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ECJ Rules on Latvian Excessive Pricing Case

ECJ Rules on Latvian Excessive Pricing Case

  • Europe
  • Competition, EU and Trade

20-09-2017

Summary

On 14 September the European Court of Justice (ECJ) delivered its long awaited judgement on questions referred to it by the Latvian Supreme Court (LSC) relating to the issue of excessive pricing (Autortiesību un komunicēšanās konsultāciju aģentūra / Latvijas Autoru apvienība vs Konkurences padome, Case 177/16, 14 September 2017). Whilst not conclusive, this decision throws further light on how competition authorities could approach this complex area of EU competition law. The key points were as follows:

  • The court reaffirmed the two-stage excessive pricing test from the United Brands case. Namely that it is first necessary to decide if the difference between the cost incurred in providing the goods or services and the price of the goods or services is excessive. If the difference is excessive, then this can only be abusive if the price is unfair in itself or unfair compared to competing products.
  • In assessing whether a price is unfair or not, the court suggested (in the context of copyright management services) some suitable price benchmarks to use, as well as the criteria, which should be used in selecting benchmarks. Namely, the prices in neighbouring Member States and the prices in other Member States adjusted in accordance with the PPP index, provided that the reference Member States have been selected in accordance with objective, appropriate and verifiable criteria and that the comparisons are made on a consistent basis.
  • Finally the court ruled that for a price to be excessive, for the purposes of Article 102, the difference in prices must be significant and persistent.

Background

This judgement is the culmination of an appeal following a decision by the Latvian Competition Council (LCC) to fine the Copyright and Communication Consulting Agency/Latvian Authors Association (AKKA/LAA), a collecting society owning the exclusive right to license music to retailers and service providers to play at their venues, for charging excessive fees for the right to play such music in 2008. The AKKA/LAA established new tariffs to apply from 2011. On 31 May 2012, the LCC opened a review into the new tariffs.

The LCC compared the society’s prices in Latvia with its neighbouring Member States (Estonia and Lithuania). Upon review, it was found that the Latvian prices were two to three times higher than those in Lithuania and Estonia for certain sizes of premises. Furthermore, applying the Purchasing Power Parity index (PPP index) showed that AKKA/LAA were charging retailers and venue owners excessively high rates – between 50% and 100% higher than the EU average for such licences.

The LCC ruled that, in segments where the AKKA/LAA’s prices were significantly higher than in Estonia and Lithuania, such prices were unfair and therefore there had been an abuse of a dominant position. Subsequently, the LCC imposed a fine of approximately €32,080. In response, the AKKA/LAA appealed to the Latvian Regional Administrative Court making four key arguments.

Firstly, the AKKA/LAA argued that the LCC’s approach in comparing prices was too restrictive by looking at only two neighbouring Member States (Estonia and Lithuania). Secondly, that the LCC did not make sufficiently clear how the reference prices were calculated. Thirdly, that the LCC’s decision to make the AKKA/LAA justify its pricing was incorrect. Lastly, that the LCC was wrong to include the amount collected for the remuneration of the authors when calculating the fine, since this money did not belong to the society.

In 2015, the Regional Administrative Court reinstated the decision that the AKKA/LAA had abused its dominant position but did agree that the LCC had improperly calculated the fine by factoring in the authors’ remuneration.

The Latvian Supreme Court Case

Both sides appealed to the LSC. The LSC doubted the interpretation of Article 102(a) and questioned whether the society’s activities even fell within the scope of the provision at all. The LSC also questioned the method used by the LCC to determine the unfair pricing. Like the Regional Administrative Court, the LSC was also concerned that the fine calculation should nt have incorporated the remuneration for the copyright owners. The LSC stayed proceedings to refer several questions to the ECJ for a preliminary ruling. The questions were:

  1. ‘Is Article 102 (a) TFEU applicable to a dispute concerning the rates laid down by a national copyright management organisation if that entity also collects remuneration in respect of works of foreign authors and the rates laid down by it may be a deterrent to the use of those works in the Member State in question?
  2. For the purpose of defining the concept of “unfair prices” used in Article 102 (a) TFEU, in the context of the management of copyright and related rights, is it appropriate and sufficient – and in which cases– to draw a comparison between the prices (rates) in the market in question and the prices (rates) in neighbouring markets?
  3. For the purpose of defining the concept of “unfair prices” used in Article 102 (a) TFEU in the context of the management of copyright and related rights, is it appropriate and sufficient to use the PPP index based on gross domestic product?
  4. Should tariff comparisons be made for each separate segment or based on the average level of the rates?
  5. When must it be considered that the difference in the rates examined in connection with the concept of “unfair prices (rates)” used in Article 102 (a) TFEU is appreciable, with the result that it is incumbent upon the economic operator enjoying a dominant position to demonstrate that its rates are fair?
  6. What information can reasonably be expected from an economic operator to prove the fair nature of the rates for works covered by copyright, within the scope of Article 102 (a) TFEU, if the cost of those works cannot be determined in the same way as that of products of a material nature? Is it solely a question of the cost of administering the copyright management organisation?
  7. In the event of infringement of competition law, is it appropriate to exclude from the business turnover of a copyright management organisation, for the purposes of determining a fine, the remuneration paid to authors by that economic operator?’

ECJ Judgment – the key questions

Is there an effect on trade between Member States?

The ECJ delivered its final judgment on 14 September 2017 on the questions at hand. In relation to the effect on trade between Member States, the court already recognises that a monopolistic body’s pricing levels are likely to have an effect on cross-border trade and so Article 102 is always applicable in such situations. When applying this to the case, the ECJ agreed that Article 102 will apply, because the AKKA/LAA holds a dominant position on a substantial part of the internal market.

What is the appropriate basis for comparing prices in the context of management of copyright?

The ECJ addressed the second, third and fourth questions together. The court reaffirmed the two stage test from United Brands . First, it is necessary to assess whether the difference between the cost incurred for carrying out services and the price charged is excessive. If so, the authority must assess whether a price is unfair in itself or unfair compared to competing products.

In line with Attorney General Wahl’s opinion, the ECJ appreciated that there are many different methodologies for determining the benchmark price for assessing whether a price is excessive. The ECJ confirmed that comparing prices against prices in other Member States must be regarded as valid. Furthermore a comparison cannot be regarded as insufficiently representative merely because it involves a small number of Member States. Provided that the ‘small group’ of Member States is selected based on an objective and appropriate set of criteria (exercised on a uniform basis), then there can be no minimum number of markets for comparison. Such objective criteria could include: consumption habits and other economic and sociocultural factors (e.g. GDP per capita and cultural or historical heritage). However, comparisons between prices in different Member States must be made on a consistent basis.

The ECJ reiterated another key point made by the Attorney General: it must be appreciated that there are significant price differences for identical services, depending on which Member State an individual resides in. Therefore, the PPP index can be a useful instrument to ensure that a comparison of the pricing levels applying to the same service is made on a consistent and just basis. Overall, to determine whether unfair pricing exists in the context of copyright management services, it is appropriate to compare its prices with neighbouring Member States’ and adjust it using the PPP index to ensure such comparisons are objective. Additionally, it is acceptable to compare the price charged in more than one specific ‘segment’ of the market if there are indications that the excessive pricing relates in some way to each of those segments.

When is a price excessive?

The ECJ also considered the fifth and sixth questions together about the determination of an excessive price and what evidence the defendant can provide in order to disprove the claim made against them. In short, the court stated that not every price difference should be regarded as excessive. Instead, only appreciable price deviations should qualify as an abuse. A price difference is appreciable if it is both significant and persistent on the facts.

The ECJ emphasised that even if there seems to be an ‘appreciable difference’, this is only indicative of an excessive pricing infringement. The AKKA/LAA, or any party in a similar position, still has the opportunity to justify the difference in price on the basis of objective dissimilarities which may have an effect on the comparable prices.

What is the basis for calculating relevant turnover?

Lastly, the court addressed the concern about the potential miscalculation of the fine. The ECJ highlighted the necessity to consider the overall duration of the infringement, any repetition of the offence and whether the first fine was adequate in ensuring the penalty was proportionate to the offence. The ECJ concluded that in this case, the remuneration of the artists must be included in the total turnover, provided that it forms part of the value of the services and provided that it is necessary to guarantee the effective, proportionate and dissuasive nature of the penalty imposed.

Comment

There is very limited judicial guidance from the ECJ or the European Commission on the excessive pricing abuse. This judgement largely reaffirms previous case law but it is helpful because it provides some useful guidance for comparing prices to determine whether the price in question is excessive or not. It sets out what might be suitable price benchmarks and what factors the authorities should consider when selecting suitable benchmarks. Although it should be noted that the Court answered these questions in the context of copyright management services.

Alongside Attorney General Wahl’s earlier opinion, it also sets out what constitutes an excessive price, for the purposes of Article 102. The judgement broadly follows the Attorney General’s opinion, although it does not go as far as the opinion in restricting the circumstances in which a high price will constitute an excessive price. The Attorney General concluded that “it is only when no rational economic explanation – other than the mere capacity and willingness to use market power even when abusive - can be found for the high price applied by a dominant undertaking that that price may be qualified as abusive under Article 102 TFEU.” Whereas the Court only went as far as to say the difference in price must be “significant and persistent” in order to be potentially abusive. The Court did stress though, that such a price is indicative of an abuse only and it is for the holder of the dominant position “to show that its prices are fair by reference to objective factors” .

Excessive pricing appears to be an area of renewed focus for European Competition Authorities. For example, Italy’s Autorità Garante della Concorrenza e del Mercato and the UK’s Competition and Markets Authority have both issued excessive pricing judgements in recent years. It is therefore an issue which businesses with significant market power need to be aware of.

  1. United Brands and United Brands Continentaal v Commission, 27/76, EU:C:1978:22, paragraph 252
  2. Autortiesību un komunicēšanās konsultāciju aģentūra / Latvijas Autoru apvienība vs Konkurences padome, Case C-177/16, Opinion of A-G Wahl, 6 April 2017, paragraph 131.
  3. Autortiesību un komunicēšanās konsultāciju aģentūra / Latvijas Autoru apvienība vs Konkurences padome, Case C-177/16, 14 September 2017, paragraph 56.
  4. Autortiesību un komunicēšanās konsultāciju aģentūra / Latvijas Autoru apvienība vs Konkurences padome, Case C-177/16, 14 September 2017, paragraph 61.

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