errors in applying the AEC Methodology, and failed to address evidence relevant to the effects of Intel's discounts; and
  • failed to prove that Intel had engaged in a long-term strategy to foreclose competitors.

The General Court dismissed the appeal, and upheld the Commission's decision.

Extraterritoriality of EU competition law

In challenging the Commission's jurisdiction to investigate certain arrangements involving entities located outside of the European Economic Area (the 'EEA'), Intel argued that to be able to assert jurisdiction over conduct involving trade with non-EEA countries, the Commission was required to establish:

  • that implementation of the arrangements had taken place within the EEA (the 'Implementation Test'[4]); and
  • that it is foreseeable that the effects of the arrangements will have an immediate and substantial effect in the EEA (the 'Qualified Effects Test'[5]).

The General Court rejected this argument, and held that the Implementation Test and the Qualified Effects Test were alternative - rather than cumulative bases upon which the Commission was able to establish jurisdiction[6].

In any event, the General Court noted that it considered that Intel's conduct satisfied both tests.

Rebates as an abuse of dominance

The General Court also agreed with the Commission's legal analysis in respect of conditional rebates. In so doing, the General Court distinguished three categories of rebates, namely:

  • Quantity rebates: being rebates linked solely to the volume of purchases made from the dominant firm, which are generally considered not to have a foreclosure effect[7].
  • Exclusivity rebates: being rebates which are conditional on customers obtaining all or most of their requirements from the dominant firm. The General Court noted that such rebates would infringe EU competition law, unless it could be shown that there was an objective justification for their use.
  • Third category rebates: being rebates where the incentive is not directly linked to a condition of (near) exclusive supply by the dominant firm, but where the mechanism for granting the rebate may nevertheless have a 'fidelity-building effect'. The General Court considered that such rebate systems would need to be assessed on a case-by-case basis, having regard to all the circumstances.

Having regard to these categories, the General Court found that Intel's conditional rebates (and payments) were examples of (or equivalent to) exclusivity rebates.

The General Court found that exclusivity rebates granted by a dominant firm are, by their very nature, capable of distorting competition and foreclosing competitors.

Accordingly, when applying EU competition law to exclusivity rebates, the General Court held that there was no need to assess all of the circumstances, nor to review the Commission's application of the AEC Methodology.

Instead, the General Court held that there effectively existed a rebuttable presumption that the grant of exclusivity rebates by a dominant player is abusive. This presumption is capable of rebuttal where it can be demonstrated that the rebate scheme in question is objectively justified.

However, the General Court held that Intel had not presented any arguments in relation to objective justification[8].

Long-term strategy to foreclose competitors

In rejecting Intel's challenge, the General Court held that, in seeking to establish the existence of an overall plan, the Commission was not required to produce direct evidence of a coherent anti-competitive plan.

Instead, it was possible for the Commission to demonstrate the existence of such a plan by reference to a body of evidence[9].

In this context, the General Court placed particular weight upon the complementarity of the rebates and the naked restrictions, and the fact that Intel had implicitly sought to conceal the majority of these arrangements, including by using "unwritten anti-competitive clauses which did not appear in the written contracts", and "written terms which indicated the opposite of what was actually agreed".

The ECJ judgment

In appealing the General Court judgment, Intel advanced several grounds of appeal, including that the General Court:

  • applied the wrong legal standard to assess the legality of Intel's conduct;
  • erred in law in its legal characterisation of Intel's rebates as 'exclusivity rebates'; and
  • incorrectly established the Commission's jurisdiction to apply EU competition law to Intel's arrangements with Lenovo, a company based in China, in 2006 and 2007.

Extraterritoriality of EU competition law

In relation to Intel's arguments in respect of the Commission's jurisdiction, the ECJ observed that the Implementation Test and the Qualified Effects Test pursued the same objective the prevention of conduct which, while not adopted within the EU, has anti-competitive effects within the EU.

Accordingly, the ECJ confirmed that the Commission was able to establish jurisdiction on the basis of either test being satisfied, and dismissed Intel's arguments on jurisdiction.

Rebates as an abuse of dominance

The ECJ reiterated that, while a dominant firm has a special responsibility not to allow its conduct to impair competition, EU competition does not prevent a dominant firm from competing 'on the merits'. Such competition may result in less efficient competitors being marginalised, or exiting the market, on the basis that these competitors' offerings are less attractive to consumers.

Accordingly, the ECJ confirmed that "not every exclusionary effect is necessarily detrimental to competition"[10].

Having regard to previous EU case law, the ECJ provided an additional clarification that, while the grant of exclusivity rebates by a dominant firm gives rise to a presumption of an abuse, it remains open to the dominant firm to submit, on the basis of supporting evidence, that its conduct was "not capable of restricting competition and, in particular, of producing the alleged foreclosure effects"[11].

In such circumstances, the Commission is then required to undertake an analysis of the firm's capacity to foreclose, having regard to:

  • the extent of the firm's dominant position (e.g., 'merely' dominant, or supra-dominant);
  • the share of the market covered by the arrangements in question, as well as the conditions and arrangements for granting the rebates, their duration, and their amount; and
  • the possible existence of a strategy aimed at excluding competitors that are at least as efficient as the dominant firm.

In addition, the ECJ confirmed that if the rebates do give rise to concerns in relation to foreclosure effects, it remains open for a dominant firm to submit that its conduct is objectively justified. The ECJ noted that this assessment can only be conducted following an analysis of whether the conduct has the capacity to foreclose competitors that are at least as efficient as the dominant firm.

Against this background, the ECJ noted that the Commission had carried out an in-depth analysis using the AEC Methodology, and found that, by doing so, Intel's conduct was capable of having a foreclosure effect.

On this basis, the ECJ concluded that the AEC Methodology 'played an important role in the Commission's assessment of whether the rebate scheme... was capable of having foreclosure effects on as efficient competitors'[12].

In the circumstances, the ECJ held that the General Court was required to examine all of Intel's arguments concerning the AEC Methodology, and that it had failed to consider the arguments alleging errors in relation to this aspect of the Commission's decision.

In view of this failure, the ECJ concluded that the General Court judgment should be set aside, with the case referred back to the General Court.

What now for the assessment of exclusivity rebates under EU competition law?

While the ECJ's judgment provides welcome guidance, Intel will still be required to persuade the General Court that its conduct did not constitute an abuse of dominance in the circumstances.

In this context, the ECJ's judgment serves to highlight the error of the General Court's previous analysis in relation to rebates; the fact that the General Court's judgment insofar as it relates to the 'naked restrictions' was not subject to appeal suggests that these aspects could still prove problematic for Intel.

More broadly, the ECJ's judgment serves to clarify, and arguably, unify, previous aspects of EU case law in relation to the use of exclusivity rebates. In so doing, it is notable that the ECJ has not sought to prescribe the nature of the analysis to be undertaken by the Commission in relation to assessing whether a competitor is 'as efficient'.

The ECJ's clarifications may also be expected to be carefully considered by the Commission case teams currently investigating various alleged abuses in relation to the use of exclusivity rebates, so as to seek to ensure that any subsequent infringement decisions adopted by the Commission are robustly reasoned and evidenced, having regard to firm's capacity to foreclose, as may be required.

Footnotes

[1] Case 85/76 Hoffmann-La Roche v Commission EU:C:1979:36.
[2] Case 85/76 Hoffmann-La Roche v Commission EU:C:1979:36.
[3] Communication from the Commission - Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings.
[4] Case C-89/95 Ahlström Osakeytiö and Others v Commission ECLI:EU:C:1988:447.
[5] Case T-102/96 Gencor v Commission ECLI:EU:T:1999:65.
[6] Case T-286/09 Intel v Commission ECLI:EU:T:2014:54, paragraph 236.
[7] Case T-286/09 Intel v Commission ECLI:EU:T:2014:54, paragraph 75.
[8] Case T-286/09 Intel v Commission ECLI:EU:T:2014:54, paragraph 94.
[9] Case T-286/09 Intel v Commission ECLI:EU:T:2014:54, paragraph 1525.
[10] Case C-413/14 Intel Corporation Inc. v Commission, ECLI:EU:C:2017:632, paragraph 134.
[11] Case C-413/14 Intel Corporation Inc. v Commission, ECLI:EU:C:2017:632, paragraph 138.
[12] Case C-413/14 Intel Corporation Inc. v Commission, ECLI:EU:C:2017:632, paragraph 143.


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