Master Thesis by
Michał Kołodyński
Antitrust law - What should the test for predation be?
Analysis of the predatory pricing rules in the EU and the US
Track
European Competition Law and Regulations 2017/2018
Word Count
12376
Supervisor
Abstract
In the recent years, due to the record fines imposed on multibillion undertakings, the importance and recognition of competition law and rules on the abuse of dominant position has greatly increased. One of the most significant elements of the abuse of dominant position is predatory pricing. Despite a decades long development, rules to assess predatory pricing in the EU and the U.S., which are the most advanced competition law systems in the world, have evolved in a substantially different manner. Nevertheless, what both systems have in common is, that they have experienced a significant criticism in the past years on the ground that the set of rules is not sufficient to tackle the current predation cases. Therefore, a question emerges – how can the test for predation be improved, and which system offers the most practical approach?
This thesis will present and assess the functionality of each of the requirements to establish predatory pricing strategy, in both the EU and the U.S. The methodology will focus on the analysis of case law of the ECJ in the EU, and the Supreme Court in the U.S. It is due to the fact that both systems have experienced the most significant reforms, and introduced most of the essential concepts through case law. The thesis will compare the approaches and elements of both systems, and identify their usefulness to assess predation. Lastly, the thesis will conclude with a proposal for the best test for predation, using the most functional elements of both systems identified in the main body.
Keywords: predation, antitrust law, predatory pricing, dominant position, abuse of dominant
Table of Content
1 – Introduction ... 1
2 – What is predation? The EU perspective ... 3
2.1 – Dominant Position ... 5
2.1.1 – Assessing Dominance ... 5
2.1.2 – Relevant Market & Market Power ... 6
2.1.3 – Expansion or Entry barriers ... 8
2.1.4 – The concept of Abuse – the Hoffman-La Roche case ... 8
2.2 – AVC rule– Areeda and Turner Test ... 10
2.3 – ECJ Case law Predatory Pricing ... 11
2.3.1 – Pre-2009 ... 12
AKZO – adoption of the Areeda-Turner test & Intent requirement... 12
Tetra Pak & France Telecom SA – Is Recoupment an element of infringement? ... 14
2.3.2 – The year 2009 ... 15
Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings ... 15
2.3.3 – Post-2009 ... 18
Post Danmark I & II ... 18
3.1 – Sources of Antitrust Law in the U.S. ... 21
3.1.1 – Sherman Act - Section 2 ... 21
3.1.2 – The Federal Trade Commission (FTC) ... 22
3.1.3 – Clayton Act ... 23
3.2 – Intent ... 24
3.3 – Case law of the US - Supreme Court ... 24
3.3.1 – Standard Oil - The beginning of Predatory Pricing ... 24
3.3.2 – Utah Pie - Enforcement of predatory pricing rules ... 25
3.3.3 – Matsushita & Brooke Group - Is Recoupment an element of infringement? ... 26
3.3.4 – Cargill - When is below cost sale legal ... 27
3.3.5 – American Airlines - Difficulties in establishing predation ... 27
5 – Bibliography ... 31 Primary Sources ... 31 Case Law ... 31 EU ... 31 U.S. ... 31 Legislation ... 32
EU ... 32 U.S. ... 32 Secondary Sources ... 32 Books ... 32 Journal Articles ... 32 Internet Sources ... 34
1
1 – Introduction
The process of European integration is like no other – a unique project that happened
through decades on many fields, and through many stages, had shaped the European continent in a non-precedented way. Yet there is one achievement that deserves the title of the most important part of the European Union project – the internal market.
At the core of the internal market there is, or ideally should be, competition. Under the rules of the EU, competition law (also known as the antitrust law in the US) has a twofold purpose: ensuring a fair and equal competition between the economic operators promoting the single market integration, and protection of the consumers freedom and right to choose freely.1 When followed, competition rules protect both aforementioned parties from harm, while ensuring that each of them profit the most from the internal market – efficiency and innovation for the operators, and reduced prices and higher quality products for the consumers.2 However, as always in cases of a fragile balance, there are practices that can unfairly grant an advantage to one party while harming the other.
Under competition law there are 3 main activities which are monitored and regulated by the EU: (1) price fixing and cartel formation (2) abuse of dominant position and (3) mergers that
would result in a market domination.3 Each of them, when abused, may lead to creation of an imbalance on the market and losses for either of the parties. Due to the extensive nature of the competition law, this paper will focus on one of the aforementioned practices – predatory
pricing – which is assessed under the rules on abuse of the dominant position.
Predatory pricing, also known as “undercutting”, refers to a behaviour that aims at driving the competition out of the market, as well as to make new companies unable / unwilling to enter the market.4 It is an example of prohibited conduct under competition law, in which the aim is achieved by offering goods and services at the price below the market rate, which is often lower than the production costs itself. By getting rid of the competition, the company is achieving a de-facto dominant position and market supremacy, what allows it to exercise almost unmatched influence on the market. At the later stage, the now dominant undertaking is allowed to exercise an inviolable recoupment, recover the losses and earn profits greatly exceeding the ones possible under ordinary competition.
1 M.I.N. Osorio, “Conditional Pricing and Predatory Pricing in European Antitrust law”, Federal Trade Commission (2014),
available at <https://www.ftc.gov/system/files/documents/public_comments/2014/09/00013-92661.pdf>, para. 1 & 4
2 „Antitrust – Overview”, EC Europa (2014), available at <http://ec.europa.eu/competition/antitrust/overview_en.html> 3 “Competition”, Europa EU (2018), available at <https://europa.eu/european-union/topics/competition_en>
2 5
Despite a decades-long development, the rules on predatory pricing were often described as insufficient and in need of a reform.6 It is due to the fact that this practice is often hard to detect, as not every decision to offer radically low prices falls under the predatory pricing strategy.7
Therefore, this paper’s aim is to try to answer the following research question: “What
should the test for predation be?”. In order to reach the most accurate answer, both EU and
U.S. systems will be analysed. This choice is justified as their competition law legal regimes existed for many decades, what made them the most developed in the world. In majority, the rules of these systems overlap and share the same values.8 However, as it is shown below, there are significant differences between them, what begs the question what would a perfect test for predation be?
5 Graph 1, Prof. dr. Maarten Pieter Schinkel, EU Competition Law Course (M1680), Lecture 3 – Abuse of Dominance 6 M. Monti, “EU competition policy after May 2004”, Fordham Annual Conference on International Antitrust Law and
Policy (2003), available at <europa.eu/rapid/press-release_SPEECH-03-489_en.pdf>
7 “Predatory Pricing”, Legal Dictionary, available at <https://legaldictionary.net/predatory-pricing/>
8 I. Kovandova, “A Brief Comparative Analysis of Predatory Pricing Rules in the EU and the US”, Durham European Law
Institute (2015), available at <https://delilawblog.wordpress.com/2015/01/19/iva-kovandova-a-brief-comparative-analysis-of-predatory-pricing-rules-in-the-eu-and-the-us/>
3
Starting with chapter 2, the reader is presented with the analysis of the EU system, i.e. a detailed assessment of its origins, definitions of predation and case law that shaped it into its current form. Due to the introduction of a Commission Guidance in 2009, the chapter is divided into three time periods – prior 2009, 2009 and post 2009.
Chapter 3 will deal with the analysis of the U.S. system and its point of view on the antitrust law – a U.S. equivalent of competition law. While the structure of this chapter corresponds to the previous one, the analysis is more focused on a comparison of differences between the two systems. The knowledge of different approaches is the key to understanding the
advantages and disadvantages of each system – what is essential for proposing a best test for predation.
Furthermore, the emphasis of the paper is put on case law – of ECJ for the EU system and the Supreme Court for the U.S. system. In both of the systems the most influential concepts and rules were either introduced or amended by cases. Therefore, each of the cases discussed is analysed with the aim to find and show the novelty it has introduced.
Lastly, the conclusion answers the research question and, based on the above analysis, it drafts a proposal for a test for predation that would benefit from the best features of both EU and U.S. systems.
2 – What is predation? The EU perspective
Predatory pricing is an example of a prohibited conduct under EU competition law. It is assessed under art. 102 TFEU which concerns abuse of a dominant position on the market. Therefore, in order to establish a predatory pricing practice, first the Commission has to follow several steps codified under art. 102 TFEU that determine whether the undertaking concerned holds a dominant position in the first place. In order for an abuse of a dominant position to arise, there are 4 steps that have to be confirmed – (1) the subject of investigation is an undertaking (2) which holds a dominant position on the relevant market (3) the conduct at stake is an abuse and (4) the conduct affects the trade between Member States (MS).9 First, the term undertaking. By definition provided in Höfner case, undertaking is every entity that is engaged in the economic activity, regardless of its legal form and the way it is financed.10
9 T. Graf, A. Waksman, “Antimonopoly & Unilateral Conduct”, Global Competition Review (2016), available at <
https://globalcompetitionreview.com/jurisdiction/1000452/european-union>
4
Following the above definition, an undertaking covers all kind of companies, partnerships etc. The Court offered a clarification several years later, in case Commission v. Italy, and specified that offering goods or services will normally qualify as an economic activity for the purpose of the undertakings definition.11 It has to be noted that there are several exceptions to the rule, such as fulfilling a purely social function, that do not qualify as undertakings despite offering a service.
Predatory pricing is an example of an exclusionary abuse under art. 102 TFEU.
Exclusionary abuse means that the purpose of the abuse is to hinder competitors. It can take several forms such as predatory pricing or reduction of selling prices in the form of rebates
and reliefs.12
The pricing is considered as predatory, when the undertaking sets prices below a particular level, which is so low that it incurs losses to the predator, in order to eliminate competition and to preserve or gain more dominance on the market.
Therefore, for the purpose of art. 102 TFEU, predatory pricing consists of two elements: (1) deliberate incursion of short-term losses, called the sacrifice;
(2) the anticompetitive foreclosure.
The anticompetitive foreclosure refers strictly to the concept of abuse. The sacrifice by the undertaking has to be proven to serve one purpose – a strategy involving violation of competition law against other competitors and consumers. In the current system, the foreclosure is built on the test of the effective competitor which will be discussed in detail below.
Looking on the above requirements, it is visible that predation is not easy to establish. Not every below-cost pricing constitutes an infringement.13 Practises such as promotion of new products, or clearing old stock are not caught under the predation rules despite the general similarity. Therefore, a careful analysis of each practice is necessary to avoid condemnation of an otherwise beneficial practice.
Due to the harmonized nature of competition law in the EU, the cases of abuse of art. 102 TFEU are mainly dealt with by the EU institutions itself. The main body responsible for assessment of predatory pricing is the EU Commission.
11 C-35/96 Commission v Italy [1998], ECLI:EU:C:1998:303, para. 36
12 M.I.N. Osorio, “Conditional Pricing and Predatory Pricing in European Antitrust law”, Federal Trade Commission (2014),
available at <https://www.ftc.gov/system/files/documents/public_comments/2014/09/00013-92661.pdf>
13 H. Rosenblatt, H. Armengod, A. Scordamaglia-Tousis, “Post Danmark: predatory pricing in the European Union”, Global
Competition Review (2013), available at < https://s3.amazonaws.com/documents.lexology.com/1a95467a-09fa-4d92-abeb-414d9bee6d30.pdf>
5
Nevertheless, on the national level the investigation can be led by the relevant National Competition Authorities (NCAs), as long as the Commission has not opened an official investigation.14 In case an infringement is found, the guilty undertaking is faced with
significant fines imposed by the Commission under Regulation 1/2003.15 The fines serve a twofold purpose – punishment of an illegal activity, as well as deterrence from undertaking such practices in the future.16
2.1 – Dominant Position
The first step to establish predation is to prove that the investigated undertaking holds a dominant position on the market. By definition developed by CJEU in the case United
Brands v Commission, a dominant position is a position of economic strength of a company
that allows it to act to an appreciable extent independently of competitors, customers and ultimately of its consumers, leading to distortion of competition law rules.17 To put it even more simple – the more power the company has, the more pressure and influence it can exercise on the other competitors.
In theory, a predatory pricing strategy could be adopted by any undertaking. However, only in case of the biggest companies it would make sense. First of all, only the big companies have the necessary financial reserve to sustain the losses in the phase of sacrifice. Secondly, the predation strategy has the highest chance of success if the firm is already influential on the market. Small enterprises would have little to no chance of profitable recoupment – what makes the whole idea of predation pointless.
2.1.1 – Assessing Dominance
In order to assess whether the undertaking holds a dominant position, the Commission has to assess the relevant market and the market share. Finding the former is the core issue, as dominance can only exist on a particular market.18 While the latter is used as a filter to check whether the undertaking concerned is capable of exercising dominance in the first place.
14 T. Graf, A. Waksman, “Antimonopoly & Unilateral Conduct”, Global Competition Review (2016), available at <
https://globalcompetitionreview.com/jurisdiction/1000452/european-union>
15 Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in
Articles 81 and 82 of the Treaty Official Journal L 1, 04.01.2003
16 “Competition: Antitrust procedures in abuse of dominance”, EC Europa (2013), available at
<http://ec.europa.eu/competition/publications/factsheets/antitrust_procedures_102_en.pdf>
17 C-27/76 United Brands Company and United Brands Continentaal BV v Commission of the European Communities
[1978], para. 65
18 “Competition: Antitrust procedures in abuse of Dominance”, EC Europa (2013), available at
6
2.1.2 – Relevant Market & Market Power
To establish the relevant market the Commission uses a set of criteria. These criteria are listed in a notice, which is used as a guidance as to how the Commission assesses the relevant market.19 Following these guidance, the Commission distinguishes 2 relevant markets – the
geographical and the product market.
The geographical market refers to a relevant geographic area in which: “(…) the firms
concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous.”.20
Following the definition, the Commission will try to define the market basing on the geographic barriers such as continents, the EU internal market etc.
On the other hand, the product market refers to a particular type of product that is subjected to the predation strategy. By definition, it compromises: “(…) all those products and/or
services which are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use.”.21 An example of a product market would be the banana market, and not the market for fresh fruits, as in case
United Brands.
The importance of the relevant market is significant. It has the central role in assessing the predatory pricing. It is due to the fact that the predator will only enforce the predatory pricing strategy if there is a prospect of gaining more power or other form of profits. Therefore, the relevant market is a market that is worth monopolizing – and worth protecting by the competition policy.
Lastly, in order to ultimately check and determine the boundaries of the market, the Small
but Significant Non-Transitory Increase in Prices (SSNIP) test was introduced. It is used to
check which products are substitutes on the market.22 It is due to the fact that in general, a market is believed to be built of products that consumers consider to be substitutes. The test functions as follows.
19Commission Notice on the definition of relevant market for the purposes of Community competition law, OJ C 372,
9.12.1997, p. 5–13
20 Ibid., para. 8 21 Ibid., para. 7
22 L. Niminet, “THE SMALL BUT SIGNIFICANT AND NONTRANSITORY INCREASE IN PRICES (SSNIP) TEST”,
7 23
First, a product which is an alleged substitute is introduced. Then, in order to assess whether it is a case, a price of that product is increased by 5-10% in a hypothetical scenario. If such increase is profitable, it means that the products are substantially different and belong to different markets. If the price increase is not profitable, it means that the products are interchangeable, and they are part of the same market.
Once the relevant market has been established, it is possible to measure the market share of the undertaking under investigation. In case of the market share in the EU system, the ECJ has developed and set a certain threshold above which the undertaking is presumed to hold a dominant position. In case United Brands the ECJ held that an undertaking holding roughly 40-45% of the market is presumed as dominant. This view was further confirmed and codified in documents such as 10th European Commission’s Report on Competition.24 Later this view was further confirmed and kept in the Commission’s Guidance of 2009 discussed below.25
23 Graph 2, Prof. dr. Maarten Pieter Schinkel, EU Competition Law Course (M1680), Lecture 3 – Abuse of Dominance 24 “Tenth Report on Competition Policy”, EU Commission (1980), available at
<http://ec.europa.eu/competition/publications/annual_report/ar_1980_en.pdf>, para. 150
8
Therefore, in the Court’s opinion any market share below 40% is unlikely to be deemed sufficient to establish dominance. Nevertheless, it is important to underline that investigation is approached on a case-by-case basis – therefore this presumption may not be true in all situations. A good example may be to look on the requirement of dominance from the angle of time. If an undertaking gained 40% market share recently, and did not hold it long enough, the likelihood that the market share level will change in the near future is high. Therefore, an undertaking with a stable market share below 40% may be a more influential market player than a recently achieved 40%.
2.1.3 – Expansion or Entry barriers
The rules on expansion and entry are another important element of dominance. It is assumed that where the expansion or entry by other competitors is likely, timely and sufficient, an undertaking can be deterred from increasing prices in fear of loss of customers.26 If a market is attractive and worth monopolizing, a dominant undertaking would try to limit the activity of its competitors to a minimum. Therefore, if the barriers to expansion or entry arise, the
investigation is one step closer to finding the predator guilty.
The definitions of likely, timely and sufficient are codified in the Guidance itself.27 A likely expansion or entry occurs when there is a high probability of gaining sufficient profits on the market. A timely expansion or entry is a sufficiently swift reaction of competitors to deter the abuse of power by the dominant undertaking. And lastly, a sufficient expansion or entry requires it to be an action of certain magnitude to deter the undertaking from raising the prices.
In case of alleged predation, when the barriers are found to exist, the likelihood of
a violation is high. It is due to the fact that there are little ways in which a potential competitor could stop the dominant undertaking from exercising its power on the market. With that element established, an undertaking is deemed to be dominant and can be assessed under the rules on abuse.
2.1.4 – The concept of Abuse – the Hoffman-La Roche case
Dominance in itself is not illegal. The whole point of the undertaking’s existence is to grow, develop and gain more market share. However, only to the extent when the power is gained through legal means.
26 Ibid., para. 16 27 Ibid., para. 16
9
Therefore, the last element to establish a violation of art. 102, is to establish that an abuse has taken place.
The understanding of abuse at first seem straightforward – illegal behaviour by the undertaking that has an advantage over its competitors with a purpose to gain more power. However, in the EU the concept of abuse is slightly more complicated and had to be defined by the ECJ in the early stages of the EU development.
The case Hoffmann-La Roche was one of the early cases of abuse of dominant position in the EU. It is well known for one of the first ECJ’s definition of abuse.28 Hoffman-La Roche was found to be a dominant undertaking on the market for sale of certain vitamins.
The undertaking has abused its position by offering exclusionary rebates and entering into exclusive agreements with the purchasers. The ECJ has found the undertaking guilty and defined the abuse as a behaviour of an undertaking: “(…) which, through recourse to methods
different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.”.29 Furthermore, the Court elaborated on the concept of abuse by saying that it covers: “(…) not
only abuse which may directly prejudice consumers but also abuse which indirectly prejudices them by impairing the effective competitive structure as envisaged by Article 3(1)(g) of the Treaty.”.30
In addition to the definition of the abuse itself, the Court elaborated on further requirements. One of these is the requirement of time. As established before, predation is a strategy. This strategy requires a dominant position on the market. By definition, a strategy is a plan to achieve a certain aim in the long run.31 Therefore, in order to prove that an action is
a predation, and that an undertaking is capable of enforcing it, evidence have to be provided on existence of a long-run plan to eliminate competition. And such plan may only originate if the dominant position is held long enough and is at the time unchallenged. Therefore, in
Hoffman the ECJ held that the 51% market share was in itself an insufficient evidence to
establish a dominant position.
28 C-85/76 Hoffmann-La Roche & Co. AG v Commission of the European Communities Court of Justice of the European
Communities [1979], ECLI:EU:C:1979:36
29 Ibid., para. 91 30 Ibid., para. 125
10
It was due to the fact that the period assessed, in which the undertaking had the majority of the market, was only one year. Therefore, in the understanding of the court, it was not long enough to prove the dominance existence.32
The concept of abuse in the EU is closely connected to the special responsibility that each dominant undertaking has towards other competitors on the market.
This concept, being absent in U.S. antitrust law, prescribes that a dominant undertaking are obliged: “(…) not to impair undistorted competition in the EU. A dominant company infringes
article 102 TFEU if it abuses its dominant position to restrict or distort competition.”.33
Looking on the above, it is clear that the concept of dominance and prohibition of abuse are taken extremely seriously by the Commission.
When the dominant position of an undertaking is established, it is time to apply the test for predation. However, the rules governing predatory pricing have experienced significant changes over the years. Since 1991, when the EU dealt with the first major case on predatory pricing, the ECJ made several developments and clarifications of the predation rules.
Nevertheless, the core of nowadays rules on predation can be traced back to 1975 when professors Areeda and Turner introduced their price-cost test for predation which had a great impact on both EU and U.S. systems.
2.2 – AVC rule– Areeda and Turner Test
In order to grasp the full meaning of the tests that were developed in the predatory pricing regime, an understanding of the basic concepts is required.
In 1975, professors Philip Areeda and Donald Turner proposed the first test for predation that used the price-cost comparison to identify predatory abuse.34 The test was based on the below-cost pricing analysis. In order to assess the alleged predation, Areeda and Turner proposed a 2-step rule.
The first and core element of the test was the concept of Average Variable Cost (hereinafter AVC), which was later commonly referred to as the AVC rule. It is calculated by dividing all variable costs by the total actual output – giving the average cost of each extra unit of
production.35
32 C-85/76 Hoffmann-La Roche & Co. AG v Commission of the European Communities Court of Justice of the European
Communities [1979], ECLI:EU:C:1979:36, para. 58
33 C-322/81 NV Nederlandsche Banden Industrie Michelin v Commission of the European Communities [1983],
ECLI:EU:C:1983:313 and C-209/10 Post Danmark A/S v Konkurrencerådet, ECLI:EU:C:2012:172, para. 23
34 C. P. Shimer, „Predatory Pricing: The Retreat from the AVC Rule and the Search for a Practical alternative”, Boston
College Law Review (1981), 22(3), nr. 3, article 2
11
In Areeda and Turners idea, if the price of a product was on or above the AVC, the practice was legal and in accordance with the competition rules. However, when the price was set below the AVC, there was a presumption of a predatory practice.36 It followed from an assumption that a dominant firm would only be interested in applying such unbeneficial strategy, in order to get rid of the competition from the market.
Areeda and Turner also suggested that in some cases, when the AVC is not applicable, predation may be established using the idea of the marginal cost. It is defined as “(…) cost incurred by a firm when producing an additional unit of output.”. The difference between the two is subtle, yet important. The marginal cost is the plain cost of production of an extra unit of output. On the other hand, the AVC is the average cost of labour put into producing an additional unit – therefore it includes all of the surrounding costs suffered. That is why, a marginal cost lower than the AVC will drag the AVC down with it, while a higher marginal cost will raise the AVC respectively. Therefore, if prices were below the marginal cost for a short period of time it would satisfy the test criteria.37
Secondly, the element of predictability. According to Areeda and Turner, in order to establish predation, the market structure has to be arranged in the way to make the strategy profitable. Therefore, one of the elements of the test is the possibility of recoupment.
It requires a proof that the predator could reasonably expect to make more profits in the future than the losses suffered in the sacrifice phase.38 As provided below, the element of
recoupment became one of the distinguishing factors between the EU and U.S.
The importance of the test is unmatched. Both EU and U.S. systems adopted the 2-tier structure in their legal regimes what made it one of the most influential elements of the current predatory pricing rules. Despite criticism, the below-cost analysis is still used today to assess predation and remains in a similar form to the original. Nevertheless, both systems added several novelties in case law and statutes such as intent or market structure
requirements.
2.3 – ECJ Case law Predatory Pricing
As stated before, in the recent years there were several ECJ judgements that significantly contributed to clarification of the predatory pricing rules in the EU.
36 P. Areeda, D. F. Turner, “Predatory Pricing and Related Practices Under Section 2 of The Sherman Act”, Harvard Law
Review (1975), 80(4), p. 733
37 H. Hovenkamp, “The Areeda-Turner Test for Exclusionary Pricing: A Critical Journal”, Review of Industrial Organization
(2015), 46(3) p. 1
38 H. Hovenkamp, “The Areeda-Turner Test for Exclusionary Pricing: A Critical Journal”, Review of Industrial Organization
12
However, to fully grasp the concept and the way it was developed, 3 different periods should be distinguished and analysed. Firstly, the period before 2009. It was the year of introduction of the Commission’s Guidance which included several updates and changes in the
Commission’s attitude towards predatory pricing. Secondly, 2009, the year of the Guidance itself. In order to grasp and understand the current set of rules on predation in the EU, an analysis of the key aspects of the document is required. Thirdly and lastly, the years that followed the Guidance introduction. In this period the ECJ has provided several judgements which offer further clarification of the competition law rules.
2.3.1 – Pre-2009
AKZO – adoption of the Areeda-Turner test & Intent requirement
The first encounter of the EU Courts with predatory pricing practices happened in 1991 when the ECJ had to deal with the AKZO case.39 The EU Commission found out that AKZO, a dominant manufacturer of chemical products, had repeatedly offered its products at below-cost prices with an intention to damage its competitors.
AKZO was - and still is - a Dutch undertaking that held over 50% of the market for production of organic peroxide. The alleged predation was investigated on many levels, including below-cost pricing, selective price cutting and threats towards its competitors.40 The ECJ has found them guilty of predatory pricing, and went even further by introducing a new test.
In this case, the ECJ has developed a 2-stage test on determining whether a practice is a predatory pricing practise. It was the first official test in the EU that covered the predatory pricing abuse. In the understanding of the Court:
1) Prices below Average Variable Cost (AVC) by a dominant firm will be presumed abusive
2) Prices below Average Total Cost (ATC) but above AVC will be regarded as abusive if
they are part of a plan to eliminate competitors41
From the above, it is clearly visible that the 2-stage test of AKZO took inspiration from the Areeda-Turner test. The first part is almost a copy-paste of the initial version proposed.
39 C-62/86 AKZO Chemie BV v Commission [1991] ECR I-3359
40 H. Rosenblatt, H. Armengod, A. Scordamaglia-Tousis, “Post Danmark: predatory pricing in the European Union”, Global
Competition Review (2013), available at < https://s3.amazonaws.com/documents.lexology.com/1a95467a-09fa-4d92-abeb-414d9bee6d30.pdf>
13
The presumption of abuse is motivated by an assumption that no firm would decide to lower its prices below AVC – other than to drive the competitors out of the market. The use of the Areeda-Turner test demonstrated the willingness and necessity of introduction of an official predation test to the EU regime. But the ECJ did not stop there.
Next to the AVC, there is a second crucial concept that serve as an economic justification of the rule - average total cost. The average total cost ( ATC) is the total amount of money invested to produce each unit of output.42 It is calculated by dividing both its variable costs and its fixed costs by its total output.43 It was a new element that further extended the scope of the test. The core requirement became the element of intent, which had to be proven in order to establish a predation between the ATC and AVC thresholds.44
The second part of the test poses a much bigger challenge than the first, due to the intent element. The Commission struggled significantly to prove that the undertaking has shown a strategic motivation to drive the competitors out of the market, what led to frequent scenarios when the predation could not be proven. The Commission had to prove that the undertaking knew, or could reasonably foresee that the conduct is a violation – and nevertheless pursued its goals that led to a distortion of competition. Therefore, the Commission considered as illegitimate an intent that has shown a proactive eviction strategy that went beyond a healthy, yet aggressive competition.45
In case of AKZO, the evidence that had shown the existence of intent were found in the form of documents and recordings of meetings – which had shown numerous direct threats of
AKZO towards their competitors. A further clarification of how to deal with intent was
offered in the Tetra Pak II case where the General Court (hereinafter GC) suggested that convergent factors can be used to establish intent. Such factors include a loss-making prices that are charged only where it is necessary to win prospective, or win back old customers.46 On the end note, it is worth to add that in addition to AKZO, the ECJ offered an important clarification of the above rule in the France Telecom case.47 The Court clarified that the relevant measure of costs is only those of the dominant firm at stake.
42 “Average Total Costs [ATC] Law and Legal Definition”, US Legal, available at
<https://definitions.uslegal.com/a/average-total-costs-atc/>
43 R. Whish, D. Bailey, “Competition Law: Text, Cases and Materials”, (8th edn) Oxford University Press (2015), p. 759 44 C-62/86 AKZO Chemie BV v Commission [1991] ECR I-3359, para. 71-72
45 H. Rosenblatt, H. Armengod, A. Scordamaglia-Tousis, “Post Danmark: predatory pricing in the European Union”, Global
Competition Review (2013), available at < https://s3.amazonaws.com/documents.lexology.com/1a95467a-09fa-4d92-abeb-414d9bee6d30.pdf>
46 C-333/94 - Tetra Pak International SA v Commission of the European Communities [1996] ECLI:EU:C:1996:436 47 C-202/07 P France Télécom v Commission [2009] ECLI:EU:C:2009:214
14
Therefore, even if the costs of the dominant firm are above the costs of its competitors, it has no influence on the assessment of predation for the dominant undertaking.
Tetra Pak & France Telecom SA – Is Recoupment an element of infringement?
A significant element of predatory pricing, and a major difference between the EU and U.S., lies in the phenomena of recoupment. It is reasonable to expect that the alleged predator hopes to recoup the losses that suffered during the sacrifice phase. However, the importance of recoupment goes much further than that. If the predator is successful in eliminating competition on the market, the dominance achieved is likely to allow the predator to gain much more than just the losses suffered.
Therefore, the recoupment is not only about the recovery of the losses, but also about the expected profit which is often a considerable sum. Without that chance of profit, the predatory pricing strategy would have no economic benefit and purpose.48 While this general remark is correct for both EU and U.S. systems, their approach differs when considering recoupment as a necessary element to establish predation.
Following the judgements of the ECJ, the possibility of recoupment is not necessary to establish predatory pricing under EU competition law. This is a major difference in comparison to the US system, as well as the prime assumption of the Areeda Turner test, which required the possibility of recoupment as one of its requirements – a requirement that was not incorporated in the AKZO judgement.
In the appeal case of Tetra Pak the Court established that it would be inappropriate to require additional proof that the recoupment of losses was possible.49 The rationale behind this decision was that upon establishing dominance, the entry barrier to the market are
sufficiently high to automatically presume the possibility to recoup.50 This view was subjected to a wide criticism, as it has evolved the AKZO definition of predatory abuse.51
Surprisingly, the Commission’s view on the presumption of recoupment was criticised by AG Fennelly and Mazak in cases Compagnie Maritime Belge52 and in an analysis of the France Telecom SA appeal respectively. Both of them advised and tried to convince that in
order to establish predatory pricing, a possibility to recoup losses has to be proven possible.
48 K. G. Elzinga, „Predatory Pricing and Strategic Theory”, The Georgetown Law Journal (2001), 89(8), p. 2475-2494 49 C-333/94 - Tetra Pak International SA v Commission of the European Communities [1996] ECLI:EU:C:1996:436, para. 44 50 T. Janssens, “The Commission Guidance on Predation: A Cautious Step in the Right Direction?”, Competition Policy
International (2009), 2(1), p. 7
51 “Tetra Pak II”, Reckon Open (2007), available at <http://www.reckon.co.uk/open/Tetra_Pak_II> 52 C-395 and 396/96P, Compagnie Maritime Belge and others v Commission (2000), 4 CMLR 1076
15
However, any uncertainty left after the Tetra Pak was clarified in the France Telecom SA.53 In this case the General Court has decided once again that recoupment is not a necessary element to establish predation, putting the uncertainty to an end. An undertaking Wandoo was found guilty of predation in the ADSL service sector. They have challenged the Court’s decision and argued that the test for predation that was adapted by the court is incorrect, and that the rate of cost recovery applied to this case was inadequate. Nevertheless, the ECJ rejected both arguments and confirmed, against AG Mazák opinion, that recoupment is not an element of infringement.54
2.3.2 – The year 2009
Guidance on the Commission's enforcement priorities in applying Article 82 of the EC
Treaty to abusive exclusionary conduct by dominant undertakings55
Following the above analysis, it is visible that the EU struggled in dealing with the predatory pricing cases. The set of rules established in AKZO, France Telecom and other cases was incomplete and often criticised for presence of gaps that could be used to easily rebut the accusation by the undertaking.56 Such situation encouraged the Commission to hasten their efforts in creating a clearer and unified approach towards these issues.
The Guidance in the EU serves the role of an explanatory document that provides practical information and informal guidance on how particular provisions of EU law should be applied. By guidance, Commission means to underline its enforcement priorities – which are situations in which it is likely to intervene.57 Therefore, it is essential to underline that they are not officially binding – their role is purely explanatory and advisory.58 However, there is an arguable opinion that the EU Commission’s guidance is nevertheless binding on the Commission itself due to principles of legal certainty and legitimate expectations.59 That is why their role is not to be underestimated.
53 Case T-340/03, France Télécom v. Commission [2007] ECR II-107 54 I. G. Ballesteros, A. Szarka, “Predatory pricing in the telecoms sector:
the ECJ rules on the issue of recouping losses”, Competition Policy Newsletter (2009), available at < http://ec.europa.eu/competition/publications/cpn/2009_2_8.pdf>
55 Guidance OJ C 45/7, 24.2.2009, p. 7–20
56 H. Rosenblatt, H. Armengod, A. Scordamaglia-Tousis, “Post Danmark: predatory pricing in the European Union”, Global
Competition Review (2013), available at < https://s3.amazonaws.com/documents.lexology.com/1a95467a-09fa-4d92-abeb-414d9bee6d30.pdf>, p. 7
57 A. C. Witt, “The Commission’s Guidance Paper on Abusive Exclusionary Conduct – More Radical Than It Appears?”,
European Law Review (2010), 35(2), p. 8
58 A. C. Witt, “The Commission’s Guidance Paper on Abusive Exclusionary Conduct – More Radical Than It Appears?”,
European Law Review (2010), 35(2), p. 7
59 T. Graf, A. Waksman, “European Union”, Global Competition Review (2018), available at
16
Firstly, the Guidance may be seen as a mix of the old and new theories on predation. The definition of predatory conduct is now codified in para. 63 of the Guidance, that says that the abuse occurs when the dominant firm “(…) engages in predatory conduct by deliberately
incurring losses or foregoing profits in the short term (referred to hereafter as ‘sacrifice’), so as to foreclose or be likely to foreclose one or more of its actual or potential competitors with a view to strengthening or maintaining its market power, thereby causing consumer harm.”.60
Following the above, there are two main focuses which are emphasized by the Commission: (1) the presence of economic sacrifice and (2) anticompetitive foreclosure.
The former concept, sacrifice, is defined as a willing incursion of avoidable losses by an increase in output or charging low prices of a particular product.61 In order to explain this new concept economically, the Commission introduced the concept of AAC (Average Avoidable Cost). The AAC is calculated by dividing all its avoidable costs by its output.
The Commission considers AAC to be a more reliable tool for predation, as it captures the sunk losses of the dominant undertaking. The AAC and AVC are the same when only variable costs can be avoided. However, AAC will be higher than AVC when it includes some fixed costs.62 In the Commissions understanding, predation occurs when (1) the dominant
undertaking prices are below AAC or (2) its prices, while above AAC, nevertheless led to losses that could be avoided as a part of a predatory strategy.63 This strategy of assessing predation shows great similarities with the AKZO test, yet it has some new elements which should help the Commission to deal with these cases more effectively.
The second concept, anticompetitive foreclosure, is often seen as a positive change of the predatory pricing regime in the EU.64 Similarly to the U.S., the Commission took an approach to apply the so called “equally efficient rival/competitor test”.65 It prescribes that the
Commission will intervene if there is a sufficient, reliable data determining that the conduct is capable of harming the competitors – and therefore constituting an anticompetitive
foreclosure.66 The test underlines the difference between exclusion from the market as a result from an abusive conduct and result of incompetent and inefficient competitors.67
60 Guidance OJ C 45, 24.2.2009, p. 7–20, para .63 61 Guidance OJ C 45, 24.2.2009, p. 7–20, para. 64-66
62 R. Whish, D. Bailey, “Competition Law: Text, Cases and Materials”, (8th edn) Oxford University Press (2015), p 758 63 T. Janssens, “The Commission Guidance on Predation: A Cautious Step in the Right Direction?”, Competition Policy
International (2009), 2(1)
64 Guidance OJ C 45, 24.2.2009, p. 7–20, para. 67-73
65 M. Klöcker, “The “As Efficient Competitor Test” is not an efficient test”, Nordic Competition (2015), available at
<http://www.nordiccompetitionblog.com/?p=481>
66 R. Nazzini, “The Foundations of European Union Competition Law: The Objective and Principles of Article 102”, Oxford
Scholarship Online (2011), p. 72
17
Therefore, only an undertaking that has suffered as a result of an abusive conduct, and not the incompetent management, will be protected. Next, as in the case of sacrifice, a new economic concept was introduced – Long-Run Average Incremental Cost (LRAIC). It is calculated by dividing all of the undertakings long-run incremental costs by the output.68 Following the Guidance, technically only pricing below LRAIC is capable to drive out an equally efficient competitor from the market.69 Therefore, if a competitor is capable of competing effectively the Commission will refrain from intervening as the conduct is unlikely to distort the
competition.70
Looking on the above, it is clear that the official approach of the Commission is more effect based, rather than intent based. The main element that will determine whether or not to intervene, is the likelihood of negative effect on competition. This attitude is a common approach of both the EU and U.S. systems – the intervention will normally happen only where the conduct at stake has already been, or is capable of, distorting competition.
Furthermore, the Commissions approach has shifted from protection of competitors towards protection of consumers. Traditionally, both EU and U.S. antitrust law has put emphasis on protection of competitors as they were the core elements of antitrust law on the market. However, in the recent years both systems acknowledged that the party that is defenceless and most likely to get harmed by the predatory pricing violations are the consumers. Therefore, the likelihood of consumer harm has become the core requirement to assess whether the intervention is necessary.71 It was also a direct aftermath of an extensive criticism of the way how Commissions and EU Courts dealt with competition law abuses. Before the introduction of the Guidance, the approach was focused on protecting the competitors. In most cases, the intervention was directed at particular undertakings to save the competition on the market. Furthermore, frequently the interventions happened in cases which did not have, or could not have, harmful effect on consumers.72 That is why a shift of priorities was necessary, and gladly the Guidance has provided it.
Nevertheless, the Guidance did not manage to evade some criticism. One of the points that were made were directed at the consumer harm requirement which was said to limit the scope of the predatory pricing rules.
68 R. Whish, D. Bailey, “Competition Law: Text, Cases and Materials”, (8th edn) Oxford University Press (2015), p. 759 69 Guidance OJ C 45, 24.2.2009, p. 7–20, para. 67
70 H. Rosenblatt, H. Armengod, A. Scordamaglia-Tousis, “Post Danmark: predatory pricing in the European Union”, Global
Competition Review (2013), available at < https://s3.amazonaws.com/documents.lexology.com/1a95467a-09fa-4d92-abeb-414d9bee6d30.pdf>, p. 21
71 Guidance OJ C 45, 24.2.2009, art. 81(3)
18
Also, the efficient competitor test was criticised for being not so efficient, by raising the costs of procedure and requiring a significant economic knowledge to be effective.73
2.3.3 – Post-2009 Post Danmark I & II
As established before, the main difficulty with predatory pricing is a correct assessment whether the investigated practice is indeed a predation. The correct enforcement of antitrust law rules is crucial to keep the market competition intact. Over-enforcement may cause the companies to avoid charging low prices, while under-enforcement may lead to abuses and distortion of competition.74 The ECJ had a chance to address this in the Post Danmark cases.75 In this case two large companies, Post Danmark (hereinafter PD) and Forbruger-Kontakt (hereinafter FK) from the unaddressed mail sector, were competing against each other on the Danish market. PD, which held a dominant position at that time, managed to sign a contract in 2003 with three major customers, which were former customers of the FK. The contract however did not allow PD to cover its ATC, yet it allowed it to cover AVC. Following this event, FK complained against PD in front of the Danish Competition Authority. The importance of the judgement considered 2 questions:
(1) under what circumstances selective price cutting is considered as an exclusionary abuse
and
(2) whether the mere fact that the price charged is lower than ATC but higher than is
sufficient to establish an abuse?
The ECJ had a chance to clarify and confirm both concepts of efficient competitor test and
intent in the cases Post Danmark I and II respectively.
In Post Danmark I the Court held that the efficient competitor test is an important and needed element of the test for predation. The ECJ held that the use of incremental costs instead of AVC was a more suitable strategy, and that application of the effective competitor test represents a more effect-based approach to predation.
73 K. Schattat, “Art. 102 TFEU - specific abusive conducts - margin squeeze”, Freie Universität Berlin (2017), available at <
https://wikis.fu-berlin.de/display/oncomment/Art.+102+TFEU+-+specific+abusive+conducts+-+margin+squeeze>
74 H. Rosenblatt, H. Armengod, A. Scordamaglia-Tousis, “Post Danmark: predatory pricing in the European Union”, Global
Competition Review (2013), available at < https://s3.amazonaws.com/documents.lexology.com/1a95467a-09fa-4d92-abeb-414d9bee6d30.pdf>
75 C-209/10 Post Danmark A/S v Konkurrencerådet, ECLI:EU:C:2012:172 & C-23/14 Post Danmark A/S v
19
In the Post Danmark II, the ECJ further explained the necessity of the concept of intent. It held that pricing below ATC but above AVC is in itself not a violation – it may serve a purpose to attract customers. In order to prove that predation took place, it is required to prove that the undertaking had an intent to violate the law and that the pricing was a part of a larger strategy to dominate the market.
3 – What is predation? U.S. perspective
Due to the federal nature of the United States, each state enjoys significant privileges in creation of its own laws.76 An analogous situation occurs in case of the main antitrust statute of the U.S. – the Sherman Act. Due to this federal regime, the application of the act is limited only to the interstate commerce. In order to regulate the intrastate commerce, many states adopted their own acts that mirror the Sherman Act.77 In other cases, states adopt only rules that focus on a particular market f.e. gasoline market.78 These laws are enforced by the State Attorney Generals, to prevent anticompetitive behaviour on the local scale.
However, due to a large number of states and laws of their own, for the sake of this paper, only the U.S. wide Federal approach will be analysed to show how the predatory pricing practices are dealt with on the interstate level.
The enforcement of the antitrust law in the U.S. is dealt with by several actors. As established by the US Supreme Court, each violation of the Sherman Act is also a violation of the Federal Trade Commission Act, discussed below.79 Therefore, the
responsibility for enforcement of the antitrust law is shared by the independent Federal Trade Commission (hereinafter FTC) and governmental Department of Justice (hereinafter DOJ).80 The concept of predatory pricing emerged in the U.S. many decades before the EU has been created. Due to that extensive time of existence, the U.S. courts have gathered extensive experience in this field and developed a significant number of rules on that matter. In many occasions, these rules served as an inspiration for the EU legislators what explain numerous similarities between the systems.
76 “Guide to Antitrust Laws”, Washington State Office of the Attorney General, available at <
https://www.atg.wa.gov/guide-antitrust-laws#statelaw>
77 “An Introduction to U.S. Antitrust Law and How it Impacts Credit Management”, ABC Omega (2012), available at
<http://www.abc-amega.com/articles/commercial-law/u-s-antitrust-law>
78 T. Calvani, Predatory Pricing and State Below-cost Sales statutes in the United States: An Analysis”, Competition Bureau
Canada (2001), available at <http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/01292.html>, p. 2
79 H. Hovenkamp, "The Federal Trade Commission and the Sherman Act", University of Pennsylvania Law School (2010),
available at < https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=2815&context=faculty_scholarship>, p. 3
20
Predation under the U.S. law is defined in statutes, primarily in section 2 of the Sherman Act. In order to establish predation, two elements have to be proven:
(1) to establish that the undertaking has a likely chance of gaining monopoly power on the
relevant market and
(2) to establish that the power was abused to gain more influence on the market using
prohibited conduct.
It is important to note that one of the key differences between the systems is the above concept of monopolization used in the U.S. The EU’s view on predation is that the
undertaking concerned has to have an already established dominant position. It is due to the fact that the EU competition law prescribes that a violation may only happen once an undertaking has achieved the dominant position. On the other hand, in the U.S. the very attempt of gaining dominance through predation is considered a violation.81
Another unique characteristics of the antitrust law that is missing in the EU is the personal
liability. Personal liability is an important element of the private damages in cases of antitrust
law violations. Therefore, while being part of the law on damages, it is not directly connected to the predatory pricing regime. Nevertheless, it is worth mentioning as this concept has a significant impact on the overall status of predatory pricing rules.
This concept, codified in the Clayton Act (see further section 3.1.3), is a significant deterrence mechanism that prescribes personal liability of company personnel in action for damages if it is possible to attribute the guilt to their behaviour.82 As private damages in the U.S. can follow the case of antitrust law violations, the personal liability is indirectly present in cases of predation.83
The further differences between the systems lies in the notion of special responsibility of the dominant undertakings. As provided above, the EU has put a significant importance on the fact that the powerful undertakings should carry a special responsibility on the market and to abstain from abusing their power.84 On the other hand, this responsibility is not an important part of the U.S. antitrust law. Competition in all forms and on all scales is allowed, even while being a dominant undertaking, as long as it is within legal barriers.
81 B. Prager, H. Rosenblatt, “US & EU Competition Law - What every counsel needs to know”, Latham & Watkins (2011),
available at <https://www.lw.com/presentations/us-and-eu-competition-law-2011>, slide 26
82 Clayton Act, 15 U.S.C. §§ 12–27, as amended by the Robinson-Patman Act of 1936, para. 24
83 G. Walker, “The Personal Liability of Corporate Officers in Private Actions Under the Sherman Act: Murphy Tugboat in
Distress”, Fordham Law Review (1987), 55(6), available at
<https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=2747&context=flr>, p. 914
84 A. C. Witt, “The Commission’s Guidance Paper on Abusive Exclusionary Conduct – More Radical Than It Appears?”,
21
It is due to the fact that, as further elaborated in the Cargill case below, the Supreme Court established that the fierce competition on the market, and a possible lack of fairness in the process, is not a competition problem. The holders of monopoly have no special duty, and as long as they do not violate the antitrust law - they are free to compete as harsh as they desire.
3.1 – Sources of Antitrust Law in the U.S.
As established before, next to the EU, the U.S. system is the by far most developed antitrust regime in the world. Such statement should not be surprising, as nowadays many of the most influential and biggest undertakings are located in or originated from the U.S. Such a situation urged the necessity to develop sophisticated and reliable system of competition law rules, which will be discussed below.
Due to the fact that the U.S. system existed for much longer time than the EU, the
significant reforms span over almost the entire 20th century. As no major reform comparable to the EU Commission Guidance happened in the past years, there is no necessity to make a particular division in time, as was done in chapter 2.
At the core of the US system of antitrust law are 2 components – case law and statutes. For some, presence of many statutes and other written laws may be surprising due to the common law nature of the US law. Nevertheless, despite considerable influence of case law, the main and the first source of antitrust law is a statute called the Sherman Act.
3.1.1 – Sherman Act - Section 2
The Sherman Act’s history goes back as far as 1890 when it entered into force. In the late 1800’s U.S. experienced a large increase in number of undertakings that reached a dominant position on the market. It caused a wide-spread fear of the monopolies in the market, what encouraged the legislator to intervene. Although it was amended by many statues, the Sherman Act remains at the core of the present antitrust law.85
Similarly to the EU competition law, it has a twofold purpose –
(1) prohibit anticompetitive behaviour and unfair business practices and (2) encouraging competition in the market.86
85 Competition and Monopoly: Single-firm conduct under Section 2 of the Sherman Act: Chapter 1”, The United States
Department of Justice (2015), available at < https://www.justice.gov/atr/competition-and-monopoly-single-firm-conduct-under-section-2-sherman-act-chapter-1>
22
In an ideal scenario, an aggressive but regulated competition should lead to a benefit of the consumers such as: “(…) lower prices, higher quality products and services, more choices,
and greater innovation.”.87 Therefore, similarly to the EU, the mere possession of dominance is not prohibited. But an abuse of it is.
At first, the act was focused on single-firm and multi-firm anticompetitive conducts what reflected the fears of monopoly mentioned above. However, in time the scope of the act extended significantly to adapt to the more demanding situations on the market.
This development led to a shift in focus of the antitrust law – from protecting competitors to protecting competition as such. Gradually, more emphasis was put on protection of consumers as well. Correspondingly to the EU, consumers and their protection became the main goal and aim of the antitrust law enforcement.
3.1.2 – The Federal Trade Commission (FTC)
Another significant similarity between the EU and the U.S. is the presence of a centralized body responsible for protection of the competition rules. In the U.S. the relevant body is the FTC – an independent federal agency responsible for protection of consumers and
enforcement of antitrust laws.88 Together with the governmental DOJ it is responsible for enforcement of antitrust laws.
The agency was created in 1914 and is founded on the FTC Act signed by the U.S. president of that time – Woodrow Wilson.89 This act is the main source of the FTC power, empowering it to pursue its goals as the protector of antitrust law.90 It is composed out of 3 bureaus, with the Bureaus of Competition being of central relevance for the predatory pricing strategy. Following the text of the act, section 5 declares unlawful practices and unfair methods that may lead to distortion of competition. The FTC is empowered to pursue such claims what, together with the DOJ, forms the core of the antitrust enforcement in the U.S. – with FTC pursuing civil claims while DOJ being capable of bringing both civil and criminal actions.
87 “Guide to Antitrust Laws”, Federal Trade Commission, available at
<https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws>
88 “Predatory Pricing”, Legal Dictionary, available at <https://legaldictionary.net/predatory-pricing/> 89 Federal Trade Commission Act, 15 U.S.C. §§ 41-58
90 “Federal Trade Commission Act”, Federal Trade Commission, available at
23
3.1.3 – Clayton Act
Due to the fact that at the beginning the Sherman Act covered only price fixing and market sharing agreements between independent undertakings, its initial scope was rather limited. Therefore, it was fairly easy for the undertaking to escape the scope of the act by merging into a single undertaking.91 Such a significant gap lead to the necessity to broaden the scope of antitrust law.
As a direct aftermath, another significant statute that broadened the scope of the Sherman Act was introduced. The Clayton Act which entered into force in 1914 – together with the FTC act – greatly contributed to an improved protection of consumers against unfair antitrust practices.92 This supplementary statue addresses several aspects of antitrust law that were missing in the Sherman Act. It is well known for introducing the unique, U.S. monetary penalty for the illegal behaviour codified in section 4. It allows to claim damages up to 3 times as large as the fine for the illegal activity.93
The acts importance for antitrust law can be summed up in 3 main areas that it covers:94 - Section 2 prohibiting price discrimination
- Section 3 prohibiting exclusionary practices that lessen competition (tying, exclusive dealing, predatory pricing)
- Section 7 prohibiting mergers that would distort competition
The act was amended in 1936, with an emphasis on section 2, which from that time on was often referred to as the Robinson-Patman Act, after its authors.95
The central feature of Clayton Act that distinguishes it from the Sherman Act is lack of criminal penalties.96 As mentioned above, it allows for monetary penalties instead, what read on conjunction with other legislation creates a consistent legal regime.
91 M. Motta, “Competition Policy. Theory and Practice”, Cambridge University Press (2004), p. 5 92 Clayton Act, 15 U.S.C. §§ 12–27, as amended by the Robinson-Patman Act of 1936
93 “Introduction to Economic Analysis”, Saylor Academy (2012), available at
<https://saylordotorg.github.io/text_introduction-to-economic-analysis/s22-01-clayton-act.html>
94 Ibid.
95 C. DePasquale, “The Robinson-Patman Act and the Consumer Effects of Price Discrimination”, The Antitrust Bulletin
(2015), 60(4)
96 R. D. Blair, C. P. Durrance, “Private Damages Actions under Robinson-Patman Act”, The Antitrust Bulletin (2015), 60(4),
24
3.2 – Intent
In the EU the element of intent holds a significant importance. In the U.S., while being present in the legislation, its role is still unclear. The view on intent has changed through the years. In 1945, in case United States v Aluminum Co of America, the Supreme Court held that to require intent as an element of infringement is nonsense.97 The argument was that no monopolist monopolizes further while being unconscious of what he is doing.
On the other hand, in case United States v United States Gypsum Co the Supreme Court held that under section 2 of the Sherman Act, intent is listed as one of the elements of the criminal antitrust offence.98 The court said that the antitrust offence must be based on solid evidence, and establishing intent to distort the market may serve as such.
The current view on intent is divided between criminal and civil claims.99 In case of the former, the intent does play a role and has to be established as an element of evidence. It is in accord with the United States v United States Gypsum Co judgement.
On the other hand, in the case of civil claims, the emphasis is put on the effect of the abusive conduct. Therefore, the effect-based approach discussed below takes precedent over the concept of intent. In short – the importance of the concept varies, but it is certainly not as significant as in the EU.
3.3 – Case law of the US - Supreme Court
After the introduction of the Clayton Act and the FTC Act in 1914, there were no major statute reforms. The burden of adapting the antitrust law fell on the Court – mainly the Supreme Court of the U.S. In the paragraphs below, several cases are analysed which hold a particular importance for the changes they have introduced. By analysing these, it will be possible to follow the process of reform of the U.S. antitrust law and to identify the key differences between the systems.
3.3.1 – Standard Oil - The beginning of Predatory Pricing
In this case, the company owned by John D. Rockefeller, owned almost all of the oil business in the U.S. Thanks to its dominant position, the competition on the market was almost non-existent as each and every existing or new competitor was quickly forced out of the market.
97 United States v Aluminum Co of America 148 F 2d 416, 432 (2d Cir 1945) 98 United States v United States Gypsum Co 438 US 422, 435 (1978)
99 E. T. Xenos, “Reclaiming Specific-Intent Under Section 2 of the Sherman Antitrust Act: A Business Theoretical
Approach”, Michigan State University College of Law (2003), available at
25
In 1909 the Supreme Court found the company guilty of violation of the Sherman Act, and ordered its dissolution.100
While the case itself did not introduce any breakthrough in the antitrust law, it is considered a “legend” of the U.S. antitrust law as it was one of the first and major cases when the
Sherman Act was enforced. This judgement marked a cornerstone moment in U.S. history, that showed the dedication of the Supreme Court to fight the abuses on the market.
3.3.2 – Utah Pie - Enforcement of predatory pricing rules
With the Supreme Court’s commitment established in the Standard Oil case, the next “modern” case on predation was Utah Pie.101 In this case a plaintiff Utah Pie, a small yet leading vendor of frozen pies in the Salt Lake City area, sued three national companies for the alleged predation. The claim was that the defendants charged artificially low prices in Salt Lake City, much lower than the prices elsewhere, to illegally increase their market share. As a result of the predation, Utah Pie’s market share has significantly reduced from 66.5% to an end share of 45%.102 It is important to note that at first, the share of Utah Pie fell as low as 34%.
Due to the relatively high market share of Utah Pie at the end of the alleged predation, this case was particularly important as it has shown what are the priorities of the court in
enforcement of antitrust law on predation. Furthermore, despite these losses in market share, Utah Pie continued to make profits and has increased the sales volume. Nevertheless, the Supreme Court held that the declining market share of Utah Pie was a result of abusive behaviour, and that it led to a distortion of competition on the market. Therefore, the three defendants were found guilty of predation and violation of section 2(a) of Clayton Act.103 Furthermore, this case holds an important position in the U.S. case law for another reason. It is a proof that the initial focus of the U.S. antitrust law was put on protecting competitors, instead of competition. Nowadays, it is likely that this case would be decided differently. The fact that the market share of Utah Pie had decreased would fade in relation to the fact that they continued to make profits. Their situation can hardly be defined as seriously endangered. Holding almost half of the market and being able to keep up the fight in the price war, would be the decisive factors to the likely judgement that the competition is aggressive – yet legal.
100 Case Standard Oil Company of New Jersey v. United States, 221 U.S. 1 (1911) 101 Case Utah Pie Co. v. Continental Baking Co., 386 U.S. 685 (1967)
102 T. Calvani, Predatory Pricing and State Below-cost Sales statutes in the United States: An Analysis”, Competition Bureau
Canada (2001), available at <http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/01292.html>, p. 3
