Post Danmark: does the ECJ take the effects based approach further than a mere price/cost-test and does it oblige the national judge to apply that effects based approach ex nunc?
In a grand chamber judgment in case C‑209/10, Post Danmark, the European Court of Justice (ECJ) handed down a preliminary ruling on the interpretation of abuse of a dominant position (Art. 102 TFEU). The case was referred to the ECJ by a Danish judge in a dispute between Post Danmark and Konkurrencerådet, the Danish competition authority.
I have three remarks concerning this judgment:
- first, it seems to me that the ECJ does not embrace the average incremental costs instead of average variable costs as the relevant economic parameter for analysing a per se abuse;
- secondly, the ECJ requires the Danish judge to apply the as-efficient-competitor-test and seems to take it further than a mere price/cost-test to decide on the question whether the pricing practices of Post Danmark were anti-competitive in effect; he must take into account all relevant circumstances;
- lastly, when the Danish judge takes into account all those circumstances, it seems that the ECJ prescribes an ex nunc appreciation, which might be a restriction of procedural autonomy.
In the Danish market for the distribution of unaddressed mail (direct mail of brochures, guides, newspapers, etc.) the two largest players are Post Danmark and Forbruger-Kontakt (FK). This market is fully liberalised. Next to that, Post Danmark is the universal postal service provider. It uses its distribution network for both the universal postal service and the distribution of unaddressed mail. In 2003, in the Danish market for the distribution of unaddressed mail Post Danmark had a market share of 44 % which increased to 55 % in 2004. According to the Danish competition authority Post Danmark held a dominant position in that market because of such high market shares and because it could maintain its distribution network covering the whole country because of it being the universal postal service provider, regardless of its activities on the market for unaddressed mail.
Three large Danish supermarket chains, SuperBest, Spar and Coop, were customers of FK. In 2004 FK lost these direct mail contracts to Post Danmark. In 2007 FK won back the contract with Coop and Spar. After it lost the contracts to Post Danmark in 2004, FK complained to the Danish competition authority that Post Danmark had abused its dominant position in order to win the said contracts. On 29 September 2004 the Danish competition authority decided that Post Danmark had abused its dominant position by (amongst others) targeting the three customers of FK with very low prices (so-called predatory pricing). The prices offered to SuperBest and Spar for direct mail were higher than the average total costs of Post Danmark, whereas the price to be paid by Coop was even below the ‘average total costs’, but above the ‘average incremental costs’. According to the Danish competition authority this constituted a breach of Art. 102 TFEU. Post Danmark appealed against this decision to a Danish lower court, which upheld the decision. Another appeal by Post Danmark brought the case before the Danish supreme court. This court referred the case to the ECJ.
According to the ECJ, the Danish judges want to know:
what the circumstances are in which a policy, pursued by a dominant undertaking, of charging low prices to certain former customers of a competitor must be considered to amount to an exclusionary abuse, contrary to Article [102 TFEU], and, in particular, whether the finding of such an abuse may be based on the mere fact that the price charged to a single customer by the dominant undertaking is lower than the average total costs attributed to the business activity concerned, but higher than the total incremental costs pertaining to the latter.
The rules from the AKZO-case:
average variable cost and a plan to drive out competition
In the milestone AKZO-case the ECJ already ruled on the question under what circumstances selling at a loss is abusive. According to the ECJ, for sales prices which are below the average variable costs (those that vary depending on the quantities produced) there is no other economic purpose than that of driving out its competitors. The reason for this, is that selling below average variable costs results in losses that are higher than when not selling at all; because when not selling at all, the loss equals the fixed costs and when selling below average variable costs means an additional loss for each unit sold, whereas the fixed costs are still not covered at all. Such prices are predatory prices and constitute an abuse of a dominant position (par. 71). With regard to selling prices above average variable costs, but below average total costs, which still results in a loss for the (dominant) undertaking, other economic purposes than driving out its competitors might be the explanation of such behavior. In such a case, the fixed costs are partly covered and therefore selling might be economically worthwhile (for a short period at least, because losses then are lower than when not selling at all). In such a case, there is only abuse if the low prices are part of a plan for eliminating a competitor (par. 72). Such a plan must then be proven by the party accusing the dominant undertaking of abuse.
According to the ECJ
[s]uch prices can drive from the market undertakings which are perhaps as efficient as the dominant undertaking but which, because of their smaller financial resources, are incapable of withstanding the competition waged against them.
1. Average incremental costs instead of average variable costs for public/universal service providers
The Danish competition authority used average incremental costs instead of average variable costs as the relevant parameter. In his opinion in this case (par. 34-38), Advocate-General Mengozzi concluded that using average incremental costs instead of average variable costs is (more) appropriate when it comes to dominant undertaking entrusted with a task of general economic interest (public/universal service), which (often) already have an infrastructure in place for the public/universal services it provides, such as Post Danmark having its national wide distribution network for the universal postal services. According to the AG, supported by a (similar) decision of the Commission concerning Deutsche Post and doctrine, average variable costs is not the appropriate parameter to use for such undertakings, since (a part of) the average variable costs relate to their network and exist regardless of whether direct mail services are provided or not; in other words the costs are common to, in this case, the distribution of direct mail and ‘normal’ mail falling under the universal postal service. Therefore, average incremental costs of direct mail are a more appropriate parameter than average variable costs.
In its judgment, the ECJ underlines several times that the specific calculation made by the Danish competition authority in this specific case in the main proceedings are appropriate (par. 32-37) and considers the price no to be per se predatory and abusive. In my view the ECJ does not affirm that the use of average incremental costs instead of average variable costs to be applied as a general rule for dominant undertaking entrusted with a task of general economic interest, contrary to what the AG had suggested.
The ECJ concluded with regard to Post Danmark that
to the extent that a dominant undertaking sets its prices at a level covering the bulk of the costs attributable to the supply of the goods or services in question, it will, as a general rule, be possible for a competitor as efficient as that undertaking to compete with those prices without suffering losses that are unsustainable in the long term.
2. As-efficient-competitor-test: more than a price/cost-test and really effects based?
The as-efficient-competitor-test which was affirmed in the 1991 AKZO-case, cited above, but was not further explained there. The European Commission used this test in its review of what is now Art. 102 TFEU (par. 23 et seq.), to apply a more so-called effects-based-approach which consists mainly of a price/cost-test to appreciate whether commercial behavior of a dominant undertaking is abusive (not only for predatory pricing, but also for margin squeeze and rebates/discounts). The Commission also uses incremental costs as the relevant parameter: as long as the prices cover the long-run average incremental costs (LRAIC) there is no reason to believe that there was exclusionary abuse (and not only for public/universal service providers which hold a dominant position, but for all dominant undertakings).
The ECJ used the as-efficient-competitor-test (as far as I can tell for the first time since AKZO) in 2010 – 19 years after its AKZO-judgment – in two margin squeeze cases: Case C‑280/08, Deutsche Telekom (par. 200 et seq.) and repeated it in Case C‑52/09,TeliaSonera (par. 40 et seq.). This also came down to a price/cost-test.
In Post Danmark it again comes down to a price/cost-test. One might conclude from that that the ECJ does not reject the effect-based approach of the Commission.
According to the ECJ, it is for the referring Danish judge to appreciate the facts of the case and apply the as-efficient-competitor-test. The ECJ adds that the Danish judge must also take into account
that Forbruger-Kontakt managed to maintain its distribution network despite losing the volume of mail related to the three customers involved and managed, in 2007, to win back the Coop group’s custom and, since then, that of the Spar group.
That is, however, more than only a cost/price-test which the Danish judge must apply. This is in my view really an effects-based approach: apparently the behavior of Post Danmark did not exclude FK from the market and this could constitute the evidence that there was no exclusionary effect. In other words: the pricing practices in question were not anti-competitive in effect.
Since the Danish competition authority had not found any evidence of a plan of driving out FK from the direct-mail market, the pricing practices in question were neither anti-competitive in object.
3. Ex nunc appreciation of all relevant circumstances and procedural autonomy
My final remark on this case is a second remark concerning the fact that the ECJ seems to be of the opinion that there was no exclusionary effect, because FK won back the contracts in 2007 and still had its distribution network in place, whereas the decision of the Danish competition authority at stake dates from 2004. I see two possible explanations for this finding of the ECJ.
- Either the grand chamber of ECJ ‘just’ wanted to add some additional factual direction to the national judge. That would be an obitur dictum since the preliminary procedure of Art. 267 TFEU only allows the ECJ to interpret EU-law.
- Another explanation for this remark might be that the ECJ rules that the national judge must take into account all relevant circumstances including those which occurred after the final decision of the administrative body, when assessing the lawfulness of that decision under the effects-based-approach; an ex nunc appreciation.
It is questionable whether a national judge is allowed to make such an ex nunc appreciation under his national procedural rules. If he cannot do this, because he is restricted to an extunc appreciation, the question arises whether he can rely on his procedural autonomy, or whether the EU-law principles of effectiveness and equivalence force him to apply the ex nunc-rule. In its judgment in Cases C-482 and 493/01, Orfanopoulos, the ECJ decided that applying the ex tunc rule was contrary to EU-law (par. 81 and 82). The same reasoning may apply here: the ex tunc rule makes it impossible for the national judge to (fully) appreciate the effect of (alleged) abusive behavior, because then he cannot take into account all relevant circumstances, as the ECJ prescribes.
If the Danish judge is bound by an ex-tunc rule, I imagine that a large part of the still to be held discussions in front of the Danish judge will be spend on this issue. The question on procedural autonomy is a good one to refer to the ECJ and for a Post Danmark II-case. To be continued?
The Journal of European Competition Law and Practice (JECLAP) has published an article that discusses the Post Danmark judgment and its implications for the application of Article 102. Those with access to the advance access articles can download the paper at http://jeclap.oxfordjournals.org/content/early/2012/10/25/jeclap.lps059.full?keytype=ref&ijkey=dN3TqBTAFFbveqz.