European Union: ECJ Ruling On Loyalty Discounts As Abuse Of Dominance

Last Updated: 27 April 2012
Article by Susan Hankey, Caroline Hobson, John Markham and David Marks

On 19 April 2012, a judgment of the European Court of Justice (ECJ) rejected an appeal by Tomra Systems ASA against a 2010 judgment of the General Court. The earlier judgment had in turn dismissed an appeal against a 2006 European Commission decision that Tomra's customer loyalty and rebate arrangements had infringed the competition rules. The ECJ's judgment is a strong indication of the continuing strict legal principles which apply to loyalty and pricing practices implemented by companies with a leading market position.

A link to our LawNow on the 2010 General Court judgment can be found here

What were the abusive practices considered by the ECJ?

The ECJ's judgment reaffirms the established principles that a company enjoying a dominant position is likely to abuse that position where it applies a loyalty discount system and that the linked purchase commitment meant to cover most or all of the purchaser's expected requirements for the relevant products is itself likely to be abusive.  A "loyalty" or "fidelity" discount occurs where a financial advantage is granted in return for a purchaser sourcing all or most of its requirements from the dominant supplier. 

The appeal to the ECJ was brought by Tomra Systems ASA and various other companies within the Tomra group ("Tomra"), who were originally fined €24m by the European Commission (the "Commission").  The Commission found that Tomra had abused a dominant position on various national markets for reverse vending machines, infringing the abuse prohibition at Article 102 of the Treaty on the Functioning of the European Union (the former Article 82).  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.  The General Court upheld the Commission's reasoning and conclusions on all points.

The practices in question 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.

Appeals to the ECJ are on points of law (not fact).  The judgment makes a number of findings of law and procedure, all of which generally uphold the Commission's and the General Court's findings. 

What are the main points from the new judgment?

The ECJ's new judgment is likely to reinforce the apparent discrepancy between, on the one hand, the strict legal principles on abusive discounts found in historical judgments of the European courts (e.g. Michelin v Commission [2003], which summarises previous cases) and, on the other, the more effects-based economic approach of the competition authorities' recent enforcement practice, as set out in the Commission's 2009 Guidance on the Commission's enforcement priorities in applying Article 82 to abusive exclusionary conduct by dominant undertakings (the "Guidance Paper").

There are three key points where the ECJ restates established points of law which, arguably, clash with the more flexible approach in the Guidance Paper.

The most striking conclusion in the judgment is that, in order to find the scheme abusive, there is no absolute requirement to assess whether a rebate scheme results in any form of below-cost selling.  According to the ECJ, it is possible to find abuse by assessing the loyalty-inducing effects of a retroactive scheme without reference to price levels. This clashes with the statistical approach in the Guidance Paper, according to which there is unlikely to be an anti-competitive effect where the effective price of the relevant range of products to which a rebate can be linked is above the long-run average incremental cost of supplying that range of products.

Second, the following quote from the ECJ echoes the General Court's finding that even a rebate scheme which applies to only part of a market could still be abusive: "...the customers on the foreclosed part of the market should have the opportunity to benefit from whatever degree of competition is possible on the market and competitors should be able to compete on the merits for the entire market and not just for a part of it".  The Guidance Paper has a different emphasis on this point, since it states that the market coverage of an alleged abuse will be a factor in assessing the foreclosure effect of that abuse.

Finally, the earlier court judgments mentioned above are generally considered to apply a hard-line rule that rebates must not be granted by dominant companies in return for customer loyalty, but must reflect cost savings to the dominant supplier arising from the increase in volumes purchased.  The theory on this point is that rebates are admissible where they are referable to gains in efficiency and economies of scale made by the supplier. The ECJ in Tomra does not state that the lack of a cost-saving justification automatically implies abuse, but does find that, in assessing abuse in such cases, it is necessary "to investigate whether, in providing an advantage not based on any economic service justifying it, the rebates tend to remove or restrict the buyer's freedom to choose his sources of supply, to bar competitors from access to the market, or to strengthen the dominant position by distorting competition".

Some commentators have seen the General Court's judgment in Tomra as an ambiguous statement of the cost saving principle and the ECJ's comment here certainly introduces an efficiency argument as a factor in analysing abusive discounts, however soft or unclear that factor may be.  Despite the continuing uncertainty on this point, such reference to the efficiency principle may induce caution in companies with strong products who are devising rebate schemes.

What is the importance of the judgment?

In its appeal, Tomra had highlighted the discrepancy between the General Court's approach and the methodology advocated in the Commission's Guidance Paper.  The ECJ held that, since the Commission decision in question (2006) predated the Guidance Paper (2009), the Guidance Paper was irrelevant to the analysis of the alleged abuse in this case.  Furthermore, the Guidance Paper represents guidelines on enforcement priorities and not binding legislation, although this point was not made by the ECJ.

It may be that future enforcement of the abuse rules will follow the more flexible criteria in the Guidance Paper, although this point is hard to call.  In any event, the ECJ has reaffirmed established and strict benchmarks which, on a cautious basis, many companies may continue to apply in order to guarantee compliance with EU competition principles.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 20/04/2012.

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