SWEDEN’S MARGIN SQUEEZING ACTION- THE TELIASONERA STORY

Early this month, the Stockholm City Court fined telecoms company TeliaSonera 144 million krone (€16million) for abusing its dominant position by squeezing its competitors’ margins. The Swedish Competition Authority dictated the amount after it gave a statement that it was one of the most important matters relating to abuse that they dealt with since the 1990s. The Competition Authority commenced the proceedings against the company in 2004 in the City Court for abusive action in the retail market for resale services for ADSL connections during the period from 2000-2003. The proceedings had been pending until last week since the City Court had requested a preliminary ruling from the European Court of Justice (ECJ) in 2009 on the interpretation of Article 102 TFEU (Formerly Article 82 EC).

Brief Overview of the Facts: At the end of the 1990s and the beginning of the 2000s, a growing number of Swedish end users of internet services moved from dial-up internet connections, with low transmission speeds, to various types of broadband connection with considerably higher transmission speeds. At that time the most widespread form of broadband connection was that achieved by asymmetric digital subscriber line (‘ADSL’). Telia­Son­era is the Swedish fixed tele­phone net­work oper­a­tor, and was the owner of the local loop to which almost all Swedish households are connected. It offered access to the local loop to other operators, in two ways. On the one hand, it offered unbundled access, in accordance with its obligations under Regulation (EC) No 2887/2000 of the European Parliament and of the Council of 18 December 2000 on unbundled access to the local loop (OJ 2000 L 336, p. 4). On the other hand, without being legally obliged to do so (hence unregulated), it offered to operators an ADSL product intended for wholesale users. At the same time, TeliaSonera offered broadband connection services directly to end-users. It was alleged by the Swedish Competition Authority that TeliaSonera was setting its wholesale/retail price spread so as to foreclose its competitors in the downstream market for end-user broadband connection.

Decision: In order to determine the nature and extent of abuse of a margin squeeze action by a dominant market player, the ECJ referred to the Deutsche Telekom v Commission case. It stated that a margin squeeze, in view of the exclusionary effect which it may create for competitors who are as efficient as the dominant undertaking, in the absence of any objective justification, is in itself capable of constituting an abuse within the meaning of Article 102 TFEU. It further stated that when such a dominant undertaking adopts abusive pricing tactics to drive efficient competitors out of the market and they cannot withstand such anticompetitive behaviour owing to their smaller financial resources, the former has abused its dominant position. Accordingly, the ECJ held that, in the present case there is such a margin squeeze since the spread between the wholesale prices for ADSL input services and the retail prices for broadband connection services to end users were either negative or insufficient to cover the specific costs of the ADSL input services which TeliaSonera has to incur in order to supply its own retail services to end users, so that that spread does not allow a competitor which is as efficient as that undertaking to compete for the supply of those services to end users.

However, the decision of the ECJ in this case has received much prominence because of its take on three very important issues. First, treatment of margin squeezing in the absence of any regulatory obligation to supply, second, its finding that margin squeezing is a separate category of infringement and merely a form of refusal to supply and third, that effect of indispensability of the input in establishing a case of abuse of dominance.

The ECJ came to a decision that a margin squeeze constitutes an abuse of dominance, contrary to article 102 TFEU even when the dominant market player does not have any obligation to supply its product to the downstream market. The reasoning accorded by the Court was that Article 102 TFEU applies if it is found that the national legislation does not preclude undertakings from engaging in autonomous conduct which prevents, restricts or distorts competition. This view was taken keeping in mind the decision in Commission and France v Ladbroke Racing, where it was held that, if anti-competitive conduct is required of undertakings by national legislation or if the latter creates a legal framework which itself eliminates any possibility of competitive activity on their part, Article 102 TFEU does not apply. In such a situation, the restriction of competition is not attributable, as those provisions implicitly require, to the autonomous conduct of the undertakings. Further, it was held in the Deutsche Telekom v Commission case that if a dominant vertically integrated undertaking has scope to adjust even its retail prices alone, the margin squeeze may on that ground alone be attributable to it. Therefore, the Court held in the present case that, the absence of any regulatory obligation to supply the ADSL input services on the wholesale market has no effect on the question of whether the pricing practice at issue in the main proceedings is abusive. This judgment thus defined a broader scope for margin squeezing even in the absence of a regulatory duty to deal.

The ECJ further rejected the argument that a margin squeeze action is a form of refusal to supply and held that it constitutes a stand-alone abuse. The Court stated that the conditions to determine margin squeezing and refusal to supply are not the same and such an understanding drawn by TeliaSonera while interpreting the Bronner case was inaccurate. Lastly, the Court also held that inorder to establish a case of abuse of dominance it is not necessary to show that the dominant player in the upstream market provides an input that is indispensible to the downstream competitor to compete. It is simply enough, if the market player holds a dominant position and the indispensible nature of the input is immaterial to determine abuse of dominant position by way of margin squeezing.

Based on all its findings, the ECJ held that TeliaSonera has abused its dominant position by imposing abusive prices on wholesale and retail broadband services such that there was an insufficient margin between the wholesale price and the price for private customers to cover Telia Sonera’s own costs of selling broadband to private customers. The City Court adopted a similar view and stated that in several cases the company had even applied a higher price in relation to its competitors than in relation to private customers. This margin squeeze restricted the opportunity for Telia Sonera’s competitors within dial-up Internet to expand in the broadband market and delayed their entry into the market. Thus, they had to sell either at a loss or with profitability that was so low that they could not engage in active marketing in order to win new customers.

While this judgment has been well received by the Swedish Competition Authority, the Advocate General has opined that such an approach may risk reducing incentives to invest in developing infrastructure and increases the risk to increase retail prices. The judgment of the City Court can however be appealed to the Market Court, which is the highest instance for competition cases.

[This post has been authored by Vidyullatha Kishor, a student of 5th Year, B.A. LL.B. (Hons.) at the W.B. National University of Juridical Sciences]

DLF Receives Temporary Relief in Abuse Of Dominance Case

DLF, India’s largest real estate company, experienced a temporary relief on 10th November, 2011, when the Competition Appellate Tribunal stayed the Rs. 630-crore penalty imposed upon it by the Competition Commission of India in August, pursuant to complaints regarding abuse of market position by the Company.

Abuse of dominant market position occurs where a firm holds a position of such economic strength that allows it to operate in a market without being significantly affected by competition and it engages in conduct that is likely to impede the development or maintenance of effective competition as well as negatively impact the consumers. The law in India, under section 4 of the Competition Act of 2002 clearly specifies that “no enterprise shall abuse its dominant position”. However, having a dominant position does not in itself breach competition law; it is only the abuse of that position that is prohibited. The section also states that there shall be an abuse of dominant position if an enterprise imposes unfair or discriminatory conditions or prices in the purchase or sale of goods or provision of services.

The DLF case relates to the complaint filed by the Belaire Owners’ Association in Gurgaon in May 2010, in response to DLF having extended the deadline by which the possession of the apartments was to be given to the consumers. They also alleged that the Company had unilaterally changed the building plans and imposed unfair and discriminatory conditions in the apartment agreements. Deciding in favour of consumers, the CCI was of the opinion that that the Apartment Agreements imposed conditions that were unfair and discriminatory towards the consumers and which were altered or included unilaterally by DLF for its own benefit and to the detriment of the allottees. It held that DLF, by placing the discriminatory and abusive clauses in the Apartment Agreements was guilty of abusing its dominant position. Imposing a penalty of Rs. 630 crore (the highest penalty ever imposed by it), the Commission stated that “The abuse of dominant position in this case is in respect of the basic necessity of housing. The earlier deliberation on the elements and extent of abuse make it clear that DLF has been grossly abusing its dominant position, and that too against a vulnerable section of consumers, who have little ability to act or organize against such abuse. The penalty, therefore, has to be commensurate with the severity of the violation through such blatant abuse of dominance”.

On appeal by the Company, the Competition Appellate Tribunal, granting a temporary relief to it, stayed the historic penalty, asking both sides to file their draft of the proposed modification to the contentious clauses that were part of the buyers' agreement (which made the agreement one-sided) within eight weeks, subsequent to which the Tribunal will finally hear the parties in February of next year and render a decision.

[This post has been authored by Payel Chatterjee, Student, 5th Year, B.A./B.Sc. LL.B., WBNUJS]

Run Out of Beverage Options During a Movie Interval ?? No Relief as CCI Rules Such Exclusive Supply Agreements Are Not Per Se Anti – Competitive

Consumers Guidance Society v. Coca Cola and INOX

The Competition Act, 2002 officially replaced the erstwhile Monopolies and Restrictive Trade Practices Act, 1969 (‘the MRTP Act’) via a Government notification dated 28th August 2009. Thus, even though the Competition Act was passed way back in the year 2002, it was notified in 2003 and further amended in 2007 to be officially brought into operation only as late as September 1, 2009. All this while, all cases relating to monopolistic / restrictive trade practices were being heard by the MRTP Commission under the repealed MRTP Act. With section 66 of the Competition Act being duly notified with effect from 1 September 2009 onwards, all pending investigations and proceedings by the Director General under the MRTP Act relating to monopolistic / restrictive trade practices have been transferred {as is the case at hand under section 66(6)} to the Competition Commission of India (CCI).

This pre September 2009 issue relates to a complaint filed by the Consumers Guidance Society, Vijayawada before the erstwhile Monopolies and Restrictive Trade Practices Commission (MRTPC) against Inox Leisure Private Limited (ILL), a company which operates multiplexes across various locations in India. The Commission delivered its final order on 23rd May 2011.

What are Exclusive Supply Agreements?
These prevent a purchaser from acquiring products from any other person apart from the manufacturer solely. These are usually held to be anti-competitive because they preclude a competitor’s products from being available widely and hence limit supply and competition. This post covers the CCI’s never-before-seen attitude towards such agreements and the unprecedented circumstances under which such agreements were held to be non-anti-competitive.

ISSUE

Whether the Exclusive Supply Agreement between Inox and its supplier Hindustan Coca Cola Beverages Pvt. Ltd. (HCCBPL) was a Restrictive Trade Practice and an Abuse of Their Dominant Positions

ALLEGATIONS : On First Look, Parties Seem to be at Fault
HCCBPL and ILL were supplying inter alia packaged drinking water and soft drinks at an ‘inflated and exorbitant price’ in sharp variance with the ordinary price prevailing in the market. A difference of more than 100% in the MRPs was noted between products being sold over the multiplex counter and those available in retail stores i.e. higher prices to buyers at Inox and lower prices in the open market. This resulted in Discriminatory Pricing with products of the same quality, quantity and standards being sold at different prices to different buyers.

There was FORECLOSURE creating barriers to entry as Inox was selling only Coke products providing the consumer with no alternative choice inside the multiplex as a result. It thus enjoyed complete economic power and commercial advantages over its competitors

Faulty Delineation of Relevant Market : Major Lapse in Investigation
The Director General upon preliminary investigation identified the respective relevant markets for ILL as ‘retail sale of bottled water and cold drinks inside IIL multiplexes’ and that for HCCBPL; ‘supply of bottled water and cold drinks to owners of closed market of multiplexes’ Striking down such an illogical inference, the Commission emphatically stated that such an inference would go on to mean that every retail outlet, restaurant or store having exclusive supply agreement with a supplier will be deemed dominant within the boundaries of its premises. The delineation had to be carried out on a pan-India level, taking into account multiplexes located throughout the country.

CCI’s Holding and Reasoning: Logic + Appreciable Business Interest = Effective Competition
Out of total 900 multi-screen theatres all over the country, HCCBPL had exclusive access to only 214 such screens whereas its closest rival PEPSICO had similar ESAs with 600 such multiplexes. Thus, this resulted in dominant player being created as there existed healthy competition between two parties in the market.

Furthermore, the impugned agreement was for a short period of four months and terminable by either party by giving 30 days’ notice. Thus, the option of switching suppliers on periodical basis cannot be said to have resulted in denial of market access / foreclosure.

Supply of products by HCCBPL made to multiplexes constituted less than 0.3% of its total supply of such products in India. Taking into account the business volume of the beverages market in India, there can be hardly be any appreciable adverse effect on competition because of ESA between HCCBPL and ILPL.

Hence, the ESA agreement was held neither to be anti – competitive nor abusing any dominant positions.

Notings and Observations 

The Commission has stayed true to the spirit of Competition Policy in India. Before declaring any agreement to be anti-competitive, first and foremost, it has to be concluded whether its operation would amount to Appreciable Adverse Effect on Competition. Thus, the Commission in the instant case has poignantly delved deep into facts and the prevalent market situation. Even though the Commission is receiving bulk load of cases every day, it has avoided blindly following the Director General’s findings which were proved erroneous. This speaks a lot about the character and capacity of the members and shows that the industry watchdog is not just an eyewash.

[This post has been authored by Shoumendu Mukherji, B.A./B.Sc. LL.B., 3rd Year, The W.B. National University of Juridical Sciences, Kolkata]