European Union: ECJ Advocate General Seeks to Affirm Judgment in Margin Squeeze Case

On 22 April 2010, Advocate General ('AG') Jan Mazák at the European Court of Justice ('ECJ') issued his opinion in Deutsche Telekom's appeal to the ECJ against the General Court ruling upholding the European Commission decision to impose a EUR 12.6 million fine on Deutsche Telekom for abusive margin squeeze. The AG opinion supports affirming the Commission decision. This is an important and closely-watched case, as it is the first time that the ECJ has been called upon to rule on the issue of a margin squeeze as a stand-alone abuse of dominant position.

Commission's decision

The Commission imposed a EUR 12.6 million fine on Deutsche Telekom for abuse of its dominant position in 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 on the basis of wholesale access purchased from Deutsche Telekom. The Commission determined that Deutsche Telekom's pricing violated Article 102 of the Treaty on the Functioning of the European Union ('TFEU') (formerly Article 82 of the EC Treaty).

The Commission compared Deutsche Telekom's charges for upstream access to competitors with prices for comparable retail services that could be offered on the downstream retail market on the basis of wholesale access services. Retail access services included the traditional analog connection, digital narrowband connection (ISDN), and broadband connection (ADSL). The Commission found that the tariffs charged to competitors for wholesale access were either higher than the retail prices it charged to consumers for the retail services, or at least that the spread between wholesale charges and retail tariffs was insufficient for a competitor profitably to trade on the retail market even if it was as efficient as Deutsche Telekom itself.

General Court

Deutsche Telekom appealed the Commission's decision to the General Court (formerly the 'Court of First Instance'), on the grounds that it could not be held responsible for the margin squeeze. It argued that the national regulator, RegTP, had capped its wholesale charges and retail prices and that margin squeeze did not constitute a stand-alone abuse in itself.

The General Court upheld the Commission's decision, since Deutsche Telekom could have charged less than the regulated wholesale charges or higher retail tariffs within the overall ceilings imposed by RegTP. Deutsche Telekom therefore had sufficient scope to halt or at least reduce the margin squeeze. The Court noted that RegTP's ex ante intervention did not prevent the application of competition law; RegTP applies national telecommunications law, which may have different objectives than competition law policy.

Furthermore, the Court established that the Commission was not required to demonstrate that Deutsche Telekom's retail prices were abusive as such, thereby recognizing for the first time margin squeeze as a stand-alone abuse under Article 102 TFEU. With regard to the appropriate method for establishing a margin squeeze, the Court upheld the Commission's reliance on an 'equally efficient competitor' test in finding a margin squeeze.

Opinion of the Advocate General

Deutsche Telekom appeals on three grounds. First, Deutsche Telekom claims that the infringement cannot be attributed to it because RegTP regulated both its wholesale charges and retail tariffs. RegTP's regulation therefore created a legitimate expectation that Deutsche Telekom's charges were lawful. Second, Deutsche Telekom claims that the General Court failed to state reasons for finding the margin squeeze to constitute a stand-alone abuse, in the absence of abusive wholesale prices or predatory retail prices. In addition, it contended that the General Court should not have upheld the Commission's application of an 'as efficient competitor' test to a dominant undertaking, which is not subject to the same regulatory conditions as new entrants. Third, Deutsche Telekom alleged errors in the calculation of fines.

The AG supports the General Court's contention that RegTP's regulation of Deutsche Telekom's tariffs did not prevent the Commission from finding an infringement of competition law attributable to Deutsche Telekom. The AG reiterates that competition law applies as long as national regulation leaves sufficient discretion to the undertaking concerned to avoid unlawful conduct. To the extent that RegTP's statements do not pre-empt the Commission's assessment under Article 102 TFEU, they could not create a legitimate expectation that Deutsche Telekom's pricing practice would be lawful under Article 102 TFEU.

The AG found that the General Court had sufficiently analyzed whether a margin squeeze could be a stand-alone abuse. With respect to the equally efficient competitor test, the AG endorses the General Court's finding that the Commission rightfully applied an 'equally efficient competitor' test, notably because competition law should not "take account of inefficiencies of dominant undertakings" and because this test shows "whether a competitor is able to compete with a dominant undertaking on the basis of equality of opportunity". The AG also notes that the application of a 'reasonably efficient competitor' test could be contrary to the general principle of legal certainty.

Regarding the calculation of the fine, the AG concluded that the General Court correctly qualified Deutsche Telekom's conduct as an intentional infringement.

Conclusion

The AG's Opinion fully supports the General Court's judgment upholding the Commission's finding of a margin squeeze abuse by Deutsche Telekom. The AG proposes that the ECJ establish margin squeeze as a stand-alone abuse, recognize that national sector-specific regulation does not prevent the application of competition law, and endorse the application of an 'equally efficient competitor' test. The ECJ ruling is expected in the coming months. If the ECJ follows the AG's Opinion, it would for the first time recognize the validity of a margin squeeze claim as a stand-alone abuse of dominant position under Article 102 TFEU. This would be 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.

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