Excessive pricing and EU Competition Law: the Opinion of the AG Wahl

The CJEU has already dealt with the issue whether pricing policies of collecting managing society violated Article 102 TFEU in Tournier (Case 395/87, Ministère Public v Tornier), Lucazeau (Case 110/88, Lucazeau v SACEM), Kanal 5 v STIM (Case C-52/07) and OSA v Léčebné lázně Mariánské Lázně a.s (Case C-351/12). This issue emerged again in AKKA/LAA (Case C-177/16, Opinion of Advocate General Wahl deliveredon 6th April 2017) where the AG Wahl gave his thoughts on the methodologies a competition authority has to follow to establish an anti-competitive excessive pricing practice.

The facts of the case and the preliminary questions referred to the CJEU

In April 2013 the Competition Council of Latvia (CCL) found that AKKA/LAA, a collecting society, applied excessively high rates in respect of the remuneration of authors. To reach that conclusion, the CCL compared the rates charged by AKKA/LAA with those applied in neighbouring Lithuania and Estonia as well as to those applied in other EU Member States adjusted with the EPP index, which is a purchasing power parity index based on the gross domestic product. Then the CCL reached the conclusion that AKKA/LAA had violated Article 13(4) of the Latvian Competition Law, corresponding to Article 102 TFEU, and levied a fine on it. On appeal, the infringement decision of the CCL was upheld by the Regional Administrative Court, which, however, annulled the CCL decision regarding the quantum of the levied fine.

CCL and AKKA/LAA challenged the appeal judgment before the Supreme Court of Latvia that stayed proceeding and referred the following question to the CJEU: ‘a) Is Article 102 (2)(a) TFEU applicable to a dispute concerning the rates laid down by a national copyright management organisation if that entity also collects remuneration in respect of works of foreign authors and the rates laid down by it may be a deterrent to the use of those works in the Member State in question? b) For the purpose of defining the concept of unfair prices used in Article 102 (2)(a) TFEU, in the context of the management of copyright and related rights, is it appropriate and sufficient —– and in which cases —– to draw a comparison between the prices (rates) in the market in question and the prices (rates) in neighbouring markets? c) For the purpose of defining the concept of unfair prices used in Article 102 (2)(a)TFEU in the context of the management of copyright and related rights, is it appropriate and sufficient to use the [PPP] index based on gross domestic product? d) Must the comparison of rates be made for each separate segment thereof or in relation to the average level of the rates? e) When must it be considered that the difference in the rates examined in connection with the concept of unfair prices used in Article 102 (2)(a) TFEU is appreciable, with the result that it is incumbent upon the economic operator enjoying a dominant position to demonstrate that its rates are fair?  f) What information can reasonably be expected from an economic operator to prove the fair nature of the rates for works covered by copyright, within the scope of Article 102 (2)(a) TFEU, if the cost of those works cannot be determined in the same way as that of products of a material nature? Is it solely a question of the cost of administering the copyright management organisation?  g) In the event of infringement of competition law, is it appropriate to exclude from the business turnover of a copyright management organisation, for the purposes of determining a fine, the remuneration paid to authors by that economic operator?’

The Opinion of AG Wahl

This post focuses on questions c), d) and f) that are about the correct methodology that the acting competition authority has to apply in order to establish a competition infringement of the shape of an excessive pricing practice.

By the seminal judgment of United Brands the CJEU has crafted a two-step test to establish abusive excessive prices. The first step is a price-cost comparison and under the second step of the test the Commission assesses the fairness of the prices charged by the dominant undertakings. Though in United Brands the Commission compared the prices charged by the dominant undertaking in the relevant market and the hypothetical prices that would have been charged in a competitive market (‘the benchmark price’), the CJEU was ready to consider alternative methodologies to administer the first step of the United Brands test.

In that regard, the AG Wahl rightly observed that ‘It can be safely stated that, at the current stage of legal and economic thinking, there is no single method, test or set of criteria which is generally accepted in economic writings or across jurisdictions for that purpose. Different authorities as well as lawyers and economists have suggested a number of methods of analysis (as well as a variety of criteria, tests or ‘screens’) to that end. However, in point of fact, each of those methods reveals some inherent weaknesses.’ (para. 36).

The AG Wahl then discussed the problems associated with the possible methodologies that may apply for the purpose of the first step of the United Brands test: ‘In the first place, none of those methods can be used in all circumstances, since their suitability (and, at times, the very possibility of applying them) depends very much on the specific features of each case. To give but one example, a cost-price comparison makes little sense with regard to the supply of certain intangible goods such as — as is the case in the main proceedings — copyrighted musical works’ (para. 37).

‘In the second place, the information required to perform the operations necessary to calculate the benchmark price may be missing or incomplete, or its value controversial. For instance, identifying costs and linking them to a particular product is highly complex in most types of businesses and for many undertakings. Calculating profit margins is thus a rather uncertain exercise. It should not be overlooked that accounting standards and rates may change across industries or countries, due to different legal provisions or accounting conventions, and, furthermore, they may not always reflect the relevant economic concepts’ (para.38).

‘In the third place, comparing prices across different geographic markets, competitors and/or time periods also presents risks. Markets are rarely so homogenous that a meaningful comparison can be made immediately and automatically. A number of ‘adjustments’ to the data which emerges from the market(s) used as a point of comparison may be necessary before that data can be used to determine the benchmark price’ (para. 39). ‘To start with, so far as concerns geographic comparisons, elements such as — to name but a few — domestic taxes, the particular characteristics of the national labour market and local consumers’ preferences may significantly affect the final prices of the relevant product or service. With regard to comparisons across competitors, it should not be overlooked that differences in prices may simply reflect different qualities: a more expensive product may objectively be (or be merely perceived to be) of superior quality’ (para. 40).

‘Finally, as regards comparisons over time, one must be mindful of the fact that changes in factors which may affect the ultimate price of a product or service can occur rather quickly in the market. Those factors may concern legitimate business strategies (for example, an undertaking might decide to try to penetrate a new market and, for some time, charge a very low price, thus accepting minimal margins); an increase in costs (due to external factors such as changes in local taxation or borrowing costs, or to business decisions of the undertaking itself such as choices regarding advertising campaigns or research and development); or even consumer preferences (for example, shifts in the perception of a product by the customers in response to new marketing strategies). All those factors may lead to (usually legitimate) sudden and significant changes in prices’ (para.41).

Bearing in mind all the above arguments and factors, the AG Wahl concluded that ‘because of those limitations, antitrust authorities and economists generally agree that the exercise consisting of determining the benchmark price in a case of possible excessive pricing carries a high risk of producing both type I errors (or false positives: a price is mistakenly considered to be above the competitive price) and type II errors (or false negatives: a price is mistakenly considered not to be above the competitive price)’ (para. 42).

Competition authorities can rely on the combination of several methods but there may be cases in which only one method may be suitable to determine the benchmark price. In that regard, the AG Wahl gives a non-exhaustive list of factors that mat corroborate or refute the results of the methodology applied by the acting competition authority:

‘First, a price cannot easily be set significantly above the competitive level where the market is not protected by high barriers to entry or expansion. Otherwise, as mentioned above, the market should, in principle, be able to self-correct in the short to medium term: high prices should normally attract new entrants or encourage existing competitors to expand. That is why — as stated in the beginning of this Opinion — I am convinced that unfair prices under Article 102 TFEU can only exist in regulated markets, where the public authorities exert some form of control over the forces of supply and, consequently, the scope for free and open competition is reduced. Obviously, the higher and longer-lasting the barriers created by the legislature, the more a dominant undertaking should be able to exercise its market power’ (para.48).

‘Second, a price significantly in excess of a competitive price is more unlikely to occur in markets where there is a sectoral regulator whose task is, inter alia, to fix or control prices charged by the undertakings active in that sector. Sectoral authorities are clearly better-equipped than competition authorities to oversee prices and, where necessary, act to remedy possible abuses. It would seem, therefore, that antitrust infringements in those situations should be mainly confined to cases of error or, more generally, to regulatory failures: cases where the sectoral authority should have intervened and erroneously failed to do so’ (para. 49).

‘Third, an undertaking with market power is evidently less able to leverage its position when negotiating with powerful buyers. To give an example, so far as concerns licences for the use of copyrighted musical works, the negotiating position of small shops is likely to be different from that of international platforms (such as Spotify) or groups of large and sophisticated undertakings (such as Hollywood majors). The size and financial strength of an undertaking (or group of undertakings) might indeed have a significant weight in the negotiations. However, the extent to which the licenced products constitute an important (or even indispensable) input for the customers’ business may also be of great importance in that context’ (para.49).

That said, the AG Wahl went on by assessing whether the methodology applied by the CCL was correct. As hinted above, the CCL relied on the criterion of yardstick competition bases on a geographical comparison. The AG Wahl gave some guidance on how this method should correctly apply that it is for national courts to consider when assessing the infringement decisions of national competition authorities. Importantly, the AG Wahl was of the view that the choice of CCL to take Lithuania and Estonia as Member States of reference for the purpose of the geographical comparison was based on objective, appropriate and verifiable criteria. The AG Wahl also praised the CCL for the considering more countries when applying the PPP index. A comparison with only two countries may not be reliable, thereby the range of countries of reference should be as broad as possible. Therefore, the AG Wahl concluded that ‘That said, any meaningful difference between the relevant Member State and the other Member States chosen for a comparison should be accounted for. As mentioned above, the Court has indeed made clear that a comparison across countries is possible if done on a consistent basis. The referring court should thus check that the necessary adjustments have been made, so as to take into account the differences existing between the different countries’ (para.68).    

In conclusion, the ICA had concerns that, by the packaging collusion and the corrugated cardboard collusion, the parties coordinated their commercial policies in the markets for corrugated cardboard and packaging with the aim to fixing prices and allocating market shares. Moreover, the sensitive information provided by GIFCO would enable the parties to monitor the colluders’ compliance with the collusive arrangements.

The AG Wahl also saw the use of a PPP index as appropriate for a cross-country comparison. ‘If the key aim of the analysis is to identify the economic value of a given transaction, that assessment cannot be made in abstracto, but must necessarily take into account the economic and financial context in which the transaction takes place’ (para.90). Whether the use of PPP indexes is also sufficient it depends on whether the other factors affecting the final price of the relevant product are considered. As made clear by the AG Wahl, the difference between the price applied by the dominant undertaking and the relevant benchmark price is excessive for the purpose of Article 102 TFEU when the former is ‘significantly and persistent above the benchmark price’ (para.106). However, looking at the decisional practice of the European Commission and the other national competition authorities, the AG Wahl was unable to give clear guidance on significant and persistent such difference must be. Rather cautiously, the AG Wahl added that ‘On the one hand, an authority should intervene under Article 102 TFEU only when it feels sure that, regardless of the limitations and uncertainties surrounding the calculation of the benchmark price, the difference between that price and the actual price is of such a magnitude that almost no doubt remains as to the latter’s abusive nature. On the other hand, the more significant the difference between the benchmark price and the actual price, and the longer the period in which that high price is applied, the easier it should be for an authority to discharge its burden of proof’ (para.112).

Then, the AG Wahl focused on the second step of the United Brands test, the fairness assessment. A price can be unfair in itself, when it is charged to customers in return of no service or products or the price is particularly high, or the price is unfair if compared to competing products. This second scenario is often ‘sanity-check of the assessment made with regard to the benchmark price: there may be relevant factors which were either overlooked in that context, or were consciously not taken into account because they were not easily quantifiable in financial terms’ (para. 124). In the view of the AG Wahl possibly legitimate reasons for the high prices may concern the production or marketing of a given product or service, such as the actual costs incurred by the dominant undertaking. The relevant costs to be considered are not only the direct and indirect production costs and the cost of capital but also all types of overheads. Consistently with Scandlines Sverige v Port of Helsingborg (Commission decision, Case COMP/A.36.568/D3), also the economic value for customers of the product or service supplied by the dominant undertaking must be considered. That said, the AG Wahl identified a number of factors and circumstances that may be taken into account in AKKA/ALA for the purpose of the fairness assessment: ‘the demand for licences by AKKA/LAA’s customers such as shops or other similar undertakings is a direct function of the economic benefits they can draw from those licenses. Accordingly, higher rates in Latvia could be justified if it were to be proven that the benefits that AKKA/LAA’s customers derive from music reproduction were to be larger than those derived by the same type of customers in other countries. For example, it cannot be ruled out that, because of different purchasing habits and cultural traditions, shops and other commercial activities in some countries may increase their business more than in other countries by reason of the public performance of music in their premises. In those circumstances, the economic value of the licences granted by the collecting society would naturally be higher in the former countries than in the latter ones.’(para. 129). Crucially, ‘it is only when no rational economic explanation —– other than the mere capacity and willingness to use market power even when abusive — can be found for the high price applied by a dominant undertaking that that price may be qualified as abusive under Article 102 TFEU’ (para.131).

In the light of the above the AG Wahl made the following conclusions: ‘a) the conduct of a collecting society which is charged with the task of collecting remuneration also in respect of works of foreign authors may affect trade between Member States for the purposes of Article 102 TFEU; b) in a situation such as the one in the main proceedings, it is, in principle, appropriate to draw a comparison between the rates in the market in question and the rates in other markets. It is, however, for the national court to verify, in the light of all the relevant circumstances, whether the comparison made was, on the one hand, correctly carried out and, on the other hand, sufficient; c) when comparing the rates charged by different collecting societies, it may be appropriate to use a purchasing power parity index based on gross domestic product; whether that instrument is sufficient depends on whether the other factors which may affect the final price of a product or service in a given country are also taken into account; d) a comparison of the rates charged by different collecting societies should be made for each relevant market; e) only prices which are significantly and persistently above the benchmark may be considered excessive;  f) a dominant undertaking may prove the fair nature of the prices applied on grounds, in particular, of higher production and marketing costs, or, more generally, of higher economic value of the product or service supplied; g) for the purposes of determining the fine to be imposed on a collecting society for a breach of the EU competition rules, the remuneration paid to authors should not be excluded from the turnover of that body’ (para. 145).

Conclusion

The Opinion of AG Wahl reminds of the well-known difficulties for competition authorities to establish abusive excessive prices, this being a task more suitable for sectoral regulators. That said, the AG Wahl also indicated under which market conditions finding an excessive pricing practice is more likely. Rather cautiously, in what it is perhaps the most important part of the Opinion, the AG Wahl claimed that excessive prices in breach of Article 102 TFEU can be found only in regulated markets. Incidentally, it may be worth noting that in one of the few latest cases in which the Italian Competition Authority succeeded in establishing an abusive excessive prices practice, to carry out the first step of the United Brands test, the ICA relied on regulated costs as a proxy for the economic value of the services supplied by the dominant undertakings. Indeed, in the ICA’s view the regulated costs determined by the aviation regulator furnish a reliable indication of the costs incurred by the managers of the airports of Milan and Rome to provide the relevant services ( on this case see, Giannino Michele, ‘Enforcement of Excessive Price Competition Provisions in the Airport Sector: An Overview’; https://ssrn.com/abstract=2080489 or http://dx.doi.org/10.2139/ssrn.2080489).

A further interesting point made by the AG Wahl concerns the much controversial assessment step of the United Brands test. It was argued that a price can be considered as unfair for the purpose of Article 102 TFEU when the difference between the chosen benchmark price and the prices applied by the dominant undertaking is both significantly and persistently. Unfortunately, the AG Wahl was unable to shed more lights on what the adverbs ‘significantly’ and ‘persistently’ mean in the context of Article 102 TFEU investigations. In other words, how much the prices applied by the dominant undertakings should be higher than the benchmark price and for how long such higher prices should be charged are all relevant questions to establish the competition liability of the dominant undertaking. Unfortunately, those questions were left unanswered in the Opinion of the AG Wahl owning to the fact that they were not clearly addressed by competition authorities and authors. Hopefully, for the sake of clarity, they may be dealt with by the ensuing judgment of the CJEU.