Loyalty rebates in Europe and the United States

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Loyalty rebates have been successfully challenged by the European Commission, with the full support of the courts, for a number of years. According to the General Court's opinion: "Such exclusivity rebates, when applied by an undertaking in a dominant position, are incompatible with the objective of undistorted competition within the common market.

The ruling is that exclusivity rebates are not based — save in exceptional circumstances — on an economic transaction which justifies this burden or benefit but are designed to remove or restrict the purchaser's freedom to choose his sources of supply and to deny other producers access to the market. Such rebates are designed, through the grant of a financial advantage, to prevent customers from obtaining their supplies from competing producers. This analysis does not consider the effect of the rebate on other market participants. Dominant firms can be found to have abused their position regardless of whether competitors suffered or were likely to have suffered foreclosure or other adverse effects.

While the limitation upon loyalty discounts seems well-established in the EU, a new debate regarding their status is emerging in the U.S. 

Until recently, loyalty rebates in the U.S. have been generally above reproach when the seller's net price, taking into account the rebate, remained "above cost." Based on the Supreme Court's Brooke Group decision, this has been the law for more than 20 years even where such discounts allegedly excluded competitors of the dominant firm from the market. However, there is now a caveat in the Third Circuit where recent decisions in ZF Meritor v. Eaton Corp. and LePage v. 3M  have abandoned the "price-cost" safe harbor, assigning liability to dominant sellers even where their discounts are "above cost" and non-predatory. At least in the Third Circuit, the competitive strategies previously enjoyed by dominant sellers may not be protected.

The era of assuming a pricing program is legal in a foreign jurisdiction simply because it does not raise antitrust issues in the United States is over. Now, more than ever, "world" pricing strategies have to be adapted to individual jurisdictions.

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