Notable improvements include a reaffirmation of the below 40% market share safe harbor and the as-efficient competitor standard, in particular for pricing conduct. Guidance has now been inserted on artificial intelligence and interoperability. Also welcome are the inclusion of clear “green lights” for certain conduct and a detailed section on objective justifications.
However, many flaws remain. In particular, the overall evidentiary burden continues to lie with the dominant undertaking.
How is dominance assessed?
No dominance below 40% market share
The draft Guidelines contained the very unhelpful suggestion that dominance could be found even with a 10% market share.
The Guidelines now reaffirm that dominance is generally unlikely where a firm’s market share is below 40%, unless there are specific market circumstances, such as customer dependence or serious capacity limitations.
Valuable guidance on aftermarkets
The Guidelines include a set of conditions under which competition on a primary market can constrain market power on the aftermarket and, therefore, exclude dominance on the aftermarket.
This is the case where: (i) customers can and are likely to make an informed choice, taking into account lifecycle-pricing between various suppliers in the primary market; and (ii) a sufficient number of customers would adapt their purchasing behavior in the primary market within a reasonable amount of time if an apparent policy of exploitation were to be pursued in the aftermarket.
These conditions originate from the less well-known EFIM case law of the EU Courts and will be welcome guidance for undertakings active in the many industries where aftermarkets are important.
Algorithmic collusion as collective dominance
Collective dominance has hardly featured in the EC’s enforcement practice to date, and collective dominance through tacit coordination (i.e., without there being any agreement or structural links between firms) even less so. The inclusion of a relatively lengthy section on collective dominance based on tacit coordination therefore indicates an important shift in focus.
Significantly, the Guidelines suggest that the EC sees tacit coordination as a potential route to reach cases of algorithmic collusion. The EC is not particularly coy about this. A footnote clearly states that “the increasing use of algorithms may lead to more findings of collective dominance based on tacit coordination, as algorithms can facilitate such coordination also in more complex environments.”
What conduct amounts to exclusionary abuse?
A two-step test—but with limited relevance
The Guidelines maintain as a general framework a two-step test to determine whether a dominant undertaking’s conduct is likely to constitute an abuse under EU antitrust rules (Article 102 TFEU). Conduct must: (i) depart from “competition on the merits”; and (ii) be capable of producing exclusionary effects.
Criticism of this approach during the consultation centered on a lack of clarity as to what “competition on the merits” meant and how the limbs could be distinguished from each other.
However, that may now be less of a concern. The Guidelines state that departure from competition on the merits does not need to be established for: (i) conduct for which the EU Courts have developed specific analytical frameworks (predatory pricing, margin squeeze, exclusive dealing, tying and bundling, refusal to supply); (ii) conduct capable of excluding a hypothetical as-efficient competitor (AEC); and (iii) conduct by its very nature harmful to competition.
In practice, these categories cover many types of potentially abusive conduct, leaving the instances in which the two-step test applies rather limited. The Guidelines point to rebates that are not conditional on exclusivity (unless a price-cost test can be applied), access restrictions, and self-preferencing. Unfortunately, the EC refrains from articulating concretely how the two-step test should be applied for these three types of conduct, limiting itself to listing elements that could be taken into account.
Overall, the EC’s continued adherence to an overarching two-step test is the most confusing element of the Guidelines—likely explained as an attempt to create the impression of a principles-based approach in an area where enforcement remains heavily case specific and unpredictable, particularly in the case of novel conduct.
As-efficient competitor benchmark as a rule, but with exceptions
The EU abuse of dominance rules (Article 102 TFEU) do not protect less efficient competitors from exiting the market.
They can therefore in principle only be relied upon where abusive conduct by dominant undertakings would lead to the exclusion of AECs (referred to as “equally efficient competitors” in the Guidelines).
EU court rulings set out only limited exceptions to this. Examples include where new entrants are not yet as efficient but may be in the future, and where there are specific market circumstances in which an AEC simply cannot materialize (e.g., in the case of pre-existing exclusive rights). There are also situations where it would not be possible to obtain objective and reliable information on the efficiency of a dominant undertaking’s competitors.
In its draft Guidelines, the EC turned these exceptions into a rule, stating that “[t]he assessment of whether conduct is capable of producing exclusionary effects does not require showing that the actual or potential competitors that are affected by the conduct are as efficient as the dominant undertaking.”
After much criticism, the Guidelines now clearly accept the AEC-benchmark as the rule for demonstrating whether conduct is capable of having exclusionary effects, both for pricing and non-pricing conduct, albeit that the exceptions, in particular relating to non-pricing conduct, continue to figure prominently.
Price-cost test when as-efficient competitor benchmark applies
A price-cost test is typically carried out by reference to the dominant undertaking’s price and cost data. It assesses whether a hypothetical AEC in terms of cost structure has the ability to offer a rate to encourage customers to switch supplier, despite the conduct, without that causing that competitor to incur losses.
For non-pricing conduct, it may not always be possible to reliably quantify the non-price elements of the conduct. When that is the case, the EC will resort to evidence of a qualitative nature to evaluate the ability of the AEC to compete profitably.
The EC will usually take the view that a price-cost test cannot be applied to non-pricing conduct. However, if a dominant undertaking submits an analysis based on a price-cost test, the EC is required to examine its probative value. Since a proper quantitative, price-based analysis is usually less easy to refute than qualitative evidence, dominant undertakings are advised to spend sufficient time developing a price-based analysis of their non-pricing conduct where possible.
Causation is a low bar
The Guidelines affirm that exclusionary effects must be attributable to the conduct in question. However, the threshold is low—it is sufficient to establish that the conduct increases the likelihood of the exclusionary effects, which can also be potential.
In practice, this will make it extremely difficult for firms to challenge any finding of causation by the EC. Showing the absence of actual exclusionary effects will not be enough.
Specific conduct categories and presumptions
No real watering down of the presumptions
The draft Guidelines explicitly stated that a number of different types of conduct are presumed to create exclusionary effects (exclusive supply or purchasing agreements, rebates conditional upon exclusivity, predatory pricing, margin squeeze in the presence of negative spreads, and certain forms of tying and bundling). This presumption-led approach faced heavy push-back from stakeholders.
In the final version, only exclusive dealing, including rebates conditional upon exclusivity, retains such a presumption (see further below).
However, the EC’s burden of proof arguably remains the same as under the draft.
For example, regarding predatory pricing, it remains the case that “[i]f prices are below average variable costs (AVC), the pricing conduct is to be considered predatory” and “[i]f prices are below average total costs (ATC) but above AVC, the pricing conduct is to be regarded as predatory if it is part of a plan to eliminate or reduce competition.” There is no difference in language compared to the draft Guidelines and the test is the same.
The same applies to margin squeeze in the presence of negative spreads and, in practice, likely also to some forms of tying and bundling, where the reference to a presumption has been replaced by a very low evidentiary standard (“without a very elaborate analysis”).
Thus, while the Guidelines have narrowed the use of presumptions, in practice the tests for many types of conduct remain unchanged.
Explicit safe harbors for pricing conduct
The Guidelines explicitly state that pricing conduct is not predatory if prices are above ATC.
In addition, a conditional rebate scheme is not considered to distort effective competition when the effective price is above long-run average incremental costs (LRAIC).
Higher evidentiary threshold for de facto exclusive dealing
Notable is a new evidentiary condition for arrangements leading to de facto exclusivity (i.e., arrangements not referring explicitly to exclusivity but which, in practice, result in exclusivity).
The EC will only treat such arrangements as de facto exclusive dealing where there is evidence that the dominant undertaking intended to require or incentivize the customer to purchase all or most of its requirements from the dominant undertaking. In the absence of such evidence, arrangements are assessed under the general principles or, where relevant, the rebates framework.
This is a material—and important—narrowing of the presumption for exclusive dealing.
It also creates a practical segmentation: volume-based rebates without evidence of exclusionary intent are to be assessed under the framework for rebates, with its price-cost test and above-LRAIC safe harbor referred to above.
The upshot: companies that use rebate systems based on volume targets should avoid any language referring to exclusivity.
Lower evidentiary threshold for rebates not conditional upon exclusivity
Regarding rebates not conditional upon exclusivity, the Guidelines now state that “[w]hen the price-cost test shows that (i) the effective price is below average avoidable costs (AAC), or (ii) the effective price is below LRAIC but above AAC and the conduct forms part of a plan to eliminate or reduce competition, it is deemed that an equally efficient competitor cannot effectively compete for the customers to whom the conditional rebate applies.”
Even though the conclusion that a conditional rebate scheme distorts effective competition still requires a further assessment of the extent of the dominant position, coverage and duration, the “below LRAIC but above AAC” standard is new and introduces presumption-like language.
Access restrictions and interoperability
Access restrictions refer to a dominant undertaking restricting access to an input, without the restriction amounting to a refusal to supply. The Guidelines reserve the stricter refusal-to-supply test for one scenario only: an input the dominant undertaking developed solely for its own use.
Other access restrictions, such as restricting access to an input developed for use by third parties or applying unfair or unreasonable access conditions, are assessed under the general less demanding test, which does not require indispensability. Falling outside the refusal-to-supply framework is therefore not necessarily an advantage.
Access restrictions are of particular importance in the digital sector, where third party interoperability has received close scrutiny—including under the Digital Markets Act. The Guidelines discuss interoperability in the section on objective justifications, recognizing that there can be circumstances in which refusing an interoperability request can be justified.
However, these circumstances are narrow and nuanced. Leaning on the framework set out in Android Auto, the fact that a technical solution to grant interoperability doesn’t exist, or would be difficult to develop, is not an objective justification unless it compromises the integrity or security of the dominant company’s products. Similarly, if it is technically impossible to grant interoperability, that may be an objective justification for not doing so—but the Guidelines don’t offer guidance on the lengths a company must go to before something is considered “impossible.”
From a practical point of view, failing to respond to an interoperability request can be used as evidence that a refusal is not objectively justified. Simply responding to a request can help to avoid a lengthy and costly investigation.
Self-preferencing: not problematic per se, but no demotion needed
The Guidelines explicitly recognize that there is no general rule that so-called self-preferencing is problematic from an antitrust standpoint, even when carried out by dominant undertakings, and may only lead to a distortion of competition in specific situations.
However, uncertainties remain. The Guidelines are ambiguous about whether self-preferencing is always a leveraging practice. This leaves the EC a degree of maneuvrability to fit self-preferencing within other frameworks (such as discrimination), which may be attractive where defining two separate markets for leveraging is challenging.
Plus, while the Google Shopping judgment suggests that self-preferencing is only problematic where there is both favorable treatment of the dominant undertaking’s own products and the demotion of those of competitors, the Guidelines do not engage with the demotion component. Instead, they merely state—in a footnote—that, the less favorable treatment of products of competitors is not necessary to establish the existence of so-called self-preferencing “in the Commission’s experience.”
Conduct harmful by nature remains without a transparent test
The Guidelines state that some practices are deemed harmful by their very nature and unlikely to be justifiable.
Examples include payments to customers conditional on those customers not selling the products of a rival to the dominant firm, dismantling of infrastructure that a competitor relies on to effectively compete, and establishing rules and sanctions that give the dominant company the power to deny rivals’ access to the market.
This is not, however, a closed list, and further undetermined conduct could fall within scope. There is no clear test, apart from an indication that it concerns conduct that has no economic interest other than of restricting competition. How the EC will assess such conduct remains unclear.
Expanded guidance on objective justifications
The Guidelines contain a much-expanded section on objective justifications.
Amongst others, sustainability benefits are now expressly recognized as a form of qualitative efficiency, for example in the form of reduced raw material use, less polluting production or distribution, increased recyclability, more resilient infrastructure, reduced supply-chain disruption risk, and new more sustainable products. Out-of-market efficiencies and EU resilience are also referenced.
The Guidelines underscore the need to substantiate each defense with concrete and detailed evidence. Undertakings should thus make it a habit to build contemporaneous evidentiary records (internal decision documents, financial substantiation, quantification where reasonably possible, and analysis of less restrictive alternatives) and avoid relying on mere generalities or ex-post studies once investigations are underway.
Practice has shown that once exclusionary conduct by a dominant undertaking has been established, there is very little room to justify it—the evidentiary thresholds are very high. It thus remains to be seen whether this section signals a softening in the EC’s future approach.
Our assessment: the EC in the driving seat
The Guidelines contain various elements that are positive from the point of view of legal certainty.
Undertakings will welcome the reaffirmation of the 40% dominance threshold, the guidance on aftermarkets, the explicit safe harbors regarding pricing conduct and the increased evidentiary threshold for de facto exclusivity. The section on objective justifications is insightful, even if its practical effect may be limited.
Overall, however, the Guidelines entail a maximalist approach to enforcement. For many types of conduct the EC only needs to meet a relatively low evidentiary threshold before the evidentiary burden switches to the dominant undertaking.
This creates an effect similar to a presumption. And the effect is exacerbated by the fact that, where possible, the EC is likely to avoid using demanding but more accepted means of evidence (such as a counterfactual analysis or a price-cost test for non-pricing conduct), and to resort to a range of evidence that more easily allows it to draw the conclusions it sees fit.
On balance, the Guidelines create an evidentiary framework that favors the EC (and national antitrust authorities) at the expense of the defending undertakings.
Takeaways for dominant firms
With all this in mind, potentially dominant firms navigating the EU antitrust landscape should consider the following:
- Remove exclusivity language from volume-based rebate schemes to avoid a finding of de facto exclusivity and the application of the presumption that exclusive dealing is distortive of competition.
- Keep pricing within the safe harbors or be able and prepared to show that pricing does not lead to exclusionary effects.
- Conduct a contemporaneous price-based analysis for both pricing and non-pricing conduct whenever possible.
- Carefully document and motivate any refusal of interoperability or access requests.
- Build a contemporaneous evidentiary record to support objective justifications and quantify any advantages specific conduct generates as much as possible.
