• Strict Line on Predatory Pricing Upheld in Europe
  • February 2, 2007
  • Law Firm: Gibson, Dunn & Crutcher LLP - Los Angeles Office
  • The European Court of First Instance (the "CFI") handed down a key and long-awaited antitrust Judgment today in France Télécom SA v Commission, addressing a number of issues relating to predatory pricing in the EU. 

    The strict approach to EU law on predatory pricing has been confirmed. As in recent cases, the CFI has declined to rein in the Commission’s ‘legal’ approach in favour of a more effects-based analysis. This case was not helped by unhelpful internal documents and the inability of the parties to explain them away at trial. 

    For firms which may have market power, the road ahead remains fraught with difficulties, particularly in relation to how they respond to aggressive competition. It is essential that clear contemporaneous evidence of legitimate business practices are kept and that documents which are liable to mischaracterisation (or worse) are not created.

    Main Points 

    While the calculations of prices and costs in the case were complicated by the particularities of the communications sector, the Judgment provides guidance across all sectors. In particular:

    • The European Commission (the “Commission”) has a broad discretion in selecting the appropriate accounting methodology. The onus rests on the applicant to show that the methodology adopted by the Commission is unlawful, and that its adoption amounts to a manifest error. It is not enough that another methodology was a credible alternative. The CFI’s deference to the Commission’s discretion in this regard has disturbing echoes to the approach it used to take in relation to the importance of economic assessments in antitrust cases.

    • Where there is evidence of a strategy and/ or intent to foreclose, a dominant entity has no absolute right to match its competitors’ prices.

    • All presentations by/documents from management will almost certainly be reviewed by a regulator looking for signs of predatory intent. 

    • The fact that recoupment of losses is unlikely is no defence. However, it may be a relevant factor in considering whether there was an intention to predate.

    In some ways, the Commission’s decision did not represent the strictest possible application of Article 82, the prohibition of abuse of a dominant position. In view of the CFI’s Judgment today, the Commission may be encouraged to further flex its Article 82 EC muscles. 

    The Facts

    In its 16 July 2003 decision, the Commission found that Wanadoo Interactive SA ("WIN") had infringed Article 82 EC by charging predatory prices for its eXtense and Wanadoo ADSL services that, until August 2001, did not enable it to cover its variable costs and, after August 2001, did not cover its total costs, as part of a plan to pre-empt the market for high-speed Internet access during a key phase in the development of the market.

    WIN appealed the Commission's decision, claiming the Commission had inter alia

    • applied a cost recovery test that was contrary to Article 82 EC both in relation to the costs taken into account and the methodology; 

    • taken an approach which denied WIN its fundamental right to align its conduct to that of its competitors; and

    • made errors of law and manifest errors of assessment in finding that WIN had a plan of predation and that it was not necessary to prove that WIN had recovered its losses.

    Predation Through Non-Recovery of Adjusted Costs

    In today's Judgment, the CFI considered the cost recovery test applied by the Commission, and the methodology on which the finding of abuse rested. Having observed that the Commission must be afforded a broad discretion for complex economic assessments, the CFI reviewed the Commission's approach to calculation of both average variable and average total costs. The Commission accepted that, in an embryonic market, where customer acquisition costs represent a substantial proportion of expenditure, a provider cannot immediately recover its full costs. It therefore considered whether the revenues covered adjusted costs. 

    The CFI found that the Commission's calculation of costs, including its decision to spread customer acquisition costs across the estimated minimum subscription period, was appropriate, even though WIN itself did not depreciate the relevant expenditure in this way. Further, the CFI found that the Commission had correctly not taken subsequent reductions that were not foreseeable at the time of the alleged abuse into account in assessing recurrent costs at the time of the alleged abuse. 

    Finally, in relation to determining the appropriate methodology for calculating costs, the CFI considered WIN's argument that the only appropriate costing methodology was discounted cash-flows, noting that it is not enough to show that an alternative methodology could be appropriate, WIN would have had to show that the Commission's use of depreciated assets and costs was unlawful. WIN failed to do so.

    No Absolute Right to Meet Competition

    In considering WIN's claim that the Commission's finding of predation had deprived WIN of the ability to meet its competitors' prices, the CFI found that a dominant entity has only a limited right to do so. The CFI noted that the only previous Judgment of the Court which described such a right referred to matching prices only in respect of a particular customer, not across the board. Further, the CFI noted that that previous Judgment had not ruled on the questions as to whether it is lawful to align prices where doing so would involve pricing below cost.

    In considering precisely that question in this case, the CFI stated that a dominant undertaking cannot be permitted to take steps to protect its commercial interests if its purpose is to strengthen its dominant position. As a result, a dominant entity has no absolute right to align its prices to those of its competitors. Even if to do so is not in itself abusive or objectionable, it might become so when it is aimed not only at protecting its interests but also at strengthening and abusing a dominant position. As such, the CFI is sending quite clear signals that it will read the "meeting competition" defence narrowly.

    A Predatory Plan

    In assessing the sufficiency of the documents relied on by the Commission to establish that there was a predatory plan sufficient to show predatory intent, the CFI noted that the impugned documents were from management-level staff and related to formal presentations and a detailed framework letter related to the decision-making process for WIN's business. In this respect, the Commission's tough approach to exclusionary abuses has been reinforced.

    Recoupment of Losses Not a Pre-Condition to Predation

    WIN submitted that if a dominant entity cannot reasonably expect to reduce long-term competition with a view to recouping its losses, it is not rational for that entity to engage in predatory pricing. In essence, it argued that unlikely recoupment of losses was a defence to predatory pricing. The CFI, referring to the Judgment of the Court of Justice in Tetra Pak II reaffirmed that proof of recoupment is not a pre-condition to a finding of predatory pricing. However, the CFI's parting words regarding recoupment could be construed as implying that recoupment may be relevant in considering whether there is a plan to eliminate competition. It may be that the Commission needs to nuance the language in paragraph 122 of its discussion paper on the application of Article 82 EC to exclusionary abuses to reflect this potential evidentiary role for the likelihood of recoupment.