Loyalty discounts may abuse a dominant position – no change

In an important appeal judgment earlier today, the General Court reaffirmed the established principle that a company enjoying a dominant market position is likely to be abusing that position where it applies a loyalty discount system. A “loyalty” or “fidelity” discount occurs where a financial advantage is granted in return for a purchaser sourcing all or most of its requirements for the relevant products from the dominant supplier. The General Court (which, before December 2009, was known as “the Court of First Instance”) also confirmed that, even in the absence of a financial advantage, a purchase commitment meant to cover most or all of the purchaser’s expected requirements for the relevant products is likely to be abusive.

What were the abusive practices considered by the General Court?

The judgment concerns the appeal to the General Court by Tomra Systems ASA and various other companies within the Tomra group (“Tomra”) of a 29 March 2006 Decision by the European Commission (the “Commission”) fining Tomra €24m. The Commission found that Tomra had abused a dominant position on various national markets for reverse vending machines, infringing the abuse prohibition at what is now Article 102 of the Treaty on the Functioning of the European Union. Such machines collect used beverage containers and, having identified the type of container, automatically dispense a deposit to be reimbursed to the consumer.

The Commission found that Tomra’s abuse consisted both in a general policy of denying market access to competitors and in specific practices evidenced by its dealings with retailers. These practices consisted of the following:

• Entering into agreements where the retailers agreed to buy exclusively from Tomra. “Exclusivity” here included quasi-exclusivity and de facto exclusivity.
• Entering into agreements specifying individualised quantity commitments corresponding to the entire or almost the entire demand of the retailer.
• Entering into retroactive rebate agreements to compensate such commitments. A “retroactive” rebate occurs where the purchaser’s bonus is granted for all purchases, even below a triggering threshold, once the threshold is attained.

What are the General Court’s conclusions?

Tomra appealed on many points, most of which concerned the Commission’s selection and analysis of evidence. Although the General Court accepts the possibility of one or two flaws in the detail of the evidence, its judgment approves the Commission’s approach on all points and rejects every point in the appeal.

The judgment also supports the Commission’s approach to the issue of anti-competitive effect. Tomra’s appeal argued that the Commission had failed to show that the practices in question had an actual detrimental effect on competition in their market context and that it had erred in law by holding that the practices were “unlawful per se”.

The judgment disagrees on the effects issue, holding that the Commission did in fact analyse the actual effects of Tomra’s practices, even though the case law only requires that the Commission demonstrate that such practices are “intended to restrict or foreclose competition…or are capable of doing so”.

What is the significance of today’s judgment?

The Commission is likely to see today’s judgment as a strong and encouraging endorsement of its investigative policy. The judgment represents a clear statement of the European Courts’ approach to the abusive nature of exclusivity arrangements, commitments agreements and loyalty discounts. It does not contain any new legal principle. It is indeed notable for the explicit firmness with which it restates longstanding principles on these issues, going back to the seminal 1979 case of Hoffman-La Roche, given above all that some commentators believe that the Commission and the European Courts have applied the abuse rules too strictly to rebate arrangements in a number of cases since Hoffman-La Roche.

On 22 July 2009, Intel Corporation appealed a 13 May 2009 decision by the European Commission on similar facts and citing similar grounds of appeal, but involving a considerably higher fine (€1.06 billion). It will be interesting to see whether the General Court, when it finally comes to rule on the Intel appeal, follows the approach in Tomra.

Tomra has two months in which to decide whether to seek to appeal the General Court’s judgment to the European Court of Justice.