by Nuno Calaim Lourenço, Managing Associate at SRS Advogados

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On 19 April 2018, the European Court of Justice (ECJ) delivered its judgment in the MEO – Serviços de Comunicações e Multimedia S.A. v. Competition Authority (C-525/16) case. The judgment provides important criteria of analysis with regard to the constituent elements of an abuse of a dominant position by discrimination, under the regime of Article 102 (c) of the Treaty on the Functioning of the European Union (TFEU) and advances the proposition that such conduct is not subject to a per se prohibition rule. The judgment clarifies, in particular, that in the case of second-degree price discrimination (directed at customers in a downstream market with whom the dominant undertaking does not compete) an infringement of competition rules only occurs if the discrimination entails actual or potential anti-competitive effects that may distort competition between downstream operators. In other words, it is the effective competitive disadvantage that results from discrimination, which must be demonstrated by reference to the actual circumstances of the case, including the impact on the costs, income and profitability structures of the affected party – rather than the practice of discrimination considered in abstract – which constitutes the criterion for the existence of an abuse. Although it does not create any ‘safe harbours’, this important clarification allows dominant companies greater flexibility in adapting their pricing policies to different market realities and does not coerce them into applying uniform tariffs.

Background to the proceedings

Cooperativa de Gestão dos Direitos dos Artistas Intérpretes ou Executantes – GDA (Cooperative for the Management of the Rights of Performing Artists, Portugal) is a non-profit collecting society, which collectively manages the rights of artists and performers. It manages the rights related to the copyright of its members and of the members of similar foreign collecting societies with which it has concluded representation agreements and/or reciprocal agreements. In this context, GDA’s principal activity is to collect the royalties, which arise from the use of the related rights, and to pay them over to the rights holders. Although it does not have a legal monopoly, it is now the only body entrusted with the collective management of the related rights of artists active in Portugal. Among the undertakings which make use of the repertoires of GDA’s members are entities which provide television signal transmission service offerings, and television content, to consumers for payment of a given sum. The applicant, MEO, is one of those service providers and one of GDA’s customers. Between 2008 and 2014 GDA applied three different tariffs to such providers, in the context of its wholesale offering, and between 2010 and 2013, GDA applied those tariffs simultaneously.

In June 2014, PT Comunicações S.A., the legal entity that preceded MEO, lodged a complaint with the Competition Authority alleging that GDA had abused its dominant position. MEO argued that GDA had been charging excessive prices for the use of the related rights of its performing artists and, in addition, had applied different terms and conditions from those which it had applied to another of its customers, NOS Comunicações SA (NOS). In a decision from March 2016, the AdC closed the case, considering that the difference in the tariffs applied to the different retail service providers who provided access to the television service and the average costs incurred by MEO and NOS in the scope of the wholesale service in question, did not lead to the conclusion that there was an effective restriction of competition, resulting in particular from a deterioration of MEO’s competitive position. According to the AdC, the fact that MEO’s market share continued to grow in the period under analysis was symptomatic that such deterioration had not occurred. The AdC therefore proposed an interpretation according to which mere discriminatory conduct on the part of an undertaking in a dominant position cannot ipso facto entail a breach of Article 102 (c) of the TFEU.

MEO appealed against the AdC’s decision to close the case, arguing that it had misinterpreted Article 102(2)(c) of the TFEU, insofar as, rather than assessing whether any competitive disadvantage — as interpreted in the case-law of the Court — had been created, it had examined whether there had been any significant and quantifiable distortion of competition.

On appeal of the decision by the AdC, the Court of Competition, Regulation and Supervision of Santarém decided to address a series of questions related to the concept of competitive disadvantage to the ECJ. Essentially, the questions sought clarification as to whether, in order to decide on the existence of a relevant competitive disadvantage, it was necessary to examine the specific effects of discrimination on the undertaking concerned and whether the seriousness of those effects should be considered as a relevant criterion.

The ECJ Judgment

The judgment stated the following main propositions:

• Second-degree price discrimination by a dominant company is only abusive and contrary to the regime in Article 102 (c) of the TFEU, when it places the trading partner in a position of ´competitive disadvantage`. In cases of price discrimination between different downstream trading partners, it is required that the conduct of the dominant undertaking distorts or tends to distort competition between those operators. The mere presence of an immediate disadvantage affecting undertakings to which higher prices were charged for an equivalent supply does not mean that competition is distorted or is likely to be distorted.

 

• The existence of anti-competitive effects must be analysed ´taking into account all the circumstances of the case`. In this context, the following aspects should be considered: ´the dominant position of the company, the negotiating power with regards to the tariffs, the conditions and arrangements for charging those tariffs, their duration and their amount, and the possible existence of a strategy aiming to exclude from the downstream market one of its trade partners which is at least as efficient as its competitors`.

 

• However, proof of an actual and quantifiable deterioration of the position of the trading partners, individually considered, is not required. For that purpose, it is sufficient to show that the differential treatment has had a significant influence on the economic interests of the party concerned (on its costs, income, profitability or any other relevant interest) and that that circumstance has appreciably affected its competitive position vis-à-vis its competitors. On the contrary, it is legitimate to conclude, in cases where the impact on the costs, income and profitability structures of the affected operator is insignificant, that the discrimination is not capable of having any effect on the competitive position of that operator. According to the Court of Justice, however, there is no justification for setting a de minimis threshold for the purpose of establishing an abuse of a dominant position.

 

• In cases of second-degree discrimination – where the application of differentiated tariffs only affects the downstream market in which the dominant undertaking is not present – the dominant undertaking has, in principle, no interest in excluding one of its trading partners from the downstream market.

On the basis of the facts of the case, the ECJ concluded that the tariff amounts charged to MEO represented but a residual percentage of the total costs incurred by it in connection with the retail service of access to the pay-TV signal and that the discrimination would have had a limited impact on its income and profitability. Moreover, it was not established that GDA had pursued any strategy to exclude MEO from the market. Quite the contrary, since the parties turned to arbitration for lack of agreement on the amount of the tariffs, GDA would only have applied the tariff previously fixed by the arbitration decision.

The implications

The doctrine advanced by this judgment is rooted in the most recent jurisprudence from the ECJ, which has argued, as a pre-condition to conclude on the existence of an abusive conduct, the need to, at least, establish a potential competition distortion effect. It is a decision that represents a further step, in the Court’s case law (of which the recent Intel judgment is quite paradigmatic) towards the rejection of the formal per se prohibition approach and the embracing of the ´effects based approach´.

The more pivotal implication that can be drawn from this judgment is that price discrimination cannot be considered per se prohibited. Article 102 of the TFEU does not require holders of a monopoly or a dominant position to apply uniform tariffs to their trading partners – tariff discrimination can only fall under the prohibition regime if competition between those partners is distorted by the discriminatory behaviour. In this regard, it is not sufficient for the affected party to suffer an immediate disadvantage by being forced to pay a higher tariff. A tangible and significant impact is required.

The ECJ judgment of 2012 in the Post Danmark case had already identified the approach to first-degree discriminatory conduct, i.e. discrimination that affects competition between the dominant company and its direct competitors. It confirmed that the discriminatory conduct cannot automatically constitute an abuse and that it is necessary, as a condition for concluding whether conduct is in fact capable of affecting competition, to consider all the relevant circumstances of the case. The MEO/GDA judgment confirms this doctrine and clarifies that the same principles of analysis apply equally to cases of second-degree discrimination.

The judgment makes it clear that the ECJ’s approach in Intel has broader implications than those initially expected (in addition to providing guidance on how to approach loyalty rebates) and that the criterion of the ´equally efficient competitor´ may, in the end, emerge in European jurisprudence as the relevant legal criterion applicable to all exclusionary abuses.

In conclusion, although it does not provide exact and arithmetical rules for assessing the legality of price discrimination, the judgment makes it possible to dispel the mistaken belief that dominant undertakings are required to apply uniform tariffs. It also creates an analytical framework that enables dominant undertakings to carry out a more objective and informed self-evaluation exercise regarding their pricing policies and to be able to implement more efficient and effective tariffs directed at larger customers, to whom the product or service provided represents a less significant portion of their total costs.

Picture credits: I thought… by The unPixie.