Art. 102 TFEU - specific abusive conducts - loyalty rebates

1. Concept 

As one of the common practices by firms in markets, the loyalty rebates systems are often employed to lure higher demand by granting the customers a discount to reward them for a particular form of purchasing behavior.

The loyalty rebates grants the customers a retroactive discount if a threshold was reached within a certain period. The undertaking granting such a discount does not have to tie the purchasers by a formal obligation; it could apply unilaterally a system of discounts conditional on customers purchasing all or most of their demand from a dominant undertaking[1]. However, the loyalty or fidelity rebates should be distinguished from quantity discounts that relate only to the volume of purchases from the manufacturer, which is, in principle not considered as an infringement of Article 102 TFEU[2]. It should also be distinguished from other conditional rebates and problematic discounts that can be incremental or retroactive such as total-sales and aggregate rebates.

2. Anti-competitive Effect

The first look at such a practice brings to mind the justification of increasing returns to scale, resulting in lower prices for consumers which is a pro-competitive result.  Sounds legitimate, but is it always!

In practice, a dominant undertaking may use these rebates to create a suction effect to the ‘contestable’ portion of the demand of the customer i.e. the amount that the customer might prefer to purchase from a competitor.[3] That would raise the switching costs for the customers and make it less attractive for them to switch small amounts of demand to another supplier, the marginal price might even become negative which can lead to foreclosure and might result in driving actual competitors out of the market or creating barriers to entry for potential competitors.

Some even argue that the loyalty rebates have been underestimated as to their negative effects; based on the assumption that loyalty rebates lead to non-rational buying behavior, which may result in financial losses for consumers[4].

3. The "as-efficient competitor" test

In all cases, loyalty rebates cannot be forbidden per se, and that leads us to the critical question; when are rebate systems considered as anti-competitive and an infringement of article 102 TFEU? The European Commission approach in answering this question include investigating whether the rebate system is capable of hindering expansion or entry even by competitors that are equally efficient[5] by estimating what price a competitor would have to offer to be able to compete with the dominant undertaking. An approach that have been adopted by the ECJ repeatedly.

However, recently and precisely on October 2015 the ECJ issued a ruling on a loyalty rebates subject stating that it is not always necessary to apply the “as-efficient competitor” test to condemn such a practice as an abuse under article 102 TFEU, particularly where the share of the dominant undertaking was such that the “emergence of an as-efficient competitor was practically impossible”[6].

Furthermore, it should be mentioned that the courts in the U.S. can be described as more lenient in regards to loyalty rebates. However, cases like AMD v. Intel (even though it ended in settlement between the two firms) assured that the subject is not settled and the anticompetitive effects of the loyalty rebates are taken into consideration.

4. Conclusion

What is settled is that the decision for the time being is taken on case by case basis and all the circumstances of the case needs to be considered and, especially to determine if the rebates have exclusionary effect, which is a reflection of another legal uncertainty position that can be a concern especially in a self-assessment system.