Introduction
Summary of the Commission’s decision
The Commission noted the following:
- First theory of competitive harm: Within the retail market, the concentration would probably have led to an increase in prices for mobile telephony services in the United Kingdom and a restriction of choice for consumers.
- Second theory of competitive harm: Within the retail market, the concentration would likely have a negative influence on the quality of services, hindering the development of mobile network infrastructure.
- Third theory of competitive harm: The concentration would likely have a negative effect on competition in the wholesale market, where the four mobile network operators (MNOs) provide hosting services to mobile virtual network operators (MVNOs), and thus restricting the ability of MVNOs to compete in the retail market.
Importantly, the Commission was not satisfied by Three’s arguments regarding efficiencies that Three claimed would result from the proposed acquisition. Furthermore, the Commission found that Three’s proposed remedies could not eliminate the post-transaction competition concerns identified by the Commission.
General Court’s judgment
CK Hutchison, on behalf of Three, appealed against the Commission’s Decision to the General Court. On 28 May 2020, the General Court annulled the Commission’s Decision.[2] Notably, the General Court’s decision is the first ruling from the European Union Courts on the “significant impediment to effective competition” (SIEC) test under Article 2(3) of the EU Merger Regulation. Under the previous Regulation on the control of concentrations between undertakings (Regulation 4064/89), the principle to declare a concentration to be incompatible with the internal market was based on the creation or the strengthening of a dominant position. Based on the EU Merger Regulation, the Commission can declare a concentration to be incompatible with the internal market even if it does not create and/or strengthen a dominant position in the market. For example, the Commission might declare a concentration to be incompatible with the internal market when it causes adverse effects on the functioning of effective competition, due to the increased likelihood of business coordination in a market with an oligopolistic structure.
Summary of the General Court’s Decision
With regard to Article 2(3) of the EU Merger Regulation, the General Court held that it should be interpreted in light of Recital 25 therein. Thus, in order to establish the existence of a significant impediment to effective competition, two cumulative conditions must be satisfied: (i) the concentration must involve the elimination of important competitive constraints that the merging parties had exerted upon each other and (ii) a reduction of competitive pressure on the remaining competitors.
As for the standard of proof, the General Court held that the Commission must demonstrate with a “strong probability” that there will be significant impediments to competition as a result of the concentration. In essence, the standard of proof was placed between the standard advocated by the Commission that it is “more likely than not” that there will be a significant impediment to competition and the standard of “being beyond all reasonable doubt”.
Furthermore, the General Court noted that the more complicated or uncertain the theory of harm on competition alleged by the Commission, the more demanding the judicial review must be in relation to the evidence in support of that theory.
Finally, the General Court pointed out that the burden of proving a theory of harm and establishing a causal link between the theory and the significant impediment to effective competition lies with the Commission.
The main positions of the General Court on the theories of competitive harm are presented in more detail below.
First theory of harm to competition
Concepts of important competitive force, elimination of important competitive constraints and significant impediment to effective competition
In relation to the Commission’s first theory of harm, the General Court held that the applicant’s allegation, that the Commission had distorted the content of the concept of an “important competitive force”, was well founded. In particular, the General Court noted that the fact that a mere decline in competitive pressure is being caused is not in itself sufficient to establish the elimination of an important competitive force. According to the General Court, the Commission made an error in law and an error in interpreting the term “important competitive force”. Specifically, the General Court held that the Commission wrongly considered that even an undertaking whose impact on competition does not make it stand out from its competitors could be regarded as an important competitive force. Otherwise, the Commission would be able to classify as an important competitive force any undertaking operating in an oligopolistic market exerting competitive pressure, and based on that, it would prohibit all horizontal concentrations in markets with an oligopolistic structure.
In relation to this, the General Court found that the Commission’s approach was, in practice, tantamount to confusing the following three concepts: (1) the concept of a significant impediment to effective competition,[3] (2) the concept of elimination of an important competitive constraint,[4] and (3) the concept of elimination of an important competitive force.[5] By confusing these three concepts, the Commission considerably broadened the scope of Article 2(3) of the EU Merger Regulation. Based on the Commission’s reasoning, any elimination of an important competitive force is tantamount to the elimination of an important competitive constraint, which, in turn, would lead to finding a significant impediment to effective competition. Based on the Commission’s evidence concerning the degree of competitive constraint exerted by Three in the retail market, the General Court ruled that Three was not an important competitive force and/or did not exert an important competitive constraint.
Closeness of competition between the parties to the concentration
With regard to the closeness of competitive relations between the merging parties, the General Court noted that the Commission’s analysis seeks, in particular, to show that the competitive relationship between Three and O2 is “close” and not “particularly close” as derived from Recital 25 of the EU Merger Regulation. As the General Court has pointed out, in certain markets such as the telecommunications market, all undertakings are close competitors with one another. Therefore, even if the Commission proves that in some market segments, the parties to the concentration are relatively close competitors, this is not sufficient to establish the elimination of important competitive constraints between the parties to the concentration or the existence of a significant impediment to effective competition. As the General Court has pointed out, if this was the case, then any concentration which would reduce the number of businesses from four to three would, in principle, be prohibited because it would eliminate the competitive pressure exerted between the parties to the concentration.
Quantitative pricing effects of the concentration
The General Court noted that the Commission could use the quantitative analysis of upward pricing pressure as a result of a concentration (known as the UPP analysis) as a first step in assessing unilateral effects (non-coordinated effects). The result of this analysis can be used as “a first screen” to determine whether further investigation of unilateral effects on price levels as a result of the concentration is required. It is pointed out that in markets with an oligopolistic structure, a concentration is expected to almost automatically cause a short-term increase in prices. Thus, the General Court emphasised that in such cases, it is necessary to assess the possibility of a longer duration of price increases and the extent of such increases.
The General Court held that the Commission’s UPP analysis has not shown with sufficient certainty that prices will increase significantly as a result of the elimination of important competitive constraints that the parties to the concentration exerted upon each other. Additionally, the General Court also noted that the Commission did not address whether the price increase would significantly impede effective competition. In this regard, the General Court noted that the Commission should have included in the UPP analysis the ‘standard efficiencies’ caused by concentrations (e.g., through rationalisation, integration of production and distribution processes by the merged entity).
Burden of proof
The General Court held that the Commission had erred in taking the view that the notifying party bears the burden of proof to demonstrate the existence of efficiencies in the context of the UPP analysis. In particular, the General Court found that the Commission confused two types of efficiencies:
- the efficiencies which are considered in the context of the overall competitive appraisal of the concentration, in order to determine whether they are likely to counteract the restrictive effects of the concentration; and
- the efficiencies which are merely a component of a quantitative model seeking to establish whether a concentration is capable of producing such restrictive effects on the market.
In this case, for the purposes of the UPP analysis, the General Court emphasised that the second type of efficiencies should have been included in the Commission’s analysis.
Overall assessment of non-coordinated effects
The General Court held that although the Commission made an overall assessment of non-coordinated effects, that assessment was “limited to a cursory reference to the body of evidence and circumstances” that would demonstrate the existence of the non-coordinated effects. Therefore, the General Court upheld the applicant’s argument that the Commission did not specify on what basis the alleged impediments to effective competition resulting from the concentration would be significant.
Second theory of harm to competition
In relation to the second theory of harm relating to the non-coordinated effects produced by the disruption of the network sharing agreements, the four mobile network operators were parties to two telecommunications network sharing agreements (BT / EE-Three and Vodafone-O2) to share the costs of developing their networks. Post-concentration, the merged entity would be a party to both agreements. The Commission considered that this would negatively affect competition as the other two entities would no longer have a fully-committed partner within their respective agreements.
The General Court noted that the second theory of harm could not be regarded as unlikely or unfounded merely on the basis of its novel nature. Notably, the General Court held that a network sharing agreement could lead to improvements in the operation of competition, as they might result in cost synergies or improvement of the network whilst competing on other significant aspects, such as price. Therefore, a disruption of a pre-existing network sharing agreement or a possible misalignment of the interests of the partners in such an agreement, as a result of the concentration, does not necessarily create a significant impediment to competition. In this context, the General Court held that the Commission had not sufficiently demonstrated that the concentration would lead to the inability of the other competing mobile network operators (in this case BT / EE and Vodafone) to exert effective competitive pressure on Three following the acquisition of O2.
According to the General Court, the Commission’s position was that the alleged inability to compete could lead to higher fixed and incremental costs, which in turn could result in reduced incentives for BT/EE and Vodafone to invest in their networks and thus, a likelihood of reduced quality of service. However, as the General Court noted, the Commission did not adequately analyse the non-coordinated effects of the concentration, nor did it take into account a possible reaction from BT / EE and Vodafone. In this context, the General Court clarified that the focus of the Commission’s analysis should have been on the effect of the concentration on the competitive process and not on specific competitors.
Third theory of harm to competition
In relation to the third theory of harm concerning the existence of non-coordinated effects in the wholesale market, the General Court observed that a particularly small market share, such as that of Three in the wholesale market (less than 5%), tends to suggest, prima facie, an absence of a significant impediment to effective competition, in particular where the other competitors in the market have significantly larger market shares.
Furthermore, the General Court noted that even if a business has a greater influence on competition than that reflected in its market shares (e.g., its gross subscriber additions were disproportionately high in comparison with its market share), it is not justified to classify it as an important competitive force.
Finally, the General Court held that there was no evidence that there were important competitive constraints between the parties to the transaction (Three and O2), which would be eliminated as a result of the concentration.
Concluding remarks
The ruling of the General Court to some extent disproves the perception that existed, mainly in the academic community and among commentators of Competition Law regarding the Commission’s attitude towards concentrations operating in certain oligopolistic markets (e.g., reduction from four to three competitors), which do not lead to the creation or the strengthening of a dominant position. The understanding thus far has been that the Commission was not willing to authorise such concentrations merely on the basis of the reduction of competitors in such markets.[6] In this case, however, the General Court emphasised the Commission’s erroneous methodology for assessing the effects of a concentration, setting a stricter standard of proof to establish a significant impediment to effective competition.[7] Nonetheless, the General Court’s judgment raises uncertainty regarding the effective implementation of the EU Merger Regulation. At the same time, it raises expectations for businesses intending to participate in such mergers in oligopolistic markets that the likelihood of non-approval of their mergers is now more limited in view of the stricter standard of proof set by the General Court in the CK Hutchison case. Nevertheless, this ruling does not mean that there are no concerns about such concentrations as the present one in this case. To go thus far, would create unrealistic expectations. This ruling simply raised the bar for the Commission to prove its case.[8]
According to a press conference with the Commission’s Spokeswoman for Competition on 29 July 2020, the Commission has appealed the General Court’s decision as it considers that the General Court has erred in its assessment of a number of crucial issues. More specifically, these statements refer to an erroneous assessment of the General Court in relation to the legal test of compatibility with the internal market of business concentrations, which do not lead to the creation or the strengthening of a dominant position (known as “gap cases”), the standard of proof of significant impediment to effective competition, error concerning the role of efficiencies and the burden of proof for those improvements, as well as the boundaries of judicial control of the Commission’s decisions by the General Court, in particular as regards the economic assessment of the concentration by the Commission’s experts.
Intern, Summer 2020
[1] Case COMP/M.7612 – Hutchison 3G UK / Telefónica UK
[2] Case T‑399/16 – CK Telecoms UK Investments Ltd v Commission
[3] Article 2 (3) of the EU Merger Regulation
[4] Recital 25 of the EU Merger Regulation
[5] Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, OJ C 31, 5.2.2004, p. 5–18
[6] Mark Powell and others, ‘A wake up call from Luxembourg?’ (White & Case LLP, 29 May 2020) <https://www.whitecase.com/publications/alert/wake-call-luxembourg> accessed 7 August 2020.
[7] Peter Alexiadis David Wood and Iseult Derème, ‘General Court Dismantles European Commission’s Tough Approach to Mobile Mergers’ (Gibson, Dunn & Crutcher LLP, 28 May 2020) <https://www.gibsondunn.com/general-court-dismantles-european-commissions-tough-approach-to-mobile-mergers/> accessed 7 August 2020.
[8] Mark Powell and others, ‘A wake up call from Luxembourg?’ (White & Case LLP, 29 May 2020) <https://www.whitecase.com/publications/alert/wake-call-luxembourg> accessed 7 August 2020.
