When will discounts and rebates in supply agreements be anti-competitive?

A recent appeal decision by the European Court of Justice ("ECJ") has provided a useful recap on the circumstances in which loyalty bonuses in supply agreements (such as discounts or rebates) will be considered anti-competitive, especially when used by a company with a dominant market position.   

On 19 April 2012 the ECJ handed down final judgment in a case that began more than a decade earlier.  On 26 March 2001, Prokent AG complained to the European Commission (the "Commission") that Tomra Systems, and a number of its group companies (together, "Tomra"), had abused a dominant position by preventing Prokent AG from entering the market for reverse vending machines ("RVMs").  RVMs are machines for recycling drinks packaging, which automatically calculate an amount of money to be reimbursed to the customer who deposits a used container. 

The Commission's Decision

Article 102 infringement

In 2006, Tomra was fined €24 million by the Commission for abusing a dominant position in the RVM market contrary to Article 102 (then Article 82 EC) of the Treaty on the Functioning of the European Union ("TFEU").

The Commission found that Tomra, which had a 70% share of the RVM market, pursued a strategy which was anti-competitive in both its object and effect.  Tomra attempted to preserve dominance and protect its market share by preventing new operators from entering the market and limiting growth possibilities for existing competitors. 

Discounts and rebates

In addition to the exclusivity agreements that were used by Tomra to ensure that customers bought RVMs only from Tomra, and which were by definition liable to foreclose competition in the market, Tomra used a system of discounts and rebates designed to ensure further loyalty.  Such loyalty arrangements are common in agreements between suppliers and customers.  The supplier typically offers price discounts or post-sale rebates on its products, usually linked to a volume purchasing target which the buyer must meet before it can benefit.  This provides an incentive for the buyer to continue doing business with the supplier, rather than looking to the supplier's competitors to meet its needs. 

While there is nothing inherently wrong with such arrangements in most cases, they can be problematic from a competition law perspective when used by a market participant such as Tomra, whose dominance had already weakened competition in the RVM market.

In particular, Tomra used 'retroactive rebates', which applied the rebate to every product bought by the customer during a particular reference period, not only to those products bought after the volume purchasing target had been met.  The promise of a discount or rebate on every product bought was a major incentive to continue doing a significant amount of business with Tomra.  Failing to meet the purchasing target (for example as a result of purchasing from another provider) effectively meant a significant increase in the buyer's costs. 

By effectively tying many of its customers in with such discounts and rebates, Tomra was able to limit the size of the remaining market that competitors could realistically contest.  Consequently, the Commission found that Tomra had abused its dominant position in breach of Article 102.

Appeals to the General Court and ECJ

Tomra unsuccessfully appealed to the General Court of the European Union (the "General Court") in 2010.  It then further appealed to the ECJ.  The ECJ's judgment is helpful in summarising some of the important issues around discounts and rebates, which featured heavily in Tomra's arguments in both appeals. 

Tomra argued before the ECJ that the Commission had erred in its assessment of the rebates scheme, failing to establish that the rebates ultimately led to prices which were lower than Tomra's production costs.  The ECJ dismissed this argument, noting that charging prices below cost price, though indicative of abusive behaviour, 'is not a prerequisite of a finding that a retroactive rebates scheme operated by a dominant undertaking is abusive.'

The ECJ then summarised a list of factors (originally set out in the General Court's decision in 2010) which demonstrate that Tomra's rebates were abusive.  The key factors in the Tomra case were as follows:

• Locking in demand: discounts and rebates were granted for meeting quantity targets corresponding to the entire or almost entire demand from a supplier.  The General Court said such discounts 'have the same effect as explicit exclusivity clauses', and the ECJ added that this was also true of rebates.
• Tailored requirements: discounts and rebates were based on quantity targets which were different for each customer, and which corresponded to the customer's entire requirements or a large proportion of them.
• Retroactivity: Tomra's system of rebates was based on a system whereby the achievement of the quantity target meant the rebates were applied to all purchases made by the customer during the period, not only those which exceed the purchasing volume target.  This creates a 'suction effect', making the purchasing incentive much stronger as the target is approached - meeting the target will trigger such a large fall in overall prices that the final units are effectively negatively priced.

Tomra raised a number of other points before the ECJ, but the appeal was dismissed in its entirety.

Key points to note

Rebates and discounts in commercial agreements

The Tomra case demonstrates the importance of considering the above factors when drafting rebate or discount provisions, especially where a dominant company is involved.  If it appears that the real aim or effect of such provisions is to tie customers in and foreclose competition on the market, it is likely that the provisions will be found to be anti-competitive.  This could lead to fines, or to the relevant provisions and/or agreements being unenforceable.

Economic analysis in Article 102 cases

One final point of interest from this case is that assessment of the key factors set out above did not require in-depth analysis of the actual or potential economic effects of Tomra's behaviour.  This may change in future Article 102 cases.  After Tomra's first, unsuccessful appeal, some commentators criticised the General Court for what they saw as an overly narrow, formalistic approach to its decision, contrary to the more economics-led approach recommended in the Commission's Guidance on the Commission's Enforcement Priorities in Applying Article [102 TFEU] (the "Guidelines"). 

Tomra raised arguments on this basis before the ECJ, querying why no detailed analysis of the economic effects and potential efficiencies of the scheme was undertaken.  These arguments were dismissed.  In its judgment, the ECJ noted that the Guidelines were published in 2009 and therefore had no relevance to the ECJ's assessment of the Commission's decision, which was adopted in 2006.

Though undoubtedly of no comfort to Tomra, this suggests that the Guidelines are likely to be followed, at least to some extent, in future Article 102 cases.  Accordingly, economic analysis will probably come to play a much more important role in the assessment of whether the behaviour of dominant companies is abusive or not.  This could have major implications for the way in which such companies defend themselves against allegations of Article 102 infringement.  However, until a post-2009 case is tried it is unclear exactly how much effect the Guidelines will have in practice.

If you would like any further information in relation to any of the issues raised in this update or any other competition issues, please contact Robert Vidal, Louisa Penny or Richard Craig.

Lawyers Robert Vidal, Louisa Penny, Richard Craig