Jurisprudence of the EUJC on margin squeeze: from

Deutsche Telekom to TeliaSonera and beyond… to

Telefonica!

Dr. Fernando Díez Estella

Universidad Antonio de Nebrija
fdieze@nebrija.es

Abstract

The latest European Court of Justice Judgment on margin squeeze, its

decision on Case C-52/09, of February 2011, giving answer to a
preliminary ruling from the Swedish antitrust authority –the
Konkurrensverket- provides valuable clarification on one of the more
controversial abuse of dominance claims. The judgment is particularly
significant as it confirms a much discussed issue: that margin
squeeze is a separate form of abuse in its own right, a so-called
“stand alone” abuse.

In this paper we provide some background on the TeliaSonera case,

and also some relevant insights on the preceding ECJ rulings on
margin squeeze in regulated industries: Deutsche Telekom and
France Telekom. All these rulings are examined jointly, and
conclusions are drawn also regarding one pending ruling, anxiously
expected by the Spanish telecom incumbent: Telefonica.

The structure in which we are going to address these issues goes as

follows: after this introductory section, we deal in Section 2 with the
way in which the abusive practice of margin squeeze has been
treated in ECJ’s jurisprudence. It seems clear that two diverging
approaches are at stake here: the one considering margin squeeze as
an abuse in itself, and the one considering it only as a form of a
refusal to deal. In Section 3 we provide with some insights on the
TeliaSonera record, namely, the facts behind the proceedings, and
the views expressed by AG Mazák in his Opinion. In the next Section
the ECJ’s ruling is closely examined, focusing our analysis in the
following issues: the anticompetitive effect, the “equally efficient
competitor” test, and the debate about whether margin squeeze
should be considered as an abusive practice in itself. Finally, in
Section 5 we consider some wider implications of the TeliaSonera
judgment, regarding the expected ruling on the Telefonica appeal.

Key words: refusal to supply; margin squeeze; TeliaSonera; Bronner; Telefónica;

Deutsche Telekom, abuse of dominance; essential facilities

JEL Codes: K 21; K23; K42; L41; L43.

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1. Introduction.

The latest European Court of Justice Judgment on margin squeeze, its

decision on Case1 C-52/09, giving answer to a preliminary ruling from
the Swedish antitrust authority –the Konkurrensverket- provides
valuable clarification on one of the more controversial abuse of
dominance claims. The judgment is particularly significant as it
confirms a much discussed issue: that margin squeeze is a separate
form of abuse in its own right, a so-called “stand alone” abuse.

In this paper we provide some background on the TeliaSonera case,

and also some relevant insights on the preceding ECJ rulings on
margin squeeze in regulated industries: Deutsche Telekom and
France Telekom. All these rulings are examined jointly, and
conclusions are drawn also regarding one pending ruling, anxiously
expected by the Spanish telecom incumbent: Telefonica. The oral
hearing is set to be celebrated in Luxembourg on 26 May this year;
its appeal to the fine imposed by the European Commission is
expected to be decided before the end of 2011.

The structure in which we are going to address these issues goes as

follows: after this introductory section, we deal in Section 2 with the
way in which the abusive practice of margin squeeze has been
treated in ECJ’s jurisprudence. It seems clear that two diverging
approaches are at stake here: the one considering margin squeeze as
an abuse in itself, and the one considering it only as a form of a
refusal to deal. In Section 3 we provide with some insights on the
TeliaSonera record, namely, the facts behind the proceedings, and
the views expressed by AG Mazák in his Opinion. In the next Section
the ECJ’s ruling is closely examined, focusing our analysis in the
following issues: the anticompetitive effect, the “equally efficient
competitor” test, and the debate about whether margin squeeze
should be considered as an abusive practice in itself. Finally, in
Section 5 we consider some wider implications of the TeliaSonera
judgment, regarding the expected ruling on the Telefonica appeal.

2. Margin squeeze in the ECJ’s jurisprudence.

A margin squeeze is an insufficient margin between the price of an

“upstream” product A and the price of a “downstream” product A+B
of which A is a component. A “price squeeze” occurs when an
upstream monopolist sells a key input that it controls to a
downstream competitor at a high price, and to its downstream

1
Judgment of the Court (First Chamber), 17 February 2011, Case C-52/09, Konkurrensverket v.
TeliaSonera Sverige AB.

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customers at a low price, such that the downstream competitors are
effectively “squeezed” out of the downstream market.

The doctrinal and jurisprudential analysis of margin squeeze clearly

diverges between two basic approaches: the one considering this
pricing policy as a form of the classical ‘refusal to deal’ abuse and the
one which considers the margin squeeze as a peculiar form of abuse
in itself, a “stand alone” abuse. As we shall now see, after
TeliaSonera clearly seems that the former has prevailed.

As regards the consideration of margin squeeze as an abuse of a

dominant position in the form of a refusal to supply, it follows from
the ECJ’s judgment in Bronner2 that such an abuse may be
committed where an undertaking which is dominant in one
(upstream) market refuses to supply a competitor in a neighbouring
or downstream market with products which are indispensable to
carrying on the competitor’s business, provided that:

(i) the refusal is likely to eliminate all competition on the

market on the part of the person requesting the
product;
(ii) the refusal is incapable of being objectively justified;
(iii) and the product is indispensable to carrying on the
competitor’s business, in the sense that there is no
realistic possibility of creating a potential alternative.

Prior to the judgment we’re debating here, there was a wide

consensus3 in the position that charging a price squeeze which
prevents an efficient competitor from competing downstream works
like a refusal to supply, so the same framework of analysis should be
used.

Regardless the ever-lasting discussion about refusals to deal4 and the

conditions under which is considered anticompetitive and liable under
antitrust rules, it seemed clear from the above that the undertaking’s
conduct should meet an objective test5: it should be anticompetitive
in the market, and not only affect the particular vulnerability of a rival
requesting supply or access.

2
Oscar Bronner GmbH & Co. c. Mediaprint Zeitungs und Zeitschriftenverlag GmbH & Co. KG,
Judgment of EJC, 26 November 1998, Case C-7/97, E.C.R. I-7791; (1999) 4 C.M.L.R. 112.
3
Presentation by MIGUEL DE LA MANO, at the ABA Antitrust Section Spring Meeting 2009, Thoughts
on Margin Squeeze (and Refusal to Supply) held in Washington, 25 March 2009.
4
See, for a comprehensive review of the issues at stake, CRISTOPHE HUMPE and CYRIL RITTER,
“Refusal to supply”, Global Competition Law Centre (College of Europe), Research Paper, June 2005.
5
LANG, T., “Defining Legitimate Competition: Companies’ Duties to Supply Competitors, and Access
to Essential Facilities”, 1994 Fordham Corporate Law Institute 245, B. Hawk ed. (1995), p. 245.

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In addition to this, it shall be noted that in the Deutsche Telekom
case, once the finding of the margin squeeze was ascertained, the
European Commission considered that practice abusive per se and
liable under Article 102 TFEU, regardless of its economic effects
(elimination of competitors detrimental to consumers). When the CFI
endorsed the Commission’s decision, it also clarified that an abusive
margin squeeze is thus “calculated” by means of the so-called
imputation test: the downstream division of the vertically integrated
operator could not trade profitably if it were to buy the upstream
input at the price charged to its downstream competitors.

It is easily understandable why this test is increasingly referred to as

the “equally efficient” or “just as efficient” standard. We shall address
it in regard to TeliaSonera in a following section. However, under
such conceptual framework there was no analysis of whether the
structure of prices had or was highly likely to exclude competitors and
reduce the level of downstream competition. This formalistic
approach jars with the modernisation of EC competition law in other
areas which has moved to an economics, effects based approach.

In few months after the Commission issued its decision in Deutsche

Telekom, this approach was confirmed by a similar case, the
Wanadoo6 decision. Notably, both cases were decided on grounds of
predatory pricing, not on grounds of excessive pricing. The alleged
margin squeeze came not as one would expect from an excessive
wholesale/access price for an essential input (access to the fixed local
loop) but a low retail access price7.

3. The TeliaSonera proceedings.

3.1. The facts.

TeliaSonera, the incumbent telecoms operator in Sweden, had for a

long time owned a metallic access network able in principle to reach
all households in that country. It is the historical operator of the fixed
telephone network and previously enjoyed a State monopoly as
regards the right to determine what equipment was to be used on its
own fixed network.

Apart from providing broadband services on the end-user market

(downstream or retail market), TeliaSonera offered access to its
metallic access network (that is, that part of the telephone network

6
Decision of 16 July 2003, relating to proceeding under Article 82 EC (Case COMP/38.233 – Wanadoo
Interactive).
7
CROCIONI, P. and VELJANOVSKI, C., “Price squeezes, Foreclosure and Competition Law –
Principles and guidelines”, Journal of Network Industries, Vol. 4, 2003, pp. 28-60.

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connecting individual households to the nearest local
telecommunications exchange) to other operators (upstream or
wholesale market) who were also active on the end-user market. Its
competitors accused it of supplying them with a wholesale ADSL
(asymmetric digital subscriber line) product at prices that did not
allow them to compete profitably with TeliaSonera's consumer
broadband offering.

The NCA alleges that TeliaSonera abused its dominant position on the
wholesale market by applying a margin between the wholesale price
for input ADSL products and the retail price for ADSL services it offers
to consumers which would not have been sufficient to cover
TeliaSonera’s incremental costs on the retail market, in the period
from April 2000 to January 2001.

It is important to point out that, in contrast with previous telecoms

cases (such as the ones we’re going to discuss here, Deutsche
Telekom and Telefonica), TeliaSonera was not under any regulatory
obligation to provide the wholesale product, and the product was
arguably not indispensable to competitors. This forced the ECJ to re-
examine the fundamental prerequisites for a finding of margin
squeeze.

Specifically, the questions the referring court has asked in its

preliminary ruling are the following:

(1) Under what conditions does an infringement of Article

102 TFEU arise on the basis of a difference between the
price charged by a vertically integrated dominant
undertaking for the sale of input ADSL products to
competitors on the wholesale market and the price which
the same undertaking charges on the end-user market?
(2) Is it only the prices of the dominant undertaking to end-
users which are relevant or should the prices of
competitors on the end-user market also be taken into
account in the consideration of question 1?
(3) Is the answer to question 1 affected by the fact that the
dominant undertaking does not have any regulatory
obligation to supply on the wholesale market but has,
rather, chosen to do so on its own initiative?
(4) Is an anti-competitive effect required in order for a practice
of the kind described in question 1 to constitute abuse and,
if so, how is that effect to be determined?
(5) Is the answer to question 1 affected by the degree of
market strength enjoyed by the dominant undertaking?
(6) Is the dominant position on both the wholesale market and
the end-user market of the undertaking engaging in the

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 practice required in order for a practice of the kind
described in question 1 to constitute abuse?
(7) For a practice such as that described in question 1 to
constitute abuse, must the product supplied by the
dominant undertaking on the wholesale market be
indispensable to competitors?
(8) Is the answer to question 1 affected by the question
whether the supply is to a new customer?
(9) Must there be an expectation that the dominant
undertaking will be able to recoup the losses it has incurred
in order for a practice of the kind described in question 1 to
constitute abuse?
(10) Is the answer to question 1 affected by the question
whether a change of technology is involved on a market
with a high investment requirement, for example with
regard to reasonable establishment costs and the possible
need to sell at a loss during an establishment phase?

For the sake of time and room saving, we cannot address all of them
in this paper, so we will focus solely in Question 1 –conditions
establishing an abusive margin squeeze-, Question 3 –lack of a
regulatory obligation to supply- and Question 7 –indispensability of
the product- given their relevance to the ECJ’s judgment in this case.

3.2. The Advocate General’s opinion.

Advocate General Mázak delivered its opinion on 2 September 2010,

and in his view margin squeeze should be treated as a form of refusal
to supply that would only arise if the supply was indispensable or if
another abuse was also involved (for example, predatory or excessive
pricing).

For the sake of discussion and clarity in our analysis, prior to deal
with Question 1 of the referring court –and AG conclusion about
them- we consider more appropriate beginning with the other two
issues, the regulatory obligation to supply and the indispensability
test.

As clearly stated in paragraph 13 of AG opinion, and contrary to the

proceedings in Deutsche Telekom v Commission, there was no
regulatory obligation on TeliaSonera to offer input products for ADSL
connections. In addition, as is derived from the order for reference,
the prices for the products in question were not covered by any price
regulation by the Swedish National Regulatory Authority (NRA), either
on the wholesale market or on the retail market.

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Regarding the indispensability nature of TeliaSonera’s facilities, as
clearly stated in paragraph 20 of the AG opinion, the fact arises that
according to the order for reference alternative technologies were
available, coupled with the possibility that TeliaSonera’s network may
have been replicated by its competitors (jointly or severally) and/or
third parties. That alone indicates that the products in question may
not have constituted an indispensable input according to the case-
law. In that regard, it would appear that in its observations the NCA
recognised that in the long term TeliaSonera’s competitors may have
been capable of building their own infrastructure or buying another
form of access.

In paragraph 16 of its opinion, the AG states that one particular

manifestation of a refusal to deal occurs in the case of an abusive
margin squeeze (or ‘constructive refusal to deal’) where, instead of
refusing entirely to supply the essential/indispensable input in
question, the dominant undertaking supplies the input to its
competitors on the downstream market at a price which does not
enable those competitors to compete effectively on the downstream
market. Therefore charging a price (margin squeeze) which prevents
an as-efficient competitor from competing downstream operates in
effect as a refusal to deal and implies that the same framework of
analysis and the general concerns about the incentives of dominant
undertakings to invest should apply.

However, and as we shall examine in the concluding section of this

paper, in its Telefonica decision the Commission rejected the
application of the Bronner conditions in the assessment of legality of
the incumbent’s conduct due to ‘the particular circumstances of this
case which fundamentally differ from those in Bronner’. The so-called
Telefonica exceptions are discussed later, and we consider them
wrong and unjust.

We now turn back to Mr. Mázak’s approach, that margin squeezes

and refusal to deal have the same rationale. Following this line of
reasoning, since there was no regulatory obligation to supply and the
wholesale product was not indispensable, the necessary conclusion is
that if a dominant company could lawfully have refused to provide the
products in question, why should it be reproached for providing those
products at conditions which its competitors might not consider
advantageous? (See paragraph 21 of the AG Conclusion).

This conclusion is explicitly set in paragraph 29:

“Therefore it follows from all the foregoing

considerations that if there is no regulatory obligation
compatible with EU law on a dominant undertaking to
supply the products in question or if those products are

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 not indispensable then that undertaking should in
principle not be charged with an abusive margin squeeze
simply on the basis of the insufficient spread between
wholesale and retail prices”.

However, as we shall turn to in the following section, the ECJ roundly

rejected this approach. Policy considerations carried the day: if
margin squeeze were merely a form of constructive refusal to supply,
the European Commission would need to apply the stringent refusal
to supply requirements each time a pricing abuse of this sort was
alleged.

Allegedly, this would “unduly reduce the effectiveness of Article 102

of the Treaty on the Functioning of the European Union” (Paragraph
58), which prohibits the abuse by companies of their dominant
market position in the EU, or a substantial part of the EU. Why?
Frankly, we can not find a coherent explanation for this statement.

Instead, and according to ECJ’s saying, margin squeeze should be

treated as an abuse in its own right. We turn to a more detailed
analysis of this judgment in the following section.

4. The ECJ’s approach to margin squeeze.

There are many –and all of them quite significant- issues discussed in
the ECJ’s ruling in the TeliaSonera case; however, we are only going
to focus here on the ones we consider more relevant to the topic
we’re analysing, margin squeeze, and more broadly, abuse of
dominant position under EC Competition Law.

Therefore we shall only comment the ECJ’s judgment on the following

issues:

(i) Firstly, the scope of abuse of dominant position, in the

framework set by the Commission in its 2008
guidance of its enforcement priorities. This basically
consists in asking ourselves one single question: what
about the anticompetitive effect?
(ii) Secondly, the “equally efficient competitor” test, and,
in this regard, which prices and costs should be taken
into account, the dominant undertaking’s or its
competitor’s.
(iii) And finally, what we consider the core saying of ECJ’s
ruling, should margin squeeze be treated as an
abusive practice in itself?

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4.1. What about the anticompetitive effect?

It may be said that, arguably, the ECJ's approach goes beyond the
Commission’s 2008 Guidance on its enforcement priorities; this
assertion is founded in the significant fact that in those priorities
refusal to supply and margin squeeze are placed in the same section8.

In its Deutsche Telekom AG v Commission judgment9, the ECJ made

it clear that margin squeeze is not a "per se" abuse: anti-competitive
effect is needed before the pricing practice will amount to an abusive
margin squeeze. In TeliaSonera, the ECJ explained that this effect
need not be concrete and may arise when a practice potentially
excludes competitors that are at least as efficient as the dominant
undertaking:

“It follows that, in order to establish whether such a

practice is abusive, that practice must have an anti-
competitive effect on the market, but the effect does not
necessarily have to be concrete, and it is sufficient to
demonstrate that there is an anti-competitive effect
which may potentially exclude competitors who are at
least as efficient as the dominant undertaking”
(Paragraph 64).

One might be excused for thinking that this approach results in

margin squeeze being not much different from a per se infringement.

Thankfully, the ECJ went further still by clarifying (paragraph 66) that
in the absence of any effect on the competitive situation of
competitors, a margin squeeze cannot be classified as an
exclusionary practice and consequently there will be no infringement
if such pricing policy does not make penetration by the competitors in
the market any more difficult.

Two factors in particular should be taken into consideration when

assessing its anti-competitive effect:

 The functional relationship between the wholesale product and

the retail product (paragraph 69). An anti-competitive effect is
probable if the wholesale product is indispensable to
competitors' retail products, although an abusive margin
squeeze cannot be excluded even if there are alternatives
available for the wholesale product.

8
Communication from the Commission – Guidance on the Commission’s enforcement priorities in
applying Article [102 TFEU] to abusive exclusionary conduct by dominant undertakings (2009/C 45/02),
OJ 2009 C 45.
9
Case T-271/03 Deutsche Telekom v Commission [2008] ECR II-477

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  The level of the margin squeeze (paragraph 73). If the margin
is negative (that is, if the wholesale price is higher than the
retail price charged to end users; sometimes referred to as a
"margin crush") an exclusionary effect is probable, since even a
more efficient company may be compelled to sell at a loss.
Again, the absence of a negative margin does not mean that
there is no anti-competitive effect. It is just that more will be
needed to demonstrate it.

The ECJ also reiterated –again, thankfully- that an ostensible margin

squeeze may be capable of economic justification by the dominant
undertaking. Even a dominant company remains at liberty to
demonstrate that its pricing practice, albeit producing an exclusionary
effect, is economically justified (Paragraph 75). It is always necessary
to look at the overall impact on the market and consumers and the
assessment should take into account all the circumstances of the
case.

So, although the ECJ has adopted a broader test for margin squeeze
than the AG proposed, there are still signs of the ECJ adopting a more
rigorously economic analysis, and therefore not fully departing from
the Commission’s views as expressed in its Guidance paper on Art.
102 TFUE.

The ECJ also appears to have put paid to any thinking that the level
of market power (so called "super-dominance") can affect whether an
abuse has been committed. It clarified that the degree of a
company’s market power can speak to the extent of effects, as
opposed to whether or not the abuse exists. It notes (paragraph 81):

“Of course, that does not mean that an undertaking’s

strength is not relevant to the assessment of the
lawfulness of the conduct in the market of such an
undertaking in the light of Article 102 TFEU (…).
Nonetheless the degree of market strength is, as a general
rule, significant in relation to the extent of the effects of
the conduct of the undertaking concerned rather than in
relation to the question of whether the abuse as such
exists”.

4.2. The “equally efficient competitor” test.

The ECJ repeated its conclusion in Deutsche Telekom that, in general,

an abuse only arises where the margin squeeze has an exclusionary
effect on an "equally efficient competitor", and that account should be
taken of the prices and costs of the dominant company on the retail

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market (paragraph 44). In other words, would the dominant
company, in light of its own internal costs, be able to make a profit if
it were to obtain the wholesale inputs at the same prices as it is
making available to its rivals?

However, the ECJ did consider (paragraph 45) that the costs and
prices of competitors can sometimes be appropriate comparators,
including where the particular market conditions of competition
dictate it (for example, because the level of the dominant company’s
costs is specifically attributable to the "competitively advantageous
situation" in which its dominant position places it).

Following what has been said above, the door has been left open for
an "adjusted equally efficient operator" test in some circumstances,
such as where former state-owned monopolies have gained
unmatchable advantages from their historic position.

Under Article 102 claims we consider essential to introduce such test,

generally, and for the specific assessment of margin squeeze abuses.
It is the only effective way to distinguish when the lack of workable
competition in the downstream market (retail sale) is consequence of
the anticompetitive and eliminatory practices of the dominant
undertaking in the upstream market (wholesale provision of service)
or simply because of the lack of competitiveness of the downstream
competitors.

As such is understood in the Discussion Paper, being this “equally

efficient competitor” test pivotal in its assessment of exclusionary
practices:

“As regards pricing behaviour a certain conduct may have

different exclusionary effects depending on how efficient
the rivals are. A very efficient rival may be able to thrive
in a market where the dominant company prices in a
certain way, while a less efficient rival may be excluded
from the market. The more detailed principles described
in this paper for assessing alleged price based
exclusionary conduct are based on the premise that in
general only conduct which would exclude a hypothetical
“as efficient” competitor is abusive. The “as efficient”
competitor is a hypothetical competitor having the same
costs as the dominant company. Foreclosure of an as
efficient competitor can in general only result if the
dominant company prices below its own costs” (Recital n.
63).

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In addition to this, the ECJ noted that TeliaSonera's alleged
dominance was in a very mature market, with the alleged abuse
relating to a rapidly growing market. Rather than show lenience, the
ECJ considered that it was precisely in such circumstances that a
margin squeeze might restrict competition, so action must be taken
“as quickly as possible” (paragraph 108)

The Commission may interpret these comments as an endorsement

of its policy of focusing its Article 102 efforts on high-tech markets
(to safeguard the possibility of follow-on innovation in related
markets), and validation of its scepticism that regulatory intervention
chills innovation.

4.3. Margin squeeze, an abusive practice in itself?

TeliaSonera confirms that an abusive margin squeeze can occur

under EU competition law without the need for the wholesale price to
be excessive or for the retail price to be predatory. The wholesale
product need not even be indispensable to the retail product.

Interestingly, not only this approach radically diverges from AG

Conclusions, from the Commission’s Guidance Paper on art. 102
TFEU, but also contrasts with US law, where –following the Trinko
jurisprudential approach- margin squeeze has been narrowed so that
it only arises when there is both a duty to deal at the wholesale level
and predatory pricing at the retail level.

We have discussed the diverging approaches in both sides of the

Atlantic to margin squeeze somewhere else10, so we are not going to
reproduce the debate here. However, it’s important to pay close
attention to the ECJ’s departure from the AG opinion.

As we have previously noted, in his opinion (See paragraphs 21 and

29 of the AG Conclusion), since there was no regulatory obligation to
supply and the wholesale product was not indispensable, the
necessary conclusion is that if a dominant company could lawfully
have refused to provide the products in question, why should it be
reproached for providing those products at conditions which its
competitors might not consider advantageous?

As we have already pointed out, this sort of reasoning seems to

mirror the one expressed by US Supreme Court in the Trinko and
linkLine decisions. In the former11 the Supreme Court held that a firm

10
DÍEZ ESTELLA, F., Telecoms Regulation, Antitrust and Margin Squeeze: Widening the Already Wide
Gap between US and EU Competition Policy? (2011). Available at: http://ssrn.com/abstract=1828723
11
Verizon Communications Inc. v. Law Offices of Curtis v. Trinko, LLP , 540 U.S. 398 (2004)

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with no antitrust duty to deal with its rivals has no obligation to
provide those rivals with a “sufficient” level of service. The later12 was
decided accordingly, and the Court substantially foreclosed price-
squeeze claims under U.S. antitrust law where a vertically integrated
defendant has no clear antitrust duty to deal with its retail
competitors at wholesale.

In both linkLine and Trinko, the defendant was under a regulatory

obligation to deal with competitors, but not an independent antitrust
duty to deal.

In Trinko, Verizon was required by the federal Communications Act to

lease its network elements to competing firms at wholesale rates. The
Trinko plaintiffs asserted that Verizon denied its competitors access to
its interconnection support services, making it difficult for its
competitors to fill their customers' orders. The Supreme Court's
decision in Trinko held that the because Verizon had no antitrust duty
to deal at wholesale with its rivals at all, claims of a denial of access
to interconnection support services under terms and conditions that
the rivals find commercially advantageous were not actionable under
Section 2 of the Sherman Act.

In linkLine, the Court reasoned that a “straightforward application” of

its decision in Trinko foreclosed any challenge to AT&T's wholesale
prices, where AT&T had no antitrust (as opposed to regulatory) duty
to deal with its competitors at wholesale.

The Court next stated that the other component of a price-squeeze

claim is the assertion that the defendant's retail prices are too low.
But in order to avoid chilling aggressive price competition, which
benefits consumers, the Court has carefully limited the circumstances
under which plaintiffs can state a violation of the antitrust laws by
alleging that the defendant's prices are too low—most notably, the
stringent predatory pricing test set forth in Brooke Group13.

Again, this approach is the exact opposite to the one taken by the
ECJ in TeliaSonera, and to the views expressed by the ECJ itself in its
France Telekom ruling, where, in a similar case of providing access to
its ADSL network to a competing operator in the retail market, the
French incumbent was found guilty of an abusive conduct consisting
in pricing below cost, that is, predatory pricing14.

12
Pacific Bell Telephone Co., d/b/a AT&T California v. LinkLine Communications, Inc., Slip Opinion,
October Term 2008 (555 U.S. ____ ), available at: http://www.supremecourtus.gov/opinions/08pdf/07-
512.pdf
13
Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993).
14
Judgment of European Court of Justice (First Chamber), 2 April 2009, Case C-202/07 P, France
Télécom v. Commission.

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The US Supreme Court goes on with its discussion with a sweeping
restatement of the aged Colgate doctrine that except in “rare
instances (…) businesses are free to choose the parties with whom
they will deal, as well as the prices, terms and conditions of that
dealing”15. It refers to two possible exceptions but quickly notes that
neither is present in this case: (i) “predatory pricing,” defined in
Brooke Group as “below cost prices that drive rivals out of the market
and allow the monopolist to raise its prices later and recoup its
losses” and (ii) the possibility, citing Aspen Skiing, that in unspecified
“limited circumstances” a monopolist may have a “duty to deal” with
its competitors16.

Relying centrally on its prior decisions in Brooke Group and Trinko,

the Court frames the issue as “whether such a price-squeeze claim
may be brought under § 2 of the Sherman Act when the defendant is
under no antitrust obligation to sell the inputs to the plaintiff in the
first place”17. The Court holds that such a claim may not be brought,
reasoning that a “price squeeze” involves unilateral pricing decisions
at two levels, wholesale and retail, and that each of these markets
must be analyzed separately.

First, with respect to the wholesale level, the Court points out the
District Court had held AT&T had no “antitrust duty to deal,” the
Court of Appeals had “assumed that any duty to deal arose only from
FCC regulations,” and the question on which the Court granted
certiorari “made the same assumption.” Thus, given the absence of
any antitrust duty to deal at the wholesale level, there can be no
violation based on unilateral pricing decisions at wholesale, for:

“Trinko . . . makes clear that if a firm has no antitrust duty

to deal with its competitors at wholesale, it certainly has
no duty to deal under terms and conditions that the rivals
find commercially advantageous”18.

In this respect, just recall once more what AG Mázak wrote in

Paragraph 21 of its opinion:

“If a dominant company could lawfully have refused to

provide the products in question, then it should not be
reproached for providing those products at conditions
which its competitors might not consider advantageous”.

15
linkLine, slip Op., at 7, citing United States v. Colgate & Co., 250 U.S. 300, 307 (1919).
16
Id. at 8, citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 US 585, 608-611 (1985).
17
Id. at 9.
18
Id. at 9.

Electronic copy available at: https://ssrn.com/abstract=1851315

Second with respect to the retail component of the “price squeeze”
allegation (i.e., that defendants’ prices were too low), the Court starts
by expressing continued scepticism about any antitrust theory of
liability that would challenge prices as being too low, and concludes
that absent a Brooke Group “predatory pricing” allegation, there can
be no antitrust violation for defendants’ unilateral pricing in the retail
market19.

The Court thus quickly concludes that plaintiffs’ price-squeeze claim,

looking to the relation between retail and wholesale prices, is thus
nothing more than an amalgamation of a merit-less claim at the retail
level, and a merit-less claim at the wholesale level. linkLine's
complaint contained no allegation that AT&T's conduct met the
Brooke Group test. In this regard, the Court announced what
undoubtedly its core holding is20:

“[I]f there is no duty to deal at the wholesale level and no

predatory pricing at the retail level, then a firm is certainly
not required to price both of these services in a manner
that preserves its rivals' profit margins.”

Therefore, and unfortunately, the ECJ's judgment in TeliaSonera

confirms that dominant companies in the EU are more exposed than
their US counterparts to allegations of margin squeeze; perhaps even
more exposed than the Commission itself believed at one point in
time.

Disregarding (paragraph 55) the application of the Bronner standard

to an allegedly abusive margin squeeze conduct, the ECJ goes on
saying (paragraph 56) that “such conduct may, in itself, constitute an
independent form of abuse distinct from that of refusal to supply”, to
conclude, evidently bearing in mind policy rather than strictly
antitrust considerations:

“Moreover, if Bronner were to be interpreted otherwise, in

the way advocated by TeliaSonera, that would, as
submitted by the European Commission, amount to a
requirement that before any conduct of a dominant
undertaking in relation to its terms of trade could be
regarded as abusive the conditions to be met to establish
that there was a refusal to supply would in every case
have to be satisfied, and that would unduly reduce the
effectiveness of Article 102 TFEU” (paragraph 58).

19
Id. at 11.
20
Id. at 12.

Electronic copy available at: https://ssrn.com/abstract=1851315

Finally, the ECJ's approach may raise questions as to the extent to
which dominant companies should rely on the Commission’s
guidance, which would further increase uncertainty in this complex
area of competition law.

Indeed, in its Guidance Paper on Article 102 TFEU, the Commission

analysed refusal to supply and margin squeeze under the same
section, which from an analytically point of view, seems to us the
correct framework. It also recognized that for these practices to be
prohibited under Article 102 TFEU, the conditions defined by the ECJ
in Bronner must be met, including a determination that the refusal in
question “relates to a product or service that is objectively necessary
to be able to compete effectively on a downstream market”21.

How then should dominant operators now interpret the Commission’s

Guidance Paper on Article 102 TFEU? If the ECJ’s ruling in
TeliaSonera runs in precisely the opposite way, regarding abusive
margin squeeze, how are they supposed to conform their pricing
policies and access to their network to downstream competitors?

5. Wider implications: bad omen for Telefonica’s appeal?

The European Commission's decision Telefonica22 deals with the

Spanish incumbent’s price structure as reflected by the difference
between its wholesale and retail prices. It’s this difference and not
the specific level of the retail and /or wholesale prices which is of
importance in margin squeeze cases. The full analysis of the technical
issues involved in such a finding is a very lengthy and complicated
matter23 consequently, its exhaustive account falls outside the scope
of this paper.

However, all the abovementioned considerations, the judgment’s

wording and its underlying message at least hint at a more nuanced
approach as to whether competition has been harmed, and the
standard of proof applied by the Commission and EU courts in price
squeeze cases.

In its Guidance Paper on Article 102 TFEU, the Commission

established three conditions24 that in its view must normally be
satisfied before a “refusal to deal” or “margin squeeze” may be

21
Guidance Paper, supra note 8, at § 80.
22
European Commission Decision of 4 July 2007, regarding a proceeding under Article 82 EC Treaty
(Case COMP/38.784 – Wanadoo España v. Telefonica).
23
Vid., for a detailed analysis, FERNÁNDEZ ÁLVAREZ-LABRADOR, M., “Margin Squeeze in the
Telecommunications Sector: An Economic Overview”, World Competition, 29 (2), 2006.
24
We have already discussed them in Section 2, above.

Electronic copy available at: https://ssrn.com/abstract=1851315

considered contrary to Article 102 TFEU, mirroring those established
by the European Court of Justice in the Bronner case.

(i) the refusal is likely to eliminate all competition on the

market on the part of the person requesting the product;
(ii) the refusal is incapable of being objectively justified; and
(iii) the product is indispensable to carrying on the
competitor’s business, in the sense that there is no
realistic possibility of creating a potential alternative.

However, in its Telefónica decision, the Commission departs from the

initial view of its own initial approach and that of EU courts to apply
standards of refusal to deal to price squeeze cases. It took the view
that in the circumstances of that case it did not have to prove that
these conditions were satisfied before concluding that there was an
abusive margin squeeze, as the particular circumstances of the
Telefónica case were fundamentally different from those in Bronner.
These “particular circumstances” were:

 Spanish and EU telecommunications law already imposed on

Telefónica an obligation to supply and it was clear, from the
considerations underlying such regulation, that the necessary
balancing of incentives had already been made by the public
authority when imposing such an obligation to supply ; and

 Telefonica’s infrastructure was to a large extent the fruit of

investments that were undertaken well before the advent of
broadband in Spain and were undertaken in a context where
Telefónica was benefiting from special or exclusive rights that
shielded it from competition25.

So, to sum up, the Commission’s view now is that price squeeze is a
“stand alone” abuse and, therefore, the standard of proof is more
focused on the insufficient margin left to competitors to “survive”.

Interestingly, AG Mázak deals extensively with these two “particular

circumstances” in its Opinion for the ECJ in the TeliaSonera case,
when assessing –applied, of course, to the proceedings referred by
the Sweden antitrust authority- the lack of regulatory duty to deal in
the providing of broadband access to ADSL (paragraph 17) and
TeliaSonera’s allegedly special situation (paragraph 24).

He first points out (paragraph 16) that the Commission, in the

Telefónica decision has rejected the application of the Bronner
conditions in the assessment of legality of the incumbent’s conduct

25
See Telefónica Decision, paragraph 302.

Electronic copy available at: https://ssrn.com/abstract=1851315

due to ‘the particular circumstances of this case, which fundamentally
differ from those in Bronner. Nevertheless, he also notes that the
Commission has reviewed the facts using a “Bronner-type analysis”.

This clearly incoherent line of reasoning in the Commission or in the

way AG Mázak reads the Commission’s decision is somehow
disturbing.

We can draw here a first conclusion of the TeliaSonera doctrine,

namely that the “Telefónica exceptions” (as the most recent and
sound scholarship has called them)26 may not make sense and may
not be justified from an EU law standpoint. On the contrary, for some
commentators, their application could lead to negative consequences
in particular by chilling innovation, as well as forcing a vertically-
integrated dominant firm to give access to its infrastructure even
when this access is not “essential” within the meaning of the refusal
to deal case law of the ECJ.

This is why, after mentioning this “particular circumstances”, AG

Mázak goes to develop his opinion on the issue of whether the access
to TeliaSonera’s network is “essential”, indispensable, in the
abovementioned meaning of case law in EU antitrust jurisprudence,
and points out (paragraph 19) that a number of alternative
technologies were available to provide end-users with broadband
services, that TeliaSonera’s network may have been replicated by its
competitors.

That indisputable fact, coupled with the lack of regulatory duty to

deal, leads him to conclude (paragraph 21) that if a dominant
undertaking could lawfully have refused to provide the products in
question, then it should not be reproached for providing those
products at conditions which its competitors may consider not
advantageous. Indeed –this is interesting- “it is difficult to see how in
such a case the alleged insufficient margin could be anti-competitive”.

So, to the question referred by the Stockholm District Court to the

ECJ, concerning whether to constitute abuse under Article 102 TFEU,
the product supplied by the dominant undertaking on the wholesale
market must be “indispensable” to downstream competitors, AG
Mazák answered that the indispensability of TeliaSonera needed to be
established except “where the dominant undertaking is subject to a
regulatory obligation compatible with EU law to supply the wholesale
products” (paragraph 58). It is fair to conclude then, that AG Mazák
endorsed the first Telefónica “exception”.

26
GERADIN, D., “Refusal to supply and margin squeeze: A Discussion of why the ‘Telefonica
exceptions’ are wrong” (January 28, 2011), Available at http://ssrn.com/abstract=1762687.

Electronic copy available at: https://ssrn.com/abstract=1851315

It is also arguably, however, that he took what can be labelled as a
more “cautious” attitude towards the second “especial circumstance”
identified by the Commission in its decision. When the Sweden
antitrust authority issued its preliminary ruling, the NCA and the
Commission had argued that TeliaSonera’s situation was special –as
well as Telefonica’s- because its upstream market position had
allegedly been developed under the protection of special or exclusive
rights or had been financed by State resources. Echoing AG Jacobs in
its Opinion in the Bronner case, AG Mazák acknowledged (paragraph
27) the importance of the fact that basic property rights affect
incentives to make investments, as well as the fact that such rights
are recognised in the legal systems of the Member States and in
some they have constitutional status.

In addition, AG Mazák noted that it had been argued that it was not
clear why a public source of funding for property should lead to a
stricter legal standard. The reason is that Article 102 TFEU does not
allow a distinction to be made between public and private funding.

Whether misguided or not, flawed or not, these so-called “exceptions”

are nevertheless endorsed by the Commission in the Guidance Paper
on art. 102 TFUE, when it says that27 “in certain specific cases, it may
be clear that imposing an obligation to supply is manifestly not
capable of having negative effects on the input owner's and/or other
operators’ incentives to invest and innovate upstream, whether ex
ante or ex post”.

In Telefónica, the Commission should have demonstrated that the

conditions set in the Bronner were present. Since it looks like a quite
indisputable fact that there did not seem to be a serious alternative
to Telefonica’s broadband network28, hence these exceptions merely
allowed the Commission to take a shortcut in its analysis. This
approach is, at least, a dangerous road to take, because of a series of
reasons.

First of all, over the years the number of Article 102 TFEU
investigations has increased significantly at the EU Commission level,
and so the amount of fines imposed for abusive conduct. As regards

27
Guidance Paper, supra note 8, at § 81.
28
Of course, Telefonica does dispute this assertion, arguing that: (i) there were real and/or potential
alternatives to the regional and national wholesale access services of Telefónica, (ii) the regional and
national wholesale access services of Telefónica could be replicated and (iii) the alleged conduct was not
likely to eliminate all competition on the downstream market. Telefónica concluded that given the fact it
was not obliged under Article 102 TFEU to grant access to its own network, it was illogical, and legally
unjustified, to maintain that its pricing policy concerning its national and regional wholesale products was
nonetheless subject to 102 TFEU on the mere ground that these wholesale products had been offered to
competitors as a result of a regulatory obligation (Wanadoo España vs. Telefónica, supra note 22, at §
301). Whether this approach prevails or not, remains to be seen, and the ECJ will say in its forthcoming
judgment dealing with Telefonica’s appeal to the Commission decision.

Electronic copy available at: https://ssrn.com/abstract=1851315

margin squeeze abuses, both the number of cases and the amount of
the fines imposed has increased also significantly. Does this trend
implicate that the Commission and/or EU courts are alleviating the
standard of proof in Article 102 TFEU cases? Hopefully, not, whereas
this sort of “shortcut” adopted in Telefonica shows otherwise.

Secondly, since there is no trace of any such exception in the case-

law of the ECJ on refusals to deal and it is not for the Commission to
set aside the legal tests adopted by the Court. This case law is based
on the premise that as a matter of law an obligation to deal can only
be imposed in “exceptional circumstances”. Nothing in the case law
suggests that the strict conditions imposed in Bronner and previous
and subsequent refusal to deal cases may be disregarded when an
obligation to deal has been imposed by a regulatory authority based
on a different set of objectives29, pursuant to different standards, and
to which is attached different consequences.

In addition to it, the way EU Commission is dealing with the already

complicated interface between ‘regulation’ and ‘antitrust’ is certainly
not enlightened by this sort of approach. As pointed out by some
authors “they seem to open for a remarkable intrusion into the
commercial freedom of dominant firms, which could negatively affect
their incentives to invest and innovate”30.

Finally, they could also lead to fundamentally misguided Article 102

decisions either when National Regulation Authorities have not
conducted a proper sectorial analysis or when there is an important
time lag between the moment this analysis was conducted and the
moment at which the Commission’s assessment of a dominant firm’s
conduct takes place with the consequence that market circumstances
may have significantly changed.

So, unless the ECJ follows AG Mazák Opinion in TeliaSonera rather

than the 2011 ruling of the First Chamber, the perspectives for
success in Telefonica’s appeal are not to be optimistically expected.

29
GERADIN, D. and O’DONOGHUE, R., “The Concurrent Application of Competition Law and
Regulation: The Case of Margin Squeeze Abuses in the Telecommunications Sector”, [2005] Journal of
Competition Law and Economics 1(2), 355-425.
30
G. FAELLA and R. PARDOLESI, “Squeezing Price Squeeze under EC Antitrust Law”, September
2009, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1478937

Electronic copy available at: https://ssrn.com/abstract=1851315

References

CROCIONI, P. and VELJANOVSKI, C., “Price squeezes, Foreclosure

and Competition Law – Principles and guidelines”, Journal of Network
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DE LA MANO, M., Presentation at the ABA Antitrust Section Spring

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Electronic copy available at: https://ssrn.com/abstract=1851315