The General Court's Intel Decision—"Back to the Seventies"

by Wilson Sonsini Goodrich & Rosati
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On June 12, 2014, the General Court in Luxembourg upheld the European Commission's 2009 (record) fine of €1.06 billion against Intel for abusing its dominant position in the market for x86 CPU microprocessors by offering exclusivity rebates that excluded its competitor AMD. Intel's arguments against the decision were quashed in their entirety. The decision effectively holds that loyalty or fidelity rebates by a dominant firm are unlawful, per se, in Europe.

Background

The Traditional "Formalistic" Approach

Unlike in the United States, antitrust enforcement against rebate schemes has a long tradition in Europe. Under the traditional "formalistic" approach, in broad terms, rebates have been found to infringe Article 102 of the Treaty on the Functioning of the European Union (TFEU) when given in exchange for customer loyalty or when they are found to induce loyalty to the dominant undertaking. In Hoffmann La Roche (1979), the Court of Justice held that rebates that are "conditional on the customer's obtaining all or most of its requirements, whether the quantity of its purchases be large or small, from the undertaking in a dominant position" will infringe Article 102 TFEU, even where such a rebate has been expressly requested by the customer. In British Airways, the Commission condemned a scheme whereby British Airways (BA) granted rebates to travel agents in the form of incentives based on the extent to which agents increased their sales of BA tickets from one year to the next. The General Court upheld the decision on appeal, stating that the (target) rebates "must be regarded as tending essentially to remunerate sales growth of BA tickets from one reference period to another and thus reinforce the fidelity to BA of travel agents."

On the other hand, rebates linked solely to the quantity of purchases made from an undertaking in a dominant position in individual transactions were generally not considered to have the type of foreclosure effects prohibited by Article 102 TFEU. The General Court reaffirmed this principle in Tomra, stating that, "if increasing the quantity supplied results in lower costs for the supplier, the latter is entitled to pass on that reduction to the customer [...]. Quantity rebates are therefore deemed to reflect gains in efficiency and economies of scale."

The More Economic Approach

Interestingly, the Tomra judgment involved a Commission decision that predated the Commission's Article 102 Guidance Paper of February 2009 (guidance paper). The latter adopted a "more economic approach" and was intended to "provide greater clarity and predictability [in regards to] the general framework of analysis" used by the commission in determining whether to pursue cases under Article 102 TFEU.

The guidance paper acknowledged that conditional rebates can have actual or potential foreclosure effects similar to exclusive purchasing obligations only when they preclude equally efficient competitors from competing for the contestable part of demand by matching the dominant company's conditional discounts ("as-efficient competitor" or "AEC test"). The Commission explained that conditional rebates "may enable [the dominant company] to use the 'non-contestable' portion of the demand of each customer (that is to say, the amount that would be purchased by the customer from the dominant undertaking in any event) as leverage to decrease the price to be paid for the 'contestable' portion of demand" that the customer might prefer to purchase from other suppliers. While the guidance paper came too late for Tomra, the AEC test was largely applied in the Commission's Intel decision. At the time, commentators thus spoke of an "evolving approach" moving EU antitrust enforcement (broadly) in the right direction of an effects-based analysis on a case-by-case basis.

The European Commission's Decision

The Commission's Intel investigation was triggered in 2000 by a complaint filed by AMD, Intel's only worldwide competitor at the time. After a lengthy (and highly controversial) investigation, in May 2009, the commission found that Intel violated Article 102 TFEU by abusing its dominant position in two specific ways.

  • First, by offering rebates to a range of PC manufacturers and to a PC retailer, which were conditional on buying all or almost all of their microprocessors from Intel ("exclusivity rebates").
  • Second, by making payments to PC manufacturers to halt or delay the launch of products containing its competitor's microprocessors (so-called "naked restrictions").

Applying the AEC test for each of the five customers subject to the investigation (including Dell, HP, and Lenovo), the Commission concluded that an equally efficient rival could not compensate them for the lost discounts on these relatively small numbers of contestable microprocessors without pricing them below Intel's costs.

Furthermore, in its fine decision, the Commission rejected several of Intel's arguments aimed at showing that the rebate practices in question were in fact lacking any foreclosure effects (or even that they covered only certain products) by merely noting that "abuse" was an "objective concept," as illustrated by the AEC test, regardless of the actual effects on existing competitors.

The General Court's Ruling

The General Court upheld the Commission's findings that the rebates granted by Intel were conditioned on exclusivity or quasi-exclusivity ("exclusivity rebates") and that the payments made by Intel to the PC manufacturers were conditioned on those manufacturers' canceling or postponing the distribution of products equipped with AMD processors ("naked restrictions") and as such amounted to an abuse.

Exclusivity Rebates

By withdrawing to the traditional approach described above and repeatedly citing the precedents established in, inter alia, Hoffmann La Roche and Tomra, the General Court based its analysis of Intel's rebate practices on the distinction of three categories of rebates, namely (i) quantity rebates, (ii) fidelity or exclusivity rebates, and (iii) rebates having a fidelity-building effect.

The General Court held that, in line with established case law, only rebates falling within the third category warranted the showing of effects on a case-by-case basis—while "exclusivity rebates granted by an undertaking in a dominant position are by their very nature capable of restricting competition." Accordingly, for exclusivity rebates, the court held that "the Commission was not required to make an assessment of the circumstances of the case in order to show that rebates actually or potentially had the effect of foreclosing competitors from the market."

The General Court also rejected the applicability of the AEC test. In this context, the court noted that "a foreclosure effect occurs not only where access to the market is made impossible for competitors. Indeed, it is sufficient that that access be made more difficult." However, the AEC test "only makes it possible to verify the hypothesis that access to the market has been made impossible and not to rule out the possibility that it has been made more difficult."

In the court's view, "it is the condition of exclusive or quasi-exclusive supply to which its grant is subject rather than the amount of the rebate which makes it abusive."

Naked Restrictions

With regard to the "naked restrictions," the General Court found that the payments in question were capable of making access to the market more difficult for AMD. It also found that Intel pursued an anti-competitive object with these practices, which fell outside the scope of competition on the merits and amounted to an abuse of a dominant position.

Implications

For the adoption of rebate policies by (arguably) dominant companies, a cautious formalistic approach currently seems advisable favoring quantity rebates and avoiding reliance on a "more economic" approach—with the Commission's Article 102 guidance paper reduced to a role of merely informing the calculation of the quantity rebates to be applied in a non-discriminatory fashion.

In general, for companies with (arguably) high market shares in Europe, the decision sends (or rather repeats) a clear message: Companies faced with an Article 102 investigation in Brussels may be better off trying to settle their case with the Commission and avoid a court fight with limited chances of success—further strengthening the Commission's leverage in settlement "negotiations."

It is regrettable that the Intel case, so far (i.e., subject to any reversal by the European Court of Justice), could be viewed as yet another example of the unfortunate combination between a rather unclear legal standard under Article 102 and possibly draconian consequences for getting it wrong.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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