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EU Court of Justice Provides Guidance on Abusive Margin Squeezes

Alexandre G. Verheyden and Serge Clerckx, Jones Day Antitrust Alert, February 2011.
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On 17 February 2011, the European Union Court of Justice ("CJ") issued a preliminary ruling in an ongoing case concerning price squeeze abuses. Questions were referred to the CJ from the Stockholm District Court, which has before it a case between Swedish telecommunications company TeliaSonera AB and the Swedish Competition Authority. The preliminary ruling provides useful guidance in assessing margin squeeze abuses under Article 102 of the TFEU, confirming its broad application, including in unregulated industries and wholesale services or products that are not indispensable inputs for competitors to sell on the downstream retail market.

In summary, the CJ’s ruling:

  • confirms margin squeeze as a standalone abuse under Article 102 TFEU, distinct from a refusal to supply, applicable even in the absence of any regulatory obligation to supply,
  • recognizes "indispensability" of the wholesale input as a relevant factor in assessing potential anticompetitive effects, but not as a necessary condition for finding a margin squeeze,
  • recognizes the general appropriateness of an "equally efficient operator" test, but identifies circumstances in which competitors’ costs could be taken into consideration, and
  • rejects double wholesale and retail dominance as a requirement for abuse.

Background

In December 2004, the Swedish Competition Authority (Konkurrensverket) brought a case against TeliaSonera before the Stockholm District Court (Tingsrätt), contending that TeliaSonera abused its dominant position on the wholesale input market for broadband services, by applying a margin between wholesale tariffs charged to downstream competitors and retail tariffs charged to end users for broadband ADSL services that did not cover TeliaSonera’s own incremental retail costs. The case differs from the Deutsche Telekom case in that the wholesale services at issue in TeliaSonera are not subject to sector-specific regulation.

The Stockholm District Court referred the case to the CJ in February 2009, requesting guidance on the relevance of certain factors in determining whether a margin squeeze is abusive. We discuss below the most relevant guidance provided by the CJ.

CJ Judgment

Stand-alone abuse, distinct from a refusal to supply. In its October 2010 Deutsche Telekom judgment the CJ for the first time recognized that a margin squeeze constitutes a standalone abuse of dominant position under Article 102 TFEU. (We discussed this in a previous alert In the TeliaSonera case, the CJ confirms its prior case law, stressing that margin squeeze can constitute an abuse distinct from a refusal to supply (and the stringent conditions for said abuse set out by the CJ in Bronner) and in the absence of any regulatory obligation to supply.

Indispensability as a factor, not as a necessary condition. The referring court asked whether the wholesale input service or product should be "indispensable" to competitors to enable them to compete on the retail market. The CJ recognizes that the indispensable nature of the wholesale input is relevant in assessing whether the pricing practice has anticompetitive effects that may potentially hinder competition, but does not regard this as a necessary condition to the finding of an abusive practice. According to the CJ, it is for the referring court to assess whether the practice is capable of having effects, even in the event that the wholesale input is not indispensable. Nonetheless, the CJ recognizes that at least potential anticompetitive effects are probable if the wholesale input is indispensable and the margin between wholesale costs and retail prices is negative.

Equally efficient competitor test. Regarding the method for determining the margin squeeze, the CJ confirms the application of an equally efficient competitor test that takes account of the dominant operator’s costs and revenues. However, it recognizes that it may be appropriate to take account of competitors’ costs in certain circumstances, for example when (i) the costs of the dominant undertaking are not precisely identifiable, (ii) the dominant competitor’s costs have been written off, or when (iii) "the particular market conditions of competition dictate it," such as when the level of the dominant competitor’s costs is determined precisely by the undertaking’s dominant position.

No double dominance requirement. In previous cases, the CJ has held that conduct that affects a market other than the dominant market can be categorized as abusive, provided the dominant and non-dominant markets are closely associated. The CJ now holds that a margin squeeze introduced by a vertically integrated undertaking that is dominant on the wholesale market can be abusive, even if that undertaking is not dominant on the associated retail market.

Conclusion

With this preliminary ruling, the CJ provides clear guidance in assessing margin squeezes, which it had established as a standalone abuse in its October 2010 Deutsche Telekom judgment. More particularly, it dismisses the argument of Advocate General Jan Mazák that a margin squeeze constitutes a constructive refusal to supply that is abusive only if there already exists a regulatory obligation to supply or if the wholesale input is indispensable to compete on the downstream market. Neither of these are necessary conditions to finding a margin squeeze, but indispensability does matter in assessing the potential anticompetitive effects of the pricing practice. The preliminary ruling further confirms the application of an equally efficient competitor test, while explicitly recognizing the need to take account of competitors’ costs "where the particular market conditions of competition dictate it." Beyond clarifying uncertainties in appraising margin squeeze abuses, this judgment also confirms that such abuses can be sanctioned in unregulated industries and even with respect to wholesale services or products not necessarily indispensable to competing on the wholesale market.

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