Federal Supreme Court examines margin squeeze under Swiss competition law

Introduction
Decision
Comment

Introduction

On 9 December 2019 the Federal Supreme Court confirmed that Swisscom AG and Swisscom (Schweiz) AG (together, Swisscom) had abused its dominant position by charging abusive prices for wholesale broadband services between 2001 and 2007. Swisscom was found to have left its competitors no possibility to gain a sufficient profit margin between the wholesale prices charged by Swisscom and their retail prices (so-called 'margin squeeze'). The court confirmed the Sfr186 million penalty against Swisscom. This was the court's first judgment where it examined a margin squeeze under Swiss competition law.

Decision

The Federal Supreme Court defined 'margin squeeze' as a particular form of an abusive pricing strategy which falls under Article 7 of the Swiss Cartel Act (CartA) and held that there are three structural prerequisites for a margin squeeze:

• a company must be vertically integrated along the supply chain, operating at two successive separate stages of production (ie, on the upstream market and the downstream market);
• the vertically integrated company must provide an input on which competitors on the downstream market depend for the production of their final product; and
• the vertically integrated company must have a dominant position. Given the close vertical link between the upstream and the downstream market, it is sufficient if the vertically integrated company is dominant in only the upstream market. However, the vertically integrated company must have a certain dominance on the downstream market, as it otherwise cannot exercise a decisive influence on the prices of the final product.

The court considered Swisscom to be a vertically integrated company, being the seller of wholesale broadband connectivity services (BBCS) and at the same time providing internet services in the downstream market. With BBCS based on the access network, Swisscom had the input on which other internet service providers necessarily relied in order to offer broadband internet to customers. As the sole provider of BBCS on the wholesale market, Swisscom was found to have a dominant position on this market. Therefore, the court considered the structural conditions for a margin squeeze to be fulfilled.

According to the court, the relevant competitive behaviour in cases of a margin squeeze is the insufficient profit margin for those that compete with the dominant undertaking on the retail level. Therefore, the court held that a conduct is abusive if:

• the wholesale prices charged by the dominant undertaking are higher than the prices it charges on the downstream market for the final product; or
• the profit margin between the wholesale price for competitors and the dominant undertaking's retail price is insufficient to cover the product-specific costs of the competitors.

Whether the profit margin of the dominant undertaking's competitors is insufficient must be determined by considering the costs and prices of the dominant undertaking itself. In substance, this is an application of the 'as efficient competitor test'. Therefore, a margin squeeze may constitute an abusive conduct within the meaning of Article 7 of CartA even if neither the wholesale nor the retail prices of the dominant undertaking are abusive on their own.

Based on this, the court determined that Swisscom had applied a margin squeeze. The court held that Swisscom had hindered its competitors on the downstream market to the extent that they were unable to operate their business profitably and that there were no justifiable reasons for Swisscom's conduct. Further, the court held that the margin squeeze had a restrictive effect on competition, since it was based on an indispensable input on the upstream market. The court stated that according to Article 7(1) of CartA, it must be examined whether the conduct of the dominant undertaking impedes other undertakings in taking up or exercising competition or whether it puts the opposite market side at a disadvantage. According to the court, this even applies to cases according to Article 7(2) of CartA, as Paragraph 2 lists only examples of conducts that may be considered abusive. The court ruled that the behaviours listed in Paragraph 2 do not indicate a per se illegal behaviour. Instead, in order to determine whether a conduct falls under Article 7 of CartA, there must be a combination of an abusive conduct and effect on competition.

Comment

In light of the fact that the Federal Supreme Court explicitly states that in addition to an abusive conduct there must also be an effect on competition, it is rather surprising that the court's judgment in this case did not comprehensively comment on the effect of the abusive conduct at hand. The court simply stated, almost incidentally, that the margin squeeze had a restrictive effect on competition because it was based on an indispensable input on the upstream market. This raises the question as to what extent the effect on competition must be shown by the competition authorities. The wording and ratio legis of Article 7 of CartA indicates that the mere suitability of a behaviour to have an effect on competition does not suffice for the behaviour to be caught by Article 7 of CartA. To what extent the effect of a conduct by a dominant undertaking will have to be shown by the competition authorities where the relevant conduct is not based on an indispensable input remains to be seen.

For more information please contact Marcel Meinhardt or Suzan Hacisalihzade at Lenz & Staehelin by telephone (+41 58 450 80 00) or email (marcel.meinhardt@lenzstaehelin.com or suzan.hacisalihzade@lenzstaehelin.com). The Lenz & Staehelin website can be accessed at www.lenzstaehelin.com.