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.