ECJ dismisses Deutsche Telekom margin squeeze appeal

01 October 2010

Richard Eccles

The European Court of Justice (“ECJ”) issued its judgment on 14 October 2010 on Deutsche Telekom’s appeal (Case C-280/08) against the General Court’s decision adopted on 10 April 2008 dismissing Deutsche Telekom’s appeal in its entirety for abuse of dominant position by imposing a margin squeeze in breach of Article 102 of the Treaty on the Functioning of the European Union (“TFEU”). The ECJ rejected all of Deutsche Telekom’s arguments and dismissed the appeal in its entirety. It upheld the General Court’s decision that the “as efficient competitor” test to demonstrate margin squeeze was correct. It further held that the fact that Deutsche Telekom’s wholesale price had to be approved under the national regulatory framework did not absolve Deutsche Telekom of its duty to comply with EU competition rules, and avoid a margin squeeze.

Deutsche Telekom offers access to its local networks to other telecommunications operators (wholesale access) and to subscribers (retail access). In May 1997, the Federal Ministry of Post and Telecommunication’s (“BMPT”) required Deutsche Telekom to offer its competitors fully unbundled wholesale access to the local loop. Furthermore Deutsche Telekom’s wholesale access charges were required under German law to be approved by the German telecommunications regulator. Its retail charges for ISDN (digital narrowband) and analogue services were also subject to a baskets price cap imposed by the regulator.

In May 2003, following competitors’ complaints with regard to Deutsche Telekom’s pricing, the Commission adopted a decision finding Deutsche Telekom to be in a dominant position in the wholesale market and the retail market for access to narrowband and broadband connections, and holding that Deutsche Telekom had infringed Article 102 TFEU by imposing an illegal margin squeeze. Deutsche Telekom charged its competitors prices for access to the local loop that were higher than its corresponding retail prices. Competitors had to impose higher retail prices than Deutsche Telekom charged for its own end-user connections. However, although the regulator needed to approve a price ceiling for a basket of services (comprising narrowband access and telephone services), and controlled Deutsche Telekom’s wholesale access charges, Deutsche Telekom had enough flexibility to reduce the margin squeeze by way of increasing its retail charges for ADSL broadband lines, which were not subject to the price cap. The Commission imposed a fine of EUR 12.6 million.

Deutsche Telekom brought an action before the General Court seeking the annulment of the decision or a reduction in the fine. On 10 April 2008 the Court dismissed Deutsche Telekom’s appeal in its entirety, specifying that the need for approval of Deutsche Telekom’s wholesale prices by the national telecommunications regulator did not remove its responsibility to comply with EU competition law. Deutsche Telekom appealed to the ECJ seeking an annulment of the General Court’s judgment.

The ECJ considered the three grounds of Deutsche Telekom’s appeal, ultimately upholding the General Court’s decision and dismissing the appeal in its entirety. The ECJ confirmed that approval of Deutsche Telecom’s wholesale prices by the national telecommunications regulator did not prevent a breach of EU competition law. It was Deutsche Telekom’s responsibility to comply with the rules and adjust its retail prices to end the margin squeeze. The ECJ further upheld the General Court’s decision that the test applied by the Commission in order to demonstrate that there was a margin squeeze (the “as-efficient” competitor test) was correct. As regards the calculation of the fine, the ECJ found that the level of fine imposed by the Commission was correctly assessed with regard to the seriousness of the infringement.

The judgment in the Deutsche Telekom case supports the Commission’s methodology and test used to demonstrate a margin squeeze. The ECJ’s approval of the Commission’s approach reinforces the developing case law on these forms of exclusionary pricing abuses and in particular the use of the “equally efficient competitor” test in margin squeeze cases.