In its judgement of 13 July 2023, the Court of Justice entirely sets aside the General Court’s judgement of 2020 which annulled the Commission’s decision blocking the acquisition of Telefonica UK by Hutchinson 3G UK and provides clarifications on the standard of proof applicable to gap cases in merger control (case C-376/20 P)
In its judgement of 13 July 2023 in Case C-376/20 P Commission v CK Telecoms UK Investments, the Court of Justice reversed the stricter legal test laid down by the General Court in its judgement of 28 May 2020 in Case T-399/16, and clarified several key questions regarding the assessment of gap cases under EU merger control provisions. So-called gap cases are cases in which a transaction (generally involving smaller players in an oligopolistic market) does not create or strengthen a dominant position but may still give rise to a significant impediment to effective competition (“SIEC”) by giving rise to non-coordinated effects.
On 11 May 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, i.e., it would have produced non-coordinated effects by reducing competitive pressure in the market.
On appeal, the General Court annulled the Commission’s decision in its entirety (see our August 2020 news item). It concluded that the Commission had incorrectly determined and applied the legal standard and burden of proof in gap cases, and rejected the Commission’s three theories of harm.
The Commission challenged that judgement before the Court of Justice, which decided to set aside the judgement of the General Court. The case has now been remanded to the lower Court to revaluate the Commission’s theories of harm in light of the correct legal standard based on the Court of justice’s findings, the main ones of which are summarised below.
• The standard of proof to demonstrate a SIEC
The Court of justice first ruled that the General Court erred in law in finding that the Commission had to demonstrate “strong probability” that a concentration will give rise to anti-competitive effects.
Indeed, the Court found that it is sufficient for the Commission to show “by means of a sufficiently cogent and consistent body of evidence” that “it is more likely than not” that the concentration would or would not result in a SIEC (para. 87).
To reach this conclusion, the Court relied on a number of elements. The Court first observed that there is nothing to suggest that the EU Merger Regulation would require the Commission to apply different standards of proof for prohibition as opposed to approval decisions. Therefore, the Court found that the Commission cannot be held to a higher standard of proof when issuing a prohibition decision than a clearance. In that context, the Court recalled that there can be no presumption of compatibility or incompatibility with the internal market. In addition, according to the Court, the standard of proof required is not dependant either on the type of concentration at stake or on the inherent complexity of a theory of competitive harm put forward therein.
• The legal standards to find non-coordinated effects and the interpretation of key notions
The Court then delves into the legal standard applicable to the assessment of a SIEC in gap cases and the interpretation of key concepts therefore.
First, the Court rejected the General Court’s finding that in gap cases the Commission must, based on Article 2(3) and recital 25 of the Merger Regulation, meet a stricter legal test (than in cases above the dominance threshold) to prove a SIEC by demonstrating that two conditions are met (i.e., the elimination of important competitive constraints that the merging parties has exerted upon each other and the reduction of competitive pressure on the remaining competitors).
Indeed, the Court found that this interpretation is too strict and incompatible with the objective of the Merger Regulation, which is to ensure an effective control of all concentrations which are capable of resulting in a SIEC, including those giving rise to non-coordinated effects. In particular, the Court noted that the General Court’s interpretation implies that neither of these two conditions would, in themselves, be sufficient to demonstrate a SIEC therefore impeding effective merger control.
Second, the Court found that the General Court also misinterpreted the key concepts used to assess the likeliness of non-coordinated effects, namely the concept of “important competitive force” (by requiring the Commission to demonstrate that the undertaking concerned competed particularly aggressively in terms of prices and that it forced the other players to align with its prices) and the concept of “close competitors” (by requiring the Commission to establish that the merging parties are ‘particularly close competitors’).
Indeed, the Court set a lower threshold and clarified that it is sufficient for the Commission to show that an undertaking “has more of an influence on the competitive process than its market share or similar measures would suggest” to classify as an “important competitive force”. In addition, the Court recalled that closeness of competition is only one of the factors in assessing a SIEC and that, in this regard, the higher degree of substitutability between the merging firms’ products (which may thus be considered as closer substitutes than others), the more likely it is that the merging firm will raise prices significantly post-merger. However, according to the Court, a very high level of substitutability between the parties’ products is not required. The reason is that, even where substitutability between the merging parties’ products is not particularly high, there may also be a lower level of substitutability between those parties’ products and the products of undertakings which are not party to the concentration, which is capable of incentivizing the parties to the concentration to increase the prices of their products.
• Quantitative analysis of the effects of the concentration
Finally, the Court found that the General Court erred in law in requiring the Commission to take into account, on its own motion, “standard” efficiencies in its analysis of predicted price increases, i.e., efficiencies which, according to the General Court, are specific to each concentration and which are a component of a quantitative model to assess whether a concentration is capable of producing a SIEC.
Indeed, the Court ruled that neither the EU Merger Regulation nor the Guidelines refer to such efficiencies or establish a presumption that any concentration gives rises to such efficiencies. In any case, the Court considered that it is for the parties to the concentration alone to demonstrate such pro-competitive effects and there can be no presumption thereof.
This judgment is of particular importance for companies seeking to merge in oligopolistic markets. By opposing the introduction of a stricter legal test and higher standard of proof for oligopolistic mergers, the Court indeed restores the Commission’s discretion to intervene in those markets.
Please contact Pierre de Bandt, Chloé Binet or Victoria Heinen for further information about this case and/or for general legal advice relating to competition law.