Margin Squeeze - Landmark & Judgment On The Application Of Abuse Rules

Author:Ms Susan Hankey, David Marks and Chris Watson
Profession:CMS Cameron McKenna LLP

The Court of Justice of the European Union (CJEU) has today rejected an appeal by Deutsche Telekom against an earlier judgment by the General Court that Deutsche Telekom had imposed a margin squeeze in breach of EU competition rules.  This is a landmark case, since it represents the CJEU's first judgment on the issue of margin squeeze.  A fine of €12.6m, originally levied by the European Commission, has been upheld.   A "margin squeeze" occurs when a dominant undertaking charges its competitors an unfair price for an input which is essential to the competitors' business.  In a May 2003 decision, the European Commission found that pricing implemented by Deutsche Telekom from 1998 to 2003 represented a margin squeeze and thereby breached the prohibition of the abuse of a dominant position at what is now Article 102 of the Treaty on the Functioning of the European Union.  In April 2008, this decision was largely upheld by the then Court of First Instance (now called the General Court, just as the CJEU used to be called the European Court of Justice).  Today, in rejecting Deutsche Telekom's further appeal, the CJEU has in its turn upheld the whole of the General Court's judgment. 

How did Deutsche Telekom impose a margin squeeze? Deutsche Telekom is the incumbent telecoms provider in Germany and operates the German fixed telephone network.  The German market was liberalised in 1996 and Deutsche Telekom is obliged to offer competing telecoms operators access (at a wholesale level) to its local networks so that the competitors can offer subscribers (i.e. their retail customers) network access. From 1998 to late 2001, competitors had to pay wholesale access charges which exceeded Deutsche Telekom's prices to its own retail customers.  Between 2002 and May 2003, its wholesale prices were lower than its relevant retail prices, but the difference between the two was not enough to cover the costs of providing the retail services.  In either phase, therefore, other telecoms providers could only compete for retail business at a loss and this was held to represent an abuse of Deutsche Telekom's dominant position on the upstream market for local loop network access in Germany. Pricing at both levels of the market was regulated by the national telecoms authority and, at all stages of this case, Deutsche Telekom argued that it should not be penalised (or should at least be penalised less severely) because its prices were set in line with the regulatory framework. ...

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