European law report - Price cutting in telecoms
In 2003, France Telecom's internet service provider Wanadoo Interactive was fined by the European Court of First Instance (CFI) a whopping €10.35 million for its anti-competitive behaviour resulting from charging predatory pricing. France Telecom has...
In 2003, France Telecom's internet service provider Wanadoo Interactive was fined by the European Court of First Instance (CFI) a whopping €10.35 million for its anti-competitive behaviour resulting from charging predatory pricing. France Telecom has since appealed the CFI decision, which appeal is currently pending before the European Court of Justice (ECJ).
Recently the Advocate General delivered its opinion on whether the decision of the CFI should be overturned or not. Although the opinion that precedes all judgments of the ECJ is not binding on the ECJ, it is followed in the majority of cases.
The Advocate General has recommended a reversal of the CFI decision and is calling for a change in the approach on judging certain practices adopted by dominant companies. The main call for change relates to the assessment of predatory pricing. Predatory pricing refers to the practice of a dominant company that sells a product at a very low price for a period of time with the intent of driving competitors out of the market or creating barriers to entry into the market for potential new competitors. Once the competitors are ousted from the market, the company can raise prices above what the market would otherwise bear and thus recoup any losses it may have sustained during the period it charged low prices.
The complexity of analysing whether a company is charging low prices legitimately or not has been the subject of much dispute. In fact, predatory pricing may be difficult to distinguish from legitimate pro-competitive conduct, such as vigorous discounting. Recoupment of losses has however been recognised as one of the central factors to assist in distinguishing between a legitimate price-cutting exercise from an illegal predatory one.
In determining whether France Telecom had practised predatory pricing, the CFI held that proof of recoupment of losses by the dominant company is not a pre-condition to making a finding of predatory pricing.
On appeal to the ECJ, France Telecom argued that community case-law requires illegitimate price cutting that can only be conceived if there is a possibility of recouping losses, since without the expectation of recoupment predatory pricing does not constitute rational economic behaviour. It explained that where there is no possibility of recouping losses, consumers and their interests should not be harmed. On the other hand, the commission claimed that community case-law does not require separate proof of the possibility of recouping losses and that the existence of a dominant position is enough to conclude that recoupment of costs is possible. The Advocate General, in his opinion, shared the view of France Telecom and maintained that proof of the possibility of recoupment is required in order to find predation pursuant to Article 82 of the EC Treaty. He argued that recouping losses is the result sought by the dominant undertaking and therefore charging predatory pricing would not be anticompetitive if no recoupment of losses is or can be made. In this sense, he followed economic theory according to which recoupment of losses is an essential part of a predatory strategy. Recoupment is the ultimate object of an unlawful predatory pricing scheme; it is the means by which a predator profits from predation.
The ECJ judgment is expected to be delivered in the near future. It remains to be seen whether the ECJ will definitely rule in favour or against the new approach recommended by the Advocate General in his opinion.
• Dr Grech is an associate with Guido de Marco & Associates and heads its European law division.
jgrech@demarcoassociates.com
Recently the Advocate General delivered its opinion on whether the decision of the CFI should be overturned or not. Although the opinion that precedes all judgments of the ECJ is not binding on the ECJ, it is followed in the majority of cases.
The Advocate General has recommended a reversal of the CFI decision and is calling for a change in the approach on judging certain practices adopted by dominant companies. The main call for change relates to the assessment of predatory pricing. Predatory pricing refers to the practice of a dominant company that sells a product at a very low price for a period of time with the intent of driving competitors out of the market or creating barriers to entry into the market for potential new competitors. Once the competitors are ousted from the market, the company can raise prices above what the market would otherwise bear and thus recoup any losses it may have sustained during the period it charged low prices.
The complexity of analysing whether a company is charging low prices legitimately or not has been the subject of much dispute. In fact, predatory pricing may be difficult to distinguish from legitimate pro-competitive conduct, such as vigorous discounting. Recoupment of losses has however been recognised as one of the central factors to assist in distinguishing between a legitimate price-cutting exercise from an illegal predatory one.
In determining whether France Telecom had practised predatory pricing, the CFI held that proof of recoupment of losses by the dominant company is not a pre-condition to making a finding of predatory pricing.
On appeal to the ECJ, France Telecom argued that community case-law requires illegitimate price cutting that can only be conceived if there is a possibility of recouping losses, since without the expectation of recoupment predatory pricing does not constitute rational economic behaviour. It explained that where there is no possibility of recouping losses, consumers and their interests should not be harmed. On the other hand, the commission claimed that community case-law does not require separate proof of the possibility of recouping losses and that the existence of a dominant position is enough to conclude that recoupment of costs is possible. The Advocate General, in his opinion, shared the view of France Telecom and maintained that proof of the possibility of recoupment is required in order to find predation pursuant to Article 82 of the EC Treaty. He argued that recouping losses is the result sought by the dominant undertaking and therefore charging predatory pricing would not be anticompetitive if no recoupment of losses is or can be made. In this sense, he followed economic theory according to which recoupment of losses is an essential part of a predatory strategy. Recoupment is the ultimate object of an unlawful predatory pricing scheme; it is the means by which a predator profits from predation.
The ECJ judgment is expected to be delivered in the near future. It remains to be seen whether the ECJ will definitely rule in favour or against the new approach recommended by the Advocate General in his opinion.
• Dr Grech is an associate with Guido de Marco & Associates and heads its European law division.
jgrech@demarcoassociates.com