CONSULEGIS EUROPEAN REGIONAL CONFERENCE February 12, 2011 PREDATORY PRICING, HOW TO PROVE IT?

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1 CONSULEGIS EUROPEAN REGIONAL CONFERENCE February 12, 2011 PREDATORY PRICING, HOW TO PROVE IT? By Henri SAINT-PERE, Partner CABINET RATHEAUX Sociét é d'avocats Cité Internationale, 34 quai Charles de Gaulle LYON cedex 06 : (33) (0) : (33) (0) : henri.saintpere@ratheaux.fr FOREWORD What is Predatory pricing? It is an attempt to artificially sale products or services at a so low price that competitors prefer to quit rather than compete or are deterred from entering, enabling the predator to raise price in the long run and take a comfortable market share. Predatory pricing is seen as a form of anticompetitive conduct and hence is subject to the competition laws and policies of OECD countries, but with a controversy over what standards should be applied to control predatory pricing. Some officials consider that any rule against predatory pricing will do more harm than good by depriving consumers of the benefit of strong price competition. Obviously, at first glance consumers will benefit of a price decrease, but after a short while, the predator will raise its price, having less competitors. Please note that there is a ceiling in such rise, because it could generate new competitors attempting to enter in the market and sell products just a little below said high price. FROM EU REGULATION TO NATIONAL COMPETITION LAW Provided that the considered market shares are affected at least in two EU countries, From a EU stand point, article 82 of the Rome Treaty, now known as article 102 TFUE (Treaty on the Functioning of the European Union), dealing with dominant position, points out that the mere fact to be in a dominant or monopole situation in a specific market, is not per se prohibited, but the abuse resulting from such a dominant situation, with unfair selling prices, shall be condemned to a fine of a maximum of 10 % of the world wide turnover, or to an injunction to stop the abusive behavior with a penalty per day of delay. The aim is to restore an arm s length competition.

2 Recent examples published in the Official Journal of the EU: EU Court of Justice 23 April 2009 FRANCE TELECOM v Commission of the EU, Case C.362/06P: The possibility of recoupment of losses suffered by the applicant of prices lower than a level of costs does not constitute a necessary precondition to establishing that a price policy is abusive. The lack of any possibility of recoupment of losses is not sufficient to prevent France Telecom reinforcing its dominant position, in particular, following the withdrawal from the market of competitors, so that the degree of competition is further reduced CJCE fined in ,35 million against FRANCE TELECOM. EU Commission decision 13 May 2009 on a complaint raised by AMD against INTEL (Case COMP/C-3/ Intel) Statement of objections sent to Intel with infringement of article 82 dominant position with the aim of excluding its main rival AMD from the x86 Computer Processing Units market: First, Intel has provided substantial rebates to various Original Equipment Manufacturers conditional on them of obtaining all of their Computer Processing Units orders; Secondly, Intel made payment to induce the Original Equipment Manufacturers to delay or cancel the launch of a product line incorporating an AMD chip, Lastly, in the context of bids against AMD chips in the server segment for strategic customers, Intel offered chips on average below cost. Fine of 1 billion and 60 millions. Same notion of unfair selling prices has been introduced in national legislation of EU members and local courts try to characterize abusive effects of a dominant situation in a specific national market and condemn such abusive practices. Main risk is to have local courts building case law with great variation carving out of what was provided under article 102 TFUE. For clarification purpose, the European Commission has enacted in the Official Journal of the European Union dated 24 February 2009, its guide line for right implementation of former article 82 (now 102 TFUE). The checking shall demonstrate a significant impediment of effective competition, with the specific point that, for an abuse of dominant position, there is no possibility to have safety provided by an individual or category of exemption agreements enacted by a EU Directive, which remains possible only for concerted practices mentioned in article 101 TFUE (formerly article 81 of the Rome Treaty).

3 Predation, could also be an attempt to protect a market share by means of abusive use of governmental procedures, including long controls by health and building inspectors, litigation against a competitor not already complying with technical standards, so that an established firm can impose larger costs on a potential entrant OR delay its access to the market. Example: Eurotunnel purchase bid for new trains lost by the French railway company SNCF and won by DEUTCHSBAN. Litigation made by SNCF before a London court arguing that no order can be made while potential new trains have not been certified as truly coping with Eurotunnel technical specifications. Nowadays, EU and national competition law are driven by economic demonstration. LEGAL MECHANISMS TO CONTROL PREDATION HIGHLIGHT ON FRENCH PRACTICE ATTEMPTING TO CONTROL PREDATION In France, there is no specific rule against predatory pricing, but 2 major law tools can be used on the basis of: - The prohibition by article L of the French Commerce Code, of reselling goods with an abusive low price with intent to eliminate a competitor (except for perishables, seasonal or obsolete goods), which requires sellers to price at a level which, at minimum, covers the cost of the goods, tax and transportation. Such prohibition does concern also sale of services. - The prohibition by article L of the French Commerce Code, of anticompetitive practice by abuse of a dominant position or abuse of the economy dependency of the purchaser, with complaint before the French Competition Authority. In both matters, Sellers who use abusive low price or anticompetitive practice are subject to prosecution, and can be condemned by a fine of maximum 3% of its highest worldwide turnover (article L 462-4). A victim of predatory pricing in France can claim for damages or bring the case before the Competition Authority, which will make an investigation in the offices of the predator and try to seize relevant documents and can, without disclosing the name of the author of the complaint, engage litigation. First case law expressly dealing with predatory pricing was rendered on 14 th March 2007 by the French Competition Authority which imposed a 10 million fine on GlaxoSmithKline for

4 having abusively hindered the entry of certain generic drugs to hospitals, by means of selling an injectable product at a price below costs. One of the most used case reference by French competition Authority is a reference to the AKZO Chemie v Commission EU precedent case (CJCE 3 July 1991 ref C-62-86), stating that the fact to sell goods at a price being below the average variable costs is a predatory pricing. HOW TO PROVE PREDATORY PRICING PRACTICES? Example: A company rents an airplane in Spain for direct flights every day during spring between Hamburg and Mallorca, its fixed costs correspond to the rent per day of the airplane and the crew + advertisement in local newspapers, its variable costs correspond to the fuel plus airport taxes per passenger. The global amount of fixed costs + variable costs divided by the number of passengers carried during a flight gives the average global cost: i.e: if the global fixed costs per day are 20 to be charged on the number of passengers (lets assume 20 people: 20 divided by 20 people = 1 charged per passenger) plus 5 of variable costs to be charged per passenger, the average global cost would be 6 per passenger, being the minimum price for a flight ticket with zero margin. 3 possibilities: The flight ticket is sold above 6: no claim possible for predatory pricing, The flight ticket is sold at 5,50, inducing a small loss, but could be economically justified by the fact that, during a short troubled time, it is better to try to attract clients instead of keeping the airplane on ground and bear fixed rental costs, The flight ticket is sold 4, inducing a large loss, not complying with the rule that you should at last sell at a price enabling you to cover your fixed costs and there is a risk that you will be considered as making predatory pricing in order to kill other competitors in same flight sector. Establishing that a company is guilty of predation is difficult. Firstly, because a company, even having a dominant position on its national market sector, has the right to defend its market share. Moreover, if such company is not in a dominant

5 share market position (for instance has only a 3% market shares) no predatory pricing complaint can be made. Secondly, because a competitor s lack of success may be driven by its inefficiency or poor quality products. The key stone in the investigation on predatory pricing is to investigate and try to demonstrate the predator is selling products below its costs, hence realizes a negative profit. For such study, local Competition Authority contacts other manufacturers of same sector to benchmark averaged manufacturing costs for a global number of X finished products. It is extremely important to select one or more manufacturers having the right size (not too small) in order to have effectively the possibility to compare the short term and long term manufacturing averaged costs of such competitor with same cost structure of the potential predator. In addition, the investigation will be made against the potential predator that will have to disclose: Internal documents, which could be used to prove a detailed plan to exclude a competitor example: Tetra Pak International v Commission ECR II 755. NOTE/ beware of s exchanged internally between the sale force using a battling vocabulary we will kill our competitor X and get him rid of the market, few documents are not relevant to characterize a predatory willingness as a general guideline issued by the management of the company, and could rather be considered merely as excessive fighting spirit for sales men paid with a bonus on targeted turnover achieved. its variable costs and fixed costs data, with justification of their accuracy. Please note that every sale under cost is not automatically considered as being predatory pricing. You can start selling under cost in order to reach the number of products effectively purchased by customers, which will make you passing over the breakeven point and becoming profitable. Particularity if the alleged predator is rendering a public service mission such as small ferries daily connected to a small island, its global cost can be at loss during winter time and with profit during summer time. Moreover, it has the right to use an average yearly global cost for checking of its minimum price ticket which cannot be challenged by a competitor trying to enter into the market only during the summer season.

6 This has been judged in the French case law Vedettes Vendéennes (Vendée sea crossing) with a French Competition Authority decision dated 23 December 2004, confirmed by the French court of appeal and the Supreme Court of cassation on July 10, HOW TO CHALLENGE ALLEGATED PREDATORY PRICING? 1. First defense line: launching new products For new products it is impossible to make a comparison test with a competitor It is necessary to sell under cost (including marketing and advertisement expenses) during the launching period in order to create a market demand for such products. It is the natural job for a company to bet on the success of a new product and expect future profits. 2. Second defense line: price adaptation on other competitors pricing Even if such price reduction will generate sales made under cost, it is vital for a company to try to preserve its market share, offering its range of products at same price than the one promoted by the competitor. Such adaptation shall be limited to correspond to the period of promotional prices offered by the competitor. During such price adaptation period the manufacturer shall work on the possibility to reduce its cost structure (use of sub contractors, new plant abroad ). 3. Third defense line: even during the alleged predatory pricing period, new competitors entered in the market. No detrimental impact. Thank you for your attention.