On 27 March 2023, the European Commission (Commission) announced its intention to adopt detailed new guidelines on the application of Article 102 TFEU to exclusionary conduct. The Commission explained that “Article 102 TFEU is one of the few areas of European competition law where no Guidelines clarify its application. However, its enforcement is key to ensuring that competition works effectively and that consumers can reap the benefits of competitive markets.”
The only guidance relating to Article 102 TFEU dates back to 2008. This is high-level, focusing on how the Commission will prioritise conduct it chooses to investigate rather than delving into the detail of what would need to hold true for the Commission to consider a particular practice abusive. This contrasts with the approach taken in other areas, in particular Article 101 TFEU, where the Commission has issued and recently updated detailed guidance on its approach to various types of horizontal and vertical agreements. This is all the more surprising given that the fines for infringement of Article 102 TFEU are comparable to – and sometimes higher – than those imposed for Article 101 TFEU.
The evidential standard the Commission must meet to prove an infringement of Article 102 TFEU has also been the subject of extensive judicial challenge over the last 15 years, which has led to an important body of European court case law on the subject (in particular, the judgments in Intel (Case C-413/14 P and Case T-286/09 RENV), Qualcomm (Case T-235/18), Google (Android) (Case T-604/18), and Unilever (Case C-680/20)). Some officials have argued recently that the high evidential standard these judgments impose risks rendering Article 102 TFEU practically unenforceable.
Viewed in this context, it appears that the Commission is resolved to square the case law with its desire to ensure that Article 102 TFEU remains enforceable and effective. Until the final Guidelines are adopted, the Commission has: (i) made certain amendments to the 2008 Guidance, which provide some insight into the likely direction of travel; and (ii) published a Policy Brief providing further insight into the rationale for these changes. We consider and comment on the main elements in more detail below.
What effects must be proven to establish Article 102 TFEU infringement?
The Commission acknowledges that to establish an infringement of Article 102 TFEU on the basis of exclusionary conduct, some consideration of effects is required. Although the Commission has not proposed any changes to the 2008 Guidance – which generally refers to the need for such effects to be “likely” – the Policy Brief acknowledges that since then, the courts have used a number of different terms to describe the degree of probability of anti-competitive effects required to find an infringement (including “capable”, “potential” and “probable”).
The Commission’s view is that “despite this varied terminology, the applicable legal standard endorsed by the Union Courts and applied by the Commission must be understood as being one and the same”. It endorses “potential effects” as most suitable to capture the standard required. The Policy Brief expands on the Commission’s interpretation of the case law in terms of what this entails in practice:
- This is not a “simplistic or formalistic” standard. The Commission must show that anti-competitive effects are more than merely “hypothetical”.
- The Commission is not required to identify actual anti-competitive effects. It is only if a practice does not produce any form of effect on the market that it escapes Article 102 TFEU.
- The Commission must consider all relevant facts and circumstances, including the dominant company’s arguments that the conduct in question is not capable of having anti-competitive effects. The relevant facts and circumstances will vary case-by-case.
The notion of “anti-competitive foreclosure”
The 2008 Guidance explained that the Commission would normally investigate conduct under Article 102 TFEU where that conduct is “likely to lead to anti-competitive foreclosure”. The Guidance defines anti-competitive foreclosure as “a situation where effective access of actual or potential competitors to supplies or markets is hampered or eliminated as a result of conduct of the dominant undertaking whereby the dominant undertaking to be in a position to profitably increase prices to the detriment of consumers”.
The Commission has amended this definition in two respects:
- No need for full exclusion of competitors. Recent EU case law (in particular SEN and Unilever), as well as experience gained through its own enforcement practice, have prompted the Commission to clarify that the notion of “effective access of actual or potential competitors to supplies or markets” covers conduct that weakens an effective competitive structure, without necessarily leading to the full exclusion or marginalisation of competitors.
- No need for the dominant company to profit from the abusive conduct. The Commission notes that such a requirement would be paradoxical given that conduct does not need to be successful – i.e. produce actual anti-competitive effects – to be abusive.
The Commission has therefore amended the definition of anti-competitive foreclosure as follows: “a situation where the conduct of the dominant undertaking adversely impacts an effective competitive structure thus allowing the dominant undertaking to negatively influence, to its own advantage and to the detriment of consumers, the various parameters of competition, such as price, production, innovation, variety or quality of goods or service”.
The relevance of as-efficient competitors
The 2008 Guidance explained that the Commission would normally only intervene in relation to conduct that was capable of harming as-efficient competitors (AEC). However, it has recognised that an unduly strict application of this standard can lead to under enforcement, particularly in markets characterised by significant barriers to entry and expansion (e.g. due to economies of scale and/or network effects). In such markets, it is unlikely that smaller players will be able to achieve a similar cost structure to the dominant company but that does not mean that they are not attractive to consumers and might become serious challengers in the future. Accordingly, enforcement in these dynamic markets should aim to protect the competitive process as opposed to being based on a strict application of the AEC test.
To that end, the Policy Brief acknowledges that “in certain instances, genuine competition may also come from undertakings that are less efficient than the dominant firm. Thus, the competitive constraint that those competitors exert may also warrant protection under Article 102 TFEU. That may be the case in particular in markets where the emergence of as-efficient competitors may not be possible because of the “structure of the market” or where the relevant market is protected by significant barriers.” Accordingly, the Commission notes that “it is not appropriate, as regards price-based exclusionary conduct of a dominant undertaking, to pursue as a matter of priority only conduct that may lead to the market exit or the marginalisation of competitors that are as efficient as the dominant undertaking in terms of their cost structure.”
Paragraphs 23 and 24 of the 2008 Guidance have been amended to reflect the above.
The use of the as-efficient competitor test
Whether or not it is necessary to conduct an AEC test to prove an infringement of Article 102 TFEU has been one of the most hotly contested topics since the 2008 Guidance was published.
That Guidance explained that in relation to price-based exclusionary conduct (including conditional rebates, multi-product rebates, predatory pricing, and margin squeeze), the Commission would normally only intervene where the conduct concerned “has already been or is capable of hampering competition from competitors which are considered to be as efficient as the dominant undertaking.”
Since then, the EU courts have clarified that if a dominant company relies on the results of an AEC test to contest the Commission’s findings of potential anti-competitive effects, the Commission must consider those results and essentially conduct its own AEC test to support its conclusions. As most, if not all, dominant companies will raise the results of such a test in their defence, this essentially places a de facto obligation on the Commission to conduct such a test itself.
The Commission’s interpretation of this case law is – perhaps unsurprisingly – more nuanced. It considers that the EU courts support the use of the AEC test in predatory pricing and margin squeeze cases but as regards other practices, notably rebates, its use is “possible but not required to prove an abuse.”
In relation to its use in rebates cases specifically, the Commission distinguishes between its potential application to exclusivity vs. other rebates:
- As regards non-exclusivity rebates, the AEC test may be appropriate to prove anti-competitive effects depending on the circumstances of each specific case. Relevant factors may include the type of conduct at stake, the availability of data, and the possibility of establishing sufficiently reliable parameters to run the test.
- As regards exclusivity rebates, the use of an AEC test is generally not warranted as such rebates are by their very nature capable of affecting competition (though the Commission acknowledges that the case law requires the Commission to assess the probative value of any AEC test results submitted by the dominant company).
The Commission emphasises that even when carried out, the AEC test is only one element in the overall competition assessment and “the fact that a dominant undertaking’s pricing conduct “passes” an AEC test should not be considered as a conclusive indication that such pricing conduct is not capable of negatively affecting competition.”
To reflect this approach, the Commission has made the following changes to the 2008 Guidance:
- In paragraph 25, it has downplayed the necessity of conducting an AEC test by substituting the word “will” for “may”:
“In order to determine whether even a hypothetical competitor as efficient as the dominant undertaking would be likely to be foreclosed by the conduct in question, the Commission [old: will] [new: may] examine economic data relating to cost and sales prices, and in particular whether the dominant undertaking is engaging in below-cost pricing.”
- Replacing paragraph 27 as follows:
Old text: “If the data clearly suggest that an equally efficient competitor can compete effectively with the pricing conduct of the dominant undertaking, the Commission will, in principle, infer that the dominant undertaking’s pricing conduct is not likely to have an adverse impact on effective competition, and thus on consumers, and will therefore be unlikely to intervene. If, on the contrary, the data suggest that the price charged by the dominant undertaking has the potential to foreclose equally efficient competitors, then the Commission will integrate this in the general assessment of anti-competitive foreclosure…, taking into account other relevant quantitative and/or qualitative evidence.”
New text: “When analysing data to assess whether an equally efficient competitor can compete effectively with the pricing conduct of the dominant undertaking, the Commission will integrate this analysis in the general assessment of anti-competitive foreclosure…, taking into account other relevant quantitative and/or qualitative evidence.”
Constructive refusal to supply
A key distinction between a constructive refusal and an outright refusal to supply is that in the former scenario, the undertaking in question already has access, albeit on unfair terms, to the input supplied by the dominant company. In spite of this difference, the 2008 Guidance explained that to warrant enforcement, either type of refusal had to satisfy the Bronner criteria (i.e. the refusal: (i) relates to a product or service that is indispensable to effectively carry on a business; (ii) is likely to lead to the elimination of effective competition; (iii) is likely to lead to consumer harm; and (iv) cannot be objectively justified).
The applicability of the Bronner criteria (and, in particular, the indispensability requirement) to constructive refusals has led to ambiguity and legal uncertainty. The EU courts have consistently found that a dominant undertaking granting access subject to unfair conditions cannot be treated in the same way as a company which outright refuses to supply and that the indispensability requirement should only apply to outright refusals.
The Commission has now acknowledged this and clarified that constructive refusals “cannot be equated to an outright refusal to supply and therefore the criterion of indispensability of the product or service in question does not apply” and deleted the last two sentences of paragraph 79 of the 2008 Guidance accordingly.
Margin squeeze
The 2008 Guidance treated margin squeeze as a specific type of a refusal to supply. As a result, the Bronner test also applied, i.e. the Commission prioritised cases involving a product or service that was objectively necessary for an undertaking to compete effectively on the downstream market.
Diverging from the Commission’s position, the EU courts have clarified that margin squeeze is an independent form of abuse and the Bronner test, including the indispensability requirement, does not apply.
In its revisions to the 2008 Guidance, the Commission has addressed this by separating out margin squeeze as a separate abuse (not subject to the refusal to supply criteria).
Practical implications & next steps
The amendments the Commission has made to the 2008 Guidance largely reflect developments in case law and enforcement practice over the intervening 15-years. It is, however, clear that while the Commission acknowledges the requirement to adopt some form of effects-based approach to enforcement under Article 102 TFEU, it does not believe that this extends to a full-blown economic analysis, whether in the form of an AEC test or otherwise. That being said, as the case law makes clear that the Commission is obliged to consider the results of an AEC test if raised by a dominant undertaking in its defence, this may not make much difference in practice.
The Commission will likely use the new Guidelines to row back from this: after all, “Guidelines” technically have more legal weight than “Guidance” under EU law, and the Commission may seek to distance itself from the recent case law on the grounds that the judgments are inextricably linked to the concepts set out in the 2008 Guidance. The Commission clearly wants to revert to a more “per se” approach for areas such as exclusivity. The new Guidelines will likely also need to address in more detail the application of Article 102 TFEU to digital and dynamic markets, including the “new” categories of abuse arising from the recent tech cases (e.g. self-preferencing, misuse of data) and the interplay with the Digital Markets Act.
The Commission plans to publish a draft of the Guidelines for public consultation by mid-2024.
For further information, please contact:
Daniel Vowden, Partner, Herbert Smith Freehills
daniel.vowden@hsf.com
