In its judgment of 28 May 2020 (CK Telecoms UK Investments / Commission, T-399/16), the General Court annulled the European Commission’s decision prohibiting the proposed merger between two competitors on the UK mobile telephony market. That judgment is important since the General Court has for the first time interpreted the legal test of “significant impediment to effective competition” (SIEC) under the EU Merger Regulation. That test was introduced to address potential non-coordinated effects (unilateral effects) in cases where the transaction would not enable the merging entities to create or strengthen an individual or collective dominant position on the relevant market.
In 2016, the Commission blocked the proposed acquisition of Telefonica UK (O2) by Hutchison 3G UK (Three), which would have given rise to a SIEC on that oligopolistic market as a result of a reduction from four to three competitors on the mobile telephony market in the United Kingdom.
In its judgment, the General Court interpreted Article 2(3) of the Merger Regulation as allowing the Commission to prohibit, under certain circumstances, concentrations on oligopolistic markets which, although not giving rise to the creation or strengthening of an individual or collective dominant position, are liable to affect the competitive conditions on the market to an extent equivalent to that attributable to such positions. It specified that two cumulative conditions are required to conclude that a concentration may result in a SIEC: the concentration must involve (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”.
As regards the standard of proof, the General Court stressed that the Commission is required to produce sufficient evidence to demonstrate with a strong probability the existence of a SIEC following the concentration. The standard of proof is therefore stricter than in the case where a significant impediment to effective competition is “more likely than not”, on the basis of a “balance of probabilities”, but is less strict than a standard of proof based on “being beyond all reasonable doubt”.
On the basis of these considerations, the General Court found in its decision that the Commission failed to provide convincing evidence to establish the existence of a SIEC following the proposed concentration.
First of all, with regard to the concept of “important competitive force”, the General Court considered that the mere fact that, following the merger, the concentration would be strengthened on an oligopolistic market cannot lead to the conclusion that such a concentration would be liable to constitute a SIEC in the context of a theory of harm based on non-coordinated effects. Indeed, such a reasoning would allow the Commission to prohibit any horizontal merger in an oligopolistic market.
In fact, the Commission confused three concepts, namely the concept of a “significant impediment to effective competition”, which is the legal criterion referred to in Article 2(3) of the Merger Regulation, the concept of “elimination of [an] important competitive [constraint]”’, referred to in recital 25 of that regulation, and the concept of elimination of an “important competitive force”, used in the contested decision and based on the Horizontal Merger Guidelines.
According to the General Court, such confusion leads to a considerable broadening of the scope of Article 2(3) of the Merger Regulation, since any elimination of an important competitive force and the mere decline in the competitive pressures which would result from the loss of an undertaking having more of an influence on competition than its market share would suggest, would amount to the elimination of an important competitive constraint which, in turn, would justify a finding of a significant impediment to effective competition. Instead, the concept of “important competitive force” means that the merging party must stand out from its competitors in terms of impact on competition.
Secondly, as regards the assessment of the closeness of competition, the General Court considered that the fact that Three and O2 are relatively close competitors in some of the segments of a concentrated market comprising four mobile network operators is not sufficient to prove the elimination of the important competitive constraints which the parties to the concentration exerted upon each other and cannot suffice to establish a SIEC. If that were not the case, any concentration resulting in a reduction from four to three operators would be prohibited as a matter of principle.
Thirdly, with regard to the quantitative analysis of the effects of the concentration on prices, it was found that the Commission’s analysis lacked probative value since it had not demonstrated, with a sufficient degree of probability, that the elimination of the important competitive constraints that the parties exerted upon each other would result in a significant increase in prices and, therefore, in a significant impediment to effective competition.
The Court also underlined that any concentration will lead to efficiencies - which stem in particular from the rationalisation and integration of production and distribution processes by the merged entity - and pointed out that the Commission did not include those standard efficiencies in its quantitative analysis. According to the General Court, the Commission thus confused two types of efficiencies, namely those referred to in the Horizontal Merger Guidelines and those specific to each concentration. Efficiencies within the meaning of the Guidelines must be taken into account in the overall competitive appraisal of the concentration, in order to ascertain whether they are likely to counteract the restrictive effects of the concentration. However, the category of efficiencies at issue in the present case was merely a component of a quantitative model designed to establish whether the concentration was capable of producing such restrictive effects. It was therefore an evidential matter relating to the existence of restrictive effects which had been dealt with prior to the overall competitive appraisal as provided for in paragraph 76 of the Horizontal Merger Guidelines.
Finally, with regard to the effects of the concentration on the two network-sharing agreements (EE/Three and Vodafone/O2) and on the mobile network infrastructure in the UK, the General Court considered that a possible misalignment of the interests of the partners in a network-sharing agreement, a disruption of the pre-existing network-sharing agreements, or even the termination of those agreements does not constitute, as such, a SIEC in the context of a theory of harm based on non-coordinated effects. It was also pointed that the Commission did not analyse the effects of the concentration in relation to a possible exercise of market power, in the form of a degradation of the services offered by the merged entity or of the quality of its own network, while such analysis should have been at the heart of the assessment of the non-coordinated effects arising from a concentration.
Like the Airtours judgment in 2002, which provided guidance for the assessment of coordinated effects or joint dominance in EU merger control, the CK Telecom judgment constitutes a landmark ruling defining the substantive criteria for assessing unilateral effects and establishing a SIEC in oligopoly situations. Since the Commission appealed the ruling, it remains to be seen whether the standards to meet the SIEC test will be confirmed by the Court of Justice.
Please contact Pierre de Bandt, Jeroen Dewispelaere for further information about this case and/or for general legal advice relating to competition law.