On 17 February 2011, the Court of Justice of the European Union (“ECJ”) handed down its judgment in the TeliaSonera case. The judgement clarifies the criteria for establishing an abusive margin squeeze within the meaning of Article 102 of the Treaty on the Functioning of the European Union (“TFEU”) (upon which section 5 of the Irish Competition Act 2002 (the “Act”) is based).
An Article 234 EC (now Article 267 TFEU) request for a preliminary ruling was made to the ECJ by the Stockholm District Court, in which the ECJ was asked a number of questions about the circumstances in which an abusive margin squeeze may be found. The ECJ in its judgment applied the principles established in its case law (and, in particular the principles set out in the recent Deutsche Telkom judgment). The judgment also, broadly, supports the European Commission’s effects-based approach and general framework of analysis of exclusionary conduct.
A margin squeeze occurs where a dominant wholesale supplier - which is also active in a downstream retail market - sets both its retail price to end users and its wholesale prices to competitors (on the downstream market) at a level whereby the difference means that a competitor, which is equally as efficient as the dominant undertaking, would be unable to compete for the supply of those services to end users on a lasting basis. The Swedish case concerned claims that fixed telephone network operator TeliaSonera had abused its allegedly dominant position in the Swedish wholesale market (which is unregulated) by applying a margin between the wholesale price for input ADSL products and the retail price for broadband services, which was insufficient to cover its incremental costs on the retail market. The ECJ confirmed that an unlawful margin squeeze may occur not only where the margin is negative (i.e. where the wholesale price is higher than the retail price) but also where it is positive. It then falls to be considered whether there is an actual or potential foreclosure effect. If there is actual or potential foreclosure, there will be an infringement of Article 102 unless the conduct can be objectively justified.
The ECJ also held that a margin squeeze does not equate to a form of constructive refusal to supply, but that it is a stand alone abuse in itself – confirming the approach established in the Deutsche Telkom case. Further, it is irrelevant whether the supply is to a new or existing customer or whether the dominant undertaking would be in a position to recoup any losses. The ECJ also confirmed that it may be appropriate to use competitors’ costs as the relevant reference point where the dominant undertaking’s costs are, for some reason, unavailable.
The judgment rejected the approach taken by Advocate General Mazak in his Opinion of 2 September 2010 and held that a margin squeeze may still constitute an abuse of dominance, even where the dominant undertaking is under no express regulatory or legal duty to supply a downstream competitor. Further, the ECJ held that there is no requirement to establish that the wholesale product is “indispensible” (in the sense that there is no realistic substitute available).
The judgement appears to contradict the characterisation of margin squeeze set out in the European Commission’s Guidance Paper and arguably introduces a less stringent test for the assessment of margin squeeze. It also confirms that margin squeeze, as a stand-alone abuse, should not be assessed in accordance with the “exceptional circumstances” test that has come to define refusal to supply cases.