As noted in the introduction, EC competition law has adopted an aggressive stance towards the granting of loyalty rebates by firms that have been held to be dominant. For example, in Michelin14 the Commission held that Michelin had abused a dominant position in replacement tyres for trucks and buses in the Netherlands through the provision of off-invoice discounts and end-of-year rebates based on performance targets. The Commission stated that:
“[W]ith the exception of short term measures, no discount should be granted unless linked to a genuine cost reduction in the manufacturer’s costs. The compensation paid to Michelin dealers must be commensurate with the tasks they perform and the services they actually provide, which reduce the manufacturer’s burden. In addition the system of discounts and bonuses agreed must be clearly confirmed to each dealer when the sales contract is presented and concluded.”
13 See Spector (2005) Loyalty Rebates: An Assessment of Competition Concerns and a Proposed Structured Rule of Reason.
14 Case 322/81 [1983] E.C.R. 3461.
This section provides a brief summary of two cases that have helped shape this current aggressive stance.
3.2.3.1 Hoffmann-La Roche
15In Hoffmann-La Roche the European Court of Justice (ECJ) held that Hoffmann – La Roche had abused its dominant position both by entering into exclusive purchasing agreements with some of its customers and also by offering loyalty rebates. The ECJ distinguished standardised volume rebates and loyalty rebates by stating that the former are discounts linked solely to the volume of purchases while the latter do not depend on quantities fixed objectively and applicable to all possible purchasers. The ECJ considered that, because they have the objective of increasing the dominant firm´s share of a customer’s purchasers rather than being related to the size of that purchase, loyalty rebate schemes can be considered to prevent customers from obtaining their supplies from competitors.
The stance taken in this case towards loyalty rebates has led the Commission to argue that loyalty rebates are necessarily exclusionary when implemented by a firm held to be dominant unless the offered discounts reflect genuine cost savings associated with additional sales. The case law in this area has therefore developed with no regard being given to whether the competitors can match the offers or whether it is possible for such loyalty rebate schemes to foreclose a sufficient part of the market to reduce the competitive threat offered by competitors or whether consumer harm is likely.16
15 Hoffmann-La Roche & Co. AG v. Commission of the European Communities, ECR [1979].
16The ECJ also pointed to the discriminatory characteristic of the loyalty rebates. This theme was later developed in other cases as a secondary
3.2.3.2 BA/Virgin
In this case the CFI approved the Commission’s decision against British Airways (BA) regarding Virgin Atlantic Airways’ complaint concerning BA´s marketing agreements with travel agents. BA was alleged to have used its travel agent incentive scheme to foreclose the market for air travel services from and to the United Kingdom.
The Commission held that the commission schemes operated by BA had the following effect.
“Travel agents are encouraged to remain loyal to BA rather than to sell their services to competitors of BA by being given incentives to maintain or increase their sales of BA tickets which do not depend on the absolute size of those sales”. (para. 102).
The decision goes on to state:
“The exclusionary effect of the commission schemes affect all of BA’s competitors and any potential new entrants. They therefore harm competition in general and so consumers, rather than only harming certain operators who cannot compete with BA on merit”. (para. 106).
Furthermore (and, to the author’s mind, amazingly) the Commission stated that no analysis of the actual impact on competition was required.17
“Despite the exclusionary commission schemes, competitors of BA have been able to gain market share from BA since the liberalisation of UK air transport markets. This cannot indicate that these schemes have had no effect. It can only be assumed that competitors would have had more success in the absence of these abusive commission schemes”.
anticompetitive effect of loyalty rebates by the Commission, see for example BA/Virgin.
17 See paragraph 107 of the Decision.
Unfortunately, the CFI confirmed this “analysis”.18 The CFI noted the loyalty building character of BA’s incentives and indicated that demonstrating concrete effects of the abuse is unnecessary to establish an infringement of Article 82 EC. Following this observation, the CFI subscribed to the Commission’s view that whether BA’s rivals had grown their market shares during the period of the alleged abuse was irrelevant and absent BA’s incentives the rivals would have grown more. No explanation was provided why the current rate of growth of Virgin indicates an absence of effective competition. Indeed, this statement provides no basis for discriminating between harm to competition and harm to competitors. The fact that a loyalty rebate creates incentives for customers to buy more from a particular supplier cannot by itself be used to imply that competition is adversely affected. This is a key theme that lies at the heart of the current debate on the need for reform of the competitive assessment of alleged abuses under Article 82.
The CFI also accepted the Commission’s argument that BA’s incentives were harming competition in the travel agency services market by creating discrimination. The fact that the Commission argued for distortion of competition by discrimination by merely showing the dissimilar conditions that applied for similar transactions and not by providing insight or information on the damages generated did not prevent the CFI from dismissing BA’s challenge on this point.
Considering “discrimination” as a separate violation of competition rules because it distorts the competition amongst retailers is contrary to any economic logic. This reasoning fails to answer a basic question: why would a dominant undertaking try to harm the competition between its retailers since tougher retail competition implies more sales for its product?
18 This line of reasoning is also presented in the CFI Michelin II judgment see for example paragraphs 241 and 245 of that judgment.