Back to Basics: Court of Justice overturns General Court judgment annulling the prohibition of CK Hutchison’s 2016 merger with O2 in the UK
On 13 July 2023, the European Court of Justice delivered its judgment in Commission v CK Telecoms UK, setting aside the General Court’s judgment of 2020 annulling the European Commission’s 2016 prohibition decision in this case and referring the case back to the General Court for a new review. The ECJ judgment addresses, in particular, when mergers pose a “significant impediment to effective competition” under the EU’s Merger Regulation, the interpretation of key principles in the assessment of mergers between competitors and the interpretation and use of economic evidence.
As Vice President Vestager announced shortly after the ECJ judgment publication, the judgment’s importance “goes far beyond the specific circumstances and mobile telecommunications sector”. The ECJ’s conclusions will have immediate implications for all mergers subject to review before the Commission.
We set out the origins of the case, some key takeaways from the judgment and what it does, and doesn’t mean, for EU merger control in the coming months and years.
The origins of the case: merger control policy for mobile telecommunications in the 2010s
The case stemmed from CK’s appeal of the Commission's prohibition of the Hutchison / O2 merger which would have reduced the number of mobile network operators in the UK from four to three. One of a slew of cases in the 2010s concerning consolidation in European mobile telecommunications markets, Commission had held that the merger would have significantly impeded effective competition for retail and wholesale mobile telecommunications in the UK.
The General Court annulled the Commission’s prohibition decision in 2020, in particular on the grounds that the Commission had failed to prove that there was a “strong probability” of any significant impediment to effective competition, the merging parties were not important competitive constraints on each other, the Commission had misapplied a number of key principles in the guidelines on horizontal mergers and the Commission had failed to account for “standard” efficiencies in its assessment of the merged entity’s pricing incentives.
The Commission subsequently challenged the General Court’s judgment for multiple errors in law, overstepping its powers of review and for distorting the Commission’s decision as well as the Commission’s pleadings. Advocate General Kokott issued her opinion for the case at the tail end of last year, opining that the Commission’s challenge was well founded on almost all grounds of appeal.
The key takeaways: restoring the status quo ex ante
The ECJ followed Advocate General Kokott’s opinion: overturning the General Court’s judgment and referring the case back to the General Court for multiple errors in law and for distorting the Commission’s decision and pleadings.
The judgment contains multiple findings that will set the Commission’s and General Court’s framework for assessing mergers in the future:
The Court confirmed, first and foremost, that the standard for proof for EU merger control is whether mergers are “more likely than not” to give rise to a significant impediment to effective competition (the “balance of probabilities” test). In dismissing the General Court’s conclusion that the Commission must demonstrate a “strong probability” of a significant impediment to effective competition, the judgment lessened the Commission’s hurdle for prohibiting mergers and restored its practical margin of manoeuvre.
The Court also confirmed that the Commission is not required to prove that the merging parties in oligopolistic markets must be important competitive constraints on each other to sustain a prohibition decision (it is sufficient that the merger significantly lessens competition in the market). Upholding a single, unified test for demonstrating a significant impediment to effective competition, the judgment means that the Commission will not face a more stringent threshold for prohibiting mergers in oligopolistic markets compared to mergers involving the creation or strengthening of a dominant position.
More specifically, the judgment overturned the General Court’s interpretation of “important competitive force” and “close competitors” in the Commission’s horizontal merger guidelines: lowering the evidential bar for their satisfaction, as well as rapping the General Court on the knuckles for distorting the Commission’s decision. The Court also threw cold water over the General Court’s proposition that the Commission should take into account “standard efficiencies” when assessing upward pricing pressure tools that are a common feature of assessing mergers between competitors.
The ECJ also held that the General Court had failed in its duty to conduct an overall assessment of the Commission’s facts and findings to assess whether it had demonstrated a significant impediment to effective competition.
Where merging parties can draw more comfort is in the judgment’s reiteration that the General Court’s review must also establish that the Commission’s evidence “contains all the information which must be taken into account … and whether it is capable of substantiating the conclusions drawn from it”. The judgment rejected, more specifically, the Commission’s contention that the General Court only had the right to review the “lawfulness” of its merger guidelines and was not entitled to interpret the economic concepts.
Implications of the judgment: restoring the Commission’s pivotal role in European merger control policy
The judgment’s most far-reaching implication for merger control is the confirmation of the balance of probabilities test as the standard of evidence, rejecting the General Court’s higher standard of strong probability. Rejection of the General Court’s narrower interpretation of the concepts of “important competitive force” and “close competitors”, compared to what the Commission had proposed, similarly reinforces the Commission’s margin for manoeuvre in merger cases involving actual and potential competitors. The reminder of the General Court’s powers of review, conversely, ensures that the Commission’s wide discretion is nevertheless subject to the prospect of significant scrutiny on appeal.
The judgment’s most significant practical impact is, on the other hand, in relation to mergers in oligopolistic markets. Had the General Court’s judgment stood, the Commission would have faced a significantly higher hurdle for prohibition. Whereas last week’s judgment means they will remain subject to the general test of whether they give rise to a significant impediment to effective competition: irrespective of how the impediment arises and thus not limited to verifying whether the impediment arises primarily due to the elimination of competition between the merging parties or the impact on competition from the other remaining firms.
The Court sidestepped, conversely, the question of the relative probative value of economic evidence in merger cases. Efficiency calculations form an integral part of upward pricing pressure models such as the UPP model employed by the Commission in Hutchison / O2. Whilst the Court may have adhered to the letter of the EU merger rules in overturning the General Court’s conclusion that Commission’s UPP model had to account for efficiencies, it ignored the more fundamental point that the evidential value of such models decreases if efficiencies are ignored (in particular if the upward pricing pressure – even without accounting for efficiencies – is relatively low). Without accounting for efficiencies, such models’ evidentiary value in predicting price increases (let alone significant price increases) is impaired. For those hoping for a perhaps more nuanced approach to economic evidence in merger cases, we can only hope that this is addressed in the future.
The case is now sent back to the General Court for a renewed review. As the court with exclusive jurisdiction to review the facts and the factual evidence, the General Court will have to decide whether the evidence is sufficient to justify a conclusion that the merger was more likely than not to lead to a significant impediment to effective competition based on the framework now set down by the ECJ.
In so doing, the General Court will need to wrestle with the questions of whether the key evidence and findings stack up to a significant impediment to effective competition. Even if CK Hutchison’s Three was an important competitive force under the ECJ’s relaxed threshold, was it sufficiently significant? Were Three and O2 sufficiently close competitors to significantly impact competition? And what was the probative value of the UPP model in predicting the likelihood of price increases if efficiencies were not included? We await the answers.
In sum, the Court’s judgment has significant implications for merger assessments under the EU Merger Regulation. By confirming the Commission's discretion in EU merger control and restoring the status quo, the judgment gives the Commission the policy space to shape EU merger control in future years. However, it remains to be seen how the Commission will apply its discretion in future cases, particularly in oligopolistic markets, and today’s cases increasingly raise new issues which will doubtless raise new controversy and appeals.