The high cost of rebates

This week the EU's General Court dismissed in its entirety an appeal by Intel, the US microchip manufacturer, against the €1.06 billion fine imposed on it by the EU Commission in May 2009.

This week the EU's General Court dismissed in its entirety an appeal by Intel, the US microchip manufacturer, against the €1.06 billion fine imposed on it by the EU Commission in May 2009.   The fine is the biggest ever imposed on a single company by the EU and related to the abuse by Intel of its dominant position in the market for x86 central processing units (CPUs).

The key components of Intel's infringement are:

• It was dominant in the market for the supply of x86 CPUs. A market share of around 70% was compounded by high barriers to entry (high cost investment to enter and expand as result of unrecoverable investments needed in R&D, IPR and production facilities). 

Note that dominance is a precondition for the abuse of dominance infringement, but is not sufficient.  There must be dominance coupled with abuse. In the EU, dominance concerns can arise with market shares well below 70% (e.g. around 40%). 

• The abuse was characterised by several measures (rebates and payments) adopted by Intel vis-à-vis its customers (PC manufacturers) and a retailer:

  • Rebates were granted to Dell, HP, NEC and Lenovo on condition that they purchased all or nearly all of their x86 CPUs from Intel. 

  • Payments were made to HP, Acer and Lenovo which were conditional on their postponing, cancelling or restricting the launch of the products that included CPUs other than Intel's

  • Payments were made to a retailer which were conditional on it selling exclusively computers containing Intel's x86 CPUs

The line between permitted (and pro-competitive) rebates and unlawful (exclusionary) rebates is often unclear.  For companies that are or may be dominant, rebates that are designed to, or have the effect of, making market access more difficult for competitors, are likely to be risky.  Therefore, rebates linked to volume purchasing targets and in particular, retroactive rebates which apply to every purchase made by a customer during a certain period, rather than only to purchases made after the volume target has been reached, will be risky.