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European Commission Finds Predatory Pricing of Chipsets
For the first time in 16 years, the European Commission has imposed a fine
for what the Commission found was an abuse of dominance by predatory
pricing. Any company which trades with or competes against a dominant
provider should be aware that an argument of predatory pricing may be
available to control its behaviour in the dominated or a related market.
The case involved Qualcomm, which was found
by the Commission to have held a dominant position in the global market for
UMTS baseband chipset between 2009 and 2011. Baseband chipsets enable
smartphones and tablets to connect to cellular networks and are used both
for voice and data transmission. The case concerned chipsets complying with
the Universal Mobile Telecommunications System (UMTS), the third generation
The dominance finding was based on Qualcomm's market share of approximately
60% (almost three times the market share of its biggest competitor) and
what was found to be the high barriers to entry to this market. These
include the significant initial investments in research and development to
design UMTS chipsets and various barriers related to Qualcomm's
intellectual property rights.
It is not illegal under EU competition law to hold a dominant position.
However, it is illegal to abuse a dominant position by restricting
competition in the market in which dominance is held or in a related
Qualcomm was held to have abused its dominance between mid-2009 and
mid-2011 by selling certain quantities of three of its UMTS chipsets below
cost to Huawei and ZTE, two strategically important customers, with the
intention of eliminating Icera, its main rival at the time in the market
segment offering advanced data rate performance.
This behaviour – determined by the Commission to be predatory pricing -
took place when Icera was becoming a viable supplier of UMTS chipsets
providing high data rate performance, thus posing a growing threat to
Qualcomm's chipset business, and could not be justified by efficiency
arguments. The company was fined €242 million for this behaviour and
ordered not to engage in such practices, or similar practices, in the
Identifying the correct “cost” in these cases is notoriously difficult. The
Commission seems to have settled on using LRAIC (long-run average
incremental cost) as the benchmark. This is average variable costs (AVC)
plus fixed costs specific to the products in question. Qualcomm was found
to have priced below this level and together with its intention to
eliminate Icera this was sufficient, according to the Commission, to found
the predatory pricing abuse.
EU Imposes Fine for Limiting Cross-Border Sales of “Anthropomorphic Cat
In recent years, the European Commission has investigated and fined
numerous companies for restricting parallel trade within the EU. The
concerns a ban Sanrio imposed on
traders selling licensed merchandise — products featuring Hello Kitty
or other characters owned by Sanrio — to other countries within the
European Economic Area (EEA). For this infringement of EU competition
law, Sanrio was fined
Sanrio is a Japanese company that designs, licenses, produces and sells
products featuring Hello Kitty, described by the Commission as an
“anthropomorphic cat girl also known by her full name Kitty White,” and
other popular characters such as My Melody, Little Twin Stars, Keroppi or
Chococat. Through its subsidiary Mister Men Limited, Sanrio also holds the
intellectual property rights to the “Mr. Men” and “Little Miss” series of
The Commission found that Sanrio's non-exclusive agreements with licensees
infringed EU competition rules in two ways:
Sanrio imposed a number of direct measures restricting
out-of-territory sales by licensees, such as clauses explicitly
prohibiting these sales, obligations to refer orders for
out-of-territory sales to Sanrio and limitations to the languages used
on the merchandising products.
Sanrio also implemented a series of measures as an indirect way to
encourage compliance with the out-of-territory restrictions. These
measures included carrying out audits and the non-renewal of contracts
if licensees did not respect the out-of-territory restrictions.
These practices, which were in force for approximately 11 years,
partitioned the EU’s single market and prevented licensees in Europe from
selling products cross-border, to the ultimate detriment of European
This finding of a competition law infringement and the fine is not
surprising. As recently as
March 2019, the Commission fined Nike €12.5 million for preventing traders from
selling licensed merchandise to other countries within the EEA. Companies
need to be aware of the (limited) situations in which cross-border sales
within the EU can be restricted.
Do Your Due Diligence: Do Not Buy a State Aid Liability
Due diligence on a corporate acquisition or joint venture or even minority
investment should, as a matter of course, cover competition law
infringements. Often overlooked is state aid provided by an EU member
state. This can be expensive since if it is found that illegal state aid
was granted, then the new owner or investor may have to repay the aid (plus
The European Commission provided an example of this on 28 June 2019, when
its findings that Finnish bus transport company Helsingin Bussiliikenne Oy
(HelB) received €54.2 million of incompatible state aid from Finland.
The Commission had received a complaint alleging that the conditions of
loans granted to HelB by the Finnish authorities were not on market terms.
Upon investigation, the Commission confirmed that no private market
creditor would have granted the loans under these terms and conditions
(such as very low interest rates), in particular considering HelB's
financial difficulties at the time when the loans were granted. On this
basis, the Commission found that the loans constituted state aid under EU
rules (aid granted on private market terms is not state aid).
The Commission therefore assessed the measure under state aid rules to
determine if it qualified for an exemption. No suitable exemption was
identified and therefore the Commission found illegal state aid and ordered
Finland to recover the aid from HelB.
During the Commission’s investigation, the assets and business operations
of HelB were sold to one of its competitors. The Commission found that this
new owner is the economic successor of HelB and is now responsible for
repaying the incompatible state aid (plus interest). It is not known
whether the purchaser was aware of this issue, but in any event, it will be
an unwelcome development for it.
UK Court Finds Competition Law Infringements in “Stand-Alone” Case
On 19 July 2019, the UK Competition Appeal Tribunal (CAT) handed down a
finding that certain requirements imposed by Network Rail infringed the
Chapter I (ban on anti-competitive agreements) and Chapter II (ban on abuse
of dominance) prohibitions of the UK Competition Act 1998. This was on the
assumption, to be determined later, that Network Rail holds a dominant
position in the market for the operation and provision of access to
national rail infrastructure in Great Britain (part of the UK).
The claimant seeks damages for breach of competition law and first had to
provide this element of the claim on a stand-alone basis (i.e., without
relying on a regulatory decision).
The CAT found that the requirement in the Sentinel Scheme and On-Track
Plant Operations Scheme run by Network Rail that suppliers and persons
seeking access to its managed infrastructure must obtain supplier assurance
only through the Railway Industry Supplier Qualification Scheme (RISQS)
(run by the Rail Safety and Standards Board) and not through alternative
schemes (such as that run by the claimants) gave rise to these
The Sentinel Scheme is a passporting system governing access by individuals
to Network Rail’s managed infrastructure. The On-Track Plant Operations
Scheme sets out processes to support safe planning, control and use of the
The central issue raised in the case was whether a restriction on
competition in a safety-critical industry is justified on health and safety
grounds. The CAT concluded that the RISQS-only rule was not justified on
this basis. It recognised that health and safety is a legitimate purpose
capable of justifying conduct which restricts competition.
However, in order to be justified, the restriction must be shown to be
indispensable to the achievement of the health and safety purpose. Network
Rail failed to establish to the satisfaction of the CAT that the
exclusivity of RISQS mandated in the Sentinel Scheme and OTPO Scheme was
indispensable to the health and safety purposes of those schemes.
This is an important judgment showing the continuing development of private
competition law litigation in the UK and that it is possible to establish
competition law infringements on a stand-alone basis.
Additional European competition law news coverage can be found in our news section.
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