EC Predation Test - the Wanadoo Case

July 1, 2009

On 2 April 2009, the European Court of Justice ruled on the article 82 case involving France Telecom's subsidiary Wanadoo Interactive SA (WIN), concerning the abuse of WIN's dominant position in the market of high-speed internet access. In particular, the ECJ confirmed that WIN had engaged in predatory practices with the intention of foreclosing competitors from the market of high-speed internet access.

The judgment largely confirmed the existing caselaw on predation and, importantly, stopped short of adopting the more complex test set out in the Commission's new Guidance Notice on exclusionary conduct.

According to existing caselaw, the predation test establishes that, where the prices charged by a dominant company are below average variable costs, there will be a presumption that such prices are predatory. On the other hand, where the prices charged are above average variable cost but below average total costs, it will be necessary to prove that the prices are part of a plan to eliminate a competitor (cfr. AKZO, Tetra Pak).

In the appeal before the ECJ, WIN contested the validity of the predation test performed by the Commission (and confirmed by the Court of First Instance). In particular, WIN argued that a correct predation test should also prove, in addition to the elements mentioned above, the possibility of the dominant undertaking to recoup the losses incurred by charging prices below cost. The Commission, on the contrary, contended that, according to the European case-law (unlike the case-law of US authorities), the existence of a dominant position is sufficient in itself to prove the possibility of recoupment of losses, and therefore this element should not be considered as a decisive part of the EC predation test.

WIN's arguments were supported by the Advocate General of the ECJ and were also consistent with the Commission's Guidance Notice. The AG based his opinion on the wording of the decisions of the ECJ in Tetra Pak II: in that decision, the Court stated that “in the circumstances of the present case” there was no need to prove the recoupment of losses in order to achieve a finding of predation.

Notwithstanding the position of the Advocate General, the ECJ ruled against WIN, restating that the ability of the dominant firm to recoup losses does not constitute a necessary element of the assessment in predatory pricing cases.

In the ECJ’s view, the recoupment of losses can be taken into account as an element of the predation test, which could be helpful in confirming the views established through the presumption or the proof of a predation plan. It cannot, on the other hand, be considered as a decisive element of the analysis, able to impair the results reached through the classical cost test. Where, for example, a presumption of predation is established or a plan of predation is proven (with prices between AVC and ATC), the Commission will have to conclude for a finding of predation, even where it is shown that the undertaking has no possibility of recouping the losses.

The ECJ decision will be a disappointment for those who favored a more economic approach and signals a difficult start to the Commission's formal steps to adopt more economic analysis in its Article 82 decision-making process.