Case T-336/07

Telefónica, SA and Telefónica de España, SA

v

European Commission

‛Competition — Abuse of dominant position — Spanish markets for broadband internet access — Decision finding an infringement of Article 82 EC — Price fixing — Margin squeeze — Market definition — Dominant position — Abuse — Calculation of margin squeeze — Effects of the abuse — Competence of the Commission — Rights of the defence — Subsidiarity — Proportionality — Legal certainty — Sincere cooperation — Principle of sound administration — Fines’

Summary of the Judgment

Under Article 21 of the Statute of the Court of Justice and Article 44(1)(c) of the Rules of Procedure of the General Court, each application is required to state the subject-matter of the proceedings and a summary of the pleas in law on which the application is based. The purely evidential and instrumental function of the annexes means that, provided that they contain elements of law on which certain pleas expressed in the application are based, those elements must be set out in the actual body of the application or, at the very least, be sufficiently identified in that application. The application must accordingly specify the nature of the grounds on which the action is based, which means that a mere abstract statement of the grounds does not satisfy the requirements of the Rules of Procedure. The annexes cannot therefore be used to develop a plea set out summarily in the application by putting forward complaints or arguments not set out in the application. That interpretation of Article 21 of the Statute of the Court of Justice and Article 44(1)(c) of the Rules of Procedure of the General Court also applies to the conditions for admissibility of a reply, which according to Article 47(1) of the Rules of Procedure is intended to supplement the application. Consequently, the annexes to the application and the reply may be taken into consideration only in so far as they support or supplement pleas or arguments expressly set out by the applicants in the body of their written pleadings and in so far as it is possible to determine precisely what are the elements contained in those annexes that support or supplement those pleas or arguments. (see paras. 58-61, 63)

In proceedings for infringement of the European Union competition rules, the failure to communicate a document to an undertaking constitutes a breach of the rights of the defence only if that undertaking shows, first, that the Commission relied on that document to support its objection concerning the existence of an infringement and, second, that the objection could be proved only by reference to that document. If there was other documentary evidence of which the undertakings concerned were aware during the administrative procedure that specifically supported the Commission’s findings, the fact that an incriminating document not communicated to the person concerned is inadmissible as evidence does not affect the validity of the objections upheld in the contested decision. It is thus for the undertaking concerned to show that the result at which the Commission arrived in its decision would have been different if a document which was not communicated to that undertaking and on which the Commission relied to make a finding of infringement against it had to be disallowed as evidence. (see para. 78)

The principle of compliance with the rights of the defence requires, in particular, that the statement of objections which the Commission sends to an undertaking on which it envisages imposing a penalty for an infringement of the competition rules contains the essential elements used against it, such as the facts, the characterisation of those facts and the evidence on which the Commission relies, so that the undertaking may submit its arguments effectively in the administrative proceedings brought against it. That requirement is satisfied where the Commission’s decision does not allege that the undertakings concerned have committed infringements other than those referred to in the statement of objections and takes into consideration only facts on which they have had the opportunity of providing an explanation. The Commission’s final decision is not, however, necessarily required to be a replica of the statement of objections. Thus, it is permissible to supplement the statement of objections in the light of the response supplied by the parties, whose arguments show that they have in fact been able to exercise their rights of defence. The Commission may also, in the light of the administrative procedure, revise or supplement the arguments of fact or of law on which it has relied in support of its objections. Thus, the rights of the defence are breached as a result of a discrepancy between the statement of objections and the final decision only where an objection stated in the final decision was not set out in the statement of objections in a manner sufficient to enable the addressees to defend their interests. That is not the case where the alleged differences between the statement of objections and the final decision do not concern any conduct other than that in respect of which the undertakings concerned had already submitted observations and are therefore unrelated to any new objection. (see paras 80-82, 84-85)

For the purposes of investigating the possibly dominant position of an undertaking on a given product market, the possibilities of competition must be judged in the context of the market comprising the totality of the products which, with respect to their characteristics, are particularly suitable for satisfying constant needs and are only to a limited extent interchangeable with other products. Moreover, since the determination of the relevant market is useful in assessing whether the undertaking concerned is in a position to prevent effective competition from being maintained and to behave to an appreciable extent independently of its competitors, its customers and its consumers, an examination to that end cannot be limited solely to the objective characteristics of the relevant products, but the competitive conditions and the structure of supply and demand on the market must also be taken into consideration. The concept of the relevant market implies that there can be effective competition between the products which form part of it, and this presupposes that there is a sufficient degree of interchangeability between all the products forming part of the same market in so far as a specific use of such products is concerned. It also follows from the Commission notice on the definition of the relevant market for the purposes of Community competition law, that a relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, their prices and their intended use. From an economic point of view, for the definition of the relevant market, demand-side substitution constitutes the most immediate and effective disciplinary force on the suppliers of a given product, in particular in relation to their pricing decisions. Supply-side substitutability may also be taken into account when defining markets in those situations in which its effects are equivalent to those of demand-side substitution in terms of effectiveness and immediacy. That means that suppliers are able to switch production to the relevant products and market them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative prices. As regards wholesale markets for broadband internet access, the Commission can rightly conclude that, in light of the considerable investments needed for the switch from a national wholesale product to a regional wholesale product and a regional wholesale product to local loop unbundling, and of the time needed for such a switch, this not being a viable option for the whole of the national territory as it requires a minimum critical size, and since there are functional differences between the national and regional wholesale products and local loop unbundling, local loop unbundling does not belong to the same market as those of the national wholesale product and the regional wholesale product. Likewise, the Commission can rightly conclude that the national and regional wholesale products do not belong to the same market, because, given the costs associated with switching from the national wholesale product to the regional wholesale product, it would be unlikely and irrational from an economic point of view that operators which have already invested in the roll-out of a network will bear the cost of not using that network and decide to use the national wholesale product, which would not give them the same possibilities in terms of control over the quality of service of the retail product as the regional wholesale product. (see paras 111-113, 116, 127, 134, 139, 143)

The question whether a pricing practice introduced by a vertically integrated dominant undertaking in a wholesale market and resulting in the margin squeeze of competitors of that undertaking in the retail market does not depend on whether that undertaking is dominant in that retail market. Therefore, in order to find an abuse of a dominant position by an undertaking in the form of a margin squeeze, the Commission does not have to establish that an undertaking had a dominant position on both the wholesale market and the retail market. (see para. 146)

The possible existence of competition on the market is indeed a relevant factor for the purposes of determining the existence of a dominant position. However, even the existence of lively competition on a particular market does not rule out the possibility that there is a dominant position on that market, since the predominant feature of such a position is the ability of the undertaking concerned to act without having to take account of this competition in its market strategy and without for that reason suffering detrimental effects from such behaviour. (see para. 162)

Although the ability to impose regular price increases unquestionably constitutes a factor capable of pointing to the existence of a dominant position, it is by no means an indispensable factor, as the independence which a dominant undertaking enjoys in pricing matters has more to do with the ability to set prices without having to take account of the reaction of competitors, customers and suppliers than with the ability to increase prices. (see para. 166)

In order to find the existence of a margin squeeze, there can be no requirement that the wholesale price charged to competitors for the downstream product should be excessive or that the retail price for the derived product should be predatory. The margin squeeze, in the absence of any objective justification, is in itself capable of constituting an abuse within the meaning of Article 82 EC. A margin squeeze is the result of the spread between the prices for wholesale services and those for retail services and not of the level of those prices as such. In particular, that squeeze may be the result not only of an abnormally low price on the retail market, but also of an abnormally high price on the wholesale market. The Commission is, moreover, entitled to take the view that the appropriate test for establishing the margin squeeze consists in determining whether a competitor having the same cost structure as that of the downstream activity of the vertically integrated undertaking would be in a position to offer downstream services without incurring a loss if that vertically integrated undertaking had to pay the upstream access price charged to its competitors, by reference to the costs incurred by the undertaking in question, without undertaking a study of the margins of the main alternative operators on the market concerned. In order to assess the lawfulness of the pricing policy applied by a dominant undertaking, reference should be made, in principle, to pricing criteria based on the costs incurred by the dominant undertaking itself and on its strategy. In particular, as regards a pricing practice which causes a margin squeeze, the use of such analytical criteria can establish whether that undertaking would have been sufficiently efficient 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 the intermediary services. The validity of such an approach is reinforced by the fact that it also conforms to the general principle of legal certainty, since taking into account the costs and prices of the dominant undertaking enables that undertaking, in the light of its special responsibility under Article 82 EC, to assess the lawfulness of its own conduct. While a dominant undertaking knows its own costs and prices, it does not as a general rule know those of its competitors. Furthermore, an exclusionary abuse also affects potential competitors of the dominant undertaking, which might be deterred from entering the market by the prospect of a lack of profitability. Admittedly, it cannot be ruled out that the costs and prices of competitors may be relevant to the examination of the pricing practice at issue. However, it is only where it is not possible to refer to the prices and costs of the dominant undertaking that the prices and costs of competitors on the same market should be examined. (see paras 186-187, 190-194)

When applying the margin squeeze test, the Commission cannot be criticised for examining the existence of a margin squeeze for each product of the undertaking concerned taken separately, while the alternative operators would use an optimal combination of products, permitting economies of cost to be made where those products are not part of the same market as the market concerned. Article 82 EC prohibits, in particular, an undertaking in a dominant position on a specific market from adopting pricing practices which have an exclusionary effect on its equally efficient actual or potential competitors. Examination of such a position calls for an assessment of the possibilities of competition in the context of the market consisting of all the products which, according to their characteristics, are particularly appropriate for satisfying consistent needs and are not readily interchangeable with other products, the determination of the relevant market serving to evaluate whether the undertaking concerned is able to hinder effective competition on that market. Furthermore, it cannot be argued that an alternative operator could offset the losses incurred as a result of the margin squeeze at the level of a wholesale product by revenues arising from the use, in certain more profitable geographic areas, of other products of the undertaking which were not subject to a margin squeeze and which belonged to another market. A system of undistorted competition can be guaranteed only if equality of opportunity is secured as between the various economic operators. Equality of opportunity means that a dominant undertaking in the telecommunications sector and its at least equally efficient competitors are placed on an equal footing on the retail market. That is not the case if the prices of wholesale products paid to that undertaking by the alternative operators could be reflected in their retail prices only by offering those products at a loss. (see paras 200-204)

For the purposes of establishing an infringement of Article 82 EC, it is sufficient to show that the abusive conduct of the undertaking in a dominant position tends to restrict competition or, in other words, that the conduct is capable of having, or likely to have, that effect. The pricing practice concerned 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 a potential anti-competitive effect that may exclude competitors who are at least as efficient as the dominant undertaking. In that regard, it cannot be argued that, in view of the time that elapsed between the beginning of the impugned conduct and the adoption of a decision by the Commission, it was not appropriate to carry out a test of probable effects, as the Commission had the time necessary to show that the alleged anti-competitive effects linked with the conduct in question did in fact materialise. (see paras 268, 272)

The existence of Directive 2002/21, on a common regulatory framework for electronic communications networks and services, has no effect whatsoever on the powers which the Commission derives directly from Article 3(1) of Regulation No 17 and, since 1 May 2004, from Article 7(1) of Regulation No 1/2003 to find infringements of Articles 81 EC and 82 EC. The competition rules laid down in the Treaty supplement, by ex post review, the regulatory framework adopted by the EU legislature for ex ante regulation of the telecommunications markets. (see para. 293)

As regards relationships formed in the context of proceedings conducted by the Commission pursuant to Articles 81 EC and 82 EC, the rules for the implementation of the duty of sincere cooperation which stems from Article 10 EC and which binds the Commission in its relationships with the Member States have been stated in, inter alia, Articles 11 to 16 of Regulation No 1/2003, in Chapter IV headed ‘Cooperation’. Those provisions do not require the Commission to consult the national regulatory authorities. (see para. 312)

As regards the question whether an infringement was committed intentionally or negligently and is therefore liable to be penalised by a fine under the first subparagraph of Article 15(2) of Regulation No 17 and, since 1 May 2004, Article 23(2) of Regulation No 1/2003, that condition is satisfied where the undertaking concerned could not have been unaware that its conduct was anti-competitive, whether or not it was aware that it was infringing the competition rules of the Treaty. An undertaking is aware of the anti-competitive nature of its conduct where it is aware of the essential facts justifying both the finding of a dominant position on the relevant market and the finding by the Commission of an abuse of that position. As a diligent economic operator, an undertaking in a dominant position must be familiar with the principles governing market definition in competition cases and, where necessary, take appropriate legal advice to assess, to a degree that is reasonable in the circumstances, the consequences that a given act may entail. That is particularly true in relation to persons carrying on a professional activity, who are used to having to proceed with a high degree of caution when pursuing their occupation. They can on that account be expected to take special care in assessing the risks that such an activity entails. Furthermore, there can be no doubt, for a prudent economic operator, that, although the possession of large market shares is not necessarily and in every case the only factor determining the existence of a dominant position, it has however a considerable significance which must of necessity be taken into consideration by him in relation to his possible conduct on the market. In that regard, the historical operator and owner of the only significant infrastructure for the supply of wholesale products in the telecommunications sector cannot be unaware that it holds a dominant position on the relevant markets. Accordingly, the significance of the market shares held by such an operator on the markets concerned means that its belief that it does not occupy a dominant position on those markets can only be the outcome of an inadequate study of the structure of the markets on which it operates or a refusal to take those structures into consideration. (see paras 319-320, 323-325)

Article 82 EC applies only to anti-competitive conduct engaged in by undertakings on their own initiative. 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 82 EC does not apply. In such a situation, the restriction of competition is not attributable, as that provision implicitly requires, to the autonomous conduct of the undertakings. By contrast, Article 82 EC may apply if it is found that the national legislation does not preclude undertakings from engaging in autonomous conduct which prevents, restricts or distorts competition. Thus, notwithstanding such legislation, if a dominant vertically integrated undertaking has scope to adjust even only its retail prices, the margin squeeze may on that ground alone be attributable to it. As regards the pricing practices of a telecommunications undertaking in a dominant position, if a reduction of the prices requires the intervention of the national authority charged with the regulation of the telecommunications market and cannot be decided freely by that undertaking, it is for such an undertaking, in the context of the special responsibility which it bore as an undertaking occupying a dominant position on the market concerned, to apply to the that authority to adjust its tariffs when they had the effect of impairing genuine undistorted competition in the common market. (see paras 328-330, 335)

Compliance by an undertaking in a dominant position on the telecommunications market with national regulations on telecommunications does not protect it against an action by the Commission on the basis of Article 82 EC. In the absence of express derogation to that effect, competition law is applicable to regulated sectors. Thus, the applicability of the competition rules is not ruled out where the sectoral provisions concerned do not preclude undertakings from engaging in autonomous conduct which prevents, restricts or distorts competition. (see paras 339-340)

The Commission’s decision not to impose a fine in certain decisions on account of the relative novelty of the infringements found does not grant immunity to undertakings subsequently committing the same type of infringement. The Commission exercises its discretion in the specific context of each case when assessing whether it is appropriate to impose a fine in order to penalise the infringement found and to protect the effectiveness of competition law. (see para. 357)

Under the first paragraph of Section 1.A of the Guidelines on the method of setting fines imposed pursuant to Article 15(2) of Regulation No 17 and Article 65(5) of the ESCS Treaty, the Commission must, in assessing the gravity of the infringement, examine its actual impact on the market only where that impact can be measured. (see para. 389)

The size of the geographic market is only one of the three criteria which, according to the Guidelines on the method of setting fines imposed pursuant to Article 15(2) of Regulation No 17 and Article 65(5) of the ESCS Treaty, are relevant for the purpose of the overall assessment of the gravity of the infringement. Among those interdependent criteria, the nature of the infringement plays a major role. By contrast, the size of the geographic market is not an autonomous criterion in the sense that only infringements affecting several Member States could be qualified as ‘very serious’. Neither the EC Treaty, nor Regulation No 17, nor Regulation No 1/2003, nor the Guidelines, nor the case-law support the conclusion that only geographically very extensive restrictions may be qualified as ‘very serious’. Therefore the Commission can qualify an infringement as ‘very serious’ even though the size of the relevant geographic market is limited to the territory of a single Member State. (see para. 413)

In assessing the gravity of an infringement for the purpose of setting the amount of the fine, the Commission must ensure that its action has the necessary deterrent effect, especially as regards those types of infringement that are particularly harmful to the attainment of the objectives of the Union. Deterrence must be both specific and general. As well as constituting punishment for an individual infringement, a fine also forms part of the general policy of compliance by undertakings with the competition rules. Therefore it cannot be argued that the principle that the penalty must be specific to the offender and the offence has been infringed, because the fine imposed on an undertaking by the Commission, calculated by reference to that undertaking’s specific situation, may also have a general deterrent effect vis-à-vis other undertakings that might be tempted to infringe the competition rules. (see para. 433)

In competition matters, since the increase of the fine for duration involves the application of a certain percentage to the starting amount of the fine which is determined according to the gravity of the infringement as a whole, and thus already reflects the varying levels of intensity of the infringement, there is no need to take into account, for the increase of that amount on the basis of the duration of the infringement, a variation in the intensity of the infringement during the period concerned. (see para. 450)