The Court of Justice of the European Union (CJEU) has today rejected an appeal by Deutsche Telekom
against an earlier judgment by the General Court that Deutsche
Telekom had imposed a margin squeeze in breach of EU competition
rules. This is a landmark case, since it represents the
CJEU's first judgment on the issue of margin squeeze. A
fine of €12.6m, originally levied by the European
Commission, has been upheld.
A "margin squeeze" occurs when a dominant undertaking charges its competitors an unfair price for an input which is essential to the competitors' business. In a May 2003 decision, the European Commission found that pricing implemented by Deutsche Telekom from 1998 to 2003 represented a margin squeeze and thereby breached the prohibition of the abuse of a dominant position at what is now Article 102 of the Treaty on the Functioning of the European Union. In April 2008, this decision was largely upheld by the then Court of First Instance (now called the General Court, just as the CJEU used to be called the European Court of Justice). Today, in rejecting Deutsche Telekom's further appeal, the CJEU has in its turn upheld the whole of the General Court's judgment.
How did Deutsche Telekom impose a margin
Deutsche Telekom is the incumbent telecoms provider in Germany and operates the German fixed telephone network. The German market was liberalised in 1996 and Deutsche Telekom is obliged to offer competing telecoms operators access (at a wholesale level) to its local networks so that the competitors can offer subscribers (i.e. their retail customers) network access.
From 1998 to late 2001, competitors had to pay wholesale access charges which exceeded Deutsche Telekom's prices to its own retail customers. Between 2002 and May 2003, its wholesale prices were lower than its relevant retail prices, but the difference between the two was not enough to cover the costs of providing the retail services. In either phase, therefore, other telecoms providers could only compete for retail business at a loss and this was held to represent an abuse of Deutsche Telekom's dominant position on the upstream market for local loop network access in Germany.
Pricing at both levels of the market was regulated by the national telecoms authority and, at all stages of this case, Deutsche Telekom argued that it should not be penalised (or should at least be penalised less severely) because its prices were set in line with the regulatory framework. It had little or no freedom to vary its wholesale prices and only limited freedom to vary its retail prices, since its retail prices were capped across a range or "basket" of services.
On the regulatory point, the CJEU has reaffirmed that national regulation can only override the competition rules when there is absolutely no commercial freedom afforded the dominant undertaking. Since Deutsche Telekom had scope, within the confines of the regulatory basket, to vary the particular retail prices at issue, it had to remain subject to the full rigours of the competition rules.
How does a margin squeeze work in general?
The CJEU's judgment mostly concerns the regulatory context and the question of whether the General Court had correctly assessed the effect of Deutsche Telekom's pricing on the competitive dynamic (which the CJEU ruled it had indeed appropriately assessed).
The significance of the judgment arguably lies even more in the indirect endorsement it gives to the general approach to margin squeeze of the European Commission and the General Court (and of the competition authorities in other cases).
The authorities' approach to this form of abuse can be summarised as follows:
- For there to be a margin squeeze, it is not necessary that a wholesale price be excessive or that a retail price be predatory. It is wrong for this purpose to view an individual price in isolation. The concept of margin squeeze relates to the spread between the two pricing levels.
- A margin squeeze arises where the dominant undertaking's retail price does not exceed the sum of (i) the price of the indispensable wholesale input (whether that input is access to a network or e.g. essential IP) and (ii) the costs of providing the retail services.
- To establish the level of retail costs, the applicable benchmark is the dominant undertaking's own costs – i.e. it is an "as efficient competitor" test.
What are the implications of today's CJEU
There have recently been a high number of margin squeeze cases and today's judgment confirms, once and for all, that a margin squeeze represents a freestanding and important category of abuse. Like other judgments in the last year or two, it also shows the European Courts generally supporting the European Commission's policy on the enforcement of the abuse rules.
Although recent margin squeeze cases have focused on the telecoms sector, there are clear implications in today's judgment for companies which, for instance, control must-have technology or which operate infrastructure which is essential to competing operators. In whichever sector such companies do business, they must ensure that their access charges to competitors satisfy the tests in the series of Deutsche Telekom judgments.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 14/10/2010.