On 14 October 2010, the European Court of Justice (ECJ) upheld the European Commission's EUR 12.6 million fine on Deutsche Telekom for imposing an abusive margin squeeze. In doing so, the ECJ confirmed the judgment of the General Court and established margin squeeze as a stand-alone abuse under Article 102 TFEU.
Background
In 2003, the Commission imposed a EUR 12.6 million fine on
Deutsche Telekom for abuse of its dominant position under Article
102 of the Treaty on the Functioning of the European Union (TFEU)
(formerly Article 82 of the EC Treaty). The abuse consisted of
setting wholesale and retail prices for access to its local loop at
levels such that new competitors could not profitably offer retail
access services to consumers using wholesale access purchased from
Deutsche Telekom.
Deutsche Telekom appealed the Commission's decision to the
General Court (formerly the Court of First Instance) on the grounds
that (i) margin squeeze did not constitute an abuse in itself, (ii)
in any event, it could not be held responsible for the margin
squeeze because RegTP (the German regulatory authority) had capped
(or at least approved) its wholesale charges and retail prices, and
(iii) in applying the margin squeeze test, the Commission should
have taken into account the higher revenues generated by its
competitors, instead of the capped tariffs approved by RegTP.
The General Court dismissed Deutsche Telekom's appeal, holding
that (i) the Commission was not required to demonstrate that
Deutsche Telekom's retail prices were abusive as such, thereby
recognizing margin squeeze for the first time as a stand-alone
abuse under Article 102 TFEU, and (ii) Deutsche Telekom could have
either charged less than the regulated wholesale charges or higher
retail tariffs within the overall ceilings imposed by RegTP. (iii)
With regard to the appropriate method for establishing a margin
squeeze, the Court upheld the Commission's reliance on an
'equally efficient competitor' test.
Deutsche Telekom appealed the General Court's judgment to the
ECJ, on essentially the same grounds as in its appeal to the
General Court. In its Opinion, Advocate General ('AG') Jan
Mazák supported the General Court's judgment upholding
the Commission's finding of a margin squeeze abuse by Deutsche
Telekom, as discussed in our previous
alert.
ECJ's reasoning
Margin squeeze is a stand-alone abuse. The ECJ
recalled that Article 102 TFEU (subparagraph (a)) prohibits
undertakings from directly or indirectly imposing unfair prices and
that the list of abusive practices contained in Article 102 TFEU is
not exhaustive. Article 102 TFEU prohibits practices having an
exclusionary effect on competitors and that are capable preventing
or hampering entry by such competitors. Article 102 TFEU prohibits
not only practices that directly harm consumer interests, but also
practices detrimental to consumers through their impact on
competition.
The ECJ noted that Deutsche Telekom did not deny that the spread
between wholesale charges and retail tariffs was capable of having
an exclusionary effect on competitors. The ECJ therefore concluded
that the General Court correctly found that "margin squeeze is
capable, in itself, of constituting an abuse within the meaning of
Article [102 TFEU] in view of the exclusionary effect that it can
create for competitors." There was no need to demonstrate that
wholesale charges or retail tariffs were separately abusive.
Attribution of the abuse. The ECJ considered that,
despite the fact that RegTP regulated (or approved) wholesale
charges and retail charges, the General Court did not err in law by
attributing the abuse to Deutsche Telekom, as it had sufficient
leeway to adjust its retail prices and avoid the exclusionary
practice.
Equally efficient competitor test. Regarding the
method for determining the margin squeeze, the ECJ found it
appropriate that the General Court and the Commission relied on an
equally efficient competitor test, which in principle takes account
of the dominant operator's costs and revenues, rather than a
reasonably efficient competitor. The ECJ stated that such approach
was also consistent with the general principle of legal certainty,
as it allowed the dominant undertaking to assess the lawfulness of
its conduct.
Nonetheless, the ECJ also recalled that "a dominant
undertaking cannot drive from the market undertakings which are
perhaps as efficient as the dominant undertaking but which, because
of their smaller financial resources, are incapable of withstanding
the competition waged against them." As such, the ECJ appeared
to indicate that in applying an equally efficient competitor test,
the dominant undertaking's costs may require adjustment in
order to take account of objective parameters relating to
competitors' size and financial capacity, but which do not bear
on their efficiency in operating a business.
Conclusion
The ECJ, by upholding the General Court's judgment and the
Commission's finding of a margin squeeze abuse by Deutsche
Telekom, for the first time recognizes the validity of a margin
squeeze claim as a stand-alone abuse of dominant position under
Article 102 TFEU. It further recognizes that national
sector-specific regulation does not prevent the attribution of an
abuse, and endorses the application of an "equally efficient
competitor" test, while arguably leaving the door open for an
adjusted test that takes account of the objectively different
situation of competitors. It is at odds with the rule in other
jurisdictions; for example, the U.S. Supreme Court recently ruled
in Pacific Bell v. linkLine that a margin squeeze claim
may not be brought under U.S. monopolization law, in the absence of
an independent antitrust duty to deal.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
