Shearman & Sterling responds to the EC Market Definition Notice consultation

Oct 12, 2020

Shearman & Sterling Responds to the EC Market Definition Notice Consultation

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SHEARMAN & STERLING RESPONDS TO THE EC MARKET DEFINITION NOTICE CONSULTATION

In her first speech upon being reappointed as Competition Commissioner, Commissioner Vestager announced that a review would be undertaken of the Commission’s Market Definition Notice (the “Notice”); the consultation on that review closed Friday, October 9th. The Notice is an important document in European competition law; it sets out the analytical framework under which the Commission decides who competes with who, a process which has determinative implications in both merger control and antitrust enforcement. The Notice is however older than most law firm trainees and clearly showing its age. Revising the Notice now can act as a release valve in response to calls for radical reforms to the merger review process in the wake of its controversial Siemen / Alstom prohibition, without regulation or treaty change, which could open a pandora’s box for the Commission. The consultation also needs to be considered in the context of a plethora of other reform initiatives to EU competition law aimed at harnessing U.S. tech giants.

As a leading voice in EU competition law, Shearman & Sterling has submitted its views to the Commission in response to the consultation. The Notice continues to provide a solid methodological framework, but clarity is needed on the issues of the day—globalization and digitalization. The Notice needs to find the delicate balance between flexibility to deal with markets across all sectors, which are evolving at different rates and legal certainty. We have also sought to focus our response on the practical elements of defining a market—it’s the day-to-day implementation of the Notice that can make or break a case—and determine how difficult the process is for businesses.

What Is the Market Definition Notice?

Defining a market is the first step the Commission takes when investigating any case, whether in merger control or antitrust enforcement. It’s a fairly rigid process to identify which products are “interchangeable or substitutable” with those that are being investigated. This definition is then used to delineate which products provide a competitive constraint and exclude those that are not considered to be competitors. Within this perimeter, the Commission calculates market shares, which it uses as an indicator of market power. This process is a key area of divergence from the U.S. process, which does not rely on this rigid structural framework step in the merger review process. In merger control, hitting the right market definition can swing a transaction from a prohibition or divestiture, towards clearance; and in antitrust cases, different market definitions can establish different scales of infringement, or in abuse of dominance cases rebut the allegation of an infringement altogether.

The Notice is a set of guidelines that aims to codify Commission practice. It sets out a step plan for the process of defining a market, explains that the viewpoint of the customer is the most important factor and identifies types of evidence the Commission will rely on.

Why Is the Commission Looking to Change the Notice Now?

The Notice was drafted based largely on the Commission’s experience enforcing the merger regulation, from its adoption in 1989 until 1997 when the Notice itself was adopted. The Merger Regulation has now been in force for 25 years, a time which has seen significant changes.

The first widely recognized change is digitalization. The digital world abounds with markets, which do not abide by a number of base assumptions on which the Notice was drafted—many do not charge customers money, are multi-sided or run as ‘ecosystems,’ rapidly growing and converging. In her speech announcing the consultation, Commissioner Vestager noted exactly these sorts issues as reasons for considering reform of the Notice.

The second widely recognized change to the economy is globalization. Customers can now benefit not just from European markets, but from many truly global markets, with greater information flow and infrastructure (partly themselves due to digitalization) to facilitate substitution. This leads to more expansive and complicated geographic market definitions, especially when globalization has, in fact, not been symmetrical. China is a particular issue here; Chinese domestic market conditions may be very different to European, yet high levels of Chinese imports to Europe are contributing substantially to competitive outcomes within Europe.

There are other reasons why the Commission would want to reform the Notice now. It has been under pressure to reform its practices since the prohibition of Siemens / Alstom. This merger, which was widely touted as creating a ‘European champion’ that could fend off future competition from aggressive overseas (particularly Chinese) players, was prohibited by Commissioner Vestager in 2019. The prohibition drew attention and criticism from business leaders and politicians—far beyond the level of scrutiny a normal merger prohibition would invoke. This resulted in calls for the Commission to be clearer about how it assesses potential competition from non-European players (i.e., competition that was not yet showing up in imports) and how far into the future it should conduct its assessment.

What Have We Suggested in Our Response to the Consultation?

Digitalization, big tech and radical reform are definitely the topics of the day, but Commission Notices are intended to codify existing practices, not invent new rules or paradigms. We, therefore, highlight areas in the Notice where these trends need to be acknowledged, e.g., asymmetric geographic competition, competition between converging markets and how to define rapidly emerging and evolving markets. Many of our suggestions relate to identifying existing current Commission practice, which diverges from the Notice, with the aim of ensuring legal certainty and transparency for parties whilst also refocusing the Commission on (their own) best practice. That said, there are broader policy objectives to be considered.

Our suggested changes to the framework for market definition include the following:

  • Understanding time as a parameter of competition. There is currently a disconnect between the market definition—which is done today at a static point—and the forward-looking nature of merger control. This issue is particularly acute when considering evolving markets, both digital, but also traditional markets in decline where consolidation is often a normal market response to remove inefficient over-capacity. The Notice should provide for defining the market in the same time frame as it the Commission predicts the role the merged entity will play in the market; codify the elements that the Commission takes into account when considering future market developments, the evidence on which it relies, what the balance of probability will be and what sort of timeframes it will consider.
  • Clarify how competition from outside the market will be assessed. The Commission routinely undervalues the competitive constraint from outside the market it has defined, falling into a trap of considering a competitive constraint to be all or nothing. We propose a clear statement that the relevant market is the starting point from which to assess a given competition problem rather than the boundaries, plus an explicit recognition that considerable competitive pressure can come from outside the market e.g., because of converging markets.
  • Update the geographic market definition to reflect possibility of asymmetric competition. Currently, this doesn’t detail how to properly evaluate competition from imports with no reciprocal trade flow. A significant example would be imports from China—a spotlight was thrown on this issue in Tata Steel / ThyssenKrupp. The Notice as drafted provides little guidance on how this should be properly evaluated leading to an inconsistent approach and the potential for import competition to be undervalued.

As regards the Commission’s use of evidence, we have proposed changes including the following:

Clarify the role of previous decisions. The Commission relies heavily on its previous decisions to define the product and geographic market. While there are certain administrative efficiencies to that practice, it should be made clear that they do not have precedential value and are not binding. The Notice should confirm this and provide guidance on when a previous decision may be relied on and when it will not. This will give more transparency to parties and will allow them to avoid wasted time and expense on seeking to update a market definition that the Commission will reject.

Codify the reliance on internal documents. Today, internal documents are considered by the Commission today as one of the most important sources of evidence in a merger investigation, however, they are not mentioned once in the Notice. The Notice should also codify how internal documents are used, which documents are most relevant, and how it assesses evidentiary value. This will create legal certainty for parties, as well as help business provide more targeted production.

Reconsider the role of e-Questionnaires. The Notice states that the views of customers and competitors must be “backed by factual evidence” in order to be taken into account. Frequently in practice, we have seen the Commission rely on an unsubstantiated show of hands to either blunt or byzantine questions. We do not consider that a change to the Notice is required, but the Commission should take this opportunity to consider whether the Notice as currently drafted is being correctly applied.

You can find the Shearman & Sterling response here.

If you would like further information on the above or how to submit your views to the Commission on on-going reforms, please do not hesitate to contact the authors.

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Sara Ashall

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Elvira Aliende Rodriguez

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+32 2 500 9837

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James Webber

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+44 20 7655 5691

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Matthew Readings

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+44 20 7655 5937

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Edward Rarity

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+44 20 7655 5782

+44 20 7655 5782

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