EU/US Comparison Pricing

Pricing Practices: A Comparative Perspective

Pricing is the centre of competition law. Every country that has adopted a competition law has some form of prohibition against ‘price-fixing’ or similar behaviour. Indeed, the basic prohibition against price-fixing tends to be quite similar around the world – the principal ways in which the law differs depending on the jurisdiction are process-oriented. The key questions include: How is evidence gathered? What is the level of evidence required to show a price-fixing ‘agreement’? What kind of defences constitute barriers to prosecution even when an ‘agreement’ is proven? What are the consequences for parties found to have engaged in price fixing? In those jurisdictions where competition law is being enforced, the government tends to be the most important player in pursuing price-fixing type cases. While private proceedings exist, the vast majority are simply a ‘follow-on’ to a prior governmental prosecution.

But once one moves away from cartel behaviour, the legal variations among jurisdictions with regard to pricing practices increases tremendously. This divergence is mainly caused by several factors: the lack of real consensus over precisely when various non-cartel-based pricing practices are anti-competitive; differing underlying substantive law among the various jurisdictions; and differing goals for a country’s competition law. In the US, for example, there is a specific statute addressing price discrimination without regard to market power that was intended to protect small businesses while under EU law, price discrimination is addressed as a potential abuse of dominance.

The disparate treatment of non-cartel pricing practices makes counselling international clients challenging. A pricing programme established for one jurisdiction cannot necessarily be implemented in another because of different legal risks. Moreover, pricing practices in one jurisdiction may affect pricing in another because of transshipment or other efforts of purchasers to try to take advantage of more favourable pricing terms and conditions in one jurisdiction as compared to another.

Increasing the counselling difficulties in the entire pricing area is the United States’ movement away from bright line rules toward standards that require evaluation of non-cartel pricing practices on a case-by-case basis focusing on economic factors and business justifications for some practices, and a general scepticism towards condemning other practices. The US Supreme Court has been leading the way in this transition as it attempts to narrow historic, more stringent prohibitions on pricing and monopolistic abuses. During the past year, the Court decided yet another case relating to pricing – in this instance, involving so-called ‘price squeezes’ by an alleged monopolist. In the recent past, the Court abandoned its prior treatment of minimum resale price maintenance agreements by overturning an almost century-old precedent and also clarified the treatment of pricing by buyers with substantial market power (monopsony). The lower courts are therefore faced with applying relatively new standards and also with a continued struggle over the proper analysis of such pricing practices as bundled pricing.

Elsewhere in the world, however, what is essentially a per se prohibition against resale price maintenance continues and enjoys reasonably aggressive enforcement. Perhaps more complicating is the scepticism faced by other pricing practices which may reflect efficiencies or may otherwise be simply benign.

To illustrate these points, we focus on a comparison between US law and EU law, with regard to three different settings: pricing by persons with market power, including price squeezes, predatory pricing and bundling; price discrimination by any seller; and resale price maintenance.

Pricing by persons with market power

Concern about the pricing practices by entities with market power is an area where antitrust enforcement in the US has appeared to diverge from other jurisdictions and with Europe in particular. This divergence is created by fundamentally different laws and legal processes: section 2 of the Sherman Act is narrower than article 82 (and national laws modelled on it). Section 2 reaches only a dominant firm’s use of improper means to attain or maintain monopoly power. By contrast, article 82 prohibits this same conduct, but also prohibits the exercise of monopoly power to injure others unfairly. Thus, exclusion is all that matters in the US, while both exploitation and exclusion can create liability in Europe. Moreover, European law has been created and enforced by an administrative process involving well-staffed agencies while most US law in this area rests principally on private litigation before often sceptical judges.

In Europe, the courts have been reasonably deferential to the Commission’s finding of ‘abuse’ in pricing and other areas, often in cases of privatised state monopolies. Meanwhile it seems likely that US courts will continue to be concerned about chilling innovation and investment by powerful firms and will therefore exercise restraint in precluding single-firm conduct that is potentially benign or pro-competitive while relying less on the market share held by the firm in question.

This cautious approach in the US has been particularly relevant to the pricing area. As a general rule, a company can price its products or services as it pleases. This is true even if the company has market power in a properly defined market. The notion is that market power, or even monopoly power, generally results from skilled competitors applying sound business acumen and efficient firm practices. Elsewhere in the world, however, there is a strong tradition that with the acquisition of market power comes an obligation not to unduly impede competition. Thus, for example, in Europe a dominant firm may not be able to engage in conduct that is otherwise considered permissible by non-dominant firms simply because such normal commercial behaviour may be seen to be ‘unfair’ in how it adversely affects lesser competitors. Accordingly, outside the US, ‘too high’ pricing may be condemned as exploitative. The European Court of Justice, for example, has set forth a standard which compares the price charged to the economic value of the goods or services at issue. Pricing can be condemned where it is excessive as compared to that economic value. Making such a determination has proved to be a difficult, and somewhat artificial, endeavour.

Notwithstanding the trend in the US, it is noteworthy that the Antitrust Division of the US Department of Justice (DoJ) under President Obama immediately repealed the very conservative and cautious report on prosecuting unilateral conduct that had been issued under President Bush. Moreover, the Obama administration DoJ has made clear that it is seeking to re-invigorate antitrust enforcement. Nonetheless, in attempting to do so, DoJ faces Supreme Court precedent that is increasingly adverse to condemning pricing that is not shown to be below some appropriate measure of cost.

In any case, and generally speaking, a recurring concern over non-cartel based pricing by firms with market power, regardless of the jurisdictions in which they operate, stems from what could be called ‘exclusionary’ pricing. While such pricing may take a variety of forms, the most commonly known is ‘below cost’ (or ‘predatory’) pricing. In addition, many jurisdictions have condemned, and there is growing concern in the US with, the offering of rebates and other efforts to ‘bundle’ products. In each circumstance, the core of the concern is the ability of the firm employing the practice to exclude equally efficient competitors from the marketplace. These will be discussed in turn.

Predatory pricing and ‘price squeezes’

There is a long-standing reluctance by US courts to penalise firms for engaging in ‘below cost’ (or ‘predatory’) pricing due to the extreme uncertainty that such pricing strategies succeed in foreclosing competitors from the market; and lowered prices benefit consumers and stimulate competition consistent with the fundamental goals of antitrust law. The modern standard for analysing predatory pricing claims in the US comes from the 1993 Supreme Court case Brooke Group Ltd v Brown & Williamson Tobacco.

In order to establish illegal predatory pricing, consistent with Brooke Group, the party challenging the pricing must prove: pricing below an appropriate measure of cost (generally, average variable cost) by a firm with substantial market power where that firm has an ability to recoup any losses it incurs in employing the below cost strategy. It should be noted that, since Brooke Group, there have been very few successful challenges to conduct alleged to be predatory pricing.

More recently, the US Supreme Court confirmed the Brooke Group framework and extended its ‘recoupment’ requirement to ‘monopsony’ (buyer power) cases. In Weyerhaeuser v Ross-Simmons, the Supreme Court made clear that a plaintiff challenging ‘predatory bidding’ (paying too much for a product in order to make it harder for companies requiring the product to compete) also requires a showing of recoupment. The Supreme Court rejected the reasoning that a lower standard of liability should be applied to predatory bidding because buy-side predatory bidding did not have the analogous benefits of lowering prices to the consumer. Rather, the Supreme Court emphasised the uncertainty that accompanies such a pricing scheme and declined to accept that such pricing strategies would be unlikely to stimulate competition.

This holding is assuring as it does not impugn the myriad of legitimate reasons a firm may have for paying higher prices for inputs, such as hedging against uncertain future input costs or increasing output in the selling market. And, as the Weyerhaeuser Court noted, it has the potential effect of attracting new firms to enter the market for input sales.

During the past year, the US judicial scepticism towards claims of predatory-type pricing has now been extended to so-called ‘price squeezes’ where the plaintiff claims that the defendant is selling at wholesale to the plaintiff at a high price while the defendant also competes a retail and uses a low price. In Pacific Bell v linkLine, the US Supreme Court held that price-squeeze claims cannot be maintained unless the defendant has a duty to deal with the plaintiff in the wholesale market and the plaintiff can establish that the retail price used by defendant meets the Brooke Group test for predatory pricing. The court found support for its analysis in its broader policy of establishing clear rules for liability for unilateral conduct. It also noted the difficulty that courts had in addressing potential antitrust violations in a single market; a price squeeze claim necessarily involves analysis in two different markets. (It is notable that the Bush administration DoJ had filed an amicus brief urging the position that the Supreme Court ultimately adopted, while the Federal Trade Commission issued a press release dissenting from the position taken in the DoJ brief.)

What is particularly fascinating, and potentially ironic, about this decision from a global perspective is that just two months after the linkLine decision, the European Commission announced that it was opening formal proceedings against Slovak Telekom for engaging in, among other things, a possible margin squeeze with regard to broadband access services and also unbundled local telecommunications services – the very situation at issue in linkLine. While no EC statement of objections has been issued, it remains to be seen whether the Supreme Court’s linkLine analysis will have any effect on the Commission’s approach.

One should not expect the US approach to have a strong influence on the Commission in this area. As noted above, the EU condemns ‘exploitative’ pricing practices. Moreover, there have traditionally been critical differences between the US approach and the law elsewhere with regard to refusals to deal by dominant firms – and in linkLine, the Supreme Court majority reasoned that, if the monopolist could refuse to deal altogether, it could not be found liable for dealing only on unfavourable terms.

This same kind of divergence can be found in the predatory pricing area – where the recent decisions by the US Supreme Court have widened these differences. For example, EU law is distinguishable from the US approach on a couple of key fronts. Pricing below either average variable cost or average total cost may be found to be predatory in Europe. The 1991 Akzo case establishes that prices below average variable cost are per se predatory; prices above average variable cost but below average total cost are presumed to be predatory and are condemned if evidence of predatory intent is found.

In addition, no showing of recoupment is required under EU law. The European Court of Justice in Tetra Pak II (1996) intentionally departed from the US approach and explained: ‘it would not be appropriate ... to require ... proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalise predatory pricing whenever there is a risk that competitors will be eliminated’. This approach was recently confirmed by the Court of First Instance in France Telecom SA (2007), which again rejected the necessity to show a probability of recoupment.

‘Bundling’ and other pricing practices

Beyond predatory pricing and price discrimination, there are a number of pricing practices that may create concerns when utilised by a company with market power irrespective of jurisdiction. The basic question is whether the pricing practice is being used to exclude competitors or is simply an effort to compete on the merits by offering customers products or services at lower price.

In this regard, ‘bundling’ has received tremendous recent attention, driven in part by the Commission’s stringent prohibition decision against Intel. The concept of ‘bundling’ encompasses a variety of pricing practices, but the common theme is a concern that the company employing ‘bundling’ is attempting to use its market power over one product to limit competition in other products or to force exclusivity. ‘Bundling’ therefore is very much akin to ‘tying’ or ‘exclusive dealing’.

A ‘tying’ analysis applied to pricing appears reasonably straightforward – did a company with substantial market power in one product force a purchaser, through low pricing, to take another product in order to get the first product? In other words, is the price of the two products together low enough to ‘force’ a purchaser to buy them as a package?

The analysis of product ‘bundles’ as exclusive dealing is somewhat less clear in the US and elsewhere. This is true because many practices are condemned without sophisticated analysis. In the EU, for example, even quantity discounts may be questionable if employed by a dominant firm. In such cases, the European Commission appears to require some form of cost justification. More importantly, a firm with a dominant position cannot use ‘loyalty’ rebates or other payments that provide an incentive to use the dominant firm exclusively. This is true even if the rebate or other payment is not substantial and could otherwise be met by competitors. The Commission’s virtually per se prohibition on loyalty rebates by dominant firms is at the core of the Commission’s very recent decision to fine Intel €1.06 billion for breaching EU law by giving rebates to computer manufacturers in exchange for an agreement not to purchase computer central processing units (CPUs) from competitors. Intel was also found to have paid a retailer to stock only computers using Intel’s CPUs. Central to the Commission’s decision is an apparent finding that there was no real efficiency enhancing reason for Intel’s pricing practices – they were adopted to prevent customers from dealing with competitors.

In the US, the difficulty in analysis stems from a split in the courts: between the 3rd Circuit Court of Appeals’ (in Philadelphia) 2003 decision in LePage’s and the 9th Circuit’s (in San Francisco) decision in PeaceHealth. In LePage’s, the court upheld a jury verdict condemning 3M’s granting of large rebates to customers which made substantial purchases across several 3M product lines. The court found that these large rebates essentially forced the customers to purchase office tape from 3M, harming LePage, which competed only in the sale of tape. The court refused to adopt a standard that required a showing of below cost pricing and quite frankly provides very little guidance on the appropriate analytical standard to apply to bundling practices.

In PeaceHealth, the court specifically rejected LePage’s and required proof that the rebates would result in some products being sold below cost. The court explained that it would calculate the price by focusing on the products for which the seller did not have market power – and apply the entire rebate to such sales. If this resulted in a price below cost, then Brooke Group would apply and the plaintiff would have to show that the seller could recoup its losses.

The PeaceHealth case leaves the bundled product area under considerable uncertainty in the US – not only is the LePage’s case a difficult one to apply, it is not clear whether which courts will apply LePage’s as opposed to PeaceHealth. Until the Supreme Court acts in this area, companies must proceed with caution.

Resale price maintenance

The Supreme Court’s 2007 reversal of precedent from 1911 that imposed per se illegality on minimum resale price maintenance (RPM) continues to create controversy in the US. In Leegin, the court (by a 5-4 margin) overturned precedent by examining economic evidence that the suppression of intrabrand competition between retailers often serves to stimulate interbrand competition among manufacturers. The court recognised that RPM has the potential to give consumer more choices, to eliminate free-riding on the promotional efforts of the distributor and to facilitate entry for new firms and brands.

While the court also acknowledged the potential anti-competitive effects of RPM (such as discouraging price cutting), the court concluded that such effects are not always or almost always present and therefore the per se rule is not appropriate. Accordingly, it directed that claims of illegal RPM be examined under the rule of reason. There have been several efforts in the US Congress to overturn Leegin, but as of yet, none have been successful.

Yet around the world, as in Europe, fixing the resale price, or establishing a minimum resale price, have long been considered hard-core restrictions on competition and are therefore presumed anti-competitive. While such treatment is not precisely the same as condemning the restraint as per se illegal, most jurisdictions have not been sympathetic to alleged justifications for either practice. Indeed, Microsoft was recently fined e9 million by the German cartel office for coordinating the resale price of a retailer.

Nonetheless, in many jurisdictions, and consistent with US practice, neither maximum nor recommended resale prices are treated as hard-core restrictions. Such conduct can be presumed pro-competitive. In Europe, however, recent decisions demonstrate that the Commission, and the European courts, will look beyond mere presumptions to confirm that such pricing is not a cover for anti-competitive behaviour.

In any case, the very inconsistent treatment of RPM between the US and the rest of the world makes implementing global pricing and distribution policies virtually impossible and will ensure counselling clients in this area will be frustrating.

Price discrimination

Under US law, charging a different price to two competing purchasers of a product is a violation of the Robinson-Patman Act (RP Act). The seller is not required to have any market power whatsoever, and there are various presumptions that make the plaintiff’s case even easier. The RP Act therefore creates the unfortunate reality of making it very easy for a potential challenger to state a prima facie case of illegal price discrimination – all that is required is a difference in the price charged for the same product to customers that compete in a resale market. As one can imagine, there are cases litigating each aspect of this simple formulation, but the end result remains the same – any time that a company decides to charge two customers different prices for the same product, it must conduct some analysis to ensure RP Act compliance.

For any company, there are some important points to consider with regard to the prima facie case. First, the ‘price’ element is read very broadly – it can include, for example, different credit terms. Second, the purchasers must be ‘competing’. This has a functional and geographic dimension. With regard to the functional dimension, there are cases that support the view that companies within certain channels of distribution do not compete with companies within other channels. But placing customers into different channels does not completely resolve the problem. The critical inquiry is to determine whether participants in one channel of distribution are selling to the same customers as participants in another channel in the same geographic region. Third, the products must be of ‘like grade and quality’. Thus, charging different prices for different types of a product (eg, light v regular beer) should not raise an issue, but charging different prices for products that simply have different labels on the same formulation would.

The good news about the RP Act is that there are important and useful defences. Perhaps the most practical is the ‘functional availability’ defence. This defence allows a company to discriminate in price, provided that it has made the lower price available to the competing purchasers. For example, if a company has a volume discount programme, it will end up discriminating in price among purchasers depending on the purchasers’ volumes. A company should not face liability, however, provided it has made the programme reasonably available to all purchasers, even if some purchasers currently lack sufficient sales to qualify for higher volume discounts.

Other countries around the world appear to lack such a broad prohibition on price discrimination. Many jurisdictions require that the party engaging in price discrimination have some form of market power. Under EU law, for example, article 82 prohibits companies with a dominant position from ‘applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage’. Accordingly, not just any price discrimination is actionable under article 82; the price discrimination must be imposed by a company with a dominant position.

There are few EU cases dealing with pure price discrimination (ie, where some other form of competitive abuse is not present). Such cases are most likely were the customers receiving the favoured pricing are ‘targeted’ because they had traditionally purchased from a competitor or the price discrimination is based on nationality of the customer.

Perhaps most surprising, based on the article 82’s language, has been the Commission’s condemnation of price discrimination directed toward ultimate consumers. While such treatment has largely been limited to cases involving discrimination on nationality grounds, it provides an additional contrast to RP Act analysis.

***

Pricing is an important, but difficult, area of antitrust for firms operating in multiple jurisdictions. As demonstrated by a basic comparison of US and European Union law, some care is required before employing any particular practice on a broad basis because there is tremendous divergence in analysis around the world.

Key cases

• Brooke Group Ltd v Brown & Williamson Tobacco Corp, 509 US 940 (1993).
• Volvo Trucks N Am Inc v Reeder-Simco GMC Inc, 546 US 164 (2006).
• Weyerhaeuser Co v Ross-Simmons Hardwood Lumber Company Inc, 549 US 312 (2007).
• Pac Bell Tel Co v linkLine Communs Inc, 129 S Ct 1109 (2009).
• Case 62/86 AKZO v Commission [1991] ECR I-3359.
• Case C-333/94P Tetra Pak v Commission (Tetra Pak II) [1996] ECR I-5951.
• Case T-340/03 France Telecom SA v Commission [2007] ECR II-107.
• LePage’s Inc v 3M, 324 F.3d 141 (2003).
• Cascade Health Solutions v PeaceHealth, 542 F3d 668 (2008).
• Leegin Creative Leather Prods v PSKS Inc, 551 US 877 (2007).
• IP/09/745 and Memo/09/235 Intel (2009).