The European Commission’s ability to block mergers in oligopolistic markets is likely to be more restricted as it faces greater evidential hurdles in meeting the higher standard of proof imposed by the EU General Court, which could lead to more consolidation attempts by competitors in these markets.
The EU General Court on 28 May annulled the 2016 decision by the European Commission (Commission) to block the merger between Hutchison (operating in the United Kingdom under the brand Three) and Telefonica UK (O2). The judgment is the first court ruling since the 2004 introduction of the new significant impediment to effective competition (SIEC) test in a so-called “gap case,” i.e., a case in an oligopolistic market where the Commission had found that the merger would result in SIEC without creating or strengthening a dominant position. As such, it is likely to significantly influence European merger control going forward (at least unless and until the ruling is overturned).
Historically, oligopolistic markets have been a major focus for the Commission due to concerns that they may not deliver competitive outcomes (i.e., result in structural market failure) even without companies acting anti-competitively. However, enforcement has proved to be difficult in this area, as the Commission has faced some of its biggest court defeats in both prospective merger control (e.g., Airtours), as well as in retrospective antitrust enforcement cases (e.g., Wood Pulp).
One response to these defeats was the 2004 revision of the EUMR to introduce the SIEC test, according to which a transaction should be prohibited if it would “significantly impede effective competition, in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position.” This addressed the perceived “enforcement gap” under the previous regime, which required a merger to be found to result in the creation or strengthening of a dominant position of a single undertaking or a group of undertakings before it could be prohibited.
As a result, the Commission reasoned that it could now prohibit mergers in oligopolistic markets without a prior finding of dominance (as in the present case). The judgment, if upheld, thus marks a significant setback to the Commission’s attempt to increase its enforcement efforts in oligopolistic markets via prospective merger control. Further, it may mean that the recently launched consultation on a new competition tool to allow prospective market investigations to address structural market failures becomes even more important for the Commission’s enforcement policy going forward.
In 2016, the Commission blocked the planned Three–O2 merger, on the basis that it would have led to higher prices, less choice for consumers, and reduced innovation in the United Kingdom. The court has now, following an intense review, annulled this prohibition decision. More specifically, the court struck down all the Commission’s three theories of harm by finding that it had failed to prove to the requisite legal standard that the merger would have resulted in anticompetitive effects on the UK retail or wholesale mobile markets or in relation to the two UK network sharing agreements.
In doing so, the court also raised a number of controversial legal issues, set out below.
Definition and Use of Concept of Important Competitive Force
The court found that the Commission had considerably and unjustifiably broadened the scope of the SIEC test, by concluding that any elimination of an “important competitive force” would amount to the elimination of an important competitive constraint which, in turn, would justify a finding of a SIEC.
The court thus held that the Commission had made an error of both law and assessment in wrongly concluding the following:
This use would allow the Commission to prohibit horizontal concentrations in oligopolistic markets on the basis of a theory of harm based solely on a reduction of competitive pressure on the remaining competitors (without, therefore, the need for any analysis of the possible elimination of the important competitive constraints that the merging parties exert upon each other).
The court then went on to clarify that noncoordinated effects may only lead to an SIEC where a transaction results in
This is likely to be a key issue for any Commission appeal of the judgment to the ECJ given the importance of this issue for future cases. One of the main questions here would be whether the Commission’s analysis fell within its margin of discretion in applying a complex economic assessment to the facts, or whether it exceeded its discretion by drawing conclusions which were not supported by the evidence.
Standard of Proof
The court addressed this issue by noting that the prospective analysis in merger control involves a two-stage process:
The court also noted that since the second stage of the analysis is the result of an assessment based on hypotheses, the Commission did not need to prove that the scenarios and theories of harm underpinning that assessment would inevitably occur. However, the Court went on to note that “those scenarios and theories of harm must appear sufficiently realistic and plausible, and cannot therefore solely be conceivable from a theoretical point of view, in the light of an analysis of all the relevant factors.”
The court concluded that the Commission must show that there is a “strong probability” that the transaction will give rise to an SIEC. This is a higher threshold than requiring the Commission to show that the transaction was “more likely than not,” or on the balance of probabilities, likely, to give rise to an SIEC, but not as high as requiring that the Commission prove “beyond all reasonable doubt” that the transaction would give rise to an SIEC.
This formulation of the standard of proof appears to further develop the law as stated in the Cisco Systems and Messagenet case in which the court held that an “assessment of probabilities” was involved and not an obligation on the Commission “to show beyond any reasonable doubt” that a concentration does not give rise to any competition concern. Furthermore, the ECJ in the Impala case previously held that the standard proof for prohibition decisions is the same as for clearance decisions and does not vary according to the complexity of the theory of harm at issue. This would mean in principle that the higher standard of proof imposed by the court in the judgment would apply to all cases under the EUMR, thus imposing this higher burden on the Commission in every merger case. Accordingly, this is also likely to be a key issue in any Commission appeal of the judgment.
The Commission’s Quantitative Analysis
The court also addressed the Commission’s upward pricing pressure (UPP) analysis, a quantitative analysis on the merger’s likely effects on prices. Although the court confirmed that such an analysis can be useful for initial screening purposes (i.e., to determine whether a transaction requires further investigation), it found that the Commission’s assessment did not sufficiently demonstrate that prices would significantly increase post-merger, or that the merger would lead to a degradation in network quality.
Further, the court held that the Commission should have included as part of its quantitative analysis any “standard efficiencies” (e.g., from the rationalisation and integration of the merged entity’s production/distribution processes (which may ultimately lead to lower prices)).
Unless and until the ECJ rules in the Commission’s favour on a possible appeal, the Commission’s ability to block mergers in oligopolistic markets is likely to be more restricted as it faces greater evidential hurdles in meeting the higher standard of proof imposed by the court. This could lead to more consolidation attempts by competitors in oligopolistic markets.
As regards further telecoms consolidation, the issue of evidence is likely to become even more important and thus also the role of NRAs such as Ofcom. While the Commission may find it difficult to adduce sufficient evidence in order to support its theories of harm to the requisite standard, NRAs have been collecting and assessing data over a much longer time period than the Commission and may thus be in a position to support (or attack) such theories of harm with more robust evidence.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers: