Comment: EU Court of Justice annulled the General Court’s judgment in the Three-O2 case – potential implications for in-market mobile consolidation

EU Court of Justice annulled the General Court’s judgment in the Three-O2 case – potential implications for in-market mobile consolidation

On 13 July 2023, the EU Court of Justice (ECJ) annulled the General Court’s judgment that had in turn annulled the European Commission’s decision to block the merger between Three and O2 in the UK, a deal worth £10.25 billion.[1]

The ECJ judgment is unlikely to resume that deal, after several years from its prohibition, but it reinvigorates EU merger-control powers[2] while disappointing dealmakers advocating for a more relaxed approach to telecom consolidation.[3] In particular, the ECJ found that the General Court had erred in law when setting a higher bar for the European Commission (Commission) to challenge future similar mergers resulting in a reduction of the number of national mobile network operators (MNOs) from four to three, also called “gap cases”.

The term “gap cases” in competition law parlance refers to anticipated mobile mergers resulting in a significant impediment of competition, although neither creating nor strengthening a single or collective dominant position (unilateral or non-coordinated effects).

The Three/O2 decision was the first merger prohibition ordered by EU Competition Commissioner Margrethe Vestager since she took office in November 2014, and only the second telecoms deal blocked in 25 years, while the 243 calendar days review was the longest before a prohibition decision in 25 years.

Challenging four-to-three consolidation in highly concentrated mobile markets has been a central feature of merger enforcement under Ms Vestager’s watch – with a mobile merger abandoned in Denmark in the face of a prohibition decision and another mobile merger approved in Italy only subject to the entry of a new fourth player. As Ms Vestager is near to end her term this year, the ECJ judgment is an important validation for her legacy.

As a result of the ECJ judgment, the General Court must rule once more on the lawfulness of the Commission’s prohibition decision. However, in doing so, it must take account of the ECJ’s findings of law and, therefore, it is likely to uphold the Commission decision this time around. The ECJ’s judgment will be studied closely to see the extent to which it may allow further consolidation in the sector, as deals are currently pending review in Brussels, such as the proposed Orange-MasMovil deal.[4]

In outline, the following bullet points summarise the main findings of the ECJ:

• By holding that the Commission is required to demonstrate with a ‘strong probability the existence of significant impediments’ to effective competition following the concentration and that ‘the standard of proof applicable in the present case is therefore stricter than that under which a significant impediment to effective competition is “more likely than not”’, the General Court applied a standard of proof which does not follow from the EU Merger Regulation, as interpreted by the ECJ, and thus made an error in law. According to the ECJ, the prospective nature of the economic analysis which the Commission must carry out under the EU Merger Regulation precludes a requirement for that institution to meet a particularly high standard of proof in order to demonstrate that a concentration would or would not significantly impede effective competition.
• The General Court erred in law in holding that the EU Merger Regulation must be interpreted as meaning that, in the absence of the creation or strengthening of a dominant position following a concentration on an oligopolistic market (such as most, if not all, national mobile networks markets in the EU), a significant impediment to effective competition can be established only if the Commission demonstrates that two cumulative conditions are satisfied, namely, first, the elimination of important competitive constraints that the merging parties had exerted upon each other and, second, the reduction of competitive pressure on the remaining competitors. Such a restrictive interpretation is incompatible with the objective of that regulation, namely to establish effective control of all concentrations which would significantly impede effective competition, in the internal market or in a substantial part of it, including those giving rise to non-coordinated effects.
• The ECJ held that the General Court distorted the Commission decision in finding that it was apparent from that decision that the Commission was of the view that the elimination of an ‘important competitive force’ or the ‘closeness of competition’ between Three and O2 would be sufficient, in themselves, to prove a significant impediment to effective competition. In addition, in finding that, in order to classify Three as an ‘important competitive force’, the Commission was required to demonstrate that Three competed particularly aggressively in terms of price and that it forced the other players on the market to align with its prices or that its pricing policy was likely to alter significantly the competitive dynamics on the market, the General Court erred in law. In order to classify an undertaking as an ‘important competitive force’, it is sufficient that it has more of an influence on the competitive process than its market share or similar measures would suggest.
• By requiring the Commission to demonstrate that the merging parties are not close competitors, but rather ‘particularly close’ competitors, the General Court erred in law. This is perhaps one of the most crucial point of the judgment. Most, if not all, mobile networks mergers will be mergers between close competitors, given the oligopolistic nature of these markets; but not all of them would be between particularly close competitors. By removing the requirement that a significant impediment of competition could only arise from a merger between particularly close competitors, the ECJ has in practice lowered the bar that the General Court had set for the Commission to ban future in-market mobile networks mergers in the EU.
• As regards the quantitative analysis of the effects of the proposed concentration on prices, the General Court distorted the Commission’s written pleadings at first instance as regards the exact value of the price increase to which the proposed concentration could give rise. In addition, the General Court erred in law when it found that the Commission ought to have included the ‘standard’ efficiencies which accompany all concentrations, in its quantitative analysis. While certain concentrations may give rise to efficiencies which are specific to them, that possibility in no way implies that all concentrations give rise to such efficiencies. In any event, it is for the notifying parties to demonstrate those efficiencies so that the Commission can take them into account in its review. This is another crucial point of the ECJ judgment and is likely to require a higher burden of proof from merging parties wishing to rely on the so-called efficiencies defence to win Commission’s approval of their merger plans.
• Finally, with regard to the network sharing arrangements involving the merging parties, ECJ found that it was apparent from the Commission decision that the Commission did in fact assess the possible degradation of the quality of the network of the entity resulting from the proposed concentration. By observing that the Commission had not made such an assessment when concluding that the merger would have reduced the incentives of the parties to continue to invest in their respective network sharing arrangements, the General Court distorted the Commission decision.

Commission officials are breathing a big sigh of relief. There are two main outcomes from the ECJ ruling:[5]

• Firstly, the Commission won’t face increased demands to prove that its concerns over a particular deal are valid. Merger review is an inherently predictive craft, and officials will retain leeway to make those predictions.
• A second outcome relates to the telecom industry, which has repeatedly called for looser rules to allow consolidation in order to keep the sector reasonably profitable. The Commission defended its block of a merger that would have seen a drop in the number of providers in the UK. This will strengthen its hand for any other such deal.

While the fight is not over — the case now goes back to the General Court for a fresh look — the regulator won on all its major arguments before the ECJ. The ruling will free it up to proceed with business as usual and the General Court must respect the findings of law made by the ECJ. In particular, the burden of proof is back to the “more likely than not” test that existed before. The Commission doesn’t need to meet the higher “strong probability” of harm standard, as the General Court had said in the annulled judgment.

As King George III sings in the famous Hamilton musical… “What comes next?” Across Europe, telecom executives were emboldened when the General Court struck down the Three-O2 prohibition. They want to be liberated to consolidate because they say it’s necessary to enable investment in infrastructure. That veto symbolized the EU regulator’s tough approach to mobile consolidation — and the General Court judgment had put cracks in that edifice. That has now been patched up.

Other dealmakers are watching closely. Orange and MásMóvil are currently seeking EU approval for their Spanish telecom merger, and in recent days responded to a formal charge sheet where the Commission said the deal would reduce the number of network operators in Spain and remove “a significant competitive constraint and innovative rival” on the market there.[6] The companies are reportedly in the throes of difficult negotiations about what remedies might be needed to get their deal through. Where it might previously have felt vulnerable, the Commission now can take comfort from the ECJ’s approval of the legal framework that it applied when blocking the Three-O2 deal.

Similarly, Vodafone might have also been planning to draw inspiration from the General Court’s jurisprudence when approaching the UK’s Competition and Markets Authority (CMA) to consider its proposed merger with CK Hutchison’s Three UK, announced last October. Brexit’s carveout of the UK as independent means it won’t be the EU regulator looking at that deal this time. Instead, it will see the CMA investigate a four-to-three mobile merger for the first time in living memory.[7]

Of course, rulings of the EU courts no longer have legal effect in the UK and the EU Merger Control rules are different from the UK Enterprise Act merger control rules, but – given the similarities between the two regimes in terms of substantive assessment – Vodafone and CK Hutchison may presumably have planned to highlight the General Court’s approach to support their case. As a result of the ECJ’s ruling, they will probably now be facing a higher evidentiary burden to demonstrate their lack of closeness of competition and the efficiencies arising from their merger.

[1] Case C-376/20 P, Commission v CK Telecoms UK Investments, not yet reported in ECR.

[2] EU’s merger policy ‘validated’ with top court’s Hutchison-O2 ruling, Vestager says, Mlex.

[3] European telecom companies were disappointed yesterday after the EU’s top court reversed and remanded the lower court’s decision to lift a veto on Three UK’s bid for O2 seven years ago, Reuters.

[4] Mergers: Commission opens in-depth investigation into the proposed transaction between Orange and MasMovil, Eur-lex.

[5] Comment: EU merger-control powers reinvigorated by CK Hutchison-O2 court reversal, Mlex.

[6] Orange and MásMóvil get formal EU charges over Spanish merger (update*), Mlex.

[7] Comment: Vodafone-Hutchison deal would face tough path to UK approval, Mlex.