By Liang Gao

 

On November 16, 2016, the State Administration for Industry and Commerce (hereinafter the “SAIC”) issued a Competition Enforcement Announcement, making its definitive ruling on the abuse of a dominant position by Tetra Pak International Co., Ltd. (hereinafter "Tetra Pak"). In such Administrative Punishment Decision, in addition to the conduct of tying and restrictive dealing prohibited by Article 17 of the Anti-Monopoly Law, Tetra Pak, also implemented loyalty rebates. In respect of the Tetra Pak case, it is the first time that China’s antitrust authority sets out its position on the issue of loyalty rebates. Nowadays, the loyalty rebate is a hot topic in global competition law circle, and the methods adopted by different countries in dealing with loyalty rebates differ considerably. This article seeks to compare the new Tetra Pak case with the Intel case, with the aim of analyzing the perspective and method adopted in the two cases on the issue of loyalty rebates.

 

1. Case Background

 

(1) Tetra Pak Case

 

In the Tetra Pak case, SAIC identified three relevant product markets, i.e., market for paper-based aseptic packaging equipment, market for paper-based aseptic packaging material and market for technical services of paper-based aseptic packaging equipment. In the above three markets, Tetra Pak's market shares each exceed 50%, and Tetra Pak holds a strong market power in the three markets, which is heavily relied on by other business operators. In addition, the market-entry barriers for relevant product markets are very high, requiring tremendous capital inputs and R&D expenses. Therefore, SAIC confirmed that Tetra Pak holds a dominant market position in the above three relevant markets.

 

After confirming Tetra Pak's dominant market position, SAIC proceeded to confirm that Tetra Pak had undertaken the conduct of abusing a dominant position, including loyalty rebates; and this is the first time that SAIC gives a clear answer on whether or not loyalty rebate is illegal. Currently loyalty rebate is not expressly set out under China's Anti-Monopoly Law or in the relevant rules stipulated by SAIC itself. As a matter of fact, the issue of loyalty rebate in the Tetra Pak case witnessed the specific application of Article 17 (1) (7) of the Anti-Monopoly Law and Article 9 of the Provisions on Prohibiting the Abuse of Dominant Positions, which grant SAIC the discretion to determine the nature of other activities of abuse of a dominant market position on which the legislation remains silent.

 

Given that loyalty rebates are subject to regulation by SAIC in the Tetra Pak case, it can be recognized that monopolistic conducts not specifically set out in the Anti-Monopoly Law of China or other relevant administrative rules, are also likely to become the target for antitrust investigations in the near future.

 

From 2009 to 2013, Tetra Pak had implemented various rebates in the packaging material business, among which SAIC deemed that retroactive cumulative sales rebates and personalized target rebates belonged to loyalty rebates.

 

Retroactive cumulative sales rebates are at the heart of the Tetra rebate system, meaning that a customer may receive rebates of a certain unit price when purchase volumes of the customer reach the specified quantity within a certain period and such rebates may be retroactively applied to all of the cumulative purchases of the customer in such period, and when the amount of purchases reaches a higher threshold, then the extent of rebates will be larger. In the Tetra Pak case, retroactive cumulative sales rebates consist of the single-product retroactive cumulative rebates and the compound-product retroactive cumulative rebates, and the former has regard to the cumulative amount of purchasing a single product by a single customer within one year on the basis of the pre-set standards, and the latter refers to uniform rebates after the amount of purchase of two or more categories of packaging materials is aggregated on the basis of the single-product retroactive cumulative rebates or to extra rebates in addition to the single product retroactive cumulative rebates[1].

 

As for the personalized target rebate, it means the rebate conditional on reaching or exceeding the target ratios or individually fixed numbers by specified customers within a certain period[2]. In the Tetra Pak case, the target rebates are often tailored by Tetra Pak for specific customers with very strong objectives.

 

(2) Intel Case

 

In the Intel case, the European Commission (hereinafter “the Commission”) released its decision on May 13, 2009, arguing that Intel had abused its dominant position in the x86 CPU market, which constitutes a breach of Article 82 of the EC Treaty, and it levied a fine of € 1.006 billion on Intel and required Intel to cease its illegal acts as determined. Intel was not satisfied to the decision and brought a lawsuit before the General Court. On June 12, 2014, the General Court issued its ruling which dismissed Intel's claim and upheld the Commission's decision. Currently, the case is in the process of the appeal. However, according to the trial history of the European Court of Justice (hereinafter the “ECJ”), the ECJ tends to respect and uphold the ruling of the General Court.

 

In this case, the Commission found that Intel had more than 70% market shares in x86 CPU market, and that “there are significant barriers to entry and expansion present in the x86 CPU market”. As a result, all of Intel's competitors, except AMD, were driven out of the relevant market or were left with an insignificant share. Intel’s conduct of abusing its dominant position which is contrary to Article 82 of the Treaty, mainly referred to the implementation of loyalty rebates. More specifically, Intel conducted the following activities:

 

Firstly, Intel granted rebates to four computer manufacturers (Dell, HP, NEC, and Lenovo), on condition that the four manufacturers should purchase all or almost all of their requirements of x86 CPU products from Intel.

 

Secondly, Intel provided direct payments to MSH, the largest PC retailer in Europe, conditional on MSH selling exclusively Intel-based PCs.

 

Thirdly, the Commission found that Intel had implemented the so-called "naked restrictions". Specifically, Intel provided direct payments to computer manufacturers (HP, Acer, and Lenovo), on condition that these manufacturers halted or postponed the launch of products containing AMD CPUs, which are in competition with those of Intel. Intel also put restrictions on the distribution of AMD CPUs.

 

The above first conduct belongs to a typical loyalty rebate, and it is thus at the core of this article. In my view, the above second and third conducts are loyalty rebate activities in a broad sense, rather than those in a narrow sense, since the beneficiaries received benefits from Intel by accepting direct payments without purchasing products from Intel directly and therefore, such benefits were not obtained through rebates.

 

2. Analysis of Loyalty Rebates

 

(1) Tetra Pak Case

 

In the Tetra Pak case, SAIC made a detailed analysis on the issue of the loyalty rebate. In particular, in respect of the retroactive cumulative sales rebates, SAIC elaborated on the anti-competitive effects of retroactive cumulative sales rebates by adopting the economic analysis. SAIC analyzed the loyalty rebates by mainly taking the following steps:

 

First, it set out basic facts of the case, and made it clear that the retroactive cumulative rebates and personalized target rebates fell within the scope of the loyalty rebates.

 

Second, it confirmed the existence of the inducing effect of the loyalty rebates. For the retroactive cumulative rebates, it can induce customers to purchase more products, so as to reach the threshold for a higher rebate, and this thus causes the inducing effect[3]. For the target rebates, it can lead to the loyalty-inducing effect; in respect of an undertaking with a dominant position, it can set sales targets, the achievement of which would constitute the condition of obtaining rebates; so the target rebates would create the strong foreclosure effect, which is able to eliminate or limit the customer’s freedom of choosing its supplies.

 

Third, it stated the anti-competitive effect caused by Tetra Pak's loyalty rebates. The anti-competitive mechanism caused by loyalty rebate lies in the fact that the undertaking in a dominant position uses its non-contestable share to limit and influence the contestable share, and the degree of its anti-competitive effect mainly depends on its ability to use its economic power on the non-contestable share as leverage to secure also the contestable share{C}[4]{C}. In this section, SAIC adopted the economic analysis to clarify the anti-competitive effect of retroactive accumulative rebates; and the target rebate is equivalent to a sort of retroactive cumulative rebate with only one threshold, with significant anti- competitive effects{C}[5]{C}. In this case, the direct consequence of the target rebate is to lock the customer's purchase ratio and volume, thus further compressing the contestable space for the other packaging material manufacturers.

 

Finally, it stated the impact of Tetra Pak loyalty rebates on the competition of packaging material market. In this case, loyalty rebates, on the one hand, will lead to the competitors having to offer more rebates to maintain their competitiveness in the packaging material market, with the consequence that part of the competitors would be driven out of the market, and on the other hand, it would make it easier for Tetra Pak to expand its market share and to foreclose its competitors. In the long term, loyalty rebates would squeeze the sales and profits of other packaging material manufacturers, thus resulting in insufficient capacity utilization and affecting the competition in the packaging material market and consumers’ interests[6].

 

Through the above analysis of the loyalty rebates in this case, it can be learnt that, in reaching the conclusion that loyalty rebates are in violation of the Anti-Monopoly Law, SAIC adopted the rule of reason principle, instead of per se illegal rules, i.e., merely providing evidence to demonstrate the existence of a loyalty rebate is not sufficient to constitute a violation of Article 17 of Anti-Monopoly Law, and, in addition, evidence demonstrating the consequences of eliminating or restricting competition arising from loyalty rebate must be presented as well. In respect of economic analysis of loyalty rebates, SAIC applied the standard of the as-efficient-competitor test (hereinafter the “AEC test”) frequently used in the European Union[7], and in particular, SAIC has adopted almost the same analytic method as one applied in Intel case in explaining the relationship between the non-contestable share and the contestable share (See Below).

 

(2) Intel Case

 

In the Intel case, with respect to the issue of whether the rebate granted by an undertaking in a dominant position may be defined as “abusive”, the General Court classified the rebates into three categories according to their characteristics:

 

First, quantity rebates: such rebates are solely related to the amount of purchase from an undertaking in a dominant position, and generally they would not be considered to have the foreclosure effect prohibited by Article 82 of the Treaty. If increasing of the quantity of supply results in lower costs for the supplier, then the supplier is entitled to pass on that reduction to the customer in the form of a more favourable price. Quantity rebates are therefore deemed to reflect gains in efficiency and economies of scale made by the undertaking in a dominant position[8].

 

Second, exclusivity rebates: the granting of exclusivity rebate is conditional on a customer buying all or most of the products from an undertaking in a dominant position. Such rebates are referred to as exclusivity rebates, which are also called loyalty rebates in previous cases by the Commission. The General Court held that the exclusivity rebates when applied by an undertaking in a dominant position, are incompatible with the objective of undistorted competition within the common market, because they are not based — save in exceptional circumstances — on an economic transaction which justifies this burden or benefit but are designed to remove or restrict the purchaser’s freedom to choose his sources of supply and to deny other producers access to the market[9]. Therefore such rebates are designed to prevent customers from obtaining their supplies from competing producers.

 

Third, other rebates: there are other rebate systems where the granting of a financial incentive is not directly linked to a condition of exclusive or quasi-exclusive supply from an undertaking in a dominant position, but where the mechanism for granting the rebate may also have a fidelity-building effect. That category of rebates includes inter alia rebate systems depending on the attainment of individual sales objectives which do not constitute abovementioned exclusivity rebates[10]. In examining whether the application of such a rebate constitutes an abuse of a dominant position, the General Court took the view that it is necessary to consider all the circumstances, particularly the criteria and rules governing the grant of the rebate, and to investigate whether, in providing an advantage not based on any economic service justifying it, that rebate tends to remove or restrict the buyer’s freedom to choose his sources of supply, to bar competitors from access to the market, or to strengthen the dominant position by distorting competition[11].

 

As regards the Intel case, the General Court confirmed that those rebates granted to the four computer manufacturers (Dell, HP, NEC and Lenovo) as pointed out by the Commission should belong to the second category of rebates, i.e. exclusivity rebates. Such rebates are conditioned on Dell and Lenovo purchasing all x86 CPUs products, and HP purchasing 95% of x86 CPUs products and NEC purchasing 80% of x86 CPUs products, from Intel.

 

With regard to the issue of whether the exclusivity rebate of Intel constitutes an abuse of dominant position, the General Court further pointed out that, the question whether an exclusivity rebate can be categorized as abusive does not depend on an analysis of the circumstances of the case aimed at establishing a potential foreclosure effect[12].

 

Absent objective reasons, the exclusivity rebate can be directly identified as an abuse of dominant position without the requirement of providing the evidence of a capacity to restrict competition. In addition, the General Court took the view that the assessment of all circumstances is only applicable to the third type of rebates and that in respect of exclusivity rebates, there is no need to assess all circumstances, since exclusivity rebates implemented by the undertaking in a dominant position, in essence, are in a position to restrict competition.

 

To further demonstrate the effect of restricting competition of exclusivity rebates in themselves, the General Court held that the discounts offered to the customers on condition that the customers shall purchase all or most of products from this undertaking implied that the purpose of providing the economic profits by the undertaking in a dominant position is to prevent customers from obtaining the supply of products from its competitors. In addition, exclusivity rebates can result in customers being motivated not to obtain products from its competitors. Meanwhile, the General Court also recognizes the potential positive effects of exclusivity rebates on competition, so that in a normal situation on a competitive market, it is necessary to assess their effects upon a certain market. However, for an exclusivity rebate implemented by the undertaking in a dominant position, there is no need to consider the specific effects.

 

The opportunity of rebuttal, however, is not entirely denied to exclusivity rebates by the General Court. Specifically, the undertaking in a dominant position can justify the use of exclusivity rebates by considering the following two aspects: first, the use of exclusivity rebates is objectively necessary; second, the potential foreclosure effect that it brings about may be counterbalanced, outweighed even, by advantages in terms of efficiency that also benefit consumers[13].

 

Moreover, as indicated above, the General Court made an analysis between demand of non-contestable share and demand of contestable part when explaining the anti-competitive mechanism of exclusivity rebates. The General Court believed that the mechanism of an exclusivity rebate granted by an undertaking in a dominant position which is an unavoidable trading partner enables it to use the non-contestable share of the demand of the customer as leverage to secure also the contestable share[14].

 

The General Court found that when the exclusivity rebate mechanism does exists, then it is not necessary to analyze the actual effects of the rebates on competition. The General Court further deemed that given that it is not necessary to prove actual effects of the rebates, it follows necessarily from this that the Commission is also not required to prove a causal link between the practices complained of and actual effects on the market[15].

For the economic analysis, the Commission carried out the AEC test in analyzing the case in order to demonstrate whether the exclusivity rebates granted were capable of foreclosing a hypothetical competitor as efficient as Intel. However, the General Court held that in confirming the anti-competitive effect of exclusivity rebates, it is actually unnecessary for the Commission to apply the AEC test.

 

Through the determination of the exclusivity rebate by the General Court, we can recognize that the General Court held that the very existence of an exclusivity rebate can be presumed to be an abusive conduct of a dominant position, so there is no need to elaborate on the effect of elimination or restriction of competition caused by the exclusivity rebates; and from a legal point of view, exclusivity rebates fall within the scope of per se illegal.

 

3. Comparison between Tetra Pak Case and Intel Case

 

Both Tetra Pak case and Intel case involve the loyalty rebates issue, but the methods of analysis towards loyalty rebates are quite different between the two cases. One of the most obvious differences is that SAIC, in its ruling of Tetra Pak case, applied the rule of reason rather than the per se illegal principle, while the General Court observed that loyalty rebates in the Intel case were per se illegal and therefore did not carry out an analysis over the anti-competitive effect. On the surface, the two analysis methods are categorically different from each other but we deem that there exists no fundamental difference between them in the two cases.

 

As shown above, the General Court divided rebates into three categories, and the Intel case was caught by the second category, i.e, exclusivity rebate, to which the General Court took the strictest attitude with the adoption of the principle of per se illegal; specifically, the existence of such rebate would suffice to prove that an undertaking in a dominant position has constituted an abuse of a dominant position without the need to further elaborate on the anti-competitive effect caused by such rebate. In light of the specific circumstances of the loyalty rebate in the Tetra Pak case, coupled with the way the General Court classified the rebate, we deem that the loyalty rebate in the Tetra Pak case belongs to the third category. First of all, given that the Tetra Pak case involves retroactive cumulative sales rebates and personalized target rebates, from the perspective of their characteristics, these two rebates are clearly not exclusivity rebates which are implemented under the condition that all or almost of the products be purchased from one single supplier. However, retroactive cumulative sales rebates and personalized target rebates do not have the “exclusive” feature owned by exclusivity rebates, nor are customers required to purchase the products only from one single supplier. Second, retroactive cumulative sales rebates and personalized target rebates should belong to the third category set by the General Court, for the two rebates can lead to a sort of fidelity-building effect. In the Tetra Pak case, the individualized target rebate is a typical rebate mechanism conditioned on achieving a certain sales target. In addition, according to the relevant settled case-law[16], the retroactive accumulative sales rebate also belongs to the third category of rebates defined by the ECJ.

 

According to the ruling in the Intel case, the General Court took the view that it is necessary to consider all the circumstances of the case when analyzing the third category of rebates, which means that in addition to proof of the actual existence of such rebate, the anti-competitive effect that the rebate may produce should be taken into account as well. Thus, with respect to the retroactive cumulative sales rebate and the personalized target rebate that both fall within the scope of the third category, the courts at the EU level would also apply the rule of reason, as opposed to the principle of per se illegal. Therefore, there is no fundamental conflict as to the specific analytic methods concerning the loyalty rebates between Tetra Pak case and Intel case, since the categories of the rebates involved therein are different.

 

Notwithstanding the difference as to analytic methods between the above two cases, they still share some similarities. For instance, both of the two cases adopted the AEC test with the analytic methods applied therein being almost the same as each other. It is the first time that SAIC makes use of the AEC test to demonstrate the existence of anti-competitive effect of loyalty rebates. Second, both of the two cases have incorporated loyalty rebates into the scope of regulation of antitrust law. As mentioned above, the Tetra Pak case is the first time for China’s antitrust authority to determine that loyalty rebates are considered to be an abuse of a dominant position. In the EU, as early as 2009, the Commission issued the “Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings”[17], which provides that a rebate with the loyalty enhancing effect should be subject to regulation.

 

4. Practical Implications

 

First of all, an undertaking in a dominant position on a market should eliminate both the existing and potential loyalty rebates through its internal compliance review, in particular the retroactive cumulative sales rebate and personalized target rebate as found in the Tetra Pak case. Moreover, undertakings need also to understand and grasp the specific meaning and characteristics of the retroactive cumulative sales rebate and personalized target rebate, so as to conduct the targeted compliance review.

 

Second, given the impact of the EU competition law on China's antitrust legislation and practice, an undertaking in a dominant position on a market should also get rid of the exclusivity rebate found in the Intel case in its internal compliance review. Since the anti-competitive effects caused by exclusivity rebates are even worse than those by retroactive rebates and targeted rebates and thus the legal risk posed by exclusivity rebates is expected to be much greater. In addition, before the introduction of the new cases, it is difficult to foresee whether the principle of per se illegal or rule of reason would be applied by China’s antitrust authority in scrutinizing exclusivity rebates, and therefore exclusivity rebates should be one of the priorities in the compliance review.

 

Thirdly, in the Tetra Pak case, according to Article 17 (1)(7) of the Anti-Monopoly Law and Article 9 of the Provisions on the Prohibition of Abuse of Dominant Positions, SAIC used its discretion to subject loyalty rebates to the scope of antitrust regulation. As such, in terms of the internal compliance review, in addition to the Anti-Monopoly Law and other relevant anti-monopoly administrative regulations and rules, particular attention should be paid to abusive conducts of a dominant position on which the legislation still remains silent.