In Short
The Development: The Court of Justice of the European Union ("ECJ") annulled a General Court ("GC") ruling that had adopted a high standard of proof for the European Commission ("EC") to block transactions in concentrated markets in which neither the parties to the deal nor other competitors have a "dominant position," a so-called "gap case" (European Commission v CK Telecoms).
The Background: Prior to Brexit, the EC had prohibited a merger in mobile networks in the United Kingdom that would have left three remaining competitors. The EC found that the merger would significantly restrict competition even though it did not result in a "dominant position" under EU law. The GC annulled the EC's decision, holding that the EC failed to prove a "strong probability" of competitive harm. The ECJ disagreed, stressing that the EC need show only that such harm is "more likely than not."
Looking Ahead: Although the ECJ ruling adopted a lower standard of proof for merger challenges, it also reaffirmed the EC's duty to rely on a robust, consistent body of evidence, in particular when the EC's theory of harm is complex. EC challenges to deals in gap cases are likely to remain difficult for the EC and, therefore, rare.
Most EC challenges to deals involve the EU Merger Regulation that prohibits transactions that "significantly impede" competition through either: (i) the creation or strengthening of a dominant position; or (ii) implicit coordination in an oligopoly market. A dominant position means that a company can set prices above competitive levels without being constrained by customers or competitors.
The EU Merger Regulation also permits the EC to challenge deals in "gap cases." In a gap case, the EC must still demonstrate that the purported loss of competition between the parties results in a significant impediment to effective competition ("SIEC"). There have been few EC challenges under that rule because, by definition, merged companies in those markets face competitive pressure from the other market participants. There is a dearth of case law around the SIEC rule, and this case is the first time that the EU courts have ruled on a gap case.
The GC Raised the Bar, but then the ECJ Recalibrates It
In 2020, the GC annulled an EC decision that prohibited the transaction. The GC held the EC must show a "strong probability" of an SIEC, applying a stricter standard of proof than applied in previous merger challenges. The GC also held the EC must show the merging parties are not just close, but "particularly" close, competitors.
The ECJ, in its Grand Chamber composition reserved for significant cases, disagreed with the GC's decision to apply the "strong probability" standard of proof. In holding that a "more likely than not" standard applies to such cases, the ECJ reasoned that "a particularly high standard of proof" would render the EC's review ineffective. In particular, the ECJ highlighted that merger review is prospective by nature.
The ECJ's decision returns the case to the GC, which will apply the ECJ's ruling to the facts even though the parties long ago abandoned the transaction that was the subject of this case.
Quality of Evidence and Judicial Review
Despite the ECJ's holding, the ECJ reaffirmed holdings dating back to 2005 that require the EC to provide more compelling evidence when it pursues a more complex theory of harm.
The ECJ also rejected limits on judicial review of EC decisions. According to the ECJ, while EU courts should not second-guess the EC's analysis absent manifest errors, the courts must assess the "accuracy, reliability, and consistency" of the evidence that the EC offers to support its conclusions. The ECJ also held that the EU courts must interpret concepts of EU law requiring an economic analysis, such as "dominance," "close competitors," or "important competitive force," which therefore cannot be left to the EC's discretion.
"Close" Competitors
The ECJ took issue with the GC's view that the EC must prove that the parties are "particularly" close competitors. The GC had reasoned that anticompetitive effects were plausible only if the merging parties were particularly strong competitors of each other given the continued competitive pressure from other competitors. The ECJ rejected that requirement. Instead, the ECJ held that a merger between close competitors, even if not particularly close, could result in incentives to increase prices depending on the level of product substitution among the parties and other market participants.
The Assessment of an SIEC
The ECJ also rejected the GC's requirement that, to show an SIEC, the EC must demonstrate that the merger: (i) eliminates important competitive constraints between the merging parties; and (ii) reduces competitive pressure from other market players. Both requirements are found in the preamble of the EU Merger Regulation and the EC's own horizontal merger guidelines, and were widely accepted.
The ECJ, however, held the EC need prove only one of the two elements, provided the EC also shows that the merger results in a significant price increase. The ECJ elected not to provide guidance about how to assess the significance of the price increase, noting the analysis must be done on a case-by-case basis.
EC Need Not Presume Efficiencies
The ECJ disagreed with the GC's finding that the EC should presume that every merger creates certain efficiencies such as the elimination of duplicate resources, and include the effect of those efficiencies in its analysis of post-merger prices. The ECJ stressed that there is no such presumption and the parties have the burden to prove efficiencies.
Three Key Takeaways
- Under the ECJ's ruling, to block a "gap case" transaction, the EC must prove that a significant impediment to effective competition is "more likely than not."
- Although the ECJ adopted the EC's preferred, lower standard of proof, it reaffirmed demanding evidentiary obligations on the EC. Therefore, proving an SIEC will remain difficult for the EC. EC enforcement, therefore, likely will continue to focus on oligopolistic mergers between substantially close competitors or acquisitions involving an "important competitive force" (i.e., a particularly disruptive or aggressive competitor).
- The ECJ decision clarifies specific EU competition law concepts such as "closeness of competition" and "important competitive force." The decision also explains the EC's and the parties' obligations with respect to efficiencies, rejecting a rule that the EC must presume that certain efficiencies exist in all transactions.
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