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The Cookie Jar

Greater flexibility in relation to rebates present opportunities for successful tech companies

Competition law’s approach to rebates offered by dominant companies is a controversial topic.  It has become a forum for the ongoing debate between those who favour clear rules (arguing that this leads to legal certainty) and those who think it is important to assess the impact of behaviour before deciding whether it breaks competition law (arguing that this avoids penalising pro-competitive conduct).

This debate frequently involves tech companies’ use of rebates, for example Intel (here) and Qualcomm (here).  Crucially, the CJEU’s judgment in Intel, 2017, has moved away from the previous form-based approach of the EU Courts towards a more effects-based analysis.

What is the issue with rebates?
Rebates are a normal part of commercial life. In principle rebates should only infringe competition law where they have a detrimental effect on competition. Where companies have a very strong position in a market, this is more likely to be the case, so the law focusses on the behaviour of dominant companies.

Case law
Before the recent Intel case, the EU Courts took the view that exclusivity and ‘loyalty enhancing’ rebates were so likely to have an impact on competition that they could be held to be illegal without the need to look at economic effects on a particular market (Hoffman-La Roche (here) and Post-Danmark II (here)). 

That case law identified three categories of rebate:
  • Pure quantity/volume based rebates, where the level of any rebate is linked to the actual volume of purchase and granted in respect of each individual order, were assumed to be legal.
  • Exclusivity rebates were considered as inevitably abusive:  these are rebates requiring customers to obtain all or most of their requirements from the dominant supplier. Such rebates are linked to the proportion of a customer’s demand purchased from the dominant supplier, rather than simply the quantity purchased.
  • Rebates which involve neither pure quantity nor exclusivity-linked volume rebates required an assessment of “all the relevant circumstances”.
Practically, this meant dominant companies were prohibited from implementing rebate schemes that effectively required customers to buy only or principally from them. 

In Intel the CJEU moved away from these categories commenting that “not every exclusionary effect is necessarily detrimental to competition” (para 134). If a dominant company puts forward reasons a rebate scheme is not capable of having exclusionary effects, then a full market analysis is required and the scheme cannot be presumed to be illegal.

The four questions proposed by the CJEU in Intel are (para 139):
  • The extent of the undertaking’s dominant position on the relevant market.
  • The share of the market covered by the challenged practice.
  • The conditions and arrangements for granting the rebates in question, their duration and their amount.
  • The possible existence of a strategy aiming to exclude competitors that are at least as efficient as the dominant undertaking from the market.
This framework for analysing discounts offered by dominant firms is reflected in the Commission’s Qualcomm Decision in 2018 (here), which fined Qualcomm EUR 997,439,000 for abusing its dominant positon on the 4G baseband chips market, resulting in its becoming Apple’s sole supplier. 

Where are we now?
The CMA’s August 2017 ‘no grounds for action’ decision,  on Unilever’s rebate scheme for impulse ice cream shows the type of evidence that competition authorities will require for an Intel inspired effects-based analysis (see  here).

The CMA looked in detail at Unilever’s rebates and ultimately concluded that the structure and availability of the promotional schemes, taken together with the purchasing patterns of the retailers, meant that Unilever’s promotional schemes were unlikely to have an exclusionary effect.

The CMA is likely to follow a similarly effects-based approach in its current investigation of Merck Sharp & Dohme Limited’s discount scheme for Remicade, a medicine used to treat autoimmune conditions (see here). 

The CJEU’s judgement in Intel represents a decisive shift and suggests that dominant companies now have the possibility to implement exclusivity or ‘loyalty inducing’ rebates, provided they can demonstrate that these will not have a significant foreclosing effect. Given the prevalence of strong companies in the tech sector, this shift is of real interest for those operating in that field.

Pat Treacy and Noel Watson-Doig