The “as efficient competitor test” is not an efficient test

The Court of Justice has informed the Danish Maritime and Commercial High Court in a matter concerning Post Danmark’s alleged abuse of dominance that a dominant undertaking may not solely rely on the “as efficient competitor test” when assessing a potential objection on abuse of dominance. According to the “as efficient competitor test” a dominant company should be able to perform a test proving that an as efficient competitor could compete with the dominant player. If such prove could be performed, the European Commission would normally not investigate the dominant undertaking; hence, dominant undertakings have been giving the “as efficient competitor test” a lot of attention as it appeared to be a kind of a safe harbour or at least a test that could easily identify whether a rebate was not likely to be compliant with article 102.

In a request by the Danish Maritime and Commercial High Court for a preliminary ruling concerning Post Danmark’s (the Danish incumbent postal service provider) alleged abuse of dominance, the Court has replied that Post Danmark could not solely rely on the “as efficient competitor test”. The Court informed that when assessing a rebate scheme, it is necessary to examine all the circumstances of the case, in particular the criteria and rules governing the grant of the rebates, the extent of the dominant position of the undertaking concerned and the particular conditions of competition prevailing on the relevant market.

The ruling indicates that the “as efficient competitor test” is not an efficient test. Consequently, the ruling has made it even more difficult for dominant undertakings to ensure compliance with competition law. It appears that dominant undertakings cannot solely rely only on economic evidence showing that other as efficient undertakings are able to compete. Further considerations and assessments must be taken into account.

Post Danmark’s rebate scheme

On 24 June 2009 the Danish Competition Council rendered a decision that Post Danmark abused its dominant position by implementing a rebate scheme in respect of direct advertising which excluded competitors to Post Danmark from the market. The rebate scheme contained a scale of rebates from 6% to 16%. Also, the rebate scale was ‘standardised’, meaning that all customers were entitled to receive the same rebate on the basis of their aggregate purchases over the reference period, namely one year. At the beginning of the year, Post Danmark and its customers concluded agreements setting out estimated quantities of mailings for that year. The rebates were granted and invoicing took place periodically on that basis. At the end of the year, Post Danmark made an adjustment where the quantities presented were not the same as those in the initial estimate. The price of mailings for each customer was adjusted at the end of the year, with retroactive effect from the beginning of that same year, on the basis of the quantity of items of mail actually sent.

The Competition Council concluded that Post Danmark had at the time a market share of 95%. Also, due to regulatory issues at the time Post Danmark had an exclusive right to distribute 70% of all bulk mail also resulting in significant barriers to entry. Consequently, the Council concluded that Post Danmark was an unavoidable trading partner. The council also drew attention to the structure of the rebate scheme, in particular the retrospective nature and the one year reference period.

The decision was appealed but yet upheld by the Danish Competition Appeals Tribunal.

Post Danmark appealed the Tribunal’s decision to the Danish Maritime and Commercial High Court, which decided to refer the case to the Court of Justice for a preliminary ruling.

The Court ruled that a dominant undertaking cannot solely rely on the “as efficient competitor test”, i.e. it may not be sufficient only to provide an economic test proving that an as efficient competitor should be able to make a profit. The dominant undertaking must also take other factors into account in order to analyse whether other factors than costs would exclude competitors to the dominant undertaking from competing in the market.

The “as efficient competitor test “

In short, the “as efficient competitor test” provides that a dominant undertaking is not likely to exclude competitors from the market if the pricing used covers the dominant undertaking’s costs, i.e. if the dominant undertaking earns a profit, so would an as efficient competitor. The benchmark must be an as efficient competitor. If the competitor is less efficient, such competitor should not be protected from competition even from a dominant player. Protecting an inefficient competitor would not benefit consumers. Thus, if an as efficient competitor earns a profit, it could be argued that economic evidence show that competitors are not excluded from the market; therefore no exclusionary abuse can be established.

The “as efficient competitor test” was formally introduced in the European Commission’s guidance paper on exclusive abuse. According to the guidance paper the Commission would not prioritise investigation of matters concerning abuse of dominance if a competitor as efficient as the dominant undertaking could apply the same pricing structure as the dominant undertaking and still make a profit. At the time it was suggested that the guidance paper introduced a new concept focusing on the effect rather than the form of the rebate scheme. It was also suggested that safe harbours could be identified, i.e. as long as the dominant undertaking could demonstrate that the effective price was above average costs, the pricing and rebate structure would not be exclusionary.

Case law has supported these suggestions. For instance in the Post Danmark I case where the Court held that the fact that a rebate was discriminatory and prices to specific customers were below average total cost (but above average incremental cost) was not sufficient to establish that the rebate scheme constituted an abuse, i.e. a more detailed analysis of the effect was necessary as the cost analysis by itself did not demonstrate that an as efficient competitor was not capable of making a profit.

However, case law has also supported that the effects based test is not sufficient on its own. The Post Danmark II case confirms this. Basically, the Post Danmark II case concludes that comparing a dominant undertaking with an as efficient competitor will give very limited guidance on how competition in the market works if no “as efficient competitor” can be identified. Indeed, in the Post Danmark II case no other player in the market could possibly be as efficient given that Post Danmark under national law was appointed exclusive distributor of mail weighing less than 50 grams.

Learning points

There are many interesting points to explore in the Post Danmark II case. One important point is that the Post Danmark II ruling underlines that exclusionary abuse is not a battle between a form based test and an effects based test. It is not a battle between lawyers and economists. Clearly, it follows from the ruling that the “as efficient competitor test” is not always an efficient test. Dominant undertakings cannot solely rely on the possibility that an as efficient competitor can price in the same way as the dominant undertaking. There is more to it. Also, Post Danmark II does not say that demonstrating that an as efficient (and existing) competitor can in fact compete in the market is not a sufficient defence. The ruling says that one must not forget to include other factors as well. It may be that an as efficient competitor could compete; thus, the economist will approve the rebate scheme. Yet, at the same time it may be that the rebate scheme is designed to foreclose access to the market; hence, the lawyer will not approve the rebate scheme.

This observation is not new. Looking at both the Court’s recent rulings and the recent decisional practise from the Commission, it seems both have applied a more complex test rather than solely relying on either a form based or an effects based test. Both the Court and the Commission have acknowledged that assessing a rebate scheme rarely is a standard assessment. All facts and circumstances must be included in the assessment before it can be established whether a rebate is anti-competitive or not. This is not a surprise. It follows from paragraph 20 in the guidance paper that the Commission will include many other criteria besides the economic evidence in the assessment of a potential exclusionary abuse.

Indeed, in some – or even many – cases it is possible to identify safe harbours in order to conclude that a rebate scheme is not problematic (or problematic), meaning that in some cases it may not be necessary to assess all details of all facts and circumstances before reaching a conclusion. That said, when assessing a rebate scheme one should take care not to cut corners. Even if a rebate appears unproblematic, risks are taken if all facts and circumstances are not considered. Consequently, it should always be considered to do a reverse test, i.e. looking at the rebate scheme from the competitor’s perspective to see whether it seems likely based on the market conditions that competitors are foreclosed due to the rebate scheme even though an economist may demonstrate that an as efficient competitor can match the price offered by the dominant undertaking. Performing this test will often require both a form based and an effects based approach; hence, the involvement of both lawyers and Economists.

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Michael Klöcker is a Partner at LETT's Copenhagen office.

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