ECJ clarifies test for predatory pricing – no need to show ultimate profit

In a judgment dated 2 April 2009, the European Court of Justice (ECJ) has held that the Court of First Instance (CFI) was right to uphold a European Commission decision that France Télécom had abused a dominant position by charging below-cost, predatory prices.

This judgment represents an important confirmation of the appropriate test for predation under EC competition law. Above all, the judgment clarifies the law on the key issue of recoupment of losses: the ECJ has held that demonstrating that it is possible for the dominant company to recoup its losses is not a necessary precondition for a finding of abusive predation.

The history of the Wanadoo predation case

The ECJ’s judgment rejects an appeal by France Télécom against a 30 January 2007 CFI judgment, which had in turn rejected an appeal against a 16 July 2003 decision by the Commission that Wanadoo Interactive SA had abused a dominant position under Article 82 EC Treaty, by charging predatory prices for Internet access services in France from March 2001 to October 2002. The Commission fined Wanadoo € 10.35m. Wanadoo was at the time of the abusive conduct a company in France Télécom’s group.

In effect, the ECJ has therefore upheld the Commission’s initial reasoning concerning Wanadoo’s conduct, which is the final stage of this case. It did not accept any of France Télécom’s arguments, which were based on a number of factual and legal grounds.

Legal messages – predation test, meeting competition, recoupment of losses

Three principal legal messages come out of the ECJ’s judgment:

• The underlying test for predation in earlier cases was not disputed at any stage, but it is significant to note that the ECJ restates it without qualification: prices below average variable costs must be considered prima facie abusive, whereas prices below average total costs but above average variable costs are to be considered abusive only where it can be shown that the prices are fixed in the context of a strategy to eliminate competition.
• France Télécom had argued that even a dominant company had a right to align its prices with its competitors or at least that the CFI had failed to show why such a right did not apply in this case. The ECJ disagreed, holding that a dominant company’s special duties meant that conduct acceptable for non-dominant companies may be viewed differently in cases of dominance and that, in any event, the CFI had addressed the appellant’s arguments on this issue (on this last point contradicting the Advocate-General’s Opinion of 25 September 2008). This confirms that there is no automatic “meeting competition” defence to an accusation of predation.
• The Advocate-General had agreed with France Télécom’s view that it followed from earlier cases that proof of subsequent recoupment of the losses incurred through below-cost selling is required for a predation finding, since the motive for below-cost selling would otherwise be normal competition. Without referring to the Advocate-General’s Opinion, the ECJ disagreed, holding that the possibility or otherwise of recoupment may be a factor in analysing abusive predation, but that the key point was whether competition could be eliminated, in relation to which the recoupment issue would not always be relevant.

A victory for the European Commission’s enforcement policy?

In its 3 December 2008 guidelines on enforcement of Article 82 cases, the European Commission stated in relation to investigations of alleged predation that “identifying consumer harm is not a mechanical calculation of profits and losses, and proof of overall profits is not required” and that its focus is the possibility of competitor exclusion. The Commission is therefore likely to view the ECJ’s judgment as a vindication of its enforcement policy.

On the other hand, companies like France Télécom with a strong market position may feel that the ECJ has missed an opportunity to accept that even dominant companies should be allowed some latitude to compete on price unless there is a clear case of unfair profits.