The ECJ Judgment in CK Telecoms – Setting the Record Straight?

The ECJ Judgment in CK Telecoms – Setting the Record Straight? - 0122 Blog post

Introduction

On 13 July 2023, the European Court of Justice (‘ECJ’) delivered its highly anticipated ruling in CK Telecoms UK Investments v European Commission (‘CK Telecoms’).

The Grand Chamber judgment is significant at the most fundamental level. It clarifies some of the core legal concepts and principles at the very heart of EU merger control.

The five crucial issues the ECJ deals with are (1) the standard of proof under the EU Merger Regulation (‘EUMR’); (2) unilateral effects in so-called ‘gap cases’; (3) the scope and limits of judicial review in competition law; (4) the concepts of ‘closeness of competition’ and ‘important competitive force’; and finally (5) the role of efficiencies and quantitative analyses.

In doing so, the ECJ largely follows the Opinion of Advocate General Kokott, comprehensively reverses the controversial judgment of the General Court, and sides with the European Commission (‘Commission’) on all six grounds of its appeal (partly or in full).

Factual and Legal Background

The long-running CK Telecoms litigation saga arose out of a merger prohibition decision the Commission took back in May 2016 (and thus pre-Brexit).

On 11 May 2016, the Commission blocked the proposed acquisition of Téléfonica UK O2 by Hutchison 3G UK, finding that the telecoms merger would result in a significant impediment to effective competition (‘SIEC’). The merger would have reduced the number of competing mobile network operators in the UK from four to three, and, according to the Commission, would have produced ‘unilateral effects’ – a harmful loss of competitive pressure the merging parties exert on one another. The concentration would have removed an ‘important competitive constraint’ and allowed the new ‘market leader’ to unilaterally raise prices and degrade quality to the detriment of UK consumers.

However, the proposed ‘4-to-3’ horizontal merger would not have created a position of dominance, as the merged entity would only have accounted for around 40% of the relevant market.

As a concentration that could significantly impede effective competition, but nonetheless fell short of creating or strengthening a dominant market position, the Téléfonica O2/ Hutchison Three merger presented a typical ‘gap case’.

The reformed EUMR adopted in 2004 explicitly and deliberately adopted a substantive merger control test no longer centered around ‘dominance’ but instead designed to capture such ‘gap cases’. This is clear from recital 25 of the EUMR– which expressly states that the SIEC test used in Article 2(2) and Article 2(3) EUMR can be satisfied through anti-competitive unilateral (‘non-coordinated’) effects even without the concentration creating or strengthening a dominant position.

However, what remained unclear (until now) was the exact legal test for finding a SIEC based on unilateral effects in ‘gap cases’.

On 28 May 2020, the General Court allowed CK Telecoms’ appeal and quashed the Commission’s prohibition decision. The General Court’s ‘rather innovative’ [151] re-interpretation of some key legal concepts under the EUMR was heavily criticized by Advocate General Kokott in her Opinion, delivered on 20 October 2022.

The ECJ endorses the Advocate General’s Opinion and sets aside the General Court judgment in its entirety, stressing the ‘breadth, nature and scope of the errors made by the General Court’[337].

Standard of Proof

The ECJ finds that the Commission must only show, on the balance of probabilities, that it is ‘more likely than not’ that a concentration would significantly impede effective competition [87].

The General Court had erred in law when requiring the Commission to demonstrate that there was a ‘strong probability’ the concentration would significantly impede effective competition. In doing so, the General Court had imposed too stringent a standard of proof, which follows neither from the EUMR itself, nor from the case law of the Court of Justice [88].

The ECJ emphasizes that there is no presumption of legality (or illegality) under the EUMR, i.e., there is no general presumption that a concentration is either compatible or incompatible with the internal market [71].

It is remarkable how consistently the ECJ emphasizes the symmetry and uniformity of the legal standard of proof in EU merger control. The same legal standard of proof applies to decisions prohibiting and approving concentrations [70]-[73], to all different types of concentrations [79] (horizontal, vertical, conglomerate) and irrespective of whether the SIEC is found based on coordinated or non-coordinated effects.

Yet the quality and quantity of evidence that is required to satisfy this legal standard can vary, depending on the novelty or inherent complexity of the theory of harm, or type of merger [76]-[79].

The ECJ therefore draws a clear distinction between the immutable legal standard of proof and idiosyncratic evidentiary issues in satisfying that standard (which may vary from case to case) [79].

Given the prospective, and thus inherently more uncertain [83], nature of the analysis in merger control, a standard of proof as demanding as the ‘strong probability’ one would be inadequate [86]. It would unduly restrict the Commission’s essential margin of discretion in merger control [82], and ultimately set the bar too high for the effective prohibition of harmful concentrations ex-ante.

The ECJ’s pronouncement that the standard of proof in merger control does not vary, in accordance with the complexity or ‘novelty’ of the theory of harm, could prove highly consequential. At a time when the Commission increasingly experiments with ‘novel’ theories of harm (such as ‘innovation theories of harm’ used in Dow/DuPont, or in Illumina/Grail, the standard of proof remains one based on the balance of probabilities.

SIEC Test in Gap Cases

The General Court had held that in ‘gap cases’ a SIEC based on unilateral effects can only be found if two cumulative criteria are satisfied. A concentration, not creating or strengthening a dominant position, would have to both

  • eliminate the ‘important competitive constraints’ the merging parties exerted upon one another; and
  • reduce the competitive pressure on the other remaining competitors on the market.

The General Court derived the cumulative character of these two criteria from its (erroneous) textual interpretation of recital 25 EUMR. Read a whole, recital 25 warns against the risks that concentrations in oligopolistic markets pose to effective competition. The recital then specifies that ‘under certain circumstances, concentrations involving the elimination of important competitive constraints that the merging parties had exerted upon each other, as well as a reduction of competitive pressure on the remaining competitors, may, even [absent coordinated effects], result in a [SIEC]’.

The General Court adopted a narrow, literalist interpretation of the conjunction ‘as well as’ to impose the aforementioned two-pronged cumulative legal test.

The ECJ dismisses the General Court’s both ‘formalistic and reductionist’ [73] textual construction, finding that recital 25 does not impose these two cumulative conditions.

Instead, it is sufficient for the Commission to show only that the concentration would eliminate the competitive constraints the merging parties exerted on one another.

The ECJ bases this conclusion on a broader teleological and purposive interpretation of the EUMR as a whole, emphasizing the crucial legislative objective the EUMR pursues: to allow for the effective control of all concentrations that would significantly impede effective competition within the internal market (recital 5/6 and recital 24 EUMR).

The General Court’s reading of recital 25 would be incompatible with this crucial, overarching legislative objective, because it would allow a certain type of harmful concentration to fall through the cracks of the EUMR.

Under the General Court’s two-part legal test, a merger that would result in a harmful elimination of competitive pressure between the merging firms, allowing the merged entity to unilaterally raise prices, could escape effective control under the EUMR [111]-[113]. This outcome would clearly be unsatisfactory, and leave a significant lacuna in the EUMR system of effective control.

The ECJ therefore closes the so-called ‘non-collusive oligopoly gap’. The upshot is that an (oligopolistic) merger, eliminating important competitive constraints between the merging parties, can be prohibited, solely on the basis that the merged entity could unilaterally exercise its market power to the detriment of consumers. There is no requirement to additionally show reduced competitive pressure on the remaining competitors.

The Scope of Judicial Review in Merger Control

The ECJ judgment is notable in its clear restatement of the broad scope of judicial review, in merger control specifically and competition law generally.

The Commission’s margin of discretion in (complex) economic assessments does not preclude the EU Courts from examining the Commission’s use and interpretation of economic evidence [125]. The economic evidence used must hold up to judicial scrutiny, and be factually accurate, reliable, consistent, complete, and capable of substantiating the conclusions the Commission drew from it [125].

The EU Courts are competent to interpret concepts used in the Commission’s Horizontal Merger Guidelines, in particular when the Commission has invoked these concepts in its merger decisions [123].

More generally, the EU Courts are always competent to interpret legal concepts, even if they require economic analyses in their application [126]-[127].

The concepts of an ‘important competitive force’ and of ‘closeness of competition’ (used in the Commission’s Horizontal Merger Guidelines) fall exactly into this category – these two are legal concepts, requiring economic analyses in their application.

The EU Courts are therefore fully competent interpret these two legal concepts, when reviewing a Commission decision that specifically refers to them [129].

The ‘Important Competitive Force’ Concept

The ECJ makes clear that an undertaking can constitute an ‘important competitive force’ even without being an aggressive rival competing particularly fiercely in terms of price [166]-[168].

It is remarkable how robustly the ECJ dismisses the General Court’s various propositions regarding the ‘important competitive force’ concept.

The overarching concern still is whether a concentration would significantly impede effective competition. The ‘important competitive force’ concept must not be construed so as to hinder the prohibition of harmful mergers that would create a SIEC [161].

The Commission is not required to show that an undertaking ‘stands out’ from other competitors in the market, in that it behaves like a maverick and engages in aggressive price competition. Nor was the General Court correct in defining the whole ‘important competitive force concept’ exclusively in terms of the intensity of price competition. A concentration can adversely affect the competitive dynamics on a market, even without removing a rival that competes fiercely in terms of price.

The finding that an undertaking does constitute an ‘important competitive force’ is just one factor in the SIEC test analysis – and is not in itself conclusive and sufficient to show a SIEC.

The Commission’s past decisions and findings on which undertakings constitute an ‘important competitive force’ can at best be indicative, but never binding or decisive in the interpretation of the general concept.

The ECJ concludes that 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’ (Horizontal Merger Guidelines, paragraph 37).

Closeness of Competition

The General Court committed yet another error of law when requiring the Commission to demonstrate that the merging parties were not just ‘close’ – but ‘particularly close’ – competitors [192].

The ECJ stipulates that it is not necessary for the Commission to demonstrate that the merging parties are ‘particularly close’ competitors. The closeness of competition is again just one factor in the SIEC test analysis, and not in itself decisive or conclusive [196].

A merger in a differentiated product market can produce harmful unilateral effects, even if the merging undertakings’ products are not particularly close substitutes. If substitutability between the merging parties’ products and the other remaining competitors’ products is even lower than the substitutability between the merging parties’ respective products, the merged entity could still unilaterally raise prices [187]-[191].

That is not to say that the relative closeness of competition is irrelevant. The finding that the merging firms are particularly close competitors could be used as evidence, indicating an especially high risk of significantly impeded effective competition [188].

Efficiencies and Quantitative Analysis

Finally, the ECJ comprehensively quashes the General Court’s radical approach to efficiencies and quantitative analyses in merger control.

The Commission had used an upward pricing pressure (‘UPP’) econometric model to predict the likelihood and magnitude of post-merger price increases in this differentiated product market.

In this case, the post-merger price increases predicted through the UPP model were lower compared to the price hikes anticipated in previously cleared 4-to-3 mobile telco mergers (in Ireland and Germany). The ECJ finds that the price increases forecast in this case cannot be dismissed as insignificant, merely because they are comparatively lower.

The Commission’s past decisional practice in itself does not create binding legal precedent and can at best be considered indicative [219]. The previously approved Irish and German mobile telco mergers differed decisively: the merging parties in those cases had offered commitments sufficient to comprehensively address the Commission’s competition concerns [218]. Any direct comparison would therefore be ill-founded and misguided.

In a more radical vein, the General Court had held that the Commission, in its quantitative assessment, is obliged to take into account the so-called ‘standard efficiencies’ that all concentrations create.

The General Court did not further substantiate the blanket assertion that ‘any concentration will lead to efficiencies’ [277]. However, it did use this unsubstantiated claim to effectively create a universal presumption of efficiencies in merger control. In the General Court’s view, the merging parties would not have to bear the burden of proof for demonstrating the existence of these ‘standard efficiencies.’

Differentiating between ‘standard efficiencies’ and ‘merger-specific efficiencies’, the General Court found that the merging parties would still carry the onus for proving the existence of the latter with substantiating evidence at the justification stage. By contrast, the Commission would, by default and of its own motion, be obliged to take into account ‘standard efficiencies.’

Following Advocate General Kokott, the ECJ finds that this new approach to efficiencies simply has no basis whatsoever, neither in the EUMR, nor in the Horizontal Merger Guidelines. The concept of ‘standard efficiencies’ is foreign to EU merger control.

While it is certainly possible that a concentration may create (merger-specific) efficiencies, this ‘possibility in no way implies that all concentrations give rise to such efficiencies’ [242]. The ECJ emphasizes that it is always for the merging parties to prove alleged efficiencies. The General Court’s presumption of efficiencies would have reversed the burden of proof and required the Commission to prove the absence of efficiencies [243]. The General Courts’ efficiencies presumption would thus weaken and undermine the effectiveness of the EU merger control regime.

Conclusion

The ECJ’s judgment is a robust rebuttal of the General Court’s ingenious attempts to reinterpret some of the core legal concepts in EU merger control and a comprehensive return to orthodoxy.

The contrast between both judgments could not be starker. The ECJ consistently emphasizes the importance of preserving the effectiveness of the EU merger control regime. The General Court, by contrast, seemed animated by the concern that the Commission might ‘systematically prohibit all horizontal mergers in an oligopolistic market’ [175]. It thus sought to systematically raise the bar for merger prohibitions – through a higher standard of proof, the presumption of ‘standard efficiencies’ and a restrictive reading of recital 25 EUMR and the Horizontal Merger Guidelines’ concepts.

The General Court’s concerns of aggressive merger over-enforcement through the Commission’s unchecked discretion seem unwarranted. The Commission still prohibits only a tiny share of all mergers notified and has, on average, not even blocked a single concentration annually over the past 20 years.

The Commission’s unconditional approval of the T-Mobile NL/ Tele2 NL acquisition in November 2018, clearly shows that there is no systematic opposition to all ‘4-to-3’ mergers in oligopolistic markets.

Interestingly, the General Court itself may have realized that it overstepped the mark in CK Telecoms. The General Court’s most recent judgments in Wieland/ARP/Schwermetall and Thyssenkrupp/ Tata Steel, handed down in May and June 2022, already show a major retreat from the bold views the General Court expressed in CK Telecoms. In Wieland and Tata Steel, the General Court itself already applies the ‘balance of probabilities’ standard, no longer requires ‘particular closeness’ of competition and overall strengthens (or reaffirms) the Commission’s flexible discretion in applying the SIEC test. In that respect, the General Court’s most recent jurisprudence already closely mirrors the principles laid down by the ECJ in CK Telecoms.

At a time of growing concerns over market concentration, a trio of recent judgments could mark the renaissance of vigorous merger enforcement – Towercast, Illumina/Grail and now CK Telecoms could embolden the return of a more interventionist approach in the realm of EU merger control.

Towercast and Illumina/Grail expand the jurisdictional scope of the EU merger control regime, creating procedural routes for reviewing harmful below-threshold concentrations. Both Illumina/Grail and Towercast provide tools to capture non-notifiable ‘killer acquisitions’ in particular, curing the imperfections of a merger control regime that bases jurisdiction on turnover thresholds alone.

By contrast, CK Telecoms addresses the core substantive issues at the heart of the EUMR, and strengthens the Commission’s hand in horizontal merger enforcement. While Executive Vice-President Vestager stated that the ECJ judgment ‘validates [the Commission’s] approach to merger assessment’, only time will tell just how far-reaching the legal effects of CK Telecoms are.

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