Posted by Chantal Lavoie on 30 December 2017
The request for a preliminary ruling in MEO – Serviços de Comunicaçoes e Multimédia SA v Autoridade da Concorrência provides a rare opportunity for the Court of Justice to rule on the elements needed for discriminatory pricing to constitute an abuse under article 102(c) TFEU. In his opinion issued on 20 December 2017, Advocate General Wahl suggests that, in relation to secondary line discriminatory pricing, it is the ‘competitive disadvantage’ resulting from the discrimination - and not the discrimination as such - which is key to a finding of abuse and that evidence of concrete effects is necessary.
The case arose from a decision of the Portuguese competition authority not to open proceedings against GDA (Cooperativa de Gestão dos Direitos dos Artistas Intérpretes Ou Executantes) following a complaint received by MEO (Serviços de Comunicaçoes e Multimédia SA). GDA is a cooperative set up to manage collectively the rights of artists and interprets. It collects royalties arising from the exercise of neighbouring rights and distributes these amounts to rights holders.
MEO is a provider of television services which uses the repertoire of members of GDA. GDA grants licenses to MEO for the distribution of its members’ protected works. Between 2010 and 2013, GDA applied differentiated license tariffs to providers such as MEO. MEO complained to the Portuguese Competition Authority that the tariffs applied by GDA were discriminatory. In particular, MEO argued that GDA imposed more advantageous tariffs to NOS, a direct competitor of MEO. The Portuguese Competition Authority closed the matter without opening proceedings against GDA on the grounds that even if GDA were found to hold a dominant position and to have applied discriminatory pricing, there is no evidence that such discriminatory pricing has affected the competitive position of MEO. In fact, MEO’s market share rose from 25% to 40% during the period in question, whereas NOS’ share diminished from 60% to 45%.
MEO appealed to the Portuguese Competition Tribunal which stayed proceedings and referred to the Court of Justice a number of questions regarding the interpretation of article 102(c) TFEU. The key question at issue is whether the criteria of ‘competitive disadvantage’ required to show an infringement under article 102(c) TFEU can be presumed from the existence of discriminatory pricing or whether it must be shown concretely that the competitive capacity of MEO was reduced as a result of the discriminatory pricing.
Article 102(c) TFEU reads as follows:
Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.
Such abuse may, in particular, consist in: (…)
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
Opinion of Advocate General Wahl
Conditions for discriminatory pricing to constitute an abuse
Advocate General Wahl confirms that discriminatory pricing in of itself does not constitute an abuse under article 102 TFEU. On the contrary, discriminatory pricing can provide an important stimulus to competition.
Wahl’s key conclusions are as follows:
- Article 102(c) TFEU does not impose on dominant firms an obligation to charge uniform prices to its business partners. Discriminatory pricing applied by a dominant firm to its upstream or downstream business partners (so-called secondary line discrimination) will only constitute an abuse if it is shown to have the effect of distorting competition between the affected firms.
- An actual or potential restriction of competition cannot be presumed under article 102 TFEU.
- Article 102(c) TFEU is related mainly to secondary line discrimination with which this case is concerned.
- As confirmed in the judgments British Airways v Commission and Clearstream v Commission, behaviour will fall under article 102(c) TFEU if the dominant firm discriminates between business partners and if this discrimination “tends, having regard to the whole of the circumstances of the case, to lead to a distortion of competition between those business partners” (para. 145, British Airways v Commission).
- There is a distinction between a ‘competitive disadvantage’ and ‘disadvantage between competitors’. Article 102 TFEU is concerned with the former not the latter.
- As regards the interpretation of “competitive disadvantage”, it is necessary to show that the disadvantage is sufficiently significant to have an effect on the commercial position of the discriminated firm. This requires taking into account all the circumstances of the case and considering whether the discriminatory pricing is concretely capable of affecting negatively competition on the market. However, there is no need to show an actual quantifiable (or de minimis) deterioration in the competitive position of the business partners.
- In assessing the actual or potential restrictive effects of the discriminatory pricing, the following elements should be taken into account: (i) the nature and relative significance of the difference in pricing (ii) the importance of the costs of the goods/services supplied by the dominant firm compared to the total costs incurred by the disadvantaged business partner. If the price imposed by the dominant firm represents a significant portion of the total costs of the disadvantaged business partner, then the discriminatory pricing may impact not only on its profitability but also on its competitive position. In this case, the Portuguese Competition Authority has found that the costs arising from GDA’s tariff were not significant.
Preliminary conditions: Dominant position? Equivalent conditions?
As regards the preliminary conditions to be met under article 102, Wahl also expressed the following views:
- GDA may not have a dominant position as it may not be able to act independently of its business partners. This is due in particular to the strong buyer power of clients such as MEO and NOS on whom it is strongly dependent and to national law which requires parties to resort to arbitrage in the event price negotiations with GDA fail; and
- the tariffs imposed on MEO and NOS may not relate to “equivalent transactions” as required under 102(c) TFEU given that they were set under different conditions, in particular the tariffs were established at different times and the tariff applicable to MEO was set by arbitration decision.
Stand-alone secondary line discriminatory pricing cases are rare under article 102 TFEU. Wahl’s opinion confirms that the bar is set very high for such cases to succeed. In practice, this should not come as a surprise. A literal reading of Article 102(c) TFEU makes clear that discriminatory pricing cannot constitute on its own an abuse and that the words ‘thereby placing it at a competitive disadvantage’ must be given their full meaning. Wahl’s opinion is valuable in many respects:
- in his suggestion that a competitive disadvantage cannot be presumed from the mere existence of discriminatory pricing. Wahl therefore rejects a form-based approach and emphasises the need to take into account all the circumstances of the case in showing the actual or potential effects on competition.
- in his interpretation of ‘competitive disadvantage’ which focuses on the notion of competitiveness as different from profitability. This requires an assessment not only of the isolated effect of the discriminatory pricing on the disfavoured firm but also an assessment of the impact on its competitive positioning on the market. Whilst discriminatory pricing will have a relative impact on the profitability of the disfavoured firm, this does not necessarily imply an impact on its competitive position. The latter will depend on the significance of the competitive disadvantage suffered by the disfavoured firm relative to the disfavoured firm’s total costs.
- in his view that the competitive disadvantage must be sufficiently significant and that discriminatory treatment having very minor or no effect on competition should not amount to an abuse under article 102(c) TFEU.
It remains to be seen whether the Court of Justice will rule in line with Wahl’s opinion. If so, this will be a further confirmation of the Court’s increasing preference for an effects-based approach in article 102 cases. It will also confirm the very limited scope of application of article 102(c) TFEU in relation to secondary line discriminatory pricing. Nevertheless, it is hoped that the Court will also provide even further clarification regarding the evidence required to show the extent of the competitive disadvantage. In particular, is it sufficient to show that the discriminatory pricing represents a significant portion of the total costs of the disfavoured firm, thereby implying the existence of a competitive disadvantage? What constitutes a significant portion? Is it necessary in addition to show concretely the impact on the competitive position of the disfavoured firm? If so, does this impact need to be sufficiently significant as Wahl suggests in his opinion? How does one measure a sufficiently significant competitive disadvantage?