Assessing abuse of dominance: Change of approach imminent?

Advocate General opines against European Commission ahead of long-awaited Intel judgment on whether anticompetitive effects are necessary for a finding of a breach of competition rules

On Thursday 20 October 2016, Advocate General Wahl (AG Wahl) issued his long-awaited opinion in the Intel case. This is the case that in 2009 led to fines of over €1 billion being imposed on Intel in respect of rebates and other “naked restrictions” which the European Commission found had been intended to exclude competition by Intel’s rival, AMD, in manufacture of a particular type of computer microprocessor (x86 CPUs).

The Intel decision – good law but bad policy?

The Intel decision by the Commission was controversial because the Commission appeared to follow a highly form-based line of reasoning, finding anticompetitive conduct on the basis of the legal parameters of previous cases, without seeking to justify its decision by considering in detail the existence of any actual anticompetitive effects arising from Intel’s conduct. In Intel's first appeal of the Commission's decision in 2014, the Commission's approach was endorsed by the EU General Court. AG Wahl’s opinion comes as part of the subsequent appeal to the EU Court of Justice – and, while not binding on the Court, the Court typically follows the AG's opinion in its subsequent judgment. AG Wahl’s opinion is striking in that it finds the Commission and the General Court were wrong on five of the six grounds of appeal raised by Intel. Significantly, the AG’s opinion looks again at the case law on which the Commission and General Court had relied, but the AG interprets that case law differently and finds that there was indeed a requirement that the case against Intel should consider more closely whether the practices in question were “capable” of restricting competition, when considering “all the circumstances”, the “legal and economic context”, and whether agreements had any “immediate, substantial and foreseeable anticompetitive effect in the EEA”. This approach would raise the evidential bar for the Commission in future cases.

From a competition policy perspective, it would seem uncontroversial that companies should not face sanction – and certainly not €1 billion in penalties – for conduct where no anticompetitive effect has been demonstrated. The Commission had also appeared to recognise the need for a more “effects-based” approach to enforcement of its abuse of dominance rules in its 2009 Enforcement Priorities Guidance, which made the Intel decision more surprising for many commentators.

However, and as has also been seen in cartel case law, there has been an inclination on the part of the European Commission to follow the path of least resistance in framing its cases, relying on interpretations of legal precedent to allow it to avoid protracted consideration of the anticompetitive effects of the arrangements in question. There are of course circumstances where anticompetitive effects will be obvious and such an approach is justified. In such situations, for example obvious cartels involving price-fixing, it is not in the public interest for the Commission to have to address detailed economic submissions from the parties seeking to establish (against the relevant counterfactual) that there were no anticompetitive effects from such obvious practices. However, the AG’s opinion suggests a different threshold should apply in abuse of dominance cases such as Intel.

What is the correct legal standard for illegal behaviour?

In the Intel case, Intel had a market share for x86 CPUs in excess of 70 per cent for the period considered by the Commission. This was sufficient to establish that Intel held a dominant position, and therefore had a “special responsibility” as regards its market conduct not to unfairly exclude competitors. The conduct at the heart of the case involved two practices:

a. rebates, which were conditional on major Intel customers buying all or the vast majority of their x86 CPUs from Intel; and

b. payments made to certain customers conditional on them postponing or cancelling launch of products based on CPUs produced by Intel’s rival, AMD.

The Commission’s case had sought to characterise Intel’s rebates as “exclusivity rebates”, a category of rebates which, if employed by a dominant undertaking, according to the Commission's decision “render it unnecessary to verify whether they are capable of restricting competition in a specific case”. The AG disagreed with this approach, and suggested the Commission and General Court had wrongly identified three possible categories of rebates (broadly: (i) exclusivity rebates, which are presumptively illegal; (ii) volume-based rebates, which are presumptively legal; and (iii) rebates having a loyalty-inducing effect, which may be illegal, but only when judged against “all the circumstances”). The AG said in fact the illegality of all rebates – including so-called "exclusivity rebates" – needed to be judged in the circumstances in which they exist. The Commission’s failure to provide evidence on anticompetitive effects therefore meant its decision was legally incorrect. The AG also found that in considering whether the rebates were “capable” of restricting competition, the Commission had failed to establish in “all the circumstances” whether the conduct had “in all likelihood” had an anti-competitive effect. The message was clear: the Commission needed to demonstrate in context the harm arising from these allegedly illegal practices.

In addition, the AG found the Commission and General Court to have erred in suggesting Intel’s behaviour was illegal even during periods where the proportion of the market covered by the restrictive practices was limited (in two years of the alleged infringement as little as 14 per cent of the market was effected by Intel's restrictive clauses). The AG did not conclude whether 14 per cent market coverage was sufficient to lead to an abuse. His point was that the Commission’s failure to consider this issue was legally incorrect, and could not be replaced with an assessment of whether the conduct had persisted over a longer period of time (the notion of a “single and continuous infringement”). Again, this can be seen as a criticism of the Commission’s failure to consider the effects that the conduct actually had on the markets in question.

The AG made further criticisms of the Commission’s decision: (i) it artificially segmented the market in order to characterise rebates as “exclusivity” rebates for specific products, even though customers could still buy a significant proportion – or majority – of their overall x86 CPUs from AMD; (ii) the Commission made procedural errors in not recording third party interviews which it relied on in its decision; and (iii) the Commission failed to establish any impact in the EU (or EEA) of Intel's agreements with Lenovo (which related primarily to the Chinese market). An effect on trade in the EU/EEA is a pre-requisite for the Commission to have jurisdiction to rule in competition cases. The first and third of these criticisms can again both be linked to the Commission’s failure to consider the effects of Intel’s conduct: if customers could actually still buy most of their CPUs from AMD without restriction, where was the harm in Intel’s rebate schemes for certain products?  And if Intel entered an agreement with a Chinese computer company which foreclosed AMD’s ability to supply in China, but not in the EU, why was the Commission seeking to sanction this?

What happens next?

Although the AG’s opinion is not binding on the Court of Justice, it is to be expected that – on at least some of these grounds – the Commission will be defeated. In such circumstances the Court of Justice’s only option will be to remit the case to the General Court, and the General Court may then revisit the facts and – by finding evidence of anticompetitive effects – reformulate the case against Intel to justify the original finding and impose a (likely reduced) penalty.

That said, the AG's opinion delivers a sharp rebuke to the Commission and General Court in having made and supported a decision which did not look sufficiently closely at the effects of the conduct which was being sanctioned. This is a positive message for business, and for competition policy more broadly, but it remains to be seen whether the AG’s opinion is followed, and how the interpretation of the relevant legal standards set out by the AG will be applied in future cases by the Commission.

We will be considering this important case further in upcoming publications.