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EU Court’s Analysis of “Competitive Disadvantage” in Rare Price Discrimination Case

On 19 April 2018, the Court of Justice of the EU (CJEU) issued its judgment in MEO vs Autoridade da Concorrência, providing guidance as to what amounts to “competitive disadvantage”, an important element required to show abusive price discrimination under Article 102 of the Treaty on the Functioning of the EU (TFEU).  The CJEU found that there is no need for proof of “actual, quantifiable deterioration in the competitive situation” of the customer, if an analysis of the relevant circumstances demonstrates that discrimination distorts competition.

Background

In 2014, MEO (Serviços de Comunicações e Multimédia, a TV broadcaster) complained that GDA (Cooperativa de Gestão dos Direitos dos Artistas Intérpretes Ou Executantes, a collecting society) had abused its dominant position by charging MEO a higher royalty rate for audio-visual content than its competitor NOS (NOS Comunicações SA).  Looking at MEO’s average costs and profitability, the Portuguese competition authority concluded that the rate differentiation had no restrictive effects on MEO’s competitive position, and closed its investigation.

On appeal, the Portuguese Competition, Regulation and Supervision Court referred questions to the CJEU regarding the competitive advantage concept.  In essence, the questions asked whether it is necessary to analyse the specific effects of price discrimination on the undertaking affected to establish that there is a competitive disadvantage, and whether the seriousness of those effects should be considered.

Discriminatory pricing between a dominant company’s customers

This case is about second-degree price discrimination, i.e., discrimination by an allegedly dominant company (GDA) between customers active in a market (MEO and NOS) in which the respondent entity is not active.  There are relatively few cases considering this type of potential abuse.  As the CJEU expressly noted in its judgment, where price discrimination only concerns a downstream market in which the respondent entity is not active, it would appear to have no interest in excluding one of its customers from that downstream market.  Most of the limited number of discrimination cases relate to first-degree price discrimination, i.e., discrimination by a vertically-integrated entity against its downstream rivals (foreclosure effects).

Article 102(c) TFEU prohibits dominant entities from “applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage.”  This case turned on whether MEO (i.e., the customer paying the higher price) was placed at a “competitive disadvantage” vis-à-vis NOS by GDA’s rates.

Analysing competitive advantage taking into account all of the relevant circumstances

Until now it has not been clear whether the existence of a “competitive disadvantage” needs to be demonstrated.  Prior to this judgment, the CJEU had indicated that competition authorities must show that the behaviour “tends to distort [the] competitive relationship, in other words, to hinder the competitive position of some of the business partners of [the allegedly dominant] undertaking in relation to the others” (British Airways).  In this case, the CJEU takes an approach consistent with its judgment in Intel, finding that “it is necessary to examine all the relevant circumstances in order to determine whether price competition produces or is capable of producing a competitive disadvantage”.  The CJEU goes on to clarify that there is no need to establish “actual, quantifiable deterioration in the competitive position of the companies taken individually.”  The circumstances to be considered include the extent of the undertaking’s dominance, the negotiating power of the downstream operator, the duration and amount of the tariffs and the (potential exclusionary) practice directed towards the downstream operator “which is at least as efficient as its competitors” (the “AEC test”).  As a result, the CJEU adds price discrimination to the types of abuse, including rebates (Intel), other anti-competitive pricing (Post Danmark I) and margin squeeze (TeliaSonera or Deutsche Telekom), for which the AEC test is relevant.

Seriousness of the competitive advantage

Finally, the CJEU confirms that there is no de minimis threshold in relation to abusive practices.  However in assessing the relevant circumstances in the present case – particularly the royalties paid by MEO – the CJEU found that the discrimination had a limited effect on MEO’s profits (because the royalties accounted for a low percentage of MEO’s total costs).

That said, the CJEU concludes that, where the effect is “not significant”, it may be deduced “in some circumstances” that the price discrimination is not capable of having an effect on the customer’s competitive position.  This can be read as a form of “materiality” threshold regarding the level of the effect on the customer(s) resulting from discriminatory pricing.  Accordingly, where the price paid by the customer(s) to a dominant entity represents a material proportion of the customer’s total costs (of the products or services supplied downstream), the discrimination is more likely to be held to create a competitive disadvantage for the disfavoured customer.

Next Steps

According to the CJEU, discriminatory pricing is not per se  abusive – at least where a dominant entity is not active on the same market as its customers.  Further, the CJEU seems to suggest that a price difference between customers of a non-significant input would likely not raise concerns under Article 102 TFEU.  The Competition, Regulation and Supervision Court in Portugal will now have to apply the CJEU’s findings to the facts of the case.  Given the CJEU’s suggestion that the discrimination in issue in the case had only a limited effect on MEO’s profits, it is plausible that the national court will find that the royalty differential was not abusive under Article 102 TFEU.

© 2022 Covington & Burling LLPNational Law Review, Volume VIII, Number 113
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About this Author

Jennifer Boudet, Covington Burling, technology and communications attorney
Associate

Jennifer Boudet is an associate in the Antitrust and Competition team advising clients in a variety of sectors, including in particular technology and communications, and life sciences.

Ms. Boudet advises clients across a broad range of EU and national competition law matters, with specific experience in multi-jurisdictional merger control filings, Articles 101 and 102 cases, as well as regulatory issues.

32.2.545.7503
Miranda Cole, Covington, Intellectual property attorney
Partner

Miranda Cole is a partner based in Covington's Brussels and London offices. She specialises in competition law (merger control, abuse of dominance, vertical and collaborative arrangements and technology licences and other agreements). Chambers Global notes that she "takes a proactive, holistic approach" (2014).

Her practice has a particular focus on advising companies active in the technology, communications and media, software and ecommerce, aviation and life sciences sectors. She advises clients on the competition issues raised by IP, data and...

32-2-549-5264
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