In a judgment dated 17 February 2011, the European Court of Justice (ECJ) responded to a series of questions referred to it by the Stockholm District Court concerning the criteria for establishing an anti-competitive margin squeeze. Only four months ago, the ECJ provided definitive clarification of the rules for margin squeezes and also confirmed that a margin squeeze may constitute a stand-alone abuse of a dominant position under Article 102 of the Treaty on the Functioning of the European Union (see our earlier Law-Now on the 14 October 2010 Deutsche Telekom judgment).

A "margin squeeze" occurs when a company which is dominant in an upstream input market charges its downstream competitors an unfair price for its upstream input. The Swedish competition authority had brought proceedings against TeliaSonera, the historical operator of the Swedish fixed telephone network, alleging an illegal margin squeeze between the price it charged for access to its network and the price it charged for linked broadband retail services – retailers who had to pay the former could not allegedly compete against the latter.

The ECJ declined to assess the facts of the Swedish case, despite the factual background being raised in submissions to it concerning the admissibility of the Swedish court’s reference. It would indeed be unusual for the ECJ to go into the facts of a case referred by a national court and, here, the ECJ followed its normal procedure in confining itself to answering the referred list of general analytical queries on the criteria for margin squeezes.

Perhaps the most interesting point in its answers concerns indispensability. In a 2 September 2010 Opinion, Advocate General Mazák had taken the view that a margin squeeze is abusive only where the dominant supplier has a regulatory obligation to supply the upstream input or where the input is indispensable to the downstream competitor’s business. Instead, the ECJ held as follows:

  • To be abusive, a margin squeeze (like other pricing practices) must have anti-competitive effect. The effect need not be concrete – a potential anti-competitive effect may suffice.
  • Where the input is indispensable for retail business, this may be a strong indication of anti-competitive effect, but it is only a factor in assessing effect.
  • There is therefore no absolute requirement for the input to be indispensable for anti-competitive effect to be found. The ECJ’s more flexible approach to the indispensability criterion is likely to extend the range of practices which could be categorised as margin squeezes.

The ECJ’s other responses are listed below.

  • If possible, the dominant undertaking’s own costs should be the benchmark to apply in assessing the cost of providing the retail service.
  • The absence of a regulatory obligation is not a relevant factor for determining whether the pricing practice is abusive.
  • It is sufficient to establish that the allegedly infringing company has a dominant position only in the relevant upstream/wholesale market – abuse does not depend on its being dominant in the downstream/retail market.
  • The degree of the dominant company’s market strength may be relevant in assessing the effect of abusive practices, but not in assessing their actual existence.
  • It is not generally relevant to a margin squeeze assessment whether the input is supplied to a new customer.
  • Nor is it generally relevant that the markets concerned feature new technology.
  • There is no requirement for an antitrust enforcer to demonstrate that the dominant company can recoup losses suffered as result of its pricing practices, including margin squeezes.

The subject of margin squeeze has grown in significance in recent years and has turned into a compliance priority for incumbent network operators in utility industries. In any sector, it has implications for companies wishing to control e.g. a distribution network or other key infrastructure. The ECJ’s answers in this new judgment provide further important clarification to complement and develop its analysis in Deutsche Telekom.