Dominant companies cannot hide behind regulatory action taken by national authorities when committing an abuse. Any abuse of a dominant position on the EU market contravenes the EU competition rules and deserves hefty fines, the European Court of Justice has recently confirmed, while upholding the €12.6 million fine imposed by the European Commission on Deutsche Telekom for the abuse of its dominant position in the fixed telephony markets in Germany.
The ruling arose from the following facts. Before the full liberalisation of the telecommunications market in Germany, Deutsche Telekom enjoyed a legal monopoly in the retail provision of fixed-line telecommunications services. Following the lodging of complaints from competitors of Deutsche Telekom, the Commission concluded that Deutsche Telekom had been abusing its dominant position in the market for direct access to its fixed telephony network during the period when it was enjoying a legal monopoly.
The abuse consisted in charging competitors wholesale prices for network access services known as local loop access services that were higher than the retail prices which Deutsche Telekom’s end-users themselves were charged for access. Such a pricing policy forced Deutsche Telekom’s competitors to charge their own clients higher prices than those charged by Deutsche Telekom to its own end-users. The Commission fined Deutsche Telekom €12.6 million. Deutsche Telekom brought an action before the general court for an annulment of the Commission’s decision or for a reduction of the fine imposed.
The general court dismissed the action, holding that the Commission was entitled to impose such a fine on Deutsche Telekom on account of the implementation of an unfair pricing practice, resulting in a margin squeeze. Eventually, Deutsche Telekom proceeded to appeal to the European Court of Justice against the judgment of the general court.
Once again, the European Court of Justice confirmed the ruling given by the Commission and by the general court. The court maintained that, indeed, even though wholesale prices for local loop access services were set by national regulatory authorities, Deutsche Telekom could still be considered as guilty of carrying out a margin squeeze on its competitors. Deutsche Telekom could still adjust the retail prices charged to its end-users, notwithstanding the fact that those prices were subject to some regulation, the court affirmed. The court went so far as to state that it is indeed not inconceivable that the national regulatory authorities may themselves have infringed EU law and could themselves be the subject of infringement proceedings.
The court confirmed that adopting a pricing policy which results in a margin squeeze is one of the ways in which a dominant company can abuse of its dominance in violation of EU competition rules. By squeezing the margins of its competitors, thereby driving them out of the market, Deutsche Telekom strengthened its dominant position and, consequently, caused damage to consumers by limiting the choices available to them. Consumers were also deprived of the possibilities of benefiting from a longer-term reduction of retail prices for end-user access services as a result of competition in the particular market.
The court affirmed that the “as-efficient-competitor” test is a suitable test in order to determine whether a margin squeeze is abusive. Such a test involves considering whether the pricing practices of a dominant undertaking could drive an equally efficient economic operator from the market, relying solely on the dominant undertaking’s charges and costs instead of on the particular situation of its competitors.
In practical terms, this implies that the court had to establish whether Deutsche Telekom would have been able to offer its retail services to end-users otherwise than at a loss if it had first been obliged to pay its own wholesale prices for local loop access services.
The Court of Justice also confirmed that, in order to be regarded as abusive, a margin squeeze must have made market penetration more difficult for Deutsche Telekom’s competitors. In the case at hand, the court noted, that the wholesale services provided by Deutsche Telekom were indispensable for its competitors to be in a position to penetrate the retail market for the provision of services to end-users.
A margin squeeze by Deutsche Telekom had the effect of hindering the growth of competition in the retail markets in services to end-users, since a competitor who is just as efficient as Deutsche Telekom could not carry on his business in the retail market for end-user access services without incurring losses.
This ruling goes to prove the stringent application and interpretation of the EU’s competition rules by the EU institutions. Indeed, the court has confirmed that it is of no use for dominant companies to hide behind the action or rulings taken by the national authorities in order to engage in abusive behavior. Any abuse of a dominant position in a particular market which has anti-competitive effects on the market in question is illegal and could be the subject of hefty fines.
mariosa@vellacardona.com
Dr Vella Cardona is a practicing lawyer and a freelance consultant in EU, intellectual property, consumer protection and competition law. She is also a visiting lecturer at the University of Malta.