ECJ Advocate Normal Recommends Setting Apart the CK Telecoms Judgment and Endorsing the European Fee’s Established Method to Reviewing Mergers in Oligopolistic Markets


Advocate Normal Kokott has discovered [1] that the Normal Courtroom erred in regulation in requiring the European Fee to indicate anti-competitive results of a merger with “robust likelihood” and that the scope of its judicial overview was overly broad, notably in relation to financial proof.

 

Key takeaways

  • This case will give the Courtroom of Justice (ECJ) a possibility to rule, for the primary time, on the idea of “vital obstacle to efficient competitors” (SIEC), as that idea applies to non-coordinated horizontal results in an oligopolistic market.
  • The ECJ follows Advocate Normal (“AG”) Kokott’s opinions in 85 per cent of circumstances. So the ECJ is anticipated to substantiate that the usual of proof that the Fee should meet to problem a merger is a “stability of chances” check, versus the Normal Courtroom’s “robust likelihood” check. In line with AG Kokott, the “robust likelihood” check set by the Normal Courtroom in CK Telecoms is simply too strict. Within the mild of varied “conceivable” market situations, the Fee might prohibit a merger whether it is “extra seemingly than not” anti-competitive. The identical customary of proof ought to apply no matter whether or not the merger leads to the creation or strengthening of a dominant place, whether or not it’s challenged based mostly on unilateral results in an oligopolistic market, or if the Fee advances a principle that’s advanced or unsure.
  • AG Kokott agreed with the Fee on all different key criticism of the Normal Courtroom’s findings that led to the annulment of the Fee’s merger veto. AG Kokott criticises the Normal Courtroom for setting too excessive a bar for the Fee to problem a merger under the dominance threshold. The opinion means that the ECJ ought to endorse the Fee’s method to reviewing cell mergers (but in addition different mergers in oligopolistic markets). In line with AG Kokott, opposite to the Normal Courtroom’s findings, merging events don’t have to be “notably shut” rivals for the Fee to deduce anti-competitive results, even when all rivals out there are comparatively shut. Equally, whereas the time period “essential” aggressive pressure implies that the corporate’s influence on competitors must be substantial (past what is usually recommended by market shares or related measures), opposite to the Normal Courtroom’s place, it mustn’t apply solely to firms “competing notably aggressively by way of costs” or “mavericks”. Even so, neither “closeness” nor being “an essential aggressive pressure” are ample in and of themselves to problem a merger: the Fee should assess the influence of the merger based mostly on all related elements and proof.
  • General, AG Kokott’s reasoning is an expression of robust judicial self-restraint: AG Kokott’s level of departure is that the EU Courts’ position is restricted to verifying that the info had been precisely said and that the Fee made no manifest error of evaluation. A mere error of evaluation isn’t sufficient to overturn the Fee. In line with AG Kokott, the Normal Courtroom can’t substitute its personal evaluation with that of the Fee, that means that the Fee ought to have considerably extra leeway than what the Normal Courtroom proposed in CK Telecom in reviewing mergers in oligopolistic markets. That stated, AG Kokott seems to acknowledge that the EU Courts should diligently overview the proof on which the Fee based mostly its evaluation and will require that novel or unsure theories of hurt are sufficiently backed up by proof on the Fee’s file.

 

The merger prohibition

In 2016, the Fee prohibited the proposed acquisition by Hutchison 3G UK (“Three”) of Telefónica UK (“O2”). The transaction would have diminished the variety of Cellular Community Operators (MNOs) on the UK market from 4 to a few.

The merged entity would have turn out to be the brand new chief on the retail market (with a share of greater than 40 per cent) and its numerous sub-segments, together with, particularly, the important thing non-public post-paid section. As in different four-to-three mergers, the principle principle of hurt was based mostly on the non-coordinated results within the cell retail market.  There was no discovering of single agency dominance or of coordinated results.  Since cell mergers will hardly ever result in the creation of a dominant place, they’re the archetypal “hole circumstances” that the SIEC check launched in 2004 was alleged to catch. The Fee challenged the merger asserting that the events had been shut (however not one another’s closest) rivals and that Three was an “essential aggressive pressure” and subsequently, the merger eradicated the aggressive constraints that the events exercised on one another and the remaining market individuals, which might result in an SIEC within the UK cell retail market.

The Fee additionally asserted {that a} state of affairs the place the merged entity would take part in two completely different network-sharing agreements might harm its network-sharing companions — Vodafone and EE — and subsequently influence competitors on community high quality and innovation.  Lastly, the Fee alleged that the transaction would result in non-coordinated results on the wholesale cell market (i.e. the market referring to the supply of community entry companies to cell digital community operators (“MVNOs”). The Fee blocked the merger following failed cures negotiations.

Hutchison appealed the Fee’s choice, which led to the CK Telecoms Normal Courtroom (GC) judgment.

 

The CK Telecoms GC judgment

In a landmark judgment in 2020, the GC annulled the EC’s prohibition choice in its entirety.

The GC dominated that the Fee had basically disregarded the usual of proof relevant to the overview of transactions giving rise to non-coordinated results on an oligopolistic market (so-called “hole circumstances”, which permit the Fee to ban mergers on account of non-coordinated or unilateral horizontal results the place the merged entity doesn’t have a dominant place). The GC said that in such circumstances, the Fee “is required to provide ample proof to exhibit with a “robust likelihood” the existence of serious impediments following the focus”.

The GC additionally discovered that novel theories of hurt (corresponding to the speculation of hurt developed by the Fee in relation to the community sharing settlement) must be topic to the next customary of proof. In that regard, the GC reasoned: “the extra potential the evaluation is and the chains of trigger and impact dimly discernible, unsure and troublesome to determine, the extra demanding the EU judicature should be by way of the precise examination of the proof produced by the Fee”.

The Normal Courtroom additional criticised the Fee’s “toolbox” for assessing mergers in oligopolistic markets.  The Courtroom held that the Fee can classify a merging get together as an “essential aggressive pressure” provided that it “stands out” from its rivals by way of influence on competitors.  It additionally stated that in a market the place all rivals are shut, the Fee should present that the events are “notably shut” if it needs to make use of that as proof that the merger would end in a SIEC.

The Fee appealed the GC’s judgment earlier than the ECJ.

 

AG Kokott’s opinion

AG Kokott really useful the GC’s judgment be put aside in its entirety and referred again to the GC for it to supply a “contemporary ruling”.

Commonplace of proof

AG Kokott thought-about that the GC erred in regulation by requiring the manufacturing of ample proof to indicate with a “robust likelihood” a SIEC. In line with AG Kokott, it suffices that the Fee gives “proof of the ‘almost definitely’ end result or ‘plausibility’ of its potential evaluation”. This line of reasoning echoes the current ThyssenKrupp judgment,[2] through which the Normal Courtroom diverged from the CK Telecoms ruling, holding that it suffices that the Fee reveals “with a ample diploma of likelihood, […] that the transaction considerably impedes efficient competitors within the inner market.”  See our earlier publish on this judgment right here.

The Opinion makes the next observations on the idea of a SIEC and the usual of proof.

  1. The requirement to indicate the ‘almost definitely’ end result or plausibility of the Fee’s potential financial evaluation corresponds to the ‘stability of chances’ check. [3] The envisaged market developments needn’t be ‘very possible’ or ‘notably seemingly’ or established ‘past affordable doubt’ (in accordance with the notably excessive customary relevant in legal or quasi-criminal issues), (para 56 of the Opinion).
  2. There is no such thing as a justification for requiring the next customary of proof within the case of concentrations giving rise to non-coordinated results in oligopolistic markets than within the case of concentrations giving rise to ‘conglomerate’ or ‘collective’ sort dominant positions (para 59). That is due to:
  • The unitary nature of the idea of a SIEC regardless of the kind of focus. The Fee should set up a SIEC, regardless of whether or not or not that obstacle outcomes from the creation or strengthening of a dominant place (para 49).
  • The symmetry of the usual of proof. The EU Merger Regulation doesn’t impose completely different requirements of proof with respect to choices authorising a focus and choices prohibiting a focus (para 55).

The identical check applies additionally if the Fee advances a principle that’s advanced or unsure or stems from a cause-and-effect relationship which is troublesome to determine (para 60). Nonetheless, with respect to such theories, AG Kokott notes that EU Courts might assess the proof introduced earlier than them to help the plausibility of the varied penalties that such a focus might have and to establish the result almost definitely to come up on that foundation (para 61).

Accordingly, the Fee should adduce convincing and cogent proof in help of such theories for the pertinent customary of proof to be met. Certainly, AG Kokott doesn’t give the Fee carte blanche systematically to ban horizontal mergers in oligopolistic markets. The Fee is obliged to “examine and assess a lot of elements and quite a lot of proof which might give rise to a discovering of the existence” of a SIEC (para 64).

 

Judicial overview

AG Kokott steered that there must be restricted scope for judicial overview over the appliance of the idea of a SIEC in a niche case. She made the next factors:

  • The Fee has a margin of discretion over financial issues for the needs of making use of the EU Merger Regulation. Due to this fact, the overview by the EU Courts of a Fee merger choice is confined to ascertaining that the info have been precisely said and that there was no manifest error of evaluation (para 51).
  • The AG commented that the Normal Courtroom in its judgment had departed in a variety of locations from the idea of ‘manifest error of evaluation’ and held that mere ‘errors of evaluation’ had been made. But the AG was constrained from analyzing this situation additional, because the Fee didn’t straight problem this method in its attraction, and thus, it couldn’t be additional examined on this case.

Right here once more, the appliance of the manifest error customary echoes the judgments of the GC in ThyssenKrupp (see our earlier entry on this judgment right here).

 

Essential aggressive pressure

AG Kokott confirms that the Normal Courtroom imposed extreme necessities for classifying an organization as an ‘essential aggressive pressure’ (para 106). In that regard, the Opinion embraces the method adopted by the Fee within the UK case in 2016 and in all different cell mergers. Whereas AG Kokott confirms that the Normal Courtroom was competent to overview the idea of an “essential aggressive pressure”, it finds that the Normal Courtroom’s interpretation of this idea is unsuitable in view of the next concerns:

  • The Horizontal Tips do not presuppose that an organization should stand out from its rivals by way of its influence on competitors or be ‘competing notably aggressively by way of costs’, forcing these rivals to align with its costs to be categorised as an ‘essential aggressive pressure’. It suffices that such an organization has extra of an affect on the aggressive course of than its market share or related measures would counsel (para 108).
  • The truth that the Fee, prior to now, thought-about that sure firms performed a novel position as ‘mavericks out there’ doesn’t suggest that the idea of ‘essential aggressive pressure’ is restricted to these conditions (para 109).
  • Opposite to what the Normal Courtroom dominated, there isn’t a justification for deciphering the idea of ‘essential aggressive pressure’ restrictively. In line with AG Kokott, such an interpretation might threat underestimating the aggressive forces current inside an already concentrated oligopolistic market from the outset. Whereas the time period ‘essential’ implies that the corporate’s aggressive behaviour available on the market must be substantial (past what is usually recommended by market shares or related measures), it doesn’t require that firm to be ‘competing notably aggressively by way of costs’ (para 110).

According to the Fee’s place, nevertheless, the AG discovered that the lack of an essential aggressive pressure is in itself inadequate to determine a SIEC. It’s only one of many a number of standards thought-about (para 98).

 

Closeness of competitors

AG Kokott thought-about that the Normal Courtroom erred in regulation in holding that the Fee’s evaluation of the closeness of competitors was flawed (para 125). Specifically, she rejects the Normal Courtroom’s discovering that rivals should be “notably shut as unfounded for the next causes:

  • There could be “completely different levels of closeness of competitors” based mostly on the Horizontal Tips, however “it does not comply with that […] the related diploma of proximity should […] be that of “notably shut rivals” (para 121). AG Kokott notes that the requirement of being “notably shut” neither follows from the Horizontal Tips (para 121), neither is it supported by EU Merger Regulation or the idea of a “vital obstacle to efficient competitors” (para 123). As an alternative, AG Kokott argues that the Normal Courtroom’s requirement of “notably shut” is “based mostly on the extreme customary of proof” imposed on the Fee, i.e. a consequence of “the Normal Courtroom’s failure to use the usual of proof required” (para 123).
  • The criterion of closeness of competitors is only one of a number of elements which should be thought-about when assessing whether or not a transaction provides rise to a SIEC. It follows that lack of closeness or “specific closeness” isn’t a legitimate floor to conclude that there isn’t a “proof of the existence of such an obstacle [SIEC]” (para 122).

AG Kokott, subsequently, seems to take the view that, so long as the aggressive relationship of the events to a focus could be characterised as someplace on the sliding scale of “closeness” (no matter simply shut or notably shut), closeness is related proof in establishing the existence of a SIEC.

In that regard, AG Kokott’s Opinion echoes the Fee’s declare in Wieland/Aurubis (see our earlier alert on this judgment right here) the place the Fee argued that it suffices to determine that the events had been ‘shut rivals’ (somewhat than ‘closest’), and through which the Normal Courtroom concluded that the Fee’s evaluation establishing the events had been shut rivals was “legally ample”. [4]

To make sure, nevertheless, the AG Kokott Opinion confirms that closeness alone is inadequate to discover a SIEC (and, presumably, relative closeness ought to contribute much less to the discovering of a SIEC than the next diploma of closeness).

 

Financial fashions

AG Kokott thought-about that the Normal Courtroom erred in regulation when requiring the Fee to incorporate ‘customary efficiencies’ [5] in its UPP evaluation (para 150-158), calling the Normal Courtroom’s method “somewhat revolutionary”, “encroaching on its discretion in managing competitors coverage and merger management” and missing authorized bases (paras 151 and 153). She noticed the next:

  • The Normal Courtroom’s class of ‘customary efficiencies’ isn’t recognised by Regulation No. 139/2004, Regulation (EC) No. 802/2004 or Horizontal Tips. The Normal Courtroom failed to point the authorized bases for recognising the relevance of such ‘customary efficiencies’ and the Fee’s requirement to take them into consideration exterior the relevant regulatory framework (para 153).
  • There is no such thing as a convincing cause to recognise an obligation for the Fee to incorporate the Normal Courtroom’s ‘customary efficiencies’ in its evaluation of the existence of a SIEC exterior the regulatory framework relevant to merger management. At most, it’s the Fee’s process when exercising its discretion on this space, to find whether or not it’s needed to hold out such an evaluation of its personal initiative (para 155). In AG Kokott’s view, as “EU regulation at present stands”, such an obligation could be neither present in EU Merger Regulation, Annex I to Regulation No. 802/2004 nor the Horizontal Tips (paras 155 and 156).

The AG seems to recognise, nevertheless, the potential shortcomings of the UPP mannequin that all the time leads to a worth improve, noting that it must be in itself inadequate to indicate a SIEC, which must be demonstrated on the premise of “a physique of proof and elements, seen as an entire” (para 163).

 

Conclusions

In mild of the broader coverage tendencies and the current judgments of the Normal Courtroom within the ThyssenKrupp case talked about above, AG Kokott’s options on the usual of proof should not shocking.

AG Kokott means that the ECJ ought to successfully affirm the Fee’s customary toolbox for assessing cell mergers, and extra broadly, mergers in oligopolistic markets. This doesn’t imply that the Fee would have a inexperienced mild to problem any four-to-three cell merger. It solely implies that the Fee would proceed to use its present method, which includes assessing every case on its deserves based mostly on its particular person circumstances.  As AG Kokott herself stresses, the Fee should substantiate its case with “sufficiently vital and persuasive proof” taking into consideration all related circumstances of the case (para 59). The Fee has repeatedly said that there’s “no magic quantity”.  Certainly, after issuing a prohibition choice towards the UK four-to-three merger topic to the attraction in CK Telecoms case, the Fee cleared unconditionally a four-to-three cell merger within the Netherlands. [6]

The Opinion does little to handle the criticism that the Fee’s evaluation of cell mergers lacks any limiting ideas.  Specifically, as the problem was not earlier than her, the AG didn’t handle the purpose that the ideas of closeness and essential aggressive pressure had been primarily launched to handle the consequences of mergers in differentiated product markets (the place market shares don’t correctly replicate the aggressive dynamics, and the lack of rivalry between the merging events) and should must be utilized otherwise within the context of homogeneous product markets.  So regardless of the ECJ lastly decides, the controversy on the exact contours of so-called “hole circumstances” that has been raging for 18 years for the reason that introduction of the SIEC check has many extra years but to run.

 

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[1] European Fee v. CK Telecoms UK Investments Ltd, Case C-376/20 P, Opinion of Advocate Normal Kokott, October 20, 2022.

[2] Thyssenkrupp AG v Fee, Case T-584/19, judgment of twenty-two June 2022.

[3] Described in AG Kokott’s opinion in Bertelsmann and Sony Company of America v Impala, judgment of 10 July 2008.

[4] Wieland-Werke AG v Fee, Case T-251/19, judgment of 18 Might 2022, Para. 130

[5] These customary efficiencies correspond to the class of ‘default’ efficiencies that some economists suggest recognising within the mannequin to counterbalance the truth that the UPP evaluation assumes no efficiencies and all the time leads to a worth improve. Opinion, Para. 152.

[6] See Case M.8792 – T-Cellular NL/Tele2 NL (2018).

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