Qualcomm case sees EU antitrust officials dust off predatory-pricing tools

22 July 2019 10:32am

18 July 2019, by Nicholas Hirst

Qualcomm's 242 million-euro fine ($272 million) sees the European Commission dusting off its enforcement tools on predatory pricing, which have lain dormant for some 16 years.

Their proper application in the case required plenty of resources and took years, and opened up the commission to counterattacks about the invasiveness of its investigation. But officials have now sent a signal that the test's clunkiness would not deter them for unleashing it against abusive companies.

“No matter how difficult and complex these cases are, we remain committed to fighting predatory pricing by dominant companies,” said Margrethe Vestager, the EU commissioner for competition.

EU trust-busters today sanctioned Qualcomm for selling chips below costs to eliminate a rival, Icera, that posed a “real threat” to its dominant position atop the market for 3G baseband chipsets.

In internal documents, Qualcomm assessed the danger posed by Icera as “critical,” prompting it to take “preventive actions,” according to the commission.

Lower prices

The case relates to rebates given to two key customers, Chinese phone makers Huawei and ZTE, between 2009 and 2011. The length of the probe is of note, given that Icera first contacted officials in 2009 and its chipset business closed down in 2015.

In the 10 years since opening the investigation, officials quizzed other market players, opened proceedings, sent a statement of objections and a supplementary one, plus a letter of facts setting out evidence that made it into the final decision, and held two oral hearings. Qualcomm also lodged a legal challenge against the investigation in 2017.

Qualcomm has described the decision as "unsupported by the law, economic principles or market facts" and said it would appeal.

Predatory-pricing cases are notoriously difficult and have been at the center of a wider debate about the proper role of economics in competition enforcement.

They raise a broader point: What's not to like about lower prices? Companies frequently sell at a loss to launch new products and empty old stock.

Starting in the 1990s, appeals by dominant paintmakers, telecom companies and packaging giants against predatory-pricing fines have spawned judgments that set out two tests to assess whether bargain-basement prices are longlasting and harmful to competition.

The EU courts established in a judgment against Akzo that products sold below “average variable cost” or AVC by a dominant firm are presumed to be anti-competitive. Products sold above AVC but below “total variable cost” are only anti-competitive if there is evidence of an intent to eliminate a rival.

The commission last applied the tests when sanctioning broadband provider Wanadoo 10 million euros in 2003.

Predatory intent

In the Qualcomm decision, the commission employed the latter test. It had identified internal documents detailing Qualcomm's intent to sideline Icera, which it had identified as a danger to its business.

That would appear well above the evidentiary threshold that satisfied the General Court in an appeal by Tetra Pak, where judges took convergent factors into account such as Tetra Pak dropping prices when its rival was raising prices.

Officials then needed to show that Qualcomm was selling its chipsets at a loss, prompting a debate about the correct cost-base.

“It is quite complicated to make sure you get it right ... if you have to attribute the cost of a company to these specific products, because a company like Qualcomm does more products than these baseband chipsets,” said Vestager.

Ultimately the commission established the benchmark cost as “long-run average incremental cost” or LRAIC — which is AVC plus fixed costs that were specific to the chipsets at the center of the case. Qualcomm's prices were below this benchmark.

Unlike in the US, EU officials do not need to show that the dominant firm recouped its losses down the road, although officials are understood to have looked at the question of how Qualcomm would compensate its losses when assessing its intentions.

The commission's finding of abuse will be binding on national courts, although if Icera wants full compensation from a court it will likely have to show its demise was caused by Qualcomm's predation — a high bar.

Risky approach

The commission has also exposed itself to counterattacks from Qualcomm over the invasiveness of its investigation — something that Vestager said was unavoidable.

Following several disputes, the chipmaker took the regulator to court over a request for information, describing it as disproportionate and “harassment.” Qualcomm lost that case at the General Court but has appealed to the Court of Justice.

“When you want to do a price-cost test, you need a lot of information from the company,” said Vestager. “If I was the company, this is quite an intrusive investigation.”

“You can have a back and forth about what information you need and what information is proportional for you to request ... this is what makes predatory pricing cases so challenging for us,” she said. “The procedural steps and the substance of the case have been intertwined.”

By the end of the case, the commission had 40,000 documents on file.

“The in-built dilemma here [is] that we have a very strong incentive for speeding up cases, but those that we investigate will very often have the opposite incentive ... to prolong the investigation,” said Vestager.

Other cases had not been so slow, she continued, citing probes into Google's AdSense and Android, and Amazon's eBooks businesses.

She said officials had made progress in “expediting” procedures, by ensuring, for example, that day-to-day procedures for the handling of inquiries are as streamlined as possible.

ABA 2019