General Court ruling annulling European Commission prohibition decision in Hutchison 3G UK/O2
Posted by Chantal Lavoie on 31 May 2020
The General Court’s judgment of 28 May 2020 in CK Telecoms UK Investments Ltd v Commission is important for several reasons. In a rare occurrence, it annuls a Commission’s merger prohibition decision. It also provides valuable judicial interpretation on fundamental concepts relevant to assess the non-coordinated effects of a merger, the standard of proof required to meet the substantive test of the Merger Regulation (the so-called SIEC test i.e. substantial impediment to effective competition) and the criteria and evidence which can be relied upon.
Facts of the case
The case concerns the European Commission’s decision of 11 May 2016 (the Hutchison/O2 decision) prohibiting the proposed acquisition of Telefonica Europe Plc (O2) by Hutchison 3G UK Investments Ltd, now known as CK Telecoms UK Investments Ltd (Three). The proposed acquisition amounted to a ‘four to three’ acquisition between the second and fourth largest players in a market with four mobile network operators (MNOs), namely EE Ltd owned by BT (BT/EE), O2, Vodafone and Three. The transaction would have given the merged entity a market share between 30% and 40% in the retail market for mobile telecoms services in the UK, thus becoming the largest player in the market.
Network-sharing agreements were also in place in this retail market between BT/EE and Three on the one hand and between Vodafone/O2 on the other hand in order to allow them to share the costs of rolling out their networks. Finally, the retail market also included mobile virtual network operators, which are dependent on network agreements with the MNOs to provide their services to consumers (the non-MNOs).
In its prohibition decision, the Commission identified two relevant markets, namely the retail market for mobile telecoms services in the UK (the retail market) and the wholesale market for mobile telecoms services in the UK (the wholesale market). The Commission concluded that the transaction created a significant impediment to effective competition. In particular the Commission found that the transaction would lead to increase in prices for consumers, less choice and hinder the development of mobile network infrastructure in the UK. It relied on three theories of harm based on the existence of non-coordinated effects, namely:
- as a result of the elimination of an important competitive constraint on the retail market;
- as relates to the network sharing arrangements on the retail market; and
- as a result of the elimination of an important competitive constraint on the wholesale market.
The Commission rejected the commitments offered as inadequate to address the concerns identified and prohibited the transaction.
The findings of the General Court
The General Court’ conclusions can be summarised as follows:
On the SIEC test generally:
The General Court finds that the ‘conditions and limits’ for meeting the SIEC test in oligopolistic markets where the merger parties do not have a dominant position are not set out in the Merger Regulation and an interpretation is therefore required based on the objectives of the Merger Regulation. The General Court concludes that, in order to meet the SIEC test, the non-coordinated effects of a transaction must be shown to both (i) eliminate important competitive constraints which the merging parties exerted on each other; and (ii) reduce competitive pressure on the remaining competitors.
On the Commission’s assessment of non-coordinated effects on the retail market
The Commission was right to view the market share of the merged entities as a ‘first indication’ of the loss of an important competitive constraint exerted by Three and O2 on each other. However further conclusions on anti-competitive effects cannot be drawn from the market share analysis.
As regards the Commission’s interpretation of the notion of ‘important competitive force’, the Commission confused this concept with the concept of ‘significant impediment to effective competition’ and the ‘elimination of an important competitive constraint’. In doing so, the Commission made an error of law and of assessment by holding that an important competitive force does not need to stand out from its competitors and it suffices that the entity has more of an influence on its competitors than its market share would suggest. In such a case, any entity in an oligopolistic market could represent an important competitive force. The Commission was also wrong in finding that the elimination of an important competitive force amounted to the elimination of an important competitive constraint since in such a case it would be sufficient to find a reduction in competitive pressure as a result of the elimination of an important competitive force without actually assessing whether the transaction eliminated an important competitive constraint. By doing so, the Commission applied only one of the two conditions mentioned above for finding a significant impediment to effective competition, thereby lowering the standard of proof applicable under the SIEC test.
Three was not a ‘particularly close competitor of O2’ whilst all competitors in the retail market were close to one another to a certain extent. Even if Three and O2 might have been “relatively close competitors in some of the segments” of this four player market, this was not sufficient in of itself to show an elimination of important competitive constraints. Otherwise, “any concentration resulting in a reduction from four to three operators would as a matter of principle be prohibited” (para. 249).
The quantitative analysis based on upward pricing pressure was not sufficient in of itself to meet the standard of proof that the elimination of important competitive constraints exerted by the parties would result, with a significant degree of probability, in a significant increase in prices and therefore a significant impediment to effective competition. (para. 268). Also the Commission did not provide evidence that the price increase would be significant.
Finally, the Commission failed to show that the impediment to effective competition resulting from the merger would be ‘significant’.
On the Commission’s assessment of non-coordinated effects on the retail market resulting from the network sharing agreements
The Commission adopted a novel theory of harm based on the need for the parties to the network sharing agreements to remain aligned and stable. The Court disagrees with the Commission’s finding that a misalignment, disruption or termination of the existing network sharing would constitute in of itself a significant impediment to effective competition.
The Commission failed to consider the effect of the transaction as a result of the exercise of market power by the merged entity by means of a degradation of the quality of its network. The Commission also failed to show that, even assuming the decision of the merged entity to favour one of the network sharing agreements, the other party to the agreement (i.e. Vodafone or BE/EE) would not be able nor have the incentive to react to an increase in its costs and therefore would cease to invest in the network.
On the Commission’s assessment of non-coordinated effects on the wholesale market
The reduction from 4 to 3 MNOs is not in of itself sufficient to show a significant impediment to effective competition on the wholesale market. The Commission was wrong to conclude that Three, with a market share between O% and 5%, represented an ‘important competitive force’ on the wholesale market. A small market share provides a prima facie indication of an absence of significant impediment to effective competition, particularly given the high market shares of the remaining three MNOs. Reliance on Three’s gross add share, even if higher that its market share, is not sufficient in of itself to show that it is an important competitive force and to establish a significant impediment to effective competition.
Even if Three were an important competitive force, this was insufficient evidence as the Commission had to show that the transaction would have eliminated important competitive constraints which the parties exercised on each other.
Commentary
The judgment is a significant setback for the Commission. The General Court finds several errors of law and of assessment made by the Commission in its assessment of the proposed acquisition. In fact, the Commission is criticised for its assessment and application of the SIEC test in relation to each of the three theories of harm used to support its case.
Surprisingly, since adoption of the Merger Regulation in 2004 (which replaced the test based on the creation or strengthening of a dominant position for an extended SIEC test), the Courts of the European Union had not until now considered the interpretation to be given to the SIEC test in relation to non-coordinated effects. The judgment is therefore unique in providing guidance on the conditions and limits of the SIEC test, particularly in a context where the transaction did not create a dominant position.
The judgment will require the Commission to do some serious introspection and consider whether it needs to fundamentally change the way it assesses the non-coordinated effects of complex mergers. Based on the findings of the General Court, there is no doubt that the Commission will need to tighten up its future reviews and to produce evidence which is sufficiently compelling to meet the standard of proof as interpreted by the General Court. The General Court found the Commission’s analysis in the prohibition decision to lack evidence of sufficient probative value and even to result in applying a lower standard of proof. Some of the scenarios and even economic analysis relied upon were also found to lack a direct and immediate causal link to the concentration; to not be sufficiently realistic and plausible; and therefore to be insufficient to meet the standard of proof based on a ‘strong probability’. Of particular significance is the General Court’s finding that the Commission failed to demonstrate that the impediment to effective competition, which it concluded to as result of its overall assessment, was ‘significant’.
The General Court’s view that the standard of proof to which the Commission is held for demonstrating a significant impediment to effective competition in this case is somewhere between a ‘balance of probabilities’ and ‘beyond a reasonable doubt’ is of significant value. It is unclear however whether one can extrapolate from the General Court’s statement in paragraph 118 of the judgment – which is relevant to reviews based on “a body of evidence, and which is based on several theories of harm” - that this same standard should apply beyond such complex cases to all merger review cases. In my view, this should be the case since the General Court concludes In paragraph 110 that the standard of proof applicable to show non-coordinated effects should be the same, whether the case is complex or not. The difference lies rather in the nature and quality of the evidence and the fact that the Courts will be more demanding in reviewing the evidence since complex cases may rely more on prospective analysis, uncertain effects or a chain of cause and effect which is more difficult to establish.
The General Court provides an important reminder that two cumulative conditions (elimination of a competition constraint and reduction of competitive pressure) must be met to demonstrate a significant impediment to effective competition. This is based on a combined reading of the SIEC test set out in article 2(3) and recital 25 of the Merger Regulation. In its decision, the Commission confused several concepts and lacked rigour by finding that a reduction in competitive pressure through the elimination of an important competitive force was sufficient to result in a significant impediment to effective competition. The weakness of the evidence used to show that Three was an important competitive force was also highlighted by the General Court.
The Commission’s reliance on closeness of competition in merger cases may also require further internal review following this judgment. As pointed out by the General Court, the concept of closeness of competition does not exist in the Merger Regulation and is considered rather as an element forming part of the body of economic evidence used to show the elimination of an important competitive constraint. In this respect, the Commission is criticised for the weak value of the evidence it relied upon, in particular by limiting itself to showing that Three and O2 were close but not how close they were. Interestingly the General Court appears to take the view that the Commission should have shown that Three and O2 were ‘particularly close competitors’. It will be interesting to see whether and how the Commission will conduct future analysis of closeness of competition. In this case and even if closeness of competition may have been established for certain segments of the retail market, it would have been insufficient in of itself, according to the General Court, to show the elimination of an important competitive constraint and also a significant impediment to effective competition. This is particularly relevant in oligopolistic markets where all players are likely to be close to another and therefore the Commission will need to rely on particularly compelling evidence to show with sufficient probability that the merging parties are particularly close competitors.
As regards the telecoms sector, the judgment may open the way for further consolidation in Europe. As the General Court stated : “the reduction from four to three operators on the wholesale market is not, in itself, capable of establishing a significant impediment to competition on the wholesale market in the present case. As is apparent from recital 25 of Regulation No 139/2004, many oligopolistic markets exhibit a degree of competition which can be described as healthy.” (para.434).
As regards oligopolistic markets, the judgment is an important reminder that the Commission is subject to the same standard of proof required to demonstrate a substantial impediment to effective competition. There should not be a prima facie assumption going into a review of a merger in an oligopolistic market that the transaction will be more difficult to clear. An important take-away from the General Court’s judgment is that in oligopolistic markets, a concentration resulting in impediments to competition, a likely increase in prices and loss of competitive pressure are not sufficient to meet the SIEC test unless such non-coordinated effects are proven to be significant. In this context, the Commission will also need to change its interpretation of the concept of ‘important competitive force’ which is one of the factors relevant for assessing whether a concentration will give rise to non-coordinated effects. Indeed, in order to support the evidence that a merged entity constitutes an important competitive force, it will not suffice to show that it contributes substantially and consistently to the competitive process; it will also be necessary, as the General Court concluded, to show that the merged entity stands out from its competitors. This is an important conclusion since in oligopolistic markets, most competitors are likely to exert an important competitive force and the Commission’s expansive interpretation would have made it easier to meet the SIEC test.
Another important takeaway is the General Court’s recognition that certain efficiencies must form part of the Commission’s economic analysis of anticompetitive effects and therefore they are different from efficiencies raised by the merging parties as justification for the merger and in relation to which the merging parties bear the burden of proof. This part of the judgment will no doubt lead to much discussion going forward as it raises the question of which types of efficiencies need to be taken into account by the Commission in its quantitative analysis and which efficiencies are to be raised rather by the merging parties at a later stage. To a certain extent, the General Court may be opening the door for the incorporation of ‘efficiencies’ at an earlier stage in a competition analysis, allowing for more of a balancing of anti-competitive and pro-competitive effects, as carried out under article 101(3) TFEU.
The Commission will no doubt be considering whether to appeal the judgment. The General Court’s judgment finds a number of errors of law and of assessment committed by the Commission. Since an appeal to the Court of Justice can only be made on points of law, the Commission has nevertheless a number of grounds on which it could base its appeal.