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Recoupment in predatory pricing: France Telecom v Commission

14 April 2009

On 2 April 2009, the European Court of Justice (ECJ) dismissed as partially inadmissible and partially unfounded France Telecom's appeal against the Court of First Instance's (CFI's) judgment of 30 January 2007.
The CFI's judgment upheld the European Commission's (the Commission) finding that France Telecom had abused its dominant position on the French market for high-speed internet access between March 2001 and October 2002 (the Judgment).

The Judgment is of importance in two principal respects. First, it confirms that in EC law it is unnecessary to show that a dominant undertaking must have a reasonable prospect of recouping its losses in order to prove the abuse of predatory pricing, which is contrary to the position under US law. Secondly, it clarifies that it will not be a defence to an allegation of abusive conduct in all circumstances for a dominant undertaking to show that it was aligning its prices with those of its rivals, and therefore meeting competition in the market.
 
Background
 
In July 1999, the Commission launched a sectoral inquiry into the provision of local loop access services and the use of residential local loop in the EU. This included a review of the provision of high-speed internet access by competitors in France. As a result of this inquiry, the Commission opened an investigation into the activities of France Telecom. The Commission found that the prices charged by France Telecom for its eXtense and Wanadoo internet services were below average variable cost (AVC – costs that vary depending on the quantities produced) between March 2001 and August 2001, and were approximately equal to AVC but below average total costs (ATC – average fixed costs plus average variable costs) between August 2001 and October 2002. This was found to be part of a plan by France Telecom to pre-empt its competitors in the emerging market for the provision of high-speed internet access.
As a result, on 16 July 2003, the Commission issued its decision concluding that France Telecom had abused its dominant position on the French market for the supply of high-speed internet access and fined it EUR 10.35 million.
 
France Telecom lodged an appeal against the Commission's decision in October 2003. The CFI rendered its judgment in respect of that appeal on 30 January 2007, upholding the Commission's decision and dismissing France Telecom's appeal. France Telecom then lodged a further appeal with the ECJ. Prior to the rendering of this judgment, Advocate General Mazak delivered his opinion on 25 September 2008. On the points of substance, Advocate General Mazak concluded that France Telecom's appeal should be upheld and that the CFI had erred in law. As regards the recoupment of losses, Advocate General Mazak considered that the CFI had taken a fact-specific proposition and turned it into a general rule - that the prospect of recoupment was not a pre-condition to a finding of predatory pricing. He concluded that the CFI should have assessed whether, on the facts of the case, it was necessary to consider the prospect of recoupment. As regards a dominant undertaking's right to align its prices with those of its competitors, Advocate General Mazak agreed with the CFI's general proposition that dominant undertakings have no absolute right to align their prices where to do so would result in abusive conduct. However, Advocate General Mazak found that the CFI had failed to apply this general proposition to the particular facts of France Telecom's case.
 
Judgement
 
France Telecom had two main substantive grounds of appeal. First, that the CFI had erred in law by not concluding that a reasonable prospect of recouping losses was a precondition to a claim of predatory pricing. Secondly, that the CFI had failed to recognise the right of dominant undertakings to align their prices with those of their competitors.
 
Recoupment of losses
 
The crux of France Telecom's argument was that the CFI had erred in law in stating that the possibility of recouping losses is not a precondition to a finding of predatory pricing. France Telecom argued that EC law always requires proof that allegedly abusive behaviour would be an economically rational course of conduct to adopt. The ECJ held that no such proof of recoupment was necessary. It stated that "it does not follow from the case-law of the Court that proof of the possibility of recoupment of losses suffered by [France Telecom], by an undertaking in a dominant position, of prices lower than a certain level of costs constitutes a necessary precondition to establishing that such a pricing policy is abusive" (Judgment, para. 110).
 
The ECJ went on to state that "[i]n particular, the Court has taken the opportunity to dispense with such proof in circumstances where the eliminatory intent of the undertaking at issue could be presumed in view of that undertaking's application of prices lower than average variable costs" (para 110).
 
The ECJ noted that the fact that recouping losses is not a precondition to a finding of predatory pricing in EC law does not prevent the Commission from finding the possibility of recoupment (or the lack thereof) to be a relevant factor in assessing whether or not the conduct in question is abusive. In particular, in cases where prices are lower than AVC, it may assist in excluding economic justifications other than the elimination of competition, and where prices are above AVC but below average total costs, it may assist in establishing a plan to eliminate competition.
 
Right to align prices
 
France Telecom argued that it had a right to align its price with those of its competitors even where its competitors' prices were below cost and argued that the CFI had provided insufficient reasoning as to why France Telecom's alignment of prices was considered to be abusive. The ECJ stated that "although the fact that an undertaking is in a dominant position cannot deprive it of the right to protect its own commercial interests if they are attacked and such an undertaking must be allowed the right to take such reasonable steps as it deems appropriate to protect those interests, it is not possible, however, to countenance such behaviour if its actual purpose is to strengthen that dominant position and abuse it" (Judgment, para. 46). Therefore, dominant undertakings have no right to align their prices with competitors if, in so doing, their conduct is abusive.
 
Commission's enforcement priorities
 
On 9 February 2009, the Commission issued its guidance on enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings (the Guidance), including predatory pricing. The Guidance provides greater clarity and predictability as regards the general framework of analysis that the Commission employs in determining whether it should pursue cases concerning various forms of exclusionary conduct. In respect of predatory pricing, the Commission set out that it will generally intervene where there is evidence that a dominant undertaking has engaged in predatory conduct by deliberately incurring losses or foregoing profits in the short term (referred to as "sacrifice"), so as to foreclose one or more actual or potential competitors, and thereby causing consumer harm.
 
Conduct will be viewed by the Commission as entailing sacrifice if, by charging a lower price for all or a particular part of its output over the relevant period, or by expanding its output over the relevant time period, the dominant undertaking incurred a loss that could have been avoided. Accordingly, the Commission will take the average avoidable costs (AAC) as the starting point for assessing whether a dominant undertaking has incurred or is incurring avoidable losses. If a dominant undertaking charges a price below AAC for all or part of its output, it is not recovering the costs that could have been avoided by not producing that output (on the basis that a firm would not produce a unit of output for which it could not at least recover its costs), it will be regarded as incurring a loss that could have been avoided, and thereby engaging in predatory conduct.
 
Summary
 
A summary of the main EC law principles regarding predatory pricing is as follows:
  • Prices below average avoidable costs will generally be regarded as abusive, no evidence of a plan to eliminate competition being required.
  • Prices above average avoidable costs but below average total costs will be regarded as abusive if they are found to be part of a plan to eliminate one or more competitors from the market.
  • It is not necessary to show that competitors have exited the market in order to prove that there has been abusive conduct on a market.
  • It is not necessary to show that a dominant undertaking would have a reasonable prospect of recouping its losses in order for the Commission to prove predatory pricing. This is a clear distinction between EC law and US law, where evidence of recoupment is required.
  • In general, the Commission considers it unlikely that predatory pricing will create any efficiencies that could be said to outweigh the likely negative effects on competition, although the Commission will consider claims that low pricing enables economies of scale.
  • Dominant undertakings have no absolute right to align their prices with those of their competitors if such price alignment results in the dominant undertaking engaging in abusive conduct.