Three/O2 – EU merger control test clarified? (And lions in Regent’s Park)

“Formalistic”, “reductionist”, “selective and unbalanced or even deficient”. Advocate General Juliane Kokott did not mince her words in last week’s Opinion on the General Court’s judgment in CK Telecoms, in which she asks the Court of Justice to annul the judgment and refer the case back to the General Court. An AG Opinion is an impartial and independent senior legal opinion on a case which assists the Court in coming to its final judgment.

Her Opinion is the third big development in EU merger control recently, following the General Court upholding the Commission’s approach to calling in non-notifiable mergers in Illumina/GRAIL (discussed by my colleague Tom) and Kokott’s Opinion in Towercast that non-notified mergers could fall foul of Article 102, the prohibition on abuse of a dominant position.

But CK Telecoms is that rare beast of a case where the Court has a chance to weigh in on substantive rather than procedural issues. In particular, the General Court for the first time made findings in relation to a horizontal merger that does not create or strengthen a dominant position, but that the European Commission nonetheless considers causes non-coordinated effects that lead to a significant impediment to effective competition (SIEC). These cases are known as “gap” cases to symbolise the gap between unproblematic mergers and mergers that create or strengthen a dominant position. While they are particularly relevant in telecoms, where we often see (attempts at) “4-to-3” mergers, this type of analysis is important for any merger in an oligopolistic market.

The General Court’s judgment in this case was welcomed by many practitioners because it raised the standard of proof and applied a rigorous review of the Commission’s economic evidence. However, it was criticised by enforcers.

Below, we provide a quick background after which we dive straight into the Opinion. For full disclosure, the author acted for the Government of the United Kingdom in intervening in the case before the General Court. The UK did not intervene before the Court of Justice.

Background

This case is about the planned merger between Three and O2, two mobile network operators (MNOs) in the UK, through the acquisition of O2 by Three’s group, announced in 2015. Other than Three and O2, there are two further MNOs in the UK, EE (now owned by British Telecom) and Vodafone. In addition, at the time of the merger there were several mobile virtual network operators (MVNOs) in the UK, including Tesco Mobile, Virgin Mobile and TalkTalk. The difference is that MNOs own the networks they use, whereas MVNOs do not, and therefore need to contract with one or more MNOs to have access to their network at wholesale prices. The merger would reduce the number of MNOs from four to three.

Because the merger was announced pre-Brexit, it fell to the European Commission to review it. After referring the case to an in-depth Phase II inquiry, the Commission adopted a Statement of Objections in February 2016, informing Three and O2 that it was concerned about the merger. The parties proposed remedies to address these concerns, but these were rejected, after which the Commission blocked the merger. This was a break with tradition, as the Commission had previously cleared four-to-three mergers in telecoms on the basis of remedies that would strengthen competition from MVNOs. However, studies carried out after those clearances suggested that prices went up despite the MVNO remedies, leading to an increased scepticism about four-to-three mergers. The Commission was supported in this scepticism by the UK’s Competition and Markets Authority and Ofcom (its telecom regulator).

Importantly, the Commission had based its decision to block the merger on “non-coordinated effects” on an oligopolistic market. The Commission did not say that the merger created or strengthened a dominant position. According to the Commission, the merger would reduce competition and increase prices, hinder the development of network infrastructure in the UK, and eliminate important competitive constraints in the wholesale market.

Three’s parent company appealed the Commission’s decision at the General Court. In May 2020, that Court annulled the decision in its entirety, in essence on the ground that the Commission had failed to meet the standard of proof for demonstrating non-coordinated effects giving rise to an SIEC. The General Court’s judgment contained some stark findings. For present purposes, the most important points were:

  • To prohibit a merger that does not create or strengthen a dominant position on the basis of non-coordinated effects, the Commission must prove that the merger (i) eliminates “important competitive constraints” that the merging parties had exerted on each other, and (ii) reduces competitive pressure on the remaining competitors. These are cumulative conditions. The Commission’s reliance on the idea that Three was an “important competitive force” would lower the standard of proving an SIEC.
  • The standard of proof is stricter than the “balance of probabilities” (more likely than not), but less strict than “beyond reasonable doubt” (the criminal standard).
  • The evidence relied on by the Commission did not allow it to conclude that Three was an important competitive force or that Three and O2 were particularly close competitors.
  • The upward pricing pressure (UPP) analysis carried out by the Commission did not demonstrate with a sufficient degree of probability that prices would increase significantly following the elimination of competition between Three and O2.

The judgment was a major blow to the Commission. It could be argued that the General Court took this opportunity to raise some fundamental questions about the concept of SIEC, oligopolistic markets, and the standard of proof in merger cases. Whatever your views on the merits of the judgment, it was welcome that this went to the Court of Justice as clearly a final view from Europe’s highest court is necessary on questions as fundamental as these.

Advocate-General Kokott’s Opinion – Standard of proof

In her Opinion, the Advocate General indeed marks the occasion, noting that this is a further opportunity to clarify questions of principle in relation to merger control after landmark cases Tetra Laval and Sony/Impala.

Importantly, Kokott states, citing Sony/Impala, that the EU Merger Regulation does not impose different standards of proof with respect to decisions authorising a merger and decisions blocking it, since “those standards of proof are perfectly symmetrical”.

There is then a discussion of what that standard is, with the Advocate General essentially approving the Commission’s view that it should be the simple “balance of probabilities”, i.e. that the outcome is likely. Kokott also refers to “plausible”, which some have argued depicts a lower threshold than simply “likely”.

However, the two concepts (likely and plausible) are applied to different aspects. Kokott links likelihood to the outcome predicted by the Commission (“most likely outcome”) and plausibility to the prospective economic analysis carried out by the Commission. Thus, the Advocate General effectively says that the Commission needs to satisfy itself that a certain market development post-merger is the most likely outcome (on the balance of probabilities), using a plausible prospective analysis. When the General Court reviews the Commission’s assessment, it must not substitute its own economic analysis for that of the Commission.

If the Court of Justice follows this Opinion (and it does often do so), then that would not mean that all the Commission needs to do in future merger cases is to demonstrate that a certain scenario is plausible. Indeed, out of different future scenarios, a number may well be “plausible”. That does not equate to “more likely than not”. That would indeed be internally inconsistent since multiple scenarios can be plausible, but only one can be “more likely than not”. Consequently, it would be manifestly inaccurate to say that simply because one scenario is plausible, the Commission has discharged its burden of proof. If that was the Commission’s finding in a decision, then the Commission would have applied the wrong test. If the Commission however applies a prospective economic analysis to get to the most likely outcome, then that analysis must be plausible to withstand judicial review. In other words, a plausible economic analysis can discharge the Commission’s burden of proof as against a balance of probabilities standard.

The Opinion does not therefore equate the concepts of plausibility and balance of probabilities. The Commission must show that a future market development is likely to occur on the balance of probabilities, but when the General Court reviews that assessment, it must limit itself to determining whether the Commission applied the right test, whether the evidence relied on is factually accurate, reliable and consistent, whether the evidence contains all relevant information that must be taken into consideration and whether it is capable of substantiating the conclusions drawn. The Commission has a margin of discretion, albeit that this margin is not unlimited.

It follows that the General Court’s reference to the Commission being required to demonstrate with a “strong probability” that the merger will lead to an SIEC and the notion that this standard of proof is stricter than “more likely than not” on the “balance of probabilities” is – according to Kokott – wrong in law.

The evidence required must still be strong, but that should not be confused with the standard of proof. Indeed, depending on the complexity of the issue and the likelihood of what is being claimed, a decision maker will sometimes require stronger evidence to be satisfied on the balance of probabilities than in other instances. In the UK, this was famously discussed in Secretary of State For The Home Department v. Rehman, in which Lord Hoffmann said that “It would need more cogent evidence to satisfy one that the creature seen walking in Regent’s Park was more likely than not to have been a lioness than to be satisfied to the same standard of probability that it was an Alsatian”.

Some things are inherently more likely than others. But that does not change the standard of proof, it changes what is required to meet that standard. The more complex or inherently unlikely the scenario favoured by the Commission, the stronger the evidence needs to be for the Court to uphold the Commission on that point.

When do non-coordinated effects amount to an SIEC?

Advocate General Kokott also shares her views on when non-coordinated effects give rise to an SIEC.

As noted above, the General Court had held that where the Commission was not alleging that the merger would lead to the creation or strengthening of a dominant position, it had to demonstrate the existence of two cumulative conditions to find an SIEC: (i) 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.

However, the Advocate General calls the General Court “formalistic” and “reductionist” in this approach to the concept of SIEC. According to Kokott, the General Court’s approach would prevent the Commission from fully investigating the competitive relationships and forces which determine the functioning of an oligopolistic market and from developing theories of harm which do not fulfil the two conditions. The General Court is wrong, according to the Advocate General, to view the two conditions as cumulative and exhaustive, and these conditions do not determine the scope of what forms an SIEC.

Other important aspects of the Opinion

The Opinion is of considerable length and one blog post cannot really do it justice. However, there are other important aspects that should be noted:

  • An “important competitive force” must have more of an influence on competition than its market share would suggest, but it is not essential that this party competes in a particularly aggressive way and forces other players to follow that conduct. These are only examples of how a competitor could have more of an influence than its market share would suggest.
  • It is not necessary for the Commission to find that the merging parties were “particularly close competitors” for closeness of competition to be used in support of a non-coordinated effects theory of harm.
  • The General Court attributed excessive weight to the factors of “important competitive force” and closeness of competition by criticising the Commission for having considered these two factors as being, in themselves, sufficient to establish the existence of an SIEC. The Commission had examined those factors only as one of a number of other factors in order to demonstrate the existence of an SIEC.
  • There is no legal requirement on the Commission by default to take into account “standard” merger efficiencies (like the rationalisation and integration of production and distribution processes) when carrying out a UPP analysis.  
  • The General Court carried out a “selective and unbalanced or even deficient assessment” of the theories and evidence put forward by the Commission by assessing only some of the factors and evidence relied on and not assessing the probative nature of other factors and evidence. The Court also failed to carry out its own overall assessment on whether the three theories of harm were independent or interdependent.

Where next?

This is an important step towards a final judgment in this case which has been running since 2015 when it was notified to the Commission. As has been noted elsewhere, while the General Court judgment provided a boost to deal prospects in markets with a similar number of major players, this Opinion may well put a dampener on things. This is especially the case in European telecoms markets that are eager to consolidate, although it does not nowadays affect the analysis of a possible 4-to-3 merger in the UK between Vodafone and Three.

However, it is only when we have the final judgment from the Court of Justice that it will be clear where things stand on important issues like the standard of proof and the requirements for finding an SIEC in an oligopolistic market. Future deals may also have different justifications or efficiencies that were not in play in the Three/O2 merger. This Opinion does not affect the validity of those justifications and efficiencies.

Stijn Huijts is a partner at Geradin Partners. He acted for the Government of the United Kingdom in its intervention in the General Court. Photo by Nick Fewings on Unsplash.

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