Shearman And Sterling

Antitrust, European Commission

Jun 02, 2020

The Court’s Quash of the European Commission’s UK Mobile Merger Prohibition Will Have Consequences Far Beyond the Telco Sector

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THE COURT’S QUASH OF THE EUROPEAN COMMISSION’S UK MOBILE MERGER PROHIBITION WILL HAVE CONSEQUENCES FAR BEYOND THE TELCO SECTOR

Under the leadership of Margrethe Vestager, the European Commission has taken an increasing interventionist stand across all areas of antitrust enforcement, in particular in merger control. The EU’s General Court dealt that aggressive agenda a massive blow by annulling the first of her many prohibition decisions.

The Commission will undoubtedly appeal the General Court’s ruling. Unless overturned by the higher court, this judgment will have a significant impact on the legal test and evidentiary burden to support prohibitions. Perhaps more fundamentally, it may dent the confidence of the Commission in its current fight to assert its authority against the Member States.

The UK Mobile Merger

On 11 May 2016, the Commission blocked Hutchison Whampoa’s efforts to merge its U.K. operations with Telefónica’s U.K. mobile business–O2.

Prior to this, the Commission under Commissioner Almunia had permitted similar deals in Germany, Austria and Ireland subject to behavioural remedies. These remedies have been mired in difficulties from the outset–lack of suitable remedy takers, bankruptcy and the first statement of objections for breach of commitments in living memory. On top of all the implementation difficulties, a study was released by a consortia of EU regulators that showed post-merger price rises despite the remedies.

Against this backdrop and buoyed by the abandonment of the Danish mobile merger due to Commission pressure, Commissioner Vestager jettisoned Commissioner Almunia’s behavioural remedy approach. Despite the parties offering a behavioural remedy on steroids, with much fanfare, the Commission prohibited the merger.

There were three limbs to the prohibition:

  • Higher prices and less choice on the retail market;
  • Higher prices and less choice on the wholesale market; and
  • A negative influence on the quality of services given the network sharing agreements that are a feature of the British market.

Under each of these theories of harm, the Commission found that, even with the remedies proffered, the deal would result in a “significant impediment to effective competition” but without concluding that the merged entity would be dominant, or finding that there would be collective dominance between the remaining players.

Cases such as this are often called “gap” cases–as they fit into the grey area between mergers that establish dominance and clearly unproblematic deals.

What are Gap Cases?

After a number of important court losses, in 2004, the Commission adopted a revised and expanded Merger Regulation. The reform package included a number of developments; the most important substantive change was the expansion of the Commission’s jurisdiction to take action against cases that present a “significant impediment to effective competition” (known in the trade as an SIEC). The previous 1989 merger regulation only prescribed for action against deals that result in the creation or strengthening of a dominant position of a single undertaking or a group of undertakings. The new regulation plugged what the Commission had long considered to be an enforcement gap in Europe—the ability to prohibit without a finding of dominance. The Commission calls these “non-coordinated horizontal effects,” known as “unilateral” effects in the U.S. after being officially recognised in the 1992 U.S. horizontal merger guidelines.

Under the revised merger regulation, deals in oligopolistic markets can be prohibited if the Commission can show that two conditions are met: (i) the transaction would eliminate the important competitive constraints that the merging parties exert on each other; and, in turn, (ii) the competitive pressure on the remaining competitors is reduced significantly.

The Commission’s horizontal merger guidelines adopted with the 2004 reform package consider that in assessing these two limbs, multiple factors should be taken into account including: the market shares of the merging firms; whether the merging firms are close competitors; whether there are limited possibilities for customers to switch suppliers; the ability of the merged entity to hinder expansion by rivals; and whether the merger would eliminate an important competitive force.

This new legal standard has been used in many different markets but has been particularly relevant in assessing the reduction of four players to three in national mobile mergers. The U.K. case should have been a reasonably safe one for the Commission to push the envelope: the merger would have resulted in a new leader with a 40% market share, it seems quite clear that Hutchison was an aggressive and disruptive player and there were already only two physical mobile networks.

What Did the Court Say?

Many lawyers practicing in Brussels simply take it for granted that the Commission has the power to act against mergers in oligopolistic markets. However, despite the DG Comp celebrating the Merger Regulation’s 15th birthday last year, the Court has not until now opined on what an SIEC actually looks like. This is in part because appeals against merger decisions are rare because they do not offer a timely and effective remedy for parties denied their deal, but also because the court has dodged the question, most notably in UPS/TNT when the Commission prohibited a gap case but then lost on appeal due to procedural grounds.

This time, however, there has been no dodge. The Court dealt head on with the meaning of the SIEC test in gap cases and it is not an overreaction to say that that the Court has taken a sledgehammer to the Commission’s approach in these cases.

In oligopolistic markets, there are, by definition, only a few players. In many ways, it is not too difficult for the Commission to establish that merging parties are close competitors, that each of the parties is an important competitive force and that the merging parties place an important competitive constraint on each other.

The Court found that by confusing the concepts of ‘significant impediment to effective competition’ (merger regulation), ‘elimination of an important competitive constraint’ (merger regulation), and ‘elimination of an important competitive force (Commission guidelines),’ the Commission considerably widened the scope of the rules on concentrations of undertakings and distorted the concept of ‘important competitive force.’

The wrecking ball was also directed at the Commission’s econometric modelling and the evidence it has relied on to prove its case. The Court found that the Commission had not shown with a sufficiently high degree of probability that prices would increase “significantly.”

The Court also dismantled the Commission’s theories of harm related to the decrease of quality due to the network sharing agreement and problems on the wholesale market, but it’s the harm done to the finding of an SIEC on the retail market that will have caused the most damage to the Commission’s merger control enforcement policy.

What Impact Will This Have on the Commission’s Merger Policy?

The Commission may publicly attempt to brush this off as a simple matter of interpretation, and a request for greater reasoning rather than a fundamental issue of what the legal standard is. Internally, however, this judgment will deal a serious blow to the Commission’s confidence for many years to come, especially in the content of other recent losses regarding the substantive assessment in Article 101 and 102 cases.

Businesses with big deal plans will of course rejoice that the Commission’s wings have been clipped, and mobile operators will be dusting off the consolidation plans they shelved in 2016/2017.

The Commission’s investigations have become longer and heavier in recent years. Further increasing the evidentiary thresholds for the Commission will mean more work for case teams, which in turn will mean, for the parties, more RFIs, more document requests and longer review periods. For those able and motivated to pursue the exhausting process to its conclusion, however, there may well now be a greater prospect of the Commission giving up and stepping back from a prohibition decision.

It is also interesting to see how this will play into the wider debate about new reforms to the merger regulation. The German and French governments want much greater influence over the Commission’s decisions after the Siemens/Alstom debacle and the German Chancellor has long been at odds with the Commission about the need for mobile consolidation in Europe.

This rebuke from the Court will add fuel to the fire. This is a vulnerable moment for the Commission and its authority. It is now defending the system from all sides—the two largest Member States wish the rules to change for protectionist reasons, companies are seeking consolidation to cut costs and survive in response to COVID-19 and a Court that is prepared to completely overturn the Commission’s analytical approach in the hardest cases.

Ironically, the Commission may also now be missing the U.K.—traditionally one of the Commission’s most powerful allies for tough enforcement on existing antitrust principles—and the CMA strongly supported the intervention against Three/O2. 

Authors and Contributors

Sara Ashall

Counsel

Antitrust

+32 2 500 9818

+32 2 500 9818

Brussels

Elvira Aliende Rodriguez

Partner

Antitrust

+32 2 500 9837

+32 2 500 9837

Brussels

Matthew Readings

Partner

Antitrust

+44 20 7655 5937

+44 20 7655 5937

+32 2 500 9866

+32 2 500 9866

London

James Webber

Partner

Antitrust

+44 20 7655 5691

+44 20 7655 5691

+32 2 500 9800

+32 2 500 9800

London