EU Court of Justice in CK Telecoms sides with the European Commission's approach to mergers in oligopolistic markets
11 min read
The EU Court of Justice in the CK Telecoms1 ruling has addressed key questions of EU merger control, including the standard of proof for the European Commission to challenge a merger, the assessment of mergers below the dominance threshold ("gap cases"), the concepts of "closeness of competition" and "important competitive force", and the treatment of efficiencies. The ruling endorses the European Commission's approach to gap cases, likely bolsters its increasingly hawkish approach to merger control enforcement, and dampens the hopes of the telco industry for more leeway towards in-market consolidation in Europe.
- The EU Court of Justice (ECJ) held that to block a merger or require remedies, the European Commission ("Commission") needs to show based on a "cogent and consistent body of evidence" that a merger "more likely than not" will result in a significant impediment to effective competition (SIEC). The ECJ reasoned that the prospective nature of merger review precludes a requirement for the Commission to meet a higher standard of proof ("strong probability"), as suggested by the General Court (GC).2
- The judgment clarified that in mergers below the dominance threshold (so-called "gap cases") finding an SIEC cannot be limited only to scenarios, as the GC suggested, where the two conditions set out in recital 25 of the EU Merger Regulation (EUMR) are cumulatively fulfilled, namely: (i) the elimination of an important competitive constraint that the merging parties had exerted upon each other and (ii) a reduction of competitive pressure on the remaining competitors. According to the ECJ, the restrictive interpretation suggested by the GC would be incompatible with the objective of the EUMR,3 which is to establish effective control of all mergers.
- The ECJ also confirmed the key components of the Commission's analysis of gap cases and the Commission's interpretation of the notions of "closeness of competition" and "important competitive force". The ECJ disagreed with the GC's stricter interpretation requiring the Commission to show that the merging parties are "particularly close" if the case involved a market characterised by a high degree of product homogeneity. Instead, the merging parties' closeness relative to their competitors might be used by the Commission as evidence against the merging parties. In addition, a merging party may be considered an "important competitive force" even if it does not "stand out" from its competitors by, e.g., being more aggressive in terms of pricing conduct, as required by the GC. It suffices that it has "more of an influence on the competitive process than its market share or similar measures would suggest".
- The judgment confirmed that the Commission is not required of its own motion to take into account "standard efficiencies" as part of its quantitative analysis of price increases. The ECJ held that only efficiencies that meet the high standard of proof required by the Commission to recognise the parties' efficiency claims need to be taken into account.
- The judgment is widely seen as a major victory for the Commission. Margrethe Vestager, the Commission's Commissioner for Competition, commented that the judgment "validated" the Commission's approach to merger assessment and made clear that the judgment's importance "goes far beyond the specific circumstances and mobile communications sector affected by the Commission's decision".4
- In particular, it remains to be seen whether in oligopolies featuring homogeneous products, the Commission can just claim each competitor is "close" and one of them is an "important competitive force" to show an SIEC. While the judgment makes clear that all the relevant circumstances of the case need to be considered, these thresholds are relatively easy to meet in such cases and will be the key elements of the Commission's analysis in such cases.
The ECJ's judgment relates to the appeal lodged by CK Telecoms against the Commission's 2016 decision blocking the proposed acquisition of Telefónica's UK business by CK Telecoms.5 The transaction would have reduced the number of mobile network operators in the UK from four to three and made the merged entity the largest operator in the UK.
The Commission found that the merger would have removed an important competitor from the UK market and led to higher prices and reduced choice and quality for consumers. The Commission rejected the (mostly behavioural) remedies proposed by the parties and blocked the merger. In 2020, the GC quashed the Commission's prohibition decision (for more details see our alert here). Following the Commission's appeal of the GC's decision to the ECJ, last year's opinion of Advocate General (AG) Kokott,6 in turn, criticised the GC's ruling and recommended to the ECJ to set aside the GC's judgment in its entirety and to refer it back to the GC for a new ruling (for more details see our alert here).
The ECJ's judgment
Standard of proof
As it does in most cases, the ECJ followed the advice of AG Kokott and ruled that the GC erred in law by requiring the Commission to demonstrate "strong probability" that a merger will give rise to anti-competitive effects. The ECJ held that the Commission only needs to show that "it is more likely than not" that the merger would result in an SIEC. The ECJ held in that regard that:
- The standard of proof does not vary according to the type of decision (approval or prohibition). The standard of proof is symmetrical – nothing in the EUMR imposes different standards of proof in relation to decisions approving or prohibiting a merger and there is no general presumption that a merger is compatible or incompatible with the internal market.
- The standard of proof does not vary depending on the type of merger or the complexity of a theory of harm put forward.
- The Commission enjoys a margin of discretion with regard to economic matters in the ex ante review of mergers when applying the merger control rules. The ECJ observed that the prospective and more often complex merger control analyses are necessarily more uncertain and this precludes a requirement for the Commission to meet a particularly high standard of proof to demonstrate that a merger would or would not result in an SIEC.
SIEC in gap cases
The ECJ ruled that the GC erred in law by holding that in mergers below the dominance threshold (gap cases) an SIEC can only be established if the Commission demonstrates that the two conditions set out in recital 25 of the EUMR, namely (i) elimination of an important competitive constraint that the merging parties had excreted upon each other and (ii) reduction of competitive pressure on the remaining competitors, are cumulatively satisfied. According to the ECJ:
- The EUMR aims to establish effective control of all mergers in terms of effect on competition and extends to all mergers which would result in an SIEC, i.e., including gap cases.
- The application of the merger control rules cannot be limited to gap cases which cumulatively fulfil the above-mentioned conditions, as that would limit the scope of merger review of gap cases. Such a restrictive interpretation would be incompatible with the EUMR's aim to establish effective control of all mergers which would result in an SIEC.
Important competitive force
The ECJ ruled that the GC erred in law by requiring the Commission to demonstrate that the merging parties competed particularly aggressively in terms of price; it is sufficient for the Commission to demonstrate 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". The ECJ reasoned that:
- The requirements for classifying a company an "important competitive force" should not be as such as to prevent the Commission from prohibiting a merger which could harm effective competition; this would hamper the effectiveness of merger control.
- It is not necessary to show that a company "stands out" from its competitors by being "particularly aggressive" in terms of price to find that the merger could alter the competitive dynamic to a significant and detrimental extent; being "particularly aggressive" is not decisive for establishing an SIEC.
- Price is often not the only important parameter for assessing competitive dynamics; an exclusively price-focused approach to classify an undertaking as an "important competitive force" would be incomplete. The concept of an "important competitive force" cannot be thus limited to companies which compete particularly aggressively in terms of price, force their competitors to align with their pricing, or whose pricing policy is likely to alter significantly the competitive dynamics of the market concerned.
- The Commission's past determinations that a company classifies as an "important competitive force" can merely serve as indication for future cases. Previous determinations do not mean that those are the only situations capable of giving rise to a classification as an "important competitive force".
- The GC wrongly concluded that the Commission was of the view that the elimination of an important competitive force was in itself sufficient to prove an SIEC. Instead, according to the ECJ, the fact that one of the merging parties acts as an "important competitive force" is just one of many factors that need to be considered.
Closeness of competition
The ECJ ruled that the GC erred in law by requiring the Commission to find that the merging parties are "particularly close" competitors. The ECJ held that also mergers between competitors that are not "particularly close" can result in an SIEC. The ECJ reasoned that:
- Closeness of competition is only one of the factors when assessing whether a merger will result in significant non-coordinated effects. A higher degree of closeness of competition between the merging parties may constitute evidence that it is more likely than not that a merger will result in an SIEC, a lesser degree may constitute evidence to the contrary.
- Requiring that the parties are "particular close" implies that there is a high level of product substitutability between the merging parties. However, even where substitutability between the merging parties' products is not particularly high, there may be a lower level of substitutability between the merging parties' products and the products of its competitors, which is capable of incentivising the merging parties to increase prices post-transaction.
- The GC wrongly concluded that the Commission was of the view that closeness of competition was in itself sufficient to prove an SIEC. Closeness is just one of many factors that need to be considered.
The ECJ confirmed that the GC's comparison of the predicted price increase in the present case to the ones in the Commission's past cases was flawed; the Commission is also not required to take into account ‘standard efficiencies' on its own motion:
- The GC erred in law by holding that the price increases predicted in the present case were not significant since it was lower compared to the price increases predicted by the Commission in cases concerning 4-to-3 mobile mergers in Ireland and Germany. Besides the fact that the GC distorted the Commission's defense in that regard, according to the ECJ, the Irish and German cases were not comparable to the present case because the merging parties in those cases offered sufficient remedies to address the Commission's concerns. In any event, the Commission's past decisions can merely serve as an indication – they are not a legal framework for future cases.
- The GC erred in law by requiring the Commission to take into account "standard efficiencies" in its analysis of predicted price increases on its own motion. Neither the EUMR nor the Horizontal Merger Guidelines refer to "standard" efficiencies, let alone establish a presumption that any merger gives rise to such efficiencies. The mere possibility that a merger may give rise to efficiencies "in no way implies that all concentrations give rise to such efficiencies"; in any case, it is always for the merging parties to demonstrate efficiencies. The GC's view would create a presumption that certain efficiencies exist, which in turn would reverse the burden of proof from the merging parties to the Commission, which could, in turn, reduce the effectiveness of EU merger control.
A holistic assessment is required
The ECJ held that the GC erred in law by failing to carry out an overall assessment of the relevant factors and findings to ascertain whether the Commission had demonstrated an SIEC. The Horizontal Merger Guidelines set out factors influencing whether an SIEC is likely, but not all such factors need be present to establish an SIEC. All the relevant factors "must be subject to an overall assessment". It is for the EU Courts to assess if all the relevant factors and evidence on which the Commission has relied are sufficient to demonstrate the existence of an SIEC.
The judgment not only confirms the Commission's approach to 4-to-3 mobile mergers, but more broadly backs the Commission's toolbox in assessing gap cases. It could also be expected to provide the Commission with renewed confidence to challenge mergers in oligopolistic markets, also in cases involving novel theories of harm. Overall, it is a big win for the Commission and could be viewed as an endorsement of the more interventionistic approach to merger control that started during Margrethe Vestager's second term at the Commission's Directorate-General for Competition.
1 European Commission v. CK Telecoms UK Investments Ltd, Case C-376/20 P, 13 July 2023 (ECJ Judgment).
2 CK Telecoms UK Investments Ltd v. European Commission, Case T-399/16, 28 May 2020 (GC Judgment).
3 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings.
4 Commission press release, 13.07.2023, "Statement by Executive Vice-President Margrethe Vestager on today's Court of Justice judgment on the Hutchison/O2 UK merger prohibition decision".
5 Commission decision, M.7612 – Hutchison 3G UK / Telefonica UK, 11.05.2016.
6 European Commission v. CK Telecoms UK Investments Ltd, Case C-376/20 P, Opinion of Advocate General Kokott, 20 October 2022 (AG Opinion).
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