The General Court annuls the decision to block Hutchinson 3G’s acquisition of Telefónica UK

On May 28, 2020, the General Court of the European Union annulled the Commission’s decision of May 2016 blocking the acquisition of the Telefónica’s British subsidiary (O2) by Hutchison 3G UK (Three).

The European Commission believed the transaction would have eliminated an important competitor from the British mobile telephony market, where there were only four mobile network operators: the two companies concerned, EverythingEverywhere (EE)—owned by British Telecom (BT)—and Vodafone. Three and O2’s joint market share in the British mobile telephony market was between 30% and 40% at that time. In particular, the Commission concluded that, as a result of the transaction, mobile telephony service prices would rise, as well as consumer choice would be reduced, and the quality of the services would decline. The Commission also identified potential negative effects for virtual mobile network operators that do not have their own network. The parties’ arguments on the efficiencies of the project and the expected consumers’ welfare were not successful. 

Three appealed this decision before the GCEU questioning (i) the harm theories developed by the Commission in its decision (grounds 1, 3, and 4); (ii) the assessment of the hypothetical scenario for the analysis of the retail and wholesale market (ground 2); and (iii) the analysis of the commitments submitted by the claimant in the merger control proceedings (ground 5). More specifically, in each of these grounds, the claimant underlined the errors of law committed by the Commission.

In its judgment of May 28, the General Court annulled the European Commission’s Decision based on appeal grounds 1, 3, and 4 put forward by Three without analyzing the other grounds.

First, the Court considers that the Commission erred in considering that the  transaction would have entailed a “significant impediment to effective competition” as it failed to prove, according to the applicable legal test, the negative effects of the transaction on the prices and quality of mobile telephony services for consumers.

The judgment recognized the Commission’s authority to block mergers affecting the competition conditions in oligopolistic markets. However, merely reducing of competitive pressures on the remaining competitors is not sufficient to demonstrate an impediment to effective competition.

The General Court also found that the Commission’s quantitative analysis of the merger’s effects on prices did not establish, with a sufficiently high degree of probability, that prices would have actually increased. The Commission committed several errors of law, particularly in analyzing the gross growth of subscribers, the growth of Three’s subscribers (1% in 2014, which is irrelevant according to the GCEU), the relevance of its price policy (classified as aggressive by the Commission), and its historic role in the market.

Second, the Court concludes that the Commission did not prove that the effects of the transaction on the network-sharing agreements and on the mobile network infrastructure in the United Kingdom would have constituted a significant impediment to competition.

A particular feature of the retail telephony market in the United Kingdom in 2016 was that BT/EE and Three, on the one hand, and Vodafone and O2, on the other, were part to two network-sharing agreements in order to reduce the cost of infrastructure and network roll-out while continuing to compete in the retail market, as each of the entities in the merger is party to one of the agreements. After the merger, Three would, therefore, be party to both agreements.

The Commission had considered that the merger would allow Three-O2 to degrade the network quality. By being party to both network-sharing agreements, the new company would have had access to the information of both and could have weakened a competitor by prioritizing just one of the current agreements. However, the Court rejected this argument as the Commission did not show that a competitor would be weakened on such a scale that would have eliminated itfrom the market.

However, in accordance with paragraph 347 of the judgment, the CJEU considers that a disagreement between the partners in the network-sharing agreements, the amendment of those agreements, and even their termination cannot be considered a significant impediment to effective competition in this case. Furthermore, it added that the Commission did not show either that the partner of the affected network-sharing agreement would have been incapable of coping with the network infrastructure cost increase, therefore ceasing to invest in it to the consumer’s detriment.

Finally, the Commission did not sufficiently prove the harmful effects of the transaction on competition in the wholesale market.

At the UK mobile telephony retail level, in addition to the four operators mentioned above, there are others that lack network infrastructure and use that of these four “host” operators. The Commission considered in its decision that a drop in the number of network infrastructure providers would place these operators in a more vulnerable bargaining position when establishing their access terms. However, the Court believes that the Commission did not sufficiently prove these possible effects.

Based on the above arguments, the General Court annulled the Commission’s decision that was blocking the merger. In 2017, the General Court had already annulled the Commission’s decision of January 30, 2013 blocking the acquisition of TNT Express by UPS. The General Court’s judgment in this case was confirmed by the CJEU on January 16, 2019 (case C-265/17). After the Commission’s decision was annulled, UPS filed an appeal before the Court (case T-834/17) claiming for damages amounting to 1,742 billion euros from the European Commission.

The General Court’s judgment in the Three/O2 case emphasizes the distinction between the concepts of legal test and standard of proof. In this case, the Commission did not meet the standard of proof when it blocked the merger based on its potential anti-competitive effects.

An appeal against the General Court’s judgment can be filed before the Court of Justice.