The General Court recently clarified that to establish a margin squeeze in the case of positive margins, the Commission needs to prove the exclusionary effects of the dominant company's pricing practices. It also indicated that in cases of refusal to grant access, it is not always necessary to establish the indispensability of the access.
Furthermore, if a parent company is classed as a repeat offender it risks being exposed to an additional fine, even where its liability is entirely derivative of that of its subsidiary.
On 13 December 2018, the General Court partially annulled the European Commission's decision imposing a fine on both Deutsche Telekom (DT) and its Slovak subsidiary, Slovak Telekom (ST), for abuse of a dominant position in Slovakia's broadband internet services market. The Commission found that ST, the incumbent telecommunications operator in Slovakia, refused to provide alternative operators with fair access to its local loop network and engaged in margin squeeze which had the effect of delaying or preventing the entry of new competitors. While the General Court largely upheld the Commission's decision, it reduced the fines imposed on the basis that the Commission failed to establish that ST's pricing practices resulted in exclusionary effects before 1 January 2006. In addition, it reduced the additional fine imposed on DT by the Commission for reasons of deterrence.
The judgment sheds light on (i) when the Commission will be required to prove that access to a network is "indispensable" for it to establish an abusive refusal by a dominant company; (ii) the test for establishing margin squeeze and (iii) the circumstances in which a parent company will be deemed to exercise "decisive influence" over a subsidiary such that it will be jointly liable for violations of competition law.
(i) Refusal of access may constitute abuse even if network is not 'indispensable'
The General Court dismissed ST's argument that the Commission erred in failing to demonstrate that ST's local loop network was indispensable for rivals to compete. The General Court held that since the relevant regulatory framework acknowledged the indispensability of ST's local loop for alternative operators, the Commission was no longer required to independently establish indispensability. By holding that telecom regulation could act as a stand-in for competition law analysis, the judgment combines to an extent the (distinct) mandates of telecom and competition authorities.
(ii) Margin squeeze may violate competition law even if margins are positive
The Commission concluded that ST's pricing practices constituted a margin squeeze because the spread between the prices it charged alternative operators for access to its network and the prices charged to its own retail customers was either negative or insufficient for an equally efficient competitor to cover its costs in the downstream retail market. The General Court confirmed that margin squeeze can be established even where margins are positive if the Commission proves that the pricing practice is likely to have the effect of making it more difficult for rivals to compete, for example, because of reduced profitability. Since the Commission failed to show that ST's pricing practices would have this effect for the last four months of 2005, a period in which ST had positive margins, the fine was reduced to reflect the shorter duration of the infringement.
(iii) Decisive influence over subsidiaries can be inferred from a wide range of practices
The Commission found that because ST and DT were part of a single undertaking, they were both liable for the alleged infringement committed by ST. The General Court reiterated that, according to settled case law, a parent company will be held liable for the conduct of its subsidiary where that subsidiary – although it has separate legal personality – does not independently decide on its own conduct on the market but carries out, in all material respects, the instructions given to it by the parent company, taking into account the economic, organisational and legal links between those two legal entities. The General Court rejected DT's argument that its 51% stake in ST did not confer "decisive influence" on the basis of the following cumulative factors, among other things:
- DT could impose its views for all votes requiring a simple majority;
- DT nominated four of seven ST directors under a shareholders' agreement;
- overlaps of staff between those two companies;
- decisions of ST's directors which were compatible with DT's instructions;
- regular transmission to DT of information concerning ST's intended commercial policy;
- influence exercised by DT over ST's choice of a vendor of internet television services; and
- the fact that DT was the notifying party in EU merger filings concerning the acquisition by ST of Eurotel.
The General Court subsequently noted that where the liability of parent company is entirely derivative of the conduct of its subsidiary, its fine can exceed that of the subsidiary only where there are factors which individually reflect the conduct for which it is held liable. The General Court held that the status of DT as a repeat offender justified a higher fine whereas the size of its overall turnover did not. The General Court therefore reduced the amount of the additional fine imposed on DT.
This article was published in the Competition Law Newsletter of January 2019.