By Lorenzo Gugliotta
On April 19, 2018 the Court of Justice made an important clarification to the understanding of Article 102 TFEU with a judgment in case C-525/16 MEO – Serviços de Comunicações e Multimédia SA v Autoridade da Concorrência. This judgment, in which the CJEU followed the detailed Opinion of Advocate General Wahl, is important for at least three reasons: first, it clarifies the substantive scope of point (c) of Article 102 TFEU, which prohibits dominant firms from “applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage” (my emphasis); second, building on previous case law such as Post Danmark II and Intel, it provides guidance on the law of abuse of dominance in general; third, its conclusions could be significant for a particular kind of undertakings, namely holders of standard-essential patents (SEPs).
MEO and NOS are the main television service providers in Portugal. GDA is the only entity in Portugal that engages in collective management of copyright and related rights, for which providers need licenses in order to display protected works. According to the facts as presented by the referring court, GDA and MEO could not reach an agreement on the licensing of the above rights; thus, as prescribed by domestic law, they had resorted to arbitration. The arbitration decision had set the licensing tariff that GDA subsequently applied to MEO, which was higher than that applied to NOS. Considering that by applying differentiated tariffs to its two main customers GDA engaged in abusive price discrimination under Article 102(c) TFEU, MEO complained with the Portuguese Competition Authority, which, however, dismissed the complaint on the grounds that the price difference was not high enough to compromise MEO’s competitiveness. MEO contested the Authority’s application of Article 102(c) and brought an appeal. The Portuguese court sought guidance from the CJEU as to which test applies to find an infringement of Article 102(c).
- The notion of ‘competitive disadvantage’
As observed above, Article 102(c) outlaws discriminatory practices by dominant players which result in one or more contractors being placed in a competitive disadvantage. Now, in order for a price discrimination to cause such a competitive disadvantage, is it sufficient to show that the undertaking contracting with the dominant firm faces unfavourable economic conditions as a result of that discrimination? Or, rather, is it necessary to take account of its specific effects on the competitive dynamics existing in the market where the affected undertaking operates?
The Court resoundingly answered ‘no’ to the first question, and ‘yes’ to the second one. The need to assess the conduct’s (potential) impact on competition cannot be limited to finding “the mere presence of an immediate disadvantage affecting operators who were charged more, compared with the tariffs applied to their competitors for an equivalent service” (para. 26). What matters is whether “the behaviour of the undertaking in a dominant position tends, having regard to the whole of the circumstances of the case, to lead to a distortion of competition between […] business partners.” (para. 27). Simply put, an individual prejudice stemming from a price differentiation cannot be equated as such with a distortion of competition.
This follows from the underlying rationale of competition law, which has to intervene only when commercial practices are likely to reduce consumer welfare. Accordingly, consumer welfare will only be shrunk when higher prices impact the competitive position of that undertaking, and, as a result, have an adverse effect on the ability of the competitive process in the market to benefit final consumers. Thus: how to ascertain whether a distortion of competition exists? The Court does not provide detailed methodology with regard to the specific practice under scrutiny, but refers to Intel and, implicitly, Post Danmark I holding that authorities have to take due account of the dominant contractor’s position, the parties’ negotiating power, the amount and conditions of the pricing schemes, “and the possible existence of a strategy aiming to exclude from the downstream market one of its trade partners which is at least as efficient as its competitors” (para. 31).
- Confirmation of existing case law: ‘object’ versus ‘effect’ distortions and appreciability
This holding is consistent with a distinction drawn by the EU Courts between two categories of abuses under Article 102: on the one hand, we have inherently abusive conduct, i.e., borrowing from Article 101, abuses ‘by object’, which do not require an analysis of effects and are struck by a (rebuttable) presumption of illegality (see, for instance, the judgments in Michelin II, AKZO and France Télécom); on the other hand, we have conduct that cannot be presumed to be abusive and must be assessed in practice, i.e. abuses ‘by effect’.
What is clear after MEO is that the price discrimination such as that put into effect by GDA evidently falls within the second category. The reasons are given by AG Wahl: first, this kind of discrimination may have neutral or even pro-competitive effects (points 61 to 63 of the opinion); second, it makes in principle little sense for firms such as GDA – which is not vertically integrated and thus does not compete with its customers downstream – to reduce the competitiveness of some of its trading partners (points 76 to 79). Therefore, it would be illogical to hold that a competitive disadvantage exists whenever a downstream firm enjoys less favourable conditions from a differentiated pricing scheme: that would mean that price discrimination as such is an abuse (it is easy to show economic detriment resulting from a higher tariff), but this would blatantly run counter sound economic evidence.
Importantly, the Court confirmed that one shall not set any appreciability (de minimis) threshold below which distortions of competition would not give rise to abuses. The Court refines here its approach in Post Danmark II, where at paras. 70 to 74 it rejected of a de minimis rule in the context of Article 102 altogether. In other words, once a (likely) distortion of competition has been established, even less serious distortions will be caught by Article 102. It should be clear that the absence of an appreciability criterion concerns the characterisation of the distortion of competition – i.e. if and after it has been found, but does not relate to the impact of price discrimination for the purpose of finding competitive harm. In other words, national courts and authorities can certainly consider that a certain price difference has an ‘insignificant’ (not appreciable) impact on the firm’s competitive position (in which case, if the remaining evidence concurs, no distortion of competition will be found); however, if they find that a distortion is actual or likely, then it infringes Article 102 regardless of its extent.
- Potential implications for owners of standard-essential patents
What the Court essentially held in MEO is that price discrimination does not per se lead to an abuse. This conclusion matters to holders of standard-essential patents (SEPs), i.e. patents protecting some technology that is considered indispensable to manufacture products compliant with a particular standard (e.g. Wi-Fi). In most cases, such patent holders commit themselves to license their SEPs on fair, reasonable, and non-discriminatory (FRAND) terms (in such a case they are referred to as ‘FRAND-encumbered SEPs’). These FRAND commitments generally limit somewhat the amount of royalties that patent holders are entitled to extract from licensees; also, under some circumstances, holders of FRAND-encumbered patents are generally limited in their right to seek injunctive relief against infringement. In this regard, a few years ago the CJEU issued a landmark judgment in case C-170/13 Huawei Technologies, setting out the conditions under which a SEP holder would commit an abuse of dominance if it sought injunctions against an infringing third party.
However, there is currently much controversy as to the full scope of FRAND commitments. It is not clear, inter alia, whether the ‘non-discriminatory’ character of such commitments prohibits SEP holders from differentiating their licensing tariffs across licensees that are in a comparable legal and factual situation (similarly-situated licensees). Absent clear contractual terms, competition law might have a say here. Indeed, what MEO teaches us is that, when a SEP holder applies different licensing tariffs to different licensees, assuming it is a dominant undertaking, it will not as such infringe Article 102 TFEU. Rather, one will have to prove that price differentiation, by affecting one or more licensees, causes harm to the competitive environment in the downstream market (i.e. market for standard-compliant products) to the detriment of consumers. And this is a much higher burden than just bringing evidence of how price discrimination impacted the cost structure of one licensee.
The importance of MEO should not be overstated, however. First, detailed contractual terms might outlaw price discrimination as such. Second, even if such terms were uncertain in this respect, under Article 102 one has first to prove that the SEP holder concerned is a dominant undertaking. This would only be the case if the standard to which the patent refers is not replaceable (e.g. there is no alternative standard or it is too costly for a licensee to switch), and if the patent in question is truly indispensable for accessing the market for standard-compliant products. Arguably, instead, if more than one standard is available, or if the patent can be circumvented, a dominant position would be much more difficult to establish. Third, in a dominance scenario anti-competitive effects would not be easy to prove: one would still need to show that price discrimination occurred across similarly-situated licensees, or that, even across licensees in different situations, competition was (likely to be) distorted by the tariff discrimination; further, recalling AG Wahl’s considerations on price discrimination, it is not easy to envisage why a SEP holder would want to weaken competition between licensees: such a practice would arguably strengthen the position of a smaller number of licensees – i.e. run counter its commercial interests.
The Court’s judgment in MEO clarifies key guiding principles of the law under Article 102 TFEU (no de minimis threshold, likelihood of anti-competitive effects is enough), and discusses a rather underlitigated area of that provision, namely price discrimination covered by point (c). Crucially, the Court embraced a full effects-based approach towards price discrimination, requiring complainants and authorities to show that the parameters of competition in the market – those that measure consumer welfare – have been harmed by such discrimination. With some limitations, this judgment might be extremely interesting for owners of standard-essential patents engaging in licensing fee discrimination, should they be confronted with claims of anti-competitive behaviour.