UK: Hutchinson - O2: Oligopoly Or Not, The Balance Of Probabilities Test Applies

Introduction

On 13 July 2023, the European Court of Justice delivered its ruling in Commission v CK Telecoms UK Investments (C-376/20 P), overturning the General Court's judgment annulling the European Commission's (Commission) prohibition of CK Hutchinson's (Three) proposed acquisition of O2, and referring the case back to the General Court. The ruling addresses the "standard of proof" required by the Commission to conclude that a concentration could significantly impede effective competition (SIEC), amongst other things.

The case stems from the Commission's prohibition of the Three/O2 transaction in 2016, a four-to-three merger in the UK mobile communications sector. In 2020, the General Court annulled the Commission's decision on appeal, ruling that the Commission had not met the requisite legal standard - namely that there was a "strong probability" of a SIEC. It also found that the merging parties did not impose important competitive constraints on each other, and that the Commission had failed to account for "standard" efficiencies in its assessment of the merged entity's pricing incentives.

The Commission challenged the General Court judgment on multiple grounds, including multiple errors of law, distorting the Commission's decision (and its pleadings) and overstating its powers of review. It argued that the judgment undermined its authority to prevent problematic deals across all sectors. Considering the broad application of the principles at stake, the reversal of the General Court judgment by the EU's highest court represents a significant victory for the Commission.

While the implications of this ruling are particularly significant for the mobile communications sector which has seen significant consolidation over the last ten years (such that the sector is already quite concentrated in many jurisdictions), they go far beyond his sector, and will be felt in many other concentrated sectors.

Key points: Standard of proof, SIEC, closeness of competition, and efficiencies

The Court confirmed that the standard of proof under the EUMR is whether mergers are "more likely than not" to give risk to a significant impediment to effective competition (the so-called "balance of probabilities" or "more likely than not" test). It explicitly dismissed the General Court's conclusion that the Commission must demonstrate a "strong probability" of a SIEC, thereby lowering the bar for the Commission to prohibit a merger.

Specifically, it confirmed that the Commission is not required to prove that merging parties in oligopolistic markets impose important competitive constraints on each other (i.e., it is sufficient that the merger significantly lessens competition). In other words, the bar is not higher for the Commission when it is assessing mergers in oligopolistic markets (compared to mergers involving the creation or strengthening of a dominant position).

The Court affirmed that the prospective nature of the economic analysis leaves the Commission with a margin of discretion. Reiterating the predictive nature of merger control, the judgment emphasizes that the Commission need only provide a cogent and consistent body of evidence that the concentration is "more likely than not" to lead to a SIEC.

The judgment explicitly lowered the bar for the Commission to conclude that a party is an "important competitive force" and that the parties are "close competitors". The Court dismissed the General Court's interpretation of both concepts, finding that the General Court was incorrect to require the Commission to demonstrate that the merging parties are not "particularly close competitors", as a result of its over emphasis of the market structure and reduction in the number of mobile network operators (from four to three). The ECJ reaffirmed that the closeness of competition is just one of multiple factors that must be considered when assessing whether a transaction gives rise to a SIEC.

Finally, the ECJ ruled that the General Court made an error in law by requiring the Commission to take into account standard efficiencies which are common to all concentrations in its quantitative analysis. Consequently, as foreshadowed by the Advocate General's Opinion, the Commission won on its key arguments, and the ECJ set aside the General Court's reasoning as a whole and referred the case back to it.

Takeaways

It goes without saying that the judgment's confirmation of the balance of probabilities test (including in oligopolistic markets) is the most far-reaching implication. Reiteration of this "more likely than not" test, and rejection of the General Court's higher "strong probability" of harm standard lowers the bar for the Commission. Likewise, its dismissal of the General Court's narrow approach to the "closeness of competition" and "important competitive force" concepts has also confirmed the Commission's range of manoeuvre, particularly in transactions concerning potential competition.

On a more practical note, the judgment means that mergers falling short of creating or strengthening a dominant position (in oligopolistic markets) will not fly under the radar. This does not mean all four-to-three mergers will draw intense scrutiny as illustrated by the unconditional clearance of a four-to-three merger of Dutch mobile network operators (M.8792 - T-Mobile NL/Tele 2 NL). As the Commission has said before, there is no 'magic number' in cases concerning oligopolistic markets.

Now it is for the General Court, with exclusive jurisdiction to consider the facts and factual evidence, to decide whether the merger was more likely than not to lead to a SIEC using the legal framework set out by the ECJ.

The author wishes to thank Aliriza Ozturk, International Trainee, Norton Rose Fulbright LLP Brussels for his contribution.

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