The Legal 500

The Court of Appeal's recent judgment in Attheraces Ltd and another v The British Horseracing Board Ltd and another has provided an important judicial statement of the law on excessive and discriminatory pricing by a dominant business.

Under Chapter II of the Competition Act 1998 and Article 82 of the EC Treaty, businesses that hold a dominant position have a special responsibility not to engage in behaviour that impairs effective competition through abuse of their market power. The provisions explicitly prohibit excessive and discriminatory pricing by specifying that an abuse may, respectively, arise from 'directly or indirectly imposing unfair purchase or selling prices or unfair trading conditions' or 'applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage'.

In practice, the dividing line between lawful and unlawful pricing by a dominant company is often blurred and decisions in this area tend to be controversial. There has also been some uncertainty as to how the courts, as opposed to competition authorities, would approach such matters, given the central role of economic analysis. As a result, the Attheraces case has raised considerable interest amongst practitioners.

Background

The British Horseracing Board (BHB) is the governing body of British horseracing. It owns a database that generates so-called pre-race data for each horse race taking place in Great Britain (essentially, the name of each horse entered in a race, together with its number, jockey, trainer and owner). BHB then licenses this data to bookmakers, who need it to take bets on British races.

Attheraces Holdings Ltd and its subsidiaries (Attheraces) licensed pre-race data from BHB and relicensed it, together with pictures of racing, to bookmakers. In return for licensing this data, BHB sought a 50% share of the profits Attheraces received from sales to overseas bookmakers. In response, Attheraces commenced proceedings in the High Court against BHB alleging that it had charged excessive and/or discriminatory fees for its data, contrary to the Chapter II prohibition/Article 82.

In a groundbreaking judgment, the High Court ruled that BHB was dominant in the market for the supply of pre-race data outside of the UK and that its pricing was unlawful as both excessive and discriminatory. BHB appealed this judgment to the Court of Appeal.

Were the charges abusive?

It was not disputed before the Court of Appeal that BHB held a dominant position in the market for pre-race data relating to British horse races supplied outside the UK. The Court of Appeal therefore focused on whether the High Court had been correct to conclude that BHB had abused this dominance by imposing charges for its data that were excessive and/or discriminatory.

In the landmark case of United Brands Company and United Brands Continentaal BV v Commission of the European Communities, the European Court of Justice (ECJ) held that:

'... charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied would be an abuse.'

Effect of the prices on Attheraces

Following the approach laid out by the ECJ in that case, the Court of Appeal agreed with the High Court that a 'fair price' is one that reflects the 'economic value' of the product. However, the Court of Appeal ruled that the High Court had been wrong to assess economic value by reference to BHB's cost of compiling the data plus a reasonable profit ('cost +'). Importantly, the Court of Appeal considered that charging a price of more than cost + was a necessary, but not sufficient, test of abuse. Rather, it ruled that Attheraces also needed to show that its competitiveness was being materially compromised by the level of charges. In determining the economic value of the pre-race data, consideration should therefore have been given to the effect of the pricing of data on, and its value to, Attheraces. In reaching this conclusion, the Court of Appeal stressed that adoption of a simple cost + approach would have made Article 82 into 'a general provision for the regulation of prices', an approach that it expressly rejected.

Differential pricing did not result in material distortion of competition

In relation to the question of BHB's alleged discriminatory pricing, the Court of Appeal considered that the High Court had also been wrong to conclude that BHB had infringed Article 82 simply by charging Attheraces 50% of its profits whilst charging its competitor, Phumelela, only 30%. Significantly, the Court made it clear that charging customers different prices is not prohibited per se; the differential pricing must also result in a material distortion of competition between those customers. Since Attheraces had failed to establish that the differential pricing had caused such distortion in this case, its case failed.

Comment

In taking a relatively permissive approach to the issue of excessive and discriminatory pricing, the Court of Appeal has diverged from some of the more hard-line precedents offered by past European Commission decisions and judgments of the European courts. Its judgment is nevertheless much closer to the prevailing view of most legal and economic commentators of what the law should be in this area and is, in this respect, to be welcomed. Coupled with the generally hands-off approach taken by the OFT in abuse of dominance cases, this judgment suggests that dominant UK companies can be reasonably relaxed on such pricing issues, provided that the conduct does not materially affect competition. Since Attheraces has sought leave to appeal the judgment to the House of Lords, it remains to be seen whether this will be the last word on the matter, however.

Attheraces Ltd and another v The British Horseracing Board Ltd and another [2005] EWHC 3015(Ch)

Attheraces Ltd and another v The British Horseracing Board Ltd and another Rev 2 [2007] EWCA Civ 38

United Brands Company and United Brands Continentaal BV v Commission of the European Communities, Case 27/76 [1978] ECR 207

By Becket McGrath, partner, and Victoria Oates, associate, Berwin Leighton Paisner LLP.