CK Hutchison court opinion upholds strict EC standard for telco deals

Legal Analysis 25 October

CK Hutchison court opinion upholds strict EC standard for telco deals

  • Pending judgment would likely be victory for EC on standard of proof
  • Case likely to go back to GC, prolonging uncertainty
  • ECJ case could affect arguments in Vodafone/Three

The opinion from an advisor to the EU’s top court to back the European Commission’s (EC) arguments for blocking CK Hutchison’s [HKG:0013] merger of its 3G UK mobile operator with Telefonica’s [[BME:TEF] O2 should reinforce the agency’s stringent approach to consolidation, lawyers told this news service.

On Thursday (20 October), ECJ Advocate General (AG) Juliane Kokott issued her non-binding opinion in the court’s review of the General Court’s (GC) judgment that overturned the EC’s 2016 veto of the UK telco deal.

“This is a resounding victory for EC,” said Kyriakos Fountoukakos, partner at Herbert Smith Freehills. He noted that the Kokott opinion endorses the EC appeal and suggests that the ECJ completely reverse the judgment of the GC. 

Should the court follow the AG’s opinion, it would restore the case law on the standard of proof and standard of review of the pre-CK Telecoms era, he said. According to analytics by this news service, it took a median of 192 days – roughly six months – for the ECJ to issue a judgment following an opinion from Kokott on competition policy appeals. In 85% of competition appeal cases, the AG’s opinion was followed by the ECJ, analytics also show.

The GC’s 2020 judgment may have made quite a few CEOs “optimistic” about the prospects of consolidation in the telco industry, noted Katarzyna Czapracka, partner at White & Case. The judgment made it more difficult for the EC to challenge mobile mergers, requiring that the EC show that a merger has a “strong probability” of significantly affecting competition and raising the bar the EC has to meet to show anticompetitive effects in oligopolistic markets, said Czapracka.

“The opinion is not a surprise: it was pretty clear that AG Kokott would go with the standard of proof,” said Czapracka.

Should the ECJ follow Kokott and refer the case back to the lower court, it could mean that the parties will have to wait several years for a resolution to the case, she said. In the meantime, the EC will continue to apply its ‘normal’ toolbox in assessing mobile mergers, she added, noting that after the GC’s judgment in 2020, several senior EC officials said that they would continue to apply that framework.

If there is a referral, Hutchison’s expectation is that the GC will inevitably rule in its favour, said a source familiar with the case. This source noted that the original appeal concerned the lack of evidence behind the EC’s conclusion, and not the standard of proof. These court proceedings might take more than ten years to resolve, during which there would be no legal certainty on the possibility for urgently needed mobile consolidation in the EU, said the source familiar.

In the meantime, the opinion could have some read-across on pending and future deals, such as Orange’s [EPA:ORA] joint venture with Masmovil, insofar as it bolsters the EC’s position on four-to-three telco mergers, said a competition lawyer. 

Kokott’s arguments could also carry some rhetorical weight in the UK when it comes to any potential regulatory review of a merger of CK Hutchison’s Three with Vodafone [LON:VOD], said the lawyer, who caveated that the judgment has no binding effect. If Kokott had sided with the parties it would have been easier for them to ask for a reappraisal by the Competition and Markets Authority (CMA) and telco regulator Ofcom of consolidation in the sector, said the lawyer.

“Now that it's come back to the orthodoxy, it’s going to be more of an uphill struggle the for the parties in the UK,” said the lawyer, who added that its argumentation could show up as an additional element of evidence presented by a third party against the deal.

EC’s reinforced discretion

Kokott’s opinion also notes that the EC has a broad discretion in assessing mergers and conducting its analysis of potential anticompetitive effects, said Czapracka.

EU courts cannot, as the AG submitted, interfere with that margin of discretion, in particular when it comes to the economic analysis made by the Commission. The Court only needs to check that the facts were accurately stated and the Commission made no manifest error of assessment, she said.

This could limit the scope of judicial review of the Commission’s decisions and may further embolden the EC to intervene in merger cases, said Czapracka.

“By emphasizing the EC’s margin of discretion on economic matters and claiming that the General Court could scrutinize only ‘manifest’ errors of assessment, the opinion turns back the clock on effective judicial review by 20 years and would have us go back to the pre-Tetra Laval era,” said Sven Volcker, partner at Latham & Watkins.

However, Kokott did not fully endorse the EC’s arguments that the GC had overstepped its jurisdiction, noting that EU Courts still have a role to play in clarifying concepts like closeness of competition and assessing whether the EC correctly applied those concepts, in addition to having an exclusive power of interpretation over legal concepts yet to be delimited, such as the concept of ‘significant impediment to effective competition’. It follows that a role remains for the lower court to conduct intensive reviews of merger decisions, said Neil Hoolihan, partner at Linklaters.

The practical implication of this and other judgments like UPS/TNT that affirm the court’s role in reviewing EC decisions is that it will keep up the pressure on the EC to do the necessary work in demonstrating likely competitive harm, otherwise they risk losing on appeal to the GC, he said. This in turn leads to more work for the merging parties, as the EC will seek to ensure that it has done all the necessary fact-gathering and ‘ticked all the procedural boxes’, which ties into the theme of longer pre-notification, said Hoolihan.

The opinion also goes into a broader set of topics then the ECJ judges will necessarily have to rule on, said Hoolihan, noting that the finding as regards the standard of proof is sufficient to refer the case back to the GC. Kokott discusses some key economic concepts that were raised in the EC’s pleas, like the interpretation of an important competitive force and what it means to be particularly close competitors said Hoolihan.

Regarding the concept of an important competitive force, Kokott says that it is sufficient that an undertaking has more of an influence on the competitive process than its market share of similar measures would suggest, and not, as the GC held, that it must stand out from its competitors or compete particularly aggressively in terms of price, noted Hoolihan.

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