Summary

The Court of Justice of the EU has confirmed that price discrimination by a dominant firm is not in itself illegal under competition law. However, it will infringe Article 102 TFEU if it is capable of distorting competition between the dominant firm’s upstream or downstream trading partners.

The judgment provides useful guidance to firms with significant market power, their rivals and trading partners. It remains to be seen whether it will make EU competition authorities more inclined to pursue such cases.

Context

Article 102 of the Treaty on the Functioning of the European Union (the “TFEU”) prohibits an abuse of a dominant position in so far as it may affect trade between EU Member States. Part (c) of the second paragraph of Article 102 provides that such abuse may, in particular, consist in applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a “competitive disadvantage”.

In this case, the relevant parties were Cooperativa de Gestão dos Direitos dos Artistas Intérpretes ou Executantes (“GDA”) and MEO – Serviços de Comunicações e Multimédia SA (“MEO”). GDA is a collecting society for artists and performers, and the only entity entrusted with the collective management of their copyright rights in Portugal. MEO is a provider of paid television signal transmission services and television content to consumers. MEO is a customer of GDA.

In 2014, MEO lodged a complaint with the Portuguese competition authority, arguing that GDA, as a dominant company, had been charging discriminatory prices for equivalent transactions by applying different terms and conditions to MEO from those it applied to another of its customers, NOS Comunicações SA. The competition authority decided not to take further action on the grounds that there was no evidence of sufficiently probative value of an abuse of a dominant position. In particular, the Portuguese competition authority considered that the difference in tariffs paid by MEO as compared to its rivals was minimal when compared to MEO’s average costs, and it had not prevented MEO from growing financially over the relevant period.

MEO challenged this decision in court. The Portuguese court referred a number of questions to the Court of Justice of the EU (the “Court”). These questions boiled down to whether the concept of ‘competitive disadvantage’, for the purposes of subparagraph (c) of the second paragraph of Article 102 TFEU, requires:

  • an analysis of the specific effects of differentiated prices being applied by an dominant undertaking on the competitive situation of its customers; and
  • the seriousness of those effects to be taken into account.

The Court’s Approach

The Court confirmed that, in order to constitute an abuse, differentiated pricing by a dominant entity must tend to distort competition between the dominant entity’s (upstream or downstream) business partners in the market in which those business partners operate. It is not necessary for the dominant entity’s behaviour to affect its own competitive position on the market in which it operates. Discriminatory pricing can therefore amount to an abuse even if the dominant company is not present on the market in which the relevant prices are applied.

When assessing the effect on the dominant undertaking’s trading partners, the mere fact that some operators are charged a higher price than their competitors for an equivalent service does not mean that the “competitive disadvantage” criterion is met. However, it is not necessary for proof to be adduced of an actual, quantifiable deterioration in the competitive position of the business partners taken individually. Instead, regard must be had to the whole circumstances of the case in order to determine whether the dominant company’s behaviour produces or is capable of producing a distortion of competition between its trading partners. For an infringement to arise, there must be an effect on the costs, profits or other relevant interests of the trading partners sufficient to affect the competitive position of one or more of them.

Relevant circumstances to be taken into account may include:

  • the undertaking’s dominant position;
  • the parties’ negotiating power as regards the tariffs;
  • the conditions and arrangements for charging those tariffs;
  • their duration and their amount; and
  • the possible existence of a strategy on the part of the dominant undertaking aimed at excluding from the downstream market one of its trading partners which is at least as efficient as that trading partner’s competitors.

In terms of whether it is necessary to consider the seriousness of a possible competitive disadvantage, the Court stresses that it is not appropriate to fix an appreciability threshold for an abuse of dominance to arise.

Application to GDA

The Court held that the referring court should take into account the following factors to determine whether GDA’s behaviour amounted to an infringement of Article 102 TFEU:

  • as one of its largest customers, MEO had a certain negotiating power vis-à-vis GDA;
  • the prices charged to MEO by GDA were established by an arbitration decision;
  • the differentiated prices were applied between 2010 and 2013;
  • the amounts MEO paid annually to GDA represented a relatively low percentage of the total costs borne by MEO for the relevant service and the differentiation in tariffs had a limited effect on MEO’s profits in that context; and
  • GDA had no interest in principle in excluding one of its trade partners from the downstream market, as it was not vertically integrated.

Consequences for Business

This judgment follows a similar approach to that adopted by the Court in the recent Intel judgment which stressed the need to assess the actual or potential effects of an alleged abuse before an infringement can be found (see our previous article here).

It therefore marks a further endorsement by the EU’s highest court of the European Commission’s preferred approach to Article 102 cases and may encourage the Commission and its national counterparts in EU member states to bring more Article 102 (and specifically discriminatory pricing) cases, provided that there is sufficient economic evidence to demonstrate the necessary competitive disadvantage has occurred.

The judgment may however provide some comfort to parties in a dominant or potentially dominant position, in that it makes clear that there is no absolute requirement on such parties (under Article 102(c)) to apply uniform prices to their downstream customers in relation to equivalent transactions. Such parties’ capacity to engage in price discrimination is limited (by Article 102(c)) only to the extent that these practices are capable of resulting in a distortion of competition between their downstream customers.

From the perspective of firms who do business with dominant or potentially dominant businesses, the judgment serves as a reminder that price discrimination is not inherently anti-competitive – and so is not as a matter of course challengeable on competition grounds. However, the MEO judgment provides useful guidance on the relevant factors that should be taken into account when assessing whether a challenge is likely to be successful and makes clear that there is no requirement to find an actual, quantifiable deterioration in the competitive position of the dominant company’s business partners for an infringement to be found.