Tying & Bundled Discounting

Transcription

1 Agency Name: Bundeskartellamt Date: November 20, 2008 Tying & Bundled Discounting This part of the questionnaire seeks information on ICN members analysis and treatment of tying and bundled discounting. The information provided will serve as the basis for a report that is intended to give an overview of law and practice regarding tying and bundled discounting in the respective jurisdictions. Unless otherwise stated, the questions concern unilateral conduct by a dominant firm or firm with significant market power. For the purposes of this questionnaire, tying is defined as a dominant firm (or firm with substantial market power) selling one product (the tying product) only on the condition that the buyer also purchases a different (or tied) product, or agrees that it will not purchase the tied product from another supplier. It also includes the sale of products or services that could be viewed as separate but are sold only together as a bundle. For the purposes of this questionnaire, bundled discounting is defined as discounts or rebates based on a buyer s purchase of two or more different products or services. Unlike tying, bundled discounting arrangements do not prevent buyers from purchasing individual products separately, although the aggregate price of the individual components is typically higher than the price of the bundle. This part of the questionnaire covers only tying and bundled discounting, and not other practices such as exclusive dealing, single branding, and single-product loyalty discounts and rebates. Your responses should therefore not address these practices unless they have a clear and relevant connection to the analysis and treatment of tying and bundling. You should feel free not to answer questions concerning aspects of your law or policy that are not well developed. Answers should be based on agency practice, legal guidelines, relevant case law, etc., rather than speculation. Experience 1. Please state the statutory provisions or legal basis for your agency to address tying and bundled discounts. Are tying and bundled discounts a civil and/or a criminal violation of your jurisdiction s antitrust laws? Do these provisions apply only to dominant firms or to other firms as well? a) The Bundeskartellamt applies Article 82 EC and national provisions ( 19, 20 Act against Restraints of Competition, henceforth ARC 1 ) to unilateral conduct. Article 82 EC states: 1 An English version of the ARC is available at Novelle_e.pdf.

2 2 Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. 19 (1) ARC provides for a general prohibition for dominant undertakings to abuse their market power as a blanket clause and is similar to Article 82 EC (first sentence). Similar to Article 82 EC (sentence 2), 19 (4) ARC sets out four non-exhaustive examples of forbidden abusive behaviour. 19 ARC reads: (1) The abusive exploitation of a dominant position by one or several undertakings shall be prohibited. (4) An abuse exists in particular if a dominant undertaking, as a supplier or purchaser of certain kinds of goods or commercial services, 1. impairs the ability to compete of other undertakings in a manner affecting competition in the market and without any objective justification; Besides 19 ARC, another provision, 20 ARC, addresses unilateral conduct. 20 provides: (1) Dominant undertakings, associations of competing undertakings within the meaning of 2, 3, and 28 (1) and undertakings which set retail prices pursuant to 28 (2), or 30 (1) sentence 1, shall not directly or indirectly hinder in an unfair manner another undertaking in business activities which are usually open to similar undertakings, nor directly or indirectly treat it differently from similar undertakings without any objective justification. (2) Paragraph 1 shall also apply to undertakings and associations of undertakings insofar as small or medium-sized enterprises as suppliers or purchasers of certain kinds of goods or commercial services depend on them in such a way that sufficient and reasonable possibilities of resorting to other undertakings do not exist. A supplier of a certain kind of goods or commercial services shall be presumed to depend on a purchaser within the meaning of sentence 1 if this purchaser regularly obtains from this supplier, in addition to discounts customary in the trade or other remuneration, special benefits which are not granted to similar purchasers. 2

3 3 (3) Dominant undertakings and associations of undertakings within the meaning of paragraph 1 shall not use their market position to invite or to cause other undertakings in business activities to grant them advantages without any objective justification. b) Tying and bundling, if anticompetitive, are civil violations of antitrust law. Tying and bundling is investigated in administrative proceedings by the Bundeskartellamt. The Bundeskartellamt may also conduct administrative fine proceedings (where the Bundeskartellamt may impose an administrative fine) which are however very rare in abuse of dominance cases. c) 20 (2) and (3) ARC apply to undertakings that do not have a dominant position but have superior market power. The following focuses on abuse of dominance cases. 2. If your jurisdiction has specific criteria for analyzing tying or bundled discounting, please describe them and state their source. (e.g., legislation, court decisions, or agency policy statements). Under both German and EC competition law the analysis of tying or bundled discounting includes the following criteria (based on the above-mentioned provisions as interpreted in the case law): - Dominant Position - Hindrance by way of tying/ foreclosure or discrimination - No objective justification 3. How many in-depth investigations (i.e., beyond a preliminary review) of tying arrangements and (separately) of bundled discounting arrangements has your agency conducted during the past ten years? Please describe what prompted the investigations (e.g., competitor complaints). a) Tying: 1 case Bundled discounting: 3 cases b) Investigations were prompted by competitor complaints. 4. State the number of tying arrangements and the number of bundled discounting arrangements your agency found to be unlawful over the past ten years (1999 to date); include cases resolved informally as well as those that led to a formal decision. If your agency has found any tying and bundled discounting arrangements to be unlawful, please describe the anticompetitive effect and the circumstances that led to the finding. For administrative systems (i.e., the agency issues its own decisions on the legality of the conduct, which may be appealable in court), please state the number of agency decisions finding a violation or settlements that were challenged in court and, of those, the number upheld and overturned. In the cases investigated the Bundeskartellamt did not find violations of antitrust law. In a case litigated by private parties, however, the Federal Court of Justice held that 3

4 4 conduct that the Bundeskartellamt had found to be in line with antitrust law violated abuse of dominance provisions (see the Oberhammer case, below). N/a. For judicial systems (i.e., the agency challenges the legality of the conduct in court and the court issues a decision), please state the number of cases your agency has brought that resulted in a final court decision that the program violates the competition law or a settlement that includes relief. Also state the number of cases that resulted in a final court decision that the conduct did not violate the competition law. Please state whether any of these cases were brought under a criminal antitrust law. Antitrust proceedings in Germany are civil in nature. Tying: Please provide a short English summary of the leading tying and bundled-discounting cases in your jurisdiction, and, if available, a link to the English translation, an executive summary, or press release. Der Oberhammer (2004) 2 The case concerned Deutsche Telekom s practice to supply Telekom ISDN connections (regular base rate plus call charge) together with a T-Online connection with a call-by-call tariff and no regular base rate. Deutsche Telekom formerly had a state monopoly in telecom networks and telecommunication services in Germany and is still dominant in the fixed-line telecommunication services market. T-Online is a subsidiary of Deutsche Telekom and had a strong market position in the internet connection market. The Federal Court of Justice held that although the customers were not contractually bound to use T-Online internet services the conduct at issue constituted tying that violated German antitrust law. Both products were separate, both objectively and in accordance with industry practice. The court underlined that anticompetitive effects of bundling might not necessarily only arise when customers were forced to use the tied product, i.e. the T-Online internet services, but could also materialize when the tying resulted in a quasi-automatic loss of customers for other online service providers who used the pre-installed internet access and were not expected to switch to other providers. Consequently, by way of tying, the dominant firm leveraged its market power to the tied product market and strengthened the internet provider s market position on that market. Strom und Telefon I and Strom und Telefon II (2003) 3 2 BGH (Federal Court of Justice), Case KZR 1/03, WuW/E DE-R 1283 Der Oberhammer. 3 BGH (Federal Court of Justice), Case KZR 16/02, WuW/E DE-R 1206 Strom und Telefon I; Case KZR 38/02, WuW/E DE-R 1206 Strom und Telefon II. 4

5 5 Both judgments of the Federal Court of Justice concerned proceedings initiated by Deutsche Telekom, the German incumbent telecommunication services provider. The firm still holds a dominant position in the market for fixed-line telephone services in Germany. The proceedings concerned the combined offer by a municipal utility and a telecommunications provider for electricity and telecommunication services. Deutsche Telekom argued, inter alia, that the defendant municipal utility was abusing its dominant position in the local market for the provision of electricity to end customers by offering to provide telecom services together with electricity for a cheap combined price or, respectively, with refunds amounting to approx. 60 and 150 euros per annum. The Federal Court of Justice stated that all undertakings, including dominant ones, are free to conduct their business activities as long as they did not run counter to the aims of the ARC to ensure competition. The court underlined that, as a consequence, dominant firms are in general not prevented from making attractive offers to their customers. The court also stated that the lower court correctly found that the offer did not involve a coercion element nor combined an attractive with a less attractive service 4. Customers were not induced or obliged to purchase not only electricity but also telecommunication services from the defendant. To the contrary, they would have had to decide not to purchase telecommunication services from the incumbent company but from other providers. Consequently, there was no suction effect to the dominant firm. Bundled discounting: Strom und Telefon I and Strom und Telefon II (2003) 5 The cases referred to above, although considered as cases of tying ( Kopplung ) in Germany, can basically be seen as bundling cases (for further details, see above). It is clear from the Federal Court of Justice s decisions that a dominant firm is, in general, not prevented from making attractive offers to its customers by bundling products and selling them at a lower price than the individual products. Stadtwerke Düsseldorf ( ) A company that had been supplied by Stadtwerke Düsseldorf, a municipal utility, with electricity, gas and long distance heating, entered into negotiations with various energy suppliers in 2005 for the supply of energy in 2006 and After having compared the offers, the company decided to continue to purchase electricity and long-distance heating from Stadtwerke Düsseldorf but to purchase gas from another supplier which had made a much better offer. In response, Stadtwerke Düsseldorf stated that if it was not commissioned with the supply of all forms of energy, it would have to raise the price for long-distance heating alone by 12%. The court found that 4 Consequently, the cases may rather be classified as bundling cases according to the definition of this questionnaire. The reasoning of the court implies that a dominant firm s tying practice involving a coercion element or combining an attractive with a less attractive service would be problematic under German law. 5 BGH (Federal Court of Justice), Case KZR 16/02, WuW/E DE-R 1206 Strom und Telefon I; Case KZR 38/02, WuW/E DE-R 1206 Strom und Telefon II. 6 OLG (Higher Regional Court) Düsseldorf, Case VI-2 U (Kart) 8/06, WuW/E DE-R 2287 Stadtwerke Düsseldorf. 5

6 6 Stadtwerke Düsseldorf had a dominant position in the markets for gas and longdistance heating. The court held that the firm had abused this dominant position by granting a reduced price only if its customer purchased not only long-distance heating, but also other forms of energy. The court stated that such bundling was not uncommon, may give rise to efficiencies and could in principle also be applied by a dominant firm. If, however, such bundling had the effect that entry barriers were maintained, established or fortified, such conduct was contrary to the objectives of the ARC to keep markets open for competition. The court found that in the case, Stadtwerke Düsseldorf's conduct in linking the better price to the bundled supply with all forms of energy, maintained and fortified barriers to entry, contrary to the aims of the ARC to liberalize the energy sector. Cost-saving arguments found their limits when these aims were compromised by the conduct at issue. Fertigfutter (1980) 7 Fertigfutter is an older but important case. The Berlin Higher Regional Court found that Effem, a firm held to be dominant in the market for cat and dog food, abused its dominant position by operating a bonus system. In particular, the firm granted a bonus on all goods for animals purchased from Effem within one year. The court found that the bonus granted on the rebate scale operated by Effem was not economically justified and led to the exclusion of (potential) competitors. In its analysis the court looked at the rebate steps and analyzed the incentives for customers to purchase additional sales from the dominant firm rather than switching to competitors. 5. Does your jurisdiction allow private parties to challenge tying or bundled discounting in court? Yes/No. If yes, please provide a short description of representative examples of these cases. If known, indicate the number of cases (or an estimate thereof) brought by private parties. Yes, private parties may challenge tying and bundled discounting in court. Indeed, such proceedings are common in Germany and have led to important decisions in recent years (see the Telefon und Strom cases, the Oberhammer and the Stadtwerke Düsseldorf case mentioned above, question 4). There is no robust statistical data on private tying or bundled discounting cases. Civil litigants have brought at least one tying and four bundled discounting cases in the last ten years. Evaluation of Tying Arrangements 6. In your jurisdiction, is the term tying used in a manner different from the definition in the introductory paragraphs above? If so, how? In principle, the same definition is used. As can be seen from the cases mentioned to above (Question 4) the term tying may be used in a somewhat broader sense in German antitrust practice and may to a certain extent overlap with what is referred to as bundled discounting in the introductory paragraphs above. In German, the term Zwangskoppelung (coercive tying) describes what is referred to as tying in the questionnaire, while Kopplung (tying) is also used to describe bundled discounts. 7 KG (Higher Regional Court) Berlin, Case Kart 32/79, WuW/E OLG 2403 Fertigfutter. 6

7 7 7. Please explain the competitive concern(s), if any, generally associated with tying in your jurisdiction, e.g. maintaining dominance/substantial market power in the tying market, distortion of or harm to competition in the tied product market, exploitation of consumers, exclusion of competitors, price discrimination, other. One concern with tying is that dominant firms may use their market power to foreclose (actual or potential) competitors: Dominant firms may use tying to leverage their market power to another market 8. This may have negative effects on competition in the tied product market by foreclosing (actual and potential) competitors from the market 9 and by creating, maintaining or by reinforcing barriers to entry 10. Tying may also have effects on the tying market: dominant firms may use tying as a means to secure or strengthen their market power by hindering or foreclosing (actual and potential) competitors from this market. As a result, competition may be further harmed in a market where competition is already weakened as a result of the very high degree of market power of one firm. German competition law has the objective to protect the competitive process rather than focusing directly on consumer harm. Indirectly, protecting the competitive process also prevents consumer harm because in the medium and long-run, anticompetitive rebates will also harm consumers because hindrance and foreclosure will result in less product diversity and higher prices. 8. What specific tests, if any, are applied to determine under the competition law whether two products or services are separate rather than a single integrated product? To determine whether two products are separate, competition authorities and courts have to analyse whether the products objectively belong together or whether there is an industry practice to sell two products only together 11. In the Oberhammer case the Federal Court of Justice found that neither was the case and that the provision of an ISDN connection as the necessary infrastructure for telecom services on the one hand and the provision of internet services on the other hand were distinct. The court held that there were no conclusive technical or economical reasons for combining both services. Finally, there was no industry practice but, quite to the contrary, both products were generally offered apart and by different undertakings. 9. In what market(s) e.g., the tying or the tied market must effects, if any, be shown to demonstrate an illegal tie? Negative effects on competition may arise in the tying as well as the tied market. If a 8 BGH (Federal Court of Justice), Case KZR 1/03, WuW/E DE-R Der Oberhammer, under item II.5.b), with further references. 9 BGH (Federal Court of Justice), Case KZR 16/02, WuW/E DE-R 1206 Strom und Telefon I. 10 Düsseldorf (Higher Regional Court, Case VI-2 U (Kart) 8/06, WuW/E, DE-R 2287 Stadtwerke Düsseldorf. 11 BGH (Federal Court of Justice), Case KZR 1/03, WuW/E DE-R Der Oberhammer, under item II.5.c), with further references. Cf. also Court of First Instance (CFI), Case T-201/04, Microsoft Corp. v Commission, not yet reported, paragraphs 912 et seq., where the distinctness is assessed in particular by reference to customer demand, the supply side and commercial practice. As regards the latter, agencies would need to take into account that commercial practice may to a large extent be influenced by the dominant firm, cf. ibid., at paragraph

8 8 dominant firm uses tying to leverage its market power to another market, negative effects on competition must be shown on the tied market 12. Tying practices may also be used to maintain or strengthen market power in the tying product market (see question 7 above). a. What specific types of effects must be shown, e.g. market distortion, market foreclosure, harm to consumer welfare? According to the jurisprudence of the European courts the conduct of an undertaking in a dominant position must have the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition in order to constitute an infringement of Article 82 EC 13. Under German law it needs to be shown that competitors are hindered and (potentially) foreclosed from the tied market 14. The Bundeskartellamt understands market foreclosure as a situation where actual or potential competitors of the dominant firm are completely or partially denied profitable access to a market and thereby the degree of competition or the growth of competition in the market is hindered. Tying may also result in raising barriers to entry and may help a dominant firm to maintain market power (see also question 7 above). Both under European and German law it is not necessary for a certain conduct to cause direct consumer harm. Rather it is sufficient that conduct is detrimental to competition and to an effective competition structure and thus harms consumers indirectly 15. b. What degree of proof is required? Must the effect be actual, likely, or potential? Negative effects on competition need to be at least potential or likely (but need not be actual) to give rise to liability 16. The requisite standard of proof in German competition law depends on the type of proceedings. In administrative fine proceedings (where the Bundeskartellamt may issue a decision imposing a fine) the violation of antitrust law needs to be shown with no reasonable doubt (note that, as far as can be seen, the Bundeskartellamt has not yet conducted such proceedings with respect to tying). In administrative proceedings (where the Bundeskartellamt may issue a cease and desist order) the standard of proof 12 Cf., e.g., BGH (Federal Court of Justice), Case KZR 1/03, WuW/E DE-R Der Oberhammer, under item II.5.b). 13 ECJ, Case 85/76, Hoffmann-La Roche v Commission, [1979] ECR 461, paragraph 91; ECJ, Case 322/81, Michelin v Commission, [1983] ECR 3461, paragraph 70; ECJ, Case C-62/86, AKZO v Commission, [1991] ECR I-3359, paragraph 69; CFI, Case T-228/97, Irish Sugar v Commission, [1999] ECR II-2969, paragraph 111; CFI, Case T-203/01, Michelin v Commission, [2003] ECR II-4071, paragraph Cf. BGH (Federal Court of Justice), Case KZR 1/03, WuW/E DE-R Der Oberhammer, under item II.5.d). 15 See ECJ, Case C-95/04 P, British Airways [2007] ECR I-2331, paragraphs 106 and 107. The provisions of the ARC have the objective to ensure an effective competitive process which has the effect of enhancing consumer welfare and an efficient allocation of resources. 16 Cf. BGH (Federal Court of Justice), Case KZR 1/03, WuW/E DE-R Der Oberhammer, under item II.5.b) the danger [that market power is leveraged to other market] 8

9 9 can be described with probability or balance of probabilities. 10. Does intent play a role, and if so what role and how is it demonstrated? In principle, it is not necessary to show that the dominant firm intended negative effects on competition or the violation of antitrust provisions, since abuse of dominance is an objective concept. However, if there is evidence of intent, this may be of relevance in the analysis of effects and, under German law, in the process of weighing the interests involved, including justifications (e.g. if internal documents show that the conduct was intended to foreclose competitors). Furthermore, if an investigation was conducted in administrative fine proceedings (so far, there are no administrative fine proceedings concerning tying), intent would also be relevant, in particular with respect to the determination of fines. Evaluation of Bundled Discounting 11. In your jurisdiction, is the term bundled discounting used in a manner different from the definition in the introductory paragraphs above? If so, how? The term is used in the same manner. As was pointed out above, the term tying may be used in a broader sense in German antitrust law and comprise to a certain extent what is described as bundled discounting in the introductory paragraphs (see question 6 above). 12. Please explain the competitive concern(s), if any, generally associated with bundled discounting in your jurisdiction, e.g. maintaining dominance/ substantial market power, distortion of or harm to competition, exploitation of consumers, exclusion of competitors, price discrimination, other. Dominant firms may use their market power to secure or strengthen their market position by hindering or foreclosing (potential) competitors from this market 17 and by creating, maintaining or by reinforcing barriers to entry. As a result, competition may be further harmed in a market where competition is already weakened as a result of the very high degree of market power of one firm. Furthermore, competition may be restricted as a consequence of the leverage of market power to another market, e.g. by market foreclosure, in a market where the firm under investigation is not dominant 18. German competition law has the objective to protect the competitive process rather than focusing directly on consumer harm. Indirectly, protecting the competitive process also prevents consumer harm because in the medium and long-run, anticompetitive rebates will also harm consumers because hindrance and foreclosure will result in less product diversity and higher prices. 13. Does price-cost comparison play a role in the evaluation of bundled discounting? Yes/No. If yes, please describe the comparison used and the role that it plays. Please also indicate if recoupment plays a role and, if so, what role it plays. 17 Cf. OLG Düsseldorf, Case VI U Kart 34/02 Blutprodukte. 18 Cf. BGH (Federal Court of Justice), Case KZR 16/02, WuW/E DE-R 1206 Strom und Telefon I, OLG (Higher Regional Court) Düsseldorf, Case VI-2 U (Kart) 8/06, WuW/E DE-R 2287 Stadtwerke Düsseldorf; Cf. OLG (Higher Regional Court) Düsseldorf, Case VI U Kart 34/02 Blutprodukte. 9

10 10 In Germany, competition authorities and courts analyse whether bundled discounting leads to foreclosure effects (e.g. by increasing entry barriers). To this end competition authorities and courts analyse inter alia the possibilities and incentives of companies to switch to other suppliers. In this context, the Bundeskartellamt examines the quantitative effects of the discount, i.e. in particular the discount percentage, the discount scale, the turnover on the basis of which the discount percentage is calculated, individualized sales targets, the length of reference period, the importance of the dominant firm as a trading partner and the importance of its products (e.g. as must-stock items ), as well as potential losses that switching would bring about. So far, price-cost comparisons have not played a role. If price-cost data was readily available, it might possibly be used in investigations. Recoupment is not relevant in the assessment. If, however, evidence showing recoupment of losses incurred was readily available, this might be used in the analysis. 14. What sort of effects, if any, must be shown to demonstrate an illegal bundled discount? For example, must market distortion, market foreclosure, harm to consumer welfare or any other effect be shown? It must be shown that the conduct results in the hindrance or foreclosure of (potential) competitors. Foreclosure can be described as conduct by the dominant firm which hinders or eliminates actual or potential competitors profitable access to the market, thereby weakening competition (see also question 12 above). In its assessment, the Bundeskartellamt analyses the economic incentives that arise as a consequence of bundled discounting, in particular whether they provide for a suction effect that is likely to lead to unjustified hindrance or foreclosure 19. No consumer harm needs to be shown (see questions 9.a) and 12 above). a. What degree of proof is required? Must the effects be actual, likely, or potential? Negative effects on competition need to be at least potential or likely (but need not be actual) to give rise to liability 20. The requisite standard of proof in German competition law depends on the type of proceedings. In administrative fine proceedings (where the Bundeskartellamt may issue a decision imposing a fine) the violation of antitrust law needs to be shown with no reasonable doubt. In administrative proceedings (where the Bundeskartellamt may issue a cease and desist order) the standard of proof can be described with probability or balance of probabilities. 15. Does intent play a role, and if so what role and how is it demonstrated? Generally, intent is not needed to show that bundled discounting violates antitrust 19 Cf. KG (Higher Regional Court) Berlin, Case Kart 32/79, WuW/E OLG 2403 Fertigfutter; KG (Higher Regional Court) Berlin, Case Kart 27/76, WuW/E OLG 1767 Kombinationstarif. 20 Cf. KG (Higher Regional Court) Berlin, Case Kart 27/76 WuW/E OLG 1767 Kombinationstarif. 1

11 11 law. Intent may, however, be of relevance in the context of demonstrating (potential or likely) negative effects on competition (e.g. if internal documents show that the conduct was intended to foreclose competitors). It may also be relevant in administrative fine proceedings, in particular with respect to the determination of fines (see question 10 above). Presumptions and Safe Harbors 15. Are there circumstances under which tying or bundled discounting is presumed illegal? Yes/No If yes, please explain, including whether the presumption is rebuttable and, if so, what must be shown to rebut the presumption. No. 16. Are there any circumstances under which there is a safe harbor? Are there any circumstances under which there is a presumption of legality? Please explain the terms of any presumptions or safe harbors. No. Justifications and Defenses 17. What justifications or defenses, if any, are permitted (e.g., reduced manufacturing or distribution costs, meeting competition, product reputation, technological linkages) for tying or bundled discounting? According to the jurisprudence of the European Courts a conduct does not violate Article 82 EC if there is an objective economic justification for a system of rebates, discounts or bonuses 21. In this context, efficiencies are of relevance 22. The Bundeskartellamt, when applying the national provisions ( 19, 20 ARC) balances the interests of the undertakings involved, i.e. especially the economic and competitive interests of the dominant firm and its competitors. In this respect, the aim of the ARC to ensure competition and open markets is of particular importance. In balancing the different interests, the Bundeskartellamt also takes into account objective necessities and efficiencies. Under both European and German competition law, the justifications invoked by the dominant firm would need to outweigh the competitive harm caused by the conduct at issue. a. Please specify the types of justifications and defenses that your agency considers in the evaluation of tying arrangements, the role they play in the competitive analysis, and who bears the burden of 21 ECJ, Case C-95/04 P, British Airways v Commission [2007] ECR I-2331, paragraph 86; ECJ, Case 322/81 Michelin I [1983] ECR 3461, paragraphs 73 et seq.; ECJ, Case 85/76 Hoffmann-La Roche [1979] ECR 461, paragraph 90; ECJ, Case 40-48, 50, 54-56, 111, 113, 114/73 Suiker Unie [1975] ECR 1663, paragraph ECJ, case C-95/04 P, British Airways v Commission [2007] ECR I-2331, paragraph 86. See also CFI, Case T-201/04, Microsoft Corp. v Commission, not yet reported, paragraph 1091 et seq. 1

12 12 proof. In principle, all of the above mentioned issues may be of relevance in the analysis but pro-competitive effects would need to outweigh the anticompetitive concern. The case law on justifications and defenses is not extensive. In the Oberhammer case, the Federal Court of Justice did not refer to justifications. However, the court did not give a definite judgment but referred the matter back to the lower court. From the Telefon und Strom cases it emerges that the Federal Court of Justice follows a very strict approach as far as coercive tying is concerned. The burden of proof to show that the conduct is justified is on the firm under investigation. It would then fall to the Bundeskartellamt to assess whether the justifications outweigh the anticompetitive effects. b. Please specify the types of justifications and defenses that your agency considers in the evaluation of bundled discounts, the role they play in the competitive analysis, and who bears the burden of proof. In principle, all of the above mentioned issues may be of relevance but procompetitive effects would need to outweigh the anticompetitive concern. From the jurisprudence it emerges that efficiencies leading to cost saving, rationalization and synergy effects would have to be substantial 23 and were in practice often not held to be sufficient to outweigh foreclosure effects 24. In one case, the Federal Court of Justice confirmed that conduct that aims at averting insolvency may justify bundled discounting that has anticompetitive effects 25. The burden of proof to show that the conduct is justified is on the firm under investigation. It would then fall to the Bundeskartellamt to assess whether the justifications outweigh the negative effects on competition. 18. What policy considerations does your jurisdiction consider with respect to tying and bundled discounts? You may wish to address the following sorts of issues: Are tying and bundled discounting common? Does your jurisdiction generally consider them to be procompetitive? Does your answer depend on whether the firm is dominant? Does your jurisdiction view tying and bundled discounting by a dominant firm as generally anticompetitive? What 23 Cf. BGH (Federal Court of Justice, Case KVR 9/81, WuW/E BGH 1965 gemeinsamer Anzeigenteil. The court held the dominant firms interest to organise product more efficiently to generate greater turnover was in particular legitimate if savings were passed on to customers/consumers. 24 Cf. OLG (Higher Regional Court) Düsseldorf, Case VI-2 U (Kart) 8/06, WuW/E DE-R 2287 Stadtwerke Düsseldorf; KG (Higher Regional Court) Berlin, Case Kart. 32/79, WuW/E OLG 2403 Fertigfutter. In the latter case, the court stated that bundled rebates based on shorter reference periods are more likely to be justified. 25 BGH (Federal Court of Justice), Case KVR 9/81, WuW/E BGH 1965 gemeinsamer Anzeigenteil; OLG (Higher Regional Court) Stuttgart, Case 2 Kart 2/78, WuW/E OLG 2126 Kombinationstarif I. 1

13 13 competitive concern(s), if any, are generally associated with tying and bundled discounts in your jurisdiction? Tying and bundled discounting are neither considered pro- nor anticompetitive as such. There is no such rule that each and every tying or bundled discounting by a dominant firm is problematic. As was mentioned above, tying and bundling may, however, have negative effects on competition in particular by foreclosing markets. Dominant firms are encouraged to compete on the merits and, like non-dominant firms, are not prevented from making attractive offers. This finds its limits if entry barriers are raised and markets foreclosed. 19. Please provide any additional comments that you would like to make on your experience with tying and bundled discounting and enforcement in your jurisdiction. This may include, but is not limited to, whether there have been or whether you expect there to be major developments or significant changes in the criteria by which you assess tying and bundled discounting. The Bundeskartellamt s track record of tying and bundled discounting in recent years is rather limited and the number of cases brought in civil litigation seems to be rather low. Consequently, overenforcement and significant chilling effects are highly unlikely. 1

14 14 Agency Name: Bundeskartellamt Date: November 20, 2008 Single-Product Loyalty Discounts and Rebates This part of the questionnaire seeks information on ICN members analysis and treatment of loyalty discounts and rebates. The information provided will serve as the basis for a report that is intended to give an overview of law and practice regarding loyalty discounts and rebates in the respective jurisdictions. Unless otherwise stated, the questions concern unilateral conduct by a dominant firm or firm with significant market power. For this questionnaire, loyalty discounts and rebates are defined as discounts or rebates on units purchased of a single product, conditioned upon the level or share of purchases. This part of the questionnaire concerns only treatment of single-product discounts rather than pricing practices involving multiple products (bundling, tying, and related practices). You should feel free not to answer questions concerning aspects of your law or policy that are not well developed. Answers should be based on agency practice, legal guidelines, relevant case law, etc., rather than speculation. Experience 1. Please state the statutory provisions or legal basis that allow your agency to address loyalty discounts and rebates. Are loyalty discounts a civil and/or a criminal violation of your jurisdiction s antitrust laws? Do these provisions apply only to dominant firms or to other firms as well? a) The Bundeskartellamt applies Article 82 EC and national provisions ( 19, 20 Act against Restraints of Competition, henceforth ARC 26 ) on unilateral conduct. Article 82 EC states: Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; 26 An English version of the ARC is available at Novelle_e.pdf. 1

15 15 (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; 19 (1) ARC provides for a general prohibition for dominant undertakings to abuse their market power and is similar to Article 82 EC (first sentence). Similar to Article 82 EC (sentence 2), 19 (4) ARC sets out four non-exhaustive examples of forbidden abusive behaviour. 19 ARC reads: (1) The abusive exploitation of a dominant position by one or several undertakings shall be prohibited. (4) An abuse exists in particular if a dominant undertaking, as a supplier or purchaser of certain kinds of goods or commercial services, 1. impairs the ability to compete of other undertakings in a manner affecting competition in the market and without any objective justification; Besides 19 ARC, another provision, 20 ARC, addresses unilateral conduct. 20 provides: (1) Dominant undertakings, associations of competing undertakings within the meaning of 2, 3, and 28 (1) and undertakings which set retail prices pursuant to 28 (2), or 30 (1) sentence 1, shall not directly or indirectly hinder in an unfair manner another undertaking in business activities which are usually open to similar undertakings, nor directly or indirectly treat it differently from similar undertakings without any objective justification. (2) Paragraph 1 shall also apply to undertakings and associations of undertakings insofar as small or medium-sized enterprises as suppliers or purchasers of certain kinds of goods or commercial services depend on them in such a way that sufficient and reasonable possibilities of resorting to other undertakings do not exist. A supplier of a certain kind of goods or commercial services shall be presumed to depend on a purchaser within the meaning of sentence 1 if this purchaser regularly obtains from this supplier, in addition to discounts customary in the trade or other remuneration, special benefits which are not granted to similar purchasers. (3) Dominant undertakings and associations of undertakings within the meaning of paragraph 1 shall not use their market position to invite or to cause other undertakings in business activities to grant them advantages without any objective justification. b) Violations of the above mentioned provisions are civil not criminal. The Bundeskartellamt investigates potentially anticompetitive loyalty discounts and rebates in administrative proceedings. The Bundeskartellamt may also investigate such conduct in administrative fine proceedings in which it may impose administrative fines. 1

16 16 c) 20 (2) and 3 ARC (see above) apply to undertakings that do not have a dominant position but have superior market power. The following focuses on abuse of dominance. 2. How many in-depth investigations (i.e., beyond a preliminary review) of loyalty discount and rebate programs has your agency conducted during the past ten years? Please describe what prompted the investigations (e.g., competitor complaints). a) 4 cases, of which one case was investigated under Article 81 EC 27. b) Investigations were prompted by competitor complaints. 3. State the number of loyalty discounts and rebate programs that your agency found to be unlawful over the past ten years (1999 to date); include cases resolved informally as well as those that led to a formal decision. If your agency has found any loyalty discounts and rebate programs to be unlawful, please describe the anticompetitive effect and the circumstances that led to the finding. For administrative systems (i.e., the agency issues its own decisions on the legality of the conduct, which may be appealable in court), state the number of agency decisions finding a violation or settlements that were challenged in court and, of those, the number upheld and overturned. The Bundeskartellamt found violations of antitrust law in two cases, DSL- Connections and Share deals, of which the latter was analysed under Article 81 EC, i.e. not as an abuse of dominance but as an anticompetitive agreement. In the DSL-connections case, the conduct at issue was investigated by the Bundeskartellamt and the Federal Network Agency in parallel. In May 2006 the Federal Network Agency issued a prohibition decision in which it declared Deutsche Telekom s conduct to be abusive according to 28 Telecommunications Law. The Bundeskartellamt refrained from issuing a decision in. It terminated proceedings when Deutsche Telekom had withdrawn its appeal against the Federal Network Agency s decision and this decision had become final. In the Share deals case the Bundeskartellamt issued a decision imposing administrative fines, which was not appealed and became final. DSL-Connections (2006) Approximately until the end of 2005, Deutsche Telekom AG offered DSLconnections for resale on the basis of a model called "Resale DSL". According to this model resellers were granted a standardized deduction of 11.5% on the end customer price charged by DTAG. After the end of 2005, Deutsche Telekom alternatively offered resellers a model called "DSL Net Rental" and concluded respective contracts with United Internet AG and AOL Deutschland GmbH & Co. KG. This new model 27 See English press release at 1

17 17 which was characterised by Deutsche Telekom as the "supply of virtual net capacities" differed from "Resale DSL" essentially only with regard to the pricing. Within the new model the pricing was based on the connection areas of Deutsche Telekom s network. There are several thousand of such connection areas. For each connection area a minimum net capacity of 192 ports was billed irrespective of the actual use. This minimum capacity and additional 64 port packages were supplied for a minimum term of 24 months. Ports within the minimum capacity or the additional 64port packages were not physically reserved for the resellers, but were allocated dynamically according to demand. The prices were calculated by Deutsche Telekom on a diminishing scale based on the number of ports billed for each connection area. As the number of ports increased, the price charged for the supply of each port decreased, at a certain point significantly below the price level under the "Resale DSL" model. The Bundeskartellamt came to the preliminary conclusion that the "DSL Net Rental" model violated both Article 81 EC/ 1 ARC and Article 82 EC/ 19 ARC. With regard to the latter provisions, Deutsche Telekom had a dominant position in the market for upstream services for broadband internet connections. The new tariff can be qualified as a volume rebate for the same services offered on the basis of Resale DSL. There was the danger that these benefits granted to large resellers could drive competitors out of the market and lead to the establishment of an oligopoly. Relevant differences in terms of technology or risk between both offers could not be determined. Therefore, it was relevant whether, along general lines, the quantity scale was consistent with the cost function of Deutsche Telekom. However, there were no facts supporting this assumption. Rationalisation advantages over Resale DSL on Deutsche Telekom s side could not be ascertained in the investigations. Share deals (2007) In November 2007, the Bundeskartellamt issued a decision imposing fines totalling 216 million euros against the advertising time marketing companies of the two private broadcasting groups RTL and Pro7Sat.1. The marketing companies IP Deutschland GmbH, active for RTL, and SevenOne Media GmbH, active for Pro7Sat.1, had concluded agreements with media agencies and the advertising industry in the form of contracts for the broadcasting of television advertising spots. These vertical agreements violated Article 81 EC as well as the corresponding 1 ARC: Under the agreements, the media agencies were granted significant discounts and other refunds if they placed certain substantial proportions of their advertising budget with the respective broadcasting group. These discounts provided the media agencies with a strong economic incentive to place the respective proportion of their advertising budget with the two large marketing companies rather than with other broadcasters, thus foreclosing markets for (potential) competitors. The reason for this was that the discounts were granted retroactively for the entire budget, i.e. not only for incremental placements exceeding the discount thresholds. The Bundeskartellamt analysed the potential loss that media agencies would incur by switching to other suppliers and found that it was substantial and led to the foreclosure of the TV advertising market. There were no indications, and the companies themselves did not claim that the requirements for exemption under Article 81 (3) EC were satisfied, i.e. that the agreement contributed to improving the production or distribution of goods or to 1

18 18 promoting technical or economic progress while allowing consumers a fair share of the resulting benefit. N/a. For judicial systems (i.e., the agency challenges the legality of the conduct in court and the court issues a decision), state the number of cases your agency has brought that resulted in a final court decision that the conduct violates the competition law or a settlement that includes relief. Also state the number of cases that resulted in a final court decision that the conduct did not violate the competition law. Please state whether any of these cases were brought under a criminal antitrust law. Proceedings concerning violations of the above-mentioned provisions are civil (administrative) proceedings, not criminal proceedings. The Bundeskartellamt may also conduct administrative fine proceedings which are, however, very rare in abuse of dominance cases. Please provide a short English summary of the leading loyalty discount and rebate cases in your jurisdiction, and, if available, a link to the English translation, an executive summary, or press release. The recent leading discount cases concern bundled discounting and are mentioned in the context of case law (question 3 concerning tying and bundling). In recent years there have not been any decisions on loyalty discounts/rebates beyond the cases mentioned above (see question 3 above). 4. Does your jurisdiction allow private parties to challenge loyalty discounts and rebates in court? Yes/No. If yes, please provide a short description of representative examples of these cases. If known, indicate the number of cases brought (or an estimate thereof) by private parties. Private parties may challenge loyalty discounts and rebates in court. There is no robust statistical data concerning private cases. Evaluative Criteria 5. In your jurisdiction, is the term single-product loyalty discounts and rebates used in a manner different from the definition in the first paragraph above? If so, how? The same definition is used. 6. What are your jurisdiction s criteria for evaluating the legality of loyalty discounts and rebates? When analysing the legality of loyalty discounts and rebates under EC or German competition law, the Bundeskartellamt employs the following criteria (based on the above-mentioned provisions in the light of the case law): 1